NATIXIS - 2018 Registration document and annual financial report

5 FINANCIAL DATA

Consolidated financial statements and notes

level 1: market value is determined directly using prices quoted a on active markets for identical assets and liabilities; level 2: market value is determined using valuation techniques a based on significant data that may be directly or indirectly observed on the markets; level 3: market value is determined using unrecognized models a and/or models based on non-observable market data, where they are liable to materially impact the valuation. Financial assets and liabilities categorized according to the fair value hierarchy and a description of the key models are presented in Note 8.5. Guarantee mechanism for the assets 6.7 of the former GAPC hive-off vehicle On November 12, 2009, an arrangement was made by BPCE to protect a portion of the portfolios of the former GAPC hive-off vehicle with retroactive effect at July 1, 2009. With this guarantee mechanism, Natixis was able to free up a significant portion of its equity allocated to segregated assets and to protect itself against the risk of loss from these portfolios subsequent to June 30, 2009. This protective arrangement is based on two mechanisms: a sub-participation with the characteristics of a financial a guarantee, covering 85% of the face value of assets recognized in “loans and receivables” and “available-for-sale financial assets”. Under this guarantee, Natixis is protected from the very first euro in default up to 85% of the default amount; two Total Return Swaps (TRS), one in euros and one in US$, a transferring to BPCE 85% of unrealized and realized gains and losses on the portfolio of instruments at fair value through profit or loss (cash and derivatives) since July 1, 2009. TRS are derivatives and are therefore carried at fair value on the balance sheet, with a matching entry to income. At the same time, Natixis purchases an option from BPCE which, if exercised, allows it to recover the net gains on this portfolio after a ten-year period in return for the payment of a premium estimated at €367 million. The premium is also recognized at fair value. The amount of the premium paid in 2009 by Natixis in return for the financial guarantee amounted to €1,183 million. Since the unrealized capital losses or write-downs on the assets covered by the guarantee have already been recorded in income, the premium was not immediately taken to income or recognized on a straight-line basis. Instead, the premium is initially recognized on the accruals line and taken to income over the same period, in the same amount and on the same line as: reversals of provisions for impairment (in Provision for credit a losses); the deferred recognition of the discount (under net revenues) a arising on October 1, 2008 on assets reclassified within “Loans and receivables” at that date pursuant to the amendment to IAS 39 and IFRS 7 published on October 13, 2008. At December 31, 2018 (as was the case at December 31, 2017), the financial guarantee now has almost no impact in accounting and prudential terms, as the positions which it backed have almost all been sold or closed. The same is true of the guarantee comprising TRS and an option, with the option in the money.

Control system The calculation of fair value is subject to control procedures aimed at verifying that fair values are determined or validated by an independent function. Fair values determined by reference to external quoted prices or market parameters are validated by an independent unit (the Market Data Control Department). Second-level controls are carried out by the Risk Department. On less liquid markets, other market information, primarily observable data, is used to validate the fair value of instruments. The factors taken into account include the following: the origin of the external source (stock market pages, content a contribution services, etc.); the consistency of the various sources; a the frequency at which the data are updated; a the representative nature of inputs based on recent market a transactions. For fair values determined using valuation models, the control system consists of the independent validation of model construction and of the inputs incorporating these models. This is carried out under the responsibility of the Risk Department. It involves verifying that the model is consistent with and relevant to its intended function (price setting, valuation, coverage, measurement and control of risk) and the product to which it applies, based on: the theoretical approach: the financial and mathematical a foundations of the model; the application of the model: the pricing models used to a generate risk and earnings data; the stability of the model under parametric stress; a an assessment of the stability and consistency of the a numerical methods used; the independent re-implementation of the model as part of a algorithm validation; the comparative analysis of the calibration of model a parameters; an assessment of the model risk, particularly the comparative a analysis of the model with other valuation models, in order to ensure the adequacy of the model and the payoff (the Formula of positive or negative flows attached to the product at maturity); the implementation of an adjustment in respect of model risk a to account for potential deficiencies in the model or its calibration; integration of the model in information systems. a The methods for determining fair value are monitored by a number of bodies including the Observability and Inputs Committee, the Valuation Committee, the Impairment Committee and the Model Validation Committee, which comprise representatives of the Risk Department, the Finance Department, and the Market Data and Valuations Control Department. Financial assets and liabilities measured and presented at fair value are categorized based on the following scale:

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Natixis Registration Document 2018