NATIXIS - 2018 Registration document and annual financial report

5 FINANCIAL DATA

Consolidated financial statements and notes

Level 3: Fair value measurement using non-observable c) market data Level 3 comprises instruments measured using unrecognized models and/or models based on non-observable market data, where they are liable to materially impact the valuation. This mainly includes: unlisted shares whose fair value could not be determined using a observable inputs; Private Equity securities not listed on an active market, a measured at fair value with models commonly used by market participants, in accordance with International Private Equity Valuation (IPEV) standards, but which are sensitive to market fluctuations and whose fair value determination necessarily involves a judgment call; structured or representative of private placements, held by the a insurance business line; hybrid interest rate and currency derivatives and credit a derivatives that are not classified in Level 2; loans in the syndication process for which there is no a secondary market price; loans in the securitization process for which fair value is a determined based on an expert appraisal; investment property whose fair value is obtained using a a multi-criteria approach based on the capitalization of rents at the market rate combined with a comparison with market transactions; instruments with a deferred day-one margin; a mutual fund units for which the fund has not published a a recent NAV at the valuation date, or for which there is a lock-up period or any other constraint calling for a significant adjustment to available market prices (NAV, etc.) given the low liquidity observed for such securities; instruments carried at fair value on the balance sheet and for a which data are no longer available due to a freeze in trading in the wake of the financial crisis, which were not reclassified as “Loans and receivables” pursuant to the amendment to IAS 39 and IFRS 7 published on October 13, 2008 (see below) . When there is a significant drop in trading in a given market, a valuation model is used based on the only available relevant data.

Plain vanilla derivatives are also classified as Level 3 in the fair value hierarchy when exposure is beyond the liquidity horizon determined by underlying currencies or by volatility surface (e.g., certain foreign currency options and volatility caps/floors). In accordance with the decree of February 20, 2007, amended by the decree of November 23, 2011, relating to regulatory capital requirements applicable to credit institutions and investment firms, and in accordance with the European Capital Requirements regulation (CRR) of June 26, 2013 on requirements resulting from Basel 3, a description of crisis simulations and ex-post controls (validation of the accuracy and consistency of internal models and modeling procedures) is provided for each model used in Section 3.2.5 of Chapter [3], “Risk factors, risk management and the pillar III report”. Under IAS 9, day-one profit should be recognized only if it is generated by a change in the factors that market participants would consider in setting a price, i.e. only if the model and parameters input into the valuation are observable. If the selected valuation model is not recognized by current market practices, or if one of the inputs significantly affecting the instrument’s valuation is not observable, the trading profit on the trade date cannot be recognized immediately in the income statement. It is taken to income on a straight-line basis over the life of the transaction or until the date the inputs become observable. Any losses incurred at the trade date are immediately recognized in income. At December 31, 2018, instruments for which the recognition of day-one profit/loss has been deferred included: multi-underlying structured equity and index products; a synthetic loans; a options on funds (multi-asset and mutual funds); a structured fixed-income products; a securitization swaps. a

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Natixis Registration Document 2018