NATIXIS - 2018 Registration document and annual financial report

FINANCIAL DATA Statutory Auditors’ report on the consolidated financial statements

Assessment of complex derivative financial instruments

Risk identified and main judgments

Our audit approach

As part of its Corporate & Investment Banking activity, the Natixis Group holds on its balance sheet a significant portion of complex derivative financial instruments recognized at fair value. The determination of the fair value of some these derivative financial instruments is based on valuation techniques that include a significant amount of judgment in the choice of methodologies and data used: use of adequate internal valuation models; a determination of valuation inputs unobservable on the market; a estimation of additional valuation adjustments, to reflect a certain market, counterparty or liquidity risks. We deemed the assessment of complex derivative financial instruments, and in particular those classified in fair value Levels 2 and 3, to be a key audit matter due to: the material nature of the exposures and the use of judgment a in determining fair value; and specific valuation adjustments recognized by Natixis in 2018 on a certain products marketed in Asia where the business model used led to the introduction of a hedging strategy that proved to be inadequate in the market conditions in 2018. At December 31, 2018, Level 2 financial instruments represented assets of €174,251 million and liabilities of €179,846 million. At December 31, 2018, Level 3 financial instruments represented assets of €6,975 million and liabilities of €3,415 million. For more details, please refer to the paragraph on Key Events as well as to Notes 6.6, 6.23, 8.5 and 8.7 to the consolidated financial statements.

We examined the internal control procedures and systems for the identification, valuation and accounting of complex derivative financial instruments, in particular those classified in Levels 2 and 3. We tested the relevant control to our audit, including those relating to: the validation and periodic review, by the Risk division, of a valuation models; the independent verification of valuation inputs; a the determination of the main valuation adjustments; a the classification of instruments according to fair value levels. a We carried out these checks with the assistance of our valuation experts, with whom we also carried out independent valuations by examining, based on samples, the assumptions, methodologies and models used to estimate valuations. For 2018, this work focused on the valuation adjustments recognized by Natixis on certain products marketed in Asia. We also examined, on a sample basis, any variances in margin calls with Natixis' market counterparties, which helped us assess the appropriateness of the valuations.

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Natixis Registration Document 2018