NATIXIS // 2021 Universal Registration Document

3 RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management

calculation of the regulatory capital of these transactions. Transactions submitted to the SWWR are treated as “one-off” requests (for both market and credit risk) regardless of existing limits. The risk-weightedassets (RWA) of these transactionsare determined by considering each transaction as a separate netting set with an exposure in the event of default (EAD) corresponding to the notional amount of the transaction, ex post: control is carried out by the Risk division through V dedicated weekly reporting; General Wrong-Way Risk, i.e. the risk generated when there is a V correlation between the counterparty’s credit quality and general market factors. This is assessed through exposure to country risk through a system of limits defined for emerging countries and validatedannually by the Committee.More specifically, these limits apply to activities generating WWR in the context of securities financing transactions (“Security Financing Transaction”) (i.e. repurchase agreements, Total Return Swaps) and credit derivatives (CDS)). The WWR limits are monitored monthly by the overstepping Committee. (Data certified by the Statutory Auditors in accordance withIFRS 7) The internal rating system is an integral part of Natixis’ credit risk assessment, monitoring and control mechanism. It covers all the methods, processes, tools and controls used to evaluate credit risk. It takes into account fundamental inputs, including probability of default (PD), which corresponds to a rating as well as loss given default (LGD), expressed as a percentage of exposure at default (EAD). Pursuant to regulatory requirements, all counterparties in the banking book and the related exposuresmust have an internal rating if they: carry a loan or are assigned a credit limit; V guarantee a loan; V internal rating methodologies specific to the various Basel asset V classes and consistent with Natixis’ risk profile; there is a unique rating procedure and methodology for each type of counterparty; an IT system used for managing the successive stages of the V rating process, from the initiation of the process to the approval and logging of the complete process; procedures and controls that place internal ratings at the heart of V the risk management system, from transaction origination to ex post analysis of defaulting counterparties and the losses incurred on the relevant loans; periodic reviews of rating methodologies, the method for V calculating the LGD and the underlying risk inputs. With respect to country risk, the system is based on sovereign ratings and country ratings that limit the ratings that can be given to non-sovereign counterparties. These ratings are reviewed annually or more often if necessary. issue securities used as collateral for a loan. V The internal rating mechanism is based on: Rating system 3.2.4.6 Internal rating system

Measuring exposure to counterparty risk Natixis uses an internal model to measure and manage its own counterparty risk. Based on Monte Carlo-type simulations for the main risk factors, the model measures the positions for each counterparty and for the entire lifespan of the exposure, taking into account the netting and collateralization criteria. Thus, the model determines the EPE (Expected Positive Exposure) profile and the PFE (Potential Future Exposure) profile, the latter of which is the main indicator used by Natixis for assessing counterparty risk exposure. For the purpose of determiningcapital requirementsfor counterparty risk, the European Central Bank has partially authorized Natixis S.A. to use the internal EEPE (Effective Expected Positive Exposure) model to calculate exposure. For other entities, as well as the scope of operations for which Natixis S.A. is not authorized to use the EEPE model, exposure is determined using the mark-to-market method. Counterparty risk limit framework The limits are defined dependingon the counterparty risk profile and after analysis of all information relevant and useful for decision-making purposes. The limits are in line with Natixis’ credit approval process and are reviewed and approved either by means of delegated authority or by credit Committees. The limits are monitored daily using the dedicated consolidation systems to ensure compliance with the supervision mechanisms. Credit valuation adjustment Natixis includes Credit Valuation Adjustment (CVA) in the valuation of derivative instruments. These adjustments comprise the expected loss as per a counterparty’s default risk and aim to account for the fact that Natixis cannot recover the entire market value of the transactions. Natixis has calculated capital requirements for the CVA since January 1, 2014. Wrong-Way Risk Wrong-Way Risk (WWR) refers to the risk that Natixis’ exposure to a counterparty is heavily correlated with the counterparty’s probability of default. From a regulatory standpoint, this risk is presented as two concepts: Specific Wrong Way Risk (SWWR): it arises when the future V exposure is strongly and positively correlated with the probability of default of the counterparty and there is a direct legal relationship between the underlying issuer and the counterparty. For example, for a securities financing transaction, the SWWR can be identified when the issuer of the reference asset and the counterparty are part of the same group. This risk is assessed in accordance with the European regulatory requirements of the CRD IV Directive and is subject to a capital surcharge in the calculation of capital requirements. The authorization process for transactionssubject to the SWWR is subject to a specific granting system: ex ante: the Front Office, in charge of identifying these V transactions, must inform the Risk division as part of the approval process as well as for the monitoring, reporting and

124

NATIXIS UNIVERSAL REGISTRATION DOCUMENT 2021