NATIXIS_PILLAR_III_2017_EN

MARKET RISK Independent valuation control

VALIDATION OF VALUATION 8.2.2 MODELS

NATIXIS’ ADJUSTMENT POLICY 8.2.3

The Market Risk Department is tasked with defining and implementing the adjustment policy for Capital market activities’ management results. The aim of this policy is twofold: ensuring the reliability of the result announced by applying the a principle of prudence; protecting Natixis from adverse events that cannot be easily a hedged or that are non-hedgeable. The adjustment policy thus defines the principles for calculating adjustments for market risks to financial instruments measured at fair value. Adjustments for market risks are divided into: adjustments for the cost of position reversals/liquidity positions a in an active market; adjustments for uncertainty relating to observable and a unobservable valuation inputs and modeling risks in non-active markets; adjustments specific to risks inherent to positions a (discontinuity risks, risks relating to uncertainty regarding size, etc.); adjustments for modeling risk to hedge model-related a uncertainties (numerical method, calibration, etc.). The shocks applied and methodologies used are updated on a continuous basis. Adjustment amounts are updated on a monthly basis and reported to Natixis Senior Management. Changes in methodology applied to adjustment calculation are submitted for independent validation by the Model Risk & Risk Governance teams.

Valuation models used by the front office are subject to independent validation by a dedicated team within the Model Risk & Risk Governance department of the Risk division. This independent validation verifies the evaluation of financial instruments traded and the suitability of the model. In accordance with the validation procedures, these reviews cover the following aspects: the theoretical and mathematical validation of the model, the a analysis of assumptions and their justification in model documentation; algorithm validation and benchmarking; a the model’s stability and convergence of the numerical method a in a stress scenario; the assessment of implied risk factors and calibration, the a analysis of input, and the upstream identification of models; the measurement of modeling risk and validation of the related a reserves methodology. These models may be subject to backtesting and monitoring in terms of quality and solidity to ensure that the applied risk parameters correspond to the value ranges projected upon their validation. These models are also reviewed periodically, with the periodicity and depth of the review depending on the level of materiality. Conclusions from validation work are presented to the Valuation Models Oversight Committee which brings together model designers and validators on a quarterly basis and contradictory issues are discussed. Conclusions from these Committee Meetings are reporting to the Model Risk Management Committee, chaired by the Chief Risk Officer who is a member of the Senior Management Committee. This Committee is tasked with supervising the risk model for all of Natixis’ activities by, on one hand, approving validation reports and the related remediation plans and, on the other hand, monitoring consolidated risk model indicators.

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NATIXIS Risk report Pillar III 2017