NATIXIS_PILLAR_III_2017_EN

MARKET RISK Methodology for measuring market risk

Correlation assumptions are based on the rating of each issuer’s creditworthiness within the IRC horizon (one year). The simulation process is based on intra-sector correlation parameters. The internal IRC calculation model used by Natixis was approved by the Autorité de Contrôle Prudentiel et de Résolution in 2012. In accordance with regulatory requirements, Natixis has an internal model validation policy and procedures. This model validation phase is an essential prerequisite for their use.

a commodity crisis based on an assumption of an 4. interruption to commodity supplies caused by a geopolitical crisis, an emerging market crisis reflecting the sudden withdrawal 5. of capital from an emerging economy during a period of global economic slowdown (increase in cost of refinancing, stockmarket crash and depreciation of the currency against the USD), default by an influential corporate due to a credit market 6. shock, a liquidity crisis mainly due to a major widening in European 7. interbank spreads, a widening of liquidity spreads and rate hikes in peripheral countries; Specific stress tests are also calculated daily in the management tools for all the portfolios and are governed by limits. They are set on the basis of the same severity standard and are aimed at identifying the main loss areas by portfolio. In addition, reverse stress tests are used to highlight the most high-risk scopes and market environments as well as concentration and contagion links. This mechanism is based on plausible scenarios drawn from extremely adverse assumptions on the fulfillment of risk factors leading to the breach of a loss threshold, and allows Natixis to implement a new risk monitoring and steering tool, identify circumstances that may trigger this loss and adapt the appropriate action plans where necessary. All the stress test mechanisms are defined by the Risk division, which is responsible for defining principles, methodology and calibration and scenario choices. The Stress Test Committee is responsible for the operational implementation of stress tests and meets on a monthly basis. The Committee approves work to be carried out, its workload and determines the annual IT budget. loss alerts by portfolio and aggregated by business, which 2. alert management and the Risk division if losses reach a certain threshold over a given month or on a cumulative basis since the beginning of the year. These thresholds are set by the Market Risk Committee according to the characteristics of each portfolio, past performance and budgetary targets; finally, the supervisory framework includes operational 3. indicators on an overall and/or by business basis, which focus on more directly observable criteria (sensitivity to changes in the underlying and to volatility, correlation, nominals, etc.). The limits of these qualitative and quantitative indicators are set in line with the VaR and stress test limits.

STRESS TESTS AND OPERATIONAL 8.3.4 INDICATORS

In addition to VaR, SVaR and IRC measures, stress tests are used to simulate the impact of extreme market conditions on the value of Natixis’ portfolios. Operational indicators are also used to measure and manage business risks: stress tests to measure potential losses on portfolios in 1. extreme market conditions. Natixis’ mechanism is based on two categories of stress tests: overall stress tests and dedicated stress tests for each business. Overall stress tests are regularly presented to the Market Risk Committee. They are performed daily and can be grouped into two categories: historic stress tests consist of reproducing sets of changes j in market input observed during past crises in order to create an ex-post simulation of the P&L changes recorded. While stress tests do not have any predictive value, they do make it possible to gauge the exposure of the portfolio to known scenarios. There are 12 stress tests in total and take into account key economic events, including: the 1987 equity market crash, the September 11, 2001 terrorist attack, the 2008 Lehman crisis and the 2011 sovereign debt crisis; hypothetical stress tests are used to simulate changes in j market parameters for all the activities, based on plausible assumptions regarding one market’s predicted response compared with another’s, depending on the nature of the initial stress. Stresses are determined through a joint effort involving the Risk Division, the front office and Economic Research. A set of seven scenarios have been defined: a fall in stockmarket indices along with a flatting of the rate 1. curve and an increase in credit spreads, a sharp European rate hike in an inflationary context, 2. default by a bank with an increase in credit spreads and rates 3. and a moderate fall in equity markets,

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NATIXIS Risk report Pillar III 2017