NATIXIS_REGISTRATION_DOCUMENT_2017

3 RISKS AND CAPITAL ADEQUACY Credit and counterparty risks

COUNTERPARTY RISK 3.5.3 MANAGEMENT

Mitigating counterparty risk Natixis reduces its exposure to counterparty risk using three measures: the use of bilateral netting agreements under which, if a a counterparty goes into default, only the balance of the positive and negative valuations of the transactions carried out with the counterparty in question is considered as risk; appendices to these agreements that govern the use of a collateral swaps that fluctuate according to the daily valuation of the portfolios of transactions carried out with the counterparties in question; the use of clearing houses, which stand in for their members a by bearing most of the counterparty risk. To do this, they use initial margins and a variation margin call system. To manage this risk, Natixis set up a management framework for the risks borne by clearing houses. Wrong-way risk Wrong-way risk refers to the risk that Natixis’ exposure to a counterparty is heavily correlated with the counterparty’s probability of default. This risk is represented in regulations by two concepts: specific wrong-way risk: referring to the risk generated when, a due to the nature of the transactions entered into with a counterparty, there is a direct link between its credit quality and the amount of the exposure; general wrong-way risk: referring to the risk generated when a there is a correlation between the counterparty’s credit quality and general market factors. Specific wrong-way risk gives rise to specific own funds requirements (Article 291.5 of the European regulation of June 26, 2013, on prudential requirements for credit institutions and investment firms) and to prior approval of specific limits. General wrong-way risk is covered in the wrong-way risk stress tests defined by asset class. Internal Rating system (Data certified by the Statutory Auditors in accordance with IFRS 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 parameters, including probability of default (PD), corresponding to a rating, and loss given default (LGD), which is expressed as a percentage. Pursuant to regulatory requirements, all counterparties in the banking book and the related exposures must have an internal rating if they: carry a loan or are assigned a credit limit; a guarantee a loan; a issue securities used as collateral for a loan. a RATING SYSTEM 3.5.4

(Data certified by the Statutory Auditors in accordance with IFRS 7) The principles of counterparty risk management are based on: measuring exposure to counterparty risk; a counterparty risk limits and allocation procedures; a a value adjustment in respect of counterparty risk (credit valuation a adjustment); counterparty risk mitigation; a factoring in specific wrong-way risk. a 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 values 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. Limit framework on counterparty risk The limits are defined depending on 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 the 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 adjustments (CVA) in the valuation of derivative instruments. These adjustments correspond to the expected loss related to a counterparty's default risk and aims to account for the fact that Natixis cannot recover all the transactions' market value. Natixis has calculated capital requirements for the CVA since January 1, 2014.

128

Natixis Registration Document 2017