NATIXIS_REGISTRATION_DOCUMENT_2017

RISKS AND CAPITAL ADEQUACY Market risks

For the calculationof VaR, the portfolio’sholdinghorizon is set at one day for risk monitoring and 10 days for the calculation of capital. The 10-day holdingperiod involvesextrapolatingfrom the one-dayVaR by multiplyingit by the squareroot of 10. Portfolio valuation methods vary according to product and are either based on a total revaluation or on sensitivity to first or secondorder market inputs to factor in both linear and non-linear effects(in particularfor derivativefinancialinstruments). Both general and specific risk are calculatedfrom a single model that incorporatesthe correlationbetweenrisk factors. Yields used by Natixis to simulate potential changes in risk factors are absolute yields for most risk factors. The exceptions to this rule are exchangerates, share prices and indices,precious metals prices and indices, commodity indices and commodity futures. Moreover,the reliabilityof the VaR is measuredregularlythrough comparison with the changes in the daily trading results, a process also known as backtesting. This exercise allows an ex-post comparisonof the potential losses, as projected ex-ante by the VaR, with the actual losses. Stressed VaR (SVaR) As part of changing regulatory standards (Basel 2.5), Natixis implemented a daily stressed VaR model (SVaR), which is calculated based on a fixed econometric model over a continuous 12-month period that defines the charge that the bank’s currentVaRmodel would generateunder a representative crisis scenario relevant to its portfolio. The calculationmethod is based on an historical simulation for a one-day horizon and a confidence level of 99%. However, unlike VaR, which uses 260 daily fluctuation scenarios on a rolling one-year period, stressedVaR uses a one-yearhistoricalwindowcorrespondingto a periodof significantfinancialtension. The stressed period currently used by Natixis covers the period between September 1,2008, and August 30, 2009, as it is the most conservativefor calculatingstressedVaR. As is the case for VaR, the 10-day holding period used by Natixis involves extrapolating from the one-day stressed VaR by multiplyingit by the squareroot of 10. Incremental Risk Charge (IRC) The IRC (IncrementalRisk Charge) is the capital charge required to cover rating migration risk and the default within one year of issuers for approved products in terms of specific interest rate risk. This calculation mainly concerns bond products and CDS (credit default swaps). Calculated using a Monte Carlo internal simulation model, the IRC is a 99.9% value at risk which correspondsto the largest risk after eliminatingthe 0.1% of the worst outcomesover a periodof one year. Rating and default migrations are simulated using an issuer correlationmodel and migrationmatricesover a capital horizonof one year. Positions are revalued based on various scenarios. Thus, for each scenario,positionsmay be downgraded,upgraded or go into default.

The liquidityhorizon,which representsthe time requiredto sell a positionor hedge it in unfavorablemarket conditions,used in the IRC calculationmodel is one year for all positionsand all issuers. The calibration of the transition matrix is based on Standard & Poor's historical transition data. For both corporates and sovereigns, the historical depth exceeds 20 years. For issuers not rated by S&P, restatementsare performedinternally. Correlationassumptionsare 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 calculationmodel used by Natixiswas approved by the Autorité de Contrôle Prudentielet de Résolutionin 2012. In accordance with regulatory requirements, Natixis has an internal model validation policy and procedures. This model validationphase is an essentialprerequisitefor their use. Stress tests and operational indicators In addition to VaR, SVaR and IRC measures, stress tests are used to simulatethe impact of extrememarketconditionson the value of Natixis’portfolios.Operationalindicatorsare also used to measureand manageactivityrisks: stress tests to measure potential losses on portfolios in 1) extrememarket conditions.Natixis’ mechanismis based on two categories of stress tests: overall stress tests and dedicatedstresstests for each business. Overall stress tests are regularly submitted to the Market Risk Committee. They are performed daily and can be groupedinto two categories: historic stress tests consist of reproducingsets of changes j in market parametersobservedduring past crises in order to create an ex-post simulation of the P&L changes recorded. While the stress tests do not have any predictivevalue, they do make it possibleto gauge the exposureof the portfolioto known scenarios.There are 12 historic stress tests covering the most significantevents since 1987, the year of the stock market crash, including the Lehman collapse in the 2008 period and the terrorist attack of September 11, 2001, throughto the sovereigndebt crisis in 2011. hypotheticalstress 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 seriesof sevenscenarioshas been defined: fall in stock market indices combinedwith a flatteningof 1. the yield curve and an increasein credit spreads, strong rise in European interest rates in an inflationary 2. environment, failure of a financial institution with a rise in credit 3. spreads and interest rates and a moderate fall in equity markets,

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Natixis Registration Document 2017