NATIXIS_REGISTRATION_DOCUMENT_2017

3 RISKS AND CAPITAL ADEQUACY Market risks

Independent price verification Independentprice verification is carried out by the "Service des Résultats" department’s IPV (Independent Price Verification) teams, which, in accordancewith the division’s Charter, control the market inputs used in the valuation process for the bank’s transactions.The review of market inputs may lead to valuation adjustments recognized in economic results and the financial statement. IPV governanceis based in particularon: a supervisionmechanismoverseenby committees (Observability a and Inputs Committee, Valuation Committee, Market Risk Committee); a policy and set of procedures, explaining the validation and a escalationsystem; comprehensivereporting; a the mappingand internalclassificationof data; a dedicatedtools. a Moreover, the Market Risk Department’steams carry out level twomonthlycontrolsof marketinputs. Validation of valuation models Valuation models used by the front office are subject to independentvalidationby Model Risk Management,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 keeping with the validationprocedure,these reviews cover the following areas: theoretical and mathematical validation of the model, and a analysis of assumptions and their justification in the model documentation; algorithm validation and comparison to alternative models a (benchmarking); analysis of the stability and consistency of the numerical a methodused, and the model’sstabilityin a stressscenario; assessmentof implied risk factors and calibration, analysis of a input data and identificationof upstreammodels; measurementof modelingrisk and validationof the associated a reservemethodology. These models may be subject to backtesting and monitoring in terms of quality and solidity to ensure that the applied risk parameterscorrespondto the value ranges projected upon their validation. These models also undergo a periodic review; the depth of the review and the period covered depend on the materialityof the model.The outcomesof the validationwork are presented at meetings of the Valuation Models Oversight Committee, at which the designers and validators of models come together on a quarterly basis to possibly debate matters from their respective viewpoints. The Committee’sfindings are brought to the attention of the Model Risk Management Committee,chaired by the Chief Risk Officer, who is a member of the Senior Management Committee. The role of this Committeeis to overseemodel risk for all of Natixis'activitiesby approvingvalidationreportsand associatedremedialplans on the one hand and by tracking consolidatedmodel risk indicators on the other.

commodity crisis based on a scenario of disruption to 4. supplydue to geopoliticalevents, emergingmarket crisis reflecting the consequencesof a 5. sudden withdrawal of capital from an emerging country during a global economic downturn (higher refinancing costs, stock market crash and depreciation of the currencyagainstthe US dollar), failureof a high-profilecorporatebasedon a creditmarket 6. shock, liquiditycrisis characterizedmainlyby a sharpwideningof 7. European interbank spreads, a widening of the liquidity spreadand a rise in “peripheral”yields. Specific stress tests are also calculated daily in the managementtools for all the portfolios and are governedby limits. They are set on the basis of the same severity standard and are aimed at identifyingthe main loss areas by portfolio. In addition, reverse stress tests are used to highlight the most high-risk scopes and market environmentsas well as concentrationand contagion links. This mechanismis based on plausible scenarios drawn from extremely adverse assumptionson the fulfillment of risk factors leading to the breachof a loss threshold,and allowsNatixis to implementa new risk monitoringand steeringtool, identifycircumstances that may trigger this loss and adapt the appropriate action planswherenecessary. All stress test mechanismsare defined by the Risk division, which is responsiblefor definingprinciples,methodologyand calibrationand scenariochoices. The Stress Test Committee is responsible for the operational implementationof stress tests and meets on a monthly basis. The Committee approves work to be carried out, its workload and determinesthe annualIT budget. loss alerts by portfolio and aggregated by business line, 2) which alert managementand 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 budgetarytargets. 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 quantitativeindicatorsare set in line with the VaR and stress test limits. Independent valuation control The valuation of Natixis’ various market products forms part of the independent control system made up of dedicated procedures. In accordance with the provisions of IAS 39, financial instrumentsare recognizedat their fair value. (See Chapter 5 of the Natixis 2017 registration document for further information regardingfair value accountingmethodologies.) Fair value determinationis subject to a control procedure aimed at verifying that the valuation of financial instruments is determinedand validatedby an independentfunction in terms of prices and/orvaluationmodels.

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Natixis Registration Document 2017