NATIXIS - Universal registration document and financial report 2019

3 RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management

the model’s stability and convergence of the numerical method in V a stress scenario; the assessment of implied risk factors and calibration, the V analysis of input, and the upstream identification of models; the measurement of model risk and validation of the related V reserves methodology. The design, modification and ongoing management of the model are performed by the model designers on behalf of the model owner. Model Risk Management, an independent entity, is called upon for all new models as well as for all modifications or improvements to existing models. On an annual basis, the team in charge of designing internal or valuation models monitors the models’ performance, notably through an analysis of backtesting and usage tests. The third line of defense is the General Inspection Department, which annually reviews internal models and compliance with the risk model management framework and the correct application by Model Risk Management of its own policies and procedures. The results of the model validation process performed at Natixis are presented to the Model Oversight Committees for confirmation, then submitted to the Model Risk Management Committee for approval before being sent, in the case of internal models, to the Standards and Methods Committee of the Groupe BPCE Risk, Compliance and Permanent Control division for final validation and possible submission to the regulator. This Model Risk Management 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. The Risk Model Oversight Committees are chaired by the Head of the Risk Governance Department; the Risk Model Management Committee is chaired by Natixis’ Chief Risk Officer who is a member of the Senior Management Committee. Natixis’ adjustment policy The MARPL Department is tasked with defining and implementing the adjustment policy for Capital Market activities’ management results. The aim of this policy is twofold: ensure the reliability of the result announced by applying the V principle of prudence; protect Natixis from adverse events that cannot be easily hedged V 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; V adjustments for input uncertainty; V adjustments for model uncertainty. V 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 calculations in respect of market and model-related uncertainties are submitted for independent validation by the Model Risk Management teams.

Independent price verification Independent price verification is carried out by MARPL’s IPV (Independent Price Verification) teams which, in line with the division’s policy, 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 governance is based in particular on: a supervision mechanism overseen by various Committees V (Observability Committee, Market Inputs Committee, Valuation Committee, IPV Committee); a policy and set of procedures, explaining the validation and V escalation system; a set of weekly and monthly reports; V dedicated tools. V Validation of models In accordance with regulatory requirements, Natixis has established internal model validation policies and procedures for evaluating market risk and valuation models. This independent model validation policy is part of its wider risk model management framework. As part of the Risk Governance Department which reports to the Chief Risk Officer, Model Risk Management is responsible for the governance and standards applicable to a model’s life cycle. The various stages of a model’s life cycle — design, IT development, validation, and use — are clearly presented and the roles and responsibilities of each participant specified and detailed. Internal market risk models are validated by the Natixis Risk Supervision Division’s Risk Model Validation team, under the authorization of the Groupe BPCE Group Modeling Committee. Valuation models are validated by the Valuation Model Validation team, under the authorization of the Groupe BPCE Group Modeling Committee. The Natixis Validation teams use a six-fold validation process: data and parameters applied by the model: analysis of data quality V and representativeness, integrity of controls, error reports, comprehensiveness of data, etc.; methodology: analysis of model’s underlying theory, analysis of V estimates, sizing methods, risk indicators, aggregation rules, model benchmarking, analysis of precision and convergence; usage and robustness test: the validation team ensures that the V internal models are used by qualified staff, that usage procedures are documented and up to date, that ex-post controls and stress tests are performed; IT development: counter-implementation, code analysis, tests; V compliance with regulations: gap analysis; V documentation: analysis of quality and comprehensiveness of V methodological documentation received. Specifically, the following aspects are assessed in respect of valuation models: the theoretical and mathematical validation of the model, the V analysis of assumptions and their justification in model documentation; algorithm validation and benchmarking; V

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NATIXIS UNIVERSAL REGISTRATION DOCUMENT 2019