NATIXIS - Universal registration document and financial report 2019

5 FINANCIAL DATA

Consolidated financial statements and notes

IAS 39 recognizes three types of hedging relationship: cash flow hedges, fair value hedges and hedges of net investments in foreign operations. Derivatives may only be designated as hedges if they meet the criteria set out in IAS 39 at inception and throughout the term of the hedge. These criteria include formal documentation that the hedging relationship between the derivatives and the hedged items is both prospectively and retrospectively effective. Hedging relationships are presumed to be effective when, retrospectively, changes in the value of the hedging instrument offset changes in the value of the hedged item in a range of 80%-125%. Cash flow hedging Cash flow hedging is used to hedge future cash flows from an existing or highly probable future transaction. Hedging of variable-rate borrowings and issues Natixis uses interest rate swaps borrowing at fixed rates to fix future costs of interbank borrowings and public/private issues. Hedging of variable-rate loans Natixis uses plain vanilla interest rate swaps lending at fixed rates to fix future variable-rate borrowing costs. Overall hedging of interest rate risk Cash flow hedges are mainly used to hedge Natixis’ overall interest rate risk. The documentation for these structural hedges is based on future variable cash management schedules for all variable-rate transactions. Prospective hedge effectiveness tests involve establishing (by index and currency): cumulative variable-rate borrowings and fixed-rate borrower swaps by maturity bracket, and cumulative variable-rate loans and fixed-rate lender swaps, by maturity bracket. Hedging is demonstrated if, for each maturity, the nominal amount of the items to be hedged is greater than the notional amount of the hedging derivatives. Retrospective hedge effectiveness tests are used to verify whether the hedge was effective at different reporting dates. At each such date, changes in the fair value of hedging instruments (excluding accrued interest) are compared with changes in the fair value of the hypothetical derivative instruments hedged (synthetic instruments representative of hedged assets or liabilities and management intentions). Changes in the fair value of hedging instruments must offset changes in the fair value of hedged items in a range of 80%-125%. Outside these limits, the hedge would no longer qualify. Accounting for cash flow hedges The effective portion of the gain or loss on the hedge is recognized directly in equity, while the ineffective portion is taken to income at each reporting date under “Net gains or losses on financial instruments at fair value through profit or loss”. No specific entries are made to hedged items (other than those that would be made if they were not hedged). If a hedging relationship is discontinued, for example when hedge effectiveness is outside the 80%-125% range, the derivative must be reclassified in financial instruments at fair value through profit or loss, while the cumulative amount relating to the effective portion of the hedge that has been carried directly in recyclable other comprehensive income under “Gains and losses recognized directly in equity” is recycled to income when the hedged item itself affects income.

Fair value hedging Fair value hedging is intended to hedge the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment. Overall hedging of interest rate risk The subsidiary Natixis Financial Products LLC documents overall hedging of its interest rate risk in accordance with fair value hedging rules. To account for these transactions, the subsidiary applies the carve-out provisions of IAS 39 as adopted by the European Union. The accounting treatment of derivative financial instruments designated for accounting purposes as structural fair value hedges is similar to that applied to fair value hedging derivatives. Changes in the fair value of portfolios of hedged instruments are reported on a specific line of the balance sheet (“Revaluation adjustments on portfolios hedged against interest rate risk”), with a corresponding entry in income. Hedging of fixed-rate loans and borrowings Natixis uses plain vanilla interest rate swaps lending at fixed rates to protect itself against the impact of unfavorable changes in interest rates on its fixed-rate borrowings and issues. Plain vanilla swaps borrowing at fixed rates are used to protect it from the impact of unfavorable changes in interest rates on its fixed-rate loans and securities. Documentation of fair value hedges Prospective hedge effectiveness tests involve verifying that the financial characteristics of the hedged item and the hedging instrument are virtually identical: value date, maturity date, notional amount, fixed rate, and payment frequency. Retrospective hedge effectiveness tests are used to verify whether the hedge was effective at different reporting dates. At each such date, changes in the fair value of hedging instruments (excluding accrued interest) are compared with changes in the fair value of the hypothetical assets and liabilities hedged (synthetic instruments representative of hedged assets or liabilities). Changes in the fair value of hedging instruments must offset changes in the fair value of hedged items in a range of 80%-125%. Outside these limits, the hedge no longer qualifies for hedge accounting under IFRS. Accounting for fair value hedges Changes in the fair value of the derivatives are recognized as income for both the effective and ineffective portions. Symmetrically, changes in the fair value of the hedged items are recognized as income. Accordingly, only the ineffective portion of the hedge affects income. Changes in the fair value of hedging derivatives excluding accrued interest are recorded in income under “Net gains or losses on financial instruments at fair value through profit or loss”. Accrued interest relating to these instruments is recorded under “Interest and similar income” or “Interest and similar expenses”. When a hedging relationship is discontinued, the hedging instrument is reclassified in financial instruments at fair value through profit or loss, while the unrealized gain or loss on the hedged item is fixed at its amount on the date the hedge is discontinued and recorded in income through to maturity.

270

NATIXIS UNIVERSAL REGISTRATION DOCUMENT 2019