Société Générale / Risk Report - Pillar III

8 MARKET RISK

VALUATION OF FINANCIAL INSTRUMENTS

VALUATION OF FINANCIAL INSTRUMENTS 8.3

In terms of valuation, market products are marked to market, when such market prices exist; otherwise, they are valued using parameter-based models. On the one hand, each model designed by the front office is subject to independent validation by the Market Risks Department as second line of defence that especially checks the theoretical aspects of the model (relevance of the hypotheses, analytical calculations, numerical methods), its performance (for instance in case of stressed conditions) and its implementation in systems. Following this review, the validation status of the model, its scope of use and the recommendations which will have to be dealt with are formalised in a report. On the other hand, the parameters used in the valuation models – whether or not they come from observable data – are subject to controls by the Market Risks Department and the Finance Division (Independent Pricing Verification). If necessary, the valuations are supplemented by reserves or adjustments (for example, bid-ask spreads or liquidity) using calculation methods approved by the Market Risk Department. Accounting valuation governance is enforced through two valuation committees, both attended by representatives of the Global Markets Division, the Market Risk department and the Finance Division: the Global Valuation Committee is convened whenever necessary, p and at least every quarter, to discuss and approve financial instrument valuation methodologies (model refinements, reserve methodologies, etc.). This committee, chaired by the Finance Division and organised by its valuation expert team (Valuation Group) has worldwide accountability with respect to the approval of the valuation policies concerning financial instruments on market activities;

on a quarterly basis, the Global Valuation Review Committee, p chaired by the Finance Division, reviews changes in reserves, valuation adjustment figures, and related accounting impacts. This analytical review is performed by the Valuation Group. Lastly, a Valuation Policy guide describes the valuation framework and its governance, specifying the breakdown of responsibilities between the stakeholders. Furthermore, regarding the prudential component, Additional Valuation Adjustments (AVAs) are computed on fair value assets, in compliance with the Regulatory Technical Standards (RTS) published by the European Banking Authority (EBA), which lay out the requirements related to Prudent Valuation, in addition to the principles already specified in the CRD3 (Capital Requirements Directive). These Regulatory Technical Standards define the various uncertainties which have to be taken into account in the Prudent Valuation and set a target level of confidence to reach. Within this framework, in order to take into account the various factors which could generate additional exit costs compared to the expected valuation (model risk, concentration risk, liquidation cost, uncertainty on market prices, etc.), Prudent Valuation Adjustments (PVAs) are computed for each exposure. The Additional Valuation Adjustments (AVAs) are defined as the difference between the Prudent Valuation obtained and the accounting fair value of the positions, in order to comply with the target level of confidence to reach (the confidence interval is equal to 90%). These amounts of AVA are deducted from the Common Equity Tier 1 capital. In terms of governance, the topics related to Prudent Valuation are dealt with during methodological committees and validation committees, chaired by the Finance Division and organised quarterly, and both attended by representatives of the Global Markets Division and the Market Risk department.

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PILLAR 3 - 2020 | SOCIETE GENERALE GROUP |