Société Générale / Risk Report - Pillar III

10 STRUCTURAL INTEREST RATE AND EXCHANGE RATE RISKS STRUCTURAL INTEREST RATE RISK

STRUCTURAL INTEREST RATE RISK 10.2

Structural interest rate risk is generated by commercial transactions and their hedging, as well as the management operations specific to each of the consolidated entities. This interest rate risk arises mainly from residual fixed-rate positions with future maturities. The Group’s objective The objective of managing structural interest rate risk is to reduce the degree of exposure of each Group entity as much as possible. To this end, the Board of Directors, the Finance Committee and the ALM Committees set sensitivity limits (in terms of value and income) for the Group, the BU/SUs and the entities, respectively. Measuring andmonitoring structural interest rate risk Societe Generale uses several indicators to measure the Group's overall interest rate risk. The three most important indicators are: the sensitivity of the net present value (NPV) to the risk of interest p rate mismatch. It is measured as the sensitivity of the net present value of the static balance sheet to a change in interest rates. This measure is calculated for all currencies to which the Group is exposed; the sensitivity of the interest margin to changes in interest rates in p various interest rate scenarios. It takes into account the sensitivity generated by future commercial production over a three-year period and is calculated on a dynamic basis; the sensitivity of NPV to basis risk (risk associated with decorrelation p between different variable rate indices). Limits on these indicators apply to the Group, the BUs/SUs and the various entities. Assets and liabilities are analysed without prior allocation of resources to uses. Maturities of outstanding are determined by taking into account the contractual characteristics of the transactions, adjusted for the results of customer behaviour modeling (in particular for demand deposits, savings and early loan repayments), as well as a certain number of disposal agreements, in particular on equity items. Where possible, hedging transactions are documented from an accounting view point: this can be carried out either as micro-hedging

(individual hedging of commercial transactions) or as macro-hedging under the IAS 39 carve-out arrangement (global backing of portfolios of similar commercial transactions within a treasury department; macro-hedging concerns essentially French retail network entities). Macro-hedging derivatives are essentially Interest Rate Swaps in order to maintain networks net asset value and result sensitivity within limit frameworks considering hypothesis applied. For macro-hedging documentation, the hedged item is an identified portion of a portfolio of commercial client or interbank operations. Conditions to respect in order to document hedging relationships are reminded in Note 3.2 of Chapter 6 of the 2020 Universal Registration Document. Macro-hedging derivatives are allocated to separate portfolios according to whether they are used to hedge fixed-rate assets or liabilities in the accounting books. The hedging instrument portfolios allocated to liability elements are net fixed-rate receiver/variable-rate payer whereas the hedging instrument portfolios allocated to asset elements are net fixed-rate payer/variable-rate receiver. The non-over hedging tests and hedged items non-disappearing tests make the link between the balance sheet available assets or liabilities outstanding and the amount of assets and liabilities outstanding designated as hedged. The prospective non-over hedging test is satisfied when the net outstanding amount of the swaps is lower for each maturity band and on each measurement date than the determinated outstanding amount of items eligibles to fair value hedge. The estimated outstanding may be defined as the outstanding amount resulting from ALM projections. The non-over hedging a posteriori test is performed in two stages. The first stage is the same as the a priori test but on the outstanding amount eligible for a fair value hedge on closing date, new production excluded. The second stage is called the non-disappearance of the hedged item test and consists of verifying that the hedgeable position is always at least as significant as the maximum position that had initially been hedged. The effectiveness of the hedge is then determined using the dollar off-set method. The sources of ineffectiveness result from the last fixing of the variable leg of the hedging swaps, the bi-curve valorisation of the collateralised hedging instruments, possible mismatches in the cash flows payment dates and counterparty risk on hedging instruments valorisation. The Group's sensitivity to changes in interest rates at 31 December 2019 stood at EUR -54 million (for an instantaneous and parallel increase in interest rates of 0.1%).

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