Société Générale / Risk Report - Pillar III

6 CREDIT AND COUNTERPARTY CREDIT RISK COUNTERPARTY CREDIT RISK

These adjustments concern cyclical economic sectors which have had default peaks in the past and whose Group exposure exceeds a threshold determined and reviewed every year by Risk Department. Lastly, on an ancillary basis, loss allowances based on expert opinion

that increase or decrease expected credit loss have been retained to factor in future risks which cannot be modelled (mainly legislative or

regulatory changes). These inputs are updated quarterly.

COUNTERPARTY CREDIT RISK 6.4

CREDIT VALUATION ADJUSTMENT RISK In addition to the replacement risk, the Credit Valuation Adjustment (CVA) risk measures the adjustment to the value of the Group derivatives and repos portfolio that is required to take into account the credit quality of the counterparties facing the Group (see dedicated section). The positions taken to hedge the volatility of CVA (credit, interest rate or equity instruments) are monitored through sensitivity limits or stress tests. Scenarios representative of the market risks impacting CVA (interest rates, exchange rates and credit spreads) are applied to carry out the stress test on CVA. RISK ON CENTRAL COUNTERPARTIES (CCP) The counterparty credit risk stemming from the clearing of derivatives and repurchase agreement transactions by central couterparties is framed by specific limits on initial margins, both for house or for third parties’ activities, and on our contributions to the CCPs default funds. In addition, a stress test limit is also defined to capture the impact of a scenario where a major CCP member should default. The EMIR (European Market Infrastructure Regulation) in Europe and the DFA (Dodd-Frank Act) in the United States have resulted in increased exposure to central counterparties from financial institutions by requiring that the most standardised over-the-counter (OTC) transactions be cleared through CCP, approved by competent authorities and subject to prudential regulation. See table "EAD and RWA towards Central Counterparties (CCP)” in section 6.9 "Counterparty risk detail"). Mitigation of counterparty credit risk on market operations Various mitigation techniques are used to reduce this risk, namely: the signing, where possible according to standard policy, of global p close-out netting agreements for OTC transactions; collateralisation of market operations, either through central p counterparties for eligible products (listed products and certain OTC products) or through a bilateral margin call exchange mechanism which covers both current exposure (variation margins) and future exposure (initial margins).

Counterparty credit risk (CCR) is the risk of losses stemming from market operations should a counterparty fail to meet its payment obligations. The future market value of the exposure and the counterparty’s credit quality are uncertain and may vary over time as underlying market parameters change. CCR covers the replacement risk resulting from the default of a counterparty, the CVA (Credit Valuation Adjustment) risk related to the adjustment to the value of the Group portfolio, and the risk over the central counterparties (CCP) following clearing of market transactions. CCR is also affected by the wrong-way risk, which occurs when the exposure to a counterparty is positively correlated with the probability of default of the counterparty, i.e. the risk of the Group’s exposure to a counterparty increasing significantly, combined with a simultaneous increase in the probability of the counterparty defaulting. Market transactions involving counterparty credit risk include among others repurchase agreement transactions, securities and lending transactions, and derivative contracts, cleared or not, whether they are processed in principal (house trades) or on behalf of third parties (agency activity). Limit setting and framework monitoring Counterparty credit risk is framed through a set of limits which comply with the Group’s risk appetite. The limits defined for each counterparty are proposed by the credit management team in charge of the counterparty and are validated by the dedicated risk units. Individual limits are supplemented by limits in stress tests or in nominal to capture the impact of certain risk factors which are more difficult to measure. These limits are subject to annual or ad hoc reviews as often as necessary according to needs and changes in market conditions. Dedicated Risk Department teams monitor consumption limits (most often on a daily basis, or on the metrics computation frequency). In addition, a specific monitoring and approval process is implemented for the most sensitive counterparties or the most complex categories of financial instruments. In addition to the CORISQ, the Counterparty Credit Risk committee (CCRC) closely monitors counterparty credit risk and identifies emerging risk areas by conducting specific analyses. The Committee consists of representatives from the Market Activities Department and from the departments in charge of monitoring counterparty credit risks on market operations within the Risk Department. The CCRC can approve certain changes in the risk frameworks within its delegation. REPLACEMENT RISK The limits for monitoring replacement risk are: defined at the counterparty level, using the Potential Future p Exposure (PFE) measure; calibrated according to the credit quality and the nature of the p counterparty, the nature and the maturity of the financial instruments contemplated, the rationale for the trading activity entered into, and the contractual legal framework agreed.

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