NATIXIS_REGISTRATION_DOCUMENT_2017

FINANCIAL DATA Consolidated financial statements and notes

Fair value of financial instruments 5.6 General principles The fair value of an instrument(asset or liability) is the price that would be receivedto sell an asset or paid to transfer a liability in a standard arm’s length transactionbetweenmarket participants at the measurementdate. Fair value is thereforebasedon the exit price. The fair value of an instrument on initial recognition is normally the transaction price, i.e. the price paid to acquire the asset or receivedto assumethe liability. In subsequentmeasurements,the estimatedfair value of assets and liabilitiesmust be based primarilyon observablemarketdata, while ensuringthat all inputs used in the fair value calculationare consistentwith the price that market participantswould use in a transaction. In this case, fair value consists of a mid-market price and additional valuation adjustments determined according to the instrumentsin questionand the associatedrisks. The mid-marketprice is obtainedbasedon: the quoted price if the instrument is quoted on an active a market. A financial instrument is regarded as quoted on an activemarket if quotedprices are readily and regularlyavailable from an exchange, dealer, broker, industry group, pricing service or regulatoryagency, and those prices representactual and regularly occurring transactions on an arm’s length basis on the main market or, failing that, the most advantageous market; if the marketfor a financialinstrumentis not active,fair value is a established using valuation techniques. The techniques used must maximize the use of relevant observable entry data and minimizethe use of non-observableentry data. They may refer to observable data from recent transactions, the fair value of similar instruments,discounted cash flow analysis and option pricing models, proprietary models in the case of hybrid instrumentsor non-observabledata when no pricing or market data are available. Additional valuation adjustments incorporate factors related to valuation uncertainties,such as market, credit and liquidity risks in order to account, in particular, for the costs resulting from an exit transaction on the main market. Similarly, a Funding Value Adjustment(FVA) aiming to account for – through assumptions – costs associated with the funding of future cash flows of uncollateralized derivatives or imperfectly collateralized derivativesis also taken into account. The main additionalFundingValueAdjustmentsare as follows: Bid/ask adjustment – Liquidity risk This adjustmentis the differencebetween the bid price and the ask price correspondingwith the selling costs. It reflectsthe cost requestedby a market player in respect of the risk of acquiringa position or of selling at a price proposed by another market player. Adjustment for model uncertainty This adjustment takes into account the imperfections of the valuationtechniquesused – in particular,the risk factors that are

not considered, even when observable market inputs are available. This is the case where risks inherent to various instruments differ from those considered by the observable inputsused to value them. Adjustment for input uncertainty Observing certain prices or inputs used in valuation techniques may be difficult or the price or input may be too regularly unavailable to determine the selling price. Under these circumstances,an adjustment may be necessary to reflect the probability that market participantsmight adopt different values for the same inputs when evaluating the financial instrument’s fair value. Value adjustment for counterparty risk (Credit Valuation Adjustment – CVA) This adjustmentapplies to valuationsthat do not account for the counterparty’scredit quality. It correspondsto the expected loss related to a counterparty’sdefault risk and aims to account for the fact that Natixis cannot recover all the transactions’market value. The method for determining the CVA is primarily based on the use of market inputs in connection with professional market practices for all counterparty segments included in this calculation. In the absence of liquid market inputs, proxies by type of counterparty,rating and geographicarea are used. Value adjustment for own credit risk (Debit Valuation Adjustment – DVA) and funding valuation adjustment (FVA) The DVA is symmetricalto the CVA and representsthe expected loss, from the counterparty’sperspective, on liability valuations of derivative financial instruments. It reflects the impact of Natixis’ credit quality on the valuation of these instruments.The adjustmentis made by observing credit spreads on a sample of comparable entities, taking into account the liquidity of Natixis’ CDS spread over the period. The funding valuation adjustment (FVA) is taken into accountin the DVA calculation. The followingcriteria are used to determinewhethera market is active: the level of activity and trend of the market (includingthe level a of activityon the primarymarket); the length of historical data of prices observed in similar a markettransactions; scarcityof prices recoveredby a serviceprovider; a sharp bid-askprice spread; a steep price volatility over time or between different market a participants. Control system The calculation of fair value is subject to control procedures aimed at verifying that fair values are determinedor validatedby an independentfunction. Fair values determinedby referenceto external quoted prices or market parameters are validated by an independent unit (the Market Data Control Department). Second-level controls are carriedout by the Risk Department.

5

233

Natixis Registration Document 2017