NATIXIS_REGISTRATION_DOCUMENT_2017

5 FINANCIAL DATA

Consolidated financial statements and notes

On less liquid markets, other market information, primarily observabledata, is used to validatethe fair value of instruments. The factorstaken into accountincludethe following: the origin of the external source (stock market pages, content a contributionservices, etc.); the consistencyof the varioussources; a the frequencyat which the data are updated; a the representative nature of inputs based on recent market a transactions. For fair values determined using valuation models, the control system consists of the independent validation of model constructionand of the inputs incorporatingthesemodels. This is carried out under the responsibility of the Risk Department. It involves verifying that the model is consistent with and relevant to its intended function (price setting, valuation, coverage, measurementand control of risk) and the product to which it applies,basedon: the theoretical approach: the financial and mathematical a foundationsof the model; the application of the model: the pricing models used to a generaterisk and earningsdata; the stabilityof the modelunder parametricstress; a an assessment of the stability and consistency of the a numericalmethodsused; the independent re-implementationof the model as part of a algorithmvalidation; the comparative analysis of the calibration of model a parameters; an assessment of the modeling risk, particularly the a comparativeanalysisof the model with other valuationmodels, in order to ensure the adequacy of the model and the payoff (the Formula of positive or negative flows attached to the productat maturity); the implementationof an adjustment in respect of modeling a risk to account for potential deficiencies in the model or its calibration; integrationof the model in informationsystems. a The methods for determining fair value are monitored by a number of bodies including the Observability and Inputs Committee, the Valuation Committee, the Impairment Committee and the Model Validation Committee, which comprise representativesof the Risk Department, the Finance Department, and the Market Data and Valuations Control Department. Fair value hierarchy For financial reporting purposes, IFRS 13 requires fair value measurementsapplied to financial and non-financialinstruments to be allocatedto one of three fair value levels: Level 1: Fair value measurement using prices quoted on a) liquid markets Level 1 comprises instruments whose fair value is determined basedon directlyusablepricesquotedon activemarkets.

This mainly includes securities listed on a stock exchange or traded continuously on other active markets, derivatives traded on organizedmarkets (futures, options, etc.)whose liquidity can be demonstrated, and shares of UCITS whose NAV is determinedand reportedon a daily basis. Level 2: Fair value measurement using observable market b) data Level 2 fair value comprises instruments other than those mentionedin Level 1 fair value and instrumentsmeasuredusing a valuation technique incorporatinginputs that are either directly observable (prices) or indirectly observable (price derivatives) throughto maturity.Thismainly includes: Simple instruments Most over-the-counter derivatives, swaps, credit derivatives, forward rate agreements, caps, floors and plain vanilla options are traded in active markets, i.e. liquid markets in which trades occur regularly. These instruments are valued using generally accepted models (discounted cash flow method, Black & Scholes model, interpolationtechniques),and on the basis of directly observable inputs. For these instruments,the extent to whichmodels are used and the observabilityof inputshas been documented. Instrumentsmeasuredusing level 2 inputsalso include: securities that are less liquid than those classified as Level 1, a whose fair value is determined based on external prices put forward by a reasonablenumber of active market makers and which are regularly observable without necessarily being directly executable (prices mainly taken from contributionand consensus databases); where these criteria are not met, the securitiesare classifiedas Level 3 fair value; securities not quoted on an active market whose fair value is a determined based on observable market date. E.g. use of market data publishedby listed peer companiesor the multiple method from techniques commonly used by market participants; Greek sovereign securities, whose fair value was recorded a under Level 2 given the wide bid-ask price spread on market prices; shares of UCITS whose NAV is not determinedand published a on a daily basis, but are subject to regular reporting or offer observabledata from recenttransactions; debt issuesmeasuredat fair value throughprofit and loss. The a valuationof the “issuer credit risk” componentis based on the discounted cash-flow method, using inputs such as yield curves, revaluationspreads, etc. For each issue, this valuation representsthe productof its remainingnotionalamountand its sensitivity, taking into account the existence of calls, and basedon the differencebetweenthe revaluationspread(based on BPCE’s cash reoffer curve at December 31, 2017, as on previous reporting dates) and the average issue spread. Changes in the issuer spread are generally not material for issueswith an initial maturityof less than one year. Complex instruments Some more hybrid and/or long-maturityfinancial instrumentsare measured using a recognized model on the basis of market inputs derivedfromobservabledata such as yield curves, implied volatility layers of options, market consensus data or active over-the-countermarkets.

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Natixis Registration Document 2017