BPCE_REGISTRATION_DOCUMENT_2017

FINANCIAL REPORT IFRS Consolidated Financial Statements of BPCE SA group as at December 31, 2017

HEDGING OF A NET INVESTMENT IN A FOREIGN CURRENCY The net investment in a foreign operation is the amount of the investment held by the consolidatingentity in the net assets of the operation. The purpose of a net investment hedge in a foreign currency is to minimizethe foreign exchangeeffect for a consolidatingentity of an investment in an entity whose functional currency is different from the presentation currency of the consolidating entity’s financial statements. Net investment hedges are accounted for in the same manner ascash flow hedges. Unrealizedgains and losses initially recognizedin equity are taken to income when the net investment is sold in full or in part (or when partially sold with loss of control). General principles The fair value of an instrumentis the price that would be received to sell an asset or paid to transfer a liability in a standard arm’s length transaction betweenmarketparticipants at the measurement date. Fair valueis therefore determinedusing the exit price. On first recognition,fair value is usually the transactionprice and is thus the price paid to purchase the asset or the price received to assume theliability. In subsequentmeasurements,the estimated fair value of assets and liabilities must be based primarily on observable market data, while ensuring that all inputs used in the fair value calculation are consistent with the price that market participants would use in a transaction. In this case, fair value consists of a mid-marketprice and additional valuation adjustments determined according to the instruments in question and the associated risks. The mid-marketprice is obtained based on: the instrument’s quoted price, if the instrument is quoted on an ● active market. A financial instrument is regarded as quoted on an active market if quoted prices are readily and regularly available from an exchange,dealer, broker, industry group, pricing service or regulatory agency, and these prices represent actual and regularly occurring transactions on the principal market or, failing that, on the mostfavorablemarket,on an arm’s length basis; if the market for a financial instrument is not active, fair value is ● established using valuation techniques. The techniques used must maximize the use of relevant observable entry data and minimize the 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 instruments or non-observable data when no pricingor marketdata are available. Additional valuation adjustmentsinclude factors related to valuation uncertainties, such as market, credit and liquidity risks, in order to recognize the costs incurred by a divestment transaction on the primary market. Likewise, an adjustment (Funding Valuation Determination of fair value 4.1.6

Adjustment – FVA) for using assumptions to recognize costs related to the financing costs of future cash flows of uncollateralized or partially collateralized derivatives is also recognized.

The mainadditionaladjustments areas follows:

BID/ASK ADJUSTMENT – LIQUIDITY RISK This adjustment is the difference between the bid price and the ask price correspondingto the selling costs. It reflects the cost requested by a market player in respect of the risk of acquiring a position or of selling at aprice proposed by another market player. MODEL UNCERTAINTY ADJUSTMENT This adjustment takes into account imperfections in the valuation techniques used, and in particular risk factors not considered even though observablemarket inputs are available. This is the case when the risks inherentin the instrumentsdiffer from those incurredby the observablemarketdata used to determine their valuation. INPUT UNCERTAINTY ADJUSTMENT Observing certain prices or inputs used in valuation techniques may be difficult or the price or input may be too regularly unavailableto determinethe selling price. Under these circumstances,an adjustment may be necessary to reflect the probability that market participants might adopt differentvalues for the same inputs when evaluatingthe financial instrument’s fair value. CREDIT VALUATION ADJUSTMENT (CVA) This adjustment applies to valuations that do not account for the counterparty’scredit quality. It correspondsto the risk of loss linked to the risk of default by a counterpartyand aims to take into account the fact that the Group may not recover the full market value of the transactions. The method for determiningthe CVA is primarily based on the use of market inputs in connection with professional market practices, for all segments of counterparties subject to this calculation. In the absence of liquid market inputs, proxies by type of counterparty, rating and geographic area are used. DEBIT VALUATION ADJUSTMENT (DVA) AND FUNDING VALUATION ADJUSTMENT (FVA) The DVA is symmetrical to the CVA and represents the risk of loss, from the counterparty’s perspective, on liability valuations of financial instruments. It reflects the impact of the Group’s credit quality on the valuationof these instruments.The DVA adjustmentis assessed by observing the Group’s “credit” market input. At Natixis, the main contributor for the Group, this involves the observation of the credit spreads of a sample of comparable banking institutions, taking into account the liquidity of the spread on Natixis’ CDS during the period. The DVA adjustment is established after taking into accountthe funding valuation adjustment (FVA). The followingcriteria are used to determinewhether or not a market is active: the level of activity and trend of the market (includingthe level of ● activity onthe primary market); the length of historical data on prices observed in similar market ● transactions;

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Registration document 2017