BPCE_REGISTRATION_DOCUMENT_2017

5 FINANCIAL REPORT

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

Fair value hierarchy For financial reporting purposes, IFRS 13 requires fair value measurementsapplied to financial and non-financialinstruments to be allocated to one of three fair valuelevels: LEVEL 1: VALUATION USING PRICES QUOTED ON A LIQUID MARKET Level 1 comprises instrumentswhose fair value is determined based on directly usable prices quoted on activemarkets. This mainly includes securities listed on a stock exchange or traded continuouslyon other active markets,derivativestraded on organized markets (futures, options, etc.) whose liquidity can be demonstrated, and shares of UCITS for which NAV is determinedand reported on a daily basis. LEVEL 2: VALUATION USING OBSERVABLE MARKET INPUTS Level 2 fair value comprises instruments – other than instruments mentioned in Level 1 fair value – measured using a valuation technique incorporating inputs that are either directly observable (prices) or indirectly observable (price derivatives) through to maturity. Thismainlyincludes: Standard instruments: Most over-the-counterderivatives, swaps, credit derivatives, forward rate agreements, caps, floors and plain vanilla options are traded in activemarkets, i.e. liquidmarkets inwhich trades occurregularly. These instruments are valued using generally accepted models (discounted cash flow method, Black & Scholes model, interpolation techniques), andon the basisof directly observable inputs. For these instruments,the extent to which models are used and the observability of inputshas been documented. ● fair value is determinedbased on external prices put forward by a reasonablenumberof activemarketmakers and which are regularly observable without necessarily being directly executable (prices mainly taken from contribution and consensus databases); where these criteria are not met, the securities are classified as Level 3 fair value; securities not quoted on an active market whose fair value is ● determined based on observable market data (for example, using market data for listed peers or the earningsmultiplemethod based on techniques widely used in the market); greek sovereign securities, whose fair value is recorded under ● Level 2 given thewide bid-ask price spread on marketprices; shares of UCITS whose NAV is not determined and published on a ● daily basis but is subject to regular reporting or which offer observabledata from recent transactions; debt securitiesdesignatedat fair value, mainly by Natixis, and to a ● lesser extent Crédit Foncier. The methodology used by Natixis to value the “issuer credit risk” componentof issues designatedat fair value is based on the discounting of future cash flows using directly observable inputs such as yield curves and revaluation differences.For each issue, this valuationrepresentsthe product of the notional amount outstanding and its sensitivity, taking into account the existence of calls and the difference between the revaluation spread (based on the BPCE cash reoffer curve at December 31, 2017 as for previous closing dates) and the average issue spread. Changes in own credit risk are generally not material for issueswith an initial maturity of less than one year. Instruments measuredusing Level 2 inputsalso include: securitiesthat are less liquid than those classifiedas Level 1, whose

scarcityof prices recoveredby a service provider; ● sharp bid-ask price spread; ● steep price volatility over time or between different market ● participants. NATIXIS’ CONTROL SYSTEM (NATIXIS IS THE MAIN CONTRIBUTOR TO THE GROUP’S BALANCE SHEET ITEMS MEASURED AT FAIR VALUE) The calculationof fair value is subject to control proceduresaimed at verifying that fair values are determined or validated by an independent function. Fair values determined by reference to external quoted prices or market inputs are validatedby an independentunit (the Market Data Controldepartment).Second-levelcontrolsare carried out by the Risk department. On less liquid markets,other market information,primarilyobservable data, isused to validate the fair value of instruments. The factorstaken into account includethe following: the origin of the external source (stock market pages, content ● contributionservices, etc.); the consistency of thevarioussources; ● the frequency of data feeds; ● the representative nature of inputs based on recent market ● transactions. For fair values determinedusing valuationmodels, the control system consists of an independentvalidation of the model constructionand of the inputs included in these models. This is carried out under the responsibility of the Risk department. It involves verifyingthat the model is consistentwith and relevant to its intendedfunction(price setting,valuation,coverage,measurement and control of risk) and the producto which it applies, based on: a theoreticalapproach:the financialand mathematicalfoundations ● of the model; the application of the model: the pricing models used to generate ● risk and earnings data; the stabilityof the model under parametric stress; ● an assessment of the stability and consistency of the numerical ● methods used; the independent re-implementation of the model as part of ● algorithmvalidation; the comparative analysis of the calibration of model inputs; ● an assessment of the modeling risk, particularly the comparative ● analysis of the model with other valuation models, in order to ensure the adequacy of the model and the payoff (the formula of positive or negative flows attached to the product at maturity); the implementationof an adjustmentin respect of modelingrisk to ● accountfor potentialdeficienciesin the model or its calibration; the incorporationof the model into information systems. ● The methodsfor determiningfair value are monitoredby a number of bodies including the Inputs and Observability Committee, the Valuation Committee, the Impairment Committee and the Model Validation Committee, which comprise representatives of the Risk department, the Finance department and the Market Data Control and Valuation department.

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Registration document 2017