BPCE_REGISTRATION_DOCUMENT_2017

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

Complex instruments: Certain hybrid and/or long-maturity financial instruments are measured using a recognized model on the basis of market inputs derived from observable data such as yield curves, implied volatility layers of options, market consensus data or active over-the-counter markets. The main models for determiningthe fair value of these instruments are described below by type of product: equity products: complexproducts are valued using: ● market data, - a payoff, i.e. the formulaof positiveor negativeflows attachedto - the product at maturity, a modelof changesin the underlying asset. - These products can have single or multiple underlyings or be hybrids (fixed income/equity for example). The main models used for equity products are local volatility models, local volatility combined with Hull & White 1 factor (H&W1F), Tskew and Pskew. The local volatilitymodel treats volatility as a function of time and the price of the underlying.Its main propertyis that it considersthe implied volatility of the option (derived from market data) relative to its exercise price. The local volatility hybrid model, paired with the H&W1F, consists of pairing the local volatility model described above with a Hull & White 1 factor type fixed-income model, described below (see fixed-income products). The Tskew model is a valuation model for mono and multi-underlying options. Its principle is to calibrate the distribution of the underlying asset or assets at maturity to standard option prices. The Pskew model is similar to the Tskew model. It is used in particular for simple ratchet equity products such as capped or floored ratchet products; fixed income products: fixed income products generally have ● specific characteristics which justify the choice of model. Underlying risk factors associated with the payoff are taken into account. The main models used to value and manage fixed-incomeproducts are Hull & White models (one-factor and two-factor models or one-factor Hull & White stochastic volatility model), the Hunt Kennedy model and the “smiled” BGM model. The Hull & White models are simple pricingmodels for plain vanilla fixed-incomeproductsand can be calibratedeasily. Productsvalued using these models generallycontaina Bermudan-typecancellation option ( i.e. one that may be exercised at certain dates set at the beginning of the contract). SBGM and Hunt Kennedy models are used to value fixed-income products that are sensitive to volatility smiles ( i.e. implied change in volatilityrelative to the exerciseprice) and to autocorrelation(or correlation between interest rates);

foreign exchange products: foreign exchange products generally ● have specific characteristics which justify the choice of model. The main models used to value and manage foreign-exchange productsare local and stochasticvolatilitymodels,as well as hybrid models, which combine modeling of the underlying foreign exchange with two Hull & White 1 factor models to ascertain the fixed-income factors. Inputs relating to all such Level 2 instrumentswere demonstratedto be observable and documented. From a methodology perspective, observability is based on four inseparablecriteria: inputs are derived from external sources (primarily a recognized ● contributor, for example); they are updated periodically; ● they are representative of recent transactions; ● their characteristics are identical to the characteristics of the ● transaction. If necessary, a proxy may be used, provided that the relevance of such an arrangement is demonstrated and documented. The fair value of instruments obtained using valuation models is adjusted to take account of liquidity risk (bid-ask), counterpartyrisk, the risk relating to the cost of funding uncollateralizedor imperfectly collateralizedderivatives,internalcredit risk (measurementof liability derivative positions), as well as modeling risk and inputrisk. The margin generated when these instruments begin trading is immediately recognized in income. LEVEL 3: VALUATION USING UNOBSERVABLE MARKET INPUTS Level 3 comprises instrumentsmeasured using unrecognizedmodels and/or models based on unobservable market data, where they are liable to materially impact the valuation. This mainlyincludes: unlisted shares whose fair value could not be determined using ● observableinputs; private equity securitiesnot listed on an activemarket,measuredat ● fair value with models commonly used by market participants, in accordance with International Private Equity Valuation (IPEV) standards, but which are sensitive to market fluctuations and whose fair value determination necessarily involves a judgment call; structured securities or securities representative of private ● placements, held bythe Insurancebusinessline; hybrid interest rate and currency derivatives and credit derivatives ● that arenot classified inLevel 2; instruments with adeferredday-onemargin; ● shares of UCITS for which the fund has not publisheda recent NAV ● at the valuationdate, or for which there is a lock-up period or any other constraint calling for a significant adjustment to available market prices (NAV, etc.) in respect of the low liquidityobservedfor such shares; instruments carried at fair value on the balance sheet and for ● which data are no longer availabledue to a freeze in trading in the wake of the financial crisis, which were not reclassified within “Loans and receivables”pursuant to the amendmentto IAS 39 and IFRS 7 published onOctober13, 2008 (see below).

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Registration document 2017