BPCE - 2018 Registration document

FINANCIAL REPORT IFRS Consolidated Financial Statements of Groupe BPCE as at December 31, 2018

The method for determining the 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 valuation of these instruments. The DVA is 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 account the funding valuation adjustment (FVA). The following criteria are used to determine whether or not a market is active: the level of activity and trend of the market (including the level of ● activity on the primary market); the length of historical data on prices observed in similar market ● transactions; scarcity of prices recovered by 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 calculation of fair value is subject to control procedures aimed 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 validated by an independent unit (the Market Data Control department). Second-level controls are carried out by the Risk department. On less liquid markets, other market information, primarily observable data, is used to validate the fair value of instruments. The factors taken into account include the following: the origin of the external source (stock market pages, content ● contribution services, etc.); the consistency of the various sources; ● the frequency of data feeds; ● the representative nature of inputs based on recent market ● transactions. For fair values determined using valuation models, the control system consists of the independent validation of model construction and of the inputs included in these models. 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, measurement and control of risk) and the product to which it applies, based on:

a theoretical approach: the financial and mathematical ● foundations of the model; the application of the model: the pricing models used to generate ● risk and earnings data; the stability of 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 ● algorithm validation; 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 implementation of an adjustment in respect of modeling risk ● to account for potential deficiencies in the model or its calibration; the incorporation of the model into information systems. ● The methods for determining fair value are monitored by 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 Monitoring and Valuation department. Fair value hierarchy For financial reporting purposes, IFRS 13 requires fair value measurements applied to financial and non-financial instruments to be allocated to one of three fair value levels: LEVEL 1: VALUATION USING PRICES QUOTED ON A LIQUID MARKET Level 1 comprises instruments whose fair value is determined based on directly usable prices quoted on active markets. This mainly includes securities listed on a stock exchange or traded continuously on other active markets, derivatives traded on organized markets (futures, options, etc.) whose liquidity can be demonstrated, and units of UCITS that calculate and report their net asset value on a daily basis. LEVEL 2: VALUATION USING OBSERVABLE MARKET INPUTS Level 2 fair value comprises instruments other than those mentioned in Level 1 fair value and instruments measured using a valuation technique incorporating inputs that are either directly observable (prices) or indirectly observable (derived from prices) through to maturity. This mainly 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, interpolation techniques), and on the basis of directly observable inputs. For these instruments, the extent to which models are used and the observability of inputs have been documented.

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Registration document 2018