BPCE - 2018 Registration document

5 FINANCIAL REPORT

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

Instruments measured using Level 2 inputs also include: securities that are less liquid than those classified as Level 1, ● whose fair value is determined based on external prices put forward by a reasonable number of active market makers 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 earnings multiple method based on techniques widely used in the market); greek sovereign securities, whose fair value is recorded under ● Level 2 given the wide bid-ask price spread on market prices; shares of UCITS that do not calculate and report their net asset ● value on a daily basis but which are subject to regular reporting or which offer observable data from recent transactions; debt securities designated at fair value, mainly by Natixis, and to a ● lesser extent Crédit Foncier. The methodology used by Natixis to value the “issuer credit risk” component of issues designated at fair value is based on the discounting of future cash flows using inputs such as yield curves and revaluation spreads. For each issue, this valuation represents the 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, 2018 as for previous closing dates) and the average issue spread. Changes in own credit risk are generally not material for issues with an initial maturity of less than one year. 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 determining the fair value of these instruments are described below by type of product: equity products: complex products are valued using: ● market data, - a payoff, i.e. the formula of positive or negative flows attached - to the product at maturity, a model of changes in 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 volatility model treats volatility as a function of time and the price of the underlying. Its main property is that it considers the 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-income products 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 pricing models for plain vanilla fixed-income products and can be calibrated easily. Products valued using these models generally contain a Bermudan-type cancellation 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 volatility relative to the exercise price) 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 products are local and stochastic volatility models, 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 instruments were demonstrated to be observable and documented. From a methodology perspective, observability is based on four inseparable criteria: 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), counterparty risk, the risk relating to the cost of financing uncollateralized or partially collateralized derivatives, own credit risk (measurement of liability derivative positions), and modeling and input risk. The margin generated when these instruments begin trading is immediately recognized in income. LEVEL 3: VALUATION USING UNOBSERVABLE MARKET INPUTS Level 3 comprises instruments measured using unrecognized models and/or models based on unobservable market data, where they are liable to materially impact the valuation. This mainly includes:

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Registration document 2018