Presentation of banking portfolio securitization positions (including securitization positions deducted from equity)
❚ INVESTOR
(in millions of euros) Exposure at risk Risk-weighted assets Regulatory capital requirements
On-balance sheet exposure 7,149 4,928 394
Off-balance sheet exposure 3,969 3,869 310
TOTAL 11,117 8,797 704
❚ ORIGINATOR
(in millions of euros) Exposure at risk Risk-weighted assets Regulatory capital requirements
On-balance sheet exposure 7,076 456 36
❚ SPONSOR
(in millions of euros) Exposure at risk Risk-weighted assets Regulatory capital requirements
On-balance sheet exposure 174 107 9
Off-balance sheet exposure 3,960 3,156 252
TOTAL 4,134 3,263 261
(in millions of euros) Exposure at risk Risk-weighted assets Regulatory capital requirements
TOTAL 22,327 12,516 1,001
3.2.5.4
Market Risk
ORGANIZATION OF MARKET RISK MANAGEMENT
(Data certifi ed by the Statutory Auditors in accordance with IFRS 7).
Market risk control is primarily the responsibility of the front offi ce business lines, which manage and monitor on a daily basis the limits that are allocated to them beforehand.
Natixis’ market risk is controlled by the Market Risk Department, an integral part of the Risk function. This department independently defi nes the principles (methods and limits) for measuring risks, submits them to the executive management for approval and monitors these risks. It validates market product valuation models and regularly ensures that models used are consistent with market developments and changes in best practices.
The market risk control mechanism is based on a delegation structure (mandates), which is under the responsibility of the Global Risk Committee and in which the Market Risk Committee plays an essential role.
The Market Risk Committee is tasked with defi ning the Bank’s market risk policy and ensuring compliance with it. As the operational extension of the executive body, the Committee is vested with decision-making powers to carry out its role with regard to market risk issues (methods and limits). It meets on a bi-monthly basis (though special sessions may be held) and is chaired by the Chief Executive Offi cer or his/her delegated representative who is a member of the Senior Management Committee. The Committee Chairman has sole decision-making authority on all matters presented, after discussion between the business lines concerned and the Risk Department.
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The Market Risk Committee determines market risk policy, notably via the following tasks:
● determining and reviewing VaR and stress test limits,
operational limits, and loss alerts;
● establishing delegations for validation purposes;
● reviewing risk exposure with a potential focus on a specific class of risk, class of asset or pay-off;
● informing on methodological changes concerning the
calculation of VaR and stress tests;
● preparing quarterly summaries of limit excesses;
● communicating the results of backtesting;
● reviewing delegated decisions after they have been taken;
● providing information on the validation of market risk methodologies and fair value adjustments, and on the validation of models.
The Market Risk Department comprises two units, namely an operational unit and a cross-functional unit.
The operational unit is responsible for the following functions with regard to each business line:
● risk measurement methods;
● analysis and control of market risks and preparation of the corresponding reports;
● regular monitoring of positions and their results;
● monitoring and analysis of specific stress tests;
● proactive risk management;
● setting of limits and risk indicators;
● validation of valuation models (pricers);
● defining provisioning and fair value adjustment policies (for liquidity risk, risks related to non-hedgeable parameters, model risks, etc.).
The cross-functional unit is in charge of:
● all consolidated reports presented to management and control and supervisory bodies;
● introducing standards and procedures common to all entities (subsidiaries and branches) carrying market risks;
● international coordination;
● regulatory monitoring;
In line with the recommendations of France’s Lagarde Report, it also ensures adherence to the limit notifi cation procedure. It also makes sure that each trader sends email confi rmation that they belong to the desk where they are authorized to trade and that they respect their allocated limits.
MARKET RISK MEASUREMENT METHODS
(Data certifi ed by the Statutory Auditors in accordance with IFRS 7).
Natixis’s market risk management is based on a risk metrics model that measures the risk run by each Group entity. Different techniques are used to measure market risk:
1- Synthetic measures of VaR to identify potential losses in each business, based on a pre-determined confidence level (99%) and time period (1 day).
To this end, a statistical model has been constructed to track the combined behavior of market parameters affecting portfolio value. The calculation method is based on an econometric model whose standard deviations are calculated as being the maximum (risk factor by risk factor) standard deviations calculated over rolling 12-month and 3-month periods. This method makes VaR more responsive if the markets become more volatile.
All decisions regarding risks factors are revised annually in Committee Meetings attended by all parties concerned (Risk Department, front office and P&L division),. Quantitative, objective tools are used to measure the relevance of risk factors. The aim is to ensure consistency between VaR calculations, results and sensitivities (use of the same risk factors).
Natixis uses VaR calculated with numerical simulations, based on Monte Carlo-type methodology taking into account a portfolio’s possible non-linear characteristics with respect to different risk factors. Calculation methods are harmonized using a single calculation tool.
VaR is calculated and monitored daily for all the group’s trading portfolios. A VaR limit is set at an overall level and for each business.
The robustness of the VaR indicator is regularly backtested against the change in daily trading results. This exercise allows ex-post loss potential, as provided ex-ante by VaR, to be compared with actual outcomes.
Natixis’ internal VaR model was approved by the French Prudential Supervisory Authority (Autorité de Contrôle
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2- Operational indicators are used to manage activity on an overall and/or homogenous business basis, by focusing on more directly observable criteria (sensitivity to changes in the underlying and to volatility, correlation, nominal, diversification indicators, etc.). Limits corresponding to these qualitative and quantitative operational indicators thereby complement VaR, stress test and loss alert limits. They are determined in accordance with the latter limits;
3- Stress tests to measure potential losses on portfolios in extreme market conditions. Natixis’ mechanism is based on two categories of stress tests: overall stress tests and dedicated stress tests for each business.
Stress tests to measure potential losses on portfolios in extreme market conditions. Natixis’ mechanism is based on two categories of stress tests: overall stress tests and dedicated stress tests for each business.
Overall stress tests are revised on a continuous basis. They are performed daily and may be grouped into three categories:
●Historic stress tests consist of reproducing sets of changes
in market parameters observed during past crises in order to create an ex-post simulation of the extent of P&L changes recorded. While stress tests do not have any predictive powers, they do make it possible to gauge the exposure of the portfolio to known scenarios. Two new historic stress tests were calibrated in 2010, increasing the total to 11.
●Hypothetical stress tests are used to simulate variations in
market parameters on all activities, on the basis of plausible assumptions concerning one market’s predicted response compared with another’s, depending on the nature of the initial stress. Stresses are determined through a joint effort involving the Risk Department, the front office and Natixis economists. Their scenarios can be defined on the basis of economic criteria (e.g. real estate crisis, economic crisis), geopolitical considerations (e.g. terrorist attacks in Europe, overthrow of a Middle East regime) or other factors (e.g. avian flu). A new theoretical stress test was calibrated in 2010, increasing the total to six.
●Adverse stress tests are designed to detect the most
adverse situations for the Bank, based on the characteristics of the Bank’s portfolio. Calculations involve running stress scenarios through a matrix, with adverse stress being defined as the level resulting in the maximum loss.
Specific stress tests, which are also calculated daily in
management applications, were rolled out over all portfolios and supported by alerts. They were defi ned using the same severity standard and are used to identify the main loss areas by portfolio.
All limits (operational indicators, VaR, stress tests, loss alerts) are monitored daily by the Market Risk Department. Any limit breaches must be reported and loss alert limits may lead to a management decision concerning the positions in question (close, hedge, maintain, etc.).
BPCE guarantees most of the workout portfolio management assets in Paris and New York. Nevertheless, the Market Risk Department continues to manage risks on all transactions on a standardized and exhaustive basis, whether these transactions are guaranteed or not by BPCE. Overall VaR and stress tests taking into account the effects of this guarantee are now produced on a daily basis.
Specifi c reports by activity are sent to the traders and managers concerned on a daily basis. A global market risk report is also distributed daily to Executive Management, BPCE and front offi ce managers. Finally, specifi c reports covering the scope of BPCE’s guarantee are sent to BPCE daily.
QUANTITATIVE DATA FOR MEASURING MARKET RISK
Change in VaR for Natixis taking into account BPCE’s
guarantee
The 99% 1-day VaR level for Natixis’ trading portfolios averaged €12.9 million. It peaked at €20.6 million on June 10, 2010 and stood at €7.5 million on December 31, 2010.
As the chart below shows, VaR fell slightly over the year, thus indicating that exposure continued to decline (for the GAPC workout management portfolio) and that the volatility of market data and standard deviations used to calculate VaR were stable. The chart below presents trading VaR history between 31.12.2009 and 31.12.2010, for the entire scope and GAPC after accounting for BPCE’s guarantee. As well as the history VaR for CIB.
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❚ OVERALL NATIXIS VAR – TRADING PORTFOLIO (1 DAY VAR 99%)
0 5 10 15 20 25
Overall VaR including the BPCE guarantee GAPC VaR including the BPCE guarantee VaR CIB
31.12.09 31.01.10 28.02.10 31.03.10 30.04.10 31.05.10 30.06.10 31.07.10 31.08.10 30.09.10 31.10.10 30.11.10 31.12.10