FACTORES RELACIONADOS CON EL PACIENTE:

Business risks

Strategic risk

Strategic risk is the possibility that an event related to the practices or relationships of the Caisse, its subsidiaries or its employees will contravene its mission, culture and fundamental values.

Strategic risk is also related to the inadequacy of business strategies and deficiencies in the implementation of the Caisse’s strategic orientations. The Caisse will be exposed to strategic risk if its resources are not allocated according to its established priorities.

The Caisse manages this risk with a structured strategic planning process that involves all its units. Strategic orienta- tions are proposed by the Executive Committee, approved by the board of Directors and communicated to all employees. Annual business plans are then drawn up. The members of the board of Directors and of the Executive Committee receive a quarterly summary of the Caisse’s activities.

Reputational risk

Reputational risk is the possibility that an event related to the business practices or relationships of the Caisse, its subsi- diaries or its employees will adversely affect its image or cause the public to lose confidence in it. This risk could detract from the Caisse’s ability to achieve its objectives.

All directors, officers and employees are responsible for carrying out their activities so as to minimize reputational risk. The Caisse manages and controls this risk through codes of ethics and professional conduct for directors, officers and employees, training programs, effective internal management and governance practices, and a set of policies and procedures, including its Policy on Responsible Investment. The Caisse also ensures that the information it provides internally and exter- nally is truthful and has been verified, and it aims to ensure that the public and the media gain a better understanding of its operations. The Caisse also monitors matters concerning it and issues public positions as necessary.

Financial risks

Market risk

Market risk is the risk of financial loss arising from changes in the value of financial instruments. The value of a financial instrument may be affected by changes in market variables, particularly interest rates, foreign exchange rates, share prices and commodity prices. The risk arises from the volatility of prices of financial instruments, which, in turn, result from the volatility of such market variables. The Caisse manages all market risks in an integrated manner. The main elements that give rise to risks such as sector, country and issuer are taken into account. To manage market risk, the Caisse may use derivative financial instruments that are traded on exchanges or directly with banks and securities dealers.

Value at risk

The Caisse measures market risk using a statistical technique known as value at risk (VaR). This technique, used by most investment firms and financial institutions, covers all the assets held by the Caisse. The Caisse determines the VaR for each instrument in its specialized portfolios and aggregates the information for the overall portfolio. Two types of risk are assessed: the absolute VaR of the Caisse’s benchmark portfolio and of overall portfolio, and the VaR of active management. VaR is based on a statistical measurement of the volatility of the market value of individual portfolio positions and their corre- lations. VaR uses historical data to estimate the loss expected during a given period according to a predetermined confidence level. For example, with a 99% confidence level, VaR indicates a loss that should exceed this level in only 1% of cases.

One of the advantages of VaR is that it incorporates the risks of a wide range of investments into a single measurement, providing an overall risk measurement for a portfolio and even for a set of portfolios.

The Caisse uses the historical simulation approach to assess VaR. This method is based primarily on the assumption that the fluctuation of securities observed during a given period can be used to infer future fluctuation of the securities. It requires historical data series for all the risk factors required to assess the returns on the instruments. In the absence of such historical data, especially for less liquid products, such as private equity and real estate, proxies and various mathematical models are used to calculate VaR. Historical data from 1,500 days of obser- vation of risk factors, such as variations in exchange rates, interest rates and financial asset prices, are used to assess the volatility of returns and the correlation between returns on various assets.

The results of calculations obtained with this methodology do not make it possible to estimate, on the basis of a specific event, the amount of the loss that a portfolio would incur if such an event recurred.

The methodology used by the Caisse estimates a portfolio’s risk by annualizing its potential daily loss, that is, by assuming that the amounts lost throughout the year will be reinvested to maintain the same level of risk. In summary, this methodology means that the effects on the portfolio of the most adverse events observed over a one-day horizon will be repeated several times a year.

It is inappropriate to make a connection between the calculation of VaR at 99% used by the Caisse and a specific historical event. This methodology is not intended for such an objective. It seeks to provide the Caisse’s managers with the means to assess and manage portfolio risk dynamically.

VaR measures risk under normal market conditions. Therefore, losses realized may greatly differ from VaR when the historically observed interrelationship between risk factors is disrupted. because VaR is not designed to be used on its own, the Caisse uses complementary limits and measurements. In particular, the investment policies set concentration limits (region, sector, instrument, issuer, etc.) as well as loss limits.

Absolute risk and active risk

The same method is used to calculate the absolute risk of the Caisse’s benchmark portfolio and its overall portfolio. The absolute risk of the benchmark portfolio is the result of the risk of the benchmark indexes related to the asset classes that make up the portfolio at a given date. For example, if the depositors choose to increase the weighting of bonds and to reduce the weighting of publicly traded equities in their benchmark portfolio, the risk will automatically decrease, given bonds’ lower volatility. The expected long-term absolute return will therefore also decrease.

The absolute risk of the overall portfolio is the result of the risk of the positions that make up the Caisse’s overall portfolio at a given date.

Active risk represents the possibility that the Caisse’s return will differ from the benchmark portfolio’s return owing to active management of its portfolio. The greater the active risk, the more the overall portfolio’s expected absolute return (see Figure 38, p. 54) will differ from the benchmark portfolio’s return. The absolute risk of the Caisse’s benchmark portfolio and the active risk and the absolute risk of the overall portfolio are measured regularly and are subject to various limits.

Stress tests

The Caisse also uses stress tests to assess the losses of a specialized portfolio and the Caisse’s overall portfolio in extreme circumstances. The stress test is a risk measurement that complements VaR by estimating the impact of extreme circumstances on returns. Such circumstances have a low probability of occurring but are likely to give rise to substantial losses. Using different types of extreme scenarios, the stress test measures the loss of value of a position after a variation in one or more often interrelated risk factors, such as equity prices, interest rates, credit spreads, foreign exchange rates, commodity prices and market volatility.

Like VaR, a stress test agregates the risk of many positions in a single overall measurement, making it possible to analyze losses for a portfolio or for a set of portfolios, according to selected extreme scenarios.

credit, concentration and counterparty risk

Credit risk

Credit risk is the possibility of a loss of market value in the event that a borrower, an endorser, a guarantor or a counter- party does not honour its obligation to repay a loan or fulfill any other financial obligation, or experiences a deterioration of its financial position.

Credit risk analysis involves measuring the probability of default and the recovery rate on debt securities held by the Caisse as well as monitoring changes in the credit quality of issuers and groups of issuers1 _{whose securities are held in all the Caisse’s}

portfolios. In managing credit risk, the Caisse frequently monitors changes in the ratings issued by rating agencies and compares them with in-house credit ratings, whenever available. It also uses the credit VaR for its bond, Long Term bond, Real Return bond and Real Estate Debt portfolios. Credit VaR is a statistical measurement that incorporates information on the current and potential creditworthiness of the issuers in a portfolio, their interrelations and the level of loss in case of default. This measurement therefore estimates potential losses over a given period in accordance with a specified confidence level. The Caisse assesses credit VaR over a one-year period with a 99% confidence level.

Concentration risk

Concentration risk analysis measures the fair value of all the financial products related to a single issuer or group of issuers1

with similar characteristics (region, industry, credit rating). Concentration limits have been established for each specia- lized portfolio, taking into account the investment philosophy and the risk tolerance. In addition, concentration limits for the Caisse’s overall portfolio, for each issuer and for emerging markets, have also been established.

Counterparty risk

Counterparty risk is the credit risk from current or potential exposure related to the Caisse’s operations involving over-the- counter financial instruments.

Transactions involving derivatives are carried out with financial institutions whose credit ratings are established by recognized rating agencies and for which operational limits are set by senior management. Moreover, the Caisse enters into legal agreements based on the standards of the International Swaps and Derivatives Association (ISDA)2 _{to benefit from the netting}

of amounts at risk and the exchange of collateral to ensure the Caisse limits its net exposure to this credit risk.

1. A group of issuers is a set of issuers controlled by a parent company.

2. ISDA promotes sound risk management practices and issues legal opinions on netting and collateral arrangements.