2020 Universal registration document and annual financial report - BNP PARIBAS 171

4Consolidated finanCial statements for the year ended 31 deCemBer 2020

4

Notes to the financial statements

Based on the progress made in 2020, notably with the definition of a detailed plan, the Bank is confident in its operational capacity to manage the transition process of large volumes of transactions to the new benchmark rates.

In Europe, the Eonia- STR transition, which is purely technical in view of the fixed link between these two indices, continued, while the maintenance of Euribor on a sine die basis was confirmed.

The reform of IBOR rates in other currencies exposes the Bank to various risks that the programme aims to manage closely. These risks include in particular:

■ change management risks, but also of litigation and conduct linked to negotiations with customers and market counterparties to amend existing contracts;

■ operational risks related to changes in the Bank s IT systems and processes;

■ economic risks in case of financial market disturbances linked to the various transitions induced by the IBOR reform;

■ valuation risks in a scenario of reduced liquidity during the transition in certain derivative market segments.

In September 2019, the IASB published Phase 1 amendments to IAS 39 and IFRS 7, amending the hedge accounting requirements so that hedges affected by the benchmark interest rate reform can continue despite the uncertainty before the hedged items or hedging instruments are amended to incorporate the reformed benchmark rates. These amendments, endorsed by the European Commission on 15 January 2020, are mandatory for annual financial statement as from 1 January 2020, with the possibility of early adoption, an option which the Group has chosen.

In August 2020, the IASB published Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 introducing several changes applicable during the effective transition to the new benchmark interest rates. These amendments allow for changes in the contractual cash flows of financial instruments resulting from the IBOR reform to be treated as a simple reset of their variable interest rate, provided, however, that such changes are made on an economically equivalent basis. They also allow the continuation of hedging relationships, subject to amending their documentation to reflect changes in hedged instruments, hedging instruments, hedged risk, and/or the method for measuring effectiveness during the transition to the new reference rates. The measures introduced in this framework also include:

■ the possibility of documenting an interest rate as a hedged risk component even if this rate is not immediately separately identifiable, provided that it can reasonably be expected to become so within 24 months;

■ the possibility of resetting cumulative fair value changes to zero in the hedge ineffectiveness test;

■ and the obligation in the framework of portfolio hedges to isolate in subgroups instruments referring to the new risk-free rates (RFR).

These amendments, adopted by the European Commission in December 2020, are applicable for the annual financial statements as from 1 January 2021, with the possibility of early adoption, an option which the Group has chosen in order to maintain its existing hedging relationships which have been modified as a result of the transition to the new RFRs.

The Group has documented hedging relationships in regard of reference interest rates in the scope of the reform, mainly Eonia, Euribor, and Libor rates. For these hedging relationships, the hedged items and hedging instruments will be progressively amended, where necessary, to incorporate the new rates. The Phase 1 amendments to IAS 39 and IFRS 7 are applicable when the contractual terms of the hedged instruments or of the hedging instruments have not yet been amended (i.e. with the inclusion of a fallback clause), or if they have been amended, when the terms and the date of the transition to the new reference interest rates have not been clearly stipulated. Conversely, the Phase 2 amendments are applicable when the contractual terms of the hedged instruments or of the hedging instruments have been amended, and the terms and date of transition to the new reference interest rates have been clearly stipulated.

The notional amounts of hedging instruments documented in the hedging relationships impacted by the benchmark interest rate reform are presented in note 4.b Derivative instruments used for hedging purposes.

As at 31 December 2020, 143,964 contracts with a maturity date beyond 31 December 2021 are backed by rates covered by this reform, including 104,315 derivative contracts.

Besides, the reform leads to a change in the reference overnight interest rate applied for the remuneration of collateral. This was accomplished in particular in 2020 by the clearing houses for derivatives in euro and United States dollar, leading to changes in valuation curves. The net impact of these changes on the Group accounts is non-significant.

The introduction of other standards, amendments and interpretations that are mandatory as from 1 January 2020 had no effect on the 2020 financial statements.

The Group did not anticipate the application of the new standards, amendments, and interpretations adopted by the European Union, when the application in 2020 was optional.

1.a.2 New major accounting standards, published but not yet applicable

IFRS 17 Insurance Contracts , issued in May 2017, will replace IFRS 4 Insurance Contracts and will become mandatory for annual periods beginning on or after 1 January 2023(1), after its adoption by the European Union for application in Europe.

The analysis of the standard and the identification of its effects are going on.

(1) On 25 June 2020, the IASB published Amendments to IFRS 17 including in particular the deferral of the mandatory initial application of IFRS 17 for two years.