2020 Universal registration document and annual financial report - BNP PARIBAS 431

5risks and CaPital adequaCy Pillar 3

5

Market risk

Risk monitoring set up and limit setting

The Group uses an integrated system to follow the trading positions on a daily basis and manage VaR calculations. This system not only tracks the VaR, but also detailed positions and sensitivities to market parameters based on various criteria (such as by currency, product, counterparty). This system is also configured to include trading limits, reserves and stress tests.

Responsibility for limit setting and monitoring is delegated at three levels, which are, in order of decreasing importance: CMRC, followed by the Head of the business line and finally the manager of a trading portfolio. Limits may be changed either temporarily or permanently, in accordance with the level of delegation and the prevailing procedures. Appropriate escalation mechanisms are in place to ensure that the independent view from the RISK Function on the level of limits is heard.

Core risk analysis and reporting to Executive Management

RISK reports, through various risk analyses and dashboards, to Executive Management and business lines Senior Management on its risk analysis work (limit, VaR monitoring, core risk analysis, etc.). The MCLAR (Market, Counterparty and Liquidity Analysis and Reporting) team within RISK is responsible for compiling/circulating main global risk reports.

The following reports are generated on a regular basis:

■ weekly Main Position reports for each business line (equity derivatives, commodities, credit G10 rates and FX & Local Markets), summarising all positions and highlighting items needing particular attention; these reports are mainly intended for business line managers;

■ monthly local bottom up stress testing reports for Executive Management identifying key risk concentrations around the globe;

■ supporting documentation for the CMRC comprising markets and risk event summaries, global counterparty exposure summary, VaR/ Stressed VaR evolution, market and counterparty risk stress testing and capital evolution summaries, market and counterparty risk backtesting;

■ geographical and global risk dashboards;

■ reports on valuation adjustments in the trading book, in particular regarding market and CVA sensitivities.

VaR (Value at Risk)

The VaR is a statistical measure indicating the worst loss expected for a given portfolio over a given time horizon and within a given confidence interval under normal market movements. It is not a maximum loss and it can potentially be exceeded in some cases, for example in the event of abnormal market conditions.

The BNP Paribas VaR calculation uses an internal model which has been approved by the banking supervisor. The BNP Paribas VaR methodology aims to accurately compute a one-day Value at Risk at the 99% confidence level.

The VaR calculation is based on a Monte-Carlo approach, which not only performs normal or log-normal simulations but also accounts for the non-normality often observed in financial markets as well as correlation between risk factors. An equally weighted one-year rolling window of historical market data (updated every month) is used to calibrate the Monte-Carlo simulation.

The principle groups of simulated factors includes: interest rates, credit spreads, exchange rates, equity prices, commodities prices, and associated volatilities. Changes in risk factors are proportional (share prices, volatility, CDS spreads) or absolute (rates excluding OIS, spreads, repo rates, correlations).

The valuation method used varies depending not upon the product but upon the type of risk we are capturing. To generalise, the methods used are either sensitivity based or full revaluation based on grid interpolation to incorporate both linear and, especially for derivatives, non-linear effects. In both cases, BNP Paribas calculates the general and specific risk as a whole, taking into account the diversification effect by correlating market parameters.

The algorithms, methodologies and sets of indicators are reviewed and improved regularly to take into account the capital market evolution.

The scope of the BNP Paribas internal model covers the majority of capital market activities (Global Markets, BNP Paribas Securities Services, ALM Treasury). As an indication, market risk based on the standardised approach (excluding securitisation positions in the trading book) represented less than 5% of the total market risk capital requirement at 31 December 2020, including foreign exchange risk.

VaR is a statistical measure that does not take into account losses outside a given confidence interval, and does not apply to losses related to intraday market movements. Other risk measures, such as Stressed VaR (SVaR), IRC and CRM, complement the BNP Paribas Group s market risk monitoring and management system.