SFIL Annual financial report 2018

1 I Management report 24 SFIL Annual Financial Report 2018 Control of non-regulatory market risks is carried out by monitoring sensitivity to market variables (the “Greeks”), which reflects instruments’ fair value changes in response to a standardized movement (or shock) in market variables. For portfolios of intermediation swaps between SFIL and CAFFIL, the sensitivity limits are set to zero. Securities without an adjustable rate at outset that are rec‑ ognized at fair value through other comprehensive income under IFRS or as investment securities under French GAAP are generally hedged by swaps. The securities portfolio’s residual risk is limited to credit spread risk, with the Market and Balance Sheet Risks division calculating the impact rec‑ ognized as a result of changes in the issuers’ credit spreads. Changes in accounting value adjustments on derivatives (CVA and DVA) are monitored quarterly. 2.3 – BALANCE SHEET RISK 2.3.1. Governance Balance sheet risk management revolves around three committees: •  the Asset-Liability Management (ALM) Committee, on which sit representatives of the Finance division’s ALM unit, the Market and Balance Sheet Risks division and the other bank business lines concerned by this management; this com‑ mittee determines the strategy for managing balance sheet risks and ensures that it is correctly applied by monitoring management indicators; •  the Interest Rate ALM and Liquidity ALM committees pre‑ pare information for the ALM Committee and are responsible for implementing its decisions operationally. The Finance division’s ALM Management unit is responsible for implementing the ALM management policies defined in compliance with the relevant management limits and regu‑ latory framework. The Market and Balance Sheet Risks divi‑ sion is in charge of defining the general balance sheet risk management policy, calibrating and monitoring the limits on ALM indicators and performing second-level controls on most of these indicators. 2.3.2. Liquidity risk Liquidity risk is defined as the risk that the institution may not be able to find the necessary liquidity on a timely basis and at a reasonable cost to cover the financing needs related to its activity. The SFIL group's activity is mainly focused on the manage‑ ment of its subsidiary société de crédit foncier , CAFFIL. CAFFIL’s liquidity risk mainly reflects how able it is to reim‑ burse certain debts benefiting from the legal privilege on a timely basis in the event of an excessive lag between the repayment of its assets and that of its debt benefiting from the legal privilege. It relates to the fact that SFIL is respon‑ sible for most of the funding requirement associated with CAFFIL’s over-collateralization. Regarding SFIL, liquidity risk lies in its ability to deploy suf‑ ficient resources to meet all the Group’s cash requirements, either by renewing expiring market and/or shareholder refi‑ nancing or by obtaining new market and/or shareholder refinancing. The Group’s liquidity requirements are mainly of three types: •  the financing of balance sheet assets (EUR 46.7 billion in loans and EUR 9.5 billion in securities); On a consolidated basis, all swaps are carried out for hedging purposes. Furthermore, as a société de crédit foncier , CAFFIL cannot hold a trading or investment portfolio and is therefore not exposed to regulatory market risk. SFIL’s and CAFFIL’s banking portfolio positions and activ‑ ities that pose a risk to their accounting income or equity as a result of exposure to market volatility are monitored as non-regulatory market risks. These risks are mainly: •  risks arising from fluctuations in the valuation of finan‑ cial assets recognized at fair value through profit or loss or through other comprehensive income; •  risks associated with a very limited portfolio of swaps, cover‑ ing loans to customers for which actual defaults have been observed that interrupted the hedging relationship as defined under IFRS accounting standards; •  risks arising from the export credit activity (monitoring of the value changes of the indicator specific to export credit and, for USD-denominated loans, the change in the valuation of currency swaps hedging this activity); •  changes in accounting valuation adjustments on derivatives, such as credit valuation adjustments (CVA) and debit valua‑ tion adjustments (DVA), recognized in profit or loss in accord‑ ance with IFRS; •  the provision for investment securities within the meaning of French accounting standards; •  risks that may materialize at the level of SFIL’s individual finan‑ cial statements, in connection with its derivatives intermedia‑ tion activity carried out on behalf of CAFFIL, if the derivatives that SFIL enters into with external counterparties are not fully matched at the level of CAFFIL. 2.2.2. Governance and monitoring of market risk The governance of market risk monitoring revolves around the Market Risks Committee, which carries out quarterly monitoring of defined risk indicators (sensitivity, mark- to-market changes in structured swaps hedging loans to customers in default, monitoring of the valuation of assets recognized at fair value through profit or loss or equity and of provisions for investment securities under French GAAP, and monitoring of interest rate limits, cash collateral received or paid and export credit activity indicators). This committee is notably responsible for approving policies, guidelines and procedures regarding non-regulatory market risks before they are submitted to the Risks Committee. The continuous monitoring of non-regulatory market risks is carried out by SFIL’s Market and Balance Sheet Risks divi‑ sion, which is mainly responsible for: •  defining policies, guidelines and procedures related to the monitoring of market risks; •  defining limits; •  defining calculation and measurement methods for these risks; •  certifying the valuation of derivatives for recognition in the accounts; •  carrying out daily controls of margin calls on derivatives (cash collateral); •  valuing balance sheet items (assets and liabilities); • monitoring the valuation of currency swaps entered into to hedge USD-denominated export credit loans not yet recognized under hedge accounting; • monitoring the valuation of swaps that can no longer be classified under hedge accounting following the default of certain customers.