SFIL Annual financial report 2018

1 I Management report 26 SFIL Annual Financial Report 2018 swaps, but the same effect can also be obtained, when‑ ever possible, by canceling swaps of opposite direction. •  in the second stage, Euribor lending and borrowing flows (scheduled or post- hedging) are swapped against Eonia over a maximum two-year period to protect income from the basis risk generated by differences in tenor (Euribor 1, 3, 6, or 12 months) and the fixing risk arising from ref‑ erence index refixing dates that differ for assets and lia‑ bilities. The residual risk is managed using macro-hedges, with a one-week management horizon. For the parent company SFIL, the strategy involves a per‑ fect micro-hedge of the interest rate risk, by swaps against Eonia, by matching asset and liability transactions on the same index or, as regards the export credit activity, by hedging transactions carried out under the stabilization mechanism. This process results in zero interest rate risk. These different types of interest rate risk are monitored, analyzed and managed through the production of gaps (fixed rate, basis and fixing) and/or net present value (NPV) sensitivity indicators. The following static viewpoint indicators are calculated: •  the fixed rate gap, which corresponds to the difference between balance sheet and off-balance sheet assets and liabilities for fixed rate transactions or variable rate trans‑ actions for which the rate has been fixed. This gap is cal‑ culated every month until balance sheet extinction; •  index gaps, which correspond to the difference between balance sheet and off-balance sheet assets and liabilities for a given index tenor that has not yet been fixed. This gap is calculated every month until balance sheet extinction; •  basis gaps, which result from the matching of two index gaps. There are therefore as many basis gaps as there are index pairs; •  the fixing gap, which corresponds, for a given index tenor, to the difference between adjustable rate balance sheet and off-balance sheet assets and liabilities, by fixing date. The sensitivity of the residual fixed rate and subsequently fixed variable rate positions remaining after hedging by CAF‑ FIL is monitored every month. It is subject to limits designed to reduce the impact on the value of balance sheet items in the event of yield curve parallel shifts, steepening or rota‑ tion. These limits have been calibrated to restrict capital loss to 6% (EUR 80 million) with a 99% quantile calculated based on ten-year historical data. The NPV sensitivity indicators are calculated for a rate shock of 100 x +1 basis points (bp), aiming to limit losses in value in the event of: •  a parallel yield curve shift (limit of EUR 25 million for a shock of 100 x 1bp): measurement of the fixed rate or directional rate risk; •  sloping/rotation of the yield curve: –– NPV sensitivity calculation and limiting by time bucket (TB), using four buckets of distinct risks on the yield curve in order to limit risk between distant points on the curve (limit per bucket of EUR 10 million for a shock of 100 x 1bp); –– NPV sensitivity calculation in terms of absolute value (AV) and limiting by time bucket, using four buckets of dis‑ tinct risks on the yield curve in order to limit risk between distant points on the curve within each bucket (limit per bucket of EUR 20 million for a shock of 100 x 1bp). For the parent company SFIL, the limit is applied to the fixed rate gap. It is currently at zero, reflecting SFIL’s strat‑ egy of perfect micro-hedge management. •  Internal liquidity indicators: –– the management coverage ratio (or over-collateraliza‑ tion ratio), which targets an over-collateralization level consistent with CAFFIL’s target rating; –– the duration gap between assets and debt benefiting from the legal privilege (limited to three years): this is published quarterly. As of December 31, 2018, it stood at 0.26 years; –– an indicator that tracks the SFIL Group’s unsecured funding maturities falling within a given year. Each year, the SFIL Group’s unsecured resources must be greater than its unsecured requirements (over-collateralization of CAFFIL and financing of the collateral paid, mainly on derivatives); –– the one-year survival horizon in stressed conditions; –– the sensitivity of the net present value of the con‑ solidated static liquidity gap adjusted for regulatory constraints (compliance with the LCR and the over-col‑ lateralization ratio); –– the consumption of the EUR/USD spread and basis risk appetite by the various maturities of export credit loans. Lastly, the SFIL Group regularly carries out dynamic liquid‑ ity forecasts (taking into account new asset and refinanc‑ ing assumptions) under normal and stressed conditions. Under normal conditions, these forecasts aim to define the amounts and maturities of the various sources of financing that may be raised by each entity (issuance of obligations foncières for CAFFIL and, for SFIL, of negotiable debt secu‑ rities or EMTN, or drawing down of shareholder liquidity lines). Under stressed conditions, these forecasts aim to assess the Group’s capacity to withstand a liquidity shock. 2.3.3. Interest rate risk Interest rate structural risk is defined as the risk of loss incurred in the event of a change in interest rates that would lead to a loss in value of balance sheet and off-balance sheet transactions, excluding any trading portfolio transac‑ tions. As SFIL and CAFFIL do not hold a trading portfolio they are not affected by this exception. There are three different types of interest rate risk for SFIL: •  the fixed interest rate risk that results from the difference in volume and maturity between assets and liabilities at fixed rates, or at adjustable rates that have subsequently been fixed. This risk can result in yield curve parallel shifts, steepening, flattening or rotation; •  the basis risk resulting from the gap that may exist in the matching of assets and liabilities indexed to variable rates of different types or index tenors; •  the fixing risk that results, for each index, from the gap between the adjustment dates applied to all the variable rate balance sheet and off-balance sheet items linked to the same tenor. These risks are generally hedged using derivatives. To limit the impact of these risks, CAFFIL has implemented a two-staged hedging strategy: •  in the first stage, all the assets and liabilities benefiting from the legal privilege which did not have a variable rate are hedged against Euribor until maturity as soon as they are recorded on the balance sheet. In practice, acquisitions of loan portfolios (of which the unit value is generally small) are usually macro-hedged. Loans granted individually or bond issues may be micro- or macro-hedged. Assets and liabilities are usually hedged by entering into interest rate