2012 Registration document and annual financial report - BNP Paribas

CONSOLIDATED FINANCIAL STATEMENTS - YEAR ENDED 31 DECEMBER 2012Notes to the financial statements4The l evel 3 financial instruments may be hedged by other l evel 1 and/or l evel 2 instruments, the gains and losses on which are not shown inthis table. Consequently, the gains and losses shown in this table are notrepresentative of the gains and losses arising from management of thenet risk on all these instruments. More particularly, losses and gains onfinancial assets and liabilities at model value through profit or loss heldfor trading purposes, amounting respectively to EUR 5, 792 million andEUR 4, 437 million at 31 December 2012 (compared with EUR 552 millionand EUR 162 million at 31 December 2011), primarily correspond tochanges in the value of CDO positions classified in l evel 3 hedged by CDSpositions classified in l evel 2.Sensitivity of model values to reasonably likelychanges in level 3 assumptionsDetermination of value adjustmentsTrading portfolio instruments classified as level 3 comprise mainlyilliquid securities, derivatives with an illiquid underlying asset andother instruments containing complex derivatives. The valuation ofthese instruments generally requires the use of valuation models basedon dynamic risk hedging techniques, and may require the use of nonobservableinputs.All of these instruments are subject to uncertainties in their valuation,which give rise to value adjustments, reflecting the risk premium thatwould be incorporated by a market operator when setting the price. Thesevaluation adjustments take account in particular of:■ risks that would not be taken into account by the model (adjustmentfor model risk);■ the inherent uncertainty in estimating valuation parameters(adjustment for uncertain parameters);■ liquidity risks associated with the instrument or parameter concerned;■ specific risk premiums intended to offset certain additional costsresulting from the dynamic management strategy associated withthe model under certain market conditions;■ counterparty risk.When determining value adjustments, each risk factor is consideredindividually and no effect of diversification between risks, parameters ormodels of different kinds is taken into account. Meanwhile, for a givenrisk factor, a portfolio-based approach is used, with offsetting betweeninstruments when they are managed together.All of these adjustments are components of the model value ofinstruments and portfolios.Assessment of value sensitivityIn order to measure the sensitivity of the model value of level 3instruments (excluding securities positions) to a change in assumptions,the following two scenarios have been considered: a favourable scenarioin which all portfolio valuations are made without a value adjustment,and an unfavourable scenario in which all of these valuations are madewith twice as high a value adjustment. Calculated in this way, sensitivity isa measurement of the difference between the values obtained by marketoperators with a different perception of valuation risk and risk aversion.In the interest of simplification, the sensitivity of the value of securitiespositions, whether relating to trading portfolios, available-for- sale assetsor instruments designated at model value through profit or loss, is basedon a 1% change in the value applied.4In millions of eurosPotential impacton income31 December 2012 31 December 2011Potential impacton equityPotential impacton incomePotential impacton equityFinancial instruments at fair value through profit or lossheld for trading or designated as at fair value (1) +/-857 - +/-1,300Available-for-sale financial assets - +/-105 +/-104(1) Financial instruments at fair value through profit and loss are presented under the same heading, whether they are part of the trading portfolio orhave been designated at fair value through profit or loss, as sensitivity is calculated on the net positions in instruments classified as l evel 3 regardlessof their accounting classification .2012 Registration document and annual financial report - BNP PARIBAS 145