2012 Registration document and annual financial report - BNP Paribas

5RISKSAND CAPITAL ADEQUACYCounterparty risk5.6 Counterparty riskEXPOSURE TO COUNTERPARTY RISK [A udited]The table below shows exposure to counterparty risk (measured as exposure at the time of default) by Basel asset class on derivatives contracts andsecurities lending/borrowing transactions, after the impact of any netting agreements.➤ TABLE 33: EXPOSURE AT DEFAULT TO COUNTERPARTY RISK BY BASEL ASSET CLASS OF DERIVATIVES AND SECURITIESLENDING/BORROWING INSTRUMENTS5In millions of eurosIRBAStandardisedApproach31 December 2012 31 December 2011 VariationTotal2012AverageEADIRBAStandardisedApproachTotal2011AverageEADTotalAverageEADCentral governmentsand central banks 14,160 34 14,194 12,669 11,142 2 11,144 10,073 3,050 2,596Corporates 49,531 1,808 51,339 49,574 45,324 2,484 47,808 46,288 3,531 3,286Institutions (*) 25,078 605 25,683 31,324 35,803 1,163 36,966 37,750 (11,283) (6,426)Retail - 13 13 16 - 19 19 15 (6)TOTAL EAD 88,769 2,460 91,229 93,583 92,269 3,668 95,937 94,126 (4,708) (544)(*) Institutions asset class comprises credit institutions and investment firms, including those recognised in other countries. It also includes someexposures to regional and local authorities, public sector agencies and multilateral development banks that are not treated as central governmentauthorities.For counterparty risk, the share of exposures under the IRB approachrepresents 97% at 31 December 2012, almost unchanged compared with31 December 2011 (96%).BNP Paribas is exposed to counterparty risk on its capital marketstransactions. This risk is managed through the widespread use ofstandard close-out netting and collateral agreements and through adynamic hedging policy. Changes in the value of the Bank’s exposure aretaken into account in the measurement of over-the-counter financialinstruments through a credit value adjustment process.NETTING AGREEMENTSNetting is used by the bank in order to mitigate counterparty credit riskassociated with derivatives trading. The main instance where nettingoccurs is in case of trades termination: if the counterparty defaults, all thetrades are terminated at their current market value, and all the positiveand negative market values are summed to obtain a single amount (net)to be paid to or received from the counterparty. The balance (“close-outnetting”) may be subject to a guarantee (“collateralisation”) granted ascollateral: cash, securities or deposits.The Bank also applies settlement netting in order to mitigate counterpartycredit risk in case of currency-settlements. This corresponds to the nettingof all payments and receipts between the bank and one counterparty inthe same currency to be settled in the same day. The netting results ina single amount (for each currency) to be paid either by the Bank or bythe counterparty.Transactions affected by this are processed in accordance with bilateral ormultilateral agreements respecting the general principles of the nationalor international framework. The main forms of bilateral agreementsare those issued by Fédération Bancaire Française (FBF) and on aninternational basis by International Swaps and Derivatives Association(“ISDA”).2822012 Registration document and annual financial report - BNP PARIBAS