2012 Registration document and annual financial report - BNP Paribas

5RISKSAND CAPITAL ADEQUACYMarket risk5Reserve and other valuation adjustmentsRisk-IM defines and calculates reserves. Reserves are market or modelsv alue accounting adjustments. They take into account the exit cost of aposition (cost to sell or to hedge) as well as a risk premium that marketparticipant would charge for positions containing non hedgeable or nondiversifiable risks.The reserves cover mainly:■ the bid-offer and liquidity spreads;■ the model or market parameters uncertainties;■ the elimination of non hedgeable risks (smoothing digital or barrierpay-offs).A general v aluation adjustment policy exists. Reserve methodologies aredocumented by Risk-IM for each product lines and these documentationsare updated regularly. The analysis of reserve variations is reported atthe monthly VRC.Reserve methodologies are improved regularly and any change is aValuation Model event. Reserve improvements are generally motivatedby the conclusion of a model review or by the calibration to marketinformation during the Market parameter review process.“Day One profit or loss”Some transactions are valued with “non observable” parameters. IAS 39requires to differ any initial P/L for non observable transactions as theinitial model v alue needs to be calibrated with the transaction price.Risk- IM works with Group Finance, middle-offices, and business lineson the process of identifying and handling these profit and loss items,in order to determine whether a type of parameter or transaction isobservable or not in accordance with the observability rules, in additionduly documented.The P/L impact of the P/L deferral is calculated by the Middle-Office.Observability rules are also used for the financial information requiredby the IFRS 7 reporting.MARKET RISK EXPOSURE [A udited]Market risk is first analysed by systematically measuring portfoliosensitivity to various market parameters; The results of these sensitivityanalyses are compiled at various aggregate position levels and comparedwith market limits.VaR (“Value at Risk”)VaR is calculated using an internal model. It estimates the potential losson a trading portfolio under normal market conditions over one tradingday, based on changes in the market over the previous 260 business dayswith a confidence level of 99%. The model has been approved by thebanking supervisor and takes into account all usual risk factors (interestrates, credit spreads, exchange rates, equity prices, commodities prices,and associated volatilities), as well as the correlation between thesefactors in order to include the effects of diversification. It also takes intoaccount specific credit risk.The algorithms, methodologies and sets of indicators are reviewed andimproved regularly to take into account growing market complexity andproduct sophistication.Following the Belgian and French regulators (BNB and ACP) agreement,BNP Paribas internal model has been extended since the second quarterof 2011 to Fortis Bank SA/NV. VaR internal model is also used by BNL.Historical VaR (10 days, 99%) in 2012The Values at Risk (VaRs) set out below are calculated from aninternal model, which uses parameters that comply with the methodrecommended by the Basel Committee for determining estimated valueat risk (“Supplement to the Capital Accord to Incorporate Market Risks”).They are based on a ten day time horizon and a 99% confidence interval.2882012 Registration document and annual financial report - BNP PARIBAS