CA Indosuez (Switzerland) SA Annual Report 2022 68 Origination means the transaction date, when the Bank becomes party to the contractual provisions of the financial instrument. For financing and guarantee commitments, origination is the date of the irrevocable commitment. An algorithm determining the significant deterioration is applied to each exposure as follows: • If the exposure is a bond issued by an issuer with a rating higher or equal to C- (on a scale from A+ to F), then the exposure is classified in Bucket 1. • Otherwise, the exposure is placed in Bucket 2 if at least one of the following conditions is met: • the counterparty of the exposure is rated E or E-, • the exposure is more than 30 days past due, • the exposure is under special watch, • the exposure has been renegotiated (or is in a probationary period), • the exposure is non-performing, • the relative deterioration of the exposure since origination is deemed significant, -• cumulative severity due to the forward looking scenario. If the deterioration from origination is no longer observable, the impairment can be reversed to 12-month expected losses (Bucket 1). If some factors or indicators of significant deterioration cannot be identified at the level of the financial instrument taken separately, the standard authorises the measurement of the significant deterioration for portfolios, groups of portfolios or a part of a portfolio of financial instruments. Concerning the Wealth Management Business Line, counterparties that are physical persons or investment firms holding assets less than €3 million are aggregated, among other things, by rating and country of risk. For securities, CACIB uses the approach that consists of applying an absolute level of credit risk below which the exposures are classified in Bucket 1 and impaired on the basis of 12-month ECL. Therefore, the following rules will apply for monitoring the significant deterioration of securities: • the securities rated investment grade, at the reporting date, are classified in Bucket 1 and provisioned based on 12-month ECL. • the securities rated non-investment grade (NIG), at the reporting date, are subject to monitoring of the significant deterioration, from origination, and are classified in Bucket 2 (lifetime ECL) in the event of significant deterioration in the credit risk. The relative deterioration must be assessed before the occurrence of a proven default (Bucket 3). 4.3.7. Valuation of collateral for credit Lombard loans are granted against collateral. The main types of accepted collateral are creditor accounts, fiduciary deposits with approved third parties, selected, easily marketable securities (stocks and bonds), precious metals, structured products, funds, management mandates and life insurance policies. All accepted collateral is assigned a collateral rating, a margin call threshold and a liquidation threshold based on its liquidity, volatility, any ratings and maturities and country risk. Loans guaranteed by a pledge of property are never granted without a collateral evaluation conducted by a licensed external specialist and based on the use of the asset. The value used for residential property for personal use is the lower of the acquisition cost and the appraisal value at the time of purchase and of the market value and the index value when the loan is reviewed. For commercial property and residential property rented out in Switzerland, the value used is the earning capacity value. 4.4. BUSINESS POLICY REGARDING THE USE OF DERIVATIVE INSTRUMENTS AND HEDGE ACCOUNTING Proprietary transactions are carried out within the framework of internal directives applying to the management of market risk and interest rate risk. Transactions carried out on behalf of clients include foreign exchange transactions (forward and options), stock options, stock exchange rates, interest rates, precious metals and futures. The Bank calculates an equivalent risk on these transactions to determine the amount of collateral required. This equivalent risk corresponds to the replacement value of the instruments plus an add-on or the usual margin calculated by the market. Margin calls are made as soon as the value of the assets given as guarantee is no longer sufficient to hedge the risk exposure. 4.4.1. Use of hedge accounting The Bank uses derivative financial instruments for trading and hedging purposes. It uses them for risk management purposes, mainly to hedge against interest rate and foreign currency risks. The Bank documents the relationship between the hedging product and the underlying transaction when the transactions are completed. It documents the hedging transaction goals and the method used to assess the effectiveness of the hedging. A hedge is seen as effective when the following criteria are fulfilled: • The hedge is expected to be highly effective at the inception of the hedge and for its full duration, • There is a close economic relation between the underlying transaction and the hedge, • Changes in the value of the underlying transaction and of the hedge are offset relative to the risk being hedged. The effectiveness of the hedge is assessed on an ongoing basis. A hedge deemed ineffective is immediately regarded as a trading transaction and the ineffective portion of the gain or loss on the hedging instrument is recognised under the heading "Gains and losses from trading and the fair value option".
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