CFM INDOSUEZ Wealth Management - 2020 Annual Report

69 models, and on observablemarket parameters (such as yield curves or implied volatility tables), the initial margin generated on the instruments thus valued is recognised in the income statement from the outset. • Level 3: fair values ​for which a significant portion of the inputs used for their determination do not meet the observability criteria The determination of the fair value of certain complex market instruments not traded in an active market is based on valuation techniques using assumptions that are not supportedby observablemarket data for the same instrument. These products are presented in level 3 in the fair value hierarchy. These are essentially complex rate products, equity derivatives and structured credit products whose valuation requires, for example, correlation or volatility inputs that are not directly comparable to market data. The original transaction price is deemed to reflect the market value and recognition of the initial margin is deferred. The margin earned on these structured financial instruments is generally recognised in the income statement over the period during which the inputs are deemed unobservable. When market data becomes “observable,” the margin remaining to be recognised is immediately taken to income. The methodologies and valuation models for financial instruments presented in Level 2 and Level 3 incorporate all the factors that market participants use to calculate a price. They must first be validated by an independent audit. In particular, the calculation of the fair values ​of these instruments takes into account liquidity risk and counterparty risk. Offsetting financial assets and liabilities In accordance with IAS 32, CFM Indosuez Wealth Group offsets a financial asset and a financial liability and presents a net balance if and only if it has a legally enforceable right to offset the amounts recognised and intends to settle the net amount or realise the asset and realise the liability simultaneously. Derivatives and repurchase agreements traded with clearing houses whose operating principles meet the two criteria established by IAS 32 are offset in the balance sheet. Net gains or losses on financial instruments Net gains or losses on financial instruments at fair value through profit or loss For financial assets recognised at fair value through profit or loss, this item includes the following items of income: • Dividends and other income fromequities and other variable income securities classified as financial assets at fair value through profit or loss; • Changes in the fair valueof financial assets or financial liabilitiesmeasured at fair value through profit or loss; • Capital gains and losses realised on financial assets at fair value through profit or loss; • Changes in fair value and income from the sale or termination of derivative instruments that are not subject to a fair value hedging or cash flow hedging relationship. This itemalso includes the ineffective portion of hedging transactions. Net gains or losses on financial instruments at fair value through other comprehensive income For financial assets recognised at fair value through other comprehensive income, this item includes the following items of income: • Dividends from equity instruments classified as financial assets at fair value through other comprehensive income not recyclable to income: • Capital gains and losses and income related to the termination of the hedging relationship on debt instruments classified as financial assets at fair value through recyclable equity; • Income from the sale or termination of fair value hedges of financial assets at fair value through other comprehensive incomewhen the hedged item is sold. Financing commitments and financial guarantee commitments given Financing commitments that are not classified as assets measured at fair value through profit or loss or that are not considered to be derivative instruments within the meaning of IFRS 9 are not included in the balance sheet. However, they are subject to provisions in accordance with IFRS 9. A financial guarantee arrangement is a contract that requires the issuer to make specified payments to reimburse the holder for a loss that it sustains as a result of the default of a specified debtor who fails to make a payment when due according to the initial or amended conditions of a debt instrument. Financial guarantee contracts are initially measured at fair value and subsequently at the one of the following, whichever is greater: • the amount of the impairment for credit losses determined in accordance with IFRS 9, or • theamount initially recognised less, if any, accumulated income recognised in accordancewith the principles of IFRS 15 Revenue fromContracts with Customers.