CFM Indosuez Wealth Management Annual Report 2022 74 profit or loss (by default or option), the fair value takes into account the issuer’s own credit risk. Fair value hierarchy The standard classifies fair value according to three levels based on the observability of inputs used in valuation. Level 1: fair values corresponding to (unadjusted) prices in active markets Level 1 financial instruments are those directly quoted on active markets for identical assets and liabilities to which CFM Indosuez Wealth has access at the valuation date. These include equities and bonds listed on an active market, units in investment funds listed on an active market and derivatives contracted on an organised market, in particular futures. A market is deemed active if quoted prices are readily and regularly available from an exchange, broker, dealer, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions conducted on an arm's length basis. For financial assets and liabilities with offsetting market risks, CFM Indosuez Wealth uses mid-price quotes as the basis for determining the fair value of these positions. For net short positions, the market values used are the bid prices and for net long positions, ask prices are used. Level 2: fair values calculated using directly or indirectly observable data, other than level 1 These data are directly observable (i.e. prices) or indirectly observable (derived from price data) and generally meet the following conditions: they are data not specific to CFM Indosuez Wealth which are publicly available/accessible and based on a market consensus. The following are present in level 2: • shares and bonds quoted on a market that is considered inactive, or not quoted in an active market, but for which the fair value is determined using a valuation method commonly used by market participants (such as discounted cash flows, the Black & Scholes model) and based on observable market data; • instruments traded over-the-counter for which valuation is performed with models that use observable market data, i.e. that can be obtained from multiple sources independent of internal sources and on a regular basis. For example, the fair value of interest rate swaps is generally derived from yield curves based on the market’s interest rates as observed at the reporting date. When the models used are based notably on standard models and observable market parameters (such as yield curves or implied volatility spread), the original margin realised for instruments valued in this way is recorded in the Income Statement at inception. Level 3: fair values for which a significant portion of the inputs used for their determination do not meet the observability criteria For some complex market instruments that are not traded on an active market, fair value is determined on the basis of valuation techniques using assumptions that cannot be backed up by observable data on the market for the same instrument. These instruments are included in Level 3. 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 initial margin is deferred. The margin relating to these structured financial instruments is generally recognised through profit or loss over the period in which parameters are deemed unobservable. When market data becomes “observable,” the margin remaining to be recognised is immediately taken to income. Valuation methodologies and models for financial instruments within Levels 2 and 3 incorporate all factors used by market participants in calculating a price. They must first be validated through an independent check. Determining the fair value of these instruments takes account notably of liquidity risk and counterparty risk. OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES In accordance with IAS 32, CFM Indosuez Wealth 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. The derivative instruments and repurchase operations handled with clearing houses whose operating principles meet both the criteria required by IAS 32 are offset on the balance sheet. NET GAINS OR LOSSES ON FINANCIAL INSTRUMENTS Net gains (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 from equities and other variable income securities classified as financial assets at fair value through profit or loss; - Changes in the fair value of financial assets or financial liabilities measured at fair value through profit or loss;
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