Société Générale / Risk report 2021 - Pillar 3 2020

7 COUNTERPARTY CREDIT RISK LIMIT SETTING AND FRAMEWORK MONITORING PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 140 LIMIT SETTING AND FRAMEWORKMONITORING 7.1 Main principles Counterparty credit risk is framed through a set of limits that reflect the Group’s appetite for risk. The Risk approval process follows the same fundamental principles as for Credit Risk: a system of delegation of competence, largely based on the internal p rating of the counterparties, confers decision-making capacities to the risk units on the one hand and the customer monitoring sector on the other; the commercial monitoring sector and this risk unit must be p independent of each other; the limits and internal rating set for each counterparty are proposed p by the customer monitoring sector and validated by the dedicated risk unit in charge of the counterparty type. Individual limits are supplemented by stress test or nominal frameworks to capture the impact of certain risk factors that are more difficult to measure. These limits are subject to annual or ad hoc reviews depending on the needs and changing market conditions. A dedicated team within the Risk Department is in charge of production, reporting and controls on risk metrics, namely: ensuring the completeness and reliability of the risk calculation by p taking into account all the transactions transmitted by the transaction processing department; producing daily certification and risk indicator analysis reports; p controlling compliance with defined limits, at the frequency of p metrics calculation, most often on a daily basis. In addition, a specific monitoring and approval process is implemented for the most sensitive counterparties or the most complex categories of financial instruments. Governance While not a substitute for CORISQ or for the Risk Committee of the Board of Directors (see the section 3.4 “Risk management organisation”), the Counterparty Credit Risk Committee (CCRC) closely monitors counterparty credit risk and identifies emerging risk areas through specific analysis (focus). This Committee, chaired by the Risk Department, brings together representatives from the Market Activities and the Global Banking and Advisory Business Units, but also departments that, within the risk management function, are in charge of monitoring counterparty credit risks on market transactions and credit risk. The CCRC also provides an opinion on the changes to the frameworks within its competence. Replacement risk The Group frames the replacement risks by limits: defined at the counterparty level; p consolidated across all products types authorised with the p counterparty; established by maturity buckets to control future exposure using the p Potential Future Exposure (PFE) measure also known as CVaR within the Group; calibrated according to the credit quality and the nature of the p counterparty, the nature/maturity of the financial instruments contemplated (FX transactions, repos transactions, security lending transactions, derivatives, etc.), and the economic understanding, the contractual legal framework agreed and any other risk mitigants. The Group also considers other measures to further control the replacement cost risk: it has developed a set of stress test scenarios that are used to calculate the exposure that would result from changes in the fair value of transactions concluded with all its counterparties in the event of extreme shocks affecting the market parameters (see wrong way risk section). CVA (Credit Valuation Adjustment) In addition to the replacement risk, the CVA (Credit Valuation Adjustment) measures the adjustment of the value of the Group’s derivatives and repos portfolio in order to take into account the credit quality of the Group’s counterparties (see dedicated section). Positions taken to hedge the volatility of the CVA (credit, interest rate or equity instruments) are monitored through: sensitivity limits; p stress test limits: scenarios representative of the market risks p impacting the CVA (credit spreads, interest rates and exchange rates) are applied to carry out the stress test on CVA. The different indicators and the Stress-Tests are monitored on the net amount (the sum of the CVA exposure and of the hedges traded by the desk). Calibrations and monitoring of these limits follow the same rules as the one described in the market risk section. Risk on central counterparties The counterparty credit risk stemming from the clearing of derivatives and repos with central counterparties (CCP) is framed by specific limits on initial margins, both for house and client activities (client clearing), and on the Group’s contributions to the CCP default funds (guarantee deposits). In addition, a stress test limit is also defined to capture the impact of a scenario where a major CCP member should default. It should be noted that the EMIR (European Market Infrastructure Regulation) Regulations in Europe and the DFA (Dodd-Frank Act) in the United States, require that the most standardised over-the-counter transactions be compensated via clearing houses approved by the authorities and subject to prudential regulation. See table “EAD and RWA towards central counterparties” of section 7.4 “Quantitative Information” for more information.