Société Générale / Risk report 2021 - Pillar 3 2020

9 MARKET RISK MARKET RISK MAIN MEASURES PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 178 BREAKDOWN BY RISK FACTOR OF TRADING VAR (ONE-DAY, 99%) – CHANGES IN QUARTERLY AVERAGE OVER THE 2019-2020 PERIOD (IN EURM) VaR was riskier in 2020 on average (EUR 33 million vs EUR 23 million in 2019) with contrasting trends: over the first two months of the year, VaR remained relatively stable p at its 2019 year-end level; from the end of February and throughout the second quarter, VaR p increased sharply, with a high level of variability due to the financial crisis triggered by the Covid-19 pandemic. This increase is mainly attributable to the interest rate and credit scope, the equity scope, and notably the exotic products activities, being the main factor of volatility; VaR then fell gradually to reach again pre-crisis values and dynamic p at the end of the year. STRESSED VAR (SVAR) The Internal Stressed VaR Model (SVaR) was introduced at the end of 2011 and has been approved by the Regulator within the scope of the regulatory capital requirements on the same scope as the VaR. The calculation method used for the 99% one-day SVaR is the same as as the one for the VaR. It consists in carrying out a historical simulation with one-day shocks and a 99% confidence interval. Contrary to VaR, which uses 260 scenarios for one-day fluctuations over a rolling one-year period, SVaR uses a fixed one-year historical window corresponding to a period of significant financial tension. The method for determining the fixed historical stress window, which has been approved by the regulator (1) , is based on a review of the historic shocks on the risk factors representative of the Societe Generale portfolio (related to equity, fixed income, foreign exchange, credit and commodity risks): historical shocks are aggregated to determine the period of highest stress for the entire portfolio. Each risk factor is assigned a weighting to account for the weight of each risk factor within its asset class and the weight of the asset class in the Group’s VaR. The historical window used is reviewed annually. In 2020, this window was “September 2008-September 2009”. The ten-day SVaR used for the computation of the regulatory capital is obtained, as for VaR, by multiplying the one-day SVaR by the square root of ten. The continuous backtesting performed on VaR model cannot be replicated to the SVaR model as, by definition, it is not sensitive to the current market conditions. However, as the VaR and the SVaR models rely on the same approach, they have the same advantages and limitations. The relevance of the SVaR is regularly monitored and reviewed by the Risk Department in charge of the validation of internal models, as second line of defence. The independent review process ends with (i) review and approval Committees and (ii) an Audit Report detailing the scope of the review, the tests performed and their outcomes, the recommendations and the conclusion of the review. The model control mechanism gives rise to recurrent reporting to the appropriate authorities. A complementary method has been submitted to the regulator for approval in Q2 2018: the purpose is to ensure the relevance of the period obtained following the method (1) based on the weighting of historical shocks by computing an approached VaR on the same selection of risk factors representative of the portfolio.