DETERMINATION OF THE FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments is determined by making maximum use of observable inputs. It is shown according to the hierarchy defined in IFRS 13. IFRS 13 defines fair value as the price that would be received on the sale of an asset or paid to transfer a liability in an ordinary transaction between market participants, on the main or most advantageous market at the valuation date. Fair value applies to each financial asset or financial liability individually. As an exception, it can be estimated by portfolio if the risk management and monitoring strategy permits and is appropriately documented. Thus, certain fair value parameters are calculated on a net basis when a group of financial assets and financial liabilities is managed on the basis of its net exposure to market or credit risks. CFM Indosuez Wealth considers that the best indication of fair value is reference to quoted prices published on an active market. In the absence of such quoted prices, fair value is determined using valuation techniques that maximise use of relevant observable data and minimise use of unobservable data. When a debt is valued at fair value through profit or loss (by nature or designated), fair value takes account of 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 become “observable”, the remaining margin to be deferred is immediately recognised in profit or loss. 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. CFM Indosuez Wealth Management 78
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