Société Générale / Risk report 2021 - Pillar 3 2020

9 MARKET RISK RISK-WEIGHTED ASSETS AND CAPITAL REQUIREMENTS | SOCIETE GENERALE GROUP | PILLAR 3 - 2021 181 RISK-WEIGHTED ASSETS AND CAPITAL 9.4 REQUIREMENTS Allocation of exposures in the trading book The on- and off-balance sheet items must be allocated to one of the two portfolios defined by prudential regulations: the banking book or the trading book. The banking book is defined by elimination: all on- and off-balance sheet items not included in the trading book are included by default in the banking book. The trading book consists of all positions in financial instruments and commodities held by an institution either for trading purposes or in order to hedge other positions in the trading book. The trading interest is documented as part of the traders’ mandates. The prudential classification of instruments and positions is governed as follows: the Finance Division’s prudential regulation experts are responsible p for translating the regulations into procedures, together with the Risk Division for procedures related to holding period and liquidity. They also analyse specific cases and exceptions. They share these procedures to the business lines; the business lines comply with these procedures. In particular, they p document the trading interest of the positions taken by traders; the Finance and Risk Departments are in charge of the control p framework. The following controls are implemented in order to ensure that activities are managed in accordance with their prudential classification: new product process: any new product or activity is subject to an p approval process that covers its prudential classification and regulatory capital treatment for transactions subject to validation; holding period: the Market Risk Department has designed a control p framework for the holding period of certain instruments; liquidity: on a case-by-case basis or on demand, the Market Risk p Department performs liquidity controls based on certain criteria (negotiability/transferability, bid/ask size, market volumes, etc.); strict process for any change in prudential classification, involving p the business line and the Finance and Risk Divisions; internal audit: through its various periodic assignments, Internal p Audit verifies or questions the consistency of the prudential classification with policies/procedures as well as the suitability of the prudential treatment in light of existing regulations. Quantitative information Almost ninety per cent of Societe Generale capital requirements related to market risk are determined using an internal model approach. The standard approach is mainly used for the positions presenting a foreign exchange risk, which are not part of the trading book, as well as for the Group’s subsidiaries that do not have access to the core IT tools developed internally. The main entities concerned are some International Retail Banking and Financial Services entities such as Rosbank, SG Maroc, Crédit du Nord, BRD, SG Algérie, etc. The increase in capital requirements for market risk is due to a diffuse and moderate increase in several components: VaR, which has almost returned to its pre Covid-19 level at the end of p the year, after having increased significantly at the end of the first quarter and in the second quarter, increase mainly attributable to Fixed Income activities and to a lesser extent to the credit perimeter; IRC, which is increasing due to debt instruments on several p categories of issuers (US companies and European governments); RWAs calculated under the standard approach, reflecting new p securitisation positions, and a growth in the rate component.