Dedicated assets’ exposure to risks

EDF is exposed to equity risks, interest rate risks and foreign exchange risks through its dedicated asset portfolio.

The market value of the listed equities in EDF’s dedicated asset portfolio was €13,024 million at 31 December 2019. The volatility of the listed equities at the same date was 9.2% based on 52 weekly performances, compared to 14.3% at 31 December 2018. Applying this volatility to the value of listed equity assets at the same date, the Group estimates the annual volatility of the equities portion of dedicated assets at €1,198 million.

At 31 December 2019, the sensitivity of the listed bonds (€11,226 million) was 6.1, i.e. a uniform 100 base point rise in interest rates would result in a €682 million decline in market value. This sensitivity was 5.3 at 31 December 2018.

5.1.6.1.7 Management of counterparty/credit risks

Counterparty risk is defined as the total loss that the EDF group would sustain on its business and market transactions if a counterparty defaulted and failed to perform its contractual obligations.

The Group has a counterparty risk management policy which applies to EDF and all operationally controlled subsidiaries. This policy sets out the governance associated with monitoring for this type of risk, and organisation of the counterparty risk management and monitoring. The policy also involves monthly consolidation of the Group’s exposures, updated monthly for financial and energy market activities and quarterly for other activities. The CRFI (Financial Risks Control) Department closely monitors Group counterparties (daily review of alerts, special cautionary measures for certain counterparties).

The table below gives details, by rating, of the EDF group’s consolidated exposure to counterparty risk. At 30 September 2019, 90% of the Group’s exposure concerns “investment grade” counterparties, mainly as a result of the predominance of exposures generated by the cash and asset management activity, as most short-term investments concern low-risk assets:

The exposure to counterparty risk by nature of activity is distributed as follows:

Exposure in the energy trading activities is concentrated in EDF Trading, where each counterparty is assigned a limit that depends on its financial robustness. A range of methods are used to reduce counterparty risk at EDF Trading, primarily position netting agreements, cash-collateral agreements and establishment of guarantees from banks or affiliates.

For counterparties dealing with EDF’s trading room, the CRFI Department has drawn up a framework specifying counterparty authorisation procedures and the methodology for calculation of allocated limits. The level of exposure can be consulted in real time and is systematically monitored on a daily basis. The suitability of limits is reviewed without delay in the event of an alert or unfavourable development affecting a counterparty.

As the political and financial situation in the Euro zone is still uncertain, EDF has continued to apply a conservative management policy for its cash investments in non-core countries. Only banking, sovereign and corporate counterparties with good credit ratings are authorised, for limited amounts and maturities.

5.1.6.2 Management and control of energy market

5.1.6.2.1 Management and control of energy market risks

In keeping with the opening of the final customer market, the growth of wholesale markets and its international development, the EDF group is exposed to price variations on the energy market which can significantly affect its financial statements (see section 2.2.2) of the Universal Registration Document, “Energy market risks”).

Consequently, the Group has an “energy markets” risk policy for all energy commodities, applicable to EDF and entities over which it has operational control.

The purpose of this policy is to:

• define the general framework for management of energy market risks, governing the various Group entities’ asset portfolio management activities (energy generation, optimisation and sale), and trading for EDF Trading;
• define the responsibilities of asset managers and traders, and the various levels of control of activities;
• implement a coordinated Group-wide hedging policy that is coherent with the Group’s financial commitments;
• consolidate the exposure of the various entities operationally controlled by EDF on the structured energy-related markets.
  
  

The Group Risk Division presents an annual report on the implementation of this policy to the Board of Directors’ Audit Committee.

At entities not operationally controlled by EDF, the risk management framework is reviewed by the governance bodies.

5.1.6.2.2 Organisation of risk control and general risk hedging principle

The process for controlling energy market risks for entities operationally controlled by the Group is based on:

• a governance and market risk exposure measurement system, clearly separating management and risk control responsibilities;
• an express delegation to each entity, defining hedging strategies and establishing the associated risk limits. This enables the Executive Committee to set out and monitor an annual Group risk profile consistent with the financial objectives, and thus direct operational management of energy market risks over market horizons (generally three years).