of 100 bps across all yield curves, the value of the FRR s portfolio would now decrease by just 1.65%, i.e. around EUR 0.59 billion. This level of modified duration takes into account the FRR s reduced exposure to interest rate risk on invest- ment grade credit through the introduction of tactical hedging.

Symmetrically, a 100 bp rise in interest rates would reduce the FRR s balance sheet liabilities by 3.81% through a fall in the value of fixed

income commitments. Modified duration had been 4.26 at the end of 2015, and will continue to drop as the number of payments due to the CADES falls.

The portfolio s credit risk

The table below shows a breakdown by rating of the FRR s fixed income assets at the end of 2015 and 2016. The bulk of these assets are invested in investment grade securities.

AAA AA A BBB 31/12/2015 1% 40% 23% 27% 8% 31/12/2016 1% 31% 27% 28% 13%

The overall quality of the FRR s credit portfolio in 2016 was slightly lower than in 2015, as 87% of it was invested in investment grade securities, as opposed to 91% in 2015. This change on 2015 was due to: the lower weighting of short-term OATs in the FRR s assets. Rated AA, they have been replaced with debt securities issued by national and international banks, generally rated A;

the search for more yield through an increase in less well rated investments (within new investment grade credit mandates, which allow for marginal diversification outside of this category) or unrated investments in new private debt funds used to finance the economy.

Counterparty risk

Counterparty risk is the risk linked to trading by investment managers in over-the-counter for- ward financial instruments with bank counter- parties (swaps and currency forwards). It has been sharply reduced through the introduction of various measures: minimum rating of author- ised counterparties, margin calls, use of CLS2 Bank s clearing services for foreign exchange, limits per counterparty. At the end of 2016, the FRR s overall exposure to counterparty risk was EUR 46 million, with changes dependent on var- iations in the EUR/USD exchange rate.

2 Continuous Linked Settlement: clearing and settlement system that reduces counterparty risk.

Issuer risk diversification ratios

The regulations applicable to the FRR lay down specific risk diversification ratios with regard to issuers of equities and debt securities. In addi- tion to these ratios, the FRR has applied, since 2011, a maximum internal exposure limit for a single issuer or OTC counterparty corresponding to 3.5% of the FRR s net assets, excluding sover- eign issuers for which specific limits have been set depending on the issuer s rating. Since a rul- ing on 24 May 2016, the application of regula- tory limits on issuer or counterparty concentration also take into account positions held indirectly through undertakings for collec- tive investment.

Currency risk

The FRR s portfolio is partly invested in foreign currencies. In the strategic allocation, perfor- mance assets currency risk is theoretically 90% hedged, excluding assets denominated in emerging currencies, for which the exchange rate is an intrinsic performance factor. Never- theless, the FRR has some flexibility in its level of hedging, provided that its total currency risk exposure remains below 20% of its total assets (regulatory limit). In 2016, hedging of exposure to developed market currencies excluding the euro (chiefly the USD) increased relative to 2015, and returned to the usual 90% level after being substantially lower from April 2014. The cur- rency risk of hedging assets has been fully hedged since 2011.