A derivative can have little value today and still create a substantial exposure tomorrow. The standardised approach for counterparty credit risk, or SA-CCR, estimates a regulatory exposure amount by combining current replacement cost with an allowance for possible future exposure. The resulting exposure at default is an input to a capital calculation; it is not itself the capital charge.

The path begins with netting and collateral because the legal agreement determines which positions can be considered together. It then develops replacement cost, the potential future exposure multiplier, adjusted notionals, supervisory delta and maturity factors. The asset-class examples show how those trade-level inputs feed the relevant hedging sets and aggregate add-ons.

Pay particular attention to the difference between a market sensitivity and a supervisory parameter. SA-CCR deliberately uses prescribed conventions, so a supervisory delta is not a substitute for the hedge ratio from a trading model. Use the portfolio and governance lessons to connect individual examples to the overall exposure calculation, including the stated PRA alpha treatment and the boundaries of the simplified cases.

Continue your learning: SA-CVA counterparty risk · XVA valuation adjustments · The Standard Initial Margin Model

Look up a term as you work through the examples. Definitions explain the terminology; the source references and assumptions beside each lesson explain the scope of its calculation.

73 definitions

Alpha

Alpha is the multiplier used in the relevant regulatory exposure formula. Its value and any conditional treatment must be taken from the applicable framework and jurisdiction, rather than assumed from a different version of the rules.

Asset

An asset is a resource or contractual right with economic value. For a bank, examples include cash, securities and loans that customers are expected to repay.

At the money

An option is at the money when its strike is close to the relevant underlying price or forward price under the stated convention. Moneyness describes that relationship more generally.

Basis risk

Basis risk arises when two related prices or rates do not move together as assumed. A hedge tied to one benchmark may therefore leave exposure to a different benchmark, location or contract specification.

Call and put

A call gives the holder the right to buy the underlying on the contract’s terms. A put gives the right to sell it. The holder’s exercise choice makes the payoff asymmetric.

Cash flow

A cash flow is a payment or receipt at a specified time. Its amount, date, currency and legal owner affect both valuation and liquidity.

Collateral

Collateral is cash or another eligible asset provided to secure an obligation. Its protection depends on value, legal enforceability, availability and the time required to realise it.

Correlation

Correlation summarises a specified relationship between two variables. A linear correlation does not fully describe joint tail behaviour, and a prescribed regulatory correlation is a model parameter rather than a measured relationship for every portfolio.

Counterparty credit risk

Counterparty credit risk is the risk of loss when the other party to a financial contract fails to perform. For derivatives, exposure can change with market conditions and may be positive for either party at different times.

Credit default swap

A credit default swap exchanges a protection premium for a contractual payment if a specified credit event occurs. The protection buyer generally benefits when the reference credit deteriorates, subject to the contract’s terms.

Credit spread

A credit spread is the additional yield or premium associated with credit exposure relative to a reference rate. It can reflect default risk, liquidity and other market effects, so it is not a direct default probability.

Credit support annex

A credit support annex or comparable margin agreement sets out collateral obligations, eligible assets and transfer mechanics. Its terms affect exposure, funding and the timing of collateral payments.

Currency codes

GBP denotes pounds sterling, USD denotes US dollars, EUR denotes euros and JPY denotes Japanese yen. Currency labels matter because values and thresholds must be converted consistently before they are compared or combined.

Curvature

Curvature describes the part of a value change that a first-order sensitivity does not capture. Its regulatory construction differs by framework: FRTB uses specified repricing shocks, whereas SIMM derives a curvature exposure from volatility-weighted vega and expiry scaling.

CVA

Credit valuation adjustment reduces a default-free value to reflect expected loss from counterparty default under the selected valuation framework. The value of CVA and the capital held against changes in CVA are different measures.

Delta

Delta is the first-order sensitivity of value to a specified underlying input. A delta hedge offsets that local exposure at the current point but may need adjustment when the market moves.

Discount rate

A discount rate is a rate used to value future cash flows in present terms. The appropriate rate depends on the valuation framework and the characteristics of the cash flow.

Diversification

Diversification is the reduction in aggregate risk that can arise when positions do not experience adverse outcomes together. Its benefit depends on the chosen risk measure, dependence assumptions and any regulatory aggregation rules.

Duration

Duration summarises the timing of cash flows or their sensitivity to rates, depending on the definition. Macaulay duration is a present-value-weighted time, while modified duration estimates proportional price sensitivity to yield.

Equity

Equity represents an ownership interest. On a bank balance sheet, equity is the residual interest in assets after liabilities; in a market-risk example, an equity position usually means shares in a company.

Expected loss

Expected loss is the probability-weighted average loss over a defined set of outcomes. In a simple single-period credit example it is PD multiplied by LGD and EAD, but richer models also account for timing and dependence.

Expiry

Expiry is the time at which an option’s exercise right ends. A European option can be exercised only at expiry, while other exercise styles allow different choices.

Exposure at default

Exposure at default is the amount exposed when default occurs under the relevant model or regulatory definition. It can include future drawings or prescribed add-ons and need not equal today’s drawn balance.

FRTB

FRTB stands for the Fundamental Review of the Trading Book. It is the market-risk capital framework covered in the selected Basel and jurisdictional documents, including standardised and internal-models approaches.

Full and reduced factor sets

FRTB internal-models calculations distinguish a full risk-factor set from a reduced set used for stress calibration. Labels such as FC and RC in the applets refer to full-current and reduced-current measures; RC in SA-CCR instead means replacement cost. PES labels the supplied partial expected-shortfall inputs in the relevant FRTB lesson.

Haircut

A haircut reduces the recognised value of collateral or an asset pool for a specified calculation. It accounts for the relevant risk or rule and is not necessarily the price discount obtained in an actual sale.

Hedge

A hedge is a position intended to offset part of another exposure. It can leave basis, timing, legal or non-linear risks and can introduce its own funding and counterparty demands.

Hedging set

A hedging set is a defined grouping within the applicable counterparty-exposure calculation. The grouping determines which trade exposures can offset and which correlation or aggregation rules apply.

Implied volatility

Implied volatility is the volatility parameter that makes a selected pricing model match an observed option price. A volatility smile or surface describes how implied volatility varies across strikes and expiries.

Incremental and standalone risk

Standalone risk measures a position by itself. Incremental risk is the change in portfolio risk when the position is added; it can be negative when the new position hedges an existing exposure.

Independence

Variables are independent when learning the value of one does not change the probability distribution of the other. This is stronger than having zero linear correlation.

Index decomposition

Index decomposition represents a position through exposures to its constituents when the relevant framework permits or requires it. Delta, vega and curvature can have different index treatments, so look-through should not be applied indiscriminately.

Interest-rate swap

An interest-rate swap exchanges interest payments calculated on a reference notional. A common swap exchanges fixed interest for floating interest, allowing the parties to change their exposure to future rates.

Leverage

Leverage increases exposure relative to the capital supporting it, often through borrowing or derivatives. It can magnify gains and losses and create funding pressure even when a position is expected to be profitable.

Long and short positions

A long position generally benefits from ownership or a rise in the relevant instrument’s value. A short position has the opposite exposure. For complex derivatives, the precise payment and sign convention should always be checked.

Loss allowance and write-off

A loss allowance records the relevant impairment estimate. A write-off reduces the carrying amount when the accounting criteria are met, which is different from deciding that collection or enforcement must always stop.

Margin period of risk

The margin period of risk is the period over which exposure can change between the relevant collateral snapshot and effective close-out or replacement. Operational delays and contractual conditions can affect its required treatment.

Maturity

Maturity is the date or remaining period until a contract ends or principal becomes due. It can differ from an instrument’s next interest-rate reset or an option’s expiry.

Modified duration

Modified duration measures the approximate proportional price response to a small yield change under its convention. It is distinct from contractual maturity and from supervisory duration used in SA-CCR.

Net independent collateral amount

NICA is the net independent collateral amount defined for the SA-CCR calculation. Its treatment depends on whether collateral is received or posted and on the applicable legal and segregation conditions.

Netting set

A netting set contains transactions that can be combined under the relevant legally recognised agreement and calculation rules. Economic offsets across different legal sets do not automatically qualify as regulatory or collateral offsets.

Notional

Notional is the reference amount used to scale a financial contract’s payments or exposure measures. It is not generally the contract’s market value or the amount that would be lost on default.

Option

An option gives its holder a contractual choice, such as buying or selling an asset on specified terms. Optionality also occurs inside other products, for example when a borrower can repay early.

Payoff

A payoff is the amount a contract produces in a specified outcome, usually at exercise or maturity. Its present value is not generally equal to the payoff because timing and uncertainty also matter.

Portfolio

A portfolio is a collection of positions considered together. Its risk depends on their sizes, relationships and permitted offsets, not just the sum of their standalone risks.

Potential future exposure

Potential future exposure allows for an increase in exposure after the current snapshot. In SA-CCR it is calculated through a prescribed multiplier and aggregate add-on, which differs from a generic simulated exposure quantile.

PRA

The Prudential Regulation Authority is the UK prudential supervisor for the firms within its remit. PRA rules, supervisory statements and consultation proposals have different roles and legal status.

Probability of default

Probability of default is the probability that a borrower defaults over a defined horizon and under specified conditions. One-year, remaining-lifetime, market-implied and prudential PDs answer different questions.

Regulatory capital and RWA

Regulatory capital is eligible loss-absorbing funding measured under the applicable rules. Risk-weighted assets express exposures or requirements on a risk-adjusted basis and are used with capital ratios; an exposure amount is not automatically a capital charge.

Remediation and add-ons

Remediation addresses a model or control deficiency through documented actions. An add-on is an additional required amount under the relevant method or agreement; its basis and governance should remain separate from unexplained changes to raw sensitivities.

Replacement cost

Replacement cost is the current exposure component in SA-CCR under the applicable netting and collateral rules. Current market value, or CMV, is an input; replacement cost need not equal an unadjusted positive trade value.

Risk class and bucket

A risk class groups related risk types, such as interest rates or equities. A bucket is a further prescribed grouping used in aggregation. The definitions differ across FRTB, SA-CVA and SIMM.

Risk-neutral measure

A risk-neutral measure is a pricing probability measure under which suitably discounted traded asset prices are martingales under the model’s conditions. Its probabilities are pricing weights and need not represent a real-world forecast.

SA-CCR

SA-CCR is the standardised approach for counterparty credit risk. It combines replacement cost and potential future exposure, with the relevant alpha treatment, to produce a regulatory exposure-at-default amount.

SA-CVA and BA-CVA

SA-CVA is the standardised approach to CVA risk capital and uses the relevant sensitivities and eligible hedges. BA-CVA is the basic approach under its own rules. Permissions and portfolio scope determine which treatment applies.

Securitisation and tranche

A securitisation allocates cash flows and credit losses from a pool of exposures to securities or positions. A tranche has a specified priority and loss-absorption range, so its risk can differ substantially from the average risk of the pool.

Segregation

Segregation separates collateral or assets under specified legal arrangements. Bankruptcy-remoteness and permitted reuse depend on the actual structure, so received initial margin cannot automatically be assumed available to fund posted margin.

Sensitivity

A sensitivity measures how a value changes when a specified input changes, under a stated bump and unit convention. Greeks are familiar option sensitivities such as delta, gamma and vega.

Spot price

The spot price is the price or exchange rate for a transaction with the usual near-term settlement convention. It differs from a forward price agreed for a later transaction.

Standard deviation

Variance is the probability-weighted squared deviation from a mean. Standard deviation is its square root and is expressed in the original units of the variable.

Standardised approach

A standardised approach uses prescribed calculation structures and parameters, although some inputs still come from the bank’s portfolio and systems. The precise meaning depends on whether the framework concerns market risk, counterparty exposure or another risk.

Strike

The strike is the price specified in an option for buying or selling the underlying. Its position relative to the current underlying price helps determine the option’s value and sensitivities.

Supervisory delta

Supervisory delta is a prescribed representation of trade direction and optionality used in SA-CCR. It is a regulatory calculation input and need not equal the market delta used to hedge the instrument.

Supervisory duration

Supervisory duration transforms the relevant interest-rate or credit trade notional using prescribed start and end dates. Adjusted notional is the resulting exposure scale, with different definitions for other asset classes.

Supervisory factor and maturity factor

A supervisory factor scales the risk of the relevant SA-CCR exposure category. A maturity factor adjusts for the applicable maturity or margin-period convention. These are different inputs and should not be confused with market volatility estimates.

Threshold and MTA

A threshold defines an amount that may remain unsecured or uncollateralised under the applicable arrangement. A minimum transfer amount limits small collateral transfers. Their legal scope and treatment differ across regulatory and contractual contexts.

Underlying

The underlying is the asset, rate, index or other reference quantity on which a derivative’s payments depend. A derivative can depend on more than one underlying risk factor.

Variation margin

Variation margin addresses changes in current exposure by transferring collateral according to the agreement. A received or posted amount is a cash or collateral flow, not an additional valuation profit by itself.

Vega

Vega measures how value changes with the volatility input of a pricing model. A vega quoted per one volatility percentage point differs by a factor of 100 from a derivative taken with respect to volatility expressed as a decimal.

Volatility

Volatility measures the variability of a price, return or other risk factor over a stated period. It describes dispersion, not the direction in which the next move will occur.

Yield

Yield is a rate of return implied by a price and a specified set of cash flows under a stated convention. Different yield definitions and compounding conventions can produce different numerical rates.

Yield

A yield is a rate of return implied by a price and a specified cash-flow convention. Yield to maturity is the single discount rate that equates a bond’s promised payments to its price; realised returns can differ.

Yield curve

A yield curve or term structure describes how rates or discount factors vary with maturity. Projection curves and discount curves can serve different purposes within one valuation.