The Potential Credit Exposure measure aims to determine the largest unsecured exposure that could arise if a counterparty defaults due to market shocks. It examines scenarios where assets and liabilities are stressed and the mark-to-market value changes, which could cause the net position to become a liability. If the stress impact creates a shortfall larger than the excess margin, the bank may face an unsecured loss upon default. The measure will be positive if the collateral value covers positions under stress scenarios, but negative if there is a shortfall that could cause potential loss.

1. Exposure Measurement
The Potential Credit Exposure measure aims to determine the potential unsecured
exposure in the event of a default and is based on the largest exposure arising from a
set of standardised scenarios that examine systematic and idiosyncratic market
shocks.
The Net Equity amount provides a
buffer for volatility in the value of the
Liabilities assets, MtM and liabilities. The Net
Assets Equity amount will always match or
exceed the Margin Requirement; in
Excess Margin
general ccounterparties will keep
Net Equity Margin Requirement more assets in the pledge account to
MtM reduce their funding costs through
rehypothecation of those assets.
As a result of market stress, the value
Stressed Stressed of assets, liabilities and the MtM on
net position may change; the MtM can
Assets Liabilities turn from asset to liability. If the
change is large enough, Bank may
Margin Requirement
Prior to Default
face an unsecured loss. In the
Stress
Impact
Stressed MtM calculation of Potential Credit
Exposure it is assumed that the
PCE counterparty has drawn down any
Excess Margin available.

2. Exposure Measurement
The measure will have a positive value under many scenarios,
indicating that the value of the collateral under these scenarios is
sufficient to cover market stress; negative values on the other hand
indicate a shortfall in the value of the collateral versus the positions
held, and a potential loss for the Bank.
Stress Impact, indicates the “volatility” of the portfolio and P&L
effect implicit in the measure.
Stress Impact = Potential Shortfall Exposure – Margin
Requirement
Net Equity = Net Assets + Net MTM - Net Liabilities
PCE = Stressed Assets + Stressed Liabilities + Stressed Net MtM –
Excess Margin