Risk glossary

Potential future exposure (PFE) is a measure of counterparty credit risk. PFE estimates the maximum expected loss that a financial institution would suffer if one or more of its counterparties in a derivatives contract defaulted or otherwise failed to meet its obligations.

PFE is calculated by simulating gains or losses on a trade or a portfolio of trades over time. The resulting figure is expressed at a given confidence level, say 95%. In this sense, PFE analogous to another common risk metric, value-at-risk, or VAR.

PFE is used for setting margin requirements on derivatives and other trades, such as repo. It is also one of the inputs for the standardised approach to counterparty credit risk (SA-CCR), which forms part of the latest Basel III capital adequacy regime.

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