BASEL REFORMS

The Adjusted Notional is the second component of the Risk Position. Calculated at the trade level, it converts a raw contract notional into a standardised measure of exposure size that is consistent across asset classes. The calculation depends on risk category — unlike the Supervisory Delta, which depends on instrument type.

The Supervisory Delta (δ) is the first component of the Risk Position. Calculated at the trade level, it captures the direction of a trade's exposure to its primary risk driver and adjusts for optionality. The formula depends on instrument type.

Before any trade can contribute to the Add-On, it must be expressed as a single signed number — the Risk Position. Calculated at the trade level, one per transaction, it compresses three dimensions of a trade into one quantity: direction, size, and time. Trades with opposite Risk Positions offset each other within a hedging set, which is how genuine hedges reduce capital.

The Add-On is the engine of SA-CCR. It estimates how much a derivatives portfolio's exposure could grow over the remaining life of its trades, and it drives the Potential Future Exposure (PFE) — one of the two inputs to the Exposure at Default.