Potential Future Exposure (PFE) is the forward-looking component of SA-CCR. While Replacement Cost captures today's exposure, PFE estimates how much that exposure could grow before a defaulted counterparty's trades can be closed out. It is the product of the aggregated add-on and the multiplier.

The multiplier scales the aggregated add-on to reflect the net collateral position of a netting set. When exposure exceeds collateral the multiplier is 1 and the full add-on applies. When collateral exceeds exposure the multiplier reduces the add-on, recognising that excess collateral already absorbs part of the potential future loss.

In the world of OTC derivatives, collateral is the ultimate safety net against counterparty credit risk. To understand how capital requirements are calculated under the Standardised Approach for Counterparty Credit Risk (SA-CCR), we first need to distinguish between the two primary flavors of collateral: