Credit limit usage for derivatives is normally measured by the maximum of potential future exposure (PFE), not by average expected exposure. PFE is a high percentile of the exposure distribution at each future date1. Taking into account the counterparty's credit quality, the tenor of the trades, and the liquidity of the positions1, a unit independent of the trading business sets and reviews the limit2.

Consider a hypothetical example in which a bank sets a credit limit of 2 billion yen for a corporate counterparty and usage is 1.2 billion yen. The bank checks before execution whether usage after adding a new trade stays within 2 billion yen. If market moves push usage above 2 billion yen, the excess goes through the same approval process as an excess caused by a new trade2.

Notes

  1. Office of the Comptroller of the Currency et al., "Interagency Supervisory Guidance on Counterparty Credit Risk Management" (June 2011, revised June 2026), V.1, pages 13–14, and Appendix A, pages 20–21. ↩ ↩2

  2. Financial Services Agency and Bank of Japan, "バーゼル銀行監督委員会「カウンターパーティ信用リスク管理に関するガイドライン」について" (On the Basel Committee on Banking Supervision's Guidelines for counterparty credit risk management) (April 2025), page 15, "Limits（信用枠・リミット）" (Limits), and page 20, "Limit governance and exception management（リミットのガバナンスと超過管理）" (Limit governance and exception management) (in Japanese). ↩ ↩2