Expected positive exposure condenses expected exposure, which changes from date to date, into a single value, and is suited to measuring exposure in credit risk models that combine many counterparties. Under the internal model method of the capital adequacy rules (called the expected exposure method in Japan's capital adequacy notice), expected exposure is first replaced so that it never falls below its previous maximum. It is then averaged to give effective EPE, which is multiplied by a regulatory factor to give exposure at default.
Consider a hypothetical example in which expected exposure at 0.25, 0.5, 0.75, and 1 year is 100, 160, 140, and 200 million yen. Each interval is 0.25 years, so expected positive exposure over the first year is 0.25 × (100 + 160 + 140 + 200) = 150 million yen. For effective EPE, the 140 million yen at 0.75 years is replaced by the previous maximum of 160 million yen, giving 0.25 × (100 + 160 + 160 + 200) = 155 million yen, larger than expected positive exposure.