Introduction
Every ADCA in SA-CCR begins with one number: the Adjusted Notional. Before Supervisory Delta, Maturity Factor, or Supervisory Factor are applied, the bank must first determine how large the notional exposure of each derivative contract actually is for regulatory purposes. This sounds straightforward but is not — the same $50 million swap, the same $50 million FX forward, and a $50 million equity total return swap each require a fundamentally different calculation to arrive at their Adjusted Notional.
The reason for this difference is that different asset classes measure “exposure size” in genuinely different ways. An interest rate swap’s risk is not just its notional — it is its notional scaled by how long that notional is exposed to rate movements. An FX forward’s risk is captured by the size of the currency leg being exchanged. An equity derivative’s risk is captured by the current market value of what is referenced. The Adjusted Notional formula in each case is designed to produce a number that is proportional to the actual risk, not merely the contractual notional.
The regulation at §217.132(c)(9)(ii) sets out three separate paths:
- Path (A): Interest rate and credit derivative contracts — multiply notional (in USD) by the Supervisory Duration
- Path (B): Exchange rate derivative contracts — use the notional of the non-USD leg, with special rules for cross-currency trades and multiple principal exchanges
- Path (C): Equity and commodity derivative contracts — use the current fair value of one unit multiplied by the number of units referenced
This article covers all three paths in full, including every special case, exception, and product variant named in the regulation.
Where Adjusted Notional Sits in the ADCA Formula
| ADCA = Adjusted Notional × Supervisory Delta × Maturity Factor × Supervisory Factor |
| Adjusted Notional is always a positive number. It sets the scale of the ADCA before the other three components modify it for direction, time horizon, and asset class risk. |
Adjusted Notional is the foundation the other three components build on. Get it wrong and the entire ADCA is wrong — regardless of how precisely Supervisory Delta, Maturity Factor, and Supervisory Factor are calculated. For interest rate trades in particular, where the Supervisory Duration calculation involves exponentials and can significantly amplify or compress the face notional, accuracy in this step matters enormously.
Path (A) — Interest Rate and Credit Derivative Contracts
For interest rate and credit derivative contracts, the Adjusted Notional is not simply the face notional of the trade. It is the face notional scaled by the Supervisory Duration — a formula that converts the contract’s notional into a duration-equivalent exposure, reflecting how long and how heavily the notional is exposed to rate or spread movements over the contract’s remaining life.
Why Duration Scaling Is Needed for IR and Credit
Consider two interest rate swaps, both with a $100 million face notional: one maturing in 6 months and one maturing in 10 years. The 10-year swap has vastly more rate sensitivity than the 6-month swap. If both were assigned the same $100 million Adjusted Notional, SA-CCR would treat them identically — which would massively understate the 10-year swap’s exposure and overstate relative capital requirements for short-dated trades. The Supervisory Duration formula solves this by producing a duration-equivalent notional that scales with the trade’s actual rate sensitivity.
The Supervisory Duration Formula
The regulation at §217.132(c)(9)(ii)(A)(1) specifies the formula as:
| SD = max{ [ e^(−0.05×S/250) − e^(−0.05×E/250) ] / 0.05 , 0.04 } |
| S = business days from today until the contract’s start date (0 if the start date has already passed) | E = business days from today until the contract’s end date | Floor: SD ≥ 0.04 |
The Adjusted Notional is then:
| Adjusted Notional = Notional (in USD) × Supervisory Duration |
| The notional must be converted to USD using the exchange rate on the calculation date if denominated in another currency. |
Understanding the Supervisory Duration Formula
The formula is based on a continuously compounded 5% discount rate applied across the contract’s duration window. Breaking it down:
- e^(−0.05×S/250) is the discount factor at the start date S, measuring how long the contract has before it begins accumulating interest rate risk
- e^(−0.05×E/250) is the discount factor at the end date E, measuring how long until all cash flows have settled
- The difference of these two exponentials, divided by 0.05, produces a measure of the area under the discount curve between S and E — which is the duration-equivalent exposure
- The floor of 0.04 ensures no trade is assigned a Supervisory Duration smaller than 0.04 years (approximately 10 business days), regardless of how short-dated it is
For a spot-starting trade (S = 0), the formula simplifies because e^(0) = 1:
| SD (spot-starting) = max{ [ 1 − e^(−0.05×E/250) ] / 0.05 , 0.04 } |
For a forward-starting trade (S > 0), both exponentials matter and the formula captures only the exposure during the period from S to E, not from today to E. A 5-year swap starting in 2 years, for example, has a Supervisory Duration corresponding to the 2-to-7 year window, not the 0-to-7 year window.
The 0.04 Floor on Supervisory Duration
Even the shortest-dated interest rate or credit derivative cannot have a Supervisory Duration below 0.04. This floor ensures that even a 1-day FRA or a 5-day interest rate swap carries a minimum duration-equivalent exposure of 4% of its notional. The regulatory view is that no interest rate trade is so short-dated that it carries essentially zero duration exposure — there is always some residual sensitivity.
Special Case 1 — Variable Notional Swaps
For interest rate or credit derivative contracts that are variable notional swaps — amortising swaps, accreting swaps, or swaps where the notional steps up or down over time — the regulation at §217.132(c)(9)(ii)(A)(2)(i) specifies:
“For an interest rate derivative contract or credit derivative contract that is a variable notional swap, the notional amount is equal to the time-weighted average of the contractual notional amounts of such a swap over the remaining life of the swap.”
The time-weighted average notional is computed across all periods of the swap’s remaining life, weighting each period’s notional by its length as a fraction of the total remaining life. This prevents an amortising swap from being over-stated (using its initial high notional) or under-stated (using only its final low notional).
Special Case 2 — Leveraged Swaps
For a leveraged swap — where the notional of all legs is divided by a factor and all rates are simultaneously multiplied by the same factor — the regulation at §217.132(c)(9)(ii)(A)(2)(ii) requires:
“For an interest rate derivative contract or a credit derivative contract that is a leveraged swap, in which the notional amount of all legs of the derivative contract are divided by a factor and all rates of the derivative contract are multiplied by the same factor, the notional amount is equal to the notional amount of an equivalent unleveraged swap.”
This prevents a bank from artificially reducing its Adjusted Notional by structuring a swap with embedded leverage. A swap with a notional of $10 million but rates multiplied by 5 (effectively equivalent to a $50 million vanilla swap) must use $50 million as its notional — the equivalent unleveraged amount.
Credit Derivatives — Same Path (A) Formula
Credit derivative contracts — including single-name and index CDS — use the identical adjusted notional formula as interest rate derivatives: face notional (in USD) multiplied by Supervisory Duration, with the same variable notional and leveraged swap exceptions. The credit derivative’s notional is typically the protection amount, and E is the scheduled maturity of the CDS protection period.
Path (B) — Exchange Rate Derivative Contracts
FX derivatives do not use Supervisory Duration. The primary risk factor is the exchange rate — a spot or forward exchange rate — and the exposure is directly proportional to the notional amount being exchanged. No time-scaling is needed because the FX rate applies instantaneously to the principal; there is no accumulation of sensitivity over the contract’s life in the same way as for interest rates.
Standard Rule — One USD Leg
For the standard FX derivative where one leg is in US dollars and one leg is in a foreign currency, the rule at §217.132(c)(9)(ii)(B)(1) is:
“For an exchange rate derivative contract, the adjusted notional amount is the notional amount of the non-U.S. denominated currency leg of the derivative contract, as measured in U.S. dollars using the exchange rate on the date of the calculation.”
The USD leg is simply ignored. Only the foreign currency leg matters, converted to USD at the spot rate on the calculation date.
Both Legs Non-USD
When neither leg of an FX derivative is in US dollars — for example, a EUR/GBP forward — the regulation selects the larger of the two legs when both are converted to USD:
“If both legs of the exchange rate derivative contract are denominated in currencies other than U.S. dollars, the adjusted notional amount of the derivative contract is the largest leg of the derivative contract, as measured in U.S. dollars using the exchange rate on the date of the calculation.”
Multiple Exchanges of Principal
Cross-currency swaps frequently involve more than one exchange of principal — commonly at both the start and maturity of the trade. For these instruments, the regulation at §217.132(c)(9)(ii)(B)(2) requires:
“For an exchange rate derivative contract with multiple exchanges of principal, the Board-regulated institution must set the adjusted notional amount of the derivative contract equal to the notional amount of the derivative contract multiplied by the number of exchanges of principal under the derivative contract.”
This rule ensures that a cross-currency swap which exchanges principal twice (at inception and at maturity) is not treated as carrying the same FX exposure as a simple forward that exchanges principal only once. Each exchange creates a separate, independent FX exposure at the prevailing exchange rate at that point in time.
Path (C) — Equity and Commodity Derivative Contracts
Equity and commodity derivatives do not use notional amounts in the traditional sense. Instead, the exposure is anchored to the current market value of what is actually being referenced — the number of shares, barrels, ounces, or bushels multiplied by today’s price per unit.
Standard Rule — Fair Value per Unit Times Number of Units
The regulation at §217.132(c)(9)(ii)(C)(1) states:
“For an equity derivative contract or a commodity derivative contract, the adjusted notional amount is the product of the fair value of one unit of the reference instrument underlying the derivative contract and the number of such units referenced by the derivative contract.”
This is a current-market-value calculation, not a historical cost or contractual notional calculation. If the share price moves between today and yesterday, the Adjusted Notional changes. This is the SA-CCR framework’s way of ensuring that the size of the exposure tracks the current economic risk of the position, not an outdated contractual amount.
Special Case — Volatility Derivative Contracts
A volatility derivative — such as a variance swap, volatility swap, or VIX futures contract — references volatility rather than a price or rate. For these instruments, the standard “fair value per unit × number of units” formula would be nonsensical (what is the “fair value per unit of volatility”?). The regulation at §217.132(c)(9)(ii)(C)(2) provides a specific override:
“Notwithstanding paragraph (c)(9)(ii)(C)(1) of this section, when calculating the adjusted notional amount for an equity derivative contract or a commodity derivative contract that is a volatility derivative contract, the Board-regulated institution must replace the unit price with the underlying volatility referenced by the volatility derivative contract and replace the number of units with the notional amount of the volatility derivative contract.”
In plain terms: for volatility derivatives, Adjusted Notional = referenced volatility × the derivative’s own notional amount. The “reference instrument’s fair value per unit” is replaced by the actual volatility being referenced (for example, 18% implied volatility), and the “number of units” is replaced by the derivative’s notional amount in USD.
How Adjusted Notional Varies by Asset Class for the Same Face Notional
To make the difference between the three paths concrete, consider a $50,000,000 face notional trade in each asset class and see how the Adjusted Notional differs:
| Asset Class | Instrument | Face Notional | Adjusted Notional | Key Driver |
| Interest Rate | 5-year swap (spot-starting) | $50,000,000 | $221,200,000 (SD = 4.424) | Duration scaling multiplies notional by >4x |
| Interest Rate | 3-month FRA (forward start) | $50,000,000 | ~$12,210,000 (SD ~0.244) | Short duration = small SD < 1 |
| Credit | 5-year CDS | $50,000,000 | $221,200,000 (SD = 4.424) | Same SD formula as IR |
| Exchange Rate | EUR/USD forward | $50m USD equivalent | $50,000,000 | No duration scaling — face notional is Adj. Notional |
| Exchange Rate | Cross-currency swap, 2 exchanges | $50m USD equivalent | $100,000,000 | Multiplied by 2 for two principal exchanges |
| Equity | Equity TRS, $50m of stock at current price | $50,000,000 | $50,000,000 | Fair value x units = current market value |
| Commodity | Oil swap, 100k barrels at $500/barrel | $50,000,000 | $50,000,000 | Fair value x units = current market value |
The most striking pattern in this table is the duration effect for interest rate and credit trades. A spot-starting 5-year trade carries 4.4 times its face notional as Adjusted Notional, while a 3-month trade carries only about 25% of its face notional. This is the SA-CCR framework doing exactly what it is designed to do: producing an exposure measure proportional to actual risk, not a flat reflection of contract size.
Quick Summary
- Adjusted Notional is the first and foundational component of the ADCA formula. It sets the scale of each trade’s exposure before Supervisory Delta, Maturity Factor, and Supervisory Factor are applied.
- Path (A) — IR and Credit: Adjusted Notional = Face Notional (USD) × Supervisory Duration. SD = max{[e^(−0.05S/250) − e^(−0.05E/250)] / 0.05, 0.04}. S = days to start, E = days to end. Floor of 0.04 applies.
- Variable notional swaps: use time-weighted average of the contractual notional amounts over the remaining life before multiplying by SD.
- Leveraged swaps: use the notional of the equivalent unleveraged swap, not the reduced stated notional of the leveraged structure.
- Path (B) — Exchange Rate: Use the non-USD leg’s notional converted to USD. If both legs are non-USD, use the larger leg in USD. For multiple exchanges of principal, multiply the base notional by the number of exchanges.
- Path (C) — Equity and Commodity: Adjusted Notional = current fair value per unit × number of units. For volatility derivatives, replace fair value per unit with the referenced volatility and number of units with the derivative’s own notional amount.
- All notional amounts must be converted to USD on the calculation date. Adjusted Notional is always a positive number.
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