In the comprehensive approach, when taking collateral, conventional bank licensees must calculate their adjusted exposure to a counterparty for capital adequacy purposes in order to take account of the effects of that collateral. Using haircuts and add-ons, conventional bank licensees are required to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either¹⁸, occasioned by market movements. This will produce volatility adjusted amounts for both exposure and collateral. Unless either side of the transaction is cash, the volatility adjusted amount for the exposure will be higher than the exposure due to the add-on and for the collateral it will be lower due to the haircut.

¹⁸ Exposure amounts may vary where, for example, securities are being lent.