The margin or deposit that is tied up to cover a position taken by a financial intermediary such as a broker.
With respect to a lending transaction, a haircut refers to the below-market (markdown) value that would be assigned to an asset being placed as collateral for a loan. More specifically, a haircut is the reduction to, or deduction from, the collateral posted by the borrower and held by the lender, in a repo transaction, in order to guarantee contractual fulfillment. In other words, it is the amount by which the sum borrowed against the collateral is less than the market value. This difference or discount helps protect the lender against changes in the market value of the collateral. For example, a trader may put up collateral worth 102% of the funds borrowed. The 2% is said to be the haircut of the repo transaction. Of course, the haircut relates to how much the collateral changes value in the market.
Quite not often, haircut also refers to a commission or fee that is paid against executing a transaction.
In yet a different context, haircut (regulatory haircut) may refer to the amount of capital provision made by a bank or financial institution when booking a particular transaction in order to get a recognition of 100% of regulatory capital. This effectively implies that it has taken a “capital haircut“, that is it would have less capital available to absorb or cover losses associated with other business on its books.
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