How Does the Exchange’s “Haircut” Policy Mitigate the Risk of Volatile Collateral?

A "haircut" is a discount applied to the market value of a volatile asset when it is used as collateral. For example, if an asset is worth $100, an exchange might apply a 10% haircut, valuing it at only $90 for margin purposes.

This haircut creates an immediate, built-in buffer against a sudden drop in the collateral's price. By valuing the collateral conservatively, the exchange reduces the risk of the collateral's value falling below the maintenance margin level before a liquidation can be executed.