What Is a “Haircut” in the Context of Collateral Valuation?
A haircut is a percentage reduction applied to the market value of an asset posted as collateral. It accounts for the potential decline in the asset's value (market risk) and the liquidity risk of selling it quickly in the event of a default.
For example, a $100 asset with a 10% haircut is valued at only $90 for margin purposes, providing a safety buffer for the CCP.
