What Is a ‘Margin Haircut’ and How Is It Applied in Cross-Margining?

A margin haircut is a percentage reduction applied to the market value of an asset when it is used as collateral. It is a risk management tool that accounts for the potential volatility and illiquidity of the collateral asset.

In cross-margining, different collateral types (e.g. Bitcoin vs. stablecoins) will have different haircuts, meaning the amount of margin credit received is less than the asset's face value.

Higher haircuts are applied to more volatile or less liquid assets.