What Is the Role of Collateral Haircut in Managing Margin Call Risk?

A collateral haircut is a discount applied to the market value of an asset used as collateral. For example, a 10% haircut means $100 of collateral is valued at only $90 for margin purposes.

This is a risk management tool that provides a buffer against potential future price declines and reduces the likelihood of a margin call being triggered by minor price fluctuations. Assets deemed more volatile receive larger haircuts.