What is a haircut?
A haircut is the percentage a lender, broker or clearing house subtracts from the market value of an asset when it accepts that asset as collateral. The reduced figure is the asset's lending value or collateral value.
The haircut protects the party taking the collateral. If the borrower defaults, the asset may have to be sold at a lower price than today's quote. The haircut is a buffer against that fall.
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Worked example (hypothetical)
A borrower pledges a government bond to get a short-term loan.
| Item | Value |
|---|---|
| Market value of the bond | M |
| Haircut rate set by the lender | h |
| Haircut amount | M × h |
| Lending value (maximum loan) | M − (M × h) |
The borrower receives cash equal to the lending value, not the full market value. If the bond's price falls by less than the haircut amount, the lender is still fully covered. If it falls by more, the lender usually asks for more collateral (a margin call).
Riskier assets get a larger haircut. A short-dated government bill normally gets a smaller haircut than a long-dated corporate bond or a listed share.
Formal definition and edge cases
In repo and securities lending, the haircut is the difference between the market value of the collateral and the cash lent, expressed as a share of the collateral's market value. Some contracts state the same protection the other way round, as an "initial margin" ratio of collateral to cash. These are two ways of writing the same buffer.
What drives the size of a haircut:
- Price volatility. Assets that move more get larger haircuts.
- Maturity and duration. Longer bonds are more sensitive to interest rates.
- Credit quality of the issuer.
- Liquidity. Assets that are hard to sell quickly get larger haircuts.
- Currency mismatch. Collateral in a different currency from the loan often carries an extra add-on for currency risk.
- Wrong-way risk. Collateral issued by the borrower, or closely linked to it, may be refused or heavily discounted.
Haircuts are procyclical. In a stress period, lenders and central counterparties raise haircuts. Borrowers then have to post more collateral or sell assets, which can push prices down further. This was a feature of the credit crunch period.
Haircut as a loss for creditors
In news about debt restructuring, "haircut" has a second meaning: the share of a debt's face value that creditors agree, or are forced, to give up. A sovereign restructuring or a bail-in of bank creditors is often described as "bondholders taking a haircut."
Where you see the term
- Central bank repo and open market operations, where banks pledge government securities.
- Clearing and settlement rules that list accepted collateral and the haircut for each asset type.
- Broker margin schedules for securities accounts.
- Financial news on defaults, restructurings and bank resolutions.
If you trade with leverage, remember that the value of what backs your position can drop faster than expected. Leveraged CFD and forex trading can lose money fast. See risk management for the basics.
Related terms
Frequent questions
What is a haircut in simple words?
It is a discount on the value of an asset you pledge as security. The lender counts the asset as worth less than its market price.
Is a haircut the same as margin?
They are closely related. A haircut is a discount on collateral value. Margin is the amount of your own money or collateral that you must keep against a position. Both act as a buffer against losses.
Who decides the haircut rate?
The party accepting the collateral decides it: a lender, broker, clearing house or central bank. It sets the rate in its rules or contract, and it can change the rate.
What does "investors took a haircut" mean in the news?
It means creditors accepted getting back less than the full amount they were owed, usually in a debt restructuring.