Financial Glossary: Haircut


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Haircut

Haircut

The difference between prices at which a market maker can buy and sell a Security.

It is the percentage by which an asset's Market value is reduced for the purpose of calculating Capital requirement, Margin, and Collateral levels. In finance, a Haircut is a percentage that is subtracted from the Par value of the assets that are being used as Collateral. The size of the Haircut reflects the perceived Risk associated with holding the assets.

For example, Treasury bills (which are seen as fairly safe) might have a Haircut of 1%, while for a Stock option (which is seen as less safe) the Haircut might be as High as 30%.

When used in the context of Exchange traded products such as stocks, options or futures, Haircut is used interchangeably with the term Margin. It is the amount of capital required by a Broker to maintain the positions currently in a trading account. If Haircut exceeds the account's capital, the Broker can either require additional capital (e.g. Margin call), or Liquidate positions until the Haircut no longer exceeds available capital.

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