Haircut

A haircut is the percentage deducted from the value of a security (usually debt) to determine the maximum amount against which it can be used as collateral.

For example, if a debt security with a market value of £100 has a 5% haircut, it can be used as collateral to raise up to £95.

The amount of the haircut reflects the riskiness of the security. This is not just the risk that the issuer may fail to meet payments, but also the volatility of the security over the lifetime of the loan. A security with a high modified duration will need a large haircut.

Some trading systems allow repos and similar deals to be matched on criteria that include the size of the haircut required.

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