Haircut

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DEFINITION of 'Haircut'

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

2. The percentage by which an asset's market value is reduced for the purpose of calculating capital requirement, margin and collateral levels.

INVESTOPEDIA EXPLAINS 'Haircut'

1. The term haircut comes from the fact that market makers can trade at such a thin spread.

2. When they are used as collateral, securities will generally be devalued since a cushion is required by the lending parties in case the market value falls.

RELATED TERMS
  1. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. Risk-Based Capital Requirement

    A rule that establishes minimum required liquid reserves for ...
  3. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  4. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  5. Risk-Based Haircut

    A reduction in the recognized value of an asset in order to produce ...
  6. Market Maker

    A broker-dealer firm that accepts the risk of holding a certain ...
RELATED FAQS
  1. What is the haircut rate imposed by clearing corporations?

    A haircut rate is a measure that reduces the value of any collateral used in a loan to ensure that when the effects of volatility ...
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