Word of the Day: Haircut

The percentage by which an asset's market value is reduced for the purpose of calculating capital requirement, margin, and collateral levels, or the difference between the actual market value of a security and the value assessed by the lending side of a transaction.

Notes:

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