Haircut and Margin
Definition
A haircut is additional collateral required by the holder of collateral in a repo, buy/sell-back or securities lending transaction, to protect against the possibility of a fall in the collateral’s price.
Margin transfers are payments of cash or transfers of securities to maintain the value of collateral held by the buyer in a transaction equal to the value of the cash held by the seller, adjusted for any haircut requirement.
How are they used?
In order for the collateral in a repo or similar transaction to be of adequate value, it is important for the buyer to recalculate its value continually and ensure that it is at least equal to the cash lent. This marking to market is customarily done daily and, if the transactions ...
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