Haircut In A Collateral Agreement

The lender must determine which buffer is sufficient to cover the risk of not being able to sell the asset at its current value. This depends on the above factors, including the risks posed by this type of asset, that is. How volatile its price is and how « liquid » it is, that is, how easy it is to sell it quickly and without loss of value. Going back to our example, an old mansion (for which there is little demand) in an area known for its thunderstorms (which damages it) would receive a bigger haircut than a brand new two-room apartment in a city center. Similarly, in the context of a central bank, government bonds are generally relatively safe liquid investments and enjoy a lower discount than bank loans, which can also be used as collateral and tend to be less liquid. For the calculation of « net capital », the rule requires deductions from « net assets » of certain fixed percentages of the market values of marketable securities and derivative contracts, long and short, in the capital and equity accounts of the broker or trader and in the « partner accounts ». (These deductions are usually referred to as « haircuts » in the industry….