In finance, a haircut is a percentage that is subtracted from the market value of the assets that are being used as collateral. The size of the haircut reflects the perceived riskiness associated with the assets.

For example, Treasury bills (which are seen as fairly safe) might have a haircut of 1%, while for a stock option (which are seen as less safe) the haircut might be as high as 30%.

ECB use of haircuts

The European Central Bank (ECB) applies a haircut to all securities offered as collateral. The size of the haircut depends on the riskiness of the security offered as collateral. See the ECB Risk control framework

LTCM and haircut fees

LTCM was able to obtain practically next-to-zero haircuts, as it was considered safe by its lenders. This was likely due to LTCM’s clout and the fact that no counterparty had a total picture of the extent of its operations

References

---

• Jorion, P. (1999), "“Risk Management Lessons from Long-Term Capital Management"