- valuation formula used by broker-dealers in computing net capital positions. A dealer’s haircut is an estimate of potential losses, taking into account credit risk, market risk, time to maturity, and other factors. Haircuts vary according to class of security: ranging from 0% haircut for U.S. Treasury securities, 30% for equities, to 100% for issues in default, where total loss is probable. Haircuts in government securities trading are based on weekly yield volatility, as tabulated by the Federal Reserve Bank of New York. Dealer capital requirements are governed by the Securities and Exchange Commission’s Rule l5c3-1. The lowest haircuts are given to securities considered least likely to default, for example, Treasury bills.
- in lending, difference between the amount advanced by a lender and the market value of collateral securing the loan. For example, if a lender makes a loan equal to 90% of the dollar value of marketable securities, the difference (10%) is the haircut. Also called haircut financing.
- spread in a repurchase agreement, or the difference between the market value and the value actually used.
- in a bank failure, a depositor’s potential loss as an uninsured depositor when deposits exceed the $100,000 coverage limit.
securities industry term referring to the formulas used in the valuation of securities for the purpose of calculating a broker-dealer’s net capital. The haircut varies according to the class of a security, its market risk, and the time to maturity. For example, cash equivalent governments could have a 0% haircut, equities could have an average 30% haircut, and fail positions (securities with past due delivery) with little prospect of settlement could have a 100% haircut.