Haircut has different meanings in different contexts. In relation to repo transactions, haircut (repo haircut) is the collateral (repo collateral) posted by the borrower and held by the lender.

In the context of positions taken in financial instruments (or broadly, in an investment, a market index, etc.), it is the margin or amount of capital (equity) that is tied up by a financial intermediary, acting on behalf of, or at instruction of, a client (market participant), on either side of the market. A haircut is used in the valuation of securities (bought on margin, in a buying on margin), in order to calculate a broker-dealer’s net capital for a transaction. The haircut’s proportion depends on a security’s class, risk, and time to maturity.

Not often, a haircut may refer to a commission or fee that is charged for execution of a transaction.