Repo margin is the amount by which the market value of the security used as collateral exceeds the face value of the loan. The repo margin is typically proportionate to credit worthiness of the borrower: the lower the credit worthiness, the higher the repo margin, and vice versa. Generally, repo margin could range between 1% (100 basis points) and 3% (300 basis points). For low quality borrowers and collateral it could spring up to 10% (1000 basis points). Repo margin is meant to help lenders reduce their credit risk exposures. It provides some cushion especially in cases where the collateral’s market value decreases and hence sets lender exposed to potentially higher levels of credit risk.
Repo margin and haircut (or repo haircut) denote the same concept. However, haircut is used in the US market, while repo margin is mainly used in Europe and other specific countries.
