In finance, a haircut is the difference between the current market value of an asset and the value ascribed to that asset for purposes of calculating regulatory capital or loan collateral. The amount of the haircut reflects the perceived risk of the asset falling in value in an immediate cash sale or liquidation. The larger the risk or volatility of the asset price, the larger the haircut.
For example, United States Treasury bills, which are relatively safe and highly liquid assets, have little or no haircut, whereas more volatile or less marketable assets might have haircuts as high as 50%.
Lower haircuts allow for more leverage. Haircut plays an important role in many kinds of trades, such as repurchase agreements (referred to in debt-instrument finance as "repo" but not to be confused with the concept of repossession denoted by that term in consumer finance) and reverse repurchase agreements ("reverse repo" in debt-instrument finance).
In mass media,[1][2][3] as well as in economics texts,[4][5] especially after the financial crisis of 2007–2008,[6] the term "haircut" has been used mostly to denote a reduction of the amount that will be repaid to creditors,[3] or, in other words, a reduction in the face value of a troubled borrower's debts,[2][note 1] as in "to take a haircut": to accept or receive less than is owed.[7] In 2012, world media was reporting on the "biggest debt-restructuring deal in history",[8]: 1 which included the "very large haircut" of some "70 percent of par value" of Greek state bonds, in NPV terms.[8]: 27
The financial term "haircut" began, and continues to be used, as a reference to valuation discounts applied under the U.S. Securities and Exchange Commission's net capital rule. The net capital rule was adopted to provide safeguards for public investors by setting standards of financial responsibility to be met by broker-dealers and requires a broker-dealer to have at all times sufficient liquid assets to cover its current indebtedness. The SEC explained the role of haircuts in calculating net capital in 1967:
In computing "net capital," the rule requires deductions from "net worth" of certain specified percentages of the market values of marketable securities and future commodity contracts, long and short, in the capital and proprietary accounts of the broker or dealer, and in the "accounts of partners." (These deductions are generally referred to in the industry as "haircuts.") . . . The purpose of these deductions from "net worth," is to provide a margin of safety against losses incurred by a broker or dealer as a result of market fluctuations in the prices of such securities or future commodity contracts.[9]
"Haircut" since has been extended to a number of other financial contexts, whenever it is desirable to show that some securities (typically debt securities) are being valued for some purpose at a discount.
ECB use of haircuts
The European Central Bank applies a haircut to all securities offered as collateral. The size of the haircut depends on the riskiness and liquidity of the security offered as collateral.[10]
LTCM and haircut fees
The hedge fundLong Term Capital Management (LTCM) saw spectacular losses that led to its dissolution in 1998. It had previously been able to trade with little collateral on positions that were considered safe by its lenders.[citation needed]
As used for exchange-traded products
When used in the context of exchange traded products such as stocks, options, or futures, haircut is used interchangeably with the term margin. It is the amount of capital required by a broker to maintain the positions currently in a trading account. If haircut exceeds the account's capital, the broker can either require additional capital (e.g., margin call), or liquidate positions until the haircut no longer exceeds available capital.
In sovereign debt write-downs
During the Eurozone crisis, and particularly in the context of the Greek financial crisis, the term "haircut" acquired more specifically the meaning of state-debt holders receiving less than par.[8]: 27 It's "the market's euphemism for wiping out a large portion of the debt owed to the creditors".[11]
The haircut agreed to by Greek-state debt holders was deemed "voluntary" by the banks' chief negotiator Charles Dallara, although, in order to convince domestic bond holders, the Greek government "made it clear that holdouts would not receive a sweeter deal", while it also declared that if the haircut was not completed, the Greek state would not be able to "further service its debt".[12]
Notes
^Not just state- but also corporate-debt. See "Private equity firm bosses to get $370M windfall in Caesars mess", The New York Post, 22 August 2016
^ ab"All Greek to you? Greece's debt jargon explained". BBC. 10 July 2015. Retrieved 3 July 2018.
^ abClinch, Mark (19 August 2015). "Why the IMF is wrong on a Greek debt haircut". CNBC. Retrieved 3 July 2018.
^Brigham, Eugene F.; Houston, Joel F. (2011). Fundamentals of Financial Management. Cengage Learning. ISBN978-0538477116.
^Blundell-Wignall, Adrian; Slovik, Patrick (February 2011). "A Market Perspective on the European Sovereign Debt and Banking Crisis" (PDF). Financial Market Trends. OECD. 2010 (2): 87–108.
^"Ukraine creditors' debt plan shows bond haircut inevitable". Reuters. 29 May 2015. Retrieved 3 July 2018.
^"What is a Haircut (in finance)?". Corporate Finance Institute. Retrieved 3 July 2018.
^Parkinson, David (12 July 2011). "Rollover? Haircut? Greece faces ugly choices". The Globe and Mail. Retrieved 3 July 2018.
^Wautelet, Patrick R. (2 July 2013). "The Greek Debt Restructuring and Property Rights: A Greek Tragedy for Investors?" (PDF). University of Liège). Retrieved 3 July 2018.
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In finance a haircut is the difference between the current market value of an asset and the value ascribed to that asset for purposes of calculating regulatory capital or loan collateral The amount of the haircut reflects the perceived risk of the asset falling in value in an immediate cash sale or liquidation The larger the risk or volatility of the asset price the larger the haircut For example United States Treasury bills which are relatively safe and highly liquid assets have little or no haircut whereas more volatile or less marketable assets might have haircuts as high as 50 Lower haircuts allow for more leverage Haircut plays an important role in many kinds of trades such as repurchase agreements referred to in debt instrument finance as repo but not to be confused with the concept of repossession denoted by that term in consumer finance and reverse repurchase agreements reverse repo in debt instrument finance In mass media 1 2 3 as well as in economics texts 4 5 especially after the financial crisis of 2007 2008 6 the term haircut has been used mostly to denote a reduction of the amount that will be repaid to creditors 3 or in other words a reduction in the face value of a troubled borrower s debts 2 note 1 as in to take a haircut to accept or receive less than is owed 7 In 2012 world media was reporting on the biggest debt restructuring deal in history 8 1 which included the very large haircut of some 70 percent of par value of Greek state bonds in NPV terms 8 27 Contents 1 SEC net capital rule 2 ECB use of haircuts 3 LTCM and haircut fees 4 As used for exchange traded products 5 In sovereign debt write downs 6 Notes 7 References 8 External linksSEC net capital rule EditThe financial term haircut began and continues to be used as a reference to valuation discounts applied under the U S Securities and Exchange Commission s net capital rule The net capital rule was adopted to provide safeguards for public investors by setting standards of financial responsibility to be met by broker dealers and requires a broker dealer to have at all times sufficient liquid assets to cover its current indebtedness The SEC explained the role of haircuts in calculating net capital in 1967 In computing net capital the rule requires deductions from net worth of certain specified percentages of the market values of marketable securities and future commodity contracts long and short in the capital and proprietary accounts of the broker or dealer and in the accounts of partners These deductions are generally referred to in the industry as haircuts The purpose of these deductions from net worth is to provide a margin of safety against losses incurred by a broker or dealer as a result of market fluctuations in the prices of such securities or future commodity contracts 9 Haircut since has been extended to a number of other financial contexts whenever it is desirable to show that some securities typically debt securities are being valued for some purpose at a discount ECB use of haircuts EditThe European Central Bank applies a haircut to all securities offered as collateral The size of the haircut depends on the riskiness and liquidity of the security offered as collateral 10 LTCM and haircut fees EditThe hedge fund Long Term Capital Management LTCM saw spectacular losses that led to its dissolution in 1998 It had previously been able to trade with little collateral on positions that were considered safe by its lenders citation needed As used for exchange traded products EditWhen used in the context of exchange traded products such as stocks options or futures haircut is used interchangeably with the term margin It is the amount of capital required by a broker to maintain the positions currently in a trading account If haircut exceeds the account s capital the broker can either require additional capital e g margin call or liquidate positions until the haircut no longer exceeds available capital In sovereign debt write downs EditDuring the Eurozone crisis and particularly in the context of the Greek financial crisis the term haircut acquired more specifically the meaning of state debt holders receiving less than par 8 27 It s the market s euphemism for wiping out a large portion of the debt owed to the creditors 11 The haircut agreed to by Greek state debt holders was deemed voluntary by the banks chief negotiator Charles Dallara although in order to convince domestic bond holders the Greek government made it clear that holdouts would not receive a sweeter deal while it also declared that if the haircut was not completed the Greek state would not be able to further service its debt 12 Notes Edit Not just state but also corporate debt See Private equity firm bosses to get 370M windfall in Caesars mess The New York Post 22 August 2016References Edit Safire William 6 January 2009 Haircut The New York Times Retrieved 3 July 2018 a b All Greek to you Greece s debt jargon explained BBC 10 July 2015 Retrieved 3 July 2018 a b Clinch Mark 19 August 2015 Why the IMF is wrong on a Greek debt haircut CNBC Retrieved 3 July 2018 Brigham Eugene F Houston Joel F 2011 Fundamentals of Financial Management Cengage Learning ISBN 978 0538477116 Blundell Wignall Adrian Slovik Patrick February 2011 A Market Perspective on the European Sovereign Debt and Banking Crisis PDF Financial Market Trends OECD 2010 2 87 108 Ukraine creditors debt plan shows bond haircut inevitable Reuters 29 May 2015 Retrieved 3 July 2018 What is a Haircut in finance Corporate Finance Institute Retrieved 3 July 2018 a b c Liu Yan Bergthaler Wolfgang Giddings Andrew Kosonen Amanda Papaioannou Michael Grigorian David Guscina Anastasia Presciuttini Gabriel Tsuda Takahiro Baqir Reza 26 April 2013 Sovereign Debt Restructuring Recent Developments and Implications PDF Policy Papers IMF Retrieved 30 June 2018 Net Capital Requirements for Brokers and Dealers Interpretation and Guide Release Nos ASR 107 34 8024 32 Fed Reg 856 1967 WL 88933 Jan 18 1967 ECB Risk control framework Parkinson David 12 July 2011 Rollover Haircut Greece faces ugly choices The Globe and Mail Retrieved 3 July 2018 Wautelet Patrick R 2 July 2013 The Greek Debt Restructuring and Property Rights A Greek Tragedy for Investors PDF University of Liege Retrieved 3 July 2018 External links EditCollateral Management on Financial edu Haircut on Investopedia Collateral Value on Investopedia Retrieved from https en wikipedia org w index php title Haircut finance amp oldid 1056868767, wikipedia, wiki, book, books, library,
