How do haircuts turn collateral into safety — and into leverage?
A repo lender is protected by collateral. But collateral has a price that moves, so the lender demands more of it than the cash it hands over. That cushion is the haircut, and it is one of the most consequential numbers in finance.
The arithmetic
haircut = (collateral market value − cash advanced) / collateral market value
Rearranged, the number you actually need:
cash advanced = collateral market value × (1 − haircut)
Worked example. A borrower pledges $100 million market value of Treasuries at a 2% haircut:
cash advanced = 100,000,000 × (1 − 0.02) = $98,000,000
The lender holds $100 million of bonds against $98 million of cash. It is over-collateralised by $2 million — enough to absorb a 2% fall in the bond's price before it is exposed at all. On top of that, repo collateral is marked to market daily, and a borrower whose collateral falls in value must post more.
If that overnight repo is done at 4.30%:
interest = 98,000,000 × 0.0430 × 1 / 360 = $11,705.56
repurchase price = $98,011,705.56
Read the same number backwards and it becomes leverage
Flip the borrower's perspective. To hold $100 million of bonds, it needed only $2 million of its own money — the rest was borrowed against the bonds themselves. The implied leverage is simply the reciprocal of the haircut:
maximum leverage = 1 / haircut
- 2% haircut → 50×
- 5% haircut → 20×
- 15% haircut (lower-quality collateral) → about 6.7×
The haircut and the leverage are the same fact seen from opposite sides of the trade. This is why collateral quality drives everything: government bonds typically carry haircuts of roughly half a percent to a few percent; corporate bonds, structured products and equities carry far more.
The haircut protects the cash lender and exposes the collateral giver by the same amount. The dealer that repos out $100 million of bonds and receives $98 million holds a claim on its counterparty for the $2 million difference, plus any rise in the bonds' value since the last mark. If the cash lender fails, the dealer keeps the $98 million, loses the bonds, and stands in the queue for the rest. The exposure grows with the haircut, so a firm funding itself through one counterparty at large haircuts is a large unsecured creditor of that counterparty with no unsecured trade on its books. Repo desks measure this in both directions; the safe harbour that lets the lender sell collateral on a failure gives the giver nothing symmetrical.
Why rising haircuts are the dangerous part
Haircuts are not constants. They are set by lenders, and lenders revise them when they get nervous.
Worked example. An investor funds a $10 billion bond book at a 2% haircut, so it has $200 million of its own money in the position. Lenders raise the haircut to 4%. Nothing about the bonds has changed. But now the same book requires $400 million of own money. The investor must find another $200 million — or shrink the book to what $200 million supports at the new haircut:
200,000,000 / 0.04 = $5 billion
It must sell $5 billion of bonds. Now imagine every leveraged holder of that collateral receiving the same call on the same morning. The forced selling pushes prices down, falling prices make lenders more nervous, and haircuts go up again.
That loop is what happened across 2007 and 2008, and researchers named it a run on repo. It is a very particular kind of run: lenders never had to refuse to lend. They only had to ask for a slightly bigger cushion.
Try it now
- Compute the cash advanced against $250 million of collateral at a 2% haircut and at a 5% haircut. What is the implied leverage in each case?
- Take a $4 billion position funded at 3%. If the haircut moves to 6%, how much must the holder sell to stay funded with the same own money?
- Below is TGCR minus BGCR for every business day from 18 August to 24 September 2026. Both are general-collateral repo rates over different venue and collateral mixes — note how small the usual gap is, and remember what a widening gap would be telling you.