Haircut
Always Applied During Clearing:The Normal Case
The haircut is the first output of RAVA's VaR Oracle. It determines how much margin must be posted when entering a position or using an asset as collateral.
When Haircut is Used
The haircut is always applied. Every trade, every position, every time.
Even for a simple T+2 token, the haircut is applied because a two-day settlement window creates:
- Price risk:The asset value could move against you
- Delivery risk:The counterparty might not deliver
- Operational risk:Systems could fail, processes could delay
The haircut ensures that if anything goes wrong, there's enough margin posted to absorb losses without breaking settlement.
The Formula
Collateral Value = Market Value × (1 − Haircut)
Or equivalently:
Margin Required = Notional × Haircut
Example
A trader wants to sell $100M of a private credit token.
- Haircut: 35%
- Margin Required: $100M × 35% = $35M
The trader posts $35M in USDC as margin. If settlement succeeds normally, the $35M is returned (minus fees). The haircut is insurance against what might go wrong.
Haircut Components
Haircut = S + D(t)
Static Component (S)
Structural factors that cannot change over the settlement period:
- Legal complexity (time to unwind)
- Asset structure layers
- Manager quality
- Underlying liquidity
- Embedded leverage
Range: 2-10% depending on asset type
These factors are locked. No amount of hedging or market movement changes them.
Dynamic Component (D(t))
Market factors that update continuously:
- Credit spreads
- Interest rates
- Market volatility
- Liquidity conditions
- Equity correlation
Range: Varies with market conditions
These factors can be hedged through liquid derivatives. A holder can reduce their effective haircut by hedging the dynamic components.
Haircuts by Asset Class
| Asset Class | Typical Haircut | Primary Drivers |
|---|---|---|
| Treasuries | 1-3% | Minimal:highly liquid, continuous pricing |
| Infrastructure | 8-12% | Moderate:quarterly valuation, longer exit |
| Private Credit | 10-15% | Redemption delays, gating provisions |
| Real Estate / PE | 15-25% | Quarterly NAV, illiquid underlying, long exit |
The T+2 Token Example
For a T+2 token, the haircut is always applied as part of clearing because even a two-day settlement window creates price, delivery, and operational risk.
The haircut determines:
- How much margin must be posted
- How much exposure can be safely supported during the settlement period
Normal settlement: Position settles at T+2, margin is returned, everyone is happy.
If something goes wrong: The posted margin absorbs the loss. The clearing system remains solvent.
Haircut vs Discount
| Aspect | Haircut | Discount |
|---|---|---|
| When applied | Always, upfront | Only if settlement fails |
| Purpose | Margin requirement | Execution pricing |
| Formula | S + D(t) | S + D(t) + E |
| Normal case | Paid and returned | Never realized |
The haircut exists so that IF the discount becomes relevant (settlement failure), the losses are already covered.
Reducing Your Haircut Through Hedging
The dynamic component D(t) can be hedged:
- Short CDX HY Index → Removes credit spread sensitivity
- Buy VIX Futures → Removes volatility sensitivity
- Rate Swap → Removes interest rate sensitivity
Before hedging: Haircut = 15% (9% static + 6% dynamic)
After hedging: Haircut = ~9.5% (9% static + 0.5% residual)
The static component cannot be hedged:it reflects the fundamental structure of the asset.
Why This Matters
The haircut is not a penalty. It's not overcollateralization for its own sake.
The haircut is the mathematically-derived amount of margin needed to ensure settlement succeeds even under adverse conditions. It's calibrated to cover losses over the margin period of risk at a high confidence level.
Without haircuts, clearing systems would be fragile. With properly calibrated haircuts, they're robust.