Glossary entry
Collateral is an asset pledged to support an obligation, such as a loan or derivative exposure. If the obligation is not met, the secured party may have rights over that asset under the agreement. Eligible assets, valuation discounts called haircuts, substitution rules, and margin calls determine how much borrowing or exposure the collateral supports.
Illustrative example
A lender accepts bonds valued at 10,000 but applies a 10% haircut. Those bonds therefore support only 9,000 of recognized collateral value.
What to consider
Collateral can fall in value when it is most needed. Pledging an asset can also restrict the owner's ability to use it.
General information, not a personal recommendation. Product availability, rights, and obligations are determined by the relevant provider, jurisdiction, and approved agreements.