Conservatism depends on your frame of reference.
To address your question specifically, conservatism refers to the concept of a quantity being marginally higher (or lower) with respect to a relative quantity. I realize this is quite general, but the definition itself is general and depends on what you're describing. Stating a quantity is conservative does not give you a indication of whether it is 'comparatively small', it does not tell you anything about the magnitude of the conservatism. It only indicates direction.
For example, if one applies a conservative haircut to a counterparty's
collateral, is this a small haircut?
A conservatism haircut in this case means that you (not the counterparty) will reduce the collateral you post. So if the collateral is assessed at 100, you may use an estimate of 90. You may also use 50. Both are conservative estimates. In terms of best practices, you should apply a haircut that is commensurate to the risks/uncertainties. This is the standard practice. What is riskier: cash or commodity? The common practice is to apply a higher haircut for the commodity. In fact, there are guidelines on how much of a haircut to apply to different product types (see Basel II) if you want to see the relationship yourself.
As for the Fed stress testing, conservative assumptions are exactly as they sound. Don't understate your losses, defaults, exposures, risks...and don't overstate the market factors or economic scenarios relevant to your portfolio.