Mark-to-Market

Mark-to-market means valuing a position at its current market price instead of at what you paid for it. In futures and many derivatives markets, it goes one step further: every day, gains and losses are actually paid. Cash moves into the accounts of traders whose positions gained and out of the accounts of those whose positions lost. This daily settlement is one of the main reasons futures markets rarely suffer defaults.

How daily settlement works in futures#

At the end of each trading day, the exchange sets a settlement price for every contract. Each open position is revalued at that price, and the difference from the previous day's settlement is paid in cash.

Why it exists#

Without daily settlement, a trader could build up a large unrealised loss over weeks and then be unable to pay. Mark-to-market caps how much can build up between payments to roughly one day's move. Together with margin requirements and a clearing house that guarantees both sides, it makes exchange traded futures one of the safest structures in finance from a counterparty point of view.

What it means for your account#

• You need spare cash. Losses are taken from your account each day. If your balance falls below the maintenance margin, you must add funds or reduce positions. See Futures Margin: Initial and Maintenance.
• Gains are usable immediately. Daily profits are credited as cash and can support other positions or be withdrawn.
• A winning trade can still trigger a margin call. A position that ends profitable can dip deeply first; if your account cannot absorb the dip, you may be forced out before the recovery.

Mark-to-market beyond futures#

• Brokerage accounts show positions marked to the current price every day, even when no cash moves, so your account value reflects unrealised gains and losses.
• Margin accounts use marked values to decide whether you meet maintenance requirements. See Margin.
• Funds calculate a daily net asset value from marked prices.
• Banks and companies use mark-to-market accounting for many financial assets, valuing them at fair market value. When markets are frozen and prices unreliable, this can produce large swings, as seen during the 2008 crisis.
• Taxes: in the United States, many regulated futures contracts are marked to market at year end for tax purposes, and some traders can elect mark-to-market tax treatment. Rules are specific; see Trading Taxes and Capital Gains and consult a tax professional.

Settlement price vs last price#

The settlement price is not always the last traded price. Exchanges calculate it using rules such as a weighted average of trades in the final minutes of the session. This reduces the influence of a single odd trade at the close. If you check your account against the last price you saw, small differences are normal.

Frequently asked questions#

What does marked to market mean?#

It means a position has been valued at its current market price. In futures, it also means gains and losses for the day have been settled in cash.

Does mark-to-market change my profit or loss?#

No. The total result is the same as the difference between your entry and exit prices. It only changes when cash is paid in or out.

Why did my futures account lose money when I have not closed my trade?#

Because futures are settled daily. Losses on open positions are deducted from your cash balance each evening, even before you close.

Sources#

• Wikipedia, Mark-to-market accounting
• Wikipedia, Futures contract