Mark-to-Market

The mark-to-market (MTM) process revalues futures contracts and other derivatives to current market prices at the end of each trading day. Gains and losses are calculated and immediately credited or debited to the trader’s account. This daily settlement—unique to futures and some exchange-traded options—differs from forward contracts, which settle only at expiration date. Mark-to-market reduces counterparty risk and forces traders to post margin to maintain positions.

Daily settlement mechanism

At the end of each trading day, the exchange sets a settlement price—the official close or a volume-weighted average.

For a trader long a December crude oil contract:

• Bought at $70/barrel, December contract
• Today’s settlement price: $71/barrel
• Gain: +$1/barrel × contract size = $1,000 (for a 1,000-barrel contract)
• This $1,000 is credited to the trader’s account immediately

Next day, if the settlement price falls to $69:

• Loss: −$2/barrel × 1,000 = −$2,000
• The $2,000 is debited from the account

The trader’s account balance moves daily with the contract’s value.

Margin and forced liquidation

If daily losses drain the account below maintenance margin, the trader faces a margin call: deposit more funds or close the position. This forces risk management and prevents traders from accumulating unlimited losses.

A trader with $5,000 initial margin might have $3,500 maintenance margin. If losses reach $1,500, the trader is below maintenance and must deposit cash or sell the contract.

Accounting implications

In regular investing, you do not realize a gain until you sell. A stock bought at $100 and now at $110 has an unrealized $10 gain.

In futures, MTM forces realization. The daily gain is treated as realized income for tax and accounting purposes, even if the position remains open. This creates tax complications for some strategies.

Counterparty risk reduction

The fundamental purpose of MTM is to reduce counterparty risk. With forward contracts, losses accumulate over time and are settled at maturity. If the counterparty defaults before maturity, you lose everything.

With futures and MTM, losses are settled daily. If the counterparty defaults tomorrow, you lose only today’s loss, not weeks or months of accumulated exposure.

Comparison with forwards

OTC swaps and MTM

Swap contracts traded OTC typically do not have daily MTM. They settle at maturity (for fixed-term swaps) or on termination. Some swap dealers offer MTM settlements for special arrangements.

The lack of daily settlement is why swap credit risk is higher than futures.

See also