What is Mark-to-Market (MTM)?

Mark-to-Market (MTM) is a valuation method used in trading and finance to determine the current fair value of an asset or liability based on prevailing market conditions. This method is particularly relevant in segments like futures trading, where profits and losses are calculated on an MTM basis. 

Why is MTM Important in Trading? 

A common reason for using margin money, essentially borrowing funds to trade, is to amplify market exposure without needing full capital upfront. While this approach enables greater potential returns, it also increases the risk of larger losses if the trade doesn’t go as expected. Therefore, trading with leverage is generally recommended only for experienced traders. 

In futures trading, MTM ensures that profits and losses on open positions are calculated and settled daily throughout the duration of the contract. In Indian markets, these daily gains or losses are derived from the change between the previous and the current day's settlement price. The result, whether a gain or loss, is credited or debited to the trader's account at the end of each trading session. 

This daily adjustment based on market price fluctuations is referred to as Mark-to-Market settlement. For example, if the price of the underlying asset falls in a day, the contract’s seller receives funds from the buyer. Conversely, if the price rises, the buyer gets paid by the seller. This transparent mechanism keeps both parties financially aligned with the current market movement. 

Understanding Margins and MTM in Futures 

Futures contracts are inherently leveraged instruments. Traders participating through platforms like m.Stock must maintain margins, essentially deposits of good faith, within their trading accounts. These are held in cash form and represent a small percentage of the total contract value. When entering a futures trade, an initial margin is required. This ensures some level of protection for both parties in case the market moves unfavorably. 

How Does MTM Work in Practice? 

From the very first day a futures position is opened, the trader’s account is subject to daily MTM adjustments. Profits from favorable price moves are credited, while losses are debited. This process continues throughout the life of the contract. As the market fluctuates, the margin balance in the trader’s account also changes. 

If the market moves against the trader’s position, the margin can fall below a set maintenance level, prompting a margin call a request to add more funds to keep the position active. 

Let’s break this down with a simple example: 

• Trader A buys a futures contract of HDFC Bank on Monday at ₹1,460, expecting the stock to rise. 

• Each contract represents 550 shares, and the initial margin required is ₹1,45,000. 

• The maintenance margin is ₹1,30,000. 

• The price moves as follows during the week: 

• Tuesday: ₹1,470 

• Wednesday: ₹1,450 

• Thursday: ₹1,420 

These fluctuations impact the trader's account via the MTM mechanism. By Thursday, due to continued losses, the account balance drops below ₹1,30,000, resulting in a margin call. 

Key Points to Remember 

• Mark-to-Market enables traders to track and settle daily gains or losses in futures and options trades. 

• If the margin falls below the required threshold, the broker will issue a margin call to restore balance.