Mark-to-Market Explainer
Mark-to-market means updating a position’s carrying or account value using current market prices or the best available valuation inputs. In liquid markets, observable trades and quotes can provide a direct reference; illiquid instruments may require models and judgment.
Futures positions are marked to market at the end of each trading session. Gains are credited and losses debited through the margin system, turning price changes into daily cash flows rather than waiting until the contract is closed or reaches delivery.
Accounting fair value and clearing settlement are related concepts but operate under different rules and purposes. A financial statement may classify inputs by observability, while an exchange uses its designated settlement methodology for margin and contract obligations.
Marking improves transparency and keeps losses from accumulating unseen, yet it can create liquidity pressure when prices gap or markets become disorderly. A model-based mark is still an estimate. Organizations should document sources, valuation controls, reserves, overrides, and the cash needed if marks move sharply.
Liquid quotes are preferred when available.
Illiquid positions may require models and controls.
Account cash changes with each session’s settlement price.
The process links valuation directly to margin.
Economic hedges may offset value but not immediate cash timing.
Large moves can require funding before the exposure matures.
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