6. What is Mark-to-Market (MTM) in Futures Trading?
Mark-to-Market (MTM) is a daily settlement process in futures trading where the value of your open positions is adjusted to reflect the day’s closing market price.
This means profits and losses are realized daily, not just at expiry.
Why Is MTM Important?
- Proactively manages risk by adjusting trader accounts daily
- Ensures financial discipline and avoids surprises at contract expiry
- Helps exchanges/brokers monitor exposure and margin health
- Maintains transparency and market stability
How MTM Works – Step by Step
Suppose:
- You buy 1 lot Nifty Futures @ ₹22,000
- Lot Size = 50
- Contract Value = ₹11,00,000
- Margin Paid = ₹1,10,000 (10% assumed)
Daily MTM tracking:
| Day | Futures Price | MTM Gain/Loss | Cumulative Position |
|---|---|---|---|
| Day 1 | ₹22,000 (entry) | ₹0 | ₹0 |
| Day 2 | ₹22,200 | (22,200 - 22,000) × 50 = ₹10,000 | ₹10,000 credited |
| Day 3 | ₹21,900 | (21,900 - 22,200) × 50 = -₹15,000 | ₹15,000 debited → ⚠️ Margin Call possible |
| Day 4 | ₹22,000 | (22,000 - 21,900) × 50 = ₹5,000 | ₹5,000 credited |
If MTM Falls Below Margin Requirement…
- If losses reduce your margin below maintenance level → Broker issues margin call
- If funds not topped up → Broker can auto-square off your position
- Protects the system from defaults
Daily MTM Ledger – What Brokers Show You
At day’s end, broker updates:
- MTM Gain/Loss
- Available Margin
- Margin Shortfall (if any)
- New Margin Requirement
Real-Life Analogy
MTM is like paying your credit card bill daily instead of monthly. This avoids one big shock later by handling risk daily.
MTM Applies to Both Buyer & Seller
| Trader Type | Impact of Price Rise | Impact of Price Fall |
|---|---|---|
| Buyer (Long) | Profit | Loss |
| Seller (Short) | Loss | Profit |
The system is zero-sum → Buyer’s gain = Seller’s loss.
Summary: MTM vs. Final Settlement
| Aspect | Mark-to-Market (MTM) | Final Settlement |
|---|---|---|
| Frequency | Daily | At expiry (if not squared off) |
| Purpose | Risk control, margin monitoring | Closing the contract |
| Affects Margin? | Yes (daily adjustment) | Yes (final P&L) |
| Can Trigger Action? | Yes (margin call/auto-square off) | Yes (final credit/debit) |
Key Takeaways
- MTM = Daily revaluation of futures contracts
- Profit/loss is settled daily, not just at expiry
- Ensures risk control and liquidity for exchanges
- Traders must monitor margin balance daily
- MTM directly impacts available capital & exposure