Marked to market

From MarketsWiki

A market position held on a futures exchange is marked to market - or marked to its present market value - at least at the end of every trading day, and sometimes more than once during a trading day. The purpose of the action is to calculate profits and losses or to confirm that margin requirements are being met.

The marked to market practice was first developed among traders on futures exchanges in the 19th century. In the 1980s the practice also began to be utilized by big banks and corporations.

The term marked to market found its way into mainstream America in conjunction with the Enron scandel. Enron used so-called marked-to-market accounting for energy trading business.

Under marked-to-market rules, whenever companies have outstanding energy-related or other derivative contracts on their balance sheets at the end of a quarter, they must adjust them to fair market value, booking unrealized gains or losses to the income statement of the period.

Problems arose with Enron because there are often no quoted prices upon which to base valuations for long-term derivatives contracts such as gas. The company was left to develop and use a discretionary valuation model based on its own assumptions and methods.