Futures mark to market

From MarketsWiki

In its broadest sense, mark-to-market is the process whereby the price or value of a security, futures contract, portfolio or account is revalued daily using current prices to determine profit/loss and, therefore, variation margin.

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When you trade futures, for example, you need to make an initial margin deposit with your broker. This is not a down payment, but a good-faith deposit to assure that your account has enough money to cover any losses you might incur while trading.

Minimum margins are based on a percentage of a contract’s underlying value, and are determined by the futures exchange and by your brokerage firm. Margins are a small fraction of the total value of the futures contract, typically between about 3% and 15%. The amount required for a futures margin differs by product’s underlying value and also by the amount of current volatility in that market. The greater the volatility, normally the larger the initial margin required for deposit. This ensures that the margin will be adequate to cover maximum losses that could be incurred in a single day.

Here's where the mark-to-market comes into play: In futures, trading losses are not allowed to accumulate from day to day. At the end of each trading day, the exchange settles the current price for each contract, and the account is credited or debited based on that day's gains or losses. “Marking to the market” as it is called, is different that in the stock market where price settlement can span three days, known as T+3.

If a futures account drops to a certain level, the trader must add margin money to bring the account back up to the original margin amount -- this is known as a "maintenance margin." Until that maintenance margin is satisfied, the trader is not allowed to continue trading. Traders can take profits above the initial margin level but must always maintain the minimum margin required by the brokerage firm.

Mark to market is an important feature of futures, as it is a daily accounting of profits and losses. A trader who makes a profit today will see the money deposited in his/her account before the next morning. If he/she loses money, the loss will be deducted from the account before trading begins that next morning.