markingtomarket

Mark-to-market (MTM) is the accounting and valuation practice of adjusting the value of assets and liabilities to reflect their current market prices rather than the price at which they were originally acquired. The goal is to present a timely and transparent view of a firm’s financial position by recognizing changes in market conditions.

In financial markets, MTM is widely used for trading portfolios, including futures, options, and certain securities. For futures contracts, gains and losses from price movements are settled daily, a process known as daily settlement or variation margin. This mechanism reduces credit risk by ensuring that parties post collateral proportional to the current value of their positions. In broader accounting, MTM often aligns with fair value measurement, where changes in asset values are recognized in earnings or, in some frameworks, in other comprehensive income.

MTM contrasts with historical cost accounting, which records assets at their original purchase price and may not reflect subsequent market shifts. While MTM can provide timely information and improve risk visibility, it can also introduce higher volatility in reported earnings, especially for illiquid or highly volatile instruments. Critics argue that MTM can amplify financial stress during market downturns when marks become unfavorable but actual dispositions have not yet occurred.

Applications extend to investment funds, broker-dealer margins, and risk management practices. In over-the-counter derivatives and certain structured securities, MTM underpins margin calls and collateral management to address credit risk. Limitations include valuation uncertainty for assets with few observable trades and model risk when active markets are absent. Overall, mark-to-market is a standard method for aligning reported values with current conditions while balancing transparency and volatility.