Mark to Market Meaning: How Your Futures Account Is Settled Every Day

Buy a share in the cash market and nothing happens to your bank balance until you sell. Futures don’t work that way. Every evening the clearing corporation works out what your position is worth, and the gain or loss for the day actually moves as cash. That, in one line, is the mark to market meaning for a derivatives trader: your open position is re-valued at the day’s settlement price, and the difference is paid or collected straight away instead of waiting for you to exit.

It sounds like bookkeeping. In practice it decides whether you get a margin call on a Tuesday for a trade you still think is right. So it’s worth understanding properly, with the actual rules NSE Clearing publishes and a few worked numbers.

Mark to market meaning, in plain terms

The phrase comes from accounting. Mark-to-market or fair value accounting means valuing an asset or liability at its current market price (or the price of similar assets, or another objectively assessed fair value) rather than at what you originally paid. The alternative, historical cost, is steadier and simpler, but it tells you what happened in the past, not what the thing is worth today.

Exchanges took the same idea and attached money to it. In equity futures, NSE’s settlement mechanism page lays out the process: positions are marked to market to the daily settlement price at the end of each trading day. The profit or loss is the difference between your trade price (or the previous day’s settlement price, if you carried the position overnight) and that day’s settlement price. Clearing members who lost pay the amount to NSE Clearing, NSE’s clearing arm, and that money is passed on to members who gained.

Notice the bit in brackets. On day one your reference point is the price you traded at. From day two onwards it is yesterday’s settlement price, because after each daily settlement, as NSE Clearing’s own settlement page puts it, all open positions are reset to the daily settlement price. Your “cost” quietly moves every evening.

Which price is used: the daily settlement price

This is where many new traders get confused, because the price used is not simply the last traded price you see at 3:30 pm. According to NSE Clearing’s settlement price rules, the daily settlement price for index and stock futures is based on the volume weighted average price (VWAP) of the contract over the last 30 minutes, across exchanges, or any other price the relevant authority decides.

What if a contract, say a far-month future, doesn’t trade at all in that last half hour? Then NSE Clearing uses a theoretical price, F = S × e^rt, where S is the value of the underlying, r is the rate of interest (MIBOR, or another rate it specifies) and t is the time to expiration. That is the classic cost-of-carry relationship; if the formula looks unfamiliar, our explainer on cost of carry in futures unpacks it.

A quick theoretical-price example

Here’s how that formula behaves with illustrative inputs (these are not live market figures). Suppose the index is at 25,000, the interest rate is 6% a year, and 20 days are left to expiry, so t = 20/365 of a year.

• r × t = 0.06 × 20/365 ≈ 0.003288
• e^0.003288 ≈ 1.003293
• F ≈ 25,000 × 1.003293 ≈ 25,082.33

So an untraded future on that day would be marked at roughly 25,082, a small premium to the index that reflects the carrying cost.

When the money actually moves

The timing is spelt out clearly. The pay-in and pay-out of mark-to-market settlement happen on T+1, where T is the trade day, and the amounts are debited or credited directly to the clearing member’s bank account. NSE Clearing’s settlement schedule says members with a funds pay-in obligation must have clear funds in their primary clearing account by 9:00 am on the settlement day.

There’s an extra wrinkle at the clearing-member level. A clearing member can choose to pay daily MTM on a T+0 basis instead. The option can be exercised once a quarter and, once chosen, holds for that quarter. Members who opt for it aren’t charged the scaled-up margins; the pay-out side, though, stays on T+1. If such a member misses the T+0 payment, or pays only part of it, NSE Clearing treats it as non-payment, levies a penalty of 0.07% of the margin amount at end of day on T+0, and withdraws the scaled-down margin benefit until the end of that quarter.

You, as a retail trader, rarely see any of this directly. Your broker sits in between. But the chain matters: clearing members collect MTM from the trading members and clients clearing through them, which is why the broker’s ledger in your app shows a debit or credit every day you hold a future.

A futures position has no “paper loss”. Every losing day is a real debit, settled the next morning, whether or not you’ve closed the trade.

Worked example 1: a long stock future over three days

All numbers here are hypothetical. Say you buy one lot of a stock future, 500 shares to the lot, at ₹1,200.

• Day 1: the settlement price is ₹1,180. MTM = (1,180 − 1,200) × 500 = −₹10,000. You pay ₹10,000.
• Day 2: your reference is now ₹1,180, not ₹1,200. The settlement price is ₹1,215. MTM = (1,215 − 1,180) × 500 = +₹17,500. You receive ₹17,500.
• Day 3: you sell at ₹1,230. Gain versus the Day 2 settlement price = (1,230 − 1,215) × 500 = +₹7,500.

Add them up: −10,000 + 17,500 + 7,500 = ₹15,000. Now compare with the simple calculation, (1,230 − 1,200) × 500 = ₹15,000. Same answer. Mark to market doesn’t change your total profit or loss on a trade. It changes when the cash moves, which is the whole point: losses are collected in small daily pieces before they can pile up.

Worked example 2: a short index future

Again, hypothetical numbers, and a hypothetical lot of 75 units (lot sizes are revised from time to time, so check the current one before trading). You sell one lot of an index future at 25,000.

• Day 1: settlement price 25,180. For a short, a rising price hurts: (25,000 − 25,180) × 75 = −₹13,500.
• Day 2: settlement price 24,900. Against the reset reference of 25,180: (25,180 − 24,900) × 75 = +₹21,000.

Net so far: +₹7,500, which matches (25,000 − 24,900) × 75. But look at the path. On Day 1 you had to fund a ₹13,500 debit even though, two days later, the trade was in profit. If your account didn’t have the money, the trade might have been cut before it ever got there. We see this happen a lot with short positions sized too big for the account.

How MTM and margins fit together

Mark to market is not the same as margin, though the two are tied tightly. Margin is the deposit collected upfront to cover what could go wrong. MTM is settling what already did.

NSE Clearing’s margins page explains the link. Initial margin, computed with its SPAN system, is based on a 99% value at risk over a one-day horizon. For futures, though, where it may not be possible to collect the mark-to-market amount before trading starts the next day, the initial margin is computed over a two-day horizon. In other words, the margin is sized partly because MTM arrives a day late.

On top of that sits the extreme loss margin: 2% of notional value for index derivatives and 3.5% for stock derivatives, where notional value for a future is the contract value at the last traded or closing price. The same page also says a trading member should collect upfront margins from clients, which is why your broker blocks margin before letting you take the position.

Worked example 3: the extreme loss margin piece

Take the stock future from example 1 (hypothetical): 500 shares at ₹1,200 gives a notional value of ₹6,00,000. The extreme loss margin at 3.5% is ₹6,00,000 × 0.035 = ₹21,000. That’s only one component; the SPAN initial margin comes on top and depends on the stock’s volatility, so we won’t guess a number for it here.

Now connect it back to MTM. The ₹10,000 Day 1 loss in example 1 has to be paid. If you pay it out of the same money that was sitting as margin, your margin cover shrinks, and the broker will want it restored. That’s the mechanical origin of most margin calls. Our pillar on risk management in trading covers how to size positions so that a run of bad days doesn’t force your hand.

The total profit or loss on a futures trade is the same with or without daily settlement. What changes is how much cash you need along the way.

What happens at expiry

Expiry is just one last mark to market, with a different price. NSE Clearing marks all positions to the final settlement price and settles the difference in cash, computed against your trade price or the previous day’s settlement price, as the case may be. That amount is debited or credited on T+1, where T is the expiry day, and open futures positions cease to exist after the expiration day.

The final settlement price differs by product:

• Index futures and options: based on the closing price of the underlying index on the last trading day.
• Stock futures and options: based on the last 30 minutes VWAP of the underlying stock across exchanges on the last trading day.

If you’d rather not ride a position into expiry, rolling it to the next month is the usual route; our guide to Nifty futures rollover explains how traders read rollover data.

Options are settled differently

One common mix-up: options are not marked to market the same way. NSE Clearing describes option premium settlement as premium style and cash settled. Premium payable and receivable amounts are netted across all option contracts for each clearing member at the client level at the end of each day, and settled on T+1. An option buyer pays the premium once; there’s no daily MTM debit on the long option. Option sellers are a different story on the margin side, but that’s a separate topic.

Practical takeaways before your next futures trade

1. Keep free cash in the trading account beyond the blocked margin. A couple of bad settlement days can drain more than you expect.
2. Track your P&L against the previous day’s settlement price, not just your entry, because that’s what your daily debit or credit is based on.
3. Remember the settlement price is a last-30-minute VWAP, so it can differ from the closing tick you saw on screen.
4. Size positions for the worst few days you can imagine, not the average day. MTM makes those days cost real money.

Once the mark to market meaning clicks, futures feel less mysterious. You aren’t waiting for a final verdict on the trade; you’re settling up with the market every evening, one day at a time.

Sources: NSE equity derivatives settlement mechanism page; NSE Clearing equity derivatives pages on settlement mechanism, settlement price, settlement schedule and margins; Wikipedia entry on mark-to-market accounting. All worked examples use hypothetical numbers.

Disclaimer: This article is for information and education only and is not investment advice. Please consult a SEBI-registered adviser before making any investment decision.