Mark-to-Market

Mark-to-market accounting shows what holdings are worth today. If the market value of an asset rises, its recorded value rises; if the market value falls, the recorded value falls, and the gain or loss is recognised.

In futures markets, positions are marked to market every day. For example, a trader holds a futures contract that rises in value by 2,000 in a day. That 2,000 is credited to the trader's margin account at the end of the day. If the contract falls by 2,000 the next day, the amount is deducted. This daily settlement prevents large unpaid losses from building up.

Banks, investment funds and brokers mark many of their holdings to market regularly. Mutual funds calculate their net asset value by marking their investments to market each day.

Mark-to-market gives an up-to-date picture of financial positions, but it can also amplify problems during crises. When markets fall sharply, institutions must record large losses, which can reduce their capital and force them to sell assets, pushing prices down further. When there is no active market for an asset, valuing it may require models and judgment, sometimes called mark-to-model.