Mark to Market
Mark to market (MTM) is the daily settlement process in futures markets where open positions are revalued at the day's closing settlement price and gains or losses are immediately credited or debited to the trader's account.
Mark to market is one of the defining features that distinguishes futures from most other financial instruments. Rather than accumulating unrealized gains or losses that only crystallize when the position is closed, futures P&L is settled every trading day. The CME Clearing House calculates a daily settlement price for each contract, compares it to the previous day's settlement, and transfers cash between accounts accordingly — winners receive cash, losers pay cash, on a net basis across the clearing system.
This daily cash flow has important practical consequences. A trader who is long 10 ES futures and the S&P 500 settles 20 points lower will see $10,000 debited from their account that evening (20 points x $50/point x 10 contracts). The next day begins with this new cost basis. If the market subsequently recovers those 20 points, the $10,000 is credited back. Over the life of a futures position, the cumulative mark-to-market settlements equal the total P&L of the trade.
For tax purposes in the United States, the mark-to-market rules under Section 1256 of the Internal Revenue Code treat regulated futures contracts as if they were sold at fair market value on December 31 of each year. Gains and losses on futures are taxed at a blended rate: 60% treated as long-term capital gains and 40% as short-term, regardless of how long the position was actually held. This is more favorable than the short-term capital gains rate that applies to most actively traded securities.
The mark-to-market system at the CME virtually eliminates counterparty credit risk from futures trading. Because losing traders must pay daily rather than accumulating paper losses for months, the total credit exposure at any given time is limited to a single day's price movement — an amount easily covered by initial margin deposits.
Understanding mark-to-market helps traders manage cash flow in futures accounts correctly, particularly when holding positions through periods of adverse price movement that trigger multiple consecutive debits before the position ultimately becomes profitable.