What’s futures mark to market?

Mark to market is a daily process that adjusts your account balance based on the current market value of your open futures positions. Unlike stocks or options, where gains or losses are realized only when you close a position, futures trading requires you to settle gains or losses at the end of each trading day. Any profits are credited to your account, while losses are debited; a process known as mark to market. The price used for this adjustment is called the daily settlement price, which is calculated by the exchange.

A key difference between futures and stocks is how gains and losses are managed. In stock trading, gains or losses accumulate but aren't realized until you close your position. With futures, however, the daily mark-to-market process realizes gains and losses each day to reflect the current value of your contracts. It’s important to note that only positions held through the daily close are marked to market; positions opened and closed within the same session aren’t subject to the mark-to-market process. While the mark to market process credits or debits your account on a daily basis, at Robinhood Derivatives, your actual net liquidating value (or total account value if you were to close your positions) will increase or decrease in real-time.

For traders unfamiliar with mark to market, it plays a crucial role in managing risk. This process ensures traders maintain sufficient margin, or collateral, to cover potential losses to help prevent unmanageable deficits from accruing. It protects both traders and brokers by enforcing financial accountability on a daily basis. At Robinhood Derivatives, you’ll see your account balance fluctuate in real-time, but it’s the mark to market process that plays an important factor in whether or not you are issued a futures margin call.

Example

Gary has a futures account with a position in 1 gold futures contract (/GC) that he purchased at $1,900 per ounce. The following day, the price of gold rises to $1,920 per ounce. Since each /GC contract represents 100 ounces of gold, Gary's account is credited with a $2,000 gain (($1,920 - $1,900) x 100). The day after, the price of gold drops to $1,890 per ounce and his account is now debited $3,000 (($1,890 - $1,920) x 100) because of the mark to market process.

This daily adjustment of his account balance based on price movements is known as mark to market and is calculated using the daily settlement price from the exchange. Gary’s broker processes these adjustments on a daily basis overnight. Gary must maintain enough funds in his account to cover potential losses, ensuring he can handle the risk of price fluctuations. If the mark-to-market process causes his account value to fall below the required margin, Gary will receive a margin call. In this case, he must either deposit funds to meet the margin requirement or close his position.

The daily futures mark to market occurs at the end of each trading day, when all open positions are adjusted to reflect the current market price of the contracts. This process takes place after the market is closed for the trading day. At this time, gains or losses from the day's price movements are calculated, and the trader’s account is credited or debited accordingly. This is typically when your daily gain or loss (known as Day P&L) will reset. This process ensures all accounts are up-to-date and accurately reflect the market for the next trading session.

Mark to market is used because it helps support accurate risk management. By settling gains and losses every day, brokers can ensure that you have enough margin/collateral held in your account to cover potential losses. If your account balance falls below the margin requirement due to daily losses, then you may receive a margin call, requiring you to deposit additional funds or close some of your positions to avoid further losses. This daily monitoring and settlement reduces the risk of accumulating large, unaccounted-for losses and keeps both you and your broker protected in volatile market conditions.

The daily settlement price in futures trading is calculated by the exchange at a specific time period in the trading day, known as the settlement time. The settlement time varies by product and can sometimes occur a few hours before the trading day closes. The daily settlement price is usually based on the weighted average of the prices of trades executed during a specific time frame right before the settlement time. For highly liquid markets, the settlement price may reflect the last trade or a range of trades just before the settlement time. In less liquid markets, the exchange might use a combination of actual trades and other pricing methods, such as bids, offers, or theoretical models, to calculate a fair settlement price. This ensures that all positions are marked based on a representative price from the trading session. On the Robinhood app, the previous settlement field is the daily settlement price from the prior trading day.

Daily mark to market in futures trading is the process of adjusting the value of open positions at the end of each trading day based on the daily settlement price, ensuring that gains or losses are settled daily in the trader’s account. In contrast, final settlement occurs when the futures contract reaches its expiration. At that point, the contract is either cash-settled (reflecting the difference between the final price and the initial trade price) or through physical delivery of the underlying asset, depending on the contract. (Note: Robinhood Derivatives doesn’t facilitate physical delivery of futures, so positions must be closed by the last day to trade.) While mark to market manages daily price fluctuations, final settlement fully expires the contract.

Unrealized gains and losses refer to the profits or losses on an investment that you haven’t yet sold or closed. These are also known as "paper" gains or losses because they represent the change in value while the position is still open. For example, if you own a stock that has gone up in price but you haven't sold it, the increase is an unrealized gain.

Realized gains and losses, on the other hand, occur when you close a position by liquidating the investment. At that point, the profit or loss becomes "real" and is officially recorded in your account. In futures trading, realized gains or losses happen when you close a futures contract, while unrealized gains or losses are adjusted daily through the mark-to-market process, and cash will be debited from or credited to your account.

Yes, daily settlement can trigger a margin call if a position is marked to market bringing the trader’s equity below the margin requirement. In such cases, you’ll likely receive a margin call notification from your broker at some point during next trading day. Keep in mind that futures trading days differ from calendar days, and trading hours vary by contract—meaning the "next" trading day could actually fall on the same calendar day. If you receive a margin call, don’t panic. You can meet the margin call by depositing additional funds, or liquidating part or all of your position. If your position gains value during the trading day, it may cover the margin call. To view Robinhood Derivative's margin call policies see here.

Mark to market is an important part of futures trading. It determines the value of a position at the end of the trading day and whether any funds should be credited or debited from the trader’s account. Mark to market is also used to trigger margin calls when account values have fallen below required margin amounts.