Mark to Market (MTM)

Mark to Market (MTM) refers to the accounting practice of valuing Assets and liabilities at their current market price rather than their Book Value. This method provides a realistic appraisal of an institution’s financial situation and helps in reflecting the true economic value of an Asset or Liability. MTM is particularly important in financial markets, where the value of Assets can fluctuate significantly over time.

Examples:

• In a brokerage firm, the Securities held in cLient accounts are marked to market daily. If a Stock’s market price rises from $100 to $120, the value of that Stock in the firm’s books is adjusted to reflect the new market price.
• For derivatives, such as Options and futures, MTM is used to calculate daily gains and losses. If a futures contract was initially valued at $50 and the market price moves to $55, the contract’s value is marked up to $55, and the difference ($5) is realized as a gain.

Cases:

• During the 2008 financial crisis, many Financial Institutions faced significant losses as Asset prices plummeted. MTM accounting required these firms to adjust their Asset values downwards, reflecting their true market value, which contributed to a loss of investor confidence.
• In the context of investment funds, MTM can impact net Asset value (NAV) calculations. For example, if a mutual fund holds Bonds that are marked down due to rising Interest Rates, the NAV of the fund would decrease, impacting the Returns for investors.