Mark-to-Market Margin Account

Daily mark-to-market settlement moves real money in and out of a client's account every trading day a futures position stays open. That flow has to be recorded somewhere in the client's own books.

The Mark-to-Market Margin Account is that record. Every payment or receipt from daily settlement is debited or credited here, and the running balance tells the client, at any point, whether they are sitting on an unrealised loss or an unrealised gain.

Chapter 9, section 9.1, sets out the treatment:

• Daily settlement payments or receipts are debited or credited to "Mark-to-Market Margin – Equity Index/Equity Stock Futures Account," which can be maintained index-wise or stock-wise.
• At the balance sheet date, a debit balance (net payment made) represents an anticipated loss. Following the prudence principle, a provision equal to that debit balance must be created, by a debit to the profit and loss account.
• A credit balance (net amount received) represents an anticipated profit, which is ignored — no credit is taken to the profit and loss account for it, again on grounds of prudence.
• The debit balance is shown under "Current Assets, Loans and Advances," with the provision shown as a deduction from it. The credit balance is shown as a current liability.
• Such provisioning is done index-wise or stock-wise, combining all series of the same stock or index together.
• When a contract is squared off, the profit or loss is recognised through this same account; if more than one contract in the series is outstanding at square-off, the weighted average method is used to work out the profit or loss.
• On settlement, the released initial margin is credited to the Initial Margin Account, with the corresponding debit to bank or deposit.

A client's Mark-to-Market Margin Account for Nifty futures shows a debit balance of Rs 18,000 at the balance sheet date — meaning the client has net-paid Rs 18,000 in daily settlement so far, an unrealised loss.

Under the prudence principle, the client must create a provision of Rs 18,000 by debiting the profit and loss account, and show the Rs 18,000 debit balance under Current Assets, Loans and Advances, net of the Rs 18,000 provision — so it nets to nil on the balance sheet even though the exposure is disclosed.

Had the account instead shown a credit balance of Rs 18,000 (an anticipated profit), no credit would be taken to the profit and loss account at all — the Rs 18,000 would simply be shown as a current liability, and the anticipated gain would not be recognised until it is actually realised.

Chapter 9, section 9.1, sets out the debit/credit and provisioning rules for this account immediately after the Initial Margin Account rules, and separately covers the parallel treatment for options premium accounts. Expect a question on how a debit balance versus a credit balance in this account is treated differently under the prudence principle.

• A debit balance (loss) is provisioned for; a credit balance (profit) is not recognised at all. This asymmetry is the prudence principle at work, and it is the single most tested point on this account.
• The provision is a deduction from the Current Assets figure, not a separate liability line.
• Weighted average method applies only when more than one contract in the same series is outstanding at the time of square-off.
• Do not confuse this account with the Initial Margin Account — the initial margin is the upfront deposit; this account tracks the ongoing daily settlement gain or loss on top of it.