Mark to Market (MTM) loss margin
Also written MTM Loss Margin
In the cash segment, one of three margins a clearing corporation collects upfront: the loss on a member's outstanding settlement obligations, marked to the closing price, grossed across all clients.
In plain language
A client buys shares today, but settlement happens tomorrow. If the price falls overnight, the client is sitting on a paper loss before the trade has even settled. Someone has to be sure that loss will actually be paid, and not just hoped for.
MTM loss margin is how the clearing corporation covers that risk in the cash segment. It is one of three margins collected upfront on every open cash-market obligation, alongside VaR margin and extreme loss margin. It is not the same thing as the Mark to Market settlement used for futures, though the two ideas rhyme: both mark a position to the day's closing price and settle the difference in cash.
How it works
The workbook (Chapter 4, section 4.1.1.1) defines MTM loss margin as the mark to market loss on the outstanding settlement obligations of the member, and this includes any intraday crystallised MTM losses (ICMTM).
The loss is calculated by marking each transaction to the closing price of the security (or, if untraded that day, the latest available closing price). If a client's net outstanding position in a security is nil, the difference between buy and sell values is still treated as a notional loss for this purpose.
Collection rules:
- MTM is collected from the member before the start of trading the next day.
- It is collected against the cash / cash-equivalent component of the member's liquid assets — not against any liquid asset.
- It is computed on the member's gross open position: a client's own positions are netted across securities, but the resulting figures for all clients are then grossed together, with no set-off of one client's loss against another client's profit.
- There is no netting of MTM across two different settlements, such as T+1 and T+0, though netting within a single day's computation of that day's profit and loss is allowed.
- For Trade For Trade Surveillance (TFTS) securities, each trade is separately marked to market at closing price.
- Collected MTM is released along with the pay-in, including early pay-in.
- Together with VaR margin and extreme loss margin, MTM loss margin together with VaR and ELM must not exceed the purchase value of a buy transaction, and VaR and ELM together must not exceed the sale value of a sell transaction (though MTM continues to be levied on the sale side too).
A worked example
A broker has three clients, each holding one security:
| Client | Security | MTM profit / (loss) at client level (Rs) |
|---|---|---|
| A | X and Y combined | (900) |
| B | Z and Y combined | (1,100) |
| C | A and Y combined | 1,400 |
Only the losses count towards what the broker must deposit. Client A's Rs 900 loss and Client B's Rs 1,100 loss are added together: total MTM margin payable by the broker = Rs 2,000. Client C's Rs 1,400 profit is not netted against the other two clients' losses — it simply is not collected as margin, but it also does not reduce what the broker owes for A and B.
The broker must have this Rs 2,000 available in cash or cash equivalents before trading opens the next day. Once the client's pay-in of funds and securities for that settlement is complete, the Rs 2,000 blocked for MTM is released.
Why NISM asks about it
Chapter 4 (Risk Management, section 4.1.1.1) sets out MTM loss margin as one of three cash-segment margins, right after VaR margin, and works through the client-level and broker-level gross-up in a table nearly identical to the one above. The chapter's own sample question asks which margins in the cash segment are collected on an upfront basis — the answer includes VaR and ELM, while MTM is collected before next-day trading rather than at the moment of trade, a distinction the paper tests directly.
Common exam traps
- MTM loss margin is grossed across clients — profits of one client never offset losses of another for the purpose of what the broker must deposit.
- It is collected against cash/cash-equivalent assets specifically, unlike VaR and ELM, which can be met from the wider pool of liquid assets.
- No netting of MTM across T+1 and T+0 settlements, even for the same client and security.
- This is a cash-segment margin on outstanding settlement obligations. It is a different mechanism from the derivatives segment's daily Mark to Market settlement of futures positions, even though both mark a position to the closing price — the cash-segment version margins an unsettled trade; the derivatives version cash-settles an open futures contract every single day, settled or not.
- A nil net position can still carry a notional MTM loss, computed from the difference between buy and sell values.
Where this is taught
Free preparation for NISM Series VIIRelated terms
- Value at RiskA statistical estimate of the most a position is likely to lose over a set holding period at a chosen confidence level — the idea behind the initial margin a clearing corporation charges on a derivatives trade.
- Extreme Loss MarginA flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.
- Gross settlementA settlement method where transactions in a security are not netted: a member's security pay-in equals cumulative sell quantity and pay-out equals cumulative buy quantity, trade by trade.
- ICMTMIntraday Crystallized Mark to Market Losses: a real-time margin on losses from trades that are both executed and squared off on the same day, computed at weighted average prices and collected as it accrues.
- Scrip sigmaThe volatility of an individual security, computed as of the previous trading day's close using an exponentially weighted moving average of daily returns, that drives its VaR margin rate.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.