Mark to market (MTM) settlement

This one is not written up yet

The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.

Written up from the same chapter

• Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
• Daily Settlement PriceThe price at which every open futures position is marked and reset at the end of each day — the last 30 minutes' volume weighted average price of that contract, computed separately for each expiry.
• Final Settlement PriceThe price at which a commodity derivative is finally settled at expiry — a simple average of the polled spot prices of the expiry day and the two days before it.
• Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
• InteroperabilityA clearing member choosing one clearing corporation to clear and settle everything it trades, across all exchanges, instead of being tied to a separate clearing corporation per exchange.
• Investor Protection FundA trust-administered fund at every stock exchange and depository that compensates clients of a trading member who has been declared a defaulter or expelled, up to a per-investor limit the exchange fixes.