NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures

Margining, Mark-to-Market and Settlement in Futures

Updated 11 October 2026 · Fact-checked

Margining means depositing initial margin to cover possible loss on a futures position. Mark-to-market (MTM) settlement credits or debits each day's price change in cash. The clearing corporation guarantees trades, collects margins and settles daily and finally. Daily MTM = (today's settlement price − previous reference price) × quantity.

Understand Margining, Mark-to-Market and Settlement

A futures contract is a promise to buy or sell at a set price on a future date. Either side may walk away if prices move against it. Margining exists to stop that. It makes both sides put money up front and settle gains and losses every day.

Initial margin is the deposit you pay when you open a position. It is set to cover the likely largest loss in a single day (or a short period) at a high confidence level. Both buyers and sellers pay it, because both can lose. The clearing corporation sets it using a risk model (SPAN-based in India). It is not a price and not a fee. It stays your money and is returned when you close out, adjusted for gains and losses.

Mark-to-market (MTM) margin deals with daily price changes. At the end of each day, every open position is revalued at the daily settlement price. The loser pays the day's loss in cash. The winner receives the day's gain. The position then carries forward at the new price. So losses never pile up unpaid for weeks.

The clearing corporation sits between the two sides through novation. After a trade, it becomes the buyer to every seller and the seller to every buyer. Each party now faces the clearing corporation, not the original counterparty. It collects margins, runs the daily MTM and guarantees settlement. Trading members and clearing members are responsible for collecting margins from their clients and passing them on.

Final settlement happens on expiry. On expiry day, open positions get a last MTM at the final settlement price, and this last MTM is paid in cash. Index futures are cash settled: the final settlement is in cash at the closing price of the index on expiry day, and only the difference is paid. For stock futures, the final MTM is settled in cash, and the open positions are then settled by physical delivery under SEBI's framework: the seller delivers the shares and the buyer takes delivery and pays for them. Daily MTM already took care of earlier price changes, so the last MTM only covers the last day's difference from the previous day's settlement price.

Key formulas to remember

Daily MTM profit or loss (long futures): (Today's daily settlement price − Previous day's settlement price) × Quantity; Positive means the long receives money. Negative means the long pays.
Daily MTM profit or loss (short futures): (Previous day's settlement price − Today's daily settlement price) × Quantity; The short gains when the price falls. It is the opposite sign of the long.
MTM on the day a trade is made: (Daily settlement price − Trade price) × Quantity for a long position; On day one, use the trade price as the reference, not the previous settlement price.
Final MTM on expiry day: (Final settlement price − Previous day's settlement price) × Quantity for a long; This is only the last day's MTM, paid in cash. For index futures, the final settlement price is the closing price of the index on expiry day and the contract ends in cash. For stock futures, open positions are then settled by physical delivery.
Quantity: Quantity = Number of lots × Lot size; Always convert lots into units before computing.
Total profit over the life of a position: Sum of all daily MTM amounts = (Final settlement price − Original trade price) × Quantity for a long; Use this to check your daily working.

How to solve Margining, Mark-to-Market and Settlement questions

Use the same method for any question on margins, MTM or settlement.

1Identify what is asked: initial margin, daily MTM, final settlement or the role of the clearing corporation.
2Note whether the position is long or short. This decides the sign.
3Compute quantity as lots × lot size.
4Pick the correct reference price: trade price on day one, previous settlement price on later days.
5Apply the formula. Price rise gains for the long and loses for the short.
6State who pays and who receives. Cash moves through the clearing corporation.
7Check the answer: the sum of daily MTMs should equal (final price − trade price) × quantity.
8Match your result to the options and watch for sign traps.

Quickest way: Sign and difference shortcut

When to use it: Use for numerical MTM questions with several days of prices.

Write the prices in a row: trade price, then each day's settlement price.
Find each price difference in turn, with the sign for the long.
Multiply each difference by the quantity only once at the end if you need a total.
For a short, flip all signs.
For total profit, skip the days and use final price − trade price.

Common mistakes in Margining, Mark-to-Market and Settlement

Thinking initial margin is the price of the futures contract or a fee that is lost.
Students confuse margin with premium in options.
Fix: Remember that margin is a refundable security deposit. The futures buyer pays no premium. Only option buyers pay a premium.
Using the trade price as the reference on every day.
It feels natural to compare with the entry price.
Fix: Daily MTM uses the previous day's settlement price. Only day one uses the trade price.
Getting the sign wrong for a short position.
Students apply the long formula to both sides.
Fix: For a short, a price fall is a gain. Reverse the sign of the long's result.
Forgetting to multiply by lot size.
Questions give prices per unit and lots separately.
Fix: Always compute quantity = lots × lot size before the final multiplication.
Believing only the buyer pays initial margin.
Students link margin with the party that fears loss.
Fix: Both long and short can lose, so both pay initial margin.
Thinking the counterparty settles directly with you after the trade.
Students ignore novation.
Fix: The clearing corporation becomes the counterparty to both sides and guarantees settlement.

Worked examples

Example 1

A trader buys 2 lots of a stock futures contract at ₹500. The lot size is 400. The daily settlement price that day is ₹508. The next day it is ₹503. Find the MTM on each day.

Show the solution

Quantity = 2 × 400 = 800 units.
Day 1 uses the trade price: (508 − 500) × 800 = 8 × 800 = ₹6,400 gain.
Day 2 uses the previous settlement price: (503 − 508) × 800 = −5 × 800 = −₹4,000.
Check: total = 6,400 − 4,000 = ₹2,400. Also (503 − 500) × 800 = ₹2,400.
Note: daily MTM is settled in cash for all futures. If this stock futures position is held to expiry, the final settlement is by physical delivery of shares, not cash.

Answer: Day 1: gain of ₹6,400. Day 2: loss of ₹4,000. Net gain is ₹2,400. These are daily cash MTM amounts; stock futures held to expiry end in physical delivery.

Example 2

A trader sells 1 lot of index futures at 24,000. Lot size is 50. The daily settlement price is 24,120 the same day. What is the MTM, and who pays whom?

Show the solution

Quantity = 1 × 50 = 50 units.
For a short, MTM = (trade price − settlement price) × quantity.
= (24,000 − 24,120) × 50 = −120 × 50 = −₹6,000.
The price rose, so the short loses. The short pays ₹6,000 through the clearing corporation, and the long side receives its gain.

Answer: The short position has an MTM loss of ₹6,000 and pays this amount in cash on that day.

Exam tips

Read whether the question asks about the long or short. Many wrong options are the same number with the wrong sign.
Remember that the clearing corporation is the counterparty to every trade after novation. This is a common conceptual question.
Do not confuse futures margin with option premium. Questions often test this.
Use the total check: sum of daily MTMs equals (last price − trade price) × quantity.
For settlement type, read the contract named. Index derivatives are cash settled. Stock derivatives are physically settled.

Practice questions from Introduction to Forwards and Futures

Margining, Mark-to-Market and Settlement in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Margining, Mark-to-Market and Settlement: frequently asked questions

What is the difference between initial margin and MTM margin?

Initial margin is a deposit paid when you open a position. It covers a likely one-day loss. MTM margin is the daily cash settlement of the price change on your open position. Initial margin is held as security. MTM is paid or received.

How does mark-to-market work in futures?

At the end of each day, the clearing corporation revalues every open position at the daily settlement price. The side that lost pays the loss and the side that gained receives it. The position then continues at the new reference price.

What is the role of the clearing corporation in futures?

It becomes the buyer to every seller and the seller to every buyer through novation. It guarantees settlement, collects margins and runs daily MTM and final settlement. This removes counterparty risk between traders.

How are futures settled on expiry?

On expiry day, open positions get a final MTM in cash, calculated from the final settlement price and the previous day's settlement price. Index futures are cash settled at the closing price of the index, so the contract ends there. For stock futures, the final MTM is in cash and the open positions are then settled by physical delivery of shares. Earlier price changes have already been settled through daily MTM.