Mark-to-Market Settlement
The daily process by which NSE's clearing corporation revalues all open futures positions at the end-of-day settlement price, crediting gains and debiting losses in cash to the respective margin accounts before the next trading session begins.
Mark-to-market settlement, often abbreviated as MTM settlement, was the mechanism that transformed futures trading from a contract spanning weeks or months into a series of daily cash settlements. Rather than waiting until expiry to realise a profit or absorb a loss, every open futures position on NSE was settled in cash each day based on the daily settlement price announced by NSCCL.
NSCCL computed the daily settlement price for each futures contract as the weighted average price of the futures contract during the last thirty minutes of trading. If sufficient trades did not occur in the last thirty minutes, NSCCL used a theoretical price based on the underlying spot price and the prevailing interest rate. This settlement price became the reference against which positions were marked.
The mechanics flowed as follows: a trader long one Nifty futures contract who bought at 22,000 had that position marked to the settlement price each evening. If the settlement price was 22,150, the trader's margin account was credited with 150 points multiplied by the lot size. The new cost basis of the position became 22,150. The following day, any further move would be measured from this new basis. Over a thirty-day holding period, the cumulative profit or loss on a futures position equalled the sum of each day's MTM settlement, which mathematically equalled the difference between the entry price and the final exit or settlement price.
For option buyers, MTM settlement worked differently. Premium was paid upfront, and there was no daily cash flow — the buyer's loss was locked in at the premium paid. For option sellers, NSE collected variation margin in a manner analogous to futures MTM for certain in-the-money or near-the-money positions.
From a tax perspective, SEBI and the income tax framework treated futures MTM settlements as income from business and profession, not capital gains, which had implications for how traders structured their accounting and tax filings.