Daily settlement and mark-to-market in futures work like this: at the end of each trading session the exchange calculates one official settlement price for each contract, compares it to the previous day’s settlement, and moves cash between accounts to reflect the change. If the market moved in your favor, cash lands in your account that same day. If it moved against you, cash leaves. Your profit or loss on a futures position is not something that sits on paper until you sell — it is collected or paid out every business day the contract is open, and if the debit is large enough to drop your account below the required margin, you have until the close of the Fedwire Funds Service that day to send more money or your broker can close the position.
How the Daily Settlement Price Is Set
The whole process starts with one number per contract. Shortly after the trading session closes, the exchange calculates the daily settlement price using a method spelled out in its rulebook and approved by federal regulators. Most exchanges use a volume-weighted average price during a short closing window. CME Group’s grain futures derive settlements from trading during a one-minute window at the end of the session.1CME Group. Daily Settlement Procedure Cboe’s VX volatility futures use a 30-second interval.2Cboe Futures Exchange. Rule Certification Regarding Daily Settlement Price Methodology
When no trades happen inside the window, the exchange falls back to a defined hierarchy rather than skipping the day. For S&P 500 futures at CME, the first fallback is the midpoint between the best bid and offer during the settlement period. If there’s no two-sided market, the exchange builds a theoretical price from the cash index, an interest rate, and the days remaining to expiration.3CME Group Client Systems Wiki. Standard and Poors 500 Value Futures Every open contract gets a settlement price every trading day, and that number is the input for the cash movement that follows.
How the Daily Cash Transfer Is Calculated
Once the settlement price is posted, the clearing system compares it to the previous day’s settlement (or to your entry price, if you opened the trade that day). The difference, multiplied by the contract size, is the cash amount that moves between accounts. This transfer is called variation margin.
Say you’re long one gold futures contract representing 100 troy ounces, and today’s settlement comes in $10 below yesterday’s. The clearinghouse debits your account $1,000 and credits the same $1,000 to the trader on the other side. If the price had risen $10, the flow would reverse and you’d receive the credit.4CME Group. Margin: Know What’s Needed
The practical effect is that your contract is effectively rewritten at the new settlement price every day. By the time you close the position, you’ve already received or paid your entire profit or loss in daily installments. There is no lump-sum reckoning at exit, and there is no such thing as an unrealized paper loss on an open futures position — the loss becomes cash the same day the market moves.
Cash from a winning day is available immediately. You can withdraw it or use it to margin new positions. The system is symmetric: losers pay, winners collect, and each new session begins with every account collateralized against the current settlement price.
Margin You Need Before and During the Position
Because cash moves every day, you have to post collateral before you can trade and keep enough of it in the account to absorb daily debits. Futures margin is not a loan the way stock margin is; it’s a performance deposit backing your daily obligations.
The initial margin is what you post to open a position, typically 3% to 12% of the contract’s notional value depending on the product’s volatility.4CME Group. Margin: Know What’s Needed A $200,000 crude oil contract might require $10,000 to $24,000 up front. Once the position is on, your account has to stay above a lower floor called the maintenance margin. Drop below that floor, even for a single day, and you’re undermargined.
Collateral doesn’t have to be cash. Exchanges accept Treasury bills and other high-quality liquid assets, applying a haircut to reflect the chance those securities could fall in value before being sold. CME Group applies a 0.5% haircut to Treasury bills maturing within a year, so a $100,000 T-bill counts as $99,500 of margin; longer-dated securities get larger haircuts.5CME Group. Review of Collateral Haircuts – Notice 26-125
Margin levels are not fixed. Exchanges can raise requirements during periods of extreme volatility, and federal rules require clearing agencies to review their models more frequently than monthly when markets get volatile or illiquid. Your broker can also impose its own house margin above the exchange minimum and change it at any time. A mid-position increase can force an immediate deposit even when the market hasn’t moved against you.
Margin Calls and Same-Day Funding Deadlines
When a variation margin debit pushes your equity below the maintenance line, your broker issues a margin call. Meeting it requires enough cash to bring the account back up to the full initial margin, not just to the maintenance floor.4CME Group. Margin: Know What’s Needed
The clock is short. Under federal regulations, margin calls for separate accounts must be met by the close of the Fedwire Funds Service on the same business day.6eCFR. 17 CFR 1.44 – Margin Adequacy and Treatment of Separate Accounts Individual brokers may allow slightly more time for retail customers, but planning on more than one business day would be optimistic.
If you don’t meet the call, the broker can liquidate your position. Brokers have broad authority to close positions without your consent when the account is in deficit, without calling you first and without needing your permission.4CME Group. Margin: Know What’s Needed A forced liquidation locks in your loss at whatever price the broker can get, which in a fast market can be well below the settlement price that triggered the call.
The end-of-day mark is not the only checkpoint. Brokers can also issue intraday margin calls when the market moves sharply during the session, well before the settlement window.7National Futures Association. Margins Handbook The consequences are the same: wire funds or the position gets closed.
Price Limit Days: When the Mechanic Turns Against You
Most commodity futures have daily price limits capping how far the price can move in a single session. When a contract hits its limit — “lock limit up” or “lock limit down” — trading may halt while the exchange expands the limits, remain frozen at the limit price for the rest of the session, or stop for the day, depending on the product.8CME Group. Price Limits: Ags, Energy, Metals, Equity Index
If you’re on the wrong side, this is the worst version of the daily mechanic. Your position is being marked to the limit price, cash is leaving your account, and you may not be able to exit. When a contract settles at the limit, some exchanges automatically expand the price limits for the next session by roughly 50% above the normal daily limit and keep them expanded until no contract month settles at limit.9CME Group. Grain and Oilseed Price Limit FAQ Consecutive limit days compound the mark-to-market losses while you remain trapped in the position.
Holidays and Final Settlement at Expiration
Settlement prices are not calculated on days the exchange is closed. During holiday closures, CME Group does not derive or disseminate settlement prices for any of its exchanges.10CME Group. New Year’s Eve Holiday Settlement Times 2025/2026 The last settlement price before the break stays on the books until trading resumes. A three-day weekend leaves you with three days of unpriced market risk, and the first settlement after the break can gap enough to trigger a margin call reflecting several days of movement at once.
If a margin call arises from market moves on the business day before a holiday, the deadline extends to the close of the Fedwire Funds Service on the next business day after the holiday.6eCFR. 17 CFR 1.44 – Margin Adequacy and Treatment of Separate Accounts
Daily marking continues until the contract expires. At expiration, cash-settled contracts (like E-mini S&P 500 futures) take the difference between the final settlement price and the previous day’s mark, and that last variation margin payment closes the position. Physically delivered contracts (like crude oil or agricultural commodities) transition into a delivery process where the seller delivers the underlying commodity and the buyer pays full contract value. Either way, most of the economic gain or loss has already been paid out through daily settlement by the time expiration arrives.
You Can Lose More Than You Deposited
One consequence of the daily mechanic surprises many retail traders: liability does not stop at zero. If the market moves fast enough — a limit move, a gap at the open, an overnight shock — a variation margin debit can push your account balance below zero. When that happens, you owe your broker the deficit.
Brokers are required to pursue negative balances. Under NFA rules, futures commission merchants cannot promise or imply that they will refrain from attempting to collect margin owed on each contract.11National Futures Association. NFA Regulatory Requirements for FCMs, IBs, CPOs and CTAs The broker must cover the shortfall from its own funds to keep the segregated customer account whole, and then come after you for repayment. Maximum loss on a futures position is not capped at the margin you posted.
Tax Treatment of Daily Marking
The daily mechanic reaches into your tax return. Under Section 1256 of the Internal Revenue Code, regulated futures contracts are treated as if they were sold at year-end at fair market value, whether or not you actually closed the position. The resulting gain or loss is split 60/40: 60% is treated as long-term capital gain or loss, and 40% as short-term, regardless of how briefly you held the contract.12Office of the Law Revision Counsel. 26 U.S. Code 1256 – Section 1256 Contracts Marked to Market
The blended rate often works in a trader’s favor. For 2026, long-term capital gains are taxed at 0%, 15%, or 20% depending on income, while short-term gains are taxed at ordinary rates as high as 37%. The 60/40 result is almost always lower than what a stock day-trader pays on positions held under a year.
You report Section 1256 gains and losses on IRS Form 6781.13Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles Your broker generally provides a year-end statement showing the net mark-to-market result, but the tax obligation is based on the change in value between the start and end of the tax year (or the date you closed the position, if earlier), not on the sum of every day’s variation margin debits and credits.