Marking to the market occurs when a broker dealer who has an open contractual commitment to another broker dealer monitors the market value of the securities involved relative to the contract or trade price. This process is known as marking to the market. A broker dealer who is partially unsecured can issue a call or demand for more collateral. If a firm sends a mark to the market demand to another broker dealer, the demand must be met promptly.
Applying "Marking To The Market" to Securities Exams:
If a broker dealer borrows $20,000 worth of securities for a customer who is executing a short sale for $20,000 worth of ABC, the borrowing broker dealer would have to deposit $20,000 with the lending broker dealer as collateral for the securities. If the market value of ABC increases to $25,000 the broker dealer who loaned the securities may demand that the borrowing broker dealer deposit an additional $5,000 as collateral. Alternatively if the market value of ABC had fallen to $15,000 the borrowing broker dealer may demand a return of $5,000.