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ISDA Anatomy™

incorporating our exclusive ISDA in a Nutshell™

Marky mark.png

Resources Wikitext | Nutshell wikitext | 1992 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA | JC’s ISDA code project
Navigation Preamble | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
Events of Default: 5(a)(i) Failure to Pay or Deliver5(a)(ii) Breach of Agreement5(a)(iii) Credit Support Default5(a)(iv) Misrepresentation5(a)(v) Default Under Specified Transaction5(a)(vi) Cross Default5(a)(vii) Bankruptcy5(a)(viii) Merger without Assumption
Termination Events: 5(b)(i) Illegality5(b)(ii) Force Majeure Event5(b)(iii) Tax Event5(b)(iv) Tax Event Upon Merger5(b)(v) Credit Event Upon Merger5(b)(vi) Additional Termination Event

Index: Click to expand:

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The market value is the value of an asset by reference to its market price — what the market will pay for it at the particular point in time, rather than by evaluating the fundamental components of the asset. The latter involves ineffable wisdom, technical analysis and cojones of steel — and at times of stress is apt to make an owner feel aggrieved at the world; the former is a bit like sticking something on eBay — hence, “marking-to-market” — and yields an instant answer if not necessarily gratification.

“Marking-to-market” is a method of accounting to value an asset. In the absence of a better idea, it is to treat the value of something you have not sold as if you had sold it. Regular readers will not be surprised to hear that this can lead to confusion, disappointment and colossal regret. They may, however, be surprised to hear there have been many financial professionals — ones who, similarly, should not have be surprised to hear that — who, in fact, have been surprised to hear it, and have had the frights of their lives finding it out the hard way over the 30 years since mark-to-market accounting became de rigueur — re-popularising itself in the hands of accounting wizards like Jeff Skilling and Andrew Fastow in the 1990s, President Roosevelt having banned it, at the SEC’s urging, as long ago as 1938.

How it works

If a market bid is “firm[1] and the market liquid[2] then however estimable your fundamental valuation techniques, you can’t argue about a market value. In financial markets one can do without a firm bid for your own asset if there is an public market for assets exactly like your one where one can see trading prices every day. Like the equities market, for example.

These are big ifs. As has been demonstrated time and again —Enron, the Global Financial Crisis, Archegos — the market is an inconstant friend. When you don’t really need it, it is there for you, regular as clockwork. Everyone feels reassured. When you do need it, mark-to market valuations have a horrible habit of turning out to have been quite badly wrong. This has something to to with observation dependence: an expression we made up, but which owes something to systems theory and even quantum indeterminacy. The very act of interacting in the market changes the market. Observing someone else’s sale does not count as interacting. Selling your own does. For it is one thing to value your asset by reference to the prevailing price at which other people are buying and selling assets like yours — while at the same time not selling yours, remaining on risk to its forward price — and quite another to crystallise your gain and actually sell. The environment in which you are selling makes a big difference. If everyone is simply enquiring about the going rate, to mark their own pnl statement, the market will tell you one thing. If everyone is actually selling to beat the dip, it will tell you something quite different.

The good citizens of north London, we are told, possess houses valued, on average, at £824,540, based on actual sale data.[3] There are, near enough, 1.8 million residential properties in North London. This values the total North London property market at a shade under 1.5 trillion pounds.

But these values are generated on the assumption that, generally speaking, Londoners do not want to sell their homes, and that tiny fraction who do so so for reasons unrelated to their bearish view of the intrinsic value of their property - they are either trading up to a bigger house, trading down to a smaller one — in either case, net flat the London market itself — and a few are arriving, or leaving moving to retirement villages in Milton Keynes. But the net “view” expressed by these activities is more or less neutral.

Now, what would be the mark-to-market view of the average North London property if all 1.5m owners decided to sell at the same time? We postulate, quite a lot less than £824,540.


An alternative — there are no good alternatives, by the way: accounting is a necessarily historical exercise and is logically unable to predict the future — is to stick with cost until the point where you liquidate your position. This is unfun for “talented” hedge fund managers who are generating book profits in a rising market. It also incentivises “bad” managers to sit on crappy investments and avoid selling them to realise a loss.


There the temptation might be to mark-to-model — cue much jiggery pokery and opacity, because you value your positions based on what your clever models — the same ones that did all that lovely backtesting — tell you. But Models don’t always behave themselves, do they. Especially when they’ve been ginned up by self-interested credit derivative structurers or fanciful Enron employees.

Mark-to-market has its drawbacks, especially in illiquid contracts or for speculative new business lines for which there isn’t yet a market. This did not stop Enron recognising $110 million of estimated profits from a 20-year deal with Blockbuster Video[4] for on-demand entertainment to various U.S. cities by notwithstanding dubious technical viability and no evidence of market demand.[5] When the network failed to work, Blockbuster withdrew from the contract. Enron continued to recognise future profits, even though the deal resulted in a loss.

See also


  1. Meaning the person making the bid is prepared to trade at that price.
  2. Meaning there are lots of people in the market for that asset at that time
  3. Rightmove, retrieved August 2022
  4. Remember them
  5. At the time. In fairness, it was an idea before its time. But let not rose-tinted shades of 20:20 hindsight distract you from the essential fact: no-one knew that then, and it was accounting fraud.