Marking to market: what is it and what changes in fixed income with the new rule?

Investing in fixed income requires more than considering characteristics such as yield, maturity, risks and liquidity. It’s also important to understand how certain mechanisms work — for example, do you know what mark-to-market is?

As it focuses mainly on fixed income securities, it is worth understanding what their impacts are on investments and how to avoid them. In addition, it is essential to consider what changes are foreseen for this investment pricing process.

Do you want to better understand what mark-to-market is and what are the new market rules? Continue reading and find out more!

What is mark-to-market?

Mark-to-market, also known as MAM, is a mechanism used to constantly price certain financial market alternatives. Its main objective is to update investment prices, according to market conditions.

In the case of fixed income securities, for example, marking to market updates the price of the investments, showing how much they would be sold for if redeemed in advance.

In addition, mark-to-market applies to investment fund shares . The objective is to prevent the transfer of wealth between quotaholders, ensuring that each one is entitled to results compatible with their own level of participation.

Which assets suffer this markup?

As you have seen, there are two main groups of investments that suffer the effects of mark-to-market: fixed-income securities and fund shares. In the case of fixed income investments, the periodic updating of prices applies to public and private securities and private credit.

In addition, the methodology applies to shares of fixed income and variable income investment funds. Therefore, not all financial market assets are affected by this mechanism, but it has an impact on a significant part of the market.

What is the mark-to-market process like?

Now that you know what mark-to-market is and how it works, it is interesting to understand how the asset pricing promoted by it occurs. To make it easier, you can consider the impacts on fixed-income securities.

Below, check out the two main scenarios and see the effects of mark-to-market on each of them!

high interest

As an example of the mark-to-market effect, consider one of the Direct Treasury securities , such as Prefixed Treasury . Imagine that you invested 2,000 in a bond that offers a return of 12.5% ​​per year and matures in 5 years.

When you buy this bond, the Selic — which is the basic interest rate for the economy — is at 13.25%. In this situation, two main scenarios may occur: the Central Bank may raise or lower the interest rate, depending on economic conditions.

If the Bacen decides to increase the Selic, it is likely that the new prefixed public bonds will be issued with a rate above 12.5%, right? After all, the Selic will be higher, making the rate offered in the application need to be higher to attract investors.

In this situation, your security tends to devalue because investors will find new alternatives with a more attractive pre-fixed return than the one defined in your application. Therefore, if you redeem the money during this period (and before maturity), the tendency is for you to receive a lower amount — generating losses .

low interest

Now, imagine the opposite situation. If Bacen lowers the rate to 12%, it is likely that the new fixed-rate bonds will offer returns lower than this value. Meanwhile, its issued bond continues to offer a fixed yield of 12.5% ​​per annum.

In this situation, redeeming the application early can generate profit. This is because there tends to be greater interest in your bond as it offers a higher return than new investments available.

In both cases, it is worth noting that the effects of mark-to-market are canceled out when securities are carried to maturity. Therefore, if you withdraw your financial investment only within the period defined by the issuer, you will be entitled to receive exactly what was agreed upon.

What changes in fixed income with the new mark-to-market rule?

So far, you have understood the general functioning of mark-to-market on investments. However, you also need to know that in 2023 there will be a change in the rules.

The change was defined by the Association of Financial and Capital Market Entities (ANBIMA) and is related to the way information is presented in relation to the effects of mark-to-market.

Before the change, information about investor investments was presented based on the so-called markup on the curve. So when an investor checked the results of his portfolio, he would see the numbers based on the contracted rate.

With the change, financial institutions will be required to show updated investment prices. Therefore, investors come to know the price at which securities are traded in the market at a given time.

So, if marking to market occurs daily, the investment price can be marked to market every day, with frequent updating of information. However, it is worth mentioning that the update can be done at other frequencies, as long as it happens at least once a month.

Which investments will undergo the change?

At first, the changes in the mark-to-market rules will not be intended for all fixed-income financial applications.

Instead, investments in:

– debentures;

– certificates of real estate receivables (CRIs);

– agribusiness receivables certificates (CRAs);

– public securities acquired through the treasury of banks and stockbrokers.

Thus, public securities acquired via the Direct Treasury platform and investments such as bank deposit certificates (CDB) and real estate credit notes (LCIs) or agribusiness letters (LCAs) were left out.

What changes for the investor?

For those who choose to invest in fixed income securities affected by the change in mark-to-market, the process can bring more transparency. With this follow-up, it is easier to know if there is an opportunity to profit from the early redemption of a security, for example.

However, there are no changes in the general functioning of investments. If they are taken to maturity, as seen, they will yield according to the defined conditions.

In this article, you found out what mark-to-market is and how the rules will change from 2023 onwards. Despite this, the changes will not have a negative impact on investments — they will just help investors to follow the results obtained more easily.

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