Mark to market is the process of valuing the underlying assets in a securitisation transaction based on their current market value. This is in contrast to the historical cost method, which values the underlying assets based on their purchase price.
Mark to market is typically used in securitisation transactions where the underlying assets are traded in an active market. This is because the market value of these assets can be easily determined. However, mark to market can also be used in securitisation transactions where the underlying assets are not traded in an active market. In this case, the market value of the assets is determined by using a variety of factors, such as the credit rating of the underlying assets, the yield curve, and the interest rate environment.
Mark to market is important in securitisation transactions because it allows the issuer to assess the current value of the underlying assets. This is important for a number of reasons, including:
- To determine the fair value of the securities: The fair value of the securities issued in a securitisation transaction is determined by the market value of the underlying assets. Therefore, mark to market is used to determine the fair value of the securities.
- To assess the risk of the securitisation transaction: The risk of a securitisation transaction is determined by the market value of the underlying assets. Therefore, mark to market is used to assess the risk of the securitisation transaction.
- To manage the liquidity of the securitisation transaction: The liquidity of a securitisation transaction is determined by the market value of the underlying assets. Therefore, mark to market is used to manage the liquidity of the securitisation transaction.
Here are some of the benefits of using mark to market in securitisation transactions:
- Accuracy: Mark to market provides a more accurate valuation of the underlying assets than the historical cost method. This is because it takes into account the current market value of the assets.
- Transparency: Mark to market provides transparency to investors about the value of the underlying assets. This can help investors to make informed investment decisions.
- Risk management: Mark to market can be used to manage the risk of a securitisation transaction by identifying assets that are likely to decline in value.
- Liquidity: Mark to market can help to improve the liquidity of a securitisation transaction by making it easier for investors to buy and sell the securities.
Overall, mark to market can be a valuable tool for securitisation transactions. It can help to improve accuracy, transparency, risk management, and liquidity.