Pay/Collect Definition

What Is Pay/Collect?

Pay/collect is an abbreviated reference to the payment and collection of funds—after futures positions have been marked to market (MTM)—between clearing members and their respective clearinghouses.

In futures trading, accounts in a futures contract are marked to market on a daily basis. Profit and loss are calculated between the long and short positions.

Understanding Pay/Collect

Pay/collect arises with futures positions, which are marked to market every evening after exchanges are closed for trading. As futures trading is a zero-sum game, in marking to market, one side of the futures position will be in a deficit position while the other is in a surplus. This imbalance is offset through the pay/collect transactions executed by brokers to their clearing organizations.

The “pay” part refers to a payment required—or a loss. The “collect” side is money received—or a gain. A clearinghouse offsets trades against one another at the end of every day to ensure the least amount of money has to change hands. The ultimate payment or money received is the pay/collect.

Mark to Market in Pay/Collect

In securities trading, mark to market involves recording the price or value of a security, portfolio, or account to reflect the current market value rather than the book value or a trader's model value. This is done most often in futures accounts to ensure that margin requirements are being met.

If the current market value causes the margin account to fall below its required level, the trader will be faced with a margin call. Mutual funds are also marked to market on a daily basis at the market close so that investors have a better idea of the fund's net asset value (NAV).

Mark-to-market losses are paper losses generated through an accounting entry rather than the actual sale of a security. Mark-to-market losses occur when financial instruments held are valued at the current market value, which is lower than the price paid to acquire them. These would correspond with a "pay."

An exchange marks traders' accounts to their market values daily by settling the gains and losses that result due to changes in the value of the security. There are always two counterparties on either side of a futures contract—a long trader and a short trader. The trader who holds the long position in the futures contract is usually bullish, while the trader shorting the contract is considered bearish.

If, at the end of the day, the futures contract entered into goes down in value, the long margin account will be decreased and the short margin account increased to reflect the change in the value of the derivative. Conversely, an increase in value results in an increase to the margin account holding the long position and a decrease to the short futures account.