Mark-to-Market Reporting to Clients

When a client receives a market value for its financial closing or audit, the person at the financial institution responds through this work.

Why market values are reported

Mark-to-market reporting gives the client the information it needs for its financial closing and for deciding whether to keep or terminate a trade. The Financial Services Agency's "Comprehensive Guidelines for Supervision of Major Banks, etc." and "Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc." both list, as a point of focus, a framework for giving clients information such as market values after a derivatives contract¹². When a client asks, the financial institution tells it, periodically or as needed at any time, the market value of its positions and the termination payment amount at that point, among other things. In the FSA's supervisory guidelines for financial instruments business operators, this is one of the points to note when explaining OTC derivatives such as interest rate swaps and currency options. An FSA pamphlet also lists the provision of market value information as an example of follow-up after the sale³.

Clients need the market value because their accounts measure derivatives at fair value. The net receivables and payables arising from derivative transactions go on the balance sheet at fair value, and the valuation difference is in principle recognized in profit or loss for the period⁴. The accounting guidance says a price obtained from the financial institution on the other side of the trade can also be used in measuring fair value, after certain checks⁵.

What the reported value means and how it differs from the termination payment

In accounting, fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants on the measurement date⁶. When there is a bid price and an ask price, the appropriate price between them is used. As a practical expedient, the midpoint between the bid and ask prices, among others, may also be used⁷.

A termination payment is the amount the parties actually pay or receive when they end a trade before maturity through early termination. In the supervisory guidelines for major banks, market value information and the termination payment amount are separate items, and both are to be provided¹. The termination payment is not necessarily the same amount as the reported market value. The market value is calculated ignoring transaction costs⁸, and an actual termination may add costs and other amounts on top of the market value. How the amount is set on termination and the rules for explaining it are covered in Early Termination.

Consider a fictional example of Company R, which fixes the rate on its loan with an interest rate swap. Company R has borrowed 2 billion yen at a floating rate (a benchmark rate plus a spread) and has entered into an interest rate swap with a financial institution, with a notional amount of 2 billion yen and a term of 5 years. Company R pays a fixed rate of 0.8% and receives a floating rate based on the same benchmark as its loan. Suppose the market value report for the fiscal year-end shows one of the following two values.

The value of a derivative transaction is the net value of the rights and obligations under the contract. If the net amount is positive, it is a financial asset (a net receivable); if negative, a financial liability (a net payable)⁹. In Company R's example, a positive value means that, measured in the market on the fiscal year-end, the value of Company R's right (receiving the floating rate) exceeds the value of its obligation (paying the fixed rate). A negative value means the opposite.

Whether the value is positive or negative, Company R still uses the floating rate it receives on the swap to pay the interest on its loan and pays a fixed 0.8%. So if it keeps both until maturity, its interest rate, excluding the loan's spread, stays at 0.8%. How to calculate a swap's market value is covered in Valuing an Interest Rate Swap. Combining a loan with a swap is one example of hedging.

How and when values are reported

Some market value reports are provided at the client's request, some are provided periodically under the law, and some answer a request from the client's auditor.

Figure description

The figure shows two routes by which valuations or gains and losses reach Company R from the financial institution, and one route by which they reach Company R's auditor. When Company R asks the financial institution, the financial institution gives Company R a report on request (the dotted lines all show the flow of information, and no money or assets move). The financial institution also issues a trade balance report to Company R. However, this is the route for the case where Company R is not a professional investor. If Company R is a professional investor, the report in principle does not apply. The auditor sends the financial institution a confirmation request letter issued in Company R's name, and the financial institution returns the reply to the balance confirmation directly to the auditor. In the figure, "Institution" is the financial institution, "Report" is the report on request, "Trade balance" is the trade balance report, and "Reply" is the reply to the balance confirmation.

A financial instruments business operator, etc. must provide the client with the information set by Cabinet Office Order when, for example, a financial instruments transaction contract is concluded¹⁰. Financial instruments business operators, etc. include not only financial instruments business operators but also banks and other financial institutions registered to conduct transactions such as interest rate and currency derivatives (registered financial institutions)¹¹. The trade balance report is one of the documents issued under this rule. The report is generally issued for periods of three months or less, and if the client asks, the report is issued each time there is a trade or a delivery¹². The items to be stated include the details of unsettled derivative transactions and the valuation gains and losses as of the last day of the period¹³. If the client is a professional investor, this rule in principle does not apply¹⁴.

In an audit confirmation, the auditor receives the reply directly from the financial institution, so it is strong evidence. According to the notice from the Japanese Institute of Certified Public Accountants (amended October 2022), confirmation requests to banks pile up around the closing season, so auditors may send request letters leaving ample time for replies. Financial institutions would like a schedule of usually about 10 bank business days from sending the balance confirmation to collecting it¹⁵.

Items listed in the sample balance confirmation form

The relevant parts of the supervisory guidelines do not specify the items to include in a market value report on request. The sample form of the bank balance confirmation that the Japanese Institute of Certified Public Accountants publishes for audits (the "balance confirmation" below) gives an example of such items. The balance confirmation is a different document from a trade confirmation. Like a market value report, a reply to a balance confirmation request shows the value of ongoing trades at a point in time.

The section on OTC derivatives lists the following items for each type of transaction, and every type has a column for the market value on the confirmation date¹⁶.

In the sample form, buy or sell and receive or pay are filled in from the bank's side¹⁷. When the client reconciles the form against its own books, it first makes sure both values are seen from the same side and then compares them.

How clients use the value in accounting and audits

A client cannot necessarily use the market value it receives from a financial institution in its accounts as it is. A quoted price obtained from a third party, such as the financial institution on the other side of the trade, a broker or a data vendor, may be used in measuring fair value if the client judges that it was measured in line with the accounting standard⁵. As examples of procedures for that judgment, the accounting guidance lists comparing the third party's price with an estimate the client calculates itself, comparing it with prices from other third parties, and checking how the third party measured it (the inputs and the valuation method)¹⁸.

Where the reported value appears in the client's financial statements depends on the client's accounting treatment. In principle, the valuation difference is recognized in profit or loss for the period⁴. Under hedge accounting, the principle is to defer the gains, losses or valuation differences on the hedging instrument in net assets until the gains or losses on the hedged item are recognized¹⁹. There is a special treatment for interest rate swaps used to change the interest terms of a loan. Suppose the swap meets the requirements for hedge accounting, and its notional amount, interest payment terms and contract period are almost the same as the loan's. Then the swap need not be measured at fair value, and the net amount paid or received can be added to or subtracted from the interest on the loan²⁰.

What happens when the market value moves sharply

When the market value moves sharply, the financial institution still answers client questions as part of its follow-up after the contract. The timing for providing market value information is "periodically or as needed at any time", and no threshold is given for how far the market value must move before the client is told¹.

Notes

1. Financial Services Agency, "主要行等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Major Banks, etc.) (October 2026), III-3-3-1-2(2)①イ.h (pages 219–220) (in Japanese; quoted wording translated from the Japanese). ↩ ↩² ↩³

2. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.) (October 2026), IV-3-3-2(6)⑥ (page 166) (in Japanese). ↩

3. Financial Services Agency, "デリバティブ商品を契約するときのポイント" (Points to check when entering into a derivative product, in Japanese), back page, "販売後のフォローアップ" (Follow-up after the sale). ↩

4. Accounting Standards Board of Japan, ASBJ Statement No. 10, "金融商品に関する会計基準" (Accounting Standard for Financial Instruments, in Japanese), paragraph 25 (version updated July 17, 2026). ↩ ↩²

5. Accounting Standards Board of Japan, ASBJ Guidance No. 31, "時価の算定に関する会計基準の適用指針" (Implementation Guidance on Accounting Standard for Fair Value Measurement, in Japanese), paragraph 18 (page 7). ↩ ↩²

6. Accounting Standards Board of Japan, ASBJ Statement No. 30, "時価の算定に関する会計基準" (Accounting Standard for Fair Value Measurement, in Japanese) (issued July 2019; version reflecting amendments up to July 1, 2024), paragraph 5 (page 4). ↩

7. Accounting Standards Board of Japan, ASBJ Guidance No. 31, "時価の算定に関する会計基準の適用指針" (Implementation Guidance on Accounting Standard for Fair Value Measurement, in Japanese) (revised June 2021; version reflecting amendments up to July 1, 2024), paragraph 9 (page 5). ↩

8. Society of Actuaries, "Interest Rate Swaps" (May 2017), section 6 "Market Value" (page 15), main text. It describes the market value as the value "ignoring transaction costs." ↩

9. Accounting Standards Board of Japan, ASBJ Statement No. 10, "金融商品に関する会計基準" (Accounting Standard for Financial Instruments, in Japanese), paragraphs 4 and 5, and paragraph 52 of the basis for conclusions. ↩

10. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 37-4. ↩

11. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 34 (definition of financial instruments business operators, etc.) and Article 33-2, item 3 (registration of financial institutions). ↩

12. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 98, item 3. If there has been no trade or delivery for a year and there is a balance of money or securities, the reporting period can be one year, among other options (sub-item (b) of the same item). ↩

13. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 108, paragraph 1, item 6. ↩

14. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 45, item 2. Cases specified by Cabinet Office Order are excluded (proviso to the same article). ↩

15. 日本公認会計士協会 (Japanese Institute of Certified Public Accountants), 監査・保証基準委員会, "監査基準報告書505周知文書第４号 銀行等取引残高確認書に係る周知文書" (Notice on bank balance confirmations, our translation) (revised October 2022), "１．はじめに" (Introduction) and "２．銀行等取引残高確認書に関する回答期間の確保" (Securing time for replies to bank balance confirmations) (page 1) (in Japanese). ↩

16. 日本公認会計士協会 (Japanese Institute of Certified Public Accountants), 監査・保証基準委員会, "監査基準報告書505実務ガイダンス第１号 銀行等取引残高確認書及び証券取引残高確認書の様式に係る実務ガイダンス" (Practical guidance on the forms of bank balance confirmations and securities balance confirmations, our translation) (last revised October 2022), paragraph 3(13) (page 2) (in Japanese). ↩

17. The same practical guidance, paragraph 6 (page 2), and Appendix 1 "銀行等取引残高確認書の様式例" (Sample form of the bank balance confirmation): the request letter, "ご記入上の注意" (Notes on filling in the form), and "13．デリバティブ取引の契約額等" (13. Contract amounts of derivative transactions, etc.) (pages 5–13) (in Japanese). ↩ ↩² ↩³

18. Accounting Standards Board of Japan, ASBJ Guidance No. 31, "時価の算定に関する会計基準の適用指針" (Implementation Guidance on Accounting Standard for Fair Value Measurement, in Japanese), paragraph 43 (page 21). ↩

19. Accounting Standards Board of Japan, ASBJ Statement No. 10, "金融商品に関する会計基準" (Accounting Standard for Financial Instruments, in Japanese), paragraph 32. ↩

20. Accounting Standards Board of Japan, ASBJ Statement No. 10, "金融商品に関する会計基準" (Accounting Standard for Financial Instruments, in Japanese), Note 14, "金利スワップについて" (Interest rate swaps). ↩