How does a swap's mark-to-market evolve over its lifecycle and what drives MTM swings?

Question

AcadiFi · Accepted Answer

Post-inception, swap MTM = PV(receive leg) − PV(pay leg) at current market rates. For a fixed-receiver, rising rates push MTM negative; for a fixed-payer, rising rates push MTM positive.

Example: Silverbrook Industries entered a 5-year pay-fixed $75M IRS on January 15, 2026 at 4.05% when the 5Y swap rate was 4.05% (zero MTM). On April 15, 2026, with 4.75 years remaining, the 4.75Y swap rate has risen to 4.55%.

MTM to Silverbrook = Notional × (new rate − contract rate) × Annuity_4.75Y.

With annuity factor ≈ 4.21 using current discount curve:
MTM = $75M × (4.55% − 4.05%) × 4.21 = $1,578,750 positive.

Drivers of MTM:
1. Parallel curve shifts — largest contributor, captured by DV01
2. Curve steepening/flattening — non-parallel twists affecting different tenors
3. Basis spread moves (SOFR vs OIS, single-currency basis)
4. Time decay — approaching maturity reduces MTM toward zero
5. Credit valuation adjustment (CVA) changes from counterparty spread moves

```mermaid
flowchart LR
  A[t=0 MTM=0] --> B[Rates move]
  B --> C[Curve revalue]
  C --> D[New PV legs]
  D --> E[Updated MTM]
  E --> F[VM posted/received]
```

Cleared swaps post daily variation margin equal to MTM change, keeping open MTM near zero from CCP's perspective. Uncleared swaps accrue MTM under CSA, with thresholds and minimum transfer amounts determining collateral timing.

How does a swap's mark-to-market evolve over its lifecycle and what drives MTM swings?

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