How do swap mechanics actually work from trade date through final settlement?

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AcadiFi · Accepted Answer

A swap is a bilateral contract where two counterparties agree to exchange cash flow streams over a defined tenor. Consider Meridian Pacific Corp entering a 5-year $100M notional interest rate swap with Vanguard Beacon Bank on March 10, 2026. Meridian pays fixed 4.20% semi-annually (30/360) and receives SOFR + 15bp quarterly (Act/360). Key dates: trade date (March 10), effective date (March 12 after two business days), reset dates (quarterly for floating), payment dates (matching resets for floating, semi-annual for fixed), and maturity (March 12, 2031). At each reset, the floating rate is observed — say SOFR compounds to 4.35% for Q1. Meridian's receive leg: $100M × (4.35% + 0.15%) × 92/360 = $1,150,000. The fixed leg accrues $100M × 4.20% × 180/360 = $2,100,000 semi-annually. On overlapping payment dates, flows are netted — only the difference exchanges hands. This reduces settlement risk and operational friction. Notional never exchanges in a plain vanilla IRS; it's purely a reference amount. ```mermaid flowchart LR M[Meridian
Pays Fixed] -->|4.20% fixed| B[Beacon Bank] B -->|SOFR+15bp| M M -->|Net payment| C[CCP clearing] ``` Modern swaps clear through CCPs like LCH SwapClear, posting initial margin and daily variation margin based on MTM moves.

How do swap mechanics actually work from trade date through final settlement?

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