OTC Derivative — Subsequent Mark-to-Market Gain

💡 Accountant's Note

After inception, derivatives are marked-to-market at every reporting date with changes through P&L (unless designated as a hedging instrument under ASC 815 / IFRS 9). For the interest rate swap dealer: if SOFR rises after entering a pay-fixed / receive-SOFR swap, the swap moves in-the-money (the dealer is receiving more variable cash than paying fixed) — the FV increases, creating an asset. The gain is recognized immediately in 'Net trading revenues' on the income statement. The MTM of a large derivatives book (a major bank may have $100T+ in notional derivatives outstanding) creates enormous balance sheet gross-ups — offset by CSA collateral (variation margin) which reduces the net exposure. Post-Dodd-Frank: cleared swaps receive variation margin in cash daily (effectively daily settlement — similar to futures), dramatically reducing outstanding derivative asset/liability gross balances.