How to set volume for PC -> Icon HDP -> Swan M200MKIII setup?

I would suggest controlling the volume at the hdp but as long as either the hdp or the speakers are at maximum volume it shouldn't matter.

I would also suggest that if you find that setup to bright you use the eq in foobar to reduce the highs. 

Also the nuforce hdp is a fairly bright source and the speakers are fairly bright so I am not surprised that they are fatiguing.

If you still do not like that setup after attempting to eq it I suggest you sell the speakers and replace them with either some headphones or possibly a different set of speakers + an amplifier.

I may be way off here, but the reason you’re finding your new setup to be too bright may be that you’re used to the (very likely) boosted bass from the 2.1 Logitech setup. You’re missing that, plus now you’re also getting to hear clearer, more detailed highs which may make them seem more pronounced. The end result is sound that you may perceive as too bright, even though it’s simply more accurate. At least that was the case with me when I initially went from a similar 2.1 setup to something with a more accurate frequency response. If you can rule out problems with your hardware/software, you might just want to give yourself time to get used to your new setup. Again, I may be way off. The fact that you find the sound outright fatiguing (paired with your doubts about distortion) makes me wonder what else could be going on.

I haven’t listened to the Icon HDP, but I do own a pair of the M200MkIII’s, and they don’t sound harsh or overly bright at all (on the contrary, I find them to have a full-bodied sound). I do have them paired with the uDac-2, which is said to be on the warm side, but regardless, I’ve noticed several comments about the speakers themselves being on the warm side. That makes me think that you can probably rule them out as the cause of the harshness you’re hearing.

In my computer set-up, the one thing that makes things sound harsh and seem distorted is disabling wasapi output, but you have that covered (edit: actually, this happened in Windows XP  if I didn't bypass KMixer; I haven't tested DS output in Vista).  I’m assuming you have the bass and treble controls on the speakers set at 12 o’clock, right?