The swap is the oldest tool in the structuring toolkit. For four decades it has let one party receive the economic return of an asset it does not own, in exchange for paying a financing rate to a party that does. In public markets the technique is familiar and well regulated: a meaningful minority of European exchange-traded funds replicate their indices through swaps, and bank-issued structured notes have delivered swap-based exposure to private clients across Latin America for years. What is new is the arrival of the swap, at scale, in private markets, an asset class whose defining feature is that its assets do not trade.
The evidence is spread across the whole private markets chain. At the fund level, total return swaps have become a financing tool, allowing a fund to carry exposure to a portfolio of loans or fund interests on a fraction of the capital. At the bank level, synthetic risk transfer, in which banks keep loans on their books but pass the credit risk to investors through derivatives and credit-linked notes, protected around EUR 750 billion of assets across the major jurisdictions at the Basel Committee’s last count, with private credit funds among the largest buyers. At the market level, the first credit default swap index linked to business development companies was launched in April 2026, and at least one U.S. exchange-traded fund now obtains its exposure to a private credit index through a swap. And at the wrapper level, where private clients meet the asset class, structured notes, actively managed certificates and traditional exchange-traded notes use derivatives to deliver a return that the issuing bank hedges on its own balance sheet.
This paper makes four arguments. First, swaps are doing useful work in private markets: they finance portfolios, transfer risk to investors who want it and allow precision in hedging, including the currency hedging that many Latin American investors need. Second, every swap introduces a counterparty, a collateral arrangement and a valuation process, and in an asset class without observable prices those three features deserve more attention than they get. Third, the wrappers through which private clients access private markets fall into two families with very different architecture: synthetic notes, where a bank promises the return and hedges it with derivatives, and asset-backed notes, where a special purpose vehicle holds the underlying fund or portfolio and passes its performance through. Fourth, the practical question for an adviser in Miami, Mexico City or São Paulo is not whether swaps are good or bad, but what sits behind the note the client is being asked to buy.
The Swap Comes to Private Markets
A swap is a contract in which two parties exchange cash flows. In a total return swap, the version that matters most for this discussion, one party, the total return receiver, is paid the full economic performance of a reference asset: its interest or dividends, its fees and its gains or losses in value. The other party, the total return payer, receives a financing rate, usually a floating benchmark plus a spread, calculated on the notional amount of the contract. The payer typically owns the reference asset as a hedge, directly or through a vehicle set up for the purpose. The receiver owns nothing but the contract. In economic terms the receiver has bought the asset with borrowed money; in legal terms it has bought a derivative.
That distinction, between economic exposure and legal ownership, is what makes the swap so versatile, and it explains why the instrument has migrated into private markets. Private assets are hard to buy, hard to transfer and hard to finance. A loan to a mid-sized company in Monterrey or a limited partnership interest in a buyout fund cannot be bought on an exchange, cannot be lent out in a repo market and cannot be split into small pieces for distribution. A swap referencing that loan or that interest can do all three. The asset stays where it is. The exposure moves.
The consequence is that swaps now appear at four distinct points in the private markets chain. They appear inside funds, as a form of leverage. They appear between banks and investors, as a way of transferring loan risk without transferring loans. They appear in the market, as indices and hedging tools built around private credit. And they appear in the wrapper, as the mechanism by which some notes and certificates deliver a private markets return to a client’s brokerage account. Each use is legitimate. Each also changes who bears what risk, and the changes are not always visible from the product name.
How a Total Return Swap Works
The mechanics are worth setting out, because the details are where the risks live. Consider a fund that wants exposure to a portfolio of private loans worth $100 million without committing $100 million of its investors’ capital. It approaches a bank. The bank acquires the loans, or already holds them, and enters a total return swap with the fund. Under the total return leg, the bank pays the fund everything a holder of the loans would receive: the coupons, the fees and any increase in value. Under the financing leg, the fund pays the bank a floating rate plus a spread on the $100 million notional. At maturity, or on early termination, the loans are valued. If they have appreciated, the bank pays the difference to the fund. If they have fallen, the fund owes the difference to the bank.
The fund does not pay the full $100 million. It posts initial margin, a fraction of the notional whose size reflects the loan-to-value the bank is willing to extend. If the loans fall in value, the fund posts variation margin to restore the agreed ratio. Documentation follows the standard ISDA architecture: a master agreement, a schedule and a credit support annex governing collateral, with a bespoke confirmation for the transaction. Law firm Weil, Gotshal & Manges, in a 2025 primer on these structures, notes that repos are typically suited to liquid, freely transferable assets, whereas a swap, being synthetic, requires no transfer of title; the bank simply keeps the asset and passes the return along.
Three features deserve emphasis for anyone applying this to private markets. The first is valuation. In a swap on listed equities, the reference price is observable every second. In a swap on private loans or fund interests, it is not. The bank usually acts as calculation agent, with a degree of discretion over valuation inputs, and the Weil primer identifies valuation as a key source of negotiation, particularly for illiquid assets; the extent of any right to challenge a mark is itself a negotiated term. In practice this means that the party on one side of the swap also sets the price that determines margin calls on the other.
The second is information. A fund that holds a loan receives the borrower’s financial statements and votes on waivers and amendments. A fund that holds a swap on that loan may not; the Weil primer notes that information and voting rights often do not transfer fully to the swap receiver, who may request that they be exercised in a certain way. The economic owner of the risk may therefore have less insight into it than the legal owner, who has hedged it away.
The third is the gap between hedged and liquid. A bank that holds a private loan and has swapped away its return has eliminated its market risk, but it has not made the loan tradeable. If the fund on the other side defaults, if the hedge counterparty fails or if a valuation shock triggers a margin dispute, the bank is left holding an asset it cannot sell quickly. That gap is at the centre of the regulatory attention described in the next section.
Swaps in the Private Credit Machine
The clearest evidence of the swap’s arrival in private markets comes from the regulators who are trying to measure it. The Financial Stability Board’s May 2026 report on vulnerabilities in private credit describes banks as a critical node in the private credit ecosystem. Where exposures could be separately identified in supervisory data, bank lending to private credit funds was below 0.5 percent of total bank assets, but commercial data put bank credit exposure to those funds at roughly $270 billion to $500 billion, and public filings of the largest banks, cited in the report, show about $300 billion drawn and $155 billion undrawn. Subscription lines are the most common facility; net asset value facilities, secured on a fair-value estimate of fund assets, are, according to some member data, generally limited to around 30 percent loan-to-value. The FSB was blunt about the quality of its own numbers: member data were «not directly comparable across jurisdictions,» several jurisdictions relied on best-efforts collections, and the lack of harmonised private credit definitions remained a key challenge.
The U.S. Federal Reserve’s May 2026 Financial Stability Report puts the broader picture in context. Bank credit commitments to other financial entities grew to $2.6 trillion in the fourth quarter of 2025. Private equity, business development companies and other private credit vehicles were the largest category, around a quarter of all bank loan commitments to nonbank financial institutions, and commitments to that category grew 17 percent in 2025. The Office of Financial Research, in a March 2026 brief, estimated total lending exposure to private credit funds at $410 billion to $540 billion at the end of 2024, and noted that its leverage measure excluded off-balance-sheet exposures, «such as derivatives.» In other words, the official count of leverage in private credit does not yet include the swap.
The second channel is synthetic risk transfer. In an SRT, a bank keeps a portfolio of loans on its balance sheet but buys protection on the first losses, through a financial guarantee, a credit-linked note or a credit default swap, from an investor willing to bear them. The bank obtains capital relief; the investor obtains a high-yielding exposure to bank-originated credit. The Basel Committee’s February 2026 report estimated protected assets in Canada, the euro area, the United States and the United Kingdom at around EUR 750 billion, about 1.1 percent of total bank assets, with an investor base dominated by nonbank financial intermediaries including private credit funds, hedge funds, pension funds and insurers. The FSB adds that private credit funds are the main SRT buyers in Europe. The FSB also raises the question that gives supervisors pause: how far do banks lend to the very funds that buy their SRTs, creating what the report calls «circles of risks,» in which a fund’s SRT exposure becomes, through financing, a bank’s exposure again.
The third channel is the market itself. In April 2026, S&P Dow Jones Indices launched a credit default swap index referencing 25 North American financial entities, including, for the first time, business development companies, the listed and non-traded vehicles through which much of U.S. private credit is held. Several dealer banks, initially four, were reported to be preparing to make markets in it, and the index gives investors a way to hedge, or to short, a sector that had been difficult to trade. Separately, at least one U.S. exchange-traded fund launched in 2025 obtains its exposure to a private credit index through a swap and uses long and short total return swaps on bespoke corporate credit indices to hedge the credit risk of its exposure. Under SEC rules, illiquid holdings in a U.S. open-ended fund are capped at 15 percent of assets; a swap-based structure obtains its exposure without holding the illiquid asset itself.
Regulators are watching the plumbing closely. The Basel report warns that bank financing of protection providers can reduce the real amount of risk transferred and leave banks exposed to counterparty risk backed by illiquid, hard-to-value collateral; that SRT markets are opaque; and that their risk mitigants have not been tested by large-scale credit losses. The U.K. Prudential Regulation Authority, in an April 2025 letter to bank chief financial officers on financing of illiquid and structured portfolios, stated that «repackaging of illiquid assets into a tradeable format, is not, without appropriate supporting evidence,» sufficient to justify treating a position under trading book rules, and set out expectations that collateral must demonstrate secondary market liquidity and reliable valuation. In October 2026, it was widely reported that a European bank’s classification of total return swaps referencing private credit loans had drawn supervisory review; the bank said its treatment complied with accounting and capital requirements. Whatever the outcome, the episode illustrates the question that now follows the swap wherever it goes in private markets: when the reference asset does not trade, what is the derivative on it worth, and who decides?
None of this is an argument against swaps. Fund-level financing allows managers to deploy capital more efficiently; risk transfer moves credit risk from banks to investors with longer horizons and a mandate to hold it; hedging indices give the market a price for something it previously could not price. The argument is narrower. Each of these uses introduces a counterparty, a collateral arrangement and a valuation process, and in an asset class whose values are set by appraisal rather than by trading, those three features carry more weight than their public-market equivalents.
Swaps in the Wrapper: Synthetic Exposure for Private Clients
The uses described so far sit between institutions. The fourth use sits between the asset class and the private client, and it is the one that advisers in the U.S. Offshore and Latin American markets encounter most directly, because many of the products on their shelves already work this way.
Start with the swap-based exchange-traded fund, the most transparent version. A European UCITS ETF that replicates its index synthetically holds a basket of collateral securities, which need not resemble the index at all, and enters a total return swap with a bank, often the parent of the fund sponsor. The bank pays the index return; the fund pays the return on the collateral basket plus a fee. UCITS rules cap the fund’s net exposure to a bank swap counterparty at 10 percent of assets, and sponsors generally reduce it further through frequent resets, over-collateralisation and multiple counterparties. The investor owns a fund, the fund owns collateral, and a bank promises the difference. For indices that are expensive or impractical to hold physically, the arrangement works well, and the disclosure regime around it is mature.
Next, the traditional exchange-traded note. FINRA, the U.S. broker-dealer regulator, describes an ETN as a type of debt security that trades on an exchange and promises a return linked to a market index or other benchmark, with an indicative value calculated from that benchmark less fees, and with the investor bearing the risk that the issuer defaults or takes other actions that affect the note’s price. The issuer, typically a large bank, does not hold the index for the investor; it issues an unsecured promise and manages its own hedge, usually with derivatives, on its own balance sheet. The 2008 failure of a major investment bank made the consequence concrete. Its three listed ETNs, one of which tracked a private equity index, were delisted within weeks of the bankruptcy filing, holders became unsecured creditors, and a 2018 account of the aftermath, ten years on, found they had by then recovered about 44.5 percent of their allowable claims. The amounts were small. The lesson was not: with a traditional ETN, the investor’s exposure is to the issuer first and to the index second.
Latin American private clients know this structure under other names. In Brazil, the Certificado de Operações Estruturadas, or COE, is a bank-issued note that combines a fixed-income component with a derivative-based payoff, offered in capital-protected and principal-at-risk forms. B3, the Brazilian exchange, reported in March 2026 that the registered stock of COEs reached a record R$100.25 billion across roughly 427,000 contracts in February, up 12 percent on the year, and noted that a 2024 rule change added a credit-linked modality in which the payoff depends on whether a credit event occurs for a reference entity. In Mexico, banks offer notas estructuradas to private banking clients on the same principle: a bank liability whose return is defined by a derivative on an underlying. In Switzerland and Europe, actively managed certificates allow a manager’s strategy to be delivered as a bank-issued or SPV-issued security whose performance tracks a reference portfolio. All of these are swap structuring applied to distribution. The derivative is what connects the client’s return to the underlying, and the bank is what stands in between.
These structures have real advantages for the wealth channel. They produce a security with an ISIN that settles in a brokerage account, they allow precise payoffs including capital protection, they reach underlyings that are otherwise inaccessible, and in the case of currency, they allow a Brazilian or Colombian client’s exposure to a dollar-denominated private markets strategy to be hedged into local currency, a service many families value. But when the underlying is a private markets strategy rather than a public index, the features of the swap discussed in Section II return with greater force. Who values the reference portfolio, and how often? What collateral, if any, protects the note holder if the issuer fails? Is the client’s credit exposure to the bank disclosed with the same prominence as the strategy’s track record? And does the wrapper imply a liquidity that the underlying cannot provide?
The Other Architecture: Asset-Backed Notes
There is a second way to turn a private markets strategy into a security, and it does not involve a swap. Instead of a bank promising the return of an asset it holds elsewhere, a special purpose vehicle acquires the asset itself and issues notes whose payments are funded only by that asset. The architecture is that of a securitisation, and it is well established in Europe’s main issuing jurisdictions. In Ireland, for example, the vehicle is typically a designated activity company whose shares are held by a share trustee on charitable trust, so that it is insulated from the insolvency of any sponsor or shareholder. Under standard market documentation it contracts on limited-recourse and non-petition terms, so that note holders’ claims are confined to the assets backing their series and creditors cannot petition for the vehicle’s insolvency. A single vehicle can issue many series, each contractually segregated from the others, and the notes can be listed, assigned an international securities identification number and made eligible for settlement through the international central securities depositories.
Applied to private markets, the vehicle subscribes to the underlying fund, or acquires the underlying portfolio or managed account, and issues a note whose value follows the net asset value of what it holds. The note holder’s exposure runs through the vehicle to the underlying asset, not to a bank’s promise about that asset. There is no swap counterparty and no financing leg; the economic performance passes through, less the costs of the structure. Valuation is anchored to the underlying fund’s own net asset value, produced by the fund’s administrator under the fund’s own valuation policy, rather than to a calculation agent’s mark on a derivative. Subscriptions and redemptions follow the underlying fund’s own terms, so the liquidity the note offers is, by construction, the liquidity the fund offers.
Lynk Markets, a fintech infrastructure company built for private markets, works with this architecture. Its Private ETNs are issued from Ireland and settle through Euroclear and Clearstream, the settlement infrastructure that private banks and broker-dealers serving Latin American clients already use every day, and each note is designed to track the performance of the strategy or fund it holds. Lynk Markets’ infrastructure is designed to simplify access to private markets strategies and to empower the wealth managers and distributors who serve end clients, rather than to distribute directly.
It would be a mistake to read this as a claim that asset-backed notes are without risk. They are not. The vehicle has an issuer, service providers and operational processes, and advisers should understand them. The underlying asset remains illiquid, and no wrapper changes that. The point is narrower and structural: the asset-backed note and the synthetic note allocate risk differently, and the difference is invisible at the level of the product name. Both are «notes.» Both carry an ISIN. Both appear as a line in a custody statement. One is a bank’s unsecured promise, hedged with derivatives; the other is a ring-fenced claim on a specific asset held for the note holders. An adviser who cannot say which kind a client holds cannot complete a suitability assessment, however thorough the diligence on the underlying manager.
It is also worth placing the asset-backed note alongside the fund platform, since the two are the main routes by which private wealth reaches private markets. Alternative investment platforms give wealth managers access to a broad menu of funds through a single agreement, with digital subscriptions, capital call processing, consolidated reporting and education, and feeder funds have brought minimums down from several million dollars to the low hundreds of thousands. Fund structures were built for larger, more developed markets like the U.S. and Europe, and they work very well there. Many Latin American advisers and their clients operate in smaller markets, with smaller average allocations, assets held across several custodians and jurisdictions, and operating models built around securities that settle in a custody account; for some or all of a private markets allocation, a securitised note can be the more practical route. Funds and asset-backed notes are two routes to the same destination. Neither inserts a swap between the client and the underlying fund, and neither changes the nature of the underlying asset. The synthetic note is a third route, and it does.
What Changes for Advisers in Latin America and the U.S. Offshore Market
The practical consequence of all this is a due-diligence framework that treats the wrapper with the same seriousness as the underlying. Advisers in the region already run manager diligence: track record, team, strategy, fees, liquidity terms. What the arrival of the swap in private markets adds is a second layer of questions about the structure that sits between the client and the manager. Four are essential.
The first is the reference asset. What exactly does the note’s return track? A fund’s net asset value, a managed account, an index, a basket of loans, a single credit? Who produces the valuation, how often, under what policy, and does the note holder have a right to see it or to dispute it? In a private markets strategy, the answer determines everything downstream, because margin calls, redemptions and the client’s statement all flow from a number that no market produces.
The second is the counterparty. Is there a swap? If so, with whom, for what share of the exposure, and under what collateral terms? A synthetic UCITS fund’s 10 percent counterparty limit, a traditional ETN’s unsecured bank credit, a COE’s issuer risk and an SPV’s limited-recourse claim on a specific asset are four very different answers to the same question. The client’s statement will not distinguish between them. The adviser must.
The third is the vehicle. Who is the legal issuer, and what happens to the note if that issuer, or its sponsor, fails? Is the note a general obligation of a bank, or a ring-fenced claim on segregated assets? If a single vehicle issues many series, how is the segregation achieved and has it been tested? These are questions that fixed-income analysts ask of every bond. They should be asked of every note that delivers private markets exposure.
The fourth is liquidity, and specifically the gap between the liquidity the wrapper implies and the liquidity the underlying provides. A note with an ISIN that trades over the counter looks liquid in a custody account. If the underlying is a quarterly-dealing evergreen fund, the note’s real liquidity is quarterly, and a well-designed note will say so plainly. If the underlying is a swap on illiquid loans, the note’s liquidity depends on a bank’s willingness to unwind a derivative at a price it sets. The regulatory principle that repackaging an illiquid asset into a tradeable format does not, by itself, make it liquid applies to a private client’s portfolio as much as to a bank’s trading book.
There is a positive side to this framework for the region’s advisers. Latin American private clients have decades of experience with bank-issued structured notes, through COEs in Brazil, notas estructuradas in Mexico and the structured products shelves of the global private banks. They understand issuer risk, capital protection and derivative-based payoffs better than many of their counterparts elsewhere. That experience is an asset. The task is to extend it to private markets, where the underlying does not have a daily price, and to recognise that the same word, note, can describe two very different architectures. Advisers who can explain that difference to a family in Bogotá or Montevideo in plain language will be better placed to serve them.
Questions for Managers, Advisers and Family Offices
The argument of this paper reduces to a set of questions that each participant in the private markets chain can put to themselves.
For private markets managers, ask how much of the firm’s own leverage is obtained through swaps and other derivatives, whether that leverage appears in the figures reported to investors, and how the firm would meet variation margin on a portfolio whose value is set by appraisal. Ask which wrappers deliver the firm’s strategies to private clients in each market, and whether the firm knows, for each one, what sits between the client and the fund.
For private banks and broker-dealers, ask whether the product approval process distinguishes between synthetic and asset-backed notes, and whether the client-facing material does. Ask how issuer credit exposure across the structured-product shelf is aggregated and reported to clients, and whether private markets notes are included in that view. Ask whether the firm’s liquidity disclosure for each note matches the liquidity of the underlying.
For independent advisers and multi-family offices, ask whether the firm can answer the four questions in Section VI for every private markets note its clients hold: reference asset, counterparty, vehicle, liquidity. Ask whether a client who holds a COE, a structured note and a securitised fund note understands that these are three different credit exposures, and whether the firm’s reporting shows it.
For family offices, ask how the family’s private markets exposure is held: through direct commitments, funds, asset-backed notes or synthetic structures, and whether that mix reflects deliberate choice. Ask whether the family’s currency hedging on private markets positions is understood as a swap with its own counterparty and collateral, and who monitors it. Ask what the family would be left holding if the issuer of any note in the portfolio failed tomorrow.
For everyone, ask one question of every note: what is behind it?
The swap has earned its place in private markets. It finances portfolios that would otherwise sit idle, moves risk from institutions that must shed it to investors who want it, gives the market a way to price a sector it could not price, and lets a family in Lima hold a dollar strategy in soles. But it also inserts a counterparty, a collateral arrangement and a valuation process into an asset class that has none of the public-market machinery for managing them. The regulators counting bank exposures to private credit have said plainly that their leverage measures leave out off-balance-sheet exposures such as derivatives. The advisers serving private clients in Miami, Mexico City and São Paulo cannot afford the same gap. For them, the question is not whether swaps belong in private markets. It is whether they know when one is in the portfolio, and what stands behind the note that put it there.
Sources
- Financial Stability Board. «Report on Vulnerabilities in Private Credit.» May 6, 2026. https://www.fsb.org/uploads/P060526.pdf
- Board of Governors of the Federal Reserve System. «Financial Stability Report, Section 3: Leverage in the Financial Sector.» May 2026. https://www.federalreserve.gov/publications/2026-may-financial-stability-report-leverage.htm
- Berg, Ted, and Jung Hoon Lee. «Measuring Counterparty Exposures to Private Credit.» Office of Financial Research Brief 26-02, March 12, 2026. https://www.financialresearch.gov/briefs/files/OFRBrief-26-02-measuring-counterparty-exposures-private-credit.pdf
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