The Central Bank of Chile warned in May about the risks of the large positions held by AFPs (pension fund managers) in interest rate swaps, according to BioBioChile. The warning came months before criticism erupted over the multimillion-dollar losses from those bets.
According to revelations by Bloomberg, the managers pursued a "long-term strategy" that, in simple terms, sought to profit from a drop in interest rates in the United States. The result was the opposite: losses of US$7,700 million on those investments.
According to calculations by Diario Financiero, the impact on pension funds rises to US$11,600 million so far this year. In fund E alone, the system's most conservative fund, losses amount to US$1,400 million.
To understand what happened, it is first necessary to understand what a swap is. It is a type of derivative, a financial instrument whose value depends on the price of another asset, such as stocks, commodities or interest rates.
In an interest rate swap, two parties agree to exchange future payments using a fixed formula. One pays a fixed rate and the other a variable rate that moves with the market. Think of it as betting that borrowing costs will fall: if they rise, you lose.
That was what the Central Bank outlined in its Financial Stability Report (IEF) for the first half of the year, published in May. The document acknowledged that the funds' swap positions had moderated but remained high.
According to the central bank, these purchases increase the funds' exposure "to the risk of increases at the long end of the curve". In other words, if long-term rates rise, whether because of decisions by the Federal Reserve (Fed, the central bank of the United States) or because of US debt, the value of those investments falls.
The same report highlighted that the Superintendency of Pensions issued a resolution in April setting new limits on pension fund managers' exposure to these instruments. According to the Central Bank, this mitigates the risk of margin calls (margin call), when the swap counterparty demands more money to cover losses.
A box in the IEF also detailed that derivatives reporting had increased since November 2022 in the Integrated Derivatives Information System, a platform administered by the Central Bank. Banks, entities supervised by the Financial Market Commission (CMF) and those trading derivatives with foreign counterparties must report there.
The Central Bank described the greater depth of this market as "positive", because it helps manage risks, "provided that its use is subject to adequate safeguards for financial stability". The institution identified continuously reviewing this regulatory framework as an outstanding task.
