A slightly better example - if the Australian Future Fund owns $50 mill of Coke bonds, they probably need an fx swap so that every time Coke sends them some USD

A slightly better example - if the Australian Future Fund owns $50 mill of Coke bonds, they probably need an fx swap so that every time Coke sends them some USD, they can swap it into AUD and know in advance how many AUD they are going to get. If the USD got stronger against the AUD, the swap the Future Fund are in becomes a liability for them, if viewed through a "mark to market" lens. But the USD they are receiving is worth more to them, so they could increase the value of the bond holding - this would mean everything was "on balance sheet". But there is a very good argument that this "on balance sheet" method is a bad representation of the true economics of the situation. So instead, they leave the value of the Coke bond on their balance sheet at the same level, and don't record the liability of the fx swap. Clearly the use of the FX derivative reduces the volatility for the Future Fund. Note this is a somewhat contrived example, but it illustrates why off balance sheet isn't a black hole per se. At the same time, if you think through a few issues that could come up in this case, it's easy to see why it can be manipulated by bad actors, and why counter party risk is a big deal.