This is pretty technical, but in essence X owns junk bonds, so he swaps them for Treasury bonds with a promise to un-swap later. Then X has good collateral to post to buy another asset. Y owns Treasury bonds, so he swaps them for junk bonds. Then he has yield (the 10-year Treasury pays less than 2% today).
Accounting regulations allow everyone to pretend it doesn’t exist.
Trillions of dollars of such counterfeit credit are being created (inflation, by my definition: http://monetary-metals.com/inflation-an-expansion-of-counterfeit-credit/) though this does not cause in itself a change to the “money supply”.