Nov. 12 (Bloomberg) -- The global market for derivatives traded outside exchanges grew 20 percent to a record $170 trillion in the first half of the year, led by contracts pegged to interest rates, the Bank for International Settlements said.

The market for derivatives, contracts based on underlying assets, is more than five times as big as global gross domestic product for 2002 as measured by the World Bank. Of the world's largest 500 companies, 92 percent use derivatives to insure against moves in borrowing costs, currencies or commodities, according to the International Swaps and Derivatives Association.

Interest-rate contracts grew 20 percent to $121.8 trillion from January to June, the BIS said. Derivatives based on currencies grew 20 percent.

``The interest-rate market will continue to grow,'' said Raphael Geys, UBS AG's London-based head of European fixed-income distribution, in an interview. ``Every corporate, government and asset manager should be looking at using interest-rate derivatives for proper risk management purposes.'' UBS ranked top in Risk magazine's 2003 survey of derivatives users.

Derivatives let holders bet on or guard against gains or declines in an underlying asset without having to own the asset. They can be tied to things ranging from gold to cocoa, with most based on interest rates and currencies. Swaps, agreements to exchange types of interest payments, make up the largest portion of the market.

Borrowing costs fell in the period, with the Federal Reserve cutting the benchmark U.S. interest rate to 1 percent in June, the lowest since 1958. Currencies also moved, with the euro rising 9.3 percent against the dollar.

`Vigorous Growth'

The figures ``point to continued vigorous growth in interest- rate swap contracts in the first half,'' the Basel, Switzerland- based BIS said in its twice-yearly derivatives report today. ``The strong growth in the market was visible in all market risk categories except gold.''

The BIS measures the contracts by notional amount -- the value of the underlying assets -- and not the money at risk. Gross market value, the market cost of all derivatives contracts, grew 24 percent to $7.9 trillion, the BIS said.

The over-the-counter derivatives market involves privately negotiated contracts between securities firms. Contracts done through exchanges, such as Frankfurt-based Eurex and the Chicago Mercantile Exchange, have standard sizes and maturities.

`Boom Times'

J.P. Morgan Chase & Co., the world's largest user of derivatives and the second-biggest U.S. bank, had derivatives with a face value of $33.1 trillion on June. 30, according to the U.S. government's Office of the Comptroller of the Currency. The total compares with $14.2 trillion at Bank of America Corp. and $12.8 trillion at Citigroup Inc.

The notional value of gold derivatives fell 4 percent and gross market value dropped 22 percent in the period.

``The gold price was on a dramatic rollercoaster ride through the first half of 2003,'' the report said. There was ``continual and extensive producer de-hedging. With extremely low interest rates, producers earn less on proceeds of forward sales of gold.''

After taking into account netting agreements, where banks offset their trades with one another, the amount at risk from counterparties defaulting on their derivatives contracts was $1.75 trillion at the end of the first half, the BIS said.

Among other trends, the BIS noticed there were ``boom times for the exchanges.'' Business on derivatives exchanges rose 61 percent in the period, the BIS said.

The Bank for International Settlements, formed in 1930, is used as a bank by central banks. It tracks financial markets, compiles and monitors securities figures, and regulates banks. The BIS currently has 55 member central banks.

Last Updated: November 12, 2003 05:28 EST