Nov. 17 (Bloomberg) -- The use of derivatives grew at the fastest pace in eight years during the first half of 2006, boosting earnings at securities firms and reducing costs for investors.

The face value of derivatives based on corporate bonds, currencies, interest rates, commodities and stocks jumped 24 percent to $370 trillion, according to the Bank for International Settlements. It was the biggest percentage rise since the bank began keeping records in 1998.

Trading in credit-default swaps, the fastest-growing derivatives market, helped spur record earnings for banks including New York-based Morgan Stanley and Goldman Sachs Group Inc. At London-based Barclays Capital derivatives accounted for more than 60 percent of revenue and profit, Chief Executive Officer Bob Diamond said in May.

``The pace of growth is going to have continued unabated in the second half of the year,'' said Kit Juckes, head of fixed-income research in London at Royal Bank of Scotland Group Plc.

The amount of outstanding credit-default swap contracts jumped to $20.3 trillion from $13.9 trillion at the end of last year, the Basel, Switzerland-based bank said on its Web site today. The securities are financial instruments based on bonds and loans that are used to bet on an increase or decrease in indebtedness.

Investors who buy the contracts are paid the face value of the underlying debt in exchange for the defaulted notes should the company fail to adhere to debt agreements. A decline in the cost of the contracts indicates an improvement in the perception of credit quality; an increase signals deterioration.

Contracts Cheaper

Banks and hedge funds say it's cheaper and easier to use the contracts than buying or selling the underlying securities. Derivatives based on the debt of more than 3,000 companies are actively traded, according to Markit, a London-based provider of prices. Estimates on the size of the market are based on the assets underlying the contracts.

Within the credit derivatives market, trading on indexes based on groups of companies soared as much as 86 percent, the report said.

``Greater standardization, deeper liquidity and more efficient pricing'' is helping to boost trading, said Sunil Hirani, chief executive officer of New York-based Creditex Group Inc., one of the brokers that matches buyers and sellers in the market. ``The number of participants will continue to grow.''

Greenspan Comments

Alan Greenspan, the former chairman of the Federal Reserve, has been saying since 2002 that derivatives reduce risks by making financial markets resilient to shocks. In May he told a Bond Market Association gathering in New York that derivatives are the most significant change on Wall Street ``in decades.''

The rapid growth of derivatives is also raising concerns that their ease of use may lead to market abuse such as insider trading related to leveraged buyouts, after unusual price changes occurred prior to the announcement of takeovers in the U.S.

Derivatives are financial obligations derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

Trading in derivatives overall grew 24 percent in the first six months, compared with 5 percent in the second half of 2005, the BIS said.

Interest-rate swaps, which make up 70 percent of the derivatives market, rose the most in Europe, growing 27 percent in the first half compared with 18 percent in the U.S., the report said.

The BIS, formed in 1930, monitors financial markets and regulates banks. The bank polled 62 institutions for its semiannual report.

T*

The outstanding amounts of derivatives (All numbers in $trillion).

End-June 2005 End-Dec 2005 End-June 2006

Interest rates 204.7 211.97 262.3

Credit 10.2 13.9 20.3

Equity 4.5 5.7 6.7

Commodities 2.9 5.4 6.4

Foreign Exchange 31 31.3 38.1

Unallocated 27.9 29.1 36

To contact the reporter on this story: Hamish Risk in London hrisk@bloomberg.net.

Last Updated: November 17, 2006 11:37 EST