The worldwide use of interest rate swaps, currency swaps, and related derivatives surged in the first half of 1994 despite the rate hikes that began last February.

The notional principal amount of the contracts outstanding rose nearly 45% during the first half of last year, to $4.2 trillion, according to a semiannual survey by the International Swaps and Derivatives Association.

According to chairman Gay H. Evans, the continued growth in privately negotiated swaps deals "underscores ever wider recognition that they offer a more cost-effective way to better manage risk."

In its semiannual market survey of privately negotiated swaps and related derivatives transactions, the association found that interest rate swaps continued to form the bulk of all swaps transactions.

U.S. dollar-denominated transactions were again the most prevalent, accounting for more than $1 trillion during the first half of the year, an increase of 40.8%. Dollar transactions account for more than one-third of the currency swaps market. Japanese yen transactions rose 31.2% to $592 billion. French franc transactions reached $457 billion, up 58.3%.

Privately negotiated swaps and other derivatives transactions are bilateral agreements under which two parties agree to exchange cash flows. Exchange-traded futures and options are not part of the ISDA survey.

New interest rate swaps written during the first six months of 1994 increased 46.9% to $3.2 trillion in notional principal. Currency swap volume rose 30.8% in the period to $181 billion, ISDA said.

Notional principal is the base amount against which cash flows between swap contract counterparties are calculated. It does not indicate the market value or credit risk of the transactions.

The association pointed out that credit risk for portfolios of privately negotiated swaps contracts typically amount to between 1% and 2% of the notional amount.

The survey found that the number of interest rate swap contracts written during the first half of 1994 totaled 86,414, a 27% increase from the same period a year earlier. New currency swap contracts totaled 5,648, up 16%.

Jeffrey R. Larsen, a managing director of Chemical Banking Corp. and the chairman of ISDA's market survey committee, said the growth in the derivatives market is a testament to the legal controls imposed on the market.

"The extent of the market's growth in the first half of 1994 in some measure reflected international recognition of the legal enforceability of netting," said Mr. Larsen.

He said that a study last year by the General Accounting Office, which found that the risk exposure from many derivatives transactions is significantly smaller than that from other activities performed by financial institutions, proves his point.

The survey also found that caps, collars, floors, and swaptions combined amounted to $850.2 billion during the first half of 1994, an increase of 40% from the same period a year earlier.

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