Derivatives activity perked up a bit over the past week in the primary and secondary markets.

In California, the Santa Clara Valley Water District included $35.6 million of derivatives on a $220 million issue of revenue bonds and certificates of participation last Wednesday.

The derivatives, in the 2015 maturity of the COP series, consisted of an equal amount of auction-set floatingrate securities and corresponding inverse floating-rate securities. Auctions will be held every 35 days, but the floaters will pay interest semi-annually.

The derivatives are insured by Financial Guaranty Insurance Co. and saved the issuer, about five basis points, an official at senior manager PaineWebber said.

The derivatives were sold unlinked. In May, PaineWebber sold $32 million of linked floaters and inverse floaters on an $87 million issue by the Chino Basin Regional Financing Authority in California.

A $342.8 million issue of tax and revenue anticipation notes from San Diego County last Thursday included $57.8 million of taxable notes with a floating rate based on the London Interbank Offered Rate. Merrill Lynch & Co., senior manager of the note deal, considered including more complicated derivatives, but market moves left the structure out of the money.

In the secondary derivatives market, Moody's Investors Service announced a slew of ratings for trust receipt structures sponsored by J.P. Morgan & Co.

Among the larger issues, Moody's gave a long-term rating of Aaa and a short-term rating of VMIG-1 to a trust consisting of a $14.9 million block of general obligation bonds issued by Tennessee. The trust, which includes a tender option remarketing agreement from Morgan Guaranty Trust Co. of New York, issued puttable tax-exempt receipts.

Moody's rated a similar trust backed by $10 million of bonds issued by the North Carolina Eastern Municipal Power Agency Aaa and a trust backed by $10.4 million of bonds issued by Memphis Aa. Moody's also rated receipts from both trusts VMIG-1.

In the municipal futures market, open interest is climbing again. In the past three weeks, open interest in the September contract has risen from 15,554 to 26,182 by the end of trading Monday. Part of the rise is attributable to investors rolling over their positions from the June contract, which expired last week.

Some investors said that they are increasing their use of the contract to weather continued volatility in the bond market.

"It gives us a viable short position that hopefully will be a truer reflection of the market than the [Treasury bond futures] contract," one mutual fund manager said.

The Treasury futures contract is considerably more liquid than the municipal contract, but does not always reflect changes in the tax-exempt market.

Open interest in the municipal contract hit an all-time record on April 6 at 37,070 contracts.

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