EUROPE - The Bank for International Settlements says interest-rate swaps activity surged in the first half of 2006 - with analysts putting it down to pension fund interest.

The BIS's latest study into over the counter (OTC) derivatives market activity in the first half found "growth in the market for OTC interest rate derivatives accelerated".

"Notional amounts of these instruments reached $262trn at the end of June 2006, 24% higher than six months before," says co-author of the report Christian Upper. There was a particularly high growth in euro-dominated contracts, which were concentrated in interest-rate swaps (28%) and options (29%).

"Certainly on the rates side, much of the growth has been driven by pension funds," said Alan James, Barclays Capital's head of global inflation research.

"A lot more pension funds now have the set-up themselves and ultimately it makes sense for them to be matching their liabilities with interest-rate derivatives and then looking to assign risk allocation elsewhere."

The separation of alpha and beta has encouraged much greater use by "real money" of derivatives, according to James.

However, "the growth has been more in flow than in stock and it's really the increase in stock derivatives that comes from the pension fund sector," he added.

ING derivative strategist Yiu Chung Cheung cited the flattening of the euro zone swap curve - adding that most of the "receiver demand" is coming from ALM activity.

The BIS-report also showed a slowing growth in commodity contracts.

According to Barclays' James this has to do with problems with some of the commodity markets, for instance gasoline.