Every December, staff at Lehman Brothers produce a list showing all the new derivatives products they have created that year. However, as Andrew Morton, head of European fixed income, thinks about the 2006 list, he has spotted a striking trend.

"Every year there are more and more new products launched - the innovation cycle is speeding up," according to Mr Morton, who says that this year's offerings from Lehman includes items such as property derivatives, or new complex credit instruments.

This pattern is being repeated across the City and Wall Street. For, as recent data on derivatives from the Bank for International Settlement show, although the sector barely existed three decades ago, it is now mushrooming at an extraordinary rate.

Not only are banks writing more of these contracts, but the products are becoming ever more complex as banks compete furiously with each other to offer innovative new ideas and schemes.

In the eyes of many investment bankers, this is a wonderful thing, accounting for an increasingly large slice of banks' revenues. Consequently, in this year's bonus bonanza, some of the biggest pay-outs will go to the eggheads inventing new derivatives - or developing brilliant strategies to trade them.

For observers outside the banking industry, however, the explosion of derivatives is more of a mixed blessing. On the one hand, derivatives are giving investors more choice about how they manage risk.

However, it is a moot point whether investors can always manage these new "choices" wisely, given that history is littered with cases where investors have used derivatives to place bets that have subsequently gone wrong.

Moreover, what worries some observers is that the derivatives sector is very opaque, since much of it occurs "over-the-counter" (OTC) or in private deals between banks.

That creates challenges for regulators since they cannot control this OTC world.

There are several reasons for the rapid growth in derivatives. One is that the global economy has recently experienced a bout of consistently very low interest rates.

That has made it hard for banks or sophisticated investors to earn good returns by investing in mainstream products. It forces them to find clever ways to slice and dice risk, via derivatives, instead.

A second related factor is that the collapse in returns is prompting more mainstream investors to enter the derivatives world for the first time. This includes pension funds, that have traditionally been nervous of using these instruments, but are being pushed into their use by pressure from their clients - and competitors.

Technology is the third reason behind the growth in derivatives. The spread of computer-based finance - or "cyber money" as some bankers call it - has made innovation easier.

"Most of the innovation these days is driven by a desire to meet client demand," echoes Mr Morton of Lehmans, whose mathematics mirrors that of many in the field.