Corporate issuers have substantially increased their use of derivatives during the past decade, according to a new report published today by Standard & Poor’s Ratings Services.

Derivatives in use range from the relatively generic instruments – such as interest-rate swaps and foreign exchange forward contracts – to more exotic instruments, such as credit default swaps or weather derivatives, as well as derivatives with a leverage factor. Although predominantly used for risk management practices, derivatives may also be used in conjunction with an issuer’s trading activities. In addition, derivative transactions occasionally are entered into for purely speculative or arbitrage purposes.

“The increasing use of derivative instruments, coupled with the complex nature of the instruments themselves–many of which have yet to be tested under real severe stress conditions–and the relatively opaque accounting and disclosures for derivatives and financial instruments, mandate a closer scrutiny of this area in our ratings process,” said Neri Bukspan, managing director and chief accountant at Standard & Poor’s, in a release.

Derivatives used by corporate issuers can increase or decrease their credit risk profile–they can be an effective tool in mitigating many risks, while potentially also introducing other risks, S&P added. Further, issuers may well face large risks as a result of not using derivatives at all.

Standard & Poor’s has developed a framework to facilitate the assessment of derivative usage by corporate issuers globally. This framework, which gradually will be phased in over the next several months, is intended to identify those issuers with derivative usage (or non-usage) and related risk management practices that warrant further consideration in the ratings process.

“Given that the assessment process is segmented based on industry and region, it also provides a better perspective from which to analyze how issuers within each segment manage financial and operational risks through the use of derivative instruments, and why,” said Jonathan Nus, a director at Standard & Poor’s.