them they must be aware of their pluses and their perils, Bermuda Commercial Bank's managing director said yesterday.

"Derivatives are here to stay and if used properly can be extremely useful.

They can also be very risky,'' said Ms Audette Exel, pointing to the bankruptcy of Orange County which resulted from derivative speculation in connection with interest rates.

"Bermuda's banks deal with derivatives every day, especially through custodial management,'' she told a group of about 100 at a Chartered Institute of Banker luncheon.

Banks deal with derivatives by taking principle positions to hedge risk, taking positions on behalf of clients or giving advice to clients and most importantly as custodians.

"We should never be fooled into believing that using a hedge fund is not using a derivative,'' she said.

A derivative, used primarily when people hedge their position, is a generic term for a financial instrument that derives its value from another asset.

They can be very difficult to value.

Warrants, futures, options, and swaps, fall under the derivative banner. Ms Exel said she found derivatives to be an interesting part of the review of the Bermuda Commercial Bank's risk profile.

"It is very important that the industry regulate itself to assure regulators do not do it for us. Many are waiting to see if regulations are the result of Orange County's (collapse).

"Banks have already agreed to self-regulation with the 10 percent risk ratio agreement,'' said Bermuda Monetary Authority general manager Mr. Malcolm Williams.

The ratio is a voluntary one between banks' capital and assets.

"We encourage self regulation within the stock exchange, in the trust companies, and similarly with the banks. The ten percent risk ratio has a restraining effect, it is a good effect and I am satisfied with the system Bermuda has,'' he said.