When the Bank for International Settlements, the central banking group, did its last triennial survey of the global derivatives and foreign exchange world in 2004, the results shocked some.

The Basel-based group put daily global derivatives turnover at almost $6,000bn - half the size of the US economy.

Now the BIS could startle again.

Yesterday, it announced another survey of the derivatives market that it hopes to complete "before the end of 2007" and which will cover the credit derivatives world for the first time.

The results will almost certainly show that the derivatives world is continuing to explode in size and becoming a lot more complex.

The capital markets world is in the grip of an innovation wave that is leading to the creation of numerous new products, many of which barely existed when the BIS did its last review.

Terms such as LCDS (loan credit default swaps), CDOs (collateralised debt obligations), variance swaps and binary options have entered the banking lexicon, though few outside the industry understand exactly what they are.

As one senior banker recently admitted, "Almost every other week a new word pops up that I have to ask [my juniors] to explain."

Bankers say the innovations are helping investors and bolstering the resilience of markets by allowing them to tailor their risks and assets to their needs in ever more sophisticated ways.

Cynics contend that some of the new products could be introducing more risk into the system, while bolstering bankers' fees.

The pace of innovation is creating challenges for investors, companies and regulators as they try to keep up with the changes, particularly since much of the innovation is occurring away from exchanges and tends to be opaque.

"We have seen dramatic changes in the US and global financial system over the past 25 years," said Timothy Geithner, president of the New York Federal Reserve, in a speech earlier this year.

"We are now in the midst of another wave of innovation."

What is driving this surge of creativity?

Some say historically low global interest rates have forced financiers to develop more complex instruments, such as CDOs, in an effort to boost investment returns.

Another contributing factor cited by Mr Geithner and others is the increasing significance of hedge funds, which tend to be nimble, innovative and eager to make specialised investments.

Financiers have become more creative than ever in designing products tailored to specific tax, accounting and regulatory regimes.

One factor in the recent dramatic growth in credit derivatives has been a desire by banks to shift risk off their balance sheets to comply with international regulatory standards.

Similarly, an issue that is helping to drive some of the equity derivatives innovation is the growing pressure on pension funds to better match their assets with their liabilities.

Meanwhile, tax remains a perennial trigger for creativity.

At a conference in London on LCDS last week, Robert Lepone of Morgan Stanley pointed out that one attraction of this new product - which bankers are aggressively marketing to their clients - is that "in certain jurisdictions with withholding tax issues, this [LCDS product] does not attract withholding tax".

Separately, some eight centuries after European merchants first produced creative schemes to circumvent a Christian ban on usury, the Islamic financial world has become a new source of innovation.

This week Sabic became the first company in Saudi Arabia to issue a large sukuk, or Islamic bond.

Technology is also driving innovation.

Electronic finance not only integrates markets around the world, but makes it easier to construct innovative financial schemes.

"These days, most financial products are virtual products. They exist in cyberspace," says Stephen Kingsley, managing director of BearingPoint, the consultancy.

"That means that although there is a capital constraint, there is no physical constraint to what you can create."

It is enabling bankers to create tailor-made products for their clients at relatively low additional cost.

"What we are seeing is the increasing customisation of products, taking the structuring onus off the end user but putting risk into the market place," adds Mr Kingsley.

But the growing integration of global markets via electronic trading means the competitive pressures on banks are intensifying.

Unlike in other industries, such as engineering, the concept of "patents" has never existed in the financial world.

As a result, although it typically took 10-15 years for new products to spread across the market place in the 1970s, diffusion of innovation now happens "in less than five years", according to Mercer Oliver Wyman, the consultants.

A consequence is that banks will have to invent new products faster than ever in the coming years if they want to beat the competition.

However, another implication, says Nick Studer of Mercer Oliver Wyman, is that "the next wave of innovation will happen less in products and more in the way that products are delivered".

What will matter, he says, "is not just having a brilliant idea but being able to implement it".

This has already sparked a headline-grabbing battle between dealers, exchanges and other start-up groups over who will dominate the process of trading in the current years.

The innovation battleground in the capital markets world could be about to become even more complex - and creative.