EUA – The Wall Street Journal – 29/05/2009
SAO PAULO (Dow Jones)–Seeking to avoid a repeat of the currency derivatives debacle that rocked Brazilian markets last year, regulators are demanding companies detail the risks they run in over-the-counter contracts.
Brazil’s main clearinghouse for financial instruments, known as Cetip, now requires companies and banks to detail exposure involved in derivative contracts. Automated registration means each company’s exposure can be quickly obtained, Jorge Sant’Anna, Cetip’s participant relations director, told Dow Jones Newswires.
“Last year, people were talking about (foreign exchange) derivatives as Brazil’s subprime. That was ridiculous, but the new system will more clearly show each company’s exposure, reducing uncertainty,” said the executive, whose institution registers all over-the-counter operations in Brazil.
Brazilian banks were not exposed to U.S. subprime credit and the local financial system is weathering the global financial crisis better than most. But investors were put on edge in September after a series of large Brazilian exporters announced heavy losses on currency-related clauses on export financing contracts when the dollar strengthened dramatically against the real and other currencies the world over.
The Brazilian real nose-dived from BRL1.56 to the dollar at the start of August to BRL2.52 in early December amid the international meltdown. This caused local cellulose company Aracruz (ARA) to lose over $2 billion while meatpacker Sadia (SDA) lost 650 million Brazilian reals ($322 million) on ostensibly normal export finance contracts, which contained disastrously heavily bet on the real continuing its five-year tear.
The news of the foreign exchange losses at these and other companies led to wild speculation about how many companies had lost how much on similar contracts.
That’s because there was no register that tabulated the potential losses implied in such contracts.
In the event, only a few large companies were exposed and confidence in Brazilian stocks returned. But investors had to wait for earnings releases to be sure that companies hadn’t made bad bets.
A recent history of economic instability and high inflation prompted Brazil to create a highly regulated financial system in the 1990s, a time when self-regulation was de rigeur abroad.
As a result, while it was unclear how many toxic assets or exposure to derivative contracts each U.S. bank had, Brazilian banks, funds and companies were obliged to register all financial contracts at Cetip or with the local bourse, the BM&FBovespa.
Indeed, the new over-the-counter market rules proposed by U.S. Treasury Secretary Timothy Geithner are similar to those already in existence in Brazil, notes Sant’Anna.
However, previously Cetip had no database for the details of these contracts. As a result, a seemingly innocuous $100 million dollar futures contract could actually involve exposure of up to $2.4 billion without anybody knowing, he said.
He explained that Cetip is implementing a system that contains much greater detail of the risk involved in contracts in an automated system that will allow regulators to see the potential exposure of each company and bank.
“We were already implementing this system before and the crisis underlined the importance of this measure,” he said.
Under the new system, investors would have been much more confident that foreign exchange exposure was limited, Sant’Anna says. However, the new rules do not offer absolute transparency as Brazilian companies do not have to register agreements abroad.
All Sadia’s derivatives exposure was taken out abroad and not registered at Cetip, while only 40% of Aracruz’s exposure was registered in Brazil.
But the global tendency for increased regulation may mean that it gets a little easier to detect when executives take risky financial bets that can ruin companies, he added. Both Sadia and Aracruz were forced to join forces with local rivals as a result of the crippling derivatives debts.
According to Sant’Anna, Brazilian exporters have now largely unwound their short dollar positions and are simply hedging export contracts.
“Previously, we had exporters with foreign exchange exposure that represented 15 times export contracts. Now it is rare to find exposure beyond 1.5 times,” he said.
Meanwhile, with the recovery of the real in recent months, companies have seen their foreign exchange exposure on preexisting contracts fall dramatically, said Sant’Anna.
The Brazilian real has recovered since December to BRL2.02 in early trade Thursday.
By Alastair Stewart
