BM&F CFO Says Extent of Derivatives Losses Is Unknown

By Fabio Alves and Deirdre Bolton

Oct. 28 (Bloomberg) -- Brazilian financial regulators don’t know the full extent of losses on currency derivatives owned by the country’s companies, BM&FBovespa SA Chief Financial Officer Carlos Kawall said.

“Most of the problems occurred in the over-the-counter contracts and because of lack of transparency, no one knows the size of the problem,” Kawall said at a conference in New York.

Companies ranging from pulp maker Aracruz Cellulose SA to poultry producer Sadia SA reported combined losses of more than 5 billion reais ($2.3 billion) from wrong-way bets on the Brazilian real. Former central bank governor Paulo Vieira da Cunha said Oct. 16 that total potential losses on the contracts may be as much as $28 billion, while Banco Itau Holding Financeira SA estimated the total at $10 billion last week.

The real lost 28 percent from its nine-year high against the dollar on Aug. 1, before credit writedowns spurred the collapse of financial companies worldwide and caused short-term funding to dry up.

About 80 percent of Brazil currency derivatives trade on exchanges, said Kawall, a former Treasury secretary. The problems occurred with contracts traded over the counter with banks.

“Even being a small proportion of total derivatives in Brazil, the OTC market has already shown it’s caused a lot of harm,” he said. “The exposure is not on the exchange. The exposure is with the banks.”

Jorge Sant’Anna, director at Cetip SA, the nation’s clearing house for over-the-counter contracts, wasn’t immediately available for comments, his secretary said.

More derivatives reporting rules are likely to be enacted to increase transparency, he said.

Disclosure Rules

The Comissao de Valores Mobiliarios, Brazil’s Rio de Janeiro-based securities commission, may extend a requirement that companies disclose and detail the effect of derivatives on earnings beyond the third quarter, the agency’s president, Maria Helena Santana, said at a conference on Oct. 20.

The crisis may lead the agency “to consider change in the regulatory framework to face possible failures that became evident with the passage of the hurricane.”

BM&FBovespa required more collateral for derivatives since losses began to mount, Kawall said. The exchange has currently about 120 billion reais in collateral placements.

“I don’t think there’s a systemic risk with the banks nor with the exchange,” he said. “We have no problem with settlements.”

BM&FBovespa has lost 62 percent since it began trading on Aug. 20, compared with a 40 percent drop in Brazil’s Bovespa index. The stock gained 13 percent to 4.55 reais at 5:26 p.m. New York time in Sao Paulo trading, while the Bovespa index rallied 10.5 percent to 18,632.53.

BM&F Bovespa SA was created in May when shareholders approved the merger of the derivatives and stock exchanges.

To contact the reporters on this story: Deirdre Bolton in New York at dbolton@bloomberg.net; Fabio Alves in New York at falves3@bloomberg.net.