Mexico to Require Companies to Detail Derivative Bets
By William Freebairn
Dec. 2 (Bloomberg) — Mexico’s securities regulator will force companies to provide a more detailed explanation of their derivative holdings, mirroring a move by Brazil, after wrong-way bets triggered more than $3 billion in losses.
Companies will be required to report a list of derivatives they own, their purpose and their value under two scenarios at the end of each quarter, Guillermo Babatz, president of the Mexico’s National Banking and Securities Commission, said in an interview in Mexico City. Babatz said the agency may charge two companies, which he did not identify, for violating rules on disclosure and accounting for derivatives.
Mexican companies recorded losses last quarter as bets on gains in the peso and energy prices soured when the global financial crisis deepened in September. Bad derivative bets also spurred tighter rules in Brazil, where regulators are requiring greater details on the contracts following more than 5 billion reais ($2.08 billion) in losses.
“The increasing complexity of structured products and derivatives offered in today’s financial markets are now testing authorities’ abilities to respond worldwide,” Babatz said during at a conference on corporate governance sponsored by the Organization for Economic Cooperation and Development.
Form Required
Mexican companies must file the derivatives disclosure forms for the third quarter by the end of this month, Babatz said after addressing the conference. The forms will be required in all future quarters.
Under previous rules, companies only disclosed the overall effect of derivatives on their profit and balance sheet and any “relevant events” that could affect their shares.
Derivatives are financial contracts that allow investors to hedge against, or speculate on, price swings in an underlying asset, such as a stock or currency. Some Mexican companies used the contracts to bet on gains in the peso just before the currency fell 28 percent from a six-year high on Aug. 4.
Mexico’s third-largest supermarket chain, Controladora Comercial Mexicana SAB, sought bankruptcy protection and disclosed more than $1 billion in derivatives liabilities tied to the declining peso. Gruma SAB, Mexico’s biggest maker of corn flour for tortillas, said in October it had derivatives tied to the currency with a negative value of more than $788 million.
“Our recent experience with financial derivatives has shown how damaging inadequate disclosure of operations with these instruments can be for a firm,” Babatz said.
Investigating Disclosures
Babatz said in October that an investigation into whether companies properly disclosed and accounted for their investments in financial derivatives would be done by the end of November. The commission is preparing to sanction some companies, which have the right to respond, he said today.
Brazil’s regulators required companies to estimate the impact of derivatives on earnings based on three risk scenarios in the third quarter. These rules will be enforced from now on, said Suzana Ferreira Liskauskas, a press official at Comissao de Valores Mobiliarios, the Rio de Janeiro-based agency in charge of regulating Brazilian markets.
Brazilian pulpmaker Aracruz Celulose SA said it will lose $2.13 billion to unwind derivatives. Sadia SA, a Brazilian food producer, fired Chief Financial Officer Adriano Lima Ferreira after the company reported 1.21 billion reais in financial expenses, mostly from currency derivatives and other wrong-way investments.
To contact the reporters on this story: William Freebairn in Mexico City at wfreebairn@bloomberg.net.
Last Updated: December 2, 2008 16:25 EST