Brazil wants to regulate currency derivatives

Mon Oct 20, 2008 6:15pm EDT
BRASILIA, Oct 20 (Reuters) - The Brazilian government wants to tighten regulations on the country's currency derivatives market after key companies announced heavy losses in recent weeks, a senior government aide said on Monday.
"We need to create a mechanism so that these hedge operations don't turn into flame throwers," an aide of President Luiz Inacio Lula da Silva told Reuters. He asked not be named.
Brazil's currency, the real BRBY, has weakened by nearly one-third since reaching a nine-year high in early August, causing massive currency losses for pulp producer Aracruz Celulose (ARCZ6.SA: Quote, Profile, Research, Stock Buzz) (ARA.N: Quote, Profile, Research, Stock Buzz), meat processor Sadia (SDIA4.SA: Quote, Profile, Research, Stock Buzz) and industrial conglomerate Votorantim Group.
Aracruz's foreign exchange and derivatives losses totaled 2.7 billion reais ($1.27 billion) in the third quarter.
"Investment banks had been offering these derivatives a lot. A brake needs to be put on that," Lula's cabinet member said, without detailing what measures were being studied.
"We were surprised (by these operations), we and the boards of directors of these companies," he said.
The Sao Paulo stock and derivatives exchange, BM&F Bovespa (BVMF3.SA: Quote, Profile, Research, Stock Buzz), has increased deposit requirements from clients to cover losses in derivatives and securities trade, the head of the exchange told Reuters on Monday.
The total exposure of companies to foreign currency derivatives could exceed 20 billion reais, according to one estimate.
Separately, the government said on Monday that it would increase credit lines to Brazil's large farm sector by 2.5 billion reais and to the construction industry by as much as 4 billion reais.
$1=2.125 reais (Reporting by Natuza Nery; Additional reporting by Aluisio Alves and Isabel Versiani; Writing by Raymond Colitt; Editing by Leslie Adler)