Brazil Changes Rules for Hedge Operations Abroad

Hedge funds from BrazilBrazil’s National Monetary Council has just announced that as of March 15, all hedge operations undertaken by Brazilian businesses abroad will have to be registered in Brazil. The head of the Norms Department at the Central Bank, Sergio Odilon dos Anjos, explains that the objective is to make the derivative market more transparent.

Derivatives are defined as investments that are supposed to provide protection against losses. On the other hand, it must be remembered that Warren Buffet famously attacked all derivatives, calling them “… time bombs, both for the parties that deal in them and the economic system.”

In 2008, some large Brazilian exporters, such as Sadia and Aracruz Celulose, lost billions with derivative investments. The companies were engaging in a common and often necessary practice: trying to avoid losses from exchange rate variations or, in other words, hedging foreign-currency risk.

This was being done through investments in exchange rate derivatives. However, there are two ways to deal with derivatives. You can use them to protect gains and keep business operations balanced or you can speculate in derivatives, trying to obtain financial gains from them.

It is now pretty clear that some people in  financial departments were speculating. That can be extremely dangerous with derivatives because when the markets go the wrong way (against your bets) your losses do not just increase – they explode. In the case of Sadia and Aracruz, all bets were on a continued valorization of the real, but in September 2008 the dollar suddenly rose sharply in value.

“One of the consequences of the recent international financial crisis is a movement toward more transparency. This new rule is a tool we can use to oversee the derivatives market as a whole. It does not prohibit anything. There is no bias in favor of or against anything. It is simply a transparency measure,” declared Odilon.

So, the new rule’s mechanism is that operations carried out by companies will now be registered by banks because they control exchange contracts. Actually, this latest rule is just one in a series.

Brazilian authorities already required the registration of funds obtained abroad through derivative instruments. And last month, the Monetary Council made it mandatory for branches of Brazilian banks operating outside the country to report derivative operations even if the money does not enter Brazil.

As most of the rest of the world debates the pros and cons of tighter controls on financial activities (at Davos, for example), Brazil moves ahead in favor of very tight controls. The future will show who got it right. 

ABr

Tags:

You May Also Like

Ex-Im Bank Guarantees Loans to US Firms Selling to Brazil’s Petrobras

The Export-Import Bank of the United States (Ex-Im Bank) has approved a US$ 39 ...

Brazil: Celso Adolfo Sings His Homeland

Celso Adolfo, mineiro to the core, never exchanged his home state for life in ...

Fresh Icons

Thanks to the lowest common denominator factor even the less gifted new Brazilian idols ...

Portugal, a Brazil Colony

Wandering around the streets of Lisbon, you will eventually bump into a Brazilian. It ...

All You Learned in School about Brazil Is Actually (Gasp!) True

I’ve been thinking about my Brazilian experience a lot lately because for two months I’ve ...

American Hughes Brings Satellite Broadband to 800 Schools in Brazil

U.S.-based Hughes Network Systems announced that it has started the rollout of it HughesNet ...

Continental Adds a Nonstop Flight Between Houston and Rio, Brazil

US-based Continental Airlines will start December 17 a new nonstop seasonal service between its ...

São Francisco river in the Brazilian Northeast

Hundreds of Brazilian Indians and Slave Descendants Protest River Transposition

The sentence "No to the transposition of the São Francisco river, the solution is ...

Brazil Believed to Be Bluffing About Its Nuclear Capacity

Experts in atomic energy are skeptical that Brazil has the cutting-edge nuclear technology as ...

Brasil Telecom Gets Half a Million DSL Clients in Brazil

Brasil Telecom S.A. announced that the company ended 2004 with 535,500 customers for its ...