Mexican regulator investigates corporates’ derivatives disclosures

After several Mexican corporates reported millions of dollars of mark-to-market losses on foreign exchange derivatives, the Mexican banking and securities regulator has launched an investigation into their disclosures about derivatives positions.

The losses sparked anger from shareholders who felt they were not sufficiently informed of the derivatives positions these companies took. As a result, the regulator, Comisión Nacional Bancaria y de Valores (CNBV), is inspecting the disclosure of derivatives positions by two listed companies. It will question whether the information provided to investors was detailed and accurate enough.

“We hope to be able to conclude the investigations within the following weeks, and depending on our findings, we can apply administrative fines to the companies as well as to the relevant officials in each of these companies,” said Miguel Garza, vice-president for commercial banking supervision and international affairs at CNBV in Mexico City. “Based on the results, we will determine whether additional regulation is needed or not, but I would say it is too early for the moment to make a call on this issue.”

Garza declined to name the two companies under investigation.

The Mexican central bank's governor, Guillermo Ortiz, has criticised investment banks for selling Mexican companies overly complex derivatives products unsuitable for their businesses. However, the current investigation will not cover mis-selling, or whether companies aggressively used derivatives for speculative purposes.

“We are not investigating banks over legal issues around the sale of these foreign exchange derivatives. These derivatives were created in normal conditions, and just because they have faced losses it does not mean they are necessarily illegal,” said Garza.

While a variety of forex derivatives positions would have been hit by the volatility in exchange rates, dealers say a number of Mexican companies were eager to employ cost-reduction strategies that incorporate a view on market direction. This would mean companies took on riskier derivatives believing that exchange rates would remain stable.

Problems started for the Mexican companies with the sharp depreciation of the Mexican peso against the dollar in early October, which caused massive changes in the value of companies’ forex derivatives. The currency plunged 18.4% from 10.9855 pesos to the dollar at the start of October to 13.0099 on October 8. As of October 23, it was trading at 13.669.

On October 9, San Pedro-based cement producer Cemex revealed a mark-to-market loss of $500 million on its derivatives portfolio. A day later, Monterrey-headquartered Vitro, a glass manufacturer, reported the mark-to-market value of its derivatives positions as of October 9 at negative $227 million.

One of the worst affected was the supermarket chain operator Controladora Comercial Mexicana. The company filed for bankruptcy on October 9, losses on its derivatives positions contributed greatly to its collapse. Of the company’s $2 billion in liabilities, $1.39 billion related to derivatives positions and associated collateral.

• This investigation and the types of derivatives the companies used are explored in more depth in the November edition of Risk, published next week.

See also: Japanese ban naked shorts despite liquidity fears
US Treasury considering allowing insurers, auto-makers to access Tarp