JV: I started my career as a quantitative research analyst for RBS in 2001 at the start of the structured credit expansion which peaked just before the stock market crash in the US. I was involved in modelling various complex credit products. After two years I decided to trade equities. I had the opportunity and found it was a good idea to start trading those products, being an expert on the quantitative side. I traded there for about two years before joining Societe Generale to do the same thing but on a slightly bigger scale. I became an expert in exotic products just as the market was brewing up nicely. I traded exotic credit until the end of 2012 and I managed the exotic desk from the beginning of 2009. I was co-heading in 2008 before and during the crash. That was an interesting time. At the end of 2012, I was given the opportunity to setup CVA activity and AV activity at Societe Generale and we launched in 2013. I needed a change. Not that exotic credit wasn’t interesting but I’d been there and done that and I needed a new challenge.
What we like to do is to narrow options down to find products that are acceptable in terms of risk. It’s really a question of measuring your portfolio against certain products.
HoT: Could you tell me a little bit about the trading philosophy and strategies for the CVA products and the AV products at Societe Generale?
JV: CVA products are very complex. There is an extremely complex modelling process that involves the modelling of risk over a very long period of time. Normally trading involves being an expert in a specific asset class whereas CVA trading involves most, but not all, asset classes. Also, it’s mostly dominated by the effects of interest rate products.
Risk needs to be measured over a very long period of time. Most of the products, on the structured side tend to be five years, maybe sometimes ten years. On the CVA desk you get involved with a lot of risk over thirty years or even longer. Complexity-wise, it’s probably the most complex product that can be modelled. That in itself is a challenge. In practice, because the field of CVA trading is very different from general trading both on the flow side and the structured side, it’s not directly client facing, which is a big difference.
We’re here to manage the risk of the group, not to make profit, the purpose of the CVA desk is to correctly price complex risk and to risk manage on a safe basis. We don’t necessarily get involved in new products so much. We’re not supposed to do any directional trading for making money in itself. The new regulation makes that very clear.
In terms of strategies, we try to stay reasonably simple because the books are very complicated. We are risk managing, so what we don’t want to do is to create a monster to hedge a monster. Take, for example, the London whale, that was a typical example of unbounded complexity, something that was simple and reasonably well-understood to start with that became inexplicable and incomprehensible.
In terms of strategies, we try to stay reasonably simple because the books are very complicated. We are risk managing, so what we don’t want to do is to create a monster to hedge a monster.
From a group aspect we must make sure that the CVA traders have very clear limits and have a mandate to trade only specific products that are necessary and important for CVA hedging. We wouldn’t choose any exotic products to hedge CVA. Even if it’s a better match, one would need to consider risk. It takes a lot to convince people that it’s possible to trade complicated products to hedge CVA.
What we like to do is to narrow options down to find products that are acceptable in terms of risk. It’s really a question of measuring your portfolio against certain products. These are quite specific to different institutions. We have specific risk here. Some of the banks have a very different portfolio profile. It’s not one rule for all. Some desks use vanilla products, swaps, options, FX, market forwards, credit default swaps. Certainly you wouldn’t trade any collateralized products. Ten years ago, some people did hedge using CDOs. But not today. It’s not right to use complex credit products to hedge a vanilla portfolio of credit risk. You don’t want to make it too complicated to manage costs.
How much input do you have and what criteria do you use in choosing the trading platforms, clearing platforms and other technology for the firm?
JV: I have very minimal input as far as trading platforms are concerned as the CVA desk trades internally. In terms of clearing platforms, we have a reasonably unusual setup here. I work closely with the person in charge of clearing and clearing house risk. It’s not part of the CVA desk. Risk management is a specific monitoring activity of clearing so opening new relationships with clearing houses etc. is done by a separate team. It’s not that we don’t look at it at all; our role is important but not the main driver. We do have a very big say in the IT structure for CVA, which is very challenging. The IT infrastructure around the measurement of the portfolio of the group such as credit risk monitoring used to be the risk department’s sole responsibility but that is now shared.
Risk management is a specific monitoring activity of clearing so opening new relationships with clearing houses etc. is done by a separate team. It’s not that we don’t look at it at all; our role is important but not the main driver.
HoT: What impact, if any, are new regulations having on your day-to-day activities as a head of CVA trading?
JV: New regulations cause many difficulties for the fixed-income business, but they are very good for CVA traders. They make us very important. That is to say that the CVA desk becomes more generalised and more central in the pricing and capital management and overall business selection. A fixed-income business is all about profitability. They can make money but how much balance sheet do they use? Is that really profitable for the group in the long-term? Who is measuring this profitability? Vanilla products that used to be simple buy or sell products on the OTC market have now become a lot more complex. It’s the same product but the regulations mean they need assistance from an expert team. That’s the CVA team.