Rebuilt SG London's index arbitrage

This reorganisation was a real technical challenge, in a fast evolving environment.

Background

Société Générale's FTSE Index Arbitrage activity was in turmoil at the end of 1997, the time of: 

  • The arrival of the electronic Orderbook SETS, which was impacting the arbitrage margin so significantly that the activity was considered doomed. This profound market evolution was actually amplified by the lack of robustness of the new trading servers

  • The need to transfer the city's largest cash-and-carry position ($4 billions = £ 2.5 billions) into a new legal entity to benefit from a yield enhancement opportunity, even if the new structure was legally, financially, operationally, and technically not ready for the migration

  • A disastrous and irreversible failure of the Front Office system for risk control and PL assessment - a change to the backbone database had made the system inaccurate, unreliable and even worse, unpredictable

Actions

I adopted the following pragmatic approach:

  • To maintain the arbitrage income, the failing old servers were duplicated until the newly ordered servers were delivered six months later. New trading skills were developed and new arbitrage strategies introduced

  • The transfer of the position to the new French entity was realized through intermediary companies. The overnight refinancing restrictions were compensated by financing trades, the Parisian Operations and Finance groups were assisted by the London groups and new computer links allowed the trading to take part directly in the new entity

  • The failure of the Front Office system was the hardest to compensate for. A regular check of every functionality was implemented, with a manual Excel recomputation when necessary. The second failure of the system (the loss of all treasury registries) was fully compensated in Excel as well. A new system was eventually delivered, fully checked and implemented 18 months later.

  • Trading was implemented during trading hours. Risk assessment and PL reporting was implemented at night. Staff turnover remained limited 

Results

Thanks to the improved organization and sheer hard work, the following results were achieved:

  • The arbitrage generated £ 12 Mn of profits, the equivalent of four times the PL target and five times the PL of the previous year

  • The large cash-and-carry position was managed without any risk issue, allowing the generation of an additional £10 Mn profit in yield enhancement

  • Société Générale actually gained the reputation of market leader in the field, and the Market Supervision Authorities eventually asked us to share our expertise with them. The presentation was well received, as per the enclosed London Stock Exchange acknowledgment