The new hot thing: CVA trading

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Counterparty valuation adjustment (CVA) desks are nothing new. Most major US banks have had them for a while. However, thanks to Basel III capital rules related to CVA, the area is becoming substantially more popular.

For anyone unfamiliar with the concept, CVA desks are an internal function which aggregates counterparty risks across the bank. Having centralised this risk, they then hedge against it, typically through the purchase of related CDSs. Hence, in June, Alphaville pointed out that CVA desks accounted for a large proportion of trading in the sovereign CDS market.

Under Basel III, banks will have to put aside increased capital to cover counterparty default risk. Dirk Hoffman-Becking, senior analyst at Bernstein Research, estimates that without any offsetting actions by the bank, CVAs would create an additional €944bn in capital requirements.

Banks are therefore keen to bring on experienced CVA staff who can help mitigate the risk.

"There will be a lot of hiring in this area next year," says Simeon Ramsden, a consultant at Nicholas Scott Executive Search. "It's become a much more high profile area. All the US banks have CVA desks and the European banks are increasingly following in their footsteps."

Although CVA trading is fundamentally an internal function, Ramsden says it's seen as a front office position. "CVA traders come from areas like structured credit trading and exotics trading.

"P&L is based on exposure to risk," adds Ramsden. "Some of the top CVA traders are making a lot of money and doing incredibly well. There's a severe shortage of them."