The outstanding contribution award: R. Martin Chavez
The skillset and experience of Marty Chavez is superlative—few can boast the same degree of commercial and technological savoir-faire that has brought such success to a wide array of businesses across all asset classes and functions
“There are very few people who have the combination of skills that Marty has,” notes Richard Prager, head of global trading at BlackRock in New York. “He has a commercial mind-set, a technology orientation, an ability to digest the changes in regulation, in addition to having tremendous interpersonal skills.”
In a career that has spanned more than twenty years in financial services, Chavez has been at the forefront of developments in financial risk-management solutions, as well as becoming a beacon of greater market safety and soundness in his role as a board director at the International Swaps and Derivatives Association. In two stints at Goldman Sachs, he has led its equities franchise and securities strategists, among other areas, before becoming the firm’s Chief Information Officer in September 2013.
He is the very essence of what is required from a modern CIO. Very few people come away from a meeting with a corporation’s CIO in awe of their interpersonal abilities, deep-rooted knowledge of market drivers as well as a far-reaching technological proficiency.
The Marty Chavez effect is perhaps therefore best summed up by Eric Litvack, head of regulatory strategy at Société Générale in Paris: “The terrible thing about Marty is that not only is he effortlessly brilliant, he's also impossible to dislike: frighteningly clever, and infectiously good-humoured.”
Chavez has consistently achieved success in financial markets despite never harbouring aspirations to pursue a career in the industry—he is at heart a computer scientist. It was Armen Avanessians, currently head of the quantitative investment group at Goldman Sachs Asset Management, who successfully hired Chavez in 1993 after instructing a headhunter to compile a list of entrepreneurs in Silicon Valley with PhDs in maths, physics or computer science. At the time, Chavez was co-founder and chief technology officer of Quorum Software Systems, but found himself lured to the glamour of the east coast to work for Goldman’s J. Aron Currency and Commodities Division.
“I think it was an interesting example of me being in the right place at the right time and I just happened to have the right preparation, although I didn’t really know what I was preparing for,” said Chavez. “So I went out to New York, and I did the interviews and quizzes. I knew nothing about Wall Street and what I knew was common knowledge. I had heard of mergers and acquisitions, but currencies and commodities, what has that got to do with anything?”
He started out at Goldman Sachs in the J. Aron Currency and Commodities Division as an energy strategist, initially working in a team that was developing a risk-management platform for its foreign exchange sales and trading business. The project—Securities Database or SecDB—was created before Java and required a distributed, transactionally protected, object-oriented risk database, which Goldman built from scratch in C.
On the commodities desk, Chavez and his colleagues were able to judge the risk of an inventory position through SecDB when it was facilitating a risk transfer for its clients. It meant the firm was always aware of the potential losses from an inventory position.
“That was the core mission of SecDB. At the beginning of the day, we would have reports on how much money we would make or lose subject to the price and volatility movements,” said Chavez. “What we didn’t know was what those price and volatility movements would be, but, at the end of the day those movements would be historical fact. Then we would slide those movements back into our original equations and we would get the P&L and then we would revaluate our positions so that we would have no mismatches. That is something that we did a very solid job of very early on.”
As SecDB was being developed, some of Chavez’ colleagues at Goldman Sachs were emerging as future leaders of the firm, most notably current chairman and CEO Lloyd Blankfein, president and COO Gary Cohn, and CFO Harvey Schwartz. All progressed higher, as did SecDB with Chavez working to extend variations of the platform to other businesses within the firm.
“The aim was to put all of the risk of the firm in one platform, not in 68 randomly different platforms, which could happen because one business wasn’t talking to another business, or you had an acquisition and people couldn’t be bothered to integrate the systems,” said Chavez. “That approach served us incredibly well, and as Lloyd, Gary, Harvey and others moved up the firm, they would want to see the same reports they had in their previous business.”
In 1997, he left Goldman Sachs to move to Credit Suisse Financial Products as global head of energy derivatives. Chavez’ stint at Credit Suisse lasted two years. “It was a great learning experience for me—but I regretted every single day leaving Goldman Sachs.”
Leaving Credit Suisse opened the opportunity for Chavez to use his technological expertise and test his commercial acumen with the launch of Kiodex, a web-based commodity risk platform that delivered risk reports to clients. It was also another example of Chavez being a step ahead with a software platform that would lead to strategic advantages for its clients—previously at Quorum, Chavez’ idea was to run Macintosh software on computers that had a UNIX operating system, ten years before Apple made the same move.
Co-running Kiodex exposed Chavez to the pressures of running a business outside of a large institution, notably in how to deploy capital from investors, and in best practices for sales and project management. Despite launching Kiodex one month before the bursting of the dotcom bubble in 2000, the company grew and was sold to SunGard in 2004.
“I learnt a lot about sales discipline and project discipline—there was no tolerance for error,” said Chavez. “We couldn’t be over budget or a few months late on our software releases because we didn’t have that much runway, we were always looking at bankruptcy and had to turn the corner to cash flow profitability. That was a fantastic experience, but it was intense.”
The launch of Kiodex was not only unique in that it provided clients with an independent source of commodity forward curves and volatility surfaces, among other services, but also served as a springboard for many of its employees to develop their own careers further, much like the effect Goldman Sachs has had on Chavez. Kiodex’ leadership team included Tom Farley, now COO of NYSE, Raj Mahajan, the current CEO at Allston Holdings, and Sean Maloney, who moved into politics to become a US Congressman.
After the sale of Kiodex to SunGard, Chavez chose a life of retirement in Fire Island, NY, which was cut short after a call from Gary Cohn. When Chavez had left Goldman for Credit Suisse in 1997, Cohn had asked Chavez to make the first call when he had changed his mind about leaving Goldman and wanted to re-join the firm.
“Unfortunately for me, when I knew I made the wrong decision, pride kept me from calling Gary and asking for my job back,” said Chavez. “After I sold Kiodex, he called me up and said, ‘I heard you sold your company, congratulations. I heard you retired, that’s ridiculous. You’re coming back to Goldman Sachs.’ My retirement lasted three months and I re-joined Goldman Sachs in January 2005.”
He turned down the opportunity of going back into Goldman’s commodity business after citing burnout from the asset class, and instead accepted Cohn’s invitation to move into banking and apply his quantitative commodities experience as a managing director in the Investment Banking Division. The invitation from Cohn paid off, as Chavez, under Harvey Schwartz’ direction, contributed to the transformation of the firm’s share buyback business, which had been established in 1999.
Previously, the share buyback business was not a focus for many firms—a sellside firm would receive half a penny a share, while clients would pay half a penny a share. Goldman Sachs, like others, moved to replicate commodity prepaid forward deals in reverse to make the share buyback product more attractive to both sellside firms and their clients.
“So, in commodity prepaid forwards, we would pay money up front to an oil producer, and then they would pay us monthly over a fixed time period the average price of West Texas Intermediate crude oil over the month, multiplied by the fixed notional barrel quantity,” said Chavez. “So Harvey said, ‘why couldn’t we turn that around: A client delivers us cash upfront, we deliver them some shares, and then we observe their stock price averaging over a period of time and we make an adjustment delivery of shares at the end?’”
Before the Goldman team could perfect this innovative solution, now known as the Accelerated Share Repurchase (ASR), they needed to solve for all the applicable accounting and securities regulations. There were also questions as to how the firm would delta-hedge the product.
“We worked with our clients as well as with colleagues across the firm—bankers, traders, strategists, legal, accounting, tax, compliance, and over a period of time solved those problems. It created a whole new business line that didn’t exist before and I attribute the positive outcome entirely to Gary, Harvey and others, who saw that the equities market might benefit from quantitative strategies developed in the commodities world,” said Chavez. “This is now an important business for the Street and it’s a business that our clients appreciate because instead of paying a commission they actually get their shares back at a discount to the volume-weighted average price.”
Following on from the success in helping to develop the share buyback business, Chavez was promoted to global co-head of securities division strategists, where he branched out into new areas including interest rate derivatives, credit derivatives and structured products.
Prior to being named global co-chief operating officer of the equities franchise, Chavez was invited to become Goldman Sachs’ representative on the ISDA board. He joined during a period when some politicians and regulators were pointing to derivatives as either causes or symptoms of the global financial crisis. Nevertheless, it provided Chavez with an opportunity to advocate standards in the derivatives market from the perspective of a computer scientist.
“If I look back on what I’ve been able to contribute thorough ISDA, it’s changing the way we think of ourselves in the industry, away from complexity and toward standardization. Complexity, to me, was just an incidental characteristic of the business,” said Chavez. “What has always been fundamental, essential and permanent about this business is that we are transferring risk from people who don’t want it to people who are prepared to accept it. We are creating risk positions for people who want that risk position and don’t have it. If there is demand for some customization, whether it’s a master agreement or credit support annex, then let’s have the customisation, otherwise let’s not.”
One area where he was heavily involved in at ISDA was the publication of the 2013 Standard Credit Support Annex (SCSA), which standardized market practices in collateral management for bilateral derivatives. It removed embedded optionality in the custom annexes, and promoted the adoption of overnight indexed swap discounting, among other areas. Chavez, who also worked in promoting greater regulatory coordination among derivatives regulators, was succeeded on the ISDA board earlier this month by Jon Hall, who then served as head of Goldman Sachs’ North American Interest Rate Products Trading and is now an advisory director to the firm.
“As we look at all the regulatory changes over the last several years that have been driven in large part by clearing, execution and electronic platforms, he’s been an advocate of that and has been actively involved in the derivatives industry in developing some of the key building blocks of the future,” said Robert Pickel, CEO of ISDA, on the contribution Chavez has made to the association. “As we look back, drawing on his interests, capabilities and experience, Marty has been a leader within Goldman Sachs and within the industry in anticipating how technology will change the derivatives business.”
Moving forward as Goldman Sachs’ new CIO, Chavez has been tasked with leading the firm’s Technology Division while also holding joint responsibility with divisional leadership for the firm’s global strategists. He aims to reconfigure all of the engineering at the firm to fit a pattern where the engineers are part of, and understand, the business.
“Engineering has become so much more important than it ever was. Once upon a time I would have done anything to get into the business,” noted Chavez. “Now it seems to me that the whole world has really moved in my direction and I don’t have to be in the closet about being an engineering geek. So we will be busy reconfiguring our business to provide platforms internally and externally.”