Jamie Cawley, ceo of IDX Capital, answers SCI's questions

Jamie Cawley

I established a voice-broking operation in New York called Axiom, which I ran until 2005. At that time, I believed that technology could be leveraged to deliver live execution prices to the inter-dealer community, thereby reducing costs and enhancing transparency. The aim was to also clean up the settlement process.

However, there was a strategic difference of opinion at Axiom and so I went on to found IDX Capital. We built a live execution platform and deployed it to the New York market.

Q: What is your strategy?
A: CDS trading is a sales-driven business and so we set out to anticipate client needs both on a day-to-day basis as well as at an operational level. The business has taken off - we've had a record first quarter, where volumes went through the roof. This is evidence of having a clear plan in an unclear environment, as well as aligning ourselves with our customers' needs.

We also developed a consortium called V10, which was designed to create a dialogue with dealers around the issue of straight-through processing and potentially creating a jointly-owned broker-dealer. But, given the timing, the discussions went sideways.

Q: How do you differentiate yourself from your competitors?
A: We differentiate ourselves by only focusing on CDS. We occasionally execute cash corporate bonds as a service for customers looking to put on basis trades to profit from market dislocation.

We have been offered opportunities in equities, convertible bonds and corporate bonds, but we passed for strategic reasons - namely, that these asset classes tend not to be revenue-growth businesses and so could dilute our revenues. While the free cashflow and diversification potential of these other asset classes can be seductive, we don't want to lose focus.

Q: Which challenges/opportunities does the current financial environment bring to your business and how do you intend to manage them?
A: As a marketplace, credit derivatives have grown exponentially both in volume and diversification over the past few years, notwithstanding the challenges of 2008-2009. We expect the business to continue growing, while perhaps not in the same trajectory, by at least 20%-30% compound growth over the next two years. Although our current focus is on servicing clients in New York, we have plans to eventually establish a business in London as well.

The challenge for us is to endure the current volatile environment. We lost five customers last year and the risk profiles of the remainder have changed significantly.

Having said that, we added three new clients at the end of March. So it will be interesting to see how our client base evolves going forward.

Q: What major developments do you need/expect from the market in the future?
A: The big question is: what will 'credit derivatives 2.0' look like? Ultimately, I expect the market to be broader, deeper and less levered. We believe in simple precepts, including transparency and fair dealing, and anonymous execution at low cost.

Increased transparency and regulation is a good development for the CDS market. It has been shown to operate neither efficiently nor rationally by the excesses of the last few years. If measured and well thought-out, regulation has significant benefits in terms of levelling the playing field and creating 'one price for all'.

The initial response from the industry to criticism following Lehman Brother's default was counterproductive - it only served to bring about the ire of the general public. In hindsight, there should have been a more proactive dialogue with governments and regulators about recognising the fact that systemic risk can pose threats to the broader financial markets and the economy, as well as the need to mitigate counterparty risk. By embracing change, Wall Street can help mould the final outcome.

It is challenging for governments to balance systemic risk and moral hazard, however - it requires long-term solutions. One solution is, of course, to create CDS central counterparties.

It would have been difficult to create a CDS CCP four or five years ago because the appropriate market data wasn't available. There is no reason why such data can't come from ECNs, for example, as well as dealers and the buy-side in the future - providing it is broad-based and statistically sound.

About IDX Capital
IDX Capital is a fast-growing inter-dealer broker of credit default swaps operating in the OTC market and catering to the world's premier financial institutions. IDX currently services the New York marketplace, with plans to expand into the European and Asian markets. IDX is licensed by the FINRA through its subsidiary to act as an agent - matching market dealers in the wholesale market - for a fee.

CS