The ISDA Common Domain Model (CDM) is a common digital representation of derivatives trade events and actions, which aims to improve the way derivatives are managed, from trade to processing while also establishing a standard foundation for the application of newer technologies such as distributed ledger or blockchain. In a DerivSource Q&A, Ian Sloyan, director of market infrastructure and technology at ISDA, and Leo Labeis, co-founder and CEO REGnosys, outline the benefits and challenges of the new CDM model. Listen to the related podcast here to via iTunes.
Q: For thosenot familiar with the ISDA CDM, can you give us a brief overview of the model and how it came to be?
Ian: About 18 months ago, ISDA’s members came together through our market infrastructure and technology oversight committee and asked ISDA to look at the landscape of the post-trade life cycle and the challenges that firms are facing there. Many different technologies were being used, and the previous years of meeting regulatory requirements meant that a lot of processes had been introduced to the derivatives market, which weren’t necessarily there before. Through that, each firm had its own systems and its own unique way of representing trades and the processes.
At the same time, a lot of new blockchain and distributed ledger technology (DLT) firms, as well as cloud computing and artificial intelligence (AI) firms, were coming to ISDA saying they could provide solutions to the derivatives market to make it more efficient. ISDA has been setting standards in legal documentation for nearly 40 years, as well as providing a digital representation of those documents through Financial products Markup Language (FpML). We started to think about what ISDA should be doing to meet these challenges for our firms and to make sure the opportunity represented by the new technologies was brought to fruition.
We set out to develop a new standard for derivatives processing and data, the Common Domain Model or CDM. The CDM is essentially a digital representation of the derivative products, as well as the processes that occur throughout the life of those products. In the typical life cycle, a trade gets created, there’s a notional amount that might get increased or decreased, it might get novated to another party for risk reasons or moved to clearing, or there might be portfolio compression activity. All those common processes should be represented in the CDM. The goal is to be able to publish a standard for how these types of events are represented, which can then be picked up by the whole market.
Q: REGnosys was appointed earlier in 2018 to develop the digital version of the ISDA CDM. Where is the development of this digital version now?
Leo: Practically speaking, the CDM is a software, which is provided by REGnosys via a portal called Rosetta. There are over a hundred users and new versions of the CDM which are being tested and released on a weekly basis.
The initial scope was fixed income derivatives, namely credit and interest rate derivatives, which has now been delivered with respect to individual transaction elements. Further deliverables include adding new asset classes and also incorporating portfolio considerations and the management of the life cycle.
Ian: We used an agile approach, asking members to review the work that has been done and give guidance about what might need to change on a weekly basis. This has been very fruitful and has produced a rapid development so far. We hope that continues into the other asset classes and the other business processes we want to model.
Q: In your view, what is the biggest benefit to market participants using the model?
Ian: Derivatives market participants have an opportunity to drastically reduce cost and improve the efficiency of all their back-office processing. We also want to be able to create standards to support innovation and promote the adoption of new technologies. ISDA standards have essentially allowed the derivatives market to go from one-to-one transactions to much more standardization. At a high level, we are aiming for a golden source of trade data, creating an environment for innovation in financial markets.
Beyond that, the CDM can also lead to better regulatory oversight. If the industry has a standard way of creating the trades and managing the trades, we can share that transparently with regulators, we can meet regulatory requirements in that same language, and they can write the rules and write implementations or regulatory rules in the CDM. Rather than writing very prescriptive rules, such as MiFID or EMIR in Europe, Dodd-Frank in the US, and the similar regulations in Japan and Hong Kong and Singapore, all those reporting requirements could have been done in a much more collaborative way with the industry if we had had a common way to talk about the data and the processes.
Q: What about the application of the model to smart contracts or distributed ledger?
Ian: The CDM is a standard that would allow those technologies to interoperate with the incumbent technologies. A number of DLT firms have become ISDA members over the last year and are actively seeking to implement those processes on the blockchain.
Leo: REGnosys has a number of ongoing engagements with dealers to use our CDM-based regulatory reporting solutions, including one to scale production across their portfolio. That regulatory use case sits firmly in the operational efficiency and operational risk-reduction bucket and is exactly what the CDM is for. It is a digital standard on top of which products, applications, and services can be built. Thanks to a shared standard, these solutions can achieve far greater interoperability, operational efficiency, and cost reduction than the point solutions that are implemented in silos.
CDM is an instrument that sits alongside the strategy for data management and processed transformation. We discover new uses through continuous feedback from our clients. For example, we have requests about applying CDM to inter-entity trades for recovery and resolution planning.
Q: How can market participants go about adopting the model, and what challenges might they face in doing so?
Ian: We are working with the central infrastructures in the market, as well as the members, to see what they need to do to adopt the CDM. The big infrastructures for derivatives, such as the Trade Information Warehouse at DTCC, tend to use FPML, so the difference in language and standards isn’t that great. We want to bring those central infrastructures along with us and show them it is not a big challenge.
Likewise, large software vendors that create solutions for derivatives markets are also considering how they could adopt the CDM as libraries to build new derivative systems and applications. The distributed ledger or Blockchain community, and the broader fintech community, want to use the CDM to build solutions for the derivatives market.
“There is also a strong case for extending the CDM to cover collateral management processing beyond derivatives. In light of the upcoming Securities Financing Transactions Regulation (SFTR), there are elements of collateral management that you can reuse when you look at other asset classes such as securities financing.” Leo Labels, REGnosys.
Q: How will accessibility of the portal evolve?
Leo: The Rosetta portal, which is where the CDM can be accessed, features many tools, such as visualizations that are designed to facilitate usage and adoption. Most importantly, the portal is free. It is available for use currently to ISDA members, but soon to all market participants. We are effectively on the path to providing an open-access to the CDM and to the portal itself.
Because the CDM is expressed into executable code, it means IT developers can use it straight away as part of their technology stack. They don’t need to write their own code derived from the CDM. Several projects are currently underway to deliver new market infrastructure implementations, providing benefits to the industry as a whole. REGnosys provides a CDM tool kit, such as ingestion, translation services, which enables firms to connect the CDM with existing systems on day one.
Q: With the digital framework established, what’s next for the ISDA CDM?
Ian: Equity swaps is an area our members are keen that we address. That’s happening in the first quarter of 2019. Another area is collateral processing for derivatives. The challenge of exchanging collateral for derivatives portfolios is keenly felt by ISDA members.
To do that, we need to model the credit support annexes that will be used for the exchange of initial margin under the new margin rules. We’re trying to help the market standardize that approach, and so we’ll build a collateral data model, and they’ll build common processes that happen in collateral with the exchange of collateral next.
Leo: There is also a strong case for extending the CDM to cover collateral management processing beyond derivatives. In light of the upcoming Securities Financing Transactions Regulation (SFTR), there are elements of collateral management that you can reuse when you look at other asset classes such as securities financing.
Ian: Longer-term, we want to hear from people who might have an application for the CDM, so we can tailor the model to meet those real-world requirements. If people have a pilot or proof of concept or a full-scale implementation they’re working on with regards to derivatives where this model could be useful, we want to hear from them.