Bob Currie reviews recent advances and developments in the ISDA common domain model project, a blueprint for how derivatives, securities lending, repo and bonds are traded and managed across the transaction lifecycle
The Common Domain Model (CDM) provides a common data representation of transaction events, offering a common template or set of fields that the industry will use to share trade information and other key data.
Since 2017, the International Swaps and Derivatives Association (ISDA) has been active in the OTC derivatives market in promoting a common digital representation of the steps, or ‘lifecycle events’, associated with a derivatives transaction.
Among multiple benefits, CDM adoption aims to reduce the burden of reconciliation and lower the risk of mismatches or settlement failure caused by inconsistency in how data fields are used. ISDA indicates that having a single digital representation of derivatives trade events and actions will boost consistency and facilitate interoperability across firms and platforms, providing a foundation onto which new technologies can be applied.
Subsequently, the International Securities Lending Association (ISLA) has been working with ISDA and the International Capital Markets Association (ICMA) to apply a CDM to securities lending transactions, and ICMA has been doing similarly for repo and bond trades. Aligned to this activity, these trade associations have been working to develop digital versions of their market standard master agreements.
A post-trade game changer
For Ishan Singh, SVP, Solutions at Axoni, the ISDA CDM is a potential game-changer for post-trade processes. CDM provides an abstracted framework that Axoni uses to model complex financial instruments, particularly OTC derivatives. As derivative contracts change state, Axoni uses CDM transformation functions to standardise those lifecycle updates (including amendments, terminations, novations and allocations). While there is an upfront investment, this approach reduces implementation time and ensures uniformity and predictability for end users.
For clients, Singh believes that a standardised data model and consistent processing across asset classes can offer other significant benefits in terms of reporting and trade reconciliation. “These advantages are enhanced further by our data platform, which delivers CDM data, from financial market infrastructures (FMIs) and industry utilities, to banks and asset managers in real time, directly to their destination database or system of choice,” he says. “This real time delivery of CDM representations of trades ensures that our clients can make informed decisions quickly and efficiently, while adhering to a market-wide standard.”
ISDA’s Global Head of Derivative Products and Infrastructure Tara Kruse suggests that the industry has hit a tipping point where a growing number of users are adopting the ISDA CDM. This is generating a network effect and encouraging more users to come on board as they recognise the benefit of adopting a standardised data model.
CDM and trade reporting
In terms of trade reporting, the CDM is a key component of ISDA’s Digital Regulatory Reporting (DRR) initiative and is being adopted as a standard for regulatory reporting in an increasing number of jurisdictions. This builds on momentum established over more than a decade, capitalising on foundations set in place from 2013 when the Commodity Futures Trading Commission (CFTC) introduced a real-time reporting obligation in accordance with the Dodd-Frank Act in the US and the broader G20 recommendations that followed the 2008 financial crisis.
This DRR project aims to deliver a standardised data model to guide trade reporting. Rather than each firm creating a regulatory reporting solution based on its own interpretation of the rules, market participants are developing an industry-led standardised interpretation of the regulation as open-source code.
In turn, DRR allows regulators to publish reporting rules as machine-executable code that can be automatically read and interpreted by the IT systems of reporting firms, thereby improving the reporting process across asset classes.
There is a significant level of translation risk to convert active regulations into technical code for compliance and this can result in a long and costly adaptation process for firms that fall into scope of these changes… We are working to mutualise this effort and to make this transition as easy as possible for affected firms.
Tara Kruse, ISDA
“There is a significant level of translation risk to convert active regulations into technical code for compliance and this can result in a long and costly adaptation process for firms that fall into scope of these changes,” says Kruse. “We are working to mutualise this effort and to make this transition as easy as possible for affected firms.”
As for collateral, ISDA has seen a growing recognition – from market participants, collateral management services and regulators – of the value of automated workflows and data standards to reduce operational, liquidity and counterparty risks. The industry association is witnessing greater interest to invest in CDM collateral solutions as part of a long-term strategy to improve efficiency and reduce the cost of transaction management.
In 2018, regulatory fintech REGnosys was selected by ISDA to help it to develop a digital version of the CDM, with the goal of delivering a common set of processes and data standards designed to increase automation and efficiency in derivatives markets.
REGnosys’ chief executive Leo Labeis observes that although CDM is one of the most promising technologies to emerge in this new era of robust post-trade processing frameworks, some critics have suggested that it has failed to fulfil its promise owing to a supposedly low adoption rate.
For Labeis, this criticism misunderstands the very purpose that the CDM was created to serve. “Rather than a solution that can be adopted for a specific problem, the CDM offers a platform on which firms can enhance the efficiency of the tools they already have,” he says. “To truly measure the success of the CDM, we must therefore look at criteria outside of ‘adoption’. This includes looking at successful solutions such as DRR, which have been developed based on the infrastructure.”
For regulatory reporting, there is no economic or competitive advantage to having “better” reporting logic, observes ISDA’s Kruse. Consequently, it makes sense to mutualise the delivery of regulatory rewrites for the benefit of the industry. “In doing so, we can implement changes centrally and push these out quickly to the market, doing so with a high level of transparency,” she says.
ISDA has a steering committee in place to guide this process and it receives regular input from industry working groups. This provides an opportunity to review and update ISDA best practice that its regulatory reporting groups have developed over time. “In preparing regulatory rewrites, this also enables us to assess what is practical and deliverable before we write the code,” she says.
CDM and collateral management
For collateral management, document digitisation expedites onboarding and interoperability and decreases operational risks. Standard collateral representation streamlines eligible collateral schedule data onboarding and collateral settlement. It improves business-as-usual data processing across collateralised products and collateral optimisation may help to reduce collateral valuation disputes.
Vermeg’s Head of Collateral Solutions Strategy Wassel Dammak indicates that Vermeg has been involved in CDM development since 2019, working closely with the team at ISDA on development of the model and its practical implementation. Specialising in the collateral management area, Vermeg recognises that by ensuring that data is standardised, this will reduce friction in downstream operational processes.
In cases where initial margin (IM) Credit Support Annexes (CSAs) are agreed on ISDA Create – ISDA’s electronic platform that enables participants to negotiate and execute derivatives contract documentation – this will enable an STP flow of these IM data elements into Colline, Vermeg’s collateral management platform.
During the onboarding process at Vermeg, data will be subject to a four-eyes or six-eyes validation process and there may be some enrichment from the JSON file imported from ISDA Create. On completing this audit process, Dammak notes that the data from the CSA will be available within minutes in Colline to be used in derivatives margining. This represents a major saving in cost and time required to onboard these data elements.
In June 2024, Vermeg and ISDA announced that Vermeg had integrated CDM into Colline to support the consumption of digitised regulatory IM CSAs – and the company expects to extend CDM integration for variation margin CSAs in coming months, along with legacy CSAs in the longer term.
Over time, the company also expects to work with ICMA on integration of CDM for digital consumption of key data from Global Master Repurchase Agreement (GMRA) contracts and with ISLA on Global Master Securities Lending Agreement (GMSLA) documentation.
Chris Rayner, Senior Associate, Market Infrastructure and Technology at ISLA, states that there has been considerable demand from members to expand the Association’s work on pre-trade processing and digitisation of legal documentation.
“In standardising the initial negotiation of the trade we have been able to reduce the probability of breaks in the post-trade lifecycle,” he says. “Similarly, in digitising our master agreement and annexes, we are facilitating the automation of resolving any break based upon the actual legal terms that bind these trades.”
According to Rayner, recent market outages have highlighted that standardisation is a key factor not only in maintaining the efficiency of the securities lending market but also in solidifying its resilience, with the standard processing, data and workflows inherent in the CDM providing a backbone that all financial products and applications can lean against.
Axoni has been involved with ISDA and the CDM since 2017. The standardised model offered by the CDM has significantly shaped how Axoni represents and processes OTC derivatives on its platform. Singh indicates that one of the unique benefits of using CDM functions is the concept of “lineage,” enabling tracking of a trade’s history, independent of common characteristics like trade identifiers or counterparties. For instance, a given trade might have lifecycle states such as “confirmed,” “terminated,” “cleared,” or “amended,” all represented by CDM functions. Axoni indicates that it has embraced this capability to provide transparency and accuracy in post-trade processes.
“Our data platform processes each lifecycle event and replicates the CDM instruction outcome and the resulting position states in an auditable sequence of updates directly to end users,” says Singh. “Not only does this data move across infrastructures in real time, but we also offer guarantees of accuracy and completeness, enabling firms to fully trust the data and build internal operational or analytical capabilities on the back of their data systems.”
FINOS repository
In May 2022, the three industry associations which have collaborated to deliver the CDM project issued a tender to meet the requirements of providing a repository for the CDM resources. The requirements included maintaining the CDM code, facilitating the growth of a community of CDM contributors, and creating governance structures which allow these contributions to be overseen by the associations.
On the basis of this request for proposal (RFP) and selection process, FINOS was appointed in September 2022 to provide this repository service, enabling users to access CDM resources as open source.
FINOS has provided a neutral space where industry experts can come together and drive the direction of the model, observes ISLA’s Rayner. Under Open Source governance, participants have an opportunity to contribute to the model with an equal voice, regardless of whether they come from a vendor startup or a tier 1 investment bank.
“At the FINOS working groups and the twice yearly Open Source in Finance Forum (OSFF) we are able to collaborate with more ISLA member and non-member firms and people we would not normally have the opportunity to engage with,” says Rayner. “Through these conversations, we have established a broader range of real-world applications for the CDM, from high impact areas like collateral optimisation to the implementation of new technology to extend the efficiency that the CDM can bring to individual institutions and the market as a whole.”
For Axoni’s Singh, making the CDM project resources broadly accessible via open source is an important step towards reducing barriers to market adoption. By opening up the CDM framework, firms of all sizes can access and implement these resources, fostering a more inclusive and innovative ecosystem. Although participant adoption is still in its nascent stages, the democratisation of access is already showing positive results, enabling firms to explore new capabilities and develop solutions more efficiently. A number of firms have become increasingly self-sufficient by utilising the open-source CDM libraries, enabling them to iterate through solutions to problems faster and with greater flexibility.
Regulatory updates
In 2021, during its fourth year of development, ISDA’s DRR project extended its focus to the CFTC Rewrite, which was introduced to update CFTC regulatory reporting rules to improve quality of reported data, to extend market transparency and to enable more effective oversight by financial regulators. REGnosys’ Labeis indicates that there were gaps in the CDM that needed to be filled before it could be “CFTC-ready”. But it had a big head-start – including a recently revamped lifecycle event model that was instrumental for trade reporting.
The past 12 months have been a busy period for regulatory adaptation – and Labeis believes DRR has been a key tool in helping firms to keep pace with this change agenda. The first regulatory update of the year was CFTC version 3.2 on 29 January 2024, which introduced a requirement for a Unique Product Identifier (UPI) and product classification system to be introduced in swap data reporting and recordkeeping.
On 1 April 2024, Japan’s Financial Service Agency (JFSA) updated its reporting regime, significantly amending derivatives reporting requirements in the Asia-Pacific region and increasing the number of firms falling into scope of this reporting regime. The EU’s EMIR Refit was enacted on 29 April 2024, increasing the number of reportable fields in the reporting template from 125 to 203.
“DRR had been in User Acceptance Testing (UAT) for EMIR Refit and JFSA since December 2023 and was production-ready by February,” explains Labeis. “Firms benefited from shared insights, thereby avoiding the need to develop their own solutions. Both regimes introduced mandatory ISO 20022 reporting, fully supported by DRR.”
In the pipeline, the UK EMIR Refit is due in September 2024, with rewrites from the Monetary Authority of Singapore (MAS) and the Australian Securities and Investments Commission (ASIC) due for October.
For ISDA, the focus for the remainder of 2024 and into 2025 will be on digital reporting and collateral eligibility. “Looking into 2025, we are working on the code for the amended rules due to come into force in Hong Kong and Canada, which are scheduled for enactment at the end of 2025, and updates to the Markets in Financial Instruments Regulation (MiFIR) in the EU and UK,” says Kruse. The CFTC has also issued a proposal to add approximately 40 additional fields to its OTC derivatives reporting framework and ISDA will monitor this development to code and integrate these changes into the DRR framework.
Overarching this work, ISDA has been focused heavily on education, working with industry groups to ensure that as many participants as possible can benefit from the advantages that standardisation and mutualisation through the CDM can offer. It is a significant step for firms to step away from their internal builds and to apply internally for the resources to reconfigure their reporting or collateral requirements around the CDM. Consequently, ISDA subject matter experts are liaising with participating firms to help them to negotiate this transition.
For collateral, ISDA’s primary focus is on digital representation of legal documents and collateral representation. By using the CDM, this can instil greater consistency in how firms extract key terms from legal agreements and integrate this into their systems, thereby improving interoperability and the efficiency of data capture. To support this, ISDA has promoted a campaign of document digitisation, including ISDA Master Agreements and CSAs for initial and variation margin.
A second point of focus is on collateral representation. The objective is to streamline onboarding of key data from eligible collateral schedules, ensuring that counterparties are aligned in terms of how they identify collateral. This is key to minimising risk of collateral disputes and improving efficiency of collateral settlement.
With financial supervisors giving detailed attention to liquidity coverage, these initiatives are important to ensure that firms can post and accept collateral, and perform collateral substitutions quickly and efficiently, particularly in conditions of market stress.
To assist this process, ISDA has introduced an object-builder facility into the open-source CDM code, which can be used to construct collateral eligibility schedules that are standardised around the CDM. This will accelerate the task of negotiating collateral eligibility schedules and reduce the resources consumed in this process.
Through the ISLA CDM Working Group, ISLA has also been reviewing the representation of collateral eligibility schedules and eligibility from a securities lending perspective. It is presenting these findings to the CDM Collateral Working Group, hosted at FINOS and chaired by ISDA, for further expansion.
Looking further ahead, Rayner suggests that there is scope for ISLA to work together with ISDA and ICMA on new regulatory requirements, including the proposed SEC 10c-1a reporting requirements for securities finance trades in the US, or amendments to existing regulatory reporting such as the Securities Financing Transactions Regulation in the EU or the UK.
As the market moves forward with increased regulatory scrutiny and transition to T+1 settlement, Rayner suggests that the industry is reaching an inflexion point where legacy infrastructure and processes will not be able to provide the level of efficiency required – not just in settlement but throughout the trade and collateral lifecycle. “We see the CDM as a solution for many of these challenges, providing a single standard that can enable automation and allow innovation to thrive,” he says.
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