The International Swaps and Derivatives Association (Isda)’s latest common domain model (CDM) will force much-needed convergence of distributed ledger technology (DLT) looking to assist in the derivatives market, according to Leo Labeis, co-founder and CEO of Regnosys, the firm responsible for the digital version of the CDM.
“You obviously have a number of DLT companies in the market that are actively exploring that opportunity and looking to already start to provide some solutions for a lot of banks. The problem that was identified was, ‘well if we end up with a fragmented DLT market with all of these different providers operating on different standards, different languages etc, we won’t have achieved much,’” says Labeis.
“We have to recognize the ambition of that [CDM] project, it is a very ambitious project, it is a re-architecting of the derivatives market infrastructure. So obviously it is not going to turn around in six months, but this step is critical to having the right re-architecting because short of this having this processing standard, doing the re-architecting using DLT solutions would not have actually achieved much,” he says.
The CDM was developed in response to regulatory changes, high costs associated with current manual processes and a demand for greater automation across the industry, according to Isda. It aims to tackle the lack of standard conventions in how derivatives trade events and processes are represented.
The latest version of the CDM was released last week, with Isda making it available to everyone in the market, even those not part of organisation’s membership.
Clive Ansell, head of market infrastructure and technology at Isda says the current interoperability difficulties are widespread in a trade’s lifecycle.
“If one person has traded on a swap execution facility or on a trading venue, at that trading venue they have their own way of representing the trade. When the trade is done, they send that information maybe to some sort of confirmation system, and then that has its own interpretation of the trade, and that gets sent in its own format. That might then be sent to a clearing house for the trade to be cleared and that has its own format for how it represents the trade. All of that is very sticky to connect, it takes a lot of effort to connect between those systems,” says Ansell.
“From speaking to vendors and technology firms, they don’t really like having to do all of this connectivity work. Often when people are trying to connect to new systems to test things, it’s weeks of work that isn’t of any value,” he says.
For Ian Sloyan, Isda’s director of market infrastructure and technology, adoption of the CDM could mean new technology providers have a higher chance of their offerings being used by market participants.
“This standard and Isda’s work are probably a little bit ahead of the curve. We are putting the standard out there to facilitate new technology providers to build systems for this market which can then be adopted. And if this is the standard that these guys are using to build systems, they have a better chance of the incumbent players and market participants using them,” says Sloyan.
However, take up of the CDM and resulting benefits will take time, according to Steve Toland founder of TransFICC.
"Some believe the CDM will also enable the emergence of new applications delivered via distributed ledgers. Delivering applications on a ledger may bring closer cooperation between firms, but this will also take time to be realised,” said Toland.