Roles lack clarity in Isda’s CDM

By Emma Olsson | 30 July 2020

Debate is growing over the implementation of the International Swaps and Derivatives Association’s (Isda’s) common domain model (CDM), as uptake remains slow nearly three years after the project’s launch.

“Lack of standards creates a self-perpetuating mess,” says Daniel Schwartz, head of fintech and capital markets tech strategy advisory firm FT Advisory.

“Furthermore, for those financial activities which evolve over time such as over-the-counter (OTC) derivatives trade, a data only standard will not fully address the problem.  You might have accurate data at one point in time, but as the trade evolves it’s more than likely to get out of sync.”

Earlier this month, Barclays published a whitepaper urging exchanges and clearing houses to lead the way in adoption of the data standardisation project. Other market participants believe regulators are needed to drive CDM forward, says Schwartz.

“I can understand the motivation [for a regulatory push]. If the regulator said that the reporting of trades has to be CDM-based to the trade warehouses, that would certainly change something.”

But being forced to adopt the model for trade reporting by a regulator would only take advantage of a limited set of CDM's capabilities, he says.

“There is way more opportunity than just the reporting of trades and frankly the idea that you are reporting trades or differences to yesterday’s trades every day in CDM seems a bit strange, just because CDM itself should accommodate the life cycle of the trade.”

Randal Parsons, chief technology officer and partner at Lucido Group, also questions the role of regulators in pushing adoption.

“A regulator shouldn’t be saying you have to use CDM – that would be a little bit silly, like it’s an overreach. And the intention of CDM is to be agnostic. It’s not supposed to be locking you into one thing, it’s supposed to be making you open to many. The philosophy is the right one, the problem is getting momentum.”

Isda is not worried about the current lack of widescale adoption. According to Ian Sloyan, director, market infrastructure and technology at Isda, the CDM project was predicted to be a long term process.

“We’ve never expected a big bang implementation of the CDM. The CDM is available for certain asset classes and processes now, and it is being adopted by a number of entities to help improve efficiency and consistency. We would expect a gradual adoption of the CDM as firms replace systems and process over time,” said Sloyan in an email.

He points out that CDM has received support from regulators, including the UK’s Financial Conduct Authority (FCA) which deployed CDM in its regulatory reporting pilot last year.

While the project aims to save billions in reconciliation costs, a costly implementation process is hindering its uptake, says Parsons.

“The biggest issue with CDM is it takes a lot of investment to get agreement between lots of organisations, and by its nature of getting agreement is a sort of bureaucratic process and not very much a money making process. A lot of organisations are not so motivated to contribute.”

Schwartz believes material success is needed for further progress.

“There are a couple of routes to common adoption of new protocols. One is you’re forced to use the protocol – say if the regulators or a central actor such as central clearing counterparty (CCP) requires its use … Another is that it offers material benefit and I think on the equity derivatives front you definitely see a place where the industry found material benefit to using CDM as a base with the Axoni project.”

Tech company Axoni established a method for standardising equity derivatives by utilising smart contracts to the CDM standard. Schwartz believes initiatives like these should propel CDM usage.

Alternatively, external triggers such as the transition away from the London Interbank Offered Rate (Libor) could trigger adoption, he says.

“I think [CDM] has huge potential, but the industry’s going to have to organise itself to achieve it. I think it might happen with the replacement of Libor. At a minimum, the new reference rates will require some trades to be rebooked and if you’re rebooking the trades, you have the question of what format do you use – why not CDM?”

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