The Inexorable Advance of the Common Domain Model
BY STUART MCCLYMONT, March 2019
This article was first published on TABB Forum, March 2019
It may feel to some that progress towards the International Swaps and Derivatives Association’s universal data language has stalled over the last few years, but in reality, much has been done to demonstrate the potential of the Common Domain Model to lower market costs. The reconciliation’s challenge
Data is a fundamental component of trading activity. However, data representation by industry participants differs and this is largely responsible for the huge number of reconciliations that need to be conducted to ensure each party captures the trade correctly. It is estimated that reconciliations account for as much as two thirds of post-trade costs. The need for reconciliations is rooted in a fragmented post-trade architecture that is unable to agree on credible sources of data and needs to employ intermediaries to arbitrate. The industry could have decided to continue to develop technology and market infrastructure based on independent and isolated standards, but this would have added yet more costs and laborious reconciliations onto legacy platforms.
Instead, ISDA and its members took the initiative to develop a common product definition, process and lifecycle event data standard. This allowed all market participants to consistently represent all data at the start and throughout the life of derivative contracts some of which last for 50 years. The benefits of a Common Domain Model The advantages of the Common Domain Model or CDM include increased efficiency and automation, and greater integration with new technologies such as distributed ledger, cloud and artificial intelligence. Implementing CDM would enable the OTC derivatives market to adopt an industry standard on how derivatives are traded and managed across their lifecycle and how each step in the process is captured and represented.
If central market infrastructure providers such as CCPs and trade repositories adopt the CDM, they can immediately be the catalyst for mass market adoption rather than relying on each market participant to adopt at their own pace. Industry commentators have acknowledged the considerable benefits of finessing processes, although it is not a one-way street to success – too many blockchain initiatives, embarked upon with so much enthusiasm, ultimately fail.
However, coupling the power of distributed ledger technology with smart contracts can enable complex processes to be simplified and break the traditional and onerous input, process and output cycle. Data is stored and the calculations only have to be made once because the technology standardises the data representation and the process into the smart contract definition to facilitate consistency and interoperability.
Such data stores are shared, accessed and deployed by permitted market participants and regulators, enabling consistency in regulatory compliance and reporting. The CDM also raises questions about the value of middleware which exists today due to the persistence of each industry participant to capture, represent and process trades duplicatively and inconsistently. If it can deliver a common standard for trade and event data representation, middleware providers will need to develop their value propositions to ensure they can deliver value over and above what they do now.
JDX has continued its efforts around the Common Domain Model since helping ISDA launch the concept at their AGM in Lisbon, Portugal in April 2017. This was followed by the publication of the CDM definition document in October 2017. This work has involved collaborating with the industry to take the new data and event standard from a concept to a business case and determining the benefits for a range of asset classes.
The progress so far
Following the publication of the data standard in June 2018, JDX participated in collaboration with R3 and Xceptor in a hackathon run by Barclays and ISDA. JDX was able to describe new trades and lifecycle events on trades using the CDM. Since September 2018, the platform has continued to expand and is being used to represent the CDM and identify proofs of concept. It may seem like progress has been slow given we are two years on from Lisbon 2017, but if we look back to the development of the ISDA Common Master Agreement, it took several years for that to be widely adopted. Over time we are confident that the CDM will become the common language people in the industry speak from a data perspective.
Moreover, the continued move towards machine readable data and using data to drive processes underlines the importance of the CDM – if data is not represented consistently the industry will miss an opportunity to drive down costs between participants.
Using a common language will help in the drive to reduce return on equity ratios and cost income ratios of industry participants. It takes two parties to transact a trade but there is only one trade, so moving towards a single trade representative that both parties can use based on a common data standard has obvious benefits.
The future of CDM
The ultimate aim for the CDM is for it to be adopted by all market participants. This would significantly boost efficiency compared to the current laborious processes which are overly reliant on information exchange, transformation, interpretation and reconciliation.
Thirty years ago, there were probably concerns that the ISDA Master Agreement was not developing sufficiently rapidly – now it is the single most important standard form contract on which business is done internationally. The industry is laying the foundational steps necessary to move us into a new 30-year journey with the CDM for data standards.