Without realizing it, we made life pretty difficult for ourselves in the derivatives market. As the market developed, each firm established its own systems and its own unique set of representations for events and processes that occur during the life of a typical derivatives trade. This not only means counterparties have to continually reconcile their trades to make sure they have the same information – a big drain on resources – it also curtails the potential for greater automation. We have to change this situation, and that work starts now.
We’ve just taken an important step to reduce this complexity and to create greater efficiency in the derivatives market with the launch of an initial digital representation of the ISDA Common Domain Model (CDM). This first iteration is now available on the ISDA website for ISDA members to download and test. We strongly encourage you to do so, and to feed back the results so we can further enhance the model.
But what exactly is the CDM? It’s essentially a blueprint for actions and processes that occur during the lifecycle of a derivatives trade. The current situation is a bit like having a box of Lego but without the instructions. You know what you’re supposed to build, you have all the pieces, but it’s unlikely everyone will put those pieces together in exactly the same order. The results may be optically similar, but they probably won’t be identical.
In contrast, if everyone follows the same set of instructions, they’ll get exactly the same outcome every time. It doesn’t matter whether those instructions are published in English, French or German – so long as the blueprint is followed, the result will be the same.
In the same way, using a common blueprint for derivatives events and processes within the CDM will enhance consistency and facilitate interoperability across firms and platforms, irrespective of the programing language that is ultimately used for each technology – the end result will be the same.
The next step is the most exciting. We’ll be working on proof-of-concept applications of the CDM. The possible use cases are incredibly broad, from trading to operations to regulatory reporting.
This overhaul of derivatives infrastructure will not happen overnight. It will take time to make the necessary changes to internal systems. But the current situation isn’t viable over the long term. Without a common architecture, we’ll never be able to fully realize the efficiencies that new technologies like distributed ledger, smart contracts and artificial intelligence offer.
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Quantifying the Benefits of Digitization
Updating Term SOFR