ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.
Reporting of risk data has never been the easiest of tasks, either for banks or regulators. Different firms capture the information in different ways, which then needs to be submitted to different regulators across numerous jurisdictions in a variety of formats, creating an operational headache and the potential for errors and inconsistencies. There’s now an opportunity to change this amid increased use of a common standard for risk data – a development that, as adoption grows further, will dramatically reduce the burden of compiling and interpreting risk data, increase the accuracy and consistency of the information reported, and pave the way for greater automation.
The standard – ISDA’s Common Risk Interchange Format (CRIF) – actually isn’t new. It was developed a few years back to support the ISDA Standard Initial Margin Model (ISDA SIMM) by enabling users to exchange risk data in a common form – critical for counterparties to quickly get to the bottom of any discrepancies in their initial margin calculations. With the forthcoming rollout of Basel III and increased use of benchmarking to assess how banks are implementing new standardized capital models versus their peers, the CRIF has also been extended to cover the Fundamental Review of the Trading Book and credit valuation adjustment standardized approaches (FRTB-SA and SA-CVA).
This means the CRIF is already well-established and regularly used by increasing numbers of banks, vendors and regulators – either for ISDA SIMM calculations or as part of regulatory or industry standardized capital model benchmarking exercises, where it enables valuable analysis. We now have a chance to build on that by working with regulators to promote use of the CRIF as a common standard for risk data reporting and processing.
This would come with several benefits. Avoiding the need to compile and report risk data under a variety of different standards and formats would increase efficiency and reduce duplication of effort. It would also improve the comparability of what is reported, enabling regulators to easily interpret and analyze the data globally using an interchangeable format.
Adoption of the CRIF could be further enhanced by leveraging the Common Domain Model (CDM), which establishes a digital standard for trade events and processes. Linking the two will enable firms to semi-automate the generation of CRIF files, which could be input directly into FRTB-SA or SA-CVA capital models, or the ISDA SIMM. The resulting capital or margin amounts could then be digitized by the CDM and automatically reported to regulators – drastically reducing the operational burden associated with regulatory reporting.
ISDA completed a proof of concept earlier this year to demonstrate that combining the CRIF and CDM is achievable – a development that will ultimately enable regulators to obtain accurate and up-to-date risk and capital data at any time. Additional pilots are now on the cards to develop this further.
For decades, ISDA has developed and promoted standards to make derivatives markets safer and more efficient. We believe widescale adoption of the CRIF and the CDM for the processing and exchange of risk data is an important next step in that process.
Read a paper on the use of the CRIF for risk data here.
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