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CDM and the path to Christmas 2027

by Alan McIntyre, Industry Relations Lead

Keeping the theme seasonal and giving a slight nod to our previous article (The CFTC Roadmap and Christmas 2019), earlier this month we were afforded a glimpse of the ghost of a future Christmas. That glimpse came courtesy of ISDA with their excellent conference in London on Technology and Standards: Unlocking Value in Derivatives.

Before anyone says ‘Bah humbug’, we’ll admit that the Christmas reference is pretty tenuous. But in the same way that the CFTC roadmap gave us an illustration of the path to Christmas 2019, the Common Domain Model (CDM) that ISDA is embarking upon demonstrates a longer-term path for where the industry is headed. That and we had to say something catchy to lure you into an article about future data standards! So we’ll seek the forgiveness of the season before ploughing (or should that be sleighing) on.

So what exactly is this ISDA CDM? And more to the point, why should we be interested? Put simply this is a very ambitious attempt by ISDA to work across the derivatives industry to establish a common agreed representation of the concepts and processes that apply across the derivatives landscape.

Upon first hearing about CDM, my instinctual question was: do we not already have FpML for that? But no, not quite, and here is the rub.

As a common messaging language, FpML allows firms to trade with each other, confirm the trade details and report trades to regulators such as CFTC, JFSA or HKMA. However, each FpML user and even the three regulators may have slightly nuanced interpretations as to what the various fields contained within the FpML messages really mean. And more to the point, all of them will almost certainly have different processes, systems and data inputs going into the FpML messages. This is the key difference for CDM as it seeks to define each of the processing steps in the derivatives lifecycle. And as explained during the CDM panel session by Stuart McClymont, Managing Director of Base60 Consulting, these process standards have until now been missing.

Scott O’Malia, CEO of ISDA, commented in the conference opening remarks that in the recent past, derivatives know-how and processing abilities were regarded by many firms as a competitive advantage. However, after the raft of regulations resulting from the financial crisis, any slight competitive advantage from derivatives data processing is greatly outweighed by the regulatory risk associated with that same derivatives data. The risk being that differing interpretations around what data the regulations really require can result in varying levels of compliance, with the worst-case scenario involving large fines for non-compliance due to data issues.

The ISDA grand CDM plan is therefore to define common process models and terminology across the derivatives spectrum that the market participants, infrastructures and in time the regulators themselves will increasingly adopt.

With a wink back to the festive theme, only the ghost of Christmas-yet-to-come will be able to accurately foretell the extent to which the progress made on CDM will permeate into the ongoing works of CPMI-IOSCO, and in time into the revisions of future reporting rules by the regulators. But at first glance, the potential to improve efficiency and reduce regulatory risk through the definition of common standards is pretty substantial.

Longer term it should be easier to compare apples to apples with more certainty. Or perhaps that should be to compare Christmas oranges!