Unification of Financial Market Technology Standards: The Common Domain Model

Unification of Financial
Market Technology
Standards:
The Common Domain
Model

                           www.reformis.com

Unification of Financial Market Technology Standards: The Common Domain Model

Background
This article is the first in a series of three articles to be published by Reformis to review the Common Domain
Model (CDM) for the benefit of its clients. This first article serves as an overview of the CDM.

Too Many Standards?

One of the traditional problems with technology standards in the global capital markets is that there are too many
different standards, each representing a different dimension of trading products or trading life-cycle events.

For example, an Interest Rate Swap trade might be represented in the format of FpML (Financial Products Markup
Language), while a Foreign Exchange trade might initially be recorded in the FIX (Financial Information Exchange)
Protocol, but for some market participants, key terms would be translated to the SWIFT (Society for Worldwide
Interbank Financial Telecommunication) message type format for confirmation with the counterparty. Interim
life-cycle events and regulatory reporting requirements may necessitate conversions of these records to
additional formats.

As a result, market participants have had to patch together their own enterprise-wide architecture by connecting
different standards and filling in gaps with bespoke solutions, while hoping for the emergence of a universal
standard.

A Common Standard:
The CDM introduces a normalized digital representation of trade agreements, regulatory reporting, and trade
events across the lifecycle of all financial products and includes synonyms (translators) to convert messages from
other standards into the CDM format.

The CDM is an open-source model that has incorporated contributions of technology and design from many
organisations and is available in multiple different programming languages as a free download from a site
managed by ISDA.

Operational Challenges of the Trade Life-Cycle

The underlying drivers for the development of the CDM include the continued growth of negotiated transactions
and the high operational costs of stand-alone processes for complex transactions. As one example, the peaks of
notional volume of Interest Rate Swaps quadrupled from around US$2.5 trillion traded per week in 2013 to US$10
trillion in 20201 because they continue to be effective tools for managing interest rate risk.

However, the disparate set of operational processes for the life-cycles of these trades generally result in costly
manual tasks to agree on collateral for daily margins, reconcile cash flows on payments, and execute contract
modifications. As an added challenge, market participants are subject to data-intensive regulatory requirements
that vary by jurisdiction. Some firms have tried to address these challenges by outsourcing manual processes,
which might reduce operational and reporting costs per transaction. However, this approach has had limited
overall benefits as it does not provide the high levels of transparency and automation required to support
continued growth in trading volumes and the addition of new product types.

1   http://swapsinfo.org/derivatives-transaction-data/

With these challenges in mind, ISDA (International Swap Dealers Association) issued a call to action in 2016 by
publishing a white paper titled, “The Future of Derivatives Processing and Market Infrastructure,” which called for
industry collaboration on common domain models that would result in reduced operational costs per trade,
increased compliance for regulatory reporting, and a greater capacity to increase trading volume due to the fixed
costs that would result from standardisation. One of the key elements of ISDA’s vision was the concept of an
open-source model that is expected to accelerate growth by tapping community contributions2.

Market Response to a new standard

The market affirmed its interest in this vision by participating in various working groups and initiatives to design
and build a single CDM. In March 2019, ISDA announced v2.0 of a highly normalized CDM with support for an
initial group of OTC Derivatives products and codification of key legal agreements, such as the Credit Support
Annex for initial margin. By the end of H1 2021, the product had grown significantly in the breadth and depth of
its coverage for products, life cycle events, legal agreements, and regulatory reporting. The model now supports
all the high-volume OTC Derivative products, repurchase agreements, and securities lending agreements, as well
as listed derivatives and securities and a variety of widely used legal agreements.

The coverage and stability of the CDM has led to a number of pilots such as an Interest Rate Swap Clearing
initiative jointly developed by ISDA and Digital Asset over a 2-year period with input from the Australian Stock
Exchange (ASX) and UBS. This pilot, which was announced in 2020, deploys the CDM on a distributed ledger with
the added features of signing of state transitions, data ownership, and privacy elements.

The ASX pilot is expected to remove the challenges of multiple parties connecting to disparate systems to novate
trades to a Central Clearing Party and replaces those complications with a streamlined clearing process with a
shared view of trades visible only to the participants of each trade.3

Community Participation in a Digital
Revolution

Further evidence of market support for
the CDM was revealed in a
groundbreaking announcement in August
2021:

Three independent trade associations
(ICMA, ISDA, and ISLA), each with distinct
initiatives in different negotiated
transaction categories announced that
they have been working together on
further development of the CDM and have
formally signed a memorandum of
understanding to further strengthen
collaboration on this model4.

Reformis believe that the CDM has the potential to deliver a long-term solution to improve problems in the trade
life-cycle and also serve as a catalyst to revolutionise application design, data management, and integration of
trading systems. Therefore, Reformis is interested in continuing conversations with its clients regarding their
experiences seeking operational efficiencies for OTC Derivatives, FX, Repos, and Securities Lending. As a
community, we have an opportunity to help ensure that the governing committees for the CDM are effectively
addressing our unique needs. ISDA agrees with this viewpoint, as noted by Ian Sloyan, Director, Market
Infrastructure and Technology at ISDA: "Community participation is one of the keys to the success of the
CDM. We welcome input from Reformis on behalf of its clients or input directly from its clients."

2  “ISDA Whitepaper: The Future of Derivatives Processing and Market Infrastructure,” September 2016, https://www.isda.org/a/UEKDE/infrastructure-
white-paper.pdf
3 ISDA and Digital Asset Launch CDM Clearing Pilot Using DAML, 6-October-2021, https://www.isda.org/2020/10/06/isda-and-digital-asset-launch-cdm-

clearing-pilot-using-daml/
4ISDA, ICMA and ISLA Sign MoU on the Common Domain Model, 2-August-2021, https://www.isda.org/2021/08/02/isda-icma-and-isla-sign-mou-on-the-

common-domain-model/

Reformis has been in communication with ISDA in order to be an advocate for the needs of its clients and to be
able to convey to its clients the latest developments and plans. With that goal in mind, the next edition in this
series of CDM articles from Reformis will focus on the digital regulatory reporting initiatives in the CDM
community.

If you would like to further discuss the CDM and how Reformis can advise on the use and implementation of the
CDM or related topics, please reach out to enquiries@reformis.com

Useful links for more information on the CDM:
   • CDM Portal: https://portal.cdm.rosetta-technology.io/#/login
   • CDM User Documentation: https://docs.rosetta-technology.io/cdm/index.html

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