The Fintech Open Source Foundation (Finos) has been selected to provide an open-source repository for the common domain model (CDM), a single digital representation of trade products, events, and actions across a trade lifecycle.

“Following a request for proposal earlier this year, the International Swaps and Derivatives Association (Isda), the International Capital Market Association (Icma), and the International Securities Lending Association (Isla) are pleased to confirm that Finos has been selected to provide an open-source repository for the common domain model,” says a spokesperson for the three industry bodies. “We look forward to working with Finos on this important initiative, which will extend the benefits of the CDM from derivatives to securities, repo, and securities lending.”

The three industry associations signed an MoU in August 2021 to strengthen their collaboration on developing the CDM. As part of the joint initiative, they invited organizations to put forward service proposals that would meet their requirements for a neutral third-party host. The RFQ specified that it needed this host to provide a central repository in which the CDM user community could access and consume the model; to facilitate continuous development and maintenance of the CDM code; and to help the Isda, Isla, and Icma in governing the model and growing awareness of it in the financial services industry.

Finos, the umbrella body for financial services under the Linux Foundation, was a logical choice: the body promotes the adoption of open source and open standards, and has worked with Isda on a pilot project using Legend, a modeling language that Goldman Sachs contributed to Finos, to develop extensions to the CDM.

The CDM, originally founded by Isda, began as a blueprint for how over-the-counter derivatives can be traded and managed across the transaction lifecycle. It is a single digital representation of trade events and actions. The model has since expanded beyond derivatives to other product types. For instance, Icma, under its CDM Steering Committee, is applying the model to the repo and bond markets, and Isla’s CDM Working Group, in collaboration with tech partner REGnosys, has developed an early version for modeling securities lending transactions.

“If you think of those three product sets, there is a core CDM that underpins them. It could be a set of common data types, values, and definitions for what a quantity is, what a product is or what a trade is. These are the kinds of common things that we all use,” says Ian Sloyan, director of market infrastructure and technology at Isda. 

Outsourcing the CDM governance will offload some of the logistical work currently managed by the trade associations. A simple example is that communications about the CDM for over-the-counter derivatives are hosted and run on Isda’s internal systems. For instance, Isda’s mailbox, or Microsoft Teams accounts, are currently being used to coordinate working group calls for projects like its Digital Regulatory Reporting (DRR).

Sloyan tells WatersTechnology that another reason for using a third-party entity was to communicate to the industry that the CDM is not solely a derivatives solution but an open, free-to-use framework.

“We want to make a bigger statement about how the core CDM is open-source, and other trade associations, should they want to develop things for different markets, can similarly build on this neutral CDM,” he says.

Another core objective of the decision is to encourage adoption, participation, and contribution to the CDM code. “It’s hopefully opening up the tent, or at least building a bigger tent for us to progress,” Sloyan says.

Cracking the code

One core area that Isda’s CDM aims to resolve is trade reporting. In February 2021, the trade association launched its DRR initiative to help interpret and implement regulatory reporting rules consistently using a common, machine-executable code. The DRR has several working groups that interpret the rules, apply them to the CDM digital blueprint for the derivatives business, and translates those terms into coded instructions that are then used in reporting systems.

The objective of Isda’s DRR is to help investment firms with the constant barrage of regulatory changes, putting pressure on compliance teams and forcing them to frequently update their internal systems. For example, the US Commodity Futures Trading Commission’s (CFTC) upcoming revision of swap data reporting rules will come into effect on December 5, making it the first regulator to amend its framework to incorporate globally harmonized, unique product identifiers and other critical data elements (CDE) intended to improve the consistency and accuracy of the reported data.

Other jurisdictions, such as Europe and Asia, will follow in the US’s footsteps to align their rulebooks by including new CDEs and end-to-end reporting in ISO 20022 XML, a messaging standard created by Swift and used for reporting to trade repositories or swap data repositories under the CFTC. The European Securities and Markets Authority consulted on the draft changes to the European Markets Infrastructure Regulation, known as Emir Refit, in July 2021 and the rule updates will take effect 18 months after they are finalized.

While reporting firms will have to undergo the painful exercise of preparing for the new global rule changes, one silver lining is that there will be a significant overlap in the compliance work across jurisdictions. Together with that, Isda’s DRR project aims to alleviate some of the compliance costs on firms.

“There’s probably about 70% overlap between Emir and CFTC, so why try to solve the problem twice when you can solve it once? If there’s a rule that has interpretation across Emir and CFTC, and both communities attend our peer review meetings, we can solve it just once,” says Alan Milligan, Isda’s head of data and digital solutions.

The Isda DRR initiative is made up of members from banks, asset managers, trade repositories, and vendors and is currently focused on codifying the CFTC rewrite. As part of the agile development project, there are two working groups. One that meets monthly and is responsible for interpreting the CFTC rules. The second working group, which consists of 30 to 50 contributors, is focused on turning the interpretations into coded executable instructions. Milligan says that the groups have 98% of the coded instructions completed against the CFTC rules. On July 1, during a CFTC Peer Review, SDRs and reporting firms had the opportunity to test the DRR CFTC codifications but because this was done at their own discretion, it is unclear how many opted to use Isda’s DRR.

In search of common ground

Technology is only one part of the compliance puzzle, understanding what the rules mean and how they should be understood, is often a bigger challenge. If bank A interprets a rule one way and bank B interprets it a second way, this sets off a chain reaction of different tech design implementations, leading to different data fields being filled, and often inconsistent data being reported to their national competent authorities.

In other cases, banks might have similar interpretations of the written rules but still end up having inconsistent, and often costly, bespoke technical implementations, says Andrew Bayley, director of data reporting at Isda. Downstream this could also impact data quality and matching rates to their designated TR or SDR.

“They may well both be correct but because of the way the rule is written up, because of the way it’s been interpreted, you may end up with two processes which aren’t compatible,” says Bayley.

The goal of DRR is to mutualize the work of interpreting the rules and create common implementations that lead to cost savings for the industry. This might sound great in theory, but it’s a whole other beast putting it into action. One barrier to adoption of the CDM for reporting is creating confidence in the codified interpretations of the rules so that it meets the compliance needs of the regulators.

In parallel, some regulators like the Financial Conduct Authority and the Bank of England are exploring their own pilot programs for developing machine-readable and executable regulation, which, ironically, is also named the Digital Regulatory Reporting (DRR).

To test Isda’s DRR outputs, Bayley says the working groups cross-check the data against member-provided reported data and is engaging with regulators periodically to validate interpretations and outputs.

“The regulators are unlikely to say, ‘Yes, this is 100% correct’, but they will point out to us if we’ve got it wrong,” he adds.

Adopt or shop?

Developing and releasing a domain model in one thing, but its success, however, is contingent on its adoption. There are 30 to 50 contributors to Isda’s DRR, but even the trade association is unclear as to how many of those are using the CDM for the codifications for their native reporting or as a validation tool to benchmark and reconcile their reporting framework.

On July 1, during a CFTC Peer Review, SDRs and reporting firms had the opportunity to test the DRR CFTC codifications but because this was done at their own discretion, it is also unclear as to how many opted to use Isda’s DRR.

Bayley says adoption “is not all or nothing.” The DRR codifications are open and free to use, and firms have the choice to use it as their primary or secondary reporting method, but Isda does not have precise numbers on firms using it internally.

In the past, however, the original CDM releases have shown patchy uptake, with some citing the model being too complex to use or some struggling to dedicate resources to the scale of work required to map their internal definitions to the CDM. Milligan says the cost of implementation is a personal one. In other words, each firm will have to decide if or how they want to adopt the CDM into their process and reporting framework.

“[The member firms] are providing subject matter experts every week, so there’s a headcount cost to provide that to the community. But the implementation costs vary enormously, because if you’re using it as a validation tool, that’s technically quite lightweight, but if you’re implementing it as part of your strategic build, then there’s potentially more work,” he adds.