2020/11/10

CDM: Enabling Trading in the Digital Age

by Lucido Group

In 2018, ISDA announced their Common Domain Model (CDM), which the industry body describes as a model for ‘how derivatives are traded and managed across the trade lifecycle’. We feel that CDM is a game changer for the industry. The technology was initially slow to gain traction (bobsguide, July 2020), but some recent events show that momentum is growing. Lucido Group is part of that momentum: we joined ISDA earlier this year as a  “CDM Champion” to help accelerate its suitability for commercial use.

Organizations gain little benefit from developing and maintaining their own unique representation for trades and trade processing: the costs significantly outweigh the benefits. After all, standardization is a prerequisite for digitization. Over time there have been a number of attempts to create standardized trade models, such as FpML and FIX. A lot of investment has been put into defining these models as well as implementing them in a multitude of systems, so why start again?

How is the CDM product model similar to what has come before and what extra does it offer?

Same, Same, But Different

FpML provides a comprehensive derivatives trade model, and given ISDA’s involvement, it is no surprise that it heavily influences the representation of trades in CDM, although with much of the unnecessary complexity removed. For example, FpML has around fifteen different ways (!) of describing an option structure, whereas ISDA is synthesizing a single option across all asset classes.

CDM data representation uses a web-friendly JSON format, doing away with cryptic codes such as FIX or verbose XML. While XML Schemas provide the ability to define simple data constraints, they do not provide the ability to define arbitrary business-level relationships between fields. CDM defines standard conditions, which can enforce much more complicated validation criteria. It also defines mappings to multiple other trade models, which potentially provides huge benefits for systems integration.

A further critical piece CDM provides, which is missing from prior trade models, is a definition of how the various events which can occur will actually transform trades over their lifecycle. This standardization of post-trade events and associated processes promises to greatly reduce the burden of integration and reconciliation between systems. These are the types of changes that simplify digitization, particularly in the back office, and are a critical benefit from CDM.

On a technical level, CDM is much more than just a data model, which is why it includes code generators for multiple languages including Java, C#, DAML, Scala, Go, and TypeScript. These generate the types, functions and events and JSON serialization, defined by CDM. It is worth noting that Java is used for the reference implementation, while the implementations for the other languages currently have varying levels of completeness and ISDA is looking for more contributors!

Building On Early Wins

ISDA and REGnosys recently won the regulatory reporting category in the G20 TechSprint by leveraging CDM to digitize derivatives reporting for the Monetary Authority of Singapore. One of the initial motivations for CDM was to enable consistency in regulatory compliance and reporting. This success demonstrates that they are on track to deliver on this early goal.

Another initial goal was to provide a common foundation for Distributed Ledger Technology (DLT) and Smart Contracts. The pilot project with ASX using DAML is likely to be the first of many and other DLT vendors are also exploring CDM. As an example, ISDA is also working with R3 and a number of legal firms to analyze legal issues associated with using smart derivatives contracts on DLT. While DLT technology is not widely used in the financial and commodity markets yet, there is a vast amount of both ongoing research and future potential, for which CDM is very well positioned.

CDM is evolving rapidly and its reach is expanding. Initially there was broad support for interest rate and credit related products, while a significant amount of work has since been contributed for collateral management and equities. In collaboration with FINOS Legend, there has been a more recent focus on FX and commodity derivatives. Product coverage will continue to expand over time and Lucido Group is participating to ensure that is the case – we hope others will join us.

If you are in the space, we strongly encourage you to explore the CDM portal and get involved.