10 minute read 18 Dec 2019
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How financial services can accelerate the adoption of the ISDA Common Domain Model

By David Williams

EY UK Financial Services IT Consulting Leader, Ernst & Young – United Kingdom Banking & Capital Markets Consulting Partner

Transformation leader. Passionate about innovation. Action-oriented realist. Driving business transformation through the intelligent use of the latest technology. Husband and father of two.

10 minute read 18 Dec 2019

What will it take for the financial services industry to drive the Common Domain Model “CDM” adoption?  We observed the Barclays 2019 DerivHack to find out more.

The International Swaps and Derivatives Association (ISDA) Common Domain Model (CDM) is a new standard for how derivatives are traded and managed across their life cycle.

The objectives of CDM are to drive consistency and standardization, promote golden sources of trade data, and ultimately increase efficiency and reduce costs for market participants across the trade life cycle.

For the second year in succession, the Barclays DerivHack event has brought a wide range of participants together to explore and advance the CDM concept.

DerivHack: recap of 2018

Standardization of costly, inefficient post-trade processes has long been the goal for financial services participants and market infrastructure providers. The Barclays DerivHack 2018 demonstrated that by using the ISDA CDM, and creating a standard representation for events and products, market participants can create automated solutions that can be scalable for derivative products.

The 2018 Barclays DerivHack was held in London and New York and served to validate the ISDA CDM concept and its application to post-trade processing for derivative products. In collaboration with ISDA and hosted at the Barclays Rise centers, 33 teams were recognized for completing six use cases across a derivative trade life cycle by developing innovative CDM solutions. These use cases took the teams through the set-up of counterparty data (client onboarding) to processing life cycle events and trade reporting.

An important outcome of the 2018 DerivHack was that CDM became open source, whereas previously it was under ISDA license. The ISDA CDM has been implemented using Rosetta, a language and tooling developed by REGnosys using open-source technology, with the intention of making it openly available to all industry participants. This became a reality in March 2019 with REGnosys and ISDA providing open access to CDM 2.0 for deployment.

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Chapter 1

Barclays DerivHack 2019: event summary

Building on the success of the Barclays 2018 DerivHack, the ISDA Common Domain Model was again in focus.

The Barclays 2019 DerivHack took on a more global feel adopting a follow-the-sun model with teams participating in Singapore, London and New York.

The two-day event was hosted by Barclays in October 2019 at their innovation centers in London and New York, and in the Barclays Singapore offices, in collaboration with ISDA.  Technology partners included REGnosys through the Rosetta portal, Digital Asset, R3 Corda and Algorand. Digital Asset and R3 provided a ledger-as-a-service in each location to simulate a common repository for CDM application with Algorand providing platform support in New York. Smart contract languages such as DAML, Kotlin and Java were made available to the teams. An EY team participated in the event as an independent observer.

The event’s core objective was to build upon the use case success from 2018 to extend the simulation to post-trade processing of securities.

The use cases

To simulate post-trade processing of securities, there were seven use cases that aimed to model the typical steps of a front-to-back trade flow from execution to settlement, including client account portfolio allocations. Barclays developed the use cases in partnership with The Depository Trust & Clearing Corporation “DTCC” and The International Capital Market Association “ICMA”.  These use cases were:

Number Use case Objectives
1. Execution Convert trades from CDM representation to native representation and set up relevant accounts of their platform
2. Allocation Allocation of executed trade to two subaccounts — consume the allocation of trades on the platforms and demonstrate lineage to the block trade
3. Affirmation Allocated trades must be affirmed by each subaccount by generating the relevant CDM object, and linking them to associated allocated trades
4. Confirmation Confirmation of the trade details and economics for each account — in CDM, these are represented by a status change associated with each allocation
5. Settlement Settlement through the transfer of cash and securities across participant’s accounts using SSIs 
6. Position report Construct a portfolio report object that includes settled and traded positions
7. Collateral event Construct the collateral event in CDM, capturing the transfer of securities from the client’s main account to subaccounts

Participants

Forty-two teams participated, with 15 in London, 19 in New York and 8 in Singapore. The event attracted global banking institutions, financial market infrastructure companies, FinTechs and independent developers. A highly experienced team of judges from banking institutions, industry and trade associations, and academia evaluated each team on the basis of completeness of the use cases (from execution to collateral event), adoption of the CDM, and innovation and complexity of the solution architecture. 

At the end of day one, the teams were given the opportunity to test the development of their solution with the judges, and to receive feedback on design, CDM adoption and pitch presentation. This was in addition to feeding back to ISDA on challenges and bugs identified in the CDM and DLT technology. At the close of day two, each team presented their solution to the judges, journalists and industry representatives.

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Chapter 2

Five themes we learned from the event

Creating an eco-system of market participants is critical to driving adoption of the CDM.

The goal to standardize post-trade operations have long been well-understood. Many banks have been through multiple cycles of post-trade simplification or front-to-back re-engineering to cut costs and improve efficiency.

The CDM highlights that post-trade data structures, data lineage, economic terms and data domain extensions lend themselves well to the standardization approach.

The Barclays 2019 DerivHack demonstrated that the CDM can be extended beyond derivatives to securities post-trade processing, and that distributed ledger platforms and smart contract languages have the potential to enable the CDM.

Here are five things we learned from the event:

1. The decision for CDM to go open source was a positive one

The Barclays 2018 DerivHack was a turning point as it helped the value of building a community to be understood. The CDM became open source in March 2019 when CDM 2.0 was released. 

The hackathon is the start of building the open-source community for CDM and seeing it in action
Leo Labeis
REGnosys Founder and CEO

While that CDM community is still forming, the value of collaboration through open source was practically demonstrated in this year’s hackathon as teams identified bugs, uploaded fixes to Rosetta, and provided near real-time feedback on the application of the CDM and the underlying technology platforms.

Hackathons are a perfect environment to test frameworks and methodologies, and to provide a diverse group the opportunity to innovate and provide valuable feedback. A number of technology partners from the DerivHack have developed technology-enablers to support adoption, including REGnosys Rosetta Ingest (converts documents into objects) and Digital Asset’s smart contract language (DAML) that can be run on traditional databases as well as Distributed Ledge Technologies “DLT”.

In our opinion, the speed of adoption of CDM is likely to be significantly faster, thanks to the decision to go open source.

2. The model can be extended beyond derivatives

Not every team in each location had great depth of business context and detailed understanding of post-trade processes, yet many were still able to complete all seven use cases, which bodes well for pace of extension and adoption.

Teams were successfully able to extend the CDM beyond derivative products into post-trade processing for securities products, which is encouraging.

This success can be, in part, attributed to how complex trade life cycle definitions are simplified and standardized in the CDM. For example, Digital Asset has developed a reference code library that enables developers to implement the CDM. 

DerivHack 2019 was a great example of how developers can pick up use cases and easily implement the CDM using DAML, which is available in open source through the REGnosys Rosetta Platform
Beth Sendra
Product manager at Digital Asset

The open-source library provides for a full reference implementation of the CDM via DAML.  This can be executed by anyone through the DAML Software Development Kit which is openly available.

3. All market participants have a role to play

Market participants, regardless of their role, stand to benefit from the CDM. The sell-side, the buy-side, market infrastructure, technology entrants and industry groups can work together to tackle relevant use cases and to drive adoption.

The sell-side has a huge incentive to participate due to their cost base, and their adoption at scale will go a long way to determine the overall success of CDM; however, other types of participants are also hugely active.

For example, the DTCC already has a number of in-flight initiatives to accelerate the time to settlement and optimize the post-trade process. DTCC’s proposal to Match-to-Instruct (M2i) and for Exception Manager could ultimately help to enable more trades to move smoothly and quickly into an optimized settlement cycle. The principles of the M2i complement the CDM concept well as the M2i looks to leverage centralized settlement information and SSIs to create pre-matched settlement instruction. Such initiatives are steps toward a centralized model for post-trade processing and are pulling market participants in the direction of CDM.

FinTechs also have a role to play. If DLT and Smart Contacts are to be part of the CDM adoption answer, the co-development of the underlying blockchain technology needs to allow for advanced solutioning and challenge by the FinTech community. We observed the power of this collaborative development during the DerivHack as bugs were identified and fixes submitted back to Rosetta in real time.

Industry groups such as ISDA and ICMA are very helpful through their provision for use case development. Currently, in cooperation with other industry bodies, ISDA is looking to expand the CDM to other markets and asset classes beyond derivatives and securities post trade.  ICMA, for example, is working with ISDA in developing the CDM to extend to bond and repo markets.

4. Choices remain with respect to the underlying technology; interoperability will be essential

Participating teams were permitted to code on a technology platform of their choice, whether this was on a centralized database or on a distributed ledger.

For DLT solutions, teams were given the opportunity to work with platform providers, DAML (Digital Asset’s smart contract language), R3 Corda and Algorand — all firms who have been active in post-trade processing use case development.

The hackathon demonstrated that it is feasible to apply the CDM using DLT. It is too early to say whether blockchain will ultimately be the preferred technology, and if it is, which platforms will emerge dominant. The financial services industry must learn lessons from its past — fragmentation is best avoided, and the extent to which underlying technologies can easily interoperate will help to avoid a repeat of past issues further down the line.

Integration with legacy systems is critical to driving the adoption strategy
Kapil Bansal
from DTCC

5. Acceleration of adoption must be the next focus

At all three global locations, there was a huge sense of optimism among the participants. That said, these are challenging times, and as such, the questions now start to become more practical.

We think acceleration in adoption will depend on the following:

  • Clear articulation of the value business case for CDM
  • The ability to demonstrate that, even in cost-constrained environments, investment in CDM is a “no regrets” decision
  • Clarity on how to deploy and integrate CDM, into and alongside complex legacy infrastructure

Critical mass and momentum generated by active market participants and technology firms

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Chapter 3

Where does the CDM go from here?

How does the industry move the CDM from proof-of-concept to proof-of-value?

Moving from proof-of-concept to proof-of-value

Beyond use case and technical development, the near-term next step could be a structured pilot or series of sprints where a core group of market participants provide the governance and funding.

The pilot ought to focus on a part of the post-trade landscape that brings as many key market participants together in order to fully showcase the value that CDM can bring — settlements, for example. 

DerivHack 2019 demonstrates that CDM can be applied across multiple product classes and functions. Extending adoption to settlement processing brings capital efficiencies over and above operational efficiencies from process optimization
Sunil Challa
from Barclays Strategy

The pilot could also explore some of the development feedback from the 2019 Barclays DerivHack such as:

  • Segregation of data and data lineage
  • Improved data privacy between affirmation and confirmation
  • Proven simultaneous settlement with collateral transfer

Where possible and without compromising standardization principles, there may be opportunity to demonstrate ease of CDM interoperability across traditional and distributed ledger technology.

The CDM is not just about reducing operational and other costs. We should also remember business value driven by the CDM can ultimately impact a bank’s capital. Any pilot must run a baseline of examining the impacts on both operational costs and capital from a pre-CDM to post-CDM scenario.

Governance is critical to sustain momentum

Without a strong central governance framework, it will be challenging to sustain the pace of progress, establish ways of working and uphold strong design decisions that help avoid fragmentation.

Agreeing and publishing a time line is critical for the technical evolution of the model to the point of a minimal viable product that can be piloted using live data in a live banking scenario. 

The following would need to be agreed:

  • Objectives and hypothesis to be tested
  • Appropriate use cases, timelines for pilots or sprints
  • The financial institutions, and utilities to fund and provide resources to manage pilots
  • The technology and business partners to review outputs
  • Discussion on a supporting common data model where relevant
  • Roadshow on progress and publication of the benefits
  • How the intellectual property arising out of pilot will be shared with all participants on a non-compete basis 

A successful hackathon that can generate a wave of CDM adoption

The 2019 Barclays DerivHack, in its second extremely successful year, proves that the CDM concept enjoys strong support, interest and enthusiasm from the technology and financial services communities globally.

However, the challenge is that the DerivHack is a once-a-year event, and as such, the industry needs to scale the success. If the industry puts its collective energies and resources behind a well-executed pilot, the longer-term benefits of CDM will come more sharply into focus.

Summary

The Barclays 2019 DerivHack demonstrated that the CDM can be extended from derivatives to post trade processing for securities. The event highlighted the importance of building an eco-system of market participants with access to open source technologies that will need to be interoperable to drive critical mass adoption.  Moving from the annual proof-of-concept to a well-executed, proof-of-value pilot will help bring the potential for capital efficiencies more into focus and help to accelerate the adoption of the CDM.

About this article

By David Williams

EY UK Financial Services IT Consulting Leader, Ernst & Young – United Kingdom Banking & Capital Markets Consulting Partner

Transformation leader. Passionate about innovation. Action-oriented realist. Driving business transformation through the intelligent use of the latest technology. Husband and father of two.