08 June 2018

ISDA: A big step towards efficiency

As the market developed, each firm established its own systems and its own unique set of representations for events and processes that occur during the life of a typical derivatives trade. This not only means counterparties have to continually reconcile their trades to make sure they have the same information – a big drain on resources – it also curtails the potential for greater automation. We have to change this situation, and that work starts now.

What exactly is the CDM? It’s essentially a blueprint for actions and processes that occur during the lifecycle of a derivatives trade. The current situation is a bit like having a box of Lego but without the instructions. You know what you’re supposed to build, you have all the pieces, but it’s unlikely everyone will put those pieces together in exactly the same order. The results may be optically similar, but they probably won’t be identical.

In the same way, using a common blueprint for derivatives events and processes within the CDM will enhance consistency and facilitate interoperability across firms and platforms, irrespective of the programing language that is ultimately used for each technology – the end result will be the same.

The first digital iteration of the CDM covers a core set of key events in the credit and interest rate markets – for instance, ‘partial termination’, ‘novation’ and ‘compression’.

The overhaul of derivatives infrastructure will not happen overnight. It will take time to make the necessary changes to internal systems. But the current situation isn’t viable over the long term. Without a common architecture, we’ll never be able to fully realize the efficiencies that new technologies like distributed ledger, smart contracts and artificial intelligence offer.

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