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In September 2009, it took just nine words – OTC derivative contracts should be reported to trade repositories – for the Group of 20 (G-20) to unleash one of the most ambitious and complex initiatives in the history of derivatives markets. Despite the obvious rationale for improving transparency to give regulators better insight into market activity and emerging risks, trade reporting has proven exceptionally challenging.
It’s now time to take a technology-first approach to this challenge, and we have a plan to put that into action. Using the Common Domain Model (CDM), we are working on a digital regulatory reporting (DRR) initiative that will enable all firms to interpret and implement regulatory reporting rules consistently via a common, machine-readable code.
This is a very familiar topic for me, as I was a commissioner at the Commodity Futures Trading Commission (CFTC) when the US reporting rules were first debated and approved. As chairman of the CFTC’s Technology Advisory Committee, I convened a subcommittee on data standardization to ensure the rules could be successfully implemented. I did have concerns that without consistent, global standards, the rules would not deliver the valuable insights they had promised.
Nearly 12 years on, trade reporting has been implemented around the world, but policy-makers are now having another look at the regulations. Their aim is to achieve greater harmonization, enhance data quality and improve consistency by using unique product identifiers, unique transaction identifiers and other critical data elements (CDE). In late 2020, the CFTC finalized its revisions to the reporting rules with a May 2022 deadline for implementation, while the European Securities and Markets Authority has submitted draft technical standards to the European Commission that will take effect 18 months after they are finalized.
Given the challenges that have been encountered with reporting, these initiatives are certainly welcome, but the revisions alone will not solve the problem. Based on what has been achieved so far, less than half of the reportable fields under the European Market Infrastructure Regulation (EMIR) and CFTC rules are defined consistently, even though both regimes use the international CDE guidance.
The CDM’s DRR capabilities offer the best way to achieve the consistency necessary to implement the rules effectively. By creating a single, common digital representation of events and processes that occur throughout the derivatives trade lifecycle, the CDM enables market participants to achieve consistency in the interpretation and implementation of complex rules. It’s a model that has enormous potential to realize efficiencies and cost savings across the derivatives market.
When faced with a major new regulation, a firm would typically set up an in-house team and allocate budget to interpret and implement it. With the support of legal and compliance functions, the regulation would be rolled out according to the firm’s own interpretation, often resulting in subtly different interpretations between institutions. A better approach would be to establish agreed best practices in each jurisdiction and to apply the CDM’s common code to execute the reporting requirement, reducing costs and inefficiencies.
The CDM has already demonstrated that it can improve the accuracy and consistency of trade reporting. Last year, ISDA and fintech firm REGnosys developed a DRR pilot that enables firms to access an executable code version of the reporting requirements set by the Monetary Authority of Singapore – a project that won the regulatory reporting category in the G-20 TechSprint in October. This follows earlier work on the DRR pilot with the Bank of England and the UK Financial Conduct Authority.
ISDA is now working with regulators, market participants and trade repositories to take this work forward. We have established a CDM DRR working group, which will convert reporting rules into machine-readable and executable code in the CDM and engage with regulators on implementation. While the work is initially focused on the EMIR and CFTC reporting rules, it will expand over time to cover all reporting regimes.
Using the CDM to support regulatory reporting will give greater confidence to both market participants and regulators, enabling a faster, cheaper and more reliable implementation than was possible a decade ago. Ultimately, it will also enable regulators to issue new rules directly in the CDM, in addition to legal text, allowing updates to be implemented far more efficiently.
Through the CDM, we will realize the objective of the G-20’s nine-word commitment on trade reporting, increasing transparency and allowing regulators to monitor derivatives markets much more effectively.