Creating Standards for Blockchain: Experience from The Derivatives Market The ISDA Common Domain Model (ISDA CDM)

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1 3 rd Blockchain for Finance Conference, Dublin Creating Standards for Blockchain: Experience from The Derivatives Market The ISDA Common Domain Model (ISDA CDM) Clive Ansell Head of Market Infrastructure & Technology ISDA Copyright 2018 by International Swaps and Derivatives Association, Inc.

2 The Current State The current information creation, and exchange processes and technologies were developed over a number of years for the purposes of electronification and automation As regulation and market standards have become more sophisticated this has resulted in a major technology dependency and unserviceable operating expense debt 2

3 ISDA Market Infrastructure and Technology Vision 1. Catalyst There is no commercial advantage to organisations developing and maintaining standards separately. Current mechanisms for information exchange and storage are not scalable and will potentially (i) inhibit innovation and (ii) increase operational risks and costs New technologies remain underutilized, and despite significant investments many banks are unable to make the requisite changes in their operating models to embrace the benefits they offer Market participants seeking to address high operating costs and complexity are faced with an environment that is particularly challenging 2. Opportunity The industry is at a critical juncture in its efforts to define and adopt improved data and process hierarchy standards An opportunity exists to create standards that provide an environment for innovation and promotes the adoption of technologies ISDA has facilitated industry agreement on standards for over thirty years and is a trusted partner who can lead the discussion around relevant standards for the future state 3. Objective The ISDA Market Infrastructure and Technology Oversight Committee (MITOC) has been spearheading an ISDA initiative to develop a common, robust, digital blueprint for how derivatives are traded and managed across the lifecycle, and create a bedrock of standards upon which new technologies such as distributed ledger, cloud and smart contracts can be built. These offer the potential for much greater automation and cost reduction, enhancing consistency and boosting the potential for these services to operate across firms and platforms. This blueprint is called the ISDA Common Domain Model (CDM) 3

4 What is the ISDA CDM? 4

5 IR pay-out Object CDS Object The Design Principles A standardised hierarchical data and process model that builds upon FpML to express transactions as collections of economic features and trade events ContractualProduct Product Definition Current Approach A sequence of events driven by product, asset class and business process specific trade events: Event Definition Economics (E) Pay-out Legals Collateral P1 P2 Q (E ) Legal Provision (Cancelable Early Term Extendible) Other Payment CDM Approach Trade states change according to agreed standard primitive events which can be aggregated into complex scenarios ensuring lineage and consistency of business processes. IR pay-out (P1 P2 Q ) Credit pay-out (P1 P2 Q) Fee Example partial termination IRS type Product Details: Leg Obs CDS type Product Details: Leg Obs Trade Metadata Trade Metadata Illustrative 5

6 CDM Overview Benefits of the CDM: Enables consistent hierarchical representation across trades, portfolios and events providing enhanced risk management and trade processing capabilities Creates an environment for innovation - Defines the requisite foundations now for genuine long-term process transformation in concert with emerging technologies (Cloud Tech, AI, RPA, DLT, DocTech, ) Promotes transparency and alignment between market participants and regulators Enables market participants to comply with regulatory requirements in a cost-effective manner without fear of redundant effort ISDA CDM Version 1.0 Published June 2018 Includes a solid product representation for simple IRD and CRD based on a hierarchical composite approach leveraging FpML Proposes an initial scalable event model that encapsulates primitive changes and de facto defines the fabric of complex business and operational processes Demonstrates the transformability of legal documentation (e.g. ISDA Definitions) into digital artefacts (Smart contract component precursor) Includes an initial version of the ISDA CDM and a testable instantiation using JAVA programming language and a usable first set of model compliant illustrative JSON trade and event representations 6

7 What s next Engage with market participants, including incumbent infrastructures and solution providers, and FinTech to demonstrate the opportunity for post trade transformation and solicit feedback to refine the model as necessary Work with market participants to identify specific use cases and support delivery of industry POCs, implementation initiatives and technical testing to ensure current design is fit for purpose Expand and consolidate the model across: a broader set of products (complete rates and credit, extend to equity swaps) business scenarios (e.g. collateral management and reporting), and processes (e.g. portfolio compression and reconciliation Explore emerging technologies which have highlighted major opportunities for process transformation Establish a governance framework that encourages broad market adoption and creates a sustainable control of the standards Work with regulatory organisations to identify common objectives and create and environment that facilitates efficient regulatory oversight leveraging suitable technologies 7

8 Implementation A Target Future State Design Principles Store data in one format Perform actions once Find common solutions to different problems at different scales Negotiation/Agreement Electronic Trading Venues Common Doman Model Counterparty/Service Provider Node Data Stores can be shared across permissioned market participants and regulators No {Extract, Transform, Transmit, Load Transform, Store, Reconcile} processes Interim benefits can be achieved through basic data clean up and introduction of standards Events Settlement (Movement/transfer of assets) Calculation (Risk, Finance, Collateral) Portfolio Reporting (Finance, Regulatory) Updates Party A CCP Service Party B Regulator Provider(s) Trans. Mgt (TM) Portfolio Mgt (PM) Valued Portfolio (VP) Golden Record Validation *Party A Portfolio is enlarged for illustrative purposes only not indicative of relative scale 8

9 ISDA Market Infrastructure & Technology Contact Us Please direct question or comments to Clive Ansell or the ISDA Market Infrastructure and Technology mailbox 9