Plus ça change, plus c’est la même chose.

Or, for the non-Francophones among us: the more things change, the more they stay the same.

The phrase may have particular resonance for observers of the so-called common domain model (CDM), a derivatives data standard first proposed in 2017 by the International Swaps and Derivatives Association. Two years after its inception, only a few banks and clearing houses were actively engaging with the standard. Today, little has changed.

“I know several institutions have made an effort, but it’s not moving fast because it not a regulatory requirement and other projects are more important,” says Zohar Hod, formerly head of post-trade service platform TruePTS and now chief executive officer of data firm One Creation.

The idea behind CDM is to eliminate the need to reconcile data across post-trade back-office processes for over-the-counter derivatives, saving banks an estimated $3 billion a year.

However, those savings may require banks to fork out tens—or even hundreds—of millions of dollars to rewire their IT systems to the alternative data standard. Many are struggling to make the case.

“I can’t walk into a senior management office with a PowerPoint presentation, forensically highlighting a big six-figure number that I can claim hand on heart we are going to be able to save or make if we are to adopt CDM,” says a derivatives clearing executive at a global systemically important bank (G-Sib).

Not all companies are holding back, though. Banks including BNP Paribas and JP Morgan are working on projects that use CDM to automate regulatory reporting.

Among clearing houses, Japan Securities Clearing Corporation in June became a member of the Fintech Open Source Foundation (Finos), which took over administration of CDM last year.

Tetsuo Otashiro, head of global policy and regulation for JSCC’s over-the-counter derivatives clearing service, says: “We believe use of CDM would be a positive industry initiative to increase market efficiency, reduce operational risk and the potential for errors on collateral operations, as well as for swap trade reporting.”

The derivatives clearing executive says take-up by a major central counterparty (CCP) such as LCH, would make the standard “more practically persuasive” for the wider market.

However, there are no signs that such a move is imminent among CCPs. A spokesperson for the London Stock Exchange Group, LCH’s parent, declined to comment on any plans for the clearing house to embrace CDM.

A spokesperson for Eurex says CDM is not relevant to their activities: “The focus of CDM is on bilateral markets,” says the spokesperson.

A spokesperson for Ice declined to comment.

An early push from CME seems to have stalled. Five years ago, the exchange and clearing giant was one of the most advanced in its use of CDM, having mapped 90% of its cleared interest rate swaps workflow against the new standard. Yet a spokesperson said the firm had no further comment on the topic.

The derivatives clearing executive welcomes JSCC’s initiative, but adds: “I don’t really understand why LCH and Eurex would not at least embrace the concept. The concept of the idea is, to most people, a no-brainer.”

A source at a second bank in the process of CDM adoption is also surprised that more clearing houses are not on board.

There may be good reason for the skepticism.

Margin vendor Acadia, which was acquired by LSEG in 2022, has worked closely with the industry on CDM development from the get-go. Despite broad support for the initiative, a spokesperson for the firm, which was acquired by LSEG in 2022, says there are “practical adoption hurdles to natively adopt or use CDM”.

It’s the same as any other change in large financial institutions—existing fiefdoms and processes that have been built over the years … That always takes time to change

Leo Labeis, REGnosys

Rewriting existing applications to natively use CDM for specific use cases can be “resource-intensive” and “expensive,” the spokesperson says: “It is much more practical to consider the use of CDM for any newly built products or services, assuming that CDM is comprehensive for that relevant use case.”

While CCPs and banks waver on the sidelines, vendor developments are ramping up.

In June, banking and insurance technology provider Vermeg became the first entity to integrate CDM for collateral processing efficiency, by implementing the standard into its Colline collateral management system.

Collateral management platform CloudMargin has an ongoing CDM project aimed at easing the creation of collateral eligibility schedules.

Such activities—which expand use cases beyond reporting—could act as an “accelerant” for vendors without their own data models to bring new tools to the market and challenge the status quo, according to Leo Labeis, chief executive of REGnosys, which is developing a digital version of CDM.

“It's the same as any other change in large financial institutions—existing fiefdoms and processes that have been built over the years … That always takes time to change,” says Labeis.

Reporting for duty

CDM is an open-source, machine-executable standard that aims to provide a shared representation of trade events and actions for OTC derivatives. It was conceived to apply to the full trade lifecycle: from execution, through risk systems and reporting, to collateral and settlement.

Currently, Isda is working on two main derivatives use cases. One is standardization and automation of collateral processes. The second is digital regulatory reporting, via a tool that would automatically take account of changing rules for regulatory reporting.

“Both use cases bring significant efficiencies to processes that have historically been beset by high costs and significant resource requirements, and we’re seeing growing interest from industry participants as a result,” says Tara Kruse, global head of derivative products and infrastructure at Isda.

She adds that other trade associations are working on alternative applications, based on feedback from their own members.

Working alongside the Depository Trust & Clearing Corporation and REGnosys, Isda’s digital regulatory reporting initiative aims to establish a golden-source interpretation of market practices and trade reporting logic.

According to REGnosys’s Labeis, of around 30 G-Sibs, 10 are actively contributing to the development of digital regulatory reporting.

In 2022, BNP Paribas announced it had successfully rolled out Isda’s digital regulatory reporting for trades under the US Commodity Futures Trading Commission Rewrite. Standard Chartered also supports its ongoing development.

JP Morgan is implementing CDM for digital regulatory reporting on its Pyramid platform for equity derivatives. Reporting is being tested first in Australia and Singapore, and the bank may consider other post-trade applications.

Some experts are concerned that the narrow focus on regulatory reporting is a step down from the project’s initial ambition. One source involved in the early development of CDM—and now working in another industry—says the standard was originally intended to be more aligned with users’ business needs. Instead, the development emphasis is towards the low-hanging fruit of regulatory reporting, which is the easiest and cheapest implementation of the technology.

A former counterparty credit risk manager at a tier one bank adds that the case for CDM has not yet been made successfully from a business perspective. In a world where banks typically scrape terms out of documents using their own models, “what’s the incentive for people to actually adopt it?” asks the risk manager.

“If you don’t see that there’s an issue—other than an uncomfortable feeling that something might be a mess and everybody’s whingeing—why would you put dollars towards that? Other than as a pet project,” they add.

Contracts with a difference

Collateral initiatives lag further behind regulatory reporting, although JSCC is conducting proof-of-concept testing with distributed ledger technology (DLT), with the view of incorporating CDM for tokenized margin calls and collateral management. These smart contracts could trigger margin calculation requirements to the external system. It could also be used for pre-trade checks, what-if simulations and collateral optimization.

The use case received a further boost with Vermeg’s announcement that credit support annexes for initial and variation margin can now be digitally represented in Colline.

Wassel Dammak, head of collateral solutions product strategy at Vermeg, says the firm’s “CDM connector” can ingest all types of legal agreement. The firm is offering the tool free to all Colline users. He says interest has been received from tier two banks and tier one asset servicers.

CloudMargin’s CDM project is for the creation of collateral eligibility schedules, which govern the types of securities used to back non-cleared derivatives trades.

“What we’ve seen since the concept of uncleared margin rules is that eligibility schedules are becoming more complex as financial organizations look to widen the choice of assets that they can pledge,” says Helen Nicol, head of product at CloudMargin.

Nicol recognizes that for the concept to work fully, more of the financial community must back adoption: “It’s all going in the right direction, but it will take time.”

Cassini Systems, which offers margin and collateral analytics, says projects by vendors from which it is downstream may be critical for driving adoption.

“From our perspective, there hasn’t been a lot of value in implementing adapters to support CDM data interfaces until someone can give us that data. We needed these collateral workflow vendors such as Vermeg to move ahead and support an external CDM feed,” says Liam Huxley, CEO and founder of Cassini Systems.

The benefit of standardized data is that the firm “doesn’t have to worry about mapping data between systems. We can consume that in a robust form, trust it and know what it means”, he says.

As a first step, Cassini will build an adapter early next year that can consume CDM data for clients it shares with Vermeg. Huxley expects this will take “one or two months of developer time”. 

However, he doubts clearing houses will have a big incentive to use CDM for their agreements with clearing members. Huxley sees a much higher potential for agreements between clearing members and end-clients to benefit from CDM-standardized collateral eligibility schedules.

A spokesperson for Acadia says the firm is “actively reviewing” building an adapter to CDM, but acknowledges the path to compliance is not straightforward.

Acadia’s Agreement Manager, which enables firms to digitally represent legal documentation, was built before CDM had a comprehensive enough data model to support more complicated collateral eligibility schedules.

“Agreement Manager is therefore not natively CDM-compliant, but there is a high degree of consistency between Acadia’s data model and CDM,” says the spokesperson.

Acadia’s own ORE XML format has been previously tipped as a derivatives specification that could rival CDM.

Barclays, an early proponent of CDM, believes derivatives processing, collateral management and regulatory reporting remain the best drivers for the CDM. Lee Braine, a managing director and engineer in Barclays’ chief technology office, says CDM also could be leveraged for tokenized assets on DLT, or extended into payments ranging from retail to wholesale transactions.

“But we need to be realistic about the degree of change,” he says. “The end state is many years away. You need a road map and stepping stones. It gives you a payback later, but don’t underestimate the adoption challenges.”

Cynics might say that these were the conversations that were taking place several years ago. Plus ça change.