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Upcoming regulatory requirements pave the way for global OTC overhaul

While new regulatory requirements enter into force in the coming months, ISDA Chief Executive Officer Scott O’Malia’s recent announcement shows that its Common Domain Model (CDM) is becoming central for financial firms in order to meet these requirements1. We believe this is just the prelude to an extensive overhaul of the management of OTC trades, especially collateral management and post-trade. CDM is the gateway to a world of full collaboration and optimized processes.

New regulatory reports to enter into force starting in May 2022

Post-Lehman crisis the G20 leaders agreed in 2009 that all over-the-counter (OTC) derivatives contracts should be reported to trade repositories to further the goals of improving transparency, mitigating systemic risk and preventing market abuse. However, 10 years after the entry into force of Dodd-Frank in the US, EMIR in the UE and similar regulations all over the world, regulators consider that regulatory reports are not accurate enough. Data quality must still be improved. This is why they are strengthening their requirements, requesting that additional data be reported, and that counterparties and trade repositories perform systematic checks of accuracy. This move is starting with amendments of Dodd-Frank provisions by the CFTC, which will enter into force in May 20222, and is continuing with EMIR.
As many bankers know only too well, complying with trade reporting rules requires a lot of work, effort and money, particularly as the same rule may be interpreted differently by different firms and as rules vary by jurisdiction. To facilitate this, the ISDA has started the essential job of digitizing reporting requirements, based on CDM. “As part of ISDA’s Digital Regulatory Reporting (DRR) initiative, [the ISDA is] modelling the amended CFTC rules into open-source code using ISDA’s CDM [and is] also working to digitize revised EU trade reporting requirements under EMIR”. It’s fair to say that CDM is to become the de facto standard to address increasingly stringent regulations.
This regulatory evolution represents not only a constraint for financial firms, but also an opportunity. Broader adoption of CDM will remove the hurdles for a global overhaul of the management of OTC contracts. Besides regulatory reporting, several initiatives rely on CDM: contract management (based on ISDA Create), collateral, and post-trade. CDM allows the exchange of information between financial firms in a standard and structured way, replacing ambiguous and error-prone emails and phone calls.

Based on CDM, an easy plug to post-trade platforms

As noted in a white paper by Barclays, “the industry’s current methods of managing trades through the post-trade lifecycle can be inefficient, with estimated potential cost savings of 80%”3. As soon as they are consistent with CDM, firms’ information systems will be easily plugged to new post-trade platforms, which streamline interactions between firms. At no additional cost, firms will benefit from establishing a golden source for both the economic and legal terms of their transactions. Similarly to regulatory reports, they will adapt to any firm’s data model to produce matching and calculation services. They will synchronize their operations – trades and events – with their counterparties in near real-time. Paper confirmations will disappear. Such collaborative processing will allow to eliminate most manual tasks and redundancies and to dramatically reduce costs and risks.
And to close the loop, this approach will bring further benefits on regulatory reporting. The golden source of trades will ensure that reports sent by both counterparties are consistent with each other (for EMIR); and that non-reporting counterparties are certain that there is no error in data sent by the reporting counterparty (for Dodd-Frank).

The Fragmos Chain platform transforms the post-trade of OTC contracts

Being CDM-native, it creates a standard model for clients’ trades and provides automatic confirmation directly in ISDA format. Thanks to Corda, the leading blockchain (DLT) technology created by R34, our clients can share their data, identify discrepancies and match their trades as well as all their lifecycle events – securely and in real-time.

This is a virtuous loop. Increasingly stringent regulatory requirements demand standardisation, here CDM. And standardisation allows for a broad optimisation of processes.

(1) “The Efficient and Scalable Answer to CFTC Reporting Compliance”, ISDA, 15 November 2021, https://www.isda.org/2021/11/15/the-efficient-and-scalable-answer-to-cftc-reporting-compliance/

(2) “Certain Swap Data Repository and Data Reporting Requirements, Final Rule”, CFTC, 25 November 2020, https://www.federalregister.gov/documents/2020/11/25/2020-21570/certain-swap-data-repository-and-data-reporting-requirements

(3) “Industry Adoption Scenarios for Authoritative Data Stores using the ISDA Common Domain Model”, Barclays, 13 July 2020, https://www.fragmos-chain.comscenarios-for-industry-adoption-of-the-isda-common-domain-model/

(4) https://www.corda.net/

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