07 May 2024
Global financial shocks are inevitable. But we can’t quite predict their shape, size or consequences, not to mention when they might happen. This uncertainty has led the industry to disregard the need for preparation, resulting in a lack of readiness.
One example that helps to paint this picture is trade data, which is stored by counterparties in different formats. Lifecycle changes are then recorded incongruously, creating a chain of unstructured data and a lack of standardisation across institutions, increasing the risk of legal issues – particularly during crises.
Enter the Common Domain Model (CDM), a cross-industry framework developed by ISDA, ICMA and ISLA. This model standardises data definitions, leveraging powerful digital technology to unlock efficiency on an unprecedented scale and safeguard the industry against future shocks. It was a hot topic at the recent ISDA AGM in Tokyo, which I left with lots to reflect on.
In the ‘CDM-Collateral’ roundtable, the CDM was described as a standardised data and process model for financial products, trade in those products and their lifecycle events – designed to be easily read and executed by machines.
It can offer a silver bullet when faced with the challenge of disparate data. When parties use different methods to record contract data, it can leave them vulnerable to inaccuracies, differences in valuation or legal disputes. Let’s consider eligible collateral representation as an example. Standardising data in line with the CDM can remove any room for interpretation within agreements, ensuring everyone is singing from the same hymn sheet.
Standardising data in this way also makes it easier to share it across the marketplace and redistribute it into downstream systems, while also improving data governance by allowing institutions to report more accurately.
Our own master data model allows for the collection of data from various agreement types, including ISDA, MSA, CSA and others, across many contractual terms and attributes. It allows our clients to efficiently identify contractual terms within agreements, posed by credit, legal and market events, where accurate and standardised data is paramount. The CDM is a model that Likezero can adopt to organise legal data, representing another potential path towards better decision-making and risk management for our clients.
By creating a model to standardise data across institutions, the CDM has created a universal language for financial transactions. It provides one example of how transformative digitisation can be for the global financial market and has laid foundations for a more seamless financial world – one where we all speak the same language.
Beyond the CDM, the ‘Managing Disruption’ panel explored the difficulty of managing risks during periods of geopolitical upheaval, reminding us how rapidly and unpredictably the global landscape can change. It brought home what we know – that the best way to adapt and safeguard institutions against global shocks or regulatory change is through taking a proactive, not reactive, approach. In the context of digitisation, this involves moving away from muddled files held in disjointed formats and lying idle, waiting for disaster to strike.
The transformative power of digital transformation was also highlighted in the ‘Implementing Digital Transformation’ panel, particularly in contract lifecycle management, where efficiency and cost reduction can be achieved through the automation of manual processes.
We can’t predict the future without a crystal ball. But getting your ducks in a row now and digitising legacy agreements can really pay off when the next crisis hits. Having this critical contractual data at your fingertips can ensure you stay one step ahead of whatever is around the corner, enabling you to react quickly and with confidence. Plus, it’s a game-changer for managing counterparty credit risk efficiently and getting the most out of trading financial products.
Looking ahead, digital transformation holds a lot of promise, and Likezero is at the forefront of this transition. By optimising legacy trading legal agreements in Capital Markets, we’re not just increasing capital availability and reducing risk – we’re also pioneering ‘smart contracting’, enhancing critical terms to match today’s market conditions.
