The OTC derivatives market is a highly fragmented one, especially when it comes to the processing of trades by different market participants. Over time, firms and market participants have established their own data formats and representation of trade events, leading to a high degree of data normalization and reconciliation at the time of processing and largely through manual efforts. This increases costs and operational risk and reduces efficiencies and scalability across the post trade landscape.
To this effect, the International Swaps and Derivatives Association (ISDA) has come up with a Common Domain Model (CDM) which would eliminate the above inconsistencies and help standardize the trading and management of derivatives through their trade life cycle. The main business areas CDM are expected to standardize are trade affirmation and trade management, collateral management, regulatory reporting, reconciliations, exercises and settlements.
The various events involved in the processing of derivatives trades are standardized by the CDM, ensuring data consistency across the life cycle. However, for this to be implemented, all market participants need to implement the CDM to ensure uniformity.
The CDM , which consists of several steps defines the events that can be standardized and automated in two categories, independent and dependent. Independent events are those which are independent of the economic logistics of the derivative and can be events like creation, termination, cancellation or amendment of a derivative. Dependent events are those which affect the economic value of the derivative and are events like exercise of an option or settlement of a derivative trade.