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We’ve heard these and similar statements in the capital markets industry over the past few years. Since the initial drafting of Dodd-Frank, billions of dollars are being spent on regulatory projects every year all over the world. However, are we done? Is Regulatory Reporting working? According to the recent penalties and fines given to major financial institutions, the answer is clearly NO.
All these issues provide the framework for what regulatory projects are: really complex and costly projects involving data integration, aggregation, and deep business domain knowledge.
The ISDA Common Domain Model (CDM) is a standardized, machine-readable and machine-executable blueprint for how financial products are traded and managed across the transaction lifecycle. The product scope of the CDM includes OTC derivatives, cash securities, securities financing, and commodities. Detailed documentation on CDM is available here.
DRR is the coding of regulatory rules in CDM. Yes, the rules are coded and the functional logic of each rule is implemented and distributed in multiple programming languages in an open source license.
ISDA and its members are currently developing a DRR implementation for CFTC rewrite and the new EMIR/Refit rules. The project started in 2021 and is continuing in 2022. More jurisdictions are expected to be included. TradeHeader is actively involved in the project implementing and testing all the rules.
Let’s take a look at a specific CFTC field, #83 CDS index attachment point. Each field is modeled in CDM as a reporting rule with a reference to the regulation:
reporting rule CDSIndexAttachmentPoint <"CDS Index Attachment Point">
[regulatoryReference CFTC Part45 appendix "1" dataElement "83" field "CDS Index Attachment Point"
provision "Defined lower point at which the level of losses in the underlying portfolio reduces the notional of a tranche. For example, the notional in a tranche with an attachment point of 3% will be reduced after 3% of losses in the portfolio have occurred. This data element is not applicable if the transaction is not a CDS tranche transaction (index or custom basket)."]
The CFTC CDSIndexAttachmentPoint calls the reporting rule CDECDSIndexAttachmentPoint. CDS Index Attachment Point is a Critical Data Element (CDE) so the implementation of the rule can be reused across jurisdictions:
The CDECDSIndexAttachmentPoint reporting rule extracts the information from the CDM model:
as "83 CDS Index Attachment Point"
The TradeForEvent function extracts the Trade object from the different CDM events in which it may appear:
reporting rule CDECDSIndexAttachmentPoint <"CDS Index Attachment Point">
[regulatoryReference CPMI_IOSCO CDE section "2" field "81"
provision Same as above]
Once we access the CDM Trade object, we navigate through the credit product representation until the generalTerms object:
then extract Trade -> tradableProduct -> product -> contractualProduct -> economicTerms -> payout -> creditDefaultPayout -> generalTerms
The extraction logic for the credit index tranche product is:
if GeneralTerms -> indexReferenceInformation -> tranche exists
then GeneralTerms -> indexReferenceInformation -> tranche -> attachmentPoint
The extraction logic for the credit basket tranche product is:
else if GeneralTerms -> basketReferenceInformation -> tranche exists
then GeneralTerms -> basketReferenceInformation -> tranche -> attachmentPoint
as "2.81 CDS Index Attachment Point"
We are in the process of standardizing a piece of the regulatory reporting via commoditized tooling that can be used across jurisdictions. We are following the path to having common and consistent implementable regulatory standards.
Marc Gratacos is a Managing Partner at TradeHeader. TradeHeader is a global consulting company focused on financial data standards such as FpML, CDM, FIX, and ISO 20022. It also provides software development and training services. Prior to founding TradeHeader, Mr. Gratacos was a Data Architect at the International Swaps and Derivatives Association, Inc. (ISDA). He helped develop FpML (Financial products Markup Language) providing support, analysis, and technical expertise to all FpML working groups. Mr. Gratacos received his Masters Degree in Information Management and Systems, with honors, from the University of California, Berkeley and his BA in economics from the Universitat Pompeu Fabra in Barcelona.