Blockchains and smart contracts were supposed to fix the inefficiencies and slash the costs of derivatives trading, but two years since such promises came in vogue, a foundational issue has yet to be ironed out.
Before banks and traders can rely on a distributed ledger technology as the vaunted “single record of truth,” there first needs to be better standardization. Yet as it stands, they use a hodgepodge of data structures and formats to track the life cycle of trades, reflecting in part the variety of regulatory requirements imposed after the 2008 financial crisis.
Simply put, without a common language, there’s not much to be gained from having a common ledger.
Now, the financial world’s blockchain evangelists are pinning their hopes on a broader industry effort to harmonize the way data is presented and reported, regardless of the platform used. Known as the common domain model (CDM), it was proposed by the International Swaps and Derivatives Association (ISDA) in May of last year and has the support of blockchain tech startups such as R3 and Axoni.
But perhaps the biggest champion of CDM as the key to making blockchain a reality in the derivatives space is Barclays.
The U.K.-based bank recently set up an internal CDM adoption working group, and will be presenting its vision for how smart contracts can be combined with the concept Thursday at ISDA’s annual meeting in Miami, Florida.
It’s a pivotal time for the project, as ISDA is expected to release the first iteration of the blockchain-compatible version of CDM early this summer.
Sunil Challa from the business architect team at Barclays was emphatic about hitting the reset button.
“There is a shiny new technology promising to be a panacea for fixing many post-trade processing issues. So, now is an opportune moment to re-engineer our processes,” Challa told CoinDesk, adding:
“Simply replicating the existing fragmented state would be a colossal missed opportunity.”
A common tongue
Stepping back, Barclays has played a central role in the convergence of DLT, smart contracts and common data standards.
Two years ago the bank showcased a prototype of how smart contracts could be used throughout the lifecycle of a derivatives trade, including negotiating an ISDA master agreement, entering individual trades and performing the trades on a distributed ledger.
While the concept has caught on, the standards challenge remains in the way of adoption, according to Dr. Lee Braine, a member of the investment bank CTO Office at Barclays. On the one hand, distributed ledger platforms are now reaching acceptance by some of the most systemically important market infrastructure incumbents, Braine said.
“But what we haven’t yet seen is adoption of common standards by the industry,” he said. “What we ultimately need in the derivatives space is multiple market infrastructures, including multiple clearing houses, adopting a common standard for data formats, reference data, transactional data, and business processes.”
That’s where Barclays and others believe the CDM comes in.
Traditionally, banks have worked to standardize the format of messages between them, but kept their own idiosyncratic ways of communicating data internally – like a country with a national language but numerous local dialects.
But, as Braine pointed out, the CDM and DLT share a common goal in going further and standardizing data within institutions…