Abstract
The Common Domain Model (CDM) is a standardised, machine-readable, and machine-executable model that represents financial products, trades in those products, and the lifecycle events of those trades.[1] An area of CDM that has had a large amount of development over the past two years has been the representation of collateral legal agreements and eligible collateral terms. This white paper outlines how a company can, in a theoretical context, save multiple hundreds of thousands of dollars by implementing CDM into workflow.
Introduction
Beginning as an ISDA initiative[2], CDM has grown from a single governing body concept into a cross jurisdictional, multi-bodied, open-source enterprise, supported by both ISLA[3] and ICMA[4]. The CDM model is now governed by FINOS (The Fintech Open-Source Foundation) who manage several open-source financial projects. An area that has had a lot of dedicated, cross body contributions and time devoted to development has been that of the collateral use cases, with a dedicated working group that regularly meets to capture the essence of digitising the multitude of different collateral cases, agreement terms and eligible collateral criteria[5].
The collateral representation of legal agreements such as the Credit Support Annex (CSA) is now at a robust and comprehensive enough point that it is a viable option for adoption. The CDM model can represent all the common clause outcomes across legacy, VM and IM CSAs. In addition, a standard structure for umbrella agreements and amendments is provided. This is an ideal time for CDM to be used for the representation of collateral data inside financial institutions digital ecosystems. Companies are now beginning to utilise the common domain model in their collateral management systems to manage collateral quickly and easily[6]. Ark 51 provides companies with an easy, accessible and instantaneous way to convert the information from a PDF or Microsoft Word document into CDM format. In reality, it means that companies and institutions can start to ‘talk’ seamlessly to one another, and allow for a single ingestion of data, saving time and effort and removing the risk of multiple sources of truth.
The cost of integration
Digital technology and the technical infrastructure of financial institutions is accelerating at a near exponential rate. Vendors are available to handle multiple different stages of the financial lifecycle of a trade, and are consistently improving their offerings with new technologies such as artificial intelligence, tokenization, blockchain and more and more efficient, cloud-based SaaS offering (Software as a Service).
With the multitude of options available, from multiple different vendors, the very real cost of integrating new systems has never been more relevant to consider. Data lock in, and hence vendor lock in, is a real fear. “More than once, we have had a potential client love our system and want to move, but then conversations stall at moving the already digitised data from one platform to another. It has cost companies tangible benefits from not being able to easily port their data from system to another”[7].
CDM is the obvious solution to this problem, creating the standards for seamless interoperability.
Map for integration once, integrate everything
The obvious positives of CDM (being open-source, community driven, and globally recognised) make it a clear candidate for being the integration language used by financial institutions. Indeed, that was one of the big driving goals of its conception. A company (be it a financial institution like a bank or a hedge fund, or a vendor) adopting CDM as its communication and integration layer, can expect more liquid data transfer, and a much easier adoption of new and emerging technology, removing the risk of vendor and data lock-in. Because of the sensitive nature of the price of integration, and the fact that a case study into the real fiscal impact is exceptionally difficult to contextualise, in this paper we examine two hypothetical companies, and the cost it takes for them to integrate new systems.
Company A
Company A uses an in-house digital solution for managing its collateral processes. It costs a lot of time and money to store the data, and it has decided to seek a vendor to ease the internal workload on managing day-to-day collateral processes. Company A commissions Vendor 1 after an RFP process. Vendor 1 can map from the older digital format natively, or via CDM. Company A opts for native, as a more bespoke option. After a year, company A realises Vendor 1 was not a suitable fit, and instead commissions Vendor 2 to handle the collateral management work moving forward. Vendor 2 is also commissioned to migrate the existing collateral data contained within Vendor 1’s system across, to ensure a single source of truth for all collateral data. As the data is not in CDM format, this migration must be performed using a bespoke mapper to integrate the two systems.
Company B
Company B is exactly the same as Company A except that, on the decision of how to map from Vendor 1, it opts for CDM. On deciding which vendor to engage after deciding Vendor 1 is not suitable, it opts for Vendor 3. This is primarily due to the fact Vendor 3 already has CDM integration, so the second migration costs will fall to effectively zero. This is a clear and obvious advantage that Vendor 3 has gained by utilising CDM.
For the purposes of this hypothetical study, we will assume that there are 200 different distinct data points to be mapped from the legacy system into Vendor 1’s system. We will also assume that it takes approximately half a day to create the necessary mapping to allow migration of a data point from one data representation to another. While this is obviously an over-estimation for something straightforward like base currency, it is probably an underestimation for the more complicated elements like eligible collateral schedules, particularly in an IM context. The final assumption made is that a day rate for a developer competent enough to handle the mapping is GBP 1,000 per day.
Results
| Company A | Company B | |
| Initial legacy migration | £100,000 | £100,000 |
| Migration from Vendor 1 | £100,000 | £0 |
| Total cost | £200,000 | £100,000 |
| Savings from utilizing CDM | £0 | £100,000 |
If after migrating from Vendor 1 either Company A or Company B decides to further integrate or change their collateral management pipeline, the impact on utilising CDM from the beginning of the technical adoption grows.
It is accepted that this is a rudimentary and basic example, and additional considerations may factor into the decision and cost to integrate natively or utilise CDM. An interactive calculator is also available to change the numbers and visualise the cost savings that implementing CDM can bring to a company.[8]
Conclusion
Several years of work has been completed within the Collateral related working groups[9] across the community of members from FINOS and the trade associations to ensure that CDM is ready for production use cases. This has resulted in a clear and obvious argument for both vendors and companies to adopt CDM into the pipeline of data management. A clear and apparent savings potential exists for commissioning companies as well as a palpable advantage to vendors in a very competitive area of the financial technological ecosystem.Ark 51 is an industry leading AI extraction tool, allowing for digitisation of documents with a bespoke automatic and AI powered pipeline, while keeping humans in the loop at the important touch points in the data extraction process. The system allows for key and complex data to be extracted from a range of different contract types, such as the ISDA Master Agreement, Credit Support Annexes, GMSLA, GMRA, Prime Brokerage Agreements and Investment Management Agreements to name a few, with new contract types and data extraction metrics taking minutes to add. Wherever a Common Domain Model representation of the Legal Agreement exists, Ark 51 can map validly and
[1] https://www.finos.org/common-domain-model
[2] https://www.isda.org/2018/02/15/isda-appoints-regnosys-to-develop-digital-common-domain-model/
[3] https://www.islaemea.org/common-domain-model/
[4] https://www.icmagroup.org/media-and-market-data/icma-webinars-and-podcasts/icma-virtual-event-common-domain-model-cdm-for-repo-and-bonds/
[5] https://cdm.finos.org/docs/cdm-collateral-wg/
[6] https://www.vermeg.com/news/vermeg-integrates-common-domain-model-into-colline-collateral-management-system/
[7] Quote from Paul Hands, CTO of Parallel 51, regarding experience of the advantages of utilizing CDM