Historical reasons—including literal sabre-rattling—are behind the laws for driving on the left or right in certain countries. And while these rules function within borders, the optimal approach would be a universal one.

But a dual approach could now develop on the road to machine-executable standards for swaps—where banks and regulators alike are exploring the development of freely available code to ensure compliance with rules governing derivatives.

The first of these electronic blueprints for over-the-counter derivatives product definitions and processes—the common domain model (CDM)—came from an initiative launched by the International Swaps and Derivatives Association in 2017 and revised in 2019. After a slow start, the model has gained a certain amount of traction in the industry.

But now, a second industry body—the Association of National Numbering Agencies’ Derivatives Service Bureau, or Anna DSB—has come forward with its own idea for machine-executable rules that has some in the industry rattled.

If there’s another standard to build to, then we continue to perpetuate the data and integration challenges that have befallen the industry to date

Brian Lynch, SteelEye

The two initiatives use slightly different approaches—and some participants say dual initiatives could complicate reporting infrastructures if there are different standards for firms to work towards.

“These two standards will move at different speeds, and there will be conflicts that will have to be resolved by the market,” says Brian Lynch, a veteran in regulatory reporting and now US president of compliance and regtech firm SteelEye.

The CDM itself was partly aimed at eliminating the proliferation of firms that exist to compare and match derivatives trade details—middleware, messaging and reconciliation vendors.

Should translation layers between standards be required, there is a danger of repeating the bifurcation that has plagued the derivatives industry for years.

“If there’s another standard to build to, then we continue to perpetuate the data and integration challenges that have befallen the industry to date,” says Lynch.

This fragmentation could even play out across jurisdictions. DSB is already the service provider for Mifid II (the second Markets in Financial Instruments Directive) reporting in the European Union, which could assist the new standard’s case for further deployment in the region.

The US might be keener to follow Isda’s CDM. Dawn Stump, a former commissioner at the Commodity Futures Trading Commission, says regulators in the US are open to embracing industry-led solutions, but that other authorities are more skeptical.

The UK is also likely to favor the CDM, according to the regulatory reporting lead at a tier one bank. Stump says she would be “surprised” if there were a need to recreate what the CDM is doing.

“If Anna DSB is trying to go down the path of creating a set of machine-executable definitions that can run to satisfy the entire OTC derivatives reporting requirements, that’s an enormous endeavor that’s taken Isda quite some time.”

Two roads diverged

The benefit of machine-executable rules for banks lies in cutting the need to interpret specific data fields themselves, enhancing efficiency and reducing the time that staff spend on the task, as well as minimizing the risk of fines from misinterpretation. The Bank of England has said regulations could be digitized to streamline reporting, calling them “instructions as code”.

Anna DSB’s proposal comes off the back of its developing an identifier code for individual derivatives, known as the unique product identifier (UPI). Sassan Danesh, part of the management team at Anna DSB, says the work could be extended to create a machine-executable standard for the EU’s swap reporting rules, the European Market Infrastructure Regulation (Emir).

A spokesperson for the European Securities and Markets Authority tells Risk.net it hasn’t been in touch with Anna DSB about the provider’s solution for Emir reporting and that it is “too early to say if and what” might be used. The regulator adds that the choice of any solution would need to be assessed against criteria that include coverage of reporting regimes, extensibility and governance, but that, “as a matter of principle”, Esma relies on the use of International Organization for Standardization (ISO) standards—a worldwide federation of national standards bodies—when setting up reporting requirements. It has not performed an assessment on how CDM could interoperate with Anna DSB’s idea.

“What we are absolutely doing is machine-executable specification for all the data elements required to define the UPI,” says Danesh. “Emir reporting is bigger than that. We are in discussions with European regulators, and if they wished us to do [Emir reporting], then we would do that.”

Anna DSB is building its standard for derivatives events and products using data elements from the UPI and leveraging the Financial Information eXchange (Fix) protocol’s Orchestra tool. Isda’s CDM, on the other hand, is an open-source standard for the electronic dealing and processing of derivatives—developed by the industry—that can produce messages to enable machine-readable regulation.

If Anna DSB is trying to go down the path of creating a set of machine-executable definitions that can run to satisfy the entire OTC derivatives reporting requirements, that’s an enormous endeavour that’s taken Isda quite some time

Dawn Stump, ex-CFTC

Orchestra is “a way of defining any messaging structure, so you could use it for defining regulatory reporting messages”, says Jim Kaye, executive director at the Fix Trading Community. He draws a distinction between the two. “CDM is more of an implementation with executable code. Orchestra can be used to define the data structures the code needs to support, but doesn’t create code. And whereas the Fix protocol is about information transfer between parties, CDM is more about modeling data itself and the transactions that happen on that data.”

Some members of the European Commission’s Expert Group on European Financial Data Space are proposing the use of Isda’s CDM as a blueprint for regulatory reporting, says the German Investment Funds Association (BVI), which says it has yet to receive details of the Anna DSB standard.

So far, industry knowledge of the DSB initiative appears to be limited. Isda says it “doesn’t know enough about these developments yet to be able to discuss them”.

The International Securities Lending Association is also considering use of the CDM. David Shone, director of market infrastructure and technology at Isla, says he hadn’t heard of Anna DSB’s plans, but that the association’s engagement with the CDM is encouraging, and about 20 of its member firms are in a working group looking at implementing the model.

The head of technology at a bank that is also backing Isda efforts to create machine-executable code for reporting describes plans to “reach out” to Anna DSB to find out how the two ideas could complement each other.

Isda’s initiative has an obvious head start, with some firms already using its code for reporting, or to validate their own reporting infrastructure for the US version of swaps reporting rules, as outlined in the Dodd-Frank Act.

Yet the trade body’s standard has some distance to go.

Isda plans to provide a separate code for Emir reporting next year—but some doubt they can implement its solution quickly. Since its launch in 2017, take-up of the CDM across the industry hasn’t been what it could have been. Some say exchanges and clearing houses should lead in pushing the project.

And miles to go

Esma chair Verena Ross said at Isda’s annual general meeting in May that the “appropriate governance framework” was one aspect that needed to be assessed in the drive towards machine-readable reporting.

If the Anna DSB standard gets approval from the ISO, the organization rates its chances of being adopted by regulators.

But just last week, DSB decided to hold off applying for ISO certification until it could consult more with “all relevant stakeholders”. If the decision is taken, however, a fast-track process for ISO certification should take only a “smallish number of months”, according to Kaye of Fix.

[Anna DSB] is a little bit different from the Isda CDM model, where it is purely the private sector

Sassan Danesh, Anna DSB

EU regulatory authorities in particular are said to favor standards certified by ISO. Matthew Coupe, Fix co-chair and Barclays Investment Bank’s director of market structure for Europe, the Middle East and Africa, says: “When you’re looking at it from a regulatory perspective, and particularly within Europe, having an ISO certification across that data standard is looked on very favorably.”

If Anna DSB’s effort were to be supported by an international standards body and by regulators, that would “reduce the risk of inconsistency with the regulator’s expectations”, says SteelEye’s Lynch, and would provide it with an advantage over the CDM.

Anna DSB is touting its initiative as regulator-friendly. Danesh says its technology advisory committee has regulatory observers enabling collaborations between authorities and the private sector: “That is a little bit different from the Isda CDM model, where it is purely the private sector.”

Only this week, Anna DSB has appealed for more derivatives technology practitioners to join its technology advisory committee.

Traveling both?

Anna DSB could make its and Isda’s solutions interoperable, says Danesh, giving banks a choice to use either code. He thinks that public authorities will likely adopt the ISO standard to write machine-executable regulations and that “auto-generators” will be able to translate them to the CDM for those banks that have already invested in the model. There would then be a choice between banks using the proposed ISO standard or the CDM, he says.

He sees Anna DSB’s work as “complementary” to Isda’s, rather than competing with its solution, and points out that Anna DSB is an Isda member.

Anna DSB tends to “plow ahead without consensus”, says a regulatory reporting lead at a tier one bank, who also believes its initiative will eat into the use of the CDM. He believes that endorsing CDM as the ISO standard would have been “a much more pragmatic approach”.

Rudolf Siebel, managing director of the BVI, says that its members “support strongly” the use of ISO 20022 messaging in regulatory standards and that BVI is supportive of Anna DSB. He adds that it would be “helpful” if the CDM also gained ISO approval.

DSB’s Danesh emphasizes that his organization wants to ensure complete interoperability between the ISO standard and CDM, “so we will work with Isda to make sure the CDM is there as a total option”.

As the organization is the “golden source” of reference data for derivatives, he adds, Anna DSB is happy to consider taking leadership positions within Isda’s working groups.

Its efforts are not expected to bear fruit any time soon, however. Danesh says many years will elapse before DSB can extend its UPI solution to the whole of Emir reporting.

SteelEye’s Lynch says that’s no bad thing: “If they’re only talking about it now, then it’s several years before anything really happens here. So we’ll see firms pressing forward with CDM in the hope that good sense prevails.”

In the meantime, we can probably expect some saber-rattling of the metaphorical kind.