Recent financial crises laid bare serious shortcomings in risk management and financial regulation. In retrospect, the lack of timely granular data reported in a data standard capable of supporting financial analysis contributed much to the crises. The ACTUS project aims to remedy this weakness by creating a global standard for the consistent representation of financial instruments.
The centrality of expected cash flows for financial analysis is obvious and undisputed. Less obvious is the role of the financial contracts. Financial contracts are mutual agreements between counterparties to exchange cash flows. The agreements are written by lawyers in different languages, legal terminology, and jurisdictions. This leaves us with a plethora of terms and different contracts.
However, if one abstracts from the legal terms and focuses on the cash flow obligations, the diversity of financial contracts or agreements shrinks drastically. The vast majority of the relevant financial contracts are built on a manageable number of underlying mechanisms. Financial contracts follow a limited number of patterns.
The goal of ACTUS is to break down the diversity in financial instruments into a manageable number of cash flow patterns – so called Contract Types (CT). Thereby, ACTUS defines two standards:
- ACTUS Data Standard
- ACTUS Algorithmic Standard
The Data Standard defines a universal set of legal terms – or CT Attributes – used as parameters throughout the different financial agreements. It is implemented in form of a Data Dictionary with Attribute Applicability by Contract Type. The second standard defines the logic embedded in legal agreements that eventually turn the contract terms into actual cash flows, or more generally business events.
The Standards together will support forward-looking financial and risk analysis. ACTUS software code will be available under an open source license and can be integrated with any commonly used risk and finance analysis platform. Maintenance of ACTUS will be ensured by the not-for-profit ACTUS Financial Research Foundation and the ACTUS Users Association.