What is FpML®?
The mission behind FpML:
To streamline the process supporting trading activities in the financial derivatives
domain through the creation, maintenance and promotion of an e-business language for
describing these products and associated business interactions based on industry standards.
products Markup Language) is the business information exchange standard for electronic
dealing and processing of financial
derivatives instruments. It establishes a new protocol for sharing information
on, and dealing in swaps, derivatives and structured products. It is based on XML (Extensible Markup Language), the standard
meta-language for describing data shared between applications. All categories of over-the-counter (OTC)
derivatives will eventually be incorporated into the standard.
The standard, which is freely licensed, is
intended to automate the flow of information across the entire derivatives partner and
client network, independent of the underlying software or hardware infrastructure
supporting the activities related to these transactions. FpML is of value when the
direct communication of derivative trade descriptions and environment information
between two firms is desired. Ultimately, it will allow for the electronic integration
of a range of services, from Internet-based electronic dealing and confirmations to
the risk analysis of client portfolios.
FpML has been designed to be modular,
easy-to-use and in particular intelligible to practitioners in the financial industry. It is
expected to become the standard for the derivatives industry in the rapidly growing field of
electronic commerce. Some important benefits in using FpML include:
- Financial instruments are specified in a format that is readable to both computers and
humans. This enables system-to-system communication within business-to-business e-commerce
- Financial information can be readily exchanged between diverse sets of applications, as
applications and technology vendors provide both turn-key applications and core technology
that support FpML-based information exchange.
- Processing costs will be reduced as a result of lower communication costs between
applications and lower system implementation costs.
- The wholesale financial services market can take advantage of interactive technology to
reduce operational risks while increasing business opportunities.
Background: The Need for FpML®
Over-the-counter (OTC) derivative
transactions such as swaps have developed rapidly since they were introduced in the
early 1980's. These contracts share a number of attributes that make them flexible and
effective for solving many complex financial needs for organizations. For example, as
they involve only two firms ("counterparties"), these transactions can easily be
customized to meet specific customer requirements. As they are over the counter, it is
not necessary to get agreement from an exchange or a regulator to change the contract
specifications. These characteristics have caused the OTC derivatives market to grow
quickly in volume and in product variety.
||However, the very flexibility and
rapid evolution of OTC derivatives has challenged technology. For most of the life of
the OTC derivatives industry, technology development has focused on building tools for
pricing and risk managing these transactions, functions that are primarily internal to
the firms entering these transactions. Because of the wide variety and rapid change in
the products that are traded, it has typically been viewed as not cost effective to
build standard electronic mechanisms for interchanging details of the transactions
between participating firms. The perpetual fear was that any such standardized data
interchange mechanism would be doomed to being obsolete, as new product attributes
could not be added and agreed to in the data interchange standard as quickly as they
could be by trading desks.
The above diagram depicts the current manual process utilized for derivatives
(click on image to view larger size)
There have been several attempts in
recent years to resolve this problem, but so far none of them have been successful in
attracting a critical mass of market participants. However, with the advent of
wide-spread e-commerce provoked by the Internet, and the general availability of
generic document languages like XML, technology has now evolved to the point that it
is possible to see how it can be used to solve this problem cost-effectively.
For this reason, the communication
and confirmation of details of these transactions between counterparties has typically
been highly manual, and therefore error-prone and frequently of poor timeliness. Firms
typically exchange details via fax, and humans read these faxes to compare them with
their own firms' representations of these transactions. Whether for initial
confirmation of the trades, or for purposes such as settlement or collateral matching,
the lack of an automated mechanism for communicating this information causes
significant expense and operational risk, as well as rigidity in business
Vision: Applying FpML®
FpML will facilitate OTC business communication:
- between companies participating in a transaction
- within a company seeking to integrate information across systems
- between a company participating in a transaction and a firm offering a service
related to that transaction, e.g. confirmation matching or valuation.
FpML can be used for a variety of business processes,
- structuring and negotiating the terms of a transaction
- executing and confirming the transaction
- communicating settlement details about the transaction