What is FpML®?

The mission behind FpML:

Financial products Markup Language (FpML) is the business information exchange standard for electronic dealing and processing of derivatives instruments. FpML establishes the electronic 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. 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. While the initial versions of the standard focused on product description for interest rate derivatives, the standard has since been expanded to cover in depth the various derivative asset classes (link to coverage table) and to cover a multitude of business processes in the pre-trade, trade and post trade space. The product coverage has been further enlarged to cover, among others, commercial loans, bonds and repo transactions and since version 5.7 the standard contains representations of actual documents rather than transactions, with the representation of the standardized CSA. FpML has been designed to be modular, easy-to-use and in particular intelligible to practitioners in the financial industry. 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 applications.
  • 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. The counterparties can tailor their particular Transaction.

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. 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. For this reason, the communication and confirmation of details of these transactions between counterparties has for a long time has been highly manual, and therefore error-prone and frequently of poor timeliness. With the growing volumes, focus shifted to optimizing and automating trade processing, in particular the post trade part of the lifecycle. In line with this evolution the FpML development was focused initially on the confirmation process. Great strides have been made and derivatives post trade processing has in most cases closed the gap or indeed taken the lead in post trade processing compared to other financial products. Growth in volumes has required an increased standardization in trade representation and trade processing for the vanilla portion of the market. The highly customized nature of derivative products on the bespoke side of the scale continues to challenge a move towards standardized representation and processing. FpML is unique in covering the whole spectrum.

The 2008 financial crisis has led to new requirements for OTC derivative trade processing. The 2009 Pittsburg G-20 summit mandated the electronic trading of OTC Derivatives and central clearing where appropriate and required reporting of all OTC derivatives to trade repositories. Mandates for public reporting have been put in place as well in various jurisdictions. These requirements are leading to a further standardization of large portions of the derivatives markets and the need to further automate processes. FpML is uniquely placed to be the underlying data standard that describes the messages and data requirements linked to various business processes, from electronic execution to central clearing and trade reporting. The multiple views in FpML allow to develop schemas tailored to the specific requirements.