## 11 VARIANCE PRODUCT ARCHITECTURE

### 11.1 Variance Derivatives Scope

The Equity Derivative Working Group extended FpML to cover:

- Variance Swaps, a type of volatility swap where the payout is linear to variance rather than volatility, therefore the payout will rise at a higher rate than volatility;
- Short Form Variance Options represented also as Transaction Supplements under ISDA Master Confirmation Agreements.

### 11.2 Overall Architecture

Variance Swaps and Options are modelled using the following product element in FpML:

- varianceSwap
- varianceSwapTransactionSupplement
- varianceOptionTransactionSupplement

these components provide support for:

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11.2.2 varianceSwap

varianceSwap specifies the structure of a variance swap.

| productType - A classification of the type of product. FpML defines a simple product categorization using a coding scheme. productId - A product reference identifier allocated by a party. FpML does not define the domain values associated with this element. Note that the domain values for this element are not strictly an enumerated list. additionalPayment - Specifies additional payment(s) between the principal parties to the netted swap. extraordinaryEvents - Where the underlying is shares, defines market events affecting the issuer of those shares that may require the terms of the transaction to be adjusted. varianceLeg - Variance leg. The maximum allowable number of variance legs has been increased to unbounded to allow Variance Dispersion to be supported.

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11.2.3 varianceSwapTransactionSupplement

varianceSwapTransactionSupplement specifies the structure of a variance swap transaction supplement. This modelled using the same variance legs as Variance Swap, but does not allow for long form content such as extraordinary events.

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11.2.4 VarianceLeg

varianceLeg - A type describing return which is driven by a Variance calculation.

| legIdentifier - Version aware identification of this leg. (e.g. Variance Dispersion typically involves many legs, with 1 IVS and 50 EVS legs being typical. Leg Identifier has been introduced as an optional child element to support identification of each of these legs.)

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11.2.5 varianceOptionTransactionSupplement

varianceOptionTransactionSupplement specifies the structure of a variance option transaction supplement. VarianceOptionTransactionSupplement implements Variance Option Transaction Supplement by providing a short form representation for use in trades governed by a Master Confirmation Agreement.

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