## 8 FX PRODUCT ARCHITECTURE

### 8.1 FX Scope

The Scope of FpML 5.5 Recommendation includes redesigned FX product model developed by the Modeling Task Force (MTF) and FX Working Group to make it more consistent with other FpML product representations and to facilitate its further development. As a result of this work many of an original 4.x model’s issues were addressed:

- A number of sets of reusable components that facilitates product development were defined, so that the existing and future FX products will leverage these building blocks to ensure the FX model is coherent and easy to maintain, as per FpML best practices
- Extended the existing coverage to include Dual Currency Deposits and FX Flexible Forward.
- Rationalized the models' constraints:
  - Made use of grammar to bring related data together.
  - Made better use of XML schema to simplify the validation rules.

In FpML 5.5 Recommendation the following FX products are covered:

- Basic FX Products
  - FX Spot, FX Forward (including non-deliverable settlements, or NDFs) and FX Flexible Forward.
  - FX Swap
- Simple FX Option Products (including, features, cash and physical settlement)
  - FX options
    - European and American

NOTE: Some additional fields for Foreign Exchange Flexible Forward product are being considered for the next draft.

### 8.2 Foreign Exchange Spot and Forward

Foreign exchange single-legged instruments include spot and forwards. fxSingleLeg contains a reusable entity (FxCoreDetails.Model) that describes common components to FX spot, forward and swap legs: two instances of the exchangedCurrency component (the first currency and the second currency), an optional dealtCurrency that indicates which currency was dealt, either a single value date component for the trade or an optional value date per exchanged currency, an optional tenorPeriod that denotes the tenor on which both currencies traded will settle, a single instance of the exchangeRate component, and an optional nonDeliverableSettlement component.

Note: An optional confirmationSenderPartyReference (to the party that is sending the current document as a confirmation of the trade is accommodated) has been moved out from the product economics. It will be placed at the trade level.

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8.2.1 Exchanged Currency

The simple FX transaction contains two currencies which are exchanged between parties. The characteristics of each currency exchange: the currency, the amount, and optionally settlement instructions are described in the exchangedCurrency structure. An optional payment date is allowed per currency if there is a requirement to provide for date adjustments for each currency based upon business day conventions to accommodate unscheduled holidays.

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8.2.2 Exchange Rate

The rate of exchange is required for a foreign exchange trade. The rate of exchange includes a reusable entity (QuotedCurrencyPair) that describes the underlying composition of the rate: the currencies and the method in which the rate is quoted. The actual trade rate is required, but other rate information such as spot rate, forward points and point value are also accommodated. For non-base currency trades, cross rates (or rates to base) to accommodate the currency exchange rates to cross between the traded currencies are provided for.

Note: the refactored rate of exchange model has stricter grammar than FpML 4.x, which eliminates a few rules (e.g. fx-1, fx-2, fx-3, fx-28, fx-29 ).

### 8.3 Foreign Exchange Flexible Forward

FxFlexibleForward-Product model for a flexible-term fx forward (also known as callable forward, window forward). This is a term forward transaction over a specific period, allowing the client full flexibility on the timing of the transactional flow(s). The product allows for (full or partial) execution at a predetermined forward rate, at any time between the start date and the expiry date. Although, the product is an outright, it has some option-like characteristics, leading to the use of option components in the model: (i) the BuyerSeller model expresses the roles of the parties in the overall transaction - the client "buys" the product (ii) the PutCallCurrency model expresses the buyer's perspective on the exchanged currencies i.e. the client may buy (call) or sell (put) the notional currency for the alternative currency.

| BuyerSeller.model-No Annotation Available PutCallCurrency.model-No Annotation Available notionalAmount-The aggregate notional amount which will be exchanged, possibly as multiple partial executions, during the course of the execution period. Any residual notional which remains unexchanged at the expiry date will automatically be executed at the applicable exchange rate (strike). minimumExecutionAmount-The minimum notional amount which must be executed in any single transaction. executionPeriodDates-The period during which the client has the right to execute a transaction, on any business day defined by reference to the specified business centers, subject to the constraints of the minimum execution amount and aggregate total notional amount. * Period dates are inclusive i.e. the expiry date is the final date on which execution may occur.The period during which the client has the right to execute a transaction, on any business day defined by reference to the specified business centers, subject to the constraints of the minimum execution amount and aggregate total notional amount. * Period dates are inclusive i.e. the expiry date is the final date on which execution may occur. earliestExecutionTime-The earliest time of day at the specified business center, at which the client may execute a transaction. latestExecutionTime-The latest time of day at the specified business center, at which the client may execute a transaction. settlementDateOffset-The date on which delivery of the transacted currency amounts will occur, expressed as an offset from the execution date. * This property is optional in the schema, allowing it to be omitted by systems which do not support it; however this information would be expected in contractual documentation (e.g. termsheet, confirmation).The date on which delivery of the transacted currency amounts will occur, expressed as an offset from the execution date. * This property is optional in the schema, allowing it to be omitted by systems which do not support it; however this information would be expected in contractual documentation (e.g. termsheet, confirmation). finalSettlementDate-The final date for settlement. This is the date on which any residual exchange amount will be delivered. * This is an adjusted date i.e. a good business day for delivery in the location(s) specified in executionPeriodDates /businessCentersThe final date for settlement. This is the date on which any residual exchange amount will be delivered. * This is an adjusted date i.e. a good business day for delivery in the location(s) specified in executionPeriodDates /businessCenters forwardRate-Definition of the forward exchange rate for transactions executed during the execution period.Definition of the forward exchange rate for transactions executed during the execution period. forwardRate-Definition of the forward exchange rate for transactions executed during the execution period.Definition of the forward exchange rate for transactions executed during the execution period.

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8.3.1 FxFlexibleForward->executionPeriodDates

executionPeriodDates-The period during which the client has the right to execute a transaction, on any business day defined by reference to the specified business centers, subject to the constraints of the minimum execution amount and aggregate total notional amount. * Period dates are inclusive i.e. the expiry date is the final date on which execution may occur.The period during which the client has the right to execute a transaction, on any business day defined by reference to the specified business centers, subject to the constraints of the minimum execution amount and aggregate total notional amount. * Period dates are inclusive i.e. the expiry date is the final date on which execution may occur.

| startDate-Start date of the execution period/window. expiryDate-Expiry (maturity) date of the execution period. businessCenters-Business centers for determination of execution period business days.

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8.3.2 FxFlexibleForward->forwardRate

forwardRate-Definition of the forward exchange rate for transactions executed during the execution period.Definition of the forward exchange rate for transactions executed during the execution period.

| rate-Constant rate value, applicable for the duration of the execution period.Constant rate value, applicable for the duration of the execution period. spotRate-The spot exchange rate for the specified currency pair as per the specified quote basis, as at the trade date.The spot exchange rate for the specified currency pair as per the specified quote basis, as at the trade date.

### 8.4 Foreign Exchange Swap

A foreign exchange swap is a single product that combines two trades, either spot/forward or forward/forward. (The FpML 4.x model allowed any number of exchanges but the new restricts it to just two. In the old model FX Swap was a container for other products – like a strategy. In the new model it's a single product). A standard FX swap contains only two legs, nearLeg and farLeg to indicate the value date order. There are a variety of different types of FX swaps in the marketplace: standard (round-amount) swaps, overnight swaps, unequal-sided swaps, forward-forward swaps. All of the features that are available within FxCoreDetails.Model, common components to standard FX spot and forward trades (described previously) can be utilized in describing an FX swap as well.

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8.4.1 FX Swap Leg

Near and far legs are based on a new FxSwapLeg type and derived from a super type Leg from which all swap legs are extended (and is not derived from Product as in 4.x).

### 8.5 Foreign Exchange Option

Foreign exchange options model is completely redesigned compared to 4.x model that was very loose with too many independent optional elements. It did not enforce relationships between elements. The basic data types used for values like rates had no constraints (e.g. could be negative). The 5.x model is designed to bring related data together and many elements were renamed in line with FpML naming convention and MTF recommendations.

Foreign exchange options are now more consistent with other option products. FxOption type extends new Option base type - a type that defining the common features of options - buyer and seller model and derived from a Product type (the Option type could be used to re-factor other option types). It also includes separate exercise structures for standard European and American options.

A vanilla fxOption identifies an exercise style, the put currency and amount, and call currency and amount, strike price and premium information. The premium is structured similar to an exchanged currency for a conventional FX trade, where optional settlement information for the premium can be attached. In addition, there are optional procedures associated with the exercise, a soldAs reference to allow buyer/seller perspective to be easier to derive – did I buy a put or sell a call, spotRate that this represents the current market rate for a particular currency pair. Note: quotedAs component has been removed as it was a legacy element carried through the versions and the group felt it was confusing.

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8.5.2 FX Option Exercise

The fxOption element allows the description of a basic FX Vanilla option with European or American exercise.

It provides a (mandatory) choice between describing European or American exercise:

##### 8.5.2.1 American Exercise

##### 8.5.2.2 European Exercise

European exercise is at a date, time, cut and identifies the value date.

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8.5.3 Premium

### 8.6 Foreign Exchange Binary and Digital Options

The terms binary and digital are not clearly defined in the FX markets and can occasionally be synonymous. This is used to define an option that has a discontinuous payout profile. It typically pays out a fixed amount if the underlying satisfies a predetermined trigger condition or else pays nothing. Unlike the standard option, the amounts quoted are the payout amounts as opposed to a notional underlying amount. Below are the structures for FX OTC binary and digital options.

### 8.7 Trade Strategies

One or more financial instruments, of any sort that are supported by the FpML specification, can be combined to form what is called a strategy. This can include various packages of the same or different asset classes in a single trade. Typical examples of this would include option packages (e.g., straddles, strangles) or a delta hedge (FX OTC option with spot risk hedged by FX spot deal). Additionally, other asset classes can be combined in a strategy (e.g., interest rate swap with FX, etc.)

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