Take It to the Bank
Implementing FpML
Source Code for this article
Global derivatives markets continue to enjoy strong growth. The Bank for International Settlements Quarterly Review for June 2003 notes "Data from the semiannual BIS survey on positions in global OTC derivatives markets at the end of December 2003 show there was an exceptionally sharp increase in gross market values, up by 43% to $6.4 trillion."
The International Swaps and
Derivatives Association
(ISDA) is the global trade
association representing participants
in the privately negotiated
derivatives industry, a business covering
swaps and options across all
asset classes. One of its most
notable achievements has been the
formation of a standardized document
architecture that has greatly facilitated
market evolution.
As a natural next step in market evolution,
ISDA is working with market participants to
express the hardcopy document architecture
in softcopy form to allow increasing volumes
in the derivatives markets to be handled with
greater accuracy and lower cost, through
extensive use of automation. As part of this
process, ISDA formally adopted FpML.org, the
organization that developed Financial products
Mark-Up Language, a business information
exchange standard for electronic dealing
and processing of financial derivatives instruments.
Based on XML, FpML establishes the
industry protocol for sharing information and
dealing in, financial swaps, derivatives, and
structured products (see Figure 1).
FpML 4.0 provides XML Schema objects
to describe the majority of derivative contracts
by volume, derived directly from the
legal framework established by ISDA, and is
made freely available by them under public
license. ISDA does not provide "off-theshelf"
support in the public standard; it is
straightforward to create private extensions,
for product description or workflow
reasons.
These XML Schema objects are
composed to form different distinct
document prototypes, such as a Trade
Confirmation. This document-centric
approach allows us to form document
instances that represent both the full
economics of the deal (or optionally, a
reference to it) and the workflow state
the document instance is currently in.
Web services provide an ideal interface to
services that operate on document instances
given the support provided for structure, data
typing, and platform neutrality. Support can
be provided at all stages of process flow (see
Figure 2).
Several services are outlined below, some of
which focus on the theme of traversal, either
locally within the FpML document instance, or
remotely to related document instances, such
as legal FpML document instances. Techniques
for traversal are well established within the rich
heritage of SGML, and by applications such as
Boeing Data Renaissance Suite 4, which are
applied to critical systems. Such services allow
all elements of the trade "package" to be traversed,
most commonly for software automation,
but also for the benefit of end users who
may need to inspect legal definitions or applicable
business rules.
Other services fit more directly into a conventional
framework of interactive Web application
technology, such as exposing services
using JAX-RPC, to support interaction
between components, both within and without
the organization. These more typically
operate on the document to perform a business
action, resulting in a workflow state transition,
as opposed to traversal services.
FpML for legal documents: Allen & Overy
submitted an initial proposal to ISDA to
represent legal data in electronic form. This
will make it possible to describe the complete
nature of the relationship (legal, credit,
collateral, and commercial) between participants.
Currently the electronic text contained
within FpML documents is illustrative,
and dispute resolution occurs by reference
to definitive hardcopy documents. Our
objective is to reduce the need for human
intervention to resolve definitions and
reduce legal risk.
Business rule validation: XML Schema provides
support for syntactical validation of a
document instance against the associated
document prototype, but cannot ensure
correct business sense is enforced for the
large number of legal syntax combinations
that now exist in FpML. The FpML
Validation Working group has formed
Business Validation Rules, which have been
implemented using both XLinkIt and
Schematron.
Workflow: Earlier versions of FpML concentrated
on describing the economics of a
trade in a neutral context, which gave no
sense of where the trade was in the workflow
process. ISDA has now formed distinct
document types, such as Trade Confirmation,
which arise as part of a well-defined
workflow and allow for the ready
automation of workflow. ISDA/FpML is collaborating
with FIX, with the focus from our
side on performing a gap analysis of FIX
business processes that are applicable to
over-the-counter derivatives markets.
Confirmation matching: The ISDA 2003
Operations Benchmarking Survey clearly
highlights confirmations processing as
one of the most important issues facing
the derivative market today. It finds that
"84% of equity derivative confirmations
( are ) sent out by T+5 ... reasons most often
cited for confirmations not meeting their
normal dispatch times are nonstandard language;
new or nonstandard products; and
delays in obtaining data or approval from
front office, legal or compliance ... average
number of confirmations that are outstanding
... increases generally with the sophistication
of the product."
This highlights both the delay in sending
the confirmation request out, and the subsequent
problem of confirms being outstanding.
FpML-based confirmationmatching
services resolve these issues by
providing a standard language, and allowing
for either policy-based confirmation matching
by each party, or provision of a central
confirmation-matching service.
Valuations: Vendors Gemsoup and
Integrasoft have proposed the addition of
valuation support to FpML. This proposal
distinguishes between the market environment,
the model environment, and
the valuation result, and is an excellent
example of the "package traversal" theme
outlined above, where all involved parties
are able to traverse to the part of the
package of interest to them. The client of
the Valuation service will wish to see both
the valuation and how it was arrived at.
To remove the problem of traversal to a
"remote" part of the package, such as a
yield curve the provider of the valuation
is using, it is most likely that all these
parts will be made "local" through inlining
them into the valuation method. A
fragment of a valuation is shown in
Listing 1.
Summary
Going forward, implementers will
exploit the natural fit between the migration
to electronic documentation and Web
services, with utility and value added as the
main focus. Implementations will vary in
scale between integration of legacy systems
to an external service such as confirmation
matching, through to full front-to-back
support, providing seamless support for the
full life cycle, regardless of where the services
providing this support are located.
Given the wide range of network, software,
and consultancy services already in
the marketplace, it is possible to implement
FpML-based systems at moderate
cost, and without imposing a steep learning
curve. The ISDA 2003 Operations
Benchmarking Survey finds "large firms
indicated that they had increased FpML
use … 33% of medium firms in this year's
survey expect to increase the use of FpML
during 2003." ISDA/FpML will continue to
work closely with market participants to
ensure that they capture the maximum
benefit from automation.
References
Bank for International Statements Quarterly Review for June 2003
www.bis.org/publ/r_qt0306.htm
International Swaps and Derivatives Association:
www.isda.org/index.html
Financial products Markup Language:
www.fpml.org
Boeing Quill 21:
www.boeing.com/defensespace/aerospace/techdata/quill.htm
FIX Protocol Organization:
www.fixprotocol.org/cgi-bin/Workgroup.cgi?
id=1057070654&menu=1057070654
ISDA 2003 Operations Benchmarking Survey:
www.isda.org/c_and_a/pdf/ISDAOperations-Survey2003.pdf
About the Author
Andrew Parry is a project manager at Deutsche Bank, and
chair of the FpML Equity Derivative Working Group. His current
area of specialty is risk control and P&L attribution systems for
business area controllers in equity derivative, convertible bond,
and cash equity business lines. He holds a BA in economics
from Manchester University and a masters degree in computer
science from Sheffield Hallam University.
andrew.parry@db.com
Take It to the Bank by Andrew Parry
WSJ Vol 03 Issue 11 - pg.15
Listing 1
<valuationReport id = "val-report-01">
<portfolioRef>abc-port-01</portfolioRef>
<valuation>
<receiverPartyReference href = "abc"/>
<currency>GBP</currency>
<npv>1203490.00</npv>
<valDate>2003-06-04</valDate>
<npvSide>mid</npvSide>
</valuation>
<marketEnvironmentReference href = "usdlibor"/>
<marketEnvironmentReference href = "euribor"/>
</valuationReport>
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