Alan Coleman Mr

1. XML For Capital Markets
2. Acknowledgements

XML For Capital Markets

HTML links presentation and content inextricably which presents a problem when trying to model content for multi-channel delivery. What is required is the encapsulation of the view from the model of the data. XML represents this adjustment. XML offers a simple intuitive way of describing and creating tags, DTDs and Schemas (more complicated DTDs). This capability has resulted in a huge number of markup languages specifying the inherent commonalities present in various market sectors. One of the markets that has taken this descriptive ability to heart is the Capital Market.

Today's capital markets are moving faster than ever. Innovative products, new market opportunities and lower-barriers to entry are driving the requirement for rapid innovation. Internet based technologies are eliminating traditional market practices, they are reducing the lifecycles of market opportunities and negating geographic locations as an obstacle to making deals. This in turn is feeding into increased competition and decreasing profit margins. If you are not lean in this market then you will be eaten alive. In order to compete companies are throwing out the rule books on how one should conduct business in the market and are beginning to seek competitive advantage wherever they can. One of the main sources of efficiency has been technology. The goal is to reduce operational overhead per trade as much as possible. In isolation technological innovation can offer a firm substantial savings but when innovation is adopted market-wide it offers the possibility of exponentially decreasing cost and overhead while at the same time changing the competitive focus towards innovation. A leaner, more innovative market is good news for all participants and offers true competition derived from intelligent, proactive business models rather than the more traditional savings afforded by process and system re-engineering.

XML's benefits to a capital market participant can be viewed from two standpoints; Internal to the organisation and; External to the organisation.

Internally

XML within organizations offers a way to integrate feeds from various applications. It facilitates data integration and consolidation which in turn offers many advantages to financial firms. Firms can create hubs for risk information, trade information, customer information etc. It offers firms the ability to create architectures that are easily complimented and interchangeable. This presents the advantage of no longer having to rely on one supplier exclusively for any given solution. Having an XML based architecture allows you to resource the best-of-breed niche components and then be confident of their ability to interoperate. This removes the time honoured problem of being dependent on one legacy or proprietary system.

Given the complexity associated with many of the products in the capital markets previous attempts to regulate and define them have failed. The fact that OTC products, for example,change with such rapidity means that the communication and confirmation of details of these transactions between counterparties has typically been highly manual which bring with them the associated human errors and related delays in processing. Current counterparty interaction will typically involve the faxing and telexing of information so that the operator can check counterparty details against those held by their firm. This level of human interaction whether for confirmation, settlement or collateral matching causes significant operational overhead and associated risk, as well as rigidity and lack of innovation in business processes.

Through the construction of systems that can internally represent information in XML format and externally interface with other market participants an opportunity presents itself to further automate the confirmation, settlement and collateral matching procedures and hence reduce a firm's exposure to operational overhead.

XML is perfect for describing the non-static nature of traded products. It allows for the dynamic storage of products whose reference information is constantly fluctuating with the market. Through the adaptation of industry described standards and XML the potential for innovation across the markets promises to fundamentally change operating practices. XML based standards can offer dynamic references through the use of technologies like XPATH. It can make T+0 settlement of trades a realisable goal. Even trading practices can be improved to offer enhanced pre-trade negotiation where a complex trade can be described in XML according to common market references. This trade can then be easily evaluated by any prospective purchaser on his/her own pricing system without need for reformatting. In doing this market efficiency can be improved. Clearance could take place in a centralised electronic clearing house which would make today's paper chase a thing of the past.

Externally

There are a number of industry initiatives currently underway that are trying to encourage the development and subsequent use of XML based financial information exchange standards. Three of the most prominent ones would be FpML, FinXML and FIXML.

FpML describes itself as 'a business information exchange standard for electronic dealing and processing of financial derivatives instruments'. The standard was created by JP Morgan and PriceWaterhouse Coopers but has subsequently been handed over to a consortium of market participants, software vendors and system integrators. It is initially focused on interest rate swaps and FRAs. There have been a number of attempts in the past to try to automate the operationally intensive world of OTC derivative processing however none of them gained broad market acceptance. The fact that FpML is based on a solid, open technology like XML has aided it in gaining credibility. It is supported by practically every major market participant and the standard has been adopted already by a number of institutions for pilot schemes. It offers the following business applications ::

• 1. structuring and negotiating the terms of a transaction
• 2. executing and confirming the transaction
• 3. communicating settlement details about the transaction
• 4. pricing and risk managing transactions
• 5. performing collateral reporting and matching

Whereas FpML has been very specifically targeted at the derivatives market, FinXML has aimed to attain more comprehensive coverage. It has been designed to be a framework to create ' a single universal standard for data interchange within Capital Markets'. This framework supports the use of vocabularies that define various elements and attributes that represent financial transactions, reference data, market data, payments, settlements and confirmations. It also supports a wide variety of related products. All these vocabularies are based upon standards defined by ISDA. FinXML was developed by Integral Corporation. However similar to FpML Integral is currently forming a consortium to drive the standard.

Currently there exists a degree of co-operation between the two standards however it easy to see that they are offering very similar services to the same market and that the current level of cooperation may be difficult to maintain in a ever competitive marketplace. However both standards seem to have different end-games. FpML has served to aide the perception that JP Morgan is an innovative technology adapter and implementor while Integral hopes to profit from building applications and services for FinXML. The only thing that remains certain in this battle to win the hearts and minds of the financial service industry is the inherent uncertainty associated with which standard will win out. What might yet up stage both these standards is the proposed FIXML which is the XML'ified FIX standard. This may prove to be more palatable to banks who are supporting incumbent FIX compatible legacy systems. FIX already supports the majority of products and transactions that both FinXML and FpML are targeting.

What is sure is that these XML based standards are challenging traditional solutions in the middleware space and their associated vendors. The adoption of these standards will result in the shift of syntactic and semantic checking away from the application layer and towards the model layer (XML). This in turn will facilitate the thin client paradigm.It will also negate the need to interface to proprietary data feeds as these systems will have been built to interface to one of the pre-described standards. The new area of focus for these traditional vendors will be developing XML based middleware that allows the consolidation of all these different XML feeds. It should be a functionally rich XML bus that allows you manipulate data, permission it, create audit flows and add security. It should be enabled to allow a 'one source, multiple channel delivery' strategy. Increasingly organisations are turning from being insular with relation to data towards a more open paradigm where information external to an organisation can be leveraged. They also are increasingly expected by clients both private and institutional to externalise their interaction on a real-time basis allowing them access to their information and subsequently allowing direct transactional access as well.

Macalla Software as a vendor in this market has recognised these changes and as such our architecture for multi-channel delivery is an XML based, functionally rich middleware.

This architecture is real-time enabled and offers interfaces to traditional sources of data and functionality aswell as newer XML based feeds. It takes traditional feeds and converts their contents into XML. The middle layer is a functionally rich XML environment where value-added services can be applied. This architecture lends itself to the dual role of an internal consolidation and external distribution.

Figure 1 . Mobility - architecture diagram

There can be no doubt that this data modeling technology will have a fundamental change on capital markets as a whole. Its potential effects are broadsweeping and pervasive. It stands poised to cause a wholescale metamorphosis in the way in which business is conducted in the markets from pre-trade through to post-trade activities. The participants and vendors alike have embraced it as a technology and now they are working through the painful process of trying to realise its potential,both internally and externally. The benefits on offer from successful adoption of this technology almost guarantee that XML will be the next driver for technology in Capital Markets in the coming years.

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