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Financial Products Markup Language
introduction to FpML
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Abstract
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Originally released by J.P. Morgan & Co. Incorporated and PricewaterhouseCoopers
LLP, now guided by an organization of key derivatives industry participants, FpML(tm) is a new protocol for Internet-based
electronic dealing and information sharing of financial derivatives, initially
handling interest rate and foreign exchange products. This presentation reviews
the history of FpML; discusses the process of creating a new standard, lessons
learned, success factors and the differences between dot com and dot org;
and explores how changes in technology will create eService opportunities
for derivatives processing in the wholesale capital markets.
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Contents
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Introduction to FpML
The FpML vision
The major components of the FpML vision include:
- Enable e-commerce for financial derivatives
- Create a “lingua franca” for communicating in the derivatives domain
- Driven by the financial industry
- Build critical mass of financial institutionsand vendors
FpML business goals
- Enable electronic communication between firms
- Confirms, Trading, Pricing
- Facilitate inter-system communication within an organization
- Front office ⇒ Mid office ⇒ Back office
- Facilitate STP for derivatives
- Enable new internet-based business opportunities
- Market and credit risk management
- Automated trade confirmation
What is FpML?
- Standard for Internet -based dealing and processing of financial instruments
- Initially focuses on Interest Rate and Foreign Exchange derivatives
- Open Standard based on the XML from the W3C.
Figure 1
. FpML exists in the context of other protocols
Figure 2
. FpML currently describes the trade
Figure 3
. FpML reuses general trade components
Extensible component model
- Ability to add new Views
- Pricing view, risk management view
- Ability to add new Core Components
- Can add pricing information for FX products
- Ability to reuse General Components
- Represent new products reusing existing components
Figure 4
. FpML Views (conceptual)
Business benefits
- Reduces processing cost
- Lower communication costs between apps
- Lower system implementation costs
- Decreases operational risk
- Increases business opportunities
- Enables end-to-end processing
- Allows adding proprietary data for internal processing
Time line
- 1998 - JPM starts prototyping with XML
- Spring 1999 - JPM and PwC begin collaborating
- June 1999 - JPM and PwC announce standard
- Aug 1999 - Draft is released
- July - Sept - Technical meetings, discussions
- Oct. ‘99 - Steering Committee formed (met Nov ‘99)
- Dec. ‘99 - Standards Committee starts meeting
- Jan. ‘00 - Product and Architecture WGs formed
Steering committee
- Consists of senior derivatives business leaders from major market participants
- Sets overall priorities and direction
- Currently consists of representatives from:
- Bank of America, Chase, Deutsche Bank, Fuji Capital, J.P. Morgan, Morgan Stanley, Paribas, UBS / Warburg Dillon Read, PricewaterhouseCoopers (advisor)
Standards committee
- Consists of derivatives technology and middle office leaders (MDs and VPs) from major market participants, and representatives from key vendors
- Defines approach for developing the standard, monitors progress, and officially approves the result
- Currently consists of representatives from:
- All Steering Committee member firms
- CSFB, Citibank
- IBM, Infinity (Sungard), ISDA, PricewaterhouseCoopers, Reuters, S.W.I.F.T
Previous
Table of Contents
Current focus
Q1 deliverable
- Steering Committee set Q1 2000 goal for an approved version of FpML
for a subset of the vision
- Focus on matching of interest rate derivatives to achieve post-trade confirmation
- Initial priority on basic products (FRAs, vanilla swaps, caps/floors, swaptions)
- Steering committee is considering related issues, including legal issues, FpML governance, etc.
Standards committee
- Standards Committee meeting monthly
- Scoping products based on SWIFT MT340 and MT360 messages (⇒ no swaptions in Q1 deliverable)
- Defining approval process
- Two working groups established (products, architecture)
- Developing prototyping plans
- a non-robust interchange of FpML soon after Q1 deliverable
Product working group
- Compared FpML to SWIFT message formats
- Identified issues/inconsistencies
- Reviewing feedback from early prototyping efforts
- Developing consistent definitions for vanilla swaps, FRAs
Architecture working group
- Review/agree on XML conventions, syntax
- Agree on which versions of XML standards to follow
- Address versioning
- Address referencing
- Consider equivalence
FpML milestones and achievements
- January 2000, Risk Magazine - FpML is selected as the most significant technological development in 1999 for the derivatives industry.
- PricewaterhouseCoopers selects FpML as winner of its global Innovation Award for Client Service.
Next steps
- Develop the deployment strategy
- How to exchange the FpML? Will the business process change?
- Raise awareness in firms outside of the process
- Public Communications
- Consider impact on business processes, legalities, etc.
- Other products? (semi-exotics, credit and equity derivatives?)
XML in the Capital Markets
- J.P. Morgan - Cygnifi.com
- ASP for pricing, valuation and risk management
- PricewaterhouseCoopers - Datatopia™
- Full service provider for B2B middleware
- Integral Development - CFOWeb.com
- Internet portal site for CFOs, fund managers, and corporate treasury operations
- Centerprise Services
- ASP for Straight Through Processing (GSTPA)
J.P. Morgan - Cygnifi.com
Business concept
- J.P. Morgan is a first tier investment bank. While virtual exchanges can facilitate efficient pricing, they cannot assume the counterparty credit risk in a derivative transaction. J.P. Morgan can quantify and package the risk in a transaction.
- Use FpML to automate risk management technology, and distribute those services over the web.
Mission statement
- Cygnifi Advice-on-Demand will provide professional, expert advice in the domains of market risk, credit risk, and collateral management.
- These services use the underlying application infrastructure together with independent data and business expertise to deliver valuable analytical business advice to clients.
Value proposition
- The web-based provision of risk management services from a centralized infrastructure will allow cost-effective risk management services to be offered to a wide range of clients who currently do not have access to this functionality due to the high cost of internal or packaged systems.
Services and features
- Cygnifi ASP will include pricing, valuation, market and credit risk management, and collateral management functionality.
- Central customer support teams of high-caliber professionals with leading-edge skills in portfolio valuation, counterparty credit and collateral will be an important element in the provision of these services.
- Counterparty Exposure And Credit Risk Services
- Counterparty exposure calculations based on Monte Carlo simulations.
- Dynamic counterparty exposure analysis based on sensitivities to market parameters.
- Impact of credit enhancements on counterparty exposure provided through collateral.
- Portfolio Valuation And Market Risk Services
- Independent appraisal service
- "What if" scenarios and stress testing
- Collateral Management Services
- CSAs and other types of collateral agreements on-line
- Daily or as needed computation of collateral requirements
- Advice on legal risks associated with collateral and netting enforceability around the world
PwC Universal Data Interface
Business concept
- PricewaterhouseCoopers has developed real time XML based middleware technology (1993-2000).
- Only the largest companies can amortize the cost of middleware implementation and ownership.
- Connectivity is an expectation and a barrier, it does not increase valuation.
- Outsource B2B middleware infrastructure soup to nuts!
Datatopia™ - a happy place for your data!
Mission statement
- Combine high performance middleware, systems integration and operational support to allow B2B providers to outsource connectivity.
- Provide seamless connectivity between files, databases and wire devices (TCP/IP, MQ Series, COM, TIBCO).
- Understand industry specific application requirements.
- Handle institutional volumes and complexity.
Value proposition
- Why buy when you can lease?
- Buying a Service vs. “Coconuts and String”
- Similar to the phone company
- Outsourcing B2B Provider-to-Client Connection
- Decrease Time to Market
- Reduce TCO
- Minimize Operational Risk
Services and features
- One Stop Shopping for B2B Connectivity
- Data Analysis and Specification
- Software Licenses and Maintenance
- Middleware Implementation
- Production Support and Operations
- Full Service Global Client Acquisition
- On site systems analysis and integration
- Improved customer relationship management
- Superior Middleware Technology
- XML Centric, not Buzz Word Compliant
- Very High Volumes and Throughput
- First Client Deployment in 1993
- In Production at +12 Capital Markets FI’s
- Industry Specific Expertise
- Capital Markets Middle Office and ERP Applications
- Insurance Industry Sales Force Automation
- Retail Banking and CRM Applications
Integral Development – CFOWeb
Business concept
- Create a portal that brings together financial institutions, software vendors and corporate clients.
- CFOWeb.com is the financial services industry's first full-service Internet portal site for CFOs, fund managers, and corporate treasury operations. It represents the first single-source location for independent third-party valuations, portfolio and risk management, and trading directly with providers.
Mission statement
- Independent - not affiliated with or beholden to any financial institution or exchange.
- Professional - managed by an experienced group of financial, business, and e-commerce professionals who put customer needs first.
- Neutral - Provides an open and honest meeting place for market participants and does not take sides in any transaction.
Value proposition
- Dependable - carefully screens financial providers to assure that they are of the highest caliber and reputation.
- Efficient - uses the power of the Internet to achieve unprecedented access, ease of use, and economies of scale for both members and providers.
- Secure - employs the latest Internet encryption and security technologies to ensure complete privacy and protection.
Services and features
- Capture and Price Financial Trades
- Interest Rate Swaps
- Currency Swaps
- Interest Rate Caps/Floors
- Forward Rate Agreements
- Foreign Exchange (Spot, Fwd)
- Foreign Exchange Options
- Loans and Deposits
- Government Bonds (for portfolio/risk management only)
- Cash Instruments
- Perform Portfolio Analysis
- Market-to-Market
- Cash Management
- Perform Risk Management
- Calculate Value-at-Risk
- Scenario Analyses
- Market Rate Sensitivity Analyses
- Perform Back Office Operations
- Settlements
- Confirmations
- Payments
- Rate Resetting
- Event Diary Management
- Generate e-mail events for all processes
- Manage a calendar of operational events
Centerprise Services
Business concept
- Redefine the mission of the capital markets institution by providing the first ASP for GSTPA.
- Outsource the entire bank including front, middle and back office technology and operations.
- Create a virtual infrastructure for the capital markets.
Mission statement
- Centerprise is an application service provider (ASP) for capital market organizations.
- The core business focus of Centerprise is to offer a set of on-line enterprise-wide management services targeted for the specialized needs of capital market institutions.
Value proposition
- Virtual infrastructure for many of the daily enterprise-wide production and risk control functions that are currently being performed in-house.
- Tighter control environment in which there is a more explicit linkage between senior management's objectives and the actual daily processes.
- The product focus encompasses on-line enterprise-wide functionality with a strong risk control theme.
Services and features
- Daily market and credit risk management
- Trading P&L and financial reporting
- Product and valuation control functions
- Counterparty and relationship management
- Key workflow processes linking policies, roles, and responsibilities with related process flows
- Data Management Services
- Pricing and market rate data
- Time series management (for purposes like VaR)
- Reference data management for instruments
- Counterparties including credit and legal hierarchy
- Data scrubbing and hierarchy management
- Technical assistance in setting up and maintaining your organizational and HR data, calculation configurations
- Detailed risk classification schemes, instrument type hierarchies, risk factor to market factor mapping, limit types, stress scenarios, policies and procedures based on best practices and related workflow templates.