Derivatives Standards
The race that wasn't seemed to have all the makings of a hard-fought battle, a straight-through processing technical brawl to the finish line with swinging elbows and determined strides. Its winner would have been able to call itself the creator of the standard for delivering financial derivatives and foreign-exchange products information and deal processing over the Internet. But both sides are insisting on playing nice-a good thing, industry watchers say, for the financial services information technology space.
Collaborating IT professionals at J.P. Morgan & Co. and PricewaterhouseCoopers (PWC) have spent the last half year hunkered down in their New York headquarters creating what they call FpML-Financial Products Markup Language-an XML (eXtensible Markup Language)-based protocol that allows for information sharing and electronic dealing of derivatives and foreign exchange products. Meanwhile, some 3,000 miles away in Palo Alto, Calif., Integral Corporation has for the past fourteen months been building FinXML 1.0 (Finance XML), a protocol that also electronically transmits information for trade execution and processing of derivatives and FX, in addition to other financial products. XML is the emerging standard for Net-based information-sharing between applications.
Derivatives and FX deal information that within the next few months will begin being sent over the Net via FpML and FinXML, is now relayed between buy- and sell-sides through a series of faxes, e-mails and phone calls. By all accounts this is an arduous, time-consuming process. Processing of this information over the Net is expected to dramatically decrease paperwork and man hours for derivatives and FX deal makers by automating messaging from indications of interest, to trade confirmation and execution, straight through to clearance and settlement. It will also assist with portfolio analysis in that it will allow firms to receive complex messages on derivatives deals to help price and analyze portfolios.
Both J.P. Morgan/PWC's and Integral's protocols, it would seem, could have been steamrolling toward becoming competing, uninteroperable straight-through processing "standards"-a scenario that would have caused headaches for derivatives and FX buy and sell desk counterparts at investment firms.
A situation like this would have defeated the purpose of a standard, leaving firms to depend on middleware vendors to translate e-dealings between legacy systems-the current method of choice for communicating derivatives-and FX-related information between incompatible computer languages.
Foreseeing the potential quagmire competing standards might present, J.P. Morgan/PWC and Integral have begun working together to ensure that FpML and FinXML are interoperable, according to Edward Hoofnagle, director of technology and e-business of the Financial Risk Management Group at PWC. This means that both protocols, while existing as separate de facto standards, will operate seamlessly with each other when processing information for derivatives and FX deals over the Internet. "FinXML and FpML are not competing standards, but different ways of approaching the same standard itself," adds Waqar Ali, senior consultant at PWC.
To facilitate interoperability between FinXML and FpML, Integral has joined a now-forming J.P. Morgan/PWC FpML technical committee, which also includes financial derivatives, FX, and e-commerce powerhouses such as Merrill Lynch & Co., Credit Suisse First Boston, International Business Machines Corp., Sybase, Inc., Chase Manhattan Corp., and Deutsche Bank. These firms will be meeting in a scheduled series of workshops intended to smooth the way for the implementation of FpML, the specifications of which became available over the committee's site (www.fpml.org) for public use in August. Officials at J.P. Morgan/PWC and Integral could not provide details regarding their technical approaches in assuring their standards' compatibility, citing early planning stages.
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