FPML

Financial Innovation being one of my favourite topics, I decided to pick on some popular technology standards in the Industry. FPML(Financial Products Markup Language), FIX(Financial Information Exchange), SWIFT(Society for Worldwide Interbank Financial Telecommunication) and MDDL(Market Data Definition Language) are major ones. FPML and MDDL are XML based while SWIFT and FIX being older are non-XML. Well I concentrate on FPML here to leave other implementations in later post.

The need for the standards arrived due to communication hassles between the exchanges and different format of messages. To streamline the whole process of trading activities, an e-business language was established based on industry standards for derivatives industry. It is based on XML which is standard meta-language for sharing data between the applications. FPML provides basis for information sharing which is independent of hardware or software underlying.

Though there were already a couple of globally accepted standards previously, they were not able to cater to rising needs of financial products which were innovated constantly since 1980s. OTC(Over-the-Counter) derivatives were constantly evolving on basis of needs of trading partners. Technology at those times were used in price and risk calculations. A typical illustration of how OTC trading operated in those days would help to see the need of such evolution.

"When two partners traded each quoting the suitable price to other, the price would go to price/risk management department of each for confirmation. Once the pricing and risk deparment would confirm the order, the confirmation receipt would go on each sides settlement and collateral management departments to execute the order. The confirmation receipts being different caused non-seamless communication and delay in execution of trades."

Also with growing number of attributes the current systems were doomed to be obselete due to non-provision for such requirements. However, with evolution of Internet and development of global standard as XML, it is now possible to develop systems which can work on flexible messaging format. It has now become cost-effective to build such systems which are less error-prone, manual and lot more flexible to the need of ever-growing financial products.

Advantages
The advantages are quite obvious.
Seamless communication between systems and business processes.
Support for diverse set of applications including turn-key applications and core technology ones.
Reduced processing costs, communication costs and labour costs.
Less operational risks and business opportunities.