FpML is fast emerging as the data formatting standard for financial products. It could hold the key to a transparent future for e-commerce

The single most important step in risk management technology last year was the decision by JP Morgan and PriceWaterhouseCoopers (PWC) to release FpML – Financial products Mark-up Language. The new language was the result of a joint project to create a set of eXtensible Mark-up Language-based (XML) specifications for currency and interest rate derivatives.

Thorkild Juncker and Edward Hoofnagle, pioneers behind the project, proposed that it form the basis of a wider set of standards and invited the industry to participate. Juncker is head of e-commerce markets at JP Morgan; and Hoofnagle is director of technology and e-business in the financial risk management group at PWC. Juncker and Hoofnagle helped set up a committee to develop the FpML standard, and institutions and technology suppliers have been quick to sign up.

The open nature of the FpML organisation has proved to be a rallying point around which the industry can form a consensus on data standards.

Meetings in New York and London in September attracted nearly 200 participants from banks, trading houses, technology suppliers and elsewhere. A technical committee was established and on October 14 a steering committee was formed comprising representatives from Bank of America, Chase Manhattan, Deutsche Bank, Fuji Capital Markets, JP Morgan, Morgan Stanley Dean Witter, Paribas and Warburg Dillon Read.

The technical committee includes data management and systems integration specialists such as IBM, Sybase and Financial Technologies International, as well as financial software suppliers Infinity and Integra Development, both based in California, which recognise the need for a convergence of XML initiatives if a new standard is to have any chance of success.

FpML will not completely solve data issues. Nor will it connect machines, or manage the routing of messages between systems. And it will do nothing to help a situation where one system handles transactions in batches while another handles them in real time. But a set of standard FpML specifications for formatting derivatives and other financial data should make the task of gathering and consolidating information for risk management significantly easier.

XML is a cousin of HTML (hypertext mark-up language), the standard for presenting information on the Web. Both XML and HTML differ from traditional formats where data is coded or confined to specific fields within records. Instead, they use tags to describe chunks of data, allowing far greater flexibility in what they can handle.

But whereas HTML specifies only how information should be displayed, XML can describe the information within its tags. In other words, it can also convey data about data, known as “metadata”. This metadata is what gives XML its power – it provides an explanatory key for every chunk of information. So it can be applied to any kind of data, including complex financial instruments, descriptions of counterparties and market prices. Another advantage of XML is that its metadata can be understood by both people and machines, which makes the formatting of data more transparent to its users.

This transparent, flexible, extensible format is exactly what is required for the burgeoning world of Internet communications and e-commerce and it has been seized on by technology suppliers and e-businesses of all kinds. It also has the potential to solve the risk management data problem. XML is a format that the industry can rally around to create a lingua franca for financial information.

Many institutions, such as JP Morgan and Dresdner Kleinwort Benson, and software suppliers such as Infinity and Integral Development, have already adopted XML and are using it to format and exchange data within their own systems. But that does not mean they can necessarily exchange data automatically among each other. XML is like a framework or template that can be filled in in a number of ways. To make it viable as a cross-industry standard there has to be some agreement on how to specify common data within the XML format.

As with the early days of most emerging standards, there have been several competing approaches to specifying a financial XML format. In May last year, Integral Development offered the industry FinXML – its XML-based specification for capital markets instruments, transactions and data that it developed for a new systems architecture it launched at the same time. Shortly afterwards, Infinity presented an XML-based model of trades, their associated data and events through the trade lifecycle, which it calls the Network Trade Model.

Meanwhile, Microsoft has been getting in on the act. It is trying to draw a high-level map of business processes and their system requirements, including those in the financial sector. It calls its generic map distributed Internet architecture, or DNA, and its financial subset DNAfs (Distributed Internet Architecture for financial services). Microsoft is filling in the map with technologies and has identified XML as the standard for data formatting and integration. Infinity has joined the DNAfs technical committee, which should help convergence with Microsoft’s efforts as well.

These software supplier initiatives helped establish the credibility of XML. But the efforts could have fragmented and the momentum stalled had not the institutions picked up the baton and proposed a non-proprietary formula for creating financial data standards – FpML.

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