FpML Emerging E-Commerce Standard for OTC Derivatives Trading and Key to Lower Processing Costs

Future of $88 Trillion Derivatives Market Charted at London Symposium

FpML (Financial products Markup Language) is the emerging e-commerce standard for OTC derivatives trading, Phil Ellis of Cygnifi Derivatives Services told a symposium of approximately 160 representatives of financial institutions and technology vendors here November 1. Mr. Ellis, who is Head of Solutions Business for the New York-based firm, said "FpML has a well-defined architecture to integrate a number of applications with diverse technologies and makes it easier for financial institutions to reach consensus on an external standard rather than 'rolling their own'."

The symposium was sponsored by FpML.org, Inc., a consortium of leading banks, information and software vendors, and systems integrators.*

Matt Meinel, Managing Director for UBS Warburg, opened the symposium by noting that the OTC derivatives market has grown to more than $88 trillion of notional since the interest rate swaps market emerged in the 1980s. "This represents a 10% increase overall during 1999," he said, "and more than a 20% increase in interest rate swaps alone."

Damian Kissane Managing Director and Head of Derivatives eBusiness for Deutsche Bank, said "FpML is essential from a business perspective to drive down the cost of processing OTC derivatives, and to satisfy the information demands of the market. Electronic trading is the wave of the future," he said. "Supporting it requires a commonality of straight-through processing between front and back offices and ultimately between institutions that participate in this market."

Other presentations described how FpML is being used at SunGard Trading and Risk Systems; an FpML Toolkit for Java developed by Kronos Software, and work done by Logica in implementing an FpML-based middle office system for managing exotic trades at Commerzbank.

According to FpML.org, some 30 financial, technology and consulting firms are at work to broaden the application of the standard into areas beyond interest rate swaps and forward rate agreements. Responding to demands for faster time-to-market and broader product coverage, the organization is planning to roll out its next release in early 2001 to accommodate interest rate caps and floors, interest rate swaptions, optional and mandatory early swap terminations, basis swaps and cancelable swaps. The consortium will review the scope of this and future releases based on the feedback received at the London symposium and one held earlier in New York. FpML provides the derivatives industry with a unique opportunity to streamline the flow of information across all front-to-back-office processes, promising to dramatically reduce the estimated $1 billion annual cost of OTC trading in financial derivatives. It supports exploring new ways of doing business and challenges existing outdated practices.

Electronic trading is clearly on the upswing, according to FpML.org. While only 2% of the derivative end-user organizations polled in a recent survey use the Internet to negotiate or purchase OTC derivatives, 12% expect to do so within the next 12 months and 25% within 18 months. Of all respondents, 45% already use the Internet to transact financial services businesses of some kind.

FpML is a freely licensed XML-based standard. It is designed to support the electronic dealing and processing of financial derivatives between trading partners, including financial institutions and their client network. The standard received a 2000 Technological Development of the Year award from Risk Magazine.

Visit www.fpml.org for further information on FpML and the symposium

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