In-Depth

How One Industry Adopted XML

• By Nick Wreden
• 10/01/2001

To bridge the gap between universal standards and industry imperatives, consortiums and industry groups are creating XML specifications for specific industries. The best known is RosettaNet for the electronics industry, which has more than 5,000 definitions. More than 3,500 definitions, such as “mouse part,” are unique to the electronics industry, symbolizing the difficulty of developing a universal, inter-industry standard. Other examples include NewsML for the publishing industry and Astronomical Instrument Markup Language (AIML) for those in the space and related industries.

Few disagree over the core standard of XML, which is based on version 1.1 of the XML specification developed by the World Wide Web Consortium, which oversees development for major Internet technology standards. However, agreement gets harder over the schemas. The debate revolves around the vocabulary used and their definitions.

The continuing effort by the currency derivative industry to put aside competitive concerns and develop FpML (Financial Products Markup Language) provides insights into the compelling arguments for XML. It also illustrates lessons for companies seeking to drive XML throughout their industry and supply chains.

The interest rate swaps industry grew from almost nothing in the early 1980s to more than $100 trillion by 2000, drowning the currency derivative market in paperwork. Even the simplest two- or three-page document took 60 to 90 minutes to check and recheck. More complex documents could take up to 50 hours. It was estimated that the manual-intensive process was costing the industry more than $1 billion annually.

Recognizing much of the problem resulted from a lack of communications standards, the industry explored data formats like SWIFT (used for funds transfers) and financial EDI, but found them either inflexible or lacking expandability. Financial powerhouse JP Morgan (now JPMorganChase), working in conjunction with consulting firm PricewaterhouseCoopers, then developed a draft standard based on XML for basic document exchange.

“XML is a rich language for representing information, which makes it particularly attractive for the derivatives industry, where the instruments are very complex,” says Brian Lynn, co-chair of FpML.org. “Until XML came along, there wasn’t any standard rich enough to handle the variety of structures our industry deals with.”

JP Morgan sought endorsements from IBM and other major vendors for its draft standard, issued a press release and contacted executives throughout the industry. The lobbying efforts paid off in a steering committee kickoff meeting in 1999, with representatives from such major industry players as UBS Warburg, Deutsche Bank, Morgan Stanley and Bank of America. The group eventually evolved into FpML.org, a nonprofit organization overseeing XML development for the financial derivatives industry.

The meeting focused on back-office integration, reconciliation and confirmation as well as operational costs. More complex issues were postponed. “Everyone had to agree on where to cooperate and where to compete,” says Lynn. “Nothing like this had ever been done before.”

Ultimately, version 1.0 of FpML emerged, which focused on interest rate swaps and common derivative contracts. FpML.org is now working on expanding XML standards to options, foreign exchange and commodity derivatives. “The roadmap is being created by the entire community; there’s no heavy hand,” says Lynn. Long-term, Lynn hopes the FpML standard is adopted by all businesses to help them manage risk more effectively with less expense.