The introduction of open protocols almost two decades ago changed the face of communication among financial institutions. The first one was FIX protocol. Although it was introduced with limited scope, later the scope was expanded to almost all areas of electronic communication. Today, in securities market, it is widely used protocol for pre-trade, trade, post-trade processes and regulatory reporting.
The credit goes to the concept of open standards, the involvement broader trading community. The next such protocol is FpML that was introduced to serve the OTC derivatives originally. Today it is widely used in derivatives world. The regulatory reporting has been moving over to FpML in last few years. Today, most of the SDR (DoddFrank, EMIR) reporting uses FpML.
In last several years, FpML Regulatory Reporting Working Groups has been working to develop standards to use FpML for regulatory reporting of different products and business events. They are fully defined for jurisdictions such as CFTC and SEC in US, ESMA in Europe.
Although FpML provides the open standard, the internal systems are very distinct and vary by organization’s software platform. It may be hard to map various trade life cycle events and reversal from internal systems to FPML, unless you spend lot of time. I happen to work on this last few years and learned a great deal of reporting process and FpML representation. In this short article, I am sharing some essential event mapping.
Just to give you some context – FpML is XML based open protocol that supports variety of derivatives contracts and business processes. In FpML, we use views to represent a specific business process. Although underlying component formats remain common across all views, each view may have a different set of rules and structure to support the specific business processes. The following list contains various views and the usage (based on latest FpML version).
- Pre-trade – used for messaging in pre-trade processes
- Reporting – used for reporting trading activity, positions, other business processes including reconciliation
- Confirmation – used for post-trade events including trade confirmation
- Recordkeeping – used to communicate Primary Economic Terms of the contract. It is primarily used to report contract details to SDR from all reporting entities
- Transparency – primary purpose of this view is to report transaction information that affects the price discovery. The information eventually made available to market.
Based on the trade events contracts are reported to Regulatory agencies using different views. The following table shows typical derivatives contract life-cycle events and the corresponding FpML event. The event list includes most common events of Cleared and OTC products. Not all events may be applicable to all types of contracts. Please note that although FpML latest versions support comprehensive list of events, the reporting agencies may not support all. The below list provides the event mapping to the most commonly used FpML events.
Contract Event and corresponding Reporting Event (through FpML)
- New trade confirmation => Open Position (recordkeeping)
- Price forming event (new trade, restructure etc) => Realtime (+ the event as mapped below) (transparency)
- Trade Economic terms amendment => Amendment (recordkeeping)
- Trade Party Assignment (Clearing etc.) => Exit old trade, Open Position with new counterparty (recordkeeping)
- Unwind / Termination => Exit (Close position) (recordkeeping)
- Step-In (Novation) => Novation (Trade) (recordkeeping)
- Step-Out (Novation) => Novation (Exit) (recordkeeping)
- Exercise => Exercise (Close position) (recordkeeping)
- Partial Unwind /Termination => Amendment (Partial Termination if supported) (recordkeeping)
- Partial Exercise => Amendment (recordkeeping)
- Cancellation of any Amendment Event => Amendment (recordkeeping)
- Cancellation of any Position closing Event => Open Position (as last event closed the position)
In FpML, combination of multiple tags (tradigEvent, originatingEvent) is used to represent the specific event. For more details on how to represent the above events, refer FpML Specification. For details on SDR reporting in US and Europe, please visit DTCC site.
Important Disclaimer: Please note that this is just my understanding being shared for the educational purposes only. All the information provided here is from public domain, to best of my knowledge no proprietary information is used. It doesn’t include any specific views of my past employers or any regulatory agencies. If any questions or concerns about the content, please contact me directly.