The Scope of Fpml 5.1Includes Broadened Businessprocess/Messaging Coverage and Redesigned

1.7 SCOPE

The scope of FpML 5.1includes broadened BusinessProcess/Messaging coverage and redesigned FX product model which includes additional product support.

The FpML FX Working Group evaluated and updated the FX redesign proposal developed by the Modeling Task Force (MTF) to make the FX product model in FpML consistent with other FpML product representationsand to facilitate its further development. As a result of this work many of an original 4.x model’s issues were addressed:

• A number of sets of reusable components that facilitates product development were defined, so that the existing and future FX products will leverage these building blocks to ensure the FX model is coherent and easy to maintain, as per FpML best practices.
• Extended the existing coverage to include Dual Currency Deposits.
• Rationalized the models’ constraints:
• Made use of grammar to bring related data together.
• Made better use of XML schema to simplify the validation rules

1.7.6 FX Scope

In FpML 5.1 Working Draft the following FX products are covered:

• Basic FX Products
• FX Spot and FX Forward (including non-deliverable forwards, or NDFs)
• FX Swap
• FX Option Products (cash and physical settlement)
• Simple FX options
• European and American
• Averaging
• Barriers
• Digital Options
• Range Accrual Option (is expected to be included later in FpML 5.x version)
• Option Strategies (multiple simple options)

In addition, support for the following money market instrument is also provided:

• Term Deposits
• Money Market Deposits
• Dual Currency (feature option).

7 FX PRODUCT ARCHITECTURE

7.1 Foreign Exchange Spot and Forward

Foreign exchange single-legged instruments include spot and forwards. fxSingleLeg contains a reusable entity (FxCoreDetails.Model) that describes common components to FX spot, forward and swap legs:two instances of the exchangedCurrency component (the first currency and the second currency), an optional dealtCurrency that indicates which currency was dealt, either a single value date component for the trade or an optional value date per exchanged currency, an optionaltenorPeriod that (appears in the Reporting View only) denotes the tenor on which both currencies traded will settle, a single instance of the exchangeRate component, and an optional nonDeliverableForward component. An optional confirmationSenderPartyReference to the party that is sending the current document as a confirmation of the trade is accommodated.

7.1.1 exchangedCurrency

The simple FX transaction contains two currencies which are exchanged between parties. The characteristics of each currency exchange: the currency, the amount, and optionally settlement instructions are described in the exchangedCurrency structure. An optional payment date is allowed per currency if there is a requirement to provide for date adjustments for each currency based upon business day conventions to accommodate unscheduled holidays.

7.1.1.1 settlementInformation

Significant effort has been spent in the development of FX to incorporate the appropriate information required for trade confirmation and settlement. An optional settlementInformation structure has been included for each exchanged currency. This can be used in a variety of ways: not at all, flagging a trade for standard settlement, flagging a trade for settlement netting, or specifying the detailed settlement instructions for that particular currency flow.

If the specific settlement instruction is included, then this is broken out into correspondent, intermediary, and beneficiary information. This includes the identification of the routing mechanism (e.g., -SWIFT, Fedwire, etc.) that the trade will settle via and the id and account that the trade will settle via. Routing can be handled either via purely a routing id (e.g., - SWIFT code), routing details (a customer name, address, and account number), or a combination of routing id and details. The following diagrams show the correspondent, intermediary, and beneficiary structures.

7.1.1.1.1 correspondentInformation

7.1.1.1.2 intermediaryInformation

7.1.1.1.3 beneficiaryInformation

7.1.1.1.4 beneficiaryBank

7.1.1.1.5 splitSettlement

Split settlement is also accommodated. Split settlement will mean that there will be multiple beneficiaries associated with a single trade, where the payment amounts are broken down between beneficiaries. The following diagram shows how this has been modeled:

7.1.2 exchangeRate

The rate of exchange is required for a foreign exchange trade. The refactored rate of exchange model has stricter grammar than 4.x, which eliminates a few rules (e.g. fx-1, fx-2: “if forwardPoints exists, then spotRate must exist”, fx-3, fx-28, fx-29 ).The rate of exchange includes a reusable entity (QuotedCurrencyPair) that describes the underlying composition of the rate: the currencies and the method in which the rate is quoted. The actual trade rate is required, but other rate information such as spot rate, forward points and point value are also accommodated. For non-base currency trades, side rates (or rates to base) are provided for.

7.1.3 nonDeliverableForward

Non-deliverable forwards are catered for within the conventional FX single leg structure by including an optional non-deliverable information structure. This content identifies the agreed-upon settlement currency and describes the fixing date and time, as well as the settlement rate source that the fixing will be based upon. The non-deliverable structure is shown below.

The following FX Spot and Forward examples are included:

• fx-ex01-fx-spot.xml
• fx-ex02-spot-cross-w-side-rates.xml
• fx-ex03-fx-fwd.xml
• fx-ex04-fx-fwd-w-settlement.xml
• fx-ex05-fx-fwd-w-ssi.xml
• fx-ex06-fx-fwd-w-splits.xml
• fx-ex07-non-deliverable-forward.xml

7.2 Foreign Exchange Swap

A foreign exchange swap is a single productthat combines two trades, either spot/forward or forward/forward. (The FpML 4.x model allowed any number of exchanges but the new restricts it to just two.In the old model FX Swap was a container for other products – like a strategy. In the new model it’s a single product). A standard FX swap contains only two legs, nearLeg and farLeg to indicate the value date order. . There are a variety of different types of FX swaps in the marketplace: standard (round-amount) swaps, overnight swaps, unequal-sided swaps, forward-forward swaps. All of the features that are available within FxCoreDetails.Model,common components to standard FX spot and forward trades (described previously) can be utilized in describing an FX swap as well.

7.2.1 FxSwapLeg

Near and far legs are based on a new FxSwapLeg type and derived from a super type Leg from which all swap legs are extended(and is not derived from Product as in 4.x).

The following FX Swap examples are included:

• fx-ex08-fx-swap.xml

7.3 Foreign Exchange Option

Foreign exchange options model is completely redesigned compared to 4.x model that was very loose with too many independent optional elements. It did not enforce relationships between elements. The basic data types used for values like rates had no constraints (e.g. could be negative). The model is designed to bring related data together and many elements were renamed in line with FpML naming convention and MTF recommendations.

Foreign exchange options are now more consistent with other option products.FxOption type extends new Option base type - a type that defining the common features of options - buyer and seller model and derived from a Product type (the Option type could be used to re-factor other option types). It also includesseparate exercise structures for standard European and American options. FxOption structure now can be used for both"vanilla”,as well as for Averaging and Barriers options that are represented in fxOption as ‘features’ and not as separate products like in 4.x.

A vanilla fxOption identifies an exercise style, the put currency and amount, and call currency and amount, strike price and premium information. The premium is structured similar to an exchanged currency for a conventional FX trade, where optional settlement information for the premium can be attached. In addition, there are optional procedures associated with the exercise, a soldAs reference to allow buyer/seller perspective to be easier to derive – did I buy a put or sell a call,spotRate that this represents the current market rate for a particular currency pair, quotedAs structure that contains information about how the option was originally quoted, which can be useful.

Below are the structures for a conventional FX OTC option.

7.3.1 americanExercise

Fx American Exercise structure includes additional support for multiple exercise with optional limits on the notional size.

7.3.2 europeanExercise

Fx European Exercise structure describes the exercise parameters and the associated value date.

7.3.3 FxBarrierFeature

The 4.x FX barrier option model extended fx option product with spot rate, fx barrier and trigger payout. As part of the refactoring work, Asian and/or Barrier represented as a new features to the FX Option and not as separate products.An fxOption with barrier features - a conventional option except that it is changed in a predetermined way when the underlying trades at predetermined barrier levels.Foreign exchange barrier features defines the level and the condition for activation. A knock-in option pays nothing at expiry unless at some point in its life the underlying reaches a pre-set barrier and brings the option to life as a standard call or put. A knock-out option is a conventional option until the price of the underlying reaches a pre-set barrier price, in which case it is extinguished and ceases to exist. Barrier options have both a strike price and a barrier price.

An FxBarrierTypeEnum is used to allow for differentiation between knockin, knockout, reverse knockin, and reverse knockout options. One or more barriers are supported. The reference spot rate, while optional, is recommended, as it determines whether the option need to go up or down (or is "out-of-the-money" or "in-the-money") in order to hit the barrier. Below are the structures for an FX OTC barrier features.

Note: FXWG apprv.trigerPayoutstructure (payoutStyle, settlementInformation, amount, currency) that was present in 4.x FxBarrierOptionto be removed in the 5.1 FxOption.

7.3.4 FxAsianFeature

Foreign exchange asian features - (sometimes referred to as asian or average rate) captures the parameters for the average rate calculation. FxOption with asian features is an option whose payout is based upon the average of the price of the underlying, typically (but not necessarily) over the life of the option. These options are popular because they are usually cheaper than conventional options because the averaging process over time reduces volatility.

fxAverageRateOption allows for either a parametric representation of the averaging schedule (e.g., daily, 2nd Friday, etc.), utilizing the same rolling convention schemes as utilized within the interest rate derivatives area. Alternatively, each specific averaging period can be identified, along with a specific weighting factor for that period. In addition, average rate options on occasion, when struck, already have agreed-upon rate observations in the past; the structure accommodates this as well.A combination of an average rateand one or more barrier are supported.Below are the structures for an FX OTC asianfeatures.

7.3.5 premium

7.3.6 cashSettlementTerms

Non-deliverable options are also supported by including the cashSettlementTerms element, which is the identical structure used within non-deliverable forwards.

The following FX Option examples are included:

• fx-ex09-euro-opt.xml
• fx-ex10-amer-opt.xml
• fx-ex11-non-deliverable-option.xml
• fx-ex12-fx-barrier-option.xml
• fx-ex13-fx-dbl-barrier-option.xml
• fx-ex20-avg-rate-option-parametric.xml
• fx-ex21-avg-rate-option-specific.xml

7.4 Foreign Exchange Binary and Digital Options

The terms binary and digital are not clearly defined in the FX markets and can occasionally be synonymous. This is used to define an option that has a discontinuous payout profile. It typically pays out a fixed amount if the underlying satisfies a predetermined trigger condition or else pays nothing. Unlike the standard option, the amounts quoted are the payout amounts as opposed to a notional underlying amount.

Below are the structures for FX OTC binary and digital options.

7.4.1 europeanExercise and trigger

Fx digital option model uses grammar to ensure triggers match the exercise style.

Digital options typically are defined as being European, meaning the observation occurs only if the spot rate trades above (or below) the trigger level on expiry date. The two examples that have been included in the specification are the digital and the range digital.

7.4.1 americanExercise and touch

Binary options, on the other hand, are more like American options, meaning that the payout occurs if the spot rate trades through the trigger level at any time up to and including the expiry date. The four examples that have been included in the specification are the one-touch, no-touch, double one-touch, and double no-touch binary options.

The following FX Digital Options examples are included:

• fx-ex16-one-touch-option.xml
• fx-ex17-no-touch-option.xml
• fx-ex18-double-one-touch-option.xml
• fx-ex19-double-no-touch-option.xml

7.5 Term Deposits

The term deposit is an agreement between two parties to enter into a financial contract. Similar to a forward rate agreement, a term deposit is contained within a single component and contains no interim interest payments. It is an on-balance sheet transaction that pays interest at maturity based upon an agreed interest rate. While the term deposit instrument is technically an interest rate product, it is included within the FX section of FpML because many institutions that utilize FX transactions also conduct short-term deposits in their respective portfolios to fund foreign currency requirements.

Although there are a number of structured deposits that are occasionally transacted in the marketplace, including deposits with amortizing structure, rateset schedules, and periodic interest payment or interest recapitalization schedules, or even deposits that are denominated in one currency but pay interest in another currency, those types of transactions represent a significant minority of the number of deposits dealt in the wholesale financial marketplace. Therefore, the term deposit structure is intentionally very simple to accommodate the simple yet highly liquid deposit instruments.

The fixed interest rate + the foreign exchange option that can provide a higher rate of return become increasingly popular. These products are confirmed as a single trade which combines deposit and option data attributes. In FpML 5.1, a dual currency option has been modeled as a ‘feature’ that is embedded into a term deposit that causes the payout to be in a second currency.

There are other variants that could be added (e.g. deposit taker can decided interest and principal payment currency)

Note that both the start date and maturity date of the term deposit is negotiated upfront and are typically of short duration, so the dates of these instruments are fixed. Any unforeseen holidays will generally cause for renegotiation of the contract. Thereforethere are no allowances for date adjustments.

7.5.1 TermDepositFeatures

Dual Currency Term Deposits is a term deposit with an embedded option that causes the payout to be in a second currency. The fixed interest rate + the foreign exchange option can provide a higher rate of return. These products are confirmed as a single trade which combines deposit and option data attributes which has been modeled as a ‘feature’ that can be added to a term deposit. Element ‘dualCurrency' of type 'DualCurrencyFeature' represents Dual Currency Deposit using the 'termDeposit' product's 'features', instead of the 'strategy' like in 4.x model ( [termDeposit] and [fxSimpleOption] products).

There are other variants that could be added (e.g. deposit taker can decided interest and principal payment currency)

The following FX Simple and Dual Currencyexamples are included:

• td-ex01-simple-term-deposit.xml
• td-ex02-term-deposit-w-settlement-etc.xml
• dcd-ex01-dual-currency-deposit.xml
  7.6 Trade Strategies

One or more financial instruments, of any sort that are supported by the FpML specification, can be combined to form what is called a strategy. This can include various packages of the same or different asset classes in a single trade. Typical examples of this would include option packages (e.g., straddles, strangles) or a delta hedge (FX OTC option with spot risk hedged by FX spot deal). Additionally, other asset classes can be combined in a strategy (e.g., interest rate swap with FX, etc.).

The following Trade Strategy examples are included:

• fx-ex22-straddle.xml
• fx-ex23-delta-hedge.xml

FX WG to do list

• Rreview FX product rules current set to ~47 rules. A lot of rules for such simple products.

A number of rules can be eliminated by adding constraints to the element in the model e.g. FX rates must be greater than zero. Some can be eliminated by having more general enumerations e.g. sideRateQuoteBasis.

• Improve the new FX model
• RangeAcrualOptions – awaiting test cases to review the model.
• Possibly other FX products

1