Updating FpML’s FX ProductsAndrew JacobsHandCoded Consulting Ltd.4th Mar, 2010

Contents• Introduction

▫ Background▫ The ‘Option’ Framework▫ Validation Issues

• Basic FX Products▫ Spot & Forward▫ FX Swaps

• FX Option Products▫ Simple FX options

Barriers Averaging

▫ Digital Options▫ Range Accrual

• Term Deposits▫ Money Market Deposits▫ Dual Currency Deposits

Background• This presentation describes a number of

change to the FX options to bring them into line with other product areas▫Turned out not to be that easy as every product

area derives its options inconsistently with the others

▫The changes also update the base products to make better use of XML schema and simplify the validation rules

• This work has been based on experience of using the FX products at BNP Paribas, JP Morgan and a few other firms, as well as designing the FX validation rule set.

Currently No Common Option Base

Option Framework?

•There is no common ‘Option’ base type in FpML▫‘OptionBase’ comes close but forces the

inclusion of a put/call flag which is no good for digitals

•The only thing all option types have in common is that they have is a buyer and seller/writer.

New Option Base Type

• Only enforces a buyer and seller

• Could be used to re-factor other option types

Grammar & Rule Issues

•FX products where added to FpML 3.0 as a DTD based model▫The grammar is very loose – Too many

independent optional elements. It does not enforce relationships between elements

▫The basic data types used for values like rates have no constraints (e.g. can be negative)

Validation Issues

•The FX product set current has ~47 rules▫A lot of rules for such simple products

•A number of rules can be eliminated by adding constraints to element▫e.g. FX rates must be greater than zero

•Some can be eliminated by having more general enumerations▫e.g. sideRateQuoteBasis

Spot & Forward Trades

•In 4.x the spot and forward trades are based on the same fxSingleLeg element▫New model renames this to

fxSpotOrForward

FxSpotOrForward• Largely the same as 4.x

▫ New dealtCurrency element

Exchange Rate• Stricter grammar than 4.x

▫ Eliminates a few rules

FX Swap Trades•An FX Swap is a combination of two trades,

either spot/forward or forward/forward▫The old 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▫Underlying FX trades are named the ‘nearLeg’

and the ‘farLeg’ to indicate the value date order

FxSwap• Now contains only two

underlying legs▫ 4.x. allowed any number –

was effectively a strategy

FX Swap Legs• Near and far legs based

on a new type and not FxSpotOrFoward▫ Is not derived from

Product as in 4.x

FxOption• More consistent with other

products▫ Separate exercise

structures for American and European

▫ Averaging and barriers are represented as ‘features’ not separate products

• New ‘soldAs’ reference to allow buyer/seller perspective to be easier to derive▫ Did I buy a put or sell a

call? • Reordered to bring related

data together

FxAmercanExercise• Adds support for multiple

exercise▫ With optional limits on

the notional size

FxEuropeanExercise• Describes the exercise

parameters and the associated value date

FxOptionFeatures• Adds Asian and/or Barrier

features to the option

FxAsianFeature• Captures the parameters

for the average rate calculation

FxBarrierFeature• Defines a barrier level and

then condition for activation

FxDigitalOption• Uses grammar to ensure

triggers match the exercise style

FxTouch

FxTrigger

• Payout is proportional to the number of days that an FX rate remains between bounds▫ notional * accruing days /

days in period• Can have additional

barrier features▫ e.g. Knock-out barriers

FxRangeAccrualOption

Consistency with Interest Rates?• It was suggested that the TermDeposit

model be made more consistent with Swaps, but▫Confirmations for Term Deposits are much

simpler▫The current model is compares well with

example confirmations•The changes introduced

▫Change the terminology used to identify the parties (e.g. the depositor and deposit taker)

▫Re-order some of the elements to group related data

TermDeposit• Some renaming and

reordering compared to 4.x model

Dual Currency Term Deposits• 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 provides a higher rate of return• These products are confirmed as a single

trade which combines deposit and option data attributes

• Has been modelled as a ‘feature’ that can be added to a term deposit▫There are other variants that could be added

(e.g. deposit take can decided interest and principal payment currency)

DualCurrencyFeature• Describes the properties

of an option used to deliver the interest and principal in another currency

Compatibility with 4.x

•All 4.x FX products can be transform into the new model▫Some element renaming and re-ordering▫Could be achieved with XSLT

•FX Swaps with more than two legs can be modelled as strategies