Wednesday, August 5, 2009

ISDA to regulators: get ready for FpML

Financial regulators want transparency in the OTC derivatives markets. They would like financial institutions and clearing houses to provide transaction and position level data. What's becoming clear to them however is that when they get the data, they may nor be able to figure out what they are looking at. Not only are they going to be swamped with data volume, but each institution may send it in a different format.

To address this issue, ISDA is launching a working group to focus on standardized reporting. The idea is to use a standard financial reporting language called Financial Products Markup Language (FpML). FpML follows the tradition of data delivery protocols using a "markup manguage", similar to the HyperText Markup Language (HTML) that allows browsers to read and display web pages. The idea is to be able to describe any unique OTC derivative transaction with all it's features. Here is and example of FpML - a portion of a bond option description:

From ISDA:
"Reporting of relevant data to the regulatory community and working with the regulators to turn the data available into meaningful risk management tools is one of the key commitments the industry made to regulators in the June 2 letter to the New York Fed and other regulators," said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. "FpML provides the technical framework to provide this data."

Let's hope the regulators will develop the software to interpret, aggregate, and report on the data. And even after they create these massive aggregated reports, it's not clear what, if anything, they will be able to do with this information.

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