Updating FpML’s FX Products

1. Updating FpML’s FX Products Andrew JacobsHandCoded Consulting Ltd. 4th Mar, 2010

2. 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

3. 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.

4. Currently No Common Option Base

5. 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.

6. New Option Base Type • Only enforces a buyer and seller • Could be used to re-factor other option types

7. 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)

8. 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

9. Basic FX Products

10. Spot & Forward Trades • In 4.x the spot and forward trades are based on the same fxSingleLeg element • New model renames this to fxSpotOrForward

11. FxSpotOrForward • Largely the same as 4.x • New dealtCurrency element

12. Exchange Rate • Stricter grammar than 4.x • Eliminates a few rules

13. 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

14. FxSwap • Now contains only two underlying legs • 4.x. allowed any number – was effectively a strategy

15. FX Swap Legs • Near and far legs based on a new type and not FxSpotOrFoward • Is not derived from Product as in 4.x

16. FX Option Products

17. 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

18. FxAmercanExercise • Adds support for multiple exercise • With optional limits on the notional size

19. FxEuropeanExercise • Describes the exercise parameters and the associated value date

20. FxOptionFeatures • Adds Asian and/or Barrier features to the option

21. FxAsianFeature • Captures the parameters for the average rate calculation

22. FxBarrierFeature • Defines a barrier level and then condition for activation

23. FxDigitalOption • Uses grammar to ensure triggers match the exercise style

24. FxTouch

25. FxTrigger

26. FxRangeAccrualOption • 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

27. Term Deposits

28. 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

29. TermDeposit • Some renaming and reordering compared to 4.x model

30. 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)

31. DualCurrencyFeature • Describes the properties of an option used to deliver the interest and principal in another currency

32. 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