Four groups are busily competing to develop the ultimate Lingua Franca for all financial systems.

By Robert Hunter

The biggest problem in risk management, whether across a global enterprise or between trading desks, has always been the difficulty in getting clean data into and out of various systems. For a while, it seemed as if middleware—a software layer of applications written to allow disparate systems to talk to each other—was the answer. But in most of its current incarnations, middleware has proved to be a bulky, awkward, costly and all-around inelegant solution.

With the stunning proliferation of Internet technology in recent months, it has become clear that another solution was needed that would serve as a lingua franca flexible enough to transfer data between the legacy systems now enabled by web browsers and the new applications written explicitly for the Internet. That’s where the extensible markup language (XML) comes in.

In its simplest form, XML is a standard that allows users to describe data in one application so that it can be passed along to—and understood by—other applications. An XML standard was released last spring by W3C, the international group responsible for creating core web specifications. The W3C had been working for years to make the web more easily accessible, and created standards such as XML to that end.

The problem with any standard is specificity. XML in its original form is essentially a prototype: It works well in passing simplistic, general data from here to there, but it depends on interested technologists developing it to serve an agreed, specific purpose. Standards have been agreed on in high-tech scientific projects like the human genome project, but the same progress hasn’t occurred on Wall Street. Once a standard achieves wide acceptance, a financial version of XML could relieve financial institutions of the hassles and headaches associated with getting disparate data to move smoothly across different applications.

The race is on

As with most Internet-flavored initiatives, time to market is of critical importance. Integral Development Corp. was first out of the gate when it announced in April the creation of FinXML, a capital markets XML standard used in its Integral 4 product that was written based on International Swaps and Derivatives Association standards.

Meanwhile, the steering committee of the Financial Information Exchange (FIX) language, a messaging protocol developed in 1992, had already begun working on its own version of XML, called FIXML, which it released just after FinXML was announced.

“We believe it’s one thing putting out a piece of paper saying, yes, we developed a standard, and another being able to offer useful ways of transmitting and receiving that standard.” Ron Dembo Algorithmics

Then, on June 9, came a bombshell announcement: JP Morgan, the self-styled master of the risk management universe, had partnered with PricewaterhouseCoopers to develop a financial XML called FpML, which can be used for foreign exchange and fixed-income derivatives. “We’re in the business of helping our clients reduce their operational risk and lower their transaction costs,” beams Adam Greissman, a director in the financial services practice of PricewaterhouseCoopers. “From Morgan’s standpoint, the company wants to exchange this information with its clients, so it saw FpML as a strategic enabling technology.”

Less than a week after the FpML announcement, Infinity, a SunGard company, announced that it had contributed its Network Trade Model, a new XML-based risk management product, to the Microsoft Windows Distributed interNetworking Architecture for Financial Services (Windows DNAfs) initiative. (The DNAfs initiative seeks to promote financial industry standards to allow for straight-through processing via business-to-business connectivity and new and legacy application integration.) The upshot: Infinity’s version of XML will become the financial XML used in Microsoft applications.

The XML version that Microsoft supports has one important advantage over rivals: it is expected to integrate perfectly with Excel, the most prevalent financial application. “Excel is still the application of choice for the derivatives and risk management people,” says Cristobal Conde, executive vice president at SunGard Data Systems. “Whatever standard Excel supports at the native level is likely to become the industry standard.”

But the debate is far from over. Some are predicting a half-dozen or more new financial XML standards by the end of the year. Harpal Sandhu, CEO of Integral, scoffs at the notion of a standard developed by any single dealer. “The last thing a money-center bank wants to happen is for one institution to introduce ‘The Language,’” he says. Meanwhile, Algorithmics is reportedly working with some 80 banks to develop another standard before year’s end, and such an approach has its supporters. “The single-vendor-led initiatives [such as FinXML] are not likely to be the important ones,” says Carl Carrie, president of CastleNet, a New York-based software vendor. “It will be the user-based initiatives like the JP Morgan-PwC proposal that are likely to drive the market.”

Of course, few of these announced standards have actually materialized in any workable form, leading many to question the wisdom of proclaiming a standard prematurely. “We believe it’s one thing putting out a piece of paper saying, yes, we’re standard, and another being able to offer useful ways of transmitting and receiving that standard,” says Ron Dembo, president and CEO of Algorithmics. Val Tannen, a professor of information technology at the University of Pennsylvania, agrees. “It doesn’t make sense to introduce an XML format and not describe what it is, or to say that your tools use XML and not tell people what the exact details of your XML format are. XML is supposed to be a method of communication, not something kept on a proprietary basis and shrouded in secrecy.”

XML may be little more than hype at the moment, but vendors and dealers are scrambling to get in the game. Most don’t care which standard is ultimately victorious—as long as it’s theirs.

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