November, 2001

Allan D. Grody,
President, Financial InterGroup,
Adjunct Professor, Stern School of Business, NYU

Over the five decades that financial institutions have deployed electronic information technology, a major constraint on the limits of that technology was the inability of computers to talk to each other through a common information exchange. Today, a potential common language, Extensible Markup Language (XML) born out of Internet technology, more exactly the World Wide Web’s HyperText Markup Language (HTML), has shown promise to finally bring information technology to its full potential in the financial services industry.

Any standard requires a critical mass of users in order to achieve its benefits. The embrace of XML by so many trade associations, industry working groups, major financial institutions and global standards organizations suggest that such a critical mass is being built. What is driving this major initiative now is a heightened recognition of the risks of global interactions amongst financial institutions, the success of standards initiatives at a country or product level, and a drive to move financial transactions closer to a real time payment mechanism, in keeping with the increasingly real time nature of the underlying transactions themselves.

This later point is made more significant as more countries’ economic structures and capital market systems embrace a free market, competitive model. This model rewards the strong and punishes the non-competitive. Thus, this model anticipates failure of some sort amongst financial institutions, with extremes from controlled acquisitions to abrupt bankruptcies. To protect the global financial system in this increasingly competitive regime, financial institutions and their regulators are encouraging uniformity of message formats, communications protocols, data content, and product and participant identifiers so as to enable, ultimately, real time, computer to computer transaction, transfer and payment processing and, thus, minimize risks to the interrelated global financial system.

The number of initiatives now underway is quite remarkable. The most significant and most far reaching is the Global Straight-through-Processing (GSTP) initiative. Its objective is to create a seamless electronic passageway of capital market transactions amongst global financial institutions. The focus is on removing the settlement risk inherent in waiting three days between when a security is bought or sold and when it is paid for and ownership is transferred.

These efforts proceeded from a number of initiatives undertaken over the years by leading financial institutions and software vendors to create international standards for interacting electronically between financial institutions and their support organizations. Initiatives between investment professionals and brokerage firms resulted in the FIX standard; between brokerage firms and custodians, the ISITC initiative; between foreign exchange participants, the CLS system; between payment systems and international securities participants, the SWIFT network; between capital market participants, the ISIN standard; and amongst software vendors and their clients (the OFX standard created by Intuit, Checkfree and Microsoft, Sungard Data Systems Network Trade Model (NTM) and Thomson Financial Service’s OASYS ML).

Each of the initiatives described previously had its origins in different technology eras, some going back 50 years or more with the establishment of symbols to describe issues of securities (i.e. GM, IBM, etc.), later recast into country specific numbering systems (i.e. CUSIP in the U.S., Sedol in the U.K. etc.) and more recently into a universal numbering system, ISIN. Later messaging standards were created, the earliest was the FIX protocol, a standard for communicating orders and executions of securities trades electronically.

FIX originated in the equity world in 1993 with the introduction of a pilot protocol by Fidelity and Salomon Brothers. The Financial Information eXchange (FIX) protocol is a messaging standard developed specifically for the real-time electronic exchange of securities transactions at the order-through-execution phase of the capital market’s financial transaction process. FIX is a public-domain specification owned and maintained by FIX Protocol, Ltd., a volunteer committee of broker-dealers, fund mangers, vendors and other industry participants. With rigid data formatting requirements, FIX satisfied the need for substituting voice interaction, or proprietary systems interactions, with a data standard that could be implemented across PC based input screens.

Recently, the Futures Industry Association was invited to participate in the FIX protocol. For example, while the FIX protocol provided a format for a message such as "buy 50 June Eurodollars," it had no "tag" available for entering futures specific information (i.e. customer type indicator code, origin code, segregated vs. non-segregated funds, time bracket, time in, time out, etc.). The new FIX protocol now recognizes these and many other futures and options functions in its formal standard. In addition, the FIX standard, as are many other legacy standards, is being recast around the XML protocol.

XML is a way of representing data so that its content is discernable within the message or transport layer. Unlike earlier standards that primarily transported data, this standard imbeds the data’s intent, or content, and structure into the message through the use of tags. A typical XML message describing a customer appears on the next page.

XML also employs Document Type Definitions (DTDs) that allow any application to understand both the data and the context of the data. Thus, XML can play an increasingly important role in both the transmission and integration of data into an application.

Two developments in the securities industry are now providing the impetus for a coordinated effort to bring together the work in standards creation now being undertaken by disparate bodies with often-overlapping purposes. These are the move to a new International Standards Organization (ISO) standard for securities messages (ISO 15022) and the growing acceptance of the potential role of XML in overcoming communication barriers in a TCP/IP environment. Paradoxically, it is the fear that the various XML initiatives in the financial services industry could lead to further divergence that has prompted the current formal co-operation within the ISO organizational structure.

The newly formed ISO Working Group is charged with developing a common grammar among the XML initiatives. Represented on the committee are the key XML participants and industry infrastructure organizations including CUSIP/ANNA, DTCC, SWIFT, FIX, GSTPA, ISITC, FINXML, FpML, and Thomson Financial, among others. Key to the success of all the XML variants is that they agree on the "tags" embedded within their specifications. As examples, STPML calls one tag "handling instructions," while the same function is named "21" in FIX; an “execution report” in FIXML is represented as “<ExecutionReport> while in SWIFTML it is “<NoticeOfExecution>”; for a “trade date” of Sept. 10, 2001 the current 15022 syntax is: “98A::TRAD//20010920”; in FIXML it is: “<TradeDate>20010920</TradeDate>”; while in regular FIX it is “75=20010920”. The methodology for rationalizing these conflicts involves a three-step process that begins with the business requirements and leads to a logical design. Once the logical design is in place, transformation rules are laid down to move from the model to its technical implementation, whether in XML or another syntax. Whatever tag is used in a message, the functional (industry accepted definition) must be agreed on after which a single, unique name would be provided in all XML specifications.

ISO 15022 replaces the previous standard for electronic messages exchanged between securities industry participants - ISO 7775 (scheme for message types) and ISO 11521 (scheme for inter-depository message types). It further sets down the principles necessary to provide the various communities of participants with the tools to design message types to support their specific information flows. These tools consist of a set of syntax and message design rules, a dictionary of data fields and a catalogue for present and future messages built by the industry from the defined fields, following the agreed rules. A most recent XML standard, MDDL - Market Data Definition Language (securities prices, volume, bids and offers, etc.), has been constructed following these principles.

The financial services industry has been accommodating the move to message standardization and the XML explosion with a new set of middleware, both for real time message translation as well as guaranteeing message delivery. Many middleware companies are also promising the ability to handle all the legacy protocols as well as the new XML standards, a necessity in the transition phase of any standards initiative. Further, the many software based middleware companies are being challenged by a new set of hardware appliances that imbed the translation and message delivery in the network, portending a more intelligent and scalable solution then centralized server based middleware. In addition, it allows the routing of messages from its content, rather than from its IP address.

The creation of a common content driven messaging protocol for global financial transactions portends a more efficient, more tightly coupled, less risky and more economic financial industry. It holds the promise of a real time global financial services business where transactions and payments occur simultaneously. Creative use of these new standards should enable the financial industry to increasingly be recognized as the first significant global information technology driven service business of the twenty first century.


References

XML for the World Wide Web, Castro, Peachpit Press, 2001
FpML Sets the Standard, Butler, Futures and Options World, June, 2001
XML: The Data Standard Promises to Revolutionize the Financial Services Industry, Shahrawat, Tower Group, September, 1999
XML: Extremely Monumental Let Down?, Lambe, The New Economy, June 2001
Asset Managers Find T+1 Help at the Back Door, Guerra, Wall Street & Technology, October, 2001
The Futures and Options FIX, Burns, Futures Industry, Aug/Sept, 2001
STP Backers Focus on Cross-Border Space, Global Investment Technology,
Oct. 1, 2001
How Money Talks, Nyberg, CFO, October, 2001