XML and the future of risk management

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					                                                            Risk analysis

 XML and the future
 of risk management
 Risk managers need to know how to use XML. Without it, they will be stuck in an era of
                constantly changing data formats, argues David Rowe

                ruly enterprise-wide risk manage-                                                           sions. These conventions are contained in what

T               ment continues to elude many
                large financial organisations. Why?
                In terms of technology, it is main-
                ly because of fragmentation – dis-
parate computer systems across both product
and region. So far, the most common attempt to
remedy this has been to build a central data ware-
                                                                                                            are called document-type definitions (DTDs). A
                                                                                                            specific data transmission can include a DTD that
                                                                                                            defines the structure to which the data are sup-
                                                                                                            posed to conform.

                                                                                                            Semantic consistency
                                                                                                            We cannot construct an abstract language that
house that captures all the relevant data from                                                              describes all existing and possible future features
these systems and stores them in a single con-                                                              of a security or derivative transaction. Therefore,
sistent format.                                                                                             we must fall back on mutually agreed conven-
    The problem here, though, is that this is a                                                             tions for how such features are to be represent-
never-ending task. This is especially true in the                                                           ed. Using XML, such an agreement is manifested
capital markets, where new products and new                                                                 in a specific DTD. This defines the kinds of in-
variations of old ones mean that the format of                                                              formation that are either permitted or required,
the data feeds into the central warehouse con-                                                              whether there are zero, one or many values of a
tinually has to be revised and extended.                                                                    given type. It also specifies tags used to repre-
    Now, a new technical innovation called eX-                                                              sent specific concepts. Once such a DTD is de-
tensible Markup Language (XML), offers the                                                                  fined, XML provides syntactical checking for any
promise of improvement. Risk managers should                                                                particular transmission. Matching opening and
understand this new technique and be aware of                                                               closing tags will be checked, the existence of
its potential.                                                                                              unauthorised tags within any given part of an ac-
                                                                                                            tual data transmission will be detected and the
FpML, NTM and all that                                                                                      presence of values specified as required in the
Several initiatives are under way to establish an                                                           DTD will be assured.
XML-based standard for describing financial                                                                     Of more interest is semantic checking. Do the

transactions and events. A consortium led by JP                  avid Rowe is senior vice-                  values, while syntactically correct, make sense in-
Morgan and PricewaterhouseCoopers is propos-                     president of risk management               dividually and in combination? If a value is spec-
ing one standard called Financial Product                        at Infinity, a SunGard company             ified as a floating-point number, XML will not
Markup Language (FpML). Infinity has proposed           e-mail: david_rowe@infinity.com                     produce an error if the actual information that
the Network Trade Model (NTM) and is also par-                                                              follows equals “ABC”. If all elements in a numeric
ticipating in the FpML consortium. Eventually, a                                                            schedule are specified as having to total zero,
consensus will emerge on a core of standard con-      guage created using SGML. It is the foundation        XML itself will not check that this condition is sat-
ventions. When this happens, it will be possible      for distributing information over the Internet. It    isfied by the actual data. Such semantic require-
to move beyond the huge number of bilateral           allows a data packet to be self-describing in one     ments can be specified in a DTD, but the logic
interface formats between specific systems.           important but limited respect; namely, how it is      to understand and enforce them must be engi-
Each system will only need to be able to send         to be displayed by the receiving application (usu-    neered in each particular application.
and receive data formatted according to the stan-     ally an Internet browser).                                Most important, such a DTD is extensible. New
dard XML-based conventions. Financial data                HTML does not permit self-description of the      features can be added or new field types allowed,
consolidation across internal systems will be sig-    informational content of the data. Even more im-      for example, without disrupting existing appli-
nificantly easier. Even more dramatic is the          portant, the “conventions of self-description” in     cations that do not utilise these new features. Just
prospect of automated trade confirmations be-         HTML are static, not dynamic. This was the rea-       like the problem with the browser wars, howev-
tween otherwise incompatible systems. This            son for the incompatibility among browsers a few      er, an old application will not cope with a data
would contribute to a meaningful reduction in         years ago as new HTML “standards” emerged with        feed that takes full advantage of extensions to the
the current level of operational risk.                uncomfortable regularity. Browser versions de-        DTD. This is because it will not have the logic to
So what exactly is XML and where does it come         signed to deal with one set of self-describing con-   deal with newly permitted features of the data.
from? Both XML and the widely known Hyper-            ventions could not handle a later convention that     In effect, any given convention for describing fi-
Text Markup Language (HTML) are descendants           was embedded in a particular Web site.                nancial transactions or life-cycle events is at the
of an earlier language called Standard General            XML is also a descendent of SGML, but in a        same level of abstraction as a particular version
Markup Language (SGML). Unfortunately, using          different sense. Like SGML, XML is not really a       of HTML and can be correctly considered a mark-
the term “mark-up language” for all three of these    mark-up language at all, but a more restricted        up language. As long as later versions are true
is misleading. SGML might better be called Stan-      meta language based on the more general foun-         extensions and do not change any conventions
dard General Meta Language, because it is a tool      dation of SGML. XML is a tool for creating spe-       of an earlier version, there is no need to revise
for creating specific mark-up languages. It exists    cific mark-up languages that have various             existing data feeds. s
at a higher level of abstraction than any specif-     functions. Its most important use, from a risk man-
ic language created by it.                            agement perspective, is to define self-describing     The author would like to thank Kerry
    HTML, in contrast, is an actual mark-up lan-      conventions for various kinds of data transmis-       Williams for his help in writing this article
                                                                 89 • RISK • JANUARY 2000

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