FpML in Syndication

What is FpML?

FpML is Financial Product Markup Language; it is an attempt to have the systems of different financial institutions speak and understand a common language and communicate electronically. FpML strives to establish a new protocol for sharing information between different entities. It is based on eXtensible Marketup Language, or XML, the standard meta-language for describing data shared between applications. In comparison to other prevalent financial standards such as SWIFT and FIX, FpML is purely a standard and does not provide a network or specification for a transport mechanism.

Why the need

In Syndication there are many notices sent by the agent bank to the participant lenders as well as to the borrower. These notices are sent by fax or by emails (fax used more often); each institution following their own format. By converting the fax or email messages into an electronic standardized message, the manual key-punching is sought to be reduced and error in portfolio updating be minimized. When systems talk to each other automatically, the lenders will get an accurate view of their loan portfolio real time. FpML also ensures completeness and accuracy of information by providing as many as forty data fields which can be used for validation by appropriate business logic. None the less to mention the reams of paper saved worldwide when all these paper faxed notices are needed no more!

FpML Standard formulation for Syndication – a Birds-Eye-View

FpML terms & structure for syndication is discussed & decided in 3 collaborative Working Groups (WG):

1. 1.       LSTA Agent Bank Communications WG for the US Market
2. 2.        LMA Operations WG for the European Market
3. 3.       Syndicated Loan FpML WG entrusted in creating the Business Requirements Document

The standards are defined in such a way that the format, though being made to be machine-read, can also be easily human-read. The tags are mostly how the terms appear in a credit agreement; for e.g. <Margin>250</Margin>. Hereby, a consensus is reached for the business processes followed in syndication and an agreement on a common terminology to be used worldwide.

The WG strives to arrive at FpML message types needed for different loan business events like drawdown, rate set, payments etc. Each message type is further broken down into needed data fields (name and data type), optional or mandatory, and to which business event it belongs to. For e.g. a drawdown event can have two message type – Drawdown notice and other Initial Rate Set notice. Both these notices will have one of the data fields as draw down payment; for former it is mandatory while for the latter it is optional.

The different notices standardized under FpML Syndication and the phase in which it has been brought about is as follows:

Phase 1

Loan Administrative Notices

Drawdown Notice

Rate Set Notice

Interest Payment Notice

Scheduled Principal Repayment Notice

Unscheduled Mandatory & Voluntary Principal Repayment Notice

On-Going Fee Payment Notice

One-Off Fee Payment Notice

Phase 2 

Loan Administrative Notices 

Rollover Notice

Letter of Credit Issuance Notice

Letter of Credit Balance Notice

Letter of Credit Amendment Notice

Letter of Credit Fee Notice

Letter of Credit Termination Notice

Pricing Change Notice

Commitment Adjustment Notice

Phase 3

Instrument Extensions and Secondary Market Loan Trading

Deal and Facility Structures

Loan Contract Structures

Loan Trading Notices

Phase 4

Loan Administration Messages

Net Cash Flow Notice

The Loan Admin message types typically go with a common Data Section which consist of the Message Header , Notice Details, Notice Type, Deal Summary, Facility (Tranche) Summary, Loan Contract Summary (for loan contract-level notices), A/c. details (ID, name, beneficiary), Facility Commitment Position, Contact Details, Generic Cash Flow - Payment Flag. Further info available at http://www.fpml.org/

The Way Forward

With FpML standards in place and technicalities being finalized (ver5.5), the next move will be for the financial services industry to provide the infrastructure to enable banks to enter into the electronic era for Syndicated Loans, streamline their operations and improve efficiency and transparency. On the forefront are Citi and JPMorgan Chase Bank, N.A. as administrative agents to transmit loan data (since May 2012) via FpML by using the loan messaging hub from Markit (a service provider). This major transition can be summarized in the words of Atilla Karasapan, Global Loan & Credit Risk Operations Managing Director at Citi - “Migrating to FpML for transmitting agent notices streamlines our operations, makes sense from an environmental standpoint and helps the lenders we serve.  Considering our scale, moving to an entirely electronic environment for notices is a major advance.”