The recent announcement that J.P. Morgan & Co. and PricewaterhouseCoopers plan to develop a financial products markup language is a resounding confirmation that Internet technology has been accepted as a strong contender to become the next technology standard on the trading floors of Wall Street.

Wall Street is carefully studying this alternative to the widely used client/server architecture in the hope of solving problems that have been around longer than the Internet itself.

By now, the Internet has proven itself to be a reliable architecture. More so, it has changed the way consumers interact with business. Scalability is one of the biggest obstacles that client/server systems were never able to overcome. The Internet has solved this problem overnight -- several million users go to Amazon.com every month and make transactions.

Having studied these effects, businesses feel comfortable enough to explore the Internet's potential to improve business-to-business relationships, where the stakes are usually higher than in the business-to-consumer world, and its well-publicized success stories such as Amazon.com, Yahoo, and eBay.

If there are any doubts about how digitalization can affect the way we do business, try to remember how we exchanged documents before e-mail became available, or what CDs did to vinyl records. The financial industry is going to be the next prime example.

I am not even talking about the recent revolution in on-line trading. These developments all took place only in equities -- which are a very small fraction of capital markets instruments that are traded on exchanges.

The New York Stock Exchange, Nasdaq, and others get a small piece of that action. Wall Street houses are spending much more time and energy on non-exchange-traded financial instruments such as foreign exchange products, bonds, money market instruments, and derivatives. This is also where they make much more money.

It is estimated that the top players are each spending about $1 billion a year on the development and adoption of software applications, continual hardware upgrading, and user training.

Despite all these efforts and the tens of thousands of dollars banks have spent on individual trader workstations, deals are still closed by a phone call or a fax. It seems ironic that financial products, which should lend themselves more to a digital form than a book or a Pez dispenser, do not have an adequate digital representation to encompass the complete business cycle of such complex transactions. The simple reason is that technology could not keep pace with the capital markets' innovation and the ever-increasing complexity of transactions.

If two bond traders who are surrounded by millions of dollars of technology have agreed to do business together, they pick up the phone or exchange papers to validate the deal. Then four or more people enter data related to the agreement into several systems, processing the deal from the front to the back office and guaranteeing settlement.

This process is bound to change with the emergence of the Web standard XML, eXtensible Markup Language, and Sun Microsystems' Java language. These applications are only now gaining ground with key players in the financial world.

The potential for XML to improve efficiencies cannot be underestimated. Straight-through processing, enabling a financial instrument to pass from system to system throughout its life cycle, is only the beginning.

The one big difference between ordering a book and completing a foreign exchange transaction is standardization. The public so readily accepted Amazon.com as a reliable alternative to brick-and-mortar bookstores because we know what we get. Ordering a book is the same in the real world and in cyberspace.

It is extremely important to understand that such clear-cut definitions for non-exchange-traded capital markets instruments simply do not yet exist in a digital form. Therefore, the creation of a common standard is crucial to the success of this business model. XML can handle this challenge and perform the role of an interpreter.

XML not only enables organizations to represent complex financial instruments in digital form but also allows them to share these transactions across different lines of business, within banks, and between banks and their customers. Suddenly, electronic settlement becomes a close reality. In addition, XML lets banks integrate today's information technology infrastructure with older mainframe computers, which are still in use to process immense flows of data.

XML has the potential to become a standard and revolutionize the way banks do business in capital markets but only if certain conditions apply. To make the most of what XML offers, it has to be established as an industrywide standard, and this cannot be left to the initiative of one institution.

To guarantee lasting success and continuous refinement, a working group has to be formed among those who agree on a set of standards to create one vocabulary that will be the base for all XML applications to come. All existing XML efforts that have been developed within banks will have to be translated into this common vocabulary.

It makes business sense to rely on standards that are already in use, as in the definitions of legal terms offered by the International Swaps and Derivatives Association. Finally all progress that comes out of these joint efforts has to be shared with all players in the financial industry and with vendors.

All these steps will be needed to unlock the power of XML and ultimately bring the most benefit to clients.

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