© 2016 IBM Corporation

Using Cognitive Computing to Streamline Regulatory Compliance

Grace Brasington

IBM Watson Financial ServicesRisk & Compliance Innovation Forum

London

24 May 2017

Regulatory Compliance Challenges

Annual cost to address compliance

$99B Pages of regulation, constantly changing

300MSanctions and fines

$100B+

96%plan to make changesto either their risk management methodologies or the scope and reach of their risk management activities

Source: CEB, Risk Management Survey, 2016

A New Approach is Required

45%wish to spend less time facilitating risk identification and assessment and more time supporting risk monitoring and mitigation

Source: CEB, Risk Management Survey, 2016

Welcome to a New Era in Regulatory Change, Compliance,and Risk

IBM and Promontory Financial Group intend to transform regulatory compliance withcognitive solutions and expertise in the financial services industry

ibm.com/regulatorycompliance

Financial Services

§ Comprehensive regulatory knowledge and understanding of regulator intentions

§ Experienced operations leaders and subject matter experts

§ Expertise on how to best address regulatory obligations

§ Ability to reduce regulatory burden through client specific action plans

§ IBM Watson Solutions for regulatory change management, surveillance, KYC and AML

§ Cognitive technologies to streamline and reduce costs of compliance

§ Scalable platforms for delivering enterprise grade systems and capabilities

§ Large, global delivery capabilities for integration and managed services

Deep regulatory expertise and business process experience

Regulatory compliance solutions powered by scalable, cognitive platforms

IBM + Promontory Financial Group

End-to-EndExecution Capability

Promontory’s deep expertise combined with IBM’s technology and scalable delivery capabilities creates an unparalleled value proposition for our clients

Opportunities to Improve Regulatory Compliance with Cognitive

Regulatory Change Management

Know YourCustomer

Anti-MoneyLaundering Misconduct Surveillance

Address constantly changing regulations and manage control requirements more effectively

Streamline customer due diligence and remediation activities

Enable more effective identification and investigation of suspicious transactions

Identify potential misconduct more effectively

Regulatory Compliance Analytics

• Compliance Repository

• Standard Taxonomy

• Assessments/Tests

• KRIs/KPIs

• Risk Events/Incidents

• Policy Management

• Issues & Actions

• Context to ExtendedGRC Capabilities

• Operational Controls

/

A Cognitive Journey

Regulation Ingestion

1Risk & Control

Lifecycle Management

52 Obligation Extraction &Tagging

3 Control Identification and

Mapping4 Obligation &

Control Analysis

Industry-specific controls

Company policies imports

Normalization of Content

Commodity Futures Trading Commission Financial Crimes Enforcement Network

Consumer Financial Protection Bureau Financial Industry Regulatory Authority

Department of Justice Municipal Securities Rulemaking Board

Federal Deposit Insurance Corporation National Futures Association

Federal Financial Institutions Examination Council Office of Foreign Assets Control

Federal Reserve Board Office of the Comptroller of the Currency

Federal Trade Commission Securities and Exchange Commission

New Requirement: Track, Analyze & Benchmark Regulation

Regulatory Change Management Streamlines the Process of Constantly Changing Requirements

Capture & Ingest Regulatory Content

IdentifyPotential

Obligations

Manage Obligations

& Applicability

Identify & Map

Controls

Manage Controls &

Assess Risks

Existing Scope

2Step

Identify&ManageRegulatoryObligations

Classify & map obligations

Analyze & reportIdentify obligations

Curate regulations to be analysed by Watson

Holistic reporting to monitor the current compliance environment and understand changes in regulation

Watson identifies potential obligations, analyst confirms validity and adds comments

Organize controls based on jurisdiction, line of business and regulations

Input regulations for cognitive processing

Curate regulations to be analysed by Watson

Regulation Ingestion

1 2 Obligation Extraction &Tagging

3 Control Identification and

Mapping

Regulatory Compliance Analytics Overview

Surveillance

Challenges with Surveillance

SILOED APPROACHnot effective

80% alerts false positives, but

still missing some misconduct

CONSTANTLY CHANGING

market manipulation techniques

100+scenarios identified,

growing in complexity across assets and venues

INCREASING EXPECTATIONSset by regulators

72hrs to

respond to investigations

End to End Process: Where does Cognitive apply?

1

Ingest Data

2

Apply Surveillance

3

Identify potential misconduct

8

4

Investigate potential misconduct

Data Management Surveillance Insight: anticipate intent, don’t just detect

View Alerts

Understand Behavior

Confirm

Reject

DataSource Ingestion SurveillanceAnalytics PotentialMisconduct AlertGeneration

PotentialMisconduct AlertReview

§ Aggregatedatafromcoresystems,

§ Applyretentionpolicies§ Dataretainedaccordingto

reg.requirements&internalpolicy

§ Nearreal-timesupervisionpoliciesappliedatfrontoffice

§ Endofdaysurveillancemodelsandalgorithmsappliedinthebackoffice

§ Generatealerts§ Prioritizealertsbyrisk§ Aggregateevidencefor

eachalert

§ Reviewalertsthroughacasemanager

§ ConfirmorrejectalertsbydeterminingiffalsepositiveS

§ Escalateconfirmed

Data Sources

Transactions

Communications

External

15

Opportunity to Transform with Cognitive

Go Beyond Rules Take Holistic Approach

Leverage behaviors and machine learning toproactively identify abnormalities and potential

misconduct without pre-defined rules

Integrated analytics, focused on total conduct across activities and channels. Provide

a 360o view for understanding Trader and Employee behavior

Machine LearningBehaviorProactiveActivityeComms

VoiceTrade

URL: Understand, Reason and Learn

Surveillance Insight for Financial Services

Fuse insights to detect suspicious activities

View linkages with instant drill-down & playbacks

Build employee profileswith personality & behavior traits

See alerts & investigationsfrom continuously updated risk models

Order Trade

Execution Reference

News Social

EmailChatVoice

Reduced cost of employee non-compliance & misconduct

Faster detection of sophisticated scenarios

Risk based prioritization of alerts and reduced false positives

Transactions

Communications

External

Surveillance

Correlates across channels, applying cognitive & machine learning to proactively identify abnormalities and potential misconduct

Know Your Customer / Anti Money Laundering

Challenges with KYC & AML

FINES & SANCTIONS

from failures to adhere to compliance programs

and practices

EXTREMELY MANUAL

PROCESSES highly FTE-intensive

1,000s

from current systems and processes

1 in 5have experienced

enforcement actions

10s of thousands of false positives and too

many alerts

ALERT OVERLOAD

AML COSTS

INCREASING

$10Bis the global spend

expectation in the next couple years

on average rate of 53%

33%of respondents cite challenges

with data quality

Know Your Customer

Opportunities to Apply Cognitive

Collect Customer

Information

Customer Due

Diligence

Customer Risk

Assessment

Onboarding Decision

Review & Refresh

Customer Information

Initial Second Follow-on

New Account Application

AML

Opportunities to Apply Cognitive

Initial Second Follow-on

Transaction Monitoring

AML Investigation Regulatory Reporting

Alert Identification

Alert Prioritization &

Triage

Research & Investigation

Disposition Decision SAR Filing

Initial Second Follow-on

Transaction Occurs

Improving effectiveness & efficiencies Sm

arte

r Tar

getin

g

Better Intelligence

Focus efforts on likely vs. unlikely risks

Improve conversion rates on all alerts

Improve conversion on all cases

Make better decisions

Increase throughput

Chase fewer bad leads

with alert prioritization and automation

Thank you