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Reginald Ford, Grit Denker, Daniel Elenius, Wesley Moore and Elie Abi-Lahoud | Automating Financial Regulatory Compliance Using Ontology+Rules and Sunflower

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Reginald Ford, Grit Denker, Daniel Elenius, Wesley Moore and Elie Abi-Lahoud | Automating Financial Regulatory Compliance Using Ontology+Rules and Sunflower

  1. 1. © 2014 SRI International SRI ProprietarySRI Proprietary Automating Financial Regulatory Compliance Using Ontology+Rules and Sunflower SEMANTiCS 2016, September 12-15, 2016, Leipzig, Germany Reginald Ford, Grit Denker, Daniel Elenius SRI International Wesley Moore, Elie Abi-Lahoud Quarule, Inc
  2. 2. © 2014 SRI International SRI Proprietary $3M fine and COO barred from industry: SEC Charges Owner of N.J.- Based Brokerage Firm With Manipulative Trading (May 1, 2014) Ignored a Rule Failed to Supervise Violated a Rule Failed to Report Layering…gamed the market Violated a Rule
  3. 3. © 2014 SRI International SRI Proprietary Fines and Penalties since 2007* 3 * Committee on Capital Markets Regulation
  4. 4. © 2014 SRI International SRI Proprietary Core Work of Compliance Programs 4
  5. 5. © 2014 SRI International SRI Proprietary An Example: Regulation W • The Federal Reserve Board’s (FRB) Regulation W (Transactions Between Member Banks and their Affiliates) implements Sections 23A and 23B of the Federal Reserve Act (FRA). – Bank affiliate includes any company that controls the bank, any company under common control with the bank, and certain investment funds that are advised by the bank or an affiliate of the bank. • Protects the financial integrity of banks, for example: – Limits RegW-covered transactions with affiliates that are not subsidiaries – Imposes collateral requirements on extensions of credit – Prohibits the purchase of low-quality assets by banks from their Reg W affiliates or sister banks 5
  6. 6. © 2014 SRI International SRI Proprietary RegW Covered Transactions, Exemptions, and Prohibited Transactions • Covered transaction is one that the bank is required to report under RegW rules, e.g.: – Securities issued by affiliates – Securities purchased from an affiliate • Exemptions, e.g., – Intraday credit to affiliates – Riskless principal transactions – Purchase of assets, other than securities issued by affiliates, that have ready, liquid markets for buying and selling • Not permitted, e.g.: – Transactions with counterparty exceeds 10% of bank’s capital stock and surplus – Transactions with all counterparties exceeds 20% of bank’s capital stock and surplus 6
  7. 7. © 2014 SRI International SRI Proprietary Approach to Regulatory Compliance Subject Matter Experts and Technologists Regulations, Related Laws, P&Ps, etc. Production Data from IT systems, spreadsheets, etc. Monitoring & Surveillance Reports SMEs and Technologists capture Regulations and Policies in a machine- understandable format The System executes Machine reasoning over regulations/Policies and your data To produce Surveillance and Monitoring reports that can be reconfigured, escalated and regenerated Sunflower Based Intelligent Desktop or Web Service 1 2 3 7
  8. 8. About the EDM Council • The EDM (Enterprise Data Management) Council is a financial services industry consortium, working to improve data management across the industry • One of their primary focus areas is on content, and in particular, on development of content standards that define and facilitate conversations about  Business entities  Financial instruments  The terms and conditions of financial contracts  Classification to support aggregation and analysis • Membership includes  The largest banks in the US (Bank of America, Citigroup, Bank of New York Mellon, JP Morgan Chase, State Street, Wells Fargo …) and internationally (Bank of Tokyo, Barclays, Canadian Imperial Bank, Credit Suisse, HSBC, UBS, and many others)  The largest insurance companies and brokerage firms  The relevant regulatory agencies (CFTC, OFR, SEC, FINRA, FDIC, Federal Reserve, etc.)  Many of the largest consulting firms and vendors who operate in the financial services industry Copyright © 2013 Thematix Partners LLC
  9. 9. © 2014 SRI International SRI Proprietary FIBO Example: Classification of Securities (fragment) 9
  10. 10. © 2014 SRI International SRI ProprietarySRI Proprietary Leveraging Ontology with Rules • Ontologies provide a conceptual framework for modeling domain knowledge, but . . . • When it comes to modeling complex policies and regulations, we need more expressiveness in the form of rules • Automated reasoning and inferencing tools can use rules to infer new facts from existing facts and data 10
  11. 11. © 2014 SRI International SRI ProprietarySRI Proprietary Why Flora-2 and Not OWL+SWRL for Ontology+Rules? • Flora-2 is a highly expressive knowledge representation language and associated reasoning engine – Developed and maintained primarily by Michael Kifer of SUNY-Stony Brook and Coherent Knowledge Systems – Built on top of XSB-Prolog • Flora-2 advantages over OWL+SWRL include: – N-ary formulas, negation-as-failure, aggregation, higher-order predicates, functions, frame syntax for classes and instances, infix mathematical expressions, prioritized or default rules, and knowledge base update operators 11
  12. 12. © 2014 SRI International SRI Proprietary What is Sunflower? 12
  13. 13. © 2014 SRI International SRI Proprietary Sunflower Highlights • Synchronized suite of tools for ontology and rule editing, understanding, and validation – Text and graphical editors, search, graph views, query UI • Provides English explanation of analysis results • Provides importers from various formats (SQL, CSV, OWL, RDF, SWRL) and live connectors to databases/triple stores • Provides an API to enable integration with enterprise solutions • Declarative semantic language supports faster development than traditional procedural software – Changes easily made, for example, to perform “What If” Analysis • Provides server for web applications • Supports reasoning about hard and soft constraints and thus can rank solutions 13
  14. 14. © 2014 SRI International SRI Proprietary List of loaded projects and ontologies and Knowledge Bases (KBs) Textual view of rules, ontologies and KBs (Flora-2) Sunflower IDE Main Window The IDE is for people with some training in semantic technologies. We also have specialized web browser interfaces for end-users. 14
  15. 15. © 2014 SRI International SRI Proprietary FIBO Ontologies Translated from OWL to Flora • FIBO OWL ontologies and SWRL rules are translated (within seconds) into Flora. 15
  16. 16. © 2014 SRI International SRI Proprietary Example Queries Questions to answer: • Am I in compliance with RegW? Yes/No • Why? / Why not? CounterpartyBank 1) Is counterparty an affiliate? 2) Is transaction covered? 3) Is amount permitted? Covered transactions with an affiliate cannot exceed 10 percent of a bank's capital stock and surplus, and transactions with all affiliates combined cannot exceed 20 percent of the bank's capital stock and surplus. 16
  17. 17. © 2014 SRI International SRI Proprietary Reg-W Covered Transaction Scenarios (extract) 17 Subject Matter Experts (SMEs) described 17 Reg-W scenarios
  18. 18. © 2014 SRI International SRI Proprietary Reg-W Rule Development Translate each row into a formal, machine-readable Flora-2 rule 18
  19. 19. © 2014 SRI International SRI Proprietary Transaction Trade Data Automatic ingestion of production data into Sunflower: CSV & SQL DB importer 19
  20. 20. © 2014 SRI International SRI Proprietary Reg-W Transaction (in Ontology Editor) Transaction instances 20
  21. 21. © 2014 SRI International SRI Proprietary Queries 21
  22. 22. © 2014 SRI International SRI Proprietary Query Results for “Which transactions are (or are not) reportable and permitted?” 22
  23. 23. © 2014 SRI International SRI Proprietary Understanding and Tracing Analysis Results 23
  24. 24. © 2014 SRI International SRI Proprietary Comparing Results • Analysis results can be stored and compared to previous analysis results (e.g., data changes, hypothetical scenarios) 1. Save analysis results 2. Change the Moody rating of the CVS_Care asset from Baa1 to BBB+ using the ontology editor 3. Re-execute query and compare the result • New results in boldface, old results italicized and grayed out 24
  25. 25. © 2014 SRI International SRI Proprietary Sunflower Benefits For Regulatory Compliance 25 Declarative interpretations of regulations shared across the enterprise Compliance officer can modify declarative rules locally/provisionally to perform “what if” analysis Transparent compliance decision making Automatic ingestion of/ live connection to data from IT SQL/RDF systems, spreadsheets, etc. Rationale behind compliance analysis results in English Can ask “why not?” as well as “why?”
  26. 26. © 2014 SRI International SRI Proprietary Headquarters: Silicon Valley SRI International 333 Ravenswood Avenue Menlo Park, CA 94025-3493 650.859.2000 Washington, D.C. SRI International 1100 Wilson Blvd., Suite 2800 Arlington, VA 22209-3915 703.524.2053 Princeton, New Jersey SRI International Sarnoff 201 Washington Road Princeton, NJ 08540 609.734.2553 Additional U.S. and international locations www.sri.com Thank You Questions? Contacts: grit.denker@sri.com reginald.ford@sri.com daniel.elenius@sri.com wesley.moore@quarule.com elie.abi-lahoud@quarule.com
  27. 27. © 2014 SRI International SRI Proprietary Backup slides 27
  28. 28. © 2014 SRI International SRI Proprietary Benefits for Regulatory Compliance Issue Current Sunflower Adapt to new regulations & controls $30K-$500K+ 3-12 months $10K-$40K 1 week to 1 month Automated monitoring for rule violation 0-20% >95% Rate of false positives 75-95% <10% Prevention and Detection N/A ~40% Demand for qualified compliance staff High Low Sharing across enterprise Hours or days (sometimes never) Seconds or minutes Data integration Manual Automated Transparency Poor Results easily understood by all stakeholders Stakeholder collaboration Compliance officer, indirect ALL Stakeholders, direct Evidence chain Obscure and scattered (Spreadsheets, e-mail, etc.) Integrated evidence chain with traceable provenance 28
  29. 29. © 2014 SRI International SRI Proprietary Why Flora-2? Open source, human readable, expressive rules, ontologies, semantic web features
  30. 30. © 2014 SRI International SRI Proprietary Flora-2/Eclipse vs. OWL/SWRL/Protege • Much more powerful rule language than SWRL – Proper negation, if/then/else, aggregation, higher order, n-ary predicates, etc – SWRL can’t create new individuals (only new numbers) – Built-in type checking and metadata support – Debugging statements in rules, error messages with line numbers • HiLog is expressive enough for the “meta modules” (tracer, natural language, task engine) – This makes it easier to make changes to these modules and adapt them for different purposes – Results in improved tracing & natural language result explanation • Human readable source – Easy to see/edit things in context – Syntax highlighting – Supports diffing – Avoids corruptions • Easier to add more views to the UI as Eclipse plugins • Based on XSB Prolog, maintained by Michael Kifer from SUNY Stony Brook

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