1. “Zest for Enlightenment” Z/Yen Group Limited Risk/Reward Managers 5-7 St Helen’s Place London EC3A 6AU United Kingdom tel: +44 (20) 7562-9562 www.zyen.com © Z/Yen Group 2010 Compliance Architectures The Implications For Machine Learning Professor Michael Mainelli, Executive Chairman University College London “The future will be better tomorrow.” Dan Quayle

2. www.zyen.com © Z/Yen Group 2010 Agenda Who are Z/Yen? Compliance issues DAPR - Predict This! Explaining PropheZy In the field Benefits Working together “If a man will begin with certainties, he will end in doubts; but if he will be content to begin with doubts, he will end in certainties.” Francis Bacon

3. www.zyen.com © Z/Yen Group 2010 Z/Yen Overview Special – mission is to be the foremost risk/reward management firm, “helping organisations to improve by making better decisions” Services – projects, systems, coaching/training, interim managers Sectors – technology, finance, NGOs, professional services, outsourcing Some Highlights – British Computer Society Award, DTI Smart Award & Foresight Challenge Award, Global Financial Centres Index, Global Intellectual Property Index, Investment Banking CCC’s, The London Accord, IT for the Not-for-Profit Sector, Clean Business Cuisine “I use not only all the brains I have, but all I can borrow.” Woodrow Wilson

4. www.zyen.com © Z/Yen Group 2010 Some Clients Finance – Reuters, Morgan Stanley, JP Morgan, HSBC, Goldman Sachs, GA Partners, Thomas Miller, Barclays, CSFB, BP Voluntary Sector – Unison, British Red Cross, Cancer Research UK, The Childrens’ Society, Barnardo’s Technology – 3Com, Hitachi, MoD/QinetiQ, Scottish Universities, Medicsight, Research in Motion, Vodafone, GlaxoSmithKline Professional Services – ICAEW, Hill & Knowlton, Kroll, Taylor Wessing Outsourcing – Johnson Controls, East Sussex CC, British Gas, Deutsche Bank

5. www.zyen.com © Z/Yen Group 2010 Compliance Issues Corporate Governance: 1992 Cadbury Report, 1995 Greenbury Report, 1998 Hampel Report, 1999 Turnbull Report and 2003 Higgs report; German KonTraG corporate governance reforms; Sarbanes-Oxley Act 2002; and the OECD Principles of Corporate Governance. General Compliance: Basel 2, Markets in Financial Instruments Directive (MiFID), Sarbanes-Oxley (Section 404), the Patriot Act, Anti-Money Laundering, the Financial Services Modernisation Act, the Insurance Mediation Directive Privacy and Electronic Communications (EC Directive) Regulations, the Freedom of Information Act 2000, substantially different International Financial Reporting Standards, Data Protection Act 1998 and the Financial Groups Directive. Regulators’ Rules: from the FSA, SEC, OCC, BAFIN, etc., let alone SAS 70 or ISO 9000 as voluntarily-incurred compliance, or industry trade association voluntary compliance codes. General Business Regulation: Health & Safety, COSHH, taxation, equal rights, etc.; let alone…

6. www.zyen.com © Z/Yen Group 2010 Compliance Costs “Up to 15% of support staff at Dresdner Kleinwort Wasserstein are working on compliance projects or financial regulations, Stephen Ashton, director of global IT business management at the investment bank, revealed last week.” [Computer Weekly, 1 February 2005] “Regulatory controls take up a sizeable proportion of spend. Basel 2 and Sarbanes-Oxley compliance is chewing up 40% of investment spend.” Kevin Lloyd, Barclays CTO [Computer Weekly, 15 June 2004] Diffuse systems thinking

7. www.zyen.com © Z/Yen Group 2010 The Year(s) of OpRisk in Finance? 199X to 200X – market and credit analogies  Technology  Knowledge - what price risk? Willpower - why do anything? no capital allocation? Discipline - imposed? Basel? “Perfect numbers like perfect men are very rare.” René Descartes

8. www.zyen.com © Z/Yen Group 2010 Z/Yen – Risk/Reward “Errors using inadequate data are much less than those using no data at all.” Charles Babbage

9. www.zyen.com © Z/Yen Group 2010 Risk/Reward Management Volatility Reduction Reward Enhancement Risk Avoidance ‘Margin’ ‘Stability’ ‘Flexibility’ Sustainability

10. www.zyen.com © Z/Yen Group 2010 Existing Approaches Standards - fiduciary ratings ISO9000, SAS70 Manual Necessity 6Ʃ6Ʃ 6.03.499.9997% 5.032099.98% 4.06,21099.4% 3.066,80093.3% 2.0308,00069.2% 1.0690,00030.9% SigmaDPMOYield modelling

11. www.zyen.com © Z/Yen Group 2010 Activity-Based Cost Variance New Approaches Dynamic Anomaly & Pattern Response Environmental Consistency Confidence KRI  Losses Stochastic AccountingEnterprise Risk/Reward Management Systems Prediction Markets

12. www.zyen.com © Z/Yen Group 2010 Philosophical Splits Six SigmaISO9000 Total Quality  Checklists  Procedures  Inspection  Numerical targets  Engineering  Automation  Contribution  Commitment  Culture MeasureManage Motivate

13. www.zyen.com © Z/Yen Group 2010 What is DAPR? Dynamic Initiates an action Real-time Anomaly & Pattern Identifies unusual behaviour Reinforces successful patterns Response Adaptive, moves with the data Integrative, can work without rebuilding the entire IT architecture “Inertia can develop a momentum of its own.” attributed to Douglas Hurd by Lord Howe

14. www.zyen.com © Z/Yen Group 2010 How – IT Architecture Bulk Load Excel Predict Model “Errors using inadequate data are much less than those using no data at all.” Charles Babbage

15. www.zyen.com © Z/Yen Group 2010 Anomalies

16. www.zyen.com © Z/Yen Group 2010 Network Integration

17. www.zyen.com © Z/Yen Group 2010 Applications Increase success rates among targets, reduce churn Identify best sales techniques, bid approaches or cross- sales Set targets for client revenue, profitability, bid success, satisfaction as well as – television audience and time predictions, price-your-audit, property costs, credit scorecards, asylum seeker costs, song charts, satellite imagery, client targeting, customer satisfaction, bid success, project success/risk, homeland security, anti-money laundering … “Science must begin with myths, and with the criticism of myths.” Karl Popper

18. www.zyen.com © Z/Yen Group 2010 Predict This! PropheZy makes predictive applications using readily available data PropheZy is based on a SVM as an ASP with XML architecture so it integrates with existing IT architectures PropheZy’s development environment is Excel, reducing training and integration issues “Although this may seem a paradox, all exact science is dominated by the idea of approximation.” Bertrand Russell

19. www.zyen.com © Z/Yen Group 2010 PropheZy Model – “Cast” “The purpose of models is not to fit the data but to sharpen the questions.” Samuel Karlin

20. www.zyen.com © Z/Yen Group 2010 PropheZy Predict – “Forecast” “Prediction is extremely difficult. Especially about the future.” Niels Bohr

21. www.zyen.com © Z/Yen Group 2010 Results – LSE Testing & DTI Smart Award credit diabetes dna heart letter satimage segment vehicle 0.00 0.20 0.40 0.60 0.80 1.00 Error rate worst best average PropheZy “unboosted” PropheZy “boosted” “96.37% of all statistics are made up.” Kevin D. Quitt

22. www.zyen.com © Z/Yen Group 2010 In The Field Successful Applications Global Intellectual Property Index Global Financial Centres Index Successful Research Best Execution Compliance Automation Predicting The Effectiveness of Grant- making

23. www.zyen.com © Z/Yen Group 2010 VizZy – Anomaly Detection “You can only predict things after they've happened.” Eugene Ionesco

24. www.zyen.com © Z/Yen Group 2010 Real-time Enterprise Coping with floods of rapidly changing information Static MIS not good enough Seeking robust, general-purpose tools suitable for many datasets Moving from analytics to action “There’s lies, damn lies, and statistics.” Benjamin Disraeli

25. www.zyen.com © Z/Yen Group 2010 DAPR in Finance Best execution compliance automation Liquidity prediction Non-STP correction Customer targeting Operational risk and losses Trade performance benchmarking Opening prices Automated “tipster” Anti-money laundering “Every scientific truth goes through three states: first, people say it conflicts with the Bible; next, they say it has been discovered before; lastly, they say they always believed it.” Jean Louis Agassiz

26. www.zyen.com © Z/Yen Group 2010 Suitability Need to investigate anomalies OR reinforce patterns Testable proposition reasonable historic data (not necessarily large volumes) – consistent, valid clear classification of outcomes Data changes moving forward Ability to use the predictions Feedback loop on predictions “Get a big picture grip on the details.” Chao Kli Ning

27. www.zyen.com © Z/Yen Group 2010 Packages Service – predictions daily, weekly… Application development and maintenance ASP application development and maintenance Licence – based on time, transactions, models, processing, users Joint venture in information services “Strange as it may sound, the power of mathematics rests on its evasion of all unnecessary thought and on its wonderful saving of mental operations.” Ernst Mach

28. www.zyen.com © Z/Yen Group 2010 PropheZy Outlook Release 3.5 – statistical enhancement automated boosting iterative builds 3D Voronoi’s automated column sensitivity, row anomaly Release 4 – hyper-performance multiple, parallel, super-computer large-scale, real-time integration “You don’t have to be cleverer than other people, you just have to be one day earlier.” Leo Szilard

29. www.zyen.com © Z/Yen Group 2010 Prediction Markets

30. www.zyen.com © Z/Yen Group 2010 Working Together? Contact us for a private discussion on radical improvement. Michael_Mainelli@zyen.com “The future just ain’t what it used to be and, what’s more, it never was.” Ira Hays