UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
   
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
   
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20072008
OR
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to                .
OR
   
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-15060
UBS AG
(Exact Name of Registrant as Specified in Its Charter)
Switzerland
(Jurisdiction of Incorporation or Organization)
Bahnhofstrasse 45
CH-8001 Zurich, Switzerland
and
Aeschenvorstadt 1
CH-4051 Basel, Switzerland
(Address of Principal Executive Offices)
Niall O’Toole
UBS AG
1285 Avenue of the Americas
New York, NY 10019
Telephone: (212) 713-3000
Fax: (212) 713-6211
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
Please see page 3.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Please see page 4.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Please see page 4.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of 31 December 2007:2008:
Ordinary shares, par value CHF 0.10 per share: 2,073,547,3442,932,580,549* ordinary shares (including 158,105,52461,903,121 treasury shares)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
   
Yesþ Noo
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d)
15(d) of the Securities Exchange Act of 1934.
   
Yeso Noþ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
   
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check One):
     
Large accelerated filerþ acceleratedAccelerated filero Non-accelerated filero
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAPoInternational Financial Reporting Standards
as issued by the International Accounting
Standards Boardþ		Othero
*As of December 31, 2008, UBS had two outstanding mandatory convertible notes (“MCNs”), one in the face amount of CHF 13 billion and the other CHF 6 billion. Upon their conversion or settlement, these MCNs are expected to lead to the issuance of 270,438,942 and a maximum of 329,447,681 new shares out of conditional capital, respectively.

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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
   
Item 17o Item 18þo
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
   
Yeso
 Noþ
 
 

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Securities registered or to be registered pursuant to Section 12(b) of the Act:
   
  Name of each exchange on
Title of each class which registered
Ordinary Shares (par value of CHF 0.10 each) New York Stock Exchange
$300,000,000 7.25% Noncumulative Trust Preferred SecuritiesNew York Stock Exchange
$300,000,000 7.25% Noncumulative Company Preferred SecuritiesNew York Stock Exchange*
   
$300,000,000 Floating Rate Noncumulative Trust Preferred Securities New York Stock Exchange
   
$300,000,000 Floating Rate Noncumulative Company Preferred Securities New York Stock Exchange*
   
$1,000,000,000 6.243% Noncumulative Trust Preferred Securities New York Stock Exchange
   
$1,000,000,000 6.243% Noncumulative Company Preferred Securities New York Stock Exchange*
   
Subordinated Guarantee of UBS AG with respect to each of the
Noncumulative Company Preferred Securities above		 New York Stock Exchange*
   
$9,000,000 PPNs due April 2009 American Stock ExchangeNYSE Alternext US
   
$6,900,000 PPNs due May 2009 American Stock ExchangeNYSE Alternext US
   
$5,100,000 PPNs due September 2009 American Stock ExchangeNYSE Alternext US
   
$24,223,000 PPNs due OctOctober 2009 American Stock ExchangeNYSE Alternext US
   
$30,000,000 PPNs due April 2010 American Stock ExchangeNYSE Alternext US
   
$31,000,000 PPNs due May 2010 American Stock ExchangeNYSE Alternext US
   
$23,000,000 PPNs due June 2010 American Stock ExchangeNYSE Alternext US
   
$10,000,000 PPNs due July 2010 American Stock ExchangeNYSE Alternext US
   
$7,750,000 PPNs due August 2010 American Stock ExchangeNYSE Alternext US
   
$12,660,000 PPNs due September 2010 American Stock ExchangeNYSE Alternext US
   
$8,000,000 PPNs due November 2010 American Stock ExchangeNYSE Alternext US
   
$17,842,000 PPNs due October 2011 American Stock ExchangeNYSE Alternext US
$100,000,000 E-TRACS UBS Bloomberg CMCI Food ETN due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Agriculture ETN due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Energy ETN due April 2038NYSE Arca
$100,000,000 E-TRACS UBS Bloomberg CMCI ETN due April 2038NYSE Arca
$100,000,000 E-TRACS UBS Bloomberg Gold ETN due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Industrial Metals due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Livestock ETN due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Bloomberg CMCI Silver ETN due April 2038NYSE Arca
$50,000,000 E-TRACS UBS Long Platinum ETN due May 2018NYSE Arca
$50,000,000 E-TRACS UBS Short Platinum ETN due May 2018NYSE Arca
 
1* Not for trading, but solely in connection with the registration of the corresponding Trust Preferred Securities.

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Securities registered or to be registered pursuant to Section 12(g) of the Act:
NoneAuction Rate Securities Rights Series A-1, A-2, B-1, B-2, C-1, C-2 and G (non-transferable)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

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CONTENTS
     
  Page
Cautionary Statement Regarding Forward-Looking Statements
  67 
PART I
  79 
Item 1. Identity of Directors, Senior Management and Advisors
  79 
Item 2. Offer Statistics and Expected Timetable
  79 
Item 3. Key Information
  79 
Item 4. Information on the Company
  79 
Item 5. Operating and Financial Review and Prospects
  810 
Item 6. Directors, Senior Management and Employees
  911 
Item 7. Major Shareholders and Related Party Transactions
  1012 
Item 8. Financial Information
  1113 
Item 9. The Offer and Listing
  1113 
Item 10. Additional Information
  1315 
Item 11. Quantitative and Qualitative Disclosures About Market Risk
  2124 
Item 12. Description of Securities Other than Equity Securities
  2124 
PART II
  2225 
Item 13. Defaults, Dividend Arrearages and Delinquencies
  2225 
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
  2225 
Item 15. Controls and Procedures
  2225
Item 15.T. Controls and Procedures
25 
Item 16.A. Audit Committee Financial Expert
  2225 
Item 16.B. Code of Ethics
  2225 
Item 16.C. Principal Accountant Fees and Services
  2225 
Item 16.D. Exemptions from the Listing Standards for Audit Committee
  2226 
Item 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  2326
Item 16.F. Change in Registrant’s Certifying Accountant
26
Item 16.G. Corporate Governance
26 
PART III
  2326 
Item 17. Financial Statements
  2326 
Item 18. Financial Statements
  2326 
Item 19. Exhibits
  2326 
Signatures
  2428 
Index to Exhibits
  2529 
 EX-1.1: ARTICLES OF ASSOCIATION
 EX-4.B: TERMS OF THE MANDATORY CONVERTIBLE NOTESEX-1.2: ORGANIZATION REGULATIONS
 EX-7: STATEMENT REREGARDING RATIO OF EARNINGS TO FIXED CHARGES
 EX-12: CERTIFICATIONS
 EX-13: CERTIFICATIONS
 EX-15: CONSENT OF ERNST & YOUNG LTD.LTD

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
     This report contains statements that constitute “forward-looking statements”,statements,” including but not limited to statements relating to the anticipated effect of transactions described herein, risks arising from the current market crisis and other risks specific to ourUBS’s business, and the implementation of strategic initiatives, as well as other statements relating to our future business development and economic performance and our intentions with respect to future returns of capital.performance. While these forward-looking statements represent ourUBS’s judgments and future expectations concerning the development of ourits business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from ourUBS’s expectations. These factors include, but are not limited toto: (1) the extent and nature of future developments in the US sub-prime market and in other market segments that have been or may be affected by the current market crisis;crisis and their effect on UBS’s assets and exposures, including UBS’s remaining net and gross exposures related to the United States mortgage market; (2) developments affecting the availability of capital and funding to UBS and other financial institutions, including any changes in UBS’s credit spreads and ratings; (3) other market and macro-economicmacroeconomic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates, whether or not arising directly or indirectly from the current market crisis; (3) the impact of these developments on other markets and asset classes;rates; (4) changes in internal risk control and in the regulatory capital treatment of UBS’s positions, in particular those affected by the current market crisis, (5) limitations in the effectiveness of ourUBS’s internal processes for risk management, processes, of our risk control, measurement control and modeling, systems, and of financial models generally; (5) the possible consequences of governmental investigations of certain of UBS’s past business activities, including the possibility that tax or regulatory authorities in various jurisdictions will focus on the cross-border wealth management services provided by UBS and other financial institutions; (6) developments relatingthe degree to UBS’s access to capitalwhich UBS is successful in implementing its remediation plans and funding, including anystrategic and organizational changes, in our credit ratings;and whether those plans and changes will have the effects anticipated; (7) changes in the financial position or creditworthiness of ourUBS’s customers, obligors and counterparties, and developments in the markets in which they operate;operate, including possible failures resulting from the current market crisis and adverse economic environment; (8) management changes and changes to the internal or overall structure of our Business Groups;UBS’s business divisions; (9) the occurrence of operational failures, such as fraud, unauthorized trading and systems failures; (10) legislative, governmental and regulatory developments;developments, including the effect of new and more stringent capital requirements and of direct or indirect regulatory constraints on UBS’s business activities; (11) changes in accounting standards or policies, and accounting determinations affecting the recognition of gain or loss, the valuation of goodwill and other assets or other matters; (12) changes in and the effect of competitive pressures; (12)pressures, including the possible loss of key employees as a result of compensation issues or for other reasons; (13) technological developments; and (13)(14) the impact of all such future developments on positions held by UBS, on ourits short-term and longer-term earnings, on the cost and availability of funding and on our BISUBS’s capital ratios. In addition, these results could depend on other factors that we have previously indicated could adversely affect our business and financial performance which are contained in other parts of this document and in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth elsewhere in this Annual Report on Form 20-Freport and in documents furnished by UBS and other filings made by UBS with the SEC. UBS is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise.
The effect of future changes in accounting standards
     Included in the Notes to the Financial Statements is a description of the expected effect of IFRS accounting standards that have been issued but have not yet been adopted.
     Although we believe that description includes all significant matters that have been approved, IASBthe International Accounting Standards Board has a large number of projects in process that could result in significant new accounting standards or significant changes to existing standards.
     This increased level of activity includes normal ongoing development and efforts to improve the existing body of accounting standards, and also is in response to a number of perceived deficiencies in accounting standards exemplified by reported abuses by various companies.

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     We believe it is likely that several new accounting standards will be issued in the near future, and that those new standards could have a significant effect on our reported results of operations and financial position, but we cannot predict the precise nature or amounts of any such changes.

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PART I
Item 1. Identity of Directors, Senior Management and Advisors.
Item 1.Identity of Directors, Senior Management and Advisors.
     Not required because this Form 20-F is filed as an annual report.
Item 2. Offer Statistics and Expected Timetable.
Item 2.Offer Statistics and Expected Timetable.
     Not required because this Form 20-F is filed as an annual report.
Item 3. Key Information.
Item 3.Key Information.
A—Selected Financial Data.
     Please seeSelected Financial Dataon pages 145394 to 148397 andStatement of Changes in Equityon pages 258 to 260 of the Financial Statementsinformation report.
(a) Ratio of Earnings to Fixed Charges
     Please see page 148397 of the Financial Statementsinformation report and Exhibit 7 to this Form 20-F.
B—Capitalization and Indebtedness.
     Not required because this Form 20-F is filed as an annual report.
C—Reasons for the Offer and Use of Proceeds.
     Not required because this Form 20-F is filed as an annual report.
D—Risk Factors.
     Please see pages 2023 to 2327 of the Strategy, Performanceperformance and Responsibilityresponsibility report.
Item 4. Information on the Company.
Item 4.Information on the Company.
A—History and Development of the Company.
   
1-3 Please seeCorporate Informationon page 1556 of the Strategy, Performance and Responsibility report, page 75 of the Risk, Treasury and Capital Management report, page 55 of the Corporate Governance and Compensation report, and page 167 of the Financial Statements report.Annual Report 2008.
   
44-6 Please seeThe Making of UBSon page 18 andKey factors affecting UBS’s financial positions and results of operations in 2008on pages 18 and 1929 to 30 of the Strategy, Performanceperformance and Responsibilityresponsibility report.
5, 6None.
   
7 None.
B—Business Overview.
   
1, 2, 5, 7 Please refer toUBS’s businesses the UBS business divisions and Corporate Center report on pages 8574 to 152 in the Strategy, Performance and Responsibility report and, in particular, pages 86 and 8976 with respect to Global Wealth Management & Business Banking, pages 9177 to 9579 with respect to Wealth Management International & Switzerland, pages 83 to 85 with respect to Wealth Management US, pages 89 to 90 with respect to Business Banking Switzerland, pages 94 to 98 with respect to Global Asset Management, pages 102 to 104 with respect to the Investment Bank, and

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  Management International & Switzerland, pages 103110 to 107 with respect to Wealth Management US, pages 113 to 116 with respect to Business Banking Switzerland, pages 122 to 128 with respect to Global Asset Management, pages 134 to 140 with respect to the Investment Bank, pages 147 to 148112 with respect to the Corporate Center and page 152 with respect to Industrial Holdings.Center. For a breakdown of revenues by category of activity and geographic market for each of the last three financial years, please refer to Notes 2a and 2b to the Financial Statementsinformation reportSegment Reporting by Business GroupDivisionon pages 281 to 287 andSegment Reporting by Geographic Locationon pages 41 to 48 of the Financial Statements report.page 288.
   
3 Please refer toSeasonal Characteristicson page 2830 of the Strategy, Performanceperformance and Responsibilityresponsibility report.
   
4 6 Not applicable.
6Please see Item 10.C of this Form 20-F.
   
8 Please seeRegulation and Supervisionon pages 44218 to 46220 of the Corporate Governancegovernance and Compensationcompensation report.
C—Organizational Structure.
     Please see Note 3334 to the Financial StatementsSignificant Subsidiaries and Associateson pages 96347 to 99350 of the Financial Statementsinformation report.
D—Property, Plant and Equipment.
     Please seeProperty, Plant and Equipmenton page 148398 of the Financial Statementsinformation report.
Information Required by Industry Guide 3
     Please seeInformation Required by Industry Guide 3on pages 149399 to 164413 of the Financial Statementsinformation report. See alsoSelected Financial Dataon pages 146395 and 147396 of the Financial information report for the return on equity attributable to UBS shareholders, return on average equity, return on average assets, dividend payout ratio and the ratio of average equity to average assets.
Item 4.A. Unresolved Staff Comments.
Item 4.A.Unresolved Staff Comments.
     None.
Item 5. Operating and Financial Review and Prospects.
Item 5.Operating and Financial Review and Prospects.
A—Operating Results.
     Please seeFinancial Performanceon pages 2528 to 5553 of the Strategy, Performanceperformance and Responsibilityresponsibility report. For a discussion of operating results by business division, please refer to the UBS business divisions and Corporate Center report, andUBS’s businesseson pages 8580 to 152, in particular pages 96 to 10182 with respect to Wealth Management International & Switzerland, pages 10886 to 11188 with respect to Wealth Management US, pages 11791 to 12093 with respect to Business Banking Switzerland, pages 12999 to 133101 with respect to Global Asset Management, pages 141105 to 146109 with respect to the Investment Bank and pages 149113 to 150115 with respect to the Corporate Center and pages 151 to 152 with respect to Industrial Holdings.Center.
     For information regarding the impact of foreign currency fluctuations, seeCorporate currency managementon pages 49160 to 50161 of the Risk Treasury and Capital Managementtreasury management report.

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     Please also seeExposure to US mortgage marketson pages 11 to 13,Exposure to monoline insurerson pages 13 to 14,,Exposure to auction rate certificatessecuritieson page 14 andExposure to leveragedleverage finance dealson page 14pages 125 to 127 of the Risk Treasury and Capital Managementtreasury management report.

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B—Liquidity and Capital Resources.
     We believe that our working capital is sufficient for the company’s present requirements. UBS liquidity and capital management is undertaken at UBS as an integrated asset and liability management function. For detailed discussion, please seeLiquidity and funding managementon pages 51151 to 55157 andCapital managementon pages 56162 to 61167 of the Risk Treasury and Capital Managementtreasury management report.
     For a discussion of UBS’s balance sheetborrowings and cash flows, please seeBalance sheeton pages 4644 to 4846 andCash flowson pages 5452 to 5553 of the Strategy, Performanceperformance and Responsibilityresponsibility report.
     Please see alsoInterest Rate and Currency Managementon pages 48159 to 50161 andShares and capital instrumentson pages 62168 to 67171 of the Risk Treasury and Capital Managementtreasury management report and Note 19 to the Financial StatementsFinancial Liabilities Designated at Fair Value and Debt Issuedon pages 63 and 64303 to 304 of the Financial Statementsinformation report.
     For a discussion of UBS’s long termlong-term credit ratings, please seeCredit Ratingson pages 60 to 61page 158 of the Risk Treasury and Capital Managementtreasury management report.
C—Research and Development, Patents and Licenses, etc.
     Not applicable.
D—Trend Information.
     Please seeCurrent Market Climate and Industry TrendsDriverson pages 1520 to 1722 of the Strategy, Performanceperformance and Responsibility report and for more detail,Industry Trendson page 107 of the Strategy Performance and Responsibility report with respect to Wealth Management US,Strategic Opportunitieson page 128 of the Strategy Performance and Responsibility report with respect to Global Asset Management, andStrategic Opportunitieson page 140 of the Strategy Performance and Responsibility report with respect to the Investment Bank.responsibility report.
E—Off-balance Sheet Arrangements.
     Please seeOff-balance sheet arrangementson pages 4947 to 5351 of the Strategy, Performanceperformance and Responsibilityresponsibility report and Notes 24 and 25,Pledgeable off-balance sheet securitiesandOperating lease commitments,respectively, on pages 319 to 320 of the Financial information report.
F—Tabular Disclosure of Contractual Obligations.
     Please seeContractual obligationson page 4947 of the Strategy, Performanceperformance and Responsibilityresponsibility report.
Item 6. Directors, Senior Management and Employees.
Item 6.Directors, Senior Management and Employees.
A—Directors and Senior Management.
   
1, 2, 3 Please see pages 9199 to 12202 and pages 16206 to 18209 of the Corporate Governancegovernance and Compensationcompensation report.
   
4 and 5 None.

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B—Compensation.
   
1 Please see pages 30225 to 35234 ofCompensation, shareholdings and loansin the Corporate Governancegovernance and Compensationcompensation report and also Note 3031 to the Financial StatementsEquity Participation and Other Compensation Planson pages 89339 to 92

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343 and Note 3132 to the Financial StatementsRelated Partieson pages 93344 to 95346 of the Financial Statementsinformation report.
   
2 Please see Note 2930 to the Financial StatementsPension and Other Post-RetirementPost-Employment Benefits Planson pages 83333 to 88338 of the Financial Statementsinformation report.
C—Board Practices.
   
1 Please see pages 12199 to 15 ofBoard of Directors202 and pages 206 to 209 in the Corporate Governancegovernance and Compensationcompensation report.
   
2 Please see page 32pages 226 to 228 ofCompensation, shareholdings and loansin the Corporate Governancegovernance and Compensationcompensation report and Note 3132 to the Financial StatementsRelated Partieson pages 93344 to 95346 of the Financial StatementsInformation report.
   
3 Please seeInternal organization, Board of Directors’ committeesAudit committeeon page 203 and meetings in 2007Human resources and compensation committeeon pages 13 and 14203 to 204 of the Corporate Governancegovernance and Compensationcompensation report.
D—Employees.
     Please seeUBS Employeeson pages 5854 to 6759 of the Strategy, Performanceperformance and Responsibilityresponsibility report.
E—Share Ownership.
     Please seeShareShares, options and option ownershiploans for the Board of Directors and Group Executive Boardon pages 33230 to 35233 in the Corporate Governancegovernance and Compensationcompensation report, Note 30 to31 of the Financial StatementsEquity Participation and Other Compensation Planson pages 89339 to 92343 of the Financial Statementsinformation report andEquity holdings “Equity holdings” in Note 3132 to the Financial StatementsRelated Partieson page 93pages 344 to 346 of the Financial Statements report. Please also seeEmployee Share Ownership on pages 64 and 65 of the Strategy, Performance and Responsibilityinformation report.
Item 7. Major Shareholders and Related Party Transactions.
Item 7.Major Shareholders and Related Party Transactions.
A—Major Shareholders.
     Please seeGroup structure and shareholderson pages 5195 to 6196 of the Corporate Governancegovernance and Compensationcompensation report. At December 31, 2008, the portion of UBS ordinary shares held in the United States was 275,845,594 by 1,039 record holders.
B—Related Party Transactions.
     Please seeLoanson pages 35page 236 ofCompensation, shareholdings and 36 ofloansin the Corporate Governancegovernance and Compensationcompensation report and Note 3132 to the Financial StatementsRelated Partieson pages 93344 to 95346 of the Financial Statementsinformation report.
C—Interests of Experts and Counsel.
     Not applicable because this Form 20-F is filed as an annual report.

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Item 8. Financial Information.
Item 8.Financial Information.
A—Consolidated Statements and Other Financial Information.
     Please see Item 18 of this Form 20-F. Please refer toDistributions to shareholderson page 66 andDistributionspages 170 to shareholders in 2008on page 67171 of the Risk Treasury and Capital Managementtreasury management report for a description of UBS’s dividend policy.
B—Significant Changes.
     UBS is not aware of any significant change that has occurred since the date of the annual financial statements included in this Form 20-F. Please seeKey factors affecting UBS’s financial positions and results of operations in 2008on pages 29 to 30 of the Strategy, performance and responsibility report and Note 3233 to the Financial StatementsPost-Balance Sheet Eventson page 95347 of the Financial Statements report.information report.
Item 9. The Offer and Listing.
Item 9.The Offer and Listing.
A—Offer and Listing Details.
   
1, 2, 3, 5, 6, 7 Not required because this Form 20-F is filed as an annual report.
   
4 Please seeStock exchange priceson page 71175 of the Risk Treasury and Capital Managementtreasury management report.
B—Plan of DistributionDistribution.
     Not required because this Form 20-F is filed as an annual report.
C—Markets.
     UBS’s shares are listed on the SIX Swiss Exchange (but traded on SWX Europe Limited,Europe), the New York Stock Exchange and the Tokyo Stock Exchange. The symbols are shown on page 68172 of the Risk Treasury and Capital Managementtreasury management report.
(a) Trading on SWX Europe Limited
     Since July 2001, Swiss blue chip stocks have not been traded on the SIX Swiss Exchange (formerly SWX Swiss Exchange.Exchange). All trading in the shares of members of the Swiss Market Index now takes place on SWX Europe, Limited (formerly virt-x Exchange Limited) referred to herein as 'SWX Europe', although these stocks remain listed on the SWXSIX Swiss Exchange.
     SWX Europe is wholly owned by the SWX Swiss Exchange.SIX Group. It is a cross-border platform providing a pan-European blue-chip market. It addresses the increasing requirement for equity investment to be conducted on a sectoral basis across Europe rather than being limited to national markets.
     SWX Europe is a Recognized Investment Exchange supervised by the Financial Services Authority in the United Kingdom. It is delivered on the modern, scalable SIX trading platform.
     Trading is possible on all target days, as specified by the European Central Bank. The opening hours are 06:00 to 22:00 CET and the trading hours are 09:00 to 17:30 CET. During the after-hours trading phase from 17:30 to 22:00 CET and in the pre-trading phase from 06:00 to 09:00 CET, orders can be entered or deleted. From 09:00 CET, once the opening price is set, trading begins. Orders are executed automatically according to established rules that match bid and ask prices. Regardless of their size or origin, incoming orders are executed on a price/time priority, i.e., in the order of price (first priority) and

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time received (second priority). Depending on the type of transaction, the order and trade details are also transmitted to data vendors (Reuters, Bloomberg, Telekurs, etc.).

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     In most cases, each trade triggers an automatic settlement instruction which is routed through one of three central securities depositories (CSD); SIS SegaInterSettle AG, CrestCo or Euroclear. Members can choose to settle from one or more accountaccounts within these CSD’s and when counterparties have selected different CSD’s, settlement will be cross-border. Additionally, SWX Europe offers a choice of Central Counterparties (CCP) for cross-border trading.
     All trades executed through the order book settle on a uniform “T+3” basis, meaning that delivery and payment of exchange transactions occur three days after the trade date. The buyer is able to ask SWX Europe to enforce settlement if the seller has not delivered within three days of the intended settlement date.
     Any transaction executed under the rules of SWX Europe must be reported to SWX Europe. Order book executions are automatically reported by the trading system. There are separate provisions for the delayed reporting of certain qualifying trades. Individual elements of portfolio trades must be reported within one hour while block trades and enlarged risk trades must be reported when the business is substantially (80%) complete, or by the end of order book trading that day, unless the trade is agreed one hour or less before the market close, when the trade must be reported by the end of order book trading on the following market day. Block trades and enlarged risk trades are subject to minimum trade size criteria. During normal trading hours, all other transactions must be reported within three minutes. The enlarged risk trades provisions enable a member to protect a client’s interest while the member works a large trade on behalf of the client. The block trade provisions allow a member a publication delay when the member has executed a large transaction for a client; the delay gives the member time in which to offset the risk of the large trade.
     In the event of extraordinary situations such as large price fluctuations and other situations likely to hamper fair and orderly trading, virt-xSWX Europe may take whatever measures it deems necessary to maintain fair and orderly markets. A listed security may be suspended, the opening of trading in that security may be delayed or continuous trading may be interrupted.
(b) Trading on the New York Stock Exchange
     UBS listed its shares on the New York Stock Exchange (“NYSE”(the “NYSE”) on May 16, May 2000.
     As of 31 December 2007,2008, the securities of over 2,8003,500 corporations were listed on the NYSE, of which approximately 420412 were non-USnon-U.S. issuers with a combined market valuation of approximately USD 1715 trillion.
     The NYSE is open Monday through Friday, 9:30 A.M. —to 4:00 P.M., EST.
     The NYSE is an agency auction market. Trading at the NYSE takes place by open bids and offers by Exchange members, acting as agents for institutions or individual investors. Buy and sell orders meet directly on the trading floor, and prices are determined by the interplay of supply and demand. In contrast, in the USU.S. over-the-counter market, the price is determined by a dealer who buys and sells out of inventory.
     At the NYSE, each listed stock is assigned to a single post where the specialist manages the auction process. NYSE members bring all orders for NYSE-listed stocks to the Exchange floor either electronically or through a floor broker. As a result, the flow of buy and sell orders for each stock is funneled to a single location.

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     This heavy stream of diverse orders is one of the great strengths of the Exchange.NYSE. It provides liquidity — the ease with which securities can be bought and sold without wide price fluctuations.
     When an investor’s transaction is completed, the best price will have been exposed to a wide range of potential buyers and sellers.

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     Every transaction made at the NYSE is under continuous surveillance during the trading day. Stock Watch, a computer system that searches for unusual trading patterns, alerts NYSEthe NYSE’s regulatory personnel to possible insider trading abuses or other prohibited trading practices. The NYSE’s other regulatory activities include the supervision of member firms to enforce compliance with financial and operational requirements, periodic checks on brokers’ sales practices, and the continuous monitoring of specialist operations.
(c) Trading on the Tokyo Stock Exchange
     The volume of UBS shares traded on the Tokyo Stock Exchange is negligible in comparison to the volume on SWX Europe or on the NYSE.
D—Selling Shareholders.
     Not required because this Form 20-F is filed as an annual report.
E—Dilution.
     Not required because this Form 20-F is filed as an annual report.
F—Expenses of the Issue.
     Not required because this Form 20-F is filed as an annual report.
Item 10. Additional Information.
Item 10.Additional Information.
A—Share Capital.
     Not required because this Form 20-F is filed as an annual report.
B—Memorandum and Articles of Association.
     Please see the Articles of Association of UBS AG and the Organization Regulations of UBS AG (Exhibits 1.1 and 1.2, respectively, of this Form 20-F).
     Set forth below is a summary of the material provisions of our Articles of Association, which we call the “Articles” throughout this document, Organization Regulations and the Swiss Code of Obligations relating to our shares. This description does not purport to be complete and is qualified in its entirety by references to Swiss law, including Swiss company law, and to the Articles and Organization Regulations.
     The shares are registered shares with a par value of CHF 0.10 per share. The shares are fully paid-up and non-assessable.paid up.
     Each share carries one vote at our shareholders’ meetings. Voting rights may be exercised only after a shareholder has been recorded in our share register as a shareholder with voting rights. Registration with voting rights is subject to certain restrictions. See “— Transfer of Shares” and "—“—Shareholders’ Meeting”.

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     The Articles provide that we may elect not to print and deliver certificates in respect of registered shares. Shareholders may, however, request at any time that we print and deliver such certificates free of charge.

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Transfer of Shares
     The transfer of shares is effected by corresponding entry in the books of a bank or depositarydepository institution following an assignment in writing by the selling shareholder and notification of such assignment to us by the bank or depository institution. The transfer of shares further requires that the purchaser file a share registration form in order to be registered in our share register as a shareholder. Failing such registration, the purchaser may not vote at or participate in shareholders’ meetings.
     A purchaser of shares will be recorded in our share register with voting rights upon disclosure of its name, citizenship and address. However, we may decline a registration with voting rights if the shareholder does not declare that it has acquired the shares in its own name and for its own account. If the shareholder refuses to make such declaration, it will be registered as a shareholder without voting rights.
     There is no limitation under Swiss law or our Articles on the right of non-Swiss residents or nationals to own or vote our shares.
Shareholders’ Meeting
     Under Swiss law, annual ordinary shareholders’ meetings must be held within six months after the end of our fiscal year, which is 31 December. Shareholders’ meetings may be convened by the Board of Directors (BoD) or, if necessary, by the statutory auditors, with twenty-days’ advance notice. The Board of DirectorsBoD is further required to convene an extraordinary shareholders’ meeting if so resolved by a shareholders’ meeting or if so requested by shareholders holding in aggregate at least 10% of our nominal share capital. Shareholders holding shares with an aggregate par value of at least CHF 62,500 have the right to request that a specific proposal be put on the agenda and voted upon at the next shareholders’ meeting. A shareholders’ meeting is convened by publishing a notice in the Swiss Official Commercial Gazette (Schweizerisches Handelsamtsblatt) at least twenty days prior to such meeting.
     The Articles do not require a minimum number of shareholders to be present in order to hold a shareholders’ meeting.
     Resolutions generally require the approval of an “absolute majority” of the votes cast at a shareholders’ meeting. Shareholders’ resolutions requiring a vote by absolute majority include:
amendments to the Articles;
elections of directors and statutory auditors;
approval of the annual report and the consolidated statements of accounts;
approval of the annual financial statements and the resolution on the use of the balance sheet profit (declaration of dividend);
decisions to discharge directors and management from liability for matters disclosed to the shareholders’ meeting; and
passing resolutions on matters which are by law or by the Articles reserved to the shareholders’ meeting (e.g., the ordering of an independent investigation into the specific matters proposed to the shareholders’ meeting).

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•amendments to the Articles
•elections of directors and statutory auditors
•approval of the annual report and the annual group accounts
•setting the annual dividend
•decisions to discharge directors and management from liability for matters disclosed to the shareholders’ meeting
•the ordering of an independent investigation into the specific matters proposed to the shareholders’ meeting
     Under the Articles, a resolution passed at a shareholders’ meeting with a supermajority of at least two-thirdstwo thirds of the Shares represented at such meeting is required to:
change the limits on BoardBoD size in the ArticlesArticles;

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remove one fourth or more of the members of the BoD; or
•remove one-fourth or more of the members of the Board of Directors
•delete or modify the above supermajority voting requirements
delete or modify the above supermajority voting requirements.
     Under Swiss corporate law, a resolution passed by at least two-thirdstwo thirds of votes represented and an absolute majority of the par value of the shares represented must approve:
•a change in our stated purpose in the Articles
•the creation of shares with privileged voting rights
•a restriction of transferability
•an increase in authorized capital
•an increase of capital out of equity against contribution in kind, for the purpose of acquisition and granting of special rights
•changes to pre-emptive rights
•a change of domicile of the company
a change in our stated purpose in the Articles;
the creation of shares with privileged voting rights;
a restriction of transferability;
an increase in authorized capital;
an increase of capital out of equity against contribution in kind, for the purpose of acquisition and granting of special rights;
changes to pre-emptive rights;
a change of domicile of the corporation; or
dissolution of the corporation without liquidation.
     At shareholders’ meetings, shareholdersa shareholder can be represented by proxy, but onlyhis or her legal representative or under a written power of attorney by another shareholder eligible to vote, by a corporate proxy, appointed by us, anthe independent representative nominatedproxy or by us, or a depository institution.custodial proxy. Votes are taken electronically, by written ballot or onby a show of hands. If a written ballot is requested by at least 3% of the votes present at the shareholders’ meeting or such ballot is ordered by the Chairman of the meeting, a written ballot will be conducted.
Net Profits and Dividends
     Swiss law requires that at least 5% of the annual net profits of a corporation must be retained as general reserves for so long as these reserves amount to less than 20% of the corporation’s nominal share capital. Any net profits remaining are at the disposal of the shareholders’ meeting, except that, if an annual dividend exceeds 5% of the nominal share capital, then 10% of such excess must be retained as general reserves.
     Under Swiss law, dividends may be paid out only if the corporation has sufficient distributable profits from previous business years or if the reserves of the corporation are sufficient to allow distribution of a dividend. In either event, dividends may be paid out only after approval by the shareholders’ meeting. The Board of DirectorsBoD may propose that a dividend be paid out, but cannot itself set the dividend. The auditors must confirm that the dividend proposal of the Board conforms with statutory law. In practice, the shareholders’ meeting usually approves the dividend proposal of the Board of Directors.BoD.

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     Dividends are usually due and payable after the shareholders’ resolution relating to the allocation of profits has been passed. Under Swiss law, the statue of limitations in respect of dividend payments is five years.
     U.S. holders of shares will receive dividend payments in dollar denominations,U.S. dollars, unless they provide notice to our U.S. transfer agent, Mellon Investor Services, that they wish to receive dividend payments in Swiss francs. Mellon Investor Services will be responsible for paying the U.S. dollars or Swiss francs to registered holders, and for withholding any required amounts for taxes or other governmental charges. If Mellon Investor Services determines, after consultation with us, that in its judgment any foreign currency received by it cannot be converted into U.S. dollars or transferred to U.S. holders, it may distribute the

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foreign currency received by it, or an appropriate document evidencing the right to receive such currency, or in its discretion hold such foreign currency for the accounts of U.S. holders.
Preemptive Rights
     Under Swiss law, any share issue, whether for cash or non-cash consideration or for no consideration, is subject to the prior approval of the shareholders’ meeting. Shareholders of a Swiss corporation have certain preemptive rights to subscribe for new issues of shares in proportion to the nominal amount of shares held. AThe Articles or a resolution adopted at a shareholders’ meeting with a supermajority may, however, limit or suspend preemptive rights in certain limited circumstances.
Borrowing Power
     Neither Swiss law nor the Articles restrict in any way our power to borrow and raise funds. No shareholders’ resolution is required.
Conflicts of Interests
     Swiss law does not have a general provision on conflicts of interests. However, the Swiss Code of Obligations requires Directorsdirectors and members of senior management to safeguard the interests of the corporation and, in this connection,as such, imposes a duty of care and a duty of loyalty on directors and officers. This rule is generally understood as disqualifying directors and senior officers from participating in decisions that directly affect them. Directors and officers are personally liable to the corporation for any breach of these provisions. In addition, Swiss law contains a provision under which payments made to a shareholder or a director or any person associated therewith, other than at arm’s length, must be repaid to us if the shareholder or director was acting in bad faith.
     In addition, our Organization Regulations prohibit any member of the BoD from participating in discussions and decision-making regarding a matter as to which he or she has a conflict of interest.
Repurchase of Shares
     Swiss law limits a corporation’s ability to hold or repurchase its own shares. We and our subsidiaries may only repurchase shares if we have sufficient free reserves to pay the purchase price and if the aggregate nominal value of the shares does not exceed 10% of our nominal share capital. Furthermore, we must create a special reserve on our balance sheet in the amount of the purchase price of the acquired Shares.shares. Such shares held by us or our subsidiaries do not carry any rights to vote at shareholders’ meetings.
Notices
     Notices to shareholders are made by publication in the Swiss Official Gazette of Commerce. The Board of DirectorsBoD may designate further means of communication for publishing notices to shareholders.

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     Notices required under the listing rules of the SIX Swiss Exchange will be published in two Swiss newspapers in German and French. We or the SIX Swiss Exchange may also disseminate the relevant information on the online exchange information systems.
Registration and Business Purpose
     We are registered as a corporation in the commercial registerregisters of Canton Zurich and Canton Basle-City under the registration number CH-270.3.004.646-4 and have registered offices in Zurich and Basel, Switzerland.
     Our business purpose, as set forth in our Articles, is the operation of a bank, with a scope of operations extending to all types of banking, financial, advisory, trading and service activities in Switzerland and abroad.

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Duration, Liquidation and Merger
     Our duration is unlimited.
     Under Swiss law, we may be dissolved at any time by a shareholders’ resolution which must be passed by (1) an absolute majority of the shares represented at the meeting in the event we are to be dissolved by way of liquidation, or (2) a supermajority of at least two-thirdstwo thirds of the votes represented and an absolute majority of the par value of the shares represented at the meeting in other events (for example, in a merger where we are not the surviving entity). Dissolution by court order is possible if we become bankrupt.
     Under Swiss law, any surplus arising out of a liquidation (after the settlement of all claims of all creditors) is distributed to shareholders in proportion to the paid-up nominal value of shares held.
Disclosure of Principal Shareholders
     Under the applicable provisions of the new Swiss Stock Exchange Act, shareholders and shareholders acting in concert with third parties who reach, exceed or fall below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 33 1/3%, 50% or 66 2/3% of the voting rights of a Swiss listed corporation must notify the corporation and the SIX Swiss Exchange on which such shares are listed of such holdings, whether or not the voting rights can be exercised. Following receipt of such notification, the corporation has the obligation to inform the public. The companycorporation must disclose in an attachment to the balance sheet the identity of any shareholders who own in excess of 5% of its shares.
Mandatory Tender Offer
     Under the Swiss Stock Exchange Act, shareholders and groups of shareholders acting in concert who acquire more than 33 1/3% of the voting rights of a listed Swiss company will have to submit a takeover bid to all remaining shareholders. A waiver from the mandatory bid rule may be granted by our supervisory authority. If no waiver is granted, the mandatory takeover bid must be made pursuant to the procedural rules set forth in the Swiss Stock Exchange Act and implementing ordinances.
Other
     Ernst & Young AG,Ltd, Aeschengraben 9, P.O. Box 2149, CH-4002CH-4051 Basel, Switzerland, have been appointed as statutory auditors and as auditors of the consolidated accounts of UBS. The auditors are subject to confirmation by the shareholders at the ordinary general meeting on an annual basis.

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     Please seeCapital structureon pages 7197 and 8 and198,Shareholders’ participation rightson pages 37211 and 38212 andElection and terms of officeon page 202 of the Corporate Governancegovernance and Compensationcompensation report.
C—Material Contracts.
     Please see Mandatory Convertible Notes on pages 64 and 65 of the Risk, Treasury and Capital Management report.None.
D—Exchange Controls.
     There are no restrictions under UBS’s Articles of Association or Swiss law, presently in force, that limit the right of non-resident or foreign owners to hold UBS’s securities freely. There are currently no Swiss foreign exchange controls or other Swiss laws restricting the import or export of capital by UBS or its subsidiaries. In addition, there are currently no restrictions under Swiss law affecting the remittance of dividends, interest or other payments to non-resident holders of UBS securities.

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E—Taxation.
     This section outlines the material Swiss tax and United StatesU.S. federal income tax consequences of the ownership of UBS ordinary shares by a USU.S. holder (as defined below) who holds UBS ordinary shares as capital assets. It is designed to explain the major interactions between Swiss and USU.S. taxation for USU.S. persons who hold UBS shares.
     The discussion does not address the tax consequences to persons who hold UBS ordinary shares in particular circumstances, such as tax-exempt entities, banks, financial institutions, life insurance companies, broker-dealers, traders in securities that elect to mark to market, holders liable for alternative minimum tax, holders that actually or constructively own 10% or more of the voting stock of UBS, holders that hold UBS ordinary shares as part of a straddle or a hedging or conversion transaction or holders whose functional currency for USU.S. tax purposes is not the USU.S. dollar. This discussion also does not apply to holders who acquired their UBS ordinary shares pursuant to the exercise of employee stock options or otherwise as compensation or through a tax-qualified retirement plan.plan, nor generally to unvested UBS ordinary shares held under deferred compensation arrangements.
     The discussion is based on the tax laws of Switzerland and the United States, including the USU.S. Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations under the Internal Revenue Code, published rulings and court decisions, as in effect on the date of this document, as well as the convention between the United States of America and Switzerland, which we call the “Treaty,” all of which may be subject to change or change in interpretation, possibly with retroactive effect.
     For purposes of this discussion, a “US“U.S. holder” is any beneficial owner of UBS ordinary shares that is for USU.S. federal income tax purposes:
a citizen or resident of the United States,
a domestic corporation or other entity taxable as a corporation,
an estate, the income of which is subject to U.S. federal income tax without regard to its source, or

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•a citizen or resident of the United States,
•a domestic corporation or other entity taxable as a corporation,
•an estate, the income of which is subject to United States federal income tax without regard to its source, or
•a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust.
a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.
     The discussion does not generally address any aspects of Swiss taxation other than income and capital taxation or of United StatesU.S. taxation other than federal income taxation. Holders of UBS shares are urged to consult their tax advisors regarding the United StatesU.S. federal, state and local and the Swiss and other tax consequences of owning and disposing of these shares in their particular circumstances.
(a) Ownership of UBS Ordinary Shares-Swiss Taxation
Dividends and Distributions
     Dividends paid by UBS to a holder of UBS ordinary shares (including dividends on liquidation proceeds and stock dividends) are subject to a Swiss federal withholding tax at a rate of 35%. The withholding tax must be withheld from the gross distribution, and be paid to the Swiss Federal Tax Administration.
     A USU.S. holder that qualifies for Treaty benefits may apply for a refund of the withholding tax withheld in excess of the 15% Treaty rate (or for a full refund in case of qualifying retirement arrangements). The claim for refund must be filed with the Swiss Federal Tax Administration, Eigerstrasse

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65, CH-3003 Berne, Switzerland no later than December 31 of the third year following the end of the calendar year in which the income subject to withholding was due. The form used for obtaining a refund is Swiss Tax Form 82 (82 C for companies; 82 E for other entities; 82 I for individuals; 82 R for regulated investment companies), which may be obtained from any Swiss Consulate General in the United States or from the Swiss Federal Tax Administration at the address above. The form must be filled out in triplicate with each copy duly completed and signed before a notary public in the United States. The form must be accompanied by evidence of the deduction of withholding tax withheld at the source.
     Mellon Investor Services, the registrar for UBS AG shares in the US,United States, is offering tax reclamation services for the cash dividends.
     Repayment of capital in the form of a par value reduction is not subject to Swiss withholding tax.
Transfers of UBS Ordinary Shares
     The purchase or sale of UBS ordinary shares, whether by Swiss resident or non-resident holders (including USU.S. holders), may be subject to a Swiss securities transfer stamp duty of up to 0.15% calculated on the purchase price or sale proceeds if it occurs through or with a bank or other securities dealer in Switzerland as defined in the Swiss Federal Stamp Tax Act. In addition to the stamp duty, the sale of UBS ordinary shares by or through a member of a recognized stock exchange may be subject to a stock exchange levy.
     Capital gains realized by a USU.S. holder upon the sale of UBS ordinary shares are not subject to Swiss income or gains taxes, unless such USU.S. holder holds such shares as business assets of a Swiss business operation qualifying as a permanent establishment for the purposes of the Treaty. In the latter case, gains are taxed at ordinary Swiss individual or corporate income tax rates, as the case may be, and losses are deductible for purposes of Swiss income taxes.

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(b) Ownership of UBS Ordinary Shares-United StatesShares-U.S. Federal Income Taxation
Dividends and Distribution
     Subject to the passive foreign investment company rules discussed below, USU.S. holders will include in gross income the gross amount of any dividend paid, before reduction for Swiss withholding taxes, by UBS out of its current or accumulated earnings and profits, as determined for United StatesU.S. federal income tax purposes, as ordinary income when the dividend is actually or constructively received by the USU.S. holder. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a return of capital to the extent of the U.S. holder’s basis in its UBS ordinary shares and thereafter as capital gain.
     Dividends paid to a noncorporate USU.S. holder in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to the holder at a maximum rate of 15%, provided that the holder has a holding period in the shares of more than 6160 days during the 120-day121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends paid by UBS with respect to the shares will generally be qualified dividend income.
     For United StatesU.S. federal income tax purposes, a dividend will include a distribution characterized as a repayment of capital in the form of a par value reduction, if the distribution is made out of current or accumulated earnings and profits, as described above.
     Dividends will be income from sources outside the United States for foreign tax credit limitation purposes, but dividendspurposes. Dividends paid in taxable years beginning before January 1, 2007 generally will be “passive income” or “financial services income,” and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be “passive” or “general” income which, in either case, areis treated separately from other types of income for foreign tax credit limitation purposes. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% rate. The dividend will not be eligible for the dividends-received deduction generally allowed to United StatesU.S. corporations in respect of dividends received from other United StatesU.S. corporations.

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     The amount of the dividend distribution included in income of a USU.S. holder will be the USU.S. dollar value of the Swiss franc payments made, determined at the spot Swiss franc/USU.S. dollar rate on the date such dividend distribution is included in the income of the USU.S. holder, regardless of whether the payment is in fact converted into USU.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend distribution is included in income to the date such dividend distribution is converted into USU.S. dollars will be treated as ordinary income or loss. Such gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a return of capital to the extent of the US holder’s basis in its UBS ordinary shares and thereafter as capital gain.
     Subject to certainU.S. foreign tax credit limitations, the nonrefundable Swiss tax withheld in accordance with the Treaty and paid over to Switzerland will be creditable against the USU.S. holder’s United StatesU.S. federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to a USU.S. holder under the laws of Switzerland or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against the USU.S. holder’s United StatesU.S. federal income tax liability, whether or not the refund is actually obtained.
     Stock dividends to USU.S. holders that are made as part of a pro rata distribution to all shareholders of UBS generally will not be subject to United StatesU.S. federal income tax. USWhether a stock dividend is considered to be such a nontaxable pro rata distribution for U.S. federal income tax can be a complex inquiry. U.S. holders that received a stock dividend that is subject to Swiss tax but not USU.S. tax may not have enough foreign income for US tax purposesfrom other sources to receive the benefit of the foreign tax credit associated with that tax, unless the holder has foreign income from other sources.tax.

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Transfers of UBS Ordinary Shares
     Subject to the passive foreign investment company rules discussed below, a USU.S. holder that sells or otherwise disposes of UBS ordinary shares generally will recognize capital gain or loss for United StatesU.S. federal income tax purposes equal to the difference between the USU.S. dollar value of the amount realized and the tax basis, determined in USU.S. dollars, in the UBS ordinary shares. Capital gain of a non-corporate USU.S. holder that is recognized in taxable years beginning before January 1, 2011 is generally taxed at a maximum rate of 15% if the UBS ordinary shares were held for more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
Passive Foreign Investment Company Rules
     UBS believes that UBS ordinary shares should not be treated as stock of a passive foreign investment company for United StatesU.S. federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change. In general, UBS will be a passive foreign investment company with respect to a USU.S. holder if, for any taxable year in which the USU.S. holder held UBS ordinary shares, either (i) at least 75% of the gross income of UBS for the taxable year is passive income or (ii) at least 50% of the value, determined on the basis of a quarterly average, of UBS’s assets is attributable to assets that produce or are held for the production of passive income (including cash). If UBS were to be treated as a passive foreign investment company, then unless a USU.S. holder makeswere to make a mark-to-market election, gain realized on the sale or other disposition of UBS ordinary shares would in general not be treated as capital gain. Instead, a USU.S. holder would be treated as if the holder had realized such gain and certain “excess distributions” ratably over the holder’s holding period for the shares and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. In addition, dividends received from UBS would not be eligible for the preferential tax rate applicable to qualified dividend income if UBS were to be treated as a passive foreign investment company either in the taxable year of the distribution or the preceding taxable year, but would instead be taxable at rates applicable to ordinary income.

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F—Dividends and Paying Agents.
     Not required because this Form 20-F is filed as an annual report.
G—Statement by Experts.
     Not required because this Form 20-F is filed as an annual report.
H—Documents on Display.
     UBS files periodic reports and other information with the Securities and Exchange Commission. You may read and copy any document that we file with the SEC on the SEC’s website, www.sec.gov, or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 (in the US)United States) or at +1 202 942 8088 (outside the US)United States) for further information on the operation of its public reference room. You may also inspect our SEC reports and other information at the New York Stock Exchange, Inc., 11 Wall Street, New York, NY 10005. Much of this additional information may also be found on the UBS website at www.ubs.com/investors.
I—Subsidiary Information.
     Not applicable.

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Item 11. Quantitative and Qualitative Disclosures About Market Risk.
Item 11.Quantitative and Qualitative Disclosures About Market Risk.
(a) Quantitative Information About Market Risk.
     Please seeMarket riskon pages 31128 to 41133 of the Risk Treasury and Capital Management treasury management
report.
(b) Qualitative Information About Market Risk.
     Please seeMarket riskon pages 31128 to 41133 of the Risk Treasury and Capital Managementtreasury management report.
(c) Interim Periods.
     Not applicable.
Item 12. Description of Securities Other than Equity Securities.
Item 12.Description of Securities Other than Equity Securities.
     Not required because this Form 20-F is filed as an annual report.

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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
Item 13.Defaults, Dividend Arrearages and Delinquencies.
     There has been no material default in respect of any indebtedness of UBS or any of its significant subsidiaries or any arrearages of dividends or any other material delinquency not cured within 30 days relating to any preferred stock of UBS AG or any of its significant subsidiaries.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds.
     Not applicable.
Item 15. Controls and Procedures.
Item 15.Controls and Procedures.
(a) Disclosure Controls and Procedures.
     Please seeUS regulatory disclosure requirementson page 43pages 216 and 217 of the Corporate Governancegovernance and Compensationcompensation report. See also Exhibit 12 to this Form 20-F.
(b) Management’s Annual Report on Internal Control over Financial Reporting.
     Please seeManagement’s Report on Internal Control over Financial Reportingon page 13251 of the Financial Statementsinformation report.
(c) Attestation Report of the Registered Public Accounting Firm.
     Please seeReport of the group auditorsIndependent Registered Public Accounting Firm on Internal Control over Financial Reportingon pages 14 and 15252 to 253 of the Financial Statementsinformation report.
(d) Changes in Internal Control over Financial Reporting.
   �� None.
Item 16.A. Audit Committee Financial Expert
Item 15.T.Controls and Procedures.
     Not applicable.
Item 16.A.Audit Committee Financial Expert.
     Please seeAudit committeeon pages 13 and 14page 203 andCompliance with New York Stock Exchange listing standards on corporate governanceon pages 47221 to 49222 of the Corporate Governancegovernance and Compensationcompensation report.
Item 16.B. Code of Ethics
Item 16.B.Code of Ethics.
     SeeCodePlease see “Code of Business Conduct and EthicsEthics” underIndependence of Directorson page 49221 of the Corporate Governancegovernance and Compensation report andCorporate responsibility in UBS guidelines and policieson page 84 of the Strategy, Performance and Responsibilitycompensation report. The code of business conduct and ethics is published on our website under http://www.ubs.com/1/e/about/cg/business_conduct.html.business_conduct.html.
Item 16.C. Principal Accountant Fees and Services
Item 16.C.Principal Accountant Fees and Services.
     SeePlease seeAuditorson pages 40214 to 41215 of the Corporate Governancegovernance and Compensationcompensation report.
Item 16.D. Exemptions from Fees for non-audit services approved by the Listing Standards for Audit Committee
     Not applicable. pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X were CHF 45,000 and are included under Total Non-Audit Fees (of which CHF 29,000 audit-related fees and CHF 16,000 other non audit fees) in the table on page 214.

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Item 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16.D.Exemptions from the Listing Standards for Audit Committee.
     SeeNot applicable.
Item 16.E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
     Please seeShare buyback programs Share buybackon page 169 of the Risk and treasury management report.
Item 16.F.Change in Registrant’s Certifying Accountant.
     Not applicable.
Item 16.G.Corporate Governance.
     Please seeTreasury share activitiesCompliance with New York Stock Exchange listing standards on corporate governance on pages 63 and 64221 to 222 of the Risk, TreasuryCorporate governance and Capital Managementcompensation report.
PART III
Item 17. Financial Statements.
Item 17.Financial Statements.
     Not applicable.
Item 18. Financial Statements.
Item 18.Financial Statements.
     Please see the Financial Statements and the Notes to the Financial Statements on pages 18251 to 120370 of the Financial Statementsinformation report.
Item 19. Exhibits.
Item 19.Exhibits.
   
Exhibit  
Number Description
1.1. Articles of Association of UBS AG.
   
1.2. Organization Regulations of UBS AG (incorporated by reference to Exhibit 1.2 of UBS AG’s annual report on Form 20-F for the year end December 31, 2006).AG.
   
2(b). Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.

We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
   
4(b).Terms of the Mandatory Convertible Notes.
7. Statement regarding ratio of earnings to fixed charges.
   
8. Significant Subsidiaries of UBS AG.

Please see Note 3334 to the Financial StatementsSignificant Subsidiaries and Associateson pages 96347 to 99350 of the Financial Statementsinformation report.

-26-

   
Exhibit
NumberDescription
12. The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a)).
   
13. The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United StatesU.S. Code (18 U.S.C. 1350).
   
15. Consent of Ernst & Young Ltd.

-22--27-

SIGNATURES
     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
   
 UBS AG
 /s/ Marcel RohnerOswald Grübel
Name:  Oswald Grübel 
Title:  Group Chief Executive Officer
   
  Name: Marcel Rohner
Title: Chief Executive Officer
   
Date: March 17, 200811, 2009 /s/ Marco SuterJohn Cryan
Name:  John Cryan 
Title:  Group Chief Financial Officer 

-28-

   
  Name: Marco Suter
Title: Group Chief Financial Officer

-23-

INDEX TO EXHIBITS
   
Exhibit  
Number Description
1.1. Articles of Association of UBS AG.*
   
1.2. Organization Regulations of UBS AG (incorporated by reference to Exhibit 1.2 of UBS AG’s annual report on Form 20-F for the year end December 31, 2006).AG.*
   
2(b). Instruments defining the rights of the holders of long-term debt issued by UBS AG and its subsidiaries.

We agree to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
   
4(b).Terms of the Mandatory Convertible Notes.*
7. Statement regarding ratio of earnings to fixed charges.*
   
8. Significant Subsidiaries of UBS AG.

Please see Note 3334 to the Financial StatementsSignificant Subsidiaries and Associateson pages 96347 to 99350 of the Financial Statementsinformation report.
   
12. The certifications required by Rule 13(a)-14(a) (17 CFR 240.13a-14(a)).*
   
13. The certifications required by Rule 13(a)-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United StatesU.S. Code (18 U.S.C. 1350).*
   
15. Consent of Ernst & Young Ltd.*
* Filed as exhibit herewith.

-24-
*Filed as exhibit herewith

-29-

(GRAPHIC)
Annual Report 20071 | Strategy, Performance and Responsibility 2 | Risk, Treasury and Capital Management 3 | Corporate Governance and Compensation Report 4 | Financial Statements

Contents

Introduction
3
Letter to shareholders
4
Strategy and development
7
Strategy and structure
10
Industry trends
15
The making of UBS
18
Risk factors
20
Financial performance
25
Measurement and analysis of performance
28
UBS reporting structure
31
Performance indicators
33
UBS results
36
Financial businesses results
38
Balance sheet and off balance sheet
46
Cash flows
54
UBS employees
57
Corporate Responsibility
69
UBS’s businesses
85
Global Wealth Management & Business Banking
86
Global Asset Management
122
Investment Bank
134
Corporate Center
147
Industrial Holdings
151
More about UBS
153
Sources of information
154
Corporate information
155
Contacts
156

1

annual report
2008

 

 

 

 

 

 

 

1 | Strategy, performance and responsibility
2 | UBS business divisions and Corporate Center
3 | Risk and treasury management
4 | Corporate governance and compensation
5 | Financial information

(UBS LOGO)

Contents

2
Letter to shareholders
5
UBS reporting at a glance
6
Other sources of information
7
Contacts


1.
Strategy, performance
and responsibility
12
Strategy and structure
18
The making of UBS
20
Current market climate and industry drivers
23
Risk factors
28
Financial performance
29
Measurement and analysis of performance
32
UBS reporting structure
33
Accounting changes
35
Key performance indicators
38
UBS results
44
Balance sheet
47
Off-balance sheet
52
Cash flows
54
UBS employees
60
Corporate responsibility
2.
UBS business divisions and
Corporate Center
74
Global Wealth Management & Business Banking
77
Wealth Management International & Switzerland
83
Wealth Management US
89
Business Banking Switzerland
94
Global Asset Management
102
Investment Bank
110
Corporate Center
3.
Risk and treasury
management
120
Risk management and control
125
Risk concentrations
128
Market risk
134
Credit risk
149
Operational risk
150
Treasury management
151
Liquidity and funding management
159
Interest rate and currency management
162
Capital management
168
Shares and capital instruments
176
UBS shares in 2008
180
Basel II Pillar 3
4.
Corporate governance and
compensation
194
Corporate governance
195
Group structure and shareholders
197
Capital structure
199
Board of Directors
206
Group Executive Board
210
Senior leadership
211
Shareholders’ participation rights
213
Change of control and defense measures
214
Auditors
216
Information policy
218
Regulation and supervision
221
Compliance with New York Stock Exchange listing standards on corporate governance
223
Compensation, shareholdings and loans
224
Compensation governance
225
2008 compensation for the Board of Directors and Group Executive Board
230
Shares, options and loans for the Board of Directors and Group Executive Board (at end of 2008)
237
Compensation principles 2009 and beyond for UBS senior executives
5.
Financial
information
244
Introduction
245
Accounting principles
246
Critical accounting policies
251
Consolidated financial statements
263
Notes to the consolidated financial statements
371
UBS AG (Parent Bank)
371
Parent Bank review
372
Parent Bank financial statements
374
Notes to the Parent Bank financial statements
393
Additional disclosure required under SEC regulations
393
A – Introduction
394
B – Selected financial data
398
C – Information on the company
399
D – Information required by industry guide 3


1

Annual Report 2008

Letter to shareholders

Dear Shareholders,

UBS recorded a net loss attributable to shareholders of CHF 20.9 billion in 2008. This extremely poor result stemmed primarily from the results of the fixed income trading business of the Investment Bank, mainly due to losses and writedowns on exposures related to US real estate and other credit positions. The loss has affected all stakeholders in UBS: in 2008, in US dollar terms, shareholders suffered a 58% fall in market capitalization, compared with the average 47% decline of the other members of the Dow Jones Banks Titans 30 Index; the total number of employees was reduced by 7%; and employee compensation was cut 36%. Clients have, understandably, expressed to us their disappointment about our losses, while at the same time stressing their appreciation for the advice and service levels they receive from their advisors.

For financial markets as a whole, 2008 was an extraordinary year in economic and financial history: world stock markets fell 42% (the MSCI world index), interest rates reached the lowest levels ever in the US and the UK, and a major investment bank failed. Responses to the crisis included the injection of new capital into many of the world’s major financial institutions by governments. With hindsight, it is clear that UBS was not prepared for this. Our balance sheet was too large and the systems of risk control and risk management that should have limited our exposure failed. We placed too much emphasis on growth and not enough on controlling risks and costs, particularly in regards to our compensation systems, performance targets and indicators and executive governance structures. Imponderable levels of cross-subsidy and confusion about accountability resulted from complex relationships between our business divisions.

In 2008, we focused on addressing our structural and strategic weaknesses and on establishing the long-term financial stability of UBS.Activities centered on the key areas we identified as requiring change: corporate governance, risk management and control processes, the liquidity and funding framework and management compensation. As a result, 2008 saw the introduction of new organization regulations to clarify the responsibilities of the Board of Directors (BoD) and the Group Executive Board (GEB), the establishment of an Executive Committee (EC) to allocate and monitor the use of capital and risk in each of the business divisions, and the formation of a dedicated BoD risk committee. We also merged the credit and market risk functions of the Investment Bank into a single unit led by the newly es-

tablished Chief Risk Officer position and a new liquidity and funding framework was introduced that requires each business division to be charged market-based rates for funding from other UBS divisions. We will continue to make changes in 2009, including the implementation of a new compensation model for senior executives that aligns compensation with the creation of sustainable results for shareholders. In addition, management compensation within business divisions will be based largely on divisional results and the responsible and independent management of each division’s resources and balance sheet.

Changes in our business divisions will play a vital role in the transformation of our firm.As announced on 10 February 2009, UBS now operates with four business divisions and a Corporate Center. The former Global Wealth Management & Business Banking division has been split into two business divisions: Wealth Management & Swiss Bank and Wealth Management Americas. We will continue to reposition the Investment Bank as a client-orientated and fee- and commission-earning business – in other words, the Investment Bank is moving away from the proprietary trading business that adversely affected our capital. A new unit has been established within the Investment Bank to manage the positions of those fixed income businesses we have decided to exit.

We took active steps to increase the financial stability of UBS in 2008.The issuance of two Mandatory Convertible Notes (MCNs) and a rights issue raised CHF 34.6 billion of new capital. During the year, our total balance sheet was reduced 11% to CHF 2,015 billion, risk-weighted assets fell 19% to CHF 302.3 billion and our identified risk concentrations fell sharply – with these reductions assisted by an agreement made in 2008 to sell a large portfolio of illiquid securities and other positions to a fund owned and controlled by the Swiss National Bank. Operating expenses fell 19% and the year-end tier 1 ratio was 11.0%, compared with 9.1% for year-end 2007 under the different standards that were then applicable under Basel I.

As announced on 18 February 2009, UBS settled a US cross-border case with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) by entering into a Deferred Prosecution Agreement (DPA) with the DOJ and a Consent Order with the SEC.As part of these agreements, we will complete our previously announced exit of our US cross-border business and implement an enhanced program of internal controls to



2

Introduction(KURER-GRUEBEL PHOTO)

3

Annual Report 2008

ensure compliance with the Qualified Intermediary Agreement with the Internal Revenue Service. In addition, pursuant to an order issued by the Swiss Financial Market Supervisory Authority, information was transferred to the DOJ regarding accounts of certain US clients as set forth in the DPA, who, based on evidence available to UBS, committed tax fraud or the like within the meaning of the Swiss-US Double Taxation Treaty. The total cost for the settlement of USD 780 million has been fully charged to our 2008 results. This episode makes it particularly clear that our control framework must be extremely robust and that employee incentives must be aligned with risk management and control and the creation of long-term value for shareholders.

Outlook –The recent worsening of financial conditions and UBS-specific factors have adversely affected our results, particularly in the Investment Bank. Even after substantial risk reduction, our balance sheet remains exposed to illiquid and

volatile markets and our earnings will therefore remain at risk for some time to come. Net new money remains positive for our Wealth Management Americas division, but this is being partially offset by net outflows in Wealth Management & Swiss Bank. Global Asset Management has also experienced further net outflows.

More generally, financial market conditions remain fragile as company and household cash flows continue to deteriorate, notwithstanding the very substantial measures governments are taking to ease fiscal and monetary conditions. Our near-term outlook remains extremely cautious.
For 2009, we will continue to implement our program to strengthen our financial position by reducing our risk positions, our overall balance sheet size, and our operating costs. Management will also focus on securing and building the firm’s core client businesses and on returning the Group as soon as possible to a sustainable level of overall profit-ability.



11 March 2009

UBS

(-s- Peter Kurer)
(-s- Oswald J. Gruebel)
Peter KurerOswald J. Gruebel
ChairmanGroup Chief Executive Officer



On 26 February 2009, Oswald J. Gruebel joined UBS in the capacity of Group Chief Executive Officer, replacing Marcel Rohner. Mr. Gruebel brings to UBS his deep understanding of banking and the markets and proven management skills. He also brings a strong determination to restore the bank’s sustained profitability and regain client trust. As announced on 4 March 2009, Peter Kurer, Chairman of the UBS Board of Directors, has decided not to stand for re-election at the annual general meeting on 15 April 2009. The UBS Board of Directors is nominating Kaspar Villiger for the role of Chairman.

4

IntroductionUBS reporting at a glance

This year we have changed the structure of our annual report. Based on feedback from users, our annualAnnual publications

Annual report now consists of four themed reports. These combine audited(SAP no. 80531)

Published in both German and non-audited information.
Together, the four reports make up UBS’s fullAnnual Report 2007and replace the former Financial Report, the Handbook and the Compensation Report. They comply with the US disclosure requirements for foreign private issuers as defined by Form 20-F of the Securities and Exchange Commission (SEC).

The four reports are:

Strategy, Performance and Responsibility 2007
ThisEnglish, this single volume report provides a letter to shareholder and a description of our firm, its strategy, organizational structure and financial performance for the last two years. It also discusses our standards for corporate behavior and responsibility, outlines demographic trends in our work-force and describes the way our people learn and are led.of:

–UBS’s strategy, performance and responsibility;
–the strategy and performance of the business divisions and the Corporate Center;
–risk, treasury and capital management at UBS;
–corporate governance and executive compensation; and
–financial information, including the financial statements.

Risk, Treasury and Capital Management 2007Review (SAP no. 80530)
In addition to outlining the principles by which we manage and control risk, this report provides an account of developments in credit risk, market risk, operational risk and treasury management during 2007. It also provides

The booklet contains key information on UBS shares.UBS’s strategy and fi-nancials. It is published in English, German, French and Italian.

Corporate Governance and Compensation Report 2007
Comprehensive information on our governance arrangements is included in this report which also explains how we manage our relationships with regulators and shareholders. (SAP no. 82307)

Compensation of senior management and the Board of Directors (executive and non-executive members) is discussed here. It is published in English and German.

Quarterly publications

Letter to shareholders

The letter provides a quarterly update from UBS’s executive management on the firm’s strategy and performance. The letter is published in English, German, French and Italian.

Financial Statements 2007report (SAP no. 80834)

This comprisesreport provides a detailed description of UBS’s strategy and performance for the auditedrespective quarter. It is published in English.

How to order reports

The annual and quarterly publications are available in PDF format on the internet atwww.ubs.com/investors/topicsin the reporting section. Printed copies can be ordered from the services section of the website. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, Information Center, P.O. Box, CH-8098 Zurich, Switzerland.



5

Annual Report 2008

Other sources of information

Website

The “Analysts & Investors” website atwww.ubs.com/investorsprovides the following information on UBS: financial statementsinformation (including SEC documents); corporate information; UBS share price charts and data; the UBS event calendar and dividend information; and the latest presentations by management for investors and financial analysts. Information on the internet is available in English and German, with some sections in French and Italian.

Result presentations

UBS’s quarterly results presentations are webcast live. A
playback of the most recent presentation is downloadable
atwww.ubs.com/presentations.

Messaging service / UBS news alert

On thewww.ubs.com/newsalertwebsite, it is possible to subscribe to receive news alerts about UBS via SMS or e-mail. Messages are sent in English, German, French or Italian and it is possible to state preferences for 2007, 2006the theme of the alerts received.

Form 20-F and 2005, prepared accordingother submissions to the International Financial Reporting Standards (IFRS). It also includes the audited financial statements of US Securities and Exchange Commission

UBS AG (the parent bank) for 2007files periodic reports and 2006, prepared according to Swiss banking law. Additional disclosure required by Swiss and US regulations is included where appropriate.

In additionsubmits other information about UBS to the four reports,Review 2007US Securities and Exchange Commission (SEC). Principal among these filings is distributed broadlythe annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934.

UBS’s Form 20-F filing is structured as a “wrap-around” document. Most sections of the filing can be satisfied by referring to parts of the annual report. However, there is a small amount of additional information in Form 20-F which is not presented elsewhere, and is particularly targeted at readers in the US. Readers are encouraged to refer to this additional disclosure.
Any document that UBS shareholdersfiles with the SEC is available to read and contains keycopy on the SEC’s website,www.sec.gov, or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, DC, 20549. Please call the SEC by dialing 1-800-SEC-0330 for further information on our strategy and financials. This booklet summarizes the operation of its public reference room. Much of this additional information inmay also be found on the four-part annual report.

If you only ordered specific reports in prior years, please note that the former Compensation Report is now calledUBS website atCorporate Governance and Compensation Report 2007,www.ubs. com/investors,and copies of documents filed with the former Annual Review is now calledReview 2007. OurSEC may be obtained from UBS’s Investor Relations team, whose contact details are listed inon the final pagesnext page of this report – please be in contact with us so that we can arrange delivery of the reports you require.

This report contains information that is current as of the date of this report. We undertake no obligation to update this information or notify you if it should change or if new information should become available.

Our aim is to provide publications that are useful and informative. In order to ensure that UBS remains among the leading providers of corporate disclosure, we would like to hear your opinions on how we can improve the content and presentation of our products (see contact details on the final pages of this report).

UBS



3

Corporate information

The legal and commercial name of the company is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS.

UBS AG is incorporated and domiciled in Switzerland and operates

under Swiss Company Law and Swiss Federal Banking Law as an Aktieng-esellschaft, a corporation that has issued shares of common stock to investors.

The addresses and telephone numbers of UBS’s two registered offices are: Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41-44-234 1111;

and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, phone +41-61-288 2020. UBS AG shares are listed on the SIX Swiss Exchange (traded through its trading platform SWX Europe, formerly virt-x), on the New York Stock Exchange (NYSE) and on the Tokyo Stock Exchange (TSE).



6

Letter to shareholders

Letter to shareholders

Dear shareholders,

In this year’s annual report we present a Group net loss of CHF 4,384 million. This resulted almost completely from our exposure to the US residential real estate market through positions in mortgage-backed securities and related structured products. The losses on these positions overshadow the outstanding 2007 performance in the majority of our other businesses. This makes this year’s financial result even more difficult for us to accept.

This letter discusses what we consider to be the structural reasons for our losses and how we are addressing them. It also outlines our strategy and current position and the reasons we consider these to have so much potential.
UBS has historically paid close attention to the management of illiquid and long dated risk exposures. And we have fared well in these particular risk categories. Our positions in leveraged lending and commercial real estate are comparatively small and of good quality. At the same time, and in line with our traditional focus, we grew our trading activities in seemingly liquid and high quality securities. The availability of cheap, short-term funding from UBS’s strong capital position facilitated this growth, accelerating the expansion of our balance sheet and comparatively high tradable asset inventories. The creation of Dillon Read Capital Management (DRCM) led to an overweight exposure to the US mortgage market. After a range of largely proprietary driven trading activities were transferred into DRCM, the Investment Bank replaced them with client-driven origination, trading and structuring of mortgage-backed securities. However, this still involved taking principal risk. This decision was driven by an attempt to close revenue gaps with key competitors in certain areas of the fixed income business. In hindsight, these three structural issues were important factors in the very bad outcome we experienced in the context of the US real estate market crisis.
Our shareholders’ support for the measures to strengthen our capital base at the extraordinary general meeting on 27 February was important for the future of UBS. We would like to thank you and reassure you that we see this as just one step on the path to recovery.
Contacts

How are we correcting our shortcomings?SwitchboardsWe closed DRCM in 2007 and re-integrated its businesses into the Investment Bank. Recently, we introduced a new funding framework for the Investment Bank to ensure that our trading activities are financed at market comparable levels and consistent with the nature and liquidity of the respective positions. This will reduce the potential incentive to hold dis-

proportionately high trading inventories. Combined with commensurate balance sheet limits, it will also ensure better control over the size of our balance sheet. Finally, we have repositioned the activities of the Investment Bank so that its future will be built on our strengths and client franchises. In 2007, the areas in which we achieved outstanding results are those where we have developed strong and long-standing client relationships and excellent client service. They represent the majority of the Investment Bank’s business and are a solid basis on which to build sustainable and profitable growth.

Wealth and asset management delivered excellent results in 2007.Global Wealth Management & Business Banking produced record results in both net new money inflow, at CHF 156 billion, and profitability. Our Global Asset Management business group fell short of a record result only because it absorbed costs related to the closure of DRCM. The outflows in institutional assets largely related to the weak past investment performance in some core and value equity capabilities. However, these problems have been addressed and new investment management teams are in place. We are therefore confident that we can reverse this trend in the medium term.

Outside Switzerland we have a focused business portfolio that concentrates on wealth management, asset management and investment banking. In our domestic Swiss market, we are the leading universal bank. UBS’s revenue mix, which has a much higher wealth and asset management component than our peers, is unique. With a re-positioned and client-centric Investment Bank, we believe our business portfolio is uniquely placed to benefit from the continuing growth of wealth around the world and therefore deliver sustainable, profitable growth. For us, such growth lies in establishing a set of earnings streams based on true customer benefit, building a strong and growing client base and maintaining assets and capabilities that our competitors find hard to copy. All of our businesses – Global Wealth Management & Business Banking, Global Asset Management and the Investment Bank – are built to benefit from the same fundamental trend, the long-term creation of wealth. Growth of all our businesses, across all countries in which they operate, improves when they work together as a unified firm, as opposed to operating independently of one another.
Efficiency in managing our financial resources, capital and risk is a prerequisite for growth. By making continuous efficiency improvement a permanent task, we will strengthen the enforcement of cost management discipline on a firm-



4

wide basis and therefore be able to direct investment spending towards areas where it most benefits our clients and investors. We remain committed to managing our capital in a disciplined fashion. We will strive, subject to regulatory requirements, to return to our usual pattern of redistributing capital not required to grow our business to shareholders, once our profitability and capital ratios return to more normalized levels.

Our Investment Bank now has new leadership. Jerker Johansson is a very experienced banker with an outstanding track record in the finance industry. He will fulfill a crucial role in our mission to build UBS to the stage where we are the firm with the fastest client-driven growth. At Group level, our leadership has been further strengthened by the appointment of three UBS senior managers to the Group Executive Board, helping to improve the integration of the Investment Bank with other businesses: Robert Wolf, Chairman and Chief Executive Officer, UBS Group Americas and President and Chief Operating Officer, Investment Bank; Alexander Wilmot–Sitwell, Joint Global Head, Investment Banking Department, Investment Bank and Marten Hoekstra, Head of Wealth Management, Americas.
We are proud of our employees. We appreciate their achievements, loyalty and hard work, especially in these difficult times. The way in which they fulfill their responsibility

towards our clients is the backbone of our business. As an employer, UBS therefore remains committed to investing in its employees. We are dedicated to creating a productive working environment based on fairness and meritocracy.

Outlook –As explained in our letter about the fourth quarter result for 2007, we expect 2008 to be another difficult year. We are focusing on the development of our client-driven businesses and the risk management of our remaining exposures to the US real estate market. Our employees and senior management are committed to managing the business in a disciplined fashion, while continuing to deliver outstanding services to clients. We believe this is the best way to earn your confidence.

For all general queries.Zurich+41-44-234 1111
   


UBS		London+44-20-7568 0000  
(-s- Marcel Ospel)
 (-s- Marcel Rohner)
Marcel Ospel Marcel Rohner
ChairmanNew York Chief Executive Officer+1-212-821 3000
Hong Kong+852-2971 8888

Investor Relations

UBS’s Investor Relations team supportsHotline+41-44-234 4100UBS AG
institutional, professional and retail
investors from our offices in ZurichNew York+1-212-882 5734Investor Relations
and New York.
Fax (Zurich)+41-44-234 3415P.O. Box
www.ubs.com/investorsCH-8098 Zurich, Switzerland
sh-investorrelations@ubs.com


(PHOTO)Media Relations

UBS’s Media Relations team supportsZurich+41-44-234 8500mediarelations@ubs.com
global media and journalists from
offices in Zurich, London, New YorkLondon+44-20-7567 4714ubs-media-relations@ubs.com
and Hong Kong.
New York+1-212-882 5857mediarelations-ny@ubs.com
www.ubs.com/mediaHong Kong+852-2971 8200sh-mediarelations-ap@ubs.com

5Shareholder Services

UBS Shareholder Services, a unit of theHotline+41-44-235 6202UBS AG
Company Secretary, is responsible for
the registration of the global registeredFax+41-44-235 3154Shareholder Services
shares.
P.O. Box
CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com

US Transfer Agent

For all global registered share-relatedCalls from the US+866-541 9689BNY Mellon Shareowner Services
queries in the US.
Calls outside the US+1-201-680 6578480 Washington Boulevard
www.melloninvestor.comFax+1-201-680 4675Jersey City, NJ 07310, USA
sh-relations@melloninvestor.com

7

Strategy, performance and responsibility

Strategy, performance and responsibility

 

 

 

 

 

 

 

6

Strategy and development

 

 

 

 

 

7

Strategy and development

performance

   
– UBS is a global firm providing financial services firm delivering advice, productsto private, corporate and services to corporate, institutional and private clients
   
– ThreeIts strategy is to concentrate on three global core businesses – Global Wealth Management & Business Banking, Global Asset Managementwealth management, asset management and the Investment Bankinvestment banking – operating as one firm
–Challenges facedand retail and corporate banking services in 2007 are being addressed at a strategic, structural and operational levelSwitzerland

UBS’s commitmentstrategic priorities

Client focus:focus

UBS’s purpose is to serve clients and providegive them with confidence in making financial decision making.decisions. Whether it serves individual, corporate or institutional clients, UBS puts their success and interests first and strives to truly understand clients’ goals –their goals. As client needs and the first priority isfinancial services industry constantly evolve, UBS makes a systematic effort to capture client feedback, identify potential for improvement and adapt its offerings accordingly.

Profitable growth and earnings quality

UBS shareholders expect the success and interests of clients

Growth through client-driven revenue streams: targetingfirm to achieve profitable growth. Fulfilling this expectation requires UBS to establish sustainable and profitable growth by establishing a set of earningsearning streams based on true customer benefitclient benefit. It therefore strives to build a strong and growing client base and to continuously develop its unique assets and capabilities.

Three businesses, one underlying trend – growth of wealth:based on sustained socialRisk and economic trends, allcapital management

Taking, managing and controlling risk is a core element of UBS’s businesses – Global Wealth Management & Business Banking, Global Asset Managementbusiness activities. UBS’s aim is not, therefore, to eliminate all risks, but to achieve an appropriate balance between risk and return. Risk reduction and capital measures taken in 2008 aimed at maintaining UBS’s capital strength as a source of competitive advantage. Adapting risk exposures to the current market environment and managing UBS’s balance sheet remain strategic priorities for the firm.

Measures taken in 2008

In August 2008, UBS launched a comprehensive program to help the firm adjust to the new realities in the financial industry. It aims to capitalize on the strengths inherent in its leading client franchises across its business divisions, to further grow these franchises, and to address certain weaknesses in its business model that had become apparent both before and as a result of the financial crisis.

A significant reduction in risk exposures has been achieved during the year.UBS reduced its risk positions very significantly during the year, including through a transaction with the Swiss National Bank. UBS also took several measures to strengthen its risk organization.

The Investment Bank – are focused on areasis in the process of repositioning itself toward client-driven growth,combined with above-average growth ratesa further reduction of its balance sheet and risk positions.

“One firm” approach:UBS has implemented new corporate governance guidelines,actively reinforcing a clear separation of the synergies between UBS’s businesses create additionalroles and responsibilities of the Board of Directors and its committees, from those of the Group Executive Board.

Senior management compensation has been reviewed.In November 2008, UBS announced the new compensation model that is directly aligned with sustainable earnings opportunities, on topvalue creation within each manager’s area of their individual growth rates. To UBS, the “one firm” approach means meeting client needs without expecting clients to worry about its internal organizational structuresresponsibility, and incorporates a longer performance evaluation horizon.

Challenges in 2007

Losses on sizeable trading positions in the US mortgage market led to UBS’s first ever negative Group result:the sudden collapse in the US mortgage securitization market impacted UBS worse than anticipated, overshadowing the strength of UBS’s client-driven businesses. Lessons from these developments were drawn at all levels

Measures taken
–Closure of alternative investment business Dillon Read Capital Management (DRCM) in the first half of 2007
–Strategic realignment of the Investment Bank in early 2008 led to repositioning of the fixed income, currencies and commodities (FICC) business unit, in order to strengthen client-driven businesses and consolidate integration with wealth and asset management businesses
–Establishment of a workout group for mortgage-backed securities (MBS) and collateralized debt obligation (CDO) portfolios, in order to improve risk management and reduce exposure
–Introduction of a new funding framework to improve balance sheet management discipline



8

UBS’s business structure

(Flow Chart)

                 
UBS key facts 
  As of or for the year ended  % change from 
  31.12.07  31.12.06  31.12.05  31.12.06 
 
                 
Financials
                
 
Operating income (CHF million)  31,980   47,736   40,691   (33)
 
Net profit attributable to UBS shareholders (CHF million)  (4,384)  12,257   14,029     
 
Invested assets (CHF billion)  3,189   2,989   2,652   7 
 
Tier 1 ratio (%)1
  8.8   11.9   12.8     
 
                 
Economic
                
 
Tax expense (CHF million)2
  1,017   2,751   2,785   (63)
 
Distribution to shareholders (dividends and buybacks) (CHF million)  5,075   5,889   6,702   (14)
 
Salaries and bonuses (CHF million)  20,057   19,011   15,867   6 
 
                 
Social and environmental
                
 
Personnel (FTE)2
  83,560   78,140   69,569   7 
 
Women in ranked positions (% of total officer population)  26.5   25.5   22.1   4 
 
Corporate charitable donations (incl. disaster relief efforts) (CHF million)3
  46   38   45   21 
 
Volunteering hours spent by employees  82,858   53,679   N/A   54 
 
CO2 emissions (tons)
  281,705   293,169   372,184   (4)
 
                 
Long-term ratings and benchmarks
                
 
Fitch, London AA  AA+  AA+     
 
Moody’s, New York Aaa  Aa2  Aa2     
 
Standard & Poor’s, New York AA  AA+  AA+     
 
Dow Jones Sustainability Index4
  ü   ü   ü     
 
FTSE4Good4
  ü   ü   ü     
 
Climate Leadership Index4
  ü   ü   ü     
 
Interbrand: rank among 100 most valuable global brands  39   42   44     
 
                 
UBS financial highlights 
  For the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
                 
Performance indicators from continuing operations
                
 
Diluted earnings per share (CHF)1
  (7.60)  (2.61)  4.64   (191)
 
Return on equity attributable to UBS shareholders (%)2
  (57.9)  (11.7)  23.9   (395)
 
Cost/income ratio (%)3
  680.4   111.0   70.5     
 
Net new money (CHF billion)4
  (226.0)  140.6   151.7     
 
                 
Group results
                
 
Operating income  1,201   31,721   47,484   (96)
 
Operating expenses  28,555   35,463   33,365   (19)
 
Operating profit before tax (from continuing and discontinued operations)  (27,155)  (3,597)  15,007   (655)
 
Net profit attributable to UBS shareholders  (20,887)  (5,247)  11,527   (298)
 
Personnel (full-time equivalents)5
  77,783   83,560   78,140   (7)
 
Invested assets (CHF billion)  2,174   3,189   2,989   (32)
 
                 
UBS balance sheet and capital management
                
 
Balance sheet key figures
                
 
Total assets  2,015,098   2,274,891   2,348,733   (11)
 
Equity attributable to UBS shareholders  32,800   36,875   51,037   (11)
 
Market capitalization6
  43,519   108,654   154,222   (60)
 
BIS capital ratios7
                
 
Tier 1 (%)  11.0   9.18  12.28    
 
Total BIS (%)  15.1   12.28  15.08    
 
Risk-weighted assets  302,273   374,4218  344,015   (19)
 
Long-term ratings
                
 
Fitch, London  A+  AA  AA+     
 
Moody’s, New York Aa2  Aaa  Aa2     
 
Standard & Poor’s, New York  A+  AA  AA+     
 
1 Includes hybrid Tier 1 capital. Please referRefer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report.2Net profit attributable to UBS shareholders from continuing operations/average equity attributable to UBS shareholders.3Operating expenses/operating income before credit loss expense or recovery.4Excludes interest and dividend income.5Excludes personnel from private equity (part of the Corporate Center).6Refer to the BIS capital“UBS shares in 2008” section of this report for 2008 for further information.7Refer to the “Capital management” section of this report for further information.8The calculation prior to 2008 is based on the Basel I approach.

The 2008 results and ratios tablethe balance sheet in this report differ from those presented in UBS’s fourth quarter 2008 report issued on 10 February 2009 due to: (1) the settlement agreements with the US Department of Justice and Securities and Exchange Commission related to the US cross-border case, as described in the capital management section in Risk, Treasury and Capital Management 2007.  2 Excludes Industrial Holdings.  3 Excludes UBS Optimus Foundation.  4ü Indicates UBS is included“Settlement regarding the US cross-border case” sidebar in the index.“Wealth Management International & Switzerland” section of this report; and (2) the determination by the Swiss National Bank (SNB) of the 30 September 2008 valuation of approximately USD 7.8 billion of securities not yet transferred by UBS to the SNB StabFund, as described in the “Transaction with the Swiss National Bank” sidebar in the “Strategy and structure” section of this report. The full effect of the settlement agreements, and all but approximately CHF 0.1 billion of the SNB pricing adjustment, are taken into account in UBS’s 2008 results and the balance sheet in this report. The total impact on net profit after tax was negative CHF 1,190 million.

9

Strategy, performance and developmentresponsibility
Strategy and structure

Strategy and structure

UBS is a global firm working withproviding financial services to private, corporate institutional and privateinstitutional clients. Its strategy is to concentrate on three global core businesses – wealth management, asset management and investment banking – and securities trading. It also focuses onto provide retail and corporate banking services in Switzerland. All the businesses are built to benefit from the same underlying fundamental trend – the growth of wealth. UBS operates as one firm and aims to deliverBy delivering valuable advice, products and services to its clients, while creating high qualitythe firm aims to generate sustainable earnings streams.and create value for its shareholders.

UBS clientsstrategy and businessesbusiness model

UBS has crafted its business strategy to benefit from one underlying global trend: the growth of wealth. Despite the current financial crisis, the firm believes that over the long term wealth creation will continue to be a prominent characteristic of the world economy. UBS’s three core businesses of wealth management, asset management and investment banking are geared to take advantage of this trend.

Organizationally, UBS has operated throughout 2008 as a Group with three business divisions: Global Wealth Management & Business Banking, Global Asset Management and the Investment Bank. As announced on 10 February 2009, Global Wealth Management & Business Banking has been divided into two business divisions: Wealth Management & Swiss Bank and Wealth Management Americas. Each business division is accountable for its own results, but co-operates to provide a broad palette of cross-business solutions for clients. UBS considers the breadth and depth of its offering to be one of its main strengths, and a key to its ability to create value for clients and shareholders.

Wealth Management & Swiss Bank
InUBS’s wealth managementUBS’s services are designed for business caters to high net worth and affluent individuals around the world (except those served by Wealth Management Americas) whether they are investing internationally or in their home country. UBS provides them withoffers these clients a complete range of tailored unbiased advice and investment services – ranging from asset management to estate planning and from corporate finance to art banking.services. ItsSwiss retail and corporate bankingBank businessprovides a complete set of banking and securities services for domesticSwiss individual and corporate clients.

Wealth Management Americas
Wealth Management Americas offers sophisticated products and services specifically designed to address the needs of high net worth and affluent individuals. It includes Wealth Management US, domestic Canada, domestic Brazil and the international business booked in the United States.

Global Asset Management
As ana worldwide asset manager,UBS offers innovative investment management solutions in nearly every asset class to

private, institutionalcorporate and corporateinstitutional clients, as well as through financial intermediaries. Investment capabilities compriseinclude traditional assets (for instance equities, fixed income and asset allocation), alternative and quantitative investments (multi-manager funds, funds of hedge funds and hedge funds) and real estate.

Investment Bank
In theinvestment banking and securitiesbusinesses, UBS provides securities products and research in equities, fixed income, rates, foreign exchange energy and metals. It also provides advisory services as well as access to the world’s capital markets for corporate, institutional, intermediary and alternative asset management clients.
èRefer to the “Reporting structure” and “UBS business divisions and Corporate Center” sections of this report for more information on UBS’s business divisions and the Corporate Center

UBS competitive profile

UBS’s competitive profilecurrent business mix is a result of many decades of development, internal growth initiatives and acquisitions. Since 1998, UBS has progressively divested non-core businesses and participations, and invested in growing its core businesses and creating a balanced reach worldwide.

UBS is now a leading global wealth manager: it is a market leader (by client assets) in both Europe and Asia Pacific, in sixth position in the US and one of the only firms of global scale focusing on wealth management as a core business. In 2008, UBS was among the top five firms globally in mergers and acquisitions based on deal volume. The asset management business is one of the leading active asset managers globally and one of the largest mutual fund managers in Europe based on assets under management.
In Switzerland, UBS is the leading firm for retail and commercial banking. It serves around 2.5 million individual clients and 133,500 corporations, institutional investors, public entities and foundations, collectively. The bank has chosen to limit its retail and commercial banking business to the Swiss market, concentrating on domestic opportunities and growing selected market segments.



12

Strategy, performance and responsibility

UBS corporate governance

As mandated by Swiss banking law, UBS operates under a strict dual board structure comprising the Board of Directors (BoD) and the Group Executive Board (GEB).

The BoD is UBS’s most senior body and is ultimately responsible for the firm’s strategy and the supervision of its executive management. The BoD sets the mid- and long-term strategic direction of the Group, is responsible for appointments and dismissals at top management levels and for defining the firm’s risk principles and risk capacity. A clear majority of its members are non-executive and fully independent.
The management of the business is delegated by the BoD to the GEB. Under the auspices of the Group CEO, the GEB has executive management responsibility for the Group and its businesses. It assumes overall responsibility for the development and the implementation of the Group’s and the business divisions’ strategies and for the exploitation of synergies across the firm.
The Executive Committee (EC) consists of the Group Chief Executive Officer (CEO), the Group Chief Financial Officer (CFO), the Group Chief Risk Officer (CRO) and the Group General Counsel, and is responsible for the allocation of the Group’s financial resources to the business divisions. These resources include capital, funding, and risk capacity and parameters within the limits set by the BoD.
èRefer to the “Corporate governance” section of this report for more information

UBS’s strategic priorities

Client focus
UBS’s purpose is to serve clients and give them confidence in making financial decisions. Whether it serves individual, corporate or institutional clients, UBS puts their success and interests first and strives to truly understand their goals. ClientAs client needs develop continuously, as doesand the financial services industry.industry constantly evolve, UBS strivesmakes a systematic effort to systematically capture clients’client feedback, in order to identify potential for improving processes,improvement and then adapt its products and servicesofferings accordingly.

Three businesses, one underlying trend: growth of wealth Based on sustained social and economic trends, UBS’s businesses are focused on areas with above-average growth rates. In addition, structural developments in various countries are creating broader regional client demand for new financial advice, structuring and execution.

The long-term creation of wealth is the fundamental trend that drives all three of UBS’s businesses – Global Wealth Management & Business Banking, Global Asset Management and the Investment Bank. The influence of this trend on UBS’s businesses with private clients is direct. Private wealth, together with shifting demographics, also drives institutional growth. Taken together, these factors should result in growing capitalization levels in the global financial markets and higher demand for trading execution, financing solutions and risk intermediation.
èFinancial industry trends are detailed on page 15–17

A global and focused strategy
UBS’s consistent strategic focus has led to the current business mix. The current business mix has emerged over fifteen years of development, internal growth initiative and acquisitions, reflecting the firm’s core capabilities, strengths, culture and history. Since 1998, UBS has progressively divested non-core businesses and participations, helping it to invest in growing its core businesses and create a balanced reach worldwide.

UBS is the leading global wealth manager. It is one of the market leaders in both Europe and Asia Pacific, in fourth position in the US and the only firm of global scale focusing on wealth management as a core business. In mergers and acquisitions, and equity underwriting, UBS is among the top five firms globally, and the only global bulge bracket investment bank with roots outside the US.
The asset management business is one of the leading active asset managers globally and is also one of the largest mutual fund managers in Europe.
In Switzerland, UBS is, and has been since 1998, the leading bank for retail and commercial banking. It serves around 2.7 million individual clients and 137,000 corporations, institutional investors, public entities and foundations. The bank has chosen to limit its Swiss retail and commercial banking



10

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business to the Swiss market, concentrating on domestic opportunities and growing selected market segments.

Growth through sustainable, client-driven revenue streams The composition and structure of UBS’s businesses is defined by the long-term needs of its clients. The optimal basis for building a high quality, sustainable earnings stream is a business mix that reflects these long-term needs. Because UBS takes this approach, the firm can grow without needing to change its strategic positioning or competitive profile. In order to fulfill the long-term needs of its clients, UBS:
–makes efficiency improvementa permanent task and a source of innovation, allowing investment spending to be directed to areas that will make the greatest difference for clients and investors;
–expands market share in existing businessesby attracting new clients in fast growth segments (for example, high net worth private clients) and increasing business volume through improved client segmentation and targeted solutions customized to client needs; and

–expands geographically,with a focus on regions with rapid economic and wealth growth, such as China, Brazil, Russia, India and the Middle East.
As UBS has significant scale in its areas of focus, with strong positions in large, mature markets as well as a growing presence in emerging markets, its main priority is to develop and grow organically. Acquisitions should accelerate and complementProfitable growth and they must have an obvious strategic and cultural fit, while being financially attractive to shareholders.

“One firm” approach
The synergies between UBS’s businesses create additional sustainable earnings opportunities, on top of their individual growth rates.

To UBS, the “one firm” approach means meeting client needs without expecting clients to worry about its internal organizational structures.
Many clients – particularly wealth management clients – are banking with UBS because it can offer a broad range of investment banking services along with its wealth manage-



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11

Strategy and development
Strategy and structure

ment offering. Cooperation between businesses helps UBS to capture important trends such as the demand for structured products and alternative investments. In mid-2006, the investment banking department and the wealth management businesses launched a dedicated joint initiative focusing on the ultra-high net worth segment. In 2007, the cooperation between the investment banking department and wealth management in key regions has resulted in an inflow of approximately CHF 9 billion of net new money

into the wealth management business and resulted in over 90 new mandates for the Investment Bank, generating around CHF 300 million in fees.

Overall, UBS estimates that, in 2007, around CHF 3.6 billion in incremental revenues were generated by its “one firm” approach – on margins kept in-house on proprietary products (mutual funds, structured products and alternative investments), on spreads and fees on client transactions and on cross-business client referrals.



Challenges in 2007 and the way forward

Last year was very difficult for UBS, with the sudden and unprecedented collapse in the US mortgage securitization market hitting UBS far worse than anticipated. Since the middle of 2007, UBS has concentrated on the immediate challenge of risk managing its exposure to the US real estate market, and on drawing the appropriate lessons for the firm as a whole. With the approval of the capital improvement measures by UBS shareholders at the extraordinary general meeting in February 2008, UBS retained a strong capital position. These measures include:
–the issuance of mandatory convertible notes (MCNs) of CHF 13 billion to two long-term financial investors
–the Government of Singapore Investment Corporation Pte. LTD (GIC) has subscribed for CHF 11 billion and an investor from the Middle East for 2 billion;
–the replacement of the cash dividend with a stock dividend; and
–the rededication of treasury shares previously bought for cancellation.

In addition to further developing its client businesses, UBS is currently placing a specific focus on pursuing the structural changes described below which began towards the end of 2007. These changes will address the weaknesses that led to the losses in 2007.

Closure of Dillon Read Capital Management and repositioning of fixed income, currencies and commodities
In May 2007, UBS announced the closure of Dillon Read Capital Management (DRCM) an alternative investment management venture established in June 2006 in order to allow outside investors access to the trading strategies managed by UBS. The core of DRCM was formed by the transfer of UBS’s principal finance and commercial real estate trading business from the Investment Bank to Global Asset Management. DRCM’s first outside investor fund was launched at the end of 2006. The development of the business, however, did not meet original expectations. After a review of its prospects, the operational complexity of its business model and other factors, UBS’s management decided to close DRCM. As a consequence, outside investor interests were redeemed and UBS’s proprietary portfolios were returned from Global Asset Management to the Investment Bank, where the positions were integrated into the appropriate desks of the fixed income, currencies and commodities (FICC) business unit.

FICC’s sizeable positions in the US mortgage market, including former

DRCM portfolios and positions held by the Investment Bank, incurred significant losses in the second half of 2007, prompting UBS to restructure the business unit. The restructure was designed to strengthen its client-facing businesses, improve cooperation with other parts of UBS and introduce stronger risk discipline. The implementation of these measures was kicked off in January 2008.
As part of this effort, a workout group has been created for certain mortgage-backed securities and CDO portfolios. The remainder of FICC’s real estate securitization business is being repositioned in order to focus on intermediating client flows, while scaling back origination efforts. Real estate finance will be increasingly aligned to the needs of investment banking and wealth management clients, in addition to providing commercial real estate financing solutions with the intention of distributing risk via the securitization or loan syndication market.
Overall, UBS is also strengthening risk discipline in FICC with a dedicated risk management position for real estate and securitization.
Besides this, exiting selected proprietary credit businesses in the US, Asia and Europe will help reduce risk and balance sheet utilization, allowing UBS to concentrate resources on client-


12

Another advantage of the “one firm” approach is that it helps UBS to create synergies on cost and funding, which the firm estimates saves it around CHF 1 billion per year. UBS shares infrastructure and services between parts of its business, eliminating redundant structures, management and control functions and providing it with more purchasing power. All the businesses operate under one brand, increasing the efficiency of brand building efforts.

Managing UBS’s business

Board structure
The management and oversight structure of UBS is based on two separate boards – the Board of Directors (BoD) and the Group Executive Board (GEB).

The BoD is the more senior body, with ultimate responsibility for the strategy and management of the company, as well as the supervision of executive management. The BoD



driven businesses such as global syndicated finance and the flow credit businesses (investment grade, high yield trading and loans sales and trading).
èRefer to the Investment Bank section on pages 134 to 146 for details regarding developments of its strategy and structure

Balance sheet management and funding framework
Until 2007, the Investment Bank’s activities were substantially funded on a short-term basis and therefore at short-term rates. This allowed individual business lines in the Investment Bank to benefit from the low, short-term funding rates available to UBS as a whole and led to the build-up of sizeable trading inventories. Now, in order to encourage more disciplined use of UBS’s balance sheet, the internal pricing applied for the Investment Bank reflects UBS’s funding costs, plus an add-on to align the price more closely to the prices of defined peer firms. In addition, the Investment Bank’s businesses are required to be term-funded, based on an assessment of the quality and liquidity of their assets by UBS’s central treasury function.

Investment Bank will fund its assets at a rate that matches the liquidity of its assets as assessed by UBS’s central

treasury department. As a result of this change, the cost of funding in the Investment Bank now better reflects the liquidity of the underlying assets being funded and is comparable with the costs applicable to its peer group.
èDetails on funding management can be found inRisk, Treasury and Capital Management 2007

Improvements in risk management and control
The losses experienced in 2007 do not invalidate UBS’s risk management and risk control principles, but it became evident that their implementation needs to be strengthened. In addition to the structural changes in the Investment Bank and its funding framework, risk management and valuation of US residential real estate related products have been refined, and will continue to be updated to reflect changes in projections for lifetime cumulative losses and market parameters. UBS is also applying more extensive limits, by asset class, based on gross values and risk sensitivities. Stress testing is being revisited to deliver a more diverse range of scenarios which better differentiate between the source of a stress event and its contagion effect. UBS plans to use more targeted analysis of the positions and vulnerabilities of each portfolio. Liquidity as well as price

sensitivity will form another important aspect of stress testing.
èDetails on risk control can be found inRisk, Treasury and Capital Management 2007

Focus on profitable growth
UBS shareholders expect the firm to achieve profitable growth. As described in this section, fulfillingFulfilling this expectation requires UBS to establish a set ofsustainable earning streams that are based on true customer benefit, client benefit. It therefore strives to

build a strong and growing client base and maintainto continuously develop its unique assets and capabilitiescapabilities.

In order to fulfill these requirements, UBS needs to ensure that are hard for competitors to copy. Efficiency in managingit efficiently manages its financial resources and risks is a prerequisite for all three of these requirements.resources. By making continuous efficiency improvementimprovements – achievingthat is, by looking for ways to achieve the same or a better result or service with fewer resources – UBS strives both to manage costs in a permanent task, UBS will enforce discipline in the way it manages costs. This will helpdisciplined manner and to optimize its spending across different economic and business cyclescycles.

Risk and capital management
Taking, managing and controlling risk is a core element of UBS’s business activities. UBS’s aim is not, therefore, to eliminate all risks, but to achieve an appropriate balance between risk and return. Risk reduction and capital measures taken in such2008 aimed at maintaining UBS’s capital strength as a way that it creates valuesource of competitive advantage. Adapting risk exposures to the current market environment and managing UBS’s balance sheet remain strategic priorities for the firm.
èRefer to the “Risk and treasury management” section of this report for more information on risk and capital management

Business divisions’ franchises
UBS continues to develop the platform and reach of the business divisions known since 10 February 2009 asWealth Management & Swiss BankandWealth Management Americas. This includes the expansion of its global presence in international wealth management growth markets. UBS’s leading position in Switzerland, both clientsas a wealth manager and investors.as the largest retail bank, will remain a cornerstone of UBS’s strategy and a source of sustainable profit growth.

UBS also continues to develop the platform and reach of itsGlobal Asset Managementbusiness division. This includes focusing on developing innovative products and managing toward sustainable investment performance.
TheInvestment Bankis in the process of repositioning itself toward client-driven growth, combined with a further reduction of its balance sheet and risk positions. This will allow the Investment Bank to build on its global coverage and distribution capability and to ensure maximum accountability for the creation of shareholder value. This repositioning includes the downsizing or exiting of certain businesses.
èRefer to the “UBS business divisions and Corporate Center” section of this report for more information on UBS’s business divisions and the Corporate Center



13

Strategy, performance and developmentresponsibility
Strategy and structure

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Measures taken

also defines UBS’s risk framework, principlesIn August 2008, UBS launched a comprehensive program to re-engineer its businesses and overall risk-taking capacity. A clear majority of its members are non-executive and fully independent.

The GEB,to adjust to the new realities in the financial industry. It aims to capitalize on the other hand, assumes overall responsibility forstrengths inherent in its leading client franchises across its business divisions, to further grow these franchises, and to address certain weaknesses in its business model that had become apparent both before and as a result of the daily managementfinancial crisis.

Executive governance
Controls have been improved and accountability and transparency increased at the level of UBS,top management. One result has been the implementationcreation of strategyan Executive Committee to allocate and continuously monitor the use of capital and risk in each of the business divisions. Other wide-ranging changes to the Group’s business results. Together withgovernance have been proposed and implemented. Refer to the Chairman’s Office“Corporate governance” section of the BoD (which consists of the Chairman and the Vice Chairmen of the BoD), the GEB is responsiblethis report for developing UBS’s strategies.

This dual board structure requires that the two boards are institutionally independent of one another, and therefore establishes a system of checks and balances. Furthermore, the
more information on corporate governance.

functionsLiquidity and funding framework
The business divisions have been incentivized to manage their balance sheets with greater autonomy and responsibility. A new liquidity and funding concept has been approved and is being implemented. Refer to the “Liquidity and funding management” section of Chairmanthis report for more information on liquidity and funding.

Senior management compensation
Senior management compensation is now aligned to sustainable value creation within each manager’s area of the BoD and Chief Executive Officer (who is positioned within the GEB) are performed by two different people. No member of one board may be a member of the other.
èCorporate Governance and Compensation Report 2007details the corporate governance structures and principles of UBS

Organizational structure
While UBS is structured into three business groupsresponsibility and a Corporate Center, it is managed as an integrated firm. Eachlonger performance evaluation horizon has been introduced. UBS announced a new compensation model for senior executives in November 2008 (effective 1 January 2009). Refer to the “Compensation, shareholdings and loans” section of this report for more information on senior management compensation.

Transformation of UBS’s wealth management business group is led by a member of the GEB.
As announced on 10 February 2009, Global Wealth Management & Business Banking has been divided into two new business divisions: Wealth Management & Swiss Bank and Wealth Management Americas.



14

Strategy, performance and responsibility

Strategy

Key performance indicators: 2009 and development
Industry trends

Industry trendsbeyond

Long-term perspectives

UBS uses key performance indicators (KPIs) to monitor the firm’s performance and the delivery of returns to shareholders. Until the end of 2008, UBS focused on four KPIs at the Group level, as described in the discussion of performance measures in the “Measurement and analysis of performance” section of this report. In response to the next ten years,changing market environment, UBS conducted a detailed review of its KPI framework in 2008. The objective of this review was to adjust these indicators – which are used by the world economyfirm to evaluate its economic performance as a whole and the contribution of individual employ-

ees to that performance – to more closely reflect the firm’s strategic priorities.

This review focused on the identification of the key drivers of total shareholder return (TSR) – defined as the change in the share price and any dividend yield – which represents the ultimate measure of performance for UBS shareholders. However, several factors driving TSR cannot be directly influenced by UBS management, such as valuation multiples and short-term market trends. Therefore, on a day-to-day basis, UBS management measures performance in the form of profitability after the cost of

equity or economic profit. Consequently, the KPI framework has been designed to explicitly incorporate the drivers of economic profit at the Group and business division level. UBS manages its businesses based on its KPI framework, which is expectedused for internal performance measurement to grow around 3.1% per year (source: International Monetary Fundensure management accountability and UBS research, December 2007). Thereconsistency. Both Group and business division KPIs are used to determine variable compensation of executives and staff.
The Group and business division KPIs shown in the table below will be continued productivity gainsdisclosed beginning in first quarter 2009 and going forward.


Key performance indicators
Wealth Management &Wealth Management
GroupSwiss BankAmericasInvestment BankGlobal Asset Management
Net profit growth
Pre-tax profit growthPre-tax profit growthPre-tax profit growthPre-tax profit growth
Cost / income ratio
Cost / income ratioCost / income ratioCost / income ratioCost / income ratio
Gross margin (RoIA)1Gross margin (RoIA)Gross margin (RoIA)
Return on equity (RoE)
Return on attributed equity
Return on assets, gross
Return on assets, gross
Return on risk-weighted assets, gross
FINMA leverage ratio2
Impaired lending portfolio3Value at Risk4
Tier 1 ratio
Net new money rate
Net new money rateNet new money rateNet new money rate
Economic profit
1 For International clients segment only. RoIA: return on invested assets.  2 FINMA: Swiss Financial Market Supervisory Authority.  3 Impaired lending portfolio as a result% of global competition and the diffusion of new technologies. Worldwide population, and therefore economic activity, will also grow; although employment may increase at a slower pace, reflecting demographic shifts towards older populations in some countries, which is expected to reduce the growth potential of the global economy.
The real growth rate of gross domestic product (GDP) will be highest in Asia (excluding Japan), followed by Central and Eastern Europe, the Middle East, Africa and Latin America. As a result of the strong growth performance of many emerging market countries, developing markets will contribute a total of 52% to the increase in global GDP between 2007 and 2015. Asia, excluding Japan, will represent the largest increase in GDP in absolute terms, closely followed by North America and Western Europe, due to the current size of these developed markets. This is why it is important for global financial service providers, such as UBS, to have significant positions both in growth markets and large, mature markets.
The financial services sector has been growing faster than the economy on average for the last three decades. Despite the credit crisis in the US affecting the securitization and credit market, which started in 2007 and continued into early 2008, the financial services sector continues to have attractive long-term growth opportunities. Financial innovation, closely linked to the evolution of securities markets, will not disappear and will remain the driving force for further development in the financial sector. UBS sees several specific factors that will drive the development of its business over the coming decades. The factors which are expected to result in the financial services industry having continued higher growth rates than the overall economy are: client sophistication, wealth accumulation, retirement provisioning, securitization, equitization, non-traditional asset classes, and corporate restructuring and internationalization.
These terms, and their distinct impact on UBS’s businesses, are explained in more detail below.lending portfolio. For Swiss clients segment only.  4 Regulatory VaR.

Client sophistication

The recent growth of financial sponsors and hedge funds ex-emplifies the changing nature of financial market relationships, in which increasingly sophisticated clients are asking for more complex solutions to meet their needs. These clients require innovative solutions that span product groups and

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geographies. Aided by technological improvements, investment banks are reacting with product innovations, such as new structured products, algorithmic trading or equity bridge financing and targeted services, such as prime brokerage, in a bid to produce the most competitive offering. UBS believes that the investment banks which are best positioned to serve such clients are those with global reach, strong platform capabilities and the scale to offer customization economically.

At the individual level, an unprecedented process of wealth accumulation has occurred within the last decade, triggered first by the technology boom, and spurred on by continued equitization and the creation of wealth in emerging markets. UBS sees wealthy clients taking a more proactive stance in investing their wealth, strongly influenced by their personal circumstances. In order to meet the needs of such clients, the finance industry will be required to offer tailor-made solutions with a more sophisticated approach to segmentation criteria and targeting. Such solutions will increasingly take into account a client’s lifestyle and stage of life, meaning that traditional segmentation criteria (for example, those that simply assess the assets held) will no longer be adequate in comparison.
UBS believes that an integrated business is best able to compete in an increasingly client-centric environment through a deep understanding of clients’ needs as well as a strong tailored offering of comprehensive financial products and services.

Wealth accumulation

In many economies, a notable shift is taking place away from labor-intensive production to more capital-intensive activity.



15

Strategy, performance and developmentresponsibility
Industry trendsStrategy and structure

Risk management in 2008

BasedUBS entered 2008 with significant legacy risk positions which exceeded the firm’s risk bearing capacity. While UBS incurred substantial writedowns on this, UBS seesits risk positions, it pursued an active risk reduction program through sales in 2008. Significant transactions included the sale in May of US residential mortgage-backed securities to a clear trend towards individual wealth accumulation that is likely to continue overfund managed by BlackRock for proceeds of USD 15 billion and the next decade, particularlyagreement reached in Asia. Wealth is expected to grow faster than GDP in developed countries. Moreover,October with the ratio of wealth to GDP in emerging markets is currently low and should increase, due, among other factors, to generally higher savings rates. These developments will benefit wealth management businesses across the world. They will also help the asset management industry as private wealth is a key driver for institutional asset growth. Investment banks and securities businesses should also benefit thanks to rising capitalization levels in global financial markets and higher trading volumes.

Retirement provisioning

In coming decades, most countries with established, mature economies will face a major demographic shift related to declining birth rates. This means that while the number of retired citizens will rise, there will be fewer younger people available to replace them in the workforce and therefore fund their retirement. Due to this demographic trend, pension reform is on the agenda of many governments across the world. The strong reliance in Continental Europe and Japan on unfunded schemes will make reform especially urgent in these locations. Although each country will follow its own regulatory agenda, UBS sees a general and gradual shift from unfunded public pension schemes to privately funded ones.

This development benefits both the asset gathering and investment banking businesses. Aside from managing pension mandates, asset management businesses will increasingly address other issues such as asset and liability management for under-funded defined benefit corporate pension funds. With strong capabilities in derivatives and structured products, investment banks also fill an important role in this area.
Swiss National Bank (SNB) (see details below).

In wealthUBS identified significant weaknesses in its risk management UBS believes that current developments will influence the demand for retirement-specific products. Private clients usually experience a mind-set change when they enter the sixth decade of their life – the focus shifts from wealth accumulation to wealth protection. Appropriate products and services are needed incontrol organization. In order to helpaddress these individualsweaknesses, UBS launched an extensive remediation plan, which included the overhaul of its risk governance, significant changes to fundrisk management and secure their retirement, representingcontrol personnel, as well as improvements in risk capture, risk representation and risk monitoring. Implementation of this plan is ongoing and remains a substantial growth areahigh priority for the financial services industry.

Securitization

The de-emphasis of traditional on-balance sheet lending and an increase in securities trading were key contributors to the transformation of the financial services industry over the past decades. Better capital market access and a globalization of financial flows, which improved the pool of available liquidity, have enabled corporations to solve funding needs by directly accessing capital markets while allowing banks to securitize assets and redistribute risk previously held on balance sheet. However, the recent US-led dislocation of credit markets has slowed down this development.

The turmoil highlights a number of issues that need to be addressed, on both the issuer and investor side. Nevertheless, with securitization markets in Europe and most emerging markets still being relatively underdeveloped compared to the US, UBS expects the global securitization trend to progress in the medium to long term. This will require significantly more transparency in the securitization process in order to improve market participants’ ability to effectively price these assets.

Equitization

According to recent estimates, equity accounts for nearly half of the growth in global financial assets as more institutional and individual investors tend to allocate a greater share

UBS.



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Transaction with the Swiss National Bank

As announced on 16 October 2008, the Swiss National Bank (SNB) and UBS reached an agreement to transfer illiquid securities and other positions from UBS’s balance sheet to a fund owned and controlled by the SNB. From the originally agreed USD 60 billion, the transaction size has been reduced to USD 38.6 billion (including the effect of price adjustments so far totaling USD 0.7 billion). With this transaction, UBS caps future potential losses from these assets, reduces its risk-weighted assets, materially de-risks its balance sheet and is no longer exposed to the funding risk of the assets to be transferred.

Transaction structure
The SNB will finance the fund with a loan in the amount of 90% of the purchase price to be paid by the fund, secured by the assets of the fund. 10% of the purchase price will be financed through an equity contribution by the SNB. The loan will be non-recourse to UBS and will be priced at LIBOR plus 250 basis points. The fund and loan facility will terminate in eight years, but the termination date may be extended to 10 or 12 years. The cash flow from the assets, including interest, rental income, principal repayments and proceeds from asset sales (net of expenses and working capital requirements),

will be applied to service the loan until full repayment.

At the closing of each asset transfer, UBS will purchase, for an amount equal to the SNB’s equity contribution on that date, an option to acquire the fund’s equity once the loan has been fully repaid. The option exercise price will be USD 1 billion plus 50% of the amount by which the equity value exceeds USD 1 billion at the time of exercise. This option will be carried on UBS’s balance sheet at its fair value. In the event of a change of control of UBS, the SNB will have the right but not the obligation to require UBS to purchase the outstanding loans at par plus accrued interest and to purchase the fund equity at 50% of its value at the time.
If, upon the fund’s termination, the SNB incurs a loss on the loan it has made to the fund, the SNB will be entitled to receive 100 million UBS ordinary shares against payment of the par value of those shares (currently CHF 0.10 per share).

Governance
In fourth quarter 2008, the fund was established under the name SNB StabFund as a Swiss limited partnership for collective investments. Its objective is to manage the acquired positions based on fundamental value considerations. The SNB StabFund is owned by a general partner and a limited partner,

both of which are wholly owned by the SNB. The general partner has a board of directors with five members, of which three are designated by the SNB and two by UBS.

UBS acts as the investment manager of the SNB StabFund, subject to the oversight of the board of directors of the general partner which must approve certain types of decisions. The board also retains the right to remove UBS as the investment manager of the SNB StabFund.

Portfolio composition and size
The overall portfolio valuation of positions already transferred or still expected to be transferred to the SNB StabFund is USD 38.6 billion, as shown in the table opposite, subject to any further pricing adjustments. The SNB StabFund acquired a first tranche of 2,042 securities positions from UBS on 16 December 2008 for USD 16.4 billion. The remaining positions identified for sale to the fund are planned to be transferred in March 2009 in one or more additional transfers.

The purchase price for the securities transferred to the fund on 16 December 2008 was the value of these securities as of 30 September 2008 as determined by the SNB based on a valuation conducted by third-party valuation experts. On the same basis, the SNB has since determined the purchase price to



16

Strategy, performance and responsibility

be paid for a further USD 7.8 billion in securities and other positions that have not yet been transferred to the fund. So far, the determined purchase prices for securities and other positions transferred to or to be transferred to the fund were, in the aggregate, USD 0.7 billion lower than the value UBS assigned to these positions on 30 September 2008. All but approximately CHF 0.1 billion of their assetsthis difference is accounted for in UBS’s results for 2008. Purchase prices have not yet been determined for the other positions not yet transferred to equities. Since 1980, global equity market capitalization has grownthe fund, valued at an annual rate of around 12%. With regardsUSD 14.4 billion by UBS on 30 September 2008. Any difference between the purchase prices to global GDP,be determined by the capitalization of world stock markets increased from 23% of GDP in 1980 to almost 110% of GDP at the end of 2007 (see graph below). The rising share of equity in global financial assets reflects the transfer of ownership of productive assets from government and private owners to public marketsSNB and the increasing reliancevalue UBS assigned to these positions will affect UBS’s results in first quarter 2009.

Implications for UBS’s 2008
income statement

The overall impact on UBS’s 2008 income statement of corporationsthe SNB transaction and the placement of the mandatory convertible notes (MCNs) with the Swiss Confederation was a net charge of CHF 4.5 billion. This reflects a net loss arising from the acquisition of the equity purchase option, the loss referred to above arising from valuation differences determined to date on public equity financing

securities sold or to fund their operation.be sold to the SNB StabFund, losses on hedges that were subject to trading restrictions as a result of the SNB transaction, and the impact of the contingent issuance of UBS believes thatshares in connection with the underlying trend towards an increasing role for equity financingtransaction. The fair valuation impact of the issuance of the MCNs, as described in “Note 26 Capital increases and equity investments remains intact, even thoughmandatory convertible notes” in the private equity industryfinancial statements of this report, is also growing fast. included in this total.


Issuance of MCNs to the
Swiss Confederation
In Western Europe,connection with the transaction with the SNB, UBS sees significant growth potential becauseraised CHF 6 billion of continued financial market integration. Growth potential is even highernew capital in the emerging markets in viewform of the relatively low levels of stock market capitalization compared with GDP. Equitization is expected to provide growth opportunities not only to investment banking and securities businesses, but also to wealth and asset managers, as assets are increasingly shiftedmandatory convertible notes (MCNs) convertible into higher margin classes. In addition,UBS registered shares. These were placed with the continued commoditiza-tionSwiss Confederation and issued on 9 December 2008. Refer to the “Capital management” section of trading services, UBS believes that smaller providers will start outsourcing these services to larger competitors.

Non-traditional asset classes

The last two decades have seen robust growththis report and “Note 26 Capital increases and mandatory convertible notes” in non-traditional asset classes – meaning investments other than cash, bonds or public equities. North America led the way, with real estate and private equity becoming significant componentsfinancial statements of portfolios from the early 1980s onwards. More recently, UBS has seen hedge funds becoming mainstream investments across the globe. Investors are increasingly relying on these asset classes to boost expected returns and increase portfolio diversification. The strong demand and improved ability to structure and securitize even non-financial assets has spurred the development of even more asset classes.

While this is a key driver for the asset management industry, it also builds demand for a variety of sophisticated ancillary products and services, ranging from initial public offerings (IPOs) and leveraged finance for private equity firms to prime brokerage and administrative services for hedge funds.

The growth of non-financial assets is supported by the scarcity of commodities needed in production, raising the importance of an efficient allocation of resources. Energy and raw material markets are becoming increasingly similar to financial markets. Financial firms buy and sell futures and enter into private financial contracts (derivatives) with other market participants. With clients askingreport for more sophisticated products and services in the commodities area, financial firms are in an ideal position to profit from these developments through application of their experience in capital markets.information.

Corporate restructuring and internationalization

In the last few years, many businesses have benefited from strong global economic growth, low levels of nominal interest rates and abundant global liquidity. As a result, the global default rate touched a historical minimum and profits grew significantly. More recently, however, due to the sub-prime crisis, interest rates have risen while global levels of liquidity have fallen. The credit cycle has turned and default rates are moving back towards the long-term average. This is likely to trigger continued corporate restructuring which will, in turn, offer business opportunities for the investment banking business.

At the same time, the internationalization of business will continue, particularly in Asia, where strong economic growth is allowing local businesses to gradually become net buyers of assets abroad (especially in the US and in Europe, as well as the commodity-rich countries of Africa and Latin America). This trend will provide business opportunities for UBS advisory experts, who are able to assist businesses interested in making acquisitions around the world.
             
Positions affected by the transfer to the Swiss National Bank StabFund
   Valuation as of 30 September 2008 
USD million Priced  Not yet priced  Total 
 
US sub-prime  4.0   1.6   5.6 
 
US Alt-A  1.5   0.8   2.4 
 
US prime  1.2   0.7   1.9 
 
US reference-linked note program  5.8   0.0   5.8 
 
Commercial real estate  3.4   2.3   5.7 
 
Student loan-backed securities  0.5   0.0   0.5 
 
Other positions  8.5   9.0   17.5 
 
Price difference  (0.7)   1  (0.7)
 
Total
  24.2   14.4   38.6 
 

1 To be determined.


(GRAPH)

17

Strategy, performance and developmentresponsibility
The making of UBS

The making of UBS

All the firms that have come to make up today’s UBS look back on a long and illustriousdiverse history. Both the two Swiss predecessor banks and PaineWebber Group Inc. (PaineWebber) came into being in the second half of the 19th century, while S.G. Warburg’s roots go back to 1934. But it was in the 1990s when UBS’s current identity began to form.

In the early 1990s, the two Swiss banks that are part ofcame to form the current UBS, Swiss Bank Corporation (SBC) and Union Bank of Switzerland, were commercial banks operating mainly out of Switzerland. The two banks shared a similar vision: to become a world leader in wealth management and a global bulge-bracket investment bank with a strong position in global asset management, while remaining an important commercial and retail bank in Switzerland.
Union Bank of Switzerland, the largest and best-capitalized Swiss bank of its time, opted to pursue a strategy of organic growth, or expansion by internal means. In contrast, SBC, then the third-largest Swiss bank, decided to take another route by starting a joint venture with O’Connor, a leading US derivatives firm that was fully acquired by SBC in 1992. O’Connor was noted for its young, dynamic and innovative culture, its meritocracy and its team orientation. It brought state-of-the-art risk management and derivatives technology to SBC. In 1994, SBC acquired Brinson Partners, one of the leading US-based institutional asset management firms. Both the O’Connor and Brinson deals represented fundamental steps in the development of the firm.

The next major move was in 1995, when SBC merged withacquired S.G. Warburg, the British merchant bank. The deal helped to fill SBC’s strategic gaps in corporate finance, brokerage and research and, most importantly, brought with

it an institutional client franchise, which is still crucial to today’s equities business.

The 1998 merger of Swiss Bank Corporation and Union Bank of Switzerland brought together these two leading Swiss financial institutions, creating the world leader ina leading global wealth managementmanager and improving the new firm’s chances of becoming a majorglobal bulge bracket investment bank not to mention providing it with greater capital strength.and a leading global institutional asset manager.
Still, in order to become a truly global player in investment banking and wealth management, UBS needed to establish a significant presence in the key US market. That was achievedUBS advanced towards this objective when it acquired PaineWebber became a part of UBS in 2000.
Since the acquisition of PaineWebber, UBS’s strategymain priority has focused on organic growth aided by carefully chosen “bolt-on” acquisitions. In Europe,been to develop and grow organically. Smaller acquisitions have helped to accelerate and complement the domestic wealth management initiative, launched in 2001, has made a number of acquisitions, most notably in Germany (Sauerborn, Merrill Lynch International), the UK (Laing & Cruickshank, Scott Goodman Harris) and France (Lloyds Bank SA).firm’s growth. In 2006, for instance, UBS strengthenedenhanced its wealth management business in the US through the acquisitions of the private client branch networks of both Piper Jaffray (closed in 2006) and of McDonald Investments (closed in 2007). In the same year, the Investment Bank saw important additions in the Americas through the acquisition of Banco Pactualpresence in Brazil and ABN AMRO’s Global FuturesLatin America by acquiring Brazil’s largest independent investment bank and Options business.
In February 2008,asset manager, Banco Pactual. Today, UBS completed the acquisitionhas significant scale in Franceits areas of Caisse Centrale de Réescompte Group (CCR), an asset and wealth manager basedfocus, with strong positions in Paris, from Commerzbank.
Taken together, all these acquisitions have helped UBS to comprehensively widen the range of services offered across businesses and regions.large, mature markets as well as a growing presence in emerging markets.
 è DetailedRefer to www.ubs.com/history for more information on UBS’s history can be found at www.ubs.com/history



18

Strategy, performance and responsibility

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19

Strategy, performance and responsibility
Current market climate and industry drivers

Current market climate and industry drivers

The current crisis and its aftermath will have profound implications for the financial services industry and the world economy.

Market crisis and economic downturn

2008 was one of the most difficult years ever for the financial services industry. As the crisis deepened over the course of the year, the problems in the financial industry spread to other parts of the world economy. A precipitous drop in prices across most main asset classes, coupled with deleveraging, resulted in poorly functioning lending markets and a lack of inter-bank liquidity. Banks were forced to recapitalize, sometimes with the help of governments. Hopes that the crisis might be short-lived were dashed after the failure of one of the major US investment banks in mid-September, which resulted in very severe liquidity issues for many financial institutions. Banks experienced a scarcity of equity, credit supply further contracted and numerous countries fell into recession.

Recessions characterized by a simultaneous fall in prices across asset classes, an increase in consumer savings rates and contractions in lending caused by a shortage of bank capital are very rare, and have always been severe. There have in fact only been four recorded instances of such recessions in the past century: the “bankers’ panic” in 1907, the “great depression” in 1929–39, the Swedish economic crisis in 1992, and most recently the “lost decade” in Japan from 1990–2000.
Changes in consumer demand drive capital expenditures by companies and consequently affect capital goods indus-

tries, sometimes very rapidly. Even countries which have not experienced high leverage growth and significant asset price increases have been affected as investment spending and exports dropped. In particular, countries which relied on foreign capital inflows (either to the government or to the private sector) are at risk of seeing foreign investment and exports fall, which could in turn hurt the value of their currency.

There were radical changes to monetary and fiscal policy during 2008. Government borrowing and spending (through “stimulus packages”, transfer payments, loans, guarantees and purchases of bank capital) increased dramatically and led to higher deficits. Central bank balance sheets expanded, both as a result of traditional central bank activity and through unconventional measures such as the purchase of distressed assets from financial institutions (for example, mortgage backed securities). Interest rates have fallen to historically low levels in most countries as central banks attempt to support private and corporate spending.

Macro economic perspectives

The macro economic outlook for 2009 is not positive. A modest recovery can be expected only if the measures taken by governments and central banks prove to be both effective and efficient. Few observers expect the financial services industry to rebound quickly from this crisis.



Market capitalization of the components of the Dow Jones Banks Titans 30 Index, 2008 versus 20071

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20

Strategy, performance and responsibility

Stock market indices development

(GRAPH)

Industry drivers

A number of drivers are expected to have a significant impact on banks’ earnings and the structure of the financial services industry in the short to medium term. The most relevant factors are described below.

De-leveraging
The current downturn is different from previous ones not only in terms of its severity and wide geographical reach, but also in terms of the de-leveraging process that lies at its heart. De-leveraging is the process through which households, companies and the banks that intermediate between them simultaneously attempt to sell real and financial assets to pay back their debts. This unleashes two strong deflationary forces.

First, there is a reduction and restructuring of banks’ balance sheets, which may affect their capacity to lend money. Such a restructuring is already well under way, having started in 2007 when banks began recording losses on their asset portfolios, disposing of assets and raising capital. This trend gathered pace in the course of 2008 and has continued in the early part of 2009 as several banks disclosed more losses and raised further capital.
Second, household and corporate balance sheets are also in effect being restructured and reduced, depressing consumer and capital spending and appetite for risk. This process has just started and may last several years, as households address the need to permanently increase their savings. It may be particularly long and painful in countries with historically low savings rates, such as the US.
While debt levels are lower among non-financial corporations than in previous recessions, these companies will also have to restructure their balance sheets as they face falling demand for their products and services, and funding becomes increasingly scarce and more expensive.
The process of de-leveraging is expected to have, on balance, a negative impact on banks’ earnings. While increased

savings can provide opportunities for certain banks, risk aversion and the downward pressure it exerts on asset prices tend to reinforce each other.

Government intervention and re-regulation
The financial crisis has sparked heavy public intervention in the global financial system. State intervention packages have included a mix of capital injections by governments, public guarantees for selected bank liabilities such as deposits and commercial paper, and maximum loss guarantees for illiquid assets held in banks’ balance sheets. Governments have increasingly attached conditions to the measures they have taken, providing them the opportunity to at least temporarily influence the business activities of certain banks.

At the same time, the financial industry and its regulators are analyzing the lessons learned and implementing measures to adjust their business practices and the regulatory framework. This will fundamentally impact and likely transform the industry. While many details of the regulatory response to the financial crisis are still to be worked out, new regulation will likely focus on ways of mitigating the negative effects of the business cycle through regulatory policy, as well as on measures to increase the transparency of financial markets and to strengthen their resilience. Regulators are also likely to try to better identify and address systemic risks, for example by adapting regulatory requirements to the size and profile of certain financial institutions.
Specific measures are likely to include adjustments to the following six broad areas of direct relevance to international banks: higher capital requirements and the introduction of leverage limitations; more robust liquidity buffers and risk management; management and partial reintegration of off-balance sheet exposure onto firms’ balance sheets; review of valuation and accounting practices; increased cooperation between stronger and better-equipped supervisors and central banks, especially from an international perspective; and alignment of compensation programs and pay levels with long-term, firm-wide profitability. Some national regulators have moved quickly, including the Swiss Financial Market Supervisory Authority (FINMA; until 31 December 2008 Swiss Federal Banking Commission), which has already defined new transitional capital requirements for UBS and Credit Suisse.
Overall, the regulatory changes prompted by the current market turmoil will have lasting effects on the industry in terms of bank size, business portfolios, controls, capital requirements, profitability and compensation. These will result in significant changes to the competitive landscape. At the product level, regulatory restrictions and greater supervision in areas such as structured products, credit default swaps, and securitization are likely to result in lower margins for banks. Enhanced transparency requirements and disclosure standards for investment products are also likely.



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Strategy, performance and responsibility
Current market climate and industry drivers

Client behavior and demand
The relationship between financial firms and their clients has seen accelerating change over the past couple of years, for example with the rise of increasingly sophisticated clients (such as leveraged finance investors and hedge funds). However, the corporate and institutional client segment as a whole is expected to continue requiring innovative solutions which cater to specific and unique needs, and span product groups and geographies.

2008 has marked a turning point with regard to the investment behavior of many private clients, and fundamental changes in this behavior are expected in the future. Returns have been negative in most asset classes and many investors have grown suspicious of hedge funds and complex products in general, especially as these proved to be more correlated with equity and credit markets than originally thought.
Internal UBS research shows that private clients’ risk appetite is changing, moving towards more “traditional” asset classes such as equities, bonds, cash or precious metals. This trend is expected to have, on balance, a negative impact on banks’ income as it results in lower gross margins.

Wealth preservation
The financial crisis has already resulted in a substantial destruction of wealth as the price of many real and financial assets has fallen from the peaks of 2007. Many investors see a risk of further wealth destruction in the current economic climate. During this phase business opportunities for the financial services industry will mostly be in the realm of value preservation rather than return maximization.

Investors have reacted to the current crisis by selling assets, paying back debt and accumulating cash or deemed equivalent. History shows that investors generally need several years to return to more risky asset allocations following periods of financial distress. Therefore, capital preservation is likely to remain a priority for investors and most will seek to do this by holding cash before considering a diversification across a wider range of asset classes and products. On the other hand, an increase in savings by individuals, particularly in countries where household saving rates have been historically low, such as the US, represents an opportunity for banks.

Retirement provisions
The economic crisis does not fundamentally alter the private retirement industry’s growth drivers, namely the demographic shift related to falling birth rates and aging and the falling coverage provided by public pension schemes. Despite the drop in the value of their assets in 2008, private fully funded schemes will continue providing individuals with the best investment tools to accumulate wealth for

retirement, and savings will continue to flow into them. The ability of public pension schemes to fund themselves over the long term may be limited as several countries are already heavily indebted and running large deficits, including some driven by measures taken to help their economy in the current downturn, while demographics indicate that the ratio of workers to retirees will decrease in the foreseeable future. In some countries, particularly those which have experienced the largest destruction of accumulated wealth due to the crisis (for example, the US and UK, where pension funds are comparatively more exposed to equity markets than in other countries), a pick-up in individual savings rates would provide additional funds, which will partly be invested in private retirement schemes. This, combined with continued demand for specialist advice in wealth management, continues to represent an opportunity for wealth and asset managers.

Corporate restructuring
The corporate sector is generally better equipped to deal with the negative impact of a slowing economy than in previous downturns, mostly due to a relatively lower level of debt. However, a sharp reduction in demand for goods and services across developed and emerging markets and a continued lack of liquidity in credit markets will inevitably impact the corporate sector. Over the medium term, default rates are expected to rise from the historically low levels prevailing before the crisis, and further major bankruptcies are likely. The internationalization of business – particularly expansion in emerging markets – is likely to slow down as the attractiveness of new markets remains subdued and cash flows previously available for expansion are used to restructure balance sheets. In such a corporate environment, most of the opportunities for the banking sector are likely to arise from simple financing requirements, balance-sheet restructuring and asset disposals.

Emerging markets
Strong growth in emerging markets has been a key feature of the boom years in the global economy prior to the crisis, and banks have benefited greatly from strong growth in these markets. Growth in emerging markets is expected to slow markedly in 2009, reflecting the increased interconnections between economies in the era of globalization. Export surplus countries, including those relying on commodities exports, are most vulnerable to a further deterioration in the global economic environment, but also best placed to benefit from a potential recovery. Over the long term, however, banks which have built up a significant presence in emerging markets and serve a wide range of institutional and private clients are likely to continue benefiting from above-average economic growth in these countries.



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Strategy, performance and responsibility

Strategy, performance and responsibility
Risk factors

Risk factors

Certain risks, including those described below, can impact UBS’s ability to carry out its business strategies and directly affect its earnings. Asbusiness activities, financial condition, results of operations and prospects. Because the business of a consequence,broad-based international financial services firm such as UBS is inherently exposed to risks that only become apparent with the revenuesbenefit of hindsight, risks of which UBS is not presently aware could also materially affect its business activities, financial condition, results of operations and operating profit of UBS have varied from period-to-period – andprospects. The sequence in which the risk factors are likely to continue to vary – and revenues and operating profit for any particular period willpresented below is not be indicative of future results.their likelihood of occurrence or the potential magnitude of their financial consequences.

Risks related to the current market crisis

UBS, like many other financial market participants, was severely affected by the progressive market dislocation during 2007.financial crisis that unfolded in 2007 and worsened in 2008. The deterioration of financial markets in 2008 was extremely severe by historical standards, and UBS recorded substantial losses on legacy risk positions. UBS has taken a series of measures to reduce its risk exposures, including the US residential mortgage market in 2007 was more sudden and severe than any such event in recent market history. As a result, the securitized markets becamesale of up to USD 38.6 billion of illiquid and UBS’sother positions including securities that had been assigned high credit ratings, lost substantial value. The losses incurredto a fund owned and controlled by the Swiss National Bank (SNB) as announced in 2007, and the fourth quarter. However, UBS continues to hold positions held by UBS on 31 December 2007, are detailed inidentified as risk concentrations (refer to the “Risk concentrations” section ofRisk, Treasury and Capital Management 2007 this report for more information on these positions, as well as positions in other asset classes that might be negatively affected by the current market crisis).

In addition, UBS continues to hold positionsis exposed to the US residential mortgagegeneral systemic and counterparty risks that are exacerbated by the ongoing market

crisis and related instability of financial institutions and of the financial system as a whole.

UBS holds positions which may be adversely affected by the ongoing financial crisis and economic climate
As discussed in the paragraphs below on general risk factors, the values of all the assets UBS holds on its own account depend on the development of market conditions and the overall economic environment, as well as factors affecting particular assets, may lead to reductions in the market or carrying value of UBS’s assets. Although UBS’s exposure to the US mortgage market (including residential sub-prime, Alt-A and prime) was reduced dramatically in 2008, UBS still holds sizeableremains exposed to that market, albeit on a reduced scale. In addition, certain of its monoline-insured positions relatedare exposed to the US residential mortgage market in particular residential mortgage-backed securities (RMBS) and super senior tranches of collateralized debt obligations (CDO) backed by RMBSs. While UBS continues to manage, trade and hedge these positions, theas described below. The markets for most of theseUS mortgage-related securities have so far remained illiquid. In 2007, UBS incurred substantial losses (realizedilliquid and mark-to-market) on its holdings. The firm may record further realized losses upon the sale of any assets, or upon liquidation following a default under CDO structures to which it is exposed, and may record additional mark-to-market losses in the event of adverse developments specificimpossible to its positions (such as the deterioration of remittance data in underlying mortgage pools). In addition, the value of UBS’s holdings has been and may be further reduced by various factors affecting the overall mortgage market or the US mortgage and real estate markets in general. These factors include deteriorating loss assumptions with respect to mortgage-related assets generally, even those assets that are not themselves experiencing difficulties, due to higher levels of mortgage borrower defaults and the possible forced sale of inventories by other market participants.

determine

whether and how long current market conditions will persist, or whether they will further deteriorate.

UBS has boughtrelies on credit protection from third parties, including monoline insurers, that may not be effective


UBS’s business entails exposure to counterparty credit risk.risk, including to monoline insurers and other providers of credit protection. UBS’s credit exposure to the monoline sector arises from over-the-counter (OTC) derivative contracts – mainly credit default swaps (CDS)(CDSs) which are carried at fair value.value – in respect of mortgage related and “monoline-wrapped” securities. The fair value of these CDSs – and thus UBS’s exposure to the counterparties – depends on the valuation and the perceived credit risk of the instrument against which protection has been bought. Towards the end of 2007, monolineMonoline insurers werehave been very adversely affected by their exposure to US residential mortgage-linked products, resulting in credit rating downgrades and the need to raise additional capital. UBS has recorded large credit valuation adjustments on theits claims against monoline counter-parties.counterparties. If the financial condition of these counterparties or their perceived credit worthinesscreditworthiness deteriorates further, UBS could record further credit valuation adjustments on the CDSs bought from monoline insurers.
UBS iscould also actively tradingincur losses in connection with restructurings of monoline insurers, including possible losses on third party hedge protection which UBS may incur as a result of changes in the corporate structure of the insurers. UBS also trades securities issued securitiesby and derivatives of monolinesrelated to monoline insurers, including CDSs, and the value of these contractssecurities and derivatives is subject to market volatility.

UBS holds positions in other asset classes that have been or might be negatively affected by the current market crisis


In 2007 and 2008, UBS incurred substantial losses (realized and mark-to-market) on its holdings of securities related to the US residential mortgage market. The market dislocation that began in 2007 has been progressively felt in asset classes beyond US sub-primeresidential mortgages. In 2007,2008, UBS recorded markdowns on other assets carried at fair value, including auction rate securities (ARS), leveraged underwritingfinance commitments, – particularly commitments made prior to the credit market dislocation in July 2007 – and positions related to Alt-A residential mortgages and commercial mortgages in the US. InUnited States and non-US mortgage- and asset-backed securities (ABSs). UBS has recorded and in the future UBS could record negative fair value adjustments on these assets and on other asset classes to which the effect ofmay be affected by the crisis in the credit markets may spread, such as other US asset-backed securities or securities issued by US states and municipalities and student loan programs, including auction rate certificates (ARCs) and others.markets. Such securities may also be wrapped by monoline insurers and therefore could incurgive rise to losses if the difficulties in the monoline sector persist or increase (see the previous risk factor on monoline exposures).



23

As

Strategy, performance and responsibility
Risk factors

UBS’s inventory of ARS is likely to increase in the future as a sponsorresult of ARCs programs,its commitment to repurchase client-owned ARS, as further described in the “Risk management” section of this report. UBS has provided liquidity to their auction processes. Dueis also exposed to the decreasing demand for ARC securities in lightrisk of recent market concerns about the financial status of monoline insurerslosses and the continued deterioration of credit markets, the firm’s inventory in these securities has increased and is subject to valuation uncertainties.write-downs on its leveraged finance commitments. UBS holds positions related to real estate markets in countries other than the US and these exposuresUnited States on which it could also recordsuffer losses.



20

These include exposures to non-US residential and commercial real estate and mortgages and non-US ABS programs. For example, as described in the “Credit risk” section of this report, UBS has a very substantial Swiss mortgage portfolio which is booked in Global Wealth Management & Business Banking. UBS is also exposed to risk when it provides financing against the affected asset classes such as in its prime brokerage, reverse repo and lombard lending activities.

Risk factors related to UBS’s business activity

Performance in the financial services industry depends on the economic climate – negative developments can adversely affect UBS’s business activities


The financial services industry prospers in conditions of economic growth, stable geopolitical conditions, capital markets that are transparent, liquid and buoyant and positive investor sentiment. An economic downturn, inflation or a severe financial crisis (as seen in 2007) would2008) can negatively affect UBS’s revenues and it wouldmay be unable to immediately adjust all of its costs to the resulting deterioration in market or business conditions.
A market downturn can be precipitated by a number of factors, including geopolitical events, changes in monetary or fiscal policy, trade imbalances, natural disasters, pandemics, civil unrest, war or terrorism. Because financial markets are global and highly interconnected, even local and regional events can have widespread impact well beyond the countries in which they occur. A crisis could develop, regionally or globally, as a result of disruption in emerging markets, which are particularly susceptible to macro-economic and geopolitical developments, or as a result of the failure of a major market participant. As UBS’s presence and business in emerging markets increases, it becomes more exposed to these risks.
Adverse and extreme developments of this kind have affected UBS’s businesses in a number of ways, and may continue to have further adverse effect on the firm’s businesses:
– a general reduction in business activity and market volumes affects fees, commissions and margins from market-making and customer-driven transactions and activities;
– a market downturn is likely to reduce the volume and valuations of assets UBS manages on behalf of clients, reducing its asset- and performance-based fees;
– reduced market liquidity limits trading and arbitrage opportunities and impedes UBS’s ability to manage risks, impacting both trading income and performance-based fees;

– assets UBS holds for its own account as investments or trading positions could continue to fall in value;
– impairments and defaults on credit exposures and on trading and investment positions could increase, and losses may be exacerbated by falling collateral values; and
– if individual countries impose restrictions on cross-border payments or other exchange or capital controls, UBS could suffer losses from enforced default by counterparties, be unable to access its own assets, or be impeded in – or prevented from – managing its risks.

The developments mentioned above can affect the performance of both the Group and its business units. As such, there is a risk that the carrying value of goodwill of a business unit might suffer impairments.

Due to its sizeable trading inventory, trading activities and the counterparty credit risks in many of its businesses, UBS is dependent upon its risk management and control processes to avoid or limit potential losses

Risk-taking
Controlled risk-taking is a major part of the business of a financial services firm. UBS derives a substantial part of its revenues from market-making and proprietary trading in cash and derivatives markets. Credit is an integral part of many of UBS’s retail, wealth management and Investment Bank activities. This includes lending, underwriting and derivatives businesses and positions.
InterestChanges in interest rates, equity prices, foreign exchange levels and other market fluctuations can adversely affect itsUBS’s earnings. Some losses from risk-taking activities are inevitable but, to be successful over time, UBS must balance the risks it takes with the returns it generates. It must therefore diligently identify, assess, manage and control its risks, not only in normal market conditions but also as they might develop under more extreme (“stressed”) conditions, when concentrations of exposure can lead to severe losses. UBS’s approach to risk management and control and its tools and processes for market and credit risk control, including country risk, are described inRisk, Treasury and Capital Management 2007. The steps UBS is taking to strengthen its market risk framework are also described in the same report.
As seen in 2007,2008, UBS is not always able to prevent losses arising from extreme andor sudden market dislocationsevents that are not anticipated by its risk measures and systems and affect sizeable inventory positions and therefore lead to serious losses. Value at Risk (VaR), a statistical measure for market risk, is derived from historical market data, and thus, by definition, could not have predicted the losses seen in the stressed conditions in 2007. However,2008. Moreover, stress loss and concentration controls, and the dimensions in which UBS aggregates risk to identify potentially highly correlated exposures, proved to be inadequate.
UBS’s tools and processes for market and credit risk control, including country risk, its approach to risk management and control, and the steps UBS is taking stepshas taken to strengthen its risk management and risk control frameworksframework are described in the affected areas, but the firm“Risk management” section of this report.
Notwithstanding such steps, UBS could suffer further losses in the future if:if, for example:
– it does not fully identify the risks in its portfolio, in particular risk concentrations and correlated risks;



24

Strategy, performance and responsibility

– its assessment of the risks identified, or its response to negative trends, proves to be inadequate or incorrect;
– markets move in ways that are unexpected – in terms of their speed, direction, severity or correlation – and UBS’s ability to manage risks in the resultant environment is therefore restricted;
– third partiesthird-parties to whom UBS has credit exposure or whose securities it holds for its own account are severely affected by events not anticipated by UBS’s models and the bank accordingly suffers defaults and impairments beyond the level implied by its risk assessment; andor
– collateral or other security provided by its counterparties proves inadequate to cover their obligations at the time of their default.



21

Strategy and development
Risk factors

UBS also manages risk on behalf of its clients in its asset and wealth management businesses. Its performance in these activities could be harmed by the same factors. If clients suffer losses or the performance of their assets held with UBS is not in line with relevant benchmarks against which clients assess investment performance, UBS may suffer reduced fee income and a decline in assets under management or withdrawal of mandates.
If UBS decided to support a fund or another investment sponsored by UBS in its asset or wealth management business it might, depending on the facts and circumstances, incur charges that could increase to material levels. UBS does not currently foresee the likelihood of material losses as a result, but the possibility cannot be definitively ruled out.
Investment positions – such as equity holdings made as a part of strategic initiatives for revenue generation, held in support of UBS’s business activities, and seed investments made at the inception of funds managed by UBS – may also be affected by market risk factors. These investments however, are often not liquid and are generally intended or required to be held beyond a normal trading horizon. They are subject to a distinct control framework (described inRisk, Treasury the “Risk and Capital Management 2007)treasury management” section of this report). Deteriorations in the fair value of these positions would have a negative impact on UBS’s earnings.

The valuation of certain assets including many of the positions related to the US sub-prime residential mortgage market, relyrelies on models. For some or all of the inputs to these models there is no observable source


Where possible, UBS marks its trading book assets at their quoted market price in an active market. In the current environment, such price information is not available for certain instruments linked to the US residential mortgage market and UBS applies valuation techniques to measure such instruments. Valuation techniques use “market observable inputs” where available, derived from similar assets in similar and active markets, from recent transaction prices for comparable items or from other observable market data. For positions for which some or all of the reference data is not observable or has limited observability, UBS uses valuation models with non-market observable inputs. These positions include super senior RMBS CDO tranches related to“Note 27 Fair value of financial instruments” in the US residential mortgage market.Note 26 inFinancial Statements 2007financial statements of this

report provides detailed information on the determination of fair value from valuation techniques. There is no single market standard for valuation models in this area and sucharea. Such models have inherent limitations, andlimitations; different assumptions and inputs would generate different results, and these differences could have a significant impact on UBS’s financial results. UBS is obliged to regularly reviewreviews and updateupdates its valuation models to incorporate all factors that market participants would consider in setting a price, – this includesincluding factoring in current market conditions. Judgment is an important component of this process and UBS carefully considers whether the assumptions and inputs of its models remain appropriate to establish a fair value for the instrument.process. Changes in model inputs or in the models themselves could have a material impact on UBS’s financial results.

Liquidity

Credit ratings and liquidity and funding management are critical to UBS’s ongoing performance


Moody’s Investors Service, Fitch Ratings and Standard & Poor’s all lowered their long-term credit rating of UBS, on one or more times in 2008 and 2009. A further reduction in UBS’s credit rating could increase its funding costs, in particular with regard to funding from wholesale unsecured sources, and reduce access to capital markets. Some of these ratings downgrades have resulted, and additional reductions in the credit ratings would result, in UBS having to make additional cash payments or post additional collateral. These events may increase UBS’s need for funding to ensure that it will always have sufficient liquidity to meet liabilities when due, while reducing its ability to obtain such funding. UBS’s credit ratings also have an impact on the performance of UBS’s businesses. Along with UBS’s capital strength and reputation, both of which are described in greater detail in the risk factors below, UBS’s credit ratings contribute to maintaining client and counterparty confidence in UBS.
Liquidity is essential to UBS’s businesses. A substantial part of UBS’s liquidity and funding requirement isrequirements are met using short-term unsecured funding sources, including wholesale and retail deposits and the regular issuance of money market paper.securities. The volume of these funding sources is largely stable.has generally been stable, but may change in the future due, among other things, to general market disruptions. Any such change could occur quickly and without notice. If this situationsuch a change were to change,occur, UBS could be forced to liquidate assets, in particular from its trading portfolio, to meet maturing liabilities or deposit withdrawals. Given the depressed prices of many asset classes in current market conditions, UBS might be forced to sell themassets at discounts that could adversely affect its profitability and its business franchises.
A reduction in its credit rating would adversely increase UBS’s cost of borrowing, in particular from wholesale unsecured sources, and reduce its access to capital markets. It would also result in UBS having to make additional cash payments or post collateral, or in the premature termination of contracts with rating trigger clauses. These events may further increase UBS’s liquidity needs, while reducing its ability to obtain funding.
In 2007,2008, UBS’s credit spreads increased substantially, in line with the general trend for the financial services industry. The losses UBS incurred in 2007 have put its credit ratings under pressure. If these trends continue, or if UBS maintains substantially elevated levels of liquidity for an extended period of time, the combination of an increase in UBS’s borrowing costs and lower margins could have an adverse impact on the firm’s profitability.
 è Refer to the “Risk and treasury management” section of this report for more information on UBS’s approach to liquidity and funding management is described inRisk, Treasury and Capital Management 2007



25

Strategy, performance and responsibility
Risk factors

UBS’s capital strength is important to support its client franchise


UBS’s capital position measured by the BIS capital ratios is and has traditionally been strong, both in absolute terms and relative to its competitors. Capital ratios are determined by (1) risk-weighted assets – balance(RWAs) (balance sheet, off-balance sheet and other market and operational risk positions, measured and risk-weighted according to regulatory criteria –criteria) and (2) eligible capital.
Both RWAs and eligible capital. UBS’s capital ratiosare subject to change. Eligible capital, for example, could come under pressure due toexperience a reduction in case of financial losses, acquired goodwill or as seen towardsa result of foreign exchange movements. RWAs, on the endother hand, will be driven by UBS’s business activities and by changes in the risk profile of 2007,these assets. They could furthermore be subject to a change in regulatory requirements or due to an increase in risk-weighted assets.the interpretation thereof. For instance, substantial market volatility, a widening of credit spreads (the major driver of UBS’s VaR) or, a change in regulatory treatment of certain positions (including, but not limited to, the definitions of assets allocated to the trading or the banking books), stronger foreign currencies, increased counter-party risk or a further deterioration in the economic environment could result in a rise in risk-weighted assetsRWAs or a change in capital requirements and thereby potentially reduce UBS’s capital ratios.

Operational risks may affect UBS’s business


All UBS’s businesses are dependent on the bank’s ability to process a large number of complex transactions across multiple and diverse markets in different currencies, in addition to being subject to the many different legal and regulatory regimes of these countries. UBS’s operational risk management and control systems and processes, which are described in the operational risk“Operational risk” section ofRisk, Treasury and Capital Management 2007, this report, are designed to ensure that the



22

risks associated with the bank’s activities, including those arising from process error, failed execution, unauthorized trading, fraud, systems failure and failure of security and physical protection, are appropriately controlled. If these internal controls fail or prove ineffective in identifying and remedying such risks, UBS could suffer operational failures that might result in losses.

Legal claims and regulatory risks and restrictions arise in the conduct of UBS’s business


In the ordinary course of its business, UBS is subject to regulatory oversight and liability risk. It is involved in a variety of other claims, disputes and legal proceedings and regulatorygovernment investigations in jurisdictions where UBS is active, including the US, SwitzerlandUnited States and other jurisdictions. Regulatory activity and legal claims have increased as a consequenceSwitzerland. These types of the current market crisis, and are expected to increase further. Such proceedings expose UBS to substantial monetary damages and legal defense costs, injunctive relief, criminal and civil penalties and the potential for regulatory restrictions on UBS’s businesses. The outcome of these matters cannot be predicted and they could adversely affect UBS’s future business.busi-

ness. Currently, UBS is responding to a number of government inquiries and investigations, and is involved in a number of litigations and disputes, related to the sub-prime crisis, sub-prime securities, and structured transactions involving sub-prime securities. These matters concern, among other things, UBS’s valuations, disclosures, writedowns, underwriting and contractual obligations.

UBS has been in active dialogue with its regulators concerning remedial actions that it is taking to address deficiencies in its risk management and control, funding and certain other processes and systems. UBS will for some period be subject to increased scrutiny by the Swiss Financial Market Supervisory Authority and its other major regulators, and accordingly will be subject to regulatory measures that might affect the implementation of its strategic plans.
UBS recently announced that it had entered into a Deferred Prosecution Agreement with the US Department of Justice and a Consent Order with the US Securities and Exchange Commission in connection with its cross-border private banking services provided to US private clients. The US Internal Revenue Service has issued a civil summons seeking information concerning UBS’s cross-border business, including records located in Switzerland, and recently filed a petition for enforcement of this summons. It is possible that this and other governmental actions will lead to changes which could affect cross-border financial services and the application of Swiss financial privacy law, and this could adversely affect the future profitability of UBS’s cross-border banking businesses. Following disclosure of the US cross-border matter, moreover, it is possible that tax or regulatory authorities in various jurisdictions will focus on the cross-border wealth management services provided by UBS and other financial institutions. It is premature to speculate as to the scope or effect of any such reviews.
 è See NoteRefer to “Note 21 provisions and litigation” inFinancial Statements 2007 the financial statements of this report for more information on legal proceedings in which UBS is involved

UBS might be unable to identify or capture revenue or competitive opportunities, or retain and attract qualified employees

The financial services industry is characterized by intense competition, continuous innovation, detailed (and sometimes fragmented) regulation and ongoing consolidation. UBS faces competition at the level of local markets and individual business lines, and from global financial institutions comparable to UBS in their size and breadth. Barriers to entry in individual markets are being eroded by new technology. UBS expects these trends to continue and competition to increase in the future.
The competitive strength and market position of UBS could be eroded if the firm is unable to identify market trends and developments, does not respond to them by devising and implementing adequate business strategies or



26

Strategy, performance and responsibility

is unable to attract or retain the qualified people needed to carry them out.

In particular, the efforts required to address the current market crisis and related challenges might diminish the attention UBS devotes to managing other risks including those arising from its competitive environment. The changes recently introduced with regard to UBS’s balance sheet management, funding framework inand risk management and control, as well as the repositioning of the fixed income, currencies and commodities business, are likely to reduce the revenue contribution of certain activities that require substantial funding or focus on proprietary trading.

DespiteFollowing the losses incurred in 2007,2008, UBS has soughtvery significantly reduced the variable compensation granted to reward its employees appropriately based on competitive compensation schemes. Given the competitivenessfor that year. It is possible that, as a result of the financial industry, however, the possibility cannot be excluded thatthis reduction or other factors, key employees will be attracted by competitors and decide to leave UBS, or that UBS may be less successful in attracting qualified employees.

UBS’s reputation is key to its business


UBS’s reputation is critical in maintaining its relationships with clients, investors, regulators and the general public. The reputation of UBS can be damaged, for instance, by misconduct by its employees, by activities of business partners over which UBS has limited or no control, by severe or prolonged financial losses or by uncertainty about its financial soundness and its reliability. This could result in client attrition in different parts of UBS’s business and could negatively impact its financial performance. TheMaintaining the firm’s reputation isand addressing adverse reputational developments are therefore a key factorfactors in itsUBS’s risk management efforts.

UBS’s global presence exposes the bank to other risks,

including currency fluctuation
UBS operates in more than 50 countries, earns income and holds assets and liabilities in many different currencies and is subject to many different legal, tax and regulatory regimes.
UBS’s ability to execute its global strategy depends on obtaining and maintaining local regulatory approvals. This includes the approval of acquisitions or other transactions and the ability to obtain and maintain the necessary licenses to operate in a local market. Changes in local tax laws or regulations and their enforcement may affect the ability or the willingness of UBS’s clients to do business with the bank, or the viability of the bank’s strategies and business model.
In its financial accounts, UBS accrues taxes but the final effect of taxes on earnings is only determined after completion of tax audits (which might takegenerally takes a number of years) or the expiration of statutes of limitations. In addition, changes in tax laws, judicial interpretation of tax laws or policies and practices of tax authorities could have a material impact on taxes paid by UBS and cause the amount of taxes ultimately paid by UBS to differ from the amount accrued.
Because UBS prepares its accounts in Swiss francs, while a substantial part of its assets, liabilities, assets under management, revenues and expenses are denominated in other currencies, changes in foreign exchange rates, have an effect on its reported income, particularly between the Swiss franc and the US dollar (US dollar income represents the major part of UBS’s non-Swiss franc income). have an effect on its reported income and shareholders’ equity. UBS’s approach to management of this currency risk is explained in the corporate currency management system inRisk, Treasury and Capital Management 2007.“Treasury management” section of this report.



23

24

Financial performance

25

Financial performance
–In 2007, UBS reported a Group net loss attributable to UBS shareholders of CHF 4,384 million
–Losses from positions related to the US residential mortgage market outweighed the strong performance in the other parts of UBS

UBS results 2007

Losses on trading positionsrelated to the US residential sub-prime and Alt-A real estate market totaled approximately CHF 21.3 billion

Record net fee and commission incomeof CHF 30.6 billion, reflecting strong performance in wealth and asset management, investment banking and equity underwriting

Operating expensesof the financial businesses, at CHF 34,503 million, were up 5% from 2006. Higher staff levels drove salary expenses and general and administrative expenses up. Performance-based compensation declined, reflecting the losses on US sub-prime related positions

UBS performance indicators 2007

Return on equitywas negative 10.2%, down from positive 26.4% in 2006

Diluted earnings per sharewere negative CHF 2.49, compared with a positive CHF 5.57 in 2006

Cost/income ratiofor financial businesses was 110.3% in 2007, significantly up from 69.7% in 2006

Net new money:at CHF 140.6 billion, down from a record in 2006 (CHF 151.7 billion). The decrease was mostly driven by full-year outflows in Global Asset Management. Record net new money inflows were seen in Swiss and international wealth management (up by CHF 27.5 billion from 2006)



26

                 
Business group performance from continuing operations before tax 
  For the year ended  % change from 
CHF million 31.12.07  31.12.06  31.12.05  31.12.06 
 
Wealth Management International & Switzerland  6,306   5,203   4,161   21 
 
Wealth Management US  718   582   312   23 
 
Business Banking Switzerland  2,460   2,356   2,189   4 
 
Global Wealth Management & Business Banking
  9,484   8,141   6,662   16 
 
Global Asset Management
  1,3151  1,392   1,057   (6)
 
Investment Bank
  (15,525)  5,943   5,181     
 
Corporate Center
  1,2552  (1,087)  (708)    
 
Financial Businesses
  (3,471)  14,389   12,192     
 
1 Includes costs related to the closure of Dillon Read Capital Management (DRCM) (CHF 384 million, pre-tax).  2 Includes gain on sale of 20.7% stake in Julius Baer (CHF 1,950 million, pre-tax).

(CHART)

(CHART)



(CHART)

(CHART)



1 Net profit attributable to UBS shareholders / average equity attributable to UBS shareholders less distributions (where applicable).  2 Excludes results from Industrial Holdings.  3 Operating expenses/ operating income less credit loss expense or recovery.  4 Excludes interest and dividend income.  5 Includes gain on sale of 20.7% stake of Julius Baer (CHF 1,926 million, post-tax) and costs related to the closure of DRCM (CHF 229 million, post-tax).  6 Includes gain on sale of 20.7% stake of Julius Baer (CHF 1,950 million, pre-tax) and costs related to the closure of DRCM (CHF 384 million, pre-tax).

27

FinancialStrategy, performance
Measurement and analysis ofresponsibility
Financial performance

Measurement and analysis ofFinancial performance

UBS’s performance is reported in accordance with International Financial Reporting Standards (IFRS). as issued by the International Accounting Standards Board. This section provides a discussion and analysis of the UBSUBS’s results commentsfor 2008, commenting on the underlying operational performance of the business, with a focus on continuing operations.

                 
UBS financial highlights 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
                 
Performance indicators from continuing operations
                
 
Diluted earnings per share (CHF)1
  (7.60)  (2.61)  4.64   (191)
 
Return on equity attributable to UBS shareholders (%)2
  (57.9)  (11.7)  23.9   (395)
 
Cost/income ratio (%)3
  680.4   111.0   70.5     
 
Net new money (CHF billion)4
  (226.0)  140.6   151.7     
 
                 
Group results
                
 
Operating income  1,201   31,721   47,484   (96)
 
Operating expenses  28,555   35,463   33,365   (19)
 
Operating profit before tax (from continuing and discontinued operations)  (27,155)  (3,597)  15,007   (655)
 
Net profit attributable to UBS shareholders  (20,887)  (5,247)  11,527   (298)
 
Personnel (full-time equivalents)5
  77,783   83,560   78,140   (7)
 
Invested assets (CHF billion)  2,174   3,189   2,989   (32)
 
                 
UBS balance sheet and capital management
                
 
Balance sheet key figures
                
 
Total assets  2,015,098   2,274,891   2,348,733   (11)
 
Equity attributable to UBS shareholders  32,800   36,875   51,037   (11)
 
Market capitalization6
  43,519   108,654   154,222   (60)
 
BIS capital ratios7
                
 
Tier 1 (%)  11.0   9.18  12.28    
 
Total BIS (%)  15.1   12.28  15.08    
 
Risk-weighted assets  302,273   374,4218  344,015   (19)
 
Long-term ratings
                
 
Fitch, London  A+  AA  AA+     
 
Moody’s, New York Aa2  Aaa  Aa2     
 
Standard & Poor’s, New York  A+  AA  AA+     
 
1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report.  2 Net profit attributable to UBS shareholders from continuing operations/average equity attributable to UBS shareholders.  3 Operating expenses/operating income before credit loss expense or recovery.  4 Excludes interest and dividend income.  5 Excludes personnel from private equity (part of the Corporate Center).  6 Refer to the “UBS registered shares” section of this report for further information.  7 Refer to the “Capital management” section of this report for further information.  8 The calculation prior to 2008 is based on the Basel I approach.

28

Strategy, performance and responsibility

Measurement and analysis of performance

Key factors affecting UBS’s financial position and
results of operations in 2008

–In 2008, UBS continued to be severely affected by negative revenues in the Investment Bank due to trading losses on risk positions. Refer to the “Risk concentrations” section and “Note 3 Net interest and trading income” in the financial statements of this report for more information on risk positions and associated losses.
–UBS recorded a significant increase in credit losses from CHF 238 million in the prior year to CHF 2,996 million. This reflects the deteriorating economic environment and impairment charges taken on reclassified financial assets in fourth quarter 2008. Refer to the “Credit risk” section of this report for more information.
–On 5 March 2008, UBS issued mandatory convertible notes (MCNs) with a face value of CHF 13 billion to two investors. This transaction resulted in an accounting gain of CHF 3,860 million in first quarter 2008 and in an increase in share premium of CHF 7.0 billion. Refer to “Note 26 Capital increases and mandatory convertible notes” in the financial statements of this report for more information.
–On 23 April 2008, the annual general meeting of shareholders approved a proposal that UBS strengthen its shareholders’ equity by way of an ordinary capital increase. The capital increase was completed in June 2008 by means of a rights offering and resulted in the issue of 760,295,181 new fully paid registered shares with a par value of CHF 0.10 each. Net proceeds from the capital increase were approximately CHF 15.6 billion. Refer to “Note 26 Capital increases and mandatory convertible notes” in the financial statements of this report for more information.
–On 20 May 2008, UBS completed the sale of a portfolio of US residential mortgage-backed securities (RMBSs) for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP, a third-party entity managed by BlackRock, Inc. The portfolio had a notional value of approximately USD 22 billion and comprised primarily Alt-A and sub-prime related assets. The fund was capitalized with approximately USD 3.75 billion in equity raised by BlackRock from third-party investors and an eight-year amortizing USD 11.25 billion senior secured loan provided by UBS (balance at year-end 2008 was USD 9.2 billion).
–As announced on 16 October 2008, the Swiss National Bank (SNB) and UBS have reached an agreement to transfer, in one or more sales, up to USD 60 billion of illiquid and other positions from UBS’s balance sheet to a sepa-

rate fund entity controlled and owned by the SNB. The size of the transaction has since been reduced to USD 38.6 billion. This transaction allowed UBS to reduce its exposure to certain asset classes and potential associated losses. In parallel, UBS placed CHF 6 billion of MCNs with the Swiss Confederation on 9 December 2008. The overall impact on UBS’s income statement of the SNB transaction and the placement of the MCNs with the Swiss Confederation was a net charge of CHF 4.5 billion. This reflects a net loss arising from the acquisition of the equity purchase option, a loss arising from valuation differences determined to date on securities sold or to be sold to the SNB StabFund, losses on hedges that were subject to trading restrictions as a result of the SNB transaction, and the impact of the contingent issuance of UBS shares in connection with the transaction. The fair valuation impact of the issuance of the MCNs, as described in “Note 26 Capital increases and mandatory convertible notes” in the financial statements of this report, is also included in this total.
–In 2008, the Investment Bank recorded a gain on own credit from financial liabilities designated at fair value of CHF 2,032 million, resulting from the widening of UBS’s credit spread, which was partly offset by the effects of redemptions and repurchases of such liabilities. The cumulative own credit balance for such debt held at 31 December 2008 amounts to CHF 2,953 million. Refer to “Note 27 Fair value of financial instruments” in the financial statements of this report for more information. Financial liabilities designated at fair value are liabilities for which UBS applied the option granted by IFRS to fair value them through profit or loss, predominately issued structured products. The gain reflects an increase in the difference between the market value of UBS’s debt accounted for under the fair value option (which is presented on the balance sheet line “Financial liabilities designated at fair value”) and the amount it would cost UBS to issue this debt at current market terms. As a general rule, the market value of UBS’s outstanding debt decreases if UBS’s own credit spread widens and increases if UBS’s credit spread tightens. Therefore, if UBS’s credit spread were to tighten again in the future, the market value of UBS’s outstanding fair valued debt would increase accordingly, resulting in the reversal of some or all of the gains on own credit recorded so far, unless UBS redeems own debt before maturity.
–Following the auction rate securities (ARS) settlement in August 2008, Wealth Management US recorded losses of CHF 1,524 million, of which CHF 1,464 million were in-


29

Strategy, performance and responsibility
Financial performance

cluded in general and administrative expenses, and CHF 60 million were recognized as trading losses. Under the ARS settlement, Wealth Management US agreed to purchase ARS from clients at their par value. Up to fourth quarter 2008, the ARS settlement liability represented a provision. The liability was reclassified from provisions to negative replacement values in fourth quarter 2008, when ARS settlement rights, which are treated as derivative instruments, were issued to and accepted by clients. Losses incurred post-reclassification represented trading losses.
–As announced on 18 February 2009, UBS settled the US cross-border case with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC), by entering into a deferred prosecution agreement with the DOJ and a consent order with the SEC. As part of these settlement agreements, UBS agreed to pay an amount of CHF 917 million (USD 780 million) to the United States. Refer to the “Settlement regarding the US cross-border case” sidebar in the “Wealth Management International & Switzerland” section of this report for more information.
–UBS recognized an income tax benefit of CHF 6,837 million in 2008, which mainly reflects the CHF 6,126 million impact from the recognition of incremental deferred tax assets on available tax losses. The incremental deferred tax assets relate mainly to Swiss tax losses incurred during 2008 (primarily due to the writedown of investments in US subsidiaries) but was reduced by a decrease in the deferred tax assets recognized for US tax losses. Refer to “Note 22 Income taxes” in the financial statements of this report for more information.

Discontinued operations

As discontinued activities are no longer relevant to the management of the company, UBS does not consider them to be indicative of its future potential performance. Theyperformance and they are therefore not included in UBS’sits business planning decisions. This helps to better assessassists in comparing UBS’s performance against that of its peers, and to estimatein the estimation of future growth potential.

results. In the last three years, twoone such itemsitem had a significant impact on UBS’s consolidated financial statements:
–in fourth quarter 2005, UBS’s Private Banks & GAM unit was sold to Julius Baer at a gain of CHF 3,705 million after tax (pre-tax CHF 4,095 million) – the unit comprised the Banco di Lugano, Ehinger & Armand von Ernst and Ferrier Lullin private banks as well as specialist asset manager GAM. After the sale, UBS retained a stake of 20.7% in the new Julius Baer; and
–on On 23 March 2006, UBS sold its 55.6% stake in Motor-Columbus to a consortium representing Atel’s Swiss minority shareholders, EOS Holding and Atel, as well as French utility Electricité de France (EDF) for a sale price of approximately CHF 1,295 million, which led to an after-tax gain on sale of CHF 387 million.
Up to a consortium representing Atel’s Swiss minority shareholders, EOS Holding, Atel and including 2005, UBS provided comments and analysisFrench utility Electricité de France (EDF) for a sale price of approximately CHF 1,295 million, leading to an after-tax gain on an adjusted basis that also excluded the amortizationsale of goodwill and other acquired intangible assets. With the introduction of IFRS 3Business Combinationsat the beginning of 2005, UBS ceased amortizing goodwill, which was by far the largest adjustment made to its results.
CHF 387 million.

Factors affecting UBS’s financial positions and results of operations in 2007
–In second quarter 2007, UBS sold its 20.7% stake in Julius Baer which was held as a financial investment available-for-sale. The post-tax gain of CHF 1,926 million was therefore included in performance from continuing operations.
–In the same quarter, the closure of Dillon Read Capital Management (DRCM), an alternative investment venture launched in 2006, led to a charge against profits of CHF 384 million pre-tax (CHF 229 million after-tax).
–In the second half of 2007, UBS was severely affected by the progressive market dislocation. This led to total losses of approximately USD 18.7 billion (CHF 21.3 billion) on UBS’s positions related to the US residential sub-prime and Alt-A real estate market, representing a combination of write-

downs, hedge gains and losses, realized losses from the scale of position and credit valuation adjustments on credit default swaps (CDSs) purchased from monoline insurers. Losses on securities related to US sub-prime residential mortgages totaled USD 14.6 billion, of which USD 9.2 billion were recorded on super senior tranches of collateralized debt obligations (CDOs). Positions related to Alt-A mortgages lost USD 2 billion due to spread widening towards the end of the year. Losses of USD 1.3 billion were incurred on US structured credit programs (reference-linked notes) in the US. Total credit valuation adjustments on protection bought from monoline insurers were USD 0.8 billion in 2007, reflecting the degree to which UBS considers its claims against these counterparties to be impaired.
èFor details on these positions, see the “Risk concentrations” section inRisk, Treasury and Capital Management 2007

Seasonal characteristics

The main businesses of UBS do not generally show significant seasonal patterns, except foralthough the Investment Bank, whereBank’s revenues are impactedhave been affected in some years by the seasonal characteristics of general financial market activity and deal

flows in investment banking.

Accordingly, when discussing quarterly performance, the Investment Bank’s financial results of the reported quarter are compared with those achieved in the same period of the previous year. Similarly, when considering the impact of the Investment Bank’s performance on UBS’s financial statements, the overall quarterly performance is discussed on a year-on-year basis (comparing the actual quarter with the same quarter in the previous year). Because of the volatile nature of market movements, and the resulting Other business and trading opportunities, the market risk and balance sheet items in the Investment Bank are compared on a present-quarter to previous-quarter basis. For all other business groups and business units, recent quarterly results are compared with the previous quarter’s, as theydivisions are only slightly impacted by seasonal components, such as asset withdrawals that tend to occur in fourth quarter and lower client activity levels related to the end-of-year holiday season.

Performance measures

UBSKey performance indicators (2008)
ForUntil the last eight years,end of 2008, UBS has consistently assessed its performance against a set of four measures that wereindicators designed to measure the delivery of continuously improving returns to its shareholders.



28

On(on average and through periods of varying market conditions, UBS will:
–seek to increase the value of its firm by achieving a sustainable, after-tax return on equity of a minimum of 20%;
–aim to achieve a clear growth trend in net new money for all financial businesses, including Global Wealth Management & Business Banking as well as Global Asset Management;
–target a double-digit percentage growth for diluted earnings per share (EPS); and
–continue to manage business group and business unit cost / income ratios at levels that compare well with competitors. The cost / income ratio target is limited to the financial businesses.

Business group key performance indicators
conditions) of returns to its shareholders. At the business group or business unitGroup level, performance is measured by carefully chosenthese indicators were: after-tax return on equity; net new money; diluted earnings per share (EPS); and cost / income ratio. Business division key performance indicators (KPIs). They indicate the business group’s or business unit’s success in creating value for shareholders but UBS does not disclose explicit targets for these KPIs. The KPIs show the key drivers of each unit’s core business activities and include financial metrics, such as cost / income ratios and invested assets, along with non-financial metrics, such as the number of client advisors.

These business group KPIs are were also used for internal performance measurement and planning as well as external reporting. This ensures management accountability for performance by senior executives and consistency in external and internal performance measurement.
èA new key performance indicator framework was introduced in first quarter 2009 and will be used to measure performance in 2009 and forward. Refer to the “Key performance indicators: 2009 and beyond” sidebar in the “Strategy and structure” section of this report for more information

Client/invested assets reporting
Since 2001, UBS has reportedreports two distinct metrics for client funds:
– clientClient assetsare all client assets managed by or deposited with UBS, including custody-only assets and assets held for purely transactional purposes; andpurposes.
– investedInvested assetsis a more restrictive term and includes all client assets managed by or deposited with UBS for investment purposes.

InvestedOf the two, invested assets is the central measure for UBS and includes, for example, discretionary and advisory wealth management portfolios, managed institutional assets, managed fund assets and wealth management securities or brokerage accounts. It excludes all assets held for purely transactional

and custody-only purposes as UBS only administers the assets and does not offer advice on how these assets should be invested. Since 1 January 2004, corporate client assets (other than pension funds) deposited with the Business Banking Switzerland unit have been excluded from invested assets, as UBS has a minimal advisory role for such clients and as asset flows are driven more by liquidity requirements than investment needs. The same holds true for the corporate cash management business of the Wealth Management US unit, which UBS has excluded from its invested assets since the end of 2005. Non-bankable assets (for example, art collections) and deposits from third-party banks for funding or trading purposes are excluded from both measures.
Net new money in a reported period is the net amount of invested assets that are entrusted to the bankUBS by new and existing clients less those withdrawn by existing clients and clients who terminate their relationship with UBS. Net new money is calculated using the direct method, by which in- and outflows to and from invested assets are determined at the client level based on transactions. Interest paid to UBS on clients’ loans out of invested assets is treated asNegative net new money outflow. From 2008 onwards, these interest payments will be deducted from the performance of invested assets and no longer impact net new money.means that there are more outflows than inflows. Interest and dividend income from invested assets is not counted as net new money inflow. Market and currency movements as well as fees, commissions and fees and commissionsinterest on loans charged are excluded from net new money, as are the effects resulting from any acquisition or divestment of a UBS subsidiary or business. Reclassifications between invest-



30

Strategy, performance and responsibility
Business division / business unit key performance indicators (2008)
BusinessKey performance indicatorsDefinition
Business divisions and business units (excluding Corporate Center)
Cost/income ratio (%)Total operating expenses/total operating income
before credit loss (expense)/recovery
Return on attributed equity (%)Performance before tax/average attributed equity
Wealth and asset management businesses and Business Banking Switzerland
Invested assets (CHF billion)Client assets managed by or deposited with UBS for investment purposes only (for further details please see “Client/invested assets reporting”)
Net new money (CHF billion)Inflow of invested assets from new clients
+ inflows from existing clients
– outflows from existing clients
– outflows due to client defection
Wealth and asset management businesses
Gross margin on invested assets (bps)Total operating income before credit loss
(expense)/recovery/average invested assets
Wealth Management International & Switzerland
Client advisorsExpressed in full-time equivalents
Revenues per advisor (CHF thousand)Total operating income before credit loss (expense)/recovery/average number of client advisors
Net new money per advisor (CHF thousand)Net new money/average number of client advisors
Invested assets per advisor (CHF thousand)Average invested assets/average number of client advisors
Wealth Management US
Recurring income (CHF million)Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees (as opposed to transactional revenues)
Revenues per advisor (CHF thousand)Total operating income before credit loss (expense)/recovery/average number of financial advisors
Net new money per advisor (CHF thousand)Net new money/average number of financial advisors
Invested assets per advisor (CHF thousand)Average invested assets/average number of financial advisors
Business Banking Switzerland
Impaired lending portfolio as a % of total lending portfolio, grossImpaired lending portfolio, gross/total lending
portfolio, gross
Investment Bank
Compensation ratio (%)Personnel expenses/total operating income before
credit loss (expense)/recovery
Impaired lending portfolio as a % of total lending portfolio, grossImpaired lending portfolio, gross/total lending
portfolio, gross
Average regulatory VaR (10-day, 99% confidence, based on 5 years of historical data)Value at Risk (VaR) expresses maximum potential loss measured to a 99% confidence level, over a 10-day time horizon and based on 5 years of historical data

ed assets and client assets as a result of a change in the service level delivered are treated as net new money flow.

inflow or outflow.
When products are managed in one business groupdivision and sold in another, they are counted in both the investment management unit and the distribution unit. This results in double counting inwithin UBS’s total invested assets as both units provide an independent service to their respective client, add value and generate revenues. Most double counting arises where

mutual funds are managed by the Global Asset Management business division and sold by Global Wealth Management & Business Banking. Both businesses involved count these funds as invested assets. This approach is in line with both finance industry practices and UBS’s open architecture strategy and allows the firm to accurately reflect the performance of each individual business. Overall, CHF 392273 billion of invested assets were double counted in 20072008 (CHF 371392 billion in 2006)2007).



29

Financial performance
Measurement and analysis of performance

Business group / business unit key performance indicators
BusinessKey performance indicatorsDefinition
Business groups (excluding Corporate Center) and Business units within financial businesses
Cost / income ratio (%)Total operating expenses / total operating income before adjusted expected credit loss.
Wealth & Asset Management Businesses and Business Banking Switzerland
Invested assets (CHF billion)Client assets managed by or deposited with UBS for investment purposes only (for further details please see page 29).
Net new money (CHF billion)Inflow of invested assets from new clients
+ inflows from existing clients
- outflows from existing clients
- outflows due to client defection.
Wealth & Asset Management Businesses
Gross margin on invested assets (bps)Operating income before adjusted expected credit loss / average invested assets.
Wealth Management International & Switzerland
Client advisorsExpressed in full-time equivalents.
Revenues per advisor (CHF thousand)Income / average number of client advisors.
Net new money per advisor (CHF thousand)Net new money / average number of client advisors.
Invested assets per advisor (CHF thousand)Average invested assets / average number of client advisors.
Wealth Management US
Recurring income (CHF million)Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees (as opposed to transactional revenues).
Revenues per advisor (CHF thousand)Income (including net goodwill funding) / average number of financial advisors. Net goodwill funding is defined as goodwill and intangible asset related funding, net of interest income on the corresponding regulatory capital allocated.
Net new money per advisor (CHF thousand)Net new money / average number of financial advisors.
Invested assets per advisor (CHF thousand)Average invested assets / average number of financial advisors.
Business Banking Switzerland
Impaired lending portfolio as a % of total lendingImpaired lending portfolio, gross /
portfolio, grosstotal lending portfolio, gross.
Return on allocated regulatory capital (%)Business unit performance before tax /average allocated regulatory capital.
Investment Bank
Compensation ratio (%)Personnel expenses / operating income before adjusted expected credit loss.
Impaired lending portfolio as a % of total lendingImpaired lending portfolio, gross /
portfolio, grosstotal lending portfolio, gross.
Return on allocated regulatory capital (%)Business group performance before tax /average allocated regulatory capital.
Average VaR (10-day, 99% confidence, 5 years of historical data)Value at Risk (VaR) expresses maximum potential loss measured to a 99% confidence level, over a 10-day time horizon and based on 5 years of historical data.
Corporate Center
IT infrastructure (ITI) cost per financial businesses full-time employeeITI costs / average number of Financial Businesses employees.

30

Financial performance
UBS reporting structure

UBS reporting structure

Changes to reporting structure and presentation in 2007 and other adjustments

Reintegration of Dillon Read Capital Management portfolios into the Investment Bank

On 3 May 2007, UBS announced that the proprietary funds managed by Dillon Read Capital Management (DRCM) in Global Asset Management were being transferred to the Investment Bank. As a result, DRCM’s principal finance, credit arbitrage and commercial real estate businesses were merged with the relevant business lines in the Investment Bank and DRCM’s third party funds were redeemed. As a result, the business activities related to DRCM are no longer reported separately.

Netting of balance sheet items

In second quarter 2007, after concluding that it met netting criteria for certain balance sheet items, UBS decided to begin netting the positive and negative replacement values of over-the-counter interest rate swaps processed through the London Clearing House (LCH).
In addition, the reclassification of certain receivables and payables resulting from the prime brokerage business, which was first announced by UBS at the end of 2006, required further minor adjustments to its loans and “Due to customers” balance sheet positions.

Syndicated finance revenues

In fourth quarter 2007, UBS revised the presentation of certain syndicated finance revenues in its income statement. Revenues which relate to syndicated loan commitments designated at fair value through profit or loss are now presented

in net trading income rather than as debt underwriting fees in net fee and commission income. Prior periods have been adjusted to conform to this presentation. The adjustments resulted in a reduction of net fee and commission income of CHF 425 million and CHF 252 million for 2006 and 2005 respectively, in addition to a corresponding increase in net trading income in these periods. The change in presentation had no impact on UBS’s net profit and earnings per share for any period presented.

Accounting changes

Effective 2007, UBS adopted the disclosure requirements of the International Financial Reporting Standard 7 (IFRS 7). The new standard has no impact on recognition, measurement and presentation of financial instruments. It does require entities to provide disclosures in their financial statements that enable users to evaluate:
–the significance of financial instruments for the entity’s financial position and performance; and
–the nature and extent of the credit, market and liquidity risks arising from financial instruments during the period and at the reporting date (including concentrations of such risk), and how the entity manages those risks.

The principles of IFRS 7 complement the principles for recognizing, measuring and presenting financial assets and financial liabilities in International Accounting Standard 32 (IAS 32) Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement.
èIFRS 7 disclosure requirements are discussed inRisk, Treasury and Capital Management 2007andFinancial statements 2007



(CHART)

31

Strategy, performance and responsibility
Financial performance

UBS reporting structure

Changes to reporting structure and
presentation in presentation of non-performing loan disclosure2008

UBS stopped disclosing non-performing loans as a key performance indicator for the Investment Bank and Business Banking Switzerland in quarterly reports beginning in first quarter 2007, after the firm had previously stopped doing so in its annual report 2006. UBS continues to disclose and discuss the impaired lending portfolio, which is a key component of its internal credit risk management and control processes. As in previous years, non-performing loans, as defined under Swiss Federal Banking Commission (SFBC) regulation, will beIndustrial Holdings reported in the notes to the annual financial statements.

Other new disclosures, changes in presentation

Some minor enhancements have been made to UBS’s disclosure in 2007, as part of the firm’s continuing effort to improve the transparency of its financial reporting and provide the best possible understanding of its business.
In first quarter 2007, UBS introduced key performance indicators in the Wealth Management International & Switzerland business unit to better illustrate the productivity of UBS client advisors. As a result, UBS now reports revenues, net new money and invested assets per advisor in all its wealth management businesses (the indicator “revenues per advisor” was already a part of Wealth Management US disclosure).
Moreover, in discussion of its financial businesses results, UBS changed the breakdown of net interest and trading income to better reflect the structure of the business.



Accounting changes in 2008

Share-based payment: disclosure (IFRS 2)

In January 2008, the International Accounting Standards Board (IASB) issued an amendment to IFRS 2 Share-based Payment. The amended standard, entitled IFRS 2Sharebased Payment: Vesting Conditions and Cancellations, is effective 1 January 2009 (early adoption permitted). The new standard clarifies the definition of vesting conditions and the accounting treatment of cancellations. UBS has adopted this amended standard as of 1 January 2008. Under the amended standard, UBS is required to distinguish between vesting conditions (such as service and performance conditions) and non-vesting conditions. The amended standard no longer considers vesting conditions to include certain non-compete provisions and transfer restrictions. Prior to adopting this amendment, UBS treated non-compete provisions as vesting conditions. The

impact of this change will be that, from 1 January 2008 on, most of UBS’s share awards will be expensed in the performance year rather than over the period through which the non-compete conditions are applicable. Restrictions remaining effective after the employee becomes entitled to the share-based award will be considered when determining grant date fair value. Following adoption of this amendment, UBS will fully restate the two comparative prior years (2006 and 2007). With the restatement, an additional compensation expense of approximately CHF 800 million will be recognized in 2007 to account for higher share-based awards, mainly in the Investment Bank. For further details please see Note 1 inFinancial Statements 2007.

Discontinuation of the adjusted expected credit loss concept Starting in first quarter 2008, UBS will cease using the adjusted expected

credit loss concept and begin to book actual credit losses (recoveries) in the respective business groups in its internal management reporting. This will affect the results of the business groups in future management reports and simplify Note 2 inFinancial Statements 2007.

Industrial Holdings to be reported in Corporate Center


As UBS has continuously reduced its private equity business in Industrial Holdings over the last three years to a very low level, it has beenwas decided to report these activities under the Corporate Center from 2008 onwards.

Exiting of the municipal securities business by the
Investment Bank
In June 2008, UBS announced the closure of its Investment Bank’s institutional municipal securities business. This hap-

pened with immediate effect and the retail operations of the municipal securities business, including secondary market activities, were transferred to Wealth Management US. A goodwill impairment charge of CHF 341 million was recorded in second quarter 2008 in relation to the exiting of this business and was attributed to the Investment Bank.

Exiting of certain commodities businesses by the
Investment Bank
In October 2008, UBS announced that the Investment Bank would exit the commodities business, with the exception of precious metals. This resulted in an expense of CHF 133 million in fourth quarter 2008.



UBS reporting structure in 2008

Global Wealth Management &Global Asset ManagementInvestment BankCorporate Center
Business Banking
Wealth Management
International & Switzerland

Wealth Management US
Business Banking Switzerland

Changes to the reporting structure in 2009

Wealth Management & Swiss Bank and Wealth Management Americas
On 10 February 2009, UBS announced with immediate effect the split of Global Wealth Management & Business Banking into two divisions: Wealth Management & Swiss Bank and Wealth Management Americas. UBS will start reporting results based on this new structure with the first quarter 2009 results.

Investment Bank
As announced on 3 October 2008 onwards. As in previous years,and reiterated on 10 February 2009, the strategyInvestment Bank is being repositioned to de-emphasizefocus on its core franchises. The fixed income, currencies and reduce exposurecommodities (FICC) business unit of the Investment Bank has exited several businesses including institutional municipal securities, proprietary trading, commodities (excluding

precious metals, exchange-traded derivatives and indices) and real estate and securitization activities, as well as exotic structured products. The internal organization of the FICC business unit has changed to private equity while capitalizingreflect this repositioning, but these changes are not expected to have an immediate impact on orderly exit opportunities as they arise continues.

the Investment Bank’s or UBS’s reporting structure.



32

Financial performance
Performance indicators
Strategy, performance and responsibility

Performance indicators

             
  For the year ended 
  31.12.07  31.12.06  31.12.05 
 
RoE (%)1
            
 
as reported  (9.4)  28.2   39.7 
 
from continuing operations  (10.2)  26.4   27.6 
 
Diluted earnings per share (CHF)2
            
 
as reported  (2.28)  5.95   6.68 
 
from continuing operations  (2.49)  5.57   4.65 
 
Cost / income ratio of the financial businesses (%)3,4
  110.3   69.7   70.1 
 
Net new money, financial businesses (CHF billion)5
  140.6   151.7   148.5 
 
Accounting changes

(BAR CHART)Share-based payments: revisions to International
Financial Reporting Standard 2

(BAR CHART)UBS adopted amended IFRS 2 on 1 January 2008. As a result, from 1 January 2008, UBS’s share-based awards that are not generally forfeited upon the employee leaving UBS are expensed in the performance year. In contrast, share-based awards featuring stringent forfeiture rules are amortized over the shorter of the legal vesting period and the period from grant through to the retirement eligibility date of the employee.

UBS has fully restated the two prior years (2006 and 2007), with net profit attributable to UBS shareholders declining by CHF 863 million in 2007 and declining by CHF 730 million in 2006. The net increase in compensation expense was CHF 797 million for 2007 and CHF 516 million for 2006, mainly affecting the Investment Bank. Refer to “Note 1 Summary of significant accounting policies” in the financial statements of this report for more information.

Recognition of a defined benefit asset for the
Swiss pension plan

In third quarter 2008, UBS concluded that it meets the requirements of IAS 19Employee Benefits for recognizing a defined benefit asset associated with its Swiss pension plan. Prior to this, it had been UBS policy to disclose only this amount in “Note 30 Pension and other post-employment benefit plans” in the financial statements of UBS’s annual reports. UBS concluded that recognition of an asset should also consider unrecognized net actuarial losses and past service cost as permitted by IAS 19 as this results in a better reflection of the corridor approach. At the end of third quarter 2008, the measurement of the defined benefit asset represented the total cumulative unrecognized net actuarial losses plus unrecognized past service cost plus the present value of economic benefits available in the form of refunds of the plan or reductions in future contributions to the plan.

The change in accounting policy resulted in the following effects on the balance sheet for 30 September 2008, the date on which the change in policy occurred, 31 December 2007 and 31 December 2006: an increase of approximately CHF 2.1 billion in other assets, an increase of approximately

(BAR CHART)CHF 0.5 billion in deferred tax liabilities and an increase of approximately CHF 1.6 billion in retained earnings. Refer to “Note 1 Summary of significant accounting policies” in the financial statements and the “Capital management” section of this report for more information.

(BAR CHART)IAS 39Reclassification of financial instruments

The markets for many financial instruments began to dry up in 2007 and many instruments that previously traded in active and liquid markets ceased to trade actively by mid-2008. In an effort to address accounting concerns arising from the global credit crisis, the International Accounting Standards Board published an amendment to International Accounting Standard 39 (IAS 39Financial Instruments: Recognition and Measurement) on 13 October 2008.

Although the amendment could have been applied retrospectively from 1 July 2008, UBS decided at the end of October 2008 to apply the amendment prospectively with effect from 1 October 2008 following an assessment of the implications on its financial statements.
Subject to certain conditions being met, the amendments to IAS 39 permit financial assets to be reclassified out of the “held for trading” category if the firm has the intent and ability to hold them for the foreseeable future or until maturity. Eligible assets may be reclassified to the “loans and receivables” category, carried at amortized cost less impairment, or the “available-for-sale” category, carried at fair value through equity, with impairment recognized in profit or loss. Assets designated at fair value through profit or loss (“fair value option”) and derivatives may not be reclassified.
Effective 1 October 2008, UBS reclassified eligible assets which it intends to hold for the foreseeable future with a fair value of CHF 17.6 billion on that date from “held for trading” to the “loans and receivables” category. In addition, student loan auction rate securities (ARS) with a fair value of CHF 8.4 billion have been reclassified as of 31 December 2008. In fourth quarter 2008, an impairment charge of CHF 1.3 billion was recognized as credit loss expense on reclassified financial instruments. If reclassification had not occurred, the impairment charge would not have been recognized but a trading loss of CHF 4.8 billion would have been recorded in UBS’s fourth quarter income statement. In



33

Strategy, performance and responsibility
Financial performance

the fourth quarter, the operating profit before taxes would have been CHF 3.8 billion lower if the reclassification had not occurred. Refer to “Note 29 Measurement categories of financial assets and liabilities” in the financial statements of this report for more information on the reclassification of financial assets in 2008.

Discontinuation of the adjusted expected
credit loss concept

In first quarter 2008, UBS ceased using the adjusted expected credit loss concept in its internal management reporting and began to book, in line with IFRS, actual credit losses (recoveries) instead. Prior year results have been restated. This change had no impact on the Group’s overall net profit.



 
Accounting changes in 2009

IFRS 8 Operating Segments
The new standard on segment reporting, IFRS 8Operating Segments, came into force on 1 January 2009 and replaced IAS 14Segment Reporting. The external segmental reporting is based on internal reporting within UBS to the Group Executive Board (or, the “chief operating decision maker”) which makes decisions on the allocation of resources and assesses the performance of the reportable segments. Based on the new UBS structure which was announced on 10 February 2009 and following IFRS 8 guidance, UBS will show in 2009 four reportable segments. The business divisions Wealth Management & Swiss Bank, Wealth

Management Americas, Global Asset Management and the Investment Bank represent one reportable segment each. The Corporate Center, which does not meet the requirements of an operating segment, will also be shown separately. In addition, the new standard requires UBS to provide descriptive information about the types of products and services from which each reportable segment derives its revenue. As UBS’s reportable segment operations are mainly financial, the total interest income and expense for all reportable segments will be presented on a net basis.

Based on the present arrangement of revenue-sharing agreements, the inter-segment revenue for UBS is

unlikely to be material. Going forward, the segment assets and segment liabilities will be disclosed without the intercompany balances and this basis is in line with the internal reporting. An explanation of the basis on which the segment information is prepared, and reconciliations to the amounts presented in the statement of comprehensive income and the statement of financial position are also required by the new standard. UBS will be providing geographical information about total operating income and total non-current assets based on the following new geographical breakdown: Switzerland, UK, Rest of Europe, USA, Asia Pacific and Rest of the World.



34

Key performance indicators

Until the end of 2008, UBS focused on four key performance indicators: return on equity, diluted earnings per share, cost / income ratio and net new money. These indica-

Return on equity

(BAR CHART)

Diluted earnings per share

(BAR CHART)

tors are designed to monitor the returns UBS delivers to shareholders and are calculated using results from continuing operations.

Cost/income ratio

(BAR CHART)

Net new money

(BAR CHART)



             
Key performance indicators
 
 
  For the year ended 
  31.12.08  31.12.07  31.12.06 
 
Return on equity (RoE) (%)1
  (57.5)  (10.9)  25.7 
 
RoE from continuing operations (%)1
  (57.9)  (11.7)  23.9 
 
Diluted earnings per share (EPS) (CHF)2
  (7.55)  (2.43)  4.99 
 
Diluted EPS from continuing operations (CHF)2
  (7.60)  (2.61)  4.64 
 
Cost/income ratio (%)3
  680.4   111.0   70.5 
 
Net new money (CHF billion)4
  (226.0)  140.6   151.7 
 
1Net profit attributable to UBS shareholders / shareholders/average equity attributable to UBS shareholders less distributions (where applicable).2Details Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of thethis report for more information on EPS calculation can be found in Note 8 in Financial Statements 2007.calculation.  3Excludes results from Industrial Holdings.4Operating expenses / expenses/operating income lessbefore credit loss expense or recovery.54Excludes interest and dividend income.6Includes gain on sale of 20.7% stake of Julius Baer (CHF 1,926 million, post-tax) and costs related to the closure of Dillon Read Capital Management (DRCM) (CHF 229 million, post-tax).7Includes gain on sale of 20.7% stake of Julius Baer (CHF 1,950 million, pre-tax) and costs related to the closure of DRCM (CHF 384 million, pre-tax).

3335

Strategy, performance and responsibility
Financial performance
Performance indicators

2007

UBS focuses on four2008

The key performance indicators designed to measure the continuous delivery of improving returns to shareholders. Each indicator is calculated based on results from continuing operations. The first two indicators, return on equity and diluted earnings per share, are based on the results of the entire firm. The cost / income ratio and net new money indicators are limited to the financial businesses. On this basis, performance indicators 2007 show:
– return on equity from continuing operations for full-year 2008 at negative 57.9%, down from negative 11.7% in 2007. The profits recorded by UBS’s wealth and asset management businesses were more than offset by substantial losses in the Investment Bank.
–negativediluted earnings per share from continuing operations of CHF 7.60, compared with negative CHF 2.61 in 2007.
–acost/income ratio of 680.4%, compared with 111.0% a year ago.
–net new money at negative CHF 226.0 billion, down from positive CHF 140.6 billion in 2007. Net new money outflows were most pronounced in the Global Wealth Management & Business Banking division, which recorded total net new money outflows of CHF 123.0 billion. Wealth

Management International & Switzerland contributed to the majority of this total with net outflows of CHF 101.0 billion, the most significant outflows occurring in the Latin America, Mediterranean, Middle East & Africa regions. Wealth Management US reported net new money outflows of CHF 10.6 billion, mainly due to net outflows in the second and third quarters. The Swiss retail business recorded net new money outflows of CHF 11.4 billion. Global Asset Management saw total net outflows of CHF 103.0 billion. Of this, outflows in institutional were CHF 55.6 billion and occurred primarily via third-party distribution channels. Institutional net outflows were observed in all categories except money market funds, infrastructure and real estate. Wholesale intermediary had total net outflows of CHF 47.4 billion, reflecting higher outflows mainly in multi-asset, equities and fixed income. Approximately three-fourths of the wholesale intermediary outflows were through UBS distribution channels.



             
Net new money1 
  For the year ended 
CHF billion 31.12.08  31.12.07  31.12.06 
 
Wealth Management International & Switzerland  (101.0)  125.1   97.6 
 
Wealth Management US  (10.6)  26.6   15.7 
 
Business Banking Switzerland  (11.4)  4.6   1.2 
 
Global Wealth Management & Business Banking
  (123.0)  156.3   114.5 
 
Institutional  (55.6)  (16.3)  29.8 
 
Wholesale intermediary  (47.4)  0.6   7.4 
 
Global Asset Management
  (103.0)  (15.7)  37.2 
 
UBS
  (226.0)  140.6   151.7 
 
1 Excludes interest and dividend income.
                 
Invested assets 
  As of  % change from 
CHF billion 31.12.08  31.12.07  31.12.06  31.12.07 
 
Wealth Management International & Switzerland  870   1,294   1,138   (33)
 
Wealth Management US  600   840   824   (29)
 
Business Banking Switzerland  129   164   161   (21)
 
Global Wealth Management & Business Banking
  1,599   2,298   2,123   (30)
 
Institutional  335   522   519   (36)
 
Wholesale intermediary  240   369   347   (35)
 
Global Asset Management
  575   891   866   (35)
 
UBS
  2,174   3,189   2,989   (32)
 

36

Strategy, performance and responsibility

2007

Key performance indicators show:
–return on equity from continuing operations for full-year 2007 at negative 10.2%11.7%, down from positive 26.4%23.9% in the same period a year earlier, while the2006. The strong results posted by UBS’s wealth and asset management businesses were more than offset by substantial losses in the Investment Bank;
– negativediluted earnings per share from continuing operations of CHF 2.49,2.61, compared with positive CHF 5.574.64 in 2006;
– a cost / cost/income ratio for of 111.0%, compared with 70.5% in the financial businesses of 110.3% in 2007, significantly up from 69.7% a year ago; andprior year;

– net new money at CHF 140.6 billion, down from a record in 2006 of CHF 151.7 billion. The decrease was mostly driven by full-year outflows in Global Asset Management, mainly in institutional which had net new money out-flowsoutflows of CHF 16.3 billion. The net new money outflowsout-flows in core / value equity mandates and, to a lesser extent, in fixed income mandates were only partly offset by net new money inflows into all other asset classes, particularly alternative and quantitative investments and money market funds. Record net new money inflows were seen in Swiss and international wealth management (where net new money inflows increased by CHF 27.5 billion from 2006),Wealth Management International & Switzerland, particularly in Europe and Asia Pacific. Net new money inflows of CHF 26.6 billion in theWealth Management US wealth management business were an increase of CHF 10.9 billion from prior year, reflectingreflected the recruitment of experienced advisors and reduced outflows from existing clients. The Swiss retail business recorded net new money inflows of CHF 4.6 billion.



             
Net new money1 
  For the year ended 
CHF billion 31.12.07  31.12.06  31.12.05 
 
Wealth Management International & Switzerland  125.1   97.6   68.2 
 
Wealth Management US  26.6   15.7   26.9 
 
Business Banking Switzerland  4.6   1.2   3.4 
 
Global Wealth Management & Business Banking
  156.3   114.5   98.5 
 
Institutional  (16.3)  29.8   21.3 
 
Wholesale intermediary  0.6   7.4   28.2 
 
Global Asset Management
  (15.7)  37.2   49.5 
 
UBS excluding Private Banks & GAM
  140.6   151.7   148.0 
 
Corporate Center            
 
Private Banks & GAM2
  0.0   0.0   0.5 
 
UBS
  140.6   151.7   148.5 
 
1Excludes interest and dividend income.2Private Banks & GAM was sold on 2 December 2005.
                 
Invested assets 
      As of      % change from 
CHF billion 31.12.07  31.12.06  31.12.051  31.12.06 
 
Wealth Management International & Switzerland  1,294   1,138   982   14 
 
Wealth Management US  840   824   752   2 
 
Business Banking Switzerland  164   161   153   2 
 
Global Wealth Management & Business Banking
  2,298   2,123   1,887   8 
 
Institutional  522   519   441   1 
 
Wholesale intermediary  369   347   324   6 
 
Global Asset Management
  891   866   765   3 
 
UBS
  3,189   2,989   2,652   7 
 
1Private Banks & GAM was sold on 2 December 2005.New key performance indicator framework

34

A new key performance indicator (KPI) framework was introduced in first quarter 2009 and will be used to

measure performance in 2009 and forward. Refer to the “Key performance indicators: 2009 and beyond”

sidebar in the “Strategy and structure” section of this report for more information on UBS’s new KPIs.



37

Strategy, performance and responsibility
Financial performance

2006

From continuing operations, performance indicators show:
–return on equity in full-year 2006 at 26.4%, down from 27.6% in 2005. Higher attributable profit was offset by an increase in average equity following strong retained earnings;
–diluted earnings per share (EPS) in 2006 at CHF 5.57, up 20% from CHF 4.65 in 2005, a reflection of increased earnings and a slight reduction in the average number of shares outstanding (–2%) following share repurchases;

UBS results
                 
Income statement 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
                 
Continuing operations
                
 
Interest income  65,890   109,112   87,401   (40)
 
Interest expense  (59,687)   (103,775)  (80,880)  (42)
 
Net interest income  6,203   5,337   6,521   16 
 
Credit loss (expense) / recovery  (2,996)   (238)  156     
 
Net interest income after credit loss expense  3,207   5,099   6,677   (37)
 
Net fee and commission income  22,929   30,634   25,456   (25)
 
Net trading income  (25,818)   (8,353)  13,743   (209)
 
Other income  884   4,341   1,608   (80)
 
Total operating income  1,201   31,721   47,484   (96)
 
Cash components  16,356   22,342   21,346   (27)
 
Share-based components  (94)   3,173   2,685     
 
Total personnel expenses  16,262   25,515   24,031   (36)
 
General and administrative expenses  10,498   8,429   7,942   25 
 
Depreciation of property and equipment  1,241   1,243   1,244   0 
 
Impairment of goodwill  341   0   0     
 
Amortization of intangible assets  213   276   148   (23)
 
Total operating expenses  28,555   35,463   33,365   (19)
 
Operating profit from continuing operations before tax  (27,353)   (3,742)  14,119   (631)
 
Tax expense  (6,837)   1,369   2,998     
 
Net profit from continuing operations  (20,517)   (5,111)  11,121   (301)
 
                 
Discontinued operations
                
 
Profit from discontinued operations before tax  198   145   888   37 
 
Tax expense  1   (258)  (11)    
 
Net profit from discontinued operations  198   403   899   (51)
 
                 
Net profit  (20,319)   (4,708)  12,020   (332)
 
Net profit attributable to minority interests  568   539   493   5 
 
from continuing operations  520   539   390   (4)
 
from discontinued operations  48   0   103     
 
Net profit attributable to UBS shareholders
  (20,887)   (5,247)  11,527   (298)
 
from continuing operations  (21,037)   (5,650)  10,731   (272)
 
from discontinued operations  150   403   796   (63)
 
                 
Earnings per share
                
 
Basic earnings per share (CHF)  (7.54)   (2.42)  5.19   (212)
 
from continuing operations  (7.60)   (2.61)  4.83   (191)
 
from discontinued operations  0.05   0.19   0.36   (74)
 
Diluted earnings per share (CHF)  (7.55)   (2.43)  4.99   (211)
 
from continuing operations  (7.60)   (2.61)  4.64   (191)
 
from discontinued operations  0.05   0.19   0.34   (74)
 
                 
Additional information
                
 
Personnel (full-time equivalents)1
  77,783   83,560   78,140   (7)
 
–a cost / income ratio for the financial businesses of 69.7% in 2006, down 0.4 percentage points from 70.1% in 2005, reflecting the increase in net trading income and net fee and commission income, partly offset by higher personnel and general and administrative expenses (in 2006, over 8,500 employees were added in areas where UBS saw long-term strategic opportunities); and
–for the whole of 2006, net new money of CHF 151.7 billion, up from CHF 148.0 billion a year earlier (excluding Private Banks & GAM), corresponding to an annual growth rate of 5.7% of the asset base at the end of 2005. Inflows remained strong worldwide.
1Excludes personnel from private equity (part of the Corporate Center).


3538

Financial performance
Strategy, performance and responsibility

2008

Results

2008 saw the unfolding of a global financial crisis that affected UBS deeply. While UBS’s wealth and asset management businesses contributed positively to UBS results

despite extremely difficult conditions, losses on the Investment Bank’s risk positions were very significant and led to an overall negative result.

UBS results

                 
Income statement 
  For the year ended  % change from 
CHF million, except per share data 31.12.07  31.12.06  31.12.05  31.12.06 
 
Continuing operations
                
Interest income  109,112   87,401   59,286   25 
 
Interest expense  (103,775)  (80,880)  (49,758)  28 
 
Net interest income  5,337   6,521   9,528   (18)
 
Credit loss (expense) / recovery  (238)  156   375     
 
Net interest income after credit loss expense  5,099   6,677   9,903   (24)
 
Net fee and commission income  30,634   25,456   21,184   20 
 
Net trading income  (8,353)  13,743   8,248     
 
Other income  4,332   1,598   1,127   171 
 
Revenues from Industrial Holdings  268   262   229   2 
 
Total operating income  31,980   47,736   40,691   (33)
 
Personnel expenses  24,798   23,591   20,067   5 
 
General and administrative expenses  8,465   7,980   6,504   6 
 
Depreciation of property and equipment  1,251   1,252   1,247   0 
 
Amortization of intangible assets  282   153   133   84 
 
Goods and materials purchased  119   116   97   3 
 
Total operating expenses  34,915   33,092   28,048   6 
 
Operating profit from continuing operations before tax  (2,935)  14,644   12,643     
 
Tax expense  1,311   2,785   2,465   (53)
 
Net profit from continuing operations  (4,246)  11,859   10,178     
 
                 
Discontinued operations
                
 
Operating profit from discontinued operations before tax  135   879   5,094   (85)
 
Tax expense  (266)  (12)  582     
 
Net profit from discontinued operations  401   891   4,512   (55)
 
                 
Net profit  (3,845)  12,750   14,690     
 
Net profit attributable to minority interests  539   493   661   9 
 
from continuing operations  539   390   430   38 
 
from discontinued operations  0   103   231   (100)
 
Net profit attributable to UBS shareholders
  (4,384)  12,257   14,029     
 
from continuing operations  (4,785)  11,469   9,748     
 
from discontinued operations  401   788   4,281   (49)
 
                 
Earnings per share
                
 
Basic earnings per share (CHF)  (2.28)  6.20   6.97     
 
from continuing operations  (2.49)  5.80   4.84     
 
from discontinued operations  0.21   0.40   2.13   (48)
 
Diluted earnings per share (CHF)  (2.28)  5.95   6.68     
 
from continuing operations  (2.49)  5.57   4.65     
 
from discontinued operations  0.21   0.38   2.03   (45)
 

36

2007

In 2007,2008, UBS reported a Group net loss attributable to UBS shareholders (“attributable loss”) of CHF 4,38420,887 million – a loss of CHF 4,78521,037 million from continuing operations and a profit of CHF 401150 million from discontinued operations. In 2006,2007, UBS recorded a Group net profit attributable to UBS shareholders (“attributable profit”) of CHF 12,257 million.

The financial businesses reported an attributable loss from continuing operations of CHF 5,235 million in 2007. This compares with an attributable profit of CHF 11,249 million in 2006.5,247 million.

Dividend

As agreed by the extraordinary general meeting on 27 February 2008, the cash dividend for 2007 was replaced by a stock dividend. Furthermore, the Board of Directors (BoD) is authorized, at any time until 27 February 2010, to increase the share capital by a maximum of CHF 10,370,000 through the issuance of a maximum of 103,700,000 fully paid registered shares with a par value of CHF 0.10 each. Existing shareholders will be granted subscription rights for the acquisition of the new shares without payment in proportion

to their shareholdings after the annual general meeting (AGM) to be held on 23 April 2008. The exchange ratio will be determined by the BoD, and shareholders will be informed of it on or by the date of the AGM. The allotted entitlements will be tradable on virt-x and therefore allow shareholders to choose whether they wish to receive new UBS AG shares or monetize the value of the entitlements by selling them in the market.

For the performance year 2006 (paid in 2007), UBS paid a cash dividend of CHF 2.20 a share. Total payout for the 2005 financial year (paid in 2006), which included a par value repayment of CHF 0.30 a share for the gain realized from the sale of Private Banks & GAM, was CHF 1.90 a share.

2006

In 2006, attributable profit was CHF 12,257 million.

The financial businesses contributed CHF 11,253 million to attributable profit, of which CHF 11,249 million was from continuing operations. This was an improvement of 19% from CHF 9,442 million in 2005. Discontinued operations contributed CHF 4 million net profit to financial businesses. Attributable profit benefited by CHF 1,004 million from Industrial Holdings with CHF 220 million stemming from continuing operations.



37

Financial performance
Financial businesses results

Financial businesses results

                 
Income statement1 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
                 
Continuing operations
                
 
Interest income  109,112   87,401   59,286   25 
 
Interest expense  (103,775)  (80,880)  (49,758)  28 
 
Net interest income  5,337   6,521   9,528   (18)
 
Credit loss (expense) / recovery  (238)  156   375     
 
Net interest income after credit loss expense  5,099   6,677   9,903   (24)
 
Net fee and commission income  30,634   25,456   21,184   20 
 
Net trading income  (8,353)  13,743   8,248     
 
Other income  3,652   1,295   561   182 
 
Total operating income  31,032   47,171   39,896   (34)
 
Cash components  22,300   21,282   18,275   5 
 
Share-based components2
  2,387   2,187   1,628   9 
 
Total personnel expenses  24,687   23,469   19,903   5 
 
General and administrative expenses  8,421   7,929   6,448   6 
 
Services (to) / from other business units  (124)  (9)  (14)    
 
Depreciation of property and equipment  1,243   1,245   1,240   0 
 
Amortization of intangible assets  276   148   127   86 
 
Total operating expenses  34,503   32,782   27,704   5 
 
Operating profit from continuing operations before tax  (3,471)  14,389   12,192     
 
Tax expense  1,275   2,751   2,296   (54)
 
Net profit from continuing operations  (4,746)  11,638   9,896     
 
                 
Discontinued operations
                
 
Profit from discontinued operations before tax  7   4   4,564   75 
 
Tax expense  (258)  0   489     
 
Net profit from discontinued operations  265   4   4,075     
 
                 
Net profit  (4,481)  11,642   13,971     
 
Net profit attributable to minority interests  489   389   454   26 
 
from continuing operations  489   389   454   26 
 
from discontinued operations  0   0   0     
 
Net profit attributable to UBS shareholders
  (4,970)  11,253   13,517     
 
from continuing operations  (5,235)  11,249   9,442     
 
from discontinued operations  265   4   4,075     
 
                 
Additional information
                
 
Personnel (full-time equivalents)  83,560   78,140   69,569   7 
 
1 Excludes results from Industrial Holdings.  2 Additionally includes social security contributions and expenses related to alternative investment awards.

38

2007

Results

Last year was one of the most difficult in UBS’s history. While most UBS businesses, in particular the wealth management businesses, continued their strong revenue and profit growth momentum and finished the year with record results, this performance was overshadowed by the developments in the Investment Bank’s positions related to the US residential mortgage market. The sudden and serious deterioration in the US housing market, in combination with a large exposure in sub-prime mortgage related securities and derivatives, has deeply impacted UBS.

Attributable net loss in 2007 was CHF 4,970 million. Discontinued operations contributed a profit of CHF 265 million, compared with CHF 4 million in 2006. Net loss from continuing operations was CHF 5,235 million, down from a profit of CHF 11,249 million in 2006.

Operating income

Total operating income was CHF 31,0321,201 million in 2007,2008, down 34% from CHF 47,17131,721 million in 2006.2007.Net interest incomeat CHF 6,203 million was up 16% compared with CHF 5,337 million was down 18% compared with CHF 6,521 million a year earlier.Net trading incomewas negative CHF 25,818 million, sharply down from negative CHF 8,353 million sharply down from positive CHF 13,743 million in 2006.2007.

As well as income from interest margin-based activities (loans and deposits), net interest income includes income earned as a result of trading activities (for example, coupon and dividend income). ThisThe dividend income component of interest income is volatile from period to period, depending on the composition of the trading portfolio. In order to provide a better explanation of the movements in net interest income and net trading income, UBS analyzestheir total is analyzed below under the total according to therelevant business activities that give rise to the income, rather than by the type of income generated.activities.

Net income from trading businesses

Net income from trading businesses dropped to negative CHF 26,883 million for full-year 2008. This compares with income of negative CHF 10,658 million in the prior year, with the decline mainly due to losses on disclosed risk con-

Trading versus non-trading income

(BAR CHART)

centrations in the fixed income, currencies and commodities (FICC) area of the Investment Bank in 2008.

Within FICC, trading losses were experienced in difficult markets marked by a significant increase in volatility and an extreme scarcity of liquidity which negatively affected many trades and positions. Real estate and securitization, and credit and proprietary strategies all had a significant negative impact on FICC trading revenues. These losses obscured good results in select areas, notably foreign exchange and money markets, which had a strong year with revenues up from 2007. Rates had positive revenues but were down from the prior year.
Trading revenues from the equities business were down from the previous year, mainly as a result of lower revenues in derivatives, especially in Europe and Asia. Equity-linked saw negative revenues in difficult equity and credit markets. The exchange-traded derivatives business was up as it benefited from significant volatility in the market. Prime brokerage services had a solid performance but revenues were down overall from 2007 as clients deleveraged their positions. Proprietary trading contributed a limited loss for the year.
In 2008, the Investment Bank recorded a gain on own credit from financial liabilities designated at fair value of CHF



                 
Net interest and trading income 
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Net interest income  6,203   5,337   6,521   16 
 
Net trading income  (25,818)   (8,353)  13,743   (209)
 
Total net interest and trading income
  (19,615)   (3,016)  20,264   (550)
 
                 
Breakdown by businesses
                
 
Net income from trading businesses1
  (26,883)   (10,658)  13,730   (152)
 
Net income from interest margin businesses
  6,160   6,230   5,718   (1)
 
Net income from treasury activities and other
  1,107   1,412   816   (22)
 
Total net interest and trading income
  (19,615)   (3,016)  20,264   (550)
 
1Includes lending activities of the Investment Bank.

39

Strategy, performance and responsibility
Financial performance

2,032 million, resulting from the widening of UBS’s credit spread, which was partly offset by the effects of redemptions and repurchases of such liabilities. Refer to “Note 27 Fair value of financial instruments” in the financial statements of this report for more information. In 2007, the Investment Bank recorded a gain of CHF 659 million on own credit.

Net income from interest margin businesses

Net income from interest margin businesses decreased 1% to CHF 6,160 million from CHF 6,230 million. This slight decrease was primarily due to lower income from mortgages.

Net income from treasury activities and other

Net income from treasury activities and other was CHF 1,107 million compared with CHF 1,412 million. Gains from the accounting treatment of the MCNs issued on 5 March 2008 and 9 December 2008 were offset by negative income from the transaction with the SNB.

Credit loss expense

A credit loss expense of CHF 2,996 million was recorded in full-year 2008, compared with a credit loss expense of CHF 238 million in full-year 2007. The difference mainly reflects impairment charges taken on reclassified financial assets in fourth quarter 2008 and a further deterioration of the credit environment.
Net credit loss expense at Global Wealth Management & Business Banking amounted to CHF 421 million in 2008 compared with a net credit loss recovery of CHF 28 million in 2007. This result was mainly due to provisions made for lombard loans in 2008, particularly in the fourth quarter. The Investment Bank recorded a net credit loss expense of CHF 2,575 million in 2008, compared with a net credit loss expense of CHF 266 million in 2007. This increase mainly re-flects impairment charges taken on reclassified instruments in fourth quarter 2008, of which the majority was related to leveraged finance commitments.
èRefer to the “Risk management and control” section of this report for more information on UBS’s risk management approach, method of credit risk measurement and the development of credit risk exposures

Net fee and commission income

Net fee and commission income was CHF 22,929 million, down 25% from CHF 30,634 million. Income declined in all major fee categories, as outlined below:
–Underwriting fees fell 48% to CHF 1,957 million, driven by a 56% decline in equity underwriting fees and a 31% decline in debt underwriting fees.
–Mergers and acquisitions and corporate finance fees fell 40% to CHF 1,662 million, in an environment of reduced market activity and lower mandated deal volumes.
–Net brokerage fees fell 16% to CHF 6,445 million, mainly due to lower client transaction volumes in the wealth management businesses and the Investment Bank’s cash equities and Asian equity derivatives business.
–Investment fund fees fell 25% to CHF 5,583 million due to lower asset-based fees from the asset management and wealth management businesses.
–Fiduciary fees increased 1% to CHF 301 million, reflecting an increase in business volume.
–Custodian fees fell 12% to CHF 1,198 million, mainly due to the lower asset base.
–Portfolio and other management and advisory fees fell 21% to CHF 6,169 million mainly due to the lower asset base in the wealth management businesses and reduced performance fees in the asset management business.
–Insurance-related and other fees, at CHF 317 million in 2008, decreased by 25% from a year earlier mainly due to lower commission income from life insurance products at Wealth Management US.

Other income

Other income decreased to CHF 884 million from CHF 4,341 million. The main driver for this change was UBS’s sale of its 20.7% stake in Julius Baer during second quarter 2007, which gave rise to the recognition in second quarter 2007 of a CHF 1,950 million pre-tax gain, attributed to the Corporate Center. 2008 included a gain of CHF 168 million from the sale of a stake in Adams Street Partners in the third quarter and a gain of CHF 360 million on the sale of UBS’s stake in Bank of China in the fourth quarter.



                 
Credit loss (expense) / recovery
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Global Wealth Management & Business Banking  (421)   28   109     
 
Investment Bank  (1,246)   (266)  47   368 
 
Investment Bank – credit losses from reclassified financial instruments  (1,329)             
 
UBS
  (2,996)   (238)  156     
 

40

Strategy, performance and responsibility
                 
Net fee and commission income 
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Equity underwriting fees  1,138   2,564   1,834   (56)
 
Debt underwriting fees  818   1,178   1,279   (31)
 
Total underwriting fees
  1,957   3,742   3,113   (48)
 
Mergers and acquisitions and corporate finance fees  1,662   2,768   1,852   (40)
 
Brokerage fees  8,355   10,281   8,053   (19)
 
Investment fund fees  5,583   7,422   5,858   (25)
 
Fiduciary fees  301   297   252   1 
 
Custodian fees  1,198   1,367   1,266   (12)
 
Portfolio and other management and advisory fees  6,169   7,790   6,622   (21)
 
Insurance-related and other fees  317   423   449   (25)
 
Total securities trading and investment activity fees
  25,540   34,090   27,465   (25)
 
Credit-related fees and commissions  273   279   269   (2)
 
Commission income from other services  1,010   1,017   1,064   (1)
 
Total fee and commission income
  26,823   35,386   28,798   (24)
 
Brokerage fees paid  1,909   2,610   1,904   (27)
 
Other  1,984   2,142   1,438   (7)
 
Total fee and commission expense
  3,894   4,752   3,342   (18)
 
Net fee and commission income
  22,929   30,634   25,456   (25)
 

Operating expenses

Total operating expenses were down 19% to CHF 28,555 million from CHF 35,463 million. The decline was mainly due to significantly lower performance-related compensation, partly offset by provisions for auction rate securities and the provision made in connection with the US cross-border case.

Personnel expenses

Personnel expenses decreased 36% to CHF 16,262 million from CHF 25,515 million. This was primarily due to lower accruals on performance-related compensation, mainly in the Investment Bank, as well as lower salary costs due to reduced staff levels. Full-year results for 2007 included accruals for share-based compensation for performance during the year. These are not reflected in full-year 2008 as, starting in 2009, they will be amortized over the vesting period of these awards.
Contractors’ expenses, at CHF 423 million, were down 33% from 2007. This was due to a lower number of contractors employed, mainly at the Investment Bank. Insurance and social security contributions declined 45% to CHF 706 million in 2008, driven by lower performance-related compensation. Contributions to retirement benefit plans increased CHF 4 million to CHF 926 million as changes in contributions to various plans largely offset each other. At CHF 2,000 million in 2008, other personnel expenses increased 2%, mainly due to severance payments relating to the reduction in staff levels.

General and administrative expenses

At CHF 10,498 million, general and administrative expenses increased CHF 2,069 million from CHF 8,429 million. This increase was mainly due to provisions related to auction rate se-

curities of CHF 1,464 million, the provision of CHF 917 million made in connection with the US cross-border case and restructuring charges. These offset cost reductions in all other categories during 2008. In absolute terms, the largest reductions came from lower travel and entertainment expenses, reduced costs from outsourcing of IT and other services and lower marketing and public relations expenses.

Depreciation, amortization and impairment of goodwill

Depreciation of property and equipment declined CHF 2 million to CHF 1,241 million. Amortization of intangible assets declined to CHF 213 million from CHF 276 million.
A goodwill impairment charge of CHF 341 million was recorded in second quarter 2008, relating to the Investment Bank’s exit from the municipal securities business. There was no goodwill impairment charge for full-year 2007.

Income tax

UBS recognized an income tax benefit in the income statement of CHF 6,837 million for 2008, which mainly reflects the CHF 6,126 million impact from the recognition of incremental deferred tax assets on available tax losses.

The incremental deferred tax assets mainly relate to Swiss tax losses incurred during 2008 (primarily due to the writedown of investments in US subsidiaries) but was reduced by a decrease in the deferred tax assets recognized for US tax losses.
The Swiss tax losses can be utilized to offset taxable income in Switzerland arising in the seven years following the year in which the losses are incurred.
UBS recognized a net income tax expense of CHF 1,369 million for full year 2007.



41

Strategy, performance and responsibility
Financial performance

2007

Results

In 2007, UBS reported a Group net loss attributable to UBS shareholders (“attributable loss”) of CHF 5,247 million – a loss of CHF 5,650 million from continuing operations and a profit of CHF 403 million from discontinued operations. In 2006, UBS recorded a Group net profit attributable to UBS shareholders (“attributable profit”) of CHF 11,527 million.

Operating income

Total operating income was CHF 31,721 million in 2007, down 33% from CHF 47,484 million in 2006.Net interest income at CHF 5,337 million was down 18% compared with CHF 6,521 million a year earlier.Net trading income was negative CHF 8,353 million, sharply down from positive CHF 13,743 million in 2006.

Net income from trading businesses

Net income from trading businesses was down significantly from a positive CHF 13,730 million in 2006 to a negative CHF 10,658 million in 2007. The second half of 2007

was severely impacted by losses on positions related to the US mortgage market (see Note 3 inFinancial statements 2007for further details). Fixed income, currencies and commodities (FICC)FICC results were very weak. As credit markets continued to worsen towards the end of 2007, theThe credit business in FICC delivered negative revenues, especially in proprietary strategies. Structured products results were down, especially in Europe and the US, reflecting the decrease in customer demand for complex derivatives transactions. Markdowns on highly leveraged underwritingfinance commitments also had a negative impact. The result for emerging markets was helped by gains from the sale of UBS’s stake in Brazil Mercantile & Futures Exchange after demutualization. In addition, UBS had a gain of CHF 397 million on credit default swaps (CDS) hedging loan exposures, compared with a loss of CHF 245 million the previous year.

Revenues from the equities business were up, mainly as a result of very strong gains in the derivatives business in China. Equity capital markets and equity prime brokerage revenues were up in Latin America following the acquisition of Banco Pactual at the end of 2006. Exchange-traded derivatives profited from the acquisition of ABN AMRO’s global futures and options business towards the end of 2006. Mark-to-market gains ofon UBS’s stake in Bovespa, the BrazilianBrazil-ian stock exchange, helped the equities result. These positive performances were partially offset by losses recorded in proprietary trading as all regions were impacted by the market dislocation.
As a result of observed marketthe widening of UBS’s credit spread both equities and FICC recorded gains in net trading income on structured liabilities for which the fair value option was elected. In full year 2007, the Investment Bank recorded a gain on own credit of CHF 659 million.million on financial liabilities designated at fair value in net trading income. Refer to “Note 27 Fair value of financial instruments” in the financial statements of this report for more information. No gain or loss was recorded on own credit on financial liabilities designated at fair value in net trading income in 2006.

Net income from interest margin businesses

Net income from interest margin businesses was CHF 6,230 million, up 9% from CHF 5,718 million in 2006, reflecting an increase in spreads for Swiss franc, euro and US dollar deposits and growth in wealth management’s collateralized lending business. TheWealth Management US wealth management business also benefited from increased levels of deposits.



                 
Net interest and trading income 
  For the year ended  % change from 
CHF million 31.12.07  31.12.06  31.12.05  31.12.06 
 
Net interest income  5,337   6,521   9,528   (18)
 
Net trading income  (8,353)  13,743   8,248     
 
Total net interest and trading income
  (3,016)  20,264   17,776     
 
                 
Breakdown by businesses
                
 
Net income from trading businesses1
  (10,658)  13,730   11,795     
 
Net income from interest margin businesses
  6,230   5,718   5,292   9 
 
Net income from treasury activities and other
  1,412   816   689   73 
 
Total net interest and trading income
  (3,016)  20,264   17,776     
 
1 Includes lending

Net income from treasury activities of the Investment Bank.

39

and other

Financial performance
Financial businesses results

(BAR CHART)

At CHF 1,412 million,net income from treasury activities and otherin 2007 was up CHF 596 million, or 73% higher than the CHF 816 million inof 2006. The accounting treatment of interest rate swaps, which hedge the economic interest rate risk of accrual-accounted balance sheet items (for example, loans or money market and retail banking products), positively affected income. They are carried on the balance sheet at fair value and, if they qualify for cash flow hedge accounting under IAS 39, changes in fair value are recorded in equity, thereby avoiding volatility in the groupGroup income statement. In 2007, these hedges were not fully effective, leading to a gain that was booked to UBS’s income statement. Higher interest income was also recorded as a result of increased yield on a slightly higher average capital base.

In 2007, UBS experienced anet credit loss expenseof CHF 238 million, compared to a net credit loss recovery of CHF 156 million in 2006. The market dislocations stemming from the US sub-prime mortgage market during the second half of 2007 were the main reasons for the significant increase, mainly in the Investment Bank.
Net credit loss recovery at Global Wealth Management & Business Banking amounted to CHF 28 million in 2007 compared with a net credit loss recovery of CHF 109 million in 2006. The reduced level of credit loss recovery was a consequence of the continued reduction in the impaired lending portfolio and related allowances to a level such that recoveries realized from work-outs continue to trend lower and no longer compensate for the ongoing need to establish new allowances. The US mortgage market dislocation had no impact on these figures.

The Investment Bank realized a net credit loss expense of CHF 266 million in 2007, compared with a net credit loss recovery of CHF 47 million in 2006. This mainly relates to valuation adjustments taken in connection with the securitization of certain US commercial real estate assets.
èRisk, Treasury and Capital Management 2007details UBS’s risk management approach, method of credit risk measurement and the development of credit risk exposures

Net fee and commission income

In 2007,net fee and commission incomewas CHF 30,634 million, up 20% or CHF 5,178 million from CHF 25,456 million in 2006. Asset-based revenues showed particular strength, reflecting higher average invested asset levels, following strong inflows into the wealth management businesses. Underwriting fees, at their highest level ever, were CHF 3,742 million, up 20% from CHF 3,113 millionIncome increased in 2006. Equity underwriting fees, at CHF 2,564 million, increased by CHF 730 million, or 40%, with double-digit growth in the Americas and Europe. Fixed income underwriting fees were CHF 1,178 million, down 8% or CHF 101 million from CHF 1,279 million, reflecting the adverse conditions in credit markets and a decline in investor sentiment affecting volume and pricing of debt issuance. At CHF 2,768 million, mergers and acquisitions and corporate finance fees in 2007 were up significantly by 49% from CHF 1,852 million a year earlier. Advisory gross revenues increased during 2007,nearly all major categories, as clients took advantage of strategic opportunities in the brisk merger and acquisition environment and UBS’s growing franchises across all regions. Net brokerage fees were CHF 7,671 million in 2007, up 25% or CHF 1,522 million from CHF 6,149 million in 2006, mainly driven by higher revenues in Europe, the US and Asia, due to additional services from a new equities trading platform, and a considerable increase in client activity in all client segments. Additionally, the equity derivatives business also posted higher revenues due to increased business volume. Investment fund fees, at their highest level ever, were CHF 7,422 million in 2007, up 27% from CHF 5,858 million in 2006, mainly reflecting higher asset-based fees for the wealth management businesses, driven by strong client money inflows. Global Asset Management also increased management and performance fees globally. Fiduciary fees were slightly higher in 2007, increasing from CHF 252 million in 2006 to CHF 297 million, reflecting an increase in business volume. At CHF 1,367 million, custodian fees in 2007 were up 8% from CHF 1,266 million in 2006. This increase wasoutlined below:
–Underwriting fees, at their highest level ever, were CHF 3,742 million, up 20% from 2006. Equity underwriting fees were up significantly and offset a decrease in fixed income underwriting fees.



                 
Credit loss (expense) / recovery 
  For the year ended  % change from 
CHF million 31.12.07  31.12.06  31.12.05  31.12.06 
 
Global Wealth Management & Business Banking  28   109   223   (74)
 
Investment Bank  (266)  47   152     
 
UBS
  (238)  156   375     
 

4042

Strategy, performance and responsibility

–At CHF 2,768 million, mergers and acquisitions and corporate finance fees in 2007 were up significantly by 49% compared with 2006, in a brisk merger and acquisition environment.
–Net brokerage fees were CHF 7,671 million in 2007, up 25% from 2006, mainly driven by higher revenues in Europe, the US and Asia, due to additional services from a new equities trading platform, and a considerable increase in client activity in all client segments. Additionally, the equity derivatives business also posted higher revenues due to increased business volume.
–Investment fund fees, at their highest level ever, were CHF 7,422 million in 2007, up 27% from 2006, mainly reflecting higher asset-based fees for the wealth management businesses and higher management and performance fees at Global Asset Management.
–Fiduciary fees increased 18% to CHF 297 million due to an increase in business volume.
–At CHF 1,367 million, custodian fees in 2007 were up 8% compared with 2006. This increase was due to an enlarged asset base.
–Portfolio and other management and advisory fees increased by 18% to CHF 7,790 million in 2007. The increase was again the result of rising invested asset levels and to a lesser extent higher management fees.
–Insurance-related and other fees, at CHF 423 million in 2007, decreased by 6% from a year earlier.

due to an enlarged asset base. Portfolio and other management and advisory fees increased by 18% to CHF 7,790 million in 2007 from CHF 6,622 million in 2006. The increase is again the result of rising invested asset levels driven by strong net new money inflows and to a lesser extent due to higher management fees. Insurance-related and other fees, at CHF 423 million in 2007, decreased by 6% from a year earlier. Lower insurance fees paid in Global Asset Management were only partially offset by increased sales and asset-based fees from the wealth management businesses. Credit-related fees and commissions increased slightly by 4% to CHF 279 million in 2007 from CHF 269 million in 2006. Commission income from other services decreased by 4% from CHF 1,064 million in 2006 to CHF 1,017 million in 2007, mainly driven by equity derivative products, partially offset by higher fees for account keeping.

Other income
Other income was up considerablysignificantly in 2007 by CHF 2,3572,733 million, or 182%170%, to CHF 4,341 million from last year’s CHF 1,295 million.1,608 million in 2006. This was mainly relatingrelated to the sale of a 20.7% stake in Julius Baer in second quarter 2007. The demutualization of UBS’s stake in Bovespa, the Brazilian stock exchange, and in the Brazil Mercantile & Futures Exchange positively affected the other income line as well. In 2006 UBS recorded gains on theits New York Stock Exchange membership seats, which were exchanged into shares when it went public in March 2006. In the same year UBS sold its stakes in the London Stock Exchange, Babcock & Brown and EBS group.

Operating expenses

Total operating expenses increased by 5%6% to CHF 34,50335,463 million in 2007 from CHF 32,78233,365 million in 2006.

Personnel expenses

Personnel expenses increased CHF 1,2181,484 million, or 5%6%, to CHF 24,68725,515 million in 2007 from CHF 23,46924,031 million in 2006. The rise was driven by higher salaries due to the 7% increase in personnel over the year, mainly in the wealth management businesses which added 1,400 client and financial

advisors. Performance-related compensation decreased, reflecting the losses incurred in the Investment Bank. Personnel expenses are managed on a full-year basis with final fixing of annual performance-related payments in fourth quarter. Share-based components were up 9%18%, or CHF 200488 million, to CHF 2,3873,173 million from CHF 2,1872,685 million, mainly reflecting accelerated amortization of deferred compensation awarded for senior managers who have left UBS. Contractors’ expenses, at CHF 630 million, were CHF 192 million below 2006’s,2006 levels, mainly due to the transfer of Perot contractors into permanent staff. Insurance and social security contributions declined by 11%8% to CHF 1,2191,290 million in 2007 compared with CHF 1,3741,398 million in 2006, reflecting lower bonus payments. Contributions to retirement benefit plans rose 15% or CHF 120 million to CHF 922 million in 2007 as a result of both higher salaries paid and the increased staff levels. At CHF 1,9561,958 million in 2007, other personnel expenses increased by CHF 392390 million from 2006, mainly driven by severance payments relating to the reduction in staff levels.

General and administrative expenses

At CHF 8,4218,429 million in 2007,general and administrative expensesincreased by 6% from CHF 7,9297,942 million a year ago. Administration costs increased due to elevated business volumes in Latin America related to the acquisition of Banco Pactual in 2006 and higher levels of UBS staff. The increased number of employees pushed occupancy costs, as well as



                 
Net fee and commission income 
  For the year ended  % change from 
CHF million 31.12.07  31.12.06�� 31.12.05  31.12.06 
 
Equity underwriting fees  2,564   1,834   1,341   40 
 
Debt underwriting fees  1,178   1,279   1,264   (8)
 
Total underwriting fees  3,742   3,113   2,605   20 
 
Mergers and acquisitions and corporate finance fees  2,768   1,852   1,460   49 
 
Brokerage fees  10,281   8,053   6,718   28 
 
Investment fund fees  7,422   5,858   4,750   27 
 
Fiduciary fees  297   252   212   18 
 
Custodian fees  1,367   1,266   1,176   8 
 
Portfolio and other management and advisory fees  7,790   6,622   5,310   18 
 
Insurance-related and other fees  423   449   372   (6)
 
Total securities trading and investment activity fees  34,090   27,465   22,603   24 
 
Credit-related fees and commissions  279   269   306   4 
 
Commission income from other services  1,017   1,064   1,027   (4)
 
Total fee and commission income  35,386   28,798   23,936   23 
 
Brokerage fees paid  2,610   1,904   1,631   37 
 
Other  2,142   1,438   1,121   49 
 
Total fee and commission expense  4,752   3,342   2,752   42 
 
Net fee and commission income
  30,634   25,456   21,184   20 
 

41

Financial performance
Financial businesses results

             
Indicative tax rates for financial businesses 
  For the year ended 
in % 31.12.07  31.12.06  31.12.05 
 
Global Wealth Management & Business Banking
  20   20   19 
 
Wealth Management International & Switzerland  19   19   18 
 
Wealth Management US  42   42   40 
 
Business Banking Switzerland  20   20   17 
 
Global Asset Management
  20   24   24 
 
Investment Bank
  N/A   31   29 
 

travel and entertainment expenditures, higher. Professional fees were up on higher legal fees and IT and other outsourcing expenses were higher in all UBS businesses. This increase was only partially offset by lower provisions.

Depreciation, amortization and impairment of goodwill

Depreciationwas CHF 1,243 million in 2007, almost unchanged from CHF 1,2451,244 million in 2006. Lower depreciation on IT and communication equipment was offset by higher real estate charges.
At CHF 276 million,amortization of intangible assetswas up 86% from CHF 148 million a year earlier, related to acquisitions made at the end of 2006, mainly Banco Pactual. There was no goodwill impairment charge in 2007 or 2006.

TaxIncome tax

TaxUBS recognized a tax expense from continuing operationsin the income statement of CHF 1,369 million for 2007, was CHF 1,275 million, compared with a tax expense for 2006 of CHF 2,7512,998 million.

The tax charge for 2007 reflects tax expenses on profits earned outside the US during the year, partially offset by US and Swiss tax benefits on the writedowns incurred related to the US sub-prime crisis. The US tax benefits recognized have arisenarose mainly as a result of the ability to carry back losses against US profits earned in the two prior years. The remainder of the losses are carried forward to offset against future US taxable earnings. Only a portion of these losses have been recognized as deferred tax assets on the balance sheet in line with the requirements of IAS 12, which limits the ability to recognize such assets when losses have been incurred.

Business group tax rates

Indicative business group and business unit tax rates are calculated on an annual basis based on the results and statutory tax rates of the financial year. These rates are approximate calculations, based upon the application to the year’s adjusted earnings of statutory tax rates for the locations in which the business groups operated. These tax rates, therefore, give guidance on the tax cost of each business group doing business during 2007 on a stand-alone basis, without the benefit of tax losses brought forward from earlier years.
No tax rate has been presented for the Investment Bank, since the combination of applying statutory tax rates to losses related to the US sub-prime crisis and profits in other locations would not result in a meaningful overall tax rate for the Investment Bank. The indicative tax rate for Global Asset Management of 20% takes into account tax benefits related to closure costs of Dillon Read Capital Management. Excluding these tax benefits, the indicative tax rate for Global Asset Management would have been 24%, at the same level as in the last two years.
Please note that these tax rates are not necessarily indicative of future tax rates for the businesses or UBS as a whole.

Fair value disclosure of shares and options

The fair value of shares granted in 2007 rose to CHF 2,116 million. This is 258 million, or 14%, more than the CHF 1,858



                 
Business group performance from continuing operations before tax 
  For the year ended  % change from 
CHF million 31.12.07  31.12.06  31.12.05  31.12.06 
 
Wealth Management International & Switzerland  6,306   5,203   4,161   21 
 
Wealth Management US  718   582   312   23 
 
Business Banking Switzerland  2,460   2,356   2,189   4 
 
Global Wealth Management & Business Banking
  9,484   8,141   6,662   16 
 
Global Asset Management
  1,3151  1,392   1,057   (6)
 
Investment Bank
  (15,525)  5,943   5,181     
 
Corporate Center
  1,2552  (1,087)  (708)    
 
Financial businesses
  (3,471)  14,389   12,192     
 

1 Includes costs related to the closure of Dillon Read Capital Management (CHF 384 million, pre-tax).  2 Includes gain on sale of 20.7% stake in Julius Baer (CHF 1,950 million, pre-tax).

42

million granted in 2006, with the increase largely due to a rise in the proportion of bonuses being delivered in restricted shares.

The fair value of options granted as of 31 December 2007 was CHF 501 million, down CHF 63 million, or 11%, from CHF 564 million in 2006. The decrease reflects a lower fair value per option, related to changes in market parameters. Additionally, the number of options granted in 2007 was lower.
Most share-based compensation is granted in the first quarter of the year, with any further grants mainly under the Equity Plus program, a continuing employee participation program under which voluntary investments in UBS shares each quarter are matched with option awards.
These amounts, net of forfeited awards, will be recognized as compensation expense over the service period, which is generally equal to the vesting period. Most UBS share and option awards vest incrementally over a three-year period.

2006

Results

Attributable net profit in 2006 was CHF 11,253 million, of which discontinued operations contributed CHF 4 million, compared with CHF 4,075 million in 2005 following the sale of Private Banks & GAM. Net profit from continuing operations was CHF 11,249 million, up 19% from CHF 9,442 million in 2005. Higher revenues in practically all businesses drove the increase, outpacing growth in costs. Asset-based revenues showed particular strength, a reflection of rising market levels as well as strong inflows into the wealth and asset management businesses. UBS saw a strong increase in brokerage, corporate finance and underwriting fees. Income from trading activities was driven by higher gains from equity derivatives, prime brokerage and equity proprietary trading. Fixed income activities saw stronger results driven by positive market conditions and improved performances in derivatives, mortgage-backed securities and commodities. Revenues from interest margin products increased, a reflection of the success and growth of lending activities to wealthy private clients worldwide. UBS also reported credit loss recoveries. Expenses continued to increase (+18%) in the context of strategic expansion. Personnel expenses were up 18% from 2005, performance-related payments rose with revenues and there was a 12% increase in staff numbers. For 2006, 53% of personnel expenses took the form of bonus or other variable compensation, up from 50% in 2005. General and administrative expenses were up 23% from 2005. Provision expenses rose, mainly as a result of the settlement agreement with Sumitomo Corporation and the sublease of unused office space in New Jersey, US. The rise in costs was

outpaced by the improvement in revenues, driving the cost / income ratio down to 69.7% – the lowest level ever recorded.

Operating income

Total operating income was CHF 47,171 million in 2006, up 18% from CHF 39,896 million in 2005.
Net interest incomewas CHF 6,521 million in 2006, down from CHF 9,528 million in 2005.Net trading income was CHF 13,743 million, up from CHF 8,248 million in 2005.
Net income from trading businessesincreased by 16%, or CHF 1,935 million, from CHF 11,795 million in 2005 to CHF 13,730 million in 2006. Equities trading income in 2006 was up as it saw a large increase in derivatives trading, as well as in prime brokerage. Additionally, the proprietary business recorded higher results. These gains were partially offset by lower revenues in the cash equity business, partly due to increased client facilitation requirements by clients in the US and Europe. Fixed income trading revenues were up. The rates business recorded significant increases with business expansion in energy trading and in mortgage backed securities driven by higher client activity and favorable market conditions. This was partially offset by lower derivatives income due to declining customer flows. The metals business was positively affected by active markets. Revenues from the credit fixed income business were up slightly compared with 2005, while a loss of CHF 245 million was recorded in relation to credit default swaps (CDSs) hedging existing credit exposure in the loan book, against a gain of CHF 103 million in 2005.
Net income from interest margin businesses increased by 8% to CHF 5,718 million in 2006, a reflection of the growth in collateralized lending to wealthy clients worldwide. It also reflected an increase in spreads for US dollar, euro and Swiss franc deposits and higher volumes of mortgages to Swiss clients. The wealth management business in the US achieved higher levels of deposits, and benefited from higher spreads on them. This increase was partially offset by lower income from the shrinking Swiss recovery portfolio, which dropped by CHF 0.7 billion compared to year-end 2005.
At CHF 816 million,net income from treasury activities and otherin 2006 was CHF 127 million or 18% higher than CHF 689 million in 2005. Interest income increased due to a higher consolidated capital base. Compared with 2005, income benefited from mark-to-market gains on US dollar foreign exchange options used to hedge the currency exposure arising from future earnings. The US dollar fell against the Swiss franc in 2006 while it increased in 2005. During 2005, treasury revenues were negatively affected by the accounting treatment of interest rate swaps, as these hedges were not fully effective.
In 2006, UBS experienced anet credit loss recoveryof CHF 156 million, compared to a net credit loss recovery of CHF 375 million in 2005. The positive macro-economic en-



43

Strategy, performance and responsibility
Financial performance
Financial businesses results

Balance sheet

             
% change from 
CHF million 31.12.08  31.12.07  31.12.07 
 
             
Assets
            
 
Cash and balances with central banks  32,744   18,793   74 
 
Due from banks  64,451   60,907   6 
 
Cash collateral on securities borrowed  122,897   207,063   (41)
 
Reverse repurchase agreements  224,648   376,928   (40)
 
Trading portfolio assets  271,838   660,182   (59)
 
Trading portfolio assets pledged as collateral  40,216   114,190   (65)
 
Positive replacement values  854,100   428,217   99 
 
Financial assets designated at fair value  12,882   11,765   9 
 
Loans  340,308   335,864   1 
 
Financial investments available-for-sale  5,248   4,966   6 
 
Accrued income and prepaid expenses  6,141   11,953   (49)
 
Investments in associates  892   1,979   (55)
 
Property and equipment  6,706   7,234   (7)
 
Goodwill and intangible assets  12,935   14,538   (11)
 
Other assets  19,094   20,312   (6)
 
Total assets
  2,015,098   2,274,891   (11)
 
             
Liabilities
            
 
Due to banks  125,628   145,762   (14)
 
Cash collateral on securities lent  14,063   31,621   (56)
 
Repurchase agreements  102,561   305,887   (66)
 
Trading portfolio liabilities  62,431   164,788   (62)
 
Negative replacement values  851,803   443,539   92 
 
Financial liabilities designated at fair value  101,546   191,853   (47)
 
Due to customers  474,774   641,892   (26)
 
Accrued expenses and deferred income  10,196   22,150   (54)
 
Debt issued  197,254   222,077   (11)
 
Other liabilities  34,040   61,496   (45)
 
Total liabilities
  1,974,296   2,231,065   (12)
 
             
Equity
            
 
Share capital  293   207   42 
 
Share premium  25,250   12,433   103 
 
Net income recognized directly in equity, net of tax  (4,471)  (1,161)  (285)
 
Revaluation reserve from step acquisitions, net of tax  38   38   0 
 
Retained earnings  14,892   35,795   (58)
 
Equity classified as obligation to purchase own shares  (46)  (74)  38 
 
Treasury shares  (3,156)  (10,363)  70 
 
Equity attributable to UBS shareholders
  32,800   36,875   (11)
 
Equity attributable to minority interests  8,002   6,951   15 
 
Total equity
  40,802   43,826   (7)
 
Total liabilities and equity
  2,015,098   2,274,891   (11)
 

44

Strategy, performance and responsibility

vironment in key emerging markets allowed the release

2008 asset development

(BAR CHART)

31.12.08 vs 31.12.07:

UBS’s total assets stood at CHF 2,015 billion on 31 December 2008, down from CHF 2,275 billion on 31 December 2007. These shifts were driven by deliberate reductions of CHF 48 million462 billion in the trading portfolio and of collective loan loss provisionsCHF 236 billion in collateral trading, led by the Investment Bank. These substantial reductions were, however, partly offset by a significant rise in replacement values (increasing to a similar extent on both sides of the balance sheet as discussed under “Replacement values” below) during 2008, as market movements drove up positive replacement values by 99%, or CHF 426 billion, to reach CHF 854 billion at year-end. Excluding positive replacement values, UBS’s total assets dropped CHF 686 billion in 2008.
Currency effects for country risk.2008 included a strengthening of the Swiss franc against the British pound, US dollar and euro. These effects deflated the balance sheet, excluding positive replacement values, by CHF 75 billion, implying an underlying reduction of effectively CHF 611 billion.
Net credit loss recovery atExcluding positive replacement values, the Investment Bank significantly reduced its balance sheet assets by CHF 664 billion during 2008, and the positions of Global Wealth Management & Business Banking amounted toand Global Asset Management remained relatively stable at CHF 109 million in 2006 compared291 billion and CHF 25 billion, respectively.

Lending and borrowing

Lending

Cash and balances with a net credit loss recovery of CHF 223 million in 2005. The benign credit environment in Switzerland, where the corporate bankruptcy rate continued to fall in 2006, coupled with the measures taken in recent years to improve the quality of the credit portfolio has again resulted in a low level of new defaults. The management of the impaired portfolio, which continues to shrink, has also contributed to this result.
The Investment Bank realized a net credit loss recovery of CHF 47 million in 2006, compared with a net credit loss recovery of CHF 152 million in 2005. This continued strong performance was the result of further recoveries of previously established allowances and provisions from the work-out of the impaired portfolio, and no new defaults in 2006.
In 2006,net fee and commission incomecentral banks was CHF 25,456 million, up 20% from CHF 21,184 million in 2005. Underwriting fees were CHF 3,113 million in 2006, up 20% from CHF 2,605 million in 2005. Equity underwriting fees, at CHF 1,834 million, increased by CHF 493 million, or 37%, in all geographical regions. This was partially due to UBS’s role in the initial public offering of the Bank of China during second quarter 2006, where the firm acted as joint coordinator and bookrunner. Fixed income underwriting fees, at CHF 1,279 million, were slightly up by CHF 15 million. At CHF 1,852 million, mergers and acquisitions and corporate finance fees in 2006 were up 27% from CHF 1,460 million in 2005. Advisory gross revenues increased during 2006, as clients took advantage of strategic opportunities in the brisk merger and acquisition environment and UBS’s growing franchise in this area. Net brokerage fees were CHF 6,149 million in 2006, up 21%, or CHF 1,062 million, from CHF 5,087 million in 2005, a reflection of the improved markets and the resulting higher confidence of institutional and individual clients. Additionally, higher income from exchange-traded derivatives was driven by the acquisition of ABN AMRO’s global futures and options business. Investment fund fees were CHF 5,858 million in 2006, up 23% from CHF 4,750 million in 2005, mainly a reflection of higher asset-based fees for the wealth and asset management businesses, driven by strong client money inflows and favorable market conditions. Fiduciary fees were slightly higher in 2006, increasing from CHF 212 million in 2005 to CHF 252 million, reflecting an increase in the underlying asset base. At CHF 1,266 million, custodian fees in 2006 were up 8% from CHF 1,176 million in 2005. This increase was due to an enlarged asset base. Portfolio and other management and advisory fees increased by 25% to CHF 6,622 million in 2006 from CHF 5,310 million in 2005. The increase was again the result of rising invested asset levels driven by market valuations and strong net new

money inflows. Insurance-related and other fees, at CHF 449 million in 2006, increased by 21% from 2005, due to higher commissions from insurance related products. Credit-related fees and commissions decreased by 12% to CHF 269 million in 2006 from CHF 306 million in 2005, a reflection of declining business volumes and lower income from loans.

Commission income from other services increased by 4% from CHF 1,027 million in 2005 to CHF 1,064 million in 2006, mainly driven by equity derivative products and higher fees for credit cards.
Other incomeincreased by 131% to CHF 1,295 million in 2006 from CHF 561 million in 2005. This was driven by gains on UBS’s New York Stock Exchange membership seats, which were exchanged into shares when it went public in March 2006. In addition, UBS sold its stakes in the London Stock Exchange, Babcock & Brown and EBS group.

Operating expenses

Total operating expenses increased by 18% to CHF 32,782 million in 2006 from CHF 27,704 million in 2005.
Personnel expensesincreased CHF 3,566 million, or 18%, to CHF 23,469 million in 2006 from CHF 19,903 million in 2005. The rise was driven by higher performance-related compensation which reflected the better performance in all UBS businesses. Salary expenses rose due to the 12% increase in personnel over 2006, reflecting the expansion of UBS’s business as well as annual pay rises. Share-based components were up 34% or CHF 559 million to CHF 2,187 million from CHF 1,628 million, mainly a reflection of more share awards being granted in 2006 and the higher fair value of options, driven by the rise in the share price. Contractors’ expenses, at CHF 822 million, were CHF 1 million below 2005’s. Insurance and social security contributions rose by 9% to CHF 1,374 million in 2006 compared with CHF 1,256 million in 2005. Contributions to retirement benefit plans rose 13% or CHF 90 million to CHF 802 million in 2006 as a result of both higher salaries paid and the increased staff levels. At CHF 1,564 million in 2006, other personnel expenses increased CHF 174 million from 2005, mainly driven by increased levels of staff.
At CHF 7,929 million in 2006,general and administrative expensesincreased CHF 1,481 million from CHF 6,448 million in 2005. The increase was driven by a number of provisions, mainly for the Sumitomo settlement and the long-term lease on an office building in New Jersey, US. Professional fees rose for projects that support UBS’s growth strategy. IT and other outsourcing costs, marketing and public relations as well as expenses for market data services were driven up by increased business volume. Higher staff levels resulted in increased costs for occupancy and for travel.
Depreciationwas CHF 1,245 million in 2006, almost unchanged from CHF 1,240 million in 2005. Higher depreciation on real estate was partially offset by falling IT-related charges.



44

At CHF 148 million,amortization of intangible assetswas up 17% from CHF 127 million in 2005, related to acquisitions made during 2006.

Tax

The tax expense for 2006 was CHF 2,751 million, resulting in an effective tax rate of 19.1%, compared with the full-year 2005 tax rate of 18.8%. The tax rate for 2006 was positively influenced by the release of deferred tax valuation allowances, mainly reflecting improved forecast earnings in certain group companies and branches.

Fair value disclosure of shares and options

The fair value of shares granted in 2006 rose to CHF 1,858 million, 35% higher than CHF 1,381 million in 2005. The increase compared with 2005 was primarily driven by higher performance-based compensation and a rise in the proportion of bonuses being delivered in restricted shares.

The fair value of options granted as of 31 December 2006 was CHF 564 million, up 56% from CHF 362 million in 2005. The increase reflected a higher fair value per option, primarily due to a higher UBS share price.



45

Financial performance
Balance sheet and off balance sheet

Balance sheet and off balance sheet

Balance sheet

             
  % change from 
CHF million 31.12.07  31.12.06  31.12.06 
 
             
Assets
            
 
Cash and balances with central banks  18,793   3,495   438 
 
Due from banks  60,907   50,426   21 
 
Cash collateral on securities borrowed  207,063   351,590   (41)
 
Reverse repurchase agreements  376,928   405,834   (7)
 
Trading portfolio assets  610,061   627,036   (3)
 
Trading portfolio assets pledged as collateral  164,311   251,478   (35)
 
Positive replacement values  428,217   292,975   46 
 
Financial assets designated at fair value  11,765   5,930   98 
 
Loans  335,864   297,842   13 
 
Financial investments available-for-sale  4,966   8,937   (44)
 
Accrued income and prepaid expenses  11,953   10,361   15 
 
Investments in associates  1,979   1,523   30 
 
Property and equipment  7,234   6,913   5 
 
Goodwill and intangible assets  14,538   14,773   (2)
 
Other assets  18,000   17,249   4 
 
Total assets
  2,272,579   2,346,362   (3)
 
             
Liabilities
            
 
Due to banks  145,762   203,689   (28)
 
Cash collateral on securities lent  31,621   63,088   (50)
 
Repurchase agreements  305,887   545,480   (44)
 
Trading portfolio liabilities  164,788   204,773   (20)
 
Negative replacement values  443,539   297,063   49 
 
Financial liabilities designated at fair value  191,853   145,687   32 
 
Due to customers  641,892   555,886   15 
 
Accrued expenses and deferred income  21,848   21,527   1 
 
Debt issued  222,077   190,143   17 
 
Other liabilities  60,776   63,251   (4)
 
Total liabilities
  2,230,043   2,290,587   (3)
 
             
Equity
            
 
Share capital  207   211   (2)
 
Share premium  8,884   9,870   (10)
 
Net income recognized directly in equity, net of tax  (1,188)  815     
 
Revaluation reserve from step acquisitions, net of tax  38   38   0 
 
Retained earnings  38,081   49,151   (23)
 
Equity classified as obligation to purchase own shares  (74)  (185)  60 
 
Treasury shares  (10,363)  (10,214)  (1)
 
Equity attributable to UBS shareholders
  35,585   49,686   (28)
 
Equity attributable to minority interests  6,951   6,089   14 
 
Total equity
  42,536   55,775   (24)
 
Total liabilities and equity
  2,272,579   2,346,362   (3)
 

46

UBS’s total assets stood at CHF 2,272.633 billion on 31 December 2007, down2008, an increase of CHF 14 billion from the prior year-end. Due from banks and loans to customers both increased CHF 2,346.44 billion, rising to CHF 64 billion and CHF 340 billion, respectively. The customer loan increase stemmed mainly from the BlackRock collateralized funding transaction (a USD 11.25 billion eight-year amortizing loan; balance on 31 December 2008 USD 9.2 billion) in second quarter 2008 and the reclassification of illiquid trading assets from the trading portfolio in fourth quarter 2008, par-

tially offset by lower volumes from the Investment Bank prime brokerage business and from lombard lending in Global Wealth Management & Business Banking. The Swiss loan portfolio remained stable during 2008 at around CHF 163 billion.

Borrowing

The reduction of the Investment Bank’s assets led to lower unsecured borrowing needs during a continued difficult market environment for term debt issuance and decreasing client deposits. Money market paper issuance was CHF 112 billion in 2008, a considerable reduction of CHF 41 billion from the prior year, as UBS decreased its reliance on these funding sources (in line with the firm’s lower overall funding needs) amid a reduced access to these markets for issuers in general. Financial liabilities designated at fair value stood at CHF 102 billion on 31 December 2006. These shifts were driven2008, a drop of CHF 90 billion from 31 December 2007, as a lower demand for structured debt was accompanied by declinesdeclining market values, in particular of equity-linked notes as major stock indices fell. Long-term debt grew CHF 16 billion to CHF 86 billion as new issues of senior straight bonds, the Investment Bank, where deliberate balance sheet reductions ledCHF 6 billion MCN issuance to lower collateral trading portfolio (down CHF 173.4 billion) and lower trading portfolio assets (down CHF 104.1 billion). The positive and negative replacement values grew by CHF 135.2 billion and CHF 146.5 billion respectively and the loan portfolio was up CHF 38.0 billion. Currency movements against the Swiss franc (mainlyConfederation and around CHF 2 billion of mortgage bonds issued via the 7% depreciation of the US dollar) strongly supported the decline in total assets. Total liabilities decreased dueSwiss Mortgage Bond Bank combined to lower collateral trading liabilities (down CHF 271.1 billion) and trading portfolio liabilities (down CHF 40.0 billion), however, these movements were partially offset by higher unsecured borrowings, which went up CHF 106.2 billion.

Lending andoutweigh maturing senior straight bonds. Interbank borrowing

Lending

Cash (due to banks) was CHF 18.8126 billion on 31 December 2007, up2008, down CHF 15.320 billion from a year earlier, mainly related31 December 2007. Customer deposits (due to temporarily higher sight deposit balances held with central banks. Atcustomers) amounted to CHF 60.9475 billion on 31 December 2007,2008, a decrease of CHF 167 billion for the Due from banks line increased byyear, or CHF 10.5 billion, largely related to short-term over-the-counter margin calls. Loans to customers stood at CHF 335.9134 billion, on 31 December 2007, upa currency-adjusted basis. Global Wealth Management & Business Banking client deposits declined CHF 109 billion with reductions in fixed deposits, fiduciary investments and current accounts. Savings and personal accounts dropped CHF 10 billion over the course of 2008, though the last quarter recorded net inflows of CHF 3 billion. Investment Bank deposits declined CHF 58 billion, mainly driven by CHF 38.0 billion fromlower business funding needs and a year earlier, reflecting increased collateralized lending (lombard lending), mainlydecline in the international wealth management businesses, and higher mortgage volumes in Switzerland. Additionally, this was further accentuated by an increase in the Investment Bank’s collateralized lending to prime brokerage clients. This was partially offset by the exit of certain US legacy positions which were built up by Dillon Read Capital Management (DRCM).business.

Borrowing

The Due to banks declined sharply by CHF 57.9 billion to CHF 145.8 billion, mainly due to efforts from the Investment Bank’s foreign exchange and money market desk. This reduced UBS’s dependency on the short-term inter-bank market by replacing related liabilities with longer-term money market papers (up by CHF 32.7 billion). Total debt issued (including money market paper and financial liabilities designated at fair value) increased to CHF 413.9 billion on 31 December 2007, up CHF 78.1 billion from a year earlier. The amount of long-term debt issued (including financial liabilities designated at fair value) grew by CHF 45.4 billion to CHF 261.7 billion. The Due to customers line was up CHF 86.0 billion, mainly reflecting larger time deposits from private clients in the wealth management franchise around the globe and in Switzerland from the retail banking business. Growth in customer deposits in the Investment Bank

occurred primarily in prime brokerage and the exchange-traded derivatives business.

RepurchaseRepurchase/reverse repurchase agreements
and securities borrowing/lending

In 2007,Secured lending on the asset side of the balance sheet, the sums of cash collateral on securities borrowed and reverse repurchase agreements significantly decreased by CHF 173.4 billion, or 23%declined during 2008 to CHF 584.0348 billion while the sum of securities lent and repurchase agreements declined byon 31 December 2008. The CHF 271.1236 billion or 45% to CHF 337.5 billion. Thisdecline occurred almost entirely in the Investment Bank, where the matched book (awas reduced as part of its overall balance sheet reduction (the matched book is a repurchase agreement portfolio comprised of assets and liabilities with equal maturities and equal value so that the market risks substantially cancel each other out) was reduced. In addition,. Furthermore, as part of the fixed income book decreased as a result of lower short trading inventories and, to a lesser extent, through lower equity securities borrowing activities.

Trading portfolio

Between 31 December 2006 and 31 December 2007, trading assets declined sharply by CHF 104.1 billion to CHF 774.4 billion. This included a currency impact of approximately CHF 33 billion. Trading assets inventory in debt instruments dropped by CHF 97 billion in all major securities categories such as commercial paper, government bonds, asset-backed securities and corporate bonds due to either disposals or markdowns. Equity instruments also slightly decreased, while precious metals inventory continued to grow.

Replacement values

In 2007, the positive replacement value of derivative instruments increased by CHF 135.2 billion to CHF 428.2 billion, while the negative replacement values of derivative instruments increased by CHF 146.5 billion to CHF 443.5 billion. Both changes are due to movements in interest rates and currencies, as well as because of increased spread volatility in credit default swaps on products related to the US mortgage trading business.

Other assets/liabilities

Investments in associates increased by 30% to CHF 2.0 billion on 31 December 2007, mainly due to a direct investment of Global Asset Management’s infrastructure business. Property and equipment were marginally up by 5% to CHF 7.2 billion, mainly driven by new investments, partially offset by write-offs and currency impact. Goodwill and other intangible assets, at CHF 14.5 billion on 31 December 2007, declined slightly by 2% from a year earlier, mainly related to currency movements, partially offset by UBS’s acquisitionsInvestment Bank’s balance sheet reduction measures, its trad-



4745

Strategy, performance and responsibility
Financial performance
Balance sheet and off balance sheet

during 2007ing short positions were reduced CHF 102 billion, which resulted in lower short-coverings via reverse repurchase agreements and securities borrowing transactions.

A significant amount of McDonald Investmentstrading assets are funded via repurchase agreements, so, in addition to the matched book reduction, the yearly decrease in trading assets also contributed to the drop in repurchase agreements. These reductions are reflected on the liability side of the balance sheet, where repurchase agreements and Daehan Investment Trust Management Company Ltd. (DIMCO).

Equity

Atsecurities lent against cash collateral declined CHF 35.6221 billion, standing at CHF 117 billion on 31 December 2007,2008.

Trading portfolio

Significant reductions were achieved in the trading portfolio, which declined CHF 462 billion during 2008, or CHF 445 billion on a currency-adjusted basis. At the end of 2008, the trading portfolio stood at CHF 312 billion. The majority of the decrease related to the Investment Bank’s overall balance sheet reductions and occurred within the fixed income, currencies and commodities (FICC) business area and the equities business area. In FICC, trading inventories in a number of areas, including real estate, securitization and commodities, were substantially reduced, including USD 16.4 billion of illiquid assets transferred to the Swiss National Bank StabFund and approximately CHF 26 billion (represents fair values at the reclassification dates) of trading assets reclassified in fourth quarter 2008 to banking book as “Loans and receivables”. The reduction in equities inventories was mainly a result of stock market declines. Reductions occurred across all trading products, with debt instruments declining CHF 278 billion, equity instruments falling CHF 130 billion, traded loans falling CHF 35 billion and precious metals falling CHF 19 billion.

Replacement values

The positive and the negative replacement values (RVs) of derivative instruments developed in parallel, showing continued strong rises during 2008, driven by increased market valuations, while notional values declined 2% year-on-year. Positive RVs grew CHF 426 billion to CHF 854 billion in 2008, while the negative RVs of derivative instruments increased CHF 408 billion to CHF 852 billion. In both cases, the increases were largely driven by movements in currencies (for example, the weakening of the US dollar), lower interest rates and widening credit spreads. Increases occurred across almost all derivative products, with interest rate contracts growing by CHF 211 billion, foreign exchange contracts by CHF 123 billion and credit derivative contracts by CHF 92 billion.

Shareholders’ equity

On 31 December 2008, equity attributable to UBS shareholders decreased bywas CHF 14.132.8 billion, from 2006. representing a decrease of CHF 4.1 billion compared with 31 December 2007.

The decline in 2008 reflects mainly the net loss attributable lossto shareholders of CHF 4.420.9 billion and dividend payments for the performance year 2006combined with other losses recognized directly in equity (including foreign currency translation) of CHF 4.33.3 billion. In addition,Refer to the cancellation“Statement of secondary trading line treasury shares thatrecognized income and expense” in the financial statements of this report for more information about the losses recognized directly in equity.
These equity reductions were purchased

underlargely offset by UBS’s capital strengthening measures taken in 2008 (see the share buy-back program 2006 / 2007 of CHF 2.4 billion also reduced UBS’s equity.

Equitytable below showing the impact by equity attributable to minority interests increased by 14% to CHF 7.0 billion on 31 December 2007 from CHF 6.1 billion on the same date a year ago, mainly reflecting the new issuance of preferred securities of CHF 1.0 billion and the minority interest profit and loss of CHF 0.5 billion. This was partially offset by a decrease in dividend payments of CHF 0.5 billion and the foreign currency impact of CHF 0.3 billion.UBS shareholders accounts).



48Equity attributable to UBS shareholders development

  
          Net income          Equity 
          recognized          attributable 
      Share  directly  Retained  Treasury  to UBS 
CHF billion Share capital  premium  in equity  earnings  shares  shareholders 
 
Starting balance
  0.2   12.4   (1.2)  35.8   (10.4)  36.9 
 
Net loss attributable to UBS shareholders              (20.9)      (20.9)
 
of which: amount relates to MCNs issued in March 20081
              3.7         
 
of which: amount relates to MCNs issued in December 20082
              0.7         
 
Rights issue  0.1   15.5               15.6 
 
MCNs issued in March 20081
      7.0               7.0 
 
MCNs issued in December 20082
      (3.6)              (3.6)
 
Share-based compensation plans/sale of treasury shares      (6.6)          7.2   0.6 
 
Others      0.5   (3.3)          (2.8)
 
Ending balance
  0.3   25.2   (4.5)  14.9   (3.2)  32.8 
 
1 Of the CHF 13 billion MCN1, CHF 2.3 billion, being the outstanding coupon liability recorded in “Debt issued”.  2 Of the CHF 6 billion MCN2, a balance of CHF 8.8 billion was recorded as financial liabilities on balance sheet.

46

Strategy, performance and responsibility

Off-balance sheet

Contractual obligations

The table below summarizes UBS’sincludes contractual obligations as of 31 December 2007. 2008.

All contracts included in the table below, with the exception of purchase obligations (those where UBS is committed to purchasing determined volumes of goods and services), are either recognized as liabilities on UBS’s balance sheet or, in the case of operating leases, disclosed in Note“Note 25 Operating lease commitments” inFinancial Statements 2007. the financial statements of this report.
The following liabilities are recognized on the balance sheet and excluded from the table below:table: provisions (as disclosed in “Note 21 Provisions and litigation” in the financial statements of this report), current and deferred tax liabilities (refer to “Note 22 Income taxes” in the financial statements of this report for more information), liabilities to employees for equity participation plans, settlement and clearing accounts and amounts due to banks and customers.
Within purchase obligations, the obligation to employees under the mandatory notice period is excluded (this is the period in which UBS must pay employees contractually agreedleaving the firm contractually-agreed salaries).
On 31 December 2007, UBS had a firm commitment to acquire Caisse Central de Réescompte Group (CCR). The transaction was completed in February 2008. The terms and conditions of this agreement are disclosed in Note 35 inFinancial Statements 2007.

Off-balance sheet arrangements

In the normal course of business, UBS enters into arrangements that, under International Financial Reporting Standards, (IFRS), arelead to either de-recognition of financial assets and liabilities for which UBS has transferred substantially all risks and rewards, or the non-recognition of financial assets (and liabilities) received for which UBS has not initially recognizedassumed the related risks and rewards. UBS recognizes these types of arrangements on the balance sheet and do not affectto the income statement. These typesextent of arrangements are kept off-balance sheet, unless (i) they become onerous, (ii) they are considered derivative instruments,its involvement, which, for example, may be in the form of derivatives, guarantees, financing commitments or (iii)servicing rights.

     When UBS, through these arrangements, incurs an obligation from them or becomes entitled to a specific asset. As soon as such an obligation is in-asset, it recognizes them

curred, it is recognized on the balance sheet, with the resulting loss or gain recorded in the income statement.

However, it It should be noted that in many instances the amount recognized on the balance sheet does not represent the full gain or loss potential for loss inherent in such arrangements. For the most part, theGenerally, these arrangements discussed below either meet the financial needs of customers or offer investment opportunities through entities that are not controlled by UBS. The following paragraphs discuss several distinct areas of off-balance sheet arrangements and any potential obligations that may arise from them as of 31 December 2007.
Off-balance sheet arrangements include purchased and retained interests, derivatives and other involvements in non-consolidated entities and structures. UBS has originated such structures and has acquired interests in structures set up by third-parties.third parties.
The following paragraphs discuss several distinct areas of off-balance sheet arrangements.

Risk concentrationspositions

UBS’s main concentrations of risk and other relevant risk positions are disclosed in detail in the audited parts of the “Risk management and control” section “Risk concentrations” inRisk, Treasury and Capital Management 2007.of this report. These risk concentrationspositions include exposures to US mortgage markets, monoline insurers, auction rate certificatessecurities and leveraged finance.finance deals. The quantitative summary about each of these risk concentrationpositions includes exposures of on- and off-balance sheet arrangements.
The importance and the potential impact of such risk concentrationspositions to UBS (with respect to liquidity, capital resources or market and credit risk support), including off-balance sheet structures, isare also described inRisk, Treasury the “Risk and Capital Managementtreasury management” section of this report.

Liquidity facilities and similar obligations

On 31 December 2008 and 31 December 2007,.
The losses UBS had no significant exposure through liquidity facilities and guarantees to structured investment vehicles, conduits and other types of approximately CHF 21.3 billion (USD 18.7 billion)special purpose entities (SPEs). Losses resulting from UBS’s involvementsuch obligations were not significant in the US residential sub-prime2008 and Alt-A mortgage markets are disclosed in detail in Note 3 inFinancial Statements 2007.2007.



                         
Contractual obligationsContractual obligations Contractual obligations 
 Payment due by period  Payment due by period 
CHF million Less than 1 year 1 – 3 years 3 – 5 years More than 5 years  <1 year 1–3 years 3–5 years >5 years 
Long term debt 58,869 68,517 35,735 98,553 
Long-term debt 36,024 42,188 31,869 77,100 
Capital lease obligations 163 301 222 0  63 104 40 0 
Operating leases 1,085 1,929 1,595 3,769  1,034 1,799 1,405 2,573 
Purchase obligations 873 973 41 99  202 166 85 0 
Other long term liabilities 2,549 21 1,564 7 
Other liabilities 3,718 121 1,406 0 
Total
 63,539 71,741 39,157 102,428  41,041 44,378 34,805 79,673 

4947

Strategy, performance and responsibility
Financial performance
Balance sheet and off balance sheet

    
 
Off-balance sheet arrangements, risks,  Disclosure in the annual report 
consolidation and fair value measurements  Disclosure in the Annual Report
  Contractual obligations  Strategy, performance and responsibility, “Off-balance sheet” section
Credit guarantees, performance guarantees, undrawn irrevocable credit facilities, and similar instruments  Strategy, Performanceperformance and Responsibility,responsibility, “Off-balance sheet” section Off-balance sheet arrangements, and Risk, Treasury and Capital Management, section Liquidity and funding management
 
Contractual obligationsPrivate equity funding commitments and equity underwriting commitments  Strategy, Performanceperformance and Responsibility,responsibility, “Off-balance sheet” section Off-balance sheet arrangements
 
Derivative financial instruments  Financial Statements, Notestatements, “Note 23 DerivativesDerivative instruments and Hedge Accountinghedge accounting”
  Credit derivatives  Financial statements, “Note 23 Derivative instruments and hedge accounting”
Leases  Financial Statements, Notestatements, “Note 25 Operating Lease Commitmentslease commitments”
 
Non-consolidated securitization vehicles – agency transactionsStrategy, Performance and Responsibility, section Off-balance sheet arrangements
Non-consolidated securitization vehiclescollaterialized debt obligations – non-agency transactions  Strategy, Performanceperformance and Responsibility,responsibility, “Off-balance sheet” section Off-balance sheet arrangements
  Support to non-consolidated investment funds  Strategy, performance and responsibility, “Off-balance sheet” section
Securitizations (banking book only)Risk and treasury management, “Basel II Pillar 3 disclosures” section
Risk concentrations  Risk Treasury and Capital Management,treasury management, “Risk concentrations” section Risk concentrations
 
Credit risk information  Risk Treasury and Capital Management,treasury management, “Credit risk” section Credit risk
 
Market risk information  Risk Treasury and Capital Management,treasury management, “Market risk” section Market risk
 
Investment risk informationRisk, Treasury and Capital Management, section Investment positions
Liquidity risk information  Risk Treasury and Capital Management, section Treasury and Capital Management, Liquiditytreasury management, “Liquidity and funding managementmanagement” section
 
Consolidation  Financial Statements,statements, “Critical accounting policies” section Critical accounting policies
 
Fair value measurements, including Level 3 sensitivity and Levellevel 3 impact on the income statement consolidation  Financial Statements, Note 26statements, “Note 27 Fair Valuevalue of Financial Instruments
financial instruments” 
 

Liquidity facilities and similar obligations

UBS has no significant exposure through liquidity facilities, guarantees and similar obligations to structured investment vehicles (SIVs), conduits and other types of SPEs. Losses resulting from such obligations were not significant in 2007.

Non-consolidated securitization vehicles and collateralized debt obligations

UBS sponsorssponsored the creation of special purpose entities (SPEs)SPEs that facilitate the securitization of acquired residential and commercial mortgage loans, other financial assets and related securities. UBS also securitizessecuritized customers’ debt obligations in transactions that involveinvolving SPEs which issueissued collateralized debt obligations. A typical securitization transaction of this kind would involveinvolved the transfer of assets into a trust or corporation in return for beneficial interests in the form of securities. Generally, UBS intends a sale of the beneficial interests to third-parties shortly after securitization. Due to illiquid markets for certain instruments linked to the US mortgage market in the second half of 2007, several retained interests could not be sold in the short-term.
UBS does do not have material exposures from guarantees or other forms of credit support to these SPEs. Financial assets held by such trusts and corporations are no longer reported in the consolidated financial statements of UBS once their risks and rewards are transferred to a third-party. For discussionthird-party, e.g. in a sales transaction. Refer to “Note 1 Summary of significant accounting policies” in the financial statements of this report for more information about UBS’s accounting policies regarding securitization activities, see Note 1a11)activities.
Generally, UBS intended to sell the beneficial interests to third parties shortly after securitization but beginning inFinancial Statements 2007.

In a securitization, UBS generally represents that the second half of 2007 and continuing in 2008, certain se- curitized assets meet specific requirements, such as credit rating, type of credit, collateral or documentary attributes. UBS mayretained interests could not be required to repurchase the assets and / or indemnify the purchaser of the assets against lossessold due to any breaches of such representations or warranties. In general, the Group could be required to make future payments under such repurchase and / or indemnification provisions. The maximum amount of these payments correspondsilliquid markets for certain instruments, mainly those linked to the amount of assets held by such securitization-related SPEs as of 31 December 2007US mortgage market.
The volume and under certain circumstances, accrued and unpaid interest on such assets and certain expenses. UBS performs due diligence to ensure the assets comply with requirements set forth in the representations and warranties of the contractual agreements with its counterparties – and this mitigates the potential loss due to such repurchase and / or indemnity. UBS receives no compensation for representations and warranties, and it is not possible to determine their fair value because they rarely, if ever, result in a payment. Historically, losses incurred on such obligations have been insignificant. No liabilities related to such representations, warranties and indemnifications are included in the balance sheet as at 31 December 2007 and 2006.
UBS continually evaluates its involvements with consolidated and non-consolidated SPEs as required under IFRS. Certain events – such as restructurings, the vesting of potential rights and the acquisition, disposition or expirationsize of interests etc. – may prompt reconsideration of the initial consolidation conclusions made by UBS at the inception of its involvement with


50

Non-consolidatedheld in securitization vehicles and Collateralized debt obligations – agency transactions1, 2

             
  
          Purchased and 
CHF billion SPE assets  retained interests 
  Original principal  Current principal    
As of 31 December 2007 outstanding  outstanding  Fair value 
 
Securitizations originated by UBS3
            
 
Residential mortgage  2.1   1.9   0.6 
 
Commercial mortgage  0.4   0.3   0.1 
 
Total
  2.5   2.2   0.7 
 
Securitizations not originated by UBS
            
 
Residential mortgage4
          33.9 
 
1 Reflects material exposures.  2 Residential or commercial mortgage securities backed by an agency of the US Government; the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), or the Federal Home Loan Mortgage Corporation (FHLMC).  3 Structuresstructures originated by UBS include transactions within the scope of US GAAP, Financial Accounting. 140 paragraph 17.  4 Information for special purpose entity assets is not available.

such entities. In these instances, SPEs may be consolidated or de-consolidated as the conditions warrant. In December 2007,and asset-backed securities purchased from third parties declined significantly in 2008, mainly due to market conditions, various non-consolidated CDOs in which UBS held a majority stake in super-senior securities were declared to have breached technical default provisions pursuant to the entities’ governing documents. In these instances, various contingent decision-making rights became immediately vested in the super-senior class holders. UBS determined that, in certain instances, the rights arising from such events caused it to be in control of these entities. The affected SPEs are consolidated in UBS’s statement of financial position as of 31 December 2007. The impact of consolidation was not material to UBS’s financial position or results of operations.following factors:

The portion of purchased and retained interests and derivatives in non-consolidated securitization vehicles and CDOs which relates to the US residential sub-prime, Alt-A and commercial real estate market is included in the section “Risk concentrations” inRisk, Treasury and Capital Management 2007.
–Sale and expected sale of positions to a fund owned and controlled by the Swiss National Bank (for a total volume of USD 38.6 billion).
–Sale of a portfolio of US residential mortgage-backed securities for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP, a third-party entity managed by BlackRock, Inc.
–Several other true sales of asset-backed securities portfolios to third parties without recourse.
–In addition, UBS announced the repositioning of its fixed income, currencies and commodities (FICC) business around client servicing and facilitation. The repositioning includes a substantial downsizing or exiting of real estate, securitization, and proprietary trading activities.
UBS’s involvements in non-consolidated securitization vehicles and CDOs disclosed here are typically managed on a portfolio basis alongside hedges and other offsetting financial instruments. The tables dotable on the next page does not include these offsetting factors and dodoes not represent a measure of risk. ForRefer to the “Risk management and control” section of this report for information on UBS’s risk concentrations refer toRisk, Treasurypositions and Capital Management 2007.risks.
UBS’s involvement in vehicles whose residential and commercial mortgage securities are backed by an agency of the US government – the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), or the Federal Home Loan Mortgage Corpora-


Non-consolidated48

Strategy, performance and responsibility

tion (FHLMC) – is not included in the table below, due to the comprehensive involvement of the US government in these organizations and the significantly lower risk profile.
The numbers in the table are different to the numbers disclosed on securitizations in the “Basel II Pillar 3” section, predominately due to different scopes (for example Pillar 3 disclosures are on banking book positions only, and the consolidation status is different for several vehicles), and to some extent due to a different measurement basis.

Consolidation of securitization vehicles and Collateralized debt obligations – non-agency transactions1CDOs

                     
  
              Purchased and    
              retained interests  Derivatives held by 
CHF billion Total SPE assets  held by UBS  UBS 
  Original principal  Current principal  Delinquency       
As of 31 December 2007 outstanding  outstanding  amounts  Fair value  Fair value 
 
Originated by UBS2
                    
 
CDOs and CLOs
                    
 
Residential mortgage  2.8   2.8   0.0   0.8   (0.1)
 
Commercial mortgage  6.0   6.0   0.0   0.2   0.0 
 
Other ABS  12.8   3   0.0   5.3   0.0 
 
Securitizations
                    
 
Residential mortgage  2.9   2.6   0.2   0.4   0.0 
 
Commercial mortgage  7.8   7.8   0.0   0.5   0.0 
 
Other ABS  2.1   3   3   0.2   0.0 
 
Total
  34.4   3   3   7.4   (0.1)
 
Not originated by UBS
                    
 
CDOs and CLOs
                    
 
Residential mortgage  103.9   100.5   0.0   0.2   0.3 
 
Commercial mortgage  38.8   35.1   0.0   2.0   (0.6)
 
Other ABS  51.6   3   0.0   11.5   (3.9)
 
Securitizations
                    
 
Residential mortgage  742.6   3   16.9   21.4   0.2 
 
Commercial mortgage  224.2   206.3   0.7   5.2   0.1 
 
Other ABS  182.2   3   2.8   10.7   0.0 
 
Total
  1,343.3   3   20.4   51.0   (3.9)
 
UBS continually evaluates whether triggering events require the reconsideration of the consolidation conclusions made at the inception of its involvement with securitization vehicles and CDOs. Triggering events generally include items such as major restructurings, the vesting of potential rights and the acquisition, disposition or expiration of interests. In these instances, SPEs may be consolidated or de-consolidated in light of the changed conditions. Starting in December 2007 and during 2008, due to adverse market conditions, various non-consolidated vehicles in which UBS held a majority stake in super senior securities were declared to have

breached default provisions pursuant to the entities’ governing documents. In these instances, various contingent decision-making rights became immediately vested in the super-senior class holders. As a consequence, UBS determined that, in certain instances, the rights arising from such events caused it to be in control of these entities and therefore UBS had to consolidate the affected entities. The consolidation had no material incremental impact on UBS’s income statement and balance sheet.

Risks resulting from non-consolidated securitization vehicles and CDOs

The “Risk management and control” section of this report provides detailed disclosure of UBS’s main risk concentrations, as well as risks associated with UBS’s involvement in consolidated and non-consolidated US mortgage securitization vehicles and CDOs. If future consolidation of additional securitization vehicles is required by accounting standards, UBS does not expect this would have a significant impact on its risk exposure, capital, financial position or results of operations. Positions with significant impact on the income statement are disclosed in “Note 3 Net interest and trading income” in the financial statements of this report.



                         
Non-consolidated securitization vehicles and collateralized debt obligations – non-agency transactions1
CHF billion Total SPE assets Involvements in non-consolidated SPEs held by UBS 
              Purchased and    
  Original  Current      retained interests, and    
  principal  principal  Delinquency  loans held by UBS2  Derivatives held by UBS
   
As of 31 December 2008 outstanding  outstanding  amounts  Fair value  Fair value  Nominal value 
 
Originated by UBS3
                        
 
CDOs and CLOs
                        
 
Residential mortgage  23.1   8.8   0.5   1.1   0.6   4.0 
 
Commercial mortgage  0.0   0.0   0.0   0.1   (0.5)  0.7 
 
Other ABS  0.5   0.5   0.0   0.0   0.1   0.1 
 
Securitizations
                        
 
Residential mortgage  57.3   43.1   2.3   0.0   (0.3)  12.7 
 
Commercial mortgage  21.2   17.3   1.4   0.2   0.0   0.0 
 
Other ABS  3.8   1.1   0.1   0.0   0.0   5.1 
 
Total
  105.9   70.8   4.3   1.4   (0.1)  22.6 
 
Not originated by UBS
                        
 
CDOs and CLOs
                        
 
Residential mortgage  330.8   169.5   17.1   3.4   1.9   8.7 
 
Commercial mortgage  6.7   1.3   0.0   0.6   0.1   0.9 
 
Other ABS  53.1   18.6   0.7   4.8   1.2   3.4 
 
Securitizations
                        
 
Residential mortgage  1,259.7   616.5   81.6   3.5   (2.4)  29.1 
 
Commercial mortgage  555.0   476.1   3.7   4.2   0.0   0.0 
 
Other ABS  301.7   142.8   5.5   3.4   0.0   2.2 
 
Total
  2,507.0   1,424.8   108.6   19.9   0.8   44.3 
 
1 Reflects material exposures.Includes all purchased and retained interests and derivatives held by UBS which are considered involvements in non-consolidated securitization vehicles and CDOs (under IFRS). This implies for example that UBS would include an insignificant involvement in such a vehicle into the table (under “Involvements in non-consolidated SPEs held by UBS”), whereas the pool assets held by such vehicle would be included under “Total SPE assets”. The size of the pool assets of such vehicle can be very high, but relates to third parties, if UBS’s involvement is insignificant. The “Total SPE assets” include information which UBS could gather after making exhaustive efforts but excludes data which UBS was unable to receive (in sufficient quality), especially for structures originated by third parties.  2Loans and receivables have been included in this column with a carrying value of CHF 1.0 billion for structures originated by UBS and CHF 9.9 billion for structures not originated by UBS.  3 Structures originated by UBS presented in this SEC disclosure include transactions within the scope of US GAAP, Financial Accounting Standard 140, paragraph 17.3 Information is not available.

5149

Strategy, performance and responsibility
Financial performance
Balance sheet and off balance sheet

InvestmentSupport to non-consolidated investment funds

Purchase of commercial papers and other securities

UBS Global Asset Management has not purchased commercial paper or other securities issued by an off-balance sheet entity (including investment funds) that it manages (other than seed money at origination of the fund).
In its wealth management business, UBS issues in the ordinary course of business, UBS issues investment certificatescer-tificates to third-parties whichthird parties that are linked to the performance of non-consolidated investment funds. Such investment funds are originated either originated by UBS or by third-parties.third parties. For hedging purposes, UBS generally invests intoin the funds to which its obligations from the certificates are linked. Risks resulting from thosethese contracts are considered minimal, as the full performance of the funds is passed on to third parties. The Investment Bank is involved in similar structures, such as those due to the issuance of notes, index certificates and related hedging activities.

Other types

In 2008, as a result of the financial markets crisis which caused declining asset values, market illiquidity and de-leveraging by investors, UBS supported several non-consolidated investment funds that it manages in its wealth and asset management businesses. UBS provided this support primarily to facilitate redemption requests of fund investments by clients. Material support was provided in the form of collateralized financing, direct acquisition of fund units and purchases of assets from the funds. The support provided by UBS to these investment funds was made where there are regulatory or other legal requirements or other exceptional considerations. During 2008, material support has been provided as follows: fund units were acquired in the amount of CHF 0.8 billion; assets purchased from such funds amounted to CHF 0.7 billion; and fully collateralized financing provided to the funds was CHF 2.4 billion at 31 December 2008 and decreased significantly in early 2009. Guarantees granted to third-parties in the context of these non-consolidated funds were immaterial at 31 December 2008. Losses incurred in 2008 as a result of such fund support were immaterial.
Acquired fund units and fund assets are generally accounted for as financial investments available-for-sale, and are included into the respective risk disclosures in the “Risk management and control” section of this report. Financing provided by UBS at 31 December 2008 was included in the credit risk disclosures.
In the second half of 2007, UBS Global Asset Management purchased financial assets, predominately US RMBS, from investment funds managed by UBS. The acquisition of financial assets owned by these investment funds was executed to maintain a stable net asset value of USD 1 per unit or to facilitate the orderly redemption of a fund in an unfavorable market environment. The acquired financial assets include predominantly asset-backed US mortgage instruments. The total loss resulting from the purchases, writedowns and sales of acquired financial assets amountsamounted to approximately USD 68 million0.1 billion in 2007, of which USD 66 million relatesthe majority related to transactions with a fund consolidated at 31 December 2007 and 2008 in UBS’s financial statements. The support provided to these investment funds has been made on a voluntary basis and cannot be expected to be provided to other investment funds in similar situations.
During 2007, and until 6 March 2008, UBS was not required to support any money market fund which is subject to the Investment Company Act due to past industry practice.
In addition, in the ordinary course of business, UBS’s wealth and asset management businesses provide short-term funding facilities to UBS managedUBS-managed investment funds. This bridges time

lags in fund unit redemptions and subscriptions. These bridge financings did not incur past losses and are not expected to result inbe paid without significant future losses.
Should UBS be required to consolidate previously uncon-solidatedunconsolidated investment funds in the future, it expects no significant impact on debt covenants, capital ratios, credit ratingsrat-

ings and dividends. However, future fund support itself, depending on its size, could impact these measures.
Depending on market developments in 20082009 and beyond, it is possible that Global Asset ManagementUBS may decide to provide financial support to one or more of its investment funds. Such decisions will be taken on a case-by-case basis depending upon market and other circumstances pertaining at the time. The risks incurred by providing such support will depend on the type of support provided and the riskiness of the assets held by the fund(s) in question. If UBS were to provide extensive financial support to some of its investment funds, losses incurred as a result of such support could become material.

Leveraged finance deals

UBS has leveraged finance commitments entered into both before and after the market dislocation in July 2007.
Transactions since this dislocation typically have pricing terms and covenant and credit protection that are more favorable to underwriters and investors than those entered into in the first half of 2007. On 31 December 2007, of the total commitments of USD 11.4 billion, commitments entered into by UBS before the dislocation (“old deals”) amounted to USD 5.6 billion while those entered into subsequent to the dislocation (“new deals”) totaled USD 5.8 billion. Commitments in the amount of USD 4.2 billion are unfunded.

Guarantees and similar obligations

UBS issues the following in the normal course of business: various forms of guarantees; commitments to extend credit; standby and other letters of credit to support its customers; commitments to enter into repurchase agreements; note issuance facilities; and revolving underwriting facilities. With the exception of related premiums, these guarantees and similar obligations are kept off-balance sheet unless a provision to cover probablyprobable losses is required.
On 31 December 2007,2008, the net exposure to credit risk for contingent claims,credit guarantees and similar instruments, based on IFRS numbers, was CHF



Contingent claims and undrawn credit facilities

                         
  
  31.12.07  31.12.06 
      Sub-          Sub-    
CHF million Gross  participations  Net  Gross  participations  Net 
 
Credit guarantees and similar instruments  13,381   (593)  12,788   12,142   (813)  11,329 
 
Performance guarantees and similar instruments  3,969   (464)  3,505   3,199   (333)  2,866 
 
Documentary credits  3,474   (517)  2,957   2,567   (238)  2,329 
 
Total contingent claims
  20,824   (1,574)  19,250   17,908   (1,384)  16,524 
 
Undrawn irrevocable credit facilities
  83,980   (2)  83,978   97,287   (2)  97,285 
 

52

19.3 18.5 billion compared towith CHF 16.519.3 billion one year earlier. Fee income from issuing guarantees is not material to total revenues.
Guarantees represent irrevocable assurances, subject to the satisfaction of certain conditions, that the Group will make payment in the event that customers fail to fulfill their obligations to third-parties.third parties. The Group also enters into commitments to extend credit in the form of credit lines that are available to secure the liquidity needs of customers but have not yet been drawn on by them, the majority of which range in maturity from one month to five years. If customers fail to meet their obligations, the maximum amount at risk for the Group is the contractual amount of these instruments. The risk is similar to the risk involved in extending loan facilities and is subject to the same risk management and control framework. For the year ended 31 December 2008, the Group recognized net credit loss recoveries of CHF 18 million; and for the years ended 31 December 2007 and 2006, the Group recognized net credit loss recoveries of CHF 3 million; and for the years ended 31 December 2006 and 2005, the Group recognized net credit loss recoveries of CHF 10 million and CHF 3910 million respectively, related to obligations incurred for contingencies and commitments. Provisions recognized for guarantees, documentary credits and similar instruments were CHF 31 million at 31 December 2008 and CHF 63 million at 31 December 2007 and CHF 76 million at 31 December 2006. See also Note 20 inFinancial Statements 2007.2007.
The Group generallypartially enters into sub-participations to mitigate the risks from commitments and contingencies. A sub-participation is an agreement by another party to take a share of the loss in the event that the obligation is not fulfilled by the obligor and, where applicable, to fund a part of



50

Strategy, performance and responsibility

the credit facility. The Group retains the contractual relationship with the obligor, and the sub-participant has only an indirect relationship. The Group will only enter into sub-participation agreements with banks to which UBS ascribes a credit rating equal to or better than that of the obligor.
Furthermore, UBS provides representations, warranties and indemnifications to third-partiesthird parties in connection with numerous transactions, such as asset securitizations (as described earlier in this section).securitizations.

Clearinghouse and future exchange memberships

UBS is a member of numerous securities and futures exchanges and clearinghouses. In associationconnection with some of those memberships, UBS may be required to pay a share of the financial obligations of another member who defaults, or otherwise be exposed to additional financial obligations as a result. While the membership rules vary, obligations generally would arise only if the exchange or clearinghouse had exhausted its resources. The maximum exposure to credit loss is not reflected in the table on exposure to credit risk in the section “Credit risk” inRisk, Treasury and Capital Management 2007.UBS considers the probability of a material loss due to such obligations to be remote.

Swiss deposit insurance

Effective 1 January 2006, Swiss Banking Lawbanking law and the newly established deposit insurance system require Swiss banks and securities dealers to jointly guarantee an

amount of up to CHF 46 billion for privileged client deposits in the event that a Swiss bank or securities dealer becomes insolvent. For the period from 1 July 200720 December 2008 to 30 June 2008, the Swiss Federal Banking Commission2009, FINMA estimates UBS’s share in the deposit insurance system to be CHF 846 million.1.2 billion. The deposit insurance is a guarantee and exposes UBS to additional risk which is not reflected in the table on exposure“Exposure to credit risk – UBS Group” table in the section “Credit risk” inRisk, Treasury and Capital Management 2007.section of this report. At 31 December 2007,2008, UBS considers the probability of a material loss from its obligation to be remote.

Private equity funding commitments and equity underwriting commitments

The Group enters into commitments to fund external private equity funds and investments, which typically expire within five to ten years. The commitments themselves do not involve credit or market risk asgenerally require the Group to fund external private equity funds purchaseand investments at market value at the time the commitments are drawn. The amount committed to fund these investments at 31 December 20072008 and 31 December 20062007 was CHF 440 million0.5 billion and CHF 766 million0.4 billion respectively. Equity underwriting commitments in the Investment Bank amounted to CHF 0.4 billion at 31 December 2008.



53Commitments1

The table below shows the maximum committed amount of commitments.

                         
  31.12.08  31.12.07 
      Sub-          Sub-    
CHF million Gross  participations  Net  Gross  participations  Net 
 
Credit guarantees and similar instruments  13,124   (344)  12,780   13,381   (593)  12,788 
 
Performance guarantees and similar instruments  3,596   (446)  3,150   3,969   (464)  3,505 
 
Documentary credits  2,979   (415)  2,564   3,474   (517)  2,957 
 
Total commitments
  19,699   (1,205)  18,494   20,824   (1,574)  19,250 
 
Undrawn irrevocable credit facilities
  60,316   (1)  60,315   83,980   (2)  83,978 
 
1 Includes only credit and performance guarantees and similar instruments, documentary credits, and undrawn irrevocable credit facilities. On 31 December 2008, the commitment to repurchase auction rate securities was recognized on UBS’s balance sheet as a negative replacement value for CHF 1,028 million (USD 964 million). It is not included into this table. Refer to the “Exposure to auction rate securities” sidebar in the “Risk concentrations” section of this report for more information.

51

Strategy, performance and responsibility
Financial performance
Cash flows

Cash flows

2008

At 31 December 2008, the level of cash and cash equivalents rose to CHF 179.7 billion, up CHF 30.6 billion from CHF 149.1 billion at the end of 2007.

Operating activities

Operating activities generated a cash inflow of CHF 77.2 billion in 2008 compared with a cash outflow of CHF 52.1 billion in 2007. Operating cash outflows (before changes in operating assets and liabilities and income taxes paid) totaled CHF 71.2 billion in 2008, an increase of CHF 67.5 billion from 2007. Net profit decreased CHF 15.6 billion compared with 2007.
Cash inflow of CHF 402.8 billion was generated by the net decrease in operating assets, while a cash outflow of CHF 253.5 billion was reflected in the operating liabilities. The increase in cash was used to fund the operating liabilities. Payments to tax authorities were CHF 0.9 billion in 2008, down CHF 2.8 billion from a year earlier.

Investing activities

Net cash flow used in investing activities was CHF 1.7 billion compared with an overall cash inflow of CHF 2.8 billion in 2007. The net cash outflow for investments in subsidiaries and associates was CHF 1.5 billion, compared with CHF 2.3 billion in 2007, due to the acquisitions of Caisse Centrale de Réescompte Group (CCR) and VermogensGroep and a net increase in the purchase of property and equipment of CHF 1.1 billion. The net investment of financial investments available for sale was CHF 0.7 billion, whereas in 2007 the divestments generated cash inflows of CHF 6 billion. Disposals of subsidiaries and associates in 2008 generated a cash inflow of CHF 1.7 billion. Refer to “Note 36 Business combinations” and “Note 38 Reorganizations and disposals” in the financial statements of this report for more information about UBS’s investing activities in 2008 and 2007.

Financing activities

In 2008, financing activities generated cash outflows of CHF 5.6 billion. This reflected the net repayment of money market paper of CHF 40.6 billion and the issuance of CHF 103.1 billion in long-term debt – the latter significantly outpacing long-term debt repayments, which totaled CHF 92.9 billion. That outflow was partly offset by inflows attributable to capital issuances of CHF 23.1 billion, including CHF 15.6 billion from rights issues and CHF 7.6 billion from

mandatory convertible notes. In 2007, UBS had a net cash inflow of CHF 74.6 billion from financing activities. The difference between the two years was mainly due to the fact that net long-term debt repayments and money market paper repaid, amounting to CHF 111.6 billion in 2008, were only partially compensated by the cash increase due to the capital issuances.

2007

At the end of31 December 2007, the level of cash and cash equivalents rose to CHF 149.1 billion, up CHF 13.0 billion from CHF 136.1 billion at end-2006.the end of 2006.

Operating activities

Net cash flow used in operating activities was CHF 51.352.1 billion in 2007 compared towith a cash outflow of CHF 4.95.4 billion in 2006. Operating cash outflows (before changes in operating assets and liabilities and income taxes paid) totaled CHF 2.93.7 billion in 2007, a decrease of CHF 17.918.2 billion from 2006. Net profit decreased by CHF 16.616.7 billion compared towith 2006.
Cash inflow of CHF 218.9 billion was generated by the net decrease in operating assets. Thisassets, while a cash inflowoutflow of CHF 263.6 billion was reflected in the operating liabilities. The increase in cash was used to partially repayfund the operating liabilities which totaled CHF 263.6 billion.liabilities. Payments to tax authorities were CHF 3.7 billion in 2007, up CHF 1.1 billion from a year earlier.

Investing activities

Investing activities generated a cash inflow of CHF 2.8 billion. The net cash outflow for investments in subsidiaries and associates was CHF 2.3 billion due to the acquisitions of McDonaldthe branch network of McDonalds Investments and 51% of Daehan Investment Trust Management Company Ltd. (DIMCO) and a net increase in purchasesthe purchase of property and equipment of CHF 1.8 billion. The net divestment of financial investments available for sale was CHF 6.0 billion, mainly due to theUBS’s sale of its 20.7% stake in Julius Baer which contributedfor CHF 3.9 billion. Disposals of subsidiaries and associates in 2007 generated a cash inflow of CHF 0.9 billion. In 2006, the net cash inflow from investing activities was CHF 4.4 billion. Cash inflows of CHF 6.4 billion were offset by the acquisition ofacquired new businesses forworth CHF 3.5 billion. Purchases of property and equipment totaled CHF 1.8 billion and the net divestment of financial investments available for sale totaledwas CHF 1.7 billion. Disposals of subsidiaries and associates in 2006 generated a cash inflow of CHF 1.2 billion.



52

Strategy, performance and responsibility

Financing activities

In 2007, financing activities generated cash flows of CHF 73.874.6 billion, which werewas used to finance the expansion of business activities. This reflected the net issuance of money market paper of CHF 32.7 billion and the issuance of CHF 110.9 billion in long-term debt – the latter significantly outpacing long-term debt repayments, which totaled CHF 62.4 billion. That

inflow was partly offset by outflows attributable to net movements in treasury shares and own equity derivative activity (CHF 3.62.8 billion), and dividend payments

(CHF (CHF 4.3 billion). In 2006, UBS also had a net cash inflow of CHF 47.648.1 billion from financing activities. The difference between the two years was mainly due to the fact that net long-term debt issuance and money markedmarket paper increased by CHF 26.3 billion in 2007.

2006

At the end of 2006, the level of cash and cash equivalents rose to CHF 136.1 billion, up CHF 45.1 billion from CHF 91.0 billion at end-2005.

Operating activities

Net cash flow used in operating activities was CHF 4.9 billion in 2006 compared to a cash outflow of CHF 63.2 billion in 2005. Operating cash inflows (before changes in operating assets and liabilities and income taxes paid) totaled CHF 15.0 billion in 2006, an increase of CHF 0.4 billion from 2005. The net profit decreased by CHF 1.9 billion compared to 2005.
Cash of CHF 98.7 billion was used to fund the net increase in operating assets, while a net increase in operating liabilities generated cash inflows of CHF 81.3 billion. The increase in cash was used to fund operating assets – in line with the expansion of business. Payments to tax authorities were CHF 2.6 billion in 2006, up CHF 0.2 billion from a year earlier.

Investing activities

Investing activities generated a cash inflow of CHF 4.4 billion. Cash inflows of CHF 2.9 billion reflected cash equivalents received of CHF 6.4 billion, partly offset by the acquisition of new businesses for CHF 3.5 billion. Purchases of property and equipment totaled CHF 1.8 billion and the net divestment of financial investments available for sale was CHF 1.7 billion. Disposals of subsidiaries and associates in 2006 generated a cash inflow of CHF 1.2 billion, mainly due to the sale of Motor-Columbus. In 2005, UBS saw a net cash outflow from investing activities of CHF 2.4 billion. This was due to the acquisition of new businesses worth CHF 1.5 billion and because UBS made CHF 1.6 billion in net purchases of property and equipment. This was only partially offset by disposals of subsidiaries and associates.

Financing activities

In 2006, financing activities generated cash flows of CHF 47.6 billion, which was used to finance the expansion of business activities. This reflected the net issuance of money market paper of CHF 16.9 billion and the issuance of CHF



5453

97.7 billion in long-term debt – the latter significantly outpacing long-term debt repayments, which totaled CHF 59.7 billion. That inflow was partly offset by outflows attributable to net movements in treasury sharesStrategy, performance and own equity derivative activity (CHF 3.6 billion), and dividend payments (CHF
3.2 billion). In 2005, responsibility
UBS also had a net cash inflow of CHF 64.5 billion from its financing activities. The difference be- tween the two years was mainly due to the fact that net long-term debt issuance and money marked paper decreased by CHF 14.2 billion in 2006.


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employees

UBS employees

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UBS employees

–UBS invests in its employees – increasing their value to both the firm and its clients
–Business operations are supported by high-quality people management processes
–UBS places importance on skill-development and career-building opportunities
–Employees are appropriately rewarded for their performance, results and commitment

Strategic focus

UBS relies on the skill and dedication of its employees to deliver the solutions and service its clients demand.

The firm continually invests in its people and ensures organization-wide processes are in place to support this.

Increases in employee skill and productivity over time will support the growth of UBS’s businesses. To drive business growth from within, UBS seeks to retain and develop its own workforce, as illustrated by the firm’s staffing, people management, training and compensation policies and practices. The chart “Investing in employees” on the opposite page illustrates this.

Collaboration and respect underpin the firm-wide culture of valuing individual contributions and excellence. UBS fosters a performance-oriented environment, in which pay is linked to performance and compensation is linked to the achievement of business objectives.

Developments in 2007

–The UBS workforce (in terms of total full-time equivalents) grew to 83,560, up 5,420, or 7%, from 78,140 on 31 December 2006
–Global Wealth Management & Business Banking accounted for more than half of the growth, with 3,056 new staff
–Graduate recruiting remained strong; hiring increased about 10% from 2006
–This growth occurred despite the difficult market conditions and related staff reductions of about 900 in the Investment Bank
–Other significant achievements included: opening the Singapore-based UBS Wealth Management Campus – Asia Pacific, the launch of the “UBS Career Comeback” program, allowing people to resume their career in financial services after a break, and ongoing external recognition as an excellent employer



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Investing in employees

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UBS employees

UBS employees

Investing in UBS employees

UBS relies on the expertise and commitment of its employees to delivermeet clients’ needs. For employees, UBS’s wide range of businesses, global career opportunities and an open and collaborative culture offer a platform for individual success.

Investing in UBS employees

UBS relies on the solutionsexpertise, talent and the quality of service demanded by its clients. “Human capital return on investment” is used by UBS as an indicator of the increase in skill and productivitycommitment of its workforce, in combination with financial performance. In 2007, UBS’s human capital return on investment showed a decreaseemployees to meet clients’ needs and deliver results for the year. As shownfirm. Engaging, developing and retaining a high-value workforce is therefore a priority, and in the graph at the right, following a steady increase from 2002 until the first half of 2007,2008 UBS continued to judiciously invest in its return on investment declined in the second half of 2007. This decrease is principally the result of a continued investment in the bank’s workforce despite the quick and steep deterioration in market conditions in the second half of 2007.personnel. This investment however, should provewill help ensure that the firm has the range of skills and experience necessary to be centralmeet client needs now and to UBS’s ability to grow the firm when market conditions stabilize.

The firmimprove. UBS invests in developing and motivating its employees whether they are new hires, seasoned employees,staff, key talent or senior managers. The graph below highlights the most important factors driving the value created by UBS personnel.

Staffing

UBS workforce

The number of people employed in the financial businesses was 83,560 on 31 December 2007, up 7%, or 5,420, from 78,140 at the end of 2006. Staff levels increaseddecreased in allmost UBS businesses over the course of the year.
Inyear, with the Swiss and international wealth management business, where personnel increased by 2,247, investment contin-

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ued in growth markets such as Asia Pacific and Europe. The number of client advisors in Switzerland also increased. Staff levels in the US-based wealth management business rose by 790, after the February 2007 integration of the McDonald Investments private client network and related hiring (in support of divisional and home office growth initiatives). This was partly offset by staff reductions in certain business areas, mainly IT and operations. The Swiss commercial and retail banking business increased personnel numbers by 19, as more IT staff were required to support both growing business volumes and new hires in the Swiss domestic banking business. The asset management business raised staff levels across all areas, hiring a total of 189 new employees in the context of business growth and acquisitions. The increase was partly offset by declines re-



Investing in employees

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lated to the closure of Dillon Read Capital Management (DRCM) in second quarterpeople employed on 31 December 2008 at 77,783, down 5,777 or 7% from year-end 2007. The Investment Bank’s staff levels were essentially flat year-on-year, only increasing by 33. As announced in October, the Investment Bank reduced its personnel levels by 901 people during fourth quarter and informed around 430 employees that they will have to leave the bank in the course of first quarter 2008. This decrease was offset by the annual intake of graduates and reintegration of DRCM staff. In Corporate Center, personnel numbers were up by 2,142, mainly a result of converting former Perot staff members to permanent IT Infrastructure employees. Demand for offshoring services increased as well, driving up staff levels in the UBS Service Centre in Hyderabad.

In 2007,2008, UBS personnel worked in more than 5060 countries, with about 38% of staff employed in the Americas, 33%34% in Switzerland, 16%15% in Europe, the Middle East & Africa and 12%13% in Asia Pacific. Growth continued to be strongest in Asia Pacific, where staff levels rose 31% in 2007, following a 41% rise in 2006.
Internal job mobility across both businesses and regions, drivesencourages business innovation and individual career development. The exchange of knowledge and experience benefitsMobility across regions increased slightly in 2008, with 1,285 employees and their teams, allowing UBS to better implement and benefit from its integrated “one-firm” approach. In 2007, 1,062 employees movedmoving to roles in a different region.region, versus 1,062 in 2007. The highest

Gender distribution by geographical region1

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number of employees transferred from Switzerland, with 125143 going to Asia Pacific, 92 going to the Americas, 107 to Asia Pacific, 6763 to the UK and 5357 to locations in Europe, the Middle East & Africa. Overall,Cross-division mobility in the businesses was slightly lower in 20072008 than in 2006,2007, with 903784 employees transferring from one business group to anotherchanging divisions during the course of



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Strategy, performance and responsibility

Personnel
Regional distribution

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Business unit distribution

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the year, versus 909903 in 2006. The highest number of2007. At 238 employees, transfers (at 184 employees) were betweenfrom the Investment Bank andto Global Wealth Management & Business Banking.

Banking were most common.

Recruiting staff

Recruiting efforts aim at hiring highly qualified people in orderIn 2008, UBS continued to maintain and expand UBS’s long-term position as a major global financial services institution. In 2007, the firm significantly increased recruitmentrecruit staff in the key markets in which it operates, although the firm sought throughout the

year to reduce personnel costs, increase personnel efficiency and soughtimprove the ratio of front-office to recruit specialistsback-office staff. As UBS believes the long-term trends for wealth and asset management remain positive, particular emphasis was placed on hiring client advisors in non-traditional markets such as India2008. Among other things, a new “Fast Forward” initiative was introduced to improve the hiring, retention and Poland.productivity of client advisors and front-office managers. More effective recruitment, integration, and skill and competency development processes are supported by line manager coaching.

To further improve the quality of all candidates, better match open jobs with the right candidate and more successfully integrate new hires, UBS standardized its approach to sourcing, selecting and “on-boarding” new hires globally in 2008. Additionally, Global Wealth Management & Business Banking launched an internal marketplace aimed at filling vacancies with internal candidates.
TheIn regard to graduate recruitment, UBS developed a firm-wide campus recruiting strategy in 2008, creating a cross-division governance body and aligning marketing with the needs of “Generation Y” (20- to 30-year-olds) to enhance the UBS brand within this recruitment segment. A more interactive website and focused print materials support a globally consistent candidate experience. UBS also focused on enhancing relationships with target schools in 2008 through a new university relations strategy, while global sourcing efforts targeted bilingual graduates overseas for UBS’s businesses in the Asia Pacific region. For the fourth straight year, global consultant Universum ranked UBS the number ofone employer for business students in Switzerland.
In 2008, UBS hired more than 1,100 university graduates UBS hired for its undergraduate and MBA training programs across the firm was over 1,000 in 2007, an increase of about 10% from 2006. In Asia Pacific, where the business grew strongly last year, the number of undergraduate, MBA and intern hires rose by 52%. In Switzerland, theprograms. The UBS apprenticeship program (for students in secondary schools specializing in banking or IT)Switzerland hired 286304 apprentices in 2007, 26 more apprentices than in 2006, bringing the total number of apprenticeship positions

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to 830.2008, up 9% from 2007. In total, around 1,900 young people participated in vocational training in Switzerland in 2007.

UBS also remained oneGlobal Wealth Management & Business Banking interns and graduate trainees represent approximately 1% of the top-ranked employersworkforce. In response to external market conditions, the Investment Bank instituted a graduate deferral program for university2008, in which 43 graduates postponed their start dates at UBS for up to one year to engage in Switzerland, with global consultant Universum ranking UBS number one for business students in Switzerland for the third straight year. In the UK, UBS was the 24th “most ideal employer” among business students, up from forty-first two years earlier. In the US,BusinessWeekmagazine named UBS among the top 50 places to launch a career in 2007.
A newcommunity service for all new employees, both graduates and professional hires, was the introduction of the “New Joiner Experience” in 2007. Its core is a series of locally customizable online guides to allow new employees to gain an overview of UBS’s global organization and culture and to settle quickly into their role. It also includes networking and information events, as well as a survey and measurement framework.or pursue educational opportunities.



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UBS employees

Gender distribution by employee category1

                                     
 
On 31.12.08 Officers Non-officers Total
 Officers Non-officers Total  Number % Number %     
As of 31.12.07 Number % Number %     
Male 34,622 73.5 18,204 47.8 52,826 62.0  30,788 75.0 18,337 48.1 49,125 62.1 
Female 12,496 26.5 19,886 52.2 32,382 38.0  10,283 25.0 19,758 51.9 30,041 37.9 
Total 47,118 100.0 38,090 100.0 85,208 100.0  41,071 100.0 38,095 100.0 79,166 100.0 
1 Calculated on the basis that a person (working full-time or part-time) is considered one headcount in this table only. This accounts for the total UBS end-2007year-end 2008 employee number of 85,208 in this table. Normally, UBS expresses employee numbers in terms of full-time equivalents (FTEs), which is measured as a percentage of the standard hours normally worked by permanent full-time staff. When calculated according to full-time equivalents, the end-2007 total is 83,560.

Developing and sustaining a diverse workforce

UBS considers diversity to include the recognition and appreciation of multiple backgrounds, cultures and perspectives. Citizens from 154 countries comprise the UBS workforce. The largest number of employees, as measured by primary citizenship, hold US or Swiss citizenship (34% and 27%, respectively), followed by British citizenship (9%).
Over the past five years, UBS has promoted diversity in three stages. At the start of this program, a focus was placed on raising basic awareness of diversity, its meaning and its implications. UBS concentrated on developing policies, creating teams and building senior management commitment. The second phase integrated diversity into UBS’s working practices, such as recruiting, performance management and talent development. In 2007, the third phase was launched, in which diversity will ultimately become a self-sustaining part of UBS’s culture. This will require personal ownership, line manager accountability and successfully linking diversity to revenue generation.
In 2007, UBS also continued to build a diverse workforce through a variety of programs and processes across the organization. Managing and executive directors were asked to set personal diversity objectives in the performance management system. Additionally, since 2005, more than 3,000 se-

nior managers have attended actor-based diversity training sessions that give them demonstrated behavioral options to handle potential issues within teams. In 2007, online diversity training was rolled out to Investment Bank, Global Asset Management and operational Corporate Center staff to provide basic diversity education and extend the actor-based training concepts to a wider audience. Approximately 10,000 employees took the training in the first three months. Global Wealth Management & Business Banking employees were offered access to the training in early 2008.
New programs and policies were introduced in 2007 that help employees better manage their work and personal lives. In the UK for example, the maternity support program aims to prepare employees for maternity or adoption leave, as well as training line managers in the handling of related issues. In the US, UBS introduced two annual paid family care days in 2007, available in addition to regular vacation and personal days. UBS also has over 20 employee networks addressing cultural awareness, disability, family, heritage, sexual orientation, gender and other aspects of diversity, which provide a forum for employees’ involvement in diversity-related activities.
Efforts aimed at external audiences in 2007 included “UBS Career Comeback”, a new program targeting professional


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Composition of UBS’s workforce by citizenship1

             
  
As of 31.12.07 
      % change  Total % of 
Country Number  from 2006  citizenship 
 
USA  29,019   (1.5)  34.1 
 
Switzerland  23,412   (1.6)  27.5 
 
United Kingdom  8,008   (0.2)  9.4 
 
Germany  3,669   0.3   4.3 
 
India  2,422   1.1   2.8 
 
Australia  1,865   0.0   2.2 
 
Italy  1,794   0.0   2.1 
 
Singapore  1,536   0.2   1.8 
 
France  1,372   0.1   1.6 
 
Hong Kong  1,329   0.2   1.6 
 
Japan  1,163   0.1   1.4 
 
China  921   0.5   1.1 
 
Canada  799   0.0   0.9 
 
Spain  762   0.0   0.9 
 
Russia  452   0.0   0.5 
 
Taiwan  451   0.1   0.5 
 
Ireland  339   0.0   0.4 
 
Austria  298   0.0   0.4 
 
Malaysia  259   0.0   0.3 
 
Belgium  226   0.0   0.3 
 
Other countries  5,112   0.6   6.0 
 
Total
  85,208       100.0 
 
1 As measured by primary citizenship. Calculated on the basis that a person (working full-time or part-time) is considered one headcount in this table only. This accounts for the total UBS end-2007 employee number of 85,20879,166 in this table. Normally, UBS expresses employee numbers in terms of full-time equivalents (FTEs), which is measured as a percentage of the standard hours normally worked by permanent full-time staff. When calculated according to FTEs, the end-2007year-end 2008 total is 83,560.77,783.

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Strategy, performance and responsibility
UBS employees

Developing and sustaining a diverse workforce

A workforce of people from different backgrounds, cultures and experiences is indispensable in some instances men, who had lefttoday’s global business environment, in part because it can help enhance understanding of regional markets and sensitivity to cultural norms and labor market issues. In 2008, the work-forceUBS workforce included citizens of 153 countries. The scope of UBS’s diversity initiatives is global, with 10 regional diversity boards translating this global commitment into regional action, working with local business and now would likeHR leaders. In addition, more than 20 employee networks globally help to return to professional employmentbuild cross-business relationships and strengthen UBS’s inclusive culture.
Over the past six years, UBS has promoted diversity in the financial industry. Participants must havethree stages: raising basic awareness; integrating diversity into management processes such as recruiting and performance management; and ensuring that diversity ultimately becomes a minimum of five years of relevant work experience and be seeking to return to the workforce after an 18-month to seven-year period away from the industry. In March 2007, the program was launched with the Wharton School (of business)selfsustaining part of the University of Pennsylvania. Three months later, 28% of the 60 participants were working either full-time or part-time at various companies, including UBS. The program was expandedworkplace culture. In 2008, efforts continued to Hong Kong and Sydney in November 2007 andfocus on making diversity self-sustaining by linking diversity to London in March 2008.

Diversity and clients

revenue generation. Among other initiatives, UBS believes cross-cultural, diverse teams generate new ideas and creative solutions for its increasingly diverse client base. And, as clients come to recognize the positive influence of diversity on business success, the issue is becoming an increasingly important topic for them. As a result, UBS actively targets a broad range ofinvited women clients and prospects in marketingChina, Italy, Switzerland, the UK and the US to targeted events designed to help UBS build market share among this important client segment.
UBS also continued its services.
program to help professionals return to work after a career break. In 2007,2008, four such programs were held in London, Philadelphia / New York, Singapore and Sydney. These programs have helped more than 300 professionals, primarily women, prepare to return to work over the past two years. In addition, UBS hostedwas recognized byWorking Mother magazine as being among the second annual Women’s Leadership Conference in Zurich, which attracted nearly 2,000 professional women and men who were either UBS clients or

employed100 best companies for working mothers in the financial services industry. In addition,US for the UBS Women’s Conference Monaco, designed exclusively for existing and prospective high net worth European women clients, drew nearly 100 attendees, while a UBS Diversity Conference, attended by more than 160 clients and representatives from financial institutions, universities and government, was held in Hong Kong in March 2007.

Employee retention

A number of factors influence employee retention. These include compensation, and incentives, performance management and learning and development opportunities. UBS manages these elements at all levels and offers targeted career development opportunities to talented employees across the company. The retention of key staff is also tracked. Among the Group Executive Board (GEB), Group Managing Board (GMB) and managing director (MD) populations, 87% have been with the firm three years or more, 26% have worked at UBS between five and ten years, 34% between 11 and 20 years, and 19% have been with the firm for 21 years or more. 128 of the 188 managing directors hired in 2004 or 2005 were still employed at the end of 2007.
UBS grew significantly in 2006 and 2007 in certain geographical regions and business areas (Asia Pacific and wealth management, for example). This is visible in the number of staff hired, including hiring to replace staff who left UBS during that time. As of the end December 2007, 14.5% of UBS staff had between one and two years of experience at UBS. Due to the net hiring of staff, this is an increase from 11.6% in 2006. In Asia Pacific, 32.8% of staff have less than one year experience with UBS, while 23.4% have between one and two years of experience at UBS.sixth consecutive year.

Performance management

The skills, expertise and ambition of UBS employees, together with a business culture that values meritocracy, are essential to achieving results for both clients and UBS alike. Performance management processes throughout the year support staff development, reinforce the firm’s core values and help ensure employees have the skills necessary to implement the long-term strategy of taking advantage of the global trend of wealth creation.
As UBS believes employee-manager dialog underpinsthat the foundation of good performance management andis an ongoing employee-manager dialogue, with demonstrable performance isas the basis for meritocracy. All employees therefore participate in a year-round performance management process that assesses individual achievements against specific objectives. Implemented in 1996,This process supports staff development, links behavior to corporate values and helps ensure that employees have the performance measurementskills required to meet their clients’ needs and management (PMM) process specifies expectations for behavior and actions according to (and increasing with) experience and rank. As an example of this, evaluations for all employees include a “client focus” element, although the specific requirements to successfully fulfill this vary significantly according toimplement their function or role.



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UBS employees

Each employee and his or her evaluating manager agree upon specific performance objectives at the beginning of the year. These objectives relate to clients, people and team, economic goals and professional expertise. They can be updated in the PMM online application throughout the year. Then, in the fourth quarter, the employee’s achievements are assessed against these previously defined targets – a process involving the employee, the line manager and, in many cases, peers, internal clients and direct reports.
Thisdivision’s strategic goals. The performance management framework allows UBS to target specific personnel development needs in its businesses and among specific types of employees. For example, in 2007,process the PMM tool was used to support the building of staff development and management skills among the Global Wealth Management & Business Banking workforce, and also to design a training program targeted at first-level managers across the company to help them build a consistent set of management skills. The program was developed following a detailed analysis of UBS’s management competency profile in the PMM system and is a focused solution for building relevant management capabilities among this population.
The PMM process for the executive members of the Board of Directors, members of the GEB and members of the GMBsenior executives is broadly the same as for other employees. Achieving thespecific financial targets set for both the Group and each business group plays a significant role. Leadership, cross-business cooperation, strategic thinkingrole, with business leadership, client leadership, people leadership and cross-business group contribution arepersonal leadership also evaluated.explicitly reviewed.

The PMM assessment is one element defining individual incentive awards, with top performers receiving proportionately higher rewards. The total amount of money granted in incentive awards is determined by the financial performance of the firm and its individual businesses.

Compensation and incentives

On 12 August 2008, UBS announced the separation of its business groups into business divisions, with incentives for management and staff in each business division aligned directly with its financial results. This is being achieved through a centrally managed change program that includes the development of revised incentive systems to reward divisional management and staff for shareholder value creation in their own division. As part of this, beginning in 2009, UBS will adopt a new compensation model for the BoD and the GEB that has a long-term focus and is more closely aligned with the creation of value for the firm. (Refer to the “Compensation principles 2009 and beyond for UBS senior executives” section of this report for more information.)
To support its integrated business strategy, UBS endeavors to foster an entrepreneurial and performance-oriented culture. CompensationUBS’s compensation programs are results-oriented and market-focused. In the rigorous performance management process, totalTotal compensation is linked to statedUBS’s business objectives, and pay and incentive programs are designed to pay for performance.
UBS’s total compensation and benefits philosophy has five guiding principles. Theseprinciples which require UBS to:
– use carefully selected performance measures, rigorous performance management and a strict pay-for-performance relationship to support UBS’s business strategy;
– support the reward opportunities across the firm by consistently communicating theUBS’s business strategy and promoting a meritocratic culture;
– provide competitive total compensation opportunities to enable UBS to attract and retain talent;
– balance thecompensation components of compensation to meet short-term needs while focusing on mid- to long-term objectives; and
– encourage employee share ownership to strengthen the alignment between employee and shareholder interests.
èA full discussion of UBS’s compensation policy is available inCorporate Governance and Compensation Report 2007

Employee share ownership

UBS is committed to the principle of employee share ownership, throughout the organization. Accountabilitybelieving accountability for long-term implications of decisions and actions is encouraged through equity-based awards that vest and / or become unrestricted over time. Positions with a large scope of responsibility and a significant potential impact on the firm have higher equity exposure.



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To align the interests of UBS’s management with those of its shareholders, UBS also has stringent share ownership guidelinesrequirements for senior executives.executives.
Moreover, aA voluntary equity-based program offersenables employees the chance to purchase UBS shares at fair market value (on the purchase date) and generally receive two free UBS options for each share purchased. Staff with annual incentive awards above a certain threshold are awarded a component in UBS shares or notional shares instead of cash. Select high-performing employees are granted stock options with a strike price not less than the fair market value of the shares on the date the options areoption is granted.



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Strategy, performance and responsibility

On 31 December 2007,2008, current UBS employees held an estimated 6% of UBS shares outstanding (including approximately 3% in unvested / blocked shares), based on all known share holdings from employee participation plans, personal holdings and individual retirement plans. Additionally, approximately 1% could be imputed for stock options (based on the options’ intrinsic value) for a total of 7%. At the end of 2007,2008, an estimated 52%56% of all employees held UBS shares while 40%51% of all employees held UBS stock options through employee participation plans.options.
èFor a full discussion of UBS’s equity plans, see Note 30 “Equity participation and other compensation plans”, inFinancial Statements 2007

Learning and development

Leadership development

UBS invests in the career and skill development of its people. The firm recognizes that maintaining its leadership capabilities is an important factor in ensuring its long-term success and therefore takes a structured approach to both talent management and leadership development, understanding that both capabilities are important factors in ensuring high-quality client service and long-term business success.

In 2008, a Group-wide talent management architecture was established to align the firm’s identification and selection processes for “key talent”. All levels of employees with the potential to take on substantially more senior roles in the organization than they currently have may be considered key talent. In 2008, about 4% of employees were placed in a key talent pool where they can benefit from focused investment in their career and professional development.
LeadershipUBS’s leadership development activities target peopleare separated into Group-wide and divisional initiatives. A new framework created in key positions, their succession candidates2008 centralizes development initiatives for managing directors and high potential employees acrossabove within a Group-level learning organization. An organizational development and culture change initiative for the company. UBS has defined Group-wide criteriaGEB, GMB and managing director populations, called “Leading our Future”, is being developed to help identifyengage and manage these talent pools. UBS is an integrated firmalign the firm’s leadership with diverseits vision, core values, strategy and leadership principles. A new leadership and management development needs. Learning and development teams in the business groups and the Leadership Institute, which is responsible for Group-wide senior leadership development, work togethercore curriculum will be designed to provide consistent leadership development offerings across the company.
The key Group-wide leadership programs are the “Accelerated Leadership Experience” and the “Global Leadership Experience”. The Accelerated Leadership Experience is an 18-month process aimed at strengtheningstrengthen the capabilities of high-potential managers. A set of three Global Leadership Experience programs targetssenior leaders in their current

roles, while a key position holderstalent core curriculum will build leadership capabilities among potential future senior leaders. Initiatives for all other employees are managed within the divisions but coordinated with the Group-wide initiatives to ensure consistency and focuses on understanding the organization, leveraging cross-busi-



Expansion and growth in Asia Pacific

Asia Pacific has produced UBS’s highest growth rate over the past few years. Between 2004 and 2006, UBS’s wealth management business in Asia Pacific doubled its invested assets to CHF 151 billion. As the leading wealth manager in the region, UBS has drawn accolades from the financial media in 2007 and was named best private bank in Asia for the sixth consecutive year. Additionally,Dealogicfigures confirm UBS as the most profitable investment bank in the region in 2007. This business growth necessitated substantial recruitment, together with strong retention and development efforts for experienced UBS employees in the region. To retain and attract wealth management professionals, the UBS Wealth Management Campus - Asia Pacific was launched in Singapore in April 2007. Following Switzerland, Singapore is UBS’s second largest

wealth management center for international clients, and this campus acts as the regional hub for employee and client education. Developed in close collaboration with Singapore’s government, the campus is accredited by the Singapore Institute of Banking and Finance.
UBS anticipates that 5,000 wealth management staff will be trained at the campus by 2010. In addition to financial education, employees learn about the “UBS Client Experience” (a structured advisory process employed by client advisors), leadership principles, business strategy and values. Internal subject matter experts and external trainers deliver a comprehensive training offering with formal professional accreditation. Open dialog and constructive challenges fosterpromote the sharing of work experience and specialist knowledge. The campusbest practices.

Commitment

appeals to potential and existing employees who desire career advancement thatWhile meeting the needs of clients is supported by well-structured learning pathways and curricula for competency development.
In addition, UBS’s wealth management clients, their children and grandchildren are able to participate in a range of specifically developed programs to enable them to remain well informed in a fast changing market. The most recent event, delivered on campus in December 2007, was the “UBS Young Generation Seminar”. It was the first of four modules designed to enhance clients’ understanding of investment fundamentals and wealth planning in a fun and inspiring way. Clients are thus enabled to take better advantage of UBS’s wealth management expertise and content, which, in turn, can deepen UBS’s relationship with them over time.



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UBS employees

ness group opportunities and building personal leadership capabilities. More than 2,400 leaders have participated in at least one of these programs since 1999.
Senior executives at UBS play a direct role in teaching and mentoring key talent. A structured, firm-wide program sees GEB members mentor GMB members, who in turn mentor people in key positions. Senior executives also participate in forums that enable them to develop a common understanding and goals, advanceultimate purpose, it is the firm’s business agenda and learn from one another. In June 2007, the top 86 leaders participated in the Annual Strategic Forum to analyze factors shaping the firm’s strategy. The Senior Leadership Conference in October 2007 brought 675 senior executives together to build a common understanding of the firm’s key business goals.
Business group leadership development courses also play a role in developing the firm’s leaders. An example is the intensive “Leading for Growth” program run by Global Wealth Management & Business Banking, where participants examine their personal leadership practices and are encouraged to use them to optimize performance in their teams. At the end of 2007, 77% of managing directors and 35% of executive directors had attended this program. At the Investment Bank, ASCENT, a 24-month mid-career program designed to expose high-potential employees to current business challenges and develop their client and leadership skills, has trained 750 people since 2005. SUMMIT was launched in 2007 to develop networks and partnerships among the Investment Bank’s 1,400 managing directors. Global Asset Management’s AMSLE program helps “managers of managers” strengthen their strategic leadership skills by focusing on both leadership and core technical skills. Over 100 managers have participated since 2005.

Business training

All employees have access to professional and personal skill development opportunities. As business or regulatory needs require, additional educational initiatives are developed to meet the training need. The promotion of cross-business collaboration is one example. A mandatory online course, “Introducing Global WM&BB to the IB”, was introduced for Investment Bank employees in 2007 to strengthen participant understanding of UBS’s wealth management business and highlight opportunities for cross-business group partnership.
For graduate trainees, the Investment Bank’s new 18 to 24-month EXPLORE program combines tailored business-specific training with personal development initiatives and networking opportunities. Launched in 2007, the program helps graduate trainees develop a better understanding of the firm’s business, culture and values. About 700 employees are part of the inaugural class.
Building a common people management culture across the firm is addressed by the “Essential Management Skills” program, which also focuses on developing fundamental managerial skills among the

firm’s first-level line managers. 1,320 line managers across the company have participated in this program since its launch in late 2006.
Clients are the focus of the Client Leadership Experience, launched in February 2008 and consisting of 20 regional workshops focusing on specific client segments, including family offices, hedge funds or financial institutions. This Group-wide business development initiative allows senior client advisors to share opportunities to deliver all of UBS’s capabilities to specific clients and thus enable UBS to increase its share of business with these clients.

Commitment

UBS’s corporate values formthat lay the foundation of what the firm does and how it does it.for its long-term sustainable growth. These values are integrated into the commercial decision making process,processes, management techniques and the ways in which peopleemployees interact with one another duringeach other in the daily course of business. The implementation of this vision is underpinned by UBS’s ethical beliefs of diversity, integrity and privacy, and corporate responsibility. Entrepreneurial leadership, partnership and meritocracyvalues are the core competencies that help UBS succeed. And client focus is UBS’s ultimate purpose.
clustered into four categories:
–Focus on the client: The ultimate purpose of all UBS activities is to increase client satisfaction;
–Lead yourself: Each individual takes responsibility for his or her own motivation, development and success;
–Lead others: Everyone can lead others by being a role model, appreciating others’ successes and supporting one another’s endeavors. Leading others is about creating a collaborative environment and developing people on the basis of meritocracy and diversity;
–Act with integrity: UBS upholds the law, respects regulations and behaves in a principled way. UBS is self-aware and has the courage to face the truth. UBS maintains the highest ethical standards.

Measuring employee satisfactionperceptions

Employee engagement is central tosupports workforce retention and performance. An annual employee survey is used to assess the UBSassesses UBS’s corporate culture engagement and levels of employee engagement. A



The client leadership experience

Launched in February 2008, this Group-wide initiative brings together senior client-facing employees from different divisions for a one-and-a-half-day workshop designed to improve UBS’s ability to meet the incorporationdiverse needs of its core values into dailyclients and to increase UBS’s share of business activities. While surveys are customized for

with them. Participants learn about relevant products and services in the other divisions, build cross-division partnerships and learn how to work more effectively across boundaries. Seventeen regional workshops, each business group,focusing on a specific client segment such as family offices, hedge funds

and financial institutions, or on a specific region such as Western Europe, brought nearly 500 senior client-facing participants together. Almost 400 cross-divisional client service opportunities were shared, ultimately bringing in more than USD 300 million in net new money to UBS.



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Strategy, performance and responsibility
UBS employees

core set of questions and themes are the same in order to provideacross all divisions provides a comprehensive view of employee responses across UBS.

opinions.
47,46848,205 employees, tookor 60% of UBS’s employee population, participated in the survey conducted in May 2007, and overall, 80%June / July 2008. Most measures declined compared with earlier years. For example, 67% of respondents were very satisfied with UBS as a place to work. This comparedwork (compared with the MIDAS industry benchmark of 73% (MIDAS is a consortium of financial services companies). Additionally, 83% agreed they were highly motivated80% in 2007) and 77% reported high motivation to contribute to the success of the firm beyond what is expected. 76%expected of them (versus 83% in 2007). These overall satisfaction ratings covering the period between June 2007 and June 2008 show the continued dedication of UBS employees said that diverse perspectives were valued in their team (the MIDAS benchmark is 73%), while 79% felt encouraged to come up with new ways to do things (the MIDAS benchmark is 76%).despite the challenges. However, the survey results also clearly revealed a perceived lack of communication from senior management.
EachUBS and its business group, and the individual businesses within them,divisions take thethese results seriously. Clear processes existThe GEB committed to reviewincreasing employee communication through employee events, intranet and manage results. For example, following feedback that more dialog on career development was desirable, Global Wealth Management & Business Banking invited employees and managerse-mail. Additionally, dialogue with managing directors across UBS increased to hold development discussions in mid-2007, supported by the PMM process, so asensure they had accurate, updated information about UBS to agree on individual career development activities.share with their teams.

Employee assistance

UBS is committed to being a conscientious employer. The firm supports its employees during all stagesExamples of their careers.



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The employee assistance programsthis commitment can be found in the firm’s Employee Assistance Programs (EAPs) and the COACH programand SOVIA programs in Switzerland.
EAPs are examples of this commitment.
UBS offers EAPsavailable in a number of locations to provide employees with confidential support to help balance work, family and personal issues. Theglobally. In the US, EAP provides a wide range of services on issues such as personal conflicts, depression, grief and work performance issues. It alsothe program provides information, referrals and ongoing

support for child care, academic services and issues surrounding elder care, issues. The EAP program inwork performance and personal conflicts. In the UK, the program is part of a wider health and wellbeing program that includesincluding onsite medical specialists, and emergency childcare, in addition to counseling and referral services.

In Switzerland, UBS offers professional assistance for current and retired employees, as well as their family members, through its HR Social Counseling service. A new online Health Portal gives employees direct access to the many health management offerings for staff in Switzerland.
and HR Retiree Service.
The COACH transfer and severance process was launched in earlySwitzerland in 2003 to help staff in Switzerland who lose their jobs inemployees displaced by a restructuring. It advises employeesCOACH advisors provide support and supports themassistance in finding new jobs, in UBS or externally. Employees who have been dismissed as a result of restructuring have their standard notice term extended by two months in addition toworking closely with UBS’s internal recruitment center and outside employment services. During the period stipulated in the employment contract. They alsoCOACH process employees retain full salary and benefits, during this time and receive counseling and support to help them apply for new jobs. Financialfinancial assistance is available for job-related training, if applicable. To date, more than 2,150 staff have enrolledneeded.
Staff below the level of director are eligible for the new Social Partnership Agreement for employees in COACH.Switzerland (SOVIA) that became effective on 1 August 2008. SOVIA lays out the terms and conditions for implementing redundancies among employees whose jobs are subject to the Agreement on Conditions of Employment for Bank Staff. SOVIA now governs the requirements and procedures for internal hiring, job transfers, and, when needed, severance. The aim is to implement necessary job cuts and operational changes in a responsible manner, making full use of the UBS internal labor market, and to offer targeted, relevant support and career advice to these employees.



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Employee representation

Established in February 2002, theThe UBS Employee Forum facilitates the exchange of information between employees and management on pan-European issues withthat have the potential to impact the performance and prospects of UBS and, in particular, its operations in Europe. This forum fulfills the obligations contained in EU Directive 94 / 45 on the establishment of a European Works Council.
A UK Employee Forum meets on Local forums also exist in a bi-annual basisnumber of locations across Europe to discuss topics likeaddress local issues such as health and safety, issues, changes to work-placeworkplace conditions, pension arrangements and collective redundancies. The UK Employee Forum, for example, is made up of internal elected representatives for each business area and division that has employees in the UK.
Employee representation inIn Switzerland, is led by the Employee Representation Committee (ERC). This group of representatives partner with UBS management in the annual salary negotiations and are involved in employee matters, including health and safety issues, social security and pension issues. ERC employee representatives are elected internal representatives representsto represent the interests of employees whose work contracts are governed by Swiss law and the Agreement on Conditions of Employment for Bank Staff. The ERC is the partner of UBS management in the annual salary negotiations and is involved in employee matters, including health and safety issues, social security and pension issues. The ERC also monitors and encourages communicationfosters an open dialogue between management and employees. During late 2008 and early 2009, for example, the ERC and management jointly hosted a program called “Trust is Key”. In total, around 1,100 employees gathered in seven UBS locations across Switzerland for open forum events in which employees developed and proposed measures to rebuild trust and confidence in UBS. These measures can be implemented in employees’ working environments or by management.

Selected 2007Select 2008 awards

 

Top 10“100 Best Companies for Working Mothers in the US (WorkingUS”
(Working Mother magazine US) 2003–2008)

Top 50 Best Places to Launch a Career (Business Week)“No. 1 employer of choice for business graduates in Switzerland”
(Universum Switzerland 2008)

Top 50 Best Workplaces in the UK “Top 100 Employers for Lesbian, Gay and Bisexual People in Europe (Financial Times)

No.2 Employer in Japan (Hewitt Associates)

Top Leadership Award for Learning Programs (Corporate University Xchange)

CorporateBritain”
(Stonewall Workplace Equality Index (Perfect Score) (Human Rights Campaign Foundation, US) 2008)

“Best Graduate Recruitment and Development Program”
(UBS EXPLORE Graduate Program)
(Graduate Solutions 2008)

“UBS’s learning programs: awards in three categories”
(Corporate University Xchange 2008)



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Corporate responsibility

Corporate responsibility

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Corporate responsibility

–Corporate responsibility is integral to the way UBS does business
–UBS helps clients consider corporate responsibility opportunities and risks, by providing relevant research, advisory services and product offerings
–UBS actively maintains its strong track-record in managing environmental challenges
–The firm seeks to positively influence the well-being of its local communities

UBS’s commitment

Active advancement of corporate responsibility: UBS has participated in the UN Global Compact initiative since its inception and is a long-standing member of the UNEP Finance Initiative, a founding member of the Carbon Disclosure Project and a founding financial partner of the Energy Efficiency Building Retrofit Program (a project of the Clinton Climate Initiative)
Prevention of financial crime:a founding member of the Wolfsberg Group, UBS maintains an effective risk-based approach to anti-money laundering
Established environmental management:ISO 14001 certified for its environmental management system since 1999, UBS set a group-wide CO2 emission reduction target in 2006, a 40% reduction of 2004 levels by 2012
Respect of human rights:UBS adopted its own statement on human rights in 2006 – a clear indication that the firm recognizes the significance of promoting and respecting human rights in its sphere of influence
Assisting local communities:the firm has established partnerships in the communities where it does business, focusing on the key themes of “Empowerment through education” and “Building a stronger community”
External recognition of corporate responsibility activities:UBS is a component of the Dow Jones Sustainability Indexes, the FTSE4Good Index and the Climate Leadership Index

Milestones 2007

–Socially Responsible Investments (SRI):SRI invested assets increased by 116% (to CHF 38.9 billion) in 2007. UBS launched new SRI products in Japan and Taiwan and launched strategy certificates for climate change, water and demographics

–Climate Change:UBS reduced its own CO2 emissions by 22% from 2004, provided financial and advisory services to companies in renewable energy sectors, published major research reports on the impacts of climate change on companies and sectors and launched the UBS Global Warming Index and the UBS Greenhouse Index

–Wolfsberg Group’s statement against corruption:UBS actively participated in the drafting and release of this statement, which clarifies the link between financial institutions and international corruption fighting efforts and outlines ways financial institutions can prevent both corruption and the misuse of their operations in relation to corruption

–More than CHF 46 million contributed to charitable causes around the globe:nearly 8,000 employees spent over 80,000 hours in volunteering services



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Corporate responsibility

Corporate responsibility contributes to UBS’s goal of sustainable value creation.

As a leading global financial services firm, oneUBS is confronted with the concerns and expectations of UBS’s main purposes isa wide and diverse range of stakeholders. Along with clients, investors and employees, for example, various government regulators and suppliers can also be said to have a stake in the company to varying degrees. In a broader sense, the communities in which UBS has a presence are stakeholders too.

UBS takes the term “corporate responsibility” to mean the process of understanding, assessing, weighing and addressing the concerns and expectations of these groups. This process supports UBS in its efforts to safeguard and advance the firm’s reputation for responsible corporate conduct. In very direct ways, responsible corporate conduct helps create long-term value. UBS believes thissustainable value for the company.
The crisis faced by the financial services industry made it difficult for the firm to do as much as it would have liked to fulfill its stakeholder expectations. Still, as can be best achieved by providing clients with value-added productsseen from the examples given below – from anti-money laundering to community development and services and by promoting a corporate culture that adhereshuman rights to high ethical standards. The firm also firmly believes that, for any business, long-term value creation is also dependent on what it does above and beyond what laws and regulations require. It is why UBS dedicates itself to creating a working environment based on the values of equal opportunity, diversity and meritocracy.
UBS has adopted measures to protectprotecting the environment is committed to affirmative social standards– UBS continued with a wide range of important and contributes to the communities it is a part of. All of the firm’seffective corporate responsibility-related activities are underpinned by its governance structure and are implemented along existingduring 2008. Even in difficult times, UBS remains convinced that corporate responsibility makes good business processes.sense.
èFor more on UBS’s workforce, see the “UBS employees”
section in this report
èFor more on governance, seeCorporate Governance
and Compensation Report 2007

Adherence to the UNUnited Nations Global Compact initiative

In 2000, UBS wasbecame one of the first companies to joinsign the UNUnited Nations (UN) Global Compact, which comprises tenCompact. This global corporate responsibility initiative unites governments, business, labor

organizations and civil society, fostering adherence to 10 principles covering the areas of human rights, labor standards, the environment and corruption. Its geographic reach is now global, withanti-corruption. UBS considers the initiative, which had over 3,700 business5,200 corporate participants from 120 countries adhering to it at the end of 2007. Although it is2008, to be an important componentyardstick providing guidance for its key corporate responsibility initiatives and activities. In addition, by participating in any discussion with the public about the role of business in society, it is ultimately aimed at concrete actions. Key among these, from UBS’s point of view, is the “Who cares wins” initiative which, initiated by 20 financial institutions in June 2004, maps the progress made by different actors in

integrating environmental, social and governance issues into mainstream investment decisions. UBS has been involved in this initiative since its inception and also participates in other Global Compact-related endeavors, including the Swiss UN Global Compact network, which was established in 2006.
UBS contributes actively to important corporate responsibility discussions across industrial sectors among Swiss-based companies.

Labor standards and human rights

UBS has recognizedwell established human rightsresources policies and practices that address issues for many years. Indeed, human resource policies addressingsuch as employment, diversity, equal opportunity and discrimination, by definition,discrimination. Such policies also tackle human rights issues, as cando policies relating to health and safety practices. UBS has well-establishedUBS’s human resources policies and practices in these areas and they are regularly reviewed to ensure that labor standards are respected.
In 2006,line with the firm’s endorsement of the UN Global Compact and its underlying principles, UBS adopted a statement supporting basic human rights signaling to employees, clients and society that the firm recognizes the significance of promoting and respecting human rights in its sphere of influence.2006. The “UBS Statement on Human Rights” bothoutlines important human rights issues and sets out the firm’s position on the topic. In 2008, UBS reaffirmed its commitment to human rights by supporting the UN Global Compact’s Chief Executive Officer statement, which marked the 60th anniversary of the UN’s Universal Declaration of Human Rights. In 2008, UBS continued with the implementation of its human rights statement with the introduction of a responsible supply chain guide-



Operational corporate responsibility at UBS

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Strategy, performance and responsibility

line. It also continued the development of industry sector guidelines to support the consistent identification and embraces key issues in a single document.

The firm isassessment of environmental and social risks in the process of implementing initiatives relating to the statement’s focus on employees, suppliers and clients. In 2007, it continued to build a diverse UBS workforce through a variety of programs.
firm’s banking activities.
 è For more on labor standards and diversity programs,
seeRefer to the “UBS employees” section of this report for more information on labor standards and diversity programs
èRefer to the discussion on supply chain management and environmental risk management below for more information on the responsible supply chain guidelines and on industry sector guidelines

Responsible procurement is a key aspect of UBS’s approach to human rights and the environment. Environment

In the past few years, UBS has established processes to manage environmental and human rights issues in key areas of its supply chain (such as client gifts, IT equipment and energy sourcing). For example,



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after UBS’s encouragement five years ago, the supplier of UBS’s branded umbrellas started to take account of environmental and labor rights concerns in its production facilities in Guangzhou, China. In the meantime, this supplier has developed a positive reputation in the area of corporate responsibility and this has helped attract new clients that are concerned about environmental and human rights issues in their own supply chain. In order to further incorporate these issues into procurement processes, UBS has developed a supply chain guideline that provides guidance for identifying, assessing and monitoring environmental and human rights risks of suppliers and in support of consistent decision-making throughout all business groups and regions. This guideline focuses on high risk suppliers and contractors with whom UBS has influence through direct contractual agreements.
A number of industry sectors with higher potential environmental and social risks have also been identified, and UBS is developing sector guidelines for assistance and guidance when doing business with clients in these environmentally and socially sensitive industry sectors.

Environment

1992, UBS was one of the first signatories of the United NationsUN Environment Program’s Bank Declaration (UNEP) in 1992, which. This act committed the firm to integrating appropriate environmental measures within its activities. Today, the efforts of UBS to protect the environment, which startedIt has resulted in the 1970s, have grown into a well-developed,well developed global environmental management system, certified to the ISO 14001 standard, coveringwhich covers both banking activities and in-house operations. UBS considers efficient and sustainable management of the firm’s energy requirements, and the measures it is taking to reduce its carbon emissions, as an important factor in being a responsible corporation. With this in mind, the firm set a target in February 2006 to reduce its carbon emissions in 2012 by 40% from 2004 levels. UBS acknowledges that climate change represents one of the most significant environmental challenges of current times. It will have wide-ranging effects on ecosystems, societiesBy offering relevant products and economies worldwide. To support itsservices across businesses, UBS seeks to help clients in responding to these challenges, UBS incorporatesaddress risks and take advantage of opportunities presented by climate change issues intoand the expected transition to a lower carbon economy. With this in mind, UBS continued in 2008 to expand its research, advisoryoffering of climate change-related products and services and product offerings.to publish dedicated research reports. In addition, UBS seeks to lead by example by acting to reduce its own environmental impact. To this end, in 2006 the Group Executive Board (GEB) set a target to reduce the firm’s carbon emissions through 2012 by 40% from 2004 levels. UBS continued in 2008 to make good progress towards achieving this target.
 è ForRefer to www.ubs.com/environment for more information on the environment, see the end of this section and www.ubs.com/environmentUBS’s environmental policies

Fighting corruption

UBS has long been committed to assisting in the fight against money laundering, corruption and terrorist financing by operating an effective and dynamicfinancing.
The firm employs a vigorous risk-based approach to its internal anti-money laundering (AML) process. (A “risk-based approach” means that the processes are continually tested to prove their effectiveness against the risks they are intended to address.) In early 2007,2008 it also issued a revised Group Policy Against Corruption, setting out its zero-tolerance stance towards corruption and strictly prohibiting all forms of bribery by UBS and its employees, including so-called facilitation payments. At the Wolfsberg Group,same time, it issued more detailed guidance papers to address the following topics: guidance for employees who have connections to public officials; the hiring of which UBS is a founding member, released a statement against corruption. It describes the rolepolitical advisers; guidance on engaging intermediaries; and anti-corruption guidance in connection with corrupt activity by clients. Implementation of the Wolfsberg Group and financial institutions more generally in support of international efforts to fight corruption and identifies some of the measures finan-policy

cial institutions may consider to prevent

against corruption by the business divisions is well under way, and training materials developed by the Group Money Laundering Prevention Unit (GMLPU) have formed the basis for business division training modules that raise awareness of new and revised topics. In some instances web-based training programs have also been developed.

Although internal policies are an important support for UBS’s high ethical standards, in their own business and protect againstpractice the misuse of their operationsmajor risk for the firm in relation to corruption.bribery is not so much employee behavior as the potential misuse of UBS systems by clients to perpetrate bribery. Many firms, including UBS, continue to face the legal, regulatory and reputational risk of being used to collect, store or transfer corrupt funds. UBS’s efforts to reduce the risk of misuse of its systems to perpetrate bribery will continue in 2009 and beyond.
 è ForRefer to the discussion on preventing money laundering below for more information on UBS’s AML activities
please see the next page

External recognition

The firm’s corporate responsibility work has been widely recognized, and UBS has been included in many indexes that track such efforts, including beingefforts. It has, for example, been a component of the Dow Jones Sustainability indexesIndexes since their inception in 1999. TheThese indexes track the financial performance of the leading sustainability-driven companies worldwide. UBS is also included in the FTSE4Good Index, which measures the performance of global companies in the areas of environmental sustainability, stakeholder relations and support for human rights. The firm has been a member of the Climate Leadership Index (CLI) since its launch in 2004. The CLI discloses to investors which FT500 companies have the most comprehensive climate-change disclosure practices in place, judged on the basis of each company’s individual response to the Carbon Disclosure Project (CDP) questionnaire.

Corporate responsibility governance

The Corporate Responsibility Committee,corporate responsibility committee was established in 2001 and, as a Board of Directors (BoD) committee, it supports the BoD’s efforts to safeguard and advance UBS’s reputation for responsible conduct. As part of the governance changes introduced by UBS in 2008, the committee’s charter was created in 2001revised and assessesupdated. Under the revised charter, the committee is mandated to review and assess how toUBS should meet the evolving corporate responsibility expectations of UBS’s stakeholders in relation toits stakeholders. It also has responsibility for monitoring the firm’s corporate conduct. Ifresponsibility policies and regulations, as well as the Corporate Responsibility Committee concludes that there is a gap between what stakeholders expectimplementation of its corporate responsibility activities and what UBS practices – and that this gap represents either a risk or an opportunity tocommitments. Headed by the firm – it suggests appropriate actions to the Group Executive Board (GEB).

The Corporate Responsibility Committee is chaired by Stephan Haeringer, Executive Vice-Chairman of UBS. It includes another memberChairman of the BoD, eightthe committee includes three other BoD members. A new advisory panel to the committee has also been established consisting of members of the GEB and other senior UBS executives representing UBS businesses,managers. The panel participates in committee meetings and implements its recommendations. Meetings are held at least twice a number of corporate functions, including legalyear, with the agenda and communications. The committee meets two to three times a year. It is supported by a working group that comprises 22 functional experts from all UBS business groups and is chaireddocumentation prepared by the firm’s Chief Communication Officer, a member ofcommittee chair and the Corporate Responsibility Committee.
Neither the Corporate Responsibility Committee nor the working group runs operational processes related to corporate responsibility; it is the GEB that has overall responsibility for corporate responsibility strategymanagement function of UBS’s chief communication officer area.



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Strategy, performance and that decides on specific corporate responsibility measures.
Corporate responsibility

     The implementation of these measures is then undertaken within existing processes in the different business groups.

For example, the GEB is responsible for UBS’s environmental policy and nominates a Group Environmental Representative. Each business group also nominatesenvironmental representative, a representa-



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Corporate responsibility

tive,function currently held by the firm’s Chief Risk Officer. A committee, comprising both Group and togetherdivisional environmental representatives, is tasked with the Group Representative, they form a committee that overseesoverseeing the implementation of UBS’s environmental policy. This committee also providespolicy and providing guidance to the different business groupsdivisions in their implementation of “UBS’sthe “UBS Statement on Human Rights”.
The GMLPU leads the Group’s overall efforts in all aspects of money laundering prevention, including terrorism financing, sanctions and anti-bribery. It issupports the Group General Counsel and the head of compliance in their functional responsibilities by providing, in conjunction with the compliance functions in the business divisions, reasonable assurance that UBS meets relevant regulatory and professional standards in its business conduct. It also defines, where appropriate, uniformly applicable minimum standards for AML as a whole. The GMLPU coordinates its work via various committees and specialist networks with the core committee being the global AML committee.
Regional diversity boards consider and decide on key regional issues, such as the regional diversity strategy and diversity goals and measures. The boards are chaired by senior managers and are also responsible for assessing the Group Chief Credit Officerprogress made on relevant issues. UBS’s global community affairs activities are governed in a decentralized fashion. Every region has a dedicated community affairs function that coordinates charitable commitments by UBS, its senior management and is supported by coordinators and functional units across the business groups.employees within their region.

Corporate responsibility: training and
raising awareness

It is important that employees are aware

UBS strives to increase employee awareness of UBS’sits corporate responsibility effortsprocesses, activities and processes. Apart from the generalcommitments. General information is published on the firm’s intranet and website, in 2007, UBS directly provided nearly 3,000em-

ployee magazines. In 2008, 2,800 employees participated in all businesses with information on the approach taken by the firm towards corporate responsibility through a range of training and awareness-raising activities. They extended from short presentations, in particular at new employee induction events, to longer presentations and workshops. In Global Wealth Management & Business Banking, for example, a module on ethics,activities dealing with corporate and personal responsibility forms part of the business group’s managementresponsibility. Specific training program.

Training is also integralgiven to staff working in the more specialized areas of AML and environmental management and anti-money laundering (AML).management. It is mandatory for AML and compliance staff have to complete mandatorya training program every two years, and all new joiners go through an AML and compliancein all UBS business divisions receive training in the issue of anti-corruption as part of their induction training. In 2007, 6,000process. Furthermore, in 2008, 5,232 employees participated in training on environmental issues.
issues, with 3,905 receiving general education on UBS’s environmental policy and programs, mostly in induction training, and 1,327 employees receiving specialist training targeted at their area of expertise and impact.

ContributingPreventing money laundering, corruption and
terrorist financing

UBS takes its responsibility to society – preventingpreserve the integrity of the financial system, and its own operations, very seriously. The firm has developed extensive policies intended to prevent, detect and report money laundering, corruption and terrorist financing

Extensive and constant effortsfinancing. These policies seek to prevent money laundering, corruption and terrorist financing are important contributions

to society. The integrity ofprotect the financial system is the responsibility of all those involved in it. UBS takes its duties extremely seriously – in protecting both the overall financial systemfirm, and its own operations. reputation, from those who may intend to legitimize their ill-gotten gains through UBS.
The threats posed by money laundering and terrorism are real, and everyone has a role in contributing to the fight against them as effectively as possible.
UBS’s Group Money Laundering Prevention UnitGMLPU leads itsUBS’s efforts to fight money laundering, corruption and the financing of terrorism. Its key task isIt does so by continuously assessing the threats and risks that UBS faces with respect to helpAML in all its businesses. It takes a risk-based approach, ensuring the firm’s policies and procedures are commensurate with those risks, and that relationships that are classified as higher risk are dealt with appropriately. The firm constantly engages with its business divisions to ensure that these policies and procedures are adapted to their businesses and specific AML exposures, while also seeking to streamline and increase consistency between business divisions by using consistent methodologies and tools (for ex-



UBS’s corporate responsibility governance process

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Strategy, performance and responsibility

ample, the creation of a uniform country risk framework). UBS also seeks to ensure its employees adhere to recognize and then manage and report suspicious activities – in the firm’s strict know-your-customer regulations, while at the same time not treating clientsa way that neither treats all clients priorias criminals nor unduly hinders normal business. While doing so, the firm also remains completely committedor undermining their right to the respectprivacy. Employees regularly undergo training in AML-related issues and protection of its clients’ privacy, a cornerstone of the firm’s philosophy.

The best way to achieve such goals is through a spirit of partnership across the firm – between those who manage client relationships and the risk managers and controllers who support them. Employees should be focused on really getting to know clients, understanding their needs – and then asking questions when things do not make sense. To assist employees in their “know your customer” (KYC) skills and the identification of new trends, in suspicious behavior, employees undertake regularbe it through online training, courses, both in the form of on-line training andawareness campaigns or seminars.
To prevent money laundering, UBS takes a risk-oriented approach that is tailored to its different business lines and their particular risks and exposures. This includes establishing consistent criteria by which a business relationship should be judged “higher-risk” from an AML perspective. UBS also utilizes advanced technology to assist the firm in the identification of transaction patterns or unusual dealings.

A particular focus in

Over the last few years, and as a core part of its risk-based approach, UBS has been onparticularly vigilant about enhancing UBS’s controls around dealings with regard to regimes and countries with heightened risks. This included establishing



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The need for increased vigilance has been underscored by the acknowledgement by the Financial Action Task Force (FATF) of the importance of country risk considerations in the risk-based approach, increasing international focus on corruption, and implementing an approach wherethe need for the firm to manage its global security risk activity. As a result of these considerations, UBS decided to exit commercial and clienthas implemented a global sanctions policy, ceasing all business dealingsactivities with a limited number of countries – reflecting increasing international concern and a commitment by UBS to actively managing its global security risk, notwithstanding that its legacy involvement was in any event very small. Countries involved included Iran, Myanmar, North Korea and Sudan.countries.
In 2007,2008, UBS continued to workits engagement with the public sector and its peers to better define how and in what areas financial institutions can contribute to the wider efforts of society against money laundering. In particular, as regulators continue to shift from the traditional “rule-based” approach to AML regulation to “principle-based” regulation (including the so-called “risk-based” approach), the firm actively contributed to the Financial Action Task Force’s (FATF) development of their “Guidance on the Risk-Based Approach to Combating Money Laundering and Terrorist Financing”. The “risk-based” approach requires UBS to continue to reassess its own policies and procedures, focusing on the firm’s particular risks, and continually develop its own risk-based models, something that UBS did throughout 2007. Where possible, UBS seeks to streamline and increase consistency between business groups in their AML / KYC policies and procedures using consistent methodologies and tools (for example, the creation of a consistent country risk framework for identifying sensitive countries).
UBS remains strongly committed to promotingpromote the development and implementation of AML standards for the financial industry as a whole. As an example ofwhole, thereby contributing to wider efforts against money laundering. A notable achievement in this UBSregard was one of the driving forces behind the launch of the Wolfsberg Group, which issued its first global AML principles in 2000. In subsequent years, UBS has contributed substantially to other guidances, including on corruption; correspondent banking; mutual funds and investment and commercial banking. Most recently, during 2007, UBS has played an active role in the work undertakenmade by the Wolfsberg Group, and the Clearing House Association to develop and issue a statement endorsing measures to enhance the transparency of international wire transfers to promote the effectiveness of global AML and anti-terrorist financing programs.

Community investment

In additionwhere UBS actively contributed to the economic impact generated throughFATF’s development of its business activities, Guidance Paper on Weapons of Mass Destruction Proliferation Finance, as well as completing and on 14 January 2009 publishing its own trade finance principles paper. Wolfsberg Group’s work is ongoing in the area of credit cards and stored value cards, the implementation of a new SWIFT message format to protect against the abuse of cover payments and a review of the Group’s 2003 paper on monitoring, screening and searching.

Supply chain management

In 2008, UBS spent over CHF 6.9 billion purchasing a wide range of products and services from suppliers and contractors around the world. UBS has established processes to manage environmental and human rights issues in relevant areas of its supply chain such as client gifts, IT equipment and energy sourcing. In order to further incorporate these issues into procurement processes, UBS has developed a supply chain guideline, which provides Group-wide guidance on identifying, assessing and monitoring supplier practices in the areas of human and labor rights, the environment and corruption. Examples of human rights issues that have been included are avoidance of child and forced labor, non-discrimination, remuneration, hours of work, freedom of association, humane treatment, and health and safety. In 2008, the guideline was gradually applied to new contracts and contract renewals with suppliers. By the end of the year

around 100 suppliers had been screened according to the guideline’s social and environmental criteria, and responsible supply chain requirements were included in the contractual arrangement with those suppliers who were awarded contracts. Also, some 170 procurement and sourcing officers were trained on the relevance and application of the new guidelines.

Community investment

UBS, together with its employees, seeks to have a positive influence on the social and environmental well-being of the local communities in which it is active.operates. The firm does this through its well established community affairs program.

This program encompasses activities such as direct cash donations to selected organizations, employee volunteering,

matched-giving schemes, in-kind donations, disaster relief efforts and / or partnerships with community groups, educational institutions and cultural organizations. DedicatedUBS has dedicated teams around the world which work closely with staff at all levels to build partnerships with organizations in the communities, focusing on the key themes of “Empowerment“empowerment through education” and “Building“building a stronger community”.
Overall, in 2007,2008, UBS and its affiliated foundations donated more thannearly CHF 46 million to support charitable causes. UBS employees, through their donations and volunteer efforts, make furtheralso made significant contributions to the communities they live in. Last year, almost 8,0009,300 employees spent over 80,00084,700 hours volunteering. UBS supports their commitment by matching their donations and offering depending on location, up to two working days a year for volunteering efforts.
UBS has also established a number of foundations and associations that donate money to worthy causes in Switzerland. The association “AA Helping Hand from UBS Employees” assistsEmployeeshelps disabled and disadvantaged people to lead active, independent lives. UBS encouragesencouraged this employee involvement by matching the funds raised in 2007.2008. TheUBS Cultural Foundationfosters creativity, appreciation of different forms of art, and contact between artists and society. The foundation financially supportsprovides financial support for fine arts, film, literature, music, preservation of historic buildings, archaeological projects and studiesresearch in history and philosophy in Switzerland. In similar fashion, the purpose of theUBS Foundation for Social Issues and Educationis to support deprived communities in Switzerland in various forms. Non-profit, charitable organizations, projects and initiatives aiming at improving social welfare receive monetary assistance from these funds.

Client foundation

Besides the engagement of the firm and its employees, UBS also provides its clients with the opportunity to contribute to charitable causes. The UBS Optimus Foundation invests donations from UBS clients into a number of programs and



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Examples of UBS’s global community affairs in 2008

Americas:In partnership with Northwestern University, UBS launched a program to identify and develop future leaders in the non-profit sector. According to the Donors Forum of Chicago, the non-profit sector will see a large turnover in its local and national executive leadership in the next five years, with nearly 60% of executive directors set to retire. This program produced its first graduates in 2008 and four UBS fellows took classes at Northwestern and were mentored by a UBS senior executive.

Asia Pacific:UBS launched the firstCommunity Leadership Experience program at the India Service Centre in Hyderabad. This initiative aims to build the capacity of leaders from the non-profit sector using the expertise and human resources of UBS and to provide them with a platform for

dialogue, discussion, sharing and learning. Modeled on UBS leadership programs, it gave 20 promising young leaders from the non-profit sector a chance to learn from UBS and external speakers about topics related to leadership, governance, strategic planning, communication and mentorship.

Switzerland:Twenty employees volunteered forProcap Sport, an organization that promotes enthusiasm for sport among people with physical or mental disabilities. Volunteers supported participants in a broad range of sports activities. In another volunteering project, 200 UBS employees
successfully participated at the eighth Finance Forum charity run to aidKispex– a service providing home care for very sick, disabled and terminally ill children. UBS employees came in first in terms of numbers of

participants and donations collected.

UK:UBS continues to support an independent secondary school in Hackney, newly established in 2007, through the UK government’s Academies program. A local school for students of all abilities, The Bridge Academy opened in September 2007 by welcoming 187 students, and by 2013 will cater to 1,150 students including 250 sixth formers. The school’s ambition is to create an outstanding learning environment for students, staff and the local community. The Bridge Academy exemplifies UBS’s commitment to improving the provision of education and to supporting regeneration efforts in the London Borough of Hackney.
èRefer to www.ubs.com/ corporateresponsibility for more information on UBS’s community affairs program



organizations, focusing on the key themes of children and of medical and biological research. The projects involve close collaboration with respected partner organizations and are selected by a team of specialists within the foundation, who also closely monitor their implementation. The costs of managing and administering the UBS Optimus Foundation are borne by UBS, so that the full contribution from the firm’s clientsof each client reaches the projects. In 2007,2008, the UBS Optimus Foundation spent almostover CHF 1117 million supporting 5571 projects in Africa, Asia Pacific, Europe and North and South America.



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Corporate responsibility

Examples of UBS’s 2007 global community affairs activities

In theAsia Pacificregion, UBS supports the Child Welfare and Holistic Organization for Rural Development (CHORD) in Hyderabad, India. The organization provides a bridge education program and emotional support to child workers, helping them to return to normal schooling. As part of a “buddy” program, UBS employees assist the children with their schoolwork, and act as mentors, guiding them in their development and their efforts to return to school. Over the past year, the UBS India Service Centre (ISC) has organized a “Fun Day” for 420 CHORD children, a “Teachers’ Day” at the CHORD school as well as a field visit to the ISC itself, giving many students their first look inside a large corporation. One of the students at the CHORD school said: ”I was working in a shop previously. I have seen many customers and many faces. But no one ever bothered about me and my feelings. After I joined CHORD school I had the privilege of interacting with UBS. They bring smiles back on our sad faces.” In theUK, UBS is working in partnership with two other City firms to support the regeneration of Shoreditch. Situated in East London, Shoreditch is one of the most deprived areas in the UK with 82% of its population living in social housing and more than 30% of school leavers unable to find a job. Working directly with government and non-profit social regeneration agencies, the corporate collaboration known as Project Shoreditch focuses on matching the skills, expertise and enthusiasm of UBS employees to the needs of Shoreditch organizations. Since the project’s inception in April 2005, over 1,500 UBS volunteers have

supported a wide variety of Shoreditch-based community groups, charities and schools, through team challenges, business planning, mentoring, training, web design, workplace visits, the provision of employment advice and fundraising. Volunteers provide direct support for Shoreditch-based organizations while also assisting with the regeneration of the area. In 2007, Project Shoreditch was awarded the “Positive Impact on London” Award from Business in the Community. InSwitzerland, a notable volunteering project is the support of business training for students called “Fit for business”. The training is aimed at young people aged 14 to 16. UBS employees conduct the training sessions and support students with career guidance, help them write job applications and give them advice in managing their own money. UBS makes direct donations to charitable projects such as Swiss mountain aid, an organization that tries to stop the significant population outflows from poor mountainous areas in Switzerland by financing projects and businesses that help alpine communities achieve or maintain sustainable rates of economic subsistence. In addition, UBS helps Swisscontact, a Swiss foundation for technical cooperation, to give young girls and boys in Benin, Africa, training in various professions including carpentry, tailoring and hairdressing. The youths participating in the program learn how to read and write and are informed about important health issues they face, including AIDS and how to prevent it. In theAmericas, the wealth management business launched a new philanthropic focus “Education as a Pathway to a Better Future”, concen-

trating its charitable activities in the US on improving the education of students in kindergarten, elementary and high school in low-income areas. In conjunction with the new focus, a national volunteer initiative, called “Building Brighter Futures”, was launched in October 2007 with the goal of cultivating community, school and civic collaboration to help paint, garden and liven up schools and organizations related to education. During the month, over 2,100 UBS employees, family and friends volunteered in over 90 projects across the country. The Investment Bank launched a pilot education program in conjunction with Earthwatch International, a non- profit organization that engages people worldwide in scientific field research and education to promote the understanding and action necessary for a sustainable environment. Six UBS employees were selected as Earthwatch Fellows together with three public school teachers to participate in climate change expeditions in the northern reaches of Canada and on the coast of central Mexico. After the eight-day expeditions, the Fellows returned to share their experiences with colleagues and students from Medill Elementary school in Chicago, Illinois, the Hart Magnet School in Stamford, Connecticut; and the Manhattan Center for Science and Math in New York City. In 2008, the program will be expanded to include other UBS business areas in the Americas as employees work with their local schools to increase awareness of global environmental issues.
èFor more information on UBS’s
community affairs program, see www.ubs.com/corporateresponsibility





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UBS and the environment

UBS’sThrough its commitment to the environment, is underpinned by a globalembodied in its environmental management system certified underpolicy, UBS aims to create long-term value for the ISO 14001 standard since 1999.firm and its clients and the communities they live in. The system covers both banking activities and in-house operations and was successfully re-certified in 2005 by the firm’s auditor, SGS.

The firm remains committed to integrating environmental considerations into all its business activities. Its environmental policy is based on five principles:
principles, under which the firm is continuously:
– seeking to consider environmental risks in all UBS businesses, especially in lending, investment banking, advisory and research, and itsUBS’s own investments;
– seeking to pursue opportunities in the financial marketmarkets for environmentally friendly products and services, such as socially responsible investments;

– seeking ways to reduce UBS’s direct environmental impact on air, soil and water from in-house operations, with a primary focus on reducing greenhouse gas emissions. UBS will also seek to assessassesses the environmental impact of its suppliers’ products and services;
– ensuring efficient implementation of UBS’s policy through a global environmental management system certified according to ISO 14001
–the international environmental management standard; and
– integrating environmental considerations into internal communications and training.

Environmental management system

Environmental performance indicators

Every year, UBS provides a detailed description of its environmental performance using key performance indicators (KPIs), which allow for annual comparisons. They are based on in-

(FLOW CHART)

dustry standards such as the Global Reporting Initiative (GRI), the Greenhouse Gas Protocol and ISO 14064. The management indicators below provide an overview of the firm’sUBS’s environmental management system.

Environmental market opportunities

system covers both its banking activities and in-house operations and has been certified under the ISO 14001 standard since 1999. ISO 14001 requires that the system be audited annually and recertified every three years. UBS has strong expertisesuccessfully passed the extensive ISO 14001 recertification audit in incorporating environmental and social aspects into its research and advisory activities. A socially responsible investments (SRI) team was established in Global Asset Management as early as 1996. Socially responsible investments are sustainable investments that take ecological and social criteria into account alongside classical financial analysis. Today, SRI teams operate in all business groups and regions, allowing UBS to produce original SRI research and to offer a broad range of SRI investment products. Furthermore, the Investment Bank actively pursues related market opportunities, for example2008. Conducted by trading emissions on behalf of clients, or by arranging finance and providing advisory services to re-



Environmental management indicators

                     
  
     For the year ended % change from 
Full-time equivalent, except where indicated GRI1  31.12.07  31.12.06  31.12.05  31.12.06 
 
Financial businesses personnel2
      83,560   78,140   69,569   7 
 
In specialized environmental units3
      38   30   25   28 
 
Environmental awareness raising
                    
 
Employees trained  F5   5,090   2,489   2,251   104 
 
Training time (hours)  F5   2,133   1,498   1,214   42 
 
Specialized environmental training
                    
 
Employees trained  F5   976   977   1,010   0 
 
Training time (hours)  F5   1,420   1,758   2,066   (19)
 
External environmental audits4
                    
 
Employees audited  F6   37   30   147   23 
 
Auditing time (days)  F6   8   6   17   40 
 
Internal environmental audits5
                    
 
Employees audited  F6   121   154   216   (21)
 
Auditing time (days)  F6   38   44   39   (15)
 
1 Global Reporting Initiative (see also www.globalreporting.org). F stands for the Environmental Performance Indicators defined in the GRI Financial Services Sector Supplement.   2 All employment figures represent the state as of 31 December 2007.  3 2007: 32 UBS and six external employees (FTE).  4 Audits carried out by SGS Société Générale de Surveillance SA. Surveillance(SGS), 24 days of audits took placeinvolving 163 employees were undertaken. SGS confirmed that a well-performing environmental management system, integrated in 2006the organization and 2007. The more comprehensive Re-Certification Audit was done in 2005.  5 Audits / reviews carried out by specialized environmental units. The implementation of environmental risk policies is also audited by Group Internal Audit.suitable for manag-



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Corporate responsibility

The five principles of UBS’s environmental policy

(CHART)

newableing environmental risks and improving environmental performance on a continual basis, is in place.

Environmental products and services

During the last ten years UBS has developed a range of products and services that meet or anticipate clients’ needs in environmental and socially responsible investments (SRI). This offering currently stretches across UBS’s businesses in wealth management, investment banking, asset management, and retail and commercial banking. It includes SRI funds, research and advisory services provided to private and institutional clients, access to the world’s capital markets for renewable energy companies. Finally, Global Wealth Management & Business Banking has decidedfirms and, in Switzerland, “green” mortgages.

Investment products and advisory

In 2008, UBS continued to integrate SRI into the UBS Client Experience framework by adapting relevant client profiling tools, adding new proprietary and selected third-party products toexpand its SRI offering and enhancing internal platforms that provide information and sales documentation. These measures should help client advisors identify, understand and meet client demand for SRI products more effectively. After a successful pilot in Switzerland in 2007, which contributed to the overall increase of SRI invested assets, this approach will also be rolled out to the other regions.

Investment products and advisory

UBS’s asset management business is rapidly expanding its offering in the area of SRI to respondresponse to growing demand from a number of markets. In 2007, for example, UBS launchedmarkets, including

the launch of two new SRI products, in Japanthe UBS (Lux) Equity Sicav – Emerging Markets Innovators and Taiwan. Thethe UBS Strategy Certificate Energy Efficiency. UBS’s SRI offering is diversifieddiverse and includes products managed according to “best-in-class” practicepractices and theme-based approaches. “Best-in-class” is an active equity management approach that is based on stock selection of companies that generate above-average environmental, social and economic performance and offer significant growth potential.performance. The “best-in-class” offering includes a Global fund, a European fund, a Japaneseglobal fund and a TaiwaneseEuropean fund. The theme-based approach focuses investment around particular issues and themes such as energy,on segmented climate change, water and demographics. Products offered include a Global Innovators fund and segmented Climate Change, Water and Demographicsdemographics strategies.

Additionally, the Global Asset Management offering comprisesUBS offers customized client portfolios in the form of segregated mandates / institutional accounts based on “negative” screening, which is the exclusion or avoidance ofexcludes certain controversial stocks or sectors from the portfolio based on their perceived negative social or environmental impact as perceived by the client. UBS’s global platform and investment research enable the firm to offer such tailor-made solutions to meet its client needs.
solutions. In the UK, the asset management business seeks to influ-

enceinfluence the corporate responsibility and corporate governance practices of the companies it invests in.
In addition to fund management services, UBS also offers structured products that take into account environmental and social topics, such as the UBS Climate Change Strategy Certificate and UBS Water Strategy Certificate.
In the Investment Bank, the UBS Global Warming Index, the UBS Greenhouse Index and other index-linked products have been introduced to clients. The SRI Equity Sales team provides stock brokingstock-broking and account management services to alternative energy and SRI fund managers.
Finally, UBS also offers SRI portfolio management solutions to selected private client segments. This offering pools internal and external SRI expertise and includes SRI-focused portfolios in Switzerland and SRI-managed accounts in the US. UBS’s open architecture approach also allows clients to invest in SRI bond, equity and microfinance products from third-party providers.

Investment Bank: sell-side research

In 2004, the Investment Bank created anpast years UBS experienced increased client demand for SRI teamand expanded its SRI product offering, resulting in a significant increase in UBS SRI invested assets. In 2008 these SRI invested assets decreased significantly year on year, primarily due to severe corrections in the global equity markets (equities is the preferred asset class of sell-side analysts (sell-side analysts write recommendationsUBS’s SRI products), but also due to asset outflows.



Socially responsible investments invested assets1

 
                  % change 
     For the year ended  from 
CHF billion, except where indicated
 GRI2   31.12.08   31.12.07   31.12.06   31.12.07 
 
UBS
      2,174   3,189   2,989   (32)
 
UBS SRI3 products and mandates
                    
 
positive criteria  FS11   2.12   5.20   1.84   (59)
 
exclusion criteria  FS11   14.05   33.33   16.17   (58)
 
Third-party
  FS11   1.85   1.08   N/A   72 
 
Total SRI invested assets
  FS11   18.03   39.61   18.01   (54)
 
Proportion of total invested assets (%)4
      0.83%  1.24%  0.60%    
 
1All figures are based on the level of knowledge as of January 2009.  2Global reporting initiative (GRI) (see also www.globalreporting.org). FS stands for the performance indicators defined in the GRI Financial Services Sector Supplement.  3Socially responsible investments (SRI).  4Total SRI / UBS’s invested assets.

Positive criteria:apply to the active selection of companies, focusing on how a company’s strategies, processes and reportsproducts impact its financial success, the environment and society. This includes best-in-class or thematic investments.

Exclusion criteria:companies or sectors are excluded based on environmental, social or ethical criteria, for professional investors)example, companies involved in its equityweapons, tobacco, gambling, or companies with high negative environmental impacts. This also includes faith-based investing consistent with principles and values of a particular religion.

Third-party:UBS’s open product platform gives clients access to socially responsible investment products from third-party providers. This includes both positive and exclusion criteria, and microfinance investments.



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Corporate responsibility

Research

UBS’s SRI research area. Among other things, these sell-side analysts research areas of increasing or diminishing risk. Many SRI issues cannot easily be quantified, but, where possible, the team leverages UBS standard models, such as the Value Creation Analysis Model, toteams analyze the potential effects of socialemerging socio-economic and environmental issuestrends and assess their potential impact on investment markets and companies’ share prices. Identifying the material SRI issues presents challenges as, essentially,is challenging. Essentially, three things help determine which environmental and social issues are critical: society’s perception of what society sees asis important; the nature of the competitive pressures facing firms in an industry; and how costs and benefits are (or will be) distributed between stakeholders.
SinceThe UBS SRI research teams were established in each of the firm’s divisions to serve their respective clients. In the Investment Bank, the equity research team was established, clientwrites recommendations and reports for institutional investment clients on renewable energy, the carbon markets and the impact of climate change on companies in a wide range of sectors. SRI and sustainability research is provided by a dedicated team. In the asset management business, an internal SRI research team manages portfolios around themes such as climate change / energy efficiency, water and demographics. The SRI research team in UBS’s wealth management business conducts SRI research and provides advice to private clients on SRI investment solutions.
Client interest in some aspects of SRI – most notablyfor instance climate change, demographics and water – has grown, and so has research coverage. The SRI teamteams regularly collaboratescollaborate with analysts in sectorother teams to write about emerging SRI themes, and relevant research content is regularly published by a growing number of specialists within the mainstream research effort. An SRI page is available to UBS’s institutional clients on UBS’s Research Web. This brings together publicationsIn 2008, for example, UBS published the report “Mind over Matter”, which broadly examines the issue of resources efficiency, and makes the SRI team, as well as relevant sector reports from other teams.



Socially responsible investments invested assets

                     
  
     For the year ended  % change from 
CHF billion, except where indicated GRI1  31.12.07  31.12.06  31.12.05  31.12.06 
 
UBS
      3,189   2,989   2,652   7 
 
UBS socially responsible investments (SRI) products and mandates
                    
 
Positive criteria  F9   5.42   1.84   1.05   194 
 
Exclusion criteria  F9   32.06   16.17   10.73   98 
 
Third-party
  F9   1.38   N/A   0.61   N/A 
 
Total SRI invested assets
  F9   38.86   18.01   12.39   116 
 
Proportion of total invested assets (%)2
      1.22%  0.60%  0.47%    
 
1 Global Reporting Initiative (see also www.globalreporting.org). F standscase that higher prices for the Environmental Performance Indicators defined in the GRI Financial Services Sector Supplement.  2 Total socially responsible investments / UBS’s invested assets.

Positive criteria:applies to the active selection of companies, focusing on how a company’s strategies, processesbasic necessities, urbanization, and products impact its financial success, the environment and society. This includes “best-in-class” or thematic investments.

Exclusion criteria:companies or sectors are excluded based on environmental, social or ethical criteria. For example, companies involved in weapons, tobacco, gambling, or with high negative environmental impacts.

Third-party:UBS’s open product platform gives clients access to SRI products from third-party providers. This includes both positive and exclusion critieria.



78

Global Asset Management: buy-side research

In the asset management business, an SRI buy-side (internal proprietary research) team was established in Switzerland in 1996 and has expanded to the US and Singapore. The team carries out in-depth, theme-based research in the areas ofmore stringent climate change water and demographics. It also leverages the asset management business’s research platform of more than 100 analystspolicies will eventually yield benefits to construct all of its SRI portfolios. The internal research is complemented by specialized rating agencies. An academic board of experts also provides strategic support.those who invest in efficiency upgrades.

Global Wealth Management & Business Banking: secondary research

The secondary research team in UBS’s wealth management business helps private investors navigate large volumes of global financial data. It monitors and interprets research information on most traded asset classes. The team established an SRI competence center in 2007 in order to provide sound advice to clients. It publishes in-depth studies of emerging socio-economic and environmental trends such as climate change by assessing their potential impact on investment markets.

Financing and advisory services
UBS’s renewable energy investment banking business arranges financing and provides strategic and financial advisory services for companies in the biofuels, solar, wind, wave and other renewable energy sectors. Since 2006, UBS has led over 2030 financing transactions in these sectors, raising over USD 57 billion for renewable energy companies worldwideworldwide. In 2008, to name just one example of such a transaction, UBS acted as the joint global coordinator and winning a top-five ranking two years in a row (includingjoint bookrunner for the prestigious “Top Underwriter” award in 2006) from New Energy Finance, a specialist provider of financial information and analysis to investors in clean energy. UBS provides advice on a number of high-profile strategic combinations including the merger between US BioEnergy Corporation and VeraSun Energy Corporation, the largest transaction of its type in the historyEUR 1.8 billion initial public rights offering of the biofuel sector.
UBS is also a founding financial partner in the Clinton Foundation’s Climate Initiative (CCI), Energy Building Retrofit Program. The program, which includes five other major financial institutions, four of the world’s largest energy service companies and 15 large cities, is designed to reduce energy consumption in existing buildings. Under the program, participat-



Engaging investors in climate change issues

As a leading wealth and asset manager, UBS wants to help investors evaluate risks and opportunities presented by climate change in their investments. To do so, the firm produces relevant research and raises investors’ awareness by hosting dedicated conferences and seminars. It also seeks to increase the availability of data by collaborating in the Carbon Disclosure Project.
At the end of January 2007, the research team in the wealth management business published a report examining the scientific, technological and economic effects of climate change. Its authors argued that climate change will have far-reaching implications for the global economy and the worldwide investment climate and concluded that measures to combat global warming will increasingly influence people’s behavior, the risk profiles of certain industries and prospects for investment. The analysis
suggests that products and processes that improve energy efficiency, as well as the development of renewable or low-CO2 energy sources, have great potential to slow climate change. In the Investment Bank, over 60 analysts were involved in collaborative work on climate change in 2007. The utilities team wrote on the link between CO2 and the share price of utilities since 2004. This team also now writes on and forecasts the CO2 price traded on carbon exchanges. Elsewhere, sector teams cover photovoltaics, wind and other alternatives, as well as energy efficiency.
In addition to producing research on the effects of climate change on certain companies and sectors, UBS regularly invites institutional investors and other clients to attend conferences focusing on these topics. In 2007 alone, UBS hosted eight conferences and seminars featuring distinguished speakers on climate
change related topics in London, Tokyo, Hong Kong, Amsterdam, Stockholm, Paris and New York. For example, the UBS Global Alternative Energy Conference in New York City isgeneration company EDP Renováveis, one of the largest of its kind and represents an opportunity to meet investors and executives from leadingwind generation companies in the sector.
UBS isworld and a founding membersubsidiary company of the Carbon Disclosure Project. In collaboration with other institutional investors, it seeks information from the world’s largest companies concerning the business risks and opportunities presented by climate change and greenhouse gas emissions data. In 2007, unlike in previous years, responding companies appear to have moved beyond awareness and have implemented carbon strategies: 76% of respondents disclosed existing greenhouse gas emissions reduction efforts with targets and timelines. This marks a significant shift from 48% in 2006.


Portuguese utility Energias de Portugal (EDP).

79

Carbon trading

Corporate responsibility

ing city governmentsIn cap and local building owners will retrofit buildings for increased energy efficiency. Participating cities include London, Paris, New York, Mexico City and Tokyo, among others. UBS has committed expertise and other resources to create financial structures capable of delivering capital effectively to public and private projects in this program.

Carbon trading

UBS is an active participant in emissions trading markets and is a member of the Intercontinental Exchange (ICE), an electronic marketplace for energy and emissions trading in conjunction with the European Climate Exchange (ECX). In “cap and trade”trade emissions markets, such as the EU Emissions Trading Scheme (EU ETS), companies have annual caps on

the amount of emissions their facilities are issued with permits that limit, or cap, their emissions.allowed to produce. Companies who are able to reduce their emissions at low costbelow their cap have the ability to sell their unused permitsquota to other companies, requiring them, thereby creating an emissions allowances market and ensuring that emission reductions are achieved in a cost-effective manner.market. Through the use of carbon financial instruments, UBS is able to help clients manage their exposure to the emissions markets.

UBS ETD (Exchange Traded Derivatives) is an active member of and offers execution and full service clearing on the major emission exchanges in Europe and North America for contracts on EU ETS allowances (EUA), UN Certified Emissions Reductions (CER), Regional Greenhouse Gas Initiative allowances, CCX Carbon Financial Instruments (CFI) and Nitrogen Oxide and Sulfur Dioxide.

Environmental risk management

For UBS it is importantseeks to identify, manage and control environmental risks in its business transactions. An exampleExamples of suchenvironmental risk include the impairment of a risk is when a counterparty’sclient’s cash flow or assets are impaired by environmental factors such(such as inefficient production processes or property that is polluted or contaminated property. Another iscontaminated) or through liability risk, such as when a bank takes over environmentally unsound collateral onto its own books.

As environmental risks can manifest themselves across the wide variety of risks inherent in UBS’s business activities, including credit risks, liability risks and reputational risks, UBS has a long track record in managing environmental risks: an environmental credit assessment procedure was introduced for Swiss corporate clients as early as 1994, and the Investment Bank’s first environmental guideline was issued in 1999. Since then, UBS has constantly sought to adapt and refine its environmental risk framework.
The general approach to managing environmental risks is derived from the methodology of the ISO 14001 standard: the first step is to assess and rate the potential for material environmental risks arising in the various products and services offered by the bank. The result of this analysis is reviewed every year and currently shows that the potential for material risk is greater within the context of lending and capital markets practices for commercial lending, investment banking and direct infrastructure investments. In a second step, for each product and client segment rated with high potential risk, UBS designsdesigned environmental procedures and tools thatfor their identification, management and control. These environmental procedures and tools are adapted to their specific risk profile and integrated into existing processes, such as due diligence on transactions or investments and ongoing risk management.

Global Wealth Management & Business Banking

EnvironmentalUBS continues to develop and test internal industry sector guidelines to support the consistent identification and assessment of environmental and social risks are assessed in all its banking activities. The sector guidelines cover industry sectors that have a three-stage processhigh potential for environmental and social risk and summarize industry standards for dealing with potential issues in the various life cycles of the sector.
Not all products and services provided by UBS have the same risk potential: UBS therefore takes a risk-based approach to environmental risk management and regularly analyzes its portfolio of products and services to assess their respective potential environmental risk potential. With its current business profile and operating environment, UBS’s potential for material risk is greater within the context of its lending and capital markets businesses, as well as its direct real estate and infrastructure investments. As a result, Global Wealth Management & Business Banking has introduced a standardized environmental risk check to identify material environmental risk in its lending to all relevant clients, including its roughly 140,000 corporate clients in Switzerland. In the Investment Bank, the environmental risk framework covers all banking activities including debt and equity under-



66

Strategy, performance and responsibility

writing, financial advisory services and lending. For its part, Global Asset Management has put environmental due diligence processes in place for its real estate and infrastructure funds. If significant potential environmental risks are identified in a transaction, the risks are assessed. Wherever possible, UBS seeks to engage with the client to discuss possible mitigating measures. Where this is not possible or successful, the firm may decline the transaction altogether.

Global Wealth Management & Business Banking

The business group. The client advisor carries outdivision assesses its environmental risks in a three-stage process. Client advisors complete the first screening, coveringscreenings, looking at financial risks linked to environmental aspects such as compliance with environmental legislation, work-placeworkplace safety, contaminated sites and natural hazards. In 2008, close to 100,000 lending transactions in Switzerland were subject to such a screening. If the risks cannot be fully ruled out during the first screening, a credit officer initiates a second screening and decides whether the risks identified are transparent enough for the credit decision to be taken. Transactions entailing significant environmental risk undergo a third step, a detailed environmental assessment –as a third step, a service provided by the business group’sdivision’s environmental risk competence center. In 2007, 362008, 32 such detailed assessments took place. If a transaction poses substantial environmental risks, the bank can take several courses of action. It can adapt the terms of the loan contract, it may engage theplace and 134 client in a dialog about possible remedial action, or it may decline the transaction altogether.advisors and credit officers were trained.

Investment Bank

The Global Environmental Risk Guidelines apply to all transactions, services and activities within the Investment Bank. This requirement isThe guidelines are supported by an Environmental Risk Frameworkenvironmental risk framework that is integrated into the Investment Bank’sbusiness division’s due diligence and approval processes. Investment Bank staff identify potential environmental risks in the initial due diligence phase and alert the Investment Bank’s Environmental Risk Group (ERG)environmental advisory group (EAG) in case of significant potential risks. Assessments by lawyers and / or external consultants are routinely sought for certain sectors and products. The ERGEAG works with the relevant business and control functions (80 transactions in 2008) to assess the risks, determine any mitigating measures and direct further due diligence, as required, so thatrequired. In this way the relevant senior business committee may fully consider the potential environmental risk in the course of its review of the transaction and / or client. The ERG reinforces this requirement withimplementation of the environmental risk framework is supported by training and awareness raisingawareness-raising activities. In 2007, the ERG provided2008, sector-specific training on the Environmental Risk Frameworkwas provided to 500443 bankers and support functions and high-level training to a further 600 employees and advised on environmental issues in 108 transactions.107 employees.

Global Asset Management

The business division introduced a formal environmental risk matrix introduced in 2004 within Global Asset Management, which assessesin order to assess the reputationreputational and environmentalenvi-

ronmental risks that investments made by UBS on behalf of its clients might imply,imply. The matrix is reviewed annually for applicability and comprehensiveness. Itcomprehensiveness and forms part of the environmental management system employed within the business group.



division. In 2008, all properties acquired or developed by Global Real Estate for its direct investment vehicles were subject to a thorough environmental due diligence process, in accordance with local regulations and internal best practice guidance. Similar processes are in operation in Infrastructure Asset Management.

80

Environmental and CO2 footprints

The firmUBS directly impacts the environment in a number of ways. Itsways: its businesses consume electricity,electricity; employees travel for business purposes theyand use paper and generate waste in the course of their work,work; and offices require heating and cooling systems. Improving the use of these resources can boost operating marginsreduce costs and enhance environmental performance, and UBS therefore UBS has a series of measures thatto efficiently manage its environmental impact efficiently.

UBS has a long track record for managing its environmental impact and CO2 footprint, with the first energy unit having been established in the 1970s.
impact.

CO2 strategy and emission reduction

The Group Executive BoardGEB decided in February 2006 to set a group-wideGroup-wide CO2 emission reduction target of 40% below 2004 levels by 2012. UBS seeks to achieve this target by implementing:by:
– adopting in-house energy efficiency measures that reduce energy consumption in buildings it operates in;operates;
– increasing the proportion of renewable energy used to avoid emissions at source; and
– offsetting and neutralizing emissions that cannot be reduced by other means.

UBS’s CO2 footprint

(BAR CHART)



67

Strategy, performance and responsibility
Corporate responsibility

These measures allowed UBS to further increase the share of renewable energy it purchases, and to reduce its 2008 CO2 emissions by 22%27% compared with 2004, an importantanother step toward achieving the 40% reduction target by 2012.

Energy consumption and energy efficiency

Energy consumption represents an important environmental impact area for UBS and is a majorthe biggest contributor to its overall greenhouse gas emissions. EnergyUBS has a long track record of managing its energy consumption, with the firm establishing its first energy management function in the 1970s. Today, energy efficiency measures are therefore an important component of UBS’s program for achievement of the Group-wide CO2 emission reduction target. Measures include investments in energy-efficient technology and encouraging good housekeeping measures. InFor example, a major IT server consolidation project has been under way since 2007 which has reduced the total number of distributed servers at UBS was awarded the “Energy Model Zurich” trophy for the firm’s achievements in improving its energy efficiency in Switzerland by 17% since 1997.2,200. The firm’s newly renovated offices in Stamford, Connecticut, were awarded the Silver Standard

(BAR CHART)

by the US Green Building Council’s Leadership in Energy and Environmental Design (LEED). The building incorporates many energy optimizing features, such as light harvesting where sensors detect levels of sunshine,project focused on consolidating applications sitting on multiple old servers to fewer, newer machines and the building automatically adjusts interior lighting depending ondecommissioning of old applications. The resulting energy savings of 17 GWh contributed significantly to the leveltotal of exterior light. Going forward, UBS has adopted a technical standard supporting worldwide oversight25 GWh of measures taken to improve energy efficiency in fields such as building operation, replacement investments and rehabilitations.savings from IT activities since 2007 (representing around 3% of UBS’s global power consumption).

Renewable energy

In addition to its energy efficiency programs, UBS seeks to improve the energy mix it purchases towardsby including a higher proportion of renewable energy. The percentage of renewable energy and district heating purchasepurchases rose from 24% in 2004 to 45%48% in 2007.2008.
InSince 2007, UBS signed a new agreement (roughlyroughly 210 GWh per year) under whichor 90% of the electricity supply for itsUBS’s buildings in Switzerland now comeshas come from renewable sources, such as water and solar power stations. Similarly, in the UK, UBS purchases electricity backed by 100% renewable sources for all its major buildings, representing 85% of the total volume. In addition, UBS purchases Renewable Energy Creditsrenewable energy credits (RECs) in the US electricity markets, which accounted for 10%16% of its electricity consumption in the US in 2007.2008.



Environmental indicators per full-time employee (FTE)

                     
 
  Unit  2007  Trend  2006  2005 
 
Total direct and intermediate energy kWh / FTE  11,942   î   12,736   12,925 
 
Total indirect energy kWh / FTE  20,391   ê   23,974   26,024 
 
Total business travel Pkm / FTE  12,685   è   12,544   10,659 
 
Total paper consumption kg / FTE  190   è   188   197 
 
Total waste kg / FTE  299   è   303   325 
 
Total water consumption m3 / FTE  26.7   è   26.0   26.0 
 
Total environmental footprint kWh / FTE  32,530   ê   38,148   41,129 
 
CO2 footprint
 t / FTE  3.43   ê   3.93   5.24 
 
Legend:kWh = kilowatt hour; Pkm = person kilometer; kg = kilogram; m3 = cubic meter; t = ton

81

Corporate responsibility

Both these initiatives are a continuation of the renewable energy purchasing that began in 2000 in Switzerland and 2003 in London and represent an improvement on the previous contracts in terms of the increased volume derived from renewable sources.

Business travel and offsetting

Business travel is a significant contributor to UBS’s greenhouse gas emissions. While the firm encourages its employees to use environmentally friendly alternatives to air and road travel, for example video conferences, travel is essential for a global financial services firm that strongly believes in personalized client relationships. Therefore, since 2006, UBS has decided to offset emissions from business relatedbusiness-related air travel, i.e. over 110,000representing roughly 100,000 tons of CO2, representing per year, or about a quarter of its total annual CO2 emissions. Offsetting emissions means that UBS indirectly neutralizes its business air travel emissions

by investing in third-party projects that reduce an equivalent amount of greenhouse gas emissions. For 2007, UBS selected offsetting projects in Brazil, Russia, India, China, Turkey and Germany, on the basis of their adherence to international quality standards such as the Voluntary Carbon Standard and the Gold Standard, and of their additional environmental and social benefits.

Paper and waste

UBS has agreed on newcontinues to work towards achieving its firm-wide targets for paper use and waste.waste reduction. This includes the goal of reducing paper consumption per employee by 5% byfor 2009 when compared with 2006 levels. UBS also wantsaims to have 20% of the paper it uses come from recycled sources. Across Europe, UBS has now switchedmade steady progress towards achieving these paper targets, for example by switching across Europe to a 100% recycled paper for all internal printing.printing, and through continuing improvements in electronic distribution of client statements. At the same time, the firm will be seekingseeks to improve its environmental footprint by reducing waste per employee (for example, plastic bottles or packaging) per employee by 10% and by sending 70% of waste to recycling sites. These latter targets are proving to be challenging in certain regions as they heavily rely on behavioral changes rather than technical measures or processes. UBS will continue to educate its employees on environmental matters, helping them make the right choices and promoting sustainable behavior both at work and at home.
 è More detailedRefer to www.ubs.com/environment for more information on UBS’s environmental management system is available at www.ubs.com/ environment



82Environmental indicators per full-time employee

                     
 
  Unit  2008  Trend  2007  2006 
 
Total direct and intermediate energy kWh / FTE   11,792   è   11,942   12,736 
 
Total business travel Pkm / FTE   10,281   ê   12,685   12,544 
 
Total paper consumption kg / FTE   167   ê   190   188 
 
Total waste kg / FTE   298   è   299   303 
 
Total water consumption m3 / FTE   28.1   ì   26.7   26.0 
 
CO2 footprint
 t / FTE   3.07r   ê   3.43   3.93 
 
Legend:FTE = full-time employee; kWh = kilo watt hour; Pkm = person kilometer; kg = kilogram; m3 = cubic meter; t = ton

68

                         
Environmental indicators1    20072  20062  20052 
      Absolute          Absolute  Absolute 
  GRI3  normalized4  Data quality5  Trend6  normalized4  normalized4 
 
Total direct and intermediate energy consumption7
     981 GWh   ***   è  951 GWh  918 GWh 
 
Total direct energy consumption8
 EN3  130 GWh   **   î  154 GWh  169 GWh 
 
natural gas      83.3%   **   è   85.5%   86.0% 
 
heating oil      12.1%   ***   è   11.8%   11.0% 
 
fuels (petrol, diesel, gas)      4.6%   ***   é   2.7%   3.0% 
 
renewable energy (solar power, etc.)      0.03%   ***   ì   0.03%   0.02% 
 
Total intermediate energy purchased9
 EN4  851 GWh   ***   ì  797 GWh  749 GWh 
 
electricity from gas-fired power stations      12.3%   **   è   13.2%   14.3% 
 
electricity from oil-fired power stations      4.2%   ***   è   4.5%   4.3% 
 
electricity from coal-fired power stations      18.6%   **   î   21.7%   22.9% 
 
electricity from nuclear power stations      13.6%   **   ê   20.5%   29.9% 
 
electricity from hydroelectric power stations      25.5%   ***   é   21.4%   12.1% 
 
electricity from other renewable resources      22.0%   ***   é   12.7%   11.1% 
 
district heating      3.8%   ***   ê   6.0%   5.4% 
 
Total indirect energy consumption10
 EN4  1,674 GWh   ***   î  1,790 GWh  1,849 GWh 
 
Total business travel
 EN29  1,042 m Pkm   ***   é  936 m Pkm  757 m Pkm 
 
rail travel11
      3.3%   **   î   4.1%   3.7% 
 
road travel11
      0.5%   **   ê   0.6%   0.7% 
 
air travel      96.2%   ***   è   95.3%   95.6% 
 
Number of flights (segments)
      446,274   ***   é   402,629   358,992 
 
Total paper consumption
 EN1   15,593 t   ***   é   14,013 t   14,020 t 
 
post-consumer recycled  EN2   10.5%   ***   é   6.2%   7.1% 
 
new fibers FSC12
      10.7%   ***   é   0.0%   0.0% 
 
new fibers ECF + TCF12
      78.6%   ***   ê   93.8%   92.9% 
 
new fibers chlorine bleached      0.2%   **   é   0.0%   0.0% 
 
Total waste
 EN22   24,589 t   ***   ì   22,631 t   23,073 t 
 
valuable materials separated and recycled      56.3%   ***   è   58.2%   64.8% 
 
incinerated      15.8%   ***   é   12.7%   9.3% 
 
landfilled      27.9%   **   è   29.1%   25.9% 
 
Total water consumption
 EN8   2.19 m m3  **   ì   1.94 m m3  1.84 m m3
 
Total environmental footprint13
     2,671 GWh   **   è  2,848 GWh  2,922 GWh 
 
Total CO2 footprint14
      281,705 t   ***   è   293,169 t   372,184 t 
 
Total direct CO2 (GHG scope 1)15
  EN16   26,701 t   ***   ê   31,519 t   34,556 t 
 
Total indirect CO2 (GHG scope 2)15
  EN16   218,681 t   **   è   230,015 t   225,854 t 
 
Total other indirect CO2 (GHG scope 3)15
  EN17   149,323 t   ***   é   132,635 t   111,773 t 
 
Total CO2e offsets (business air travel)16
      113,000 t   ***   é   101,000 t   – 
 
Strategy, performance and responsibility

Environmental indicators1

                         
 
          20082      20072  20062 
      
      Absolute  Data      Absolute  Absolute 
  GRI3  normalized4  quality5  Trend6  normalized4  normalized4 
 
Total direct and intermediate energy consumption7
     1,016 GWh   ***   è  981 GWh  951 GWh 
 
Total direct energy consumption8
 EN3  127 GWh   **   è  130 GWh  154 GWh 
 
natural gas      83.3%   **   è   83.3%   85.5% 
 
heating oil      12.2%   ***   è   12.1%   11.8% 
 
fuels (petrol, diesel, gas)      4.5%   ***   è   4.6%   2.7% 
 
renewable energy (solar power, etc.)      0.03%   ***   î   0.03%   0.03% 
 
Total intermediate energy purchased9
 EN4  890 GWh   ***   è  851 GWh  797 GWh 
 
electricity from gas-fired power stations      11.7%   **   è   12.3%   13.2% 
 
electricity from oil-fired power stations      3.7%   ***   ê   4.2%   4.5% 
 
electricity from coal-fired power stations      18.4%   **   è   18.6%   21.7% 
 
electricity from nuclear power stations      11.1%   **   î   13.6%   20.5% 
 
electricity from hydroelectric power stations      25.8%   ***   è   25.5%   21.4% 
 
electricity from other renewable resources      23.1%   ***   è   22.0%   12.7% 
 
district heating      6.2%   ***   é   3.8%   6.0% 
 
Share of renewable energy and district heating
      48%   ***   ì   45%   34% 
 
Total business travel
 EN29  886 m Pkm   ***   ê  1,042 m Pkm  936 m Pkm 
 
rail travel10
      3.5%   **   è   3.3%   4.1% 
 
road travel10
      0.6%   **   é   0.5%   0.6% 
 
air travel      96.0%   ***   è   96.2%   95.3% 
 
Number of flights (segments)
      398,369   ***   ê   446,274   402,629 
 
Total paper consumption
 EN1   14,403 t   ***   î   15,593 t   14,013 t 
 
post-consumer recycled  EN2   16.2%   ***   é   10.5%   6.2% 
 
new fibers FSC11
      16.6%   ***   é   10.7%   0.0% 
 
new fibers ECF + TCF11
      66.8%   ***   ê   78.6%   93.8% 
 
new fibers chlorine bleached      0.4%   **   é   0.2%   0.0% 
 
Total waste
 EN22   25,644 t   ***   è   24,589 t   22,631 t 
 
valuable materials separated and recycled      54.6%   ***   è   56.3%   58.2% 
 
incinerated      14.3%   ***   î   15.8%   12.7% 
 
landfilled      31.1%   **   ì   27.9%   29.1% 
 
Total water consumption
 EN8   2.42 m m3  **   ì   2.19 m m3  1.94 m m3
 
Total CO2 footprint12
      264,197 t   ***   î   281,705 t   293,169 t 
 
total direct CO2 emissions (GHG scope 1)13
  EN16   26,490 t   ***   è   26,701 t   31,519 t 
 
total indirect CO2 emissions (GHG scope 2)13
  EN16   204,344 t   **   è   218,681 t   230,015 t 
 
total other indirect CO2 emissions (GHG scope 3)13
  EN17   129,364 t   ***   ê   149,323 t   132,635 t 
 
total CO2e offsets (business air travel)14
      96,000 t   ***   ê   113,000 t   101,000 t 
 
Legend:GWh = gigawattgiga watt hour; Pkm = person kilometer; t = ton; m3 = cubic meter; m = million
1All figures are based on the level of knowledge as of January 2008.2009.  2Reporting period: 2008 (1 July 2007–30 June 2008), 2007 (1 July 2006–30 June 2007), 2006 (1 July 2005–30 June 2006), 2005 (1 July 2004–30 June 2005).  
3Global Reporting Initiativereporting initiative (see also www.globalreporting.org). EN“EN” stands for the Environmental Performance Indicatorsenvironmental performance indicators as defined in the GRI.  4Non-significant discrepancies from 100% are possible due to roundings.  5Specifies the estimated reliability of the aggregated data and corresponds approximately to the following uncertainty (confidence level 95%): up to 5% – ***, up to 15% – **, up to 30% – *. Uncertainty“Uncertainty” is the likely difference between a reported value and a real value.  6Trend: at a *** / ** / * data quality, the respective trend is stable (è) if the variance equals 5 / 10 / 15%, low decreasing / increasing (î,ì) if it equals 10 / 20 / 30% and decreasing / increasing if the variance is bigger than 10 / 20 / 30% (ê,é).  7Refers to energy consumed within the operational boundaries of UBS.  8Refers to primary energy purchased which is consumed within the operational boundaries of UBS (oil, gas, fuels).  9Refers to energy purchased that is produced by converting primary energy and consumed within the operational boundaries of UBS (electricity and district heating).  10 Refers to primary energy, which is consumed to produce the electricity and district heating consumed by UBS.   11Rail and road travel: Switzerland only.  1211Paper produced from new fibers. FSC“FSC” stands for Forest Stewardship Council, ECF“ECF” for Elementary Chlorine Freeelementary chlorine free and TCF“TCF” for Totally Chlorine Free.totally chlorine free.  1312 Shows the environmental impact (through emissions, use of resources, waste) by a process including all relevant upstream and downstream processes. The environmental footprint is approximated using the equivalent of non-renewable energy consumed.   14CO2 footprint equals total CO2 emissions (GHG scope 1, 2 and 3) minus CO2e offsets.  1513Refers to ISO 14064 and the “GHG (greenhouse gas) protocol initiative” (www.ghgprotocol.org), the international standards for CO2 reporting: direct CO2 (Scope 1)Scope 1 accounts for direct CO2 emissions by UBS; indirect COScope 2 (Scope 2) accounts for indirect CO2 emissions associated with the generation of imported / purchased electricity, heat or steam; other indirect CO2 (Scope 3)Scope 3 accounts for indirect CO2 emissions associated with business travel, paper consumption and waste disposal.  1614Offsets from third-party GHG reduction projects measured in CO2 equivalents (CO2e). These offsets neutralize CO2 emissionemissions from our business air travel.

Verification by SGS Société Générale de Surveillance SA

“We have verified the correctness of the statements in the 2007 Environmental Report of UBS AG and, where necessary, have requested that proof be presented. We hereby confirm that the report has been prepared with the necessary care, that its contents are correct with regard to environmental performance, that it describes the essential aspects of the environmental management system at UBS AG and that it reflects the actual practices and procedures at UBS AG.

We have also conducted a third party verification of the CO2 emissions in the years 2004 to 2007 against the principles of ISO 14064-I (2006). In our opinion, the reported CO2 emissions are fair, accurate, transparent and free from material errors or misstatements and meet the materiality threshold.”

Elvira Bieri, Dr Erhard Hug and Dr Jochen Gross, Zurich, February 2008


8369

Strategy, performance and responsibility
Corporate responsibility



Corporate responsibility in UBS guidelines and policies

The importance UBS attaches to responsible corporate behavior is reflected in the various documents and policies defining the rules and principles the firm applies to the behavior of its employees. These guidelines define the way UBS does business and the firm regularly monitors compliance.

UBS’svision and valuesstate that the firm is a member of the global community and should behave as a responsible corporate citizen. The firm and its employees should conduct themselves in a manner that is above reproach, as preserving UBS’s integrity is vital to its most valuable asset – its reputation.
The firm has acode of business conduct and ethics,which sets forth the policies and practices UBS expects all its employees to follow. The code outlines the required standards of fairness, honesty and integrity in a general manner. It is the basis for all UBS policies.
(ASSURANCE STATEMENT)

Employment of staff

UBS provides equal employment and advancement opportunities for all its employees, regardless of gender, ethnicity, race, nationality, age, disability, sexual orientation or religion.

Whistleblowing protection

A whistleblowing policy allows employees to report any breach of law, regulations or codes of ethics to a senior manager without fear of retaliation.

Conflicts of interest

UBS is committed to ensuring fair treatment of all its stakeholders, while recognizing that conflicts of interest cannot always be avoided. The firm has therefore established guiding principles outlining its approach to properly identifying and managing conflicts of interest. In addition, various other policies address situations in which a conflict of interest might potentially arise, such as personal account dealing, or the providing and receiving of gifts. UBS’s Investment Bank also has specific conflict of interest policies for its research activities.

Anti-money laundering and bribery of public officials

UBS is committed to fighting money laundering, corruption and terrorist finance. To do that, the firm has a number of policies in place, an effective risk management framework and a dedicated money laundering prevention unit. UBS aims to prevent

bribery of public officials by requiring the pre-approval of any transfer of value by UBS or any employee to a public official.

Memberships and donations

A policy is in place to govern the handling and uniform treatment of memberships and donations by UBS globally. It specifies that donations are goodwill payments made to organizations whose activities serve (among others) non-profit, charitable, cultural and educational purposes.

Information security

UBS adheres to the highest standards of information security. It meets legal and regulatory requirements related to information security, satisfying the obligations it has to clients, employees and shareholders.

Environmental management

UBS is committed to integrating environmental considerations into all its business activities.

Human rights

The “UBS Statement on Human Rights” sets out the firm’s approach to promote and respect human rights standards within its sphere of influence.



84

UBS’s businesses

85

Global Wealth Management & Business Banking

–Leading global provider of financial services for wealthy clients
–Top bank for individual and corporate clients in Switzerland
–Record profitability and net new money inflows in 2007


Business description

Global Wealth Management & Business Banking comprises the following business units, which are reported separately:

Wealth Management International & Switzerland provides a comprehensive range of products and services, individually tailored for wealthy and affluent clients around the world (except domestic US clients), via its extensive global branch network and through financial intermediaries. An open product platform gives clients access to a wide array of pre-screened, top-quality products from third-party providers that complement UBS’s own lines

Wealth Management USoffers sophisticated products and services specifically designed to address the needs of emerging affluent, affluent, high net worth and ultra-high net worth domestic US clients

Business Banking Switzerlandoffers high-quality, standardized products to the retail market for individual and small company clients, as well as more complex products and advisory services for larger corporate and institutional clients and financial institutions in Switzerland

Performance in 2007

Wealth Management International & Switzerland
–Record net new money intake of CHF 125.1 billion (CHF 97.6 billion in 2006) leading to an all-time high in invested assets of CHF 1,294 billion (up 14% from 2006)
–Record pre-tax profit of CHF 6,306 million (up 21% compared with 2006)
–Cost / income ratio improved for the fifth consecutive year to 50.9%
Wealth Management US
–23% year-on-year increase in performance before tax to CHF 718 million despite weakening of the US dollar. Record recurring income and lower general and administrative expenses
–Strong net new money intake of CHF 26.6 billion (CHF 15.7 billion in 2006). Invested assets increased to CHF 840 billion reflecting rising markets, net new money intake and the first-time inclusion of McDonald Investments
Business Banking Switzerland
–Record performance before tax of CHF 2,460 million (CHF 2,356 million in 2006), mainly due to income growth
–Continued high level of efficiency with cost / income ratio of 57.3%


86

Business group / business unit reporting

                                 
 
  Wealth Management                  Global Wealth Management 
CHF million, except where indicated International & Switzerland  Wealth Management US  Business Banking Switzerland  & Business Banking 
As of or for the year ended 31.12.07  31.12.06  31.12.07  31.12.06  31.12.07  31.12.06  31.12.07  31.12.06 
 
Total operating income  12,866   10,798   6,659   5,863   5,489   5,270   25,014   21,931 
 
Total operating expenses  6,560   5,595   5,941   5,281   3,029   2,914   15,530   13,790 
 
Business group / business unit performance before tax
  6,306   5,203   718   582   2,460   2,356   9,484   8,141 
 
Additional information
                                
 
Net new money (CHF billion)  125.1   97.6   26.6   15.7   4.6   1.2   156.3   114.5 
 
Invested assets (CHF billion)  1,294   1,138   840   824   164   161   2,298   2,123 
 
Personnel (full-time equivalents)  15,811   13,564   19,347   18,557   15,932   15,913   51,090   48,034 
 

(PIE CHART)

(CHART)



(CHART)

87

UBS’s businesses

Global Wealth Management & Business Banking




Global Wealth Management & Business Banking

Global Wealth Management & Business Banking is the leading global provider of financial services for wealthy clients and the top bank for individual and corporate clients in Switzerland.

Business group reporting

                 
 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
Income  24,841   21,775   19,131   14 
 
Adjusted expected credit loss1
  173   156   107   11 
 
Total operating income
  25,014   21,931   19,238   14 
 
Cash components  10,535   9,043   8,252   16 
 
Share-based components2
  357   306   237   17 
 
Total personnel expenses  10,892   9,349   8,489   17 
 
General and administrative expenses  3,141   3,028   2,845   4 
 
Services (to) / from other business units  1,171   1,118   960   5 
 
Depreciation of property and equipment  241   232   226   4 
 
Amortization of intangible assets  85   63   56   35 
 
Total operating expenses
  15,530   13,790   12,576   13 
 
Business Group performance before tax
  9,484   8,141   6,662   16 
 
                 
Key performance indicators
                
 
Cost / income ratio (%)3
  62.5   63.3   65.7     
 
Capital return and BIS data
                
 
Return on allocated regulatory capital (%)4
  41.9   39.3   34.7     
 
BIS risk-weighted assets  169,650   155,158   147,348   9 
 
Goodwill and excess intangible assets5
  5,828   5,978   5,407   (3)
 
Allocated regulatory capital6
  22,793   21,494   20,142   6 
 
                 
Additional information
                
 
Invested assets (CHF billion)  2,298   2,123   1,887   8 
 
Net new money (CHF billion)7
  156.3   114.5   98.5     
 
Client assets (CHF billion)  3,554   3,337   2,895   7 
 
Personnel (full-time equivalents)  51,090   48,034   44,612   6 
 
1 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the business groups (see Note 2 in Financial Statements 2007).   2 Additionally includes related social security contributions and expenses related to alternative investment awards.   3 Operating expenses / income.   4 Business group performance before tax / average allocated regulatory capital.   5 Goodwill and intangible assets in excess of 4% of BIS Tier 1 capital.   6 10% of BIS risk-weighted assets plus goodwill and excess intangible assets.   7 Excludes interest and dividend income.

8870

Business

The global branch network delivers comprehensive financial services to wealthy private individuals around the world and to private and corporate clients in Switzerland. Global Wealth Management & Business Banking provides all its clients with the advice, financial products and tools that fit their individual needs.

Organizational structure

On 1 July 2005, the business group called Global Wealth Management & Business Banking was formed to encompass UBS’s global wealth management businesses, along with the Swiss corporate and retail banking unit. On this date, UBS also transferred the municipal finance unit, until then a part of the Wealth Management US unit, to the Investment Bank’s fixed income area.

Global Wealth Management & Business Banking is managed in a fully integrated way along its main geographic markets, although financial results are reported for the following business units separately:

–Wealth Management International & Switzerland, serving wealthy and affluent clients around the world, except domestic clients in the US;
–Wealth Management US, serving wealthy and affluent domestic US clients; and
–Business Banking Switzerland, serving retail and corporate clients in Switzerland.
Businesses focusing on client needs can only fully exploit their potential if they are provided with a reliable and efficient infrastructure. Support areas within Global Wealth Management & Business Banking provide products and services to these three business units as well as to other UBS business groups, which are charged accordingly via a transfer pricing mechanism.
At the end of 2007, as a result of the strong growth of UBS’s international wealth management business, Global Wealth Management & Business Banking broadened its regional management structure. The new regional business areas are now Asia Pacific; Western Europe, Mediterranean, Middle East & Africa; North, East & Central Europe; Switzerland;divisions and Wealth Management Americas. This development will accelerate decision-making processes and help the business group better focus on local client needs worldwide.


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UBS business divisions and Corporate Center

Wealth Management International & Switzerland

–One of the leading wealth managers worldwide
– 2007 was a record year in terms of profitability, net new money intake
As announced on 10 February 2009, Global Wealth Management & Business Banking has been divided into two business divisions: Wealth Management & Swiss Bank and invested assetsWealth Management Americas.
–Global reach, with 5,774 client advisors in 110 offices in Switzerland and 93 offices worldwide
–Further business expansion through successful growth initiatives in Asia Pacific and the European onshore business

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UBS’s businesses
Global Wealth Management & Business Banking

Wealth Management International & Switzerland
Business description

With more than 140 years of experience, an extensive global network and CHF 1,294 billion in invested assets on 31 December 2007, the 5,774 client advisors of this wealth management business deliver high-quality, individually tailored solutions to clients worldwide.

Business

The Wealth Management International & Switzerland business unit provides a comprehensive range of products and services, individually tailored for wealthy clients around the world, via its global branch network and through financial intermediaries.

Client advisors combine strong personal relationships with the resources that are available from across UBS, helping them to provide a full range of wealth management services – from asset management to estate planning and from corporate finance advice to art banking. An open product platform gives clients access to a wide array of pre-screened, top-quality products from third-party providers that complement UBS’s own lines.

Organizational structure

The Wealth Management International & Switzerland business unit comprises the following management areas:
–Asia Pacific;
–Western Europe, Mediterranean, Middle East & Africa;
–North, East & Central Europe;
– The Americas;Investment Bank underwent a detailed strategic review in 2008. The result was a repositioning of the business division, personnel and
–Switzerland. cost reductions and a refocusing of the business division’s activities and businesses.

Competitors

Major competitors for the business unit comprise all globally active wealth managers, such as the wealth management

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operations of Credit Suisse, HSBC and Citigroup. Wealth Management International & Switzerland also competes with private banks that operate mainly within their respective domestic markets, such as Julius Baer and Pictet in Switzerland, Coutts in the UK, Deutsche Bank and Sal. Oppenheim in Germany and Unicredito in Italy and Swiss banks focused on international clients (such as Julius Baer and Pictet in Switzerland).

Clients and markets

Wealth management is a market with strong long-term growth prospects. According to an internal UBS estimate, the global growth rate of liquid assets held by wealthy individuals is expected to grow by 5.7% annually between 2006 and 2010.

The wealth management market is very fragmented, and UBS’s global market share, including the US wealth management business, is estimated at 3.5% (UBS internal estimate).
A clearly structured advisory process helps client advisors add value at each step and provides clients with a comprehensive service. The approach consists of four clear, mutually enhancing steps, which are shown in the UBS Client Experience graph on the bottom of this page.
Wealth Management International & Switzerland offers sophisticated products and services specifically designed to address the needs of:
–core affluent clients with investable assets of CHF 250,000 to CHF 2 million (international clients only);

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–high net worth clients with investable assets of CHF 5 million;
–private wealth management clients with investable assets of up to CHF 5 million to CHF 50 million; and
–ultra-high net worth clients with investable assets of more than CHF 50 million.
The business unit also provides financial intermediaries, both inside and outside Switzerland, with UBS’s wealth management solutions, products and services.

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Growth initiatives

Wealth management in Asia Pacific
One of the main challenges for the wealth management business in the next few years will be to enhance its already strong business footprint in the Asia Pacific region. The region is very heterogeneous and, taken together, accounts for more than half the world’s population, while contributing a quarter of total global gross domestic product (GDP).

The wealth management business has a presence in six domestic Asia Pacific markets (Australia, China, Japan, Hong Kong, Singapore and Taiwan) and plans to gradually expand its network of branches and offices into further high-potential locations. By cooperating with the other UBS business groups in the region, it is possible to realize mutually beneficial opportunities leveraging a wide array of products and services, as well as share infrastructure, to deliver significant revenue synergies as well as cost savings.
In 2007, wealth management offices were opened in Nagoya (Japan) and Brisbane (Australia). In addition, UBS also received regulatory approval to convert the non-business offices in Taichung and Kaohsiung (both in Taiwan) to full branches.



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     Given the strong demand for wealth management services in the region, UBS opened a regional training center for employees located in Singapore in 2007. It is the first institution to be accredited by the Financial Industry Competency Standards (FICS) as a financial training and assessment service provider in wealth management. Clients will also be able to take courses at the facility. UBS considers that its growth in Asia Pacific depends on much more than just hiring client advisors – the training and retaining of them is critical.

European on-shore business
The European wealth management business was launched in early 2001 and is aimed at wealthy clients in the five target countries of France, Germany, Italy, Spain and the UK. Over the past seven years, the number of European domestic branches (now 56) has more than trebled, while invested assets have risen to CHF 167 billion from CHF 16 billion in 2001, corresponding to an annual growth rate of 48%. Much of the rise in invested assets was due to the CHF 93 billion in net new money taken in during the past six years. The European wealth management business currently has a total of 1,056 client advisors, up from 177 advisors at the beginning of 2001. After having successfully established a European physical presence and made the business profit-able, the European wealth management business has been profitable every quarter since first quarter 2006 and now forms an integral part of the business.

Products and services

Clients of Wealth Management International & Switzerland can count recorded apre-tax profitof CHF 3,601 million in 2008, a decrease from the record profit of CHF 6,310 million in 2007. This is partially due to a provision of CHF 917 million in connection with the US cross-border case. During this period:

Net new moneyoutflows were CHF 101.0 billion compared with inflows of CHF 125.1 billion.Invested assetsdeclined to CHF 870 billion from CHF 1,294 billion. Thegross margin on the expertise of 4,000 professionals worldwide dedicatedinvested assetsfell six basis points to developing wealth management solutions. In 2007, a new products and services consultancy group was formed97 basis points. Thecost/income ratioincreased to support client advisors in providing optimum solutions and capabilities to clients.

This ensures its private clients have access to what 63.1% from 51.1%.

Wealth Management International &USrecorded apre-tax lossof CHF 698 million in 2008, compared with a pre-tax profit of CHF 674 million in 2007. 2008 included auction rate securities-related charges of CHF 1,524 million. During this period:

Net new moneyoutflows were CHF 10.6 billion compared with inflows of CHF 26.6 billion.Invested assetsdeclined to CHF 600 billion from CHF 840 billion. Thegross margin on invested assetsincreased seven basis points to 84 basis points. Thecost/income ratioincreased to 111.3% from 89.9%.Recurring incomedeclined 8% to CHF 3,835 million.Revenues per advisordecreased to CHF 735,000 from CHF 828,000.

Business Banking Switzerland judgesrecorded a pre-tax profit of CHF 2,449 million, up CHF 182 million from 2007. During this period:

Net new moneyoutflows were CHF 11.4 billion compared with inflows of CHF 4.6 billion.Invested assetsdeclined to be high-quality investments, sourcing internally whenCHF 129 billion compared with CHF 164 billion. Thecost/income ratiodecreased to 51.2% from 57.7%. Theloan portfoliodeclined 2% to CHF 143 billion. The ratio of the requisite expertise is considered impaired gross lending portfolioto be available within UBS and otherwise screening the market for the best products. By aggregating private investment flows into institutional-size flows, the business unit is in a positiontotal gross lending portfolio improved to offer its private clients access to investments that would otherwise only be available to institutional clients.

Both discretionary and non-discretionary mandates are offered. Clients that opt for a discretionary mandate delegate the management of their assets, including investment decisions, to a team of professional portfolio managers who work according to an agreed investment strategy.
Clients that prefer to be actively involved in the management of their assets can choose a non-discretionary mandate, where investment professionals provide analysis and monitoring of portfolios, together with tailor-made proposals to support investment decisions. In both cases,
1.0% from 1.2%.







UBS reporting structure in 2008
Global Wealth Management
& Business Banking
Global Asset ManagementInvestment BankCorporate Center
Wealth Management
International & Switzerland
Wealth Management US
Business Banking Switzerland

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relative return programs that aim to outperform benchmarks are offered. For discretionary mandates, the business unit also offers absolute return programs that focus on preserving capital while still participating in market upturns. At the end of 2007, around 21% of assets invested with Wealth Management International & Switzerland were discretionary.

Wealth Management International & Switzerland’s product and service offering covers the wide-ranging banking needs of its clients. Clients can trade in a full range of financial instruments – from single securities, such as equities and bonds, to structured products and alternative investments. The assets private clients have invested in alternative investment and structured products have grown from CHF 81 billion in 2004 to CHF 238 billion in 2007. The business unit also fulfills the basic banking needs of private clients with a wide variety of products, ranging from cash accounts and savings accounts to credit cards, mortgages and securities-backed lending.
                 
Performance from continuing operations before tax 
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Wealth Management International & Switzerland  3,601  6,310   5,197   (43)
 
Wealth Management US  (698)  674   542     
 
Business Banking Switzerland  2,449  2,267   2,281   8 
 
Global Wealth Management & Business Banking
  5,352  9,251   8,020   (42)
 
Global Asset Management
  1,333  1,454   1,320   (8)
 
Investment Bank
  (34,092)  (16,669)  5,568   (105)
 
Corporate Center
  54  2,222   (789)  (98)
 
The business unit’s offering includes expert financial advice to support clients throughout the different stages of their lives. Wealth planning advice is also given on topics such as the funding of education, the giving of gifts to children, art banking and the planning of tax, inheritance and succession, trusts and foundations. Corporate finance advice is offered to support clients in the process of acquiring or disposing of corporate assets.

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Distribution

The extensive wealth management branch network comprises 5,774 client advisors, 110 offices in Switzerland and 93 offices worldwide.



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UBS’s businesses
Global Wealth Management & Business Banking

Business performance

Business unit reporting

                 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
Income  12,893   10,827   9,024   19 
 
Adjusted expected credit loss1
  (27)  (29)  (13)  (7)
 
Total operating income
  12,866   10,798   9,011   19 
 
Cash components  3,704   2,999   2,491   24 
 
Share-based components2
  147   138   88   7 
 
Total personnel expenses  3,851   3,137   2,579   23 
 
General and administrative expenses  1,064   885   804   20 
 
Services (to) / from other business units  1,531   1,479   1,371   4 
 
Depreciation of property and equipment  95   84   89   13 
 
Amortization of intangible assets  19   10   7   90 
 
Total operating expenses
  6,560   5,595   4,850   17 
 
Business unit performance before tax
  6,306   5,203   4,161   21 
 
                 
Key performance indicators
                
 
Invested assets (CHF billion)  1,294   1,138   982   14 
 
Net new money (CHF billion)3
  125.1   97.6   68.2     
 
Gross margin on invested assets (bps)4
  103   103   102   0 
 
Cost / income ratio (%)5
  50.9   51.7   53.7     
 
Cost / income ratio excluding the European wealth management business (%)5
  46.7   47.5   47.7     
 
Client advisors (full-time equivalents)  5,774   4,742   4,154   22 
 
Client advisor productivity
                
 
Revenues per advisor (CHF thousand)6
  2,424   2,441   2,272   (1)
 
Net new money per advisor (CHF thousand)7
  23,516   22,008   17,173   7 
 
Invested assets per advisor (CHF thousand)8
  234,504   236,879   222,474   (1)
 
                 
International clients
                
 
Income  9,739   7,907   6,476   23 
 
Invested assets (CHF billion)  1,013   862   729   18 
 
Net new money (CHF billion)3
  115.6   90.8   64.2     
 
Gross margin on invested assets (bps)4
  101   101   100   0 
 
                 
European wealth management (part of international clients)
                
 
Income  1,220   1,010   722   21 
 
Invested assets (CHF billion)  167   144   114   16 
 
Net new money (CHF billion)3
  18.4   18.2   21.8     
 
Client advisors (full-time equivalents)  1,056   870   803   21 
 
1In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the business groups (see Note 2 in Financial Statements 2007).  2 Additionally includes related social security contributions and expenses related to alternative investment awards.  3 Excludes interest and dividend income.  4 Income / average invested assets.  5 Operating expenses / income.  6 Income / average number of client advisors.  7 Net new money / average number of client advisors.  8 Average invested assets / average number of client advisors.

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Business unit reporting (continued)

                 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
                 
Swiss clients
                
 
Income  3,154   2,920   2,548   8 
 
Invested assets (CHF billion)  281   276   253   2 
 
Net new money (CHF billion)1
  9.5   6.8   4.0     
 
Gross margin on invested assets (bps)2
  111   110   109   1 
 
                 
Capital return and BIS data
                
 
Return on allocated regulatory capital (%)3
  80.7   81.2   78.9     
 
BIS risk-weighted assets  63,125   51,485   43,369   23 
 
Goodwill and excess intangible assets4
  1,761   1,740   1,566   1 
 
Allocated regulatory capital5
  8,074   6,889   5,903   17 
 
                 
Additional information
                
 
Recurring income6
  9,617   8,143   6,635   18 
 
Client assets (CHF billion)  1,651   1,436   1,235   15 
 
Personnel (full-time equivalents)  15,811   13,564   11,555   17 
 

1 Excludes interest and dividend income.  2 Income / average invested assets.  3 Business unit performance before tax / average allocated regulatory capital.  4 Goodwill and intangible assets in excess of 4% of BIS Tier 1 capital.  5 10% of BIS risk-weighted assets plus goodwill and excess intangible assets.  6 Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees.

Components of operating income

Wealth Management International & Switzerland derives its operating income principally from:
–fees for financial planning and wealth management services;
–fees for investment management services;
–transaction-related fees; and
–interest income from client loans.

These revenues are based on the market value of invested assets, the level of transaction-related activity and the size of the loan book. As a result, operating income is affected by factors such as fluctuations in invested assets, changes in market conditions, investment performance, inflows and outflows of client funds and investor activity levels.


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2007

Key performance indicators

In 2007, net new money was a record CHF 125.1 billion, compared with CHF 97.6 billion in 2006, representing an annual growth rate of 11% of the underlying invested asset base at end-2006. This outstanding result reflected increases in all geographical regions throughout the year, particularly in Asia Pacific and Americas, both a result of the growth strategy.

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Invested assets, at CHF 1,294 billion on 31 December 2007, were up 14% from CHF 1,138 billion a year earlier, mainly reflecting the strong inflow of net new money and rising financial markets. This increase was partially offset by negative currency effects. The 7% fall of the US dollar against the Swiss franc contributed to this decrease – approximately 36% of invested assets were denominated in US dollars at the end of 2007.

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The gross margin on invested assets was 103 basis points in 2007, unchanged from a year earlier, as the increase in non-recurring margin following a sustained level of client

activity was partly offset by a lower recurring margin. Overall, recurring income made up 77 basis points of the margin in 2007, down from 78 basis points in 2006. Non-recurring income comprised 26 basis points of the margin in 2007, up 1 basis point from 2006.

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The cost / income ratio improved to 50.9% in 2007 from 51.7% a year earlier. The cost / income ratio has improved for the fifth consecutive year despite the rise in costs in pursuit of the global expansion strategy. This improvement reflects the strong rise in income due to a higher asset base and higher volumes in lombard lending, which more than offset the increase in personnel expenses (mainly headcount increase and performance-related compensation) and general and administrative expenses.

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Excluding the European wealth management business, the 2007 cost / income ratio fell to 46.7% from 47.5% a year earlier.

European wealth management

The European wealth management business continued to make good progress. In 2007, net new money intake into the domestic European network totaled CHF 18.4 billion, up



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1% from the 2006 inflow of CHF 18.2 billion, reflecting an annual net new money growth rate of 13% of the underlying asset base at year-end 2006. The strongest inflows were in Germany, the UK and Italy.

UBS will no longer disclose the key performance indicators of its European wealth management business from first quarter 2008 onwards. This is due to the fact that the original European wealth management initiative, which was launched in 2001, has become a regular, integrated part of UBS’s businesses.

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The level of invested assets was a record CHF 167 billion on 31 December 2007, a 16% increase compared with CHF 144 billion a year earlier. This reflected strong net new money inflows in all countries as well as positive market performance.

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In 2007, income from the European wealth management business was CHF 1,220 million, up 21% from a year earlier, reflecting a growing asset and client base.

In 2007, the number of client advisors increased by 186 to 1,056. The increase in client advisors was mainly in Germany and the UK. The business unit remains committed to growing its presence in the European target markets and will continue to invest in qualified advisory staff.

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Results

In 2007 pre-tax profit, at a record CHF 6,306 million, rose 21% compared with 2006. Total operating income was up 19% in 2007, reflecting a higher asset base and increased collateralized lending volumes and more client activity. Operating expenses, up 17% in 2007 from 2006, also rose as the business expanded.

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Operating income
Total operating income in 2007 was CHF 12,866 million, up 19% from CHF 10,798 million a year earlier. This was the highest level ever, reflecting a rise in recurring as well as in non-recurring revenues. Recurring income increased 18% on rising asset-based fees, benefiting from strong net new money inflows. This was accentuated by higher interest income due to the expansion of lombard lending activities. Non-recurring income rose by 22% due to higher brokerage fees, reflecting high client activity levels.

Operating expenses
At CHF 6,560 million, operating expenses in 2007 were up 17% from CHF 5,595 million a year earlier, reflecting higher personnel expenses and general and administrative expenses as a result of ongoing business growth. Personnel expenses rose 23% to CHF 3,851 million in 2007 compared with CHF 3,137 million a year earlier, reflecting the increase in salaries due to business expansion and higher performance-related



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compensation. Share-based expenses in 2007 increased due to higher share and option awards and the increased fair value of options. General and administrative expenses, at CHF 1,064 million, were up 20% in 2007 from CHF 885 million a year earlier due to increased expenses for travel and entertainment, premises and professional fees – all a consequence of continuous business expansion. Expenses for services from other business units, at CHF 1,531 million in 2007, were up 4% from CHF 1,479 million the previous year, mainly reflecting increased consumption. Depreciation was CHF 95 million in 2007, up 13% from CHF 84 million a year earlier because of continued business growth. Amortization of intangible assets was CHF 19 million, up CHF 9 million from 2006.

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2006

Key performance indicators

In 2006, net new money totaled CHF 97.6 billion, compared with CHF 68.2 billion in 2005. This result reflected increases in all geographical regions throughout the year, particularly in Asia Pacific and Europe, both a result of the growth strategy.

Invested assets, at CHF 1,138 billion on 31 December 2006, were up 16% from CHF 982 billion in 2005, mainly reflecting the strong inflow of net new money and rising financial markets, with CHF 4.8 billion coming from new assets gained from acquisitions integrated in 2006. This increase was partially offset by negative currency effects. The 7% fall of the US dollar against the Swiss franc contributed to this decrease – approximately 36% of invested assets were denominated in US dollars at the end of 2006.
The gross margin on invested assets was 103 basis points in 2006, up one basis point from 102 basis points in 2005, mainly due to higher fee income and increased lombard lending. Overall, recurring income made up 78 basis points of the margin in 2006, up from 75 basis points in 2005. Non-recurring income comprised 25 basis points of the margin in 2006, down two basis points from 2005.
The cost/income ratio improved to 51.7% in 2006 from 53.7% a year earlier. This improvement reflected the strong rise in income due to a higher asset base and higher volumes in lombard lending, which more than offset the increase in personnel and higher general and administrative costs.
Excluding the European wealth management business, the 2006 cost/income ratio fell to 47.5% from 47.7% in 2005.

European wealth management

In 2006, the European wealth management business made good progress. With a good performance in the UK and Germany, the inflow of net new money totaled CHF 18.2 billion, down 17% from the 2005 intake of CHF 21.8 billion. The result reflected an annual net new money growth rate of 16% of the underlying asset base at year-end 2005.

The level of invested assets was a record CHF 144 billion on 31 December 2006, a 26% increase compared with CHF 114 billion in 2005. This reflected rising equity markets and new inflows across Europe.

In 2006, income from the European wealth management business was CHF 1,010 million, up 40% from 2005. This reflected a growing asset and client base.
In 2006, the number of client advisors increased by 67. The increase in client advisors was mainly in Italy and France.

Results

Wealth Management International & Switzerland’s 2006 pre-tax profit, at CHF 5,203 million, increased 25% compared with 2005. This increase reflected higher asset-based fees as well as rising interest income, a reflection of higher volumes in the lombard lending business. At the same time, the business unit’s expenses, up 15% in 2006 from 2005, reflected its ongoing growth strategy.

Operating income
Total operating income in 2006 was CHF 10,798 million, up 20% from CHF 9,011 million in 2005. Recurring income increased 23% on rising asset-based fees, benefiting from a buoyant market and net new money inflows. This was accentuated by higher interest income due to the expansion of margin lending activities. Non-recurring income rose due to higher brokerage fees, a reflection of high client activity levels. These positive effects were offset by the depreciation of the US dollar against the Swiss franc.

Operating expenses
At CHF 5,595 million, operating expenses in 2006 were up 15% from CHF 4,850 million in 2005. This reflected higher personnel expenses and general and administrative expenses, as well as the ongoing investment in growth initiatives. Personnel expenses rose 22% to CHF 3,137 million in 2006 compared with CHF 2,579 million in 2005, a reflection of the increase in salaries due to business expansion and higher performance-related compensation. General and administrative expenses, at CHF 885 million, were up 10% in 2006 from CHF 804 million in 2005 due to investments in physical and information technology infrastructure, as well as travel and entertainment and marketing costs – all a consequence of continuous business expansion. Expenses for services from other business units, at CHF 1,479 million in 2006, were up 8% from CHF 1,371 million in 2005. Depreciation was CHF 84 million in 2006, down 6% from CHF 89 million in 2005, because of lower charges for information technology equipment. Amortization of intangible assets was CHF 10 million, practically unchanged from CHF 7 million in 2005.



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Wealth Management US

–One of the leading wealth managers in the US with more than 8,200 financial advisors in over 480 branch and satellite office locations in the US and Puerto Rico
–In 2007, the newly acquired McDonald Investments was successfully integrated
–Financial indicators improved in 2007, e.g. profitability, net new money, cost/income ratio and invested assets

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Wealth Management US
Business description

As one of the leading wealth managers in the US, the Wealth Management US unit provides a complete set of sophisticated wealth management services to private clients.

Business

Wealth Management US is one of the business units that make up Global Wealth Management & Business Banking. With CHF 840 billion in invested assets, its focus is on providing wealth management services to private clients. The business unit offers sophisticated products and services specifically designed to address the needs of the emerging affluent (less than USD 250,000 in investable assets), core affluent (USD 250,000 to USD 1 million in investable assets), high net worth (USD 1 million to USD 10 million in investable assets) and ultra-high net worth clients (more than USD 10 million in investable assets). More than 8,200 financial advisors in over 480 branch and satellite office locations in the US and Puerto Rico develop, build and maintain consultative relationships with clients.

Organizational structure

The business unit’s organizational structure comprises a national branch network in the US, consisting of financial advisors, branch office managers, market area managers, regional managers and administrative support staff. Most corporate and operational functions of the business unit are located in the home office in Weehawken, New Jersey.

2005
In July, Wealth Management US became part of Global Wealth Management & Business Banking, while the municipal finance unit was transferred to the Investment Bank.

2006
In June, the US-based bank branches of the Wealth Management International unit became part of Wealth Management US, giving clients the option of receiving services from both financial advisors and private bankers. The integration enhanced the Wealth Management US product offering while strengthening and broadening client services, enabling the business unit to further expand its market share within the ultra-high net worth segment. In August, Wealth Management US acquired the private client branch office network of Piper Jaffray. In December, a Delaware trust office was opened to offer clients the strategic benefits of establishing trusts in Delaware that may not be available in other states, including confidentiality, broad investment flexibility and potential tax advantages and asset protection.

2007
In February, the McDonald Investments’ private client branch network was acquired. Following that, in August, Wealth Management US announced it would reorganize and streamline its client-facing organization. The restructuring positioned resources closer to clients, enhancing their relationship with UBS and their financial advisors, ultimately driving business growth. The reorganization, which came into effect on 1 January 2008, reduced the number of US regions from 13 to eight. Regional managers oversee 45 market area managers, who form a new structural level locally, together with the managers of the business unit’s private wealth management offices and several larger, free-standing offices. Each market area manager supervises six to eight branch managers in addition to managing a home branch. With fewer direct reports, regional managers will be more effective in recruiting and leading their regions. Under the new structure, branch managers also have improved access to UBS’s infrastructure and tools.

Legal structure

In the US, the business unit operates through direct and indirect subsidiaries of UBS. Securities activities are conducted primarily through three registered broker-dealers – UBS Financial Services Inc., UBS Financial Services Inc. of Puerto Rico and UBS Services USA LLC. Wealth Management US’s banking services include Federal Deposit Insurance Corporation (FDIC) insured deposit accounts and enhanced collateralized lending services, which are conducted through UBS Bank USA, a federally regulated Utah Bank.

Competitors

Major competitors include Citigroup’s Smith Barney business and the wealth management and private client group businesses of Morgan Stanley, Merrill Lynch and Wachovia. In addition, Wealth Management US competes with domestic and global private banks, regional broker-dealers, independent broker-dealers, registered investment advisors, commercial banks, trust companies and other financial services firms offering wealth management services to US private clients.



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Clients and strategy

UBS is one of the premier US wealth managers. The Wealth Management US unit aims to further increase its market share by improving the client experience and making use of the increased range of products and services available from its integration into Global Wealth Management & Business Banking. Growth will depend on a focused commitment to successfully recruiting, retaining and developing experienced and new financial advisors and providing them with the resources needed for increased asset growth.

Following the integration of Wealth Management US into the firm’s global wealth management business, the business unit has embarked on a long-term strategy that focuses on the delivery of a high-quality and consistent client experience. The strategy comprises a number of organic growth initiatives and infrastructure enhancements aimed at fundamentally improving the way financial advisors approach and service individual clients. These targeted investments leverage the global wealth management platform, bringing scale efficiencies. Wealth Management US will also evaluate any suitable acquisition opportunity that potentially complements its organic growth drive, provided that it meets stringent financial, strategic and cultural criteria.

Internally, asset-gathering efforts benefit from the established strategy of treating client feedback systematically and seriously. Extensive proprietary survey data sampled annually are used to create an index for every financial advisor. The index is the base by which each financial advisor gets specific feedback in terms of the four consultative steps of the “UBS Client Experience” – understanding the client’s needs, proposing solutions, agreeing and implementing them with the client and reviewing performance on a continuous basis. This helps to generate an accurate, overall picture of what clients think about the advice they receive.
Other strategic investments focus on further developing financial advisor expertise, enhancing internal infrastructure and upgrading technological capabilities. At the same time, there is a large-scale effort to collaborate more closely with UBS’s other businesses. With the help of the global wealth and asset management businesses, and by pursuing an open architecture framework, Wealth Management US has increased the number of solutions provided to its clients.
Wealth Management US is also expanding their ability to address the specific needs of ultra-high net worth clients. Following a successful launch of its private wealth management office in New York in July 2006, the business unit expanded to five other locations in 2007 – Stamford (Connecticut), Chicago (Illinois), Atlanta (Georgia), Los Angeles and


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UBS’s businesses
Global Wealth Management & Business Banking

San Francisco (California) – dedicated to the specialized needs of clients and prospects with assets greater than USD 10 million. At these locations, areas of expertise include private planning, trust and estate planning, philanthropic services, concentrated stock management and tax optimization strategies.

Following from this success, the business unit is now establishing targeted segmentation for high net worth, core affluent and mass affluent clients. This will help improve the focus of the business unit’s approach and improve delivery of individually tailored services.

Products and services

Wealth Management US offers clients a full array of wealth management services that focus on the individual investment needs of each client. Comprehensive planning supports clients through the various stages of their lives, including retirement, education funding, charitable giving, tax management strategies, estate strategies, insurance, trusts and foundations. Advisors work closely with consultants who are subject matter experts in areas such as: wealth planning, asset allocation, retirement and annuities, alternative investments, structured products, banking and lending. The size of Wealth Management US enables its clients to gain access to investments that would otherwise be available only to institutions.

UBS clients have the option of transaction-based or asset-based pricing for their relationships. Clients who choose asset-based pricing have access to both discretionary and non-discretionary investment advisory programs. While non-discretionary advisory programs enable the client to

maintain control over all transactions in the account, clients with discretionary advisory programs direct investment professionals to manage a portfolio on their behalf. Depending on the type of discretionary program, the client can give investment discretion to a qualified financial advisor, a team of UBS investment professionals or to a third-party investment manager. Separately, mutual fund advisory programs are also offered, where a financial advisor works with the client to create a diversified portfolio of mutual funds.

Transaction-based pricing offers access to a broad range of transaction products, including individual securities such as equities and fixed income instruments. To complement portfolio strategies, qualified clients may leverage the robust offerings in structured products and alternative investments. And, in response to high investor interest in hedge funds and funds-of-funds, Wealth Management US has further strengthened its ability to create, structure and manage a range of alternative investments for qualified high net worth individuals and institutions.
Products and services are designed to meet a wide variety of investment objectives including, but not limited to: capital appreciation, income generation, diversifying portfolio concentration and tax optimization. To address the full range of clients’ investment needs, Wealth Management US offers competitive lending and cash management services, including the Resource Management Account (RMA) product, credit cards, FDIC-insured deposits, securities-backed lending and mortgages. And, through Corporate Employee Financial Services, the business unit provides stock option and other related services to many of the largest US corporations and their executives.



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Industry trends

Industry trends continue to support the development of Wealth Management US and its business. The demographic landscape is changing; the aging of the “baby boom” generation suggests an increased need for retirement and estate planning. The increasing concentration of wealth provides business opportunities with clients in the high-end segments. A shift towards the provision of comprehensive wealth management and financial planning services will increase the importance of fee-based accounts and continue to blur the line between banking and brokerage. Wealth Management US believes it is well positioned to exploit these market trends.

By 2015, there are expected to be more than 45 million US households with people between 51 and 70 years of age, compared with about 25 million households for the previous generation. These individuals will control nearly 60% of US net wealth (up from 51% today), according to the consultancy McKinsey & Co. To position UBS as the primary provider for their wealth management needs, it is imperative that Wealth Management US continues to perfect the “UBS Client Experience” and tailor it to meet their needs.
Historical patterns indicate that clients utilizing banking and brokerage services in their younger years tend to increasingly, as they age, select trusts as the preferred method for transferring assets. Perfecting the client experience will enhance the ability of Wealth Management US to deliver these services effectively, easily and comprehensively to wealthy clients in the US, helping to maintain its leading market position in the long-term.



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Business performance

                 
Business unit reporting 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
Income  6,662   5,863   5,158   14 
 
Adjusted expected credit loss1
  (3)  0   (2)    
 
Total operating income
  6,659   5,863   5,156   14 
 
Cash components  4,351   3,683   3,353   18 
 
Share-based components2
  155   117   107   32 
 
Total personnel expenses  4,506   3,800   3,460   19 
 
General and administrative expenses  976   1,073   1,047   (9)
 
Services (to) / from other business units  314   281   223   12 
 
Depreciation of property and equipment  79   74   65   7 
 
Amortization of intangible assets  66   53   49   25 
 
Total operating expenses
  5,941   5,281   4,844   12 
 
Business unit performance before tax
  718   582   312   23 
 
                 
Key performance indicators
                
 
Invested assets (CHF billion)  840   824   752   2 
 
Net new money (CHF billion)3
  26.6   15.7   26.9     
 
Net new money including Interest and dividend income (CHF billion)4
  51.5   37.9   45.2   36 
 
Gross margin on invested assets (bps)5
  77   76   75   1 
 
Cost / income ratio (%)6
  89.2   90.1   93.9     
 
Recurring income7
  4,173   3,488   2,834   20 
 
Financial advisor productivity
                
 
Revenues per advisor (CHF thousand)8
  828   776   690   7 
 
Net new money per advisor (CHF thousand)9
  3,305   2,077   3,597   59 
 
Invested assets per advisor (CHF thousand)10
  107,719   101,922   91,464   6 
 
                 
Capital return and BIS data
                
 
Return on allocated regulatory capital (%)11
  11.8   10.2   5.8     
 
BIS risk-weighted assets  18,735   18,308   18,928   2 
 
Goodwill and excess intangible assets12
  4,067   4,238   3,841   (4)
 
Allocated regulatory capital13
  5,941   6,069   5,734   (2)
 
                 
Additional information
                
 
Client assets (CHF billion)  917   909   826   1 
 
Personnel (full-time equivalents)  19,347   18,557   17,034   4 
 
Financial advisors (full-time equivalents)  8,248   7,880   7,520   5 
 
1 In management accounts, adjusted expected credit loss rather than credit loss expense is reported for the business groups (see Note 2 in Financial Statements 2007).   2 Additionally includes related social security contributions and expenses related to alternative investment awards.   3 Excludes interest and dividend income.   4 For purposes of comparison with US peers.   5 Income / average invested assets.   6 Operating expenses / income.   7 Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees.   8 Income (including net goodwill funding) / average number of financial advisors.   9 Net new money / average number of financial advisors.   10 Average invested assets / average number of financial advisors.   11 Business unit performance before tax / average allocated regulatory capital.   12 Goodwill and intangible assets in excess of 4% of BIS Tier 1 capital.   13 10% of BIS risk-weighted assets plus goodwill and excess intangible assets.

Components of operating income

Wealth Management US principally derives its operating income from:
–fees for financial planning and wealth management services;
–fees for investment management services;
–transaction-related fees; and
–interest income from client loans and deposits.

These revenues are based on the market value of invested assets, the level of transaction-related activity and the size of the loan book and deposits. As a result, operating income is affected by such factors as fluctuations in invested assets, changes in market conditions, investment performance, inflows and outflows of client funds and investor activity levels.


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2007

Key performance indicators

The inflow of net new money in 2007 was CHF 26.6 billion, up from CHF 15.7 billion a year earlier, reflecting reduced out-flows from existing clients and the recruitment of experienced advisors. Including interest and dividends, net new money in 2007 was CHF 51.5 billion, up from CHF 37.9 billion in 2006.

In US dollar terms, net new money intake in 2007 totaled USD 21.8 billion, up from USD 12.6 billion the previous year. Including interest and dividends, net new money intake in 2007 totaled USD 42.2 billion, up from USD 30.3 billion the previous year.

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     Wealth Management US had CHF 840 billion in invested assets on 31 December 2007, up 2% from CHF 824 billion on 31 December 2006. This was a result of rising markets over the year, net new money inflows and the first-time inclusion of former McDonald Investments assets. These increases were partly offset by the negative impact of currency translation. In US dollar terms, invested assets increased 10% compared with a year earlier.

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The gross margin on invested assets was 77 basis points in 2007, up from 76 basis points in 2006. The increase is mainly a result of a higher recurring income margin, while the non-recurring margin decreased.

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     The cost / income ratio was 89.2% for 2007, compared with 90.1% in 2006. The improvement in the cost / income ratio reflects higher operating income due to strong growth in recurring income, partially offset by a rise in expenses mainly reflecting higher personnel expenses in support of growth initiatives and the integration of the McDonald Investments private client branch network.

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     In 2007, recurring income was a record CHF 4,173 million, up 20% from CHF 3,488 million a year earlier. Excluding the impact of currency fluctuations, recurring income was up 23% in 2007 from 2006. This increase mainly reflects higher levels of managed account fees on a year-end record level of invested assets, higher investment advisory fees and higher net interest income. Recurring income represented 63% of income in 2007, compared with 59% in 2006.



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     Revenue per advisor increased in 2007 to CHF 828,000 from CHF 776,000 in 2006 as a higher average number of financial advisors was able to produce significantly higher recurring income than a year earlier. The number of financial advisors rose by 5% compared to 2006, increasing by 368 advisors to 8,248 at the end of 2007, while recurring income increased by 20%.

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Results

In 2007, Wealth Management US reported a pre-tax profit of CHF 718 million, compared with CHF 582 million in 2006. Because this business unit is almost entirely conducted in US dollars, comparisons of results with prior periods are affected by the movements of the US dollar against the Swiss franc. In US dollar terms, performance in 2007 was up 26% from 2006. Performance in 2007 benefited from record levels of recurring income and lower general and administrative expenses. This was partly offset by higher personnel expenses.

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Operating income
In 2007, total operating income was CHF 6,659 million, up 14% from CHF 5,863 million in 2006. Excluding currency effects, operating income increased by 16% from 2006. The increase in operating income reflects the record recurring income (driven by increased asset levels in managed account products) and increased transactional revenue.

Operating expenses
Total operating expenses rose 12% to CHF 5,941 million in 2007 from CHF 5,281 million in 2006. Excluding currency effects, operating expenses were 15% higher.

Personnel expenses increased by CHF 706 million or 19%, with higher salaries as well as share-based compensation. This reflects rising headcount due to organic growth and the McDonald Investments private client branch network inclusion. General and administrative expenses decreased 9% to CHF 976 million in 2007 from CHF 1,073 million in 2006. In US dollar terms, they fell 7%, primarily reflecting lower provisions compared with 2006. Services from other business units increased by 12% from CHF 281 million in 2006 to CHF 314 million in 2007. Depreciation was higher due to leasehold improvement. The amortization of intangibles was CHF 66 million in 2007, up 25% from CHF 53 million, mainly due to the acquisition of the McDonald Investments private client branch network and the full-year impact of the acquisition of the Piper Jaffray private client branch network.



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2006

Key performance indicators

In 2006, inflows of net new money were CHF 15.7 billion, down 42% from CHF 26.9 billion in 2005, largely a result of 2006’s competitive recruiting environment of financial advisors. Including interest and dividends, net new money in 2006 was CHF 37.9 billion, down from CHF 45.2 billion a year earlier.
Invested assets were CHF 824 billion on 31 December 2006, up 10% from CHF 752 billion on 31 December 2005. The increase was due to the strong market performance in 2006 as well the inclusion of the private client branch network of Piper Jaffray in the third quarter, which added CHF 54 billion of invested assets on a net basis. In US dollar terms, invested assets were 18% higher on 31 December 2006 than they were on the same date in 2005.
The gross margin on invested assets was 76 basis points in 2006, up from 75 basis points in 2005.
The cost / income ratio was 90.1% for 2006, compared with 93.9% in 2005. The decrease in the cost / income ratio reflects higher operating income, partially offset by a rise in expenses mainly reflecting higher personnel expenses in support of growth initiatives and the integration of the Piper Jaffray private client branch network.
In 2006, recurring income was CHF 3,488 million, up 23% from CHF 2,834 million a year earlier. Excluding the impact of currency fluctuations, recurring income was also up 23% in 2006 from 2005. This increase mainly reflected higher levels of managed account fees on a record level of invested assets, higher investment advisory fees and higher net interest income.
Revenue per advisor increased in 2006 to CHF 776,000 from CHF 690,000 in 2005 as a slightly higher average number of financial advisors were able to produce significantly higher recurring income than a year earlier. The number of financial advisors rose by 5% compared with 2005, increasing by 360 advisors to 7,880 at the end of 2006. This was due to the Piper Jaffray private client group branch network acquisition in third quarter 2006.

Results

In 2006, Wealth Management US reported a pre-tax profit of CHF 582 million, compared with CHF 312 million in 2005. This increase reflected record levels of recurring income, and lower litigation provisions.

Operating income
In 2006, total operating income was CHF 5,863 million, up 14% compared with CHF 5,156 million in 2005. Excluding currency effects, operating income also increased 14% from 2005. The increase in operating income was primarily due to strong growth in recurring income based on higher levels of assets.

Operating expenses
Total operating expenses rose 9% to CHF 5,281 million in 2006 from CHF 4,844 million in 2005. Excluding currency effects, operating expenses were also 9% higher due to higher personnel costs and general and administrative expenses, both related to strategic growth initiatives in support of the business, the inclusion of the Piper Jaffray private client branch network and the New Jersey office provision that was made after the decision to sublet unused office space instead having it be occupied by Wealth Management US itself. This was offset by a lower impact of litigation provisions compared with 2005.

Personnel expenses rose by CHF 340 million or 10%, reflecting growing levels of personnel and increased financial advisor compensation related to higher compensable revenue. General and administrative expenses increased 2% to CHF 1,073 million in 2006 from CHF 1,047 million in 2005. In US dollar terms, they were also up 2%, reflecting higher occupancy and marketing expenses, partially offset by lower litigation provisions compared with 2005. Services from other business units increased by 26% to CHF 281 million in 2006. Depreciation was also higher due to leasehold improvements. The amortization of intangibles was CHF 53 million in 2006, up 8% from 2005, mainly due to the acquisition of the Piper Jaffray private client branch network.



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Business Banking Switzerland

–UBS is the leading bank in Switzerland with market share ranging between 20% to 35%
–The business unit serves around 2.7 million individual clients in Switzerland through more than 3 million accounts, mortgages and other financial relationships
–It services around 137,000 corporate clients, including institutional investors, public entities and foundations based in Switzerland
–With a total loan book of CHF 145 billion by the end of 2007, UBS leads the Swiss lending and retail mortgage markets

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UBS’s businesses
Global Wealth Management & Business Banking

Business Banking Switzerland
Business description

Business Banking Switzerland, UBS’s retail and commercial banking unit, is the market leader in Switzerland and provides a complete set of banking and securities services for individual and corporate clients.

Business

UBS is the leading bank in Switzerland. At the end of 2007, clients had CHF 164 billion in invested assets with us. With a total loan book of CHF 145 billion on 31 December 2007, UBS leads the Swiss lending and retail mortgage markets.

Business Banking Switzerland aims to provide clients with optimal levels of convenience and service. Together with its e-banking offering, customer service centers and 1,262 automated teller machines (ATMs) and 301 branches across Switzerland, the business unit provides a network that is larger than that of any of its domestic competitors.
One of the key objectives is to increase profitability by continuously improving efficiency and revenues through the consistent implementation of the business unit’s risk-adjusted pricing model. Business Banking Switzerland aims to create additional value by providing integrated financial solutions for its clients’ individual requirements.

Organizational structure

Business Banking Switzerland comprises the firm’s domestic branch network, for corporate and individual clients, and is organized into eight geographical regions.

Competitors

Business Banking Switzerland’s major competitors are banks active in the retail and corporate banking markets in Switzerland This group includes Credit Suisse, the country’s cantonal banks, Raiffeisen Bank, other regional or local Swiss banks and foreign bank branches in Switzerland.

Clients and products

Business Banking Switzerland offers high-quality, standardized products to the retail market for individual and small company clients, as well as more complex products and advisory services for larger corporate and institutional clients and financial institutions.

Individual clients

The business unit serves around 2.7 million individual clients in Switzerland through more than 3 million accounts, mortgages and other financial relationships. With its extensive

Swiss branch network, the business unit offers a wide range of products and services supported by a complete set of distribution channels (ATMs, phone services, e-banking). The range of products and services for individual clients includes a comprehensive selection of cash accounts, savings products, wealth management services, residential mortgages, pensions and life insurance.

Corporate clients

Business Banking Switzerland services around 137,000 corporate clients, including institutional investors, public entities and foundations based in Switzerland.
The corporate client base consists of around 200 major companies with operations spanning a broad range of markets and geographical regions. These clients require advanced financing and risk management skills and comprehensive access to the capital markets for funding needs.
Around 8,500 of the business units’ clients are large companies that utilize its expertise in handling complex financial transactions. Clients are provided with a wide range of financial advice from the selection and design of investment products, to assisting in complex mergers and acquisitions or providing structured financing. Client advisors often work in close cooperation with specialists from other parts of UBS to provide such solutions.
The remaining corporate clients (some 128,000) are small and medium-sized enterprises requiring local market expertise and access to the business units’ full range of products and services.
The business unit also provides substantial business process support to its clients, ranging from transactional payments and securities services to the facilitation of cross-border transactions with trade finance products.
Business Banking Switzerland’s global custody services offer institutional investors the opportunity to consolidate multiple-agent bank relationships into a single, cost-efficient global custodial relationship. This simplifies their processing and administration arrangements and allows them to take advantage of other services, such as flexible consolidated performance reporting and powerful portfolio management tools.
In 2007, assets under global custody for institutional clients grew to CHF 325 billion from CHF 300 billion a year earlier.



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Financial institutions

Payments, securities and custodial services are also offered to more than 3,000 financial institutions worldwide. The business unit plays a leading role, together with the Investment Bank, in the firm’s “Bank for Banks” strategy. This strategy focuses on offering state-of-the-art services to other banks, allowing UBS to put more business through its infrastructure. Other banks, that lack UBS’s scale, can outsource their payment, security or custodial services in order to benefit from UBS’s scale efficiencies.

Business Banking Switzerland

         
 
Swiss market share      
 
in % 31.12.06  31.12.07 
 
Mortgages for individual clients  23   23 
 
Savings for individuals  23   22 
 
Credit card business  32   32 
 
Source: Swiss National Bank

Distribution

The needs of private clients have changed in recent years. Today, they want the flexibility of being able to access their accounts using the full range of modern communication technology when it is convenient for them, without restrictions imposed by regular business hours.

To meet these needs, Business Banking Switzerland pursues an integrated, multi-channel strategy. The business unit uses technology to complement, rather than replace, the

traditional physical branch network. Standard transactions can be conveniently executed using one of the electronic channels, enabling client advisors to focus on providing advice and developing financial solutions. For basic products and services, technology is used to ensure around-the-clock availability. Customer service centers exist in five locations and provide basic information and support 24 hours a day via telephone. Additionally, in 62 of the UBS branches in Switzerland, a two-zone concept has been implemented: standard transactions are executed via ATMs, while client advisors, sitting in an open plan desk area next to the automated tellers, focus on giving clients value-added advice. Customers make extensive use of e-banking channels. On 31 December 2007, around 600,000 clients had active e-banking contracts and almost 80% of all payment orders were made by electronic channels.

Total lending portfolio, gross

On 31 December 2007, Business Banking Switzerland’s total lending portfolio was CHF 145.5 billion, gross. Of the total, mortgages represented CHF 117 billion, of which 85% were residential mortgages. Continued discipline in implementing the risk-adjusted pricing model has resulted in a strengthened focus of origination efforts on higher quality exposures with an attractive risk / return relationship. Thanks to the introduction of this model, the risk pro-file of the business unit’s portfolio has clearly improved in recent years.
èThe “Credit risk” section ofRisk, Treasury and Capital Management 2007details the UBS credit portfolio



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Recovery portfolio

Because there will always be a certain percentage of clients unable to meet their financial obligations, Business Banking Switzerland has a dedicated team of recovery specialists to help them pursue a possible economic recovery. This can be achieved through restructuring or, alternatively, by achieving the best possible value through liquidation of available collateral in order to limit the financial loss on the loan.
The recovery portfolio amounted to CHF 2.5 billion on 31 December 2007. Since the end of 1998, this portfolio has been cut by more than 90% thanks to successful recovery efforts. Over the same nine-year period, non-performing loans decreased from CHF 14.0 billion to CHF 1.4 billion, resulting in a ratio of non-performing loans to total lending portfolio of 1.0%.

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Business performance

Business unit reporting

                 
 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
Interest income  3,470   3,339   3,317   4 
 
Non-interest income  1,816   1,746   1,632   4 
 
Income  5,286   5,085   4,949   4 
 
Adjusted expected credit loss1
  203   185   122   10 
 
Total operating income
  5,489   5,270   5,071   4 
 
Cash components  2,480   2,361   2,408   5 
 
Share-based components2
  55   51   42   8 
 
Total personnel expenses  2,535   2,412   2,450   5 
 
General and administrative expenses  1,101   1,070   994   3 
 
Services (to) / from other business units  (674)  (642)  (634)  (5)
 
Depreciation of property and equipment  67   74   72   (9)
 
Amortization of intangible assets  0   0   0     
 
Total operating expenses
  3,029   2,914   2,882   4 
 
Business unit performance before tax
  2,460   2,356   2,189   4 
 
                 
Key performance indicators
                
 
Invested assets (CHF billion)  164   161   153   2 
 
Net new money (CHF billion)3
  4.6   1.2   3.4     
 
Cost / income ratio (%)4
  57.3   57.3   58.2     
 
Impaired lending portfolio as a % of total lending portfolio, gross  1.2   1.7   2.3     
 
                 
Capital return and BIS data
                
 
Return on allocated regulatory capital (%)5
  28.2   27.5   25.6     
 
BIS risk-weighted assets  87,790   85,365   85,051   3 
 
Goodwill and excess intangible assets6
  0   0   0     
 
Allocated regulatory capital7
  8,779   8,537   8,505   3 
 
                 
Additional information
                
 
Deferral (included in adjusted expected credit loss)1
  489   512   485   (4)
 
Expected credit loss (included in adjusted expected credit loss)1
  (286)  (327)  (363)  13 
 
Client assets (CHF billion)  986   992   834   (1)
 
Personnel (full-time equivalents)  15,932   15,913   16,023   0 
 
1 In management accounts, adjusted expected credit loss rather than credit loss expense or recovery is reported for the business groups (see Note 2 inFinancial Statements 2007). The adjusted expected credit loss is the sum of expected credit loss and deferrals. The expected credit loss reflects expected average annual impairment costs. The deferral represents the difference between actual credit loss and expected credit loss, amortized over a three-year period.  2 Additionally includes related social security contributions and expenses related to alternative investment awards.  3 Excludes interest and dividend income.  4 Operating expenses / income.  5 Business unit performance before tax / average allocated regulatory capital.  6 Goodwill and intangible assets in excess of 4% of BIS Tier 1 Capital.  7 10% of BIS risk-weighted assets plus goodwill and excess intangible assets.

Components of operating income

Business Banking Switzerland derives its operating income principally from:
–net interest income from its lending portfolio and customer deposits;
–fees for investment management services; and
–transaction fees.

As a result, operating income is affected by movements in interest rates, fluctuations in invested assets, client activity levels, investment performance, changes in market conditions and the credit environment.



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UBS’s businesses
Global Wealth Management & Business Banking

2007

Key performance indicators

Net new money was CHF 4.6 billion in 2007, CHF 3.4 billion higher than the inflow of CHF 1.2 billion in 2006. This was due to an increase in inflows from existing clients.

Invested assets rose to CHF 164 billion in 2007 from CHF 161 billion a year earlier, driven by positive market developments and net new money inflows. This was slightly offset by the transfer of assets to Wealth Management International & Switzerland. Over the course of 2007, UBS transferred CHF 9.2 billion in client assets from the Business Banking Switzerland business unit to the Wealth Management International & Switzerland business unit, reflecting the development of client relationships. In 2006, UBS transferred CHF 8.2 billion in client assets for the same reason.
In 2007 the cost / income ratio stood at 57.3%, unchanged from a year earlier.

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Business Banking Switzerland’s gross lending portfolio was CHF 145.5 billion on 31 December 2007, up 1% from the previous year. This positive development was also reflect-

ed in the key credit quality ratio of the impaired lending portfolio, gross, to the total lending portfolio, gross, which was 1.2% compared to 1.7% in 2006.

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The return on allocated regulatory capital was 28.2% for 2007, up 0.7 percentage points from 27.5% a year earlier. This reflects the increased profitability of the business unit, outpacing the increase in risk-weighted assets.

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Results

Pre-tax profit in 2007 was a record CHF 2,460 million, CHF 104 million or 4% above the result achieved in 2006. This was mainly due to income growth. In 2007, interest income rose on higher volumes and margin for liabilities, while non-interest income rose due to higher asset-based and brokerage fees.

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Operating income

Total operating income in 2007 was CHF 5,489 million, up from 2006’s level of CHF 5,270 million. Interest income

increased by 4% to CHF 3,470 million in 2007 from CHF 3,339 million in 2006. The slight increase reflects the expansion of the business unit’s loan portfolio and the higher margins on liabilities. Non-interest income increased by CHF 70 million to CHF 1,816 million in 2007 from CHF 1,746 million in 2006, reflecting a higher asset base as well as higher trading income. Adjusted expected credit loss recoveries, at CHF 203 million in 2007, increased from recoveries of CHF 185 million in 2006. This positive result reflects the deferred benefit of the structural improvement in the loan portfolio in recent years.

Operating expenses

Operating expenses in 2007 were CHF 3,029 million, up 4% from CHF 2,914 million in 2006. Personnel expenses, at CHF 2,535 million, were up 5% from CHF 2,412 million in 2006 due to higher salary costs for the employee pension plan in Switzerland, related to its change from a defined benefit to a defined contribution plan under Swiss law. General and administrative expenses, at CHF 1,101 million in 2007, rose and were 3% higher than the CHF 1,070 million recorded in 2006. Net charges to other business units continued to rise to CHF 674 million in 2007 from CHF 642 million in 2006 because of higher consumption of services in other business units. Depreciation in 2007 decreased to CHF 67 million from CHF 74 million in 2006.



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UBS’s businesses
Global Wealth Management & Business Banking

2006

Key performance indicators

Net new money was CHF 1.2 billion in 2006, CHF 2.2 billion lower than the inflow of CHF 3.4 billion in 2005.

Invested assets rose to CHF 161 billion in 2006 from CHF 153 billion in 2005, driven by positive market developments and net new money inflows. This was slightly offset by the transfer of assets to Wealth Management International & Switzerland. Over the course of 2006, UBS transferred CHF 8.2 billion in client assets from the Business Banking Switzerland business unit to the Wealth Management International & Switzerland business unit, a reflection of the development of client relationships.
The cost / income ratio stood at 57.3%, 0.9 percentage points lower than the 2005 ratio of 58.2%, as the rise in income outpaced the increase in expenses.
Business Banking Switzerland’s gross lending portfolio was CHF 143.4 billion on 31 December 2006, up 1% from the previous year. An increase in volumes of private client mortgages was partly offset by the ongoing reduction of the recovery portfolio, which fell to CHF 2.6 billion from CHF 3.3 billion in 2005. The impaired loan ratio was 1.7% compared to 2.3% in 2005.
The return on allocated regulatory capital was 27.5% for 2006, up 1.9 percentage points from 25.6% in 2005. This reflected the increased profitability of the business unit, which outpaced the increase in risk-weighted assets.

Results

Pre-tax profit in 2006 was CHF 2,356 million, CHF 167 million or 8% above the result achieved in 2005. This was mainly due to income growth. In 2006, non-interest income rose due to higher asset-based and brokerage fees. The result also showed the tight management of the cost base and an

adjusted expected credit loss recovery of CHF 185 million. While personnel costs were at their lowest levels ever, general and administrative expenses increased, a reflection of the outsourcing of Edelweiss facility management.

Operating income

Total operating income in 2006 was CHF 5,270 million, up slightly from 2005’s level of CHF 5,071 million. Interest income increased by 1% to CHF 3,339 million in 2006 from CHF 3,317 million in 2005. The slight increase reflected the expansion of the loan portfolio of Business Banking Switzerland, as well as higher investment interest rates on its variable rate accounts, offset by lower revenues from its reduced recovery portfolio. Non-interest income increased by CHF 114 million to CHF 1,746 million in 2006, up from CHF 1,632 million in 2005. This reflected a higher asset base as well as valuation gains from equity participations and divestment proceeds. Adjusted expected credit loss recoveries, at CHF 185 million in 2006, increased from recoveries of CHF 122 million in 2005. This positive result reflected the deferred benefit of the structural improvement in the loan portfolio in recent years.

Operating expenses

Operating expenses in 2006 were CHF 2,914 million, up 1% from CHF 2,882 million in 2005. Personnel expenses, at CHF 2,412 million, were down 2% from CHF 2,450 million in 2006 due to lower salary costs, a reflection of the outsourcing of Edelweiss, partly offset by higher share-based expenses. General and administrative expenses, at CHF 1,070 million in 2006, rose and were 8% higher than the CHF 994 million recorded in 2005, mainly due to the outsourcing of Edelweiss facility management at the end of 2005. Net charges to other business units continued to rise to CHF 642 million in 2006 from CHF 634 million in 2005 because of lower charges-in for IT services. Depreciation in 2006 slightly increased to CHF 74 million from CHF 72 million in 2005 due to higher expenses for information technology equipment.



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Global Asset Management

–One of the world’s leading investment managers
–Among the largest global institutional asset managers, the world’s largest hedge fund of funds manager, one of the largest mutual fund managers in Europe and the largest in Switzerland
–2007 fell short of a record only because of closure costs for Dillon Read Capital Management

Business description

Two principal client segments:

Institutionalincludes: corporate and public pension plans; endowments, municipalities, charities and private foundations; insurance companies; governments and their central banks; and supranationals

Wholesale intermediary:financial intermediaries including Global Wealth Management & Business Banking and third-parties

Broad range of investment capabilities and services:

–Traditional, alternative, real estate and infrastructure investment solutions
–Over 500 investment funds, exchange-traded funds and others, plus service platform for hedge funds and other investment funds

PerformancePre-tax profit decreased 8% to CHF 1,333 million in 2007

–Pre-tax profit of CHF 1,315 million, down 6% from a year earlier. The decrease reflects closure costs of CHF 384 million from Dillon Read Capital Management. This charge offset the positive impact of increased performance and management fees in all business areas coupled with the inclusion of acquisitions in Brazil and Korea
–Total net new money outflow of almost CHF 16 billion due to outflows in primarily equity mandates in the institutional business, while the wholesale business had small net new money inflows
–Past weak investment performance in some capabilities, notably core / value equities and fixed income, are at the root of this development, alongside the generally unsettled market environment. Over the last year, UBS has taken steps to address these issues by reorganizing its equities business. In addition, UBS has made changes to the management in these areas, focused on recruiting high performing candidates and added new investment capabilities



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Business group reporting

         
 
  As of or for the year ended 
CHF million, except where indicated 31.12.07  31.12.06 
 
Institutional fees  2,370   1,803 
 
Wholesale intermediary fees  1,724   1,417 
 
Total operating income  4,094   3,220 
 
Total operating expenses  2,779   1,828 
 
Business group performance before tax
  1,315   1,392 
 
         
Additional information
        
 
Invested assets (CHF billion)  891   866 
 
Net new money (CHF billion)  (15.7)  37.2 
 
Personnel (full-time equivalents)  3,625   3,436 
 

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UBS’s businesses
Global Asset Management

Global Asset Management
Business description

Global Asset Management is one of the world’s leading investment managers, providing traditional, alternative, real estate and infrastructure investment solutions to private, institutional and corporate clients. The business group also provides services through financial intermediaries.

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Business

Global Asset Management offers a wide range of investment capabilities across all major asset classes. This approach combines the expertise of investment professionals with sophisticated risk-management processes and systems, helping the business group provide clients with products and services that meet their needs.

Invested assets totaled CHF 891 billion on 31 December 2007, making Global Asset Management one of the largest global institutional asset managers and the largest hedge fund of funds manager in the world. The business group is also one of the largest mutual fund managers in Europe and the largest in Switzerland.


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Clients and distribution

Global Asset Management’s integrated distribution model allows it to deliver an extensive range of investment capabilities to clients through offices in the Americas, Asia Pacific and Europe, Middle East & Africa.

Revenues and key performance indicators are reported according to two principal asset management client segments: institutional and wholesale intermediary clients.

Institutional

The institutional business has a diverse set of clients globally, including:
–corporate and public pension plans;
–endowments, municipalities, charities and private foundations;
–insurance companies;
–governments and their central banks; and
–supranationals.
In markets where institutions usually employ investment consultants, such as the US and UK, Global Asset Management relies on developing and maintaining strong relationships with the major consultants that advise corporations and public pension plans. New business is also generated directly with clients.

Wholesale intermediary

The wholesale intermediary business offers over 500 investment funds, exchange-traded funds and other investment vehicles across all asset classes in a wide range of country, regional and industry sectors.
Investment funds are mainly distributed using financial intermediaries, including Global Wealth Management & Business Banking, and selected third parties.

Organizational structure

Global Asset Management employs over 3,600 personnel in 25 countries. The main offices are located in Basel, Chicago,

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Frankfurt, Grand Cayman, Hartford, Hong Kong, London, Luxembourg, New York, Rio de Janeiro, Sydney, Tokyo, Toronto and Zurich.

Significant recent acquisitions and business transfers

In January 2005, Global Asset Management signed an agreement with Siemens in which UBS acquired a majority stake (51%) in the real estate funds business of Siemens Kapitalanlagegesellschaft mbH (SKAG). The transaction closed in April 2005 and the business is now part of Global Asset Management’s European real estate business.
In April 2005, the China Securities Regulatory Commission granted approval to UBS and the State Development Investment Corporation (SDIC) to form a joint venture fund management company. The new company was established in June 2005 and is known as UBS SDIC Fund Management Co. Ltd (UBS SDIC). It was formed as a result of UBS’s purchase of a 49% stake in Shenzhen-based China Dragon Fund Management Co. Ltd (China Dragon). The joint venture was the first to allow the new maximum 49% foreign partner holding in a Chinese fund management company. The first fund was successfully launched in April 2006.
In June 2005, UBS announced the formation of Dillon Read Capital Management (DRCM). The business was launched in June 2006, with principal trading locations in London, New York, Singapore and Tokyo. DRCM had been solely managing UBS money until November 2006, when the first outside investor fund was launched. However, the development of the business did not meet original expectations. After a review of its prospects, the operational complexity of its business model and other factors, UBS’s management decided to close DRCM. The outside investor interests were redeemed and the portfolios of the outside investor funds and the proprietary funds were returned to the Investment Bank.
In December 2006, UBS completed its acquisition of Banco Pactual. The acquisition is a key element in UBS’s growth strategy to expand in emerging markets. The renamed UBS Pactual Asset Management is currently the



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Global Asset Management

Investment capabilities and services

Alternative and
quantitativeGlobalGlobal investment
EquitiesFixed incomeinvestmentsreal estatesolutionsInfrastructureFund services
Core/ValueGlobalSingle manager
hedge funds		GlobalGlobalDirect investmentHedge funds
GlobalCountry and regionalCountry and regionalCountry and regionalListed securitiesInvestment funds
Country and regionalSector specificMulti-manager
hedge funds		Private strategiesAsset allocationGlobal and regional
Emerging marketsEmerging marketsReal estate securitiesCurrency management
SpecialistHigh yieldQuantitativeAgricultureReturn and risk targeted
Growth InvestorsStructured creditInfrastructure
fund of funds		Structured portfolios
Risk management and
advisory services
GlobalLiquidity/short duration
Country and regionalIndexedPrivate equity
fund of funds
Structured equities
DSI
Systematic alpha
Portfolio construction
solutions
(including passive)

fourth largest asset manager in Brazil, with invested assets of approximately CHF 40 billion on 31 December 2007.

In May 2007, Global Asset Management entered into an agreement with Hana Daetoo Securities (formerly Daehan Investment & Securities Company Ltd), a wholly owned subsidiary of Hana Financial Group, to acquire 51% of Daehan Investment Trust Management Company Ltd (DIMCO). The acquired company is known as UBS Hana Asset Management Company Ltd (UBS Hana Asset Management) internationally, and as Hana UBS Asset Management in Korea. The transaction closed in late July 2007 and led to Global Asset Management acquiring one of the market leaders in the Korean asset management industry, with invested assets of CHF 29 billion on 31 December 2007.
In October 2007, UBS entered into an agreement with Commerzbank to acquire 100% of the Caisse Centrale de Réescompte (CCR) Group in France. The acquisition closed on 1 February 2008. CCR Group is an asset and wealth manager with EUR 17 billion of invested assets as of June 2007. It has approximately 190 employees and numbers four principal entities: CCR (a provider of banking services to its subsidiaries), CCR Actions (an asset manager specializing in equity funds), CCR Gestion (an asset manager specializing in fixed income and alternative products) and CCR Chevrillon Philippe (a provider of asset management services to private clients). The business of the CCR Group will be combined with the asset management and wealth management businesses of UBS in France.

Products and services

Investment management products and services are offered in the form of segregated, pooled and advisory mandates

and a range of registered investment funds across all major asset classes.

The equities investment area offers a broad range of strategies across the full spectrum of investment styles and with varying risk and return objectives. Equity capabilities are grouped into three investment pillars: core / value (portfolios managed according to a price to intrinsic value philosophy); growth investors (a high-quality global growth manager); and structured equities (strategies that employ proprietary analytics and quantitative methods). Each pillar offers distinctive strategies and has a dedicated team of investment professionals.
Fixed income offers a diverse range of global and local market-based investment strategies. Capabilities go beyond the “core” government and corporate bond sectors and extend to other sectors, such as high-yield and emerging market debt. Global Asset Management combines these capabilities to create country, regional and global strategies that cover a wide range of benchmarks.
Alternative and quantitative investments has two primary business lines – multi-manager (or fund of funds) and a single manager business. The multi-manager businesses construct portfolios of hedge funds and other alternative investments operated by third-party managers, allowing clients diversified exposure to a range of hedge funds, private equity and infrastructure strategies. The single manager business is run by O’Connor, a key hedge fund specialist with global reach.
The global real estate business actively manages investments in Asia, Europe and the US and across all major sectors. Its capabilities include core, value-added and opportunistic strategies on a global, regional and country basis. These are offered through open and closed-end private



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funds, fund of funds, individually managed accounts and publicly traded real estate securities globally.

The global investment solutions team offers asset allocation, currency, risk management and advisory services. It manages a wide array of domestic, regional and global balanced portfolios, currency mandates, structured portfolios and absolute return strategies. It aims to deliver portfolios that manage risk exposures in three dynamic dimensions: market, currency and security selection using internal and external sources of return. In addition, the team supplies risk management and portfolio construction tools to portfolio managers within the business group and a range of advisory services to clients.
Infrastructure forms part of Global Asset Management’s broader offering of alternative investments. The infrastructure asset management business originates and manages infrastructure funds, including listed funds and funds that make direct investments in core infrastructure assets globally. Infrastructure includes the permanent assets which society requires to operate smoothly, such as transportation and communication networks, electricity, gas and water distribution and education, recreation and healthcare facilities.
The global fund administration business, referred to as fund services, provides professional services, including legal set up, reporting and accounting, for retail and institutional investment funds and hedge funds.

Investment performance

There was a distinct change in the direction of investment markets during 2007. The strong equities bull market that started in February 2003 faltered in mid-2007 and, after a strong beginning to the year, returns ended up a modest 4.7% for the developed world markets in local currency terms.

The global equity strategy lagged its benchmark, due to stock selection across a number of sectors, most notably financials and technology, and weak sector positioning, including underweights in cyclical areas such as materials and energy. This was partly offset by strong stock selection in healthcare and consumer discretionary and the overweight to telecoms.
The performance of Global Asset Management’s regional equities strategies varied. Key core / value strategies, such as those in Europe and the US, underperformed in full-year 2007. Specialist strategies, including emerging markets, US value and regional small cap, produced better relative returns.
The growth equities platform, including the recently added global (ex-US) growth team, generated solid absolute and relative performance with eight of nine equity capabilities outperforming their benchmarks. For US large cap growth, outperformance was driven primarily by stock selection in both consumer discretionary and information technology sectors. The small and mid cap growth portfolios benefited from stock selection in healthcare and financials, which was

offset in part by selection in consumer discretionary. For the global (ex-US) growth capabilities, stock selection in the industrials and materials sectors was the primary contributor to the strong outperformance.

2007 was also a dramatic year for global bond markets, with the relatively benign conditions of the first six months being followed by a sharp increase in volatility due to the US credit crisis. The initial trigger for the rapid change in sentiment was the weakness in the US housing market, which highlighted flaws in the residential mortgage backed securities (RMBS) sector, particularly those issues backed by sub-prime mortgages. Swiftly, the magnitude of price falls in these securities impacted a number of banks, as well as other leveraged investors, and caused a sharp contraction in money market liquidity. The rapid rise in risk aversion, together with growing fears over the resilience of US and global economic growth, undermined confidence in other sectors, most notably collateralized debt obligations (CDO) and corporate bonds from financial issuers. At the same time, the strong demand for US Treasuries and other domestic government bonds drove their yields down by 100 basis points or more. Several of Global Asset Management’s leading fixed income strategies had their performance significantly impaired by exposure to RMBS and CDOs as the severity of price declines in these sectors greatly outweighed the impact of other active decisions.
Balanced funds underperformed their benchmarks over 2007, with most of the under-performance due to weak stock selection in the underlying portfolio. Asset allocation was generally positive due to the management of equity exposures through the year. The business group started overweight in equities and cut its exposure as the year progressed. The underweight position in real estate also contributed positively towards the end of the year. Negative contributions came from an overweight position in US equities and emerging market debt.
The Dynamic Alpha Strategies (DAS) posted negative returns through 2007. Returns to market exposure were negative. Positive contributors to market returns came from the positioning in equity markets, notably emerging market equities, as well as US and UK equities. Other positive contributors included exposures to convertible bonds and high yield debt. Negative contributions came from short positions in European, Canadian and Australian equities.
Currency strategy detracted from the performance of balanced and DAS portfolios over the year. The main positive contributors included positive exposures to the Japanese yen, Swiss franc and Swedish kronor, as well as negative exposure to sterling. Negative contributions came from a negative stance on the euro and a positive exposure to the Taiwan dollar.
In alternative and quantitative investments, absolute and risk adjusted performance in 2007 was strongly positive despite market turmoil in the latter half of the year. Most of the



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UBS’s businesses
Global Asset Management

O’Connor hedge fund strategies produced strong positive performance, with attractive volatility, correlation and liquidity attributes. On the multi-manager side, Global Asset Management’s core, broad-based multi-manager funds also generated positive returns for the year despite mixed performance in the third quarter.

Real estate was also impacted by the turmoil in the financial markets in 2007, albeit some markets have been more affected than others. Notwithstanding this challenging climate, overall invested assets in the global real estate business increased. Investment performance of real estate securities products provided a mixed picture in 2007, given market conditions, although longer-term performance remained positive.

Strategic opportunities

The investment environment and markets in which Global Asset Management operates are becoming ever more complex. Clients’ investment requirements are evolving and competition is likely to increase from both new and traditional sources. Key industry trends vary for each location, capability and client segment. There is a constant need to adapt and review products and services to meet future client needs.

The pension industry is seeing a continued shift from defined benefit to defined contribution pension plans. The speed of this shift, though, varies by country. Access to third-party and wholesale distribution channels will also become more important as the pension industry moves closer to a model of open architecture, allowing investors to monitor and select the best performing capabilities from an array of different managers. In addition, as so-called “baby boomers” move towards retirement, focus has shifted from wealth accumulation to income generation and capital protection, providing a number of attractive new opportunities for asset managers. Investors are increasingly looking to standardize core or central portfolios, adding actively managed products or satellite portfolios with a focus on uncorrelated assets such as hedge funds, real estate, private equity and infrastructure. Global Asset Management also remains optimistic about the growth potential provided by emerging markets.
Global Asset Management has embraced these changes by diversifying existing investment capabilities and expanding its alternative investment offerings into multi-manager

hedge funds, real estate, private equity and infrastructure. In parallel, the business group has also developed its global investment solutions business to provide a blend of products and advisory services across all major asset classes to meet the specific needs of its clients.
The Global Asset Management distribution model has expanded markedly in recent years, partly as a result of acquisitions and joint ventures. Distribution has also increased through the introduction of new and innovative products and services to existing capabilities – both through proprietary channels and third party providers. The acquisition of Banco Pactual in Brazil and joint ventures in Korea and China (to create UBS Hana Asset Management and UBS SDIC respectively) are key elements in the business group’s emerging markets growth strategy. The acquisition of Commerzbank’s asset management business in France, and initiatives to build Global Asset Management’s retirement business in North America, further demonstrate a commitment to strategic growth. To address the market shift in the US from wealth accumulation to income generation, Global Asset Management has formed a strategic alliance with Affiliated Computer Services (ACS) to offer pension plan sponsors an end-to-end retirement solution.
The fund services business area has also been expanding its capacity to meet increased industry demand for fund administration and servicing. To meet this growing demand, new offices have been opened in Hong Kong and Poland. Global Asset Management is the first tenant of the UBS Poland Service Centre in Krakow, part of UBS’s multi-hub offshoring strategy designed to help grow the business and increase process efficiency.

Competitors

Global Asset Management has a range of global competitors in active investments, extending from firms organized on a global basis (such as Fidelity Investments, AllianceBernstein Investments, BlackRock, JP Morgan Asset Management, Deutsche Asset Management and Goldman Sachs Asset Management) to firms managed on a regional or local basis or specializing in a particular asset class. In the real estate, hedge funds and infrastructure investment sectors, competitors of the business group tend to be local or regional niche players.



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Business performance

Business group reporting

                 
 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
Institutional fees  2,370   1,803   1,330   31 
 
Wholesale Intermediary fees  1,724   1,417   1,157   22 
 
Total operating income
  4,094   3,220   2,487   27 
 
Cash components  1,632   1,305   899   25 
 
Share-based components1
  363   198   89   83 
 
Total personnel expenses  1,995   1,503   988   33 
 
General and administrative expenses  559   399   304   40 
 
Services (to) / from other business units  153   (105)  116     
 
Depreciation of property and equipment  53   27   21   96 
 
Amortization of intangible assets  19   4   1   375 
 
Total operating expenses  2,7792  1,828   1,430   52 
 
Business group performance before tax  1,315   1,392   1,057   (6)
 
                 
Key performance indicators
                
 
Cost / income ratio (%)3
  67.9   56.8   57.5     
 
                 
Institutional
                
 
Invested assets (CHF billion)  522   519   441   1 
 
of which: money market funds
  32   28   16   14 
 
Net new money (CHF billion)4
  (16.3)  29.8   21.3     
 
of which: money market funds
  6.7   11.0   (3.0)    
 
Gross margin on invested assets (bps)5
  44   38   34   16 
 
1 Additionally includes related social security contributions and expenses related to alternative investment awards.  2 Includes CHF 384 million related to the closure of Dillon Read Capital Management.  3 Operating expenses / operating income.  4 Excludes interest and dividend income.  5 Operating income / average invested assets.

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Business group reporting (continued)

                 
 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
                 
Wholesale Intermediary
                
 
Invested assets (CHF billion)  369   347   324   6 
 
of which: money market funds
  70   59   62   19 
 
Net new money (CHF billion)1
  0.6   7.4   28.2     
 
of which: money market funds
  4.8   (2.5)  (9.7)    
 
Gross margin on invested assets (bps)2
  47   43   40   9 
 
                 
Capital return and BIS data
                
 
Return on allocated regulatory capital (%)3
  60.7   84.8   69.9     
 
BIS risk-weighted assets  3,784   2,723   1,570   39 
 
Goodwill and excess intangible assets4
  2,058   1,677   1,438   23 
 
Allocated regulatory capital5
  2,436   1,949   1,595   25 
 
                 
Additional information
                
 
Invested assets (CHF billion)  891   866   765   3 
 
Net new money (CHF billion)1
  (15.7)  37.2   49.5     
 
Personnel (full-time equivalents)  3,625   3,436   2,861   6 
 
1 Excludes interest and dividend income.  2 Operating income / average invested assets.  3 Business group performance before tax / average allocated regulatory capital.  4 Goodwill and intangible assets in excess of 4% of BIS Tier 1 Capital.  5 10% of BIS risk-weighted assets plus goodwill and excess intangible assets.

Components of operating income

Global Asset Management generates its revenue from the asset management and fund administration services it provides to financial intermediaries and institutional investors. Fees charged to institutional clients and wholesale intermediary clients are based on the market

value of invested assets and on successful investment performance. As a result, revenues are affected by changes in market and currency valuation levels, as well as flows of client funds, and relative investment performance.


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2007

Key performance indicators

For 2007, the cost / income ratio was 67.9%, an increase of 11.1 percentage points from 2006, primarily due to the CHF 384 million charge related to the closure of Dillon Read Capital Management (DRCM) in second quarter 2007.

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Institutional

Institutional invested assets were CHF 522 billion on 31 December 2007, up CHF 3 billion2008 from CHF 519 billion on 31 December 2006. The net increase was a result of positive impacts of financial market valuations as well as the inclusion of assets related to the acquisition of Hana Asset Management1,454 million in third quarter. This was offset by net2007. During this period:

Net new money outflows and negative currency translation impacts.

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In 2007, net new money outflows were CHF 16.3103.0 billion compared with net inflows of CHF 29.815.7 billion.Institutional invested assetsdeclined to CHF 335 billion in 2006. Outflows in core / value equity mandates and,compared with CHF 522 billion.Wholesale intermediary invested assetsfell to a lesser extent in fixed income mandates, were partly offset by inflows into all other asset classes, particularly alternative and quantitative investments and money markets, in 2007.

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CHF 240 billion compared with CHF 369 billion. Thegross margin on institutional invested assets for 2007 was 44 basis points, up declined six basis points from 2006.to 38 basis points. The increase is due to higher performance fees, mainly in alternative and quantitative investments as well as inflows into higher margin products.

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Wholesale intermediary

Invested assets were CHF 369 billion on 31 December 2007, up by CHF 22 billion from 31 December 2006. This increase is primarily due to positive financial markets valuation impacts and the inclusion of assets related to the acquisition of UBS Hana Asset Management in third quarter, partly offset by negative currency translation impacts.



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In 2007, net new money inflows were CHF 0.6 billion, compared with inflows of CHF 7.4 billion for 2006. Inflows, mainly into multi-asset and money market funds, were partly offset by outflows from fixed income funds.

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The 2007 gross margin on wholesale intermediary invested assets was 47fell six basis points up by fourto 41 basis points from a year earlier, largely driven by higher performance fees (mainly in the Brazilian asset management business) as well as inflows into higher margin products.

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Results

Pre-tax profit in 2007 points. Thecost/income ratiowas CHF 1,315 million, down from CHF 1,392 million a year earlier. The decrease reflects closure costs of CHF 384 million from DRCM in second quarter. This charge offset the positive impact of increased performance and management fees in all business areas coupled with the inclusion of acquisitions in Brazil and Korea.

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Operating income

In 2007, operating income was CHF 4,094 million, up 27% from CHF 3,220 million a year earlier. Institutional revenues increased by 31% to CHF 2,370 million in 2007 from CHF 1,803 million in 2006. This was mainly due to higher management fees in all investment areas, as well as the full-year impact of the Brazilian asset management business and the post-July impact of the Korean asset management business. These were partly offset by higher provisions. Wholesale intermediary revenues rose by 22% to CHF 1,724 million in 2007 from CHF 1,417 million in 2006, reflecting higher management fees across all businesses and higher performance fees, mainly from the Brazilian asset management business.

Operating expenses

In 2007, operating expenses increased by 52% to CHF 2,779 million from CHF 1,828 million in 2006, primarily reflecting DRCM related closure expenses and increased staff levels. Personnel expenses were CHF 1,995 million in 2007, 33% above 2006. Personnel expenses were up54.1% compared with 2006, reflecting the closure of DRCM, higher staff levels as well as the inclusion of the Brazilian and Korean asset management business. General and administrative expenses increased by 40% to CHF 559 million in 2007 from CHF 399 million in 2006. In addition to the DRCM closure expenses, general and administrative expenses increased due to higher technology related expenditure and the full-year impact of the inclusion of the Brazilian asset management business. Net charge-ins from other business units were CHF 153 million compared with the net charge-outs to other business units of CHF 105 million a year earlier, primarily due to DRCM. Over the same period, depreciation increased by 96% to CHF 53 million, as a result of the DRCM closure.



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2006

Key performance indicators

For 2006, the cost / income ratio was 56.8%, a decrease of 0.7 percentage points from 2005. A result of improved operating income, this change represented higher management fees across all businesses, combined with significantly higher performance fees in alternative and quantitative investments. This was partly offset by increased operating expenses from increased staff levels and higher variable personnel expenses.

Institutional

Institutional invested assets were CHF 519 billion on 31 December 2006 – up 18% from CHF 441 billion on 31 December 2005. This increase reflected positive market performance, strong net new money inflow and the inclusion of Banco Pactual.
In 2006, net new money inflows were CHF 29.8 billion, up from the CHF 21.3 billion recorded in 2005. Strong inflows were reported in most asset classes, partly offset by outflows from equity mandates.
The gross margin on invested assets for 2006 was 38 basis points, up four basis points from 2005.

Wholesale intermediary

Invested assets were CHF 347 billion on 31 December 2006, up by CHF 23 billion from 31 December 2005. This reflected positive market performance, net new money inflows and the inclusion of Banco Pactual.
In 2006, net new money was CHF 7.4 billion, down from CHF 28.2 billion a year earlier. In 2005, net new money inflows resulted from the large number of product launches across all major asset classes. In 2006, there were outflows in fixed income and equities while inflows in multi-asset funds continued.
64.5%.

The 2006 gross margin on invested assets was 43 basis points, up by three basis points from 2005.

Results

Pre-tax profit in 2006 was CHF 1,392 million, up from CHF 1,057 million a year earlier. This increase reflected higher management fees in all businesses and alternative and quantitative investment performance fees. The result was partly offset by higher operating expenses, which reflected increased staffing, performance-related compensation and investments in strategic initiatives and information technology infrastructure projects.

Operating income

In 2006, operating income was CHF 3,220 million, up 29% from CHF 2,487 million a year earlier. The 36% increase of institutional revenues, from CHF 1,330 million in 2005 to CHF 1,803 million in 2006, reflected higher management fees in most investment areas. Wholesale intermediary revenues rose by 22% to CHF 1,417 million in 2006 from CHF 1,157 million in 2005 and this reflected higher management fees in most areas.

Operating expenses

In 2006, operating expenses increased to CHF 1,828 million from CHF 1,430 million in 2005, due to higher staff levels and performance-related compensation. Personnel expenses were CHF 1,503 million in 2006, 52% above 2005, mainly due to the inclusion of DRCM. General and administrative expenses increased by 31% to CHF 399 million in 2006 from CHF 304 million in 2005 mainly due to investments in strategic initiatives. Other business units were charged CHF 105 million compared with the net charges from other business units of CHF 116 million a year earlier. Over the same period, depreciation increased by CHF 6 million to CHF 27 million. Amortization of intangible assets slightly increased to CHF 4 million in 2006.



133

Investment Bank

Pre-tax loss of CHF 34,092 million in 2008, compared with a pre-tax loss of CHF 16,669 million in 2007. During this period:

Thecost/income ratioandcompensation ratio remained not meaningful due to negative overall results in both years.Average regulatory Value at Risk (VaR)(10-day, 99% confidence, five years of historical data) was CHF 374 million compared with CHF 514 million. The ratio of theimpaired gross lending portfolioto the total gross lending portfolio was 3.6%, up from 0.4%.

Corporate Center

The Corporate Center produced a slightly positive result of CHF 54 million in 2008 from continuing operations, compared with a gain of CHF 2,222 million in 2007. During this period,total operating incomedecreased to CHF 1,083 million from CHF 3,562 million andtotal operating expensesdeclined to CHF 1,029 million from CHF 1,340 million.



UBS business divisions and Corporate Center
Global Wealth Management & Business Banking

Global Wealth Management & Business Banking

Global Wealth Management & Business Banking is a leading global provider of financial services for wealthy clients and the leading bank for individual and corporate clients in Switzerland.

                 
Business division reporting 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Income  21,802   24,841   21,775   (12)
 
Credit loss (expense)/recovery  (421)   28   109     
 
Total operating income
  21,381   24,869   21,884   (14)
 
Cash components  9,191   10,564   9,074   (13)
 
Share-based components1
  187   444   377   (58)
 
Total personnel expenses  9,378   11,008   9,451   (15)
 
General and administrative expenses  5,367   3,178   3,078   69 
 
Services (to)/from other business units  926   1,106   1,040   (16)
 
Depreciation of property and equipment  261   241   232   8 
 
Amortization of intangible assets  98   85   63   15 
 
Total operating expenses
  16,030   15,618   13,864   3 
 
Business division performance before tax
  5,352   9,251   8,020   (42)
 
                 
Key performance indicators
                
 
Cost/income ratio (%)2
  73.5   62.9   63.7     
 
                 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)3
  17.3             
 
Return on attributed equity (RoaE) (%)4
  31.0             
 
BIS risk-weighted assets (CHF billion)5
  89.2   169.7   155.2     
 
Return on BIS risk-weighted assets (%)6
  5.9   5.6   5.3     
 
Goodwill and intangible assets (CHF billion)7
  6.2   5.8   6.0     
 
                 
Additional information
                
 
Invested assets (CHF billion)  1,599   2,298   2,123   (30)
 
Net new money (CHF billion)8
  (123.0)   156.3   114.5     
 
Client assets (CHF billion)  2,393   3,554   3,337   (33)
 
Personnel (full-time equivalents)  49,541   51,243   48,200   (3)
 
1 Includes social security contributions and expenses related to alternative investment awards.    2 Operating expenses / income.    3 Refer to the “Capital management” section of this report for more information about the equity attribution framework, which was implemented in 2008.    4 Business division performance before tax / average attributed equity.    5 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006.    6 Business division performance before tax / average BIS RWA.    7 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.    8 Excludes interest and dividend income.

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UBS business divisions and Corporate Center

Global Wealth Management & Business Banking business portfolio

()

Business

A global branch network delivers comprehensive financial services to wealthy private individuals around the world and to private and corporate clients in Switzerland. All clients are provided with the advice, financial products and tools that fit their individual needs.

Strategy

The cornerstones of this business division’s strategy are:
– Leading investment bankingto strengthen its global leadership in wealth management by actively investing in fast-growing markets and securities firm for corporatedeveloping a strong focus on high and institutional clients, governments, financial intermediaries and alternative asset managers
ultra-high net worth clients;
– 2007 results were impactedto position UBS as the universal bank of choice in Switzerland by substantial losses on exposuresstrengthening its position across all client segments, as well as developing clients across segments and therefore each client relationship to the US residential mortgage market
its full potential; and
– Repositioningto maximize risk-adjusted profits by a balanced focus on top-line growth, risk and efficiency.

UBS places great emphasis on differentiating strategies for individual markets according to their profitability and growth potential. In the international markets where UBS is well established with a high market share and in Switzerland, the focus is on maximizing productivity and profitability as the growth prospects are less high. For domestic businesses within the five biggest European economies, UBS aims to increase profitability. For the key domestic US presence, UBS concentrates on continuing earnings growth and achieving profitability comparable with the best of its peer group. In those international markets which have been expanding strongly (for example, Asia, Eastern Europe, Latin

America and the Middle East), UBS will continue to invest actively in order to tap their long-term growth potential. In addition, within the next seven to 10 years UBS plans to establish a significant domestic presence in select markets where its business is not yet mature.

Organizational structure

Formed on 1 July 2005, this business division encompassed UBS’s global wealth management businesses and the Swiss corporate and retail banking unit. Throughout 2008, until the recent reorganization, it comprised the following business units: Wealth Management International & Switzerland, serving wealthy and affluent clients around the world, except domestic clients in the US; Wealth Management US, serving wealthy and affluent domestic US clients; and Business Banking Switzerland, serving retail and corporate clients in Switzerland. Each of these business units is provided with infrastructure, products and services by the business division’s support functions, which also provide services to other UBS business divisions under a transfer pricing mechanism.

On 10 February 2009, UBS announced a reorganization of its global wealth management and Swiss business banking businesses. Global Wealth Management & Business Banking has been divided into two new business divisions: Wealth Management & Swiss Bank, which comprises all wealth management business booked outside the Americas plus the Swiss private and corporate client business; and Wealth Management Americas, including Wealth Management US, the domestic Canadian and Brazilian businesses, as well as the international business booked in the United States.
This new management structure will be the basis for the business division’s segment reporting starting with UBS’s



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UBS business divisions and Corporate Center
Global Wealth Management & Business Banking

Current reporting structure (on 31 December 2008)

()
New reporting structure (from first quarter 2009 onwards)
()
1Includes “Swiss Bank” and “Corporate and Institutional Banking”.  2 Includes “Wealth Management International” and “Wealth Management Global”.

financial report for first quarter 2009. UBS will provide separate segment reporting for Wealth Management & Swiss Bank and Wealth Management Americas. UBS has chosen to subdivide Wealth Management & Swiss Bank into Swiss and international business areas for reporting purposes (income data and key performance indicators):
–“Swiss clients” will cover services provided to Swiss retail, wealth management and small businesses, as well as corporate and institutional clients.
–“International clients” will encompass the international wealth management business conducted out of Switzerland and all wealth management businesses of UBS’s other booking centers in Asia and Europe.

èPrior to publication of first quarter 2009 results, UBS will publish restated business division results on www.ubs.com/investors showing quarterly and annual results for 2007 and 2008 under the new organizational structure announced on 10 February 2009.


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UBS business divisions and Corporate Center

Wealth Management International & Switzerland
Business description

Business

Wealth management solutions are delivered via this business unit’s global branch network and through financial intermediaries. In addition to the specific wealth management products and services outlined below, clients benefit from UBS’s entire range of resources, from asset management to estate planning and corporate finance advice. An open product platform gives clients access to a wide array of pre-screened, top-quality products from third-party providers that complement UBS’s own product lines. On 31 December 2008, invested assets were CHF 870 billion.

Organizational structure

Throughout 2008, until the recent reorganization, this business unit comprised the following areas: Asia Pacific; Latin America, the Mediterranean, the Middle East and Africa; North, East and Central Europe; and Switzerland. The extensive wealth management branch network consisted of 5,755 client advisors, around 110 offices in Switzerland and more than 100 offices worldwide.

Competitors

Major competitors of this business unit include globally active wealth managers, such as the wealth management operations of Credit Suisse, HSBC and Citigroup. The business unit also competes with private banks that operate mainly within their respective domestic markets, such as

Coutts in the UK, Deutsche Bank AG and Sal. Oppenheim in Germany, Unicredit in Italy, and Swiss banks focused on international clients (such as Julius Baer and Pictet).

Clients and markets

The following client segments are offered sophisticated products and services specifically designed to address their needs: international core affluent clients with investable assets of CHF 250,000 to CHF 2 million; high net worth clients with investable assets of up to CHF 5 million; private wealth management clients with investable assets of CHF 5 million to CHF 50 million; and ultra-high net worth clients with investable assets of more than CHF 50 million. The business unit also provides financial intermediaries, both inside and outside Switzerland, with UBS’s wealth management solutions, products and services.

Products and services

The business unit offers expert financial advice to support clients throughout the different stages of their lives. Wealth planning advice is also given on topics such as the funding of education, gift giving, inheritance and succession. Corporate finance advice is offered to support clients in the process of disposing of corporate assets. Clients can also trade a full range of financial instruments, from single securities, such as equities and bonds, to structured products and alternative investments. The business unit also fulfills the basic banking needs of private clients with a wide variety of products, rang-



Invested assets by asset class

(INVESTED ASSETS BY ASSET CLASS)

Invested assets by currency

(INVESTED ASSETS BY CURRENCY)



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UBS business divisions and Corporate Center
Global Wealth Management & Business Banking

Loan penetration

(LOAN PENETRATION)

ing from cash accounts and savings accounts to credit cards, mortgages and securities-backed lending.

By aggregating private investment flows into institutional-size flows, the business unit is in a position to offer its private clients access to investments that would otherwise only be available to institutional clients. Expertise is sourced either from within UBS or from the external market.
Both discretionary and non-discretionary mandates are offered. Clients who opt for a discretionary mandate delegate the management of their assets, including investment decisions, to a team of professional portfolio managers who work according to an agreed investment strategy. Clients who prefer to be actively involved in the management of their assets can choose a non-discretionary mandate, where investment professionals provide analysis and monitoring of portfolios, together with tailor-made proposals to support investment decisions.

Invested assets by client domicile

(INVESTED ASSETS BY CLIENT DOMICILE)

Invested assets by client wealth

(INVESTED ASSETS BY CLIENT WEALTH)



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UBS business divisions and Corporate Center

Settlement regarding the US cross-border case

As announced on 18 February 2009, UBS settled the US cross-border case with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) by entering into a Deferred Prosecution Agreement (DPA) with the DOJ and a Consent Order with the SEC. As part of these settlement agreements:
–UBS will pay a total of USD 780 million (CHF 917 million) to the United States, USD 380 million representing disgorgement of profits from maintaining the US cross-border business and USD 400 million representing US federal backup withholding tax required to be withheld by UBS, together with interest and penalties, and restitution for unpaid taxes associated with certain account relationships involving fraudulent sham and nominee offshore structures and otherwise as covered by the DPA.
–UBS will complete the exit of the US cross-border business out of non-SEC registered entities, as announced in July 2008, which these settlements now allow UBS to do in a lawful, orderly and expeditious manner.
–UBS will implement and maintain an effective program of internal controls with respect to compliance with its obligations under its Qualified Intermediary Agreement (QIA) with the Internal Revenue Service (IRS) as well as a revised

legal and compliance governance structure in order to strengthen independent legal and compliance controls.
–Pursuant to an order issued by the Swiss Financial Market Supervisory Authority (FINMA), information has been transferred to the DOJ regarding accounts of certain US clients as set forth in the DPA, who, based on evidence available to UBS, appear to have committed tax fraud or the like within the meaning of the Swiss-US Double Taxation Treaty.
Under the DPA, the DOJ has agreed that any prosecution of UBS be deferred for a period of at least 18 months, which is subject to extension under certain circumstances, such as UBS needing more time to complete the implementation of the exit of its US cross-border business. If UBS satisfies all of its obligations under the DPA, the DOJ will refrain from pursuing charges against UBS relating to the investigation of its US cross-border business.
Additionally, as published by FINMA on 18 February 2009, FINMA has concluded that UBS violated the requirements for proper business conduct, and it barred UBS from providing services to US resident private clients out of non-SEC registered entities. Further, FINMA ordered UBS to enhance its control framework around its cross-border
businesses and announced that the effectiveness of such a framework will be audited. The order by FINMA in support of the resolution achieved with the DOJ was instrumental in averting the imminent risk of further negative implications and uncertainties for the bank.
The cost for the settlement has been fully charged to the year 2008, as reflected in this report.
The settlement agreements do not resolve issues concerning the pending “John Doe” summons which the IRS served on UBS in July 2008. The summons seeks information regarding a substantial number of undisclosed accounts maintained by US persons at UBS in Switzerland, whose information is protected from disclosure by Swiss financial privacy laws. As announced on 19 February 2009, the IRS has commenced a civil action, seeking enforcement of the summons, which UBS intends to challenge. UBS believes it has substantial defenses to the enforcement of the summons and intends to vigorously contest its enforcement in the civil proceeding, as is permitted under the terms of the DPA. Objections to the enforcement of the summons are based upon US law, the terms of UBS’s QIA with the IRS, Swiss financial privacy and other laws, and the principles of international comity that require US courts to take into account foreign laws.


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Global Wealth Management & Business Banking

Business performance

                 
Business unit reporting 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Income  10,819   12,893   10,827   (16)
 
Credit loss (expense) / recovery  (390)  (1)  1     
 
Total operating income
  10,429   12,892   10,828   (19)
 
Cash components  3,037   3,704   2,999   (18)
 
Share-based components1
  75   169   174   (56)
 
Total personnel expenses  3,112   3,873   3,173   (20)
 
General and administrative expenses  2,001   1,064   885   88 
 
of which: impact from US cross-border settlement
  917             
 
Services (to) / from other business units  1,581   1,531   1,479   3 
 
Depreciation of property and equipment  97   95   84   2 
 
Amortization of intangible assets  38   19   10   100 
 
Total operating expenses
  6,828   6,582   5,631   4 
 
Business unit performance before tax
  3,601   6,310   5,197   (43)
 
of which: impact from US cross-border settlement
  (917)            
 
of which: business unit performance before tax excluding US cross-border settlement
  4,518   6,310   5,197   (28)
 
                 
Key performance indicators
                
 
Invested assets (CHF billion)  870   1,294   1,138   (33)
 
Net new money (CHF billion)2
  (101.0)  125.1   97.6     
 
Gross margin on invested assets (bps)3
  97   103   103   (6)
 
Cost/income ratio (%)4
  63.1   51.1   52.0     
 
Client advisors (full-time equivalents)  5,755   5,774   4,742   0 
 
Client advisor productivity
                
 
Revenues per advisor (CHF thousand)5
  1,824   2,424   2,441   (25)
 
Net new money per advisor (CHF thousand)6
  (17,029)  23,516   22,008     
 
Invested assets per advisor (CHF thousand)7
  187,159   234,504   236,879   (20)
 
                 
International clients
                
 
Income  8,185   9,739   7,907   (16)
 
Invested assets (CHF billion)  682   1,013   862   (33)
 
Net new money (CHF billion)2
  (71.3)  115.6   90.8     
 
Gross margin on invested assets (bps)3
  94   101   101   (7)
 
                 
Swiss clients
                
 
Income  2,634   3,154   2,920   (16)
 
Invested assets (CHF billion)  189   281   276   (33)
 
Net new money (CHF billion)2
  (29.7)  9.5   6.8     
 
Gross margin on invested assets (bps)3
  110   111   110   (1)
 
1 Includes social security contributions and expenses related to alternative investment awards.  2 Excludes interest and dividend income.  3 Income/average invested assets.  4  Operating expenses/income.  5 Income/average number of client advisors.  6 Net new money/average number of client advisors.    7 Average invested assets/average number of client advisors.

80

UBS business divisions and Corporate Center
                 
Business unit reporting (continued) 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
                 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)1
  6.1             
 
Return on attributed equity (RoaE) (%)2
  59.0             
 
BIS risk-weighted assets (CHF billion)3
  25.2   63.1   51.5     
 
Return on BIS risk-weighted assets (%)4
  12.3   10.5   10.8     
 
Goodwill and intangible assets (CHF billion)5
  1.9   1.8   1.7     
 
                 
Additional information
                
 
Recurring income6
  8,194   9,617   8,143   (15)
 
Client assets (CHF billion)  1,048   1,651   1,436   (37)
 
Personnel (full-time equivalents)  15,271   15,811   13,564   (3)
 
1 Refer to the “Capital management” section of this report for more information on the equity attribution framework, which was implemented in 2008.  2 Business unit performance before tax/average attributed equity.  3 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006.  4 Business unit performance before tax/average BIS RWA.  5 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.  6 Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees.

2008

Key performance indicators

In 2008,net new money outflows amounted to CHF 101.0 billion, compared with inflows of CHF 125.1 billion in 2007. This occurred in the context of continuing credit market turbulence and its impact on the firm’s operating performance and reputation. Outflows of net new money were most pronounced in September and the first half of October.

Invested assets, at CHF 870 billion on 31 December 2008, were down 33% from CHF 1,294 billion a year earlier, mainly reflecting sharply lower equity markets and the strong decline of major currencies against the Swiss franc, as well as net new money outflows.
Thegross margin on invested assets was 97 basis points in 2008, down six basis points from a year earlier, as clients increased their allocation of lower-margin cash products. A further contributing factor was substantially lower levels of client transaction activity. Overall, recurring income made up 74 basis points of the margin in 2008, down from 77 basis points in 2007. Non-recurring income comprised 23 basis points of the margin in 2008, down 3 basis points from 2007.
Thecost/income ratio increased to 63.1% in 2008 from 51.1% a year earlier. This increase is primarily due to general and administrative expenses from the recognition of a provision of CHF 917 million (USD 780 million) in connection with the US cross-border case (refer to the “Settlement regarding the US cross-border case” sidebar in this section for more information). Excluding the impact of these costs, the cost / income ratio would have increased to 54.6% in 2008 from the previous year.

Results

In 2008, pre-tax profit fell 43% to CHF 3,601 million, compared with the record CHF 6,310 million in 2007. This is partially due to a provision of CHF 917 million in connection with the US cross-border case. Excluding the impact of these costs, the pre-tax result would have fallen 28%, mainly reflecting the lower asset base and client transaction activity.

Operating income

Total operating income in 2008 was CHF 10,429 million, down 19% from CHF 12,892 million a year earlier. Recurring income decreased 15% on lower asset-based fees. Non-recurring income fell by 20% due to lower brokerage fees, reflecting decreased client transaction activity levels.

Operating expenses

At CHF 6,828 million, operating expenses in 2008 were up 4% from CHF 6,582 million a year earlier. This is primarily due to a provision of CHF 917 million in connection with the US cross-border case. Excluding the impact of these costs, the operating expenses would have decreased 10%, mainly due to lower performance-related compensation. This resulted in lower personnel expenses, which fell 20% to CHF 3,112 million in 2008 compared with CHF 3,873 million a year earlier. General and administrative expenses, at CHF 2,001 million, were up by 88% from CHF 1,064 million a year earlier due to the abovementioned provisions related to the US cross-border case. Expenses for services from other business units, at CHF 1,581 million in 2008, were up 3% from CHF 1,531 million the previous year, mainly reflecting increased consumption of services. Depreciation was CHF 97 million in 2008, almost unchanged from CHF 95 million a year earlier. Amortization of intangible assets was CHF 38 million, up CHF 19 million from 2007 mainly reflecting an impairment charge.



81

UBS business divisions and Corporate Center
Global Wealth Management & Business Banking

2007

Key performance indicators

In 2007,net new money was a record CHF 125.1 billion, compared with CHF 97.6 billion in 2006, representing an annual growth rate of 11% of the underlying invested asset base at year-end 2006. This outstanding result reflected increases in all geographical regions throughout the year, particularly in Asia Pacific and Americas, both a result of the growth strategy.

Invested assets, at CHF 1,294 billion on 31 December 2007, were up 14% from CHF 1,138 billion a year earlier, mainly reflecting the strong inflow of net new money and rising financial markets. This increase was partially offset by negative currency effects. The 7% fall of the US dollar against the Swiss franc contributed to this decrease – approximately 36% of invested assets were denominated in US dollars at the end of 2007.
Thegross margin on invested assets was 103 basis points in 2007, unchanged from a year earlier, as the increase in non-recurring margin following a sustained level of client activity was offset by a lower recurring margin. Overall, recurring income made up 77 basis points of the margin in 2007, down from 78 basis points in 2006. Non-recurring income comprised 26 basis points of the margin in 2007, up one basis point from 2006.
Thecost/income ratio improved to 51.1% in 2007 from 52.0% a year earlier. The cost / income ratio improved for the fifth consecutive year despite the rise in costs in pursuit of the global expansion strategy. This improvement reflected the strong rise in income due to a higher asset base and higher volumes in lombard lending, which more than offset the increase in personnel expenses (mainly headcount increase and performance-related compensation) and general and administrative expenses.

Results

In 2007, pre-tax profit, at a record CHF 6,310 million, rose 21% compared with 2006. Total operating income was up 19% in 2007, reflecting a higher asset base and increased collateralized lending volumes and more client activity. Operating expenses, up 17% in 2007 from 2006, also rose as the business expanded.

Operating income

Total operating income in 2007 was CHF 12,892 million, up 19% from CHF 10,828 million a year earlier. This was the highest level ever, reflecting a rise in recurring as well as nonrecurring revenues. Recurring income increased 18% on rising asset-based fees, benefiting from strong net new money inflows. This was accentuated by higher interest income due to the expansion of lombard lending activities. Nonrecurring income rose 22% due to higher brokerage fees, reflecting high client activity levels.

Operating expenses

At CHF 6,582 million, operating expenses in 2007 were up 17% from CHF 5,631 million a year earlier, reflecting higher personnel expenses and general and administrative expenses as a result of ongoing business growth. Personnel expenses rose 22% to CHF 3,873 million in 2007 compared with CHF 3,173 million a year earlier, reflecting the increase in salaries due to business expansion and higher performance-related compensation. General and administrative expenses, at CHF 1,064 million, were up 20% in 2007 from CHF 885 million a year earlier due to increased expenses for travel and entertainment, premises and professional fees – all a consequence of continuous business expansion. Expenses for services from other business units, at CHF 1,531 million in 2007, were up 4% from CHF 1,479 million the previous year, mainly reflecting increased consumption. Depreciation was CHF 95 million in 2007, up 13% from CHF 84 million a year earlier because of continued business growth. Amortization of intangible assets was CHF 19 million, up CHF 9 million from 2006.



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UBS business divisions and Corporate Center

Wealth Management US
Business description

Business

Wealth Management US provides wealth management services to US private clients. On 31 December 2008, the business unit had CHF 600 billion in invested assets.

Organizational structure

Wealth Management US is headquartered in Weehawken, New Jersey, where most corporate and operational functions are located. The client-facing organization consists of the branch network in the US and Puerto Rico, with more than 8,100 financial advisors. The branch network is staffed by regional managers, market area managers, branch office managers, financial advisors and administrative support staff.

Established as part of Global Wealth Management & Business Banking in 2005, the business unit continues to evolve to meet the specific needs of its client base. Key acquisitions and transactions over the last three years included:

–August 2006 acquisition of the private client services branch network of Piper Jaffray.
–February 2007 acquisition of the McDonald Investments’ private client branch network.
–October 2008 saw the Investment Bank’s municipal securities operations serving private clients transfer to Wealth Management US (following UBS’s decision in June 2008 that its Investment Bank basedwould exit the institutional municipal securities business).

Legal structure

In the US, the business unit operates through direct and indirect subsidiaries of UBS. Securities and operations activities are conducted primarily through three registered broker-dealers: UBS Financial Services Inc., UBS Financial Services Inc. of Puerto Rico and UBS Services USA LLC. Wealth Management US’s banking services include Federal Deposit Insurance Corporation (FDIC)-insured deposit accounts and enhanced collateralized lending services, which are conducted through UBS Bank USA, a federally regulated Utah bank.



Geographical presence in key markets

(GEOGRAPHICAL PRESENCE IN KEY MARKETS)

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UBS business divisions and Corporate Center
Global Wealth Management & Business Banking

Competitors

Wealth Management US competes with national full-service brokerage firms, domestic and global private banks, regional broker-dealers, independent broker-dealers, registered investment advisors, commercial banks, trust companies and other financial services firms offering wealth management services to US private clients. In 2008, the financial crisis triggered consolidation within the industry that directly impacted the business unit’s major competitors: Citi Global Wealth Management, Merrill Lynch Global Wealth Management, Morgan Stanley Global Wealth Management Group and Wachovia Securities. Specifically, Merrill Lynch was acquired by Bank of America, effective 1 January 2009 and Wachovia Corporation was acquired by Wells Fargo, effective 31 December 2008. In January 2009, Morgan Stanley and Citi announced an agreement to combine Morgan Stanley’s Global Wealth Management Group and Citi’s Smith Barney unit into a joint venture called Morgan Stanley Smith Barney.

Clients and strategy

Wealth Management US is focused on the delivery of services tailored to meet the needs of four distinct client segments: ultra-high net worth (more than USD 10 million in investable assets), high net worth (USD 1 million to USD 10

million in investable assets), core affluent (USD 250,000 to USD 1 million in investable assets) and the emerging affluent (up to USD 250,000 in investable assets).

The business unit is committed to a number of strategic priorities, including gaining market share, achieving improved profitability, enhancing the client experience and attracting and retaining key talent.
One long-term strategy is to ensure the delivery of a high-quality and consistent client experience as defined by the four steps of the “UBS Client Experience”: understanding client needs, proposing appropriate solutions, agreeing on and implementing them, and reviewing progress toward client goals. To do so, the organization is focused on implementing a number of organic growth initiatives, infrastructure enhancements and staff development programs, all aimed at fundamentally improving the way financial advisors serve clients. In 2008, Wealth Management US expanded its services and capabilities by increasing its range of client-segment specific offerings. Two additional private wealth management offices were opened to service ultra-high net worth clients in Houston, Texas, and Boston, Massachusetts. With these openings, UBS has nine dedicated private wealth management offices across the US, with additional offices to be opened in select markets through 2010. In June 2008, the first group of UBS wealth advisors received accreditation from a new and comprehensive development program



Invested assets by asset class

(INVESTED ASSETS BY ASSET CLASS)

Invested assets by client wealth

(INVESTED ASSETS BY CLIENT WEALTH)



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UBS business divisions and Corporate Center

designed by UBS for advisors focused on the high net worth segment. In the first and third quarters of 2008, investment centers in New Jersey and North Carolina were opened to serve emerging affluent clients.

Products and services

Wealth Management US offers clients a full array of wealth management services that focus on the individual investment needs of each client. Comprehensive planning supports clients through the various stages of their lives, including education funding, charitable giving, tax management strategies, estate strategies, insurance, retirement, and trusts and foundations. Advisors work closely with consultants who are subject-matter experts in areas such as wealth planning, asset allocation, retirement and annuities, alternative investments, structured products, and banking and lending. They also have access to Wealth Management Research content to support investment decisions.

Products and services are designed to meet a wide variety of investment objectives including capital appreciation, income generation, diversifying portfolio concentration and tax optimization. To address the full range of clients’ investment needs, Wealth Management US offers competitive lending and cash management services, including the Resource Management Account (RMA) product, credit

cards, FDIC-insured deposits, securities-backed lending and mortgages. Additionally, through Corporate Employee Financial Services, it provides stock option and other related services to many of the largest US corporations and their executives.
The business unit’s clients have the option of transaction-based or asset-based pricing for their relationships. Clients who choose asset-based pricing have access to both discretionary and non-discretionary investment advisory programs. While non-discretionary advisory programs enable the client to maintain control over all transactions in the account, clients with discretionary advisory programs direct investment professionals to manage a portfolio on their behalf. Depending on the type of discretionary program, the client can give investment discretion to a qualified financial advisor, a team of UBS investment professionals or a third-party investment manager. Separately, mutual fund advisory programs are also offered, where a financial advisor works with the client to create a diversified portfolio of mutual funds guided by a research-driven asset allocation framework.
Transaction-based pricing offers access to a broad range of transaction products, including individual securities such as equities and fixed income instruments. To complement portfolio strategies, qualified clients may take advantage of the offerings in structured products and alternative investments.


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Global Wealth Management & Business Banking

Business performance

                 
Business unit reporting 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Income  5,959   6,662   5,863   (11)
 
of which: ARS settlement impact
  (60)            
 
Credit loss (expense) / recovery  (25)      (2)  (1)
 
Total operating income
  5,933   6,660   5,862   (11)
 
Cash components  3,806   4,352   3,686   (13)
 
Share-based components1
  85   199   153   (57)
 
Total personnel expenses  3,891   4,551   3,839   (15)
 
General and administrative expenses  2,348   976   1,073   141 
 
of which: ARS settlement impact
  1,464             
 
Services (to) / from other business units  238   314   281   (24)
 
Depreciation of property and equipment  94   79   74   19 
 
Amortization of intangible assets  60   66   53   (9)
 
Total operating expenses
  6,631   5,986   5,320   11 
 
Business unit performance before tax
  (698)  674   542     
 
of which: ARS settlement impact
  (1,524)            
 
of which: business unit performance before tax excluding ARS settlement impact
  826   674   542   23 
 
 
Key performance indicators
                
 
Invested assets (CHF billion)  600   840   824   (29)
 
Net new money (CHF billion)2
  (10.6)  26.6   15.7     
 
Net new money including interest and dividend income (CHF billion)3
  11.7   51.5   37.9   (77)
 
Gross margin on invested assets (bps)4
  84   77   76   9 
 
Cost / income ratio (%)5
  111.3   89.9   90.7     
 
Recurring income6
  3,835   4,173   3,488   (8)
 
Financial advisor productivity
                
 
Revenues per advisor (CHF thousand)7
  735   828   776   (11)
 
Net new money per advisor (CHF thousand)8
  (1,307)  3,305   2,077     
 
Invested assets per advisor (CHF thousand)9
  87,876   107,719   101,922   (18)
 
 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)10
  7.3             
 
Return on attributed equity (RoaE) (%)11
  (9.5)            
 
BIS risk-weighted assets (CHF billion)12
  25.9   18.7   18.3     
 
Return on BIS risk-weighted assets (%)13
  (3.3)  3.6   3.0     
 
Goodwill and intangible assets (CHF billion)14
  4.3   4.0   4.3     
 
 
Additional information
                
 
Client assets (CHF billion)  636   917   909   (31)
 
Personnel (full-time equivalents)  18,929   19,347   18,557   (2)
 
Financial advisors (full-time equivalents)  8,182   8,248   7,880   (1)
 
1Includes social security contributions and expenses related to alternative investment awards.2Excludes interest and dividend income.3For purposes of comparison with US peers.4Income / average invested assets.5Operating expenses / income.6Interest, asset-based revenues for portfolio management and account-based, distribution and advisory fees.7Income / average number of financial advisors.8Net new money / average number of financial advisors.9Average invested assets / average number of financial advisors.10Refer to the “Capital management” section of this report for more information on the equity attribution framework, which was implemented in 2008.11Business unit performance before tax / average attributed equity.12BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006.13Business unit performance before tax / average BIS RWA.142007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.

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2008

Key performance indicators

In 2008,net new money outflows amounted to CHF 10.6 billion compared with inflows of CHF 26.6 billion in 2007, with net new money outflows concentrated in the second and third quarters. This reflects the credit market turbulence and its impact on the firm’s operating performance and reputation, which led to an increase in financial advisor attrition and clients diversifying assets away from the firm. Net new money improved to positive levels in the fourth quarter, with its strongest inflows occurring in December after financial advisor recruiting and retention. Including interest and dividends, net new money in 2008 was CHF 11.7 billion, down from CHF 51.5 billion in 2007.

Wealth Management US had CHF 600 billion ininvested assetson 31 December 2008, down 29% from CHF 840 billion on 31 December 2007. This was a result of declining markets over the year, net new money outflows and the negative impact of currency translation. In US dollar terms, invested assets decreased 24% compared with a year earlier.
Thegross margin on invested assetswas 84 basis points in 2008, up from 77 basis points in 2007. The increase is mainly a result of a six basis point increase in the recurring income margin to 54 basis points, while the non-recurring margin increased one basis point to 30 basis points.
Thecost/income ratioincreased to 111.3% in 2008 from 89.9% in 2007. Following the auction rate securities (ARS) settlement in August 2008, Wealth Management US recorded losses of CHF 1,524 million, of which CHF 1,464 million were included in general and administrative expenses, and CHF 60 million were recognized as trading losses. Under the ARS settlement, Wealth Management US agreed to purchase ARS from clients at their par value. Up to fourth quarter 2008, the ARS settlement liability represented a provision. The liability was re-classified from provisions to negative replacement values in fourth quarter 2008, when ARS settlement rights, which are treated as derivative instruments, were issued and accepted by clients. Losses incurred post-reclassification represented trading losses. Excluding ARS-related charges, the cost / income ratio improved to 85.8% due to lower expenses, including reduced performance-based compensation accruals. Refer to the “Exposure to auction rate securities” sidebar in the “Risk concentration” section of this report for more information.
In 2008,recurring incomewas CHF 3,835 million, down 8% from CHF 4,173 million a year earlier. Excluding the impact of currency fluctuations, recurring income increased 6% in 2008, driven by growth in net interest income from increased deposit balances, while recurring fee income

declined slightly due to lower asset levels. Recurring income represented 65% of total operating income in 2008, compared with 63% in 2007.
Revenues per advisordecreased in 2008 to CHF 735,000 from CHF 828,000 in 2007. In US dollar terms, revenue per advisor increased 2% as higher recurring income was partly offset by lower transactional revenue. The number of financial advisors at 31 December 2008 was 8,182, down 66 or 1% from a year earlier. Turnover among financial advisors was concentrated among lower producing advisors, including trainees.

Results

For full-year 2008, Wealth Management US recorded a pre-tax loss of CHF 698 million compared with a pre-tax profit of CHF 674 million in 2007. Driving the decline were total ARS-related charges of CHF 1,524 million taken during 2008. Excluding these charges, the pre-tax result would have increased 23%. In US dollar terms and excluding ARS-related charges, the pretax performance would have increased 41% driven by resilient operating income growth during a challenging environment, coupled with a decline in expenses, including lower performance-based compensation accruals.

Operating income
In 2008, total operating income was CHF 5,933 million, down 11% from CHF 6,660 million in 2007. Excluding currency effects and ARS related trading losses, operating income increased 4% from 2007. The increase in operating income reflects stronger net interest income related to an increase in deposit balances, and a positive impact of the new equity attribution framework introduced in first quarter 2008, partly offset by lower transactional revenue and an increase in credit losses.

Operating expenses
Total operating expenses rose 11% to CHF 6,631 million in 2008 from CHF 5,986 million in 2007. Excluding ARS-related expenses, operating expenses declined 14%. In US dollar terms and excluding ARS-related expenses, operating expenses declined 1%. On this basis, personnel expenses decreased 2% driven by lower performance-based compensation accruals, partly offset by higher severance costs related to staff reductions. Excluding ARS-related expenses, non-personnel costs (including general and administrative expenses, depreciation and amortization expenses, and services provided to and received from other business units), rose 2% in US dollar terms due to an increase in depreciation costs, while total general and administrative expenses were essentially flat from the prior year.



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Global Wealth Management & Business Banking

2007

Key performance indicators

The inflow ofnet new money in 2007 was CHF 26.6 billion, up from CHF 15.7 billion a year earlier, reflecting reduced outflows from existing clients and the recruitment of experienced advisors. Including interest and dividends, net new money in 2007 was CHF 51.5 billion, up from CHF 37.9 billion in 2006.

Wealth Management US had CHF 840 billion ininvested assetson 31 December 2007, up 2% from CHF 824 billion on 31 December 2006. This was a result of rising markets over the year, net new money inflows and the first-time inclusion of former McDonald Investments’ assets. These increases were partly offset by the negative impact of currency translation. In US dollar terms, invested assets increased 10% compared with a year earlier.
Thegross margin on invested assetswas 77 basis points in 2007, up from 76 basis points in 2006. The increase is mainly a result of a higher recurring income margin, while the non-recurring margin decreased.
Thecost/income ratiowas 89.9% for 2007, compared with 90.7% in 2006. The improvement in the cost/income ratio reflects higher operating income due to strong growth in recurring income, partially offset by a rise in expenses mainly reflecting higher personnel expenses in support of growth initiatives and the integration of the McDonald Investments’ private client branch network.
In 2007,recurring incomewas a record CHF 4,173 million, up 20% from CHF 3,488 million a year earlier. Excluding the impact of currency fluctuations, recurring income was up 23% in 2007 from 2006. This increase mainly reflects higher levels of managed account fees on a year-end record level of invested assets, higher investment advisory fees and higher net interest income. Recurring income represented 63% of operating income in 2007, compared with 60% in 2006.
Revenues per advisorincreased in 2007 to CHF 828,000 from CHF 776,000 in 2006 as a higher average number of financial advisors was able to produce significantly higher

recurring income than a year earlier. The number of financial advisors rose 5% compared with 2006, increasing by 368 advisors to 8,248 at the end of 2007, while recurring income increased 20%.

Results

In 2007, Wealth Management US reported a pre-tax profit of CHF 674 million, compared with CHF 542 million in 2006. In US dollar terms, performance in 2007 was up 27% from 2006. Performance in 2007 benefited from record levels of recurring income and lower general and administrative expenses. This was partly offset by higher personnel expenses.

Operating income
In 2007, total operating income was CHF 6,660 million, up 14% from CHF 5,862 million in 2006. Excluding currency effects, operating income increased 16% from 2006. The increase in operating income reflected the record recurring income (driven by increased asset levels in managed account products) and increased transactional revenue.

Operating expenses
Total operating expenses rose 13% to CHF 5,986 million in 2007 from CHF 5,320 million in 2006. Excluding currency effects, operating expenses were 15% higher.

Personnel expenses increased CHF 712 million or 19%, with higher salaries as well as share-based compensation. This reflects rising headcount due to organic growth and the McDonald Investments’ private client branch network inclusion. General and administrative expenses decreased 9% to CHF 976 million in 2007 from CHF 1,073 million in 2006. In US dollar terms, they fell 7%, primarily reflecting lower provisions compared with 2006. Services from other business units increased 12% from CHF 281 million in 2006 to CHF 314 million in 2007. Depreciation was higher due to leasehold improvements. The amortization of intangibles was CHF 66 million in 2007, up 25% from CHF 53 million, mainly due to the acquisition of the McDonald Investments’ private client branch network and the full-year impact of the acquisition of the Piper Jaffray’s private client services branch network.


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Business Banking Switzerland
Business description

Business

Business Banking Switzerland is UBS’s retail and commercial banking unit and the leading bank in Switzerland. At the end of 2008, business banking Switzerland had CHF 129 billion in invested assets. UBS also leads the Swiss lending and retail mortgage markets, with a total loan book of CHF 143 billion on 31 December 2008.

Organizational structure

Business Banking Switzerland is home to the firm’s Swiss branch network for corporate and individual clients. It is organized in eight geographical regions. The customer services network includes e-banking services, customer service centers, 1,260 automated teller machines (ATMs) and 303 branches across Switzerland.

To meet the needs of private clients, which are changing in line with technological advances, Business Banking Switzerland pursues an integrated, multi-channel strategy. It uses technology to complement, rather than replace, the traditional physical branch network. Standard transactions can be executed using one of the electronic channels, enabling client advisors to focus on providing advice and developing financial solutions. For basic products and services, technology is used to ensure around-the-clock availability. Customer service centers exist in five locations and provide basic information and support 24 hours a day via telephone. Additionally, in 65 of the UBS branches in Switzerland, a two-zone concept has been implemented:

standard transactions are executed via ATMs, while client advisors, sitting in an open plan desk area next to the ATMs, focus on giving clients value-added advice. Clients make extensive use of e-banking channels. On 31 December 2008, more than 600,000 clients had active e-banking contracts and more than 80% of all payment orders were made in 2008 through electronic channels.

Competitors

UBS’s major competitors are the banks that are active in the retail and corporate banking market in Switzerland. This group includes Credit Suisse, the country’s cantonal banks, Raiffeisen Bank, other regional or local Swiss banks and foreign bank branches in Switzerland.

Clients and products

The business unit serves both retail and commercial clients, including financial institutions.

Approximately 2.5 million individual Switzerland-based clients are served through over 3 million accounts, mortgages and other financial relationships. Through the client service networks described above, individual clients can access services such as a comprehensive selection of cash accounts, savings products, advisory services, residential mortgages, pensions and life insurance.
Of the approximately 135,000 corporate clients, about 200 are major companies with operations spanning a broad range of markets and geographical regions and therefore

Invested assets by asset class

(INVESTED ASSETS BY ASSET CLASS)



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Global Wealth Management & Business Banking

require advanced financing and risk management skills as well as comprehensive access to the capital markets for funding needs; about 8,200 are large companies requiring expertise in handling complex financial transactions, including the selection and design of investment products, assistance in complex mergers and acquisitions or provision of structured financing; and some 126,000 are small- and medium-sized enterprises requiring local market expertise and access to a full range of products and services. In addition, substantial business process support is available (ranging from transactional payments and securities services to the facilitation of cross-border transactions with trade finance products).
Global custody services offer institutional investors the opportunity to consolidate multiple-agent bank relationships into a single, cost-efficient global custodial relationship. This simplifies their processing and administration arrangements and allows them to take advantage of other services, such as flexible consolidated performance reporting and powerful portfolio management tools.
Payments, securities and custodial services are offered to more than 3,000 financial institutions worldwide. Other banks which lack UBS’s scale can also outsource their payment, security or custodial services in order to benefit from UBS’s scale efficiencies.

Total lending portfolio, gross

On 31 December 2008, the total lending portfolio was CHF 143 billion, gross. Of this amount, mortgages comprised CHF 116 billion, with 84% being residential mortgages. Continued discipline in implementing risk-adjusted pricing has resulted in a strengthened focus of origination efforts on higher-quality exposures with an attractive risk/return relationship. The introduction of this model has resulted in a clear improvement in the risk profile of the business unit’s lending portfolio.
èRefer to the “Credit risk” section of this report for more information on client-driven businesses and core franchisesUBS’s credit portfolio.

Recovery portfolio

A dedicated team of recovery specialists assists clients that are unable to meet their financial obligations. Economic recovery can be achieved through restructuring or through liquidation of available collateral in order to limit the financial loss on the loan. The recovery portfolio amounted to CHF 2.3 billion on 31 December 2008. Since the end of 1998, successful recovery efforts have reduced the portfolio by more than 91% and non-performing loans have decreased from CHF 14.0 billion to CHF 1.5 billion, resulting in a ratio of non-performing loans to total lending portfolio of 0.9%.



Total lending portfolio by category, gross

(TOTAL LENDING PORTFOLIO BY CATEGORY, GROSS)

Development of UBS’s recovery portfolio, 2000-2008

(DEVELOPMENT OF UBS'S RECOVERY PORTFOIO, 2000-2008)



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UBS business divisions and Corporate Center

Business performance

                 
Business unit reporting 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Interest income  3,234   3,470   3,339   (7)
 
Non-interest income  1,790   1,816   1,746   (1)
 
Income  5,024   5,286   5,085   (5)
 
Credit loss (expense) / recovery  (5)  31   109     
 
Total operating income
  5,019   5,317   5,194   (6)
 
Cash components  2,348   2,508   2,389   (6)
 
Share-based components1
  27   76   50   (64)
 
Total personnel expenses  2,376   2,584   2,439   (8)
 
General and administrative expenses  1,018   1,138   1,120   (11)
 
Services (to) / from other business units  (893)  (739)  (720)  (21)
 
Depreciation of property and equipment  70   67   74   4 
 
Amortization of intangible assets  0   0   0     
 
Total operating expenses
  2,570   3,050   2,913   (16)
 
Business unit performance before tax
  2,449   2,267   2,281   8 
 
                 
Key performance indicators
                
 
Invested assets (CHF billion)  129   164   161   (21)
 
Net new money (CHF billion)2
  (11.4)  4.6   1.2     
 
Cost/income ratio (%)3
  51.2   57.7   57.3     
 
Impaired lending portfolio as a % of total lending portfolio, gross  1.0   1.2   1.7     
 
                 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)4
  3.8             
 
Return on attributed equity (RoaE) (%)5
  64.0             
 
BIS risk-weighted assets (CHF billion)6
  38.0   87.9   85.4     
 
Return on BIS risk-weighted assets (%)7
  6.1   2.6   2.7     
 
Goodwill and intangible assets (CHF billion)8
  0.0   0.0   0.0     
 
                 
Additional information
                
 
Client assets (CHF billion)  709   986   992   (28)
 
Personnel (full-time equivalents)  15,341   16,085   16,079   (5)
 
1 Includes social security contributions and expenses related to alternative investment awards.  2 Excludes interest and dividend income.  3 Operating expenses/income.  4 Refer to the “Capital management” section of this report for more information about the equity attribution framework, which was implemented in 2008.  5 Business unit performance before tax/average attributed equity.  6 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006.  7 Business unit performance before tax/average BIS RWA.  8 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.

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Global Wealth Management & Business Banking

2008

Key performance indicators

Net new money outflows totaled CHF 11.4 billion in 2008, compared with an inflow of CHF 4.6 billion in 2007. This was mainly due to clients’ diversification of assets and reevaluation of banking relationships in the context of continuing global market turmoil.

Invested assets fell to CHF 129 billion in 2008 from CHF 164 billion a year earlier, driven by negative market developments and net new money outflows.
In 2008 thecost/income ratio stood at 51.2%, strongly improved from 57.7% a year earlier due to a 16% decrease in operating expenses reflecting cost-cutting measures.
Business Banking Switzerland’sloan portfolio was CHF 143.0 billion on 31 December 2008, down 2% from the previous year.
The key credit quality ratio of theimpaired lending portfolio, gross, to the total lending portfolio, gross, improved to 1.0% compared with 1.2% in 2007.

Results

Pre-tax profit in 2008 was a record CHF 2,449 million, CHF 182 million, or 8% above the result achieved in 2007 due to a strong decrease in operating expenses reflecting stringent

cost-cutting measures as well as higher charges paid to this business unit for services provided to other businesses.

Operating income

Total operating income in 2008 was CHF 5,019 million, down from 2007’s level of CHF 5,317 million. Interest income decreased 7% to CHF 3,234 million in 2008 from CHF 3,470 million in 2007. This decrease reflects lower deposit and loan volumes as well as lower margins on mortgages. Non-interest income decreased CHF 26 million to CHF 1,790 million in 2008 from CHF 1,816 million in 2007, reflecting the lower asset base. Credit loss, at CHF 5 million in 2008, deteriorated from credit loss recoveries of CHF 31 million in 2007.

Operating expenses

Operating expenses in 2008 were CHF 2,570 million, down 16% from CHF 3,050 million in 2007. Personnel expenses, at CHF 2,376 million, were down 8% from CHF 2,584 million in 2007, reflecting lower performance-related compensation accruals. General and administrative expenses, at CHF 1,018 million in 2008, were 11% lower than the CHF 1,138 million recorded in 2007. Net charges to other business units continued to rise for the fourth consecutive year to CHF 893 million in 2008 from CHF 739 million in 2007 because of higher consumption of services in other businesses. Depreciation in 2008 slightly increased to CHF 70 million from CHF 67 million in 2007.



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UBS business divisions and Corporate Center

2007

Key performance indicators

Net new money was CHF 4.6 billion in 2007, CHF 3.4 billion higher than the inflow of CHF 1.2 billion in 2006. This was due to an increase in inflows from existing clients.

Invested assets rose to CHF 164 billion in 2007 from CHF 161 billion a year earlier, driven by positive market developments and net new money inflows. This was slightly offset by the transfer of assets to Wealth Management International & Switzerland, which occurred over the course of 2007, when UBS transferred CHF 9.2 billion in client assets from the Business Banking Switzerland business unit to the Wealth Management International & Switzerland business unit, reflecting the development of client relationships. In 2006, UBS transferred CHF 8.2 billion in client assets for the same reason.
In 2007 thecost/income ratio was 57.7%, compared with 57.3% a year earlier.
Business Banking Switzerland’s gross lending portfolio was CHF 145.5 billion on 31 December 2007, up 1% from the previous year. This positive development was also reflect-ed in the key credit quality ratio of theimpaired lending portfolio, gross, to the total lending portfolio, gross, which was 1.2% compared with 1.7% in 2006.

Results

Pre-tax profit in 2007 was CHF 2,267 million, CHF 14 million or 1% below the result achieved in 2006, as the increase in

operating expenses outpaced income growth. In 2007, interest income rose on higher volumes and margin on liabilities, while non-interest income rose due to higher asset-based and brokerage fees.

Operating income

Total operating income in 2007 was CHF 5,317 million, up from the 2006 level of CHF 5,194 million. Interest income increased 4% to CHF 3,470 million in 2007 from CHF 3,339 million in 2006. The slight increase reflects the expansion of the business unit’s loan portfolio and the higher margin on liabilities. Non-interest income increased by CHF 70 million to CHF 1,816 million in 2007 from CHF 1,746 million in 2006, reflecting a higher asset base as well as higher trading income. Credit loss recoveries were CHF 31 million in 2007, a decrease from recoveries of CHF 109 million in 2006.

Operating expenses

Operating expenses in 2007 were CHF 3,050 million, up 5% from CHF 2,913 million in 2006. Personnel expenses, at CHF 2,584 million, were up 6% from CHF 2,439 million in 2006 due to higher salary costs for the employee pension plan in Switzerland, related to its change from a defined benefit to a defined contribution plan. General and administrative expenses, at CHF 1,138 million in 2007, rose and were 2% higher than the CHF 1,120 million recorded in 2006. Net charges to other business units continued to rise to CHF 739 million in 2007 from CHF 720 million in 2006 because of higher consumption of services in other business units. Depreciation in 2007 decreased to CHF 67 million from CHF 74 million in 2006.



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UBS business divisions and Corporate Center
Global Asset Management

Global Asset Management

Business description

One of the world’s leading asset managers, Global Asset Management provides investment capabilities and services to private clients, financial intermediaries and institutional investors.

Business

This business division offers a wide range of investment capabilities and services across all major asset classes including equities, fixed income, asset allocation, currency, risk management, hedge funds, real estate, infrastructure, private equity and fund administration. Invested assets totaled CHF 575 billion on 31 December 2008, making Global Asset Management one of the largest institutional asset managers and hedge fund of funds managers in the world. This business division is also one of the largest mutual fund managers in Europe and the largest in Switzerland.

Revenues and key performance indicators are reported according to two principal asset management client segments: institutional (for example, corporate and public pension plans, governments and their central banks) and wholesale intermediary (for example, financial intermediaries, including Wealth Management, and selected third parties).

Strategy

The financial crisis of 2008 is likely to have a major adverse impact on the immediate growth prospects of the asset management industry. A key change that could depress

future growth in certain areas but provide opportunities in others is increased aversion to risk among investors. Investors are considering risk not only in terms of volatility and the possibility of underperformance in asset classes but also in terms of the liquidity constraints related to the ability to redeem investments as well as counterparty risks.
In the longer term, however the industry outlook remains strong as fundamental drivers over the past two decades have not changed and, indeed, have now been reinforced. Strong growth has been driven by the recognition, both within government and outside, of the need for increased retirement savings as median populations age and pressures on public finances correspondingly increase. This has created a growing industry in both established markets and, more recently, the new markets of the Middle East, South America and Asia Pacific.
Global Asset Management’s diversified business model will allow it to continue to service growth segments by offering a wide range of products from boutique-like capabilities to various markets and distribution channels. Global Asset Management’s wide spectrum of investment capabilities puts it in a strong position to further develop a holistic range of investment solutions including liability-driven investment and retirement products. This business division is well posi-


Key focus areas

(FLOW CHART)

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UBS business divisions and Corporate Center

tioned to capture opportunities with the move towards more tangible asset classes such as infrastructure, real estate and private equity. It will also continue to drive its third-party wholesale initiative forward, particularly in Europe and the Americas.

Organizational structure

This business division is headquartered in London, with other main offices in Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Rio de Janeiro, Sydney, Tokyo, Toronto and Zurich, and employs around 3,800 persons in 25 countries.

Significant recent acquisitions and business transfers
–In December 2006, UBS completed its acquisition of Banco Pactual and renamed the asset management business UBS Pactual Asset Management. It is currently the seventh largest asset manager in Brazil with invested assets of approximately CHF 19 billion on 31 December 2008.
–In May 2007, UBS announced the closure of Dillon Read Capital Management (DRCM). The business was formed in June 2005 and officially launched in June 2006. The business had two arms – one managing existing proprietary assets transferred from UBS Investment Bank, the other established to manage outside investor assets. As the development of the business did not meet original expectations, it was closed in May 2007.
–In July 2007, UBS purchased a 51% stake in Daehan Investment Trust Management Company Ltd. (DIMCO) from Hana Daetoo Securities (formerly Daehan Investment & Securities Company Ltd.), a wholly owned subsidiary of Hana Financial Group. DIMCO was renamed UBS Hana Asset Management Company Ltd. internationally

and Hana UBS Asset Management in Korea and is one of the market leaders in the Korean asset management industry, with invested assets of CHF 13 billion on 31 December 2008.
–In February 2008, UBS acquired 100% of the Caisse Centrale de Réescompte (CCR) Group in France from Commerzbank. The businesses of the CCR Group are being combined into the asset management and wealth management businesses of UBS in France. CCR Group had invested assets of CHF 4 billion on 31 December 2008.
–In August 2008, UBS sold its 24.9% stake in Adams Street Partners to its remaining shareholders. The transaction closed on 6 August 2008.

Competitors

Global Asset Management’s competitors range from global competitors in active investments (such as Fidelity Investments, AllianceBernstein Investments, BlackRock, JP Morgan Asset Management, Deutsche Asset Management and Goldman Sachs Asset Management) to those managed on a regional or local basis or specializing in particular asset classes. In the real estate, hedge fund, infrastructure and regional private equity investment areas, competitors tend to be specialist niche players who focus mainly on one asset class.

It is likely that the current market turmoil will alter the composition of the asset management industry and its participants. Successful competitors are expected to be well- diversified, large asset managers – structured as either multi-boutiques or with a more traditional structure that can benefit from economies of scale – with access to a wide range of asset classes and a broad global distribution.



Invested assets by client type

(BAR CHART)

Institutional/wholesale intermediary revenues

(BAR CHART)



95

UBS business divisions and Corporate
Center Global Asset Management

Products and services

Investment management products and services are offered in the form of segregated, pooled and advisory mandates along with a range of more than 500 registered investment funds, exchange-traded funds and other investment vehicles across all major asset classes.
–Equitiesoffers a full spectrum of investment styles with varying risk and return objectives. It has three investment pillars with distinct strategies – core/value (portfolios managed according to a price to intrinsic value philosophy), growth investors (a quality global growth manager) and structured equities (strategies that employ proprietary analytics and quantitative methods).
–Fixed incomeoffers a diverse range of global, regional and local market-based investment strategies that cover a wide range of benchmarks. Its capabilities include “core” government and corporate bond strategies, complemented by extended strategies such as high-yield and emerging market debt.
–Alternative and quantitative investmentshas two primary business lines – multi-manager (or fund of funds) and single manager. The former constructs portfolios of hedge funds and other alternative investments operated by third-party managers, allowing clients diversified exposure to a range of hedge funds, private equity and infrastructure strategies. O’Connor is a key provider of single manager global hedge funds.
–Global real estateactively manages real estate investments in Asia, Europe and the US across all major sectors. Its capabilities include core, value-added and opportunistic strategies on a global, regional and country basis, and are offered through open and closed-end private funds,

funds of funds, individually managed accounts and publicly traded real estate securities globally.
–Global investment solutionsoffers asset allocation, currency, risk management and advisory services. It manages a wide array of domestic, regional and global balanced portfolios, currency mandates, structured portfolios and absolute return strategies which invest in internal and external portfolios.
–Infrastructure and private equityis involved in the origination and management of specialist funds that invest in infrastructure and other private assets globally.
–Fund services, the global fund administration business, provides professional services, including legal set up, reporting and accounting for retail and institutional investment funds, for hedge funds and for other alternative funds.

Investment performance full-year 2008

The decline in almost all financial markets that began in the latter half of 2007 continued in 2008 and accelerated towards the end of the year. Investors became increasingly risk averse and sensitive to news flow thus creating very volatile market conditions, even in perceived lower risk sectors such as money markets. Across the asset management industry, this difficult environment led to a wide dispersion of investment performance.

Among equity strategies, a higher proportion equaled or exceeded their benchmark for 2008 than for 2007, with most strategies also improving their relative standings compared with peers. This notable improvement in relative performance followed the leadership and broader personnel changes initiated during 2007. In core/value equities, the strongest performance for the year was seen in European



Invested assets by region1

(BAR CHART)

1 Assets represented are totals for the Global Asset Management business division worldwide. The regional split is based on the client servicing location.

Institutional invested assets by asset class

(BAR CHART)



96

UBS business divisions and Corporate Center

Investment capabilities and services

Alternative and
quantitativeGlobalGlobal investmentInfrastructure and
EquitiesFixed incomeinvestmentsreal estatesolutionsprivate equityFund services
Core/value
Global
Single manager
hedge funds		Global
Global
Direct infrastructure
investment		Alternative funds
GlobalCountry and regionalCountry and regionalCountry and regionalInvestment funds
Country and regional
Sector specific
Multi-manager
hedge funds		Private strategies
Asset allocation
Listed infrastructure
securities
Emerging marketsEmerging marketsReal estate securitiesCurrency management
Specialist
High yield
Quantitative
Agriculture
Return and risk targeted
Direct private equity
investment

Growth investors
Structured credit
Infrastructure
fund of funds
Structured portfolios

GlobalLiquidity/short durationRisk management andGlobal and regional
advisory services
Country and regional
Indexed
Private equity
fund of funds



Structured equities
Systematic alpha
Quantitative equities
Portfolio construction
solutions
(including passive)

and in Canadian and Australian equities. European equities performance was particularly strong in the second half of the year and, overall, sector positioning contributed positively, especially overweights to telecoms and pharmaceuticals and an underweight to materials. Global equity strategies showed distinct performance improvement during the year, despite some setbacks in the fourth quarter where a range of positive contributors were insufficient to fully offset the drag on performance of only modest overweights to banks and diversified financials. US equity strategies had a very difficult first half, followed by a strong third quarter and a weaker fourth quarter. Contributors to performance varied quarter by quarter but, over the year as a whole, underweights to energy

and materials were the largest detractors. Overweights to utilities and telecoms were positives, although the latter was offset by weak stock selection in the sector.

Growth equities strategies posted mixed performance results with the US large cap growth and US mid cap growth strategies marginally outperforming their benchmarks while other strategies underperformed for the year. The first and second halves of the year delivered markedly different results. At the end of the second quarter, all major strategies were outperforming their respective benchmarks for the year to date. The accelerated deleveraging of the second half of the year saw an indiscriminate and broad-based sell-off in the global equity markets that put significant pressure on growth



Wholesale intermediary invested assets by asset class

(BAR CHART)



97

UBS business divisions and Corporate
Center Global Asset Management

stocks and more than erased the outperformance of the first half of the year. Longer-term returns from growth strategies generally remain strong.

2008 was another dramatic year for global bond markets. Some easing of financial market stress was evident towards the end of the first quarter but this was soon reversed as the economic outlook deteriorated. Levels of stress in money markets, government and corporate bond markets increased dramatically during the third quarter, culminating with the Lehman bankruptcy in September. Despite historic levels of government and central bank intervention globally, the third quarter saw a substantial flight to quality in fixed income markets. Corporate bond yield spreads (the difference in yield versus government bonds) increased substantially. In the fourth quarter, central banks cut rates aggressively and combined with falling inflation expectations, this led to substantial falls in yield in developed government bond markets. Despite the announced bank bail-out plans, yield spreads on financial sector bonds widened to record levels. A combination of these factors and our portfolio positioning led to significant underperformance of US, UK, global aggregate and absolute return strategies. The structured credit exposure in some of these strategies was a factor, although less so as the year progressed as a result of exposures being reduced. In contrast, European aggregate, Australian, US municipal and high yield strategies outperformed. Money market funds continued to achieve their capital preservation objectives and Global Asset Management did not need to support its large funds, including its US 2a7, Swiss or Luxembourg money market funds. Refer to the disscusion on other types of support in the “Off-balance sheet” section of this report for more information on UBS’s support to non-consolidated funds in its wealth and asset management businesses.
Multi-asset strategies, including the global securities composite, underperformed their benchmarks in 2008, largely as a result of asset allocation and bond selection in some of the underlying portfolios. Equity selection was mixed and currency management was strongly positive. At the beginning of 2008, the asset allocation position in equities was neutral. As equity valuations became more favorable and there were clear signals that the authorities were seeking to support the financial system, exposure to equities was gradually increased at the expense of government bonds. This market positioning detracted from performance for the year but is expected to contribute positively in the long term. Dynamic

alpha strategies posted significantly negative returns in 2008 due to the overall long exposure in equities built up over the course of the year. Positive contributions came from the positioning within equity markets. Currency strategy performed very strongly across all strategies for the year. Currency strategy had been quite aggressively positioned against the large exchange rate misevaluations that had resulted from the popularity of carry trades (borrowing in a lower yielding currency to invest in a high yielding currency). The unwinding of carry trades in more risk-averse markets meant that this strategy paid off.

In alternative and quantitative investments, hedge fund performance in 2008 reflected the unprecedented market dislocations and asset price destruction that occurred globally. In the multi-manager business, the vast majority of funds of funds posted losses in absolute terms as most hedge fund strategies were affected by the extreme market conditions. Among the O’Connor single manager hedge funds, performance was mixed: multi-strategy alpha was negative (but out performed many peers), while fundamental long/short neutral and currency and rates strategies were notably positive for the year.
Overall, invested assets in the global real estate business declined moderately against a background of falling property values and investor risk aversion. Investment performance for some of our direct real estate funds subsequently came under pressure, notably in the UK and US. In contrast, funds in certain markets, notably Germany and Switzerland, achieved positive absolute returns. Global real estate securities strategies suffered in absolute terms over the year but their long-term relative performance against benchmark began to see some recovery.
2008 was a significant year for the infrastructure and private equity business. The core global direct investment infrastructure fund (the UBS International Infrastructure Fund) reached its final close in October, raising USD 1.52 billion. The underlying investments are performing well, benefiting from their defensive attributes and strong underlying cash flows from operating companies. The fund itself is delivering positive absolute returns. In contrast, global infrastructure securities strategies suffered negative performance for the year, in line with the wider equities markets. The launches of complementary, regionally-focused infrastructure and private equity fund initiatives were announced during 2008 with joint venture partners Abu Dhabi Investment Company and MerchantBridge respectively.



98

UBS business divisions and Corporate Center

Business performance

                 
Business division reporting 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Institutional fees  1,6591  2,370   1,803   (30)
 
Wholesale intermediary fees  1,246   1,724   1,417   (28)
 
Total operating income
  2,904   4,094   3,220   (29)
 
Cash components  922   1,632   1,305   (44)
 
Share-based components2
  4   224   270   (98)
 
Total personnel expenses  926   1,856   1,575   (50)
 
General and administrative expenses  434   559   399   (22)
 
Services (to)/from other business units  150   153   (105)  (2)
 
Depreciation of property and equipment  29   53   27   (45)
 
Amortization of intangible assets  33   19   4   74 
 
Total operating expenses
  1,572   2,640   1,900   (40)
 
Business division performance before tax
  1,333   1,454   1,320   (8)
 
                 
Key performance indicators
                
 
Cost/income ratio (%)3
  54.1   64.5   59.0     
 
                 
Institutional
                
 
Invested assets (CHF billion)  335   522   519   (36)
 
of which: money market funds
  42   32   28   31 
 
Net new money (CHF billion)4
  (55.6)  (16.3)  29.8     
 
of which: money market funds
  6.0   6.7   11.0     
 
Gross margin on invested assets (bps)5
  38   44   38   (14)
 
                 
Wholesale intermediary
                
 
Invested assets (CHF billion)  240   369   347   (35)
 
of which: money market funds
  80   70   59   14 
 
Net new money (CHF billion)4
  (47.4)  0.6   7.4     
 
of which: money market funds
  15.2   4.8   (2.5)    
 
Gross margin on invested assets (bps)5
  41   47   43   (13)
 
                 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)6
  3.0             
 
Return on attributed equity (RoaE) (%)7
  44.4             
 
BIS risk-weighted assets (CHF billion)8
  8.5   3.8   2.7     
 
Return on BIS risk-weighted assets (%)9
  18.9   49.5   62.5     
 
Goodwill and intangible assets (CHF billion)10
  2.2   2.1   1.7     
 
                 
Additional information
                
 
Invested assets (CHF billion)  575   891   866   (35)
 
Net new money (CHF billion)4
  (103.0)  (15.7)  37.2     
 
Personnel (full-time equivalents)  3,786   3,625   3,436   4 
 
1 Includes a gain of CHF 168 million on the sale of a minority stake in Adams Street Partners.  2 Includes social security contributions and expenses related to alternative investment awards.  3 Operating expenses/income.  4 Excludes interest and dividend income.  5 Operating income/average invested assets.  6 Refer to the “Capital management” section of this report for more information on the equity attribution framework, which was implemented in 2008.  7 Business division performance before tax / average attributed equity.  8 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006.  9 Business division performance before tax / average BIS RWA.  10 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS tier 1 capital.

99

UBS business divisions and Corporate
Center Global Asset Management

2008

Key performance indicators

Net new money

Net new money outflows were CHF 103.0 billion for full-year 2008, compared with outflows of CHF 15.7 billion for full-year 2007. Flows through UBS channels – namely the asset management flows relating to Global Wealth Management & Business Banking clients – accounted for more than a third of these full year 2008 outflows and UBS reputational issues also impacted third-party flows.
Outflows ofinstitutional net new money were CHF 55.6 billion, up from CHF 16.3 billion. Excluding money market flows, outflows increased to CHF 61.6 billion from CHF 23.0 billion. Net outflows were reported in multi-asset, fixed income, equities and alternatives mandates.
Outflows ofwholesale intermediary net new money were CHF 47.4 billion, compared with an inflow of CHF 0.6 billion in 2007. Excluding money market flows, outflows of net new money increased to CHF 62.6 billion from CHF 4.2 billion. Outflows were mainly reported in multi-asset, equities and fixed income funds.

Invested assets

Institutional invested assets were CHF 335 billion on 31 December 2008, down from CHF 522 billion on 31 December 2007. This decrease reflects the negative impact of financial market developments, net new money outflows and currency fluctuations.
Wholesale intermediaryinvested assets were CHF 240 billion on 31 December 2008, down from CHF 369 billion on 31 December 2007, reflecting the negative impact of financial market developments and net new money outflows and, to a lesser extent, currency fluctuations.

Gross margin

The gross margin oninstitutional invested assets was 38 basis points compared with 44 basis points in 2007. The decline in gross margin was mainly due to lower performance fees from alternative and quantitative investments and the Brazilian asset management business and to a negative asset-mix effect from a higher proportion of money market funds to total invested assets.
The gross margin onwholesale intermediary invested assets was down 6 basis points to 41 basis points, mainly due to lower performance fees from the Brazilian asset management business and a change in asset-mix to lower margin products.

Cost/income ratio

The cost/income ratio was 54.1% compared with 64.5% in 2007. This improvement was primarily due to the closure of Dillon Read Capital Management (DRCM) in 2007, the sale of

a minority stake in Adams Street Partners in 2008 and lower incentive compensation provisions combined with changes to the forfeiture provisions of future share-based awards.

Results

Pre-tax profit for full year 2008 was CHF 1,333 million, an 8% decrease from CHF 1,454 million in 2007. Excluding costs related to the closure of DRCM in 2007 and the gain from the sale of the minority stake in Adams Street Partners in 2008, full-year pre-tax profit would have decreased CHF 501 million.

Operating income

Total operating income declined 29% to CHF 2,904 million from CHF 4,094 million, driven largely by a significant decline in equity market valuations and relative strengthening of the Swiss franc against the major currencies, especially the US dollar. Institutional revenues declined to CHF 1,659 million from CHF 2,370 million. Excluding the gain from the sale of the minority stake in Adams Street Partners, institutional revenues would have declined CHF 879 million due to lower performance fees (from alternative and quantitative investments and the Brazilian asset management business) and lower management fees (from the lower average invested assets base). Wholesale intermediary revenues declined to CHF 1,246 million from CHF 1,724 million due to lower management fees (from the lower average invested assets base) and lower performance fees (from the Brazilian asset management business).

Operating expenses

Total operating expenses were CHF 1,572 in 2008, a 40% decline from CHF 2,640 million in 2007. Excluding CHF 212 million in DRCM restructuring costs in 2007, total operating expenses would have declined 35% or CHF 856 million. This decline mainly reflects reduced incentive based compensation accruals resulting from the lower revenues, the changes to the forfeiture provisions of future share-based awards, and the results of the ongoing expenditure review, partly offset by the first time inclusion of the acquisition in France of the CCR Group and the full-year impact of the acquisition in Korea of 51% of Daehan Investment Trust Management Company Ltd.
General and administrative expenses were CHF 434 million, down from CHF 559 million. The 22% decrease was due to lower provisions and lower travel and entertainment expenses, partly offset by higher IT costs, the inclusion of the acquisition in France and the full-year impact of the acquisition in Korea.
Net charges from other business divisions were down slightly, decreasing by CHF 3 million to CHF 150 million.
Depreciation of property and equipment at CHF 29 million was down by CHF 24 million. Excluding the impact of the DRCM restructuring costs in 2007, depreciation of property and equipment increased slightly. This was mainly due to the inclusion of the acquisition in France and the full-year impact of the acquisition in Korea.



100

UBS business divisions and Corporate Center

2007

Key performance indicators

Net new money

Institutional net new money outflows were CHF 16.3 billion, compared with net inflows of CHF 29.8 billion in 2006. Out-flows in core / value equity mandates, and to a lesser extent in fixed income mandates, were partly offset by inflows into all other asset classes, particularly alternative and quantitative investments and money markets.
Wholesale intermediary net new money inflows were CHF 0.6 billion, compared with inflows of CHF 7.4 billion for 2006. Inflows, mainly into multi-asset and money market funds, were partly offset by outflows from fixed income funds.

Invested assets

Institutional invested assets were CHF 522 billion at year end, up CHF 3 billion from 2006. The net increase was driven by the positive impact of financial market valuations and the inclusion of assets related to the acquisition in Korea in third quarter 2007, which were only partly offset by net new money outflows and negative currency translation impacts.
Wholesale intermediary invested assets were CHF 369 billion on 31 December 2007, up CHF 22 billion from 31 December 2006. This increase was primarily due to positive financial markets valuation impacts and the inclusion of assets related to the acquisition of UBS Hana Asset Management in third quarter 2007, partly offset by negative currency translation impacts.

Gross margin

The gross margin oninstitutional invested assets was 44 basis points, up six basis points from 2006. The increase was due to higher performance fees, mainly in alternative and quantitative investments, as well as inflows into higher margin products.
The gross margin onwholesale intermediary invested assets was 47 basis points, up four basis points from 2006, largely driven by higher performance fees (mainly in the Brazilian asset management business) as well as inflows into higher margin products.

Cost/income ratio

The cost/income ratio was 64.5%, an increase of 5.5 percentage points from 2006, primarily due to the CHF 212 million charge related to the closure of DRCM in second quarter 2007.

Results

Pre-tax profit increased to CHF 1,454 million from CHF 1,320 million in 2006, despite the CHF 212 million of DRCM-related closure costs in second quarter 2007. This charge partly offset the positive impacts of increased performance and management fees in all business areas and the inclusion of acquisitions in Brazil and Korea.

Operating income

Operating income was CHF 4,094 million, up 27% from CHF 3,220 million in 2006. Institutional revenues increased 31% to CHF 2,370 million from CHF 1,803 million in 2006. This was mainly due to higher management fees in all investment areas, as well as the full-year impact of the Brazilian asset management business and the post-July impact of the Korean asset management business. These were partly offset by higher provisions. Wholesale intermediary revenues rose 22% to CHF 1,724 million from CHF 1,417 million in 2006, reflecting higher management fees across all businesses and higher performance fees, mainly from the Brazilian asset management business.

Operating expenses

A 39% increase, to CHF 2,640 million from CHF 1,900 million in 2006, primarily reflected DRCM-related closure expenses and increased staff levels. Personnel expenses were CHF 1,856 million, 18% above 2006, reflecting the closure of DRCM, higher staff levels as well as the inclusion of the Brazilian and Korean asset management business. General and administrative expenses increased 40% to CHF 559 million in 2007 from CHF 399 million in 2006. In addition to the DRCM closure expenses, general and administrative expenses increased due to higher technology-related expenditure and the full-year impact of the inclusion of the Brazilian asset management business. Net charge-ins from other business units were CHF 153 million, primarily due to DRCM, compared with the net charge-outs to other business units of CHF 105 million a year earlier. Over the same period, depreciation increased by 96% to CHF 53 million, as a result of the DRCM closure.



101

UBS business divisions and Corporate Center
Investment Bank

Investment Bank

Business description

UBS is a leading investment banking and securities firm, delivering comprehensive advice and execution to clients across the world’s capital markets.

Business description

The Investment Bank comprisesprovides a broad range of products and services to corporate and institutional clients, governments, financial intermediaries and alternative asset managers. The needs of private investors are met indirectly through working with UBS’s wealth management businesses and other private banks.

Strategy

The current crisis in the followingfinancial markets and the resulting dramatic changes in industry dynamics, and the losses incurred in 2007 and 2008, require the Investment Bank to recalibrate its business units:in order to generate profitable and sustainable growth. A number of senior leadership changes took place within the Investment Bank in 2008: Jerker Johansson joined UBS as Chairman and Chief Executive of the Investment Bank in March 2008, Carsten Kengeter and Jeffrey Mayer were appointed co-heads of the fixed income, currencies and commodities (FICC) business area and Tom Daula was appointed Chief Risk Officer to oversee credit risk and market risk on a combined basis as well as operational risk.

The Chairman and CEO of the Investment Bank, members of the Group Executive Board and the UBS Board of Directors have concluded a detailed strategic review. Based on this, the Investment Bank is implementing a comprehensive repositioning plan focused on client-driven growth, a simplified organizational structure and a de-levered and de-risked balance sheet. The FICC business area has significantly restructured to concentrate on client service, simplify its operating model, strengthen risk management and focus on competitive strengths, including foreign exchange and flow businesses in credit and rates. The municipal securities business and fixed income proprietary trading businesses have been closed and certain commodities businesses have been sold. Real estate and securitization businesses and complex structured products have been substantially or downsized or exited.
Equities will continue to leverage its global distribution platform and product expertise, while seeking further efficiency gains. The investment banking department will continue to provide corporate and institutional clients with advi-

sory services while leveraging its capital markets knowledge to both deepen long-term client relationships and gain market share.
These steps will require more efficient utilization of resources and a continued emphasis on cost containment and workforce productivity, and will bring costs down to a more sustainable level. They are occurring in conjunction with an aggressive effort to reduce the size of the balance sheet. In addition, a new market-based funding model and robust risk framework have been implemented. However, implementation of this strategy is inextricably linked to the talent and expertise within the firm. The Investment Bank will therefore continue to attract, develop and retain the best people and foster a collaborative and meritocratic culture. Announced headcount reductions have and will come predominantly from the businesses being exited or downsized.

Organizational structure

Theequities Investment Bank is headquartered in London and employs approximately 17,000 people across 38 countries. It has three distinct business unitareas which are run functionally on a global basis: equities, FICC and the investment banking department. The investment banking department is an industry leader and provides advice on cross-border mergers and acquisitions in addition to raising capital for companies and governments. Traditionally one of the leaders in European corporate finance, the Investment Bank has built strong franchises in the US and Asia Pacific in recent years. An important partner for institutional clients, the Investment Bank’s market-leading equities business is complemented by its top-tier foreign exchange business and broad product capabilities across fixed income markets.

Although the Investment Bank pursues a strategy of organic development, its presence has been enhanced through acquisitions. Key acquisitions over the past three years include:
–the September 2006 acquisition of the global futures and options business of ABN AMRO, which positioned UBS as a market leader in futures and options as well as a global provider of execution and clearing services.
–the December 2006 acquisition of the Brazilian financial services firm Banco Pactual, which placed the Investment Bank as a leader in its field in the Brazilian market.
–the April 2007 acquisition of a 20% stake in UBS Securities, China.



102

UBS business divisions and Corporate Center

Legal structure

The Investment Bank operates through branches and subsidiaries of UBS AG. Securities activities in the US are conducted through UBS Securities LLC, a registered broker-dealer.

Competitors

The competitive landscape changed significantly in 2008. Market dislocation led UBS and its competitors to take significant steps to strengthen their balance sheets, reduce costs and maintain client confidence. Some governments and investors also took significant stakes in select financial institutions in 2008. The Investment Bank competes against other major international players such as Bank of America / Merrill Lynch, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase and Morgan Stanley.

Products and services

Equities

A leading participant in the global primary and secondary markets for equity, equity-linked and equity derivative products, the equities business area distributes, trades, finances and clears cash equity and equity-linked products. It also structures, originates and distributes new equity and equity-linked issues and provides research on companies, industry sectors, geographical markets and macro-economic trends

Thefixed income, currencies and commodities (FICC)business unit services corporate, institutional and public sector clients in all major markets globally. Major business areas include: credit, rates, foreign exchange and money markets, structured products, commodities, debt capital markets and emerging markets

Theinvestment bankingdepartment provides services to corporate clients, financial sponsors and hedge funds. Its advisory group assists on transactions and advises on strategic reviews and corporate restructuring solutions. Its capital markets and leveraged finance teams arrange the execution of primary and secondary equity, as well as debt issues worldwide

Performance in 2007

–Pre-tax loss of CHF 15,525 million (profit of CHF 5,943 million in 2006), due to losses in FICC on sizeable positions related to the US mortgage market
–Performance in other areas was strong:Record equities revenues,up 13% from 2006, and retained market leadership in secondary equities tradingRecord investment banking revenues,up 39% from 2006, with market share gains exceeding growth of global fee pool

Recent developments

Repositioning of FICC to:
–strengthen client-facing businesses
–improve cooperation with other parts of UBS – strengthen risk discipline
–create a workout group for mortgage-backed securities and collateralized debt obligation portfolios, including the positions that caused the 2007 losses



134

Business group reporting

         
 
  As of or for the year ended 
CHF million, except where indicated 31.12.07  31.12.06 
 
Equities  10,603   9,397 
 
Fixed income, currencies and commodities (FICC)  (15,681)  9,056 
 
Investment banking  4,540   3,273 
 
Adjusted expected credit loss  (19)  61 
 
Total operating income  (557)  21,787 
 
Total operating expenses  14,968   15,844 
 
Business group performance before tax
  (15,525)  5,943 
 
Personnel (full-time equivalents)  21,932   21,899 
 
1 Pan-Europe is Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, UK, Greece, Austria, Belgium, Cyprus, Luxembourg, and Iceland  2 Asia ex-Japan is China, Hong Kong, India, Indonesia, South Korea, Philippines, Singapore, Malaysia, Taiwan, Thailand, Bangladesh, Cambodia, Fiji, Guam, Laos, Myanmar, Pakistan, Sri Lanka, Togo, Vietnam and Papua New Guinea  3 Latin America is Brazil, Peru, Venezuala, Colombia, Panama, Chile, Argentina and Mexico

(BAR CHART)

(WOELF MAP)

(BAR CHART)

Global fee pool market share

             
 
  Year ended 
  31.12.07  31.12.06  31.12.05 
 
In %  5.9   4.9   5.0 
 
Rank  5   8   7 
 
Source: Dealogic



135

UBS’s businesses
Investment Bank

Investment Bank
Business description

UBS is a leading investment banking and securities firm, providing a broad range of products and services to corporate and institutional clients, governments, financial intermediaries and alternative asset managers.

Business

The Investment Bank is a global investment banking and securities firm. Its investment bankers, salespeople and research analysts, supported by internal risk and logistics teams, deliver advice and execution to clients all over the world. In addition to serving the world’s key corporate and institutional clients, governments and financial intermediaries, the Investment Bank works with financial sponsors and hedge funds and indirectly meets the needs of private investors through both the UBS wealth management business and other private banks.

For both its corporate and institutional clients, and the clients of other parts of UBS, the Investment Bank provides products, research and advisory services and comprehensive access to the world’s capital markets. Through its market-leading investment banking department, the Investment Bank provides advice on cross-border mergers and acquisitions, in addition to raising capital for companies and governments. Traditionally one of the leaders in European corporate finance, the Investment Bank has also experienced very strong growth in the US and Asia Pacific in recent years.
An important partner for institutional clients, the Investment Bank is anchored by its market-leading equities business and complemented by both its top-tier foreign exchange business and broad product capabilities across fixed income markets.

Organizational structure

The Investment Bank is headquartered in London and New York and employs approximately 22,000 people across 38 countries. The businesses of the Investment Bank are organized into three distinct business units, which are run functionally on a global basis. The business units are:
–equities;
–fixed income, currencies and commodities (FICC); and
–investment banking (the investment banking department)

Although a strategy of organic development is pursued in the Investment Bank, its presence is enhanced through acquisitions when appropriate opportunities arise. Major acquisitions or internal transfers made over the last four years:
–the 2004 acquisition of Charles Schwab SoundView Capital Markets (the capital markets division of Charles Schwab), which made UBS one of the top traders on NASDAQ;
–an internal 2005 transfer of the US-based municipal securities unit into the fixed income area of FICC (from Wealth Management US) better positioned the Investment Bank to serve both investors and issuers;
–the 2005 acquisition of the remaining assets in Prediction Company, which specializes in the development of advanced financial and trading software, resulted in better trading technology for the Investment Bank;
–the September 2006 acquisition of ABN AMRO’s global futures and options business, which increased the Investment Bank’s ability to exploit product commoditization and globalization in exchange-traded derivatives;
–the December 2006 acquisition of the Brazilian financial services firm Banco Pactual, which made the Investment Bank a leader in its field in the significant and growing Brazilian market;
–the May 2007 reintegration of Dillon Read Capital Management’s principal finance and credit arbitrage and commercial real estate businesses into the Investment Bank, which had previously been moved into Global Asset Management in June 2006; and
–the October 2007 combination of the fixed income and the money markets, currencies and commodities businesses to create the FICC area.

Legal structure

The Investment Bank operates through branches and subsidiaries of UBS AG. Securities activities in the US are conducted through UBS Securities LLC, a registered broker-dealer.



136

Vision

“Our goal is to be the Investment Bank with the fastest client-driven growth by building on our unique set of core strengths. We will create sustainable profits and value by prioritizing client service and providing seamless access to the capabilities of the whole firm to generate superior returns on allocated capital for our shareholders.”

Competitors

As UBS is a global investment banking and securities firm, its Investment Bank competes against other major international players such as Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase, Lehman Brothers, Merrill Lynch and Morgan Stanley.

Products and services

Equities
The Investment Bank’s equities business unit is a leading participant in the global primary and secondary markets for equity, equity-linked and equity derivative products. The business unit distributes, trades, finances and clears cash equity and equity-linked products. It also structures, originates and distributes new equity and equity-linked issues and provides research on companies, industry sectors, geographical markets and macro-economicmacroeconomic trends.

UBS’s equity research analysts provide independent assessments of the prospects for over 3,400 companies across most industry sectors and all geographical regions; this corresponds to some 87% of world market capitalization. This is complemented by economic, strategic, quantitative and derivative research.
UBS has the world’s leading cash equities business, offering clients a full range of execution services: direct market access, algorithmic trading solutions, single stock, portfolio, capital commitment and block trading. A presence in every major world market gives institutional, hedge fund and intermediary client bases access to one of the deepest global liquidity pools, allowing the delivery of best execution to clients.
Derivatives are among the business unit’s fastest growing products and it will continue to focus on providing innovative and customized investment solutions to institutional and corporate clients, in addition to private clients in the wealth management business and other intermediaries. In addition to products with returns linked to equities or equity indices, the business unit also offers derivative products linked to hedge funds, mutual funds, real estate and commodity indices, in a variety of formats such as over-the-counter, securitized and wrapped-in-a-fund products.
The equity capital markets team manages large and complex transactions, with the business unit having built a position for itself as a leading global distributor of block

trades, rights offerings, initial public offerings and hybrid and convertible issues to both institutional and private clients in every market.
The prime services business provides integrated global services, including securities borrowing and lending, equity swaps execution, multi-asset class prime brokerage and exchange-traded derivatives. These services are provided to a rapidly expanding list of hedge fund, asset management and commodity trading clients. In 2006, the purchase of ABN AMRO’s global futures and options business was a key step in the expansion of offerings in the exchange-traded derivative markets.
The equities business unit, through a focus on technology has adapted and continuously improved itsled to significant improvements in business processes and client services. Significant investmentsInvestments have been made in the technology platform, including direct market access, prime brokerage derivatives, research and customerclient relationship platforms. This has led toplatforms, earning UBS recognition as a market leader in the provision of a number of electronic services including equity research and trading, to clients. The business area also has a global footprint with a strong presence in many local markets.
Emerging markets are an increasingly important partBusiness lines of the equities business in all geographical regions and business lines, with particular strengths in Latin America and Asia, where there is a growing presence in China.their functions are listed below:
–Cash equities provides clients with expert advisory and execution offerings with top-tier research, corporate access and tailored investment ideas. With market-leading trading execution for single stock and portfolio trading, UBS provides capital commitment, full service and block trading, advanced electronic trading strategies and tools, state-of-the-art analytics and value-enhancing commission management services.
–Derivatives provides standardized products and customized investment solutions to clients. In addition to products with returns linked to equities or equity indices, it also offers derivative products linked to hedge funds, mutual funds, real estate and commodity indices in a variety of formats such as over-the-counter, securitized, fund-wrapped and exchange-traded.
–Prime services provides integrated global services, including securities borrowing and lending, equity swaps execu-

(MAP)Selected deals

Mergers and acquisitions (M&A)
Joint financial advisor, bookrunner and sponsor toLloyds TSB Group Plc on its GBP 14.7 billion acquisition of HBOS Plc and GBP 5.5 billion capital raising
Lead financial advisor, joint lead arranger and joint bookrunner toGas Natural SDG, S.A. on its EUR 16.8 billion cash offer for Union Fenosa S.A.
Lead financial advisor toEli Lilly and Company on its USD 6.5 billion acquisition of Imclone Systems Inc.
Sole financial advisor toSt. George Bank Limited on its AUD 18.6 billion merger with Westpac Banking Corporation
Equity capital markets
Advisor and joint bookrunner on the USD 19.7 billion initial public offering (IPO) ofVisa Inc. This was a landmark transaction representing the largest IPO in US history, and the second largest IPO worldwide after the USD 21.9 billion IPO for Industrial & Commercial Bank of China in 2006
Joint bookrunner on the GBP 2.2 billion rights issue forCentrica Plc, the second-largest UK equity issue in 2008 outside the financial sector
Joint lead manager and joint underwriter for the fully underwritten AUD 2.6 billion entitlement offer forWesfarmers Limited
Debt capital markets
Joint bookrunner on a USD 2.5 billion issue forWells Fargo & Co, its first institutional fixed income hybrid offering since November 2006
Joint bookrunner forChina Merchants Bank Co Ltd. on its USD 4.4 billion domestic lower tier 2 bond, the largest bank capital deal in Asia Pacific since 2005 and voted the Best Local Currency Bond by FinanceAsia in 2008
Joint bookrunner on a EUR 5 billion benchmark issue forKFW, the promotional bank of the Federal Republic of Germany, its first euro benchmark transaction in 2008
Joint lead arranger and joint bookrunner toVerizon Wireless on a USD 17.0 billion bridge facility to finance the acquisition of Alltel Corp.

1Selected awards Pan-Europe is Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, UK, Greece, Austria, Belgium, Cyprus, Luxembourg, and Iceland    2 Asia ex-Japan is China, Hong Kong, India, Indonesia, South Korea, Philippines, Singapore, Malaysia, Taiwan, Thailand, Bangladesh, Cambodia, Fiji, Guam, Laos, Myanmar, Pakistan, Sri Lanka, Togo, Vietnam and Papua New Guinea    3 Latin America is Brazil, Peru, Venezuala, Colombia, Panama, Chile, Argentina and Mexico

Investment Bank
No. 1 M&A Financial Advisor (ECM roles) –Thomson Reuters 2008
Corporate Broker of the Year –Acquisitions Monthly 2009
Equities
Asia Pacific Equity House of the Year –International Financial Review 2003, 2005–2008
No. 1 European Equity Research Firm –Institutional Investor 2002–2009
Fixed income currencies and commodities
Financial Bond House of the Year –International Financial Review 2008
No. 2 Foreign Exchange House –Euromoney 2008



137103

UBS’s businessesUBS business divisions and Corporate
Center Investment Bank

tion, multi-asset-class prime brokerage and multi-asset-class exchange-traded derivatives execution and clearing. These services are provided to an expanding list of hedge funds, banks, asset management and commodity trading clients.
–Equity research provides independent assessments of the prospects for over 3,400 companies across most industry sectors and geographical regions (corresponding to 82% of world market capitalization), as well as economic, strategic and quantitative research.

Fixed income, currencies and commodities

The integrated fixed income, currencies and commodities (FICC)FICC business unitarea delivers a broad range of products and solutions to corporate, institutional and public sector clients in all major markets. AtIn response to changes in global markets and client demand, FICC significantly restructured at the endstart of 2007, the business unit was reorganized2009 to improve client service, simplify its operating model, improve client service, strengthen risk management and focus on its competitive strengths.
The business unit’s global origination and distribution platforms provide clients with services across the spectrum of FICC products. A market-leading research group provides investors with superior analysis across a broad range of issuers, products, markets and industries.
The credit business delivers credit-related products and services to clients. It is active in the origination, underwriting, structuring and distribution of primary cash and synthetic credit transactions, as well as being active in secondary trading and market-making in high yield and investment grade bonds and loans in both cash and derivative products.
The rates business covers flow rate-driven products and services, including interest rate derivatives trading, underwriting and trading of government and agency securities. The services provided to their broad client base include trading strategy, pricing, trade execution and distribution, market-making and risk management of rates products in major currencies, as well as underwriting and origination of government securities.
The foreign exchange and money markets business provides a range of treasury and liquidity management solutions to institutional clients. Through white label services, other financial institutions are able to sell UBS products using their own brand names. Working with UBS’s wealth management business, the business provides private individuals and family offices direct access to foreign exchange capabilities. Structured products and add-on services, such as research and prime brokerage to hedge funds, are also offered.

The structured products business combines the structured credit and rates teams and delivers product origination, pricing, execution and trading, as well as integrated risk management. The product suite covers yield-enhancing instruments and innovative derivatives solutions indexed to a broad range of FICC asset classes, as well as alternative assets such as weather derivatives and emissions products.
The commodities business is engaged in the power and gas, crude oil, metals and agricultural commodities markets. It trades derivatives and manages energy contracts for future physical delivery, and also arranges transactions and design structured risk management and investment solutions on behalf of asset and liability clients.
The real estate and securitization groupbusiness will be exited (with the exception of pass-through trading, which is focused on the origination, structuring, trading and securitization of a broad range of asset-based and real estate-related securities. In light of recent market conditions, UBS began restructuring thisnow part of macro, described below); certain commodities businesses (excluding precious metals) have been sold, and the structured products business significantly downsized. In December 2008, a significant proportion of FICC risk positions were transferred to a fund owned and controlled by the Swiss National Bank (SNB), and further positions are planned to be transfered in orderMarch 2009. Refer to strengthen its client-facing businesses, improve cooperationthe “Transaction with other parts of UBSthe Swiss National Bank” sidebar in the “Strategy and introduce stronger risk discipline. As partstructure” section of this report for more information on this transaction. In first quarter 2009 additional risk positions will be isolated in a workoutspecialist group has been created for certain mortgage-backed securities and CDO portfolios.whose mandate is to maximize value while conducting an orderly exit of positions.
The debt capital marketsbusiness lines of the FICC business and structured solutions group offers debt financing and related risk management in investment grade and emerging markets to corporate, financial institution and public sector clients. In addition, the municipal banking business in the US assists state, local and other governmental authorities with their financing needs.functions are listed below:
–Macro consists of foreign exchange, money market and interest rate risk management activities. It provides a range of foreign exchange, treasury and liquidity management solutions to institutional and private clients. Interest rate activities include standardized rate-driven products and services such as interest rate derivatives trading, underwriting and trading of government and agency securities.
–Credit is active in the origination, underwriting, and distribution of primary cash and synthetic credit transactions. It is also active in secondary trading and market-making in high yield and investment grade bonds and loans in both cash and derivative products.
–Emerging markets has local market presence in Latin America through UBS Pactual, as well as in Asia and Cen-

The emerging markets business has a local market presence in Latin America, through UBS Pactual, as well as in Asia and Central and Eastern Europe, enabling it to offer local investors access to international markets and international investors local exposure.

Foreign exchange: Euromoney-eligible volumes1


(BAR CHART)
 èRepositioning
tral and Eastern Europe, enabling it to offer local investors access to international markets and international investors an opportunity for local exposure.
–Client services is the global sales effort, unifying product specialist sales groups, including foreign exchange, money market, rates and emerging markets products.
–Quantitative analysis provides tailored solutions for clients as well as more broadly scalable solutions for the FICC flow platforms.
–Research provides investors with analysis across a selected range of the fixed income, currenciesissuers, products, markets and commodities unit is discussed in the “Strategy and development” section of this reportindustries.


UBS gross capital market and corporate finance fees

             
 
CHF million 2007  2006  2005 
 
M&A and corporate finance fees  2,768   1,852   1,460 
 
Equity underwriting fees  2,564   1,834   1,341 
 
Debt underwriting fees and fees on Global Syndicated Finance positions  1,712   1,704   1,516 
 
debt underwriting fees  1,178   1,279   1,264 
 
fees on Global Syndicated Finance positions1
  534   425   252 
 
Other capital market revenues2
  702   594   436 
 
Gross capital market and corporate finance fees
  7,746   5,984   4,753 
          
Capital market fees booked outside investment banking3
  1,006   856   943 
 
Amount shared with equities and fixed income, currencies and commodities  2,049   1,689   1,182 
 
Financing, hedging and risk adjustment costs  151   166   122 
 
Net investment banking area revenues
  4,540   3,273   2,506 
 
1Fees on Global Syndicated Finance positions comprises fees received from clients related to the syndication of lending business which is reported in net trading income.2Other capital market revenues comprise equity and debt revenues with investment banking involvement that are not underwriting fees (for example, derivative or trading revenues).3Capital market fees booked outside investment banking comprises equity and debt underwriting fees that had no investment banking involvement (for example, municipal or mortgage-backed securities).

138

Investment banking

The investment banking department provides first-class advice and a range of execution services to corporate clients, financial institutions, financial sponsors, sovereign wealth funds and hedge funds. Its advisory group assists both publicon complex transactions and private companies in multiple aspects of a transaction, including negotiation, structuring, coordination of due diligence process, company valuation and drafting of both internal and external communication material. The investment banking department also advises on strategic reviews and corporate restructuring solutions. Itssolutions, while UBS’s capital markets and leveraged finance teams arrange the execution of primary and secondary equity, as well as investment grade and non-investment grade debt issues worldwide.
With over 2,000 client-facing professionals, the investment banking department has a presence in all major financial and economic markets. In order to meet the needs of clients,markets, coverage is based on a comprehensive matrix of country, sector and product banking professionals.
Competitors generally include allWith the goal of creating a fully integrated primary business to drive revenue growth and realize productivity gains, the major globally active investment banking firms and there has been little change in that landscape over the last few years. In certain developedglobal groups for equity capital markets and in the increasingly important emerging market segment, there is also competition from locally-based investment banking firms. The investment banking department believes that its global presence, experienced professionals and breadth of product offering provide it with competitive advantages.
A number of stepsdebt capital markets have been takencombined. The initial focus is on product knowledge sharing, to expand in areas where identified market opportunities exist. One area of focus that has seen a significant return on investment isenable teams to provide holistic advice and innovative solutions across the BRIC countries (Brazil, Russia, India and China). The investment banking department is a major player in these markets, ranking first on a fee basis for the overall BRIC market and in the top-ten for each country, according toDealogic. The integration of Banco Pactual successfully broadened the business’s reach into Latin America and the investment in Beijing
entire capital structure.

(BAR GRAPH)

1 Eligible volumes not equal to reported UBS volumes.  2 FX-poll results are based on the previous year’s volume.

Selected deals
Mergers and acquisitions (M&A)
Sole financial advisor to the Board of Directors of aluminum company Alcan on the USD 44 billion recommended offer from Rio Tinto which followed Alcoa’s earlier USD 33 billion unsolicited takeover bid
Joint lead financial advisor to ABN AMRO on its EUR 71 billion acquisition through a public offer by a consortium of Fortis, Royal Bank of Scotland and Santander, lead financial advisor to ABN AMRO on the USD 21 billion sale of LaSalle to Bank of America and the EUR 9 billion sale of Banca Antonveneta to Banca Monte dei Paschi di Siena
Equity capital markets
Joint bookrunner on the USD 2.9 billion initial public offering of MF Global, a leading broker of exchange-listed futures and options
Joint lead manager, joint sponsor and joint bookrunner on the USD 8.9 billion IPO of PetroChina on the Shanghai Stock Exchange, the largest IPO ever in China
Debt capital markets
Joint book-runner on a EUR 5 billion equivalent dual currency multi-tranche issue for Enel, Italy’s largest utility company. UBS was the only international bank involved in the M&A and in the equity, bond and syndicated loan elements of the financing for Enel’s acquisition of Endesa
Joint bookrunner on a EUR 3 billion dual tranche offering for GECC, an American financial services company
Global Syndicated Finance
Joint lead arranger and underwriter of AUD 3.6 billion senior debt facilities and AUD 600 million subordinated bridge facility in connection with the buyout of PBL Media, the newly established Australian media and entertainment company, in the largest ever leveraged buyout in Australia
Sole lead arranger on the USD 875 million senior secured credit facilities for Algoma Steel
Selected awards
Investment Bank
Best Global Emerging Markets Investment Bank – Euromoney 2007
IBD
M&A Bank of the Year – Acquisition Monthly 2008
IPO House of the Year – The Banker 2007
Equities
Equity House of the Year – IFR 2007
No. 1 Global Equity Derivatives for Corporates – Risk 2005–2007
Fixed income currencies and commodities
Best Bank Overall for the last 20 years – EuroWeek 2007
Modern Great Currency House for the last 20 years – Risk 2007


139104

UBS’s businesses
Investment Bank

Securities (subsequently UBS Securities) resulted in UBS being one of the first foreign banks with a platform to issue China A shares, further strengthening its position in China. Investment continues in India and Russia, where recent structural changes will allow the investment banking department to enhance its presence in the market.
UBS business divisions and Corporate Center

Strategic opportunities

In light of the market dislocation in 2007 and the continuing volatility in early 2008, the outlook for investment banking services is mixed. The equities business unit should benefit from the continued growth of prime brokerage and derivatives, while preserving its stable cash businesses. While a considerable level of uncertainty surrounds many fixed income asset classes, investors are expected to continue to seek diversity of exposure with greater yield potential. The repositioned FICC business unit is now well placed to meet its clients’ intermediation, structuring and trading needs in these challenging markets. In the investment banking department, mergers and acquisitions, equity capital markets and financial sponsor-driven activity are expected to decline. However, financial institutions are anticipated to be active in both capital raising and consolidation as a result of the recent credit market dislocation. In all of its business areas, the Investment Bank will build upon its strong positions in Europe, Asia Pacific and the emerging markets.
To better service clients, a number of initiatives are being initiated to enable the Investment Bank to leverage its prod-

uct strengths and improve alignment across the whole of UBS. These include the combination of the equity and debt capital markets businesses, the creation of an integrated structured products team for the wealth management business, the integration of UBS’s industry leading research capabilities, the alignment of the investment banking department and FICC coverage for financial institutions, and the creation of an integrated electronic execution platform for the securities businesses. These key initiatives will enable provision of comprehensive advice and innovative solutions across asset classes for clients.
The Investment Bank is also focused on more efficiently utilizing the resources available to it. It intends to continue to reduce the size of the balance sheet and more risk-efficient revenues will be promoted through a new market-based funding model and a robust risk framework. This will be supported by an increased emphasis on cost containment and workforce productivity in order to generate real operational leverage.
Success of the Investment Bank’s strategy is founded on the talent and expertise within the firm. The business group will therefore continue to attract, develop and retain the best people and foster a collaborative and meritocratic culture. By working to deliver the full complement of UBS’s services and products to clients, the Investment Bank is well positioned to take advantage of market opportunities and generate profitable and sustainable growth.


140

Business performance

Business groupdivision reporting

                 
  
  For the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
Equities  10,603   9,397   6,980   13 
 
Fixed income, currencies and commodities  (15,681)  9,056   7,962     
 
Investment banking  4,540   3,273   2,506   39 
 
Income  (538)  21,726   17,448     
 
Adjusted expected credit loss1
  (19)  61   36     
 
Total operating income
  (557)  21,787   17,484     
 
Cash components  8,918   9,801   8,065   (9)
 
Share-based components2
  1,499   1,552   1,194   (3)
 
Total personnel expenses  10,417   11,353   9,259   (8)
 
General and administrative expenses  3,423   3,260   2,215   5 
 
Services (to) / from other business units  746   956   640   (22)
 
Depreciation of property and equipment  210   203   136   3 
 
Amortization of intangible assets  172   72   53   139 
 
Total operating expenses
  14,968   15,844   12,303   (6)
 
Business group performance before tax
  (15,525)  5,943   5,181     
 
                 
Key performance indicators
                
 
Compensation ratio (%)3
  N/A4  52.3   53.1     
 
Cost / income ratio (%)5
  N/A4  72.9   70.5     
 
Impaired lending portfolio as a % of total lending portfolio, gross  0.4   0.1   0.2     
 
Average VaR (10-day, 99% confidence, 5 years of historical data)  537   420   346   28 
 
                 
Capital return and BIS data
                
 
Return on allocated regulatory capital (%)6
  (63.0)  29.4   28.6     
 
BIS risk-weighted assets  190,763   174,599   151,313   9 
 
Goodwill and excess intangible assets7
  5,300   5,465   4,309   (3)
 
Allocated regulatory capital8
  24,376   22,925   19,440   6 
 
                 
Additional information
                
 
Deferral (included in adjusted expected credit loss)1
  217   232   155   (6)
 
Expected credit loss (included in adjusted expected credit loss)1
  (236)  (171)  (119)  (38)
 
Personnel (full-time equivalents)  21,932   21,899   18,174   0 
 
                 
 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Investment banking
  2,880   6,636   4,999   (57)
 
Advisory  1,609   2,697   1,821   (40)
 
Capital market revenues  1,844   4,261   3,631   (57)
 
equities  977   2,783   2,095   (65)
 
fixed income, currencies and commodities  866   1,478   1,536   (41)
 
Other fee income and risk management  (573)  (322)  (453)  (78)
 
Sales and trading
  (26,504)  (7,833)  16,727   (238)
 
Equities  5,184   9,004   8,387   (42)
 
Fixed income, currencies and commodities  (31,687)  (16,837)  8,340   (88)
 
Total Investment Bank income
  (23,624)  (1,197)  21,726     
 
Credit loss (expense) / recovery1
  (2,575)  (266)  47   (868)
 
Total Investment Bank operating income excluding own credit
  (26,199)  (1,463)  21,773     
 
Own credit2
  2,032   659   0   208 
 
Total Investment Bank operating income as reported
  (24,167)  (804)  21,773     
 
Cash components  5,173   8,902   9,788   (42)
 
Share-based components3
  (292)  2,384   1,898     
 
Total personnel expenses  4,882   11,286   11,686   (57)
 
General and administrative expenses  3,399   3,386   3,210   0 
 
Services (to) / from other business units  990   811   1,034   22 
 
Depreciation of property and equipment  231   210   203   10 
 
Impairment of goodwill  341   0   0     
 
Amortization of intangible assets  83   172   72   (52)
 
Total operating expenses
  9,925   15,865   16,205   (37)
 
Business division performance before tax
  (34,092)  (16,669)  5,568   (105)
 
                 
Key perfomance indicators
                
 
Compensation ratio (%)4
  N/A5  N/A5  53.8     
 
Cost / income ratio (%)6
  N/A5  N/A5  74.6     
 
Impaired lending portfolio as a % of total lending portfolio, gross  3.6   0.4   0.1     
 
Average VaR (10-day, 99% confidence, 5 years of historical data)7
  374   514   410   (27)
 
                 
Attributed equity and risk-weighted assets
                
 
Average attributed equity (CHF billion)8
  26.8             
 
Return on attributed equity (RoaE) (%)9
  (127.4)            
 
BIS risk-weighted assets (CHF billion)10
  195.8   190.7   174.6     
 
Return on BIS risk-weighted assets (%)11
  (15.7)  (8.7)  3.5     
 
Goodwill and intangible assets (CHF billion)12
  4.6   5.3   5.5     
 
                 
Additional information
                
 
Personnel (full-time equivalents)  17,171   21,779   21,733   (21)
 
1In management accounts, adjusted expected 2008 includes CHF 1,329 million in credit losses from impairment charges on reclassified financial instruments.  2 Represents own credit changes of financial liabilities designated at fair value through profit or loss. The cumulative own credit gain for such debt held at 31 December 2008 amounts to CHF 2,953 million. This gain has reduced the fair value of financial liabilities designated at fair value through profit or loss rather than credit loss expense or recovery is reportedrecognized on UBS’s balance sheet. Refer to “Note 27 Fair value of financial instruments” in the financial statements of this report for the business groups (see Note 2 in Financial Statements 2007). The adjusted expected credit loss is the sum of expected credit loss and deferrals. The expected credit loss reflects expected average annual impairments costs. The deferral represents the difference between actual credit loss and expected credit loss, amortized over a three-year period.2Additionally includes relatedmore information.  3 Includes social security contributions and expenses related to alternative investment awards.34Personnel expenses/expenses / income.4Both5 Neither the cost / income andnor the compensation ratiosratio are not meaningful due to lossesnegative revenues recorded in the Investment Bank.56Operating expenses/expenses / income.67 Regulatory Value at Risk. In third quarter 2008, UBS changed from internal management VaR to regulatory VaR as the basis for external disclosure. Refer to the “Value at Risk developments – treatment of CVA” sidebar in the “Market risk” section of this report for more information about this change.  8 Refer to the “Capital management” section of this report for more information on the equity attribution framework, which was implemented in 2008.  9Business groupdivision performance before tax / average allocated regulatory capital.7Goodwillattributed equity.  
10 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006.  11 Business division performance before tax / average BIS RWA.  
12 2007 and 2006 represent goodwill and intangible assets in excess of 4% of BIS Tiertier 1 capital.810% of BIS risk-weighted assets plus goodwill and excess intangible assets.

Components of operating income

The Investment Bank generates operating income from:
–commissions on agency transactions and spreads or markups on principal transactions
–fees from debt and equity capital markets transactions, leveraged finance, and the structuring of derivatives and complex transactions;
–mergers and acquisitions and other advisory fees;

–interest income realized on principal transactions; and from the loan portfolio; and
–realized and mark-to-market gains and losses on market making, proprietary, and arbitrage positions.
As a result, operating income is affected by movements in market conditions, interest rate swings, the level of trading activity in primary and secondary markets and the extent of merger and acquisition activity. These and other factors have had, and may have in the future, a significant impact on results of operations from year-to-year.



141105

UBS business divisions and Corporate Center
Investment Bank

2008

Key performance indicators

As in 2007, neither thecost/income ratio nor thecompensation ratiowere meaningful in 2008 due to negative total operating income.

Average regulatory Value at Risk (VaR) (10-day, 99% confidence, five years of historical data) decreased to CHF 374 million, down from CHF 514 million in 2007. Year-end regulatory VaR was also lower at CHF 485 million, compared with CHF 552 million the previous year. Refer to the “Market risk” section of this report for more information on the Investment Bank’s VaR.
The Investment Bank’sgross lending portfolio was CHF 169 billion, up from CHF 148 billion on 31 December 2007. The ratio of the impaired gross lending portfolio to the total gross lending portfolio was 3.6% at the end of 2008, up from 0.4% at the end of 2007. Following the reclassification of certain assets in fourth quarter 2008, impairment charges related to these assets have been reflected in credit loss as opposed to trading, contributing to this increase. Refer to the “Credit risk” section of this report for more information on the Investment Bank’s lending portfolio and “Note 29 Measurement categories of financial assets and financial liabilities” in the financial statements of this report for more information on the reclas-sification of certain assets in fourth quarter 2008.

Results

In 2008, the Investment Bank recorded a pre-tax loss of CHF 34,092 million compared with a pre-tax loss of CHF 16,669 million in 2007, primarily due to the losses on risk positions within the fixed income, currencies and commodities (FICC) area. For full-year 2008, equities and investment banking revenues were down from a record year in 2007. A credit loss expense of CHF 2,575 million was recorded in 2008, mainly due to impairment charges taken on reclassified financial assets, as mentioned above, compared with CHF 266 million in 2007. In 2008, the Investment Bank recorded a gain on own credit from financial liabilities designated at fair value of CHF 2,032 million, resulting from the widening of UBS’s credit spread, which was partly offset by the effects of redemptions and repurchases of such liabilities. Refer to “Note 27 Fair value of financial instruments” in the financial statements of this report for more information. Operating expenses for the Investment Bank in 2008 decreased sig-nificantly from 2007, mainly reflecting lower performance-related compensation.

Operating income

Total operating income in 2008 was negative CHF 24,167 million, down from negative CHF 804 million a year earlier.

Equities

Revenues, at CHF 5,184 million in 2008, were down 42% from CHF 9,004 million in 2007. 2008 was a demanding year for equities with continued difficult market conditions impacting overall business performance. Cash equity revenues were marginally lower as declines in revenues across Asia Pacific and Europe were only partially offset by growth in the US. Derivatives revenues were down as market volatility, depressed client volumes, lack of liquidity and highly correlated markets impacted performance across all regions, particularly in the fourth quarter. Equity linked revenues were down, with most regions impacted by declines in valuations, falling equity markets and reduced liquidity. Prime brokerage services had a solid performance, but revenues were down overall as a strong first half performance was offset by deterioration in the second half. Exchange-traded derivatives revenues increased, as it benefited from strong first and fourth quarters driven by significant volatility in the market. Proprietary trading revenues were negative for the year, reflecting the significant change in market conditions.

Fixed income, currencies and commodities

Revenues were negative CHF 31,687 million, down from negative CHF 16,837 million a year earlier. Consequences of the global market crisis, including forced liquidations, government bail-outs and consolidation in the banking sector, negatively affected the majority of the FICC businesses in 2008. Credit recorded losses in both client and proprietary trading as a result of the significant turbulence in the markets and subsequent severe lack of liquidity. The negative emerging markets result was driven by losses in Asia Pacific.
These negative effects were only partially offset by positive results in certain areas. Rates experienced a solid year, driven by derivatives and government bonds in Europe and rates derivatives in both Asia Pacific and the US. Foreign exchange and money markets produced a strong year as it capitalized on volatile markets and strong client flows. The short-term interest rate business benefited from market movements to generate an exceptional result in 2008. The foreign exchange distribution business posted very good results across all regions, benefiting from strong client flows seeking to access liquidity in the market. Structured products posted positive revenues due to strong client interest in structured funding solutions.

Investment banking

Revenues of the investment banking department, at CHF 2,880 million in 2008, decreased 57% from CHF 6,636 million the previous year. Market activity slowed significantly during the year, resulting in reduced advisory revenues across all regions. Market volatility in both equity and debt markets led to lower capital markets revenues.
According to data fromDealogic, UBS ended 2008 with a 5.6% market share of the global fee pool compared to 5.8%



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in 2007. However, UBS improved its rank from sixth in 2007 to fifth in 2008.

Operating expenses

Operating expenses declined by CHF 5,940 million to CHF 9,925 million in 2008, a 37% decrease from CHF 15,865 million the previous year.
Personnel expenses, at CHF 4,882 million in 2008, decreased 57% from a year earlier, driven by significantly lower performance-related compensation and lower salary costs, only partly offset by restructuring charges. Share-based compensation was down significantly from 2007, mainly due to lower performance-related compensation. Full-year results for 2007 included accruals for share-based compensation during the year. These are not reflected in full-year 2008 as, starting in 2009, they will be amortized over the vesting period of these awards.
General and administrative expenses increased slightly to CHF 3,399 million in 2008 from CHF 3,386 million in 2007. Reductions in travel and entertainment and IT and other out-sourcing costs were more than offset by increases in occupan-

cy costs due to real estate restructuring, and by legal provisions.
Charges from other business units increased to CHF 990 million in 2008 from CHF 811 million in 2007. The increase reflects the cessation of a private equity performance fee received in 2007, an IT data center restructuring fee and increased allocations from Global Wealth Management & Business Banking reflecting higher operating volumes.
Depreciation rose 10%, to CHF 231 million in 2008 from CHF 210 million in 2007, as the real-estate restructuring charges mentioned above resulted in additional depreciation costs. Amortization of intangible assets, at CHF 83 million in 2008, was down from CHF 172 million a year earlier. A goodwill impairment charge of CHF 341 million relating to the exiting of the municipal securities business by the Investment Bank was recognized in second quarter 2008. There was no goodwill impairment charge for full-year 2007.
Included in the 2008 expenses mentioned above is a restructuring charge of CHF 737 million recorded in fourth quarter, consisting of CHF 435 million of personnel expenses and CHF 302 million of costs related to real estate.


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2007

Key performance indicators

Neither the cost / cost/income ratio nor thecompensation ratio are was meaningful in 2007 due to the negative total operating income relating to the US sub-prime crisis.income. In 2006, the cost / income ratio was 72.9%74.6% and the full-year compensation ratio 52.3%53.8%.

(BAR GRAPH)

(BAR GRAPH)

Average regulatory Value at Risk (VaR – 10-day,(VaR) (10-day, 99% confidence, 5 years of historical data) increased to CHF 537514 million, up from CHF 420410 million in 2006. Year-end regulatory VaR was also higher at CHF 614552 million, up from CHF 473465 million the previous year, reflectingyear. These increases reflect the exposuresignificant pick-up in market volatility in the second half of 2007. Refer to the US residential mortgage market.
èMarket risk developments in 2007 are explained in detail in the respective sections inRisk, Treasury and Capital Management 2007

“Market risk” section of this report for more information on the Investment Bank’s VaR.

(BAR GRAPH)

The Investment Bank’sgross lending portfolio in the Investment Bank was CHF 148 billion, up from CHF 120 billion on 31 December 2006, reflecting the expanding prime brokerage and exchange tradedexchange-traded derivatives businesses. The gross impaired lending portfolio to total gross lending portfolio ratio rose to 0.4% in 2007 from 0.1% in 2006.

(BAR GRAPH)

The return on allocated regulatory capital was negative 63%, a reflection of the losses mentioned previously. The extreme market volatility since the start of third quarter 2007, which pushed up 10-day 99% VaR, has increased market risk regulatory capital requirements. Continuous high volatility, especially in credit markets, resulted in an increase in risk-weighted assets on derivative products.



142

(BAR GRAPH)

Results

In 2007 the Investment Bank recorded a pre-tax loss of CHF 15,52516,669 million compared with a profit of CHF 5,9435,568 million in 2006, primarily due to the losses totaling approximately USD 18.7 billion (CHF 21.3 billion) recorded on positions related to the US residential sub-prime and Alt-A real estate market which more than offset the solid performance in other areas.
èFor more details on these losses, please see Note 3 inFinancial Statements 2007

For full-year 2007, equities posted record results with very strong cash commissions, derivatives and prime services revenues. The investment banking department also had a record year in 2007, with all geographical regions showing double-digit growth. Operating expenses for the Investment Bank decreased from 2006, mainly reflecting lower performance-related bonus accruals and a change in the composi-

(BAR GRAPH)

tioncomposition of bonus between cash and shares. This was partially offset by higher salary and general and administrative costs, driven by increased average staff levels over the year.

Operating income

Total operating income in 2007 was negative CHF 557804 million, down from positive CHF 21,78721,773 million a year earlier. This change was driven by losses recorded on positions related to the US residential real estate market.

Operating income by segment

Investment banking

Revenues of the investment banking department, at CHF 6,636 million in 2007, increased 33% from CHF 4,999 million the previous year. This reflected growth in each geographical

region, especially in the Americas. While the advisory and equity capital markets businesses reported significant gains over the prior year (up 48% and 33% respectively), the debt capital markets business declined 4% as it was impacted by challenging markets in the second half of 2007.

Sales and trading

Revenues declined to negative CHF 7,833 million from positive CHF 16,727 million, driven by negative revenues of CHF 16,837 in FICC that were only partly offset by a positive revenue contribution of CHF 9,004 from Equities.

Equities

Equities revenues, at CHF 10,6039,004 million in 2007, were up 13%7% from CHF 9,3978,387 million in 2006. Overall, cash equity revenues were higher, with strong volumes leading to record commissions, partially offset by greater client facilitation costs. Despite a slowdown in the second half of 2007, the derivatives business posted its highest ever results following strong growth in Asia Pacific and Europe, Middle East &and Africa. The exchange tradedexchange-traded derivatives business rose as it benefited from a full year of ABN AMRO’s futures and options (acquiredrevenues (ABN AMRO’s futures and options business was acquired on 1 October30 September 2006) revenues.. Prime brokerage services continued to grow as client numbers and balances increased. Equity capital markets revenues rose in the Americas and Europe, Middle East & Africa due to a very strong pipeline throughout 2007. Equities proprietary trading revenues sharply declined compared to the prior year, related to the credit market dislocation in the US. The equity linked businesses also contributed lower returns compared to 2006.

Fixed income, currencies and commodities (FICC)

FICC revenues were negative CHF 15,68116,837 million, down from positive CHF 9,0568,340 million a year earlier. The credit market dislocation affected most of the FICC businesses in the second half of 2007, leading to losses on mortgage relatedmortgage-related positions. Credit recorded losses in both client and proprietary trading in the context of extreme market disruption and low liquidity at the end of 2007. Structured products revenues were down compared to lastthe previous year, largely driven by the negative impact of the credit dislocation. Commodities revenues declined due to lower volumes and volatility, especially affecting power and gas and to a lesser extent precious metals.
These negative effects were only partially offset by positive results in certainother areas. The emerging markets business result was up as full-year revenues from Banco Pactual were included. Positive results were also driven by the demutualization and mark-to-market gains on the stake in the Brazil Mercantile & Futures Exchange. The underlying foreign exchange spot business saw strong increaseincreases due to higher volumes. The foreign exchange distribution business also posted very good results, stemming from all geographical regions. The Rates



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Investment Bank

rates business was up, driven by higher results in European derivatives. FICC income was further helped by gains of CHF 397 million on credit default swaps hedging loan exposures, compared with a loss of CHF 245 million the previous year.

Revenues of the investment banking department, at CHF 4,540 million in 2007, increased 39% from CHF 3,273 million the previous year. This reflected growth in each geographical region, especially in the Americas. While the advisory and the equity capital markets business reported significant gains over the prior year, the debt capital market and the leveraged finance franchise were down, the latter impacted by challenging markets in the second half of 2007.



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(BAR GRAPH)

UBS business divisions and Corporate Center

Operating expenses

Operating expenses declined by CHF 876340 million to CHF 14,96815,865 million in 2007, a 6%2% decrease from CHF 15,84416,205 million the previous year.
Personnel expenses, at CHF 10,41711,286 million in 2007, decreased 8%3% from a year earlier, reflecting lower accruals of

performance-related compensation and a change in the composition of bonuses between cash and shares. This was partially offset by higher salary costs due to organicinternal growth and the acquisition of Banco Pactual and ABN AMRO’s futures and options business.acquisitions. In addition, severance payments were made for redundancies towards the end of the year. Share-based compensation declined 3%was up significantly from 2006, mainly reflecting a change in the prior year as a resultforfeiture rules of a decrease in social security expenses following a lower UBS share price. This was partially offset by accelerated amortization of deferred compensation for certain terminated employees.share-based awards.
General and administrative expenses were CHF 3,4233,386 million in 2007, up 5% from 2006’s CHF 3,260 million.3,210 million in 2006. Professional fees were up due to higher legal-related expenditures in all businesses. Occupancy costs in the Americas and Asia Pacific, rent and maintenance of machines and equipment and IT and other outsourcing costs rose due to

higher staff levels. Administration expenditures rose as well. This was partially offset by lower provisions compared to 2006.
Charges from other business units decreased to CHF 746811 million in 2007 from CHF 9561,034 million in 2006. The decline reflectsreflected lower charges by Global Asset Management for management of the Investment Bank’s funds invested in Dillon Read Capital Management (DRCM), which waswere reintegrated into the Investment Bank in May 2007, and as a result of thea 2007 performance-related credit from Industrial Holdings. This was only partially offset by higher charges from the information technology infrastructure unit as a result of the increased levels of staff.
Depreciation rose slightly, by 3%, to CHF 210 million in 2007 from CHF 203 million in 2006. This was due to additional office space in the Americas and Europe.
The amortization of intangible assets, at CHF 172 million in 2007, was up 139% from CHF 72 million a year earlier due to the two acquisitions – Blanco Actual and ABN Ammo’s futures and options business.


144

2006

Key performance indicators

The cost / income ratio rose to 72.9% in 2006 from 70.5% in 2005. The increase in performance-related personnel expenses and higher general and administrative expenses was only partly offset by revenue growth in all three Investment Bank business units.

The full-year compensation ratio, at 52.3%, fell 0.8 percentage points between 2005 and 2006. Higher revenues more than offset higher performance-related compensation and increased staff levels. Average Value at Risk (VaRy – 10-day, 99% confidence, 5 years of historical data) increased to CHF 420 million, up from CHF 346 million in 2005. Year-end Vary was also higher at CHF 473 million, up from CHF 355 million in 2005, following the integration of Blanco Actual from 1 December 2006.
The total gross lending portfolio at the Investment Bank was CHF 134 billion on 31 December 2006 compared with CHF 97 billion on 31 December 2005, reflecting expansion of the prime brokerage and exchange traded derivatives businesses. The gross impaired lending portfolio to total gross lending portfolio ratio fell to 0.1% from 0.2% in the same period.
The return on allocated regulatory capital was 29.4% in 2006, up from 28.6% a year earlier, reflecting the increase in profit. Risk-weighted assets grew, mainly driven by higher credit exposures from over-the-counter (OTC) derivatives, collateral trading and the leveraged finance portfolio. Goodwill and excess intangible assets rose compared with 2006 due to the acquisitions of Blanco Actual and ABN Ammo’s futures and options business.

Results

Pre-tax profit in 2006 was CHF 5,943 million, up 15% from 2005. This result was driven by strong revenues in equities (up 35%) and in the investment banking department (up 31%), which saw strong performances across all regions. The increase in FICC (up 14%) reflected progress in the plan to expand global syndicated finance, asset-backed securities, structured credit and the commodities businesses, as well as strong revenues in foreign exchange and cash and collateral trading. Drum’s business activities managed on behalf of the Investment Bank achieved revenues at a level consistent with 2005. Investments were also made in information technology infrastructure and more professional fees were incurred.

Operating income
Total operating income in 2006 was CHF 21,787 million, up 25% from CHF 17,484 million a year earlier.

Equities business unit revenues, at CHF 9,397 million in 2006, were up 35% from CHF 6,980 million in 2005. Overall, cash equity revenues were higher, with results benefiting from positive market conditions. Increased cash commissions were partially offset by greater facilitation costs from clients. Revenues in the derivatives business increased globally while equity capital markets revenues rose with increased capital raising activities. Prime brokerage services continued to grow as client numbers and balances increased. Exchange-traded derivatives revenues rose, boosted by the impact of the acquisition of ABN Ammo’s global futures and options business. Proprietary, as well as the equity-linked businesses, also contributed to higher returns.
FICC revenues were CHF 9,056 million, up 14% from CHF 7,962 million in 2005. Revenues in the rates business were up against 2005 in energy trading, mortgage-backed securities, structured credit and secondary loan activity. This was partially offset by lower income from derivatives. Syndicated finance also recorded higher income as the business benefited from increased market activity. Credit default swaps hedging loan exposures recorded a loss of CHF 245 million compared with gains of CHF 103 million in 2005. While municipal securities revenues were lower in 2006, the foreign exchange and cash collateral trading business, especially the metals business, saw a significant increase in revenues.
Investment banking department revenues, at CHF 3,273 million in 2006, increased 31% from CHF 2,506 million a year earlier. This reflected growth in each region, especially in Asia. The debt and equity capital markets groups reported significant gains over 2005. The leveraged finance franchise continued to grow. Revenues from the advisory business also increased compared with 2005, as clients took advantage of strategic opportunities.

Operating expenses
Operating expenses rose by CHF 3,541 million to CHF 15,844 million in 2006, a 29% increase from CHF 12,303 million in 2005.

Personnel expenses, at CHF 11,353 million in 2006, increased 23% from 2005, reflecting an increase in the bonus accrual and additional salaries due to higher staff levels. Share-based compensation rose 30% from prior year as a result of higher share awards in 2006, and the increased fair value of options granted in 2006 – driven by the rise in UBS’s share price.



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General and administrative expenses were CHF 3,260 million in 2006, up 47% from 2005’s CHF 2,215 million. IT and other outsourcing costs, as well as professional fees, rose as a result of higher project spending in support of future business growth in fixed income, prime brokerage and emerging markets. Administration, travel and entertainment and, to a lesser extent, occupancy expenses increased as well. Provision levels in 2006 rose from 2005.
Charges from other business units increased to CHF 956 million in 2006 from CHF 640 million in 2005. The rise reflects the charges by Global Asset Management for manag-
ing the Investment Bank’s funds invested in DRCM, as well as higher charges from the infrastructure technology unit as a result of the increased levels of staff.
Depreciation rose by 49% to CHF 203 million in 2006 from CHF 136 million in 2005 due to higher IT write-offs, office expansion and renewal costs.
The amortization of intangible assets, at CHF 72 million in 2006, was up 36% from CHF 53 million a year earlier due to the two acquisitions – Blanco ActualBanco Pactual and ABN AMRO’s futures and options business. There was no goodwill impairment charge for either full-year 2007 or 2006.


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UBS’s businessesUBS business divisions and Corporate Center
Corporate Center

Corporate Center
Business description

Description

The Corporate Center partners with the business groupsdivisions to ensure that UBS operates as an effective and integratedagile firm, responding effectively to trends in the financial industry according to a common vision and set of values. The functions of Corporate Center encompass risk, financial control, treasury, communication, legal and compliance, human resources, strategy, offshoring and technology.

Aims and objectives

The Corporate Center helpsassists UBS to managein managing its complementary businesses underpinningthrough provision of Group-level control in the bank’s commitment to the “one-firm” approach.areas of finance, risk, legal and compliance. It strives to maintain an appropriate balance between risk and return in the firm’s businesses while establishing and controlling UBS’s corporate governance processes, including compliance with relevant regulations. Each functional head in the Corporate Center has authority across UBS’s businesses for his or her area of responsibility, including the authority to issue Group-wide policies for that area, and is directly reported to by theirhis or her business groupdivision counterpart.

The Corporate Center is responsible for the following activities in UBS:
–financial, tax and capital management;
–risk control, legal and compliance activities;
–communicating with all UBS stakeholders;
–branding; and
–positioning the firm as the employer of choice.
financial, tax and capital management; risk control, legal and compliance activities; communicating with all UBS stakeholders; branding; and positioning the firm as an employer of choice. In addition, the Corporate Center also assumes operational responsibility for certain business units that provide shared services to the business groupsdivisions – among them the information technology infrastructure and offshoring units (including the service centers in India and Poland).

Organizational structure

The Corporate Center consists of its operational functions plus the information technology infrastructure and Group offshoring units. It is led by the Chief Operating Officer (COO) of the Corporate Center and its operational functions are managed by the Corporate Center Executive Committee.

Although not formally a part of Corporate Center, the costs for the Chairman’s Office (which comprises the Company Secretary, Board of Directors (BoD) and Group Internal Audit) are reported in its financial statements.
executive committee.

Chief Operating Officer of the Corporate Center

The Chief Operating Officer (COO)COO of the Corporate Center is head of the Corporate Center and responsible for its business planning and forecasting, as well as its human resources core processes. Additionally, theThe holder of this position is also the Group Executive Board (GEB) member responsible for information technology infrastructure, Group Offshoringgroup offshoring activities and the corporate real estate portfolio for UBS’s own use.

Group Chief Financial Officer

The Group Chief Financial Officer (Group CFO) is responsible for ensuring that presentationtransparency within the reporting of the financial performance offinan-

cial results for both the Group and its businesses is transparent.businesses. The role also entails responsibility for the Group’s financial reporting, planning, forecasting and controlling processes, as well as the provision of advice on financial aspects of strategic plans and mergers and acquisitions transactions. Further responsibilities include overseeing UBS’s tax and capital management.treasury functions. In coordination with the Group General Counsel, and Chief Communication Officer, the Group CFO defines the standards for accounting, reporting and disclosure and, together with the Chief Executive Officer, provides external certifications under sections 302 and 404 of the US Sarbanes-Oxley Act of 2002. These duties are in addition to managing relations with investors and coordination of working relationships with internal and external auditors.

Group Chief Risk Officer

The Group Chief Risk Officer (Group CRO) is responsible for developingthe development and implementation of UBS’s risk management and control principles. The position is also responsibleprinciples, including the development of appropriate control frameworks for the independent risk control processes formarket, credit market and operational risks.risks throughout the Group. The Chief Credit Officer, the Head of Market RiskGroup and the Head of Operational Risk all report to the Group CRO. These four rolesbusiness division risk functions work together to manage the following: formulating and implementing risk policies and control processes; developing risk quantification methods and sets;methods; monitoring associated limits and controls; ensuring that risks are completely and consistently recorded and aggregated; and ensuring that exposures are continuously monitored, pro-actively controlled and remain within approved risk profiles. Further, the four positions also work together to ensure that UBS’s approach is consistent with best market practice and that the firm is operating within its agreedEach risk bearing capacity. Each Risk Officerofficer exercises specific risk control authorities.

Group General Counsel

The Group General Counsel, supported by the head of Group Compliance, has Group-wide responsibility for legal and compliance matters and for legal and compliance policies and processes, supported by the Head of Group Compliance.processes. The position is responsible for defining the strategy, goals and organizational structure of the legal function, in addition to setting and monitoring the Group-wide quality standards for handling the legal affairs of the Group. Supported



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by the Headhead of Group Compliance, the Group General Counsel is responsible for ensuring that UBS meets relevant regulatory and professional standards in the conduct of its business. Other responsibilities include supervision of the General Counsels of the business groupsdivisions and working closely with the Group CRO with regard to the operational risk aspects of legal



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UBS business divisions and Corporate Center

and liability risk. Furthermore, the Group General Counsel represents UBS’s interests to the policy-makers and, in close cooperation with the Group CRO and Group CFO as appropriate, establishestablishes Group-wide management and control processes for the Group’s relationship with regulators.

Group Treasurer

The Group Treasurer is responsible for the management of UBS’s financial resources and financial infrastructure. The position is responsible for Group-level governance of treasury processes and transactions relating to UBS’s corporate legal structure, regulatory capital, balance sheet, funding and liquidity, and non-trading currency and interest rate risk. Additional responsibilities include the issuance of policies in order to ensure proper management and efficient co-ordination of treasury processes on a Group-wide basis. The Group Treasurer manages the Group’s equity, taking into account financial ratios and regulatory capital requirements, with a view to maintaining strategic flexibility and adequate capitalization and ratings levels. The position manages UBS’s holdings of its own shares and recommends corporate actions to the GEBGroup Executive Board (GEB) and the BoD.Board of Directors (BoD).

Head of Group Controlling & Accounting

The Head of Group Controlling & Accounting has UBS-wide responsibility for financial control. The position is responsible for the production and analysis of accurate and objective regulatory, financial and management accounts and reports. The Head of Group Controlling & Accounting communicates relevant financial and regulatory information to the BoD, the GEB, Group Managing Board (GMB), the Audit Committee,audit committee, internal and external auditors and the CFOs of the business groups.divisions. The position is also responsible for operating the UBS-wide quarterly and annual SOX 302-certification process and supports the Group CFO in the Group’s planning and forecasting process.

Head of Group Tax

The Head of Group Tax is responsible for managing the bank’s corporate income tax affairs, in such a manner that UBS achieves sustainable tax efficiency whilst acting in compliance with all applicable tax laws, regulations and other requirements. Group Tax also provides tax advice to the business divisions in relation to their business activities, and acts as a control function in the review of new business initiatives and transactions requiring pre-approval.

Head of Group Accounting Policy

The Head of Group Accounting Policy establishes Group-wide financial accounting policies and supports the business groupsdivisions and the Corporate Center in their responsibility to implement and enforce the Group accounting policy framework. The position manages relations with external auditors and accounting standards bodies.

Chief Communication Officer

The Chief Communication Officer is responsible for managing UBS’s communication tocommunications with its various stakeholders, en-

suring that a positive and powerful image of UBS is established and broadcast to all stakeholders globally.stakeholders. Another key responsibility is the development of the strategy, content and positioning of communications of corporate importance, emphasizing transparency, consistency, speed and integrity. The Chief Communication Officer presents UBS and its businesses to the media, enhancing and protecting the firm’s reputation. To employees, the position promotes understanding of the firm’s strategies, performance and culture. The Chief Communication Officer also presents UBScoordinates UBS’s approach to corporate responsibility.

Head of Group Strategic Advisory &
Financial Communication

The Head of Group Strategic Advisory & Financial Communication provides independent advice to the GEB (collectively and individually) and the BoD on strategic matters and supports the business divisions in the execution of their strategies. The position coordinates cross-business division strategic initiatives, drives the implementation of challenging Group strategic targets and measures progress towards goals. Additionally, it monitors the competitive environment and assesses the impact of opportunities and threats on Group strategy. The Head of Group Strategic Advisory & Financial Communication also communicates with investors, analysts and rating agencies about developments at UBS and is responsible for preparing and publishing quarterly and annual reporting products, manages and promotes the UBS corporate brand via advertising, sponsorship, art and visual design and coordinates UBS’s approach to corporate responsibility.reports.

Group Head Human Resources

The Group Head Human Resources has UBS-wideGroup-wide responsibility for the management of human resources. The position is responsible forresources, the development of the relevant human capital strategies as well as the governance over their effective implementation. This includes shaping a meritocratic culture of ambition and performance, and promoting UBS’s values for action. The Group Head Human Resources buildsbuilding UBS’s capacity to attract and retain the besthigh-quality, diverse and mobile talent, in addition toas well as creating an innovativeattractive and flexible work environmentenvironment. The position is ultimately and directly responsible for the management of talent and development of leadership within UBS’s senior management group. Additionally, Group Human Resources is mandated to ensure that all employees from different cultures and backgrounds with different perspectives candesign, develop and succeed. Other responsibilities include succession planning for senior executives, designing and administeringadminister global compensation programs, to oversee regional and benefits programslocal benefit strategies, and the design, developmentto establish innovative and delivery of leadership development programs targeted at current and future senior leaders.competitive incentive frameworks on a firm-wide basis.

Chief Technology Officer (CTO)

The Chief Technology Officer (CTO) is the head of the information technology infrastructure unit (ITI). This unit encompasses all information technology infrastructure teams across UBS, covering management of data networks, telephone and other communications systems, IT security, distributeddis-



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Center Corporate Center

tributed computing and servers, mainframes and data centers, market data services, user services and desktop computing. The unit focuses on serving all UBS’s businesses in a client-driven and cost-efficient way, as well as building towards a consistent technical architecture across UBS through the execution of the information technology infrastructure strategy.

Head of Group Offshoring

The Head of Group Offshoring is responsible for delivering offshoring services to the business groupsdivisions at appropriate and competitive prices. The service centers, which are operated by UBS staff in India and Poland, ensure that physical and technical features meet UBS risk and quality standards and comply with the operational risk framework.



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UBS business divisions and Corporate Center

Financial resultsResults

Business group reporting

                 
  
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
Income  2,8731  294   455   877 
 
Credit loss (expense) / recovery2
  (392)  (61)  232   (543)
 
Total operating income
  2,481   233   687   965 
 
Cash components  1,215   1,133   1,059   7 
 
Share-based components3
  168   131   108   28 
 
Total personnel expenses  1,383   1,264   1,167   9 
 
General and administrative expenses  1,298   1,242   1,084   5 
 
Services (to) / from other business units  (2,194)  (1,978)  (1,730)  (11)
 
Depreciation of property and equipment  739   783   857   (6)
 
Amortization of intangible assets  0   9   17   (100)
 
Total operating expenses4
  1,226   1,320   1,395   (7)
 
Business group performance from continuing operations before tax  1,255   (1,087)  (708)    
 
Business group performance from discontinued operations before tax  7   4   4,564   75 
 
Business group performance before tax
  1,262   (1,083)  3,856     
 
                 
Additional information
                
 
BIS risk-weighted assets  7,984   8,969   8,143   (11)
 
Personnel (full-time equivalents)  6,913   4,771   3,922   45 
 
Personnel excluding information technology infrastructure (ITI) (full-time equivalents)  2,570   1,716   1,370   50 
 
Personnel for ITI (full-time equivalents)  4,343   3,055   2,552   42 
 
1Includes pre-tax gain of CHF 1,950 million related to the sale of 20.7% stake in Julius Baer.2In order to show the relevant business group performance over time, adjusted expected credit loss rather than credit loss expense is reported for all business groups. The difference between the adjusted expected credit loss and credit loss expense recorded at Group level is reported in the Corporate Center (see Note 2 in Financial Statements 2007).3reportingAdditionally includes related
                 
 
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.07 
 
Total operating income
  1,083   3,562   607   (70)
 
Cash components  1,069   1,244   1,179   (14)
 
Share-based components1
  7   121   140   (94)
 
Total personnel expenses  1,076   1,365   1,319   (21)
 
General and administrative expenses  1,299   1,306   1,255   (1)
 
Services (to)/from other business units  (2,066)  (2,070)  (1,969)  0 
 
Depreciation of property and equipment  720   739   782   (3)
 
Amortization of intangible assets  0   0   9     
 
Total operating expenses2
  1,029   1,340   1,396   (23)
 
Performance from continuing operations before tax  54   2,222   (789)  (98)
 
Performance from discontinued operations before tax  198   145   888   37 
 
Performance before tax
  252   2,367   99   (89)
 
                 
Contributions from private equity/Industrial Holdings
                
 
Total operating income  22   689   313   (97)
 
Total operating expenses  54   163   67   (67)
 
Operating profit from continuing operations before tax  (32)  526   246     
 
Profit from discontinued operations before tax  155   138   884   12 
 
                 
Additional information
                
 
BIS risk-weighted assets (CHF billion)3
  8.8   10.2   11.5     
 
Personnel (full-time equivalents)4
  7,285   6,913   4,771   5 
 
Personnel for the Operational Corporate Center (full-time equivalents)  1,572   1,622   1,452   (3)
 
Personnel for ITI5 (full-time equivalents)
  4,066   4,343   3,055   (6)
 
Personnel for Group Offshoring (full-time equivalents)  1,646   948   264   74 
 
1 Includes social security contributions and expenses related to alternative investment awards.42Includes expenses for the Chairman’s office (comprising the Company Secretary, Board of Directors and Group Internal Audit)Audit.  3 BIS risk-weighted assets (RWA) are according to Basel II for 2008, and according to the Basel I framework for 2007 and 2006.  4 Personnel numbers exclude full-time equivalents from private equity (part of the Corporate Center): 1 for 2008, 3,843 for 2007, 4,241 for 2006.  5 Information Technology Infrastructure (ITI).

113

UBS business divisions and Corporate
Center Corporate Center

2008

Results

The Corporate Center recorded a result from continuing operations of CHF 54 million in full-year 2008, down from a gain of CHF 2,222 million in 2007. This decline was mainly related to a charge of CHF 3.5 billion following a transaction between UBS and the Swiss National Bank (SNB) in the fourth quarter. This charge reflects a net loss arising from the acquisition of the equity purchase option, and the impact of the contingent issuance of UBS shares in connection with the transaction. The total charge also includes the fair valuation impact of the mandatory convertible notes (MCNs) placed with the Swiss Confederation. The call component of the MCNs will be revalued each quarter and UBS expects a corresponding fluctuation in the results of the Corporate Center. This fluctuation is subject to the expected volatility of the UBS share price and will continue until the conversion of the MCNs into UBS shares. The loss from the SNB transaction is reported in the Corporate Center as it benefits the whole bank and not just the Investment Bank. At the 27 November 2008 extraordinary general meeting, shareholders approved for this purpose the creation of conditional capital in the maximum amount of 365 million shares. Furthermore, 2008 was impacted by losses resulting from cash flow hedge ineffectiveness, driven by the accelerated amortization of gains recorded until November 2007.

On the positive side, a gain of CHF 3,860 million due to the accounting treatment of the MCNs in first quarter 2008 and a gain of CHF 174 million on UBS’s sale of its stake in Bank of China in the fourth quarter assisted the 2008 result.

Operating income

Total operating income decreased to CHF 1,083 million in 2008 from CHF 3,562 million in 2007, largely driven by the above-

mentioned SNB transaction and fair valuation of the MCNs in fourth quarter 2008, losses on swaps not fully eligible for hedge accounting and a gain from UBS’s sale of its stake in Bank of China. The 2007 result was driven by a gain from the sale of UBS’s 20.7% stake in Julius Baer. In addition, the contribution from the former Industrial Holdings decreased to CHF 22 million in 2008, compared with CHF 689 million in 2007.

Operating expenses

Total operating expenses were CHF 1,029 million in 2008, down CHF 311 million from CHF 1,340 million in 2007. At CHF 1,076 million in 2008, personnel expenses were down 21% from CHF 1,365 million in 2007, which reflected lower bonus accruals and lower headcount, the latter being partly offset by growth in the Offshoring Service Center headcount. In the same period, general and administrative expenses decreased 1% to CHF 1,299 million from CHF 1,306 million. This was related mainly to lower advertising and sponsoring costs, a partial release of provisions and lower project costs as well as decreased travel activities, and were partly offset by higher real estate restructuring provisions. Other businesses were charged CHF 2,066 million, compared with CHF 2,070 million in 2007. Depreciation decreased CHF 19 million, or 3%, to CHF 720 million as a result of management action to reduce spending on IT equipment partly offset by a fair value adjustment in corporate real estate.

Information technology infrastructure

In 2008, the average ITI cost per UBS employee was CHF 25,178, a CHF 1,953 decrease from CHF 27,131 the previous year. This reflects an 8% cost reduction in ITI in 2008 compared to 2007, reflecting ongoing cost-cutting initiatives and foreign exchange movements. Average UBS staff levels decreased slightly to 81,382 in 2008 from 81,715 in 2007.



114

UBS business divisions and Corporate Center

2007

Results

The Corporate Center recorded a pre-tax profit from continuing operations of CHF 1,2552,222 million in full-year 2007. This improvement, up from a loss of CHF 1,087789 million in 2006, was related mainly related to the CHF 1,950 million gained from theUBS’s sale of aits 20.7% stake in Julius Baer. In addition, positive cash flow hedges and higher treasury income from the investment of equity also assisted the 2007 result. While all these developments helped operating income to rise, higher levels of credit loss expenses in 2007 moderated the increase.

Operating income

Total operating income increased to CHF 2,4813,562 million in 2007 from CHF 233607 million in 2006. This mainly reflects higher income, up from CHF 294 million in 2006 to CHF 2,873 million in 2007, which was boosted byreflected the gains from theUBS’s sale of UBS’sits 20.7% stake in Julius Baer, positive impacts from cash flow hedges and higher proceedstreasury income. In addition, the contribution from the invest

ment of equity. Thisformer Industrial Holdings was partially offset by substantially increased credit loss expense recorded this yearCHF 689 million in 2007, compared with a year earlier.
The credit loss result bookedCHF 313 million in Corporate Center represents the difference between the adjusted expected credit loss result booked in the business groups and the actual credit loss expense recognized in UBS’s financial statements. In 2007, UBS recorded a credit loss expense of CHF 238 million. The adjusted expected credit loss booked in the business groups was a recovery of CHF 154 million, resulting in a difference of CHF 392 that was booked in Corporate Center as a credit loss expense. In 2006, Corporate Center booked a credit loss expense of CHF 61 million.2006.

Operating expenses

Total operating expenses were CHF 1,2261,340 million in 2007, down CHF 9456 million from CHF 1,3201,396 million in 2006. At CHF 1,3831,365 million in 2007, personnel expenses were up 9% 3%

from CHF 1,2641,319 million in 2006, mainly reflecting the higher personnel numbers in information technology infrastructure (ITI),ITI, driven by higher business demand. Accelerated amortization of share-based compensation to certain terminated



149

UBS’s businesses
Corporate Center

employees during their employment also drove personnel costs up. In the same period, general and administrative expenses increased 5%4% to CHF 1,2981,306 million from CHF 1,2421,255 million. This iswas related mainly related to higher ITI expenses in support of higher staff levels in the business groups. Operatingdivisions. The Operational Corporate Center also booked higher expenses in all areas. This was partially offset by lower provisions (2006 included a small portion of the provision for sub-leasingsubleasing office space in the US) and advertising expenditures. Other businesses were charged CHF 2,1942,070 million compared towith CHF 1,9781,969 million, reflecting the business drivenbusiness-driven cost increases of ITI and the India Service Centre.Center. Depreciation of property and equipment decreased CHF 43 million, or 5%, to CHF 739 million by CHF 44 million, or 6%, as several software components came to the end of their depreciation cycle. Amortization of intangible assets was CHF 0 million in 2007, CHF 9 million below the level a year earlier.

Information technology infrastructure

In 2007, the average ITI cost per average number of financial business employeesUBS employee was CHF 27,131, a CHF 941 decrease from CHF 28,072 the previous year. This reflectsreflected a 12% increase in the average staff levels in financial businesses from 72,885 on 31 Decemberin 2006 to 81,715 at the end of 2007.in 2007, while ITI costs only increased byonly 8% during this period, supporting business growth plans.

2006

Results

Corporate Center recorded a pre-tax loss from continuing operations of CHF 1,087 million in full-year 2006, compared with a loss of CHF 708 million in 2005. The increased loss was mainly driven by a CHF 454 million decline in operating income.

Operating income
Total operating income decreased to CHF 233 million in 2006 from CHF 687 million in 2005. This reflected the credit loss expense recorded in 2006, which contrasted with the credit recovery reported in 2005. It was also a result of lower income from treasury activities.

The credit loss result booked in Corporate Center represents the difference between the adjusted expected credit loss

result recorded in the business units and the credit loss expense / recovery recognized in the UBS financial statements. In 2006, UBS recorded a credit loss recovery of CHF 156 million compared to a recovery of CHF 375 million in 2005. In 2006, the adjusted expected credit loss recoveries of CHF 217 million credited to the business units exceeded UBS’s credit loss recovery. The difference of CHF 61 million was recorded in Corporate Center as a credit loss expense compared with the recovery of CHF 232 million recorded in 2005.
Income decreased by CHF 161 million to CHF 294 million in 2006 compared to CHF 455 million in 2005, mainly due to lower real estate gains and losses related to cash flow hedging (that were gains in 2005). This was slightly offset by gains from foreign exchange options in 2006.

Operating expenses
Total operating expenses were CHF 1,320 million in 2006, down CHF 75 million from CHF 1,395 million in 2005. At CHF 1,264 million in 2006, personnel expenses were up 8% from CHF 1,167 million in 2005, mainly a reflection of higher personnel numbers in ITI driven by higher business demand and the hiring of people to address the growing complexity of regulatory requirements. Personnel costs increased due to higher performance-related compensation and higher expenses for share-based components as the UBS share price increased compared with 2005. In the same period, general and administrative expenses increased 15% to CHF 1,242 million from CHF 1,084 million. In ITI, expenses for rent and maintenance of IT equipment, occupancy and communications increased with higher staff levels. Costs also increased as a small portion of the provision for sub-leasing office space in the US was booked in Corporate Center. Other businesses were charged CHF 1,978 million compared to CHF 1,730 million, reflecting the business driven cost increases of ITI. Depreciation of property and equipment decreased to CHF 783 million by CHF 74 million, or 9%, as several software components came to the end of their depreciation cycle. Amortization of intangible assets was CHF 9 million in 2006, CHF 8 million below the 2005 level.

Information technology infrastructure

In 2006, the ITI cost per average number of financial business employees was CHF 28,072, up CHF 1,341 from CHF 26,731 in 2005, reflecting the impact of supporting businesses in their growth plans. This was partially offset by cost savings from centrally managing the ITI.period.



150

UBS’s businesses
Industrial Holdings

Industrial Holdings

Income statement

                 
  
  As of or for the year ended  % change from 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
                 
Continuing operations
                
 
Revenues from Industrial Holdings  268   262   229   2 
 
Other income  680   303   566   124 
 
Total operating income
  948   565   795   68 
 
Personnel expenses  111   122   164   (9)
 
General and administrative expenses  44   51   56   (14)
 
Services (to) / from other business units  124   9   14     
 
Depreciation of property and equipment  8   7   7   14 
 
Amortization of intangible assets  6   5   6   20 
 
Goods and materials purchased  119   116   97   3 
 
Total operating expenses
  412   310   344   33 
 
Operating profit from continuing operations before tax  536   255   451   110 
 
Tax expense  36   34   169   6 
 
Net profit from continuing operations
  500   221   282   126 
 
                 
Discontinued operations
                
 
Profit from discontinued operations before tax  128   875   530   (85)
 
Tax expense  (8)  (12)  93   33 
 
Net profit from discontinued operations
  136   887   437   (85)
 
                 
Net profit  636   1,108   719   (43)
 
Net profit / (loss) attributable to minority interests  50   104   207   (52)
 
from continuing operations  50   1   (24)    
 
from discontinued operations  0   103   231   (100)
 
Net profit attributable to UBS shareholders
  586   1,004   512   (42)
 
from continuing operations  450   220   306   105 
 
from discontinued operations  136   784   206   (83)
 
                 
Additional information
                
 
Private equity1
                
 
Investments, at cost2
  92   344   744   (73)
 
Gains recognized directly in equity  76   517   264   (85)
 
Portfolio fair value  168   861   1,008   (80)
 
Cost / income ratio (%)3
  43.5   54.9   43.3     
 
BIS risk-weighted assets  117   443   2,035   (74)
 
Personnel (full-time equivalents)  3,843   4,241   21,636   (9)
 
1Only comprises financial investments available-for-sale.2Historical cost of investments made, less divestments and impairments.3Operating expenses / operating income.

151

UBS’s businesses
Industrial Holdings

Major participations

The private equity investments of UBS were moved to the Industrial Holdings segment in first quarter 2005, matching the strategy of de-emphasizing and reducing exposure to this asset class while capitalizing on orderly exit opportunities as they arise.

The sale of UBS’s 55.6% stake of Motor-Columbus to a consortium of Atel’s Swiss minority shareholders, EOS Holding and Atel, as well as to French utility Electricité de France (EDF), which was included in this segment, was successfully completed on 23 March 2006. The sale price was set at approximately CHF 1,295 million. The disposal gain of CHF 387 million and the operating result of CHF 71 million realized during the quarter before the deal closed are reported as discontinued operations after tax. All prior periods have been restated accordingly.

2007

In 2007, the Industrial Holdings segment reported a net profit of CHF 636 million, of which CHF 586 million was attributable to UBS shareholders.

In 2007, UBS completed the sale of two fully consolidated investments. The realized divestment gains are presented as discontinued operations for Industrial Holdings. Previous income statements have also been restated to reflect these divestments.
In 2007, unconsolidated private equity investments, including those accounted for under the equity method, recorded total divestment gains of CHF 718 million. The level of financial investments available-for-sale fell to CHF 92 million on 31 December

2007 from CHF 344 million a year earlier due to a number of exits which were partially offset by the funding of existing commitments. The fair value of this part of the portfolio decreased to CHF 168 million in 2007 from CHF 861 million in 2006 reflecting revaluations and successful divestments. Unfunded commitments on 31 December 2007 were CHF 67 million, down from CHF 227 million at the end of December 2006.
The net profit result in 2007 is shown after transfers of CHF 118 million to the Investment Bank. This was to compensate the Investment Bank for its efforts in helping dispose of certain private equity instruments, which had been transferred from the Investment Bank in 2005.

2006

In 2006, the Industrial Holdings segment reported a net profit attributable to UBS shareholders of CHF 1,004 million. In 2006, it completed the sale of four fully consolidated investments. The realized divestment gains are presented as discontinued operations for Industrial Holdings.

In 2006, unconsolidated private equity investments, including those accounted for under the equity method, recorded total divestment gains of CHF 391 million. The level of financial investments available-for-sale fell to CHF 344 million on 31 December 2006 from CHF 744 million a year earlier due to a number of exits which were partially offset by the funding of existing commitments. The fair value of this part of the portfolio decreased to CHF 861 million in 2006 from CHF 1,008 million in 2005 reflecting revaluations and successful divestments. Unfunded commitments on 31 December 2006 were CHF 227 million, down from CHF 367 million at the end of December 2005.



152

More about UBS

153

More about UBS

Sources of information

Annual report 2007

Four reports make up UBS’s fullAnnual Report 2007.They comply with the US disclosure requirements for foreign private issuers as defined by Form 20-F of the Securities and Exchange Commission (SEC) and combine audited and non-audited information. All four reports are available in English and German (SAP no.80531). The four reports are:

Strategy, Performance and Responsibility 2007
This provides a description of our firm, its strategy, organizational structure and financial performance for the last two years. It also discusses our standards for corporate behavior and responsibility, outlines demographic trends in our workforce and describes the way our people learn and are led.

Risk, Treasury and Capital Management 2007
In addition to outlining the principles by which we manage and control risk, this report provides an account of developments in credit risk, market risk, operational risk and treasury management during 2007. It also provides information on UBS shares.

Corporate Governance and Compensation Report 2007
Comprehensive information on our governance arrangements is included in this report, which also explains how we manage our relationships with regulators and shareholders. Compensation of senior management and the Board of Directors (executive and non-executive members) is discussed here. This report can be ordered separately (SAP no. 82307).

Financial Statements 2007
This comprises the audited financial statements of UBS for 2007, 2006 and 2005, prepared according to the International Financial Reporting Standards (IFRS). It also includes the audited financial statements of UBS AG (the parent bank) for 2007 and 2006, prepared according to Swiss banking law. Additional disclosure required by Swiss and US regulations is included where appropriate.

In addition to the four reports,Review 2007is distributed broadly to UBS shareholders and contains key information on our strategy and financials. This booklet summarizes the information in the four-part annual report.

Quarterly reports

We provide detailed quarterly financial reporting and analysis, including comment on the progress of our businesses and key strategic initiatives. These quarterly reports are available in English.

How to order reports

These reports are available in PDF format on the internet atwww.ubs.com/investors/topicsin the reporting section. Printed copies can be ordered from the same website by accessing the order / subscribe panel on the right-hand side of the screen. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, Information Center, P.O. Box, CH-8098 Zurich, Switzerland.



154

Information tools for investors

Website
Our Analysts & Investors website atwww.ubs.com/investorsoffers a wide range of information about UBS, financial information (including SEC filings), corporate information, share price graphs and data, an event calendar, dividend information and recent presentations given by senior management to investors at external conferences. Information on the internet is available in English and German, with some sections in French and Italian.

Messaging service
On the Analysts & Investors website, you can register to receive news alerts about UBS via Short Messaging System (SMS) or e-mail. Messages are sent in either English or German and users are able to state their preferences for the topics of the alerts received.

Results presentations
Senior management presents UBS’s results every quarter. These presentations are broadcast live over the internet, and can be downloaded on demand. The most recent result webcasts can be found in the financials section of our Analysts & Investors website.

Form 20-F and other submissions to the US Securities and Exchange Commission

We file periodic reports and submit other information about UBS to the US Securities and Exchange Commission (SEC). Principal among these filings is our annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934.

Our Form 20-F filing is structured as a “wrap-around” document. Most sections of the filing can be satisfied by referring to parts of the four reports (Strategy, Performance and Responsibility 2007,Risk, Treasury and Capital Management 2007,Corporate Governance and Compensation Report 2007andFinancial Statements 2007). However, there is a small amount of additional information in Form 20-F which is not presented elsewhere, and is particularly targeted at readers in the US. You are encouraged to refer to this additional disclosure.
You may read and copy any document that we file with the SEC on the SEC’s website,www.sec.gov,or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, DC, 20549. Please call the SEC by dialing 1-800-SEC-0330 (in the US) or +1 202 942 8088 (outside the US) for further information on the operation of its public reference room. You may also inspect our SEC reports and other information at the New York Stock Exchange, Inc., 20 Broad Street, New York, NY 10005. Much of this additional information may also be found on the UBS website atwww.ubs.com/investors,and copies of documents filed with the SEC may be obtained from UBS’s Investor Relations team at the address shown on the next page.



Corporate information

The legal and commercial name of the company is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS.

UBS AG is incorporated and domiciled in Switzerland and operates under Swiss Company Law and Swiss Federal Banking Law as an Aktiengesellschaft, a corporation that has issued shares of common stock to investors.

The addresses and telephone numbers of our two registered offices are:

Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone
+41-44-234 11 11; and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, phone +41-61-288 20 20.

UBS AG shares are listed on the SWX Swiss Exchange (traded through its trading platform virt-x), on the New York Stock Exchange (NYSE) and on the Tokyo Stock Exchange (TSE).
More about UBS



155

More about UBS

Contacts

Switchboards
For all general queries.Zurich+41-44-234 1111
London+44-20-7568 0000
New York+1-212-821 3000
Hong Kong+852-2971 8888
Investor Relations
Our Investor Relations team supports
institutional, professional and retail
investors from our offices in Zurich
and New York.

www.ubs.com/investors		Hotline+41-44-234 4100UBS AG
New York+1-212-882 5734Investor Relations
Fax (Zurich)+41-44-234 3415P.O. Box
CH-8098 Zurich, Switzerland
sh-investorrelations@ubs.com
Media Relations
Our Media Relations team supports
global media and journalists from
offices in Zurich, London, New York
and Hong Kong.

www.ubs.com/media		Zurich+41-44-234 8500mediarelations@ubs.com
London+44-20-7567 4714ubs-media-relations@ubs.com
New York+1-212-882 5857mediarelations-ny@ubs.com
Hong Kong+852-2971 8200sh-mediarelations-ap@ubs.com
Shareholder Services
UBS Shareholder Services, a unit of the
Company Secretary, is responsible for
the registration of the global registered
shares.		Hotline+41-44-235 6202UBS AG
Fax+41-44-235 3154Shareholder Services
P.O. Box
CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com
US Transfer Agent
For all global registered share-related
queries in the US.

www.melloninvestor.com		Calls from the US+866-541 9689BNY Mellon Shareowner Services
Calls outside the US+1-201-680 6578480 Washington Boulevard
Fax+1-201-680 4675Jersey City, NJ 07310, USA
sh-relations@melloninvestor.com

156115

 

 

Cautionary statement regarding forward-looking statements |This report contains statements that constitute “forward-looking statements”, including but not limited to statements relating to the risks arising from the current market crisis, other risks specific to our business and the implementation of strategic initiatives, as well as other statements relating to our future business development and economic performance and our intentions with respect to future returns of capital. While these forward-looking statements represent our judgments and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to (1) the extent and nature of future developments in the US sub-prime market and in other market segments that have been affected by the current market crisis; (2) other market and macro-economic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates, whether or not arising directly or indirectly from the current market crisis; (3) the impact of these developments on other markets and asset classes; (4) changes in internal risk control and in the regulatory capital treatment of UBS’s positions, in particular those affected by the current market crisis; (5) limitations in the effectiveness of our internal risk management processes, of our risk measurement, control and modeling systems, and of financial models generally; (6) developments relating to UBS’s access to capital and funding, including any changes in our credit ratings; (7) changes in the financial position or creditworthiness of our customers, obligors and counterparties, and developments in the markets in which they operate; (8) management changes and changes to the structure of our Business Groups; (9) the occurrence of operational failures, such as fraud, unauthorized trading, systems failures; (10) legislative, governmental and regulatory developments; (11) competitive pressures; (12) technological developments; and (13) the impact of all such future developments on positions held by UBS, on our short-term and longer-term earnings, on the cost and availability of funding and on our BIS capital ratios. In addition, these results could depend on other factors that we have previously indicated could adversely affect our business and financial performance which are contained in other parts of this document and in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth elsewhere in this document and in documents furnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2007. UBS is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

Imprint |Publisher / Copyright: UBS AG, Switzerland | Languages: English, German
Order number Annual Report 2007: SAP-No. 80531E-0801

(FSC LOGO)
Mixed Sources
Product group from well-managed
forests and other controlled sources
www.fsc.org Cert no. SQS-COC-100112
© 1996 Forest Stewardship Council

(UBS LOGO)
UBS AG
P.O. Box, CH-8098 Zurich
P.O. Box, CH-4002 Basel
www.ubs.comRisk and treasury management

(STRATEGY, PERFORMANCE AND RESPONSIBILITY)Risk and treasury management

1 Strategy, Performance and Responsibility UBS Annual Report 2007


(FRONT COVER)
Annual Report 20071 | Strategy, Performance and Responsibility 2 | Risk, Treasury and Capital Management 3 | Corporate Governance and Compensation Report 4 | Financial Statements

 

 

 

 

 

 

 

 

Contents

Introduction
3
Risk management
4
Risk management and control
6
Risk concentrations
11
Credit risk
15
Market risk
31
Investment positions
42
Operational risk
44
Treasury and capital management
46
Interest rate and currency management
48
Liquidity and funding management
51
Capital management
56
Shares and capital instruments
62
UBS shares in 2007
68
More about UBS
73
Sources of information
74
Contacts
76

1

2

Introduction

Introduction

This year we have changed the structure of our annual report. Based on feedback from users, our annual report now consists of four themed reports. These combine audited and non-audited information.

Together, the four reports make up UBS’s fullAnnual Report 2007and replace the former Financial Report, the Handbook and the Compensation Report. They comply with the US disclosure requirements for foreign private issuers as defined by Form 20-F of the Securities and Exchange Commission (SEC).

The four reports are:

Strategy, Performance and Responsibility 2007
This provides a description of our firm, its strategy, organizational structure and financial performance for the last two years. It also discusses our standards for corporate behavior and responsibility, outlines demographic trends in our workforce and describes the way our people learn and are led.

Risk, Treasury and Capital Management 2007
In addition to outlining the principles by which we manage and control risk, this report provides an account of developments in credit risk, market risk, operational risk and treasury management during 2007. It also provides information on UBS shares.

Corporate Governance and Compensation Report 2007
Comprehensive information on our governance arrangements is included in this report, which also explains how we manage our relationships with regulators and shareholders. Compensation of senior management and the Board of Directors (executive and non-executive members) is discussed here.

Financial Statements 2007
This comprises the audited financial statements of UBS for 2007, 2006 and 2005, prepared according to the International Financial Reporting Standards (IFRS). It also includes the audited financial statements of UBS AG (the parent bank) for 2007 and 2006, prepared according to Swiss banking law. Additional disclosure required by Swiss and US regulations is included where appropriate.

In addition to the four reports,Review 2007is distributed broadly to UBS shareholders and contains key information on our strategy and financials. This booklet summarizes the information in the four-part annual report.

If you only ordered specific reports in prior years, please note that the former Compensation Report is now calledCorporate Governance and Compensation Report 2007,and the former Annual Review is now calledReview 2007. Our contact details are listed in the final pages of this report – please be in contact with us so that we can arrange delivery of the reports you require.

This report contains information that is current as of the date of this report. We undertake no obligation to update this information or notify you if it should change or if new information should become available.

Our aim is to provide publications that are useful and informative. In order to ensure that UBS remains among the leading providers of corporate disclosure, we would like to hear your opinions on how we can improve the content and presentation of our products (see contact details on the final pages of this report).

UBS



Audited information according to IFRS 7 and IAS 1

Risk disclosures provided in line with the requirements of the International Financial Reporting Standard 7 (IFRS 7),Financial Instruments: Disclosures,and disclosures on capital required by the International Accounting Standard 1 (IAS 1),Financial Statements: Presentationform part of the financial statements audited by UBS’s independent registered public accounting firm Ernst & Young Ltd., Basel. This information (the audited texts, tables and graphs) is marked by a bar on the left-hand side throughout this report and is incorporated by cross-reference into UBS’sFinancial Statements 2007.the financial statements of this report.

3

Risk management
–UBS entered 2008 with significant legacy risk positions which exceeded the firm’s risk bearing capacity. Risk reduction will remain a priority for UBS until risk exposure is commensurate with the firm’s targeted risk appetite.

UBS incurred substantial writedowns on its risk positions and actively reduced exposures through sales.Significant transactions included the sale in May 2008 of US residential mortgage-backed securities to a fund managed by BlackRock for proceeds of USD 15 billion and the agreement reached in October 2008 to transfer illiquid securities and other positions from UBS’s balance sheet to a fund owned and controlled by the Swiss National Bank (SNB).

In order to address weaknesses identified in its risk management and control organization,UBS launched an extensive remediation plan which included: the overhaul of its risk governance; significant changes to risk management and control personnel; and improvements in risk capture, risk representation and risk monitoring.








Corporate governance and risk control

(FLOW CHART)

1For full listing of Board of Directors committees, refer to Annex C of the Organization Regulations of UBS AG.

Treasury management
–UBS’s treasury department is responsible for the management of the firm’s financial resources. This includes the management of: liquidity and funding; capital and balance sheet; and interest rate and currency risks arising from balance sheet and capital management responsibilities.

Liquidity management

Liquidity management remained challenging throughout 2008, as the financial and credit market crisis, which had its origins in the US residential mortgage market in the second half of 2007, spread and gained in intensity throughout the year.

In anticipation of an extended period of market turbulence, UBS proactively undertook several measures, starting in 2007 and continuing in 2008, to further strengthen and safeguard its liquidity position, including adjustment of short-term funding targets and increased focus on balance sheet asset reduction. Combined with the broad diversity of its funding sources, its contingency planning processes and its global scope, these additional measures have enabled UBS to maintain a balanced asset/liability profile throughout the current market dislocation.

Funding management

Despite challenging market conditions in the second half of 2008, UBS was able to maintain access to funding, primarily as a result of its broadly diversified funding base.

Risk-weighted assets and eligible capital

In 2008, risk-weighted assets declined from CHF 374.4 billion (Basel I) to CHF 302.3 billion. In this period, eligible tier 1 capital decreased from CHF 34.1 billion to CHF 33.4 billion, reflecting the effects of losses incurred during 2008 and further negative impacts on equity, only partially offset by the positive effects from issues of capital instruments.

Capital instruments

The following events occurred in 2008: issuance of CHF 13 billion of mandatory convertible notes to two long-term financial investors in March; issuance of EUR 1 billion of perpetual preferred securities as hybrid tier 1 capital in April; net increase in capital of CHF 15.6 billion from the rights issue in June; and issuance of CHF 6 billion of mandatory convertible notes to the Swiss Confederation in December.




             
Capital adequacy 
  Basel II  Basel I 
CHF million, except where indicated 31.12.08  31.12.08  31.12.07 
 
BIS tier 1 capital  33,371   35,884   34,101 
 
of which hybrid tier 1 capital
  7,393   7,393   6,387 
 
BIS total capital  45,588   46,233   45,797 
 
BIS tier 1 capital ratio (%)  11.0   9.9   9.1 
 
BIS total capital ratio (%)  15.1   12.7   12.2 
 
Credit risk  222,563   326,608   323,345 
 
Non-counterparty related risk  7,411   8,826   8,966 
 
Market risk  27,614   27,614   42,110 
 
Operational risk  44,685   N/A   N/A 
 
Total BIS risk-weighted assets
  302,273   363,048   374,421 
 

Risk and treasury management
Risk management and control

Risk management and control

UBS was severely affected by the financial crisis that unfolded in 2007 and worsened in 2008. UBS entered 2008 with significant legacy risk positions, particularly related to US real estate and other credit positions, which exceeded the firm’s risk bearing capacity. As reported during 2008, UBS incurred significant losses on these positions. Risk reduction will remain a priority for UBS until risk exposure is commensurate with the firm’s targeted risk appetite. UBS identified significant weaknesses in its risk management and control organization, as well as limitations in its traditional market risk, credit risk, liquidity risk and funding risk measures (including the interplay between these measures). As a result of these weaknesses, the firm failed to adequately assess correlated risks and risk concentrations. In order to address these weaknesses, UBS launched an extensive remediation plan, which included the overhaul of its risk governance, significant changes to risk management and control personnel, as well as improvements in risk capture, risk representation and risk monitoring. Implementation of this plan is ongoing and remains a high priority for UBS. In addition, in light of the continued dislocation in financial markets, UBS has placed less emphasis on statistical models for the identification and management of risks, and more on its stress-based measures, particularly to identify and manage those portfolios considered most at risk.

Market commentary in 2008

Market conditions deteriorated progressively in 2008 culminating with weak macroeconomic data in fourth quarter 2008 which confirmed the severe downturn in the global economy. Credit markets worsened considerably over the year with the market dislocation spreading from US real estate-related markets to broader asset-backed security and credit markets, especially after the market-wide liquidity concerns engendered following the collapse of a major US investment bank in September 2008. Levels of market volatility were high throughout the year and peaked in fourth quarter, as global deleveraging and a lack of liquidity in global markets continued to distort asset prices, reducing the effectiveness of some risk mitigation techniques. Extreme market moves throughout the year caused a breakdown in the relationship between a number of trading positions and related hedges, particularly in credit and equity markets. Hedge funds experienced significant redemptions in the second half of the year as performance suffered. In the last four months of the year, central banks and governments reacted with increasing urgency to the escalating financial crisis with a series of measures which attempted to stabilize financial markets and support specific financial institutions.

Summary of key developments in 2008

The important developments that took place in 2008 with regard to risk management and control include:
–UBS incurred substantial writedowns on its risk positions and actively reduced exposures through sales. Significant

transactions included the sale in May of US residential mortgage-backed securities to a fund managed by BlackRock for proceeds of USD 15 billion and the agreement reached in October to transfer illiquid securities and other positions from UBS’s balance sheet to a fund owned and controlled by the SNB. From an originally agreed USD 60 billion, the size of the transaction has been reduced to USD 38.6 billion. UBS will continue its program of active risk reduction.
–UBS strengthened the roles and responsibilities of its Board of Directors (BoD) and executive management with regard to risk management and control. The BoD has been allocated responsibility for setting the highest-level portfolio and concentration risk measures and limits, while the Group Chief Executive Officer (Group CEO) is authorized to apply these measures and limits to specific transactions, positions and exposures. A new BoD risk committee was established to take on some of the responsibilities of the former Chairman’s Office.
–UBS integrated its approach to risk control by merging the market and credit risk functions of the Investment Bank into a single unit. A new Chief Risk Officer (CRO) was appointed in the Investment Bank to oversee credit risk and market risk on a combined basis as well as operational risk. Several other changes to senior personnel in the Investment Bank CRO organization were also made. The Corporate Center risk function was reorganized, resulting in the formation of a unit to focus on the control of portfolio and concentration risks and a combined function to determine methodologies to measure and assess market and credit risk. UBS also made a number of other changes to senior personnel in order to strengthen its risk management and control organization. These included


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Risk management and control
 
–Taking, managing and controlling risk is core to UBS’s businesses.
The aim is to achieve an appropriate balance between risk and return
–UBS’s risk management and control frameworks are based on business management accountability and independent risk control for credit, market, liquidity, funding and operational risks
–After its substantial losses in 2007, UBS is taking steps to ensure that the lessons learnt are embedded in its risk management and control framework

Developments in 2007

Many parts of UBS’s risk management and control framework were resilientin the face of 2007’s stressful market conditions

Credit risk:
    
 – the qualityappointments in the Investment Bank of Global Wealth Management & Business Banking’s lending portfolio remains higha new Chief Executive Officer and new heads of Fixed Income Currencies and Commodities.
  –In the third quarter, the Swiss Financial Market Supervisory Authority (FINMA, until 31 December 2008 Swiss Federal Banking Commission) concluded its investigation into the causes of the significant writedowns incurred by UBS. It confirmed UBS’s own conclusions in all material aspects. UBS developed a comprehensive and detailed plan to eliminate the weaknesses it identified, including those related to risk management and control (for example UBS’s market and credit risk functions had failed to identify certain significant portfolio and concentration risks, and there were weaknesses identified in risk systems and infrastructure). Delivery against this plan remains broadly in line with expectations and is a high priority for UBS.
(AUDITED)Risk management and control principles
 
 –the Investment Bank actively reduced credit risk where possible, in light of its exposure to the US residential mortgage market and in conjunction with its management of balance sheet and risk-weighted assets usage

Market risk:
–neither trading management nor market risk controllers foresaw the extreme developments in the previously deep and liquid US residential mortgage market, which revealed the tail risks in UBS’s portfolio
–with the accompanying drying up of liquidity in parts of the market, the size of UBS’s positions has proved excessive relative to the market

Recent enhancements to market risk management and control

Risk management:
Repositioning of the Investment Bank’s fixed income, currencies and commodities (FICC) business:

–creation of a workout group to ensure robust risk management of segregated legacy portfolios and develop orderly exit strategies
–refocusing remaining real estate-related activities towards intermediation of client flows and alignment to needs of investment banking and wealth management clients
–consolidation of flow credit trading management to improve risk aggregation and communication

Risk management and valuation models for products related to US residential mortgages have been refined and recalibrated to reflect current projections and market prices

Risk control:
–improvement of measurement of basis risk by increasing granularity of risk representation
–protection against extreme market moves through more extensive use of limits by asset class, based on gross values as well as risk sensitivities
–additional controls to highlight positions which are large relative to market depth
–revision of global stress testing approach to deliver a more diverse range of scenarios, which better differentiate between the source of a stress event and its contagion effect. Stress testing to consider liquidity as well as price sensitivity



4

Disclosed risk concentrations

US sub-prime residential mortgages:
–residential mortgage-backed securities (RMBS)
–super senior RMBS collateralized debt obligations (CDOs)
–warehouse and retained RMBS CDOs

US Alt-A residential mortgages:
–AAA-rated RMBS backed by first lien mortgages
–other

US commercial real estate exposures:
–trading assets
–real estate loans

US reference-linked note program

Monoline insurers

Auction rate certificates

Leveraged finance deals

Disclosure is detailed on pages 11-14 of this report

(BAR CHART)



(BAR CHART)

(BAR CHART)

5

Risk management
Risk management and control

Risk management and control

In 2007, UBS suffered significant losses as a result of positions in instruments related to US residential mortgage markets. This experience does not invalidateFive key principles underpin UBS’s risk management and risk control framework. These principles –are intended to allow the high level precepts remain valid – but it has demonstrated that the policies, measures and processes that implement the principles can be strengthened in some ways. UBS is taking steps to ensure that the lessons learned in 2007 are embedded in its risk management and control frameworks and in the structure and processes of its risk control organization.

Risk management and control principles

(Audited)

Taking, managing and controlling risk is core to UBS’s business. The aim is not, therefore, to eliminate all risks butfirm to achieve an appropriate balance between risk and return. UBS’s approach to risk management and control is based onThe five principles:

key principles are:
 –
–  
businessBusiness management is accountable for risk. Business management throughout the firm is accountablefor all the risks assumed or incurred by theirits business operations andoperations. This means that each business is responsible for the continuous and active management of its risk exposures, to ensure thatas well as for ensuring an appropriate balance between risk and return are balanced;return.
 –
–  an
independentIndependent control of risk. A control process independent of the businesses is an integral part of the firm’s structure – its goal isUBS’s risk management and control framework. Independent risk control aims to provide an objective check onassessment of risk-taking activities, and to supporthelping senior management in achieving appropriate alignment ofalign the interests of all stakeholders, including shareholders, clients and employees;employees.
 –
–  comprehensive,
Disclosure of risk. Comprehensive, transparent and objectiverisk disclosureto senior management, the Board of Directors (BoD), shareholders, regulators, rating agencies and other stakeholders is an essential component of the risk control process;process. This includes disclosure and periodic reporting to senior management, the BoD, shareholders, regulators, rating agencies and other stakeholders.
 –
–  
Earnings protection. UBS aims to protect earnings protectionis based onby limiting the scope for adverse variations in earningslosses and exposure to stress events – controlsevents. Controls and limits are applied at the level ofto individual exposures and portfolios in each business, and to risk in aggregate risks across all businesses, and to major risk types relative to the firm’s risk capacity (the level of risk UBS is capable of absorbing, based on its anticipated earnings power); and.
 –
–  
protectionReputation protection. Protection of UBS’s reputationultimately depends, among other things, on the effective management and control of the risks incurred in the course of its business.
The principles are All employees should make the foundation upon which the more detailed risk management and control frameworks are built. These frameworks comprise both qualitative elements, including policies and authorities, and quantitative components including limits. They are continually adapted and enhanced asprotection of UBS’s business and the market environment evolve.reputation an overriding concern.
   
(AUDITED)     The risk assessment and management performed by the BoD is in line with the statutory requirements and so is the related disclosure in this section.
 Risk management and control responsibilities
 

Key roles and responsibilities related to risk management and control are outlined below:

–The paceBoD has a strategic and supervisory function and is responsible for determining UBS’s fundamental approach to risk. The firm’s risk principles, risk appetite and risk capacity are also determined by the BoD. A newly established BoD risk committee oversees the firm’s risk profile and the implementation of innovationrisk management and control principles.
–The GEB is responsible for the implementation of risk management and control principles. Its newly established Executive Committee (EC) allocates the Group’s total risk capacity amongst the business divisions, controls the firm’s overall risk profile and approves the core risk policies.
–In line with UBS’s dual board structure, the authority to control risk is split between the BoD and the Group CEO. The BoD has risk control authority for portfolio and concentration limits, while the Group CEO has risk control authority for the firm’s transactions, positions and exposures. These risk control authorities, however, are partially delegated to the Group CRO and the CEOs of each business division. Risk officers in the business divisions may also be delegated certain risk control authorities depending on their experience and portfolio responsibility.
–The CEO of each business division is accountable for the results and risks of his or her division as well as maintaining an appropriate risk management structure.
–The Group CRO is responsible for the development and implementation of appropriate control frameworks for credit, market and operational risks with support from the business divisions through their CROs. In addition, risk functions within the Corporate Center support the control of portfolio and concentration risks, the determination of methodologies to measure and assess risk, and the development and operation of appropriate risk infrastructure (including reporting).
–The CROs of the business divisions are responsible for the independent control of risk in their respective business divisions.
–The Group CFO is responsible for ensuring that UBS and its business divisions disclose their financial markets makesperformance in a clear and transparent way, and that this challenging,reporting and never more so than when markets undergo major dislocations as they did in 2007. Many partsdisclosure meets all regulatory requirements and corporate governance standards. The Group CFO is also responsible for the implementation of UBS’s risk management and control frameworks were resilient in the face of these stressful conditions, but, in a limited area of the Investment Bank, some aspects of risk management assessments and the market risk control framework proved inadequate to identify certain risk concentrations and therefore to prevent losses in the extreme market conditions of the second half of 2007.

èThe steps UBS is taking to strengthen its risk management and control frameworks are described in the sidebar “Enhancements to market risk management and control” on pages 36–37 of this report

Risk management and control responsibilities

(Audited)

TheBoDhas a strategic and supervisory function. It is responsible for the firm’s fundamental approach to risk, for approving the risk principles and for determining risk capacity and risk appetite.

TheChairman’s Officeacts as the Risk Council of the BoD. In this capacity, it oversees the risk profile of the firm on behalf of the BoD and oversees implementation by the Group Executive Board (GEB) of the risk management and control principles.
TheGEB, together with its Risk Sub-Committee, is responsible for implementing the risk principles, including approval of core risk policies, and for managing the risk profile of UBS as a whole.
TheGroup Chief Risk Officer (Group CRO)has overall responsibility for the development, implementation and enforcement of UBS’s risk principles. The role is supported by the Group Chief Credit Officer (Group CCO), the Group Head of Market Risk and the Group Head of Operational Risk. Together they establish risk control frameworks, formulate risk policies and determine methodologies for measurement and assessment of risk. They are responsible for monitoring UBS’s risks and its risk / return profile, and have the authority to mandate risk reductions in the light of market conditions and UBS’s financial resources.
TheGroup Chief Financial Officer (Group CFO) is responsible for transparency in the financial performance of UBS and its business groups, including high-quality and timely reporting and disclosure in line with regulatory requirements, corporate governance standards and global best practice. The Group CFO is responsible for implementation of the risk principles in the areas of capital management, liquidity, funding and tax.


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Risk management and control

Corporate governance and risk control

(FLOW CHART)

1  For full listing of Board of Directors committees, refer to Annex C of the Organization Regulations of UBS AG.

(AUDITED)–TheGroup General Counselis responsible for implementing theUBS’s risk management and control principles in the areas of legal and compliance.



6

Risk management and control framework

(GRAPHIC)

(Audited)

TheChief Executive Officer (CEO)of each business group has overall responsibility for the business group and its management, and is accountable for its results and risks.

Within the business groups,business management is responsible for ensuring that risks are identified and managed. Therisk control functions are responsible for the implementation of independent control processes. They are empowered to enforce the risk principles and frameworks and corrective measures mandated by the Group CRO, the risk function heads and senior management.

All employees, but in particular those involved in risk decisions, must make UBS’s reputation an overriding concern. Responsibility for UBS’s reputation cannot be delegated or syndicated.
 
  

The riskRisk management and control process

framework
 
  

UBS’s risk management and control principles are implemented via a detailed risk management and control framework. The framework comprises both qualitative elements such as policies and authorities, and quantitative components including limits. With the risk management and controls principles as its basis, the framework is continually adapted and enhanced as UBS’s businesses and the market environment evolve.

There are five key elementscomponents in the independent risk control process:

framework:
  
–
riskRisk policies and authoritiesto implement the firm’s risk management and control principles reflecting(see above). These reflect UBS’s risk capacity and risk appetite, and consistent withmay be adapted to accommodate the firm’s evolving business requirements and international best practice. UBS’s risk policies are principle-based, specifying minimum requirements, high-level controls and standards, and broad authorities and responsibilitiesrequirements.
  –  they are never a substitute for the exercise of sound business judgment but, rather, guide and determine actions and decisions;
– riskRisk identificationthrough continuous monitoring of portfolios, assessment of risks in new businesses and complex or unusual transactions, and ongoing review of the overall risk profile in the light of market developments and external events;events and trends.
– riskRisk measurementusing methodologies and models which are independently verified and approved;approved by specialists in the CRO organization. Appropriate risk measures are applied to portfolios and risk concentrations. Risks that are not well reflected by standard measures are subject to additional controls, which may include pre-approval of transactions and specific risk limits. Models to quantify risk are generally developed by dedicated units within the business divisions and the Corporate Center. UBS requires that models addressing risks which could impact its books and records be subjected to independent verification and ongoing monitoring and control by the CRO organization.
– riskRisk controlby monitoring and enforcing compliance with risk principles, policies and limits, andas well as with regulatory requirements; andrequirements.
– Transparenttransparent risk reportingto stakeholders and to management at all levels, on all relevant aspects of the approved risk control framework, including limits.
UBS has control processes around the establishment of new businesses or significant changes to existing businesses, and the execution of complex or unusual transactions. These processes involve the business, and potentially all the control functions – risk control, legal, compliance, treasury, finance, tax and logistics, as necessary. The objective is to ensure that all critical elements are addressed across disciplines. A key aspect is whether transactions can be booked in a way that will permit appropriate ongoing risk management, measurement, control and reporting. These processes are being strengthened to reflect the lessons learned in 2007.
More generally, UBS is seeking ways to further integrate its credit and market risk structure in the Investment Bank to provide a more holistic view within and across asset classes.
èFor further details, refer This includes daily reports on certain portfolio risk measures to senior management. Monthly and quarterly reports are also prepared by the business divisions and provide the basis for consolidated reports to the sidebar “Enhancements to marketGroup CRO, EC, BoD risk managementcommittee and control” on pages 36–37the BoD as a whole. Periodic reporting is made publicly available for the benefit of this reportother stakeholders.


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Risk and treasury management

   
  

Risk categories

     UBS has control processes to deal with the establishment of new businesses or significant changes to existing businesses, and the execution of complex or unusual transactions. These processes are designed to subject the business or transaction in question to all the necessary control functions – risk control, legal, compliance, treasury, finance, tax and logistics – as necessary. A key aspect of this process is to ensure that transactions are booked in a way that permits appropriate ongoing risk management, measurement, control and reporting.
 
  

Risk categories

The risks faced by UBS’s businesses can be broken down into different categories.
     On the most fundamental level there areBusinessbusiness risksare arising from the commercial and economic risks associated with a choseninherent in any business strategy – itactivity. It is business management’s responsibility to respond to fundamental changes in the economic environment and the competitive landscape. Business risks are not subject to independent risk control but are factored into the firm’s strategic planning and budgeting process and the assessment of UBS’s risk capacityappetite and overall risk exposure.
The primary
Primary andoperational risks inherent in which result from particular business activities are, on the other hand, subject to independent risk control.

(Audited)

(AUDITED)		 
Primary risksare:
 
–
Credit risk– credit risk –the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations. It arises on traditional banking products, such as loans and commitments, and on derivatives and similar transactions. A form of credit risk also arises on securities and other obligations in tradable form. Their fair values are affected by changing expectations about the probability of failure to meet obligations as well as actual failures. Where these instruments are held in connection with a trading activity, UBS controls the risk as market risk;
 –
–  
marketMarket risk– the risk of loss resulting from changes in market variables of two broad types: generalvariables. These can be categorized as overall changes in market levels and rates (the “general” market risk factors and idiosyncratic components. Generalcomponent), or relative changes with respect to specific companies or instruments (often referred to as the “idiosyncratic” market risk factors include interest rates, exchange rates, equity market indices, commodity prices and general credit spreads. Idiosyncratic components are specific to individual names and affect the values of their securities and other obligations in tradable form, and derivatives referenced to those names.Investment positionsmay also be affected by market risk factors but they are often not liquid and are generally intended or required to be held beyond a normal trading horizon. For these reasons they are subject to a different control framework; andcomponent).
 –
–  
liquidityLiquidity and funding risk– the risk that UBS might be unable to meet its payment obligations when due or to borrow funds in the market on an unsecured or secured basis at an acceptable price to fund actual or proposed commitments.
 –
Operational riskis the risk of loss resulting from inadequate or failed internal processes, people and systems (for example failed IT systems, or fraud perpetrated by a UBS employee), or from external causes, whether deliberate, accidental or natural. Operational risks must be monitored, and are controlled and mitigated to the extent possible and desirable.
èThe control frameworks for these risk categories are described in the following sections of this report: “Credit risk”, “Market risk”, “Investment positions”, “Operational risk” and “Treasury and capital management”
   
èRefer to the “Market risk”, “Credit risk”, “Operational risk” and “Liquidity and funding management” sections of this report for a description of the control frameworks for these risk categories
 
(AUDITED) 

Quantitative controls

 

(Audited)

In principle, for risks that are quantifiable, UBS measuresquantifies potential loss atfuture losses using three levels –complementary risk measures: expected loss, statistical loss and stress loss.

   

(AUDITED)		 

Expected lossis the loss that is expected to arise on average over time in connection with an activity.activity (for example, expected number of loan defaults under normal economic conditions). It is an inherent cost of such activity, and must be factored into business plans. For financial instruments carried at fair value, expected loss is reflected in valuations and deducted directly from revenues.

Statistical loss measures, such as Value at Risk (“VaR”), estimate the amount by which actual losslosses in a portfolio cancould exceed the expected loss over a specified time horizon, measured to a specified level of confidence (probability).
Stress lossis the loss that could arise from extreme events, typically beyond the confidence level of the statistical loss estimate, and is normally a scenario-based measure.
     These risk measures are typically applied at a portfolio level. They are complemented by controls such as targeted stress measures for concentrated exposures and vulnerable portfolios, sub-portfolios or positions. Concentration controls complement portfolio risk measures. Controlscontrols are generally applied where UBS identifies that positions in different financial instruments or different portfolios are affected by changes in the same risk factor or group of correlated factors and there isfactors. Such concentrations can have the potential for significant loss in the event of extreme but plausible adverse developments. UBS’s concentration controls include credit limits for individual clients, counterpartiesIdentifying such developments and counterparty groups, ceilings on exposure to all but the best-rated countries, limits on potential loss from changes in general market risk factors, and thresholds on single name exposures in the trading portfolio.

èThese controls are explained in more detail in the “Credit risk” and “Market risk” sections of this report; an analysis of identified risk concentrations is provided in the “Risk concentrations” section of this report

(Audited)

The primary day-to-day quantitative controls are intended to govern normal periodic adverse results and prevent severe losses as a result of stress events. The identification of stress events and scenarios to which UBS is vulnerable and an assessment ofassessing their potential impact – in particular the danger of aggregated losses from a single event through concentrated exposures – is a critical component of the risk control process. Risk measures and controls rely on a combination of past experience, available external data, and judgments about likely future developments. Each new stress event is in some way unique, and thus no risk measure can provide complete protection against every possible scenario. Equally, each stress event offers new insights into ways of enhancing risk measures and controls, whether specific to an individual portfolio or risk type or, as is the case with the experience of 2007, a more generic extension from a particular experience, applying the lessons learned more broadly.

èThe measures UBS is taking in response to the losses incurred in 2007 are described in the sidebar “Enhancements to market risk management and control” on pages 36–37 of this report
   
èRefer to the “Risk concentrations”, section of this report for more information on risk exposures and identified risk concentrations
  

“Earnings-at-risk”Qualitative controls

Although measurement of risk is clearly important, not all risks are quantifiable. Due diligence, sound judgment, common sense and “Capital-at-risk”
an appreciation of a wide range of potential outcomes, including a willingness to challenge assumptions, are key components of a strong risk culture for both risk management and risk control. UBS has reinforced its qualitative risk controls through changes to its risk management and control organization, as described above in the summary of key developments in 2008 section, as well as through education programs.
Earnings-at-risk and capital-at-risk
To complement theits day-to-day operating controls, UBS has developed twothe concepts – “Earnings-at-risk”of “earnings-at-risk” and “Capital-at-risk” –“capital-at-risk”. These are general measures designed to assess aggregatethe firm’s overall ability to absorb the potential losses inherent across all its business lines and from all major sources in the current economic cycle.
Earnings-at-risk focuses on UBS’s ability to absorb losses through its current earnings. It is an integral part of the risk exposure acrosscontrol process and is monitored by the BoD, the BoD risk types and businesses against its financial resources. These measures



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assess UBS’s ability to absorb

committee and the potential loss inherent in its business in the current economic cycle, across all business lines, and from all major sources, including primary risks, operational risks and business risks.

Earnings-at-risk focuses on UBS’s ability to absorb losses from current earnings, while capital-at-risk considers more extreme losses and their potential to lead to a breach of minimum regulatory capital requirements or, ultimately, to insolvency. Capital-at-risk is an input to the capital management process.
Earnings-at-riskhas been an integral part of the risk control process since 2004 and is monitored by the GEB and Chairman’s Office as part of the regular quarterlyUBS’s monthly risk reporting cycle.reporting. The concept reflects UBS’s long-held view that the first and primary resource to absorb losses isshould be a firm’s earnings stream. Earnings-at-risk has three elements – risk capacity, risk exposure and risk appetite.
Risk capacity is the level of risk UBS considers itself capable of absorbing, based on its earnings power, without damage to its dividend paying ability, its strategic plans and, ultimately, its reputation and ongoing business viability. It is based on a combination of budgeted, / forecast and historical revenues and costs, adjusted for performance-relatedvariable compensation, and dividends and related taxes.
Risk exposure is an estimate of potential loss based on current and prospective risk limits and risk positions across major risk categories – primary risks, operational risk and business risk. It builds as far as possible on the statistical loss measures used in the day-to-day operating controls, extending their time horizons where necessary, with adjustments and supplements determined by management to reflect known coverage gaps. Correlations are taken into account when aggregating potential losses from risk positions in the various risk categories to obtain an overall estimate of the risk exposure. The risk exposure is assessed against a severe but plausible constellation of events over a one-year time horizon to a 95% confidence level – in effect to assess the impact of a “once in 20 years” event. The measure builds
Risk appetite is established by the BoD, who set an upper boundary on the statistical loss measures used in the day-to-day operating controls as far as possible, extending their time horizons where necessary, with adjustments and supplements determined by management to reflect known coverage gaps, measurement weaknesses and potential events. The results are combined to reflect potential correlations between the variousaggregate risk categories under the severe scenarios envisaged.
exposure. A comparison of risk exposure with risk capacity serves as a basis for determining the appropriateness ofif current or proposed risk limits are appropriate, and UBS’s ability to pay a cash dividend out of its current year earnings. It is also one of the tools available to management to guide decisions on adjustments to the risk profile. It also provides an indication of UBS’s ability to pay a cash dividend out of its current year earnings.
Risk appetite is established by the BoD, who set an upper bound on aggregate risk exposure in the form of a “risk exposure ceiling”. It is appropriate thatUBS’s risk exposure should be less thannot normally exceed its risk capacity but in the extremely difficult market conditions that confronted UBS in 2007,persisted throughout 2008, this relationship has not held: calculated risk exposure has increased and risk capacity has fallen beyond the levels predicted.held. For 20072008 as a whole, UBS recorded a large net loss, showing that the risk inherent in some positions had resulted in total risk exposureexposures remained greater than UBS’s risk capacity.
Risk exposure remained high as a result of a lack of liquidity in the markets for securitized assets to which UBS had significant exposures during a large part of the year, and due to significantly increased volatility levels in global markets.

The pattern of UBS’s lossesreduction in risk exposure that was unexpected – a limited area experiencing extreme writedowns while other areas maintained strong or even record performance. In these circumstances, there was less flexibility to adjust performance-related compensation than had previously been assumed. This,achieved through sales (including transactions with BlackRock and the actual losses experienced, reduced measuredSNB) in addition to the significant writedowns incurred on risk capacity.

On the other hand,positions, was offset by a simultaneous decrease of risk exposure increased. Major market and credit risk limits for partscapacity due to downward revisions of earnings expectations as a consequence of the Investment Bank not connected to US residential mortgage markets were adjusted in recognition of the reduced risk capacity but the reduction was more than offset by other factors: the standard market risk measures reported higher exposure as volatility increased, and because it had become apparent that some of these measures did not fully capture certain market risks, a much larger exposure estimate was used for these positions.
deteriorating economic outlook.
Measured risk exposure is neither an expected case nor a worst case scenario and it can be significantly affected by many external factors. Based on UBS’s assessment of the various dimensions of its portfolio of risks and their potential evolution – particularly in light of its US residential mortgage-related exposures –development, management has and will continue to reduce the firm’s risk exposure to achieve an appropriate level relative to its risk capacity, butcapacity. However, liquidity has been and remains quite poor in the markets for positions on which UBS has suffered major losses.
many markets. As with any model, Earnings-at-riskearnings-at-risk is heavily dependent on the many assumptions (including the chosen confidence level) and estimates that are necessarily entailed in determining the inputs and generating the output, not least because risk exposure includes a combination of statistical and more judgmental elements.estimates. Measured risk exposure must be understood in this context. Risk capacity and risk exposure are, furthermore, dynamic measures, affected significantly byDuring the external environment which will impact, for example, correlations between risk categories, the liquidity of UBS’s positions, the potential to reduce or hedge them at reasonable prices, and UBS’s funding costs. In the currentextremely difficult market conditions there isthat prevailed in 2008, a high degreenumber of uncertainty insupplementary measures were added to the statistical estimationassessment of risk exposure and a material element is now contributed by supplementary measures. Observableexposure. For example, observable data has beenwere supplemented by judgmental elements forjudgments in several areas including residential and commercial real estate, corporate and consumer credit and US municipal and student loan markets, and for potential defaults by monoline insurers.insurers and certain corporate loan portfolios. These estimates are subjective, not derived from statistical models but determined throughsupplementary measures were a result of extensive consultation between risk management and control professionals.professionals and contributed materially to the overall risk exposure that UBS recognized in 2008.
Capital-at-risk builds off considers more extreme losses and their potential to lead to a breach of minimum regulatory capital requirements or even insolvency. Capital-at-risk is an input to the Earnings-at-riskcapital management process, building on the earnings-at-risk concept but assessesassessing the potential for losses to exceed earnings capacity and erode capital. For Capital-at-risk,capital-at-risk, the analysis of risk exposureparallels that for earnings-at-risk but is essentially the same as for Earnings-at-risk but measured at two higher confidence levels – thelevels. The first is in relation


9

Risk management
Risk management and control

to UBS’s minimum regulatory capital requirement and is set at a 99% confidence level or a “once in 100 years event”. The second is in relation to the second in termssolvency of solvency.UBS and is set at a confidence level exceeding 99.9%.

The Capital-at-risk measurecapital-at-risk measures of aggregate risk exposure is anare important considerationconsiderations in the assessment of capital adequacy.
èFurther details are available in the “Capital management” section of this report

Like Earnings-at-risk, Capital-at-riskearnings-at-risk, capital-at-risk also relies on the day-to-day risk control measures and will potentially underestimate aggregate exposure if these measures do not fully capture the risks. As the underlying systems are enhanced – a process which is already in hand – the measures of aggregate risk exposure will also improve, and in the meantime supplementary estimates will continue to be incorporated. Furthermore, as a result of the events of 2007, UBS has gained a better understanding of the dynamics of the risk capacity and exposure measures and of the interplay between differ-

measures.

ent measures of capacity – in particular the relationship between risk management, treasury management and capital management measures.

Qualitative controls

Although measurement of risk is clearly important, quantification does not always tell the whole story, and not all risks are quantifiable. Due diligence, sound judgment, common sense and an appreciation of a wide range of potential outcomes – including a willingness to challenge assumptions–are key components of a strong risk culture for both risk management and risk control. UBS’s risk measures did not adequately identify risks in the US residential mortgage markets in 2007, and qualitative assessments equally did not fully appreciate the range of potential outcomes and the deep tail risk in the portfolio. UBS will learn from this experience and will strive to strengthen its risk culture accordingly.



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Risk concentrations

Risk and treasury management

Risk concentrations

   

(Audited)

 

Risk concentrations

(AUDITED)A concentration of risk exists wherewhere: (i) a position or group of positions in financial instruments areis affected by changes in the same risk factor or group of correlated factors,factors; and (ii) the exposure could, in the event of extremelarge but plausible adverse developments, result in significant losses.
     The identification of risk concentrations necessarily entailsrequires judgment aboutbecause potential future developments which cannot be predicted with certainty.certainty and may vary from period to period. In determining whether a risk concentration of risk exists, risk controllers considerUBS considers a number of elements, both individually and in combination. They includeThese elements include: the shared characteristics of the instruments; the size of the position;position or group of positions; the sensitivity of the position or group of positions to changes in risk factors and the volatility and correlations of those factors;factors. Also important in this assessment is the liquidity of the markets in whichwhere the instruments are traded and the availability and effectiveness of hedges, oras the value of a hedge instrument may not always move in line with the position being hedged. This is referred to as basis risk.
     UBS is exposed to price risk, basis risk, credit spread risk and default risk, other potentialidiosyncratic and correlation risks on both equities and fixed income inventories, and to country risk mitigants;in many of its lending and trading activities. Refer to the “Market risk”, “Credit risk” and “Operational risk” sections of this re-
(AUDITED)port for more information on the risk reward profilecategories to which UBS is exposed. UBS has also bought and may be required to buy securities and units from funds that UBS has sold to clients. Such purchases, especially of the positions.illiquid assets such as interests in hedge funds, could create a significant risk exposure for UBS.
     If a risk concentration is identified, it is assessed to determine whether it should be reduced or the risk should be mitigated, and the available means to do so.so are also evaluated. Identified risk concentrations are subject to increased monitoring.
Identified risk concentrations
Based on itsUBS’s assessment of theits portfolios and asset classes where there is thewith potential for material loss in a stress scenario relevant to today’sthe current environment, UBSthe firm believes that the various exposures shown below can be considered risk concentrations according to the abovementioned definition.
     UBS has significant lending, counterparty and country risk exposures that could sustain significant losses if the current economic conditions were to persist. Refer to the “Credit risk” section of this definition.
Therereport for more information.
     It is clearly a possibilitypossible that material losses could ariseoccur on asset classes, positions and positionshedges other than those disclosed in this section of this report, particularly if the correlations that emerge in a stressed environment differ markedly from those envisagedanticipated by UBS. The firm has, for example, exposures to other US asset-backed securities (ABS), non-US (both Swiss and non-Swiss) residential and commercial real estate and mortgages, non-US ABS, non-US reference linked note (RLN) programs, corporate collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) globally, and non-US structured credit programs. It is exposed to credit spread and default risk on its fixed income trading inventory, to idiosyncratic risk on both equities and fixed income inventory, and to emerging markets country risk in many of its trading

activities. It has derivatives transactions and a significant prime services business through which it is exposed to the hedge fund industry. If UBS decided to support a Global Asset Management fund or another investment sponsored by UBS it might, depending on the facts and circumstances, present risks that could increase to material levels. UBS does not currently foresee the likelihood of material losses on such positions but the possibility cannot be ruled out.
èThe amount and composition of UBS’s Swiss real estate exposure, which arises from domestic lending by Global Wealth Management & Business Banking, is discussed in the “Credit risk” section of this report

(Audited)

Exposure to US mortgage markets

The area of UBS most severely affected by the progressive market dislocation during 2007 is the fixed income, currencies and commodities (FICC) business of the Investment Bank, which has positions in securities related to the US residential mortgage market in a number of portfolios. The deterioration of this sector was more sudden and severe than any such event in recent market history. As a result, the securitized credit markets became illiquid and UBS’s positions, including securities with high credit ratings, lost substantial value. These difficulties persisted throughout third quarter 2007, with further deterioration in fourth quarter 2007 as increasing homeowner delinquencies fuelled market expectations of future writedowns. During fourth quarter, monoline insurers were adversely affected by their exposure to US residential mortgage-linked products.

èThe major losses incurred in 2007 on the positions disclosed below are detailed in Note 3 inFinancial Statements 2007

(Audited)

In the tables below, the size of the positions held is expressed as “net exposure”. Net exposures for each instrument class are the sum of the long and short positions where hedge effectiveness is considered to be high. UBS’s net exposures will increase



                       
(AUDITED) Exposure to monoline insurers, by rating1 
 USD million, unless otherwise stated 31.12.08 
           Fair value of CDSs      Fair value of CDSs 
           prior to credit  Credit valuation  after credit 
       Fair value of  valuation  adjustment on  valuation 
   Notional amount3  underlying CDOs4  adjustment5  31.12.08  adjustment 
   Column 1  Column 2  Column 3 (=1–2)  Column 4  Column 5 (=3–4) 
  
 
Credit protection on US RMBS CDOs2
  9,111   1,695   7,415   4,659   2,756 
  
 
of which: from monolines rated AAA to A
  23   12   11   4   6 
  
 
on US sub-prime residential mortgage-backed
securities (RMBS) CDOs high grade
  0   0   0   0   0 
  
 
on US sub-prime RMBS CDOs mezzanine
  0   0   0   0   0 
  
 
on other US RMBS CDOs
  23   12   11   4   6 
  
 
of which: from monolines rated BBB and below
  9,088   1,683   7,404   4,655   2,750 
  
 
on US sub-prime residential mortgage-backed
securities (RMBS) CDOs high grade
  6,222   952   5,269   2,961   2,308 
  
 
on US sub-prime RMBS CDOs mezzanine
  1,092   28   1,064   897   167 
  
 
on other US RMBS CDOs
  1,774   703   1,071   797   275 
  
 
Credit protection on other assets2
  12,424   7,509   4,914   2,335   2,579 
  
 
of which: from monolines rated AAA to A
  2,399   1,568   830   334   496 
  
 
of which: from monolines rated BBB and below
  10,025   5,941   4,084   2,001   2,083 
  
 
Total 31.12.08
  21,535   9,204   12,329   6,994   5,335 
  
 Total 31.12.07 (USD billion)  24.2   19.7   4.5   0.9   3.6 
  
 
1 Excludes the benefit of credit protection purchased from unrelated third parties.  2 Categorization based on the lowest insurance financial strength rating assigned by external rating agencies.  3 Represents gross notional amount of credit default swaps (CDSs) purchased as credit protection.  4 Collateralized debt obligations (CDOs).  5 Credit default swaps.

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Risk management and control

     

(Audited)

(AUDITED)		 US sub-prime residential mortgage exposureExposure to monoline insurers
 
Net exposures
USD billionas of 31.12.07
Total1
27.6
Of which
residential mortgage-backed securities (RMBS)14.2
super senior RMBS collateralized debt obligations (CDOs)2
13.3
warehouse and retained RMBS CDOs0.1
1 The equivalent position at 31 December 2006 was approximately USD 42.5 billion. At this date, positions were not analyzed in the form presented for 31 December 2007. The figure for 31 December 2006 has therefore been estimated based on securities position records, in order to supply the disclosure required by accounting standards.  2 Hedges provided by a single monoline insurer rated non-investment grade on 31 December 2007 were considered to be ineffective. Hedge ineffectiveness is treated as an addition to net exposure and no value is ascribed to the hedge.

11

Risk management
Risk concentrations

(Audited)

US Alt-A residential mortgage exposures
Net exposures
USD billionas of 31.12.07
Total1
26.6
Of which
AAA-rated RMBS backed by first lien mortgages21.2
other5.4
1 There is no industry standard definition of Alt-A. For 31 December 2007 the classification is based solely on FICO scores, which are a commonly used basis of categorization. The equivalent position at 31 December 2006 was approximately USD 37.6 billion. At this date, positions were not analyzed in the form presented for 31 December 2007. The figure for 31 December 2006 has therefore been estimated based on securities position records, in order to supply the disclosure required by accounting standards.

(Audited)

US commercial real estate exposures
Net exposures
USD billionas of 31.12.07
Trading assets1
3.6
Real estate loans2
4.1
1 Equivalent position at 31 December 2006 USD 6.5 billion.2Equivalent position at 31 December 2006 USD 3.7 billion.

               

(Audited)

 US reference-linked notes program exposure
  
   31.12.071 
 USD billion Assets held  Credit protection remaining  Net exposures 
   
  Market value  13.2   2.0   11.2 
   
  Of which            
   
  sub-prime and Alt-A  4.4   0.6   3.8 
   
  commercial mortgage-backed securities (CMBS)  3.6   0.6   3.0 
   
  other  5.2   0.8   4.4 
   
  
1 Equivalent positions at 31 December 2006 were: assets held USD 20.8 billion, of which sub-prime and Alt-A USD 9.9 billion, commercial mortgage-backed securities (CMBS) USD 3.7 billion; net exposure USD 17.2 billion, of which sub-prime and Alt-A USD 7.9 billion, CMBS USD 3.1 billion.

(Audited)

if hedges are considered to have become ineffective. From a risk management perspective, it is necessary to look beyond net exposure and consider important factors such as different vintages, delinquency rates, credit ratings and underlying mortgage pools, as well as differences in attachment points, timing of cash flows, control rights, other basis risks and counterparty risk.

Positions related to US residential sub-prime mortgages

On 31 December 2007, approximately one-quarter of residential mortgage backed securities (RMBS) referred to mortgage loans of 2005 or earlier vintages, while three-quarters referred to mortgage loans with 2006 and 2007 vintages. On 31 December 2007, the overwhelming majority of these securities were rated AAA and had an expected weighted average life of around three years.
At the same date, around one-third of UBS’s positions in super senior RMBS CDOs referred to mortgage loans of vintage 2005 or earlier. The other two-thirds referred to mortgage loans with 2006 and 2007 vintages. These securities have a range of subordination levels, maturities and rights in the event of default.

Positions related to US residential Alt-A mortgages

UBS’s Alt-A position can be divided into two categories. The first consists of AAA-rated RMBSs, backed by first lien mortgages, which amounted to USD 21.2 billion at 31 December

2007. The second category consists of other RMBSs, either non-AAA or RMBSs backed by second lien mortgages, and a small CDO exposure. These positions amounted to USD 5.4 billion at year-end 2007.

Positions related to US commercial real estate

UBS has exposure to US commercial real estate from two sources. The first is its trading inventory, which includes commercial mortgage-backed securities (CMBS) and loans held for securitization, amounting to USD 3.6 billion net exposure on 31 December 2007. Approximately 90% of the CMBS and loans are rated AA or better. These positions are exposed to credit spread movements and this risk is actively managed.
The second category consists of direct loans and investments totaling USD 4.1 billion on 31 December 2007, of which USD 400 million are classified as equity investments. These assets are diversified by sector and geography.

Positions related to the US reference-linked note program

The structure of UBS’s reference-linked note (RLN) program is explained in the sidebar opposite.
UBS has created ten US RLNs to date. The maximum permitted face values of the underlying asset pools total USD 16.9 billion face value, and UBS holds total credit protection of USD 3.8 billion (on average about 23%).



12

                       

(Audited)

 Exposure1 to monoline insurers, by rating
  
   31.12.07 
                   Fair value of CDSs 
            Fair value of CDSs5  Credit valuation  after credit 
        Fair value of  prior to credit valu-  adjustment in  valuation 
  USD billion Notional amount3  underlying CDOs4  ation adjustment  2007  adjustment 
  Credit protection bought from monoline insurers rated2 Column 1  Column 2  Column 3 (=1–2)  Column 4  Column 5 (=3–4) 
   
  
A or higher
                    
   
  on US sub-prime residential mortgage-backed securities (RMBS) CDOs high grade  7.1   4.7   2.4   0.2   2.2 
   
  on US sub-prime RMBS CDOs mezzanine  1.1   0.6   0.5   0.0   0.5 
   
  on other US RMBS CDO  1.0   0.8   0.2   0.0   0.2 
   
  
Total
  9.2   6.1   3.1   0.2   2.9 
   
  
Non-investment grade or unrated
                    
   
  on US sub-prime RMBS CDOs high grade  0.0   0.0   0.0   0.0   0.0 
   
  on US sub-prime RMBS CDOs mezzanine  1.6   1.16  0.5   0.4   0.1 
   
  on other US RMBS CDO  0.8   0.66  0.2   0.2   0.0 
   
  
Total
  2.4   1.76  0.7   0.6   0.1 
   
  
Credit protection on US RMBS CDO
  11.67  7.8   3.8   0.8   3.07
   
  
Credit protection on other than US RMBS CDOs
  12.67  11.9   0.7   0.1   0.67
   
  
1 Excludes the benefit of credit protection purchased from unrelated third parties.  2 Categorization based on the lowest insurance financial strength rating assigned by external rating agencies.  3 Represents gross notional amount of credit default swaps (CDSs) purchased as credit protection.  4 Collateralized debt obligations (CDOs).  5 Credit default swaps (CDSs).  6 Remaining credit protection from non-investment grade monoline of USD 1.2 billion on sub-prime residential mortgage-backed securities (RMBS) CDOs and USD 0.6 billion on other RMBS CDOs is considered ineffective.  7 As of 31 December 2006, the notional amount of CDSs on US RMBS CDOs bought from monoline insurers was USD 6.7 billion and on other exposures USD 7.8 billion. The fair values of these CDSs were zero at that date.

(Audited)

On 31 December 2007, the total fair value of assets held by UBS in connection with the US RLN program was USD 13.2 billion.

The original credit protection of USD 3.8 billion is still intact. Cumulative fair value gains of USD 1.8 billion have been recognized on this credit protection in the income statement up to 31 December 2007 and the fair value of the remaining credit protection at 31 December 2007 was USD 2 billion.

Exposure to monoline insurers

The vast majority of UBS’s direct exposure to the monoline sectorinsurers arises from over-the-counter (OTC) derivative contracts, – mainly credit default swaps (CDSs). Across all asset classes,, purchased to hedge specific positions. On 31 December 2008, the total fair value of CDS protection purchased from monoline insurers against these positions was USD 5.3 billion after cumulative credit valuation adjustments (CVAs) of USD 7.0 billion. The level of CVAs increased significantly in 2008 from USD 0.9 billion on 31 December 2007 was USD 3.6 billion, afterreflecting the progressive deterioration in both the fair value of the underlying CDOs and the credit valuation adjustmentsquality of USD 957 million (CHF 1,091 million) in 2007, all of which were taken in



the monoline insurers during the year.
      

(Audited)

Reference-linked note program
Reference-linked notes (RLN) are credit-linked notes issued by UBS referenced to an underlying pool of assets which are consolidated on UBS’s balance sheet. The assets consist of a variety of fixed income positions, including corporate bonds, collateralized loan obligations, residential mortgage-backed securities (RMBSs), commercial mortgage-backed securities, collateralized debt obligations (CDOs) and other asset-backed securities. The proceeds of the notes provide UBSExposure under CDS contracts with credit protection
against defined default events in the underlying asset pool up to a certain percentage. The notes have a maturity that is generally longer than the life of the instruments included in the underlying pool.
Through the lifetime of each RLN, UBS will realize losses if defaults in the underlying asset pool exceed the percentage protection, or if assets which do not ultimately default are sold at a loss.
Up to maturity, UBS is subject to revenue volatility as the RLN program is
classified as held for trading under International Financial Reporting Standards (IFRS) and is therefore carried at fair value. Since the inception of the US RLN program, the credit protection has been valued using approaches that UBS considers to be consistent with market standard approaches for tranched credit protection. UBS seeks to actively manage its risk exposures in connection with the US RLN program via derivative and cash market positions. This can also contribute to revenue volatility.

13

Risk management
Risk concentrations

(Audited)

Leveraged finance commitments
As of
USD billion31.12.071
Total
11.4
Of which old deals
5.6
funded3.2
Of which new deals
5.8
funded4.2
1 The total equivalent position at 31 December 2006 was total USD 12.3 billion, of which the funded component was USD 0.9 billion.

(Audited)

fourth quarter. Of these totals, USD 2.9 billion represents CDSs bought as protection for portfolios of US RMBS CDO, after credit valuation adjustments of USD 871 million (CHF 993 million) in fourth quarter.

Direct exposure to monoline insurers is calculated as the sum of the fair values of individual CDSs.CDSs after credit valuation adjustments. This, in turn, depends on the valuation of the instruments against which protection has been bought. A positive fair value, or a valuation gain, on the CDS is recognized if the fair value of the instrument it is intended to hedge is reduced.decreases.
(AUDITED)The table on the previous page shows the CDS protection bought from monoline insurers.insurers to hedge specific positions. It illustrates the notional amounts of the protection originally bought, the fair value of the underlying CDOsinstruments and the fair value of the CDSs both prior to and after credit valuation adjustments taken for these contractscontracts. Refer to “Note 27 Fair value of financial instruments” in 2007.
In fourth quarter 2007, UBS took creditthe financial statements of this report for more information on CVA valuation adjustments of USD 588 million (CHF 670 million) on CDSs on US RMBS CDOs purchased from a monoline insurer whose credit rating was downgraded to “non-investment grade”. These valuation adjustments reflect the degree to which UBS considers its claims against this monoline counterparty to be impaired. For risk management purposes, the underlying US RMBS CDOs are treatedand sensitivities. The CVA as unhedged onat 31 December 2007 and are included in2008 was adjusted to take into account the super senior RMBS CDO exposureanticipated economic impact of commuting trades with certain monolines.
     Other than credit protection bought on the positions detailed in the table on the previous page, 11.
UBS held direct derivative exposure to monolines of USD 437 million after CVAs of USD 499 million on 31 December 2008. In its trading portfolio, UBS also hashad indirect exposure to monoline insurers through “monoline wrapped” securities which they have guaranteed (“wrapped”) and which were issued primarily by US states and municipalities and US student loan programs and other asset-backed securities totaling approximately USD 11 billion on 31 December 2007 (approximately USD 8 billion on 31 December 2006).

programs. These


Exposure to auction rate securities

   
(AUDITED) 

Exposure to auction rate certificates

Auction rate certificates (ARCs)securities held by UBS
Auction rate securities (ARS) are long-term securities structured to allow frequent resettingreset of their coupon and, at the same time, the possibility for holders to redeemsell their investment in a periodic auction, giving ARCsthe securities some of the characteristics of a short-term instrument in normal market conditions. These are typically issued by municipal entities and student loan trusts, and may be wrapped by monoline insurers. Coupons paid on ARS are determined by an auction at the beginning of each interest reset period, the intention being to allow investors to earn a market rate of interest. In the past UBS

(AUDITED)acted as broker-dealer for certain ARS programs. Although it is not obligated to do so, UBS has in the past provided liquidity, from time to time, to these markets by submitting bids to ARS auctions and acquired ARS inventory in the first half of 2008 as a result. As described in the “Changes in 2008” section of UBS’s fourth quarter report, UBS and the Swiss National Bank (SNB) agreed that UBS’s student loan ARS positions will not be sold to the SNB fund. UBS’s inventory of student loan ARS was reclassified from “held for trading” to “loans and receivables” on 31 December 2008 and the student loan ARS repurchased from clients in fourth quarter 2008 were also
           
(AUDITED) Auction rate securities exposure 
   Net exposures on  Net exposures on 
   31.12.081,2 (USD million)  31.12.071 (USD billion) 
  
 US student loan auction rate securities  8,362   4.5 
  
 US municipal auction rate securities  451   1.4 
  
 US taxable auction preferred securities  782     
  
 US tax-exempt auction preferred securities  3,167     
  
 
Total
  12,763   5.9 
  
 
1 Net exposure represents market value of gross exposure net of short positions and hedges considered effective.  2 On 31 December 2008, USD 4.6 billion of the US student loan auction rate securities were monoline wrapped.
(AUDITED)classified as loans and receivables. Under their new classification, all student loan ARS positions held by UBS are subject to an impairment test which includes a detailed review of the quality of the underlying collateral. In fourth quarter 2008 UBS carried out a fundamental analysis of its student loan ARS inventory as well as client positions included in the buy-back program (refer to “Maximum exposure to client auction rate securities” on the next page for more information). The majority of the collateral backing the securities is backed by Federal Family Education Loan Program (FFELP) which is reinsured by the US Department of Education.
Auction preferred stocks (APS) are issued by closed-end mutual funds with an underlying portfolio of tax-exempt municipal bonds, common stock, preferred stock, or taxable debt. A closed-end fund is a publicly traded investment company registered under the Investment Company Act of 1940. The Investment Company Act of 1940 requires significant over-collateralization which benefits the APS holders.


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Risk and treasury management

(AUDITED)had a net market value of approximately USD 5.5 billion on 31 December 2008.

Exposure to leveraged finance deals
UBS defines leveraged finance deals according to internal credit ratings, which correspond with external corporate credit ratings of BB– or worse at the point of reporting and included underwritten positions that experienced a rating downgrade in 2008. The net exposure to leveraged finance commitments held by UBS was reduced significantly in 2008 to USD 4,009 million at 31 December 2008, of which USD 3,161 million was funded. Leveraged finance exposures on 31 December 2008 are shown net of cumulative gross writedowns and impairment charges, as well as effective hedges. Exposure to leveraged finance commitments, net of effective hedges, at 31 December 2007 was USD 11.4 billion, of which USD 7.4 billion was funded. The net exposure at this date, after deductions of cumulative gross markdowns, was USD 11 billion.
   

(AUDITED)		 

short-term instrument. They are typically issuedPreviously disclosed risk concentrations

In 2008, UBS significantly reduced its exposures to US residential and commercial real estate-related positions and the US reference-linked note (RLN) program. These reductions were achieved both through sales and writedowns as well as UBS’s agreement with the Swiss National Bank (SNB) in October 2008, which allows for the transfer of illiquid securities and other positions from UBS to a fund owned and controlled by US states, student loan programs, municipalities and related agencies and authorities, and may be wrapped by monoline insurers. An auction takes place at the beginning of each interest reset period to determine the coupon for that period.

UBS sponsors ARCs programs and although it is not obligated to do so, it has, from time to time, provided liquidity to the auction process by buying securities when there were not enough bids from investors.SNB. As a result of this agreement, UBS’s residual positions in these asset classes were no longer considered as concentrations of risk. Refer to the continued deterioration“Strategy and structure” section of this report for more information on the SNB transaction. UBS previously reported net exposures on 31 December 2007 to US sub-prime residential mortgages of USD 27.6 billion and to US Alt-A residential mortgages of USD 26.6 billion. At the same date UBS had net exposures to US commercial real estate of USD 7.7 billion and to US RLN of USD 11.2 billion. UBS also reported in third quarter 2008 net exposures of USD 6.1 billion on 30 June 2008 and USD 2.3 billion on 30 September 2008 to US prime residential mortgages.


(AUDITED)On 31 December 2008, UBS had student loan ARS positions with a carrying value totaling USD 8.4 billion, of which approximately 66% of the securities in the portfolio was backed by FFELP guaranteed collateral. On the same date, UBS had exposures to US auction preferred securities of USD 4.0 billion.

Maximum exposure to client auction rate securities
UBS has committed to restore liquidity to client holdings of ARS. This commitment is in line with previously announced agreements in principle with various US regulatory agencies, and the final settlements entered into
(AUDITED)with the Massachusetts Securities Division, the US Securities and Exchange Commission, and the New York Attorney General. On 7 October 2008, UBS filed a registration statement with the US Securities and Exchange Commission for Auction Rate Securities Rights necessary to offer clients the right to sell their ARS to UBS at par value during their buy-back period. The table below shows the maximum required repurchase amount at par of ARS, which would occur over various time periods between 31 October 2008 and 2 July 2012 according to client type and security. UBS anticipates that the maximum required repurchase
(AUDITED)amount is likely to decline over time as issuers refinance their debt obligations and UBS works with issuers, industry peers and US government officials on restructuring initiatives and redemption opportunities.
Approximately 88% of the USD 11.8 billion student loan ARS held by clients are backed by FFELP guaranteed collateral. Following the start of the buy-back program in fourth quarter 2008, UBS repurchased approximately USD 0.5 billion of US student loan ARS, USD 0.2 billion of US municipal ARS, USD 0.6 billion of US taxable auction preferred securities (APS) and USD 3.2 billion of US tax exempt APS from clients.


                   
(AUDITED) Client holdings: auction rate securities 
      Buy-back period 
   Par value of maximum required
purchase on 31.12.08		  Private clients  Institutional clients 
 USD million   31.10.08–4.1.11  2.1.09–4.1.11  30.6.10–2.7.12 
      
 US student loan auction rate securities  11,775   41   3,196   8,538 
  
 US municipal auction rate securities  2,041   144   1,589   308 
  
 US taxable auction preferred securities  1,659   161   1,202   296 
  
 US tax-exempt auction preferred securities  64   64   –   – 
  
 
Total
  15,539   410   5,987   9,142 
  

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Market risk

(AUDITED)Market risk is the risk of loss from changes in market variables. There are two broad categories of changes: general market risk factors and idiosyncratic components. General market risk factors are driven by macroeconomic, geopolitical and other market-wide considerations, independent of any instrument or single issuer or counterparty. They include such things as interest rates, the levels of equity market indices, exchange rates, commodities (including the price of energy and metals), as well as general credit spreads. The associated volatility of these risk factors and the correlations between them are also considered to be general market risk factors. Idiosyncratic components, on the other hand, are those that cannot be explained by general market moves. Broadly they are the elements of the prices of debt and equity instruments, as well as derivatives linked to them, which result from factors and events specific to individual companies or entities.

Sources of market risk

UBS takes both general and idiosyncratic market risks in its trading activities, and some non-trading businesses are also subject to general market risks.

Trading
Most of UBS’s trading activity is in the Investment Bank. During 2008 it included market-making, facilitation of client business and proprietary position taking in the cash and derivative markets for equities, fixed income, interest rates, foreign exchange, energy, metals and commodities. However, the Investment Bank is being
repositioned to focus primarily on client activities. In addition to the planned exit from municipals, proprietary trading and commodities (excluding precious metals) businesses, the Investment Bank will also largely exit its remaining real estate and securitization activities as well as the exotic structured products business. Refer to the “Investment Bank” section of this report for further information.
     The largest contributor to market risk within the Investment Bank has been the fixed income trading area. This business area has been progressively reducing risk positions. Those that remain relate to corporate and consumer credit markets, US municipal and student loan markets, as well as significantly reduced positions in asset-backed securities (including residential and commercial real estate).
     The relative contribution from a market risk perspective from equities, currencies and commodities has been modest compared to that seen in the fixed income trading area.
(AUDITED)     Trading businesses are subject to multiple market risk limits. Traders are required to manage their risks within these limits which in turn may involve employing hedging and risk
(AUDITED)mitigation strategies. These strategies can expose UBS to risk as the hedge instrument and the position being hedged may not always move in parallel (often referred to as “basis risk”). Senior management and risk controllers may also give instructions for risk to be reduced, even when limits are not exceeded, if particular positions or the general levels of exposure are considered inappropriate.
     The asset management and wealth management businesses carry small trading positions, principally to support client activity. The market risk from these positions is not material to UBS as a whole. UBS has also bought and may be required to buy securities and units from funds that UBS has sold to clients, which may be exposed to market risk. These positions are managed as investment positions. Refer to the “Equity investments” section below for further information.

Non-trading
In the Investment Bank, significant non-trading interest rate risk and all non-trading foreign exchange risks are captured, controlled and reported under the same risk management and control framework as trading risk.
     In the other business divisions, exposures to general market risk factors – primarily interest rates and exchange rates – also arise from non-trading activities (the largest items are the interest rate risks in Global Wealth Management & Business Banking). These market risks are generally transferred to the Investment Bank or Group Treasury, which manage the positions as part of their overall portfolios within their allocated limits.
     Market risks that are retained by the other business divisions are not significant relative to UBS’s overall risk, and exposures are subject to market risk measures and controls. With the exception of structural currency exposures which arise from Group Treasury’s management of consolidated capital, non-trading currency and commodity positions are subject to market risk regulatory capital and are therefore captured in VaR, although such positions do not contribute significantly to overall VaR.
     Group Treasury also assumes market risk from its funding, balance sheet and capital management responsibilities. For example, it finances non-monetary balance sheet items such as bank property and equity investments in associated companies. It also manages interest rate and foreign exchange risks resulting from the deployment of UBS’s consolidated equity, from structural foreign exchange positions and from non-Swiss franc revenues and costs. The market risk limits allocated to Group Treasury cover both the risks resulting from these responsibilities, and those transferred from other business divisions.
èRefer to the “Treasury management” section of this report for more information on Group Treasury’s risk management activities.


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(AUDITED)Measuring market risk

UBS has two major portfolio measures of market risk – VaR and stress loss – which are common to all business divisions. They are complemented by concentration and other supplementary limits on portfolios, sub-portfolios, asset classes or products for specific purposes where standard limits are not considered to provide comprehensive control. They may also be applied to complex products for which not all model input parameters are observable, and which thus create challenges for valuation and risk measurement. Operational limits can take a variety of forms including values (market, nominal or notional) or risk sensitivities (a measure of exposure to a given risk factor such as interest rates or credit spreads). These “operational limits” are intended to address concerns about the financial statusextent of monoline insurers,market liquidity, available operational capacity or valuation uncertainty, for example.
     Market risk limits are set for each of the demandbusiness divisions and Group Treasury. The limit framework in the Investment Bank is clearly more detailed than the other divisions reflecting the nature of the risks it takes and the capacity in which it takes risks.

Value at Risk (VaR)
VaR is a statistical estimate of potential loss from adverse movements in market risk factors. A single VaR model is used for ARC securities has been falling since fourth quarter 2007.both internal limit purposes and for determining market risk regulatory capital requirements. However, the population of risk positions included in the internal management VaR measure differs from the regulatory VaR measure, largely due to required exclusions from regulatory VaR. UBS’s internal management VaR includes interest rate risk from banking book positions and credit spread sensitivities related to counterparty exposures in the OTC derivatives portfolios (referred to as credit valuation adjustment – CVA). The inclusion of CVA in internal management VaR resulted in a material difference between this measure and the regulatory VaR. In firstthird quarter 2008, UBS changed its VaR disclosure and now presents both the regulatory and internal VaR.
     UBS measures VaR using a 10-day time horizon for regulatory and for internal purposes, while VaR backtesting is based on a 1-day time horizon (refer to the discussion on backtesting below for more information). VaR is calculated daily, based on end-of-day positions, and is not subsequently restated to reflect any retrospective adjustments to position valuations. VaR models are based on historical data and thus implicitly assume that market moves over the next 10 days or one day will follow a similar pattern to those that have occurred over 10-day and one-day periods in the past. UBS uses a look-back period of five years which generally captures the cyclical nature of financial markets but may be slow to react to periods of heightened volatility. UBS applies these historical changes directly to current positions, a method known as historical simulation.
(AUDITED)     Realized market losses can differ from those implied by the VaR measure for many reasons. All VaR measures are subject to limitations and must be interpreted accordingly. The losses experienced by UBS in 2008 highlight the limitations of VaR as an absolute measure of risk and reinforce the need for multiple views of risk exposure. As an essential complement to VaR, UBS applies stress scenarios reflecting different combinations of market moves intended to capture a range of potential stress events, and more targeted stress tests for concentrated exposures and vulnerable portfolios.

VaR developments in 2008
UBS made a number of auctions failedchanges to its VaR model in 2008, while also changing the scope of the regulatory and internal management VaR to better reflect the market has becomeunderlying risks. These changes significantly impacted the levels of VaR in 2008 compared with 2007, and are summarized below.
–From 1 January 2008, UBS changed its approach to internal risk control for illiquid leading to valuation uncertainties.
On 31 December 2007, UBS had ARCUS residential mortgage-related exposures: US sub-prime and Alt-A residential mortgage-backed securities (RMBS); super senior RMBS collateralized debt obligations (CDOs); the US reference-linked note program; and related hedges. These positions were excluded from internal management VaR and related limits with new controls were instituted directly over the volume of remaining positions in itsthese categories. As the regulatory capital treatment changed from trading inventory totaling USD 5.9 billion, of which USD 4.5 billion relatedbook to banking book, these positions were also excluded from regulatory capital VaR.
–In second quarter 2008, positions in student loans. USD 1.9 billionloan auction rate securities (ARS) were reclassified from trading book to banking book for regulatory capital purposes and excluded from regulatory capital VaR and backtesting due to the illiquidity of the student loans and USD 1.4 billion ofpositions.
–Enhancements to the other ARCs are “monoline wrapped” and are included in the indirect exposures to monolines of USD 11 billion detailed above. ThereVaR model were no material writedowns on ARCs securities up tointroduced at the end of 2007.
On 31 December 2006, June 2008 to increase the granularity of credit spread risk representation between single name CDS, several CDS indices and cash positions.
–UBS had ARCincreased the scope of its internal management VaR in third quarter 2008 to more accurately represent risk exposures and related hedges. Before these changes, certain credit hedges were included in VaR but the underlying credit exposures were not, resulting in an inconsistent treatment for risk monitoring and control. UBS therefore incorporated into its internal management VaR the impact of changes in credit spread sensitivities relating to counterparty exposures in its OTC derivatives portfolio. However, when computing regulatory capital these credit spread sensitivities are currently excluded. Refer to the “Value at Risk developments – treatment of CVA” sidebar in UBS’s third quarter 2008 financial report for more information.
–In fourth quarter 2008, UBS introduced additional granularity between certain cost of funding measures – Libor


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(AUDITED)and the overnight index swap (OIS) rate. In addition, UBS excluded positions totaling USD 1.0 billion, of which USD 0.3 billion related to student loans. USD 0.1 billionthe asset and liability management (ALM) portfolio from its regulatory VaR. The ALM desk is a treasury function within the Investment Bank which manages the funding and liquidity exposures of the student loansInvestment Bank and USD 0.7 billionis not managed with trading intent. The positions related to ALM this portfolio remain in internal management VaR.
–UBS continues to review the performance of its VaR implementation and will continue to enhance its VaR model to more accurately capture the relationships between market risks associated with certain risk positions, as well as the revenue of large market movements for some trading positions.
Backtesting
The accuracy of the other ARCsVaR model is monitored by backtesting, which compares the 1-day regulatory VaR calculated on trading portfolios at close of each business day with the actual revenues arising on those positions on the next business day. These backtesting revenues exclude non-trading components such as commissions and fees as well as estimated revenues from intraday trading. If backtesting revenues are negative and exceed the 1-day regulatory VaR, this results in a “backtesting exception”.
(AUDITED)     VaR based on a one-day horizon provides an estimate of the range of daily mark-to-market revenues on trading
(AUDITED)positions under normal market conditions similar to those experienced during the historical period used in the model. As UBS’s VaR model uses a look-back period of five years it does not respond quickly to periods of heightened volatility as experienced in 2008. When 1-day regulatory VaR is measured at a 99% confidence level, such an exception can be expected, on average, to occur on one in a hundred business days. More frequent backtesting exceptions may occur if market moves are greater than those seen in the look-back period, the frequency of large moves increases, or historical correlations and relationships between markets or variables break down (for example, in a period of extreme market disruption or an extreme stress event). Backtesting exceptions are also likely to arise if the way positions are represented in VaR does not adequately capture all their differentiating characteristics or the relationships between them.
     UBS experienced 50 backtesting exceptions in 2008 compared with 29 backtesting exceptions in 2007.
     The extreme market movements in a number of risk factors combined with a breakdown in traditional relationships between trading positions and their corresponding hedges (basis risk) were monoline wrapped.

the primary contributors to the backtesting exceptions experienced. These results highlight the limitations of VaR and illustrate the need for multiple views of risk exposure such as macro and more targeted stress scenarios. Refer to the “Stress loss” section below for more information. UBS will continue improving its VaR model to better


Investment Bank: backtesting revenue1 distribution

(GRAPH)

1 Backtesting revenues exclude non-trading revenues, such as commissions and fees, and revenues from intraday trading.

Investment Bank: analysis of negative backtesting revenues1

(GRAPH)

1 Backtesting revenues exclude non-trading revenues, such as commissions and fees, and revenues from intraday trading. Analysis for loss days only.



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Exposure to leveraged finance deals

capture all relevant risks in its trading portfolio.
     The first histogram on the previous page shows daily backtesting revenues in the Investment Bank for the whole of 2008. In the second histogram, the daily backtesting revenues are compared with the corresponding VaR over the same 12-month period for days when backtesting revenues were negative. A positive result in this histogram represents a loss less than VaR while a negative result represents a loss greater than VaR and therefore a backtesting exception.
     All backtesting exceptions and any exceptional revenues on the profit side of the VaR distribution are investigated. In
   
  

UBS has leveraged finance commitments entered into both beforeaddition all backtesting results are reported to senior business management, the Group CRO and after thebusiness division CROs.

(AUDITED)     Backtesting exceptions are also reported to internal and external auditors and relevant regulators.

Stress loss
The purpose of stress testing is to quantify exposure to extreme and unusual market dislocationmovements. UBS’s VaR measure is based on observed historical movements and correlations, whereas its stress loss measures are informed by past events but include forward looking elements. UBS’s objectives in July 2007. Transactions since this dislocation typically have pricing terms and covenant and credit protection that are more favorable to underwriters and investors than those entered into in the first half of 2007. On 31 December 2007, commitments entered into by UBS before the dislocation (“old deals”) amounted to USD 5.6 billion while those entered into subsequent to the dislocation (“new deals”) totaled USD 5.8 billion.



                                   
  Investment Bank: Value-at-Risk (10-day, 99% confidence, 5 years of historical data)1
   
    Year ended 31.12.08 Year ended 31.12.07
  CHF million Min.  Max.  Average  31.12.08  Min.  Max.  Average  31.12.07 
   
  
Risk type
                                
   
  Equities  82   185   131   117   147   415   209   164 
   
  Interest rates (including credit spreads)  217   659   397   544   260   858   450   548 
   
  Foreign exchange  12   58   28   30   9   73   28   21 
   
  Energy, metals and commodities  14   60   30   22   24   90   51   41 
   
  Diversification effect   2   2  (212)  (229)   2   2  (225)  (223)
   
  
Total regulatory VaR
  240   601   374   485   276   820   514   552 
   
  Diversification effect (%)          (36%)  (32%)          (30%)  (29%)
   
  
Management VaR1,3
  239   499   316   424   291   836   537   614 
   
  
1 From 1 January 2008, excludes US residential sub-prime and Alt-A mortgage-related exposures, super senior RMBS CDOs and the US reference-linked note program, and related hedges.  2 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.  3 Includes all positions subject to internal management VaR limits (including CVAs since 3Q 2008).
 
(AUDITED) UBS Group: Value-at-Risk (10-day, 99% confidence, 5 years of historical data)1
  
   Year ended 31.12.08 Year ended 31.12.07
 CHF million Min.  Max.  Average  31.12.08  Min.  Max.  Average  31.12.07 
  
 
Business divisions
                                
  
 
Investment Bank1
  240   601   374   485   276   820   514   552 
  
 Global Asset Management  1   7   2   6   2   10   4   3 
  
 Global Wealth Management & Business Banking  1   17   4   16   2   5   3   2 
  
 
Corporate Center2
  3   93   26   10   1   87   18   21 
  
 Diversification effect   3   3  (34)  (25)   3   3  (29)  (29)
  
 
Total regulatory VaR
  246   609   373   492   273   814   509   548 
  
 Diversification effect (%)          (8%)  (5%)          (5%)  (5%)
  
 
Management VaR1, 4
  246   521   320   459   288   833   535   588 
  
 
1 From 1 January 2008, excludes US residential sub-prime and Alt-A mortgage-related exposures, super senior RMBS CDOs and the US reference-linked note program, and related hedges.  2 The Corporate Center regulatory VaR only includes FX risk of Group Treasury.  3 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.  4 Includes all positions subject to internal management VaR limits (including CVAs since 3Q 2008).
 
  UBS: Value-at-Risk (1-day, 99% confidence, 5 years of historical data)1
  
    Year ended 31.12.08 Year ended 31.12.07
  CHF million   Min.  Max.  Average  31.12.08  Min.  Max.  Average  31.12.07 
   
  Investment Bank Regulatory VaR2  96   210   132   162   122   249   160   134 
     
    Management VaR3  101   171   125   160   124   253   164   149 
   
  
UBS
 Regulatory VaR2  97   207   133   163   122   249   159   136 
     
    Management VaR3  101   169   125   159   126   254   165   152 
   
  
1 10-day and 1-day Value at Risk (VaR) results are separately calculated from underlying positions and historical market moves. They cannot be inferred from each other. From 1 January 2008, excludes US residential sub-prime and Alt-A mortgage-related exposures, super senior RMBS CDOs and the US reference-linked note program, and related hedges.  2 Backtesting is based on regulatory capital VaR.  3 Includes all positions subject to internal management VaR limits (including CVAs since 3Q 2008).

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CreditRisk management and control

stress testing are to explore a wide range of possible outcomes, to understand vulnerabilities, and to provide a control framework that is comprehensive, transparent and responsive to changing market conditions.

In light of the continued dislocation in financial markets, UBS has placed less emphasis on statistical models such as VaR for the identification and management of risks and more on its stress-based measures, particularly to identify and manage those portfolios considered most at risk.
In 2008, UBS continued to enhance its Group-wide stress testing framework, with a particular focus on the development of a range of concrete, detailed forward-looking stress scenarios. Each scenario is based on the premise of a large initial shock occurring in one part of the financial markets, leading to a series of subsequent shocks in other markets. The scenario specifications are explicitly intended to capture the liquidity characteristics of different markets and positions. More frequent review of the range of scenarios in the context of macroeconomic risk analysis has also been initiated.
Standard scenarios are recalculated daily, allowing the development of stress loss exposure to be tracked and comparisons made from one period to the next. Stress loss limits approved by the Board of Directors are applied for all business divisions. Additional requirements for stress scenario calculation capabilities are being established for all Investment Bank trading systems.
Specific or “targeted” stress scenarios focusing on current concerns and vulnerabilities are also used. These measures are adapted to changing market conditions, as well as changes to UBS’s portfolios, sub-portfolios and positions. The choice of scenarios depends on management’s view of potential economic and market developments and their relevance to UBS’s risk exposures. Targeted stress measures also feed into UBS’s earnings-at-risk and capital-at-risk metrics.
The VaR results beyond the 99% confidence level are analyzed to better understand the potential risks of the portfolio and to help identify risk concentrations. The results of this analysis are valuable in their own right and can also be used to formulate position-centric stress tests. Although the standard scenarios incorporate generic elements of past market crises, more granular detail of specific historical events is provided by extreme VaR outcomes. The largest possible loss arising from UBS’s daily VaR simulation using five years of historical data is also monitored against limits as an additional stress scenario.
UBS applies country limits to all but the best-rated countries, covering market as well as credit risks. This includes applying appropriate stress loss limits to emerging markets in aggregate as well as to individual emerging market countries.
The market moves envisaged in stress scenarios, including targeted stress scenarios, might prove to be less than the

moves actually seen in a stress event, and actual events may differ significantly from those modeled in the stress scenarios.
     Most major financial institutions employ stress tests, but their approaches differ widely and there is no benchmark or industry standard in terms of scenarios or the way they are applied to an institution’s positions. The impact of a given stress scenario, even if measured in the same way across institutions, depends entirely on the make-up of each institution’s portfolio, and a scenario that is relevant to one institution may have no relevance to another. Comparisons of stress results between institutions can therefore be highly misleading, and for this reason UBS, like most of its peers, does not publish quantitative stress results.

Concentration limits and other controls

(AUDITED)UBS applies concentration limits on exposures to general market risk factors and to single name exposures. The limits take account of variations in price volatility and market depth and liquidity.
     In the Investment Bank, limits are placed on exposures to individual risk factors. They are applied to general market risk factors such as interest rates, credit spreads, equity indices and foreign exchange rates or groups of highly correlated factors based on assumed moves in the risk factors broadly consistent with the terms of UBS’s VaR measure. Each limit applies to exposures arising from all instrument types in all trading businesses of the Investment Bank. The assumed moves in risk factors are updated in line with the VaR historical time series and the limits are reviewed annually or as necessary to reflect market conditions.The effectiveness of risk factor limits in controlling concentrations of risk depends critically upon the way risk positions are represented. If long and short positions are considered to be sensitive to the same risk factor, potential gains and losses from changes in that factor are netted. The steps UBS has taken in 2008 to enhance the granularity of risk representation in its VaR measure are also relevant to its risk concentration controls as underlying relationships between risk factors are more clearly represented in VaR exposures.
     UBS also applies volume-based limits to certain portfolios and sub-portfolios. Additionally, UBS measures and limits the potential impact of increased default rates on the value of its portfolio of single name exposures.
     The Investment Bank carries exposure to single names, and therefore to event risk (including default risk). This risk is measured across all relevant instruments (debt and equity in physical form and from forwards, options, default swaps and other derivatives including basket securities) as the aggregate change in value resulting from an event affecting a single name or group. The maximum amount that could be lost if all underlying debt and equity of each name became worthless is also tracked. Positions are controlled in the con-


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text of the liquidity of the market in which they are traded, and all material positions are monitored in light of changing market conditions and information on individual names.
     This form of single name exposure measure is most appropriate to corporate issuers, financial institutions and other entities, the value of whose equity and debt instruments is dependent on their own assets, liabilities and capital resources.
(AUDITED)     Exposures arising from security underwriting commitments are subject to the same measures and controls as secondary market positions. There are also governance processes for the commitments themselves, generally including review by a commitment committee with representation from business and control functions. Underwriting commitments are approved under specific delegated risk management and risk control authorities.

Other applications of market risk measures

Market risk measurement tools may be selectively applied to portfolios for which the primary controls are in other forms. VaR can, for example, provide additional insight into the sensitivity of investment positions to market risk factors, even though some of the assumptions of VaR – in particular the relatively short time horizon – may not be representative of their full risk. The results can be used by business management and risk controllers for information purposes or to trigger action or review.

Equity investments

(AUDITED)UBS makes investments for a variety of purposes. Some are made for revenue generation or as part of strategic initiatives, while others, such as exchange and clearing house memberships, are held in support of UBS’s business activities. Investments may also be made in funds managed by UBS to fund or “seed” them at inception or to demonstrate alignment of UBS’s interests with those of investors. UBS has also bought and may be required to buy securities and units from funds that UBS has sold to clients. These include purchases of illiquid assets such as interests in hedge funds.
     UBS may make direct investments in a variety of entities or buy equity holdings in both listed and unlisted companies. Such investments tend to be illiquid. The fair values of equity investments are generally dominated by factors specific to the individual stocks, and the correlation of individual holdings to equity indices varies. Furthermore, equity investments are generally intended to be held for the medium- or long-term and may be subject to lock-up agreements. For these reasons, they are not directly controlled using the market risk measures applied to trading activities. They are, however, subject to controls, including pre-approval of new investments by business management and risk control, and regu-
(AUDITED)lar monitoring and reporting. They are also included in earnings-at-risk and capital-at-risk metrics.
     Where investments are made as part of an ongoing business they are also subject to standard controls, including portfolio and concentration limits. Seed money and co-investments in UBS-managed funds made by Global Asset Management are, for example, subject to a portfolio limit. All investments must be explained and justified, approved according to delegated authorities, and monitored and reported to senior management throughout their life.
     Private equity positions were, in the past, the major component of equity investments, but the portfolio has been managed down over recent years.
     Under International Financial Reporting Standards (IFRS), equity investments may be classified as “financial investments available-for-sale”, “financial assets designated at fair value through profit or loss” or “investments in associates”.

Composition of equity investments
At 31 December 2008, UBS held equity investments totaling CHF 3,653 million, of which CHF 1,681 million were classified as “financial investments available-for-sale”, CHF 1,079 million as “financial assets designated at fair value” and CHF 892 million as “investments in associates”. Within “financial investments available-for-sale”, CHF 258 million are listed equities.
     At 31 December 2007, UBS held equity investments totaling CHF 7,690 million, of which CHF 3,583 million were classified as “financial investments available-for-sale”, CHF 2,128 million as “financial assets designated at fair value” and CHF 1,979 million as “investments in associates”. Within “financial investments available-for-sale”, CHF 1,865 million are listed equities.
     In December 2008, UBS disposed of its equity stake in Bank of China through a placing of approximately 3.4 billion Bank of China Limited H-shares to institutional investors for a cash consideration of approximately CHF 887 million (HKD 6,519 million). UBS acquired the shares in 2005 in preparation for Bank of China’s IPO to the international market. The investment in Bank of China was accounted for as a “financial investment available-for-sale”. The disposal resulted in a gain of approximately CHF 360 million.
     Within the total of CHF 1,079 million “financial assets designated at fair value”, CHF 1,058 million represents the assets of trust entities associated with employee compensation schemes. They are broadly offset by liabilities to plan participants included in “other liabilities”. The equivalent positions at 31 December 2007 amounted to CHF 1,788 million.
èRefer to “Note 34 Significant subsidiaries and associates” in the financial statements of this report for details of significant associates


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Credit risk

   

(Audited)

(AUDITED)		 

Credit risk is the risk of financial loss resulting from failure by a client or counterparty to meet its contractual obligations to UBS. This can be caused by factors directly related to the counterparty, such as business or management problems, or from failures in the settlement process, for example on foreign exchange transactions where UBS has honored its obligation but the counterparty fails to deliver the counter-value (settlement risk)(“settlement risk”). Alternatively, it can be triggered by economic or political difficulties in the country in which the counterparty or issuer of the security is based or where it has substantial assets (country risk)(“country risk”).



Sources of credit risk



Credit risk is inherent in traditional banking products –such as loans, commitments to lend and contingent liabilities such as(for example, letters of credit – andcredit) as well as in “traded products” –: derivative contracts such as forwards, swaps and options,options; repurchase agreements (repos and reverse repos),; and securities borrowing and lending transactions. The risk control processes applied to these products are fundamentally the same, although the accounting treatment varies, –as they can be carried at amortized cost or fair value, depending on the type of instrument and, in some cases, the nature of the exposure.

Many of the business activities of Global Wealth Management & Business Banking and the Investment Bank createexpose UBS to credit risk.risk, while credit risk exposure is a less material concern to Global Asset Management. Global Wealth Management & Business Banking offers private and corporate customers in Switzerland and wealth management clients internationally a variety of credit products, although the majority of credit risks are well secured againstby financial collateral or other assets. The Investment Bank gives corporate, institutional, intermediary and alternative asset management clients access to thea full range of credit and capital markets instruments across all product classes, and engages with other professional counterparties in its trading and risk management activities.



Credit risk control organization and governance

Effective credit risk control is critical to UBS’s safety and soundness. The credit risk control framework is based on the risk management and control principles, supported by credit policies. It has both qualitative and quantitative elements. UBS has established processes to ensure that risks are identified, assessed, pre-approved where necessary, and continuously monitored and reported. Measures and limits are applied to the credit risk of individual counterparties and counterparty groups, and the quality and diversification of portfolios and sub-portfolios are assessed, a key objective being to control risk concentrations.

The Group Chief Credit Officer (Group CCO), who reports to the Group Chief Risk Officer (Group CRO), is responsible for implementing and maintaining this framework, supported by independent credit risk control units in the business groups who report to the Group CCO functionally and who continuously monitor and control credit risk. Their responsibilities include assessing the creditworthiness of individual counterparties and the adequacy and effectiveness of any security or credit hedges, and evaluating credit risk in portfolios, sub-portfolios and other aggregations, including country risk.

The Chairman’s Office delegates authority to the Group Executive Board (GEB) and approves delegations by the GEB ad personam to the Group CCO and the business group CCOs. Further delegations are made to credit officers in the business groups. The level of credit authority delegated to holders depends on their seniority and experience and varies according to the quality of the counterparty and any associated security. These authorities encompass all aspects of the approval of credit risk, including settlement risk, and the determination of allowances, provisions and credit valuation adjustments for any impaired claims.

Credit risk control



Limits and controls

The primary objective of quantitative controls is to avoid, as far as possible, undue credit risk concentrations.
Concentrations of credit risk existcan arise if clients are engaged in similar activities, or are located in the same geographical region or have comparable economic characteristics such that their ability to meet contractual obligations would be similarly affected by changes in economic, political or other conditions. To avoid, as far as possible, undue credit risk concentrations, UBS has established limits and operational controls to constrain credit exposure to individual counterparties
(AUDITED)and counterparty groupsgroups. Where appropriate, it has also established industry and country limits and guidelines at portfolio and sub-portfolio levels, wherever risk concentrations are identified, including exposure to specific industries and countries, where appropriate.
levels.
At the level of the individual counterparty and counterpartycounter-party group, credit officers establish limits for all types ofare established covering banking and traded products exposure, which coverproducts. These limits put constraints not only on the current outstanding amount and replacement values of contractual obligations but also on contingent commitments and the potential future developmentexposure of exposure on traded products. Credit engagements may not be entered into without the appropriate approvals and limits.
Limits are applied in a variety of formsadherence to portfolios or sectors, where necessary, to restrict risk concentrations or areas of higher risk, or to control the rate of portfolio growth. In particular for higher risk engagements, such as the Investment

these limits.


15

Risk management
Credit risk

      

(Audited)

Bank’s leveraged lendingIn the Investment Bank, at a portfolio the impact of variations in default rates and asset values is assessed using stress scenarios, taking into account risk concentrations. Stress loss limits are applied to portfolios where considered necessary, including limits on exposures to all but the best-rated countries.

In establishing these controls, including the related authorities and approval processes,level a distinction is made between those exposures which are to be held to maturity (“take and hold” exposures)hold exposures”) and those which will be held only inover the short term, pending distribution or risk transfer (“temporary exposures”). An exampleMost limits and operational controls constrain the credit exposure of temporary exposure is syndicateda sub-portfolio, but UBS also has limits that restrict the credit risk of a whole portfolio using credit risk measures such as stress loss, as described below. Such limits are applied for instance to the Investment Bank’s leveraged lending portfolio, where the bulkimpact of the original commitment will be distributed to other financial institutions or investors. For all exposures, the credit qualityvariations in default rates and cash flow generation capacity of the counterparty over the full term of the obligation are at the heart of the credit assessment. For temporary exposures,asset prices is considered, together with market liquidity and UBS’s distribution capabilities are also key considerations in the approval process.

capabilities.

Risk mitigation

UBS employs risk mitigation techniques for most of its credit portfolios, typically by taking security in the form of financial
Taking collateral (cash or marketable securities) or other assets, or through risk transfers or the purchase of credit protection.
Taking security is the most common form of risk mitigation. Valuation standardsway to mitigate credit risk. Loans to wealth management clients (“lombard lending”) are applied in assessing the mitigating effect of security. In lending to affluent private clients (lombard lending)made against the pledge of sufficient eligible marketable securities or cashcash. For real estate financing, a mortgage over the relevant property is required.taken to secure the claim. The Investment Bank also takes financial collateral in the form of marketable securities in much of its over-the-counter (OTC) derivatives activityactivities and in its securities financing business (securities lending /and borrowing andor repurchase /and reverse repurchase) business. Where financial. To ensure with a high degree of certainty that the collateral is taken,value will cover the exposure, discounts (“haircuts”) are generally applied to the current market value, reflectingvalue. These reflect the quality, liquidity, volatility – and, in some cases, the complexity – of the individual instruments. Exposures and collateral positionsvalues are continuously monitored, and margin calls andor close-out procedures are enforced, when the market value of collateral falls below a predefined levels relative to the exposure. Collateral concentrationstrigger level. Concentrations within individual clientcollateral portfolios and across clients are also monitored where relevant and may affect the discount applied to a specific collateral. For property financing, a mortgage over the relevant property is taken to secure the claim, considering the ability of the borrower to service the debt from income, and in accordance with UBS’s policy on loan to value ratios.
collateral pool.
     The OTC derivatives business is generally conducted almost without exception under bilateral master agreements, which generallytypically allow for the close outclose-out and netting of all transactions in the event of default by the other party.default. UBS has also entered intohas two-way collateral agreements with all major market participants, under which either party can be


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Risk and treasury management

(AUDITED)required to provide collateral in the form of cash or marketable securities when exposure exceeds a pre-definedpredefined level. The OTC derivatives business with lower-rat-

edlower-rated counterparties is generally conducted under one-way collateral agreements where only the counterparty provides collateralis required to UBS. Under these agreements, onlyprovide UBS with cash or very liquid collateral. For certain counterparties, like hedge funds, UBS may use two-way collateral is accepted.agreements. UBS has standardspolicies for netting and collateral agreements, including assurancerequiring a legal opinion that contracts are legally enforceable in the case of insolvency in the relevant jurisdictions.

UBS has
     The Investment Bank also made use ofutilizes credit hedging into actively manage the form ofcredit risk transfers, securitizations and purchase of credit protection, as part of its active managementportfolios, with the goal of credit risk to reduce concentrated exposures toreducing concentrations in individual names, or sectors or in specific portfolios. MostThe Investment Bank utilizes a number of this creditdifferent hedging is achieved by transferring underlying credit risk to high-grade market counterparties usingmeasures which include single name credit default swaps (CDS), index CDS, credit linked notes and total return swaps. Single name CDS are generally executed under bilateral netting and collateral agreements, and generally also under collateral agreements. Credit-pooling vehicleswith high-grade market counterparties. For the purposes of monitoring against limits, UBS observes strict standards. Credit hedges are also used to transfer risk to outside investors via credit-linked notes. In the internal risk reporting processes, the gross exposure before hedging as well as net exposure is tracked. The benefit of credit hedges is only recognized in creditas a risk measuresmitigant if they are single name credit default swaps, total return swaps or credit linked notes. They must cover futurepotential credit exposure increases to a high level of confidence, and offer protection against a wide range of credit events, including failure to pay, bankruptcy and insolvency, restructuring and repudiation, and moratorium. Proxyevents. Other credit risk mitigants such as proxy hedges (credit protection on a correlated but different but correlated name) andor index or macro hedgesCDS are not recognized.
recognized for the purposes of monitoring against limits.
     Buying credit protection creates credit exposure against the hedge provider. The exposure to credit protection providers and thus the effectiveness of credit protection bought from a counterparty depends on the ability of the counterparty to meet any claim. Exposure to credit protection providershedges is monitored as part of the overall credit exposure.exposure against the relevant names. Where there is significant correlation between the counterparty and the hedge provider (so-called “wrong-way risk”), UBS’s policy is not to recognize any benefit in credit risk measures.

 
  

Reporting

An essential element of the credit risk control process is transparent and objective risk reporting.
The credit risk control units in the business groups are responsible for risk reporting to business group management covering both exposure to individual counterparties from all products and activities, and portfolio risks. They also supply information to a central unit under the Group CCO, which provides consolidated reports of counterparty and portfolio risk and country risk to senior management, the GEB, the Chairman’s Office, the Board of Directors (BoD) and regulators where applicable.

Credit risk measurement



Credit risk measurement is an essential component of the credit risk control framework. The measurement of credit exposure from a loan which is fully drawn is straightforward. By contrast, the estimation of credit exposure on a traded product, the value of which varies with changes in market variables, interim cash flows and the passage of time, is more complex and requires the use of models. The assessment of



16

portfolio risk also entails estimations of the likelihood of defaults occurring, of the associated loss ratios if they do, and of default correlations between counterparties.

UBS has developed tools to support the quantification of the credit risk of individual counterparties, applying the three generally accepted parameters: probability of default, loss givenexposure at default and exposure atloss given default. Models are also used to derive the portfolio risk measures – expected loss, statistical loss and stress loss.
Models are generally developed by dedicated units within the business groups. In line with UBS’s internal governance standards and the requirements of the new regulatory capital framework (Basel II), the development and maintenance of models conforms to global standards, and the models and their components are subject to independent verification by a specialist team in Corporate Center before implementation. The model owners in the business groups are responsible for monitoring performance once the models are deployed. Models must comply with established measurement standards to ensure consistency and allow meaningful aggregation of credit risk across all businesses.

   

(Audited)

(AUDITED)		 

Credit risk parameters


Three parameters are used to measure and control individual counterparty credit risk:

 –
–  the
The“probability of default”,defaultwhich is an estimate of the likelihood of the client or counterparty defaulting on its contractual obligations. This probability is assessed using rating tools tailored to the various categories of counter-parties. Theycounterparties. These categories are also calibrated to the UBS 15-class Masterscale in order(UBS’s proprietary credit rating scale) to ensure consistency in the quantification of default probabilities across all counterparties. Besides their use for credit risk measurement, ratings are an important element in setting credit risk authorities;approval authorities.
 
–  the likely recovery ratio on the defaulted claims, which is a function of the type of counterparty and any credit mitigation or support (such as security or guarantee), from which the“loss given default”is determined;
 
–Exposure at default is derived from the current exposure to the counterparty and its possible future development, from which potential“exposure at default”is derived.development. For traded products such as OTC derivatives, the exposure at default is not a definitive number – it must be derived by modeling the range of possible outcomes. In measuring individual counterparty exposure against credit limits, UBS considers the “maximummaximum likely exposure”exposure measured to a high confidence level over the full life of all outstanding obligations, whereas inobligations. However, when aggregating exposures to different counter-partiescounterparties for portfolio risk measurement, the expected exposure to each counterparty at a given time horizon (usually one year) generated by the same model is used.
–Theloss given default is determined based on the likely recovery rate of defaulted claims, which is a function of the type of counterparty and any credit mitigation or support (such as security or guarantee).
      These parameters are the basis for most internal measures of credit risk. They are also key inputs to the regulatory capital calculation under the Advancedadvanced Internal Rating Based

approach of the new Basel Capital Accord (Basel II), which UBS has adopted from 1 January 2008, when the Accordaccord came into force.

  
èForRefer to the discussion on rating system design and estimation of credit risk parameters below for a more detailed description of the three credit risk parameters discussed above please refer to “Rating system design and estimation of credit risk parameters” on pages 29–30 of this report
 
  

Expected loss


Credit losses must be expectedanticipated as an inherent cost of doing business. But the occurrence of credit losses is erratic in both timing and amount, and those losses that do arise usually relate to transactions entered into in previous accounting periods. In order to reflect the fact that future credit losses are implicit in today’s portfolio, UBS uses the concept of “expected loss”.
Expected credit loss is a statistically basedstatistical concept which is used to estimate the annual costs that are expected to arise, on average, from positions in the current credit portfolio that become impaired. The expected loss for a given credit facility is a function of the three components described above – probabilityabove: proba-


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Risk and treasury management
Risk management and control

bility of default, loss givenexposure at default and exposure atloss given default. The expected loss figures for individual counterparties are aggregated to derive the expected credit loss for the whole portfolio.
Expected loss is the foundation ofbasis for quantifying credit risk quantification in all portfolios. It is an input used to the valuationvalue or pricing ofprice some products, and the determinant of credit risk costs charged to the business in the management accounts, which differs from the credit loss expense reported under International Financial Reporting Standards (IFRS).products. Expected loss is also the starting point for the measurement of portfolio statistical loss and stress loss.

èFor more information on credit loss expenses, please refer to pages 28–29 of this report and Note 2a inFinancial Statements 2007
   
èRefer to the discussion on credit loss expense below for more information
  


Statistical loss


UBS uses a statistical model – Creditcredit Value at Risk (“Creditcredit VaR”) – to estimate the largest potential loss on the portfolio over one year measured to a specified level of confidence. The shape of the modeled loss distribution is driven by systematic default relationships amongst counterparties within and between segments. The results of this analysis provide an indication of the level of risk in the portfolio, and the way it develops over time. It is also an important input to the overall risk measures Earnings-at-riskearnings-at-risk and Capital-at-risk.

capital-at-risk.
  
è“Earnings-at-risk”Refer to the discussion on earnings-at-risk and “Capital-at-risk” are describedcapital-at-risk in the “Risk management and control” section of this report for more information
   
  

Stress loss


Stress loss is a scenario-based measure which complements the statistical model. It is used to assess potential loss in various extreme but plausible scenarios in which it is assumed that one or more of the three key credit risk parameters deteriorates substantially according to a pattern that is



17

Risk management
Credit risk

typical for the chosen scenario. Stress tests are run regularly, and on an ad hoc basis as necessary, in order to identify adverse portfolio situations, particularly risk concentrations. All scenario results are monitored, and for certain portfolios and segments, stress loss is subject to limits.

(Audited)



Composition of credit risk (Group)

– UBS Group

(AUDITED) 

The measures of credit risk used by UBS may differ depending on the purpose for which exposures are aggregated –aggregated: financial accounting under IFRS,the International Financial Reporting Standards (IFRS); determination of regulatory capital,capital; or UBS’s own internal management view i.e.(i.e. the wayeconomic risk of the credit portfolio which reflects how that risk is managed.managed by UBS). The table “Exposure to credit risk – UBS Group” below startsbegins with the IFRS view (“maximum exposure to credit risk”), and shows the adjustments maderequired to reachreconcile to the internal management view (“grossCredit exposure before hedges”).



                               
(AUDITED) Exposure to credit risk – UBS Group 
 For the year ended 
   31.12.2008  31.12.2007 
   IFRS1 reported  Adjustments:          IFRS1 reported       
   values  Maximum  Credit  Credit  values  Credit  Credit 
   Maximum  exposure  exposure  exposure  Maximum  exposure  exposure 
   exposure to  to internal  before  after  exposure to  before  after 
 CHF million credit risk2  risk view  hedges3  hedges4  credit risk2  hedges3  hedges4 
 Balances with central banks  29,156       29,156       16,433   16,434     
  
 Due from banks  64,451   (45,419)   19,032       60,907   26,304     
  
 Loans  340,308   (68,627)   271,681       335,864   285,093     
  
 Contingent claims  19,699   (807)   18,892       20,824   20,347     
  
 Undrawn irrevocable credit facilities  60,316   (3,326)   56,990       83,980   80,971     
                
 
Banking products
  513,930   (118,179)   395,750   347,900   518,008   429,149   377,622 
  
 
Derivative instruments3
  854,100   (626,448)   227,652       428,217   184,809     
  
 
Securities lending/borrowing4
  122,897 } (300,694)   46,851       207,063 } 58,896     
            
 Repurchase/reverse repurchase agreements  224,648            376,928       
                
 
Traded products
  1,201,645   (927,142)   274,503   263,677   1,012,208   243,704   237,790 
  
 Financial assets designated at fair value – debt instruments  5,153               4,116         
  
 Financial Investments available-for-sale – debt instruments  3,567               1,383         
  
 Trading portfolio assets – debt instruments  224,862               376,928         
  
 Accrued income  3,238               9,200         
  
 Other assets  6,189               12,874         
  
 Irrevocable commitments to acquire ARS  16,571               N/A         
                
 
Other products
  259,580               404,501         
  
 
Total at the year-end
  1,975,155   (1,304,902)   670,253   611,577   1,934,717   672,853   615,412 
  
 
1 International Financial Reporting Standards (IFRS).  2 These amounts are considered the best representation of “maximum exposure to credit risk” as defined by the IFRS, without taking into account credit conversion factors for off-balance sheet positions.  3 Includes temporary exposure, before risk transfer, deduction of collateral and risk mitigation.  4 Exposure after risk transfer, deduction of allowances, provisions, credit valuation adjustments, credit default swaps and credit linked notes.

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(AUDITED)     In the tables in this section the internal management view of credit exposure”).risk exposure is based on a revised measurement methodology for traded products compared with 2007. The gross credit exposure2007 numbers have been restated accordingly. The methodology was refined to reflect the internal reporting methods used in the business divisions.
     In general, the exposures shown in the table is broadly aligned with the regulatory capital view, but doestables are gross and do not include the potential future exposure that can arise on traded products which is an additional component of both the internal and regulatory capital views, as explained below.
In general, none of the exposures in the table reflectsreflect the benefit of security held or other risk mitigation employed, such as hedging and risk transfers. The main differences between the internal management and IFRS views of gross credit exposure are:

 ––  within banking products, cashCash collateral posted by UBS against negative replacement values on derivativesof derivative instruments and other positions is not considered to be credit exposure but, rather, is reflectedreported on a gross basis for IFRS purposes. For internal management purposes these exposures are treated on a net basis after factoring in thean assessment of the counterparty risk on the underlying positions. On the other hand, in its internal risk control view UBS considers certain financing which is conducted,

for legal reasons, under repurchase- / reverse repurchase-like agreements, and shown as such under IFRS, to be loans;
 ––  the derivatives exposure shown under IFRSFor internal management purposes netting is the sum of all positive replacement values, offset by negative replacement values with the same counterparty only if the cash flows are intended to be settled on a net basis. Internally, UBS netsapplied for positive and negative replacement values with the same counterparty, where the business is conducted under a bilateral master agreement which allows for close-out and netting of all transactions in the event of default by either party, and such agreements are judged to be legally enforceable in insolvency; andnetting agreement. Under IFRS, netting is applied on a more restrictive basis. Refer to “Note 1 Sum-
  
(AUDITED)mary of significant accounting policies” in the financial statements of this report for further information on IFRS netting.
–  underUnder IFRS, securities lending / lending/borrowing and repurchase / repurchase/reverse repurchase transactions are shown on the balance sheet as UBS’s full claim on the counterparty without recognizing the counterclaim which the counter-partycounterparty has for return of cash or securities on the same transactions. By contrast, for internal risk control purposes, the claims on and counterclaims from each counter-partycounterparty are considered on each transaction on a net basis, and further netted across transactions where such netting is considered to be legally enforceable in insolvency.
 –All positions that were reclassified in fourth quarter from the “held for trading” to the “loans and receivables” category are included as loans under the IFRS reported exposures. Refer to the “Financial performance” section and “Note 29 Measurement categories of financial assets and liabilities” in the financial statements of this report for more information. However, for the purposes of providing a breakdown of UBS’s lending portfolios, only the loan underwriting positions are included in the internal management view of loan exposures. All reclassified positions are


                                   
(AUDITED) Gross credit exposure by UBS internal ratings – UBS Group 
CHF million  Banking products  Traded products  Total exposure 
UBS internal rating       31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07 
 
0–1          27,462   21,367   55,729   60,463   83,191   81,830 
 
2–3          128,763   157,221   150,364   144,317   279,127   301,538 
 
4–5          108,963   121,940   42,055   23,394   151,018   145,334 
 
6–8          89,865   81,959   14,933   12,300   104,798   94,259 
 
9–13          27,327   40,913   2,852   2,123   30,180   43,036 
 
Total 0–13 (net of past due)
          382,380   423,400   265,933   242,597   648,313   665,997 
 
Defaulted          7,622   2,468   6,909   1,013   14,531   3,481 
 
Past due but not defaulted          3,526   2,268           3,526   2,268 
 
Other1
          2,222   1,013   1,661   94   3,883   1,107 
 
Total
          395,750   429,149   274,503   243,704   670,253   672,853 
 
1 Includes Global Asset Management and the Corporate Center.
   
  Gross credit exposure by business division 
    Global Wealth Management          
    & Business Banking  Investment Bank  Other1  UBS 
  CHF million 31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07 
   
  Balances with central banks  17,629   9,992   11,528   6,441   0   1   29,157   16,434 
   
  Due from banks  6,606   8,236   12,044   17,532   382   535   19,032   26,303 
   
  Loans  226,183   240,643   37,230   39,725   730   466   264,143   280,834 
   
  Financial assets designated at fair value  0   0   6,576   4,166   961   0   7,537   4,166 
   
  Contingent claims  14,687   15,929   4,056   4,500   149   11   18,892   20,440 
   
  Undrawn irrevocable credit facilities  2,789   2,081   54,201   78,890   0   0   56,990   80,971 
   
  
Banking products
  267,893   276,881   125,636   151,254   2,222   1,013   395,750   429,149 
   
  Derivatives  8,353   14,039   218,482   170,677   817   94   227,652   184,810 
   
  Securities financing transactions  12,747   13,023   33,260   45,873   844   0   46,851   58,896 
   
  
Traded products
  21,100   27,061   251,742   216,550   1,661   94   274,503   243,704 
   
  
Total credit exposure, gross
  288,993   303,942   377,378   367,804   3,883   1,107   670,253   672,853 
   
  
Net of impairment losses recognized
  287,774   302,974   370,494   366,882   3,883   1,107   662,151   670,963 
   
  
1 Includes Global Asset Management and the Corporate Center.

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Risk management and control

(AUDITED)
subject to appropriate portfolio limits and risk controls, including earnings-at-risk and capital-at-risk metrics.
The redesignated assets comprised: monoline protected assets (USD 5.7 billion); US reference-linked program (USD 1.1 billion); US commercial real estate (USD 3.4 billion); leveraged finance (USD 2.3 billion); student loan auction rate securities (USD 7.9 billion); and other assets (USD 2.3 billion). Exposure amounts provided were the carrying values on 31 December 2008. The exposures relating to monoline-protected assets, leveraged finance and student loan auction rate securities are included in the respective asset class disclosures in the “Risk concentrations” section of this report.
Note that under US Generally Accepted Accounting Principles (GAAP), a greater degree of netting is permitted than under IFRS for OTC derivatives replacement values and for securities lending / lending/borrowing and repurchase / repurchase/reverse repurchase transactions. UBS’s balance sheet figures for these types of transactions are not directly comparable towith those of firms which report under US GAAP.


                               

(Audited)

 Exposure to credit risk
  
   31.12.2007  31.12.2006 
   IFRS1          Valuation  IFRS1    
    reported  Adjustments: balance sheet  and other  reported    
    values2  to regulatory capital view  adjustments  values2    
    Maximum  Consolidation        Gross  Maximum    
    exposure to  scope  Capital view     credit  exposure to  Gross credit 
  CHF million credit risk  adjustment  adjustments     exposure3  credit risk  exposure3 
   
  Cash and balances with central banks  18,793   (1)  0   (2,358)  16,434   3,495   1,311 
   
  Due from banks  60,907   (293)  (1,928)  (32,383)  26,303   50,426   25,810 
   
  Loans  335,864   (136)  (3,910)  (50,984)  280,834   297,842   274,830 
   
  Financial assets designated at fair value  4,116   0   0   50   4,166   2,252   2,348 
   
  Contingent claims  20,824   0   0   (384)  20,440   17,908   17,654 
   
  Undrawn irrevocable credit facilities  83,980   51   846   (3,906)  80,971   97,287   83,428 
   
  
Banking products
  524,484   (379)  (4,992)  (89,965)  429,148   469,210   405,381 
   
  
Derivatives4
  428,217   3,171   (39)  (292,371)  138,978   292,975   110,732 
   
  
Securities lending / borrowing5
  207,063   0   0   (184,060)  23,003   351,590   37,851 
   
  Repurchase / reverse repurchase agreements  376,928   0   0   (372,937)  3,991   405,834   10,019 
   
  
Traded products
  1,012,208   3,171   (39)  (849,368)  165,972   1,050,399   158,602 
   
  
Total at the end of the year
  1,536,692   2,792   (5,031)  (939,333)  595,120   1,519,609   563,983 
   
  Less: contra assets allowances, provisions and credit valuation adjustments                  (1,978)      (1,477)
   
  
Net of impairment losses recognized
                  593,142       562,506 
   
  
1 International Financial Reporting Standards (IFRS).  2 These amounts are considered the best representation of “maximum exposure to credit risk” as defined by IFRS, measured gross, without taking into account collateral held or other credit enhancements and only netting in accordance with IFRS.  3 Gross credit exposure is an internal view of credit risk.  4 Positive replacement values, netted in accordance with IFRS or internal view as applicable.  5 Cash collateral on securities borrowed.

18

       
As explained in the Creditcredit risk measurement section, UBS also measures, and generally applies limits to, credit exposureexposures to individual counterparties and counterparty groups andgroups. It also measures risk across counterparties at various portfolio and sub-portfolio levels. In these calculations UBS alsofurther considers the potential development of replacement values of traded products over time as market risk factors change, interim payments are made and transactions mature, all of which can significantly alter the risk exposure profile over time.profile. These potential developments are not reflected in the various tables opposite and below,in this section, which reflect only the current exposures.

(Audited)

(AUDITED)		 The credit risk exposure reported in the table opposite also“Exposure to credit risk – UBS Group” in this section excludes UBS’s participation in the deposit insurance guarantee scheme under Swiss Banking Law,banking law, according to which Swiss banks and securities dealers are required to jointly guarantee an amount of up to CHF 46 billion for privileged client deposits in the event that another Swiss bank or securities dealer becomes insolvent. For the period 1 July 200720 December 2008 to 30 June 2008, the Swiss Federal Banking Commission (SFBC)2009 FINMA has established UBS’s share in the deposit insurance as CHF 8461,192 million.
Total gross credit exposure amounted to CHF 595.1 billion on 31 December 2007, an increase of CHF 31.1     Total gross credit exposure amounted to CHF 670.3 billion on 31 December 2008, a decrease of CHF 2.6 billion since the end of the previous year. Banking products decreased by CHF 33 billion mainly driven by reductions in loans and undrawn irrevocable commitments partially compensated by higher balances with central banks, while the traded products category increased by CHF 31 billion due to a significant increase in the derivatives line of CHF 43 billion, partially compensated by a reduction of CHF 12 billion for securities financing transactions. The reduction in loan exposure was mainly due to a reduction in the end of the previous year. Almost half of this increase was due to higher balances with central banks, reflecting UBS’s higher liquidity reserves towards year-end. The growth in loan exposure was entirely due to increased collateralized lending activity in Global Wealth Management & Business Banking. The Investment Bank continued to actively reduce credit risk.     The quality of the gross unimpaired credit portfolio improved as the investment grade component (internal rating grades 0–5) remained at 79%.
     The table “Gross credit exposure by business division” on the previous page shows the gross credit exposure (i.e. without recognition of credit hedges, collateral or other risk mitigation) by business division.
     The largest contributor to gross credit exposure at CHF 291 billion is the lending portfolio (due from banks CHF 19 billion, loans CHF 264 billion, and “financial assets designated at fair value” CHF 8 billion) which represents 43% of total gross credit exposure and 73% of total banking products exposure. Within this lending portfolio, CHF 233 billion (80%) is attributable to Global Wealth Management & Business Banking. Traded products exposure is incurred predominantly by the Investment Bank. The sections below provide further details of products, industry and rating distributions in the business division portfolios.
     The property financing portfolio is diversified and limits per counterparty ensure that no single property exposure presents an undue concentration.
     Exposure to providers of credit protection, usually in the form of credit derivatives, is controlled by the overall credit limit for the counterparty, which is typically a high-grade financial institution.

Composition of credit risk (business divisions)

Global Wealth Management & Business Banking
The total gross banking products exposure of Global Wealth Management & Business Banking was CHF 268 billion on 31 December 2008 down by CHF 9.0 billion or 3% from a year earlier. The high quality of the banking products exposure, with 64% in the investment grade category is demonstrated by the rating distribution on the next page. The introduction of a revised credit risk framework was aimed at improving statistical credit risk measurement and reinforcing the link between the credit assessment and pricing. This resulted in a decrease in counterparty rating on average by one rating class as shown in the table on the next page by the increase in category 6 sub-investment grade exposures. The distribution of the exposure across UBS’s internal rating and

Global Wealth Management & Business Banking. The Investment Bank actively reduced credit risk, where possible, in lightBanking:
composition of its exposure to US residential mortgage-related products and in conjunction with its management of balance sheet and risk-weighted asset usage.

The quality of the gross unimpaired credit portfolio improved as the investment grade component (internal rating grades 0–5) increased to 79.0% from the previous year’s level of 73.5%.
The table below shows the gross credit exposure (i.e. without recognition of credit hedges, collateral or other risk mitigation) by business group.
The largest contributor to gross credit exposure at CHF 311 billion is the lending portfolio, (Due from banks CHF 26 billion, Loans CHF 281 billion, and Financial assets designatedgross
(excluding repurchased ARS positions)
(PIE CHART)



                           

(Audited)

 Gross credit exposure by UBS internal ratings
  
 CHF million Banking products  Traded products  Total exposure 
 UBS internal rating 31.12.07  31.12.06  31.12.07  31.12.06  31.12.07  31.12.06 
   
  0–1  30,540   5,265   42,852   34,148   73,392   39,413 
   
  2–3  164,476   135,149   98,454   95,449   262,930   230,598 
   
  4–5  113,955   119,926   15,210   19,973   129,165   139,899 
   
  6–8  76,601   94,278   7,566   8,084   84,167   102,362 
   
  9–12  38,875   44,711   915   760   39,790   45,471 
   
  Total 0–12 (net of past due)  424,447   399,329   164,997   158,414   589,444   557,743 
   
  Impaired assets  2,433   2,682   975   188   3,408   2,870 
   
  Past due but not impaired  2,268   3,370           2,268   3,370 
   
  Total  429,148   405,381   165,972   158,602   595,120   563,983 
   

                                 
Gross credit exposure by business groups
 
  Global Wealth Management &          
  Business Banking  Investment Bank  Other1  UBS1 
CHF million 31.12.07  31.12.06  31.12.07  31.12.06  31.12.07  31.12.06  31.12.07  31.12.06 
 
Cash and balances with central banks  9,992   900   6,441   410   1   1   16,434   1,311 
 
Due from banks  8,236   6,245   17,532   18,966   535   599   26,303   25,810 
 
Loans  240,643   222,775   39,725   51,951   466   104   280,834   274,830 
 
Financial assets designated at fair value  0   0   4,166   2,348   0   0   4,166   2,348 
 
Contingent claims  15,929   13,138   4,500   4,516   11   0   20,440   17,654 
 
Undrawn irrevocable credit facilities  2,081   2,064   78,890   81,364   0   0   80,971   83,428 
 
Banking products
  276,881   245,122   151,254   159,555   1,013   704   429,148   405,381 
 
Derivatives  2,735   1,273   136,149   109,437   94   22   138,978   110,732 
 
Securities lending / borrowing  63   307   22,940   37,544   0   0   23,003   37,851 
 
Repurchase / reverse repurchase  162   234   3,829   9,785   0   0   3,991   10,019 
agreements                                
 
Traded products
  2,960   1,814   162,918   156,766   94   22   165,972   158,602 
 
Total credit exposure, gross
  279,841   246,936   314,172   316,321   1,107   726   595,120   563,983 
 
Net of impairment losses recognized
  278,873   245,705   313,162   316,075   1,107   726   593,142   562,506 
 
1 Includes Global Asset Management, Corporate Center and Industrial Holdings.

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Credit risk

Risk and treasury management

at fair value CHF 4 billion) which represents 52% of total gross credit exposure and 73% of total banking products exposure. Within this lending portfolio, CHF 249 billion (80%) is attributable to Global Wealth Management & Business Banking. Traded products exposure is incurred predominantly by the Investment Bank. The sections below provide further details of products, industry and rating distributions in the business group portfolios.

In the portfolio of loans to affluent private clients secured by securities (lombard lending) there are no material risk concentrations, either within the overall collateral pool or with respect to the counterparties themselves.
The property financing portfolio is diversified and limits per counterparty ensure that no single property exposure presents an undue concentration.
Exposure to providers of credit protection, usually in the form of credit derivatives, is controlled by the overall credit limit for the counterparty, which is typically a high-grade financial institution, or else the exposure is fully funded, for example through a synthetic securitization.

Composition of credit risk (business groups)

Global Wealth Management & Business Banking

Total gross banking products exposure of Global Wealth Management & Business Banking, which stood at CHF 277 billion on 31 December 2007, increased by CHF 32 billion or 13% from a year earlier. Both the amount and the proportion of the total portfolio classified as investment grade increased from the previous year. The distribution of the exposure across UBS’s internal rating and loss given default (LGD) buckets as displayed in the table belowon the next page shows that the majority of the exposure is from products attracting the lowest LGDs, demonstrating the continued improvement in the quality of this portfolio.
portfolio (refer to the “UBS internal rating scale and mapping of external ratings” table in the “Rating system design and estimation of credit risk parameters” section for more information).
Global Wealth Management & Business Banking’s gross lending portfolio (Due(due from banks and Loans)loans) on 31 December 20072008 amounted to CHF 249233 billion, of which CHF 142 billion (57%(60%) was secured by real estate and CHF 7862 billion (31%(27%) by marketable securities. The pie chart aboveon the

previous page shows that exposure to real estate is well diversified, with 38%40% of the gross lending portfolio being secured on single family homes and apartments, which historically,generally have exhibited a

(PIE CHART)

low risk profile. The 11% of exposure secured by residential multi-family homes consists of rented apartment buildings. Loans and other credit engagements with individual clients, excluding mortgages, amounted to CHF 9991 billion and are predominantly extended against the pledge of marketable securities. The volume of collateralized lending to private individuals rosedecreased by CHF 1516 billion or 24%20% from the previous year. The increasing demand for this product, as in 2006, reflects the continuing low interest rate environment.

The high qualityThis was mainly due to substantial deleveraging by clients. As of 31 December 2008 more



Global Wealth Management & Business Banking’sBanking: banking products, gross by UBS internal rating

(LINE CHART)
                         
Global Wealth Management & Business Banking:                 
distribution of banking products exposure across UBS internal rating and loss given default (LGD) buckets 
On 31.12.08                     Weighted 
CHF million     Loss given default (LGD) buckets  average 
UBS internal rating Gross exposure  0–25%  26–50%  51–75%  76–100%  LGD–(%) 
 
0  13,625   88   13,537           39 
 
1  5,232   19   5,193   20       39 
 
2  39,937   37,521   2,115   301       20 
 
3  34,717   26,127   8,064   526       22 
 
4  25,135   20,837   3,659   639       14 
 
5  51,347   45,059   5,597   691       13 
 
6  44,727   40,617   3,371   736   3   13 
 
7  18,870   16,281   2,395   193   1   15 
 
8  16,892   14,224   2,090   567   11   17 
 
9  9,458   6,757   1,671   13   1,017   23 
 
10  1,997   1,591   402   3   1   20 
 
11  2,252   2,045   206   1       19 
 
12  155   119   36           19 
 
13  93   34   59           30 
 
Total non-defaulted
  264,437   211,319   48,395   3,690   1,033   18 
 
Investment grade  169,993   129,651   38,165   2,177         
 
Sub-investment grade  94,444   81,668   10,230   1,513   1,033     
 
Defaulted1
  3,456                     
 
Total banking products
  267,893   211,319   48,395   3,690   1,033     
 
1 Includes CHF 27 million of off-balance sheet items.

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Risk management and control

Business Banking Switzerland: lending portfolio, is demonstratedgross (excluding mortgages) by the table below, which shows newly impairedindustry sector

(LINE CHART)

than 80% of loans and related allowances and provisions in relation to the total gross lending portfolio at year-end for the last four years. Despite an increase in the total gross lending portfolio each year, the totals of new impairments and of new allowances and provisions have declined. Most of the newly impaired loans are secured by mortgages or other collateral so that new allowances are proportionately lower than the newly impaired positions.

marketable securities were attributed to business outside Switzerland, of which nearly one-third relates to Wealth Management US.
The Swiss lending portfolio (excluding mortgages) within the Business Banking area amounted to CHF 2223 billion, representing 8%9% of Global Wealth Management & Business Banking’s total gross banking products exposure. It is widely spread across industries, with the largestmajority of exposures being to banks and financial institutions, followed by public authorities.



Global Wealth Management & Business Banking: development of impaired loans portfolio

                 
 
CHF million, except where indicated 2007  2006  2005  2004 
 
Total lending portfolio, gross, at year-end  248,878   229,021   217,327   180,718 
 
New impaired loans  323   345   532   537 
 
New allowances / provisions  91   128   138   239 
 
New impairments as a % of total lending portfolio, gross  0.13   0.15   0.24   0.30 
 
New allowances / provisions as a % of total lending portfolio, gross  0.04   0.06   0.06   0.13 
 
 The increase in exposures to banks and financial institutions was driven by additional lending to UBS fund entities.

20

(BAR CHART)

Global Wealth Management & Business Banking: distribution of banking products
exposure across UBS internal rating and loss given default buckets

                         
 
As of 31.12.07     Loss given default (LGD) buckets  Weighted average 
CHF million Gross exposure  0–25%  26–50%  51–75%  76–100%  LGD (%) 
 
0  1,498   104   1,393   1       33 
 
1  9,741   4   9,696   41       40 
 
2  52,237   48,881   3,110   246       20 
 
3  47,473   40,476   5,083   570   1,344   21 
 
4  25,163   21,643   2,986   534       18 
 
5  58,957   53,665   3,650   1,639   3   17 
 
6  29,307   25,222   3,851   222   12   19 
 
7  19,210   16,599   1,977   613   21   20 
 
8  17,192   11,723   4,502   962   5   24 
 
9  9,019   6,883   840   237   1,059   27 
 
10  2,192   1,805   266   119   2   23 
 
11  1,689   1,468   194   27       22 
 
12  1,349   1,305   29   15       20 
 
Total non-impaired
  275,027   229,778   37,577   5,226   2,446   21 
 
Investment grade  195,069   164,773   25,918   3,031   1,347     
 
Sub-investment grade  79,958   65,005   11,659   2,195   1,099     
 
Impaired and defaulted1
  1,854                     
 
Total banking products
  276,881   229,778   37,577   5,226   2,446     
 
1 Includes CHF 34 million of off-balance sheet items.

(BAR CHART)

21

Risk management
Credit risk

Investment Bank

A substantial majority of the Investment Bank’s gross credit exposure falls into the investment grade category (internal counterparty rating classes 0 to 5), both for gross banking products (69%(77%) and for traded products (94%(91%). The counterparties are primarily banks and financial institutions, multinational corporate clients and sovereigns. The increase in category 3 resulted from the loan to the fund managed by BlackRock. Refer to the “Loan to BlackRock fund” sidebar for more information.

Banking products exposure

On 31 December 2007,2008, the Investment Bank’s total gross credit exposure from banking products amounted to CHF 125.6 billion or CHF 79.0 billion net, taking credit hedges into account. This represents a significant reduction compared to CHF 151.3 billion orgross and CHF 100.7 billion net taking credit hedges

into account. Of this net amount, CHF 31.3 billion was considered temporaryfor 2007. The exposure held for distribution also reduced significantly as a consequence of the market deterioration, which resulted in mark downs of existing commitments and CHF 69.4 billion take and hold exposure.a substantial reduction in new lending. The table “Investment Bank: banking products” below shows the composition of the Investment Bank’s gross banking products exposure, the hedges and other risk mitigation and the net exposure in total and for the take and hold portfolio. Compared with the end of 2006, the net take and hold exposure fell by one-third as a result of active risk reduction and management of balance sheet and risk-weighted asset usage.total.

As described under “Risk mitigation”in the discussion on page 16 of this section,risk mitigation, the Investment Bank has engaged in a substantial credit risk hedging program and on 31 December 20072008 had CHF 45 billion of credit hedges in place against banking products exposure. In addition certain loans captured on an accrual basis are hedged with mark-to-market hedges.
To illustrate the effects of credit hedging and other risk mitigation, the first graph on the next page shows the exposures by counterparty rating before and after application of risk mitigation.



Investment Bank: banking products

                                 
 
CHF million 31.12.07  31.12.06 
      Sub-  Impaired          Sub-  Impaired    
  Investment  investment  and      Investment  investment  and    
  grade  grade  defaulted  Total  grade  grade  defaulted  Total 
 
Gross banking products exposure  103,848   46,755   651   151,254   98,801   60,503   251   159,555 
 
Risk transfers1
  2,901   (2,864)  (37)      2,576   (2,551)  (25)    
 
Less: specific allowances for credit losses and loan loss provisions  0   0   (126)  (126)  0   0   (101)  (101)
 
Net banking products exposure  106,749   43,891   488   151,128   101,377   57,952   125   159,454 
 
Less: credit protection bought (credit default swaps,  (43,012)  (7,391)  (29)  (50,432)  (28,245)  (4,410)  (1)  (32,656)
credit-linked notes)2
                                
 
Net banking products exposure, after application of credit hedges
  63,737   36,500   459   100,696   73,132   53,542   124   126,798 
 
Less: temporary exposure  (11,091)  (20,160)  (30)  (31,281)  (6,833)  (21,354)      (28,187)
 
Net take and hold banking products exposure
  52,646   16,340   429   69,415   66,299   32,188   124   98,611 
 
                                 
Investment Bank: banking products 
On 31.12.08  31.12.07
      Sub-  Impaired          Sub-  Impaired    
  Investment  investment  and defaul-      Investment  investment  and defaul-    
CHF million grade  grade  ted loans  Total  grade  grade  ted loans  Total 
 
Gross banking products exposure  96,244   25,280   4,112   125,636   103,848   46,755   651   151,254 
 
Risk transfers1
  1,710   (1,764)  54       2,901   (2,864)  (37)    
 
less: specific allowances for credit losses
and loan loss provisions
          (1,526)  (1,526)   0   0   (126)  (126) 
 
Net banking products exposure  97,953   23,516   2,640   124,110   106,749   43,891   488   151,128 
 
less: credit protection bought
(credit default swaps, credit-linked notes)2
  (38,388)  (6,690)  (28)  (45,106)   (43,012)  (7,391)  (29)  (50,432) 
 
Net banking products exposure,
after application of credit hedges
  59,566   16,826   2,612   79,004   63,737   36,500   459   100,696 
 
of which: held for distribution
  3,685   2,808           11,091   20,160         
 
1 Risk transfers include unfunded risk participations. Risk participations are shown as a reduction in exposure to the original borrower and corresponding increase in exposure to the participant bank.
2 Notional amount of credit protection bought on net banking products exposure includes credit default swaps (CDSs) and the funded portion of structured credit protection purchased through the issuance of credit-linked notes.notes (CLNs).

(BAR CHART)

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Risk and treasury management

a total of CHF 50 billion in credit hedges in place against banking products exposure.

To illustrate the effects of credit hedging and other risk mitigation, the graph opposite shows the exposures by counterparty rating before and after application of risk mitigation.
Additionally, the matrix belowon page 142 shows the distribution of the Investment Bank’s take and holdnet banking products exposure after application of risk mitigants, across UBS internal rating classes and LGDloss given default buckets. Mitigants include risk participations and single name credit default swaps. No offset is given for portfolio hedges. There is a concentration in the 26–50% bucket where most senior secured and unsecured claims fall. Sub-investment grade exposure – which in

aggregate was reduced by CHF 163.3 billion (–49%(21%) – decreased mainly in the 0–25% LGD bucket as exposure to US mortgage originators was wound down. At the end of the year UBS had no credit risk exposure to any sub-prime mortgage originators.. It should be noted that exposure distributions shown elsewhere in this section refer only to gross or net exposure and do not take recovery expectations into account.account (refer to the “UBS inter-

nal rating scale and mapping of external ratings” table in the “Rating system design and estimation of credit risk parameters” section below for more information).
Net banking products exposure after application of credit hedges continues to be widely diversified across industry sectors. At 31 December 2007,2008, the largest exposures were to regulated banks (22%(30%) and financial institutions (21%(28%). The increase in bank exposures resulted from higher nostro (a bank’s current account with another bank) positions and the loan to the fund managed by BlackRock resulted in an increase in the financial institutions category. Refer to the “Loan to BlackRock fund” sidebar for more information.



Investment Bank: distribution of net take and hold banking products
exposure acrossby UBS internal rating and loss given default buckets

                         
 
As of 31.12.07     Loss given default (LGD) buckets  Weighted 
CHF million Exposure1  0–25%  26–50%  51–75%  76–100%  average LGD (%) 
 
0 and 1  9,388   27   8,632   617   112   50 
 
2  19,309   2,396   15,382   534   997   44 
 
3  11,894   384   9,606   919   985   48 
 
4  8,059   588   6,083   968   420   45 
 
5  3,996   1,004   1,686   1,140   166   44 
 
6  1,995   262   1,223   425   85   45 
 
7  2,184   142   1,630   379   33   46 
 
8  2,383   214   1,128   771   270   51 
 
9  3,659   887   2,254   514   4   36 
 
10  2,865   1,173   1,138   457   97   35 
 
11  2,579   1,256   871   380   72   31 
 
12  675   509   117   29   20   20 
 
Total non-impaired
  68,986   8,842   49,750   7,133   3,261   43 
 
Investment grade  52,646   4,399   41,389   4,178   2,680   44 
 
Sub-investment grade  16,340   4,443   8,361   2,955   581   39 
 
Impaired and defaulted  429   360   54   15   0   12 
 
Net take and hold exposure
  69,415   9,202   49,804   7,148   3,261   43 
 
1 Net take and hold exposure.(BAR CHART)

(BAR CHART)Investment Bank: banking products exposure1 by industry sector

(BAR CHART)
1 Net banking products exposure, after application of credit hedges.

23Investment Bank: banking products exposure1 by geographical region

(BAR CHART)
1Net banking products exposure, after application of credit hedges.

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Risk and treasury management
Credit riskRisk management and control

                         
Investment Bank: distribution of net banking products exposure             
across UBS internal rating and loss given default buckets 
  
On 31.12.08                     Weighted 
CHF million     Loss given default (LGD) buckets  average 
UBS internal rating Exposure  0-25%  26-50%  51-75%  76-100%  LGD (%) 
 
0 and 1  8,291       8,291           49 
 
2  16,292   3,201   10,675   776   1,641   45 
 
3  22,223   11,083   9,360   630   1,150   30 
 
4  9,068   1,213   6,604   943   307   35 
 
5  3,692   341   2,306   821   224   48 
 
6  2,254   1,017   732   427   78   32 
 
7  2,321   334   1,499   388   100   37 
 
8  1,419   133   948   285   53   34 
 
9  3,811   1,930   1,473   223   184   19 
 
10  1,682   598   707   293   85   34 
 
11  4,430   1,303   2,705   205   217   21 
 
12  687   473   128   82   3   23 
 
13  221   122   99           21 
 
Total non-defaulted
  76,391   21,749   45,528   5,073   4,042   39 
 
Investment grade  59,566   15,839   37,237   3,169   3,321   39 
 
Sub-investment grade  16,826   5,910   8,291   1,903   721   26 
 
Defaulted  2,612   531   1,520   467   95   37 
 
Net banking products exposure
  79,004   22,280   47,048   5,539   4,137   36 
 

Loan to BlackRock fund

As reported in second quarter 2008, UBS sold a portfolio of US RMBSs for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP (the “RMBS fund”), a special purpose entity managed by BlackRock, Inc. The RMBS fund was capitalized with approximately USD 3.75 billion in equity raised by BlackRock from third-party investors and an eight-year

amortizing USD 11.25 billion senior secured loan provided by UBS. Since its inception, the RMBS fund has amortized the loan through monthly payments in line with UBS’s original expectations. On 31 December 2008, the loan had a balance outstanding of USD 9.2 billion. UBS does not consolidate the RMBS fund into its balance sheet as the equity investors in the

RMBS fund continue to bear and receive the majority of the risks and rewards. UBS continues to monitor the development of the RMBS fund’s performance and would reassess the consolidation status if deterioration of the underlying mortgage pools related to the RMBSs were to indicate that UBS may not fully recover the loan granted to the RMBS fund.



142

Risk and treasury management

Settlement risk

Settlement risk arises in transactions involving exchange of value when UBS must honor its obligation to deliver without first being able to determine that the counter-value has been received. Market volumes have continuedUBS continues to rise year-on-year but UBS has expandedreduce its own transactionactual settlement volume without increasing settlement risk by the same proportion,proportions as in previous years through the use of multilateral and bilateral arrangements. agreements.

In fourth quarter 2007,2008 settlement risk on 78% of gross settlement volumes was eliminated through risk mitigation.
The most significant source of settlement risk is foreign exchange transactions. UBS is a member of CLS (“Continuous linked settlement”)Linked Settlement (CLS), a foreign exchange clearing house which allows transactions to be settled on a delivery versus payment basis, thereby significantly reducing foreign exchange-related settlement risk relative to the volume of business. In 2007, the transaction volume settled through CLS continued to increase, although theThe proportion of UBS’s overall gross volumes settled through CLS fellincreased to 51%55% during 2008 compared to 53% in fourth quarter 2007 from 55% in fourth quarter 2006. 71% of2007. In 2008 UBS’s CLS volume was with other CLS settlement members and the remainder with third party members, who settle their eligible trades via CLS settlement members.was 72%, which is comparable to 2007. While the number of CLS settlement members is relatively stable, in 20072008 the number of third party membersthird-party participants that UBS dealt with again increased considerably year-on-year.from 2007.
Risk reduction by other means – primarily account-accountaccount to account settlement and payment netting – increasedfell correspondingly to 27%23% of gross volumes in fourth quarter 2007 from 23% a year earlier.2008 compared to 26% in 2007.
The avoidance of settlement risk through CLS and other means does not, of course, eliminate the credit risk on foreign exchange transactions resulting from changes in exchange rates prior to settlement. Pre-settlementSuch counterparty risk on forward foreign exchange transactions is measured and controlled as part of the overall credit risk on OTC derivatives.

Country risk

UBS assigns ratings to all countries to which it has exposure. Sovereign ratings express the probability of occurrence of a country risk event that would lead to impairment of UBS’s claims. The default probabilities and the mapping to theof external ratings of the major rating agencies are the same as for counterparty rating classes (as described under “Probability of default”). In the case of country ratings, rating the three lowest classes (12 10

Emerging markets exposure by
UBS internal rating category

(PIE CHART)

to 14)13 are designated “distressed”.“very high risk” while the lowest rating class 14 contains countries in outright default.

For all countries rated three and below, UBS sets country risk ceilings approved by the Chairman’s OfficeBoard of Directors or under delegated authority. The country risk ceiling applies to all UBS’s exposures to clients, counterparties or issuers of securities from the country, and to financial investments in that country. Country risk measures cover both cross-border transactions and investments, and local operations undertaken by all UBS branches andas well as by subsidiaries in countries where the risk is material. In determining the size of a country risk ceiling, goodwill resulting from acquisitions is also taken into account. Extension of credit, transactions in traded products and positions in securities may be denied on the basis of a country ceiling, even if exposure to the name is otherwise acceptable. Within
From a country risk control perspective, exposures to emerging markets are considered the group of countries subject to ceilings, those that have yet to reach a mature stage of economic, financial, institutional, political and social development or have significant potential for economic or political instability are defined as emerging market countries. The country datamost relevant, therefore additional information is provided in this section cover only country risk exposurescovering exposure to countries that UBS groups under the emerging market countries.category.
Counterparty defaultsLosses due to counterparty or issuer default resulting from multiple insolvencies (“systemic risk”) or general prevention of payments by authorities (“transfer risk”) are the most significant effects of a country crisis, but for internal measurement and control of country risk UBS also considers the probable financial impact of market disruptions arising prior to, during and following a country crisis. These might take the form of a severe fallsdeterioration in the country’s debt and equity markets and asset prices, longer-term devaluationand a sharp depreciation of the currency, and potential immobilization of currency balances.currency.

(PIE CHART)



                                         
Emerging markets exposure by major geographical area and product type 
  
CHF million Total  Banking products  Traded products  Financial investments  Tradable assets
On 31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07 
 
Emerging Europe  3,706   5,439   1,454   1,590   1,177   1,071   211   151   864   2,627 
 
Emerging Asia  16,460   22,039   3,594   5,653   7,059   6,210   879   2,123   4,928   8,053 
 
Emerging America  6,802   8,778   1,491   1,486   2,157   2,288   167   150   2,987   4,854 
 
Middle East/Africa  5,747   5,007   1,338   2,414   3,980   1,603   0   0   429   990 
 
Total
  32,715   41,263   7,877   11,143   14,373   11,172   1,257   2,424   9,208   16,524 
 
Temporary exposures1
  738   3,049                                 
 
1 Temporary exposures are loan underwritings which are held short-term, pending syndication, sale or hedging. They are not included in the regional sub-total or overall total.

24143

The potential financial impact of severe emerging markets crises is assessed by stress testing. This entails identifying countries that might be subject to a potential crisis eventRisk and determining potential loss, making conservative assumptions about potential recovery rates depending on the types of transaction involvedtreasury management
Risk management and their economic importance to the affected countries.

UBS’s liquidity position could be adversely impacted by restrictions on, or major impediments to, cross-border transfers of funds, which might prevent a liquidity surplus in one country being used to meet a shortfall in another. This risk does not generally result from existing or foreseeable legal restrictions in specific countries but, rather, from unexpected economic stress situations or sovereign defaults, which might induce a government to limit or prohibit the transfer of funds outside the country. UBS assesses the potential impact on its liquidity position of potential transfer risk events in countries with a one-year probability of default of 5% or more as indicated by UBS’s internal sovereign rating.
control

Country risk exposure

Exposure to emerging market countries amounted to CHF 41.3 billion on 31 December 2007, compared with CHF 30.6 billion on 31 December 2006. Of this amount, CHF 30.9 billion or 75% was to investment grade countries. The growth of CHF 10.6 billion in total emerging markets exposure arose to a large extent in Asia.
The pie chart opposite shows UBS’s emerging market country exposures (excluding those which are of a temporary nature) on 31 December 2007, based on the main country rating categories. The table below analyzes emerging market country exposures by major geographical area and product type on 31 December 2007 compared with 31 December 2006. Temporary exposures arising from loan underwriting in these markets are separately shown in the table.
On 31 December 2007, UBS had net exposure totaling CHF 911 million to 29 countries with a one-year probability

   
  

     The potential financial impact of default of 5% or more, of which CHF 556 million was to those with a probability of default of 8% or more. Only CHF 81 million was to distressed countries, which have a one-year probability of default of 13% or more and where restrictions are highly probable or have already materialized. This represents less than 0.2% of UBS’ssevere emerging markets exposurecrises is assessed by stress testing. This entails identifying countries that might be subject to a potential crisis event and determining potential loss and making conservative assumptions about potential recovery rates depending on the associated risk is immaterial.

types of transaction involved and their economic importance to the affected countries.
   
Country risk exposure
  

Exposure to emerging market countries amounted to CHF 32.7 billion on 31 December 2008, compared with CHF 41.3 billion on 31 December 2007. Of this amount, CHF 24.6 billion or 75% was to investment grade countries based on UBS’s internal ratings-based approach. The reduction of CHF 8.5 billion in total emerging markets exposure arose to a large extent in Asia.

     The pie chart on the previous page shows UBS’s emerging market country exposures (excluding those which are temporary exposures) on 31 December 2008, based on the main country rating categories. The table on the previous page analyzes emerging market country exposures by major geographical area and product type on 31 December 2008 compared with 31 December 2007. Temporary exposures arising from loan underwriting in these markets are shown separately in the table.

Impairment and default – distressed claims


(AUDITED) 

(Audited)

UBS has a number of classifications for distressed claims.

A loan carried at amortized cost is considered to be“past “past due”when a significant payment has been missed. It is classified as“non-performing”where payment of interest, principal or fees is overdue by more than 90 days and there is no firm evidence that the claim will be settled by later payments or the liquidation of collateral; or when insolvency proceedings have commenced against the borrower; or when obligations have been restructured on concessionary terms.
Any claim, regardless of accounting treatment, is classified as“impaired” “impaired” if UBS considers it probable that ita loss will suffer a lossresult on that claim as a result ofdue to the obligor’s inability to meet its obligations according to the contractual terms, and after realization of any available collateral. “Obligations” in this context include interest payments, principal repayments or other payments due, for example under an OTC derivative contract or a guarantee.
The recognition of impairment in the financial statements depends on the accounting treatment of the claim. For products carried at amortized cost, impairment is recognized through the creation of an allowance or provision, which is charged to the income statement as credit loss expense. For products recorded at fair value such as derivatives, impairment is recognized through a credit valuation adjustment, which is charged to the income statement through the net“Net trading incomeincome” line.
UBS has policies and processes to ensure that the carrying values of impaired claims are determined in compliance with IFRS on a consistent and fair basis, especially for those im-



Emerging markets exposure by major geographical area and product type

                                         
 
CHF million Total  Banking products  Traded products  Financial investments  Tradable assets 
As of 31.12.07  31.12.06  31.12.07  31.12.06  31.12.07  31.12.06  31.12.07  31.12.06  31.12.07  31.12.06 
 
Emerging Europe  5,439   4,663   1,590   1,476   1,071   1,110   151   104   2,627   1,973 
 
Emerging Asia  22,039   15,904   5,653   4,266   6,210   3,401   2,123   1,325   8,053   6,912 
 
Emerging America  8,778   7,282   1,486   1,024   2,288   2,267   150   132   4,854   3,859 
 
Middle East / Africa  5,007   2,768   2,414   1,145   1,603   892   0   19   990   712 
 
Total  41,263   30,617   11,143   7,911   11,172   7,670   2,424   1,580   16,524   13,456 
 
Temporary exposures1
3,049   2,160                                 
 
1 Temporary exposures are loan underwritings which are held short-term, pending syndication, sale or hedging. They are not included in the regional subtotals or overall total.

25

Risk management
Credit risk

(Audited)

pairedimpaired claims for which no market estimate or benchmark for the likely recovery value is available. The credit controls applied to valuation and workout are the same for both amortized cost and fair-valued credit products. Each case is assessed

(AUDITED)on its merits, and the workout strategy and estimation of cash flows considered recoverable are independently approvedapproved.
     Credit officers monitor derivative counterparties for default or impairment using generally the same principles and processes as used for loans. In the event that a derivatives counterparty defaults on its obligations a specific credit valuation adjustment (CVA) is established by the credit risk control organization.
officer.
Portfolios of claims carried at amortized cost with similar credit risk characteristics are also assessed for collective impairment. A portfolio is considered impaired on a collective basis if there is objective evidence to suggest that it contains impaired obligations but the individual impaired items cannot yet be identified.

èNote: portfolios Portfolios considered impaired on a collective basis are not included in the totals of impaired loans in the tables on pages 20, 21 and 23shown in the discussion of the composition of credit risk for business divisions in the “Credit risk” section of this report or in Note 9c inFinancial Statements 2007
report.
      

(Audited)

The assessment of collective impairment differs depending on the nature of the underlying obligations. In UBS’s retail businesses, where delayed payments are routinely seen, UBS typically reviews individual positions for impairment only after they have been in arrears for a certain time. To cover the time lag between the occurrence of an impairment event and its identification, collective loan loss allowances are established, based on the expected loss measured for the portfolio over the average period between trigger events and their identification for individual impairments. Collective loan loss allowances of this kind are not required for corporate and investment banking businesses because individual counterparties and exposures are continuously monitored and impairment events are identified at an early stage.

Additionally, for all portfolios, UBS assesses each quarter – or on an ad hoc basis if necessary – whether there hashave been any previously unforeseen developmentdevelopments which might result in impairments whichthat cannot be immediately identified individually. Such events could be stress situations such as a natural disaster or a country crisis, or they could result from structural changes in, for example, the legal or regulatory environment. To determine whether an event-driven collective impairment exists, a set of global economic drivers is regularly assessed for the most vulnerable countries and, on a case by casecase-by-case basis, the impact of specific potential impairment events since the last assessment is reviewed. Again, the expected loss parameters of the affected sub-portfolios are the starting point for determining the collective impairment, adjusted as necessary to reflect the severity of the event in question.

  


Past due but not impaired loans

(Audited)

 The table opposite provides an overview of the aging of pastPast due but not impaired loans. These loans have suffered missed payments but are not considered impaired because UBS ex-

pectsexpects ultimately to collect all amounts due under the contractual terms of the loans or with equivalent value.

  Compared with 31 December 2006,2007, the past due exposure has decreased byincreased CHF 1.11.3 billion primarily as a result of improved processes to identifyat 31 December 2008.


144

Risk and settle overdue amounts.treasury management
           
(AUDITED) Past due but not impaired loans
 		 
   On 
 CHF million 31.12.08  31.12.07 
  
 1–10 days  1,226   515 
  
 11–30 days  475   1,381 
  
 31–60 days  320   74 
  
 61–90 days  795   36 
  
 > 90 days  772   262 
  
 
Total
  3,588   2,268 
  

   
    

Impaired loans, allowances and provisions


The table oppositebelow shows that allowances and provisions for credit losses decreased by 12.6%increased 184%, to CHF 1,1642,927 million on 31 December 20072008 from CHF 1,3321,031 million on 31 December 2006. Note2007. Refer to “Note 9b Due from banks and loans” inFinancial Statements 2007provides further details the financial statements of this report for more information on the changes in allowances and provisions for credit losses during the year. In accordance with International Accounting Standard (IAS) 39, UBS has assessed its portfolios of claims with similar credit risk characteristics for collective impairment. On 31 December 2007, allowances and provisions for collective impairment amounted to CHF 34 million.
The gross impaired lending portfolio decreasedincreased significantly to CHF 9,145 million on 31 December 2008 from CHF 2,392 million on 31 December 2007 from CHF 2,628 million on 31 December 2006.2007. This was largely driven by the reclassification of certain financial instruments, some of which carried impairments, in addition to various real estate-related positions that were also considered impaired during the year. Refer to “Note 29 measurement
categories of financial assets and liabilities” in the financial statements and the “Financial performance” sections of this report for more information.
The ratio of the impaired lending portfolio to the total lending portfolio (both measured gross) improveddeteriorated to 2.2% on 31 December 2008 from 0.6% on 31 December 2007 from 0.8% on 31 December 2006.
In general, Swiss practice is to write off loans only on final settlement of bankruptcy proceedings, sale of the underlying assets, or formal debt forgiveness. By contrast, US practice is generally to write off non-performing loans, in whole or in part, much sooner, thereby reducing the amount of such loans and corresponding allowances recorded. A consequence of applying the Swiss approach is that, for UBS, recoveries of amounts written off in prior accounting periods tend to be small, and the level of outstanding impaired loans as a percentage of gross loans tends to be higher than for its US peers.

2007.

(Audited)

(AUDITED)		 
Loans or receivables with a carrying amount of CHF 126224 million and CHF 48126 million were reclassified from impaired to performing during 2008 and 2007 and 2006respectively. This reclassification was made either because theythe loans had been renegotiated and the new terms and conditions met normal market criteria for the quality of the obligor and type of loan, or because there had been an improvement in the financial position of the obligor, enabling it to repay any past due amounts


                                 
Allowances and provisions for credit losses1
 		 
  Global Wealth Management &          
CHF million Business Banking  Investment Bank  Other2  UBS 
On 31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07 
 
Due from banks  6,606   8,237   57,485   52,164   382   534   64,473   60,935 
 
Loans  230,684   240,641   111,798   95,760   730   466   343,213   336,867 
 
Total lending portfolio, gross3
  237,290   248,878   169,282   147,924   1,113   1,000   407,685   397,802 
 
Allowances for credit losses  (1,195)  (908)  (1,733)  (123)  0   0   (2,927)  (1,031)
 
Total lending portfolio, net
  236,095   247,970   167,550   147,801   1,113   1,000   404,758   396,771 
 
Impaired lending portfolio, gross  2,998   1,820   6,147   572   0   0   9,145   2,392 
 
Estimated liquidation proceeds of
collateral for impaired loans		  (1,594)  (740)  (2,336)  (364)  0   0   (3,930)  (1,104)
 
Impaired lending portfolio, net of collateral
  1,404   1,080   3,811   208   0   0   5,215   1,288 
 
Allocated allowances for impaired lending portfolio  1,171   874   1,733   123   0   0   2,904   997 
 
Other allowances and provisions  24   34   0   0   0   0   24   34 
 
Total allowances and provisions for
credit losses in lending portfolio
  1,195   908   1,733   123   0   0   2,927   1,031 
 
Allowances and provisions for
credit losses outside of lending portfolio
  24   60   119   73   0   0   143   133 
 
                                 
Ratios
                                
 
Allowances and provisions as a %
of total lending portfolio, gross		  0.5   0.4   1.0   0.1   0.0   0.0   0.7   0.3 
 
Impaired lending portfolio as a %
of total lending portfolio, gross		  1.3   0.7   3.6   0.4   0.0   0.0   2.2   0.6 
 
Allocated allowances as a %
of impaired lending portfolio, gross		  39.1   48.0   28.2   21.5   0.0   0.0   31.8   41.7 
 
Allocated allowances as a %
of impaired lending portfolio, net of collateral		  83.4   80.9   45.5   59.1   0.0   0.0   55.7   77.4 
 
1 Figures reflect IFRS reported values.  2 Includes Global Asset Management and the Corporate Center.  3 Excludes loans designated at fair value.

145

Risk and treasury management
Risk management and control

                   
(AUDITED) Impaired assets by type of financial instrument
 		 
           Specific    
       Estimated  allowances,    
       liquidation  provisions and    
       proceeds of  credit valuation  Net impaired 
 CHF million Impaired exposure  collateral  adjustments  exposure 
  
 Impaired loans  9,145   (3,930)  (2,916)  2,299 
  
 Impaired contingent claims  41       (20)  21 
  
 Defaulted derivatives contracts  6,163       (4,205)  1,958 
  
 Defaulted securities financing transactions  309       (111)  198 
  
 
Total 31.12.08
  15,658   (3,930)  (7,252)  4,476 
  
 Total 31.12.07  3,408   (1,104)  (1,914)  390 
  

(AUDITED)such that future principal and interest are deemed to be fully collectible in accordance with the original contractual terms.
Collateral held against the impaired loans portfolio consists in most cases of real estate. It is UBS policy to dispose of foreclosed real estate as soon as practicable. The carrying amount of foreclosed property recorded in the balance sheet under Other assets“Other assets” at the end of 20072008 and 20062007 amounted to CHF 122280 million and CHF 248122 million respectively.
UBS seeks to liquidate collateral in the form of financial assets in the most expeditious manner, at prices considered fair. This may require that it purchases assets for its own account, where permitted by law, pending orderly liquidation.
     The table “Impaired assets by type of financial instrument” above includes not only impaired loans, but also impaired off-balance sheet claims and defaulted derivatives and repurchase / reverse repurchase contracts, which are subject to the same workout and recovery processes.
     The impaired assets of CHF 15.7 billion increased significantly as a consequence of the market turbulence in 2008.
     After deducting allocated specific allowances, provisions and credit valuation adjustments of CHF 7.2 billion and the estimated liquidation proceeds of collateral of CHF 3.9 billion, net impaired assets amounted to CHF 4.5 billion in 2008.

Credit loss expense

UBS’s financial statements are prepared in accordance with IFRS. Under IFRS the credit loss expense charged to the income statement in any period is the sum of net allowances and direct write-offs minus recoveries arising in that period, i.e. the credit losses actually experienced.
     In 2008, UBS experienced a net credit loss expense of CHF 2,996 million, of which CHF 1,329 million was due to impairment charges taken on reclassified financial instruments in the Investment Bank. This was mainly due to an impairment charge taken against a client in the petrochemical industry, excluding any benefit from hedges. In comparison, UBS recorded a net credit loss expense of CHF 238 million in 2007.
     The Investment Bank recorded a net credit loss expense of CHF 2,575 million for 2008, compared with a net credit loss expense of CHF 266 million in 2007. Excluding the credit loss expense from reclassified financial instruments of CHF 1,329


26

           

(Audited)

 Past due but not impaired loans
  
 CHF million 31.12.07  31.12.06 
  
 1–10 days  515   942 
   
  11–30 days  1,381   410 
   
  31–60 days  74   544 
   
  61–90 days  36   463 
   
  > 90 days  262   1,011 
   
  
Total
  2,268   3,370 
   

                                 
Allowances and provisions for credit losses
 
  Global Wealth Management &          
CHF million Business Banking  Investment Bank1  Other2  UBS1 
As of 31.12.07  31.12.06  31.12.07  31.12.06  31.12.07  31.12.06  31.12.07  31.12.06 
 
Due from banks  8,237   6,245   52,164   43,612   507   506   60,908   50,363 
 
Loans  240,641   222,776   95,760   76,188   466   104   336,867   299,068 
 
Total lending portfolio, gross
  248,878   229,021   147,924   119,800   973   610   397,7753  349,4313
 
Allowances for credit losses  (908)  (1,159)  (123)  (97)  0   0   (1,031)  (1,256)
 
Total lending portfolio, net
  247,970   227,862   147,801   119,703   973   610   396,7443  348,1753
 
Impaired lending portfolio, gross  1,820   2,507   572   121   0   0   2,392   2,628 
 
Estimated liquidation proceeds of collateral for impaired loans  (740)  (1,034)  (364)  (25)  0   0   (1,104)  (1,059)
 
Impaired lending portfolio, net of collateral
  1,080   1,473   208   96   0   0   1,288   1,569 
 
Allocated allowances for impaired lending portfolio  874   1,121   123   97   0   0   997   1,218 
 
Other allowances and provisions  94   110   73   4   0   0   167   114 
 
Total allowances and provisions for credit losses
  968   1,231   196   101   0   0   1,164   1,332 
 
Of which collective loan loss provisions and allowances
  34   38   0   0   0   0   34   38 
 
                                 
Ratios
                                
 
Allowances and provisions as a % of total lending portfolio, gross  0.4   0.5   0.1   0.1   0.0   0.0   0.3   0.4 
 
Impaired lending portfolio as a % of total lending portfolio, gross  0.7   1.1   0.4   0.1   0.0   0.0   0.6   0.8 
 
Allocated allowances as a % of impaired lending portfolio, gross  48.0   44.7   21.5   80.2   N/A   N/A   41.7   46.3 
 
Allocated allowances as a % of impaired lending portfolio, net of Collateral  80.9   76.1   59.1   101.0   N/A   N/A   77.4   77.6 
 
1 Figures reflect International Financial Reporting Standards (IFRS) reported values and, for 31 December 2006, the reclassification of prime brokerage as explained Note 1 inFinancial Statements 2007.  2 Includes Global Asset Management and Corporate Center.  3 Excludes CHF 27 million and CHF 93 million gross loans from Industrial Holdings for the years ended 31 December 2007 and 31 December 2006.

                   

(Audited)

 Impaired assets by type of financial instrument
  
           Allocated    
     Estimated  allowances,    
        liquidation  provisions and    
        proceeds of  credit valuation  Net impaired 
  CHF million Impaired exposure  collateral  adjustments  exposure 
   
  Impaired loans  2,392   (1,104)  (997)  291 
   
  Impaired contingent claims  41   0   (33)  8 
   
  Defaulted derivatives contracts  905   0   (814)  91 
   
  Defaulted securities financing transactions  70   0   (70)  0 
   
  
Total 31.12.07
  3,408   (1,104)  (1,914)  390 
   
  Total 31.12.06  2,870   (1,059)  (1,399)  412 
   

27

Risk management
Credit risk

Impaired assets by region and time elapsed since impairment1

                         
 
  Time elapsed since impairment 
CHF million 0–90 days  91–180 days  181 days–1 year  1 year–3 years  > 3 years  Total 
 
Switzerland  135   41   89   326   1,306   1,897 
 
Europe  33   11   2   22   80   148 
 
North America / Caribbean  1,221   4   17   1   35   1,278 
 
Latin America  12   22   0   14   3   51 
 
Asia Pacific  0   5   0   1   12   18 
 
Middle East / Africa  0   0   0   0   16   16 
 
Total 31.12.07
  1,401   83   108   364   1,452   3,408 
 
Allocated allowances, provisions and credit valuation adjustments  (813)  (26)  (40)  (154)  (881)  (1,914)
 
Carrying value  588   57   68   210   571   1,494 
 
Estimated liquidation proceeds of collateral  (436)  (26)  (55)  (146)  (441)  (1,104)
 
Net impaired assets  152   31   13   64   130   390 
 
1 Impaired assets include loans, defaulted derivative contracts, defaulted securities financing transactions and impaired contingent claims.

The table above shows the geographical breakdown and aging of the impaired assets portfolio on 31 December 2007. This portfolio includes not only impaired loans, but also impaired off-balance sheet claims and defaulted derivatives and repurchase / reverse repurchase contracts, which are subject to the same workout and recovery processes.

The CHF 1,221 million of impaired assets shown against North America / Caribbean in the 0 to 90 day time band is a consequence of the recent US mortgage-related market dislocations. Two exposures make up the majority of the total. One is an exposure to a monoline insurer from whom UBS has purchased credit protection in the form of credit default swaps, predominantly on collateralized debt obligations backed by US residential mortgage-backed securities. A 90% credit valuation adjustment on this exposure was taken in fourth quarter 2007. The second is a loan to an Alt-A mortgage originator where the estimated liquidation proceeds of the collateral are only slightly below the outstanding loan amount.
CHF 1.5 billion, or 42% of the gross portfolio of CHF 3.4 billion, relates to positions that defaulted more than three years ago.
After deducting allocated specific allowances, provisions and credit valuation adjustments of CHF 1.9 billion and the estimated liquidation proceeds of collateral (to a large extent real estate) of CHF 1.1 billion, net impaired assets amounted to CHF 0.4 billion.

Credit loss expense

UBS’s financial statements are prepared in accordance with IFRS, under which credit loss expense charged to the income statement in any period is the sum of net allowances and direct write-offs minus recoveries arising in that period, i.e. the credit losses actually incurred. By contrast, for internal management reporting, credit loss expense is based on the expected loss concept described under “Credit risk measurement”. To hold the business groups accountable for credit

losses actually incurred, they are additionally charged or refunded the difference between actual credit loss expense and expected credit loss, amortized over a three-year period. The difference between the amounts charged to the business groups in the management accounts (“adjusted expected credit loss”) and the credit loss expense recorded at Group level is reported in Corporate Center.
 èFor further information on adjusted expected credit loss, see Note 2a inFinancial Statements 2007

From first quarter 2008, as part of the transition to the new Capital Accord (Basel II), UBS will cease using the adjusted expected credit loss concept in management accounts and will no longer report adjusted expected credit losses in its quarterly reports. Expected loss as a risk measure will, however, continue to be a key part of the overall credit risk framework.

The discussion which follows covers only the credit loss expense recorded under IFRS.
In 2007, UBS experienced a net credit loss expense of CHF 238 million, compared with a net credit loss recovery of CHF 156 million in 2006.
The Investment Bank recorded a net credit loss expense of CHF 266 million for 2007, compared with a net credit loss recovery of CHF 47 million in 2006. The main component was valuation adjustments of CHF 131 million taken during fourth quarter 2007, reflecting spread widening (as opposed to credit impairment) on US commercial mortgages that had been carried at amortized cost and were securitized or sold at less than their carrying value.
Global Wealth Management & Business Banking reported a net credit loss recovery of CHF 28 million for 2007, compared with a CHF 109 million net credit loss recovery for 2006. The reduced level of net credit loss recovery was a consequence of the continued reduction in the impaired lending portfolio and related allowances to a level such that recoveries realized from work-outs continue to trend lower and no longer compensate for the ongoing need to establish new allowances. The US



28

   
  

mortgage market dislocation had no impactmillion, the credit loss expense amounted to CHF 1,246 million, mainly driven by new allowances on securities financing transactions, real estate loan positions and asset backed securities as a consequence of the deteriorations in the financial markets.

     Global Wealth Management & Business Banking figures.

reported a net credit loss expense of CHF 370 million for 2008, compared with a CHF 28 million net credit loss recovery for 2007. This significant increase in credit loss expenses was mainly due to collateral shortfalls against lombard lending resulting from the turmoil in the financial markets in the fourth quarter of 2008 with sharp moves in securities prices and an unprecedented decrease in the liquidity of certain asset categories.
  


Rating system design and estimation of
credit risk parameters



Probability of default


UBS assesses the likelihood of default of individual counterpartiescounter-parties using rating tools tailored to the various counterparty segments. Probability of default is summarized in a common Masterscale,the UBS internal rating scale and mapping of external ratings (Masterscale), shown below,on the next page, which segments clients into 15 rating classes two being(0 to 14), one of which is reserved for cases of impairment or default. The UBS Masterscale reflects not only an ordinal ranking of counterparties, but also the range of default probabilities defined for each rating class, andclass. Also, in order to ensure consistency in determining default probabilities, all rating tools must be calibrated to the common Masterscale. This approach means that clients migrate between rating classes as UBS’s assessment of their probability of default changes. The performance of rating tools, including their predictive power with regard to default events, is regularly validated and model parameters are adjusted as necessary.
External ratings, where available, are used to benchmark UBS’s internal default risk assessment. The ratings of the major rating agencies shown in the table are linked to the internal rating classes based on the long-term average 1-yearone-year default rates for each external grade. Observed defaults per agency rating category vary year-on-year,from year to year, especially over an economic cycle, and therefore UBS does not expect the actual number of defaults in its equivalent rating band in any


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Risk and treasury management

(AUDITED)UBS internal rating scale and mapping
of external ratings
UBSMoody's InvestorStandard & Poor's
RatingDescriptionServices equivalentequivalent
0 and 1
Investment gradeAaaAAA
2
Aa1 to Aa3AA+ to AA–
3
A1 to A3A+ to A–
4
Baa1 to Baa2BBB+ to BBB
5
Baa3BBB–
6
Sub-investment gradeBa1BB+
7
Ba2BB
8
Ba2BB
9
Ba3BB–
10
B1B+
11
B2B
12
B3B–
13
Caa to CCCC to C
14
DefaultedDD
given period to equal the rating agency average. UBS monitors the long-term average default rates associated with external rating classes. If these long-term averages were ob-

observed to have changed in a material and permanent way, their mapping to the Masterscale would be adjusted.
     At the Investment Bank, rating tools are differentiated by broad segments. Current segments include banks, sovereigns, corporates, funds, hedge funds, commercial real estate and several more specialized businesses. The design of these tools follows a common approach. The selection and combination of relevant criteria (financial ratios and qualitative factors) are determined through a structured analysis by credit officers with expert knowledge of each segment, supported by statistical modeling techniques where sufficient data are available.
     The Swiss banking portfolio includes exposures to both large and small- to medium-sized enterprises, and the rating tools vary accordingly. For segments where sufficient default data are available, rating tool development is primarily based on statistical models. Typically, these “score cards” consist of eight to 12 criteria combining financial ratios with qualitative and behavioral factors which have proven good indicators of default in the past, are accepted by credit officers and are easy to apply. For smaller risk segments with few observed defaults the approach relies more on judgment and expertise, similar to that applied at the Investment Bank. For the Swiss commercial real estate segment and for lombard lending, which is part of the retail segment, the probability of default is derived from simulation of potential changes in the value of the collateral and the probability that it will fall below the loan amount.
     Default expectations for the Swiss residential mortgage segment are based on the internal default and loss history, where the major differentiating factor is the loan-to-value ratio (i.e. the amount of the outstanding obligation expressed as a percentage of the value of the collateral).

     
 Exposure at default
Exposure at default represents the amounts UBS expects to be owed at the time of default.
     For outstanding loans, the exposure at default is the drawn amount or face value. For loan commitments and for contingent liabilities, it includes any amount already drawn plus any additional amount which is expected to be drawn at the time of default, should it occur. This calculation is based on a “credit conversion factor” – a fixed percentage per product type derived from historical experience of drawings under commitments by counterparties within the year prior to their default.
     For traded products, the estimation of exposure at default is more complex, since the current value of a contract or portfolio of contracts can change significantly over time and may, at the time of a future default, be considerably higher or lower than the current value. For repurchase and reverse repurchase agreements and for securities borrowing and lending transactions, the net amount which could be owed to or by UBS is assessed, taking into account the impact of market moves over the time it would take to close out all transactions (“closeout exposure”). For exchange-traded derivatives (ETDs), the exposure at default is derived from the difference between the initial margin and the current variation margin. Exposure at default on OTC derivative transactions is determined by modeling the potential evolution of the replacement value of the portfolio of trades with each counterparty over the lifetime of all transactions (“potential credit exposure”), taking into account legally enforceable closeout netting agreements where applicable.
     For traded products, excluding ETDs, the exposure at default is derived from a Monte Carlo simulation (a statistical technique involving a large number of simulations) of potential market moves in all relevant risk factors, such as interest rates and exchange rates, based on estimated correlations between the risk factors. This ensures a scenario-consistent estimation of market value across all traded products at counterparty and portfolio level. The randomly simulated sets of risk factors are then used as inputs to product-specific valuation models to generate valuation paths, taking into account the impact of maturing contracts and changing collateral values.
     The resultant distribution of future valuation paths supports various exposure measures. All portfolio risk measures are based on the expected exposure profile. By contrast, in controlling individual counterparty exposures UBS limits the potential “worst case” exposure over the full tenor of all transactions, and therefore applies the limits to the “maximum likely exposure” generated by the same simulations, measured to a specified high confidence level.
     Cases where there is material correlation between the factors driving a counterparty’s credit quality and the factors driving the future path of traded products exposure (“wrong-


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Risk and treasury management
Treasury management

     

(Audited)

 way risk”) require special treatment. In such cases, the potential credit exposure generated by the standard model is overridden by a calculation from a customized exposure model that explicitly takes this correlation into account. For portfolios where this risk is inherently present, for instance for the hedge funds portfolio, UBS internal rating scale and mapping
of external ratingshas established special controls to capture these wrong-way risks.
       The performance of exposure models is monitored by backtesting and benchmarking whereby model outcomes are compared against actual outcomes, based on UBS’s internal as well as external historical experience.
 UBS
Loss given default
Loss given default or loss severity represents UBS’s expectation of the extent of loss on a claim should default occur. It is expressed as a percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and the availability of collateral or other credit mitigation. Loss given default estimates cover loss of principal, interest and other amounts due (including workout costs), and also consider the costs of carrying the impaired position during the workout process.
       Moody’s InvestorStandard & Poor’sAt the Investment Bank loss given default estimates are based on expert assessment of the risk drivers (country, industry, legal structure, collateral and seniority), supported by empirical evidence from internal loss data and external benchmark information where available. In the Swiss portfolio, loss given default differs by counterparty and collateral type and is statistically estimated using internal loss data. For the residen-
 ratingDescriptionServices equivalentequivalent
   
  0 and 1
Investment grade
AaaAAAtial mortgage portfolio, a further differentiation is derived by statistical simulation based on loan-to-value ratios.
 
(AUDITED) 2Aa1 to Aa3AA+ to AA–
3A1 to A3A+ to A–
4Baa1 to Baa2BBB+ to BBB
5Baa3BBB–
6
Sub-investment grade
Ba1BB+
7Ba2BB
8Ba3BB–
9B1B+
10B2B
11B3B–
12Caa to CCCC to C
13
Impaired and defaulted
DD
14DD

served to have changed in a material and permanent way, their mapping to the Masterscale would be adjusted

At the Investment Bank, rating tools are differentiated by broad segments. Current segments include banks, sovereigns, corporates, funds, hedge funds, commercial real estate and a number of more specialized businesses. The design of these tools follows a common approach. The selection and combination of relevant criteria (financial ratios and qualitative factors) is determined through a structured analysis by credit officers with expert knowledge of each segment, supported by statistical modeling techniques where sufficient data is available
The Swiss banking portfolio includes exposures to a range of enterprises, both large and small- to medium-sized (“SMEs”) and the rating tools vary accordingly. For segments where sufficient default data is available, rating tool development is primarily based on statistical models. Typically, these “score cards” consist of eight to twelve criteria combining financial ratios with qualitative and behavioral factors which have proven good indicators of default in the past, are accepted by credit officers and are easy to apply. For smaller risk segments with few observed defaults a more expert-based approach is chosen, similar to that applied at the Investment Bank. For the Swiss commercial real estate segment and for lombard lending, which is part of the retail segment, the probability of default is derived from simulation of potential changes in the value of the collateral and the probability that it will fall below the loan amount.
Default expectations for the Swiss residential mortgage segment are based on the internal default and loss history, where the major differentiating factor is the loan to value ratio – the amount of the outstanding obligation expressed as a percentage of the value of the collateral.

Loss given default

Loss given default or loss severity represents UBS’s expectation of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim, and availability of collateral or other credit mitigation. Loss given default estimates cover loss of principal, interest and other amounts due (including work-out costs), and also consider the costs of carrying the impaired position during the work-out process.
At the Investment Bank, where defaults are rare events, loss given default estimates are based on expert assessment of the risk drivers (country, industry, legal structure, collateral and seniority), supported by empirical evidence from internal loss data and external benchmark information where available. In the Swiss portfolio, loss given default differs by counterparty and collateral type and is statistically estimated using internal loss data. For the residential mortgage portfolio, a further differentiation is derived by statistical simulation based on loan to value ratios.



29

Risk management
Credit risk

Exposure at default

Exposure at default represents the amounts UBS expects to be owed at the time of default.
For outstanding loans, the exposure at default is the drawn amount or face value. For loan commitments and for contingent liabilities, it includes any amount already drawn plus the further amount which is expected to be drawn at the time of default, should it occur. This calculation is based on a “credit conversion factor”, a fixed percentage per product type derived from historical experience of drawings under commitments by counterparties within the year prior to their default.
For traded products, the estimation of exposure at default is more complex, since the current value of a contract or portfolio of contracts can change significantly over time and may, at the time of a future default, be considerably higher or lower than the current value. For repurchase and reverse repurchase agreements and for securities borrowing and lending transactions, the net amount which could be owed to or by UBS is assessed, taking into account the impact of market moves over the time it would take to close out all transactions (“close-out exposure”). Exposure at default on OTC derivative transactions is determined by modeling the potential evolution of the replacement value of the portfolio of trades with each counterparty over the lifetime of all transactions – “potential credit exposure” – taking into account legally enforceable close-out netting agreements where applicable.

For all traded products, the exposure at default is derived from the same Monte Carlo simulation of potential market moves in all relevant risk factors, such as interest rates and exchange rates, based on estimated correlations between the risk factors. This ensures a scenario-consistent estimation of exposure at default across all traded products at counterparty and portfolio level. The randomly simulated sets of risk factors are then used as inputs to product specific valuation models to generate valuation paths, taking into account the impact of maturing contracts and changing collateral values, including the ability to call additional collateral.

The resultant distribution of future valuation paths supports various exposure measures. All portfolio risk measures are based on the expected exposure profile. By contrast, in controlling individual counterparty exposures UBS limits the potential “worst case” exposure over the full tenor of all transactions, and therefore applies the limits to the “maximum likely exposure” generated by the same simulations, measured to a specified high confidence level.
Cases where there is material correlation between factors driving a counterparty’s credit quality and the factors driving the future path of traded products exposure – “wrong-way risk” – require special treatment. In such cases, the potential credit exposure generated by the standard model is overridden by a calculation from a customized exposure model that explicitly takes this correlation into account. For portfolios where this risk is inherently present, for instance for the hedge funds portfolio, UBS has established special controls to capture these wrong-way risks.



30

Risk management
Market risk

Market risk

(Audited)

Market risk is the risk of loss from changes in market variables. There are two broad categories of variables – general market risk factors and idiosyncratic components. General market risk factors are variables which are driven by macroeconomic, geopolitical and other market-wide considerations, independent of any instrument or single name. They include the level, slope or shape of yield curves (interest rates), the levels of equity market indices and exchange rates, prices of energy, metals and commodities, and the general level of credit spreads – the yield paid by borrowers above that on risk-free securities. Associated volatilities and correlations between risks factors – which may be unobservable or only indirectly observable – are also considered to be general market risk factors. Idiosyncratic components are those that cannot be explained by general market moves – broadly, elements of the prices of debt and equity instruments and derivatives (including derivative securities and basket products) linked to them, that result from factors and events specific to individual names.

UBS discloses its market risk in terms of statistical loss using its proprietary Value at Risk (“VaR”) model, but internally also applies stress measures and a variety of concentration and other quantitative and qualitative controls.

In 2007, the market for US residential mortgage-related products – a previously large and highly liquid market – suffered extreme moves and severe dislocation. Although, conceptually, the market risk framework includes appropriate types of controls, their detailed implementation did not cover all the dimensions of risk measurement and aggregation which, in the extreme events of 2007, proved to be necessary. The Investment Bank had accumulated positions, predominantly in highly rated instruments, which were not identified as concentrations. Enhancements have been made and will continue to be made to reflect the lessons learnt.
èFurther detail is provided in the sidebar “Enhancements to market risk management and control” on pages 36–37 of this report

Sources of market risk

(Audited)

UBS takes both general and idiosyncratic market risks in its trading activities, and some non-trading businesses create general market risks.

Trading

(Audited)

Most of UBS’s trading activity is in the Investment Bank. It includes market-making, facilitation of client business and proprietary position taking in the cash and derivative mar-

kets for equities, fixed income, interest rates, foreign exchange, energy, metals and commodities.

The fixed income trading area of fixed income, currencies and commodities (FICC) carries inventory, including exposures to residential and commercial real estate, corporate and consumer credit, and US municipal and student loan markets. Credit spread exposure from FICC positions is generally the largest contributor to VaR.
Exposure to movements in the level and shape of yield curves arises in all the Investment Bank’s trading activities but predominantly in parts of FICC. Exposure to directional interest rate movements varies depending on client flows and traders’ views of the markets. It is often these variations that drive changes in the level of Investment Bank VaR, although the impact of any position or change in position depends on the composition of the whole portfolio at the time.
UBS is active in all major equity markets and an increasing number of newer markets. Equity risk is the other major contributor to Investment Bank market risk, partly from index-based transactions but also from individual stocks, giving rise to idiosyncratic as well as general market risk. A significant component of equity VaR is event risk from proprietary positions, which are taken, for example, to capture arbitrage opportunities or price movements resulting from mergers and acquisitions.
UBS trades in large volumes in currencies, and to a lesser extent in energy, metals and commodities, but the contribution from these activities to overall market risk has generally been relatively small.

(Audited)

The asset management and wealth management businesses carry small trading positions, principally to support client activity. The market risk from these positions is not material to UBS as a whole.
Trading businesses are subject to a variety of market risk limits within which traders manage their risks according to their view of the market, employing a variety of hedging and risk mitigation strategies. Senior management and risk controllers may, however, give instructions for risk to be reduced, even when limits are not exceeded, if particular positions or the general levels of exposure are considered inappropriate. Hedging and mitigation strategies are then discussed and agreed with trading management.

Non-trading

(Audited)

In the Investment Bank, significant non-trading interest rate risk and all non-trading foreign exchange risks are captured, controlled and reported under the same risk management and control framework as trading risk.


31

Risk management
Market risk

(Audited)

In the other business groups, exposures to general market risk factors – primarily interest rates and exchange rates – also arise from non-trading activities. Market risks are generally transferred to the Investment Bank or Treasury, who manage the positions as part of their overall portfolios within their allocated limits. The largest items are the interest rate risks in Global Wealth Management & Business Banking. All risk transfers take place according to approved transfer pricing mechanisms. Market risks that are retained by the other business groups are not significant relative to UBS’s overall risk, and all exposures are subject to market risk measures and controls. With the exception of structural currency exposures, all non-trading currency and commodity positions are subject to market risk regulatory capital and are therefore generally captured in VaR, although such positions do not contribute significantly to overall VaR.

Treasury also assumes market risk from its balance sheet and capital management responsibilities. Treasury finances non-monetary balance sheet items such as bank property and equity investments in associated companies; it also manages interest rate and foreign exchange risks resulting from the deployment of UBS’s consolidated equity, from structural foreign exchange positions and from non-Swiss franc revenues and costs. The market risk limits allocated to Treasury cover both the risks resulting from these responsibilities, and those transferred from other business groups. The limits allow them flexibility to pre-hedge or delay hedging if desired, both to manage large flows and to take advantage of market movements.

èTreasury’s risk management activities are explained in more detail in the “Treasury and capital management” section of this report

Exposure to single names arising from debt instruments, such as loans, which are not originated or acquired as part of a trading activity is controlled under the credit risk framework. Neither idiosyncratic nor credit spread risk on these instruments is captured under the market risk framework. Credit spread risk is, however, a material component of the risk on the Investment Bank’s syndicated financing business and the credit spread exposures from this activity are reported to senior management alongside those on the trading inventory.

The Investment Bank hedges an increasing proportion of its credit exposure. Specific hedges, such as credit default swaps on the same name, are reflected in credit risk measures, but other types of hedge may also be used for exposure management – for example, credit indices or proxy hedges on other names. Hedges of this type are treated as open positions for risk control purposes and are captured under the market risk framework.
Risk on equity investment positions, including private equity, is not controlled under the market risk framework.

èFor details on risk control please see the “Investment positions” section of this report

(Audited)

Risk control organization, governance and structure

The Group Head of Market Risk, reporting to the Group Chief Risk Officer (Group CRO), is responsible for development of the market risk control framework. There is a CRO in each business group and a designated CRO for Treasury. The Group Head of Market Risk, the business group CROs and their teams are responsible for the independent control of market risk.

It is the primary responsibility of traders to identify the risks inherent in their activities, including those arising from new businesses and products, and from structured transactions. The independent controllers are responsible for ensuring that identified risks are completely and accurately captured in risk measurement systems and appropriately constrained by portfolio and concentration controls. They are also responsible for assessing the reasonableness of reported risk, particularly in relation to the revenues generated on the risk positions – an important step in identifying risks that are not adequately reflected in risk measures.
The Investment Bank CRO organization provides market risk measurement and reporting support to all business groups and, in close cooperation with the Group Head of Market Risk, is responsible for the development and ongoing enhancement of market risk measures, including the models used to measure VaR, stress loss and risk on tradable single name exposures.
The Chairman’s Office delegates market risk authority to the GEB and approves delegations by the GEB ad personam to the Group CRO, the Group Head of Market Risk and the business group CROs. Further delegations are also made to market risk officers in the business groups. For many trading businesses, standard transactions within approved business lines and limits do not require prior risk control approval. Rather, risk management and risk control authority holders approve the retention of positions or give instructions for risk to be reduced based on subsequent review. Large transactions such as security underwritings and transactions creating less liquid risks – particularly structured and complex transactions – do, however, require pre-approval, as do temporary increases in limits to accommodate new transactions or positions.
Standard forms of market risk measures, limits and controls are applied to portfolios and risk concentrations. Other forms of measurement and control are developed, where necessary, for individual risk types, particular books and specific exposures. The quantitative controls are complemented by qualitative controls geared to the prompt identification, assessment, measurement and monitoring of market risks. Risks that are not well reflected by standard measures are subject to additional controls, potentially including transaction level pre-approval and specific limits.
UBS’s policy requires that models used for valuation or which feed risk positions to risk control systems are subject



32

(Audited)

to independent verification by specialist quantitative units in the CRO organization.

UBS’s approach to valuation of instruments for which no directly observable market price is available is described in Note 26 inFinancial Statements 2007.Valuation adjustments for model uncertainty are applied where appropriate, consistent with accounting requirements.
Reporting is an important component of the qualitative framework and UBS therefore has processes requiring regular reporting to senior managment in the business groups, the Group Head of Market Risk and Group CRO, and the GEB, Chairman’s Office and Board of Directors (BoD).

Utilizations of most limits, including all major portfolio and concentration limits, are reported daily and all excesses are investigated. Daily reports, including commentary, on material risk positions are provided to senior management in the business groups and to the Group Head of Market Risk and Group CRO. Monthly and quarterly reports, including both quantitative and qualitative information, are prepared in the business groups, and these provide the basis for consolidated reports to the GEB, the Chairman’s Office and the BoD.

Risk measures

(Audited)

UBS has two major portfolio measures of market risk – VaR and stress loss – which are common to all business groups. They are complemented by concentration risk measures and supplementary controls.

Concentration limits are tailored to the nature of the activities and the risks they create. They therefore differ between, for example, the Investment Bank, where the risks are most varied and complex, and Treasury, which carries market risk in a limited range of risk types and not generally in complex instruments.
Supplementary limits are established on portfolios, sub-portfolios, asset classes or products for specific purposes where standard limits are not considered to provide comprehensive control. These “operational limits” are intended to address concerns about, for example, market liquidity or operational capacity. They may also be applied to complex products for which not all model input parameters are observable, and which thus create difficulties in valuation and risk measurement. Operational limits can take a variety of forms including values (market, nominal or notional) or risk sensitivities. The ways in which operational limits are applied have been expanded following the experience of 2007.

èFor further information, please see the sidebar “Enhancements to market risk management and control” on pages 36–37 of this report

Value at Risk (VaR)

(Audited)

VaR is a statistically based estimate of the potential loss on the current portfolio from adverse movements in both general and idiosyncratic market risk factors. The same VaR

model is used for internal risk control (including limits) and as the basis for determining market risk regulatory capital requirements.

èFor futher information, please refer to the “Capital management” section of this report

(Audited)

UBS measures VaR using a 10-day time horizon for internal risk measurement and control, and as the basis for market risk regulatory capital, and based on a 1-day horizon for information and for backtesting. VaR is derived from a distribution of potential losses. It expresses the amount that might be lost over the specified time horizon as a result of changes in market variables, but only to a certain level of confidence (99%) and there is therefore a specified statistical probability (1%) that actual loss over the period could be greater than the VaR estimate.

VaR is calculated at the end of each trading day, based on positions recorded at that time. Retrospective adjustments to valuations, affecting risk positions, may be booked some days later, particularly at period ends. VaR is not subsequently restated to reflect these later adjustments to positions.
VaR models are based on historical data and thus implicitly assume that market moves over the next 10 days or one day will follow a similar pattern to those that have occurred over 10-day and 1-day periods in the past. For general market risk, UBS uses a look-back period of five years – a period which generally captures the cyclical nature of financial markets and is likely to include periods of both high and low volatility. UBS applies these historical changes directly to current positions, a method known as historical simulation.
Idiosyncratic risk is measured on all forms of single name risk. For debt instruments the measure includes rating migration risk and prepayment risk – these measures were enhanced during 2007. For equity instruments, the measure is based on the Capital Asset Pricing Model (“CAPM”) supplemented by a “deal break” methodology for equity arbitrage positions, where UBS is typically long in the stock of one company and short in that of another. The deal break measure assesses the probability of collapse of a merger or take-over, and its impact on the two stock prices – a one-off jump move generating the same potential loss for both 10-day and 1-day VaR.

The Chairman’s Office annually approves a 10-day VaR limit for UBS as a whole and allocations to the business groups, the largest being to the Investment Bank. In the business groups, VaR limits are set for lower organizational levels as necessary.
In the start-up phase of a business, some market risks may be controlled outside VaR but the level of such risk is deliberately kept small, typically by application of operational limits.


33

Risk management
Market risk

Backtesting
The predictive power of the VaR model is monitored by “backtesting”. Backtesting compares the 1-day VaR calculated on trading portfolios at close of each business day with the actual revenues arising on those positions on the next business day. These revenues (“backtesting revenues”) exclude non-trading components such as commissions and fees, and estimated revenues from intraday trading. If back-testing revenues are negative and exceed the 1-day VaR, a “backtesting exception” is considered to have occurred. If the number of backtesting exceptions in a rolling 12-month period exceeds levels specified by regulators, the “multiplier” by which the market risk regulatory capital requirement is derived from 10-day VaR is increased.

Although UBS uses VaR to measure general market risks arising in non-trading books, the results are not formally backtested because these books are not generally marked to market.

(Audited)

VaR based on a 1-day horizon provides an estimate of the likely range of daily mark to market revenues on trading positions under normal market conditions. When 1-day VaR is measured at a 99% confidence level, such an exception can be expected, on average, one in a hundred business days. More frequent backtesting exceptions are likely to occur if market moves are greater than those seen in the look-back period, if the frequency of large moves increases, or if historical correlations and relationships between markets or variables break down (for example, in a period of market disruption or a stress event). Backtesting exceptions are also likely to arise if the way positions are represented in VaR does not adequately capture all their differentiating characteristics and the relationships between them. Such granularity can become particularly important as business grows and as markets evolve or when they experience the sort of dislocation seen in 2007.
UBS experienced many backtesting exceptions as a result of these developments and is responding to them.
èFor further details, please refer to the sidebar “Enhancements to market risk management and control” on pages 36–37 of this report

All backtesting exceptions and any exceptional revenues on the profit side of the VaR distribution are investigated, and all backtesting results are reported to senior business management, the Group CRO and business group CROs.

As required by regulations, backtesting exceptions are also notified to internal and external auditors and relevant regulators.

Stress loss
The purpose of stress testing is to quantify exposure to extreme and unusual market movements. It is an essential complement to VaR.

The VaR measure is based on observed historical movements and correlations, whereas stress loss measures are informed but not constrained by past events. UBS’s objectives in stress testing are to explore a wide range of possible outcomes, to understand vulnerabilities, and to provide a control framework that is comprehensive, transparent and responsive to changing market conditions.

UBS’s stress scenarios include an industrial country market crash with a range of yield curve and credit spread behavior, and emerging market crises, with and without currency pegs breaking. A general recovery scenario is also assessed. The standard scenarios are run daily, and it is against these that the development of stress loss exposure is tracked and comparisons are made from one period to the next. Stress loss limits, approved by the Chairman’s Office, are applied to the outcome of these scenarios for all business groups. Emerging markets stress loss in aggregate and stress loss for individual emerging market countries, measured under the standard stress scenarios, are also separately limited. The scenarios and their components are reviewed at least annually.
UBS has been developing and will soon implement a new approach to the specification of stress loss scenarios that better differentiates between the source of a stress event and its contagion effect.
Specific scenarios targeting current concerns and vulnerabilities are also used. They must, by definition, be constantly adapted to changing circumstances and portfolios. The choice of scenarios is judgmental, depending on management’s view of potential economic and market developments and their relevance to the positions UBS carries. The market moves envisaged in a targeted stress test might prove to be less than the moves actually seen in a stress event, and actual events may differ significantly from those modeled in the stress scenarios. UBS’s targeted stress tests did not predict the severe dislocation in US residential mortgage-related markets in 2007 – in particular the breakdown in correlation within and between asset classes and the complete drying up of liquidity. UBS is endeavoring to reflect these experiences in its stress testing framework.
The VaR results beyond the 99% confidence level are analyzed to better understand the potential risks of the portfolio and to help identify risk concentrations. The results of this analysis are valuable in their own right and can also be used to formulate position-centric stress tests. Although the standard scenarios incorporate generic elements of past market crises, more granular detail of specific historical events is provided by the VaR tail. During 2007, the “worst historical loss” from the VaR distribution was introduced as an additional formal stress scenario. UBS is also considering use of a longer historical time series, where available, to generate this stress exposure.
Additionally, UBS measures and limits the impact of increased default rates on the value of its portfolio of single name exposures.



34

UBS applies country ceilings to limit exposure to all but the best-rated countries and these measures cover market as well as credit risks.
èFor details of country risk control please refer to pages 24–25 in the “Credit risk” section of this report

Most major financial institutions employ stress tests, but their approaches differ widely and there is no benchmark or industry standard in terms of scenarios or the way they are applied to an institution’s positions. Furthermore, the impact of a given stress scenario, even if measured in the same way across institutions, depends entirely on the makeup of each institution’s portfolio, and a scenario highly applicable to one institution may have no relevance to another. Comparisons of stress results between institutions can therefore be highly misleading, and for this reason UBS, like most of its peers, does not publish quantitative stress results.

Concentration limits and other controls

(Audited)

UBS applies concentration limits to exposures to general market risk factors and to single name exposures. The limits take account of variations in price volatility and market depth and liquidity.

In the Investment Bank, limits are placed on exposure to individual risk factors. They are applied to general market risk factors or groups of highly correlated factors based on market moves broadly consistent with the basis of VaR, i.e. 10-day, 99% confidence moves. Each limit applies to exposures arising from all instrument types in all trading businesses of the Investment Bank. The market moves are updated in line with the VaR historical time series and the limits are reviewed annually or as necessary to reflect market conditions.The effectiveness of risk factor limits in controlling concentrations of risk depends critically upon the way risk positions are represented. If long and short positions are considered to be sensitive to the same risk factor, potential gains and losses from changes in that factor are netted. The steps UBS is taking to enhance granularity of risk representation in its VaR measure are equally relevant to its risk concentration controls.
The Investment Bank carries exposure to single names, and therefore to event – including default - - risk. This risk is measured across all relevant instruments (debt and equity, in physical form and from forwards, options, default swaps and other derivatives including basket securities) as
the aggregate change in value resulting from an event affecting a single name or group. The maximum amount that could be lost if all underlying debt and equity of each name became worthless is also tracked. Positions are controlled in the context of the liquidity of the market in which they are traded, and all material positions are monitored in light of changing market conditions and specific, publicly available information on individual names – market risk officers do not have access to non-public information and must therefore rely to a significant extent on external ratings.
This form of single name exposure measure is most appropriate to corporate clients, financial institutions and other entities, the value of whose equity and debt instruments is dependent on their own assets, liabilities and capital resources. Asset-backed securities are usually issued through special purpose, bankruptcy remote vehicles and it is more important to aggregate risk in other dimensions than the issuer name, in particular the factors affecting the value of the underlying asset pools. UBS monitored underlying exposures by broad asset category but not to the level of granularity that proved neccessary in the case of mortgage-backed securities. It is now enhancing its measures accordingly.
èFor further details, please refer to the sidebar “Enhancements to market risk management and control” on the next two pages of this report

(Audited)

Exposures arising from security underwriting commitments are subject to the same measures and controls as secondary market positions. There are also governance processes for the commitments themselves, generally including review by a commitment committee with representation from both the business and the control functions. All firm underwriting commitments are approved under specific delegated risk management and risk control authorities.

Other applications of market risk measures

Market risk measurement tools may be selectively applied to portfolios for which the primary controls are in other forms. VaR can, for example, provide additional insight into the sensitivity of investment positions to market risk factors, even though some of the assumptions of VaR – in particular the relatively short time horizon – may not be representative of their full risk. The results can be used by business management and risk controllers for information or to trigger action or review.



35

Risk management
Market risk

Enhancements to market risk management and control

In 2007, UBS’s market risk measures underestimated the potential losses resulting from exposures to the previously deep and liquid US residential mortgage market – neither trading management nor market risk controllers foresaw the extreme rates of delinquency and default and low recovery levels now projected, or the breakdown in correlation within and between asset classes that emerged in the second half of 2007 and revealed the tail risk in UBS’s positions. With the accompanying drying up of liquidity in parts of the market, the size of UBS’s positions has proved excessive relative to the market. The size, frequency and pattern of market moves were exceptional and UBS suffered losses in excess of those predicted by statistical or even stress loss risk measures based on historical market movements. Other market risk management and control processes were, however, intended to identify risk concentrations and sources of potential loss in more extreme circumstances. UBS is therefore taking steps to address the gaps which these events have revealed.

Risk management

Following the major losses, senior management changes were made. The fixed income, currencies and commodities (FICC) business unit is being restructured to build upon and strengthen its core business strategy of

client servicing and risk distribution, and introduce stronger risk discipline:
–a workout group has been established to ensure robust risk management of the segregated, legacy portfolios and to develop orderly exit strategies;
–the remaining real estate-related activities are being refocused towards intermediation of client flows and alignment to the needs of investment banking and wealth management clients; and
–management of flow credit trading is being consolidated. This will improve risk aggregation and communication and, over time, will allow consolidation of risk management systems.
The introduction of a new funding framework for the Investment Bank will encourage more disciplined use of the balance sheet.
èFor further information, please refer to the sidebar “New funding framework” on page 51 of this report

The models used in the risk management and valuation of US residential real estate-related products have been refined and recalibrated to reflect projections for lifetime cumulative losses consistent with market prices, where observable, and will continue to be updated as these projections and market parameters change. Even

though some of these developments were undertaken under time pressure in a period of rapidly evolving markets and expectations, all models were approved for use by the independent model verification team. In first quarter 2008, the models were put into full production mode in the Investment Bank.

Risk control

As explained under “Risk measures”, which starts on page 33 of this section, where values of different instruments are assessed to be driven by the same risk factor, sensitivities in standard risk control measures have typically been expressed net across instruments and positions. If the drivers are not, in fact, the same risk factor but, rather, risk factors which have historically been very closely correlated, this netting will disguise “basis” risk – the risk of divergent movements between risk factors that are not perfectly correlated. A feature of the market dislocation in 2007 was the breakdown of historical correlations within markets, for example delinquency rates on sub-prime mortgages of different vintages. An important enhancement to the market risk control framework is therefore to increase the granularity of risk representation – not just for US residential mortgage related products but more generally – so that basis risks can be appropriately measured and



36

controlled.

The specific characteristics of individual instruments which are critical in a stress event cannot always be predicted and it is therefore important to have a multi-faceted framework with complementary controls. UBS is applying more extensive limits, by asset class, based on gross values as well as risk sensitivities, in order to protect against extreme losses in the event of future dislocations and breakdowns – even if the probability of their occurring currently appears to be remote. Additionally, controls have been introduced to highlight positions which are large relative to market depth. In 2007, UBS also suffered significant markdowns as a result of leveraged positions – positions on which the rate of loss accelerated as market moves became more extreme – and on positions which were protected against market moves up to a certain point but fully exposed beyond that level. Such risks often only materialize when markets move beyond the range covered by statistical and stress loss parameters, and thus they do not show up in the regular risk measures. Controls over these deep tail risks already exist for some portfolios and are now being more widely applied. UBS is revising its approach to global stress testing to deliver a more diverse range of scenarios, which better differentiate between the source of a

stress event and its contagion effect. Additionally, more extensive use of targeted stress tests is planned, using forward looking scenarios based on analysis of the positions and vulnerabilities of each portfolio. An important additional aspect of stress testing will be to consider liquidity as well as price sensitivity. New stress loss limits have been introduced at business area level, and on the stress loss contribution to standard scenarios from emerging markets, individually and in aggregate.
Since second quarter 2007, a series of in-depth reviews, which will cover all Investment Bank trading portfolios, has been under way. The findings of these reviews are being incorporated into development plans and will be factored into the quantitative enhancements described above. They also provide important insights into necessary qualitative changes to market risk management and control. It is intended that reviews of this type will become a regular feature, contributing to the ongoing enhancement of the market risk framework. UBS has, for many years, had a policy covering the pre-approval of structured and complex transactions. This has operated well at the transactional level but needs to be more systematically complemented by an assessment of the cumulative impact of “one-off” transactions with similar characteris-
tics on market risk in the portfolio. Processes have been adjusted so that repeat transactions now trigger a review as a new business initiative, the objective being to identify, at an early stage, any potential build-up of risks that are not appropriately captured by the control framework.
Investment Bank market risk policies are also being revised to emphasize the key characteristics of trading activities, and the criteria for assessing the liquidity of positions.
Market and credit risk control operate on opposite sides of information barriers – market risk officers do not generally have access to non-public information about clients and counter-parties unless formally brought “over the wall”. There are, however, areas where the two teams can and do work closely together to provide a comprehensive and consistent view of risks. Areas for further cooperation and integration in organization and processes are being explored to better exploit the complementary skills of the two units. The planned quantitative improvements and enhancements to processes will be reinforced through education to ensure that the lessons from 2007 are understood by risk managers and risk controllers alike. UBS has a dedicated risk education unit, reporting to the Group CRO, which is developing programs to help strengthen risk culture and risk awareness.


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Risk management
Market risk

Market risk in 2007

The graphs below illustrate the relative calm of the first half of 2007, and the severe dislocation of markets and extreme volatility of the second half. Markets retreated in response to the first fall in the US sub-prime market, but by the end of first quarter the impact appeared to have been contained. Equities markets resumed their upward trend from late March through to May, but by June inflation fears and renewed concerns about wider contagion from the sub-prime market led to increased volatility. A flight to quality and rapid deleveraging by some market participants followed in third quarter, resulting in intra-market dislocations as participants exited “crowded trades”. Spreads between government yields and bank borrowing rates (“TED spread”) widened dramatically and central banks intervened to counter

the general drying up of liquidity. In the US residential mortgage-related markets, credit spreads on the highest rated securities reached unprecedented levels, with associated increases in volatilities. A temporary recovery in September was short-lived – markets fell again in November on further deterioration in US residential mortgage markets, fears of a US recession and uncertainties about the health of the banking sector. Despite a slight recovery in some markets in December many experienced professionals regard trading conditions in fourth quarter as amongst the most difficult for many years.

Value at Risk

(Audited)

In 2007, Investment Bank VaR was higher on average and at year-end than in 2006, with a much greater range between minimum and maximum.



(BAR CHART)

(BAR CHART)

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The graph of US sub-prime mortgage-backed securities illustrates the scale of market value decline which eroded partial hedges on positions, and increased risk exposure. The extreme volatility of spreads has progressively increased reported VaR on existing positions with each update of the 5-year historical time series. While the illiquidity of large parts of this market has prevented significant reductions in positions, amortizations and writedowns, together with active risk reduction in other areas, resulted in a lower VaR at year end than the peak for the year which occurred in fourth quarter.

There were other notable contributors to the fluctuations in Investment Bank VaR during the course of the year. The acquisition of Banco Pactual, completed in December 2006, resulted in more volatile interest rate VaR. In the first half of the year, directional exposure to equity markets not only increased equity VaR but also reduced the offset against interest rate VaR.

Credit spread exposure and idiosyncratic risk were major contributors to the risk profile throughout the year.
Market risk limits were adjusted in third quarter to constrain the level of risk in areas other than US residential mortgage market related exposure, but the impact on these positions of updates to the historical time series in third and fourth quarters has more than offset risk reductions elsewhere.
Corporate Center VaR was generally lower than in 2006, until fourth quarter when the major writedowns announced in December led to temporary positions associated with Treasury’s management of the foreign exchange component of parent bank profits and losses, and its management of the parent bank equity.
VaR for UBS as a whole was dominated by the Investment Bank, with Treasury providing some offset at times.


                                 
Investment Bank: Value at Risk (10-day, 99% confidence, 5 years of historical data)
  
  Year ended 31.12.07  Year ended 31.12.06 
CHF million Min.  Max.  Average  31.12.07  Min.  Max.  Average  31.12.06 
 
Risk type
                                
 
Equities  147   415   210   242   144   360   203   232 
 
Interest rates (including credit spreads)  269   877   475   576   237   607   417   405 
 
Foreign exchange  9   73   28   21   16   65   31   40 
 
Energy, metals and commodities1
  24   90   51   41   26   102   49   44 
 
Diversification effect  2   2   (227)  (266)  2   2   (280)  (248)
 
Total
  291   836   537   614   331   559   420   473 
 
1Includes base metals and soft commodities risk from 15 March 2006.    2 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.

                                   

(Audited)

 UBS: Value at Risk (10-day, 99% confidence, 5 years of historical data) 
   
   Year ended 31.12.07  Year ended 31.12.06 
 CHF million Min.  Max.  Average  31.12.07  Min.  Max.  Average  31.12.06 
  
  
Business groups
                                
   
  
Investment Bank1,2
  291   836   537   614   331   559   420   473 
   
  
Global Asset Management3
  2   10   4   3   4   16   9  ��10 
   
  Global Wealth Management & Business Banking  2   5   3   3   4   14   10   5 
   
  Corporate Center  10   92   25   61   25   69   43   27 
   
  Diversification effect  4   4   (34)  (93)  4   4   (54)  (52)
   
  
Total
  288   833   535   588   336   565   429   464 
   
  
1 Includes UBS risk managed by Dillon Read Capital Management from June 2006 to 2 May 2007 and risk transferred from Dillon Read Outside Investor Fund from 3 May 2007.    2 Includes UBS Pactual from 1 December 2006.    3 Only covers UBS positions in alternative and quantitative investments. During first quarter 2007, seed money and coinvestments in these funds were reclassified as financial investments and they are not included in reported Value at Risk from that point.   4 As the minimum and maximum occur on different days for different business groups, it is not meaningful to calculate a portfolio diversification effect.

                                 
UBS: Value at Risk (1-day, 99% confidence, 5 years of historical data)1
  
  Year ended 31.12.07  Year ended 31.12.06 
CHF million Min.  Max.  Average  31.12.07  Min.  Max.  Average  31.12.06 
 
Investment Bank2
  124   253   164   149   129   230   172   160 
 
UBS
  126   254   165   152   131   233   173   162 
 
1 10-day and 1-day Value at Risk (VaR) results are separately calculated from underlying positions and historical market moves. They cannot be inferred from each other.   2 Positions in Investment Bank subject to market risk regulatory capital contributed average VaR of CHF 160 million in 2007 and CHF 169 million in 2006.

39

Risk management
Market risk

Backtesting
As a result of the severe market volatility and dislocation which prevailed from the end of July, UBS experienced 29 backtesting exceptions in 2007, its first since 1998. The multiplier by which the market risk regulatory capital requirement is derived from 10-day VaR has been increased accordingly.

The first histogram shows daily backtesting revenues alongside all daily revenues for 2007. In the second histogram, the daily backtesting revenues are compared with the corresponding VaR over the same 12-month period for days when backtesting revenues were negative.
Given market conditions, the occurrence of backtesting exceptions is not surprising. Moves in some key risk factors were, on occasions, well beyond the level expected statistically with 99% confidence based on the historical time series in use at the time. Despite regular updates to the time series, backtesting exceptions have continued, partly caused by “jump events”. Some of these reflect a step change in market conditions, such as the mass downgrade by a rating agency of highly rated US residential mortgage market-linked securities. Others result from periodic new information or show the cumulative impact over several days or weeks of changing conditions in markets with diminished liquidity – the monthly remittance data published by mortgage servicers typically results in discontinuities of this type. UBS also made changes to its valuation approach to certain positions, leading to step changes. For example, as liquidity dried up, certain positions moved from a mark-to-market to a market-to-model basis. The enhancements UBS is making to market risk measures will not, of course, eliminate backtesting exceptions from these sources.

Stress loss
Stress loss for Investment Bank is defined as the worst case outcome from the official stress scenarios, which now include the worst historical loss from each day’s VaR simulation. Stress loss, like VaR, is dominated by US residential mortgage-related positions, with a significant contribution from corporate credit spread exposure. Changing directional exposures to interest rates and equity markets have led to fluctuations in reported stress loss over the course of the year.

(BAR CHART)

(BAR CHART)



40

Value at Risk outlook

In its fourth quarter 2007 report, UBS indicated that it was considering changing the internal risk control and / or regulatory capital treatment of some US residential mortgage market-related positions. Decisions have now been taken to reclassify some of the legacy portfolios managed by the FICC workout group. The markets for these positions are not liquid and 10-day VaR is not an adequate measure of their risks or an appropriate risk control tool. They will no longer be subject to internal VaR limits, they will be subject to banking book, rather than trading book, regulatory capital, and they

will be excluded from UBS’s disclosed VaR from first quarter 2008.

(Audited)

The marginal contribution of the legacy positions to Investment Bank VaR at 31 December 2007 is approximately CHF 260 million.
Since year-end 2007, the VaR historical time series has been further updated to capture the continued increase in market volatility in November and December. As a result, VaR on existing Investment Bank positions – excluding the legacy positions – increased by approximately 4%. Had the legacy positions remained in VaR their marginal contribution to Investment Bank VaR would have more than trebled.


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Risk management
Investment positions

Investment positions

(Audited)

UBS makes investments for a variety of purposes. The majority of investment positions are equity holdings, some of which are made for revenue generation or as part of strategic initiatives, while others, such as exchange and clearing house memberships are held in support of UBS’s business activities. Investments are also made in funds managed by UBS to seed them at inception or to demonstrate alignment of UBS’s interests with those of investors. UBS also holds debt investments.

Equity investments

Many equity investments are unlisted and therefore illiquid. Investments in listed stocks are limited in number both by individual market and in total. The fair values of equity investments are generally dominated by factors specific to the individual stocks and the correlation of individual holdings to equity indices varies. Furthermore, equity investments are generally intended to be held medium- or long-term and may be subject to lock-up agreements. For these reasons, they are not directly controlled using the market risk measures applied to trading activities. They are, however, subject to controls, including pre-approval of new investments by business management and risk control, and regular monitoring and reporting.

Where investments are made as part of an ongoing business they are also subject to standard controls, including portfolio and concentration limits. Seed money and co-investments in UBS-managed funds made by Global Asset Management are, for example, subject to a portfolio limit. All investments must be explained and justified, approved according to delegated authorities, and monitored and reported to senior management throughout their life.
Private equity positions were, in the past, the major component of equity investments but the portfolio is being managed down.
While equity investments are not subject to UBS’s Group and business group VaR limits, market risk measurement tools may be selectively applied to them, where appropriate, for internal management information. VaR can, for example, provide additional insight into the sensitivity of investments in UBS-managed funds where the assets and other exposures of the funds are in the form of tradable financial instruments. Although some of the assumptions of VaR – in particular the relatively short time horizon – may not be representative of the full risk on equity investments, the results can be used by business management and risk controllers for information or to trigger action or review.

Under International Financial Reporting Standards (IFRS), equity investments may be classified as Financial investments available-for-sale, Financial assets designated at fair value through profit and loss, or Investments in associates.

Composition of equity investments
At 31 December 2007, UBS held equity investments totaling CHF 7,690 million of which CHF 3,583 million were classified as Financial investments available-for-sale, CHF 2,128 million as Financial assets designated at fair value and CHF 1,979 million as Investments in associates. Within Financial investments available-for-sale, CHF 1,865 million are listed equities. None of UBS’s equity investments is in structured equity products.

At 31 December 2006, equity investments totalled CHF 10,014 million of which CHF 8,062 million were classified as Financial investments available-for-sale, CHF 429 million as Financial assets designated at fair value and CHF 1,523 million as Investments in associates. Within Financial investments available-for-sale, CHF 5,880 million were listed equities.
UBS’s largest single equity investment is its 1% stake in Bank of China, which was taken in 2005, as part of a major strategy initiative. The fair value of this investment on 31 December 2007 was CHF 1,644 million, of which CHF 1,084 million is an unrealized gain reported in equity. The fair value at 31 December 2006 was CHF 2,055 million of which CHF 1,450 million was an unrealized gain recorded in equity. Bank of China is a domestic Chinese bank which has a listing on the H-share register in Hong Kong. The fair value at which UBS carries this investment is determined by a valuation technique (level 2) to reflect the lock-up agreement between UBS and Bank of China. The market value of the shares is affected primarily by the performance of the bank itself, which will, in turn, be somewhat influenced by the Chinese economy, but it is not expected that day to day movements in either Chinese or Hong Kong stock market indices will have a long term impact on the value of this investment. Changes in the exchange rate between the Swiss franc and the Chinese renmimbi, in which the assets and liabilities of Bank of China are primarily denominated, will affect the fair value at which the investment is recorded in UBS’s financial statements.
At 31 December 2006, UBS held a stake in Bank Julius Baer with a fair value of CHF 3,029 million. This stake was acquired when Private Banks & GAM was sold in 2005. It was sold in June 2007.
Within the total of CHF 2,128 million Financial assets designated at fair value, an amount of CHF 1,788 million



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(Audited)

represents the assets of trust entities associated with employee compensation schemes. They are broadly offset by liabilities to plan participants included in Other liabilities. The equivalent positions at 31 December 2006 amounted to CHF 1,726 million.
èDetails of significant associates are provided in
Note 33 inFinancial Statements 2007

Debt investments



Debt investments classified for IFRS as Financial“financial investments available-for-saleavailable-for-sale” can be broadly categorized as money market papersinstruments and debt securities, which are mainly held for statutory, regulatory or liquidity reasons, andreasons. Debt investments also include non-performing loans, which arewere purchased in the secondary market by the Investment Bank as part of an approved business line.

Bank.
The risk control framework applied to debt instruments classified as Financial“Financial investments available-for-saleavailable-for-sale” varies depending on the nature of the instruments and the purpose for which they are held.
UBS Bank USA holds debt investments in instruments for which there are liquid markets and of a type which the Investment Bank also carries in its trading inventory (US government sponsored agency securities). They are controlled

      

under the market risk framework and for internal risk control purposes are not considered to be investment positions.
Non-performing loans are subject to specific limits and controls, including risk management and risk control pre-approval. The fair value of non-performing loans is not highly sensitive to interest rate movements but, rather, depends on the expected recovery rate for each individual loan.
Other debt investments are predominantly securities issued by sovereigns of the Organization for Economic Cooperation and Development (OECD) and highly rated financial institutions.
Where applicable, debt investments are reflected in reports to senior management of consolidated credit exposures and in large exposure“large exposure” reports to the Swiss Federal Banking Commission (SFBC).
FINMA.
 


Composition of debt investments
On 31 December 2007,2008, debt financial investments classified as Financial“Financial investments available-for-saleavailable-for-sale” consisted of money market paperspaper of CHF 3492,165 million and other debt investments of CHF 1,0341,402 million.

The increase in money market instruments is due to UK Treasury Gilts held in UBS Ltd.
At 31 December 2006,2007, the equivalent positions were CHF 354349 million money market paperinstruments and CHF 5211,034 million other debt investments.



43148

Risk and treasury management

Risk Management
Operational risk

Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems (for example failed IT systems, or fraud perpetrated by a UBS employee), or from external causes, whether deliberate, accidental or natural. It is inherent in all of UBS’s activities, not only in the business the firm conducts but dueactivities. Operational risks are monitored and, to the fact it is a business – because UBS is an employer, it ownsextent possible, controlled and occupies property and holds assets, including information, belonging to both the firm and its clients. Themitigated. UBS’s approach to operational risk is not designed to eliminate risk per sealtogether but, rather, to contain itrisks within acceptable levels as determineddeemed acceptable by senior management, and to ensure that the firm has sufficient information to make informed decisions about additional controls, adjustments to controls, or other risk responses.management. The Group Chief Risk Officer (Group CRO) and, supported by the Group Head of Operational Risk, (who reports to the Group CRO) areis responsible for the independence, objectivity and effectivenesseffective design of the operational risk framework.

Operational risk framework

Every function,

All UBS functions, whether a front-end business, or a control or logistics unit,functions, must manage the operational risks that arise from its owntheir activities. Because theseOperational risks are all pervasive, withas a failure in one area potentially impacting many others, UBS’s framework is basedmay have a potential impact on mutual oversight across all functions.several other areas. Each business groupdivision has therefore established a cross-functional bodiesbody to actively manage operational risk as an integral part of its governance structure, to actively manage operational risk.

structure.
To ensure the integrity of risk management decisions, each business groupdivision also has an Operational Risk Control unit, the head of which reports functionally to the Group Head of Operational Risk. The primary remit of these units is to confirm the effective implementation of the operational risk framework in the business group, to ensure transparent assessment and reporting of risks to senior management, and to coordinate with their counterparts in other business groupsperform independent oversight of the design and with the Group Head of Operational Risk on cross-business group matters.conclusions regarding operating effectiveness reached by management.
The foundation of the operational risk framework is the definition bythat all functions ofhave adequately defined their roles and responsibilities so that,responsibilities. The functions can then collectively they can ensure that there is adequate segregation of duties, complete coverage of risks and clear accountability. From this analysis, they develop control objectives and standards to protectmanage UBS’s tangible and intangible assets, and interests, based on the types of operational risk events that might arise, ranging from daily reconciliation problems to potentially severe events such as fraud. UBS recognizes that it cannot eliminate all risks, because errors and accidents will always happen, and that even where it is pos-

siblepossible to eliminate certain risks it is not always cost effective to do so. UBS’s internal control framework differentiates potential events depending on their likely frequency and impact. Its mitigation and avoidance efforts are focused on areas where UBS believes it is most exposed to severe events – including both those that are reasonably foreseeable and those that, while not predictable, are thought to be reasonably possible. For lower impact risks UBS concentrates on management and monitoring.
The functions use their controls to monitor compliance with their controls and assess their operating effectiveness in several ways, including self-certification by staff, and evaluationtracking of responses by management. Additionally, they track a wide range of metrics to provide potential early warning of increased risk associated with non-attainment of control objectives. These include numbers(for example, the number and characteristics (severity, size, age, etc.) of for example, client complaints, and claims, deal cancellations and corrections, unreconciled items

on cash and customer accounts, and systems failures. The implicationsfailures), and the analysis of internal and external audit findings and other relevant sources of information are also assessed.findings.
As major financial and non-financial operational risk events occur, UBS assesses their causes and the implications for its control framework, whether or not they lead to direct financial loss.framework. This includes events affecting third parties that are relevant to the firm’s business, ifprovided that sufficient information is made public. It is important to use all available information to test the control framework because, even if an internal event does not lead to a direct or indirect financial loss, it may indicate that UBS’s standards are not being complied with.publicly available.
The totality of this information is reviewed by functional managers to assess their operational risk exposure and the actions needed to address specific issues. These issues are formally captured onin a risk inventory, which forms the basis of operational risk reporting to senior management. Regular reports are madeprovided both within the business groupsdivisions and to the Group CRO to allow senior management to assess the overall operational risk profile.profile of the firm.

Operational risk measurement

UBS has developed a model for the quantification of operational risk which meets the regulatory capital standard underspecified by the Basel II Advanced Measurement Approach (AMA). ItThe model has two main components. The historical component is based on UBS’s own internal losses and is used primarily to determine the expected loss portion of the capital requirement. The firm has been collecting operational risk event data (both profits and losses) since 2002.



44

The scenario component of the AMA model is used primarily to determine the unexpected loss portion of the capital requirement. It is based on a set of generic scenarios that represent categories of operational risks to which UBS is exposed. The scenarios themselves are generated from an analysis of internal and external event information, the current business environment, and UBS’s own internal control environment through comparison to the risk inventory. For each scenario, UBS estimates a base case mainly derived from its own experience, a stressed case mainly derived from integrating experiences of select peers and a worst case based on events experienced by an expanded set of peers in the financial industry. The scenarios are reviewed at least annually by experts in the relevant subject matter and their risk control counterparts to ensure their validity and may be updated based on material new information or events that occur.
Currently, UBS does not reflect mitigation through insurance in its AMA model.
UBS does not set limits on operational risk but reports the measured risk through the standard reporting processes, and includes it in the overall quantification of risk under the Earnings-at-risk and Capital-at-risk frameworks.
With the implementation of Basel II from 1 Januarycomponents:
–The historical component is based on UBS’s own internal losses and is used primarily to determine the expected loss portion of the capital requirement. UBS has been collecting operational risk event data (both profits and losses) since 2002.
–The scenario component is used primarily to determine the unexpected loss portion of the capital requirement. It is based on a set of generic scenarios that represent categories of operational risks which UBS is exposed to. The scenarios themselves are generated from an analysis of internal and external event information, the current business environment and UBS’s own internal control environment. The scenarios are reviewed at least annually by experts to ensure their validity and may be updated based on material new information or events. During 2008, scenarios were adjusted for a number of industry-wide events including unauthorized trading losses and disputes over client practices.
UBS calculates its operational risk regulatory capital requirement using the AMA model for the consolidated groupGroup and the parent bank in accordance with the requirements of the Swiss Federal Banking Commission, UBS’s primary regulator.FINMA. For regulated subsidiaries the simpler basic indicator or standardized approaches are adopted as agreed with local regulators. Currently, UBS does not reflect mitigation through insurance in its AMA model.



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Risk and treasury management
Treasury management

The operational risk framework

Treasury management

UBS’s treasury department is primarily qualitative rather than quantitative –responsible for the management of the firm’s financial lossesresources. This includes the management of: liquidity and funding; capital and balance sheet; and interest rate and currency risks arising from balance sheet and capital considerations are only one, and not the most important, element.management responsibilities. UBS uses the operational risk framework as the basis for specialist internal control assessments in areas such as legal, compliance, tax and human resourcesaims to maintain sound capital ratios at all times – to ensure strong external credit ratings and to meet internal control-related regulatory requirements, such as Section 404remain one of the US Sarbanes-Oxley Act of 2002, as well asbest-capitalized firms in the international financial sector.

UBS: funding by currency

(UBS: FUNDING BY CURRENCY)

UBS: BIS capital ratios1

(UBS: BIS CAPITAL RATIOS)
1 Prior to and including 4Q07 the capital ratios above are based on Basel II.I capital regulations, thereafter on Basel II rules.

UBS: funding by product type

(UBS: FUNDING BY PRODUCT TYPE)



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Risk and treasury management

TreasuryLiquidity and capitalfunding management


– UBS’s treasury department is responsible for the management of the firm’s financial resources. This includes management of: liquidity and funding; capital and balance sheet; and interest rate and currency risks arising from balance sheet and capital management responsibilities
–(AUDITED) UBS aims to maintain sound capital ratios at all times – to ensure strong external credit ratings and to remain one of the best capitalized firms in the international financial sector

Liquidity management

–Liquiditydefines liquidity riskis as the risk of being unable to raise funds to meet payment obligations when they fall due. Liquidity must be continuously managed to ensure that the firm can survive a crisis

–Liquidity managementbecame a challenge during 2007, following the dislocation of the US residential mortgage market

–Liquidity position:in anticipation of an extended period of market turbulence, UBS took several measures to strengthen its liquidity position, including adjustment of short-term funding targets and increased focus on balance sheet management

Funding management

–Funding riskis the risk of being unable, on an ongoing basis, to borrow funds in the market at an acceptable price to fund actual or proposed commitments and thereby support UBS’s current business and desired strategy

strategy. Liquidity and funding are not the same, but they are closely related. Both are finite resources that are critical for a financial institution.
– Access     Liquidity must be continuously managed to funding:despite challengingensure that the firm can survive a crisis, whether it is a general market conditionsevent, a localized difficulty affecting a smaller number of institutions, or a problem unique to an individual firm. An institution that is unable to meet its liabilities when they fall due may collapse, even though it is not insolvent, because it is unable to borrow sufficient funds on an unsecured basis, or does not have sufficient good quality assets to borrow against or liquid assets to sell to raise immediate cash.

Market liquidity overview: 2008

The financial and credit market crisis, which had its origins in the US residential mortgage market in the second half of 2007, spread and gained in intensity throughout 2008, as a broader economic crisis developed and pointed towards a severe global downturn. A precipitous fall in trading volumes in some previously highly liquid markets accompanied a sharp reduction in asset market values. After the failure of one of the major US investment banks in mid-September, the tenor of the interbank lending market was dramatically reduced. Although other short-term funding remained available at this time, it was largely limited to tenors within one month, while in secured funding markets certain assets were subjected to significantly higher haircuts and in some cases were no longer accepted as collateral. Access to other longer-term wholesale funds was also severely constrained, as the level of credit spreads surged, and companies’ financing costs reached new heights.
     In an attempt to contain the sustained and growing crisis, which resulted in significant bank failures or forced restructurings of several major financial institutions throughout the year, central banks and governments were induced to intervene on a large scale to support both specific institutions and the global financial system as a whole. These public sector initiatives included a series of restructurings, recapitalizations – both direct and indirect – and the introduction, then subsequent expansion, of broad-based credit and liquidity support facilities. New policies were implemented in many major economies to permit direct government investment in banks, loan and bank debt guarantees, as well as the provision of

large volumes of additional liquidity to their financial systems via extraordinary financing facilities. Certain major banks became majority-owned by their governments. Several countries announced that they would insure all domestic bank deposits and others substantially increased the insurance protection for their deposits and bank debts, pressuring the deposits and debts of banks covered by weaker protection schemes. In the fourth quarter, the Swiss government announced a number of steps to support its banking system, including a strengthening of the country’s bank deposit insurance scheme and a willingness to guarantee interbank liabilities if and when deemed necessary. Throughout most of the fourth quarter, public bond market issuance was largely limited to banks whose debt was government-guaranteed.

UBS’s response to the ongoing crisis

Despite the very challenging conditions, UBS was able to maintainmaintained its access to funding at all times, primarily as a result of its broadly diversified funding basebase. In addition, in anticipation of an extended period of market turbulence, UBS proactively undertook several measures starting in 2007 and continuing in 2008 to further strengthen and safeguard its liquidity position. Short-term funding targets were adjusted, and increased focus was placed on asset reduction. Combined with the broad diversity of its funding sources, its contingency planning processes and its global scope, these additional measures have enabled UBS to maintain a balanced asset / liability profile. UBS also maintains a substantial multi-currency portfolio of unencumbered high-quality short-term assets and has available and unutilized collateralized liquidity facilities at several major central banks.
     Like many other major financial institutions, UBS saw decreased access to wholesale term funding and a decline in client deposits during 2008. This was counterbalanced by ongoing asset reductions – mostly in the Investment Bank – which reduced UBS’s overall funding needs. As part of these asset reductions, the trading portfolio was pared back by CHF 462 billion compared with year-end 2007.
     The transaction with the SNB, which was announced in fourth quarter 2008, further bolsters the firm’s liquidity and funding position by reducing overall funding requirements.

Liquidity and funding risk management framework

A new liquidity and funding risk management framework was approved by the Board of Directors (BoD) of UBS in 2008. This new framework outlines the principles, roles and responsibilities, models, methodologies and tools UBS uses

Capital management

Despite significant writedowns on US mortgage-related exposures, UBS remains one of the best capitalized financial institutions in the world

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Risk-weighted assets in 2007

In 2007, capital requirements increased for the Investment Bank, in particular for market risk exposures

Risk and derivatives

treasury management
Treasury management

Eligible capital in 2007

In 2007, UBS’s BIS Tier 1 capital decreased, reflecting the losses sustained, accruals for share-based compensation plans and foreign exchange translation differences

Capital improvement program

Effective by year-end 2007:
to manage liquidity and funding risk. The framework describes a target state; many of these measures have already been, or are in the process of being implemented. The benefits of the new framework are the following:
– rededicationFirst, sustainable profits will be achieved through allocation of 36.4 million sharesthe real costs of funding to the business that had previously been bought back for cancellationgenerates the funding requirement. There will be no more cross-subsidization of one business division by another, allowing an unbiased and more accurate view of the firm’s profitability.
– replacementSecond, liquidity and funding risk are being reduced as UBS limits the size of cash dividend for 2007 with stock dividendits balance sheet, funds illiquid assets long-term and reduces reliance on short-term unsecured funding.

Effective in first quarter 2008:
– issuanceFinally, UBS is establishing best practice liquidity and funding risk management processes. The new framework is designed to keep the firm in line with industry best practice, and prepare it for further changes in regulatory requirements and oversight.
The approach taken by UBS will proceed in parallel: tactically addressing a number of CHF 13 billionkey initiatives in the short term, while developing the framework into a target liquidity and funding model to be strategically integrated into each business division, region and entity within the Group.
Liquidity approach
(Audited)UBS’s approach to liquidity management, which covers all branches and subsidiaries, aims to ensure that it will always have sufficient liquidity to meet liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking sustained damage to its various business franchises.
    Central to the integrated framework is an assessment of mandatory convertible notesall material, known and expected cash flows and the level of high-grade collateral that could be used to tworaise additional funding. It entails both careful monitoring and control of the daily liquidity position, and regular liquidity stress testing. Limits are set at Group level by the BoD risk committee, while the Executive Committee of the Group Executive Board (GEB) is responsible for the allocation of resources to the business divisions and sets limits for each of the business divisions. These limits are monitored by Group Treasury, who reports the results and trends on a regular basis to the BoD risk committee and the Executive Committee of the GEB. Contingency plans for a liquidity crisis are incorporated into UBS’s wider crisis management process.
    The liquidity position and asset and liability profile are continuously tracked. This involves monitoring the balance sheet contractual and behavioral maturity profiles and projecting and modeling the liquidity exposures of the firm under a variety of potential scenarios – encompassing both normal and stressed market conditions. UBS considers the possibility that its access to markets could be impacted by a stress event

(Audited)affecting some part of its business or, in the extreme case, if it was to suffer a severe rating downgrade combined with a period of general market uncertainty. The results are factored into the overall contingency plans of UBS.
    UBS’s major sources of liquidity are channeled through entities that are fully consolidated.
Liquidity management
(Audited)UBS manages its liquidity position in order to be able to ride out a crisis without damaging the ongoing viability of its business. This is complemented by the firm’s funding risk management which aims to achieve the optimal liability structure to finance its businesses cost-efficiently and reliably. The long-term financial investorsstability and security of UBS’s funding in turn helps protect its liquidity position in the event of a UBS-specific crisis.
    The firm’s business activities generate asset and liability portfolios which are intrinsically highly diversified with respect to market, product and currency. This reduces UBS’s exposure to individual funding sources, and also provides a broad range of investment opportunities, which in turn reduces liquidity risk.
    UBS adopts a centralized approach to liquidity and funding management to exploit these advantages to the full. The liquidity and funding process is undertaken jointly by Group Treasury and the foreign exchange and money market (FX&MM) unit within the Investment Bank’s fixed income, currencies and commodities (FICC) business area. Group Treasury establishes a comprehensive control framework, while FX&MM undertakes operational cash and collateral management within the established parameters.
    This centralization permits close control of both UBS’s global cash position and its stock of highly liquid securities. The central treasury process also ensures that the firm’s general access to wholesale cash markets is concentrated in FX&MM. Funds raised externally are largely channeled into FX&MM including the proceeds of debt securities issued by UBS, an activity for which Group Treasury is responsible. FX&MM in turn meets all internal demands for funding by channeling funds from units generating surplus cash to those requiring finance. In this way, UBS reduces its external borrowing and use of available credit lines, and presents a consistent and coordinated face to the market.
Liquidity modeling and contingency planning
(Audited)
For the purpose of monitoring its liquidity situation, UBS employs the following main measures:
–A cash ladder, which is used by FX&MM to manage the firm’s funding requirements on a daily basis within limits that are set by the BoD risk committee and controlled by Group Treasury. This cumulative cash ladder shows the daily liquidity position – the net cumulative funding requirement for a specific day – projected for each business day from the current day forward six months.

Introduction of Basel II in 2008

UBS expects the overall impact on its BIS Tier 1 ratio to
be negative, depending on the further development of
the business mix



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Capital adequacy 
  As of 
CHF million, except where indicated
  31.12.07   31.12.06   31.12.05 
 
BIS Tier 1 capital  32,811   40,528   39,834 
 
of which hybrid Tier 1 capital  6,387   5,633   4,975 
 
BIS total capital  44,507   50,364   43,808 
 
BIS Tier 1 capital ratio (%)  8.8   11.9   12.8 
 
BIS total capital ratio (%)  12.0   14.7   14.1 
 
Balance sheet assets  292,988   273,588   252,364 
 
Off-balance sheet and other positions  37,200   48,444   37,010 
 
Market risk positions1
  42,110   19,860   21,035 
 
Total BIS risk-weighted assets  372,298   341,892   310,409 
 
1 BIS risk-weighted asset equivalent of market risk capital requirement.
Risk and treasury management

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(AUDITED)–A contractual maturity gap analysis of UBS’s assets and liabilities.
–A behavioral maturity gap analysis under an assumed severe liquidity crisis scenario.
–A cash capital model which measures the amount of stable funding in relation to the amount and composition of its assets.
     The breakdown of the contractual maturity of UBS’s assets and liabilities serves as a starting point for stress testing analyses. One such breakdown is shown in the “Maturity analysis” table at the end of this section. This maturity analysis is an accounting view. It does not fully represent a liquidity risk management perspective, which would also include behavioral stress analyses and a more detailed breakdown of asset and liability types.
     The aforementioned liquidity crisis scenario combines a firm-specific crisis with market disruption and focuses on a time horizon starting with overnight and extending up to one year. This UBS-specific scenario envisages large draw-downs on otherwise stable client deposits, an inability to renew or replace maturing unsecured wholesale funding and limited capacity to generate liquidity from trading assets. Liquidity crisis scenario analysis supports the liquidity management process so that immediate corrective measures, such as the use of a liquidity buffer to absorb potential sudden liquidity shortfalls, can be put into effect.
(AUDITED)     Since a liquidity crisis could have a myriad of causes, UBS focuses on a scenario that encompasses all potential stress effects across all markets, currencies and products.
     The assessment includes the likelihood of maturing assets and liabilities being rolled over in a UBS-specific crisis within an otherwise stressed market environment, and gauges the extent to which the potential crisis-induced shortfall could be covered by available funding. This would be raised on a secured basis against available collateral, which includes securities eligible for pledging at the major central banks, or by selling liquid inventory. In both cases UBS applies crisis-level discounts to the value of the assets. It assumes that it would be generally unable to renew any of the Group’s wholesale unsecured debt, including all its maturing money market paper (outstanding volume CHF 112 billion on 31 December 2008) and that no contingency funding could be raised on an unsecured basis. Since liquidity needs may also result from commitments and contingencies, including credit lines extended to secure the liquidity needs of customers, UBS regularly monitors undrawn committed credit facilities and other latent liquidity risks and factors these potential liquidity outflows into the scenario analysis. Particular emphasis is placed on potential drawdowns of committed credit lines.
     If UBS’s credit rating were to be downgraded, “rating trigger” clauses, especially in derivative contracts, could result in an immediate cash outflow due to the unwinding of derivative positions, or the need to deliver additional collateral. UBS also analyzes the potential impact on its net liquidity position of ad-

()

verse movements in the replacement value of its over-the-counter (OTC) derivative transactions which are subject to collateral arrangements and includes potential outflows in its crisis scenario. Given the diversity of UBS’s derivatives business and that of its counterparties, there is not necessarily a direct correlation between the factors influencing net replacement values with each counterparty and a firm-specific crisis scenario.

Liquidity limits and controls
(AUDITED)Liquidity and funding limits are set by senior management, taking into consideration UBS’s business model and strategy, the prevailing market conditions and the firm’s tolerance for risk. Structural limits focus on the composition and profile of the balance sheet, while supplementary limits are designed to drive the utilization and allocation of funding resources. The supplementary limits, which consist of three categories – operational, funding and regulatory – are monitored and performance is regularly communicated to senior management. Operational limits focus on structural liquidity risk for terms from intra-day out to one year including stress testing, while funding limits focus on the liability mix. The principles underlying UBS’s limit framework aim to maximize and sustain the value of its business franchise and appropriately balance the asset / liability structure in light of prevailing market conditions. Group Treasury is responsible for the control and oversight of the liquidity and funding limits.
     To complement and support the limit framework, regional teams monitor the markets in which UBS operates for potential threats and regularly report any significant findings to Group Treasury.
(AUDITED)     UBS has also developed detailed contingency plans for liquidity crisis management, the cornerstone of which is the Group’s substantial liquidity reserves, including a large multi-currency portfolio of unencumbered high-quality and short-term assets as well as available and unutilized liquidity facilities at several major central banks.
     The liquidity contingency plan is an integral part of the global crisis management concept, which covers all types of crisis events. Its implementation falls under the responsibility of a core crisis team with representatives from Group Treasury, from FX&MM and from related areas including the functions responsible for payments and settlements, market and credit risk control, collateral and margin management, and information technology and infrastructure. FX&MM’s centralized global management model lends itself naturally to efficient liquidity crisis management. Should a crisis require contingency funding measures to be invoked, Group Treasury takes responsibility for coordinating liquidity generation together with representatives from FX&MM and the relevant business areas.
     UBS manages its relationships with the major central banks as part of its general policy, which is to base contingency plans on having sufficient liquidity reserves at its disposal and to raise contingency funding on a secured basis against provision of collateral.


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Risk and treasury management
Treasury management

Funding

UBS’s domestic retail and global wealth management businesses continue to be valuable, cost-efficient and reliable sources of funding. These businesses contributed CHF 340 billion, or 72% of the CHF 475 billion total customer deposits shown in the UBS asset funding diagram below. Compared with the CHF 340 billion of net loans as of 31 December 2008, customer deposits provided 140% coverage. In terms of secured funding, i.e. repurchase agreements and securities lent against cash collateral received, UBS borrows less cash on a collateralized basis than it lends, leading to a surplus of net securities sourced (and rehypothecable) – shown as the CHF 231 billion cash-equivalent surplus in the diagram below. Furthermore, through the establishment of short-, medium- and long-term funding programs in Europe, the US and Asia, UBS can provide specialized investments to its customers through which it can efficiently raise funds globally from both institutional and private investors, minimizing its dependence on any particular source. A maturity breakdown of UBS’s long-term straight debt portfolio of CHF 58 billion is shown further below.

Through broad diversification of its funding sources (by market, product and currency), UBS maintains a well-balanced portfolio of liabilities, which generates a stable flow of financing and provides protection in the event of market disruptions. This, together with its centralized funding management, enables UBS to efficiently fund its business activities.

UBS asset funding
Net replacement values (RVs)

(Diagram)

Funding approach
Medium- and long-term funding activities are planned by assessing the overall funding profile of the balance sheet, taking due account of the effective maturity of the asset base and the amount of maturing debt that will have to be

replaced. The ability to continue to fund ongoing business activities through periods of difficult market conditions is also factored in. Prior to the outbreak of the current crisis, at the beginning of 2007, UBS decided to further strengthen its funding profile through public issuance of senior, straight, long-term debt and to thereby enhance the overall diversification of its funding sources. Despite the persistent turbulence prevailing in the capital managementmarkets throughout the year, UBS raised CHF 24 billion of proceeds through public senior debt issuance during 2008 (compared with CHF 15 billion during 2007). Two recent examples of this funding diversification effort were the inaugural Samurai domestic Japanese Yen issuance (totaling JPY 91.5 billion) in June 2008 and the approximately CHF 2 billion Swiss covered bond (Pfandbrief) issuance via the Swiss Mortgage Bond Bank in December 2008.

In addition, the extraordinary capital strengthening measures implemented during 2008 in response to the losses incurred during the current crisis – such as the CHF 13.0 billion mandatory convertible notes (MCNs) issued in March 2008, the EUR 1 billion proceeds from the issue of perpetual preferred securities in April 2008, the net proceeds from the June 2008 rights issue of CHF 15.6 billion and the issue of CHF 6.0 billion MCNs to the Swiss Confederation in December 2008 – contributed funding to UBS.
èRefer to the “Shares and capital instruments” section of this report for more information about capital instruments
To ensure that a well-balanced and diversified liability structure is preserved, Group Treasury routinely monitors UBS’s funding status and reports its findings on a monthly basis to the GEB. A key measure employed among UBS’s main analysis tools is an assessment of its “cash capital”. This concept is designed to ensure that illiquid assets are being financed by long-term sources of funding.
UBS seeks to run a cash capital surplus (i.e. an excess of cash capital supply over cash capital consumption). The cash capital supply consists of long-term sources of funds: unsecured funding with remaining time to maturity of at least one year; shareholders’ equity; and core deposits (the portion of customer deposits deemed to have a “behavioral” maturity of at least one year). Cash capital consumption reflects the illiquid portion of the assets, which is defined as the portion of assets that could only be transformed into cash by sale or secured funding in more than one year. In the case of secured funding, the illiquid portion is the difference (the “haircut”) between the carrying value of an asset on the balance sheet and its effective cash value when given as collateral. The potential funding needs that could arise from off-balance sheet exposures, such as undrawn committed credit lines that UBS has sold, are also included in the total cash capital consumption.
UBS also regularly monitors its main funding portfolios for any concentration risks – including an assessment by individual counterparty.


Interest rate

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Risk and treasury management

UBS: funding by product and currency

                                         
  All currencies  CHF  EUR  USD  Others 
In % 31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07  31.12.08  31.12.07 
 
Securities lending  1.4   2.1   0.0   0.0   0.4   0.2   0.6   1.5   0.4   0.4 
 
Repurchase agreements  10.1   19.9   0.9   1.5   1.6   2.5   6.6   12.2   1.0   3.7 
 
Interbank  12.4   9.5   0.8   0.5   4.9   1.8   4.9   4.5   1.8   2.8 
 
Money market paper  11.0   9.9   0.3   0.3   1.0   0.9   8.5   7.3   1.2   1.3 
 
Retail savings/deposits  9.9   7.1   6.0   4.6   1.0   0.8   3.0   1.6   0.0   – 
 
Demand deposits  13.8   11.7   2.8   2.2   2.8   2.4   6.5   5.3   1.7   1.8 
 
Fiduciary  6.0   6.0   0.3   0.3   2.0   1.8   3.0   3.1   0.7   0.8 
 
Time deposits  17.0   16.9   1.6   2.3   2.9   1.9   9.1   9.5   3.5   3.1 
 
Long-term debt1
  18.4   17.0   2.7   1.4   5.9   4.7   5.0   6.2   4.8   4.7 
 
Total
  100.0   100.0   15.3   13.2   22.4   17.0   47.2   51.2   15.1   18.6 
 
1 Including financial liabilities designated at fair value.

Funding position and diversification
UBS continues to maintain a balanced portfolio of liabilities that is broadly diversified by market, product and currency. The vast product offerings and global scope of the firm’s business activities are the primary reasons for funding stability. Funding is provided through numerous short-, medium-, and long-term funding programs in Europe, the US and Asia, which provide specialized investments to institutional and private clients. UBS’s domestic retail and global wealth management businesses are also a valuable source of funding.

The overall composition of UBS’s funding sources, as illustrated in the graphs below, has remained stable. These sources amount to CHF 1,016 billion on the balance sheet comprising repurchase agreements, securities lending against cash collateral received, due from banks, money market paper issued, due to customers and long-term debt (including financial liabilities at fair value). In terms of currencies, 48% of these funds are denominated in US dollars, while 22% are in euros and 15% in Swiss francs.
The proportion of funding raised on a secured basis, primarily through repurchase agreements (and to a lesser extent through cash collateral received for securities lent), has dropped to 11% from 22% since year-end 2007, primarily due to continued asset reductions (in particular trading as-

sets and reverse repurchases/securities borrowed that were financed through repurchase agreements).

UBS’s unsecured funding base remains well diversified. At year-end 2008, savings and demand deposits amounted to 24% of UBS’s funding sources, up from 19% a year earlier. The proportion of funding raised through long-term debt was stable, accounting for 18% of funding sources (up slightly from 17% a year ago), as was the proportion of money market paper, which was likewise marginally higher, at 11% (up from 10%). Compared with year-end 2007, the proportion of funding from time deposits remained constant, at 17%, as did fiduciary deposits, at 6%. The relative share of short-term interbank borrowing was 12%, up from 9% a year earlier.
UBS, like many other major financial institutions, experienced decreased access to medium- and longer-term funds in the wholesale debt markets during 2008. Moreover, UBS did not raise any public long-term debt during fourth quarter 2008 as public issuance was practically limited to banks with government-guaranteed debt. While this contributed to a shortening of the maturity profile of UBS’s debt issued during 2008, this was compensated by UBS’s sale of a significant volume of illiquid positions during the year (to the fund managed by Black Rock, the SNB StabFund and to the market in general).



UBS: funding by currency

(Pie Chart)

UBS: funding by product type

(Pie Chart)



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Risk and treasury management
Treasury management

Credit ratings

As of 31.12.08Moody'sStandard & Poor'sFitch Ratings
RatingOutlookRatingOutlookRatingOutlook
Long-term ratingAa2stableA+stableA+stable
Short-term ratingP–1stableA–1stableF1+stable
Financial strength rating/IndividualB–stableB/Cstable1
1 Fitch’s Individual rating was changed to C, rating watch negative, on 21 January 2009.

UBS Ratings
The table above summarizes UBS’s long- and short-term debt ratings as of 31 December 2008 (refer to the “Credit ratings” sidebar).

Maturity breakdown of long-term straight debt portfolio
The graph below shows a contractual maturity breakdown of the portion of UBS’s long-term debt portfolio consisting of straight debt (and therefore excluding all structured debt, which is predominately booked as “financial liabilities desig-

Long-term straight debt – contractual maturities

(Bar Graph)

nated at fair value”). This amounted to CHF 58 billion on 31 December 2008, and is accounted for on the balance sheet as part of the CHF 197 billion shown on the “Debt issued” line (which in addition includes money market paper issued and the December 2008 MCN issuance). UBS’s long-term straight debt portfolio is composed of CHF 42 billion of senior debt (including both publicly and privately placed notes and bonds as well as Swiss cash bonds) and CHF 16 billion of subordinated debt. CHF 5 billion, or 9%, of the positions mature during 2009.



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Risk and treasury management
                                       
(AUDITED) Maturity analysis 
   On-demand and trading instruments    
   Instruments              Due  Due  Due       
  at cost and at  Instruments  Instruments  Due  between  between  between       
   fair value/ at fair value/ at fair value/  within  1 and 3  3 and 12  1 and 5  Due after    
 CHF billion level 1  level 2  level 3  1 month  months  months  years  5 years  Total 
  
                                      
 
Assets
                                    
  
 Cash and balances with central banks  32.7   0.0   0.0   0.0   0.0   0.0   0.0   0.0   32.7 
  
 Due from banks  54.6   0.0   0.0   5.3   1.1   1.4   1.7   0.4   64.5 
  
 Cash collateral on securities borrowed  77.8   0.0   0.0   43.7   1.4   0.0   0.0   0.0   122.9 
  
 Reverse repurchase agreements  28.0   0.0   0.0   179.6   8.7   6.8   0.8   0.7   224.6 
  
 
Trading portfolio assets1
  128.1   128.4   15.3   0.0   0.0   0.0   0.0   0.0   271.8 
  
 
Trading portfolio assets pledged as collateral1
  25.4   13.2   1.6   0.0   0.0   0.0   0.0   0.0   40.2 
  
 
Positive replacement values1
  5.1   811.2   37.8   0.0   0.0   0.0   0.0   0.0   854.1 
  
 
Financial assets designated at fair value2
  1.1   0.1   0.0   1.5   0.5   1.0   4.0   4.7   12.9 
  
 Loans  71.4   0.0   0.0   71.8   33.1   32.6   80.5   50.9   340.3 
  
 Financial investments available-for-sale  0.0   0.5   1.1   1.4   0.8   0.2   0.1   1.1   5.2 
  
 Accrued income and prepaid expenses  0.0   0.0   0.0   6.1   0.0   0.0   0.0   0.0   6.1 
  
 Investments in associates  0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.9   0.9 
  
 Property and equipment  0.0   0.0   0.0   0.0   0.0   0.0   0.0   6.7   6.7 
  
 Goodwill and other intangible assets  0.0   0.0   0.0   0.0   0.0   0.0   0.0   12.9   12.9 
  
 Other assets  0.0   0.0   0.0   19.1   0.0   0.0   0.0   0.0   19.1 
  
 
Total 31.12.08
  424.1   953.5   55.9   328.5   45.5   42.1   87.1   78.3   2,015.1 
  
 Total 31.12.07  676.4   787.5   75.7   438.5   80.9   76.1   79.9   59.8   2,274.9 
  
                                      
 
Liabilities
                                    
  
 Due to banks  55.1   0.0   0.0   52.3   12.2   4.9   0.8   0.4   125.6 
  
 Cash collateral on securities lent  12.6   0.0   0.0   1.5   0.0   0.0   0.0   0.0   14.1 
  
 Repurchase agreements  8.6   0.0   0.0   82.6   5.7   5.1   0.3   0.3   102.6 
  
 
Trading portfolio liabilities1
  33.9   27.5   1.0   0.0   0.0   0.0   0.0   0.0   62.4 
  
 
Negative replacement values1
  4.9   812.0   34.9   0.0   0.0   0.0   0.0   0.0   851.8 
  
 
Financial liabilities designated at fair value3
  0.0   0.0   0.0   0.6   7.8   20.7   37.2   35.3   101.5 
  
 Due to customers  208.6   0.0   0.0   206.1   34.3   16.2   0.5   9.1   474.8 
  
 Accrued expenses and deferred income  0.0   0.0   0.0   10.2   0.0   0.0   0.0   0.0   10.2 
  
 Debt issued  0.0   0.0   0.0   83.6   20.7   13.9   37.1   41.9   197.3 
  
 Other liabilities  13.1   0.0   0.0   21.0   0.0   0.0   0.0   0.0   34.0 
  
 
Total 31.12.08
  336.7   839.5   35.9   457.8   80.6   60.7   75.9   87.0   1,974.3 
  
 Total 31.12.07  501.9   465.0   16.8   671.4   190.7   167.8   106.5   111.0   2,231.1 
  
                                      
 
Off-balance sheet
                                    
  
 
Undrawn irrevocable facilities4
  59.9   0.0   0.0   0.2   0.0   0.1   0.1   0.0   60.3 
  
 
1 Trading and derivative positions are presented in the first three columns of the table: “Instruments at cost and fair value / Level 1,” “Instruments at fair value / Level 2” and “Instruments at fair value / Level 3.” Management believes that such presentation most accurately reflects the short-term nature of trading activities. The contractual maturity of the instruments may, however, extend over significantly longer periods. The breakdown of these positions into the fair value measurement categories of levels 1, 2 and 3 indicates the liquidity of the markets in which the financial instruments are traded and the availability of market observable inputs to measure these instruments (refer to “Note 27 Fair value of financial instruments” in the financial statements of this report). Contractual maturities of trading portfolio liabilities are: CHF 61.2 billion due within one month; and CHF 1.2 billion due between one month and one year.  2 The contractual redemption amount at maturity of financial assets designated at fair value approximates the carrying value as of 31 December 2008 and 31 December 2007.  3 Non-trading and non-derivative financial liabilities are categorized based on the earliest date on which UBS can be required to pay.  4 Excludes commitments from contingent claims (credit guarantees, performance guarantees and similar instruments, and documentary credits) of CHF 18,494 million and commitments to acquire auction rate securities (ARS) of CHF 16,571 million on 31 December 2008. Refer to the “Exposure to auction rate securities” sidebar in the “Risk concentrations” section of this report for more information.

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Treasury management

Credit ratings

Despite a 2008 full-year loss of slightly above CHF 20 billion, UBS maintained a sound and strong capital position as it believes that this is a key part of its value proposition for both clients and investors.

In July 2008, Moody’s Investors Service downgraded from “B” to “B–” the bank financial strength rating (BFSR) and from “Aa1” to “Aa2” the senior debt and deposit ratings of UBS AG, with a stable outlook for both ratings. In its comments, the agency said: “This downgrade reflects the challenges still facing the bank’s management team to return UBS to a position of stability following the losses in its investment banking division. The bank’s financial performance and risk management since the onset of the financial crisis have been below the level expected of a B (BFSR) / Aa1 (deposit & debt) rated bank.” Moody’s further said that “the bank has initiated many changes to senior management, risk management, and, more recently, corporate governance, but it is not yet clear whether these changes will be effective considering the complexity of the task. Moody’s considers the core wealth management franchise to be resilient, and although the bank’s high profile difficulties have led to some outflows of assets under management, Moody’s considers that the bank’s franchise has not been permanently affected.”
In October 2008, Moody’s affirmed both the ratings of UBS AG and the stable outlook.
In December 2008, Standard & Poor’s Ratings Services (S&P’s) lowered its long-term counterparty credit rating on UBS AG to “A+” from “AA–”, following S&P’s global review of major mature-market financial institutions. The agency commented that the “rating actions on UBS reflect changes in our view of the level of risk associated with the range of activities

pursued by major financial institutions.

Moreover, we view the current downturn as being potentially longer and deeper than we had previously considered. Therefore, for UBS and most of its peers, we view asset quality as likely to weaken materially more than we had previously believed. In addition, the downgrade of the counterparty credit ratings on UBS reflects the outstanding challenges we believe it faces, which include: restoring its reputation, particularly among private banking clients; completing the repositioning of the investment bank; resolving regulatory and legal cases, particularly the US governmental investigation into cross-border private banking services provided to US clients; and managing down risk concentrations not included in the transaction with the SNB, particularly the exposure to monoline bond insurers. The ratings on UBS recognize both the Group’s intrinsic credit profile and extraordinary external support from the Swiss government and the SNB. Specifically, the long-term issuer credit rating incorporates a two-notch uplift from UBS’s stand-alone credit profile in recognition of the significantly beneficial external support provided to it. We expect that additional external support would be extended, if required, reflecting UBS’s high systemic importance within Switzerland.” S&P’s further commented that the ratings on UBS remain underpinned by a number of factors: “the asset-gathering businesses remain strongly cash-generative; having started earlier than most peers, UBS appears more advanced in deleveraging and managing costs in its investment bank; UBS appears committed to a strong regulatory capital position, and its recent CHF 6 billion issue of mandatory convertible notes (MCNs) to the Swiss Confederation offsets the dilutive effect on the tier 1 ratio of the SNB transaction; UBS’s funding and liquidity

position has, in our view, remained relatively robust, and is further enhanced by the cash received from the SNB transaction.”

In February 2009, S&P’s affirmed the ratings of UBS AG and the stable outlook.
In October 2008, Fitch Ratings downgraded UBS AG’s long-term issuer default ratings (IDRs) from “AA–” to “A+” and UBS’s individual rating from “B” to “B / C”, commenting: “the stable outlooks and affirmation of the short-term IDRs reflect Fitch’s belief that the measures taken to de-risk and recapitalize the bank should enable UBS to draw a line under the problems that have taken their toll over the past 15 months. Nevertheless, management faces challenges in reshaping the investment bank and delivering stable and sustainable earnings in difficult market conditions with a refocused, lower-risk strategy.”
In January 2009, Fitch Ratings downgraded UBS AG’s individual rating to “C” from “B / C” and placed it on rating watch negative (RWN), while the bank’s long-term IDR and short-term IDR have been affirmed at “A+” and “F1+” respectively. On 5 March 2009, Fitch Ratings affirmed the long-term and short-term IDRs of UBS AG (UBS) at “A+” and “F1+” respectively. The IDR outlooks are stable, reflecting Fitch’s view of continued official support being available. The agency has downgraded UBS’s individual rating to “D” from “C” reflecting Fitch’s concerns over the medium-term earnings outlook for the bank amid persistently challenging market conditions, and the impact of ongoing reputational and litigation issues on the stability of UBS’s key private banking and wealth management franchise. The rating watch negative (RWN) on the individual rating has been removed.


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Risk and treasury management

Interest rate and currency management

   
  

(AUDITED)

Management of non-trading interest rate risk

(Audited)



UBS’s largest non-trading interest rate exposures arise in its wealth management and Swiss-based banking business.within the Global Wealth Management & Business Banking business division. These risks are transferred from the originating businessesbusiness into one of UBS’s two centralized interest rate risk management units –units: Group Treasury or the Investment Bank’s foreign exchange and money market unit (FX&MM). unit. These units manage the risks on an integrated basis, exploiting the full netting potential across risks from different sources.

Risks from fixed-maturity, short-term Swiss franc and all non-Swiss franc transactions are generally transferred to FX&MM. Risks from Swiss franc transactions with fixed maturities greater than one year are transferred to Group Treasury by individual back-to-back transactions. These fixed-rate lending products do not contain embedded options such as early prepayment that would allow customers to prepay at par – allpar. All prepayments are therefore subject to market-based unwinding costs.
Risks from Swiss franc transactions with fixed maturities greater than one year are transferred to Treasury by individual back-to-back transactions.
     Current and savingsavings accounts and many other retail products of Global Wealth Management & Business Banking have no contractual maturity date or direct market-linked rate, and therefore their interest rate risk cannot be transferred by simple back-to-back transactions. Instead, they are transferred on a pooled basis via “replicating” portfolios. A replicating portfolio is a series of loans or deposits at market rates and fixed terms between the originating business unit and Group Treasury, structured to approximate, – on average, – the interest-rateinterest rate cash flow and repricing behavior of the pooled client transactions. The portfolios are rebalanced monthly. Their structure and parameters are based on long-term market observations and client behavior, and are regularly reviewed and adjusted as necessary. The originating business units are thus immunized as far as possible against market interest rate movements, but retain and manage their product margin.
A significant amount of interest rate risk also arises from the financing of non-monetary related balance sheet items, such as the financing of bank property and equity investments in associated companies. These risks are generally transferred to Group Treasury through replicating portfolios which, in this case, are designed to approximate the funding profile mandated by senior management.
     Group Treasury manages its residual open interest rate exposures, – taking advantage of any offsets that arise between positions from different sources, – within its approved market risk limits (Value at Risk (VaR) and stress loss). The preferred risk management instrument is interest rate swaps, for which

   

(AUDITED)		 for which there is a liquid and flexible market. All transactions are executed via the Investment Bank – Group Treasury does not directly access the external market.
  
èForRefer to the “Market risk” section of this report for further details on UBS’s market risk measures and controls please refer to the “Market risk” section of this report
 
(AUDITED) 

Market risk arising from management of consolidated capital

(Audited)



UBS is required, by international banking regulation (BISregulations (Bank for International Settlements regulations), to hold a minimum level of capital against assets and other exposures (risk-weighted assets). The relationship between UBS’s capital and its risk-weighted assets, – the BIS Tiertier 1 ratio, – is monitored by regulators and analysts and is a key indicator of its financial strength.

The majority of UBS’s capital and many of its assets are denominated in Swiss francs, but the Group also holds risk-weighted assets and some eligible capital in other currencies, primarily US dollar, euro, and UK sterling. Following the integration of Banco Pactual in December 2006, UBS now also has material risk-weighted assets insterling and Brazilian real. Any significant depreciation of the Swiss franc against these currencies would adversely impact the Group’s BIS Tiertier 1 ratio. Group Treasury’s mandate is therefore to protectminimize adverse currency impacts on this ratio against adverse currency movements and to generate an income flow from the capital. This mandate determines a currency, tenor and product mix – a target profile – against which Group Treasury manages the Group’s capital.
On an overall Group basis, Group Treasury’s target profile is based on a currency mix which broadly reflects the currency distribution of the consolidated risk-weighted assets, using products and tenors which generate the desired income stream. As the Swiss franc depreciates (or appreciates) against these currencies, the consolidated risk-weighted assets increase (or decrease) relative to UBS’s capital. These currency fluctuations also lead to translation gains (or losses) on consolidation, which are recorded through equity. Thus, UBS’s consolidated equity rises or falls in line with the fluctuations in the risk-weighted assets, protecting the Tiertier 1 ratio. The capital of the parent bank itself is held predominantly in Swiss francs in order to avoid any significant effects of currency fluctuations on its standalone financial results.
The capital of the parent bank and its subsidiaries is placed in the form of interest bearinginterest-bearing cash deposits internally within the Group, – primarily with the Investment Bank’s FX&MM



48

                                 
Treasury: Value at Risk (10-day, 99% confidence, 5 years of historical data) 
     
       
  Year ended 31.12.07  Year ended 31.12.06 
CHF million
 Min.  Max.  Average   31.12.07  Min.  Max.  Average   31.12.06 
 
Interest rates  9   55   17   54   19   72   36   19 
 
Foreign exchange  1   87   18   21   4   51   30   20 
 
Diversification effect  1   1   (10)  (14)  1   1   (23)  (12)
 
Total
  10   92   25   61   25   69   43   27 
 
1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.

(Audited)

unit. Where necessary, Group Treasury also executes derivatives (mainly interest rate swaps) withthrough the Investment Bank’s trading desks to achieve the target profile. FX&MM and the derivative trading units manage the resultant cash and market risk positions as part of their normal


159

Risk and treasury management
Treasury management

(AUDITED)business activities and, in the case of FX&MM, within the approved liquidity and funding risk framework.
  
èFor details on UBS’s liquidity framework please referRefer to the “Liquidity and funding management” section of this report for details on UBS’s liquidity and funding risk framework
 

(Audited)

(AUDITED)		 
For the purposes of measuring and managing Group Treasury’s market risk position, the Group’s consolidated equity is represented in the Treasurytreasury book by replicating portfolios (liabilities) with the target currency and interest rate profile. The interest rate positions created by Group Treasury’s deposits with FX&MM or other units, and the associated derivatives, generally offset the interest rate risk of the replicating portfolios. Any mismatches between the two are managed, together with other non-trading interest rate risk positions, within Group Treasury’s market risk limits (VaR and stress)stress loss).
The structural foreign currency exposures are controlled by senior management but are not subject to internal market risk limits and are not included in Group Treasury’s reported VaR.
 


Group Treasury interest rate risk development


In measuring Group Treasury’s interest rate risk – expressed as VaR – both the representation of the consolidated equity (replicating portfolios) and the deployment of the equity described above are included in the calculations. Towards the end of December 2007, and as a consequence of the reported writedowns, Treasury had to reduce the amount of shareholders’ equity invested in Swiss francs.
(AUDITED)On 31 December 2007,2008, UBS’s consolidated equity was deployed as follows: in Swiss francs (including most of the capital of the parent bank) with an average duration of approximately three years and an interest rate sensitivity of CHF 5.17.9 million per basis point; in US dollardollars with an average duration of approximately four years and a sensitivity of CHF 8.68.0 million per basis point; in euro with an average duration of approximately three years and a sensitivity of CHF 0.7 million per basis point; and in UK sterling with a duration of approximately three years

and a sensitivity of CHF 0.50.4 million per basis point. The interest rate sensitivity of these positions is directly related to the chosen duration – targeting significantly shorter maturities would reduce the apparent interest rate sensitivity but would lead to greater fluctuations in interest income.
 


Corporate currency management



UBS’s corporate currency management activities are designed to reduce the impact of adverse currency fluctuations on its reported financial results, given regulatory constraints. UBS specifically focuses on three principal areas of currency risk management: match funding/funding / investment of non-Swiss franc assets/assets / liabilities; sell-down of non-Swiss franc profit and loss; and selective hedging of anticipated non-Swiss franc profit and loss.


                                 
Group Treasury: Value-at-Risk (10-day, 99% confidence, 5 years of historical data) 
  Year ended 31.12.08  Year ended 31.12.07 
CHF million Min.  Max.  Average  31.12.08  Min.  Max.  Average  31.12.07 
 
Interest rates  8   54   19   26   9   55   17   54 
 
Foreign exchange  3   93   26   10   1   87   18   21 
 
Diversification effect  1   1   (10)  (14)  1   1   (10)  (14)
 
Total management VaR
  10   97   34   28   10   92   25   61 
 
1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect.

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Risk and treasury management

   
(AUDITED) 

Match funding and investment of non-Swiss franc assets and liabilities
As far as it is practical and efficient to do so, UBS follows the principle of matching the currency of its assets with the currency of the liabilities which fund them – thus a US dollar asset is typically funded in US dollars, a euro liability is offset by an asset in euros, etc. This avoids profits and losses arising from retranslation at the prevailing exchange rates to the Swiss franc at each quarter-end.

quarter end.

Sell-down of reported profits and losses


For accounting purposes, reported profits and losses are translated each month from the original transaction currencies into Swiss francs at the exchange rate prevailing at the end of the month. Group Treasury centralizes profits or losses in foreign currencies that arise in the parent bank, and sells or buys them for Swiss francs in order to eliminate earnings volatility which would arise from retranslation at different exchange rates of previously reported non-Swiss franc profits and losses. Other UBS operating entities follow a similar monthly sell-down process into their own reporting currencies. Profits retained in operating entities
(AUDITED)with a reporting currency other than the Swiss franc are managed as part of UBS’s consolidated equity, as described earlier.



49

Treasury and capital management
Interest rate and currency management

(Audited)



Hedging of anticipated future reported profits

and losses
The monthly sell-down process cannot protect UBS’s earnings from swings caused by a sustained depreciation against the Swiss franc of one of the main currencies in which UBS earns net revenues or by an appreciation of one in which it incurs significant net costs.
The firm’s corporate currency management seeks to mitigate the potential adverse impact of any such development by executingexecutes a dynamic and cost-efficient rollover hedge

strategy on a portion of the profits or losses that UBS anticipates for the next three months, on a rolling one-month basis.
Although intended to hedge future earnings, these transactions are considered open currency positions. They are therefore subject to internal market risk VaR and stress loss limits.
In public segmental reporting, the profits and losses arising from the hedge strategy are shown as Corporate Center items, while the business groupdivision results are fully exposed to exchange rate fluctuations.


50161

TreasuryRisk and capitaltreasury management
Liquidity and funding management

Liquidity and funding management

(Audited)

Liquidity risk is the risk of being unable to raise funds to meet payment obligations when they fall due. Funding risk is the risk of being unable, on an ongoing basis, to borrow funds in the market at an acceptable price to fund actual or proposed commitments and thereby support UBS’s current business and desired strategy. Liquidity and funding are not the same, but they are closely related and both are critical to a financial institution.

Liquidity must be continuously managed to ensure that the firm can survive a crisis, whether it is a general market event, a localized difficulty affecting a smaller number of institutions, or a problem unique to an individual firm. An institution that is unable to meet its liabilities when they fall due may collapse, even though it is not insolvent, because it is unable to borrow on an unsecured basis, or does not have sufficient good quality assets to borrow against or liquid assets to sell to raise immediate cash.
During 2007, liquidity management became a challenge following the dislocation of the US residential mortgage market, which led to a sharp reduction in trading volumes in some previously highly liquid markets. In the repo market, certain assets were subject to higher haircuts, and were sometimes not accepted. Despite these challenging conditions, UBS was able to maintain access to funding, primarily as a result of its broadly diversified funding base. In addition, in anticipation of an extended period of market turbulence, several measures were taken to further strengthen UBS’s liquidity position during this period. Short-term funding targets were adjusted accordingly, and increased focus was placed on balance sheet management.

Liquidity approach

(Audited)

UBS’s approach to liquidity management, which covers all branches and subsidiaries, is to ensure that it will always have sufficient liquidity to meet liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking sustained damage to its various business franchises.
Central to the integrated framework is an assessment of all material, known and expected cash flows and the level of high-grade collateral that could be used to raise additional funding. It entails both careful monitoring and control of the daily liquidity position, and regular liquidity stress testing. Risk limits are set by the Group Executive Board (GEB) and monitored by Treasury and contingency plans for a liquidity crisis are incorporated into UBS’s wider crisis management process.
The liquidity position is assessed and managed under a variety of potential scenarios encompassing both normal and stressed market conditions. UBS considers the possibility that its access to markets could be impacted by a stress event affecting some part of its business or, in the extreme case, if it was to suffer a severe rating downgrade combined with a period of general market uncertainty.
UBS’s major sources of liquidity are channeled through entities that are fully consolidated.


New funding framework

In 2007, UBS introduced a new funding model for the Investment Bank. The model incorporates two principal changes: the first is the adjustment of the internal pricing curve to reflect UBS’s true cost of
funding, with an additional component to align the price more closely to the prices of defined peer institutions. The second is the requirement for UBS businesses to be term-funded, based on Treasury’s assessment of
the quality and liquidity of their assets. These changes will encourage more disciplined use of UBS’s balance sheet by the Investment Bank.


51

Treasury and capital management
Liquidity and funding management

Liquidity management

(Audited)

UBS manages its liquidity position in order to be able to ride out a crisis without damaging the ongoing viability of its business. This is complemented by the firm’s funding risk management which aims to achieve the optimal liability structure to finance its businesses cost-efficiently and reliably. The long term stability and security of UBS’s funding in turn helps protect its liquidity position in the event of a UBS-specific crisis.
UBS’s business activities generate liability portfolios which are intrinsically highly diversified with respect to market, product and currency. This provides a broad range of investment opportunities for UBS’s clients and thus reduces the firm’s exposure to individual funding sources, which in turn reduces liquidity risk.
UBS adopts a centralized approach to liquidity and funding management to exploit these advantages to the full. The liquidity and funding process is undertaken jointly by Treasury and the foreign exchange and money market (FX&MM) unit within Investment Bank fixed income, currencies and commodities (FICC). Treasury establishes a comprehensive control framework, while FX&MM undertakes operational cash and collateral management within the established parameters.
This centralization permits close control of both UBS’s global cash position and its stock of highly liquid securities. The central treasury process also ensures that the firm’s general access to wholesale cash markets is concentrated in FX&MM. Funds raised externally are largely channeled into FX&MM including the proceeds of debt securities issued by UBS, an activity for which Treasury is responsible. FX&MM in turn meets all internal demands for funding by channeling funds from units generating surplus cash to those requiring finance. In this way, UBS minimizes its external borrowing and use of available credit lines, and presents a consistent and coordinated face to the market.

Liquidity modeling and contingency planning

(Audited)

The daily liquidity position – the net cumulative funding requirement for a specific day – is projected under cautious assumptions for each business day from the current day out to one month to produce a cumulative “cash ladder”. The short-term cash ladder is the tool used by FX&MM to manage net daily funding requirements efficiently, while Treasury monitors liquidity exposure against limits set by the GEB.

UBS also regularly assesses the impact of a liquidity crisis scenario, combining a firm-specific crisis with market disruption and focusing on a time horizon starting with overnight and extending up to one year. This UBS-specific scenario envisages large draw-downs on otherwise stable client deposits, an inability to renew or replace maturing unsecured wholesale funding and limited capacity to generate liquidity from trading assets. Liquidity crisis scenario analysis supports the liquidity management process so that immediate

corrective measures, such as the build-up of a liquidity buffer to absorb potential sudden liquidity gaps, can be put into effect.
The starting point for stress testing analyses is a breakdown of the contractual maturity of UBS’s assets and liabilities. One such breakdown is shown in the table at the end of this section. This maturity analysis is an accounting view. It does not fully represent a liquidity risk management perspective which would also include stress analyses and a more detailed breakdown of asset and liability types.

(Audited)

Since a liquidity crisis could have a myriad of causes, UBS focuses on a scenario that encompasses all potential stress effects across all markets, currencies and products.
The assessment includes the likelihood of maturing assets and liabilities being rolled over in a UBS-specific crisis, and gauges the extent to which the potential crisis-induced shortfall could be covered by available funding. This would be raised on a secured basis against available collateral, which includes securities eligible for pledging at the major central banks, or by selling liquid inventory. In both cases UBS applies crisis-level discounts to the value of the assets. It assumes that it would be generally unable to renew any of the Group’s wholesale unsecured debt, including all its maturing money market papers (outstanding volume CHF 152.3 billion on 31 December 2007) and that no contingency funding could be raised on an unsecured basis. It also factors in potential liquidity outflows from contingent liabilities, in particular those resulting from the drawdown of committed credit lines. Exposures to other contingent commitments, such as guarantees and letters of credit, are included in this analysis, although they are not as vulnerable since they are generally not unconditional but, rather, are linked to other, independent conditions being fulfilled.
Liquidity needs may also result from commitments and contingencies, including credit lines extended to secure the liquidity needs of customers. UBS regularly monitors undrawn committed credit facilities and other latent liquidity risks.
If UBS’s credit rating were to be downgraded, “rating trigger” clauses, especially in derivative contracts, could result in an immediate cash outflow due to the unwinding of derivative positions, or the need to deliver additional collateral. UBS’s contingent exposure arising directly from these rating triggers is judged not to be material compared to its liquidity-generation capacity, even in a crisis situation. UBS also analyzes the potential impact on its net liquidity position of adverse movements in the replacement values of its over-the-counter (OTC) derivative transactions which are subject to collateral arrangements and includes the potential outflows in its crisis scenarios. Given the diversity of UBS’s derivatives business and that of its counterparties, there is not necessarily a direct correlation between the factors influencing net replacement values with each counterparty and a firm-specific crisis scenario.


52

Liquidity limits and controls

(Audited)

While its estimated capacity to generate liquidity when required will naturally vary, UBS generally applies a constant limit structure, which imposes a ceiling on the projected net funding requirement along the cash ladder. Limits are based on the amount of cash UBS believes it could raise in a firm-specific crisis.
The limits vary by time zone since access to liquidity will depend on the time of day – at the beginning of the global trading day, during Asia Pacific trading hours, the limits are less severe since more time is available to mobilize funding sources or, if necessary, initiate asset sales to generate additional liquidity. As the day proceeds and currency zones begin to close, the limits become tighter, with the strictest limits applied later in the day when only the US markets are available. FX&MM’s day-to-day liquidity management is based on global books that are handed over from time zone to time zone, ensuring 24-hour coverage. Compliance with the risk limits and actual credit liquidity exposures are regularly reported to the GEB.
To complement and support the limit framework, regional teams monitor the markets in which UBS operates for potential threats and regularly report any significant findings to Treasury.

(Audited)

UBS has also developed detailed contingency plans for liquidity crisis management, the cornerstone of which is the Group’s access to secured funding either from the market or from the major central banks, coupled with the ability to turn sufficient liquid assets into cash within a short time frame.
The liquidity contingency plan is an integral part of the global crisis management concept, which covers all types of crisis events. It would be implemented under a core crisis team with representatives from Treasury, from FX&MM and
from related areas including the functions responsible for payments and settlements, market and credit risk control, collateral and margin management, and information technology and infrastructure. FX&MM’s centralized global management model lends itself naturally to efficient liquidity crisis management.
UBS is continuing to strengthen its relationships with the major central banks, consistent with its general policy, which is to base contingency plans on secured funding against pledges of high-quality collateral, rather than relying on third-party credit lines.

(Audited)

Liquidity ratios

In addition to the limits and controls described above, UBS also measures three ratios to monitor liquidity risk – the ratio of trading assets (trading portfolio assets and positive replacement values on derivatives) to total assets, the ratio of “level 1” trading assets to total assets, and the ratio of customer savings and deposits to mortgages. Level 1 trading assets are those for which fair values can be obtained from observable market prices and which are therefore considered to be the most liquid. These ratios are largely driven by UBS’s two largest business groups, the Investment Bank and Global Wealth Management & Business Banking. The first two ratios show the proportion of UBS’s total assets that are of a trading nature and are dominated by the Investment Bank’s activities. The third ratio is mainly driven by Global Wealth Management & Business Banking and shows the extent to which UBS is effectively funding its largest Swiss asset portfolio with customer deposits (savings and deposit accounts only), which are a stable funding source – the higher this percentage, the less the bank is reliant on wholesale funding for these potentially longer-term assets.



           

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 Liquidity ratios
  
 in % 31.12.07  31.12.06 
 Ratio of trading assets to total assets  52.92   49.93 
   
  Ratio of level 1 trading assets to total assets  15.02   20.88 
   
  Ratio of customer savings and deposits to mortgages  76.10   79.10 
   

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Liquidity and funding management

Funding

UBS’s domestic retail and global wealth management businesses have proven in the past to be valuable, cost-efficient and reliable sources of funding. Furthermore, through the establishment of short-, medium- and long-term funding programs in Europe, the US and Asia, UBS can provide specialized investments to its customers through which it can efficiently raise funds globally from both institutional and private investors, minimizing its dependence on any particular source.

Through broad diversification of its funding sources (by market, product and currency), UBS maintains a well-balanced portfolio of liabilities, which generates a stable flow of financing and provides protection in the event of market disruptions. This, together with its centralized funding management, enables UBS to pursue a strategy of efficient funding of business activities.

Funding approach

Medium- and long-term funding activities are planned by assessing the overall funding profile of the balance sheet, taking due account of the effective maturity of the asset base and the amount of maturing debt that will have to be replaced. The ability to continue to fund ongoing business activities through periods of difficult market conditions is also factored in. At the beginning of 2007, UBS decided to further strengthen its funding profile through public issuance of senior, straight, long-term debt and thereby enhance the overall diversification of its funding sources.
To ensure that a well-balanced and diversified liability structure is preserved, Treasury routinely monitors UBS’s funding status and reports its findings on a quarterly basis to the GEB. Two main analysis tools are employed – “cash cap-

ital” and “secured funding capacity”. UBS complements these analyses with regular assessments of any concentration risks in its main funding portfolios.
Cash capital is the excess of UBS’s long-term funding over the total of illiquid assets. “Long-term” and “illiquid” both refer to a time horizon of one year. The secured funding capacity concept ensures that short-term, unsecured (wholesale) funding is effectively only invested in freely marketable assets. UBS seeks to maintain a minimum stock of unencumbered assets and cash that exceeds its outstanding short-term unsecured wholesale borrowings.

(Audited)

Funding position

UBS’s secured funding base reduces its exposure to periods of stressed market conditions when the ability to raise unsecured funding could be temporarily restricted.

The charts below show a breakdown by product type and by currency of UBS’s secured and unsecured funding as of 31 December 2007. Of the total, 22% was raised on a secured basis and 78% unsecured. The unsecured funding base is well diversified, with 19% of total funding stemming from savings and demand deposits, 17% from long-term debt, 17% from time deposits, 9% from short-term interbank borrowing, 10% from money market papers and 6% from fiduciary deposits. Around half of UBS’s funding is originated in US dollars, with substantial portions in Swiss francs and euros, roughly mirroring the currency breakdown of its assets. Around 19% of funding was denominated in other currencies (primarily UK sterling and Japanese yen). UBS does not rely on buying committed credit facilities from third-party banks, but instead bases its contingent funding sources on its ability to raise secured funding through the use of high-quality collateral.




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 Maturity analysis of assets and liabilities 
   On demand and trading instruments    
   Instruments                  Due  Due  Due       
   at cost and  Instruments  Instruments      Due  between  between  between       
    at fair  at fair  at fair  Subject to  within 1  1 and 3  3 and 12  1 and 5  Due after    
  CHF billion value / level 1  value / level 2  value / level 3  notice1  month  months  months  years  5 years  Total 
   
                                           
  
Assets
                                        
   
  Cash and balances with central banks  18.8   0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.0   18.8 
   
  Due from banks  46.4   0.0   0.0   0.0   6.7   2.1   4.1   1.4   0.2   60.9 
   
  Cash collateral on securities borrowed  0.0   0.0   0.0   149.5   46.5   2.4   3.8   1.5   3.4   207.1 
   
  Reverse repurchase agreements  0.0   0.0   0.0   34.8   277.3   40.0   22.8   1.9   0.1   376.9 
   
  
Trading portfolio assets2
  249.3   323.4   37.3   0.0   0.0   0.0   0.0   0.0   0.0   610.0 
   
  
Trading portfolio assets pledged as collateral2
  85.3   55.8   23.2   0.0   0.0   0.0   0.0   0.0   0.0   164.3 
   
  
Positive replacement values2
  6.8   407.4   14.0   0.0   0.0   0.0   0.0   0.0   0.0   428.2 
   
  
Financial assets designated at fair value3
  1.8   0.3   0.0   0.0   1.9   1.7   0.8   2.2   3.1   11.8 
   
  Loans  72.5   0.0   0.0   42.0   61.5   20.0   38.6   72.7   28.6   335.9 
   
  Financial investments available-for-sale  0.4   0.5   1.0   0.0   0.3   0.0   1.8   0.3   0.7   5.0 
   
  Accrued income and prepaid expenses  0.0   0.0   0.0   0.0   12.0   0.0   0.0   0.0   0.0   12.0 
   
  Investments in associates  0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.0   2.0   2.0 
   
  Property and equipment  0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.0   7.2   7.2 
   
  Goodwill and other intangible assets  0.0   0.0   0.0   0.0   0.0   0.0   0.0   0.0   14.5   14.5 
   
  Other assets  0.0   0.0   0.0   0.0   18.0   0.0   0.0   0.0   0.0   18.0 
   
  
Total 31.12.07
  481.3   787.4   75.5   226.3   424.2   66.2   71.9   80.0   59.8   2,272.6 
   
  Total 31.12.06  549.9   673.9   13.1   351.4   404.6   114.3   92.3   98.9   48.0   2,346.4 
   
                                           
  
Liabilities
                                        
   
  Due to banks  39.1   0.0   0.0   1.0   77.8   15.1   11.8   0.4   0.5   145.7 
   
  Cash collateral on securities lent  0.0   0.0   0.0   30.5   1.1   0.0   0.0   0.0   0.0   31.6 
   
  Repurchase agreements  0.0   0.0   0.0   17.4   186.7   46.8   54.4   0.6   0.0   305.9 
   
  
Trading portfolio liabilities2
  119.9   44.9   0.0   0.0   0.0   0.0   0.0   0.0   0.0   164.8 
   
  
Negative replacement values2
  6.6   420.1   16.8   0.0   0.0   0.0   0.0   0.0   0.0   443.5 
   
  
Financial liabilities designated at fair value3
  0.0   0.0   0.0   0.0   4.5   35.3   28.8   68.0   55.3   191.9 
   
  Due to customers  179.6   0.0   0.0   124.1   252.3   49.8   23.5   0.7   11.9   641.9 
   
  Accrued expenses and deferred income  0.0   0.0   0.0   0.0   21.8   0.0   0.0   0.0   0.0   21.8 
   
  Debt issued  0.0   0.0   0.0   0.0   52.2   63.6   49.0   22.6   34.7   222.1 
   
  Other liabilities  0.0   0.0   0.0   27.5   33.3   0.0   0.0   0.0   0.0   60.8 
   
  
Total 31.12.07
  345.2   465.0   16.8   200.5   629.7   210.6   167.5   92.3   102.4   2,230.0 
   
  Total 31.12.06  386.3   290.1   9.2   254.6   843.4   169.8   150.6   97.5   89.1   2,290.6 
   
  
1 Deposits without a fixed term, on which notice of withdrawal or termination has not been given (such funds may be withdrawn by the borrower subject to an agreed period of notice).   2 Trading and derivative positions are presented in the first three columns of this table: “Instruments at cost and fair value / level 1”, “Instruments at fair value / level 2” and “Instruments at fair value / level 3”. Management believes that such presentation most accurately reflects the short-term nature of trading activities. The contractual maturity of the instruments may, however, extend over significantly longer periods. The breakdown of these positions into the fair value measurement categories of levels 1, 2 and 3 indicates the liquidity of the markets in which the financial instruments are traded and the availability of market observable inputs to measure these instruments (refer to Note 26 inFinancial Statements 2007).   3 The contractual redemption amount at maturity of financial assets and liabilities designated at fair value approximates the carrying value as of 31 December 2007 and 31 December 2006.
           

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 Contingent claims and commitments 
 CHF million 31.12.07  31.12.06 
  
 Contingent claims  20,824   17,908 
  
 Undrawn irrevocable facilities  83,980   97,287 
  
 The Group enters into commitments to extend credit lines to secure the liquidity needs of customers. From the outstanding undrawn irrevocable credit facilities, approximately one-fifth mature within 12 months while four-fifths mature beyond 12 months.

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Treasury and capital management
Capital management

Capital management

   

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(AUDITED)		 

In managing its capital, UBS considers a variety of requirements and expectations. Sufficient capital must be in place to support current and projected business activities, according to both UBS’s own internal assessment and the requirements of its regulators, in particular its lead regulator the Swiss Financial Market Supervisory Authority (FINMA; until 31 December 2008 Swiss Federal Banking Commission (SFBC)Commission).

  
Capital is also managed in order to achieve sound capital ratios, to ensure strong external credit ratings and to ensure that UBS remains one of the best capitalized firms in the international banking sector. This is crucial in retaining clients’ confidence in UBS’s financial strength and also supports UBS’s funding position and favorable borrowing costs in the international financial markets.
UBS aims to maintain sound capital ratios at all times, and it therefore considers not only the current situation but also projected developments in both its capital base and capital requirements. The main tools by which UBS manages the supply side of its capital ratios are active management of shares, capital instruments and dividend payments.
   

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(AUDITED)		 

Capital adequacy management



Ensuring compliance with minimum regulatory capital requirements and targeted capital ratios is central to capital adequacy management. In this ongoing process, UBS manages towards Tiertier 1 and Totaltotal capital target ratios. In the target setting process UBS takes into account the regulatory minimum capital requirements, and regulators’ expectations that UBS holds additional capital above the minimum requirements, UBS’s

internal assessment of aggregate risk exposure in terms of Capital-at-risk,capital-at-risk (refer to “Earnings-at-risk and capital-at-risk” in the “Risk management and control” section of this report), the views of rating agencies, and comparison towith peer institutions considering UBS’s business mix and market presence.

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Capital

Regulatory requirements

At year end 2007,

On 1 January 2008, UBS was subject to regulatory guidelines based onadopted the original – Basel I –II capital framework established byof the Basel Committee on Banking Supervision (“BIS guidelines / ratios”)of the Bank for International Settlements (BIS). (Refer to the “General description of risk exposure measures and capital requirements” in the “Basel II Pillar 3” section of this report for details regarding UBS’s implementation of Basel II.) The introduction of Basel II led to a decrease in UBS’s overall capital it is required to hold is determinedrequirements, as measured by its risk-weighted assets – its balance sheet, off-balance sheet(RWA). Eligible capital calculations have also been modified by the introduction of new deductions from tier 1 capital and market risk positions, measured and risk-weighted according to criteria defined by its lead regulator, the SFBC. Under BIS guidelines, a financial institution’stotal capital, resulting in lower eligible capital must be at least 8% of its total risk-weighted assets.

UBS’scapital.
     To allow for comparability, published capital ratios and risk-weighted assetsRWA are determined according to the rules of the BIS guidelines, which differ in certain respects fromBasel II framework. UBS’s regulatory capital requirements are based on the regulations of the SFBC. The most important differences are:

–  whereFINMA, which lead to higher risk-weighted assets compared with BIS guidelines apply a maximum risk weight of 100%,(refer to the SFBC applies risk weights above 100% to certain asset classes (for example real estate, fixed assets, intangibles, and non-trading equity positions); and
–  where the BIS guidelines apply a 20% risk weight to obligations of Organization for Economic Co-operation and Development (OECD) banks, the SFBC applies risk weights of 25% to 75%, depending on maturity.


Capital improvement program

In fourth quarter 2007, the markets for US residential sub-prime mortgages and related securities, and the US residential housing market in general continued to deteriorate. In December, it became increasingly evident that substantial writedowns would be required.
The reduction in the Tier 1 ratio resulting from the expected substantial overall loss in fourth quarter could, among other consequences, have led to rating agency downgrades of UBS’s top-tier financial ratings. This, in turn, could have damaged client confidence

in UBS’s financial strength and increased the Group’s borrowing costs in the international financial markets. UBS therefore decided to take immediate actions to strengthen its capital position.
The most important element of the capital improvement program was the proposal to issue CHF 13 billion of mandatory convertible notes (MCN), which was approved at the extraordinary general meeting on 27 February 2008.
Since the capital impact of the MCN issue would only become effective in

first quarter 2008, it was also decided in December 2007 to take additional measures that would have an immediate effect on the Tier 1 capital ratio. Firstly, the Board of Directors approved the rededication of 36.4 million shares that had previously been bought back and earmarked for cancellation. Secondly, it proposed to replace the cash dividend for 2007 with a stock dividend.
  èFurther details on the mandatory convertible notes can be foundadditional capital management disclosure in the “Shares and capital instruments”“Basel II Pillar 3” section of this report



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(Audited)

As a result ofreport). Eligible capital is the differences in regulatory rules, UBS’s risk-weighted assets are higher and capital ratios (total and Tier 1) are lower when calculated under SFBC regulations thansame under BIS guidelines. UBS has always had total capitalguidelines and Tier 1 capital in excess of the minimum requirements of both the BIS and the SFBC.
UBS measures on- and off-balance sheet claims according to regulatory formulas. Claims are weighted according to type of counterparty and collateral. The least risky claims, such as claims on OECD governments and claims collateralized by cash, are weighted at 0%, meaning that no regulatory capital support is required, while the claims deemed most risky, including unsecured claims on both corporate and private customers, are weighted at 100%, meaning that 8% capital support is required.
Securities not held for trading are treated as claims, based on the net position in the securities of each issuer, including both actual holdings and exposures from derivative instruments. UBS’s investments in entities which are consolidated under International Financial Reporting Standards (IFRS) and which are not active in the field of banking and finance (including consolidated industrial holdings) are treated for regulatory capital purposes as positions in securities not held for trading.
Claims arising from derivatives transactions have two components – the current replacement values, and “add-ons” to reflect the potential future exposure. Where UBS has entered into a master netting agreement that is considered legally enforceable in insolvency, positive and negative replacement values with individual counterparties can be netted.
FINMA regulations.
   

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Off-balance sheet claims arising from contingent commitments and irrevocable facilities are converted into credit equivalent amounts based on percentages of nominal value specified by the regulators.

Regulatory     In 2008, UBS complied with all externally imposed capital is required to support market risk arising on all foreign exchange, energy, metal and other commodity positions, and on all positions held for trading purposes, including equities and traded debt obligations held in the trading book. For most market risk positions, UBS derives its regulatory capital requirement from its internal Value at Risk (VaR) model which is approved by the SFBC. It is based on 10-day VaR, which is subject to a multiplier reflecting the regulator’s view of the robustness of the VaR model. This multiplier is increased in response to backtesting exceptions. For some small positions, market risk regulatory capital is computed using the standardized method defined by the regulators. Unlike the calculations for credit risk, the market risk measure produces the capital requirement itself rather than the amount of risk-weighted assets. In order to compute a total capital ratio, the total market risk capital requirement is converted to a “risk-weighted asset equivalent” such that the capital requirement is 8% of this risk-weighted asset equivalent, i.e. the total market risk capital requirement is multiplied by 12.5.
Other assets, most notably property and equipment, and intangibles are not subject to credit or market risk, but they represent a risk to the Group in respect of their potential for writedown and impairment and therefore require capital underpinning in accordance with regulatory formulas.

requirements.


                 
Risk-weighted assets (BIS) 
      Risk-weighted      Risk-weighted 
  Exposure  amount  Exposure  amount 
 
CHF million
  31.12.07   31.12.07   31.12.06   31.12.06 
 
Balance sheet exposures
                
 
Due from banks and other collateralized lendings1
  463,796   7,450   452,821   10,438 
 
Net positions in securities2
  12,721   9,510   10,262   8,447 
 
Positive replacement values3
  138,978   34,800   110,732   24,161 
 
Loans, net of allowances for credit losses and other collateralized lendings1
  710,564   210,493   887,694   206,359 
 
Accrued income and prepaid expenses  10,383   5,255   9,302   4,920 
 
Property and equipment  8,370   8,370   8,436   8,436 
 
Other assets  27,234   17,110   15,976   10,827 
 
Off-balance sheet exposures
                
 
Contingent liabilities  20,824   7,512   17,908   7,842 
 
Irrevocable commitments  84,978   13,028   98,439   23,592 
 
Forward and swap contracts4
  732,930   15,565   459,170   16,599 
 
Purchased options4
  9,954   1,095   8,220   411 
 
Market risk positions5
      42,110       19,860 
 
Total risk-weighted assets
      372,298       341,892 
 
1 Includes gross securities borrowing and reverse repurchase agreement exposures, and those traded loans in trading portfolio assets originated by the Group for syndication or distribution. These financial instruments are excluded from the Market risk positions.   2 Includes industrial holdings, which are not consolidated for capital adequacy. Excludes positions in the trading book, which are included in Market risk positions.   3 Represents the mark-to-market values of Forward and swap contracts and Purchased options, where positive but after netting, where applicable.   4 Represents the add-ons for these contracts.   5 Regulatory capital adequacy requirements for market risk, calculated using the approved Value at Risk model, or the standardized method, multiplied by 12.5. This results in the risk-weighted asset equivalent.

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Capital management

   
  Developments
As publicly announced, in fourth quarter 2008 FINMA enhanced the capital requirements under Basel II, Pillar 2, for UBS and Credit Suisse. The new regulatory measures will have to be implemented progressively until full applicability on 1 January 2013.
     First, FINMA will increase the capital buffer (the regulatory excess capital expected to be held over and above the regulatory minimum requirement) from 20% to 50%–100% over the cycle. At the same time, FINMA will allow for enlarged recognition of hybrid capital.
     Second, FINMA will introduce a minimum leverage ratio, defining the minimum amount of tier 1 capital required for a given balance sheet size. For this calculation, the IFRS balance sheet is adjusted for a number of factors: replacement values determined according to the rules of IFRS are substituted by the corresponding values under Swiss Generally Accepted Accounting Principles (Swiss GAAP), allowing for increased recognition of netting benefits, similar to US GAAP. Moreover, the Swiss loan book, certain cash and balances with central banks and specified reverse repurchase agreements where the repurchase price is payable in Swiss francs will be excluded from the balance sheet. Furthermore, a number of adjustments will be made to avoid double-counting of assets that are already deducted from tier 1 capital, most notably goodwill and intangible assets. FINMA will require a minimum leverage ratio of 3% on Group level, with an expectation that the ratio will be well above the minimum requirements in normal times.
     The table on the next page shows the calculation of the FINMA consolidated leverage ratio as of 31 December 2008.
     In January 2009, the Basel Committee on Banking Supervision issued consultative documents on proposed revisions to the Basel II market risk framework. Broadly, the committee aims to address perceived shortcomings of the current Value at Risk (VaR) framework, most notably by enhancing capital requirements to incorporate effects of “stressed VaR” and by introducing new capital charges for price risks that are incremental to any default and event risks already captured by VaR models used by banks. Furthermore, the Basel Committee also plans to update – for regulatory capital purposes – the prudent valuation guidance for illiquid positions accounted for at fair value. It is envisaged that the revised requirements will have to be implemented by the end of 2009 and 2010, respectively.
     Finally, in January 2009 the Basel Committee issued a consultative document on further enhancements to the Ba-


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sel II framework, with revised requirements for securitization exposures and, in particular, higher risk weights for re-securitization positions.

Capital ratios

The BIS ratios compare the amount of eligible capital (in total and tier 1) with the total of risk-weighted assets.
     At year-end 2008, the BIS tier 1 ratio amounted to 11.0% and the total capital ratio to 15.1%, compared with 9.1% and 12.2%, respectively, under Basel I rules at year-end 2007. In this period, risk-weighted assets declined from CHF 374.4 billion (Basel I) to CHF 302.3 billion, while tier 1 capital decreased from CHF 34.1 billion to CHF 33.4 billion.
     Eligible capital and capital ratios were restated following a change in accounting policy on pension and other post-retirement benefit plans (refer to “Note 30 Pension and other post-retirement benefit plans” in the financial statements of this report for more information). Due to this restatement, tier 1 capital and total capital increased by approximately CHF 1.6 billion and the corresponding capital ratios by 40 basis points at year-end 2007.
(AUDITED)Capital requirements

UBS’s capital requirements are generally based on its consolidated financial statements in accordance with IFRS. Under these standards,IFRS, subsidiaries and special purpose entities that are directly or indirectly controlled by UBS must be consolidated, whereas for regulatory capital purposes, different consolidation principles apply. For example, subsidiaries that are not active in the banking and finance business are excluded.
è  Refer to the additional capital management disclosure in the “Basel II Pillar 3” section of this report

UBS: BIS capital ratios1

(CHART)

1 Prior to and including 4Q07 the capital ratios above are based on Basel I capital regulations, thereafter on Basel II rules.
On 31 December 20072008 risk-weighted assets were CHF 372.3302.3 billion, up 9% fromcompared with CHF 341.9374.4 billion (Basel I) at year-end 2007. Figures by component are as follows:
Credit risk
Risk-weighted assets for credit risk amounted to CHF 222.6 billion at year-end 2006. Roughly 55%31 December 2008, compared with CHF 323.3 billion under Basel I on 31 December 2007. The introduction of the increase was driven by exposures from the Investment Bank, in particular increased capital requirements for market risk resulting from higher market volatility and an increase in the regulatory multiplier, higher positive replacement values of derivatives, and an increase in the syndicated loan portfolio, partially offset by a decrease inBasel II led to considerably lower risk-weighted assets for undrawn commitments and securities lending and borrowing activities.credit risk. However, the impact on individual business divisions varied: Global Wealth Management & Business Banking contributedsaw lower risk-weighted assets for customer loans, mortgages and lombard lending, while the remainderInvestment Bank was subject to higher capital requirements for over-the-counter (OTC) derivatives and repo-style transactions (i.e. repurchase/reverse repurchase and securities, lending and borrowing transactions).
èRefer to the “Credit risk” section of this report for more information



FINMA1 adjusted assets for leverage ratio calculation
CHF billion, except where indicatedAverage fourth quarter 2008
Total assets (IFRS)2 prior to deductions
2,212
Less: difference between IFRS and Swiss GAAP positive replacement values3
(653)
Less: loans to Swiss clients (excluding banks)(165)
Less: cash and balances with central banks(27)
Less: Other4
(23)
Total adjusted assets
1,344
FINMA consolidated leverage ratio (%)
2.48
1 Swiss Financial Market Supervisory Authority (FINMA).  2 International Financial Reporting Standards.  3 The netting difference is disclosed in the «Off-balance sheet» section of this report.  4 Refer to the “Capital components” table for more information on deductions of assets from tier 1 capital.

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Treasury management

Non-counterparty related assets
Risk-weighted assets for non-counterparty related assets amounted to CHF 7.4 billion at 31 December 2008, compared with CHF 9.0 billion under Basel I on 31 December 2007.

Market risk
In 2008, risk-weighted assets for market risk decreased by CHF 14.5 billion to CHF 27.6 billion on 31 December 2008, due to lower regulatory VaR. The decrease resulted primarily from the risk-weighted asset increase, mainly relatedtransfer of certain illiquid assets from the trading book to increased collateralized lending.the banking book on 1 January 2008 and was partially offset by increases in VaR following higher market volatility and enhancements made to the VaR model.
èRefer to the “Market risk” section of this report for further information
   

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EligibleOperational risk
The new Basel II capital requirement for operational risk amounted to risk-weighted assets of CHF 44.7 billion on 31 December 2008.

èRefer to the “Operational risk” section of this report for further information
  
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Eligible capital

The capital available to support risk-weighted assets – eligible capital – consists of Tiertier 1 and Tiertier 2 capital. Tier 1 capital is required to be at least 4% of risk-weighted assets and total capital (Tier(tier 1 plus Tiertier 2) at least 8%. To determine eligible Tiertier 1 and total capital, adjustments have to be made to shareholders’ equity as defined under IFRS, most notably by deducting goodwill and investments in unconsolidated entities engaged in banking and financefinancial activities.
Eligible capital is the same under BIS guidelines and SFBC regulations.

   

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Tier 1 capital / UBS shares

  
(AUDITED) 

The majority of Tier 1 capital comprises retained earnings attributable to capital/UBS shareholders. As ofshares
On 31 December 2007, total IFRS equity attributable to UBS shareholders amounted to CHF 35,585 million, which serves as the basis for determining2008, the regulatory eligible Tiertier 1 capital. Thecapital was CHF 33.4 billion, down CHF 0.7 billion compared with year-end 2007. This is the net effect of: CHF 20.9 billion in losses incurred during 2008; reversal for capital purposes of CHF 4.5 billion gains recognized under IFRS related to the accounting for the mandatory convertible notes (MCNs), which issued in March and December 2008 (refer to the “IFRS equity to BIS tier 1 capital” section below for more information); CHF 3.8 billion reductions of capital related to own shares; CHF 2.9 billion losses recognized directly in equity; additional deductions of CHF 2.6 billion for intangible assets and other Basel II deductions; and the reversal of CHF 2.3 billion of gains on own credit for capital purposes. These negative effects were announced on 10 December 2007 did not contribute to eligible capital as of 31 December 2007, but became eligible capital after the approval ofcompensated by the issue of CHF 13.0 billion MCNs aton 5 March 2008, proceeds of EUR 1.0 billion from the EGM, which took placeissuance of perpetual preferred securities on 27 February11 April 2008, the net proceeds from the rights issue of CHF 15.6 billion on 17 June 2008, and the issuance of CHF 6.0 billion MCNs on 9 December 2008.



Hybrid Tiertier 1 capital


Hybrid Tiertier 1 instruments are perpetual instruments that can only be redeemed if they are called by the issuer. The payment of interest is subject to compliance with minimum capital ratios and any payment missed is non-cumulative. As of 31 December 2008, UBS’s hybrid Tiertier 1 instruments amounted to CHF 7.4 billion. Under IFRS, these instruments are accounted for underas equity attributable to minority interests and amounted to CHF 6,387 million as of 31 December 2007, representing approximately 19.5% of eligible Tier 1 capital.

interests.

Tier 2 capital


Tier 2 capital consists mainly of subordinated long-term debt that ranks senior to both UBS shares and hybrid Tiertier 1 instrumentsinstru-



             
Capital adequacy
  Basel II  Basel I 
CHF million, except where indicated 31.12.08  31.12.08  31.12.07 
 
BIS tier 1 capital  33,371   35,884   34,101 
 
of which hybrid tier 1 capital
  7,393   7,393   6,387 
 
BIS total capital  45,588   46,233   45,797 
 
BIS tier 1 capital ratio (%)  11.0   9.9   9.1 
 
BIS total capital ratio (%)  15.1   12.7   12.2 
 
Credit risk1
  222,563   326,608   323,345 
 
Non-counterparty related risk  7,411   8,826   8,966 
 
Market risk  27,614   27,614   42,110 
 
Operational risk  44,685   N/A   N/A 
 
Total BIS risk-weighted assets
  302,273   363,048   374,421 
 
1 Includes securitization exposures and equity exposures not part of the trading book and capital requirements for failed trades.

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Risk and treasury management

(AUDITED)ments but is subordinated with respect to all senior obligations of UBS. Tier 2 instrumentscapital accounted for CHF 14,071 million12.2 billion in total capital as of year-end 2007.

2008.
     
èFurther information on UBS’sRefer to the “Shares and capital instruments is provided on pages 64–65instruments” section of this report for details about UBS’s issuance of capital securities during 2008, including hybrid tier 1 instruments and tier 1 instruments


               

(Audited)

 Capital components 
      % change from 
 CHF million 31.12.07  31.12.06  31.12.06 
   
  Gross Tier 1 capital  50,147   57,713   (13)
   
  
of which paid-in share capital
  207   211   (2)
   
  
of which share premium, retained earnings, currency translation differences
  43,552   51,869   (16)
   
  
of which innovative capital instruments
  6,047   5,267   15 
   
  
of which non-innovative capital instruments
  340   366   (7)
   
  
Less: goodwill1
  (13,203)  (13,852)  5 
   
  
Less: other Tier 1 deductions2
  (4,133)  (3,333)  (24)
   
  
Total eligible Tier 1 capital
  32,811   40,528   (19)
   
  Upper Tier 2 capital  301   0     
   
  Lower Tier 2 capital  13,770   13,093   5 
   
  Tier 3 capital  0   0     
   
  
Less: deductions3
  (2,375)  (3,257)  27 
   
  Total eligible capital  44,507   50,364   (12)
   
  
1 Includes intangible assets exceeding 4% of Tier 1 capital.   2 Consists of: i) net-long position in own shares held for trading purposes; ii) own shares bought for cancellation (second trading line) or for upcoming share awards; iii) other treasury share positions net of delta-weighted obligations out of employee stock options granted prior to August 2006.   3 Consists of the net-long position of non-consolidated participations in the finance sector and first loss protections out of securitizations.

58

UBS’s eligible capital is based on its consolidated financial statements prepared under IFRS. As illustrated in the table on the opposite page, shareholders’ equity is subject to a number of adjustments to arrive at regulatory eligible capital.
On 31 December 2007, BIS Tier 1 capital was CHF 32.8 billion, down from CHF 40.5 billion at year end 2006, reflecting primarily the negative effects of the loss in 2007, accruals for share based compensation plans and foreign exchange translation differences. In 2007, UBS issued EUR 600 million of innovative Tier 1 capital instruments (Trust Preferred Securities).

IFRS Equity to BIS Tier 1 capital

The key adjustments made to IFRS Equity attributable to shareholders to determine TierIntragroup transfer of capital
UBS enters into intragroup transactions in order to manage funding and capital of individual UBS entities. As at 31 December 2008, UBS was not aware of any material restrictions, or other major impediments, concerning the transfer of funds or regulatory capital within the Group apart from those which apply to these entities by way of local laws and regulations.

IFRS equity to BIS tier 1 capital

The key adjustments made to IFRS equity attributable to shareholders to determine tier 1 eligible capital result from:
– An increase in IFRS share premium of CHF 7.0 billion and retained earnings of CHF 3.8 billion from the ability to net treasury shares held as hedges against obligations from employee stock options granted prior to August 2006 (reducing deductions for treasury sharesrecognition of CHF 13.0 billion MCNs issued in March 2008, versus an increase of tier 1 capital (recognized in

BIS share premium) by CHF 6,230 million);13.0 billion. Refer to “Note 26 Capital increases and mandatory convertible notes” in the financial statements of this report for more information.
– The different treatment of MCNs placed with the Swiss Confederation in December 2008 for IFRS and regulatory capital purposes: IFRS equity attributable to UBS shareholders decreased overall by CHF 2.9 billion, which reflects the net effect of a reduction to share premium of CHF 3.6 billion and a positive impact on retained earnings of CHF 0.7 billion. In contrast, tier 1 capital increased by CHF 6.0 billion. Refer to “Note 26 Capital increases and mandatory convertible notes” in the financial statements of this report for more information.
–A negative impact on BIS share premium of CHF 0.9 billion from adjustments for the recognition of interest payments on both MCNs for capital purposes.
–The inability to recognize, for tier 1 capital, fair value changes recorded directly in equity under IFRS from financial investments available-for-sale and cash flow hedges (reduction of CHF 1,509 million);

1.1 billion).
  –  a reductionFurther corrections in retained earnings for gains on own credit of CHF 3.0 billion relating to the application of the fair value option under International Accounting Standard (IAS) 39 for capital adequacy purposes, which was partially offset by adjustments for differences in the scope of consolidation (reducing retained earnings by net CHF 564 million);purposes.


               
(AUDITED) Capital components
   Basel II  Basel I 
 CHF million 31.12.08  31.12.08  31.12.07 
  
 Core capital prior to deductions  48,971   48,971   51,437 
  
 
of which: paid-in share capital
  293   293   207 
  
 
of which: share premium, retained earnings, currency translation differences and other elements
  41,285   41,285   44,842 
  
 
of which: non-innovative capital instruments
  1,810   1,810   340 
  
 
of which: innovative capital instruments
  5,583   5,583   6,047 
  
 
Less: treasury shares/deduction for own shares1
  (1,488)2  (1,488)  (4,133)
  
 
Less: goodwill & intangible assets3
  (12,950)  (11,600)  (13,203)
  
 
Less: other Basel II deductions4
  (1,163)  –     
  
 
Total eligible tier 1 capital
  33,371   35,884   34,101 
  
 Upper tier 2 capital  1,090   69   301 
  
 Lower tier 2 capital  12,290   12,290   13,770 
  
 
Less: other Basel I deductions5
  –   (2,010)  (2,375)
  
 
Less: other Basel II deductions4
  (1,163)  –     
  
 
Total eligible capital
  45,588   46,233   45,797 
  
 
1 Consists of: i) net long position in own shares held for trading purposes; ii) own shares bought for cancellation (second trading line) and for unvested or upcoming share awards; iii) other treasury share positions net of delta-weighted obligations out of employee stock options granted prior to August 2006.  2 Netting of own shares with share-based payment obligations is subject to a grandfathering agreement with the Swiss Financial Market Supervisory Authority.  3 Includes under Basel I only goodwill and the portion of intangible assets exceeding 4% of tier 1 capital.  4 Positions to be deducted as 50% from tier 1 and 50% from total capital mainly consist of: net long position of non-consolidated participations in the finance sector, first loss positions from securitization exposures, excess of expected losses above general provisions (AIRB), expected loss for equities (simple risk weight method).  5 Consists of the net long position of non-consolidated participations in the finance sector and first loss positions from securitization exposures.

165

Risk and treasury management
Treasury management

   –  removingRemoving minority interests other than trust preferred securities,of entities not consolidated for regulatory capital purposes, causing a further reduction of regulatory capital by CHF 564 million.0.5 billion.
–A positive adjustment of CHF 1.7 billion primarily for the ability to net, for capital purposes, treasury shares held as hedges against obligations from employee stock options granted prior to August 2006.
   
  

Capital ratios

Equity attribution framework

In first quarter 2008, UBS implemented a new framework for attributing equity capital to its businesses. This reflects UBS’s overarching objectives of maintaining a strong capital base and guiding businesses towards activities with the best balance among profit potential, risk and capital usage. In this framework, the Group Executive Board (GEB) attributes equity to the businesses after considering their risk exposure, asset size, goodwill and intangible assets.
The design of the equity attribution framework enables UBS to:
–Calculate and assess return on attributed equity (RoaE) in each of its businesses. With effect from first quarter 2008, RoaE and return on BIS risk-weighted assets (RoRWA) are disclosed for all business groups and units and replace the previously disclosed “return on allocated regulatory capital” measure.
   
   

The BIS ratios compare the amount of eligible capital (in total and Tier 1) with the total of risk-weighted assets.

(Audited)

–		 The combination of the 9% risk-weighted assets increaseIntegrate Group-wide capital management activities with those at business group and the 19% reduction in BIS Tier 1 capital resulted in a decrease of BIS Tier 1 ratio by 3.1 percentage points to 8.8% at the end of December 2007, down from 11.9% at year-end 2006. In the same period, the total capital ratio decreased from 14.7% to 12.0%.business unit level.
  
èFor details–
Measure performance in a consistent manner across business divisions and business units.
–Make better comparisons between the Group’s businesses and those of competitors.
    The framework operates as follows: First, each business is attributed an amount of equity equal to the average book value of goodwill and intangible assets, as reported for that business division or business unit according to IFRS. Next, the GEB considers a number of factors that drive required capital, including:
–Equity requirements based on aggregated risk exposure, including the potential for losses exceeding UBS’s issuanceearnings capacity as defined by the firm’s “capital-at-risk” concept.
–Regulatory capital requirements which are based on risk-weighted asset usage of capital securities during 2007, including hybrid Tierthe businesses and also take into account the different market standards for tier 1 instruments and subordinated debt, please seeratios associated with “pure-play” competitors of each of the section “Capital structure” inCorporate Governance and Compensation Report 2007businesses.
–The asset size of the businesses.
    After reviewing the results of this formulaic approach, the GEB makes adjustments to the final tangible equity attribution to reflect the amount of equity it believes is appropriate for each business. This assessment is based on the


               

(Audited)

 Reconciliation of IFRS1 Equity to BIS Tier 1 capital 
   31.12.07 
   IFRS  Reconciliation  BIS 
 CHF million view  items  view 
   
  Share capital  207   0   207 
   
  Share premium  8,884   (189)  8,695 
   
  Net income recognized directly in equity, net of tax  (1,188)  (1,509)  (2,697)
   
  Revaluation reserve from step acquisitions, net of tax  38   0   38 
   
  Retained earnings  38,081   (564)  37,517 
   
  Equity classified as obligation to purchase own shares  (74)  74   0 
   
  Treasury shares / deduction for own shares  (10,363)  6,2302  (4,133)
   
  
Equity attributable to UBS shareholders / gross Tier 1 net of own shares
  35,585   4,042   39,627 
   
  Equity attributable to minority interests  6,951   (564)  6,387 
   
  
Total equity / gross Tier 1 including hybrid Tier 1 instruments
  42,536   3,478   46,014 
   
  Less: goodwill          (13,203)3
   
  Less: accrual for expected future dividend payment          0 
   
  Eligible Tier 1 capital          32,811 
   
               

   31.12.06 
   IFRS  Reconciliation  BIS 
 CHF million view  items  view 
  
 
Total equity / gross Tier 1 including hybrid Tier 1 instruments
  55,775   3,187   58,962 
   
  Less: goodwill          (13,852)3
   
  Less: accrual for expected future dividend payment          (4,582)
   
  Eligible Tier 1 capital          40,528 
   
  
1 International Financial Reporting Standards (IFRS).   2 Generally, treasury shares are fully deducted from Equity under IFRS, whereas for capital purposes only the following positions in own shares are deducted: i) net-long position in own shares held for trading purposes; ii) own shares bought for cancellation (second trading line) or for upcoming share awards and; iii) other treasury share positions net of delta-weighted obligations out of employee stock options granted prior to August 2006.   3 Includes intangible assets exceeding 4% of Tier 1 capital.
                   
(AUDITED) Reconciliation of International Financial Reporting Standards equity to BIS tier 1 capital 
 
   31.12.08 
       Basel II  Basel I 
       Reconciliation       
 CHF million  IFRS1 view  items  BIS view  BIS view 
  
 Share capital  293   0   293   293 
  
 Share premium  25,250   8,500   33,750   33,750 
  
 Net income recognized directly in equity, net of tax  (4,471)  (1,129)  (5,600)  (5,600)
  
 Revaluation reserve from step acquisitions, net of tax  38   0   38   38 
  
 Retained earnings  14,892   (7,908)  6,984   6,984 
  
 Equity classified as obligation to purchase own shares  (46)  46   0   0 
  
 Equity attributable to minority interests  8,002   (495)  7,507   7,507 
  
 Treasury shares/deduction for own shares  (3,156)  1,6682  (1,488)  (1,488)
  
 Mandatory convertible notes (MCNs) to the Swiss Confederation  03  6,000   6,000   6,000 
  
 
Total equity/gross tier 1 including MCNs and hybrid tier 1 instruments
  40,802   6,682   47,484   47,484 
  
 Less: goodwill, intangible assets and other Basel II deduction items          (14,113)4  (11,600)5
  
 
Eligible tier 1 capital
          33,371   35,884 
  
 
1 International Financial Reporting Standards (IFRS).  2 Generally, treasury shares are fully deducted from equity under IFRS, whereas for capital adequacy purposes only the following positions in own shares are deducted: i) net long position in own shares held for trading purposes; ii) own shares bought for cancellation (second trading line) and for unvested or upcoming share awards; and iii) other treasury share positions net of delta-weighted obligations out of employee stock options granted prior to August 2006, subject to an interim agreement with the Swiss Financial Market Supervisory Authority.  3 Under IFRS, the recognition of the MCNs to the Swiss Confederation reduced the share premium CHF 3.6 billion and increased retained earnings CHF 0.7 billion.  4 “Other Basel II deduction items” includes primarily 50% of the deductions for net long position of non-consolidated participations in the finance sector, first loss positions from securitization exposures, excess of expected losses above general provisions (AIRB), expected loss for equities (simple risk weight method).  5 Equals to goodwill and the intangible assets exceeding 4% of tier 1 capital.

59166

Risk and treasury management

expectations of the business’s clients and the business environment, including allowing for sufficient capital to support the business’s underlying risks and sustain extreme stress scenarios. The amount of equity attributed to all the businesses corresponds to the amount that UBS believes is required to maintain a strong capital base and support its businesses adequately. If the total equity attributed to the businesses differs from the Group’s actual equity during a particular period, the surplus or deficit is shown in the Corporate Center.

As reflected in the table below, during 2008, the amount of average equity attributed to the Investment Bank was reduced by CHF 2 billion due to lower risk exposures. In the fourth quarter, the average equity attributed to Global Wealth Management & Business Banking grew by CHF 1 billion, mainly reflecting actual and projected increases in capital needs for operational risks in Wealth Management US. Global Asset Management’s average attributed equity was CHF 3 billion during 2008.
In the table below, equity attributable to UBS shareholders includes the CHF 13 billion nominal value of the MCNs issued in March 2008. However, the CHF 6 billion nominal value of the MCNs issued in December 2008 will be included in this figure only when the notes will be converted or if certain other conditions are met which make it appropriate to include the December 2008 MCNs in equity.



                     
Average equity attributed 
CHF billion 2008  4Q08  3Q08  2Q08  1Q08 
 
Wealth Management International & Switzerland  6.1   6.0   5.9   6.2   6.3 
 
Wealth Management US  7.3   8.3   7.6   6.8   6.6 
 
Business Banking Switzerland  3.8   3.7   3.5   4.0   4.1 
 
Global Wealth Management & Business Banking  17.3   18.0   17.0   17.0   17.0 
 
Global Asset Management  3.0   3.0   3.0   3.0   3.0 
 
Investment Bank  26.8   26.0   26.0   27.0   28.0 
 
Corporate Center  (10.7)  (7.4)  0.2   (15.0)  (20.5)
 
Equity attributable to UBS shareholders
  36.3   39.6   46.2   32.0   27.5 
 

167

Risk and treasury management
Treasury management

Shares and capital management
Capital management

Introduction of Basel II

Upon implementation of Basel II on 1 January 2008, UBS expects the overall impact on its BIS Tier 1 ratio to be negative, depending on the further development of the business mix, in particular the profile of the loan book. This expectation is based on a direct comparison between capital ratios under regulations effective at year-end 2007 and the corresponding ratios at the same date under Basel II rules.

Overall, the implementation of Basel II will introduce capital requirements that are more accurate and sensitive to underlying risk positions: not only is the type of counterparty considered when determining the risk-weighted assets; both the counterparty rating and the type of transaction, including collateralization, are taken into account. A new capital requirement for operational risks will also be introduced as part of Basel II.
In addition, with the advent of Basel II, the calculation of the eligible capital will be tightened through the introduction of new deductions from Tier 1 capital and total capital. This will lower the capital ratios, but at the same time clearly improve the quality of capital available to support risks.
Future capital ratios will depend on, among other factors, developments in financial markets and their impact on profit and loss, valuations and capital requirements for market risk;

(LINE GRAPH)

the development of the credit quality of UBS’s obligors and counterparties; future issuances of capital instruments and the management of treasury shares; capital requirements for operational risk; and future changes in the regulatory frameworks.



Credit ratings

Despite significant writedowns in US sub-prime-related securities, UBS remains one of the best-capitalized financial institutions in the world. It believes that this is a key part of its value proposition for both clients and investors.
In November 2007, Moody’s Investors Service downgraded from “A-” to “B+” the Bank Financial Strength Rating (BFSR) of UBS AG and affirmed the “Aaa” senior debt and deposit ratings. “The downgrade of the BFSR reflects Moody’s view that UBS’ sub-prime related exposures have a large loss content which negatively impacts the bank’s earnings stability and our understanding of the quality of their risk management,” Moody’s said in a related media release. At the end of January 2008, Moody’s

Investors Service changed the outlook to negative from stable on the B+ BFSR and Aaa senior debt and deposit ratings of UBS AG. “The change in outlook follows the announcement that UBS will take additional writedowns of approximately USD 4 billion on not only its positions related to the US sub-prime mortgage market, but also on positions related to US residential mortgage securities, contributing to a net loss of approximately CHF 4.4 billion in 2007”. In February 2008, following the fourth quarter 2007 earnings release, Moody’s affirmed the ratings of UBS AG, commenting: “UBS continues to enjoy a very strong and diversified franchise with solid earnings capability in a number of areas outside the affected fixed-income franchise, and

the bank maintains excellent liquidity and good asset quality. Its capitalization levels should be restored to past high levels over a reasonable time frame, benefiting from the planned capital increase of CHF 13 billion”. In October 2007, Standard & Poor’s Ratings Services lowered its long-term counterparty credit rating on UBS AG to “AA” from “AA+”, commenting that: “the downgrade primarily reflects concerns over the effectiveness of the bank’s risk management practices in allowing such a large sub-prime exposure to build”.
In late January 2008, Standard & Poor’s revised UBS’s outlook to negative, commenting: “the outlook was revised to negative in recognition of the challenges to UBS’s future revenue generation from the current economic



60

             
Capital adequacy 
  As of 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05 
 
BIS Tier 1 capital  32,811   40,528   39,834 
 
of which hybrid Tier 1 capital  6,387   5,633   4,975 
 
BIS total capital  44,507   50,364   43,808 
 
BIS Tier 1 capital ratio (%)  8.8   11.9   12.8 
 
BIS total capital ratio (%)  12.0   14.7   14.1 
 
Balance sheet assets  292,988   273,588   252,364 
 
Off-balance sheet and other positions  37,200   48,444   37,010 
 
Market risk positions1
  42,110   19,860   21,035 
 
Total BIS risk-weighted assets  372,298   341,892   310,409 
 
1 BIS risk-weighted asset equivalent of market risk capital requirement.

 

and market conditions, its large residual sub-prime-related exposure, and the strategic repositioning of the investment bank”. The ratings reflect “UBS’s continued strengths, including its diverse business position, strong liquidity, and robust capitalization once its capital strengthening measures are completed”. In December 2007, Fitch Ratings downgraded UBS AG’s long-term issuer default ratings (IDR) from “AA+” to “AA” and UBS’s Individual rating from “A/B” to “B”, commenting: “the additional writedowns announced by UBS on 10 December are significantly higher than previous guidance from the group and reflect ongoing valuation challenges in a still difficult market environment. UBS AG’s ratings reflect its excellent private

banking/wealth management franchise, diversified revenues, historically consistent profitability, strong liquidity and sound capitalization. The outlook on the long-term IDRs remains negative, reflecting continued uncertainty over future earnings, together with the challenges faced by a new management team in reshaping the group’s investment bank.”
At the end of January 2008, Fitch Ratings affirmed UBS’s long-term issuer default rating at “AA” with negative outlook, and the individual rating at “B”.
UBS’s long-term credit ratings are shown in the table. Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any

explanation of the significance of a rating may be obtained only from the rating agency. A security rating is not a recommendation to buy, sell or hold securities and each rating should be evaluated independently of any other rating. There is no assurance that any credit rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by the rating agency if, in the rating agency’s judgment, circumstances so warrant.

             
Long-term ratings 
  As of 
  31.12.07  31.12.06  31.12.05 
 
Fitch, London AA  AA+  AA+ 
 
Moody’s, New York Aaa  Aa2  Aa2 
 
Standard & Poor’s, New York AA  AA+  AA+ 
 



Shares

61

Treasury and capital management
Shares and capital instruments

Shares and capital instruments

Shares

UBS shares and Tiertier 1 capital
The majority of TierUBS’s tier 1 capital comprises share premium and retained earnings attributed to UBS shareholders. As perof 31 December 2007,2008, total International Financial Reporting Standard (IFRS)IFRS equity attributable to UBS shareholders amounted to CHF 35,58532,800 million and was represented by a total of 2,073,547,3442,932,580,549 issued UBS shares, of which 158,105,524 shares (7.6 %)61,903,121 (2.1%) were held by UBS. Each outstanding share has a par value of CHF 0.10 and entitles the holder to one vote at the shareholders’ meeting and to receive a proportionate share of the dividend that is distributed. There are no preferential rights for individual shareholders and no other classes of shares are issued by the parent bank (UBS AG) directly.

In 2007,2008, as part of UBS’s shareholder-approved recapital-

ization measures, the outstanding shares were reducedincreased by a total of 859,033,205 reflecting mainly the issuance of newly created shares for the stock dividend (98,698,754 shares) and for the capital increase by means of a rights offering (760,295,181 shares). For the stock dividend, each share held on 25 April 2008 was allocated one entitlement. Twenty of those entitlements gave the holder the right to receive one UBS share for free on 19 May 2008. For the subsequent capital increase by means of a rights offering, shareholders were allotted one subscription right per share held on 26 May 2008. For every 20 of those rights, shareholders were entitled to buy seven shares at CHF 21.00 on 17 June 2008. As a result of the latter rights offering, a net total of 31,725,942 million shares, reflectingCHF 15.6 billion of new capital was received. At the cancellationtime of shares bought back under the 2006 / 2007 share buyback program.

Additional future issuance this was equal to an increase of shares for mandatory convertible notes and stock dividend

As part of the measures to strengthen its capital base following the substantial writedowns related to the US residential sub-prime mortgage market, on 10 December 2007 UBS announced the issuance of mandatory convertible notesapproximately 4.8% in UBS’s tier 1 ratio.



     
Shares 
For the year ended 
Number of shares 31.12.0731.12.08 
 
Balance at the beginning of the year
  2,105,273,2862,073,547,344 
 
Issue of share capital (exercise of employee options)shares for stock dividend  1,294,05898,698,754 
 
CancellationIssue of second trading line treasury shares for capital increase (rights offering)  (33,020,000760,295,181)
Issue of shares for employee options39,270
 
Balance at the end of the year
  2,073,547,3442,932,580,549 
 

             
Shareholder-approved issuance of shares 
  Maximum number  Year approved by  % of shares issued 
  of shares to be  shareholder  (including MCNs1) 
  issued  general meeting  31.12.08 
 
Authorized capital
            
 
Stock dividend 2007 (not used)  5,001,246   2008   13.99 
 
Conditional capital
            
 
March 2008 MCNs  277,750,000   2008   7.77 
 
December 2008 MCNs  365,000,000   2008   10.21 
 
Employee equity participation plans of UBS AG  149,994,296   2006   4.20 
 
Employee stock ownership plan of former PaineWebber  100,415   2000   0.00 
 

(MCNs) and the distribution of a stock dividend for 2007 instead of a cash dividend – see the “Capital management” section and pages 64, 65 and 67 of this report.

To allow for the delivery of shares upon conversion of the MCNs, the extraordinary general meeting of shareholders on 27 February 2008 approved the creation of the conditional capital in a maximum amount of CHF 27,775,000. The conditional capital is to be used exclusively for sourcing the shares for the conversion of the MCNs, which is to occur in March 2010 at the latest. Based on the conditional capital, the share capital of UBS AG upon conversion of the MCNs will be increased through the issuance of a maximum of 277,750,000 fully paid registered shares of UBS AG with a par value of CHF 0.10.
For the stock dividend, shareholders approved the creation of authorized capital at the extraordinary general meeting of shareholders on 27 February 2008. The stock dividend will not exceed 5% of the share capital at year-end 2007 or a ratio of one free new share for a minimum of every 20 shares already owned. This corresponds to a maximum amount of authorized capital of CHF 10,370,000 or 103,700,000 shares. The final exchange ratio will be determined by the Board of Directors (BoD) and the shareholders will be informed on the day of the annual general meeting (AGM) on 23 April 2008.
Furthermore, conditional capital is available to issue an additional 150,138,634 shares against the exercise of employee options.1 Mandatory convertible notes.

Capital dilution

Whether earnings per share will be higher or lower as a result of these measures depends on the effect they have in maintaining the strength, and therefore profits, of UBS in general and the wealth management business in particular. When there is excess capital available, UBS expects to also return to its normal policy, subject to regulatory requirements, of returning excess capital – that is, capital that



             
Shareholder approved issuance of shares 
      Year approved    
  Maximum number of  by shareholders'  % of shares issued 
  shares to be issued  general meeting  31.12.07 
 
Authorized capital
            
 
Stock dividend 2007  103,700,000   2008   5.00 
 
Conditional capital
            
 
Mandatory convertible note  277,750,000   2008   13.39 
 
Employee equity participation plans of UBS AG  149,994,296   2006   7.23 
 
Employee stock ownership plan of the former PaineWebber  144,338   2000     
 

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exceeds the level that UBS believes to be reasonably appropriate in the context of its portfolio and business growth – to shareholders, through buyback and cash dividends.

Holding of UBS shares

UBS holds its own shares for three main purposes.purposes: Group Treasury holds shares to cover employee share and option programs; it repurchases shares on a second trading line, where they are earmarked for cancellation purposes. Shares are bought back by Treasury to cover employee share and option programs;purposes (the latter activity is temporarily suspended); and the Investment Bank holds shares, to a limited extent, for trading purposes where it engages in market-making activities in UBS shares and its related derivative products.

Share buyback programs

Under Swiss regulations, a company wishing to cancel shares must purchase them on the stock exchange under a special security code that clearly identifies to the market the time and quantity of shares repurchased for that specific purpose (the so-called second trading line). For each buy-back program to date, UBS has announced a maximum Swiss franc amount to be used for share purchases. The level of actual repurchases is determined by the capital management plan, which is adjusted throughout the year to reflect changes in business plans or acquisition opportunities. UBS publishes the number of shares repurchased and the average price paid on a weekly basis on the internet at www.ubs.com/investors.

Treasury shares earmarked for cancellation (share buyback program 2006 / 2007)

As part of the 2006 / 2007 share buyback program ending on 7 March 2007, 33,020,000 shares representing a total value of CHF 2.4 billion were cancelled on 29 June 2007.

At the AGM on 18 April 2007, shareholders gave the BoD a mandate to set up a repurchase program (2007 / 2010) for a maximum amount of 10 % of shares totaling 210,527,328 shares. Between 14 March 2007 and 25 September 2007, 36.4 million shares in the total amount of CHF 2.6 billion

(BAR CHART)

were purchased for cancellation. As part of the capital measures announced on 10 December 2007, the BoD has used its discretion to rededicate for further use the 36.4 million treasury shares previously intended for cancellation. At year-end, no shares were held under the buyback program earmarked for cancellation.

The holding of treasury shares on 31 December 2008 decreased to 61,903,121 or 2.1% of shares issued, from 158,105,524 or 7.6% of shares issued on 31 December 2007, from 164,475,699 or 7.8% on the same date aone year ago. Shares held cover employee share and option programs and, to a limited extent, market-making activities at the Investment Bank.prior.
In 2007,2008, a total of 32.23.7 million employee options were exercised and an additional 45.563.0 million new options were granted. As of 31 December 2007,2008, UBS was holding approximately 14148.9 million shares in Group Treasury and an additional 150 million unissued shares in conditional share capitalcapi-

tal that can be used to cover future employee option exercises, of which a total of CHF 186236 million were outstanding on 31 December 2007. The2008. At year-end 2008, the shares available covercovered all exercisable employee options.



             
Effect of second trading line program on basic earnings per share 
  For the year ended 
  31.12.07  31.12.06  31.12.05 
 
Weighted average shares for basic earnings per share (EPS) after treasury shares  1,926,328,078   1,976,405,800   2,013,987,754 
 
Weighted average second trading line treasury shares1
  625,684,926   598,982,426   544,339,510 
 
Basic EPS (CHF)  (2.28)  6.20   6.97 
 
Cumulative impact of treasury shares on basic EPS (CHF)1
  (0.56)  1.44   1.49 
 
Cumulative impact of treasury shares on basic EPS (%)1
  24.6   23.2   21.4 
 
1 From first share buyback programThe presentation in 2000.

63

the table below shows the purchase of UBS shares by Group Treasury under buy-back programs at the stock exchange and capital management
Shares and capital instruments

does not include activities of the Investment Bank in UBS shares.

Treasury shares held by the Investment Bank


The Investment Bank, acting as liquidity provider to the equity index futures market and as a market maker in UBS shares and derivatives, has issued derivatives linked to UBS stock. Most of these instruments are classified as cash-settled derivatives and are held for trading purposes only. To hedge the economic exposure, a limited number of UBS shares are held by the Investment Bank.

The presentation in the table below shows the purchase of UBS shares by Treasury at the stock exchange and does not include activities of the Investment Bank in UBS shares.

Capital Instruments

Mandatory convertible notes
On the 27 February 2008 the extraordinary general meeting (EGM) of shareholders approved the issuance of a maximum of 277,750,000 shares (corresponding approximately to 13.4% of the current share capital) to two long-term financial investors, Government of Singapore Investment Corporation Pte Ltd (GIC) and an investor from the Middle East without future dilutive effects. UBS expects to use a maximum of 252,525,253 shares of the available conditional capital. The share capital will be increased upon voluntary or



                                 
Treasury share activities 
                  Treasury shares purchased    
                  for employee share    
                  and option participation    
  Share buyback program  plans and acquisitions1  Total number of shares 
          Remaining volume of  Remaining volume of              
          2006/2007 share  2007/2010 share              
  Number of  Average  buyback program in  buyback program in      Average  Number of  Average 
Month of purchase shares  price in CHF  CHF million  millions of shares  Number of shares  price in CHF  shares  price in CHF 
 
January 2007  9,900,000   76.72   2 626       24,438   74.92   9,924,438   76.72 
 
February 2007  520,000   78.06   2 585       1,803,391   78.18   2,323,391   78.15 
 
March 2007  7,210,000   69.35       2032  19,465,000   71.64   26,675,000   71.02 
 
April 2007  3,380,000   74.04       200   2,400,000   72.02   5,780,000   73.20 
 
May 2007  2,590,000   77.24       197   6,600,000   76.48   9,190,000   76.69 
 
June 2007  5,850,000   75.96       191   2,750,000   77.89   8,600,000   76.58 
 
July 2007  11,970,000   72.24       180   0   0.00   11,970,000   72.24 
 
August 2007  950,000   64.06       179   0   0.00   950,000   64.06 
 
September 2007  4,450,000   62.73       174   0   0.00   4,450,000   62.73 
 
October 2007  0   0.00       174   0   0.00   0   0.00 
 
November 2007  0   0.00       174   500,000   58.77   500,000   58.77 
 
December 2007  0   0.00       1743  4,500,000   55.30   4,500,000   55.30 
 
                                         
Share buy-back programs 
                      Maximum                  Unutilized 
                  Maximum  volume          Average  Unutilized  volume 
                  volume (in  (in millions  Amount  Total shares  price  volume  (in millions 
Program Announcement  Beginning  Expiration  Cancellation  CHF billion)  of shares)  (CHF billion)  purchased  (in CHF)  (CHF billion)  of shares) 
 
2000/2001  14.12.99   17.1.00   2.3.01   13.7.01   4.0       4.0   110,530,6981,2  36.181, 2  0     
 
2001/2002  22.2.01   5.3.01   5.3.02   5.7.02   5.0       2.3   57,637,3802  39.732  2.7     
 
2002/2003  14.2.01   6.3.02   8.10.02   10.7.03   5.0       5.0   135,400,0002  36.922  0     
 
2002/2003  9.10.02   11.10.02   5.3.03   10.7.03   3.0       0.5   16,540,1602  32.042  2.5     
 
2003/2004  18.2.03   6.3.03   5.3.04   30.6.04   5.0       4.5   118,964,0002  37.972  0.5     
 
2004/2005  10.2.04   8.3.04   7.3.05   8.7.05   6.0       3.5   79,870,1882  44.362  2.5     
 
2005/2006  8.2.05   8.3.05   7.3.06   13.7.06   5.0       4.0   74,200,0002  54.262  1.0     
 
2006/2007  14.2.06   8.3.06   7.3.07   29.6.07   5.0       2.4   33,020,0002  73.142  2.6     
 
2007/20105  13.2.07   8.3.07   8.3.10           210.53  2.64  36,400,0004  71.414      174.13
 
1 This table excludes market-making and related hedging purchases by UBS. The table also excludes UBS shares purchased by investment funds managed by UBS for clients in accordance with specified investment strategies that are established by each fund manager acting independently of UBS; and also excludes UBS shares purchased by pension and retirement benefit plans for UBS employees, which are managed by a board of UBS management and employee representatives in accordance with Swiss law guidelines. UBS’s pension and retirement benefit plans purchased 424,803 UBS shares during the year and held 2,436,257 UBS shares as of 31 December 2007.    Restated to reflect 3:1 stock split on 16 July 2001.  2 Restated to reflect 2:1 stock split on 10 July 2006.  3 The 2007/2010 program was approved for a maximum of 210,527,328 shares, equal to 10% of the outstanding shares as of 31 December 2006.   3 In 2007, of the 210,527,328 shares approved to be purchased in the 2007/2010 buyback program, 36,400,000 shares were repurchased for CHF 2.6 billion (at an average price of CHF 71.41 per share). On 10 December 2007, the UBS Board of Directors communicated its decision that these shares will not be cancelled but will be rededicated as a measure to strengthen UBS’s capital. However, the number of shares which may be repurchased in the future under the program is reduced by these 36,400,000 shares.
                                             
                      Maximum              Unutilized  Unutilized 
                  Maximum  volume  Amount      Average  volume  volume 
              Cancella-  volume (in  (in millions  (CHF  Total shares  price  (CHF  (in millions 
Program Announcement  Beginning  Expiration  tion  CHF billion)  of shares)  billion)  purchased  (in CHF)  billion)  of shares) 
 
2000/2001  14/12/1999   17/01/2000   02/03/2001   13/07/2001   4.0       4.0   110,530,6981,2  36.181,2  0     
 
2001/2002  22/02/2001   05/03/2001   05/03/2002   05/07/2002   5.0       2.3   57,637,3802  39.732  2.7     
 
2002/2003  14/02/2001   06/03/2002   08/10/2002   10/07/2003   5.0       5.0   135,400,0002  36.922  0     
 
2002/2003  09/10/2002   11/10/2002   05/03/2003   10/07/2003   3.0       0.5   16,540,1602  32.042  2.5     
 
2003/2004  18/02/2003   06/03/2003   05/03/2004   30/06/2004   5.0       4.5   118,964,0002  37.972  0.5     
 
2004/2005  10/02/2004   08/03/2004   07/03/2005   08/07/2005   6.0       3.5   79,870,1882  44.362  2.5     
 
2005/2006  08/02/2005   08/03/2005   07/03/2006   13/07/2006   5.0       4.0   74,200,0002  54.262  1     
 
2006/2007  14/02/2006   08/03/2006   07/03/2007   29/06/2007   5.0       2.4   33,020,0002  73.142  2.6     
 
2007/2010  13/02/2007   08/03/2007   08/03/2010           210.53  2.64  36,400,0004  71.414      174.13
 
1 Restated to reflect 3:1 stock split on 16 July 2001.   2 Restated to reflect 2:1 stock split on 10 July 2006.   3 The 2007/2010 program was approved for a maximum of 210,527,328 shares, equal to 10% of the outstanding shares as of 31 December 2006. On 31 December 2007, the unutilized number of shares (174.1 million) multiplied by the prevailing market price of UBS shares of CHF 52.40 per share equaled an unutilized volume of approximately CHF 9.1 billion.  4 In 2007, 36,400,000 shares were repurchased under the 2007/2010 program for CHF 2.6 billion (at an average price of CHF 71.41 per share). On 10 December 2007 the UBS Board of Directors communicated its decision that these shares will not be cancelled but will be rededicated as a measure to strengthen UBS’s capital.5 This program is currently suspended.

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Treasury management

Capital instruments

Mandatory convertible notes
As part of the measures taken to strengthen its capital base in 2008, UBS issued two mandatory convertible notes (MCNs), with principal amounts of CHF 13 billion (MCN1) and CHF 6 billion (MCN2) respectively, in private placements to large institutional investors and the Swiss Confederation. To allow for the delivery of shares upon conversion of the MCNs, separate extraordinary general meetings of UBS shareholders were held on 27 February and 27 November 2008 to approve the creation of conditional capital for this purpose. The shareholders approved a maximum number of 277.8 million UBS shares to be delivered under the first issued MCN and 365 million UBS shares to be delivered under the second MCN. The initial investors in the MCNs are allowed to sell or transfer the instruments without restrictions to other investors. The share capital will be increased upon voluntary or mandatory conversion of the MCNs due 2010.MCNs. The future mandatory capital increase allows the full proceeds of CHF 13 billion to be counted as Tiertier 1 capital for regulatory capital purposes forfrom the first time in first quarter 2008.date of issuance.

MCNs are a special type of equity-linked security that will never be redeemed in cash but rather, upon maturity or early conversion, will automatically convert into shares of the note issuer or an affiliated company. The number of shares to be delivered depends on the conversion price, and will vary according to the precise terms (see below).
The MCNs issued by UBS mature in two years (March 2010) and contain market-standard provisions allowing early conversion at the option either of the holders or of UBS.
ThroughThroughout the lifetime of the MCNs, the holders will receive an annual coupon of 9% ofbased on the nominal value of the MCNs. This annual coupon reflects not only reflects the cost of capital but also compensates the noteholders for the value of options embedded in the structure, for instance for bearing the risk of a share price deterioration before conversion if the share price falls below the reference price described below, and for the fact that MCN holders only participate in the benefit of an increasing share price once the share price exceeds 117% of the reference price, and for the fact that until conversion MCN holders will not receive any dividends on the underlying UBS shares.price. The MCNs can be converted at the earliest after a period of six months has elapsed afterfollowing their issuance and they must be converted at the latest by maturity of the notesnotes.
As of year end, holders of the March 2008 MCNs (or MCN1) are expected to receive in March 2010.
If the MCNs are converted at maturity, they will be converted foraggregate a fixed number of 270.4 million UBS shares at a price – the “conversion price” – that is linked to the prevailing market priceconversion or settlement independently of UBS shares at specific dates. The conversion price is set within a range that is dependent on the UBS share price in relation todevelopment, whereas under the “reference

price”terms of the second issuance (the December 2008 MCNs or MCN2) holders will receive a variable number of shares. At or below a UBS share price of CHF 51.48. (This, in turn, was determined by18.21, the average of (i) CHF 57.2 and (ii) the average of the three daily volume-weighted average price on virt-x for the three days prior to the EGM, subject to a minimum of CHF 51.48 andDecember 2008 MCNs will be converted into a maximum of CHF 62.92). The total amount329.4 million UBS shares. Should the UBS share price rise above this level, the holders would receive a lower number of shares and the minimum would be reached with a share price

of CHF 21.31. Thereafter, a further increase in price leads to an incremental increase in shares delivered, provided however that the MCN holders receive is then calculated by dividing CHF 13 billion bytotal number of shares to be issued will not exceed the conversion price. There are basically three different scenarios for conversion at maturity. The conversion price will be set at:
–CHF 60.23, corresponding to 117%maximum number of shares (see the reference price, if at maturity the UBS share price is at or above CHF 60.23. In this case, the MCN holders will receive approximately 215,839,283 shares (CHF 13 billion / CHF 60.23), which is theminimum amountof shares;
–the prevailing UBS share price if it is between CHF 51.48 and CHF 60.23 (corresponding respectively to 100% and 117% of the reference price) at maturity; and
–CHF 51.48, corresponding to 100% of the reference price, if the prevailing UBS share price is at or below CHF 51.48 at maturity. In this case, the MCN holders will receive approximately 252,525,253 shares (CHF 13 billion/CHF 51.48), which is themaximum amountof shares;
–If either UBS or the MCN holders choose to convert the MCNs prior to maturity, the maximum conversion price (and hence minimum amount of shares) is applied in case the early conversion occurs at the request of the MCN holders, while the minimum conversion price (and hence maximum amount of shares) is applied if converted at the request of UBS.
The two graphs below illustrateon the payout profile of the MCNs at maturity as a function of the underlying UBS share price.next page).



(LINE CHART)

(LINE CHART)



65

Treasury and capital management
Shares and capital instruments

Hybrid Tiertier 1 capital


Hybrid Tiertier 1 instruments represent innovative and non-innovative perpetual instruments and accounted formade up approximately 19.5%21.4% of eligible Tier 1adjusted core capital on 31 December 2007.2008. They are accounted for under minority interestinterests in the bank’sIFRS equity. In 20072008, UBS raised EUR 600 million in the form1 billion of capital preferred securities issued by UBS Capital Securities (Jersey) Ltd. The instrument bears a 7.152%an 8.836% coupon and is callable in 2017.2013. As perof 31 December 31, 20072008, UBS had issued in various currencies a total of CHF 6,3877,393 million of such instruments.instruments in various currencies. Hybrid Tiertier 1 instruments are perpetual instruments which can only be redeemed if they are called by the issuer. If such a call is not exercised at the respective call date, the terms might include a change from fixed to floating coupon payments and, in the case of innovative instruments only, a limited step-up of the interest rate. Non-innovative instruments do not have a step-up of the interest rate and are therefore viewed as having a higher equity characteristic for regulatory capital purposes. The instruments are issued either through trusts or subsidiaries of UBS and rank senior to UBS shares in dissolution. Payments under the instruments are subject to the adherence to minimalminimum capital ratios by UBS. Any payment missed is non-cumulative.

Tier 2 capital


The major element in Tiertier 2 capital consists of subordinated long-term debt. Tier 2 instruments have been issued in various currencies and with a range of maturities across capital markets globally. They accountaccounted for CHF 13,77012,290 million in total capital as perof year-end 2007, representing 3.7 percentage points of the total capital ratio of 12.0%.2008. Tier 2 instruments rank

senior to both UBS shares and to hybrid Tiertier 1 instruments but are subordinated with respect to all senior obligations of UBS. In 2007 UBS raised GBP 250 million with a coupon of 6.375% maturing in 2024 callable by the issuer in 2019 and CHF 350 million with a 4.125% coupon maturing in 2017.

Distributions to shareholders

UBS normally pays an annualThe decision whether to pay a dividend to shareholders registered as ofand the date of the AGM (the record date). Payment is usually scheduled three business days thereafter.

The level of the dividend isare dependent on UBS’s targeted capital ratios and theits cash flow generation of the company. The dividend policy takes into account the fact that shareholders have different preferences for receiving shareholder returns: some prefer cash dividends, some prefer share buy-backs. By pursuing both avenues, UBS aims to attract and retain the widest, most diverse global shareholder base.
generation. The decision on dividend payments falls underis proposed by the AGM’s authorityBoard of Directors (BoD) to the shareholders and is subject to shareholder approval.

Total distributions in 2007

Fromtheir approval at the results of ordinary business, UBS transferred a total of CHF 5.1 billion in equityannual general meeting. The BoD has decided not to its shareholders in 2007. This included CHF 0.8 billion in shares the bank repurchased during 2007 for purposes of cancellation and a total payout to shareholderspropose any dividend for the 2006 financial year of CHF 4.3 billion or CHF 2.20 per share with payment on 23 April 2007.

Shareholders in the US received a net dividend payment of USD 1.19 (rounded) per share on 23 April 2007. This excludes the 35% Swiss withholding tax that can partly be reclaimed by US investors.



2008.

66

DistributionsDistribution to shareholders in 2008

Stock – stock dividend
At the extraordinary shareholders’general meeting held onof 27 February 2008, the shareholders approved distribution of a stock dividend to shareholders. The stock dividend is designed to provide shareholders withoffering the opportunity to obtain sale proceeds comparable towith the cash dividend paid in previous years. There will be one entitlementOne entitle-



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Risk and treasury management

ment was allocated to each share outstanding after the close of business on the record date onof 25 April 2008 after close of business. A certain number of2008. Twenty entitlements will givegave the holder the right to receive one additional UBS share for free. The entitlements are expected to be tradable for nine business days and will then be exchanged into UBS shares. For the stock dividend shareholders approved the creation of authorized capital at the EGM on 27 February 2008. The stock dividend will not exceed 5% of the share capital at year-end 2007 or a ratio of one free new share for a minimum of every 20 shares already owned. This corresponds to a maximum amount of authorized capital of CHF 10,370,000 or 103,700,000 shares. The final exchange ratio will be determined by the BoD and the shareholders will be informed on or by the day of the AGM on 23 April 2008. After expiration of the entitlement trading period on 9 May 2008, all entitlements will automatically be exchanged into new shares, which will settle on 19 May 2008. Fractions that have not been sold or aggregated during the entitlement trading period will not be compensated by UBS in its capacity as issuer.
This stock dividend iswas tax-efficient for many shareholders resident in Switzerland and those in many other countries. Unlike a cash dividend, where the Swiss withholding tax of 35% is deducted from the gross amount payable, the
stock dividend will bewas allocated to shareholders without deduction

of Swiss withholding tax. For Swiss income tax purposes, the taxable value of the stock dividend will approximately be equal to the par value of CHF 0.10 per share of the shares distributed as a stock dividend proportionately allocated to the entitlement distributed. For Swiss shareholders, this is a very small fraction of the taxable value of an equivalent cash dividend. The taxation of shareholders not resident in Switzerland depends on the laws in their tax jurisdiction. In many cases, the distribution of entitlements and the exercise thereof should be tax-free. Shareholders should consult with their own tax advisors to determine the tax treatment applicable to them.

Compared with the cash dividend, a stock dividend is also more beneficial for UBS’s (Tier(tier 1) capital base. Cash dividend payments are deducted from the bank’sfirm’s net profits and retained earnings, which are some of the major components of the bank’sits core (Tier(tier 1) capital. In contrast, by issuing new shares in lieu of a dividend cash payment, the level of UBS’s (Tier(tier 1) capital base is maintained.


(BAR CHART)Conversion price and number of shares

                             
      Amount              Conversion price per  Conversion into 
  Coupon  (CHF billion)  Issuance date  Conversion period / maturity  UBS share (CHF)  numbers of UBS shares 
 
MCN 1
  9%  13.0   5.3.08   6.9.08   5.3.10   48.071   270,438,942 
 
MCN 2
  12.50%  6.0   9.12.08   9.6.09   9.6.11   18.212   329,447,681 
 
                       21.312   281,579,096 
 
                      additional shares     
                      if above 21.31    3
 
1 Adjusted for dilution effects on the capital increase.  2 Conversion price between CHF 18.21 and CHF 21.31 (rounded) results in a variable number of shares between 329,447,681 and 281,579,096.  3 Approximately CHF 48 million countervalue in additional UBS shares per CHF 1 increase in the UBS share price.

Number of shares to be delivered

(NUMBER OF SHARES TO BE DELIVERED)

Number of shares to be delivered

(NUMBER OF SHARES TO BE DELIVERED)

Value of shares

(VALUE OF SHARES)

Value of shares

(VALUE OF SHARES)



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Treasury and capital management
UBS shares in 2007

UBS shares in 20072008

(LINE GRAPH)UBS share price versus Dow Jones Banks Titans 30 Index

(PERFORMANCE GRAPH)

UBS shares are listed on the SIX Swiss stock exchange (SWX), where they are tradedExchange (traded on virt-x (SWXSWX Europe), and on the New York Stock Exchange and the Tokyo stock exchanges.Stock Exchange.
    è  For a detailed definitionRefer to the “Capital structure” section of this report for more information on UBS shares (includingincluding par value, type and rights of security), please refer to the section “Capital structure” inCorporate Governance and Compensation Report 2007security

     In 2007, despite continued

2008 saw the unfolding of a global financial crisis and a marked global economic slowdown, with falling prices in nearly every asset class. Concerns that the deterioration in the US housing market dollar weaknessseen in 2007 would spread to the general consumer area materialized as consumer confidence reached new lows and oil price inflation,several western economies fell into recession. Government central banks and regulators joined forces in a global equity markets posted modest gains forpolicy response to stabilize and provide liquidity to a financial system that, in the first halfopinion of many,

nearly collapsed in the second part of the year buoyed byyear. Capital injections, the continued high corporate earnings and high levelspartial or full nationalization of mergers and acquisitions activity, particularly in the leveraged finance space. Emerging markets outperformed on high commodity prices and strong economic activity. The S&P 500 and MSCI World indices were up 6% and 8% respectively.

The summer of 2007 brought the strong positive performance of world markets to an abrupt end. Evidence of a

significant dislocation in the US sub-prime market led to concerns of contagion and a worldwide credit crunch. In response, many banks andseveral financial institutions began to hoard liquidity, leading to an almost complete cessation of activityand sharp reductions in the world’s credit markets.

Despite an improvement ininterest rates did not, however, restore confidence and liquidity in the final quartershort term and credit markets remained paralyzed for most of 2008. Emerging markets suffered and commodities prices saw a sharp reversal and falling prices in the second half of 2008.
Corporate earnings deteriorated at a fast pace during 2008 and entire segments of the year, worldeconomy entered 2009 with a very uncertain outlook. Worldwide stock markets continued to fall sharplydropped significantly during the year, with the financial and insurance sectors bearing the brunt of the declines. Increasing losses from US sub-prime investments, other real estate assets and leveraged lending placed a growing strain on the balance sheets of banks and subsequently financial guarantors.
Outside these sectors growing concerns over a US recession and possible worldwide slowdown tempered an otherwise positive performance in all major indices. The MSCI world index closed up 7% for the year,sector most hit: the Dow Jones IndustrialsBanks Titans 30 Index dropped 58%, the MSCI World index closed down 42%, the Dow Jones Industrial Average closed the year up 6%down 34% and the S&P 500 closed up 4% for the year.down 38%.



(BAR CHART)Market capitalization

(BAR CHART)
1 Market capitalization calculated based on the total UBS ordinary shares issued times the UBS share price at period end. The total UBS ordinary shares as at 31 December 2008 does not reflect the 270.4 million UBS shares and the maximum of 329.4 million UBS shares to be issued through the conversion of mandatory convertible notes in the future. Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report for details on shares outstanding for EPS.

     
Ticker symbols

Trading exchange		 Bloomberg Reuters
 
virt-xSWX Europe UBSN VX UBSN.VX
 
New York Stock Exchange UBS US UBS.N
 
Tokyo Stock Exchange 8657 JP 8657.T
 
   
Security identification codes
 
ISIN CH0024899483
 
Valoren 2.489.948
 
Cusip CINS H89231 33 8
 


68172

             
UBS share data 
  As of 
Registered shares 31.12.07  31.12.06  31.12.05 
 
Total shares outstanding  1,915,441,820   1,940,797,587   1,968,745,296 
 
Total shares ranking for dividend  2,073,547,344   2,082,673,286   2,109,495,044 
 
Treasury shares  158,105,524   164,475,699   208,519,748 
 
Weighted average shares (for basic earnings per share (EPS) calculations)  1,926,328,078   1,976,405,800   2,013,987,754 
 
Weighted average shares (for diluted EPS calculations)  1,927,698,732   2,058,834,812   2,097,191,540 
 
Risk and treasury management
             
  For the year ended 
CHF 31.12.07  31.12.06  31.12.05 
 
Earnings per share
            
 
Basic EPS  (2.28)  6.20   6.97 
 
Basic EPS from continuing operations  (2.49)  5.80   4.84 
 
Diluted EPS  (2.28)  5.95   6.68 
 
Diluted EPS from continuing operations  (2.49)  5.57   4.65 
 

                 
UBS shares and market capitalization 
  As of  % change from 
Number of shares, except where indicated 31.12.07  31.12.06  31.12.05  31.12.06 
 
Total ordinary shares issued
  2,073,547,344   2,105,273,286   2,177,265,044   (2)
 
Second trading line treasury shares                
 
2005 program          (67,770,000)    
 
2006 program      (22,600,000)        
 
Shares outstanding for market capitalization
  2,073,547,344   2,082,673,286   2,109,495,044   0 
 
Share price (CHF)
  52.40   74.05   62.55   (29)
 
Market capitalization (CHF million)
  108,654   154,222   131,949   (30)
 
Total treasury shares
  158,105,524   164,475,699   208,519,748   (4)
 

             
Trading volumes 
  For the year ended 
1000 shares 31.12.07  31.12.06  31.12.05 
 
SWX total (virt-x)  4,079,863   2,731,841   2,568,531 
 
SWX daily average (virt-x)  16,451   10,884   10,073 
 
NYSE total  304,446   214,912   167,231 
 
NYSE daily average  1,213   853   664 
 
Source: Reuters

69

Treasury and capital management
UBS shares in 2007

First quarter 20072008

Equity markets got off2008 continued in the same vein as the closing months of 2007, with growing concerns over contagion from real estate losses to the real economy. At the end of January, UBS pre-announced its fourth quarter 2007 results as a positive startloss of CHF 12.5 billion. In March, UBS’s peer Bear Stearns approached bankruptcy as it suffered a liquidity crisis in 2007, but corrected downwards in later February and early March. After the US Federal Bank’s decision to leave its interest rates unchanged, investor confidence stabilized and markets closedwake of speculation over growing losses. This put further pressure on industry stock prices as the quarter slightly higher than they began.

2007 started onended. The global banking sector and the broader global indices declined by 13% and 10% respectively, while UBS underperformed the market with its shares declining 45%.

Second quarter 2008

The Bear Stearns bankruptcy and acquisition by JPMorgan announced in March proved somewhat purgative for the markets in the second quarter, which remained steady as expectations of a positive note for UBS with a strong deal pipeline, high levels of market activity. UBSdeep global recession were tempered. In the banking sector, however, reported a strong full-year performance reporting record revenues, profits and net new money figures acrosslosses mounted leading to capital-raising by a number of business lines, leadinglarge international banks including UBS. Alongside the board to increasepre-anouncement of the total payout in 2006 by 16%, declaring a dividend CHF 2.20 per share. UBS shares declined by 2% compared with a flat performance in the DJ Stoxx Banks as the market favored businesses with greater fixed income and leveraged finance exposure.

Second quarter 2007

During the quarter stock markets recovered from the lows reached in mid-March. However, credit conditions deteriorated sharply from the middle of June onwards. UBS reported its first quarter results, which were strong and consistent with record profits in each business group and for the business as a whole. During the period UBS disposed of stake in Julius Baer, recording a post tax gain ofrights issue to raise approximately CHF 1,926 million. UBS shares recovered by 2% in the quarter compared15 billion was announced together with a flat performancenumber of measures to reduce risks and costs and stabilize performance. UBS performed in the DJ Stoxx Banks Index.

Third quarter 2007

Credit conditions deteriorated sharply from the middle of June onwards leading to extreme volatility in equity and credit markets over the course of the summer. Concerns over counterparty credit risk led banks to hoard liquidity leading to an almost complete cessation of credit market activity in late August.

UBS reported strong second quarter results in many of its business, but was dissatisfied with fixed income results in some areas due to continued difficulties US mortgage securities markets. Marcel Rohner, delivered the results for the first time in his role as CEO and noted the possibility of weaker

results in the second half of 2007 if difficult markets conditions prevailed. UBS shares fell by 15% in the quarter comparedline with the broaderglobal banking sector, (DJ Stoxx Banks Europe) which lost 10%.

Fourth quarter 2007

Credit markets remained closed for large part of the quarter and only reopened after significant persistent injections of liquidity by many of the world’s central banks. Losses in the US sub-prime sector mounted for the banks, financial institutions and financial guarantors, putting capital ratios under strain and prompting capital raising.

UBS reported a loss for the group for the third quarter mainly reflecting writedowns in US sub-prime residential mortgages and noted an expectation that market conditions would not be resolved in the short term. UBS shares declined bydown 16% in the quarter compared with DJ Stoxx Banks Europe down 8%while the broader indices remained generally flat.

Third quarter 2008

The third quarter of 2008 proved to be one of the most tumultuous in banking history. The collapse of Lehman Brothers in September triggered a series of banking failures and government rescues which brought the global banking system close to breaking point. Despite posting modest losses for the second quarter in August, UBS shares declined 14% in the quarter.

Emerging markets’ economiesquarter and markets, which performed well throughout 2007, began to reverse someunderperformed the global banking sector, down 2% in the wake of the year’s gain on growing concernsfailure of Lehman Brothers.

Fourth quarter 2008

The fourth quarter commenced with persistent concerted efforts by central banks to maintain liquidity and, shortly afterwards, a series of government-led programs to stabilize the banking system. As the prospect of a USdeep global recession loomed, central banks united to deliver their first ever coordinated rate cut. UBS announced a further material risk reduction of its balance sheet through the transfer of risk assets to the Swiss National Bank as well as further strengthening its capital base through the issue of CHF 6 billion in mandatory convertible notes to the Swiss Confederation. UBS reported a modest profit for the third quarter. Market volatility remained extreme with a slew of profit warnings and losses reported across the banking sector. UBS shares closed the quarter down 20%, outperforming the global slowdown. Thebanking sector which fell 41% as well as the broader indices which declined by more than 20% on average.

Over the course of 2008 UBS shares declined 68%, un-derperforming the global banking sector (down 58%), the MSCI World lost 9% inand the fourth quarter.S&P (down 42% and 38% respectively).

Share liquidity

During 2007,2008, daily average volume in UBS shares on virt-xSWX Europe was 13.128.5 million shares. On the New York Stock Exchange (NYSE), it was 2.42.1 million shares.

Because of the greater volume on virt-x,SWX Europe, trading of UBS shares there is expected to remain the main factor determining the movement in UBS’s share price.
During the hours in which both virt-xSWX Europe and NYSE are simultaneously open for trading (currently 3:30 pmp.m. to 5.30 pm5:30 p.m. Central European Time), price differences are likely to be arbitraged away by professional market makers.market-makers. The NYSE price will therefore typically be expected to depend on both the virt-xSWX Europe price and the prevailing US dollar / dollar/Swiss franc exchange rate. When virt-xSWX Europe is closed for trading, traded volumes will typically be lower. However, the specialist firm making a market in UBS shares on the NYSE, Van der Moolen, is required to facilitate sufficient liquidity and an orderly market in UBS shares.



70173

Risk and treasury management
Treasury management

             
UBS share data 
  As of
Registered shares 31.12.08  31.12.07  31.12.06 
 
Total ordinary shares issued  2,932,580,549   2,073,547,344   2,105,273,286 
 
Treasury shares  61,903,121   158,105,524   164,475,699 
 
Weighted average shares (for basic EPS1 calculations)
  2,769,575,922   2,165,301,597   2,221,591,786 
 
Weighted average shares (for diluted EPS calculations)  2,770,727,478   2,166,768,923   2,309,834,516 
 
             
  For the year ended
CHF 31.12.08  31.12.07  31.12.06 
 
EPS
            
 
Basic EPS  (7.54)  (2.42)  5.19 
 
Basic EPS from continuing operations  (7.60)  (2.61)  4.83 
 
Diluted EPS  (7.55)  (2.43)  4.99 
 
Diluted EPS from continuing operations  (7.60)  (2.61)  4.64 
 
1 Earning per share.
                 
UBS shares and market capitalization
  As of  % change from
  31.12.08  31.12.07  31.12.06  31.12.07 
 
Share price (CHF)1
  14.84   46.60   65.86   (68)
 
Market capitalization (CHF million)2
  43,519   108,654   154,222   (60)
 
1 Historical share price adjusted for the rights issue and stock dividend.  2 Market capitalization calculated based on the total UBS ordinary shares issued times the UBS share price at period end. The total UBS ordinary shares as at 31 December 2008 does not reflect the 270.4 million UBS shares and the maximum of 329.4 million UBS shares to be issued through the conversion of mandatory convertible notes in the future. Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the financial statements of this report for details on shares outstanding for EPS.

Source: Bloomberg

             
Trading volumes
  For the year ended
1000 shares 31.12.08  31.12.07  31.12.06 
 
SWX total (SWX Europe)  7,174,486   4,079,863   2,731,841 
 
SWX daily average (SWX Europe)  28,584   16,451   10,884 
 
NYSE total  539,856   304,446   214,912 
 
NYSE daily average  2,134   1,213   853 
 Source: Reuters

Source: Reuters

174

                         
Stock exchange prices 
  SWX Swiss Exchange  New York Stock Exchange 
  High (CHF)  Low (CHF)  Period end (CHF)  High (USD)  Low (USD)  Period end (USD) 
 
                         
2007
  80.90   48.00   52.40   66.26   43.50   46.00 
 
Fourth quarter 2007
  68.65   48.00   52.40   58.01   43.50   46.00 
 
December  59.10   51.85   52.40   51.89   44.73   46.00 
 
November  61.70   48.00   57.20   51.26   43.50   50.48 
 
October  68.65   59.90   61.95   58.01   52.19   53.69 
 
Third quarter 2007
  75.20   60.35   62.60   62.34   49.84   53.25 
 
September  65.85   60.35   62.60   55.18   50.85   53.25 
 
August  68.85   61.25   63.00   57.72   49.84   52.24 
 
July  75.20   64.55   67.55   62.34   53.34   55.07 
 
Second quarter 2007
  80.45   71.65   73.60   66.26   58.73   60.01 
 
June  80.45   71.95   73.60   65.18   58.73   60.01 
 
May  80.45   74.60   79.90   65.75   61.75   65.24 
 
April  79.95   71.65   79.15   66.26   59.01   64.90 
 
First quarter 2007
  80.90   67.20   72.20   64.30   55.40   59.43 
 
March  73.80   67.20   72.20   60.74   55.40   59.43 
 
February  80.90   70.30   72.25   64.30   57.65   59.04 
 
January  78.95   73.85   77.80   63.33   59.35   63.01 
 
                         
2006
  79.90   59.85   74.05   63.39   48.34   60.33 
 
Fourth quarter  79.90   70.70   74.05   63.39   58.50   60.33 
 
Third quarter  74.80   59.85   74.80   59.77   48.34   59.31 
 
Second quarter  75.65   61.35   67.00   61.70   49.36   54.85 
 
First quarter  72.35   62.80   71.60   55.55   48.66   54.99 
 
                         
2005
  63.50   46.75   62.55   49.02   38.60   47.58 
 
Fourth quarter  63.50   52.75   62.55   49.02   41.22   47.58 
 
Third quarter  56.15   50.40   55.00   43.40   38.92   42.75 
 
Second quarter  51.40   47.23   50.00   42.93   38.60   38.93 
 
First quarter  52.30   46.75   50.50   44.71   39.70   42.20 
 
                         
2004
  49.18   40.80   47.68   42.19   32.47   41.92 
 
Fourth quarter  48.18   42.00   47.68   42.19   35.05   41.92 
 
Third quarter  45.50   40.80   43.95   36.19   32.47   35.17 
 
Second quarter  49.18   44.13   44.13   38.03   34.45   35.53 
 
First quarter  48.53   42.85   47.05   39.63   33.96   37.25 
 
                         
2003
  42.70   24.90   42.35   34.08   19.00   34.00 
 
Fourth quarter  42.70   37.43   42.35   34.08   28.77   34.00 
 
Third quarter  40.25   36.75   37.05   29.63   27.19   28.12 
 
Second quarter  37.88   29.45   37.68   29.18   21.79   27.70 
 
First quarter  36.05   24.90   28.75   25.93   19.00   21.35 
 
Risk and treasury management
                         
Stock exchange prices1 
  SIX Swiss Exchange  New York Stock Exchange 
  High (CHF)  Low (CHF)  Period end (CHF)  High (USD)  Low (USD)  Period end (USD) 
 
2008
  45.98   10.67   14.84   46.40   8.33   14.30 
 
Fourth quarter 2008
  24.00   10.67   14.84   21.30   8.33   14.30 
 
December  16.28   12.63   14.84   14.30   10.89   14.30 
 
November  19.90   10.67   15.15   17.85   8.33   12.74 
 
October  24.00   14.20   19.35   21.30   12.28   16.90 
 
Third quarter 2008
  25.76   15.18   18.46   23.07   12.22   17.54 
 
September  25.76   15.18   18.46   22.59   12.22   17.54 
 
August  24.40   19.43   24.14   22.17   18.62   21.89 
 
July  24.44   17.52   20.38   23.07   17.90   19.39 
 
Second quarter 2008
  35.11   20.96   21.44   36.02   20.41   20.66 
 
June  27.14   20.96   21.44   25.72   20.41   20.66 
 
May  35.11   24.60   25.10   35.21   23.58   23.66 
 
April  34.48   25.44   32.68   36.02   30.87   33.59 
 
First quarter 2008
  45.98   21.52   25.67   46.40   22.33   28.80 
 
March  30.65   21.52   25.67   32.24   22.33   28.80 
 
February  41.16   30.10   30.56   42.42   32.20   32.34 
 
January  45.98   33.65   39.42   46.40   38.05   41.29 
 
2007
  71.95   42.69   46.60   66.26   43.50   46.00 
 
Fourth quarter 2007  61.05   42.69   46.60   58.01   43.50   46.00 
 
Third quarter 2007  66.88   53.67   55.67   62.34   49.84   53.25 
 
Second quarter 2007  71.55   63.72   65.46   66.26   58.73   60.01 
 
First quarter 2007  71.95   59.76   64.21   64.30   55.40   59.43 
 
2006
  71.06   53.23   65.86   63.39   48.34   60.33 
 
Fourth quarter 2006  71.06   62.88   65.86   63.39   58.50   60.33 
 
Third quarter 2006  66.52   53.23   66.52   59.77   48.34   59.31 
 
Second quarter 2006  66.97   54.31   59.32   61.70   49.36   54.85 
 
First quarter 2006  64.05   55.60   63.39   55.55   48.66   54.99 
 
2005
  56.39   41.19   55.38   49.30   38.47   47.58 
 
Fourth quarter 2005  56.39   46.52   55.38   49.30   40.73   47.58 
 
Third quarter 2005  49.84   43.60   48.69   43.49   38.55   42.75 
 
Second quarter 2005  45.68   41.37   44.27   43.06   38.47   38.93 
 
First quarter 2005  46.70   41.19   44.71   45.10   39.61   42.20 
 
2004
  43.76   35.52   42.21   42.29   32.31   41.92 
 
Fourth quarter 2004  42.81   37.09   42.21   42.29   34.94   41.92 
 
Third quarter 2004  40.68   35.52   38.91   36.28   32.31   35.17 
 
Second quarter 2004  43.76   39.06   39.06   38.09   34.05   35.53 
 
First quarter 2004  43.14   37.40   41.65   39.70   33.35   37.25 
 
1 Historical share price adjusted for the rights issue and stock dividend 2008.

71175

Risk and treasury management
Basel II Pillar 3

72Basel II Pillar 3

UBS publishes Basel II Pillar 3 disclosures on a semi-annual basis. Year-end disclosures are contained within this report. Disclosure elements not covered in the “Risk management and control” and “Treasury management” sections are shown below.

Introduction

On 1 January 2008, UBS adopted the revised capital framework of the Basel Committee on Banking Supervision – Basel II – which introduced new and amended capital requirements for the different risk types and revised the calculation of eligible capital.

The aim of Basel II Pillar 3 is to encourage market discipline by allowing market participants to assess key pieces of information regarding the capital adequacy of banks via a set of disclosure requirements.

This section presents UBS’s Basel II Pillar 3 disclosures as of 31 December 2008 and consists mainly of quantitative disclosures complemented with explanatory text where needed.

    èQualitative disclosures related to the bank’s risk management and control, definitions and risk exposures as well as capital management can be found in the “Risk management and control” and “Treasury management” sections of this report



Overview of disclosures

The following table provides an overview of UBS’s Basel II Pillar 3 disclosures:

Basel II Pillar 3 requirementDisclosure in the annual report
Capital structure“Capital management” section of this report
Capital adequacy“Capital management” and “Basel II Pillar 3” sections of this report
Risk management objectives, policies and methodologies (qualitative disclosures)“Risk management and control” section of this report
Credit risk“Basel II Pillar 3” section of this report
Investment positions“Basel II Pillar 3” section of this report
Market risk“Risk management and control” section of this report
Securitization“Basel II Pillar 3” section of this report
Operational risk“Risk management and control” section of this report

General description of risk exposure measures and capital requirements

Measures of risk exposure may differ depending on the purpose for which exposures are calculated: financial accounting under International Financial Reporting Standards (IFRS) determination of regulatory capital, or UBS’s internal management. UBS’s Basel II Pillar 3 disclosures are based on the measures of risk exposure that are used to calculate the regulatory capital that is required to underpin those risks.

Under the advanced Internal Ratings Based (IRB) approach applied by UBS for the majority of its businesses, credit risk weights are determined by reference to internal counterparty ratings and loss-given default estimates. UBS uses internal models, approved by FINMA, to measure the credit risk exposures to third parties on over-the-counter derivatives and repurchase-style (repo-style) transactions. For a subset of its credit portfolio, UBS applies the standardized approach (SABIS), based on external ratings.
Securitization exposures in the banking book are treated under the Ratings Based Approach (RBA), applying risk-


176

Risk and treasury management
             
Detailed segmentation of required capital 
  Basel II 
  31.12.08 
CHF million Advanced  Standardized  Total 
 
Credit risk  156,1871  52,3092  208,496 
 
Sovereigns  9,393   803   10,196 
 
Banks  23,924   4,286   28,209 
 
Corporates  104,180   43,8823  148,062 
 
Residential mortgages  13,150   1,499   14,650 
 
Other retail  5,510   1,833   7,342 
 
Failed trades from non-delivery-versus-payment (non-DvP) transactions  30   7   37 
 
Securitization exposures  6,202       6,202 
 
Non-counterparty related risk      7,411   7,411 
 
Equity exposures outside trading book  7,6464      7,646 
 
Settlement risk      219   219 
 
Market risk  27,6145      27,614 
 
Operational risk  44,6856      44,685 
 
Total BIS risk weighted assets
  242,334   59,939   302,273 
 
Additional risk-weighted assets according to FINMA regulations7
          32,620 
 
Total FINMA8 risk weighted assets
          334,8939
 
1Advanced Internal Ratings Based approach (AIRB).    2BIS defined standardized approach.    3RWA for corporate exposures under the standardized approach include lombard loans from Wealth Management International & Switzerland and certain traded products, primarily relating to derivatives, from the Investment Bank.    4Simple risk weight method.    5Value-at-Risk approach.  6Advanced measurement approach (AMA).  7Reflects an additional charge of 10% on risk-weighted assets (RWA) for credit risk for exposures treated under the standardized approach, a FINMA surcharge of 200% for RWA of non-counterparty related assets and additional FINMA capital requirements for market risk.    8Swiss Financial Market Supervisory Authority (FINMA).    9On 31 December 2008, the FINMA tier 1 ratio amounted to 10.0% and the FINMA total capital ratio to 13.6%. Taking into account the effects from the transitional provisions of the capital floor, which require that during the year 2008 Basel II capital requirements had to amount to at least 90% of Basel I capital requirements, FINMA RWA would have increased CHF 67.7 billion, resulting in a FINMA tier 1 ratio of 8.3% and a FINMA total capital ratio of 11.3%.

weights based on external ratings. Non-counterparty related assets such as UBS premises, other properties and equipment require capital underpinning according to prescribed regulatory risk weights.

For market risk positions, UBS derives its regulatory capital requirement from its internal Value-at-Risk (VaR) model, which is approved by FINMA.
UBS has developed a model to quantify operational risk, which meets the regulatory capital standard under the Basel II Advanced Measurement Approach (AMA).
Basel II requires deduction of some positions from eligible capital, most notably goodwill, intangible assets (excluding software), net long positions in non-consolidated participations in financial institutions and certain positions in securiti-zation exposures.
The naming conventions for the “Exposure segments” used in the following tables are based on the BIS rules and differ from those under Swiss and EU regulations. “Sovereigns” under the BIS naming convention equate to “Central governments and central banks” as used under the Swiss and EU regulations. Similarly “Banks” equate to “Institutions” and “Residential mortgages” equate to “Claims secured on residential real estate”.

Additional capital management disclosures

Although UBS determines published risk-weighted assets (RWA) according to the Basel II Capital Accord (BIS guide-

lines), the calculation of UBS’s regulatory capital requirement is based on the regulations of FINMA, leading to higher RWA.

Generally, the scope of consolidation for purposes of calculating these regulatory capital requirements follows the IFRS consolidation rules for subsidiaries directly or indirectly controlled by UBS AG which are active in the banking and finance business, but excludes subsidiaries in other sectors. The significant operating subsidiary companies in the Group consolidated for IFRS purposes are listed in “Note 34 Significant subsidiaries and associates” in the financial statements of this report. More specifically, the main differences in the basis of consolidation for IFRS and regulatory capital purposes relate to the following entity types and apply regardless of UBS’s level of control:
–Real estate and commercial companies as well as collective investment schemes are not consolidated for regulatory capital purposes but are risk-weighted.
–Insurance companies are not consolidated for regulatory capital purposes but are deducted from capital.
–Securitization vehicles are not consolidated for regulatory capital purposes but are treated under the securitization framework.
–Joint ventures that are controlled by two ventures are fully consolidated for regulatory capital purposes, whereas they are valued under equity method accounting for IFRS.
The “Detailed segmentation of required capital” table above provides a granular breakdown of UBS’s capital requirements.



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Basel II Pillar 3

Credit risk

UBS’s Pillar 3 disclosure presents the details on the parameters and input data used in its regulatory capital calculation. Although the parameters applied under the advanced IRB approach are generally determined using the same methodologies, data and systems as UBS uses for internal risk quantification, there are nevertheless several differences due to regulatory floors, multipliers, eligibility criteria and exposure definitions that cause the figures presented in this section to deviate from the information disclosed within the “Risk management and control” section of this report. The regulatory capital calculation of credit risk exposure also differs from that required under IFRS.

The Probability of Default (PD) and Loss Given Default (LGD) estimates applied in the regulatory capital calculation are the same as those used for internal risk quantification, with the regulatory prescribed exceptions of a PD floor of 0.03% for non-sovereign exposures, an LGD floor of 10% for residential mortgages and a downturn LGD addressing a potential worsening of the economic cycle. However, because the regulatory exposure definitions are different from the internally applied exposure definitions for traded products, the rating and LGD distributions presented in this section deviate from the information presented in the “Risk management and control” section of this report.

For banking products, there are no differences in the Exposure at Default (EAD) calculation between the regulatory and the internal management views. However, due to some differences in the scope of consolidation and segmentation, the regulatory exposure reported for Pillar 3 purposes differs from the internal management view of credit exposures which is reported in the “Risk management and control” section of this report.
The regulatory exposure for traded products is predominantly calculated on the same systems using the same models that are used for internal risk quantification. However, whereas in the “Risk management and control” section of this report the maximum likely exposure is shown, this section reports the respective regulatory exposure measures. For securities financing exposures, this is the Close-Out VaR measure as defined in paragraphs 178 to 181 of the Basel II framework. For derivative exposures, UBS has received approval from FINMA to apply the Effective Expected Positive Exposure (EPE) as defined in Annex 4 to the Basel II framework. For a minor part of the portfolio, UBS also applies the Comprehensive Approach or the Current Exposure Method.
In the tables in this section, the regulatory net credit exposure shows the Basel II EAD after all collateral, netting and other eligible risk mitigants have been applied as specified by the relevant regulation. Certain Pillar 3 tables also require a regulatory gross credit exposure view, which differs for bank-


                     
Derivation of risk-weighted assets 
  
              Average regulatory  Risk-weighted 
  Exposure  risk-weighting2  assets3 
      Less: regulatory          
  Regulatory gross  credit risk offsets  Regulatory net       
CHF million credit exposure  and adjustments1  credit exposure       
 
Cash and balances with central banks  22,872   (70)  22,802   6%  1,349 
 
Due from banks  33,884   (5,125)  28,759   25%  7,066 
 
Loans  295,395   (21,117)  274,278   24%  66,547 
 
Financial assets designated at fair value  11,803   (6,153)  5,649   20%  1,123 
 
Off-balance sheet4
  45,589   (581)  45,008   34%  15,105 
 
Banking products
  409,542   (33,046)  376,496   24%  91,191 
 
Derivatives  190,047       190,047   42%  79,663 
 
Securities financing  63,825       63,825   16%  10,404 
 
Traded products
  253,872       253,872   35%  90,067 
 
Trading portfolio assets  32,916   (68)  32,848   40%  13,255 
 
Financial investments available-for-sale5
  3,027       3,027   15%  467 
 
Accrued income and prepaid expenses  5,011   26   5,036   93%  4,665 
 
Other assets  10,696   (28)  10,668   82%  8,814 
 
Other products
  51,650   (70)  51,579   53%  27,201 
 
Total 31.12.08
  715,064   (33,116)  681,947   31%  208,459 
 
1 Regulatory credit risk offsets and adjustments mainly include margin accounts for derivatives.    2 The derivation of risk-weighted assets (RWA) is based on the various credit risk parameters of the advanced Internal ratings-based approach and the standardized approach respectively.    3 Failed trades are excluded (RWA of CHF 37 million).    4 Includes contingent claims and undrawn irrevocable credit facilities.    5 Financial investments available-for-sale exclude equity positions.

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ing products in that cash balances in margin accounts are not offset with the corresponding traded products exposures. This section also presents information on impaired and defaulted assets in a segmentation which is consistent with the regulatory capital calculation.

The table “Derivation of risk-weighted assets” on the previous page shows the derivation of risk-weighted assets from the regulatory gross credit exposure.


                                 
Regulatory gross credit exposure by geographical region 
  
                      Africa /  Total regulatory    
  Switzer-  Other  North  Latin  Asia /  Middle  gross credit  Total regulatory 
CHF million land  Europe  America1  America  Pacific  East  exposure  net exposure 
 
Cash and balances with central banks  6,015   8,957   2,309   35   5,555       22,872   22,802 
 
Due from banks  898   15,253   12,512   126   4,648   448   33,884   28,759 
 
Loans  163,351   31,579   76,661   5,312   15,251   3,242   295,395   274,278 
 
Financial assets designated at fair value  73   2,317   9,144   24   219   25   11,803   5,649 
 
Off-balance sheet  6,000   10,533   25,791   905   1,884   475   45,589   45,008 
 
Banking products
  176,337   68,639   126,417   6,402   27,556   4,190   409,542   376,496 
 
Derivatives  10,659   79,629   80,127   1,468   15,423   2,740   190,047   190,047 
 
Securities financing  16,645   18,033   26,030   124   2,931   62   63,825   63,825 
 
Traded products
  27,304   97,662   106,157   1,592   18,354   2,803   253,872   253,872 
 
Trading portfolio assets  48   12,485   17,977   658   1,542   206   32,916   32,848 
 
Financial investments available-for-sale 2  30   2,226   570   8   3   190   3,027   3,027 
 
Accrued income and prepaid expenses  464   1,429   2,797   82   218   20   5,011   5,036 
 
Other assets  4,593   1,852   3,736   145   363   6   10,696   10,668 
 
Other products
  5,135   17,992   25,080   893   2,126   422   51,650   51,579 
 
Total regulatory gross credit exposure 31.12.08
  208,777   184,294   257,654   8,887   48,037   7,415   715,064   681,947 
 
1 North America includes the Caribbean.    2 Financial investments available-for-sale exclude equity positions.
                         
Regulatory gross credit exposure by counterparty type 
  
          Public entities          
          (including  Banks and  Total regulatory    
          sovereigns and  multilateral  gross credit  Total regulatory 
CHF million Private individuals  Corporates1  central banks)  institutions  exposure  net exposure 
 
Cash and balances with central banks          22,402   470   22,872   22,802 
 
Due from banks          758   33,127   33,884   28,759 
 
Loans  157,265   129,701   8,430       295,395   274,278 
 
Financial assets designated at fair value      6,484   29   5,290   11,803   5,649 
 
Off-balance sheet  2,905   40,003   1,057   1,623   45,589   45,008 
 
Banking products
  160,170   176,188   32,675   40,510   409,542   376,496 
 
Derivatives  1,422   115,140   27,929   45,555   190,047   190,047 
 
Securities financing  882   31,458   5,256   26,229   63,825   63,825 
Traded products
  2,304   146,598   33,185   71,784   253,872   253,872 
 
Trading portfolio assets      11,301   21,168   448   32,916   32,848 
 
Financial investments available-for-sale2
  5   536   2,304   181   3,027   3,027 
 
Accrued income and prepaid expenses  742   4,033   30   205   5,011   5,036 
 
Other assets  1,795   5,356   265   3,280   10,696   10,668 
 
Other products
  2,542   21,226   23,767   4,114   51,650   51,579 
 
Total regulatory gross credit exposure 31.12.08
  165,016   344,012   89,627   116,408   715,064   681,947 
 
1 Includes corporates and non-banks financial institutions.    2 Financial investments available-for-sale exclude equity positions.

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The “Regulatory gross credit exposure by geographical region” table on the previous page provides a breakdown of UBS’s portfolio by major types of credit exposure according to classes of financial instruments and also by geographical regions. The latter distribution is based on the legal domicile of the customer.

The table “Regulatory gross credit exposure by counterparty type” on the previous page provides a breakdown of UBS’s portfolio by major types of credit exposure according to classes of financial instruments and also by counterparty type. The classification of counterparty type applied here is also used for the grouping of the balance sheet. Refer to the financial statements in this report for more information. The counterparty type is different from the Basel II defined exposure segments used in certain other tables in this section.
The “Regulatory gross credit exposure by residual contractual maturity” table on the next page provides a breakdown of UBS’s portfolio by major types of credit exposure according to classes of financial instruments and also by maturity. The latter distribution is based on the residual contractual tenor.
The “Regulatory gross credit exposure covered by guarantees and credit derivatives” table on the next page provides a breakdown of collateral information, showing exposures covered by guarantees and those covered by credit derivatives, according to Basel II defined exposure segments. These are defined as follows:
–Corporates: consists of all exposures that do not fit into any of the other exposure segments below. Mostly, it includes private commercial entities such as corporations, partnerships or proprietorships, insurance companies, funds, exchanges and clearing houses.
–Sovereigns (“Central governments and central banks” under Swiss and EU regulations): consists of exposures relating to sovereign states and their central banks, the Bank for International Settlement (BIS), the International

Monetary Fund (IMF), the European Union including the European Central Bank and eligible multilateral development banks (MDB).
–Banks (“Institutions” under Swiss and EU regulations): consists of exposures towards banks, i. e. legal entities holding a banking license. It also includes those securities firms that are subject to supervisory and regulatory arrangements comparable to those applied to banks according to the Basel II Revised Framework, including, in particular, risk-based capital requirements. Basel II also defines this regulatory exposure segment such that it contains exposures to public sector entities with tax raising power or whose liabilities are fully guaranteed by a public entity.
–Residential mortgages (“Claims secured on residential real estate” under Swiss and EU regulations): consists of residential mortgages, regardless of exposure size, if the obligor owns and occupies or rents out the mortgaged property.
–Other retail: consists of exposures to small businesses, private clients and other retail customers without mortgage financing. Notably, this includes the lombard loan portfolio.
The collateral amounts in the table reflect the values used for determining regulatory capital. However, UBS has engaged in a substantial credit hedging program to reduce concentrated exposure to individual names or sectors or in specific portfolios, which is not fully reflected in the regulatory numbers in this section.
The “Derivation of regulatory net credit exposure” table on the next page provides a derivation of the regulatory net credit exposure from the regulatory gross credit exposure according to the advanced IRB approach and the Standardized approach. The table also provides a breakdown according to Basel II defined exposure segments.


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Regulatory gross credit exposure by residual contractual maturity 
                  Total  Total 
                  regulatory  regulatory 
  Due in  Due over  Due over      gross credit  net credit 
CHF million 1 year or less  1-5 years  5 years  Other1  exposure  exposure 
 
Cash and balances with central banks              22,872   22,872   22,802 
 
Due from banks  2,240   1,638   377   29,629   33,884   28,759 
 
Loans  118,100   78,699   44,905   53,690   295,395   274,278 
 
Financial assets designated at fair value  2,677   3,987   4,664   475   11,803   5,649 
 
Off-balance sheet  10,541   32,112   1,859   1,077   45,589   45,008 
 
Banking products
  133,559   116,436   51,805   107,743   409,542   376,496 
 
Derivatives  73,386   47,130   69,412   120   190,047   190,047 
 
Securities financing  17,511   8   719   45,586   63,825   63,825 
 
Traded products
  90,897   47,138   70,131   45,706   253,872   253,872 
 
Trading portfolio assets  21,051   7,891   3,043   931   32,916   32,848 
 
Financial investments available-for-sale2
  2,312   94   621       3,027   3,027 
 
Accrued income and prepaid expenses              5,011   5,011   5,036 
 
Other assets  85           10,611   10,696   10,668 
 
Other products
  23,448   7,985   3,664   16,553   51,650   51,579 
 
Total regulatory gross credit exposure 31.12.08
  247,904   171,558   125,600   170,001   715,064   681,947 
 
1 Includes positions without an agreed residual contractual maturity, for example loans without a fixed term, on which notice of termination has not been given.  2 Financial investments available-for-sale exclude equity positions.
             
Regulatory gross credit exposure covered by guarantees and credit derivatives 
  Total regulatory  Of which: exposure  Of which: exposure 
  gross credit  covered by  covered by credit 
CHF million exposure  guarantees1  derivatives 
 
Exposure segment
            
 
Corporates  338,370   3,373   28,156 
 
Sovereigns  71,953   183   6 
 
Banks  121,776   563   206 
 
Residential mortgages  118,703   13     
 
Other retail  64,262   169     
 
Total regulatory gross credit exposure 31.12.08
  715,064   4,302   28,368 
 
1 Includes guarantees and stand-by-letters of credit provided by third-parties, mainly banks.
             
Derivation of regulatory net credit exposure 
  Advanced IRB1  Standardized  Total 
CHF million approach  approach  31.12.08 
 
Total regulatory gross credit exposure
  618,333   96,731   715,064 
 
Less: regulatory credit risk offsets and adjustments2
  (26,226)  (6,891)  (33,116)
 
Total regulatory net credit exposure
  592,107   89,841   681,947 
 
 
Breakdown of the regulatory net credit exposure by exposure segment 
 
Corporates  237,704   48,618   286,321 
 
Sovereigns  45,270   24,818   70,089 
 
Banks  130,493   11,979   142,473 
 
Residential mortgages  116,539   2,001   118,540 
 
Other retail  62,101   2,424   64,525 
 
Total regulatory net credit exposure
  592,107   89,841   681,947 
 
1 Internal ratings-based.  2 Regulatory credit risk offsets and adjustments mainly include margin accounts for derivatives.

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Basel II Pillar 3

Advanced IRB approach
The upper part of the table “Advanced internal ratings-based approach: regulatory net credit exposure by UBS-internal rating” below provides a breakdown of the regulatory net credit exposure of UBS’s credit portfolio using the advanced IRB approach according to UBS-internal rating classes.

The middle part of the table “Advanced IRB approach: exposure-weighted average loss given default by UBS-internal rating” provides a breakdown of the net exposure-

weighted average loss given default for UBS’s credit portfolio exposures calculated using the advanced IRB approach, according to UBS-internal rating classes.
The lower part of the table “Advanced IRB approach: exposure-weighted average risk-weight by UBS-internal rating” provides a breakdown of the net exposure-weighted average risk-weight for UBS’s credit portfolio exposures calculated using the advanced IRB approach according to UBS-internal rating classes.


                             
Advanced internal ratings-based approach: regulatory net credit exposure by UBS-internal rating 
     Total 
  UBS-internal rating  regulatory 
  Investment grade Sub-investment grade Defaulted1  net credit 
                          exposure 
CHF million 0/1  2/3  4/5  6–8  9–13      31.12.08 
 
Regulatory net credit
exposure-weighted
average PD		  0.011%   0.064%   0.269%  0.929%   5.376%       0.484% 
 
                             
Exposure segment
                            
 
Corporates  19,978   102,563   47,706   43,562   17,694   6,202   237,704 
 
Sovereigns  30,321   14,730   86   88   37   8   45,270 
 
Banks  11,390   89,216   27,330   1,748   509   299   130,493 
 
Residential mortgages  3   6,803   51,922   52,723   4,883   206   116,539 
 
Other retail      47,797   7,039   4,529   1,807   928   62,101 
 
Total 31.12.08
  61,691   261,108   134,083   102,651   24,929   7,644   592,107 
 
1 Values of defaulted derivative contracts are based on replacement values, including “add-ons” used in the calculation of regulatory capital.
                         
Advanced internal ratings-based approach: exposure-weighted average loss given default by UBS-internal rating 
  UBS-internal rating  Regulatory net credit
exposure-weighted		 
  Investment grade Sub-investment grade  average LGD1 (%) 
CHF million 0/1  2/3  4/5  6–8  9–13  31.12.08 
 
 
Regulatory net credit exposure-weighted average LGD (%)
 
Corporates  24   33   42   34   32   35 
 
Sovereigns  26   61   36   37   20   37 
 
Banks  22   25   32   36   15   26 
 
Residential mortgages  10   10   10   11   11   11 
 
Other retail      15   22   13   15   16 
 
Average 31.12.08
  25   28   26   21   26   26 
 
1 Loss given default.
                         
Advanced internal ratings-based approach: exposure-weighted average risk-weight by UBS-internal rating
     Regulatory net credit 
  UBS-internal rating  exposure-weighted 
  Investment grade Sub-investment grade  average risk-weight (%) 
CHF million 0/1  2/3  4/5  6–8  9–13  31.12.08 
 
 
Regulatory net credit exposure-weighted average risk-weight (%)
 
Corporates  11   14   53   61   108   39 
 
Sovereigns  5   47   38   69   81   19 
 
Banks  9   11   29   100   125   17 
 
Residential mortgages  1   2   5   13   30   10 
 
Other retail      3   15   16   30   8 
 
Average 31.12.08
  8   13   28   35   87   24 
 

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Standardized approach
The standardized approach is generally applied where it is not possible – usually for technical reasons – to use the advanced IRB approach and/or where an exemption from the advanced IRB has been granted by FINMA. The standardized approach requires banks to use risk assessments prepared by External Credit Assessment Institutions (ECAI) or Export Credit Agencies to determine the risk weightings applied to rated counterparties.

ECAI risk assessments are used by UBS to determine the risk weightings for the following classes of exposure:
–Central governments and central banks;
–Regional governments and local authorities;
–Multilateral development banks;
–Institutions; and
–Corporates.

UBS has selected three FINMA-recognized external credit assessment institutions for this purpose – Moody’s Investors Service, Standard and Poor’s Ratings Group and Fitch Group. The mapping of external ratings to the standardized approach risk weights is determined by FINMA and published on its website.
The “Regulatory gross and net credit exposure by risk weight under the standardized approach” table below provides a breakdown of the regulatory gross and net credit exposure by risk-weight for UBS’s credit portfolio exposures treated under the standardized approach, according to Basel II defined exposure segments.
The “Eligible financial collateral recognized under standardized approach” table below provides a breakdown of the financial collateral, which is eligible for recognition in the regulatory capital calculation under the standardized approach, according to Basel II defined exposure segments.


                         
Regulatory gross and net credit exposure by risk weight under the standardized approach1
  Total exposure
CHF million 0%  >0%–35%  36%–75%  76%–100%  150%  31.12.08 
 
 
Regulatory gross credit exposure
                        
 
Corporates      6,538   671   44,840   1,602   53,651 
 
Sovereigns  23,884   149   26   825   1   24,885 
 
Banks      8,086   4,492   1,068   8   13,654 
 
Residential mortgages          1,068   997       2,065 
 
Other retail          2,476           2,476 
 
Total 31.12.08
  23,884   14,773   8,732   47,731   1,612   96,731 
 
 
Regulatory net credit exposure2
                        
 
Corporates      6,538   671   39,807   1,602   48,618 
 
Sovereigns  23,884   149   26   758   1   24,818 
 
Banks      7,478   3,425   1,068   8   11,979 
 
Residential mortgages          1,004   997       2,001 
 
Other retail          2,424           2,424 
 
Total 31.12.08
  23,884   14,165   7,550   42,630   1,611   89,841 
 
1 The risk-weights are based on regulatory values or external ratings.  2 For traded products, the regulatory gross credit exposure is equal to the regulatory net credit exposure.
         
Eligible financial collateral recognized under standardized approach 
      Eligible financial collateral 
  Regulatory net credit exposure  recognized in capital 
CHF million under standardized approach  calculation1 
 
 
Exposure segment
        
 
Corporates  48,618   8,911 
 
Sovereigns  24,818   1,148 
 
Banks  11,979   5,942 
 
Residential mortgages  2,001   64 
 
Other retail  2,424   648 
 
Total 31.12.08
  89,841   16,713 
 
1 The eligible financial collateral reflects the impact of the application of regulatory haircuts. For traded products, it is the difference between the International Financial Reporting Standards’ reported values and the regulatory net credit exposure.

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Basel II Pillar 3

Impairment, default and credit loss
The “Impaired assets by geographical region” table below provides a breakdown of credit exposures arising from impaired assets and allowances/provisions by geographical region, based on the legal domicile of the customer. Impaired asset exposures include loans, off-balance sheet claims, securities financing transactions and derivative contracts.

The “Impaired assets by exposure segment” table on the next page shows a breakdown of credit exposures arising from impaired assets and allowances/provisions according to Basel II defined exposure segments. Impaired asset expo-

sures include loans, off-balance sheet claims, securities financing transactions, and derivative contracts.
The “Changes in allowances, provisions and specific credit valuation adjustments” table on the next page provides a breakdown of movements in the specific and collective allowances and provisions for impaired assets, including changes in the credit valuation allowance for derivatives.
The “Total credit loss at year-end 2008” table on the next page provides a breakdown of the credit loss amount charged against UBS’s income statement in 2008 according to Basel II defined exposure segments of the advanced IRB approach.


                         
Impaired assets by geographical region 
              Exposure net      Total 
          Specific  of specific      allowances, 
          allowances,  allowances,      provision and 
          provisions and  provisions and  Collective  specific credit 
  Regulatory gross      credit valuation  credit valuation  allowances and  valuation 
CHF million credit exposure  Impaired assets1  adjustments  adjustments  provisions  adjustments 
 
Switzerland  208,777   1,534   (849)  684   (23)  (873)
 
Other Europe  184,294   2,334   (1,138)  1,196       (1,138)
 
North America2
  257,654   10,053   (4,808)  5,245       (4,808)
 
Latin America  8,887   206   (56)  150       (56)
 
Asia/Pacific  48,037   1,387   (361)  1,027       (361)
 
Africa/Middle East  7,415   145   (41)  104       (41)
 
Total 31.12.08
  715,064   15,658   (7,252)  8,406   (23)  (7,275)
 
1 Values of defaulted derivative contracts (CHF 6,048 million) are based on replacement values and do not include “add-ons” used in the calculation of regulatory capital.  2 North America includes the Caribbean.

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Impaired assets by exposure segment 
                  Total    
                  allowances,    
          Specific      provisions    
          allowances,      and specific    
          provisions  Collective  credit    
  Regulatory  Of which  and credit  allowances  valuation    
  gross credit  impaired  valuation  and  adjust-    
CHF million exposure  assets1  adjustments  provisions2  ments2  Write-offs3 
 
Corporates  338,370   13,855   (6,777)      (6,777)  (714)
 
Sovereigns  71,953   16   (12)      (12)  (2)
 
Banks  121,776   139   (20)      (20)  (122)
 
Residential mortgages  118,703   352   (103)      (103)    
 
Other retail  64,262   1,296   (340)      (340)  (30)
 
Not allocated segment4
              (23)  (23)    
 
Total 31.12.08
  715,064   15,658   (7,252)  (23)  (7,275)  (868)
 
1 Values of defaulted derivative contracts (CHF 6,048 million) are based on replacement values and do not include “add-ons” used in the calculation of regulatory capital.  2 Collective credit valuation adjustments of CHF 6.1 billion are partially included in the upper tier 2 capital and therefore not included in this table.  3 The write-offs refer to the period from 1 January 2008 to 31 December 2008.  4 Collective loan loss allowances and provisions are not allocated to individual counterparties and thus also not to exposure segments.
                     
Changes in allowances, provisions and specific credit valuation adjustments 
  Specific allowances      Total specific       
  and provisions for  Specific credit  allowances,       
  banking products  valuation  provisions and  Collective    
  and securities  adjustments for  credit valuation  allowances and    
CHF million financing  derivatives  adjustments  provisions2  Total 
 
Balance at the beginning of 2008
  1,130   818   1,948   34   1,981 
 
Write-offs  (868)      (868)      (868)
 
Recoveries (on written-off positions)  44       44       44 
 
Increase/(decrease) in credit loss allowances, provisions and specific credit valuation adjustments1
  3,006   4,550   7,556   (11)  7,545 
 
Foreign currency translations and other adjustments  (42)  (825)  (867)      (867)
 
Transfers  (223)  (337)  (561)      (561)
 
Balance at year-end 2008
  3,047   4,205   7,252   23   7,276 
 
1 Total credit loss (credit loss expense and changes in specific credit valuation adjustments).  2 Collective credit valuation adjustments of CHF 6.1 billion are partially included in the upper tier 2 capital and therefore not included in this table.
             
Total credit loss at year-end 2008 
      Specific credit valuation    
      adjustmens for    
CHF million Credit loss expense  defaulted derivates  Total credit loss 
 
Corporates1
  2,564   4,117   6,681 
 
Sovereigns            
 
Banks  114   433   547 
 
Residential mortgages  (1)      (1)
 
Other retail  342       342 
 
Not specified2
  (24)      (24)
 
Total
  2,996   4,550   7,545 
 
1 Includes credit losses from reclassified financial instruments, which amounted to CHF 1,329 million.  2 Includes collective loan loss allowances and provisions.

185

Risk and treasury management
Basel II Pillar 3

Other credit risk tables

The “Credit exposure of derivatives instruments” table below provides an overview of UBS’s credit exposures arising from derivatives. Exposures are provided based on the balance sheet carrying values of derivatives as well as regulatory net credit exposures. The net balance sheet credit exposure differs from the regulatory net credit exposures because of differences in valuation methods and the netting and collateral deductions used for accounting and regulatory capital purposes. Specifically, net current credit exposure is derived

from gross positive replacement values, whereas regulatory net credit exposures is calculated using UBS internal credit valuation models.
The “Credit derivatives” table below provides an overview of UBS’s credit derivative portfolio by product group using notional values. The table also provides a breakdown of credit derivative positions used to risk manage UBS’s own credit portfolio (banking book for regulatory purposes) and those arising through intermediation activities (trading book for regulatory capital purposes).


Credit exposure of derivative instruments
CHF million31.12.08
Gross positive replacement values860,943
Netting benefits recognized1
(651,756)
Collateral held(51,765)
Net current credit exposure
157,422
Regulatory net credit exposure (total counterparty credit risk)2
190,047
of which treated with internal models (effective expected positive exposure (EPE))2
164,707
of which treated with supervisory approaches (current exposure method)2
25,340
Breakdown of the collateral held
Cash collateral46,967
Securities collateral and debt instruments collateral (excluding equity)4,246
Equity instruments collateral121
Other collateral430
Total collateral held
51,765
1 Derivatives exposure based on accounting definition (consolidation scope for capital) measured as gross positive replacement values with netting benefits from negative replacement values with the same counterparty.  2 Derivatives exposure is defined as regulatory net credit risk exposure.
                             
Credit derivatives 
  Regulatory banking book  Regulatory trading book  Total 
  Protection  Protection      Protection  Protection       
Notional amounts, CHF million bought  sold  Total  bought  sold  Total  31.12.08 
 
Credit default swaps  26,297   1,030   27,326   2,120,407   1,469,723   3,590,130   3,617,457 
 
Total return swaps      1,166   1,166   15,060   7,819   22,879   24,044 
 
Total 31.12.08
  26,297   2,196   28,492   2,135,468   1,477,542   3,613,009   3,641,502 
 
1 Notional amounts of credit derivatives are based on accounting definitions and do not include any netting benefits. For capital underpinning of the counterparty credit risk of derivative positions, the effective expected positive exposure (or current exposure method) is taken.

186

Risk and treasury management

Investment positions

The “Equities disclosure for banking book positions” table below provides an overview of UBS equity investments held in the banking book for regulatory capital purposes. The calculation of equity investment exposure for financial accounting under IFRS differs from that required for regulatory capital purposes. The table illustrates these two measures of exposure as well as the key differences between them.

The IFRS view differs from the regulatory capital view primarily due to: (i) differences in the basis of valuation, that is IFRS is based on “fair value accounting” whereas the “lower of cost or market value” (LOCOM) and “cost less impairment”

is used for regulatory capital purposes; (ii) positions that may be treated under a different framework for regulatory capital purposes, for example tradable assets treated under Market Risk VaR; and (iii) differences in the scope of consolidation for IFRS, for example, special purpose entities consolidated for IFRS but not for regulatory capital purposes.

Also disclosed in the table are realized and unrealized gains and losses. There were no unrealized gains and losses that were not recognized either on the balance sheet or in the statement of income relating to “available for sale” investments designated at fair value. In addition there was no significant disparity between the share prices of investment positions held in publicly quoted entities and their fair value.



Equities disclosure for banking book positions
CHF millionBook value 31.12.08
Equity investments
Financial investments available-for-sale1,681
Financial assets designated at fair value1,079
Investments in associates892
Total equity investments under IFRS
3,653
Realized gains and (losses), net
815
Unrealized gains and (losses), net
421
Consolidation scope adjustment(80)
Capital view adjustments405
Total equity exposure regulatory capital view under BIS
3,978
of which: to be risk weighted
publicly traded
1,423
privately held
1,681
of which: deducted from equity
874
Capital requirement
Total simple risk weight method
612
Unrealized gains included in tier 2
69

187

Risk and treasury management
Basel II Pillar 3

Securitization

Sources and control of risks resulting from
securitization structures

Historically UBS was involved in many aspects of the origination of securitization structures. This ranged from warehousing assets as principal and for clients, the creation of securitization vehicles, as well as underwriting, market-making and managing securitized assets. UBS retained securitization exposures in the form of senior or subordinated tranches (including first loss positions) and interest only strips. UBS also purchased third-party securitization positions as part of its trading activities. UBS has not, however, provided any material liquidity facilities for securitization structures and has not acted as a sponsor of securitization schemes to purchase exposures from third-party entities.
UBS significantly reduced its exposures to securitization related assets in 2008 through a combination of asset sales and writedowns. As announced in October 2008 and February 2009, UBS is repositioning its Investment Bank to focus primarily on client activities. As part of this repositioning, the Investment Bank will largely exit its real estate and securitization activities. Refer to the “Investment Bank” section of this report for more information. Remaining positions at 31 December 2008 that are treated under the securitization framework for regulatory capital purposes include the global reference-linked note programs. These positions are subject to appropriate portfolio limits and risk controls.
During 2008, UBS acquired student loan auction rate securities (ARS) from its provision of liquidity to these markets by submitting bids to ARS auctions and from its commitment to restore liquidity to client holdings of ARS. Refer to the “Exposure to auction rate securities” sidebar in the “Risk management and control” section of this report for more information. For regulatory capital purposes, exposures from these positions are also treated as securitizations and are subject to appropriate portfolio limits and risk controls.

Regulatory treatment of securitization

UBS generally treated exposures from securitization positions under market risk regulatory capital and any remaining securitization exposures that are still subject to this treatment do not form part of this disclosure. Exposures from the global reference-linked note programs and certain originated traditional securitizations were treated under the securitization approach for regulatory capital and are therefore included in this disclosure.
In first quarter 2008 certain securitization exposures relating to illiquid US real estate positions (specifically super se-

nior US RMBS CDOs, sub prime and Alt A RMBS, and related hedges) were excluded from internal management and regulatory VaR and were therefore no longer treated under market risk regulatory capital. Refer to “VaR developments in 2008” in the “Risk management and control” section of this report for more information. These positions are treated under the standardized approach as agreed with FINMA and are therefore not included in this disclosure.
UBS generally applies the Ratings Based Approach to securitization exposures in the banking book using Moody’s, Standard & Poor’s and Fitch’s Ratings for all securitization exposures. Unrated tranches for which no rating can be inferred are deducted from eligible capital. Under the Ratings Based Approach the amount of capital is capped at the capital requirement that would be assessed against the underlying assets had they not been securitized. On 31 December 2008 such exposures mainly included the student loan ARS positions (including purchase commitments) and the global reference-linked note programs.
Interest rate or foreign currency derivatives with securitization vehicles are treated under the advanced Internal Ratings Based approach.

Accounting Policies

For IFRS purposes, UBS treats originated securitized exposures as sales, i.e. they are derecognized from UBS’s balance sheet provided that specific derecognition criteria are met and UBS does not consolidate the transferee (as described in “Note 1 Summary of significant accounting policies” in the financial statements of this report). A gain or loss on sale is recognized when the exposures are derecognized. Derivatives used for synthetic securitizations are accounted for in line with the abovementioned note.
Securitization positions that are classified as trading assets for IFRS purposes are valued at fair value as described in “Note 27 Fair value of financial instruments” in the financial statements of this report. Securitization positions that have been redesignated from trading assets to loans and receivables are valued at cost less impairment as described in “Note 1 Summary of significant accounting policies” in the financial statements of this report.

Good practice guidelines

On 18 December 2008 the European Banking Federation, the London Investment Banking Association, the European Savings Banks Group and the European Association of Public Banks and Funding Agencies published the “Industry good practice guidelines on Pillar 3 disclosure requirement for securitization”. UBS is in compliance with material aspects of these guidelines.



188

Risk and treasury management

Securitization activity during 2008

The first table below shows exposures that have been securitized by UBS via a traditional securitization during the year. It also shows any gains or losses recognized on sales into these traditional securitization structures for regulatory capital purposes. The exposure values disclosed are based on the transaction date and were accounted for at fair value pre-securitization (the resulting gain or loss is not significant). UBS retained securitization positions for all traditional securitization made in 2008. No synthetic securitizations occurred during 2008.

Total outstanding exposures securitized –
synthetic securitizations

The second table below provides a breakdown of the inventory of the total outstanding exposures that have been secu-

ritized by UBS via synthetic securitizations prior to 2008 as part of its global reference linked note program. Historically, UBS retained securitization positions from its synthetic securitizations. The exposure values disclosed are calculated on the basis of their regulatory exposure value. Due to the transfer of assets to the SNB fund, however, UBS no longer holds securitization positions of all synthetic securitizations.

Amount of impaired/past due assets securitized –
synthetic securitizations

The third table below provides a breakdown of the inventory of outstanding impaired or past due exposures that have been securitized by UBS via a synthetic securitization. The exposure values are based on the amounts referenced in the transaction and are included into the below disclosure once a credit event has occurred.



         
Securitization activity during 2008 – traditional securitizations 
  Amount of exposures  Recognized gain or loss 
CHF million securitized  on sale 
 
For year ended  31.12.08   31.12.08 
 
Residential mortgages  577   (13)
 
Commercial mortgages  964   13 
 
Other  0   0 
 
Total
  1,541   0 
 
Total outstanding exposures – synthetic securitizations
CHF millionAmount of exposures securitized
For year ended31.12.08
Residential mortgages433
Commercial mortgages596
Other1
9,657
Total
10,686
1 Contains securitization structures comprising various exposure types, e.g. residential mortgages, commercial mortgages, credit card receivables and trading receivables.
Amount of impaired/past due assets securitized – synthetic securitizations
CHF millionAmount of exposures impaired/past due
For year ended31.12.08
Residential mortgages22
Commercial mortgages0
Other190
Total
212

189

Risk and treasury management
Basel II Pillar 3

Losses recognized on originated transactions in 2008

The table below provides a breakdown of losses recognized by UBS on securitization tranches purchased or retained that result from a securitization originated by UBS, after taking into account the offsetting effects of any credit protection that is an eligible risk mitigation instrument for the retained or repurchased tranche. UBS partially reports such exposures on a fair value and partially on a cost less impairment basis. These losses mainly include losses related to the global reference-linked note program.

Securitization exposures retained or purchased

The table below provides a breakdown of securitization exposures purchased or retained by UBS, irrespective of its role in the securitization transaction. The exposure values disclosed are calculated on the basis of their regulatory exposure value.

Capital charge for securitization exposures retained or purchased

The table below provides a breakdown of securitization exposures purchased or retained by UBS, irrespective of its role in the securitization transaction as well as a breakdown of the related capital requirement.



Losses recognized on originated transactions in 2008
CHF millionAmounts of losses recognized
For year ended31.12.08
Residential mortgages789
Commercial mortgages153
Other291
Total
1,233
Securitization exposures retained or purchased
Exposure typeExposure amount
CHF million
For year ended31.12.08
Residential mortgages592
Commercial mortgages583
Other1
33,960
Total
35,135
1 Contains securitization structures comprising various exposure types, for example, residential mortgages, commercial mortgages, credit card receivables and trading receivables. Includes also student loan auction rate securities positions (including purchase commitments).
         
Capital charge for securitization exposures retained or purchased 
  Exposure amount  Capital charge 
CHF million 31.12.08     
 
> 0–20%  32,576   332 
 
> 20–35%  464   13 
 
> 35–50%  253   11 
 
> 50–75%  321   19 
 
> 75–100%  1,181   100 
 
> 100–150%  –   – 
 
> 150–250%  24   5 
 
> 250–300%  –   – 
 
> 300–350%  –   – 
 
> 350–375%  –   – 
 
> 375–400%  –   – 
 
> 400–625%  10   4 
 
> 625–1250%  –   13 
 
Deducted from capital  306   306 
 
Total
  35,135   803 
 

190

Corporate governance and compensation

More about UBS

73

Corporate governance and compensation

More about UBS

Sources Information according to articles 663bbis and 663c (paragraph three)
of information

theSwiss Code of Obligations

Annual report 2007

Four reports make up UBS’s fullAnnual Report 2007.They complyDisclosures provided in line with the US disclosure requirements for foreign private issuers as defined by Form 20-Fof articles 663bbis and 663c (paragraph three) of the SecuritiesSwiss Code of Obligations’“Supplementary disclosures for companies whose shares are listed on a stock exchange: compensations and Exchange Commission (SEC) and combine audited and non-audited information. All four reportsparticipations” are available in English and German (SAP no.80531). The four reports are:

Strategy, Performance and Responsibility 2007
This provides a description of our firm, its strategy, organizational structure and financial performance for the last two years. It also discusses our standards for corporate behavior and responsibility, outlines demographic trends in our workforce and describes the way our people learn and are led.

Risk, Treasury and Capital Management 2007
In addition to outlining the principles by which we manage and control risk, this report provides an account of developments in credit risk, market risk, operational risk and treasury management during 2007. It also provides information on UBS shares.

Corporate Governance and Compensation Report 2007
Comprehensive information on our governance arrangements is included in this report, which also explains how we manage our relationships with regulators and shareholders. Compensation of senior management and the Board of Directors (executive and non-executive members) is discussed here. This report can be ordered separately (SAP no. 82307).

Financial Statements 2007
This comprises the audited financial statements of UBS for 2007, 2006 and 2005, prepared according to the International Financial Reporting Standards (IFRS). It also includes the audited financial statements of UBS AG (the parent bank) for 2007 and 2006, prepared according to Swiss banking law. Additional disclosure requiredthis report. This information is marked by Swiss and US regulations is included where appropriate.

In addition to the four reports,Review 2007is distributed broadly to UBS shareholders and contains key information on our strategy and financials. This booklet summarizes the information in the four-part annual report.

Quarterly reports

We provide detailed quarterly financial reporting and analysis, including commenta bar on the progress of our businesses and key strategic initiatives. These quarterly reports are available in English.left-hand side throughout this section.

How to order reports

These reports are available in PDF format on the internet atwww.ubs.com/investors/topicsin the reporting section. Printed copies can be ordered from the same website by accessing the order / subscribe panel on the right-hand side of the screen. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, Information Center, P.O. Box, CH-8098 Zurich, Switzerland.



74

Information tools for investorsCorporate governance
–UBS implemented new corporate governance guidelines in 2008, actively reinforcing a clear separation of the roles and responsibilities of the Board of Directors and its committees from those of the Group Executive Board

Website
Our Analysts & Investors website atwww.ubs.com/investorsoffers

The dual-board structure achieves a wide rangeclear
separation of information about UBS, financial information (including SEC filings), corporate information, share price graphs and data, an event calendar, dividend information and recent presentations given by senior management to investors at external conferences. Information on the internetpower:

The Board of Directors (BoD) is available in English and German, with some sections in French and Italian.

Messaging service
On the Analysts & Investors website, you can register to receive news alerts about UBS via Short Messaging System (SMS) or e-mail. Messages are sent in either English or German and users are able to state their preferencesresponsible for the topicsfirm’s strategic direction as well as the monitoring and supervision of the alerts received.business. All members are independent with the exception of its full-time Chairman. Dissolution of the Chairman’s Office in 2008 streamlined the management process, with its duties and responsibilities spread amongst existing and newly established committees.

Results presentations
SeniorThe Group Executive Board is responsible for the executive management presentsof the firm and must account to the BoD for the firm’s financial results. It is led by the Group Chief Executive Officer and supported by the newly established Executive Committee.

The following events strengthened UBS’s results every quarter. These presentations
leadership capacity during 2008:

The position of senior independent director was established to facilitate direct communication between shareholders and the BoD, as well as between BoD members and their Chairman.

The term of office for all BoD members was reduced to one year. This was approved at the annual general meeting held in April and is effective for all elections and re-elections held from 2008 onwards.

The firm believes that shareholder interests are broadcast live over
served by good corporate governance. At the internet, and can be downloaded on demand. The most recent result webcasts can be found
extraordinary general meetings (EGM) held in 2008,
shareholders approved the following:

On 27 February, shareholders approved the creation of a maximum of CHF 10,370,000 in authorized capital, allowing the distribution of a stock dividend. Shareholders also approved the creation of conditional capital allowing two financial investors to subscribe to an issue of CHF 13 billion of mandatory convertible notes (MCNs).

On 27 November, shareholders approved the creation of conditional share capital for the issuance of MCNs in the financials sectionamount of our Analysts & Investors website.

Form 20-F and other submissionsCHF 6 billion to the US Securities and Exchange Commission

We file periodic reports and submit other information about UBS to the US Securities and Exchange Commission (SEC). Principal among these filings is our annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934.

Our Form 20-F filing is structured as a “wrap-around” document. Most sections of the filing can be satisfied by referring to parts of the four reports (Strategy, Performance and Responsibility 2007,Risk, Treasury and Capital Management 2007,Corporate Governance and Compensation Report 2007andFinancial Statements 2007). However, there is a small amount of additional information in Form 20-F which is not presented elsewhere, and is particularly targeted at readers in the US. You are encouraged to refer to this additional disclosure.
You may read and copy any document that we file with the SEC on the SEC’s website,www.sec.gov,or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, DC, 20549. Please call the SEC by dialing 1-800-SEC-0330 (in the US) or +1 202 942 8088 (outside the US) for further information on the operation of its public reference room. You may also inspect our SEC reports and other information at the New York Stock Exchange, Inc., 20 Broad Street, New York, NY 10005. Much of this additional information may also be found on the UBS website atwww.ubs.com/investors,and copies of documents filed with the SEC may be obtained from UBS’s Investor Relations team at the address shown on the next page.
Swiss Confederation.



 

 

Corporate information

The legal and commercial name of the company is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS.

UBS AG is incorporated and domiciled in Switzerland and operates under Swiss Company Law and Swiss Federal Banking Law as an Aktiengesellschaft, a corporation that has issued shares of common stock to investors.

The addresses and telephone numbers of our two registered offices are:
Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41-44-234 11 11; and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, phone +41-61-288 20 20.

UBS AG shares are listed on the SWX Swiss Exchange (traded through its trading platform virt-x), on the New York Stock Exchange (NYSE) and on the Tokyo Stock Exchange (TSE).



75

More about UBS

Compensation, shareholdings and loans
–UBS’s compensation principles for senior executives were extensively reviewed in 2008
–New compensation principles are effective from 2009 onwards

Contacts

Compensation for 2008

Total senior executive compensation decreased 77% in 2008.

No incentive award or discretionary stock options were granted to the Chairman and executive members of the Board of Directors nor to the members of the Group Executive Board in reflection of UBS’s negative financial performance for the year.

Compensation principles 2009

These will align compensation with the creation of sustainable shareholder returns through sound risk taking; promote a performance-driven culture with a long-term view to results and shareholder interests; and support the firm’s focused business strategy.

These principles include a “malus” system for cash awards as well as performance conditions for equity awards.

A non-binding vote on executive compensation will be held at the annual general meeting to be held in April 2009.



       
SwitchboardsCompensation authorities
 Compensation recommendations    
For all general queries.Recipients Zurichdeveloped by +41-44-234 1111Approved by Communicated by
London+44-20-7568 0000
New York+1-212-821 3000
Hong Kong+852-2971 8888
 
       
Investor RelationsChairman of the BoD
  Chairman of the HRCC1  HRCC  
Our Investor Relations team supports
institutional, professional and retail
investors from our offices in Zurich
and New York.

www.ubs.com/investors		Hotline+41-44-234 4100UBS AG
New York+1-212-882 5734Investor Relations
Fax (Zurich)+41-44-234 3415P.O. Box
CH-8098 Zurich, Switzerland
sh-investorrelations@ubs.com
HRCC
       
Media RelationsGroup CEO
  Chairman of the BoD  HRCC  
Our Media Relations team supports
global media and journalists from
offices in Zurich, London, New York
and Hong Kong.

www.ubs.com/media		Zurich+41-44-234 8500mediarelations@ubs.com
London+44-20-7567 4714ubs-media-relations@ubs.com
New York+1-212-882 5857mediarelations-ny@ubs.com
Hong Kong+852-2971 8200sh-mediarelations-ap@ubs.com
HRCC
       
Shareholder ServicesMembers of the GEB
  Group CEO  HRCC  
UBS Shareholder Services, a unit of the
Company Secretary, is responsible for
the registration of the global registered
shares.

Hotline+41-44-235 6202UBS AG
Fax+41-44-235 3154Shareholder Services
P.O. Box
CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com
Group CEO
       
US Transfer AgentIndependentBoDmembers
(remuneration system and fees)
  Chairman of the BoD/HRCC  BoD  
For all global registered share-related
queries inChairman of the US.

www.melloninvestor.com		Calls from the US+866-541 9689BNY Mellon Shareowner Services
Calls outside the US+1-201-680 6578480 Washington Boulevard
Fax+1-201-680 4675Jersey City, NJ 07310, USA
sh-relations@melloninvestor.com

76

Cautionary statement regarding forward-looking statements |This report contains statements that constitute “forward-looking statements”, including but not limited to statements relating to the risks arising from the current market crisis, other risks specific to our business and the implementation of strategic initiatives, as well as other statements relating to our future business development and economic performance and our intentions with respect to future returns of capital. While these forward-looking statements represent our judgments and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to (1) the extent and nature of future developments in the US sub-prime market and in other market segments that have been affected by the current market crisis; (2) other market and macro-economic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates, whether or not arising directly or indirectly from the current market crisis; (3) the impact of these developments on other markets and asset classes; (4) changes in internal risk control and in the regulatory capital treatment of UBS’s positions, in particular those affected by the current market crisis; (5) limitations in the effectiveness of our internal risk management processes, of our risk measurement, control and modeling systems, and of financial models generally; (6) developments relating to UBS’s access to capital and funding, including any changes in our credit ratings; (7) changes in the financial position or creditworthiness of our customers, obligors and counterparties, and developments in the markets in which they operate; (8) management changes and changes to the structure of our Business Groups; (9) the occurrence of operational failures, such as fraud, unauthorized trading, systems failures; (10) legislative, governmental and regulatory developments; (11) competitive pressures; (12) technological developments; and (13) the impact of all such future developments on positions held by UBS, on our short-term and longer-term earnings, on the cost and availability of funding and on our BIS capital ratios. In addition, these results could depend on other factors that we have previously indicated could adversely affect our business and financial performance which are contained in other parts of this document and in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth elsewhere in this document and in documents furnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2007. UBS is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

Imprint |Publisher / Copyright: UBS AG, Switzerland | Languages: English, German
Order numberAnnual Report 2007:SAP-No. 80531E-0801

(FSC LOGO)
Mixed Sources
Product group from well-managed
forests and other controlled sources
www.fsc.org Cert no. SQS-COC-100112
© 1996 Forest Stewardship CouncilBoD

77

 1The human resources and compensation committee.

(UBS LOGO)
UBS AG
P.O. Box, CH-8098 Zurich
P.O. Box, CH-4002 Basel
www.ubs.com

 

(LEFT MARGIN HEADER)

2 Risk, Treasury and Capital Management UBS Annual Report 2007


 

(COVER GRAPHIC)Corporate governance and compensation
Corporate governance

 

Contents

Introduction
2
Corporate governance
3
Introduction and principles
4
Group structure and shareholders
5
Capital structure
7
Board of Directors
9
Group Executive Board
16
Compensation, shareholdings and loans
20
Shareholders’ participation rights
37
Change of control and defense measures
39
Auditors
40
Information policy
42
Regulation and supervision
44
Compliance with New York Stock Exchange listing standards on corporate governance
47
Senior leadership
50
More about UBS
53
Sources of information
54
Corporate information
55
Contacts
56

1

Introduction

Introduction

Corporate governance

This year we have changed the structure of our annual report. Based on feedback from users, our annual report now consists of four themed reports. These combine audited and non-audited information.

Together, the four reports make up UBS’s fullAnnual Report 2007and replace the former Financial Report, the Handbook and the Compensation Report. They comply with the US disclosure requirements for foreign private issuers as defined by Form 20-F of the Securities and Exchange Commission (SEC).

The four reports are:

Strategy, Performance and Responsibility 2007

This provides a description of our firm, its strategy, organizational structure and financial performance for the last two years. It also discusses our standards for corporate behavior and responsibility, outlines demographic trends in our work-force and describes the way our people learn and are led.

Risk, Treasury and Capital Management 2007

In addition to outlining thegovernance principles by which we manage and control risk, this report provides an account of developments in credit risk, market risk, operational risk and treasury management during 2007. It also provides information on UBS shares.

Corporate Governance and Compensation Report 2007

Comprehensive information on our governance arrangements is included in this report, which also explains how we manage our relationships with regulators and shareholders. Compensation of senior management and the Board of Directors (executive and non-executive members) is discussed here.

Financial Statements 2007

This comprises the audited financial statements of UBS for 2007, 2006 and 2005, prepared accordingare designed to the International Financial Reporting Standards (IFRS). It also includes the audited financial statements of UBS AG (the parent bank) for 2007 and 2006, prepared according to Swiss banking law. Additional disclosure required by Swiss and US regulations is included where appropriate.

In addition to the four reports,Review 2007is distributed broadly to UBS shareholders and contains key information on our strategy and financials. This booklet summarizes the information in the four-part annual report.

If you only ordered specific reports in prior years, please note that the former Compensation Report is now calledCorporate Governance and Compensation Report 2007,and the former Annual Review is now calledReview 2007. Our contact details are listed in the final pages of this report – please be in contact with us so that we can arrange delivery of the reports you require.

This report contains information that is current as of the date of this report. We undertake no obligation to update this information or notify you if it should change or if new information should become available.

Our aim is to provide publications that are useful and informative. In order to ensure that UBS remains among the leading providers of corporate disclosure, we would like to hear your opinions on how we can improve the content and presentation of our products (see contact details on the final pages of this report).

UBS



Information according to Art. 663bbisand Art. 663c paragraph three of the Swiss Code of Obligations

Disclosures provided in line with the requirements of Art. 663bbis and Art. 663c paragraph three of the Swiss Code of Obligations’ “Supplementary disclosures for companies whose shares are listed on a stock exchange: Compensations and Participations” are also included in the audited reportFinancial Statements 2007.This information is marked by a bar on the left-hand side throughout this report.

2

Corporate governance

–Aims to lead UBS towards sustainable growth, protect the interests of its shareholders and create value for them and all stakeholders of the firm
–Checks and balances through a strict dual board structure
–Shareholders’ rights encourage their participation in decision-making processes

Key features

Strict dual board structure

TheBoard of Directors (BoD)is the most senior body in the firm with ultimate responsibility for its mid- and long-term strategic direction and supervision of executive management. The majority of its members are independent

TheGroup Executive Board (GEB)has business management responsibility for UBS. Its members account to the BoD for the firm’s results

Separation of powersis achieved by limiting membership to one board and assigning the functions of Chairman of the BoD and Group Chief Executive Officer to different people

Shareholder participation rights

–No restrictions on share ownership and voting rights
–Shareholders (individually or jointly) representing shares with an aggregate par value of CHF 62,500 can submit proposals for the agendas of shareholders’ meetings

Recent developments

Extraordinary general meeting on 27 February 2008 approved capital strengthening program

–Creation of conditional capital to issue CHF 13 billion of mandatory convertible notes to financial investors

–Creation of authorized capital of maximum CHF 10.4 million to replace cash dividend with stock dividend

Annual general meeting on 23 April 2008 to vote on reduced terms of office for members of the Board of Directors

–Proposed reduction of the terms of office from three years (current terms) to one year

–As a result, by 2010 at the latest, the entire BoD will have to be confirmed on a yearly basis



3

Corporate Governance
Introduction and principles

Introduction and principles

Corporate governance – the way that the leadership and management of a firm are organized and how they operate in practice – ultimately aims to lead UBS towards sustainable growth and protect the interests of its shareholders, andas well as to create value for both themshareholders and all stakeholders. Good corporate governance seeksUBS uses the term “corporate governance” to balance entrepreneurship, controlrefer to the organizational structure and transparency, while supporting the firm’s success by ensuring efficient decision-making processes.operational practices of its leadership and management.

UBS is subject to, and fully complies with, the SWXfollowing regulatory requirements regarding corporate governance: the SIX Swiss Exchange’s (SWX) regulatory requirement(SIX) “Directive on Information Relating to Corporate Governance” (revised directive as of 1 January 2007), as well as; the amended Swiss Code of Obligations(CO) with the newly introduced articles Art. 663bbis and Art. 663c paragraph three(paragraph three) regarding transparency inof compensation paid to members of the Board of Directors (BoD) and senior management. In addition, UBS fully complies withmanagement; and the standards established in the “SwissSwiss Code of Best Practice for Corporate Governance”Governance, including the recently adopted appendix on executive compensation.

In addition, as UBS also meetsis listed on the New York Stock Exchange (NYSE) as a foreign listed company, the firm must meet all corporate governance standards applicable to foreign listed foreign companiescompanies. UBS meets these standards, and additionally complies with the overwhelming majority of NYSE standards for US domestic issuers. The few exceptions are mainly due to different legal systems in Switzerland and the US and relate to the role, responsibilities and authorities of the BoD and the annual general meeting (AGM) (see pages 47–48 for more information). UBS complies with the applicable requirements of the US Sarbanes-Oxley Act of 2002, including the certification
This section of UBS’s annual report on Form 20-Fprovides the information required by the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO).

ThisCorporate Governance and Compensation Report 2007contains the following regulatory information required by:requirements:
– SWXThe SIX “Directive on Information Relating to Corporate Governance” (revised directive as of 1 January 2007), with regard toto: Group structure and shareholders,shareholders; capital structure, Board of Directors,structure; BoD; Group Executive Board (GEB); compensation, shareholdings and loans (revised),loans; shareholders’ participation rights,rights; change of

control and defense measures,measures; auditors and information policy;policy.
– Art.Articles 663bbis and Art. 663c paragraph three(paragraph three) of the CO “Supplementary disclosures for companies whose shares are listed on a stock exchange: Compensationscompensations and Participations”participations”, with regard to share and option ownership and loans; andloans.
– The NYSE “Corporate Governance Listing Standards” with regard to foreign listed companies, independence of directors, boardBoD committees and differences from the NYSE standards.standards applicable to US domestic issuers.
In addition to the regulatory requirements mentioned above, this section of the report also summarizes the regulatory and supervisory environment of UBS in its principal locations, and provides a list of all members of UBS’s senior leadership, including the Group Managing Board (GMB) and the Vice Chairmenvice chairmen of the business groups who, together withdivisions. Updates have been made to the Group Executive Board (GEB), formsections discussing the senior leadershipBoD, GEB and compensation, shareholdings and loans. These updates follow an overhaul of the firm.
The section on“Organization Regulations of UBS AG” (“organization regulations”), which was conducted by the BoD following the annual general meeting, and the findings of the review of the executive compensation has been re-written this year to reflect and fully comply with new reporting requirements under the CO.governance structure conducted in late 2008.


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Corporate Governance
Group structure and shareholders

Group structure and shareholders

Under Swiss company law, UBS is organized as a limited company, a corporation that has issued shares of common stock to investors. UBS AG is the parent company of the UBS Group.

UBS Group legal entity structure

The legal entity structure of UBS is designed to support its businesses within an efficient legal, tax, regulatory and funding framework. Neither the business groups of UBS nor its Corporate Center are separate legal entities: they operate out of the parent bank, UBS AG, through its branches worldwide. This structure is designed to capitalize on the increased business opportunities and cost efficiencies offered by the use of a single legal platform and to enable the flexible and efficient use of capital.

Where it is neither possible nor efficient to operate out of the parent bank – usually due to local legal, tax or regulatory rules or as a result of additional legal entities joining the UBS Group through acquisition – businesses operate through local subsidiaries.

Operational group structure

The three business groups – Global Wealth Management & Business Banking, Global Asset Management and the Investment Bank – together with Corporate Center form the operational structure of the Group’s financial businesses. Performance
UBS Group legal entity structure
Under Swiss company law, UBS is organized as a limited company, a corporation that has issued shares of common stock to investors. UBS AG is the parent company of the UBS Group (Group).
     The legal entity structure of UBS is designed to support its businesses within an efficient legal, tax, regulatory and funding framework. Neither the business divisions of UBS nor its Corporate Center are separate legal entities: they primarily operate out of the parent bank, UBS AG, through its branches worldwide. This structure is designed to capitalize on the increased business opportunities and cost efficiencies offered by the use of a single legal platform and to enable the flexible and efficient use of capital. Where it is neither possible nor efficient to operate out of the parent bank, businesses operate through local subsidiaries. Instances of this are usually due to local legal, tax or regulatory rules or a result of additional legal entities joining the Group through acquisition.
Operational Group structure
On 31 December 2008, the operational structure of the Group comprised the Corporate Center and the three business divisions: Global Wealth Management & Business Banking, Global Asset Management and the Investment Bank. In this report, performance is reported according to this structure. However, on 10 February 2009, UBS announced that Global Wealth Management & Business Banking had been divided into two new business divisions: Wealth Management & Swiss Bank and Wealth Management Americas. Refer to the “Strategy and structure” section of this report for more information on the restructuring of the business divisions.
Listed and non-listed companies belonging to the
Group (consolidated entities)
The Group includes a number of subsidiaries, none of which, however, are listed companies.
 èRefer to “Note 34 Significant subsidiaries and associates” in the financial statements of this report for details of significant operating subsidiary companies of the Group
Significant shareholders
(AUDITED)Chase Nominees Ltd., London, acting in its capacity as a nominee for other investors, was registered with 7.19% of

 è
(AUDITED)all shares issued on 31 December 2008, compared with 7.99% at year-end 2007 and 8.81% at year-end 2006.
     DTC (Cede & Co.), New York, The “UBS’s businesses” sectionDepository Trust Company, a US securities clearing organization, was registered as a shareholder for a large number of beneficial owners with 9.89% of all shares issued on 31 December 2008 (14.15% on 31 December 2007).
     According to UBS’s “Regulation on the Registration of Shares”, voting rights of nominees are restricted to 5%, but clearing and settlement organizations are exempt from this restriction. On 31 December 2008, no other shareholder had reported holding 3% or more of all voting rights. Ownership of UBS shares is widely spread. The tables on the next page provide information about the distribution of UBS shareholders by category and geography. This information relates only to registered shareholders and cannot be assumed to be representative of the entire UBS investor base. Only shareholders registered inStrategy, Performance and Responsibility 2007details each business group and its strategy, structure, organization, products and services the share register as “shareholders with voting rights” are entitled to exercise voting rights.

Listed and non-listed companies belonging to the Group (consolidated entities)

The UBS Group includes a great number of subsidiaries, none of which, however, are listed companies. For details of significant operating subsidiary companies of the Group, see Note 35 inFinancial Statements 2007.

Significant shareholders

Chase Nominees Ltd., London, acting in its capacity as a nominee for other investors, was registered with 7.99% of all shares issued as of 31 December 2007, compared to 8.81% at year-end 2006 and 8.55% at year-end 2005. DTC (Cede & Co.), New York, The Depository Trust Company, a US securities clearing organization, was registered as a shareholder for a great number of beneficial owners with 14.15% of all shares

issued as of 31 December 2007 (13.21% as of 31 December 2006). According to “UBS’s Regulation on the Registration of Shares”, voting rights of nominees are restricted to 5%, while clearing and settlement organizations are exempt from this restriction. As of 31 December 2007, no other shareholders had reported holding 3% or more of all voting rights. Ownership of UBS shares is widely spread. The tables on the next page provide information about the distribution of shareholders by category and geography. This information relates only to registered shareholders and cannot be assumed to be representative of the entire UBS investor base. Only shareholders registered in the share register as shareholders with voting rights are entitled to exercise voting rights.

Under the Swiss Stock Exchange Act, anyone holding shares in a company listed in Switzerland, or derivative rights related to shares of such a company, has to notify the company and the stock exchange if the holding attains, falls below or exceeds one of the following thresholds: 3, 5, 10, 15, 20, 25, 331/3, 50, or 662/3% of the voting rights, whether they are exercisable or not. The detailed disclosure requirements and the methodology for calculating the thresholds are defined in the “Ordinance of the Swiss Financial Market Supervisory Authority on Stock Exchanges and Securities Trading” (disclosure of shareholdings). In particular, the ordinance prohibits the netting of so-called acquisition positions (i.e. in particular shares, conversion rights and acquisition rights or obligations) with disposal positions (i.e. rights or obligations to sell). It further requires that each such position be calculated separately and reported as soon as it reaches a threshold.     In addition to the notification requirements according to Swiss law, as of 16 May 2008, shareholders of UBS also have notification obligations with regard to major shareholdings in shares of UBS under the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG). These obligations arise due to the fact that UBS has chosen Germany as its home member state within the meaning of the European Union’s “Prospectus Directive”. The obligations came into force with the first filing of the listing application for the new shares created as a result of the stock dividend by UBS on SWX Europe, a regulated market in the EU. According to the WpHG, anyone whose shareholding in UBS attains, exceeds or falls below the thresholds of 3, 5, 10, 15, 20, 25, 30, 50 or 75% of the voting rights has to


195

Corporate governance and
compensation Corporate governance

notify, without undue delay, such change simultaneously to UBS and the German Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht; BaFin). The detailed disclosure requirements and the methodology for calculating the thresholds are defined in the “Ordinanceparagraphs 21 et seq. of the Swiss Federal Banking Commission on the Stock Exchanges and Securities Trading” (disclosure of shareholdings). In particular, the ordinance prohibits the netting of so-called acquisition positions (i.e. in particular shares, conversion rights and acquisition rights or obligations) with disposal positions (i.e. rights or obligations to sell). It further requires that each such position be calculated separately and reported simultaneously as soon as it reaches a threshold. Since 13 September 2002, UBS’s holdings of its own shares have been above the 3% threshold requiring disclosure under the Swiss stock exchange laws. UBS’s position in its own shares remained between 3% and 10% throughout 2007.

WpHG.
At year-end 2007,2008, UBS held a stake of 7.79% (161,475,748) of acquisition positions (proportion of voting rights) consisting of 160,841,275 UBS registered shares and acorresponding to less than 3% of the total share capital of 634,473 acquisition rights and granted disposal rights on UBS registered shares.AG. At the same time, UBS held 10.32% (213,775,377) ofhad disposal positions (proportionrelating to 891,230,556 voting rights of UBS AG and these corresponded to 30.39% of the total voting rights of UBS AG. These con-

sisted mainly of 8.91% of voting rights) relatingrights attached to employee options, 9.22% of voting rights attached to the mandatory convertible notes issued by UBS registered shares.

in March 2008 and 11.23% of voting rights attached to the mandatory convertible notes issued by UBS in December 2008.

Cross shareholdings

UBS has no cross shareholdings in excess of a reciprocal 5% of capital or voting rights with any other company.



5

Corporate Governance
Group structure and shareholders

                         
Distribution of UBS sharesDistribution of UBS shares Distribution of UBS shares 
As of 31.12.07 Shareholders registered Shares registered 
On 31 December 2008 Shareholders registered Shares registered 
Number of shares registered Number % Number % of shares issued  Number % Number % of shares issued 
1–100 33,819 16.2 1,982,968 0.1  39,458 11.6 2,279,778 0.1 
101–1,000 124,749 59.6 52,269,332 2.5  200,945 59.1 89,228,454 3.0 
1,001–10,000 46,603 22.3 123,861,673 6.0  92,559 27.2 242,151,755 8.2 
10,001–100,000 3,577 1.7 87,704,010 4.2  6,280 1.9 145,370,413 5.0 
100,001–1,000,000 384 0.2 112,916,436 5.5  500 0.2 148,881,546 5.1 
1,000,001–5,000,000 70 0.0 148,229,789 7.2  99 0.0 200,105,606 6.8 
5,000,001–20,735,473 (1%) 18 0.0 147,702,880 7.1 
5,000,001–29,325,805 (1%) 31 0.0 324,972,121 11.1 
1–2% 6 0.0 194,124,566 9.4  1 0.0 38,551,136 1.3 
2–3% 0 0.0 0 0.0  3 0.0 202,408,105 6.9 
3–4% 0 0.0 0 0.0  0 0.0 0 0.0 
4–5% 0 0.0 0 0.0  0 0.0 0 0.0 
Over 5%  21 0.0 459,135,393 22.0   21 0.0 500,789,047 17.1 
Total registered 209,228 100.0 1,327,927,047 64.0  339,878 100.0 1,894,737,961 64.6 
Unregistered2
 745,620,297 36.0  1,037,842,588 35.4 
Total shares issued
  2,073,547,3443 100.0   2,932,580,5493 100.0 
1 As ofOn 31 December 2007,2008, DTC (Cede & Co.), New York, the US securities clearing organization, was registered with 14.15 %9.89% of all shares issued. Chase Nominees Ltd., London, was entered as a trustee / trustee/nominee holding 7.99 %7.19% of all shares issued.  2 Shares not entered in the share register as ofon 31 December 2007.2008.  3 Registered211,917,438 registered shares totaling 199,544,283 do not carry voting rights.
                         
Shareholders: category and geographical location 
Shareholders: type and geographical distributionShareholders: type and geographical distribution 
 Shareholders Shares 
As of 31.12.07 Number % Number % 
 Shareholders Shares 
On 31 December 2008 Number % Number % 
Individual shareholders 202,019 96.6 244,744,640 11.8  330,226 97.1 460,037,591 15.7 
Legal entities 6,713 3.2 247,068,373 11.9  9,063 2.7 433,384,170 14.8 
Nominees, fiduciaries 496 0.2 836,114,034 40.3  589 0.2 1,001,316,200 34.1 
Unregistered 745,620,297 36.0  1,037,842,588 35.4 
Total
 209,228 100.0 2,073,547,344 100.0  339,878 100.0 2,932,580,549 100.0 
 
Switzerland 186,725 89.2 460,203,410 22.2  310,284 91.3 802,619,576 27.4 
Europe 15,205 7.3 425,716,963 20.5  20,060 5.9 625,650,671 21.3 
North America 2,390 1.1 398,561,800 19.2  2,505 0.7 400,179,323 13.6 
Other countries 4,908 2.4 43,444,874 2.1  7,029 2.1 66,288,391 2.3 
Unregistered 745,620,297 36.0  1,037,842,588 35.4 
Total
 209,228 100.0 2,073,547,344 100.0  339,878 100.0 2,932,580,549 100.0 

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Corporate Governance
Capital structure

Corporategovernanceandcompensation

Capital structure

UBS is committed to capital management that is driven by shareholder value considerations. At the same time, UBS is dedicated to maintaining its strong capital position.

Capital

Under Swiss company law, shareholders have tomust approve in a shareholders’ meeting any increase in the total number of issued shares, which may bearise from an ordinary share capital increase or the creation of conditional or authorized capital. At year-end 2007, the2008, 2,932,580,549 shares were issued with a par value of CHF 0.10 each, leading to ordinary share capital wasof CHF 207,354,734.40293,258,054.90 (including shares issued for the capital increase out of authorized and conditional capital during 2007).

At the annual general meeting (AGM) on 18 April 2007, shareholders gave the Board of Directors (BoD) a mandate to continue a repurchase program during 2007-2010 for a maximum of 10% of the share capital (210,527,328 shares) over the next three-year period. As part of the measures announced in December 2007 to strengthen UBS’s capital base, the BoD decided to rededicate the 36.4 million treasury shares held for cancellation.
2008).

Conditional share capital

At year-end 2007, total2008, conditional share capital amountedof CHF 15,009,471.10 was available to CHF 15,013,863.40,settle employee option exercises, corresponding to a maximum of 150,138,634150,094,711 shares.
Conditional capital was created in 2000 in connection with the acquisition of PaineWebber Group Inc. (PaineWebber) to cover option rights previously granted by PaineWebber to its employees. Additionally, at the annual general meeting (AGM) held in 2006, AGM, shareholders approved conditional capital in the amount of 150 million UBS shares to be used for employee option grants limited to a period of three years. Options under both plans are exercisable at any time between their vesting and the expiry date. Shareholders’ pre-emptive rights are excluded. In 2007,2008, options with respect to 1,288,35439,270 shares were exercised under the PaineWebber option plans, and 4,7184,653 options expired without being exercised. UnderNo options were settled with conditional capital shares in 2008 under the UBS employee stock option plans 5,704 options were exercised.

plans.
At the extraordinary general meeting (EGM) held on 27 February 2008, UBS shareholders also approved the creation of conditional capital atthrough the extraordinary general meeting (EGM) on 27 February 2008, allowingissuance of 277,750,000 shares to satisfy the Government of Singapore Investment Corporation Pte. Ltd. (GIC) and an undisclosed financial investorsettlement in the Middle East to subscribe to an issueshares of CHF 13 billion ofin mandatory convertible notes (MCNs). with maturity 5 March 2010 placed with two financial investors.
At the 27 November 2008 EGM, UBS shareholders approved the creation of conditional capital through the issuance of 365,000,000 shares to satisfy the settlement in

shares of CHF 6 billion in MCNs with maturity 9 June 2011 issued to the Swiss Confederation.

Authorized share capital

At the EGM on 27 February 2008 EGM, UBS shareholders approved the creation of authorized capital for a maximum amount of CHF 10,370,000 or 103, 700,000103,700,000 new shares (approximately 5% of the issued share capital at year-end 2007). The issue priceA total of 98,698,754 new shares will be CHF 0.10.were issued on the basis of entitlements alloted. The authorized capital created will bewas used to replace the cash dividend for the 2007 financial year 2007 with a stock dividend. UBS shareholders will receive one tradable entitlement for each UBS share held on 25 Aprildividend paid in 2008. Entitlements will be tradable on SWX Europe (formerly known as virt-x) from 28 April to 9 May 2008. The maximum exchange ratio will be at least 20:1, i. e. no fewer than 20 entitlements will enable a holder to receive one new share for free. The exchange ratio will be determined by the BoD and communicated to shareholders on or by the day of the AGM on 23 April 2008.

Changes of shareholders’ equity

According to International Financial Reporting Standards (IFRS), equity attributable to UBS shareholders amounted to CHF 35.532.8 billion on 31 December 2007.2008.
  èChangesRefer to the “Statement of changes in shareholdersequity” in the financial statements of this report for more information on changes in shareholders’ equity over the last three years are detailed inFinancial Statements 2007

Shares, participation and bonus certificates,
capital securities

UBS shares are issued in registered form, traded and settled as so-called global registered shares. Each registered share



             
Ordinary share capital 
  Share capital  Number  Par value 
  in CHF  of shares  in CHF 
 
As of 31 December 2006
  210,527,329   2,105,273,286   0.10 
 
Share repurchase programs 2006 / 2007:            
 
cancellation of shares upon annual general meeting decision of 18 April 2007  (3,302,000)  (33,020,000)  0.10 
 
options excercised from conditional capital  129,405   1,294,058   0.10 
 
As of 31 December 2007
  207,354,734   2,073,547,344   0.10 
 

7

Corporate Governance
Capital structure

has a par value of CHF 0.10 and carries one vote. Voting rights may, however, only be exercised if the holder expressly declares havingthat he or she acquired these shares in his or her own name and for his or her own account. Global registered shares provide direct and equal ownership for all shareholders, irrespective of the country and stock exchange in which they are traded at.
èFor details, see the “Shareholders’ participation rights” section in this report

traded. Refer to the “Shareholders’ participation rights” section of this report for more information.

On 31 December 2007, 1,128,382,7642008, 1,682,820,523 shares carried voting rights, 199,544,283211,917,438 shares were entered in the share register without voting rights, and 745,620,2971,037,842,588 shares were not registered. All 2,073,547,3442,932,580,549 shares were fully



             
Ordinary share capital 
 
  Share capital  Number  Par value 
  in CHF  of shares  in CHF 
 
On 31 December 2007
  207,354,734   2,073,547,344   0.10 
 
Issue of shares for stock dividend  9,869,875   98,698,754   0.10 
 
Issue of shares for capital increase (rights offering)  76,029,518   760,295,181   0.10 
 
Issue of shares out of employee options exercised from conditional capital  3,927   39,270   0.10 
 
On 31 December 2008
  293,258,055   2,932,580,549   0.10 
 

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Corporate governance and compensation
Corporate governance

paid up and rankedeligible for dividends. There are no preferential rights for individual shareholders.

UBS hasdid not issuedissue any participation certificates or bonus certificates.certificates in 2008.
In 2007,2008, UBS Capital Securities (Jersey) Ltd. raised EUR 600 million1 billion hybrid Tiertier 1 capital in the form of preferred shares.securities. Additionally, UBS tapped the capital markets twice in 2007 and raised GBP 250 million with a coupon of 6.375% maturing in 2024 (and callable by the issuer in 2019) andincreased an existing CHF 350 million with a 4.125% couponsubordinated bond issue maturing in 2017.2017 by CHF 50 million. At year-end 2007,2008, UBS had outstanding CHF 6,3877,393 million in preferred shares outstandingsecurities, which count as Tierhybrid tier 1 capital under regulatory rules. Outstanding Tiertier 2 capital securities accounted for CHF 13,77012,290 million in eligibletotal capital as ofon 31 December 2007.2008.

Limitation on transferability and nominee registration

UBS does not apply any restrictions or limitations on the transferability of its shares. Shares registered in the share register with voting rights may be voted without any restrictions, according to the provisions of the “Articles of Association of UBS AG” (which require an express declaration of beneficial ownership) may be voted without any limit in scope..

UBS has issued special provisions for the registration of fiduciaries /and nominees. Fiduciaries /and nominees are entered in the share register with voting rights up to a total of 5% of all shares issued, if they agree to disclose, upon request from the firm, beneficial owners holding 0.3% or more of all UBS shares. An exception to the 5% rule exists for securities clearing organizations such as The DepositaryDepository Trust Company in New York.

Convertible bonds and options

On 31 December 2007,2008, there were 236 million employee options outstanding, amounted to 185,993,330, of which a total of 90,453,625124 million were exercisable. UBS satisfies share delivery obligations under its option-based participation plans either by purchasing UBS shares in the market on grant date or shortly thereafter, or through the issuance of new shares out of conditional capital. At exercise, shares held in treasury or newly issued shares are delivered to the employee against receipt of the strike price. As ofOn 31 December 2007,2008, UBS was holdingheld approximately 14148.9 million shares in treasury and an additional 150 million unissued shares in conditional share capital, which arewere available and canto be used for future employee option exercises. The shares available cover all vested (i.e. exercisable) employee options.

The Investment Bank, acting as liquidity provider to the equity futures market and as a market-maker in UBS shares and derivatives, issuedissues derivatives linked to UBS stock. Most of these instruments are classified as cash-settled derivatives and are held for trading purposes only. To hedge the economic exposure, a limited number of UBS shares are held by the Investment Bank.
On 5 March 2008, UBS issued CHF 13 billion of MCNs followingas approved at the EGM on 27 February 2008.2008 EGM. The notes were placed with two financial investors (GIC(Government of Singapore Investment Corporation and one other investor). The notes and will pay a coupon of 9% until conversion into UBS shares, which must take place on or before a date two years after issuance.
The MCNs contain market-standard provisions allowing for early conversion at the option of either UBS or the MCN holders. Early conversion is only possible as from the date six months after issuance of the MCNs (expected earliest conversion date is 5 September 2008).MCNs. The conversion of the MCNs which will occur only after the stock dividend (see the paragraph titled “Authorized share capital” in this section), is expected to increase the number of shares in issueissued by between 9.9% and 11.6%, depending on270,438,942, reflecting adjustments due to the development ofordinary capital increase approved by UBS shareholders at the UBS share price and in the absence of dilutitive events. The proceeds raised from the sale of the MCNs will support UBS’s business and its long-term profit capacity.23 April 2008 AGM, subject to no further dilutive events occurring until conversion. The terms of the MCNs contain standard market provisions for the adjustment of the conversion price if any dilutive events occur between issuance and maturity, such as capital increases at a discount, dividends in cash or in specie in excess of CHF 2.202.05 per share and per financial year, and similar events.
On 9 December 2008, in order to enable UBS to retain a strong tier 1 capital ratio after giving effect to the transaction with the Swiss National Bank, UBS issued CHF 6 billion of MCNs, following the 27 November 2008 EGM. The notes were placed with the Swiss Confederation and have a maturity date 30 months after the issue date (i.e. 9 June 2011). Until maturity of the MCNs, the holders will receive an annual coupon of 12.5% of their nominal value. The conversion of the MCNs is expected to increase the number of shares issued by 9.3%, depending on the development of the UBS share price and the absence of dilutive events (such as any dividend payments). The terms of the MCNs contain standard market provisions allowing for early conversion at the option of either UBS or MCN holders and for the adjustment of the conversion price if any dilutive events occur between issuance and maturity.
  èDetailsRefer to the discussion on shares and capital instruments in the “Treasury management” section of this report for more information on the MCN can be found in the section “Shares and capital instruments” inRisk, Treasury and Capital Management 2007MCNs



8198

Corporategovernanceandcompensation

Corporate Governance
Board of Directors

Board of Directors

The Board of Directors (BoD) is the most senior body with ultimate responsibilityultimately responsible for the firm’s strategy and management of the company and for the supervision of its executive management. The shareholdersIt also approves the financial statements for issue. Shareholders elect each member of the Board of Directors,BoD, which in turn appoints its Chairman, at least one Vice Chairmanvice chairman and the members of its various committees.

Members of the Board of Directors

The text in the boxes belowThis section provides information on the composition of the Board of Directors (BoD) as ofBoD on 31 December 2007.2008. It shows each member’s functions in UBS, nationality, year of initial appointment to the BoD and current term of office, professional history and education, date of birth and other activities and functions, such as mandates on boards of important corporations, organizations and foundations, permanent functions for important interest groups and official functions and political mandates.

As ofAt the annual general meeting (AGM) held on 1823 April 2007, Stephan Haeringer, Helmut Panke2008, Peter R. Voser and Peter SpuhlerLawrence A. Weinbach were re-elected as their term of office expired. Sir Peter Davis, who had reached the retirement age limit,Marcel Ospel did not stand for re-election. Sergio Marchionne was newly elected. Furthermore,Peter Kurer and David Sidwell were

elected to their first term on the BoD, and Peter Kurer replaced Marcel Ospel as partfull-time Chairman of the changes in management announced inBoD. Stephan Haeringer, Rolf Meyer, Peter Spuhler and Lawrence A. Weinbach tendered their resignations effective 2 October 2007, Marco Suter stepped down from2008. At the extraordinary general meeting (EGM) held on 2 October 2008, Sally Bott, Rainer-Marc Frey, Bruno Gehrig and William G. Parrett were elected to the BoD to take upfor the positionfirst time.

On 31 December 2008, with the exception of Group Chief Financial Officer (CFO) and became a memberits executive Chairman, Peter Kurer, all members of the Group Executive Board (GEB).BoD were considered independent by the BoD.
As announced on 4 March 2009, Peter Kurer has decided not to stand for re-election at the AGM on 15 April 2009. The UBS BoD is nominating Kaspar Villiger as a candidate for the role of 31 December 2007, the membership consisted of 11 directors, of which the majority (nine members) were non-executive and independent.Chairman.



Marcel OspelPeter Kurer
   
 
Address UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
 
FunctionFunction(s) in UBS Chairman
NationalitySwiss 
Year of initial appointment2001 
Current term of office runs until2008 (proposed for
re-election at the
2008 AGM)

Professional history, education and date of birth
Marcel Ospel has been Chairman of the Board of Directors (BoD) of UBS AG since 2001. Prior to this, he served as Group Chief Executive Officer (Group CEO) of UBS. He was the President and Group CEO of Swiss Bank Corporation (SBC) from 1996 to 1998. He was appointed CEO of SBC Warburg in 1995, having been a member of the Executive Board of SBC since 1990. From 1987 to 1990, he was in charge of Securities Trading and Sales at SBC. From 1984 to 1987, Mr Ospel was a Managing Director with Merrill Lynch Capital Markets, and from 1980 to 1984, he worked at SBC International London and New York in the Capital Markets division. He began his career at SBC in the Central Planning and Marketing Division in 1977. Mr Ospel graduated from the School of Economics and Business Administration (SEBA) in Basel and holds an “Honorary Doctor of Laws Degree” of the University of Rochester. He was born on 8 February 1950.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations:
Marcel Ospel is a member of the Monetary Authority of Singapore’s International Advisory Panel. He is a trustee of the Foundation Board of the Patronate Committee for the Basel Museums of Art and of the Committee for the Museum of Antiques, Basel, and is the Chairman of the “Optimus Foundation”, a charitable foundation administered by UBS.
Permanent functions for important interest groups:
Marcel Ospel is the treasurer of “Economiesuisse”, the Swiss business federation, Zurich, and is a member of the European Financial Services Round Table, Brussels.



Stephan Haeringer


AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Functions in UBSExecutive Vice Chairman /Chairman of the Corporate Responsibility CommitteeBoard of Directors (BoD) / chair of the corporate responsibility committee / chair of the strategy committee
 
Nationality Swiss
 
Year of initial appointment 20042008 
Current term of office runs until2009 

Professional history, education and date of birth
Peter Kurer was elected to the BoD at the annual general meeting (AGM) held in 2008 and thereafter appointed Chairman of the BoD. He chairs the corporate responsibility committee and the strategy committee. Mr. Kurer had served as Group General Counsel of UBS since 2001, when he joined the firm. He also served as a member of UBS’s Group Executive Board (GEB) from 2002 until his election to the BoD in April 2008. Between 1991 and 2001, Mr. Kurer was a partner at the law firm Homburger AG in Zurich. Between 1980 and 1990, he was with the Zurich office of Baker & McKenzie law firm, first as associate and later as partner. He was a law clerk at the District Court of Zurich from 1977 to 1979. Mr. Kurer graduated as doctor iuris from the University of Zurich and was admitted as attorney-at-law at the Zurich Bar. He holds an LL.M. from the University of Chicago. He was born on 28 June 1949.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Peter Kurer is a member of the board of Avenir Suisse as well as a member of the visiting committee of the University of Chicago’s Law School. He is also a member of the board of trustees of a foundation which acts as an advisory board to the University of St. Gallen’s program for law and economics, and a member of the committee of continuing education, Executive School of Management, Technology and Law, University of St. Gallen.



Sergio Marchionne
AddressFiat S.p.A.
Via Nizza 250
I-10126 Turin
Function(s) in UBSIndependent vice chairman and senior independent director / member of the governance and nominating committee/member of the strategy committee
NationalityCanadian and Italian
Year of initial appointment2007 
 
Current term of office runs until 2010 
 

Professional history, education and date of birth

Before being electedSergio Marchionne serves as Chief Executive Officer (CEO) of Fiat S.p.A., Turin, and Fiat Group Automobiles. Mr. Marchionne began his professional career in 1983 as a chartered accountant and tax specialist for Deloitte & Touche in Canada. Two years later, he became Group controller and then director of corporate development at Lawson Mardon Group of Toronto. In 1989 and 1990, he served as executive vice president of Glenex Industries. In the following two years Mr. Marchionne acted as vice president of finance and Chief Financial Officer (CFO) at Acklands Ltd. He returned to Lawson Mardon Group in 1992 as vice president of legal and corporate development and CFO. The company was acquired by Alusuisse Lonza in 1994. After the BoDacquisition, having become CEO in 2004, Stephan Haeringer was Deputy President1996, he held various positions of increasing responsibility until 2000. Upon completion of the merger of Alusuisse with Alcan, he acted as CEO and Chairman of the spin-off Lonza Group Executive Board (GEB), a position he held betweenLtd. until 2002. In 2002, and 2004. Between 2000 and 2002, heMr. Marchionne was appointed CEO of UBS Switzerland and the Private and Corporate Clients business. In 1998, following the UBS-SBC merger, he was appointed the Division HeadSociété Générale de Surveillance (SGS) Group of Private and Corporate Clients.Geneva. He originally joined the former Union Bank of Switzerland in 1967, assuminghas been a broad variety of responsibilities within the firm – among them CEO Region Switzerland, Division Head Private Banking and Institutional Asset Management and Headmember of the Financial Division. Between 1967supervisory board of Fiat S.p.A. since 2003 and 1988, Mr Haeringer was assigned various management roleshas served as CEO of the company since June 2004. Mr. Marchionne studied philosophy at the University of Toronto (Canada), business at the University of Windsor (Canada) and law at Osgoode Hall Law School in the areas of Investment Counseling, Specialized Investments, Portfolio Management, Securities AdministrationToronto (Canada) and Collateral Loans.is a lawyer and chartered accountant. He received professional training at Williams de Broe Hill Chaplin & Cie, London, and at Goldman Sachs & Co. and Brown Brothers Harriman in New York. Mr Haeringer was born on 6 December 1946.

17 June 1952.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations:foundations or interest groups:

Stephan HaeringerSergio Marchionne is a member of the Board of the Helmut Horten Foundation, Croglio (Ticino, Switzerland), Chairman of the Foundation Board of the UBS Pension Fund, a member of the Board Committee of the Zurich Chamber of Commerce, a member of the German-Swiss Chamber of Commerce, a member of the “Institut International D’Etudes Bancaires”SGS and a member of the BoardBoD of TrusteesPhilip Morris International Inc., New York. He is also a member of the Goethe Business School, Frankfurt.Acea (European Automobile Manufacturers Association) and Chairman of CNH Case New Holland Global N.V.



9199

Corporate Governancegovernance and compensation
Board of DirectorsCorporate governance

Ernesto Bertarelli
   
 
Address Bemido SA 2, chemin des Mines
Avenue Giuseppe-
Motta 31–33
PO Box 145
CH-1211 Geneva 20
 
FunctionFunction(s) in UBS Member of the Nominating Committeegovernance and nominating committee / member of the human resources and compensation committee
 
Nationality Swiss
 
Year of initial appointment 2002 
 
Current term of office runs until 2009 
 

Professional history, education and date of birth

Ernesto Bertarelli was CEO of Serono International SA, Geneva, between 1996 and 2007. The company was sold to Merck KGaA, Germany, on 5 January 2007. He started his career with Serono in 1985 and held several positions in sales and marketing. Prior to his appointment as CEO, he served for five years as Deputydeputy CEO. MrMr. Bertarelli was also the vice chairman of the BoD of Serono SA, Coinsins (Switzerland) and the Chairman of SeroMer Biotech SA, Chéserex (Switzerland), until 5 January 2007. Mr. Bertarelli holds a Bachelor of Science from Babson College, Boston and aan MBA from Harvard MBA.University. He was born on 22 September 1965.



Other activities and functions

Mandates on boards of important corporations, organizations and foundations:foundations or interest groups:

Ernesto Bertarelli is Chairman of Team Alinghi SA (winner of the America’s Cup 2003 and 2007), Ecublens (Switzerland), and of Alinghi Holdings Ltd. Jersey. He is the Chairman of Kedge Capital Partners Ltd., Jersey of Team Alinghi SA, Ecublens (Switzerland), and of AlinghiKedge Capital Holdings Ltd, Jersey.(Jersey) Ltd., Switzerland. He was awarded two extraordinary national honors: the Légion d’honneur by President Chirac of France, and the Cavaliere di Gran Croce by Carlo Azeglio Ciampi, former President of the Italian Republic. He is a member of the strategic advisory board of Ecole Polytechnique Fédérale de Lausanne (EPFL) and holds various board mandates in professional organizations of the biotech and pharmaceutical industries.



Sally Bott
AddressBP p.l.c.
1 St. James's Square
GB-London SW1Y 4PD
Function(s) in UBSMember of the human resources and compensation committee / member of the corporate responsibility committee
NationalityAmerican (US)
Year of initial appointment2008 
Current term of office runs until2009 

Professional history, education and date of birth
Sally Bott serves as Group HR Director of BP plc, which she joined in early 2005, and is a member of its Group Executive Committee. Ms. Bott spent most of her career in financial services. Between 2000 and 2005, she was a Managing Director at Marsh & McLennan, a US-based global risk and insurance services business, and head of global HR for Marsh, Inc. She was at Barclays Bank from 1994 to 2000, first as BZW HR director and then Group HR director from 1997 to 2000. In 1970, she joined Citibank out of college as a research analyst in the economics department. She was credit trained and in the Finance Function. She joined HR in 1978 and worked as a HR director in most of the wholesale bank and investment banking businesses during the next 15 years. She was the Global HR Director of the wholesale bank from 1990 to 1993. Ms. Bott has a BS in economics from Manhattanville College, USA. She was born on 11 November 1949.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Sally Bott is a member of the board of the Royal College of Music in London and the Carter Burden Center for the Aged in NYC.




Rainer-Marc Frey
AddressHorizon21
Poststrasse 4
CH-8808 Pfaeffikon
Function(s) in UBSMember of the risk committee / member of the strategy committee
NationalitySwiss
Year of initial appointment2008 
Current term of office runs until2009 

Professional history, education and date of birth
Rainer-Marc Frey is the founder and Chairman of Horizon21, an investment management company which takes long-term investment views on various megatrends in the investment management industry. In 1992, he founded RMF Investment Group (RMF), one of the first hedge fund groups in Europe, and became CEO. RMF was acquired by Man Group Plc in 2002. Between 2002 and 2004, he held a number of senior roles within Man Group Plc and was the largest individual shareholder. From 1989 to 1992, prior to founding RMF, Mr. Frey served as a director at Salomon Brothers Inc. in Zurich, Frankfurt and London, where he was involved mainly with equity derivatives. Between 1987 and 1989, he worked for Merrill Lynch Inc. covering equity, fixed income and swaps markets. He holds a degree in economics from the University of St. Gallen. Mr. Frey was born on 10 January 1963.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Rainer-Marc Frey is a member of the BoD of DKSH Group, Zurich, and a member of the advisory board of Invision Private Equity AG, Zug. He is a member of the BoD of the Frey Charitable Foundation, Freienbach.



Bruno Gehrig
AddressSwiss Life
General-Guisan-Quai 40
Postfach
CH-8022 Zurich
Function(s) in UBSMember of the audit committee
NationalitySwiss
Year of initial appointment2008 
Current term of office runs until2009 

Professional history, education and date of birth
Bruno Gehrig has been Chairman of Swiss Life Holding since 2003 and will resign on 7 May 2009 from this position. Between 1996 and 2003, he served at the Swiss National Bank, starting as a member of the governing board and becoming vice chairman in 2000. From 1992 to 1996, he was a professor of banking and finance at the University of St. Gallen and concurrently served as a member of the Swiss Federal Banking Commission (FINMA since 1 January 2009). Between 1989 and 1991, he held the position of CEO at Cantrade Private Banking Group. Mr. Gehrig worked for the former Union Bank of Switzerland (UBS) between 1981 and 1989, where he started as chief economist before assuming responsibility for securities sales and trading. He studied economics at the University of Berne, where he also did his PhD studies. He completed postgraduate studies at the University of Rochester, New York. He was assistant professor at the University of Berne and received his Dr. h.c. from the University of Rochester, New York. Mr. Gehrig was born on 26 December 1946.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Bruno Gehrig is the vice chairman of the BoD of Roche Holding AG, Basel, and the Chairman of the Swiss Air Transport Foundation, Zug.



200

Corporategovernanceandcompensation

Gabrielle Kaufmann-Kohler
   
 
Address Lévy Kaufmann-Kohler
3-5, rue du Conseil-
Gé
Conseil-Général
CH-1205 Geneva
 
FunctionsFunction(s) in UBS MemberChair of the Nominating Committee /membergovernance and nominating committee / member of the Corporate Responsibility Committeecorporate responsibility committee
 
Nationality Swiss
 
Year of initial appointment 2006 
 
Current term of office runs until 2009 
 

Professional history, education and date of birth

Gabrielle Kaufmann-Kohler has been aarbitrator and partner with Lévy Kaufmann-Kohler since 1 January 2008, and has also been a professor of private international private law, including international arbitration, at the University of Geneva Law School since 1997. Between 1996 and 2007, she wasworked as a partnerpracticing attorney at the Schellenberg Wittmer law firm.firm, Geneva, where she was a partner. Ms. Kaufmann-Kohler was adjunct professor for private international law at the University of Geneva Law School from 1993 to 1996. From 1985 to 1995, she was a partner atwith Baker & McKenzie law firm.firm, first as associate and then as partner. She is a member of the Geneva Bar (since 1976) and of the New York State Bar (since 1981) and is known worldwide for her expertise in international arbitration. MsIn 1980, she worked for the UBS New York Branch as a legal advisor. Ms. Kaufmann-Kohler completed her legal studies at the University of BaselGeneva in 1977 and received her doctorate from the same institutionUniversity of Basel in 1979. She was born on 3 November 1952.



Other activities and functions

Mandates on boards of important corporations, organizations and foundations:foundations or interest groups:

Gabrielle Kaufmann-Kohler is a member of the board of the American Arbitration Association.






Sergio Marchionne

AddressFiat S.p.A Via Nizza 250 I-10126 Torino
Function in UBSMember of the Compensation Committee
NationalityCanadian and Italian
Year of initial appointment2007 
Current term of office runs until2010 

Professional history, education and date of birth
Sergio Marchionne serves as CEO of Fiat S.p.A., Turin, and Fiat Group Automobiles. Sergio Marchionne began his professional career in 1983 as a Chartered Accountant and Tax Specialist for Deloitte & Touche in Canada. Two years later, he became Group Controller and then Director of Corporate Development at Lawson Mardon Group of Toronto. In 1989 and 1990, he served as Executive Vice President of Glenex Industries. In the following two years Sergio Marchionne acted as Vice President of Finance and Chief Financial Officer (CFO) at Acklands Ltd. He returned to Lawson Mardon Group in 1992 as Vice President of Legal and Corporate Development and CFO. The company was acquired by Alusuisse Lonza (Algroup) in 1994. After the acquisition he held various positions of increasing responsibility until 2000, after having become CEO in 1996. After completing the merger of Alusuisse with Alcan, he acted as CEO and Chairman of the spin-off Lonza Group Ltd. In 2002, Sergio Marchionne was appointed CEO of the Société Générale de Surveillance (SGS) Group of Geneva, and in early 2006 he became Chairman of the same company. He has been a member of the BoD of Fiat S.p.A. since 2003 and served as CEO of the company from June 2004 onwards. Sergio Marchionne studied philosophy at the University of Toronto, Canada, business at the University of Windsor, Canada, and law at Osgoode Hall Law School in Toronto, Canada, and is a lawyer and chartered accountant. He was born on 17 June 1952.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations:
Sergio Marchionne is a member of the Supervisory Board of Hochtief AG.



Rolf A. Meyer

AddressHeiniweidstrasse 18
CH-8806 Bäch
Functions in UBSChairman of the Compensation Committee / member of the Audit Committee
NationalitySwiss
Year of initial appointment1998 
Current term of office runs until2009 

Professional history, education and date of birth
Rolf A. Meyer has been a member of the BoD of UBS and its predecessor, Union Bank of Switzerland, since 1992. He was Chairman and CEO of Ciba Specialty Chemicals Ltd. until November 2000. Today, he holds several board memberships. He first joined Ciba-Geigy Group in 1973 as a financial analyst and subsequently became Group Company Controller in Johannesburg, South Africa, Head of Strategic Planning and Control in Basel, Head of Finance and Information Systems in Ardsley, N.Y., and later CFO of the Group. After the merger of Ciba-Geigy and Sandoz to create Novartis, he led the spin-off of Ciba Specialty Chemicals. Mr Meyer graduated in Political Science (Ph.D.) and holds a Master of Business Administration (lic. oec. HSG). He was born on 31 October 1943.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations:
Rolf A. Meyer is a member of the Board of Directors of DKSH AG (Diethelm Keller Siber Hegner), Zurich, and is the Chairman of its Audit and Finance Committee. He is also a member of the Board of Directors of Ascom (Switzerland) Ltd., Bern.



10

Helmut Panke

   
 
Address BMW AG
Petuelring 130
D-80788 Munich
 
FunctionFunction(s) in UBS ChairmanMember of the Nominating Committeehuman resources and compensation committee / member of the risk committee
 
Nationality German
 
Year of initial appointment 2004 
 
Current term of office runs until 2010 
 

Professional history, education and date of birth

Between 2002 and 2006, Helmut Panke was Chairman of the Boardboard of Managementmanagement of BMW AG, Munich, between 2002 and September 2006.Munich. In 1982, he joined as head of Planningplanning and Controllingcontrolling in the Researchresearch and Development Division.development division. He subsequently assumed management functions in corporate planning, organization and corporate strategy. Before his appointment as Chairman, he was a member of BMW’s Boardboard of Managementmanagement from 1996. Between 1993 and 1996, he was Chairman and CEO of BMW Holding Corporation in the US. Today, he holds several board memberships. MrMr. Panke graduated from the University of Munich with a doctoral degreePhD in physics (Ph.D.) and was assigned to the University of Munich and the Swiss Institute for Nuclear Research before joining McKinsey & Co in Dusseldorf and Munich as a consultant. He was born on 31 August 1946.



Other activities and functions

Mandates on boards of important corporations, organizations and foundations:foundations or interest groups:

Helmut Panke is a member of the Board of DirectorsBoD of Microsoft Corporation, Redmond, WA (USA) and is also a member of the supervisory board of Bayer AG (Germany).
Permanent functions for important interest groups:
Helmut Panke He is a member of the BoardBoD of Directors ofthe American Chamber of Commerce in Germany and a member of the International Advisory Boardinternational advisory board for Dubai International Capital’s “Global Strategic Equities Fund”.



Peter SpuhlerWilliam G. Parrett
   
 
Address Stadler Bussnang AG
Bahnhofplatz
CH-9565 Bussnang433 Country Club Rd. W.
New Canaan,
Ct. 06840 USA
 
FunctionFunction(s) in UBS Member of the Compensation Committeeaudit committee
 
Nationality SwissAmerican (US)
 
Year of initial appointment 20042008 
 
Current term of office runs until 20102009 
 

Professional history, education and date of birth

Peter Spuhler isWilliam G. Parrett served his entire career with Deloitte Touche Tohmatsu, a global organization of member firms that operates with 160,000 people in nearly 140 countries. He was CEO from 2003 until his retirement in 2007. Between 1999 and 2003, he was a managing partner of Deloitte & Touche USA LLP and served on Deloitte’s Global Executive Committee. Mr. Parrett founded the ownerUS National Financial Services Industry Group (1995) and the Global Financial Services Industry Group (1997) of Stadler Rail AG (Switzerland),Deloitte, both of which he acquiredled as Chairman. In his 40 years of experience in 1989 when it wasprofessional services, Mr. Parrett served public, private, governmental, and state-owned clients worldwide in order to help Deloitte achieve superior financial performance and growth. Mr. Parrett has a small firm with 18 employees. Today the Stadler Rail Group has more than 2,500 staffBachelors degree in accounting from St. Francis College, New York, and is an internationally successful light railway car business. Since 1997, Peter Spuhler has taken over a number of companies and founded new units within the Stadler Rail Group, mainly in Switzerland and in Germany. Mr Spuhler joined Stadler AG in 1987 as an employee after studying economics at the University of St. Gallen.certified public accountant. He was born on 9 January 1959.

4 June 1945.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations:foundations or interest groups:

Peter SpuhlerWilliam Parrett is an independent director of Eastman Kodak Co., Blackstone Group LP, and Thermo Fisher Scientific Inc., USA. He is also the Chairman of Stadler Rail AGthe BoD of the United States Council for International Business and of Stadler Bussnang AG, as well asUnited Way of various companies within the Stadler Rail Group. In addition, he isAmerica, a member of the Boardboard of Directorstrustees of Kühne Holding, Switzerland,Carnegie Hall, and Walo Bertschinger Central AG, Switzerland.
Permanent functions for important interest groups:
He is Vice President of LITRA, a Swiss organization based in Berne that provides informational services in the interests of public transport.
Official functions and political mandates:
Peter Spuhler is a member of the National CouncilExecutive Committee of the Swiss Parliament (lower house).International Chamber of Commerce.



David Sidwell
AddressApartment 26-O
25 Central Park West
New York
N.Y. 10023 USA
Function(s) in UBSChair of the risk committee / member of the corporate responsibility committee
NationalityAmerican (US) and British
Year of initial appointment2008 
Current term of office runs until2009 

Professional history, education and date of birth
David Sidwell was executive vice president and CFO of Morgan Stanley in New York between March 2004 and October 2007. Before joining Morgan Stanley he was with JPMorgan Chase & Co. He joined JPMorgan Chase & Co. in 1984 in New York where he held a number of different positions during his 20 years of service, including controller and CFO of the Investment Bank. Prior to this he was with PricewaterhouseCoopers LLP in both London and New York. Mr. Sidwell graduated from Cambridge University in England and is a chartered accountant qualifying in the Institute of Chartered Accountants in England and Wales. He was born on 28 March 1953.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
David Sidwell is a director of the Federal National Mortgage Association Fannie Mae. He is a trustee of the International Accounting Standards Committee Foundation, London and the Chairman of the BoD of Village Care of New York, a not-for-profit organization, as well as director of the National Council on Aging.






201

Corporate governance and compensation
Corporate governance

Peter R. Voser
   
 
Address Royal Dutch Shell plc
2501 AN
NL-The Hague
 
FunctionFunction(s) in UBS MemberChair of the Audit Committeeaudit committee / member of the strategy committee
 
Nationality Swiss
 
Year of initial appointment 2005 
 
Current term of office runs until 2008 (proposed for re-election at the AGM 2008)2009 
 

Professional history, education and date of birth

Peter R. Voser has been Chief Financial OfficerCFO and an executive BoD member of Royal Dutch Shell plc in London since 2004. Between 2002 and 2004, he was CFO of Asea Brown Boveri (ABB) in Switzerland. Between 1982 and 2002, he worked for the Royal Dutch / Shell Group, holding various assignments in Switzerland, the UK, Argentina and Chile. MrMr. Voser graduated atfrom the University of Applied Sciences, Zurich. He was born on 29 August 1958.



Other activities and functions

Mandates on boards of important corporations, organizations and foundations:foundations or interest groups:

PeterMr. Voser is a board member of the Federal Auditor Oversight Authority.



11

Corporate Governance
Board of Directors

Lawrence A. Weinbach

AddressYankee Hill Capital Management 300 East 42nd Street USA-New York, NY 10017 
Function in UBSChairman of the Audit Committee
NationalityAmerican (US)
Year of initial appointment2001 
Current term of office runs until2008 (proposed for
re-election at the
2008 AGM)

Professional history, education and date of birth
Lawrence A. Weinbach is a partner of the Yankee Hill Capital Management LLC, a private equity firm based in Southport, CT (USA). He was Executive Chairman of Unisys Corporation until January 2006. From 1997 to 2004 he was Chairman, President and CEO of Unisys Corporation. From 1961 to 1997 he was with Arthur Andersen / Andersen Worldwide as Managing Partner and was Chief Executive of Andersen Worldwide from 1989 to 1997, Chief Operating Officer from 1987 to 1989, and Managing Partner of the New York office from 1983. He was elected to partnership at Arthur Andersen in 1970 and became Managing Partner of the Stamford, Connecticut, office in 1974 and Partner in charge of the accounting and audit practice in New York from 1980 to 1983. Mr Weinbach is a Certified Public Accountant and holds a Bachelor of Science in Economics from the Wharton School of the University of Pennsylvania. He was born on 8 January 1940.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations:
Lawrence A. Weinbach is a member of the Board of Directors of Avon Products Inc., New York, where he is the ChairmanBoD of the Audit Committee. He is a trustee and member of the audit committee of Carnegie Hall, New York and a member of the Board of Directors of Quadra Realty Trust, Inc., New York and Discover Financial Services, Riverwoods, Illinois.Swiss Federal Auditor Oversight Authority.
Permanent functions for important interest groups:
Lawrence A. Weinbach is a member of the New York Stock Exchange Listed Company Advisory Committee and of the National Security Telecommunications Advisory Committee.




Joerg Wolle
   
 
Address DKSH Holding AG
Wiesenstrasse 8
CH-8034 Zurich
 
FunctionFunction(s) in UBS MemberChair of the Nominating Committeehuman resources and compensation committee / member of the governance and nominating committee
 
Nationality German and Swiss
 
Year of initial appointment 2006 
 
Current term of office runs until 2009 
 

Professional history, education and date of birth

Since 2002, Joerg Wolle has been Presidentpresident and CEO of DKSH Holding Ltd. since 2002. From 2000 until the merger with Diethelm Keller in 2002, he was Presidentpresident and CEO of SiberHegner Holding AG. He completed his studies in engineering in 1983 and received his doctorate in 1987 from the Technical University of Chemnitz in Germany. JoergMr. Wolle was born on 19 April 1957.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Joerg Wolle is a member of the BoD of Diethelm Keller Holding Ltd., Zurich. He is also the Chairman of the BoD of BURU Holding Ltd., Cham, and a member of the BoD of OAV (German Asia-Pacific Business Association), Hamburg.







Elections and terms of office

AllIn accordance with the membersnew article 19 (paragraph one) of the BoD are elected individually by the AGM for a term of office of three years. The initial term of each member is fixed in such a way as to ensure that about one-third of the membership have to be newly elected or reelected every year.

The BoD of UBS will propose to the AGM to be held on 23 April 2008 to reduce the terms of office of its members from three years to one year. The proposal will require that the “Articles of Association of UBS AG” (“Articles of Association”) be amendedapproved at the AGM on 23 April 2008. The same regulation will apply2008 AGM, all BoD members are to all members who subsequently standbe elected on an individual basis for reelection after the expiration of their termsa one-year term of office. As a result, by 2010 at the latest, shareholders must confirm the entire membership of the UBS BoD will have to be confirmed on a yearly basis byat the AGM.
A director shall notBoD members are normally standexpected to serve for re-election if hea minimum of three years. No BoD member can continue to serve beyond the AGM held in the calendar year following his or she has reached the age of 65 when the mandate expires.her sixty-fifth birthday. The BoD may, in exceptional circumstances, propose to the AGM that a directorBoD member be reelectedre-elected despite having reached this age limit. No director shall, however,However, no BoD member may hold office beyond the age of 70.
èThe boxes on pages 9–12 lists the following for each BoD member:
The boxes on the previous pages list the following for all BoD members: year of first appointment to the BoD and the expiry of their current mandate

Changes in 2008

The BoD will propose to the AGM on 23 April 2008 that Marcel Ospel, Peter Voser and Larry Weinbach, whose terms expire on the date of the AGM, be re-elected for a one-year term.

The BoD has also appointed Sergio Marchionne as a non-executive Vice Chairman of the BoD. Effective 24 April 2008, the Chairman’s Office will therefore consist of Marcel Ospel, Chairman of the BoD and Stephan Haeringer as executive Vice Chairman and Sergio Marchionne as non-executive Vice Chairman.
Larry Weinbach, who had expressed his desire to hand over the chairmanshipexpiry of the Audit Committee, will remain a member of this committee and continue to provide his valuable experience and expertise. He will be succeeded as Chairman of the Audit Committee by Peter Voser.
The BoD will propose as non-executive director the following new member for election at the AGM on 23 April 2008: David Sidwell, former Chief Financial Officer (CFO) of Morgan Stanley. The BoD will thereafter consist of 12 members.their current mandate.

Organizational principles

The BoD has ultimate responsibility for the mid- and long-term strategic direction of the UBS Group (Group), for appointments and



12

dismissals at top management levelslevel and for the definition of the firm’s risk principles and risk capacity. While the majority of members are always non-executive and independent, the Chairman of the BoD and at least one Vice Chairman have executive roles, in line with Swiss banking laws, and assume supervisory and leadership responsibilities.

Organizational structure

Internal organization, Board of Directors’
committees and meetings in 2007

AfterFollowing each AGM, the BoD electsmeets to elect or appoint its Chairman, and one or more Vice Chairmenvice chairmen, the senior independent director and the members and chairs of its committees. The BoD appoints a company secretary who acts as secretary to the BoD and its Secretary. Itcommittees.

There were significant changes to the organizational structure of the BoD in 2008, including the dissolution of the Chairman’s Office as of 1 July 2008, which was composed of the Chairman and the vice chairman / vice chairmen. The duties and responsibilities of the former Chairman’s Office were allocated to a number of BoD committees, including the new risk committee and the new strategy committee. In addition, the duties and responsibilities of the governance and nominating committee (formerly the nominating committee) and the human resources and compensation committee (formerly the compensation committee) have been expanded. The duties and responsibilities of the committees of the BoD are described below. Moreover, the position of a senior independent director has been established and is currently held by Sergio Marchionne, in addition to his role as the firm’s vice chairman.
According to the Articles of Association, the BoD meets as often as business requires, but at least six times pera year. In 2007, sevenA



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total of 47 meetings were held together within 2008, of which 17 included Group Executive Board (GEB) members, 26 were without GEB participation, and four were independent BoD meetings held without the memberspresence of the GEB, as well as one telephone conference and a full-day strategy seminar. The BoD met nine times without participation of executive management.its Chairman. On average, 96%91% of the BoD members were present at theBoD meetings and 91%83% at private board meetings (i.e. without participation of executive management). In addition, the BoD held five ad-hoc meetings without GEB participation.

Each committee chair provides the BoD with individual GEB members. Participation at these meetings was 91%. Theregular updates on the current activities of his or her committee and on important committee issues.
At least once per year, the BoD without executive management, was also asked to take one decision by written consent (circular decision).
Sergio Marchionne was introduced to his new function through a tailored program, consistingreviews its own performance as well as the performance of a session focusingeach of its committees. This review is based on a detailed description of the various businessesan assessment conducted by the Chief Executive Officers (CEOs) of each business group.governance and nominating committee and seeks to determine whether the BoD and its committees are functioning effectively and efficiently.

The BoD is organized as follows:

Chairman’s Office
The Chairman operates

UBS had a Chairman’s Office includinguntil 30 June 2008. Since then, the Vice Chairman (or Vice Chairmen if more than one), which meets to address issues that are fundamental for UBS, such as overall strategy, mid-term succession plans at GEB level, compensation systemsduties and principles and the risk profileresponsibilities of the firm. The Group CEO normally participates in formal meetings of thedissolved Chairman’s Office in an advisory capacity. The Chairman’s Office acts as the Risk Committeehave been allocated to a number of the BoD. In this capacity it has the highest approval authority for the following (within the risk capacity and principles approved by the BoD): allocation of responsibility for credit, market and other risk-related matters; setting of standards, concepts and methodologies for risk control; and allocation of the major risk limits to the business groups. It also acts as the supervisory body for Group Internal Audit. The Chairman’s Office is responsible for shaping the corporate governance of the firm and formulates appropriate principles, which it submits to the Nominating Committee for review and subsequent submission to the full BoD for approval. It also assumes responsibility for long-term succession planning at BoD level and reviews, upon proposal by the Chairman of the BoD and the Group CEO, GEB candidates for appointment or dismissal bycommittees.

the full BoD. In exceptional cases, and in consideration of the non-transferable and inalienable duties of the BoD under mandatory corporate law, urgent decisions falling within the authority of the BoD may be taken by the Chairman’s Office. Such decisions have to be reported to the full BoD as soon as possible.Audit committee

The members of the Chairman’s Office, as of 31 December 2007, were Marcel Ospel, Chairman of the BoD, and Stephan Haeringer, executive Vice Chairman.
The Chairman’s Office held 15 meetings in 2007 and met once with the lead partners of UBS’s external independent auditors, Ernst & Young Ltd. The Chairman’s Office also met once with members of the Swiss Federal Banking Commission (SFBC). It additionally met seven times as supervisory body for Group Internal Audit, with these meetings chaired by Stephan Haeringer. The Chairman’s Office was also asked to take four circular decisions. The executive Vice Chairman attended the 15 Chairman’s Office meetings, including the ones related to Group Internal Audit issues. Since October 2007, there has been only one executive Vice Chairman.

Audit Committee
The BoD appoints an Audit Committee withaudit committee comprises at least three independent BoD members, from among the non-executive, independent directors. The Audit Committee assists the BoD in monitoring the integrity of the financial statements of the firm, compliance with legal and regulatory requirements, the qualification, independence and performance of UBS’s external auditors and their lead partners, and the integrity of the systems of internal controls for financial reporting. Allall members of the Audit Committee havehaving been determined by the BoD as being fully independent and financially literate. Lawrence A. Weinbach,Peter R. Voser, the Audit Committee’s Chairman,committee’s chair, as well as Rolf A. Meyer and Peter Voserthe other two members, have accounting orand financial management expertise and are therefore considered “financial experts”, according to the rules established by the US Sarbanes-Oxley Act of 2002.

The Audit Committeecommittee operates under the audit committee charter, as described in the “Organization Regulations of UBS AG” (organization regulations) and its annexes. The committee does not itself perform audits, but supervises the work of the auditors. Its primary responsibility is thereby to monitorassist the BoD in: (i) monitoring the integrity of the financial statements of UBS and reviewcompliance with legal and regulatory requirements; and (ii) reviewing the organization and efficiency of internal control procedurescontrols and the financial reporting process. The Audit Committee plays an important role in ensuringprocesses. On behalf of the BoD, the committee monitors the qualification, independence and performance of theUBS’s external auditors and therefore has to authorize all mandates assigned to them.their lead partners. It also has responsibilityprepares proposals for the treatmentBoD regarding the appointment or removal of complaints regarding accountingUBS’s external auditors. The BoD then submits these proposals to the AGM.
The committee also reviews the financial statements of UBS and auditing matters (“whistleblowing”).UBS Group, and makes proposals as to whether the annual financial statements of UBS and UBS Group should be submitted to the AGM for approval.
As ofOn 31 December 2007, Lawrence A. Weinbach was2008, Peter R. Voser chaired the Chairman of the Audit Committeecommittee with Bruno Gehrig and Rolf A. Meyer and Peter VoserWilliam G. Parrett as its additional members. The Audit Committeecommittee met sevensix times in 2007,2008, with the head of Group Internal Audit, the representatives of the external auditors, the Group CFO,Chief Financial Officer (CFO), the Head head of

Group Controlling &and Accounting Headand the head of Group Accounting Policies and the Head Group Internal AuditPolicy participating. The sevensix meetings included regular separate sessions with these representatives.



13

Corporate Governance
Board of Directors

In addition, the Group General Counsel attended one meeting. A special session was organized with the Group CEOCFO to discuss the annual financial results. All three membersParticipation at the meetings averaged 94% and all were held with external auditors present.

The committee reports back to the BoD about its discussions with UBS’s external auditors. Once per year, the lead partners take part in a BoD meeting, presenting the long-form report of UBS’s external auditors, as required by the Swiss Financial Market Supervisory Authority (until 31 December 2008, Swiss Federal Banking Commission).

Corporate responsibility committee

The corporate responsibility committee were present at allsupports the meetings.

Compensation Committee
BoD in fulfilling its duty to safeguard and advance the Group’s reputation for responsible corporate conduct and to assess developments in stakeholder expectations and their possible consequences for UBS. The Compensation Committee, comprisingcommittee comprises at least three non-executive, independentBoD members and, on 31 December 2008, Peter Kurer chaired the committee with Sally Bott, Gabrielle Kaufmann-Kohler and David Sidwell as its additional members. The committee is advised and supported by a number of senior business representatives. The committee met twice in 2008, with an average participation of 63%.

  èRefer to the “Corporate responsibility” section of this report for more information on corporate responsibility

Governance and nominating committee

The governance and nominating committee supports the BoD in fulfilling its duty to establish best practices in corporate governance across the Group, to conduct a self-assessment of the full BoD, in consultation with the Chairman of the BoD, hasto establish and maintain a specific responsibilityprocess for appointing new BoD members and to reviewmanage the succession of the Group Chief Executive Officer (Group CEO). The committee comprises at least three independent BoD members and, on 31 December 2008, Gabrielle Kaufmann-Kohler chaired the committee with Ernesto Bertarelli, Sergio Marchionne and Joerg Wolle as its additional members. In 2008, 14 meetings were held with an average participation of 95%. Of these 14 meetings, eight were held with external advisors.

Human resources and compensation policy for submissioncommittee

The human resources and compensation committee has the following functions: (i) to support the BoD in fulfilling its duty to set guidelines on compensation and for approvingbenefits; (ii) to approve the design of thetotal individual compensation system for the members of the GEB and the executive members of the BoD (senior executives). It determines the individual salaries and incentive awards for the executive membersChairman of the BoD, the Group CEO and the members of the GEB. It reviews and approves contracts and employment agreements with executivenon-independent BoD members and the GEB as well as termination agreementsmembers; (iii) together with GEB members relinquishing their positions.the Chairman of the BoD, to provide the BoD with a proposal for total individual compensation for the independent BoD members; and (iv) to scrutinize the performance of the executives and supervise



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Corporate governance

and approve the succession planning for all executives (other than the Group CEO). The Compensation Committeehuman resources and compensation committee also reviews the compensation disclosure included in this report. The committee operates under the human resources and compensation committee charter, as described in the organization regulations and its annexes.

AsThe Group CEO must provide this committee with an annual report on the effectiveness of UBS’s human resources polices and suggest modifications and supply regular updates regarding the results of employee and executive surveys and leadership processes.
The committee comprises at least three independent BoD members and, on 31 December 2007, Rolf A. Meyer2008, Joerg Wolle chaired the committee with Sergio MarchionneSally Bott, Helmut Panke and Peter SpuhlerErnesto Bertarelli as its additional members. Eight meetings were held in 2008, with an average participation of 93%. Of those meetings, four were held with external advisors.
  èRefer to the “Compensation, shareholdings and loans” section of this report for more information on the BoD human resources and compensation committee’s decision-making procedures

Risk committee

The risk committee became effective on 1 July 2008 and took over many responsibilities of the former Chairman’s Office. The function of the committee is to support the BoD in fulfilling its duty to supervise and to set appropriate risk management and control principles in the areas of: (i) risk management and control, including credit, market and operational risk; (ii) treasury and capital management, including funding and liquidity; and (iii) balance sheet management, including in each case any consequent reputational risk. For these purposes, the committee will receive all relevant information from the GEB. The Group CEO, the Group CFO, the Group CRO and the Executive Committee are responsible for assessing and managing the risks of the Group and are ultimately accountable to the BoD with regard to their activities.
The committee comprises at least three independent BoD members and, on 31 December 2008, David Sidwell chaired the committee with Rainer-Marc Frey and Helmut Panke as its additional members. The committee has met foureight times during 2007, with each meeting attended by all three members. The committee was also asked to take one circular decision.
èPlease refer to pages 26–28 for details on the Compensation Committee’s decision-making procedures

Nominating Committee
The Nominating Committee comprises at least three non- executive, independent directors. It assumes responsibility for defining the principles governing the selection of candidates for BoD membership, reviewing possible candidates and proposing to the full BoD those to be submitted for election to the BoD by the AGM. The committee supports the Chairman’s Office and the full BoD in evaluating the performance of the BoD and executive management.

As of 31 December 2007, Helmut Panke was the Chairman and Ernesto Bertarelli, Gabrielle Kaufmann-Kohler and Joerg Wolle the additional members of the committee. In 2007, the Nominating Committee held six meetings, and all four members were present at each meeting. Gabrielle Kaufmann-Kohler, who joined the committee in April 2007, was briefedsince its formation on important UBS nominations as well as corporate governance philosophy, policies and procedures in a special session.

Corporate Responsibility Committee
UBS has a Corporate Responsibility Committee, normally consisting of six to ten members appointed by the BoD from among its members, the members of the GEB and the Group Managing Board (GMB). On an exceptional basis, external specialists may also be appointed as members of the committee.

The committee’s mandate is to discuss and judge the relevance of current or anticipated developments in stakeholder expectations related to responsible corporate conduct and their possible consequences for UBS. The committee suggests appropriate action to the GEB or other bodies in UBS. As of 31 December 2007, Stephan Haeringer chaired the committee. Additional members were Gabrielle Kaufmann-Kohler, representing the BoD, Peter Kurer, Group General Counsel, Marco Suter, Group CFO, Maria Bentley, Global Head Human Resources, Investment Bank, Gabriel Herrera, Head of Europe, Middle East & Africa, Global Asset Management, Thomas R. Hill, Chief Communication Officer, Corporate Center, Marten Hoekstra, Head Wealth Management Americas, Global Wealth Management & Business Banking, Jeremy Palmer, CEO Investment Bank in Europe, Middle East & Africa, Investment Bank and Kathryn Shih, Head Wealth Management Asia Pacific and CEO UBS Hong Kong, Global Wealth Management & Business Banking. The Corporate Responsibility Committee met twice during 20071 July 2008, with an average participation of 78%87%.
èFor additional information on corporate responsibility, please refer to the specific section inStrategy, Perfomance and Responsibility 2007
èThe charters of the BoD, of the Chairman’s Office and of all BoD committees are available at www.ubs.com/boards
Three of these meetings were held with external advisors. A special session was held with the Governing Board of the Swiss National Bank, and will continue to be held on an annual basis.

Strategy committee

The strategy committee became effective on 1 July 2008. The functions of the strategy committee are: (i) to work with the Group CEO to initiate, at least once per year, a review of the firm’s strategy and its implementation by the GEB, with a view to submitting presentations to the BoD to facilitate its

decisions on the Group’s strategy; (ii) to monitor the implementation of the Group’s current strategy and report results to the BoD; (iii) to consider, in conjunction with the risk committee, the Group’s strategy to deal with anticipated or existing high-level risks; and (iv) to validate the Group’s current strategy with external experts where the committee considers such external advice to be appropriate.

The committee comprises at least three independent BoD members and, on 31 December 2008, Peter Kurer chaired the committee with Rainer-Marc Frey, Sergio Marchionne and Peter R. Voser as its additional members. All members were present at the six committee meetings held in 2008, with one meeting held as a strategy seminar and external advisors present at two.

Roles and responsibilities of executive members of
the Board of Directors

Marcel Ospel and Stephan Haeringer, the Chairman of the BoD andBoard of Directors

Peter Kurer, the executive Vice Chairman, havehas entered into a full-time employment contractscontract with UBS AG in connection with their serviceshis service on the BoD and areis entitled to receive pension benefits upon retirement. They assumeHe assumes clearly defined management responsibilities.

The Chairman of the BoD Marcel Ospel takes a leading role in mid- and long-term strategic planning, the selection and supervision of the Group CEO and the GEB members, of the GEB, mid-term succession planning and developing and shaping compensation principles. He alsoIn addition, the Chairman actively supports major client and transaction initiatives.
Stephan HaeringerAs leader of the BoD, the Chairman is responsible for corporate governance issues on behalf ofensuring that the BoD. He chairs the Chairman’s Office meetings on group internal audit issues, where the Chairman’s Office acts asBoD is effective and correctly balances its focus between its strategic and supervisory body for Group Internal Audit. Credit and market risk approval authorities have also been delegated by the Chairman’s Office to Stephan Haeringer, who brings his decisions to the Chairman’s Office for ratification. He also assumes the function of Chairman’s Office delegate to the GEB Risk Subcommittee, where all major risk issues (credit, market and operational risks) are dealt with.functions. In addition, hethe Chairman presides over the AGMs and EGMs and works with the committee chairs to coordinate the work of all committees. Together with the Group CEO, the Chairman is responsible for helpingensuring effective communication with shareholders and other stakeholders, including government officials and regulators. This is in addition to foster, maintainestablishing and maintaining a close working relationship with the Group CEO and the other GEB members, providing advice and support relationshipswhile respecting the fact that day-to-day management responsibility is delegated to the GEB.

Roles and responsibilities of the senior independent director

At least once per year, the senior independent director organizes and leads a meeting of the independent BoD members without the presence of the Chairman. The senior independent director reports to the Chairman of the BoD on the evaluation of the Chairman’s performance. The senior independent director acts as a contact point for shareholders wishing to engage in discussions with major clients.

an independent BoD member.



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Non-executive members of the Board of Directors

Important business connections of non-executiveindependent members of the Board of Directors with UBS

UBS, as a global financial services provider and thea major bank in Switzerland, has business relationships with many large companies including those in which UBS BoD members assume management or non-executiveindependent board responsibilities. NoneThe nature of the relationships withbetween UBS and companies represented on the BoD by their chairmanwhose chair or chief executive is a member of a magnitude that jeopardizesUBS’s BoD is not considered to compromise the BoD members’ capacity for independent judgment; furthermore,judgment. Furthermore, no non-executive directorindependent BoD member has personal business relationships with UBS that could infringe oncompromise his or her independence.

All relationships and transactions with UBS directorsBoD members and their affiliated companies are conducted in the ordinary course of business and are on the same terms as those prevailing at the time for comparable transactions with non-affiliated persons.

Checks and balances: Board of Directors and Group Executive Board

Effective 1 July 2008, the separation of responsibilities between the BoD and executive management has been clarified. The BoD has a clear strategy-setting responsibility and will supervise and monitor the business, whereas the GEB, headed by the Group CEO, has executive management responsibility. UBS operates under a strict dual board structure, as mandated by Swiss banking law. The functions of Chairman of the BoD and Group Chief Executive Officer (Group CEO)CEO are assigned to two different people, thus providingensuring a separation of powers. This structure establishes checks and balances and creates anpreserves the institutional independence of the BoD from the day-to-day management of the firm, for which responsibility is delegated to the GEB.GEB under the leadership of the Group CEO. No member of one board may be a member of the other.

The supervision
Supervision and control of the executive management remains with the BoD. All details as toThe authorities and responsibilities of the two bodies are governed by the “Articles of Association”Association of UBS AG” and the “Organization Regulations”Regulations of UBS AG”, including the “Appendix to the Organization Regulations – Authorities”latter document’s “Annex B - Responsibilities and authorities”.
  èPlease referRefer to www. ubs.com/corporate-governancewww.ubs.com/governance for more informationdetails on checks and balances for the BoD and GEB

Information and control instruments vis-à-vis the Group Executive Board

The BoD is kept informed of the activities of the GEB in various ways. The Chairman or the executive Vice Chairman participates in each meeting of the GEB in an advisory capacity, thus keeping the Chairman’s Office appraised of all current developments. The minutes of the GEB meetings are filed with the executive BoD members and made available for inspection to the non-executiveBoD members. At BoD meetings, the Group CEO and the GEB members of the GEB regularly update the BoD on important issues.

At BoD meetings, BoD members may request from members of the BoD or the GEB members any information about any matters concerning UBS that are necessarythey require to fulfill their duties. Outside of meetings, any memberBoD members may request information from executiveother BoD members and GEB members, of the GEB concerning the Group’s business development. Requests for information about individual businesses or transactionsin which case such requests must be approved by the Chairman of the BoD.
Group Internal Audit monitors the compliance of business activities with legal and regulatory requirements and all internal regulations, policies and guidelines. This internal audit organization, which is independent from management, reports significant findings to the Chairman of the BoD, the Chairman’s Officerisk committee and the Audit Committee.audit committee.
The GEB submits a quarterly risk report to the Chairman’s Office for approval. This report provides an update on all categories of risk and contains a comprehensive assessment of the risk situation of the Group. The full BoD is briefed quarterly on the major developments through an executive summary of the report and an oral update. For the first time in February 2008, theUBS’s internal compliance function provided an annual compliance report to the BoD. This report is required by sectionsections 109 and 112 of circular 08/24 of the SFBC’s circular EBK-RS 06 / 6Swiss Financial Market Supervisory Authority on the supervision and includes a risk-based action plan.internal controls at banks.
  èDetails on riskRefer to the “Risk management and control can be found inRisk, Treasury and Capital Management 2007control” section of this report for more information



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Group Executive BoardCorporate governance

Group Executive Board

UBS operates under a strict dual board structure, as mandated by Swiss banking law. The Group Executive Board hasmanagement of the business management responsibility for UBS. Its members, including the Group Chief Executive Officer, are appointedis delegated by the Chairman and members of the Board of Directors –(BoD) to whom they must also account for the firm’s results.

Group Executive Board (GEB).

Members of the Group Executive Board on
28 February 2009

The text in the boxes below provides information on the composition of the Group Executive Board (GEB) as of 31 December 2007.GEB on 28 February 2009. It shows each member’s function in UBS, nationality, year of initial appointment to the GEB, professional history and education, date of birth and other activities and functions, such as mandates on boards of important corporations, organizations and foundations, permanent functions for important interest groups andas well as official functions and political mandates.

Changes in 2008
On 23 April 2008, Peter Kurer stepped down as Group General Counsel (Group GC) and was replaced by Markus U. Diethelm on 1 September 2008. In the meantime, David Aufhauser, Neil Stocks and Bernhard Schmid acted as interim co-General Counsels while Peter Kurer retained an overall supervisory role over the team of the three General Counsels. This was accepted by the Swiss Financial Market Supervisory Authority as a transitional arrangement.

On 6 July 2007, Peter Wuffli1 September 2008, Marco Suter stepped down as Group Chief Financial Officer (Group CFO) and John Cryan replaced him as Group CFO.

On 4 November 2008, Joe Scoby stepped down as Group Chief Risk Officer (Group CRO) and Philip J. Lofts replaced him as Group CRO.
On 12 November 2008, Marten Hoekstra assumed the duties on an interim basis of Raoul Weil, Chairman and Chief Executive Officer (Group CEO) and was replaced by Marcel Rohner.(CEO) of Global Wealth Management & Business Banking, who relinquished his duties on that date. Currently Raoul Weil is a member of the GEB but does not hold a function.

Changes in 2009
Francesco Morra and Juerg Zeltner have been appointed as CEOs of Wealth Management & Swiss Bank and as CEO Switzerland and CEO Wealth Management Global, respectively. They assumed their roles on 10 February 2009 and became members of the GEB at this date. As CEO Switzerland, Francesco Morra will head the wealth management business for domestic Swiss wealth management and private clients. As CEO Wealth Management Global, Juerg Zeltner will lead all UBS domestic wealth management businesses outside of Switzerland and the Americas. Marten Hoekstra heads the business division Wealth Management Americas and no longer assumes the role of deputy Chairman and CEO of Global Wealth Management & Business Banking. Clive Standish,Oswald J. Gruebel was named Group Chief Financial Officer, retiredCEO on 30 September 2007 and was replaced by Marco Suter,26 February 2009, replacing Marcel Rohner who stepped down from the Board of Directors (BoD). At the same time Huw Jenkins stepped down from the GEB and Marcel Rohner additionally assumed his position as Chairman andGroup CEO Investment Bank. Walter Stuerzinger was appointed Chief Operating Officer (COO) of Corporate Center and Joe Scoby Group Chief Risk Officer as of 1 October 2007.

on that date.



   
Oswald J. Gruebel1

M
Professional history, education and date of birth
Oswald J. Gruebel was named UBS Group Chief Executive Officer (Group CEO) on 26 February 2009. Before joining UBS he was the CEO of Credit Suisse Group and of Credit Suisse and stepped down from this role in May 2007. He was CEO of Credit Suisse Financial Services from 2002 to 2004 and was additionally Co-CEO of Credit Suisse Group from 2003 until 2004. Mr. Gruebel was a member of the Credit Suisse Group Executive Board (GEB) between 1997 and 2001 and again from 2002 to 2007. From 1991 until 1997 he was member of the Executive Board of Credit Suisse, responsible for equities, fixed income, global foreign exchange, money markets and asset/liability management in Zurich. Before that he was a member of the GEB, Financière Credit Suisse First Boston in Zug. In 1970 Mr. Gruebel joined White Weld Securities and became its CEO in 1978. From 1961 to 1970 he worked for Deutsche Bank AG. He was born on 23 November 1943.
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSGroup Chief Executive
Officer
NationalityGerman
Year of initial appointment2009 
1 Oswald J. Gruebel was named Group CEO on 26 February 2009, replacing Marcel Rohner who stepped down as Group CEO on that date.

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Corporate governance and compensation
John Cryan
M
Professional history, education and date of birth
John Cryan, formerly global head of the financial institutions group at UBS’s Investment Bank, was appointed Group CFO in September 2008. As an alumnus of Arthur Andersen & Co, Mr. Cryan joined S.G. Warburg in London in 1987. Since 1992, he has specialized in providing strategic and financial advice to a wide range of companies in the financial services sector globally. In recent months, he has played an active role in advising UBS’s Board of Directors (BoD) and Group Executive Board (GEB) on issues related to the current financial crisis. Mr. Cryan graduated in 1981 and holds an MA Hons from the University of Cambridge. He was born on 16 December 1960.
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSGroup Chief Financial
Officer (Group CFO)
NationalityBritish
Year of initial appointment2008 
Markus U. Diethelm
M
Professional history, education and date of birth
Markus U. Diethelm was appointed Group General Counsel of UBS on 1 September 2008. From 1998 to 2008, he worked for Swiss Re. He started his career in 1983 with Bär & Karrer, a Zurich law firm. In 1988, he joined Paul, Weiss, Rifkind, Wharton & Garrison in New York as a foreign associate. As of 1989, he practiced with New York’s Shearman & Sterling, specializing in mergers and acquisitions. In 1992 he joined the Los Angeles-based law firm Gibson, Dunn & Crutcher, focusing on corporate matters, securities transactions, litigation and regulatory investigations while operating out of the firm’s Brussels and Paris offices. He joined Swiss Re in 1998 as Group Chief Legal Officer and was appointed to its GEB effective 1 January 2007. Mr. Diethelm holds a law degree from the University of Zurich and a Masters degree and PhD from the law school at Stanford University. He is a qualified attorney-at-law in Switzerland and admitted to the New York Bar. He was born on 22 October 1957.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Markus U. Diethelm is the Chairman of the legal committee of the Swiss American Chamber of Commerce.
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSGroup General Counsel
NationalitySwiss
Year of initial appointment2008 
  
   
John A. Fraser
M
Professional history, education and date of birth
John A. Fraser was appointed Chairman and CEO of the Global Asset Management division in late 2001. Prior to that, he was President and COO of UBS Asset Management and Head of Asia Pacific. In 2008, he became Chairman of UBS Saudi Arabia. From 1994 to 1998, he was Executive Chairman and CEO of The Australia Funds Management business. Before joining UBS, Mr. Fraser spent over 20 years in various positions at the Australian Treasury, including two international postings to Washington D.C., first, at the International Monetary Fund and, second, as Minister (Economic) at the Australian Embassy. From 1990 to 1993, he was Deputy Secretary (Economic) of the Australian Treasury from 1990 to 1993. Mr. Fraser graduated from Monash University in Australia in 1972 and holds a first-class honors degree in economics. He was born on 8 August 1951.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
John A. Fraser is a member of the Board of Governors of the Marymount International School at Kingston-upon-Thames in the UK.
 
Address UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
  Bahnhofstrasse 45
CH-8098 Zurich
FunctionsFunction(s) in UBS Group ChiefChairman and
CEO Global Asset
Management
 Executive Officer /
Chairman and Chief
Executive Officer
Investment Bank
 
Nationality SwissAustralian
 
Year of initial appointment2002 
  
appointment to the GEB 2002

Professional history, education and date of birth
Marcel Rohner was appointed Group Chief Executive Officer (Group CEO) on 6 July 2007 and Chairman & CEO Investment Bank on 1 October 2007. He became a member of the Group Executive Board (GEB) in 2002. Between 2002 and 2007, he was CEO of Wealth Management & Business Banking and additionally named Chairman in 2004. Before that, in 2001 and 2002, he was Chief Operating Officer (COO) and Deputy CEO of the Private Banking unit of UBS Switzerland. In 1999, he was named Group Chief Risk Officer (Group CRO), after being appointed Head of Market Risk Control of Warburg Dillon Read in 1998. Between 1993 and 1998, Mr Rohner was with Swiss Bank Corporation’s investment banking arm and in 1995 he was appointed Head of Market Risk Control Europe. Mr Rohner graduated with a Ph.D. in economics from the University of Zurich and was a teaching assistant at the Institute for Empirical Research in Economics at the University of Zurich from 1990 to 1992. He was born on 4 September 1964.

Other activities and functions
Permanent functions for important interest groups:
Marcel Rohner is Vice Chairman of the Swiss Bankers Association, Basel and the Vice Chairman of the Board of Trustees of the Swiss Finance Institute.



John A. Fraser
  
   
Marten Hoekstra
M
Professional history, education and date of birth
On 12 November 2008, Marten Hoekstra assumed the duties of Raoul Weil, as Chairman and CEO Global Wealth Management & Business Banking, on an interim basis. He was appointed head of Wealth Management US in July 2005 and Deputy CEO Global Wealth Management & Business Banking in November 2007. Between 2001 and 2005, he assumed different management roles in Global Wealth Management & Business Banking, including head of market strategy and development, and in July 2002 became a member of the Group Managing Board. Previously, from 1983 to 2000, he held various roles with PaineWebber, including that of financial advisor. Mr. Hoekstra graduated with a BA in political science from the University of North Dakota and received his MBA from the Kellogg Graduate School of Management at Northwestern University. He was born on 21 May 1961.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Marten Hoekstra is a member of the BoD of Prisoner Fellowship Ministries and of the Zurich International School Foundation, both non-profit organizations. He is also a member of the BoD of the Securities Industry & Financial Markets Association (SIFMA).
 
Address UBS AG

Bahnhofstrasse 45

CH-8098 Zurich
Function in UBSChairman and Chief
Executive Officer Global
Asset Management
NationalityAustralian
Year of initial
appointment to the GEB2002

Professional history, education and date of birth
John A. Fraser was appointed as Chairman and CEO of the Global Asset Management Business Group in late 2001. Prior to that, he was President and COO of UBS Asset Management and Head of Asia Pacific. From 1994 to 1998 he was Executive Chairman and CEO of SBC Australia Funds Management Ltd. Before joining UBS, Mr Fraser held various positions at the Australian Treasury, including two international postings to Washington DC – first, at the International Monetary Fund and, second, as Minister (Economic) at the Australian Embassy. From 1990 to 1993, he was Deputy Secretary (Economic) of the Australian Treasury. Mr Fraser graduated from Monash University in Australia in 1972 and holds a first-class honors degree in economics. He was born on 8 August 1951.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations:
John A. Fraser is a member of the board of the Marymount International School at Kingston-upon-Thames.



16

Peter Kurer
 
  
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
FunctionsFunction(s) in UBS Group General Counsel /
member of the
Corporate Responsibility
Committee
NationalitySwiss
Year of initial
appointment to the GEB2002

Professional history, education and date of birth
Peter Kurer has been the Group General Counsel since 2001, when he joined UBS. Between 1991 and 2001 he was a partner at the Homburger law firm in Zurich. Between 1980 and 1990 he was with the Zurich office of Baker & McKenzie law firm, first as associate, later as partner, having been a law clerk at the District Court of Zurich. Mr Kurer graduated as a doctor iuris from the University of Zurich and was admitted as attorney-at-law in Zurich. He holds an LL.M. from the University of Chicago and was born on 28 June 1949.

Other activities and functions
Permanent functions for important interest groups:
Peter Kurer is a member of the Visiting Committee to the Law School of The University of Chicago, a member of the Board of Trustees of a foundation which acts as an advisory board to the University of St. Gallen Program for law and economics, and a member of the Committee of Continuing Education, Executive School of Management, Technology and Law, University of St. Gallen.



Joe Scoby
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function in UBSGroup Chief Risk Officer
NationalityAmerican (US)
Year of initial
appointment to the GEB2007

Professional history, education and date of birth
Joe Scoby was appointed Group CRO and became a member of the GEB in October 2007. Prior to this appointment, he was Global Head of Alternative and Quantitative Investments (A&Q), an alternative investment platform in UBS’s asset management business between 2003 and 2007. Previously, between 2000 and 2003, he headed O’Connor, a specialist hedge fund provider within the same alternative investment platform. From 1995-1999, he was the Joint Head of US Equities at UBS’s Investment Bank. Joseph Scoby began his career with O’Connor and Associates in 1987 and became a Managing Director in 1993. He has a Bachelor’s degree in Finance from Wharton School and a Master’s degree in Regional Science from the University of Pennsylvania. He was born on 23 April 1965.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations:
Joe Scoby is a member of the Wharton School Undergraduate Executive Board, a member of the Board of Chicago’s After School Matters and a member of the Board of Children’s Memorial Hospital. He was the founder of St. Joseph Club in Chicago.



Walter Stuerzinger
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function in UBSChief Operating Officer,
Corporate Center
NationalitySwiss
Year of initial
appointment to the GEB2005

Professional history, education and date of birth
Walter Stuerzinger became a member of the GEB in 2005. He was appointed COO, Corporate Center in October 2007. Prior to that, he was Group CRO from 2001 until 2007 and Head Group Internal Audit from 1998 until 2001. Before the merger, he was Head Group Internal Audit at the former Union Bank of Switzerland. Previously, he worked with Credit Suisse on various assignments in the controlling and auditing areas. Walter Stuerzinger holds a Swiss banking diploma and is a member of the Institute of Chartered Accountants. He was born on 6 July 1955.

Other activities and functions
Permanent functions for important interest groups:
Walter Stuerzinger is a member of the Foundation Board of the UBS Pension Fund.



Marco Suter
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Functions in UBSGroup Chief
Financial Officer /
member of the
Corporate Responsibility
Committee
NationalitySwiss
Year of initial
appointment to the GEB2007

Professional history, education and date of birth
Marco Suter was appointed Group Chief Financial Officer and became a member of the GEB in October 2007. Prior to this appointment, he was elected as a member of the Board of Directors at the annual general meeting in April 2005 and thereafter appointed as Executive Vice Chairman. Marco Suter has been with UBS and its predecessor, Swiss Bank Corporation (SBC), since 1974. Between 1999 and 2005, he was Group Chief Credit Officer and a member of the Group Managing Board. From 1996 until the merger of SBC and Union Bank of Switzerland in 1998 he served as regional manager of the Zurich-Eastern Switzerland-Ticino area for the corporate and commercial banking activities of SBC. Prior to that, he held various management positions in SBC’s investment banking operations, first as the Continental European Head of Merchant Banking and later as the Chief Credit Officer for EMEA. Mr Suter graduated from the Commercial School in St. Gallen. He was born on 7 May 1958.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations:
Marco Suter is a member of the Swiss Institute of International Studies (SIAF), the Latin-American Chamber of Commerce (Switzerland), the Swiss-Chinese Chamber of Commerce and the IIF Special Committee on Crises Prevention and Resolution in Emerging Markets.



17

Corporate Governance
Group Executive Board

Rory Tapner
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function in UBSChairman and
Chief Executive Officer
Asia Pacific
NationalityBritish
Year of initial
appointment to the GEB2006

Professional history, education and date of birth
Rory Tapner became a member of the GEB in January 2006. He was appointed Chairman and CEO Asia Pacific in May 2004. Previously, he was Joint Global Head of Investment Banking. From 1983 to 1998, he was with S.G. Warburg and Warburg Dillon Read as Global Head of Equity Capital Markets, Joint Head of UK Corporate Finance and Head of UK Capital Markets Team. He also was a member of the Warburg Dillon Read Executive Board. Rory Tapner has a law degree from Kings College, London University and went to Lancaster Gate Law School. Mr Tapner was born on 30 September 1959.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations:
Rory Tapner is the treasurer and Chairman of the Financial Committee of Council of Kings College University, London.



Raoul Weil
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function in UBSChairman and Chief
Executive Officer Global
Wealth Management &
Business Banking
NationalitySwiss
Year of initial
appointment to the GEB2005

Professional history, education and date of birth
Raoul Weil was appointed Chairman and CEO Global Wealth Management & Business Banking on 6 July 2007. He was Head of Wealth Management International between 2002 and 2007 and was appointed to the GEB in July 2005. Previous to that, he assumed different management roles in the Private Banking Division in Asia and Europe. Between 1984 and 1998, Mr Weil was with SBC, holding various assignments within the Private Banking Division in Basel, Zurich, Monaco and New York. He graduated with a degree in economics from the University of Basel and was born on 13 November 1959.



18

Changes in 2008

Jerker Johannsson has been appointed as Chairman and CEO of the Investment Bank. He took on the role on 17 March 2008, joining UBS from Morgan Stanley, where he was Vice Chairman Europe. He will become a member of the GEB at this date.

To strengthen the management structure of the firm, the following new members were appointed to the GEB as of 14 February 2008:
–Marten Hoekstra, Deputy CEO Global Wealth Management & Business Banking and Head Wealth Management US
NationalityAmerican (US)
Year of initial appointment2008 

207

Corporate governance and compensation
Corporate governance
M
Jerker Johansson
M
Professional history, education and date of birth
Jerker Johansson joined UBS and was named Chairman and CEO of the UBS Investment Bank on 13 February 2008. Previously he was vice chairman of Morgan Stanley Europe, and a member of its management committee. From 2005 to 2007, he was head of Morgan Stanley’s institutional equity division. In 2005, he was also named co-head of the combined sales and trading business, consisting of the institutional equity division and the fixed income division. In 2007, he became co-head of sales and trading with responsibility for clients and services, continuing his responsibility for prime brokerage and becoming solely responsible for the sales and trading side of capital markets. Mr. Johansson joined Morgan Stanley in 1985 as a summer associate and held various positions including head of equity capital markets Europe before being promoted in 1997 to COO, institutional equity division Europe. He was also a member of the European management committee. From 2002 to 2005, he was head of the institutional equity division in Europe. Before joining Morgan Stanley, Mr. Johansson was part of Bankers Trust’s Graduate Training Program, and also worked for Chase Manhattan Bank. He holds a Masters degree in economics from Stockholm University and an MBA from Stanford. He was born on 19 May 1956.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Jerker Johansson is a member of the Stanford Business School advisory board, a trustee of Tower Hamlets Educational Business Partnership and a Business Leader at Community Links, London.
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSChairman and
CEO of the UBS
Investment Bank
NationalitySwedish
Year of initial appointment2008 
Philip J. Lofts
M
Professional history, education and date of birth
Philip J. Lofts, formerly deputy Group CRO and Group risk Group chief operating officer, was appointed Group CRO as of November 2008. He has been with UBS for over 20 years. In 2008, he became Group risk chief operating officer after having previously been Group chief credit officer for three years. Before this, Mr. Lofts worked for the Investment Bank in a number of business and risk control positions in Europe, Asia Pacific and the US. He was born on 9 April 1962.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Mr. Lofts is a member of the foundation board of the University of Connecticut.
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSGroup CRO
NationalityBritish
Year of initial appointment2008 
Francesco Morra
M
Professional history, education and date of birth
Francesco Morra was appointed CEO Switzerland and became a member of the GEB in February 2009. In November 2007, he was appointed Head of Wealth Management Americas;Western Europe, Mediterranean, Middle East & Africa. In addition, as of September 2008, he was also responsible for the business unit Latin America, Caribbean & Canada. Francesco Morra joined UBS in 2005 as Head of Wealth Management Italy and as a member of the Group Managing Board. Before joining UBS, he held various management positions at The Boston Consulting Group Inc. between 1992 and 2005. He holds a PhD in economics from the University of St. Gallen (Switzerland). He was born on 31 August 1967.
–
Address Alexander Wilmot-Sitwell,UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSCEO Switzerland
NationalitySwiss and Italian
Year of initial appointment20091
1 Appointed on 10 February 2009.
Walter H. Stuerzinger
M
Professional history, education and date of birth
Walter H. Stuerzinger was appointed COO Corporate Center in October 2007. Prior to that, he was Group CRO from 2001 until 2007 and head of Group Internal Audit from 1998 until 2001. Before the merger with SBC, he was head of Group Internal Audit at the former Union Bank of Switzerland. Previously he worked with Credit Suisse on various assignments in the controlling and auditing areas. Mr. Stuerzinger holds a Swiss banking diploma and is a member of the Institute of Chartered Accountants. He was born on 6 July 1955.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Walter H. Stuerzinger is a member of the foundation board of the UBS Pension Fund.
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSCOO Corporate Center
NationalitySwiss
Year of initial appointment2005 
Rory Tapner
M
Professional history, education and date of birth
Rory Tapner was appointed Chairman and CEO Asia Pacific in May 2004. Previously he was Joint Global Head of Investment Banking. From 1983 to 1998 he was with S.G. Warburg and Warburg Dillon Read as global head of equity capital markets, joint head of UK corporate finance and head of the UK capital markets team. He was also a member of the Warburg Dillon Read executive board. Mr. Tapner has a law degree from Kings College, London University and went to Lancaster Gate Law School. Mr. Tapner was born on 30 September 1959.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Rory Tapner is the treasurer and Chairman of the financial committee of Council of Kings College, London University.
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSChairman and
CEO Asia Pacific
NationalityBritish
Year of initial appointment2006 

208

Corporate governance and compensation
Alexander Wilmot-Sitwell
M
Professional history, education and date of birth
In January 2008, Alexander Wilmot-Sitwell became Joint Global Head of Investment Banking Department, UBS Investment Bank, and Chairman and CEO of UBS Group Europe, Middle East & Africa;Africa. In 2006, Mr. Wilmot-Sitwell became a member of the Group managing board. He joined the firm in 1996 as head of corporate finance in South Africa and moved to London in 1998 as head of UK investment banking. Prior to joining Warburg Dillon Read, he was head of corporate finance at SBC Warburg in South Africa, SBC Warburg. Mr. Wilmot-Sitwell graduated from Bristol University with a degree in modern history. He was born on 16 March 1961.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Alexander Wilmot-Sitwell is vice president of the “Save the Children Fund”, London.
–
Address Robert Wolf,UBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSJoint Global Head of Investment Banking, Chairman and CEO of UBS Group AmericasEurope, Middle East & Africa
NationalityBritish
Year of initial appointment2008 
Robert Wolf
M
Professional history, education and date of birth
Robert Wolf was appointed President of the UBS Investment Bank in 2007 and was COO of the UBS Investment Bank.Bank from 2004 to 2008. Since 2006, he has also served as Chairman and CEO of UBS Group Americas. Prior to this, Mr. Wolf served as global head of fixed income from 2002 to 2004 and held the position of global head of credit trading, research & distribution from 1998 to 2001. He joined the firm in 1994, after spending approximately 10 years at Salomon Brothers in fixed income. Mr. Wolf graduated from the Wharton School at the University of Pennsylvania with a Bachelors of Science in economics in 1984. He was born on 8 March 1962.

Other activities and functions
Mandates on boards of important corporations, organizations and foundations or interest groups:
Robert Wolf is a member of the undergraduate executive board of Wharton School, of the athletics board of overseers of UPENN and of the Financial Services Round Table. Mr. Wolf is a member of the Council on Foreign Relations and of the committee encouraging corporate philanthropy. He is in the executive leadership council of the Multiple Myeloma Research Foundation, Norwalk, CT, and on the board of trustees of the Children’s Aid Society, New York.
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSChairman and
CEO of UBS Group
Americas,
President of the
UBS Investment Bank
NationalityAmerican (US)
Year of initial appointment2008 
Juerg Zeltner
M
Professional history, education and date of birth
Juerg Zeltner was appointed CEO Wealth Management Global and became a member of the GEB in February 2009. In November 2007, he was appointed Head of Wealth Management North, East & Central Europe and became a member of the Group Managing Board in the same year. From 2005 to 2008, he was CEO of UBS Deutschland AG, Frankfurt and became CEO of all UBS business in Benelux, Germany and Central Europe in 2007. Prior to that, he held various management positions in the Private Banking Division of UBS. Between 1987 and 1998, Juerg Zeltner was with SBC in various roles within the Private and Corporate Client Division in Bern, New York and Zurich. He graduated from the School of Economics and Business Administration in Bern and completed the Advanced Management Program at Harvard Business School. He was born on 4 May 1967.
AddressUBS AG
Bahnhofstrasse 45
CH-8098 Zurich
Function(s) in UBSCEO Wealth
Management Global
NationalitySwiss
Year of initial appointment20091
1 Appointed on 10 February 2009.

Establishment of the Executive Committee

The Executive Committee (EC) was established on 1 January 2009. The EC consists of the Group CEO, the Group CFO, the Group CRO and the Group GC. Under the leadership of the Group CEO, the EC is responsible for the allocation of the UBS Group’s financial resources to the business divisions – i.e. the capital, the terms and availability of funding and the risk capacity and parameters, in each case within the limits set by the BoD. Additionally, the EC sets the performance targets of the business divisions and then monitors and evaluates them. Under the auspices of the Group CEO, the EC prepares proposals for approval by the BoD and supports the BoD in its decision-making process. The EC has overall responsibility for implementing UBS’s risk management and control principles, allocating risk capacity to the business divisions and controlling the firm’s overall risk profile.

Responsibilities, authorities and organizational
principles of the GEB

TheUnder the leadership of the Group CEO, the GEB has executive management responsibility for the Group and is accountable to the BoD for the firm’s results. Together with the Chairman’s Office, theits business. The GEB assumes overall responsibility for the development and implementation of UBS’s strategies.strategies for the Group and business divisions. The GEB, in particular the Group CEO, is responsible for the implementation and results of the firm’s business strategies, for the alignment of the business groups to UBS’s integrated business model and for the exploitation of synergies across the firm. Through its Risk Subcommittee, the GEB assumes responsibility for the Group’s risk control standards, concepts, methodologies and limits.strategies. The GEB plays a key role in defining the human resources policy and the compensation principles of the Group. It also fosters an entrepreneurial leadership spirit throughout the firm.
 èThe authorities ofRefer to the GEB are defined in the “The Organization“Organization Regulations of UBS AG”, which are available at www.ubs.com/corporate-governancegovernance, for more information on the authorities of the GEB

Management contracts

UBS has not entered into management contracts with any third parties.



19209

Compensation, shareholdings and loans
UBS’s senior executive compensation policy
–is aligned with the creation of sustainable shareholder returns
–promotes a performance-driven culture and adherence to ethical values
–supports the firm’s integrated business strategy

Principles

RigorousCorporate governance and approval processto ensure that no one participates in any decision affecting his or her own compensation
Corporate governance  

Senior leadership

Shareholder alignment:a minimum

The Group Managing Board (GMB) comprises members of business division and Corporate Center management and individuals assuming special Group functions. In the first half of 2009, the annual incentive compensation is paid inGMB will be dissolved and replaced by a new group of senior leaders reflecting the form of UBS shares. Stock options are awarded with a 10% price hurdle. In addition, UBS has the highest share ownership requirements for senior executives in its peer group

Pay-for-performance:performance is the primary driver of compensation decisions

Transparent decision-making process,based onresponsibilities at Group, divisional and business group performance as well as individual performance and contribution to pre-defined targetsregional levels.

Compensation in 2007

67% decrease in total senior executive compensation.
This reflects the losses occurred on specific trading positions in 2007, which led to an overall net loss for the Group as a whole, but also the strong performance in UBS’s client-driven businesses

No stock optionswere awarded to senior executives for the 2007 performance year

No incentive awardwas granted to executive members of the Board of Directors as their incentive award is dependent on overall Group financial performance



20210

(FLOW CHART)

(PIE CHART)

(CHART)



21

Corporate Governance
Compensation, shareholdings and loans

Compensation, shareholdings and loans

UBS’s competitive strength depends on its ability to attract, retain and motivate the most talented people in financial services. The policies established by the Board of Directors’ Compensation Committee create incentives to promote a performance-driven culture, adhere to ethical values and support the firm’s integrated business strategy. Compensation of senior executives is linked to the creation of long-term value and sustainable shareholder returns.

Compensation Committee

The Compensation Committee is made up of three non-executive, independent members of the Board of Directors (BoD). As of 31 December 2007, these were Rolf A. Meyer (Chairman of the Compensation Committee), Sergio Marchionne and Peter Spuhler.

Governance, authorities and responsibilities
UBS has long been committed to the highest standards of corporate governance. The approval of senior executive compensation follows a rigorous process designed to ensure that no one participates in any decision affecting his or her own compensation.

The Compensation Committee is responsible for reviewing the UBS Total Compensation and Benefits Principles for submission to the BoD.
Additionally – for executive members of the BoD and

members of the Group Executive Board (GEB) (senior executives) – the Compensation Committee has responsibilities in five key areas:
–reviewing and approving the design of the total compensation framework, including compensation programs and plans;
–determining the relationship between pay and performance;
–approving base salaries and annual incentive awards for senior executives;
–reviewing and approving individual employment agreements; and
–reviewing and approving the terms and conditions for GEB members relinquishing their positions.

Authority for compensation-related decisions is governed by the “Appendix to the Organization Regulations – Authorities” and the “Charter for the Compensation Committee”. The structure is as follows:



(FLOW CHART)

22

Activities
During 2007, the Compensation Committee carried out:
–a review of best practice in compensation governance, design, pay-mix and disclosure, which combined publicly-available information on key competitors with market data provided by UBS’s principal executive compensation consultant (Towers Perrin MGMC);
–a review of pay and performance to ensure that senior executive compensation levels were appropriate compared with counterparts of competitors; and
–a review of the compensation plan rules for senior executives to ensure they clearly reflect shareholders’ interests and provide appropriate incentives for long-term value creation.

The Compensation Committee did not appoint any external compensation consultants during 2007. Rather, it relied on detailed background documentation – internal and external compensation surveys and other intelligence – provided by internal HR compensation specialists as well as on data from the Group controlling department and the accounting department. The Chairman of the Compensation Committee also made use of information obtained through participation in various international seminars for compensation professionals.

Senior executive compensation policy

Principles
Two related principles govern the firm’s senior executive compensation framework (and, indeed, the compensation of all UBS employees): creation of shareholder value and pay-for-performance. Specifically:
–all elements of compensation are managed in a globally consistent and integrated fashion, with clear recognition of pay-for-performance;
–compensation levels and practices are benchmarked against competitors and global best practice; and
–significant exposure to UBS shares through equity-based awards serves to align senior executive and shareholder interests.

Annual total compensation is competitively positioned and UBS places a strong emphasis on the variable components of compensation, with the understanding that only superior performance will be rewarded with superior compensation. Such incentives provide the motivation to excel in the entrepreneurial, performance-oriented culture that is re-

quired to execute UBS’s integrated business strategy. In addition, the Compensation Committee verifies whether the senior executive fulfilled their objectives and key performance indicators (KPIs), including the importance of maintaining and spreading UBS’s ethical values throughout the firm.

Shareholder alignment
The Compensation Committee structures senior executive compensation to ensure alignment with shareholder interests and long-term value creation. Specifically:
–it rewards the achievement of personal and corporate objectives that balance individual performance and long-term business growth;
–a minimum of half of the annual incentive compensation awarded to senior executives takes the form of UBS shares that vest or become unrestricted over five years, ensuring focus on long-term decisions and actions and aiding retention of executive talent;
–in addition to this significant mandatory deferral of compensation, all senior executives are required to accumulate and hold five times their cash compensation (average of last three years) in UBS shares after five years in their position;
–the strike price of stock options is set at 110% of the average high and low sale price of UBS shares on the grant date resulting in a 10% performance hurdle – significant

(CHART)



23

Corporate Governance
Compensation, shareholdings and loans

share price growth is thus required before the exercise price becomes meaningful;
–in certain circumstances, share
Corporate governance and stock option plans are forfeited at termination or thereafter;
–no additional severance payments are offered in instances of termination, although obligations earned up to and including the notice period are honored in line with the contractual arrangements; and
–all senior executives are offered the opportunity to invest voluntarily in additional UBS shares from their cash compensation.
All these mechanisms help focus senior leadership on the long-term interests of UBS shareholders and minimize the cost of any future terminations.

Employment agreements and contractual payments
The Compensation Committee regularly reviews the individual employment agreements of senior executives. To protect UBS’s franchise and competitive position, these contracts provide for a general 12-month notice period, in compliance with leading corporate governance guidelines and international best-practice procedures. During the notice period, the senior executive is generally prohibited from working in any competitive position in the financial services industry and from soliciting UBS staff or clients. In recognition of these restrictions, the senior executive is entitled to receive base salary, pro rata incentive and certain employment benefits until expiry of the notice period, unless the senior executive has been terminated for cause.

The Compensation Committee has drawn up special employment agreements for the Chairman of the BoD and the Executive Vice Chairman. These agreements reflect the fact that these officers are appointed by UBS shareholders for a defined term and may be terminated only by means of a shareholders’ vote.
Neither the GEB employment agreement nor the agreements for executive members of the BoD provide for any additional severance payment in case of termination, apart from contractual salary, pension and bonus entitlements. All payments are included in the numbers reported under compensation for members of the BoD and GEB.

Pay-for-performance
Performance is the primary driver of compensation decisions. UBS is committed to providing superior compensation in return for superior performance and continually develops the benchmarks and processes that support informed compensation decision-making.

At the beginning of the year, each UBS senior executive agrees individual objectives and KPIs. Individual objectives

focus on clients, economics, technical expertise, leadership, cross-business cooperation, strategic impact, risk management and personal contribution. KPIs vary by business and by individual and typically include such measures as revenue growth, net profit, return on equity, return on assets, cost / income ratio, net new money, progress on strategic initiatives and adherence to UBS values.

Financial performance targets are clearly defined at UBS Group and business group levels.
As the year draws to a close, a senior executive’s performance against each objective and KPI is rigorously evaluated, not only by his or her immediate superior but also by peers and subordinates. This 360-degree assessment is qualitative and quantitative – comprising financial and operational results for the year, as well as indicators of future performance. Performance against key competitors and performance trends over time are likewise reviewed to the extent that data is available.
To the extent that a senior executive’s business and individual performance exceeds – or falls short – of his or her agreed expectations, total compensation mirrors the outcome. In consequence, compensation levels may be highly variable from year-to-year.
èThe relationship between performance and pay determination is described in more detail in the section “Key elements for decision-making process within the Compensation Committee” on pages 26–28

Elements of compensation
The total compensation framework for senior executives comprises four elements: base salary, annual incentive, discretionary stock option awards and benefits.

(PIE CHART)



24

Base salaries

Base salaries are established in a manner consistent with the role of each senior executive. Base salary adjustments are limited to significant changes in job responsibility.

Due to the variability of annual incentive awards, the ratio of base salary (a fixed amount) to total compensation can vary significantly year-to-year. In 2007, base salaries for senior executives constituted, on average, some 17.8% of total compensation as compared to 6.5% in 2006, reflecting the significantly lower incentive awards granted for 2007.

Annual incentive awards

Each annual incentive award is assessed according to the individual’s achievement of his or her personal objectives and key performance indicators. All senior executives are considered for an annual incentive award provided performance targets are achieved, but with a few rare exceptions (for example, competitive practice or business strategy), annual incentives are completely discretionary and can vary considerably, both from individual-to-individual and from year-to-year.

Exceptional individual performance is reflected in the annual incentive award rather than in an adjustment to base salary. The maximum annual incentive award is limited to double the senior executive’s target.
50% of the annual incentive award is granted in the form of mandatory restricted or deferred UBS shares; senior executives also have the opportunity to invest a further portion of their annual incentive in UBS shares, which attract a “two-for-one” stock option match.
In certain jurisdictions, senior executives may also be offered the opportunity to allocate a portion of their cash incentive in vehicles not related to UBS shares, provided this does not jeopardize their individual shareholding requirement.



Discretionary stock option awards

Stock options help align executive performance with long-term shareholder interests, since they deliver value only to the degree the share price appreciates more than 10% after grant.
At UBS, discretionary stock option awards reward the individual’s contribution to the overall success of the firm. They are complementary to the annual incentive award, a reflection of the success of UBS’s integrated business model.

The Board of Directors approves an annual option quantity for a three-year period. Within this limit, the Chairman’s Office annually allocates option quantities to the business groups and Corporate Center.

Benefits

UBS provides benefits to help attract and retain the best employees in each local market. Changes, terminations and the introduction of new benefits are governed by the procedures contained in the “Organization Regulations of UBS AG”. Benefits are a supplemental element of total compensation and vary substantially from location to location. Retirement plan benefits: in Switzerland, senior executives participate in the firm’s general pension plan made up of three elements: (1) a basic component operated on the defined contribution principle; (2) a savings plan to bridge the income gap between UBS retirement age and the age defined for the start of social security payments; and (3) a defined contribution bonus plan.

Outside Switzerland, senior executives participate in appropriately designed local pension plans. In the US, the firm offers two plans – one operating on a cash-balance basis, the other on defined contributions. US senior executives may also participate in a 401K defined contribution plan open to all employees. In the UK, senior executives participate in a pension plan operated on a defined contribution basis. No special pension schemes are offered to senior executives.
èNote 30 inFinancial Statements 2007details the various retirement benefit plans established in Switzerland and in major foreign markets



25

Corporate Governance
Compensation, shareholdings and loans

Senior executive compensation plans

Senior executive equity ownership plan (SEEOP)
Under SEEOP, senior executives typically receive a minimum of 50% of their annual incentive award in the form of UBS shares. (The amount is subject to the discretion of the Compensation Committee). Wherever practical, senior executives receive actual UBS shares with the same rights as ordinary shareholders. Shares are denominated either in Swiss francs or US dollars depending on the currency of the executive’s incentive.

Shares normally vest in equal portions over a period of five years. For tax reasons, shares of Swiss-based senior executives are additionally restricted from sale for the duration of the five-year period.
Shares that have not vested at the time of termination are subject to forfeiture under certain circumstances; these include voluntary termination to join a competitor, termination for cause or in connection with activities detrimental to the interests of UBS.

Senior executive stock option plan (SESOP)
Discretionary stock option awards are a long-term incentive recognizing individual contributions to Group and business group performance, exceptional contribution to cross-business cooperation and integration, outstanding achievement, personal performance or commitment to UBS, outstanding professional and technical expertise and Group-wide strategic leadership skills and potential.

All senior executives may be granted discretionary stock options under SESOP and are also eligible to receive two matching stock options for each restricted share they purchase voluntarily from cash compensation.
The strike price for senior executive stock options is set at 10% above the UBS share price on the grant date. This perfor-

mance hurdle creates a strong incentive for senior executives to build sustainable shareholder value over the longer term.
Options normally vest after three years and remain exercisable for seven further years, subject to continued employment. Any unvested options will generally be forfeited should the executive leave voluntarily, join a competitor, be terminated for cause or act against the firm’s interests.

Key elements for decision-making process
within the Compensation Committee

Actual process and decisions taken
The Compensation Committee makes decisions on individual senior executive compensation based on:
–Group and business group performance;
–the individual performance and personal contributions of each member;
–actual UBS compensation in prior periods;
–an assessment submitted by the Chairman of the BoD; and
–market data of competitors.

However market data is only one of several factors in the compensation decision-making process. Market data informs but does not directly drive any individual decisions on executive compensation. In addition, the Compensation Committee takes into consideration input from the Group Chief Executive Officer (Group CEO) when making compensation decisions for GEB members.

Key competitors
Compensation and benefit levels are primarily result-driven and further benchmarked against appropriate key competitors. These companies are selected for the similarity of their core business to that of UBS, as well as for comparable size, geographic distribution, business strategy and performance.



Comparison by business activities (key peers)
Key competitorsOthers
UBSBSCitiCSDBGSJPMLBMLMSHSBCINGBofA
Global WM&BB
WM CHüüüüüüüü
WM Int.üüüüüüüüüüü
WM USüüüüüüüüüüü
BB / retail CHüüüüü
Investment Bank
Equitiesüüüüüüüüüü
Fixed incomeüüüüüüüüüüü
Foreign exchangeüüüüüüüüüü
Corporate financeüüüüüüüüüü
Global AM
Coreüüüüüüüüü
Alternativesüüüüüüüüüüü

26

Typically, these are also the companies from which UBS is most likely to hire and to which it is most likely to lose senior employees. Competitive compensation at a senior level is therefore a vital element in preventing the loss of leadership talent and experience from UBS to its competitors. Generally nine key competitors are considered to represent the most relevant labor market for senior executive compensation: Credit Suisse, Deutsche Bank, Bear Stearns, Citigroup, Gold-man Sachs, JPMorgan Chase, Lehman Brothers, Merrill Lynch and Morgan Stanley. In the view of the Compensation Committee, UBS’s compensation systems are positioned appropriately relative to these nine key competitors. For certain positions and for purposes of other analysis (including the best practice review), additional competitors may be taken into account (such as other major international banks, the large Swiss private banks, private equity firms and hedge funds, which are increasingly becoming attractive alternatives for UBS employees).

Determination of 2007 incentive targets
In February 2007, the Compensation Committee defined personal incentive targets for each senior executive. Beginning with the individual incentive award for 2006, the Compensation Committee then applied the following steps:
1)afixed percentage(increase or decrease) representing the difference between the 2007 financial forecast and the 2006 actual results – the 2006 results used were net profit attributable to UBS shareholders at the UBS Group level, and, where applicable, profit before tax adjusted for goodwill funding and impairment charges at the business group level;
2)afixed reductionaveraging 5% of the amount resulting from step one, being a productivity gain to sharehold-

ers – this means an overall increase of 5% in 2007 business performance would be required relative to 2006 in order to achieve the same level of compensation in both years (if 2007 business results had remained at the same level as 2006, the target incentive awards to senior executives would have been on average 5% lower, before the application of the final discretionary adjustment); and
3)an individualdiscretionaryincrease or decrease, taking into account future potential, any change in role, and competitive positioning.

Determination of 2007 actual incentives
In early February 2008, actual 2007 results were assessed against the 2007 forecast (UBS’s Group and business group financial targets) as well as against similar metrics of key competitors. Incentive awards of senior executives in Global Wealth Management & Business Banking, Global Asset Management and the Investment Bank were based equally on the financial performance of the Group overall and the results of the respective business group (on a 50:50 ratio). Incentive awards for executives at Group level and in Corporate Center were based fully on Group performance. These measurements and assessments resulted in afixed theoreticalincentive award for each senior executive.

Finally, this theoretical incentive award was measured against various additional factors: personal performance against objectives, future potential, leadership qualities and contributions to the overall success of UBS. This qualitative assessment led to discretionary increases or decreases from the theoretical incentive by up to +/– 25%.
Further information is included in the section “Highest total compensation for a Group Executive Board member” on pages 31–32.



(FLOW CHART)

27

Corporate Governance
Compensation, shareholdings and loans

Marcel Rohner was Chairman and CEO of Global Wealth Management & Business Banking until early July 2007. He was entitled to receive an incentive award for his time in this position given the business group’s excellent full-year results. However, he chose to forgo the 2007 incentive award.
GEB members appointed during the last quarter of a financial year are generally assessed on their Group Managing Board targets and performance objectives, while nevertheless taking account of the overall Group results.
No long-term incentive stock option awards were granted to senior executives in February 2008.

Performance factors used to determine 2007
senior executive compensation
The Compensation Committee considered the following factors when determining incentive awards for senior executives:

Performance factors exceeding 2007 target
–results in all businesses of Global Wealth Management & Business Banking were at an all-time high, with net new money inflows in this business group 37% above 2006 levels;
–in 2007, investment banking (corporate finance) net revenues rose 39% from 2006 to the highest level ever recorded, driven by double-digit growth in Asia Pacific and Europe, Middle East & Africa; and
–during 2007, UBS’s businesses in Asia Pacific made a record contribution to the Group’s global revenues.

Performance factors below target
–for the full-year 2007, UBS recorded a Group net loss attributable to its shareholders of CHF 4,384 million, entirely due to very weak trading results and writedowns in its fixed income, currencies and commodities (FICC) area;
–overall, UBS’s net new money also fell, by 7.3% to CHF 140.6 billion for full-year 2007, driven by net new money outflows in Global Asset Management;
–return on equity for full-year 2007 was negative 10.2% compared to 26.4% in 2006, despite strong results posted by UBS’s wealth and asset management businesses;
–earnings per share for 2007 were negative CHF 2.49, compared with positive CHF 5.57 for 2006; and
–UBS’s return on equity and total shareholder returns are below the median achieved by its key competitors. Since third quarter 2007, UBS’s share price has underperformed that of its peers. It has also significantly underperformed the SMI and DJ indices.

Other performance factors taken into account
–Global Asset Management’s pre-tax profits were down 5.5% on 2006. Excluding the costs for the closure of Dillon Read Capital Management of CHF 384 million, however, the business group results would have been at record level and 22% higher than in 2006.

The decrease of 67% over the 2006 compensation figures for all senior executives takes into account the losses occurred in 2007. Total incentive awards for 2007 granted to senior executives represented 0.56% of the overall incentive awards distributed to UBS employees as a whole. This is down substantially from the corresponding figure of 1.85% for 2006.



28

(BAR GRAPH)

(LINE GRAPH)

29

Corporate Governance
Compensation, shareholdings and loans

Actual 2007 compensation for members of the Board of Directors and the Group Executive Board

Actual 2007 compensation for members of the
Board of Directors

Compensation of the Chairman of the Board of Directors

For its decision on the Chairman of the BoD’s compensation, the Compensation Committee relies on an annual assessment performed by the full BoD and its own judgment with regards to the Chairman’s performance and contributions, taking into account pay levels for comparable functions outside of UBS.
As the Chairman of the BoD’s incentive award is fully dependent on the Group’s financial performance, the Compensation Committee decided against granting such an award in 2007.

Total compensation for Chairman of the BoD, Marcel Ospel, the highest-paid member of the BoD, amounted to CHF 2,568,379 for the 2007 financial year, a decrease of 90% over his total compensation in 2006.

Compensation for executive members of the
Board of Directors

No incentive award was granted to the executive members of the BoD in 2007, since this award fully depends on the Group’s financial performance.



Compensation details and additional information for executive members of the Board of Directors1

                                 
 
CHF, except where indicateda 
              Annual incentive  Discretionary      Contributions    
          Annual incentive  award (shares;  award (options;  Benefits  to retirement    
Name, function2 For the year  Base salary  award (cash)  fair value)b  fair value)c  in kindd  benefits planse  Total 
 
Marcel Ospel, Chairman  2007   2,000,000   0   0   0   307,310   261,069   2,568,379 
 
Stephan Haeringer, Executive Vice Chairman  2007   1,500,000   0   0   0   111,808   261,069   1,872,877 
 
Marco Suter, Executive Vice Chairman  2007   1,125,000   0   0   0   70,820   155,252   1,351,072 
 
1 Individual compensation figures of the previous year will be disclosed from 2008 onwards.  2 2007: Marcel Ospel and Stephan Haeringer are executive members in office as of 31 December 2007; Marco Suter stepped down during the year as a member of the Board of Directors. His 2007 payment is pro-rata for the nine months served as executive Vice Chairman.

Remuneration details and additional information for non-executive members of the Board of Directors1

                                                 
 
CHF, except where indicateda 
              Corporate  For the                        
  Audit  Compensation  Nominating  Responsibility  period AGM      Committee  Benefits  Additional      Share  Number of 
Name, function2 Committee  Committee  Committee  Committee  2007 / 2008  Base fee  retainer  in kind  payments  Total  percentage  shares3 
 
Ernesto Bertarelli, member          M       2007/2008   325,000   150,000   0   0   475,000   100   14,677 
 
Gabrielle Kaufmann- Kohler, member          M   M   2007/2008   325,000   250,000   0   0   575,000   50   9,349 
 
Sergio Marchionne, member      M           2007/2008   325,000   200,000   0   0   525,000   100   16,226 
 
Rolf A. Meyer, member  M   C           2007/2008   325,000   650,000   0   0   975,000   50   15,853 
 
Helmut Panke, member          C       2007/2008   325,000   250,000   0   0   575,000   50   9,349 
 
Peter Spuhler, member      M           2007/2008   325,000   200,000   0   0   525,000   100   16,226 
 
Peter Voser, member  M               2007/2008   325,000   300,000   0   0   625,000   50   10,162 
 
Lawrence A. Weinbach, member  C               2007/2008   325,000   600,000   0   0   925,000   50   15,040 
 
Joerg Wolle, member          M       2007/2008   325,000   150,000   0   0   475,000   100   14,677 
 

Legend:C = Chairman of the respective committee; M = Member of the respective committee

1 Individual compensation figures for the previous period will be disclosed from 2008 onwards. 2 There are nine non-executive members of the Board of Directors in office as of 31 December 2007. Sergio Marchionne was appointed to the Board of Directors at the 2007 annual general meeting. 3 Number of shares is reduced in case of the 100% election to deduct social security contribution. All remuneration payments are submitted to social security contribution / taxes at source.

30

Total payments to all members of the Board of Directors1

         
 
CHF, except where indicateda For the year2  Total 
 
Aggregate of all (executive and non-executive) members of the Board of Directors  2007   11,467,328 
 
1 The previous year will be disclosed from 2008 onwards.  2 For non-executive members of the Board of Directors: period AGM 2007 / 2008.

Payments to non-executive members of the
Board of Directors

The table on previous page shows remuneration for non-executive BoD members as from one annual general meeting date to the next, i.e. for the period 2007 / 2008.
Explanations:
–non-executive BoD members receive a base fee of CHF 325,000, including a fixed reimbursement of expenses which was previously paid separately;
–fees are paid 50% in cash and 50% in restricted UBS shares, however, members can elect to have 100% of their remuneration paid in restricted UBS shares (shares are attributed with a price discount of 15% and are restricted from sale for four years);
–2007 shares valued at CHF 36.15 (average price of UBS shares on virt-x over the last ten trading days of February 2008), discount price CHF 30.75; and
–the non-executive chairmen and members of the Audit, Compensation, Nominating and Corporate Responsibility Committees receive additional retainers between CHF 100,000 and CHF 600,000 per mandate, commensurate with the associated workload.
Remuneration of non-executive directors is not dependent on the Group’s financial performance, but is determined annually by executive members of the BoD, taking into account market practice in comparable global financial services and other relevant companies.

Actual 2007 compensation for members of the
Group Executive Board

Changes in the composition of the GEB and restructuring of existing executive roles clearly impact the total compensation number disclosed for 2007 and should be taken into consideration in any year-on-year comparison. Marcel Roh-

ner was appointed Group CEO with effect from 6 July 2007, while Raoul Weil became Chairman and CEO of Global Wealth Management & Business Banking on the same date. On 1 October 2007, Walter Stuerzinger was appointed Chief Operating Officer of Corporate Center, Marco Suter stepped down from the BoD to take up the position of Chief Financial Officer, and Joseph Scoby was appointed to the GEB as Group Chief Risk Officer.

Peter Wuffli relinquished his position as Group CEO on 6 July 2007, Clive Standish retired on 30 September 2007 and Huw Jenkins stepped down from the GEB on 30 September 2007; all three executives are contractually entitled to receive base salary, pro rata incentive and certain employment benefits until the expiry of their 12-month notice period. Huw Jenkins is retained in a consultancy position with UBS until 30 September 2008. The total amount due to all three executives – CHF 15.3 million payable in 2008 and CHF 45.3 million payable in 2009 – has been fully accrued in 2007 and reflected in the 2007 income statement. It reflects obligations earned under the repsective employment contracts.
For further information, see the “Employment agreements and contractual payments” section on page 27.

Highest total compensation for a Group Executive
Board member

Total compensation for the highest-paid member of the GEB, Rory Tapner, amounted to CHF 10,306,920. He joined the GEB on 1 January 2006 as Chairman and CEO, Asia Pacific. In reaching their decision on his compensation, the Chairman of the BoD and the Compensation Committee took into account his achievements against financial and profitability targets for the Asia Pacific region, and his performance against his personal objectives and key performance indicators for 2007.



Total compensation for all members of the Group Executive Board1

                                 
 
CHF, except where indicateda 
              Annual  Discretionary      Contributions    
          Annual  incentive  award      to retirement    
          incentive  award (shares;  (options;  Benefits in  benefits    
Name, function For the year  Base salary  award (cash)  fair value)b  fair value)c  kindd  planse  Total 
 
Rory Tapner, Chairman and Chief Executive                                
 
Officer Asia Pacific (highest-paid)  2007   1,291,960   4,501,900   4,501,904   0   10,256   900   10,306,920 
 
Aggregate of all members of the Group Executive Board (GEB) who were in office as of 31 December 20072
  2007   6,995,885   15,305,667   15,305,708   0   532,706   912,974   39,052,939 
 
Aggregate of all members of the GEB who stepped down during 20073
  2007   2,511,947   23,042,376   6,750,036   0   406,567   275,635   32,986,561 
 
1 Compensation figures for the previous year will be disclosed from 2008 onwards.  2 Number and distribution of senior executives: eight Group Executive Board members in office as of 31 December 2007, including three months for both Marco Suter and Joseph Scoby.  3 Takes into the account the period executives were active members of the Group Executive Board: nine months in office for Huw Jenkins and Clive Standish and six months for Peter Wuffli.

31

Corporate Governance
Compensation, shareholdings and loans

Under Rory Tapner’s leadership, UBS has become a dominant participant in the Asia Pacific financial sector. In 2007, UBS’s businesses in Asia Pacific made a record contribution to the Group’s global revenues. UBS is the pre-eminent wealth manager in the region and won a number of significant regional awards during 2007. The level of compensation awarded, which is appropriately positioned relative to key competitors in the region, reflects his exceptional ambassadorial skills, strong cross-business group leadership and cooperation and the unique skills needed to continue to grow UBS’s substantial presence in Asia Pacific, while maintaining high standards of corporate governance and managing a complex risk profile.

Actual 2007 compensation for former members of the Board of Directors and Group Executive Board

Former executives of UBS and its predecessor banks benefit from the use of office space and administrative support, mostly in connection with mandates they continue to hold on behalf of, or in the interests of, UBS.
All relevant payments, including these benefits, to current and former members of the BoD and GEB and their related parties are listed in the above tables. UBS does not, as a matter of principle, make any severance payments.
No additional honorariums or remunerations were paid to any BoD or GEB members. All income from business mandates must be paid or reimbursed to UBS. Senior executives have no entitlement to any compensation received by them due to any mandate-related roles undertaken on behalf of UBS, its subsidiaries or its clients.



Compensation paid to former members of the Board of Directors and Group Executive Board1

             
 
CHF, except where indicateda 
Name, function Compensation  Benefits in kind  Total 
 
Alberto Togni, former member of the Board of Directors (BoD)  318,401   502,478   820,879 
 
Philippe de Weck, former member of the BoD (Union Bank of Switzerland)  0   129,701   129,701 
 
Robert Studer, former member of the BoD (Union Bank of Switzerland)  0   260,162   260,162 
 
Georges Blum, former member of the BoD (Swiss Bank Corporation)  0   90,803   90,803 
 
Aggregate of all former members of the Group Executive Board (GEB)2
  0   257,791   257,791 
 
Aggregate of all former members of the BoD and GEB  318,401   1,240,935   1,559,336 
 
1 Compensation or remuneration that is connected with the former members’ activity on the Board of Directors or Group Executive Board, or that is not at market conditions.  2 Includes four former Group Executive Board members.

Explanations of compensation details for executive members of the BoD and members of the GEB:
a)Local currencies are converted into CHF using the exchange rates as detailed in Note 31 ofFinancial Statements 2007.
b)Values per share at grant: CHF 36.15/USD 33.55 for shares granted in 2008 related to the performance year 2007. CHF prices are average price of UBS shares at virt-x over the last ten trading days of February, and USD prices are average price of UBS shares at the New York Stock Exchange (NYSE) over the last ten trading days of February in the year in which they are granted. Share awards in this report are disclosed at fair value for the performance year for which they were granted. This differs from the recognition of share-based compensation expense in UBS’s financial statements, which is based on International Financial Reporting Standards (IFRS). Until 2007, IFRS required the recognition of the fair value of share-based payments to employees as a compensation expense over the service period (typically equivalent to the vesting period).
c)For the performance year 2007, no options were granted in 2008. In line with the “accrual principle” outlined by the SWX Swiss Exchange (SWX) in September 2007, UBS has amended its reporting of basic stock option grants in this report to align them with the performance year for which they were awarded, rather than show them in the year in which they were actually granted. According to UBS’s previous disclosure, total compensation of the executive members of the Board of Directors (BoD) and the Group Executive Board (GEB) would have been down by 60% compared to 2006, and the Chairman of the BoD’s compensation would have decreased 81%. This presentation differs from previous years, where options were included in the grant year. It also differs from the recognition of share-based compensation expense in UBS’s financial statements (see Note 30 inFinancial Statements 2007).
d)Benefits in kind: car leasing, company car allowance, staff discount on banking products and services, health and welfare benefits and general expense allowances all valued at market price.
e)In 2007, the Swiss pension plan converted to a Swiss defined contribution model. Swiss senior executives participate in the same plan as all other employees. Under this plan, employees receive a company contribution to the plan which covers compensation up to CHF 795,600. The retirement benefits consist of a pension, a bridging pension and a one-off payout of accumulated capital from the bonus plan. Employees must also contribute to the plan. This figure excludes the mandatory employer’s social security contributions (AHV, ALV) but includes the portion attributed to the employer’s portion of the legal BVG requirement. The employee contribution is included in the base salary and annual incentive award components. In both the US and the UK, senior executives participate in the same plans as all other employees. In the US there are two different plans, one of which operates on a cash balance basis and entitles the participant to receive a company contribution based on compensation limited to USD 250,000. US senior executives may also participate in the UBS 401K defined contribution plan (open to all employees), which provides a company matching contribution for employee contributions. In the UK, senior executives participate in either the principal pension plan, which is limited to an earnings cap of GBP 100,000, or a grandfathered defined benefit plan which provides a pension on retirement based on career average base salary (uncapped).

32

Share and option ownership

Senior executive share ownership policy

With a view to aligning the interests of its management with those of its shareholders, UBS strongly encourages significant levels of stock ownership on the part of its senior executives. As previously noted in this report, a substantial part of the annual incentive award for senior executives is delivered in the form of mandatory restricted or deferred UBS shares. And, moreover, senior executives who voluntarily elect to take an even greater proportion of their annual incentive award in the form of restricted or deferred UBS shares receive two additional UBS stock options for each additional share purchased. The options cannot be exercised until three years after grant and may be forfeited under certain circumstances at termination.
Five years after appointment, senior executives are required to accumulate – and then hold – UBS shares with an aggregate value of five times the amount of the last three years’ average cash component of total compensation (base salary plus cash portion of annual incentive award). Holdings in UBS shares to be accumulated range from CHF 12 million to CHF 71 million per senior executive and thus constitute a substantial part of their personal wealth. Progress reports are provided to each senior executive annually, and executives will be expected to make steady progress towards their tar-

gets. Missed targets may lead the Compensation Committee to deny the grant of discretionary stock option awards.

Senior executives are not permitted to hedge or in any way transfer the risk of price movements of unvested UBS shares; they may however enter into specifically approved hedging strategies in order to protect against a general downturn in the financial industry, provided that no more than 10% of the base value of the underlying instrument is determined by reference to UBS shares. Breaching this policy may result in the forfeiture of any hedged award.
Although UBS does not require the return of compensation already paid, its share ownership policy (the highest in UBS’s peer group) has essentially the same effect. Senior executives are required to hold UBS shares with an aggregate value of five times the amount of their average cash compensation for the last three years. This is generally more than 250% of his or her annual incentive. A 50% reduction in UBS’s share price, for example, results in the loss of at least 125% of an annual incentive’s value. Stock options are awarded with a 10% price hurdle and, currently, many of the awards of past years have no intrinsic value. In recent months, all senior executives have seen a decline in their personal wealth in line with the fall of the UBS share price. UBS believes that this provides management with a strong incentive to focus on returning UBS to its path of shareholder value creation.



Share and option ownership of members of the Board of Directors as of 31 December 2007

                             
 
                  Potentially        
                  conferred      Type and 
      Number of  Voting rights  Number of  voting rights      quantity 
Name, function1 For the year  shares held  in %  options held  in %2     of options3 
 
                      xii:   390,000 
                      xiv:   300,000 
Marcel Ospel, Chairman  2007   769,483   0.068   940,000   0.083  xv:   250,000 
 
                      vii:   80,000 
                      ix:   80,000 
                       x:   80,000 
                      xii:   120,000 
                      xiv:   100,000 
Stephan Haeringer, Executive Vice Chairman  2007   487,053   0.043   535,000   0.047  xv:   75,000 
 
Ernesto Bertarelli, member  2007   48,411   0.004   0           0 
 
Gabrielle Kaufmann-Kohler, member  2007   3,303   0.000   0           0 
 
Sergio Marchionne, member  2007   45,800   0.004   0           0 
 
Rolf A. Meyer, member  2007   50,562   0.004   0           0 
 
Helmut Panke, member  2007   13,206   0.001   0           0 
 
Peter Spuhler, member  2007   67,092   0.006   0           0 
 
Peter Voser, member  2007   11,580   0.001   0           0 
 
Lawrence A. Weinbach, member  2007   45,520   0.004   0           0 
 
Joerg Wolle, member  2007   7,709   0.001   0           0 
 
1 This table includes vested, unvested, blocked and unblocked shares and options held as of 31 December 2007.  2 No conversion rights are outstanding.  3 For details of option plans and terms, see the table on page 35.

33

Corporate Governance
Compensation, shareholdings and loans

Share and option ownership of members of the Group Executive Board as of 31 December 2007

                             
 
                  Potentially      Type and 
      Number of  Voting rights  Number of  conferred voting      quantity 
Name, function1 For the year  shares held  in %  options held  rights in %2      of options3 
 
                      ix:   30,000 
                       x:   200,000 
                      xii:   260,000 
Marcel Rohner, Group Chief Executive Officer                     xiv:   300,000 
(CEO) and Chairman & CEO Investment Bank  2007   501,846   0.044   990,000   0.088  xv:   200,000 
 
                       i:   52,560 
                      iv:   71,672 
                      vi:   120,000 
                      viii:   120,000 
                      xi:   160,000 
                      xiii:   190,000 
John A. Fraser, Chairman and                     xiv:   200,000 
CEO Global Asset Management  2007   461,764   0.041   1,074,232   0.095  xv:   160,000 
 
                       x:   80,000 
                      xii:   90,000 
                      xiv:   90,000 
Peter Kurer, Group General Counsel  2007   292,762   0.026   350,000   0.031  xv:   90,000 
 
                      ii:   4,000 
                      iv:   57,590 
                       v:   40,000 
                      viii:   100,000 
                      xi:   133,092 
                      xiii:   52,000 
                      xiv:   66,000 
Joseph Scoby, Group Chief Risk Officer  2007   509,571   0.045   533,682   0.047  xv:   81,000 
 
                      vii:   30,000 
                       x:   60,000 
                      xii:   80,000 
                      xiv:   90,000 
Walter Stuerzinger, Chief Operating Officer Corporate Center  2007   209,442   0.019   350,000   0.031  xv:   90,000 
 
                       x:   60,000 
                      xii:   120,000 
                      xiv:   100,000 
Marco Suter, Group Chief Financial Officer  2007   235,757   0.021   355,000   0.031  xv:   75,000 
 
                      iii:   264,486 
                      vi:   200,000 
                      ix:   200,000 
                       x:   160,000 
                      xii:   150,000 
                      xiv:   160,000 
Rory Tapner, Chairman and CEO Asia Pacific  2007   514,365   0.046   1,294,486   0.115  xv:   160,000 
 
                      vi:   50,000 
                      xii:   95,976 
Raoul Weil, Chairman and CEO Global                     xiv:   120,000 
Wealth Management & Business Banking  2007   212,934   0.019   405,752   0.036  xv:   139,776 
 
1 This table includes vested and unvested shares and options held as of 31 December 2007.  2 No conversion rights are outstanding.  3 For details of option plans and terms, see the table on page 35.

Total of all vested and unvested shares held by executive members of the Board of Directors
and members of the Group Executive Board1

                     
 
Shares held as of 31 December 2007
  6,396,479                 
 
Of which                    
 
vested vesting 2008  vesting 2009  vesting 2010  vesting 2011  vesting 2012 
 
3,831,550  796,533   653,726   526,425   362,709   225,536 
 
1 Includes parties closely linked to them.

No individual BoD or GEB member holds 1% or more of all shares issued.

34

Total of all blocked and unblocked shares held by non-executive members of the Board of Directors1

                 
 
Shares held as of 31 December 2007:
  296,533             
 
Of which                
 
non-restricted blocked until 2008  blocked until 2009  blocked until 2010  blocked until 2011 
 
134,808  30,602   43,096   35,874   52,153 
 
1 Includes parties closely linked to them.

No individual board member holds 1% or more of all shares issued.

Vested and unvested options held by executive members of the Board of Directors
and by members of the Group Executive Board as of 31 December 2007

                         
 
Type Number of options  Year of grant  Vesting date  Expiry date  Subscription ratio  Strike price 
 
i  52,560   2001   20/02/2004   20/02/2009   1:1  CHF 50.00 
 
ii  4,000   2002   28/02/2005   28/02/2012   1:1  USD 23.12 
 
iii  264,486   2002   20/02/2005   31/01/2012   1:1  CHF 38.88 
 
iv  129,262   2002   31/01/2005   31/01/2012   1:1  USD 22.63 
 
v  40,000   2002   28/06/2005   28/06/2012   1:1  USD 24.85 
 
vi  370,000   2002   28/06/2005   28/06/2012   1:1  CHF 40.38 
 
vii  110,000   2002   28/06/2005   28/12/2012   1:1  CHF 40.38 
 
viii  220,000   2003   31/01/2006   31/01/2013   1:1  USD 24.00 
 
ix  310,000   2003   31/01/2006   31/07/2013   1:1  CHF 32.50 
 
x  640,000   2004   28/02/2007   28/02/2014   1:1  CHF 51.88 
 
xi  293,092   2004   28/02/2007   28/02/2014   1:1  USD 40.63 
 
xii  1,305,976   2005   01/03/2008   28/02/2015   1:1  CHF 55.75 
 
xiii  242,000   2005   01/03/2008   28/02/2015   1:1  USD 47.75 
 
xiv  1,526,000   2006   01/03/2009   28/02/2016   1:1  CHF 77.33 
 
xv  1,320,776   2007   01/03/2010   28/02/2017   1:1  CHF 78.50 
 

Unvested shares and options as well as vested options are at risk of forfeiture in the event that a senior executive’s employment is terminated.

Options can only be exercised to the extent that the UBS share price exceeds the option strike price between vesting date and expiry date. The value to the executive is limited to the excess of the UBS share price over the strike price.

Disclosure of management transactions

Since 1 July 2005, UBS has disclosed on a no-name basis all transactions by members of its BoD and GEB in the firm’s shares, options and all types of financial instruments whose price is primarily influenced by UBS shares. In 2007, 12 sales with a total amount of CHF 23,566,123 and six purchases with a total amount of CHF 3,080,000 occurred.
UBS executives receive a majority of their compensation in UBS shares or options. For this reason, management transactions will, in general, see sales outweighing pur-

chases. Blackout periods and synchronized dates for unblocking or vesting of shares or options granted as compensation may lead to transactions being concentrated in short periods.

Loans

UBS – as a global financial services provider as well as the major bank in Switzerland – typically has business relationships with most large companies. In many of these companies, members of the UBS BoD often assume management or non-executive board responsibilities. Moreover granting loans – both to individuals and to companies – is part of the ordinary business of UBS. Executive members of the BoD and the members of the GEB are granted loans, fixed advances and mortgages on the same terms and conditions as other employees, based on third-party conditions adjusted for reduced credit risk.



35

Corporate Governance
Compensation, shareholdings and loans

Loans granted to members of the Board of Directors as of 31 December 2007

             
 
CHF, except where indicateda 
Name, function1 Mortgages  Other loans granted  Total 
 
Marcel Ospel, Chairman  11,000,000   0   11,000,000 
 
Stephan Haeringer, Executive Vice Chairman  0   0   0 
 
Ernesto Bertarelli, member  0   0   0 
 
Gabrielle Kaufmann-Kohler, member  0   0   0 
 
Sergio Marchionne, member  0   0   0 
 
Rolf A. Meyer, member  480,000   0   480,000 
 
Helmut Panke, member  0   0   0 
 
Peter Spuhler, member  0   0   0 
 
Peter Voser, member  0   0   0 
 
Lawrence A. Weinbach, member  0   0   0 
 
Joerg Wolle, member  0   0   0 
 
Aggregate of all members of the Board of Directors  11,480,000   0   11,480,000 
 
1 No loans have been granted to related parties of the Board of Directors members at conditions not customary in the market. For this purpose UBS considers loans granted on the terms available to UBS employees to be at arm’s length.

Loans granted to members of the Group Executive Board

             
 
CHF, except where indicateda 
Name, function1 Mortgages  Other loans granted2 Total 
 
Joseph Scoby, Group Chief Risk Officer  0   3,145,796   3,145,796 
 
Aggregate of all members of the Group Executive Board  3,487,000   3,145,796   6,632,796 
 
1 No loans have been granted to related parties of the members of the Group Executive Board at conditions not customary in the market. For this purpose UBS considers loans granted on the terms available to UBS employees to be at arm’s length.  2 Guarantees.

Loans and advances to non-executive BoD members and related parties are made on terms comparable to those prevailing at the time for transactions with non-affiliated persons.

Loans granted to companies related to seven non-executive BoD members amounted to CHF 681.3 million, including guarantees, contingent liabilities and unused committed credit facilities. For details see Note 31 inFinancial Statements 2007.

Loans granted to former members of the Board of Directors and Group Executive Board

No loans have been granted to former members of the BoD or of the GEB or to their related parties at conditions not customary in the market. For this purpose, UBS considers loans granted under the terms available to UBS employees’ to be at arm’s length.



36

Corporate Governance
Shareholders’ participation rights

Shareholders’ participation rights

UBS is committed to making itshareholder participation in its decision-making process and aims to make such participation as easy as possible for shareholders to take part in its decision-making processes.possible. More than 200,000300,000 directly registered shareholders, andas well as some 75,00090,000 US shareholders registered via nominee companies, regularly receive written information about the firm’s activities and performance and are personally invited to shareholder meetings. Refer to the “Information policy” section of this report for further information on these documents.

Relationships with shareholders

UBS fully subscribes to the principle of equal treatment of all shareholders, rangingwho range from large investment institutions to individual investors, and regularly informs them about the development of the company of which they are co-owners.

The annual general meeting (AGM) offers shareholders the opportunity to raise any questions regarding the development of the company and the events of the year under review. The membersMembers of the Board of Directors (BoD) and Group Executive Board (GEB), as well as the internal and external auditors, are present to answer these questions.

Voting rights, restrictions and representation

UBS places no restrictions on share ownership and voting rights. Nominee companies and trustees, whowhich normally represent a greatlarge number of individual shareholders, may hold an unlimited number of shares, but voting rights are limited to a maximum of 5% of outstanding UBS shares in order to avoid the risk of unknown shareholders with large stakes being entered intoin the share register. Securities clearing organizations, such as The Depository Trust Company in New York, are exempt fromnot subject to the 5% voting limit.

In order to be recorded in the share register with voting rights, shareholders must confirm that they acquired UBS shares in their own name and for their own account. Nominee companies /and trustees are required to sign an agreement with UBS confirming their willingness to disclose to the company, upon its request, individual beneficial owners holding more than 0.3% of all issued shares.
All shareholders registered with voting rights are entitled to participate in shareholder meetings. If they do not wish to attend in person, they can issue instructions to accept, reject or abstain on each individual item on the meeting agenda either by either giving instructions to an independent proxy designated by UBS (as required under Swiss company law) or by appointing UBS, another bank or another registered shareholder of their choice to vote on their behalf. Nominee companiescom-

panies normally submit the proxy material to the beneficial owners and transmit the collected votes to UBS.

Statutory quorums

Shareholder resolutions, the election and re-election of members of the BoD and the appointment of the Group and statutory auditors are decided at the AGM by an absolute majority of the votes cast, excluding blank and invalid ballots. Swiss company law requires that for certain specific issues a majority of two-thirds of the votes represented at the meeting vote in favor of the resolution. These issues include, among others, the introduction of voting shares, the introduction of restrictions on the transferability of registered shares, conditional and authorized capital increases, and restrictions or exclusion of shareholders’ pre-emptive rights.

The “Articles of Association of UBS AG” (“Articles of Association”) also requiresrequire a two-thirds majority of votes represented for any change to its provisions regarding the number of BoD members and any decision to remove one-fourth or more of the members of the BoD.
Votes and elections are normally conducted electronically to ascertain clearly ascertain the exact number of votes cast. Voting by a show of hands remains possible if a clear majority is predictable. Shareholders representing at least 3% of the votes represented may still request, however, that a vote or election take place electronically or by written ballot. In order to allow shareholders to clearly express their views on all individual topics, each item on the agenda is put to vote individuallyseparately and BoD elections are made on a person-by-person basis.

Convocation of general meetings of shareholders

The annual general meeting of shareholdersAGM normally takes place in April each year, but in any case within six months of the close of the financial year. A personal invitation including a detailed agenda and explanation of each motion is sent to every registered shareholder at least 20 days ahead of the scheduled meeting. The meeting agenda is also published in various Swiss and international newspapers and on the internet atwww.ubs.com/shareholder-meeting.



37

agm.

Corporate Governance
Shareholders’ participation rights

Extraordinary general meetings (EGMs) may be convened whenever the BoD or the statutory auditors consider it necessary. Shareholders individually or jointly representing at least 10% of the share capital may, at any time, ask in writing that an EGM be convened to deal with a specific issue put forward by them. Such a request may also be brought forward during the AGM.



211

Corporate governance and compensation
Corporate governance  

Placing of items on the agenda

Shareholders individually or jointly representing shares with an aggregate par value of CHF 62,500 may submit proposals for matters to be placed on the agenda for consideration byat the shareholders’ meeting.

UBS publishes the deadline for submitting such proposals in various theSwiss and international newspapers Official Gazette of Commerceand on

its website(www.ubs.com/shareholder-meeting)agm).Requests for items to be placed on the agenda must include the actual motions to be put forward, together with a short explanation, if necessary. The BoD formulatesfor-

mulates an opinion on the proposals, which is published together with the motions.

Registrations in the share register

The general rules for being entered with voting rights in the Swiss or US Share Registershare registers of UBS also apply before general meetings of shareholders (for details see previous page).shareholders. There is no “closing of the share register” in the days ahead of the meeting. Registrations, including the transfer of voting rights, are processed for as long as technically possible, normally until two days before the meeting.



38212

Corporate governance and compensation

Corporate Governance
Change of control and defense measures

Change of control and defense measures

UBS refrains from restrictions that would hinder developments initiated in or supported by the financial markets. It also does not have any specific defenses in place to prevent hostile takeovers.

Duty to make an offer

An investor who acquires more than 331/3% of all voting rights (directly, indirectly or in concert with third parties), whether they are exercisable or not, has to submit a take-over offer for all shares outstanding, according to Swiss stock exchange law. UBS has not elected to change or opt out of this rule.

Clauses on changes of control

The service agreements and employment contracts of the executiveChairman of the Board of DirectorDirectors (BoD) members,and of the members of the Group Executive Board (GEB) and of the Group Managing Board (GMB) do not generally contain clauses triggered by a change of control. UBS does not offer “golden parachutes” to its senior executives. EmploymentFor 2008, employment contracts contain employment notice of termination periods of 12-months12 months for GEB members and six to 12-months12 months for GMB members, depending on local market practice. From 2009, employment contracts for GEB members will have a reduced notice period of six months. During this notice period they are entitled to salary and bonuses.pro rata discretionary incentive awards.

The Compensation Committeehuman resources and compensation committee of the BoD may, however, accelerate the vesting of optionsrestricted shares and amend the vesting date or lapse date of options for restricted sharesall employees in case of a change of control.



39213

Corporate Governancegovernance and compensation
AuditorsCorporate governance

Auditors

Audit playsis an important role inintegral part of corporate governance. While putting high priority on remaining independent,retaining their independence, the external auditors and Group Internal Audit closely coordinate their work, thereby ensuringwork. The risk committee, the most effective performance of their responsibilities. The Chairman’s Office, the Audit Committeeaudit committee and ultimately the Board of Directors (BoD) supervise the functioningadequacy of audit work.

External, independent auditors

At the annual general meeting (AGM) in 2008, Ernst & Young Ltd., Basel, (Ernst & Young) have been assigned the mandate to servewere re-elected as global auditors for the UBS Group. TheyGroup (Group) for a further one-year term of office. Ernst & Young assume all auditing functions according to laws, regulatory requests and the “Articles of Association of UBS AG” (“Articles of Association”; see also the paragraph about auditors’ responsibilities in the regulation and supervision section on pages 44–46). The Audit Committee of the Board of Directors (BoD) annually assesses the independence of Ernst & Young and has determined that they meet all independence requirements established by the US Securities and Exchange Commission (SEC). Authority for pre-approval of all additional audit, audit-related and non-audit mandates to the principal auditors lies with the Audit Committee, ensuring that independencelead partners in charge of the auditors is not jeopardized by conflicts of interest through additional mandates.UBS audit are Andrew McIntyre and Andreas Blumer (since 2005 and 2004, respectively). Ernst & Young informwill be proposed for re-election at the Audit Committee annually of the measures they are taking to ensure their own and their employees’ independence from UBS. The Audit Committee assesses this information on behalf of the BoD and informs the BoD accordingly.AGM in 2009.

At the AGM in 2006, annual general meeting (AGM), BDO Visura, Zurich, was appointed as special auditor for a three-year term of office. The special auditors provide audit opinions in connection with capital increases independently from the Group auditors.

Duration of the mandate and term of
office of the lead partners

After the UBS-SBC merger, Ernst & Young were first appointed as UBS’s principal external auditor for the audit of the 1998 financial statements. Following a comprehensive evaluation process during 1999, they were proposed for re-election at the 2000 AGM. AGMs up to 2007 annually confirmed their mandate, and they BDO Visura will be proposed for re-election at the 2008 AGM.
The lead partnersAGM in charge of the UBS audit are Andrew McIntyre and Andreas Blumer (since 2005 and 2004, respectively).2009.

Fees paid to principal external auditors
UBS paid the fees (including expenses) listed in the table below to its principal external auditors Ernst & Young.

Audit work includes all services necessary to perform the audit in accordance with applicable generally accepted auditing principles as well as other assurance services that generally only the principal auditor can provide, including comfort letters, statutory and regulatory audits, attest services, consents and reviews of documents filed with regulatory bodies under applicable law.
Audit-related work consists primarily of additional attest services, such as retirement and compensation plan audits,



Fees paid to external independent auditors

UBS paid the following
The fees (including expenses) paid by UBS to its principal external auditors Ernst & Young Ltd.:

         
  For the year ended 
in CHF thousand 31.12.07  31.12.06 
 
         
Audit
        
 
Global audit fees  49,000   48,925 
 
Additional services classified as audit (services required by law or statute,
including work of non-recurring nature mandated by regulators)		  12,718   14,766 
 
Total audit
  61,718   63,691 
 
         
Non-audit
        
 
Audit-related fees  9,779   7,843 
 
Tax advisory  1,892   1,249 
 
Other  1,699   3,043 
 
Total non-audit
  13,370   12,135 
 

40

agreed upon procedures reports required by contract and audits performed at the request of management. It also includes due diligence work on acquisitions and initial work relating to the eventual attestation as to UBS’s compliance with section 404 of the US Sarbanes-Oxley Act of 2002.

Tax work means services performed by professional staff in Ernst & Young’s tax division, other than audit work, and includes tax compliance, tax consultation and tax planning in respect of UBS’s own affairs. Ernst & Young may not provide personal tax consulting to members of UBS management who serve in a financial reporting oversight role.
“Other” services are only approved on an exceptional basis. In 2006 and 2007, they mainly comprised on-call advisory services and selected transaction-related operational reviews.
In addition to the fees listed in the table on page 40,following table. In addition, Ernst & Young received CHF 31,561,000 in 2008 (CHF 31,050,000 in 2007 (CHF 22,080,000 in 2006)2007) for audit and tax work performed on behalf of UBS investment funds, many of which have independent fund boards or trustees.

Audit work includes all services necessary to perform the audit in accordance with applicable laws and generally accepted auditing principles as well as other assurance services that generally only the principal auditor can provide. This includes statutory and regulatory audits, attest services, and reviews of documents to be filed with regulatory bodies.
Audit-related work comprises assurance and related services that are traditionally performed by the principal auditors, such as letters of comfort, internal control reviews, attestation services related to financial reporting, consultation concerning financial accounting and reporting standards as well as investment performance reports.
Tax work performed by Ernst & Young’s tax division encompasses routine preparation of draft original and amended tax returns, general tax planning and advice on tax compliance matters.
Other services are approved on an exceptional basis only. In 2007 and 2008, they mainly comprised on-call advisory services.

Pre-approval procedures and policies
AllTo ensure their independence, all services provided by Ernst & Young have to be pre-approved by the Audit Committeeaudit committee of the BoD. A pre-approval may be granted either for a specific mandate or in the form of a general pre-approval authorizing a limited and well-defined type and amount of services.

The Audit Committeeaudit committee has delegated pre-approval authority to its Chairman. After endorsement bychair; hence the Group Chief Financial Officer (Group CFO), requestssubmits all proposals for mandates are routedservices by Ernst & Young to the Company Secretary, who submits themchair of the



Fees paid to external auditors

UBS paid the Chairman of the Audit Committeefollowing fees (including expenses) to its external auditors Ernst & Young Ltd.:

         
  For the year ended 
In CHF thousand 31.12.08  31.12.07 
 
         
Audit
        
 
Global audit fees  45,848   49,000 
 
Additional services classified as audit (services required by law or statute,
including work of a non-recurring nature mandated by regulators)		  9,918   12,718 
 
Total audit
  55,766   61,718 
 
         
Non-audit
        
 
Audit-related fees  8,430   9,779 
 
Tax advisory  504   1,892 
 
Other  1,246   1,699 
 
Total non-audit
  10,180   13,370 
 

214

Corporate governance and compensation

audit committee for approval. At each quarterly meeting, the Audit Committeecommittee is informed onof the approvals granted by its Chairman.

The SEC prohibits independent auditors from providing a number of specific services. Ernst & Young have not provided any such services during 2007.
chair.

Group Internal Audit

With 314331 staff members worldwide at 31 December 2007,2008, Group Internal Audit supports the BoD and its committees by independently assessing the effectiveness of UBS’s system of internal controls and compliance of the firmfirm’s compliance with statutory, legal and regulatory requirements. All key issues raised by Group Internal Audit are communicated to the management responsible, to the Group Chief Executive Officer (Group CEO) and to the executive membersChairman of the BoD via formal audit reports. The Chairman’s OfficeIn addition, the BoD’s risk and the Audit Committee of the BoDaudit committees are regularly informed of important

findings.informed about important issues. Group Internal Audit closely cooperates with internal and external legal advisors and risk control units on investigations into major control issues.

To maximize its independence from management, the Headhead of Group Internal Audit, Ian Overton, reports directly to the Chairman of the BoD.BoD and to the risk committee. Group Internal Audit has unrestricted access to all accounts, books and records and must be provided with all information and data needed to fulfill its auditing duties. The Chairman’s Officerisk committee may order special audits to be conducted, andconducted. BoD members, BoD committees or the Group Executive Board (GEB), withCEO may submit requests for such audits to the agreement of the Chairman of the BoD, may also instruct Group Internal Audit to conduct such audits.risk committee.
Coordination and close cooperation with the external auditors enhance the efficiency of Group Internal Audit’s work.

Supervisory and control instruments vis-à-vis
the external auditors

The Audit Committee, on behalf of the BoD, monitors the qualification, independence and performance of the Group Auditors and their lead partners. It prepares proposals for appointment or removal of the external auditors for review by the full BoD, which then submits the proposal to the AGM.

The Audit Committee reviews the annual written statement submitted by the external auditors as to their independence. It also reviews the engagement letter between UBS and the external auditors and the fees and terms of the planned audit work. Mandates to the Group auditors for additional audit, audit-related and permitted non-audit work are subject to pre-approval by the Audit Committee. For details see preceding paragraph on external, independent auditors.
The external auditors provide timely reports to the Audit Committee on critical accounting policies and practices used, on alternative treatments of financial information discussed with management, and other material written communication between external auditors and management.
The Audit Committee regularly meets with the lead partners of the external auditors, at least four times per year. It also regularly meets with the Head of Group Internal Audit.
At least once per year, the Chairman’s Office discusses with the lead partners of Ernst & Young the audit work performed, the main findings and critical issues that arose during the audit.
The Audit Committee and the Chairman’s Office report back to the BoD about their contacts and discussions with the external auditors. Once per year, the lead partners take part in a BoD meeting, normally to present the Long-form Report of the External Auditors, as required by the Swiss Federal Banking Commission.



41215

Corporate Governancegovernance and compensation
Information policyCorporate governance

Information policy

UBS’s financial disclosure policies aim at achieving a fair market value for UBS shares through open, transparent and consistent communication with investors and financial markets.

UBS provides regular information to its shareholders and to the financial community.

Financial results will be published as follows

   
 
First Quarterquarter 65 May 20082009
 
Second Quarterquarter 124 August 20082009
 
Third Quarterquarter 43 November 20082009
 
Fourth Quarterquarter 109 February 20092010
 

The annual general meeting of shareholders will take place as follows

 
200823 April 2008  
 
2009 15 April 2009
2010 14 April 2010
 

UBS meets with institutional investors worldwide throughout the year. It regularly holds results presentations, specialistspecial investor seminars, road shows, individual and group meetings. Where possible, meetings involve senior management as well as members of the Investor Relationsinvestor relations team. UBS makes use of diverse technologies such as webcasting, audio links and cross-location video-conferencing to widen its audience and maintain contact with shareholders around the world.

The website www.ubs.com/investors has comprehensive information on UBS, including a complete set of published reporting documents, on-demand access to recent webcasts and a selection of senior management industry conference presentations.
Once a year, unless they explicitly choose not to, registered shareholders receive a summary of UBS’s annual report (for example,Review 2007).in the form of an annual review. It provides an overview of the firm and its activities during the year as well as key financial information. Each quarter, shareholders are mailed a brief update on the firm’s quarterly financial performance. Shareholders can also request UBS’s complete financial reports, produced on a quarterly and annual basis, free of charge.
To ensure fair access to and dissemination of its financial information, UBS makes its publications available to all shareholders at the same time.
A complete list of all sources of information about UBS, and contact details for shareholders as well as other interested parties, are included in this report on pages 54–56.
èRefer to www.ubs.com/investors for a complete set of published reporting documents, access to recent webcasts and a selection of senior management industry conference presentations

Financial disclosure principles

Based on discussions with analysts and investors, UBS believes that the market rewards companies that provide clear, consistent and informative disclosure about their business. Therefore, UBS aims to communicate its strategy and results in a manner that allows shareholders and investors to gain a full and accurate understanding of how the company works, what its growth prospects are and what risks the strategy

and results might entail.

Feedback from analysts and investors is continually assessed and, where relevant, reflected in the firm’s quarterly and annual reports. To continue to achieve these goals, UBS applies the following principles in its financial reporting and disclosure:
– transparencyTransparencyin disclosure is designed to enhanceenhances understanding of the economic drivers and, as with the provision of detailed business results, of the business, buildingbuilds trust and credibility;credibility.
– consistencyConsistencyin disclosure within each reporting period and between reporting periods;periods.
– simplicitySimplicityin disclosure allows readers to gain the appropriate level of understanding of the performance of the firm’s businesses’ performance;businesses.
– relevanceRelevancein disclosure avoids information overload by focusing on what is relevant to UBS’s stakeholders or required by regulation or statute; andstatute.
– bestBest practicein line with industry norms, leading the way to improved standards where possible.

Financial reporting policies

UBS reports its results after the end of every quarter, including a breakdown of results by business groups and business unitsdivisions and extensive disclosures relating to credit and market risk.

UBS’s financial statements are prepared according to International Financial Reporting Standards (IFRS). A as issued by the International Accounting Standards Board. Refer to “Note 1 Summary of significant accounting policies” in the financial statements of this report for a detailed explanation of the basis of UBS’s accounting is given in Note 1 inFinancial Statements 2007. An explanation of the critical accounting policies applied in the preparation of UBS’s financial statements is also provided in a specific section inFinancial Statements 2007.accounting.
UBS is committed to maintaining the transparency of its reported results and to ensuring that analysts and investors can make meaningful comparisons with previous periods. If there is a major reorganization of its business units,divisions, or if changes to accounting standards or interpretations lead to a material change in the Group’s reported results, UBS’s results



42

are restated for previous periods when required by applicable accounting standards to show how they would have been reported according to the new basis and provide clear explanations of all relevant changes. Prior to publication of first quarter 2009 results, UBS will publish restated business division results on www.ubs.com/investors showing quarterly and annual results for 2007 and 2008 under the new organizational structure announced on 10 February 2009.

US regulatory disclosure requirements
As a Swissreporting company listed onunder the New York Stock Exchange (NYSE)US federal securities laws (a foreign private issuer), UBS compliesmust file or submit certain reports and other information, including certain financial re-



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Corporate governance and compensation

ports, with the disclosure requirements of theUS Securities and Exchange Commission (SEC) and the NYSE for foreign private issuers. These include the requirement to make certain filings with the SEC. As a foreign private issuer, some of the SEC’s regulations and requirements which apply to domestic issuers are not applicable to UBS. UBS’s regular quarterly reports are provided to the SEC under cover of Form 6-K, and. UBS files an annual report on Form 20-F. These reports, as well as materials sent20-F with the SEC, and submits to shareholders in connection with annual and special shareholder meetings, are all available at www.ubs.com/investors. the SEC its quarterly financial reporting under cover of Form 6-K.
As of the end of the period covered by this annual report, an evaluation was carried out under the supervision of management, including

the Group Chief Executive Officer (CEO) and Group Chief Financial Officer (CFO), of the effectiveness of UBS’s disclosure controls and procedures (as defined in Rule 13a–15e) under the US Securities Exchange Act of 1934. Based upon that evaluation, the Group CEO and Group CFO concluded that these disclosure controls and procedures were effective as of the end of the period covered by this annual report. No significant changes were made in UBS’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

èThese reports and filings, as well as materials sent to shareholders in connection with annual and extraordinary general meetings, are all available at www.ubs.com/investors
In accordance with Section 404 of the US Sarbanes-Oxley Act of 2002, the management of UBS is responsible for establishing and maintaining adequate internal control over financial reporting.Financial Statements 2007, one The financial statements of the four reports that comprise UBS’s annualthis report containscontain management’s assessment (as of the time of publication of the annual report) of the effectiveness of internal control over financial reporting andas of the time of the report’s publication. The external auditors’ report on such assessment.this assessment is also included.



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Regulationgovernance and supervisioncompensation
Corporate governance

Regulation and supervision

UBS aims to comply with all applicable provisions and to work closely and maintain good relations with regulators in all jurisdictions where the firm conducts business.

As a Swiss-registered company, UBS’s home country regulator is the Swiss Federal Banking Commission (SFBC)Financial Market Supervisory Authority (FINMA).

However, UBS’s operations throughout the world are global and are therefore regulated and supervised by the relevant authorities in each of the jurisdictions in which it conducts business.
The following sections of this report describe This section describes the regulation and supervision of UBS’s business in Switzerland, the firm’s home market. They also describe theThe regulatory and supervisory environmentenvironments in the US and the UK, UBS’s next two largest areas of operations.
operations, are also discussed.

Regulation and supervision in Switzerland

GeneralFINMA, the successor organization of the Swiss Federal Banking Commission (SFBC), commenced operations on 1 January 2009. On that date, the Federal Act on the Swiss Financial Market Supervisory Authority, which the Swiss Parliament approved on 22 June 2007, went into full legal force. The effect of the Act is to merge three bodies – the Swiss Federal Banking Commission (SFBC), the Federal Office of Private Insurance, and the Anti-Money Laundering Control Authority – into FINMA. In addition to a new organizational framework which will also impact supervisory activity, the Act streamlines and harmonizes the sanctions regime applicable to financial institutions.

Swiss federal legislation
The legislation most relevant to UBS is that enacted by the Swiss Parliament and the Swiss Federal Council.

In this respect, UBS is regulated in Switzerland under a system established by the Swiss Federal Law relating to Banks and Savings Banks of 8 November 1934, as amended, and the related Implementing Ordinance of 17 May 1972, as amended, which are together known as the Federal Banking Law. Depending on the license obtained under this law, banks in Switzerland may engage in a full range of financial services activities, including commercial banking, investment banking and asset management. Banking groups may also engage in insurance activities, but these must be undertaken through a separate subsidiary. The Federal Banking Law establishes a framework for supervision by FINMA.
Switzerland implemented the SFBC.internationally agreed capital adequacy rules of the Basel Capital Accord (Basel II) by means of the Capital Adequacy Ordinance of 29 September 2006 and subsequent FINMA circulars. Switzerland imposes a more differentiated and tighter regime than the internationally agreed rules, including more stringent risk weights.
èRefer to the “Capital management” section of this report for more details about capital requirements

Capital requirements for the two large banks, UBS and Credit Suisse, exceed the Swiss minimum due to a mandatory capital buffer under Pillar 2 of Basel II. The revised decree on capital

requirements issued at the end of 2008 increased the risk-based buffer and complemented it with a leverage ratio requirement, i.e. a minimum ratio of capital and balance sheet.

The Federal Act of 10 October 1997 on the Prevention of Money Laundering in the Financial Sector (Money(Anti-Money Laundering Act, MLA)AMLA) lays down a common standard for due diligence obligations for the whole financial sector which must be met in order to prevent money laundering.
In its capacity as a securities broker, UBS is governed by the Swiss Federal Law on Stock Exchanges and Securities Trading of 24 March 1995, as amended. The SFBCFINMA is the competent supervisory authority.
In June 2007,

Regulation by FINMA
FINMA is strongly involved in the Parliament adoptedshaping of the new Integrated Financial Supervision Act (FINMAG) which will come into effect on 1 January 2009. Its aim is to create a new market supervisory authority (FINMA)legislative framework for banks, especially through the following mechanisms:
–First, FINMA has substantial influence on the drafting of Swiss federal legislation (for example, the specific ordinance concerning the prevention of money laundering of 18 December 2002, as amended).
–On a more technical level, FINMA is empowered to issue circulars, 44 of which are presently effective. These include, for example, FINMA circular 08/38 on market behavior and FINMA circular 08/24 on supervision and internal controls at banks.

Self-regulation by merging the SFBC, the Office of Private Insurance (BPV) and the Federal Money Laundering Control Authority. In addition to a new organizational framework, FINMAG streamlines and harmonizes the sanctions regime applicable to financial institutions.

Regulatory policy
SIX Swiss regulatory policies are formulated on three levels. The first two are the statutory levels of primary and secondary legislation issued by ParliamentExchange and the Swiss Federal Council. The SFBC has substantial influence onBankers Association
Certain aspects of securities brokering, such as the draftingorganization of these regulatory statutes (for example,trading, are subject to self-regulation through the specific ordinance concerningSIX Swiss Exchange (SIX), under the prevention of money laundering of 18 December 2002, amended in 2003). On a more technical level, the SFBC is empowered to issue so-called circulars, 27 of which are presently effective. These include a circular ruling on the supervision and internal controls at banks, issued on 27 September 2006, and a circular ruling on theoverall supervision of large banking groups, issued on 21 April 2004. The latter prescribes what information UBS is required to provide to the SFBC, the structure of UBS’s regular interaction with them and the scope of on-site reviews (prudential independent controls) and extended audits by the SFBC. In an effort to streamline regulation, the SFBC decided on 1 December 2006, in consultation with the industry, to rescind five circulars. In certain fields, the SFBCFINMA. Examples are:
–the Listing Regulations of 24 January 1996, as amended, and the General Conditions dated 7 September 2007 (the Listing Regulations are currently under review and amendments may go into force on 1 July 2009); and
–the Directive on the Disclosure of Management Transactions of 1 July 2005.

FINMA also officially endorses self-regulatory guidelines issued by the banking industry (through the Swiss Bankers’Bankers Association), making them an integral part of banking regulation. Examples are:
–Guidelines on the simplified prospectus for structured products, 2007;
–Agreement of Swiss Banks on Deposit Insurance, 2005;
–Allocation Directives for the New Issues Market, 2004;
– Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence, (CDB 03), 2003;2008.
– Directives on the Independenceindependence of Financial Research, 2008; andfinancial research, 2008.
–Guidelines on the simplified prospectus for structured products, 2007.
–Agreement of Swiss Banks on Deposit Insurance, 2005.
– Guidelines on the handling of dormant accounts, custody accounts and safe-deposit boxes held in Swiss banks, 2000.

Self regulation
Certain aspects of securities broking, such as the organization of trading, are subject to self-regulation through the SWX Swiss Exchange (SWX) (for example, the Listing regulation of 24 January 1996, as amended and the General Conditions dated 7 September 2007) and the Swiss Bankers’ Association (for example, the code of conduct for securities brokers, 1997), under the overall supervision of the SFBC. As



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a meansTwo-tier system of improving information flows to investors, the SWX enacted an amendment on 1 July 2005 requiring the disclosure of management transactions.

Role of external auditorssupervision and direct supervision
of large banking groups

The SwissUBS and Credit Suisse
Generally, supervision in Switzerland is based on a division of tasks between FINMA and a number of authorized audit firms. Under this two-tier supervisory system, relies on banks’ external auditors, who are licensedFINMA has the responsibility for overall supervision and supervised byenforcement measures while the SFBC, andauthorized audit firms carry out official duties on behalf of and subject to sanctions imposed by the SFBC.FIN-MA. The responsibility of external auditors not only encompasses the audit of financial statements, but also entails the reviewreviewing of banks’ compliance with all prudential requirements.
requirements and on-site audits.
Due to their major role in the Swiss financial system, FINMA subjects UBS and Credit Suisse to its direct supervision. The SFBC hasregime of direct responsibility for supervision in two areas: capital requirements for market risk (expanded as of 1 January 2008 to coveris regulated by the advanced credit and operational risk models of Pillars II and III under Basel II,) andFINMA 08/9 circular on the supervision of large banking groups. Supervisory tools include an intensive schedule of meetings with bank management and provision of management information encompassing all control and business areas, direct audits (on-site examinations), on-site visits to the banks’ operations in foreign jurisdictions and coordinated action and exchange with important host supervisors.
FINMA assigns to each of the two large Swiss banking groups including UBS.a team responsible for monitoring their risk situation on an ongoing basis. The analyses produced by these supervisory strategy entails direct supervision in the formteams are combined and supplemented with those of regular meetings with bank management, supervisory visits to the firm’s operations, on-site reviews, direct reporting (both routine and ad hoc) and regular meetings, with the host regulatorstwo cross-institutional specialist groups focusing on specific aspects of its overseas activities. There is close cooperation, including regular meetings between the SFBC and UBS’s US and UK regulators, as well as further links with other relevant regulators (particularly in the Asia Pacific region).

Reporting requirements and capital requirements
UBS reports financial, capital, legal and risk information to the SFBC. The SFBC also reviews the bank’s riskinvestment banking, wealth management and control principles and procedures in all areas of risk, including “know your customer” rules and anti-money laundering practices.

Switzerland applies the internationally agreed capital adequacy rules of the Basel Capital Accord, but the SFBC implementation imposes a more differentiated and tighter regime than the internationally agreed rules, including a more stringent definition of capital (see the “Capital management” section inRisk, Treasury and CapitalManagement2007). On 18 October 2006, the SFBC issued a national law implementing Basel II, which entered into force on 1 January 2008.asset management.

Disclosures to the Swiss National Bank
While Switzerland’s banks according to Swiss banking law, are primarily supervised by the SFBC whileFINMA, compliance with liquidity rules is monitored by the Swiss National Bank (SNB). UBS sendsThe SNB also takes a direct interest in the SNB detailed monthly interim balance sheets, capital adequacy and liquidity statements. UBS also submits an annual statement of condition and quarterly stress testing results and cooperates with the Financial Stability and Oversight unitpractice of the SNB whenever required. The SNB can also

require UBS to make additional disclosures of financial condition and other information relevant to its regulatory oversight.both big banks. Liquidity regulation is currently being reformed.

Regulation and supervision in the US

Banking regulation
UBS’s operations in the US are subject to a variety of regulatory regimes. It maintains branches in California, Connecticut, Illinois, New York and Florida. UBS’s branches located in California, New York and Florida are federally licensed by the Office of the Comptroller of the Currency. US branches located in Connecticut and Illinois are licensed by the state banking authority of the state in which the branch is located. Each US branch is subject to regulation and examination by its licensing authority. In addition, the Board of Governors of the Federal Reserve System exercises examination and regulatory authority over UBS’s state-licensed US branches. The firmUBS also maintains state and federally chartered trust companies and other limited purpose banks, which are regulated by state regulators or the Office of the Comptroller of the Currency. In addition, the Board of Governors of the Federal Reserve System exercises examination and regulatory authority over UBS’s state-licensed US branches. Only the deposits of UBS’s subsidiary bank located in the

state of Utah are insured by the Federal Deposit Insurance Corporation. The regulation of the firm’s US branches and subsidiaries imposes restrictions on the activities of those branches and subsidiaries, as well as prudential restrictions, such as limits on extensions of credit to a single borrower, including UBS subsidiaries and affiliates.

The licensing authority of each US branch has the authority, in certain circumstances, to take possession of the business and property of UBS located in the state of the office it licenses in certain circumstances.licenses. Such circumstances generally include violations of law, unsafe business practices and insolvency. As long as UBS maintains one or more federal branches, the Office of the Comptroller of the Currency also has the authority to take possession of the US operations of UBS AG under similar circumstances, and this federal power may preemptpre-empt the state insolvency regimes that would otherwise be applicable to UBS’s state-licensed branches. As a result, if the Office of the Comptroller of the Currency exercised its authority over the US branches of UBS AG pursuant to federal law in the event of a UBS insolvency, all of UBS’s US assets would most likely be applied first to satisfy creditors of its US branches as a group, and then made available for application pursuant to any Swiss insolvency proceeding.
In addition to the direct regulation of its US banking offices, UBS is subjected to oversight regulation by the Board of Governors of the Federal Reserve System under various laws (including the International Banking Act of 1978 and the Bank Holding Company Act of 1956) because it operates US branches. On 10 April 2000, UBS AG was designated a “financial holding company” under the Bank Holding



45

Corporate Governance
Regulation and supervision

Company Act of 1956. Financial holding companies may engage in a broader spectrum of activities than bank holding companies or foreign banking organizations that are not financial holding companies, including underwriting and dealing in securities. To maintain its financial holding company status, (1) UBS, its US subsidiary federally chartered trust company and its US subsidiary bank located in Utah are required to meet or exceed certain capital ratios, and(2) UBS’s US branches, its US subsidiary federally chartered trust company, and its US subsidiary bank located in Utah are required to meet or exceed certain examination ratings.ratings, and (3) UBS’s subsidiary bank in Utah is required to maintain a rating of at least “satisfactory” unter the Community Reinvestment Act of 1997. A major focus of US governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to UBS and its subsidiaries impose obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious consequences for the firm, both in legal terms and in terms of its reputation.



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Corporate governance

US regulation of other US operations
In the US, UBS Securities LLC and UBS Financial Services Inc., as well as UBS’s other US registeredUS-registered broker-dealer entities, are subject to regulations that cover all aspects of the securities business, including:
–sales methods;
–trade practices among broker-dealers;
– sales methods; trade practices among broker-dealers; use and safekeeping of customers’ funds and securities; capital structure; record-keeping; the financing of customers’ purchases; and safekeeping of customers’ funds and securities;
–capital structure;
–record-keeping;
–the financing of customers’ purchases; and
–the conduct of directors, officers and employees.

These entities are regulated by a number of different government agencies and self-regulatory organizations, including the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Depending upon the specific nature of a broker-dealer’s business, it may also be regulated by some or all of the New York Stock Exchange (NYSE), the Municipal Securities Rulemaking Board, the US Department of the Treasury, the Commodities Futures Trading Commission and other exchanges of which it may be a member. In addition, the US states, provinces and territories have local securities commissions that regulate and monitor activities in the interest of investor protection. These regulators have a variety of sanctions available, including the authority to conduct administrative proceedings that can result in censure, fines, the issuance of cease-and-desist orders or the suspension or expulsion of the broker-dealer or its directors, officers or employees.

Newly createdCreated in July 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the member regulation, enforcement and arbitration functions of the New York Stock Exchange (NYSE),NYSE, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.
FINRA covers a broad spectrum of securities businesses, including: registering and educating industry participants; examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities;utili-

ties; and administering a dispute resolution forum for investors and registered firms. It also performs market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange and the Chicago Climate Exchange.

Regulation and supervision in the UK

UBS’s operations in the UK are regulated by the Financial Services Authority (FSA), the UK’s single regulator, which establishes a regime of rules and guidance governing all relevant aspects of financial services businesses.

The FSA has established a risk-based approach to supervision and has a wide variety of supervisory tools available to it, including regular risk assessments, on-site inspections (which may relate to an industry-wide theme or be firm-specific) and the ability to commission reports by skilled persons (who may be the firm’s auditors, IT specialists, lawyers or other consultants as appropriate). The FSA also has an extremely wide set of sanctions which it may impose under the Financial Services and Markets Act 2000, broadly similar to those available to US regulators.
Some of UBS’s subsidiaries and affiliates are also regulated by the London Stock Exchange and other UK securities and commodities exchanges of which UBS is a member. The business canis also be subject to the requirements of the UK Panel on Takeovers and Mergers where relevant.
Financial services regulation in the UK is conducted in accordance with European Union directives which require, among other things, compliance with certain capital adequacy standards, customer protection requirements and conduct of business rules.rules (such as MiFID). These directives apply throughout the European Union and are reflected in the regulatory regimes in otherof the various member states. The standards, rules and requirements established under these directives are broadly comparable in scope and purpose to the regulatory capital and customer protection requirements imposed under applicable US law.



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Compliance with NYSE listing standards on corporate governance and compensation

Compliance with New York Stock Exchange
listing standards on corporate governance

UBS aims to comply with all relevant standards on corporate governance.

As a foreignSwiss company listed on the New York Stock Exchange the firm is only required to comply(NYSE), UBS complies with the rules relating to audit committees and annual certifications.NYSE corporate governance standards for foreign private issuers. In addition, UBS however, has voluntarily adopted the overwhelming majority of the New York Stock ExchangeNYSE governance rules for US companies.

Introduction

On 4 November 2003, the Securities and Exchange Commission (SEC) approved the revised New York Stock Exchange (NYSE) corporate governance rules. Foreign private issuers – such as UBS – were required to comply with the rules on Audit Committees by 31 July 2005 and had to also disclose significant differences and material non-compliance with all other NYSE standards by the first annual shareholders meeting after 15 January 2004. UBS fully complies with the SEC requirements relating to Audit Committees and fulfills the overwhelming majority of the NYSE listing standards on corporate governance. The few exceptions are mainly due to the different legal system in Switzerland and are explained in detail in this section.

Independence of directors

The Board of Directors (BoD), basedBased on the listing standards of the NYSE, approved “CriteriaUBS’s BoD has established specific criteria for defining the independence of its external Board members’ independence”, which are published on the firm’s website under www.ubs.com/corporate-governance.members. Each external director has to personally confirm his or her compliance with the criteria. Thecriteria, which are published on the firm’s website underwww.ubs.com/governance.

All current external members have been confirmed by the BoD at its meeting of 7 February 2008, affirmatively determined that Ernesto Bertarelli, Gabrielle Kaufmann-Kohler, Sergio Marchionne, Rolf A. Meyer, Helmut Panke, Peter Spuhler, Peter Voser, Lawrence A. Weinbach and Joerg Wolle haveas having no material relationship with UBS, either directly or as a partner, controlling shareholder or executive officer of a company that has a relationship with UBS. These members are: Ernesto Bertarelli, Sally Bott, Rainer-Marc Frey, Bruno Gehrig, Gabrielle Kaufmann-Kohler, Sergio Marchionne, Helmut Panke, William G. Parrett, David Sidwell, Peter R. Voser and Joerg Wolle. Each of them has also met all other requirements of the BoD and of the NYSE requirements with respect to independence, with the exception of Ernesto Bertarelli. He does not satisfy one of the independence requirements because UBS isholds the main sponsorbasic sponsorship rights to Team Alinghi and Ernesto Bertarelli is the owner of Team Alinghi SA. Otherwise he fully satisfies the NYSE independence requirements. The BoD considers that UBS’s compensation for these basic sponsorship rights to Team Alinghi does not believe that UBS’s sponsorship of Team Alinghi impairsimpair Ernesto Bertarelli’s independence in any way.
The BoDNYSE has also determined that Lawrence A. Weinbach, Rolf A. Meyer and Peter Voser meet the more stringent independence requirements for Audit Committee members. Theymembers of audit committees. All three members of UBS’s audit committee are external BoD members who, in addition to satisfying the above criteria, do notnot: receive, directly or indirectly, any consulting, advisory or other compensatory fees from UBS other than in their capac-

itycapacity as directors. They do notdirectors; hold, directly or indirectly, UBS shares in excess of 5% of the outstanding capital, and none of them servescapital; or serve on the audit committees of more than two other public companies. The BoD determined thatThese members are Peter R. Voser, William G. Parrett and Bruno Gehrig and all three Audit Committee members arehave been determined by the BoD as financially literate and that Lawrence A. Weinbach, Rolf A. Meyer and Peter Voser are “financial experts” according to the definitions established by the US Sarbanes-Oxley Act of 2002, Lawrence A. Weinbach being a certified public accountant2002. The NYSE guidelines allow for an exemption for audit committee members to sit on more than three audit committees, provided that all members of the BoD determine that the candidate has the time and having been in the auditavailability to fulfill his or her obligations. Considering the credentials of William G. Parrett, and accounting business during mostthe fact that he has retired from his executive functions, the BoD granted this exemption.

Board of his professional career, Rolf A. Meyer through his former responsibility as Chief Financial Officer (CFO) of a large listed company,Directors and Peter Voser being the CFO of Royal Dutch Shell plc.

its committees
UBS operates under a strict dual board structure mandated by Swiss banking law. No member of the Group Executive Board (GEB) may also be a member of the BoD and vice versa. This structure ensures anthe institutional independence of the entire BoD from the day-to-day management. Therefore all BoD members are considered non-management directors, although the three executive members of the Chairman’s Office are former members of the executive management and are performing their mandate on a full-time basis. The BoD meets regularly without executive management, but including the executive members of the BoD.

Board committees

UBS has established audit, compensation, nominatingcommittees for the following BoD mandates: audit; human resources and compensation; governance and nominating; risk; strategy and corporate responsibility committees. The chartersresponsibility. Refer to the “Board of Directors” section of this report for all BoD committees are published on www.ubs.com/corporate-governance. Additionalfurther information on the BoD committees’these committees – including their mandates, responsibilities and authorities and– as well as their activities during 20072008. In addition, the BoD elects at least one vice chairman who must be independent and who acts as the senior independent director. Sergio Marchionne has assumed this role. The BoD may elect another vice chairman who need not be independent, but has not done so at this time. More details about the vice chairman function can be found on pages 9–15 of this report.

In addition to these committees, the Chairman and the Vice Chairman of the BoD form a “Chairman’s Office”, which has clearly defined authorities and duties. It also has responsibility for oversight of the internal audit function (as defined in the Swiss Federal Banking Commission’s [SFBC’s] Circular Letter on Internal Audit) and acts as Risk Committee of the BoD. For more details see page 13 of this report, the “Organization Regulations of UBS AG” and its annexes, which are published onwww.ubs.com/governance.
The BoD has adopted organization regulations that constitute UBS’s corporate governance guidelines, which include all matters required by the NYSE rules. The BoD has also adopted a “Code of Business Conduct and Ethics” with its appendix,an addendum for principal executive, financial and accounting officers or controllers, as required by the US Sarbanes-Oxley Act. Both the organization regulations and the Charter“Code of Business Conduct and Ethics” are available on the UBS website atwww.ubs. com/governance.In addition, the audit committee has established rules for the Chairman’s Office (www.ubs.com/corporate-governance)handling of complaints related to accounting and auditing matters in addition to the internal policies on “Whistleblowing Protection for Employees” and on “Compliance with Attorney Standards of Professional Conduct”.



Differences from corporate governance standards relevant to US listed companies

47

Corporate Governance
Compliance withAccording to the NYSE listing standards on corporate governance,

Differences from NYSE standards

According to Rule 303A.11 of the NYSE Corporate Governance listing standards, foreign private issuers have to disclose any significant ways in which their corporate governance practices differ from those to be followed by domestic companies. The UBS BoD has determined the following differences:

For US listed companies the NYSE rules require:

Responsibility of the Audit Committeeaudit committee for appointment,
compensation, retention and oversight of the independent
auditors

UBS’s Audit Committeeaudit committee has been assigned all thesethe abovementioned responsibilities, except for appointment of the independent auditors, which – according to Swiss Company Law – is required to be voted upon by shareholders.shareholders as per Swiss company law. The Audit Committeeaudit commit-



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Compensation, shareholdings and loans

tee assesses the performance and qualification of the external auditors and submits its proposal for appointment, re-appointmentreappointment or removal to the full BoD, which brings this proposal to the shareholders for vote at the annual general meetingmeetings (AGM).

Discussion of risk assessment and risk management policies
by Audit Committeethe audit committee

UBS, as a global financial services firm,In accordance with UBS’s organization regulations, the BoD risk committee has a sophisticated and complex system of risk management and control. Risk management and control is the clear responsibility of the business. The BoD, of which the Audit Committee members are part, has authority to define the firm’s risk principles and its risk capacity. The Chairman’s Office, acting as Risk Committee on behalf of the full BoD,committee is responsible for monitoring theUBS’s adherence to the definedthose risk principles and for re-

viewingmonitoring whether the business and control units run appropriate systems for the management and control of risks. The Audit Committee is regularly updated by Group Internal Audit on specific risk issues.

Assistance by Audit Committeeaudit committee of the internal audit function

In accordance with
Both the SFBC’s Circular Letter on Internal Audit, dated 27 September 2006, UBS gaveChairman and risk committee of the Chairman’s OfficeBoD have the responsibility for and authority for supervisingto supervise the internal audit function. The complexity of the financial services industry requires in-depth knowledge to allow for an effective supervision of the internal audit function. The Chairman’s Office reports back to the full BoD on all important findings, and the Audit Committee is regularly updated directly by the Head of Group Internal Audit.

Responsibility of the Nominating Committeehuman resources and compensation committee for oversight
of management and evaluation by the Board of Directors

Management evaluation – performancePerformance evaluations of UBS’s senior management, comprising the Group Chief Executive Officer (CEO) and the members of

the GEB, – is doneare completed by the Chairman’s OfficeChairman of the BoD and the human resources and compensation committee and reported to the full BoD. All BoD committees perform a self-assessment of their activities and report back to the full BoD. The BoD has direct responsibility and authority to evaluate its own performance, without preparation by a BoD committee.

Proxy statement reports of the Auditaudit and Compensation
Committeeshuman resources and compensation committees

Under Swiss Company Law,company law, all reports addressed to shareholders are provided and signed by the full BoD, which has ultimate responsibility vis-à-vis shareholders. The committees submit their reports to the full BoD.



48

Shareholders’ votes on equity compensation plans

Under Swiss Company Law, the approval of compensation plans is not within the authority of the annual general meeting (AGM), but of the BoD. The reason for this approach is that the capital of a
Swiss company is determinedlaw authorizes the BoD to approve compensation plans. Though Swiss law does not allocate such authority to the AGM, it requires that Swiss companies determine capital in the “Articlestheir articles of Association UBS AG”association and therefore each increase of capital hasis required to be submitted for shareholders’ approval. IfThis means that, if equity-based compensation plans result in a need for a capital increase, AGM approval is mandatory. If, however, shares for such plans are purchased in the market, shareholders do not have the authority to vote on their approval.



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Non-management directors

Corporate governance and compensation

Compensation, shareholdings and loans

The principles of compensation for UBS senior executives are designed to meet at least once per year separately, without any directors participating whoalign their interests with those of shareholders – the creation of long-term value and sustainable shareholder returns. These principles are not independent because of their employmentestablished by the companyhuman resources and compensation committee of the Board of Directors.

Under Swiss Banking laws BoD members are
Letter from the human resources and compensation
committee of the Board of Directors

Dear shareholders,
The global financial services industry is facing challenges of a magnitude not allowed to assume any day-to-day management responsibility.seen for decades. These challenges had a clear and widespread impact on the industry in 2008 and UBS therefore considers alland its BoD members as “non-management directors”, despite the fact that two “executive” BoD members perform their mandate onpeers were no exception. Executive compensation is always a full-time basishigh-profile issue and, are remuneratedduring 2008, this was debated by the company for their services.public, media and regulators to a greater extent than ever before.

During 2008, UBS was very proactive in addressing the current issues surrounding executive compensation. The BoD meets regularly without executive management, but including the two executive BoD members.

In 2005, the NYSE amended its formsUBS Board of Directors (BoD) established a new human resources and compensation committee in July 2008. This committee is responsible for the annualsupervision of executive performance, the structure of employment agreements for senior executives and interim written affirmation required under Section 303A.12(c) of the NYSE Corporate Governance listing standards. NYSE-listed foreign private issuers are required to submit an annual written affirmation and accompanying exhibits to the NYSE, certifying that it is in compliance with the NYSE corporate governance requirements applicable to foreign private issuers – specifically the Audit

Committee requirements and the requirement to provide a statement of significant corporate governance differences. UBS filed the requested affirmation forms and exhibits in mid-July 2005succession planning for the first time. Since 2006, the annual written affirmation has been submitted no later than 30 days after filing the annual report on Form 20-F with the SEC.

“Corporate Governance Guidelines”, “Code
of Business Conduct and Ethics” and
“Whistleblowing Protection for Employees”

The BoD has adopted corporate governance guidelines, which are published on the UBS website at www.ubs.com/corporate-governance.

The BoD has also adopted a “Code of Business Conduct and Ethics” with an addendum for principal executive, financial and accounting officers or controllers, as required by the US Sarbanes-Oxley Act.
èThe code is available on the UBS website at www.ubs.com/corporate-governance

The Audit Committeemembers of the BoD has established rulesand the Group Executive Board (GEB). Shortly after its creation, the committee commissioned an extensive review of all incentive systems used throughout the UBS Group (Group). The review was accelerated following UBS’s transaction with the Swiss National Bank in October and the principles of UBS’s new compensation model were published the following month for implementation in 2009. In parallel with this review, UBS held extensive discussions with the Swiss

Financial Market Supervisory Authority (FINMA) on a range of compensation matters, including the new compensation model and the amount of variable compensation to be paid to employees for 2008.

Although the financial services industry is facing a difficult period, competition for the handlingvery best talent remains fierce and competitive pay remains a vital tool in attracting and retaining executives. Variable compensation, in both a cash and equity form, remains a core component of complaints relatedUBS’s new compensation model, though the final amount awarded to accountingexecutives depends on their achievement of performance targets linked to long-term, risk-adjusted value creation. As part of this change, awards granted under the performance equity plan will be directly linked to company performance for an initial period of three years. In addition, executives will be required to keep a minimum of 75% of all shares awarded to them (after taxes) for a further five years. To strengthen this clear and auditing mattersdirect link between shareholder value and compensation expense, UBS has announced the implementation of a three-year deferral period and a bonus-malus, or “claw-back”, structure for all executive cash awards for 2009 and beyond.

The firm explicitly sought to “alter the UBS corporate culture” through its design of the new compensation model. All members of the human resources and compensation committee strongly believe the new compensation model will play a central role in additionthe firm’s future success. Furthermore, due to its explicit goals for long-term value creation, the internal policiesmodel inherently considers and promotes the best interests of both shareholders and the Group alike. Given its commitment to shareholder input, the BoD will introduce a non-binding vote on “Whistle-blowing Protectionthe principles of executive compensation for Employees”senior executives at its annual general meeting for 2009. Materials relating to this vote are located in the “Compensation principles 2009 and on “Compliance with Attorney Standardsbeyond for UBS senior executives” section of Professional Conduct”.
èThe Audit Committee procedures are available at www.ubs.com/corporate-governance
this report. Please consider the relevant documentation and take part in implementing this pioneering approach to executive compensation practices.

(-s- Joerg Wolle)

Joerg Wolle

Chair of the human resources
and compensation committee



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Senior leadershipCompensation, shareholdings and loans

Senior leadership

Compensation governance

Human resources and compensation committee

The human resources and compensation committee is composed of four independent members of the Board of Directors (BoD). On 31 December 2008, the members were Joerg Wolle (committee chair), Ernesto Bertarelli, Sally Bott and Helmut Panke. The following external advisors supported the committee in 2008: Hostettler & Partner with regard to the design of UBS’s new senior leadershipexecutive compensation program, PricewaterhouseCoopers for the design of the performance equity plan and Towers Perrin for market data.

Authorities and responsibilities

UBS is committed to the highest standards of corporate governance. The human resources and compensation committee is responsible for reviewing UBS’s principles on total compensation and benefits for submission to the BoD. Additionally, on behalf of the BoD, the committee oversees five key areas of responsibility:
–reviewing and approving the design of the total compensation framework, including compensation programs and plans;
–determining the relationship between pay and performance;
–approving base salaries and annual incentive awards for senior executives;
–reviewing and approving individual employment agreements; and
–reviewing and approving the terms and conditions for GEB members who relinquish their positions.

Authorities for compensation-related decisions are governed by the “Organization Regulations of UBS AG”, “An-

nex B – Responsibilities and authorities”, and “Annex C – Charter for the committees of the Board of Directors of UBS AG”. The structure is shown below.

Grant policy and decision-making process
The committee decides the target amount of variable cash and equity compensation to be awarded to each senior executive based on Group, business division and individual performance, combined with market data.

Individual performance is assessed formally each year by measuring achievement against pre-defined personal objectives. Personal objectives will be focused on areas such as the following: contribution to Group and business division results; exceptional contributions to cross-business co-operation; strategic leadership skills and potential; outstanding professional and technical expertise; commitment to UBS; adherence to corporate values and principles; active risk management and the creation of shareholder value.

The 2009 non-binding vote on executive compensation

UBS places value upon the opinions of its shareholders. At the annual general meeting (AGM) to be held in additionApril 2009, the firm will provide shareholders with an opportunity to express their views through a vote on the compensation principles for senior executives for 2009 and beyond. Refer to the “Compensation principles 2009 and beyond for UBS senior executives” section of this report for the relevant materials. As the ultimate decision on executive compensation is legally within the powers of the BoD, such a vote is non-binding and advisory in nature. UBS believes that this vote presents an innovative and sensible means of including shareholder participation in compensation matters.



Compensation authorities
(Compensation authorities table)

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2008 compensation for the Board of Directors and
Group Executive Board

Board of Directors remuneration

Chairman of the Board of Directors and executive members of the Board of Directors
The new compensation model was not yet applicable in 2008 and the Chairman of the Board of Directors (BoD) was therefore eligible, in principle, to receive a variable incentive award fully dependent on the Group’s financial performance. However, as announced in the compensation report published on 17 November 2008, the human resources and compensation committee decided against granting any variable compensation award to the Chairman of the BoD for 2008. The total compensation awarded to the Chairman of the BoD, Peter Kurer, for the 2008 financial year was CHF 1,565,647. This amount made him the highest-paid member of the BoD for 2008 and consisted of eight months salary as Chairman of the BoD. This amount does not include the four months of salary he received as a member of the Group Executive Board (GEB).

Under both the new and old compensation models, the decision process to determine the overall compensation of the Chairman of the BoD includes an annual performance assessment by the full BoD and the human resources and compensation committee. Pay levels for comparable functions outside of UBS are also taken into account.

Remuneration for former executive members and the former Chairman of the Board of Directors
Marcel Ospel, former Chairman of the BoD, did not stand for re-election at the AGM of 23 April 2008. Stephan Haeringer, former executive vice chairman of the BoD, retired from the BoD on 2 October 2008. Marco Suter, formerly an executive member of the BoD, stepped down from the BoD on 1 October 2007

and thereafter acted as Group Chief Financial Officer (Group CFO) and as a member of the GEB until his stepping down from this role on 31 August 2008. While Marcel Ospel has retired from UBS as of April 2008, Stephan Haeringer and Marco Suter agreed with UBS to continue their services for UBS until their termination dates of 30 September 2009 and 31 August 2009 respectively.

All three persons were contractually entitled to receive a base salary, a payment based on their average remuneration over the last three years and certain employment benefits until the expiry of their 12-month notice period.
For the fiscal years 2007 and 2008, Marcel Ospel, Stephan Haeringer and Marco Suter did not receive any incentive awards. Furthermore, on 25 November 2008, Marcel Ospel, Stephan Haeringer and Marco Suter announced that they voluntarily relinquished substantial parts of the payments to which they were entitled during their periods of employment with UBS. The total amount waived or repaid was CHF 33 million.
The remaining contractual obligations to all three former BoD members, consisting of those due in 2008 and those upcoming in 2009, net of the CHF 33 million voluntarily waived or repaid, amounted to CHF 10 million. This amount has been fully accrued in 2008 and is reflected in the firm’s 2008 income statement. Of this amount, CHF 2.3 million was for Marcel Ospel, CHF 3.9 million for Stephan Haeringer and CHF 3.8 million for Marco Suter.

Independent members of the Board of Directors
Reflecting their independent status, the remuneration of independent members of the BoD includes no variable component and is therefore not dependent on the financial performance of the UBS Group Managing Board(Group). Fees for independent



                                 
(AUDITED) Compensation details and additional information for executive members of the BoD
 
 
CHF, except where indicateda
            Annual incentive  Discretionary      Contributions    
  For the     Annual incentive  award (shares  award (options  Benefits  to retirement    
Name, function1 year ended Base salary  award (cash)  — fair value)b  — fair value)c  in kindd  benefits planse  Total 
 
Peter Kurer, Chairman 2008  1,333,333   0   0   0   58,267   174,047   1,565,647 
   
  2007                            
 
Marcel Ospel, Chairman 2008  666,667   0   0   0   80,755   87,023   834,445 
   
  2007  2,000,000   0   0   0   307,310   261,069   2,568,379 
 
Stephan Haeringer, 2008  1,125,000   0   0   0   108,846   195,802   1,429,648 
   
Executive Vice Chairman 2007  1,500,000   0   0   0   111,808   261,069   1,872,877 
 
Marco Suter, 2008                            
   
Executive Vice Chairman 2007  1,125,000   0   0   0   70,820   155,252   1,351,072 
 
1 2008: Peter Kurer was the only executive member in office on 31 December; Marcel Ospel did not stand for re-election in April 2008 and Stephan Haeringer stepped down during the year as a member of the BoD. Both their payments are pro-rata for the four respective nine-month periods served in their functions. 2007: Marco Suter stepped down during the year as a member of the BoD. His 2007 payment was pro-rata for the nine-month period served as Executive Vice Chairman.

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Compensation, shareholdings and loans

                                             
 Remuneration details and additional information for independent members of the BoD
 		 
 CHF, except where indicateda  
          For the                          
     HR &Governance & Corporate   period                     Share    
    Auditcompensation  nominatingresponsibility  RiskStrategy AGM to     Committee  Benefits  Additional      percent-  Number of 
  Name, function1 committee committeecommitteecommittee committee committee  AGM Base fee  retainer(s)  in kind  payments  Total  age3  shares4,5 
  
  Ernesto Bertarelli,
member		  MM    2008/2009  325,000   200,000   0   0   525,000   100   51,596 
    M    2007/2008  325,000   150,000   0   0   475,000   100   14,677 
  
  Sally Bott,
member2		  M M   2008/2009  162,500   75,000   0   0   237,500   50   12,280 
         2007/2008                            
  
  Rainer-Marc Frey,
member2		     MM 2008/2009  162,500   150,000   0   0   312,500   50   16,158 
   
          2007/2008                            
  Bruno Gehrig,
member2		 M      2008/2009  162,500   100,000   0   0   262,500   50   13,572 
          2007/2008                            
  Gabrielle Kaufmann-
Kohler, member		   CM   2008/2009  325,000   250,000   0   0   575,000   50   29,731 
     MM   2007/2008  325,000   250,000   0   0   575,000   50   9,349 
  Sergio Marchionne,
senior independent
director,
vice chairman		   M  M 2008/2009  325,000   200,000   0   250,0006  775,000   100   76,228 
    M     2007/2008  325,000   200,000   0   0   525,000   100   16,226 
  Rolf A. Meyer,
member2		 MM     2008/2009  162,500   150,000   0   0   312,500   50   16,158 
   MC     2007/2008  325,000   650,000   0   0   975,000   50   15,853 
  Helmut Panke,
member		  M  M  2008/2009  325,000   300,000   0   0   625,000   50   32,316 
     C    2007/2008  325,000   250,000   0   0   575,000   50   9,349 
  William G. Parrett,
member2		 M      2008/2009  162,500   100,000   0   0   262,500   50   13,572 
          2007/2008                            
  David Sidwell,
member		    MC  2008/2009  325,000   450,000   0   0   775,000   50   40,072 
          2007/2008                            
  Peter Spuhler,
member2		        2008/2009  162,500   0   0   0   162,500   100   15,945 
    M     2007/2008  325,000   200,000   0   0   525,000   100   16,226 
  Peter R. Voser,
member		 C    M 2008/2009  325,000   400,000   0   0   725,000   50   37,487 
   M      2007/2008  325,000   300,000   0   0   625,000   50   10,162 
  Lawrence A.
Weinbach,
member2		 M      2008/2009  162,500   100,000   0   0   262,500   50   13,572 
   C      2007/2008  325,000   600,000   0   0   925,000   50   15,040 
                                        
  Joerg Wolle,
member		  CM    2008/2009  325,000   300,000   0   0   625,000   50   32,316 
     M    2007/2008  325,000   150,000   0   0   475,000   100   14,677 
  Total 2008                           6,437,500         
   
  Total 2007                           5,675,000         
   
  Legend: C = Chairman of the respective committee; M = Member of the respective committee
                                             
  
1 There were 11 independent BoD members in office on 31 December 2008. David Sidwell was appointed at the AGM on 23 April 2008 and Rolf A. Meyer, Peter Spuhler and Lawrence A. Weinbach stepped down from the BoD at the EGM on 2 October 2008. Sally Bott, Rainer-Marc Frey, Bruno Gehrig and Bill G. Parrett were appointed at the EGM on 2 October 2008.2 Remunerations is for six months only, as such members either stepped down or were appointed on 2 October 2008.  3 Fees are paid 50% in cash and 50% in restricted UBS shares. However, independent BoD members can elect to have 100% of their remuneration paid in restricted UBS shares.  4 For 2008, shares valued at CHF 11.38 (average price of UBS shares at SWX Europe over the last 10 trading days of February 2009), attributed with a price discount of 15%, discount price CHF 9.67. The shares are blocked for four years. For 2007, shares valued at CHF 36.15 (average price of UBS shares at SWX Europe over the last 10 trading days of February 2008), attributed with a price discount of 15%, discount price CHF 30.75. The shares are blocked for four years.  5 Number of shares is reduced in case of the 100% election to deduct social security contribution. All remuneration payments are submitted to social security contribution/taxes at source.  6 This payment is associated with the newly created function of a senior independent director.
                                             
  
In addition, one-off cash payments were made to the chair of the risk committee (CHF 500,000), the governance and nominating committee (CHF 300,000) and the human resources and compensation committee (CHF 200,000). These payments reflect the substantial workload of setting up the new risk committee, and expanding the mandate of the governance and nominating committee and the human resources and compensation committee.
         
 Total payments to all members of the BoD
 
   For the  
  CHF, except where indicateda year ended Total 
 
  Aggregate of all members of the BoD 2008  10,267,240 
 
  Aggregate of all members of the BoD 2007  11,467,328 
   
         

Corporate governance and compensation

members are reviewed annually by the Chairman of the BoD and the Vice Chairmenhuman resources and compensation committee for approval by the BoD. None of the independent members of the BoD has any contract with UBS providing for benefits upon the termination of their term of office at the BoD.

    The BoD substantially reduced the fees payable to members of its committees for 2008. This decision was made following consideration of market practice in comparable global financial services and other relevant companies in Switzerland.
    The table on the prior page shows remuneration for independent members of the BoD between the 2008 and 2009 AGMs.

Group Executive Board compensation

In 2008, total compensation for members of the GEB was reduced significantly from the prior year. The reduction occurred because, due to the overall negative Group result, no variable compensation was granted to GEB members for the performance year 2008. The total compensation for the highest-paid member of the GEB, Marcel Rohner, amounted to CHF 1,814,702 for the financial year 2008.

Base salary
Base salaries are established to be appropriate for the role of each senior executive on an individual basis. Base salaries consist of a fixed amount of compensation and any adjustments are limited to significant changes in job responsibility.

    Due to the variability of annual incentive awards, the ratio of base salary to total compensation can vary significantly from year to year. Since no variable incentive awards were paid for the financial year 2008, base salaries for senior executives and employers contribution to retirement benefit plans amounted to 93.7% of total compensation compared with 20.6% in 2007. The remainder of 6.3% reflects benefits in kind.

Benefits
In order to help attract and retain the best employees in each local market where it operates, UBS provides employee benefits that are competitive within each of these markets. Changes, terminations and the introduction of new benefits are governed by the procedures contained in the “Organization Regulations of UBS AG”. UBS considers benefits to be a supplemental element of total compensation and the benefits offered may vary substantially from location to location.

Generally there are no special benefits for senior executives; they receive the same benefits as all other employees in the location and business where they work.
In Switzerland, senior UBS executives share the same retirement plan benefits as all other employees. The firm’s general pension plan is made up of two defined contribution elements: one plan covering base salary and the other covering variable compensation.
Outside Switzerland, senior UBS executives participate in appropriately-designed local pension plans (in which other employees also participate) which do not provide special provisions for senior executives. In the US, senior executives can choose to participate in a 401K-defined contribution plan which is open to all employees. In addition, some executives participate in legacy defined benefit plans which were available to other employees but are no longer available to new hires. In the UK, senior executives either participate in a pension plan operated on a defined contribution basis or participate in a legacy defined benefit plan which was open to all employees but is closed to participation for new hires. No special pension schemes are offered to senior executives.
èRefer to “Note 30 Pension and other post-retirement benefit plans” in the financial statements of this report for details on the various retirement benefit plans established in Switzerland and other major markets



                                 
(AUDITED) Total compensation for all members of the GEB 
  
 CHF, except where indicateda
             Annual              
             incentive  Discretionary       Contributions    
         Annual  award  award       to retirement    
   For the     incentive  (shares;  (options;  Benefits  benefits    
 Name, function year ended Base salary  award (cash)  fair value)b  fair value)c  in kindd  planse  Total 
  
 Marcel Rohner, Group Chief Executive Officer                              
 (highest-paid) 2008  1,500,000   0   0   0   161,768   152,934   1,814,702 
  
 Rory Tapner, Chairman &                              
 CEO Asia Pacific (highest-paid) 2007  1,291,960   4,501,900   4,501,904   0   10,256   900   10,306,920 
  
 Aggregate of all members of the GEB who                              
 were in office on 31 December 20081 2008  7,815,943   0   0   0   457,652   817,315   9,090,911 
  
 Aggregate of all members of the GEB who                              
 were in office on 31 December 20071 2007  6,995,885   15,305,667   15,305,708   0   532,706   912,974   39,052,939 
  
 Aggregate of all members of the GEB who                              
 stepped down during 20082 2008  1,614,871   0   0   0   234,838   258,423   2,108,132 
  
 Aggregate of all members of the GEB who                              
 stepped down during 20072 2007  2,511,947   23,042,376   6,750,036   0   406,567   275,635   32,986,561 
  
 1 Number and distribution to senior executives: 2008: 12 GEB members in office on 31 December. 2007: eight GEB members in office on 31 December.    2 Number and distribution of senior executives: 2008: includes four months in office as a GEB member for Peter Kurer, eight months in office for Marco Suter and 10 months for Joe Scoby. 2007: includes nine months in office for Huw Jenkins and Clive Standish and six months for Peter Wuffli.

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Compensation, shareholdings and loans

Cash and equity incentives
“Pay for performance” is the guiding principle of the UBS executive compensation policy. As discussed above, the human resources and compensation committee decided not to grant any variable cash or equity compensation to GEB members for 2008. This decision recognizes the overall poor performance of the Group and the failure to achieve key performance targets despite some highly successful businesses within each of the business groups.divisions.

Replacement of forfeited awards for former employer compensation

Jerker Johansson and Markus Diethelm joined UBS during 2008. In total, they were granted 574,432 shares with a grant date fair market value of CHF 10.7 million, 700,000 options with a strike price of CHF 36.46 and 7,420 options with a strike

Group Managing Boardprice of CHF 28.10, as well as a cash amount of CHF 370,000. In line with market practice, these awards were granted as a replacement for compensation and benefits forfeited from their previous employment as a result of joining UBS.

TheEmployment contracts
There were no material changes to employment agreements for existing GEB members during 2008 and the 12-month notice period remained unchanged for the financial year 2008.

Compensation to former members of the Board of
Directors and Group ManagingExecutive Board (GMB)

Compensation and benefits in kind paid to former members of the BoD and the GEB reflect legacy agreements still honored by UBS.



                 
(AUDITED) Compensation paid to former members of the BoD and GEB1 
  
 CHF, except where indicateda 
   For the     Benefits in    
 Name, function year ended Compensation  kind  Total 
  
 Georges Blum, former member of the BoD 2008      101,579   101,579 
    
 (Swiss Bank Corporation) 2007      90,803   90,803 
  
 Franz Galliker, former member of the BoD 2008      69,596   69,596 
    
 (Swiss Bank Corporation) 2007      62,174   62,174 
  
 Walter G. Frehner, former member of the BoD 2008      74,663   74,663 
    
 (Swiss Bank Corporation) 2007      73,061   73,061 
  
 Hans (Liliane) Strasser, former member of the BoD 2008      32,673   32,673 
    
 (Swiss Bank Corporation) 2007      42,311   42,311 
  
 Robert Studer, former member of the BoD 2008      126,208   126,208 
    
 (Union Bank of Switzerland) 2007      260,162   260,162 
  
 Alberto Togni, former member of the BoD 2008  318,461   427,949   746,410 
    
 (UBS) 2007  318,401   502,478   820,879 
  
 Philippe de Weck, former member of the BoD 2008      109,703   109,703 
    
 (Union Bank of Switzerland) 2007      129,701   129,701 
  
 Aggregate of all former members of the GEB2 2008  0   171,180   171,180 
    
   2007  0   257,791   257,791 
  
 Aggregate of all former members of the BoD and GEB 2008  318,461   1,113,551   1,432,012 
    
   2007  318,401   1,418,481   1,736,882 
  
 1 Compensation or remuneration that is connected with the former members’ activity on the BoD or GEB, or that is not at market conditions.    2 Includes two former GEB members.

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Corporate governance and compensation
(AUDITED)Explanations of compensation details for executive members of the BoD and members of the GEB:
a.Local currencies are converted into CHF using the exchange rates as detailed in “Note 39 Currency translation rates” in the financial statements of this report.
b.Values per share at grant: CHF 36.15/USD 33.55 for shares granted in 2008 related to the performance year 2007. CHF prices are the average price of UBS shares at SWX Europe over the last 10 trading days of February, and USD prices are the average price of UBS shares at the NYSE over the last 10 trading days of February in the year in which they are granted.
c.No options were granted in 2009 for the performance year 2008.
d.Benefits in kind – car leasing, company car allowance, staff discount on banking products and services, health and welfare benefits and general expense allowances – are all valued at market price.
e.Swiss senior executives participate in the same pension plan as all other employees. Under this plan, employees receive a company contribution to the plan which covers compensation up to CHF 820,800. The retirement benefits consist of a pension, a bridging pension and a one-off payout of accumulated capital. Employees must also contribute to the plan. This figure excludes the mandatory employer’s social security contributions (AHV, ALV) but includes the portion attributed to the employer’s portion of the legal BVG requirement. The employee contribution is included in the base salary and annual incentive award components.
In both the US and the UK, senior executives participate in the same plans as all other employees. In the US there are two different plans, one of which operates on a cash balance basis, which entitles the participant to receive a company contribution based on compensation limited to USD 250,000. This plan is no longer available to new hires. US senior executives may also participate in the UBS 401K-defined contribution plan (open to all employees), which provides a company matching contribution for employee contributions. In the UK, senior executives participate in either the principal pension plan, which is limited to an earnings cap of GBP 100,000, or a grandfathered defined benefit plan which provides a pension on retirement based on career average base salary (uncapped).

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Compensation, shareholdings and loans

                           
   
  Shares, options and loans for the Board of Directors and Group Executive Board (at end of 2008)
   
(AUDITED) Share and option ownership of members of the BoD at 31 December 2007/2008 
  
  For the Number of  Voting rights  Number of  Potentially conferred  Type and quantity 
Name, function1 year ended shares held  in %  options held  voting rights in %2    of options3 
 
Peter Kurer, Chairman 2008  416,088   0.025   372,995   0.022  xxx:  85 256 
                    xxxv:  95 913 
                    xli:  95 913 
                    xlv:  95 913 
   
  2007  292,762   0.026   350,000   0.031  xxx:  80 000 
                    xxxv:  90 000 
                    xli:  90 000 
                    xlv:  90 000 
 
Sergio Marchionne, 2008  87,926   0.005   0   0.000       
   
senior independent director, vice chairman 2007  45,800   0.004   0   0.000       
 
Ernesto Bertarelli, member 2008  89,434   0.005   0   0.000       
   
  2007  48,411   0.004   0   0.000       
 
Sally Bott, member 2008  1   0.000   0   0.000       
   
  2007                      
 
Rainer-Marc Frey, member 2008  0   0.000   0   0.000       
   
  2007                      
 
Bruno Gehrig, member 2008  3,000   0.000   0   0.000       
   
  2007                      
 
Gabrielle Kaufmann-Kohler, member 2008  18,713   0.001   0   0.000       
   
  2007  3,303   0.000   0   0.000       
 
Helmut Panke, member 2008  31,971   0.002   0   0.000       
   
  2007  13,206   0.001   0   0.000       
 
William G. Parrett, member 2008  4,000   0.000   0   0.000       
   
  2007                      
 
David Sidwell, member 2008  1   0.000   0   0.000       
   
  2007                      
 
Peter R. Voser, member 2008  30,823   0.002   0   0.000       
   
  2007  11,580   0.001   0   0.000       
 
Joerg Wolle, member 2008  41,509   0.002   0   0.000       
   
  2007  7,709   0.001   0   0.000       
 
1This table includes vested, unvested, blocked and unblocked shares and options held by members of the BoD including related parties.    2 No conversion rights are outstanding.    3 Refer to “Note 31 Equity participation and other compensation plans” in the financial statements of this report for more information.

Group Executive Board

Senior executive share ownership policy

Share ownership policies are drawnin place to ensure that the interests of management are aligned with those of shareholders. Up to and including 2008, senior executives were required to accumulate and hold UBS shares with an aggregate value of five times the amount of the last three years’ average cash component of their total compensation (base salary

plus cash incentive award). Due to changes in the compensation model, the share ownership policy will be changed from 2009 onwards (refer to the “Compensation principles 2009 and beyond for UBS senior executives” section of this report for more information). Senior executives are not permitted to enter into any transaction which hedges, mitigates or otherwise transfers the risk of price movements of unvested UBS shares, notional shares or stock options granted under UBS compensation plans.



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(AUDITED) Share and option ownership of members of the GEB at 31 December 2007/2008 
  
  For the Number of  Voting rights  Number of  Potentially conferred  Type and quantity 
Name, function1 year ended shares held  in %  options held  voting rights in %2    of options3 
 
Marcel Rohner, 2008  711,366   0.042   1,055,043   0.063  xxv:  31,971 
Group Chief Executive Officer                   xxx:  213,140 
                    xxxv:  277,082 
                    xli:  319,710 
                    xlv:  213,140 
   
  2007  501,846   0.044   990,000   0.088  xxv:  30,000 
                    xxx:  200,000 
                    xxxv:  260,000 
                    xli:  300,000 
                    xlv:  200,000 
 
John Cryan, 2008  235,929   0.014   382,673   0.023  v:  21,362 
Group Chief Financial Officer                   vi:  20,731 
                    vii:  20,725 
                    xii:  5,454 
                    xiii:  5,294 
                    xiv:  5,292 
                    xvii:  23,626 
                    xviii:  23,620 
                    xix:  23,612 
                    xxi:  5,526 
                    xxii:  5,524 
                    xxiii:  5,524 
                    xxvii:  17,072 
                    xxviii:  17,068 
                    xxix:  17,063 
                    xxxii:  14,210 
                    xxxiii:  14,210 
                    xxxiv:  14,207 
                    xxxviii:  5,330 
                    xxxix:  5,328 
                    xl:  5,326 
                    xlii:  17,762 
                    xliii:  17,762 
                    xliv:  17,760 
                    xlvi:  53,285 
   
  2007                      
 
Markus U. Diethelm, 2008  112,245   0.007   0   0.000     0 
   
Group General Counsel 2007                      
 
John A. Fraser, 2008  583,812   0.035   1,144,808   0.068  i:  56,013 
Chairman and CEO                   viii:  76,380 
Global Asset Management                   xv:  127,884 
                    xx:  127,884 
                    xxxi:  170,512 
                    xxxvi:  202,483 
                    xli:  213,140 
                    xlv:  170,512 
   
  2007  461,764   0.041   1,074,232   0.095  i:  52,560 
                    viii:  71,672 
                    xv:  120,000 
                    xx:  120,000 
                    xxxi:  160,000 
                    xxxvi:  190,000 
                    xli:  200,000 
                    xlv:  160,000 
 
Marten Hoekstra, 2008  245,397   0.015   684,168   0.041  ii:  8,679 
Deputy CEO Global Wealth                   iii:  8,421 
Management & Business Banking                   iv:  8,421 
and Head Wealth Management US                   ix:  8,823 
                    x:  12,825 
                    xi:  8,561 
                    xxvi:  42,628 
                    xxxi:  53,285 
                    xxxvi:  53,285 
                    xli:  85,256 
                    xlv:  154,931 
                    xlvii:  239,053 
   
  2007                      
 
Jerker Johansson, 2008  521,544   0.031   753,410   0.045  xlviii:  745,990 
Chairman and CEO Investment Bank                   xlix:  7,420 
   
  2007                      
 
1This table includes vested and unvested shares and options held by members of the GEB including related parties.    2 No conversion rights are outstanding.    3 Refer to “Note 31 Equity participation and other compensation plans” in the financial statements of this report for more information.

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Compensation, shareholdings and loans

                           
(AUDITED) Share and option ownership of members of the GEB on 31 December 2007/2008 (continued) 
  
  For the Number of  Voting rights  Number of  Potentially conferred  Type and quantity 
Name, function1 year ended shares held  in %  options held  voting rights in %2    of options3 
 
Philip J. Lofts, 2008  186,434   0.011   577,723   0.034  v:  11,445 
Group Chief Risk Officer                   vi:  11,104 
                    vii:  11,098 
                    xii:  1,240 
                    xiii:  5,464 
                    xiv:  1,199 
                    xvii:  9,985 
                    xviii:  9,980 
                    xix:  9,974 
                    xxi:  1,833 
                    xxii:  1,830 
                    xxiii:  1,830 
                    xxvii:  35,524 
                    xxviii:  35,524 
                    xxix:  35,521 
                    xxxv:  117,090 
                    xli:  117,227 
                    xlv:  85,256 
                    xlvii:  74,599 
   
  2007                      
 
Walter Stuerzinger, 2008  296,886   0.018   372,995   0.022  xvi:  31,971 
Chief Operating Officer,                   xxx:  63,942 
Corporate Center                   xxxv:  85,256 
                    xli:  95,913 
                    xlv:  95,913 
   
  2007  209,442   0.019   350,000   0.031  xvi:  30,000 
                    xxx:  60,000 
                    xxxv:  80,000 
                    xli:  90,000 
                    xlv:  90,000 
 
Rory Tapner, 2008  827,809   0.049   1,379,533   0.082  vii:  281,862 
Chairman and CEO Asia Pacific                   xv:  213,140 
                    xxiv:  213,140 
                    xxx:  170,512 
                    xxxv:  159,855 
                    xli:  170,512 
                    xlv:  170,512 
   
  2007  514,365   0.046   1,294,486   0.115  vii:  264,486 
                    xv:  200,000 
                    xxiv:  200,000 
                    xxx:  160,000 
                    xxxv:  150,000 
                    xli:  160,000 
                    xlv:  160,000 
 
Raoul Weil, 2008  315,698   0.019   432,409   0.026  xv:  53,285 
Chairman and CEO Global Wealth                   xxxv:  102,281 
Management & Business Banking,                   xli:  127,884 
relinquished his duties on                   xlv:  148,959 
   
an interim basis 2007  212,934   0.019   405,752   0.036  xv:  50,000 
                    xxxv:  95,976 
                    xli:  120,000 
                    xlv:  139,776 
 
Alexander Wilmot-Sitwell, 2008  304,655   0.018   353,807   0.021  xxxiv:  53,282 
Chairman and CEO, UBS Group EMEA                   xxxvii:  2,130 
and Joint Global Head IB Department                   xxxviii:  35,524 
                    xxxix:  35,524 
                    xl:  35,521 
                    xlv:  106,570 
                    xlvii:  85,256 
   
  2007                      
 
Robert Wolf, 2008  827,307   0.049   948,473   0.056  xx:  287,739 
Chairman and CEO, UBS Group                   xxxi:  213,140 
Americas/President Investment Bank                   xxxvi:  127,884 
                    xli:  106,570 
                    xlv:  106,570 
                    xlvii:  106,570 
   
  2007                      
 
1This table includes vested and unvested shares and options held by members of the GEB including related parties.    2 No conversion rights are outstanding.    3 Refer to “Note 31 Equity participation and other compensation plans” in the financial statements of this report for more information.

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(AUDITED) Total of all blocked and unblocked shares held by non-executive members of the BoD1 
  Total Of which non-restricted  Of which blocked until 
          2009  2010  2011  2012 
 
Shares held on 31 December 2008
  307,378   177,027   12,126   13,592   30,193   74,440 
 
                         
 
           2008   2009   2010   2011 
 
Shares held on 31 December 2007
  296,533   134,808   30,602   43,096   35,874   52,153 
 
1 Includes related parties.
 
No individual board member holds 1% or more of all shares issued.
                               
(AUDITED) Total of all vested and unvested shares held by the executive members of the BoD and members of the GEB1 
  Total Of which vested  Of which vesting 
          2009  2010  2011  2012  2013 
 
Shares held on 31 December 2008
  5,585,170   2,977,807   1,058,881   595,638   461,376   319,776   171,692 
 
                             
 
           2008   2009   2010   2011   2012 
 
Shares held on 31 December 2007
  6,396,479   3,831,550   796,533   653,726   526,425   362,709   225,536 
 
1 Includes related parties.
 
No individual BoD or GEB member holds 1% or more of all shares issued.

233

Corporate governance and compensation
Compensation, shareholdings and loans

                           
(AUDITED) Vested and unvested options held by independent members of the BoD and
by members of the GEB on 31 December 2007 / 2008		 
Type Number of options  Year of grant  Vesting date  Expiry date  Subscription ratio  Strike price 
 
i  56,013   2001   20.02.2004   20.02.2009   1:1  CHF 46.92 
 
ii  8,679   2002   31.01.2002   31.07.2012   1:1  USD 21.24 
 
iii  8,421   2002   31.01.2004   31.07.2012   1:1  USD 21.24 
 
iv  8,421   2002   31.01.2005   31.07.2012   1:1  USD 21.24 
 
v  32,807   2002   31.01.2003   31.01.2012   1:1  CHF 36.49 
 
vi  31,835   2002   31.01.2004   31.01.2012   1:1  CHF 36.49 
 
vii  313,685   2002   31.01.2005   31.01.2012   1:1  CHF 36.49 
 
viii  76,380   2002   31.01.2005   31.01.2012   1:1  USD 21.24 
 
ix  8,823   2002   28.02.2002   28.08.2012   1:1  USD 21.70 
 
x  12,825   2002   29.02.2004   28.08.2012   1:1  USD 21.70 
 
xi  8,561   2002   28.02.2005   28.08.2012   1:1  USD 21.70 
 
xii  6,694   2002   28.02.2003   28.02.2012   1:1  CHF 36.65 
 
xiii  10,758   2002   28.02.2004   28.02.2012   1:1  CHF 36.65 
 
xiv  6,491   2002   28.02.2005   28.02.2012   1:1  CHF 36.65 
 
xv  394,309   2002   28.06.2005   28.06.2012   1:1  CHF 37.90 
 
xvi  31,971   2002   28.06.2005   28.12.2012   1:1  CHF 37.90 
 
xvii  33,611   2003   01.03.2004   31.01.2013   1:1  CHF 27.81 
 
xviii  33,600   2003   01.03.2005   31.01.2013   1:1  CHF 27.81 
 
xix  33,586   2003   01.03.2006   31.01.2013   1:1  CHF 27.81 
 
xx  415,623   2003   31.01.2006   31.01.2013   1:1  USD 22.53 
 
xxi  7,359   2003   01.03.2004   28.02.2013   1:1  CHF 26.39 
 
xxii  7,354   2003   01.03.2005   28.02.2013   1:1  CHF 26.39 
 
xxiii  7,354   2003   01.03.2006   28.02.2013   1:1  CHF 26.39 
 
xxiv  213,140   2003   31.01.2006   31.01.2013   1:1  CHF 30.50 
 
xxv  31,971   2003   31.01.2006   31.07.2013   1:1  CHF 30.50 
 
xxvi  42,628   2003   31.01.2006   31.07.2013   1:1  USD 22.53 
 
xxvii  52,596   2004   01.03.2005   27.02.2014   1:1  CHF 44.32 
 
xxviii  52,592   2004   01.03.2006   27.02.2014   1:1  CHF 44.32 
 
xxix  52,584   2004   01.03.2007   27.02.2014   1:1  CHF 44.32 
 
xxx  532,850   2004   28.02.2007   27.02.2014   1:1  CHF 48.69 
 
xxxi  436,937   2004   01.03.2007   27.02.2014   1:1  USD 38.13 
 
xxxii  14,210   2005   01.03.2006   28.02.2015   1:1  CHF 47.58 
 
xxxiii  14,210   2005   01.03.2007   28.02.2015   1:1  CHF 47.58 
 
xxxiv  67,489   2005   01.03.2008   28.02.2015   1:1  CHF 47.58 
 
xxxv  837,477   2005   01.03.2008   28.02.2015   1:1  CHF 52.32 
 
xxxvi  383,652   2005   01.03.2008   28.02.2015   1:1  USD 44.81 
 
xxxvii  2,130   2005   04.03.2007   04.03.2015   1:1  CHF 47.89 
 
xxxviii  40,854   2006   01.03.2007   28.02.2016   1:1  CHF 65.97 
 
xxxix  40,852   2006   01.03.2008   28.02.2016   1:1  CHF 65.97 
 
xl  40,847   2006   01.03.2009   28.02.2016   1:1  CHF 65.97 
 
xli  1,332,125   2006   01.03.2009   28.02.2016   1:1  CHF 72.57 
 
xlii  17,762   2007   01.03.2008   28.02.2017   1:1  CHF 67.00 
 
xliii  17,762   2007   01.03.2009   28.02.2017   1:1  CHF 67.00 
 
xliv  17,760   2007   01.03.2010   28.02.2017   1:1  CHF 67.00 
 
xlv  1,348,276   2007   01.03.2010   28.02.2017   1:1  CHF 73.67 
 
xlvi  53,285   2008   01.03.2011   28.02.2018   1:1  CHF 32.45 
 
xlvii  505,478   2008   01.03.2011   28.03.2018   1:1  CHF 35.66 
 
xlviii  745,990   2008   01.03.2011   07.04.2018   1:1  CHF 36.46 
 
xlix  7,420   2008   01.03.2011   06.06.2018   1:1  CHF 28.10 
 

234

Corporate governance and compensation

Transactions in 2008

In accordance with applicable rules and regulations, management transactions in UBS shares by members of the Board of Directors (BoD) and the Group Executive Board (GEB) are publicly disclosed. On 16 May 2008, persons closely associated with them also have such reporting obligations. Transactions which require reporting are those involving all types of financial instruments whose price is primarily influenced by UBS shares. As a consequence of the issuance of new UBS shares in connection with the stock dividend approved by the extraordinary general meeting on 27 February 2008, the grandfathering of Swiss rules ended on 16 May 2008, and the EU requirements (paragraph 15a of the German Securities Trading Act) regarding the reporting of management transactions are now applicable.

From 1 January to 15 May 2008, four purchases were disclosed with a total value of CHF 5,525,205, as well as two sales with a total value of CHF 847,332. Individuals’ names and transactions made by closely associated persons were not required to be disclosed.

From 16 May until 31 December 2008, seven share purchases were disclosed with a total value of CHF 5,022,563 and USD 27,228, as well as three share sales with a total value of CHF 18,302,528 and USD 757,457 – of which CHF 17,736,100 were due to a single sale. Such disclosures contained the individuals’ names. There were no share purchases or sales made by closely associated persons.
Due to the capital increase with a rights issue in June 2008, there were 29 exercises of subscription rights with a total value of CHF 27,447,987, seven purchases of subscription rights with a total amount of CHF 54,430 and 24 sales of subscription rights with a total value of CHF 3,076,438 and USD 52. These disclosures contained the individuals’ names. Two closely associated parties exercised subscription rights, one sold subscription rights.
Until 2008, UBS executives generally received a majority of their compensation in UBS shares or options. For this reason, management transactions, in general, see sales outweighing purchases. Blackout periods and synchronized dates for unblocking or vesting of shares or options granted as compensation may lead to transactions being concentrated in short time periods.


235

Corporate governance and compensation
Compensation, shareholdings and loans

Loans

As a global financial services provider and major Swiss domestic bank, UBS typically has business relationships with many large companies. Members of UBS’s BoD often assume management or independent board responsibilities in many of these companies. Moreover, the granting of loans to both individuals and companies is part of UBS’s ordinary business. The members of UBS’s BoD and GEB are granted loans, fixed advances and mortgages at arm’s length market terms.
     In 2008, loans granted to companies related to seven independent members of the BoD amounted to CHF 667.3 million, including guarantees, contingent liabilities and unused committed credit facilities. Refer to “Note 32 Related parties” in the financial statements of this report for more information.
Loans granted to former members of the Board of Directors and to the Group Executive Board
In 2008, all loans granted to former members of the BoD and GEB, or to their related parties, were on at arm’s length market terms.


                 
(AUDITED) Loans granted to members of the BoD at 31 December 2007/2008 
CHF, except where indicateda 
  For the     Other loans    
Name, function1 year ended Secured loans  granted  Total 
 
Peter Kurer, Chairman2
 2008  1,261,000   0   1,261,000 
   
  2007            
 
Sergio Marchionne, Senior Independent Director, Vice Chairman 2008  0   0   0 
   
  2007  0   0   0 
 
Ernesto Bertarelli, member 2008  0   0   0 
   
  2007  0   0   0 
 
Sally Bott, member 2008  0   0   0 
   
  2007            
 
Rainer-Marc Frey, member 2008  0   0   0 
   
  2007            
 
Bruno Gehrig, member2
 2008  798,000   0   798,000 
   
  2007            
 
Gabrielle Kaufmann-Kohler, member 2008  0   0   0 
   
  2007  0   0   0 
 
Helmut Panke, member 2008  0   0   0 
   
  2007  0   0   0 
 
William G. Parrett, member2
 2008  1,167,659   0   1,167,659 
   
  2007            
 
David Sidwell, member 2008  0   0   0 
   
  2007            
 
Peter R. Voser, member 2008  0   0   0 
   
  2007  0   0   0 
 
Joerg Wolle, member 2008  0   0   0 
   
  2007  0   0   0 
 
Aggregate of all members of the BoD    3,226,659   0   3,226,659 
 
1 No loans have been granted to related parties of the members of the BoD at conditions not customary in the market.    2 Secured loans granted prior to their election to the BoD.
 
(AUDITED) Loans granted to members of the GEB at 31 December 2007/2008 
CHF, except where indicateda 
  For the     Other loans    
Name, function1 year ended Secured loans  granted2  Total 
 
Markus U. Diethelm, Group General Counsel 2008  3,900,000   0   3,900,000 
 
Joe Scoby, Group Chief Risk Officer3
 2007  0   3,145,796   3,145,796 
 
Aggregate of all members of the GEB4
 2008  7,740,562   0   7,740,562 
 
Aggregate of all members of the GEB 2007  3,487,000   3,145,796   6,632,796 
 
1 No loans have been granted to related parties of the members of the GEB at conditions not customary in the market.    2 Guarantees.    3 Joe Scoby stepped down as Group Chief Risk Officer on 4 November 2008.    4 Including those members of the GEB who stepped down during 2008.

236

Corporate governance and compensation


Advisory vote

Compensation principles 2009 and beyond
for UBS senior executives

During 2008, the UBS Board of Directors (BoD) reviewed the incentive systems of the UBS Group (Group) and examined their level of alignment with the firm’s values and long-term orientation. Towards the end of the year, UBS announced that a new compensation model would apply from 2009 onwards. At the annual general meeting (AGM) to be held in 2009, shareholders will be invited to participate in an advisory vote on the principles of this new compensation model. This section of this report outlines these principles and explains how the new model will apply to the Chairman of the BoD, independent BoD members and Group Executive Board (GEB) members.

Compensation policy

TheChairman of the UBS BoD receives a fixed base salary that comprises cash and a pre-determined, fixed number of shares.1 The Chairman is not entitled to any variable compensation.

Theindependent BoD members receive fixed remuneration fees. Independent BoD members are not entitled to any variable compensation.
Compensation formembers of the GEBcomprises a fixed salary, variable cash compensation and variable equity compensation. Variable compensation awarded to GEB members:
–is based on long-term performance: Variable compensation remains an important component of the new model, but it is based on clear, long-term performance measures that take business risk into account. Two variable compensation schemes – one in cash (“cash balance plan”), one in equity (“performance equity plan”) – have been defined for the members of the GEB. The results of the senior executive’s business division will be a key factor in determining the amount of variable cash compensation to be awarded. In unprofitable years no new variable cash compensation will be paid. In the performance equity plan, the final number of shares that each senior executive will receive can be determined only after three years, and will be

based on achievement against two performance measures: economic profit and relative total shareholder return.
–addresses risk management: Pay that depends upon long-term performance increases risk awareness. Economic profit used to determine vesting of the performance equity plan is a market-recognized standard for measuring risk-adjusted profit taking into account the cost of equity capital, while the new cash plan no longer pays out immediately, but holds compensation at risk, subject to future business performance.
–incorporates a “malus” system: A maximum of one-third of a senior executive’s variable cash incentive will be paid out at the beginning of the following year. Should certain material adverse events occur, a “malus” or negative award may be applied to the cash balance plan. Separately, the performance equity plan will deliver between zero and two times each senior executive’s target award. Failure to achieve threshold economic profit targets or a reasonable level of total shareholder return can result in a share delivery that is considerably below target or even zero.

Compensation components

Chairman of the Board of Directors
From January 2009, the Chairman of the BoD receives a fixed base salary comprising cash and a pre-determined fixed number of UBS shares. These shares vest after four years and are subject to a “malus” in loss-making years over the vesting period. This compensation package does not include any variable, performance-dependent component, but does keep the Chairman’s pay aligned with long-term, sustainable value creation through its share component.

Independent members of the Board of Directors
The independent members of the BoD receive fixed remuneration only. Fees are paid 50% in cash and 50% in blocked



Compensation structure

Element of compensationChairman of the BoDIndependent members of BoDMembers of the GEB
Fixed pay
Base salary in cash and a fixed number of restricted share awardsFixed fee (min. 50%; max. 100% in restricted share awards)Base salary in cash
Variable cash compensation
NoNoCash balance plan
Variable equity compensation
NoNoPerformance equity plan
Share retention policy
Yes (vesting four years after grant)Yes (blocked for 4 years)Yes
1Pending Kaspar Villiger’s election as Chairman of the BoD this renumeration structure would not be applicable to him (but rather a fixed base salary only).

237


Advisory vote

Corporate governance and compensation
Compensation, shareholdings and loans

UBS shares. However, members can elect to have 100% of their remuneration paid in blocked UBS shares. These shares are attributed with a price discount of 15% and restricted from sale for four years from the management teamsdate they are granted.

Group Executive Board
Members of the GEB are entitled to a fixed salary. In addition, they may receive variable compensation under either the cash balance plan or the performance equity plan or a combination of both (these plans are discussed below).

Base salary
Members of the GEB receive a fixed base salary that is determined according to the skills, experience and knowledge they bring to their role in the relevant market segment.

Cash balance plan
The cash balance plan rewards long-term profitability by linking variable cash compensation to sustained business groupsperformance. The plan allows for a maximum of one-third of a senior executive’s variable cash incentive to be paid out at the beginning of the following year, with the entire cash incentive in question to be paid out over a three-year period. As such, the plan provides a multi-year reflection of performance and compensation. This is designed to ensure that the financial impact of decisions and actions taken in one period impacts the variable compensation over a longer period of time. The system is significantly strengthened through inclusion of a bonus – malus system, which allows for the application of a “malus” or negative award to the balance of variable compensation. Circumstances in which this could occur include: incurring of a financial loss; material restatement of the Group’s financial statements; substantial underachievement of individual performance targets; or the taking of excessive risk or causing of harm to UBS. If a senior executive leaves UBS, the cash balance will be kept at risk for the remaining life of the plan in order to capture any tail risk events.

Performance equity plan
The performance equity plan is forward-looking and dependent on results produced over a three-year time period. At the

start of each performance period, senior executives are advised of a potential quantity of restricted performance shares that, subject to the achievement of pre-defined business targets, is expected to vest after three years. A final decision on the actual number of shares that will vest and transfer to the senior executive is only possible after the end of the three-year period, depending upon the level of performance achieved. If UBS’s performance over the three-year period is below target, the number of shares that vest is reduced and may be zero. Should UBS’s performance over the three-year period be above target, the actual number of shares may be adjusted up to two times the original target. Performance measurement for the first award will begin in 2009, with the first possible vesting in 2012. Performance shares are not eligible for dividends during the three-year measurement period.

The final number of shares that will actually vest depends on cumulative achievement against two performance metrics:
–Economic profit (EP) is an internal measure for value creation that reflects both profitability and the equity required to support business risk. It is calculated by subtracting the cost of equity capital from the annual net profit attributable to UBS shareholders. EP is only realized when the return on capital achieved is greater than the firm’s cost of capital. In order to offset accounting entries which distort the economic perspective, the EP calculation is adjusted for items not reflected in business performance. The three-year EP targets for the performance equity plan are based on the UBS strategic business plan and analyst expectations. Threshold, target and stretch performance goals have been defined for the 2009 – 2011 performance period based on expected EP performance and consideration of the expected market value associated with those EP performance levels. However, the human resources and compensation committee may revise the performance target if an exceptional event occurs that makes this either necessary or advisable.
–Total shareholder return (TSR) is an external measurement of value creation that measures the total return on a UBS share, i.e. both the dividend yield and the capital appreciation of the share price. UBS measures TSR over a three-year period relative to banking industry performance as



Performance Equity Plan: basic design

(FLOW CHART)

1Refer to the description of UBS’s share retention policy for the Chairman of the BoD and GEB members in this section of the report.2Cumulative EP- and TSR-driven vesting multiple (min. 0%; max. 200%).

238

Corporate governance and compensation

Historic TSR ranking
UBS rank/
Performance periodUBS TSR# peer companies1
1.4.99–1.4.024%16/27
1.4.00–1.4.03(4%)11/27
1.4.01–1.4.046%9/28
1.4.02–1.4.0510%9/30
1.4.03–1.4.0639%10/30
1.4.04–1.4.0718%19/30
1.4.05–1.4.08(14%)28/30
1Current constituents of the Dow Jones Banks Titans 30 Index.



Vesting matrix

(VESTING MATRIX)
1But limited vesting if TSR rank 1–10.



indicated by the components of the Dow Jones Banks Titans 30 Index©. This global index comprises the top 30 companies in the banking sector, as defined by Dow Jones, and has been chosen for its relevance to UBS (banking), for transparency (known listed companies), for sector coverage (30 leading global banks assessed by market capitalization, revenues, and net profit) and for independence (managed by Dow Jones). For greater transparency and consistent with best practice, the TSR for all companies in the index will be measured in a common currency (Swiss franc).
Cumulative EP is the primary and most important performance measure, with relative TSR performance able to either increase or reduce the award indicated by the EP achievement. Both performance conditions will be pre-defined for each three-year performance period. A shortfall in value creation during the performance period, as measured by cumulative EP and relative TSR performance, may result in a “malus” or the vesting of shares below target (this could be as low as zero). However, in case of outperformance against both the EP target and the TSR index, the actual numbers of shares may be adjusted up to two times the orig-

inal target award. If a senior executive leaves UBS before the vesting of an award, the quantity of shares received will be pro-rated to the actual service period as well as being dependent upon the full three-year performance conditions. Awards may be forfeited under certain circumstances.

Employment contracts
All GEB members will receive new employment agreements during 2009, under which notice periods will be reduced from 12 months to six months. Furthermore, any discretionary variable compensation paid to senior executives who leave UBS will, as per the new employment agreements, be based on Group, business division and personal performance. Any amounts paid would be pro-rated to the end of the notice period and would use only variable cash compensation as a basis. Furthermore, any payments would generally be made under the cash balance plan, with two-thirds of any variable cash award being kept “at risk” for the remainder of the three-year performance cycle in order to capture any tail risk events. “Golden parachutes” (in the sense of ex gratia payments made to senior executives due to termination of employment) do not exist at UBS.



239


Advisory vote

Corporate Center or assume special Group functions. The GMB playsgovernance and compensation
Compensation, shareholdings and loans

Share retention policy
Effective 1 January 2009, the Chairman of the BoD and all GEB members are required to retain 75% of all vested shares (after payment of taxes) during their time in office and for a crucial roleperiod of eight years from the date of grant. This rule applies for all mandatory share-based compensation plans, in-

cluding the performance equity plan. For example, performance equity plan shares granted in achieving UBS’s onefirm vision and promoting2009 will continue to be restricted after vesting until 2017 unless the UBS agenda. Its role isexecutive leaves UBS.

All shares granted to understand, challenge and contribute to further developingindependent members of the firm’s direction, values and principles and to promote and communicate its culture.BoD are blocked for a period of four years from the date of grant.



Members asShare retention policy

(FLOW CHART)

240

Financial information

Financial information

Table of 31 December 2007 and announced changescontents

   
Global Wealth Management & Business Banking
244
Introduction
245
Accounting principles
246
Critical accounting policies
 
Michel Adjadj
251
 Head Wealth Management Eastern Mediterranean, Middle East & AfricaConsolidated financial statements


251
Management’s report on internal control over financial reporting
252
Report of independent registered public accounting firm on internal control over financial reporting
254
Report of the statutory auditor and the independent registered public accounting firm on the consolidated financial statements
256
Income statement
257
Balance sheet
258
Statement of changes in equity
260
Statement of recognized income and expense
261
Statement of cash flows
 
Matthew J. Brumsen
263
 Head Business Unit UK, Northern and Eastern EuropeNotes to the consolidated financial statements
263
1  Summary of significant accounting policies
281
2a Segment reporting
288
2b Segment reporting by geographic location
 
Bernhard Buchs
289
 Chief Risk OfficerIncome statement notes
289
3  Net interest and trading income
291
4  Net fee and commission income
291
5  Other income
292
6  Personnel expenses
292
7  General and administrative expenses
293
8  Earnings per share (EPS) and shares outstanding
 
Robert J. (Bob) Chersi Deputy Chief Financial Officer (until 31 January 2008)
 
Diane Frimmel
294
 Regional Chief Operations Officer, AmericasBalance sheet notes: assets
Marten Hoekstra
294
 Head Wealth Management Americas9a Due from banks and loans
Dieter Kiefer
295
 Head Wealth Management Western Europe9b Allowances and provisions for credit losses
Martin Liechti
295
 Head Wealth Management Americas International
10 Securities borrowing, securities lending, repurchase and reverse repurchase agreements
Francesco Morra
296
 Head Wealth Management Western Europe, Mediterranean, Middle East & Africa11 Trading portfolio
Tom Naratil
297
 Head Marketing, Segment & Client Development12 Financial assets designated at fair value
Rolf Olmesdahl
298
 Head Information Technology13 Financial investments available-for-sale
Gabriela Payer
298
 Head Human Resources & Education14 Investments in associates
Niklaus Pfau
299
 Head Global Segment & Sales Management15 Property and equipment
James M. Pierce
300
 Co-Head Wealth Management Advisor Group US
James D. PriceCo-Head Wealth Management Advisor Group US
Joe RickenbacherChief Credit Officer
Alain RobertHead Wealth Management & Business Banking Switzerland
Felix B. RonnerGlobal Head Transaction Products16 Goodwill and Head Products & Services Europe / Latin America
Kathryn ShihHead Wealth Management Asia Pacific and Chief Executive Officer (CEO) UBS Hong Kong
Anton StadelmannChief Financial Officer (Chief Financial Officer Wealth Management Americas as of 1 February 2008)
Michael StrobaekGlobal Head Investment Solutions
Michael A. WeisbergGlobal Head Products & Services
Klaus W. WellershoffGlobal Head Wealth Management Research
Juerg ZeltnerHead Wealth Management North, East & Central Europe and CEO UBS Deutschland AG
Stephan ZimmermannChief Operations Officer
intangible assets

   
Global Wealth Management & Business Banking (continued)
302
 17 Other assets
   
New members as of 1 March 2008
Allen Chun Lun Lo
303
 Head Wealth Management Greater China, Deputy Head Wealth Management Asia PacificBalance sheet notes: liabilities
John B. Hannasch
303
 Head Market Strategy & Development Americas18 Due to banks and customers
Mark Shelton
303
 General Counsel Americas19 Financial liabilities designated at fair value and debt issued
Karl Spielberger
305
 Head Large Corporates and Institutional Clients Switzerland20 Other liabilities
Ursula Suter
306
 General Counsel (excl. US)21 Provisions and litigation
310
22 Income taxes
312
23 Derivative instruments and hedge accounting
   
Investment Bank
Andy Amschwand
319
 Head Investment Bank SwitzerlandOff-balance sheet-information
David Aufhauser
319
 Global General Counsel24 Pledgeable off-balance-sheet securities
David A. Bawden
319
 Chief Credit Officer
Maria BentleyGlobal Head Human Resources
Mark BransonCEO UBS Securities Japan Ltd. (Chief Financial Officer Global WM&BB as of 1 February 2008)
Peter W. BurnettExecutive Chairman, Middle East
Daniel ColemanJoint Global Head Equities
Regina A. DolanChief Financial Officer
Andre EstevesGlobal Head Fixed Income, Currencies and Commodities Chairman and CEO, UBS Latin America
Juerg HallerChief25 Operating Officer UBS Latin America
Suneel KamlaniChief of Staff and Chief Administrative Officer
J. Richard Leaman IIIJoint Global Head Investment Banking Department
Richard B. MetcalfChief Risk Officer, Investment Bank
Brad OrgillCEO and Chairman, Australasia
Jeremy PalmerCEO Investment Bank in Europe, Middle East & Africa
John Pius WallJoint Global Head Equities
Alexander Wilmot-SitwellJoint Global Head Investment Banking Department
Robert WolfPresident and Chief Operating Officer / Chairman and Chief Executive Officer UBS Group Americaslease commitments
   
Global Asset Management
Mario Cueni
321
 General Counsel and Chief Risk OfficerAdditional information
Gabriel Herrera
321
 Head of Europe, Middle East & Africa26 Capital increases and mandatory convertible notes
Christof Kutscher
322
 Head Asia Pacific27 Fair value of financial instruments
Thomas Madsen
330
 Co-Head Equities (stepped down on 25 February 2008)
28 Pledged assets and transferred financial assets which do not qualify for derecognition
John A. Penicook Jr.
331
 Co-Head Global Fixed Income
29 Measurement categories of financial assets and financial liabilities
Markus Ronner
333
 Chief Operating Officer30 Pension and other post-employment benefit plans
Paresh Sodha
339
 Chief Financial Officer31 Equity participation and other compensation plans
Kai Sotorp
344
 Head Americas32 Related parties
347
33 Post-balance-sheet events
347
34 Significant subsidiaries and associates
351
35 Invested assets and net new money
352
36 Business combinations
356
37 Discontinued operations
358
38 Reorganizations and disposals
360
39 Currency translation rates
360
40 Swiss banking law requirements
362
41 Supplemental guarantor information required under SEC rules


50242

Financial information

   
Global Asset Management (continued)
371
 UBS AG (Parent Bank)
   
New members as of 1 March 2008
William J. Ferri
371
 Global Head of Alternative & Quantitative Investments
John C. LeonardCo-Head Equities and Head of Core /Value Equities
Paul W. MarcuseHead of Global Real Estate
Parent Bank review
   
Corporate Center
Scott G. Abbey
372
 Chief Technology OfficerParent Bank financial statements
Charles Nicholas Bolton
372
 Group Head Operational RiskIncome statement
Gerhard Bruederlin
373
 Group Head Human ResourcesBalance sheet
Seth F. Cohen
373
 HeadStatement of Offshoring
Thomas R. HillChief Communication Officer
Stephan KellerGroup Treasurer
Philip J. LoftsGroup Chief Credit Officer
Robert W. MannHead, Leadership Institute
Neil R. StocksHead Group Compliance
M. Andrew ThreadgoldGroup Head Market Risk
Peter ThurneysenHead Group Controlling and Accounting
William WiddowsonHead Group Accounting Policyappropriation of retained earnings
   
New member as of 1 March 2008
Oliver Bartholet
374
 Head Group TaxNotes to the Parent Bank financial statements
374
Accounting policies
   
Chairman’s Office
376
Additional income statement information
376
Net trading income
376
Extraordinary income and expenses
 
Luzius Cameron
377
 Company SecretaryAdditional balance sheet information
377
Allowances and provisions
377
Statement of shareholders' equity
378
Share capital
 
Ian Overton
379
 Head Group Internal AuditOff-balance sheet and other information
379
Assets pledged or assigned as security for own obligations and assets subject to reservation of title
379
Commitments and contingent liabilities
379
Derivative instruments
380
Fiduciary transactions
380
Due to UBS pension plans
380
Personnel
380
Significant shareholders
 
381
Corporate governance and compensation report
381
Compensation details and additional information for executive members of the Board of Directors
382
Remuneration details and additional information for independent members of the Board of Directors
383
Total payments to all members of the Board of Directors
383
Total compensation for all members of the Group Executive Board
384
Share and option ownership of members of the Board of Directors
385
Compensation paid to former members of the Board of Directors and Group Executive Board
386
Share and option ownership of members of the Group Executive Board
388
Vested and unvested options held by independent members of the Board and by members of the Group Executive Board
389
Loans granted to members of the Board of Directors
389
Loans granted to members of the Group Executive Board
390
Report of the statutory auditor on the financial statements
392
Confirmation of the auditors concerning conditional capital increase

Business Group Vice Chairmen

Business Group Vice Chairmen are appointed to support the businesses in their relationships with key clients. They strongly contribute to the success of UBS and work closely together with the members of the GMB.

Members as of 31 December 2007

   
Global Wealth Management & Business Banking
Arthur Decurtins
393
 
Thomas K. Escher
Carlo Grigioni
Werner H. Peyer
Additional disclosure required under SEC regulations
   
Investment Bank
393
A – Introduction
 
Chris Brodie  
394
B – Selected financial data
Lord Brittan
395
Key figures
396
Income statement data
397
Balance sheet data
397
Ratio of Spennithorne, QCearnings to fixed charges
 
Robert Gillespie  
398
C – Information on the company
Phil Gramm
398
Property, plant and equipment
  
399
D – Information required by industry guide 3
399
Selected statistical information
399
Average balances and interest rates
401
Analysis of changes in interest income and expense
403
Deposits
404
Short-term borrowings
405
Contractual maturities of investments in debt instruments, available-for-sale
406
Due from banks and loans (gross)
407
Due from banks and loan maturities (gross)
408
Impaired and con-performing loans
409
Cross-border outstandings
410
Summary of movements in allowances and provisions for credit losses
411
Allocation of the allowances and provisions for credit losses
412
Due from banks and loans by industry sector (gross)
413
Loss history statistics



51243

52

Financial information

More about UBS

53

More about UBS

Sources of informationIntroduction

Annual report 2007

Four reports make up UBS’s fullAnnual Report 2007. They comply with the US disclosure requirements for foreign private issuers as defined by Form 20-F of the Securities and Exchange Commission (SEC) and combine audited and non-audited information. All four reports are available in English and German (SAP no.80531). The four reports are:

Strategy, Performance and Responsibility 2007
This provides a description of our firm, its strategy, organizational structure and financial performance for the last two years. It also discusses our standards for corporate behavior and responsibility, outlines demographic trends in our workforce and describes the way our people learn and are led.

Risk, Treasury and Capital Management 2007
In addition to outlining the principles by which we manage and control risk, this report provides an account of developments in credit risk, market risk, operational risk and treasury management during 2007. It also providesFinancial information on UBS shares.

Corporate Governance and Compensation Report 20072008
Comprehensive information on our governance arrangements is included in this report, which also explains how we manage our relationships with regulators and shareholders. Compensation of senior management and the Board of Directors (executive and non-executive members) is discussed here. This report can be ordered separately (SAP no. 82307).

Financial Statements 2007
This comprises the audited consolidated financial statements of UBS Group for 2008, 2007 2006 and 2005,2006, prepared according to the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). It


also includes the audited financial statements of UBS AG (the parent bank)Parent Bank) for 20072008 and 2006,2007, prepared according to Swiss banking law. Additional disclosure required by Swiss and US regulations is included where appropriate.

In addition to the four reports,Review 2007is distributed broadly to UBS shareholders and contains key information on our strategy and financials. This booklet summarizes the information in the four-part annual report.

Quarterly reports

We provide detailed quarterly financial reporting and analysis, including comment on the progress of our businesses and key strategic initiatives. These quarterly reports are available in English.

How to order reports

These reports are available in PDF format on the internet atwww.ubs.com/investors/topicsin the reporting section. Printed copies can be ordered from the same website by accessing the order / subscribe panel on the right-hand side of the screen. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, Information Center, P.O. Box, CH-8098 Zurich, Switzerland.



54

Information tools for investors

Website
Our Analysts & Investors website atwww.ubs.com/investorsoffers a wide range of information about UBS, financial information (including SEC filings), corporate information, share price graphs and data, an event calendar, dividend information and recent presentations given by senior management to investors at external conferences. Information on the internet is available in English and German, with some sections in French and Italian.

Messaging service
On the Analysts & Investors website, you can register to receive news alerts about UBS via Short Messaging System (SMS) or e-mail. Messages are sent in either English or German and users are able to state their preferences for the topics of the alerts received.

Results presentations
Senior management presents UBS’s results every quarter. These presentations are broadcast live over the internet, and can be downloaded on demand. The most recent result webcasts can be found in the financials section of our Analysts & Investors website.

Form 20-F and other submissions to the US Securities and Exchange Commission

We file periodic reports and submit other information about UBS to the US Securities and Exchange Commission (SEC). Principal among these filings is our annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934.

Our Form 20-F filing is structured as a “wrap-around” document. Most sections of the filing can be satisfied by referring to parts of the four reports (Strategy, Performance and Responsibility 2007,Risk, Treasury and Capital Management 2007,Corporate Governance and Compensation Report 2007 andFinancial Statements 2007). However, there is a small amount of additional information in Form 20-F which is not presented elsewhere, and is particularly targeted at readers in the US. You are encouraged to refer to this additional disclosure.
You may read and copy any document that we file with the SEC on the SEC’s website,www.sec.gov,or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, DC, 20549. Please call the SEC by dialing 1-800-SEC-0330 (in the US) or +1 202 942 8088 (outside the US) for further information on the operation of its public reference room. You may also inspect our SEC reports and other information at the New York Stock Exchange, Inc., 20 Broad Street, New York, NY 10005. Much of this additional information may also be found on the UBS website atwww.ubs.com/investors,and copies of documents filed with the SEC may be obtained from UBS’s Investor Relations team at the address shown on the next page.



Corporate information

The legal and commercial name of the company is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS.

UBS AG is incorporated and domiciled in Switzerland and operates under Swiss Company Law and Swiss Federal Banking Law as an Aktiengesellschaft, a corporation that has issued shares of common stock to investors.

The addresses and telephone numbers of our two registered offices are: Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41-44-234 11 11; and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, phone +41-61-288 20 20.

UBS AG shares are listed on the SWX Swiss Exchange (traded through its trading platform virt-x), on the New York Stock Exchange (NYSE) and on the Tokyo Stock Exchange (TSE).



55

More about UBS

Contacts

Switchboards
For all general queries.Zurich+41-44-234 1111
London+44-20-7568 0000
New York+1-212-821 3000
Hong Kong+852-2971 8888
Investor Relations
Our Investor Relations team supports institutional, professional and retail investors from our offices in Zurich and New York.

www.ubs.com/investors		Hotline+41-44-234 4100UBS AG
New York+1-212-882 5734Investor Relations
Fax (Zurich)+41-44-234 3415P.O. Box
CH-8098 Zurich, Switzerland
sh-investorrelations@ubs.com
Media Relations
Our Media Relations team supports global media and journalists from offices in Zurich, London, New York and Hong Kong.

www.ubs.com/media		Zurich+41-44-234 8500mediarelations@ubs.com
London+44-20-7567 4714ubs-media-relations@ubs.com
New York+1-212-882 5857mediarelations-ny@ubs.com
Hong Kong+852-2971 8200sh-mediarelations-ap@ubs.com
Shareholder Services
UBS Shareholder Services, a unit of the Company Secretary, is responsible for the registration of the global registered shares.Hotline+41-44-235 6202UBS AG
Fax+41-44-235 3154Shareholder Services
P.O. Box
CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com
US Transfer Agent
For all global registered share-related queries in the US.

www.melloninvestor.com		Calls from the US+866-541 9689BNY Mellon Shareowner Services
Calls outside the US+1-201-680 6578480 Washington Boulevard
Fax+1-201-680 4675Jersey City, NJ 07310, USA
sh-relations@melloninvestor.com

56

Cautionary statement regarding forward-looking statements |This report contains statements that constitute “forward-looking statements”, including but not limited to statements relating to the risks arising from the current market crisis, other risks specific to our business and the implementation of strategic initiatives, as well as other statements relating to our future business development and economic performance and our intentions with respect to future returns of capital. While these forward-looking statements represent our judgments and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to (1) the extent and nature of future developments in the US sub-prime market and in other market segments that have been affected by the current market crisis; (2) other market and macro-economic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates, whether or not arising directly or indirectly from the current market crisis; (3) the impact of these developments on other markets and asset classes; (4) changes in internal risk control and in the regulatory capital treatment of UBS’s positions, in particular those affected by the current market crisis; (5) limitations in the effectiveness of our internal risk management processes, of our risk measurement, control and modeling systems, and of financial models generally; (6) developments relating to UBS’s access to capital and funding, including any changes in our credit ratings; (7) changes in the financial position or creditworthiness of our customers, obligors and counterparties, and developments in the markets in which they operate; (8) management changes and changes to the structure of our Business Groups; (9) the occurrence of operational failures, such as fraud, unauthorized trading, systems failures; (10) legislative, governmental and regulatory developments; (11) competitive pressures; (12) technological developments; and (13) the impact of all such future developments on positions held by UBS, on our short-term and longer-term earnings, on the cost and availability of funding and on our BIS capital ratios. In addition, these results could depend on other factors that we have previously indicated could adversely affect our business and financial performance which are contained in other parts of this document and in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth elsewhere in this document and in documents furnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2007. UBS is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

Imprint |Publisher/Copyright: UBS AG, Switzerland | Languages: English, German | SAP-No. 82307E-0801

(FSC LOGO)
Mixed Sources
Product Group from well-managed
forests and other controlled sources
www.fsc.org Cert. no. SQS-COC-100112
© 1996 Forest Stewardship Council

(UBS LOGO)

UBS AG
P.O. Box, CH-8098 Zurich
P.O. Box, CH-4002 Basel
www.ubs.com

(CORPORATE GOVERNANCE AND COMPENSATION REPORT)

(COVER)

Contents

Introduction
1
Contacts2
Accounting Standards and Policies
3
Financial Statements
9
UBS AG (Parent Bank)
121
Additional Disclosure Required under SEC Regulations
143



1

Introduction

Introduction

This year we have changed the structure of our annual report. Based on feedback from users, our annual report now consists of four themed reports. These combine audited and non-audited information.

Together, the four reports make up UBS’s fullAnnual Report 2007and replace the former Financial Report, the Handbook and the Compensation Report. They comply with the US disclosure requirements for foreign private issuers as defined by Form 20-F of the Securities and Exchange Commission (SEC).

     The four reports are:

Strategy, Performance and Responsibility 2007
This provides a description of our firm, its strategy, organizational structure and financial performance for the last two years. It also discusses our standards for corporate behavior and responsibility, outlines demographic trends in our workforce and describes the way our people learn and are led.

Risk, Treasury and Capital Management 2007
In addition to outlining the principles by which we manage and control risk, this report provides an account of developments in credit risk, market risk, operational risk and treasury management during 2007. It also provides information on UBS shares.

Corporate Governance and Compensation Report 2007
Comprehensive information on our governance arrangements is included in this report, which also explains how we manage our relationships with regulators and shareholders. Compensation of senior management and the Board of Directors (executive and non-executive members) is discussed here.

Financial Statements 2007
This comprises the audited financial statements of UBS for 2007, 2006 and 2005, prepared according to the International Financial Reporting Standards (IFRS). It also includes the audited financial statements of UBS AG (the parent bank) for 2007 and 2006, prepared according to Swiss banking law. Additional disclosure required by Swiss and US regulations is included where appropriate.

In addition to the four reports,Review 2007is distributed broadly to UBS shareholders and contains key information on our strategy and financials. This booklet summarizes the information in the four-part annual report.

If you only ordered specific reports in prior years, please note that the former Compensation Report is now calledCorporate Governance and Compensation Report 2007,and the former Annual Review is now calledReview 2007. Our contact details are listed in the final pages of this report – please be in contact with us so that we can arrange delivery of the reports you require.

This report contains information that is current as of the date of this report. We undertake no obligation to update this information or notify you if it should change or if new information should become available.

Our aim is to provide publications that are useful and informative. In order to ensure that UBS remains among the leading providers of corporate disclosure, we would like to hear your opinions on how we can improve the content and presentation of our products (see contact details on the final pages of this report).

UBS



2244

Financial Information

Accounting Standards and Policies

3

principles

Accounting Standards and Policies
Accounting Principles

Accounting Principles

UBSUBS’s consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and stated in Swiss francs (CHF). Until 2006, UBS also reconciled its Financial Statements to US Generally Accepted Accounting Principles (US GAAP). It will now no longer do so after the SEC released a final rule on 21 December 2007 under which financial statements from foreign private issuers in the US will be accepted without reconciliation to GAAP if they are prepared in accordance with IFRS as issued by the International Accounting Standards Board. As a US listed company, we had provided in the Annual Financial Statements until and including 31 December 2006 a description of the significant differences which would have arisen if our accounts had been presented under US GAAP, a detailed reconciliation of equity and net profit attributable to UBS shareholders under IFRS to US GAAP, and additional disclosures required under US GAAP.

Except where clearly identified, all of UBS’s financial information presented in this document is presented on a consolidated basis under IFRS. Pages 121371 to 142392 contain the financial statements for the UBS AG Parent Bank – the Swiss company, including branches worldwide, which owns all the UBS companies, directly or indirectly. The Parent Bank’s financial statements are prepared in order to meet Swiss regulatoryregu-

latory requirements and in compliance with Swiss Banking Law. Except in those pages, or where otherwise explicitly stated, all references to “UBS” refer to the UBS Group and not to the Parent Bank. Pages 393 to 413 include additional disclosures required under SEC rules.

All references to 2008, 2007 2006 and 20052006 refer to the UBS Group and the Parent Bank’s fiscal years ended 31 December 2008, 2007 2006 and 2005.2006. The Financial Statements for the UBS Group and the Parent Bank have been audited by Ernst & Young Ltd. An explanation of the critical accounting policies applied in the preparation of ourUBS’s Financial Statements is provided in the next section. The basis of ourUBS’s accounting is givendescribed in Note 1 to the Financial Statements.

Standards for management accounting

Our management reporting systems and policies determine the revenues and expenses directly attributable to each business unit. The presentation of the business segments reflects UBS’s organizational structure and management responsibilities. Internal charges and transfer pricing adjustments are reflected in the performance of each business unit.

Inter-business unit revenues and expenses.Revenue-sharing agreements are used to allocate external customer

revenues to business units on a reasonable basis. Inter-business unit charges are predominantly reported in the line “Services (to) / from other business units” for both Business units concerned. Transactions between Business units are conducted at internally agreed transfer prices or at arm’s length. Corporate Center expenses are allocated to the operating Business units to the extent appropriate.

Net interest incomeis allocated to the Business units based on their balance sheet positions. Assets and liabilities of the financial businesses are funded through and invested with the central treasury departments, with the net margin reflected in the results of each Business unit. To complete the allocation, the financial businesses are credited with interest income on their regulatory capital requirements adding goodwill and excess intangible assets (see below).
Commissionsare credited to the Business unit with the corresponding customer relationship, with revenue-sharing agreements for the allocation of customer revenues where several business units are involved in value creation.
For internal management reporting purposes and in the results discussion, we measurecredit lossusing an expected loss concept. Expected credit loss reflects the average annual costs that are expected to arise from positions in the current portfolio that become impaired. The adjusted expected credit loss reported for each Business Group is the expected credit loss on its portfolio plus the difference between credit loss expense and expected credit loss, amortized over a three-year period (shown as “deferral”). The difference between the sum of these adjusted expected credit loss figures, which are charged to the Business Groups or units, and the credit loss expense recorded at Group level for financial reporting purposes is reported in Corporate Center.
Regulatory capital requirementsfor the Business units are defined as 10% of BIS risk-weighted assets. To measure capital consumption of the Business units, we adjust regulatory capital for the goodwill and excess intangible assets allocated. Return on allocated regulatory capital is a key performance indicator for the Investment Bank and the Business Banking Switzerland unit.
The levels of personnel are expressed in terms of full-time equivalents (FTE) and measured as a percentage of the standard hours normally worked by permanent full-time staff. The FTE level cannot exceed 1.0 for any individual. The term personnel comprises all staff and trainees other than contractors.



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Accounting Standards and Policies
Financial information

Critical accounting policies

Critical accounting policies

Basis of preparation and selection of policies

We prepare ourUBS prepares its Financial Statements in accordance with IFRS as issued by the International Accounting Standards Board. The application of certain of these accounting principles requires considerable judgment based upon estimates and assumptions that involve significant uncertainty at the time they are made. Changes in assumptions may have a significant impact on the Financial Statements in the periods where assumptions are changed. Accounting treatments where significant assumptions and estimates are used are discussed in this section, as a guide to understanding how their application affects ourthe reported results. A broader and more detailed description of the accounting policies we employUBS employs is shown in Note 1 to the Financial Statements.

The application of assumptions and estimates means that any selection of different assumptions would cause ourthe reported results to differ. We believeUBS believes that the assumptions we haveit has made are appropriate, and that ourUBS’s Financial Statements therefore present ourthe financial position and results fairly, in all material respects. The alternative outcomes discussed below are presented solely to assist the reader in understanding ourUBS’s Financial Statements, and are not intended to suggest that other assumptions would be more appropriate.
Many of the judgements we makejudgments UBS makes when applying accounting principles depend on an assumption, which we believeUBS believes to be correct, that UBS maintains sufficient liquidity to hold positions or investments until a particular trading strategy matures – i. e.i.e. that we doUBS does not need to realize positions at unfavorable prices in order to fund immediate cash needs. Liquidity is discussed in more detail in the Treasury Management chapter“Liquidity and funding management” section of the Risk, Treasury and Capital Managementthis report.

Fair value of financial instruments

Financial assets and financial liabilities in ourUBS’s trading portfolio, financial assets and liabilities designated at fair value, and derivative instruments, and financial assets available-for-sale are recorded at fair value on the balance sheet, with changessheet. Changes in the fair value of these financial instruments are recorded in netNet trading income in the income statement.statement, except for financial assets available-for-sale, for which changes in fair value are recorded directly in equity until realized or the assets are considered impaired. Key judgments affecting this accounting policy relate to how we determineUBS determines fair value for such assets and liabilities.

Where no active market exists, or where quoted prices are not otherwise available, we determineUBS determines fair value using valuation techniques. In these cases, fair values are estimated from observable data in respect of similar financial instruments, using models to estimate the present value of

expected future cash flows or other valuation techniques, using inputs existing at the balance sheet dates. If available, market observable inputs are applied to valuation models (level 2). In cases where market observable inputs are not available for all significant valuation parameters, they are estimated based on appropriate assumptions (level 3). At 31 December 2008, financial assets categorized as level 2 amounted to CHF 965 billion (31 December 2007: CHF 799 billion) and those categories as level 3 amounted to CHF 57 billion (31 December 2007: CHF 76 billion). At 31 December 2008, financial liabilities categorized as level 2 amounted to CHF 931 billion (31 December 2007: CHF 615 billion) and level 3 to CHF 46 billion (31 December 2007: CHF 59 billion).
Valuation models are used primarily to value derivatives transacted in the over-the-counter market, including credit derivatives, unlisted equity and unlisteddebt securities (including those with embedded derivatives.derivatives), and other debt instruments for which markets were or have become illiquid in 2008. All valuation models are validated before they are used as a basis for financial reporting, and periodically reviewed thereafter, by qualified personnel independent of the area that created the model. Wherever possible, we compareUBS compares valuations derived from models with prices of similar financial instruments, and with actual values when realized, in order to further validate and calibrate ourUBS’s models.
A variety of factors are incorporated into ourin UBS’s models, including actual or estimated market prices and rates, such as time value and volatility, and market depth and liquidity. Where available, we useUBS uses market observable prices and rates derived from market verifiable data. Where such factors are not market observable, changes in assumptions could affect the reported fair value of financial instruments. We apply ourUBS generally applies its models consistently from one period to the next, ensuring comparability and continuity of valuations over time, but estimatingtime. However, models are changed or adapted to market developments in situations where peviously used models have limitations and are assessed to be inadequate.
Estimating fair value inherently involves a significant degree of judgment. Management therefore establishes valuation adjustments to cover the risks associated with the estimation of unobservable input parameters and the assumptions within the models themselves. Valuation adjustments are also made to reflect such elements as deteriorating creditworthiness (including(in-


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Financial Information

cluding country-specific risks), concentrations in specific types of instruments and market risk factors (interest rates, currencies, etc.), and market depth and liquidity. Although a significant degree of judgment is, in some cases, required in establishing fair values, management believes that the fair values recorded in the balance sheet and the changes in fair values recorded in the income statement are reflective of the underlying economics, based on ourUBS’s established fair value and model governance policies and the related controls and procedural safeguards we employ.UBS employs. For a description of the valuations of ourUBS’s positions related to the US residentialstudent loan auction rate securities, monolines, leveraged finance transactions, US and non-US reference linked notes, US commercial mortgage market seebacked securities and other instruments which were determined relevant for specific disclosure refer to Note 26a).27.
Uncertainties associated with the use of model-based valuations (both level 2 and level 3) are predominantly addressed through the use of model reserves. These reserves reflect the amounts that UBS estimates are appropriate to deduct from the valuations produced directly by the models


5

Accounting Standards and Policies
Critical accounting policies

to reflect uncertainties in the relevant modeling assumptions and inputs used. In arriving at these estimates, UBS considers the range of market practice and how it believes other market participants would assess these uncertainties. Model reserves are periodically reassessed in light of information from market transactions, pricing utilities, and other relevant sources. The level of these model reserves is, nevertheless, to a large extent judgmental.a matter of judgment.
To estimate the potential effect on the Financial Statements from the use of alternative valuation techniques or assumptions, UBS makes use of the model reserve amounts described above, by scaling the level of the model reserves higher and lower, to assess the impact on valuation of increasing or decreasing the amount of model-related uncertainty considered.
The potential effect of using reasonably possible alternative valuation assumptions has been quantified as follows:
– Scaling the model reserve amounts upward in line with less favorable assumptions would reduce fair value by approximately CHF 2,710 million2.5 billion at 31 December 2008, by approximately CHF 2.7 billion at 31 December 2007 byand approximately CHF 1,038 million1.0 billion at 31 December 2006 and approximately CHF 1,094 million at 31 December 2005.2006.
– Scaling the model reserve amounts downward in line with more favorable assumptions would increase fair value by approximately CHF 2,160 million1.4 billion at 31 December 2008, approximately CHF 2.2 billion at 31 December 2007, and approximately CHF 955 million1.0 billion at 31 December 2006, and approximately CHF 1,176 million at 31 December 2005.2006.
Refer to Note 27 for additional sensitivity information for several relevant products.

Recognition of deferred day 1 profit or lossGoodwill impairment test

A closely related issue to determining fair value of financial instruments is the recognition of deferred day 1 profit or loss. We have entered into transactions, some of which will matureThe ongoing crisis in the long-term, where we determine fairfinancial markets dramatically changed industry dynamics and the related decrease in market capitalization of UBS made it necessary to monitor closely whether there was indication that goodwill allocated to its cash-generating units was impaired. At 31 December 2008, equity attributable to UBS shareholders stood at CHF 33 billion. UBS’s market capitalization, excluding the shares to be issued upon conversion of the MCNs, amounted to CHF 44 billion at 31 December 2008. On the basis of the impairment testing methodology described in Note 16, UBS concluded that the year-end 2008 balances of goodwill allocated to all its segments remain recoverable. Goodwill allocated to the Investment Bank at 31 December 2008 amounted to CHF 4.3 billion (CHF 5.2 billion at 31 December 2007), to Wealth Management US CHF 3.7 billion, Wealth Management International & Switzerland CHF 1.6 billion and Global Asset Management CHF 2.0 billion. The assessment of the goodwill in the Investment Bank, which is most affected by the financial market crises, was a key focus.

In its review of the year-end 2008 goodwill balance, UBS considered the performance outlook of its Investment Bank division and the underlying business operations to resolve whether the recoverable amount for this unit covers its carrying amount. Based on the estimated cash flows the Investment Bank will generate from its businesses, discounted back to their present value using valuation models fora discount rate that reflects the risk profile of the Investment Bank’s activities, UBS concluded that goodwill allocated to the Investment Bank remained recoverable on 31 December 2008. The conclusion was reached on the basis of the forecast results of those activities which not all material inputsmanagement expects to generate positive cash flows in future years. The forecasts are market observable prices or rates. We initially recognize such a financial instrument atbased on an expectation that the transaction price, which iseconomic environment will gradually improve over the best indicator ofnext three years and reach an average growth level thereafter. The fair value, although the value obtained from the relevant valuation model may differ. Suchcalculation was subject to a difference betweenstress test by decreasing forecast cash flows by one third and at the transaction price andsame time increasing the modeldiscount rate by 3.5 percentage points to 16.5%. The stress value is commonly referred to as “day 1 P / L”. We do not immediately recognize that initial difference, usually a gain, in profit or loss becausecovered the applicable accounting literature prohibits immediate recognition of day 1 profit. The accounting literature does not, however, address its subsequent recognition prior to the time when fairbook value can be determined using market observable inputs or by reference to prices for similar instruments in active markets. It also does not address subsequent measurement of these instruments and recognition of subsequent fair value changes indicated by the model.

Our decisions regarding recognizing deferred day 1 profit p are made after careful consideration of facts and circumstances to ensure we do not prematurely release a portion of the deferred profit to income. For each transaction, we determine, individually,Investment Bank. However, if the appropriate method of recognizing the day 1 profit amountconditions in the income statement.financial markets and banking industry further deteriorate and turn out to be worse than anticipated in UBS’s performance forecasts, the goodwill carried in the Investment Bank business division may need to be impaired in future periods.
The same model is applied to all segments carrying goodwill. It is most sensitive to changes in the forecast earnings available to shareholders in year one to five, the estimated



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Financial information

return on equity, the underlying equity, the cost of equity and to changes in the long-term growth rate. The applied long-term growth rate is based on long-term risk-free interest rates. Earnings available to shareholders are estimated based on forecast results, business initiatives and planned capital investments and returns to shareholders. Valuation parameters used within the Group’s impairment test model are linked to external market information, where applicable. Management believes that reasonable changes in key assumptions used to determine the recoverable amounts of all segments will not result in an impairment situation.

Reclassification of financial instruments

The International Accounting Standards Board published an amendment to International Accounting Standard 39 (IAS 39 Financial Instruments: Recognition and Measurement) on 13 October 2008, under which eligible financial assets, subject to certain conditions being met, may be amortized over the lifereclassified out of the transaction,“held for trading” category if the firm has the intent and ability to hold them for the foreseeable future or deferred until fair value can be determined using market observable inputs, or realized through settlement. In all instances, any unrecognized daymaturity.

Although the amendment could have been applied retrospectively from 1 profit is immediately releasedJuly 2008, UBS decided at the end of October 2008 to income ifapply the amendment with effect from 1 October 2008 following an assessment of the implications on its financial statements.
Effective 1 October 2008, UBS reclassified eligible assets which it intends to hold for the foreseeable future with a fair value of CHF 17.6 billion on that date from “held for trading” to the financial instrument in question can be determined either by using market observable model inputs or by reference to“loans and receivables” category. In addition, student loan auction rate securities (ARS) with a quoted price for the same product in an active market.
Changes in fair value of CHF 8.4 billion have been reclassified as of 31 December 2008. In fourth quarter 2008, an impairment charge of CHF 1.3 billion was recognized as credit loss expense on reclassified financial instruments. If reclassification had not occurred, the impairment charge would not have been recognized but an additional trading loss of CHF 4.8 billion would have been recorded in UBS’s fourth quarter income statement. Net interest income after day 1 resulting from changes in observable parameters or otherwise indicatedreclassification increased by the model are recognized immediately in the income statement independently of the release of deferred day 1 profits. SeeCHF 0.3 billion. Refer to Note 26e) to the Financial Statements29 for quantitative information on deferred day 1 profit or loss.details.

Consolidation of Special Purpose Entities

UBS sponsors the formation of Special Purpose Entities (SPEs) primarily to allow clients to hold investments in separate legal entities, to allow clients to jointly invest in alternative assets, for asset securitization transactions and for buying or selling credit protection. In accordance with IFRS, we do

UBS does not consolidate SPEs that we doit does not control. In order to determine whether weUBS control an SPE or not, we haveUBS has to make judgments about risks and rewards and assess ourthe ability to make operational decisions for the SPE in question. In many instances, elements are present that, considered in isolation, indicate control or lack of control over an SPE, but when considered together make it difficult to reach a clear conclusion. When assessing whether we haveUBS has to consolidate an SPE we evaluateit evaluates a range of factors, including whether (a) the activities of the SPE are being conducted on ourUBS’s behalf according to ourits specific business needs so that we obtainUBS obtains the benefits from the SPE’s operations, or (b) we haveUBS has decision-making powers to obtain the majority of the benefits of the activities of the SPE, or UBS has delegated these decision-making powers by setting up an autopilot mechanism, or (c) we haveUBS has the rights to obtain the majority of the benefits of the activities of an SPE and therefore may be exposed to risks arising from the activities of the SPE, or (d) we retainUBS retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain the benefits from its activities. We consolidate anUBS consolidates a SPE if ourits assessment of the relevant factors indicates that we controlUBS controls the SPE.
SPEs used to allow clients to hold investmentsare structures that allow one or more clients to invest in an asset or set of assets, which are generally purchased by the SPE in the open market and not transferred from UBS. The risks and



6

rewards of the assets held by the SPE reside with the clients. Typically, weUBS will receive service and commission fees for creation of the SPE, or because we actit acts as investment manager, custodian or in some other function. Many of these SPEs are single-investor or family trusts while others allow a broad number of investors to invest in a diversified asset base through a single share or certificate. These latter SPEs range from mutual funds to trusts investing in real estate. The majority of ourUBS’s SPEs isare created for client investment purposes and isare not consolidated. However, we consolidateUBS consolidates investment funds in cases where we provideit provides or have a moral obligation to provide financial support to a fund. In these instances weUBS generally assumeassumes the majority or a significant portion of the risks of the fund, which, combined with ourUBS’s role as investment manager, makes us the party that can exercise control over the entity.

SPEs used to allow clients to jointly invest in alternative assets,, e. g. e.g. feeder funds, for which generally no active markets exist, are often in the form of limited partnerships. Investors are the limited partners and contribute all or the majority of the capital, whereas UBS serves as the general partner. In that capacity, we areUBS is the investment manager and


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Financial Information

have sole discretion aboutover investment and other administrative decisions, but have no or only a nominal amount of capital invested. WeUBS typically receivereceives service and commission fees for ourUBS’s services as general partner but do not, or only to a minor extent, participate in the risks and rewards of the vehicle, which reside with the limited partners. In most instances, limited partnerships are not consolidated under IFRS because ourUBS’s legal and contractual rights and obligations indicate that we doUBS does not have the power to govern the financial and operating policies of these entities and concurrently do not have the objective of obtaining benefits from its activities through such power.
SPEs used for securitization.SPEs for securitization are created when we haveUBS has assets (for example, a portfolio of loans) which we sellit sells to an SPE, and the SPE in turn sells interests in the assets as securities to investors. Consolidation of these SPEs depends mainly on whether we retainUBS retains the majority of the benefits or risks of the assets in the SPE.
We doUBS does not consolidate SPEs for securitization if we haveit has no control over the assets and no longer retain any significant exposure (for gain or loss) to the income or investment returns on the assets sold to the SPE or the proceeds of their liquidation. This type of SPE is a bankruptcy remote entity – if UBS were to go bankrupt the holders of the securities would clearly be owners of the asset, while if the SPE were to go bankrupt the securities holders would have no recourse to UBS.
SPEs for credit protectionare set up to allow usUBS to sell the credit risk on portfolios, which may or may not be held by us,UBS, to investors. They exist primarily to allow usUBS to have a single counterparty (the SPE), which sells credit protection to us.it. The SPE in turn has investors who provide it with capital and participate in the risks and rewards of the credit events that

it insures. WeUBS generally consolidateconsolidates SPEs used for credit protection.

Equity compensation

IFRS 2Share-based Paymentsaddresses the accounting for share-based employee compensation and was adopted by UBS on 1 January 2005 on a fully retrospective basis. The effect of applying IFRS 2 is disclosed in Note 1b) to the Financial Statements, and further information on UBS equity compensation plans, including inputs used to determine the fair value of options, is disclosed in Note 30 to the Financial Statements.

IFRS 2 requires that shares and share options awarded to employees are recognized as compensation expense based on their fair value at grant date. In valuing share awards, the employee’s entitlement to receive dividends during the vesting period and post-vesting sale and hedge restrictions and non-vesting conditions are taken into account. The share options weUBS issue to ourits employees have features that make them incomparable to options on ourUBS’s shares traded in active markets. Accordingly, weUBS cannot determine fair value by reference to a quoted market price, but weUBS rather estimateestimates it using an option valuation model. The model, a

Monte Carlo simulation, requires inputs such as interest rates, expected dividends, volatility measures and specific employee exercise behavior patterns based on statistical data.
Some of the model inputs we useUBS uses are not market observable and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized.
Several recognized models for the valuation of options exist but none can be singled out as the best or most correct. The model we applyUBS applys has been selected because it is able to handle some of the specific features included in the options granted to ourUBS’s employees. If we wereUBS was to use a different model, the option values produced would be different, even if weit used the same inputs.
Using both different inputs and a different valuation model could have a significant impact on the fair value of employee share options, which could be either higher or lower than the values produced by the model we applyUBS applys and the inputs we haveit has used.
On 1 January 2008, UBS adopted an amendment to IFRS 2Share-based Payment: Vesting Conditions and Cancellations and restated the two comparative prior years. The amended standard no longer considers non-compete conditions to establish a service requirement in order to earn the share-based awards. Accordingly, UBS changed its expense recognition for compensation awards that contain non-compete conditions from the stated vesting period to the period over which the employee is required to provide active service in order to earn the award. Post-vesting sale and hedge restrictions and other non-vesting conditions are considered when determining the fair value of an award at grant date. The adoption of these IFRS 2 amendments had the effect that the compensation expense for share and option awards containing non-compete provisions was recognized retrospectively in the year for which the award was granted. Additional compensation expense of CHF 797 million was recognized for 2007 and CHF 516 million for 2006. In 2008, management decided that most of the share-based awards to be granted in March 2009 for the year 2008 will be forfeited if the employee terminates employment with UBS prior to vesting and eliminated the non-compete conditions. Compensation expense for these awards will be recognized over the stated vesting period that commences on 1 March 2009. The adoption of the amendments to IFRS 2 and the large reduction in variable compensation for 2008 resulting in a small number of share grants related to 2008 significantly reduced share-based compensation expense for 2008.


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Financial information

Further information on UBS equity compensation plans is disclosed in Note 1a) 22) and Note 31 to the Financial Statements.

Deferred taxes

Deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; and b) expenses recognized in the books but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are taxable only when the valuation change is realized.occurs.

We recordUBS records a valuation allowance to reduce ourits deferred tax assets to the amount which can be recognized in line with the relevant accounting standards. The level of deferred



7

Accounting Standards and Policies
Critical accounting policies

tax asset recognition is influenced by management’s assessment of UBS’s historic and future profitability profile. At each balance sheet date, existing assessments are reviewed and, if necessary, revised to reflect changed circumstances. In a situation where recent losses have been incurred, the relevant accountingac-

counting standards require convincing evidence that there will be sufficient future tax capacity. In 2007, we have

profitability.

notAt 31 December 2008, recognized a significant amount of the potential deferred tax assets amount to CHF 8.9 billion. Recognized deferred tax assets include an amount related to tax loss carry-forwards of CHF 8.1 billion, mainly relating to thetax losses incurred in UBS AG, Switzerland, that we incurred and which are availablecan be utilized to offset against future taxable income duein Switzerland in future years. The losses mainly resulted from the write-down of investments in US subsidiaries. At 31 December 2007, recognized deferred tax assets amounted to CHF 3.2 billion.

Swiss tax losses can be carried forward for seven years. The deferred tax assets recognized at 31 December 2008 have been based on future profitability assumptions over a five year horizon. The level of assets recognized may, however, need to be adjusted in the recognition criteria set byfuture in the accounting standards. Seeevent of changes to those profitability assumptions. Refer to Note 22 to the Financial Statements for further details.



8

Financial Statements

9250

Financial Statements
Table of Contents

Financial Statements
Table of Contents

Management’s Report on Internal Controls over Financial Reporting
13
Report of Independent Registered Public Accounting
Firm – Internal Control over Financial Reporting
14
Report of the Group Auditors
16
Financial Statements
18
Income Statement
18
Balance Sheet
19
Statement of Changes in Equity
20
Statement of Recognized Income and Expense
22
Statement of Cash Flows
23
Information

10

       
Notes to the Financial Statements  25 
 
       
1
 Summary of Significant Accounting Policies  25 
 
2a
 Segment Reporting by Business Group  41 
 
2b
 Segment Reporting by Geographic Location  48 
 
       
Income Statement  49 
 
3
 Net Interest and Trading Income  49 
 
4
 Net Fee and Commission Income  51 
 
5
 Other Income  51 
 
6
 Personnel Expenses  52 
 
7
 General and Administrative Expenses  52 
 
8
 Earnings per Share (EPS) and Shares Outstanding  53 
 
       
Balance Sheet: Assets  54 
 
9a
 Due from Banks and Loans  54 
 
9b
 Allowances and Provisions for Credit Losses  55 
 
9c
 Impaired Due from Banks and Loans  55 
 
9d
 Non-Performing Due from Banks and Loans  56 
 
10
 Securities Borrowing, Securities Lending, Repurchase and Reverse Repurchase Agreements  56 
 
11
 Trading Portfolio  57 
 
12
 Financial Assets Designated at Fair Value  58 
 
13
 Financial Investments Available-for-Sale  58 
 
14
 Investments in Associates  59 
 
15
 Property and Equipment  59 
 
16
 Goodwill and Other Intangible Assets  60 
 
17
 Other Assets  62 
 

11

Financial Statementsinformation
Table of Contents

       
Balance Sheet: Liabilities  63 
 
18
 Due to Banks and Customers  63 
 
19
 Financial Liabilities Designated at Fair Value and Debt Issued  63 
 
20
 Other Liabilities  65 
 
21
 Provisions  65 
 
22
 Income Taxes  67 
 
23
 Derivative Instruments and Hedge Accounting  69 
 
       
Off-Balance Sheet Information  75 
 
24
 Pledgeable Off-Balance Sheet Securities  75 
 
25
 Operating Lease Commitments  75 
 
       
Additional Information  76 
 
26
 Fair Value of Financial Instruments  76 
 
27
 Pledged Assets and Transferred Financial Assets which do not Qualify for Derecognition  81 
 
28
 Measurement Categories of Financial Assets and Financial Liabilities  82 
 
29
 Pension and Other Post-Retirement Benefit Plans  83 
 
30
 Equity Participation and Other Compensation Plans  89 
 
31
 Related Parties  93 
 
32
 Post--Balance Sheet Events  95 
 
33
 Significant Subsidiaries and Associates  96 
 
34
 Invested Assets and Net New Money  100 
 
35
 Business Combinations  101 
 
36
 Discontinued Operations  107 
 
37
 Currency Translation Rates  109 
 
38
 Swiss Banking Law Requirements  110 
 
39
 Additional Disclosures Required under SEC Rules  111 
 

12

Financial Statements
Management’s Report on Internal Control over Financial ReportingConsolidated financial statements

Consolidated financial statements

Management’s Reportreport on Internal Control
internal control over Financial Reportingfinancial reporting

The Board of Directors and management of UBS AG (UBS) are responsible for establishing and maintaining adequate internal control over financial reporting. UBS’s internal control over financial reporting is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board.
UBS’s internal control over financial reporting includes those policies and procedures that:
– Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets;
– Provide reasonable assurance that transactions are recorded as necessary to permit preparation and fair presentation of financial statements, and that receipts and expenditures of the company are being made only in accordance with authorizations of UBS management; and
– Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
UBS management assessed the effectiveness of UBS’s internal control over financial reporting as of 31 December 31, 20072008 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of 31 December 31 2007,2008, UBS’s internal control over financial reporting was effective.
The effectiveness of UBS’s internal control over financial reporting as of 31 December 31, 20072008 has been audited by Ernst & Young Ltd, UBS’s independent registered public accounting firm, as stated in their report appearing on page 14,pages 252 to 253, which expressed an unqualified opinion on the effectiveness of UBS’s internal control over financial reporting as of 31 December 31, 2007.2008.


13

251

Financial Statementsinformation
Report of Independent Registered Public Accounting
Firm – Internal Control over Financial ReportingConsolidated financial statements

(REPORT OF THE GROUP AUDITORS)(INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM LETTER)

14

252

(REPORT OF THE GROUP AUDITORS)

Financial Information

(ERNST & YOUNG LETTER LETTER)

15

253

Financial Statementsinformation
Report of the Group AuditorsConsolidated financial statements

(REPORT OF THE GROUP AUDITORS)(ERNST & YOUNG LETTER LETTER)

16

254

(REPORT OF THE GROUP AUDITORS)

Financial Information

(ERNST & YOUNG LETTER LETTER)

17

255

Financial Statementsinformation
Consolidated financial statements

Financial StatementsIncome statement

                              
Income Statement 
 For the year ended % change from    For the year ended % change from   
CHF million, except per share data Note 31.12.07 31.12.06 31.12.05 31.12.06  Note 31.12.08 31.12.07 31.12.06 31.12.07 
  
Continuing operations
  
Interest income 3 109,112 87,401 59,286 25  3 65,890 109,112 87,401  (40)
Interest expense 3  (103,775)  (80,880)  (49,758) 28  3  (59,687)  (103,775)  (80,880)  (42)
Net interest income 3 5,337 6,521 9,528  (18) 3 6,203 5,337 6,521 16 
Credit loss (expense) / recovery  (238) 156 375   (2,996)  (238) 156 
Net interest income after credit loss expense 5,099 6,677 9,903  (24) 3,207 5,099 6,677  (37)
Net fee and commission income 4 30,634 25,456 21,184 20  4 22,929 30,634 25,456  (25)
Net trading income 3  (8,353) 13,743 8,248  3  (25,818)  (8,353) 13,743  (209)
Other income 5 4,332 1,598 1,127 171  5 884 4,341 1,608  (80)
Revenues from industrial holdings 268 262 229 2 
Total operating income 31,980 47,736 40,691  (33) 1,201 31,721 47,484  (96)
Personnel expenses 6 24,798 23,591 20,067 5  6 16,262 25,515 24,031  (36)
General and administrative expenses 7 8,465 7,980 6,504 6  7 10,498 8,429 7,942 25 
Depreciation of property and equipment 15 1,251 1,252 1,247 0  15 1,241 1,243 1,244 0 
Impairment of goodwill 16, 38 341 0 0 
Amortization of intangible assets 16 282 153 133 84  213 276 148  (23)
Goods and materials purchased 119 116 97 3 
Total operating expenses 34,915 33,092 28,048 6  28,555 35,463 33,365  (19)
Operating profit from continuing operations before tax  (2,935) 14,644 12,643   (27,353)  (3,742) 14,119  (631)
Tax expense 22 1,311 2,785 2,465  (53) 22  (6,837) 1,369 2,998 
Net profit from continuing operations  (4,246) 11,859 10,178   (20,517)  (5,111) 11,121  (301)
  
Discontinued operations
  
Operating profit from discontinued operations before tax 36 135 879 5,094  (85)
Profit from discontinued operations before tax 37 198 145 888 37 
Tax expense 22  (266)  (12) 582  22 1  (258)  (11) 
Net profit from discontinued operations 401 891 4,512  (55) 198 403 899  (51)
  
Net profit  (3,845) 12,750 14,690   (20,319)  (4,708) 12,020  (332)
Net profit attributable to minority interests 539 493 661 9  568 539 493 5 
from continuing operations 539 390 430 38  520 539 390  (4)
from discontinued operations 0 103 231  (100) 48 0 103 
Net profit attributable to UBS shareholders
  (4,384) 12,257 14,029   (20,887)  (5,247) 11,527  (298)
from continuing operations  (4,785) 11,469 9,748   (21,037)  (5,650) 10,731  (272)
from discontinued operations 401 788 4,281  (49) 150 403 796  (63)
  
Earnings per share
  
Basic earnings per share (CHF) 8  (2.28) 6.20 6.97  8  (7.54)  (2.42) 5.19  (212)
from continuing operations  (2.49) 5.80 4.84   (7.60)  (2.61) 4.83  (191)
from discontinued operations 0.21 0.40 2.13  (48) 0.05 0.19 0.36  (74)
Diluted earnings per share (CHF) 8  (2.28) 5.95 6.68  8  (7.55)  (2.43) 4.99  (211)
from continuing operations  (2.49) 5.57 4.65   (7.60)  (2.61) 4.64  (191)
from discontinued operations 0.21 0.38 2.03  (45) 0.05 0.19 0.34  (74)

18

256

                 
Balance Sheet 
     % change from 
CHF million Note  31.12.07  31.12.06  31.12.06 
 
                 
Assets
                
 
Cash and balances with central banks      18,793   3,495   438 
 
Due from banks  9   60,907   50,426   21 
 
Cash collateral on securities borrowed  10   207,063   351,590   (41)
 
Reverse repurchase agreements  10   376,928   405,834   (7)
 
Trading portfolio assets  11   610,061   627,036   (3)
 
Trading portfolio assets pledged as collateral  11   164,311   251,478   (35)
 
Positive replacement values  23   428,217   292,975   46 
 
Financial assets designated at fair value  12   11,765   5,930   98 
 
Loans  9   335,864   297,842   13 
 
Financial investments available-for-sale  13   4,966   8,937   (44)
 
Accrued income and prepaid expenses      11,953   10,361   15 
 
Investments in associates  14   1,979   1,523   30 
 
Property and equipment  15   7,234   6,913   5 
 
Goodwill and intangible assets  16   14,538   14,773   (2)
 
Other assets  17, 22   18,000   17,249   4 
 
Total assets
      2,272,579   2,346,362   (3)
 
                 
Liabilities
                
 
Due to banks  18   145,762   203,689   (28)
 
Cash collateral on securities lent  10   31,621   63,088   (50)
 
Repurchase agreements  10   305,887   545,480   (44)
 
Trading portfolio liabilities  11   164,788   204,773   (20)
 
Negative replacement values  23   443,539   297,063   49 
 
Financial liabilities designated at fair value  19   191,853   145,687   32 
 
Due to customers  18   641,892   555,886   15 
 
Accrued expenses and deferred income      21,848   21,527   1 
 
Debt issued  19   222,077   190,143   17 
 
Other liabilities  20, 21, 22   60,776   63,251   (4)
 
Total liabilities
      2,230,043   2,290,587   (3)
 
                 
Equity
                
 
Share capital      207   211   (2)
 
Share premium      8,884   9,870   (10)
 
Net income recognized directly in equity, net of tax      (1,188)  815     
 
Revaluation reserve from step acquisitions, net of tax      38   38   0 
 
Retained earnings      38,081   49,151   (23)
 
Equity classified as obligation to purchase own shares      (74)  (185)  60 
 
Treasury shares      (10,363)  (10,214)  (1)
 
Equity attributable to UBS shareholders
      35,585   49,686   (28)
 
Equity attributable to minority interests      6,951   6,089   14 
 
Total equity
      42,536   55,775   (24)
 
Total liabilities and equity
      2,272,579   2,346,362   (3)
 

19

Financial Statements

Financial information

Balance sheet

             
Statement of Changes in Equity 
  For the year ended 
CHF million 31.12.07  31.12.06  31.12.05 
 
Share capital
            
 
Balance at the beginning of the year  211   871   901 
 
Issue of share capital  0   1   2 
 
Capital repayment by par value reduction  0   (631)  0 
 
Cancellation of second trading line treasury shares  (4)  (30)  (32)
 
Balance at the end of the year attributable to UBS shareholders
  207   211   871 
 
Share premium
            
 
Balance at the beginning of the year  9,870   9,992   9,231 
 
Premium on shares issued and warrants exercised  12   46   36 
 
Net premium / (discount) on treasury share and own equity derivative activity  (560)  (271)  (309)
 
Employee share and share option plans  139   (508)  768 
 
Tax benefits from deferred compensation awards  (577)  611   266 
 
Balance at the end of the year attributable to UBS shareholders
  8,884   9,870   9,992 
 
Balance at the end of the year attributable to minority interests
  556   461   2,415 
 
Balance at the end of the year
  9,440   10,331   12,407 
 
Net income recognized directly in equity, net of tax
            
 
Foreign currency translation
            
 
Balance at the beginning of the year  (1,618)  (432)  (2,520)
 
Movements during the year  (1,009)  (1,186)  2,088 
 
Subtotal – balance at the end of the year attributable to UBS shareholders1
  (2,627)  (1,618)  (432)
 
Balance at the end of the year attributable to minority interests
  (480)  (208)  (26)
 
Subtotal – balance at the end of the year
  (3,107)  (1,826)  (458)
 
Net unrealized gains / (losses) on financial investments available-for-sale, net of tax
            
 
Balance at the beginning of the year  2,876   931   761 
 
Net unrealized gains / (losses) on financial investments available-for-sale  1,213   2,574   463 
 
Impairment charges reclassified to the income statement  14   19   96 
 
Realized gains reclassified to the income statement  (2,638)  (649)  (396)
 
Realized losses reclassified to the income statement  6   1   7 
 
Subtotal – balance at the end of the year attributable to UBS shareholders
  1,471   2,876   931 
 
Balance at the end of the year attributable to minority interests
  32   30   21 
 
Subtotal – balance at the end of the year
  1,503   2,906   952 
 
Changes in fair value of derivative instruments designated as cash flow hedges, net of tax
            
 
Balance at the beginning of the year  (443)  (681)  (322)
 
Net unrealized gains / (losses) on the revaluation of cash flow hedges  239   1   (474)
 
Net realized (gains) / losses reclassified to the income statement  172   237   115 
 
Subtotal – balance at the end of the year attributable to UBS shareholders
  (32)  (443)  (681)
 
Balance at the end of the year attributable to minority interests
  0   0   0 
 
Subtotal – balance at the end of the year
  (32)  (443)  (681)
 
             
Net income recognized directly in equity, net of tax – attributable to UBS shareholders
  (1,188)  815   (182)
 
Net income recognized directly in equity – attributable to minority interests
  (448)  (178)  (5)
 
Balance at the end of the year
  (1,636)  637   (187)
 
             
Revaluation reserve from step acquisitions, net of tax
            
 
Balance at the beginning of the year  38   101   90 
 
Movements during the year  0   (63)  11 
 
Balance at the end of the year attributable to UBS shareholders
  38   38   101 
 
Retained earnings
            
 
Balance at the beginning of the year  49,151   44,105   36,692 
 
Net profit attributable to UBS shareholders for the year  (4,384)  12,257   14,029 
 
Dividends paid2
  (4,275)  (3,214)  (3,105)
 
Cancellation of second trading line treasury shares  (2,411)  (3,997)  (3,511)
 
Balance at the end of the year attributable to UBS shareholders
  38,081   49,151   44,105 
 
Balance at the end of the year attributable to minority interests
  16   (25)  170 
 
Balance at the end of the year
  38,097   49,126   44,275 
 
                 
      % change from
CHF million Note  31.12.08  31.12.07  31.12.07 
 
                 
Assets
                
 
Cash and balances with central banks      32,744   18,793   74 
 
Due from banks  9   64,451   60,907   6 
 
Cash collateral on securities borrowed  10   122,897   207,063   (41)
 
Reverse repurchase agreements  10   224,648   376,928   (40)
 
Trading portfolio assets  11   271,838   660,182   (59)
 
Trading portfolio assets pledged as collateral  11   40,216   114,190   (65)
 
Positive replacement values  23   854,100   428,217   99 
 
Financial assets designated at fair value  12   12,882   11,765   9 
 
Loans  9   340,308   335,864   1 
 
Financial investments available-for-sale  13   5,248   4,966   6 
 
Accrued income and prepaid expenses      6,141   11,953   (49)
 
Investments in associates  14   892   1,979   (55)
 
Property and equipment  15   6,706   7,234   (7)
 
Goodwill and intangible assets  16   12,935   14,538   (11)
 
Other assets  17, 22   19,094   20,312   (6)
 
Total assets
      2,015,098   2,274,891   (11)
 
                 
Liabilities
                
 
Due to banks  18   125,628   145,762   (14)
 
Cash collateral on securities lent  10   14,063   31,621   (56)
 
Repurchase agreements  10   102,561   305,887   (66)
 
Trading portfolio liabilities  11   62,431   164,788   (62)
 
Negative replacement values  23   851,803   443,539   92 
 
Financial liabilities designated at fair value  19   101,546   191,853   (47)
 
Due to customers  18   474,774   641,892   (26)
 
Accrued expenses and deferred income      10,196   22,150   (54)
 
Debt issued  19   197,254   222,077   (11)
 
Other liabilities  20, 21, 22   34,040   61,496   (45)
 
Total liabilities
      1,974,296   2,231,065   (12)
 
                 
Equity
                
 
Share capital      293   207   42 
 
Share premium      25,250   12,433   103 
 
Net income recognized directly in equity, net of tax      (4,471)  (1,161)  (285)
 
Revaluation reserve from step acquisitions, net of tax      38   38   0 
 
Retained earnings      14,892   35,795   (58)
 
Equity classified as obligation to purchase own shares      (46)  (74)  38 
 
Treasury shares      (3,156)  (10,363)  70 
 
Equity attributable to UBS shareholders
      32,800   36,875   (11)
 
Equity attributable to minority interests      8,002   6,951   15 
 
Total equity
      40,802   43,826   (7)
 
Total liabilities and equity
      2,015,098   2,274,891   (11)
 

20

257

             
Statement of Changes in Equity (continued) 
  For the year ended 
CHF million 31.12.07  31.12.06  31.12.05 
 
Equity classified as obligation to purchase own shares
            
 
Balance at the beginning of the year  (185)  (133)  (96)
 
Movements during the year  111   (52)  (37)
 
Balance at the end of the year attributable to UBS shareholders
  (74)  (185)  (133)
 
             
Treasury shares
            
 
Balance at the beginning of the year  (10,214)  (10,739)  (11,105)
 
Acquisitions  (7,169)  (8,314)  (8,375)
 
Disposals  4,605   4,812   5,198 
 
Cancellation of second trading line treasury shares  2,415   4,027   3,543 
 
Balance at the end of the year attributable to UBS shareholders
  (10,363)  (10,214)  (10,739)
 
             
Minority interests – preferred securities
  6,827   5,831   5,039 
 
             
Total equity attributable to UBS shareholders
  35,585   49,686   44,015 
 
Total equity attributable to minority interests
  6,951   6,089   7,619 
 
Total equity
  42,536   55,775   51,634 
 

Financial information
Consolidated financial statements

Statement of changes in equity

             
 
  For the year ended 
CHF million 31.12.08  31.12.07  31.12.06 
 
Share capital
            
 
Balance at the beginning of the year  207   211   871 
 
Issue of share capital  86   0   1 
 
Capital repayment by par value reduction  0   0   (631)
 
Cancellation of second trading line treasury shares  0   (4)  (30)
 
Balance at the end of the year attributable to UBS shareholders
  293   207   211 
 
Share premium
            
 
Balance at the beginning of the year  8,884   9,870   9,992 
 
Change in accounting policy  3,549   2,770   2,325 
 
Premium on shares issued and warrants exercised  20,003   12   46 
 
Net premium / (discount) on treasury share and own equity derivative activity  (4,626)  (560)  (271)
 
Employee share and share option plans  (1,961)  898   (56)
 
Tax benefits from deferred compensation awards  (176)  (557)  604 
 
Transaction costs related to share issuances, net of tax  (423)  0   0 
 
Balance at the end of the year attributable to UBS shareholders
  25,250   12,433   12,640 
 
Balance at the end of the year attributable to minority interests
  417   556   461 
 
Balance at the end of the year
  25,667   12,989   13,101 
 
Net income recognized directly in equity, net of tax
            
 
Foreign currency translation
            
 
Balance at the beginning of the year  (2,627)  (1,618)  (432)
 
Change in accounting policy  27   4   (14)
 
Movements during the year  (3,901)  (986)  (1,168)
 
Subtotal – balance at the end of the year attributable to UBS shareholders1
  (6,501)  (2,600)  (1,614)
 
Balance at the end of the year attributable to minority interests
  (1,095)  (480)  (208)
 
Subtotal – balance at the end of the year
  (7,596)  (3,080)  (1,822)
 
Net unrealized gains / (losses) on financial investments available-for-sale, net of tax
            
 
Balance at the beginning of the year  1,471   2,876   931 
 
Net unrealized gains / (losses) on financial investments available-for-sale  (648)  1,213   2,574 
 
Impairment charges reclassified to the income statement  42   14   19 
 
Realized gains reclassified to the income statement  (524)  (2,638)  (649)
 
Realized losses reclassified to the income statement  6   6   1 
 
Subtotal – balance at the end of the year attributable to UBS shareholders
  347   1,471   2,876 
 
Balance at the end of the year attributable to minority interests
  2   32   30 
 
Subtotal – balance at the end of the year
  349   1,503   2,906 
 
Changes in fair value of derivative instruments designated as cash flow hedges, net of tax
            
 
Balance at the beginning of the year  (32)  (443)  (681)
 
Net unrealized gains / (losses) on the revaluation of cash flow hedges  1,836   239   1 
 
Net realized (gains) / losses reclassified to the income statement  (121)  172   237 
 
Subtotal – balance at the end of the year attributable to UBS shareholders
  1,683   (32)  (443)
 
Balance at the end of the year attributable to minority interests
  0   0   0 
 
Subtotal – balance at the end of the year
  1,683   (32)  (443)
 
             
Net income recognized directly in equity, net of tax – attributable to UBS shareholders
  (4,471)  (1,161)  819 
 
Net income recognized directly in equity – attributable to minority interests
  (1,093)  (448)  (178)
 
Balance at the end of the year
  (5,564)  (1,609)  641 
 
             
Revaluation reserve from step acquisitions, net of tax
            
 
Balance at the beginning of the year  38   38   101 
 
Movements during the year  0   0   (63)
 
Balance at the end of the year attributable to UBS shareholders
  38   38   38 
 
1 Net of CHF (39)(17) million, CHF 8339 million and CHF (292)83 million of related taxes for the years ended 2007, 200631.12.08, 31.12.07 and 200531.12.06 respectively.

258

Financial information

2Statement of changes in equity (continued) Dividends

             
 
  For the year ended 
CHF million 31.12.08  31.12.07  31.12.06 
 
Retained earnings
            
 
Balance at the beginning of the year  38,081   49,151   44,105 
 
Change in accounting policy  (2,286)  (1,423)  (693)
 
Net profit attributable to UBS shareholders for the year  (20,887)  (5,247)  11,527 
 
Dividends paid1
  (16)  (4,275)  (3,214)
 
Cancellation of second trading line treasury shares  0   (2,411)  (3,997)
 
Balance at the end of the year attributable to UBS shareholders
  14,892   35,795   47,728 
 
Balance at the end of the year attributable to minority interests
  234   16   (25)
 
Balance at the end of the year
  15,126   35,811   47,703 
 
Equity classified as obligation to purchase own shares
            
 
Balance at the beginning of the year  (74)  (185)  (133)
 
Movements during the year  28   111   (52)
 
Balance at the end of the year attributable to UBS shareholders
  (46)  (74)  (185)
 
Treasury shares
            
 
Balance at the beginning of the year  (10,363)  (10,214)  (10,739)
 
Acquisitions  (367)  (7,169)  (8,314)
 
Disposals  7,574   4,605   4,812 
 
Cancellation of second trading line treasury shares  0   2,415   4,027 
 
Balance at the end of the year attributable to UBS shareholders
  (3,156)  (10,363)  (10,214)
 
             
Minority interests – preferred securities
  8,444   6,827   5,831 
 
             
Total equity attributable to UBS shareholders
  32,800   36,875   51,037 
 
Total equity attributable to minority interests
  8,002   6,951   6,089 
 
Total equity
  40,802   43,826   57,126 
 
1 Stock dividend of 20-for-1 was distributed in April 2008, cash dividends of CHF 2.20 per share CHF 1.60 per share and CHF 1.501.60 per share were paid on 23 April 2007 and 24 April 2006 and 26 April 2005, respectively.
                    
Additional information: Equity attributable to minority interestsAdditional information: Equity attributable to minority interests Additional information: Equity attributable to minority interests 
 For the year ended  For the year ended 
CHF million 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
Balance at the beginning of the year 6,089 7,619 5,426  6,951 6,089 7,619 
Issuance of preferred securities 996 1,219 1,539  1,618 996 1,219 
Other increases 101 131 44  12 101 131 
Decreases and dividend payments  (502)  (3,191)  (595)  (532)  (502)  (3,191)
Foreign currency translation  (272)  (182) 544   (615)  (272)  (182)
Minority interest in net profit 539 493 661  568 539 493 
Balance at the end of the year
 6,951 6,089 7,619  8,002 6,951 6,089 
 
Shares issued
 
 For the year ended
 % change from 
    
Number of shares
 31.12.07 31.12.06 31.12.05 31.12.06 
Balance at the beginning of the year 2,105,273,286 2,177,265,044 2,253,716,354  (3)
Issuance of share capital 1,294,058 2,208,242 3,418,878  (41)
Cancellation of second trading line treasury shares  (33,020,000)  (74,200,000)  (79,870,188) 55 
Balance at the end of the year
 2,073,547,344 2,105,273,286 2,177,265,044  (2)
 
Treasury shares
 
 For the year ended
 % change from 
    
Number of shares
 31.12.07 31.12.06 31.12.05 31.12.06 
Balance at the beginning of the year 164,475,699 208,519,748 249,326,620  (21)
Acquisitions 102,074,942 117,160,339 156,436,070  (13)
Disposals  (75,425,117)  (87,004,388)  (117,372,754) 13 
Cancellation of second trading line treasury shares  (33,020,000)  (74,200,000)  (79,870,188) 55 
Balance at the end of the year
 158,105,524 164,475,699 208,519,748  (4)

259

During the year a total

Financial information
Consolidated financial statements

Statement of 33,020,000 shares acquired under the second trading line buyback program 2006 were cancelled. The 36,400,000 shares purchased under the buy back program 2007 (CHF 2,599 million) previously intended for cancellation have been rededicated for further use.changes in equity (continued)

                 
  For the year ended      % change from
Number of shares 31.12.08  31.12.07  31.12.06  31.12.07 
 
                 
Shares issued
                
 
Balance at the beginning of the year  2,073,547,344   2,105,273,286   2,177,265,044   (2)
 
Issuance of share capital  859,033,205   1,294,058   2,208,242     
 
Cancellation of second trading line treasury shares      (33,020,000)  (74,200,000)  100 
 
Balance at the end of the year
  2,932,580,549   2,073,547,344   2,105,273,286   41 
 
                 
Treasury shares
                
 
Balance at the beginning of the year  158,105,524   164,475,699   208,519,748   (4)
 
Acquisitions  13,398,118   102,074,942   117,160,339   (87)
 
Disposals  (109,600,521)  (75,425,117)  (87,004,388)  (45)
 
Cancellation of second trading line treasury shares      (33,020,000)  (74,200,000)  100 
 
Balance at the end of the year
  61,903,121   158,105,524   164,475,699   (61)
 

On 31 December 2007,2008, a maximum of 144,338100,415 shares couldcan be issued against the future exercise of options from former PaineWebber employee option plans. These shares

are shown as conditional share capital in the UBS AG (Parent Bank) disclosure. In addition, duringDuring 2006, shareholders approved the creation of conditional capital of up to a maximum of 150 million shares to fund UBS’s employee share option programs. AsIn 2008 and 2007, zero and 5,704 shares had been issued under this program. The remaining conditional capital to fund UBS’s employee share option programs amounts to 149,994,296 shares.

On 27 February 2008 the extraordinary general meeting of shareholders approved the creation of a maximum of
CHF 10,370,000 in authorized capital, allowing the distribution of a stock dividend. Additionally, on 23 April 2008, the Annual General Meeting of shareholders (AGM) approved a capital increase that resulted in the issuance of 760,295,181 fully paid registered shares. In addition during 2008, shareholders approved the creation of conditional capital in a maximum amount of 642,750,000 shares for the two issuances of mandatory convertible notes (MCNs). For further information refer to “Note 26 Capital increases and mandatory convertible notes” in the financial statements.
All issued shares are fully paid.


Statement of recognized income and expense

                                     
  
For the year ended 31.12.08  31.12.07  31.12.06 
  Attributable to      Attributable to      Attributable to    
  UBS          UBS          UBS       
  Share-  Minority      Share-  Minority      Share-  Minority    
CHF million holders  interests  Total  holders  interests  Total  holders  interests  Total 
 
Net unrealized gains / (losses) on financial investments available-for-sale, before tax  (1,465)  (30)  (1,495)  (1,825)  2   (1,823)  2,610   9   2,619 
 
Changes in fair value of derivative instruments designated as cash flow hedges, before tax  2,236   0   2,236   541   0   541   332   0   332 
 
Foreign currency translation  (3,884)  (615)  (4,499)  (1,025)  (272)  (1,297)  (1,251)  (182)  (1,433)
 
Tax on items transferred to / (from) equity  (196)  0   (196)  329   0   329   (676)  0   (676)
 
Net income recognized directly in equity, net of tax
  (3,309)  (645)  (3,954)  (1,980)  (270)  (2,250)  1,015   (173)  842 
 
Net income recognized in the income statement
  (20,887)  568   (20,319)  (5,247)  539   (4,708)  11,527   493   12,020 
 
Total recognized income and expense
  (24,196)  (77)  (24,273)  (7,227)  269   (6,958)  12,542   320   12,862 
 

260

Financial information

Statement of cash flows

             
  For the year ended 
CHF million 31.12.08  31.12.07  31.12.06 
 
             
Cash flow from / (used in) operating activities
            
 
Net profit  (20,319)  (4,708)  12,020 
 
Adjustments to reconcile net profit to cash flow from / (used in) operating activities
            
 
Non-cash items included in net profit and other adjustments:            
 
Depreciation of property and equipment  1,241   1,253   1,325 
 
Impairment / amortization of goodwill and intangible assets  554   282   196 
 
Credit loss expense (recovery)  2,996   238   (156)
 
Share of net profits of associates  6   (120)  (117)
 
Deferred tax expense / (benefit)  (7,020)  (371)  (303)
 
Net loss / (gain) from investing activities  (797)  (4,085)  (2,092)
 
Net loss / (gain) from financing activities  (47,906)  3,779   3,659 
 
Net (increase) / decrease in operating assets:            
 
Net due from / to banks  (16,588)  (60,762)  80,269 
 
Reverse repurchase agreements and cash collateral on securities borrowed  236,497   173,433   (61,382)
 
Trading portfolio, net replacement values and financial assets designated at fair value  350,094   60,729   (177,087)
 
Loans / due to customers  (174,443)  47,955   64,029 
 
Accrued income, prepaid expenses and other assets  7,229   (2,408)  (4,263)
 
Net increase / (decrease) in operating liabilities:            
 
Repurchase agreements, cash collateral on securities lent  (220,935)  (271,060)  66,370 
 
Accrued expenses and other liabilities  (32,550)  7,430   14,755 
 
Income taxes paid  (887)  (3,663)  (2,607)
 
Net cash flow from / (used in) operating activities
  77,172   (52,078)  (5,384)
 
             
Cash flow from / (used in) investing activities
            
 
Investments in subsidiaries and associates  (1,502)  (2,337)  2,856 
 
Disposal of subsidiaries and associates  1,686   885   1,154 
 
Purchase of property and equipment  (1,217)  (1,910)  (1,793)
 
Disposal of property and equipment  69   134   499 
 
Net (investment in) / divestment of financial investments available-for-sale  (712)  5,981   1,723 
 
Net cash flow from / (used in) investing activities
  (1,676)  2,753   4,439 
 
             
Cash flow from / (used in) financing activities
            
 
Net money market paper issued / (repaid)  (40,637)  32,672   16,921 
 
Net movements in treasury shares and own equity derivative activity  623   (2,771)  (3,179)
 
Capital issuance  23,135   0   1 
 
Capital repayment by par value reduction  0   0   (631)
 
Dividends paid  0   (4,275)  (3,214)
 
Issuance of long-term debt, including financial liabilities designated at fair value  103,087   110,874   97,675 
 
Repayment of long-term debt, including financial liabilities designated at fair value  (92,894)  (62,407)  (59,740)
 
Increase in minority interests1
  1,661   1,094   1,331 
 
Dividends paid to / decrease in minority interests  (532)  (619)  (1,072)
 
Net cash flow from / (used in) financing activities
  (5,557)  74,568   48,092 
 
Effects of exchange rate differences  (39,378)  (12,228)  (2,099)
 
Net increase / (decrease) in cash and cash equivalents
  30,561   13,015   45,048 
 
Cash and cash equivalents, beginning of the year  149,105   136,090   91,042 
 
Cash and cash equivalents, at the end of the year
  179,666   149,105   136,090 
 
Cash and cash equivalents comprise:
            
 
Cash and balances with central banks  32,744   18,793   3,495 
 
Money market paper2
  86,732   77,215   87,144 
 
Due from banks with original maturity of less than three months  60,190   53,097   45,451 
 
Total
  179,666   149,105   136,090 
 
1 Includes issuance of preferred securities of CHF 1,617 million, CHF 996 million and CHF 1,219 million for the years ended 31 December 2008, 31 December 2007 and 31 December 2006 5,704 shares and zero shares, respectively, have been issued under this program.
All issued shares are fully paid.



21

Financial Statements

                                     
Statement of Recognized Income and Expense 
For the year ended 31.12.07  31.12.06  31.12.05 
  Attributable to      Attributable to      Attributable to    
  UBS          UBS          UBS       
  share-  Minority      share-  Minority      share-  Minority    
CHF million holders  interests  Total  holders  interests  Total  holders  interests  Total 
 
Net unrealized gains / (losses) on financial investments available-for-sale, before tax  (1,825)  2   (1,823)  2,610   9   2,619   152   (58)  94 
 
Change in fair value of derivative instruments designated as cash flow hedges, before tax  541   0   541   332   0   332   (479)  0   (479)
 
Foreign currency translation  (1,009)  (272)  (1,281)  (1,186)  (182)  (1,368)  2,088   544   2,632 
 
Tax on items transferred to / (from) equity  290   0   290   (759)  0   (759)  138   0   138 
 
Net income recognized directly in equity
  (2,003)  (270)  (2,273)  997   (173)  824   1,899   486   2,385 
 
Net income recognized in the income statement
  (4,384)  539   (3,845)  12,257   493   12,750   14,029   661   14,690 
 
Total recognized income and expense
  (6,387)  269   (6,118)  13,254   320   13,574   15,928   1,147   17,075 
 

22

             
Statement of Cash Flows 
  For the year ended 
CHF million 31.12.07  31.12.06  31.12.05 
 
             
Cash flow from / (used in) operating activities
            
 
Net profit  (3,845)  12,750   14,690 
 
Adjustments to reconcile net profit to cash flow from / (used in) operating activities
            
 
Non-cash items included in net profit and other adjustments:            
 
Depreciation of property and equipment  1,253   1,325   1,556 
 
Amortization of intangible assets  282   196   340 
 
Credit loss expense / (recovery)  238   (156)  (374)
 
Equity in income of associates  (120)  (117)  (152)
 
Deferred tax expense / (benefit)  (437)  (517)  (382)
 
Net loss / (gain) from investing activities  (4,085)  (2,092)  (5,062)
 
Net loss / (gain) from financing activities  3,779   3,659   4,025 
 
Net (increase) / decrease in operating assets:            
 
Net due from / to banks  (60,762)  80,269   (1,690)
 
Reverse repurchase agreements and cash collateral on securities borrowed  173,433   (61,382)  (125,097)
 
Trading portfolio, net replacement values and financial assets designated at fair value  60,729   (177,087)  (74,799)
 
Loans / due to customers  47,955   64,029   47,265 
 
Accrued income, prepaid expenses and other assets  (2,467)  (4,536)  (1,227)
 
Net increase / (decrease) in operating liabilities:            
 
Repurchase agreements, cash collateral on securities lent  (271,060)  66,370   64,558 
 
Accrued expenses and other liabilities  7,494   14,975   15,536 
 
Income taxes paid  (3,663)  (2,607)  (2,394)
 
Net cash flow from / (used in) operating activities
  (51,276)  (4,921)  (63,207)
 
             
Cash flow from / (used in) investing activities
            
 
Investments in subsidiaries and associates  (2,337)  2,856   (1,540)
 
Disposal of subsidiaries and associates  885   1,154   3,240 
 
Purchase of property and equipment  (1,910)  (1,793)  (1,892)
 
Disposal of property and equipment  134   499   270 
 
Net (investment in) / divestment of financial investments available-for-sale  5,981   1,723   (2,487)
 
Net cash flow from / (used in) investing activities
  2,753   4,439   (2,409)
 
             
Cash flow from / (used in) financing activities
            
 
Net money market paper issued / (repaid)  32,672   16,921   23,221 
 
Net movements in treasury shares and own equity derivative activity  (3,550)  (3,624)  (2,416)
 
Capital issuance  0   1   2 
 
Capital repayment by par value reduction  0   (631)  0 
 
Dividends paid  (4,275)  (3,214)  (3,105)
 
Issuance of long-term debt, including financial liabilities designated at fair value  110,874   97,675   76,307 
 
Repayment of long-term debt, including financial liabilities designated at fair value  (62,407)  (59,740)  (30,457)
 
Increase in minority interests1
  1,094   1,331   1,572 
 
Dividend payments to / purchase from minority interests  (619)  (1,072)  (575)
 
Net cash flow from / (used in) financing activities
  73,789   47,647   64,549 
 
Effects of exchange rate differences  (12,251)  (2,117)  5,018 
 
Net increase / (decrease) in cash and cash equivalents
  13,015   45,048   3,951 
 
Cash and cash equivalents, beginning of the year  136,090   91,042   87,091 
 
Cash and cash equivalents, end of the year
  149,105   136,090   91,042 
 
Cash and cash equivalents comprise:
            
 
Cash and balances with central banks  18,793   3,495   5,359 
 
Money market paper2
  77,215   87,144   57,826 
 
Due from banks with original maturity of less than three months  53,097   45,451   27,857 
 
Total
  149,105   136,090   91,042 
 
1 Includes issuance of preferred securities of CHF 996 million, CHF 1,219 million and CHF 1,539 million for the years ended 31 December 2007, 31 December 2006 and 31 December 2005, respectively.  2 Money market paper is included in the balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 3,3643,853 million, CHF 7,1833,364 million and CHF 4,7447,183 million were pledged at 31 December 2008, 31 December 2007 and 31 December 2006 and 31 December 2005, respectively.

23

261

Financial Statementsinformation
Consolidated financial statements

Statement of cash flows (continued)

                   
Statement of Cash Flows (continued) 
 For the year ended  For the year ended 
CHF million 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
  
Additional information
  
Cash received as interest 103,828 79,805 53,117  68,450 103,828 79,805 
Cash paid as interest 97,358 76,109 44,392  61,681 97,358 76,109 
Cash received as dividends on equities (including associates, see Note 14) 5,313 4,839 3,869 
Cash received as dividends on equities (incl. Associates, see Note 14) 2,779 5,313 4,839 
  
Significant non-cash investing and financing activities
  
Private Banks and GAM, deconsolidation 
Financial investments available-for-sale 60 
Property and equipment 180 
Goodwill and intangible assets 362 
Debt issued 5 
Private equity investments, deconsolidation  
Property and equipment 24 264 248  33 24 264 
Goodwill and intangible assets 3  22 
Minority interests 62 27  62 
Acquisitions of businesses 
Financial investments available-for-sale 35 
Property and equipment 112 
Goodwill and intangible assets 377 
Minority interests 6 
Motor-Columbus , deconsolidation 
Motor-Columbus, deconsolidation 
Financial investments available-for-sale 178  178 
Property and equipment 2,229  2,229 
Goodwill and intangible assets 951  951 
Debt issued 718  718 
Minority interests 2,057  2,057 
Acquisition of ABN AMRO’s Global Futures and Options Business  
Property and equipment 13  13 
Goodwill and intangible assets 428  428 
Acquisition of Banco Pactual  
Financial investments available-for-sale 36  36 
Property and equipment 9  9 
Goodwill and intangible assets 2,218  2,218 
Debt issued 1,496  1,496 
Acquisition of Piper Jaffray  
Goodwill and intangible assets 605  605 
Acquisition of McDonald Investments branch network  
Property and equipment 3  3 
Goodwill and intangible assets 262  262 
Acquisition of Daehan Investment Trust Management Company  
Property and equipment 2  2 
Goodwill and intangible assets 224  224 
Minority interests 60  60 
Acquisition of Caisse Centrale de Réescompte Group (CCR) 
Property and equipment 5 
Goodwill and intangible assets 405 
Debt issued 114 
Acquisition of VermogensGroep 
Property and equipment 2 
Goodwill and intangible assets 173 

24

262

Financial information

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Notes to the Financial Statementsconsolidated financial statements

Note 1 Summary of significant accounting policies

a) Significant Accounting Policiesaccounting policies

a) Significant Accounting Policies

1) Basis of accounting

UBS AG and subsidiaries (“UBS” or the “Group”) provide a broad range of financial services including advisory ser- vices,services, underwriting, financing, market making, asset management and brokerage on a global level, and retail banking in Switzerland. The Group was formed on 29 June 1998 when Swiss Bank Corporation and Union Bank of Switzer-landSwitzerland merged. The merger was accounted for using the uniting of interests method of accounting.
The consolidated financial statements of UBS (the “Financial Statements”) are prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), and stated in Swiss francs (CHF), the currency of Switzerland where UBS AG is incorporated. On 65 March 2008,2009, the Board of Directors approved them for issue.
Disclosures under IFRS 7Financial Instruments: Disclosuresabout the nature and extent of risks and Capital disclosures under IAS 1Presentation of Financial Statementshave been included in the audited sectionsparts ofRisk, Treasury the “Risk and Capital Management 2007.treasury management” section.

2) Use of estimates in the preparation of
Financial Statements

In preparing the Financial Statements, management is required to make estimates and assumptions that affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of available information and application of judgment are inherent in the formation of estimates. Actual results in the future could differ from such estimates, and the differences may be material to the Financial Statements.

3) Subsidiaries, associates and jointly controlled entities

The Financial Statements comprise those of the parent company (UBS AG) and its subsidiaries including certain special purpose entities, presented as a single economic entity. The effects of intra-group transactions are eliminated in preparing the Financial Statements. Subsidiaries including special purpose entities that are directly or indirectly controlled by the Group are consolidated. UBS controls an entity if it has the power to govern the financial and operating policies so as to obtain benefits from the entity’s activities. Subsidiaries acquired are consolidated from the date control is transferred to the Group. Subsidiaries to be

divested are consolidated up to the date of disposal (i. e.(i.e. loss of control).

Equity attributable to minority interests is presented in the consolidated balance sheet within equity, separately from equity attributable to UBS shareholders. Net incomeprofit attributable to minority interests is shown separately in the income statement.

The Group sponsors the formation of entities, which may or may not be directly or indirectly owned subsidiaries, for the purpose of asset securitization transactions and structured debt issuance, and to accomplish certain narrow and well defined objectives. These companies may acquire assets directly or indirectly from UBS or its affiliates. Some of these companies are bankruptcy-remote entities whose assets are not available to satisfy the claims of creditors of the Group or any of its subsidiaries. Such companies are consolidated in the Group’s Financial Statements when the substance of the relationship between the Group and the company indicates that the company is controlled by the Group. UBS also has employee benefit trusts that are used in connection with share-based payment arrangements and deferred compensation schemes. Pursuant to the criteria set out in SIC 12Consolidation – Special Purpose Entities,an interpretation of IAS 27, UBS consolidates these trusts if it controls such entities.
Investments in associates in which UBS has a significant influence are accounted for under the equity method of accounting. Significant influence is normally evidenced when UBS owns 20% or more of a company’s voting rights. Investments in associates are initially recorded at cost, and the carrying amount is increased or decreased to recognize the Group’s share of the investee’s net profit or loss (including net profit or loss recognized directly in equity) after the date of acquisition.
Interests in jointly controlled entities, in which UBS and one or more third parties have joint control, are accounted for under the equity method. A jointly controlled entity is subject to a contractual agreement between UBS and one or more third parties, which establishes joint control over its economic activities. Interests in such entities are reflected under Investments in associates on the balance sheet and the related disclosures are included in the disclosures for associates. UBS holds certain interests in jointly controlled real estate entities.
Assets and liabilities of subsidiaries, investments in associates and interests in jointly controlled entities are classified as “held for sale” if UBS has entered into an agreement for their disposal withincarrying amount will be recovered



263

Financial information
Notes to the consolidated financial statements

principally through a period of 12 months.sale transaction rather than through continuing use – see parts 17) and 26). Major lines of business and subsidiaries that were acquired exclusively with the intent for resale are presented as discontinued operations in the income statement in the period wherewhen the sale occurred or it becomes clearhighly probable that a sale will occur within



12 months – see part 26).

25

Financial Statements
Notes to the Financial Statements

12 months. Discontinued operations are presented in the income statement as profit from discontinued operations before tax, comprising the total of profit or loss before tax from operations and net gain or loss on sale before tax, as well as discontinued operations tax expense.

4) Recognition and derecognition of financial instruments

UBS recognizes financial instruments on its balance sheet when the Group becomes a party to the contractual provisions of the instrument.
UBS enters into transactions where it transfers financial assets recognized on its balance sheet but retains either all risks and rewards of the transferred financial assets or a portion of them. If all or substantially all risks and rewards are retained, the transferred financial assets are not derecognized from the balance sheet. Transfers of financial assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions described in this Note under parts 12) and 13). They further include transactions where financial assets are sold to a third party with a concurrent total rate of return swap on the transferred assets to retain all their risks and rewards. These types of transactions are accounted for as secured financing transactions.
In transactions where substantially all of the risks and rewards of ownership of a financial asset are neither retained nor transferred, UBS derecognizes the financial asset if control over the asset is lost. The rights and obligations retained in the transfer are recognized separately as assets and liabilities as appropriate. In transfers where control over the financial asset is retained, the Group continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. Examples of such transactions are transfers of financial assets involving guarantees, writing put options, acquiring call options, or specific types of swaps linked to the performance of the asset.
UBS removes a financial liability from its balance sheet when it is extinguished, i.e. when the obligation specified in the contract is discharged or cancelled or expires.
Assets held in an agency or fiduciary capacity are not assets of the Group and are not reported in the Financial Statements,balance sheet, provided the recognition criteria of IFRS are not satisfied.

5) Determination of fair value

For an overview of financial assets and financial liabilities accounted for at fair value, refer to the IAS 39 measurement categories presented in Note 28:29: financial assets and financial liabilities held for trading (including derivatives), financial assets and financial liabilities designated at fair value through profit or loss, and financial investments available-for-sale.

For details on the determination of fair value, including those on fair value measurements for US student loan auction rate securities, monolines, leveraged finance transactions, US and non-US reference linked notes, US commercial mortgage backed securities and other instruments linked to the US residential mortgage market,which were determined relevant for specific disclosure refer to Note 26.

27.
For financial instruments traded in active markets, the determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer price quotations. For all other financial instruments, fair value is determined using valuation techniques. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which market observable prices exist and valuation models. UBS uses widely recognized valuation models for determining fair values of non-standardized financial instruments of lower complexity like options or interest rate and currency swaps. For these financial instruments, inputs into models are generally market observable.
For more complex instruments, UBS uses internally developed models, which are usually based on valuation methods and techniques generally recognized as standard within the industry. Valuation models are used primarily to value derivatives transacted in the over-the-counter market, including credit derivatives, unlisted equity and debt securities (including those with embedded derivatives), and other debt instruments for which markets were or have become illiquid in 2008. Some of the inputs to these models may not be market observable and are therefore estimated based on assumptions. The impact on Net profit of financial instrument valuations reflecting non-market observable inputs (level 3 profit and loss) is disclosed in Note 26d).27. When entering into a transaction where model inputs are not market observable, the financial instrument is initially recognized at the transaction price, which is generally the best indicator of fair value. This may differ from the value obtained from the valuation model. The timing of the recognition in income of this initial difference in fair value (“Deferred day 1 profit or loss”) depends on the individual facts and circumstances of each transaction but is never later than when the market data become observable. Refer to Note 26e)27 for details on deferred day 1 profit or loss.
The output of a model is always an estimate or approximation of a value that cannot be determined with certainty, and valuation techniques employed may not fully reflect all factors relevant to the positions UBS holds. Valuations are therefore adjusted, where appropriate, to allow for additional factors including model risks, liquidity risk and counter-party credit risk. Based on the established fair value and model governance policies and related controls and procedures applied, management believes that these valuation adjustments are necessary and appropriate to fairly state the values of financial instruments carried at fair value on the balance sheet.



264

Financial information

A breakdown of fair values of financial instruments measured on the basis of quoted market prices in active markets (level 1), valuation techniques reflecting market observable inputs (level 2), and valuation techniques reflecting significant non-market-observable inputs (level 3) is provided in Note 26b).

27.

6) Trading portfolio assets and liabilities

Trading portfolio assets consist of debt instruments (including those in the form of securities, money market paper, other debttraded corporate and bank loans), equity instruments including traded loans, equity instruments,(including those in the form of securities), precious metals and other commodities owned by the Group (“long” positions). Trading portfolio liabilities consist of obli-



26

gationsobligations to deliver financial instruments such as money market paper, other debt instruments and equity instruments which the Group has sold to third parties but does not own (“short” positions). The trading portfolio includes non-derivative financial instruments (including those with embedded derivatives) and commodities. Financial instruments which are considered derivatives in their entirety are presented on balance sheet as Positive and Negative replacement values, refer to part 14).

The trading portfolio is carried at fair value. Gains and losses realized on disposal or redemption and unrealized gains and losses from changes in the fair value of trading portfolio assets and liabilities are reported as Net trading income. Interest and dividend income and expense on trading portfolio assets or liabilities are included in Interest and dividend income or Interest and dividend expense.
An acquired non-derivative financial asset or liability is classified at acquisition as held for trading and presented in the trading portfolio, if it is (a) acquired or incurred principally for the purpose of selling or repurchasing it in the near term; or (b) part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.
The Group uses settlement date accounting when recording trading financial asset transactions. From the date the purchase transaction is entered into (trade date), UBS recognizes any unrealized profits and losses arising from revaluing that contract to fair value in Net trading income. The corresponding receivable or payable is presented on the balance sheet as a positive or negative replacement value. When the transaction is consummated (settlement date), a resulting financial asset is recognized on or derecognized from the balance sheet at the fair value of the consideration given or received plus or minus the change in fair value of the contract since the trade date. When the Group becomes party to a sales contract of a financial asset classified in its trading portfolio, unrealized profits and losses are no longer recognized from the date the sales transaction is entered into (trade date) and it derecognizes the asset on the day of its transfer (settlement date).
Trading portfolio assets transferred to external parties that do not qualify for derecognition (see part 4)) are reclassifiedreclas-

sified on UBS‘sUBS’s balance sheet from Trading portfolio assets to Trading portfolio assets pledged as collateral, if the transferee has received the right to sell or repledge them.

Following an amendment to IAS 39 in 2008 (refer to Note 1b and Note 29), subject to certain conditions being met, financial assets may be reclassified out of the “held for trading” category to the “loans and receivables” category if the firm has the intent and ability to hold them for the foreseeable future or until maturity. UBS has applied this option in fourth quarter 2008 and reclassified several illiquid financial instrument positions to the category “loans and receivables”, which requires these instruments are no longer fair valued through profit or loss but rather accounted for at amortized cost less impairment.

7) Financial assets and Financial liabilities designated at fair value through profit or loss (“Fair Value Option”)

A financial instrument may only be designated at fair value through profit or loss at inception and this designation cannot subsequently be changed. Financial assets and financial liabilities designated at fair value are presented in separate lines on the face of the balance sheet.
The conditions for applying the fair value option are met on the basis that
a) they are hybrid instruments which consist of a debt host and an embedded derivative component, or
b) they are items that are part of a portfolio which is risk managed on a fair value basis and reported to senior management on that basis, or
c) the application of the fair value option reduces or eliminates an accounting mismatch that would otherwise arise.
Hybrid instruments which fall under criterion a) above include i) bonds and compound debt liabilities issued, ii) compound debt liabilities – OTC, and iii) hybrid financial assets from reverse repurchase agreements. Bonds and compound debt liabilities issued and OTC generally include em-

beddedembedded derivative components which refer to an underlying, e. g.e.g. equity price, interest rate, commodities price or index. UBS has designated almost allmost of its issued hybrid debt instruments as Financial liabilities designated at fair value through profit or loss.

Besides hybrid instruments, the fair value option is also applied to certain loans and loan commitments which are substantially hedged with credit derivatives. The application of the fair value option to these instruments reduces an accounting mismatch, as loans would have been otherwise accounted for at amortized cost or as financial investments available-for-sale (refer to part 8)), whereas the hedging credit protection is accounted for as a derivative instrument at fair value through profit or loss. Loan commitments other than onerous loan commitments are only recognized on balance sheet if the fair value option has been applied.
UBS has also applied the fair value option to a hedge fund investment which is part of a portfolio managed on a fair



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Financial information
Notes to the consolidated financial statements

value basis. Fair value changes related to financial instruments designated at fair value through profit or loss are recognized in Net trading income.

Interest and dividend income and interest expense on financial assets and liabilities designated at fair value through profit or loss are included in Interest income on financial assets designated at fair value or Interest expense.on financial liabilities designated at fair value. Refer to Note 3.
UBS applies the same recognition and derecognition principles to financial instruments designated at fair value as for financial instruments held for trading (refer to parts 4) and 6)).

8) Financial investments available-for-sale

Financial investments available-for-sale are non-derivative financial assets that are not classified as held for trading, designated at fair value through profit or loss, or loans and receivables. They are recognized on a settlement date basis. Financial investments available-for-sale include strategic equity investments as well as instruments that, in management’s opinion, may be sold in response to or in anticipation of needs for liquidity or changes in interest rates, foreign exchange rates or equity prices. Financial investments available-for-sale consist mainly of equity instruments, including certain private equity investments. In addition, certain debt instruments and non-performing loans acquired in the secondary market are classified as financial investments available-for-sale.
Financial investments available-for-sale are carried at fair value. Lock-in periods for equity investments are considered when determining fair value. Unrealized gains or losses are reported in Equity, net of applicable income taxes, until such investments are sold, collected or otherwise disposed of, or until any such investment is determined to be impaired. On disposal of an investment, the accumulated unrealized gain or loss included in Equity is transferred to Net profit for the period and reported in Other income. Gains and losses on disposal are determined using the average cost method.



27

Financial Statements
Notes to the Financial Statements

Interest and dividend income on financial investments available-for-sale are included in Interest and dividend income from financial investments available-for-sale.
If a financial investment available-for-sale is determined to be impaired, the cumulative unrealized loss previously recognized in Equity is included in Net profit for the period and reported in Other income. UBS assesses at each balance sheet date whether there is objective evidence that a financial investment available-for-sale is impaired. In case of such evidence, it is considered impaired if its cost exceeds the recoverable amount. ForThe recoverable amount for a quoted financial investment available-for-sale the recoverable amount is determined by reference to the market price. ItA quoted financial investment available-for-sale is considered impaired if objective evidence indicates that the decline in market price has reached such a level that recovery of the cost value cannot be reasonably

expected within the foreseeable future. For a non-quoted financial instrumentsinvestment available-for-sale (debt and equity instruments), the recoverable amount is determined by applying recognized valuation techniques. The standard method applied for non-quoted equity investments available-for-saleinstruments is based on the multiple of earnings observed in the market for comparable companies. Management may adjust valuations determined in this way based on its judgment. For non-quoted debt instruments, UBS typically determines the recoverable amount by applying the discounted cash flow method.

After the recognition of impairment on a financial investment available-for-sale, a) increases in fair value of equity instruments are reported in Equity and b) increases in fair value of debt instruments up to original cost are recognized in Other income, provided the fair value increase has been triggered by a specific event (as defined by IFRS).

9) Loans and receivables

For an overview of financial assets and financial liabilities accounted for as loans“loans and receivables,receivables”, refer to the IAS 39 measurement categories presented in Note 28.29.
Loans include loans originated by the Group where money is provided directly to the borrower, participation in a loan from another lender and purchased loans that are not quoted in an active market and for which no intention of immediate or short-term resale exists. Originated and purchased loans that are intended to be sold in the short term are generally recorded as Trading portfolio assets. Certain purchased non-performing loans are recognized as financial investments available-for-sale. In addition, in fourth quarter 2008, UBS has reclassified certain debt financial assets from the category “held-for-trading” to “loans and receivables”, mainly due to illiquid markets for these instruments (refer to Note 1b and Note 29). At 31 December 2008, a significant portion of auction rate securities, including those acquired by UBS from clients was classified as “loans and receivables”. Refer to Note 9.
Loans are recognized when cash is advanced to borrowers. They are initially recorded at fair value, which is the cash given to originate or purchase the loan, plus any transaction costs, and are subsequently measured at amortized cost using the effective interest rate method.
Interest on loans is included in Interest earned on loans and advances and is recognized on an accrual basis. Fees and direct costs relating to loan origination, refinancing or restructuring and to loan commitments are deferred and amortized

to Interest earned on loans and advances over the life of the loan using the straight-line method which approximates the effective interest rate method. Fees received for commitments that are not expected to result in a loan are included in Credit-related fees and commissions over the commitment period. Loan syndication fees where UBS does not retain a portion of the syndicated loan are credited to commission income.



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Financial information

Commitments

Letters of credit, guarantees and similar instruments commit UBS to make payments on behalf of third parties under specific circumstances. These instruments, as well as undrawn irrevocable credit facilities, carry credit risk and are included in the exposure to credit risk table, in the audited “Credit risk” section ofRisk Treasury and Capital Management 2007,treasury management, with their gross maximum exposure to credit risk.

10) Allowance and provision for credit losses

An allowance or provision for credit losses is established if there is objective evidence that the Group will be unable to collect all amounts due on a claim according to the original contractual terms or the equivalent value. A “claim” means a loan or receivable carried at amortized cost, or a commitment such as a letter of credit, a guarantee, a commitment to extend credit or other credit products.
An allowance for credit losses is reported as a reduction of the carrying value of a claim on the balance sheet. For an off-balance sheet item, such as a commitment, a provision for credit loss is reported in Other liabilities. Additions to allowances and provisions for credit losses are made through Credit loss expense.
Allowances and provisions for credit losses are evaluated at a counterparty-specific level and collectively based on the following principles:
Counterparty-specific:A claim is considered impaired when management determines that it is probable that the Group will not be able to collect all amounts due according to the original contractual terms or the equivalent value.
Individual credit exposures are evaluated based on the borrower’s character, overall financial condition, resources and payment record; the prospects for support from any financially responsible guarantors; and, where applicable, the realizable value of any collateral.
The estimated recoverable amount is the present value, using the loan’s original effective interest rate, of expected future cash flows, including amounts that may result from restructuring or the liquidation of collateral. Impairment is measured and allowances for credit losses are established for the difference between the carrying amount and the estimated recoverable amount.
Upon impairment, the accrual of interest income based on the original terms of the claim is discontinued, but the increase of the present value of impaired claims due to the passage of time is reported as Interest income.



28

All impaired claims are generally reviewed and analyzed at least annually. Any subsequent changes to the amounts and timing of the expected future cash flows compared with the prior estimates result in a change in the allowance for credit losses and are charged or credited to Credit loss expense.
An allowance for impairment is reversed only when the credit quality has improved to such an extent that there is

reasonable assurance of timely collection of principal and interest in accordance with the original contractual terms of the claim or equivalent value.

A write-off is made when all or part of a claim is deemed uncollectible or forgiven. Write-offs are charged against previously established allowances for credit losses or directly to Credit loss expense and reduce the principal amount of a claim. Recoveries in part or in full of amounts previously written off are credited to Credit loss expense.
A loan is classified as non-performing when the payment of interest, principal or fees is overdue by more than 90 days and there is no firm evidence that it will be made good by later payments or the liquidation of collateral, or when insolvency proceedings have commenced against the firm, or when obligations have been restructured on concessionary terms.
Collectively:All loans for which no impairment is identified on a counterparty-specific level are grouped into sub-portfolios with similar credit risk characteristics to collectively assess whether impairment exists within a portfolio. Allowances from collective assessment of impairment are recognized as Credit loss expense and result in an offset to the aggregated loan position. As the allowance cannot be allocated to individual loans, the loans are not considered to be impaired and interest is accrued on each loan according to its contractual terms.

11) Securitizations

UBS securitizes various financial assets, which generally results in the sale of these assets to special purpose entities, which in turn issue securities to investors. UBS’s involvement in securitization structures significantly declined in 2008. UBS applies the policies set out in part 4)3) in determining whether the respective special purpose entity must be consolidated and those set out in part 3)4) in determining whether derecognition of transferred financial assets is appropriate. The following statements mainly apply to financial asset transfers which are considered true sales to non-consolidated entities.
Interests in the securitized financial assets may be retained in the form of senior or subordinated tranches, interest-only strips or other residual interests (“retained interests”). Retained interests are primarily recorded in Trading portfolio assets and carried at fair value. Gains or losses on securitization are recognized in Net trading income, which is generally when the derecognition criteria are satisfied. Typically, the Group seeks to exit its risk in retained interests shortly after close of the securitization. The Group is also an active market maker in these securities and may therefore

subsequently reacquire interests in the assets it securitizes. Financial assets purchased with the intention of securitizing them in the future, often referred to as warehousing assets or loans, are generally reflected in Trading portfolio assets, with changes in fair value recognized in net trading income. Synthetic securitization structures typically involve derivative financial instruments for which the principles set out in part 14) apply. Purchased asset-backed securities (ABS), including mortgage-backed securities (MBS), originated by third parties are recognized as financial assets held for trading, or in a minority of cases, as Financial investments available-for-sale. In 2008, certain illiquid ABS were reclassified to the category “loans and re-



267

Financial information
Notes to the consolidated financial statements

ceivables” and several student loan auction rate securities, which are considered securitized instruments, are classified as loans and receivables after acquiring them from clients.

UBS securitizes residential and commercial mortgage and other assets, actingacted as lead or co-manager. In addition, UBS acts as warehouse agent, structurer and placement agent in various collateralized debt obligation (CDO) and collateralized loan obligation (CLO), MBS and other ABS securitizations. In such capacity, UBS may purchasepurchased collateral on its own behalf or on behalf of customers during the period prior to securitization. UBS typically sellssold the collateral into designated trusts at the close of the securitization and underwrites the offerings to investors. UBS earns fees for its placement and structuring services. For residential mortgage loan and other securitizations, the investors and the securitization vehicle generally have no recourse to UBS’s other assets for failure of loan holders to pay when due.
Consistent with the valuation of similar inventory, fair value of retained tranches or warehousing assets is initially and subsequently determined using market price quotations where available or internal pricing models that utilize variables such as yield curves, prepayment speeds, default rates, loss severity, interest rate volatilities and spreads. The assumptions used for pricing are based on observable transactions in similar securities and are verified by external pricing sources, where available.

12) Securities borrowing and lending

Securities borrowing and securities lending transactions are generally entered into on a collateralized basis. In such transactions, UBS typically lends or borrows securities in exchange for securities or cash collateral. Additionally, UBS borrows securities from its clients’ custody accounts in exchange for a fee. The majority of securities lending and borrowing agreements involve shares, and the remainder typically involve bonds and notes. The transactions are conducted under standard agreements employed by financial market participants and are undertaken with counterparties subject to UBS’s normal credit risk control processes. UBS monitors the market value of the securities received or delivered on a daily basis and requests or provides additional collateral or returns or recalls surplus collateral in accordance with the underlying agreements.
The securities which have been transferred, whether in a borrowing / borrowing/lending transaction or as collateral, are not rec-



29

Financial Statements
Notes to the Financial Statements

ognizedrecognized on or derecognized from the balance sheet unless the risks and rewards of ownership are also transferred. In such transactions where UBS transfers owned securities and where the borrower is granted the right to sell or repledge them, the securities are reclassified on the balance sheet from Trading portfolio assets to Trading portfolio assets pledged as collateral. Cash collateral received is recognized with a corresponding obligation to return it (Cash collateral on securities lent). Cash collateral delivered is derecognized with a corresponding receivable reflecting UBS’s right to receive it back (Cash collateral on securities borrowed). Securities received in a lending or borrowing transaction are disclosed as off-balance sheet items if UBS has the right to resell or repledge them, with securities that UBS has actually resold or repledged also disclosed separately (see Note 24). Additionally, the sale of securities received in a borrowing or lending transaction triggers the recognition of a trading liability (short sale).

Consideration exchanged in financing transactions (i. e.(i.e. interest received or paid) is recognized on an accrual basis and recorded as Interest income or Interest expense.

13) Repurchase and reverse repurchase transactions

Securities purchased under agreements to resell (Reverse repurchase agreements) and securities sold under agreements to repurchase (Repurchase agreements) are generally treated as collateralized financing transactions. Nearly all repurchase and reverse repurchase agreements involve debt instruments, such as bonds, notes or money market paper. The transactions are conducted under standard agreements employed by financial market participants and are undertaken with counterparties subject to UBS’s normal credit risk control processes. UBS monitors the market value of the securities received or delivered on a daily basis and requests or provides additional collateral or returns or recalls surplus collateral in accordance with the underlying agreements.
In a reverse repurchase agreements,agreement, the cash delivered is derecognized and a corresponding receivable, including accrued interest, is recorded in the balance sheet line Reverse repurchase agreements, recognizing UBS’s right to receive it back. In a Repurchase agreements,agreement, the cash received is recognized and a corresponding obligation, including accrued interest, is recognized onrecorded in the balance sheet with a corresponding obligation to return it (Repurchase agreements).line Repurchase agreements. Securities received under reverse repurchase agreements and securities delivered under repurchase agreements are not recognized on or derecognized from the balance sheet, unless the risks and rewards of ownership are obtained or relinquished. In repurchase agreements where UBS transfers owned securities and where the recipient is granted the right to resell or repledge them, the securities are reclassified in the balance sheet from Trading portfolio assets to Trading portfolio assets pledged as collateral. Securities received in a reverse repurchase agreement are disclosed as

off-balance sheet items if UBS has the right to resell or repledge them, with securities that UBS has actually resold or repledged also disclosed separately (see Note 24). Additionally, the sale of securities received in reverse repurchase transactions triggers the recognition of a trading liability (short sale).
Interest earned on reverse repurchase agreements and interest incurred on repurchase agreements is recognized as interest income or interest expense over the life of each agreement.
The Group offsets reverse repurchase agreements and repurchase agreements with the same counterparty, maturity, currency and Central Securities Depository (CSD) for transactions covered by legally enforceable master netting agreements when net or simultaneous settlement is intended.

14) Derivative instruments and hedge accounting

All derivative instruments are carried at fair value on the balance sheet and are reported as Positive replacement values or Negative replacement values. Where the Group enters



268

Financial information

into derivatives for trading purposes, realized and unrealized gains and losses are recognized in Net trading income.

Credit losses incurred on over-the-counter (OTC) derivatives are also reported in Net trading income.

Hedge accounting

The Group also uses derivative instruments as part of its asset and liability management activities to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions. The Group applies either fair value or cash flow hedge accounting when transactions meet the specified criteria to obtain hedge accounting treatment.
At the time a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. Accordingly, the Group assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives have been “highly effective” in offsetting changes in the fair value or cash flows of the hedged items. UBS regards a hedge as highly effective only if the following criteria are met: a) at inception of the hedge and throughout its life, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, and b) actual results of the hedge are within a range of 80% to 125%. In the case of hedging a forecast transaction, the transaction must have a high probability of occurring and must present an exposure to variations in cash flows that could ultimately affect the reported net profit or loss. The Group discontinues hedge accounting when it determines that a derivative



30

is not, or has ceased to be, highly effective as a hedge; when the derivative expires or is sold, terminated or exercised; when the hedged item matures, is sold or repaid; or when a forecast transaction is no longer deemed highly probable.
Hedge ineffectiveness represents the amount by which the changes in the fair value of the hedging derivative differ from changes in the fair value of the hedged item or the amount by which changes in the present value of cash flows of the hedging derivative differ from changes (or expected changes) in the present value of cash flows of the hedged item. Such ineffectiveness is recorded in current period earnings in Net trading income, as are gains and losses on components of a hedging derivative that are excluded from assessing hedge effectiveness.income.

Fair value hedges

For qualifying fair value hedges, the change in fair value of the hedging derivative is recognized in the income statement. Those changes in fair value of the hedged item that are attributable to the risks hedged with the derivative instrument are reflected in an adjustment to the carrying value of the hedged item, which is also recognized in the income

statement. The fair value change of the hedged item in a portfolio hedge of interest rate risks is reported separately from the hedged portfolio in Other assets or Other liabilities as appropriate. If the hedge relationship is terminated for reasons other than the derecognition of the hedged item, the difference between the carrying value of the hedged item at that point and the value at which it would have been carried had the hedge never existed (the “unamortized fair value adjustment”) is, in the case of interest-bearing instruments, amortized to the income statement over the remaining term of the original hedge, while for non-interest-bearing instruments that amount is immediately recognized in earnings. If the hedged item is derecognized, e. g.e.g. due to sale or repayment, the unamortized fair value adjustment is recognized immediately in the income statement.profit or loss.

Cash flow hedges

A fair value gain or loss associated with the effective portion of a derivative designated as a cash flow hedge is recognized initially in Equity. When the cash flows that the derivative is hedging materialize, resulting in income or expense, then the associated gain or loss on the hedging derivative is simultaneously transferred from Equity to the corresponding income or expense line item.
If a cash flow hedge for a forecast transaction is deemed to be no longer effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative previously reported in Equity remains there until the committed or forecast transaction occurs or is no longer expected to occur, at which point it is transferred to the income statement.profit or loss.

Economic hedges which do not qualify for hedge accounting

Derivative instruments which are transacted as economic hedges but do not qualify for hedge accounting are treated in the same way as derivative instruments used for trading purposes, i. e.i.e. realized and unrealized gains and losses are recognized in Net trading income except that, in certain cases, the forward points on short duration foreign exchange contracts are reported in Net interest income. Additionally, the Group has entered into economic hedges of credit risk within the loan portfolio using credit default swaps to which it cannot apply hedge accounting. In the event that the Group recognizes an impairment on a loan that is economically hedged in this way, the impairment is recognized in Credit loss expense, whereas any gain on the credit default swap is recorded in Net trading income. See Note 23 for additional information. Where UBS designates an economically hedged item at fair value through profit or loss, all fair value changes, including impairments, on both the hedged item and the hedging instrument are reflected in Net trading income (refer to part 7)). Credit losses incurred on over- the-counterover-the-counter (OTC) derivatives are reported in Net trading income.



269

Financial information
Notes to the consolidated financial statements

Embedded derivatives

A derivative may be embedded in a “host contract”. Such combinations are known as hybrid instruments and arise predominantly from the issuance of certain structured debt instruments. If the host contract is not carried at fair value with changes in fair value reported in the income statement, the embedded derivative is generally required to be separated from the host contract and accounted for as a stand-alone derivative instrument at fair value through profit or loss if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, and is the embedded derivative actually meets the definition of a derivative. Bifurcated embedded derivatives are presented on the same balance sheet line as the host contract, and are shown in Note 2829 in the “Held for trading” category, reflecting the measurement and recognition principles applied.
Typically, UBS applies the fair value option to hybrid instruments (see part 7)), in which case bifurcation of an embedded derivative component is not required.

15) Cash and cash equivalents

Cash and cash equivalents consist of Cash and balances with central banks, balances included in Due from banks with original maturity of less than three months, and Money market paper included in Trading portfolio assets and Financial investments available-for-sale.

16) Physical commodities

Physical commodities (precious metals, base metals, energy and other commodities) held by UBS as a result of its broker-



31

Financial Statements
Notes to the Financial Statements

traderbroker-trader activities are accounted for at fair value less costs to sell and presentedrecognized within the Trading portfolio. Changes in fair value less costs to sell are reflectedrecorded in Net trading income.

17) Property and equipment

Property and equipment includes own-used properties, investment properties, leasehold improvements, IT, software and communication, plant and manufacturing equipment, and other machines and equipment.
With the exception of investment properties, Property and equipment is carried at cost, less accumulated depreciation and accumulated impairment losses, and is periodically reviewed for impairment. The useful life of property and equipment is estimated on the basis of the economic utilization of the asset.

Classification for own-used property

Own-used property is defined as property held by the Group for use in the supply of services or for administrative purposes, whereas investment property is defined as property held to earn rental income and / and/or for capital appreciation. If a property of the Group includes a portion that is own-used and another portion that is held to earn rental income or for

capital appreciation, the classification is based on whether or not these portions can be sold separately. If the portions of the property can be sold separately, they are separately accounted for as own-used property and investment property. If the portions cannot be sold separately, the whole property is classified as own-used property unless the portion used by the Group is minor. The classification of property is reviewed on a regular basis to account for major changes in its usage.

Leasehold improvements

Leasehold improvements are investments made to customize buildings and offices occupied under operating lease contracts to make them suitable for the intended purpose. The present value of estimated reinstatement costs to bring a leased property into its original condition at the end of the lease, if required, is capitalized as part of the total leasehold improvements costs. At the same time, a corresponding liability is recognized to reflect the obligation incurred. Reinstatement costs are recognized in profit and loss through depreciation of the capitalized leasehold improvements over their estimated useful life.

Software

Software development costs are capitalized when they meet certain criteria relating to identifiability, it is probable that future economic benefits will flow to the enterprise, and the cost can be measured reliably. Internally developed software meeting these criteria and purchased software are classified within IT, software and communication.

Property and equipment is depreciated on a straight-line basis over its estimated useful life as follows:
   
 
Properties, excluding land Not exceeding 50 years
 
Leasehold improvements Residual lease term,
but not exceeding 10 years
 
Other machines and equipment Not exceeding 10 years
 
IT, software and communication Not exceeding 5 years
 

Property held for sale

Non-current property formerly own-used or leased to third parties under an operating lease and equipment the Group has decided to sell and for which the sale within 12 months is highly probable are classified as non-current assets held for sale and recorded in Other assets. Upon classification as held for sale, they are no longer depreciated and are carried at the lower of book value or fair value less costs to sell.net realizable value. Foreclosed properties and other properties classified as current assets are included in Properties held for sale and recorded in Other assets. They are carried at the lower of costbook value and net realizable value.

Investment property

Investment property is carried at fair value with changes in fair value recognized in the income statement in the period of



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Financial information

change. UBS employs internal real estate experts to determine the fair value of investment property by applying recognized valuation techniques. In cases where prices of recent market transactions of comparable properties are available, fair value is determined by reference to these transactions.

18) Goodwill and intangible assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of net identifiable assets of the acquired entity at the date of acquisition. Goodwill is not amortized; it is tested yearly for impairment, and, additionally, when a reasonable indication of impairment exists. The impairment test is conducted at the segment level as reported in Note 2a. The segment has been determined as the cash generatingcash-generating unit for impairment testing purposes as this is the level at which the performance of investments is reviewed and assessed by management. Refer to Note 16 for details.
Intangible assets comprise separately identifiable intangible items arising from acquisitionsbusiness combinations and certain purchased trademarks and similar items. Intangible assets are recognized at cost. The cost of an intangible asset acquired in a business combinations are recognized on the balance sheet with theircombination is its fair value at the date of acquisition and, if they haveacquisition. Intangible assets with a definite useful life are amortized using the straight-line method over their estimated useful economic life, generally not exceeding 20 years. AlmostIntangible assets with an indefinite useful life are not amortized. Generally all identified intangible assets of UBS have a definite useful life. At each balance sheet date, intangible assets are reviewed for indications of impairment or changes in estimated future benefits. If such indications exist, the intangible assets are analyzed to assess



32

whether their carrying amount is fully recoverable. A write-downAn impairment loss is maderecognized if the carrying amount exceeds the recoverable amount.

Intangible assets are classified into two categories: a) infrastructure, and b) customer relationships, contractual rights and other. Infrastructure consists of an intangible asset recognized in connection with the acquisition of PaineWebber Group, Inc. Customer relationships, contractual rights and other includes mainly intangible assets for client relationships, non-compete agreements, favorable contracts, proprietary software, trademarks and trade names acquired in business combinations.

19) Income taxes

Income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in the period in which profits arise. The tax effects of income tax losses available for carry forward are recognized as a deferred tax asset if it is probable that future taxable profit will be available against which those losses can be utilized.
Deferred tax liabilities are recognized for temporary differences between the carrying amounts of assets and liabilities in the balance sheet and their amounts as measured for

tax purposes, which will result in taxable amounts in future periods. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future periods, but only to the extent it is probable that sufficient taxable profits will be available against which these differences can be utilized.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the asset will be realized or the liability will be settled based on enacted rates.
Tax assets and liabilities of the same type (current or deferred) are offset when they arise from the same tax reporting group, they relate to the same tax authority, the legal right to offset exists, and they are intended to be settled net or realized simultaneously.
Current and deferred taxes are recognized as income tax benefit or expense except for current and deferred taxes recognized (i) upon the acquisition of a subsidiary, (ii) for unrealized gains or losses on financial investments available-for-sale, for changes in fair value of derivative instruments designated as cash flow hedges, and for certain foreign currency translations of foreign operations, (iii) for certain tax benefits on deferred compensation awards, and (iv) for gains and losses on the sale of treasury shares. Deferred taxes recognized in a business combination (item (i)) are considered when determining goodwill. Items (ii), (iii) and (iv) are recorded in Net income recognized directly in equity.

20) Debt issued
Debt

Short-term debt
Short-term money market paper issued is initially measured at fair value, which is the consideration received, net of transaction costs incurred.

Subsequent measurement is at amortized cost, using the effective interest rate method to amortize cost at inception to the redemption value over the life of the debt. Refer to Note 28.

Long-term senior and subordinated
debt without embedded derivative

HybridIssued debt instruments thatwithout embedded derivatives are related to non-UBS AG equity instruments, foreign exchange, credit instruments or indices are considered structured instruments. If such instruments have not been designated at fair value through profit or loss, the embedded derivative is separated from the host contract and accounted for as a standalone derivative if the criteria for separation are met. The host contract is subsequently measured at amortized cost. UBS has designated most ofHowever, it is the Group’s policy to apply fair value hedge accounting to its structuredfixed-rate debt instruments atwhen the interest rate risk is managed on a mark-to-market basis. When fair value through profit or loss – (see part 7). Thehedge accounting is applied to fixed-rate debt instruments, the carrying values of debt issues are adjusted for changes in fair value option is not appliedrelated to certain hybrid instruments which contain bifurcatablethe hedged exposure rather than carried at amortized cost – refer to part 14) for further discussion.

Long-term debt with embedded derivatives with referencesderivative
(related to foreign exchange rates and precious metal prices and which are not hedged by derivative instruments. Those hybrids are still subject to bifurcation of the embedded derivative.

UBS AG shares)
Debt instruments with embedded derivatives that are related to UBS AG shares or to a derivative instrument that has UBS AG shares as its underlying(e.g. mandatory convertible notes) are separated into a liability and an equity component at issue



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Financial information
Notes to the consolidated financial statements

date if they require physical settlement. When the hybrid debt instrument is issued, a portion of the net proceeds is allocated to the debt component based on its fair value. The determination of fair value is generally based on quoted market prices for UBS debt instruments with comparable terms. The debt component is subsequently measured at amortized cost.cost or at fair value through profit or loss, if the fair value option is applied. The remaining amount of the net proceeds is allocated to the equity component and reported in Share premium. Subsequent changes in fair value of the separated equity component are not recognized. However, if the hybrid debt instrument or the embedded derivative related to UBS AG shares is to be cash settled or if it contains a settlement alternative, then the separated derivative is accounted for as a freestanding derivative, with changes in fair value recorded in Net trading income unless the entire hybrid debt instrument is designated at fair value through profit or loss (refer(“Fair Value Option”) – refer to part 7).

It is the Group’s policy

Other long-term debt with embedded derivative (not
related to hedge the fixed interest rate risk onUBS AG shares)

Debt instruments with embedded derivatives that are related to non-UBS AG equity instruments, foreign exchange, credit instruments or indices are considered structured debt issues (except for certain subordinated long-term note issues), and to applyinstruments. UBS has designated most of its structured debt instruments at fair value hedge accounting,through profit or loss (“Fair Value Option”) – see part 7). If such instruments have not been designated at fair value through profit or loss, the embedded derivative is separated from the host contract and accounted for as a standalone derivative if the criteria for separation are met. The host contract is subsequently measured at amortized cost. The fair value option is not applied to such financialcertain hybrid instruments – (see part 7). When hedge accounting is appliedwhich contain bifurcatable embedded derivatives with references to fixed-rate debt instruments,foreign exchange rates and precious metal prices and which are not hedged by derivative instruments. Those hybrids are still subject to bifurcation of the carrying values of debt issues are adjusted for changes in fair value related to the hedged exposure rather than carried at amortized cost – (refer to part 14) for further discussion.embedded derivative.
Bonds issued by UBS held as a result of market making activities or deliberate purchases in the market are treated as redemption of debt. A gain or loss on redemption is recorded depending on whether the repurchase price of the bond is lower or higher than its carrying value. A subsequent sale of own bonds in the market is treated as a reissuance of debt.



33

Financial Statements
Notes to the Financial Statements

Interest expense on debt instruments is included in Interest on debt issued.

21) RetirementPost-employment benefits

UBS sponsors a number of retirementpost-employment benefit plans for its employees worldwide. These plansworldwide which include both defined benefit and defined contribution plans and various other retirement benefits such as post-employment medical benefits. Contributions to defined contribution plans are expensed when employees have rendered services in exchange for such contributions, generally in the year of contribution.

The Group

UBS uses the projected unit credit actuarial method to determine the present value of its defined benefit plansobligations and the related current service cost and, where applicable, past service cost.

The principal actuarial assumptions used by the actuary are set out in Note 29.30.
The GroupUBS recognizes a portion of its actuarial gains and losses as income or expense if the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period are outside the corridor defined as the greater of:
 
a)10% of present value of the defined benefit obligation at that date
(before (before deducting the fair value of plan assets); and
b)10% of the fair value of any plan assets at that date.

The unrecognized actuarial gains and losses exceeding the greater of these two values are recognized in the income statement over the expected average remaining working lives of the employees participating in the plans.

If an excessthe defined benefit liability is negative (i.e. a defined benefit asset) measurement of the fair valueasset is limited to the lower of the plan assets overdefined benefit asset and the total of cumulative unrecognized net actuarial losses plus unrecognized past service cost plus the present value of economic benefits available in the defined benefit obligation cannot be recovered fully throughform of refunds of the plan or reductions in future contributions to the plan. However, no gain is recognized solely as a result of deferral of an actuarial loss or past service cost in the current period, and no loss is recognized solely as a result of deferral of an actuarial gain in the current period. Refer also to Note 1b.
UBS recognizes curtailments on its defined benefit plans when the reductions in expected future service and in the defined benefit obligation are 10% or more. Reductions in expected future service and in the defined benefit obligation of between 5% and 10% are recognized if deemed material, and reductions of less than 5% are generally not recognized.

22) Equity participation and other compensation plans

Equity participation plans
UBS provides various equity participation plans to employees in the form of share plans and share option plans. UBS recognizes the fair value of share and share option awards, determined at the date of grant, as compensation expense over the period that the employee is required to provide active services in order to earn the award. Plans containing voluntary termination non-compete provisions (i.e. good leaver clause) and no vesting conditions are considered vested in substance at the grant date because no future service is required. The related compensation expense is recognized during the performance year, which is generally the period prior to the grant date. The awards remain forfeitable until the legal vesting date if certain conditions are not met. Forfeiture of awards after the grant date does not result in a reversal of compensation expense as the related services have been received. Plans containing vesting conditions typ-



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Financial information

ically have a three-year tiered vesting structure which means awards vest in one-third increments over that period. Such awards may contain provisions that shorten the required service period which generally is equaldue to retirement eligibility. In such instances, UBS recognizes compensation expense over the shorter of the legal vesting period and the period from grant to the vesting period. retirement eligibility date of the employee. Forfeiture of these awards results in a reversal of compensation expense.

The fair value of share awards is equal to the average UBS share price at the date of grant. Forgrant adjusted for an employee’s non-entitlement to dividends during the vesting period (if applicable) and, any post-vesting sale and hedge restrictions and non-vesting conditions. The fair value of share option awards fair value is determined usingby means of a Monte Carlo valuation modelsimulation which takes into account the specific terms and conditions under which the share options are granted.
Equity settled awards are classified as equity instruments and are not remeasured subsequent to the grant date, unless an award is modified such that its fair value immediately after modification exceeds its fair value immediately

prior to modification. Any increase in fair value resulting from a modification is recognized as compensation expense, either over the remaining service period or immediately for vested awards.
Cash settled awards are classified as liabilities and remeasured to fair value at each balance sheet date as long as they are outstanding. Decreases in fair value reduce compensation expense, and no compensation expense, on a cumulative basis, is recognized for awards that expire worthless or remain unexercised.
Refer to Note 1b for the adoption of IFRS 2Share-based Payment: Vesting Conditions and Cancellationson 1 January 2008.

Other compensation plans

UBS sponsors other deferred compensation plans which can be in the form of fixed or variable deferred cash compensation. Expense is recognized over the service period, which is the period the employee is obligated to work in order to become entitled to the compensation.
Fixed deferred cash compensation is generally awarded in the form of sign-on bonuses and employee forgiveable loans. The grant date fair value is fixed at the grant date.
Variable deferred cash compensation is generally awarded in the form of Alternative Investment Vehicles (AIV’s). The grant date fair value is based on the fair value of the underlying assets (i.e. money market funds, UBS and non-UBS mutual funds and other UBS sponsored funds) on grant date and is subsequently marked-to-market at each reporting date until the award is distributed. Forfeiture of these awards results in the reversal of expense.

23) Amounts due under unit-linked investment contracts

UBS Global Asset Management’s financial liabilities from unit-linked contracts are presented as Other Liabilities (refer to

Note 20) on the balance sheet. These contracts allow investors to invest in a pool of assets through investment units issued by a UBS subsidiary. The unit holders receive all rewards and bear all risks associated with the reference asset pool. The financial liability represents the amount due to unit holders and is equal to the fair value of the reference asset pool.

24) Provisions

Provisions are recognized when UBS has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are reflected under Other liabilities on the balance sheet. Refer to Note 21.
The majority of UBS’s provisions relate to operational risks, including litigation. When a provision is recognized, its amount needs to be estimated as the exact amount of the obligation is generally unknown. The estimate is based on all available information and reflects the amount that has the highest probability of being paid. UBS revises existing provisions up or down as soon as it is able to quantify the amounts more accurately.

25) Equity, treasury shares and contracts on UBS shares

UBS AG shares held
UBS AG shares held by the Group are classified in Equity as Treasury shares and accounted for at weighted average cost. The difference between the proceeds from sales of Treasury shares and their cost (net of tax, if any) is classifiedreported as Share premium.

Contracts with gross physical settlement

Contracts that require gross physical settlement in UBS AG shares are classified in Equity as EquityShare premium (provided a fixed amount of shares isare exchanged against a fixed amount of cash) and reported as Share premium.accounted for at cost. Upon settlement of such contracts, the difference between the proceeds received – lessand their cost (net of tax, if any) – are reported as Share premium.



34

Contracts with net cash settlement or settlement option for counterparty

Contracts on UBS AG shares that require net cash settlement or provide the counterparty with a choice of settlement are generally classified as trading instruments, with changes in fair value reported in the income statement.

Physically settled written put options and forward share purchase contracts
Exceptions to the accounting treatments described on this and previous page are physically

Physically settled written put options and forward share purchase contracts, including contracts where physical settlement is a settlement alternative. In both cases,alternative, result in the recognition of a financial liability. At inception of the contract, the present value of the obligation to purchase own shares in exchange for cash is transferred out of Equity and recognized as a liability at inception of a contract.liability. The liabilityliabil-



273

Financial information
Notes to the consolidated financial statements

ity is subsequently accreted, using the effective interest rate method, over the life of the contract to the nominal purchase obligation by recognizing interest expense. Upon settlement of athe contract, the liability is derecognized, and the amount of equity originally transferred torecognized as a liability is reclassified within Equity to Treasury shares. The premium received for writing put options is recognized directly in Share premium.

Minority interests

Net profit and Equity are presented including minority interests. Net profit is split into Net profit attributable to UBS shareholders and Net profit attributable to minority interests. Equity is split into Equity attributable to UBS shareholders and Equity attributable to minority interests.

Trust preferred securities issued

UBS has issued trust preferred securities through consolidated preferred funding trusts which hold debt issued by UBS. UBS AG has fully and unconditionally guaranteed all of these securities. UBS’s obligations under these guarantees are subordinated to the prior payment in full of the deposit liabilities of UBS and all other liabilities of UBS. The trust preferred securities represent equity instruments which are ownedheld by third parties. They are presentedparties and treated as minority interests in UBS’s consolidated financial statements with dividends paid also reported underin Equity attributable to minority interests. UBS bonds held by preferred funding trusts are eliminated in consolidation.

26) Discontinued operations and non-current assets held for sale

UBS classifies individual non-current non-financial assets and disposal groups as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use – see part 17). Suchsuch assets or disposal groups are available for immediate sale in their present condition subject to terms that are usual and customary for sales of such assets or disposal groups, management is committed to a plan to sell such assets and is actively looking for a buyer, the assets are being actively marketed at a reasonable sales price in relation to their fair value, the sale is expected to be completed within one year, and their sale is considered highly probable. These assets (and liabilities in the case of disposal groups) are measured at the lower of their carrying

amount and fair value less costs to sell and presented in Other assets and Other liabilities (see Notes 17 and 20). Netting of assets and liabilities is not permitted.

UBS presents discontinued operations in a separate line in the income statement if an entity or a component of an entity has been disposed of or is classified as held for sale and a) represents a separate major line of business or geographical area of operations, b) is part of a single co-ordinated plan to dispose of a separate major line of business or b)geographical area of operations, or c) is a subsidiary acquired exclusively with a view to resale (e. g.(e.g., certain private equity investments). Net profit from discontinued operations includesin-

cludes the net total of operating profit and loss before tax from discontinued operations and theincluding net gain or loss recognized on sale before tax or measurement to fair value less costs to sell of the net assets constituting theand discontinued operations.operations tax expense. A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of UBS’s operations and cash flows. If an entity or a component of an entity is classified as a discontinued operation, UBS restates prior periods in the income statement – see part 3). Refer to Note 3637 for details.

27) Leasing

UBS enters into lease contracts, predominatelypredominantly of premises and equipment, as a lessor as well as a lessee. The terms and conditions of these contracts are assessed and the leases are classified as operating leases or finance leases according to their economic substance. When making such an assessment, the Group focuses on the following aspects: a) transfer of ownership of the asset to the lessee at the end of the lease term; b) existence of a bargain purchase option held by the lessee; c) whether the lease term is for the major part of the economic life of the asset; d) Whetherwhether the present value of the minimum lease payments is substantially equal to the fair value of the leased asset at inception of the lease term.term; and e) whether the asset is of a specialized nature that only the lessee can use without major modifications being made. If one or more of the these conditions isare met, the lease is generally classified as a finance lease, while the non-existence of such conditions normally leads to a classification as an operating lease.
Lease contracts classified as operating leases where UBS is the lessee are disclosed in Note 25 Operating Lease Commitments.25. These contracts include non-cancellable long-term leases of office buildings in most UBS locations. Lease contracts classified as operating leases where UBS is the lessor, and finance lease contracts where UBS is the lessor or the lessee, are not material. Contractual arrangements which are not considered leases in their entirety but which include lease elements are not material to UBS.
UBS recognizes a provision for a lease contract of office space, if the unavoidable costs of a contract exceed the benefits to be received under it, which requires that a lease contract is considered onerous it its entirety. A provision for onerous lease contracts often includes significant vacant rental space.

28) Fee income

UBS earns fee income from a diverse range of services it provides to its customers. Fee income can be divided into two broad categories: income earned from services that are provided over a certain period of time, for which customers are generally billed on an annual or semi-annual



35

Financial Statements
Notes to the Financial Statements

basis, and income earned from providing transaction-type services. Fees earned from services that are provided over a certain period of time are recognized ratably over the service period. Fees earned from providing transaction-type services are recognized when



274

Financial information

the service has been completed. Performance-linked fees or fee components are recognized when the recognition criteria are fulfilled. Loan commitment fees on lending arrangements where the initial expectation is that the loan will be drawn down at some point, are deferred until the loan is drawn down, and then recognized as an adjustment to the effective yield over the life of the loan.

The following fee income is predominantly earned from services that are provided over a period of time: investment fund fees, fiduciary fees, custodian fees, portfolio and other management and advisory fees, insurance-related fees, credit-related fees and commission income.commissions received up-front. Fees predominantly earned from providing transaction-type services include underwriting fees, corporate finance fees and brokerage fees.

29) Foreign currency translation

Foreign currency transactions are initially recorded at the spot exchange rate of exchange on the date of the transaction. At the balance sheet date, all monetary assets and liabilities denominated in foreign currenciesand non-monetary assets and liabilities measured at fair value through profit or loss are reportedtranslated using the closing exchange rate. Exchange differences arising onNon-monetary assets and liabilities not measured at fair value through profit or loss are translated using the settlement of transactions at rates different from those at the date of the transaction, as well as unrealizedhistorical exchange rate. Realized foreign exchange differences resulting from the sale of assets or settlement of liabilities are recognized in Net trading income.
Unrealized exchange rate differences on unsettled foreign currency monetary assets and liabilities are recognizedrecorded in the income statement.
Net trading income. Unrealized exchange rate differences on non-monetary financial assets (investments in equity instruments) are a component of the change in their entire fair value. For a non-monetary financial asset held for trading and for non-monetary financial assets designated at fair value through profit or loss unrealized exchange differences are recognized in the income statement. ForNet trading income. Unrealized exchange rate differences on non-monetary financial investments available-for-sale unrealized exchange differences are recorded directly in Equity until the asset is sold or becomes impaired.
When preparing consolidated financial statements,Upon consolidation, assets and liabilities of foreign entities are translated at the closing exchange ratesrate at the balance sheet date, whileand income and expense items are translated at the weighted average ratesrate for the period. Differences resulting from the use of closing and weighted average exchange rates and from revaluing a foreign entity’s net asset balance at the closing rate are recognized directly in Foreign currency translation within Equity.

30) Earnings per share (EPS)

Basic earnings per share are calculated by dividing the net profit or loss for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
Diluted earnings per share are calculated using the same method as for basic EPS butand adjusting the determinants are adjustednet profit or loss for the period attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding to reflect the potential dilution that could occur if options, warrants, con-

warrants, convertiblevertible debt securities or other contracts to issue ordinary shares were converted or exercised into ordinary shares.

31) Segment reporting

In 2008, UBS’s financial businesses arewere organized on a worldwide basis into three Business Groupsbusiness divisions and the Corporate Center. Each business division is comprised of individual business units. Global Wealth Management & Business Banking consists of three business segments: Wealth Management International & Switzerland, Wealth Management US and Business Banking Switzerland. The Business Groupsbusiness divisions Investment Bank and Global Asset Management constitute one segment each. The Industrial Holdings segment holds all industrial operations controlled by the Group. In total, UBS reports sixhas reported five business segments in 2007.segments. Corporate Center includes all corporate functions and elimination items, and is not considered a business segment.
Segment income, segment under IFRS. The presentation of the business segments reflects UBS’s organizational structure and management responsibilities. In February 2009, UBS announced that, going forward, it will divide its business division Global Wealth Management & Business Banking into two new business divisions: Wealth Management & Swiss Bank, comprising all non-Americas wealth management businesses as well as the Swiss private and corporate client business; and the business division Wealth Management Americas.
UBS’s management reporting systems and policies determine the revenues and expenses directly attributable to each business unit. Internal charges and segmenttransfer pricing adjustments are reflected in the performance include transfersof each business unit.
Inter-business unit revenues and expenses: Revenue-sharing agreements are used to allocate external customer revenues to business units on a reasonable basis. Inter-business unit charges are predominantly reported in the line “Services (to)/from other business units” for both business units concerned. Transactions between reportable segments. Such transfersbusiness units are conducted either at internally agreed transfer prices or where possible, at arm’s length. Corporate Center expenses are allocated to the operating business units to the extent appropriate.
Net interest incomeis allocated to the business units based on their balance sheet positions. Assets and liabilities of the business divisions are funded through and invested with the central treasury departments, with the net margin reflected in the results of each business unit. To complete the allocation, Corporate Center transfers interest income earned from managing UBS’s consolidated equity back to the segments based on the average equity attributed, a concept which was introduced in 2008. Prior to 2008, Corporate Center transferred interest income earned from managing UBS’s consolidated equity back to the segments based primarily on regulatory capital requirements. For detailed discussion on the equity attribution framework, refer to the “Capital management” section of the annual report.
Commissionsare credited to the business unit with the corresponding customer relationship, with revenue-sharing agreements for the allocation of customer revenues where several business units are involved in value creation.



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Financial information
Notes to the consolidated financial statements

Segment assets and Segment liabilities:Both segment assets and segment liabilities are reported in the management reporting system and shown before the elimination of inter-company balances. Due to the central treasury approach, equity must be allocated to the segments. The allocation basis is average equity attributed, a concept which was introduced in 2008 (for a detailed discussion on the equity attribution framework, refer to the section “Capital management” of this report). Total segment assets and total segment liabilities are derived by taking into account any remaining funding surplus or requirements in each business division. Prior to 2008, the equity was allocated to the segments based pri-

marily on regulatory capital requirements. Refer to Note 2a.

32) Netting

UBS nets assets and liabilities in its balance sheet if it has a legally enforceable right to set off the recognized amounts and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. UBS nets the positive and negative replacement values of OTC interest rate swaps transacted with London Clearing House. The positions are netted by currency and across maturities. Furthermore, amounts included in Loans and Due to customers related to the Prime Brokerage Business have been netted, where possible.



b) Changes in accounting policies, comparability and other adjustments

Effective in 2008

IFRS 2 Share-based Payment: Vesting Conditions and Cancellations
On 1 January 2008, UBS adopted an amendment to IFRS 2
Share-based Payment: Vesting Conditions and Cancellationsand fully restated the two comparative prior years. The amended standard clarifies the definition of vesting conditions and the accounting treatment of cancellations. Under the amended standard, UBS is required to distinguish between vesting conditions (such as service and performance conditions) and non-vesting conditions.
The amended standard no longer considers vesting conditions to include certain non-compete provisions.
The impact of this change is that UBS compensation awards are expensed over the period that the employee is required to provide active services in order to earn the award. Post-vesting sale and hedge restrictions and non-vesting conditions are considered when determining grant date fair value. The effect of the restatement on the opening balance sheet at 1 January 2006 was as follows: reduction of retained earnings by approximately CHF 2.3 billion, increase of share premium by approximately CHF 2.3 billion, increase of liabilities (including deferred tax liabilities) by approximately CHF 0.5 billion, and increase of deferred tax assets by approximately CHF 0.5 billion. Net profit attributable to UBS shareholders declined by CHF 863 million in 2007 and by CHF 730 million in 2006. Additional compensation expenses of CHF 797 million and CHF 516 million was recognized in 2007 and 2006, respectively. These additional compensation expenses include awards granted in 2008 for the performance year 2007. The impact of the restatement on total equity as of 31 December 2007 was a decrease of CHF 366 million. Retained earnings at 31 December 2007 decreased by approximately CHF 3.9 billion, share premium increased by approximately CHF 3.5 billion, liabilities (including deferred tax liabilities) increased by approximately CHF 0.6 billion and deferred tax assets increased by approximately CHF 0.2 billion. The restatement decreased basic and diluted earnings per share for the year ended 31 December 2007 by CHF 0.40 each and for

the year ended 31 December 2006 by CHF 0.33 and CHF 0.31, respectively. In order to provide comparative information, these amounts also reflect the retrospective adjustments to shares outstanding in 2007 due to the capital increase and the share dividend paid in 2008.

The additional compensation expense is attributable to the acceleration of expenses related to share-based awards as well as for certain alternative investment vehicle awards and deferred cash compensation awards which contain non-compete provisions and sale and hedge restrictions that no longer qualify as vesting conditions under the amended standard.

Reclassifications of financial instruments

The International Accounting Standards Board published an amendment to International Accounting Standard 39 (IAS 39Financial Instruments: Recognition and Measurement) on 13 October 2008, under which eligible financial assets, subject to certain conditions being met, may be reclassified out of the “held for trading” category if the firm has the intent and ability to hold them for the foreseeable future or until maturity.
Although the amendment could have been applied retrospectively from 1 July 2008, UBS decided at the end of October 2008 to apply the amendment with effect from 1 October 2008 following an assessment of the implications on its financial statements.
Effective 1 October 2008, UBS reclassified eligible assets which it intends to hold for the foreseeable future with a fair value of CHF 17.6 billion on that date from “held for trading” to the “loans and receivables” category. In addition, student loan auction rate securities (ARS) with a fair value of CHF 8.4 billion have been reclassified as of 31 December 2008. In fourth quarter 2008, an impairment charge of CHF 1.3 billion was recognized as a credit loss expense on reclassified financial instruments. If reclassification had not occurred, the impairment charge would not have been recognized but an additional trading loss of CHF 4.8 billion would have been recorded in UBS’s income statement. Net interest income after reclassification increased by CHF 0.3 billion. Refer to Note 29 for details.



276

Financial information

Recognition of a defined benefit asset for the Swiss pension plan

In third quarter 2008, UBS concluded that it meets the requirements in IAS 19Employee Benefitsto recognize a defined benefit asset associated with its Swiss pension plan. Prior to this, it had been UBS policy to only disclose this amount in the Note “Pension and Other Post-Employment Benefit Plans” of UBS’s Annual Report. UBS concluded that recognition of an asset should also consider unrecognized net actuarial losses and past service costs as permitted by IAS 19 as this results in a better reflection of the corridor approach.
UBS considered this a change in accounting policy to be applied retrospectively as required by IAS 8Accounting Policies, Changes in Accounting Estimates and Errors. The change in accounting policy resulted in the following effects on the balance sheets for 1 January 2007, 31 December 2007, and 30 September 2008, which is the date the change in accounting policy was effective: an increase of approximately CHF 2.1 billion inOther assets, an increase of approximately CHF 0.5 billion in Deferred tax liabilities and an increase of approximately CHF 1.6 billion in Retained earnings. There was no material impact to the income statements or earnings per share for these periods.

Revenues from Industrial Holdings and Goods and materials purchased

The income statement no longer includes the lines Revenues from Industrial Holdings include sales of goods and services from one consolidated entity. Revenue is generally recognized upon customer acceptance of goods delivered and when services have been rendered. Expenses from Goods and materials purchased, include costsas the last consolidated industrial private equity investment in Industrial Holdings was sold in first quarter 2008 and is classified as a discontinued operation in UBS’s income statement. Prior periods have been restated to reflect this classification.

Changes to segment reporting

UBS has continuously reduced its private equity business in Industrial Holdings over the last three years. The business no longer includes consolidated industrial private equity investments. Starting first quarter 2008, UBS is reporting the remaining activities from this business, mainly financial investments available-for-sale, under Corporate Center.

Trading portfolio assets pledged as collateral

The balance sheet line Trading portfolio assets pledged as collateral includes financial assets held for raw materials, partstrading which UBS has transferred to third parties with the right of rehypothecation. Financial assets held for trading which UBS has transferred to third parties without the right of rehypothecation are presented under Trading portfolio assets. In order to apply this presentation policy consistently, financial instruments have been reclassified from Trading portfolio assets pledged as collateral to Trading portfolio assets in the amount of CHF 50.1 billion as at 31 December 2007. The reclassification did not impact the income statements or earnings per share.

IFRIC 13Customer Loyalty Programmes

IFRIC 13 was issued on 28 June 2007 and finishedis effective for annual periods beginning on or after 1 July 2008. IFRIC 13 addresses how companies that grant their customers loyalty award credits when buying goods purchased from third-party suppliersor services should account for their obligation to produce theprovide free or discounted goods and services, sold.if and when the customers redeem the points. IFRIC 13 requires entities to allocate some of the proceeds of the initial sale to the award credits and recognize these proceeds as revenue only when they have fulfilled their obligations to provide goods or services. This interpretation had no significant impact on UBS’s Financial Statements.

b) ChangesIFRIC 14The Limit on a Defined Benefit Asset Minimum Funding Requirements and their Interaction –IAS 19

IFRIC 14 was issued on 5 July 2007 and is effective for annual periods beginning on or after 1 January 2008. IFRIC 14 provides guidance regarding the circumstances under which refunds and future reductions in accounting policies, comparabilitycontributions from a defined benefit plan can be regarded as available to an entity for the purpose of recognizing a net defined benefit asset. Additionally, in jurisdictions where there is both a minimum funding requirement and other adjustmentsrestrictions on the amounts that companies can recover from the plan, either as refunds or reductions in contributions, additional liabilities may need to be recognized. This interpretation had no impact on UBS’s Financial Statements.

IAS 23Borrowing Costs

The IASB issued a revised version of IAS 23 on 29 March 2007. The revised Standard is effective for annual periods beginning 1 January 2009. UBS earlier adopted the revised standard early from 1 January 2008 on a prospective basis, as permitted by the Standard. The revisions require that borrowing costs attributable to the acquisition, construction or production of a qualifying asset be capitalized as part of the cost of that asset. The adoption of the revised standard did not have a material impact on UBS’s Financial Statements.

Effective in 2007
and earlier

IFRS 7Financial Instruments: Disclosures
On 1 January 2007, UBS adopted the disclosure requirements for financial instruments under IFRS 7. The new standard has no impact on recognition, measurement and presentation of financial instruments. Accordingly, the first-time adoption of IFRS 7 had no effect on Net profit and Equity. Rather, it requires UBS to provide disclosures in its financial statements that enable users to evaluate: a) the significance of financial instruments for the entity’s financial position and performance (refer to the notes to the Financial Statements), and b) the nature and extent of credit, market and liquidity risks arising from financial instruments (including details about concentrations of such risks) during the period and at the reporting date, and how UBS manages those risks (refer



277

Financial information
Notes to the consolidated financial statements

to the audited sections inRisk Treasury and Capital Management 2007treasury management). The disclosure principles of IFRS 7 complement the principles for recognizing, measuring and presenting financial assets and financial liabilities in IAS 32



36

Financial Instruments: Presentationand IAS 39Financial Instruments: Recognition and MeasurementMeasurement..

Netting

In second quarter 2007, UBS concluded that it meets the criteria to offset Positive and Negative replacement values of OTC interest rate swaps transacted with London Clearing House (LCH). Under IFRS, positions are netted by currency and across maturities. The amount of replacement values netted was CHF 35,470 million at 31 December 2006. Furthermore, amounts included in Loans and Due to customers related to the Prime Brokerage business have been netted. At 31 December 2006, amounts netted were CHF 14,679 million. In both cases, the application of netting had no impact on UBS’s income statement, Earnings per share, credit exposure and regulatory capital.

Syndicated finance revenues

In fourth quarter 2007, UBS revised the presentation of certain syndicated finance revenues in its income statement. Revenues which relate to syndicated loan commitments designated at fair value through profit or loss are now presented in Net trading income rather than as Debt underwriting fees in Net fee and commission income. Prior periods have been adjusted to conform to this presentation. The adjustments resulted in a reduction of Net fee and commission income of CHF 425 million and CHF 252 million for 2006 and 2005 respectively and a corresponding increase in Net trading income in these periods.this period. The change in presentation had no impact on UBS’s Net profit and Earnings per share for all periods presented.
2006. The adoption of the following new interpretations on 1 January 2007 had no material impact on UBS’s Financial Statements:Statements.

IFRIC 7Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies

This Interpretationinterpretation provides guidance on how to apply the requirements of IAS 29 in a reporting period in which an entity (this could be a subsidiary) identifies the existence of hyperinflation in the economy of its functional currency, when that economy was not hyperinflationary in the prior period, and the entity therefore restates its financial statements in accordance with IAS 29. UBS has no subsidiaries operating in a hyperinflationary economy.

IFRIC 8Scope of IFRS 2

This IFRIC addresses whether IFRS 2 applies to transactions in which the entity cannot identify specifically some or all of the goods or services received. The Interpretationinterpretation requires that IFRS 2 be applied to transactions in which goods or services are received, such as transactions in which an entity receives goods or services as consideration for equity instrumentsinstru-

ments of the entity. This includes transactions in which the

entity cannot identify specifically some or all of the goods or services received. The unidentifiable goods or services received (or to be received) should be measured as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received (or to be received). Measurement of the unidentifiable goods or services received should take place at the grant date. However, for cash-settled transactions, the liability should be remeasured at each reporting date until it is settled.

IFRIC 9Reassessment of Embedded Derivatives

The Interpretationinterpretation clarifies that an entity should not reassess whether an embedded derivative needs to be separated from the host contract after the initial hybrid contract is recognized, unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. This interpretation did not have an impact on UBS’s Financial Statements.

IFRIC 10Interim Financial Reporting and Impairment

The new Interpretationinterpretation of IAS 39 and IAS 36 requires that impairment losses recognized in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost must not be reversed at a subsequent balance sheet date. This interpretation did not have an impact on UBS’s Financial Statements.

IFRIC 11 IFRS 2:Group and Treasury Share Transactions

IFRIC 11 provides guidance on (a) how to account for share-based payment arrangements between entities within the same group; (b) determining whether a transaction should be accounted for as equity-settled or cash-settled when an entity either chooses or is required to buy equity instruments (i. e. treasury shares) from another party to satisfy its obligations to its employees; and (c) determining whether a transaction should be accounted for as equity-settled or cash-settled when an entity’s employees are granted rights to equity instruments of the entity (e. g. share options), either by the entity itself or by its shareholders, and the shareholders of the entity provide the equity instruments needed. The Interpretationinterpretation requires that share-based payment transactions in which an entity receives services as consideration for its own equity instruments be accounted for as an equity-settled transaction. This applies regardless of whether the entity chooses or is required to buy those equity instruments from another party to satisfy its obligations to its employees under the share-based payment arrangement.

Effective in 2006 and earlier
IAS 39Financial Instruments: Recognition and Measurement – Amendment to the Fair Value Option

UBS adopted the revised IAS 39 fair value option on 1 January 2006. Under the amended guidance, the use of the fair value option requires that at least one of three defined criteria is satisfied, which is more restrictive than the previousJanu-



37278

Financial Statements
Notes to the Financial Statements

Financial information

guidance. All financial instruments designated at fair value through profit or loss at 31 December 2005 continued to qualify for the use of the fair value option under the revised fair value option.ary 2006. On the transition date of the revised standard, 1 January 2006, UBS did not apply the fair value option to any previously recognized financial asset or financial liability for which the fair value option had not been used under the previous fair value option guidance. Therefore, the initial adoption of the revised standard did not have an impact on UBS’s Financial Statements. See part 7) for details on the use of the revised fair value option during 2006 and 2007. In addition, effective 1 January 2006, the disclosure requirements for financial instruments designated at fair value through profit or loss (refer to Notes 12 and 19) have been amended due to the revision of IAS 32Financial Instruments: Presentation.

Staff Accounting Bulletin (SAB) 108

In response to the release of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 108,ConsideringCon-

sidering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,UBS elected to adopt a modified quantitative framework for assessing whether the financial statement effect of a misstatement is material because it renders a better evaluation of those effects. This method, which UBS adopted in December 2006, uses a dual approach for quantifying the effect of a misstatement. Prior to 2006, UBS applied only one of those methods, the “roll-over” method, which focused on the current year income-statement impact of a misstatement. Under this policy, UBS applies a dual approachmisstatement that considers both the carryover and reversing effects of prior year misstatements.



c) International Financial Reporting Standards and Interpretations to be adopted in 2009 and later

Effective in 2009

IFRS 8Operating Segments
IFRS 8Operating Segmentsis effective on 1 January 2009 and will replace IAS 14Segment Reporting. Under the requirements of the new standard, UBS’s external segmental reporting will be based on the internal reporting to the Group Executive Board (or, the “chief operating decision maker”) which makes decisions on the allocation of resources and assesses the performance of the reportable segments. Based on the new UBS structure which was announced in February 2009 and following IFRS 8 guidance, UBS will report four operating segments in 2009. The business divisions, Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and Investment Bank represent one reportable segment each. Corporate Center does not meet the requirements of an operating segment and will be shown separately. In addition, the new standard requires UBS to provide descriptive information about the types of products and services from which each reportable segment derives its revenue. As UBS’s reportable segment operations are mainly financial, the total interest income and expense for all reportable segments will be presented on a resultnet basis. Based on the present arrangement of revenue-sharing agreements, the inter-segment revenue for UBS is unlikely to be material. Going forward, the segment assets and segment liabilities will be disclosed without the intercompany balances which are in line with the internal reporting. An explanation of the basis on which the segment information is prepared and reconciliations to the amounts presented in the income statement and balance sheet are also required by the new standard. In addition, UBS will be providing geographical information about total operating income and total non-current assets based on the following new geographical breakdown, Switzerland, UK, Rest of Europe, USA, Asia Pacific and Rest of the World.

IAS 1 (revised)Presentation of Financial Statementsand IAS 32 (revised)Financial Instruments: Presentation

IAS 1 (revised),Presentation of Financial Statements,was issued in September 2007 and is effective on 1 January 2009. The revised standard affects the presentation of owner

changes in equity and of comprehensive income: UBS will continue presenting owner changes in equity in the statement of changes in equity, but the detailed information related to non-owner changes in equity will be removed from the statement of changes in equity and presented in the statement of comprehensive income. The revised standard does not change the recognition, measurement or disclosure of specific transactions addressed in other IFRSs.

In addition, the IASB issued a further amendment to IAS 1 and an amendment to IAS 32 regarding puttable financial instruments and obligations arising on liquidation in February 2008. The IAS 32 amendment clarifies under which circumstances puttable financial instruments and obligations arising on liquidation have to be treated as equity instruments. The amendment is limited in scope and is restricted to the accounting for such instruments under IAS 1, IAS 32, IAS 39 and IFRS 7. The amendment to IAS 1 requires additional information about puttable financial instruments and obligations arising on liquidations which have to be treated as equity instruments. UBS will adopt the two amendments on 1 January 2009. It is not expected that these amendments will have a significant impact on UBS’s Financial Statements.

Amendments to IFRS 1First-time Adoption of International Financial Reporting Standardsand IAS 27Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate

The amendments to IFRS 1 and IAS 27 were issued on 22 May 2008 and are effective for annual periods beginning on 1 July 2009 (which is 1 January 2010 for UBS) and 1 January 2009, respectively. The amendments to IFRS 1 allow a first-time adopter, at its date of transition to IFRSs in its separate financial statements, to use a deemed cost to account for an investment in a subsidiary, jointly controlled entity or associate. The amendments to IAS 27 remove the definition of “cost method” and require all dividends from a subsidiary, jointly controlled entity or associate to be recognized as income in the separate financial statements of the investor when the right to receive the dividend is established and provides guidance on the formation of a new parent entity. These amendments have no impact on UBS’s Financial Statements.



279

Financial information
Notes to the consolidated financial statements

IFRIC 15Agreements for the Construction of Real Estate

IFRIC 15 was issued on 3 July 2008 and is effective for annual periods beginning on or after 1 January 2009. IFRIC 15 provides guidance on the accounting for agreements for the construction of real estate where entities enter into agreements with buyers before construction has been completed and the timing of revenue recognition. UBS does not expect this interpretation to have a significant impact on its Financial Statements.

IFRIC 16Hedges of a Net Investment in a Foreign Operation

IFRIC 16 was issued on 1 October 2008 and is effective for annual periods beginning on or after 1 October 2008. IFRIC 16 provides guidance in determining which foreign exchange risks arising from net investments in foreign operations of subsidiaries, associates, joint ventures or branches qualify for hedge accounting in accordance with IAS 39Financial Instruments: Recognition and Measurement.IFRIC 16 clarifies that net investment hedging can only be applied when the net assets of the foreign operation are recognized in the entity’s consolidated financial statements. UBS is currently assessing the impact of this policy, the opening balance of Accrued expensesinterpretation on its Financial Statements.

Effective in 2010, if not adopted early

Amendments to IAS 39Financial Instruments: Recognition and deferred income atMeasurement – Eligible Hedged Items
The amendment to IAS 39 was issued on 31 July 2008 and is effective for annual periods beginning on or after 1 January 2002 was increased by CHF 399 million, Retained earnings were reduced by CHF 309 million and Deferred taxes of CHF 90 million were recognizedJuly 2009. The amendments provide additional guidance on the balance sheet.designation of a hedged item. The adjustments relateamendment clarifies how the existing principles underlying hedge accounting should be applied in two particular situations: a) a one-sided risk in a hedged item and b) inflation in a financial hedged item. UBS does not expect these amendments to have a significant impact on its Financial Statements.

IFRIC 17Distributions of Non-cash Assets to Owners

IFRIC 17 was issued on 27 November 2008 and is effective for annual periods beginning on or after 1 July 2009. IFRIC 17 clarifies when a dividend payable should be recognized, how the under-accrualdividend payable should be measured and how to account for the difference between the carrying amount of unused vacation, sabbatical leavethe asset distributed and service anniversary awards. The restatementthe carrying amount of the dividend payable once the dividend payable is settled. UBS is currently assessing the impact of adopting this policyinterpretation on its Financial Statements.

IFRIC 18Transfers of Assets from Customers

IFRIC 18 was immaterial to all quarterlyissued on 29 January 2009 and annual income statements, earnings per share amounts, and balance sheets since 1 January 2002.is effective, prospectively, for transfers of assets from customers re-

Private equity investments
Onceived on or after 1 January 2005,July 2009. The IFRIC clarifies how to account for transfers of items of property, plant and equipment by entities that receive such transfers from their customers. The interpretation also applies to agreements in which an entity receives cash from a customer when that amount of cash must be used only to construct or acquire an item of property, plant and equipment and the entity must then use that item to provide the customer with ongoing access to a supply of goods and/or services. UBS adopted revisedis currently assessing the impact of this interpretation on its Financial Statements.

IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements

In January 2008, the IASB issued a revised Standard of IFRS 3 Business Combinations and amendments to IAS 27Consolidated and Separate Financial Statementsand revised IAS 28Investments in Associates.IAS 27 was amended to eliminate the exemption from consolidating a subsidiary where control is exercised temporarily. UBS has several private equity investments where it owns a controlling interest that used to be classified and accounted for as Financial investments available-for-sale.
IAS 28 was likewise amended to eliminate the exemption from equity method accounting for investments that are held exclusively for disposal. Private equity investments where UBS has significant influence are now accounted for using the equity method whereas they were previously classified as Financial investments available-for-sale.

IFRS 2 Share-based Payment
UBS adopted IFRS 2Share-based Paymenton 1 January 2005 and fully restated the two comparative prior years. IFRS 2 requires share-based payments made to employees and non-employees to be recognized in the financial statements based on the fair value of these awards measured at the date of grant.

UBS introduced a new valuation model to determine the fair value of share options granted in 2005 and later. Share options granted in 2004 and earlier were not affected by this change in valuation model. As part of the implementation of IFRS 2, UBS thoroughly reviewed the option valuation model employed in the past by comparing it with alternative models. As a result of this review, a valuation model was identified that better reflects the exercise behavior of employees and the specific terms and conditions under which the share options are granted. Concurrent with the introduction of the new model, UBS is using implied and historical volatility as inputs.
UBS also has employee benefit trusts that are used in connection with share-based payment arrangements and deferred compensation schemes. In connection with the issuance of IFRS 2, the IFRIC amended SIC 12Consolidation – Special Purpose Entities,an interpretation of IAS 27, to eliminate the scope exclusion for equity compensation plans. Therefore, pursuant to the criteria set out in SIC 12, an entity that controls an employee benefit trust (or similar entity) set up for the purpose of a share-based payment arrangement is required to consolidate that trust.



38

Goodwill and Intangible Assets
On 31 March 2004, the IASB issued IFRS 3Business Combinations,revised IAS 36Impairment of Assetsand revised IAS 38Intangible Assets.UBS prospectively adopted the standards for goodwill and intangible assets existing at 31 March 2004 on 1 January 2005, whereas goodwill and intangible assets recognized from business combinations entered into after 31 March 2004 were accounted for immediately in accordance with IFRS 3. Refer to a18) for details.

Non-current Assets Held for Sale and Discontinued Operations
UBS adopted IFRS 5Non-current Assets Held for Sale and Discontinued Operationson 1 January 2005. Refer to a26) for details.

Presentation of minority interests and earnings per share
With the adoption of revised IAS 1Presentation of Financial Statementson 1 January 2005, Net profit and Equity were presented including minority interests. Refer to a3) and a25) for details.

c) International Financial Reporting Standards and Interpretations to be adopted in 2008 and later

IFRS 2 Share-based Payment
In January 2008, the International Accounting Standards Board (IASB) issued an amendment to IFRS 2Share-based Payment.The amended standard, entitled IFRS 2Share-based Payment: Vesting Conditions and Cancellations,is effective 1 January 2009 (early adoption permitted). The new standard clarifies the definition of vesting conditions and the accounting treatment of cancellations. UBS has early adopted this amended standard as of 1 January 2008. Under the amended standard, UBS is required to distinguish between vesting conditions (such as service and performance conditions) and non-vesting conditions. The amended standard no longer considers vesting conditions to include certain non-compete provisions and transfer restrictions. Prior to adopting this amendment, UBS treated non-compete provisions as vesting conditions. The impact of this change will be that, from 1 January 2008, most of UBS’s share and certain option awards will be expensed in the performance year rather than over the period through

which the non-compete conditions are applicable. Restrictions remaining effective after the employee becomes entitled to the share-based award will be considered when determining grant date fair value. Following adoption of this amendment, UBS will fully restate the two comparative prior years (2006 and 2007).

The effect of the restatement on the opening balance at 1 January 2006 will be as follows: reduction of retained earnings by approximately CHF 2.2 billion, increase of share premium by approximately CHF 2.3 billion, increase of liabilities (including deferred tax liabilities) by approximately CHF 0.3 billion, and increase of deferred tax assets by approximately CHF 0.4 billion. Additional compensation expense of approximately CHF 800 million and approximately CHF 500 million will be recognized in 2007 and 2006, respectively. The additional compensation expense is attributable to the acceleration of expense related to share-based awards which contain non-compete provisions and transfer restrictions that no longer qualify as vesting conditions under the Standard. The additional compensation expense of approximately CHF 800 million for 2007 includes awards granted in 2008 for the performance year 2007.

IFRS 8 Operating Segments
The new standard on segment reporting, IFRS 8Operating Segments,comes into force on 1 January 2009, replacing IAS 14Segment Reporting.It sets out requirements for disclosure of information about a firm’s operating segments, its products and services, the geographical areas in which it operates, and its major customers. The new standard introduces changes to previous requirements for identification of segments, measurement of segment information and disclosures. Specifically, it requires a firm to provide financial and descriptive information about its reportable segments – the operating segments or aggregations of operating segments based on which the senior management of the firm (the “chief operating decision maker”) regularly evaluates separate financial information in deciding how to allocate resources and how to assess performance. Generally, under IFRS 8, the information to be reported will be the same information that is used internally, which might differ from amounts reported in the financial statements. The new standard therefore requires an explanation of the basis on which the segment information is prepared, and recon-



39

Financial Statements
Notes to the Financial Statements

ciliations to the amounts presented in the income statement and the balance sheet. UBS is currently assessing the impact of IFRS 8 on the structure and content of the segment reporting in its Financial Statements.

IAS 1 (revised) Presentation of Financial Statements and IAS 32 (revised) Financial Instruments: Presentation
IAS 1 (revised),Presentation of Financial Statements,was issued in September 2007 and is effective on 1 January 2009. The revised standard affects the presentation of owner changes in equity and of comprehensive income: UBS will continue presenting owner changes in equity in the statement of changes in equity, but the detailed information related to non-owner changes in equity will be removed from the statement of changes in equity and presented in the statement of comprehensive income. The revised standard does not change the recognition, measurement or disclosure of specific transactions addressed in other IFRSs. The amended requirements will have an impact on the presentation and disclosure of the items in UBS’s Financial Statements.

In addition, the IASB issued a further amendment to IAS 1 and an amendment to IAS 32 regarding puttable financial instruments and obligations arising on liquidation in February 2008. The IAS 32 amendment clarifies under which circumstances puttable financial instruments and obligations arising on liquidations have to be treated as equity instruments. The amendment is limited in scope and is restricted to the accounting for such instruments under IAS 1, IAS 32, IAS 39 and IFRS 7. The amendment to IAS 1 requires additional information about puttable financial instruments and obligations arising on liquidations which have to be treated as equity instruments. UBS will adopt the two amendments on 1 January 2009. It is not expected that these amendments will have a significant impact on UBS’s Financial Statements.

IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements
In January 2008, the IASB issued a revised Standard of IFRS 3Business Combinationsand amendments to IAS 27Consolidated and Separate Financial Statements.The most significant changes under revised IFRS 3 are as follows:

– Contingent consideration will be recognized at fair value as part of the consideration transferred at the acquisition date. Currently contingent consideration is only recognized once it meets the probability and reliably measurable criteria.
– Non-controlling interests in an acquiree will either be measured at fair value or as the non-controlling interest’s proportionate share of the fair value of net identifiable assets of the entity acquired. The option is available on a transaction-by-transaction basis.

– Transaction costs incurred by the acquirer will no longer be part of the acquisition cost but will have to be expensed as incurred.
The revised IFRS 3 is effective for annual periods beginning on or after 1 July 2009 and has to be applied prospectively from the date of adoption to business combinations consummated after that date. Business combinations consummated prior to that date will not be impacted.
The amendments to IAS 27 reflect changes in the accounting for non-controlling interests and deal primarily with the accounting for changes in ownership interests in subsidiaries after control is obtained, the accounting for the loss of control over subsidiaries, and the allocation of profit or loss to controlling and non-controlling interests in a subsidiary. IAS 27 requires that certain amendments be applied retrospectively whereas others are applied prospectively. UBS is currently assessing the impact of restating certain amendments of the Standard.Standard on its Financial Statements.
The revised IFRS 3 and the amendments to IAS 27 are effective for annual periods beginning on or after 1 July 2009 and must be adopted together. UBS is currently assessing whether it will adopt IFRS 3 and the amendments to IAS 27 from 1 July 2009 or earlier as permitted by the Standards.

IFRIC 13 Customer Loyalty Programmes
IFRIC 13 was issued on 28 June 2007 and is effective for annual periods beginning on or after 1 July 2008. IFRIC 13 addresses how companies that grant their customers loyalty award credits when buying goods or services should account for their obligation to provide free or discounted goods and services, if and when the customers redeem the points. IFRIC 13 requires entities to allocate some of the proceeds of the initial sale to the award credits and recognize these proceeds as revenue only when they have fulfilled their obligations to provide goods or services. UBS is currently assessing the impact of this interpretation on its Financial Statements.

IFRIC 14 The Limit on a Defined Benefit Asset Minimum Funding Requirements and their Interaction – IAS 19
IFRIC 14 was issued on 5 July 2007 and is effective for annual periods beginning on or after 1 January 2008. IFRIC 14 provides guidance regarding the circumstances under which refunds and future reductions in contributions from a defined benefit plan can be regarded as available to an entity for the purpose recognizing a net defined benefit asset. Additionally, in jurisdictions where there is both a minimum funding requirement and restrictions over the amounts that companies can recover from the plan, either as refunds or reductions in contributions, additional liabilities may need to be recognized. UBS is currently assessing the impact of this interpretation on its Financial Statements.2010.



40280

Financial information

Note 2a Segment Reporting by Business Group

reporting

In 2008, UBS’s financial businesses arewere organized on a worldwide basis into three Business Groupsbusiness divisions and thea Corporate Center. The business division Global Wealth Management & Business Banking consists of three segments: Wealth Management International & Switzerland, Wealth Management US and Business Banking Switzerland. The Business Groupsbusiness divisions Investment Bank and Global Asset Management constitute one segment each. In addition, the Industrial Holdings segment holds all industrial operations controlled by the Group. In total, UBS now reports sixfive business segments and a Corporate Center.Center in 2008. The Corporate Center includes all corporate functions, and elimination items as well as the remaining industrial holdings activities and is not considered a business segment. Refer to Note 1 of this report for information about UBS’s new segment structure, effective as of first quarter 2009.

Global Wealth Management & Business Banking

In 2008, Global Wealth Management & Business Banking comprisescomprised three segments. Wealth Management International & Switzerland offers a comprehensive range of products and services individually tailored to affluent international and Swiss clients and operates from offices around the world. Wealth Management US is a US financial services firm providing sophisticatedprovides wealth management services to affluent US clients through a highly trained financial advisor network. Business Banking Switzerland provides individual and corporate clients in Switzerland with a complete portfolio of banking and securities services, focused on customer service excellence, profitability and growth, using a multi-channel distribution. The segments share technological and physical infrastructure, and have joint departments supporting major functions such as e-commerce, financial planning and wealth management, investmentin-

vestment policy and strategy. Refer to Note 1 of this report for the changes to the structure of this business division, effective first quarter 2009.

Global Asset Management

The business division Global Asset Management provides investment products and services to institutional investors and wholesale intermediaries around the globe. Clients include corporate and public pension plans, financial institutions and advisors, central banks, charities, foundations and individual investors.

Investment Bank

The business division Investment Bank operates globally as a client-driven investment banking and securities firmbusiness providing innovative products, research, advice and complete access to the world’s capital markets for intermediaries, governments, corporate and institutional clients and other parts of UBS. In addition, UBS is active in market-making and proprietary trading.

Industrial Holdings
The Industrial Holdings segment comprises the non-financial businesses of UBS, including the private equity business which primarily invests UBS and third-party funds in unlisted companies. The most significant business in this segment, Motor-Columbus, was sold on 23 March 2006 and is presented as discontinued operations. Additionally, certain private equity investments sold in 2007 and prior years are presented as discontinued operations.

Corporate Center

The Corporate Center ensures that the Business Groupsall business divisions operate as a coherent and effective whole with a common set of values and principles in such areas as risk management and control, financial reporting, marketing and communications, funding, capital and balance sheet management, management of foreign currency earnings, information technology infrastructure and service centers. Private Banks & GAM, which was shown as a separate segment withinIn addition, Corporate Center prior to 2006, was sold on 2 December 2005 and is presented as discontinued operations.

DRCM closure
Global Asset Management performanceholds the remaining activities from continuing operations before tax in 2007 includes costs of CHF 384 million for the DRCM closure. These costs are reflected in Personnel expenses (CHF 318 million), General and administrative expenses (CHF 38 million) and impairments reflected in Depreciation of property and equipment (CHF 28 million). More than 50% of the Personnel expenses recorded relate to accelerated recognition of deferred compensation of former DRCM employees leaving UBS.industrial holding business, mainly financial investments available-for-sale.



41281

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Note 2a Reporting by Business GroupSegment reporting (continued)

For the year ended 31 December 2007

CHF million


Internal charges and transfer pricing adjustments are reflected in the performance of each business. Revenue-sharing agreements are used to allocate external customer revenues to a Business Group on a reasonable basis. Transactions between Business Groups are conducted at internally agreed transfer prices or at arm’s length.

2008
Income1
   
 
Credit loss (expense) / recovery 
   
 
Total operating income 
   
 
CHF million
Internal charges and transfer pricing adjustments are reflected in the performance of each business. Revenue-sharing agreements are used to allocate external customer revenues to a business division on a reasonable basis. Transactions between business divisions are conducted at internally agreed transfer prices or at arm’s length.Income1
Credit loss (expense)/recovery
Total operating income
Personnel expenses
   
 
General and administrative expenses
   
 
Services (to)/from other business units
   
 
Depreciation of property and equipment
   
 
Amortization of intangible assets3
 Impairment of goodwill
   
 
Goods and materials purchased Amortization of intangible assets2
   
 
Total operating expenses
   
 
Business Group performance from
 
Performance from continuing operations before tax
   
 
Business Group performance from
 
Performance from discontinued operations before tax
   
 
Business Group performance
Performance before tax
   
 
Tax expense on continuing operations
   
 
Tax expense on discontinued operations
   
 
Net profit
   
 
Additional information43
   
 
Total assets
   
 
Total liabilities
   
 
Capital expenditure
 

282

Financial information

                             
   UBS 
  Global Wealth Management &  Global Asset          
  Business Banking  Management  Investment Bank  Corporate Center    
  Wealth Management                   
  International &  Wealth  Business Banking             
  Switzerland  Management US  Switzerland             
 
   10,819   5,959   5,024   2,904   (21,592)  1,083   4,197 
 
   (390)  (25)  (5)  0   (2,575)  0   (2,996)
 
   10,429   5,933   5,019   2,904   (24,167)  1,083   1,201 
 
   3,112   3,891   2,376   926   4,882   1,076   16,262 
 
   2,001   2,348   1,018   434   3,399   1,299   10,498 
 
   1,581   238   (893)  150   990   (2,066)  0 
 
   97   94   70   29   231   720   1,241 
 
   0   0   0   0   341   0   341 
 
   38   60   0   33   83   0   213 
 
   6,828   6,631   2,570   1,572   9,925   1,029   28,555 
 
   3,601   (698)  2,449   1,333   (34,092)  54   (27,353)
 
                       198   198 
 
   3,601   (698)  2,449   1,333   (34,092)  252   (27,155)
 
                           (6,837)
 
                           1 
 
                           (20,319)
 
                             
 
   248,355   61,433   240,212   33,684   1,752,783   (321,369)  2,015,098 
 
   242,390   53,106   236,504   30,684   1,726,783   (315,171)  1,974,296 
 
   83   135   34   95   33   929   1,309 
 
1 Impairments of financial investments available-for-sale for the year ended 31 December 2008 were as follows: Global Wealth Management reporting based on expected credit loss& Business Banking CHF 19 million; Global Asset Management CHF 22 million; Investment Bank CHF 121 million; Corporate Center CHF 40 million.  2
For internal management reporting purposes, credit loss Refer to Note 16 of this report for further information regarding goodwill and other intangible assets by business division.  3 The funding surplus or requirement is measured using an expected loss concept. This table shows Business Group performance consistent with the wayreflected in which the businesses are managedeach business division and the way Business Group performance is measured. Expected credit loss reflects the average annual costs that are expected to arise from positions in the current portfolio that become impaired. The adjusted expected credit loss reported for each Business Group is the expected credit loss on its portfolio plus the difference between credit loss expense and expected credit loss, amortized over a three-year period. The difference between these adjusted expected credit loss figures and the credit loss expense recorded at Group level for reporting purposes is reported in Corporate Center as adjusted expected credit loss.Center.

283

Financial information
Notes to the consolidated financial statements

Note 2a Segment reporting (continued)

For the year ended 31 December 2007

Income1
   
 
Adjusted expected credit loss 
   
 
Total operating income 
   
 
CHF million
Internal charges and transfer pricing adjustments are reflected in the performance of each business. Revenue-sharing agreements are used to allocate external customer revenues to a business division on a reasonable basis. Transactions between business divisions are conducted at internally agreed transfer prices or at arm’s length.Income1
Credit loss (expense)/recovery
Total operating income
Personnel expenses
 
General and administrative expenses
   
 
General and administrative expenses Services (to)/from other business units
   
 
Services (to) / from other business units Depreciation of property and equipment
   
 
Depreciation of property and equipment Amortization of intangible assets3
   
 
Amortization of intangible assets3
 Total operating expenses
   
 
Goods and materials purchased Performance from continuing operations before tax
   
 
Total operating expenses Performance from discontinued operations before tax
   
 
Business Group performance from continuing operations
Performance before tax
   
 
Business Group performance from discontinued operations before tax
 Tax expense on continuing operations
   
 
Business Group performance before tax
 Tax expense on discontinued operations
   
 
Tax expense on continuing operations Net profit
   
 
Tax expense on discontinued operations Additional information4
   
 
Net profit
 Total assets
   
Total liabilities
Capital expenditure

284

42

Financial information

                                 
    UBS  
  Global Wealth Management &  Global Asset  Investment       
  Business Banking  Management  Bank  Corporate Center   
  Wealth Management  Wealth                   
  International &  Management  Business Banking                
  Switzerland  US  Switzerland        Corporate Center  Industrial Holdings    
 
   12,893   6,662   5,286   4,094   (538)  2,873   689   31,959 
 
   (1)  (2)  31   0   (266)  0   0   (238)
 
   12,892   6,660   5,317   4,094   (804)  2,873   689   31,721 
 
   3,873   4,551   2,584   1,856   11,286   1,334   31   25,515 
 
   1,064   976   1,138   559   3,386   1,298   8   8,429 
 
   1,531   314   (739)  153   811   (2,194)  124   0 
��
   95   79   67   53   2102  739   0   1,243 
 
   19   66   0   19   172   0   0   276 
 
   6,582   5,986   3,050   2,640   15,865   1,177   163   35,463 
 
   6,310   674   2,267   1,454   (16,669)   1,696   526   (3,742)
 
                       7   138   145 
 
   6,310   674   2,267   1,454   (16,669)   1,703   664   (3,597)
 
                               1,369 
 
                               (258)
 
                               (4,708)
 
                                 
 
   349,849   71,570   296,199   51,471   1,984,134   (478,833)  501   2,274,891 
 
   344,662   66,637   291,001   49,099   1,965,773   (487,766)  1,659   2,231,065 
 
   106   254   26   319   88   1,326   19   2,138 
 
                                 
  
  Financial Businesses  Industrial Holdings  UBS 
  Global Wealth Management &  Global Asset  Investment  Corporate       
  Business Banking  Management  Bank  Center       
  Wealth Management  Wealth                   
  International &  Management  Business Banking                
  Switzerland  US  Switzerland                
 
   12,893   6,662   5,286   4,094   (538)  2,873   948   32,218 
 
   (1)  (2)  31   0   (266)  0   0   (238)
 
   12,892   6,660   5,317   4,094   (804)  2,873   948   31,980 
 
   3,851   4,506   2,535   1,995   10,417   1,383   111   24,798 
 
   1,064   976   1,101   559   3,423   1,298   44   8,465 
 
   1,531   314   (674)  153   746   (2,194)  124   0 
 
   95   79   67   53   2102  739   8   1,251 
 
   19   66   0   19   172   0   6   282 
 
                           119   119 
 
   6,560   5,941   3,029   2,779   14,968   1,226   412   34,915 
 
                                 
   6,332   719   2,288   1,315   (15,772)  1,647   536   (2,935)
 
                                 
                       7   128   135 
 
   6,332   719   2,288   1,315   (15,772)  1,654   664   (2,800)
 
                               1,311 
 
                               (266)
 
                               (3,845)
 
                                 
 
   349,731   71,560   295,657   51,471   1,984,045   (480,386)  501   2,272,579 
 
   344,661   66,334   290,999   49,049   1,965,465   (488,124)  1,659   2,230,043 
 
   106   254   26   319   88   1,326   19   2,138 
 
                                 
 
   12,893   6,662   5,286   4,094   (538)  2,873   948   32,218 
 
   (27)  (3)  203   0   (19)  (392)  0   (238)
 
   12,866   6,659   5,489   4,094   (557)  2,481   948   31,980 
 
   3,851   4,506   2,535   1,995   10,417   1,383   111   24,798 
 
   1,064   976   1,101   559   3,423   1,298   44   8,465 
 
   1,531   314   (674)  153   746   (2,194)  124   0 
 
   95   79   67   53   2102  739   8   1,251 
 
   19   66   0   19   172   0   6   282 
 
                           119   119 
 
   6,560   5,941   3,029   2,779   14,968   1,226   412   34,915 
 
                                 
 
                                 
   6,306   718   2,460   1,315   (15,525)  1,255   536   (2,935)
 
                                 
                       7   128   135 
 
   6,306   718   2,460   1,315   (15,525)  1,262   664   (2,800)
 
                               1,311 
 
                               (266)
 
                               (3,845)
 
1 Impairments of financial investments available-for-sale for the year ended 31 December 2007 were as follows: Global Wealth Management & Business Banking CHF 11 million; Global Asset Management CHF 39 million; Investment Bank CHF 22 million; Corporate Center CHF (1) million and Industrial Holdings CHF 3 million.  2 Includes CHF 34 million for impairments of leasehold improvements and other machines and equipment.  3 For Refer to Note 16 of this report for further information regarding goodwill and other intangible assets by Business Group, please see Note 16: Goodwill and Intangible Assets.  business division.  4 The funding surplus or requirement is reflected in each Business Groupbusiness division and adjusted in Corporate Center.

43

285

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Note 2a Reporting by Business GroupSegment reporting (continued)

For the year ended 31 December 2006

CHF million


Internal charges and transfer pricing adjustments are reflected in the performance of each business. Revenue-sharing agreements are used to allocate external customer revenues to a Business Group on a reasonable basis. Transactions between Business Groups are conducted at internally agreed transfer prices or at arm’s length.
Income1
   
 
Credit loss (expense) / recovery 
   
 
Total operating income 
   
 
CHF million
Internal charges and transfer pricing adjustments are reflected in the performance of each business. Revenue-sharing agreements are used to allocate external customer revenues to a business division on a reasonable basis. Transactions between business divisions are conducted at internally agreed transfer prices or at arm’s length.Income1
Credit loss (expense)/recovery
Total operating income
Personnel expenses
 
General and administrative expenses
   
 
General and administrative expenses Services (to)/from other business units
   
 
Services (to) / from other business units Depreciation of property and equipment
   
 
Depreciation of property and equipment Amortization of intangible assets
   
 
Amortization of intangible assets3
 Total operating expenses
   
 
Goods and materials purchased Performance from continuing operations before tax
   
 
Total operating expenses Performance from discontinued operations before tax
   
 
Business Group performance from continuing operations
Performance before tax
   
 
Business Group performance from discontinued operations before tax
 Tax expense on continuing operations
   
 
Business Group performance before tax
 Tax expense on discontinued operations
   
 
Tax expense on continuing operations Net profit
   
 
Tax expense on discontinued operations Additional information3
   
 
Net profit
 Total assets
   
 
Additional information4
 Total liabilities
   
 
Total assets Capital expenditure
 
Total liabilities
Capital expenditure

Management reporting based on expected credit loss

For internal management reporting purposes, credit loss is measured using an expected loss concept. This table shows Business Group performance consistent with the way in which the businesses are managed and the way Business Group performance is measured. Expected credit loss reflects the average annual costs that are expected to arise from positions in the current portfolio that become impaired. The adjusted expected credit loss reported for each Business Group is the expected credit loss on its portfolio plus the difference between credit loss expense and expected credit loss, amortized over a three-year period. The difference between these adjusted expected credit loss figures and the credit loss expense recorded at Group level for reporting purposes is reported in Corporate Center as adjusted expected credit loss.
Income1
Adjusted expected credit loss
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets3
Goods and materials purchased
Total operating expenses
Business Group performance from continuing operations before tax
Business Group performance from discontinued operations before tax
Business Group performance before tax
Tax expense on continuing operations
Tax expense on discontinued operations
Net profit

44

286

Financial information
                                 
  
  Financial Businesses  Industrial Holdings  UBS 
  Global Wealth Management &  Global Asset  Investment  Corporate       
  Business Banking  Management  Bank  Center       
  Wealth Management  Wealth                        
  International &  Management  Business Banking                     
  Switzerland  US  Switzerland                     
 
   10,827   5,863   5,085   3,220   21,726   294   565   47,580 
 
   1   (1)  109   0   47   0   0   156 
 
   10,828   5,862   5,194   3,220   21,773   294   565   47,736 
 
   3,137   3,800   2,412   1,503   11,353   1,264   122   23,591 
 
   885   1,073   1,070   399   3,260   1,242   51   7,980 
 
   1,479   281   (642)  (105)  956   (1,978)  9   0 
 
   84   74   74   27   2032  783   7   1,252 
 
   10   53   0   4   72   9   5   153 
 
                           116   116 
 
   5,595   5,281   2,914   1,828   15,844   1,320   310   33,092 
 
                                 
   5,233   581   2,280   1,392   5,929   (1,026)  255   14,644 
 
                                 
                       4   875   879 
 
   5,233   581   2,280   1,392   5,929   (1,022)  1,130   15,523 
 
                               2,785 
 
                               (12)
 
                               12,750 
 
                                 
 
   286,241   63,249   211,123   48,616   2,058,679   (323,434)  1,888   2,346,362 
 
   281,327   57,681   205,747   46,589   2,038,991   (343,152)  3,404   2,290,587 
 
   257   273   14   498   593   1,385   97   3,117 
 
                                 
 
   10,827   5,863   5,085   3,220   21,726   294   565   47,580 
 
   (29)  0   185   0   61   (61)  0   156 
 
   10,798   5,863   5,270   3,220   21,787   233   565   47,736 
 
   3,137   3,800   2,412   1,503   11,353   1,264   122   23,591 
 
   885   1,073   1,070   399   3,260   1,242   51   7,980 
 
   1,479   281   (642)  (105)  956   (1,978)  9   0 
 
   84   74   74   27   2032  783   7   1,252 
 
   10   53   0   4   72   9   5   153 
 
                           116   116 
 
   5,595   5,281   2,914   1,828   15,844   1,320   310   33,092 
 
                                 
   5,203   582   2,356   1,392   5,943   (1,087)  255   14,644 
 
                                 
                       4   875   879 
 
   5,203   582   2,356   1,392   5,943   (1,083)  1,130   15,523 
 
                               2,785 
 
                               (12)
 
                               12,750 
 
                                 
     UBS   
  Global Wealth Management &  Global Asset  Investment     
  Business Banking  Management  Bank  Corporate Center   
  Wealth Management  Wealth             
  International &  Management  Business Banking          
 Switzerland US Switzerland        Corporate Center  Industrial Holdings  
 
   10,827   5,863   5,085   3,220   21,726   294   313   47,328 
 
   1   (1)  109   0   47   0   0   156 
 
   10,828   5,862   5,194   3,220   21,773   294   313   47,484 
 
   3,173   3,839   2,439   1,575   11,686   1,273   46   24,031 
 
   885   1,073   1,120   399   3,210   1,242   13   7,942 
 
   1,479   281   (720)  (105)  1,034   (1,978)  9   0 
 
   84   74   74   27   2032  783   (1)  1,244 
 
   10   53   0   4   72   9   0   148 
 
   5,631   5,320   2,913   1,900   16,205   1,329   67   33,365 
 
   5,197   542   2,281   1,320   5,568   (1,035)  246   14,119 
 
                       4   884   888 
 
   5,197   542   2,281   1,320   5,568   (1,031)  1,130   15,007 
 
                               2,998 
 
                               (11)
 
                               12,020 
 
                                 
 
   286,334   63,260   211,837   48,616   2,059,019   (322,221)  1,888   2,348,733 
 
   281,328   58,007   205,749   46,672   2,039,225   (342,778)  3,404   2,291,607 
 
   257   273   14   498   593   1,385   97   3,117 
 
1 Impairments of financial investments available-for-sale for the year ended 31 December 2006 were as follows: Global Wealth Management & Business Banking CHF 8 million; Global Asset Management CHF 1 million; Investment Bank CHF 5 million; Corporate Center CHF (2) million and Industrial Holdings CHF 23 million.  2 Includes a CHF 34 million software impairment.  3   For further information regarding goodwill and intangible assets by Business Group, please see Note 16: Goodwill and Intangible Assets.  4 The funding surplus or requirement is reflected in each Business Groupbusiness division and adjusted in Corporate Center.

45

Financial Statements
Notes to the Financial Statements

Note 2a Reporting by Business Group (continued)

For the year ended 31 December 2005

 

CHF million

287


Internal charges and transfer pricing adjustments are reflected in the performance of each business. Revenue-sharing agreements are used to allocate external customer revenues to a Business Group on a reasonable basis. Transactions between Business Groups are conducted at internally agreed transfer prices or at arm’s length.

Income1
Credit loss (expense) / recovery
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets2
Goods and materials purchased
Total operating expenses
Business Group performance from continuing operations before tax
Business Group performance from discontinued operations before tax
Business Group performance before tax
Tax expense on continuing operations
Tax expense on discontinued operations
Net profit
Additional information3
Total assets
Total liabilities
Capital expenditure

Management reporting based on expected credit loss

For internal management reporting purposes, credit loss is measured using an expected loss concept. This table shows Business Group performance consistent with the way in which the businesses are managed and the way Business Group performance is measured. Expected credit loss reflects the average annual costs that are expected to arise from positions in the current portfolio that become impaired. The adjusted expected credit loss reported for each Business Group is the expected credit loss on its portfolio plus the difference between credit loss expense and expected credit loss, amortized over a three-year period. The difference between these adjusted expected credit loss figures and the credit loss expense recorded at Group level for reporting purposes is reported in Corporate Functions as adjusted expected credit loss.
Income1
Adjusted expected credit loss
Total operating income
Personnel expenses
General and administrative expenses
Services (to) / from other business units
Depreciation of property and equipment
Amortization of intangible assets2
Goods and materials purchased
Total operating expenses
Business Group performance from continuing operations before tax
Business Group performance from discontinued operations before tax
Business Group performance before tax
Tax expense on continuing operations
Tax expense on discontinued operations
Net profit

46

                                     
  
                              Industrial    
  Financial Businesses  Holdings  UBS 
  Global Wealth Management &  Global Asset  Investment  Corporate       
  Business Banking  Management  Bank  Center       
  Wealth Management  Wealth                      
  International &  Management  Business Banking        Private Banks  Corporate       
  Switzerland  US  Switzerland        & GAM  Functions       
 
   9,024   5,158   4,949   2,487   17,448       455   795   40,316 
 
   (8)  0   231   0   152       0   0   375 
 
   9,016   5,158   5,180   2,487   17,600       455   795   40,691 
 
   2,579   3,460   2,450   988   9,259       1,167   164   20,067 
 
   804   1,047   994   304   2,215       1,084   56   6,504 
 
   1,371   223   (634)  116   640       (1,730)  14   0 
 
   89   65   72   21   136       857   7   1,247 
 
   7   49   0   1   53       17   6   133 
 
                               97   97 
 
   4,850   4,844   2,882   1,430   12,303       1,395   344   28,048 
 
   4,166   314   2,298   1,057   5,297       (940)  451   12,643 
 
                                     
                       4,556   8   530   5,094
 
   4,166   314   2,298   1,057   5,297   4,556   (932)  981   17,737 
 
                                   2,465 
 
                                   582 
 
                                   14,690 
 
                                     
 
   223,790   64,896   176,837   40,782   1,706,670       (226,069)  11,549   1,998,455 
 
   219,140   59,567   170,668   39,191   1,689,041       (242,600)  11,814   1,946,821 
 
   81   84   58   16   138   25   1,264   299   1,965 
 
                                     
   9,024   5,158   4,949   2,487   17,448       455   795   40,316 
 
   (13)  (2)  122   0   36       232   0   375 
 
   9,011   5,156   5,071   2,487   17,484       687   795   40,691 
 
   2,579   3,460   2,450   988   9,259       1,167   164   20,067 
 
   804   1,047   994   304   2,215       1,084   56   6,504 
 
   1,371   223   (634)  116   640       (1,730)  14   0 
 
   89   65   72   21   136       857   7   1,247 
 
   7   49   0   1   53       17   6   133 
 
                               97   97 
 
   4,850   4,844   2,882   1,430   12,303       1,395   344   28,048 
 
                                     
   4,161   312   2,189   1,057   5,181       (708)  451   12,643 
 
                                     
                       4,508   56   530   5,094 
 
   4,161   312   2,189   1,057   5,181   4,508   (652)  981   17,737 
 
                                   2,465 
 
                                   582 
 
                                   14,690 
 
1 Impairments of financial investments available-for-sale for the year ended 31 December 2005 were as follows: Global Wealth Management & Business Banking CHF 10 million; Global Asset Management CHF 0 million; Investment Bank CHF 0 million; Corporate Center CHF 16 million and Industrial Holdings CHF 81 million.  2 For further information regarding goodwill and intangible assets by Business Group, please see Note 16: Goodwill and Intangible Assets.  3 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center.

47

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Note 2b Segment Reportingreporting by Geographic Location

geographic location

The geographic analysis of total assets is based on customer domicile, whereas operating income and capital expenditure are based on the location of the office in which the transactions and assets are recorded. Because of the global nature of financial markets, the Group’s business is managed on an integrated basis worldwide, with a view to profitability by

product line. The geographical analysis of operating income, total assets and capital expenditure is provided in order to comply with IFRS and does not reflect the way the Group is managed. Management believes that analysis by Business Group,business division, as shown in Note 2a, is a more meaningful representation of the way in which the Group is managed.



                                     
For the year ended 31 December 2007 
 
For the year ended 31 December 2008For the year ended 31 December 2008 
 Total operating income Total assets Capital expenditure 
 Total operating income Total assets Capital expenditure  CHF million Share % CHF million Share % CHF million Share % 
 CHF million Share % CHF million Share % CHF million Share % 
Switzerland 18,787 59 222,539 10 436 20  11,564 963 230,554 11 556 43 
Rest of Europe / Middle East / Africa 1,042 3 776,882 34 380 18 
United Kingdom  (8,814)  (734) 466,600 23 71 5 
Americas 5,758 18 1,015,167 45 1,004 47 
Rest of Europe 6,132 511 341,107 17 138 11 
United States  (10,519)  (876) 637,302 32 407 31 
Asia Pacific 6,393 20 257,991 11 318 15  3,122 260 201,743 10 105 8 
Rest of the world  (284)  (24) 137,792 7 32 2 
Total
 31,980 100 2,272,579 100 2,138 100  1,201 100 2,015,098 100 1,309 100 
                                     
For the year ended 31 December 2006 
For the year ended 31 December 2007For the year ended 31 December 2007 
 Total operating income Total assets Capital expenditure  Total operating income Total assets Capital expenditure 
 CHF million Share % CHF million Share % CHF million Share %  CHF million Share % CHF million Share % CHF million Share % 
Switzerland 12,964 27 211,565 9 650 21  18,787 59 224,679 10 436 20 
Rest of Europe / Middle East / Africa 12,512 26 699,516 30 385 12 
United Kingdom  (1,671)  (5) 404,506 18 261 12 
Americas 17,272 36 1,229,254 52 1,754 56 
Rest of Europe 2,541 8 358,504 16 117 5 
United States 880 3 822,825 36 923 44 
Asia Pacific 4,988 11 206,027 9 328 11  6,393 20 257,991 11 318 15 
Rest of the world 4,791 15 206,386 9 83 4 
Total
 47,736 100 2,346,362 100 3,117 100  31,721 100 2,274,891 100 2,138 100 
                                     
For the year ended 31 December 2005 
For the year ended 31 December 2006For the year ended 31 December 2006 
 Total operating income Total assets Capital expenditure  Total operating income Total assets Capital expenditure 
 CHF million Share % CHF million Share % CHF million Share %  CHF million Share % CHF million Share % CHF million Share % 
Switzerland 13,798 34 203,907 10 973 49  12,964 27 213,689 9 650 21 
Rest of Europe / Middle East / Africa 8,976 22 628,070 32 467 24 
United Kingdom 6,863 14 373,219 16 314 10 
Americas 14,284 35 1,004,230 50 386 20 
Rest of Europe 5,553 12 314,642 13 70 2 
United States 15,295 32 1,066,647 46 723 23 
Asia Pacific 3,633 9 162,248 8 139 7  4,988 11 206,027 9 328 11 
Rest of the world 1,821 4 174,509 7 1,032 33 
Total
 40,691 100 1,998,455 100 1,965 100  47,484 100 2,348,733 100 3,117 100 

48

288

Financial information

Income Statementstatement notes

Note 3 Net Interestinterest and Trading Income

trading income

Accounting standards require separate disclosure of net interest income and net trading income (see the tables on this and the next page). This required disclosure, however, does not take into account that net interest and trading income are generated by a range of different businesses. In many cases, a particular business can generate both net interest and trading income. Fixed income trading activity, for example, generates both trading profits and coupon income. UBS management therefore analyzes net interest and trading income according to the businesses that drive it. The sec-

it. The secondond table below (labeled Breakdown by businesses) provides information that corresponds to this management view. Net income from trading businesses includes both interest and trading income generated by the Group’s trading businesses and the Investment Bank’s lending activities. Net income from interest margin businesses comprises interest income from the Group’s loan portfolio. Net income from treasury and other activities reflects all income from the Group’s centralized treasury function.



                
 For the year ended % change from     
CHF million 31.12.08 31.12.07 31.12.06 31.12.07 
          
Net interest and trading incomeNet interest and trading income  
 For the year ended % change from 
CHF million 31.12.07 31.12.06 31.12.05 31.12.06 
Net interest income 5,337 6,521 9,528  (18) 6,203 5,337 6,521 16 
Net trading income  (8,353) 13,743 8,248   (25,818)  (8,353) 13,743  (209)
Total net interest and trading income
  (3,016) 20,264 17,776   (19,615)  (3,016) 20,264  (550)
 
Breakdown by businesses
 
Net income from trading businesses1
  (26,883)  (10,658) 13,730  (152)
Net income from interest margin businesses 6,160 6,230 5,718  (1)
Net income from treasury activities and other 1,107 1,412 816  (22)
Total net interest and trading income
  (19,615)  (3,016) 20,264  (550)
 
Net interest income2
 
Interest income
 
Interest earned on loans and advances3
 20,424 21,263 15,266  (4)
Interest earned on securities borrowed and reverse repurchase agreements 22,521 48,274 39,771  (53)
Interest and dividend income from trading portfolio 22,397 39,101 32,211  (43)
Interest income on financial assets designated at fair value 404 298 25 36 
Interest and dividend income from financial investments available-for-sale 145 176 128  (18)
Total
 65,890 109,112 87,401  (40)
Interest expense
 
Interest on amounts due to banks and customers 18,150 29,318 20,024  (38)
Interest on securities lent and repurchase agreements 16,123 40,581 34,021  (60)
Interest and dividend expense from trading portfolio 9,162 15,812 14,533  (42)
Interest on financial liabilities designated at fair value 7,298 7,659 4,757  (5)
Interest on debt issued 8,954 10,405 7,545  (14)
Total
 59,687 103,775 80,880  (42)
Net interest income
 6,203 5,337 6,521 16 
                 
Breakdown by businesses 
  For the year ended  % change from 
CHF million 31.12.07  31.12.06  31.12.05  31.12.06 
 
Net income from trading businesses1
  (10,658)  13,730   11,795     
 
Net income from interest margin businesses
  6,230   5,718   5,292   9 
 
Net income from treasury activities and other
  1,412   816   689   73 
 
Total net interest and trading income
  (3,016)  20,264   17,776     
 
1 Includes lending activities of the Investment Bank.
                 
Net interest income1 
  For the year ended  % change from 
CHF million 31.12.07  31.12.06  31.12.05  31.12.06 
 
Interest income
                
 
Interest earned on loans and advances2
  21,263   15,266   11,678   39 
 
Interest earned on securities borrowed and reverse repurchase agreements  48,274   39,771   23,362   21 
 
Interest and dividend income from trading portfolio  39,101   32,211   24,134   21 
 
Interest income on financial assets designated at fair value  298   25   26     
 
Interest and dividend income from financial investments available-for-sale  176   128   86   38 
 
Total
  109,112   87,401   59,286   25 
 
Interest expense
                
 
Interest on amounts due to banks and customers  29,318   20,024   11,226   46 
 
Interest on securities lent and repurchase agreements  40,581   34,021   20,480   19 
 
Interest and dividend expense from trading portfolio  15,812   14,533   10,736   9 
 
Interest on financial liabilities designated at fair value  7,659   4,757   2,390   61 
 
Interest on debt issued  10,405   7,545   4,926   38 
 
Total
  103,775   80,880   49,758   28 
 
Net interest income
  5,337   6,521   9,528   (18)
 
12 Interest includes forward points on foreign exchange swaps used to manage short-term interest rate risk on foreign currency loans and deposits.  23 Includes interest income on impaired loans and advances of CHF 99 million for 2008, CHF 110 million for 2007 and CHF 158 million for 2006 and CHF 123 million for 2005.2006.

49289

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Note 3 Net interest and trading income (continued)

                         
Note 3 Net Interest and Trading Income (continued) 
Net trading income1Net trading income1 Net trading income1 
 For the year ended % change from  For the year ended % change from  
CHF million 31.12.07 31.12.06 31.12.05 31.12.06  31.12.08 31.12.07 31.12.06 31.12.07 
Equities 9,048 7,064 3,900 28  4,694 9,048 7,064  (48)
Fixed income  (20,949) 2,755 1,240   (37,252)  (20,949) 2,755  (78)
Foreign exchange and other2
 3,548 3,924 3,108  (10) 6,739 3,548 3,924 90 
Net trading income
  (8,353) 13,743 8,248   (25,818)  (8,353) 13,743  (209)
thereof net gains / (losses) from financial assets designated at fair value
  (30)  (397) 70 
thereof net gains/(losses) from financial assets designated at fair value
  (974)  (30)  (397) 
thereof net gains / (losses) from financial liabilities designated at fair value
  (3,779)  (3,659)  (4,024) 
thereof net gains/(losses) from financial liabilities designated at fair value3
 44,284  (3,779)  (3,659) 
thereof net gains/(losses) from own credit changes of financial liabilities designated at fair value4
 3,993 659 0 506 
1 Please refer Refer to the table “Net Interestinterest and Trading Income”trading income” on the previous page for the Net income from trading businesses (for an explanation, read the corresponding introductory comment).  2 Includes cash & collateral trading from money markets, currencies and commodities.

For the year ended 31 December 2007, the Group recorded a gain of CHF 659 million in Net trading income from changes in the fair value of financial3 Financial liabilities designated at fair value attributableare to changes in the Group’s own credit risk. The change applies to those financial liabilities designated at fair value where the Group’s own credit risk would be con-

sidered by market participants and excludes fully collateralized transactionsa large extent economically hedged with derivatives and other instruments for which itwhose change in fair value is established market practice notalso reported in Net trading income.  4 Refer to include an entity-specific adjustment for own credit. It was calculated based on a yield curve generated from observed external pricing for funding associated with new senior debt issued by the Group.



         
Positions with significant impact on net trading income1,2 
For the year ended 31 December 2007 USD billion  CHF billion3 
 
US Super Senior RMBS CDO  (9.2)  (10.5)
 
US Residential mortgage-backed securities (RMBS)  (2.6)  (2.9)
 
US Warehouse and retained RMBS CDO  (2.8)  (3.2)
 
US Reference linked notes (RLN)4
  (1.3)  (1.5)
 
US Alt-A, AAA – rated RMBS backed by first lien mortgages  (0.8)  (0.9)
 
US Alt-A residental mortgage instruments, other  (1.2)  (1.4)
 
Credit valuation adjustments for monoline credit protection on US RMBS CDO  (0.8)  (0.9)
 
Total
  (18.7)  (21.3)
 
Note 27.
                 
Significant impacts on net trading income1 
  For the year ended 31.12.08  For the year ended 31.12.07
  USD billion  CHF billion  USD billion  CHF billion 
 
US sub-prime residential mortgage market  (8.1)  (8.2)  (14.6)  (16.6)
 
US Alt-A residential mortgage market  (7.4)  (7.6)  (2.0)  (2.3)
 
US prime residential mortgage market  (1.8)  (1.9)        
 
Credit valuation adjustments for monoline credit protection  (7.6)  (8.2)  (0.8)  (0.9)
 
US commercial mortgage market  (0.3)  (0.4)        
 
US reference linked notes (RLN)  (2.6)  (2.7)  (1.3)  (1.5)
 
Leveraged finance  (1.2)  (1.3)        
 
US student loans  (1.6)  (1.6)        
 
Subtotal
  (30.6)  (31.9)  (18.7)2  (21.3)2
 
Mandatory convertible notes3
      4.6         
 
SNB transaction4
      (5.2)        
 
Total
      (32.6)      (21.3)
 
1 Includes only the main The positions reflected in the audited section “Risk concentrations” inRisk, Treasury and Capital Management 2007.  2 The losses of CHF 21.3 billion disclosed in this table are reflected in Net trading income of CHF (8,353) millionas shown in the table above. Includes mainly positions (previously) considered risk concentrations (refer to the section “Risk management and control”). Certain positions have been reclassified from “held for the year ended 31 December 2007.  3 The exchange rate represents the average rate fortrading” to “loans and receivables” in fourth quarter 2007 (1 USD = 1.14 CHF) ..  2008. Refer to Note 29. The profit or loss after reclassification resulting from these positions is included in net interest income and, if applicable, credit loss (expense) / recovery.  2 Includes only positions disclosed in the Annual Report 2007.  3 Refer to Note 26.  4 Includes US residential sub-prime and Alt-A mortgage components of the RLN program. Refer to Note 38.

50

290

Financial information
                         
Note 4 Net Fee and Commission Income 
Note 4 Net fee and commission incomeNote 4 Net fee and commission income 
 For the year ended % change from  For the year ended % change from 
CHF million 31.12.07 31.12.06 31.12.05 31.12.06  31.12.08 31.12.07 31.12.06 31.12.07 
Equity underwriting fees 2,564 1,834 1,341 40  1,138 2,564 1,834  (56)
Debt underwriting fees 1,178 1,279 1,264  (8) 818 1,178 1,279  (31)
Total underwriting fees 3,742 3,113 2,605 20  1,957 3,742 3,113  (48)
M & A and corporate finance fees 2,768 1,852 1,460 49 
M&A and corporate finance fees 1,662 2,768 1,852  (40)
Brokerage fees 10,281 8,053 6,718 28  8,355 10,281 8,053  (19)
Investment fund fees 7,422 5,858 4,750 27  5,583 7,422 5,858  (25)
Fiduciary fees 297 252 212 18  301 297 252 1 
Custodian fees 1,367 1,266 1,176 8  1,198 1,367 1,266  (12)
Portfolio and other management and advisory fees 7,790 6,622 5,310 18  6,169 7,790 6,622  (21)
Insurance-related and other fees 423 449 372  (6) 317 423 449  (25)
Total securities trading and investment activity fees 34,090 27,465 22,603 24  25,540 34,090 27,465  (25)
Credit-related fees and commissions 279 269 306 4  273 279 269  (2)
Commission income from other services 1,017 1,064 1,027  (4) 1,010 1,017 1,064  (1)
Total fee and commission income 35,386 28,798 23,936 23  26,823 35,386 28,798  (24)
Brokerage fees paid 2,610 1,904 1,631 37  1,909 2,610 1,904  (27)
Other 2,142 1,438 1,121 49  1,984 2,142 1,438  (7)
Total fee and commission expense 4,752 3,342 2,752 42  3,894 4,752 3,342  (18)
Net fee and commission income
 30,634 25,456 21,184 20  22,929 30,634 25,456  (25)
                 
Note 5 Other income 
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Associates and subsidiaries
                
 
Net gains from disposals of consolidated subsidiaries  8   (70)  (11)    
 
Net gains from disposals of investments in associates  1991  28   21   611 
 
Share of net profits of associates  (6)  145   106     
 
Total
  201   103   116   95 
 
Financial investments available-for-sale
                
 
Net gains from disposals  6151  3,3382  921   (82)
 
Impairment charges  (202)  (71)  (12)  (185)
 
Total
  413   3,267   909   (87)
 
Net income from investments in property3
  88   108   61   (19)
 
Net gains from investment properties4
  0   31   5   (100)
 
Other income from Industrial Holdings  0   689   313   (100)
 
Other  183   143   204   28 
 
Total other income
  884   4,341   1,608   (80)
 
                 
Note 5 Other Income 
  For the year ended  % change from 
CHF million 31.12.07  31.12.06  31.12.05  31.12.06 
 
Associates and subsidiaries
                
 
Net gains from disposals of consolidated subsidiaries  (70)  (11)  1   (536)
 
Net gains from disposals of investments in associates  28   21   26   33 
 
Equity in income of associates  145   106   57   37 
 
Total
  103   116   84   (11)
 
Financial investments available-for-sale
                
 
Net gains from disposals  3,338   921   231   262 
 
Impairment charges  (71)  (12)  (26)  (492)
 
Total
  3,267   909   205   259 
 
Net income from investments in property1
  108   61   42   77 
 
Net gains from investment properties2
  31   5   12   520 
 
Other  143   204   218   (30)
 
Total other income from Financial Businesses
  3,652   1,295   561   182 
 
Other income from industrial holdings  680   303   566   124 
 
Total other income
  4,332   1,598   1,127   171 
 
1 Refer to Note 38 for details.   2 Includes a pre-tax gain of CHF 1,950 million from UBS’s sale of its 20.7% stake in Julius Baer.  3 Includes net rent received from third parties and net operating expenses.  24 Includes unrealized and realized gains from investment properties at fair value.

Additional information about Net gains from disposals on Financial investments available-for-sale
In late June 2007, UBS disposed of its 20.7% stake in Julius Baer for a total consideration of CHF 3,951 million. UBS received the Julius Baer shares as part of the consideration in connection with the sale of Private Banks & GAM to Julius Baer in December 2005. UBS had agreed to certain lock-up obligations which expired on 25 May 2007. The

291

interest in Julius Baer was accounted for as a Financial investment available-for-sale, and the sale resulted in a realized gain, which was previously deferred in Equity, of CHF 1,950 million pre-tax in 2007. On a post-tax basis, the gain on sale was CHF 1,926 million.

In addition, UBS recorded a pre-tax gain of CHF 634 million from the demutualization of Bovespa (the Brazilian stock exchange) and the Brazilian Mercantile & Futures Exchange.



51

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

                 
Note 6 Personnel expenses 
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Salaries and bonuses  12,207   20,715   19,441   (41)
 
Contractors  423   630   822   (33)
 
Insurance and social security contributions  706   1,290   1,398   (45)
 
Contribution to retirement plans  926   922   802   0 
 
Other personnel expenses  2,000   1,958   1,568   2 
 
Total personnel expenses
  16,262   25,515   24,031   (36)
 
                 
Note 6 Personnel Expenses 
  For the year ended  % change from 
CHF million 31.12.07  31.12.06  31.12.05  31.12.06 
 
Salaries and bonuses  20,057   19,011   15,867   6 
 
Contractors  630   822   823   (23)
 
Insurance and social security contributions  1,221   1,376   1,257   (11)
 
Contribution to retirement plans  922   802   712   15 
 
Other personnel expenses  1,968   1,580   1,408   25 
 
Total personnel expenses
  24,798   23,591   20,067   5 
 
                 
Note 7 General and administrative expenses 
  For the year ended  % change from
CHF million 31.12.08  31.12.07  31.12.06  31.12.07 
 
Occupancy  1,516   1,569   1,415   (3)
 
Rent and maintenance of IT and other equipment  669   701   648   (5)
 
Telecommunications and postage  888   948   906   (6)
 
Administration  926   991   781   (7)
 
Marketing and public relations  408   585   601   (30)
 
Travel and entertainment  728   1,029   934   (29)
 
Professional fees  1,085   1,106   919   (2)
 
Outsourcing of IT and other services  1,029   1,233   1,090   (17)
 
Other  3,2491  267   648     
 
Total general and administrative expenses
  10,498   8,429   7,942   25 
 
                 
Note 7 General and Administrative Expenses 
  For the year ended  % change from 
CHF million 31.12.07  31.12.06  31.12.05  31.12.06 
 
Occupancy  1,583   1,429   1,271   11 
 
Rent and maintenance of IT and other equipment  702   650   601   8 
 
Telecommunications and postage  950   907   839   5 
 
Administration  1,002   794   716   26 
 
Marketing and public relations  587   603   517   (3)
 
Travel and entertainment  1,032   937   731   10 
 
Professional fees  1,108   922   622   20 
 
Outsourcing of IT and other services  1,234   1,090   869   13 
 
Other  267   648   338   (59)
 
Total general and administrative expenses
  8,465   7,980   6,504   6 
 
1 Included in the year ended 31 December 2008 is an amount of CHF 1,464 million for the expected costs associated with the repurchase of auction rate securities from clients and CHF 917 million in connection with UBS’s US cross-border case. Refer to Note 21 “Provisions and litigation” and Note 23 “Derivative instruments and hedge accounting”.

52

292

Financial information
                         
Note 8 Earnings per Share (EPS) and Shares Outstanding 
 For the year ended % change from 
Note 8 Earnings per share (EPS) and shares outstandingNote 8 Earnings per share (EPS) and shares outstanding 
 31.12.07 31.12.06 31.12.05 31.12.06  For the year ended % change from 
 31.12.08 31.12.07 31.12.06 31.12.07 
 
Basic earnings (CHF million)
  
Net profit attributable to UBS shareholders
  (4,384) 12,257 14,029   (20,887)  (5,247) 11,527  (298)
from continuing operations  (4,785) 11,469 9,748   (21,037)  (5,650) 10,731  (272)
from discontinued operations 401 788 4,281  (49) 150 403 796  (63)
  
Diluted earnings (CHF million)
  
Net profit attributable to UBS shareholders  (4,384) 12,257 14,029   (20,887)  (5,247) 11,527  (298)
Less: (Profit) / loss on equity derivative contracts  (16)  (8)  (22)  (100)
Less: (profit) / loss on equity derivative contracts  (28)  (16)  (8)  (75)
Net profit attributable to UBS shareholders for diluted EPS  (4,400) 12,249 14,007   (20,915)  (5,263) 11,519  (297)
from continuing operations  (4,801) 11,461 9,749   (21,065)  (5,666) 10,723  (272)
from discontinued operations 401 788 4,258  (49) 150 403 796  (63)
  
Weighted average shares outstanding
  
Weighted average shares outstanding1
 1,926,328,078 1,976,405,800 2,013,987,754  (3)
Weighted average shares outstanding 2,769,575,922 2,165,301,597 2,221,591,786 28 
Potentially dilutive ordinary shares resulting from unvested exchangeable shares, options and warrants outstanding2
 1,370,654 82,429,012 83,203,786  (98)
Potentially dilutive ordinary shares resulting from unvested exchangeable shares, options and warrants outstanding1
 1,151,556  1,467,3262  88,242,7302  (22)
Weighted average shares outstanding for diluted EPS 1,927,698,732 2,058,834,812 2,097,191,540  (6) 2,770,727,478 2,166,768,923 2,309,834,516 28 
  
Earnings per share (CHF)
  
Basic  (2.28) 6.20 6.97   (7.54)  (2.42) 5.19  (212)
from continuing operations  (2.49) 5.80 4.84   (7.60)  (2.61) 4.83  (191)
from discontinued operations 0.21 0.40 2.13  (48) 0.05 0.19 0.36  (74)
Diluted  (2.28) 5.95 6.68   (7.55)  (2.43) 4.99  (211)
from continuing operations  (2.49) 5.57 4.65   (7.60)  (2.61) 4.64  (191)
from discontinued operations 0.21 0.38 2.03  (45) 0.05 0.19 0.34  (74)
                 
  As of  % change from 
  31.12.08  31.12.07  31.12.06  31.12.07 
 
Shares outstanding
                
 
Total ordinary shares issued  2,932,580,549   2,073,547,344   2,105,273,286   41 
 
Second trading line treasury shares                
 
2006 program          22,600,000     
 
Other treasury shares  61,903,121   158,105,524   141,875,699   (61)
 
Total treasury shares  61,903,121   158,105,524   164,475,699   (61)
 
Shares outstanding  2,870,677,428   1,915,441,820   1,940,797,587   50 
 
Retrospective adjustments for stock dividend3
      95,772,091   97,039,879     
 
Retrospective adjustments for rights issue2
      141,850,917   143,728,676     
 
Mandatory convertible notes and exchangeable shares4
  600,557,453   518,711   139,561     
 
Shares outstanding for EPS  3,471,234,881   2,153,583,539   2,181,705,703   61 
 
1 Includes an average of 490,118 and 143,809 exchangeable shares for the years ended 31 December 2007 and 31 December 2006, respectively, that can be exchanged into the same number of UBS shares.  2 Due to the net loss in 2007, 50,132,221UBS’s losses, 28 million and 54 million potential ordinary shares from unexercised employee shares and in-the-money options are not considered as they have an anti-dilutive effect for the yearyears ended 31 December 2008 and 31 December 2007. Total equivalent shares outstanding on out-of-the-money options that were not dilutive for the respective periods but could potentially dilute earnings per share in the future were 283,263,330; 119,309,645; 37,229,136; and 29,117,75037,229,136 for the years ended 31 December 2008, 31 December 2007 and 31 December 2006 respectively. An additional 100 million ordinary shares related to the SNB transaction were not dilutive for the year ended 31 December 2008 but could potentially dilute earnings per share in the future.  2 Shares outstanding and potentially dilutive ordinary shares are increased by 7.053% due to the rights issue.  3 Shares outstanding are increased by 5% to reflect the 1:20 ratio of the stock dividend.  4 31 December 2008 includes 329,447,681 shares for the mandatory convertible notes issued to the Swiss Confederation in December 2008 and 270,438,942 shares for the mandatory convertible notes issued to two investors in March 2008, adjusted for the dilution effect of the rights issue; remaining amounts related to exchangeable shares (31 December 2007 and 31 December 2005, respectively.
                 
Shares outstanding 
  As of  % change from 
  31.12.07  31.12.06  31.12.05  31.12.06 
 
Total ordinary shares issued  2,073,547,344   2,105,273,286   2,177,265,044   (2)
 
Second trading line treasury shares                
 
2005 program          67,770,000     
 
2006 program      22,600,000         
 
Other treasury shares  158,105,524   141,875,699   140,749,748   11 
 
Total treasury shares  158,105,524   164,475,699   208,519,748   (4)
 
Shares outstanding  1,915,441,820   1,940,797,587   1,968,745,296   (1)
 
2006 have been adjusted for the stock dividend and rights issue).

53293

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Balance Sheet: Assetssheet notes: assets

         
Note 9a Due from Banks and Loans (Held at Amortized Cost) 

By type of exposure		 
CHF million 31.12.07  31.12.06 
 
Banks1
  60,935   50,456 
 
Allowance for credit losses  (28)  (30)
 
Net due from banks  60,907   50,426 
 
Loans1
        
 
Residential mortgages  122,435   124,548 
 
Commercial mortgages  21,058   19,989 
 
Other loans  193,374   154,531 
 
Subtotal  336,867   299,068 
 
Allowance for credit losses  (1,003)  (1,226)
 
Net loans  335,864   297,842 
 
Net due from banks and loans (held at amortized cost)
  396,771   348,268 
 

1 IncludesNote 9a Due from banks and loans from industrial holdings in the amount(held at amortized cost)

         
By type of exposure 
CHF million 31.12.08  31.12.07 
 
Banks  64,473   60,935 
 
Allowance for credit losses  (22)  (28)
 
Net due from banks  64,451   60,907 
 
Loans        
 
Residential mortgages  121,811   122,435 
 
Commercial mortgages  21,270   21,058 
 
Other loans  170,099   193,374 
 
Debt instruments traditionally not classified as loans and receivables1
  30,033   – 
 
Subtotal  343,213   336,867 
 
Allowance for credit losses  (2,905)  (1,003)
 
of which: Debt instruments traditionally not classified as loans and receivables
  (1,329)  – 
 
Net loans  340,308   335,864 
 
Net due from banks and loans (held at amortized cost)
  404,759   396,771 
 
         
By geographical region (based on the location of the borrower)
        
 
Switzerland  166,798   166,435 
 
United Kingdom  30,540   29,796 
 
Rest of Europe  47,724   43,966 
 
United States  105,907   70,962 
 
Asia Pacific  23,279   27,843 
 
Rest of the world  38,590   62,916 
 
Subtotal  412,838   401,918 
 
Allowance for credit losses  (2,927)  (1,031)
 
Net due from banks, loans (held at amortized cost) and loans designated at fair value2
  409,911   400,887 
 
         
By type of collateral
        
 
Secured by real estate  145,491   145,927 
 
Collateralized by securities  56,312   96,306 
 
Guarantees and other collateral  124,543   79,936 
 
Unsecured  86,492   79,749 
 
Subtotal  412,838   401,918 
 
Allowance for credit losses  (2,927)  (1,031)
 
Net due from banks, loans (held at amortized cost) and loans designated at fair value2
  409,911   400,887 
 
1 Includes student loan auction rate securities (ARS) of CHF 278.4 billion and other debt instruments of CHF 17.1 billion (before impairment) reclassified from the category “held for trading” to “loans and receivables” and ARS acquired from clients of CHF 4.5 billion.  2 Includes loans designated at fair value of CHF 5,153 million on 31 December 2008 and CHF 934,116 million for 2007 and 2006, respectively.
         
Additional information about due from banks, loans (held at amortized cost)
and loans designated at fair value		 
CHF million 31.12.07  31.12.06 
 
Net due from banks and loans (held at amortized cost)  396,771   348,268 
 
Loans designated at fair value2
  4,116   2,252 
 
Total
  400,887   350,520 
 
2 Equals the sum of Loans and Structured loans in Note 12.
         
By geographical region (based on the location of the borrower) 
CHF million 31.12.07  31.12.06 
 
Switzerland  166,435   163,090 
 
Rest of Europe / Middle East / Africa  79,322   67,584 
 
Americas  128,318   102,768 
 
Asia Pacific  27,843   18,334 
 
Subtotal  401,918   351,776 
 
Allowance for credit losses  (1,031)  (1,256)
 
Net due from banks, loans (held at amortized cost) and loans designated at fair value
  400,887   350,520 
 
         
By type of collateral 
CHF million 31.12.07  31.12.06 
 
Secured by real estate  145,927   146,518 
 
Collateralized by securities  133,912   85,200 
 
Guarantees and other collateral  42,330   27,000 
 
Unsecured  79,749   93,058 
 
Subtotal  401,918   351,776 
 
Allowance for credit losses  (1,031)  (1,256)
 
Net due from banks, loans (held at amortized cost) and loans designated at fair value
  400,887   350,520 
 
on 31 December 2007. For further details refer to “Note 12 Financial Assets Designated at Fair Value”.

54

294

                 
Note 9b Allowances and Provisions for Credit Losses 
      Collective loan       
  Specific allowances  loss allowances       
CHF million and provisions  and provisions  Total 31.12.07  Total 31.12.06 
 
Balance at the beginning of the year  1,294   38   1,332   1,776 
 
Write-offs  (321)  0   (321)  (363)
 
Recoveries  55   0   55   62 
 
Increase / (decrease) in credit loss allowances and provisions  242   (4)  238   (156)
 
Disposals  (131)  0   (131)  0 
 
Foreign currency translation and other adjustments  (9)  0   (9)  13 
 
Balance at the end of the year
  1,130   34   1,164   1,3321
 
1 During 2006, all country provisions were released.
                 
      Collective loan       
  Specific allowances  loss allowances       
CHF million and provisions  and provisions  Total 31.12.07  Total 31.12.06 
 
As a reduction of Due from banks  28   0   28   30 
 
As a reduction of Loans  969   34   1,003   1,226 
 
As a reduction of other balance sheet positions  70   0   70   0 
 
Subtotal  1,067   34   1,101   1,256 
 
Included in Other liabilities related to provisions for contingent claims  63   0   63   76 
 
Total allowances and provisions for credit losses
  1,130   34   1,164   1,332 
 
         
Note 9c Impaired Due from Banks and Loans 
CHF million 31.12.07  31.12.06 
 
Total gross impaired due from banks and loans1
  2,392   2,628 
 
Allowance for impaired due from banks  28   30 
 
Allowance for impaired loans  969   1,188 
 
Total allowances for credit losses related to impaired due from banks and loans  997   1,218 
 
Average total gross impaired due from banks and loans2
  2,483   3,003 
 
1 All impaired due from banks and loans have a specific allowance for credit losses.  2 Average balances are calculated from quarterly data.
         
CHF million 31.12.07  31.12.06 
 
Total gross impaired due from banks and loans  2,392   2,628 
 
Estimated liquidation proceeds of collateral  (1,104)  (1,059)
 
Net impaired due from banks and loans  1,288   1,569 
 
Total allowances for credit losses related to impaired due from banks and loans  997   1,218 
 

55

Financial Statements
Notes to the Financial Statements

Note 9d Non-Performing Due from Banks and Loans

A loan (included in Due from banks or Loans) is classified as non-performing: 1) when the payment of interest, principal or fees is overdue by more than 90 days and there is no firm evidence that it will be made good by later payments or the

liquidation of collateral; or 2) when insolvency proceedings have commenced; or 3) when obligations have been restructured on concessionary terms.



         
CHF million 31.12.07  31.12.06 
 
Total gross non-performing due from banks and loans  1,481   1,918 
 
Total allowances for credit losses related to non-performing due from banks and loans  873   1,112 
 
Average total gross non-performing due from banks and loans1
  1,820   2,135 
 
1 Average balances are calculated from quarterly data.
         
CHF million 31.12.07  31.12.06 
 
Non-performing due from banks and loans at the beginning of the year  1,918   2,363 
 
Net additions / (reductions)  (165)  (157)
 
Write-offs and disposals  (272)  (288)
 
Non-performing due from banks and loans at the end of the year
  1,481   1,918 
 
         
By type of exposure 
CHF million 31.12.07  31.12.06 
 
Banks  26   29 
 
Loans        
 
Secured by real estate  428   561 
 
Other  1,027   1,328 
 
Total loans  1,455   1,889 
 
Total non-performing due from banks and loans
  1,481   1,918 
 
         
By geographical region (based on the location of borrower) 
CHF million 31.12.07  31.12.06 
 
Switzerland  1,349   1,744 
 
Rest of Europe / Middle East / Africa  78   106 
 
Americas  51   62 
 
Asia Pacific  3   6 
 
Total non-performing due from banks and loans
  1,481   1,918 
 
Financial information

                 
Note 9b Allowances and provisions for credit losses 
      Collective loan       
  Specific allowances  loss allowances       
CHF million and provisions  and provisions  Total 31.12.08  Total 31.12.07 
 
Balance at the beginning of the year  1,130   34   1,164   1,332 
 
Write-offs  (868)  0   (868)  (321)
 
Recoveries  44   0   44   55 
 
Increase/(decrease) in credit loss allowances and provisions  3,007   (11)  2,996   238 
 
Disposals  (223)  0   (223)  (131)
 
Foreign currency translation and other adjustments  (43)  0   (43)  (9)
 
Balance at the end of the year
  3,047   23   3,070   1,164 
 
                 
      Collective loan       
  Specific allowances  loss allowances       
CHF million and provisions        and provisions      Total 31.12.08  Total 31.12.07 
 
As a reduction of due from banks  22   0   22   28 
 
As a reduction of loans  2,882   23   2,905   1,003 
 
As a reduction of securities borrowed  112   0   112   70 
 
Subtotal  3,016   23   3,039   1,101 
 
Included in other liabilities related to provisions for contingent claims  31   0   31   63 
 
Total allowances and provisions for credit losses
  3,047   23   3,070   1,164 
 

Note 10 Securities Borrowing, Securities Lending, Repurchaseborrowing, securities lending, repurchase and Reverse Repurchase Agreements

reverse repurchase agreements

The Group enters into collateralized reverse repurchase and repurchase agreements and securities borrowing and securities lending transactions that may result in credit exposure in the event that the counterparty to the transaction is unable to fulfill its contractual obligations. The

Group controls credit

risk associated with these activities by monitoring counterpartycounter-party credit exposure and collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Group when deemed necessary.



                         
Balance sheet assetsBalance sheet assets Balance sheet assets 
 Cash collateral on Reverse repurchase Cash collateral on Reverse repurchase  Cash collateral on Reverse repurchase Cash collateral on Reverse repurchase 
 securities borrowed agreements securities borrowed agreements  securities borrowed agreements securities borrowed agreements 
CHF million 31.12.07 31.12.07 31.12.06 31.12.06  31.12.08 31.12.08 31.12.07 31.12.07 
By counterparty
                 
Banks 48,480 221,575 53,538 209,606   17,523   110,254   48,480   221,575 
Customers 158,583 155,353 298,052 196,228   105,374   114,393   158,583   155,353 
Total
 207,063 376,928 351,590 405,834   122,897   224,648   207,063   376,928 
                 
Balance sheet liabilities 
  Cash collateral on                  Repurchase    Cash collateral on               Repurchase 
      securities lent  agreements    securities lent  agreements 
CHF million 31.12.08  31.12.08  31.12.07  31.12.07 
 
By counterparty
                
 
Banks  12,181   36,088   29,512   139,156 
 
Customers  1,881   66,473   2,109   166,731 
 
Total
  14,063   102,561   31,621   305,887 
 

56295

                 
Note 10 Securities Borrowing, Securities Lending, Repurchase and Reverse Repurchase Agreements (continued) 

Balance sheet liabilities		 
  Cash collateral on  Repurchase  Cash collateral on  Repurchase 
  securities lent  agreements  securities lent  agreements 
CHF million 31.12.07  31.12.07  31.12.06  31.12.06 
 
By counterparty
                
 
Banks  29,512   139,156   44,118   274,910 
 
Customers  2,109   166,731   18,970   270,570 
 
Total
  31,621   305,887   63,088   545,480 
 

Financial information
Notes to the consolidated financial statements

Note 11 Trading Portfolio

portfolio

The Group trades in debt instruments (including money market paper and tradable loans), equity instruments, precious metals, other commodities and derivatives to meet the

financial needs of its customers and to generate revenue.

Refer to Note 23 providesfor derivative instruments. The table below represents a descriptionpure accounting view. It does not reflect hedges and other risk-mitigating factors and the amounts must therefore not be considered risk exposures.



         
CHF million 31.12.08  31.12.07 
 
         
Trading portfolio assets
        
 
Debt instruments
        
 
Government and government agencies        
 
Switzerland  121   437 
 
United States  31,366   86,684 
 
Japan  46,049   51,137 
 
Other  38,160   52,993 
 
Banks        
 
Listed1
  12,450   28,923 
 
Unlisted  10,725   13,594 
 
Corporates        
 
Listed1
  41,690   153,416 
 
Unlisted  44,301   150,768 
 
Total debt instruments
  224,862   537,952 
 
thereof pledged as collateral with central banks
  5,541   3,252 
 
thereof pledged as collateral (excluding central banks)
  56,612   152,704 
 
thereof pledged as collateral and can be repledged or resold by counterparty
  30,903   88,866 
 
Equity instruments
        
 
Listed1
  70,713   181,034 
 
Unlisted  6,545   25,968 
 
Total equity instruments
  77,258   207,002 
 
thereof pledged as collateral
  15,849   26,870 
 
thereof can be repledged or resold by counterparty
  9,312   25,325 
 
Precious metals and other commodities2
  9,934   29,418 
 
Total trading portfolio assets
  312,054   774,372 
 
         
Trading portfolio liabilities
        
 
Debt instruments
        
 
Government and government agencies        
 
Switzerland  129   171 
 
United States  18,914   50,659 
 
Japan  2,344   13,557 
 
Other  12,656   27,335 
 
Banks        
 
Listed1
  4,235   8,806 
 
Unlisted  119   873 
 
Corporates        
 
Listed1
  8,961   15,076 
 
Unlisted  1,984   3,949 
 
Total debt instruments
  49,342   120,426 
 
Equity instruments
  13,089   44,362 
 
Total trading portfolio liabilities
  62,431   164,788 
 
1 Includes financial instruments which are exchanged in representative markets, as defined by Art. 4d of the various classes of derivative instruments.



         
CHF million 31.12.07  31.12.06 
 
         
Trading portfolio assets
        
 
Money market paper
  76,866   86,790 
 
thereof pledged as collateral with central banks
  198   20,053 
 
thereof pledged as collateral (excluding central banks)
  35,604   45,356 
 
thereof pledged as collateral and can be repledged or resold by counterparty
  32,239   38,173 
 
Debt instruments
        
 
Swiss government and government agencies  304   340 
 
US Treasury and government agencies  75,137   114,714 
 
Other government agencies  57,864   71,170 
 
Corporate listed  127,990   214,129 
 
Other – unlisted  152,669   111,001 
 
Total
  413,964   511,354 
 
thereof pledged as collateral
  170,276   244,697 
 
thereof can be repledged or resold by counterparty
  106,747   158,549 
 
Equity instruments
        
 
Listed  181,034   183,731 
 
Unlisted  25,968   27,938 
 
Total
  207,002   211,669 
 
thereof pledged as collateral
  26,870   56,760 
 
thereof can be repledged or resold by counterparty
  25,325   54,756 
 
Traded loans
  47,122   47,630 
 
Precious metals and other commodities1
  29,418   21,071 
 
Total trading portfolio assets
  774,372   878,514 
 
         
Trading portfolio liabilities
        
 
Debt instruments
        
 
Swiss government and government agencies  85   129 
 
US Treasury and government agencies  50,187   81,385 
 
Other government agencies  40,610   58,538 
 
Corporate listed  24,722   21,788 
 
Other – unlisted  4,822   2,101 
 
Total
  120,426   163,941 
 
Equity instruments
  44,362   40,832 
 
Total trading portfolio liabilities
  164,788   204,773 
 
ordinance concerning capital adequacy and risk diversification for banks and securities traders (“Eigenmittelverordnung”, ERV), issued by the Swiss Financial Market Supervisory Authority (FINMA).  12 Other commodities predominantly consist of energy.

57296

Financial Statements
Notes to the Financial Statements

Financial information
             
Note 12 Financial Assets Designated at Fair Value 
Note 12 Financial assets designated at fair valueNote 12 Financial assets designated at fair value 
CHF million 31.12.07 31.12.06  31.12.08 31.12.07 
Loans 3,633 2,104  4,500 3,633 
Structured loans 483 148  653 483 
Reverse repurchase and securities borrowing agreements  
Banks 4,289 2,942  4,321 4,289 
Customers 1,232 307  2,329 1,232 
Other financial assets 2,128 429  1,079 2,128 
Total financial assets designated at fair value
 11,765 5,930  12,882 11,765 

The maximum exposure to credit loss of all items in the above table except for Other financial assets is equal to the fair value (CHF 11,803 million at 31 December 2008 and CHF 9,637 million at 31 December 2007 and CHF 5,501 million at 31 December 2006)2007). Other financial assets are generally comprised of equity investments and are not directly exposed to credit risk. The maximum exposure to

credit loss at 31 December 20072008 and 31 December 20062007 is mitigated by collateral of CHF 5,8306,335 million and CHF 3,7125,830 million, respectively.

The amount by which credit derivatives or similar instruments mitigate the maximum exposure to credit loss of loans and structured loans designated at fair value is as follows:



             
CHF million 31.12.07 31.12.06  31.12.08 31.12.07 
Notional amount of loans and structured loans 4,166 2,348  6,186 4,166 
Credit derivatives related to loans and structured loans – notional amounts1
 3,351 663  4,314 3,351 
Credit derivatives related to loans and structured loans – fair value1
 59 2  547 59 
                       
Additional InformationAdditional Information Additional Information 
 Cumulative from  Cumulative from inception until 
 inception until  For the year ended the year ended
 For the year ended the year ended 
CHF million 31.12.07 31.12.062 31.12.07  31.12.08 31.12.07 31.12.08 31.12.07 
Change in fair value of loans and structured loans designated at fair value, attributable to changes in credit risk3
  (87)  (8)  (98)
Change in fair value of loans and structured loans designated at fair value,
attributable to changes in credit risk2
  (668)  (87)  (659)  (98)
Change in fair value of credit derivatives and similar instruments which mitigate the maximum exposure to credit loss of loans and structured loans designated at fair value3
 58 2 59 
Change in fair value of credit derivatives and similar instruments which mitigate the maximum exposure to credit loss of loans and structured loans designated at fair value2
 486 58 547 59 
1 Credit derivatives and similar instruments include credit default swaps, credit-linkedcredit linked notes, total return swaps, put options, and similar instruments. These are generally used to manage credit risk when UBS has a direct credit exposure to the counterparty, which has not otherwise been collateralized.  2 Also equals the cumulative amount from inception for the year ended 31 December 2006.  3 Current and cumulative changes in the fair value of loans attributable to changes in their credit risk are only calculated for those loans outstanding at the balance sheet date. Current and cumulative changes in the fair value of credit derivatives hedging such loans include all the derivatives which have been used to mitigate credit risk of these loans since designation at fair value. For loans reported under the fair value option, changes in fair value due to changes in the credit standing of the borrower are calculated using counterparty credit information obtained from independent market sources.
         
Note 13 Financial Investments Available-for-Sale 
CHF million 31.12.07  31.12.06 
 
Money market paper
  349   354 
 
Other debt instruments
        
 
Listed  317   260 
 
Unlisted  717   261 
 
Total
  1,034   521 
 
Equity instruments
        
 
Listed  1,865   5,880 
 
Unlisted  1,718   2,182 
 
Total
  3,583   8,062 
 
Total financial investments available-for-sale
  4,966   8,937 
 
Net unrealized gains / (losses) – before tax  1,900   3,723 
 
Net unrealized gains / (losses) – after tax  1,503   2,906 
 

58297

Financial information
Notes to the consolidated financial statements

         
Note 14 Investments in Associates 
CHF million 31.12.07  31.12.06 
 
Carrying amount at the beginning of the year  1,523   2,956 
 
Additions  1,656   542 
 
Disposals  (846)  (2,043)
 
Transfers  (367)  13 
 
Income1
  137   156 
 
Impairments2
  (17)  (27)
 
Dividends paid  (42)  (33)
 
Foreign currency translation  (65)  (41)
 
Carrying amount at the end of the year
  1,979   1,523 
 
         
Note 13 Financial investments available-for-sale 
CHF million 31.12.08  31.12.07 
 
Money market paper
  2,165   349 
 
Other debt instruments
        
 
Listed1
  322   317 
 
Unlisted  1,080   717 
 
Total
  1,402   1,034 
 
Equity instruments
        
 
Listed1
  258   1,865 
 
Unlisted  1,423   1,718 
 
Total
  1,681   3,583 
 
Total financial investments available-for-sale
  5,248   4,966 
 
Net unrealized gains (losses) – before tax  403   1,900 
 
Net unrealized gains (losses) – after tax  349   1,503 
 
1 Income Includes financial instruments which are exchanged in representative markets, as defined by Art. 4d of CHF (8) millionthe ordinance concerning capital adequacy and CHF 50 million is related to industrial holdingsrisk diversification for 2007banks and 2006 respectively, of which CHF 11 million is related to discontinued operations for 2006.  2 Impairments of CHF 17 million and CHF 27 million are related to industrial holdings for 2007 and 2006, respectively.securities traders (“Eigenmittelverordnung”, ERV), issued by the Swiss Financial Market Supervisory Authority (FINMA).
         
Note 14 Investments in associates 
CHF million 31.12.08  31.12.07 
 
Carrying amount at the beginning of the year  1,979   1,523 
 
Additions  807   1,656 
 
Disposals  (1,307)  (846)
 
Transfers  (422)  (367)
 
Income  12   137 
 
Impairments  (18)  (17)
 
Dividends paid  (34)  (42)
 
Foreign currency translation  (125)  (65)
 
Carrying amount at the end of the year
  892   1,979 
 

Significant associated companies of the Group had the following balance sheet and income statement totals on an aggregated basis, not adjusted for the Group’s proportionate interest. SeeRefer to Note 3334 for a list of significant associates.

             
CHF million 31.12.07 31.12.06  31.12.08 31.12.07 
Assets 9,189 27,299  4,272 9,189 
Liabilities 2,524 22,831  3,448 2,524 
Revenues 1,228 1,888  1,211 1,228 
Net profit 321 318  198 321 

298

Financial information

Note 15 Property and equipment

                                                 
Note 15 Property and Equipment 

At historical cost less accumulated depreciation
At historical cost less accumulated depreciation		 At historical cost less accumulated depreciation 
 Other Plant and        Plant and       
 Leasehold IT, software machines manu-        Leasehold IT, software Other manu-       
 Own-used improve- and com- and facturing Projects in      Own-used improve- and com- machines and facturing Projects in     
CHF million properties ments munication equipment equipment progress 31.12.07 31.12.06  properties ments munication equipment equipment progress 31.12.08 31.12.07 
Historical cost
  
Balance at the beginning of the year 9,286 3,210 4,477 893 53 558 18,477 21,670  9,242 3,297 4,604 885 29 666 18,723 18,477 
Additions 90 287 477 205 2 666 1,727 1,793  196 265 334 75 0 311 1,181 1,727 
Additions from acquired companies 0 4 0 2 0 0 6 29  0 1 6 0 0 0 7 6 
Disposals / write-offs1
  (80)  (382)  (317)  (204)  (25) 0  (1,008)  (4,915)  (21)  (138)  (523)  (80)  (31) 0  (792)  (1,008)
Reclassifications  (28) 314 136 31 0  (529)  (76)  (26)  (28) 289 84 53 0  (620)  (222)  (76)
Foreign currency translation  (26)  (136)  (169)  (42)  (1)  (29)  (403)  (74)  (101)  (321)  (419)  (67) 2  (40)  (945)  (403)
Balance at the end of the year 9,242 3,297 4,604 885 29 666 18,723 18,477  9,289 3,393 4,086 867 0 317 17,952 18,723 
Accumulated depreciation
  
Balance at the beginning of the year 4,930 2,096 3,887 623 42 0 11,578 12,275  5,121 1,969 4,022 540 27 0 11,679 11,578 
Depreciation2,3
 231 299 608 110 5 0 1,253 1,325 
Depreciation2
 332 312 497 100 0 0 1,241 1,253 
Disposals / write-offs1
  (28)  (342)  (310)  (174)  (19) 0  (873)  (1,942)  (7)  (88)  (520)  (54)  (28) 0  (697)  (873)
Reclassifications  (10) 0  (4) 0 0 0  (14)  (10)  (160)  (4) 0 0 0 0  (164)  (14)
Foreign currency translation  (2)  (85)  (159)  (19)  (1) 0  (266)  (70)  (14)  (159)  (387)  (40) 2 0  (598)  (266)
Balance at the end of the year 5,121 1,968 4,022 540 27 0 11,678 11,578  5,272 2,031 3,612 546 0 0 11,461 11,678 
Net book value at the end of the year4
 4,121 1,329 582 345 2 666 7,045 6,899 
Net book value at the end of the year3
 4,017 1,362 475 321 0 317 6,491 7,045 
1 Includes write-offs of fully depreciated assets.  2 Depreciation expense of CHF 2 million and CHF 73 million is related to discontinued operations for 2007 and 2006, respectively.  3 In 2007,2008, amounts include CHF 30103 million inimpairments of own-used property, CHF 13 million impairments of leasehold improvements, CHF 1 million impairments of IT, software and communication and CHF 414 million in impairments of other machines and equipment.  The 2006 amount includes a CHF 34 million software impairment.  43 Fire insurance value of property and equipment is CHF 14,68914,166 million (2006:(2007: CHF 13,59614,689 million).
         
Investment properties at fair value 
CHF million 31.12.08  31.12.07 
 
Balance at the beginning of the year  189   14 
 
Additions  37   182 
 
Sales  0   0 
 
Revaluations  (6)  7 
 
Foreign currency translation  (5)  (14)
 
Balance at the end of the year
  215   189 
 

59299

Financial Statementsinformation
Notes to the Financial Statements

         
Note 15 Property and Equipment (continued) 

At fair value		 
CHF million 31.12.07  31.12.06 
 
Balance at the beginning of the year  14   28 
 
Additions  182   0 
 
Sales  0   (14)
 
Revaluations  7   0 
 
Foreign currency translation  (14)  0 
 
Balance at the end of the year
  189   14 
 
consolidated financial statements

Note 16 Goodwill and Intangible Assets

intangible assets

At year-end 2007, five out of six31 December 2008, the following four segments carry goodwill, of which Industrial Holdings has less than 1% of the total balance. Business Bankingcarried goodwill: Wealth Management International & Switzerland carries no goodwill.(CHF 1.6 billion), Wealth Management US (CHF 3.7 billion), Global Asset Management (CHF 2.0 billion), and Investment Bank (CHF 4.3 billion). For the purpose of testing goodwill for impairment, UBS considers each of these segments as a separate cash-generating unit, and determines the recoverable amount of its segmentsa segment on the basis of value in use.

The ongoing crisis in the financial markets dramatically changed industry dynamics, and the related decrease in market capitalization of UBS made it necessary during 2008 to review whether there was indication that goodwill allocated to its cash generating units was impaired. At 31 December 2008, equity attributable to UBS shareholders stood at CHF 33 billion. UBS’s market capitalization, excluding the impact of the issued MCNs, amounted to CHF 44 billion at 31 December 2008. On the basis of the impairment testing methodology described below, UBS concluded that the year-end 2008 balances of goodwill allocated to all its segments remain recoverable.

Methodology for goodwill impairment testing
The recoverable amount is determined using a proprietary model based on the discounted cash flow method,flows, which has been adapted to give effect to the special features of the banking business and its regulatory environment. The recoverable amount is determined by estimating streams of earnings available to shareholders in the next four quarters based on a rolling forecast process,five years, discounted to their present values. The terminal value reflecting all periods

beyond the firstfifth year is calculated on the basis of the estimated individual return on equity for each segment, which is derived from the forecast first-yearfifth-year profit, the underlying equity, the cost of equity and the long-term growth rate. The recoverable amount of the segmentsa segment is the sum of earnings available to shareholders from the first yearfive years and the terminal value. In 2007, the recoverable amount was based on the discounted estimated streams of earnings determined in a rolling forecast process for the next four quarters and the terminal value. The five-year period for the cash flow projections applied in 2008 is considered a more appropriate measure, given the currently volatile market environment and the uncertainties in the short-term outlook.

Assumptions
The model is most sensitive to changes in the forecast earnings available to shareholders in yearyears one to five, the estimated

return on equity, the underlying equity, the cost of equity and to changes in the long-term growth rate. The applied long-term growth rate is based on long-term risk-free interest rates. Earnings available to shareholders are estimated based on forecast results, which takes into account business initiatives and planned capital investments, and returns to shareholders. Valuation parameters used within the Group’s impairment test model are linked to external market information, where applicable. Discount rates applied are 9% for Wealth Management International & Switzerland and for Business Banking Switzer-land, 10.5% for Wealth Management US and Global Asset Management and 11.5% for Investment Bank.

Management believes that reasonable changes in key assumptions used to determine the recoverable amounts of all segments will not result in an impairment situation. Due



         
Discount rate 
In % 31.12.08  31.12.07 
 
Wealth Management International & Switzerland  9.5   9.0 
 
Wealth Management US  11.5   10.5 
 
Business Banking Switzerland  9.5   9.0 
 
Global Asset Management  11.0   10.5 
 
Investment Bank  13.0   11.5 
 

300

Financial information

Investment Bank
On 31 December 2008, the reassessment of the goodwill of UBS’s Investment Bank, which has been most affected by the implications of the financial market crises, was a key focus. Goodwill allocated to the significant losses incurred by the Investment Bank amounted to CHF 4.3 billion at 31 December 2008 (CHF 5.2 billion at 31 December 2007). The reduction is due to an impairment of CHF 341 million of goodwill related to the US Municipal Securities Business, which was closed in June 2008 (refer to Note 38 for details) and foreign currency translation effects.

In its review of the year-end 2008 goodwill balance, UBS considered the performance outlook of its Investment Bank division and the underlying business operations to resolve whether the recoverable amount for this unit covers its carrying amount, based on the methodology described above. On this basis, UBS concluded that goodwill allocated to the Investment Bank remains recoverable on 31 December 2008. The conclusion was reached based on the forecast results which include those activities that are expected to

generate positive cash flows in future years. The forecasts are based on an expectation that the economic environment will gradually improve over the next three years and reach an average growth level thereafter. The fair value obtained from the model calculation was subject to a stress test by decreasing forecast cash flows by one third and at the same time increasing the discount rate by 3.5%3.5 percentage points to 15%16.5%. The stress value obtained was still significantly abovecovered the book value of the Investment Bank. However, if the conditions in the financial markets and banking industry further deteriorate and turn out to be worse than anticipated in UBS’s performance forecasts, the goodwill carried in the Investment Bank which decreased substantiallybusiness division may need to be impaired in future quarters.
Recognition of any impairment of goodwill would reduce IFRS Equity attributable to UBS shareholders and Net profit but it would not impact cash flows, as a resultwell as the BIS Tier 1 capital, BIS total capital, and capital ratios of the losses incurred in 2007.UBS Group, as goodwill is required to be deducted from capital under the Basel II capital framework.



60

                                     
Note 16 Goodwill and Intangible Assets (continued) 
 Goodwill Intangible assets    Goodwill  Intangible assets   
 Customer        Customer       
 relationships,        relationships,       
 contractual        contractual       
CHF million Total Infrastructure rights and other Total 31.12.07 31.12.06  Total Infrastructure rights and other Total 31.12.08 31.12.07 
Historical cost
  
Balance at the beginning of the year 12,464 942 2,087 3,029 15,493 14,385  12,829 876 1,619 2,495 15,324 15,493 
Additions and reallocations 940 0  (328)  (328) 612 3,336  495 0 90 90 585 612 
Disposals 0 0  (3)  (3)  (3)  (1,373)  (20) 0  (13)  (13)  (33)  (3)
Write-offs1
 0 0  (175)  (175)  (175)  (28)  (356) 0  (116)  (116)  (472)  (175)
Foreign currency translation  (575)  (66) 38  (28)  (603)  (827)  (1,364)  (52)  (272)  (324)  (1,688)  (603)
Balance at the end of the year 12,829 876 1,619 2,495 15,324 15,493  11,585 824 1,308 2,131 13,716 15,324 
Accumulated amortization
 
Accumulated amortization and impairment
 
Balance at the beginning of the year 291 429 720 720 899  0 315 471 786 786 720 
Amortization2
 46 236 282 282 196 
Amortization 0 42 152 193 193 282 
Impairment of goodwill and intangible assets 341 0 20 20 361 0 
Disposals 0  (3)  (3)  (3)  (301) 0 0  (7)  (7)  (7)  (3)
Write-offs1
 0  (175)  (175)  (175)  (28)  (356) 0  (116)  (116)  (472)  (175)
Foreign currency translation  (22)  (16)  (38)  (38)  (46) 15  (19)  (76)  (95)  (80)  (38)
Balance at the end of the year 315 471 786 786 720  0 337 444 781 781 786 
Net book value at the end of the year
 12,829 561 1,148 1,709 14,538 14,773  11,585 487 864 1,350 12,935 14,538 
1 Represents write-offs of fully amortized intangible assets.  2 Amortization expense of CHF 43 million is relatedassets and impaired goodwill for disposed business activities.

301

Financial information
Notes to discontinued operations for 2006.

the consolidated financial statements

Note 16 Goodwill and intangible assets (continued)

The following table presents the disclosure of goodwill and intangible assets by Businessbusiness unit for the year ended 31 December 2007.2008.

                         
  Balance at                  Balance at 
  the beginning  Additions and          Foreign currency  the end 
CHF million of the year  reallocations  Disposals  Amortization  translation  of the year 
 
Goodwill
                        
 
Wealth Management International & Switzerland  1,645   125   0       (73)  1,697 
 
Wealth Management US  4,006   193   0       (292)  3,907 
 
Business Banking Switzerland  0   0   0       0   0 
 
Global Asset Management  1,531   495   0       (26)  2,000 
 
Investment Bank  5,262   127   0       (182)  5,207 
 
Corporate Center  0   0   0       0   0 
 
Industrial Holdings  20   0   0       (2)  18 
 
UBS
  12,464   940   0       (575)  12,829 
 
Intangible assets
                        
 
Wealth Management International & Switzerland  325   (22)  0   (19)  4   288 
 
Wealth Management US  793   58   0   (66)  (56)  729 
 
Business Banking Switzerland  0   0   0   0   0   0 
 
Global Asset Management  498   (262)  0   (19)  47   264 
 
Investment Bank  688   (110)  0   (172)  16   422 
 
Corporate Center  0   0   0   0   0   0 
 
Industrial Holdings  5   8   0   (6)  (1)  6 
 
UBS
  2,309   (328)  0   (282)  10   1,709 
 

61

Financial Statements
Notes to the Financial Statements

Note 16 Goodwill and Intangible Assets (continued)

                             
  Balance at  Additions              Foreign  Balance 
  the beginning  and              currency  at the end 
CHF million of the year  reallocations  Disposals  Amortization  Impairment  translation  of the year 
 
Goodwill
                            
 
Wealth Management International & Switzerland  1,697   157   0       0   (205)  1,648 
 
Wealth Management US  3,907   0   0       0   (228)  3,678 
 
Business Banking Switzerland  0   0   0       0   0   0 
 
Global Asset Management  2,000   338   0       0   (356)  1,982 
 
Investment Bank  5,207   1   0       (341)  (590)  4,277 
 
Corporate Center  18   0   (20)      0   1   0 
 
UBS
  12,829   495   (20)      (341)  (1,379)  11,585 
 
Intangible assets
                            
 
Wealth Management International & Switzerland  288   58   0   (18)  (20)  (57)  251 
 
Wealth Management US  729   0   0   (60)  0   (43)  626 
 
Business Banking Switzerland  0   0   0   0   0   0   0 
 
Global Asset Management  264   32   0   (33)  0   (77)  186 
 
Investment Bank  422   0   0   (83)  0   (52)  286 
 
Corporate Center  6   0   (6)  0   0   0   0 
 
UBS
  1,709   90   (6)  (193)  (20)  (229)  1,350 
 

The estimated, aggregated amortization expenses for intangible assets are as follows:

        
CHF million Intangible assets  Intangible assets 
Estimated, aggregated amortization expenses for:
  
2008 198 
2009 195  168 
2010 179  153 
2011 166  145 
2012 141  125 
2013 and thereafter 830 
2013 103 
2014 and thereafter 656 
Total
 1,709  1,350 

Note 17 Other Assets

                   
Note 17 Other assetsNote 17 Other assets 
CHF million Note 31.12.07 31.12.06  Note 31.12.08 31.12.07 
Deferred tax assets 22 3,031 3,686  22 8,880 3,220 
Settlement and clearing accounts 6,370 3,159  1,203 6,370 
VAT and other tax receivables 454 318  330 454 
Prepaid pension costs 886 814  2,922 3,009 
Properties held for sale 1,145 1,254  981 1,145 
Accounts receivable trade 28 114 
Inventory – industrial holdings 44 68 
Other receivables 6,042 7,836  4,778 6,114 
Total other assets
 18,000 17,249  19,094 20,312 

62302

Financial information

Balance Sheet: Liabilitiessheet notes: liabilities

         
Note 18 Due to banks and customers 
CHF million 31.12.08  31.12.07 
 
Due to banks  125,628   145,762 
 
Due to customers in savings and investment accounts  100,647   109,128 
 
Other amounts due to customers  374,127   532,764 
 
Total due to customers  474,774   641,892 
 
Total due to banks and customers
  600,402   787,654 
 
         
Note 18 Due to Banks and Customers        
 
CHF million
  31.12.07   31.12.06 
 
Due to banks  145,762   203,689 
 
Due to customers in savings and investment accounts  109,128   114,264 
 
Other amounts due to customers  532,764   441,622 
 
Total due to customers  641,892   555,886 
 
Total due to banks and customers
  787,654   759,575 
 
         
Note 19 Financial liabilities designated at fair value and debt issued 
 
Financial liabilities designated at fair value 
CHF million 31.12.08  31.12.07 
 
Bonds and compound debt instruments issued  92,446   183,143 
 
Compound debt instruments – OTC  7,468   8,251 
 
Loan commitments1
  1,632   459 
 
Total
  101,546   191,853 
 

Note 19 Financial Liabilities Designated at Fair Value and Debt Issued

         
Financial liabilities designated at fair value        
 
CHF million
  31.12.07   31.12.06 
 
Bonds and compound debt instruments issued  183,143   135,646 
 
Compound debt instruments – OTC  8,251   9,967 
 
Loan commitments1
  459   74 
 
Total
  191,853   145,687 
 
1 Loan commitments recognized as Financial liabilities designated at fair value, until drawn down and recognized as loans. See Note 1a) 7) for additional information.

The

At 31 December 2008, the contractual redemption amount at maturity of Financial liabilities designated at fair value through profit or loss approximateswas CHF 12.2 billion higher than the

carrying value atvalue. At 31 December 2007, and 31 December 2006.the contractual redemption amount at maturity of such liabilities approximated the carrying value. Refer to Note 1a7)1a) 7) for details.



             
Debt issued (held at amortized cost)Debt issued (held at amortized cost) Debt issued (held at amortized cost)
     
CHF million 31.12.07 31.12.06  31.12.08 31.12.07 
Short-term debt: Money market paper issued 152,256 119,584  111,619 152,256 
Long-term debt:  
Bonds  
Senior 52,265 53,509  64,099 52,265 
Subordinated 14,129 14,774  15,968 14,129 
Shares in bond issues of the Swiss Regional or Cantonal Banks’ Central Bond Institutions 199 38 
Shares in bond issues of the Swiss Regional or Cantonal Bank’ Central Bond Institutions 2,418 199 
Medium-term notes 3,228 2,238  3,150 3,228 
Subtotal long-term debt 69,821 70,559  85,635 69,821 
Total
 222,077 190,143  197,254 222,077 

63

303

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Note 19 Financial Liabilities Designatedliabilities designated at Fair Valuefair value and Debt Issueddebt issued (continued)

The Group uses interest rate and foreign exchange derivatives to manage the risks inherent in certain debt issues (held at amortized cost). In the case of interest rate risk management, the Group applies hedge accounting as discussed in Note 1 a14)1a) 14) and Note 23 – Derivative Instruments and Hedge Accounting. As a result of applying hedge accounting, at 31 December 20072008 and 31 December 2006,2007, the carrying value of debt issued was CHF 138904 million higher and CHF 256138 million higher, respectively, reflecting changes in fair value due to interest rate movements.

The Group issues both CHF and non-CHF denominated fixed-rate and floating-rate debt.
Subordinated debt securities are unsecured obligations of the Group that are subordinated in right of payment to all present and future senior indebtedness and certain other obligations of the Group. At 31 December 20072008 and 31 December 2006,2007, the Group had CHF 14,12915,968 million and CHF

14,774

14,129 million, respectively, in subordinated debt. Subordinated debt usually pays fixed interest annually or floating-ratefloating rate interest based on the three-month or six-month London Interbank Offered Rate (LIBOR) and provides for single principal payments upon maturity.

At 31 December 20072008 and 31 December 2006,2007, the Group had CHF 238,835162,113 million and CHF 191,431238,835 million, respectively, in unsubordinated debt (excluding money market paper, compound debt instruments – OTC and loan commitments designated at fair value).
The following table shows the split between fixed-rate and floating-rate debt issues based on the contractual terms. However, it should be noted that the Group uses interest rate swaps to hedge many of the fixed-rate debt issues, which changes their repricing characteristics into those of floating-rate debt.



                                                       
Contractual maturity datesContractual maturity dates Contractual maturity dates 
 Total Total  Total Total 
CHF million, except where indicated 2008 2009 2010 2011 2012 2013–2017 Thereafter 31.12.07 31.12.06  2009 2010 2011 2012 2013 2014–2018 Thereafter 31.12.08 31.12.07 
UBS AG (Parent Bank)
  
Senior debt  
Fixed rate 94,098 12,357 14,030 8,136 10,835 11,969 4,007 155,432 109,987  49,415 11,706 6,041 6,626 10,994 17,170 1,627 103,579 155,432 
Interest rates (range in %) 0–36.5 0–13.5 0–13.25 0–10.25 0–10 0–11.55 0–15  0–9.90 0–9.70 0–9.955 0–9.66375 0–9.75 0–9.90 0–9.75 
Floating rate 64,189 15,526 13,456 2,276 7,205 8,217 20,845 131,714 93,904  33,808 4,939 3,979 6,455 4,683 4,682 19,255 77,801 131,714 
Subordinated debt  
Fixed rate 0 515 0 0 0 6,109 3,165 9,789 9,414  465 5,665 2,745 8,875 9,789 
Interest rates (range in %) 5.875 2.375–7.375 3.385–8.75  6.0-6.0 2.375–8.622 4.5–8.75 
Floating rate 0 0 0 0 0 4,340 0 4,340 5,360  7,019 7,019 4,340 
Subtotal 158,287 28,398 27,486 10,412 18,040 30,635 28,017 301,275 218,665  83,688 16,645 10,020 13,081 15,677 34,536 23,627 197,274 301,275 
Subsidiaries
  
Senior debt  
Fixed rate 46,259 887 1,802 1,166 412 1,913 24,424 76,863 86,862  60,092 2,904 8,459 813 377 1,010 9,348 83,003 76,863 
Interest rates (range in %) 0–12.25 0–10.5 0–12 0–20 0–11.885 0–35 0–35  0–9.03 0–9.0 0–8.375 0–8.495 0–9.0 0–9.494 0–9.829 
Floating rate 5,945 4,006 6,511 4,312 1,454 6,394 7,170 35,792 30,303  3,505 2,548 2,000 1,033 783 4,303 4,277 18,449 35,792 
Subordinated debt  
Fixed rate 0 0 0 0 0 0 0 0 0  74 74 0 
Interest rates (range in %)  6.25–6.25 
Floating rate 0 0 0 0 0 0 0 0 0  0 0 
Subtotal 52,204 4,893 8,313 5,478 1,866 8,307 31,594 112,655 117,165  63,671 5,452 10,459 1,846 1,160 5,313 13,625 101,526 112,655 
Total
 210,491 33,291 35,799 15,890 19,906 38,942 59,611 413,930 335,830  147,359 22,097 20,479 14,927 16,837 39,849 37,252 298,800 413,930 

The table above indicates fixed interest rate coupons ranging from 0 up to 36.5%9.955% on the Group’s bonds. The high or low coupons generally relate to structured debt issues prior to the separation of embedded derivatives. As a result, the statedstat-

ed interest rate on such debt issues generally does not reflect the effective interest rate the Group is paying to service its debt after the embedded derivative has been separated and, where applicable, the application of hedge accounting.



64304

Financial information
                   
Note 20 Other Liabilities 
       
Note 20 Other liabilitiesNote 20 Other liabilities 
CHF million Note 31.12.07 31.12.06  Note 31.12.08 31.12.07 
Provisions 21 1,673 1,672  21 2,727 1,716 
Provisions for contingent claims 9b 63 76  9b 31 63 
Current tax liabilities 2,000 4,258  1,192 2,000 
Deferred tax liabilities 22 2,069 2,674  22 1,470 2,429 
VAT and other tax payables 1,079 931  1,022 1,079 
Settlement and clearing accounts 7,476 3,715  3,089 7,476 
Amounts due under unit-linked investment contracts 27,455 33,645  13,051 27,455 
Accounts payable 15 91 
Other payables 18,946 16,189 
Other payables1
 11,459 19,278 
Total other liabilities
 60,776 63,251  34,040 61,496 
                     
Note 21 Provisions 
              Total  Total 
CHF million Operational1  Litigation2  Other3  31.12.07  31.12.063 
 
Balance at the beginning of the year  185   699   788   1,672   2,072 
 
Additions from acquired companies  0   0   0   0   26 
 
Increase in provisions recognized in the income statement  302   318   110   730   630 
 
Release of provisions recognized in the income statement  (41)  (117)  (58)  (216)  5 
 
Provisions used in conformity with designated purpose  (123)  (386)  (61)  (570)  (466)
 
Capitalized reinstatement costs  0   0   6   6   22 
 
Disposal of subsidiaries  0   0   (16)  (16)  (607)
 
Reclassifications  (6)  6   155   155   36 
 
Foreign currency translation  (19)  (46)  (23)  (88)  (46)
 
Balance at the end of the year
  298   474   901   1,673   1,672 
 
1 The most significant individual items included in other payables are third party interests of consolidated limited partnerships of CHF 3.1 billion, contingent payments for the acquisition of Pactual in 2006, and liabilities from cash-settled employee compensation plans.

305

Financial information
Notes to the consolidated financial statements

                     
Note 21 Provisions and litigation 
              Total  Total 
CHF million Operational1  Litigation2,3  Other4  31.12.08  31.12.07 
 
Balance at the beginning of the year  298   474   944   1,716   1,703 
 
Additions from acquired companies  0   1   0   1   0 
 
Increase in provisions recognized in the income statement  473   3,069   460   4,002   742 
 
Release of provisions recognized in the income statement  (182)  (143)  (203)  (528)  (216)
 
Provisions used in conformity with designated purpose  (318)  (990)  (73)  (1,381)  (570)
 
Capitalized reinstatement costs  0   0   (21)  (21)  6 
 
Disposal of subsidiaries  0   0   0   0   (16)
 
Reclassifications  0   (980)  1   (979)  155 
 
Foreign currency translation  (1)  (13)  (69)  (83)  (88)
 
Balance at the end of the year
  270   1,418   1,039   2,727   1,716 
 
1 Includes provisions for litigation resulting from security risks and transaction processing risks.  2 Includes litigation resulting from legal, liability and compliance risks.  3 Other amounts include: In 2006,2008 Global Wealth Management and Business Banking made a provision of CHF 1,464 million (USD 1,363 million) for the expected costs of the repurchase of auction rate securities (ARS), including fines. In the fourth quarter, after the provision was partially applied for repurchases of ARS, an amount of CHF 968 million (USD 908 million), excluding fines, was reclassified to Negative replacement values (refer to Note 23 for details). In addition a provision of CHF 917 million (USD 780 million) was made in connection with a strategy reviewUBS’s US cross-border case.  4 Includes reinstatement of its business and a review of its office space planning, Wealth Management US decided not to use office space rented by UBS under a long-term contract in a new building in New Jersey. Senior management approved a proposal to enter into a 10-year sublease contract with an external partycosts for the unused office space. Under the terms of this contract, the sublease income is not sufficient to cover the rent UBS pays under its original contract and costs incurred for arranging the sublease. UBS recorded a provision to cover the shortfall of this onerous lease contractleasehold improvement which amounted to CHF 105167 million on 31 December 2007 and CHF 1852008 (CHF 233 million on 31 December 2006.2007), provisions for onerous lease contracts, provisions for employee benefits (service anniversaries and sabbatical leaves) and other items.

Litigation

Litigation

UBS Group operates in a legal and regulatory environment that exposes it to potentially significant litigation risks. As a result, UBS is involved in various disputes and legal proceedings, including litigation, arbitration, and regulatory and criminal investigations. Such cases are subject to many uncertainties, and their outcome is often difficult to predict, including the impact on the operations or financial statements, particularly in the earlier stages of a case. In certain circumstances, to avoid the expense and distraction of legal proceedings, UBS may, based on a cost-benefit analysis, enter into a settlement even though UBS denies any wrongdoing. The Group makes provisions for cases brought against it only when after seeking legal advice, in the opinion of manage-

ment,management, it is probable that a liability exists, and the amount can be reasonably estimated (see table above).estimated. No provision is made for claims asserted against the Group that in the opinion of management are without merit and where it is not likely that UBS will be found liable.

Currently, UBS is responding to a number of regulatory inquiries and investigations, and is involved in a number of litigations and disputes, related to the sub-prime crisis, sub-prime securities, and structured transactions involving sub-prime securities. These matters concern, among other things, UBS’s valuations, disclosures, write-downs, underwriting, and contractual obligations.



65

Financial Statements
Notes to the Financial Statements

Note 21 Provisions (continued)

At 31 December 2007,2008, UBS is involved in the following legal proceedings which could be material to the Group in a given reporting period:Group:

a) Tax Shelter:Shelter Investigation: In connection with a criminal investigation of tax shelters, the United States Attorney’s Office for the Southern District of New York (“US(US Attorney’s Office”) is examining UBS’s conduct in relationOffice) continues to examine certain tax-oriented transactions in which UBS and others engaged during the years 1996–between 1996 and 2000. Some of these transactions were the subject of the Deferred Prosecution Agreement which the accounting firm KPMG LLP entered into with the US Attorney’s Office in August 2005, and are at issue inUnited States v. Stein, S1 05 Cr. 888 (LAK).UBS is cooperatingcontinuing to cooperate in the government’sthis investigation.
b) Municipal Bonds:Bond: In November 2006, UBS and others received subpoenas from the US Department of Justice, Antitrust Division, and the SECUS Securities and Exchange Commission (SEC) seeking information relating to derivative transactions entered into with municipal bond issuers and to the investment of proceeds of municipal bond
issuances. Both investigations are ongoing, and UBS is cooperating. In addition, various state Attorneys General have issued subpoenas seeking similar information. In the SEC investigation, on 4 February 2008, UBS received a “Wells notice” advising that the SEC staff is considering recommending that the SEC bring a civil action against UBS AG in connection with the bidding of various financial instruments associated with municipal securities. Under the SEC’s Wells process, UBS will have the opportunity to set forth reasons of law, policy or fact why such an action should not be brought.
c) HealthSouth: UBS is defending itself in two purportedputative securities class actions brought in the US District Court of the Northern District of Alabama by holders of stock and bonds in HealthSouth Corp. In October 2008, UBS also is a defendant in HealthSouthagreed to settle derivative litigation brought on behalf of Health-South in Alabama State Court andCourt. Due to existing insurance coverage this settlement has responded to an SEC investigation relating tono impact on UBS’s role as a banker for HealthSouth.result in 2008.
d) Parmalat: UBS has been facing multiple proceedings arising out of the Parmalat insolvency. In June 2008, UBS settled all civil claims brought by Parmalat in its capacity as Assumptor in composition with creditors and Mr. Bondi (Extraordinary Commissioner of Parmalat S.p.A. and other Parmalat companies under extraordinary administration) for EUR 185 million. Other civil claims by third parties have automatically terminated as a result of termination of criminal proceedings in Milan (with the exception of some costs issues which are the subject of appeals to Court of Cassation) and will also do so in Parma when the time for filing an appeal expires, unless an appeal has been lodged in the meantime.


306

Financial information

Note 21 Provisions and litigation (continued)

e)Auction Rate Securities: UBS was sued by three state regulatory authorities and was the subject of investigations by the SEC and other regulators, relating to the marketing and sale of Auction Rate Securities (ARS) to clients and to UBS’s role and participation in ARS auctions. UBS also has been named in several putative class actions and individual civil suits and a large number of individual arbitrations. The regulatory actions and investigations and the class actions followed the disruption in the markets for these securities and related auction failures since mid-February 2008. Plaintiffs and the regulators are generally seeking rescission, i.e., for UBS to purchase the ARS that UBS sold to them at par value, as well as compensatory damages, disgorgement of profits and in some cases penalties. In May 2008, UBS entered into a settlement with the Massachusetts Attorney General in which UBS agreed to buy back USD 36 million in auction rate securities that had been sold to general purpose municipal accounts but were impermissible investments for those accounts. On 8 August 2008, UBS entered into settlements in principle with the SEC, the New York Attorney General (NYAG) and other state agencies represented by the North American Securities Administrators Association (NASAA), including the Massachusetts Securities Division (MSD), whereby UBS agreed to offer to buy back ARS from eligible customers within certain time frames, and to pay penalties of USD 150 million (USD 75 million to the NYAG, USD 75 million to the other states). On 2 October 2008, UBS finalized its settlement with the MSD, on 11 December 2008 with the SEC and the NYAG, and UBS is continuing to finalize agreements with the other state regulators. UBS’s offer to purchase back ARS was done by a registered securities offering effective 7 October 2008. UBS’s settlement is largely in line with similar industry regulatory settlements; however, UBS is the only firm of its major competitors that offered to purchase ARS from institutional clients before a date certain. UBS’s settlement with the SEC and MSD requires UBS to offer to buy eligible ARS from eligible institutional clients by no later than 30 June 2010. Settlements with the other NASAA states are being worked out. The NYAG settlement does not reference a date certain, but contains language similar to other industry settlements requiring that UBS make ‘best efforts’ to provide liquidity solutions for institutional investors. The NYAG and SEC continue to investigate individuals affiliated with UBS who traded in ARS or who had responsibility for disclosures. On 7 October 2008, the NYAG announced a settlement with the former Investment Bank Global General Counsel relating to his trading of ARS allegedly in violation of New York’s Martin Act. The former Investment Bank Global General Counsel neither admitted nor denied the state’s allegations, but agreed to certain penalties and sanctions.
f)US Cross-Border: UBS AG has been responding to a number of governmental inquiries and investigations relating to its cross-border private banking services to US private clients during the years 2000–2008. In particular, the US Department of Justice (DOJ) has been examining whether certain US clients sought, with the assistance of UBS client advisors, to evade their US tax obligations by avoiding restrictions on their securities investments imposed by the Qualified Intermediary Agreement (QIA) UBS entered into with the US Internal Revenue Service (IRS) in 2001. DOJ and IRS are also have been examining whether UBS AG has been compliant with withholding obligations in relation to sales of non-US securities under the Deemed Sales and Paid In US tax regulations. A former UBS AG client advisor pleaded guilty to one count of conspiracy to defraud the United States and the IRS in connection with providing investment and other services to a US person who is alleged to have evaded US income taxes on income earned on assets maintained in, among other places, a former UBS AG account in Switzerland. In November 2008, the CEO of Global WM&BB was indicted by a US federal grand jury sitting in the Southern District of Florida on one count of conspiring to defraud the IRS in violation of US law. Among other things, the indictment alleges that the CEO of Global WM&BB had involvement in the operation and maintenance of the US cross-border business while knowing that such business was being conducted in violation of certain US laws. The District Attorney for the County of New York has issued a request for information seeking information located in the US concerning UBS’s cross-border business, including any information located in the US relating to clients of that business. Further, the IRS has delivered to UBS AG a notice concerning alleged violations of the QIA which UBS is responding to under the applicable cure process. The SEC has been examining whether Swiss-based UBS client advisors engaged in activities in relation to their US-domiciled clients that triggered an obligation for UBS Switzerland to register with the SEC as a broker-dealer and/or investment adviser. Finally, the Swiss Financial Market Supervisory Authority (FINMA) investigated UBS’s cross-border servicing of US private clients under Swiss Banking Supervisory legislation. The investigations also have been focused on the management supervision and control of the US cross-border business and the practices at issue. UBS has been working to respond in an appropriate and responsible manner to all of these investigations in an effort to achieve a satisfactory resolution of these matters. As announced on 17 July 2008, UBS will no longer provide securities and banking services to US-resident private clients (including non-operating entities with US beneficiaries) except through its SEC-registered affiliates. On


307

Financial information
Notes to the consolidated financial statements

Note 21 Provisions and litigation (continued)

18 February 2009, UBS announced that it had entered into a Deferred Prosecution Agreement (DPA) with the DOJ and a Consent Order with the SEC. These agreements resolve the above-described criminal and regulatory investigations by these authorities. As part of these settlement agreements, among other things: (i) UBS will pay a total of USD 780 million to the United States, USD 380 million representing disgorgement of profits from maintaining the US cross-border business and USD 400 million representing US federal backup withholding tax required to be withheld by UBS, together with interest and penalties, and restitution for unpaid taxes associated with certain account relationships involving fraudulent sham and nominee offshore structures and otherwise as covered by the DPA; (ii) UBS will complete the exit of the US cross-border business out of non-SEC registered entities, as announced in July 2008, which these settlements permit UBS to do in a lawful, orderly and expeditious manner; (iii) UBS will implement and maintain an enhanced program of internal controls with respect to compliance with its obligations under its Qualified Intermediary (QI) Agreement with the Internal Revenue Service (IRS), as well as a revised Legal and Compliance governance structure in order to strengthen independent legal and compliance controls; and (iv) pursuant to an order issued by FINMA, information was transferred to the DOJ regarding accounts of certain US clients as set forth in the DPA who, based on evidence available to UBS, appear to have committed tax fraud or the like within the meaning of the Swiss-US Double Taxation Treaty. Pursuant to the DPA, DOJ has agreed that any further prosecution of UBS will be deferred for a period of at least 18 months, subject to extension under certain circumstances such as UBS needing more time to complete the implementation of the exit of its US cross-border business. If UBS satisfies all of its obligations under the DPA, the DOJ will refrain permanently from pursuing charges against UBS relating to the investigation of its US cross-border business. As part of the SEC resolution, the SEC filed a Complaint against UBS in Federal District Court in Washington, D.C., charging UBS with acting as an unregistered broker-dealer and investment advisor in connection with maintaining its US cross-border business. Pursuant to the Consent Order, UBS did not admit or deny the allegations in that Complaint, and consented to the entry of a final judgment that provides, among other things, that: (i) UBS will pay USD 200 million to the SEC, representing disgorgement of profits from the US cross-border business (this amount is included within, and not in addition to, the USD 780 million UBS is paying to the United States as described above); and (ii) UBS will complete its exit of the US cross-border business and will be permanently
enjoined from violating the SEC registration requirements by providing broker-dealer or investment advisory services to US persons through UBS entities not registered with the SEC.
The DOJ and SEC agreements do not resolve issues concerning the pending “John Doe” summons which the IRS served on UBS in July 2008. In this regard, on 19 February 2009, the Civil Tax Division of the DOJ filed a civil petition for enforcement of this summons in US Federal District Court in Miami, through which it seeks an order directing UBS to produce information located in Switzerland regarding US clients who have maintained accounts with UBS in Switzerland without providing a Form W-9. On 24 February 2009, the District Court issued a scheduling order pursuant to which a hearing will be held on 13 July 2009. The DPA preserves UBS’s ability to defend fully its rights in connection with the IRS’s enforcement effort. UBS believes that it has substantial defenses, including that complying with the summons would constitute a violation of Swiss financial privacy laws, and intends to vigorously contest the enforcement of the summons. The resolution of the summons litigation could result in the imposition of substantial fines, penalties and / or other remedies. In addition, pursuant to the DPA, should UBS fail to comply with a final US court order directing it to comply with the summons after fully exhausting all rights to appeal, the DOJ may, after certain conditions have been satisfied, choose to pursue various remedies available for breach of the DPA. This may include charging UBS with conspiracy to commit tax fraud. Also on 18 February 2009, the FINMA published the results of the now concluded investigation conducted by the Swiss Federal Banking Commission (SFBC). The SFBC concluded, among other things, that UBS violated the requirements for proper business conduct under Swiss banking law and issued an order barring UBS from providing services to US resident private clients out of non-SEC registered entities. Further, the SFBC ordered UBS to enhance its control framework around its cross-border businesses, and announced that the effectiveness of such framework will be audited.
g)Sub-prime-related Matters: UBS is responding to a number of governmental inquiries and investigations, and is involved in a number of proceedings in Italylitigations, arbitrations and disputes, related to the bankruptcy of Parmalat.sub-prime crisis, sub-prime securities, and structured transactions involving sub-prime securities. These proceedings include, inter alia, clawback proceedings againstmatters concern, among other things, UBS’s valuations, disclosures, write-downs, underwriting, and contractual obligations. In particular, UBS Limitedhas been in connectionregular communication with, a structured finance transaction. Further, UBS is a defendant in two civil damages claims broughtand responding to inquiries by Parmalat, one of which relates toFINMA, its home country consolidated regulator, as well as the same structured finance transaction against UBS Limited, whileSEC and the other against UBS AG relates to certainUnited States Attorney’s Office for the Eastern Dis-


308

Financial information

Note 21 Provisions and litigation (continued)

  derivative transactions.trict of New York (USAO), regarding some of these issues and others, including the role of internal control units, governance and processes around risk control and valuation of sub-prime instruments, compliance with public disclosure rules, and the business rationales for the launching and the reintegration of Dillon Read Capital Management (DRCM). While FINMA concluded its investigation in October 2008, the investigation by the SEC and the USAO are ongoing. In addition, UBS Limited and one current and one former UBS employee are the subject of criminal proceedings in Milan. UBS AG and UBS Limited are defendants in civil actions brought by Parmalat investors in parallel with the criminal proceedings in Milan. Furthermore, four current or former UBS employees are defendants in relation to criminal proceedings in Parma. Civil claims have also been recentlya consolidated class action was filed in parallel with the criminal proceedings by Parmalat against the individuals and UBS Limited and also by Parmalat investors against the individuals, UBS AG and UBS Limited. UBS AG and UBS Limited deny the allegations made against them and against the individuals in these matters and are vigorously defending themselves in these proceedings.
e)Insight One: In early July 2007, UBS agreed to a settlement of the InsightOne case after the New York State Attorney General filed a civil complaint regarding UBS’s fee-based brokerage program for private clients in the United States in December 2006. UBS denied that the program was part of a scheme to disadvantage clients, but chose to settle to bring the proceedings to an end. Under the settlement, UBS paid a total of USD 23.3 million, of which USD 21.3 million was paid to certain current and former InsightOne customers pursuant to an agreed-upon remediation plan, and USD 2 million was paid in penalties. In 2006, UBS established provisions sufficient to cover the settlement, and therefore the settlement did not impact UBS’s Net profit in 2007.
f)Bankruptcy Estate of Enron: In June 2007, UBS and Enron settled adversarial proceedingsa number of senior directors and officers in the US Bankruptcy Court for the Southern District of New York brought by Enron to avoid and recover payments made prior to filing for bankruptcyalleging securities fraud in connection with equity forwardthe firm’s valuations and swap transactions.disclosures relating to sub-prime and asset-backed securities. UBS believed it had valid defencesand a number of senior officers and directors have also been sued in a consolidated class action brought on behalf of holders of UBS ERISA retirement plans in which there were purchases of UBS stock. Both class actions are in their early stages.
h)Madoff: In relation to allthe Madoff investment fraud, UBS, UBS (Luxembourg) SA and certain other UBS subsidiaries are responding to inquiries by a number of Enron’s claims, but choseregulators, including FINMA and the Luxembourg Commission de surveillance du secteur financier (CSSF). CSSF has made
inquiries concerning two third party funds established under Luxembourg law the assets of which were managed by Bernard L. Madoff Investment Securities LLC, and which now face severe losses. The documentation establishing both funds suggests that UBS entities act in various capacities including custodian, administrator, manager, distributor and promoter, and that UBS employees serve as board members. On 25 February 2009, the CSSF issued a communiqué with respect to settle to eliminate the uncertainty created by the proceeding. Under the termslarger of the settlement, UBS paid Enron USD 115 million and waived a proof of claim for approximately USD 5.5 milliontwo funds, stating that UBS (Luxembourg) SA had failed to comply with its due diligence responsibilities as custodian bank. The CSSF ordered UBS (Luxembourg) SA to review its infrastructure and procedures relating to its supervisory obligations as custodian bank, but did not order it to compensate investors. To date, very few investor claims have been filed, in Enron’s bankruptcy case. In 2006, UBS recognized a provision for more than halfand most have related to unsatisfied redemption requests delivered to these funds prior to the revelation of the settlement amount, with the difference recognized in 2007. Therefore, the settlement did not materially impact UBS’s Net profit in 2007.Madoff scheme. Further, certain clients of UBS Sauerborn (the KeyClient segment of UBS Deutschland AG) are exposed to Madoff-managed positions through third party funds and funds administered by UBS Sauerborn.


66

309

Financial information
Notes to the consolidated financial statements

             
Note 22 Income taxes 
  For the year ended 
CHF million 31.12.08  31.12.07  31.12.06 
 
             
Tax expense from continuing operations
            
 
Domestic
            
 
Current  (336)  409   1,759 
 
Deferred  (7,282)  (25)  (107)
 
Foreign
            
 
Current  519   1,061   1,533 
 
Deferred  262   (76)  (187)
 
Total income tax expense from continuing operations
  (6,837)  1,369   2,998 
 
             
Tax expense from discontinued operations
            
 
Domestic
  1   (258)  (12)
 
Foreign
  0   0   1 
 
Total income tax expense from discontinued operations
  1   (258)  (11)
 
Total income tax expense
  (6,836)  1,111   2,987 
 

             
Note 22 Income Taxes 
  For the year ended 
CHF million 31.12.07  31.12.06  31.12.05 
 
Tax expense from continuing operations
            
 
Domestic
            
 
Current  409   1,759   1,403 
 
Deferred  2   (87)  86 
 
Foreign
            
 
Current  1,064   1,534   1,427 
 
Deferred  (164)  (421)  (451)
 
Total income tax expense from continuing operations
  1,311   2,785   2,465 
 
Tax expense from discontinued operations
            
 
Domestic
  (258)  (12)  554 
 
Foreign
  (8)  0   28 
 
Total income tax expense from discontinued operations
  (266)  (12)  582 
 
Total income tax expense
  1,045   2,773   3,047 
 

Of the deferred tax benefit in the income statement of CHF 7,020 million, CHF 6,126 million relates to the recognition of incremental net deferred tax assets in respect of available tax losses. The incremental deferred tax assets mainly relate to Swiss tax losses incurred during the year (primarily due to the writedown of investments in US subsidiaries). The tax benefit was reduced by a decrease in the deferred tax asset recognized for US tax losses.

The Group made net tax payments, including domestic and foreign taxes, of CHF 887 million, CHF 3,663 million, CHF 2,607 million in 2008, 2007 and CHF 2,394 million2006 respectively. The tax payments in 2007, 2006 and 2005 respectively.2008 include installment payments paid on

estimated basis during the year, part of which are expected to be repaid because the final tax liability for the year is anticipated to be less than the amounts paid.

The current tax expense for 2007 includes expenses2008 is net of tax benefits related to prior years of CHF 493 million, of which CHF 517 million was offset by related446 million. There were also deferred tax movements.

benefits related to prior years of CHF 44 million giving total tax benefits relating to prior years of CHF 490 million.

The components of operating profit before tax, and the differences between income tax expense reflected in the Financial Statements and the amounts calculated at the Swiss statutory rate, are as follows:



                  
 For the year ended  For the year ended 
CHF million 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
Operating profit from continuing operations before tax  (2,935) 14,644 12,643   (27,353)  (3,742) 14,119 
Domestic 10,379 5,564 5,854  3,269 10,337 5,503 
Foreign  (13,314) 9,080 6,789   (30,622)  (14,079) 8,616 
Income taxes at Swiss statutory rate of 22% for 2007, 2006 and 2005  (646) 3,222 2,781 
Income taxes at Swiss statutory rate of 22% for 2008, 2007 and 2006  (6,018)  (823) 3,106 
  
Increase / (decrease) resulting from:  
Applicable tax rates differing from Swiss statutory rate  (3,019) 829 388   (7,018)  (3,054) 799 
Tax effects of losses not recognized 6,327 21 71  7,327 6,327 21 
Previously unrecorded tax losses now recognized  (257)  (676)  (97)
Previously unrecorded tax losses now utilized  (10)  (257)  (676)
Lower taxed income  (1,587)  (941)  (551)  (773)  (1,587)  (941)
Non-deductible intangible asset amortization 15 21 20 
Non-deductible goodwill and intangible asset amortization 160 15 21 
Other non-deductible expenses 227 183 212  695 227 183 
Adjustments related to prior years  (72) 316  (283)  (490)  (72) 316 
Change in deferred tax valuation allowance 5  (548)  (156)  (692) 279  (192)
Other items 318 358 80   (17) 314 361 
Income tax expense from continuing operations
 1,311 2,785 2,465   (6,837) 1,369 2,998 

67310

Financial Statements
Notes to the Financial Statements

Financial information

Note 22 Income Taxestaxes (continued)

Significant components of the Group’s gross deferred income tax assets and liabilities are as follows:

             
CHF million 31.12.07 31.12.06  31.12.08 31.12.07 
Deferred tax assets
  
Compensation and benefits 2,223 2,611  1,534 3,370 
Net operating loss carry-forwards 10,385 1,508 
Tax loss carry-forwards 32,749 10,385 
Trading assets 163 768  608 163 
Other 859 598  211 859 
Total 13,630 5,485  35,103 14,777 
Valuation allowance  (10,599)  (1,799)  (26,222)  (11,557)
Deferred tax assets recognized
 3,031 3,686  8,880 3,220 
Deferred tax liabilities
  
Compensation and benefits 109 122  111 470 
Property and equipment 175 201  29 175 
Financial investments and associates 690 1,221  206 690 
Trading assets 498 684  244 498 
Goodwill and intangible assets 173 55  289 173 
Other 424 391  591 424 
Deferred tax liabilities
 2,069 2,674  1,470 2,429 

The change in the balance of net deferred tax assets and deferred tax liabilities does not equal the deferred tax expense in those years. This is mainly due to the effects of exchange rate changes on tax assets and liabilities denominated in currencies other than CHF and the booking of some of the tax benefits related to deferred compensation through Equity.CHF. For the above purposes, the valuation allowance represents amounts that are not expected to provide future benefits, either because they are offset against potential tax adjustments or due to insufficiency of future taxable income. The deferred tax assets recognized at 31 December 20072008 were as follows: Compensation and benefits: CHF 385 million, Net operating321 million; Tax loss carry-forwards: CHF 2,419 million,8,126 million; Trading assets: CHF 77 million243 million; and Other: CHF 150190 million.

Certain foreign

UBS AG Switzerland and certain overseas branches and subsidiaries of the Group have deferred tax assets related to net operatingtax loss carry-for-

wardscarry-forwards and other items. Because the realization of these assets is uncertain, the Group has established valuation allowances of CHF 10,59926,222 million (CHF 1,79911,557 million at 31 December 2006).2007) mainly relating to US tax losses. For companiesentities that suffered taxincurred losses in either the current or preceding year, an amount of CHF 2,3638,463 million (CHF 212 million at 31 December 2006) has beenis recognized as deferred tax assets at 31 December 2008 (CHF 2,363 million at 31 December 2007). These deferred tax assets mainly relate to Swiss tax losses (primarily due to the

writedown of investments in US subsidiaries) and US tax losses. Swiss tax losses can be carried forward for seven years and US federal tax losses for 20 years. The agreement which UBS entered into to transfer certain illiquid securities and other positions to a fund owned and controlled by the Swiss National Bank (refer to Note 38) materially reduced the Group’s exposures to US real estate related assets and hence provided additional evidence that future US taxable profits will be available against which part of the Group’s unused US tax losses can be utilized. A deferred tax asset has been recognized in respect of that portion of the US tax losses.

The deferred tax assets recognized at 31 December 2008 in respect of tax losses have been based on expectationsprofitability assumptions over a five-year horizon. The expected future profitability is based on business plan assumptions taking into consideration uncertainties arising from profit forecaststhe current adverse economic environment. If the business plan earnings and historical performance that sufficient taxable income willassumptions in following quarters substantially deviate from the current assumptions, the amount of existing deferred tax assets may need to be generated in future years to utilize the tax loss carry-forwards.
adjusted. The Group provides for deferred income taxes on undistributed earnings of subsidiaries except to the extent that suchthose earnings are indefinitely invested. At 31 December 2007, no2008, CHF 413 million of such earnings were treated as indefinitely invested.



311

Financial information
Notes to the consolidated financial statements

Note 22 Income taxes (continued)

At 31 December 2007, net operating loss carry-forwards2008, tax losses totalling CHF 19,28371,001 million (notwhich are not recognized as a deferred tax asset)assets are available to be offset against potential tax adjustments or future taxable income.



The tax losses expire as follows:

     
The carry-forwards expire as follows:CHF million 31.12.0731.12.08 
 
Within 1 year  1 
 
From 2 to 4 years  3819 
 
After 4 years  19,24470,982 
 
Total
  19,28371,001 
 

68

Note 23 Derivative Instrumentsinstruments and Hedge Accounting

hedge accounting

A derivative is a financial instrument, the value of which is derived from the value of another (“underlying”) financial instrument, an index or some other variable. Typically, the underlying is a share, commodity or bond price, an index value or an exchange or interest rate.

The majority of derivative contracts are negotiated as to amount (“notional”), tenor and price between UBS and its counterparties, whether other professionals or customers (over-the-counter or OTC(OTC) contracts).
The restOther derivative contracts are standardized in terms of their amounts and settlement dates and are bought and sold on organized marketsexchanges (exchange-traded contracts).
The notional amount of a derivative is generally the quantity of the underlying instrument on which the derivative contract is based and is the basis upon which changes in the value of the contract are measured. It provides an indication of the underlying volume of business transacted by the Group but does not provide any measure of risk.
Derivative instruments are carried at fair value, shown in the balance sheet as separate totals of Positive replacement values (assets) and Negative replacement values (liabilities), except for futures and exchange-traded options with daily margining, which are presented as receivables and payables. Positive replacement values represent the cost to the Group of replacing all transactions with a fair value in the Group’s favor if all the relevant counterparties of the Group were to default at the same time, assuming transactions could be replaced instantaneously. Negative replacement values represent the cost to the Group’s counterparties of replacing all their transactions with the Group with a fair value in their favor if the Group were to default. Positive and negative replacement values on different transactions are only netted

if the transactions are with the same counterparty, are denominated in the same currency, and the cash flows will be settled on a net basis. Changes in replacement values of derivative instruments are recognized in the income statement unless they meet the criteria for certain hedge accounting relationships, as explained in Note 1a14)1a) 14) Derivative instruments and hedge accounting.

Types of derivative instruments

The Group uses the following derivative financial instruments for both trading and hedging purposes.
Forwards and futures are contractual obligations to buy or sell financial instruments or commodities on a future date

at a specified price. Forward contracts are tailor-made agreements that are transacted between counterparties on the OTC market, whereas futures are standardized contracts transacted on regulated exchanges.

Swaps are transactions in which two parties exchange cash flows on a specified notional amount for a predetermined period. Most swaps are traded OTC. The major types of swap transactions undertaken by the Group are as follows:
– Interest rate swap contracts generally entail the contractual exchange of fixed-rate and floating-rate interest payments in a single currency, based on a notional amount and a reference interest rate, e. g.e.g. LIBOR.
– Cross-currency swaps involve the exchange of interest payments based on two different currency principal balances and reference interest rates and generally also entail exchange of principal amounts at the start and / or end of the contract.
– Credit default swaps (CDSs) are the most common form of a credit derivative, under which the party buying protectionpro-



312

Financial information

Note 23 Derivative instruments and hedge accounting (continued)

tection makes one or more payments to the party selling protection in exchange for an undertaking by the seller to make a payment to the buyer following a credit event (as defined in the contract) with respect to a third-party credit entity (as defined in the contract). Settlement following a credit event may be a net cash amount or cash in return for physical delivery of one or more obligations of the credit entity and is made regardless of whether the protection buyer has actually suffered a loss. After a credit event and settlement, the contract is terminated.
– Total rate of return swaps give the total return receiver exposure to all of the cash flows and economic benefits and risks of an underlying asset, without having to own the asset, in exchange for a series of payments, often based on a reference interest rate, e. g.e.g. LIBOR. The total return payer has an equal and opposite position.
– Options are contractual agreements under which, typically,Metal swaps (precious metal swaps and base metal swaps) involve the seller (writer) grantspurchase and sale of specific metals. A precious metal swap involves the purchaser the right, but not the obligation, either to buy (call option) or to sell (put option) by or at a set date,purchase and sale of a specified quantitymetal with fixed notional amount and fixed price but different settlement dates. A base metal swap is the simultaneous purchase and sale of a specified metal with same settlement dates but different pricing terms.
Options are contractual agreements under which, typically, the seller (writer) grants the purchaser the right, but not the obligation, either to buy (call option) or to sell (put option) by or at a set date, a specified quantity of a financial instrument or commodity at a predetermined price. The purchaser pays a premium to the seller for this right. Options involving more complex payment structures are also transacted. Options may be traded OTC or on a regulated exchange and may be traded in the form of a security (warrant).



69

Financial Statements
Notes to the Financial Statements

Note 23 Derivative Instrumentsseller for this right. Options involving more complex payment structures are also transacted. Options may be traded OTC or on a regulated exchange and Hedge Accounting (continued)may be traded in the form of a security (warrant).

Credit derivatives

UBS’s credit derivative portfolio consists of credit default swaps and total return swaps. The total notional value of protection bought and sold during 2008 was CHF 2,136 billion and CHF 1,474 billion, respectively.

Commitment to acquire auction rate securities

In 2008, Wealth Management US recognized provisions of CHF 1,464 million, presented as general and administrative expenses in the income statement, for the expected cost of the repurchase of auction rate securities (ARSs) and related costs, including fines. The estimate of the expected cost was based on assumptions relating to the timing of the repur-

chase, the restructuring of the securities as well as the fair values of such securities.

In October, UBS proceeded with the implementation of the settlement agreements by registering with the US Securities and Exchange Commission the offering of ARS rights (in the legal form of securities) to clients. The issued ARS rights provide eligible clients the right to sell ARS (put option), while UBS stipulated a right to call ARS from clients (as well as a litigation release from institutional clients). Pursuant to the issuance of the ARS rights, the commitment to repurchase ARS from clients was treated as a derivative. As a result, the provision, excluding fines, was reclassified to Negative replacement value. After reclassification, changes in the fair value of the commitment resulted in an additional CHF 60 million loss in Net trading income. As of 31 December 2008, the fair value of the commitment recognized as negative replacement value was CHF 1,028 million.

Derivatives transacted for trading purposes

Most of the Group’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading includesactivities include market making, positioning and arbitrage activities. Market making involves quoting bid and offer prices to other market participants with the intention of generating revenues based on spread and volume. Positioning means managing market risk positions with the expectation of profiting from favorable movements in prices, rates or indices. Arbitrage activities involve identifying and profiting from price differentials between the same product in different markets or the same economic factor in different products.

Derivatives transacted for hedging purposes

The Group enters into derivative transactions for the purposes of hedging assets, liabilities, forecast transactions, cash flows and credit exposures. The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and whether the hedge qualifies as such for accounting purposes.
Derivative transactions may qualify as hedges for accounting purposes. These are described under the corre-

spondingcorresponding headings in this note. The Group’s accounting policies for derivatives designated and accounted for as hedging instruments are explained in Note 1a14)1a) 14) Derivative instruments and hedge accounting, where terms used in the following sections are explained.



313

Financial information
Notes to the consolidated financial statements

Note 23 Derivative instruments and hedge accounting (continued)

The Group has also entered into CDSs that provide economic hedges for credit risk exposures in the loan and traded product portfolios but do not meet the requirements for hedge accounting treatment.

The Group has also entered into a limited volume of interest rate swaps and other interest rate derivatives (e. g.(e.g. futures) for day-to-day economic interest rate risk management purposes, but without applying hedge accounting. The fair value changes of such swaps are booked to Net trading income.

Fair value hedges

The Group’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate instruments (e.g. long-term-fixed rate debt issues) due to movements in market interest rates. The fair values of outstanding interest rate derivatives designated as fair value hedges were a CHF 883 million net positive replacement value at 31 December 2008 and a CHF 125 million net positive replacement value at 31 December 2007 and a CHF 222 million net positive replacement value at 31 December 2006.2007.



Fair value hedges of interest rate risk

            
Fair value hedges of interest rate riskFair value hedges of interest rate risk 
      For the year ended 
 For the year ended 
CHF million 31.12.07 31.12.06  31.12.08 31.12.07 31.12.06 
Gains / (losses) on hedging instruments 15  (28) 778 15  (28)
Gains / (losses) on hedged items attributable to the hedged risk  (11)  (11)  (796)  (11) 11 
Net gains / (losses) representing ineffective portions of fair value hedges
 4  (17)  (18) 4  (17)

In addition, the Group has entered into a fair value hedge accounting relationship in 2005 using foreign exchange derivatives to protect a certain portion of equity investments available-for-sale from foreign currency exposure. The time value associated with the FX derivatives is excluded from the evalua-

tionevaluation of hedge ineffectiveness. The hedging relation-

ship was terminated in 2008 as a result of UBS’s disposal of its foreign currency investment, which was the hedged item in this hedge accounting relationship. The fair value of outstanding FX derivatives designated as fair value hedges at 31 December 2008 and 31 December 2007 was a CHF 0 million at 31 December 2007 and CHF 1 million net positive replacement value at 31 December 2006.for both years.



Fair value hedges of foreign exchange risk

         
  For the year ended 
CHF million 31.12.07  31.12.06 
 
Gains / (losses) on hedging instruments  42   49 
 
Gains / (losses) on hedged items attributable to the hedged risk  (44)  (44)
 
Net gains / (losses) representing ineffective portions of fair value hedges
  (2)  5 
 

70

Note 23 Derivative Instruments and Hedge Accounting (continued)

             
Fair value hedges of foreign exchange risk 
  For the year ended
 
CHF million 31.12.08  31.12.07  31.12.06 
 
Gains / (losses) on hedging instruments  0   42   49 
 
Gains / (losses) on hedged items attributable to the hedged risk  0   (44)  (44)
 
Net gains / (losses) representing ineffective portions of fair value hedges
  0   (2)  5 
 

Fair value hedges of portfolio interest rate risk

The Group also applies fair value hedge accounting of portfolio interest rate risk. The change in fair value of the hedged items is recorded separately from the hedged item on the

balance sheet. The fair value of derivatives designated for this hedge method at 31 December 20072008 was a

CHF 58765 million net positivenegative replacement value and at 31 December 20062007 was a CHF 2141 million net positivenegative replacement value.



Fair value hedges

During 2008, UBS expanded the use of its method to hedge portfolio interest rate risk to include other Swiss mortgage loan portfolios.



             
Fair value hedge of portfolio of interest rate risk 
  For the year ended
 
CHF million 31.12.08  31.12.07  31.12.06 
 
Gains / (losses) on hedging instruments  (644)  (37)  (7)
 
Gains / (losses) on hedged items attributable to the hedged risk  688   30   7 
 
Net gains / (losses) representing ineffective portions of fair value hedges
  44   (7)  0 
 

314

         
  For the year ended 
CHF million 31.12.07  31.12.06 
 
Gains / (losses) on hedging instruments  37   15 
 
Gains / (losses) on hedged items attributable to the hedged risk  (30)  (23)
 
Net gains / (losses) representing ineffective portions of fair value hedges
  7   (8)
 

Financial information

Note 23 Derivative instruments and hedge accounting (continued)

Cash flow hedges of forecast transactions

The Group is exposed to variability in future interest cash flows on non-trading assets and liabilities that bear interest at variable rates or are expected to be refunded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities, based on contractual terms and other relevant factors including esti-

mates of prepayments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying the non-trading interest rate risk of the Group, which is hedged with interest rate swaps, the maximum maturity of which is 2219 years.

The schedule of forecast principal balances on which the expected interest cash flows arise as of 31 December 20072008 is shown below.



                               
Forecast cash flows 
           
Forecasted cash flowsForecasted cash flows 
CHF billion < 1 year 1–3 years 3–5 years 5–10 years over 10 years  < 1 year 1–3 years 3–5 years 5–10 years over 10 years 
Cash inflows (assets) 218 395 285 273 15  247 443 309 250 19 
Cash outflows (liabilities) 84 147 106 102 2  69 129 101 85 2 
Net cash flows
 134 248 179 171 13  178 314 208 165 17 

Gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast transactions are initially recorded in Equity as Net income recognized directly in equity and are transferred to current period earnings when the forecast cash flows affect net profit or loss. The gains and losses on ineffective portions of such derivatives are recognized immediately in the income statement. A CHF 164 million loss, a CHF 443 million gain and a CHF 36 million loss and a CHF 35 million gain were recognized in 2008, 2007 2006 and 2005,2006, respectively, due to hedge ineffectiveness.

As of 31 December 20072008 and 2006,2007, the fair values of outstanding derivatives designated as cash flow hedges of forecast transactions were a CHF 992,595 million net positive

replacement value and a CHF 46299 million net negativepositive replacement value, respectively. No Swiss franc hedging interest rate swaps were terminated during 2007 or 2006. At the end of 20072008 and 2006,2007, unrecognized income of CHF 13586 million and CHF 214135 million associated with terminatedde-designated hedging swaps remained deferred in Equity. It will be removed from Equity when the hedged cash flows have an impact on net profit or loss.loss, or when the forecasted cash flows are no longer expected to take place. In fourth quarter 2008, due to reductions in the volume of short term financial instruments, some of the forecasted cash flows previously included in the hedge relationships have been determined to no longer be expected to occur. Amounts reclassified from Net income recognized directly in Equity to current period earnings due to discontinuation of hedge accounting were a CHF 49 million net gain in 2008, a CHF 79 million net gain in 2007 and a CHF 132 millionmil-

lion net gain in 2006 and a CHF 243 million net gain in 2005.2006. These amounts were recorded in Net interest income.



71

Financial Statements
Notes to the Financial Statements

Note 23 Derivative Instruments and Hedge Accounting (continued)

Risks of derivative instruments

Derivative instruments are transacted in many trading portfolios, which generally include several types of instruments, not just derivatives. The market risk of derivatives is managed and controlled as an integral part of the market risk of these portfolios. The Group’s approach to market risk is described in the audited “Market risk” section inRisk, Treasury and Capital Management 2007.of this report.
Derivative instruments are transacted with many different counterparties, most of whom are also counterparties for other types of business. The credit risk of derivatives is managed and controlled in the context of the Group’s overall credit exposure to each counterparty. The Group’s approach to credit risk is described in the audited “Credit risk” section inRisk, Treasury and Capital Management 2007.of this report. It should be noted that, although the positive replacement values shown on the balance sheet can be an important component of the Group’s credit exposure, the positive replacement values for a counterparty are rarely an adequate reflection of the Group’s credit exposure on its derivatives business with that counterparty. This is because, on the one hand, replacement values can increase over time (“potential future exposure”), while on the other hand, exposure may be mitigated by entering into master netting agreements and bilateral collateral arrangements with counterparties. Both the exposure measures used by the Group internally to control credit risk and the capital



315

Financial information
Notes to the consolidated financial statements

Note 23 Derivative instruments and hedge accounting (continued)

requirements imposed by regulators reflect these additional factors. There are addi-

tional capital requirements shown in the in the Risk-weighted assets (BIS) table in the “Capital management” section inRisk, Treasury and Capital Management 2007under Off-balanceThe replacement values presented on UBS’s balance sheet exposures as Forward and swap contracts and Purchased options, which reflect the additional potential future exposure.

In the audited Exposure to credit risk table in the “Credit risk” section inRisk, Treasury and Capital Management 2007,and in the Risk-weighted assets (BIS) tabletables on the next two pages include netting in accordance with IFRS requirements (refer to Note 1), which is more restrictive than netting guidance provided by the “Capital management” section inRisk, Treasury and Capital Management 2007,the Positive replacement values are lower than those shown in the balance sheet because they re-flectSwiss Financial Market Supervisory Authority (FINMA). The main difference of Swiss GAAP to IFRS is that Swiss GAAP netting is generally based on close-out netting arrangements accepted by the Swiss Federal Banking Commission (SFBC) as being

which are enforceable in case of insolvency. The impact of such netting agreements on the gross replacement values shown in the tables on the next two pages is to reduce both positive and negative replacement values by CHF 292,371 million652 billion and CHF 219,820 million292 billion at 31 December 20072008 and 20062007, respectively. As a result, positive replacement values after netting for UBS Group were CHF 135,846 million202 billion at 31 December 20072008 and CHF 73,155 million136 billion at 31 December 2006. These figures differ from those shown in the sections mentioned above inRisk, Treasury and Capital Management 2007because they cover the whole UBS Group, whereas the relevant tables inRisk, Treasury and Capital Management 2007cover only those entities which are subject to consolidation for regulatory capital purposes.

2007.



72

316

                                             
Note 23 Derivative Instruments and Hedge Accounting1 (continued) 
As of 31 December 2007 Term to maturity          Total 
  within 3 months  3-12 months  1-5 years  over 5 years  Total  Total  notional 
CHF million PRV2  NRV3  PRV  NRV  PRV  NRV  PRV  NRV  PRV  NRV  CHF bn 
 
Interest rate contracts
 
Over-the-counter (OTC) contracts
 
Forward contracts  686   760   129   131   31   48           846   939   1,534.8 
 
Swaps  4,852   5,351   7,864   8,137   52,447   55,061   77,270   69,027   142,433   137,576   28,363.5 
 
Options  410   289   204   622   3,416   4,753   15,770   17,280   19,800   22,944   1,405.0 
 
Exchange-traded contracts4
 
Futures                                          2,072.7 
 
Options  568   622   265   263   28   27           861   912   89.9 
 
Total
  6,516   7,022   8,462   9,153   55,922   59,889   93,040   86,307   163,940   162,371   33,465.9 
 
Credit derivative contracts
 
Over-the-counter (OTC) contracts
 
Credit default swaps  207   248   6,471   5,951   60,864   62,495   26,822   30,905   94,364   99,599   5,172.3 
 
Total rate of return swaps  412   313   143   243   2,457   2,814   7,922   3,235   10,934   6,605   188.3 
 
Total
  619   561   6,614   6,194   63,321   65,309   34,744   34,140   105,298   106,204   5,360.6 
 
Foreign exchange contracts
 
Over-the-counter (OTC) contracts
 
Forward contracts  8,248   8,792   2,554   2,867   888   623   14   33   11,704   12,315   1,322.2 
 
Interest and currency swaps  26,887   28,169   15,780   13,616   19,412   21,934   12,467   11,605   74,546   75,324   4,871.9 
 
Options  4,807   4,396   5,887   5,519   1,316   1,313   52   76   12,062   11,304   1,506.9 
 
Exchange-traded contracts4
 
Futures                                          12.0 
 
Options  66   57   9   9                   75   66   4.5 
 
Total
  40,008   41,414   24,230   22,011   21,616   23,870   12,533   11,714   98,387   99,009   7,717.5 
 
Equity/index contracts
 
Over-the-counter (OTC) contracts
 
Forward contracts  2,384   2,006   1,736   1,047   550   738   87   63   4,757   3,854   175.8 
 
Options  3,134   4,163   4,689   9,103   5,412   12,054   1,216   3,548   14,451   28,868   291.4 
 
Exchange-traded contracts4
 
Futures                                          55.6 
 
Options  6,114   6,193   7,909   8,727   6,520   7,173   221   315   20,764   22,408   325.5 
 
Total
  11,632   12,362   14,334   18,877   12,482   19,965   1,524   3,926   39,972   55,130   848.3 
 
Precious metals contracts
 
Over-the-counter (OTC) contracts
 
Forward contracts  463   993   864   659   1,007   489   47   71   2,381   2,212   39.9 
 
Options  488   1,020   1,107   1,116   1,842   1,691   170   130   3,607   3,957   79.1 
 
Exchange-traded contracts4
 
Futures                                          0.2 
 
Options  145   127   226   233   43   41           414   401   28.0 
 
Total
  1,096   2,140   2,197   2,008   2,892   2,221   217   201   6,402   6,570   147.2 
 
Commodities contracts, excluding precious metals contracts
 
Over-the-counter (OTC) contracts
 
Forward contracts  2,421   2,425   1,580   1,567   1,886   1,751   1,065   1,157   6,952   6,900   111.5 
 
Options  469   459   896   1,187   878   1,048   117   134   2,360   2,828   24.9 
 
Exchange-traded contracts4
 
Futures                                          170.3 
 
Options  1,606   1,453   2,284   2,342   1,016   732           4,906   4,527   181.3 
 
Total
  4,496   4,337   4,760   5,096   3,780   3,531   1,182   1,291   14,218   14,255   488.0 
 
Total derivative instruments
  64,367   67,836   60,597   63,339   160,013   174,785   143,240   137,579   428,2175  443,5396    
 
Financial information
                                                 
Note 23 Derivative instruments and hedge accounting1 (continued) 
As of 31 December 2008 Term to maturity             
  Within 3 months  3–12 months  1–5 years  over 5 years  Total  Notional  Total  Notional 
CHF billion PRV2  NRV3  PRV  NRV  PRV  NRV  PRV  NRV  PRV  value  NRV  value 
 
Interest rate contracts
                                                
 
Over-the-counter (OTC) contracts                                                
 
Forward contracts  2.1   2.2   3.8   4.1   0.3   0.4       0.0   6.2   1,544.9   6.7   1,584.5 
 
Swaps  9.5   9.9   23.6   24.3   152.1   140.5   144.8   142.9   330.0   9,065.4   317.6   22,739.9 
 
Options  4.0   3.7   6.6   7.0   14.3   15.6   12.6   16.5   37.4   498.4   42.9   595.5 
 
Exchange-traded contracts4
                                                
 
Futures                                      219.8       307.8 
 
Options  0.8   0.8   0.5   0.5   0.1   0.1           1.4   6.4   1.4   8.7 
 
Total
  16.4   16.6   34.5   36.0   166.8   156.6   157.4   159.5   375.1   11,334.9   368.6   25,236.4 
 
Credit derivative contracts
                                                
 
Over-the-counter (OTC) contracts                                                
 
Credit default swaps  0.5   0.3   3.4   3.5   95.4   91.2   89.8   88.2   189.1   1,856.1   183.3   1,754.0 
 
Total rate of return swaps  3.4   0.4   0.2   0.1   3.1   0.5   1.6   0.5   8.3   31.2   1.5   12.6 
 
Total
  3.9   0.7   3.6   3.6   98.4   91.7   91.4   88.8   197.4   1,887.2   184.8   1,766.7 
 
Foreign exchange contracts
                                                
 
Over-the-counter (OTC) contracts                                                
 
Forward contracts  21.0   22.8   8.4   10.6   1.6   1.1   0.1   0.1   31.2   468.1   34.5   485.6 
 
Interest and currency swaps  72.1   74.5   36.2   33.8   34.9   39.2   27.1   26.5   170.3   2,047.4   173.9   1,868.4 
 
Options  7.5   7.6   10.0   9.1   2.1   1.8       0.0   19.7   610.1   18.6   524.8 
 
Exchange-traded contracts4
                                                
 
Futures                                              1.7 
 
Options  0.2   0.3   0.0   0.0                   0.2   12.8   0.3   6.1 
 
Total
  101.0   105.2   54.6   53.5   38.7   42.1   27.2   26.6   221.5   3,138.3   227.3   2,886.5 
 
Equity/index contracts
                                                
 
Over-the-counter (OTC) contracts                                                
 
Forward contracts  1.9   1.6   2.0   1.8   2.2   2.0   0.2   0.3   6.4   68.5   5.7   40.1 
 
Options  1.7   3.2   4.8   7.4   4.7   8.5   1.7   4.0   12.9   108.9   23.0   106.1 
 
Exchange-traded contracts4
                                                
 
Futures                                      15.3       18.2 
 
Options  5.0   5.2   5.3   6.7   4.8   5.6   0.9   1.2   16.1   97.9   18.7   110.5 
 
Total
  8.6   10.0   12.1   16.0   11.7   16.1   2.9   5.5   35.3   290.5   47.4   275.0 
 
Precious metals contracts
                                                
 
Over-the-counter (OTC) contracts                                                
 
Forward contracts  0.8   0.7   0.6   0.5   0.5   0.4   0.0   0.1   1.8   13.1   1.7   14.1 
 
Options  0.5   0.6   1.3   1.3   1.8   1.5   0.2   0.2   3.8   30.6   3.7   35.8 
 
Exchange-traded contracts4
                                                
 
Futures                                              0.6 
 
Options  0.1   0.1   0.1   0.2   0.0   0.0           0.1   4.7   0.3   9.5 
 
Total
  1.3   1.4   1.9   2.0   2.3   1.9   0.3   0.4   5.8   48.4   5.7   60.0 
 
Commodities contracts, excluding precious metals contracts                                        
 
Over-the-counter (OTC) contracts                                                
 
Forward contracts  2.2   1.7   3.7   3.2   1.4   1.2   0.9   1.0   8.2   26.1   7.1   19.0 
 
Options  0.3   0.4   1.3   1.2   0.8   0.8   0.0   0.0   2.4   5.7   2.4   6.6 
 
Exchange-traded contracts4
                                                
 
Futures                                      13.5       0.0 
 
Options  2.0   2.0   3.7   3.7   2.7   2.7           8.4   69.9   8.4   86.1 
 
Total
  4.5   4.1   8.8   8.1   4.8   4.6   0.9   1.0   19.0   115.2   17.9   111.8 
 
Total derivative instruments5,6
  135.7   138.1   115.5   119.2   322.8   313.0   280.0   281.6   854.17      851.88    
 
thereof commitments to repurchase auction rate securities              1.0                   1.0   16.6 
 
1 Bifurcated embedded derivatives are presented in the same balance sheet line as the host contract and are excluded from the table. Payables and receivables resulting from the valuation of regular way purchases and sales of financial assets between trade and settlement date are recognized as replacement values and therefore included in the table. PRVs and NRVs are categorized in the different time bands on the basis of the maximal duration of the derivative contract.  2 PRV: Positive replacement value.  3 NRV: Negative replacement value.  4 Exchange-traded products include own account trades only.  5 Total PRV and total NRV include approximately CHF 462 million and CHF 1,700 million, respectively for the option to purchase the SNB StabFund equity. Refer to Note 38.  6 Total NRVs include approximately CHF 1,058 million for the derivative component of the mandatory convertible notes issued to the Swiss Confederation in December 2008. Refer to Note 26.  7 The impact of netting agreements accepted by the Swiss Federal Banking Commission (SFBC)Financial Market Supervisory Authority (FINMA) for capital adequacy calculations is to reduce positive replacement values to CHF 135,846202,351 million.  68 The impact of netting agreements accepted by the SFBCFINMA for capital adequacy calculations is to reduce negative replacement values to CHF 151,168200,055 million.

73317

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

                                                                         
Note 23 Derivative Instruments and Hedge Accounting1 (continued) 
As of 31 December 2006 Term to maturity Total 
Note 23 Derivative instruments and hedge accounting1 (continued)Note 23 Derivative instruments and hedge accounting1 (continued) 
As of 31 December 2007 Term to maturity 
 within 3 months 3-12 months 1-5 years over 5 years Total Total notional  Within 3 months 3–12 months 1–5 years over 5 years Total Notional Total Notional 
CHF million PRV2 NRV3 PRV NRV PRV NRV PRV NRV PRV NRV CHF bn 
CHF billion PRV2 NRV3 PRV NRV PRV NRV PRV NRV PRV value NRV value 
Interest rate contractsInterest rate contracts 
Over-the-counter (OTC) contractsOver-the-counter (OTC) contracts 
Forward contracts 1,001 764 172 177 38 34 1,211 975 1,848.0  0.7 0.8 0.1 0.1 0.0 0.0 0.8 759.7 0.9 775.1 
Swaps 5,629 4,784 9,891 10,134 46,690 47,128 51,609 46,249 113,819 108,295 22,643.4  4.9 5.4 7.9 8.1 52.4 55.1 77.3 69.0 142.4 12,527.7 137.6 15,835.8 
Options 273 308 127 440 2,252 3,563 13,529 15,148 16,181 19,459 1,432.5  0.4 0.3 0.2 0.6 3.4 4.8 15.8 17.3 19.8 621.9 22.9 783.1 
Exchange-traded contracts4Exchange-traded contracts4 
Futures 2,904.4  367.7 1,705.0 
Options 406 438 474 485 96 96 976 1,019 34.7  0.6 0.6 0.3 0.3 0.0 0.0 0.9 39.0 0.9 50.9 
Total
 7,309 6,294 10,664 11,236 49,076 50,821 65,138 61,397 132,187 129,748 28,863.0  6.5 7.0 8.5 9.2 55.9 59.9 93.0 86.3 163.9 14,316.0 162.4 19,149.9 
Credit derivative contractsCredit derivative contracts 
Over-the-counter (OTC) contractsOver-the-counter (OTC) contracts 
Credit default swaps 35 54 363 673 12,874 14,035 7,425 7,953 20,697 22,715 2,536.6  0.2 0.2 6.5 6.0 60.9 62.5 26.8 30.9 94.4 2,509.7 99.6 2,662.6 
Total rate of return swaps 54 63 100 74 583 1,606 4,284 3,512 5,021 5,255 103.0  0.4 0.3 0.1 0.2 2.5 2.8 7.9 3.2 10.9 56.6 6.6 131.7 
Total
 89 117 463 747 13,457 15,641 11,709 11,465 25,718 27,970 2,639.6  0.6 0.6 6.6 6.2 63.3 65.3 34.7 34.1 105.3 2,566.3 106.2 2,794.3 
Foreign exchange contractsForeign exchange contracts 
Over-the-counter (OTC) contractsOver-the-counter (OTC) contracts 
Forward contracts 4,565 4,322 1,765 1,968 827 531 17 103 7,174 6,924 784.0  8.2 8.8 2.6 2.9 0.9 0.6 0.0 0.0 11.7 635.0 12.3 687.2 
Interest and currency swaps 24,724 22,977 10,363 10,599 14,641 12,366 12,821 11,831 62,549 57,773 4,064.6  26.9 28.2 15.8 13.6 19.4 21.9 12.5 11.6 74.5 2,457.9 75.3 2,414.0 
Options 2,877 2,624 2,987 3,042 828 1,041 51 49 6,743 6,756 1,276.2  4.8 4.4 5.9 5.5 1.3 1.3 0.1 0.1 12.1 759.2 11.3 747.7 
Exchange-traded contracts4Exchange-traded contracts4 
Futures 20.8  1.5 10.5 
Options 12 16 2 2 14 18 0.1  0.1 0.1 0.0 0.0 0.1 0.0 0.1 4.5 
Total
 32,178 29,939 15,117 15,611 16,296 13,938 12,889 11,983 76,480 71,471 6,145.7  40.0 41.4 24.2 22.0 21.6 23.9 12.5 11.7 98.4 3,853.6 99.0 3,863.9 
Equity/index contractsEquity/index contracts 
Over-the-counter (OTC) contractsOver-the-counter (OTC) contracts 
Forward contracts 1,179 1,464 386 1,217 506 8 14 103 2,085 2,792 107.8  2.4 2.0 1.7 1.0 0.6 0.7 0.1 0.1 4.8 103.1 3.9 72.7 
Options 1,073 3,485 3,702 5,655 6,121 8,821 1,605 2,795 12,501 20,756 258.0  3.1 4.2 4.7 9.1 5.4 12.1 1.2 3.5 14.5 113.5 28.9 177.9 
Exchange-traded contracts4Exchange-traded contracts4 
Futures 72.4  20.5 35.1 
Options 4,277 4,602 8,238 8,396 9,978 10,458 22,946 23,889 270.7  6.1 6.2 7.9 8.7 6.5 7.2 0.2 0.3 20.8 158.6 22.4 166.9 
Total
 6,529 9,551 12,326 15,268 16,605 19,287 2,072 3,331 37,532 47,437 708.9  11.6 12.4 14.3 18.9 12.5 20.0 1.5 3.9 40.0 395.7 55.1 452.6 
Precious metals contractsPrecious metals contracts 
Over-the-counter (OTC) contractsOver-the-counter (OTC) contracts 
Forward contracts 348 339 573 355 757 371 37 48 1,715 1,113 25.6  0.5 1.0 0.9 0.7 1.0 0.5 0.0 0.1 2.4 16.8 2.2 23.1 
Options 293 580 676 784 1,554 1,281 118 68 2,641 2,713 70.6  0.5 1.0 1.1 1.1 1.8 1.7 0.2 0.1 3.6 36.6 4.0 42.5 
Exchange-traded contracts4Exchange-traded contracts4 
Futures 1.0  0.2 
Options 75 142 242 196 332 369 649 707 23.9  0.1 0.1 0.2 0.2 0.0 0.0 0.4 18.5 0.4 9.5 
Total
 716 1,061 1,491 1,335 2,643 2,021 155 116 5,005 4,533 121.1  1.1 2.1 2.2 2.0 2.9 2.2 0.2 0.2 6.4 71.9 6.6 75.3 
Commodities contracts, excluding precious metals contractsCommodities contracts, excluding precious metals contractsCommodities contracts, excluding precious metals contracts 
Over-the-counter (OTC) contractsOver-the-counter (OTC) contracts 
Forward contracts 3,254 3,223 2,894 3,155 1,724 1,579 766 840 8,638 8,797 86.3  2.4 2.4 1.6 1.6 1.9 1.8 1.1 1.2 7.0 59.0 6.9 52.5 
Options 221 236 447 368 595 654 1 27 1,264 1,285 13.0  0.5 0.5 0.9 1.2 0.9 1.0 0.1 0.1 2.4 11.4 2.8 13.5 
Exchange-traded contracts4Exchange-traded contracts4 
Futures 236.7  0.4 169.9 
Options 1,884 1,895 2,349 2,152 1,918 1,775 6,151 5,822 67.1  1.6 1.5 2.3 2.3 1.0 0.7 4.9 88.7 4.5 92.6 
Total
 5,359 5,354 5,690 5,675 4,237 4,008 767 867 16,053 15,904 403.1  4.5 4.3 4.8 5.1 3.8 3.5 1.2 1.3 14.2 159.5 14.3 328.5 
Total derivative instruments
 52,180 52,316 45,751 49,872 102,314 105,716 92,730 89,159  292,9755  297,0636  64.4 67.8 60.6 63.3 160.0 174.8 143.2 137.6  428.25  443.56 
1 Bifurcated embedded derivatives are presented in the same balance sheet line as the host contract and are excluded from the table. Payables and receivables resulting from the valuation of regular way purchases and sales of financial assets between trade and settlement date are recognized as replacement values and therefore included in the table. PRVs and NRVs are categorized in the different time bands on the basis of the maximal duration of the derivative contract.2 PRV: Positive replacement value.  3 NRV: Negative replacement value.  4 Exchange-traded products include own account trades only.  5 The impact of netting agreements accepted by the Swiss Federal Banking Commission (SFBC)Financial Market Supervisory Authority (FINMA) for capital adequacy calculations is to reduce positive replacement values to CHF 73,155135,846 million.  6 The impact of netting agreements accepted by the SFBCFINMA for capital adequacy calculations is to reduce negative replacement values to CHF 77,243151,168 million.

74318

Off-Balance Sheet InformationOff-balance-sheet information

Note 24 Pledgeable Off-Balance Sheet Securities

Note 24 Pledgeable off-balance-sheet securities

The Group obtains securities which are not recorded on the balance sheet with the right to sell or repledge them as shown in the table below.

             
CHF million
 31.12.07 31.12.06  31.12.08 31.12.07 
Fair value of securities received which can be sold or repledged 1,491,567 1,436,827  651,380 1,491,567 
as collateral under reverse repurchase, securities borrowing and lending arrangements, derivative transactions and other transactions
 1,396,768 1,342,733  621,981 1,396,768 
in unsecured borrowings
 94,799 94,094  29,399 94,799 
thereof sold or repledged 1,011,090 1,069,795  430,670 1,118,305 
in connection with financing activities
 924,329 969,608  343,252 924,795 
to satisfy commitments under short sale transactions
 58,039 87,288  62,431 164,788 
in connection with derivative and other transactions
 28,722 12,899  24,987 28,722 
Note 25 Operating Lease Commitments

Note 25 Operating lease commitments

At 31 December 2007,2008, UBS was obligated under a number of non-cancellable operating leases for premises and equipment used primarily for banking purposes. The significant premises leases usually include renewal options and escalation clauses in line with general office rental market conditions as well as rent adjustments based on price indices. However, the lease

agreements do not contain contingent

rent payment clauses and purchase options. The leases also do not impose any restrictions on UBS’s ability to pay dividends, engage in debt financing transactions or enter into further lease agreements.
The minimum commitments for non-cancellable leases of premises and equipment are presented as follows:



    
CHF million 31.12.07  31.12.08 
Operating leases due
  
2008 1,085 
2009 1,009  1,034 
2010 920  950 
2011 833  848 
2012 762  772 
2013 and thereafter 3,769 
2013 634 
2014 and thereafter 2,573 
Subtotal commitments for minimum payments under operating leases 8,378  6,811 
Less: Sublease rentals under non-cancellable leases 742  578 
Net commitments for minimum payments under operating leases
 7,636  6,233 

319

             
CHF million 31.12.07  31.12.06  31.12.05 
 
Gross operating lease expense
  1,251   1,170   1,232 
 
from continuing operations  1,248   1,150   1,084 
 
from discontinued operations  3   20   148 
 
Sublease rental income from continuing operations  54   56   51 
 
Net operating lease expense
  1,197   1,114   1,181 
 
from continuing operations  1,194   1,094   1,033 
 
from discontinued operations  3   20   148 
 

Financial information
Notes to the consolidated financial statements

             
Note 25 Operating lease commitments (continued) 
CHF million 31.12.08  31.12.07  31.12.06 
 
Gross operating lease expense
  1,215   1,251   1,170 
 
from continuing operations  1,215   1,233   1,137 
 
from discontinued operations  0   18   33 
 
Sublease rental income from continuing operations  50   54   56 
 
Net operating lease expense
  1,165   1,197   1,114 
 
from continuing operations  1,165   1,179   1,081 
 
from discontinued operations  0   18   33 
 

Operating lease contracts include non-cancellable long-term leases of office buildings in most UBS locations. At 31 December 2007,2008, the minimum lease commitments for 17each of 12 office lo-

cations eachlocations exceeded CHF 100 million. Non-cancellablemillion and non-

cancellable minimum lease commitments for threeeach of two office locations in New Jersey London and Zurich eachNew York exceeded CHF 500 million.



75320

Financial information

Additional information

Note 26 Capital increases and mandatory convertible notes

Share capital increase

On 23 April 2008, the Annual General Meeting of shareholders (AGM) approved a proposal that UBS strengthen its shareholders’ equity by way of an ordinary capital increase. The capital increase, completed in June 2008, was effected by granting existing shareholders rights to subscribe to seven new shares for 20 old shares at a price of CHF 21 per share. The capital increase was fully underwritten and resulted in the issue of 760,295,181 new fully paid registered shares with a par value of CHF 0.10 each. Net proceeds from the capital increase were approximately CHF 15.6 billion. The newly issued shares ranked pari passu in all respects with the existing registered shares immediately upon issue.

Issuance of mandatory convertible notes (MCNs)

March 2008 issuance
On 9 December 2007, UBS entered into an agreement with the Government of Singapore Investment Corporation Pte Ltd and an investor from the Middle East to issue mandatory convertible notes (MCNs) with a face value of CHF 13 billion. The MCNs were issued on 5 March 2008 after the shareholders approved, at the Extraordinary General Meeting held on 27 February 2008, the creation of conditional capital in a maximum amount of 277,750,000 shares to be issued upon conversion of the MCNs. The MCNs counted as Tier 1 capital for regulatory capital purposes from the date of issue.
The MCNs have a coupon of 9% per annum and are convertible into UBS shares after two years, with earlier conversion options for the investors and UBS. The terms of the MCNs initially linked conversion to the share price at the date of conversion, with the minimum conversion price set at CHF 51.48 and the maximum conversion price at CHF 60.23 per share. Conversion prices were subject to anti-dilution adjustments in the event of certain corporate actions.
As a result of anti-dilution adjustments triggered by the June 2008 capital increase, the initial conversion prices were adjusted and the MCNs will be converted into a fixed number of 270,438,942 shares.
Under IFRS, the commitment to issue the MCNs to the two investors entered into by UBS on 9 December 2007 was subject to derivative accounting between the date the commitment was entered into and the date of issuance on 5 March 2008. The total change in the fair value of such commitment of approximately CHF 3,860 million was recognized as a gain in 2008.

Pursuant to the adjustments to the conversion prices, the accounting treatment for the MCNs changed. Upon issuance, the MCNs had been initially treated as a compound financial instrument consisting of a debt host and an embedded equity component. After the adjustments to the conversion prices, the MCNs have been treated as an equity instrument, which resulted in the reclassification of CHF 12,382 million from liability to Share premium in equity. In 2008, Share premium increased by approximately CHF 6,969 million due to the MCNs and interest expense incurred was approximately CHF 126 million. As of 31 December 2008, a liability representing the present value of the 9% coupon payments due on 5 March 2009 and 2010, respectively, was recorded for approximately CHF 2,297 million. Interest at a rate of 2.78% per annum continues to be accrued on the remaining liability.

December 2008 issuance

On 15 October 2008, UBS entered into an agreement with the Swiss Confederation to issue mandatory convertible notes (MCNs) with a face value of CHF 6 billion. The MCNs were issued on 9 December 2008 after the shareholders approved, at the Extraordinary General Meeting held on 27 November 2008, the creation of conditional capital in a maximum amount of 365,000,000 shares to be issued upon conversion of the MCNs. The MCNs counted as Tier 1 capital for regulatory capital purposes from the date of issue.
The MCNs pay a coupon of 12.5% per annum and are convertible into UBS shares after 30 months, with earlier conversion options for the note holders and UBS. Conversion is linked to the share price at the time of conversion, with the minimum conversion price set at CHF 18.21 and the maximum conversion price set at CHF 21.31 per share. If the share price is at or below CHF 18.21, conversion will result in the issuance of the maximum number of shares which is 329,447,681. If the share price is at or above CHF 21.31, conversion will result in issuance of a minimum number of shares of 281,579,096 plus an additional variable number of shares, provided however that the total number of shares to be issued will not exceed the maximum number of shares. If the share price is between the minimum and maximum conversion prices, the MCNs will be converted into a variable number of shares by dividing CHF 6 billion by the market price determined immediately before conversion. Conversion prices are subject to anti-dilution adjustments in the event of certain corporate actions.



321

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Note 26 Capital increases and mandatory convertible notes (continued)

Under IFRS, the commitment to issue the MCNs entered into by UBS on 15 October 2008 was subject to derivative accounting between the date the commitment was entered into and the date of issuance. Changes in the fair value of the commitment between 15 October 2008 and 9 December 2008 resulted in a gain of approximately CHF 329 million in 2008. The commitment was attributable to the equity component and was reclassified as a reduction to Share premium upon issuance of the MCNs.
Upon issuance, the MCNs were treated as a compound financial instrument consisting of a debt host and embedded equity and derivative components. The debt host was recognized as a liability initially measured at fair value and accounted for at amortized cost. The fair value of the debt host
on 9 December 2008 was estimated at approximately CHF 7,733 million. At 31 December 2008, the carrying value of the liability was approximately CHF 7,740 million and interest expense recognized in 2008 amounted to approximately CHF 8 million. The fair value of the derivative component was determined to be approximately CHF 1,425 million, recognized as a negative replacement value. Subsequent changes in the fair value of the derivative component resulted in a gain of approximately CHF 367 million in 2008. The equity component was attributed a fair value of approximately CHF 3,158 million, recorded in equity as a reduction to Share premium. The value of the equity component is not re- measured to fair value after 9 December 2008.


Additional Information

Note 26 Fair Value of Financial Instruments
a) Fair Value of Financial Instruments
Note 27 Fair value of financial instruments

a) Fair value measurements

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willingwill-

ing parties in an arm’s length transaction. For financial instruments carried at fair value, market prices or rates are used to determine fair value where an active market exists (such as a recognized stock exchange), as it is the best evidence of the fair value of a financial instrument (level 1). Refer to Note 1a5)1a) 5) for an overview on the determination of fair value.



Market prices and rates are not, however, available
                                 
Determination of fair values from quoted market prices or valuation techniques 
  31.12.08  31.12.07 
CHF billion Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
 
Trading portfolio assets  128.1   128.4   15.3   271.8   277.2   330.7   52.3   660.1 
 
Trading portfolio assets pledged
    as collateral		  25.4   13.2   1.6   40.2   57.4   48.5   8.3   114.2 
 
Positive replacement values  5.1   811.2   37.8   854.1   6.8   407.4   14.0   428.2 
 
Financial assets designated at
    fair value		  1.1   11.2   0.6   12.9   1.8   10.0   0.0   11.8 
 
Financial investments available-
    for-sale		  2.4   1.2   1.6   5.2   1.2   2.4   1.4   5.0 
 
Total assets
  162.1   965.2   57.0   1,184.3   344.4   799.0   75.9   1,219.3 
 
Trading portfolio liabilities  33.9   27.5   1.0   62.4   119.9   44.9   0.0   164.8 
 
Negative replacement values  4.9   812.0   34.9   851.8   6.6   420.1   16.8   443.5 
 
Financial liabilities designated at
    fair value		  0.0   91.2   10.3   101.5   0.0   149.5   42.4   191.9 
 
Total liabilities
  38.8   930.7   46.3   1,015.8   126.5   614.5   59.2   800.2 
 

Financial instruments accounted for certain financial assets and liabilities held and issued by UBS. In these cases, fair values are estimated using present value or other valuation techniques, using inputs existing at the balance sheet dates. If available, market observable inputs are applied to valuation models. Fair value measurements are considered level 2 if all significant inputs are market observable. Where one or more significant input is not market observable, valuations are considered level 3, and the non-market observable valuation parameters are estimated based on appropriate assumptions.

Valuation techniques are generally applied to OTC derivatives and financial assets and liabilities held for trading and designated at fair value. The most frequently applied pricing models and valuation techniques include forward pricing and swap models using present value calculations, option models such as the Black-Scholes model or generalizations of it, and credit models such as default rate models or credit spread models.
The values derived from applying these techniques are significantly affected by the choice of valuation model and the underlying assumptions made concerning factors such as the amounts and timing of future cash flows, discount rates, volatility, and credit risk.
The fair values of Loans and Debt issued measured at amortized cost are CHF 332.9 billion and CHF 222.8 billion at 31 December 2007, and CHF 296.6 billion and CHF 191.1 billion at 31 December 2006. For all other balance sheet lines including financial instruments, the fair value represents the carrying amount, or the deviation between fair value and carrying amount is negligible.
The following methods and significant assumptions have been applied in determining the fair values of financial instruments:
a)Trading portfolio assets and liabilities, trading portfolio assets pledged as collateral, financial assets and liabilities designated at fair value through profit or loss, derivatives,

credit commitments held for trading and designated at fair value, and other transactions undertaken for trading purposes are measured at fair value by reference to quoted market prices when available. If quoted market prices are not available, then fair values are estimated on the basis of pricing models, or other recognized valuation techniques. Accrued interest is recognized as part of the fair value of such instruments.
The Group’s own credit risk is included in the determination of fair value of financial liabilities accounted for at fair value, including derivative liabilities, in cases where market participants would consider it relevant to pricing. It was calculated based on a yield curve generated from observed external pricing for funding associated with new senior debt issued by the Group. For fully collateralized transactions and other instruments for which market participants do not include an entity-specific adjustment for own credit, no adjustment for own credit changes is made. For the deferral and recognition of day 1 profit or loss, refer to Note 26e.
Fair value is equal to the carrying amount for these items. For financial instruments linked to the US residential mortgage market, refer to the section on the next page.
b)Financial investments available-for-sale are measured at fair value by reference to quoted market prices when available. If quoted market prices are not available, then fair values are estimated on the basis of pricing models or other recognized valuation techniques. Lock-in periods for equity investments are considered when determining fair value. Fair value is equal to the carrying amount for these items, and unrealized gains and losses, excluding impairment write-downs, are recorded in Equity until an asset is sold, collected or otherwise disposed of.
c)The fair value of demand deposits and savings accounts with no specific maturity is assumed to be the amount payable on demand at the balance sheet date.
d)The fair value of variable-rate financial instruments accounted for at amortized cost is assumed to be approximated by their carrying amounts and, in the case of loans, does not reflect changes in their credit quality, as the impact of impairment is recognized separately by deducting any allowances for credit losses from the carrying values.
e)The fair value of fixed-rate loans and mortgages carried at amortized cost is estimated by comparing market interest rates when the loans were granted with current market rates offered on similar loans. Changes in the credit


76

Note 26 Fair Value of Financial Instruments (continued)
a) Fair Value of Financial Instruments (continued)

quality of loans within the portfolio are not taken into account in determining gross fair values, as the impact of impairment is recognized separately by deducting any allowances for credit losses from the carrying values.
These valuation techniques and assumptions provide a measurement of fair value for UBS’s assets and liabilities. However, because other institutions may use different methods and assumptions when estimating fair value using a valuation technique, and when estimating the fair value of financial instruments not carried at fair value, such fair value disclosures cannot necessarily be compared from one financial institution to another.
UBS’s undrawn credit commitments are at variable rates, except certain commitments with fixed credit spreads which are classified as held for trading or accounted for under the fair value option. Accordingly, UBS has no significant exposure to fair value fluctuations resulting from interest rate movements related to commitments which are not recognized with their fair value on balance sheet.
The fair values of UBS’s fixed-rate loans, long- and medium-term notes and bonds issued are predominantly hedged by derivative instruments, mainly interest rate swaps, as explained in Note 23. The interest rate risk inherent in balance sheet positions with no specific maturity may also be hedged with derivative instruments based on management’s view of their average cash flow and repricing behavior.
Derivative instruments used for hedging are carried on the balance sheet at fair values, which are included in the Positive or Negative replacement values. When the interest rate risk on a fixed-rate financial instrument is hedged with a derivative in a fair value hedge, the fixed-rate financial instrument (or hedged portion thereof) is measured at fair value only in relation to the interest rate risk, not the credit risk, as explained in e). Fair value changes are recorded in Net profit. The treatment of derivatives designated as cash flow hedges is explained in Note 1a14). The amount shown in the table as Derivative instruments designated as cash flow hedges is the net change in fair values on such derivatives that is recorded in Equity and not yet transferred to income or expense.

Positions related to the US residential mortgage market Where possible, holdings are marked at the quoted market price in an active market. In the current market environment, such price information is typically not available for instruments linked to the US sub-prime residential mortgage market, and UBS applies valuation techniques to measure such instruments. Valuation techniques use “market observable inputs”, where available, derived from similar assets in similar and active markets, from recent transaction prices for comparable items or from other observable

market data. For positions where observable reference data is not available, UBS uses valuation models with non-market observable inputs.

For the year ended 31 December 2007, UBS used valuation models primarily for super senior RMBS CDO tranches referenced to sub-prime RMBSs. The model used to value these positions projects losses on the underlying mortgage pools and applies the implications of these projected lifetime losses through to the RMBS securities and then to the CDO structure. The primary inputs to the model are monthly remittance data that describe the current performance of the underlying mortgage pools. These are received near the end of each month and relate to the preceding month’s cash flows on the mortgages underlying the relevant mortgage-backed securities. Since this valuation model was adopted in third quarter 2007, UBS has sought to calibrate the model to market information and to review the assumptions of the model on a regular basis. In fourth quarter 2007, UBS calibrated its loss projection estimates to ensure the super senior RMBS CDO valuation model would value relevant market indices (for example, ABX indices) consistently with their observed levels in the market. Despite the various limitations in the comparability of these indices to UBS’s own positions, it was felt that adopting this approach would be best in view of the further deterioration in liquidity and resultant lack of observed transactions to which the model could be calibrated. The valuation model also considers the impact of variability in projected lifetime loss levels and applies a discount rate for expected cash flows derived from relevant market index prices (for example, ABX indices). The external ratings of the RMBSs underlying the CDO tranches or the CDO tranches themselves are inputs to the valuation model only to the extent that they impact the timing of potential “events of default”. The valuation model incorporates the potential timing and impact of such default events based on an analysis of the contractual rights of various parties to the transaction and the estimated performance of the underlying collateral. There is no single market standard for valuation models in this area and such models have inherent limitations, and different assumptions and inputs would generate different results. The super senior RMBS CDO valuation model is used to value transactions where UBS is net long the super senior RMBS CDO exposure and transactions where UBS holds a gross long position hedged one-to-one with an offsetting short position provided by a monoline insurer. The valuation model therefore provides an estimate of the current credit exposure to monoline insurers via such transactions. The fair value of these positions also takes the counterparty credit risk of the monoline insurers into account. Where valuation techniques based on observable inputs are used to value



77

Financial Statements
Notes to the Financial Statements

Note 26 Fair Value of Financial Instruments (continued)
a) Fair Value of Financial Instruments (continued)

RMBS positions, a consistent approach is used to value related hedge positions with monoline insurers.

Adverse fair value changes of instruments related to the US residential mortgage market are reflected in Net trading income. The related trading positions are recognized on UBS’s balance sheet as Trading portfolio instruments or Positive and Negative replacement values. Financial instruments related to the US sub-prime and Alt-A market include collateralized debt obligations (CDOs), mortgage-backed secu-

rities, mortgage loans and derivatives linked to the US mortgage market. Such instruments were either purchased in transactions with third parties or retained in structures such as securitizations originated by UBS. The parameters to measure such instruments generally include expected credit default rates, weighted average life, prepayment speed and discount rates. Information about the risks and exposures of such items is included in the “Risk concentrations” section inRisk, Treasury and Capital Management 2007.



b) Determination of Fair Values from Quoted Market Prices or Valuation Techniques

For trading portfolio assets and liabilities, financial assets and liabilities designated at fair value and financial investments available-for-sale which are listed or other- wiseotherwise traded in an active market, for exchange-traded derivatives, and for other financial instruments for which quoted prices in an active market are available, fair value is determined directly from those quoted market prices (level 1).

For financial instruments which do not have quoted market prices directly available from an active market, fair values are estimated using valuation techniques or models, based wherever possible on assumptions supported by observable market prices or rates prevailing at the balance sheet date (level 2). This is the case for the majority of OTC derivatives,

and for many unlisted instruments and other itemslisted instruments which are not traded in active markets.

For some types of financial instruments, fair values cannot be obtained directly from quoted market prices, or indirectly using valuation techniques or models supported by observable market prices or rates. This is generally the case for private equity investments in unlisted securities, and for certain complex or structured financial instruments.instruments and for private equity investments. In these cases, fair value is estimated indirectly using valuation techniques or models for whichaddition, the inputs are reasonable assumptions, based on market conditions (level 3). The illiquidity of a broad range of financial instruments linked to the US residential mortgage market, as well as US student loan ARSs, monolines, leveraged finance and others required an extended use of valuations based on partially or fully non-market observable market inputs in the second half of 2007.

The following table presents the valuation methods used to determine2007 and 2008. In these cases, fair values of financial instruments carried at fair value.value is estimated indirectly



                                 
Determination of fair values from quoted market prices or valuation techniques 
  31.12.07  31.12.06 
      Valuation  Valuation          Valuation  Valuation    
      technique –  technique –          technique –  technique –    
  Quoted  market  non-market      Quoted  market  non-market    
  market  observable  observable      market  observable  observable    
CHF billion price  inputs  inputs  Total  price  inputs  inputs  Total 
 
Trading portfolio assets  249.3   323.4   37.3   610.0   215.1   411.8   0.1   627.0 
 
Trading portfolio assets pledged as collateral  85.3   55.8   23.2   164.3   243.5   8.0   0.0   251.5 
 
Positive replacement values  6.8   407.4   14.0   428.2   31.3   250.2   11.5   293.0 
 
Financial assets designated at fair value  1.8   10.0   0.0   11.8   0.0   5.1   0.8   5.9 
 
Financial investments available-for-sale  1.2   2.4   1.4   5.0   2.5   4.6   1.8   8.9 
 
Total assets
  344.4   799.0   75.9   1,219.3   492.4   679.7   14.2   1,186.3 
 
Trading portfolio liabilities  119.9   44.9   0.0   164.8   169.9   34.9   0.0   204.8 
 
Negative replacement values  6.6   420.1   16.8   443.5   32.7   255.2   9.2   297.1 
 
Financial liabilities designated at fair value  0.0   149.5   42.4   191.9   0.0   113.0   32.7   145.7 
 
Total liabilities
  126.5   614.5   59.2   800.2   202.6   403.1   41.9   647.6 
 

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Financial information

Note 27 Fair value of financial instruments (continued)

a)Fair value measurements (continued)

using valuation techniques or models for which the inputs are reasonable assumptions, based on market conditions (level 3).
In its valuations, UBS uses indices, where and to the extent appropriate. The most frequently applied pricing models and valuation techniques include forward pricing and swap models using present value calculations, option models such as the Black-Scholes model or generalizations of it, and credit models such as default rate models or credit spread models. The values derived from applying these techniques are significantly affected by the choice of valuation model and the underlying assumptions made concerning factors such as the amounts and timing of future cash flows, discount rates, volatility and credit risk. Accrued interest is recognized as part of the fair value of financial instruments accounted for at fair value. Lock-up periods for equity investments are considered when determining fair value.
Refer to the description below of the impact from UBS’s own credit movements on financial liabilities accounted for at fair value. For the deferral and recognition of day 1 profit or loss, refer to Note 27d. For a description of the valuations of UBS’s positions related to the US student loan auction rate securities (which were reclassified to “loans and receivables” per 31 December 2008), monolines, US and non-US reference linked notes, and other instruments which were determined relevant for specific disclosure refer to Note 27c.

Reflection of counterparty credit risk in the valuation of traded debt instruments and derivative instruments
UBS incorporates the counterparty credit risk inherent in over-the-counter (OTC) derivatives transactions and traded debt instruments into its fair value estimates via the credit valuation adjustment (CVA). This amount represents the estimated market value of protection required to hedge credit risk from counterparties in UBS’s OTC derivatives portfolio and traded debt instruments, taking into account expected future exposures, collateral, and netting arrangements. The most significant component of the overall CVA is the portion related to monolines, discussed further below.

UBS’s own credit risk in the valuations of financial liabilities at fair value, including derivative liabilities
The Group’s own credit changes are reflected in valuations for those financial liabilities at fair value, including derivative liabilities, where the Group’s own credit risk would be considered by market participants and excludes fully collateralized transactions and other instruments for which it is established market practice not to include an entity-specific adjustment for own credit. This amount represents the estimated difference in the market value of identical obligations

issued by a riskless intermediary, relative to the market value of those obligations issued by UBS, as judged from the perspective of the holders of those obligations. Own credit changes were calculated based on a senior long-term debt curve generated from observed external pricing for funding associated with new senior debt issued by the Group, or relevant secondary market transactions in senior long-term UBS debt. In the absence of issued debt, credit default swap spreads would be considered as well.

Disclosures on own credit for financial liabilities designated at fair value
At 31 December 2008, the own credit gain for financial liabilities designated at fair value still held at reporting date, predominantly issued structured products, amounts to CHF 2,032 million (year-to-date) and CHF 2,953 million (life-to-date). The life-to-date amount reduced the fair value of financial liabilities designated at fair value at 31 December 2008. Included in these amounts is the overall quantification of changes in fair value attributable to changes in UBS’s credit spread during the periods. In addition, it includes the credit effect of period changes in fair values attributable to factors other than credit spreads, including benchmark interest rates, prices of financial instruments issued by third parties, commodity prices, foreign exchange rates or index prices or rates (i.e. credit effect of volume changes). The year-to-date 2008 own credit profit and loss including only the change in credit spread but excluding the credit effect of volume changes was a gain of CHF 3,993 million.

Reflection of market illiquidity in fair value determinations
Fair value estimates incorporate the effects of illiquidity in the relevant markets. Where trading prices are observable in such markets, these prices invariably include a liquidity or risk premium relative to what could be concluded on the basis of an actuarial assessment of credit loss potential. Valuations based on models similarly incorporate liquidity or risk premiums either implicitly (e.g., by calibrating to market prices that incorporate such premiums) or explicitly.

Valuation processes

There may be uncertainty about the accuracy of a valuation, resulting from the choice of the valuation technique or model used, the assumptions embedded in these models, the extent to which inputs are not market observable, or as a result of other elements affecting the valuation technique. Valuation adjustments, including model reserves, are applied to reflect these uncertainties and are deducted from the fair values produced by the models or other valuation techniques. All models used for valuation undergo an internal



323

Financial information
Notes to the consolidated financial statements

Note 27 Fair value of financial instruments (continued)

a) Fair value measurements (continued)

validation process before they are approved for use. Uncertainties associated with the use of model-based valuations (both level 2 and level 3) are predominantly addressed through the use of model reserves. These reserves reflect the amounts that UBS estimates are appropriate to deduct from the valuations produced directly by the models to reflect uncertainties in the relevant modeling assumptions and inputs used.

Based on UBS’s established fair value and model governance policies and the related controls and procedural safeguards the Group employs, management believes the result-

ing estimated fair values recorded in the balance sheet and the changes in fair values recorded in the income statement are reasonable and are the most appropriate at the balance sheet date.

Financial instruments accounted for at amortized cost

The following table reflects the estimated fair values for the Group’s instruments accounted for at amortized cost. Refer to Note 29 for an overview of financial assets classified as “loans and receivables” and financial liabilities accounted for at amortized cost.



         
  31.12.08 
CHF billion Carrying value  Fair value 
 
Assets
        
 
Loans to banks and customers  403.0   402.6 
 
Cash collateral on securities borrowed and reverse repurchase agreements  347.5   347.7 
 
Accrued income and prepaid expenses, other assets  9.4   9.4 
 
Liabilities
        
 
Due to banks and customers  600.4   600.4 
 
Cash collateral on securities lent and repurchase agreements  116.6   116.6 
 
Debt issued  201.2   199.7 
 
Accrued expenses and deferred income, other liabilities  22.8   22.8 
 

The fair values included in the table above were calculated for disclosure purposes only. The valuation techniques and assumptions described below provide a measurement of fair value of UBS’s financial instruments accounted for at amortized cost. However, because other institutions may use different methods and assumptions for their fair value estimation, such fair value disclosures cannot necessarily be compared from one financial institution to another. UBS applies significant judgments and assumptions to arrive at these fair values, which are more holistic and less sophisticated than UBS’s established fair value and model governance policies and processes applied for financial instruments accounted for at fair value, whose fair values impact UBS’s balance sheet and net profit. Debt instruments reclassified in fourth quarter 2008 from “held for trading” to “loans and receivables” followed the same fair value measurement principles and governance policies as financial instruments accounted for at fair value. The following principles were applied when determing fair value estimates for financial instruments accounted for at amortized cost:
–For short-term financial instruments with remaining maturities of one year or less, the carrying amount, which is net of credit loss allowances, is generally considered a reasonable estimate of fair value. The following financial instruments accounted for at amortized cost have remaining maturities of one year or less:

  100% of cash collateral on securities borrowed and reverse repurchase agreements; 97% of loans due from banks; 61% of loans to customers; 98% of amounts due to banks and customers; 99% cash collateral on securities lent and repurchase agreements; 60% of debt issued. Refer to the chapter “Liquidity and funding management” in the “Risk and treasury management” section of this report.
– The fair value of variable-interest bearing financial instruments accounted for at amortized cost is assumed to be approximated by their carrying amounts, which are net of credit loss allowances, and does not reflect fair value changes in the credit quality of counterparties respectively UBS’s own credit movements.
–For fixed-interest bearing financial instruments with remaining maturities above one year, fair value was estimated by discounting contractual cash flows using current rates at which similar loans would be transacted to borrowers with similar credit ratings and/or collateral and for the same remaining maturities. These estimates generally include adjustments for counterparty credit respectively UBS’s own credit.
–The fair value estimates for repurchase and reverse repurchase agreements with variable and fixed interest rates, for all maturities, include the valuation of the interest rate component of these instrument. Credit and debit valua-


324

Note 26 Fair Value of Financial Instruments (continued)
c) Sensitivity of Fair Values to Changing Significant Assumptions to Reasonably Possible Alternativesinformation

Note 27 Fair value of financial instruments (continued)

a) Fair value measurements (continued)

  tion adjustments have not been included into the valuation due to the short-term nature of these instruments.
– For loans to customers from Global Wealth Management & Business Banking, mainly reflecting the impact of the Swiss Mortgage loan portfolio with a fixed rate of interest, an excess of fair value over the carrying amount of CHF 3.0 billion was determined. This amount is largely attributable to the current CHF interest rate movements, which are significantly below the average levels over the last decade. The fair values of UBS’s Investment Bank’s loans to customers were CHF 3.4 billion below their carrying values, mainly reflecting credit valuation adjustments for debt instruments reclassified from “held for trading” to “loans and receivables” in fourth quarter 2008.
–For debt issued with remaining maturities greater than one year, the fair value was determined from quoted market prices, where available. Where quoted market prices were
 not available the fair value was derived by discounting contractual cash flows by using rates at which UBS could issue debt with similar remaining maturities. Adjustments for own credit movements have been included into fair value estimation.
The fair value of loans to banks and customers measured at amortized cost at 31 December 2007 was CHF 392.3 billion (carrying value: CHF 395.3 billion). The fair value of debt issued measured at amortized cost at 31 December 2007 was CHF 222.7 billion (carrying value: CHF 222.0 billion).
The fair values of UBS’s fixed rate loans, long- and medium-term notes and bonds issued are predominantly hedged by derivative instruments. Refer to Note 23 and Note 1. The interest rate risk inherent in balance sheet positions with no specific maturity may also be hedged with derivative instruments based on management’s view of their average cash flow and repricing behavior.


b) Fair value measurements involving significant unobservable inputs (level 3)

Level 3 instruments at year-end

As of 31 December 2008, financial instruments measured with valuation techniques using significant non-market observable inputs (level 3) mainly include structured rates and credit trades, bespoke collateralized debt obligations (CDOs), instruments linked to the US sub-prime residential, US commercial and non-US real estate markets and leveraged finance instruments. Level 3 financial liabilities also include hybrid financial liabilities from structured products issuances.

Material changes in level 3 instruments for the year

Level 3 instruments recognized as Trading portfolio assets (including those pledged as collateral) were reduced by approximately CHF 44 billion compared to 2007. The decline mainly relates to the following events and transactions: reclassifications of approximately CHF 13 billion from the IAS 39 category “held for trading” to the category “loans and receivables”, the sale of US RMBS to a fund managed by BlackRock of approximately CHF 4 billion and the sale of positions (mainly products linked to US residential and commercial real estate markets) of approximately CHF 6 billion to the fund owned and controlled by the Swiss National Bank. The balance of approximately CHF 30 billion mainly reflects writedowns, other sales, deconsolidations, amortizations, and foreign exchange movements. The reductions were partially offset by net reclassifications from level 2 to level 3 of approximately CHF 9 billion as valuation inputs became less

observable during 2008. Reclassifications into level 3 mainly included student loan ARS, leveraged finance deals, and US real estate products.
Derivatives classified as level 3 increased at the end of 2008 by approximately CHF 24 billion (Positive replacement values) and approximately CHF 18 billion (Negative replacement values), predominantly driven by widening credit spreads impacting fair value of structured rates and credit trades, and bespoke CDOs. In addition, reclassifications into level 3 increased positive replacement values by approximately CHF 8 billion and negative replacement values by approximately CHF 8 billion as valuation inputs became less observable during 2008.
The decrease of level 3 financial liabilities designated at fair value of approximately CHF 32 billion at the end of 2008 was due mainly to hybrid and other financial liabilities designated at fair value of approximately CHF 15 billion which was included in level 3 as of 31 December 2007, although these financial liabilities were related to level 1 and level 2 valuations. Other factors which contributed to the decrease of level 3 financial liabilities designated at fair value during 2008 were expiries of trades, foreign exchange movements, disposals of instruments linked to the US sub-prime mortgage market and redemptions of hybrid financial liabilities.
The transfer of further level 3 instruments to the SNB fund in 2009 will lead to more reductions in level 3 trading assets, positive and negative replacement values.


325

Financial information
Notes to the consolidated financial statements

Note 27 Fair value of financial instruments (continued)

b) Fair value measurements involving significant unobservable inputs (level 3) (continued)

Level 3 profit or loss

Total Net trading income/(loss) for the years ended 31 December 2008, 31 December 2007 and 31 December 2006 was CHF (25.8) billion, CHF (8.4) billion and CHF 13.7 billion, respectively, which represents the net result from a range of products traded across different business activities, including the effect of the foreign currency translation of monetary assets and liabilities and including both realized and unrealized income. Unrealized income is determined from changes in fair values, using quoted prices in active markets when available, and otherwise estimated using valuation techniques with market observable and/or non-market observable inputs.
Net trading income includes net losses of CHF 11.5 billion, net losses of CHF 11.6 billion and net gains of CHF 0.4 billion from unrealized fair value changes of financial instruments for which fair value is calculated on the basis of valuation techniques with significant non-market observable inputs (level 3) for the years ended 31 December 2008, 2007 and 2006.
Such valuation techniques reflecting significant non-market observable inputs (level 3) include mainly models for more complex financial instruments and for financial instruments for which markets were illiquid at the balance sheet date. They require the use of reasonable assumptions and estimates based on market conditions at the balance sheet date.
Net trading income is often generated from transactions involving several financial instruments or subject to hedging or other risk management techniques. This may result in different portions of the transaction being priced using different methods. In many cases, the amounts estimated using valuation techniques with non-market observable inputs were offset or partially offset by changes in fair value of other financial instruments or transactions, for which quoted market prices or rates were available, or on which the gain or loss has been realized. Consequently, the changes in fair value which were estimated using valuation techniques with non-market observable inputs and have been recognized in profit or loss during the period represent only a portion of Net trading income.

Sensitivity information

Included in the fair value of financial instruments carried at fair value on the balance sheet are those estimated in full or in part using valuation techniques based on assumptions that are not supported by market observable prices or rates (level 3).rates.
There may be uncertainty about a valuation, resulting from the choice of valuation technique or model used, the assumptions embedded in those models, the extent to which

inputs are not market observable, or as a result of other elements affecting the valuation technique. Valuation adjustments, including model reserves, are applied to reflect such uncertainties and are deducted from the fair values produced by the models or other valuation techniques.
All models used for valuation undergo an internal validation process before they are approved for use.
Based on UBS’s established fair value and model governance policies and the related controls and procedural safeguards the Group employs, management believes the resulting estimated fair values recorded in the balance sheet and the changes in fair values recorded in the income statement are reasonable and are the most appropriate at the balance sheet date.
Uncertainties associated with the use of model-based valuations (both level 2 and level 3) are predominantly addressed through the use of model reserves. These reserves reflect the amounts that UBS estimates are appropriate to deduct from the valuations produced directly by the models to reflect uncertainties in the relevant modeling assumptions

and inputs used. In arriving at these estimates, UBS considers the range of market practice and how it believes other market participants would assess these uncertainties. Model reserves are periodically reassessed in light of information from market transactions, pricing utilities, and other relevant sources. The level of these model reserves is, nevertheless, to a large extent judgmental.a matter of judgment.

To estimate the potential effect on the Financial Statements from the use of alternative valuation techniques or assumptions, UBS makes use of the model reserve amounts described above, by scaling the level of the model reserves higher and lower, to assess the impact on valuation of increasing or decreasing the amount of model-related uncertainty considered.
The potential effect of using reasonably possible alternative valuation assumptions has been quantified as follows:
– Scaling the model reserve amounts upward in line with less favorable assumptions would reduce fair value by approximately CHF 2,710 million2.5 billion at 31 December 2008, by approximately CHF 2.7 billion at 31 December 2007, byand approximately CHF 1,038 million1.0 billion at 31 December 2006 and approximately CHF 1,094 million at 31 December 2005.2006.
– Scaling the model reserve amounts downward in line with more favorable assumptions would increase fair value by approximately CHF 2,160 million1.4 billion at 31 December 2008, by approximately CHF 2.2 billion at 31 December 2007, and approximately CHF 955 million1.0 billion at 31 December 2006, and approximately CHF 1,176 million at 31 December 2005.2006.

Please refer to Note 27c below for the instrument categories which are deemed to be relevant for specific sensitivity disclosure per 31 December 2008, and which are included in the sensitivity numbers provided above.


79326

Financial information

Note 27 Fair value of financial instruments (continued)

c) Valuation techniques and inputs by product

Where possible, financial instruments are marked at prices quoted in active markets. In the current market environment, such price information is typically not available for all financial instruments, and UBS applies valuation techniques to measure such instruments. Valuation techniques use “market-observable inputs”, where available, derived from similar assets in similar and active markets, from recent transaction prices for comparable items or from other observable market data. For positions where observable reference data are not available for some or all parameters, UBS calibrates the non-market-observable inputs used in its valuation models based on a combination of judgment, historical experience and knowledge of current market conditions.

US super senior RMBS CDOs
All material super senior RMBS CDO tranches still held by UBS are covered by corresponding monoline credit protection referencing the specific position held by UBS. Where liquidation of the RMBS CDO is deemed imminent, valuation is based on the estimated aggregate proceeds of the liquidation (using current fair value estimates of the underlying instruments) less any estimated expenses associated with the liquidation. For the remainder of the super senior RMBS CDO population, a model that projects losses on the underlying mortgage pools and applies the implications of these projected lifetime losses through to the RMBS and then to the CDO structure is applied. The loss projection is calibrated separately for each RMBS CDO so that the model recovers the estimated market value of the underlying collateral pool. At 31 December 2007, a similar model was applied, with loss projection estimates calibrated such that the model valued relevant ABX market indices consistently with their observed levels in the market. The model has been adjusted in 2008 to better reflect the prevailing market conditions and illiquidity.

Credit valuation adjustments on monoline credit protection
Credit valuation adjustments (CVAs) for monoline credit protection are based on a methodology that uses credit default swap spreads on the monolines as a key input in determining an implied level of expected loss. Where a monoline has no observable credit default swap spread, a judgment is made on the most comparable monoline or combination of monolines and the corresponding spreads are used instead. Credit valuation adjustments are intended to achieve a fair value of the underlying contracts and are normally based on publicly available information. In 2008, in some cases where UBS has had knowledge of potential restructurings that may result in economic outcomes more adverse than those implied by CDS market spreads, UBS had determined to modify CVA amounts accordingly. At 31 December 2007, a similar methodology was applied. The

methodology was re-calibrated in 2008 to reflect prevailing market conditions, in particular the greater prevalence of CDS trading with up-front cash exchanges and declines in potential recovery rates implied by recovery swap contract pricing.

To assess the sensitivity of the CVA calculation to alternative assumptions, the impact of a 10% increase in monoline credit default swap spreads (e.g. from 2,000 basis points to 2,200 basis points for a specific monoline) is considered. At 31 December 2008, such an increase would have resulted in an increase in the monoline credit valuation adjustment of approximately USD 206 million (CHF 220 million). The sensitivity of the monoline credit valuation adjustment to a decrease of one percentage point in the monoline recovery rate assumptions (e.g. from 30% to 29% for a specific monoline; conditional on default occurring) is estimated at USD 58 million (CHF 62 million).
In addition, the credit valuation adjustments related to transactions referencing RMBS CDOs are sensitive to the estimated market value of the underlying collateral pool. Holding all other parameters constant, the sensitivity of the monoline credit valuation adjustment to a 10% adverse change in the aggregate value of the collateral pools underlying the referenced RMBS CDOs is estimated at USD 106 million (CHF 113 million).
Refer to the section “Risk management and control” for details on UBS’s exposure to monolines.

Student loan auction rate securities (ARSs)
Student loan ARSs held by UBS’s Investment Bank of USD 7.9 billion (CHF 8.4 billion), previously classified as “held for trading”, were reclassified to the category “loans and receivables” per 31 December 2008. This implies that, going forward, these positions will be accounted for at amortized cost and tested for impairment, rather than being subject to fair value accounting through profit or loss. These ARS positions have been fair valued for the last time at 31 December 2008, applying the following principles. The applied method separates various factors and risks influencing fair value of ARSs and allows calibrating the result to market transactions whenever they become available. The methodology relies on four key components: (a) fundamental cash flow modeling to estimate the level and timing of potential credit losses on a given portfolio of student loans backing the ARS, (b) use of forward yields embedded in market term structure to estimate expected required coupon payments, c) discounted cash flow projections calibrated to observed ARS market transactions to correct for any model drift, and (d) liquidity penalties that impose a further discount to reflect market conditions. Each of these inputs is calculated and then aggregated in order to arrive at the fair value for each individ-



327

Financial Statementsinformation
Notes to the Financial Statements

Note 26 Fair Value of Financial Instruments (continued)
d) Changes in Fair Value Recognized in Profit or Loss during the Period which were Estimated using Valuation
Techniques with Non-market Observable Inputs
consolidated financial statements

Note 27 Fair value of financial instruments (continued)

c) Valuation techniques and inputs by product (continued)

Total Net trading income / (loss) for the years endedual security. At 31 December 2007, these instruments were not classified as level 3, as auctions had not failed at this time. After the failure of auctions due to lack of investor demand in first quarter 2008 up to third quarter 2008, UBS valued student loan ARSs by comparing them to the student loan floating rate notes (FRNs), but adopted the model described above for 31 December 20062008, consistent with the belief that it provides a better and more granular approach to fair value estimation.

Refer to the section “Risk management and control” for details on UBS’s student loan ARS exposures.

US reference linked notes (US RLNs)
The US RLN consists of a series of transactions whereby UBS purchases credit protection, predominantly in note form, on a portfolio of fixed income assets. It is described in detail in the Annual Report 2007, “Risk, Treasury and Capital Management” section, page 13. The referenced assets are comprised of USD ABSs (primarily home equity) and/or corporate bonds and loans across all rating categories. UBS’s direct exposure to these assets has been reduced via transactions including the transaction with the SNB.

The credit protection embodied in the RLN notes is fair valued using a market standard approach to the valuation of portfolio credit protection (Gaussian copula). This approach effectively simulates correlated defaults within the portfolio, where the expected losses and defaults of the individual assets are closely linked to the observed market prices (spread levels) of those assets. Key assumptions of the model include correlations and recovery rates. UBS applies fair value adjustments related to potential uncertainty in each of these parameters, which are only partly observable. In addition, UBS applies fair value adjustments for uncertainties associated with the use of observed spread levels as the primary inputs.
These fair value adjustments are calculated by applying shocks to the relevant parameters and revaluing the credit protection. These shocks for correlation, recovery, and spreads are set to various levels depending on the asset type and/or region. Correlation and recovery shocks are generally in the range of 5 to 15 percentage points. Spread shocks vary more widely and also depend on whether the underlying protection is funded or unfunded to reflect cash/synthetic basis effects. As of 31 December 2005 was CHF (8,353) million, CHF 13,743 million and CHF 8,248 million, respectively, which represents2008, the net result from a range of products traded across different business activities, including the effectfair value of the foreign currency translationUS RLN credit protection (pre-reserve) is approximately USD 3,284 million (CHF 3,502 million). The fair value adjustments calculated by applying the shocks described above are USD 299 million (CHF 319 million).

Non-US reference linked notes (Non-US RLNs)
The same valuation model and the same approach to calculation of monetary assetsfair value adjustments is applied for the non-US RLN credit protection as for the US RLN credit protection described above, except spread is shocked by 10% for European corporate names. As of 31 December 2008, the fair value of the non-US RLN credit protection is approximately USD 1,971 million (CHF 2,102 million). The fair value adjustments (up and liabilitiesdown) calculated by applying the shocks described above are USD 155 million (CHF 165 million).

Leveraged finance
A significant proportion of UBS’s leveraged finance exposures have been reclassified from the category “held for trading” to the category “loans and receivables” in fourth quarter 2008. The leveraged finance exposures in the “held for trading” category at 31 December 2008 are predominantly classified as level 3. Fair value estimates for these positions rely on market knowledge and expert judgment, including both realizedjudgmental determinations based on the terms of the relevant instrument and unrealized income. Unrealized incomevarious other factors. These other factors may include, without limitation, observable pricing for other debt of the relevant issuer or debt of issuers of comparable credit quality, credit default swap spreads and estimated loss severity factors, and prevailing interest rate levels.

Option to acquire equity of the SNB StabFund
Under IFRS, the option to purchase the SNB StabFund’s equity is determined fromrecognized on the balance sheet as a derivative at fair value with changes in fair values, using quoted pricesvalue recognized in active markets when available,profit and otherwise estimated using valuation techniques with market observable and / or non-market observable inputs.

Net trading income includes net losses of CHF 11,580 million, net gains of CHF 354 million and net losses of CHF 468 million from unrealizedloss. At 31 December 2008, the fair value changes of financial instruments for whichthe call option held by UBS was approximately CHF 1,092 million.
This fair value is calculated using a standard option pricing model, where the asset pool is treated as the underlying asset. Key assumptions relate to the level of volatility assumed and to the interest rate assumed. At 31 December 2008, UBS assigned a volatility of 11.3% to the underlying asset pool. Decreasing or increasing this assumption by 10% (i.e. 11.3% to 10.2% and 11.3% to 12.4%) would have decreased/increased the fair value at 31 December 2008 by approximately minus USD 156 million (CHF 166 million)/plus USD 156 million (CHF 166 million) respectively. At 31 December 2008, UBS applied an interest rate based on the basis of valuation techniques with significant non-market observable inputs (level 3)an assumed term funding rate for the years endedasset pool of LIBOR + 250 bp. Decreasing or increasing this assumption by 100 bp would have decreased/increased the estimated fair value at 31 December 2007, 2006 and 2005.2008 by minus USD 246 million (CHF 262 million)/plus USD 290 million (CHF 309 million).



328

Such valuation techniques reflecting significant non-market observable inputs (level 3) include mainly models for more complex
Financial information

Note 27 Fair value of financial instruments (continued)

c) Valuation techniques and inputs by product (continued)

Derivatives embedded in MCN December issuance
The MCNs issued in December 2008 include embedded equity and derivative components with UBS shares as underlying, which are bifurcated and treated as one derivative accounted for financial instruments for which markets were illiquid at the balance sheet date. They require the use of reasonable assumptions and estimates based on market conditions at balance sheet date.
Net trading income is often generated from transactions involving several financial instruments or subject to hedging or other risk management techniques. This may result in different portions of the transaction being priced using different methods. In many cases, the amounts estimated using valuation techniques with non-market observable inputs were offset or partially offset by changes in fair value of other financial instruments or transactions, for which quoted market prices or rates were available, or on which the gain or loss has been realized. Consequently, the changes inwith fair value which were estimated using valuation techniques with non-market observable inputs and have beenchanges recognized in profit or loss duringloss. Refer to Note 26 for more information. The fair value amounted to negative CHF 1,058 million at 31 December 2008. A 10% reduction in UBS’s share price from
CHF 14.84 to CHF 13.35, holding all other variables constant, would have resulted in a fair value of negative CHF 826 million, whereas an increase of UBS’s share price to CHF 16.32 would have led to a fair value of negative CHF 1,314 million. There are no impacts on UBS’s financial resources, as the period represent only a portion of Net trading income.embedded equity and derivative components will be settled in newly issued UBS shares.


e) Deferred Day 1 Profit or Loss

d) Deferred day 1 profit or loss

The table reflects financial instruments for which fair value is determined using valuation models where not all inputs are market observable. Such financial instruments are initially recognized at their transaction price although the values obtained from the relevant valuation model on day 1

may differ. The table shows the aggregate difference yet to be recognized in profit or loss at the beginning and end of the period and a reconciliation of changes in the balance of this difference (movement of deferred day 1 profit or loss).



             
 For the year ended  For the year ended 
CHF million 31.12.07 31.12.06  31.12.08 31.12.07 
Balance at the beginning of the year
 951 1,343  550 951 
Deferred profit / (loss) on new transactions 1,259 890 
Deferred profit/(loss) on new transactions 588 1,259 
Recognized (profit) / loss in the income statement  (1,383)  (1,200)
Recognized (profit)/loss in the income statement  (459)  (1,383)
Revision to fair value estimates  (224)  0  (224)
Foreign currency translation  (53)  (82)  (52)  (53)
Balance at the end of the year
 550 951  627 550 

80329

Financial information
Notes to the consolidated financial statements

Note 2728 Pledged Assetsassets and Transferred Financial Assetstransferred financial assets which do not Qualifyqualify for Derecognition

derecognition

Financial assets are mainly pledged in securities borrowing and lending transactions, in repurchase and reverse repurchase transactions, under collateralized credit lines with centralcent-

ral banks, against loans from mortgage institutions, in connection with derivative transactions and for security deposits relating to stock exchange and clearinghouse memberships.



             
Pledged assetsPledged assets Pledged assets 
 Carrying amount  Carrying amount 
CHF million 31.12.07 31.12.06  31.12.08 31.12.07 
Financial assets pledged:  
Financial assets pledged to third parties for liabilities with and without the right of rehypothecation 232,948 366,866  78,002 182,827 
thereof: Financial assets pledged to third parties with right of rehypothecation
 164,311 251,478  40,216 114,190 
Mortgage loans 200 81  3,699 200 
Other1
 21,040 0 
Total financial assets pledged
 233,148 366,947  102,741 183,027 
Other assets pledged
  
Precious metals and other commodities 8,628 5,432  780 8,628 

1Includes financial instruments of CHF 16 billion reclassified from trading portfolio to loans and receivables. On 31 December 2007 it was presented in the line Financial assets pledged to third parties for liabilities with and without the right of rehypothecation.

The following table presents details of financial assets which have been sold or otherwise transferred, but which do not

qualify for derecognition. Criteria for derecognition are discussed in Note 1a4)1a) 4).



             
Transfer of financial assets which do not qualify for derecognitionTransfer of financial assets which do not qualify for derecognition Transfer of financial assets which do not qualify for derecognition 
 Continued asset recognition in full — 
 Total assets  Continued asset recognition in full – Total assets 
CHF billion 31.12.07 31.12.06  31.12.08 31.12.07 
Nature of transaction
  
Securities lending agreements 87.7 98.9  22.0 59.7 
Repurchase agreements 73.5 146.5  13.1 51.3 
Other financial asset transfers 75.9 69.8  46.6 75.9 
Total
 237.1 315.2  81.7 186.9 

The transactions are mostly conducted under standard agreements employed by financial market participants and are undertaken with counterparties subject to UBS’s normal credit risk control processes. The resulting credit exposures are controlled by daily monitoring and collateralization of the positions. The financial assets which continue to be recognized are typically transferred in exchange for cash or other financial assets. The associated liabilities can therefore be assumed to be approximately the carrying amount of the transferred financial assets.

UBS retains substantially all risks and rewards of the transferred assets in each situation of continued recognition in

full. These include credit risk, settlement risk, country risk and market risk.

Repurchase agreements and securities lending agreements are discussed in Notes 1a12)1a) 12) and 1a13)1a) 13). Other financial asset transfers include sales of financial assets while concurrently entering into a total rate of return swap with the same counterparty and sales of financial assets involving guarantees.
Transferred financial assets which are subject to partial continued recognition were immaterial in 20072008 and 2006.2007. The carrying amounts of the partially recognized transferred financial assets are included in the table.



81330

Financial Statements
Notes to the Financial Statements

Financial information

Note 2829 Measurement Categoriescategories of Financial Assetsfinancial assets and Financial Liabilitiesfinancial liabilities

a) Measurement categories of financial assets and financial liabilities

The following table provides information about the carrying amounts of individual classes of financial instruments within the measurement categories of financial assets and financial liabilities as defined in IAS 39. Only those assets and liabilities which are deemed to be financial instruments are included

         
  31.12.07  31.12.06 
 
         
Financial Assets
        
 
Held for trading
        
 
Trading portfolio assets  580,643   605,965 
 
Trading portfolio assets pledged as collateral  164,311   251,478 
 
Positive replacement values  428,217   292,975 
 
Total
  1,173,171   1,150,418 
 
Fair value through profit or loss, other
        
 
Financial assets designated at fair value  11,765   5,930 
 
Cash, loans and receivables
        
 
Cash and balances with central banks  18,793   3,495 
 
Due from banks  60,907   50,426 
 
Cash collateral on securities borrowed  207,063   351,590 
 
Reverse repurchase agreements  376,928   405,834 
 
Loans  334,367   296,592 
 
Accrued income and prepaid expenses  9,200   8,685 
 
Other assets  12,874   11,412 
 
Total
  1,020,132   1,128,034 
 
Available-for-sale
        
 
Financial investments available-for-sale  4,966   8,937 
 
Total Financial Assets
  2,210,034   2,293,319 
 
         
Financial Liabilities
        
 
Held for trading
        
 
Trading portfolio liabilities  164,788   204,773 
 
Debt issued1
  74   463 
 
Negative replacement values  443,539   297,063 
 
Total
  608,401   502,299 
 
Fair value through profit or loss, other
        
 
Financial liabilities designated at fair value  191,853   145,687 
 
Amounts due under unit-linked contracts  27,455   33,645 
 
Total
  219,308   179,332 
 
Financial liabilities at amortized cost
        
 
Due to banks  145,762   203,689 
 
Cash collateral on securities lent  31,621   63,088 
 
Repurchase agreements  305,887   545,480 
 
Due to customers  641,892   555,886 
 
Accrued expenses and deferred income  21,665   21,353 
 
Debt issued  222,003   189,680 
 
Other liabilities  25,302   20,349 
 
Total
  1,394,132   1,599,525 
 
Total Financial Liabilities
  2,221,841   2,281,156 
 

in the table below, which may cause certain balances to differ from those presented on the balance sheet.

See the Critical accounting policies for a discussion on how fair value of financial instruments is determined. See also Note 1a) 5)–9).



         
  31.12.08  31.12.07 
 
Financial assets
        
 
Held for trading
        
 
Trading portfolio assets  261,904   630,764 
 
Trading portfolio assets pledged as collateral  40,216   114,190 
 
Debt issued1,2
  4,152     
 
Positive replacement values  854,100   428,217 
 
Total
  1,160,372   1,173,171 
 
Fair value through profit or loss, other
        
 
Financial assets designated at fair value  12,882   11,765 
 
Cash, loans and receivables
        
 
Cash and balances with central banks  32,744   18,793 
 
Due from banks  64,451   60,907 
 
Cash collateral on securities borrowed  122,897   207,063 
 
Reverse repurchase agreements  224,648   376,928 
 
Loans  338,520   334,367 
 
Accrued income and prepaid expenses  3,238   9,200 
 
Other assets  6,184   12,874 
 
Total
  792,682   1,020,132 
 
Available-for-sale
        
 
Financial investments available-for-sale  5,248   4,966 
 
Total financial assets
  1,971,184   2,210,034 
 
         
Financial liabilities
        
 
Held for trading
        
 
Trading portfolio liabilities  62,431   164,788 
 
Debt issued1
  185   74 
 
Negative replacement values  851,803   443,539 
 
Total
  914,419   608,401 
 
Fair value through profit or loss, other
        
 
Financial liabilities designated at fair value  101,546   191,853 
 
Amounts due under unit-linked contracts  13,051   27,455 
 
Total
  114,597   219,308 
 
Financial liabilities at amortized cost
        
 
Due to banks  125,628   145,762 
 
Cash collateral on securities lent  14,063   31,621 
 
Repurchase agreements  102,561   305,887 
 
Due to customers  474,774   641,892 
 
Accrued expenses and deferred income  10,012   21,665 
 
Debt issued  201,221   222,003 
 
Other liabilities  12,840   25,302 
 
Total
  941,099   1,394,132 
 
Total financial liabilities
  1,970,115   2,221,841 
 
1 Includes embeddedEmbedded derivatives presented on the balance sheet line Debt issued.2On 31 December 2007, respective amounts have been included in the line Positive replacement values.

82331

Financial information
Notes to the consolidated financial statements

Note 29 Measurement categories of financial assets and financial liabilities (continued)

b) Reclassification of financial assets

Pursuant to the amendment to IAS 39 and IFRS 7, “Reclassification of Financial Assets”, UBS reclassified certain financial assets out of Trading portfolio assets to Loans and receivables. Although the amendment could have been applied retrospectively from 1 July 2008, UBS decided at the end of October 2008 to apply the amendment with effect from 1 October 2008 following an assessment of the implications on its financial statements. The financial assets were reclassi-

fied using their fair value on the date of the reclassification which became their new cost basis at that date. The reclassification of these financial assets reflects UBS’s change in intent and ability to hold these financial assets for the foreseeable future rather than for trading in the near term.

The table below shows the fair values of the reclassified financial assets as of their reclassification date and their carrying values and fair values as of 31 December 2008:



             
  1.10.08  31.12.08 
CHF billion Fair value  Carrying value  Fair value 
 
Trading portfolio assets reclassified to Loans on 1.10.08  17.6   15.8   12.4 
 
Trading portfolio assets reclassified to Loans on 31.12.08      8.4   8.4 
 
Total financial assets reclassified to Loans and receivables
  17.6   24.2   20.8 
 

Reclassified financial assets primarily relate to student loan ARSs and other debt instruments.

As of the reclassification date, estimated effective interest rates on the reclassified financial assets ranged on average from 6% to 15% with expected recoverable cash flows of CHF 50.2 billion.
For the years ended 31 December 2008 and 31 December 2007, fair value losses of CHF 4.1 billion and CHF 0.6 billion, prior to reclassification, were recognized in the income statement on the reclassified financial assets.

If the financial assets had not been reclassified, the change in their fair values, after actual reclassification, would have resulted in additional fair value losses of CHF 4.8 billion in the income statement for the year ended 31 December 2008.
After reclassification, the contribution of the reclassified financial assets to UBS’s income statement was an increase in Net interest income of CHF 0.3 billion, less a Credit loss expense of CHF 1.3 billion, resulting in a net negative impact on operating profit before tax of CHF 1 billion for the year ended 31 December 2008.


332

Financial information

Note 2930 Pension and Other Post-Retirement Benefit Plans

other post-employment benefit plans

a) Defined benefit plans

The Group has established various pension plans inside and outside of Switzerland. The major plans are located in Switzerland, the UK, the US and Germany. Independent actuarial valuations are performed for the plans in these locations. The measurement date of these plans is 31 December for each year presented.

The pension funds of Atel Ltd. and some of its group companies in Switzerland and Germany are included in the disclosure up to 31 December 2005 but are not included in the 31 December 2007 and the 31 December 2006 disclosure since these companies were sold on 23 March 2006.
The overall investment policy and strategy for the Group’s defined benefit pension plans is guided by the objective of achieving an investment return which, together with the contributions paid, is sufficient to maintain reasonable control over the various funding risks of the plans. The investment advisors appointed by plan trustees are responsible for determining the mix of asset types and target allocations which are reviewed by the plan trustees on an ongoing basis. Actual asset allocation is determined by a variety of current economic and market conditions and in consideration of specific asset class risk.
The expected long-term rates of return on plan assets are based on long-term expected inflation, interest rates, risk premiums and targeted asset class allocations. These estimates take into consideration historical asset class returns and are determined together with the plans’ investment and actuarial advisors.

Swiss pension plans
The pension plan of UBS covers practically all UBS employees in Switzerland and exceeds the minimum benefit requirements under Swiss law. The Swiss plan was amended on 1 January 2007 to change the definition of retirement benefits from a final covered salary to a retirement savings approach.approach and on 1 January 2008 to allow employees a choice in the level of annual contributions paid by the employee. The pension plan provides benefits which are based on an-

nualannual contributions as a percentage of salary and accrue at an interest rate that is defined annually by the plan trustees.

Contributions to the pension plan of UBS are paid by employees and the employer. The employee contributions are

calculated as a percentage of covered salary and are deducted monthly. The percentages deducted from salary for the full standard level of benefit coverage (including risk benefits) depend on age and vary between 1% and 10%9% of covered base salary and 3% and 8% of covered bonus.variable compensation. The employer pays a contribution that ranges between 100% and 350%, or approximately 230%, on average, of the sum375% of employees’ contributions.contributions for the standard level of benefit coverage. The benefits covered include retirement benefits,benefits; disability, death and survivor pensions,pensions; and employment termination benefits.

The employer contributions expected to be made in 20082009 to the Swiss pension plan are CHF 580520 million.
UBS recognized a defined benefit asset associated with its Swiss pension plan in 2008 and restated prior periods. Refer to Note 1b).

Foreign pension plans
The foreign locations of UBS operate various pension plans in accordance with local regulations and practices. Among these plans are defined contribution plans as well as defined benefit plans. The locations with defined benefit plans of a material nature are in the UK, the US and Germany. The UK and the US defined benefit plans are closed to new entrants who are covered by defined contribution plans. The amounts shown for foreign plans reflect the net funded positions of the major foreign plans.

The retirement plans provide benefits in the event of retirement, death, disability or employment termination. The plans’ retirement benefits depend on age, contributions and level of compensation. The principal plans are financed in full by the Group. The employer contributions expected to be made in 20082009 to these pension plans are CHF 7696 million. The funding policy for these plans is consistent with local government and tax requirements.
The assumptions used in foreign plans take into account local economic conditions.
Refer also to Note 1a) 21).



83333

Financial Statementsinformation
Notes to the Financial Statements

consolidated financial statements

Note 2930 Pension and Other Post-Retirement Benefit Plansother post-employment benefit plans (continued)

                                     
a) Defined benefit plans 
a) Defined benefit plans (continued)a) Defined benefit plans (continued)     
CHF million Swiss Foreign  Swiss Foreign 
For the year ended 31.12.07 31.12.06 31.12.05 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 31.12.08 31.12.07 31.12.06 
Defined benefit obligation at the beginning of the year  (21,506)  (20,972)  (20,225)  (5,207)  (5,020)  (4,142)  (20,877)  (21,506)  (20,972)  (4,928)  (5,207)  (5,020)
Service cost  (367)  (347)  (353)  (88)  (76)  (82)  (336)  (367)  (347)  (63)  (88)  (76)
Interest cost  (633)  (611)  (660)  (264)  (242)  (236)  (710)  (633)  (611)  (251)  (264)  (242)
Plan participant contributions  (236)  (221)  (219)   (233)  (236)  (221) 
Amendments  (414)  (125) 0  0  (414)  (125) 
Actuarial gain / (loss) 1,508  (265)  (713) 236  (120)  (416)
Foreign currency translation 298  (84)  (280)
Actuarial gain/(loss)  (288) 1,508  (265) 318 236  (120)
Benefits paid 792 723 866 151 149 144  1,158 792 723 148 151 149 
Special termination benefits  (21)  (17)  (37) 0 0  (2)
Termination benefits  (25)  (21)  (17) 0 0 0 
Acquisitions  (54) 0  (6) 0  (54) 0 
Settlements 0 329 369 0 186 0  0 0 329 0 0 186 
Curtailments 0 0 0 
Foreign currency translation 1,134 298  (84)
Defined benefit obligation at the end of the year
  (20,877)  (21,506)  (20,972)  (4,928)  (5,207)  (5,020)  (21,311)  (20,877)  (21,506)  (3,642)  (4,928)  (5,207)
Fair value of plan assets at the beginning of the year 21,336 20,229 18,575 4,602 4,288 3,580  22,181 21,336 20,229 4,579 4,602 4,288 
Expected return on plan assets 1,067 998 925 313 283 263  990 1,067 998 282 313 283 
Actuarial gain / (loss)  (250) 447 1,284  (97) 40 247 
Foreign currency translation  (288) 74 253 
Actuarial gain/(loss)  (3,820)  (250) 447  (1,027)  (97) 40 
Employer contributions 584 492 468 200 66 89  603 584 492 194 200 66 
Plan participant contributions 236 221 219  233 236 221 
Benefits paid  (792)  (723)  (866)  (151)  (149)  (144)  (1,158)  (792)  (723)  (148)  (151)  (149)
Settlements 0  (328)  (376)  0 0  (328) 
Curtailments 
Foreign currency translation  (1,014)  (288) 74 
Fair value of plan assets at the end of the year
 22,181 21,336 20,229 4,579 4,602 4,288  19,029 22,181 21,336 2,866 4,579 4,602 
Funded status
 1,304  (170)  (743)  (349)  (605)  (732)  (2,282) 1,304  (170)  (776)  (349)  (605)
Unrecognized net actuarial (gains) / losses 865 2,123 2,334 975 1,237 1,222 
Unrecognized net actuarial (gains)/losses 4,405 2,123 2,123 1,324 975 1,237 
Unrecognized past service cost 414 0 0 0 1 1  0 0 0 0 0 1 
Unrecognized asset  (2,583)  (1,953)  (1,591)  0  (1,304) 0 
(Accrued) / prepaid pension cost
 0 0 0 626 633 491 
(Accrued)/prepaid pension cost
 2,123 2,123 1,953 548 626 633 
  
Movement in the net (liability) or asset
  
(Accrued) / prepaid pension cost at the beginning of the year 633 491 485 
(Accrued)/prepaid pension cost at the beginning of the year 2,123 1,953 1,588 626 633 491 
 
Net periodic pension cost  (584)  (492)  (468)  (97)  (103)  (125)  (603)  (414)  (127)  (69)  (97)  (103)
Employer contributions 584 492 468 200 66 89  603 584 492 194 200 66 
Acquisitions  (54) 0  (6) 0  (54) 0 
Settlement 0 170 0  0 0 170 
Foreign currency translation  (56) 9 48   (203)  (56) 9 
(Accrued) / prepaid pension cost
 0 0 0 626 633 491 
(Accrued)/prepaid pension cost
 2,123 2,123 1,953 548 626 633 
 ��  
Amounts recognized in the balance sheet
  
Prepaid pension cost 887 815 832  2,123 2,123 1,953 798 887 815 
Accrued pension liability  (261)  (182)  (341)  (250)  (261)  (182)
(Accrued) / prepaid pension cost
 0 0 0 626 633 491 
(Accrued)/prepaid pension cost
 2,123 2,123 1,953 548 626 633 

84334

Note 29 Pension and Other Post-Retirement Benefit Plans (continued)
                         
a) Defined benefit plans (continued) 
CHF million Swiss  Foreign 
For the year ended 31.12.07  31.12.06  31.12.05  31.12.07  31.12.06  31.12.05 
 
Components of net periodic pension cost
                        
 
Service cost  367   347   353   88   76   82 
 
Interest cost  633   611   660   264   242   236 
 
Expected return on plan assets  (1,067)  (998)  (925)  (313)  (283)  (263)
 
Amortization of unrecognized past service cost  0   125   (3)            
 
Amortization of unrecognized net (gains) / losses  0   25   101   58   68   68 
 
Special termination benefits  21   17   37   0   0   2 
 
Settlements  0   0   10             
 
Increase / (decrease) of unrecognized asset  630   365   235             
 
Net periodic pension cost
  584   492   468   97   103   125 
 
                         
Funded and unfunded plans Swiss
   
CHF million
  31.12.07   31.12.06   31.12.05   31.12.04   31.12.03     
 
Defined benefit obligation from funded plans  (20,877)  (21,506)  (20,972)  (20,225)  (18,216)    
 
Plan assets  22,181   21,336   20,229   18,575   17,619     
 
Surplus/(deficit)
  1,304   (170)  (743)  (1,650)  (597)    
 
                         
Experience gains / (losses) on plan liabilities  0   (265)  (77)            
 
Experience gains / (losses) on plan assets  (250)  447   1,284             
 
                         
  Foreign
   
CHF million
  31.12.07   31.12.06   31.12.05   31.12.04   31.12.03     
 
Defined benefit obligation from funded plans  (4,654)  (5,002)  (4,635)  (3,815)  (3,509)    
 
Defined benefit obligation from unfunded plans  (274)  (205)  (385)  (327)  (154)    
 
Plan assets  4,579   4,602   4,288   3,580   3,402     
 
Surplus/(deficit)
  (349)  (605)  (732)  (562)  (261)    
 
                         
Experience gains / (losses) on plan liabilities  (32)  (11)  7             
 
Experience gains / (losses) on plan assets  (97)  40   247             
 
                         
  Swiss Foreign
     
   31.12.07   31.12.06   31.12.05   31.12.07   31.12.06   31.12.05 
 
Principal weighted average actuarial assumptions used (%) Assumptions used to determine defined benefit obligations at the end of the year
                        
 
Discount rate  3.5   3.0   3.0   5.8   5.2   5.0 
 
Expected rate of salary increase  2.5   2.5   2.5   4.8   4.6   4.4 
 
Rate of pension increase  0.8   0.8   0.8   2.4   2.1   1.9 
 
Assumptions used to determine net periodic pension cost for the year ended
                        
 
Discount rate  3.0   3.0   3.3   5.2   5.0   5.5 
 
Expected rate of return on plan assets  5.0   5.0   5.0   7.0   6.7   7.0 
 
Expected rate of salary increase  2.5   2.5   2.5   4.6   4.4   4.4 
 
Rate of pension increase  0.8   0.8   1.0   2.1   1.9   1.9 
 

85

Financial information

Note 30 Pension and other post-employment benefit plans (continued)

                         
a) Defined benefit plans (continued) 
CHF million Swiss  Foreign 
For the year ended 31.12.08  31.12.07  31.12.06  31.12.08  31.12.07  31.12.06 
 
Components of net periodic pension cost
                        
 
Service cost  336   367   347   63   88   76 
 
Interest cost  710   633   611   251   264   242 
 
Expected return on plan assets  (990)  (1,067)  (998)  (282)  (313)  (283)
 
Amortization of unrecognized net (gains)/losses  0   0   25   37   58   68 
 
Amortization of unrecognized past service cost  0   0   125             
 
Immediate recognition of net actuarial (gains)/losses in current period  1,826   (1,258)  0             
 
Immediate recognition of past service cost in current period  0   414   0             
 
Termination benefits  25   21   17             
 
Settlements  0   0   0             
 
Curtailments              0   0   0 
 
Limit of defined benefit asset  (1,304)  1,304   0             
 
Net periodic pension cost
  603   414   127   69   97   103 
 
                         
Funded and unfunded plans Swiss 
CHF million 31.12.08  31.12.07  31.12.06  31.12.05  31.12.04     
 
Defined benefit obligation from funded plans  (21,311)  (20,877)  (21,506)  (20,972)  (20,225)    
 
Plan assets  19,029   22,181   21,336   20,229   18,575     
 
Surplus/(deficit)
  (2,282)  1,304   (170)  (743)  (1,650)    
 
                         
Experience gains / (losses) on plan liabilities  0   0   (265)            
 
Experience gains / (losses) on plan assets  (3,820)  (250)  447             
 
                         
  Foreign 
CHF million 31.12.08  31.12.07  31.12.06  31.12.05  31.12.04     
 
Defined benefit obligation from funded plans  (3,402)  (4,654)  (5,002)  (4,635)  (3,815)    
 
Defined benefit obligation from unfunded plans  (240)  (274)  (205)  (385)  (327)    
 
Plan assets  2,866   4,579   4,602   4,288   3,580     
 
Surplus/(deficit)
  (776)  (349)  (605)  (732)  (562)    
 
                         
Experience gains/(losses) on plan liabilities  62   (32)  (11)            
 
Experience gains/(losses) on plan assets  (1,027)  (97)  40             
 

335

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Note 2930 Pension and Other Post-Retirement Benefit Plans (continued)

a) Definedother post-employment benefit plans (continued)
                         
a) Defined benefit plans (continued) 
  Swiss  Foreign 
  31.12.08  31.12.07  31.12.06  31.12.08  31.12.07  31.12.06 
Principal weighted average actuarial assumptions used (%) 
Assumptions used to determine defined benefit obligations at the end of the year 
 
Discount rate  3.3   3.5   3.0   6.0   5.8   5.2 
 
Expected rate of salary increase  2.5   2.5   2.5   4.5   4.8   4.6 
 
Rate of pension increase  0.5   0.8   0.8   1.9   2.4   2.1 
 
                         
Assumptions used to determine net periodic pension cost for the year ended
                        
 
Discount rate  3.5   3.0   3.0   5.8   5.2   5.0 
 
Expected rate of return on plan assets  4.5   5.0   5.0   7.1   7.0   6.7 
 
Expected rate of salary increase  2.5   2.5   2.5   4.8   4.6   4.4 
 
Rate of pension increase  0.8   0.8   0.8   2.4   2.1   1.9 
 
                         
Plan assets (weighted average)
                        
 
                         
Actual plan asset allocation (%)
                        
 
Equity instruments  26   38   41   46   50   53 
 
Debt instruments  55   47   45   35   38   38 
 
Real estate  13   11   11   3   4   4 
 
Other  6   4   3   16   8   5 
 
Total
  100   100   100   100   100   100 
 
                         
Long-term target plan asset allocation (%)
                        
 
Equity instruments  20–48   33–51   33–51   45–48   49–52   49–53 
 
Debt instruments  37–63   31–50   31–50   37–38   38–44   37–44 
 
Real estate  10–20   10–19   10–19   3–7   4–6   4–6 
 
Other  0-5   0   0   10–12   1–3   1–5 
 
Actual return on plan assets (%)
  (12.8)  3.9   7.2   (18.2)  4.8   7.8 
 
                         
Additional details to fair value of plan assets
                        
 
UBS financial instruments and UBS bank accounts  782   336   684             
 
UBS AG shares1
  55   128   193             
 
Securities lent to UBS included in plan assets  0   9,379   7,169             
 
Other assets used by UBS included in plan assets  148   111   69             
 
                           
Mortality tables and life expectancies for major plans 
    Life expectancy at age 65 for a male member currently 
    aged 65  aged 45 
Country Mortality table (end of 2007) 31.12.07  31.12.06  31.12.05  31.12.07  31.12.06  31.12.05 
 
Switzerland BVG 2000  17.8   17.8   17.8   17.8   17.8   17.8 
 
UK PA 92 G, medium cohort  21.9   21.8   19.7   23.0   23.0   21.3 
 
Germany Dr. K. Heubeck 2005 G  18.9   18.7   18.5   21.6   21.5   21.3 
 
US RP2000 projected to 2008  18.3   17.9   17.5   18.3   17.9   17.5 
 
                           
    Life expectancy at age 65 for a female member currently 
    aged 65  aged 45 
Country Mortality table (end of 2007) 31.12.07  31.12.06  31.12.05  31.12.07  31.12.06  31.12.05 
 
Switzerland BVG 2000  21.1   21.1   21.1   21.1   21.1   21.1 
 
UK PA 92 G, medium cohort  24.8   24.7   22.6   25.8   25.8   24.1 
 
Germany Dr. K. Heubeck 2005 G  23.0   22.8   22.7   25.6   25.5   25.4 
 
US RP2000 projected to 2008  20.5   20.3   20.7   20.5   20.3   20.7 
 
                         
  Swiss  Foreign 
For the year ended 31.12.07  31.12.06  31.12.05  31.12.07  31.12.06  31.12.05 
 
Plan assets (weighted average)
                        
 
Actual plan asset allocation (%)
                        
 
Equity instruments  38   41   43   50   53   52 
 
Debt instruments  47   45   43   38   38   39 
 
Real estate  11   11   12   4   4   4 
 
Other  4   3   2   8   5   5 
 
Total
  100   100   100   100   100   100 
 
                         
Long-term target plan asset allocation (%)
                        
 
Equity instruments  33--51   33--51   34--46   49--52   49--53   52--55 
 
Debt instruments  31--50   31--50   30--53   38--44   37--44   44--45 
 
Real estate  10--19   10--19   11--19   4--6   4--6   0--3 
 
Other  0   0   0   1--3   1--5   1--2 
 
Actual return on plan assets (%)
  3.9   7.2   12.0   4.8   7.8   13.6 
 
                         
Additional details to fair value of plan assets
                        
 
CHF million
                        
 
UBS financial instruments and UBS bank accounts  336   684   613             
 
UBS AG shares1
  128   193   225             
 
Securities lent to UBS included in plan assets  9,379   7,169   2,222             
 
Other assets used by UBS included in plan assets  111   69   69             
 
1 The number of UBS AG shares was 2,436,257,3,734,000; 2,436,257; and 2,600,417 and 3,589,152 as of 31 December 2008, 31 December 2007 and 31 December 2006, and 31 December 2005, respectively.
                             
Mortality tables and life expectancies for major plans 
      Life expectancy at age 65 for a male member currently 
      aged 65  aged 45 
Country Mortality table  31.12.08  31.12.07  31.12.06  31.12.08  31.12.07  31.12.06 
 
Switzerland BVG 2000   17.8   17.8   17.8   17.8   17.8   17.8 
 
UK PA 92   22.7   21.9   21.8   25.6   23.0   23.0 
 
Germany Dr. K. Heubeck 2005 G   19.0   18.9   18.7   21.8   21.6   21.5 
 
US RP 2000 with projections   18.4   18.3   17.9   18.4   18.3   17.9 
 
                             
      Life expectancy at age 65 for a female member currently 
      aged 65  aged 45 
Country Mortality table  31.12.08  31.12.07  31.12.06  31.12.08  31.12.07  31.12.06 
 
Switzerland BVG 2000   21.1   21.1   21.1   21.1   21.1   21.1 
 
UK PA 92   24.5   24.8   24.7   26.4   25.8   25.8 
 
Germany Dr. K. Heubeck 2005 G   23.1   23.0   22.8   25.7   25.6   25.5 
 
US RP 2000 with projections   20.6   20.5   20.3   20.6   20.5   20.3 
 

86336

Financial information

Note 2930 Pension and Other Post-Retirement Benefit Plansother post-employment benefit plans (continued)

b) Post-retirement medical and life plans

In the US and the UK, the Group offers retiree medical benefits that contribute to the health care coverage of employees and beneficiaries after retirement. In addition to retiree medical benefits, the Group in the US also provides retiree life insurance benefits. The UK plan is closed to new entrants. The benefit obligation in excess of fair value of plan assets for those plans amounts to CHF 190159 million as of 31 December 2007 (2006:2008 (2007: CHF 190 million; 2006: CHF 219 million, 2005: CHF 216 mil-

lion)million) and the total accrued post-retirement cost

amounts to CHF 181164 million as of 31 December 2007 (2006:2008 (2007: CHF 176 million, 2005:181 million; 2006: CHF 168176 million). The net periodic post-retirement costs for the years ended 31 December 2008, 31 December 2007 and 31 December 2006 and 31 December 2005 were CHF 9 million (including a curtailment gain of CHF 11 million), CHF 26 million CHF 24 million and CHF 2124 million, respectively.

The employer contributions expected to be made in 20082009 to the post-retirement medical and life plans are CHF 7 million.



                               
b) Post-retirement medical and life plans 
CHF million 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
Post-retirement benefit obligation at the beginning of the year  (219)  (216)  (166)   (190)  (219)  (216) 
Service cost  (12)  (10)  (8)   (8)  (12)  (10) 
Interest cost  (11)  (11)  (11)   (11)  (11)  (11) 
Plan participant contributions  (1)  (1) 0   (0)  (1)  (1) 
Actuarial gain / (loss) 39 1  (17) 
Foreign currency translation 14 10  (22) 
Actuarial gain/(loss) 14 39 1 
Amendments  (8)  (1) 0  0  (8)  (1) 
Benefits paid 8 9 8  7 8 9 
Curtailments 9 0 0 
Foreign currency translation 20 14 10 
Post-retirement benefit obligation at the end of the year
  (190)  (219)  (216)   (159)  (190)  (219) 
  
Fair value of plan assets at the beginning of the year 0 0 0  0 0 0 
Employer contributions 7 8 8  6 7 8 
Plan participant contributions 1 1 0  1 1 1 
Benefits paid  (8)  (9)  (8)   (7)  (8)  (9) 
Fair value of plan assets at the end of the year
 0 0 0  0 0 0 
 
 31.12.07 31.12.06 31.12.05 31.12.04 31.12.03 
Defined benefit obligation  (190)  (219)  (216)  (166)  (179)
Plan asset 0 0 0 0 0 
Surplus/(deficit)
  (190)  (219)  (216)  (166)  (179)
Experience gains / (losses) on plan liabilities 8 1  (3) 0 0 
                     
CHF million 31.12.08  31.12.07  31.12.06  31.12.05  31.12.04 
 
Defined benefit obligation  (159)  (190)  (219)  (216)  (166)
 
Plan asset  0   0   0   0   0 
 
Surplus/(deficit)
  (159)  (190)  (219)  (216)  (166)
 
Experience gains/(losses) on plan liabilities  3   8   1   (3)  0 
 

The assumed average health care cost trend rate used in determining post-retirement benefit expense is assumed to be 11%10% for 20072008 and to decrease to an ultimate trend rate of 5% in 2013.2014. On a country-by-country basis, the same discount rate is used for the calculation of the post-retirement benefit obligation from medical and life plans as for the defined benefit obligations arising from pension plans.

Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change in the assumed health care cost trend rates would change the US post-retirement benefit obligation and the service and interest cost components of the net periodic post-retirement benefit costs as follows:



             
CHF million 1% increase 1% decrease  1% increase 1% decrease 
Effect on total service and interest cost 4  (3) 3  (2)
Effect on the post-retirement benefit obligation 25  (20) 19  (16)

87337

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Note 2930 Pension and Other Post-Retirement Benefit Plansother post-employment benefit plans (continued)

c) Defined contribution plans

The Group also sponsors a number of defined contribution plans primarily in the UK and the US. Certain plans permit employees to make contributions and earn matching or other contributions from the Group. The contributions to

these plans recognized as expense for the years ended 31 December 2008, 31 December 2007 and 31 December 2006 and 31 December 2005 were CHF 312 million, CHF 285 million and CHF 229 million, and CHF 184 million, respectively.



d) Related party disclosure

UBS is the principal bank for the pension fund of UBS in Switzerland. In this function, UBS is engaged to execute most of the pension fund’s banking activities. These activities also include, but are not limited to, trading and securities lending and borrowing. All transactions have been executed at arm’s length conditions.

The foreign UBS pension funds do not have a similar banking relationship with UBS, but they may hold and trade UBS shares and/or securities.

In 2008, UBS sold to its Swiss pension fund certain bank-occupied properties for proceeds of approximately CHF 186 million and recognized a gain of approximately CHF 97 million. UBS and its Swiss pension fund entered simultaneously into lease-back arrangements for some of the properties with 25-year lease terms and two renewal options for ten years each. At 31 December 2008 the minimum commitment towards the Swiss pension fund under the related leases is approximately CHF 41 million.
The following fees and interest have been received or paid by UBS:


                   
Related party disclosure
Related party disclosure
 For the year ended  For the year ended
CHF million 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
Received by UBS
  
Fees 58 53 48  44 58 53 
Paid by UBS
  
Interest 2 2 4  1 2 2 
Dividends and capital repayments 38 33 7  4 38 33 

The transaction volumes in UBS shares and other UBS securities are as follows:

                   
Transaction volumes – related parties
Transaction volumes – related parties
 For the year ended  For the year ended
 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
Financial instruments bought by pension funds
  
UBS AG shares (in thousands of shares) 1,728 1,793 2,774  6,925 1,728 1,793 
UBS financial instruments (nominal values in CHF million) 950 8 0  78 950 8 
Financial instruments sold by pension funds or matured
  
UBS AG shares (in thousands of shares) 1,930 2,752 4,526  1,881 1,930 2,752 
UBS financial instruments (nominal values in CHF million) 976 14 45  10 976 14 

UBS has also leased buildings from its pension funds. The rent paid by UBS under these leases amounted to CHF 7 million in 2008, CHF 6 million in 2007 CHF 4 million in 2006 and CHF 4 million in 2005.2006.

There were no financial instruments due from UBS pension plans outstanding as of 31 December 2007 (2006:2008 (2007: CHF 120 million, 2005:0 million; 2006: CHF 163120 million). The amounts due to UBS

UBS defined benefit pension plans are contained in the additional details to the fair value of plan assets. Furthermore, UBS defined contribution plans hold 14,121,23917,866,949 UBS shares with a market value of CHF 736272 million as of 31 December 2007 (2006:2008 (2007: 14,121,239 shares with a market value of CHF 736 million; 2006: 14,158,961 shares with a market value of CHF 1,043 million, 2005: 14,128,558 shares with a market value of CHF 885 million).



88338

Financial information

Note 3031 Equity Participationparticipation and Other Compensation Plansother compensation plans

a) Plans Offeredoffered

UBS has established several equity participation plans to further align the long-term interests of executives, managers and staff with the interests of shareholders. The plans are offered to eligible employees in approximately 50 countries and are designed to meet the complex legal, tax and regulatory requirements of each country in which they are offered. The explanations below describeprovide a general description of the terms of the most significant plans in general, butoffered, however specific plan rules may vary by country.

Refer to Note 1a) 22) for a description of the accounting policy related to equity participation and other compensation plans. Refer also to Note 1b for a description of the restatement impact of adopting IFRS 2 Share-based Payment: Vesting Conditions and Cancellations on 1 January 2008.

Equity participation plans
Equity Plus Plan (Equity Plus): This voluntary plan gives eligible employees the opportunity to purchase UBS shares at fair market value and generally receive at no additional cost two UBS options for each share purchased, up to a maximum annual limit. Share purchases can be made annually from bonus compensation and / and/or quarterly based on regular deductions from salary. Shares purchased under Equity Plus are restricted from sale for two years from the time of purchase. The options have a strike price equal to the fair market value of a UBS share on the date the option is granted, a two-year vesting period and generally expire ten years from the date of grant. The options are forfeitable in certain circumstances and are settled in equity, except in countries where this is not permitted for legal reasons.

Discounted purchase plan: Up Compensation expense related to the UBS options is recognized over the shorter of the legal vesting period and including 2005, selected employees in Switzerland were entitledthe period from grant to purchase a specified numberthe retirement eligibility date of UBS shares, which must be held for a specified period of time, at a predetermined discounted price each year. No new awards are made under this plan.
the employee.
Equity Ownership Plan (EOP): Selected employees receive between 10% and 45% of their annual performance-related compensation in UBS shares or notional UBS shares instead of cash, on a mandatory basis (on-cycle awards). Up to and including 2004, certain employees were eligible to receive a portion of their EOP award in Alternative Investment Vehicles (AIVs) or UBS options. Since 2005, options arehave not been granted as part of EOP and awards arehave been generally made in UBS shares, with less than 7%2% being made in AIVs to selected employee groups. The awards granted in UBS shares or notional UBS shares are settled in equity, except in countries where this is not permitted for legal reasons. Awards granted in the form of AIVs are settled in cash. EOP awards generally vest in one-third increments over a three-year vesting period. In certain circumstances, these awards are forfeitable. Compensation expense for on-cycle awards is generally recognized during

the performance year, which is generally the period prior to the grant date.

During 2008, UBS granted to certain employees on-cycle EOP awards with a nine-month vesting period. Compensation expense for these awards was fully recognized in 2007.
Beginning with on-cycle awards granted in 2009 for the performance year 2008, compensation expense will be recognized over the shorter of the legal vesting period and the period from grant to the date the employee satisfies certain retirement eligibility requirements. This change in accounting treatment is the result of the vesting provisions being amended to require forfeiture upon voluntary termination of employment rather than upon violation of non-compete provisions.
EOP awards are also granted to selected employees when joining UBS or in other special circumstances (off-cycle awards). Off-cycle awards have the same terms and conditions as on-cycle awards, except that the forfeiture conditions are more stringent. Compensation expense for off-cycle awards is generally recognized over the shorter of the legal vesting period and the period from grant to the retirement eligibility date of the employee.
Senior Executive Equity Ownership Plan (SEEOP): Senior Executivesexecutives receive between 25% and 50% of their performance-related compensation in UBS shares or notional UBS

shares instead of cash, on a mandatory basis. The awards granted in UBS shares or notional UBS shares are settled in equity. SEEOP awards generally vest in one-fifth increments over a five-year vesting period. These awards are forfeitable if certain conditions are not met. Compensation expense for all SEEOP awards is recognized during the performance year, which is generally the period prior to the grant date. During 2008, UBS granted to certain employees SEEOP awards with a nine-month vesting period. Compensation expense for these awards was fully recognized in 2007.

Key Employee Stock Option Plan (KESOP): Key and high potential employees are granted discretionary UBS options with a strike price not less than the fair market value of a UBS share on the date the option is granted. One option gives the right to acquire one registered UBS share at the option’s strike price. The awards are settled in equity, except in countries where this is not permitted for legal reasons. Options granted prior to 2008 generally vest in one-third increments over a three-year vesting period and generally expire ten years from the grant date. Options granted from 2008 vest in full following a three-year vesting period and generally expire ten years from the grant date. These awards are generally forfeitable upon termination of employment with UBS. Compensation expense is recognized over the shorter of the legal vesting period and the



339

Financial information
Notes to the consolidated financial statements

Note 31 Equity participation and other compensation plans (continued)

a) Plans offered (continued)

period from grant to the retirement eligibility date of the employee.

Senior Executive Stock Option Plan (SESOP): Senior Executivesexecutives may be granted discretionary UBS options with a strike price set at 110% of the fair market value of a UBS share on the date the option is granted. One option gives the right to acquire one registered UBS share at the option’s strike price. The awards are settled in equity. Options vest in full following a three-year vesting period and generally expire ten years from the grant date. These awards are forfeitable if certain conditions are not met. Compensation expense for all SESOP awards is recognized during the performance year, which is generally the period prior to the grant date.
Global WM&BB Partner Plus Plan (PPP): UBS grants notional UBS shares to certain client advisers, which vest in 20% increments 6 to 10 years after the grant date. The awards are generally settled in equity, except in countries where this is not permitted for legal reasons, and are forfeitable in certain circumstances. Compensation expense is recognized over the shorter of the legal vesting period and the period from grant to the retirement eligibility date of the employee. The first grants made under this plan were in 2007.

Other plans:compensation plans
Executive Capital Accumulation Plan (ECAP): UBS sponsors a voluntary deferred compensation plan for selected eligible employees. Under this plan, participants are allowed to notionally invest a portion of their cash bonus in money market funds, UBS and non-UBS mutual funds and other

UBS sponsored funds. No additional company match is granted. Thegranted, the awards are generally not forfeitable and are settled in cash. This plan does not result in compensation expense for UBS.

In addition,WMUS Partner Plus Plan: WM US sponsors a compulsory deferred compensation plan for selected eligible employees. Under this plan, UBS awards amounts based on a predefined formula during the performance year. Participants are also grants notional UBS sharesallowed to certain client advisors, whichvoluntarily contribute additional amounts earned during the year into the plan up to a percentage of UBS’s contributions. The amounts awarded earn an above-market rate of interest during a four-year period and a market rate of interest thereafter. Partner Plus awards vest in one-fifth20% increments over a five-year vesting period starting six6 to 10 years after the date of grant.grant date. The awards are generally settled in equity, except in countries where this is not permitted for legal reasons,UBS contributions and all interest earned are forfeitable in certain circumstances. Compensation expense is recognized over the shorter of the vesting period and the period from the performance year to the date that the employee is eligible to leave UBS and retain their award.
UBS satisfies share delivery obligations under its option-based participation plans either by purchasing UBS shares in the market or through the issuance of new shares. At exercise, shares held in treasury or newly issued shares are delivered to the employee against receipt of the strike price. As of 31 December 2007,2008, UBS was holding approximately 14149 million shares in treasury and an additional 150 million unissued shares in conditional share capital, which are available and can be used for future employee option exercises. The shares available cover all vested (i. e.(i.e. exercisable) employee options.



89b) Effect on income statement and balance sheet

The total share-based compensation expense recognized for the years ended 31 December 2008, 31 December 2007 and 31 December 2006 was negative CHF 94 million, CHF 3,173 million and CHF 2,685 million, respectively. The decrease in compensation expense in 2008 as compared to prior years is primarily a result of UBS adopting the amendment to IFRS 2 Share-based Payment: Vesting Conditions and Cancellations on 1 January 2008. Furthermore, UBS amended the EOP plan rules for awards to be granted in 2009 for the year 2008 for which compensation expense related to these awards will be recognized over the vesting period rather than in the performance year. For the years ended 31 December 2008, 31 December 2007 and 31 De-

cember 2006, the compensation expense recognized for share-based payments was primarily related to equity-settled plans. At 31 December 2008, total compensation expense related to non-vested awards not yet recognized in the income statement is CHF 648 million, which is expected to be recognized in Personnel expenses over a weighted average period of 3.2 years.

Payments to participants of cash-settled share-based and AIV plans for the years ended 31 December 2008, 31 December 2007 and 31 December 2006 were CHF 80 million, CHF 42 million and CHF 177 million, respectively. The total carrying amount of the liability related to these cash-settled plans amounted to CHF 207 million as of 31 December 2008.



340

Financial Statements
Notes to the Financial Statements

Financial information

Note 3031 Equity Participationparticipation and Other Compensation Plansother compensation plans (continued)
b) UBS Share Awards
 

c) UBS share awards

Movements in shares granted under variousthe equity participation plans described in Note 30a)31a) are as follows:

                         
      Weighted               
      average      Weighted      Weighted 
  Number  grant  Number  average grant  Number  average grant 
  of shares  date fair  of shares  date fair  of shares  date fair 
  31.12.07  value CHF  31.12.06  value CHF  31.12.05  value CHF 
 
Unvested, at the beginning of the year  56,141,102   58   53,725,186   46   49,273,638   40 
 
Shares awarded during the year  30,271,820   70   26,652,070   69   27,252,100   51 
 
Vested during the year  (25,031,819)  55   (22,712,566)  43   (21,991,760)  39 
 
Forfeited during the year  (2,278,523)  66   (1,523,588)  56   (808,792)  45 
 
Unvested, at the end of the year  59,102,580   66   56,141,102   58   53,725,186   46 
 
                         
      Weighted      Weighted      Weighted 
  Number of  average  Number of  average  Number of  average 
  shares  grant date  shares  grant date  shares  grant date 
  31.12.08  fair value CHF  31.12.07  fair value CHF  31.12.06  fair value CHF 
 
Forfeitable, at the beginning of the year  59,102,580   66   56,141,102   58   53,725,186   46 
 
Shares awarded during the year  90,895,5941,2  32   30,271,820   70   26,652,070   69 
 
Distributions during the year  (60,105,109)  61   (25,031,819)  55   (22,712,566)  43 
 
Forfeited during the year  (5,156,131)  54   (2,278,523)  66   (1,523,588)  56 
 
Forfeitable, at the end of the year  84,736,935   53   59,102,580   66   56,141,102   58 
 
of which: shares vested for accounting purposes
  65,767,017       47,700,903       47,345,901     
 
1 The number of shares awarded during the year include 4,260,681 of reinvested dividends as a result of the stock dividend, for which new shares were issued on 19 May 2008. There was no impact to the weighted average grant date fair value and no additional compensation expense was recognized.   2 As a result of the rights offering in June 2008, UBS adjusted the number of notional shares which were unvested at the date of the rights offering. This was done to prevent any dilution impact to holders of these notional shares. The total number of shares awarded during the year include an additional 1,806,071 notional shares as a result of this anti-dilution adjustment. No additional compensation expense was recognized.

Prior to 2008, UBS estimatesestimated the grant date fair value of shares awarded during the year by using the average UBS share price on the grant date as quoted on the virtX.SWX Europe. The grant date fair value of notional UBS shares without dividend entitlements includes a deduction for the present value of future expected dividends to be paid between grant date and distribution. The market value of shares

vested was CHF 1,7371,385 million, CHF 1,5871,737 million, and CHF 1,0831,587 million for the years ended 31 December 2008, 31 December 2007, and 31 December 2006, respectively.

For share awards granted beginning in 2008, UBS measures compensation cost based on the average market price of the UBS share on the grant date less a discount for post-vesting sale and 31 December 2005, respectively.hedge restrictions and non-vesting conditions, in accordance with IFRS 2 Share-based Payment: Vesting Conditions and Cancellations. The grant date fair

value of notional UBS shares without dividend entitlements also includes a deduction for the present value of future expected dividends to be paid between grant date and distribution. The fair value of the share awards subject to post-vesting sale and hedge restrictions is discounted based upon the duration of the post-vesting restriction. The weighted average discount for share awards granted in 2008 is approximately 19% of the market price of the UBS share. Discounts for non-vesting conditions are based on the probability that the non-vesting conditions will be achieved and the award will become exercisable. The fair value of share-based awards granted prior to 2008 was not discounted for post-vesting sale and hedge restrictions, as there was no distinction between vesting and non-vesting conditions until the IASB amended IFRS 2 effective for UBS January 2008 Share-based Payment:Vesting Conditions and Cancellations.



341

Financial information
Notes to the consolidated financial statements

c)Note 31 Equity participation and other compensation plans (continued)

d) UBS Option Awards
option awards
 

Movements in options granted under variousthe equity participation plans described in Note 30a)31a) are as follows:

                                     
 Weighted Weighted Weighted  Weighted         
 Number average Number average Number average  Number of average Number of Weighted Number of Weighted 
 of options exercise of options exercise of options exercise  options exercise price options average exercise options average exercise 
 31.12.07 price CHF1 31.12.06 price CHF1 31.12.05 price CHF1  31.12.081 CHF1,2 31.12.071 price CHF1,2 31.12.061 price CHF1,2 
Outstanding, at the beginning of the year 176,779,087 50 181,765,090 42 201,814,708 35  198,213,092 52 188,393,473 47 193,707,056 39 
Granted during the year 45,129,476 71 45,517,013 71 45,202,854 55  62,973,879 30 48,094,483 67 48,507,481 67 
Exercised during the year  (32,214,986) 38  (47,179,386) 36  (61,303,418) 34   (3,673,657) 26  (34,331,511) 36  (50,279,072) 34 
Forfeited during the year  (3,425,863) 66  (3,303,002) 55  (3,810,106) 45   (6,732,080) 52  (3,650,942) 62  (3,520,009) 52 
Expired unexercised  (274,384) 62  (20,628) 40  (138,948) 34   (14,725,689) 46  (292,411) 58  (21,983) 38 
Outstanding, at the end of the year 185,993,330 55 176,779,087 50 181,765,090 42  236,055,545 47 198,213,092 52 188,393,473 47 
Exercisable, at the end of the year 90,453,625 �� 42 80,312,503 36 74,788,838 35  124,054,442 46 96,396,428 39 85,589,034 34 
1 As a result of the rights offering in June 2008, UBS adjusted the number of options and exercise price for vested and unvested employee options which were unexercised at the date of the rights offering. This was done to prevent any dilution impact to holders of these options. No additional compensation expense was recognized. This resulted in an increase to the number of options awarded in 2008 of 3,881,320 and an increase to the prior year outstanding balance of 2,400,143.  2 Some of the options in this table have exercise prices denominated in USD which have been converted into CHF at the year-end spot exchange rate for the purposes of this table.

The weighted average share price at the time when the options were exercised during the year was CHF 34, CHF 72, and CHF 71 and CHF 53 for the years ended 31 December 2007,2008, 31 De-

cember 20062007, and 31 December 2005,2006, respectively. The following table provides additional information about option awards:



             
  31.12.07  31.12.06  31.12.05 
 
Intrinsic value of options exercised during the year (CHF million)  1,046   1,660   1,224 
 
Weighted average grant date fair value of options granted (CHF)  11.11   12.39   8.01 
 

90

Note 30 Equity Participation and Other Compensation Plans (continued)

c) UBS Option Awards (continued)
             
  31.12.08  31.12.07  31.12.06 
 
Intrinsic value of options exercised during the year (CHF million)  29   1,046   1,660 
 
Weighted average grant date fair value of options granted (CHF)  7.53   10.43   11.63 
 

The following table summarizes additional information about options outstanding and options exercisable at 31 December 2007:2008:

                                                 
 Options outstanding Options exercisable  Options outstanding Options exercisable
 Weighted Weighted  Weighted Weighted 
 Weighted Aggregate average Weighted Aggregate average  Weighted Aggregate average Weighted Aggregate average 
 Number average intrinsic value remaining Number average intrinsic value remaining  Number of average intrinsic value remaining Number of average intrinsic value remaining 
 of options exercise price (CHF / USD contractual of options exercise price (CHF / USD contractual  options exercise price (CHF/USD contractual options exercise price (CHF/USD contractual 
Range of exercise price per share outstanding (CHF / USD) million) term (years) exercisable (CHF / USD) million) term (years)  outstanding (CHF/USD) million) term (years) exercisable (CHF/USD) million) term (years) 
  
CHF
  
26.69–40.00 17,461,795 34.25 317 4.8 17,241,610 34.27 312 4.8 
14.47–25.00 9,612,902 18.31 1.7 9.8 0 0.00 0.0 
40.01–50.00 14,334,889 46.77 81 5.5 14,201,947 46.79 80 5.5 
25.01–35.00 49,437,156 31.08 0.0 8.3 8,966,563 28.22 0.0 4.3 
50.01–60.00 24,364,314 52.63 24 7.4 11,532,651 51.11 16 7.0 
35.01–45.00 27,821,969 39.23 0.0 5.9 19,023,570 40.68 0.0 4.3 
60.01–70.00 5,791,089 64.50 0 9.0 607,206 64.34 0 8.1 
45.01–55.00 26,011,919 49.18 0.0 6.0 22,846,437 48.63 0.0 5.7 
70.01–78.80 77,760,388 72.25 0 8.7 7,841,168 70.45 0 8.2 
55.01–65.00 5,398,949 60.31 0.0 8.0 2,208,584 61.30 0.0 7.4 
26.69–78.80
 139,712,475 61.14 422 7.7 51,424,582 47.38 408 6.0 
65.01–75.00 76,929,095 67.85 0.0 7.7 30,294,459 66.34 0.0 7.5 
14.47–75.00
 195,211,990 49.32 1.7 7.5 83,339,613 51.39 0.0 5.9 
  
USD
  
4.74–20.00 138,622 14.20 4 2.1 138,622 14.20 4 2.1  108,301 13.49 0.3 1.2 108,301 13.49 0.3 1.2 
20.01–30.00 18,753,410 23.26 426 4.3 18,753,410 23.26 426 4.3  15,864,689 21.60 0.0 3.7 15,864,689 21.60 0.0 3.7 
30.01–40.00 10,550,084 36.26 103 6.3 10,508,448 36.24 103 6.3  9,821,977 34.03 0.0 5.3 9,821,977 34.03 0.0 5.3 
40.01–53.50 16,838,735 44.15 39 7.2 9,628,563 43.15 29 7.1  15,048,584 41.40 0.0 6.2 14,919,862 41.36 0.0 6.1 
4.74–53.50
 46,280,851 33.79 572 5.8 39,029,043 31.63 562 5.5  40,843,551 31.86 0.3 5.0 40,714,829 31.82 0.3 5.0 

342

Financial information

d) ValuationNote 31 Equity participation and other compensation plans (continued)

e) Valuation
 

The fair value of options is determined by means of a Monte Carlo simulation. The simulation technique uses a mix of implied and historic volatility and specific employee exercise behavior patterns based on statistical data, taking into account the specific terms and conditions under which the options are granted, such as the vesting period, forced exercises during the lifetime, and gain- and time-dependent exercise behavior. The expected term of each option is calcu-

lated as the probability-weighted average period of the time between grant and exercise. The term structure of volatility is derived from the implied volatilities of traded UBS options in combination with the observed long-term historic share price volatility. Dividends are assumed to grow at a fixed rate over the term of the option.

The fair value of options granted in 2008, 2007 2006 and 20052006 was determined using the following assumptions.assumptions:



                   
 31.12.07  31.12.08
 CHF awards range low range high  CHF awards range low range high 
Expected volatility (%) 23.86 22.51 29.23  33.86 30.00 49.32 
Risk-free interest rate (%) 2.58 2.46 3.27  2.83 1.74 3.27 
Expected dividend (CHF) 3.13 2.20 4.56  1.85 1.10 2.57 
Strike price (CHF) 71.31 55.48 78.80  30.11 14.47 46.02 
Share price (CHF) 70.25 55.48 78.80  28.05 14.47 43.61 

91

             
  31.12.07
  CHF awards  range low  range high
 
Expected volatility (%)  23.86   22.51   29.23 
 
Risk-free interest rate (%)  2.58   2.46   3.27 
 
Expected dividend (CHF)  3.13   2.20   4.56 
 
Strike price (CHF)1
  71.31   55.48   78.80 
 
Share price (CHF)1
  70.25   55.48   78.80 
 

Financial Statements
Notes to the Financial Statements

Note 30 Equity Participation1 Not adjusted for stock dividend and Other Compensation Plans (continued)

d) Valuation (continued)rights offering in 2008.
             
  31.12.06
  CHF awards1  range low  range high 
 
Expected volatility (%)  25.38   22.51   27.18 
 
Risk-free interest rate (%)  2.15   1.96   2.68 
 
Expected dividend (CHF)  2.26   1.76   2.83 
 
Strike price (CHF)2
  71.19   65.13   77.33 
 
Share price (CHF)2
  70.16   65.13   76.25 
 
             
  31.12.06 
  CHF awards1  range low  range high 
 
Expected volatility (%)  25.38   22.51   27.18 
 
Risk-free interest rate (%)  2.15   1.96   2.68 
 
Expected dividend (CHF)  2.26   1.76   2.83 
 
Strike price (CHF)  71.19   65.13   77.33 
 
Share price (CHF)  70.16   65.13   76.25 
 
1 Fewer Less than 1% of awards in 2006 were granted in USD. These have been combined with CHF awards for purposes of this disclosure.
                         
  31.12.05 
  CHF awards  range low  range high  USD awards  range low  range high 
 
Expected volatility (%)  23.20   12.39   27.03   23.36   15.21   27.21 
 
Risk-free interest rate (%)  2.00   0.62   2.34   4.11   1.91   4.63 
 
Expected dividend (CHF / USD)  2.30   1.50   3.89   1.89   1.22   4.12 
 
Strike price (CHF / USD)  52.08   48.23   63.23   44.11   39.25   48.26 
 
Share price (CHF / USD)  51.33   48.23   63.23   43.40   39.25   48.26 
 
2 Not adjusted for stock dividend and rights offering in 2008.

e) Effect on income statement and balance sheet

Generally, under IFRS, for all employee share and option awards as well as certain AIV awards, UBS recognizes compensation expense over the service period which is generally equal to the vesting period. Share and option awards typically have a three-year tiered vesting structure which means awards vest in one-third increments over that period.

The total share-based compensation expense recognized for the years ended 31 December 2007, 31 December 2006 and 31 December 2005 was CHF 2,389 million, CHF 2,188 million and CHF 1,662 million, respectively. For the years ended 31 December 2007, 31 December 2006 and 31 December 2005, the compensation expense recognized for share-based payments was primarily related to equity settled plans. At 31 December 2007, total compensation expense related to non-vested awards not yet recognized in the in-
343

come statement is CHF 1,904 million, which is expected to be recognized in Personnel expenses over a weighted average period of 2.1 years.

During 2007, UBS increased the option life of certain options for certain employees, which resulted in a modification of the original terms of the option awards. This resulted in an incremental fair value granted of CHF 11 million, which was immediately recognized as compensation expense as future employee services are not required.
Payments to participants of cash-settled share-based and AIV plans for the years ended 31 December 2007, 31 December 2006 and 31 December 2005 were CHF 42 million, CHF 177 million and CHF 87 million, respectively. The total carrying amount of the liability related to these cash-settled plans amounted to CHF 134 million as of 31 December 2007.



92

Financial information
Notes to the consolidated financial statements

Note 3132 Related Parties

parties

The Group defines related parties as associated companies, post-employment benefit plans for the benefit of UBS employees, key management personnel, close family members of key management personnel and enterprises which are, directly or indirectly, controlled by, jointly controlled by or significantly influenced by or in which significant voting

power resides with key management personnel or their close family members. Key management personnel is defined as members of the Board of Directors (BoD) and Group Executive Board (GEB). This definition is based on the requirements of IAS 24Related Party Disclosures.Disclosures.





a) Remuneration of key management personnel

The executivenon-independent members of the BoD have top management employment contracts and receive pension benefits upon retirement. Total remuneration of the executivenon-inde-

pendent members of the BoD and GEB including those who stepped down during 20072008 is as follows:



             
CHF million 31.12.08  31.12.07  31.12.06 
 
Base salaries and other cash payments  12   14   16 
 
Incentive awards – cash  0   38   107 
 
Employer’s contributions to retirement benefit plans  2   2   1 
 
Benefits in kind, fringe benefits (at market value)  1   2   2 
 
Equity compensation benefits1
  0   22   113 
 
Total
  15   78   239 
 
             
  For the year ended 
CHF million 31.12.07  31.12.06  31.12.05 
 
Base salaries and other cash payments  14   16   15 
 
Incentive awards – cash  38   107   90 
 
Employer’s contributions to retirement benefit plans  2   1   1 
 
Benefits in kind, fringe benefits (at market value)  2   2   3 
 
Equity compensation benefits1
  22   1132  1212
 
Total
  78   239   230 
 
1 Expense for shares and options granted is measured at grant date and allocated over the vesting period, generally 3 years for options and 5 years for shares.2 In line with the “accrual principle” outlined by the SWX in September 2007, UBS has this year amended its reporting of both basic and matching stock option grants to align them with the performance year for which they were earned, rather than the year in which they were granted. This has resulted in a restatement

Marcel Ospel, former Chairman of the 2005 and 2006 stock option, and 2005 and 2006 total compensation figuresBoD, did not stand for membersre-election at the AGM of 23 April 2008. Stephan Haeringer, former executive vice chairman of the GEB andBoD, retired from the BoD on 2 October 2008. Marco Suter, formerly an executive membersmember of the Board of Directors.

Peter Wuffli relinquished his position as Group CEO on 6 July 2007, Clive Standish retired on 30 September 2007 and Huw JenkinsBoD, stepped down from the BoD on 1 October 2007 and thereafter acted as Group Chief Financial Officer (Group CFO) and as a member of the GEB until his stepping down from this role on 31 August 2008. While Marcel Ospel has retired from UBS as of April 2008, Stephan Haeringer and Marco Suter agreed with UBS to continue their services for UBS until their termination dates of 30 September 2007: all2009 and 31 August 2009 respectively.

All three executives arepersons were contractually entitled to receive base salary, pro rata incentivea payment based on their average remuneration over the last three years and certain employment-benefitsemployment benefits until the expiry of their 12-month notice period. Huw Jenkins is retained in a consultancy position
For the fiscal years 2007 and 2008, Marcel Ospel, Stephan Haeringer and Marco Suter did not receive any incentive awards. Furthermore, on 25 November 2008, Marcel Ospel,

Stephan Haeringer and Marco Suter announced that they voluntarily relinquished substantial parts of the payments to which they were entitled during their periods of employment with UBS until 30 September 2008.UBS. The total amount due underwaived or repaid was CHF 33 million.

The remaining contractual obligations to all three contacts – CHF 15.3 million payableformer BoD members, consisting of those due in 2008 and CHF

45.3 million payablethose upcoming in 2009, –net of the CHF 33 million voluntarily waived or repaid, amounted to CHF 10 million. This amount has been fully accrued in 20072008 and is reflected in the 2007firm’s 2008 income statement. Of this amount, CHF 2.3 million was for Marcel Ospel, CHF 3.9 million for Stephan Haeringer and CHF 3.8 million for Marco Suter.

The non-executiveindependent members of the BoD do not have employment or service contracts with UBS, and thus are not entitled to benefits upon termination of their service on the BoD. Payments to these individuals for their services as external board members amounted to CHF 6.4 million in 2008, CHF 5.7 million in 2007 and CHF 5.9 million in 2006 and CHF 6.1 million in 20052006.



344

Financial information

Note 32 Related parties (continued)

b) Equity holdings

                   
  31.12.08 31.12.07 31.12.06 
 31.12.07 31.12.06 31.12.05 
Number of stock options from equity participation plans held by executive members of the BoD and the GEB1
 6,828,152 10,886,798 10,862,250 
Number of stock options from equity participation plans held by non-independent members of the BoD and the GEB1
 8,458,037 6,828,152 10,886,798 
Number of shares held by members of the BoD, GEB and parties closely linked to them 6,693,012 7,974,724 8,713,984  5,892,548 6,693,012 7,974,724 
1 Further information about UBS’s equity participation plans can be found in Note 30.31.

Of the share totals above, at 31 December 2008, 31 December 2007 and 31 December 2006, and 31 December 2005,15,878 shares, 4,852 shares 7,146 shares and 6,5387,146 shares respectively were held by close family members of key management personnel and 2,200,000103,841 shares, 2,200,000 shares and 2,486,0602,200,000 shares respectively were held by enterprises which are directly or indirectly controlled by,

by, jointly controlled by or significantly influenced by or in which significant voting power resides with key management personnel or their close family members. Further information about UBS’s equity participation plans can be found in Note 30.31. No member of the BoD or GEB is the beneficial owner of more than 1% of the Group’s shares at 31 December 2007.2008.



93

Financial Statements
Notes to the Financial Statements

Note 31 Related Parties (continued)

c) Loans, advances and mortgages to key management personnel

Executive

Non-independent members of the BoD and GEB members have been granted loans, fixed advances and mortgages on the same terms and conditions that are available to other employees, based on terms and conditions granted to third parties adjusted for reduced credit risk. Non-executiveIndependent BoD

members are granted loans and mortgages at general market conditions.

Movements in the loan, advanceadvances and mortgage balances are as follows:



             
CHF million 31.12.07 31.12.06  31.12.08 31.12.07 
Balance at the beginning of the year 19 21  15 19 
Additions 0 1  8 0 
Reductions  (4)  (3)  (12)  (4)
Balance at the end of the year 15 19  11 15 

No unsecured loans were granted to key management personnel as of 31 December 20072008 and 31 December 2006.2007.

d) Associated companies

Movements in loans to associated companies are as follows:
             
Movements in loans to associated companies are as follows:Movements in loans to associated companies are as follows: 
CHF million 31.12.07 31.12.06  31.12.08 31.12.07 
Balance at the beginning of the year 375 321  220 375 
Additions 60 116  171 60 
Reductions  (215)  (48)  (77)  (215)
Credit loss (expense) / recovery 0 1 
Credit loss (expense)/recovery 0 0 
Foreign currency translation 0  (15)  (13) 0 
Balance at the end of the year 220 375  301 220 
Thereof unsecured loans 56 177 
thereof unsecured loans
 82 56 
Thereof allowances for credit losses 4 5 
thereof allowances for credit losses
 3 4 

All loans to associated companies are transacted at arm’s length.

345

Financial information
Notes to the consolidated financial statements

Note 32 Related parties (continued)

d) Associated companies (continued)

Other transactions with associated companies transacted at arm’s length are as follows:

                   
 For the year ended or as of  For the year ended or as of 
CHF million 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
Payments to associates for goods and services received 87 58 397  90 87 58 
Fees received for services provided to associates 20 79 258  6 20 79 
Commitments and contingent liabilities to associates 33 32  40 33 32 

Note 3334 provides a list of significant associates.

e) Other related party transactions

During 20072008 and 2006,2007, UBS entered into transactions at arm’s length with enterprises which are directly or indirectly controlled by, jointly controlled by or significantly influenced by or in which significant voting power resides with key management personnel or their close family members. In 20072008 and 2006,2007 these companies included Aebi + Co. AG (Switzer-land)(Switzerland), AC Management SA, (Switzerland), Bertarelli Family (Switzerland), BMW Group (Germany)Bertarelli Investment Ltd (Jersey) (dissolved in December 2007), DKSH Holding AG (Switzerland), Kedge Capital Funds Ltd. (Jersey)

Fiat Group (Italy), Kedge Capital Selected Funds Ltd. (Jersey), Lista AGLévy Kaufmann-Kohler (Switzerland), Limonares Ltd (Jersey) (dissolved in December 2007), Löwenfeld AG (Switzerland), Martown Trading

Ltd. (Isle of Man), Royal Dutch Shell plc (UK), Seromer Biotech SA (Switzerland, previously Bertarelli Biotech SA), Serono Group (Switzerland), Stadler Rail Group (Switzerland), Team Alinghi (Switzerland), Team Alinghi (Spain), and Unisys Corporation (USA). Related parties in 2007 also included Bertarelli Investment Ltd (Jersey), Fiat Group (Italy), Lévy Kaufmann-Kohler (Switzerland), Limonares Ltd (Jersey), Omega Fund I Ltd (Jersey), Omega Fund II Ltd (Jersey), Omega Fund III Ltd (Jersey), Omega Fund IV Ltd (Jersey), Royal Dutch Shell plc (UK), SGS Société Générale de Surveillance SA (Switzerland), Stadler Rail Group (Switzerland), Team Alinghi (Switzerland), Team Alinghi (Spain) and Walo Group (Switzerland).



94

Note 31 Related Parties (continued)

e) Other related party transactions (continued)

Movements in loans to other related parties are as follows:

                   
CHF million 31.12.07 31.12.06    31.12.08 31.12.07 31.12.06 
Balance at the beginning of the year 872 919    688 872 919 
Additions 301 34  206 301 34 
Reductions 485 81  220 485 81 
Balance at the end of the year1
 688 872  674 688 872 
1 In 2008 includes loans, guarantees and contingent liabilities of CHF 192 million and unused committed facilities of CHF 482 million but excludes unused uncommitted working capital facilities and unused guarantees of CHF 691 million. In 2007 includes loans, guarantees and contingent liabilities of CHF 270 million and unused committed facilities of CHF 418 million but excludes unused uncommitted working capital facilities and unused guarantees of CHF 205 million. In 2006 includes loans, guarantees and contingent liabilities of CHF 128 million and unused committed facilities of CHF 744 million but excludes unused uncommitted working capital facilities and unused guarantees of CHF 173 million.

Other transactions with these related parties include:

       
 For the year ended             
CHF million 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
Goods sold and services provided to UBS 8 8 15  1 8 8 
Fees received for services provided by UBS 16 8 1  22 16 8 

As part of its sponsorship of Team Alinghi, defender for the “America’s Cup 2007”, UBS paid CHF 8.9 million828,090 (EUR 5.4 million)538,000) in basic sponsoring fees for 2007. 2008.

Team Alinghi’s controlling shareholder is UBS board member Ernesto Bertarelli.



f) Additional information

UBS also engages in trading and risk management activities (e. g.(e.g. swaps, options, forwards) with various related parties mentioned in previous sections. These transactions may give rise to credit risk either for UBS or for a related party towards

UBS. As part of its normal course of business, UBS is also a market maker in equity and debt instruments and at times may hold positions in instruments of related parties.



346

Financial information

Note 32 Post-Balance Sheet Events

33 Post-balance-sheet events

Mandatory Convertible Notes

AtOn 18 February 2009, UBS announced that it settled its US cross-border case with the Extraordinary General Meeting on 27 February 2008,US Department of Justice and the shareholdersUS Securities and Exchange Commission. Refer to “Note 21 Provisions and litigation” for details.
The Swiss National Bank (SNB) determined the purchase price to be paid for certain positions that have not yet been transferred into the fund owned and controlled by the SNB. Refer to “Note 38 Reorganizations and disposals” for details.
Both events above meet the definition of UBS AG approved a conditional capital increase to issue up to 252,525,253 new shares to satisfyan adjusting event after the conversion into UBS AG sharesreporting period as defined in IAS 10Events after the Reporting Periodand have been considered in the financial statements as of CHF 13 billion mandatory convertible notes (MCN) issued on 5 March31 December 2008. The MCN were purchased by the Government of Singapore Investment Corporation Pte Ltd (CHF 11 billion) and an investor from the Middle East (CHF 2 billion). The MCN have a coupon of 9% per annum and will be converted into UBS shares at the latest within two years. Conversion is linked to the share price at the date of conversion, but is not lower than CHF 51.48 per share and not higher than CHF 60.23 per share. Conversion at CHF 51.48 would result in issuing the maximum number of shares (252,525,253), while conversion at CHF 60.23 would result in issuing the minimum number of shares (215,839,283). If at the date of conversion, the share price is between the lower and upper boundary, the number of shares issued is determined by dividing CHF 13 billion by that price. The issue of MCN immediately strengthens UBS AG’s capital base as the notes will count as tier 1 capital from the date of issue.total im-

pact on net profit after tax was negative CHF 1,190 million.

Under IFRS,On 19 January 2009, UBS announced that it had entered into an agreement to acquire the MCN is treated as a compound financial instrument that consistscommodity index business of a debt host and an embedded equity component. The debt host will initially be recognized as a liability measured at fair value and accountedAIG Financial Product Corp. Refer to “Note 36 Business combinations” for at amortized cost. The equity component, which reflects the value of the net premium paid to the investors for obtaining the right to convert the MCN into a variable number of shares if the share price at the date of conversion is between the lower and higher boundary prices, is immediately recognized as a reduction to share premium and subsequently not remeasured to fair value.
For the acquisition of Caisse Centrale de Réescompte Group refer to Note 35.details.
There have been no further material post-balance sheetpost-balance-sheet events which would require disclosure or adjustment to the 31 December 20072008 Financial Statements.
On 65 March 2008,2009, the Board of Directors reviewed the Financial Statements and authorized them for issue. These Financial Statements will be submitted to the Annual General Meeting of Shareholders to be held on 2315 April 20082009 for approval.



95

Financial Statements
Notes to the Financial Statements

Note 3334 Significant Subsidiariessubsidiaries and Associates

associates

The legal entity group structure of UBS is designed to support the Group’s businesses within an efficient legal, tax, regulatory and funding framework. Neither the Business Groupsbusiness divisions of UBS (namely Investment Bank, Global Wealth Management & Business Banking and Global Asset Management) nor Corporate Center are replicated in their own individual legal entities, but rather they generally operate out of UBS AG (Parent Bank) through its Swiss and foreign branches.

The parent bankParent Bank structure allows UBS to capitalize on the advantages offered by the use of one legal platform by all

the Business Groups.business divisions. It provides for the most cost-efficient and flexible structure and facilitates efficient allocation and use of capital, comprehensive risk management and control and straightforward funding processes.

Where, usually due to local legal, tax or regulatory rules or due to additional legal entities joining the UBS Group via acquisition, it is either not possible or not efficient to operate out of the Parent Bank, then local subsidiary companies host the businesses. The significant operating subsidiary companies in the Group are listed below:



               
Significant subsidiaries 
  Jurisdiction     Share capital  Equity interest 
Company of incorporation Business Group1   in millions  accumulated in % 
 
Banco UBS Pactual S.A. Rio de Janeiro, Brazil IB BRL  349.6   100.0 
 
Crédit Industriel Société Anonyme in Liquidation Zurich, Switzerland Global WM&BB CHF  0.1   100.0 
 
Dillon Read U.S. Finance L.P. Delaware, USA IB USD  548.0   100.0 
 
Fondcenter AG Zurich, Switzerland Global AM CHF  0.1   100.0 
 
OOO UBS Bank Moscow, Russia IB RUB  1250.0   100.0 
 
PT UBS Securities Indonesia Jakarta, Indonesia IB IDR  118000.0   98.4 
 
Thesaurus Continentale Effekten-Gesellschaft in Zürich in Liquidation Zurich, Switzerland Global WM&BB CHF  0.1   100.0 
 
UBS (Bahamas) Ltd. Nassau, Bahamas Global WM&BB USD  4.0   100.0 
 
UBS (France) S.A. Paris, France Global WM&BB EUR  25.7   100.0 
 
UBS (Grand Cayman) Limited George Town, Cayman Islands IB USD  25.0   100.0 
 
UBS (Italia) S.p.A. Milan, Italy Global WM&BB EUR  60.0   100.0 
 
UBS (Luxembourg) S.A. Luxembourg, Luxembourg Global WM&BB CHF  150.0   100.0 
 
UBS (Monaco) S.A. Monte Carlo, Monaco Global WM&BB EUR  9.2   100.0 
 
UBS Alternative and Quantitative Investments Limited London, Great Britain Global AM GBP  0.3   100.0 
 
UBS Alternative and Quantitative Investments LLC Delaware, USA Global AM USD  0.1   100.0 
 
UBS Americas Inc. Delaware, USA IB USD  0.0   100.0 
 
UBS Asesores SA Panama, Panama Global WM&BB USD  0.0   100.0 
 
UBS Bank (Canada) Toronto, Canada Global WM&BB CAD  8.5   100.0 
 
UBS Bank Mexico, S.A. Institucion de Banca Multiple, UBS Grupo Financiero Mexico City, Mexico IB MXN  409.4   100.0 
 
UBS Bank USA Utah, USA Global WM&BB USD  1700.0   100.0 
 
UBS Bank, S.A. Madrid, Spain Global WM&BB EUR  72.2   100.0 
 
UBS Belgium SA / NV Brussels, Belgium Global WM&BB EUR  23.0   100.0 
 
UBS Capital (Jersey) Ltd. St. Helier, Jersey IB GBP  130.0   100.0 
 
UBS Capital B.V. Amsterdam, the Netherlands IB EUR  29.82  100.0 
 
UBS Card Center AG Glattbrugg, Switzerland Global WM&BB CHF  0.1   100.0 
 
UBS Clearing and Execution Services Limited London, Great Britain IB USD  50.0   100.0 
 
UBS Commodities Canada Ltd. Toronto, Canada IB USD  11.3   100.0 
 
UBS Derivatives Hong Kong Limited Hong Kong, China IB HKD  500.0   100.0 
 
UBS Deutschland AG Frankfurt am Main, Germany Global WM&BB EUR  176.0   100.0 
 
UBS Employee Benefits Trust Limited St. Helier, Jersey CC GBP  0.0   100.0 
 
UBS Energy LLC Delaware, USA IB USD  0.0   100.0 
 
UBS Factoring AG Zurich, Switzerland Global WM&BB CHF  5.0   100.0 
 
UBS Fiduciaria S.p.A. Milan, Italy Global WM&BB EUR  0.2   100.0 
 
UBS Fiduciary Trust Company New Jersey, USA Global WM&BB USD  4.42  100.0 
 
UBS Finance (Cayman Islands) Ltd. George Town, Cayman Islands CC USD  0.5   100.0 
 
UBS Finance (Curação) N.V. Willemstad, Netherlands Antilles CC USD  0.1   100.0 
 
UBS Finance (Delaware) LLC Delaware, USA IB USD  37.32  100.0 
 
               
Significant subsidiaries
        Share capital  Equity interest 
Company Jurisdiction of incorporation Business division1   in millions  accumulated in % 
 
Banco UBS Pactual S.A. Rio de Janeiro, Brazil IB BRL  349.6   100.0 
 
Caisse Centrale de Réescompte Paris, France Global AM EUR  106.3   100.0 
 
CCR Actions S.A. Paris, France Global AM EUR  1.1   100.0 
 
CCR Gestion S.A. Paris, France Global AM EUR  2.2   100.0 
 
Fondcenter AG Zurich, Switzerland Global AM CHF  0.1   100.0 
 
OOO UBS Bank Moscow, Russia IB RUB  1,250.0   100.0 
 
PT UBS Securities Indonesia Jakarta, Indonesia IB IDR  118,000.0   98.6 
 
UBS (Bahamas) Ltd. Nassau, Bahamas Global WM&BB USD  4.0   100.0 
 
UBS (France) S.A. Paris, France Global WM&BB EUR  50.7   100.0 
 
UBS (Grand Cayman) Limited George Town, Cayman Islands IB USD  25.0   100.0 
 
UBS (Italia) S.p.A. Milan, Italy Global WM&BB EUR  60.0   100.0 
 
UBS (Luxembourg) S.A. Luxembourg, Luxembourg Global WM&BB CHF  150.0   100.0 
 
UBS (Monaco) S.A. Monte Carlo, Monaco Global WM&BB EUR  9.2   100.0 
 
UBS Alternative and Quantitative Investments Limited London, Great Britain Global AM GBP  0.3   100.0 
 
UBS Alternative and Quantitative Investments LLC Delaware, USA Global AM USD  0.1   100.0 
 
UBS Americas Inc Delaware, USA IB USD  0.0   100.0 
 
UBS Asesores SA Panama, Panama Global WM&BB USD  0.0   100.0 
 
UBS Bank (Canada) Toronto, Canada Global WM&BB CAD  8.5   100.0 
 
UBS Bank Mexico, S.A. Institucion de Banca Multiple, UBS Grupo Financiero Mexico City, Mexico IB MXN  639.4   100.0 
 
1 Global WM&BB: Global Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center.2 Share capital and share premium.

96347

Financial information
Notes to the consolidated financial statements

Note 3334 Significant Subsidiariessubsidiaries and Associatesassociates (continued)

               
Significant subsidiaries (continued)
        Share capital  Equity interest 
Company Jurisdiction of incorporation Business division1   in millions  accumulated in % 
 
UBS Bank USA Utah, USA Global WM&BB USD  1,700.0   100.0 
 
UBS Bank, S.A. Madrid, Spain Global WM&BB EUR  77.2   100.0 
 
UBS Belgium SA/NV Brussels, Belgium Global WM&BB EUR  23.0   100.0 
 
UBS Capital (Jersey) Ltd St. Helier, Jersey IB GBP  119.0   100.0 
 
UBS Capital B.V. Amsterdam, the Netherlands IB EUR  8.92  100.0 
 
UBS Card Center AG Glattbrugg, Switzerland Global WM&BB CHF  0.1   100.0 
 
UBS Clearing and Execution Services Limited London, Great Britain IB USD  50.0   100.0 
 
UBS Convertible Securities (Jersey) Limited St. Helier, Jersey CC CHF  50.0   100.0 
 
UBS Derivatives Hong Kong Limited Hong Kong, China IB HKD  880.0   100.0 
 
UBS Deutschland AG Frankfurt am Main, Germany Global WM&BB EUR  176.0   100.0 
 
UBS Factoring AG Zurich, Switzerland Global WM&BB CHF  5.0   100.0 
 
UBS Fiduciaria S.p.A. Milan, Italy Global WM&BB EUR  0.2   100.0 
 
UBS Finance (Cayman Islands) Ltd. George Town, Cayman Islands CC USD  0.5   100.0 
 
UBS Finance (Curação) N.V. Willemstad, Netherlands Antilles CC USD  0.1   100.0 
 
UBS Finance (Delaware) LLC Delaware, USA IB USD  37.32  100.0 
 
UBS Financial Services Inc. Delaware, USA Global WM&BB USD  2,005.82  100.0 
 
UBS Financial Services Incorporated of Puerto Rico Hato Rey, Puerto Rico Global WM&BB USD  31.02  100.0 
 
UBS Fund Advisor, L.L.C. Delaware, USA Global WM&BB USD  0.0   100.0 
 
UBS Fund Holding (Luxembourg) S.A. Luxembourg, Luxembourg Global AM CHF  42.0   100.0 
 
UBS Fund Holding (Switzerland) AG Basel, Switzerland Global AM CHF  18.0   100.0 
 
UBS Fund Management (Switzerland) AG Basel, Switzerland Global AM CHF  1.0   100.0 
 
UBS Fund Services (Cayman) Ltd George Town, Cayman Islands Global AM USD  5.6   100.0 
 
UBS Fund Services (Ireland) Limited Dublin, Ireland Global AM EUR  1.3   100.0 
 
UBS Fund Services (Luxembourg) S.A. Luxembourg, Luxembourg Global AM CHF  2.5   100.0 
 
UBS Fund Services (Luxembourg) S.A. Poland Branch Zabierzow, Poland CC PLN  0.1   100.0 
 
UBS Futures Singapore Ltd. Singapore, Singapore IB USD  39.82  100.0 
 
UBS Global Asset Management (Americas) Inc Delaware, USA Global AM USD  0.0   100.0 
 
UBS Global Asset Management (Australia) Ltd Sydney, Australia Global AM AUD  8.0   100.0 
 
UBS Global Asset Management (Canada) Co Toronto, Canada Global AM CAD  117.0   100.0 
 
UBS Global Asset Management (Deutschland) GmbH Frankfurt am Main, Germany Global AM EUR  7.7   100.0 
 
UBS Global Asset Management (France) S.A. Paris, France Global WM&BB EUR  2.3   100.0 
 
UBS Global Asset Management (Hong Kong) Limited Hong Kong, China Global AM HKD  25.0   100.0 
 
UBS Global Asset Management (Italia) SGR SpA Milan, Italy Global AM EUR  3.1   100.0 
 
UBS Global Asset Management (Japan) Ltd Tokyo, Japan Global AM JPY  2,200.0   100.0 
 
UBS Global Asset Management (Singapore) Ltd Singapore, Singapore Global AM SGD  4.0   100.0 
 
UBS Global Asset Management (Taiwan) Ltd Taipei, Taiwan Global AM TWD  340.0   100.0 
 
UBS Global Asset Management (UK) Ltd London, Great Britain Global AM GBP  68.0   100.0 
 
UBS Global Asset Management (US) Inc Delaware, USA Global AM USD  23.22  100.0 
 
UBS Global Asset Management Funds Ltd London, Great Britain Global AM GBP  19.0   100.0 
 
UBS Global Asset Management Holding Ltd London, Great Britain Global AM GBP  86.0   100.0 
 
UBS Global Asset Management Life Ltd London, Great Britain Global AM GBP  5.0   100.0 
 
UBS Global Life AG Vaduz, Liechtenstein Global WM&BB CHF  5.0   100.0 
 
UBS Global Trust Corporation St. John, Canada Global WM&BB CAD  0.1   100.0 
 
UBS Grupo Financiero, S.A. de C.V. Mexico City, Mexico IB MXN  851.8   100.0 
 
UBS Hana Asset Management Company Ltd Seoul, South Korea Global AM KRW  45,000.0   51.0 
 
UBS International Holdings B.V. Amsterdam, the Netherlands CC EUR  6.8   100.0 
 
UBS International Inc. New York, USA Global WM&BB USD  44.32  100.0 
 
UBS International Life Limited Dublin, Ireland Global WM&BB EUR  1.0   100.0 
 
UBS Investment Management Canada Inc. Toronto, Canada Global WM&BB CAD  0.0   100.0 
 
               
Significant subsidiaries (continued) 
  Jurisdiction     Share capital  Equity interest 
Company of incorporation Business Group1   in millions  accumulated in % 
 
UBS Financial Services Inc. Delaware, USA Global WM&BB USD  2005.82  100.0 
 
UBS Financial Services Incorporated of Puerto Rico Hato Rey, Puerto Rico Global WM&BB USD  31.02  100.0 
 
UBS Fund Advisor, L.L.C. Delaware, USA Global WM&BB USD  0.0   100.0 
 
UBS Fund Holding (Luxembourg) S.A. Luxembourg, Luxembourg Global AM CHF  42.0   100.0 
 
UBS Fund Holding (Switzerland) AG Basel, Switzerland Global AM CHF  18.0   100.0 
 
UBS Fund Management (Switzerland) AG Basel, Switzerland Global AM CHF  1.0   100.0 
 
UBS Fund Services (Cayman) Ltd. George Town, Cayman Islands Global AM USD  5.6   100.0 
 
UBS Fund Services (Ireland) Limited Dublin, Ireland Global AM EUR  1.3   100.0 
 
UBS Fund Services (Luxembourg) S.A. Luxembourg, Luxembourg Global AM CHF  2.5   100.0 
 
UBS Fund Services (Luxembourg) S.A. Poland Branch Zabierzow, Poland CC PLN  0.1   100.0 
 
UBS Futures Singapore Ltd. Singapore, Singapore IB USD  39.82  100.0 
 
UBS Global Asset Management (Americas) Inc. Delaware, USA Global AM USD  0.0   100.0 
 
UBS Global Asset Management (Australia) Ltd. Sydney, Australia Global AM AUD  8.0   100.0 
 
UBS Global Asset Management (Canada) Co. Toronto, Canada Global AM CAD  117.0   100.0 
 
UBS Global Asset Management (Deutschland) GmbH Frankfurt am Main, Germany Global AM EUR  7.7   100.0 
 
UBS Global Asset Management (France) S.A. Paris, France Global WM&BB EUR  2.1   100.0 
 
UBS Global Asset Management (Hong Kong) Limited Hong Kong, China Global AM HKD  25.0   100.0 
 
UBS Global Asset Management (Italia) SGR SpA Milan, Italy Global AM EUR  3.1   100.0 
 
UBS Global Asset Management (Japan) Ltd. Tokyo, Japan Global AM JPY  2200.0   100.0 
 
UBS Global Asset Management (Singapore) Ltd. Singapore, Singapore Global AM SGD  4.0   100.0 
 
UBS Global Asset Management (Taiwan) Ltd. Taipei, Taiwan Global AM TWD  340.0   100.0 
 
UBS Global Asset Management (UK) Ltd. London, Great Britain Global AM GBP  56.0   100.0 
 
UBS Global Asset Management (US) Inc. Delaware, USA Global AM USD  23.22  100.0 
 
UBS Global Asset Management Funds Ltd. London, Great Britain Global AM GBP  11.0   100.0 
 
UBS Global Asset Management Holding Ltd. London, Great Britain Global AM GBP  78.0   100.0 
 
UBS Global Asset Management Life Ltd. London, Great Britain Global AM GBP  5.0   100.0 
 
UBS Global Life AG Vaduz, Liechtenstein Global WM&BB CHF  5.0   100.0 
 
UBS Global Trust Corporation St. John, Canada Global WM&BB CAD  0.1   100.0 
 
UBS Grupo Financiero, S.A. de C.V. Mexico City, Mexico IB MXN  548.8   100.0 
 
UBS Hana Asset Management Company Ltd. Seoul, South Korea Global AM KRW  45000.0   51.0 
 
UBS International Holdings B.V. Amsterdam, the Netherlands CC EUR  6.8   100.0 
 
UBS International Inc. New York, USA Global WM&BB USD  44.32  100.0 
 
UBS International Life Limited Dublin, Ireland Global WM&BB EUR  1.0   100.0 
 
UBS Investment Management Canada Inc. Toronto, Canada Global WM&BB CAD  0.0   100.0 
 
UBS Investments Philippines, Inc. Makati City, Philippines IB PHP  360.0   99.4 
 
UBS Italia SIM SpA Milan, Italy IB EUR  15.1   100.0 
 
UBS Leasing AG Zurich, Switzerland Global WM&BB CHF  10.0   100.0 
 
UBS Life AG Zurich, Switzerland Global WM&BB CHF  25.0   100.0 
 
UBS Life Insurance Company USA California, USA Global WM&BB USD  39.32  100.0 
 
UBS Limited London, Great Britain IB GBP  29.4   100.0 
 
UBS Loan Finance LLC Delaware, USA IB USD  16.7   100.0 
 
UBS Menkul Degerler AS Istanbul, Turkey IB TRY  0.4   100.0 
 
UBS New Zealand Limited Auckland, New Zealand IB NZD  7.5   100.0 
 
UBS O’Connor Limited London, Great Britain Global AM GBP  8.8   100.0 
 
UBS O’Connor LLC Delaware, USA Global AM USD  1.0   100.0 
 
UBS Pactual Asset Management S.A. DTVM Rio de Janeiro, Brazil Global AM BRL  73.2   100.0 
 
UBS Preferred Funding Company LLC I Delaware, USA CC USD  0.0   100.0 
 
UBS Preferred Funding Company LLC II Delaware, USA CC USD  0.0   100.0 
 
UBS Preferred Funding Company LLC IV Delaware, USA CC USD  0.0   100.0 
 
1 Global WM&BB: Global Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center.  2 Share capital and share premium.

97348

Financial Statements
Notes to the Financial Statements

Financial information

Note 3334 Significant Subsidiariessubsidiaries and Associatesassociates (continued)

               
Significant subsidiaries (continued)
        Share capital  Equity interest 
Company Jurisdiction of incorporation Business division1   in millions  accumulated in % 
 
UBS Investments Philippines, Inc. Makati City, Philippines IB PHP  360.0   99.4 
 
UBS Italia SIM SpA Milan, Italy IB EUR  15.1   100.0 
 
UBS Leasing AG Zurich, Switzerland Global WM&BB CHF  10.0   100.0 
 
UBS Life AG Zurich, Switzerland Global WM&BB CHF  25.0   100.0 
 
UBS Life Insurance Company USA California, USA Global WM&BB USD  39.32  100.0 
 
UBS Limited London, Great Britain IB GBP  63.3   100.0 
 
UBS Loan Finance LLC Delaware, USA IB USD  16.7   100.0 
 
UBS Menkul Degerler AS Istanbul, Turkey IB TRY  30.0   100.0 
 
UBS New Zealand Limited Auckland, New Zealand IB NZD  7.5   100.0 
 
UBS O’Connor Limited London, Great Britain Global AM GBP  8.8   100.0 
 
UBS O’Connor LLC Delaware, USA Global AM USD  1.0   100.0 
 
UBS Pactual Asset Management S.A. DTVM Rio de Janeiro, Brazil Global AM BRL  73.2   100.0 
 
UBS Preferred Funding Company LLC I Delaware, USA CC USD  0.0   100.0 
 
UBS Preferred Funding Company LLC II Delaware, USA CC USD  0.0   100.0 
 
UBS Preferred Funding Company LLC IV Delaware, USA CC USD  0.0   100.0 
 
UBS Preferred Funding Company LLC V Delaware, USA CC USD  0.0   100.0 
 
UBS Real Estate Kapitalanlagegesellschaft mbH Munich, Germany Global AM EUR  7.5   51.0 
 
UBS Real Estate Securities Inc Delaware, USA IB USD  950.42  100.0 
 
UBS Realty Investors LLC Massachusetts, USA Global AM USD  9.3   100.0 
 
UBS Sauerborn Private Equity Komplementär GmbH Bad Homburg, Germany Global WM&BB EUR  0.0   100.0 
 
UBS Securities (Thailand) Ltd Bangkok, Thailand IB THB  400.0   100.0 
 
UBS Securities Asia Limited Hong Kong, China IB HKD  20.0   100.0 
 
UBS Securities Australia Ltd Sydney, Australia IB AUD  209.82  100.0 
 
UBS Securities Canada Inc Toronto, Canada IB CAD  10.0   100.0 
 
UBS Securities España Sociedad de Valores SA Madrid, Spain IB EUR  15.0   100.0 
 
UBS Securities France S.A. Paris, France IB EUR  22.9   100.0 
 
UBS Securities Hong Kong Limited Hong Kong, China IB HKD  430.0   100.0 
 
UBS Securities India Private Limited Mumbai, India IB INR  668.3   100.0 
 
UBS Securities International Limited London, Great Britain IB GBP  18.0   100.0 
 
UBS Securities Japan Ltd George Town, Cayman Islands IB JPY  60,000.0   100.0 
 
UBS Securities LLC Delaware, USA IB USD  22,205.62  100.0 
 
UBS Securities Malaysia Sdn. Bhd. Kuala Lumpur, Malaysia IB MYR  75.0   100.0 
 
UBS Securities Philippines Inc Makati City, Philippines IB PHP  190.0   100.0 
 
UBS Securities Pte. Ltd. Singapore, Singapore IB SGD  311.5   100.0 
 
UBS Securities Pte. Ltd. Seoul Branch Seoul, South Korea IB KRW  150,000.0   100.0 
 
UBS Service Centre (India) Private Limited Mumbai, India CC INR  1,249.6   100.0 
 
UBS Service Centre (Poland) Sp. z o.o. Krakow, Poland CC PLN  0.1   100.0 
 
UBS Services USA LLC Delaware, USA Global WM&BB USD  0.1   100.0 
 
UBS South Africa (Proprietary) Limited Sandton, South Africa IB ZAR  0.0   100.0 
 
UBS Swiss Financial Advisers AG Zurich, Switzerland Global WM&BB CHF  1.5   100.0 
 
UBS Trustees (Bahamas) Ltd Nassau, Bahamas Global WM&BB USD  2.0   100.0 
 
UBS Trustees (Cayman) Ltd George Town, Cayman Islands Global WM&BB USD  2.0   100.0 
 
UBS Trustees (Jersey) Ltd. St. Helier, Jersey Global WM&BB GBP  0.0   100.0 
 
UBS Trustees (Singapore) Ltd Singapore, Singapore Global WM&BB SGD  3.3   100.0 
 
UBS UK Holding Limited London, Great Britain IB GBP  5.0   100.0 
 
UBS UK Properties Limited London, Great Britain IB GBP  132.0   100.0 
 
UBS Wealth Management (UK) Ltd London, Great Britain Global WM&BB GBP  2.5   100.0 
 
UBS Wealth Management Australia Ltd Melbourne, Australia Global WM&BB AUD  53.9   100.0 
 
UBS Trust Company National Association New York, USA Global WM&BB USD  105.02  100.0 
 
Vermogens Advies Holding B.V. Amsterdam, the Netherlands Global WM&BB EUR  0.3   100.0 
 
               
Significant subsidiaries (continued) 
  Jurisdiction     Share capital  Equity interest 
Company of incorporation Business Group1   in millions  accumulated in % 
 
UBS Real Estate Investments Inc. Delaware, USA IB USD  0.0   100.0 
 
UBS Real Estate Kapitalanlagegesellschaft mbH Munich, Germany Global AM EUR  7.5   51.0 
 
UBS Real Estate Securities Inc. Delaware, USA IB USD  300.42  100.0 
 
UBS Realty Investors LLC Massachusetts, USA Global AM USD  9.3   100.0 
 
UBS Sauerborn Private Equity Komplementär GmbH Bad Homburg, Germany Global WM&BB EUR  0.0   100.0 
 
UBS Securities (Thailand) Ltd Bangkok, Thailand IB THB  400.0   100.0 
 
UBS Securities Asia Limited Hong Kong, China IB HKD  20.0   100.0 
 
UBS Securities Australia Ltd Sydney, Australia IB AUD  209.82  100.0 
 
UBS Securities Canada Inc. Toronto, Canada IB CAD  10.0   100.0 
 
UBS Securities España Sociedad de Valores SA Madrid, Spain IB EUR  15.0   100.0 
 
UBS Securities France S.A. Paris, France IB EUR  22.9   100.0 
 
UBS Securities Hong Kong Limited Hong Kong, China IB HKD  430.0   100.0 
 
UBS Securities India Private Limited Mumbai, India IB INR  668.3   100.0 
 
UBS Securities International Limited London, Great Britain IB GBP  18.0   100.0 
 
UBS Securities Japan Ltd George Town, Cayman Islands IB JPY  60000.0   100.0 
 
UBS Securities Limited London, Great Britain IB GBP  140.0   100.0 
 
UBS Securities LLC Delaware, USA IB USD  2455.62  100.0 
 
UBS Securities Malaysia Sdn. Bhd. Kuala Lumpur, Malaysia IB MYR  75.0   100.0 
 
UBS Securities Philippines Inc. Makati City, Philippines IB PHP  190.0   100.0 
 
UBS Securities Pte. Ltd. Singapore, Singapore IB SGD  311.5   100.0 
 
UBS Securities Pte. Ltd. Seoul Branch Seoul, South Korea IB KRW  150000.0   100.0 
 
UBS Service Centre (Poland) Sp. z o.o. Krakow, Poland CC PLN  0.1   100.0 
 
UBS Services USA LLC Delaware, USA Global WM&BB USD  0.1   100.0 
 
UBS South Africa (Proprietary) Limited Sandton, South Africa IB ZAR  87.12  100.0 
 
UBS Swiss Financial Advisers AG Zurich, Switzerland Global WM&BB CHF  1.5   100.0 
 
UBS Trust Company National Association New York, USA Global WM&BB USD  105.02  100.0 
 
UBS Trustees (Bahamas) Ltd Nassau, Bahamas Global WM&BB USD  2.0   100.0 
 
UBS Trustees (Cayman) Ltd George Town, Cayman Islands Global WM&BB USD  2.0   100.0 
 
UBS Trustees (Jersey) Ltd. St. Helier, Jersey Global WM&BB GBP  0.0   100.0 
 
UBS Trustees (Singapore) Ltd Singapore, Singapore Global WM&BB SGD  3.3   100.0 
 
UBS UK Holding Limited London, Great Britain IB GBP  5.0   100.0 
 
UBS UK Properties Limited London, Great Britain IB GBP  100.0   100.0 
 
UBS Wealth Management (UK) Ltd London, Great Britain Global WM&BB GBP  2.5   100.0 
 
UBS Wealth Management Australia Ltd Melbourne, Australia Global WM&BB AUD  53.9   100.0 
 
1 Global WM&BB: Global Wealth Management & Business Banking, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center.  2 Share capital and share premium.

98349

Financial information
Notes to the consolidated financial statements

Note 3334 Significant Subsidiariessubsidiaries and Associatesassociates (continued)

   
Consolidated companies: changes in 20072008
Significant new companies  
 
Dillon Read U.S. Finance L.P.Caisse Centrale de Réescompte – Delaware, USAParis, France  
 
Fondcenter AGCCR Actions S.A. – Zurich, SwitzerlandParis, France
CCR Gestion S.A. – Paris, France  
 
UBS Alternative and Quantitative InvestmentsConvertible Securities (Jersey) Limited – London, Great BritainSt. Helier, Jersey  
 
UBS Bank Mexico, S.A. Institucion de Banca Multiple, UBS Grupo FinancieroPreferred Funding Company LLC V – Mexico City, MexicoDelaware, USA  
UBS Fund Services (Luxembourg) S.A. Poland Branch – Zabierzow, Poland
UBS Global Asset Management (Italia) SGR SpA – Milan, Italy
UBS Global Asset Management (UK) Ltd – London, Great Britain
UBS Global Asset Management Funds Ltd – London, Great Britain
UBS Global Asset Management Life Ltd – London, Great Britain
UBS Grupo Financiero, S.A. de C.V. – Mexico City, Mexico
UBS Hana Asset Management Company Ltd – Seoul, South Korea
UBS Investments Philippines, Inc. – Makati City, Philippines
UBS O’Connor Limited – London, Great Britain  
 
UBS Service Centre (Poland) Sp. z o.o.Center (India) Private Limited – Krakow, PolandMumbai, India
Vermogens Advies Holding B.V. – Amsterdam, the Netherlands  
 
   
Deconsolidated companies
Significant deconsolidated companies Reason for deconsolidation
 
Banco UBS S.A. – Rio de Janeiro, BrazilMerged
 
Noriba Bank BSCCrédit Industriel Société Anonyme in Liquidation – Manama, BahrainZurich, Switzerland Liquidated
Thesaurus Continentale Effekten-Gesellschaft in Zurich in Liquidation – Zurich, SwitzerlandLiquidated
 
UBS CapitalFiduciary Trust Company – New Jersey, USASold
Significant associates
CompanyIndustryEquity interest in %
SIX Group AG – Zurich, Switzerland MergedFinancial17.3
 
UBS Corporate Finance Italia SpASecurities Co. Limited – Milan, ItalyBeijing, China MergedFinancial20.0
 
UBS Global Asset Management (Italia) SIM SpAWilliamsburg Edge LLC – Milan, ItalyDelaware, USA MergedReal Estate50.0
219 West 81st LLC – Delaware, USAReal Estate50.0
 
            
Significant associates
Company Industry Equity interest in %  Share capital in millions 
 
SIS Swiss Financial Services Group AG – Zurich, Switzerland Financial  32.9   CHF26 
 
Telekurs Holding AG – Zurich, Switzerland Financial  33.3   CHF45 
 
UBS Securities Co. Limited, Beijing – China Financial  20.0   CNY1,490 
 
UBS Alpha Select – George Town, Cayman Islands Private Investment Company  20.7   USD2,3231
 
UBS Global Alpha Strategies XL (Multi Currency) Limited – George Town, Cayman Islands Private Investment Company  23.2   USD1641
 
Williamsburg Edge LLC – Delaware, USA Real Estate  50.0   USD72 
 
219 West 81st LLC – Wilmington – USA Real Estate  50.0   USD56 
 
Greensands Holding Limited – St. Helier, Jersey Water Supply  15.62  GBP1,282 
 
1 For hedge funds net asset value instead of share capital.  2 In some entities UBS has significant influence even though it holds less than 20% of the voting power of the entity. In these cases, UBS exercices significant influence through other means than voting power, e. g. participation in policy-making processes or material transactions between the investor and the investee.

99350

Financial Statements
Notes to the Financial Statements

Financial information

Note 3435 Invested Assetsassets and Net New Money

net new money

Invested assets include all client assets managed by or deposited with UBS for investment purposes. InvestedFor example, invested assets include for example, managed fund assets, managed institutional assets, discretionary and advisory wealth management portfolios, fiduciary deposits, time deposits, savings accounts and wealth management securities or brokerage accounts. All assets held for purely transactional purposes and custody-only assets, including corporate client assets held for cash management and transactional purposes, are excluded from invested assets as the Group only administers the assets and does not offer advice on how the assets should be invested. Also excluded are non-bankable assets (e. g.(e.g. art collections) and deposits from third-party banks for funding or trading purposes.

Discretionary assets are defined as those whereclient assets for which UBS decides how a client’s assets are invested.to invest them. Other invested assets are those where the client ultimately decides how the assets are invested. When a single product is created in one Business Groupbusiness division and sold in another, it is counted in both the Business Groupbusiness division that manages the investment and the one that

distributes it. This results in double counting within UBS total invested assets, as both Business Groupsbusiness divisions are providing a service independently to their respective clients, and both add value and generate revenue.

Net new money in a period is the net amount of invested assets that are entrusted to UBS by new and existing clients less those withdrawn by existing clients and clients who terminate their relationship with UBS.
Net new money is calculated using the direct method, by which inflows and out-flows to / outflows to/from invested assets are determined at the client level based on transactions. Interest payments by clients on their loans are treated as net new money outflows. Interest and dividend income from invested assets is not counted as net new money inflow. Market and currency movements as well as fees, commissions and commissionsinterest on loans charged are excluded from net new money, as are the effects resulting from any acquisition or divestment of a UBS subsidiary or business. Reclassifications between invested assets and client assets as a result of a change in the service level delivered are treated as net new money flows.



             
 As of or for the year ended  On or for the year ended
CHF billion 31.12.07 31.12.06  31.12.08 31.12.07 
Fund assets managed by UBS 509 439  339 509 
Discretionary assets 877 849  528 877 
Other invested assets 1,803 1,701  1,307 1,803 
Total invested assets (double counts included)
 3,189 2,989  2,174 3,189 
thereof double count 392 371  273 392 
thereof acquisitions (divestments) 50.5 81.1  19.1 50.5 
Net new money (double counts included)
 140.6 151.7   (226.0) 140.6 

100351

Financial information
Notes to the consolidated financial statements

Note 3536 Business Combinationscombinations

Business combinations completed in 2008
 

Caisse Centrale de Réescompte Group

In February 2008, UBS completed the acquisition in France of 100% of Caisse Centrale de Réescompte Group (CCR) from Commerzbank. The cost of the business combination, including directly attributable transaction costs, amounted to approximately CHF 613 million (EUR 387 million) and was paid in cash. The cost of the business combination included approximately EUR 133 million for the excess capital in CCR at

closing. The cost of the business combination has been allocated to intangible assets reflecting customer relationships of CHF 36 million (EUR 23 million), net assets of CHF 209 million (EUR 131 million) and goodwill of CHF 368 million (EUR 233 million). The business of CCR, which included EUR 13.3 billion of invested assets as of 31 December 2007 and approximately 190 employees, was integrated into UBS’s asset management and wealth management businesses in France.



             
Caisse Centrale de Réescompte Group (CCR) 2008
CHF million Book Value  Step-up to fair value  Fair Value 
 
             
Assets
            
 
Intangible assets  0   36   36 
 
Property and equipment  5   0   5 
 
Goodwill  0   368   368 
 
All other assets  513   1   514 
 
Total assets
  518   405   923 
 
             
Liabilities
            
 
Total liabilities  297   13   310 
 
Net assets  221   392   613 
 
Total liabilities and equity
  518   405   923 
 

On the acquisition date, intangible assets and goodwill were allocated to the divisions as follows:

             
Caisse Centrale de Réescompte Group (CCR) 2008
  Global Wealth Management &  Global Asset    
CHF million Business Banking  Management  Total 
 
             
Assets
            
 
Intangible assets  10   26   36 
 
Goodwill  37   331   368 
 

352

Financial information

Note 36 Business combinations (continued)

VermogensGroep
In August 2008, UBS completed the acquisition of 100% of VermogensGroep, an independent Dutch wealth manager. The cost of the business combination, including directly attributable transaction costs, amounted to approximately CHF 171 million (EUR 105 million) out of which approximately CHF 81 million (EUR 50 million) were paid in cash upon closing. The remaining cost of the business combination is expected to be paid in installments over the next

3 years. The cost of the business combination was allocated to intangible assets of CHF 49 million (EUR 30 million), net liabilities of CHF 2.1 million (EUR 1.3 million) and goodwill of CHF 124 million (EUR 77 million). VermogensGroep serves wealthy private clients, foundations and institutions in the Dutch market and managed client assets of approximately EUR 4 billion at the time of the transaction. VermogensGroep was integrated into UBS’s wealth management business.



             
VermogensGroep 2008
CHF million Book Value  Step-up to fair value  Fair Value 
 
             
Assets
            
 
Intangible assets  0   49   49 
 
Property and equipment  2   0   2 
 
Goodwill  0   124   124 
 
All other assets  10   0   10 
 
Total assets
  12   173   185 
 
             
Liabilities
            
 
Total liabilities  2   12   14 
 
Net assets  10   161   171 
 
Total liabilities and equity
  12   173   185 
 

Acquisition announced after the balance sheet date

Acquisition of the commodity index business of AIG
Financial Products Corp.
On 19 January 2009, UBS announced that its investment bank had entered into a binding agreement to purchase the commodity index business of AIG Financial Products Corp., including AIG’s rights to the DJ-AIG Commodity index. The

purchase price for the transaction is USD 15 million, payable upon closing, and additional payments of up to USD 135 million over the following 18 months, based upon future earnings of the purchased business. Closing of the transaction, expected by May 2009, is subject to a number of regulatory and other conditions. No assurance can be given that any such conditions will be satisfied.



353

Financial information
Notes to the consolidated financial statements

Note 36 Business combinations (continued)

Business combinations completed in 2007

During 2007, UBS completed two material acquisitions that were accounted for as business combinations.

McDonald Investments’ branch network


In February 2007, UBS completed the acquisition of the branch network of McDonald Investments, a unit of KeyCorp.Key-Corp. The cost of the business combination consisted of CHF 269 million (USD 220 million) for the business operations including directly attributable transaction costs, and of CHF 70 million (USD 58 million) for the net loans to customer

portfolios of McDonald Investments, resulting in a

total cash consideration paid of CHF 339 million (USD 278 million). The cost of the business combination was allocated to an intangible asset reflecting customer relationships of CHF 57 million (USD 47 million), remaining net assets of CHF 77 million (USD 63 million) including the net loans to customer portfolios, and goodwill of CHF 205 million (USD 168 million). The unit provides comprehensive wealth management services to affluent and high net worth individuals, including estate planning, retirement planning and asset management, and has been integrated into Wealth Management US.



             
CHF million Book value  Step-up to fair value  Fair value 
 
             
Assets
            
 
Intangible assets  0   57   57 
 
Property and equipment  4   (1)  3 
 
Deferred tax assets  0   10   10 
 
Goodwill  0   205   205 
 
All other assets  70   0   70 
 
Total assets
  74   271   345 
 
             
Liabilities
            
 
Total liabilities  6   0   6 
 
Net assets  68   271   339 
 
Total liabilities and equity
  74   271   345 
 

101

Financial Statements
Notes to the Financial Statements

Note 35 Business Combinations (continued)

             
McDonald Investments’ branch network 2007
CHF million Book Value  Step-up to fair value  Fair Value 
 
             
Assets
            
 
Intangible assets  0   57   57 
 
Property and equipment  4   (1)  3 
 
Deferred tax assets  0   10   10 
 
Goodwill  0   205   205 
 
All other assets  70   0   70 
 
Total assets
  74   271   345 
 
             
Liabilities
            
 
Total liabilities  6   0   6 
 
Net assets  68   271   339 
 
Total liabilities and equity
  74   271   345 
 

Daehan Investment Trust Management Company


In July 2007, UBS completed the acquisition of 51% of Daehan Investment Trust Management Company Ltd. (DIMCO) from Hana Daetoo Securities (formerly Daehan Investment & Securities Company Ltd.), a wholly owned subsidiary of Hana Financial Group. DIMCO was integrated into UBS’s Global Asset Management business and renamed as UBS Hana Asset Management Company Ltd. internationally, and as Hana UBS Asset Management in Korea. The estimated cost of the business combination amountsamounted to approximately CHF 238 million (KRW 180 bil-

lion)billion) in total and was paid in cash. The purchasepur-

chase price is subject to an earn-out clawback of up to CHF 40 million (KRW 30 billion) over the next three to five years. The acquisition costs havehad been allocated to intangible assets reflecting customer relationships of CHF 54 million, net assets of CHF 74 million and goodwill of CHF 170 million. On the acquisition date, equity attributable to minority interests was CHF 60 million. The allocation of the cost of the business combination to assets acquired and liabilities assumed is still being finalized. At closing, DIMCO managed around CHF 26.4 billion of assets (KRW 19.9 trillion).

In 2008, the purchase price allocation was finalized and resulted in intangible assets of CHF 52 million and goodwill of CHF 188 million.



                   
Daehan Investment Trust Management Company 2007Daehan Investment Trust Management Company 2007
CHF million Book value Step-up to fair value Fair value  Book Value Step-up to fair value Fair Value 
  
Assets
  
Intangible assets 0 54 54  0 52 52 
Goodwill 0 170 170  0 188 188 
All other assets 87 0 87  87 0 87 
Total assets
 87 224 311  87 240 327 
  
Liabilities
  
 
Total liabilities 13 0 13  13 14 27 
Net assets attributable to minority interests 36 24 60  36 22 58 
Net assets attributable to UBS shareholders 38 200 238  38 204 242 
Total liabilities and equity
 87 224 311  87 240 327 

102354

Financial information

Note 3536 Business Combinationscombinations (continued)

Business combinations announced in 2007

Standard Chartered’s mutual funds management business in India
Following the expiry of the Sale and Purchase Agreement between UBS and Standard Chartered Bank executed in January 2007, UBS announced in December 2007 that it will not proceed with its planned acquisition of Standard Chartered Bank’s mutual funds management business in India.

Acquisition of significant associates in 2007

UBS Securities
In April 2007, UBS completed the acquisition of an equity stake of 20% in the newly established UBS Securities Co. Ltd. (UBSS) in China for a total consideration of approximately

CHF 369 million (RMB 2.4 billion). The cost of the acquisition consisted of cash payments of approximately CHF 324 million (RMB 2.1 billion) including transaction costs and liabilities settled as well as the assumption of liabilities of approximately CHF 45 million (RMB 0.3 billion). On the basis of its current rights and obligations, UBS has significant influence and applies the equity method of accounting. Following approvals by Chinese regulators, UBSS commenced operations in December 2006 on the basis of a comprehensive set of securities licenses. UBSS is active in both primary and secondary domestic equities and fixed income businesses, in discretionary asset management, corporate advisory and mergers and acquisitions services, and in wealth management.

Business combinations completed in 2006

During 2006, UBS completed several acquisitions that were accounted for as business combinations. The acquisition of Banco Pactual S.A. was individually significant to the Financial Statements and is therefore presented separately in this note. The other acquisitions are presented in aggregate per business group.

Banco Pactual S.A.

The acquisition of Banco Pactual S.A. was completed on 1 December 2006. The purchase price allocation was finalized in 2007. The following information reflects the final purchase price accounting for this acquisition.
In December 2006, UBS completed the acquisition of Brazilian bank Banco Pactual S.A. The bank was merged with UBS’s Brazilian business, and both are now operating under the name UBS Pactual. The cost of the business combination was CHF 2,827 million (USD 2,319 million) and includes acquisition costs for client assets transferred to UBS in 2007. Of the total consideration, CHF 1,184 million (USD 971 million) was paid on 1 December 2006 and CHF 70 million (USD 59 million) in 2007 in cash. These amounts include transaction costs. The residual payment of up to CHF 1.9 billion (USD 1.6 billion) is subject to certain performance conditions and is due on 30 June 2011. It was included in the acquisition cost at its net present value of CHF 1,573 million (USD 1,289 million).The acquisition cost was allocated to net assets of CHF 494 million (USD 405 million), intangible assets of CHF 610 million (USD 501 million) and goodwill of CHF 1,723 million (USD 1,413 million). Identified intangible assets include client relationships, non-compete agreements, favorable contracts, investment banking pipeline, proprietary software, trademarks and trade names, with an economic useful life from 1 to 20 years. UBS Pactual offers a broad range of services in investment banking, asset management and wealth management. It has offices in São Paolo, Rio de Janeiro, Belo Horizonte and Recife.
The residual payment obligation is reflected on UBS’s balance sheet in Other liabilities and is measured at its amortized cost. It had no effect on the Statement of Cash Flows for the years ended 31 December 2007 and 2006.



             
      Step-up to    
CHF million Book value  fair value  Fair value 
 
             
Assets
            
 
Intangible assets  0   610   610 
 
Property and equipment  9   0   9 
 
Deferred tax assets  16   0   16 
 
Goodwill  0   1,723   1,723 
 
All other assets  11,877   0   11,877 
 
Total assets
  11,902   2,333   14,235 
 
             
Liabilities
            
 
Provisions  52   0   52 
 
Deferred tax liabilities  28   0   28 
 
All other liabilities  11,363   (35)  11,328 
 
Total liabilities  11,443   (35)  11,408 
 
Net assets  459   2,368   2,827 
 
Total liabilities and equity
  11,902   2,333   14,235 
 

103

Financial Statements
Notes to the Financial Statements

Note 35 Business Combinations (continued)

Pro-forma information (unaudited)
 

On the acquisition date, intangible assets and goodwill were allocated to the Business Groups as follows:

                 
  Global Wealth Management &      Global Asset    
CHF million Business Banking  Investment Bank  Management  Total 
 
                 
Assets
                
 
Intangible assets  160   252   198   610 
 
Goodwill  174   1,066   483   1,723 
 

Investment Bank
ABN AMRO’s Global Futures and Options Business

In September 2006, UBS acquired the global futures and options business of ABN AMRO and paid CHF 880 million (USD 704 million) in cash. In 2007, the purchase price was reduced by CHF 21 million (USD 17 million) to CHF 859 million (USD 687 million). The ABN AMRO futures and options business

provides clearing and execution services on a global basis. The acquired business has been integrated into the Prime Services business within the Equities business of the Investment Bank. The purchase price was allocated to net assets of CHF 429 million (USD 344 million) and intangible assets of CHF 132 million (USD 106 million). The difference of CHF 298 million (USD 237 million) from the purchase price was recognized as goodwill.



             
CHF million Book value  Step-up to fair value  Fair value 
 
             
Assets
            
 
Intangible assets  0   132   132 
 
Property and equipment  13   0   13 
 
Financial investments available-for-sale  26   54   80 
 
Goodwill  0   298   298 
 
All other assets  11,942   0   11,942 
 
Total assets
  11,981   484   12,465 
 
             
Liabilities
            
 
Provisions  0   9   9 
 
Deferred tax liabilities  0   23   23 
 
All other liabilities  11,574   0   11,574 
 
Total liabilities  11,574   32   11,606 
 
Net assets  407   452   859 
 
Total liabilities and equity
  11,981   484   12,465 
 

104

Note 35 Business Combinations (continued)

Global Wealth Management & Business Banking
Piper Jaffray Companies’ Private Client Services Branch Network

In August 2006, UBS completed the acquisition of Piper Jaffray Companies’ Private Client Services branch network. The cost of the business combination consisted of CHF 616 million (USD 500 million) for the business operations and of CHF 280 million (USD 227 million) for the net loans to customer portfolios, resulting in a total cash consideration paid of CHF 896 million (USD 727 million). The purchase price was allocated to net assets of CHF 291 million (USD 236 million) and intangible assets of CHF 148 million (USD

120 million) representing client relationships. The difference of CHF 457 million (USD 371 million) from the purchase price was recognized as goodwill. Approximately 90 Piper Jaffray wealth management offices, mainly located in the Midwest and Western United States, serving 190,000 households, have been renamed and integrated into Wealth Management US.

Dolfi

In March 2006, UBS acquired Dolfi Finance SAS, a small wealth management firm based in Strasbourg, France, as well as certain assets from Mr Dolfi.



             
CHF million Book value  Step-up to fair value  Fair value 
 
             
Assets
            
 
Intangible assets  0   158   158 
 
Property and equipment  16   (4)  12 
 
Financial investments available-for-sale  1   0   1 
 
Goodwill  0   479   479 
 
All other assets  291   0   291 
 
Total assets
  308   633   941 
 
             
Liabilities
            
 
Provisions  0   8   8 
 
Deferred tax liabilities  0   3   3 
 
All other liabilities  2   4   6 
 
Total liabilities  2   15   17 
 
Net assets  306   618   924 
 
Total liabilities and equity
  308   633   941 
 

105

Financial Statements
Notes to the Financial Statements

Note 35 Business Combinations (continued)

Acquisitions of minority interests of subsidiaries in 2006
UBS Bunting Limited

In March 2006, UBS acquired the 50% minority interest in its Canadian institutional securities subsidiary, UBS Bunting Limited. The purchase price consists of a combination of cash and UBS shares and has been estimated at CHF 182 million (CAD 163 million). Approximately CHF 26 million (CAD 23 million) of the consideration is linked to the performance of the acquired business in 2006 and 2007 and may be reduced if agreed revenue targets are not achieved. The difference between the purchase price and the carrying value of the acquired minority interest of CHF 116 million (CAD 104 million) was reflected in Equity.

Acquisition completed after the balance sheet date
Caisse Centrale de Réescompte Group

In February 2008, UBS completed the acquisition in France of Caisse Centrale de Réescompte Group (CCR) from Commerzbank for a total consideration of approximately EUR 387 million, paid at the closing date. The purchase price includes EUR 247 million for a 100% interest in CCR, as

well as approximately EUR 140 million for the excess capital of CCR at closing, reflecting provisional adjustments made during the closing process. Under the terms of the transaction, the final price for the acquisition will be determined after the closing, following determination of the actual adjustments. The business of CCR, which includes EUR 13.3 billion of invested assets as of 31 December 2007 and approximately 190 employees, will be integrated into the asset management and wealth management businesses of UBS in France.

Pro-forma information (unaudited)

The following pro-forma information shows UBS’s total operating income, net profit attributable to UBS shareholders and basic earnings per share as if all of the acquisitions completed in 2008 had been made as of 1 January 2007 and all acquisitions completed in 2007, had been made as of 1 January 2006 and all acquisitions completed in 2006, had been made as of 1 January 2005.Jan-

uary 2006. Adjustments have been made to reflect additional amortization and depreciation of assets and liabilities, which have been assigned fair values different from their carryover bases in purchase accounting.



                   
Pro-forma information (unaudited)Pro-forma information (unaudited)
 For the year ended  For the year ended
CHF million, except where indicated 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
Total operating income 32,035 49,180 41,580  1,224 31,932 48,928 
Net profit  (4,404) 12,617 14,070   (20,881)  (5,233) 11,887 
Basic earnings per share (CHF)  (2.29) 6.38 6.99   (7.54)  (2.42) 5.35 

106355

Financial information
Notes to the consolidated financial statements

Note 3637 Discontinued Operations

operations

2008

Industrial holdings

In 2008, private equity investments, including the sale of one equity investment and subsequent gains on private equity investments sold in prior years, contributed CHF 155 million to UBS’s net profit from discontinued operations, which includes after-tax gains on sale of CHF 120 million and an after-tax operating profit of CHF 34 million. The cash consideration received for the equity investment sold in 2008 amounted to CHF 141 million. These private equity investments were held within the Industrial Holdings, integrated within Corporate Center since the beginning of 2008, and were sold in line with UBS’s strategy to exit the private equity business.

2007

Industrial Holdingsholdings

In 2007, private equity investments, including the sale of two private equity investments as well as subsequent gains on private equity investments sold in prior years, contributed CHF 136138 million to UBS’s Netnet profit from discontinued operations, which includes after-tax gains on sale of CHF 102 million and an after-tax operating profit of CHF 3436 million. The cash consideration received for the two investments sold in 2007 amounted to CHF 14 million. These private equity investments were all held within the Industrial Holdings segment and were divestedsold in line with UBS’s strategy to exit the private equity business. These investments are presented as discontinued operations in these Financial Statements.

Private Banksbanks & GAM

The tax benefit on gain on salefrom sales of CHF 258 million includes the release of a deferred tax liability of approximately CHF 275 million to the profit and loss account, which was recognized upon the sale of UBS’s 20.7% stake in Julius Baer in 2007. This deferred tax liability had been recognized in connection with the receipt of Julius Baer shares on the sale of Private Banks & GAM in December 2005, but was not ultimately incurred due to the manner of realization of the Julius Baer investment. The tax expense from the recognition of the deferred tax liability was booked in discontinued operations in 2005, and therefore the release has also been reflected in discontinued operations.

2006

Motor-Columbus

On 23 March 2006, UBS sold its 55.6% stake in Motor-Columbus to a consortium representing Atel’s Swiss minority shareholders (EBM, EBL, the Canton of Solothurn, IB Aarau, AIL Lugano and WWZ Zug), EOS Holding and Atel, as well as to the French utility Electricité de France (EDF) following the receipt of relevant regulatory approvals by the Swiss and international authorities. Motor-Columbus is presented as a discontinued operation in these Financial Statements. The income statements for the comparative prior periods have been restated to reflect that presentation. In total, UBS sold 281,535 Motor-Columbus shares, at a price of CHF 4,600 per share, resulting in a sale price of approximately CHF 1,295 million, which was fully paid in cash. A pre-tax gain on sale of CHF 364 million is reported in the Industrial Holdings segment. From 1 January to 23 March 2006, Motor-Columbus had a Netnet profit from operations of CHF 71 million. Together with the after-tax gain on sale of CHF 387 million, the Netnet profit from discontinued operations is CHF 458 million in 2006. For the year ended 31 December 2005, Motor-Columbus had a Net profit from operations of CHF 323 million.

Other Industrial Holdingsholdings

In 2006, private equity investments contributed CHF 429437 million to UBS’s Netnet profit from discontinued operations, which includes after-tax gains on sale of CHF 424 million and an after-tax operating profit of CHF 5 million.
In 2005, private equity investments contributed CHF 114 million to UBS’s Net profit from discontinued operations, which includes after-tax gains on sale of CHF 113 million and an after-tax operating profit of CHF 1 million. The cash consideration received for the four investments sold in 2005 amounted to CHF 17913 million.



107356

Financial Statements
Notes

Financial information
         
Note 37 Discontinued operations (continued) 
  For the year ended 31.12.08 
     
CHF million Private Banks & GAM1 Industrial Holdings 
  
Operating income  0   19 
 
Operating expenses  0   (15)
 
Operating profit from discontinued operations before tax  0   34 
 
Pre-tax gain on sale  44   120 
 
Profit from discontinued operations before tax
  44   155 
 
Tax expense on operating profit from discontinued operations before tax  0   0 
 
Tax expense on gain from sale  1   0 
 
Tax expense from discontinued operations
  1   0 
 
Net profit from discontinued operations
  43   155 
 
Net cash flows from
        
 
operating activities  0   (1)
 
investing activities  0   3 
 
financing activities  0   0 
 
1Gain resulting from a purchase price adjustment related to the Financial Statements

Note 36 Discontinued Operations (continued)

2005

Private Banks & GAM

On 2 December 2005, UBS sold its Private Banks & GAM unit to Julius Baer for an aggregate consideration of CHF 5,683 million, of which CHF 3,375 million was received in cash, CHF 225 million in the form of hybrid Tier 1 instruments, and the remaining CHF 2,083 million representing a 21.5% stake in the enlarged Julius Baer. As part of the sales agreement, CHF 200 million of cash was retained within UBS. The gain on sale after taxes from this transaction amounted to CHF 3,705 million on 31 December 2005. In 2006, UBS reported an additional after-tax gain on sale of CHF 4 million due to an adjustment to the purchase price.
As part of the agreement, UBS agreed to a lock-up period of 18 months for 19.9% of the stake and of three months

for the remaining 1.6%. The value of the Julius Baer stake is based on a price of CHF 86.20 per share at the date of closing, which is a discount of 8.4% to the market price to take into account the 18-month lock-up period to which 19.9% of the stake is subject. Shortly after closing, UBS reduced its 21.5% stake to approximately 20.7% by settling call options that were outstanding on the shares of the former holding company of the Private Banks & GAM businesses. UBS classified the stake as a financial investment available-for-sale until its sale in 2007 (refer to Note 5 and to the year 2007 section of Private Banks & GAM in this Note). Private Banks & GAM is presented as a discontinued operation in these Financial Statements.

Private Banks & GAM comprised the three private banks Banco di Lugano, Ehinger & Armand von Ernst and Ferrier Lullin as well as specialist asset manager GAM and was presented as a separate business segment.



         
  For the year ended 31.12.07 
CHF million Private Banks & GAM1  Industrial Holdings 
 
Operating income  0   135 
 
Operating expenses  0   109 
 
Operating profit from discontinued operations before tax  0   26 
 
Pre-tax gain on sale  7   102 
 
Profit from discontinued operations before tax
  7   128 
 
Tax expense on operating profit from discontinued operations before tax  0   (8)
 
Tax expense on gain on sale  (258)  0 
 
Tax expense from discontinued operations
  (258)  (8)
 
Net profit from discontinued operations
  265   136 
 
Net cash flows from
        
 
operating activities  0   28 
 
investing activities  0   0 
 
financing activities  0   (42)
 
12005. Included in Corporate Center in Note 2a.

108

Note 36 Discontinued Operations (continued)

             
 For the year ended 31.12.06  For the year ended 31.12.07 
 Other     
CHF million Motor-Columbus Industrial Holdings1  Private Banks & GAM1 Industrial Holdings 
 
Operating income 2,494 741  0 394 
Operating expenses 2,412 736  0 358 
Operating profit from discontinued operations before tax 82 5  0 36 
Pre-tax gain on sale 364 428  7 102 
Profit from discontinued operations before tax
 446 433  7 138 
Tax expense on operating profit from discontinued operations before tax 11 0  0 0 
Tax expense on gain on sale  (23) 0 
Tax expense on gain from sale  (258) 0 
Tax expense from discontinued operations
  (12) 0   (258) 0 
Net profit from discontinued operations
 458 433  265 138 
Net cash flows from
  
operating activities 1 14  0 32 
investing activities  (52) 78  0  (1)
financing activities  (22)  (88) 0  (42)
1Included in Corporate Center in Note 2a.
         
  For the year ended 31.12.06 
     
CHF million Motor-Columbus  Other Industrial Holdings1
  
Operating income  2,494   993 
 
Operating expenses  2,412   979 
 
Operating profit from discontinued operations before tax  82   14 
 
Pre-tax gain on sale  364   428 
 
Profit from discontinued operations before tax
  446   442 
 
Tax expense on operating profit from discontinued operations before tax 11   1 
 
Tax expense on gain from sale  (23)  0 
 
Tax expense from discontinued operations
  (12)  1 
 
Net profit from discontinued operations
  458   441 
 
Net cash flows from
        
 
operating activities  1   16 
 
investing activities  (52)  73 
 
financing activities  (22)  (88)
 
1Pre-tax gain on sale includes CHF 4 million related to Private Banks & GAM, which is included in Corporate Center in Note 2a.

357

             
  For the year ended 31.12.05 
          Other 
CHF million Private Banks & GAM  Motor-Columbus  Industrial Holdings 
 
Operating income  1,102   8,711   2,551 
 
Operating expenses  633   8,323   2,522 
 
Operating profit from discontinued operations before tax  469   388   29 
 
Pre-tax gain on sale  4,095   0   113 
 
Profit from discontinued operations before tax
  4,564   388   142 
 
Tax expense on operating profit from discontinued operations before tax  99   65   28 
 
Tax expense on gain on sale  390   0   0 
 
Tax expense from discontinued operations
  489   65   28 
 
Net profit from discontinued operations
  4,075   323   114 
 
Net cash flows from
            
 
operating activities  (143)  252   92 
 
investing activities  (22)  (326)  (47)
 
financing activities  0   163   29 
 

Financial information
Notes to the consolidated financial statements

Note 3738 Reorganizations and disposals

Reorganizations

Closure of the US municipal securities business
In June 2008, UBS closed its Investment Bank’s institutional municipal securities business. The retail operations of the municipal securities business, including secondary market activities, were transferred to Wealth Management US. As a result, approximately 70 employees and municipal bonds with a fair value of approximately CHF 0.4 billion (USD 0.4 billion) were transferred from the Investment Bank to Wealth Management US.
In 2008, restructuring costs of CHF 56 million (USD 55 million) and a goodwill impairment loss of CHF 341 million (USD 334 million) were recognized in the income statement in relation to this closure. The restructuring costs mainly relate to termination costs for office space rental contracts and vendor contracts, and severance payments to employees.

Repositioning of the investment bank

In connection with the repositioning of the Investment Bank announced in October 2008, restructuring costs of approximately CHF 737 million were incurred in fourth quarter 2008. These costs consisted of approximately CHF 435 million of personnel expenses, mainly severance payments and other compensation, and approximately CHF 302 million of costs related to real estate, including impairment losses on properties and equipment of CHF 100 million and costs for unused premises of CHF 202 million.

Disposals

Sale of US residential mortgage-backed securities to
BlackRock fund
On 20 May 2008, UBS completed the sale of a portfolio of US residential mortgage-backed securities (RMBS) for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP (the “fund”), a third-party fund managed by BlackRock, Inc. The portfolio had a notional value of approximately USD 22 billion and comprised primarily Alt-A and sub-prime related assets, and a limited amount of prime securities. Based on fair value at the time of the transaction, approximately three-quarters of the assets sold consisted of 2006 and 2007 vintages.
The fund was capitalized with approximately USD 3.75 billion in equity raised by BlackRock from third-party investors. The equity investors will absorb any losses sustained by the fund up to a maximum of their equity investment. UBS provided an eight-year amortizing USD 11.25 billion senior secured loan to the fund, collateralized by the RMBS assets held by the fund. The loan bears a commercial rate of interest with debt service being met from principal and interest received from the underlying mortgage pools. UBS does not retain any equity interest in the fund.

The USD 15 billion proceeds were approximately in line with the fair value of the assets recorded by UBS at 31 March 2008.
Since its inception, the fund has amortized the loan through monthly payments in line with UBS’s original expectations. As at 31 December 2008, the loan had a balance outstanding of USD 9.2 billion. UBS does not consolidate the fund into its balance sheet as the equity investors in the fund continue to bear and receive the majority of the risks and rewards. UBS continues to monitor the development of the fund’s performance and would reassess the consolidation status if deterioration of the underlying mortgage pools related to the RMBS were to indicate that UBS may not fully recover the loan granted to the fund.

Sale of assets to a third-party fund controlled by the
Swiss National Bank (SNB)

As announced on 16 October 2008, UBS entered into an agreement with the Swiss National Bank (SNB) to transfer certain illiquid securities and other positions to the SNB StabFund limited partnership for collective investments (the “fund”), which is fully owned and controlled by the SNB.
For each transfer of assets, the SNB finances 90% of the purchase price by providing a loan to the fund and the remaining 10% by making an equity contribution to the fund. Upon each asset transfer, UBS purchases, for an amount equal to the SNB’s equity contribution to the fund on that date, an option to purchase the fund’s equity (all such options referred to collectively as the “call option”). The exercise price of the call option is set at USD 1 billion plus 50% of the fund’s equity value that exceeds USD 1 billion at the time of exercise. The call option will be exercisable upon repayment in full of the loan provided by the SNB. The loan is secured by the assets of the fund and bears interest at a rate of one month LIBOR of the underlying currency plus 250 basis points. Service of the loan will be made from the cash flows generated by the fund’s assets.
In the event of a change of control of UBS, the SNB has the right but not the obligation to request that UBS purchase the SNB’s loan to the fund at its outstanding principal amount plus accrued interest and the fund’s equity for 50% of its value at the time (the “put option”).
If, upon termination of the fund, the SNB incurs a loss on its loan, it will be entitled to receive 100 million UBS ordinary shares, subject to anti-dilution adjustments, in exchange for payment of the par value of these shares (the “contingent share issue”).
The positions are transferred to the fund at market value (net exposure) determined at 30 September 2008. The positions transferred to the SNB are priced at the lower of UBS’s estimated market value as of 30 September 2008 and the



358

Financial information

Note 38 Reorganizations and disposals (continued)

value determined as of that date by the SNB based on a valuation conducted by third party valuation agents.
Compared with the initial announcement on 16 October 2008, the originally agreed size of the portfolio of USD 60 billion to be transferred has been reduced. UBS has transferred or identified for transfer positions totalling a market value (net exposure) of USD 38.6 billion (including the effect of price adjustments so far totalling USD 0.7 billion). Positions identified for transfer include approximately USD 21.9 billion of positions previously disclosed as risk concentrations, primarily US real estate-related securities and assets from the US reference-linked note program (RLN), and approximately USD 17.5 billion of other positions, mainly non-US real estate-related securities as well as other asset-backed securities, prior to the price difference of USD 0.7 billion on the positions for which the SNB already determined the purchase price.
On 16 December 2008, UBS completed the sale of a first tranche of securities positions for approximately USD 16.4 billion consisting primarily of US and European residential and commercial mortgage-backed securities and other asset-backed securities. The remaining positions identified for sale to the fund are planned to be transferred in March 2009 in one or more additional transfers.
The purchase price for the securities transferred to the fund on 16 December 2008 was the value of these securities as of 30 September 2008 as determined by the SNB based on a valuation conducted by third-party valuation experts. On the same basis, the SNB has since determined the purchase price to be paid for a further USD 7.8 billion of positions that have not yet been transferred to the fund. So far, the determined purchase prices for positions transferred to or to be transferred to the fund were, in the aggregate, USD 0.7 billion lower than the value UBS assigned to these positions on 30 September 2008. All but approximately CHF 0.1 billion of this difference is accounted for in UBS’s results for 2008. Overall, the aggregate price difference represents approximately 3% of UBS’s market value (net exposure) for these positions and reflects the inherent judgement involved in the valuation of illiquid assets.
Under IFRS, the call option is recognized on the balance sheet as a derivative at fair value with changes in fair value recognized in profit or loss. The portion of the call option already purchased is reflected as Positive replacement value. The portion of the call option yet to be purchased upon future transfers is reflected as Negative replacement value together with the amount payable to the SNB for such option.
The put option was evaluated as a contingent liability that has been deemed remote.
The contingent share issue is treated as an equity instrument and was recognized at fair value in equity as an increase to Share premium and an expense in Net trading

income. The fair value of the contingent share issue was estimated at approximately CHF 607 million and will not hereafter be re-measured to fair value.

Overall, the impact of the transaction on the income statement was a loss of approximately CHF 5,219 million in 2008. This reflects a net loss on the call option of approximately CHF 3,562 million and the expense of approximately CHF 607 million associated with the contingent share issue as well as a CHF 707 million loss due to the recognized price difference and CHF 343 million losses on hedges that were subject to trading restrictions as a result of the transaction.
The remaining market value (net exposure) of the positions already transferred or still to be transferred to the fund amounts to USD 39.4 billion excluding the effect of price adjustments so far totalling USD 0.7 billion. Of these positions USD 31.3 billion of market value (net exposure) represents financial assets, predominantly Trading portfolio assets, with a corresponding balance sheet amount of USD 31.1 billion per 30 September 2008. USD 8.1 billion of market value (net exposure) relate to financial liabilities, exclusively Negative replacement values from derivative contracts, with a balance sheet amount of USD 10.8 billion at the same date. Market values (net exposure) represent the remaining loss potential or economic risk from a position and may differ from the balance sheet carrying amount, particularly for derivative contracts which are represented on the balance sheet by replacement values.

Disposal of equity interest in Adams Street Partners

In August 2008, UBS Global Asset Management closed the sale of its 24.9% equity interest in Adams Street Partners (ASP) to the remaining shareholders of ASP for a cash consideration of approximately CHF 184 million (USD 167 million). UBS’s interest in ASP was accounted for using the equity method. The sale resulted in a gain of approximately CHF 168 million. ASP was formed in January 2001 in connection with a management buyout of that business from Global Asset Management, with UBS retaining the now sold 24.9% stake. Global Asset Management will continue its close collaboration with ASP under an existing sub-advisory agreement in place since 2001.

Disposal of financial investment in Bank of China

In December 2008, UBS disposed of its equity stake in Bank of China through a placing of approximately 3.4 billion Bank of China Limited H-shares to institutional investors for a cash consideration of approximately CHF 887 million (HKD 6,519 million). UBS acquired the shares in 2005 in preparation for Bank of China’s IPO to the international market. The investment in Bank of China was accounted for as a financial investment available-for-sale. The disposal resulted in a gain of approximately CHF 360 million.



359

Financial information
Notes to the consolidated financial statements

Note 39 Currency Translation Rates

translation rates

The following table shows the principal rates used to translate the financial statements of foreign entities into Swiss francs:

           
 Spot rate Average rate                  
 As of Year ended  Spot rate Average rate 
 31.12.07 31.12.06 31.12.07 31.12.06 31.12.05  As of  Year ended 
 31.12.08 31.12.07 31.12.08 31.12.07 31.12.06 
1 USD 1.13 1.22 1.22 1.25 1.25  1.07 1.13 1.06 1.22 1.25 
1 EUR 1.65 1.61 1.65 1.58 1.55  1.49 1.65 1.58 1.65 1.58 
1 GBP 2.25 2.39 2.31 2.31 2.27  1.56 2.25 1.96 2.31 2.31 
100 JPY 1.02 1.02 1.02 1.08 1.13  1.17 1.02 0.98 1.02 1.08 

109

Financial Statements
Notes to the Financial Statements

Note 3840 Swiss Banking Law Requirements

banking law requirements

The consolidated Financial Statements of UBS are prepared in accordance with International Financial Reporting Standards.Standards (IFRS). The Guidelines of the Swiss Financial Market Supervisory Authority (FINMA) require banks which present their financial statements under IFRS to provide a narrative explanation of the main differences between IFRS and Swiss GAAP (FINMA circular 08/2) and the Banking Ordinance. Included in this note are the significant differences in regard to recognition and measurement between IFRS and the provisions of the Banking Ordinance and the Guidelines of the Swiss Banking CommissionFINMA governing financial statement reporting pursuant to Article 23 through Article 27 of the Banking Ordinance. The differences outlined in points two through nine also apply to the Parent Bank statutory accounts.

1. Consolidation

Under IFRS, all entities which are controlled by the Group are consolidated.
Under Swiss law, only entities that are active in the field of banking and finance and real estate entities are subject to consolidation. Entities which are held temporarily are generally recorded as Financial investments available-for-sale.financial investments.

2. Financial investments available-for-sale

Under IFRS, Financial investments available-for-sale are carried at fair value. Changes in fair value are recorded directly in Equity until an investment is sold, collected or otherwise disposed of, or until an investment is determined to be impaired. At the time an available-for-sale investment is determined to be impaired, the cumulative unrealized loss previously recognized in Equity is included in net profit or loss for the period. On disposal of a financial investment available-for-sale, the cumulative unrecognized gain or loss previously recognized in Equity is recognized in the income statement.

Under Swiss law, financial investments are carried either at the lower of cost or market value.or at amortized cost less impairment with changes in measurement recorded in the income statement. Reductions to market value below cost and reversals of such reductions up to original cost as well as gains and losses on disposal are included in Other income. Equity investments that are considered permanent are carried on the balance sheet at cost less impairment with impairment losses recorded in the income statement. Permanent investments are classified on the balance sheet as investments in associated companies.

3. Cash flow hedges

The Group uses derivative instruments to hedge the exposure from varying cash flows. Under IFRS, when hedge accounting is applied the unrealizedfair value gain or loss on the effective portion of the derivativesderivative designated as a cash flow hedge is recordedrecognized in Equity untilEquity. When the hedged cash flows occur, at which timematerialize, the accumulated unrecognized gain or loss is realized and released to income.
Under Swiss law, the unrealized gains or losses on the effective portion of the fair value change of the derivative instrumentsinstrument used to hedge cash flow exposures areis deferred on the balance sheet as other assets or other liabilities. The deferred amounts are released to income when the hedged cash flows occur.materialize.

4. Investment property

Under IFRS, investment properties areproperty is carried at fair value, with changes in fair value changes reflectedrecognized in profit or loss.the income statement.
Under Swiss law, investment properties areproperty is carried at amortized cost less any accumulated depreciation less impairment losses unless the investment properties areproperty is classified as held for sale. Investment propertiesproperty classified as held for sale are recordedis carried at the lower of cost or market value.market.



360

Financial information

Note 40 Swiss banking law requirements (continued)

5. Fair value option

Under IFRS, the Group applies the fair value option to certain financial assets and financial liabilities, mainly to hybrid debt instruments. As a result, the entire hybrid instrument is accounted for at fair value with changes in fair value reflected in net trading income. Furthermore, UBS designated certain loans, loan commitments and fund investments as financial assets designated at fair value through profit and loss.
Under Swiss accounting rules, the fair value option is not available. Hybrid instruments are bifurcated: while the embedded derivative is marked to market through net trading income and the host contract is accounted for on an accrued cost basis. No own credit adjustments are booked for hybrid instruments. Generally, loans are accounted for at amortized cost less impairment, loan commitments stay off-balance sheet and fund investments are accounted for as financial investments.

6. Goodwill and intangible assets

Under IFRS, goodwill acquired in a business combinationscombination is not amortized but tested annually for impairment. Intangible assets acquired in a business combinationscombination with an indefinite useful life are also not amortized but tested annually for impairment.

Under Swiss law, goodwill and intangible assets with indefinite useful lives must beare amortized over a period not exceeding five years, unless a longer useful life, which may not exceed twenty years, can be justified.

7. Discontinued operations

Under certain conditions, IFRS requires that non-current assets or disposal groups arebe classified as held for sale. Disposal groups that meet the criteria of discontinued operations are presented in the income statement in a single line as net income from discontinued operations.
Under Swiss law, no such reclassifications takereclassification takes place.

8. Extraordinary income and expense

Certain items of income and expense are classified as extraordinary items under Swiss law, whereas in the Group Income Statement the amounts are classified as operating income or expense or are included in net profit from discontinued operations, if required.

9. Netting of replacement values

Under IFRS, replacement values are reported on a gross basis, unless certain restrictive requirements are met. Under Swiss law, replacement values are reported on a net basis, provided the netting agreements are legally enforceable.

361



110

Note 39 Additional Disclosures Required under SEC Rules
Note 39.1 Industrial Holdings’ Income Statement

From 1 July 2004, UBS held a majority ownership interest in Motor-Columbus and consolidated it in its Financial Statements. Motor-Columbus was sold on 23 March 2006, and it is presented below as a discontinued operation in the income statements for the years ended 31 December 2006 and 31 December 2005. Refer to Note 36 Discontinued Operations for further information.

The following table provides information required by Regulation S-X for commercial and industrial companies, including a condensed income statement and certain additional balance sheet information.



             
  As of or for 
  the year ended 
CHF million 31.12.07  31.12.06  31.12.05 
 
             
Operating income
            
 
Net Sales  268   262   229 
 
Operating expenses
            
 
Cost of products sold  229   220   196 
 
Marketing expenses  2   2   2 
 
General and administrative expenses  14   20   22 
 
Amortization of intangible assets  6   5   6 
 
Other operating expenses  161   63   118 
 
Total operating expenses  412   310   344 
 
Operating profit
  (144)  (48)  (115)
 
             
Non-operating profit
            
 
Interest income  6   0   6 
 
Interest expense  (9)  (44)  (54)
 
Other non-operating income, net  708   336   589 
 
Non-operating profit
  705   292   541 
 
             
Net profit from continuing operations before tax
  561   244   426 
 
Tax expense  36   34   169 
 
Equity in income of associates, net of tax  (25)  11   25 
 
Net profit from continuing operations  500   221   282 
 
Net profit from discontinued operations  136   887   437 
 
Net profit  636   1,108   719 
 
Net profit attributable to minority interests  50   104   207 
 
Net profit attributable to UBS shareholders
  586   1,004   512 
 
             
Accounts receivable trade, gross  27   103     
 
Allowance for doubtful receivables  (2)  (7)    
 
Accounts receivables trade, net
  25   96     
 

111

Financial Statementsinformation
Notes to the Financial Statements

consolidated financial statements

Note 39 Additional Disclosures Required41 Supplemental guarantor information required under SEC Rules (continued)rules
Note 39.2 Supplemental Guarantor Information

Guarantee of PaineWebber securities


Following the acquisition of Paine Webber Group Inc., UBS AG made a full and unconditional guarantee of the senior and subordinated notes and trust preferred securities (“Debt Securities”) of PaineWebber. Prior to the acquisition, PaineWebber was ana SEC Registrant. Upon the acquisition, PaineWebber was merged into UBS Americas Inc., a wholly owned subsidiary of UBS.
Under the guarantee, if UBS Americas Inc. fails to make any timely payment under the Debt Securities agreements,

the holders of the Debt Securities or the Debt Securities trustee may demand payment from UBS without first pro-

ceedingproceeding against UBS Americas Inc. UBS’s obligations under the subordinated note guarantee are subordinated to the prior payment in full of the deposit liabilities of UBS and all other liabilities of UBS. At 31 December 2007, the amount of senior liabilities of UBS to which the holders of the subordinated debt securities would be subordinated is approximately CHF 2,215 billion.

The information presented in this note is prepared in accordance with IFRS and should be read in conjunction with the Consolidated Financial Statements of UBS of which this information is a part.



                               
Supplemental Guarantor Consolidating Income StatementSupplemental Guarantor Consolidating Income Statement Supplemental Guarantor Consolidating Income Statement 
         
CHF million UBS AG UBS Consolidating    UBS AG UBS Consolidating   
For the year ended 31 December 2007 Parent Bank1 Americas Inc. Subsidiaries Entries UBS Group 
For the year ended 31 December 2008 Parent Bank1 Americas Inc. Subsidiaries Entries UBS Group 
Operating income
  
Interest income 77,306 47,747 51,985  (67,926) 109,112  49,699 21,343 27,565  (32,717) 65,890 
Interest expense  (74,689)  (46,420)  (50,592) 67,926  (103,775)  (48,686)  (17,436)  (26,282) 32,717  (59,687)
Net interest income 2,617 1,327 1,393 0 5,337  1,013 3,907 1,283 0 6,203 
Credit loss (expense) / recovery 11  (234)  (15) 0  (238)  (861)  (2,050)  (85) 0  (2,996)
Net interest income after credit loss expense 2,628 1,093 1,378 0 5,099  152 1,857 1,198 0 3,207 
Net fee and commission income 12,852 10,119 7,663 0 30,634  9,709 7,910 5,310 0 22,929 
Net trading income 3,467  (9,932)  (1,888) 0  (8,353)  (8,129)  (19,847) 2,158 0  (25,818)
Income from subsidiaries 602 0 0  (602) 0   (19,477) 0 0 19,477 0 
Other income  (4,273) 8,369 236 0 4,332  2,836 1,058  (3,010) 0 884 
Revenues from industrial holdings 0 0 268 0 268 
Total operating income
 15,276 9,649 7,657  (602) 31,980   (14,909)  (9,022) 5,656 19,477 1,201 
Operating expenses
  
Personnel expenses 12,611 8,307 3,880 0 24,798  8,738 5,169 2,355 0 16,262 
General and administrative expenses 5,684 3,446  (665) 0 8,465  3,918 4,604 1,976 0 10,498 
Depreciation of property and equipment 930 138 183 0 1,251  770 205 266 0 1,241 
Impairment of goodwill 0 341 0 0 341 
Amortization of intangible assets 3 101 178 0 282  1 93 119 0 213 
Goods and materials purchased 0 0 119 0 119 
Total operating expenses
 19,228 11,992 3,695 0 34,915  13,427 10,412 4,716 0 28,555 
Operating profit from continuing operations before tax
  (3,952)  (2,343) 3,962  (602)  (2,935)  (28,336)  (19,434) 940 19,477  (27,353)
Tax expense / (benefit) 697  (486) 1,100 0 1,311 
Tax expense  (7,407)  (4) 574 0  (6,837)
Net profit / (loss) from continuing operations
  (4,649)  (1,857) 2,862  (602)  (4,246)
Net profit from continuing operations
  (20,930)  (19,430) 366 19,477  (20,517)
Net profit / (loss) from discontinued operations 265 0 136 0 401 
Net profit from discontinued operations 43 0 155 0 198 
Net profit / (loss)  (4,384)  (1,857) 2,998  (602)  (3,845)
Net profit  (20,887)  (19,430) 521 19,477  (20,319)
Net profit / (loss) attributable to minority interests 0 18 521 0 539 
Net profit attributable to minority interests 0  (9) 577 0 568 
Net profit / (loss) attributable to UBS shareholders
  (4,384)  (1,875) 2,477  (602)  (4,384)
Net profit attributable to UBS shareholders
  (20,887)  (19,421)  (56) 19,477  (20,887)
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

362

Financial information
Note 41 Supplemental guarantor information required under SEC rules (continued)
                     
Supplemental guarantor consolidating balance sheet
CHF million UBS AG  UBS      Consolidating    
As of 31 December 2008 Parent Bank1  Americas Inc.  Subsidiaries  Entries  UBS Group 
 
Assets
                    
 
Cash and balances with central banks  27,030   332   5,382   0   32,744 
 
Due from banks  111,563   11,490   192,206   (250,808)  64,451 
 
Cash collateral on securities borrowed  48,874   109,783   16,914   (52,674)  122,897 
 
Reverse repurchase agreements  206,087   79,178   145,851   (206,468)  224,648 
 
Trading portfolio assets  183,303   54,973   50,638   (17,076)  271,838 
 
Trading portfolio assets pledged as collateral  33,445   5,240   1,531   0   40,216 
 
Positive replacement values  862,459   18,215   293,896   (320,470)  854,100 
 
Financial assets designated at fair value  5,120   7,755   12,741   (12,734)  12,882 
 
Loans  326,548   53,774   35,193   (75,207)  340,308 
 
Financial investments available-for-sale  1,237   638   3,373   0   5,248 
 
Accrued income and prepaid expenses  3,684   2,700   2,666   (2,909)  6,141 
 
Investments in associates  66,660   58   50   (65,878)  892 
 
Property and equipment  5,093   971   642   0   6,706 
 
Goodwill and intangible assets  250   9,393   3,292   0   12,935 
 
Other assets  15,541   3,905   7,132   (7,484)  19,094 
 
Total assets
  1,896,894   358,405   771,507   (1,011,708)  2,015,098 
 
Liabilities
                    
 
Due to banks  196,723   68,213   111,500   (250,808)  125,628 
 
Cash collateral on securities lent  25,248   32,884   8,605   (52,674)  14,063 
 
Repurchase agreements  30,988   140,197   137,844   (206,468)  102,561 
 
Trading portfolio liabilities  51,034   17,086   11,387   (17,076)  62,431 
 
Negative replacement values  855,005   16,792   300,476   (320,470)  851,803 
 
Financial liabilities designated at fair value  88,505   1,716   24,059   (12,734)  101,546 
 
Due to customers  422,688   70,242   57,051   (75,207)  474,774 
 
Accrued expenses and deferred income  7,417   2,584   3,104   (2,909)  10,196 
 
Debt issued  127,408   2,439   67,407   0   197,254 
 
Other liabilities  12,598   4,313   24,613   (7,484)  34,040 
 
Total liabilities
  1,817,614   356,466   746,046   (945,830)  1,974,296 
 
Equity attributable to UBS shareholders
  79,280   (1,097)  20,495   (65,878)  32,800 
 
Equity attributable to minority interests  0   3,036   4,966   0   8,002 
 
Total equity
  79,280   1,939   25,461   (65,878)  40,802 
 
Total liabilities and equity
  1,896,894   358,405   771,507   (1,011,708)  2,015,098 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

363

Financial information
Notes to the consolidated financial statements

Note 41 Supplemental guarantor information required under SEC rules (continued)

                 
Supplemental guarantor consolidating cash flow statement
 
CHF million UBS AG    UBS       
For the year ended 31 December 2008 Parent Bank1    Americas Inc.  Subsidiaries  UBS Group 
 
Net cash flow from/(used in) operating activities
  69,772   (438)  7,838   77,172 
 
Cash flow from/(used in) investing activities                
 
Investments in subsidiaries and associates  (1,502)  0   0   (1,502)
 
Disposal of subsidiaries and associates  1,686   0   0   1,686 
 
Purchase of property and equipment  (819)  (258)  (140)  (1,217)
 
Disposal of property and equipment  37   27   5   69 
 
Net (investment in)/divestment of financial investments available-for-sale  330   156   (1,198)  (712)
 
Net cash flow from/(used in) investing activities
  (268)  (75)  (1,333)  (1,676)
 
Cash flow from/(used in) financing activities                
 
Net money market paper issued/(repaid)  (52,815)  914   11,264   (40,637)
 
Net movements in treasury shares and own equity derivative activity  623   0   0   623 
 
Capital issuance  23,135   0   0   23,135 
 
Issuance of long-term debt, including financial liabilities designated at fair value  91,961   0   11,126   103,087 
 
Repayment of long-term debt, including financial liabilities designated at fair value  (62,822)  (14,500)  (15,572)  (92,894)
 
Increase in minority interests  0   842   819   1,661 
 
Dividends paid to/decrease in minority interests  0   (112)  (420)  (532)
 
Net activity in investments in subsidiaries  (11,978)  21,816   (9,838)  0 
 
Net cash flow from/(used in) financing activities
  (11,896)  8,960   (2,621)  (5,557)
 
Effects of exchange rate differences  (33,963)  442   (5,857)  (39,378)
 
Net increase/(decrease) in cash equivalents
  23,645   8,889   (1,973)  30,561 
 
Cash and cash equivalents, beginning of the year  109,110   15,532   24,463   149,105 
 
Cash and cash equivalents, end of the year
  132,755   24,421   22,490   179,666 
 
Cash and cash equivalents comprise:                
 
Cash and balances with central banks  27,030   332   5,382   32,744 
 
Money market paper2
  62,777   19,875   4,080   86,732 
 
Due from banks with original maturity of less than three months  42,948   4,214   13,028   60,190 
 
Total
  132,755   24,421   22,490   179,666 
 
1UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.  2 Money market paper is included in the Balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 3,853 million was pledged at 31 December 2008.

364

Financial information
                     
Note 41 Supplemental guarantor information required under SEC rules (continued) 
  
  
Supplemental guarantor consolidating income statement 
  
CHF million UBS AG UBS      Consolidating    
For the year ended 31 December 2007 Parent Bank1 Americas Inc.  Subsidiaries  Entries  UBS Group 
 
Operating income
                    
 
Interest income  77,306   47,747   51,985   (67,926)  109,112 
 
Interest expense  (74,689)  (46,420)  (50,592)  67,926   (103,775)
 
Net interest income  2,617   1,327   1,393   0   5,337 
 
Credit loss (expense)/recovery  11   (234)  (15)  0   (238)
 
Net interest income after credit loss expense  2,628   1,093   1,378   0   5,099 
 
Net fee and commission income  12,852   10,119   7,663   0   30,634 
 
Net trading income  3,467   (9,932)  (1,888)  0   (8,353)
 
Income from subsidiaries  464   0   0   (464)  0 
 
Other income  (4,273)  8,369   245   0   4,341 
 
Total operating income
  15,138   9,649   7,398   (464)  31,721 
 
Operating expenses
                    
 
Personnel expenses  13,239   8,329   3,947   0   25,515 
 
General and administrative expenses  5,684   3,446   (701)  0   8,429 
 
Depreciation of property and equipment  930   138   175   0   1,243 
 
Amortization of intangible assets  3   101   172   0   276 
 
Total operating expenses
  19,856   12,014   3,593   0   35,463 
 
Operating profit from continuing operations before tax
  (4,718)  (2,365)  3,805   (464)  (3,742)
 
Tax expense  794   (486)  1,061   0   1,369 
 
Net profit from continuing operations
  (5,512)  (1,879)  2,744   (464)  (5,111)
 
Net profit from discontinued operations  265   0   138   0   403 
 
Net profit  (5,247)  (1,879)  2,882   (464)  (4,708)
 
Net profit attributable to minority interests  0   18   521   0   539 
 
Net profit attributable to UBS shareholders
  (5,247)  (1,897)  2,361   (464)  (5,247)
 
1UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

365

Financial information
Notes to the consolidated financial statements

                     
Note 41 Supplemental guarantor information required under SEC rules (continued) 
  
  
Supplemental guarantor consolidating balance sheet 
  
CHF million UBS AG  UBS      Consolidating    
On 31 December 2007 Parent Bank1  Americas Inc.  Subsidiaries  Entries  UBS Group 
 
Assets
                    
 
Cash and balances with central banks  8,530   109   10,154   0   18,793 
 
Due from banks  154,138   16,530   200,488   (310,249)  60,907 
 
Cash collateral on securities borrowed  117,312   166,479   53,672   (130,400)  207,063 
 
Reverse repurchase agreements  292,839   106,775   266,470   (289,156)  376,928 
 
Trading portfolio assets  297,100   170,977   84,884   107,221   660,182 
 
Trading portfolio assets pledged as collateral  161,071   55,842   4,498   (107,221)  114,190 
 
Positive replacement values  436,271   16,770   192,144   (216,968)  428,217 
 
Financial assets designated at fair value  5,510   7,149   8,421   (9,315)  11,765 
 
Loans  370,274   41,398   43,584   (119,392)  335,864 
 
Financial investments available-for-sale  2,611   980   1,375   0   4,966 
 
Accrued income and prepaid expenses  7,379   4,369   4,883   (4,678)  11,953 
 
Investments in associates  28,049   139   150   (26,359)  1,979 
 
Property and equipment  5,352   959   923   0   7,234 
 
Goodwill and intangible assets  276   10,516   3,746   0   14,538 
 
Other assets  15,848   5,135   4,951   (5,622)  20,312 
 
Total assets
  1,902,560   604,127   880,343   (1,112,139)  2,274,891 
 
Liabilities
                    
 
Due to banks  246,977   114,066   94,968   (310,249)  145,762 
 
Cash collateral on securities lent  45,055   64,281   52,685   (130,400)  31,621 
 
Repurchase agreements  105,750   238,880   250,413   (289,156)  305,887 
 
Trading portfolio liabilities  111,955   51,904   929   0   164,788 
 
Negative replacement values  456,631   16,333   187,543   (216,968)  443,539 
 
Financial liabilities designated at fair value  146,701   14,947   39,520   (9,315)  191,853 
 
Due to customers  555,694   87,534   118,056   (119,392)  641,892 
 
Accrued expenses and deferred income  13,276   8,242   5,310   (4,678)  22,150 
 
Debt issued  168,266   3,478   50,333   0   222,077 
 
Other liabilities  19,524   5,511   42,083   (5,622)  61,496 
 
Total liabilities
  1,869,829   605,176   841,840   (1,085,780)  2,231,065 
 
Equity attributable to UBS shareholders
  32,731   (3,373)  33,876   (26,359)  36,875 
 
Equity attributable to minority interests  0   2,324   4,627   0   6,951 
 
Total equity
  32,731   (1,049)  38,503   (26,359)  43,826 
 
Total liabilities and equity
  1,902,560   604,127   880,343   (1,112,139)  2,274,891 
 
1UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

366

Financial information

Note 41 Supplemental guarantor information required under SEC rules (continued)

                 
Supplemental guarantor consolidating cash flow statement 
 
CHF million UBS AG  UBS       
For the year ended 31 December 2007 Parent Bank1  Americas Inc.  Subsidiaries  UBS Group 
 
Net cash flow from/(used in) operating activities
  (65,749)  19,670   (5,999)  (52,078)
 
Cash flow from/(used in) investing activities                
 
Investments in subsidiaries and associates  (2,337)  0   0   (2,337)
 
Disposal of subsidiaries and associates  885   0   0   885 
 
Purchase of property and equipment  (1,022)  (581)  (307)  (1,910)
 
Disposal of property and equipment  40   28   66   134 
 
Net (investment in)/divestment of financial investments available-for-sale  4,027   34   1,920   5,981 
 
Net cash flow from/(used in) investing activities
  1,593   (519)  1,679   2,753 
 
Cash flow from/(used in) financing activities                
 
Net money market paper issued/(repaid)  35,017   (1,426)  (919)  32,672 
 
Net movements in treasury shares and own equity derivative activity  (2,771)  0   0   (2,771)
 
Dividends paid  (4,275)  0   0   (4,275)
 
Issuance of long-term debt, including financial liabilities designated at fair value  105,197   1,022   4,655   110,874 
 
Repayment of long-term debt, including financial liabilities designated at fair value  (54,251)  (7,022)  (1,134)  (62,407)
 
Increase in minority interests  0   32   1,062   1,094 
 
Dividends paid to/decrease in minority interests  0   (665)  46   (619)
 
Net activity in investments in subsidiaries  871   (6,627)  5,756   0 
 
Net cash flow from/(used in) financing activities
  79,788   (14,686)  9,466   74,568 
 
Effects of exchange rate differences  (9,070)  (3,062)  (96)  (12,228)
 
Net increase/(decrease) in cash equivalents
  6,562   1,403   5,050   13,015 
 
Cash and cash equivalents, beginning of the year  102,548   14,129   19,413   136,090 
 
Cash and cash equivalents, end of the year
  109,110   15,532   24,463   149,105 
 
Cash and cash equivalents comprise:                
 
Cash and balances with central banks  8,530   109   10,154   18,793 
 
Money market paper2
  60,266   13,202   3,747   77,215 
 
Due from banks with original maturity of less than three months  40,314   2,221   10,562   53,097 
 
Total
  109,110   15,532   24,463   149,105 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.  2 Money market paper is included in the Balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 3,364 million was pledged at 31 December 2007.

367

Financial information
Notes to the consolidated financial statements

                     
Note 41 Supplemental guarantor information required under SEC rules (continued)
 
  
Supplemental guarantor consolidating income statement 
CHF million UBS AG Parent          Consolidating    
For the year ended 31 December 2006 Bank1 UBS Americas Inc. Subsidiaries Entries UBS Group 
Operating income 
Interest income  60,057   42,667   39,269   (54,592)  87,401 
 
Interest expense  (56,020)  (41,049)  (38,403)  54,592   (80,880)
 
Net interest income  4,037   1,618   866   0   6,521 
 
Credit loss (expense)/recovery  167   (6)  (5)  0   156 
 
Net interest income after credit loss expense  4,204   1,612   861   0   6,677 
 
Net fee and commission income  11,646   8,590   5,220   0   25,456 
 
Net trading income  10,306   1,634   1,803   0   13,743 
 
Income from subsidiaries  3,086   0   0   (3,086)  0 
 
Other income  (450)  1,637   421   0   1,608 
 
Total operating income
  28,792   13,473   8,305   (3,086)  47,484 
 
Operating expenses
                    
 
Personnel expenses  12,480   8,287   3,264   0   24,031 
 
General and administrative expenses  2,805   3,362   1,775   0   7,942 
 
Depreciation of property and equipment  979   133   132   0   1,244 
 
Amortization of intangible assets  14   83   51   0   148 
 
Total operating expenses
  16,278   11,865   5,222   0   33,365 
 
Operating profit from continuing operations before tax
  12,514   1,608   3,083   (3,086)  14,119 
 
Tax expense  1,499   1,018   481   0   2,998 
 
Net profit from continuing operations
  11,015   590   2,602   (3,086)  11,121 
 
Net profit from discontinued operations  512   0   387   0   899 
 
Net profit  11,527   590   2,989   (3,086)  12,020 
 
Net profit attributable to minority interests  0   527   (34)  0   493 
 
Net profit attributable to UBS shareholders
  11,527   63   3,023   (3,086)  11,527 
 
1UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

112368

Note 39 Additional Disclosures Required under SEC Rules (continued)
Note 39.2 Supplemental Guarantor Consolidating Balance Sheet

Financial information
                     
CHF million UBS AG  UBS      Consolidating    
As of 31 December 2007 Parent Bank1  Americas Inc.  Subsidiaries  Entries  UBS Group 
 
Assets
                    
 
Cash and balances with central banks  8,530   109   10,154   0   18,793 
 
Due from banks  154,138   16,530   200,488   (310,249)  60,907 
 
Cash collateral on securities borrowed  117,312   166,479   53,672   (130,400)  207,063 
 
Reverse repurchase agreements  292,839   106,775   266,470   (289,156)  376,928 
 
Trading portfolio assets  354,200   170,977   84,884   0   610,061 
 
Trading portfolio assets pledged as collateral  103,971   55,842   4,498   0   164,311 
 
Positive replacement values  436,271   16,770   192,144   (216,968)  428,217 
 
Financial assets designated at fair value  5,510   7,149   8,421   (9,315)  11,765 
 
Loans  370,274   41,398   43,584   (119,392)  335,864 
 
Financial investments available-for-sale  2,611   980   1,375   0   4,966 
 
Accrued income and prepaid expenses  7,379   4,369   4,883   (4,678)  11,953 
 
Investments in associates  28,049   139   150   (26,359)  1,979 
 
Property and equipment  5,352   959   923   0   7,234 
 
Goodwill and intangible assets  276   10,516   3,746   0   14,538 
 
Other assets  13,606   5,135   4,881   (5,622)  18,000 
 
Total assets
  1,900,318   604,127   880,273   (1,112,139)  2,272,579 
 
Liabilities
                    
 
Due to banks  246,977   114,066   94,968   (310,249)  145,762 
 
Cash collateral on securities lent  45,055   64,281   52,685   (130,400)  31,621 
 
Repurchase agreements  105,750   238,880   250,413   (289,156)  305,887 
 
Trading portfolio liabilities  111,955   51,904   929   0   164,788 
 
Negative replacement values  456,631   16,333   187,543   (216,968)  443,539 
 
Financial liabilities designated at fair value  146,701   14,947   39,520   (9,315)  191,853 
 
Due to customers  555,694   87,534   118,056   (119,392)  641,892 
 
Accrued expenses and deferred income  13,276   7,940   5,310   (4,678)  21,848 
 
Debt issued  168,266   3,478   50,333   0   222,077 
 
Other liabilities  19,011   5,356   42,031   (5,622)  60,776 
 
Total liabilities
  1,869,316   604,719   841,788   (1,085,780)  2,230,043 
 
Equity attributable to UBS shareholders
  31,002   (2,916)  33,858   (26,359)  35,585 
 
Minority interests  0   2,324   4,627   0   6,951 
 
Total equity
  31,002   (592)  38,485   (26,359)  42,536 
 
Total liabilities and equity
  1,900,318   604,127   880,273   (1,112,139)  2,272,579 
 
                 
Note 41 Supplemental guarantor information required under SEC rules (continued)                
 
  
Supplemental guarantor consolidating cash flow statement
CHF million UBS AG Parent          
For the year ended 31 December 2006 Bank1 UBS Americas Inc. Subsidiaries UBS Group 
Net cash flow from/(used in) operating activities
  (2,215)  (14,984)  11,815   (5,384)
 
Cash flow from/(used in) investing activities                
 
Investments in subsidiaries and associates  2,856   0   0   2,856 
 
Disposal of subsidiaries and associates  1,154   0   0   1,154 
 
Purchase of property and equipment  (1,292)  (255)  (246)  (1,793)
 
Disposal of property and equipment  298   47   154   499 
 
Net (investment in)/divestment of financial investments available-for-sale  90   433   1,200   1,723 
 
Net cash flow from/(used in) investing activities
  3,106   225   1,108   4,439 
 
Cash flow from/(used in) financing activities                
 
Net money market paper issued/(repaid)  17,526   1,039   (1,644)  16,921 
 
Net movements in treasury shares and own equity derivative activity  (3,179)  0   0   (3,179)
 
Capital issuance  1   0   0   1 
 
Capital repayment by par value reduction  (631)  0   0   (631)
 
Dividends paid  (3,214)  0   0   (3,214)
 
Issuance of long-term debt, including financial liabilities designated at fair value  79,358   10,881   7,436   97,675 
 
Repayment of long-term debt, including financial liabilities designated at fair value  (48,748)  (447)  (10,545)  (59,740)
 
Increase in minority interests  0   85   1,246   1,331 
 
Dividends paid to/decrease in minority interests  0   2,441   (3,513)  (1,072)
 
Net activity in investments in subsidiaries  (8,410)  3,229   5,181   0 
 
Net cash flow from/(used in) financing activities
  32,703   17,228   (1,839)  48,092 
 
Effects of exchange rate differences  406   (1,871)  (634)  (2,099)
 
Net increase/(decrease) in cash equivalents
  34,000   598   10,450   45,048 
 
Cash and cash equivalents, beginning of the year  68,548   13,531   8,963   91,042 
 
Cash and cash equivalents, end of the year
  102,548   14,129   19,413   136,090 
 
Cash and cash equivalents comprise:                
 
Cash and balances with central banks  2,660   78   757   3,495 
 
Money market paper2
  73,431   11,488   2,225   87,144 
 
Due from banks with original maturity of less than three months  26,457   2,563   16,431   45,451 
 
Total
  102,548   14,129   19,413   136,090 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

113

Financial Statements
Notes to the Financial Statements

Note 39 Additional Disclosures Required under SEC Rules (continued)
Note 39.2 Supplemental Guarantor Consolidating Cash Flow Statement

                 
CHF million UBS AG  UBS       
For the year ended 31 December 2007 Parent Bank1  Americas Inc.  Subsidiaries  UBS Group 
 
Net cash flow from / (used in) operating activities
  (65,133)  19,722   (5,865)  (51,276)
 
Cash flow from / (used in) investing activities                
 
Investments in subsidiaries and associates  (2,337)  0   0   (2,337)
 
Disposal of subsidiaries and associates  885   0   0   885 
 
Purchase of property and equipment  (1,022)  (581)  (307)  (1,910)
 
Disposal of property and equipment  40   28   66   134 
 
Net (investment in) / divestment of financial investments available-for-sale  4,027   34   1,920   5,981 
 
Net cash flow from / (used in) investing activities
  1,593   (519)  1,679   2,753 
 
Cash flow from / (used in) financing activities                
 
Net money market paper issued / (repaid)  35,017   (1,426)  (919)  32,672 
 
Net movements in treasury shares and own equity derivative activity  (3,550)  0   0   (3,550)
 
Dividends paid  (4,275)  0   0   (4,275)
 
Issuance of long-term debt, including financial liabilities designated at fair value  105,197   1,022   4,655   110,874 
 
Repayment of long-term debt, including financial liabilities designated at fair  (54,251)  (7,022)  (1,134)  (62,407)
value                
 
Increase in minority interests  0   32   1,062   1,094 
 
Dividend payments to / purchase from minority interests  0   (665)  46   (619)
 
Net activity in investments in subsidiaries  1,057   (6,679)  5,622   0 
 
Net cash flow from / (used in) financing activities
  79,195   (14,738)  9,332   73,789 
 
Effects of exchange rate differences  (9,093)  (3,062)  (96)  (12,251)
 
Net increase / (decrease) in cash equivalents
  6,562   1,403   5,050   13,015 
 
Cash and cash equivalents, beginning of the year  102,548   14,129   19,413   136,090 
 
Cash and cash equivalents, end of the year
  109,110   15,532   24,463   149,105 
 
Cash and cash equivalents comprise:                
 
Cash and balances with central banks  8,530   109   10,154   18,793 
 
Money market paper2
  60,266   13,202   3,747   77,215 
 
Due from banks with original maturity of less than three months  40,314   2,221   10,562   53,097 
 
Total
  109,110   15,532   24,463   149,105 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.  2 Money market paper is included in the Balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 3,364 million was pledged at 31 December 2007.

114

Note 39 Additional Disclosures Required under SEC Rules (continued)
Note 39.2 Supplemental Guarantor Consolidating Income Statement

                     
CHF million UBS AG  UBS      Consolidating    
For the year ended 31 December 2006 Parent Bank1  Americas Inc.  Subsidiaries  Entries  UBS Group 
 
Operating income
                    
 
Interest income  60,057   42,667   39,269   (54,592)  87,401 
 
Interest expense  (56,020)  (41,049)  (38,403)  54,592   (80,880)
 
Net interest income  4,037   1,618   866   0   6,521 
 
Credit loss (expense) / recovery  167   (6)  (5)  0   156 
 
Net interest income after credit loss expense  4,204   1,612   861   0   6,677 
 
Net fee and commission income  11,646   8,590   5,220   0   25,456 
 
Net trading income  10,306   1,634   1,803   0   13,743 
 
Income from subsidiaries  3,760   0   0   (3,760)  0 
 
Other income  (450)  1,637   411   0   1,598 
 
Revenues from industrial holdings  0   0   262   0   262 
 
Total operating income
  29,466   13,473   8,557   (3,760)  47,736 
 
Operating expenses
                    
 
Personnel expenses  12,208   8,040   3,343   0   23,591 
 
General and administrative expenses  2,805   3,362   1,813   0   7,980 
 
Depreciation of property and equipment  979   133   140   0   1,252 
 
Amortization of intangible assets  14   83   56   0   153 
 
Goods and materials purchased  0   0   116   0   116 
 
Total operating expenses
  16,006   11,618   5,468   0   33,092 
 
Operating profit from continuing operations before tax
  13,460   1,855   3,089   (3,760)  14,644 
 
Tax expense / (benefit)  1,715   585   485   0   2,785 
 
Net profit / (loss) from continuing operations
  11,745   1,270   2,604   (3,760)  11,859 
 
Net profit / (loss) from discontinued operations  512   0   379   0   891 
 
Net profit / (loss)  12,257   1,270   2,983   (3,760)  12,750 
 
Net profit / (loss) attributable to minority interests  0   527   (34)  0   493 
 
Net profit / (loss) attributable to UBS shareholders
  12,257   743   3,017   (3,760)  12,257 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

115

Financial Statements
Notes to the Financial Statements

Note 39 Additional Disclosures Required under SEC Rules (continued)
Note 39.2 Supplemental Guarantor Consolidating Balance Sheet

                     
CHF million UBS AG  UBS      Consolidating    
As of 31 December 2006 Parent Bank1  Americas Inc.  Subsidiaries  Entries  UBS Group 
 
Assets
                    
 
Cash and balances with central banks  2,660   78   757   0   3,495 
 
Due from banks  121,404   16,884   182,850   (270,712)  50,426 
 
Cash collateral on securities borrowed  99,829   303,607   156,083   (207,929)  351,590 
 
Reverse repurchase agreements  270,814   167,222   300,862   (333,064)  405,834 
 
Trading portfolio assets  294,590   188,710   143,736   0   627,036 
 
Trading portfolio assets pledged as collateral  162,722   51,834   36,922   0   251,478 
 
Positive replacement values  283,466   13,168   173,243   (176,902)  292,975 
 
Financial assets designated at fair value  2,902   4,147   7,146   (8,265)  5,930 
 
Loans  399,352   40,279   38,644   (180,433)  297,842 
 
Financial investments available-for-sale  5,843   862   2,232   0   8,937 
 
Accrued income and prepaid expenses  6,598   4,029   4,809   (5,075)  10,361 
 
Investments in associates  34,887   179   237   (33,780)  1,523 
 
Property and equipment  5,432   637   844   0   6,913 
 
Goodwill and intangible assets  258   11,128   3,387   0   14,773 
 
Other assets  10,709   5,524   5,587   (4,571)  17,249 
 
Total assets
  1,701,466   808,288   1,057,339   (1,220,731)  2,346,362 
 
Liabilities
                    
 
Due to banks  228,992   114,782   130,627   (270,712)  203,689 
 
Cash collateral on securities lent  106,019   57,937   107,061   (207,929)  63,088 
 
Repurchase agreements  167,166   419,427   291,951   (333,064)  545,480 
 
Trading portfolio liabilities  107,747   71,165   25,861   0   204,773 
 
Negative replacement values  290,746   13,629   169,590   (176,902)  297,063 
 
Financial liabilities designated at fair value  121,074   49   32,829   (8,265)  145,687 
 
Due to customers  489,823   80,936   165,560   (180,433)  555,886 
 
Accrued expenses and deferred income  12,336   8,406   5,860   (5,075)  21,527 
 
Debt issued  110,020   29,149   50,974   0   190,143 
 
Other liabilities  16,488   4,284   47,050   (4,571)  63,251 
 
Total liabilities
  1,650,411   799,764   1,027,363   (1,186,951)  2,290,587 
 
Equity attributable to UBS shareholders
  51,055   5,539   26,872   (33,780)  49,686 
 
Minority interests  0   2,985   3,104   0   6,089 
 
Total equity
  51,055   8,524   29,976   (33,780)  55,775 
 
Total liabilities and equity
  1,701,466   808,288   1,057,339   (1,220,731)  2,346,362 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

116

Note 39 Additional Disclosures Required under SEC Rules (continued)
Note 39.2 Supplemental Guarantor Consolidating Cash Flow Statement

                 
CHF million UBS AG  UBS       
For the year ended 31 December 2006 Parent Bank1  Americas Inc.  Subsidiaries  UBS Group 
 
Net cash flow from / (used in) operating activities
  (1,916)  (14,810)  11,805   (4,921)
 
Cash flow from / (used in) investing activities                
 
Investments in subsidiaries and associates  2,856   0   0   2,856 
 
Disposal of subsidiaries and associates  1,154   0   0   1,154 
 
Purchase of property and equipment  (1,292)  (255)  (246)  (1,793)
 
Disposal of property and equipment  298   47   154   499 
 
Net (investment in) / divestment of financial investments available-for-sale  90   433   1,200   1,723 
 
Net cash flow from / (used in) investing activities
  3,106   225   1,108   4,439 
 
Cash flow from / (used in) financing activities                
 
Net money market paper issued / (repaid)  17,526   1,039   (1,644)  16,921 
 
Net movements in treasury shares and own equity derivative activity  (3,624)  0   0   (3,624)
 
Capital issuance  1   0   0   1 
 
Capital repayment by par value reduction  (631)  0   0   (631)
 
Dividends paid  (3,214)  0   0   (3,214)
 
Issuance of long-term debt, including financial liabilities designated at fair value  79,358   10,881   7,436   97,675 
 
Repayment of long-term debt, including financial liabilities designated at fair  (48,748)  (447)  (10,545)  (59,740)
value                
 
Increase in minority interests  0   85   1,246   1,331 
 
Dividend payments to / purchase from minority interests  0   2,441   (3,513)  (1,072)
 
Net activity in investments in subsidiaries  (8,246)  3,055   5,191   0 
 
Net cash flow from / (used in) financing activities
  32,422   17,054   (1,829)  47,647 
 
Effects of exchange rate differences  388   (1,871)  (634)  (2,117)
 
Net increase / (decrease) in cash equivalents
  34,000   598   10,450   45,048 
 
Cash and cash equivalents, beginning of the year  68,548   13,531   8,963   91,042 
 
Cash and cash equivalents, end of the year
  102,548   14,129   19,413   136,090 
 
Cash and cash equivalents comprise:                
 
Cash and balances with central banks  2,660   78   757   3,495 
 
Money market paper2
  73,431   11,488   2,225   87,144 
 
Due from banks with original maturity of less than three months  26,457   2,563   16,431   45,451 
 
Total
  102,548   14,129   19,413   136,090 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.  2 Money market paper is included in the Balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 7,183 million was pledged at 31 December 2006.

369

117

Financial Statementsinformation
Notes to the Financial Statementsconsolidated financial statements

Note 39 Additional Disclosures Required41 Supplemental guarantor information required under SEC Rulesrules (continued)
Note 39.2 Supplemental Guarantor Consolidating Income Statement

 
                     
CHF million UBS AG  UBS      Consolidating    
For the year ended 31 December 2005 Parent Bank1  Americas Inc.  Subsidiaries  Entries  UBS Group 
 
Operating income
                    
 
Interest income  39,779   27,782   20,729   (29,004)  59,286 
 
Interest expense  (33,892)  (24,803)  (20,067)  29,004   (49,758)
 
Net interest income  5,887   2,979   662   0   9,528 
 
Credit loss (expense) / recovery  370   (3)  8   0   375 
 
Net interest income after credit loss expense  6,257   2,976   670   0   9,903 
 
Net fee and commission income  9,670   7,420   4,094   0   21,184 
 
Net trading income  7,453   (123)  918   0   8,248 
 
Income from subsidiaries  (675)  0   0   675   0 
 
Other income  2,635   476   (1,984)  0   1,127 
 
Revenues from industrial holdings  0   0   229   0   229 
 
Total operating income
  25,340   10,749   3,927   675   40,691 
 
Operating expenses
                    
 
Personnel expenses  9,962   6,587   3,518   0   20,067 
 
General and administrative expenses  2,330   2,667   1,507   0   6,504 
 
Depreciation of property and equipment  988   140   119   0   1,247 
 
Amortization of intangible assets  24   70   39   0   133 
 
Goods and materials purchased  0   0   97   0   97 
 
Total operating expenses
  13,304   9,464   5,280   0   28,048 
 
Operating profit from continuing operations before tax
  12,036   1,285   (1,353)  675   12,643 
 
Tax expense / (benefit)  1,712   1,079   (326)  0   2,465 
 
Net profit / (loss) from continuing operations
  10,324   206   (1,027)  675   10,178 
 
Net profit / (loss) from discontinued operations  3,705   0   807   0   4,512 
 
Net profit / (loss)  14,029   206   (220)  675   14,690 
 
Net profit / (loss) attributable to minority interests  0   122   539   0   661 
 
Net profit / (loss) attributable to UBS shareholders
  14,029   84   (759)  675   14,029 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.

118

Note 39 Additional Disclosures Required under SEC Rules (continued)
Note 39.2 Supplemental Guarantor Consolidating Cash Flow Statement

                 
CHF million UBS AG  UBS       
For the year ended 31 December 2005 Parent Bank1  Americas Inc.  Subsidiaries  UBS Group 
 
Net cash flow from / (used in) operating activities
  (29,118)  (15,771)  (18,318)  (63,207)
 
Cash flow from / (used in) investing activities                
 
Investments in subsidiaries and associates  (1,540)  0   0   (1,540)
 
Disposal of subsidiaries and associates  3,240   0   0   3,240 
 
Purchase of property and equipment  (1,153)  (155)  (584)  (1,892)
 
Disposal of property and equipment  71   6   193   270 
 
Net (investment in) / divestment of financial investments available-for-sale  (4,667)  (40)  2,220   (2,487)
 
Net cash flow from / (used in) investing activities
  (4,049)  (189)  1,829   (2,409)
 
Cash flow from / (used in) financing activities                
 
Net money market paper issued / (repaid)  22,698   615   (92)  23,221 
 
Net movements in treasury shares and own equity derivative activity  (2,416)  0   0   (2,416)
 
Capital issuance  2   0   0   2 
 
Dividends paid  (3,105)  0   0   (3,105)
 
Issuance of long-term debt, including financial liabilities designated at fair value  50,587   14,635   11,085   76,307 
 
Repayment of long-term debt, including financial liabilities designated at fair  (17,780)  (753)  (11,924)  (30,457)
value                
 
Increase in minority interests  0   8   1,564   1,572 
 
Dividend payments to / purchase from minority interests  0   (175)  (400)  (575)
 
Net activity in investments in subsidiaries  (1,591)  (214)  1,805   0 
 
Net cash flow from / (used in) financing activities
  48,395   14,116   2,038   64,549 
 
Effects of exchange rate differences  3,283   (720)  2,455   5,018 
 
Net increase / (decrease) in cash equivalents
  18,511   (2,564)  (11,996)  3,951 
 
Cash and cash equivalents, beginning of the year  50,037   16,095   20,959   87,091 
 
Cash and cash equivalents, end of the year
  68,548   13,531   8,963   91,042 
 
Cash and cash equivalents comprise:                
 
Cash and balances with central banks  2,712   5   2,642   5,359 
 
Money market paper2
  47,838   8,991   997   57,826 
 
Due from banks with original maturity of less than three months  17,998   4,535   5,324   27,857 
 
Total
  68,548   13,531   8,963   91,042 
 
1 UBS AG Parent Bank prepares its financial statements in accordance with Swiss banking law requirements. For the purpose of this disclosure, the accounts have been adjusted to IFRS.  2 Money market paper is included in the Balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 4,744 million was pledged at 31 December 2005.

119

Financial Statements
Notes to the Financial Statements

Note 39 Additional Disclosures Required under SEC Rules (continued)
Note 39.2 Guarantee of other securities

Guarantee of other securities


UBS AG, acting through wholly-owned finance subsidiaries, issued the following trust preferred securities:
                 
USD billion, unless otherwise indicated     Outstanding on 31.12.08 
 
Issuing Entity Type of security   Date issued   Interest (%)  Amount 
 
UBS Preferred Funding Trust I Trust preferred securities  October 2000   8.622   1.5 
 
UBS Preferred Funding Trust II Trust preferred securities1  June 2001   7.247   0.5 
 
UBS Preferred Funding Trust IV Floating rate noncumulative trust      one-month LIBOR     
  preferred securities  May 2003   + 0.7%   0.3 
 
UBS Preferred Funding Trust V Trust preferred securities  May 2006   6.243   1.0 
 
         
USD billion, unless otherwise indicated Outstanding as of 31.12.07
Issuing Entity Type of security Date issued Interest (%) Amount
 
UBS Preferred Funding Trust I Trust preferred securities October 2000 8.622  1.5 
 
UBS Preferred Funding Trust II Trust preferred securities1 June 2001 7.247  0.5 
 
  Floating rate noncumulative trust   one-month LIBOR  
UBS Preferred Funding Trust IV preferred securities May 2003 + 0.7%  0.3 
 
UBS Preferred Funding Trust V Trust preferred securities May 2006 6.243  1.0 
 
1 In June 2006, USD 300 million (at 7.25%) of Trust preferred securities also issued in June 2001 were redeemed.

UBS AG has fully and unconditionally guaranteed these securities. UBS’s obligations under the trust preferred securities guarantee are subordinated to the prior payment in full of the deposit liabilities of UBS and all other liabilities of UBS. At

31 December 2007,2008, the amount of senior liabilities of UBS to which the holders of the subordinated debt securities would be subordinated is approximately CHF 2,2151,959 billion.



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121

Financial information

Financial information
UBS AG (Parent Bank)
Table of Contents

UBS AG (Parent Bank)
Table of Contents

Parent Bank Review
124
Financial Statements
125
Income Statement
125
Balance Sheet
126
Statement of Appropriation of Retained Earnings
127
Notes to the Financial Statements
128
Additional Income Statement Information
129
Net Trading Income
129
Extraordinary Income and Expenses
129
Additional Balance Sheet Information
130
Allowances and Provisions
130
Statement of Shareholders’ Equity
130
Share Capital
131
Off-Balance Sheet and Other Information
132
Assets Pledged or Assigned as Security for Own Obligations, Assets Subject to Reservation of Title
132
Commitments and Contingent Liabilities
132
Derivative Instruments
132
Fiduciary Transactions
133
Due to UBS Pension Plans
133
Personnel
133

122

Corporate Governance and Compensation Report
134
Compensation details and additional information for executive members of the Board of Directors
134
Remuneration details and additional information for non-executive members of the Board of Directors
134
Total payments to all members of the Board of Directors
134
Total compensation for all members of the Group Executive Board
135
Compensation paid to former members of the Board of Directors and Group Executive Board
135
Share and option ownership of members of the Board of Directors as of 31 December 2007
136
Share and option ownership of members of the Group Executive Board as of 31 December 2007
137
Vested and unvested options held by executive members of the Board and by members of the Group Executive Board as of 31 December 2007
138
Loans granted to members of the Board of Directors as of 31 December 2007
139
Loans granted to members of the Group Executive Board
139
Report of the Statutory Auditors
140
Report of the Auditors of the Conditional Capital Increase
141

123

UBS AG (Parent Bank)
Parent Bank Review

Parent Bank Review

Income Statementreview

Income statement

The Parent Bank UBS AG Net profit decreasednet loss increased by CHF 10,80932,238 million from a profitloss of CHF 6,5584,251 million in the previous year to a loss of CHF 4,25136,489 million.

Income from investments in associated companies increased to CHF 3,763 million from CHF 2,592 million in 2007, from CHF 1,910 million in 2006 mainly due to higher dividend distributions received.
Personnel expenses were down to CHF 6,707 million from CHF 13,505 million in 2007, mainly due to lower accruals on performance-related compensation and recognition of a defined pension asset.
Losses resulting from the US residential mortgage market had a significant impact on the following income statement lines Depreciation, Provisions and Net trading income:lines:
– The increase of Depreciation increased from CHF 1,352 million in 2006 to CHF 8,660 million in 2007 to CHF 26,900 million in 2008, mainly reflects write-downsreflecting writedowns of investments in associated US companies.
–Provisions of CHF 2,688 million were recognized in 2007 for commitments to capitalize subsidiaries that have a capital deficit.
– Net trading income decreased from CHF 9,467 million in 2006 topositive CHF 2,767 million in 2007 whichto negative CHF 9,466 million in 2008. This mainly reflects losses in the fixed income business.fixed-income business and the charges associated with the SNB transaction.
The increasedecrease in Extraordinary income and decreaseincrease in Extraordinary expenses are explained on page 129.376.

Balance Sheetsheet

In 2008, UBS’s overall balance sheet reduction initiatives also led to lower Parent Bank total assets. In particular UBS subsidiaries in the Americas reduced their assets and therefore their funding needs from the Parent Bank. The Parent Bank total assets stood at CHF 1,189 billion on 31 December 2008, a drop of CHF 409 billion from CHF 1,598 billion on 31 December 2007, up slightly from2007.

The reductions occurred in trading balances, which declined by CHF 1,586254 billion, on 31 December 2006. The total asset rise ofinterbank lending (loans and collateral trading) dropped CHF 12171 billion, was caused by higher inter-bank lending (which includeswith customer loans and collateral trading) oftrading down CHF 8883 billion and Liquid Assets ofoth-

er assets down CHF 65 billion. These increases,declines, however, were almostpartially offset by decreases in customer and mortgage loans (down CHF 54 billion), inhigher positive replacement values on derivative instruments (down CHF 14 billion), in money market paper (down CHF 13 billion) and a decline in investments in associated companies of CHF 678 billion due toand liquid assets of CHF 19 billion. Mortgage loans remained stable in 2008 at CHF 141 billion. The above mentioned write-downs of investments in associated US subsidiaries.companies have been offset during the year by capital injections.

Interbank Lendinglending

InDuring 2008, due from banks on demand volume rosetime declined by CHF 3940 billion, partiallypredominantly due to higherlower funding needs of ourUBS bank subsidiaries in the Americas. Due from banks on demand declined slightly by CHF 4 billion, as lower funding to bank subsidiaries in the European Region combined with anoutweighed the increase to non-UBS related banks in the same regionAmericas and to a lesser extent in the Americas Region. During 2007, due from banks on time slightlyJapan. In addition, interbank collateral trading declined by CHF 5 billion. In addition, Inter-bank collateral127 billion, with roughly two thirds attributable to lower trading grew by CHF 54 billion due to tradingvolumes with UBS subsidiaries, and one third due to reductions in particular in the two Regions Europe and Asia, andtrading volumes with third party clients.

Customer Lendinglending

The customer loan drop of CHF 4255 billion was due tomainly the result of lower funding needs of UBS subsidiaries predominately related(non-banks), predominantly in the Americas region.

In addition, customer collateral trading declined CHF 28 billion, of which two thirds was attributable to third party clients in the Americas and Europe and one third to UBS subsidiaries in the Americas.

Financial investments

Compared with the previous year, the increase of CHF 10 billion is mainly due to the reintegration of positions held by Dillon Read Capital Management subsidiaries, which are no longer funded by the UBS Parent Bank. In addition, loans secured by mortgages declined (CHF 12 billion) driven by the downturnreclassification from Trading balances in the US mortgage market and the exit of certain US legacy positions which were built up by Dillon Read Capital Management.securities to Financial investments in fourth quarter 2008.



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Financial information
UBS AG (Parent Bank)
Financial Statements

Financial StatementsParent Bank financial statements

Income Statement

                   
Income statementIncome statement 
 For the year ended % change from  For the year ended % change from 
CHF million 31.12.07 31.12.06 31.12.06  31.12.08 31.12.07 31.12.07 
Interest and discount income 58,674 45,978 28  37,825 58,674  (36)
Interest and dividend income from trading portfolio 19,003 15,324 24  12,014 19,003  (37)
Interest and dividend income from financial investments 58 32 81  76 58 31 
Interest expense  (75,179)  (57,507) 31   (49,022)  (75,179)  (35)
Net interest income 2,556 3,827  (33) 893 2,556  (65)
Credit-related fees and commissions 205 199 3  208 205 1 
Fee and commission income from securities and investment business 15,468 12,288 26  11,668 15,468  (25)
Other fee and commission income 686 840  (18) 610 686  (11)
Fee and commission expense  (3,269)  (1,820) 80   (2,849)  (3,269)  (13)
Net fee and commission income 13,090 11,507 14  9,637 13,090  (26)
Net trading income 2,767 9,467  (71)  (9,466) 2,767 
Net income from disposal of financial investments 178 333  (47) 176 178  (1)
Income from investments in associated companies 2,592 1,910 36  3,763 2,592 45 
Income from real estate holdings 27 21 29  29 27 7 
Sundry income from ordinary activities 3,352 2,982 12  3,384 3,352 1 
Sundry ordinary expenses  (3,223)  (3,059) 5   (2,767)  (3,223)  (14)
Other income from ordinary activities 2,926 2,187 34  4,584 2,926 57 
Operating income
 21,339 26,988  (21) 5,648 21,339  (74)
Personnel expenses 13,505 12,886 5  6,707 13,505  (50)
General and administrative expenses 5,191 4,736 10  5,822 5,191 12 
Operating expenses
 18,696 17,622 6  12,528 18,696  (33)
Operating profit
 2,643 9,366  (72)  (6,880) 2,643 
Depreciation and write-offs on investments in associated companies and fixed assets 8,660 1,352 541  26,900 8,660 211 
Allowances, provisions and losses 2,780 342 713  3,071 2,780 10 
Profit before extraordinary items and taxes
  (8,797) 7,672   (36,852)  (8,797)  (319)
Extraordinary income 4,665 1,095 326  1,002 4,665  (79)
Extraordinary expenses 4 239  (98) 482 4 
Tax expense 115 1,970  (94) 157 115 37 
Profit for the period
  (4,251) 6,558 
Profit/(loss) for the period
  (36,489)  (4,251)  (758)

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UBS AG (Parent Bank)
Financial Statements

Financial information

Balance Sheet

                   
Balance sheetBalance sheet 
 % change from  % change from 
CHF million 31.12.07 31.12.06 31.12.06  31.12.08 31.12.07 31.12.07 
  
Assets
  
Liquid assets 8,530 2,660 221  27,030 8,530 217  
Money market paper 60,266 73,430  (18) 62,777 60,266 4  
Due from banks 527,081 439,098 20  355,679 527,081  (33) 
Due from customers 274,510 316,241  (13) 191,308 274,510  (30) 
Mortgage loans 141,381 153,114  (8) 141,328 141,381 0  
Trading balances in securities and precious metals 412,977 411,981 0  158,741 412,977  (62) 
Financial investments 1,685 2,844  (41) 11,085 1,685 558  
Investments in associated companies 21,228 27,076  (22) 22,001 21,228 4  
Fixed assets 5,273 4,527 16  5,032 5,273  (5) 
Accrued income and prepaid expenses 7,221 6,573 10  3,877 7,221  (46) 
Positive replacement values 124,244 138,222  (10) 201,801 124,244 62  
Other assets 13,676 9,975 37  8,697 13,676  (36) 
Total assets
 1,598,072 1,585,741 1  1,189,356 1,598,072  (26) 
Total subordinated assets
 6,293 5,852 8  3,924 6,293  (38) 
Total amounts receivable from Group companies
 602,667 657,919  (8) 435,721 602,667  (28) 
  
Liabilities
 
Liabilities and equity
 
Money market paper issued 104,878 69,861 50  52,063 104,878  (50) 
Due to banks 491,102 556,136  (12) 292,730 491,102  (40) 
Due to customers on savings and deposit accounts 72,303 80,883  (11) 61,872 72,303  (14) 
Other amounts due to customers 521,189 508,609 2  388,338 521,189  (25) 
Medium-term bonds 3,228 2,238 44  3,150 3,228  (2) 
Bond issues and loans from central mortgage institutions 189,023 143,779 31  143,589 189,023  (24) 
Accruals and deferred income 17,368 16,672 4  7,895 17,368  (55) 
Negative replacement values 145,445 149,879  (3) 193,108 145,445 33  
Other liabilities 15,576 10,471 49  14,181 15,576  (9) 
Allowances and provisions 3,970 2,305 72  2,724 3,970  (31) 
Share capital 207 211  (2) 293 207 42  
General statutory reserve 8,775 8,295 6  40,910 8,775 366  
Reserve for own shares 9,441 9,114 4  2,877 9,441  (70) 
Other reserves 19,818 20,730  (4) 22,115 19,818 12  
Profit for the period  (4,251) 6,558 
Profit/(loss) for the period  (36,489)  (4,251)  (758) 
Total liabilities
 1,598,072 1,585,741 1 
Total liabilities and equity
 1,189,356 1,598,072  (26) 
Total subordinated liabilities
 21,114 21,907  (4) 24,427 21,114 16  
Total amounts payable to Group companies
 330,567 450,093  (27) 271,434 330,567  (18) 

126

Statement of Appropriationappropriation of Retained Earningsretained earnings

The Board of Directors proposes to the Annual General Meeting (AGM) on 15 April 2009 to approve the following appropriation:

    
 
CHF million    
 
The Board of Directors proposes to the Annual General Meeting the following appropriation:
Profit / Profit/(Loss) for the financial year 20072008 as per the Parent Bank’s Income Statement  (4,25136,489)
 
Appropriation to other reserves  (4,25122,115)
Appropriation to general statutory reserves: Retained earnings(2,472)
Appropriation to general statutory reserves: Share premium(11,901)
 
Stock Dividend, creation of Authorized Capital

The Board of Directors has proposed to the Extraordinary Meeting of Shareholders on 27 February 2008 to create authorized share capital up to a maximum of 5% of the current share capital (103.7 million new shares) to replace the cash dividend for the business year 2007 with a stock dividend. The issuance of shares and the final exchange ratio for the entitlement to the stock dividend (not less than 20:1) will be determined by the Board of Directors on 23 April 2008.373

127

Financial information
UBS AG (Parent Bank)

Notes to the Financial StatementsParent Bank financial statements

Notes to the Financial Statements

Accounting Principles

Policies

The Parent Bank’s accounting policiesBank Financial Statements are prepared in complianceaccordance with Swiss Federal banking law. The accounting policies are principally the same as for the Group Financial Statements outlined in Note 1, Summary of Significant Accounting Policies. Major differences between the Swiss Federal banking law requirements and International Financial Reporting Standards (IFRS) are described in Note 3840 to the Group Financial Statements. In addition, the following principles arefinancial statements. The accounting policies applied for the statutory accounts of the Parent Bank:Bank are discussed below. The risk management of UBS AG is described in the context of the risk management for UBS Group. For the statutory required risk assessment refer to the “Risk and treasury management” section of this report.

Treasury shares


Treasury shares is the term used to describe when an enterprise holds itsare own equity instruments.instruments held by an entity. Under Swiss law, treasury shares are classifiedrecognized in the balance sheet as trading balances or as financial investments.balances. Short positions in treasury shares are recognized in Due to banks. Treasury shares recognized as trading balances and short positions in treasury shares are measured at fair value with unrealized gains or losses from remeasurement to fair value included in due to banks.the income statement. Realized gains and losses on the sale issuance or acquisition of treasury shares and unrealized gains or losses from remeasurement of treasury shares in the trading portfolio to market value are includedrecognized in the income statement. Treasury shares included in financial investments are carried at the lower of cost and market value.
A reserve fromfor own shares must be created in equity equal to the cost value of the treasury shares held. The reserve for own shares is not available for distribution to shareholders.

Foreign currency translation


Assets and liabilities of foreign branches are translated into CHF at the spot exchange ratesrate at the balance sheet date, while incomedate. Income and expense items are translated at weighted average exchange rates for the period. ExchangeGains resulting from exchange differences arising on the translation of each of these foreign branches are credited to a provision account (other liabilities) in case of a gain, while any losses. Losses resulting from exchange differences are debited, firstfirstly, to thatthe aforementioned provision account until such provision is fully utilized, and, secondly, to profit and loss.

Investments in associated companies


Investments in associated companies are equity interests which are held for the purpose of the Parent Bank’s business activities or for strategic reasons. They include all directly held subsidiaries and are carried at cost less impairment, if applicable.

Property and equipment

Bank buildings and other real estateDeferred taxes
Deferred tax assets are carried at cost less accumulated depreciation. Depreciation of computer and telecommunications equipment, other office equipment, fixtures and fittings isnot recognized on a straight-line basis over the estimated useful lives of the related assets. The useful lives of Property and equipment are summarized in Note 1, Summary of Significant Accounting Policies, of the Group Financial Statements.

Extraordinary income and expenses

Certain items of income and expense appear as extraordinary within the Parent Bank Financial Statements, whereasStatements. Deferred tax liabilities are recognized for all taxable temporary differences. The change in the Group Financial Statements they are considered to be operating incomedeferred tax liability is recognized in profit or expenses and appear within the appropriate income or expense category, or they are included in net profit from discontinued operations, if required.
loss.

Equity participation and other compensation plans

Equity participation plans
Under Swiss law, employee stockshare awards are recognized as compensation expense and accrued over the performance year, which is generally the period while employee stockprior to the grant date. Employee option awards which do not contain voluntary termination non-compete provisions are recognized as compensation expense inon the year of grant.grant date. If the award is performance based and contains substantive future service/vesting period, compensation expense is recognized over the performance period. Employee option awards which contain voluntary termination non-compete provisions (i.e. good leaver clause) are recognized as compensation expense over the performance year. Equity- and cash-settled awards are classified as liabilities. StockThe employee share option awards are remeasured to fair value at their intrinsic value.each balance sheet date. However, for granted employee share options that UBS intends to settle in shares from conditional capital, there is no impact on the income statement and no liability is recognized. Upon exercise of employee options, cash received for payment of the strike price payment will beis credited against share capital and general statutory reserve.

Other compensation plans
Fixed and variable deferred cash compensation is recognized as compensation expense over the performance year. If the award is performance based and contains substantive future service/vesting period, compensation expense is recognized over the performance period.



128374

Financial information

Changes in accounting policies, comparability and other adjustments

Equity participation plans

In 2008, UBS revised the measurement methodology for the liability under employee share option awards settled with treasury shares. The measurement of the liability was previously based on the higher of grant date fair value and intrinsic value of the underlying options, whereas following the revision, it is based on fair value. This change resulted in revenues of CHF 1.2 billion.
In 2006, UBS adopted the policy to decide at grant whether to use conditional capital or treasury shares to satisfy employee option delivery obligations in UBS shares. In 2008, UBS changed this policy to allow it to use treasury shares up to the number of treasury shares held, with the excess of employee option delivery obligations satisfied from conditional capital. As a result, UBS recognized an additional expense of CHF 298 million before tax in the income statement in 2008.

Post-employment benefits
In 2008, UBS concluded that it meets the requirements to recognize a defined benefit asset associated with its Swiss pension plan consistent with the consolidated financial statements. The change in accounting policy resulted in the following effects on the balance sheet and income statement for 31 December 2008: an increase of approximately CHF 2.1 billion in Other assets and a corresponding decrease in Personnel expenses.

Reclassification of trading securities
UBS decided at the end of October to reclassify securities from “trading balances in securities and precious metals” to “financial investments” with effect from 1 October 2008. The securities have been reclassified on the basis of their fair value on the reclassification date and are now accounted for on an amortized cost basis. An impairment charge of CHF 0.3 billion was recognized on the reclassified financial instruments. If the reclassification had not occurred, the impairment charge would not have been recognized but a trading loss of CHF 1.9 billion would have been recorded.



375

Financial information
UBS AG (Parent Bank)

Additional Income Statement Informationincome statement information

                   
Net Trading Income 
Net trading incomeNet trading income 
 For the year ended % change from  For the year ended % change from
CHF million 31.12.07 31.12.06 31.12.06  31.12.08 31.12.07 31.12.07 
Equities 7,867 5,761 37  3,930 7,867  (50)
Fixed income  (7,679) 1,114   (15,505)  (7,679)  (102)
Foreign exchange and other1
 2,579 2,592  (1) 2,109 2,579  (18)
Total 2,767 9,467  (71)  (9,466) 2,767 
1 Includes commodities trading income. The prior year amount has been adjusted to conform to the current year’s presentation.

Extraordinary Incomeincome and Expenses

expenses

Extraordinary income includes a gain from the sale of the Bank of China investment of approximately CHF 3,180360 million in 2008, whereas 2007 included a gain on the sale of UBS’s 20.7% stake in Julius Baer of CHF 3,180 million. Further, 2008 includes a release of provisions of CHF 72 million, a release on reserves on investments in 2007subsidiaries of CHF 490 million and a gain on the salewriteup of Motor-Columbusinvestments in associated com-

panies of CHF 67830 million in 2006. In addition, amounts(2007: CHF 409 million). Amounts in 2007 include a write-up of investments in associated companies of CHF 409 million (2006: CHF 223 million), releases of provisions for credit losses of CHF 11 million (2006: CHF 167 million). Amounts in 2007 further include a

release on reserves on own properties of CHF 824 million and for lapsed employee options of CHF 165 million.

In 2008, extraordinary expenses include CHF 478 million related to an overstatement of trading income in 2007. Extraordinary expenses in 2007 were immaterial. In 2006, Extraordinary expenses included CHF 202 million related to the under-accrual of unused vacation, sabbatical leave and service anniversary awards in prior years and a CHF 37 million loss related to the merger with a subsidiary.



129376

UBS AG (Parent Bank)
Notes to the Financial Statements

Financial information

Additional Balance Sheet Informationbalance sheet information

                                         
Allowances and Provisions 
Allowances and provisionsAllowances and provisions 
 Provisions Recoveries,      Provisions Recoveries,     
 applied in doubtful interest, New    applied in doubtful interest, New   
 accordance currency Provisions provisions    accordance currency Provisions provisions   
 Balance at with their translation released charged Balance at  Balance at with their translation released to charged to Balance at 
CHF million 31.12.06 specified purpose differences to income to income 31.12.07  31.12.07 specified purpose Reclassifications differences income income 31.12.08 
Default risks (credit and country risk) 1,298  (299) 48  (279) 268 1,036  1,036  (481) 3  (506) 1,504 1,556 
Trading portfolio risks 2,844 0 0 0 1,710 4,554 
Trading portfolio risks1
 4,554 10,304 14,858 
Litigation risks 293  (187)  (15)  (48) 115 158 
Litigation risks2
 158  (457)  (47)  (3)  (33) 1,460 1,078 
Operational risks 131  (84) 3  (44) 158 164  164  (203) 187  (280) 289 157 
Retirement benefit plans 106  (8)  (40) 0 49 107  107  (2)  (49)  (14) 52 94 
Deferred taxes 34 0  (14) 0 11 31  31 2 3 36 
Other1
 1,664  (1,091)  (3)  (88) 2,964 3,446 
Other3
 3,446  (2,672)  (68)  (244) 871 1,333 
Total allowances and provisions
 6,370  (1,669)  (21)  (459) 5,275 9,496  9,496  (3,815)  (47) 72  (1,077) 14,483 19,112 
Allowances deducted from assets 4,065 5,526  5,526 16,388 
Total provisions as per balance sheet
 2,305 3,970  3,970 2,724 
1 The increase was mainly in the area of Fixed Income, Currencies and Commodities (FICC) in the Investment Bank.  12 Includes the movements of provisions for auction rate securities (ARS): provisions have been assumed by UBS AG from a subsidiary of CHF 922 million (USD 865 million), new provisions of CHF 407 million have been expensed; the provisions have been partially applied, and the residual amount of CHF 968 million was reclassified to Negative replacement values. In addition a provision of CHF 917 million (USD 780 million) was made in connection with UBS’s US cross-border case. Refer to “Note 21 Provisions and litigations”).  3 The 31 December 20072008 balance mainly includes provisions for capitalization commitments of subsidiaries that have a capital deficit of approximately CHF 2,772592 million and provisions were applied for the writeoff of investments in subsidiaries of CHF 2,629 million. In addition, provisions for reinstatmentreinstatement costs for leasehold improvements, provisions for employee benefits (service anniversary awardsanniversaries and sabbatical leave) and other itemsleaves) are presentedmainly included in this line.
                                     
Statement of Shareholders’ Equity 
Statement of shareholders’ equityStatement of shareholders’ equity 
 Total  Total 
 shareholders’  shareholders' 
 General statutory General statutory equity (before  General statutory General statutory equity (before 
 reserves: reserves: Reserves for distribution  reserves: reserves: Reserves for own Other distribution 
CHF million Share capital Share premium Retained earnings own shares Other reserves of profit)  Share capital Share premium Retained earnings shares reserves of profit) 
As of 31.12.05 and 1.1.06
 871 6,246 1,681 10,562 26,792 46,152 
Par value reduction  (631) 35  (596)
Cancellation of own shares  (30)  (3,997)  (4,027)
Capital increase 1 34 35 
Increase in reserves 334  (334) 0 
Prior year dividend  (3,214)  (3,214)
Profit for the period 6,558 6,558 
Changes in reserves for own shares  (1,448) 1,448 0 
As of 31.12.06 and 1.1.07
 211 6,280 2,015 9,114 27,288 44,908  211 6,280 2,015 9,114 27,288 44,908 
Cancellation of own shares  (4)  (2,411)  (2,415)  (4)  (2,411)  (2,415)
Capital increase 23 23  23 23 
Increase in reserves 457  (457) 0  457  (457) 
Prior year dividend  (4,275)  (4,275)  (4,275)  (4,275)
Profit for the period  (4,251)  (4,251)
Profit / (loss) for the period  (4,251)  (4,251)
Changes in reserves for own shares 327  (327) 0  327  (327) 
As of 31.12.07
 207 6,303 2,472 9,441 15,567 33,990 
As of 31.12.07 and 1.1.08
 207 6,303 2,472 9,441 15,567 33,990 
Cancellation of own shares 
Capital increase1
 86 15,911  (15) 15,982 
Capital increase related to MCNs 16,223 16,223 
Increase in reserves 0 
Prior year dividend 0 
Profit / (loss) for the period  (36,489)  (36,489)
Changes in reserves for own shares  (6,564) 6,564 0 
Transfers2
  (11,901)  (2,472) 14,373 0 
As of 31.12.08
 293 26,536 0 2,877 0 29,706 
1 Includes stock dividend.2 Subject to approval by the Annual General Meeting on 15 April 2009.

130377

Financial information
UBS AG (Parent Bank)

                         
Share Capital 
Share capitalShare capital 
 Par value Ranking for dividends  Par value Ranking for dividends 
 No. of shares Capital in CHF No. of shares Capital in CHF  No. of shares Capital in CHF No. of shares Capital in CHF 
As of 31.12.08
 
Issued and paid up 2,932,580,549 293,258,055 2,932,580,549 293,258,055 
Conditional share capital 792,844,711 79,284,471 
As of 31.12.07
  
Issued and paid up 2,073,547,344 207,354,734 2,073,547,344 207,354,734  2,073,547,344 207,354,734 2,073,547,344 207,354,734 
Conditional share capital 150,138,634 15,013,863  150,138,634 15,013,863 
As of 31.12.06
 
Issued and paid up 2,105,273,286 210,527,329 2,082,673,286 208,267,329 
Conditional share capital 151,437,410 15,143,741 

On 31 December 2007,2008, a maximum of 144,338100,415 shares couldcan be issued against the future exercise of options from former PaineWebber employee option plans. These shares are shown as conditional share capital in the table above. In addition, duringUBS AG (Parent Bank) disclosure.

During 2006, shareholders approved the creation of conditional capital of up to a maximum of 150 million shares to fund UBS’s employee share option programs. As of 31 DecemberIn 2007, and 31 December 2006, 5,704 shares and zero shares, respectively, havehad been issued under this program. The remaining conditional capital to fund UBS’s employee share option programs amounts to 149,994,296 shares.

On 27 February 2008 the extraordinary general meeting of shareholders approved the creation of a maximum of CHF 10,370,000 in authorized capital, allowing the distribution of a stock dividend. Additionally, on 23 April 2008, the Annual General Meeting of shareholders (AGM) approved a capital increase that resulted in the issuance of 760,295,181 fully paid registered shares. In addition, during 2008, shareholders approved the creation of conditional capital in a maximum amount of 642,750,000 shares for the two issuances of mandatory convertible notes (MCNs). For further information, refer to Note 26 to the financial statements.


131378

UBS AG (Parent Bank)
Notes to the Financial Statements

Financial information

Off-Balance SheetOff-balance sheet and Other Informationother information

                                     
Assets Pledged or Assigned as Security for Own Obligations, Assets Subject to Reservation of Title 
Assets pledged or assigned as security for own obligations and assets subject to reservation of titleAssets pledged or assigned as security for own obligations and assets subject to reservation of title 
 31.12.07 31.12.06 Change in %  31.12.08 31.12.07 Change in %
CHF million Book value Effective liability Book value Effective liability Book value Effective liability  Book value Effective liability Book value Effective liability Book value Effective liability 
Money market paper 12,792 2,372 37,471 9,035  (66)  (74) 7,429 1,300 12,792 2,372  (42)  (45)
Mortgage loans 200 199 81 38 147 424  3,699 2,418 200 199 
Securities 99,821 49,397 89,869 41,306 11 20  50,223 37,083 99,821 49,397  (50)  (25)
Other 8,628 0 5,432 0 59  8,149 0 8,628  (6) 
Total
 121,441 51,968 132,853 50,379  (9) 3  69,500 40,801 121,441 51,968  (43)  (21)

Financial assets are mainly pledged in securities borrowing and lending transactions, in repurchase and reverse repurchase transactions, under collateralized credit lines with central

banks, against loans from mortgage institutions, in connection with derivative transactions and for security deposits relating to stock exchange and clearinghouse memberships.



                   
Commitments and Contingent Liabilities 
Commitments and contingent liabilitiesCommitments and contingent liabilities 
 % change from  % change from 
CHF million 31.12.07 31.12.06 31.12.06  31.12.08 31.12.07 31.12.07 
Contingent liabilities 223,105 189,627 18  286,451 223,105 28 
Irrevocable commitments 104,784 115,364  (9) 68,660 104,784  (34)
Liabilities for calls on shares and other equities 145 125 16  145 145 0 
Confirmed credits 2,630 2,133 23  2,079 2,630  (21)

UBS AG is jointly and severally liable for the value added tax (VAT) liability of Swiss subsidiaries that belong to its VAT group.

UBS has an obligation to deliver 100 million ordinary UBS shares, subject to anti dilution adjustments, in exchange for

payment of the par value of these shares, if the SNB incurs a loss on its loan provided to the SNB StabFund upon termination of this fund. If UBS would be required to deliver those shares, UBS intends to settle this obligation using conditional capital (subject to shareholders’ approval).



                                     
Derivative Instruments 
Derivative instrumentsDerivative instruments 
 31.12.07 31.12.06  31.12.08 31.12.07 
 Notional Notional  Notional Notional 
 amount amount  amount amount 
CHF million PRV1 NRV2 CHF bn PRV1 NRV2 CHF bn  PRV1 NRV2 CHF bn PRV1 NRV2 CHF bn 
Interest rate contracts 167,334 164,325 33,545 176,765 175,394 29,558  377,307 370,346 36,476 167,334 164,325 33,545 
Credit derivative contracts 111,898 116,128 5,451 29,026 31,781 2,824  202,357 187,216 3,712 111,898 116,128 5,451 
Foreign exchange contracts 99,494 99,613 7,725 76,459 70,899 6,134  222,178 229,656 6,005 99,494 99,613 7,725 
Precious metal contracts 6,363 6,569 147 4,472 4,168 121  5,804 5,697 108 6,363 6,569 147 
Equity / Index contracts 30,400 49,985 760 22,437 39,016 745  28,502 36,208 473 30,400 49,985 760 
Commodities contracts, excluding precious metals contracts 21,181 21,251 484 11,459 11,017 359  27,055 25,387 160 21,181 21,251 484 
Total derivative instruments 436,670 457,871 48,112 320,618 332,275 39,741  863,203 854,510 46,934 436,670 457,871 48,112 
Replacement value netting 312,426 312,426 182,396 182,396  661,402 661,402 312,426 312,426 
Replacement values after netting 124,244 145,445 138,222 149,879  201,801 193,108 124,244 145,445 
1 PRV: Positive replacement value.  2 NRV: Negative replacement value.

132379

             
Fiduciary Transactions 
          % change from 
CHF million 31.12.07  31.12.06  31.12.06 
 
Deposits:            
 
with other banks  46,074   41,075   12 
 
with Group banks  2,186   1,650   32 
 
Total
  48,260   42,725   13 
 
             
Due to UBS Pension Plans 
          % change from 
CHF million 31.12.07  31.12.06  31.12.06 
 
Due to UBS pension plans and UBS debt instruments held by pension plans  443   790   (51)
 
Securities borrowed from pension plans  9,379   7,169   31 
 

Personnel

Parent Bank personnel was 45,102 on 31 December 2007 and 42,443 on 31 December 2006.

133

Financial information
UBS AG (Parent Bank)
Notes to the Financial Statements

             
Fiduciary transactions 
          % change from 
CHF million 31.12.08  31.12.07  31.12.07 
 
Deposits:            
 
with other banks  36,452   46,074   (21)
 
with group banks  2,738   2,186   25 
 
Total
  39,190   48,260   (19)
 
             
Due to UBS pension plans 
  For the year ended  % change from 
CHF million 31.12.08  31.12.07  31.12.07 
 
Due to UBS pension plans and UBS debt instruments held by pension plans  876   443   98 
 
Securities borrowed from pension plans  0   9,379   (100)
 

Personnel

Parent Bank personnel was 40,998 on 31 December 2008 and 45,102 on 31 December 2007.

Significant shareholders

Chase Nominees Ltd., London, acting in its capacity as a nominee for other investors, was registered with 7.19% of all shares issued on 31 December 2008, compared with 7.99% at year-end 2007 and 8.81% at year-end 2006. DTC (Cede & Co.), New York, The Depository Trust Company,

a US securities clearing organization, was registered as a shareholder for a large number of beneficial owners with 9.89% of all shares issued on 31 December 2008 (14.15% on 31 December 2007).



380

Financial information

Corporate Governancegovernance and Compensation Reportcompensation report

                                 
Compensation details and additional information for executive members of the Board of Directors1 
CHF, except where indicateda 
              Annual incentive  Discretionary      Contributions    
          Annual incentive  award (shares;  award (options;  Benefits  to retirement    
Name, function2 For the year  Base salary  award (cash)  fair value)b  fair value)c  in kindd  benefits planse  Total 
 
Marcel Ospel, Chairman  2007   2,000,000   0   0   0   307,310   261,069   2,568,379 
 
Stephan Haeringer, Executive Vice Chairman  2007   1,500,000   0   0   0   111,808   261,069   1,872,877 
 
Marco Suter, Executive Vice Chairman  2007   1,125,000   0   0   0   70,820   155,252   1,351,072 
 
                                 
Compensation details and additional information for executive members of the BoD 
CHF, except where indicateda 
              Annual incentive  Discretionary      Contributions    
   For the     Annual incentive  award (shares  award (options  Benefits  to retirement    
Name, function1  year ended Base salary  award (cash)  – fair value)b  – fair value)c  in kindd  benefits planse  Total 
 
Peter Kurer, Chairman  2008   1,333,333   0   0   0   58,267   174,047   1,565,647 
   
   2007                             
 
Marcel Ospel, Chairman  2008   666,667   0   0   0   80,755   87,023   834,445 
   
   2007   2,000,000   0   0   0   307,310   261,069   2,568,379 
 
Stephan Haeringer,  2008   1,125,000   0   0   0   108,846   195,802   1,429,648 
   
Executive Vice Chairman  2007   1,500,000   0   0   0   111,808   261,069   1,872,877 
 
Marco Suter,  2008                             
   
Executive Vice Chairman  2007   1,125,000   0   0   0   70,820   155,252   1,351,072 
 
1 Individual compensation figures of 2008: Peter Kurer was the previous year will be disclosed from 2008 onwards.  2 2007:only executive member in office on 31 December; Marcel Ospel did not stand for re-election in April 2008 and Stephan Haeringer stepped down during the year as a member of the BoD. Both their payments are executive memberspro-rata for the four respective nine-month periods served in office as of 31 December 2007;their functions. 2007: Marco Suter stepped down during the year as a member of the Board of Directors.BoD. His 2007 payment iswas pro-rata for the nine monthsnine-month period served as executiveExecutive Vice Chairman.
                                      
Remuneration details and additional information for non-executive members of the Board of Directors1 
CHF, except where indicateda 
           Corporate For the                 
  Audit Compensation Nominating Responsibility period AGM    Committee Benefits Additional    Share Number of 
Name, function2 Committee Committee Committee Committee 2007 / 2008 Base fee retainer in kind payments Total percentage shares3 
 
Ernesto Bertarelli, member        M     2007/2008  325,000  150,000  0  0  475,000  100  14,677 
 
Gabrielle Kaufmann-Kohler, member        M  M  2007/2008  325,000  250,000  0  0  575,000  50  9,349 
 
Sergio Marchionne, member     M        2007/2008  325,000  200,000  0  0  525,000  100  16,226 
 
Rolf A. Meyer, member  M  C        2007/2008  325,000  650,000  0  0  975,000  50  15,853 
 
Helmut Panke, member        C     2007/2008  325,000  250,000  0  0  575,000  50  9,349 
 
Peter Spuhler, member     M        2007/2008  325,000  200,000  0  0  525,000  100  16,226 
 
Peter Voser, member  M           2007/2008  325,000  300,000  0  0  625,000  50  10,162 
 
Lawrence A.Weinbach, member  C           2007/2008  325,000  600,000  0  0  925,000  50  15,040 
 
Joerg Wolle, member        M     2007/2008  325,000  150,000  0  0  475,000  100  14,677 
 

Legend:C = Chairman of the respective committee; M = Member of the respective committee


1 Individual compensation figures for the previous period will be disclosed from 2008 onwards.  2 There are nine non-executive members of the Board of Directors in office as of 31 December 2007. Sergio Marchionne was appointed to the Board of Directors at the 2007 annual general meeting.  3 Number of shares is reduced in case of the 100% election to deduct social security contribution. All remuneration payments are submitted to social security contribution / taxes at source.
         
Total payments to all members of the Board of Directors1 
CHF, except where indicateda For the year2  Total 
 
Aggregate of all (executive and non-executive) members of the Board of Directors  2007   11,467,328 
 
1 The previous year will be disclosed from 2008 onwards.  2 For non-executive members of the Board of Directors: period AGM 2007 / 2008.

134

                                 
Total compensation for all members of the Group Executive Board1 
CHF, except where indicateda 
              Annual  Discretionary      Contributions    
          Annual  incentive  award      to retirement    
          incentive  award (shares;  (options;  Benefits in  benefits    
Name, function For the year  Base salary  award (cash)  fair value)b  fair value)c  kindd  planse  Total 
 
Rory Tapner, Chairman and Chief Executive Officer Asia Pacific (highest-paid)  2007   1,291,960   4,501,900   4,501,904   0   10,256   900   10,306,920 
 
Aggregate of all members of the Group Executive Board (GEB) who were in office as of 31 December 20072
  2007   6,995,885   15,305,667   15,305,708   0   532,706   912,974   39,052,939 
 
Aggregate of all members of the GEB who stepped down during 20073
  2007   2,511,947   23,042,376   6,750,036   0   406,567   275,635   32,986,561 
 
1 Compensation figures for the previous year will be disclosed from 2008 onwards.  2 Number and distribution of senior executives: eight Group Executive Board members in office as of 31 December 2007, including three months for both Marco Suter and Joseph Scoby.  3 Takes into the account the period executives were active members of the Group Executive Board: nine months in office for Huw Jenkins and Clive Standish and six months for Peter Wuffli.
             
Compensation paid to former members of the Board of Directors and Group Executive Board1 
CHF, except where indicateda 
Name, function Compensation  Benefits in kind  Total 
 
Alberto Togni, former member of the Board of Directors (BoD)  318,401   502,478   820,879 
 
Philippe de Weck, former member of the BoD (Union Bank of Switzerland)  0   129,701   129,701 
 
Robert Studer, former member of the BoD (Union Bank of Switzerland)  0   260,162   260,162 
 
Georges Blum, former member of the BoD (Swiss Bank Corporation)  0   90,803   90,803 
 
Aggregate of all former members of the Group Executive Board (GEB)2
  0   257,791   257,791 
 
Aggregate of all former members of the BoD and GEB  318,401   1,240,935   1,559,336 
 
1 Compensation or remuneration that is connected with the former members’ activity on the Board of Directors or Group Executive Board, or that is not at market conditions.  2 Includes four former Group Executive Board members.

Explanations of compensation details for executive members of the BoD and members of the GEB:
a)a. Local currencies are converted into CHF using the exchange rates as detailed in Note 37“Note 39 Currency translation rates” in the financial statements ofFinancial Statements 2007. this report.
b)b. Values per share at grant: CHF 36.15 / USD 33.55 for shares granted in 2008 related to the performance year 2007. CHF prices are the average price of UBS shares at virt-xSWX Europe over the last ten10 trading days of February, and USD prices are the average price of UBS shares at the New York Stock Exchange (NYSE)NYSE over the last ten10 trading days of February in the year in which they are granted. Share awards
c.No options were granted in this report are disclosed at fair value2009 for the performance year for which they were granted. This differs from the recognition of share-based compensation expense in UBS’s financial statements, which is based on International Financial Reporting Standards (IFRS). Until 2007, IFRS required the recognition of the fair value of share-based payments to employees as a compensation expense over the service period (typically equivalent to the vesting period).2008.
c)For the performance year 2007, no options were granted in 2008. In line with the “accrual principle” outlined by the SWX Swiss Exchange (SWX) in September 2007, UBS has amended its reporting of basic stock option grants in this report to align them with the performance year for which they were awarded, rather than show them in the year in which they were actually granted. According to UBS’s previous disclosure, total compensation of the executive members of the Board of Directors (BoD) and the Group Executive Board (GEB) would have been down by 60% compared to 2006, and the Chairman of the BoD’s compensation would have decreased 81%. This presentation differs from previous years, where options were included in the grant year. It also differs from the recognition of share-based compensation expense in UBS’s financial statements (see Note 30 inFinancial Statements 2007).
d)d. Benefits in kind:kind – car leasing, company car allowance, staff discount on banking products and services, health and welfare benefits and general expense allowances – are all valued at market price.
e. 
e)In 2007, the Swiss pension plan converted to a Swiss defined contribution model. Swiss senior executives participate in the same pension plan as all other employees. Under this plan, employees receive a company contribution to the plan which covers compensation up to CHF 795,600.820,800. The retirement benefits consist of a pension, a bridging pension and a one-off payout of accumulated capital from the bonus plan.capital. Employees must also contribute to the plan. This figure excludes the mandatory employer’s social security contributions (AHV, ALV) but includes the portion attributed to the employer’s portion of the legal BVG requirement. The employee contribution is included in the base salary and annual incentive award components.
In both the US and the UK, senior executives participate in the same plans as all other employees. In the US there are two different plans, one of which operates on a cash balance basis, andwhich entitles the participant to receive a company contribution based on compensation limited to USD 250,000. This plan is no longer available to new hires. US senior executives may also participate in the UBS 401K defined401K-defined contribution plan (open to all employees), which provides a company matching contribution for employee contributions. In the UK, senior executives participate in either the principal pension plan, which is limited to an earnings cap of GBP 100,000, or a grandfathered defined benefit plan which provides a pension on retirement based on career average base salary (uncapped).

135381

Financial information
UBS AG (Parent Bank)

                                                         
Remuneration details and additional information for independent members of the BoD 
CHF, except where indicateda 
                           For the                         
      HR &  Governance &  Corporate           period                     Share    
  Audit  compensation  nominating  responsibility  Risk  Strategy   AGM to     Committee  Benefits  Additional      percent-  Number of 
Name, function1 committee  committee  committee  committee  committee  committee   AGM Base fee  retainer(s)  in kind  payments  Total  age3  shares4,5 
        
Ernesto Bertarelli,     M M              2008/2009   325,000   200,000   0   0   525,000   100   51,596 
        
member         M              2007/2008   325,000   150,000   0   0   475,000   100   14,677 
        
Sally Bott,     M     M          2008/2009   162,500   75,000   0   0   237,500   50   12,280 
        
member2
                          2007/2008                             
        
Rainer-Marc Frey,                 M M  2008/2009   162,500   150,000   0   0   312,500   50   16,158 
        
member2
                          2007/2008                             
        
Bruno Gehrig, M                      2008/2009   162,500   100,000   0   0   262,500   50   13,572 
        
member2
                          2007/2008                             
        
Gabrielle Kaufmann-         C M          2008/2009   325,000   250,000   0   0   575,000   50   29,731 
        
Kohler, member         M M          2007/2008   325,000   250,000   0   0   575,000   50   9,349 
        
Sergio Marchionne,         M         M  2008/2009   325,000   200,000   0   250,0006  775,000   100   76,228 
        
senior independent director, vice chairman     M                  2007/2008   325,000   200,000   0   0   525,000   100   16,226 
        
Rolf A. Meyer, M M                  2008/2009   162,500   150,000   0   0   312,500   50   16,158 
        
member2
 M C                  2007/2008   325,000   650,000   0   0   975,000   50   15,853 
        
Helmut Panke,     M         M      2008/2009   325,000   300,000   0   0   625,000   50   32,316 
        
member         C              2007/2008   325,000   250,000   0   0   575,000   50   9,349 
        
William G. Parrett, M                      2008/2009   162,500   100,000   0   0   262,500   50   13,572 
        
member2
                          2007/2008                             
        
David Sidwell,             M C      2008/2009   325,000   450,000   0   0   775,000   50   40,072 
        
member                          2007/2008                             
        
Peter Spuhler,                          2008/2009   162,500   0   0   0   162,500   100   15,945 
        
member2
     M                  2007/2008   325,000   200,000   0   0   525,000   100   16,226 
        
Peter R. Voser, C                 M  2008/2009   325,000   400,000   0   0   725,000   50   37,487 
        
member M                      2007/2008   325,000   300,000   0   0   625,000   50   10,162 
        
Lawrence A. Weinbach, M                      2008/2009   162,500   100,000   0   0   262,500   50   13,572 
        
member2
 C                      2007/2008   325,000   600,000   0   0   925,000   50   15,040 
        
Joerg Wolle,     C M              2008/2009   325,000   300,000   0   0   625,000   50   32,316 
        
member         M              2007/2008   325,000   150,000   0   0   475,000   100   14,677 
        
Total 2008
                                              6,437,500         
 
Total 2007                      5,675,000         
 
Legend: C = Chairman of the respective committee; M = Member of the respective committee
1 There were 11 independent BoD members in office on 31 December 2008. David Sidwell was appointed at the AGM on 23 April 2008 and Rolf A. Meyer, Peter Spuhler and Lawrence A. Weinbach stepped down from the BoD at the EGM on 2 October 2008. Sally Bott, Rainer-Marc Frey, Bruno Gehrig and Bill G. Parrett were appointed at the EGM on 2 October 2008.  2 Remunerations is for six months only, as such members either stepped down or were appointed on 2 October 2008.  3 Fees are paid 50% in cash and 50% in restricted UBS shares. However, independent BoD members can elect to have 100% of their remuneration paid in restricted UBS shares.  4 For 2008, shares valued at CHF 11.38 (average price of UBS shares at SWX Europe over the last 10 trading days of February 2009), attributed with a price discount of 15%, discount price CHF 9.67. The shares are blocked for four years. For 2007, shares valued at CHF 36.15 (average price of UBS shares at SWX Europe over the last 10 trading days of February 2008), attributed with a price discount of 15%, discount price CHF 30.75. The shares are blocked for four years.  5 Number of shares is reduced in case of the 100% election to deduct social security contribution. All remuneration payments are submitted to social security contribution/taxes at source.  6 This payment is associated with the newly created function of a senior independent director.

NotesIn addition, one-off cash payments were made to the Financial Statementschair of the risk committee (CHF 500,000), the governance and nominating committee (CHF 300,000) and the human resources and compensation committee (CHF 200,000). These payments reflect the substantial workload of setting up the new risk committee, and expanding the mandate of the governance and nominating committee and the human resources and compensation committee.

382

Financial information
                            
Share and option ownership of members of the Board of Directors as of 31 December 2007 
                  Potentially       
                  conferred     Type and 
      Number of  Voting rights  Number of  voting rights     quantity 
Name, function1 For the year  shares held  in %  options held  in %2     of options3 
 
                       xii:  390,000 
                       xiv:  300,000 
Marcel Ospel, Chairman  2007   769,483   0.068   940,000   0.083   xv:  250,000 
 
                       vii:  80,000 
                       ix:  80,000 
                       x:  80,000 
                       xii:  120,000 
                       xiv:  100,000 
Stephan Haeringer, Executive Vice Chairman  2007   487,053   0.043   535,000   0.047   xv:  75,000 
 
Ernesto Bertarelli, member  2007   48,411   0.004   0          0 
 
Gabrielle Kaufmann-Kohler, member  2007   3,303   0.000   0          0 
 
Sergio Marchionne, member  2007   45,800   0.004   0          0 
 
Rolf A. Meyer, member  2007   50,562   0.004   0          0 
 
Helmut Panke, member  2007   13,206   0.001   0          0 
 
Peter Spuhler, member  2007   67,092   0.006   0          0 
 
Peter Voser, member  2007   11,580   0.001   0          0 
 
Lawrence A. Weinbach, member  2007   45,520   0.004   0          0 
 
Joerg Wolle, member  2007   7,709   0.001   0          0 
 
         
Total payments to all members of the BoD
 
  For the    
CHF, except where indicateda year ended  Total 
 
Aggregate of all members of the BoD 2008    10,267,240 
 
Aggregate of all members of the BoD 2007    11,467,328 
 
                                 
Total compensation for all members of the GEB 
CHF, except where indicateda 
              Annual              
              incentive  Discretionary      Contributions    
          Annual  award  award      to retirement    
  For the      incentive  (shares;  (options;  Benefits  benefits    
Name, function year ended  Base salary  award (cash)  fair value)b  fair value)c  in kindd  planse  Total 
 
Marcel Rohner, Group Chief Executive Officer (highest-paid) 2008    1,500,000   0   0   0   161,768   152,934   1,814,702 
 
Rory Tapner, Chairman & CEO Asia Pacific (highest-paid) 2007    1,291,960   4,501,900   4,501,904   0   10,256   900   10,306,920 
 
Aggregate of all members of the GEB who were in office on 31 December 20081
 2008    7,815,943   0   0   0   457,652   817,315   9,090,911 
 
Aggregate of all members of the GEB who were in office on 31 December 20071
 2007    6,995,885   15,305,667   15,305,708   0   532,706   912,974   39,052,939 
 
Aggregate of all members of the GEB who stepped down during 20082
 2008    1,614,871   0   0   0   234,838   258,423   2,108,132 
 
Aggregate of all members of the GEB who stepped down during 20072
 2007    2,511,947   23,042,376   6,750,036   0   406,567   275,635   32,986,561 
 
1 Number and distribution to senior executives: 2008: 12 GEB members in office on 31 December. 2007: eight GEB members in office on 31 December.  2 Number and distribution of senior executives: 2008: includes four months in office as a GEB member for Peter Kurer, eight months in office for Marco Suter and 10 months for Joe Scoby. 2007: includes nine months in office for Huw Jenkins and Clive Standish and six months for Peter Wuffli.

383

Financial information
UBS AG (Parent Bank)

                           
Share and option ownership of members of the BoD at 31 December 2007/2008
 
  For the  Number of  Voting rights  Number of  Potentially conferred  Type and quantity 
Name, function1 year ended  shares held  in %  options held  voting rights in %2  options3 
 
Peter Kurer, Chairman 2008    416,088   0.025   372,995   0.022  xxx:  85 256 
                      xxxv:  95 913 
                      xli:  95 913 
                      xlv:  95 913 
   
  2007    292,762   0.026   350,000   0.031  xxx:  80 000 
                      xxxv:  90 000 
                      xli:  90 000 
                      xlv:  90 000 
 
Sergio Marchionne, 2008    87,926   0.005   0   0.000       
   
senior independent director, vice chairman 2007    45,800   0.004   0   0.000       
 
Ernesto Bertarelli, member 2008    89,434   0.005   0   0.000       
   
  2007    48,411   0.004   0   0.000       
 
Sally Bott, member 2008    1   0.000   0   0.000       
   
  2007                        
 
Rainer-Marc Frey, member 2008    0   0.000   0   0.000       
   
  2007                        
 
Bruno Gehrig, member 2008    3,000   0.000   0   0.000       
   
  2007                        
 
Gabrielle Kaufmann-Kohler, member 2008    18,713   0.001   0   0.000       
   
  2007    3,303   0.000   0   0.000       
 
Helmut Panke, member 2008    31,971   0.002   0   0.000       
   
  2007    13,206   0.001   0   0.000       
 
William G. Parrett, member 2008    4,000   0.000   0   0.000       
   
  2007                        
 
David Sidwell, member 2008    1   0.000   0   0.000       
   
  2007                        
 
Peter R. Voser, member 2008    30,823   0.002   0   0.000       
   
  2007    11,580   0.001   0   0.000       
 
Joerg Wolle, member 2008    41,509   0.002   0   0.000       
   
  2007    7,709   0.001   0   0.000       
 
1 This table includes vested, unvested, blocked and unblocked shares and options held asby members of 31 December 2007.  the BoD including related parties.  2 No conversion rights are outstanding.  3 For details Refer to “Note 31 Equity participation and other compensation plans” in the financial statements of option plans and terms, see the table on page 138.this report for more information.

136384

Financial information
                            
Share and option ownership of members of the Group Executive Board as of 31 December 2007 
                  Potentially     Type and 
      Number of  Voting rights  Number of  conferred voting     quantity 
Name, function1 For the year  shares held  in %  options held  rights in %2     of options3 
 
                       ix:  30,000 
                       x:  200,000 
                       xii:  260,000 
Marcel Rohner, Group Chief Executive Officer (CEO) and                      xiv:  300,000 
Chairman & CEO Investment Bank  2007   501,846   0.044   990,000   0.088   xv:  200,000 
 
                       i:  52,560 
                       iv:  71,672 
                       vi:  120,000 
                       viii:  120,000 
                       xi:  160,000 
                       xiii:  190,000 
John A. Fraser, Chairman and                      xiv:  200,000 
CEO Global Asset Management  2007   461,764   0.041   1,074,232   0.095   xv:  160,000 
 
                       x:  80,000 
                       xii:  90,000 
                       xiv:  90,000 
Peter Kurer, Group General Counsel  2007   292,762   0.026   350,000   0.031   xv:  90,000 
 
                       ii:  4,000 
                       iv:  57,590 
                       v:  40,000 
                       viii:  100,000 
                       xi:  133,092 
                       xiii:  52,000 
                       xiv:  66,000 
Joseph Scoby, Group Chief Risk Officer  2007   509,571   0.045   533,682   0.047   xv:  81,000 
 
                       vii:  30,000 
                       x:  60,000 
                       xii:  80,000 
                       xiv:  90,000 
Walter Stuerzinger, Chief Operating Officer Corporate Center  2007   209,442   0.019   350,000   0.031   xv:  90,000 
 
                       x:  60,000 
                       xii:  120,000 
                       xiv:  100,000 
Marco Suter, Group Chief Financial Officer  2007   235,757   0.021   355,000   0.031   xv:  75,000 
 
                       iii:  264,486 
                       vi:  200,000 
                       ix:  200,000 
                       x:  160,000 
                       xii:  150,000 
                       xiv:  160,000 
Rory Tapner, Chairman and CEO Asia Pacific  2007   514,365   0.046   1,294,486   0.115   xv:  160,000 
 
                       vi:  50,000 
                       xii:  95,976 
Raoul Weil, Chairman and                      xiv:  120,000 
CEO Global Wealth Management & Business Banking  2007   212,934   0.019   405,752   0.036   xv:  139,776 
 
                 
Compensation paid to former members of the BoD and GEB1
 
CHF, except where indicateda 
  For the      Benefits in    
Name, function year ended  Compensation  kind  Total 
 
Georges Blum, former member of the BoD 2008        101,579   101,579 
   
(Swiss Bank Corporation) 2007        90,803   90,803 
 
Franz Galliker, former member of the BoD 2008        69,596   69,596 
   
(Swiss Bank Corporation) 2007        62,174   62,174 
 
Walter G. Frehner, former member of the BoD 2008        74,663   74,663 
   
(Swiss Bank Corporation) 2007        73,061   73,061 
 
Hans (Liliane) Strasser, former member of the BoD 2008        32,673   32,673 
   
(Swiss Bank Corporation) 2007        42,311   42,311 
 
Robert Studer, former member of the BoD 2008        126,208   126,208 
   
(Union Bank of Switzerland) 2007        260,162   260,162 
 
Alberto Togni, former member of the BoD 2008    318,461   427,949   746,410 
   
(UBS) 2007    318,401   502,478   820,879 
 
Philippe de Weck, former member of the BoD 2008        109,703   109,703 
   
(Union Bank of Switzerland) 2007        129,701   129,701 
 
Aggregate of all former members of the GEB2
 2008    0   171,180   171,180 
   
  2007    0   257,791   257,791 
 
Aggregate of all former members of the BoD and GEB 2008    318,461   1,113,551   1,432,012 
   
  2007    318,401   1,418,481   1,736,882 
 
1 Compensation or remuneration that is connected with the former members’ activity on the BoD or GEB, or that is not at market conditions.  2 Includes two former GEB members.

385

Financial information
UBS AG (Parent Bank)

                           
Share and option ownership of members of the GEB at 31 December 2007/2008
 
  For the  Number of  Voting rights  Number of  Potentially conferred  Type and quantity 
Name, function1 year ended  shares held  in %  options held  voting rights in %2  of options3 
 
Marcel Rohner, 2008    711,366   0.042   1,055,043   0.063  xxv:  31,971 
Group Chief Executive Officer                     xxx:  213,140 
                      xxxv:  277,082 
                      xli:  319,710 
                      xlv:  213,140 
   
  2007    501,846   0.044   990,000   0.088  xxv:  30,000 
                      xxx:  200,000 
                      xxxv:  260,000 
                      xli:  300,000 
                      xlv:  200,000 
 
John Cryan, 2008    235,929   0.014   382,673   0.023  v:  21,362 
Group Chief Financial Officer                     vi:  20,731 
                      vii:  20,725 
                      xii:  5,454 
                      xiii:  5,294 
                      xiv:  5,292 
                      xvii:  23,626 
                      xviii:  23,620 
                      xix:  23,612 
                      xxi:  5,526 
                      xxii:  5,524 
                      xxiii:  5,524 
                      xxvii:  17,072 
                      xxviii:  17,068 
                      xxix:  17,063 
             ��        xxxii:  14,210 
                      xxxiii:  14,210 
                      xxxiv:  14,207 
                      xxxviii:  5,330 
                      xxxix:  5,328 
                      xl:  5,326 
                      xlii:  17,762 
                      xliii:  17,762 
                      xliv:  17,760 
                      xlvi:  53,285 
   
  2007                        
 
Markus U. Diethelm, 2008    112,245   0.007   0   0.000     0 
   
Group General Counsel 2007                        
 
John A. Fraser, 2008    583,812   0.035   1,144,808   0.068  i:  56,013 
Chairman and CEO                     viii:  76,380 
Global Asset Management                     xv:  127,884 
                      xx:  127,884 
                      xxxi:  170,512 
                      xxxvi:  202,483 
                      xli:  213,140 
                      xlv:  170,512 
   
  2007    461,764   0.041   1,074,232   0.095  i:  52,560 
                      viii:  71,672 
                      xv:  120,000 
                      xx:  120,000 
                      xxxi:  160,000 
                      xxxvi:  190,000 
                      xli:  200,000 
                      xlv:  160,000 
 
Marten Hoekstra, 2008    245,397   0.015   684,168   0.041  ii:  8,679 
Deputy CEO Global Wealth                     iii:  8,421 
Management & Business Banking                     iv:  8,421 
and Head Wealth Management US                     ix:  8,823 
                      x:  12,825 
                      xi:  8,561 
                      xxvi:  42,628 
                      xxxi:  53,285 
                      xxxvi:  53,285 
                      xli:  85,256 
                      xlv:  154,931 
                      xlvii:  239,053 
   
  2007                        
 
Jerker Johansson, 2008    521,544   0.031   753,410   0.045  xlviii:  745,990 
Chairman and CEO Investment Bank                     xlix:  7,420 
   
  2007                        
 
1 This table includes vested and unvested shares and options held asby members of 31 December 2007.  the GEB including related parties.  2 No conversion rights are outstanding.  3 For details Refer to “Note 31 Equity participation and other compensation plans” in the financial statements of option plans and terms, see the table on page 138.this report for more information.

137386

UBS AG (Parent Bank)
Notes to the Financial Statements

Financial information

                           
Share and option ownership of members of the GEB on 31 December 2007/2008 (continued)
 
  For the  Number of  Voting rights  Number of  Potentially conferred  Type and quantity 
Name, function1 year ended  shares held  in %  options held  voting rights in %2  of options3 
 
Philip J. Lofts, 2008    186,434   0.011   577,723   0.034  v:  11,445 
Group Chief Risk Officer                     vi:  11,104 
                      vii:  11,098 
                      xii:  1,240 
                      xiii:  5,464 
                      xiv:  1,199 
                      xvii:  9,985 
                      xviii:  9,980 
                      xix:  9,974 
                      xxi:  1,833 
                      xxii:  1,830 
                      xxiii:  1,830 
                      xxvii:  35,524 
                      xxviii:  35,524 
                      xxix:  35,521 
                      xxxv:  117,090 
                      xli:  117,227 
                      xlv:  85,256 
                      xlvii:  74,599 
   
  2007                        
 
Walter Stuerzinger, 2008    296,886   0.018   372,995   0.022  xvi:  31,971 
Chief Operating Officer,                     xxx:  63,942 
Corporate Center                     xxxv:  85,256 
                      xli:  95,913 
                      xlv:  95,913 
   
  2007    209,442   0.019   350,000   0.031  xvi:  30,000 
                      xxx:  60,000 
                      xxxv:  80,000 
                      xli:  90,000 
                      xlv:  90,000 
 
Rory Tapner, 2008    827,809   0.049   1,379,533   0.082  vii:  281,862 
Chairman and CEO Asia Pacific                     xv:  213,140 
                      xxiv:  213,140 
                      xxx:  170,512 
                      xxxv:  159,855 
                      xli:  170,512 
                      xlv:  170,512 
   
  2007    514,365   0.046   1,294,486   0.115  vii:  264,486 
                      xv:  200,000 
                      xxiv:  200,000 
                      xxx:  160,000 
                      xxxv:  150,000 
                      xli:  160,000 
                      xlv:  160,000 
 
Raoul Weil, 2008    315,698   0.019   432,409   0.026  xv:  53,285 
Chairman and CEO Global Wealth                     xxxv:  102,281 
Management & Business Banking,                     xli:  127,884 
relinquished his duties on                     xlv:  148,959 
   
an interim basis 2007    212,934   0.019   405,752   0.036  xv:  50,000 
                      xxxv:  95,976 
                      xli:  120,000 
                      xlv:  139,776 
 
Alexander Wilmot-Sitwell, 2008    304,655   0.018   353,807   0.021  xxxiv:  53,282 
Chairman and CEO, UBS Group EMEA                     xxxvii:  2,130 
and Joint Global Head IB Department                     xxxviii:  35,524 
                      xxxix:  35,524 
                      xl:  35,521 
                      xlv:  106,570 
                      xlvii:  85,256 
   
  2007                        
 
Robert Wolf, 2008    827,307   0.049   948,473   0.056  xx:  287,739 
Chairman and CEO, UBS Group                     xxxi:  213,140 
Americas / President Investment Bank                     xxxvi:  127,884 
                      xli:  106,570 
                      xlv:  106,570 
                      xlvii:  106,570 
   
  2007                        
 
Vested1 This table includes vested and unvested shares and options held by executive members of the Board of Directors
and by members of the Group Executive Board asGEB including related parties.  2 No conversion rights are outstanding.  3 Refer to “Note 31 Equity participation and other compensation plans” in the financial statements of 31 December 2007
                         
  
Type Number of options  Year of grant  Vesting date  Expiry date  Subscription ratio  Strike price 
 
i  52,560   2001   20/02/2004   20/02/2009   1:1  CHF 50.00 
 
ii  4,000   2002   28/02/2005   28/02/2012   1:1  USD 23.12 
 
iii  264,486   2002   20/02/2005   31/01/2012   1:1  CHF 38.88 
 
iv  129,262   2002   31/01/2005   31/01/2012   1:1  USD 22.63 
 
v  40,000   2002   28/06/2005   28/06/2012   1:1  USD 24.85 
 
vi  370,000   2002   28/06/2005   28/06/2012   1:1  CHF 40.38 
 
vii  110,000   2002   28/06/2005   28/12/2012   1:1  CHF 40.38 
 
viii  220,000   2003   31/01/2006   31/01/2013   1:1  USD 24.00 
 
ix  310,000   2003   31/01/2006   31/07/2013   1:1  CHF 32.50 
 
x  640,000   2004   28/02/2007   28/02/2014   1:1  CHF 51.88 
 
xi  293,092   2004   28/02/2007   28/02/2014   1:1  USD 40.63 
 
xii  1,305,976   2005   01/03/2008   28/02/2015   1:1  CHF 55.75 
 
xiii  242,000   2005   01/03/2008   28/02/2015   1:1  USD 47.75 
 
xiv  1,526,000   2006   01/03/2009   28/02/2016   1:1  CHF 77.33 
 
xv  1,320,776   2007   01/03/2010   28/02/2017   1:1  CHF 78.50 
 
this report for more information.

387

138

Loans granted to members of the Board of Directors as of 31 December 2007

             
  
CHF, except where indicateda         
  
Name, function1 Mortgages  Other loans granted  Total 
 
Marcel Ospel, Chairman  11,000,000   0   11,000,000 
 
Stephan Haeringer, Executive Vice Chairman  0   0   0 
 
Ernesto Bertarelli, member  0   0   0 
 
Gabrielle Kaufmann-Kohler, member  0   0   0 
 
Sergio Marchionne, member  0   0   0 
 
Rolf A. Meyer, member  480,000   0   480,000 
 
Helmut Panke, member  0   0   0 
 
Peter Spuhler, member  0   0   0 
 
Peter Voser, member  0   0   0 
 
Lawrence A. Weinbach, member  0   0   0 
 
Joerg Wolle, member  0   0   0 
 
Aggregate of all members of the Board of Directors  11,480,000   0   11,480,000 
 

Financial information
UBS AG (Parent Bank)

1 No loans have been granted to related parties of the Board of Directors members at conditions not customary in the market. For this purpose UBS considers loans granted on the terms available to UBS employees to be at arm’s length.
                         
Vested and unvested options held by independent members of the BoD and
by members of the GEB on 31 December 2007 / 2008		 
Type Number of options  Year of grant  Vesting date  Expiry date  Subscription ratio  Strike price 
 
i  56,013   2001   20.02.2004   20.02.2009   1:1  CHF 46.92 
 
ii  8,679   2002   31.01.2002   31.07.2012   1:1  USD 21.24 
 
iii  8,421   2002   31.01.2004   31.07.2012   1:1  USD 21.24 
 
iv  8,421   2002   31.01.2005   31.07.2012   1:1  USD 21.24 
 
v  32,807   2002   31.01.2003   31.01.2012   1:1  CHF 36.49 
 
vi  31,835   2002   31.01.2004   31.01.2012   1:1  CHF 36.49 
 
vii  313,685   2002   31.01.2005   31.01.2012   1:1  CHF 36.49 
 
viii  76,380   2002   31.01.2005   31.01.2012   1:1  USD 21.24 
 
ix  8,823   2002   28.02.2002   28.08.2012   1:1  USD 21.70 
 
x  12,825   2002   29.02.2004   28.08.2012   1:1  USD 21.70 
 
xi  8,561   2002   28.02.2005   28.08.2012   1:1  USD 21.70 
 
xii  6,694   2002   28.02.2003   28.02.2012   1:1  CHF 36.65 
 
xiii  10,758   2002   28.02.2004   28.02.2012   1:1  CHF 36.65 
 
xiv  6,491   2002   28.02.2005   28.02.2012   1:1  CHF 36.65 
 
xv  394,309   2002   28.06.2005   28.06.2012   1:1  CHF 37.90 
 
xvi  31,971   2002   28.06.2005   28.12.2012   1:1  CHF 37.90 
 
xvii  33,611   2003   01.03.2004   31.01.2013   1:1  CHF 27.81 
 
xviii  33,600   2003   01.03.2005   31.01.2013   1:1  CHF 27.81 
 
xix  33,586   2003   01.03.2006   31.01.2013   1:1  CHF 27.81 
 
xx  415,623   2003   31.01.2006   31.01.2013   1:1  USD 22.53 
 
xxi  7,359   2003   01.03.2004   28.02.2013   1:1  CHF 26.39 
 
xxii  7,354   2003   01.03.2005   28.02.2013   1:1  CHF 26.39 
 
xxiii  7,354   2003   01.03.2006   28.02.2013   1:1  CHF 26.39 
 
xxiv  213,140   2003   31.01.2006   31.01.2013   1:1  CHF 30.50 
 
xxv  31,971   2003   31.01.2006   31.07.2013   1:1  CHF 30.50 
 
xxvi  42,628   2003   31.01.2006   31.07.2013   1:1  USD 22.53 
 
xxvii  52,596   2004   01.03.2005   27.02.2014   1:1  CHF 44.32 
 
xxviii  52,592   2004   01.03.2006   27.02.2014   1:1  CHF 44.32 
 
xxix  52,584   2004   01.03.2007   27.02.2014   1:1  CHF 44.32 
 
xxx  532,850   2004   28.02.2007   27.02.2014   1:1  CHF 48.69 
 
xxxi  436,937   2004   01.03.2007   27.02.2014   1:1  USD 38.13 
 
xxxii  14,210   2005   01.03.2006   28.02.2015   1:1  CHF 47.58 
 
xxxiii  14,210   2005   01.03.2007   28.02.2015   1:1  CHF 47.58 
 
xxxiv  67,489   2005   01.03.2008   28.02.2015   1:1  CHF 47.58 
 
xxxv  837,477   2005   01.03.2008   28.02.2015   1:1  CHF 52.32 
 
xxxvi  383,652   2005   01.03.2008   28.02.2015   1:1  USD 44.81 
 
xxxvii  2,130   2005   04.03.2007   04.03.2015   1:1  CHF 47.89 
 
xxxviii  40,854   2006   01.03.2007   28.02.2016   1:1  CHF 65.97 
 
xxxix  40,852   2006   01.03.2008   28.02.2016   1:1  CHF 65.97 
 
xl  40,847   2006   01.03.2009   28.02.2016   1:1  CHF 65.97 
 
xli  1,332,125   2006   01.03.2009   28.02.2016   1:1  CHF 72.57 
 
xlii  17,762   2007   01.03.2008   28.02.2017   1:1  CHF 67.00 
 
xliii  17,762   2007   01.03.2009   28.02.2017   1:1  CHF 67.00 
 
xliv  17,760   2007   01.03.2010   28.02.2017   1:1  CHF 67.00 
 
xlv  1,348,276   2007   01.03.2010   28.02.2017   1:1  CHF 73.67 
 
xlvi  53,285   2008   01.03.2011   28.02.2018   1:1  CHF 32.45 
 
xlvii  505,478   2008   01.03.2011   28.03.2018   1:1  CHF 35.66 
 
xlviii  745,990   2008   01.03.2011   07.04.2018   1:1  CHF 36.46 
 
xlix  7,420   2008   01.03.2011   06.06.2018   1:1  CHF 28.10 
 

388

Financial information

Loans granted to members of the Group Executive Board

             
  
CHF, except where indicateda         
  
Name, function1 Mortgages  Other loans granted2  Total 
 
Joseph Scoby, Group Chief Risk Officer  0   3,145,796   3,145,796 
 
Aggregate of all members of the Group Executive Board  3,487,000   3,145,796   6,632,796 
 
                 
Loans granted to members of the BoD at 31 December 2007/2008 
CHF, except where indicated a 
  For the      Other loans    
Name, function1 year ended  Secured loans  granted  Total 
 
Peter Kurer, Chairman2
 2008    1,261,000   0   1,261,000 
   
  2007              
 
Sergio Marchionne, Senior Independent Director, Vice Chairman 2008    0   0   0 
   
  2007    0   0   0 
 
Ernesto Bertarelli, member 2008    0   0   0 
   
  2007    0   0   0 
 
Sally Bott, member 2008    0   0   0 
   
  2007              
 
Rainer-Marc Frey, member 2008    0   0   0 
   
  2007              
 
Bruno Gehrig, member2
 2008    798,000   0   798,000 
   
  2007              
 
Gabrielle Kaufmann-Kohler, member 2008    0   0   0 
   
  2007    0   0   0 
 
Helmut Panke, member 2008    0   0   0 
   
  2007    0   0   0 
 
William G. Parrett, member2
 2008    1,167,659   0   1,167,659 
   
  2007              
 
David Sidwell, member 2008    0   0   0 
   
  2007              
 
Peter R. Voser, member 2008    0   0   0 
   
  2007    0   0   0 
 
Joerg Wolle, member 2008    0   0   0 
   
  2007    0   0��  0 
 
Aggregate of all members of the BoD      3,226,659   0   3,226,659 
 
1 No loans have been granted to related parties of the members of the Group Executive BoardBoD at conditions not customary in the market.  For this purpose UBS considers2 Secured loans granted onprior to their election to the terms availableBoD.
                 
Loans granted to members of the GEB at 31 December 2007/2008   
CHF, except where indicated a 
  For the      Other loans    
Name, function1 year ended  Secured loans  granted2  Total 
 
Markus U. Diethelm, Group General Counsel 2008    3,900,000   0   3,900,000 
 
Joe Scoby, Group Chief Risk Officer3
 2007    0   3,145,796   3,145,796 
 
Aggregate of all members of the GEB4
 2008    7,740,562   0   7,740,562 
 
Aggregate of all members of the GEB 2007    3,487,000   3,145,796   6,632,796 
 
1 No loans have been granted to UBS employees to berelated parties of the members of the GEB at arm’s length.  conditions not customary in the market.  2 Guarantees.3 Joe Scoby stepped down as Group Chief Risk Officer on 4 November 2008.  4 Including those members of the GEB who stepped down during 2008.

139389

Financial information
UBS AG (Parent Bank)
Report of the Statutory Auditors

(GRAPHIC(LETTER)

140390

UBS AG (Parent Bank)
Report of the Auditors of the Conditional Capital Increase

Financial information

(LETTER)

(GRAPHIC)391

141

Financial information
UBS AG (Parent Bank)

142(LETTER)

392

Additional Disclosure Required
under SEC Regulations

143

Additional Disclosure Required under SEC Regulations

Financial information

Additional Disclosure Requireddisclosure required
under SEC Regulations
Table of Contentsregulations

A–Introduction
145
B – Selected Financial Data
145
Income Statement Data
146
Data Balance Sheet
147
Ratio of Earnings to Fixed Charges
148
C–Information on the Company
148
Property, Plant and Equipment
148
D–Information Required by Industry Guide 3
149
Selected Statistical Information
149
Average Balances and Interest Rates
149
Analysis of Changes in Interest Income and Expense
151
Deposits
153
Short-term Borrowings
154
Contractual Maturities of Investments in Debt Instruments
155
Due from Banks and Loans (gross)
156
Due from Banks and Loan Maturities (gross)
157
Impaired and Non-Performing Loans
158
Cross-border Outstandings
159
Summary of Movements in Allowances and Provisions for Credit Losses
160
Allocation of the Allowances and Provisions for Credit Losses
162
Due from Banks and Loans by Industry Sector (gross)
163
Loss History Statistics
164

144

A – Introduction

The following pages contain additional disclosures about UBS Group which are required under SEC regulations.

UBS’s consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and are denominated in Swiss francs or CHF,(CHF), the reporting currency of the Group.













393

Financial information
Additional disclosure required under SEC regulations

B – Selected Financial Datafinancial data

The tables below set forth, for the periods and dates indicated, information concerning the noon buying rate for the Swiss franc, expressed in United States dollars, or USD, per one Swiss franc. The noon buying rate is the rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.

On 2927 February 20082009 the noon buying rate was 0.95830.8568 USD per 1 CHF.
                 
          Average rate1    
Year ended 31 December High  Low  (USD per 1 CHF)  At period end 
 
2003  0.8189   0.7048   0.7493   0.8069 
 
2004  0.8843   0.7601   0.8059   0.8712 
 
2005  0.8721   0.7544   0.8039   0.7606 
 
2006  0.8396   0.7575   0.8034   0.8200 
 
2007  0.9087   0.7978   0.8381   0.8827 
 
                 
Month High  Low       
 
September 2007  0.8568   0.8258         
 
October 2007  0.8629   0.8437         
 
November 2007  0.9087   0.8627         
 
December 2007  0.8951   0.8645         
 
January 2008  0.9221   0.8948         
 
February 2008  0.9583   0.9030         
 
                 
          Average rate1    
Year ended 31 December High  Low  (USD per 1 CHF)  At period end 
 
2004  0.8843   0.7601   0.8059   0.8712 
 
2005  0.8721   0.7544   0.8039   0.7606 
 
2006  0.8396   0.7575   0.8034   0.8200 
 
2007  0.9087   0.7978   0.8381   0.8827 
 
2008  1.0142   0.8171   0.9298   0.9369 
 
                 
Month High  Low         
 
September 2008  0.9248   0.8776         
 
October 2008  0.8921   0.8570         
 
November 2008  0.8616   0.8172         
 
December 2008  0.9602   0.8171         
 
January 2009  0.9359   0.8599         
 
February 2009  0.8757   0.8465         
 
1The average of the noon buying rates on the last business day of each full month during the relevant period.

145394

Financial information
                     
Key figures 
  For the year ended 
CHF million, except where indicated 31.12.08  31.12.07  31.12.06  31.12.05  31.12.04 
 
Balance sheet data
                    
 
Total assets  2,015,098   2,274,891   2,348,733   2,001,099   1,703,647 
 
Equity attributable to UBS shareholders  32,800   36,875   51,037   45,633   35,161 
 
Average equity to average assets (%)  1.5   1.8   2.0   1.9   1.9 
 
Market capitalization
  43,519   108,654   154,222   131,949   103,638 
 
Shares
                    
 
Registered ordinary shares  2,932,580,549   2,073,547,344   2,105,273,286   2,177,265,044   2,253,716,354 
 
Treasury shares  61,903,121   158,105,524   164,475,699   208,519,748   249,326,620 
 
BIS capital ratios
                    
 
Tier 1 (%)  11.0   9.11  12.21  13.31  12.31
 
Total BIS (%)  15.1   12.21  15.01  14.51  14.11
 
Risk-weighted assets  302,273   374,4211  344,0151  312,5321  266,9551
 
Invested assets (CHF billion)
  2,174   3,189   2,989   2,652   2,217 
 
Personnel (full-time equivalents)
                    
 
Switzerland  26,406   27,884   27,022   26,029   25,990 
 
United Kingdom  7,071   8,813   8,243   7,135   7,180 
 
Rest of Europe  4,817   4,776   4,338   3,759   3,461 
 
Middle East / Africa  145   139   102   112   107 
 
United States  27,362   29,921   29,076   25,999   25,180 
 
Rest of Americas  1,984   2,054   1,743   1,137   1,051 
 
Asia Pacific  9,998   9,973   7,616   5,398   4,438 
 
Total  77,783   83,560   78,140   69,569   67,407 
 
Long-term ratings2
                    
 
Fitch, London  A+  AA  AA+  AA+  AA+ 
 
Moody’s, New York Aa2  Aaa  Aa2  Aa2  Aa2 
 
Standard & Poor’s, New York  A+  AA  AA+  AA+  AA+ 
 
  1 The calculation prior to 2008 is based on the Basel I approach.  2 Refer to the “Credit risk” section of this report for information about the nature of these ratings.

395

Financial information
Additional Disclosure Requireddisclosure required under SEC Regulationsregulations

Income statement data

B – Selected Financial Data (continued)

                               
Income statement dataIncome statement data 
 For the year ended   For the year ended 
CHF million, except where indicated 31.12.07 31.12.06 31.12.05 31.12.04 31.12.03  31.12.08 31.12.07 31.12.06 31.12.05 31.12.04 
Income statement data
 
Interest income 109,112 87,401 59,286 39,228 40,045  65,890 109,112 87,401 59,286 39,228 
Interest expense  (103,775)  (80,880)  (49,758)  (27,484)  (27,784)  (59,687)  (103,775)  (80,880)  (49,758)  (27,484)
Net interest income 5,337 6,521 9,528 11,744 12,261  6,203 5,337 6,521 9,528 11,744 
Credit loss (expense) / recovery  (238) 156 375 241  (102)
Credit loss (expense)/recovery  (2,996)  (238) 156 375 241 
Net interest income after credit loss (expense) / recovery 5,099 6,677 9,903 11,985 12,159 
Net interest income after credit loss (expense)/recovery 3,207 5,099 6,677 9,903 11,985 
Net fee and commission income 30,634 25,456 21,184 18,310 16,484  22,929 30,634 25,456 21,184 18,310 
Net trading income  (8,353) 13,743 8,248 5,098 3,859   (25,818)  (8,353) 13,743 8,248 5,098 
Other income 4,332 1,598 1,127 868 295  884 4,341 1,608 1,135 875 
Income from industrial holdings 268 262 229 188 51 
Total operating income 31,980 47,736 40,691 36,449 32,848  1,201 31,721 47,484 40,470 36,268 
Total operating expenses 34,915 33,092 28,048 26,448 25,571  28,555 35,463 33,365 28,533 26,840 
Operating profit from continuing operations before tax
  (2,935) 14,644 12,643 10,001 7,277   (27,353)  (3,742) 14,119 11,937 9,428 
Tax expense 1,311 2,785 2,465 2,150 1,402   (6,837) 1,369 2,998 2,270 2,073 
Net profit from continuing operations
  (4,246) 11,859 10,178 7,851 5,875   (20,517)  (5,111) 11,121 9,667 7,355 
Net profit from discontinued operations 401 891 4,512 619 378  198 403 899 4,526 629 
Net profit  (3,845) 12,750 14,690 8,470 6,253   (20,319)  (4,708) 12,020 14,193 7,984 
Net profit attributable to minority interests 539 493 661 454 349  568 539 493 661 454 
Net profit attributable to UBS shareholders
  (4,384) 12,257 14,029 8,016 5,904   (20,887)  (5,247) 11,527 13,532 7,530 
Cost / income ratio (%)1
 110.3 69.7 70.1 73.2 76.8 
Cost/income ratio (%)1
 680.4 111.0 70.5 71.2 74.5 
Per share data (CHF)
  
Basic earnings per share2
  (2.28) 6.20 6.97 3.89 2.72   (7.54)  (2.42) 5.19 5.98 3.25 
Diluted earnings per share2
  (2.28) 5.95 6.68 3.70 2.59   (7.55)  (2.43) 4.99 5.74 3.10 
Operating profit before tax per share  (1.52) 7.41 6.28 4.86 3.35   (9.88)  (1.73) 6.36 5.27 4.07 
Cash dividends declared per share (CHF)3,4
 N/A 2.20 1.60 1.50 1.30  N/A N/A 2.20 1.60 1.50 
Cash dividend declared per share (USD)3,4
 N/A 1.83 1.26 1.27 1.00  N/A N/A 1.83 1.26 1.27 
Dividend payout ratio (%)3,4
 N/A 35.5 23.0 38.6 47.8  N/A N/A 42.4 26.8 46.2 
Rates of return (%)
  
Return on equity attributable to UBS shareholders5
  (9.4) 28.2 39.7 25.8 18.0   (57.5)  (10.9) 25.7 36.7 23.1 
Return on average equity  (9.1) 26.3 37.2 23.8 16.9   (59.3)  (10.6) 24.0 34.4 21.3 
Return on average assets  (0.16) 0.52 0.68 0.44 0.38   (0.9)  (0.2) 0.5 0.7 0.4 
1 Operating expenses / expenses/operating income before credit loss expense for Financial Businesses.  expense.  2 For EPS calculation, seerefer to Note 8 toin the Financial Statements.  3 Additionally, in July 2006, a par value reduction of CHF 0.30 (USD 0.24) per share was distributed. Dividends are normally declared and paid in the year subsequent to the reporting period.  4 The Board of Directors has proposed to the Extraordinary Meeting of Shareholders on 27 February 2008 to create authorized capital up to a maximum of 5% of the current share capital (103.7 million new shares) to replace the cash dividend for For the business year 2007 with a stock dividend. The issuance ofdividend was distributed for which 98,698,754 new shares and the finalwere issued on 19 May 2008 to UBS shareholders with an exchange ratio for the entitlement to the stock dividend (at leastof 20:1) will be determined by the Board of Directors on 23 April 2008.  1.  5 Net profit attributable to UBS shareholders / shareholders/average equity attributable to UBS shareholders less distributions.

146396

B – Selected Financial Data (continued)

                     
 
CHF million, except where indicated 31.12.07  31.12.06  31.12.05  31.12.04  31.12.03 
 
Balance sheet data
                    
 
Total assets  2,272,579   2,346,362   1,998,455   1,701,258   1,539,841 
 
Equity attributable to UBS shareholders  35,585   49,686   44,015   33,632   33,350 
 
Average equity to average assets (%)  1.74   1.96   1.83   1.87   2.25 
 
Market capitalization
  108,654   154,222   131,949   103,638   95,401 
 
Shares
                    
 
Registered ordinary shares  2,073,547,344   2,105,273,286   2,177,265,044   2,253,716,354   2,366,093,528 
 
Treasury shares  158,105,524   164,475,699   208,519,748   249,326,620   273,482,454 
 
BIS capital ratios
                    
 
Tier 1 (%)  8.8   11.9   12.8   11.8   11.8 
 
Total BIS (%)  12.0   14.7   14.1   13.6   13.4 
 
Risk-weighted assets  372,298   341,892   310,409   264,832   252,398 
 
Invested assets (CHF billion)
  3,189   2,989   2,652   2,217   2,098 
 
Personnel Financial Businesses (full-time equivalents)
                    
 
Switzerland  27,884   27,018   26,028   25,987   26,660 
 
Rest of Europe / Middle East / Africa  13,728   12,687   11,007   10,751   9,888 
 
Americas  31,975   30,819   27,136   26,231   25,508 
 
Asia Pacific  9,973   7,616   5,398   4,438   3,823 
 
Total  83,560   78,140   69,569   67,407   65,879 
 
Long-term ratings1
                    
 
Fitch, London AA  AA+  AA+  AA+  AA+ 
 
Moody’s, New York Aaa  Aa2  Aa2  Aa2  Aa2 
 
Standard & Poor’s, New York AA  AA+  AA+  AA+  AA+ 
 
1 See the “Capital management” section in Risk, Treasury and Capital Management 2007 for information about the nature of these ratings.

Balance Sheet Data

                     
 
CHF million 31.12.07  31.12.06  31.12.05  31.12.04  31.12.03 
 
Assets
                    
 
Total assets  2,272,579   2,346,362   1,998,455   1,701,258   1,539,841 
 
Due from banks  60,907   50,426   33,644   35,419   31,959 
 
Cash collateral on securities borrowed  207,063   351,590   288,435   210,606   206,519 
 
Reverse repurchase agreements  376,928   405,834   404,432   357,164   320,499 
 
Trading portfolio assets  610,061   627,036   499,297   389,487   354,558 
 
Trading portfolio assets pledged as collateral  164,311   251,478   154,759   159,115   120,759 
 
Positive replacement values  428,217   292,975   273,889   248,664   234,015 
 
Loans  335,864   297,842   279,910   241,803   220,083 
 
Liabilities
                    
 
Due to banks  145,762   203,689   124,328   120,026   129,084 
 
Cash collateral on securities lent  31,621   63,088   59,938   51,301   48,272 
 
Repurchase agreements  305,887   545,480   478,508   422,587   415,863 
 
Trading portfolio liabilities  164,788   204,773   188,631   171,033   143,957 
 
Negative replacement values  443,539   297,063   277,770   267,799   240,577 
 
Financial liabilities designated at fair value  191,853   145,687   117,401   65,756   35,286 
 
Due to customers  641,892   555,886   466,907   386,320   351,583 
 
Debt issued  222,077   190,143   160,710   117,856   88,874 
 
Equity attributable to UBS shareholders  35,585   49,686   44,015   33,632   33,350 
 

147

Additional Disclosure Required under SEC Regulations

B – Selected Financial Data (continued)

Financial information
                     
Balance sheet data 
  For the year ended 
CHF million 31.12.08  31.12.07  31.12.06  31.12.05  31.12.04 
 
Assets
                    
 
Total assets  2,015,098   2,274,891   2,348,733   2,001,099   1,703,647 
 
Due from banks  64,451   60,907   50,426   33,644   35,419 
 
Cash collateral on securities borrowed  122,897   207,063   351,590   288,435   210,606 
 
Reverse repurchase agreements  224,648   376,928   405,834   404,432   357,164 
 
Trading portfolio assets  271,838   660,182   648,346   499,297   389,487 
 
Trading portfolio assets pledged as collateral  40,216   114,190   230,168   154,759   159,115 
 
Positive replacement values  854,100   428,217   292,975   273,889   248,664 
 
Loans  340,308   335,864   297,842   279,910   241,803 
 
Liabilities
                    
 
Due to banks  125,628   145,762   203,689   124,328   120,026 
 
Cash collateral on securities lent  14,063   31,621   63,088   59,938   51,301 
 
Repurchase agreements  102,561   305,887   545,480   478,508   422,587 
 
Trading portfolio liabilities  62,431   164,788   204,773   188,631   171,033 
 
Negative replacement values  851,803   443,539   297,063   277,770   267,799 
 
Financial liabilities designated at fair value  101,546   191,853   145,687   117,401   65,756 
 
Due to customers  474,774   641,892   555,886   466,907   386,320 
 
Debt issued  197,254   222,077   190,143   160,710   117,856 
 
Equity attributable to UBS shareholders  32,800   36,875   51,037   45,633   35,161 
 

Ratio of Earningsearnings to Fixed Chargesfixed charges

The following table sets forth UBS’s ratio of earnings to fixed charges on an IFRS basis for the periods indicated. The ratios are calculated based on earnings from continuing operations. Ratios of earnings to combined fixed charges and preferred stock dividend requirements are not presented as there were no preferred share dividends in any of the periods indicated.

                     
  For the year ended 
  31.12.07  31.12.06  31.12.05  31.12.04  31.12.03 
   
   0.97   1.17   1.24   1.34   1.24 
   

                     
  For the year ended
  31.12.08  31.12.07  31.12.06  31.12.05  31.12.04 
   
   0.54   0.96   1.17   1.23   1.32 
   


397

Financial information
Additional disclosure required under SEC regulations

C – Information on the Company

company

Property, Plantplant and Equipmentequipment

At 31 December 2007,2008, UBS Financial Businesses operated about 1,1731,166 business and banking locations worldwide, of which about 37%36% were in Switzerland, 48%47% in the Americas, 11%12% in the rest of Europe, Middle East and Africa and 4% in Asia-Pacific. 16%36% of the business and banking locations in Switzerland were owned directly by UBS, with the remainder, along with most

of UBS’s offices outside Switzerland, being held under commercial leases.

At 31 December 2007, the Industrial Holdings segment operated about 17 business locations worldwide, of which 94% were in the Americas and 6% in Asia-Pacific. 94% of the business locations worldwide were held under commercial leases.

These premises are subject to continuous maintenance and upgrading and are considered suitable and adequate for current and anticipated operations.



148













398

Financial information

D – Information Requiredrequired by Industry Guideindustry guide 3

Selected Statistical Informationstatistical information

The tables below set forth selected statistical information regarding the Group’s banking operations extracted from the Financial Statements. Unless otherwise indicated, average balances for the years ended 31 December 2007,2008, 31 Decem-

ber 2006December 2007 and 31 December 20052006 are calculated from

monthly data. The distinction between domestic and foreign is generally based on the booking location. For loans, this method is not significantly different from an analysis based on the domicile of the borrower.



Average Balancesbalances and Interest Ratesinterest rates

The following table sets forth average interest-earning assets and average interest-bearing liabilities, along with the average rates, for the years ended 31 December 2008, 2007 2006 and 2005.2006.

                                                       
 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
 Average Average Average Average Average Average  Average Average Average Average Average Average 
CHF million, except where indicated balance Interest rate (%) balance Interest rate (%) balance Interest rate (%)  balance Interest rate (%) balance Interest rate (%) balance Interest rate (%) 
Assets
  
Due from banks  
Domestic 11,784 664 5.6 10,800 587 5.4 15,467 270 1.7  7,243 421 5.8 11,784 664 5.6 10,800 587 5.4 
Foreign 46,049 2,344 5.1 29,814 1,490 5.0 25,497 1,334 5.2  58,287 1,559 2.7 46,049 2,344 5.1 29,814 1,490 5.0 
Cash collateral on securities borrowed and reverse repurchase agreements  
Domestic 31,473 1,693 5.4 27,147 1,333 4.9 33,012 1,079 3.3  31,642 1,208 3.8 31,473 1,693 5.4 27,147 1,333 4.9 
Foreign 977,302 46,581 4.8 926,575 38,393 4.1 776,972 22,283 2.9  669,010 21,313 3.2 977,302 46,581 4.8 926,575 38,393 4.1 
Trading portfolio assets  
Domestic 11,866 696 5.9 17,976 651 3.6 15,545 457 2.9  15,104 520 3.4 11,866 696 5.9 17,976 651 3.6 
Foreign taxable 861,923 38,206 4.4 707,432 31,433 4.4 580,763 23,619 4.1  522,804 21,494 4.1 861,923 38,206 4.4 707,432 31,433 4.4 
Foreign non-taxable 5,754 199 3.5 4,438 127 2.9 3,390 58 1.7  8,070 383 4.7 5,754 199 3.5 4,438 127 2.9 
Foreign total 867,677 38,405 4.4 711,870 31,560 4.4 584,153 23,677 4.1  530,874 21,877 4.1 867,677 38,405 4.4 711,870 31,560 4.4 
Financial assets designated at fair value  
Domestic 588 0 42 0 616 0  945 0 588 0 42 0 
Foreign 9,114 298 3.3 2,325 70 3.0 691 26 3.8  11,024 404 3.7 9,114 298 3.3 2,325 70 3.0 
Loans  
Domestic 187,073 6,565 3.5 181,186 5,784 3.2 174,299 5,424 3.1  188,950 6,840 3.6 187,073 6,565 3.5 181,186 5,784 3.2 
Foreign 146,040 9,359 6.4 105,362 6,284 5.9 91,290 3,531 3.9  147,034 8,515 5.8 146,040 9,359 6.4 105,362 6,284 5.9 
Financial investments available-for-sale  
Domestic 3,930 66 1.7 4,126 28 0.7 1,036 3 0.3  1,599 72 4.5 3,930 66 1.7 4,126 28 0.7 
Foreign taxable 2,934 110 3.7 3,171 100 3.2 3,546 83 2.3  3,370 73 2.2 2,934 110 3.7 3,171 100 3.2 
Foreign non-taxable 0 0 0 0 0  0 0 0 0 
Foreign total 2,934 110 3.7 3,171 100 3.2 3,546 83 2.3  3,370 73 2.2 2,934 110 3.7 3,171 100 3.2 
Total interest-earning assets
 2,295,830 106,781 4.7 2,020,394 86,280 4.3 1,722,124 58,167 3.4  1,665,082 62,802 3.8 2,295,830 106,781 4.7 2,020,394 86,280 4.3 
Net interest on swaps 2,331 1,121 1,119  3,088 2,331 1,121 
Interest income and average interest- earning assets
 2,295,830 109,112 4.8 2,020,394 87,401 4.3 1,722,124 59,286 3.4 
Interest income and average interest-earning assets
 1,665,082 65,890 4.0 2,295,830 109,112 4.8 2,020,394 87,401 4.3 
Non-interest-earning assets  
Positive replacement values 373,229 278,733 271,795  600,073 373,229 278,733 
Fixed assets 7,090 7,445 9,308  7,091 7,090 7,445 
Other 80,336 66,362 55,178  82,433 82,739 68,894 
Total average assets
 2,756,485 2,372,934 2,058,405  2,354,679 2,758,888 2,375,466 

149399

Financial information
Additional Disclosure Requireddisclosure required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)regulations

                                                       
Average balances and interest rates (continued)Average balances and interest rates (continued) 
 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
 Average Average Average Average Average Average  Average Average Average Average Average Average 
CHF million, except where indicated balance Interest rate (%) balance Interest rate (%) balance Interest rate (%)  balance Interest rate (%) balance Interest rate (%) balance Interest rate (%) 
Liabilities and Equity
 
Liabilities and equity
 
Due to banks  
Domestic 60,858 2,477 4.1 46,544 1,583 3.4 35,713 897 2.5  51,027 1,503 2.9 60,858 2,477 4.1 46,544 1,583 3.4 
Foreign 146,286 8,008 5.5 108,885 5,261 4.8 92,431 3,321 3.6  88,798 3,423 3.9 146,286 8,008 5.5 108,885 5,261 4.8 
Cash collateral on securities lent and repurchase agreements  
Domestic 47,041 1,902 4.0 46,224 1,589 3.4 40,772 881 2.2  31,269 1,026 3.3 47,041 1,902 4.0 46,224 1,589 3.4 
Foreign 752,616 38,680 5.1 751,617 32,432 4.3 647,998 19,599 3.0  397,453 15,097 3.8 752,616 38,680 5.1 751,617 32,432 4.3 
Trading portfolio liabilities  
Domestic 5,561 328 5.9 4,408 283 6.4 3,632 145 4.0  5,525 256 4.6 5,561 328 5.9 4,408 283 6.4 
Foreign 214,326 15,484 7.2 202,263 14,250 7.0 173,394 10,591 6.1  132,901 8,906 6.7 214,326 15,484 7.2 202,263 14,250 7.0 
Financial liabilities designated at fair value  
Domestic 1,503 79 5.3 1,864 58 3.1 638 5 0.8  1,444 69 4.8 1,503 79 5.3 1,864 58 3.1 
Foreign 173,162 7,580 4.4 127,458 4,699 3.7 86,688 2,385 2.8  151,324 7,229 4.8 173,162 7,580 4.4 127,458 4,699 3.7 
Due to customers  
Domestic demand deposits 64,568 736 1.1 70,981 534 0.8 67,987 292 0.4  56,730 495 0.9 64,568 736 1.1 70,981 534 0.8 
Domestic savings deposits 78,775 502 0.6 86,631 392 0.5 86,373 404 0.5  68,213 604 0.9 78,775 502 0.6 86,631 392 0.5 
Domestic time deposits 41,056 1,206 2.9 28,876 639 2.2 24,245 386 1.6  35,575 1,081 3.0 41,056 1,206 2.9 28,876 639 2.2 
Domestic total 184,399 2,444 1.3 186,488 1,565 0.8 178,605 1,082 0.6  160,518 2,180 1.4 184,399 2,444 1.3 186,488 1,565 0.8 
Foreign1
 426,130 16,388 3.8 314,788 11,500 3.7 249,561 5,906 2.4  401,421 11,044 2.8 426,130 16,388 3.8 314,788 11,500 3.7 
Short-term debt  
Domestic 2,228 98 4.4 1,973 115 5.8 1,584 20 1.3  1,735 63 3.6 2,228 98 4.4 1,973 115 5.8 
Foreign 144,546 8,643 6.0 110,418 5,934 5.4 96,767 3,196 3.3  134,920 6,216 4.6 144,546 8,643 6.0 110,418 5,934 5.4 
Long-term debt  
Domestic 4,235 115 2.7 3,957 82 2.1 4,250 117 2.8  5,766 148 2.6 4,235 115 2.7 3,957 82 2.1 
Foreign 70,079 1,549 2.2 57,899 1,529 2.6 43,035 1,613 3.7  74,531 2,527 3.4 70,079 1,549 2.2 57,899 1,529 2.6 
Total interest-bearing liabilities
 2,232,970 103,775 4.6 1,964,786 80,880 4.1 1,655,068 49,758 3.0  1,638,632 59,687 3.6 2,232,970 103,775 4.6 1,964,786 80,880 4.1 
Non-interest-bearing liabilities  
Negative replacement values 382,115 278,903 288,089  605,975 382,115 278,903 
Other 87,196 76,270 70,654  67,098 88,191 77,304 
Total liabilities 2,702,281 2,319,959 2,013,811  2,311,705 2,703,276 2,320,993 
Total equity 54,204 52,975 44,594  42,973 55,612 54,473 
Total average liabilities and equity 2,756,485 2,372,934 2,058,405  2,354,678 2,758,888 2,375,466 
Net interest income
 5,337 6,521 9,528  6,203 5,337 6,521 
Net yield on interest-earning assets
 0.2 0.3 0.6  0.4 0.2 0.3 
1 Due to customers in foreign offices consists mainly of time deposits.

The percentage of total average interest-earning assets attributable to foreign activities was 89%85% for 2008 (89% for 2007 (88%and 88% for 2006 and 86% for 2005)2006). The percentage of total average interest-bearing liabilities attributable to foreign activities was 86%84% for 2008 (86% for 2007 (85%and 85% for 2006 and 84% for 2005)2006). All assets and liabilities are translated into CHF at uniform month-end rates. Interest income and expense are translated at monthly average rates.

Average rates earned and paid on assets and liabilities can change from period to period based on the changes in interest rates in general, but are also affected by changes in the currency mix included in the assets and liabilities. This is especially true for foreign assets and liabilities. Tax-exempt income is not recorded on a tax-equivalent basis. For all three years presented, tax-exempt income is considered to be insignificant and the impact from such income is therefore negligible.



150400

D – Information Required by Industry Guide 3 (continued)

Financial information

Analysis of Changeschanges in Interest Incomeinterest income and Expenseexpense

The following tables allocate, by categories of interest-earning assets and interest-bearing liabilities, the changes in interest income and expense due to changes in volume and interest rates for the year ended 31 December 20072008 compared with the year ended 31 December 2006,2007, and for the year ended 31 December 20062007 compared with the year end-

ed 31 December 2005.2006. Volume and rate variances have been calculated on movements in average balances and changes in interest rates. Changes due to a combination of volume and rates have been allocated proportionally. Refer to the appropriate section of Industry Guide 3 for a discussion of the treatment of impaired and non-performing loans.



                                     
 2007 compared with 2006 2006 compared with 2005  2008 compared with 2007 2007 compared with 2006 
 Increase/(decrease)         Increase / (decrease)            Increase/(decrease) Increase/(decrease)   
 due to changes in due to changes in    due to changes in due to changes in   
 Average Average Net Average Average Net  Average Average Net Average Average Net 
CHF million volume rate change volume rate change  volume rate change volume rate change 
Interest income from interest-earning assets
  
Due from banks  
Domestic 53 24 77  (79) 396 317   (254) 11  (243) 53 24 77 
Foreign 812 42 854 224  (68) 156  624  (1,409)  (785) 812 42 854 
Cash collateral on securities borrowed and reverse repurchase agreements  
Domestic 212 148 360  (194) 448 254  9  (494)  (485) 212 148 360 
Foreign 2,080 6,108 8,188 4,338 11,772 16,110   (14,798)  (10,470)  (25,268) 2,080 6,108 8,188 
Trading portfolio assets  
Domestic  (220) 265 45 70 124 194  191  (367)  (176)  (220) 265 45 
Foreign taxable 6,798  (25) 6,773 5,193 2,621 7,814   (14,921)  (1,791)  (16,712) 6,798  (25) 6,773 
Foreign non-taxable 38 34 72 18 51 69  81 103 184 38 34 72 
Foreign total 6,836 9 6,845 5,211 2,672 7,883   (14,840)  (1,688)  (16,528) 6,836 9 6,845 
Financial assets designated at fair value  
Domestic 0 0 0 0 0 0  0 0 0 0 0 0 
Foreign 204 24 228 62  (18) 44  63 43 106 204 24 228 
Loans  
Domestic 188 593 781 213 147 360  66 209 275 188 593 781 
Foreign 2,441 634 3,075 549 2,204 2,753  64  (908)  (844) 2,441 634 3,075 
Financial investments 
Financial investments available-for-sale 
Domestic  (1) 39 38 9 16 25   (40) 46 6  (1) 39 38 
Foreign taxable  (8) 18 10  (9) 26 17  16  (53)  (37)  (8) 18 10 
Foreign non-taxable 0 0 0 0 0 0  0 0 0 0 0 0 
Foreign total  (8) 18 10  (9) 26 17  16  (53)  (37)  (8) 18 10 
Interest income  
Domestic 232 1,069 1,301 19 1,131 1,150   (28)  (595)  (623) 232 1,069 1,301 
Foreign 12,365 6,835 19,200 10,375 16,588 26,963   (28,871)  (14,485)  (43,356) 12,365 6,835 19,200 
Total interest income from interest-earning assets 12,597 7,904 20,501 10,394 17,719 28,113   (28,899)  (15,080)  (43,979) 12,597 7,904 20,501 
Net interest on swaps 1,210 2  757 1,210 
Total interest income
 21,711 28,115   (43,222) 21,711 

151401

  Financial information
Additional Disclosure Requireddisclosure required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Analysis of Changes in Interest Income and Expense (continued)regulations

                                     
Analysis of changes in interest income and expense (continued)Analysis of changes in interest income and expense (continued) 
 2007 compared with 2006 2006 compared with 2005  2008 compared with 2007 2007 compared with 2006 
 Increase/(decrease)         Increase / (decrease)            Increase/(decrease) Increase/(decrease)   
 due to changes in due to changes in    due to changes in due to changes in   
 Average Average Net Average Average Net  Average Average Net Average Average Net 
CHF million volume rate change volume rate change  volume rate change volume rate change 
Interest expense on interest-bearing liabilities
  
Due to banks  
Domestic 487 407 894 271 415 686   (403)  (571)  (974) 487 407 894 
Foreign 1,795 952 2,747 592 1,348 1,940   (3,162)  (1,423)  (4,585) 1,795 952 2,747 
Cash collateral on securities lent and repurchase agreements  
Domestic 28 285 313 120 588 708   (631)  (245)  (876) 28 285 313 
Foreign 43 6,205 6,248 3,109 9,724 12,833   (18,113)  (5,470)  (23,583) 43 6,205 6,248 
Trading portfolio liabilities  
Domestic 74  (29) 45 31 107 138   (2)  (70)  (72) 74  (29) 45 
Foreign 844 390 1,234 1,761 1,898 3,659   (5,863)  (715)  (6,578) 844 390 1,234 
Financial liabilities designated at fair value  
Domestic  (11) 32 21 10 43 53   (3)  (7)  (10)  (11) 32 21 
Foreign 1,691 1,190 2,881 1,142 1,172 2,314   (961) 610  (351) 1,691 1,190 2,881 
Due to customers  
Domestic demand deposits  (51) 253 202 12 230 242   (86)  (155)  (241)  (51) 253 202 
Domestic savings deposits  (39) 149 110 1  (13)  (12)  (63) 165 102  (39) 149 110 
Domestic time deposits 268 299 567 74 179 253   (159) 34  (125) 268 299 567 
Domestic total 178 701 879 87 396 483   (308) 44  (264) 178 701 879 
Foreign 4,120 768 4,888 1,565 4,029 5,594   (939)  (4,405)  (5,344) 4,120 768 4,888 
Short-term debt  
Domestic 15  (32)  (17) 5 90 95   (22)  (13)  (35) 15  (32)  (17)
Foreign 1,843 866 2,709 450 2,288 2,738   (578)  (1,849)  (2,427) 1,843 866 2,709 
Long-term debt  
Domestic 6 27 33  (8)  (27)  (35) 41 �� (8) 33 6 27 33 
Foreign 317  (297) 20 550  (634)  (84) 98 880 978 317  (297) 20 
Interest expense  
Domestic 777 1,391 2,168 516 1,612 2,128   (1,328)  (870)  (2,198) 777 1,391 2,168 
Foreign 10,653 10,074 20,727 9,169 19,825 28,994   (29,518)  (12,372)  (41,890) 10,653 10,074 20,727 
Total interest expense
 11,430 11,465 22,895 9,685 21,437 31,122   (30,846)  (13,242)  (44,088) 11,430 11,465 22,895 

152402

D – Information Required by Industry Guide 3 (continued)

Financial information

Deposits

The following table analyzes average deposits and the average rates on each deposit category listed below for the years ended 31 December 2008, 2007 2006 and 2005.2006. The geographic allocation is based on the location of the office or branch

where the deposit is made. Deposits by foreign depositors in domestic offices were CHF 81,24351,228 million CHF 78,23481,243 million and CHF 54,96878,234 million at 31 December 2008, 31 December 2007 and 31 December 2006, and 31 December 2005, respectively.


                                     
 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 
 Average Average Average Average Average Average  Average Average Average Average Average Average 
CHF million, except where indicated deposit rate (%) deposit rate (%) deposit rate (%)  deposit rate (%) deposit rate (%) deposit rate (%) 
Banks
  
Domestic offices
  
Demand deposits 2,474 0.6 2,024 0.2 8,491 0.1  2,341 0.5 2,474 0.6 2,024 0.2 
Time deposits 9,310 5.1 8,776 4.5 6,976 3.3  4,902 3.8 9,310 5.1 8,776 4.5 
Total domestic offices 11,784 4.2 10,800 3.7 15,467 1.5  7,243 2.7 11,784 4.2 10,800 3.7 
Foreign offices
  
Interest-bearing deposits1
 46,049 5.5 29,814 4.8 25,497 3.6  58,287 3.9 46,049 5.5 29,814 4.8 
Total due to banks
 57,833 5.2 40,614 4.5 40,964 2.8  65,530 3.7 57,833 5.2 40,614 4.5 
 
Customer accounts
  
Domestic offices
  
Demand deposits 64,568 1.1 70,981 0.8 67,987 0.4  56,730 0.9 64,568 1.1 70,981 0.8 
Savings deposits 78,775 0.6 86,631 0.5 86,373 0.5  68,213 0.9 78,775 0.6 86,631 0.5 
Time deposits 41,056 2.9 28,876 2.2 24,245 1.6  35,575 3.0 41,056 2.9 28,876 2.2 
Total domestic offices 184,399 1.3 186,488 0.8 178,605 0.6  160,518 1.4 184,399 1.3 186,488 0.8 
Foreign offices
  
Interest-bearing deposits1
 426,130 3.8 314,788 3.7 249,561 2.4  401,421 2.8 426,130 3.8 314,788 3.7 
Total due to customers
 610,529 3.1 501,276 2.6 428,166 1.6  561,939 2.4 610,529 3.1 501,276 2.6 
1 Mainly time deposits.

At 31 December 2007,2008, the maturity of time deposits exceeding CHF 150,000, or an equivalent amount in other currencies, was as follows:

             
CHF million Domestic Foreign  Domestic Foreign 
Within 3 months 39,427 276,913  38,052 186,590 
3 to 6 months 3,448 37,109  2,216 9,387 
6 to 12 months 1,082 7,215  1,495 4,617 
1 to 5 years 448 1,679  648 1,532 
Over 5 years 87 228  231 235 
Total time deposits
 44,492 323,144  42,642 202,361 

153403

Financial information
Additional Disclosure Requireddisclosure required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)regulations

Short-term Borrowingsborrowings

The following table presents the period-end, average and maximum month-end outstanding amounts for short-term borrowings, along with the average rates and period-end rates at and for the years ended 31 December 2008, 2007 2006 and 2005.2006.

                                                       
 Money market paper issued Due to banks Repurchase agreements1  Money market paper issued Due to banks Repurchase agreements1 
CHF million, except where indicated 31.12.07 31.12.06 31.12.05 31.12.07 31.12.06 31.12.05 31.12.07 31.12.06 31.12.05  31.12.08 31.12.07 31.12.06 31.12.08 31.12.07 31.12.06 31.12.08 31.12.07 31.12.06 
Period-end balance 152,256 119,584 102,662 84,826 153,231 90,651 487,455 754,623 667,317  111,619 152,256 119,584 61,155 84,826 153,231 140,039 487,455 754,623 
Average balance 146,774 112,391 98,351 149,311 114,815 114,701 739,138 717,542 628,362  136,655 146,774 112,391 74,295 149,311 114,815 404,512 739,138 717,542 
Maximum month-end balance 167,637 123,108 112,217 175,233 153,231 101,178 848,401 777,010 719,208  170,503 167,637 123,108 87,233 175,233 153,231 591,005 848,401 777,010 
Average interest rate during the period (%) 6.0 5.4 3.3 5.1 4.4 3.3 5.0 4.4 3.0  4.6 6.0 5.4 3.5 5.1 4.4 3.5 5.0 4.4 
Average interest rate at period-end (%) 6.1 4.0 4.0 4.5 4.1 3.0 4.9 5.0 2.6  2.9 6.1 4.0 2.3 4.5 4.1 1.4 4.9 5.0 
1 For the purpose of this disclosure, balances are presented on a gross basis.

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Financial information

Contractual Maturities of Investments in Debt Instruments Available-for-Sale1,2

                                 
Contractual maturities of investments in debt instruments available-for-sale1,2
 
  Within 1 year  1-5 years  5-10 years  Over 10 years
CHF million, except percentages Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%) 
 
31 December 20083
                                
 
Swiss national government and agencies  0   0.00   2   3.46   0   0.00   1   4.00 
 
Swiss local governments  0   0.00   0   0.00   0   0.00   0   0.00 
 
US Treasury and agencies  0   0.00   0   0.00   0   0.00   0   0.00 
 
Foreign governments and official institutions  33   1.31   0   0.00   33   2.81   34   5.22 
 
Corporate debt securities  3   23.35   88   3.38   38   3.12   12   1.74 
 
Mortgage-backed securities  0   0.00   0   0.00   42   4.00   455   5.28 
 
Other debt instruments  188   9.06   3   13.47   0   0.00   37   7.42 
 
Total fair value
  224       93       113       539     
 
                                 
  Within 1 year  1-5 years  5-10 years  Over 10 years
CHF million, except percentages Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%) 
 
31 December 20073
                                
 
Swiss national government and agencies  0   0.00   2   2.02   0   0.00   1   4.00 
 
Swiss local governments  0   0.00   0   0.00   0   0.00   0   0.00 
 
US Treasury and agencies  0   0.00   0   0.00   0   0.00   0   0.00 
 
Foreign governments and official institutions  50   1.87   2   2.54   75   4.48   0   0.00 
 
Corporate debt securities  50   5.66   44   4.11   0   0.00   0   0.00 
 
Mortgage-backed securities  0   0.00   0   0.00   3   4.48   561   5.28 
 
Other debt instruments  14   4.20   216   12.41   0   0.00   0   0.00 
 
Total fair value
  114       264       78       562     
 
                                 
  Within 1 year  1-5 years  5-10 years  Over 10 years
CHF million, except percentages Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%) 
 
31 December 2006
                                
 
Swiss national government and agencies  2   2.22   0   0.00   0   0.00   1   4.00 
 
Swiss local governments  0   0.00   0   0.00   0   0.00   0   0.00 
 
US Treasury and agencies  0   0.00   0   0.00   0   0.00   0   0.00 
 
Foreign governments and official institutions  38   1.48   2   1.89   57   4.47   0   0.00 
 
Corporate debt securities  26   7.00   0   0.00   2   0.00   0   0.00 
 
Mortgage-backed securities  0   0.00   0   0.00   10   4.48   150   5.10 
 
Other debt instruments  0   0.00   233   9.28   0   0.00   0   0.00 
 
Total fair value
  66       235       69       151     
 
                                 
  Within 1 year  1-5 years  5-10 years  Over 10 years 
CHF million, except percentages Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%) 
 
31 December 2005
                                
 
Swiss national government and agencies  0   0.00   2   4.36   0   0.00   1   4.00 
 
Swiss local governments  0   0.00   0   0.00   0   0.00   0   0.00 
 
US Treasury and agencies  0   0.00   42   5.51   10   5.77   12   6.03 
 
Foreign governments and official institutions  38   1.91   2   1.90   5   5.64   2   6.17 
 
Corporate debt securities  13   3.20   239   4.25   66   5.38   103   5.66 
 
Mortgage-backed securities  0   0.00   0   0.00   14   3.92   129   4.80 
 
Other debt instruments  0   0.00   0   0.00   0   0.00   0   0.00 
 
Total fair value
  51       285       95       247     
 
1 Money market paper has a contractual maturity of less than one year and is not included in the table.  2 Average yields are calculated on an amortized cost basis.  3 Debt instruments available-for-sale recognized on UBS’s balance sheet of CHF 1,402 million CHF 1,034 million for 2008 and 2007, respectively and disclosed in Note 13 include CHF 433 million and CHF 16 million of instruments without fixed maturity.maturity for 2008 and 2007, respectively. Such instruments are not reflected in the table.

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Financial information
Additional Disclosure Requireddisclosure required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)regulations

Due from Banksbanks and Loansloans (gross)

The Group’s lending portfolio is widely diversified across industry sectors with no significant concentrations of credit risk. CHF 164.4152.5 billion (41%(37% of the total) consists of loans to thousands of private households, predominantly in Switzerland, and mostly secured by mortgages, financial collateral or other assets. Exposure to Banks and Financial Institutionsinstitutions amounted to CHF 163174.3 billion (41%(42% of the total). This includes cash posted as collateral by UBS against negative replacement values on derivatives or other positions, which, from a risk perspective, is not considered lending but is a key component of the measurement of counterparty risk taken in connection with the underlying products. Exposure to

banks includes money market deposits with highly rated institutions. Excluding Banks and Financial institutions, the largest industry sector exposure is CHF 1716.3 billion (4% of the total) to Real estate and rentals. For further discussion of the loan portfolio, see the “Credit risk”Risk and treasury management section inRisk, Treasury and Capital Management 2007.on Credit risk.

The following table illustrates the diversification of the loan portfolio among industry sectors at 31 December 2008, 2007, 2006, 2005 2004 and 2003.2004. The industry categories presented are consistent with the classification of loans for reporting to the Swiss Federal Banking CommissionFinancial Market Supervisory Authority (FINMA) and Swiss National Bank.



                               
CHF million 31.12.07 31.12.06 31.12.05 31.12.04 31.12.03  31.12.08 31.12.07 31.12.06 31.12.05 31.12.04 
Domestic
  
Banks1
 1,237 561 1,407 1,406 619  1,734 1,237 561 1,407 1,406 
Construction 1,393 1,535 1,816 1,943 2,175  1,377 1,393 1,535 1,816 1,943 
Financial institutions 5,525 5,542 4,213 4,332 4,009  8,113 5,525 5,542 4,213 4,332 
Hotels and restaurants 1,824 1,957 2,044 2,269 2,440  1,811 1,824 1,957 2,044 2,269 
Manufacturing2
 3,887 3,643 4,134 5,485 6,478  4,020 3,887 3,643 4,134 5,485 
Private households 121,536 117,852 111,549 105,160 102,180  119,285 121,536 117,852 111,549 105,160 
Public authorities 4,734 4,972 5,494 5,460 5,251  4,042 4,734 4,972 5,494 5,460 
Real estate and rentals 11,691 11,356 11,792 11,466 12,449  12,097 11,691 11,356 11,792 11,466 
Retail and wholesale 5,138 4,569 4,808 4,908 6,062  4,818 5,138 4,569 4,808 4,908 
Services3
 6,170 6,758 8,088 9,110 9,493  6,172 6,170 6,758 8,088 9,110 
Other4
 3,300 4,345 3,119 591 1,014  3,329 3,300 4,345 3,119 591 
Total domestic 166,435 163,090 158,464 152,130 152,170  166,798 166,435 163,090 158,464 152,130 
Foreign
  
Banks1
 60,333 50,124 32,287 34,269 31,405  63,708 60,333 50,124 32,287 34,269 
Chemicals 635 1,321 2,716 366 245  2,816 635 1,321 2,716 366 
Construction 624 522 295 122 84  448 624 522 295 122 
Electricity, gas and water supply 1,888 951 1,637 745 249  2,995 1,888 951 1,637 745 
Financial institutions 96,370 67,676 62,344 45,095 30,906  100,779 96,370 67,676 62,344 45,095 
Manufacturing5
 4,678 3,006 3,784 2,758 2,421  5,026 4,678 3,006 3,784 2,758 
Mining 4,509 3,177 3,431 1,695 1,114  4,394 4,509 3,177 3,431 1,695 
Private households 42,828 35,031 38,283 30,237 21,195  33,242 42,828 35,031 38,283 30,237 
Public authorities 4,172 2,175 1,686 1,228 1,224  11,094 4,172 2,175 1,686 1,228 
Real estate and rentals 5,056 4,360 2,707 940 473  4,240 5,056 4,360 2,707 940 
Retail and wholesale 2,239 1,815 1,257 1,102 1,880  2,515 2,239 1,815 1,257 1,102 
Services 9,294 16,436 5,593 8,002 7,983  9,816 9,294 16,436 5,593 8,002 
Transport, storage and communication 1,752 1,528 1,419 762 3,658  3,894 1,752 1,528 1,419 762 
Other6
 1,105 564 272 318 432  1,073 1,105 564 272 318 
Total foreign 235,483 188,686 157,711 127,639 103,269  246,040 235,483 188,686 157,711 127,639 
Total gross
 401,918 351,776 316,175 279,769 255,439  412,838 401,918 351,776 316,175 279,769 
1 Includes Due from banks and Loans from Industrial Holdings of CHF 27 million at 31 December 2007, CHF 93 million at 31 December 2006, CHF 728 million at 31 December 2005, CHF 909 million at 31 December 2004 and CHF 220 million at 31 December 2003.  2004.  2 Includes chemicals, food and beverages.  3 Includes transportation, communication, health and social work, education and other social and personal service activities.  4 Includes mining and electricity, gas and water supply.  5 Includes food and beverages.  6 Includes hotels and restaurants.

The table above also includes loans designated at fair value. Prior period amounts have been adjusted to reflect this change in presentation.

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D – Information Required by Industry Guide 3 (continued)

Financial information

Due from Banksbanks and Loansloans (gross) (continued)

The following table analyzes the Group’s mortgage portfolio by geographic origin of the client and type of mortgage at 31 December 2008, 2007, 2006, 2005 2004 and 2003.2004. Mortgages are included in the industry categories mentioned on the previous page.

                               
CHF million 31.12.07 31.12.06 31.12.05 31.12.04 31.12.03  31.12.08 31.12.07 31.12.06 31.12.05 31.12.04 
Mortgages
  
Domestic 135,341 134,468 130,880 124,496 122,069  134,700 135,341 134,468 130,880 124,496 
Foreign 8,152 10,069 15,619 12,185 7,073  8,381 8,152 10,069 15,619 12,185 
Total gross mortgages
 143,493 144,537 146,499 136,681 129,142  143,081 143,493 144,537 146,499 136,681 
 
Mortgages
  
Residential 122,435 124,548 127,990 117,731 109,980  121,811 122,435 124,548 127,990 117,731 
Commercial 21,058 19,989 18,509 18,950 19,162  21,270 21,058 19,989 18,509 18,950 
Total gross mortgages
 143,493 144,537 146,499 136,681 129,142  143,081 143,493 144,537 146,499 136,681 
Due from Banks and Loan Maturities (gross)
                 
 
Due from banks and loan maturities (gross) 
CHF million Within 1 year  1 to 5 years  Over 5 years  Total 
 
Domestic
                
 
Banks  1,733   1       1,734 
 
Mortgages  52,324   60,308   22,068   134,700 
 
Other loans  23,538   5,224   1,530   30,292 
 
Total domestic
  77,595   65,533   23,598   166,726 
 
Foreign
                
 
Banks  60,703   1,671   365   62,739 
 
Mortgages  5,533   2,249   599   8,381 
 
Other loans  116,217   13,112   40,511   169,8401
 
Total foreign
  182,453   17,032   41,475   240,960 
 
Total gross
  260,048   82,565   65,073   407,686 
 
                 
CHF million Within 1 year  1 to 5 years  Over 5 years  Total 
 
Domestic
                
 
Banks  1,235   1   0   1,236 
 
Mortgages  55,758   55,537   24,046   135,341 
 
Other loans  23,051   5,293   1,515   29,859 
 
Total domestic
  80,044   60,831   25,561   166,436 
 
Foreign
                
 
Banks  58,053   1,448   198   59,699 
 
Mortgages  4,243   3,432   477   8,152 
 
Other loans  152,535   8,746   2,234   163,515 
 
Total foreign
  214,831   13,626   2,909   231,366 
 
Total gross1
  294,875   74,457   28,470   397,802 
 
1 Includes Due from banks from Industrial Holdingsstudent loan auction rate securities (ARS) of CHF 27 million at 31 December 2007.8.4 billion and other debt instruments of CHF 17.1 billion reclassified from the category “held for trading” to “loans and receivables” and ARS acquired from clients of CHF 4.5 billion.

At 31 December 2007,2008, the total amount of dueDue from banks and loansLoans due after one year granted at fixed and floating rates wereare as follows:

                       
CHF million 1 to 5 years Over 5 years Total  1 to 5 years Over 5 years Total 
Fixed-rate loans 69,694 27,712 97,406  79,225 33,479 112,704 
Adjustable or floating-rate loans 4,763 758 5,521  3,340 31,594 34,934 
Total
 74,457 28,470 102,927  82,565 65,073 147,638 

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Financial information
Additional Disclosure Requireddisclosure required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)regulations

Impaired and Non-performing Loansnon-performing loans

A loan (included in Due from banks or Loans) is classified as non-performing: 1) when the payment of interest, principal or fees is overdue by more than 90 days and there is no firm evidence that they will be made good by later payments or the liquidation of collateral; 2) when insolvency proceedings have commenced; or 3) when obligations have been restructured on concessionary terms.

                               
CHF million 31.12.07 31.12.06 31.12.05 31.12.04 31.12.03  31.12.08 31.12.07 31.12.06 31.12.05 31.12.04 
Gross interest income that would have been recorded on non-performing loans:  
Domestic 39 50 81 107 171  16 39 50 81 107 
Foreign 4 10 8 17 23  3 4 10 8 17 
Interest income included in Net profit for non-performing loans:  
Domestic 40 56 72 106 163  32 40 56 72 106 
Foreign 2 8 9 8 8  4 2 8 9 8 

The table below provides an analysis of the Group’s non-performing loans. For further information see the “Credit risk”Risk and treasury management section inRisk, Treasury and Capital Management 2007.on Credit risk.

                               
CHF million 31.12.07 31.12.06 31.12.05 31.12.04 31.12.03  31.12.08 31.12.07 31.12.06 31.12.05 31.12.04 
Non-performing loans:  
Domestic 1,349 1,744 2,106 2,772 4,012  1,431 1,349 1,744 2,106 2,772 
Foreign 132 174 257 783 746  3,272 132 174 257 783 
Total non-performing loans
 1,481 1,918 2,363 3,555 4,758  4,703 1,481 1,918 2,363 3,555 

UBS does not, as a matter of policy, typically restructure loans to accrue interest at rates different from the original contractual terms or reduce the principal amount of loans. For more information refer to the “Credit risk” section of this report. Instead, specific loan allowances are established as necessary. Unrecognized interest related to restructured loans was not material to the results of operations in 2008, 2007, 2006, 2005 2004 or 2003.2004.

In addition to the non-performing loans shown above, the Group has CHF 4,442 million, CHF 911 million, CHF 710 million, CHF 1,071 million CHF 1,144 million and CHF 2,2411,144 million in “other impaired loans” for the years ended 31 December 2008, 2007, 2006, 2005 2004, and 2003,2004, respectively.

Other impaired loans are loans where the Group’s credit officers have expressed doubts as to the ability of the borrowers to repay the loans. For the years ended 31 December 2008, 2007, 2006, 2005 and 2004, they are loans not considered “non-performing” in accordance with Swiss regulatory guidelines, and for the year endedguidelines. As of 31 December 2003, they are loans that were current or less than 90 days in arrears with respect to payment of principal or interest. As of2008, 31 December 2007, 31 December 2006, 31 December 2005 and 31 December 2004, specific allowances of CHF 941 million, CHF 124 million, CHF 106 million, CHF 200 million, CHF 241 million, respectively, had been established against these loans.



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Financial information

Cross-border Outstandings

outstandings

Cross-border outstandings consist of general banking products such as loans and deposits with third parties, credit equivalents of over-the-counter (OTC) derivatives and securities financing, and the market value of the inventory of debt securities. Outstandings are monitored and reported on an ongoing basis by the credit risk control organization with a dedicated country risk information system. With the exception of the 33 most developed economies, these exposures are rigorously limited. The following analysis excludes Due from banks and Loans from Industrial Holdings.

Claims that are secured by third-party guarantees are recorded against the guarantor’s country of domicile. Outstandings that are secured by collateral are recorded against

the country where the asset could be liquidated. This follows

the “Guidelines for the Management of Country Risk”, which are applicable to all banks that are supervised by the Swiss Federal Banking Commission.Financial Market Supervisory Authority (FINMA).

The following tables list those countries for which cross-border outstandings exceeded 0.75% of total assets at 31 December 2008, 2007 2006 and 2005.2006. At 31 December 2007,2008, there were no outstandings that exceeded 0.75% of total assets in any country currently facing liquidity problems that the Group expects would materially affect the country’s ability to service its obligations.
For more information on country exposure, see the “Credit risk”Risk and treasury management section inRisk, Treasury and Capital Management 2007.on Credit risk.



                     
  31.12.08 
CHF million Banks  Private Sector  Public Sector  Total  % of total assets 
 
United States  13,869   71,584   14,234   99,687   4.9 
 
Japan  2,093   13,159   38,922   54,174   2.7 
 
Germany  19,098   10,418   6,010   35,526   1.8 
 
France  11,469   7,048   6,807   25,324   1.3 
 
United Kingdom  9,599   8,608   2,625   20,832   1.0 
 
Luxembourg  2,883   17,586   0   20,469   1.0 
 
                     
  31.12.07 
CHF million Banks  Private Sector  Public Sector  Total  % of total assets 
 
United States  13,110   192,049   16,545   221,704   9.8 
 
Japan  1,761   12,883   36,717   51,361   2.3 
 
Germany  21,384   12,354   2,249   35,988   1.6 
 
United Kingdom  6,624   14,647   8,552   29,823   1.3 
 
Cayman Islands  173   27,715   74   27,963   1.2 
 
France  10,620   7,075   4,605   22,300   1.0 
 
                     
  31.12.06 
CHF million Banks  Private Sector  Public Sector  Total  % of total assets 
 
United States  7,692   208,200   22,574   238,466   10.2 
 
Japan  2,283   8,263   30,158   40,704   1.7 
 
United Kingdom  11,149   16,098   559   27,806   1.2 
 
Germany  15,240   8,080   1,574   24,894   1.1 
 
                     
  31.12.05 
CHF million Banks  Private Sector  Public Sector  Total  % of total assets 
 
United States  6,700   133,561   23,297   163,558   7.9 
 
Germany  16,985   4,525   1,265   22,775   1.1 
 
Japan  2,044   7,582   10,824   20,450   1.0 
 
United Kingdom  6,384   11,423   555   18,362   0.9 
 
Italy  3,343   2,509   11,324   17,176   0.8 
 

159409

Financial information
Additional Disclosure Requireddisclosure required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)regulations

Summary of Movementsmovements in Allowancesallowances and Provisionsprovisions for Credit Lossescredit losses

The following table provides an analysis of movements in allowances and provisions for credit losses.

UBS writes off loans against allowances only on final settlement of bankruptcy proceedings, the sale of the underly-

ingunderlying assets and / and/or in case of debt forgiveness. Under Swiss law, a creditor can continue to collect from a debtor who has emerged from bankruptcy, unless the debt has been forgiven through a formal agreement.



                     
CHF million 31.12.07  31.12.06  31.12.05  31.12.04  31.12.03 
 
Balance at beginning of year
  1,332   1,776   2,802   3,775   5,015 
 
Domestic
                    
 
Write-offs
                    
 
Banks  0   0   0   0   0 
 
Construction  (9)  (14)  (16)  (49)  (73)
 
Financial institutions  (8)  (11)  (14)  (24)  (37)
 
Hotels and restaurants  (7)  (16)  (26)  (101)  (57)
 
Manufacturing1
  (45)  (40)  (39)  (77)  (121)
 
Private households  (68)  (89)  (131)  (208)  (262)
 
Public authorities  (1)  0   0   0   (18)
 
Real estate and rentals  (27)  (44)  (56)  (109)  (206)
 
Retail and wholesale  (62)  (20)  (25)  (68)  (67)
 
Services2
  (20)  (47)  (35)  (83)  (111)
 
Other3
  (21)  (2)  (4)  (9)  (43)
 
Total domestic write-offs
  (268)  (283)  (346)  (728)  (995)
 
Foreign
                    
 
Write-offs
                    
 
Banks  (1)  (3)  (164)  (21)  (17)
 
Chemicals  0   0   0   (1)  0 
 
Construction  0   0   0   (3)  0 
 
Electricity, gas and water supply  0   0   0   0   0 
 
Financial institutions  (15)  0   (50)  (34)  (112)
 
Manufacturing4
  (21)  (11)  (8)  (23)  (77)
 
Mining  0   (1)  (23)  (8)  (15)
 
Private households  (14)  (7)  (21)  (8)  (11)
 
Public authorities  (2)  (58)  (22)  (2)  0 
 
Real estate and rentals  0   0   (3)  0   (1)
 
Retail and wholesale  0   0   (9)  0   (76)
 
Services  0   0   0   (7)  (25)
 
Transport, storage and communication  0   0   0   0   (24)
 
Other5
  0   0   (5)  (21)  (83)
 
Total foreign write-offs
  (53)  (80)  (305)  (128)  (441)
 
Total write-offs
  (321)  (363)  (651)  (856)  (1,436)
 
                     
CHF million 31.12.08  31.12.07  31.12.06  31.12.05  31.12.04 
 
Balance at beginning of year
  1,164   1,332   1,776   2,802   3,775 
 
Domestic
                    
 
Write-offs
                    
 
Banks  0   0   0   0   0 
 
Construction  (6)  (9)  (14)  (16)  (49)
 
Financial institutions  (37)  (8)  (11)  (14)  (24)
 
Hotels and restaurants  (3)  (7)  (16)  (26)  (101)
 
Manufacturing1
  (31)  (45)  (40)  (39)  (77)
 
Private households  (112)  (68)  (89)  (131)  (208)
 
Public authorities  0   (1)  0   0   0 
 
Real estate and rentals  (10)  (27)  (44)  (56)  (109)
 
Retail and wholesale  (4)  (62)  (20)  (25)  (68)
 
Services2
  (7)  (20)  (47)  (35)  (83)
 
Other3
  0   (21)  (2)  (4)  (9)
 
Total domestic write-offs
  (210)  (268)  (283)  (346)  (728)
 
Foreign
                    
 
Write-offs
                    
 
Banks  (13)  (1)  (3)  (164)  (21)
 
Chemicals  (1)  0   0   0   (1)
 
Construction  0   0   0   0   (3)
 
Electricity, gas and water supply  0   0   0   0   0 
 
Financial institutions  (623)  (15)  0   (50)  (34)
 
Manufacturing4
  (6)  (21)  (11)  (8)  (23)
 
Mining  0   0   (1)  (23)  (8)
 
Private households  (5)  (14)  (7)  (21)  (8)
 
Public authorities  (2)  (2)  (58)  (22)  (2)
 
Real estate and rentals  0   0   0   (3)  0 
 
Retail and wholesale  0   0   0   (9)  0 
 
Services  0   0   0   0   (7)
 
Transport, storage and communication  (7)  0   0   0   0 
 
Other5
  (1)  0   0   (5)  (21)
 
Total foreign write-offs
  (658)  (53)  (80)  (305)  (128)
 
Total write-offs
  (868)  (321)  (363)  (651)  (856)
 
Recoveries
                    
 
Domestic  43   52   51   53   54 
 
Foreign  1   3   11   10   5 
 
Total recoveries
  44   55   62   63   59 
 
Net write-offs
  (824)  (266)  (301)  (588)  (797)
 
Increase/(decrease) in credit loss allowance and provision  3,007   242   (108)  (298)  (216)
 
Collective loan loss provisions  (11)  (4)  (48)  (76)  (25)
 
Other adjustments6
  (266)  (140)  13   (64)  65 
 
Balance at end of year
  3,070   1,164   1,332   1,776   2,802 
 
Net foreign exchange  (43)  (9)  10   50   2 
 
Other adjustments (223)7  (131)  3   (114)  63 
 
Total adjustments
  (266)  (140)  13   (64)  65 
 
1 Includes chemicals, food and beverages.  2 Includes transportation, communication, health and social work, education and other social and personal service activities.  3 Includes mining and electricity, gas and water supply.  4 Includes food and beverages.  5 Includes hotels and restaurants.6 See the table below for details.  7 An allowance was utilized as a result of foreclosure of certain loans in return for underlying collateral received.

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160

D – Information Required by Industry Guide 3 (continued)

Summary of Movements in Allowances and Provisions for Credit Losses (continued)

                     
CHF million 31.12.07  31.12.06  31.12.05  31.12.04  31.12.03 
 
Recoveries
                    
 
Domestic  52   51   53   54   49 
 
Foreign  3   11   10   5   38 
 
Total recoveries
  55   62   63   59   87 
 
Net write-offs
  (266)  (301)  (588)  (797)  (1,349)
 
Increase / (decrease) in credit loss allowance and provision  242   (108)  (298)  (216)  102 
 
Collective loan loss provisions  (4)  (48)  (76)  (25)    
 
Other adjustments1
  (140)  13   (64)  65   7 
 
Balance at end of year
  1,164   1,332   1,776   2,802   3,775 
 
Financial information
1 See the table below for details.
                     
CHF million 31.12.07  31.12.06  31.12.05  31.12.04  31.12.03 
 
Net foreign exchange  (9)  10   50   2   (57)
 
Other adjustments  (131)2  3   (114)  63   64 
 
Total adjustments
  (140)  13   (64)  65   7 
 
2 Write-downs in 2007 relate to loans that were subsequently securitized.

161

Additional Disclosure Required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Allocation of the Allowancesallowances and Provisionsprovisions for Credit Lossescredit losses

The following table provides an analysis of the allocation of the allowances and provisions for credit loss by industry sector and geographic location at 31 December 2008, 2007, 2006, 2005 2004 and 2003.2004. For a description of procedures with respect to allowances and provisions for credit losses, see the “Credit risk”Risk and treasury management section inRisk, Treasury and Capital Management 2007.The following analysis includes Due from banks from Industrial Holdings.on Credit risk.

                               
CHF million 31.12.07 31.12.06 31.12.05 31.12.04 31.12.03  31.12.08 31.12.07 31.12.06 31.12.05 31.12.04 
Domestic
  
Banks 10 10 10 10 10  16 10 10 10 10 
Construction 43 72 91 112 158  39 43 72 91 112 
Financial institutions 52 61 75 82 137  18 52 61 75 82 
Hotels and restaurants 10 27 49 98 214  8 10 27 49 98 
Manufacturing1
 113 155 174 224 327  71 113 155 174 224 
Private households 190 187 262 333 511  121 190 187 262 333 
Public authorities 1 3 8 9 9  1 1 3 8 9 
Real estate and rentals 57 99 168 250 383  50 57 99 168 250 
Retail and wholesale 247 311 330 363 201  262 247 311 330 363 
Services2
 112 113 196 222 549  78 112 113 196 222 
Other3
 76 107 61 188 150  92 76 107 61 188 
Total domestic
 911 1,145 1,424 1,891 2,649  756 911 1,145 1,424 1,891 
Foreign
  
Banks4
 18 20 35 246 256  6 18 20 35 246 
Chemicals 1 4 5 4 5  960 1 4 5 4 
Construction 1 2 2 1 0  8 1 2 2 1 
Electricity, gas and water supply 3 8 16 15 0  2 3 8 16 15 
Financial institutions 112 9 8 140 168  542 112 9 8 140 
Manufacturing5
 20 37 57 112 359  25 20 37 57 112 
Mining 0 0 1 14 19  4 0 0 1 14 
Private households 15 26 30 48 48  233 15 26 30 48 
Public authorities 20 21 72 66 69  19 20 21 72 66 
Real estate and rentals 8 4 3 5 7  208 8 4 3 5 
Retail and wholesale 4 4 1 95 51  80 4 4 1 95 
Services 4 7 27 32 32  19 4 7 27 32 
Transport, storage and communication 1 1 0 1 195  185 1 1 0 1 
Other6
 12 6 8  (75)  (345) 0 12 6 8  (75)
Total foreign
 219 149 265 704 864  2,291 219 149 265 704 
Collective loan loss provisions7w
 34 38 86 207 262 
Collective loan loss provisions7
 23 34 38 86 207 
Total allowances and provisions for credit losses8
 1,164 1,332 1,775 2,802 3,775  3,070 1,164 1,332 1,775 2,802 
1 Includes chemicals, food and beverages.  2 Includes transportation, communication, health and social work, education and other social and personal service activities.  3 Includes mining, electricity, gas and water supply.  4 Counterparty allowances and provisions only. Country provisions with banking counterparties amounting to CHF 0 million, CHF 0 million, CHF 0 million, CHF 37 million, and CHF 17 million are disclosed under Collective loan loss provisions for 2008, 2007, 2006, 2005 and 2004, respectively.  5 Includes food and beverages.  6 Includes hotels and restaurants.  7 The 2008, 2007, 2006, 2005 2004 and 20032004 amounts include CHF 0, CHF 0 million, CHF 0 million, CHF 48 million and CHF 161 million, and CHF 262 million , respectively, of country provisions.  8 The 2008, 2007, 2006, 2005 2004 and 20032004 amounts include CHF 31 million, CHF 63 million, CHF 76 million, CHF 109 million, CHF 214 million, and CHF 290 million , respectively, of provisions for unused commitments and contingent liabilities.

162411

D – Information Required by Industry Guide 3 (continued)

Financial information
Additional disclosure required under SEC regulations

Due from Banksbanks and Loansloans by Industry Sectorindustry sector (gross)

The following table presents the percentage of loans in each industry sector and geographic location to total loans. This table can be read in conjunction with the preceding table showing the breakdown of the allowances and provisions for credit losses by industry sectors to evaluate the credit risks in each of the categories.

                               
in % 31.12.07 31.12.06 31.12.05 31.12.04 31.12.03  31.12.08 31.12.07 31.12.06 31.12.05 31.12.04 
Domestic
  
Banks1
 0.3 0.2 0.4 0.5 0.2  0.4 0.3 0.2 0.4 0.5 
Construction 0.3 0.4 0.6 0.7 0.8  0.3 0.3 0.4 0.6 0.7 
Financial institutions 1.4 1.6 1.3 1.5 1.6  2.0 1.4 1.6 1.3 1.5 
Hotels and restaurants 0.5 0.6 0.6 0.8 1.0  0.4 0.5 0.6 0.6 0.8 
Manufacturing2
 1.0 1.0 1.3 2.0 2.5  1.0 1.0 1.0 1.3 2.0 
Private households 30.2 33.5 35.3 37.6 40.0  28.9 30.2 33.5 35.3 37.6 
Public authorities 1.2 1.4 1.7 2.0 2.1  1.0 1.2 1.4 1.7 2.0 
Real estate and rentals 2.9 3.2 3.7 4.1 4.9  2.9 2.9 3.2 3.7 4.1 
Retail and wholesale 1.3 1.3 1.5 1.7 2.4  1.2 1.3 1.3 1.5 1.7 
Services3
 1.5 1.9 2.6 3.3 3.7  1.5 1.5 1.9 2.6 3.3 
Other4
 0.8 1.3 1.1 0.2 0.4  0.8 0.8 1.3 1.1 0.2 
Total domestic
 41.4 46.4 50.1 54.4 59.6  40.4 41.4 46.4 50.1 54.4 
Foreign
  
Banks1
 15.0 14.2 10.2 12.3 12.3  15.4 15.0 14.2 10.2 12.3 
Chemicals 0.2 0.4 0.9 0.1 0.1  0.7 0.2 0.4 0.9 0.1 
Construction 0.2 0.1 0.1 0.0 0.0  0.1 0.2 0.1 0.1 0.0 
Electricity, gas and water supply 0.5 0.3 0.5 0.3 0.1  0.7 0.5 0.3 0.5 0.3 
Financial institutions 24.0 19.2 19.7 16.1 12.1  24.4 24.0 19.2 19.7 16.1 
Manufacturing5
 1.2 0.9 1.2 1.0 1.0  1.2 1.2 0.9 1.2 1.0 
Mining 1.1 0.9 1.1 0.6 0.4  1.1 1.1 0.9 1.1 0.6 
Private households 10.7 10.0 12.1 10.8 8.3  8.1 10.7 10.0 12.1 10.8 
Public authorities 1.0 0.6 0.5 0.4 0.5  2.7 1.0 0.6 0.5 0.4 
Real estate and rentals 1.3 1.2 0.9 0.3 0.2  1.0 1.3 1.2 0.9 0.3 
Retail and wholesale 0.6 0.5 0.4 0.4 0.7  0.6 0.6 0.5 0.4 0.4 
Services 2.3 4.7 1.8 2.9 3.1  2.4 2.3 4.7 1.8 2.9 
Transport, storage and communication 0.4 0.4 0.4 0.3 1.4  0.9 0.4 0.4 0.4 0.3 
Other6
 0.1 0.2 0.1 0.1 0.2  0.3 0.1 0.2 0.1 0.1 
Total foreign
 58.6 53.6 49.9 45.6 40.4  59.6 58.6 53.6 49.9 45.6 
Total gross
 100.0 100.0 100.0 100.0 100.0  100.0 100.0 100.0 100.0 100.0 
1 Includes Due from banks and Loans from Industrial Holdings in the amount of CHF 0 for 2008, CHF 27 million for 2007, CHF 93 million for 2006, CHF 728 million for 2005 and CHF 909 million for 2004 and CHF 220 million for 2003.  2004.  2 Includes chemicals, food and beverages.  3 Includes transportation, communication, health and social work, education and other social and personal service activities.  4 Includes mining and electricity, gas and water supply.  5 Includes food and beverages.  6 Includes hotels and restaurants.

163412

Additional Disclosure Required under SEC Regulations

D – Information Required by Industry Guide 3 (continued)

Financial information

Loss History Statisticshistory statistics

The following is a summary of the Group’s loan loss history (relating to Due from banks and Loans). The table below does not include loans designated at fair value.

                               
CHF million, except where indicated 31.12.07 31.12.06 31.12.05 31.12.04 31.12.03  31.12.08 31.12.07 31.12.06 31.12.05 31.12.04 
Gross loans1
 397,802 349,524 315,210 279,769 255,439  407,685 397,802 349,524 315,210 279,769 
Impaired loans 2,392 2,628 3,434 4,699 6,999  9,145 2,392 2,628 3,434 4,699 
Non-performing loans 1,481 1,918 2,363 3,555 4,758  4,703 1,481 1,918 2,363 3,555 
Allowances and provisions for credit losses2
 1,164 1,332 1,776 2,802 3,775  3,070 1,164 1,332 1,776 2,802 
Net write-offs 266 301 588 797 1,349  824 266 301 588 797 
Credit loss (expense) / recovery  (238) 156 375 241  (102)
Credit loss (expense)/recovery  (2,996)  (238) 156 375 241 
Ratios
  
Impaired loans as a percentage of gross loans 0.6 0.8 1.1 1.7 2.7  2.2 0.6 0.8 1.1 1.7 
Non-performing loans as a percentage of gross loans 0.4 0.5 0.7 1.3 1.9  1.2 0.4 0.5 0.7 1.3 
Allowances and provisions for credit losses as a percentage of:  
Gross loans 0.3 0.4 0.6 1.0 1.5  0.8 0.3 0.4 0.6 1.0 
Impaired loans 48.7 50.7 51.7 59.6 53.9  33.6 48.7 50.7 51.7 59.6 
Non-performing loans 78.6 69.4 75.2 78.8 79.3  65.3 78.6 69.4 75.2 78.8 
Allocated allowances as a percentage of impaired loans3
 41.7 46.3 46.4 51.6 46.8  31.8 41.7 46.3 46.4 51.6 
Allocated allowances as a percentage of non-performing loans4
 58.9 58.0 59.0 61.4 55.1  41.8 58.9 58.0 59.0 61.4 
Net write-offs as a percentage of:  
Gross loans 0.1 0.1 0.2 0.3 0.5  0.2 0.1 0.1 0.2 0.3 
Average loans outstanding during the period 0.0 0.1 0.1 0.2 0.5  0.2 0.0 0.1 0.1 0.2 
Allowances and provisions for credit losses 22.9 22.6 33.1 28.4 35.7  26.8 22.9 22.6 33.1 28.4 
Allowance and provisions for credit losses as a multiple of net write-offs 4.38 4.43 3.02 3.52 2.80  3.73 4.38 4.43 3.02 3.52 
1 Includes Due from banks and Loans from Industrial Holdings in the amount of CHF 0 for 2008, CHF 27 million for 2007, CHF 93 million for 2006, CHF 728 million for 2005 and CHF 909 million for 2004 and CHF 220 million for 2003.  2004.  2 Includes Collective loan loss provisions.  3 Allowances relating to impaired loans only.  4 Allowances relating to non-performing loans only.

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Sources of information

Annual report 2007

Four reports make up UBS’s fullAnnual Report 2007. They comply with the US disclosure requirements for foreign private issuers as defined by Form 20-F of the Securities and Exchange Commission (SEC) and combine audited and non-audited information. All four reports are available in English and German (SAP no.80531). The four reports are:

Strategy, Performance and Responsibility 2007

This provides a description of our firm, its strategy, organizational structure and financial performance for the last two years. It also discusses our standards for corporate behavior and responsibility, outlines demographic trends in our workforce and describes the way our people learn and are led.

Risk, Treasury and Capital Management 2007

In addition to outlining the principles by which we manage and control risk, this report provides an account of developments in credit risk, market risk, operational risk and treasury management during 2007. It also provides information on UBS shares.

Corporate Governance and Compensation Report 2007

Comprehensive information on our governance arrangements is included in this report, which also explains how we manage our relationships with regulators and shareholders. Compensation of senior management and the Board of Directors (executive and non-executive members) is discussed here. This report can be ordered separately (SAP no. 82307).

Financial Statements 2007

This comprises the audited financial statements of UBS for 2007, 2006 and 2005, prepared according to the International Financial Reporting Standards (IFRS). It also includes the audited financial statements of UBS AG (the parent bank) for 2007 and 2006, prepared according to Swiss banking law. Additional disclosure required by Swiss and US regulations is included where appropriate.

In addition to the four reports,Review 2007is distributed broadly to UBS shareholders and contains key information on our strategy and financials. This booklet summarizes the information in the four-part annual report.

Quarterly reports

We provide detailed quarterly financial reporting and analysis, including comment on the progress of our businesses and key strategic initiatives. These quarterly reports are available in English.

How to order reports

These reports are available in PDF format on the internet atwww.ubs.com/investors/topicsin the reporting section. Printed copies can be ordered from the same website by accessing the order / subscribe panel on the right-hand side of the screen. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, Information Center, P.O. Box, CH-8098 Zurich, Switzerland.



166

Information tools for investors

Website

Our Analysts & Investors website atwww.ubs.com/investorsoffers a wide range of information about UBS, financial information (including SEC filings), corporate information, share price graphs and data, an event calendar, dividend information and recent presentations given by senior management to investors at external conferences. Information on the internet is available in English and German, with some sections in French and Italian.

Messaging service

On the Analysts & Investors website, you can register to receive news alerts about UBS via Short Messaging System (SMS) or e-mail. Messages are sent in either English or German and users are able to state their preferences for the topics of the alerts received.

Results presentations

Senior management presents UBS’s results every quarter. These presentations are broadcast live over the internet, and can be downloaded on demand. The most recent result webcasts can be found in the financials section of our Analysts & Investors website.

Form 20-F and other submissions to the US
Securities and Exchange Commission

We file periodic reports and submit other information about UBS to the US Securities and Exchange Commission (SEC). Principal among these filings is our annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934.
Our Form 20-F filing is structured as a “wrap-around” document. Most sections of the filing can be satisfied by referring to parts of the four reports (Strategy, Performance and Responsibility 2007,Risk, Treasury and Capital Management 2007,Corporate Governance and Compensation Report 2007andFinancial Statements 2007).However, there is a small amount of additional information in Form 20-F which is not presented elsewhere, and is particularly targeted at readers in the US. You are encouraged to refer to this additional disclosure.
You may read and copy any document that we file with the SEC on the SEC’s website,www.sec.gov,or at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, DC, 20549. Please call the SEC by dialing 1-800-SEC-0330 (in the US) or +1 202 942 8088 (outside the US) for further information on the operation of its public reference room. You may also inspect our SEC reports and other information at the New York Stock Exchange, Inc., 20 Broad Street, New York, NY 10005. Much of this additional information may also be found on the UBS website atwww.ubs.com/investors, and copies of documents filed with the SEC may be obtained from UBS’s Investor Relations team at the address shown on the next page.



Corporate information

The legal and commercial name of the company is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS.

UBS AG is incorporated and domiciled in Switzerland and operates under Swiss Company Law and Swiss Federal Banking Law as an Aktiengesellschaft, a corporation that has issued shares of common stock to investors.

The addresses and telephone numbers of our two registered offices are: Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41-44-234 11 11; and Aeschenvorstadt 1, CH-4051 Basel, Switzerland, phone +41-61-288 20 20.

UBS AG shares are listed on the SWX Swiss Exchange (traded through its trading platform virt-x), on the New York Stock Exchange (NYSE) and on the Tokyo Stock Exchange (TSE).


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Contacts

Switchboards
For all general queries.Zurich+41-44-234 1111
London+44-20-7568 0000
New York+1-212-821 3000
Hong Kong+852-2971 8888
Investor Relations
Our Investor Relations team supports institutional, professional and retail investors from our offices in Zurich and New York.Hotline+41-44-234 4100UBS AG
New York+1-212-882 5734Investor Relations
Fax (Zurich)+41-44-234 3415P.O. Box
www.ubs.com/investorsCH-8098 Zurich, Switzerland
sh-investorrelations@ubs.com
Media Relations
Our Media Relations team supports global media and journalists from offices in Zurich, London, New York and Hong Kong.Zurich+41-44-234 8500mediarelations@ubs.com
London+44-20-7567 4714ubs-media-relations@ubs.com
New York+1-212-882 5857mediarelations-ny@ubs.com
www.ubs.com/mediaHong Kong+852-2971 8200sh-mediarelations-ap@ubs.com
Shareholder Services
UBS Shareholder Services, a unit of the Company Secretary, is responsible for the registration of the global registered shares.Hotline+41-44-235 6202UBS AG
Fax+41-44-235 3154Shareholder Services
P.O. Box
CH-8098 Zurich, Switzerland
sh-shareholder-services@ubs.com
US Transfer Agent
For all global registered share-related queries in the US.Calls from the US+866-541 9689BNY Mellon Shareowner Services
Calls outside the US+1-201-680 6578480 Washington Boulevard
www.melloninvestor.comFax+1-201-680 4675Jersey City, NJ 07310, USA
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Cautionary statement regarding forward-looking statements |This report contains statements that constitute “forward-looking statements”, including but not limited to statements relating to the anticipated effect of transactions described herein, risks arising from the current market crisis and other risks specific to ourUBS’s business, and the implementation of strategic initiatives, as well as other statements relating to our future business development and economic performance and our intentions with respect to future returns of capital.performance. While these forward-looking statements represent ourUBS’s judgments and future expectations concerning the development of ourits business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from ourUBS’s expectations. These factors include, but are not limited toto: (1) the extent and nature of future developments in the US sub-prime market and in other market segments that have been or may be affected by the current market crisis;crisis and their effect on UBS’s assets and exposures, including UBS’s remaining net and gross exposures related to the United States mortgage market; (2) developments affecting the availability of capital and funding to UBS and other financial institutions, including any changes in UBS’s credit spreads and ratings; (3) other market and macro-economicmacroeconomic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates, whether or not arising directly or indirectly from the current market crisis; (3) the impact of these developments on other markets and asset classes;rates; (4) changes in internal risk control and in the regulatory capital treatment of UBS’s positions, in particular those affected by the current market crisis; (5) limitations in the effectiveness of ourUBS’s internal processes for risk management, processes, of our risk control, measurement control and modeling, systems, and of financial models generally; (5) the possible consequences of governmental investigations of certain of UBS’s past business activities, including the possibility that tax or regulatory authorities in various jurisdictions will focus on the cross-border wealth management services provided by UBS and other financial institutions; (6) developments relatingthe degree to UBS’s access to capitalwhich UBS is successful in implementing its remediation plans and funding, including anystrategic and organizational changes, in our credit ratings;and whether those plans and changes will have the effects anticipated; (7) changes in the financial position or creditworthiness of ourUBS’s customers, obligors and counterparties, and developments in the markets in which they operate;operate, including possible failures resulting from the current market crisis and adverse economic environment; (8) management changes and changes to the internal or overall structure of our Business Groups;UBS’s business divisions; (9) the occurrence of operational failures, such as fraud, unauthorized trading and systems failures; (10) legislative, governmental and regulatory developments;developments, including the effect of new and more stringent capital requirements and of direct or indirect regulatory constraints on UBS’s business activities; (11) changes in accounting standards or policies, and accounting determinations affecting the recognition of gain or loss, the valuation of goodwill and other assets or other matters; (12) changes in and the effect of competitive pressures; (12)pressures, including the possible loss of key employees as a result of compensation issues or for other reasons; (13) technological developments; and (13)(14) the impact of all such future developments on positions held by UBS, on ourits short-term and longer-term earnings, on the cost and availability of funding and on our BISUBS’s capital ratios. In addition, these results could depend on other factors that we have previously indicated could adversely affect our business and financial performance which are contained in other parts of this document and in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth elsewhere in this document and in documents furnished by UBS and filings made by UBS with the SEC, including UBS’s Annual Report on Form 20-F for the year ended 31 December 2007.2008. UBS is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

Rounding | Numbers presented throughout this report may not add up precisely to the totals provided in the tables. Percentages and percent changes are calculated based on rounded figures displayed in the tables and text and may not precisely reflect the percentages and percent changes that would be derived based on figures that are not rounded.

Imprint |Publisher / Copyright: Publisher: UBS AG, P.O. Box, CH-8098 Zurich; P.O. Box, Switzerland, CH-4002 Basel, Switzerland; www.ubs.com | Languages: English, Language: English/German
Order number Annual Report 2007: | SAP-No. 80531E-0801

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()(UBS ANNUAL REPORT 2008)