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Banco Santander SAannual report 2009 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 Contents Letter to shareholders 2 5 UBS reporting at a glance 6 Other sources of information 7 Contacts 1. Strategy, performance and responsibility Financial performance 12 Strategy and structure 16 UBS corporate governance 20 The making of UBS 22 Current market climate and industry drivers 25 Risk factors 30 31 Measurement and analysis of performance 35 Accounting and reporting structure changes 37 UBS results 44 Balance sheet 47 Off-balance sheet 52 Cash flows 53 Our employees 58 Corporate responsibility 2. UBS business divisions and Corporate Center 74 Wealth Management & Swiss Bank 80 Wealth Management Americas 86 Global Asset Management Investment Bank 95 103 Corporate Center 3. Risk and treasury management 112 Risk management and control 116 Credit risk 130 Market risk 137 Operational risk 139 Risk concentrations 142 Treasury management 143 150 152 Capital management 158 Shares and capital instruments 161 UBS shares in 2009 164 Basel II Pillar 3 Liquidity and funding management Interest rate and currency management 4. Corporate governance and compensation 186 Corporate governance 187 Group structure and shareholders 189 Capital structure 191 Board of Directors 198 Group Executive Board 203 Shareholders’ participation rights 205 Change of control and defense measures 206 Auditors 208 210 Regulation and supervision 213 Compliance with New York Stock Exchange listing standards on corporate governance Information policy 215 Compensation and shareholdings 216 Compensation governance 227 2009 compensation for the Board of Directors and Group Executive Board 231 Shares and options held by the Board of Directors and Group Executive Board (at end of 2009) 5. Financial information Introduction and accounting principles 244 245 Critical accounting policies 249 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 399 Additional disclosure required under SEC regulations 399 A – Introduction 400 B – Selected financial data 404 C – Information on the company 405 D – Information required by industry guide 3 1 Annual Report 2009 Letter to shareholders Dear Shareholders, At our Annual General Meeting in April 2009, we laid out our priorities for the bank: strengthening our capital base, reducing risk and costs and returning UBS to profitability. By the end of 2009 we delivered on each of these objectives and, importantly, we reported a net profit in the fourth quar- ter. In November 2009, we set out a clear strategic direction and redefined what UBS stands for. The achievements of 2009 and our renewed strategic focus have created a firm basis on which to build a stronger, more profitable UBS and to regain your trust. The net loss attributable to UBS shareholders for 2009 was CHF 2.7 billion, a considerable reduction from the CHF 21.3 billion loss recorded in the prior year. This improvement was due to much lower losses on residual risk positions in the Investment Bank and reduced operating expenses for the Group. The result for 2009 included a number of signifi- cant items, namely an own credit loss of CHF 2.0 billion which occurred as a result of the markets’ perception of our improved creditworthiness, charges relating to the sale of UBS Pactual of CHF 1.4 billion, restructuring charges of CHF 0.8 billion, and a CHF 0.3 billion gain on the mandatory con- vertible notes converted in August 2009. Excluding these significant items, the underlying pre-tax result for the year was a profit of CHF 1.4 billion. The Group’s net profit attrib- utable to shareholders for the fourth quarter was CHF 1.2 billion, including a positive contribution from each of our business divisions. The global economy experienced one of its most difficult years in 2009, with the financial crisis evolving into one of the worst post-war recessions. Governments and central banks took further action to stabilize markets and stimulate the economy, helping to restore investor confidence world- wide. As the economic outlook gradually improved, stock prices began to recover, starting at the end of the first quar- ter of 2009 and continuing into the second half of 2009. At the end of 2009 our invested asset base was CHF 2,233 billion, broadly in line with the figure for year- end 2008. This result reflects the strong investment perfor- mance we delivered to our clients across our three asset gathering business divisions, which more than offset unac- ceptably high outflows. However, the Group’s average invest- ed asset base for the year was down significantly, and this was the primary driver of reduced profits in these businesses. In Wealth Management & Swiss Bank, average invested as- sets were 20% below the 2008 average and together with interest margin pressure and lower client activity, led to a 25% decline in revenues. Although this was partly offset by over CHF 1.5 billion of cost reductions, profits for 2009 fell by 35% to CHF 3.9 billion compared with 2008. Global Asset Management reported a profit of CHF 438 million in 2009, 67% lower than in 2008 due to lower revenues on a lower average invested asset base and a CHF 191 million net good- will impairment charge associated with the sale of UBS Pac- tual. Wealth Management Americas revenues fell 12% in the year, compared with an 11% decline in average invested as- sets. The pre-tax profit for 2009 was CHF 32 million. In our Investment Bank, the pre-tax result for 2009 was a loss of CHF 6.1 billion compared with a pre-tax loss of CHF 34.3 billion for 2008. The improvement reflects a significant reduction in losses on residual risk positions. During 2009, we laid out the steps necessary to rebuild the bank, and reached a number of important milestones on the bank’s road to recovery. In April, we set headcount and cost reduction targets for 2010. By the end of 2009, we had largely achieved these targets. Headcount was reduced by 12,500 to reach our 65,000 target, and fixed costs were reduced by over CHF 3 billion compared with the prior year. We continued to reduce our risks and balance sheet, and by the end of 2009 both were more than 30% lower than the year before. In June, we further strengthened our capital base through the issuance and placement of CHF 293 mil- lion shares from authorized capital. Combined with lower risk weighted assets, this resulted in a BIS tier 1 ratio of 15.4% at the end of 2009 compared with 11.0% one year earlier. Our FINMA leverage ratio also improved to 3.9% from 2.5% one year ago. In the third quarter, we reached two significant milestones: The Swiss government exited its investment in UBS with a profit of CHF 1.2 billion; and we agreed to a settlement with the US tax authorities in relation to the John Doe summons. During the fourth quarter we set a clear strategic direction to rebuild the firm. At our Investor Day in November, we outlined our new strategy and the targets we have established for ourselves. Our goals are to strength- en our position as a leading global wealth management business, to be a leading client-focused investment bank and to be economically profitable in every segment, market and business in which we operate. We aim to improve our operating performance substantially, building toward our medium-term target of CHF 15 billion of annual profit be- fore tax. 2 3 Annual Report 2009 Our efforts to reposition the firm are taking place alongside ongoing regulatory changes. Proposed chang- es relating to capital adequacy and liquidity requirements, efforts to mitigate the “too big to fail” risk, financial prod- ucts regulation, compensation guidelines, or the US “Volck- er” proposals may have profound consequences for the in- dustry as a whole. In preparation for dealing with a future financial crisis, relevant financial authorities will meet and share information to ensure that adequate contingency plans have been put into place to prevent serious domestic or international financial instability that would have an ad- verse impact on the real economy. We will maintain flexibil- ity in our business model to adjust to future regulatory change. We are continuing to meet our obligations under the settlement with the US Internal Revenue Service (IRS) relating to the John Doe summons proceeding. Based upon our compliance with the terms of the settlement, the IRS has withdrawn the summons with respect to all accounts other than the approximately 4,450 accounts for which the IRS requested information under the US/Swiss tax treaty. The recent decision by the Swiss Federal Administrative Court, under which certain account information cannot be provid- ed to the IRS, is a matter to be resolved by the Swiss and US Governments as contemplated by the terms of the settle- ment. We will continue to comply fully with our obligations, including providing information to the Swiss Federal Tax Ad- ministration and completing the exit of the US cross-border business out of non-SEC registered entities. Further, we con- tinue to recommend to our current and former US clients, to the extent applicable to their circumstances, the disclosure of their offshore assets to the IRS. Outlook – In 2010, we expect to see the full effects of the progress we have made in improving operating efficiency, reducing risk and rebuilding and re-focusing our businesses. We are confident the steps we are taking to reduce client outflows in our wealth and asset management business divi- sions will be effective, but in the immediate future we still expect to report net outflows with some pressure on mar- gins. We expect that the Investment Bank’s performance for the year as a whole will improve, in part because its residual risk positions will have a much reduced effect on results. Our Group results are heavily dependent on market vitality, and more favorable market conditions in January and February 2010 have benefited most of our businesses. 15 March 2010 UBS Kaspar Villiger Chairman of the BoD Oswald J. Grübel Group Chief Executive Officer 4 UBS reporting at a glance Annual publications Quarterly publications Annual report (SAP no. 80531) Published in both German and English, this single volume report provides a description of: – UBS’s strategy, performance and responsibility – the strategy and performance of the business divisions Letter to shareholders The letter provides a quarterly update from executive manage- ment on our strategy and performance. The letter is published in English, German, French and Italian. and the Corporate Center – risk and treasury management – corporate governance and executive compensation – financial information, including the financial statements Financial report (SAP no. 80834) This report provides a detailed description of our strategy and performance for the respective quarter. It is published in English. Review (SAP no. 80530) The booklet contains key information on UBS’s strategy and financials. It is published in English, German, French and Italian. Compensation Report (SAP no. 82307) Compensation for senior management and the Board of Directors (executive and non-executive members) is dis- cussed here. It is published in English and German. How to order reports These reports are available in PDF format on the internet at www.ubs.com/investors/topics in the Financial informa- tion section. Printed copies can be ordered from the same website by accessing the order / subscribe panel on the left- hand side of the screen. Alternatively, they can be ordered by quoting the SAP number and the language prefer- ence where applicable, from UBS AG, Information Center, P.O. Box, CH-8098 Zurich, Switzerland. 5 Annual Report 2009 Other sources of information Website The “Analysts & Investors” section at www.ubs.com/inves- tors provides the following information on UBS: financial in- formation (including SEC results related filings); corporate information; UBS share price charts and data and dividend information; the UBS event calendar and dividend informa- tion; and the latest presentations by management for inves- tors and financial analysts. Information on the internet is available in English and German, with some sections in French and Italian. Result presentations Our quarterly results presen tations are webcast live. A play- back of the most recent presentation is downloadable at www.ubs.com/presentations. Messaging service / UBS news alert On the www.ubs.com/newsalerts website, 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 theme preferences for the alerts received. 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 the annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934. The filing of Form 20-F 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 we file with the SEC is available to read and copy 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 the operation of its public reference room. Much of this additional information may also be found on the UBS website at www.ubs.com/investors, and copies of documents filed with the SEC may be obtained from our Investor Relations team at www.ubs.com/investors. Corporate information The legal and commercial name of the company is UBS AG. The com- pany 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 domi- ciled in Switzerland and operates under Swiss Company Law and Swiss Federal Banking Law as an Aktien- gesellschaft, 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 50 50. UBS AG shares are currently listed on the SIX Swiss Exchange, the New York Stock Exchange and the Tokyo Stock Exchange (TSE). We expect to de-list our shares from the TSE in the near future. 6 Contacts Switchboards For all general queries. Investor Relations UBS’s Investor Relations team supports institutional, professional and retail investors from our offices in Zurich and New York. www.ubs.com/investors Zurich London New York Hong Kong Hotline New York Fax (Zurich) Media Relations UBS’s Media Relations team supports global media and journalists from offices in Zurich, London, New York and Hong Kong. www.ubs.com/media Zurich London New York Hong Kong Shareholder Services UBS Shareholder Services, a unit of the Company Secretary, is responsible for the registration of the global registered shares. Hotline Fax +41-44-234 1111 +44-20-7568 0000 +1-212-821 3000 +852-2971 8888 +41-44-234 4100 +1-212-882 5734 +41-44-234 3415 +41-44-234 8500 +44-20-7567 4714 +1-212-882 5857 +852-2971 8200 +41-44-235 6202 +41-44-235 3154 US Transfer Agent For all global registered share-related queries in the US. www.melloninvestor.com Calls from the US Calls outside the US Fax +866-541 9689 +1-201-680 6578 +1-201-680 4675 UBS AG Investor Relations P.O. Box CH-8098 Zurich, Switzerland sh-investorrelations@ubs.com mediarelations@ubs.com ubs-media-relations@ubs.com mediarelations-ny@ubs.com sh-mediarelations-ap@ubs.com UBS AG Shareholder Services P.O. Box CH-8098 Zurich, Switzerland sh-shareholder-services@ubs.com BNY Mellon Shareowner Services 480 Washington Boulevard Jersey City, NJ 07310, USA sh-relations@melloninvestor.com 7 Strategy, performance and responsibility Information assured according to the Global Reporting Initiative (GRI) Content of the sections “Our employees” and “Corporate responsibility” has been assured by SGS Société Générale de Surveillance SA (SGS) using the Global Reporting Initiative Sustainability Reporting Guidelines, as evidenced in the SGS Assurance Statement on page 69. The scope of the assurance also includes text and data on the website of UBS. Both the relevant texts in the 2009 annual report and on the website are referenced in the GRI index published on www.ubs.com/gri. Strategy, performance and responsibility Strategy and performance – UBS is a client-focused financial services firm that offers a strong combina- tion of wealth management, asset management and investment banking services on a global and regional basis. – We aim to generate sustainable earnings, create value for our shareholders and be economically profitable in every segment, market and business in which we operate. UBS key figures CHF million, except where indicated Group results Operating income Operating expenses Operating profit before tax (from continuing and discontinued operations) Net profit attributable to UBS shareholders Diluted earnings per share (CHF) 1 Key performance indicators, balance sheet and capital management 2 Performance Return on equity (RoE) (%) Return on risk-weighted assets, gross (%) Return on assets, gross (%) Growth Net profit growth (%) 3 Net new money (CHF billion) 4 Efficiency Cost / income ratio (%) Capital strength BIS tier 1 ratio (%) 5 FINMA leverage ratio (%) 5 Balance sheet and capital management Total assets Equity attributable to UBS shareholders BIS total ratio (%) 5 BIS risk-weighted assets 5 BIS tier 1 capital 5 Additional information Invested assets (CHF billion) Personnel (full-time equivalents) Market capitalization 6 Long-term ratings Fitch, London Moody’s, New York Standard & Poor’s, New York As of or for the year ended 31.12.09 31.12.08 31.12.07 22,601 25,162 (2,569) (2,736) (0.75) (7.8) 9.9 1.5 N/A (147.3) 796 28,555 (27,560) (21,292) (7.63) (58.7) 1.2 0.2 N/A (226.0) 103.0 753.0 15.4 3.93 11.0 2.45 1,340,538 2,014,815 41,013 19.8 206,525 31,798 2,233 65,233 57,108 A+ Aa3 A+ 32,531 15.0 302,273 33,154 2,174 77,783 43,519 A+ Aa2 A+ 31,721 35,463 (3,597) (5,247) (2.41) (10.5) 8.6 1.3 N/A 140.6 111.0 2,274,891 36,875 3,189 83,560 108,654 AA Aaa AA 1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report. 2 For the definitions of our key performance indicators refer to the “Measure- ment and analysis performance” section of this report. 3 Not meaningful if either the current period or the comparison period is a loss period. 4 Excludes interest and dividend income. 5 Refer to the “Capital management” section of this report. 6 Refer to the “UBS shares in 2009” section of this report. 10 Our strategic priorities Measures taken in 2009 We are concentrating on: – further strengthening our position as a leading client- focused bank for high net worth and ultra high net worth clients around the world; In addition to stabilizing our financial condition, we have already undertaken several adjustments to governance and structures during the last few months to initiate and drive our transformation. – continuing to be a leading firm across all client segments in Switzerland; and Establishment of Investment Products & Services – being a top tier bank in growth regions where we choose to operate. Re-focusing the business portfolio We will further integrate our wealth management, asset management and investment banking businesses to generate more value, reflecting our commitment to comprehensively serve our clients across all segments. The Investment Bank will be more client focused building on its strong, less capital intensive flow and fee businesses. We will continue to build our onshore operations in our wealth management business, and continue to further grow our ultra high net worth business. Our managers within Global Asset Management are concentrating on driving a sustained improvement in investment performance and increasing overall efficiency. Transforming the way we operate Our transformation is geared towards exercising the full potential of our strengths based on three strategic guide- lines: reputation, integration and execution. Our reputation is our most valuable asset and is ultimately defined by the actions and decisions we make every day. To restore and safeguard our reputation, we have introduced more disciplined and effective governance processes. Further integration is a key factor in delivering on our financial targets, serving our clients in a comprehensive manner, and driving efficiencies across our businesses. This will be achieved through a series of measures, including new management processes, upgrading client coverage and enhancing structures and processes for further cost and capital efficiency. We are committed to execution at the highest standards, ensuring consistent high-quality delivery, and to building a performance-oriented culture that will help to retain, develop and attract the best talent at all levels. On 21 January 2010, we announced the establishment of the new Investment Products & Services (IPS) unit. IPS brings together product specialists from various business divisions involved in product development, coverage / sales support and execution for Wealth Management & Swiss Bank clients under one roof. Formation of UBS Switzerland We are the leading bank for retail and corporate clients and a leading asset management business in Switzerland. In 2009, we have further adjusted the governance structure to include a new executive committee: UBS Switzerland. The integrated management team of UBS Switzerland comprises all businesses active in Switzerland including retail, wealth management, corporate and institutional, investment banking and the asset management business. Corporate Center In 2009, we integrated our Group-wide shared service and control functions into the Corporate Center. Our goal is to improve effectiveness and efficiency on a sustainable basis, provide simple service delivery models and strengthen cost management by creating global and Group-wide cost-cutting measures. These shared services are overseen by the Group Chief Operating Officer. In parallel, the control functions were centralized under the Group Chief Financial Officer, Group Chief Risk Officer and Group General Counsel. This new centralized organizational structure provides a platform from which we can increase efficiency and enhance shareholder value. Risk management and control Risk reduction remained a priority in 2009. As a result of our risk reduction initiatives, we ended the year with risk exposures commensurate with our risk capacity, although legacy risks remain significant and are targeted for contin- ued reduction. Effective risk management and control are essential to our success and we have made further progress in implementing the risk renewal program we initiated in 2008. In addition, the implementation of the settlement agreement relating to the cross-border investigation remains a focus of management attention. 11 Strategy, performance and responsibility Strategy and structure Strategy and structure UBS is a client-focused financial services firm that offers a strong combination of wealth management, asset management and investment banking services on a global and regional basis. By delivering a full range of advice, products and services to our private, corporate and institutional clients, we aim to generate sustainable earnings, create value for our shareholders and be economically profitable in every segment, market and business in which we operate. UBS business model and aspiration UBS AG is the parent company of the UBS Group (Group). The operational structure of the Group comprises the Cor- porate Center and four business divisions: Wealth Manage- ment & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank. In aspiring to be a leading client-focused bank, we are concentrating on: – further strengthening our position as a leading bank for high net worth and ultra high net worth clients around the world; – continuing to be a leading firm across all client segments in Switzerland; and – being a top tier bank in growth regions where we choose to operate. We aim to have a leading investment bank with a client- centric business model that focuses on flow and advice ac- tivities, leveraging our traditional strengths and maximizing the creation of shareholder value by working closely in con- junction with our wealth management and asset manage- ment businesses. Wealth Management & Swiss Bank Wealth Management & Swiss Bank focuses on delivering comprehensive financial services to high net worth and ultra high net worth individuals around the world – except to those served by Wealth Management Americas – as well as private and corporate clients in Switzerland. We provide clients in over 40 countries, including Switzerland, with financial ad- vice, products and tools to fit their individual needs. UBS has a leading position across all client segments in Switzerland. Wealth Management Americas Wealth Management Americas provides advice-based relation- ships through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of ultra high net worth, high net worth and core af- fluent indivi duals and families. It includes the former Wealth Management US business unit, as well as the domestic Cana- dian business and the international business booked in the United States. Global Asset Management Global Asset Management is a large-scale asset manager with well diversified businesses across regions, capabilities and distribution channels. It offers investment capabilities and investment styles across all major traditional and alter- native asset classes. These include equities, fixed income, currency, hedge fund, real estate, infrastructure and private equity investment capabilities that can also be combined in multi-asset stra tegies. 12 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S Investment Bank The Investment Bank provides securities and other financial products and research in equities, fixed income, rates, for- eign exchange and precious metals. It also provides advisory services and access to the world’s capital markets for corpo- rate, institutional, intermediary and alternative asset man- agement clients. Corporate Center The Corporate Center seeks to ensure that the business divi- sions operate as a coherent and effective whole by providing and managing support and control functions for the busi- ness divisions and the Group in such areas as risk control, finance, legal and compliance, funding, capital and balance sheet management, management of foreign currencies, communication and branding, human resources, informa- tion technology, real estate, procurement, corporate devel- opment and service centres. ➔ Refer to the “Reporting structure” and “UBS business divisions and Corporate Center” sections of this report for more information on our businesses UBS competitive profile Our business mix reflects decades of continuous develop- ment, organic growth and acquisitions. As a leader in the wealth management industry in terms of total invested as- sets, we offer a combination of asset gathering (i.e. wealth management and asset management) and investment bank- ing services in local and regional markets. Speci fically, we are a leading wealth manager in Switzerland, Europe, and Asia Pacific, and also in main growth markets such as the Middle East and Latin America. In the US, we are a leading wealth management service provider and are the biggest foreign- owned wealth manager. Furthermore, we have the largest ultra high net worth business globally in terms of invested assets. Our investment bank is a strong corporate and insti- tutional clients business, and holds leading positions in busi- nesses such as equities, foreign exchange and money mar- kets and advisory, adding to the attractiveness of our overall business portfolio. In the Asia Pacific region, we operate leading investment banking, wealth management and asset management busi- nesses, with CHF 214 billion of invested assets making us the biggest foreign asset gatherer at the end of 2009. UBS strategy At our Investor Day in November 2009, we outlined strategic objectives to improve financial performance and reposition the firm for sustainable profitability in earnings and share- holder value. We aim to achieve this by re-focusing our busi- ness portfolio to fully capitalize on our strengths, and by substantially transforming the way we operate. Re-focusing the business portfolio We will further integrate our wealth management, asset management and investment banking businesses to gener- ate more value, reflecting our commitment to comprehen- sively serve our clients across all segments. The Investment Bank will be more client focused building on its strong, less capital intensive flow and fee businesses (e.g. cash equities, foreign exchange and money markets, and advisory). This will also strengthen additional com ponents, including the rates and credit business in fixed income, currencies and commodities. We will continue to build our onshore opera- 13 Strategy, performance and responsibility Strategy and structure tions in our wealth management business, and continue to further grow our ultra high net worth business. Our manag- ers within Global Asset Management are concentrating on driving a sustained improvement in investment performance and increasing overall efficiency. ➔ Refer to the “UBS business divisions and Corporate Center” section of this report for more information on the business division strategies Establishment of Investment Products & Services On 21 January 2010, we announced the establishment of the new Investment Products & Services (IPS) unit. IPS brings to- gether product specialists from various business divisions in- volved in product development, coverage / sales support and execution for Wealth Management & Swiss Bank clients un- der one roof. By making this change, we are making product specialists and expertise more accessible to our clients. Transforming the way we operate Our transformation is geared towards exercising the full po- tential of our strengths based on three strategic guidelines: reputation, integration and execution. Our reputation is our most valuable asset and is ultima- tely defined by the actions and decisions we make every day. To restore and safeguard our reputation, we have intro- duced more disciplined and effective governance processes. Further integration is a key factor in delivering on our fi- nancial targets, serving our clients in a comprehensive man- ner, and driving efficiencies across our businesses. This will be achieved through a series of measures, including new management processes, upgrading client coverage and en- hancing structures and processes for further cost and capital efficiency. We are committed to execution at the highest standards, ensuring consistent high-quality delivery externally and inter- nally, and to building a performance-oriented culture that will help to retain, develop and attract the best talent at all levels. Measures taken In addition to stabilizing our financial condition, we have al- ready undertaken several adjustments towards improved governance and structures during the last few months that facilitate our transformation process. Formation of UBS Switzerland We are the leading bank for retail and corporate clients and a leading asset management business in Switzerland. In 2009, we have further adjusted the governance structure to include a new executive committee: UBS Switzerland. The integrated management team of UBS Switzerland comprises all businesses active in Switzerland including retail, wealth management, corporate and institutional, investment bank- ing and the asset management business. The integration of these businesses defines our commitment to the Swiss mar- ket and will help deliver comprehensive financial advice, products and tools to our clients. Corporate Center In 2009, we integrated our Group-wide shared service and control functions into the Corporate Center. Our goal is to improve effectiveness and efficiency on a sustainable basis, provide simple service delivery models and strengthen cost management by creating global and Group-wide cost-cutting measures. These shared services are overseen by the Group Chief Operating Officer (COO). In parallel, the control func- tions were centralized under the Group Chief Financial Officer (CFO), Group Chief Risk Officer (CRO) and Group General Counsel (GC). This new centralized organizational structure provides a platform from which we can increase efficiency and enhance shareholder value. ➔ Refer to the “Corporate Center” section of this report for more information 14 Risk management and control Risk reduction remained a priority in 2009. As a result of our risk reduction initiatives, we ended the year with risk expo- sures commensurate with our risk capacity, although legacy risks remain significant and are targeted for continued reduc- tion. Effective risk management and control are essential to our success and we have made further progress in imple- menting the risk renewal program we initiated in 2008. In addition, the implementation of the settlement agreement relating to the cross-border investigation remains a focus of management attention Performance measures and management We manage our businesses based on our new key perfor- mance indicators (KPI) framework introduced in 2009, which is used to monitor our risk-adjusted performance and the delivery of returns to shareholders. Senior management compensation was adjusted accordingly to ensure that man- agement accountability and consistency is in alignment with long-term economic profitability. ➔ Refer to the “Measurement and analysis of performance” section of this report for more information on key performance indicators ➔ Refer to the “Compensation and shareholdings” section of this report for more information on senior management compensation y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S 15 Strategy, performance and responsibility Strategy and structure UBS corporate governance As mandated by Swiss banking law, UBS operates under a strict dual board structure comprising the Board of Directors and the Group Executive Board. The competencies of these two bodies and other relevant roles have been reviewed by the Board of Directors through out 2009, resulting in a revised version of the “Organization Regulations of UBS AG” which came into effect on 1 November 2009. Board of Directors The Board of Directors (BoD) is our most senior body. Under the leadership of the Chairman, it decides on the strategy of the Group upon recommendation of the Group Chief Exe cutive Officer (CEO), exercises the ultimate supervision over management and is responsible for the appointment and dismissal of all Group Executive Board (GEB) members, the Company Secretary and the Head of Group Internal Audit as well as supervises and sets appropriate risk management and control principles for the firm. With the exception of its current Chairman, Kaspar Villiger, all members of the BoD are independent. ➔ Refer to the “Corporate governance” section of this report for more information about the BoD From left: Rainer-Marc Frey Member Risk Committee Sally Bott Chair man Human Resources and Compensation Committee and Member Cor porate Responsibility Committee Ann F. Godbehere Member Audit Com mittee and Corporate Responsibility Committee Bruno Gehrig Member Governance and Nominating Committee and Human Resources and Com pensation Committee Michel Demaré Member Audit Committee Helmut Panke Member Human Resources and Compensation Committee and Risk Committee Sergio Marchionne Senior Independent Director and Member Governance and Nominating Committee Kaspar Villiger Chair man of the Board of Directors, Chairman Governance and Nominating Committee and Corporate Responsibility Committee David Sidwell Chairman Risk Committee William G. Parrett Chairman Audit Commit tee Axel P. Lehmann Member Risk Committee Peter R. Voser Member Governance and Nominating Committee 16 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S 17 Strategy, performance and responsibility Strategy and structure Group Executive Board Management of the firm is delegated by the BoD to the GEB. Under the leadership of the Group CEO, the GEB has exe cutive management responsibility for the Group and its busi nesses. It assumes overall responsibility for the development of the Group and business division strategies and the imple mentation of approved strategies. ➔ Refer to the “Corporate governance” section of this report for more information about the GEB From left: Philip J. Lofts Group Chief Risk Officer Ulrich Körner Group Chief Operat ing Officer and CEO Corporate Center John A. Fraser Chairman and CEO Global Asset Management Markus U. Diethelm Group General Counsel Robert Wolf Chairman and CEO, UBS Group Americas / President Investment Bank Alexander Wilmot-Sitwell coCEO Investment Bank Francesco Morra CEO UBS Switzerland, Wealth Manage ment & Swiss Bank Jürg Zeltner CEO Wealth Management, Wealth Management & Swiss Bank Chi-Won Yoon Chairman and CEO Asia Pa cific Carsten Kengeter coCEO Investment Bank Robert J. McCann CEO Wealth Management Americas Oswald J. Grübel Group Chief Executive Officer John Cryan Group Chief Financial Officer 18 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S 19 Strategy, performance and responsibility The making of UBS The making of UBS The firms that have come to make up today’s UBS look back on a long and diverse history. Both the two Swiss predeces- sor 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 our current identity began to form. In the early 1990s, the two Swiss banks that came to form the current UBS, Swiss Bank Corporation (SBC) and Union Bank of Switzerland, were commercial banks operat- ing mainly out of Switzerland. The two banks shared a simi- lar 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-capital- ized 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, meritocracy and 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 transactions repre- sented fundamental steps in the development of the firm. The next major move was in 1995, when SBC acquired S.G. Warburg, the British merchant bank. The deal helped 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 SBC and Union Bank of Switzerland brought together these two leading Swiss financial institu- tions, creating a leading global wealth manager and improv- ing the new firm’s chances of becoming a global bulge bracket investment bank and a leading global institutional asset manager. Still, in order to become a truly global player in invest- ment banking and wealth management, UBS needed to es- tablish a significant presence in the key US market. UBS ad- vanced toward this objective when it acquired PaineWebber in 2000. Since the acquisition of PaineWebber, UBS’s main priority has been to develop and grow organically. Smaller acquisi- tions have helped to accelerate and complement the firm’s growth. Today, 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. ➔ Refer to www.ubs.com/history for more information 20 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S (cid:19)(cid:26)(cid:21)(cid:18) (cid:19)(cid:26)(cid:22)(cid:18) (cid:19)(cid:26)(cid:23)(cid:18) (cid:19)(cid:26)(cid:24)(cid:18) (cid:19)(cid:26)(cid:25)(cid:18) (cid:19)(cid:26)(cid:26)(cid:18) (cid:19)(cid:26)(cid:27)(cid:18) (cid:19)(cid:27)(cid:18)(cid:18) (cid:19)(cid:27)(cid:19)(cid:18) (cid:19)(cid:27)(cid:20)(cid:18) (cid:19)(cid:27)(cid:21)(cid:18) (cid:19)(cid:27)(cid:22)(cid:18) (cid:19)(cid:27)(cid:23)(cid:18) (cid:19)(cid:27)(cid:24)(cid:18) (cid:19)(cid:27)(cid:25)(cid:18) (cid:19)(cid:27)(cid:26)(cid:18) (cid:19)(cid:27)(cid:27)(cid:18) (cid:20)(cid:18)(cid:18)(cid:18) (cid:20)(cid:18)(cid:19)(cid:18) (cid:19)(cid:26)(cid:21)(cid:20) 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(cid:45)(cid:68)(cid:70)(cid:78)(cid:86)(cid:82)(cid:81)(cid:3)(cid:9)(cid:3)(cid:38)(cid:88)(cid:85)(cid:87)(cid:76)(cid:86) (cid:19)(cid:53)(cid:53)(cid:18)(cid:18)(cid:26)(cid:65)(cid:71) 21 Strategy, performance and responsibility Current market climate and industry drivers Current market climate and industry drivers The recent crisis and its aftermath will have enduring effects on the financial services industry. Financial crisis and global recession The global economy experienced one of its most difficult years in 2009. The financial crisis originated with the sub- prime crisis in 2007-2008, and evolved into one of the worst recessions in the post-war era. For the first time in many decades, the world’s gross domestic product (GDP) deflated in real terms, as both developed and emerging economies suffered from falling international trade vol- umes and shrinking industrial production. The sharp con- traction in growth of the global economy resulted in a fur- ther correction in asset prices in the early part of the year as global stock prices plummeted to historical lows. The crisis spread from the financial sector to other industries, leading to a rapid rise in the unemployment rate as businesses re- duced their employment levels to adjust to the changes in global demand. The adverse macroeconomic scenarios triggered by the financial crisis pushed governments and central banks around the world to further step up their fiscal policy efforts during 2009. In addition to maintaining interest rates at re- cord lows, and further enlarging the scope of so-called “un- conventional monetary measures” such as the purchase of distressed assets from financial institutions, the policy focus shifted to fiscal stimulus packages to provide support to the goods and services sector. The increase in public expendi- ture, coupled with a drop in tax revenues as a result of the economic decline, led to greatly increased public deficits, particularly in the US and Europe. In the course of the second quarter, global growth reached record lows, and only during the summer did signs of stabili- zation in the global economy begin to emerge, particularly within the industrial production sector. As the economic out- look gradually began to improve there was a recovery in stock prices, which started by the end of first quarter of 2009 and continued in the second half of 2009, taking the yearly gains in the global stock indexes to more than 20%. Emerg- ing markets’ stocks – particularly in Asia – experienced the strongest rebound as they were leading the unfolding recov- ery. The rebound in asset prices that occurred during the year was not restricted to stocks but also extended to the credit security markets. Overall, the recovery in asset prices provid- ed private and institutional investors with very good returns compared with the losses experienced in 2008. As the global outlook improved, the financial services in- dustry benefited from the recovery in asset prices. Improved 22 liquidity conditions in capital markets allowed financial insti- tutions to raise capital in order to bolster funds, reinforcing their capital positions. However, despite the overall improve- ment observed during the year, the financial sector remained under pressure as the lasting effects of the financial crisis were further exacerbated by the growing impact of the global recession on banks’ balance sheets. Macroeconomic perspectives The overall economic outlook of most economists for 2010 is cautiously optimistic, as global growth returned in the second half of 2009 and is expected to improve throughout the year. However, caution has been expressed as this recovery appears “abnormal” when compared with previous economic cycles. The economic recovery seen so far remains weak when com- pared with previous recoveries following recessions of the magnitude experienced in 2009. In “normal” recoveries, glo- bal growth sharply increases following the downturn, often surpassing the pre-crisis growth rate, and then eventually falls back to its long-term growth rate. In the current market envi- ronment, the return to pre-crisis growth rates appears to be taking longer to materialize, mostly as a result of deleverag- ing in the private and corporate sectors. Secondly, the ongo- ing economic recovery also appears to be uneven from a geo- graphical point of view. While emerging markets are expect- ed to show the strongest performance, growth in advanced economies is predicted to remain low as the household and (cid:53)(cid:86)(cid:81)(cid:69)(cid:77)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:71)(cid:85)(cid:2)(cid:70)(cid:71)(cid:88)(cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86) (cid:43)(cid:80)(cid:2)(cid:7)(cid:2)(cid:10)(cid:55)(cid:53)(cid:38)(cid:11) (cid:3) (cid:20)(cid:52)(cid:19)(cid:26)(cid:3) (cid:21)(cid:52)(cid:19)(cid:26)(cid:3) (cid:22)(cid:52)(cid:19)(cid:26)(cid:3) (cid:23)(cid:52)(cid:19)(cid:26)(cid:3) (cid:20)(cid:52)(cid:19)(cid:27)(cid:3) (cid:21)(cid:52)(cid:19)(cid:27)(cid:3) (cid:22)(cid:52)(cid:19)(cid:27)(cid:3) (cid:23)(cid:52)(cid:19)(cid:27)(cid:3) (cid:20)(cid:52)(cid:19)(cid:28)(cid:3) (cid:21)(cid:52)(cid:19)(cid:28)(cid:3) (cid:22)(cid:52)(cid:19)(cid:28)(cid:3) (cid:23)(cid:52)(cid:19)(cid:28) (cid:20)(cid:25)(cid:19) (cid:20)(cid:21)(cid:19) (cid:3)(cid:3)(cid:3) (cid:3)(cid:3)(cid:27)(cid:19) (cid:3)(cid:3)(cid:23)(cid:19) (cid:3)(cid:3)(cid:3) (cid:3)(cid:3)(cid:3)(cid:3)(cid:19) (cid:48)(cid:54)(cid:38)(cid:44)(cid:3)(cid:58)(cid:82)(cid:85)(cid:79)(cid:71) (cid:54)(cid:9)(cid:51)(cid:3)(cid:24)(cid:19)(cid:19) (cid:39)(cid:82)(cid:90)(cid:3)(cid:45)(cid:82)(cid:81)(cid:72)(cid:86)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:86)(cid:3)(cid:55)(cid:76)(cid:87)(cid:68)(cid:81)(cid:86)(cid:3)(cid:22)(cid:19)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:91) (cid:53)(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:28)(cid:2)(cid:36)(cid:78)(cid:81)(cid:81)(cid:79)(cid:68)(cid:71)(cid:84)(cid:73) y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S Market capitalization of the components of the Dow Jones Banks Titans 30 Index, 2009 versus 2008 USD billion 200 150 100 50 0 31.12.08 31.12.09 UBS 1SS022_e Source: Thomson Reuters corporate sectors continue to repair their balance sheets. Un- employment rates are expected to remain high and only begin declining later during the year, as global economic re- covery is firmly established in advanced economies. Industry drivers A number of drivers are expected to have a significant im- pact on banks’ earnings and the structure of the financial services industry in the short- to medium-term. The most rel- evant factors are described below. Deleveraging The financial services industry experienced massive delever- aging in 2009. Banks in the US and Europe continued to decrease their balance sheets and raise capital to reinforce their financial position. While the deleveraging process with- in the banking sector is likely to continue for some time, and further capital might be raised in the future as a result of ongoing regulatory changes, it appears that financial sector leverage level has fallen substantially from the levels reached just before the crisis erupted. On the other hand, delever- aging in the overall economy has only just begun. The re- duction in household sector debt, which has already com- menced in some countries, has been partly offset by an increase in government debt, leaving the overall debt level mostly unchanged. Most of the financial crises experienced in the last few decades have typically been followed by pro- longed deleveraging episodes involving a substantial reduc- tion in the debt-to-GDP ratio in the private sector, the public sector or simultaneously in both sectors. Most past episodes of deleveraging have had a negative impact on growth, and lower real economy returns will neg- atively impact the profitability of the financial services indus- try in the next few years. Emerging markets Emerging markets were also impacted by the global reces- sion in 2009. Exporters of manufactured goods were hit by falling global trade volumes and reduced imports in ad- vanced economies. Commodity producers and exporters were hit by falling prices as the boom in commodity prices in the early 2000s suddenly came to an end. Economic growth slowed markedly, and governments intervened to support domestic demand through public expenditures and in- creased credit supply to state-controlled and private corpo- rations. However, due to the better shape of household and corporation balance sheets when compared with most ad- vanced economies as well as the fiscal and monetary policy stimulus, emerging markets – particularly Brazil, Asia and the Middle East – performed relatively well during the crisis. Thanks to solid macro fundamentals, most emerging eco- nomies were the first to emerge from the slump in the course of the year. This performance is expected to continue throughout 2010, with a return to sustained growth speci- fically in Asia and other emerging markets. Therefore, the economic crisis over the last year has been a driving force in the economic and geographic power shift from advanced to emerging economies which was already well under way before the financial crisis hit the global econ- omy. Banks that have built a significant presence in emerg- ing markets, and serve a wide range of institutional and pri- vate clients in those economies, may benefit if the emerging markets’ share of global profits for the financial services in- dustry continues to grow. Re-regulation of the financial services industry International organizations and national regulators have in- creased their focus on revising the regulatory framework of the financial services industry as conditions within the indus- try continue to improve and short-term governmental finan- 23 200 150 100 50 0 Strategy, performance and responsibility Current market climate and industry drivers cial support is gradually withdrawn. The G-20 has stipulated broad guidelines of re-regulation which are being specified by the Financial Stability Board, the International Monetary Fund and the Basel Committee on Banking Supervision. As some countries are starting to implement regulatory chang- es, others are still debating on what is the best way forward. For instance, the Swiss Financial Market Supervisory Author- ity (FINMA) has already introduced increased capital require- ments and liquidity constraints for the largest Swiss banks. While the international organizations are trying to achieve an international level playing field, there is a growing risk that jurisdictions will implement regulations at different times and levels of intensity. This could lead to fragmenta- tion of the regulatory framework and disparities of condi- tions between countries, with a risk of national ring-fencing tendencies. The expected significant tightening of regulatory require- ments pertaining to the financial services industry, whether globally coordinated or not, will likely reduce the profitability of certain businesses. This will eventually lead to changes in the competitive landscape of the financial services industry. Financial institutions and advisory businesses with low capi- tal intensity that will be faster and more efficient in adapting themselves to the new regulatory environment are likely to outperform in the medium-term. Rising taxation as public deficits soar One of the legacies of the global crisis is higher public debt in most of the developed world. As a result of the financial crisis, there has been a substantial transfer of private debt to the public sector. Higher public debts are most likely to be- come a dominant policy issue over the medium-term as gov- ernments will have to deal with the fiscal structural adjust- ments required to reduce the debt. The fiscal challenges that have emerged from the financial crisis are further aggravat- ed by the impact of demographic changes in public finance, which is expected to grow in most advanced economies and in some emerging markets. Fiscal restructuring will likely be a long process. It may be many years before public sector debt is brought back to pre- crisis levels. Governments will utilize a mix of measures, in- cluding structural reforms to pension and healthcare eligibil- ity as well as a revision of tax rates and coverage. In the coming years, the pre-crisis trend of falling tax rates on indi- viduals’ income will probably reverse, reducing the dispos- able income of individuals. If this occurs, clients can be ex- pected to become more focused on effective tax planning in hopes of reducing their tax burden. Banks and financial insti- tutions capable of providing this type of expertise may be able to retain or attract more clients. Global capital flows and offshore centers In the pre-crisis period, offshore centers benefited from soar- ing cross-border capital flows as they have been the financial platforms often used by investors for global investments. One implication of the global crisis has been a dramatic drop in global capital flows, as investors were more averse to taking risks and were more domestically oriented. Financial institu- tions reduced their exposure to foreign markets proportionally more than to their domestic markets. In the course of 2009, global capital flows began to recover as investors gradually increased their risk appetite, particularly in relation to assets located in emerging markets. However, it could take many years for global capital flows to return to pre-crisis levels. Offshore centers are also under increasing policy pres- sure, as governments around the world are urging for more transparency concerning income produced on assets held by investors abroad. Banks with an established broad presence in onshore markets are likely to be impacted less than other banks relying exclusively on offshore business. 24 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S Risk factors Certain risks, including those described below, can impact our ability to carry out our business strategies and directly affect our business activities, financial condition, results of operations and prospects. Because the business of a broad- based international financial services firm such as UBS is in- herently exposed to risks that only become apparent with the benefit of hindsight, risks of which we are not presently aware could also materially affect our business activities, fi- nancial condition, results of operations and prospects. The sequence in which the risk factors are presented below is not indicative of their likelihood of occurrence or the potential magnitude of their financial consequences. Our reputation is key to the success of our business Our reputation has been severely damaged by our very large losses during the financial crisis and by the US cross-border matter. This has resulted in client attrition in different parts of our business and has negatively affected our financial perfor- mance. Restoring our reputation is essential to maintaining our relationships with clients, investors, regulators and the general public, as well as with our employees. Accordingly, it is critical to the success of our strategic plans. Reputational damage is difficult to reverse. The process is slow and success can be difficult to measure. We have taken what we believe are very important steps to restore our reputation, but it is possible that it will take longer to repair than we expect, par- ticularly if further events were to occur that cause additional damage to our reputation. Any failure to restore or further damage to our reputation could have a material adverse ef- fect on our operational results and financial condition. Even if our reputation is restored, we may not progress quickly enough to achieve our medium-term goals. Regulatory changes may adversely affect our business and ability to execute our strategic plans In the wake of the recent financial crisis, regulators and leg- islators are actively considering a wide range of measures designed to address the perceived causes of the crisis and to limit the systemic risks posed by major financial institutions. Potential changes include: – significantly higher regulatory capital requirements – changes in the capital treatment of certain capital instru- ments issued by UBS and other banks – changes in the calculation of risk-weighted assets – new or significantly enhanced liquidity requirements – requirements to maintain liquidity and capital in multiple jurisdictions where activities are conducted – limitations on principal trading activities – taxes and government fees that would effectively limit balance sheet growth – a variety of measures constraining, taxing or imposing ad- ditional requirements relating to compensation – requirements to adopt structural and other changes de- signed to make major financial institutions easier to wind down or disassemble – outright size limitations Notwithstanding attempts by regulators to coordinate their efforts, the proposals differ by jurisdiction, and en- hanced regulation may be imposed in a manner that makes it more difficult to manage global institutions. Swiss author- ities have expressed concern about the systemic risks posed by its two largest banks, particularly in relation to the size of the Swiss economy and governmental resources. This may lead to more stringent regulations applicable to major banks headquartered in Switzerland in comparison with those based elsewhere. The potential regulatory and legislative de- velopments in Switzerland and in other jurisdictions in which we have operations may have a material adverse effect on our ability to execute our strategic plans, on the profitability or viability of certain business lines globally or in particular locations, and on our ability to compete with other financial institutions. They could also have an impact on our legal structure or our business model. We are exposed to possible further reduction in client assets in our wealth management and asset manage- ment businesses In 2008 and 2009, we experienced substantial net outflows of client assets in our wealth management and asset man- agement businesses. This resulted from a number of differ- ent factors, including our substantial losses, the damage to our reputation, the loss of client advisors and developments concerning our cross-border private banking business. As some of these factors can only be addressed over an extend- ed period of time, we may continue to experience net out- flows of client assets. This may adversely affect the results of our wealth management and asset management businesses. We hold proprietary risk positions that may be adversely affected by conditions in the financial markets UBS, like many other financial market participants, was se- verely affected by the financial crisis that began in 2007. The deterioration of financial markets since the beginning of the 25 Strategy, performance and responsibility Risk factors crisis was extremely severe by historical standards, and we recorded substantial losses on fixed income trading posi- tions, particularly in 2008 and to a lesser extent in 2009. We have drastically reduced our risk exposures, in part due to transfers to a fund controlled by the SNB. We do, however, continue to hold sizeable legacy risk positions that are ex- posed to the general systemic and counterparty risks that were exacerbated by the financial crisis. The illiquidity of most of these legacy risk positions is likely to make it increas- ingly difficult to reduce our exposures to them. During the market crisis, we incurred large losses (realized and mark to market) on our holdings of securities related to the US residential mortgage market. Although our exposure to that market was reduced dramatically in 2008 and 2009, we remain exposed to a smaller degree to such losses, most notably through monoline-insured positions. Monoline in- surers have been adversely affected by their exposure to US residential mortgage-linked products, and we have recorded large credit valuation adjustments on our claims against them. If the financial condition of monoline insurers or their perceived creditworthiness deteriorates further, we would have to record further material credit valuation adjustments on the CDSs bought from them. The market dislocation also affected other asset classes. In 2008 and 2009, we recorded markdowns on other assets carried at fair value, including auction rate securities (ARS), leveraged finance commitments, commercial mortgages in the US and non-US mortgage-backed and asset-backed securities (ABSs). We have a very large inventory of ARS, which is likely to increase as a result of our partially satisfied commitment to repurchase client-owned ARS. We hold posi- tions related to real estate in countries other than the US, including a very substantial Swiss mortgage portfolio, and we could suffer losses on these positions. In addition, further market dislocation or con tinued weak financial conditions could result in further writedowns on our assets carried at fair value or in the impairment of assets classified as or re- classified to loans or receivables. We are also exposed to risk in our prime brokerage, reverse repo and lombard lending activities, as the value or liquidity of the assets against which we provide financing may decline rapidly. Performance in the financial services industry depends on the economic climate The financial services industry prospers in conditions of eco- nomic growth, stable geopolitical conditions, capital mar- kets that are transparent, liquid and buoyant and positive investor sentiment. An economic downturn, inflation or a severe financial crisis (as seen in 2008 and to a lesser extent in 2009) can negatively affect our revenues and ultimately our capital base. A market downturn can be precipitated by a number of factors, including geopolitical events, changes in monetary or fiscal policy, trade imbalances, natural disasters, pandem- ics, civil unrest, war or terrorism. Because financial markets are global and highly interconnected, even local and region- al events can have widespread impact well beyond the coun- tries in which they occur. A crisis could develop, regionally or globally, as a result of disruptions in emerging markets which are susceptible to macroeconomic and geopolitical develop- ments, or as a result of the failure of a major market partici- pant. As our presence and business in emerging markets in- creases, we become more exposed to these risks. Adverse developments of this kind have affected our businesses in a number of ways, and may continue to have further adverse effects on our businesses as follows: – a general reduction in business activity and market vol- umes would affect fees, commissions and margins from market-making and customer-driven transactions and ac- tivities; – a market downturn is likely to reduce the volume and valuations of assets we manage on behalf of clients, re- ducing our asset- and performance-based fees; – reduced market liquidity limits trading and arbitrage op- portunities and impedes our ability to manage risks, im- pacting both trading income and performance-based fees; – assets we own and account for 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 loss- es may be exacerbated by falling collateral values; and – if individual countries impose restrictions on cross-border payments or other exchange or capital controls, we could suffer losses from enforced default by counterparties, be unable to access our own assets, or be impeded in – or prevented from – managing our risks. The developments mentioned above can affect the per- formance of both our business units and of UBS as a whole. There is also a risk that the carrying value of goodwill of a business unit might suffer impairments and deferred tax as- sets levels may need to be adjusted. In addition, interest rate increases triggered by central banks may adversely affect the economy and our business and funding costs. We are dependent upon our risk management and control processes to avoid or limit potential losses in our trading and counterparty credit businesses Controlled risk-taking is a major part of the business of a fi- nancial services firm. Credit is an integral part of many of our retail, wealth management and Investment Bank activities. This includes lending, underwriting and derivatives business- es and positions. Changes in interest rates, equity prices, for- eign exchange levels and other market fluctuations can ad- versely affect our earnings. Some losses from risk-taking 26 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S activities are inevitable, but to be successful over time, we must balance the risks we take against the returns we gener- ate. We must therefore diligently identify, assess, manage and control our risks, not only in normal market conditions but also as they might develop under more extreme (“stressed”) conditions, when concentrations of exposures can lead to severe losses. As seen during the recent market crisis, we are not always able to prevent serious losses arising from extreme or sudden market events that are not anticipated by our risk measures and systems. 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 the past few years. Moreover, stress loss and concentration controls and the dimensions in which we aggregate risk to identify potentially highly correlated ex- posures proved to be inadequate. Notwithstanding the steps we have taken to strengthen our risk management and con- trol framework, we could suffer further losses in the future if, for example: – we do not fully identify the risks in our portfolio, in par- ticular risk concentrations and correlated risks; – our assessment of the risks identified or our 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 our ability to manage risks in the resultant environment is therefore affected; – third parties to whom we have credit exposure or whose securities we hold for our own account are severely af- fected by events not anticipated by our models, and we accordingly suffer defaults and impairments beyond the level implied by our risk assessment; or – collateral or other security provided by our counterparties proves inadequate to cover their obligations at the time of their default. We also manage risk on behalf of our clients in our asset and wealth management businesses. Our performance in these activities could be harmed by the same factors. If cli- ents suffer losses or the performance of their assets held with us is not in line with relevant benchmarks against which clients assess investment performance, we may suffer re- duced fee income and a decline in assets under manage- ment or withdrawal of mandates. If we decide to support a fund or another investment that we sponsor in our asset or wealth management business (such as the property fund to which Wealth Management & Swiss Bank has exposure) we might, depending on the facts and circumstances, incur charges that could increase to ma- terial levels. Investment positions, such as equity holdings made as a part of strategic initiatives and seed investments made at the inception of funds we manage, may also be affected by mar- ket risk factors. These investments are often not liquid and are generally intended or required to be held beyond a nor- mal trading horizon. They are subject to a distinct control framework. Deteriorations in the fair value of these positions would have a negative impact on our earnings. Valuations of certain assets rely on models. For some of the inputs to these models there is no observable source Where possible, we mark our 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 and we apply 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 of which some or all of the reference data are not observable or have lim- ited observability, we use valuation models with non- market observable inputs. There is no single market stan- dard for valuation models in this area. Such models have inherent limitations; different assumptions and inputs would generate different results, and these differences could have a significant impact on our financial results. We regularly review and update our valuation models to incorporate all factors that market participants would consider in setting a price, including factoring in current market conditions. Judgment is an important component of this process. Changes in model inputs or in the models themselves could have a material adverse effect on our financial results. Credit ratings and liquidity and funding management are critical to our ongoing performance Moody’s Investors Service, Fitch Ratings and Standard & Poor’s lowered our long-term credit rating several times in 2008 and 2009. Further reductions in our credit rating could increase our funding costs, in particular with regard to fund- ing from wholesale unsecured sources. Some of these down- grades have required us to make additional cash payments or post additional collateral, and additional reductions in the credit ratings could have similar effects. Our credit ratings also have an impact on the performance of our businesses. Along with our capital strength and reputation, our credit ratings contribute to maintaining client and counterparty confidence in us. A substantial part of our liquidity and funding require- ments is met using short-term unsecured funding sources, including wholesale and retail deposits and the regular issu- ance of money market securities. The volume of these funding sources has generally been stable, but may change in the future due, among other things, to general market 27 Strategy, performance and responsibility Risk factors disruptions. Any such change could occur quickly and without notice. We may be required to maintain sub- stantially higher levels of liquidity than has been our usual practice due to possible changes in regulatory require- ments. This could have an adverse impact on the attractive- ness of certain lines of business, particularly in the Invest- ment Bank, and may reduce our overall ability to generate profits. ➔ Refer to the “Risk and treasury management” section of this report for more information on our approach to liquidity and funding management diverse markets in different currencies, and to comply with the requirements of the many different legal and regulatory regimes. Our operational risk management and control sys- tems and processes are designed to help ensure that the risks associated with our 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 our internal con- trols fail or prove ineffective in identifying and remedying such risks, we could suffer operational failures that might result in material losses. Our capital strength is important in supporting our client franchise Legal claims and regulatory risks and restrictions arise in the conduct of our business Our capital position, as measured by the BIS tier 1 and total capital ratios, is determined by (i) risk-weighted assets (RWAs) (balance sheet, off-balance sheet and other market and operational risk positions, measured and risk-weighted according to regulatory criteria) and (ii) eligible capital. Both RWAs and eligible capital are subject to change. Eligible cap- ital, for example, could experience a reduction resulting from financial losses, acquired goodwill or as a result of foreign exchange movements. RWAs, on the other hand, will be driven by our business activities and by changes in the risk profile of these assets. They could furthermore be subject to a change in regulatory requirements or the interpretation thereof. For instance, substantial market volatility, a widen- ing of credit spreads (the major driver of our VaR), a change in regulatory treatment of certain positions, stronger foreign currencies, increased counterparty risk or a deterioration in the economic environment could result in a rise in RWAs or a change in capital requirements, thereby potentially reduc- ing our capital ratios. We are subject to regulatory capital requirements imposed by the Swiss Financial Market Super- visory Authority (FINMA), under which we have higher RWA than would be the case under BIS guidelines. Forthcoming changes in the calculation of RWAs under FINMA require- ments are expected to increase the level of our RWAs and therefore have an adverse effect on our capital ratios. In ad- dition, FINMA has introduced a minimum leverage ratio which is being progressively implemented and will be fully applicable in 2013. Changes by FINMA in the tier 1 and total capital requirements or in the leverage ratio requirement, whether pertaining to the minimum levels required for large Swiss banks or to the calculation thereof (including changes made to implement the proposed Basel III standards), could have a material adverse effect on our business and ability to execute our strategic plans or pay dividends in the future. Operational risks may affect our business All of our businesses are dependent on our ability to process a large number of complex transactions across multiple and In the ordinary course of our business, we are subject to regulatory oversight and liability risk. We are involved in a variety of claims, disputes, legal proceedings and govern- ment investigations in jurisdictions where we are active. These types of proceedings expose us to substantial mone- tary damages and legal defense costs, injunctive relief and criminal and civil penalties, in addition to potential regula- tory restrictions on our businesses. The outcome of these matters cannot be predicted and they could adversely affect our future business. We continue to be subject to govern- ment inquiries and investigations, and are involved in a num- ber of litigations and disputes related to the financial crisis. These matters concern, among other things, our valuations, accounting classifications, disclosures, investment suitability, writedowns, underwriting and contractual obligations, as well as our role as an underwriter in securities offerings for other issuers. We have been in active dialogue with our regulators concerning remedial actions that we are taking to address deficiencies in our risk management and control, funding and certain other processes and systems. We will for some time be subject to increased scrutiny by FINMA and our other major regulators, and accordingly will be subject to regulatory measures that might affect the implementation of our strategic plans. In February 2009, we entered into a Deferred Prosecution Agreement (DPA) with the US Department of Justice (DOJ) and a Consent Order with the US Securities and Exchange Commission in connection with our cross-border private banking services provided to US private clients. In addition, a petition for enforcement of a civil summons issued by the US Internal Revenue Service (IRS), seeking information concern- ing our cross-border business, including records located in Switzerland, was filed by the civil division of the DOJ. In August 2009, we entered into a settlement agreement with the IRS and the DOJ. Pursuant to this agreement and a re- lated agreement between the US and Switzerland, the sum- mons enforcement proceeding will be dismissed if certain requirements are satisfied. It is not yet clear what effect, if 28 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S any, the recent Swiss court decision prohibiting the provision of certain UBS client data to the IRS may have on our 2009 settlements with US authorities and our businesses. Tax and regulatory authorities in a number of other juris- dictions have also requested information relating to the cross-border wealth management services provided by UBS and other financial institutions. These governmental actions, and our responses to them, could adversely affect the future profitability of our international wealth management busi- nesses. ➔ Refer to “Note 21 Provisions and litigation” in the “Financial information” section of this report for more information on legal proceedings in which UBS is involved able compensation granted in the form of deferred shares was much higher than in the past, and the percentage of compensation deferred was higher than that of most of our competitors. We continue to be subject to the risk that key employees will be attracted by competitors and decide to leave UBS, or that we may be less successful than our com- petitors in attracting qualified employees. This risk also arises in connection with the increasing legislation, regulation and regulatory pressure relating to remuneration in general and variable compensation in particular. Although this affects many if not all of the major banks, the constraints are likely to differ by jurisdiction and therefore less regulated com- petitors may tend to have an advantage. We might be unable to identify or capture revenue or competitive opportunities, or retain and attract qualified employees Our global presence exposes us to risks arising from being subject to different regulatory, legal and tax regimes, as well as from currency fluctuation The financial services industry is characterized by intense competition, continuous innovation, detailed (and some- times fragmented) regulation and ongoing consolidation. We face competition at the level of local markets and indi- vidual business lines, and from global financial institutions that are comparable in their size and breadth. Barriers to entry in individual markets are being eroded by new technol- ogy. We expect these trends to continue and competition to increase in the future. Our competitive strength and market position could be eroded if we are unable to identify market trends and devel- opments, do not respond to them by devising and imple- menting adequate business strategies or are unable to at- tract or retain the qualified people needed to carry them out. The changes recently introduced in our balance sheet man- agement, funding framework and risk management and control, as well as possible new or enhanced regulatory re- quirements, may constrain the revenue contribution of cer- tain lines of business. For example, parts of the Investment Bank’s fixed income, currencies and commodities (FICC) business may be affected as they require substantial funding and are capital-intensive. Following the losses incurred in 2008, we significantly re- duced the variable compensation granted to our employees for that year. This and other factors adversely affected our ability to retain and attract key employees, which in turn negatively affected our revenues in a number of business lines in 2009. The amount of variable compensation granted for 2009 was higher than in 2008, but the portion of vari- We operate in more than 50 countries, earn income and hold assets and liabilities in many different currencies and are subject to many different legal, tax and regulatory re- gimes. Our ability to execute our 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 local markets. Changes in local tax laws or reg- ulations and their enforcement may affect the ability or the willingness of our clients to do business with the bank, or the viability of our strategies and business model. In our financial accounts we accrue taxes, but the final effect of taxes on earnings is only determined after the completion of tax audits (which generally 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 cause the amount of taxes ultimately paid by UBS to differ materially from the amount accrued. Because we prepare our accounts in Swiss francs and a substantial portion of our assets, liabilities, assets under management, revenues and expenses are denominated in other currencies, changes in foreign exchange rates, par- ticularly between the Swiss franc and the US dollar and to a much lesser extent between the Swiss franc and the Euro and UK sterning (US dollar income represents the major part of our non-Swiss-franc income), have an effect on our re- ported income and shareholders’ equity. 29 Strategy, performance and responsibility Financial performance Financial performance Our performance is reported in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. This section provides a discussion and analysis of our results for 2009, commenting on the underlying operational performance of the business, with a focus on continuing operations. UBS key figures CHF million, except where indicated Group results Operating income Operating expenses Operating profit before tax (from continuing and discontinued operations) Net profit attributable to UBS shareholders Diluted earnings per share (CHF) 1 Key performance indicators, balance sheet and capital management 2 Performance Return on equity (RoE) (%) Return on risk-weighted assets, gross (%) Return on assets, gross (%) Growth Net profit growth (%) 3 Net new money (CHF billion) 4 Efficiency Cost / income ratio (%) Capital strength BIS tier 1 ratio (%) 5 FINMA leverage ratio (%) 5 Balance sheet and capital management Total assets Equity attributable to UBS shareholders BIS total ratio (%) 5 BIS risk-weighted assets 5 BIS tier 1 capital 5 Additional information Invested assets (CHF billion) Personnel (full-time equivalents) Market capitalization 6 Long-term ratings Fitch, London Moody’s, New York Standard & Poor’s, New York As of or for the year ended 31.12.09 31.12.08 31.12.07 22,601 25,162 (2,569) (2,736) (0.75) (7.8) 9.9 1.5 N/A (147.3) 796 28,555 (27,560) (21,292) (7.63) (58.7) 1.2 0.2 N/A (226.0) 103.0 753.0 15.4 3.93 11.0 2.45 1,340,538 2,014,815 41,013 19.8 206,525 31,798 2,233 65,233 57,108 A+ Aa3 A+ 32,531 15.0 302,273 33,154 2,174 77,783 43,519 A+ Aa2 A+ 31,721 35,463 (3,597) (5,247) (2.41) (10.5) 8.6 1.3 N/A 140.6 111.0 2,274,891 36,875 3,189 83,560 108,654 AA Aaa AA 1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report. 2 For the definitions of our key performance indicators refer to the “Measure- ment and analysis of performance” section of this report. 3 Not meaningful if either the current period or the comparison period is a loss period. 4 Excludes interest and dividend income. 5 Refer to the “Capital management” section of this report. 6 Refer to the “UBS shares in 2009” section of this report. 30 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S Measurement and analysis of performance Key factors affecting our financial position and results of operations in 2009 – In 2009, the net loss attributable to UBS shareholders for 2009 was CHF 2.7 billion, a considerable reduction from the CHF 21.3 billion loss recorded in the prior year. This improvement was due to much lower losses on residual risk positions in the Investment Bank and reduced operat- ing expenses for the Group. The result for 2009 included a number of significant items, namely an own credit loss of CHF 2.0 billion which occurred as a result of the mar- kets’ perception of our improved creditworthiness, charg- es relating to the sale of UBS Pactual of CHF 1.4 billion, restructuring charges of CHF 0.8 billion, and a CHF 0.3 billion gain on the mandatory convertible notes converted in August 2009. Excluding these significant items, the un- derlying pre-tax result for the year was a profit of CHF 1.4 billion. The Group’s net profit attributable to shareholders for the fourth quarter was CHF 1.2 billion, including a positive contribution from each of our business divisions. – At the end of 2009 our invested asset base was CHF 2,233 billion, broadly in line with the figure for year-end 2008. However, the Group’s average invested asset base for the year was down significantly, and this was the pri- mary driver of reduced profits in our asset gathering busi- ness divisions. Net new money outflows in 2009 were CHF 89.8 billion for Wealth Management & Swiss Bank, compared with CHF 107.1 billion in 2008; CHF 11.6 bil- lion for Wealth Management Americas, compared with CHF 15.9 billion; and CHF 45.8 billion for Global Asset Management, compared with CHF 103.0 billion. – At year-end 2009, the BIS tier 1 ratio amounted to 15.4% and the total capital ratio to 19.8%, up from 11.0% and 15.0%, respectively, on 31 December 2008. BIS risk- weighted assets declined from CHF 302.3 billion in De- cember 2008 to CHF 206.5 billion in December 2009, while eligible tier 1 capital decreased from CHF 33.2 bil- lion to CHF 31.8 billion over the same period, reflecting the effects of losses incurred during 2009 and further negative impacts on equity, only partially offset by the positive effects from issues of capital instruments. – Our total assets stood at CHF 1,341 billion on 31 Decem- ber 2009, down CHF 674 billion (33%) from CHF 2,015 billion on 31 December 2008. This decline was due to significant market driven reductions in replacement val- ues (RVs) on both sides of the balance sheet. – Due to the significant improvement in our credit spreads in 2009 compared with 2008, the Investment Bank in- curred an own credit charge to income of CHF 2,023 mil- lion compared with a gain of CHF 2,032 million recog- nized in 2008. – In 2009, we experienced a net credit loss expense of CHF 1,832 million, of which CHF 1,698 million related to the Investment Bank and CHF 133 million to Wealth Manage- ment & Swiss Bank. Impairment charges of the Invest- ment Bank include an impairment of CHF 425 million for reclassified securities. In comparison, we recorded a net credit loss expense of CHF 2,996 million in 2008. ➔ Refer to the “Credit risk” section of this report for more information – We recognized a net income tax benefit of CHF 443 mil- lion for 2009, which mainly related to an increase in de- ferred tax assets for tax losses following updated forecast profit assumptions over the five-year horizon used for rec- ognition purposes. In 2008, the net income tax benefit was CHF 6,837 million, which mainly reflected an in- crease in deferred tax assets for tax losses. – On 16 October 2008, we reached an agreement with the Swiss National Bank (SNB) to transfer, in one or more sales, certain illiquid and other positions from our bal- ance sheet to a separate fund entity owned and con- trolled by the SNB. In December 2008, USD 16.4 billion of positions were transferred to the fund followed by the transfer of the remaining USD 22.2 billion of posi- tions in March and April 2009. The purchase price was determined by the SNB based on valuations made by independent experts and reflected the value of these po- sitions on 30 September 2008. The purchase price for the overall portfolio was, in the aggregate, approximate- ly USD 1 billion lower than the market value we assigned to these positions on 30 September 2008. Of this USD 1 billion, USD 0.7 billion was accounted for in our results for 2008, and the remaining balance was recognized in the income statement in first quarter 2009. The impact of the SNB transaction on the income statement for 2009 was a charge of CHF 115 million, which comprised a CHF 232 million charge due to the price difference recognized in first quarter 2009, and was offset by a net valuation gain of CHF 117 million on our option to ac- quire the fund’s equity. – On 18 February 2009, we announced the settlement of the US cross-border case with the US Department of Jus- 31 Strategy, performance and responsibility Financial performance tice (DOJ) and the US Securities and Exchange Commis- sion (SEC), by entering into a deferred prosecution agree- ment with the DOJ and a consent order with the SEC. As part of these settlement agreements, we agreed to pay CHF 917 million (USD 780 million). This had no impact on our 2009 results as the cost for the settlement had been fully charged in 2008. Subsequently, on 19 August 2009, we also announced the formal signing of a settlement agreement with the IRS and the DOJ to resolve the “John Doe” summons litigation. The agreement does not call for any payment by us. Moreover, it resolves all issues re- lating to the alleged breaches of our Qualified Intermedi- ary Agreement with the IRS as set forth in the Notice of Default dated 15 May 2008. ➔ Refer to “Note 21 Provisions and litigation” In the “Financial Information” section of this report for the principal terms of this settlement agreement and the related agreement entered into at the same time by the governments of Switzerland and the US – On 15 April 2009, we announced cost-saving measures to be executed throughout 2009. We consolidated all Group-wide infrastructure and service operations in the Corporate Center and centralized our finance, risk con- trol, and legal and compliance functions. In addition, we reduced the number of employees to 65,233 as of 31 December 2009 from approximately 76,200 as of the end of March 2009. The total restructuring charge incurred in 2009 was CHF 791 million, including CHF 491 million in Personnel expenses, mainly for severance payments, CHF 256 million in General and administrative expenses, pri- marily for real-estate-related costs, and CHF 45 million of depreciation and impairment losses on property and equipment. – On 20 April 2009, we announced the agreement to sell our Brazilian financial services business, UBS Pactual, to BTG Investments, LP. The transaction was completed on 18 September 2009. The consideration included a combi- nation of a cash payment and a transfer of liabilities to BTG Investments. The cash consideration amounted to USD 620 million, of which USD 420 million was paid at closing, and USD 200 million plus accrued interest will be paid 12 months after the closing. The liabilities trans- ferred to BTG Investments consisted primarily of the pres- ent value of the residual payment obligation of USD 1.6 billion owed to former Pactual partners, which was in- curred when we acquired Pactual in 2006 and was due in 2011. In 2009, the overall impact of the transaction on our profit before tax was a net charge of CHF 1,403 mil- lion, including a goodwill impairment charge of CHF 1,123 million, a CHF 498 million pre-tax loss on the com- pletion of the sale, and was partly offset by UBS Pactual’s pre-tax operational profits in 2009 of CHF 218 million. In addition, a deferred tax benefit of CHF 243 million was recognized. – On 25 June 2009, we placed 293,258,050 newly issued shares from authorized capital with a small number of large institutional investors at a price of CHF 13.00 per share. After deducting costs associated with the place- ment, the amount of new equity capital raised was ap- proximately CHF 3.8 billion. – On 19 August 2009, the Swiss Confederation announced the conversion of its CHF 6 billion mandatory convertible notes (MCNs). Upon conversion on 25 August 2009, we issued 332,225,913 new shares with a nominal value of CHF 0.10 each from existing conditional capital. The lia- bility and the negative replacement value recorded on the balance sheet for the principal amount and the embed- ded derivative component of the MCNs were reclassified to equity. The conversion of the MCNs resulted in an overall increase in equity of CHF 6,718 million for 2009. Prior to the conversion of the MCNs, the embedded de- rivative component was re-measured to fair value result- ing in a gain of CHF 341 million for 2009. In addition, the Swiss Confederation waived its right to receive future coupon payments on the converted MCNs for a cash amount of approximately CHF 1.8 billion. The impact on our income statement resulting from this waiver was not material, but the payment reduced our BIS tier 1 capital by CHF 1.4 billion. Seasonal characteristics Our main businesses do not generally show significant sea- sonal patterns, although the Investment Bank’s revenues have been affected in some years by the seasonal character- istics of general financial market activity and deal flows in investment banking. Other business divisions are only slightly impacted by seasonal components, such as asset withdraw- als that tend to occur in the fourth quarter and by lower cli- ent activity levels related to the end-of-year holiday season. Performance measures Key performance indicators In the beginning of 2009, we implemented a new KPI frame- work. It focuses on key drivers of total shareholder return (TSR), which measures the total return of a UBS share, i.e. both the dividend yield and the capital appreciation of the share price. This performance measure also represents the ultimate measure of performance for shareholders. Complementary to the TSR, the economic profit (EP) is an internal measure which is calculated broadly by subtracting the cost of equity from the annual net profit attributable to shareholders. EP is only realized when the return on equity achieved is greater than our cost of equity. In order to offset accounting entries which distort the economic perspective, the EP calculation is adjusted for items that do not reflect business performance. 32 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S Group / business division key performance indicators Key performance indicators Definition Net profit growth (%) Pre-tax profit growth (%) Cost / income ratio (%) Return on equity (%) Return on attributed equity (%) Return on assets, gross (%) Change in net profit attributable to UBS shareholders from continuing operations between current and comparison periods / net profit attributable to UBS shareholders from continuing operations of comparison period Change in business division performance before tax between current and comparison periods / business division performance before tax of comparison period Operating expenses / operating income before credit loss (expense) or recovery Net profit attributable to UBS shareholders on a year-to-date basis (annualized as applicable) / average equity attributable to UBS shareholders (year-to-date basis) Business division performance before tax on a year-to-date basis (annualized as applicable) / average attributed equity (year-to-date basis) Operating income before credit loss (expense) or recovery on a year-to-date basis (annualized as applicable) / average total assets (year-to-date basis) Return on risk-weighted assets, gross (%) Operating income before credit loss (expense) or recovery on a year-to-date basis (annualized as applicable) / average risk-weighted assets (year-to-date basis) FINMA leverage ratio (%) BIS tier 1 capital / average adjusted assets as per definition by FINMA BIS tier 1 ratio (%) BIS tier 1 capital / BIS risk-weighted assets Net new money (CHF billion) Inflow of invested assets from new and existing clients less outflows from existing clients or due to client defection Gross margin on invested assets (bps) Operating income before credit loss (expense) or recovery (annualized as applicable) / average invested assets Impaired lending portfolio as a % of total lending portfolio, gross Average management VaR (1-day, 95% confidence, five years of historical data) Impaired lending portfolio, gross / total lending portfolio, gross Value-at-Risk (VaR) expresses maximum potential loss measured to a 95% confidence level, over a 1-day time horizon and based on five years of historical data 1 For international clients only. 2 For Swiss clients only. p u o r G X X X X X X X X t n e m e g a n a M h t l a e W k n a B s s i w S & t n e m e g a n a M h t l a e W s a c i r e m A k n a B t n e m t s e v n I t e s s A l a b o G l t n e m e g a n a M X X X X X X X X X X X X1 X2 X X X X X The Group and business divisions are now managed based on this new KPI framework, which emphasizes risk awareness, effective risk and capital management, sustain- able profitability, and client focus. Both Group and business division KPIs are used to determine variable compensation of executives and personnel. ➔ Refer to the discussion of “Compensation and sharehold- ings” in the “Corporate governance and compensation” section of this report for more information The Group and business division KPIs are explained in the “Group and business division key performance indi cators” table. In 2009, we disclosed for the first time the management VaR (1-day, 95% confidence, and five years of historical data) for the Group and the Investment Bank. This new manage- ment VaR methodology is an enhancement compared with the previous management VaR (10-day, 99% confidence, and five years of historical data) as we consider that it reflects the way that trading risks are viewed and managed by the busi- ness, and can be more directly compared with mark to market revenues. All changes to this new management VaR have been approved by FINMA. The previously reported KPI regula- tory VaR (10-day, 99% confidence, and five years of historical data) for the Investment Bank was replaced by the new management VaR as of fourth quarter 2009. 33 Strategy, performance and responsibility Financial performance Client / invested assets reporting We report two distinct metrics for client funds: – The measure “client assets” encompasses all client assets managed by or deposited with us, including custody-only assets and assets held for purely transactional purposes. – The measure “invested assets” is a more restrictive term and includes all client assets managed by or deposited with us for investment purposes. Of the two, invested assets is our central measure and includes, for example, discretionary and advisory wealth management portfolios, managed institutional assets, man- aged fund assets and wealth management securities or bro- kerage accounts. It excludes all assets held for purely trans- actional and custody-only purposes, as we only administer the assets and do not offer advice on how these assets should be invested. 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 us by new and ex- isting clients, less those withdrawn by existing clients and clients who terminated their relationship with us. Negative 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 cur- rency movements, as well as fees, commissions and inter- est on loans charged, are excluded from net new money as are the effects of 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 ser- vice level delivered are treated as net new money inflows or outflows. When products are managed in one business division and sold by another, they are counted in both the investment management unit and the distribution unit. This results in double counting within our total invested assets, as both units provide an independent service to their respective cli- ent, add value and generate revenues. Most double count- ing arises when mutual funds are managed by Global Asset Management and sold by Wealth Management & Swiss Bank and Wealth Management Americas. The business di- visions involved count these funds as invested assets. This approach is in line with both finance industry practices and our open architecture strategy, and allows us to accurately reflect the performance of each individual business. Overall, CHF 254 billion of invested assets were double counted in 2009 (CHF 273 billion in 2008). 34 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S Accounting and reporting structure changes IAS 1 (revised) Presentation of Financial Statements Effective 1 January 2009, the revised International Account- ing Standard (IAS) 1 affected the presentation of owner changes in equity and of comprehensive income. We contin- ued to present owner changes in equity in the “statement of changes in equity”, but detailed information relating to non- owner changes in equity, such as foreign exchange trans- lation, cash flow hedges and financial investments available- for-sale, is presented in the “Statement of comprehensive income”. When implementing these amendments, we also adjust- ed the format of our “statement of changes in equity” and replaced the “statement of recognized income and expense” in the financial statements of previous years with a “state- ment of comprehensive income”. Preferred securities issued by consolidated trusts are reported as “equity attributable to minority interests”, as they are equity instruments held by third parties. As these securities make up the largest part of our equity attributable to minority interests, we disclose movement information in a separate table. We also re-assessed our accounting treatment of divi- dends from trust preferred securities. In 2009, in line with the classification of trust preferred securities as equity instru- ments, we recognize liabilities for the full dividend payment obligation once a coupon payment becomes mandatory, i.e. when it is triggered by a contractually determined event. In the income statement, the same amount is reclassified from net profit attributable to UBS shareholders to net profit at- tributable to minority interests. IFRS 8 Operating Segments Effective as of 1 January 2009, we adopted IFRS 8 Operating Segments which replaced IAS 14 Segment Reporting. Under the requirements of the new standard, our external segment reporting is now based on the internal management report- ing to the GEB (or the “chief operating decision maker”), which makes decisions on the allocation of resources and assesses the performance of the reportable segments. In accordance with the new structure announced in Feb- ruary 2009, we disclosed four reportable segments. These Accounting changes in 2010 and later The International Accounting Stan- dards Board (IASB) has initiated a comprehensive project to replace IAS 39 Financial instruments: recognition and measurement. The first phase of this project has been completed by issuing IFRS 9 Financial Instruments. Phase two and three address the classification and measurement of financial liabilities, impairment of financial assets at amortized cost, hedge accounting and derecognition of financial instruments. The IASB plans to complete phase two and three during 2010, although manda- tory application is not expected before 1 January 2013. In November 2009, the IASB issued IFRS 9 Financial instruments, which includes revised guidance on the classification and measurement of financial assets. Under the revised guidance, a financial asset is to be accounted for at amortized cost only if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the contractual terms of the financial asset give rise on specified dates to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. Non-traded equity instruments may be accounted for at fair value through equity, but the subsequent release of amounts booked directly to equity into the income statement is no longer permitted. All other financial assets are measured at fair value through profit or loss. We are currently assessing the impact of the new standard on our financial statements. It is likely that a number of financial assets currently accounted for at amortized cost will be accounted for at fair value through profit or loss under the new standard because a) their contractual cash flows do not comprise solely payments of principal and interest on the principal, and / or b) we do not hold the assets with the intention to collect contractual cash flows they generate. Certain debt securities currently classified as available-for-sale may satisfy the criteria for “amortized cost” account- ing; debt securities available-for-sale failing these criteria will be accounted for at fair value. The effective date for mandatory adoption is 1 January 2013, with early adoption permitted. We did not adopt IFRS 9 for the year ended 31 December 2009. 35 Strategy, performance and responsibility Financial performance segments are the business divisions – Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank. While the Corporate Center does not meet the requirements of an operating seg- ment, it is also shown separately. Segment information from prior periods has been restated to conform to the require- ments of the new standard. As our reportable segment operations are mainly fi- nancial, the total interest income and expense for all re- portable segments is presented on a net basis. Based on the present arrangement of revenue-sharing agreements, our total in tersegment revenues are immaterial. Apart from that, the segment assets are disclosed without the inter- company balances in line with the internal management reporting. ➔ Refer to “Note 1 Summary of significant accounting policies” and “Note 2a Segment reporting” in the “Financial information” section of this report for more details on the basis on which the segment information is prepared and Allocation of Shared Services Costs in Segment Disclosures From 2009 onwards, Information Technology Infrastructure and Group Offshoring costs managed by the Corporate Cen- ter are allocated to the direct cost lines personnel expenses, general and administrative expenses and depreciation in the respective business division income statements, based on ap- propriate internally determined allocation keys. In the Corpo- rate Center income statement, costs allocated to the busi- ness divisions are deducted from the respective cost lines. In previous reports, these costs were presented as an expense on the line Services (to) / from other business divisions within each business division and an offsetting corresponding amount on that line in the Corporate Center. The new pre- sentation format provides greater transparency by allocating costs of shared services and control functions managed by the Corporate Center to direct cost lines in divisional income statements. Comparative periods have been adjusted. reconciled to the amounts presented in our income ➔ Refer to “Note 1a33 Segment reporting” in the “Financial statement and balance sheet information” section of this report for more information on our general principles for allocating shared service and control function costs managed by the Corporate Center ➔ Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” in the “Financial information” section of this report for changes to segment disclosures due to a different presentation of ITI and Group offshore cost allocations Changes to the reporting structure in 2010 Wealth Management & Swiss Bank Commencing first quarter 2010, we will amend our internal reporting of Wealth Management & Swiss Bank and present in our external financial reports two separate business units: – “Wealth Management” will encompass the domestic and international wealth management business conducted in Switzerland, and all wealth manage ment businesses of our other booking centers in Asia and Europe. – “Retail & Corporate” will include services provided to Swiss retail private clients, small businesses, as well as corporate and institutional clients. Corporate Center In 2009, we integrated our Group- wide shared service and control functions into the Corporate Center. Headcount and costs of the cen- tralized functions are re-allocated to the business divisions for which the respective services are performed. Accordingly we will change the quarterly disclosure commencing first quarter 2010 as follows: – We will continue to provide Corporate Center income statement data and additional information on www.ubs.com/ investors. – Significant items and treasury-relat- ed income data will be explained in the “Group results” section in our quarterly reports, which will no longer include a specific “Corpo- rate Center” section. 36 UBS results Income statement CHF million Continuing operations Interest income Interest expense Net interest income Credit loss (expense) / recovery Net interest income after credit loss expense Net fee and commission income Net trading income Other income Total operating income Personnel expenses General and administrative expenses Depreciation of property and equipment Impairment of goodwill Amortization of intangible assets Total operating expenses Operating profit from continuing operations before tax Tax expense Net profit from continuing operations Discontinued operations Profit from discontinued operations before tax Tax expense Net profit from discontinued operations Net profit Net profit attributable to minority interests from continuing operations from discontinued operations Net profit attributable to UBS shareholders from continuing operations from discontinued operations Performance by business division Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Corporate Center Operating profit from continuing operations before tax y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S For the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 23,461 (17,016) 6,446 (1,832) 4,614 17,712 (324) 599 22,601 16,543 6,248 1,048 1,123 200 25,162 (2,561) (443) (2,118) (7) 0 (7) 65,679 (59,687) 5,992 (2,996) 2,996 22,929 (25,820) 692 796 16,262 10,498 1,241 341 213 28,555 (27,758) (6,837) (20,922) 198 1 198 109,112 (103,775) 5,337 (238) 5,099 30,634 (8,353) 4,341 31,721 25,515 8,429 1,243 0 276 35,463 (3,742) 1,369 (5,111) 145 (258) 403 (2,125) (20,724) (4,708) 610 600 10 (2,736) (2,719) (17) 3,910 32 438 (6,081) (860) (2,561) 568 520 48 (21,292) (21,442) 150 6,013 (823) 1,333 (34,300) 19 (27,758) 539 539 0 (5,247) (5,650) 403 8,543 621 1,454 (16,669) 2,310 (3,742) (64) (71) 8 (39) 54 (23) 99 (13) 2 (40) (16) 229 (6) (12) 91 94 90 (100) 90 7 15 (79) 87 87 (35) (67) 82 91 37 Strategy, performance and responsibility Financial performance 2009 Results In 2009, we reported a Group net loss attributable to share- holders (“attributable loss”) of CHF 2,736 million – a loss before tax of CHF 2,561 million from continuing operations and a loss before tax of CHF 7 million from discontinued op- erations. In 2008, we recorded an attributable loss of CHF 21,292 million. Operating income Total operating income was CHF 22,601 million in 2009, up from CHF 796 million in 2008. Net interest income at CHF 6,446 million was up 8% compared with CHF 5,992 million a year earlier. Net trading income was negative CHF 324 mil- lion compared with negative CHF 25,820 million in 2008. Net interest income includes income earned as a result of trading activities (for example, coupon and dividend income) as well as income from interest margin-based activities (loans and deposits). The 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, their total is analyzed below under the relevant business activities. In 2009, we reviewed our approach to calculating and booking own credit of derivative liabilities and financial liabilities designated at fair value. As of the transition date 1 January 2009, changes resulting from this review increased our 2009 net trading income by CHF 143 million, made up of a CHF 365 million credit to Net income from trading busi- nesses and a charge of CHF 222 million to Net income from treasury activities and other. Net income from trading businesses Net income from trading businesses, including lending ac- tivities of the Investment Bank, was positive CHF 382 million for full-year 2009. This compares with negative CHF 27,203 million in the prior year, with the improvement mainly due to lower losses on residual risk positions in the fixed income, currencies and commodities (FICC) area of the Investment Bank in 2009. Trading revenues from the FICC business improved from the previous year, due to lower losses on residual risk posi- tions as mentioned above. Equities trading revenues (excluding own credit) improved from the previous year. Equity-linked revenues increased sig- nificantly as all regions benefitted from improvements in val- uations and liquidity. Proprietary trading revenues improved with a strong performance recorded across all geographical regions. In 2009, the Investment Bank recorded a loss on own credit from financial liabilities designated at fair value of CHF 2,023 million as our credit spread narrowed in 2009 com- pared with a gain of CHF 2,032 million in 2008. This change was partially impacted by the abovementioned change in calculating and booking of own credit. The cumulative own credit gain on existing financial liabilities designated at fair value still held as of 31 December 2009, amounted to ap- proximately CHF 0.9 billion. Own credit charges in future periods can exceed the cumulative own credit gain on exist- ing financial liabilities designated at fair value. ➔ Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this report for more information on own credit Net interest and trading income CHF million Net interest income Net trading income Total net interest and trading income Breakdown by businesses Net income from trading businesses 1 Net income from interest margin businesses Net income from treasury activities and other Total net interest and trading income 1 Includes lending activities of the Investment Bank. 38 For the year ended % change from 31.12.09 6,446 (324) 6,122 382 5,053 687 6,122 31.12.08 5,992 (25,820) (19,828) (27,203) 6,160 1,214 (19,828) 31.12.07 31.12.08 5,337 (8,353) (3,016) (10,658) 6,230 1,412 (3,016) 8 99 (18) (43) y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S Net income from interest margin businesses Net income from interest margin businesses decreased 18% to CHF 5,053 million from CHF 6,160 million. This decrease was primarily attributable to lower margins on loans and liabilities. ➔ Refer to the “Risk management and control” section of this report for more information on our risk management approach, method of credit risk measurement and the development of credit risk exposures Net income from treasury activities and other Net income from treasury activities and other was CHF 687 million compared with CHF 1,214 million driven by a net gain of CHF 297 million (including interest expenses) on the valu- ation of the MCNs issued in December 2008 and converted in August 2009 and a gain of CHF 117 million on the revalu- ation of our option to acquire the SNB StabFund’s equity. In comparison, 2008 included an accounting gain of CHF 3,860 million related to the MCNs issued in March 2008, which was offset by the CHF 3.4 billion negative impact of the transac- tion with the Swiss National Bank and the abovementioned MCNs issued in December 2008, resulting in a total gain of CHF 0.4 billion. Credit loss expenses In 2009, we experienced net credit loss expenses of CHF 1,832 million, of which CHF 425 million were due to impair- ment charges taken on reclassified securities in the Invest- ment Bank. In comparison, we recorded net credit loss ex- penses of CHF 2,996 million in 2008. The Investment Bank recorded net credit loss expenses of CHF 1,698 million for 2009, compared with net credit loss ex- penses of CHF 2,575 million in 2008. Excluding the credit loss expenses from reclassified securities of CHF 425 million, the net credit loss expenses amounted to CHF 1,273 million in 2009. Wealth Management & Swiss Bank reported net credit loss expenses of CHF 133 million for 2009, compared with CHF 392 million in 2008. Releases of allowances against lombard loans in 2009 contributed to this positive development. Net fee and commission income Net fee and commission income was CHF 17,712 million, down 23% from CHF 22,929 million. Income declined in all major fee categories except for underwriting fees, as out- lined below: – Underwriting fees increased 22% to CHF 2,386 million, driven by a 40% increase in equity underwriting fees off- set by a 3% decrease in debt underwriting fees. – Mergers and acquisitions and corporate finance fees fell 47% to CHF 881 million due to reduced market activity as deal appetite remained subdued. – Net brokerage fees fell 31% to CHF 4,469 million mainly due to a reduction in equity trading volumes. – Investment fund fees fell 28% to CHF 4,000 million as a result of lower asset based fees on both own and third- party funds. – Portfolio management and advisory fees fell 24% to CHF 5,863 million, mainly due to the decreased average asset base, especially in the wealth management businesses. – Insurance-related and other fees, at CHF 264 million in 2009, decreased by 17% from a year earlier. That was mainly due to lower commission income from insurance products. – Commission income from other services decreased 13% to CHF 878 million, mainly in the wealth management businesses. – Other commission expense fell 31% to CHF 1,368 mil- lion, mainly due to lower commissions paid to distribution partners. Credit loss (expense) / recovery CHF million Wealth Management & Swiss Bank Wealth Management Americas Investment Bank 1 of which: related to reclassified securities Corporate Center UBS 1 Includes credit loss expense of CHF 588 million (31.12.08: CHF 1,205 million) related to reclassified leveraged finance positions. For the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 (133) 3 (1,698) (425) (5) (1,832) (392) (29) (2,575) (125) 30 (2) (266) (2,996) (238) (66) (34) 240 (39) 39 Strategy, performance and responsibility Financial performance Net fee and commission income CHF million Equity underwriting fees Debt underwriting fees Total underwriting fees M&A and corporate finance fees Brokerage fees 1 Investment fund fees Portfolio management and advisory fees 2 Insurance-related and other fees Total securities trading and investment activity fees Credit-related fees and commissions Commission income from other services Total fee and commission income Brokerage fees paid 1 Other Total fee and commission expense Net fee and commission income of which: net brokerage fees For the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 1,590 796 2,386 881 6,217 4,000 5,863 264 19,611 339 878 20,827 1,748 1,368 3,116 17,712 4,469 1,138 818 1,957 1,662 8,209 5,583 7,667 317 25,394 273 1,010 26,677 1,763 1,984 3,748 22,929 6,445 2,564 1,178 3,742 2,768 10,211 7,422 9,454 423 34,020 279 1,017 35,316 2,540 2,142 4,682 30,634 7,671 40 (3) 22 (47) (24) (28) (24) (17) (23) 24 (13) (22) (1) (31) (17) (23) (31) 1 In 2009, we restated the amounts presented in previous periods on the lines Brokerage fees and Brokerage fees paid. Amounts previously disclosed for both lines have decreased by CHF 146 million for the year ended 31 December 2008, and by CHF 70 million for the year ended 31 December 2007. Net fee and commission income is not affected. 2 Includes fiduciary and custodian fees, which were presented as separate lines in previous reports. Other income Other income was CHF 599 million in 2009 compared with CHF 692 million in the previous year. 2009 includes a loss of CHF 498 million related to the sale of UBS Pactual, foreign exchange gains of CHF 430 million on other divestments of subsidiaries, a gain of CHF 304 million on the buyback of subordinated debt and impairment charges of financial in- vestments available-for-sale of CHF 349 million. nized in the income statement in 2010 and later, subject to the vesting conditions of the respective awards granted. It includes a charge for performance (and retention) awards that are to be granted, or are expected to be granted, in 2010 in relation to the 2009 performance year but which, as of the balance sheet date, had in fact not been granted. The 2009 results do not include a provision for bank payroll tax in the UK. ➔ Refer to “Note 5 Other income” in the “Financial informa- ➔ Refer to “Note 31 Equity participation and other compen- tion” section of this report for more information sation plans” in the “Financial information” section of this Operating expenses Total operating expenses were down 12% to CHF 25,162 million in 2009 from CHF 28,555 million in 2008. Total restructuring charges of CHF 791 million were in- curred in 2009, including CHF 491 million in Personnel ex- penses, mainly for severance payments, CHF 256 million in General and administrative expenses, primarily for real- estate related costs, and CHF 45 million of depreciation and impairment losses on property and equipment. Personnel expenses Personnel expenses were CHF 16,543 million compared with CHF 16,262 million in the previous year. Headcount reduc- tions were partially offset by salary increases. Variable com- pensation recognized in the income statement in 2009 was CHF 3.0 billion. Variable compensation of CHF 3.2 billion for 2009 and brought forward from prior years will be recog- report for more information about deferred compensation related to non-vested awards granted up to and including 31 December 2009 Contractors’ expenses, at CHF 275 million, were down 35% from 2008. This was due to substantial reduction of employed contractors and a favorable foreign exchange impact. Insurance and social security contributions in- creased 21% to CHF 851 million in 2009, due to our equity compensation plan. Contributions to retirement benefit plans increased CHF 15 million to CHF 941 million, other personnel expenses decreased 16%, mainly due to head- count reduction and lower training, recruitment and travel- ling costs. General and administrative expenses General and administrative expenses declined 40% to CHF 6,248 million. All general and administrative expense cate- gories decreased in 2009 primarily as a result of the cost re- duction programs. Further, 2008 included provision for auc- 40 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S tion rate securities of CHF 1,464 million and provisions in relation to the US cross-border case of CHF 917 million. Largest reductions in absolute terms were in travel and en- tertainment, and professional fees. ➔ Refer to “Note 21 Provisions and litigation” in the “Financial information” section of this report for more information about provisions ing the US (CHF 373 million) and Japan (CHF 127 million), taking into account updated forecast profit assumptions over the five-year horizon used for recognition purposes. In addition, it reflects the release of a deferred tax liability of CHF 243 million relating to UBS Pactual prior to its sale dur- ing the year. This deferred tax benefit is partially offset by a current tax charge of CHF 517 million which mainly relates to entities with taxable profits. Depreciation, amortization and impairment of goodwill Depreciation of property and equipment declined CHF 16% to CHF 1,048 million. Amortization of intangible assets was CHF 200 million compared with CHF 213 million in 2008. During 2008, we recognized a net income tax benefit in our income statement of CHF 6,837 million, which mainly reflected a CHF 6,126 million impact from the increase in deferred tax assets on tax losses. A goodwill impairment charge of CHF 1,123 million was recorded in 2009, relating to the sale of UBS Pactual. In 2008 a goodwill impairment charge of CHF 341 million was re- corded relating to the Investment Bank’s exit from the mu- nicipal securities business. Income tax We recognized a net income tax benefit in our income state- ment of CHF 443 million for full-year 2009. This includes a deferred tax benefit of CHF 960 million, which reflects the recognition of additional deferred tax assets in respect of tax losses and temporary differences in certain locations, includ- Invested assets Total invested assets stood at CHF 2,233 billion on 31 De- cember 2009, an increase of 3% from CHF 2,174 billion on 31 December 2008. Positive market developments were nearly offset by net new money outflows, reduction of in- vested assets related to divestments and negative currency translation effects. On 31 December 2009, CHF 960 billion of invested assets were attributable to Wealth Management & Swiss Bank, CHF 690 billion were attributable to Wealth Management Americas and CHF 583 billion were attribut- able to Global Asset Management. Invested assets CHF billion Swiss clients International clients Wealth Management & Swiss Bank Wealth Management Americas Institutional Wholesale intermediary Global Asset Management UBS 31.12.09 As of 31.12.08 % change from 31.12.07 31.12.08 337 624 960 690 346 237 583 325 631 955 644 335 240 575 2,233 2,174 455 937 1,392 906 522 369 891 3,189 4 (1) 1 7 3 (1) 1 3 41 Strategy, performance and responsibility Financial performance 2008 Results In 2008, we reported a Group net loss attributable to the shareholders (“attributable loss”) of CHF 21,292 million – a loss of CHF 21,442 million from continuing operations and a profit of CHF 150 million from discontinued opera- tions. In 2007, we recorded an attributable loss of CHF 5,247 million. Operating income Total operating income was CHF 796 million in 2008, down from CHF 31,721 million in 2007. Net interest income at CHF 5,992 million was up 12% compared with CHF 5,337 million a year earlier. Net trading income was negative CHF 25,820 million, sharply down from negative CHF 8,353 mil- lion in 2007. Net income from trading businesses Net income from trading businesses dropped to negative CHF 27,203 million for full-year 2008. This compares with negative CHF 10,658 million in the prior year, with the de- cline mainly due to losses on disclosed risk concentrations in the FICC area of the Investment Bank. 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 equities were down from the pre- vious year, mainly as a result of lower revenues in derivatives, especially in Europe and Asia. The Equity-linked business 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 ser- vices had a solid performance but revenues were down over- all from 2007 as clients deleveraged their positions. Proprie- tary 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 2,032 million, resulting from the widening of our credit spread, which was partly offset by the effects of redemp- tions and repurchases of such liabilities. ➔ Refer to “Note 27 Fair value of financial instruments” in the “Financial Information” section of our 2008 annual report for more information 42 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 de- crease was primarily due to lower income from mortgages. Net income from treasury activities and other Net income from treasury activities and other was CHF 1,214 million compared with CHF 1,412 million. Gains from the accounting treatment of the MCNs issued in March and in December 2008 were offset by negative income from the transaction with the Swiss National Bank. Credit loss expenses 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 Wealth Management & Swiss Bank amounted to CHF 392 million in 2008 compared with a net credit loss recovery of CHF 30 million in 2007. This result was mainly due to provisions made for lombard loans in 2008, particularly in the fourth quarter. The Investment Bank record- ed 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 reflects impairment charges taken on reclassified instruments in fourth quarter 2008, of which the majority related to leveraged finance commitments. ➔ Refer to the “Risk management and control” section of this report for more information on our 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. y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S – Portfolio management and advisory fees fell 19% to CHF 7,667 million mainly due to the lower asset base in the wealth management businesses and reduced perfor- mance 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 Americas. Other income Other income decreased to CHF 692 million from CHF 4,341 million. The main driver was the sale of our 20.7% stake in Julius Baer during 2007, which gave rise to the recognition in 2007 of a CHF 1,950 million pre-tax gain, attributed to the Corporate Center. 2008 included a gain of CHF 168 mil- lion from the sale of our stake in Adams Street Partners and a gain of CHF 360 million on the sale of our stake in Bank of China, partly offset by losses of CHF 192 million due to cur- rency translation differences on partial disposals of an invest- ment in a consolidated investment fund. 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 reduced variable 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 ac- cruals on variable compensation, mainly in the Investment Bank, as well as lower salary costs due to reduced personnel levels. Full-year results for 2007 included accruals for share- based compensation for performance during the year. These were not reflected in full-year 2008 as they are being amor- tized over the vesting period of these awards starting with 2009. Contractors’ expenses, at CHF 423 million, were down 33% from 2007. This was due to a lower number of con- tractors employed, mainly at the Investment Bank. Insurance and social security contributions declined 45% to CHF 706 million in 2008, driven by reduced variable 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 per- sonnel 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 of CHF 1,464 million related to auction rate securities, 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 ex- penses, reduced costs from outsourcing of IT and other ser- vices and lower marketing and public relations expenses. Depreciation, amortization and impairment of goodwill Depreciation of property and equipment declined CHF 2 mil- lion 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 2008 relating to the Investment Bank’s exit from the municipal securities business. There was no goodwill im- pairment charge for full-year 2007. Income tax We recognized an income tax benefit in the income state- ment of CHF 6,837 million for 2008, which mainly reflects the CHF 6,126 million impact from the recognition of incre- mental 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 write- down 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 in- come in Switzerland arising in the seven years following the year in which the losses are incurred. We recognized a net income tax expense of CHF 1,369 million for full-year 2007. 43 Strategy, performance and responsibility Financial performance Balance sheet CHF million Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Trading portfolio assets pledged as collateral Positive replacement values Financial assets designated at fair value Loans Financial investments available-for-sale Accrued income and prepaid expenses Investments in associates Property and equipment Goodwill and intangible assets Deferred tax assets Other assets Total assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Financial liabilities designated at fair value Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total liabilities Equity Share capital Share premium Net income recognized directly in equity, net of tax Revaluation reserve from step acquisitions, net of tax Retained earnings Equity classified as obligation to purchase own shares Treasury shares Equity attributable to UBS shareholders Equity attributable to minority interests Total equity Total liabilities and equity 44 31.12.09 31.12.08 31.12.08 % change from 20,899 46,574 63,507 116,689 188,037 44,221 421,694 10,223 306,828 81,757 5,816 870 6,212 11,008 8,868 7,336 32,744 64,451 122,897 224,648 271,838 40,216 854,100 12,882 340,308 5,248 6,141 892 6,706 12,935 8,880 9,931 1,340,538 2,014,815 65,166 7,995 64,175 47,469 409,943 112,653 410,475 8,689 131,352 33,986 125,628 14,063 102,561 62,431 851,864 101,546 465,741 10,196 197,254 42,998 1,291,905 1,974,282 356 34,786 (4,875) 38 11,751 (2) (1,040) 41,013 7,620 48,633 293 25,250 (4,335) 38 14,487 (46) (3,156) 32,531 8,002 40,533 1,340,538 2,014,815 (36) (28) (48) (48) (31) 10 (51) (21) (10) (5) (2) (7) (15) 0 (26) (33) (48) (43) (37) (24) (52) 11 (12) (15) (33) (21) (35) 22 38 (12) 0 (19) 96 67 26 (5) 20 (33) y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S (cid:59)(cid:71)(cid:67)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:79)(cid:67)(cid:86)(cid:87)(cid:84)(cid:75)(cid:86)(cid:91) (cid:20)(cid:20)(cid:18)(cid:18) (cid:19)(cid:27)(cid:18)(cid:18) (cid:19)(cid:24)(cid:18)(cid:18) (cid:19)(cid:21)(cid:18)(cid:18) (cid:19)(cid:18)(cid:18)(cid:18) (cid:20)(cid:18)(cid:18)(cid:27)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:70)(cid:71)(cid:88)(cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86) (cid:37)(cid:42)(cid:40)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:20)(cid:14)(cid:18)(cid:19)(cid:23) (cid:10)(cid:24)(cid:24)(cid:11) (cid:25)(cid:19) (cid:10)(cid:19)(cid:24)(cid:25)(cid:11) (cid:10)(cid:26)(cid:18)(cid:11) (cid:19)(cid:14)(cid:21)(cid:22)(cid:19) (cid:10)(cid:22)(cid:21)(cid:20)(cid:11) (cid:20)(cid:14)(cid:20)(cid:18)(cid:18) (cid:19)(cid:14)(cid:27)(cid:18)(cid:18) (cid:19)(cid:14)(cid:24)(cid:18)(cid:18) (cid:19)(cid:14)(cid:21)(cid:18)(cid:18) (cid:19)(cid:14)(cid:18)(cid:18)(cid:18) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:20)(cid:18)(cid:18)(cid:26) (cid:46)(cid:71)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73) (cid:37)(cid:81)(cid:78)(cid:78)(cid:67)(cid:86)(cid:71)(cid:84)(cid:67)(cid:78) (cid:86)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73) (cid:54)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73) (cid:82)(cid:81)(cid:84)(cid:86)(cid:72)(cid:81)(cid:78)(cid:75)(cid:81) (cid:40)(cid:75)(cid:80)(cid:16)(cid:2)(cid:43)(cid:80)(cid:88)(cid:16)(cid:2)(cid:67)(cid:72)(cid:85)(cid:17) (cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:20)(cid:18)(cid:18)(cid:27) (cid:50)(cid:81)(cid:85)(cid:75)(cid:86)(cid:75)(cid:88)(cid:71) (cid:84)(cid:71)(cid:82)(cid:78)(cid:67)(cid:69)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86) (cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:85) 31.12.09 vs. 31.12.08: Our total assets stood at CHF 1,341 billion on 31 December 2009, down CHF 674 billion (33%) from CHF 2,015 billion on 31 December 2008. These shifts were due to significant reductions in replacement values (RVs) on both sides of the balance sheet, as market movements drove down positive replacement values by CHF 432 billion to CHF 422 billion and negative replacement values by CHF 442 billion to CHF 410 billion. Excluding positive replacement values, our total assets dropped CHF 242 billion in 2009. Collateral trading assets fell by CHF 167 billion to CHF 180 billion, trading port folio assets fell by CHF 80 billion to CHF 232 billion, and lending assets fell by CHF 66 billion to CHF 385 billion. These declines were partly offset by an increase in financial invest- ments available-for-sale, which grew by CHF 77 billion to CHF 82 billion. Currency effects for 2009 included a strengthening of the Swiss franc against the Japanese yen, US dollar and euro while the Swiss franc weakened against UK sterling. These effects deflated the balance sheet, excluding positive re- placement values, by CHF 10 billion, implying an underlying assets reduction of effectively CHF 231 billion. Excluding positive replacement values, the Investment Bank significantly reduced its balance sheet assets by CHF 258 billion during 2009 to CHF 992 billion. Global Asset Management’s balance sheet decreased by CHF 4 billion to CHF 20 billion. Wealth Management Americas’ balance sheet increased by CHF 14 billion to CHF 53 billion and the Corpo- rate Center’s balance sheet increased by CHF 8 billion to CHF 27 billion. The balance sheet size of Wealth Management & Swiss Bank remained relatively stable at CHF 248 billion. Lending and borrowing CHF 47 billion, related to lower variation margins deposited for derivative instruments. Loans to customers decreased CHF 33 billion to CHF 307 billion. The CHF 21 billion de- crease in loans in the Investment Bank was spread across all major products, including fixed-term loans, which were part- ly reduced due to the final transfer under the SNB transac- tion in early April, and lower variation margins deposited for derivative instruments. The loan book of Wealth Manage- ment & Swiss Bank declined by CHF 9 billion, with the major- ity of the decline in lombard lending. (cid:20)(cid:22)(cid:16)(cid:23) Borrowing The reduction of the Investment Bank’s assets led to lower funding needs. Overall, unsecured borrowing declined by CHF 171 billion to CHF 720 billion. Interbank borrowing (Due to banks) was CHF 65 billion on 31 December 2009, down CHF 60 billion from 31 December 2008 due to asset reductions and decreased variation margins for derivative instruments. Money market paper issuance was CHF 52 bil- lion in 2009, a reduction of CHF 60 billion from the prior year, as we decreased our reliance on these funding sources in line with our overall lower funding needs. Customer de- posits (Due to customers) amounted to CHF 410 billion, a decrease of CHF 55 billion for the year, or CHF 51 billion, on a currency-adjusted basis. Wealth Management & Swiss Bank client deposits declined CHF 11 billion with reductions in fixed deposits and fiduciary investments and was partially offset by inflows / shifts into current accounts, savings and personal accounts and call deposits. Investment Bank depos- its declined CHF 47 billion, and were mainly driven by lower business funding needs, a decline in the prime brokerage business and lower variation margins received for derivative instruments. Long-term debt declined by CHF 6 billion to CHF 80 billion, mainly related to the conversion by the Swiss Confederation of the MCN issued in December 2008, which resulted in a shift of long-term debt to equity attributable to UBS shareholders. Financial liabilities designated at fair value stood at CHF 113 billion on 31 December 2009, an increase of CHF 11 billion from 31 December 2008. ➔ Refer to “Note 26 Capital increases and mandatory convertible notes” in the “Financial information” section of this report for more information ➔ Refer to “Liquidity and funding management” section of this report for more information on long-term debt issuance Repurchase / reverse repurchase agreements and securities borrowing / lending Lending Cash and balances with central banks was CHF 21 billion on 31 December 2009, a decrease of CHF 12 billion from the prior year-end, due to a decline in overnight deposits with central banks. Due from banks decreased CHF 18 billion to The secured lending on the asset side of the balance sheet consisting of the sums of cash collateral on securities bor- rowed and reverse repurchase agreements declined to CHF 180 billion on 31 December 2009. The CHF 167 billion de- cline occurred almost entirely in the Investment Bank, partly 45 Strategy, performance and responsibility Financial performance due to a strategic shift in the composition of our liquidity reserve into debt instruments (see “Financial investments available-for-sale” below) and the matched book was re- duced as part of its overall balance sheet reduction. The matched book is a repurchase agreement portfolio com- prised of assets and liabilities with equal maturities and equal value so that the market risks substantially cancel each other out. Furthermore, as part of the Investment Bank’s bal- ance sheet reduction measures, its trading short positions were reduced CHF 15 billion, which resulted in lower short- coverings via reverse repurchase agreements and securities borrowing transactions. A significant amount of trading assets are funded via re- purchase agreements, so, in addition to the matched book reduction, the yearly decrease in trading assets also contrib- uted to the drop in repurchase agreements. These reduc- tions are reflected on the liability side of the balance sheet, where repurchase agreements and securities lent against cash collateral declined CHF 44 billion, standing at CHF 72 billion on 31 December 2009. Trading portfolio Further reductions were achieved in the trading portfolio, which declined CHF 80 billion during 2009. At the end of 2009, the trading portfolio stood at CHF 232 billion. The majority of the decrease related to the Investment Bank’s overall balance sheet reductions, including USD 6.6 billion of illiquid assets transferred to the SNB StabFund. Money mar- ket paper was reduced by CHF 46 billion, partly related to the rebalancing of our liquidity reserve. Other debt instru- ments decreased by CHF 33 billion and traded loans de- creased by CHF 6 billion. These decreases were partially off- set by precious metals which increased by CHF 7 billion. Replacement values The positive and the negative replacement values (RVs) of derivative instruments decreased by CHF 432 billion (51%) and CHF 442 billion (52%), respectively, ending the year at CHF 422 billion and CHF 410 billion, mainly due to move- ments in interest rates, credit spreads and currencies. Decreases in positive and negative RVs occurred in inter- est rate contracts, which dropped by CHF 160 billon and CHF 165 billion, mainly due to upward shifts in interest rate curves across all major currencies, specifically the US dollar, and a slight reduction in underlying contract volumes. Foreign exchange contracts declined by CHF 124 billion (positive RVs) and CHF 126 billion (negative RVs) mainly due to currency movements, which outweighed the slight in- crease in notional values of the underlying contract volumes. Positive and negative RVs of credit derivative contracts declined by CHF 119 billion and CHF 114 billion respectively, due to a tightening of credit spreads and a reduction of no- tional values by approximately one third, largely related to trade compression and “tear-up” initiatives in 2009. Lastly, positive and negative RVs of commodity, including precious metals contracts, declined by CHF 19 billion and CHF 18 billion, and equity / index contracts by CHF 10 billion and CHF 19 billion, respectively. Financial investments available-for-sale Financial investments available-for-sale grew by CHF 77 bil- lion to CHF 82 billion in 2009. The increase is mainly due to our strategic decision to rebalance our liquidity reserve which led to a shift from reverse repurchase agreements and trad- ing portfolio (see above) into debt instruments available- for-sale. These instruments include high-quality liquid short- term securities issued by governments and government-con- trolled institutions in various currencies, mainly the US dollar and euro. Shareholders’ equity On 31 December 2009, Equity attributable to UBS share- holders was CHF 41.0 billion, representing an increase of CHF 8.5 billion compared with 31 December 2008. The in- crease in 2009 reflects the CHF 3.8 billion of shareholders’ equity the firm generated through our share placement in the second quarter and CHF 6.7 billion from the conversion by the Swiss Confederation in August 2009 of the MCNs issued in December 2008, and was offset by the Group’s full-year loss of CHF 2.7 billion. ➔ Refer to the “Shares and capital instruments” section of this report for more information 46 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S Off-balance sheet Off-balance sheet arrangements Off-balance sheet arrangements include purchased and re- tained interests and derivatives as well as other involvements in non-consolidated entities and structures originated by us or set up by third parties. In the normal course of business, we also enter into ar- rangements that, under IFRS, lead to either de-recognition of financial assets and liabilities for which we have transferred substantially all risks and rewards (financial assets), or for which the financial liabilities are extinguished, or the non-rec- ognition of financial assets (and liabilities) received for which we have not assumed the related risks and rewards (financial assets) and / or did not become party to the contractual provi- sions of the financial instruments. We recognize these types of arrangements on the balance sheet to the extent of its in- volvement, which, for example, may be in the form of deriva- tives, guarantees, financing commitments or servicing rights. When we, through these arrangements, incur an obliga- tion or become entitled to an asset, we recognize them on the balance sheet, with the resulting loss or gain recorded in the income statement or equity (other comprehensive in- come). It should be noted that in many instances the amount recognized on the balance sheet does not represent the full gain or loss potential inherent in such arrangements. Gener- ally, these arrangements either meet the financial needs of customers or offer investment opportunities through entities that are not controlled by us. The following paragraphs discuss several distinct areas of off-balance sheet arrangements. Additional disclosure on certain areas of off-balance sheet arrangements can be found in other sections of this report as indicated in the “Disclosure overview” table. Risk positions Our risk concentrations and other relevant risk positions are disclosed in detail in the audited parts of the “Risk manage- ment and control” section of this report. These positions in- clude monoline insurers and student loan auction rate secu- rities. The quantitative summary about each of these risk positions includes exposures of on- and off-balance sheet arrangements. The importance and the potential impact of such posi- tions (with respect to liquidity, capital resources or market and credit risk support), including off-balance sheet struc- tures, are also described in the “Risk and treasury manage- ment” section of this report. Liquidity facilities and similar obligations On 31 December 2009 and 31 December 2008, we had no significant exposure through liquidity facilities and guaran- tees to structured investment vehicles, conduits and other types of special purpose entities (SPEs). Losses resulting from such obligations were not significant in 2009 and 2008. Non-consolidated securitization vehicles and collateralized debt obligations Up to and including 2008, we sponsored the creation of SPEs that facilitate the securitization of acquired residential and commercial mortgage loans, other financial assets and Off-balance sheet arrangements, risks, consolidation and fair value measurements Contractual obligations Credit guarantees, performance guarantees, undrawn irrevocable credit facilities, and similar instruments Derivative financial instruments Credit derivatives Leases Disclosure in the annual report Strategy, performance and responsibility, section “Off-balance sheet” Strategy, performance and responsibility, section “Off-balance sheet” Financial information, “Note 23 Derivative instruments and hedge accounting” Risk and treasury management, section “Basel II Pillar 3 disclosures” Financial information, “Note 23 Derivative instruments and hedge accounting” Risk and treasury management, section “Basel II Pillar 3 disclosures” Financial information, “Note 25 Operating lease commitments” Non-consolidated securitization vehicles – non-agency transactions Strategy, performance and responsibility, section “Off-balance sheet” Support to non-consolidated investment funds Securitizations (banking book only) Risk concentrations Credit risk information Market risk information Liquidity risk information Consolidation Fair value measurements Strategy, performance and responsibility, section “Off-balance sheet” Risk and treasury management, section “Basel II Pillar 3 disclosures” Risk and treasury management, section “Risk concentrations” Risk and treasury management, section “Credit risk” Risk and treasury management, section “Market risk” Risk and treasury management, section “Liquidity and funding management” Financial information, “Note 1 Summary of significant accounting policies” Financial information, “Note 27 Fair value of financial instruments” 47 Strategy, performance and responsibility Financial performance related securities. We also securitized customers’ debt obli- gations (a collateralized debt obligation (CDO) typically re- fers to a security that is collateralized by a pool of bonds, loans, equity, derivatives or other assets) in transactions in- volving SPEs which issued CDOs. A securitization transaction of this kind generally involves the transfer of assets into a trust or corporation in return for beneficial interests in the form of securities. Financial assets held by such trusts and corporations are no longer reported in our consolidated financial statements once their risks and rewards are trans- ferred to a third-party, e.g. in a sales transaction. ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information about our accounting policies regarding securitization activities In 2009, we did not sponsor the creation of SPEs that fa- cilitated the securitization of acquired residential and com- mercial mortgage loans, and did not securitize CDOs in transactions involving SPEs. In 2008, only few of such secu- ritization structures were originated. Certain retained inter- ests relating to 2007 and earlier issuances (mainly instru- ments linked to the US mortgage market) could not be sold in 2008 and 2007 and continue to be retained in 2009 due to illiquid markets. However, the volume and size of re- tained interests are significantly reduced at 31 December 2009, mainly due to the following actions: – sale of positions to the SNB StabFund owned and con- trolled by the Swiss National Bank in 2009 and in 2008 (total volume of USD 38.7 billion; 2009: USD 22.2 billion; 2008: USD 16.4 billion); – sale of a portfolio of US residential mortgage-backed securities for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP, an entity managed by BlackRock Financial Management, Inc.; – substantial downsizing of our residual risk positions within our FICC business in 2009 and 2008, which in- cluded a significant reduction of real estate and securiti- zation activities. Our involvements in non-consolidated securitization vehi- cles and CDOs disclosed in this section are typically managed on a portfolio basis alongside hedges and other offsetting financial instruments. The “Non-consolidated securitization Non-consolidated securitization vehicles and collateralized debt obligations – non-agency transactions 1 CHF billion Total SPE assets Involvements in non-consolidated SPEs held by UBS As of 31 December 2009 Originated by UBS 3 CDOs and CLOs Residential mortgage Commercial mortgage Other ABS Securitizations Residential mortgage Commercial mortgage Other ABS Total Not originated by UBS CDOs and CLOs Residential mortgage Commercial mortgage Other ABS Securitizations Residential mortgage Commercial mortgage Other ABS Total Original principal outstanding Current principal outstanding Delinquency amounts Purchased and retained interests held by UBS 2 Derivatives held by UBS Carrying value Fair value Nominal value 6.3 0.0 0.0 5.7 21.3 1.8 35.1 130.0 7.6 78.6 872.5 656.9 692.8 4.1 0.0 0.0 2.3 21.1 0.4 27.9 59.4 3.3 38.8 338.8 552.6 521.2 2,438.4 1,514.1 0.0 0.0 0.0 0.2 0.9 0.1 1.2 9.7 0.0 0.1 69.7 21.7 19.8 121.0 0.9 0.0 0.0 0.0 0.0 0.0 0.9 2.8 0.7 3.9 1.8 3.8 3.5 16.5 0.8 (0.6) 0.0 0.0 0.0 0.0 0.2 0.1 0.2 0.6 (1.8) 0.0 0.0 (0.9) 2.6 0.7 0.1 3.9 0.0 3.2 10.5 0.1 0.9 2.7 7.6 0.0 0.0 11.3 1 Includes all purchased and retained interests and derivatives held by UBS which are considered involvements in non-consolidated securitization vehicles and CDOs. 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. 2 Includes loans and receivables measured at amortized cost in the amount of CHF 0.9 billion originated by UBS and CHF 11.9 billion for structures not originated by UBS and trading assets measured at fair value in the amount of CHF 4.6 billion for structures not originated by UBS. 3 Structures originated by UBS include transactions within the scope of US GAAP, Financial Accounting Standard 140, paragraph 17. 48 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S vehicles and collateralized debt obligations – non-agency transactions” table does not include these offsetting factors and does not represent a measure of risk. ➔ Refer to the “Risk management and control” section of this report for information on our risk positions as well as the BlackRock transaction Our involvement in vehicles whose residential and com- mercial mortgage securities are backed by an agency of the US government – the Government National Mortgage As- sociation, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation – is not included in the abovementioned table, due to the comprehensive in- volvement of the US government in these organizations and their significantly lower risk profile. The numbers in the table are different from the numbers disclosed on securitizations in the “Basel II Pillar 3” section of this report, predominantly due to different scopes (for ex- ample 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 CDOs We continually evaluate whether triggering events require the reconsideration of the consolidation conclusions made at the inception of our involvement with securitization vehi- cles and CDOs. During 2009 and 2008, due to adverse market condi- tions, various non-consolidated vehicles in which we 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, we deter- mined that in certain instances, the rights arising from such events caused us to be in control of these entities, and af- fected needed to be consolidated. The consolidation had no material incremental impact on our income statement and balance sheet. ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for further information on consolidation of securitization vehicles and CDO Risks resulting from non-consolidated securitization vehicles and CDOs The “Risk management and control” section of this report provides detailed disclosure of our main risk concentrations, as well as risks associated with our involvement in consoli- dated and non-consolidated US mortgage securitization ve- hicles and CDOs. Support to non-consolidated investment funds In the ordinary course of business, we issue investment certificates to third parties that are linked to the perfor- mance of non-consolidated investment funds. Such invest- ment funds are originated either by us or by third parties. For hedging purposes, we generally invest in the funds to which our obligations from the certificates are linked. Risks result- ing from these contracts are considered minimal, as the full performance of the funds is passed onto third parties. In 2009 and 2008, as a result of the financial markets crisis which caused declining asset values, market illiquidity and de-leveraging by investors, we supported several non- consolidated investment funds that we manage in our wealth and asset management businesses. We 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 we provided to these investment funds was made where there were regulatory or other legal requirements or other exceptional considerations. In 2009, we acquired units from non-consolidated funds that we manage in the amount of CHF 0.2 billion. Guaran- tees granted to third parties in the context of such non-con- solidated funds and collateralized financing provided to such funds were immaterial as of 31 December 2009. Impair- ments on fund units held accounted as financial investments available-for-sale amounted to CHF 0.2 billion in 2009; other losses incurred as a result of fund support were immaterial in 2009. During 2008, material support was 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 bil- lion; and fully collateralized financing provided to the funds was CHF 2.4 billion as of 31 December 2008. Guarantees granted to third-parties in the context of these non-consoli- dated funds were immaterial as of 31 December 2008. Loss- es incurred in 2008 as a result of such fund support were immaterial. Acquired fund units and fund assets are generally ac- counted for as financial investments available-for-sale, and are included in the respective risk disclosures in the “Risk management and control” section of this report. Financing we provided as of 31 December 2008 was included in the credit risk disclosures. In addition, in the ordinary course of business, our wealth and asset management businesses provide short-term fund- ing facilities to investment funds that we manage. This bridges time lags in fund unit redemptions and subscrip- tions. These bridge financings did not incur and are not ex- pected to incur material losses. Depending on market developments in 2010 and be- yond, it is possible that we may decide to provide financial support to one or more of our investment funds. Such deci- sions will be taken on a case-by-case basis depending upon market and other circumstances at the time. The risks in- curred by providing such support will depend on the type of 49 Strategy, performance and responsibility Financial performance support and the riskiness of the assets held by the fund(s) in question. If we were to provide extensive financial support to some of our investment funds, losses incurred as a result of such support could become material. Guarantees and similar obligations In the normal course of business we issue: various forms of guarantees; commitments to extend credit; standby and other letters of credit to support our customers; commit- ments to enter into repurchase agreements; note issuance facilities; and revolving underwriting facilities. With the ex- ception of related premiums, these guarantees and similar obligations are kept as off-balance sheet unless a provision to cover probable losses is required. On 31 December 2009, the exposure to credit risk (gross values less sub-participations) for credit guarantees and sim- ilar instruments was CHF 16.0 billion compared with CHF 18.5 billion one year earlier. Fee income from issuing guaran- tees is not material to total revenues. Guarantees represent irrevocable assurances, subject to the satisfaction of certain conditions, that we will make pay- ment in the event that customers fail to fulfill their obliga- tions to third parties. We also enter into commitments to ex- tend 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, our maximum amount at risk 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 2009, we recognized net credit losses of CHF 4 million; and for the years ended 31 December 2008 and 2007, we recognized net credit loss re coveries of CHF 18 mil- lion and CHF 3 million, respectively, related to obligations in- curred for contingencies and commitments. Provisions recog- nized for guarantees, documentary credits and similar instruments were CHF 90 million as of 31 December 2009 and CHF 31 million as of 31 December 2008. We enter into partial sub-participations to mitigate the risks from commitments and contingencies. A sub-participa- tion 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 the credit facility. We retain the contractual relationship with the obli- gor, and the sub-participant has only an indirect relationship. We will only enter into sub-participation agreements with banks to which we ascribe a credit rating equal to or better than that of the obligor. Furthermore, we provide representations, warranties and indemnifications to third parties in connection with numer- ous transactions, such as asset securitizations. Clearinghouse and future exchange memberships We are a member of numerous securities and futures ex- changes and clearinghouses. In connection with some of those memberships, we may be required to pay a share of the financial obligations of another member who defaults, Commitments The table below shows the maximum committed amount of commitments. CHF million Credit guarantees and similar instruments Performance guarantees and similar instruments Documentary credits Total commitments Undrawn irrevocable credit facilities 50 31.12.09 Sub- participations (222) (582) (288) (1,092) (1,793) Gross 11,180 3,484 2,406 17,070 59,328 Net 10,958 2,902 2,117 15,977 57,534 Gross 13,124 3,596 2,979 19,699 60,316 31.12.08 Sub- participations (344) (446) (415) (1,205) (1,920) Net 12,780 3,150 2,564 18,494 58,396 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S 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. We consider the probability of a material loss due to such obligations to be remote. 31 December 2008 was CHF 0.3 billion and CHF 0.5 billion, respectively. Equity underwriting commitments in the Invest- ment Bank at 31 December 2009 and 31 December 2008 amounted to CHF 1.7 billion and CHF 0.4 billion, respectively. Swiss deposit insurance Swiss banking law and the deposit insurance system require Swiss banks and securities dealers to jointly guarantee an amount of up to CHF 6 billion for privileged client deposits in the event that a Swiss bank or securities dealer becomes insolvent. For the period from 1 July 2009 to 30 June 2010, FINMA estimates our share in the deposit insurance system to be CHF 1.0 billion. The deposit insurance is a guarantee and exposes us to additional risk which is not reflected in the “Maximum exposure to credit risk” table in “Note 29c Mea- surement categories of financial assets and financial liabili- ties” in the “Financial information” section of this report. At 31 December 2009, we consider the probability of a mate- rial loss from our obligation to be remote. Private equity funding commitments and equity underwriting commitments We enter into commitments to fund external private equity funds and investments, which typically expire within five to ten years. The commitments generally require us to fund ex- ternal private equity funds and investments at market value at the time the commitments are drawn. The amount com- mitted to fund these investments at 31 December 2009 and Contractual obligations The table below includes contractual obligations as of 31 De- cember 2009. All contracts included in this table, with the exception of purchase obligations (those where we are committed to purchasing determined volumes of goods and services), are either recognized as liabilities on our balance sheet or, in the case of operating leases, disclosed in “Note 25 Operat- ing lease commitments” in the “Financial information” sec- tion of this report. The following liabilities are recognized on the balance sheet and excluded from the table: provisions (as disclosed in “Note 21 Provisions and litigation” in the “Financial infor- mation” section of this report), current and deferred tax liabilities (refer to “Note 22 Income taxes” in the “Financial information” section of this report for more information), liabilities to employees for equity participation plans, settle- ment 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 we must pay employees leaving the firm contractually-agreed salaries). Contractual obligations CHF million Long-term debt Capital lease obligations Operating leases Purchase obligations Other liabilities Total < 1 year 42,759 57 989 302 538 44,645 Payment due by period 1–3 years 3 –5 years 46,796 83 1,655 113 5 48,652 31,515 0 1,214 39 0 > 5 years 71,357 0 2,113 23 0 32,768 73,493 51 Strategy, performance and responsibility Financial performance Cash flows 2009 2008 On 31 December 2009, the level of cash and cash equiva- lents declined to CHF 165.0 billion, down CHF 14.7 billion from CHF 179.7 billion at the end of 2008. On 31 December 2008, the level of cash and cash equiva- lents 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 54.5 bil- lion in 2009 compared with a cash inflow of CHF 77.0 billion in 2008. Operating cash inflows (before changes in operat- ing assets and liabilities and income taxes paid) totaled CHF 9.9 billion in 2009, an increase of CHF 81.5 billion from 2008. Net profit improved by CHF 18.6 billion compared with 2008. Cash inflow of CHF 95.1 billion was generated by the net decrease in operating assets, while a cash outflow of CHF 50.0 billion was reflected in the operating liabilities. Net Pay- ments to tax authorities were CHF 0.5 billion in 2009, down CHF 0.4 billion from a year earlier. Operating activities Operating activities generated a cash inflow of CHF 77.0 bil- lion in 2008 compared with a cash outflow of CHF 52.1 billion in 2007. Operating cash outflows (before changes in operat- ing assets and liabilities and income taxes paid) totaled CHF 71.7 billion in 2008, a decrease of CHF 67.9 billion from 2007. Net profit decreased CHF 16.0 billion compared with 2007. Cash inflow of CHF 394.1 billion was generated by the net decrease in operating assets, while a cash outflow of CHF 244.5 billion was reflected in the operating liabilities. The increase in cash was used to fund the operating liabili- ties. Net 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 20.6 bil- lion compared with an overall cash outflow of CHF 1.7 bil- lion in 2008. The net cash outflow for the purchase of property and equipment was CHF 0.7 billion. The net investment of fi- nancial investments available-for-sale was CHF 20.1 billion, an increase due to our strategic decision to rebalance our liquidity reserve which led to a shift from reverse re purchase agreements and trading portfolio. Disposals of subsidiaries and associates in 2009 generated a cash inflow of CHF 0.3 billion mainly related to the sale of UBS Pactual. ➔ Refer to “Note 36 Business combinations” and “Note 38 Reorganizations and disposals” in the “Financial infor- mation” section of this report for more information about our investing activities Financing activities In 2009, financing activities generated cash outflows of CHF 54.2 billion. This reflected the net repayment of money market paper of CHF 60.0 billion, the issuance of CHF 67.1 billion in long-term debt and long-term debt repayments which totaled CHF 65.0 billion. That outflow was partly off- set by inflows attributable to capital issuances of CHF 3.7 billion. In 2008, we had a net cash outflow of CHF 5.6 billion from financing activities. 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 and Vermogens Groep and a net in- crease in the purchase of property and equipment of CHF 1.1 billion. The net investment of financial investments avail- able-for-sale was CHF 0.7 billion, whereas in 2007 divest- ments generated cash inflows of CHF 6.0 billion. Disposals of subsidiaries and associates in 2008 generated a cash in- flow of CHF 1.7 billion. Financing activities In 2008, financing activities generated cash outflows of CHF 5.6 billion. This reflected the net repayment of money mar- ket 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 cap- ital issuances of CHF 23.1 billion, including CHF 15.6 billion from rights issues and CHF 7.6 billion from MCNs. 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 papers repaid increased by CHF 111.6 billion and were only partially compensated by the cash increase due to the capital issuances. 52 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S Strategy, performance and responsibility Our employees Our employees We rely on the excellence, inspiration, client focus and commitment of our employees to meet clients’ needs and build our businesses. For employees, the breadth of our businesses, global career opportunities and a col- laborative, performance-oriented culture offer a platform for individual success. Investing in our employees Competitive strength in the financial services industry de- pends, more than anything else, on the expertise, talent and commitment of a firm’s employees. Therefore, engag- ing, developing and retaining a high-impact workforce is a priority for UBS. In 2009, we began to rebuild our leader- ship ranks in every business division. We also continued to invest in our workforce to help ensure we have the range of skills and experience necessary to meet client needs now, and to grow our businesses when market conditions im- prove. Our largely decentralized Human Resources (HR) function was restructured in 2009 to be simpler, leaner and more concretely focused on business priorities. We also imple- mented several human capital-related initiatives in 2009 to support the firm’s transformation, including measures to more closely align compensation with sustainable perfor- mance and support appropriate and controlled risk taking. In addition, the UBS Business University, a corporate learning and education platform, was launched in January 2010. Our workforce Personnel levels decreased in most businesses over the course of the year, with the number of people employed on 31 December 2009 at 65,233, down 12,550 or 16% from year-end 2008. This was the result of personnel reduc- tions in the various business divisions, as well as reductions from the sale of UBS Pactual, UBS’s India Service Centre and 56 branches in Wealth Management Americas. Consistent with the announcement made on 15 April 2009, we expect personnel numbers to be reduced to approximately 65,000 in 2010. In 2009, our personnel worked in 57 countries, with approximately 37% of our staff employed in Switzer- land, 36% in the Americas, 16% in Europe, the Middle East and Africa and 11% in Asia Pacific. Internal job mobility encourages integration, collabora- tion and business innovation, as well as individual career de- velopment. We continued to support employee transfers across regions and business divisions in 2009 where business needs justified the transfers. In 2009, 910 employees moved to roles in a different region, versus 1,285 in 2008. During the course of the year, 993 employees transferred between business divisions, versus 784 in 2008. Additionally, during 2009, we worked to redeploy employees who were dis- placed in the firm’s restructuring process. Of all the new roles in 2009, approximately 12% were sourced through internal job postings, while another 39% were filled by employees who found new roles within the firm through their own net- works. To further support career development and mobility, Individual Development Plans are encouraged for all staff. A global career management site was relaunched in early 2010 to integrate all of the firm’s career assessment, development and planning elements. 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(cid:19)(cid:2)(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:73)(cid:88)(cid:79)(cid:79)(cid:16)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17) (cid:19)(cid:42)(cid:52)(cid:18)(cid:18)(cid:21)(cid:65)(cid:71) 53 (cid:16)(cid:13)(cid:15)(cid:15) (cid:15)(cid:13)(cid:22)(cid:20) (cid:15)(cid:13)(cid:20)(cid:15) (cid:15)(cid:13)(cid:17)(cid:20) (cid:15)(cid:13)(cid:15)(cid:15) (cid:20)(cid:17)(cid:19)(cid:19) (cid:19)(cid:17)(cid:26)(cid:24) (cid:19)(cid:17)(cid:24)(cid:19) (cid:19)(cid:17)(cid:21)(cid:24) (cid:19)(cid:17)(cid:19)(cid:19) Strategy, performance and responsibility Our employees Recruiting personnel In 2009, we selectively recruited personnel in our key mar- kets while also working to reduce costs, increase efficiency and improve the ratio of front-office to back-office per- sonnel. Several strategic hires were made in 2009 to acceler- ate and support our turnaround, including the Group CEO, Group COO, Head of Corporate Development, Head of Wealth Management Americas and senior-level hires in growth areas within the Investment Bank and risk manage- ment functions. In 2009, 433 university graduates joined UBS as part of our undergraduate and MBA training programs. The apprentice- ship program in Switzerland hired 300 apprentices in 2009. Developing and sustaining a diverse workforce A workforce of individuals from widely different back- grounds, cultures and life experiences is indispensable in to- day’s global business environment. In 2009, our workforce was comprised of citizens from 150 countries. Diversity in gender, ethnicity, age and other factors support first-hand understanding of regional markets and segments and sen- sitivity to local customs. Competitive advantage is also achieved from more subtle differences in background, expe- rience and thought. These elements provide the perspective from which our employees can anticipate needs and gener- ate unique solutions for our increasingly diverse client base worldwide. Additionally, our long-term recovery will be supported by having the best people in the right roles, and diversity efforts help ensure that characteristics unrelated to performance do not get in the way. Achieving a world-class workforce of high-talent individ- uals demands an open-minded and respectful working cul- ture, merit-based career advancement, and a sense of indi- vidual contribution. The scope of our diversity initiatives is global, with regional teams translating this commitment into action by working with local business and HR leaders. In ad- dition, more than 20 employee networks help to build cross- business relationships and strengthen our inclusive culture. Over the past number of years, we have promoted diver- sity in three stages: raising basic awareness; integrating di- versity into the employee lifecycle through recruiting, perfor- mance management and retention; and working to ensure that diversity ultimately becomes a self-sustaining part of the workplace culture. While we have made significant progress in recent years, our efforts to further strengthen our diversity in 2009 were sometimes impacted by the firm’s restructur- ing, particularly when entire business or support areas were restructured or sold. In 2009, initiatives were launched in Europe, the US and several other regions to help create a culture in which men and women thrive equally in their ca- reers, where gender differences are a strength, and where different working styles and practices allow us to improve our service to clients. We received a 100% rating in the Hu- man Rights Campaign Foundation’s 2010 Corporate Equality Index (US), the Equal Opportunity for Women in the Work- place Agency (EOWA) Employer of Choice For Women award (Australia), and the Tokyo Labor Bureau award for supporting the growth of future generations. We also were shortlisted for the Disability Champion Award 2009 by the Employers’ Forum on Disability (UK). Gender distribution by geographical region1 On 31.12.09 Total: 24,414 6,988 4,576 25,157 6,383 28,000 21,000 14,000 9,363 7,000 15,051 3,189 3,799 0 The Americas Asia Pacific 8,966 16,191 1,905 2,671 Europe, Middle East and Africa Switzerland 2,001 4,382 United Kingdom 1HR006_e Male Female 1 Calculated on the basis that a person (working full-time or part-time) is considered one headcount in this graph only. This accounts for the total UBS year-end 2009 employee number of 67,518 in this graph, which excludes staff from UBS card center, Hotel Seepark Thun, Wolfsberg and Widder Hotel. Gender distribution by employee category 1 As of 31.12.09 Male Female Total Officers Non-officers Total Number 31,557 11,817 43,374 % 72.8 27.2 100.0 Number 10,537 13,607 24,144 % 43.6 56.4 100.0 42,094 25,424 67,518 62.3 37.7 100.0 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 our total year-end 2009 employee number of 67,518 in this table. Normally, we express 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 year-end 2009 total is 65,233. 54 28000 21000 14000 7000 0 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S Performance management Effective performance management supports and enables the drive, commitment and consistent execution by our em- ployees that is essential to achieving results for clients and UBS alike. We believe that the foundation for this is an on- going employee-manager dialogue, with demonstrable per- formance as the basis for meritocracy. All employees there- fore participate in a year-round performance management process that assesses individual achievements against spe- cific objectives. This process supports staff development, links behavior to busi ness goals and helps ensure employees have the skills required to meet their clients’ needs and im- plement our strategic objectives. Assessments focus both on achievements and on behavioral expectations that are linked to corporate strategy and values, respectively. For example, evaluations for all employees include an assessment of “cli- ent focus,” but the specific behaviors required vary signifi- cantly according to func tion, rank or role. The performance management process for our most senior executives is es- sentially the same as for all other employees. Achieving spe- cific financial targets plays a significant role; leadership is also explicitly reviewed. In 2009, we enhanced our perfor- mance monitoring at all levels, and further strengthened our focus on effective risk management within the overall per- formance management framework. ➔ Refer to the “Compensation and shareholdings” section of this report for more information on compensation and incentives and employee share ownership Leadership development and learning We take a structured approach to both leadership devel- opment and business education, understanding that these capabilities are important factors in ensuring high-quality client service and long-term business success. In August 2009, the GEB approved the formation of the UBS Business University, a global corporate university that brings all educa- tional opportunities under one virtual umbrella. Creating a corporate university will significantly increase the efficiency of our learning activities and processes while eliminating duplication. It should also help to further reduce training costs, combine and exploit the existing knowledge within our learning organizations and leverage best practices. The launch of the university in January 2010 marked an impor- tant step in aligning our leadership development and learn- ing efforts across the firm. Leadership and business faculties are at the core of the new learning structure. The leadership faculty focuses on building leadership and managerial skills and on implement- ing a common leadership strategy and culture across the firm. The business faculty focuses on initiatives that are de- signed to grow employees’ business skills and competencies to best serve clients and manage risk. All learning pathways for business-critical functions include components from le- gal, risk and compliance, sales and advisory, and products and finance. A single global learning platform simplifies ad- ministration while allowing employees to plan their training and complete e-learning modules. We also invest in talent development and succession planning for the most critical roles across the company. An annual firm-wide talent review helps to identify and then build the skills and competencies of key talent who are rec- ognized to have leadership potential. In addition, potential successors for senior leadership roles are identified and tracked on a firm-wide basis. 55 Strategy, performance and responsibility Our employees Commitment Meeting the needs of clients is a core objective. Our corpo- rate values are the foundation that enables us to be a good corporate citizen and responsible employer in addition to re- alizing long-term profitability and business growth. These values are integrated into corporate decision making and people management processes as well as daily interactions among employees. Employee assistance We are dedicated to assisting employees with professional and personal matters, and to being a conscientious employ- er. Examples of this commitment can be found in the firm’s Employee Assistance Programs (EAPs), and in the COACH and Social Partnership Agreement for Employees in Switzer- land (SOVIA CH) programs in Switzerland. EAPs are available in a number of locations globally. In the UK, the EAP program is a confidential 24 / 7 service that gives access to specialist support, including telephone and face-to-face counseling. The overall UK health and wellbe- ing program provides an on-site General Practitioner as well as occupational health services, an on-site physiotherapist, on-site dentist and an emergency back-up childcare and el- dercare facility. In Switzerland, we offer professional assis- tance for current and retired employees, as well as family members, through our HR Social Counseling and HR Retiree Services functions. Services include counseling for personal issues, difficulties in the workplace, sickness, financial diffi- culties and retirement. The EAP program in the US provides information, referrals and confidential counseling for adop- tion, child care, academic services, elder care and issues re- garding work performance and personal conflicts. The COACH transfer and severance process helps em- ployees in Switzerland who are displaced by restructuring. COACH advisors provide support and assistance in find- ing new jobs, by working closely with our internal recruit- ment center and outside employment services. During the COACH process, employees retain full salary and benefits and financial assistance is available for job-related training, if needed. Personnel below the level of director are eligible to par- ticipate in the SOVIA CH program. SOVIA CH 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 CH gov- erns the requirements and procedures for internal hiring, job transfers, and, when needed, severance. The aim is to imple- ment necessary job cuts and operational changes in a re- sponsible manner, making full use of our internal labor mar- ket, and to offer targeted, relevant support and career advice to these employees. Employee representation The UBS Employee Forum facilitates the open exchange of views and information between employees and manage- ment on pan-European issues that have the potential to impact our performance, prospects or operations in Eu- rope. It fulfills EU Directive 94 / 45 on the establishment of a European Works Council. Local forums also exist in a number of locations across Europe to address local issues such as health and safety, changes to workplace condi- tions, pension arrangements and consultation on collec- tive redundancies and business transfers. The UK Employ- ee Forum (UKEF), for example, focuses on our economic, financial and social activities in the UK which are of con- UBS values Truth Accuracy | Authenticity | Certainty We behave with respect and integrity | We are accurate, realistic and accountable | We always act fairly and abide by the law Clarity Ease | Simplicity | Directness We make it easy to do business with UBS | We are concise, precise and to the point | We are reliable and consistent Performance Achievement | Execution | Attainment We will always give our best | We will perform to the highest professional standards | We will lead the market through superior service and execution 56 cern to UK employees. The UKEF may also be used for defining any workforce agreements affecting UK employ- ees. It is made up of elected UK permanent employee rep- resentatives for each business area and division that has employees in the UK and appointed management repre- sentatives. In Switzerland, Employee Representation Committee (ERC) representatives partner with management in the an- nual salary negotiations and they are involved in employee matters, including health and safety, social security and pension issues. ERC employee representatives are elected to represent the interests of employees whose work contracts are governed by Swiss law and the Agreement on Condi- tions of Employment for Bank Staff. The ERC also fosters an open dialogue between management and employees through a variety of channels and activities. Select 2009 awards Excellence and Innovation in Corporate Learning: Measurement (Corporate University Xchange Awards 2009) Top 100 Graduate Employers (The Times High Fliers 2007–2009) Ranked No. 8 for “Best Places to Intern: 2009” (Bloomberg BusinessWeek 2009) y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S 1HR010_e 57 Strategy, performance and responsibility Corporate responsibility Corporate responsibility Responsibility and sustainability were our key themes in 2009, as we continued to contend with the effects of the major financial crisis we experienced in 2007 and 2008. We have, as detailed elsewhere in this report, assumed responsibility to resolve key issues arising from the crisis. In response to the lessons learned from the financial crisis and the latest international regulatory provisions that followed from the crisis, we have reviewed and revised important processes, pertaining to, in particular, corporate governance, risk management, compliance, personnel management (in- cluding compensation and performance measurement) and the centralization of responsibilities and competencies. These changes are highlighted by the revision of constitutional doc- uments such as the Code of Business Conduct & Ethics and the UBS Values, which accentuate the crucial significance of responsible behavior, a key driver of sustainable value for the company and our stake holders. As a leading financial services firm, we are interested in the concerns and expectations of a diverse group of stake- holders, ranging from clients, investors and employees, to the communities in which we have a presence as well as our regulators. With regard to corporate responsibility, in 2009, we continued to address key stakeholder expectations and concerns by contributing to the fight against money laun- dering, corruption and terrorist financing (AML), executing our environmental management program, implementing our human rights statement and by undertaking community investment activities. Under the guidance of the UBS Cor- porate Responsibility Committee (CRC), a BoD committee, various initiatives were instigated (including the drafting of the new Code of Business Conduct & Ethics), with their implementation continuing into 2010. ➔ Refer to www.ubs.com/responsibility for more information on the contents of this section Governance, strategy, and commitments Corporate responsibility governance The CRC is mandated to review and assess how we should meet the existing and evolving corporate responsibility ex- pectations of our stakeholders. The CRC thus supports the BoD’s efforts to ensure and advance our reputation for re- sponsible corporate conduct. Headed by the Chairman of the BoD, the committee includes two other BoD members. It is advised by a panel consisting of members of the GEB and other senior managers. The members of the advisory panel participate in committee meetings and implement its recom- mendations. The financial crisis has emphasized that success depends upon behaving responsibly towards and interacting honestly and transparently with our stakeholders. In recent meetings, the CRC focused on lessons drawn from the crisis and rec- ommended actions on a range of topics accordingly. In addition to the mandate pertaining to the expectations of our stakeholders, the CRC also monitors and reviews our (cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:67)(cid:86)(cid:2)(cid:55)(cid:36)(cid:53) (cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2) (cid:37)(cid:81)(cid:70)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:37)(cid:81)(cid:80)(cid:70)(cid:87)(cid:69)(cid:86)(cid:2)(cid:8)(cid:2)(cid:39)(cid:86)(cid:74)(cid:75)(cid:69)(cid:85) (cid:46)(cid:71)(cid:73)(cid:67)(cid:78)(cid:2)(cid:8)(cid:2)(cid:84)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:81)(cid:84)(cid:91)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85) (cid:39)(cid:86)(cid:74)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85) (cid:57)(cid:81)(cid:84)(cid:77)(cid:82)(cid:78)(cid:67)(cid:69)(cid:71)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85) (cid:53)(cid:81)(cid:69)(cid:75)(cid:71)(cid:86)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85) (cid:32)(cid:2)(cid:37)(cid:81)(cid:79)(cid:82)(cid:78)(cid:75)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:78)(cid:67)(cid:89)(cid:85)(cid:14)(cid:2) (cid:84)(cid:87)(cid:78)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:84)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85) (cid:32)(cid:2)(cid:37)(cid:81)(cid:79)(cid:68)(cid:67)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:386)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:69)(cid:84)(cid:75)(cid:79)(cid:71) (cid:32)(cid:2)(cid:54)(cid:67)(cid:90)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:78)(cid:75)(cid:67)(cid:80)(cid:69)(cid:71) (cid:32)(cid:2)(cid:39)(cid:86)(cid:74)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:85)(cid:86)(cid:67)(cid:80)(cid:70)(cid:67)(cid:84)(cid:70)(cid:85) (cid:32)(cid:2)(cid:49)(cid:87)(cid:84)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:85) (cid:32)(cid:2)(cid:40)(cid:67)(cid:75)(cid:84)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:73)(cid:84)(cid:75)(cid:86)(cid:91)(cid:2) (cid:75)(cid:80)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85) (cid:32)(cid:2)(cid:52)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:78)(cid:71)(cid:2)(cid:71)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:82)(cid:84)(cid:67)(cid:69)(cid:86)(cid:75)(cid:69)(cid:71)(cid:85) (cid:32)(cid:2)(cid:38)(cid:75)(cid:88)(cid:71)(cid:84)(cid:85)(cid:75)(cid:86)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:83)(cid:87)(cid:67)(cid:78)(cid:2)(cid:81)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:87)(cid:80)(cid:75)(cid:86)(cid:91) (cid:32)(cid:2)(cid:42)(cid:71)(cid:67)(cid:78)(cid:86)(cid:74)(cid:2)(cid:8)(cid:2)(cid:85)(cid:67)(cid:72)(cid:71)(cid:86)(cid:91) (cid:32)(cid:2)(cid:39)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86) (cid:32)(cid:2)(cid:42)(cid:87)(cid:79)(cid:67)(cid:80)(cid:2)(cid:84)(cid:75)(cid:73)(cid:74)(cid:86)(cid:85) (cid:32)(cid:2)(cid:52)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:78)(cid:71)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:78)(cid:91)(cid:2)(cid:69)(cid:74)(cid:67)(cid:75)(cid:80) (cid:32)(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:87)(cid:80)(cid:75)(cid:86)(cid:91)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86) (cid:37)(cid:81)(cid:79)(cid:79)(cid:87)(cid:80)(cid:75)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:14)(cid:2)(cid:86)(cid:84)(cid:67)(cid:75)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:67)(cid:89)(cid:67)(cid:84)(cid:71)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:84)(cid:67)(cid:75)(cid:85)(cid:75)(cid:80)(cid:73) (cid:19)(cid:37)(cid:52)(cid:18)(cid:18)(cid:19)(cid:65)(cid:71) 58 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S corporate responsibility policies and regulations as well as the implementation of our corporate responsibility activities and commitments. The GEB is responsible for the develop- ment of our Group and business division strategies as well as implementing approved new strategies, including those per- taining to corporate responsibility, while various committees or boards are concerned with tasks and activities pertaining to particular aspects of corporate responsibility. One example is the Environmental & Human Rights Com- mittee, which is made up of, among others, both Group and divisional environmental representatives. They are re- sponsible for overseeing the adoption of our environmental policy and for providing guidance to the different business divisions in their adoption of the “UBS Statement on Hu- man Rights”. In 2009, this committee reviewed a number of significant environmental and social issues and also initiated the revision of our environmental policy. Endorsed by the GEB, the revised policy was brought in line with the new Code of Business Conduct & Ethics of UBS and continues to embody our commitment to the environment. It seeks to ensure that we provide clients with a range of financial products and services that address environmental challeng- es, identify and manage environmental risks, and are con- tinuing to improve our environmental performance and re- source efficiency. The policy is implemented through a global environmental management system certified accord- ing to ISO 14001, the international environmental manage- ment standard. ➔ Refer to www.ubs.com/environment for more information on our environmental and human rights governance Led by the Head of Global AML Compliance, our efforts to fight money laundering, corruption and the financing of terrorism are supported by a network of expert global busi- ness teams. We are streamlining our policies and processes to enhance consistency between business divisions as well as The five principles of our environmental policy Environmental policy Risk management Business opportunities In-house ecology Certified environmental management system Training and communication 1CR003_e to assess threats and risks within the business. We have de- veloped extensive policies intended to prevent, detect and report money laundering, corruption and terrorist financing. These policies seek to protect the firm and our reputation from those who may intend to legitimize their ill-gotten gains through UBS. ➔ Refer to the discussion on combating financial crime below for more information on our AML activities Regional diversity heads, along with senior business managers, consider and decide on diversity / business-aligned plans linked to regional and divisional business and talent strategies. They are also responsible for advising and sup- porting regional diversity boards, or their regional equiva- lent, in assessing progress made on relevant issues. The glob- al diversity team coordinates regional efforts and integration into the HR process. ➔ Refer to the “Our employees” section of this report for more information on labor standards and diversity programs (cid:49)(cid:87)(cid:84)(cid:2)(cid:69)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:73)(cid:81)(cid:88)(cid:71)(cid:84)(cid:80)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:69)(cid:71)(cid:85)(cid:85)(cid:3) (cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:69)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71) (cid:35)(cid:73)(cid:71)(cid:80)(cid:70)(cid:67) (cid:38)(cid:81)(cid:69)(cid:87)(cid:79)(cid:71)(cid:80)(cid:86)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80) (cid:50)(cid:84)(cid:81)(cid:82)(cid:81)(cid:85)(cid:67)(cid:78)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:67)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80) (cid:35)(cid:70)(cid:88)(cid:75)(cid:69)(cid:71) (cid:47)(cid:67)(cid:80)(cid:70)(cid:67)(cid:86)(cid:71) (cid:72)(cid:81)(cid:84)(cid:2)(cid:67)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80) (cid:39)(cid:90)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78) (cid:71)(cid:90)(cid:82)(cid:71)(cid:84)(cid:86)(cid:85) (cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86) (cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:84)(cid:71)(cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:75)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:69)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)(cid:2)(cid:67)(cid:70)(cid:88)(cid:75)(cid:85)(cid:81)(cid:84)(cid:91)(cid:2)(cid:82)(cid:67)(cid:80)(cid:71)(cid:78) (cid:48)(cid:71)(cid:86)(cid:89)(cid:81)(cid:84)(cid:77)(cid:2)(cid:81)(cid:72)(cid:2) (cid:75)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:71)(cid:90)(cid:82)(cid:71)(cid:84)(cid:86)(cid:85) (cid:35)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80) (cid:57)(cid:71)(cid:67)(cid:78)(cid:86)(cid:74)(cid:2)(cid:47)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:8)(cid:2) (cid:53)(cid:89)(cid:75)(cid:85)(cid:85)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77) (cid:57)(cid:71)(cid:67)(cid:78)(cid:86)(cid:74)(cid:2)(cid:47)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2) (cid:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85) (cid:41)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:2)(cid:35)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2) (cid:47)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86) (cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86) (cid:36)(cid:67)(cid:80)(cid:77) (cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2) (cid:37)(cid:71)(cid:80)(cid:86)(cid:71)(cid:84) (cid:19)(cid:37)(cid:52)(cid:18)(cid:18)(cid:20)(cid:65)(cid:71) 59 Strategy, performance and responsibility Corporate responsibility External commitments and initiatives In implementing environmental and social standards and conventions into our business practices, we benefit from participating in various external initiatives, including the UN Global Compact and its local network in Switzerland, the Wolfsberg Group, the UNEP Finance Initiative, and the UN Principles for Responsible Investment (UNPRI). In relation to the UN Global Compact, we publicly acknowledged the sig- nificance of the looming climate crisis by supporting the Compact’s “Seal the Deal!” campaign calling for a fair, bal- anced and effective post-Kyoto climate agreement. In his testimonial for “Seal the Deal!”, UBS’s Chairman of the BoD confirmed a cornerstone of our climate change strategy in that we seek to help clients address risks and take advantage of opportunities presented by climate change and the transi- tion to a low carbon economy. We also recently joined the Global Corporate Volunteer Council (G-CVC), an initiative of the International Associa- tion for Volunteer Efforts (IAVE). G-CVC is a network for companies with leading international employee volunteer programs, which aims to showcase best practices in corpo- rate volunteering, and raise awareness of the impact of em- ployee engagement in communities around the world. External ratings, assurance and awards Our performance and efforts were reflected in key external ratings and rankings, which take account of sustainability is- sues. We were named an index component for the Dow Jones Sustainability Index (DJSI) World, and are a member of the FTSE4Good index series. We have been a continuous member of both indices since their inception. With regard to the three dimensions rated for the DJSI – economic, environ- mental, and social - we scored well in the social dimension and are one of the financial sector’s leaders in the environ- mental dimension. A lower score in the economic dimension – a reflection of a challenging period for us during 2008 and 2009 – meant, however, that we dropped out of the DJSI STOXX, a second Dow Jones Sustainability Index. We ranked among the leaders in a benchmark report on climate strategies within banks, as published by Sustainable Asset Management (SAM). The report shows that we are among the top 5% of banks, which have, compared with many of our peers, comprehensively integrated the issue of climate change into core business processes. In 1999, we were the first bank to obtain ISO 14001 cer- tification for our worldwide environmental management system. The management system covers the entire scope of our products, services and in-house operations which may give rise to an environmental impact. It is audited annually and re-certified every three years by SGS. These comprehen- sive audits (24 audit days and 163 employees in the 2008 re-certification) verify that appropriate policies and processes are in place to manage environmental issues, and that they are executed in day-to-day practice. In 2009, SGS confirmed that a well-performing environmental management system, integrated in the organization and suitable for managing environmental risks and improving environmental perfor- mance on a continual basis, was put into place. We took second place in the rankings for “Leading Brokerage Firm for Socially Responsible Investment (SRI) Research” in the 2009 Thomson Reuters Extel and UKSIF Socially Responsible In- vesting & Sustainability Survey. In May 2009, the US Environmental Protection Agency (EPA) awarded UBS Tower at One North Wacker Drive, Chi- cago, with the Energy Star Award for superior energy effi- ciency and environmental protection. In June 2009, our office building on 1285 Avenue of the Americas, New York, received the Leadership in Energy and Environmental Design (LEED) for Existing Buildings Silver Certification. Finally, in late 2009, we received two awards for our use of the web as a strategic tool for corporate responsibility communications. We came second in the first global survey of “online CSR communications” and first in the national survey for Switzerland. The surveys confirmed the signifi- cance of our website for communicating with stakeholders who wish to gain a comprehensive understanding of our corporate responsibility efforts. ➔ Refer to the “Our employees” section of this report for information on diversity awards Stakeholder dialogue and capacity building Dialogue with external parties is an important contributor to our understanding and approach to corporate responsibility. In 2009, communications with experts and stakeholders cov- ered a series of topics ranging from general (e.g. individual vs. corporate responsibility) to specific (e.g. environmental and social issues pertaining to particular industries). Input on the corporate responsibility strategy and activi- ties we pursue are also regularly sought from employees. An internal, cross-divisional network of experts plays a parti- cularly important role with our members providing critical input on stakeholder expectations and concerns. These con- tributions are provided to the CRC and add valuable features to the information gathered through other established mon- itoring channels. Training and awareness raising Equally, to advance employees’ awareness of our corporate responsibility processes, activities, commitments and rele- vant topics, these are integrated into internal education offerings and broader awareness raising activities. General information is published on our intranet and on the corpo- rate responsibility website. In 2009, nearly 10,000 employ- ees participated in training and awareness-raising activities dealing with corporate responsibility. Furthermore, 4,140 employees participated in training on environmental issues, with 3,047 receiving general education on our environmen- tal policy and programs, and 1,093 employees receiving spe- 60 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S cialist training targeted at their area of expertise and impact. Awareness of corporate responsibility was also raised in in- duction programs via an intranet-based presentation. Em- ployees are also required to undergo regular training in AML- related issues; this may include online training, awareness campaigns or seminars. Responsible banking The financial crisis has shown that an overly dominant focus on short-term thinking resulted in too many compromises on quality and sustainability. A fundamental lesson has there fore been to re-focus on long-term thinking. While actions cen- tered on the short-term undoubtedly have their place, the overall focus must be on sustainable banking. We have set our focus on earning the trust of our stake- holders, aiming for more sustainable earnings and creating long-term shareholder value. In ensuring that banking ac- tivities are undertaken in a responsible manner, and that products and services are suited to the needs and require- ments of clients, we aim to fulfill the heightened expecta- tions of clients and stakeholders. Combating financial crime We believe it is of utmost importance to actively prevent po- tentially irresponsible or harmful actions. First and foremost, this means that our employees must uphold the law, adhere to relevant regulations, and behave in a responsible and principled manner. In 2009, we made forceful strides to ensure that all em- ployees are conscious of their responsibilities and of the im- portance of abiding by the law in all of their actions. We have clearly laid out a solid foundation for this via new risk and compliance processes and the publication of a new Code of Business Conduct & Ethics in January 2010, and have also instigated an in-depth process of communicating to and with employees about their responsibilities. We continued to strengthen our efforts to both prevent and combat financial crime. Taking responsibility to pre- serve the integrity of the financial system, and our own operations, we are committed to assisting in the fight against money laundering, corruption and terrorist financ- ing. We employ a rigorous risk-based approach to ensure our policies and procedures correspond with those risks, and that relationships that are classified as higher risk are dealt with appropriately. We adhere to strict know-your- clients regulations, which do not, however, seek to under- mine clients’ legitimate right to privacy. Ongoing due diligence and monitoring is undertaken to assist in the iden- tification of suspicious activities, including the utilization of advanced technology to assist in the identification of trans- action patterns or unusual dealings which, if discovered, are promptly escalated to management or control func- tions. As part of our extensive and ongoing efforts to pre- vent money laundering, corruption and terrorist financing, the internal global AML policies were reviewed in 2009, and enhancements to address more specific risks in relation to corruption and terrorist financing will be implemented glob- ally in 2010. As part of our review of trade financing prohi- bitions regarding certain war materials, these were expand- ed from nuclear, biological and chemical weapons and anti-personnel land mines to include cluster bombs, deplet- ed uranium for military purposes as well as components of all such weapons. We are a founding member of the Wolfsberg Group, an association of 11 global banks established in 2000, which aim to develop financial services industry standards and related products for Know Your Customer, Anti-Money Laundering and Counter Terrorist Financing policies. Togeth- er with the other members of the Group, we have actively engaged with the Financial Action Task Force (FATF), which is an inter-governmental body that develops and promotes national and international policies to combat money laun- dering and terrorist financing in the context of its consul- tation processes with the private sector. Special attention has been placed on developing a risk-based approach to money laundering, implementing guidelines around Weap- ons of Mass Destruction Proliferation Finance, and actively contributing to the revision of FATF Recommendation 9 (“Customer due diligence and record-keeping”), which states that financial institutions, intermediaries or other third parties must perform certain aspects of the customer due diligence process. Managing environmental and social risks Environmental and social risk is broadly defined as the pos- sibility that we encounter reputational or financial damage as the result of transactions, products, services or invest- ments that involve a party associated with environmentally or socially sensitive activities, or that we are exposed to risks such as environmental liabilities, human rights infringe- ments, or changes in regulations. We seek to identify, manage and control these environ- mental and social risks in our business transactions. Howev- er, not all products and services we provide have the same risk potential: we therefore take a risk-based ap proach to environmental and social risk management and regularly an- alyze our portfolio of products and services to assess their respective environmental and social risk potential. With our current business profile and operating environment, our po- tential for material risk is greater within the context of our lending and capital markets businesses, as well as our direct real estate and infrastructure investments. For these prod- ucts and services, we have designed procedures and tools for the identification, assessment and management of envi- ronmental and social risks. These procedures and tools are integrated into standard risk management processes, such 61 Strategy, performance and responsibility Corporate responsibility as due diligence on transactions or investments, helping to ensure that material environmental and social risks are iden- tified, assessed and escalated in a timely fashion. For example, Wealth Management & Swiss Bank and Wealth Management Americas have introduced a standard- ized check to identify material environmental risk in their lending to all relevant clients. Transactions with significant environmental risk undergo a detailed environmental assess- ment. In 2009, nearly 100,000 lending transactions in Swit- zerland were subject to an environmental risk check, of which 24 were referred to the business division’s environ- mental risk competence center for detailed assessment. In the Investment Bank, the environmental risk framework cov- ers all banking activities including debt and equity under- writing, financial advisory services and lending. Investment Bank personnel identify potential environmental risks in the initial due diligence phase and alert the Investment Bank’s Environmental Advisory Group (EAG) in case of significant potential risks. Assessments by lawyers and / or external con- sultants are routinely sought for certain sectors and prod- ucts. The EAG works with the relevant business and control functions to assess the risks, determine any mitigating mea- sures and direct further due diligence as required (69 trans- actions in 2009). 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 cli- ent. Global Asset Management has put environmental due diligence processes in place for their real estate and infra- structure funds. In 2009, all properties acquired or devel- oped by Global Real Estate for their direct investment vehi- cles 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. Some of our clients operate in sectors that are considered to be particularly environmentally and socially sensitive. To support the consistent identification and assessment of envi- ronmental and social risks (including human rights) across the Group, we have developed internal industry sector guidelines. The sector guidelines currently cover chemicals, oil and gas, utilities, infrastructure, forestry products and biofuels and metals and mining. These guidelines are being adopted by each of our business divisions in transactional and client due diligence processes. These guidelines provide an overview of key environmental and social issues that arise in the various life cycles of the sector, and summarize indus- try standards in dealing with them. We believe that our com- mitment to our clients and to society requires us to search for solutions whenever possible. We seek to help clients to move towards more environmentally and socially responsible practices by engaging with them. This can benefit their busi- ness and decrease financial and reputational risk. However, where engagement is not possible or successful, we may de- cline the transaction altogether. Products and services Equally important to the management of environmental and social issues is the provision of financial products and ser- vices, which help clients manage their environmentally and socially-related business opportunities and risks. We seek to help investors benefit from related market opportunities and by integrating environmental and social considerations, where relevant, in research and investment analysis. This of- fering currently stretches across our businesses in wealth management, investment banking, asset manage ment, re- tail, and commercial banking. It includes SRI funds, research and advisory services provided to private and institutional cli- ents, access to the world’s capital mar kets for renewable en- ergy firms and, in Switzerland, “eco” mortgages. Taking environmental, social and governance (ESG) issues into account in investment processes is of increasing interest to clients and consultants across all of our investment areas. In 2009, Global Asset Management took another step in demonstrating commitment to ESG by becoming a signatory to the UN Principles for Responsible Investment (UNPRI). UNPRI is a global investor initiative that is designed to pro- vide a framework for better integration of ESG issues into mainstream investment practice. Also in 2009, we decided to establish a new competence center within our Wealth Management & Swiss Bank busi- ness division, which draws and expands on our resources and expertise in the areas of philanthropy and SRI. In a “one- stop” approach, the competence center will provide clients with a unique opportunity to access a comprehensive range of philanthropic, SRI and values-based wealth management services. Finally, our senior scientific advisor, Sir David King, contin- ued to advise on all scientific matters with particular empha- sis on global climate change and the challenges it poses to sustainable economic growth. Our clients benefit from Sir David’s expertise and can get further insight into a variety of timely scientific topics through a quarterly series of science- focused bulletins. In 2009, these bulletins included briefs on climate change, biofuels and mobility. Sir David also dis- cussed energy efficiency and low carbon technologies in the November issue of the UBS Investor’s Guide. Investment products and advisory In 2009, we continued to expand our SRI offering in re- sponse to growing demand from a number of markets, in- cluding the launch of two new SRI products, the UBS (Lux) Equity SICAV – Sustainable Global Leaders and the UBS (Lux) Equity SICAV – Climate Change. Our offering is diverse and includes products managed according to ESG criteria and theme-based approaches. The ESG offering includes an all cap SRI Global Equity strategy, which was among the first of its kind. The theme-based approach focuses on innovative companies providing solutions to the challenges of climate change, water scarcity and demographic change. We offer a 62 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S range of products focusing on each individual theme and the flagship UBS (Lux) Equity Fund Global Innovators, which spans all three themes. Additionally, we offer customized client portfolios in the form of segregated mandates / institutional accounts based on “negative” screening, which exclude certain controver- sial stocks or sectors based on their negative social or envi- ronmental impact, as perceived by the client. Our global platform and investment research enable us to offer such tailor-made solutions. In addition to fund management ser- vices, we provide stock-broking and account management services to alternative energy and SRI fund managers. Finally, we also offer SRI portfolio management solu tions to selected private client segments. This offering combines internal and external SRI expertise and includes SRI-focused portfolios in Switzerland and SRI-managed accounts in the US, where ESG criteria are embedded into the fundamental investment process, or where clients have the ability to iden- tify and exclude securities from ownership based on issue- oriented screens. This allows private clients to customize mandates to their particular social policy criteria. Our open architecture approach also allows clients to invest in SRI bond, equity and microfinance products from leading third- party providers. In past years, we experienced increasing client de mand for SRI and expanded our SRI product offering. As per 31 De- cember 2009, SRI invested assets had gone up to CHF 26.85 billion, representing 1.2% of our total invested assets. Engagement and voting rights The SRI team in Switzerland engages in dialogue with com- panies represented in the SRI funds they manage. The ana- lysts and portfolio managers provide positive and negative feedback on relevant ESG issues that may impact investment performance, as part of regular communication with corpo- rate management teams. When controversial information on the company’s environmental and social performance is received, the SRI analysts contact the company and provide management with a chance to demonstrate what measures have been taken to solve the issues. If the company can demonstrate how it is dealing with the problem and what progress has already been achieved, an investment is possi- ble. These engagement activities are, in addition to the posi- tive screening processes, applied to the SRI funds. We believe that voting rights have economic value and should be treated accordingly. In the UK, the asset manage- ment business seeks to influence the corporate responsibility and corporate governance practices of the companies it in- vests in. Where we have been given the discretion to vote on behalf of our clients, we will exercise our delegated fiduciary responsibility by voting in a manner we believe will most fa- vorably impact the value of their investments. Good corpo- rate governance should, in the long term, lead towards both better corporate performance and improved shareholder value. As such, we expect board members of companies in which we have invested to act in the service of their share- holders, view themselves as stewards of the company, exer- cise appropriate judgment and practice diligent oversight of the management of the company. Research Our SRI research teams analyze emerging socio-economic and environmental trends and assess their potential impact on investment markets and companies’ share prices. Identi- fying material SRI issues is challenging. As such, three things help determine which environmental and social issues are critical: society’s perception of what is important; the nature of the competitive pressures facing firms in an industry; and how costs and benefits are (or will be) distributed between stakeholders. Our SRI research teams were established in each of our business divisions to serve their respective clients. In the In- vestment Bank, the equity research team writes recommen- dations 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 Socially responsible investments invested assets 1 For the year ended % change from 31.12.08 31.12.07 31.12.08 2,174 3,189 CHF billion, except where indicated UBS UBS SRI products and mandates GRI 2 31.12.09 2,233 positive criteria exclusion criteria Third-party Total SRI invested assets Proportion of total invested assets (%) 4 FS11 FS11 FS11 FS11 2.72 22.44 1.69 26.85 3 1.20% 2.12 14.05 1.85 18.03 5.20 33.33 1.08 39.61 0.83% 1.24% 3 28 60 (9) 49 1 All figures are based on the level of knowledge as of January 2010. 2 Global Reporting Initiative (see also www.global- reporting.org). FS stands for the performance indicators defined in the GRI Financial Services Sector Supplement. 3 5.5% of reported assets have newly been included in 2009 due to adjustments in the reporting process and boundaries. 4 Total SRI / UBS’s invested assets. Positive criteria: apply to the active selection of companies, focusing on how a company’s strategies, processes 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 companies with high negative environmen- tal impacts. This also includes faith – based investing consistent with principles and values of a particular religion. Third-party: Our open product platform gives clients access to socially responsible investment products from third-party providers. This includes both positive and exclusion critieria, and microfinance investments. 63 Strategy, performance and responsibility Corporate responsibility and sustainability research is provided by a dedicated team. In 2008, the SRI and sustainability research team initiated dedicated coverage of corporate governance issues and cor- porate governance was the theme of our 2009 SRI confer- ence. In addition to publishing regular research reports on the topic, we have incorporated selected governance data within some of our research tools. 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 our wealth management business conducts SRI research and provides advice to private clients on SRI investment solu- tions. Client interest in some aspects of SRI – for instance cli- mate change, demographics and water – has grown, and so has research coverage. The SRI teams regularly collaborate with analysts in other 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. Financing and advisory services Our renewable energy investment banking business arrang- es financing and provides strategic and financial advi sory services for companies in the solar, wind, wave and oth er renewable energy sectors. Since 2006, we have led over 35 financing transactions in these sectors, raising over USD 24 billion for renewable energy companies worldwide. In 2009, we acted as the joint lead underwriter and joint lead manager for the USD 2.6 billion initial public offering of the wind power developer and operator, China Longyuan Power Group. With over 3,300 mega-watts of installed wind capacity as of September 2009, and targeting 6,500 mega-watts by the end of 2010, Longyuan Power is the largest wind power company in Asia and the fifth largest in the world. Carbon trading In cap and trade emissions markets, such as the EU Emissions Trading Scheme (EU ETS), companies have annual caps on the amount of emissions their facilities are allowed to pro- duce. Companies who are able to reduce their emissions be- low their cap have the ability to sell their unused quota to other entities, thereby creating an emissions market. Through the use of financial instruments, we are able to help clients manage their exposure to the emissions markets. UBS Ex- change Traded Derivatives (ETD) is an active member of the major emission exchanges in Europe and North America, and offers execution and full service clearing for con tracts on EU ETS allowances (EUA), UN Certified Emissions Reductions (CER), Regional Greenhouse Gas Initiative allow ances, Chi- cago Carbon Exchange (CCX) carbon financial instruments and nitrogen oxide and sulfur dioxide. 64 Corporate responsibility in operations We have long taken a very keen and active interest in lower- ing the environmental footprint of our operations and in our supply chain. Following the establishment of our first energy functional unit in the late 1970s, we were also the first Swiss bank to establish the position of an environmental officer in the 1980s. Years later, we persist to improve the environ- mental efficiency of our operations. Environmental and CO2 footprints We directly impact the environment in a number of ways: our businesses consume electricity; employees travel for busi ness purposes and use paper and generate waste in the course of their work; and offices require heating and cooling systems. Improving the use of these resources can reduce costs and enhance environmental performance; therefore, we have a series of measures to efficiently manage our envi- ronmental impact. CO2 strategy and emission reduction In February 2006, the GEB decided to set a Group-wide CO2 emission reduction target of 40% below 2004 levels by 2012. We seek to achieve this target by: – adopting in-house energy efficiency measures that re- duce energy consumption in buildings we operate; – increasing the proportion of renewable energy used to avoid emissions at source; and – offsetting and neutralizing emissions that cannot be re- duced by other means. These measures allowed us to further increase the share of renewable energy we purchase, and reduce our 2009 CO2 emissions by 31% compared with 2004, another step to- ward achieving the 40% reduction target by 2012. 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In line with our wider business strategy, improvements in energy efficiency have helped to reduce both emissions and costs. Energy consumption is down 6% (59 gigawatt hours) through a combination of tighter building controls, data center and work station effi- ciency, and reduced occupancy. Our IT-driven initiatives con- tributed significantly to these energy savings, most notably through the server efficiency program. Renewable energy In addition to our energy efficiency programs, we seek to improve the energy mix purchased by including a higher pro- portion of renewable energy. The percentage of renew able energy and district heating purchases increased from 24% in 2004 to 51% in 2009. In Switzerland, for example, the percentage of electricity sourced from renewable sources in- creased to almost 100%. We also purchase renewable en- ergy credits (RECs) in the US electricity mar kets, which ac- counted for 18% of our electricity consumption in the US in 2009. Business travel and offsetting We experienced a significant reduction (approximately 40%) in business related travel in 2009 due to difficult market con- ditions and a focus on reducing costs. Although travel is es- sential for a global financial services firm that strongly be- lieves in personalized client relationships, our previous investments in video conferencing infrastructure have en- abled employees to substantially reduce travel for internal meetings. We have also seen a shift to high speed rail to replace short haul air travel in Europe. Guidelines have also been developed to help us reduce the environmental impact when running client events and conferences. Carbon emissions resulting from business travel have been offset as in previous years, and we partner with a num- ber of specialists to carefully select global projects that match our criteria for delivering carbon offsets and contributing to the local community. In 2009, we selected projects in Brazil, India, Turkey and China. Paper and waste In 2006, we set firm-wide targets to reduce our paper and waste consumption. The goal of reducing paper consump- tion per employee by 5% for 2009 was exceeded signifi- cantly with the average amount of paper used per employee down 31% since 2006. This reduction was particularly strong in 2009, due to a combination of significantly lower publication volumes and the success of e-documents and double-sided printing initiatives. The share of paper from recycled sources is slightly under our goal of 20%, though our overall environmental foot- print from paper use has been improved by increasing the share of Forest Stewardship Council (FSC) certified paper from 0% in 2006 to 17% in 2009. The waste recycling ratio remained at a low level of around 54%, partially due to the consequence of reduced paper consumption. Supply chain management Maintaining our infrastructure, ranging from offices across IT infrastructure to more mundane components such as stationery, would not be possible without the products and services from a substantial range of suppliers and vendors around the world. In 2009, we spent over CHF 6.3 billion purchasing a wide range of products and services from s uppliers and contractors. We are committed to responsible supply management, and for many years have established processes to manage environmental and human rights issues in relevant areas of our supply chain. In line with our ambi- tion to achieve continuous improvement in our supply chain, we have developed a guideline which provides Group-wide assistance on identifying, assessing and monitoring supplier practices in the areas of human and labor rights, the envi- ronment 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, we started implementing this guideline and have gradually broadened its application to new contracts and contract renewals with suppliers over the course of 2009. Since its introduction, approximately 400 suppliers have been screened according to the guideline’s social and environmental criteria, and responsible supply chain require- Environmental indicators per full-time employee Direct and intermediate energy Business travel Paper consumption Waste Water consumption CO2 footprint Unit kWh / FTE Pkm / FTE kg / FTE kg / FTE m3 / FTE t / FTE 2009 11,986 7,016 130 265 31.9 3.12 Trend ➙ ➙ 2008 11,792 10,281 167 298 28.1 3.07 Legend: FTE = full-time employee; kWh = kilowatt-hour; Pkm = person kilometer; kg = kilogram; m3 = cubic meter; t = ton 2007 11,942 12,685 190 299 26.7 3.43 65 2009 2 Absolute normalized 4 Data quality 5 *** 957 GWh Strategy, performance and responsibility Corporate responsibility Environmental indicators 1 Total direct and intermediate energy consumption 7 Total direct energy consumption 8 GRI 3 EN3 natural gas heating oil fuels (petrol, diesel, gas) renewable energy (solar power, etc.) Total intermediate energy purchased 9 electricity from gas-fired power stations electricity from oil-fired power stations electricity from coal-fired power stations electricity from nuclear power stations electricity from hydroelectric power stations electricity from other renewable resources district heating Share of renewable energy and district heating 132 GWh 84.6% 10.9% 4.5% 0.05% EN4 825 GWh 10.6% 2.9% 17.5% 9.5% 28.0% 23.6% 7.8% 51% Total business travel EN29 560 m Pkm rail travel 10 road travel 10 air travel Number of flights (segments) Total paper consumption post-consumer recycled new fibers FSC 11 new fibers ECF + TCF 11 new fibers chlorine bleached Total waste valuable materials separated and recycled incinerated landfilled Total water consumption Greenhouse Gas (GHG) Emissions in CO2e Direct GHG emissions (Scope 1) 12 Gross indirect GHG emissions (Gross Scope 2) 12 Gross other indirect GHG emissions (Gross Scope 3) 12 Total Gross GHG Emissions GHG reductions from renewable energy 13 CO2e offsets (business air travel) 14 EN1 EN2 EN22 EN8 EN16 EN16 EN17 3.7% 1.0% 95.3% 258,396 10,349 t 16.7% 17.1% 65.9% 0.4% 21,183 t 54.4% 12.5% 33.1% 2.55 m m3 25,723 t 298,338 t 87,867 t 411,928 t 99,248 t 63,579 t 2008 2 Absolute normalized 4 1,016 GWh 127 GWh 83.3% 12.2% 4.5% 0.03% 2007 2 Absolute normalized 4 981 GWh 130 GWh 83.3% 12.1% 4.6% 0.03% 890 GWh 851 GWh 11.7% 3.7% 18.4% 11.1% 25.8% 23.1% 6.2% 48% 12.3% 4.2% 18.6% 13.6% 25.5% 22.0% 3.8% 45% 886 m Pkm 1,042 m Pkm 3.5% 0.6% 96.0% 398,369 14,403 t 16.2% 16.6% 66.8% 0.4% 3.3% 0.5% 96.2% 446,274 15,593 t 10.5% 10.7% 78.6% 0.2% 25,644 t 24,589 t 54.6% 14.3% 31.1% 2.42 m m3 26,490 t 313,582 t 129,364 t 469,436 t 109,238 t 96,000 t 264,197 t 56.3% 15.8% 27.9% 2.19 m m3 26,701 t 311,808 t 149,323 t 487,832 t 93,127 t 113,000 281,705 t Trend 6 ➘ ➙ ➙ ➙ ➘ ➙ ➙ ➘ ➚ ➙ ➚ ➙ ➙ ➙ ➙ ➙ ➚ ➙ ➙ ➙ ➙ ➙ ➘ ➘ ** ** *** *** *** *** ** *** ** ** *** *** *** *** *** ** ** *** *** *** *** *** *** ** *** *** *** ** ** *** ** *** *** *** *** Total Net GHG Emissions (GHG Footprint) 15 *** Legend: GWh = giga watt hour; Pkm = person kilometer; t = ton; m3 = cubic meter; m = million; CO2e = CO2 equivalents 249,101 t 1 All figures are based on the level of knowledge as of January 2010. 2 Reporting period: 2009 (1 July 2008–30 June 2009), 2008 (1 July 2007–30 June 2008), 2007 (1 July 2006–30 June 2007) 3 Global Reporting Initiative (see also www.globalreporting.org). EN stands for the Environmental Performance Indicators as defined in the GRI. 4 Non-significant discrepancies from 100% are possible due to roundings. 5 Specifies 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 is the likely difference between a reported value and a real value. 6 Trend: at a *** / ** / * data quality, the respective trend is stable (➙) if the variance equals 5 / 10 / 15%, low decreasing / increasing (➘,➚) if it equals 10 / 20 / 30% and decreasing / increasing if the variance is bigger than 10 / 20 / 30% ( , ). 7 Refers to energy consumed within the opera- tional boundaries of UBS. 8 Refers to primary energy purchased which is consumed within the operational boundaries of UBS (oil, gas, fuels). 9 Refers to energy purchased that is produced by convert- ing primary energy and consumed within the operational boundaries of UBS (electricity and district heating). 10 Rail and road travel: Switzerland only. 11 Paper produced from new fibers. FSC stands for Forest Stewardship Council, ECF for Elementary Chlorine Free and TCF for Totally Chlorine Free. 12 Refers to ISO 14064 and the “GHG (greenhouse gas) protocol initiative” (www.ghgprotocol.org), the international standards for GHG reporting: scope 1 accounts for direct GHG emissions by UBS; gross scope 2 accounts for indirect GHG emissions associated with the generation of imported / pur- chased electricity (grid average emission factor), heat or steam; gross scope 3 accounts for other indirect GHG emissions associated with business travel, paper consumption and waste disposal. 13 GHG savings by consuming electricity from renewable sources. 14 Offsets from third-party GHG reduction projects measured in CO2 equivalents (CO2e). These offsets neutralize GHG emission from our busi- ness air travel. 15 GHG footprint equals gross GHG emissions minus GHG reductions from renewable energy and CO2e offsets. 66 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S ments were included in the arrangement with relevant sup- pliers who were awarded contracts. Also since 2008, ap- proximately 260 procurement and sourcing officers have been trained on the relevance and application of the new guideline. The centralization of all units performing supply management activities within Supply & Demand Manage- ment (SDM) in the Corporate Center in 2009 further contrib- uted to a stringent implementation of the guideline when interacting with our suppliers. Community investment In 2009, we continued the well-established tradition of supporting the advancement and empowerment of orga- nizations and individuals within the communities we do business in. From an early focus on direct cash donations, we have progressed to a position where our community in- vestment program encompasses employee volunteering, matched-giving schemes, in-kind donations, disaster relief efforts and / or partnerships with community groups, edu- cational institutions and cultural organizations in all of our business regions. ment through Education” and “Building Stronger Commu- nities”, with some contributions to other activities, including disaster relief. These donations combined with other signifi- cant activities, notably the volunteering activities of employ- ees, have continued to provide substantial benefit to proj- ects and people around the world (as highlighted in the examples given on the next page). Across all business regions, our employees continue to play a very active role in our community investment efforts, in particular, through their volunteering activities. In 2009, more than 9,200 employees spent almost 78,800 hours vol- unteering. We support their commitment by offering up to two working days a year for volunteering efforts, and also match employee donations to selected charities. In Switzerland, our community investment efforts are also advanced by the UBS Culture Foundation, the UBS Founda- tion for Social Issues and Education and the association A Helping Hand from UBS Employees. In 2009, these organiza- tions have again made valuable contributions to important societal causes, including fostering humanities and the cre- ative arts, supporting communities in need, and helping dis- abled and disadvantaged people. Community affairs Community affairs at UBS are founded on a global strategy defined by the GEB, and are based on a global community affairs guideline. Activities are governed in a decentralized fashion. Every region has a dedicated community affairs team which reports directly to senior management. With re- gional guidelines in place, the teams coordinate charitable commitments by our firm and our employees. The Corporate Center ensures global coordination of these activities and also provides a central reporting structure to collate commu- nity investment data from across UBS as a whole. In 2009, we set clear savings goals across the firm; these also had an impact on the activities of the regional commu- nity affairs functions. Direct cash donations by UBS and our affiliated foundations to carefully selected non-profit partner organizations and charities were lower than in previous years totaling nearly CHF 27 million, assigned, primarily, to our continuing community affairs key themes, “Empower- Client foundation Charitable organizations and projects across the globe – usually in regions without a UBS business presence – also benefit from the dynamic activities of our client foundation, the UBS Optimus Foundation, which invests donations into a number of programs and organizations. The foundation focuses on the key themes of “Education and Child Pro- tection” and “Global Health Research”. The UBS Optimus foundation celebrated its tenth anniversary at the end of 2009, and proudly looked back at a successful year in which it donated CHF 22 million in support of 93 projects and two major initiatives in Africa, Asia Pacific, Europe and North and South America. Over the past ten years, the UBS Optimus Foundation has supported 146 projects in 63 countries with a total of more than CHF 79 million. For its anniversary year, it has set itself ambitious targets to further expand the benefits it extends to charitable projects around the globe. 67 Strategy, performance and responsibility Corporate responsibility Examples of UBS community investment activities across the globe Americas (I): The Power Lunch literacy mentorship program cel- ebrates a decade long partnership. Over the past ten years over 1,400 employees from UBS Americas have volunteered from sixty to ninety minutes each week to read aloud to at-risk public elementary school students. Studies have shown that student-reading skills are enhanced through the use of mentor relation- ships. The program began with Everybody Wins, a non-profit organi- zation based in New York City, and has served children in Chicago, IL, Jersey City, NJ, Los Angeles, CA, New York, NY, Stamford, CT and Wee- hawken, NJ. Over 1,600 students have participated in the reading program over the last decade; they have been the recipients of approximately 50,000 volunteer hours. “The fact that UBS supports these programs means a lot to me, and helps connect me to the firm and to the UBS culture”, says Maryellen Frank, a UBS employee who has participated in Power Lunch since its inception. “I have been here almost 20 years, and the constant connection between the firm and the community is something to be very proud of.” Americas (II): In October 2009, Wealth Management Americas orga- nized an Employee Giving Campaign, a new addition to its Building Brighter Futures program, which aims to make schools and other education- based community organizations into dynamic learning centers. The primary goal of the Campaign was to raise funds for educational organizations with the firm matching employee donations dollar for dollar, and 29 charities were nominated by our employees. By making a significant monetary contribution (nearly USD 600,000) towards the enhancement of school buildings, and the gathering of various resources to offer students the chance to achieve success, we have made a difference in the lives of the children and families involved. October 2009 was also Building Brighter Futures’ Community Engage- ment Month. Its goal is to cultivate school and civic collaboration to help transform schools or education- focused organizations into dynamic learning centers. Through our partnership with the Hands On Network, a non-profit organization focusing on community service, over 1,100 UBS employees participated in locally-driven volunteer activities. Since the launch of Community Engage ment Month in 2007, over 5,700 employees, their friends and their families have volunteered across the country. Asia Pacific: In order to maximize the impact of our grants in Singapore and Tokyo, we are now working with the Community Foundation of Singapore and Social Venture Partners Tokyo. With both partners, we are able to strengthen the capacity of community organizations to meet local needs and provide corporate philanthropic leadership. Through the creation of a donor-advised fund in Singapore in 2009, we will continue to support our existing community partners. “UBS’s leadership in corporate responsibility in Singapore is a great example for other corpo- rations”, says Stanley Tan, Chairman of the Community Foundation of Singapore. “Their strategic approach to the commitment of funds and employee skills are a tremendous investment in our community.” In Tokyo, promising social entrepreneurs have the opportunity to apply for funding through a competitive process, with the successful projects receiving strategic business counseling as well as funding. Europe, Middle East and Africa: Throughout the region, we continue to support regeneration efforts, particularly in areas close to where we conduct our business. In Milan and Paris, employees are involved in projects supporting the development and education of young adults from disadvantaged communities. In London, our efforts were recognized by the Business in the Community Example of Excellence Award for Project Shoreditch, a targeted and collaborative regeneration partnership involving UBS, Deutsche Bank, Link- laters, and community partners East London Business Alliance and Shore- ditch Trust. Project Shoreditch has placed over 5,000 employee volunteers with organizations in the Shoreditch area, and leveraged over GBP 450,000 in in-kind support. Carsten Kengeter, co-CEO of the Investment Bank, joined a group of 30 colleagues to take part in an employee volunteering project in Shoreditch, working with students at The Bridge Academy, Hackney, our flagship EMEA Community Affairs partnership, raising student aspirations by taking part in practical and group work. Switzerland: Young Enterprise Switzerland (YES) develops and supervises practice-oriented economic education programs for students, with the aim of connecting the economy with schools. The non-profit organiza- tion focuses on young people who are empowered to network in economic relations, act entrepreneurially, and be responsible and successful in finding their way within the global economy. Thanks to a quadrennial partnership, YES and UBS jointly enhance the power of innovation and competitive- ness of young Swiss students. ➔ Refer to www.ubs.com/community for more information on our community investment activities 68 y t i l i b i s n o p s e r d n a e c n a m r o f r e p , y g e t a r t S 69 UBS business divisions and Corporate Center UBS business divisions and Corporate Center Wealth Management & Swiss Bank Wealth Management Americas Wealth Management & Swiss Bank is headquartered in Switzerland and employs more than 27,500 personnel in 44 countries. We deliver comprehensive financial services to wealthy private clients around the world – except to those served by Wealth Management Americas – as well as to retail and corporate clients in Switzerland. Clients are provided with advice and financial products and services to fit their individual needs. New reporting structure Commencing in first quarter 2010, we will change the internal reporting of Wealth Management & Swiss Bank and present in our external financial reports two separate business units: “Wealth Management” and “Retail & Corporate”. Performance in 2009 Wealth Management Americas is among the leading wealth managers in the region based on invested assets and includes the former Wealth Management US business unit, the domestic Canadian business and the international business booked in the United States. Formed from the reorganization of the Global Wealth Management & Business Banking business division in 2009, Wealth Management Americas 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, Puerto Rico and Canada, with 7,084 financial advisors. Wealth Management Americas provides advice-based relationships through its financial advisors, who deliver a fully-integrated set of wealth management solutions designed to address the needs of core affluent, high net worth and ultra high net worth individuals and families. Wealth Management & Swiss Bank pre-tax profit fell 35% to CHF 3,910 million, compared with CHF 6,013 million in 2008. The decline in profit was driven by a drop in operating income, resulting from lower asset-based fees, reduced interest income due to margin pressure and decreased transaction income, partly offset by a 17% decline in operating expenses from our cost-saving measures. Net new money outflows were CHF 89.8 billion compared with CHF 107.1 billion in the previous year. The outflows in 2009 reflect clients withdrawing assets from UBS, due to the effects of the financial market turbulence on our operating performance and reputation. Invested assets were CHF 960 billion on 31 December 2009, an increase of CHF 5 billion from 31 December 2008, as higher equity markets were partially offset by net new money outflows. Performance in 2009 Wealth Management Americas reported a pre-tax profit of CHF 32 million in 2009 compared with a pre-tax loss of CHF 823 million in 2008. The 2009 results were negatively impacted by restructuring charges of CHF 152 million. In 2009, net new money outflows were CHF 11.6 billion compared with CHF 15.9 billion in the prior year. Following strong net new money inflows in first quarter 2009 due to recruitment of experienced financial advisors, we experienced net new money outflows during the remainder of the year. Wealth Management Americas had CHF 690 billion in invested assets on 31 December 2009, up 7% from CHF 644 billion on 31 December 2008. This increase was principally driven by positive market performance. The gross margin on invested assets was 81 basis points in 2009, down from 82 basis points in 2008. Performance from continuing operations before tax CHF million Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Corporate Center UBS For the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 3,910 32 438 (6,081) (860) (2,561) 6,013 (823) 1,333 (34,300) 19 (27,758) 8,543 621 1,454 (16,669) 2,310 (3,742) (35) (67) 82 91 Global Asset Management Investment Bank Global Asset Management offers a diverse range of investment capabilities and services from a boutique-like structure encompassing 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 583 billion on 31 December 2009, making Global Asset Management one of the larger institutional asset managers and hedge fund of funds managers in the world. It is also one of the largest mutual fund managers in Europe and the largest in Switzerland. Performance in 2009 Pre-tax profit for full year 2009 was CHF 438 million compared with CHF 1,333 million in 2008. Excluding a net goodwill impairment charge in 2009 of CHF 191 million related to the sale of UBS Pactual, restructuring costs in 2009 of CHF 48 million and a gain of CHF 168 million from the sale of our minority stake in Adams Street Partners in third quarter 2008, pre-tax profit would have decreased 42% to CHF 677 million. Net new money outflows were CHF 45.8 billion for full year 2009 compared with outflows of CHF 103.0 billion for full year 2008. Excluding money market flows, net new money outflows were CHF 33.6 billion in 2009 compared with CHF 124.2 billion in 2008. Net outflows from clients of our wealth management businesses were CHF 40.7 billion (around 90% of total net outflows) in 2009 com- pared with CHF 47.1 billion in 2008. The Investment Bank has three distinct but aligned business areas: – Equities – Fixed income, currencies and commodities (FICC) – the Investment banking department (IBD) Equities and FICC comprise the securities business, offering primary and secondary access to the securities and foreign exchange markets, prime brokerage services as well as securities, economic, strategic and quantitative research. IBD provides advice on mergers and acquisitions and restructurings, and raises capital mainly for corporate and sovereign clients in the debt and equity markets. Addition- ally, as part of a number of broader alignment initiatives across our business divisions, IBD plays a lead role in marketing the Group to corporates, leveraging their senior client relationships. Performance in 2009 In 2009, we recorded a pre-tax loss of CHF 6,081 million compared with a pre-tax loss of CHF 34,300 million in 2008, primarily due to a reduction in losses on residual risk positions. During this period: equities revenues decreased 5% to CHF 4,937 million; FICC revenues increased to negative CHF 547 million from negative CHF 31,895 million; investment banking revenues were down 14% to CHF 2,466 million; and operating expenses decreased 7% to CHF 9,216 million. UBS business divisions and Corporate Center Wealth Management & Swiss Bank Wealth Management & Swiss Bank Business description Wealth Management & Swiss Bank is a leading global provider of financial services for wealthy private clients, and is the leading bank for retail and corporate clients in Switzerland. Business Wealth Management & Swiss Bank is headquartered in Swit- zerland and employs more than 27,500 personnel in 44 coun- tries. We deliver comprehensive financial services to wealthy private clients around the world – except to those served by Wealth Management Americas – as well as to retail and cor- porate clients in Switzerland. Clients are provided with advice and financial products and services to fit their individual needs. Our Wealth Management & Swiss Bank business divi- sion comprises three businesses: Wealth Management, Swiss Retail and Swiss Corporate & Institutional Clients. Strategy and clients Through our Wealth Management business, we offer sophis- ticated products and services in three client segments: ultra high net worth clients with investable assets of more than CHF 50 million; high net worth clients with investable assets of CHF 2 million to CHF 50 million; and core affluent clients with investable assets of CHF 250,000 to CHF 2 million. In addition to servicing wealthy private clients directly, we also provide wealth management solutions, products and servic- es to financial intermediaries. We are one of the largest banks for high net worth and ultra high net worth clients around the world. The industry is facing increased regulation and is in the focus of tax au- thorities. This particularly influences the way we conduct cross-border business and puts pressure on margins, profit- ability and net new money flows. By managing all markets for sustainable profitability we are consolidating our strong global presence. In our cross-border businesses, we are focusing on areas with the greatest market potential while continuing to en- sure the highest levels of compliance. In Asia, we are direct- ing our cross-border business on leading financial centers within the region, specifically Hong Kong and Singapore. Furthermore, we are building on our strengths in emerging markets, and are focusing on key markets in the Middle East, Latin America and Central and Eastern Europe. We will continue to build our onshore business in markets which offer attractive growth prospects with a more differ- entiated approach, as in the current legal and regulatory cli- mate the domestic wealth management business steadily gains importance. We will place particular emphasis on the attractive markets in Asia and Europe where we already have a strong local presence. To strengthen our leading position in Switzerland we will further enhance the way we deliver our products and services to high net worth and ultra high net worth clients. We want to be the best bank for retail clients in Switzer- land. Serving one out of three households in Switzerland with more than 300 branches has set us on the right path towards achieving this goal. To best serve our clients, we have developed a life-cycle based offering where with each life-cycle stage, our clients receive dedicated products and services to meet their specific needs. In order to maximize the quality of service and level of convenience we offer our clients, we will continue to upgrade our multi-channel offer- ings including local branches, e-banking capabilities and au- tomated teller machines. To fully leverage our presence in the marketplace, we will continue investing in our branch network. In Corporate & Institutional Clients (CIC), our goal is to differentiate ourselves by leveraging our capabilities as an integrated bank. We serve almost one out of every two Swiss companies by offering strategic advisory and execu- tion services for multinationals, corporations, institutional clients and financial institutions, which makes us a leading CIC business. In addition, we are able to provide our clients with local and international banking services across all busi- ness divisions. Within CIC, we also serve the small and medium-sized enterprises (SMEs) with local market exper- tise across all regions by delivering tailored products and services. Competitors Our major global competitors within wealth management include Credit Suisse, Julius Baer, HSBC, BNP / Fortis, Barclays and Citigroup. In domestic markets, we compete with the private banking operations of large local banks such as Coutts in the UK, Deutsche Bank AG in Germany and Uni- credit in Italy. In the Swiss retail banking business our major competi- tors are Credit Suisse, Raiffeisen, the cantonal banks, and Postfinance as well as other regional or local Swiss banks. In the Swiss corporate and institutional business our main competitors are Credit Suisse, the cantonal banks, and for- eign banks in Switzerland. 74 Invested assets by asset class In %, except where indicated Invested assets by client domicile In %, except where indicated On 100 75 50 25 0 31.12.07 31.12.08 31.12.09 On 31.12.09 Total: CHF 960 billion Total: CHF 1,392 billion CHF 955 billion CHF 960 billion 6 22 17 19 11 25 6 19 14 17 16 28 8 16 19 17 17 23 17 8 Europe, Middle East and Africa Switzerland The Americas Asia Pacific 46 29 2BD004_e Accounts, money markets , fiduciary investments Bonds UBS mutual funds Equities Other 1 External mutual funds 1 Including structured products and alternative investments. Products and services Wealth Management leverages knowledge and product and service offerings from Global Asset Management and the Investment Bank, to provide expert financial advice in supporting clients throughout the different stages of their lives. By aggregating private investment flows into institution- al-size flows, we are in a position to offer our Wealth Man- agement clients access to investments that would other- wise only be available to institutional clients. Expertise is sourced either from within UBS or from the external mar- ket. Both discretionary and non-discretionary mandates are offered. Clients who opt for a discretionary mandate dele- gate the management of their assets, including investment decisions, to a team of professional portfolio managers who work according to an agreed investment strategy. Cli- ents who prefer to be actively involved in the management of their assets can choose a non-discretionary mandate, where investment professionals provide analysis and moni- toring of portfolios, together with tailor-made proposals to support investment decisions. Clients can also trade a full range of financial instruments from single securities, such as equities and bonds, to structured products and alterna- tive investments. We offer wealth planning advice on topics such as funding for education, gift giving, inheritance and succession, and also offer corporate finance advice to support clients in the process of disposing of their corpo- rate assets. As a next step of integration across the business divisions, we implemented a new organizational unit within Wealth Management called Investment Products and Services. Prod- uct specialists in Wealth Management, Global Asset Man- agement and the Investment Bank are combined to further align product innovation, distribution and after-sales service. Our retail clients can access services such as a compre- hensive selection of cash accounts, savings and retirement products, investment funds and solutions, residential mort- gages, life insurance and advisory services through our multi- channel offering in Switzerland. Our clients also receive these services in tailored life-cycle solutions in combination with individual financial advice. We offer our Swiss Corporate & Institutional Clients a com- prehensive set of products and services. By providing access to our global sector specialists from our Investment Bank, we can provide strategic advice in the field of mergers and acquisi- tions. Additionally, we advise company owners with regard to succession planning and provide professional support in liquid- ity and cash management. For clients with a high share of euro-denominated transactions, we are the only bank in Swit- zerland to offer so called Eurogateway accounts, which con- centrate euro payment streams in Switzerland, thereby opti- mizing costs. In Switzerland, we are a leading provider for financing solutions as we offer access to capital markets (eq- uity and debt capital), syndicated and structured credits, private placements, factoring, leasing and traditional financing solu- tions. Finally, we offer global custody services for institutional clients who want to consolidate multiple-agent bank custodies into a single, cost-efficient global custodial relationship. Organizational structure During 2009, the Global Wealth Management & Business Banking business division was reorganized into two new business divisions: Wealth Management Americas and Wealth Management & Swiss Bank, which comprises all wealth management business booked outside the Americas and the Swiss retail and corporate client business. In 2009, the governance structure of Wealth Management & Swiss Bank was further adjusted to include two new execu- 75 2BD006_e d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C 100 75 50 25 0 UBS business divisions and Corporate Center Wealth Management & Swiss Bank Current reporting structure (on 31 December 2009) 2BD001_e Wealth Management & Swiss Bank Swiss clients International clients New reporting structure (from first quarter 2010 onwards) Wealth Management & Swiss Bank Wealth Management Retail & Corporate International Wealth Management Swiss Wealth Management Full profit and loss disclosure Supplementary disclosure of revenues and selected key performance indicators tive committees, Wealth Management and UBS Switzerland, which are led by one divisional Executive Committee. Wealth Management is present in 44 countries with ap- proximately 200 wealth management and representative offices, half of which are outside Switzerland. We are largely active in Asia Pacific, Switzerland, Europe and in internation- al cross-border business. Our Wealth Management clients are served by approximately 4,200 client advisors, of which about 900 are working for Swiss Wealth Management. The integrated management team of UBS Switzerland comprises all businesses active in Switzerland including retail, wealth management, corporate & institutional, invest- ment banking and the asset management business. We are committed to our Swiss home market and this integrated approach allows us to drive efficiency across all businesses. With our regional approach, we are able to extend the knowledge of the entire bank to local clients and markets. This allows cross-divisional client coverage, client referrals across all businesses and systematic client development. Commencing in first quarter 2010, we will change the internal reporting of Wealth Management & Swiss Bank and present in our external financial reports two separate busi- ness units: – “Wealth Management” encompasses the domestic and international wealth management business conducted out of Switzerland, and all wealth management business- es in our Asian and European booking centers. – “Retail & Corporate” includes services provided to Swiss retail private clients, small businesses, as well as corporate and institutional clients. ➔ Prior to publication of first quarter 2010 results, UBS will publish restated business division results on www.ubs.com/investors showing quarterly and annual results for 2008 and 2009 under the new reporting structure 76 d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C Business performance Business division reporting CHF million, except where indicated Swiss clients income International clients income Income Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses of which: impact from US cross-border case Services (to) / from other business divisions Depreciation of property and equipment Amortization of intangible assets Total operating expenses Business division performance before tax of which: impact from US cross-border case of which: business division performance before tax excluding US cross-border case Key performance indicators 1 Pre-tax profit growth (%) Cost / income ratio (%) Net new money (CHF billion) 2 Impaired lending portfolio as a % of total lending portfolio, gross (Swiss clients) Gross margin on invested assets (bps) (international clients) 3 Additional information Average attributed equity (CHF billion) Return on attributed equity (RoaE) (%) BIS risk-weighted assets (CHF billion) 4 Return on BIS risk-weighted assets, gross (%) Goodwill and intangible assets (CHF billion) Recurring income Invested assets (CHF billion) Client assets (CHF billion) Personnel (full-time equivalents) Swiss clients Net new money (CHF billion) 2 Invested assets (CHF billion) International clients Net new money (CHF billion) 2 Invested assets (CHF billion) Client advisors (full-time equivalents) As of or for the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 6,228 5,295 11,523 (133) 11,390 5,197 2,017 (90) 289 67 7,480 3,910 3,910 (35.0) 64.9 (89.8) 1.0 86 9.0 43.4 48.6 21.7 1.6 8,830 960 1,844 27,548 (20.1) 337 (69.7) 624 3,182 7,714 7,698 15,413 (392) 15,021 5,430 3,295 917 (73) 323 33 9,008 6,013 (917) 6,930 (29.6) 58.4 (107.1) 1.0 96 9.5 63.3 62.3 22.3 1.7 11,613 955 1,711 31,016 (41.9) 325 (65.2) 631 4,236 8,493 9,195 17,689 30 17,718 6,356 2,514 (43) 334 15 9,176 8,543 8,543 15.7 51.9 120.4 1.0 103 1.8 13,194 1,392 2,535 32,378 15.2 455 105.2 937 4,253 (19) (31) (25) (66) (24) (4) (39) (23) (11) 103 (17) (35) (44) (10) (5) (22) (6) (24) 1 8 (11) 4 (1) (25) 1 For the definitions of UBS’s key performance indicators, refer to the “Measurement and analysis of performance” section of this report. 2 Excludes interest and dividend income. 3 Excludes valuation adjustments on a property fund (2009: CHF 155 million, 2008: CHF 9 million). 4 BIS risk-weighted assets (RWA) are according to Basel II. 77 UBS business divisions and Corporate Center Wealth Management & Swiss Bank 2009 Results In 2009, pre-tax profit fell 35% to CHF 3,910 million, com- pared with CHF 6,013 million in 2008. The decline in profit was driven by a 24% drop in operating income, resulting from lower asset-based fees, reduced interest income due to margin pressure and decreased transaction income, partly offset by a 17% decline in operating expenses from our cost-saving measures. A provision of CHF 917 million in con- nection with the US cross-border case was included in the results of the previous year. Operating income Total operating income in 2009 was CHF 11,390 million, down 24% from CHF 15,021 million a year earlier. Recurring income decreased 24% on lower asset-based fees reflecting a 20% lower average asset base, as well as a lower interest income due to margin pressure. Non-recurring income fell by 29% due to lower brokerage fees, reflecting reduced client transaction activity levels. Moreover, the decrease was due to higher internal funding-related interest charges and revalua- tion adjustments of CHF 155 million for a property fund. Credit loss expenses decreased significantly to CHF 133 mil- lion from CHF 392 million in the previous year, as 2008 was especially impacted by provisions made for lombard loans. Operating expenses At CHF 7,480 million, operating expenses in 2009 declined 17% from CHF 9,008 million one-year earlier, as a result of cost-saving measures. Excluding the restructuring charges of CHF 322 million booked in 2009, and the abovementioned provision in 2008 relating to the US cross-border case, oper- ating expenses declined 12%. Personnel expenses decreased 9% excluding restructuring charges due to an 11% reduc- tion in personnel levels, which mostly took place towards the end of the year. General and administrative expenses, at CHF 2,017 million, were down 39% from CHF 3,295 million a year earlier, mainly due to the abovementioned provision re- lated to the US cross-border case as well as a result of cost- saving measures. Net charges to other business divisions, at CHF 90 million in 2009, were up 23% from CHF 73 million the previous year, mainly reflecting lower charges for IT infra- structure. Depreciation was CHF 289 million in 2009, com- pared with CHF 323 million a year earlier. Amortization of intangible assets was CHF 67 million, up from CHF 33 million in 2008, mainly reflecting the impairment of intangible assets related to invested asset outflows in UBS (Bahamas) Ltd. Development of invested assets Net new money Net new money outflows were CHF 89.8 billion compared with CHF 107.1 billion in the previous year. Total net new mon- ey outflows comprised CHF 20.1 billion from Swiss clients and CHF 69.7 billion from international clients, compared with 2008 outflows of CHF 41.9 billion and CHF 65.2 billion, re- spectively. The outflows in 2009 reflect clients withdrawing as- sets from UBS, due to the effects of the financial market turbu- lence on our operating performance and reputation. Net new money levels were also negatively affected by client advisor at- trition, as well as by the discussions regarding Switzerland’s banking secrecy and proposed tax treaties. In addition, invest- ed assets of CHF 22.8 billion were affected by the Italian tax amnesty, of which we were able to retain CHF 14.3 billion. Invested assets Invested assets were CHF 960 billion on 31 December 2009, an increase of CHF 5 billion from 31 December 2008, as higher equity markets were partially offset by net new mon- ey outflows and a 3% decrease of the US dollar against the Swiss franc in the course of 2009. Gross margin on invested assets (international clients only) The gross margin on invested assets declined 10 basis points to a total of 86 basis points. This excludes the abovemen- tioned valuation adjustments on a property fund. The recur- ring income margin was down 9 basis points to a total of 63 basis points, as clients increased their allocation to lower- margin cash products. In addition, margins and volumes de- creased and the lombard loan volume went down. The non- recurring income margin was also down, decreasing 1 basis point to 23 basis points, mainly due to lower brokerage fees reflecting decreased client transaction activity levels. 78 2008 Results In 2008, pre-tax profit fell 30% to CHF 6,013 million, com- pared with CHF 8,543 million in 2007. This was partially due to the abovementioned provision related to the US cross-border case. Excluding the impact of this provision, the pre-tax result would have fallen 19%, mainly reflecting the lower asset base and client transaction activity as well as higher credit loss ex- penses in line with the turbulence of the financial market. Operating income Total operating income in 2008 was CHF 15,021 million, down 15% from CHF 17,718 million a year earlier. Recurring income decreased 12% on lower asset-based fees reflecting an 11% decrease in average invested assets. Non-recurring income fell by 15% due to lower brokerage fees, reflecting decreased client transaction activity levels. Credit loss ex- penses were impacted by provisions made for lombard loans, increasing significantly to CHF 392 million from net credit loss recoveries of CHF 30 million in the previous year. The deterioration in financial markets seen especially in fourth quarter 2008, resulted in a decrease in the value of collateral supporting some loans. Operating expenses At CHF 9,008 million, operating expenses in 2008 were down 2% from CHF 9,176 million one-year earlier, despite the abovementioned provision relating to the US cross-bor- der case. Excluding the impact of this provision, the operat- ing expenses would have decreased 12%, mainly due to low- er variable compensation. This resulted in lower personnel expenses, which fell 15% to CHF 5,430 million in 2008, com- pared with CHF 6,356 million one-year earlier. General and administrative expenses, at CHF 3,295 million, were up 31% from CHF 2,514 million in 2007 due to the abovementioned provisions related to the US cross-border case. Net charges to other business divisions, at CHF 73 million in 2008, were up 70% from CHF 43 million the previous year, mainly reflecting lower charges for IT infrastructure. Depreciation was CHF 323 million in 2008, slightly down from CHF 334 million one- year earlier. Amortization of intangible assets was CHF 33 million, up CHF 18 million from 2007. Development of invested assets Net new money Net new money outflows were CHF 107.1 billion in contrast to inflows of CHF 120.4 billion in the previous year, partly due to the effect of deleveraging by clients. Total net new money outflows comprised CHF 41.9 billion from Swiss cli- ents and CHF 65.2 billion from international clients, com- pared with inflows a year earlier of CHF 15.2 billion and CHF 105.2 billion, respectively. This reflected slower wealth cre- ation in a tougher economic climate, a near absence of cor- porate events creating large one-time increases in entrepre- neurial wealth, the impact of deleveraging of private client portfolios and clients with drawing assets from UBS, due to the effects of the financial market turbulence on our operat- ing performance and reputation. Invested assets Invested assets were CHF 955 billion on 31 December 2008, a decrease of CHF 437 billion from 31 December 2007. This was a result of lower equity markets and net new money outflows. Moreover, major currencies declined considerably against the Swiss franc in the course of 2008. Gross margin on invested assets (international clients only) The gross margin on invested assets declined 7 basis points to a total of 96 basis points. This excludes the abovemen- tioned valuation adjustments on a property fund. The re- curring income margin was down 5 basis points to a total of 72 basis points as clients increased their allocation to lower-margin cash products. In addition, margins for mort- gages and savings products were down and the lombard loan volume decreased. The non-recurring income margin was also down, decreasing 2 basis points to 24 basis points, mainly due to lower brokerage fees reflecting decreased cli- ent transaction activity levels. d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C 79 UBS business divisions and Corporate Center Wealth Management Americas Wealth Management Americas Business description Wealth Management Americas provides advice-based relationships through its financial advisors, who deliver a fully-integrated set of wealth management solutions designed to address the needs of core affluent, high net worth and ultra high net worth individuals and families. It includes the former Wealth Management US business unit, as well as the domestic Canadian business and the international business booked in the United States. Business Wealth Management Americas is among the leading wealth managers in the region based on invested assets and in- cludes the former Wealth Management US business unit, the domestic Canadian business and the international busi- ness booked in the United States. On 31 December 2009, the business division had CHF 690 billion in invested assets. Strategy Wealth Management Americas focuses on delivering a fully- integrated set of wealth management solutions and advice- based wealth management services through our financial advisors to meet the needs of our target 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) and the core affluent (USD 250,000 to USD 1 million in investable assets). We are committed to providing advice to our clients by employing the best profes- sionals in the industry, delivering the highest standard of ex- ecution and running a streamlined and efficient business. In 2009, we continued to develop our high net worth segment-specific offerings. With dedicated advisor teams focusing on the ultra high net worth segment, our Private Wealth Management unit now provides a targeted, advice- based and process-driven platform. With a foundation of nine dedicated offices and nine satellite offices across the Geographical presence in key markets Calgary (CDN): 1 office Vancouver (CDN): 1 office ALASKA WASHINGTON MONTANA NORTH DAKOTA MINNESOTA Montreal (CDN): 1 office VERMONT MAINE OREGON IDAHO WYOMING MICHIGAN NEW YORK SOUTH DAKOTA WISCONSIN Toronto (CDN): 1 office NEBRASKA IOWA NEVADA UTAH COLORADO KANSAS ILLINOIS OHIO INDIANA PENNSYLVANIA WEST VIRGINIA KENTUCKY VIRGINIA MISSOURI NEW HAMPSHIRE MASSACHUSETTS RHODE ISLAND CONNECTICUT NEW JERSEY DELAWARE MARYLAND WASHINGTON D.C. CALIFORNIA ARIZONA NEW MEXICO OKLAHOMA ARKANSAS TENNESSEE NORTH CAROLINA SOUTH CAROLINA MISSISSIPPI ALABAMA GEORGIA TEXAS LOUISIANA HAWAII Wealth Management Americas offices: <5 5–15 >15 80 FLORIDA PUERTO RICO 2BD010_e Invested assets by asset class In %, except where indicated Invested assets by client wealth In %, except where indicated On 100 75 50 25 0 31.12.07 31.12.08 31.12.09 On 31.12.09 Total: CHF 690 billion Total: CHF 906 billion CHF 644 billion CHF 690 billion 8 33 17 6 28 8 9 26 19 13 28 5 8 29 23 9 26 5 30 11 < CHF 1 million CHF 1–5 million CHF 5–10 million > CHF 10 million 27 32 Accounts/money markets External mutual funds Bonds Equities UBS mutual funds Other1 1 Includes structured products and alternative investments. 2BD011_e 2BD012_e d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C US, Private Wealth advisors who have access to an exclusive set of tools and capabilities through Private Wealth Man- agement, support our goals of ultra high net worth segment growth, productivity, and consistent client experi- ence. Organizational structure Formed from the reorganization of the Global Wealth Man- agement & Business Banking business division in 2009, Wealth Management Americas is headquartered in Wee- hawken, New Jersey, where most corporate and operational functions are located. The client-facing organization consists of the branch network in the US, Puerto Rico and Canada, with 7,084 financial advisors as of 31 December 2009. On 27 October 2009, Robert J. McCann was appointed as Chief Executive Officer of Wealth Management Americas and Member of the Group Executive Board of UBS AG. Significant recent acquisitions and business transfers in- clude: – February 2007, acquisition of McDonald Investments’s private client branch network. Legal structure In the US and Puerto Rico, the business division operates through direct and indirect subsidiaries of UBS AG. Securities and operations activities are conducted primarily through registered broker-dealers, which during 2009 consisted of UBS Financial Services Inc., UBS Financial Services Incorpo- rated of Puerto Rico, UBS International Inc. and UBS Services USA LLC. On 31 December 2009, UBS International Inc. and UBS Services USA LLC were merged into UBS Financial Ser- vices Inc., reducing the number of registered broker-dealers to two. Our banking services in the US include those con- ducted through the UBS AG branches and UBS Bank USA, a federally regulated Utah bank, which provides Federal De- posit Insurance Corporation (FDIC)-insured deposit accounts and enhanced collateralized lending services. The business division’s Canadian wealth management and banking operations are conducted through UBS Bank (Canada). Competitors – October 2008, transfer of the Investment Bank’s munici- pal securities operations serving private clients to the for- mer Wealth Management US business unit (following the decision in June 2008 that the Investment Bank would exit the institutional municipal securities business). – March 2009, entered into an agreement to sell 56 branches to Stifel, Nicolaus & Company, Incorporated. The sale was completed in four separate closings in the second half of 2009. – September 2009, completed the sale of UBS’s Brazilian financial services business, UBS Pactual, to BTG invest- ments, LP. Wealth Management Americas competes with national full- service brokerage firms, domestic and global private banks, regional broker-dealers, independent broker-dealers, regis- tered investment advisors, trust companies and other finan- cial services firms offering wealth management services to US and Canadian private clients, as well as foreign non-resi- dent clients seeking wealth management services within the US. In 2008 and 2009, the financial crisis triggered consoli- dation within the industry that directly impacted our major competitors including Citi Global Wealth Management, Merrill Lynch Global Wealth Management, Morgan Stanley Global Wealth Management Group and Wachovia Securi- 81 100 75 50 25 0 UBS business divisions and Corporate Center Wealth Management Americas ties. Specifically, Merrill Lynch was acquired by Bank of America, effective 1 January 2009, and Wachovia Corpora- tion was acquired by Wells Fargo, effective 31 December 2008. In June 2009, Morgan Stanley and Citi formed Mor- gan Stanley Smith Barney, a joint venture combining Morgan Stanley’s Global Wealth Management Group and Citi’s Smith Barney in the US, Quilter in the UK, and Smith Barney Aus- tralia. Products and services Wealth Management Americas offers clients a full array of wealth management services that focus on the individual in- vestment needs of each client. Comprehensive planning supports clients through the various stages of their lives, in- cluding education funding, charitable giving, tax manage- ment strategies, estate strategies, insurance, retirement, and trusts and foundations with corresponding product offerings for each stage. Our advisors work closely with internal con- sultants in areas such as wealth planning, portfolio strategy, retirement and annuities, alternative investments, structured products, banking and lending, equities and fixed income. Clients also benefit from our dedicated Wealth Manage- ment Research team who support investment decisions. Our offerings are designed to meet a wide variety of in- vestment objectives, including capital appreciation, income generation and diversification of portfolio concentration. To address the full range of our clients’ investment needs, we offer competitive lending and cash management services, in- cluding the Resource Management Account (RMA) product, credit cards, FDIC-insured deposits, securities-backed lend- ing and mortgages. Additionally, Corporate Employee Finan- cial Services provides stock option and other related services to many of the largest US corporations and their executives. Our clients have the option of asset-based or transaction- based pricing for their relationships. Clients who choose as- set-based pricing have access to both discretionary and non- discretionary investment advisory programs. Non-discretionary advisory programs enable the client to maintain control over all transactions in the account, and clients with discretionary advisory programs direct investment professionals to manage a portfolio on their behalf. Depending on the type of discre- tionary program, the client can give investment discretion to a qualified financial advisor, a team of our investment profes- sionals or a third-party investment manager. Separately, mu- tual fund advisory programs are also offered, in which a fi- nancial 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 structured products and alternative investment offerings. 82 d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C Business performance Business division reporting CHF million, except where indicated Income of which: ARS settlement impact Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses of which: ARS settlement impact Services (to) / from other business divisions Depreciation of property and equipment Impairment of goodwill Amortization of intangible assets Total operating expenses Business division performance before tax of which: ARS settlement impact of which: business division performance before tax excluding ARS settlement impact Key performance indicators 1 Pre-tax profit growth (%) 2 Cost / income ratio (%) Net new money (CHF billion) 3 Gross margin on invested assets (bps) Additional information Average attributed equity (CHF billion) Return on attributed equity (RoaE) (%) BIS risk-weighted assets (CHF billion) 4 Return on BIS risk-weighted assets, gross (%) Goodwill and intangible assets (CHF billion) Recurring income Invested assets (CHF billion) Client assets (CHF billion) Personnel (full-time equivalents) Financial advisors (full-time equivalents) Additional information (only Wealth Management US) Net new money (CHF billion) 3 Net new money including interest and dividend income (CHF billion) 5 Business division reporting excluding PaineWebber acquisition costs 6 Business division performance before tax Cost / income ratio (%) Average attributed equity (CHF billion) As of or for the year ended % change from 31.12.09 5,546 3 5,550 4,231 1,017 4 170 34 62 5,518 32 32 N/A 99.5 (11.6) 81 8.8 0.4 22.8 23.5 4.2 3,256 690 737 16,925 7,084 (7.6) 11.5 155 97.3 5.2 31.12.08 6,278 (172) (29) 6,249 4,271 2,558 1,464 16 162 0 65 7,072 (823) (1,636) 813 N/A 112.6 (15.9) 82 7.8 (10.6) 26.9 28.9 4.5 4,076 644 682 20,623 8,607 (10.6) 11.7 (689) 110.4 4.2 31.12.07 7,153 31.12.08 (12) (2) 7,151 5,060 1,209 28 163 0 70 6,530 621 621 12.1 91.3 35.9 77 4.8 4,455 906 1,018 21,180 8,693 26.6 51.5 841 88.5 (11) (1) (60) (75) 5 (5) (22) (96) (1) 13 (15) (7) (20) 7 8 (18) (18) 24 1 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report. 2 Not meaningful if either the current period or the comparison period is a loss period. 3 Excludes interest and dividend income. 4 BIS risk-weighted assets (RWA) are according to Basel II. 5 For purposes of comparison with US peers. 6 Acquisition costs represent goodwill and intangible assets funding costs and intangible assets amortization costs related to the acquisition of the PaineWebber retail brokerage business in 2000. 83 UBS business divisions and Corporate Center Wealth Management Americas 2009 Results Wealth Management Americas reported a pre-tax profit of CHF 32 million in 2009 compared with a pre-tax loss of CHF 823 million in 2008. The 2009 results were negatively im- pacted by restructuring charges of CHF 152 million and a net goodwill impairment charge of CHF 19 million related to the sale of UBS Pactual. Our performance in 2008 was nega- tively impacted by CHF 1,636 million in charges and trading losses related to auction rate securities (ARS). Excluding these items, pre-tax performance would have been a profit of CHF 203 million in 2009 compared with a profit of CHF 813 million in 2008. Operating income In 2009, operating income decreased 11% to CHF 5,550 million from CHF 6,249 million in 2008. Excluding ARS-re- lated trading losses of CHF 172 million in 2008, operating income would have declined 14%. Recurring income was CHF 3,256 million, 20% lower than the previous year due to lower managed accounts fees related to an 11% de- crease in average invested assets and lower interest income due to lower interest spreads. Recurring income declined to 59% of operating income from 65% in 2008. Non-recur- ring income increased 4% due to a CHF 35 million interest credit from the Investment Bank, resulting from a change in the UBS Bank USA investment portfolio strategy and higher municipal trading income, partly offset by lower commis- sion revenue related to lower transactional activity. In addi- tion, 2008 was negatively impacted by the abovemen- tioned trading losses related to ARS. Operating expenses Operating expenses decreased 22% to CHF 5,518 million from CHF 7,072 million. In 2009, operating expenses included CHF 152 million in restructuring charges and CHF 34 million in goodwill impairment charges related to the sale of UBS Pac- tual (of which CHF 15 million was charged to the Corporate Center as this was related to foreign exchange exposures managed by Group Treasury), while 2008 expenses included CHF 1,464 million in charges related to the ARS settlement. Excluding these charges, operating expenses would have de- creased 5%. Personnel expenses were CHF 4,231 million in 2009, down 1% from CHF 4,271 million in the previous year. Excluding CHF 71 million in restructuring charges in 2009, personnel expenses would have decreased 3% from the pre- vious year. This was a result of lower salaries related to a de- crease in headcount, and lower revenue-based financial advi- sor compensation and was partly offset by higher incentive compensation as well as higher recruiting related costs. Non- personnel expenses declined 54% to CHF 1,287 million from CHF 2,801 million in 2008, but would have decreased 11% excluding CHF 82 million in restructuring costs that were mainly related to real estate writedowns, the abovementioned goodwill impairment charges and ARS-related charges in 2008. The decline was also due to cost–cutting measures in general, including reduced general and administrative ex- penses. Development of invested assets Net new money In 2009, net new money outflows were CHF 11.6 billion compared with CHF 15.9 billion in the prior year. The former Wealth Management US business unit’s net new money out- flows were CHF 7.6 billion in 2009, compared with CHF 10.6 billion in 2008. Following strong net new money inflows in first quarter 2009 due to recruitment of experienced finan- cial advisors, we experienced net new money outflows dur- ing the remainder of the year due to financial advisor attri- tion and limited recruiting of experienced financial advisors as a result of reputational issues. Including interest and divi- dends, net new money inflows for the former Wealth Man- agement US business unit in 2009 were CHF 11.5 billion compared with CHF 11.7 billion in 2008. Invested assets Wealth Management Americas had CHF 690 billion in in- vested assets on 31 December 2009, up 7% from CHF 644 billion on 31 December 2008. This increase was principally driven by positive market performance, and was partly offset by a reduction of CHF 24 billion related to the sale of branch- es to Stifel, Nicolaus & Company, Incorporated and the sale of UBS Pactual, as well as net new money outflows. In addi- tion, invested assets were impacted by negative currency translation effects due to a 3% depreciation of the US dollar versus the Swiss franc. Gross margin on invested assets The gross margin on invested assets was 81 basis points in 2009, down from 82 basis points in 2008. The decrease is a result of a 12% decline in income compared with an 11% decrease in average invested assets. The recurring income margin declined 5 basis points to 48 basis points, corre- sponding to a 20% decrease in recurring income. The non- recurring margin increased 4 basis points to 33 basis points, driven by an increase in municipal trading income and a CHF 35 million interest credit from the Investment Bank, which was attributed to a change in the UBS Bank USA investment portfolio strategy, while 2008 included abovementioned trading losses related to ARS. 84 2008 Results In 2008, we recorded a pre-tax loss of CHF 823 million com- pared with a pre-tax profit of CHF 621 million in 2007. Driv- ing the decline were total ARS-related charges of CHF 1,636 million in 2008. Excluding these charges, the pre-tax result would have increased 31%. In US dollar terms and excluding ARS-related charges, the pre-tax performance would have increased 51%, driven by resilient operating income growth during a challenging environment coupled with a decline in expenses, including lower accruals for variable compensa- tion. Operating income In 2008, total operating income was CHF 6,249 million, down 13% from CHF 7,151 million in 2007. Excluding cur- rency effects and ARS-related trading losses, operating in- come increased 3% from 2007. The increase in operating income reflected 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, and was partly offset by lower transactional revenue and an increase in credit loss expense. Operating expenses Total operating expenses rose 8% to CHF 7,072 million in 2008 from CHF 6,530 million in 2007. Excluding ARS-related charges, operating expenses declined 14%. In US dollar terms and excluding ARS-related expenses, operating ex- penses declined 1%. In US dollar terms, personnel expenses decreased 3%, driven primarily by lower accruals for variable compensation, and were partly offset by higher costs related to financial advisor recruitment and higher severance costs related to non-financial advisor staff reductions. Excluding ARS-related expenses, non-personnel costs (including gen- eral and administrative expenses, depreciation and amortiza- tion expenses and services provided to and received from other business divisions), in US dollar terms, increased 5% due to increases in insurance costs, occupancy, legal fees, and depreciation costs, and were partly offset by lower pro- visions (non-ARS-related), lower service charges from other business divisions and reduced discretionary spending on travel, marketing, and consulting fees. Development of invested assets Net new money In 2008, net new money outflows were CHF 15.9 billion compared with inflows of CHF 35.9 billion in 2007, with net new money outflows concentrated in the second and third quarters. Net new money at the former Wealth Manage- ment US business unit reflected an outflow of CHF 10.6 bil- lion compared with an inflow of CHF 26.6 billion in 2007. The outflows reflected the financial market turbulence and its impact on our operating performance as well as reputa- tional issues which led to an increase in financial advisor attrition and clients diversifying assets away from the firm. Including interest and dividends, the former Wealth Man- agement US business unit had net new money inflows in 2008 of CHF 11.7 billion, compared with outflows of CHF 51.5 billion in 2007. Invested assets Wealth Management Americas had CHF 644 billion in in- vested assets on 31 December 2008, down 29% from CHF 906 billion on 31 December 2007. This was a result of de- clining markets over the year, net new money outflows and the negative impact of currency translation. Gross margin on invested assets The gross margin on invested assets was 82 basis points in 2008, up from 77 basis points in 2007. The increase was mainly a result of a 5 basis point increase in the recurring income margin to 53 basis points, while the non-recurring margin was unchanged at 29 basis points. d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C 85 UBS business divisions and Corporate Center Global Asset Management Global Asset Management Business description Global Asset Management is a large-scale asset manager with well diversified businesses across regions, capabilities and distribution channels. It offers investment capabilities and investment styles across all major traditional and alternative asset classes. These include equities, fixed income, currency, hedge fund, real estate, infrastructure and private equity investment capabilities that can also be combined in multi-asset strategies. Business Strategy Global Asset Management offers a diverse range of invest- ment capabilities and services from a boutique-like structure encompassing all major asset classes including equities, fixed income, asset allocation, currency, risk management, hedge funds, real estate, infrastructure, private equity and fund ad- ministration. Invested assets totaled CHF 583 billion on 31 December 2009, making Global Asset Management one of the larger institutional asset managers and hedge fund of funds managers in the world. It is also one of the largest mutual fund managers in Europe and the largest in Switzer- land. The “Key focus areas” chart shows the investment, distribution and support structure of the business division. Revenues and key performance indicators are reported ac- cording to two principal asset management client segments: institutional (for example, corporate and public pension plans, governments and their central banks) and wholesale intermediary (financial intermediaries, including UBS’s wealth management businesses, and third parties). The bar charts on the following pages show the breakdown of invested assets and revenues across these segments and by regions and asset classes. As the financial crisis recedes, significant renewed growth in the asset management industry is anticipated. The fun- damental drivers of growth in the industry, such as the need to save for retirement and the increase in savings in emerg- ing economies, remain in place and appear to be reacceler- ating. Global Asset Management is focused on seizing the op- portunities that growth within the industry will bring. The diversification of the business across geographies, capabili- ties and distribution channels in recent years, and an im- provement in investment performance in a number of capa- bilities, provide a solid foundation for future growth. Our key strategic objective is to monetize our improved investment performance through both gaining new client assets and improving our retention of existing client assets. In pursuit of our strategic objective, we are working to expand our third-party institutional and wholesale distribu- tion, to increase our cooperation with the wealth manage- ment businesses and to leverage our existing strong posi- tions in emerging markets, notably in China, Korea and the Middle East. Key focus areas Investment capabilities are globally coordinated but with boutique-like discretion wherever possible … Equities Fixed income Alternative and quantitative investments Global real estate Global investment solutions Infrastructure and private equity Fund services The Americas Switzerland Europe, Middle East and Africa Asia Pacific … distribution is regionally organized … IT1 Operations and fund treasury Human resources1 Legal, compliance and risk control1 Financial control1 Strategic planning Consultant relation- ships and marketing … and supported by global functions 1 Reports to UBS Group functional head. 86 2BD020_e d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C Organizational structure Competitors Our business division has main offices in London, Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Singapore, Sydney, Tokyo, Toronto and Zurich, and employs around 3,500 personnel in 25 countries. Significant recent acquisitions and business transfers – 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 the Invest- ment Bank, the other managing outside investor assets. As the development of the business did not meet origi- nal expectations, it was closed in May 2007. – In July 2007, UBS purchased a 51% stake in Daehan In- vestment Trust Management Company Ltd. (DIMCO) from Hana Daetoo Securities (formerly Daehan Invest- ment & Securities Company Ltd.), a wholly-owned sub- sidiary of Hana Financial Group. DIMCO was renamed UBS Hana Asset Management Company Ltd. interna- tionally, and Hana UBS Asset Management in Korea. – In February 2008, UBS acquired 100% of the Caisse Centrale de Réescompte (CCR) Group in France from Commerzbank. The asset management business of CCR currently operates as CCR Asset Management. – In August 2008, UBS sold its 24.9% stake in Adams Street Partners to its remaining shareholders. The trans- action closed on 6 August 2008 resulting in a net gain of CHF 168 million. – In September 2009, UBS completed the sale of its Brazil- ian financial services business, UBS Pactual, including its asset management business, UBS Pactual Asset Man- agement. Global Asset Management continues to serve Brazil and other Latin American markets through its Americas distribution team. Our competitors range from global firms with wide-ranging capabilities (such as Fidelity Investments, AllianceBernstein Investments, BlackRock, JP Morgan Asset Management, Deutsche Asset Management and Goldman Sachs Asset Management), to regional or local firms specializing in par- ticular asset classes. Many of our competitors are specialist niche players who focus mainly on one asset class, particu- larly in the real estate, hedge fund, infrastructure and re- gional private equity investment areas. The asset management industry is undergoing a period of consolidation and polarization into either large-scale firms or niche specialists. Large-scale firms, like our Global Asset Management business division, offer well-diversified invest- ment capabilities across all asset classes and have a broad global distribution network. Products and services The “Investment capabilities and services” chart illustrates our offering which can be delivered 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. – Equities offers a full spectrum of investment styles with varying risk and return objectives. It has three investment pillars with distinct strategies including core / value (port- folios managed according to a price to intrinsic value phi- losophy), growth investors (a quality global growth man- ager) and structured equities (strategies that employ proprietary analytics and quantitative methods). – Fixed income offers 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, complement- ed by extended strategies such as high-yield and emerg- ing market debt. Invested assets by region¹ In %, except where indicated Institutional /wholesale intermediary revenues In %, except where indicated On 100 75 50 25 0 31.12.07 31.12.08 31.12.09 Total: CHF 891 billion CHF 575 billion CHF 583 billion 33 21 13 33 33 19 10 38 35 20 12 33 On 100 75 50 25 31.12.07 31.12.08 31.12.09 Total: CHF 4,094 million CHF 2,904 million CHF 2,137 million 42 58 43 57 40 60 The Americas Asia Pacific Europe, Middle East and Africa Switzerland 1 Assets represented are totals for the Global Asset Management business division worldwide. The regional split is primarily based on the client servicing location. 0 2BD023_e Institutional Wholesale intermediary 2BD022_e_GAM 87 100 75 50 25 0 100 75 50 25 0 UBS business divisions and Corporate Center Global Asset Management – Alternative and quantitative investments has two primary business lines – multi-manager (or fund of funds) and sin- gle manager. The former constructs portfolios of hedge funds and other alternative investments operated by third-party managers, allowing clients to have 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 estate actively manages real estate invest- ments in Asia, Europe and the US and across the major real estate sectors. Its capabilities are focused on core and value-added strategies, but also include other strategies across the risk / return spectrum. These are offered on a global, regional and country basis and through open- and closed-end private funds, customized investment struc- tures, funds of funds, individually managed accounts and publicly traded real estate securities. – Global investment solutions offers asset allocation, cur- rency, manager research and risk management services. It manages a wide array of domestic, regional and global balanced portfolios, currency mandates, structured port- folios, multi-manager and absolute return strategies. Through its strategic investment advisory services, it sup- ports clients in a wide range of investment-related func- tions including investment policy setting, integrated asset liability solutions, multi-manager approaches and invest- ment outsourcing. – Infrastructure and private equity is involved in the origina- tion 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, re- porting and accounting for retail and institutional invest- ment funds, hedge funds and other alternative funds. Investment performance 2009 From March onwards, 2009 was largely characterized by varying degrees of recovery in most financial markets, with some volatility along the way. Many of our strategies were well positioned to benefit from the recovery, and the initial performance improvement of 2008 grew into a substantial and sustained improvement in 2009 across many strate- gies. Among core / value equity strategies, a high proportion delivered returns that equaled or exceeded their benchmarks for 2009 and, in most cases, by significantly more than nor- mal expectations for actively managed strategies. This built on the generally improved performance in 2008, and most strategies continued to improve their relative standings com- pared with our peers. Global, US, European, Australian and Asian emerging markets strategies saw improved perfor- mance versus benchmarks as a result of broad-based stock selection gains, which in many cases, were reported on a consistent quarter-by-quarter basis throughout the year. In addition to these core large cap traditional strategies, most global and regional small cap, concentrated and long-short strategies, and global sustainable and responsible invest- ment strategies performed especially well. UK strategies per- formed at benchmark or better for the year. Canadian strat- egies delivered disappointing returns during the year, but their medium- and long-term records remain solid. The majority of growth equities strategies exceeded their benchmarks during the year. Notable leaders were the US large cap growth and Global (ex US) small cap growth strat- egies, both of which greatly exceeded both their bench- marks and peers. Longer-term performance across the entire growth equities platform remained strong, with all strategies outpacing their respective benchmarks since inception. Institutional invested assets by asset class In %, except where indicated Wholesale intermediary invested assets by asset class In %, except where indicated 31.12.07 31.12.08 31.12.09 Total: CHF 522 billion CHF 335 billion CHF 346 billion 22 23 30 19 6 23 20 22 22 13 21 18 27 21 13 Money market Fixed income Equity Multi-asset Alternatives On 100 75 50 25 0 88 On 100 75 50 25 0 31.12.07 31.12.08 31.12.09 Total: CHF 369 billion CHF 240 billion CHF 237 billion 4 31 27 19 19 5 24 18 20 33 7 23 22 20 28 2BD025_e Money market Fixed income Equity Multi-asset Alternatives 2BD024_e 100 75 50 25 0 1.00 0.75 0.50 0.25 0.00 Investment capabilities and services Alternative and quantitative investments Single manager hedge funds Multi-manager hedge funds Quantitative Infrastructure fund of funds Private equity fund of funds Active commodities, multi-manager Equities Core/value Global Fixed income Global Country and regional Country and regional Sector specific Emerging markets Emerging markets Specialist Long /short HALO High yield Structured credit Liquidity /short duration Growth investors Indexed Global Country and regional Structured equities Systematic alpha Quantitative equities Index and portfolio construction solutions (including passive) Global real estate Global Global investment solutions Infrastructure and private equity Global Direct infrastructure investment Country and regional Country and regional Private strategies Asset allocation Global and regional Real estate securities Currency management Agriculture Return and risk targeted Structured portfolios Risk management and advisory services Fund services Alternative funds Investment funds d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o 2BD026_e C Among structured equities strategies, all key systematic alpha strategies exceeded performance objectives for the year. Particularly strong results were achieved in global, UK and Swiss small and midcap strategies. The US fundamental equity market neutral strategy generated positive absolute returns, as did quantitative equities’ global equity market neutral strategy. Among long-only strategies, quantitative equities’ global and US active strategies were ahead of benchmark, while the Japan and European strategies trailed their benchmarks. Enhanced index strategies mostly lagged benchmarks with the exception of Japan. Passive strategies continued to add value in line with their risk objectives. Global bond markets had another dramatic year in 2009, most notably the corporate bond markets where yield spreads (the difference in yield versus government bonds) peaked in March at record levels. From the first quarter on- wards, investment grade, high yield and emerging market bond yield spreads reduced dramatically, resulting in record high total returns from these fixed income asset classes. A combination of this market environment and portfolio posi- 89 UBS business divisions and Corporate Center Global Asset Management tioning led to significant outperformance of UK, US, global sovereign, Australian, Canadian, Euro, Swiss and emerging market bond strategies, and modest outperformance of Jap- anese bond strategies. The performance of many key strate- gies was substantially stronger than in the previous year. High yield strategies underperformed their benchmarks but achieved positive total returns for the year. Money market funds continued to achieve their capital preservation objec- tives. The performance of multi-asset strategies, including the global securities composite and dynamic alpha strategies, was strongly positive during the year. Asset allocation, cur- rency management and security selection all contributed to this result. Multi-asset strategies had been positioned for a recovery in risky assets such as equities, and thus benefited from the upswing in equity markets that started in early March and continued throughout the year. As in 2008, the active currency strategy performed strongly during 2009. Global and regional convertible bonds strategies ended the year well ahead of benchmark, delivering a very strong per- formance. The majority of multi-manager investment solu- tions also delivered positive returns relative to benchmark over the year. Strategic investment advisory services, includ- ing investment outsourcing, asset liability investment solu- tions and strategic alternatives advisory gained further trac- tion and brought in new clients during the year. In alternative and quantitative investments, hedge funds rebounded strongly in 2009. The O’Connor single manag- er business posted positive returns across all core funds, with the exception of currency and rates, with the key O’Connor multi-strategy fund materially outperforming its peers and relevant benchmarks. At year end, most funds were above pre-existing high water marks. In the multi- manager business, positive returns were posted across all core strategies. Investment performance of the direct real estate flagship funds generally picked up during the year. The flagship UK strategy improved in absolute terms but underperformed versus benchmark. All Germany-based Eurozone strategies produced positive absolute returns (consisting of the four UBS Swiss listed real estate funds) and also outperformed their benchmark. Although absolute performance of the US fund was negative, it substantially outperformed its bench- mark. Performance of the flagship J-REIT (managed in part- nership with Mitsubishi Corporation) was positive both in absolute and relative terms. Performance for real estate se- curities strategies was mixed versus benchmarks, however, they all posted positive absolute returns for the year. The fund of funds strategy gathered momentum over the second half of the year when positive returns were delivered. The last year was challenging for the infrastructure and private equity sector as a whole. The flagship UBS Interna- tional Infrastructure Fund’s portfolio performed well despite unprecedented market challenges, although at the end of the period a regulatory decision for the UK water sector ad- versely impacted one investment in the portfolio. The Middle East fund, managed in partnership with Invest AD, formerly Abu Dhabi Investment Company, reached first close in May 2009 with up to USD 250 million in commitments, with final close expected in 2010. 90 Business performance Business division reporting CHF million, except where indicated Institutional fees Wholesale intermediary fees Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions Depreciation of property and equipment Impairment of goodwill Amortization of intangible assets Total operating expenses Business division performance before tax Key performance indicators 2 Pre-tax profit growth (%) Cost / income ratio (%) Net new money (CHF billion) 3 Gross margin on invested assets (bps) (institutional) Gross margin on invested assets (bps) (wholesale intermediary) Additional information Average attributed equity (CHF billion) Return on attributed equity (RoaE) (%) BIS risk-weighted assets (CHF billion) 4 Return on BIS risk-weighted assets, gross (%) Goodwill and intangible assets (CHF billion) Invested assets (CHF billion) Personnel (full-time equivalents) Institutional Net new money (CHF billion) 3 of which: money market funds Invested assets (CHF billion) of which: money market funds Wholesale intermediary Net new money (CHF billion) 3 of which: money market funds Invested assets (CHF billion) of which: money market funds d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C As of or for the year ended % change from 31.12.09 1,273 863 2,137 996 387 (74) 36 340 13 1,698 438 (67.1) 79.5 (45.8) 37 36 2.8 15.9 4.1 37.7 1.7 583 3,471 (12.7) 2.1 346 45 (33.1) (14.3) 237 67 31.12.08 1,659 1 1,246 2,904 946 462 88 44 0 33 1,572 1,333 (8.3) 54.1 (103.0) 38 41 3.0 44.4 8.5 41.2 2.2 575 3,914 (55.6) 6.0 335 42 (47.4) 15.2 240 80 31.12.07 31.12.08 2,370 1,724 4,094 1,883 593 73 72 0 19 2,640 1,454 10.2 64.5 (15.7) 44 47 2.3 891 3,785 (16.3) 6.7 522 32 0.6 4.8 369 70 (23) (31) (26) 5 (16) (18) (61) 8 (67) (3) (12) (7) (52) (23) 1 (11) 3 7 (1) (16) 1 Includes a gain of CHF 168 million on the sale of a minority stake in Adams Street Partners. 2 For the definitions of our key performance indicators, refer to the “Measurement and analysis of perfor- mance” section of this report. 3 Excludes interest and dividend income. 4 BIS risk-weighted assets (RWA) are according to Basel II. 91 UBS business divisions and Corporate Center Global Asset Management 2009 Results Pre-tax profit for full year 2009 was CHF 438 million com- pared with CHF 1,333 million in 2008. Excluding a net good- will impairment charge in 2009 of CHF 191 million related to the sale of UBS Pactual, restructuring costs in 2009 of CHF 48 million and a gain of CHF 168 million from the sale of our minority stake in Adams Street Partners in 2008, pre-tax profit would have decreased 42% to CHF 677 million. Operating income Total operating income was CHF 2,137 million in 2009 com- pared with CHF 2,904 million in 2008. Institutional revenues were CHF 1,273 million in 2009 compared with CHF 1,659 million in 2008, due to lower management fees associated with a 21% decrease of the average invested assets base and reduced income following the sale of UBS Pactual in 2009, which was partly offset by higher performance fees in alternative and quantitative investments as well as lower operational losses. Additionally, 2008 institutional revenues included a gain of CHF 168 million from the sale of UBS’s minority stake in Adams Street Partners. Wholesale inter- mediary revenues were CHF 863 million in 2009 compared with CHF 1,246 million in 2008, due to lower management fees associated with a lower average invested assets base, lower performance fees from some funds and reduced in- come following the sale of UBS Pactual in 2009. Operating expenses Total operating expenses were CHF 1,698 million in 2009 compared with CHF 1,572 million in 2008. Excluding a net goodwill impairment charge in 2009, and restructuring charges during the whole period, operating expenses would have declined 7% to CHF 1,459 million. This resulted from lower general and administrative expenses, and was partly offset by higher accruals of variable compensation driven by higher performance fees in alternative and quantitative in- vestments. In 2009, operating expenses included CHF 340 million in goodwill impairment charges related to the sale of UBS Pactual (of which CHF 149 million was charged to the Corporate Center as this was related to foreign exchange exposures managed by Group Treasury). General and administrative expenses were CHF 387 million in 2009 compared with CHF 462 million in 2008, mainly due to lower entertainment expenses, marketing costs, IT costs and professional fees as a result of ongoing cost-saving mea- sures and reduced expenses following the sale of UBS Pactual. Net charges to other business divisions were CHF 74 million in 2009, compared with a net charge from other business divisions of CHF 88 million in 2008. Excluding the abovementioned charge to the Corporate Center of CHF 92 149 million, allocated costs were down by CHF 13 million, or 15%, from 2008 mainly due to lower allocated costs from service providers as a result of ongoing cost-saving measures and reduced charges following the sale of UBS Pactual. Depreciation of property and equipment at CHF 36 mil- lion in 2009 was down by CHF 8 million as a result of lower depreciation charges on premises, IT and software. Development of invested assets Net new money Net new money outflows were CHF 45.8 billion for full year 2009 compared with outflows of CHF 103.0 billion for full year 2008. Excluding money market flows, net new money outflows were CHF 33.6 billion in 2009 compared with CHF 124.2 billion in 2008. Net outflows from clients of our wealth management businesses were CHF 40.7 billion (around 90% of total net outflows) in 2009 compared with CHF 47.1 billion in 2008. Some of the inflows and outflows relating to clients of our wealth management businesses are also reported as net new money in- and outflows for the Wealth Management & Swiss Bank and Wealth Manage- ment Americas business divisions. Institutional net new money outflows were CHF 12.7 bil- lion in 2009 compared with CHF 55.6 billion in 2008. Ex- cluding money market flows, outflows were CHF 14.8 billion in 2009 compared with CHF 61.6 billion in 2008. Net out- flows were reported in alternative and quantitative invest- ments, multi-asset, equities, fixed income and real estate. Wholesale intermediary net new money outflows were CHF 33.1 billion in 2009 compared with CHF 47.4 billion in 2008. Excluding money market flows, outflows of net new money were CHF 18.8 billion in 2009 compared with CHF 62.6 billion in 2008. Outflows were mainly reported in multi- asset, equities and fixed income, and were partly offset by inflows in real estate. Invested assets Total invested assets were CHF 583 billion on 31 December 2009 compared with CHF 575 billion on 31 December 2008. Institutional invested assets were CHF 346 billion on 31 De- cember 2009 compared with CHF 335 billion on 31 Decem- ber 2008. The net increase reflects the positive impact of fi- nancial market developments and positive currency fluctuations, and was partly offset by the exclusion of UBS Pactual assets and net new money outflows. Wholesale in- termediary invested assets were CHF 237 billion on 31 De- cember 2009 compared with CHF 240 billion on 31 Decem- ber 2008. The net decrease reflects net new money outflows and the exclusion of UBS Pactual assets, and was partly off- set by the positive impact of financial market developments and CHF 4.2 billion related to the transfer of the real estate investment management business from Wealth Manage- ment & Swiss Bank. Gross margin on invested assets The gross margin on institutional invested assets was 37 ba- sis points in 2009, compared with 38 basis points in 2008. The calculation of 2008 gross margin included a CHF 168 million gain from the sale of our minority stake in Adams Street Partners in 2008. The 2009 gross margin was sup- ported by higher performance fees, primarily in alternative and quantitative investments, and lower operational losses. The gross margin on wholesale intermediary invested as- sets was 36 basis points in 2009 compared with 41 basis points in 2008. This was mainly due to lower performance fees and reduced income following the sale of UBS Pactual. d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C 93 UBS business divisions and Corporate Center Global Asset Management 2008 Results Pre-tax profit for full year 2008 was CHF 1,333 million com- pared with CHF 1,454 million in 2007. Excluding costs re- lated to the closure of Dillon Read Capital Management (DRCM) in 2007, and a gain from the sale of the minority stake in Adams Street Partners in 2008, full-year pre-tax profit would have decreased by CHF 501 million. Operating income Total operating income was CHF 2,904 million in 2008 com- pared with CHF 4,094 million in 2007, mainly due to a signifi- cant decline in equity market valuations and relative strength- ening of the Swiss franc against major currencies, especially the US dollar. Institutional revenues were CHF 1,659 million in 2008 compared with CHF 2,370 million in 2007. Excluding the gain from the sale of the minority stake in Adams Street Partners, institutional revenues would have declined by CHF 879 million due to lower performance fees from alternative and quantitative investments and the Brazilian asset manage- ment business and lower management fees from the lower average invested assets base. Wholesale intermediary reve- nues were CHF 1,246 million in 2008 compared with CHF 1,724 million in 2007 due to lower management fees from the lower average invested assets base, and lower perfor- mance fees from the Brazilian asset management business. Operating expenses Total operating expenses were CHF 1,572 million in 2008 compared with CHF 2,640 million in 2007. Excluding CHF 212 million in DRCM restructuring costs in 2007, total oper- ating expenses would have declined 35% or CHF 856 mil- lion. This decline mainly reflects lower accruals for variable compensation resulting from lower revenues, changes in the forfeiture provisions of future share-based awards and cost- saving measures. The expenses were 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 462 mil- lion in 2008 compared with CHF 593 million in 2007. The 22% decrease was due to lower provisions and lower travel and entertainment expenses, and was partly offset by higher IT costs, the inclusion of the acquisition in France and the full-year impact of the acquisition in Korea. Services (to) / from other business divisions increased by CHF 15 million to CHF 88 million in 2008. Depreciation of property and equipment was CHF 44 mil- lion in 2008 compared with CHF 72 million in 2007. Exclud- ing the impact of the DRCM restructuring costs in 2007, de- preciation of property and equipment would have been 94 virtually flat despite the inclusion of the acquisition in France and the full-year impact of the acquisition in Korea. Development of invested assets 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. Net outflows from clients of our wealth manage- ment businesses accounted CHF 47.1 billion of these full year 2008 outflows. Some of the inflows and outflows re- lated to clients of our wealth management businesses are also reported as net new money in- and outflows for the Wealth Management & Swiss Bank and Wealth Manage- ment Americas business divisions. We also experienced rep- utational damage which impacted flows other than from the wealth management businesses. Institutional net new money outflows were CHF 55.6 bil- lion in 2008 compared with CHF 16.3 billion in 2007. Ex- cluding money market flows, outflows were CHF 61.6 billion in 2008 compared with CHF 23.0 billion in 2007. Net out- flows were reported in multi-asset, fixed income, equities and alternative and quantitative investments. Wholesale intermediary net new money outflows were CHF 47.4 billion in 2008, compared with inflows of CHF 0.6 billion in 2007. Excluding money market flows, net new money outflows were CHF 62.6 billion in 2008 compared with outflows of CHF 4.2 billion in 2007, and were mainly reported in multi-asset, equities and fixed income. Invested assets Total invested assets were CHF 575 billion on 31 December 2008 compared with CHF 891 billion on 31 December 2007. Institutional invested assets were CHF 335 billion on 31 De- cember 2008 compared with CHF 522 billion on 31 December 2007, reflecting the negative impact of financial market devel- opments, net new money outflows and currency fluctuations. Wholesale intermediary invested assets were CHF 240 bil- lion on 31 December 2008 compared with CHF 369 billion on 31 December 2007, reflecting the negative impact of fi- nancial market developments, net new money outflows and, to a lesser extent, currency fluctuations. Gross margin on invested assets The gross margin on institutional invested assets was 38 basis points in 2008 compared with 44 basis points in 2007. This was mainly due to lower performance fees from both alter- native and quantitative investments and UBS Pactual, and a change in asset-mix to lower-margin money market funds. The gross margin on wholesale intermediary invested as- sets was 41 basis points in 2008 compared with 47 basis points in 2007. This was mainly due to lower performance fees from UBS Pactual and a change in asset mix to lower- margin products. d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C UBS business divisions and Corporate Center Investment Bank Investment Bank Business description The Investment Bank provides a broad range of products and services to corporate and institutional clients, governments, financial intermediaries, alternative asset managers and private investors. The products and services include advice, research, market access and execution across all major capital markets. Business The Investment Bank has three distinct but aligned business areas: – Equities – Fixed income, currencies and commodities (FICC) – the Investment banking department (IBD) Co-operation and alignment between the FICC and eq- uities business areas has recently been strengthened in or- der to optimize our infrastructure and services offered to clients. Together they now comprise the securities business, offering primary and secondary access to the securities and foreign exchange markets, prime brokerage services as well as securities, economic, strategic and quantitative research. IBD provides advice on mergers and acquisitions and re- structurings, and raises capital mainly for corporate and sovereign clients in the debt and equity markets. Addition- ally, as part of a number of broader alignment initiatives across our business divisions, IBD plays a lead role in mar- keting the Group to corporates, leveraging their senior cli- ent relationships. Strategy As a result of the losses suffered in 2007 and 2008, we have taken significant steps to reposition and rebuild the busi- ness. As part of this process, the balance sheet, risk-weight- ed assets, operating expenses and headcount have all been reduced. In addition we have established new leadership roles in some key areas to implement the new client-centric strategy, which focuses on flow trading and advice. Client service and operational excellence are key to its success, and a flexible and scalable infrastructure is being developed in order to deliver this. Trading strategies are now focused on high volume client flow businesses, and are subject to tight balance sheet and risk limits. We are focused on enhancing and protecting our tradi- tional strengths; growing our business in selected products and regions; and expanding our cooperation with, and deliv- ery to, partner divisions. In FICC, we are rebuilding and growing our credit, rates and emerging markets businesses, while maintaining a mar- ket-leading position in foreign exchange and money mar- kets. In equities, we are targeting growth in equity deriva- tives, exchange-traded derivatives (ETD) and prime brokerage, while enhancing our strengths in cash equities. IBD is focused on maintaining a leading position in Europe, the Middle East and Africa, and the Asia Pacific regions, while rebuilding our market position in the Americas. Organizational structure The Investment Bank is headquartered in London and em- ploys approximately 15,700 personnel in over 30 countries. It is comprised of three business areas which are functionally run on a global basis: equities, FICC and IBD. IBD’s global capital markets business consists of two separate joint ven- tures: equity capital markets with equities, and debt capital markets with FICC. Global leveraged finance is another joint venture between IBD and FICC, which includes the global syndicated finance business. Significant recent acquisitions and business transfers Key acquisitions and business transfers over the past three years include: – the April 2007 acquisition of a 20% stake in UBS Securi- ties, China; and – the September 2009 sale of our Brazilian financial servic- es business, UBS Pactual. Legal structure We operate through branches and subsidiaries of UBS AG. Securities activities in the US are conducted through UBS Se- curities LLC, a registered broker-dealer. Competitors The industry has seen significant global consolidation as a result of the financial crisis, with firms such as Lehman Broth- ers filing for bankruptcy and others, like Bear Stearns, being sold. At the same time, there has been an emergence of smaller boutique investment banking advisory and securities firms. Our main competitors continue to be the major global investment banks including Bank of America / Merrill Lynch, Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase and Morgan Stanley. 95 UBS business divisions and Corporate Center Investment Bank Products and services Equities Our equities business area is a leading participant in the global primary and secondary markets for equity, equity- linked and equity derivative products. It distributes, trades, finances and clears cash equity and equity-linked products. It also distributes new equity and equity-linked issues and pro- vides research on companies, industry sectors, geographical markets and macroeconomic trends. Equities has made sig- nificant investments in technology for direct market access, prime brokerage and client relationship management to im- prove client service and business efficiency. The business area also has global and multi-regional operations as well as a strong local presence in all major markets. The main business lines of the equities business area are: – Cash equities provides clients with trade execution offer- ings and related advice, and comprehensive access to corporate management. We provide full-service trade execution for single stock and portfolios, capital commit- ment, block trading, electronic trading strategies and platforms, and analytics and commission management services. – Equity research provides in-depth analysis on more than 3,000 companies worldwide, or over 80% of the global markets capitalization. In addition, we have a specialist research offering in economics, macro asset allocation, equity strategy, quantitative analysis, socially responsible investing, commodities, alternative research and valua- tion and accounting. – Derivatives provides standardized products and custom- ized solutions to our clients. In addition to products with returns linked to equities or equity indices, we also offer 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 brokerage provides integrated global services, in- cluding multi-asset class clearing and custody, capital consultancy, securities lending and equity swaps execu- tion. These services are provided through a client-centric service model to hedge funds, banks, asset management and other financial services clients. – Exchange-traded derivatives provides execution and clearing services with access to approximately 70 global exchanges to hedge funds, banks, asset managers, cor- porations, commodity trading and wealth management clients as well as to aggregators. Fixed income, currencies and commodities The FICC business area delivers products and solutions to corporate, institutional and public sector clients in all major markets, as well as to private clients via targeted intermedi- aries. In response to changes in global markets and client demand, FICC was significantly restructured in 2009 to im- prove client service, simplify its operating model, strengthen risk management and leverage competitive advantages. The main business lines of the FICC business area are: – Macro consists of foreign exchange, money market and interest rate sales and trading businesses. We provide a range of foreign exchange, precious metals, treasury, and liquidity management solutions to institutional and pri- vate clients via targeted intermediaries. Interest rate ac- tivities include standardized rate-driven products and ser- vices such as interest rate derivatives trading, underwriting and trading of government and agency securities. – Credit sales and trading encompasses the origination, un- derwriting, and distribution of primary cash and synthetic credit transactions. We are also active in corporate lend- ing, secondary trading and market-making in high yield and investment grade bonds, and loans in both cash and derivative products. – Emerging markets business offers local investors access to international markets, and offers international inves- tors an opportunity to add exposure via our onshore presence in key locations. We also provide liquidity in the local markets across foreign exchange, rates and struc- tured products. We have a local market presence in Cen- tral and Eastern Europe and Asia, and access to Latin American markets through our emerging markets hub in Stamford. In early 2010, we began the process of re-integrating re- sidual risk positions into the FICC business. The positions will be managed on separate books to be unwound or exited as needed. As part of this process, and following a thorough front-to-back review process, certain businesses will be re- entered. The focus will be on products that are liquid, price- observable and hedgeable. The businesses approved for re-entry include the secondary trading of Asian emerging market convertible bond strips, asset-backed securities, commercial mortgage-backed securities and collateralized loan obligations and structured credit / correlation trading; other proposals are also being considered. Investment banking department IBD provides strategic advice and a range of capital markets execution services to corporate clients, financial institutions, financial sponsors, sovereign clients, wealth funds and hedge funds. – The advisory group assists in acquisitions and sale pro- cesses, and also advises on strategic reviews and corpo- rate restructuring solutions. – Global capital markets offers financing and advisory ser- vices that cover capital raising including debt and equity capital, and risk management solutions. It comprises the equity capital markets business, whose products include initial public offerings, secondary offerings and equity linked transactions; and the debt capital markets business 96 products include commercial paper, medium-term notes, senior debt, high yield debt, subordinated debt and hy- brid capital. The aforementioned financing products are provided alongside risk management solutions, which in- clude derivatives, structured finance, ratings advisory ser- vices and liability management. – Global leveraged finance provides event-driven (acquisition, leveraged buy-out) loans, bond and mezzanine leveraged finance to corporate customers and financial sponsors. With a presence in all major financial markets, investment banking coverage is based on a comprehensive matrix of country, sector and product banking professionals. d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C 97 UBS business divisions and Corporate Center Investment Bank Business performance Business division reporting CHF million, except where indicated Investment banking Advisory Capital market revenues Equities Fixed income, currencies and commodities Other fee income and risk management Sales and trading Equities Fixed income, currencies and commodities Total Investment Bank income Credit loss (expense) / recovery 1 Total Investment Bank operating income excluding own credit Own credit 2 Total Investment Bank operating income as reported Personnel expenses General and administrative expenses Services (to) / from other business divisions Depreciation of property and equipment Impairment of goodwill Amortization of intangible assets Total operating expenses Business division performance before tax Key performance indicators 3 Pre-tax profit growth (%) 4 Cost / income ratio (%) 5 Return on attributed equity (RoaE) (%) Return on assets, gross (%) Average VaR (1-day, 95% confidence, 5 years of historical data) 6 Additional information Total assets (CHF billion) Average attributed equity (CHF billion) BIS risk-weighted assets, gross (CHF billion) 7 Return on BIS risk-weighted assets, gross (%) Goodwill and intangible assets (CHF billion) Compensation ratio (%) 5 Impaired lending portfolio as a % of total lending portfolio, gross Personnel (full-time equivalents) As of or for the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 2,466 858 2,514 1,609 904 (906) 4,390 4,937 (547) 6,856 (1,698) 5,158 (2,023) 3,135 5,568 2,628 (147) 360 749 59 9,216 (6,081) N/A 190.7 (24.1) 0.4 55 992.0 25.3 122.4 3.1 3.5 115.2 3.8 15,666 2,880 1,609 1,844 977 866 (573) (26,712) 5,184 (31,895) (23,832) (2,575) (26,407) 2,032 (24,375) 5,182 3,830 41 447 341 83 9,925 (34,300) N/A N/A (128.2) (1.2) 79 6,637 2,696 4,262 2,784 1,478 (321) (7,833) 9,002 (16,835) (1,197) (266) (1,463) 659 (804) 11,633 3,800 (171) 431 0 172 15,865 (16,669) N/A N/A (0.2) 1,680.3 1,922.8 26.8 195.8 (10.0) 4.6 N/A 2.6 5.6 N/A 0.4 19,132 23,739 (14) (47) 36 65 4 (58) (5) 98 (34) 7 (31) (19) 120 (29) (7) 82 (30) (41) (6) (37) (24) (18) 1 Includes CHF 1,013 million in credit losses from impairment charges on reclassified financial instruments for 2009. 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 2009 amounts to CHF 0.9 billion. This gain has reduced the fair value of financial liabilities designated at fair value through profit or loss recognized on our balance sheet. Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this report for more information. 3 For the definitions of our key performance indicators, refer to the “Measurement and analysis of performance” section of this report. 4 Not meaningful if either the current period or the comparison period is a loss period. 5 Neither the cost / income nor the compensation ratio are meaningful if revenues in the Investment Bank are negative. 6 As announced in our third quarter 2009 report, we received approval from the Swiss Financial Market Supervisory Authority (FINMA) to change the calibration of our management VaR from a 10-day 99% measure to a 1-day 95% measure. This measure is re- ported as a key performance indicator with comparatives provided as at 31.12.2008. 7 BIS risk-weighted assets (RWA) are according to Basel II. 98 d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C 2009 Results In 2009, we recorded a pre-tax loss of CHF 6,081 million compared with a pre-tax loss of CHF 34,300 million in 2008, primarily due to a reduction in losses on residual risk posi- tions. The 2009 result was also affected by a loss of CHF 2,023 million on own credit from financial liabilities desig- nated at fair value as our credit spreads narrowed in 2009, compared with a CHF 2,032 million gain in 2008. For full-year 2009, equities and IBD revenues were down from 2008 as the businesses suffered losses of key personnel in the early part of the year. We recorded net credit loss expenses of CHF 1,698 million for 2009, compared with net credit loss expens- es of CHF 2,575 million in 2008. Excluding the credit loss ex- penses from reclassified securities of CHF 425 million, our net credit loss expenses amounted to CHF 1,273 million in 2009. ➔ Refer to “Note 27 Fair value of financial instruments” in the “Financial information” section of this report for more information on own credit Our operating expenses decreased by CHF 709 million compared with 2008, mainly reflecting lower non-personnel costs. Operating income Total operating income in 2009 was positive CHF 3,135 mil- lion, up from negative CHF 24,375 million in 2008, mainly due to substantially reduced losses on risk positions within the FICC area. Equities Revenues in equities were CHF 4,937 million in 2009, down 5% from CHF 5,184 million in 2008. Equity market conditions continued to be difficult in 2009, impacting our overall busi- ness performance, as did the loss of some key personnel in the first part of the year. We have made a number of strategic hires since then. Cash equity revenues were impacted by low- er market volumes and a loss in market share. Deri vatives rev- enues were down. Prime brokerage revenues declined due to a weaker dividend season and lower client balances in the first half of 2009. A decline in exchange-traded derivatives reve- nues was driven by weaker volumes and less favorable inter- est and margin balances. Equity-linked revenues improved significantly after a weak 2008 as all regions benefited from improvements in valuations and liquidity. Proprietary trading revenues also substantially improved with a strong perfor- mance recorded across all geographical regions. Fixed income, currencies and commodities Revenues were negative CHF 547 million in 2009, up from negative CHF 31,895 million a year earlier. The FICC result continued to be affected by losses on residual risk positions which had a material impact particularly in the first and sec- ond quarters, but decreased significantly in the second half of the year. Despite the overall loss, all core FICC businesses contributed positive revenues as the businesses were rebuilt, funding costs were normalized, and liquidity improved. Credit revenues improved in 2009 as key hires were en- gaged and residual risk positions were steadily reduced. The macro rates business was negatively impacted by move- ments in our credit spreads on the valuation of our derivative positions. Foreign exchange and money markets revenues were in line with the previous year. Emerging markets reve- nues increased despite the sale of UBS Pactual, as all regions continued to perform well, most notably in Eastern Europe, Middle East and Africa. As we continued to reduce our residual risk positions, we incurred losses related to the liquidation of these positions. Losses on credit valuation adjustments for exposure to mono- line insurers arising from purchased credit default protection totaled CHF 0.8 billion for the year. Losses from credit valuation adjustments incurred in the first quarter of 2009 were only partially offset by gains in the rest of the year, resulting from commutation of a number of trades in the second and third quarter. Other areas which incurred losses in the first quarter had a less material impact on the remainder of the year. Investment banking Revenues of the investment banking department were CHF 2,466 million in 2009, down 14% from CHF 2,880 million in the previous year. Merger and acquisitions activity remained subdued during the year with global mergers and acquisi- tions volumes reaching their lowest annual total since 2004, according to Thomson Reuters. This resulted in reduced advi- sory revenues across all regions, down 47% to CHF 858 mil- lion. The decline was only partially offset by a 36% improve- ment in capital markets revenues. Equity capital markets revenues were up 65% to CHF 1,609 million with Europe, the Middle East, Africa and the Asia Pacific region performing well, as investors turned to the equity market for financing, increasing total market volumes by 42% compared with 2008, according to Dealogic. Fixed income capital markets revenues increased 4% to CHF 904 million as global issuance levels rose in 2009 by 38% compared with 2008, based on Dealogic’s debt capital markets classification. Operating expenses Operating expenses declined to CHF 9,216 million in 2009, a 7% decrease from CHF 9,925 million the previous year. Personnel expenses, at CHF 5,568 million in 2009, increased 7% from one year earlier, and were driven by increased variable compensation. Salary increases were partly offset by headcount reductions and reduced restructuring costs. General and administrative expenses decreased to CHF 2,628 million in 2009 from CHF 3,830 million in 2008. This is largely due to reduced legal provisions and real estate re- 99 UBS business divisions and Corporate Center Investment Bank structuring provisions, along with continuing reductions in professional fees, travel and entertaining and market data services resulting from headcount reductions and cost-cut- ting measures. Net charges to other business divisions were CHF 147 mil- lion in 2009, compared with a net charge from other busi- ness divisions in 2008 of CHF 41 million. lion a year earlier. A goodwill impairment charge of CHF 749 million related to the sale of UBS Pactual was incurred in 2009 (of which CHF 328 million was charged to the Corpo- rate Center as this was related to foreign exchange expo- sures managed by Group Treasury), compared with a CHF 341 million goodwill impairment charge relating to the exit of the municipal securities business in 2008. Depreciation reduced 19% to CHF 360 million in 2009 from CHF 447 million in 2008, as real-estate restructuring charges were lower in 2009. Amortization of intangible as- sets, at CHF 59 million in 2009, was down from CHF 83 mil- Included in the 2009 operating expenses is a restructur- ing charge of CHF 226 million, consisting of CHF 102 million of personnel expenses and CHF 123 million of costs related to real estate. 100 d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C 2008 Results In 2008, we recorded a pre-tax loss of CHF 34,300 million compared with a pre-tax loss of CHF 16,669 million in 2007, primarily due to the losses on risk positions within the 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 fi- nancial assets compared with CHF 266 million in 2007. In 2008, we recorded a gain on own credit from financial liabil- ities designated at fair value of CHF 2,032 million, resulting from the widening of our credit spread, which was partly offset by the effects of redemptions and repurchases of such liabilities. Operating expenses for 2008 decreased significantly from 2007, mainly reflecting lower variable compensation. Operating income Total operating income in 2008 was negative CHF 24,375 million, down from negative CHF 804 million a year earlier. Equities Revenues, at CHF 5,184 million in 2008, were down 42% from CHF 9,002 million in 2007. The overall business perfor- mance was impacted in 2008 as equities continued to expe- rience difficult market conditions. 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, de- pressed client volumes, lack of liquidity and highly correlated markets impacted performance across all regions, particu- larly 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-year performance was offset by deterioration in the second half of the year. Exchange-traded derivatives revenues increased, as the business benefited from strong first and fourth quarters that were driven by significant volatility in the market. Proprietary trading reve- nues were negative for the year, reflecting the significant change in market conditions. Fixed income, currencies and commodities Revenues were negative CHF 31,895 million, down from negative CHF 16,835 million a year earlier. Consequences of the global financial crisis, including forced liquidations, gov- ernment bail-outs and consolidation in the banking sector, negatively affected the majority of the FICC businesses. 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 due to losses in Asia Pacific. These negative effects were only partially offset by posi- tive 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 ex- change 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. The foreign exchange distribution business posted very good results across all regions, benefiting from strong client flows seek- ing 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 6,637 mil- lion in the previous year. Market activity slowed significantly during the year, resulting in reduced advisory revenues across the regions, down 40% to CHF 1,609 million. Market volatil- ity in both equity and debt capital markets led to lower cap- ital markets revenues, down 65% to CHF 977 million and 41% to CHF 866 million respectively. 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 5,182 million in 2008, de- creased 55% from a year earlier, due to significantly lower variable compensation and lower salary costs, and were partly offset by restructuring charges. Share-based compen- sation was down significantly from 2007, mainly due to re- duced variable compensation. Full-year results for 2007 in- cluded accruals for share-based compensation during the year. These are not reflected in full-year 2008 as, starting in 2009, they are being amortized over the vesting period of these awards. General and administrative expenses increased slightly to CHF 3,830 million in 2008 from CHF 3,800 million in 2007. Reductions in travel and entertainment, IT and other out- sourcing costs were more than offset by increases in occu- pancy costs due to real estate restructuring, and by legal provisions. Net charges from other business divisions were CHF 41 million in 2008, compared with a net charge to other busi- ness divisions in 2007 of CHF 171 million. This increase re- flects the end of a private equity performance fee received in 2007, an IT data center restructuring fee and increased al- locations from Wealth Management & Swiss Bank reflecting higher operating volumes. 101 UBS business divisions and Corporate Center Investment Bank Depreciation rose 4%, to CHF 447 million in 2008 from CHF 431 million in 2007, as the real-estate restructuring charges mentioned above resulted in additional deprecia- tion costs. Amortization of intangible assets, at CHF 83 mil- lion 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 operating expenses is a restructuring charge of CHF 737 million recorded in fourth quarter 2008, consisting of CHF 435 million of personnel expenses and CHF 302 million of costs related to real estate. 102 d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C UBS business divisions and Corporate Center Corporate Center Corporate Center Description The Corporate Center seeks to ensure that we operate as a coherent and effective whole, by providing and managing support and control functions for the business divisions and the Group in such areas as risk, finance (including funding, capital and balance sheet management, management of foreign currencies), legal and compliance, communication and branding, human resources, information technology, real estate, procurement and service centres. Aims and objectives The Corporate Center assists our business divisions and re- gions through provision of Group-level control in the areas of finance, risk, legal and compliance as well as through a global corporate shared services organization comprising support and logistics functions. We strive to maintain an ap- propriate balance between risk and return in our businesses, while establishing and controlling our corporate governance processes including compliance with relevant regulations. Each functional head in the Corporate Center has authority across all businesses for their area of responsibility, including the authority to issue Group-wide policies for that area. On 1 April 2009, we announced that we would be integrating our Group-wide shared service functions (infor- mation technology, supply management, real estate, human resources, communication and branding, corporate develop- ment and offshoring) as well as the control functions (finance, risk and legal and compliance) into the Corporate Center. The objectives of this integration were to improve effectiveness and efficiency of the control and shared services functions on a sustainable basis, to strengthen cost management by creat- ing global and Group-wide cost responsibilities and to pro- vide simple service delivery models with clear responsibilities. A new Corporate Center governance model was implement- ed, and corresponding organizational structures were put in place including respective management nominations. Within six months, the transformation was successfully completed and a new global corporate shared services organization sup- porting the business divisions and regions was created under the leadership of the Group Chief Operating Officer (COO). In parallel, the control functions were centralized under the Group Chief Financial Officer (CFO), Group Chief Risk Officer (CRO) and Group General Counsel (Group GC). In total, ap- proximately 15,000 employees were transferred and inte- grated into the Corporate Center. As part of this integration, significant efficiency improvement and cost-saving potentials have been identified, and initial cost-cutting measures were implemented in the course of 2009. Headcount and costs of the centralized functions are re-allocated to the business divi- sions for which the respective services are performed. A glob- al service level agreement framework provides governance, and ensures cost transparency and consistency across service providers and consumers. The integration of the control and support functions cre- ates a foundation to enhance the effectiveness and efficien- cy of the new Corporate Center, as the operating models of individual functions and cross-functional synergies will be optimized. Overall, the integrated structure provides a strong platform from which we can increase efficiency, create syn- ergies for revenue growth and enhance shareholder value. ➔ Refer to the “UBS reporting structure and accounting changes” section of this report for more information on changes to the quarterly disclosure of the Corporate Center in 2010 Organizational structure The Corporate Center consists of the control functions Group Finance, Group Risk, and Group General Counsel and the shared services functions human resources, information technology, premises, supply and demand management, communication and branding, corporate development and Group offshoring. Group Chief Financial Officer The Group CFO is responsible for transparency in, and ap- praisal of, the financial performance of the UBS Group and business divisions, the Group’s financial reporting, forecasting, planning and controlling processes and for providing advice on financial aspects of strategic projects and transactions. The Group CFO has management responsibility over the divisional and Group financial control functions. The Group CFO is re- sponsible for the management and control of our tax affairs and for treasury and capital management, including manage- ment and control of funding and liquidity risk and our regula- tory capital ratios. After consultation with the audit commit- tee, the Group CFO makes proposals to the Board of Directors (BoD) regarding the standards for accounting we have adopt- ed and defines the standards for financial reporting and dis- closure. Together with the Group CEO, the Group CFO pro- vides external certifications under sections 302 and 404 of the Sarbanes-Oxley Act 2002, and in coordination with the Group CEO manages relations with analysts and investors. 103 UBS business divisions and Corporate Center Corporate Center Group Chief Operating Officer The Group COO is responsible for the management and performance of the infrastructure and service functions of the UBS Group, and is responsible for the management and control of Group-wide information technology, supply and demand management, real estate and corporate ad- ministrative services, human resources, corporate develop- ment and communications and branding as well as for physical and information security and offshoring services of UBS. The Group COO supports the Group CEO in strategy development and key strategic issues, and assumes respon- sibility for managing the operations in ways consistent with the strategic goals and performance targets of the UBS Group. Group Chief Risk Officer The Group CRO is responsible for the development and im- plementation of principles and appropriate independent control frameworks for credit, market, country and opera- tional risks within the UBS Group. In particular, the Group CRO is responsible for the formulation and implementation of the frameworks for risk capacity / appetite, risk measure- ment, portfolio controls and risk reporting; and has manage- ment responsibility over the divisional and Group risk control functions. The Group CRO is responsible for the implemen- tation of the risk control mechanisms as determined by our BoD, the risk committee or the Group CEO. In addition, the Group CRO approves transactions, positions, exposures, portfolio limits and provisions in accordance with the risk control authorities that are delegated, and monitors and challenges the bank’s risk-taking activities. Group General Counsel The Group GC has Group-wide responsibility for legal and compliance matters, policies and processes and for manag- ing the legal and compliance function. The Group GC has responsibility for establishing a Group-wide management and control process for our relationship with regulators, in close cooperation with the Group CRO and the Group CFO where relevant, and for maintaining the relationships with our key regulators with respect to legal and compliance mat- ters. The Group GC is further responsible for reporting legal and compliance risks and material litigation, for managing litigation and special and regulatory investigations, and for ensuring that we meet relevant regulatory and professional standards in the conduct of our business. 104 Results Corporate Center reporting CHF million, except where indicated Income Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions Depreciation of property and equipment Amortization of intangible assets Total operating expenses 1 Performance from continuing operations before tax Performance from discontinued operations before tax Performance before tax Additional information BIS risk-weighted assets (CHF billion) 2 Personnel (full-time equivalents) 3 As of or for the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 394 (5) 389 551 199 306 193 0 1,250 (860) (7) (867) 8.5 1,624 998 0 998 433 353 (73) 265 0 979 19 198 217 8.8 3,097 3,562 0 3,562 583 312 114 243 0 1,252 2,310 145 2,455 2,479 (61) (61) 27 (44) (27) 28 (3) (48) d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C 1 Includes expenses for the Company Secretary, Board of Directors and Group Internal Audit. 2 BIS risk-weighted assets (RWA) are according to Basel II. 3 Personnel numbers exclude full-time equivalents from private equity (part of Corporate Center): 0 for 2009, 1 for 2008, 3,843 for 2007. 105 UBS business divisions and Corporate Center Corporate Center 2009 Results Pre-tax profit from continuing operations declined to nega- tive CHF 860 million from positive CHF 19 million. nated debt. In comparison, 2008 included an accounting gain of CHF 3,860 million related to the MCNs issued in March 2008, which was offset by the CHF 3.4 billion nega- tive impact of the transaction between UBS and the Swiss National Bank and the placement of the abovementioned MCNs with the Swiss Confederation resulting in a total gain of CHF 0.4 billion. Operating income Total operating income decreased by CHF 609 million to CHF 389 million, mainly due to own credit related allocations of negative revenues to the Corporate Center, of which CHF 222 million were related to 2008. In addition, the Corporate Center reported a CHF 498 million loss on the closing of the UBS Pactual sale in 2009, which was largely related to for- eign exchange losses. These losses were partly offset by a net gain of CHF 297 million on the valuation of the manda- tory convertible notes (MCNs) issued in December 2008 and converted in August 2009, a gain of CHF 117 million on the revaluation of our option to acquire the SNB StabFund’s eq- uity, an additional foreign exchange gain of CHF 430 million due to the deconsolidation and liquidation of subsidiaries and a gain of CHF 304 million on the buyback of subordi- Operating expenses Total operating expenses increased to CHF 1,250 million from CHF 979 million, mainly due to a goodwill impairment charge of CHF 492 million relating to the sale of UBS Pac- tual, which was reallocated to the Corporate Center from the business divisions. Excluding this charge, operating ex- penses would have decreased by CHF 221 million, mainly due to the credit related to the UBS Pactual operating result which was transferred to the Corporate Center from the business divisions; the release of a provision related to a re- solved tax claim in connection with the acquisition of PaineWebber, as well as reduced advertising and sponsoring expenditures. These items were partly offset by higher re- structuring costs and accruals for variable compensation in 2009. 106 2008 Results The Corporate Center recorded a result from continuing op- erations of positive CHF 19 million in full-year 2008, down from a gain of CHF 2,310 million in 2007. This decline related mainly to a charge of CHF 3.4 billion following a transaction between UBS and the Swiss National Bank (SNB) in fourth quarter 2008. This charge reflected 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 included the fair valuation impact of the MCNs placed with the Swiss Confederation. The quarterly revaluation of the call component of the MCNs was reflected in a corresponding fluctuation in the results of the Corporate Center. This fluctuation was subject to the vol- atility of our share price and continued until the conversion of the MCNs into UBS shares. The loss from the SNB transaction was reported in the Corporate Center as it benefited the whole bank and not just the Investment Bank. For this pur- pose, at the 27 November 2008 Extraordinary General Meet- ing, shareholders approved 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, due to 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 issued in first quarter 2008, and a gain of CHF 174 million on the sale of our stake in Bank of China in the fourth quarter assisted the 2008 re- sult. Operating income Total operating income decreased to CHF 998 million in 2008 from CHF 3,562 million in 2007, largely due to the abovementioned SNB transaction and fair valuation of the MCNs in fourth quarter 2008, losses on swaps not fully eli- gible for hedge accounting, losses of CHF 192 million due to currency translation differences on partial disposals of an in- vestment in a consolidated investment fund, and a gain from the sale of our stake in Bank of China. The 2007 result was due to the CHF 1,950 million gain from the sale of our 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 979 million in 2008, down CHF 273 million from CHF 1,252 million in 2007, predominant- ly due to a sharp reduction of accruals for variable compensa- tion, declined advertising and sponsoring costs, lower project costs as well as decreased travel activities in 2008. These were partly offset by higher real estate restructuring provisions and a fair value adjustment in corporate real estate in 2008. d n a s n o i s i v i d s s e n i s u b S B U r e t n e C e t a r o p r o C 107 Risk and treasury management 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: Presentation form 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 the financial statements of this report. Risk management – Risk reduction remained a priority in 2009. As a result of our risk reduction initiatives, we ended the year with risk exposures commensurate with our risk capacity, although legacy risks remain significant and are targeted for contin- ued reduction. Effective risk management and control are essential to our success and we have made further progress in implementing the risk renewal program we initiated in 2008. In addition, the implementation of the settle- ment agreements relating to the US cross-border investigation remains a focus of management attention. Regulatory and tax authorities in a number of countries are focusing on cross-border banking activities, and we have launched a number of initiatives to improve the effectiveness of the policy and control framework of our cross-border wealth management business globally. We further reduced our risk exposure, which was reflected in declines in our stress loss measures as well as decreases in our credit and market risk portfolios. We also reduced our exposures to residual risk positions. Our reduction in risk exposures contributed to significant decreases in the size of our balance sheet and risk-weight- ed assets. We made further progress in implementing our risk renewal program. This has resulted in enhanced risk governance (including changes in risk management and control personnel), improved risk infrastructure and processes and the associated capabilities to capture, represent and monitor risks. We have also changed the firm’s capital optimization model and enhanced our funding and balance sheet management. 110 Treasury management – We continued to further strengthen and safeguard our liquidity position and adjusted funding targets while our focus was maintained on continuing asset reductions. Combined with the broad diversity of our funding sources, our contingency planning processes and our global scope, these measures have enabled us to maintain a balanced asset / liability profile throughout the recent market dislocation. Additionally, signs of our return towards financial stability included the successful tender for certain subordinated notes in March and, in August, the exit of the Swiss Confederation’s stake in UBS through conversion of the mandatory convertible notes and immediate placement of shares in the market. At year-end 2009, our BIS tier 1 ratio amounted to 15.4% and the BIS total capital ratio to 19.8%. We achieved this by continued de-risking of our assets, which is reflected in our 32% BIS risk-weighted assets reduction. Eligible tier 1 capital decreased from CHF 33.2 billion to CHF 31.8 billion. We were able to almost compensate the effects of losses incurred during 2009 and further negative impacts on equity, by the issuance of newly created shares in June. In 2009 we experienced a decline in customer deposits and net new money outflows in our asset gathering divisions. The effects of client deposit outflows, as well as the temporary reduction in access to wholesale term debt markets during the first few months of 2009, were readily compensated by funding from alternative sources and ongoing balance sheet reductions. Our total assets declined by 33% to CHF 1,341 billion on 31 December 2009, which led to a further improvement of our FINMA leverage ratio from 2.45% to 3.93%. Our funding sources were broadened by accessing an important new investor base through our inaugural European covered bond program. Risk and treasury management Risk management and control Risk management and control Risk reduction remained a priority in 2009. We further reduced our risk exposures, which was reflected in de- clines in our stress loss measures as well as decreases in our credit and market risk portfolios. We also reduced our exposures to residual risk positions such as monoline insurers, student loan auction rate securities and some leveraged finance commitments. Our reduction in risk exposures contributed to significant decreases in the size of our balance sheet and risk-weighted assets. As a result of our risk reduction initiatives, we ended the year with risk exposures commensurate with our risk capacity, although legacy risks remain significant and are targeted for continued reduction. Effective risk management and control are essential to our success and we have made further progress in implementing the risk renewal program we initiated in 2008. In addition, the implementation of the settlement agreements relating to the US cross-border investigations remains a focus of management attention. Regulatory and tax authorities in a number of countries are focusing on cross- border banking activities, and we have launched a number of initiatives to improve the effectiveness of the policy and control framework of our cross-border wealth management business globally. Summary of key developments in 2009 The important developments that took place in 2009 with regard to risk management and control include: – A significant reduction in our risk exposures during the year was reflected in our stress loss measures as well as reductions in our average and period-end Value-at-Risk (VaR), a decrease in our credit risk portfolios and lower exposures to residual risk positions. We commuted trades with a notional value of approximately USD 7 billion with several monoline insurers which contributed to a reduc- tion in our net exposures to monoline insurers after cred- it valuation adjustments to USD 2.3 billion (excluding hedges). Approximately USD 1.6 billion at par of our ag- gregate exposures to student loan auction rate securities were either redeemed by issuers or sold in the secondary market. Our legacy leveraged finance positions were also reduced through sales and writedowns. – The decrease in our risk exposures contributed to signifi- cant reductions in our balance sheet by 33% to CHF 1,341 billion and our risk-weighted assets by 32% to CHF 206.5 billion at 31 December 2009 compared with the end of the prior year. – Our credit loss expenses were approximately 40% lower at CHF 1.8 billion for 2009 compared with CHF 3.0 billion for the prior year. – We significantly enhanced our stress testing framework which comprises portfolio-specific stress tests as well as combined firm-wide stress tests. Our firm-wide stress testing captures all major risks across our business divi- sions and is one of the most critical inputs for discussions between management, our Board of Directors (BoD) and our regulators on the risk profile of our firm. We carried out a stress test specified by the Swiss Financial Market Supervisory Authority (FINMA) which was designed to as- sess the resilience of the large Swiss banks in the event of a severe economic downturn, and FINMA reported on 2 October 2009, “that even after the effect of a severe stress event they (the two large systemically relevant banking groups in Switzerland which includes UBS) would still maintain a stable capital base with a Tier 1 capital ratio over 8%.” – We changed the calibration of our management VaR from a 10-day 99% measure to a 1-day 95% measure. We consider that a 1-day 95% VaR reflects the way that trading risks are viewed and managed by the business and can be more directly compared with mark-to-market revenues. – As a result of management’s investigation into the losses we experienced in 2007 and 2008, we launched a com- prehensive remediation program in the Investment Bank. We made further progress in implementing this program and developing sustainable solutions. Our remediation activity has resulted in enhanced risk governance includ- ing changes in risk management and control personnel, and we have improved our risk infrastructure and pro- cesses and the associated capabilities to capture, repre- sent and monitor risks. We have also changed the firm’s capital optimization model and enhanced our funding and balance sheet management. – In connection with the settlements relating to the US cross-border matter, we established a governance and control framework designed to ensure that we perform the obligations assumed in those settlements and to manage related matters including the exit from the af- fected US cross-border business activities. We have also 112 established new standards, controls and training pro- grams for conducting cross-border business globally in compliance with applicable laws and regulations. Addi- tional measures to address operational risks related to that business are being developed and put into effect under our Risk Effectiveness Project, including the com- munication of clear compliance expectations by senior management and the implementation of new disciplin- ary processes. d e t i d u A Our risk management and control principles are imple- mented via a risk management and control framework. The framework comprises qualitative elements such as policies and authorities, and quantitative components including risk measurement and limits. The framework is dynamic and is adapted as the firm’s businesses and the market environment evolve. It includes clearly defined processes to deal with new business initia- tives and complex or unusual transactions. – Our emphasis on risk awareness has been actively strengthened through the greater empowerment of our Control functions by our BoD and Group Chief Executive Officer (CEO). d e t i d u A The risk assessment and management oversight per- formed by the BoD considers evolving best practices and is intended to conform to statutory requirements as is the re- lated disclosure in this section. – Our Total Reward Principles, which summarize the com- pensation structure for our employees, include a focus on sustainable profitability as well as effective risk and capital management. Risk Control is actively involved in our com- pensation processes which are designed to support ap- propriate and controlled risk taking by our businesses. ➔ Refer to the “Credit risk“, “Market risk“, “Operational risk“, “Risk concentration” and “Liquidity and funding manage- d e t i d u A ment“ sections of this report for more information ➔ Refer to the “Compensation and shareholdings” section of this report for more information on our compensation practices ➔ Refer to “Note 21 Provisions and litigation” in the “Financial information” section of this report for more information in connection with the US cross-border matter Risk management and control principles d e t i d u A We have five key principles which are intended to support the firm in achieving an appropriate balance between risk and return. These principles are: – Protection of financial strength by controlling our overall risk exposures and assessing potential risk concentrations at the position and portfolio levels, and in combination across all risk types and business divisions. – Reputation protection which depends, among other things, on the effective management and control of risks. Our risk culture demands that all employees make the protection of our reputation an overriding concern. – Business management is accountable for all risks and is responsible for the continuous and active management of risk exposure to ensure that risk and return are balanced. – Independent control of risk through risk control functions which monitor the effectiveness of business risk manage- ment and oversee risk-taking activities. – Disclosure of risk to provide comprehensive, transparent and periodic reporting to senior management, the BoD, shareholders, regulators, rating agencies and other stake- holders. Risk management and control responsibilities Key roles and responsibilities related to risk management and control are: – The BoD is responsible for determining the firm’s risk prin- ciples, risk appetite and major portfolio limits, including the allocation of certain of these limits to the business divisions. The BoD is supported by a BoD Risk Committee which monitors and oversees the firm’s risk profile and the implementation of the risk framework established by the BoD. The BoD Risk Committee also assesses and ap- proves the firm’s key risk measurement methodologies and control principles. – The Group Executive Board (GEB) is responsible for the implementation of the risk framework, controls the firm’s risk profile and approves major risk policies. – The Group CEO is responsible for the results of the firm, has risk control authority over transactions, positions and exposures, and is also responsible for the allocation of portfolio limits to the business divisions. – The business division CEOs are accountable for the re- sults of their respective business divisions, which in- cludes responsibility for the active and continuous man- agement of risk exposures to ensure that risks and returns are balanced. – The Group Chief Risk Officer (CRO) reports directly to the Group CEO and has functional and management au- thority over risk control throughout the firm. Risk Con- trol provides independent oversight of risk and is re- sponsible for implementing the risk control processes for credit, country, market, investment and operational risks. This includes establishing methodologies to mea- sure and assess risk, setting risk limits and developing and operating an appropriate risk control infrastructure. The risk control process is supported by a framework of policies and authorities which are delegated to Risk Con- trol Officers corresponding with their experience and scope of responsibilities. 113 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Risk management and control d e t i d u A – The Group Chief Financial Officer (CFO) is responsible for ensuring that disclosure of our financial performance is clear and transparent and meets regulatory requirements and corporate governance standards. The Group CFO is also responsible for implementing the risk management and control frameworks for capital management, liquidi- ty, funding and tax. d e t i d u A – The Group General Counsel (GC) is responsible for im- plementing the firm’s risk management and control principles for legal matters and for ensuring compliance with all laws and regulations in each of the jurisdictions in which we operate. Risk categories d e t i d u A The risks faced by our businesses can be broken down into three different categories: primary risks, consequential risks and business risks. Primary and consequential risks result from our business activities and are subject to independent risk control. Primary risks consist of credit risk, country risk, market risk (including issuer risk) and investment risk. Consequential risks consist of operational risk, liquidity and funding risks, legal and compliance risks and tax risks. Further details on primary and consequential risks are provided below: – Credit risk – the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations. – Country risk – the risk of loss resulting from country- specific events. It includes transfer risk, whereby a country’s authorities prevent or restrict the payment of an obligation, as well as systemic risk events arising from country-specific political or macroeconomic devel- opments. – Market risk and investment risks – the risk of loss result- ing from changes in market variables, whether to our trading positions or financial investments. – Operational risk – the risk of loss resulting from inade- quate or failed internal processes, people and systems, or from external causes, whether deliberate, accidental or natural. This includes risks related to legal and compli- ance and tax matters. – Liquidity and funding risks – the risk that we might be un- able to either meet our payment obligations when due or borrow funds in the market at an acceptable price to fund actual or proposed commitments. Business risks arise from the commercial and economic risks inherent in our business activities and it is manage- ment’s responsibility to manage these risks. ➔ Refer to the “Credit risk”, “Market risk”, “Operational risk” and “Liquidity and funding management” sections of this report for a description of the control frameworks for these risk categories Risk measurement A variety of methodologies and measures are applied to quantify the risks of our portfolios and risk concentrations. Risks that are not well reflected by standard measures are subject to additional controls, which may include pre-ap- proval of transactions and specific restrictions. Models to quantify risk are generally developed by dedicated units within the firm-wide and business division-facing control functions. We require that valuation and risk models which could impact the firm’s books and records be independently verified and subjected to ongoing monitoring and control by the Group CRO and Group CFO Organizations. Statistical loss and stress loss We assess potential future losses using two complementary types of risk measures: statistical loss and stress loss. Statistical loss Statistical loss measures include VaR, Expected Loss (EL) and Earnings-at-Risk (EaR). VaR estimates the losses which could potentially be realized over a set time period at an estab- lished level of confidence. EL is used to measure the average annual costs that are expected to arise from our credit port- folios and from operational risks. EaR comprises a core of statistical measures overlaid with management judgment and measures the potential shortfall in our earnings which could potentially be realized over a set time period at an es- tablished level of confidence. ➔ Refer to the “Credit risk”, “Market risk” and “Operational risk” sections of this report for a description of the firm's key statistical loss measures Stress loss As a complement to our statistical loss measures, we per- form stress testing. Stress loss is the loss that could result from extreme events under specified scenarios. We use stress testing to quantify our exposures to extreme and unusual market movements and to enable us to identify, understand and manage our potential vulnerabilities and risk concentra- tions. During 2009 we significantly enhanced our stress test- ing framework, which incorporates a comprehensive range of portfolio-specific stress tests as well as combined firm- wide stress tests. Portfolio-specific stress tests are measures that focus on risks of specific portfolios within the business divisions. Our portfolio stress loss measures are characterized by past events but also include forward-looking elements. Our stress scenari- os for trading risks were enhanced in 2009 to more accurately capture the liquidity characteristics of different markets and positions. Our stress frameworks include a scenario which re- 114 flects the extreme market conditions that were experienced at the height of the financial crisis in fourth quarter 2008. Combined firm-wide stress tests were further developed in 2009 to capture the firm’s exposure to global systemic events, including a severe global recession. These stress tests are based on forward-looking macro-economic and market event scenarios calibrated to different levels of severity. The evolution of economic variables and market indicators under these scenarios is defined and applied to our entire risk port- folio. The impact of primary, consequential and business risks is assessed with the aim of calculating the loss and cap- ital implications were these stress scenarios to be realized. Stress test results are included in risk reporting and are fully integrated into the risk control, risk appetite and business planning processes of the firm. Our firm-wide stress testing, which captures all major risks across our business divisions, is one of the key inputs for discussions between management, our BoD and our regulators on the risk profile of our firm. In 2009 we carried out a FINMA specified stress test which was designed to assess the resilience of the two large Swiss banks in the event of a severe economic downturn, encompassing a deep worldwide recession, accompanied by a significant dete- rioration in the financial and property markets. FINMA report- ed on 2 October 2009 “that even after the effect of a severe stress event they [the two large systemically relevant banking groups in Switzerland which includes UBS] would still maintain a stable capital base with a Tier 1 capital ratio over 8%.” We continue to provide detailed stress analyses to FINMA in accor- dance with their requirements. Our stress scenarios are reviewed, updated and expanded regularly in the context of the macro-economic and geopo- litical environment by a committee comprised of representa- tives from the business divisions, Risk Control and Economic Research. Our stress testing therefore attempts to provide a control framework that is forward-looking and responsive to changing market conditions. However, the market moves experienced in actual stress events may differ from moves envisaged in our scenario specifications. Most major financial firms employ stress tests, but their approaches vary significantly, and there are no industry standards defining stress scenarios or the way they are ap- plied to a firm’s positions. Consequently, comparisons of stress results between firms can be misleading and there- fore we, like most of our peers, do not publish quantitative stress test results. Group risk appetite framework Our risk appetite framework was enhanced in 2009. We have established risk appetite objectives in respect of earnings and capital levels that we seek to maintain even after experiencing severe losses over a defined time horizon. In order to monitor our risk profile against our risk appetite, we use our two com- plementary firm-wide risk measurement frameworks; EaR (to- gether with its extension Capital-at–Risk or CaR) and Com- bined Stress Testing (CST). Both frameworks capture risks across all of our business divisions and from all major risk cat- egories – primary risks, consequential risks and business risks. These measures are significant components of our risk con- trol, capital management and business planning processes and are described in more detail as follows: – EaR is measured as the potential shortfall in earnings at a 95% confidence level and is evaluated over both 3-month and 1-year periods. – CaR extends EaR to consider the impact on BIS tier 1 cap- ital of a more severe earnings shortfall and is measured at confidence levels higher than 95%. – CST was incorporated into the risk appetite framework in 2009 to supplement EaR and CaR. As described under “Stress loss” above, our firm-wide stress tests evaluate the impact across our risk portfolios (and thereby on our earnings and capital) based on specified macro-economic stress scenarios. Our risk appetite is established by the BoD. Risk appetite is based on our risk capacity, which is in turn based on our capital and budgeted earnings resources. Our overall risk appetite is set as an upper limit covering the aggregate risk exposure for each risk appetite objective (taking into account inherent limi- tations in the precision of risk exposure measures that focus on extreme market and economic events). Comparison of the firm’s risk exposure with our risk capacity under prevailing op- erating conditions as well as prospective business plans serves as an input to the risk limit framework. This comparison is also a key tool to support management decisions on potential ad- justments to the risk profile of our firm. Risk reduction remained a priority for the firm in 2009, and we further reduced our risk exposure which was reflect- ed in our stress measures and decreases in our market and credit risk portfolios, including reductions in our residual risk positions. As a result, we ended the year with risk exposures commensurate with our operating risk capacity. ➔ Refer to the “Credit risk”, “Market risk” and “Risk concentration” sections of this report for more information on our risk exposures Risk disclosures The measures of risk exposure that we use may differ de- pending on the purposes for which exposures are calculated: financial accounting under IFRS, determination of our regu- latory capital, or our internal management of the firm. The exposures detailed in the “Credit risk” and “Market risk” sections below are typically based on our internal manage- ment view of risk exposure. ➔ Refer to the “Basel II Pillar 3” section of this report for further information on the exposures we use in the determination of our required regulatory capital 115 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Risk management and control Credit risk d e t i d u A d e t i d u A Credit risk is the risk of loss resulting from the failure of 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 in foreign exchange trans- actions where we have honored our obligation but the counter- party fails to deliver the counter-value (“settlement risk”). Alter- natively, it can be triggered by economic or political difficulties in the country in which a counterparty or issuer of a security is based or where it has substantial assets (“country risk”). Sources of credit risk Credit risk arises from traditional banking products such as loans, commitments to lend and contingent liabilities (for ex- ample, letters of credit) as well as from “traded products”: OTC derivative contracts; exchange-traded derivatives; and securities financing transactions such as repurchase agree- ments (repos and reverse repos) and securities borrowing and lending transactions. The risk control processes applied to these products are generally the same, although the ac- counting treatment may vary as products can be carried at amortized cost or fair value depending on the product type and the nature of the exposure. A form of credit risk also arises on securities and other obligations in tradable form, as their fair values are affected by changing expectations re- garding the probability of issuers failing to meet these obli- gations or when actual failures occur. Where these securities and obligations are held in connection with a trading activity, we view the risk as a market risk. Many of the business activities of Wealth Management & Swiss Bank and the Investment Bank expose us to credit risk, while credit risk exposures from Wealth Management Amer- icas and Global Asset Management are less material. Wealth Management & Swiss Bank offers private and corporate clients in Switzerland and wealth management clients inter- nationally (except those served by Wealth Management Americas) a variety of credit products. The Investment Bank provides corporate, institutional, intermediary and alterna- tive asset management clients access to a full range of cred- it and capital markets instruments across many product classes, and engages with other professional counterparties in trading and risk management activities. Credit risk control Limits and controls Limits are established for individual counterparties and coun- terparty groups covering banking and traded products, as d e t i d u A d e t i d u A well as settlement amounts. These limits put constraints not only on the current outstanding amount but also on contin- gent commitments and the potential future exposure of trad- ed products. Credit engagements may not be entered into without the appropriate approvals and adherence to limits. In the Investment Bank, a distinction is made between exposures intended to be held to maturity (“take and hold exposures”) and those which are intended to be held for a short term, pending distribution or risk transfer (“temporary exposures”). Credit risk concentrations can arise if clients are engaged in similar activities, are located in the same geographical region or have comparable economic characteristics such that their ability to meet contractual obligations would be similarly af- fected by changes in economic, political or other conditions. To avoid credit risk concentrations, we seek to establish limits and operational controls to constrain risk concentrations at portfolio and sub-portfolio levels, for example with regard to sector exposures, country risk or specific product exposures. Risk mitigation We actively manage the credit risk in our portfolios by taking collateral against exposures and utilizing credit hedging. In Wealth Management & Swiss Bank, the majority of loans are extended on a secured basis. For real estate financing, a mortgage over the property is taken to secure the claim. Commercial loans may also be secured by mortgages on business premises or other real estate. We apply measures to evaluate collateral and determine maximum loan-to-value ratios including an assessment of income cover. “Lombard loans” are made against the pledge of eligible marketable securities or cash. The Investment Bank also takes collateral in the form of marketable securities and cash in its OTC derivatives and securities financing businesses. Discounts (“haircuts”) are generally applied to reflect the quality, liquidity and volatility of the underlying collateral. Ex- posure and collateral values are continuously monitored and margin calls or close-out procedures are enforced when the market value of collateral falls below a predefined trigger level. Concentrations within individual collateral portfolios and across clients are also monitored where relevant and may affect the haircut applied to a specific collateral pool. Our OTC derivatives trading is generally conducted under bilateral International Swaps and Derivatives Association (ISDA) or ISDA-equivalent master trading agreements, which allow for the close-out and netting of all transactions in the event of default. We also have two-way collateral agree- ments with major market participants under which either party can be required to provide collateral in the form of 116 d e t i d u A cash or marketable securities when exposure exceeds a pre- defined level. Our OTC derivatives activity with lower-rated counterparties is typically conducted under one-way collat- eral agreements where only the counterparty is required to provide us with collateral. For certain counterparties, like hedge funds, we may also use two-way collateral agree- ments. We have clearly defined processes for netting and collateral agreements, including the requirement to have a legal opinion regarding the enforceability of contracts in rel- evant jurisdictions in the case of insolvency. We actively manage the credit risk of our portfolios using credit hedging, primarily in the Investment Bank, with the aim of reducing concentrations to specific counterparties, sectors or portfolios. Hedging measures 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, with high-grade market counterparties. We observe strict standards for recog- nizing credit hedges; for example, we do not typically recog- nize credit risk mitigants such as proxy hedges (credit protec- tion on a correlated but different name) or index CDS for the purposes of monitoring exposures against limits. Buying cred- it protection creates credit exposure against the hedge pro- vider. We monitor our exposures to credit protection providers and the effectiveness of credit hedges as part of our overall credit exposures to the relevant counterparties. Where there is significant correlation between a counterparty and the hedge provider (so-called “wrong-way risk”), our policy is to discour- age such activity, but in any event not to recognize any hedge benefit in credit risk measures. ➔ Refer to the “Basel II Pillar 3” section of this report for more information on credit derivatives Credit risk measurement d e t i d u A We have developed tools and models to measure credit risk. Exposures to individual counterparties are measured based on three generally accepted parameters: probability of default, exposure at default and loss given default. These parameters are the basis for the majority of our internal measures of cred- it risk and are key inputs to the regulatory capital calculation under the Advanced Internal Rating-Based approach of Basel II. We also use models to derive the portfolio credit risk mea- sures of expected loss, statistical loss and stress loss. Probability of default The probability of default (PD) is an estimate of the likeli- hood of a counterparty defaulting on its contractual obliga- tions. This probability is assessed using rating tools tailored to the various categories of counterparties. These categories are also calibrated to our proprietary credit rating scale (“Masterscale”) designed to ensure a consistent assessment of default probabilities across counterparties. We regularly assess the performance of our rating tools and adjust our model parameters as necessary. In addition to using ratings for credit risk measurement, we use them as an important input to determine credit risk approval authorities. In the Investment Bank, rating tools are applied by broad segments including banks, sovereigns, corporates, funds, hedge funds and commercial real estate. We determine our choice of the relevant assessment criteria (for example, fi- nancial ratios and qualitative factors) for the rating tools on the basis of various statistical analyses, externally available information and expert judgment. Within our retail and corporate banking business in Swit- zerland, we rate our business and corporate clients in the small-to-medium enterprise segment (SMEs) using statisti- cally developed scorecards. The underlying data used in our scorecards is predominantly based on a combination of fi- nancial information relating to clients, qualitative criteria and our credit loss history over several years. In order to rate our large corporate clients domiciled in Switzerland, Wealth Management & Swiss Bank uses templates established for this segment by our Investment Bank. We assess the proba- bility of default from loans secured on owner-occupied or investment properties with a model that takes loan-to-value ratios and debt service capacity of the obligor into account. We rate lombard loan exposures by means of a model simu- lating potential changes in the value of the collateral and the probability that it may be lower than the loan amount. Our Masterscale expresses default probabilities that we de- termine through our various rating tools by means of distinct classes whereby each class incorporates a range of default probabilities. Counterparties migrate between rating classes as our assessment of their probability of default changes. The ratings of the major credit rating agencies and their equivalent on our Masterscale are shown in the “UBS inter- nal rating scale and mapping of external ratings” table. The mapping is based on the long-term average one-year default d e t i d u A UBS internal rating scale and mapping of external ratings UBS Rating Description Moody’s Investor Services equivalent Standard & Poor’s equivalent t n e m e g a n a m y r u s a e r t d n a k s i R 0 and 1 Investment grade Aaa 2 3 4 5 6 7 8 9 10 11 12 13 14 Sub-investment grade Aa1 to Aa3 A1 to A3 Baa1 to Baa2 Baa3 Ba1 Ba2 Ba2 Ba3 B1 B2 B3 AAA AA+ to AA– A+ to A – BBB+ to BBB BBB – BB+ BB BB BB – B+ B B – Defaulted Caa to C D CCC to C D 117 Risk and treasury management Risk management and control rates that we observed for each external rating grade. Ob- served defaults by rating agency may vary through econom- ic cycles, and we do not necessarily expect the actual num- ber of defaults in our equivalent rating band to equal the rating agency average in any given period. We periodically assess the long-term average default rates of credit rating agencies’ grades and we adjust their mapping to our Mas- terscale as necessary to reflect any material changes. Exposure at default Exposure at default (EaD) represents the amount that we ex- pect to be owed by a counterparty at the time of default. We derive EaD from our current exposure to the counterparty and the possible future development of that exposure. The EaD of a loan is the drawn or face value of the loan. For loan commitments and contingent liabilities, the EaD includes the amount drawn as well as potential future amounts that may be drawn, which are estimated based on historical observations. For traded products, we derive the EaD by modeling the range of possible exposure outcomes at the time the coun- terparty defaults. For securities financing transactions, we assess the net amount that may be owed to us or that we may owe to others taking into account the impact of market moves over the potential time it takes to close out all our positions. For exchange-traded derivatives, our calculation of EaD takes into account daily cash margining. We derive the EaD for OTC derivatives by modeling the potential develop- ment of replacement values of the portfolio of trades by counterparty (“potential credit exposure”), after taking into account legally enforceable netting agreements. For collater- alized OTCs, our potential credit exposure takes into account the development of collateral values and models the price correlation between the various instruments. When measuring individual counterparty exposure against credit limits, we consider the maximum likely exposure mea- sured to a high confidence level over the full life of outstand- ing obligations. However, when aggregating exposures to dif- ferent counterparties for portfolio risk measurement purposes, we use the expected exposure to each counterparty at a given time period (usually one year) generated by the same model. We monitor the performance of our exposure models by backtesting and benchmarking them, whereby model out- comes are compared against actual results based on our in- ternal experience as well as externally observed results. We assess our exposures where there is a material correla- tion between the factors driving the credit quality of the counterparty and those driving the potential future value of our traded product exposure (“wrong-way risk”) and we have established specific controls to address these risks. Loss given default We determine loss given default (LGD) based on the likely recovery rate of claims against defaulted counterparties, which is a function of the type of counterparty and any cred- it mitigation or support by way of security interest or guaran- tee. LGD estimates include loss of principal and interest and other amounts, such as workout costs, including the cost of carrying an impaired position during the workout process. In our Investment Bank, LGD estimates are based on an assess- ment of key risk drivers such as industry segment, collateral and seniority of a claim, and a country’s legal environment and bankruptcy procedures, supported by our internal loss data and external information where available. In our Swiss portfolio, the LGD differs by counterparty and collateral type and is statistically estimated based on our internal loss data. Where we hold collateral, such as marketable securities or a mortgage over a property, loan-to-value ratios are a key fac- tor in determining LGD. Expected loss Credit losses are an inherent cost of doing business, but the occurrence and amount of credit losses can be erratic. In or- der to quantify future credit losses that may be implicit in our current portfolio, we use the concept of expected loss (EL). EL is a statistical measure which we use to estimate the annual costs that we expect to experience on average from positions in our current credit portfolio that become im- paired. The EL for a given credit facility is a function of the three components described above: PD, EaD and LGD. We aggregate the ELs for individual counterparties to derive our expected portfolio credit losses. EL is a basis for quantifying credit risk in all our portfolios. It is also the starting point for the measurement of our port- folio statistical loss and stress loss, and may be used as an input to value certain products. ➔ Refer to the discussion on “Impairment and default – distressed claims” below for more information Statistical and stress loss We use a statistical modeling approach to estimate the loss profile of our credit portfolios over a one-year period to a specified level of confidence. The mean value of this loss distribution is the expected loss and the variation around it is driven by systematic default relationships amongst counterparties within and between segments and is sensitive to concentration risks on individual coun- terparties and groups. The results of this analysis provide an indication of the level of risk in our portfolio and the way it may develop over time. Stress loss is a scenario-based measure which comple- ments our statistical modeling approach. We use it to assess our potential loss in various stress scenarios in which we as- sume that one or more of the three key credit risk parame- ters will deteriorate substantially. We run stress tests on a regular basis and use them to monitor our portfolios and identify potential risk concentrations. For certain of our port- folios and segments, stress loss may also be subject to limits. 118 Composition of credit risk – UBS Group The exposures detailed in the tables in this section are based on our management view of credit risk. ➔ Refer to the “Basel II Pillar 3” section of this report for more information on the credit exposures used in the determination of our required regulatory capital and additional information on credit derivatives ➔ Refer to “Note 23 Derivative instruments and hedge accounting“ and “Note 29c Measurement categories of financial assets and liabilities“ in the “Financial infor- mation” section of this report for further information on IFRS required disclosures on derivatives and credit risk The table “Credit exposure by business division” shows a breakdown of our banking and traded product exposures before and after impairments, credit valuation adjustments and specific hedges. Portfolio hedges such as index CDS are not included for this analysis. Exposures to OTC derivatives are shown in the table as net positive replacement values after the application of legally enforceable netting agree- ments and the deduction of cash collateral. ETD exposures take into account initial and variation margin, and securities financing exposures are shown net of the collateral we re- ceived. Comparatives for 2008 are also shown on this basis. Our total credit exposure before deductions amounted to CHF 451 billion on 31 December 2009, a significant de- crease of CHF 123 billion since the end of 2008. This de- crease reflects the measures we took in 2009 to actively re- duce our risk exposures in addition to market movements which drove down the positive replacement values of our derivatives. Our banking product exposures decreased by CHF 40 billion to CHF 355 billion at 31 December 2009 mainly driven by reductions in loans and balances with cen- tral banks. Our traded products exposures, which arise large- ly in our Investment Bank, reduced by CHF 82 billion to CHF 96 billion at 31 December 2009 due to the significant de- crease of CHF 68 billion in the replacement values of OTC derivatives. The largest component of our credit exposure before deductions at 31 December 2009 was our lending portfolio (due from banks and loans) at CHF 262 billion or 58% of our total credit exposure. Of this, CHF 200 billion was attributable to Wealth Management & Swiss Bank. Further information on the composition and credit quality of Wealth Management & Swiss Bank’s lending portfolio and the Investment Bank’s lending and OTC derivatives portfolios is provided in this section. Analysis of our Wealth Management & Swiss Bank’s portfolios is typically based on gross exposure (i.e. before deduction of hedges) as the majority of our exposure is secured by collateral or mortgages against property. Analysis of our Investment Bank’s portfolios is generally based on net ex- posure (i.e. after deduction of hedges) because we actively uti- lize credit hedging to manage our risks in this portfolio. t n e m e g a n a m y r u s a e r t d n a k s i R Credit exposure by business division CHF million Balances with central banks Due from banks Loans Contingent claims Undrawn irrevocable credit facilities Banking products OTC Derivatives Exchange traded derivatives Securities financing transactions Traded products Total credit exposure Total credit exposure, net 4 Wealth Management & Swiss Bank Wealth Management Americas Investment Bank Other 1 UBS 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 8,589 2,683 17,629 5,510 197,178 206,704 11,908 7,236 14,282 2,775 0 1,074 21,496 385 498 0 1,096 19,479 405 13 227,594 246,899 23,453 20,994 3,583 1,059 0 4,642 5,637 1,281 2,942 9,860 44 611 185 840 232,236 256,759 230,173 255,565 24,293 24,289 9,525 13,959 25,351 4,881 49,356 103,072 2 58,121 14,933 16,939 11,528 12,044 43,806 4,056 54,201 125,636 2 124,393 21,560 20,203 0 282 101 141 0 524 947 0 0 63 948 91 1,102 22,096 22,071 89,993 166,157 193,065 291,793 141,838 229,597 947 1,471 1,466 0 382 730 149 0 1,261 3 817 0 844 1,661 2,922 2,922 18,114 17,998 29,157 19,032 244,126 270,719 17,315 57,090 354,643 62,695 16,603 17,124 18,892 56,990 394,789 3 130,910 23,789 24,080 96,422 178,780 451,065 573,569 397,766 510,155 1 Includes Global Asset Management and Corporate Center. 2 IB banking products excluding money market and nostro accounts amount to CHF 82,084 million (31.12.2008: CHF 105,595 million). 3 Does not include financial assets designated at fair value for an amount of CHF 961 million. 4 Net of allowances, provisions, credit valuation adjustments, hedges. 119 d e t i d u A Risk and treasury management Risk management and control Composition of credit risk – business divisions Wealth Management & Swiss Bank The total gross banking products exposure of Wealth Man- agement & Swiss Bank was CHF 228 billion on 31 December 2009 down by CHF 19 billion since the end of 2008. The high quality of this portfolio is illustrated by the rating and LGD distributions shown in the “Wealth Management & Swiss Bank: distribution of gross banking products exposure across UBS internal rating and loss given default buckets” table. Approximately 60% of Wealth Management & Swiss Bank’s banking product portfolio is rated investment grade and over 80% of it is categorized in the lowest LGD bucket of 0 – 25%. The reduction in exposures rated 0 related large- ly to a reduction in our balances with central banks. At 31 December 2009, Wealth Management & Swiss Bank’s gross lending portfolio (comprised of due from banks and loans) decreased to CHF 200 billion compared with CHF 212 billion at 31 December 2008. The decrease resulted largely from lower lombard lending due to continued dele- veraging by our clients. Over 90% of Wealth Management & Swiss Bank’s lending portfolio was secured by collateral, of which CHF 142 billion was secured by real estate and CHF 39 billion by marketable securities. The majority of the real estate exposure is secured by a diversified portfolio of resi- dential property (single and multi-family homes), which have typically exhibited a low risk profile. Wealth Management & Swiss Bank’s gross unsecured loan portfolio amounted to CHF 15.6 billion at 31 December 2009 down by CHF 2.7 billion since the end of 2008, and Wealth Management & Swiss Bank: distribution of gross banking products exposure across UBS internal rating and loss given default (LGD) buckets CHF million UBS internal rating 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Total non-defaulted Investment grade Sub-investment grade Defaulted 1 Gross banking products exposure Net banking products exposure 2 31.12.09 Loss given default (LGD) buckets 0–25% 26–50% 51–75% 76–100% 31.12.08 Weighted average LGD (%) Gross exposure Weighted average LGD (%) 5 28 25,523 18,503 21,502 43,013 38,265 15,577 12,738 7,652 1,478 897 167 48 185,398 108,575 76,823 185,398 N/A 3,708 5,987 3,432 4,367 3,261 5,017 2,540 2,348 2,078 1,993 613 281 56 28 35,710 25,773 9,937 35,710 N/A 9 129 481 214 460 991 233 439 7 2,965 1,294 1,671 2,965 N/A 1 1 1 999 1 1,003 1,003 1,003 N/A 38 39 22 22 12 12 13 15 16 22 21 20 21 21 17 13,625 5,232 27,750 29,938 24,830 50,657 44,346 18,735 14,810 9,447 1,875 1,990 155 93 243,483 152,032 91,451 3,416 246,899 245,705 39 39 21 22 14 13 13 15 17 23 20 19 19 30 18 Gross exposure 3,713 6,024 29,084 23,351 24,978 48,491 41,797 18,160 15,256 10,651 2,092 1,179 224 76 225,076 135,641 89,434 2,518 227,594 225,531 1 Includes CHF 24 million of off-balance sheet items. 2 Net of allowances and provisions for credit losses amounting to CHF 1,053 million and credit hedges notional amount of CHF 1,010 million. 120 half of this portfolio is rated investment grade. Approximate- ly 60% of the unsecured portfolio related to cash-flow based lending to corporate counterparties and 20% of the unse- cured loans related to loans to central or local governments at 31 December 2009. Wealth Management Americas The total gross banking products exposure of Wealth Man- agement Americas increased to CHF 23 billion on 31 Decem- ber 2009 compared with CHF 21 billion on 31 December 2008. This portfolio consists mainly of loans secured by mar- ketable securities. These loans are of high quality with 88% rated investment grade. Wealth Management & Swiss Bank: composition of lending portfolio, gross CHF million Secured by residential property Secured by commercial / industrial property Secured by securities Lending to banks Unsecured loans Total lending portfolio, gross Total lending portfolio, net 1 1 Net of allowances and credit hedges. t n e m e g a n a m y r u s a e r t d n a k s i R 31.12.09 122,106 20,378 39,136 2,683 15,558 199,861 198,714 31.12.08 121,551 20,181 46,743 5,510 18,228 212,214 211,044 Wealth Management & Swiss Bank: unsecured loans (excluding mortgages) by industry sector CHF million Construction Financial institutions Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services Other Total 31.12.09 31.12.08 263 895 74 2,599 1,984 4,176 778 1,778 2,768 243 302 2,045 61 2,700 2,941 4,533 878 2,249 2,287 232 15,558 18,228 121 Risk and treasury management Risk management and control Investment Bank The “Investment Bank: credit exposure by industry segment and rating” table shows the Investment Bank’s credit expo- sures to banking products and OTC derivatives before and after allowances, credit valuation adjustments and specific hedges. Portfolio hedges such as index CDS are not included for this analysis. The gross banking product exposures shown in this table exclude nostro accounts and money market bal- ances which are included in the “Credit exposure by busi- ness division” table. Almost 90% of the Investment Bank’s net OTC derivative portfolio was traded with counterparties rated investment grade, the majority of which were banks and regulated fi- nancial institutions where trading was conducted on a col- lateralized basis. 64% of the Investment Bank’s net banking products portfolio was rated investment grade, with the ma- jority of exposures related to its lending activities with corpo- rates and other non-banks. The “Net banking products exposure to corporates and other non-banks” table provides additional information on this portfolio, and provides a bridge from the Investment Bank’s total banking products (loans, contingent claims and undrawn irrevocable credit facilities) according to IFRS to our internal management view of this exposure. The subse- quent tables provide additional analysis of the portfolio by our internal rating and LGD, industry sector and geograph- ical region. The Investment Bank’s net banking products exposure to corporates and other non-banks decreased by CHF 17.7 bil- lion to CHF 41.3 billion at 31 December 2009 as a result of reduced lending activity, sales and writedowns of residual lev- eraged finance positions. The Investment Bank continued to actively manage the credit risk on this portfolio and at 31 De- cember 2009 it held CHF 39 billion of single name CDS hedg- es against its exposures to corporates and other non-banks. Investment Bank: credit exposure by industry segment and rating CHF million Total exposure 1 less: allowances / credit valuations adjustment (CVA) less: credit protection bought (credit default swaps, notional) Net exposure after allowances and after application of credit hedges of which: banks and regulated financial institutions of which: sovereigns and supranationals of which: corporates of which: monoline insurers of which: others of which: investment grade of which: sub-investment grade Banking products 31.12.09 82,084 (1,520) (39,314) 41,250 4,283 1,053 20,825 15,088 26,273 14,977 31.12.08 105,595 (1,526) (45,106) 58,963 4,447 1,043 28,727 24,746 39,659 19,304 OTC derivatives 31.12.09 58,121 (4,475) (5,741) 47,905 20,373 7,435 3,119 2,730 14,248 42,883 5,022 31.12.08 124,393 (9,907) (5,506) 108,980 45,131 16,820 9,554 6,153 31,322 100,345 8,635 1 Banking products: risk view; OTC derivatives: net replacement value, includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking law, based on the IFRS scope of consolidation. Investment Bank: net banking products exposure to corporates and other non-banks CHF million Loans Contingent claims and undrawn irrevocable credit facilities Total (IFRS view) less: internal risk adjustments margin accounts, cash collateral posted, other 1 less: internal risk adjustments reclassified securities 2 less: internal risk adjustments acquired auction rate securities less: internal risk adjustments traded loan commitments and funded risk participations Gross banking products exposure 3 less: specific allowances for credit losses and loan loss provisions 4 Net banking products exposure less: credit protection bought (credit default swaps) Net banking products exposure to corporates and other non-banks, after application of credit hedges 31.12.09 90,700 56,228 146,928 (36,455) (19,255) (7,982) (1,152) 82,084 (1,520) 80,564 (39,314) 41,250 31.12.08 111,798 62,391 174,189 (40,129) (21,840) (4,500) (2,125) 105,595 (1,526) 104,069 (45,106) 58,963 1 Includes margin accounts for ETD transactions, cash collateral posted by us against negative replacement values for OTC derivatives, cash / current accounts from prime brokerage (cash legs) and valu- ation differences caused by a different exposure treatment in Risk Control than in IFRS. 2 Includes reclassified auction rate securities in the amount of CHF 8.2 billion (31.12.08: CHF 8.4 billion). 3 IB banking products including money market and nostro accounts amount to CHF 103,072 million (31.12.2008: CHF 125,636 million). 4 Does not include other allowances for credit losses for an amount of CHF 188 million (31.12.08: CHF 226 million). 122 The Investment Bank’s net banking products exposure to corporates and other non-banks continued to be diversified across industry sectors and based on our assessment, the vast majority of the sub-investment grade exposures in this portfo- lio had a loss given default of 0–50% on 31 December 2009. ➔ Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report for more information on reclassified securities including carrying values of student loan auction rate securities, monoline protected assets and US commercial real estate positions Investment Bank: distribution of net banking products exposure to corporates and other non-banks, across UBS internal rating and loss given default buckets CHF million UBS internal rating Investment grade Sub-investment grade of which: 6 of which: 7 of which: 8 of which: 9 of which: 10 of which: 11 of which: 12 of which: 13 of which: defaulted Net banking products exposure to corporates and other non-banks, after application of credit hedges 31.12.09 31.12.08 Loss given default (LGD) buckets Exposure 0–25% 26–50% 51–75% 76–100% Weighted average LGD (%) 26,273 14,977 1,407 2,044 1,293 2,151 1,486 2,168 1,684 357 2,386 9,850 6,492 102 1,210 342 896 525 1,104 1,287 158 870 10,689 5,571 3,107 2,330 942 339 705 965 720 661 277 133 830 302 338 228 265 139 396 65 63 535 2,628 583 62 157 18 26 102 7 55 3 151 41,250 16,342 16,260 5,437 3,211 39 34 47 33 37 31 32 30 18 31 44 37 Weighted average LGD (%) 36 31 32 43 45 19 36 28 23 21 33 35 Exposure 39,659 19,304 2,199 2,307 1,370 3,811 1,674 4,422 687 221 2,612 58,963 Investment Bank: banking products exposure 1 by industry sector t n e m e g a n a m y r u s a e r t d n a k s i R CHF million Chemicals Electricity, gas, water supply Financial institutions Manufacturing Mining Public authorities Retail and wholesale Transport, storage and communication Other Total 1 Net banking products exposure to corporates and other non-banks, after application of credit hedges. Investment Bank: banking products exposure 1 by geographical region CHF million Switzerland Other Europe North America Latin America Asia / Pacific Africa / Middle East Total 1 Net banking products exposure to corporates and other non-banks, after application of credit hedges. 31.12.09 31.12.08 1,347 2,120 16,316 6,695 2,284 2,657 1,530 4,057 4,243 3,072 3,685 25,716 7,978 2,588 3,246 1,855 5,794 5,030 41,250 58,963 31.12.09 31.12.08 543 6,759 29,222 152 4,014 559 41,250 1,437 9,354 42,100 1,550 3,833 689 58,963 123 Risk and treasury management Risk management and control Loan to BlackRock fund In second quarter 2008, we sold a portfolio of US residential mortgage backed securities (RMBSs) for proceeds of USD 15 billion to the RMBS Opportunities Master Fund, LP (the “RMBS fund”), a special purpose entity managed by BlackRock Financial Management, 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. The RMBS fund amortizes the loan through monthly payments drawn from amounts collected in respect of the underlying assets. These collec- tions are allocated to the payment of interest and principal of the loan and to the holders of equity interests in the RMBS fund in accordance with the terms of the loan agreement. Alloca- tions to equity holders may be reduced or suspended in the event of specified declines in the aggregate notional balance of the portfolio, and we may assume control of the underlying assets in the event of a specified further decline in the notional balance. As of 31 December 2009, the loan had a balance outstanding of USD 7.1 billion (USD 9.2 billion at 31 Decem- ber 2008), taking into account amounts held in escrow. This loan balance is also reflected in the Investment Bank’s credit exposures shown in the tables on previous pages. Collections have been slower in 2009 than in 2008, primarily due to lower levels of voluntary prepayments and reductions in floating rate interest payments, in addition to the fact that the portfolio has amortized over time. The aggregate notional balance of the RMBS fund’s assets collateralizing the loan on 31 December 2009 was USD 16.0 billion. By notional balance, the portfolio was comprised primarily of Alt-A (52%) and sub-prime (32%) credit grades. In terms of priority, the portfolio was dominated by senior positions (92%). The RMBS fund is not consolidated in our financial statements. We continue to monitor the RMBS fund and its performance and will reassess the consolidation status if events warrant and deterioration of the underlying RMBS mortgage pools indicates that the equity investors in the fund no longer receive the majority of the risks and rewards. We also continue to assess the loan to the RMBS fund to determine whether it has been impaired. Developments through the year ended 31 December 2009 have not altered our conclusion that consolidation is not required, and the loan is not considered impaired. 124 Credit loss expenses Under IFRS our credit loss expenses charged to the income statement represent the total credit losses actually experi- enced in the period from banking products and securities financing transactions. d e t i d u A In 2009, we experienced net credit loss expenses of CHF 1,832 million, of which CHF 425 million was due to impair- ment charges taken on reclassified securities in the Invest- ment Bank. In comparison, we recorded net credit loss ex- penses of CHF 2,996 million in 2008. The Investment Bank recorded net credit loss expenses of CHF 1,698 million for 2009, compared with net credit loss expenses of CHF 2,575 million in 2008. Excluding the credit loss expenses from reclassified securities of CHF 425 million, the Investment Bank’s net credit loss expenses amounted to CHF 1,273 million in 2009. Wealth Management & Swiss Bank reported net credit loss expenses of CHF 133 million for 2009, compared with CHF 392 million in 2008. Releases of allowances made against lom- bard loans in 2009 contributed to this positive development. ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information on “incurred loss” concept Impairment and default – distressed claims d e t i d u A With respect to distressed claims resulting from banking products, we distinguish between loans that are “past due” and “impaired”. We consider a loan to be past due when a contractual payment has been missed. We consider a loan as impaired if it is probable that we will not fully recover all con- tractual payments due under the loan as a result of the bor- rower’s inability to meet its obligations after realization of available collateral. Past due but not impaired loans have suffered missed payments but are not considered impaired because we expect to collect all amounts due under the con- tractual terms of the loans or the equivalent value. We also assess derivative counterparties and claims from securities financing transactions for default and impairment using generally the same principles and processes that we use for banking products. We have processes to ensure that the carrying values of impaired claims are determined in compliance with IFRS re- quirements. Our credit controls applied to valuation and workout are the same for both amortized cost and fair-val- ued credit products. We assess each case and our workout strategy and estimation of recoverable amounts are inde- pendently approved. We also assess our portfolios of claims carried at amor- tized cost with similar credit risk characteristics for collective impairment to consider if these portfolios contain impaired obligations where the individual impaired items cannot yet be identified. Our portfolios considered impaired on a collective basis are not included in the totals of impaired loans in the tables shown in the discussion of the composition of credit risk for business divisions in the “Credit risk” section of this report. Our assessment of collective impairment differs depend- ing on the nature of the underlying obligations. In our retail and corporate banking business in Switzerland where de- layed payments are routinely observed, we typically review 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, we establish collective loan loss allowances based on the ex- pected loss for the portfolio over the average period between trigger events and the identification of individual impair- ment. Collective loan loss allowances of this kind are typically not required for our investment banking businesses because we continuously monitor individual counterparties and expo- sures to identify impairment events at an early stage. Additionally, for all our portfolios we assess whether there have been any unforeseen developments which might result in impairments that cannot be immediately identified. These events could be stress situations such as a natural disaster or a country crisis, or they could result from structural changes in the legal or regulatory environment. To determine whether an event-driven collective impairment exists, we use a set of global economic drivers to regularly assess the most vulnerable coun- tries and review the impact of any potential impairment event. The recognition of impairment in our financial statements depends on the accounting treatment of the claim. For prod- ucts 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, impair- ment is recognized through a credit valuation adjustment, which is charged to the income statement through the Net trading income line. ➔ Refer to “Note 27a Valuation principles” in the “Financial information” section of this report for more information on credit valuation adjustments Impaired loans, allowances and provisions The credit risk exposures reported in the “Allowances and provisions for credit losses” table represent the IFRS balance sheet view of our gross lending portfolio comprising the bal- ance sheet line items Due from banks and Loans. The table also shows the IFRS reported allowances for credit losses and impairments as well as our impaired lending portfolio. The table shows that our allowances and provisions for credit losses decreased by 8.4% to CHF 2,680 million at 31 De- cember 2009 from CHF 2,927 million at the end of 2008. As reported in second quarter 2009, we implemented a threshold for designating a reclassified security as an im- paired loan. Under this policy a reclassified security is consid- ered impaired if the carrying value at balance sheet date is 125 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Risk management and control Allowances and provisions for credit losses CHF million As of Due from banks Loans Wealth Management & Swiss Bank Wealth Management Americas Investment Bank Others 1 UBS 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 2,683 5,510 1,074 1,096 42,568 57,485 197,178 206,704 21,496 23,981 90,700 111,798 of which: related to reclassified securities 2 19,255 21,840 Total lending portfolio, gross 3 Allowances for credit losses 199,861 212,214 22,569 25,077 133,268 169,282 (1,034) (1,169) (4) (25) (1,642) (1,733) (162) (130) 282 101 383 0 382 730 46,606 64,473 309,475 343,213 19,255 21,840 1,113 356,081 407,685 0 (2,680) (2,927) (162) (130) of which: related to reclassified securities Total lending portfolio, net 4 Impaired lending portfolio, gross 5 of which: related to reclassified securities Estimated liquidation proceeds of collateral for impaired loans of which: related to reclassified securities Impaired lending portfolio, net of collateral Allocated allowances for impaired lending portfolio Other allowances and provisions Total allowances and provisions for credit losses in lending portfolio Allowances and provisions for credit losses outside of lending portfolio Ratios Allowances and provisions as a % of total lending portfolio, gross Impaired lending portfolio as a % of total lending portfolio, gross Impaired lending portfolio excluding reclassified securities as a % of total lending portfolio, gross excluding reclassified securities Allocated allowances as a % of impaired lending portfolio, gross Allocated allowances as a % of impaired lending portfolio, net of collateral 198,827 211,044 22,566 25,052 131,625 167,550 383 1,113 353,402 404,758 1,805 2,959 (530) (1,576) 1,275 1,383 984 49 1,146 24 1,034 1,169 19 24 4 0 4 4 0 4 0 39 5,056 1,090 (18) (1,670) (958) 4,436 200 (945) (94) 21 25 0 25 3,386 3,491 1,642 1,733 0 0 1,642 1,733 0 117 119 0.5 0.9 0.6 1.4 0.0 0.0 0.1 0.2 1.2 3.8 3.5 54.5 38.7 100.0 64.1 32.5 77.2 82.9 100.0 119.0 48.5 1.0 2.6 2.9 39.1 49.6 0 0 0 0 0 0 5 0.0 0.0 0.0 0.0 0 0 0 0 0 0 0 0.0 0.0 0.0 0.0 6,865 1,090 7,434 200 (2,200) (2,539) (958) (94) 4,665 4,895 2,630 49 2,904 24 2,680 2,927 141 143 0.8 1.9 1.7 38.3 56.3 0.7 1.8 1.9 39.1 59.3 1 Includes Global Asset Management and the Corporate Center. 2 This excludes reclassified loan underwriting positions with a value of CHF 1,789 million as of 31.12.09 (31.12.08: CHF 3,713 million), which are included in the risk view of loan exposures. 3 Excludes loans designated at fair value, but includes margin accounts for exchange-traded derivatives transactions, cash collateral delivered for OTC derivatives and cash current accounts from prime brokerage (cash leg) of total CHF 70,121 million (of which Due from banks: CHF 29,770 million, of which Loans: CHF 40,351 million) (31.12.08: CHF 95,610 million of which due from banks: CHF 46,757 million, of which loans: CHF 48,853 million). 4 Reconciles to the balance sheet carrying values of Due from banks and Loans, which are re- ported net of allowances for credit losses. 5 Excludes reclassified securities with adverse cash flow estimate revisions cumulatively below 5% of the carrying value at reclassification date, adjusted for redemptions. 31.12.08 numbers have been adjusted to reflect this change. Impaired assets by type of financial instrument d e t i d u A CHF million Impaired loans Impaired contingent claims Defaulted derivatives contracts Defaulted securities financing transactions Total 31.12.09 Total 31.12.08 1 Impaired exposure 6,865 350 4,607 98 11,920 13,947 Estimated liquidation proceeds of collateral (2,200) (47) (2,247) (2,539) Specific allowances, provisions and credit valuation adjustments Net impaired exposure (2,630) (90) (3,061) (51) (5,831) (7,252) 2,035 260 1,546 0 3,841 4,156 1 Impaired exposure was restated from CHF 15,658 million originally reported in our Annual Report for 2008, estimated liquidation proceeds of collateral was restated from CHF 3,930 million. In 2009, we implemented a threshold for designating a reclassified security as an “impaired loan”. Under this policy, a reclassified security is considered impaired if the carrying value at balance sheet date is on a cumulative basis 5% or more below the carrying value at reclassification date adjusted for redemptions. 126 d e t i d u A d e t i d u A on a cumulative basis 5% or more below the carrying value at reclassification date adjusted for redemptions. In order to ensure year-on-year comparability, we have restated our 31 December 2008 Investment Bank and the Group gross impaired lending portfolio accordingly. Our gross impaired lending portfolio decreased to CHF 6,865 million on 31 December 2009 from CHF 7,434 million on 31 December 2008. The ratio of the impaired lending portfolio to the total lending portfolio (both measured gross) was 1.9% on 31 De- cember 2009 compared with 1.8% on 31 December 2008. We reclassified loans and receivables with a carrying amount of CHF 58 million and CHF 224 million from im- paired to performing during 2009 and 2008, respectively. This reclassification occurred because the loans had either been renegotiated and the new terms and conditions met normal market criteria for the quality of the obligor and type of loan, or because the financial position of the obligor im- proved, enabling it to repay any past due amounts such that we deemed future principal and interest to be fully collect- ible in accordance with the original contractual terms. Collateral held against our impaired loans portfolio mainly consisted of real estate and multi-asset-backed secu- rities. It is our policy to dispose of foreclosed real estate as soon as practicable. The carrying amount of foreclosed prop- erty recorded in our balance sheet under Other assets at the end of 2009 and 2008 amounted to CHF 245 million and CHF 280 million, respectively. We seek to liquidate collateral held in the form of finan- cial assets expeditiously and at prices considered fair. This may require us to purchase assets for our own account, where permitted by law, pending orderly liquidation. The table “Impaired assets by type of financial instru- ment” includes impaired loans, impaired off-balance sheet claims and defaulted derivatives and repurchase / reverse d e t i d u A repo contracts, which are subject to the same workout and recovery processes. Our impaired assets decreased by CHF 2.0 billion to CHF 11.9 billion at 31 December 2009. After deducting allocated specific allowances, provisions and credit valuation adjustments of CHF 5.8 billion and the estimated liquidation proceeds of collateral of CHF 2.2 bil- lion, net impaired assets amounted to CHF 3.8 billion in 2009. ➔ Refer to “Note 9b Due from banks and loans” in the “Financial information” section of this report for more information on the changes in allowances and provisions for credit losses Past due but not impaired loans The table below shows a breakdown of our total loan bal- ances on loans where payments have been missed but which we do not consider impaired because we expect to collect the amounts due. The loan balances in the table re- late to our Wealth Management & Swiss Bank, where de- layed payments are routinely observed. The past due but not impaired categorization is not typically applicable to our Investment Bank lending businesses because we con- tinuously monitor individual counterparties and exposures to identify impairment events at an early stage, including missed payments. Compared with 31 December 2008, our past due but not impaired loan exposures decreased by 47% to CHF 0.9 bil- lion on 31 December 2009. This decrease resulted primarily from recoveries in lombard lending exposures and lower lev- els of excesses experienced by Wealth Management & Swiss Bank in 2009. Our past due but not impaired loans in the greater-than-90-day category related primarily to mortgage loans. However, our overall past due but not impaired levels on mortgage loans were not significant in the context of the size of the mortgage portfolio. Past due but not impaired loans CHF million 1–10 days 11–30 days 31–60 days 61–90 days > 90 days of which: past due but not impaired mortgage loans > 90 days Total Past due but not impaired mortgage loans CHF million Total 31.12.09 31.12.08 138 62 78 17 635 511 930 522 89 272 331 547 425 1’761 31.12.09 31.12.08 Total mortgage exposure 130,348 of which: past due but not impaired > 90 days 511 Total mortgage exposure 128,441 of which: past due but not impaired > 90 days 425 127 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Risk management and control Settlement risk Settlement risk arises in transactions involving exchange of value when we must honor our obligation to deliver without first being able to determine with certainty that we will re- ceive the counter-value. We use multilateral and bilateral agreements with counterparties to reduce our actual settle- ment volumes. Our most significant source of settlement risk is foreign exchange transactions. UBS is a member of Continuous Linked Settlement (CLS), a foreign exchange clearing house which allows transactions to be settled on a delivery versus payment basis, thereby significantly reducing foreign ex- change-related settlement risk relative to the volume of business. The avoidance of settlement risk through CLS and other means, such as payment netting, does not eliminate our credit risk on foreign exchange transactions resulting from changes in exchange rates prior to settlement. We measure and control such counterparty risk on forward foreign ex- change transactions as part of our overall credit risk on OTC derivatives. Country risk Country risk is the risk of loss arising from country-specific events. We have an established country risk control frame- work to actively manage and limit, as necessary, our trading risk, lending risk, issuer risk and investment risk in a coun- try. This framework is intended to ensure that our exposure to a country is commensurate with the credit rating we as- sign to it and is not disproportionate to our overall country risk profile. We assign ratings to all countries where we have expo- sure. Sovereign ratings express the probability of a country risk event that would lead to impairment of our claims. The default probabilities that we use and our mapping of exter- nal ratings of the major rating agencies are based on our counterparty rating classes as described in Probability of de- fault above. With respect to our country ratings, the rating classes 10 to 13 are designated “very high risk” while the lowest rating class contains countries in default. For all countries rated three and below, we set country risk ceilings approved either by the BoD or under delegated authority. A country risk ceiling applies to all our exposures to counterparties or issuers of securities and financial invest- ments in the respective country. Our country risk measures cover cross-border transactions and investments as well as our local operations, branches and subsidiaries in countries where the risk is material. We may limit the extension of credit, transactions in traded products or positions in securi- ties based on a country ceiling, even if our exposure to a counterparty is otherwise acceptable. Losses due to counterparty or issuer defaults resulting from multiple insolvencies (systemic risk) or general prevention or restriction of payments by authorities (transfer risk) are the most significant effects of a country crisis. For internal mea- surement and control of country risk, we also consider the fi- nancial impact of market disruptions arising prior to, during and following a country crisis. These may take the form of a severe deterioration in a country’s debt and equity markets and asset prices or a sharp depreciation of the currency. Emerging markets exposure by UBS internal country rating category CHF million Investment grade Sub-investment grade Distressed Total 31.12.09 31.12.08 18,847 3,568 3 22,418 24,616 8,095 4 32,715 Emerging markets exposure by major geographical area and product type CHF million As of Emerging Europe Emerging Asia Emerging America Middle East / Africa Total Temporary exposures 1 Total Banking products Traded products Financial investments Tradable assets 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 2,117 13,725 3,077 3,499 22,418 340 3,706 16,460 6,802 5,747 32,715 738 664 4,299 309 1,131 6,403 1,454 3,594 1,491 1,338 7,877 542 4,949 485 1,894 7,870 1,177 7,059 2,157 3,980 14,373 136 652 100 23 911 211 879 167 1,257 775 3,825 2,183 451 7,234 864 4,928 2,987 429 9,208 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. 128 Additional information on our exposures to countries that we categorize as emerging markets is provided in the “Emerging markets exposure by UBS internal country rating category” and “Emerging markets exposure by major geo- graphical area and product type” tables. temporary exposures arising from loan underwriting in these markets are shown separately in the table. Debt investments We use stress testing to assess the potential financial im- pact of a severe emerging markets crisis. This involves iden- tifying countries that may potentially be subject to a crisis event, determining potential losses and making assumptions about recovery rates depending on the types of transactions involved and their economic importance to the affected countries. d e t i d u A Debt investments classified for IFRS as Financial investments available-for-sale can be broadly categorized as money market instruments and debt securities which are mainly held for statutory, regulatory or liquidity reasons. Debt in- vestments may also include non-performing loans which were purchased in the secondary market by the Investment Bank. Country risk exposure Our exposures to emerging market countries amounted to CHF 22.4 billion on 31 December 2009, compared with CHF 32.7 billion on 31 December 2008. The reduction of CHF 10.3 billion in our total emerging markets exposure occurred across all markets. Based on the main country rating categories, 84% of our emerging market country exposures (excluding those which are temporary exposures) on 31 December 2009 were rated investment grade, compared with 75% on 31 December 2008. The change in our risk profile in these markets was due to the fact that a large proportion of the exposure re- duction was related to sub-investment grade countries, in particular Brazil, following the sale of UBS Pactual. The table “Emerging markets exposure by major geographical area and product type” analyzes our emerging market country exposures by major geographical area and product type on 31 December 2009 compared with 31 December 2008. Our The risk control framework that we apply to debt instru- ments classified as Financial investments available-for-sale varies depending on the nature of the instruments and the purpose for which we hold them. Our exposures may be in- cluded in market risk limits or subject to specific monitoring, which may include interest rate sensitivity analysis, and firm- wide earnings-at-risk, capital-at-risk and combined stress test metrics. Composition of debt investments Debt financial instruments classified as Financial investments available-for-sale increased significantly to CHF 80.4 billion at 31 December 2009 compared with CHF 3.6 billion at 31 December 2008. This increase resulted from the strategic decision to rebalance our liquidity reserve, which led to a shift from repurchase agreements and trading portfolios into debt instruments available-for-sale. These instruments pri- marily comprised highly liquid short-term securities issued by governments and government-controlled institutions. ➔ Refer to “Note 13 Financial investments available-for-sale” in the “Financial information” section of this report for more information t n e m e g a n a m y r u s a e r t d n a k s i R 129 Risk and treasury management Risk management and control Market risk d e t i d u A Market risk is the risk of loss from changes in market vari- ables. There are two broad categories of market variables: general market risk factors and specific components. Gen- eral market risk factors include interest rates, equity index levels, exchange rates, commodity prices and general credit spreads. The volatility of these risk factors and the correla- tions between them are also general market risk factors. Specific components relate to the prices of debt and equity instruments which result from factors and events particular to individual companies or entities. d e t i d u A ditional risks as the hedge instrument and the position being hedged may not always move in parallel (often referred to as “basis risk”). We also actively manage such basis risks. Man- agement and Risk Control may also give instructions for risk to be reduced, even when limits are not exceeded. The asset management and wealth management busi- nesses carry small trading positions, principally to support client activity. The market risk from these positions is not material to UBS as a whole. Sources of market risk We take general and specific market risks both in our trading activities and in some non-trading businesses. Trading Most of our market risk arises from our trading activities in the Investment Bank, which include market-making, facilita- tion of client business and associated position taking in cash and derivative markets for equities, fixed income, interest rates, foreign exchange and commodities. Our trading businesses are subject to multiple market risk limits. Traders are required to manage their risks within these limits, which may involve utilizing hedging and risk mitiga- tion strategies. These strategies can expose the firm to ad- Non-trading Market risk exposures – primarily general interest rate and foreign exchange risks – may arise from non-trading ac- tivities such as retail banking and lending in our wealth management businesses and retail and corporate banking business in Switzerland, the Investment Bank’s lending busi- nesses and our treasury activities (primarily from funding, balance sheet, liquidity and capital management needs). Eq- uity and certain debt investments can also give rise to spe- cific market risks. In the Investment Bank, non-trading foreign exchange risks are managed under market risk limits and non-trading interest rate risk is either managed under market risk limits or subject to specific monitoring. For example, the market risks associated with the portfolio of assets that were reclas- sified to Loans and receivables from Held-for-trading in 130 d e t i d u A fourth quarter 2008 and first quarter 2009 are subject to specific monitoring, which includes interest rate and credit spread sensitivity analysis, as well as being reported in firm- wide earnings-at-risk, capital-at-risk and combined stress test metrics. In our other business divisions, exposures to market risks also arise from non-trading activities, the largest being the interest rate risks arising from customer deposits and mort- gage business in Wealth Management & Swiss Bank. These market risks are generally transferred to the Investment Bank or Group Treasury, which manage the positions as part of their trading risk portfolios within their allocated market risk limits. Market risks that are retained by our other business divisions are not significant relative to the firm’s overall risk, and exposures are either subject to market risk measures and controls or specific monitoring. In addition to managing market risks transferred from other business divisions, Group Treasury also assumes mar- ket risk from its funding, balance sheet, liquidity and capital management responsibilities. The risks resulting from these activities are either covered by market risk limits allocated to Group Treasury or subject to specific monitoring. ➔ Refer to the “Treasury management” section of this report for more information on Group Treasury’s risk manage- ment activities Market risk limits d e t i d u A We have a limit framework to control our market risks. We have two major portfolio measures of market risk – VaR and stress loss – which are common to all our busi- d e t i d u A ness divisions and subject to limits that are approved by the BoD. In the Investment Bank, these portfolio measures are complemented by concentration and other supplementary limits on portfolios, asset classes and products, and also cov- er exposures to general market risk factors and single name risk. Single name risk (or issuer risk) is a measure of our ex- posure to the tradable instruments (debt, equity and deriva- tives) of a single issuer (or issuer group) were that issuer sub- ject to a credit event including default. Our concentration and other supplementary limits take a variety of forms in- cluding values (market or notional) and risk sensitivities, which are measures of exposure to a given risk factor such as interest rates, credit spreads, equity indices, foreign ex- change rates or volatilities. These limits take into account the extent of market liquidity and volatility, available operational capacity, valuation uncertainty, and for our single name ex- posures the credit quality of issuers. Our exposures from security underwriting commitments are subject to the same measures and controls as secondary market positions. Underwriting commitments are also gen- erally reviewed by our Commitment Committee, which in- cludes representation from both business and control func- tions. Underwriting commitments are approved under specific delegated risk management and risk control au- thorities. Market risk limits are set for each of the business divi- sions and Group Treasury. The limit framework in the Invest- ment Bank is more detailed than in the other business divi- sions, reflecting the nature and magnitude of the risks it takes. t n e m e g a n a m y r u s a e r t d n a k s i R 131 Risk and treasury management Risk management and control d e t i d u A d e t i d u A d e t i d u A d e t i d u A Value-at-risk definition and limitations d e t i d u A directly to our current positions – a method known as his- torical simulation. VaR is a statistical measure of market risk, representing the market risk losses that potentially could be realized over a set time horizon at an established level of confidence. This assumes no change in our trading positions over the rele- vant time horizon. We use a single VaR model for both in- ternal management purposes and for determining market risk regulatory capital requirements, although the confi- dence levels and time horizons differ. Our VaR model is approved by FINMA and ongoing sig- nificant revisions to our VaR methodology and model are also subject to regulatory approval. The firm’s VaR model makes use of five years of historical data and is calibrated to a 1-day 95% measure for our inter- nal management purposes. However, in accordance with Ba- sel II and FINMA requirements, we use a 1-day 99% VaR for backtesting and a 10-day 99% VaR for determining market risk regulatory capital. We calculate VaR on a daily basis on our end-of-day positions. Our VaR calculation is based on the application of historical changes in market risk factors Actual realized losses may differ from those implied by our VaR. All VaR measures are subject to limitations and must be interpreted accordingly. The limitations of VaR in- clude the following: – The five-year historical period used in creating our VaR measure will include fluctuations in market rates and pric- es that differ from those observed in future periods. In particular, the use of a five-year window means that sud- den increases in market volatility will not tend to increase VaR as quickly as the use of shorter historical observation periods, but the impact of the increase will impact our VaR for a longer period of time. – The VaR measure is calibrated to a specified level of con- fidence and may not indicate potential losses beyond this confidence level. – The 1-day time horizon in the VaR measure (or 10-day in the case of regulatory VaR) may not fully capture the mar- ket risk of positions that cannot be closed out or hedged within the specified period. UBS: Value-at-Risk (1-day, 95% confidence, 5 years of historical data) CHF million Business divisions Investment Bank Wealth Management & Swiss Bank 1 Wealth Management Americas 1 Global Asset Management Corporate Center Diversification effect Total management VaR 3 Diversification effect (%) Year ended 31.12.09 Year ended 31.12.08 Min. Max. Average 31.12.09 Min. Max. Average 31.12.08 43 0 2 0 2 2 44 75 0 3 1 16 2 78 55 0 3 0 5 (8) 55 (13) 54 0 3 0 4 (7) 54 (11) 57 0 0 3 2 59 105 3 2 25 2 106 79 1 1 9 (11) 79 (12) 74 3 1 6 (6) 78 (7) 1 Split of former Global Wealth Management & Business Banking into Wealth Management & Swiss Bank and WM Americas not available for 2008, therefore all 2008 Global Wealth Management & Business Banking figures are shown under WM Americas. 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. Investment Bank: Value-at-Risk (1-day, 95% confidence, 5 years of historical data) CHF million Risk type Equities Interest rates Credit spreads Foreign exchange Energy, metals & commodities Diversification effect Total management VaR2 Diversification effect (%) Year ended 31.12.09 Year ended 31.12.08 Min. Max. Average 31.12.09 Min. Max. Average 31.12.08 13 16 33 2 2 1 43 36 38 65 12 5 1 75 22 24 46 6 4 (47) 55 (46) 21 23 50 4 3 (47) 54 (47) 18 27 35 5 3 1 57 63 85 88 15 13 1 105 38 46 56 8 6 (75) 79 (49) 19 31 61 9 5 (51) 74 (41) 1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect. 2 Includes all positions subject to internal management VaR limits. 132 d e t i d u A – In certain cases, VaR calculations approximate the impact of changes in risk factors on the values of positions and portfolios. This may happen because the number of risk factors included in the VaR model is necessarily limited – for example, yield curve risk factors do not exist for all future dates. – The effect of extreme market moves is subject to estima- tion errors which may result from non-linear interaction effects and the potential for actual volatility and correla- tion levels to differ from assumptions implicit in the VaR calculations. We continue to review the performance of our VaR imple- mentation which includes a review of risks not included in VaR. We will continue to enhance our VaR model in order to more accurately capture the relationships between the market risks associated with our risk positions, as well as the revenue impact of large market movements for particular trading positions. Value at risk developments in 2009 We made a number of changes to our VaR model and meth- odology in 2009, while also changing the scope of the regu- d e t i d u A latory and internal management VaR to better reflect our underlying risks. d e t i d u A These changes were approved by FINMA and are summa- rized below. – In third quarter 2009, we changed the calibration of our management VaR from a 10-day 99% measure to a 1-day 95% measure. We consider that a 1-day 95% measure reflects the way that trading risks are viewed and man- aged by the business and can be more directly compared with daily mark-to-market revenues. We continue to use a 10-day 99% VaR to determine regulatory capital and a 1-day 99% measure to backtest our VaR model in accor- dance with Basel II and FINMA requirements. – We increased the scope of regulatory VaR in third quarter 2009 to incorporate a significant proportion of our mar- ket risk exposures to credit valuation adjustments (CVA). CVA is the mark-to-market cost of protection required to hedge credit risk from counterparties in our over-the- counter derivatives portfolio. This change more accurate- ly represents the underlying risk exposures alongside their related hedges in our regulatory VaR. The same enhance- UBS: Value-at-Risk (10-day, 99% confidence, 5 years of historical data) CHF million Business divisions Investment Bank Wealth Management & Swiss Bank 1 Wealth Management Americas 1 Global Asset Management Corporate Center Diversification effect Total regulatory VaR Diversification effect (%) Year ended 31.12.09 Year ended 31.12.08 Min. Max. Average 31.12.09 179 0 15 0 2 2 541 1 32 7 67 2 187 545 315 0 21 2 14 (37) 315 (11) 286 0 30 1 7 (23) 301 (7) Min. 240 1 1 3 2 246 Max. Average 31.12.08 601 17 7 93 2 609 374 4 2 26 (34) 373 (8) 485 16 6 10 (25) 492 (5) 1 Split of former Global Wealth Management & Business Banking into Wealth Management & Swiss Bank and WM Americas not available for 2008, therefore all 2008 Global Wealth Management & Busi- ness Banking figures shown under WM Americas. 2 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect. Investment Bank: Value-at-Risk (10-day, 99% confidence, 5 years of historical data) t n e m e g a n a m y r u s a e r t d n a k s i R Year ended 31.12.09 Year ended 31.12.08 Min. Max. Average 31.12.09 Min. Max. Average 31.12.08 CHF million Risk type Equities Interest rates Credit spreads Foreign exchange Energy, metals & commodities Diversification effect Total regulatory VaR Diversification effect (%) 55 64 216 4 9 1 179 115 149 489 55 25 1 541 71 98 332 27 16 (229) 315 (42) 57 116 322 27 12 (248) 286 (46) 82 112 151 12 14 1 240 185 364 613 58 60 1 601 131 198 322 28 30 (335) 374 (47) 1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect. 117 131 412 30 22 (226) 485 (32) 133 Risk and treasury management Risk management and control UBS: Value-at-Risk (1-day, 99% confidence, 5 years of historical data) 1 Year ended 31.12.09 Year ended 31.12.08 CHF million Investment Bank UBS Regulatory VaR 2 Regulatory VaR 2 Min. 63 64 Max. Average 31.12.09 167 170 103 104 78 79 Min. 96 97 Max. 210 207 Average 31.12.08 132 133 162 163 1 10-day 99% regulatory VaR and 1-day 99% regulatory VaR results are calculated separately from underlying positions and historical market moves. They cannot be inferred from each other. 2 Backtesting is based on 1-day 99% regulatory VaR. d e t i d u A d e t i d u A d e t i d u A ment was implemented for our management VaR during third quarter 2008. Monoline CVA and related exposures were not included as part of this implementation and also remain outside the scope of management VaR. – Concurrently with the abovementioned changes, we changed our VaR methodology to an equivalent expected tail loss (ETL) measure. The ETL measure considers the overall distribution of losses in the VaR tail to determine the VaR loss at any given confidence level. We therefore consider the ETL measure to be more stable and to better identify losses around the VaR tail than a pure quantile measure based on a single observation in the VaR distri- bution. The tables in this section show our 1-day 95% manage- ment VaR, 10-day 99% management VaR and 1-day 99% backtesting VaR for the Group and the Investment Bank. We have provided additional granularity in the tables related to the Investment Bank by splitting out VaR for interest rate risk and credit spread risk. As at 31 December 2008 we disclosed an aggregate VaR for our interest rate and credit spread risk. The Investment Bank’s average management VaR (1-day 95%) decreased to CHF 55 million in 2009 compared with CHF 79 million in 2008. Period-end VaR was also lower at CHF 54 million at 31 December 2009 compared with CHF 74 million at 31 December 2008. d e t i d u A This decrease was driven by our active risk reduction across all risk types in 2009. Credit spread VaR remained the dominant component of the Investment Bank’s VaR. VaR for the Group as a whole followed a similar pattern to Investment Bank VaR. ➔ Refer to “Note 27c Fair value of financial instruments” in the “Financial information” section of this report for valuation sensitivities on certain portfolios and positions Backtesting Backtesting compares 1-day 99% regulatory VaR calculated for positions at the close of each business day with the revenues which actually arise on those positions on the following business day. Our backtesting revenues exclude non-trading revenues, such as fees and commissions, and estimated revenues from intraday trading. A backtesting ex- ception occurs when backtesting revenues are negative and the absolute value of those revenues is greater than the pre- vious day’s VaR. We experienced four backtesting exceptions in 2009 compared with 50 backtesting exceptions in 2008. This sig- nificant reduction resulted among other reasons from im- provements made in the granularity of risk representation in our VaR model (particularly related to credit spread risk) and more frequent update of VaR parameters as well as lower market volatility experienced in 2009. 134 Investment Bank: backtesting revenue¹ distribution Frequency in number of days 1 January 2009–31 December 2009 Investment Bank: analysis of negative backtesting revenues1 CHF million Source: management accounts 1 January 2009–31 December 2009 120 90 60 30 0 > 180 150–180 120–150 90–120 60–90 30–60 0–30 (30)–0 (60)–(30) (90)–(60) (120)–(90) (150) –(120) ) 0 0 3 ( < ) 0 5 2 ( – ) 0 0 3 ( ) 0 0 2 ( – ) 0 5 2 ( ) 0 5 1 ( – ) 0 0 2 ( ) 0 0 1 ( – ) 0 5 1 ( ) 0 5 ( – ) 0 0 1 ( 0 – ) 0 5 ( 0 5 – 0 0 0 1 – 0 5 0 5 1 – 0 0 1 0 0 2 – 0 5 1 0 5 2 – 0 0 2 0 0 3 – 0 5 2 0 0 3 > Revenues in CHF million 1 Backtesting revenues exclude non-trading revenues, such as commissions and fees, and revenues from intraday trading. (180)–(150) 3RM125_e Source: revenues management accounts (210)–(180) (240)–(210) (270)–(240) (300)–(270) < (300) The first histogram above shows daily backtesting reve- nues in the Investment Bank for the whole of 2009. In the second histogram, the daily backtesting revenues are com- pared 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. We investigate all backtesting exceptions and any ex- ceptional revenues on the profit side of the VaR distribu- tion. In addition, we report all backtesting results to senior business management, the Group CRO and business divi- sion CROs. Backtesting exceptions are also reported to internal and external auditors and relevant regulators. d e t i d u A 10 0 10 20 30 40 50 60 70 Frequency in number of days Negative backtesting revenue less than VaR Negative backtesting revenue greater than VaR 1 Backtesting revenues exclude non-trading revenues, such as commissions and fees, and revenues from intraday trading. Analysis for loss days only. 120 90 3RM125_e t n e m e g a n a m y r u s a e r t d n a k s i R 30 60 0 135 Risk and treasury management Risk management and control Stress loss As a complement to VaR, we run macro stress scenarios com- bining various market moves to reflect the most common types of potential stress events, and more targeted stress tests for our concentrated exposures and vulnerable portfo- lios. We enhanced our market risk stress framework in 2009 to increase the scope and granularity of our analysis. This in- cluded updating stress scenarios to more accurately capture the liquidity characteristics of different markets, asset classes and positions, and implementing a stress scenario to reflect the extreme market conditions that were experienced at the height of the financial crisis in fourth quarter 2008. Our market risk stress testing framework attempts to pro- vide a control framework that is forward-looking and re- sponsive to changing market conditions. Our stress scenarios are therefore reviewed regularly in the context of the macro- economic and geopolitical environment by a committee comprised of representatives from the business divisions, Risk Control and Economic Research. ➔ Refer to the discussion on stress loss in the “Risk manage- ment and control” section of this report Equity investments d e t i d u A We make investments for a variety of purposes, including revenue generation or as part of strategic initiatives. Other investments, such as exchange and clearing house member- ships, are held in support of our business activities. We may also make investments in funds that we manage to fund or “seed” them at inception or to demonstrate alignment of our interests with those of investors. We have also bought and may be required to buy securities and units from funds that we have sold to clients. These include purchases of il- liquid assets such as interests in hedge funds. We may make direct investments in a variety of entities or buy equity holdings in both listed and unlisted companies, where such investments tend to be illiquid. The fair value of equity investments tends to be dominated by factors specific d e t i d u A to the individual stocks, and our equity investments are gen- erally intended to be held for the medium- or long-term and may be subject to lock-up agreements. For these reasons, we do not generally control these exposures using the mar- ket risk measures applied to trading activities. Such equity investments are, however, subject to controls, including pre- approval of new investments by business management and risk control, and regular monitoring and reporting. They are also included in our firm-wide earnings-at-risk and capital- at-risk, and combined stress test metrics. Investments made as part of an ongoing business are also subject to our 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 approved according to delegated authorities, and are monitored and reported to senior management. Under IFRS, equity investments may be classified as Finan- cial investments available-for-sale, Financial assets designat- ed at fair value through profit or loss or Investments in as- sociates. Composition of equity investments At 31 December 2009, we held equity investments totaling CHF 3.1 billion, of which CHF 1.4 billion were classified as Financial investments available-for-sale, CHF 0.8 billion as Financial assets designated at fair value and CHF 0.9 billion as Investments in associates. As of 31 December 2008, we held equity investments totaling CHF 3.7 billion, of which CHF 1.7 billion were clas- sified as Financial investments available-for-sale, CHF 1.1 bil- lion as Financial assets designated at fair value and CHF 0.9 billion as Investments in associates. The vast majority of the CHF 0.8 billion of Financial assets designated at fair value represented the assets of trust enti- ties associated with employee compensation schemes. They are broadly offset by liabilities to plan participants included in Other liabilities. The equivalent positions at 31 December 2008 amounted to CHF 1.1 billion. ➔ Refer to “Note 12 Financial assets designated at fair value” in the “Financial information” section of this report for further information ➔ Refer to “Note 13 Financial investments available-for-sale” in the “Financial information” section of this report for further information ➔ Refer to “Note 14 Investment in associates” in the “Financial information” section of this report for further information 136 Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems (for exam- ple, failed IT systems or fraud perpetrated by an employee), or from external causes, whether deliberate, accidental or natural. We monitor our operational risks and, to the extent possible, control and mitigate them to levels considered ac- ceptable by senior management. The Group Head of Opera- tional Risk Control is responsible for the effective design of the operational risk framework. All this information is reviewed by functional managers to assess the operational risk exposure of their function and to determine the actions needed to address any specific issues. These issues are captured in a risk inventory, which forms the basis of operational risk reporting to senior management. Operational risk control units, reporting functionally to the Group Head of Operational Risk Control, confirm the ef- fectiveness of the implementation of the operational risk framework, and perform independent oversight of the con- clusions reached by functional management. Operational risk framework All the firm’s functions (whether business, control or logistics functions) must manage the operational risks that arise from their activities. The basis of our operational risk framework is that all functions adequately define their roles and responsi- bilities to ensure they have adequate segregation of duties, complete coverage of risks and clear accountability. From this analysis, the functions develop control objectives and standards based on the types of operational risk events that might arise from their activities ranging, for example, from daily reconciliation problems to potentially severe events such as fraud. We recognize that we cannot eliminate all our operational risks because errors and accidents will happen, and that even where it is possible to eliminate certain risks, it is not always cost effective to do so. Our functions apply controls to monitor compliance and assess the operating effectiveness of their control frame- works in a number of ways. These include self-certification by staff, monitoring a wide range of metrics (for example, the number and characteristics of client complaints, deal cancellations and corrections, un-reconciled items on cash and customer accounts and systems failures) and analysis of internal and external audit findings. As major financial and non-financial operational risk events occur, we evaluate their causes and the implications for our control framework. This includes an assessment of events affecting third parties that may be relevant to our businesses, provided that sufficient information is publicly available. Operational risk measurement We have developed a model for the quantification of our operational risk which meets the regulatory capital standard specified by the Basel II Advanced Measurement Approach (AMA). Our model has two main components: – The expected loss component is a statistical measure based on our own historical loss experiences (which have been collected since 2002) and is used primarily to deter- mine the expected loss portion of our capital requirement. – The unexpected loss component is based on a set of ge- neric scenarios that represent categories of operational risks that are relevant to our firm. The scenarios used are based on analysis of internal and external event informa- tion, the prevailing business environment and our own internal control environment. This component is used to determine the unexpected loss portion of our capital re- quirement. We calculate our operational risk regulatory capital re- quirement using the AMA model for the consolidated Group and the parent bank in accordance with the requirements of FINMA. For regulated subsidiaries, the basic indicator or standardized approaches are adopted as agreed with local regulators. Currently, we do not reflect mitigation through insurance in our AMA model. ➔ Refer to “Capital management” section of this report for more information on the development of RWA for operational risk t n e m e g a n a m y r u s a e r t d n a k s i R 137 Risk and treasury management Risk management and control Risk management and control renewal program In third quarter 2008, FINMA conclud- ed its investigation into the causes of the significant writedowns that we incurred in 2007 and 2008. It confirmed our own conclusions in all material respects and we developed a comprehensive and detailed plan to eliminate the weakness we identified. We have made further progress in completing remediation activities and developing sustainable solutions in 2009. This includes strategic planning and business reviews (including enhancements to our new business approval process); integrated executive reporting combining risk, treasury and financial information; changes to the risk governance framework and the Risk Management and Control organization; enhancements to our risk measurement and methodologies; changes to our capital optimization model; improvements in front office controls around trade capture and valuation; and enhancements to our funding and balance sheet manage- ment. Remediation activities will continue in certain areas requiring more significant or strategic changes to processes, systems and infrastructure. 138 Risk concentrations Risk concentrations Previously disclosed risk concentrations d e t i d u A A risk concentration exists where: (i) a position in financial instruments is affected by changes in a group of correlated factors, or a group of positions is affected by changes in the same risk factor or a group of correlated factors; and (ii) the exposure could, in the event of large but plausible adverse developments, result in significant losses. d e t i d u A The identification of risk concentrations requires judgment as potential future developments cannot be predicted and may vary from period to period. In determining whether we have a risk concentration, we consider a number of elements, both individually and collectively. These elements include: the shared characteristics of the instruments and counterparties; the size of the position or group of positions; the sensitivity of the posi- tion or group of positions to changes in risk factors; and the volatility and correlations of those factors. Also important in our assessment is the liquidity of the markets in which the in- struments are traded, and the availability and effectiveness of hedges or other potential risk mitigants. The value of a hedge instrument may not always move in line with the position be- ing hedged, and this mismatch is referred to as basis risk. If we identify a risk concentration, we assess it to deter- mine whether it should be reduced or mitigated, and we also evaluate the available means to do so. Our identified risk concentrations are subject to increased monitoring. Identified risk concentrations d e t i d u A Based on our assessment of our portfolios and asset classes with potential for material loss in a stress scenario relevant to the current environment, we believe that our exposures to monoline insurers and student loan auction rate securities shown below can be considered risk concentrations on 31 De- cember 2009, according to the abovementioned definition. It is possible that material losses could occur on asset class- es, positions and hedges other than those disclosed in this sec- tion of the report, particularly if the correlations that emerge in a stressed environment differ markedly from those we antici- pated. We are exposed to price risk, basis risk, credit spread risk and default risk, and other idiosyncratic and correlation risks on both our equities and fixed income inventories. We also have price risk on our option to acquire the SNB StabFund’s equity. In addition, we have lending, counterparty and country risk exposures that could sustain significant losses if eco- nomic conditions were to worsen. ➔ Refer to the discussion of credit risk, market risk and operational risk above for more information on the risks to which we are exposed In 2009, we significantly reduced exposures to our residual leveraged finance commitments, which were defined as loan commitments entered into with the intent to syndicate or distribute that we assigned an internal credit rating corre- sponding with external corporate credit ratings of BB– or worse at the time of reporting. We achieved these reductions through both sales and writedowns, and as a result our re- maining positions in leveraged finance commitments are no longer considered as a risk concentration. We previously re- ported exposures on 31 December 2008 to leveraged finance commitments of USD 4.0 billion, net of cumulative gross writedowns, impairment charges and effective hedges. Exposure to monoline insurers The vast majority of our direct exposures to monoline in- surers arise from OTC derivative contracts, mainly CDSs purchased to hedge specific positions. The “Exposure to monoline insurers, by rating” table shows the CDS protec- tion we bought from monoline insurers to hedge specific positions. It illustrates the notional amounts of the protec- tion held, the fair value of the underlying instruments and the fair value of the CDSs both prior to and after the CVA taken on these contracts. As a result of trade commuta- tions and because a significant portion of the underlying assets are classified as Loans and receivables for account- ing purposes, the change in CVA reported in the table does not equal the profit and loss associated with this portfolio during the year to 31 December 2009. Our exposure under CDS contracts with monoline insur- ers is calculated as the sum of the fair values of individual CDSs after credit valuation adjustments. This, in turn, de- pends on the valuation of the instruments against which protection has been bought. A positive fair value, or a valu- ation gain, on the CDS is recognized if the fair value of the instrument it is intended to hedge decreases. Changes in CVA are driven by changes in CDS fair value and also by movements in monoline credit spreads. We actively reduced our exposures to monoline insurers in 2009 by commuting trades with several monoline insur- ers. The trade commutations related primarily to US RMBS collateralized debt obligations (CDOs) that we had substan- tially written down on a fair value basis. Combined with the improved performance and composition of the portfolio, the fair values of our remaining assets hedged with monoline insurers increased over the period with a corresponding de- crease in the fair values of the related CDSs. As at 31 Decem- ber 2009, approximately 75% of the remaining assets were 139 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Risk management and control d e t i d u A collateralized loan obligations (CLOs), 20% were collateral- ized mortgage-backed securities and other asset-backed se- curities, and 5% related to US RMBS CDOs. The vast major- ity of our CLO positions were rated AA and above. As at 31 December 2009, the total fair value of CDS pro- tection purchased from monoline insurers decreased signifi- cantly to USD 2.3 billion (USD 5.3 billion at 31 December d e t i d u A 2008) after cumulative CVAs of USD 2.8 billion (USD 7.0 bil- lion at 31 December 2008). These exposures do not take into account any hedging benefits. In addition to credit protection bought on the positions detailed in the table above, we held direct derivative expo- sure to monolines of USD 329 million after CVAs of 199 mil- lion on 31 December 2009. ➔ Refer to “Note 27c Fair value of financial instruments“ in the “Financial information” section of this report for more informa- tion on CVA valuation and sensitivities Exposure to auction rate securities d e t i d u A Auction rate securities held by the Investment Bank Approximately USD 1.6 billion at par value of student loan auction rate securities (ARS) were redeemed by issuers, or sold by us in the secondary market in 2009. We repurchased USD 3.7 billion at par value of student loan ARS in 2009, including approximately USD 0.5 billion of student loan ARS where we accelerated the repurchase from our clients to facilitate redemptions with issuers or resales. Combined with other redemptions directly with clients and amortizations, this resulted in an overall decrease of USD 3,958 million to USD 7,817 million as of 31 December 2009 compared with 31 December 2008, in our commitment to repurchase student loan ARS from clients as described below. Our inventory of student loan ARS increased by USD 1,985 million to USD 10,347 million in 2009 as a result of student loan ARS repurchased in the period which were partially offset by 140 d e t i d u A the abovementioned redemptions, resales and amortizations. d e t i d u A At 31 December 2009 approximately 69% of the collateral underlying our inventory of student loan ARS was backed by Federal Family Education Loan Program (FFELP) collateral, which was reinsured by the US Department of Education for not less than 97% of principal and interest. All of our student loan ARS positions are held as Loans and receivables and are subject to an impairment test that includes a detailed review of the quality of the underlying collateral. Impairment charges incurred on our inventory of student loan ARS in 2009 were not significant. Approximately 90% of the USD 7,817 million student loan ARS that we committed to purchase from clients were backed by FFELP-guaranteed collateral. As at 31 December 2009, we also held inventory with a carrying value of USD 1,423 million in US municipal ARS, USD 1,097 million in US taxable auction preferred securities (APS) and USD 2,729 million in US tax-exempt APS. The vast majority of our inventory of municipal ARS were rated invest- ment grade with approximately 85% rated A or higher. The vast majority of our inventory of taxable and tax- exempt APS were rated AAA. On 31 December 2009, we had not incurred any impairment charges on our inventory of municipal ARS or taxable and tax-exempt APS. As at 31 December 2008, we held USD 451 million in US municipal ARS, USD 782 million in US taxable APS and USD 3,167 million in US tax-exempt APS. Commitment to repurchase client auction rate securities We have committed to restore liquidity to certain client holdings of ARS. This commitment is in line with previously announced agreements in principle with various US state agencies, and the final settlements entered into with the Massachusetts Securities Division, the US Securities and Exchange Commis- sion and the New York State Attorney General. The table on the next page shows the maximum repurchase Exposure to auction rate securities d e t i d u A d e t i d u A Exposure to monoline insurers, by rating 1 USD million 31.12.09 Fair value of underlying CDOs 4 Fair value of CDSs prior to credit valuation adjustment 5 Column 2 Column 3 (=1–2) Credit valuation adjustment as of 31.12.09 Fair value of CDSs after credit valuation adjustment Column 4 Column 5 (=3–4) Notional amount 3 Column 1 Credit protection on US sub-prime residential mortgage- backed securities (RMBS) CDOs high grade 2 of which: from monolines rated investment grade (BBB and above) of which: from monolines rated sub-investment grade (BB and below) Credit protection on other assets 2 of which: from monolines rated investment grade (BBB and above) of which: from monolines rated sub-investment grade (BB and below) Total 31.12.09 Total 31.12.08 2,352 0 2,352 11,835 2,345 9,490 14,187 21,535 457 0 457 8,626 6 1,911 6,715 9,083 9,204 1,895 0 1,895 3,208 433 2,775 5,103 12,329 1,463 0 1,463 1,332 72 1,260 2,795 6,994 432 0 432 1,876 361 1,514 2,308 5,335 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 CDOs: collateralized debt obligations. 5 CDSs: credit default swaps. 6 Includes USD 5.6 billion (CHF 5.8 billion) at fair value / USD 6.0 billion (CHF 6.2 billion) at carrying value of assets that were reclassified to Loans and receivables from Held-for-trading in fourth quarter 2008 and first quarter 2009. Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report for more information. d e t i d u A amount at par of student loan ARS required by the regulatory settlements, which would occur over various time periods according to client type, but not later than 2 July 2012. d e t i d u A had committed to repurchase from clients up to a maximum of USD 2,041 million of municipal ARS and USD 1,723 million of taxable and tax-exempt APS. d e t i d u A In future periods, we will no longer disclose our inventory of and commit- ments to repurchase municipal ARS and taxable and tax-exempt APS, as we do not consider that they involve material risk exposure. Over the same time periods, we also committed to repurchase from clients up to a maximum amount of USD 374 million of municipal ARS, and USD 212 million of taxable and tax-exempt APS at par value on 31 December 2009. As at 31 December 2008, we We anticipate that the maximum required repurchase amount of ARS is likely to decline over time, as issuers refi- nance their debt obligations and we work with issuers, industry peers and US government officials on restructuring initiatives and redemption opportunities. We will continue to disclose our inventory of and commitment to repurchase student loan ARS as our assessment of this exposure indicates that we consider it a risk concentra- tion. d e t i d u A d e t i d u A Student loan auction rate securities inventory USD million US student loan auction rate securities Carrying value as of 31.12.09 10,347 1 Carrying value as of 31.12.08 8,362 1 Includes USD 7.5 billion (CHF 7.7 billion) at carrying value of student loan auction rate securities that were reclassified to Loans and receivables from Held-for-trading in fourth quarter 2008 and first quarter 2009. Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report for more information. Client holdings: student loan auction rate securities USD million Buy-back period Par value of maximum required purchase as of 31.12.09 Remaining unpurchased holdings of private clients Holdings of Institutional clients period ends 4.1.11 30.6.10–2.7.12 Par value of maximum required purchase as of 31.12.08 US student loan auction rate securities 7,817 93 7,724 11,775 141 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Treasury management Treasury management Group treasury is responsible for overseeing the usage of our critical financial resources including liquidity and funding, capital and balance sheet. Treasury manages key portions of these resources including the interest rate and currency risks arising from balance sheet and capital management activities. Liquidity management Capital ratios, risk-weighted assets and eligible capital Stressed market conditions experienced in the latter half of 2008, continued in the first few months of 2009 but then began to ease noticeably in the second half of the year as the effects of central bank support and government assis- tance were felt in the market. High credit spreads contracted and the general tone of the money markets improved as flows in longer- term tenors increased. We continued to further strengthen and safeguard our li- quidity position and adjusted funding targets while our focus was maintained on continuing asset reductions. Combined with the broad diversity of our funding sources, our contin- gency planning processes and our global scope, these mea- sures have enabled us to maintain a balanced asset / liability profile throughout the recent market dislocation. Addition- ally, signs of our return towards financial stability included the successful tender for certain subordinated notes in March and, in August, the exit of the Swiss Confederation’s stake in UBS through conversion of the mandatory convertible notes (MCNs) and immediate placement of shares in the market. Funding management Despite challenging conditions throughout 2009, we main- tained our access to funding primarily as a result of our broadly diversified funding base. In addition, we accessed an important new investor base through our inaugural Europe- an covered bond program. At year-end 2009, the BIS tier 1 ratio amounted to 15.4% and the total capital ratio to 19.8%, up from 11.0% and 15.0%, respectively, on 31 December 2008. BIS risk-weight- ed assets declined from CHF 302.3 billion in December 2008 to CHF 206.5 billion in December 2009, while eligible tier 1 capital decreased from CHF 33.2 billion to CHF 31.8 billion over the same period, reflecting the effects of losses incurred during 2009 and further negative impacts on equity, only partially offset by the positive effects from issues of capital instruments. Shares As of 31 December 2009, we had a total of 3,558,112,753 shares issued. In 2009, the issued shares were increased by a total of 625,532,204 due to the issuance of newly created shares for a share placement with institutional investors in June (293,258,050 shares placed at CHF 13 each), the early conversion of MCNs by the Swiss Confederation in August (332,225,913 shares) plus a small number of exercises of em- ployee options (48,241 shares). The remaining CHF 13 bil lion MCNs will expire on 5 March 2010 leading to an expected issuance of 272,651,005 shares from conditional capital. 142 Liquidity and funding management d e t i d u A We define liquidity risk as 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 our current business and desired strategy. Liquidity and funding are not the same, but they are closely related and both are critical for a financial institution. Liquidity and funding must be continuously managed to ensure that we can successfully adjust to sudden adverse changes in market conditions or our operating environment, whether it is a general market crisis, a localized difficulty af- fecting 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 high qual- ity assets to borrow against or liquid assets to sell to raise immediate cash. Market liquidity overview: 2009 The first few months of 2009 saw a continuation of the stressed financial market conditions that had prevailed throughout the latter part of 2008. Economic fundamentals continued to deteriorate, developing into the worst eco- nomic recession in the post-war era; average credit spreads for high-quality corporate bonds reached historically high levels; most markets remained fragile and suffered from very limited liquidity and the banking and wider financial sector remained under considerable pressure. For the financial sec- tor, access to financing from the public term-debt markets was mostly limited to government-guaranteed bonds. On the back of large amounts of additional special central bank support and government assistance, signs of improvement emerged during the second quarter and high credit spreads for financial institutions contracted. The general tone of the money markets began to improve noticeably during the sec- ond quarter, with flows no longer being effectively limited to very short tenors. Public term-debt markets became broadly accessible to banks for unsecured bond issuances for the first time since late third quarter 2008, across various curren- cies and a range of tenors. More signs of stabilization emerged in the third quarter on improved earnings in the financial sector, leading to further declines in financial insti- tutions’ credit spreads and improved access to public debt markets. Volumes of new long-term debt issuance increased, particularly in senior unsecured debt and covered bonds, while government-guaranteed bond issuances contracted. The policy responses by governments and central banks mirrored market developments during the year. The focus had initially remained on maintaining the extraordinary mea- sures designed to reinforce country-specific financial systems and support their economies. As the year progressed, de- clines were registered in utilization levels of these facilities. With the intensity of the financial crisis beginning to abate during the first half of the year, and as signs of stabilization gradually emerged, policymakers around the world began to shift their attention toward tightening their regulatory capi- tal and liquidity frameworks with a view to reducing the sys- temic risks posed by the largest financial institutions. There are many new regulatory and legislative initiatives applicable to large financial firms that have been proposed in Switzer- land, the US, UK, European Union and other jurisdictions where we operate. These proposals and their interactions may significantly impact our future liquidity and funding management processes, if and when they are enacted. Our measures taken in managing out of the crisis Despite challenging conditions throughout 2009, we main- tained our access to funding with a broadly diversified fund- ing base, and continued with measures to further strengthen and safeguard our liquidity position. Throughout this period, funding targets were adjusted and focus was maintained on continuing asset reductions. Combined with the broad di- versity of funding sources, global scope and contingency planning processes, these measures enabled us to maintain a balanced asset and liability profile. We also maintain a sub- stantial multi-currency portfolio of unencumbered high- quality short-term assets, and also have unutilized secured liquidity facilities available with several major central banks. In addition to these centralized Group resources, like many other internationally active banks, we maintain several ad- ditional dedicated liquidity reserves where these are required by local regulation. Additionally, we have taken significant steps during 2009 including further de-risking and reducing the balance sheet, including the completion of the remain- ing transfers of assets to the SNB StabFund announced in 2008, and the sale of UBS Pactual, as well as additional me- dium- and long-term debt issuance, including accessing an important new investor base through our inaugural Europe- an covered bond program. The successful tender for certain subordinated notes in March and, in August, the exit of the Swiss Confederation’s stake in UBS through conversion of the MCNs and immediate placement of shares in the market were widely regarded as additional signs of our return to fi- nancial stability. 143 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Treasury management d e t i d u A While further signs of stabilization in the market emerged throughout 2009, and although access to wholesale term funding improved, we continued to experience a decline in customer deposits and net new money outflows in our cli- ent-asset-gathering divisions. Regarding the net outflows of client assets, only the cash deposit component of these con- stitutes a direct loss of funding for us. We were able to read- ily compensate for the effects of these outflows, as well as for the periodic reductions in access to wholesale term debt markets, through ample funding from alternative sources within our diversified funding base and our ongoing bal- ance sheet asset reductions. As part of these asset reduc- tions, the funded balance sheet mainly in the Investment Bank was reduced by CHF 242 billion compared with year- end 2008. ➔ Refer to the “Balance Sheet“ section of this report for more information Implementation of the new liquidity and funding risk management framework We made progress in implementing the new liquidity and funding risk management framework which was approved by the BoD in late 2008. Significant enhancements to our existing systems and tools used for liquidity and funding management were implemented, allowing us to forecast more accurately potential liquidity and funding demands un- der both going concern and stressed conditions. The Group Asset and Liability Management Committee (Group ALCO) was established as the primary body for managing our finan- cial resources. Furthermore, governance over the liquidity and funding management process was improved and docu- mented in a complete overhaul of our policies. In addition to balance sheet targets, new supply side limits were intro- duced to control the funding of the balance sheet, and ad- ditional limits on the off-balance sheet exposures were im- plemented. Our liquidity reserve, a pool of highly liquid cash and cash equivalent assets, was put under the direct man- agement of Group Treasury. Further strategic work is underway to improve the opera- tional setup of the liquidity and funding management pro- cess and to refine the funds transfer pricing mechanism. We are also reviewing the technical landscape of our liquidity and funding risk management tools, and have projects un- derway to upgrade our systems infrastructure. Liquidity approach d e t i d u A Our approach to liquidity management, which covers all branches and subsidiaries, aims to ensure that we will always have sufficient liquidity to meet liabilities when due, under both normal and stressed conditions, without incurring un- acceptable losses or risking sustained damage to our various businesses. Central to the integrated framework is an assessment and regular testing of all material, known and expected cash flows and the level of high-grade collateral that could be used to raise additional funding. Limits are set at Group and Division level by the BoD and the Group ALCO. These limits are monitored by Group Treasury, which reports the results and trends on a regular basis to the BoD Risk Committee and the Group ALCO. Contingency plans for a liquidity crisis are incorporated into our wider crisis management process. Our major sources of liquidity are channeled through en- tities that are fully consolidated. The liquidity position and asset and liability profile are continuously tracked. This in- volves monitoring the balance sheet contractual and behav- ioral maturity profiles and projecting and modeling the li- quidity exposures of the firm under a variety of potential scenarios – encompassing both normal and stressed market conditions. We consider the possibility that our access to markets could be impacted by a stress event affecting some, or all, parts of our business. The results are factored into our overall contingency plans. Liquidity management We manage our liquidity position in order to be able to sur- vive a UBS-specific liquidity crisis combined with a generally stressed market environment. This is complemented by our funding risk management, which aims to achieve the opti- mal liability structure to finance our businesses cost-efficient- ly and reliably. Our business activities generate asset and liability port- folios which are intrinsically highly diversified with respect to market, product and currency. This reduces our exposure to individual funding sources, and also provides a broad range of investment opportunities, which in turn reduces liquidity risk. Our funding diversification and global scope in turn help protect our liquidity position in the event of a crisis. We adopt a centralized approach to liquidity and funding man- agement to exploit these advantages in full. The liquidity and funding process is undertaken jointly by Group Treasury and the foreign exchange and money market (FXMM) unit within the Investment Bank’s fixed income, currencies and com- modities (FICC) business area. Group Treasury establishes a comprehensive control framework, while FICC undertakes operational cash and collateral management within the es- tablished limits. This centralization permits close control of both our glob- al cash position and its stock of high-quality liquid securities. Our treasury processes also ensure that the firm’s general ac- cess to wholesale cash markets is concentrated in FICC. Funds raised externally are largely channeled into FICC, in- cluding the proceeds of debt securities issued by UBS, an activity for which Group Treasury is responsible. FICC in turn meets all internal demands for funding by channeling funds from units generating surplus cash to those requiring fi- 144 nance. In this way, we reduce our external borrowing and use of available credit capacity, and present a consistent and coordinated face to the market. d e t i d u A d e t i d u A Liquidity modeling and contingency planning For the purpose of monitoring our liquidity situation, we em- ploy the following main measures: – A cash ladder which is used to manage our funding re- quirements on a daily basis within limits that are set by the Group CFO and Group Treasurer. This cumulative cash lad- der shows the daily liquidity position – the net cumulative funding requirement for a specific day – projected for each business day from the current day forward three months. – A stressed version of the cash ladder which is overlaid with behavioral assumptions that model a severe UBS- specific liquidity crisis combined with a generally stressed market environment. This stress scenario is updated daily and used to monitor potential outflows out to a one- month time horizon. – A contractual maturity gap analysis of our assets and lia- bilities out to a one-year time horizon. – A behavioral maturity gap analysis under an assumed UBS- specific liquidity crisis combined with a generally stressed market environment out to a one-year time horizon. – A cash capital model which measures the amount of sta- ble funding in relation to the amount and composition of our assets. The breakdown of the contractual maturity of our assets and liabilities serves as a starting point for stress testing anal- yses. A partial breakdown as of year-end is shown in the “Maturity analysis” table at the end of this section. This ma- turity analysis is an accounting view. It does not fully repre- sent a liquidity risk management perspective, which would also include behavioral stress analyses and a more detailed breakdown of asset and liability types. The liquidity crisis scenario combines a firm-specific crisis with market disruption and focuses on a time horizon ex- tending up to one year. This UBS-specific scenario envisages large drawdowns on otherwise stable client deposits, an in- ability to renew or replace maturing unsecured wholesale funding and limited capacity to generate liquidity from trad- ing assets. Liquidity crisis scenario analysis and contingency planning 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. d e t i d u A d e t i d u A Since a liquidity crisis could have a myriad of causes, we focus on a scenario that encompasses 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 se- curities eligible for pledging at the major central banks, or by selling inventory. In both cases we apply crisis-level discounts to the value of assets. We assume that we would generally be unable to renew any of our wholesale unsecured debt, including all our maturing money market paper (CHF 52 bil- lion outstanding on 31 December 2009). Since liquidity needs may also result from commitments and contingencies, including credit lines extended to secure the liquidity needs of customers, we regularly monitor undrawn committed credit facilities and other latent liquidity risks and factor these into the scenario analysis. Particular emphasis is placed on potential drawdowns of committed credit lines. If our credit rating were to be downgraded, “rating trig- ger” clauses, especially in derivative contracts, could result in an immediate cash outflow due to the unwinding of deriva- tive positions or the need to deliver additional collateral. We also take into account the potential impact on our net liquidity position of adverse movements in the replacement value of our OTC derivative transactions, which are subject to collateral arrangements. Given the diversity of our deriva- tives business and that of our counterparties, there is not necessarily a direct correlation between the factors influenc- ing net replacement values with each counterparty and a UBS-specific crisis scenario. ➔ Refer to the “Note 23 Derivative instruments and hedge accounting” in the “Financial information” section of this report for more information Liquidity limits and controls Liquidity and funding limits and targets are set by the BoD, the Group ALCO, the Group CFO and the Group Treasurer, taking into consideration our business model and strategy, the prevailing market conditions and our tolerance for risk. The principles underlying our limit and target framework aim to maximize and sustain the value of our business franchise and appropriately balance the asset / liability structure in light of prevailing market conditions. Structural limits and targets focus on the composition and profile of the balance sheet, while supplementary limits and targets are designed to drive the utilization and allocation of funding resources. Together the limits and targets focus on structural liquidity risk for terms from intra-day out to one year, including stress testing, and on the liability mix, including diversification by source, currency and tenor. Group Treasury is responsible for the oversight of the liquidity and funding limits and targets. Per- formance versus limits and targets is monitored and regu- larly communicated to senior management. To complement and support the limit framework, mem- bers of our regional and divisional treasuries monitor the markets in which we operate for potential threats and regu- larly report significant findings to Group Treasury. t n e m e g a n a m y r u s a e r t d n a k s i R d e t i d u A We have contingency plans for liquidity crisis manage- ment, the cornerstone of which are our substantial liquidity 145 Risk and treasury management Treasury management d e t i d u A reserves, including a large multi-currency portfolio of unen- cumbered high-quality short-term assets and available and unutilized liquidity facilities at several major central banks. d e t i d u A pendence on any particular source. A maturity breakdown of our long-term straight debt portfolio of CHF 64 billion is shown at the end of this section. 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 Trea- sury, FICC, and related areas including the functions respon- sible for payments and settlements, market and credit risk control, collateral and margin management, and informa- tion technology and infrastructure. Our centralized global management model lends itself naturally to efficient liquidity crisis management. Should a crisis require contingency fund- ing measures to be invoked, Group Treasury takes responsi- bility for coordinating liquidity generation together with rep- resentatives from FICC and the relevant business areas. Funding d e t i d u A Our wealth management businesses continue to represent valuable and cost-efficient sources of funding. These busi- nesses contributed CHF 323 billion, or 79%, of the CHF 410 billion total customer deposits shown in the “UBS asset funding” graph. Compared with the CHF 307 billion of net loans as of 31 December 2009, customer deposits provided 134% coverage compared with 140% on 31 December 2008. In terms of secured funding (i.e. repurchase agree- ments and securities lent against cash collateral received), we borrow less cash on a collateralized basis than we lend, leading to a surplus of net securities sourced – shown as the CHF 108 billion cash-equivalent surplus in the “UBS asset funding” graph. Furthermore, funding is provided through numerous short-, medium- and long-term funding pro- grams, which provide specialized investments to institutional and private clients in Europe, the US and Asia. These pro- grams can efficiently raise funds globally, reducing our de- Verküpung d e t i d u A UBS asset funding As of 31.12.09 67 82 180 Cash, balances with central banks and due from banks Financial investments available-for-sale Cash collateral on securities borrowed and reverse repurchase agreements 232 Trading portfolio assets CHF 108 billion surplus Due to Banks Money market paper issued Cash collateral on securities lent and repurchase agreements Trading portfolio liabilities Financial liabilities designated at fair value Demand deposits 307 Loans 62 Other assets (incl. net RVs) Time deposits Fiduciary deposits Retail savings/deposits 134% coverage s t i s o p e D Long-term debt Other liabilities Total Equity Assets Liabilities and equity 65 52 72 47 113 187 79 43 102 80 43 48 146 Through broad diversification of our funding sources (by market, product and currency), we maintain a well-balanced portfolio of liabilities, which provide protection in the event of market disruptions. This, together with our centralized funding management, enables us to efficiently fund our business activities. Funding approach Medium- and long-term funding activities are planned by as- sessing the overall funding profile of the balance sheet. The ability to continue to fund ongoing business activities through periods of difficult market conditions is also factored in. Since the beginning of 2007, prior to the outbreak of the recent financial crisis, we have maintained our funding profile through public issuance of senior, straight, and long-term debt. As part of these continuing diversification efforts, in third quarter 2009, we launched our inaugural covered bond program, from which we issued euro-denominated bonds that are indirectly covered by a pool of prime, Swiss franc- denominated Swiss residential mortgages originated and ser- viced by UBS AG through our branch network in Switzerland. In addition to continuing to raise medium- and long-term funds through medium-term notes and private placements, during 2009 we raised over CHF 11 billion through bench- mark public senior debt issuance, following the CHF 24 bil- lion raised from these sources during 2008. This included two covered bonds totaling around the equivalent of CHF 4.5 billion under the aforementioned new covered bond program. We raised a further CHF 6 billion through Swiss covered bond (Pfandbrief) issuances via the Swiss Mortgage Bond Bank during 2009. Additionally, the placement of new shares from authorized capital in June 2009 generated ap- proximately CHF 3.8 billion of long-term funds. To ensure that a well-balanced and diversified liability structure is preserved, Group Treasury routinely monitors our funding status and reports its findings on a monthly basis to the Group ALCO. A key measure employed among our main analysis tools is the assessment of our “cash capital“ posi- tion, this concept is designed to ensure that illiquid assets can be financed by long-term sources of funding. 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 “be- havioral“ maturity of at least one year. Cash capital con- sumption reflects the illiquid portion of the assets which could not be transformed into cash by secured funding. For a given asset, the illiquid portion is the difference (the “hair- cut“) between the carrying value of an asset on the balance sheet, and its effective cash value when used as collateral in a secured funding transaction. 3CM014a_e UBS: funding by product and currency In % 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 31.12.09 31.12.08 All currencies CHF EUR USD Others Securities lending Repurchase agreements Interbank Money market paper Retail savings / deposits Demand deposits Fiduciary Time deposits Long-term debt 1 Total 1.0 8.1 8.2 6.5 12.8 23.7 5.4 9.9 24.3 100.0 1 Including financial liabilities designated at fair value. 1.4 10.2 12.5 11.1 9.1 14.8 6.1 16.3 18.6 0.0 1.0 0.8 0.2 8.4 4.8 0.3 0.8 3.2 0.0 0.9 0.8 0.3 6.0 2.8 0.3 1.6 2.7 0.2 1.4 2.6 0.6 0.8 5.1 1.5 1.3 9.7 0.4 1.6 4.9 1.0 0.1 3.1 2.0 2.7 6.0 100.0 19.4 15.4 23.4 21.7 0.5 4.5 2.4 5.0 3.6 10.5 2.9 4.8 7.8 42.0 0.6 6.7 4.9 8.6 3.0 6.8 3.0 8.9 5.1 47.6 0.3 1.2 2.4 0.7 0.0 3.3 0.6 3.0 3.6 15.2 0.4 1.1 1.8 1.2 0.0 2.1 0.7 3.1 4.8 15.3 We also regularly monitor our main funding portfolios for any concentration risks. Funding position and diversification We continue to maintain a balanced portfolio of liabilities that is broadly diversified by market, product and currency. The vast product offerings and global scope of our business activities are the primary reasons for funding stability. Fund- ing 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. Our domestic retail and global wealth man- agement businesses are also a valuable source of funding. The overall composition of our funding sources at the end of 2009 is shown in the table above and the pie-charts be- low. These funding sources amounted to CHF 792 billion on the balance sheet, down from CHF 1,007 billion a year be- fore, and comprise repurchase agreements, securities lend- ing against cash collateral received, due to banks, money market paper issued, due to customers and long-term debt including financial liabilities at fair value. While the composi- tion was broadly similar to the prior year-end, there was a discernible shift away from time deposits, short-term money market paper and interbank debt towards higher propor- tions of demand deposits, long-term debt and savings de- posits. Money market paper issuance accounted for 7% of our funding sources on 31 December 2009, compared with 11% a year before, and at the same time the relative share of short-term interbank borrowing dropped to 8% from 13%. Customer time and demand deposits (excluding fidu- ciary deposits) accounted for 34%, up from 31% on 31 De- cember 2008, and savings deposits for 13%, up from 9% on 31 December 2008, of these funding sources. Compared with the prior year-end, the proportion of funding from fidu- ciary deposits was down slightly to 5% from 6%. The pro- portion of our funding from long-term debt including finan- cial liabilities designated at fair value was up to 24% from 19% a year earlier, reflecting our continued increased focus on medium- to long-term debt issuances. During 2009, we decreased our secured funding, with the proportion declin- ing to 9% from 11% at prior year-end, primarily through decreased repurchase agreements. Credit Ratings Credit ratings generally affect the cost and availability of funding, in particular with regard to funding from wholesale UBS: funding by product type¹ In % As of 31.12.09 UBS: funding by currency¹ In % As of 31.12.09 5 10 24 13 7 8 1 8 Fiduciary Time deposits Long-term debt Securities lending Repurchase agreements Interbank 24 Money market paper Retail savings/deposits Demand deposits 1 Excluding trading portfolio liabilities, negative replacement values, other liabilities and equity. 15 19 CHF EUR USD Other 23 43 3CM003_e 1 Excluding trading portfolio liabilities, negative replacement values, other liabilities and equity. 3CM004_e 147 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Treasury management Credit ratings As of 31.12.09 Short-term debt rating Long-term senior debt rating Standard & Poor’s Moody’s Rating Outlook Rating A–1 A+ stable stable P–1 Aa3 Outlook negative negative Fitch Ratings Rating Outlook F1+ A+ stable stable Service downgraded our long-term senior unsecured debt rating from Aa2 to Aa3 in November 2009, while Fitch Rat- ings and Standard & Poor’s long-term senior unsecured debt ratings remained unchanged during 2009 at A+. The table above summarizes our short- and long-term debt ratings as of 31 December 2009. Maturity breakdown of long-term straight debt portfolio The graph on the left-hand side shows a contractual maturity breakdown of our long-term straight debt portfolio, and therefore excludes all structured debt, which is predominantly booked as Financial liabilities designated at fair value. The long-term straight debt portfolio amounted to CHF 64 billion on 31 December 2009, and is part of the CHF 131 billion shown on the Debt issued line on the balance sheet (which in addition includes money market paper issued). It is composed of CHF 53 billion of senior debt including both publicly and privately placed notes and bonds as well as Swiss cash bonds, and CHF 11 billion of subordinated debt. Of the positions shown in the graph, CHF 11 billion, or 17%, will mature dur- ing 2010. 23.0 d e t i d u A 24.5 Maturity analysis of financial liabilities Contractual maturity information of our assets and liabilities serves as a starting point for the stress testing analyses which are described above. Following IFRS guidance, the disclosure of contractual maturities includes financial liabilities only. Our liquidity risk management framework includes, beside many other measures, a behavioral stress analysis, a more 3CM004c_e unsecured sources. Our credit ratings can also influence the performance of some of our businesses and contribute to maintaining client and counterparty confidence. Important factors used by rating agencies to assess a firm’s creditwor- thiness and determine its credit ratings include stability and quality of earnings, capital adequacy, risk profile and man- agement, liquidity management, diversification of funding sources, asset quality and corporate governance. Credit rat- ings reflect opinions of the rating agencies and can be changed at any time. Our short-term credit ratings from all three major rating agencies (Standard & Poor’s, Moody’s and Fitch Ratings) were unchanged and affirmed in 2009. Moody’s Investors Long-term straight debt – contractual maturities CHF billion As of 31.12.09 2010 2011 2012 2013–14 2015–19 2020–29 after 2029 Year of maturity Senior debt Subordinated debt 24 18 12 6 0 148 19.200001 14.400001 9.600000 4.800000 0.000000 d e t i d u A detailed breakdown and assessment of asset and liability po- sitions, and it also considers cash inflows from assets as well as outflows from various off-balance sheet exposures. d e t i d u A The contractual maturities of our non-derivative and non- trading financial liabilities as of 31 December 2009 present- ed in the table below are based on the earliest date on which we are required to pay. The total amounts contractually ma- turing in each time-band are also shown for 31 December 2008. Derivative positions and trading liabilities, which pre- dominantly include short sale transactions, are assigned to the column On demand as management believes that such presentation most accurately reflects the short-term nature of trading activities. The contractual maturity may extend over significantly longer periods. Maturity analysis of financial liabilities 1 d e t i d u A CHF billion On demand 2 Financial liabilities recognized on balance sheet Due within 1 month 2 Due between 1 and 3 months 2 Due between 3 and 12 months 2 Due between 1 and 5 years 3 Due after 5 years 3 Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities 4, 5 Negative replacement values 4 Financial liabilities designated at fair value Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total 31.12.09 Total 31.12.08 Financial liabilities not recognized on balance sheet Irrevocable loan commitments Guarantees Underwriting commitments Total 31.12.09 Total 31.12.08 50.3 8.0 7.2 47.5 409.9 0.0 261.6 0.0 0.0 21.7 806.3 1,212.3 57.2 16.1 0.0 73.3 59.9 7.1 0.0 46.6 0.0 0.0 2.3 119.8 8.5 21.9 7.4 213.5 449.4 1.1 0.3 1.8 3.2 0.2 1.9 0.0 6.6 0.0 0.0 4.7 14.5 0.0 15.8 0.0 43.4 80.6 0.3 0.2 0.2 0.8 0.0 3.2 0.0 3.8 0.0 0.0 22.3 13.6 0.0 26.5 0.0 69.4 60.7 0.5 0.2 0.2 0.9 0.1 1.3 0.0 0.0 0.0 0.0 44.7 0.9 0.0 36.9 0.0 83.8 75.9 0.2 0.1 0.0 0.3 0.1 1.4 0.0 0.0 0.0 0.0 38.7 0.1 0.0 30.4 0.0 70.6 87.0 0.0 0.1 0.0 0.1 0.0 Total 65.2 8.0 64.2 47.5 409.9 112.7 410.5 8.5 131.4 29.1 1,286.9 1,965.9 59.3 17.1 2.3 78.6 60.3 1 Only financial instruments (as disclosed in note 29a) are required to be disclosed in the maturity analysis, therefore, not all numbers in the table reconcile to the line items in the balance sheet. The differences relate to accrued expenses, deferred income and other liabilities and also comprise, deferred tax liabilities, provisions and liabilities from employee compensation plans. 2 Our liquidity risk management focus is on short and mid-term cash flows. In these time periods, the carrying values of non-derivative financial liabilities largely approximate the undiscounted cash flows. 3 Represents carrying values. 4 Carrying value is fair value. Management believes that this best represents the cash flows that would have to be paid if these positions had to be settled or closed out. Refer to “Note 23 Derivative instruments and hedge accounting” in the “Financial information” section of this report for undiscounted cash flows of derivatives designated in hedge accounting relation- ships. 5 Contractual maturities of trading portfolio liabilities are: CHF 45.9 billion due within one month; and CHF 1.6 billion due between one month and one year. t n e m e g a n a m y r u s a e r t d n a k s i R 149 Risk and treasury management Treasury management Interest rate and currency management Management of non-trading interest rate risk Market risk arising from management of consolidated capital d e t i d u A Our largest non-trading interest rate exposures arise within our wealth management business divisions. These exposures are transferred from the originating business into one of two centralized interest rate risk management units: Group Trea- sury or the Investment Bank’s FICC 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 FICC. Risks from Swiss franc transactions with fixed maturities great- er than one year are transferred to Group Treasury by individu- al back-to-back transactions. These fixed-rate products do not contain embedded options, such as early prepayment, which would allow clients to prepay at par. All prepayments are therefore subject to market-based unwinding costs. Current and savings accounts and many other retail prod- ucts of Wealth Management & Swiss Bank have no contrac- tual 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 port- folio is a series of loans or deposits at market rates and fixed terms between the originating business unit and Group Trea- sury, structured to approximate, on average, the interest rate cash flow and repricing behavior of the pooled client trans- actions. The portfolios are rebalanced monthly. Their struc- ture and parameters are based on long-term market obser- vations 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 invest- ments in associated companies. These risks are generally transferred to Group Treasury through replicating portfolios which, in this case, are designed to approximate the tenor profile mandated by senior management. Group Treasury manages its residual open interest rate exposures, taking advantage of any offsets that arise be- tween positions from different sources, within its approved market risk limits which include VaR and stress loss. The pre- ferred risk management instrument is interest rate swaps, for which there is a liquid and flexible market. All transac- tions are executed via the Investment Bank. Group Treasury does not directly access the external market. ➔ Refer to the “Market risk“ section of this report for further details on our market risk measures and controls 150 d e t i d u A The relationship between our capital and RWA, BIS tier 1 ratio, is monitored by regulators and analysts and is a key indicator of our financial strength. The majority of our capital and many of our assets are denominated in Swiss francs, but we also hold RWA and some eligible capital in other currencies, primarily US dollar, euro and UK sterling. Any significant depreciation of the Swiss franc against these currencies would adversely impact our BIS tier 1 ratio. Group Treasury’s mandate is to minimize adverse currency impacts on this ratio. On an overall Group basis, Group Treasury’s target profile is based on a currency mix which broadly reflects the cur- rency distribution of the consolidated RWA. As the Swiss franc depreciates or appreciates against these currencies, the consolidated RWA increase or decrease relative to our capi- tal. These currency fluctuations also lead to translation gains or losses on consolidation, which are recorded through eq- uity. Thus, our consolidated equity rises or falls in line with the fluctuations in the RWA, stabilizing the BIS tier 1 ratio. The capital of the parent bank itself is held predominantly in Swiss francs in order to avoid any significant effects of cur- rency fluctuations on its standalone financial results. Furthermore, Group Treasury has the mandate to gener- ate a stable interest income flow from the capital. The cap- ital of the parent bank and its subsidiaries is placed via in- terest-bearing cash deposits internally within our network. Group Treasury further maintains a portfolio of interest rate swaps to achieve a target tenor profile and return on in- vested equity. To provide a benchmark for investments of equity, Group Treasury defines a replicating portfolio of target tenors and currencies. The effective investment position created by both internal cash deposits and interest rate swaps are then mea- sured against this benchmark tenor replication portfolio. Mismatches between the two are measured, together with other non-trading interest rate risk positions, against Group Treasury’s market risk limits (VaR and stress loss). The structural foreign currency exposures (to hedge our BIS tier 1 ratio) are controlled by senior management but are not subject to internal market risk limits and are not included in Group Treasury’s reported VaR. On 31 December 2009, our consolidated equity was de- ployed as follows: in Swiss francs (including most of the cap- ital of the parent bank) with an average duration of approx- imately three years and an interest rate sensitivity of CHF 8.0 Group Treasury: Value-at-Risk (1-day, 95% confidence, 5 years of historical data) CHF million Interest rates Foreign exchange Diversification effect Total management VaR Year ended 31.12.09 Year ended 31.12.08 Min. Max. Average 31.12.09 Min. Max. Average 31.12.08 1 0 1 2 7 15 1 16 3 3 (1) 5 3 2 (1) 4 2 1 1 3 9 24 1 25 5 7 (3) 9 5 3 (2) 6 1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect. million per basis point; in US dollars with an average dura- tion of approximately four years and a sensitivity of CHF 7.1 million per basis point; in euros with an average duration of approximately three years and a sensitivity of CHF 1.0 million per basis point; and in UK sterling with a duration of ap- proximately three years and a sensitivity of CHF 0.4 million per basis point. The interest rate sensitivity of these positions is directly related to the chosen duration – targeting signifi- cantly shorter tenors would reduce the apparent interest rate sensitivity but would lead to greater fluctuations in interest income. Corporate currency management d e t i d u A Our corporate currency management activities are designed to reduce the impact of adverse currency fluctuations on our reported financial results, given regulatory constraints. We specifically focus on three principal areas of currency risk management: match funding and investment of non-Swiss franc assets and liabilities; sell-down of non-Swiss franc prof- its and losses; and selective hedging of anticipated non- Swiss franc profits and losses. Match funding and investment of non-Swiss franc assets and liabilities For monetary balance sheet items and non-core investments, we follow the principle of matching the currency of our as- sets with the same currency of the liabilities which fund them, as far as it is practical and efficient to do so. A US dol- lar asset thus is typically funded in US dollars, while a euro d e t i d u A liability is typically offset by an asset in euros. This avoids profits and losses arising from the retranslation of foreign currency assets and liabilities at the prevailing exchange rates to the Swiss franc at quarter ends. Sell-down of reported profits and losses For accounting purposes, reported profit and losses are translated each month from their original transaction cur- rencies into Swiss francs at exchange rates fixed at the pre- vailing month end. In order to eliminate earnings volatility on the retranslation of previously recognized earnings in foreign currencies, Group Treasury centralizes the profits and losses arising in the parent bank and sells or buys them for Swiss francs. Our other operating entities follow a similar monthly sell-down process into their own reporting currencies. Re- tained earnings in operating entities with a reporting cur- rency other than the Swiss franc are integrated and managed as part of our consolidated equity. Hedging of anticipated future reported profits and losses Our corporate currency management executes a dynamic and cost-efficient hedging strategy to protect anticipated fu- ture profit and losses in foreign currencies against a negative impact of adverse trends of foreign exchange rates from one reporting period to the next. At any point in time Group Treasury may hedge according to market perception part or all of the anticipated next three months’ earnings. Although intended to hedge future earnings, these transac- tions are accounted as open currency positions and are sub- ject to internal market risk VaR and stress loss limits. t n e m e g a n a m y r u s a e r t d n a k s i R 151 Risk and treasury management Treasury management Capital management d e t i d u A Sufficient capital must be available to support business ac- tivities, in accordance with both our own internal assess- ment and the requirements of our regulators, in particular our lead regulator FINMA. We aim to maintain sound capital ratios at all times, and we therefore consider not only the current situation but also projected developments in both our capital base and capital requirements. The main tools by which we manage our cap- ital ratios are active management of own shares, capital in- struments, dividends, and risk-weighted assets (RWAs). Capital adequacy management d e t i d u A Ensuring compliance with minimum regulatory capital re- quirements and target capital ratios is central to capital ad- equacy management. In this ongoing process, we manage towards tier 1 and total capital target ratios. In the target setting process we take into account the regulatory mini- mum capital requirements, regulators’ expectations that we hold additional capital above minimum requirements, our in- ternal assessment of aggregate risk exposure in terms of capital-at-risk, the views of rating agencies and comparisons with peer institutions considering our business mix and mar- ket presence. ➔ Refer to the “Risk management and control“ section of this report for more information on earnings-at-risk and capital-at-risk Regulatory requirements d e t i d u A We are subject to FINMA regulatory capital requirements, which result in higher RWA than under BIS guidelines. ➔Refer to the additional capital management disclosure in the “Basel II Pillar 3” section of this report d e t i d u A To allow for comparability, published RWA are deter- mined in accordance with the BIS guidelines. For the deter- mination of the eligible capital, there are no differences be- tween the BIS guidelines and FINMA regulations. In 2009, we complied with all externally imposed capital requirements. Regulatory developments In July 2009, the Basel Committee on Banking Supervision (the Committee) published the revised Basel II market risk framework and issued enhancements to the Basel II frame- work. Swiss banks are expected to comply with the revised requirements by 1 January 2011. The revisions to the Basel II market risk framework aim to address perceived shortcomings in the current VaR frame- work, most notably by introducing new capital requirements to incorporate effects of “stressed markets”. This is achieved by introducing a new incremental risk charge that accounts for default and migration risk of trading book positions and a stressed VaR requirement taking into account a one-year observation period relating to significant losses, which must be calculated in addition to the VaR based on the most re- cent one-year observation period. Furthermore, securitiza- tion positions, even though held for trading, will attract banking book capital charges. The enhanced Basel II framework introduces higher risk weights for resecuritization exposures, to better reflect the inherent risk in these products, and requires banks to conduct more rigorous credit analyses of externally rated securitization exposures. The Committee also issued valu- ation guidance for all illiquid positions accounted for at fair value. Additionally, the Group of Central Bank Governors and Heads of Supervision (the oversight body of the Committee) met in September 2009 to review a comprehensive set of measures to strengthen the regulation, supervision and risk management of the banking sector. In December 2009, the Committee issued a package of proposals to strengthen global capital and liquidity regulations to promote a more resilient banking sector. Based on the above, the Committee initiated a comprehensive impact assessment of the capital and liquidity standards, which will be carried out in the first half of 2010. The Committee will also consider appropriate transition and grandfathering arrangements. Together, these measures are intended to promote a better balance between financial innovation, economic efficiency, and sustainable growth in the long run. As disclosed in our 2008 financial report, FINMA intro- duced a minimum leverage ratio and higher target capital ratios for the two largest Swiss banks. Public statements by FINMA officials and by the Swiss National Bank suggest that Swiss authorities are actively considering what further mea- sures should be taken to reduce the systemic risk associated with Switzerland’s two largest banks, including measures re- lating to capital, liquidity and structure. It would be prema- ture to conclude whether these considerations will lead to further changes, and what effect such changes might have on our business and strategic direction. We continue to monitor all regulatory developments and will take necessary steps as required. 152 BIS Capital ratios UBS: BIS capital ratios¹ In % Basel I Basel II The BIS capital ratios compare eligible capital (tier 1 and total capital) with total RWA. At year-end 2009, the tier 1 ratio amounted to 15.4% and the total capital ratio to 19.8%, up from 11.0% and 15.0%, respectively, on 31 December 2008. In this period, RWA de- clined to CHF 206.5 billion from CHF 302.3 billion, while tier 1 capital decreased to CHF 31.8 billion from CHF 33.2 billion. ➔ Refer to the discussion on “Capital adequacy” and “Eligible capital” in this section for more information Capital requirements d e t i d u A Our capital requirements are based on our consolidated fi- nancial statements in accordance with IFRS, adjusted for reg- ulatory differences. Under IFRS, subsidiaries and special pur- pose entities that are directly or indirectly controlled by UBS must be consolidated, whereas for regulatory capital pur- poses, different consolidation principles apply. For example, subsidiaries that are not active in the banking and finance business are not consolidated. ➔ Refer to the additional capital management disclosure in the “Basel II Pillar 3” section of this report On 31 December 2009 BIS RWA were CHF 206.5 billion, compared with CHF 302.3 billion at year-end 2008. The analysis by component is as follows: Credit risk RWA for credit risk amounted to CHF 140.5 billion on 31 De- cember 2009, compared with CHF 222.6 billion on 31 De- cember 2008. The reduction was primarily related to lower derivatives RWA of CHF 42.1 billion and reduced loan book RWA of CHF 25.8 billion. The loan book decrease occurred mainly in the Investment Bank and Wealth Management & Swiss Bank. Further, RWA declined for security finance trans- actions, committed credit lines and guarantees as well as seed money exposures. In addition, a CHF 2.0 billion RWA reduction stemmed from the UBS Pactual sale. ➔ Refer to the “Credit risk” section of this report for more 4 0 Q 1 4 0 Q 2 4 0 Q 3 4 0 Q 4 5 0 Q 1 5 0 Q 2 5 0 Q 3 5 0 Q 4 6 0 Q 1 6 0 Q 2 6 0 Q 3 6 0 Q 4 7 0 Q 1 7 0 Q 2 7 0 Q 3 7 0 Q 4 8 0 Q 1 8 0 Q 2 8 0 Q 3 8 0 Q 4 9 0 Q 1 9 0 Q 2 9 0 Q 3 9 0 Q 4 14.2 13.9 13.9 14.1 14.2 13.4 12 12.8 12.5 12.1 12.3 12.6 11.9 12.8 11.6 19.4 19.8 17.7 15.5 14.8 14.5 14.5 15.8 16.2 15.0 15.0 13.9 15.0 15.0 14.7 15.4 15.0 13.3 13.3 12.6 12.7 12.7 12.2 12.0 12.2 12.2 13.2 11.0 11.1 11.0 11.0 10.5 9.1 7.4 20 16 8 4 BIS tier 1 capital ratio BIS total capital ratio 1 Prior to and including 4Q07 the capital ratios above are based on Basel I capital regulations, thereafter on Basel II rules. 3CM010_e Non-counterparty related assets RWA for non-counterparty related assets amounted to CHF 7.0 billion on 31 December 2009, compared with CHF 7.4 billion on 31 December 2008. Market risk In 2009, RWA for market risk decreased by CHF 14.8 billion to CHF 12.9 billion on 31 December 2009. This was due to the inclusion of credit valuation adjustments in regulatory VaR, reduced risk positions in the trading book as well as lower regulatory VaR multipliers. ➔ Refer to the “Market risk” section of this report for further information Operational risk RWA for operational risk increased to CHF 46.1 billion on 31 December 2009 from CHF 44.7 billion on 31 December 2008. This was related to the recognition of the US cross-border case and the regular scenario recalibration of operational risk events during 2009, which were partly offset by comparably low other operational risk losses experienced during 2009. ➔ Refer to the “Operational risk” section of this report t n e m e g a n a m y r u s a e r t d n a k s i R information for further information 153 Risk and treasury management Treasury management Eligible capital d e t i d u A Eligible capital, the capital available to support RWA, consists of tier 1 and tier 2 capital. To determine eligible tier 1 and total capital, specific adjustments must be made to equity attribut- able to our shareholders as defined by IFRS and as shown on our balance sheet. The most notable adjustments are the de- ductions for goodwill, intangible assets, investments in uncon- solidated entities engaged in banking and financial activities and own credit effects on liabilities designated at fair value. Tier 1 capital BIS tier 1 capital amounted to CHF 31.8 billion on 31 Decem- ber 2009, down from CHF 33.2 billion on 31 December 2008. The decrease in BIS tier 1 capital of CHF 1.4 billion is attributable to the CHF 2.7 billion loss recognized under IFRS, CHF 1.8 billion of own shares related components, CHF 2.8 billion capital impact related to coupon payments in con- nection with the mandatory convertible notes (MCNs) issued in March 2008 and the MCNs issued in December 2008, of which the latter was redeemed in August 2009. Further CHF 1.0 billion was due to changes in tier 1 deduction items and CHF 0.2 billion from other effects including FX. These nega- tive impacts were partly offset by the CHF 3.8 billion share issuance in June 2009, an adjustment for capital purposes of CHF 2.1 billion for losses on own credit and the positive ef- fect of CHF 1.2 billion from the sale of UBS Pactual. Hybrid tier 1 capital These instruments are perpetual and can only be redeemed if they are called by the issuer after having received regula- d e t i d u A tory approval. The payment of interest is subject to compli- ance with minimum capital ratios and other requirements. Any missed payment is non-cumulative. As of 31 December 2009, our hybrid tier 1 instruments amounted to CHF 7.2 billion. Under IFRS, these instruments are accounted for as equity attributable to minority interests. Tier 2 capital These instruments consist mainly of our subordinated long- term debt that ranks senior to both our shares and hybrid tier 1 instruments but is subordinated to all our senior obli- gations. Tier 2 capital net of tier 2 deductions accounted for CHF 9.1 billion in total capital as of year-end 2009. ➔ Refer to the “Shares and capital instruments“ section of this report for details about our issuance of capital securities during 2009, including hybrid tier 1 instruments and tier 1 instruments Transfer of capital within UBS Group 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 UBS Group. The legal entity structure of the Group is designed to support our businesses within an efficient legal, tax, regula- tory and funding framework. We enter into intragroup transactions in order to provide funding and capital to indi- vidual UBS entities. As of 31 December 2009, we were not aware of any material restrictions, or other major impedi- ments, concerning the transfer of funds or regulatory capital within the Group apart from those which apply to these en- tities by way of local laws and regulations. Capital adequacy CHF million, except where indicated BIS tier 1 capital of which: hybrid tier 1 capital BIS total capital BIS tier 1 capital ratio (%) BIS total capital ratio (%) BIS risk-weighted assets of which: credit risk 1 of which: non-counterparty related risk of which: market risk of which: operational risk 1 Includes securitization exposures and equity exposures not part of the trading book and capital requirements for settlement risk (failed trades). 31.12.09 31.12.08 31,798 7,224 40,941 15.4 19.8 206,525 140,494 7,026 12,861 46,144 33,154 7,393 45,367 11.0 15.0 302,273 222,563 7,411 27,614 44,685 154 d e t i d u A Capital components CHF million BIS tier 1 capital prior to deductions of which: paid-in share capital of which: share premium, retained earnings, currency translation differences and other elements of which: non-innovative hybrid tier 1 capital instruments of which: innovative hybrid tier 1 capital instruments Less: treasury shares / deduction for own shares 1 Less: goodwill & intangible assets Less: other deduction items 2 BIS tier 1 capital Upper tier 2 capital Lower tier 2 capital Less: other deduction items 2 BIS total capital 31.12.09 47,367 356 39,788 1,785 5,438 (2,424) (11,008) (2,138) 31,798 50 11,231 (2,138) 40,941 31.12.08 48,758 293 41,072 1,810 5,583 (1,488) (12,950) (1,167) 33,154 1,090 12,290 (1,167) 45,367 1 Consists of: i) net long position in own shares held for trading purposes; ii) own shares bought for unvested or upcoming share awards and iii) accrual build for upcoming share awards. 2 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; expected loss on advanced internal rating- based portfolio less general provisions (if difference is positive); expected loss for equities (simple risk weight method); first loss positions from securitization exposures. IFRS equity to BIS tier 1 capital The main differences between IFRS equity attributable to shareholders and tier 1 capital result from: – An increase in BIS share premium of which CHF 3.7 billion stems from the MCNs issued in March 2008 and the out- standing accrual related to the MCN coupon of CHF 0.2 billion. – The difference of CHF 1.2 billion in Net income recognized directly in equity, net of tax is due to fair value changes recorded directly in equity under IFRS from Financial in- vestments available-for-sale and cash flow hedges (reduc- tion of CHF 1.6 billion). This was partly offset by CHF 0.4 billion of foreign currency translation differences due to a different regulatory scope of consolidation. – The increase of BIS share premium of CHF 3.7 billion re- sulted in an equivalent reduction of the IFRS retained earnings which were reduced for gains on own credit net of tax of CHF 0.8 billion related to the application of the fair value option under IAS 39 and CHF 0.2 billion related to different regulatory scope of consolidation. – Removing minority interests of CHF 0.3 billion for regula- tory purposes not eligible as tier 1 capital. – A negative adjustment in Treasury shares / deduction for own shares of CHF 1.4 billion mainly due to accruals for upcoming share awards. t n e m e g a n a m y r u s a e r t d n a k s i R d e t i d u A Reconciliation of International Financial Reporting Standards equity to BIS tier 1 capital CHF million Share capital Share premium Net income recognized directly in equity, net of tax Revaluation reserve from step acquisitions, net of tax Retained earnings Equity classified as obligation to purchase own shares Equity attributable to minority interests Treasury shares / deduction for own shares 2 Total equity / gross tier 1 including MCNs and hybrid tier 1 instruments Less: goodwill, intangible assets and other deduction items Less: accrual for expected future dividend payments Eligible BIS tier 1 capital 31.12.09 IFRS view 1 Reconciliation items 0 356 34,786 (4,875) 38 11,751 (2) 7,620 (1,040) 48,633 3,888 (1,214) 0 (4,687) 2 (295) (1,384) (3,690) BIS view 356 38,674 (6,089) 38 7,064 0 7,325 (2,424) 44,944 (13,146) 3 0 31,798 1 International Financial Reporting Standards (IFRS). 2 Generally, treasury shares are fully deducted from equity under IFRS, whereas for capital adequacy purposes this position covers the following: i) net long position in own shares held for trading purposes; ii) own shares bought for unvested or upcoming share awards; and iii) accrual build for upcoming share awards. 3 “Other deduction items” include primarily 50% of the deductions for net long position of non-consolidated participations in the finance sector, expected loss on advanced internal rating-based approach portfolio less general provisions (if difference is positive); expected loss for equities (simple risk weight method); first loss positions from securitization exposures. 155 Risk and treasury management Treasury management FINMA leverage ratio As disclosed in our 2008 financial report, FINMA introduced a minimum leverage ratio of 3% on Group level and expects that, in normal times, the ratio will be well above this. The FINMA leverage ratio is being progressively implemented un- til it is fully applicable on 1 January 2013. On 31 December 2009, our Group FINMA leverage ratio improved to 3.93%, compared with the 31 December 2008 ratio of 2.45%. During the year, average total assets prior to deductions decreased by CHF 785.5 billion, or 36%, to CHF 1,426.2 billion as a result of our continued efforts to reduce the balance sheet size. The reduction in average total adjusted as- sets was even more pronounced, falling by 40% to CHF 809.4 billion, more than compensating for the 4% decrease in BIS tier 1 capital (as discussed earlier within this section). The table be- low shows the FINMA leverage ratio calculation for the Group. Equity attribution framework In first quarter 2008, we implemented a new framework for attributing equity capital to our businesses. This reflects our overarching objectives of maintaining a strong capital base and guiding businesses towards activities with the best bal- ance among profit potential, risk and capital usage. Within this framework, the Group Asset and Liability Management Committee (Group ALCO) attributes equity to the businesses after considering their risk exposure, asset size, goodwill and intangible assets. The design of the equity attribution framework enables us to: – Calculate and assess return on attributed equity (RoaE) in each of our businesses. RoaE and return on BIS RWA are disclosed for all business groups and units. – Integrate Group-wide capital management activities with those at business group and business unit levels. – Measure performance in a consistent manner across busi- ness divisions and business units. – Make better comparisons between our 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 Group ALCO considers a number of factors that drive re- quired capital, including: – Equity requirements based on aggregated risk exposure, including the potential for losses exceeding our earnings capacity as defined by the firm’s risk-based capital. At cer- tain other institutions, this factor is referred to as “Eco- nomic Capital”. – Regulatory capital requirements which are based on RWA usage of the businesses. – The asset size of the businesses is capitalized with a spe- cific leverage ratio. After reviewing the results of this formulaic approach, the Group ALCO makes adjustments to the final tangible equity FINMA leverage ratio calculation CHF billion, except where indicated Total assets (IFRS) prior to deductions 1 Less: netting of replacement values 2 Less: loans to Swiss clients (excluding banks) 3 Less: cash and balances with central banks Less: other 4 Total adjusted assets BIS tier 1 capital (at year-end) FINMA leverage ratio (%) Average 4Q09 Average 4Q08 1,426.2 (420.9) (161.4) (22.1) (12.4) 809.4 31.8 3.93 2,211.7 (653.5) (165.5) (26.0) (14.6) 1,352.1 33.2 2.45 1 Total assets are calculated as the average of the month-end values for the three months in the calculation period. 2 Includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking law, based on the IFRS scope of consolidation. 3 Includes mortgage loans to international clients for properties located in Switzerland. 4 Refer to the “Capital components” table in this section for more information on deductions of assets from BIS tier 1 capital. 156 attribution to reflect the amount of equity it believes is ap- propriate for each business. This assessment is based on the expectations of the business’s clients and the business envi- ronment, including allowing for sufficient capital to support the business’s underlying risks and sustain extreme stress sce- narios. The amount of equity attributed to all the businesses corresponds to the amount that we believe is required to maintain a strong capital base and support our businesses adequately. If the total equity attributed to the businesses dif- fers from the Group’s actual equity during a particular period, the surplus or deficit is reflected in the Corporate Center. The amount of equity attributed to each division is an im- portant input into the calculation of economic profit for that division. That is, broadly speaking, economic profit equals profits minus attributed equity multiplied by cost of equity. As outlined in the table “Average attributed equity”, the amount of average equity attributed to the Investment Bank was reduced by CHF 2.0 billion due to lower risk exposures from fourth quarter 2008 to fourth quarter 2009. During the same period, the average equity attributed to Wealth Man- agement Americas decreased by CHF 1 billion, while Global Asset Management’s average attributed equity was reduced by CHF 0.5 billion. If equity attributable to minority interests (which primarily consists of tier 1 capital instruments issued by us) were in- cluded, then our total equity would roughly equal the equity attributed to the business divisions, as shown in the table below. Average attributed equity CHF billion Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Corporate Center Surplus / (Deficit) Average equity attributable to UBS shareholders Average excess total equity CHF billion Average equity attributable to UBS shareholders Average equity attributable to minority interests Pro forma average total equity Average equity attributed to business divisions and CC Average excess total equity t n e m e g a n a m y r u s a e r t d n a k s i R 4Q09 4Q08 9.0 8.0 2.5 24.0 1.0 (4.2) 40.3 4Q09 40.3 7.7 47.9 44.5 3.4 9.0 9.0 3.0 26.0 1.0 (8.5) 39.5 4Q08 39.5 8.2 47.7 48.0 (0.3) 157 Risk and treasury management Treasury management Shares and capital instruments Shares UBS shares and tier 1 capital The majority of our tier 1 capital comprises share premium and retained earnings attributed to UBS shareholders. As of 31 December 2009, total IFRS equity attributable to our shareholders amounted to CHF 41,013 million, and was rep- resented by a total of 3,558,112,753 issued UBS shares, of which 37,553,872 (1.1%) were held by us. Each share has a par value of CHF 0.10, and entitles the holder to one vote at the shareholders’ meeting and to a proportionate share of the dividend that is distributed. There are no preferential rights for shareholders and no other classes of shares are is- sued by the Parent Bank directly. In 2009, the shares issued were increased by a total of 625,532,204. This increase was due to the issuance of new- ly created shares for a share placement with institutional in- vestors in June (293,258,050 shares placed at CHF 13 each), the early conversion of MCNs by the Swiss Confederation in August (332,225,913 shares) plus a small number of exer- cises of employee options (48,241 shares). Under Swiss com- pany law, shareholders must approve in a shareholders’ meeting any increase in the total number of issued shares, which may arise from an ordinary share capital increase or the creation of conditional or authorized capital. The table below lists all shareholder-approved issuance of shares in ex- istence as per year end 2009. We have as an objective to source growth and dividends from retained earnings and not to dilute shares by the issuance of additional shares unless it is warranted by stressed financial market conditions or from regulators. Holding of UBS shares We hold own shares for two main purposes: in Group Trea- sury to cover employee share and option programs and in the Investment Bank, to a limited extent, for trading pur- poses where it engages in market-making activities in UBS shares and related derivative products. The holding of treasury shares on 31 December 2009 de- creased to 37,553,872 or 1.1% of shares issued, from 61,903,121 or 2.1% on the same date one year prior. In 2009, a limited number of employee options were ex- ercised and an additional 88.7 million new options were granted. As of 31 December 2009, 27.7 million shares were available to cover employee share delivery obligations and an additional 150 million unissued shares in conditional share capital are assigned to cover future employee option exercises. At year-end 2009, the shares available covered all exercisable in-the-money employee obligations. Shares issued Number of shares Balance at the beginning of the year Issue of shares for capital increase (conversion December 2008 MCN) Issue of shares for capital increase (share placement) Issue of shares for employee options Balance at the end of the year Shareholder-approved issuance of shares Authorized capital Capital increase Conditional capital March 2008 mandatory convertible notes SNB warrants Employee equity participation plans of UBS AG Employee stock ownership plan of former PaineWebber 158 For the year ended 31.12.09 2,932,580,549 332,225,913 293,258,050 48,241 3,558,112,753 Maximum number of shares to be issued Year approved by shareholder general meeting % of shares issued 31.12.09 5,001,246 277,750,000 100,000,000 149,994,296 29,350 2008 2008 2009 2006 2000 0.14 7.81 2.81 4.22 0.00 The presentation in the table below shows the purchase of our shares by treasury and does not include activities of the Investment Bank. notes will expire on 5 March 2010, leading to the expected issuance of 272,651,005 shares from conditional capital to the holders of the mandatory convertible notes. Treasury shares held by the Investment Bank The Investment Bank, acting as liquidity provider to the eq- uity index futures market and as a market maker in our shares and derivatives, has issued derivatives linked to our stock. Most of these instruments are classified as cash-set- tled derivatives and are primarily issued to meet client de- mand and for trading purposes. To hedge the economic ex- posure, a limited number of our shares are held by the Investment Bank. Capital instruments Mandatory convertible notes As part of the measures taken to strengthen our capital base in 2008, we issued two MCNs, with principal amounts of CHF 13 billion in private placements with two financial inves- tors and CHF 6 billion to the Swiss Confederation. The CHF 6 billion issued to the Swiss Confederation was converted early into 332,225,913 UBS shares on 25 August 2009, whereas the remaining CHF 13 billion convertible Hybrid tier 1 capital Hybrid tier 1 instruments represent innovative and non-in- novative perpetual instruments. They are accounted for under minority interests in the IFRS equity. We did not issue hybrid tier 1 instruments in 2009. As of 31 December 2009, we have CHF 7,224 million of such instruments in various currencies outstanding. Hybrid tier 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 inter- est 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 our subsidiaries and rank senior to our shares in dissolution. Payments under the instruments are subject to adherence to our minimum capital ratios. Any missed payment is non- cumulative. Treasury share activities Month of purchase January 2009 February 2009 March 2009 April 2009 May 2009 June 2009 July 2009 August 2009 September 2009 October 2009 November 2009 December 2009 Treasury shares purchased for employee share and option participation plans and acquisitions 1 Number of shares Average price in CHF Total number of shares Number of shares (cumulative) Average price in CHF 0 4,982,914 15,000,000 0 0 0 0 672,876 2,661,037 0 0 1,050,000 0.00 10.93 12.00 0.00 0.00 0.00 0.00 16.02 18.85 0.00 0.00 16.03 0 4,982,914 19,982,914 19,982,914 19,982,914 19,982,914 19,982,914 20,655,790 23,316,827 23,316,827 23,316,827 24,366,827 0.00 10.93 11.73 11.73 11.73 11.73 11.73 11.87 12.67 12.67 12.67 12.81 1 This table excludes market-making and related hedging purchases by UBS. The table also excludes UBS shares purchased by investment funds managed by us 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 our 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 1,391,350 UBS shares dur- ing the year and held 4,095,850 UBS shares as at 31 December 2009. Conversion price and number of shares MCNs Coupon 9% Amount (CHF billion) Issuance date Conversion period / maturity 13 5 March 2008 6 September 2008 5 March 2010 Conversion price per UBS share (CHF) 47.68 1 Conversion into number of UBS shares 272,651,005 1 Adjusted for dilution effects on the capital increase in June 2009. 159 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Treasury management Tier 2 capital The major element in tier 2 capital consists of subordinat- ed long-term debt. Tier 2 instruments have been issued in various currencies and with a range of maturities across capital markets globally. They accounted for CHF 11,231 million in total capital as of year-end 2009. Tier 2 instru- ments rank senior to both our shares and to hybrid tier 1 instruments but are subordinated to all our senior obliga- tions. Distributions to shareholders The decision whether to pay a dividend, and the level of the dividend, are dependent on our targeted capital ratios and its cash flow generation. In line with Swiss law, a dividend may only be paid out of an annual profit. The decision on dividend payments is proposed by the BoD to the share- holders and is subject to their approval at the Annual Gen- eral Meeting. The BoD has decided not to propose any div- idend for the financial year 2009. 160 UBS shares in 2009 UBS share price chart vs DJ Banks Titans 30 Index in % 1 January 2007 – 31 December 2009 125 100 75 50 25 0 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 UBS registered share CHF DJ Banks Titans 30 Index CHF For current share price refer to: www.ubs.com/quotes UBS shares are listed on the SIX Swiss Exchange, the New York Stock Exchange (NYSE) and the Tokyo Stock Exchange (TSE). Only a small volume of UBS shares has been traded on the TSE in recent years. On 4 February 2010 UBS AG’s Board of Directors decided to delist the firm’s shares from the TSE. Pending the TSE’s approval of the delisting application, we expect de-listing to take place in the second quarter of 2010. ➔ Refer to the “Capital structure“ section of this report for more information on UBS shares including par value, type and rights of security Over the course of 2009, UBS shares rose 8% on the SIX Swiss Exchange and 11% in US dollar terms on the NYSE, underperforming the global banking sector as measured by the Dow Jones Banks Titans Index which increased 35%. The MSCI World and the S&P 500 were up 28% and 26%, respectively. Share liquidity During 2009, the daily average volume in UBS shares on the SIX Swiss Exchange was 20.3 million shares. On the NYSE, it was 0.9 million shares. The SIX Swiss Exchange trades a high- er volume of UBS shares, and as such, it is expected to remain the main factor determining the movement in our share price. t n e m e g a n a m y r u s a e r t d n a k s i R (cid:47)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:75)(cid:92)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:19)(cid:124)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:21)(cid:19)(cid:19)(cid:21)(cid:3) (cid:21)(cid:19)(cid:19)(cid:22)(cid:3) (cid:21)(cid:19)(cid:19)(cid:23)(cid:3) (cid:21)(cid:19)(cid:19)(cid:24)(cid:3) (cid:21)(cid:19)(cid:19)(cid:25)(cid:3) (cid:21)(cid:19)(cid:19)(cid:26)(cid:3) (cid:21)(cid:19)(cid:19)(cid:27)(cid:3) (cid:20)(cid:18)(cid:18)(cid:27) (cid:20)(cid:25)(cid:19) (cid:20)(cid:21)(cid:19) (cid:3)(cid:27)(cid:19) (cid:3)(cid:23)(cid:19) (cid:3)(cid:3)(cid:3)(cid:19) (cid:19)(cid:23)(cid:22) (cid:19)(cid:21)(cid:20) 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(cid:21)(cid:37)(cid:47)(cid:18)(cid:20)(cid:21)(cid:65)(cid:71) CH0024899483 2.489.948 CINS H89231 33 8 161 (cid:16)(cid:21)(cid:15) (cid:16)(cid:17)(cid:15) (cid:23)(cid:15) (cid:19)(cid:15) (cid:15) 125.00 93.75 62.50 31.25 0.00 Risk and treasury management Treasury management During the hours in which both the SIX Swiss Exchange and NYSE are simultaneously open for trading (currently 3:30 p.m. to 5:30 p.m. Central European Time), price dif- ferences are likely to be arbitraged away by professional market-makers. The NYSE price will therefore typically be expected to depend on both the SIX Swiss Exchange price and the prevailing US dollar / Swiss franc exchange rate. When the SIX Swiss Exchange is closed for trading, traded volumes will typically be lower. However, the specialist firm making a market in UBS shares on the NYSE is required to facilitate sufficient liquidity and maintain an orderly market in UBS shares. UBS share data Registered shares Total ordinary shares issued Treasury shares Weighted average shares (for basic EPS calculations) Weighted average shares (for diluted EPS calculations) CHF Earnings per share (EPS) Basic EPS Basic EPS from continuing operations Diluted EPS Diluted EPS from continuing operations UBS shares and market capitalization Share price (CHF) Market capitalization (CHF million) 1 31.12.09 As of 31.12.08 31.12.07 3,558,112,753 2,932,580,549 2,073,547,344 37,553,872 61,903,121 158,105,524 3,661,086,266 2,792,023,098 2,182,836,078 3,661,841,214 2,793,174,654 2,184,303,404 For the year ended 31.12.09 31.12.08 31.12.07 (0.75) (0.74) (0.75) (0.74) (7.63) (7.68) (7.63) (7.69) (2.40) (2.59) (2.41) (2.59) 31.12.09 16.05 57,108 As of 31.12.08 14.84 43,519 31.12.07 46.60 108,654 % change from 31.12.08 8 31 1 Market capitalization is calculated based on the total UBS ordinary shares issued multiplied by the UBS share price at period end. The total UBS ordinary shares issued as of 31 December 2009 and as of 31 December 2008 do not reflect the 272.7 million UBS shares to be issued through the conversion of mandatory convertible notes placed with two investors in March 2008. In addition, the total UBS ordinary shares as of 31 December 2008 do not reflect the 332.2 million shares issued through the conversion of mandatory convertible notes issued in December 2008 and converted in August 2009. Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report for more information. 31.12.09 5,105,358 20,340 222,052 881 For the year ended 31.12.08 7,174,486 28,584 539,856 2,134 31.12.07 4,079,863 16,451 304,446 1,213 Source: Thomson Reuters Trading volumes 1000 shares SIX Swiss Exchange total SIX Swiss Exchange daily average NYSE total NYSE daily average 162 Stock exchange prices 1 SIX Swiss Exchange New York Stock Exchange High (CHF) Low (CHF) Period end (CHF) High (USD) Low (USD) Period end (USD) 2009 Fourth quarter 2009 December November October Third quarter 2009 September August July Second quarter 2009 June May April First quarter 2009 March February January 2008 Fourth quarter 2008 Third quarter 2008 Second quarter 2008 First quarter 2008 2007 Fourth quarter 2007 Third quarter 2007 Second quarter 2007 First quarter 2007 2006 Fourth quarter 2006 Third quarter 2006 Second quarter 2006 First quarter 2006 2005 Fourth quarter 2005 Third quarter 2005 Second quarter 2005 First quarter 2005 19.65 19.34 16.67 17.86 19.34 19.65 19.64 19.65 15.94 17.51 16.40 17.51 16.27 17.00 13.69 14.33 17.00 45.98 24.00 25.76 35.11 45.98 71.95 61.05 66.88 71.55 71.95 71.06 71.06 66.52 66.97 64.05 56.39 56.39 49.84 45.68 46.70 8.20 14.76 15.56 14.76 16.90 12.50 17.66 14.95 12.50 10.56 12.95 14.12 10.56 8.20 8.20 9.35 11.22 10.67 10.67 15.18 20.96 21.52 42.69 42.69 53.67 63.72 59.76 53.23 62.88 53.23 54.31 55.60 41.19 46.52 43.60 41.37 41.19 16.05 16.05 16.05 15.58 17.30 18.97 18.97 19.54 15.61 13.29 13.29 15.93 15.95 10.70 10.70 11.06 14.64 14.84 14.84 18.46 21.44 25.67 46.60 46.60 55.67 65.46 64.21 65.86 65.86 66.52 59.32 63.39 55.38 55.38 48.69 44.27 44.71 19.31 19.18 16.49 17.60 19.18 19.31 19.31 18.55 14.80 15.82 15.82 15.82 14.25 15.31 12.35 12.37 15.31 46.40 21.30 23.07 36.02 46.40 66.26 58.01 62.34 66.26 64.30 63.39 63.39 59.77 61.70 55.55 49.30 49.30 43.49 43.06 45.10 7.06 15.03 15.03 15.36 16.47 11.25 16.64 14.10 11.25 9.40 12.17 12.92 9.40 7.06 7.06 8.08 10.00 8.33 8.33 12.22 20.41 22.33 43.50 43.50 49.84 58.73 55.40 48.34 58.50 48.34 49.36 48.66 38.47 40.73 38.55 38.47 39.61 1 Historical share price adjusted for the rights issue and stock dividend 2008. t n e m e g a n a m y r u s a e r t d n a k s i R 15.51 15.51 15.51 15.69 16.59 18.31 18.31 18.32 14.74 12.21 12.21 15.03 13.64 9.43 9.43 9.05 12.45 14.30 14.30 17.54 20.66 28.80 46.00 46.00 53.25 60.01 59.43 60.33 60.33 59.31 54.85 54.99 47.58 47.58 42.75 38.93 42.20 163 Risk and treasury management Basel II Pillar 3 Basel II Pillar 3 Introduction We operate under the Basel II capital adequacy framework. This framework consists of three pillars, each of which fo- cuses on a different aspect of capital adequacy. Pillar 1 pro- vides a framework for measuring minimum capital require- ments for the credit, market and operational risks faced by banks. Pillar 2 addresses the principles of the supervisory re- view process, emphasizing the need for a qualitative ap- proach to supervising banks. The aim of Basel II Pillar 3 is to encourage market discipline by requiring banks to publish a range of disclosures on risk and capital. The Swiss Financial Market Supervisory Authority (FINMA) requires us to publish comprehensive quantitative and quali- tative Pillar 3 disclosures at least annually, as well as an up- date of quantitative disclosures and any significant changes to qualitative information at least semi-annually. This section presents our Basel II Pillar 3 disclosures as of 31 December 2009 and consists mainly of quantitative disclo- sures complemented with explanatory texts where needed. ➔ Qualitative disclosures related to our risk management and control, definitions and risk exposures as well as to 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 our Basel II Pillar 3 disclosures: Basel II Pillar 3 requirement Capital structure Capital adequacy Disclosure in the annual report “Capital management” section of this report “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 Investment positions Market risk Securitization Operational risk Interest rate risk in the banking book “Basel II Pillar 3” section of this report “Basel II Pillar 3” section of this report “Risk management and control” section of this report “Basel II Pillar 3” section of this report “Risk management and control” section of this report “Basel II Pillar 3” section of this report Description of risk exposure measures and capital requirements Additional capital management disclosures In certain cases, our Pillar 3 disclosures may differ from the way we manage our risks and how these risks are disclosed in our quarterly reports and in other sections of this annual re- port. The naming conventions for the “Exposure segments” used in the following tables are based on the Bank for Inter- national Settlements (BIS) rules and differ from those under Swiss and EU regulations. For example, “Sovereigns” under the BIS naming convention equate to “Central governments and central banks” as used under the Swiss and EU regula- tions. Similarly, “Banks” equate to “Institutions” and “Resi- dential mortgages” equate to “Claims secured on residential real estate.” The table on the next page provides a more de- tailed summary of the approaches we use for the main risk categories for the determination of regulatory capital. Although we determine published risk-weighted assets (RWA) according to the Basel II Capital Accord (BIS guide- lines), our calculation of the regulatory capital requirement is based on the regulations of FINMA, which are more conser- vative and therefore resulting in higher RWA. Generally, the scope of consolidation for purposes of cal- culating 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 Signifi- cant subsidiaries and associates” in the “Financial informa- tion” section of this report. More specifically, the main differ- ences in the basis of consolidation for IFRS and regulatory 164 Category Credit risk UBS approach Under the Advanced Internal Ratings Based (Advanced IRB) approach applied for the majority of our businesses, credit risk weights are determined by reference to internal counterparty ratings and loss given default estimates. We use 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 our credit portfolio, we apply the Standardized approach, based on external ratings. Non-counterparty related risk Non-counterparty related assets such as our premises, other properties and equipment require capital underpinning according to prescribed regulatory risk weights. Settlement risk Capital requirements for failed transactions are determined according to the rules for failed trades and non-delivery-versus- payment transactions under the BIS Basel II framework. Equity exposures outside trading book Simple risk weight method under the IRB approach. Market risk Operational risk Securitization exposures Regulatory capital requirement is derived from our Value at Risk (VaR) model, which is approved by FINMA. We developed a model to quantify operational risk, which meets the regulatory capital standard under the Basel II Advanced Measurement Approach (AMA). Securitization exposures in the banking book are assessed using the Ratings Based approach under the IRB, applying risk weights based on external ratings. capital purposes relate to the following entity types and ap- ply regardless of our level of control: – Real estate and commercial companies as well as collec- tive investment schemes are not consolidated for regula- tory capital purposes but are risk-weighted. – Insurance companies are not consolidated for regulatory The “Detailed segmentation of BIS risk-weighted assets” table below provides a granular breakdown of our risk- weighted assets. The table also shows the Net Exposure at Default (“Net EAD”) per category for the current disclosure period, which forms the basis for the calculation of the risk- weighted assets. capital purposes but are deducted from capital. ➔ For further information on risk-weighted assets or the – 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 ful- ly consolidated for regulatory capital purposes, whereas they are valued under equity method accounting for IFRS. Detailed segmentation of BIS risk-weighted assets determination of the eligible capital, please refer to the “Capital management” section of this report CHF million Credit risk Sovereigns Banks Corporates Retail Residential mortgages Lombard lending Other retail Securitization exposures Non-counterparty related risk Settlement risk (failed trades) Equity exposures outside trading book Market risk Operational risk Total BIS risk-weighted assets Additional risk-weighted assets according to FINMA regulations 6 Total FINMA risk-weighted assets Net EAD 585,549 128,957 109,049 165,246 119,859 58,723 3,714 31,277 19,499 128 1,303 637,756 31.12.09 Advanced 1 95,161 Basel II RWA Standardized 2 32,057 6,680 16,651 56,377 12,332 2,682 441 8,515 30 4,657 3 12,861 4 46,144 5 167,369 380 1,654 26,802 1,166 0 2,055 7,026 73 39,156 31.12.08 Total 208,459 10,196 28,209 148,062 Total 127,218 7,060 18,305 83,179 13,498 14,650 2,682 2,496 8,515 7,026 103 4,657 12,861 46,144 206,525 19,103 6 225,628 7 4,502 2,840 6,202 7,411 256 7,646 27,614 44,685 302,273 32,620 334,893 1 Internal ratings-based. 2 BIS defined standardized approach. 3 Simple risk weight method. 4 Value-at-Risk approach. 5 Advanced measurement approach (AMA). 6 Reflects an additional charge of 10% on credit risk RWA for exposures treated under the standardized approach, a FINMA surcharge of 200% for RWA of non-counterparty related assets and additional FINMA capital require- ments for market risk. 7 As of 31 December 2009, the FINMA tier 1 ratio amounts to 14.1% and the FINMA total capital ratio to 18.1%. Taking into account the effects from the transitional provisions of the capital floor, which require that during the year 2009 Basel II capital requirements have to amount to at least 80% of Basel I capital requirements, FINMA RWA would increase by CHF 3.3 billion, resulting in a FINMA tier 1 ratio of 13.9% and a FINMA total capital ratio of 17.9%. 165 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Basel II Pillar 3 Credit risk The tables in this section provide details on the exposures used to determine the firm’s credit risk regulatory capital. The pa- rameters applied under the advanced IRB approach are gener- ally based on the same methodologies, data and systems used by the firm for internal credit risk quantification, except where certain treatments are specified by regulatory requirements. These include, for example, the application of regulatory pre- scribed floors and multipliers, and differences with respect to eligibility criteria and exposure definitions. The exposure infor- mation presented in this section differs therefore from that dis- closed in the “Risk management and control” section of this report. Similarly the regulatory capital prescribed measure of credit risk exposure also differs to that required under IFRS. With respect to the calculation of derivative exposures for determining our required regulatory capital, we have re- ceived 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 derivatives portfolio, we also apply the Current Exposure Method (based on the re- placement value of derivatives in combination with a regula- tory-prescribed add-on). The regulatory net credit exposure detailed in the tables in this section is shown as the Basel II EAD after applying collateral, netting and other eligible risk mitigants permit- ted by the relevant regulations. This section also presents information on impaired and defaulted assets in a seg- mentation which is consistent with the regulatory capital calculation. Credit risk exposures and risk-weighted assets This table shows the average exposure and the derivation of risk-weighted assets from the regulatory gross credit exposure. Exposure Average regulatory risk-weighting 2 Risk-weighted assets CHF million Cash and balances with central banks Due from banks Loans Financial assets designated at fair value Off-balance sheet 3 Banking products Derivatives Securities financing Traded products Trading portfolio assets Financial investments available-for-sale 4 Accrued income and prepaid expenses Other assets Other products Total 31.12.09 Total 31.12.08 Average regulatory gross credit exposure Regulatory gross credit exposure 28,634 27,789 272,384 10,613 43,961 383,382 118,749 52,327 171,076 27,172 35,623 5,855 7,454 76,104 630,562 18,114 26,842 259,131 9,386 42,407 355,880 96,063 40,756 136,819 25,803 79,680 5,369 6,485 117,336 610,036 715,064 Less: regulatory credit risk offsets and adjustments 1 (98) (8,948) (10,183) (4,829) (344) (24,402) (69) (14) (83) (24,487) (33,116) Regulatory net credit exposure 18,016 17,893 248,948 4,557 42,064 331,478 96,063 40,756 136,819 25,803 79,680 5,299 6,472 117,253 585,549 681,947 4% 20% 19% 33% 27% 20% 39% 10% 30% 28% 2% 88% 98% 17% 22% 31% 662 3,490 48,363 1,481 11,417 65,413 37,454 4,147 41,601 7,257 1,957 4,663 6,326 20,204 127,218 208,459 1 Regulatory credit risk offsets and adjustments mainly include margin accounts for derivatives. 2 The derivation of risk-weighted assets is based on the various credit risk parameters of the Advanced Internal Ratings Based (Advanced IRB) approach and the Standardized approach respectively. 3 Includes contingent claims and undrawn irrevocable credit facilities. 4 Financial investments available- for-sale exclude equity positions. Includes high-quality liquid short-term securities issued by governments and government-controlled institutions following our strategic decision to rebalance our liquid- ity reserve, which led to a shift from repurchase agreements and trading positions into debt instruments available-for-sale. 166 Regulatory gross credit exposure by geographical region This table provides a breakdown of our portfolio by major types of credit exposure according to classes of financial instru- ments and also by geographical regions. The latter distribution is based on the legal domicile of the customer. CHF million Cash and balances with central banks Due from banks Loans Financial assets designated at fair value Off-balance sheet Banking products Derivatives Securities financing Traded products Trading portfolio assets Financial investments available-for-sale 2 Accrued income and prepaid expenses Other assets Other products Switzer- land 2,974 642 158,684 6,850 Other Europe 7,525 17,392 22,420 1,760 8,914 169,151 58,012 6,192 7,176 44,131 14,266 North America 1 4,195 4,384 58,381 7,255 24,014 98,229 33,694 12,282 13,368 58,396 45,976 11,601 24,765 718 1,108 4,947 50,175 4,087 1,295 38,193 60,504 655 365 3,744 4,765 Total regulatory gross credit exposure 31.12.09 187,283 154,601 204,709 Total regulatory gross credit exposure 31.12.08 208,777 184,294 257,654 1 North America includes the Caribbean. 2 Financial investments available-for-sale exclude equity positions. Regulatory gross credit exposure by counterparty type Latin America 169 3,741 638 4,549 488 37 525 245 3 21 2 270 5,344 8,887 Asia / Pacific 3,420 3,889 12,662 345 1,630 21,947 10,467 6,786 17,253 8,932 3,950 159 309 13,350 52,550 48,037 Africa / Middle East Total regulatory gross credit exposure Total regulatory net exposure 365 3,242 25 361 3,993 1,091 210 1,301 77 132 19 27 255 5,548 7,415 18,114 26,842 259,131 9,386 42,407 355,880 96,063 40,756 136,819 25,803 79,680 5,369 6,485 117,336 610,036 715,064 18,016 17,893 248,948 4,557 42,064 331,478 96,063 40,756 136,819 25,803 79,680 5,299 6,472 117,253 585,549 681,947 This table provides a breakdown of our portfolio by major types of credit exposure according to classes of financial instru- ments and also by counterparty type. The classification of counterparty type applied here is also used for the grouping of the balance sheet. CHF million Cash and balances with central banks Due from banks Loans Financial assets designated at fair value Off-balance sheet Banking products Derivatives Securities financing Traded products Trading portfolio assets Financial investments available-for-sale 2 Accrued income and prepaid expenses Other assets Other products Private individuals Corporates 1 Public entities (including sovereigns and central banks) 154,793 3,259 158,052 1,363 172 1,535 2 4,043 1,380 5,425 17,931 96 7,544 27 1,045 26,644 18,338 7,691 26,030 16,760 69,120 40 123 86,043 138,717 89,627 96,793 4,982 36,882 138,658 45,418 21,615 67,033 8,652 7,638 1,118 4,231 21,639 227,330 344,012 Banks and multilateral institutions 183 26,745 4,376 1,221 32,526 30,943 11,279 42,222 391 2,920 168 751 4,230 78,977 116,408 Total regulatory gross credit exposure Total regulatory net exposure 18,114 26,842 259,131 9,386 42,407 355,880 96,063 40,756 136,819 25,803 79,680 5,369 6,485 117,336 610,036 715,064 18,016 17,893 248,948 4,557 42,064 331,478 96,063 40,756 136,819 25,803 79,680 5,299 6,472 117,253 585,549 681,947 Total regulatory gross credit exposure 31.12.09 Total regulatory gross credit exposure 31.12.08 165,012 165,016 1 Includes corporates and non-banks financial institutions. 2 Financial investments available-for-sale exclude equity positions. ➔ Refer to the “Financial information” section of 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 167 t n e m e g a n a m y r u s a e r t d n a k s i R Risk and treasury management Basel II Pillar 3 Regulatory gross credit exposure by residual contractual maturity This table provides a breakdown of our portfolio by major types of credit exposure according to classes of financial instru- ments and also by maturity. The latter distribution is based on the residual contractual tenor. CHF million Cash and balances with central banks Due from banks Loans Financial assets designated at fair value Off-balance sheet Banking products Derivatives Securities financing Traded products Trading portfolio assets Financial investments available-for-sale 2 Accrued income and prepaid expenses Other assets Other products Total regulatory gross credit exposure 31.12.09 Total regulatory gross credit exposure 31.12.08 Due in 1 year or less Due over 1 year to 5 years Due over 5 years 3,008 101,202 1,059 10,127 115,395 34,959 9,338 44,297 17,466 71,888 89,355 249,047 247,904 299 77,379 6,040 29,934 113,651 24,551 2 24,553 6,476 6,971 13,447 151,651 171,558 130 40,942 1,339 1,605 44,016 36,553 116 36,669 1,846 819 2,665 83,350 125,600 Total regulatory gross credit exposure Total regulatory net credit exposure 18,114 26,842 259,131 9,386 42,407 355,880 96,063 40,756 136,819 25,803 79,680 5,369 6,485 117,336 610,036 715,064 18,016 17,893 248,948 4,557 42,064 331,478 96,063 40,756 136,819 25,803 79,680 5,299 6,472 117,253 585,549 681,947 Other 1 18,114 23,405 39,607 949 741 82,817 31,300 31,301 15 1 5,369 6,485 11,870 125,988 170,001 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. Derivation of regulatory net credit exposure This table 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 de- fined exposure segments. CHF million Total regulatory gross credit exposure Less: regulatory credit risk offsets and adjustments 2 Total regulatory net credit exposure Total 31.12.08 Advanced IRB approach 1 463,836 (18,310) 445,526 592,107 Standardized approach 146,200 (6,176) 140,024 89,841 Breakdown of the regulatory net credit exposure by exposure segment Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Total regulatory net credit exposure Total 31.12.08 128,146 36,163 103,280 118,213 58,723 1,000 445,526 592,107 37,100 92,794 5,769 1,646 2,715 140,024 89,841 1 Internal rating-based. 2 Regulatory credit risk offsets and adjustments mainly include margin accounts for derivatives. Total 31.12.09 610,036 (24,487) 585,549 165,246 128,957 109,049 119,859 58,723 3,714 585,549 Total 31.12.08 715,064 (33,116) 681,947 286,321 70,089 142,473 118,540 60,099 4,426 681,947 168 Regulatory gross credit exposure covered by guarantees and credit derivatives This table 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. It includes private commercial entities such as corporations, partner- ships or proprietorships, insurance companies, funds, ex- changes 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 develop- ment banks (MDB). ing to the Basel II Revised Framework, including, in par- ticular, risk-based capital requirements. Basel II also defines this regulatory exposure segment such that it contains ex- posures 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. – Lombard lending: loans which are made against the pledge of eligible marketable securities or cash. – Other retail: consists of exposures to small businesses, pri- vate clients and other retail customers without mortgage financing. – 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 ar- rangements comparable to those applied to banks accord- The collateral amounts in the table reflect the values used for determining regulatory capital. However, we utilize credit hedging 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. CHF million Exposure segment Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Total regulatory gross credit exposure 31.12.09 Total regulatory gross credit exposure 31.12.08 1 Includes guarantees and stand-by-letters of credit provided by third parties, mainly banks. Exposure covered by guarantees 1 Exposure covered by credit derivatives 3,359 334 380 11 611 50 4,746 4,302 23,991 47 940 0 0 0 24,978 28,368 t n e m e g a n a m y r u s a e r t d n a k s i R 169 Risk and treasury management Basel II Pillar 3 Advanced IRB approach Advanced IRB 1 approach: regulatory net credit exposure by UBS-internal rating This table provides a breakdown of the regulatory net credit exposure of our credit portfolio using the advanced IRB ap- proach according to our internal rating classes. UBS-internal rating Investment grade Sub-investment grade Defaulted 2 CHF million 0 / 1 2 / 3 4 / 5 6 – 8 9 – 13 Total regulatory net credit exposure 31.12.09 Total regulatory net credit exposure 31.12.08 Regulatory net credit exposure- weighted average PD Exposure segment Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Total 31.12.09 Total 31.12.08 0.009% 0.057% 0.279% 0.955% 5.742% 0.548% 0.484% 4,187 18,491 5,069 1 27,748 61,691 45,381 17,103 86,579 5,425 50,462 135 205,085 261,108 31,940 465 10,036 53,979 4,630 70 101,119 134,083 26,991 26 1,330 52,732 2,812 768 84,659 102,651 14,306 5,341 71 231 5,477 703 18 20,805 24,929 8 35 599 116 9 6,109 7,644 128,146 36,163 103,280 118,213 58,723 1,000 445,526 237,704 45,270 130,493 116,539 60,099 2,002 592,107 1 Internal rating-based. 2 Values of defaulted derivative contracts are based on replacement values including “add-ons” used in the calculation of regulatory capital. Advanced IRB 1 approach: exposure-weighted average loss given default (LGD) by UBS-internal rating This table provides a breakdown of the net exposure-weighted average loss given default for our credit portfolio exposures calculated using the advanced IRB approach, according to our internal rating classes. Undrawn commitments included in the advanced IRB approach are CHF 57.8 billion with an EAD of CHF 30.2 billion and an average regulatory risk-weighting of 27%. UBS-internal rating Investment grade Sub-investment grade CHF million 0 / 1 2 / 3 4 / 5 6 – 8 9 – 13 Regulatory net credit exposure-weighted average LGD (%) Regulatory net credit exposure- weighted average LGD (%) 31.12.09 Regulatory net credit exposure- weighted average LGD (%) 31.12.08 39 38 23 10 35 25 34 50 28 10 20 20 29 28 32 64 38 10 20 12 20 26 32 37 41 10 20 40 18 21 25 30 47 11 20 16 21 26 31 44 29 10 20 35 25 35 37 26 11 20 40 26 Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Average 31.12.09 Average 31.12.08 1 Internal rating-based. 170 Advanced IRB 1 approach: exposure-weighted average risk weight by UBS-internal rating This table provides a breakdown of the net exposure-weighted average risk-weight for our credit portfolio exposures calcu- lated using the advanced IRB approach according to our internal rating classes. UBS-internal rating Investment grade Sub-investment grade CHF million 0 / 1 2 / 3 4 / 5 6 – 8 9 – 13 Regulatory net credit exposure-weighted average risk weight (%) Regulatory net credit exposure- weighted average risk weight (%) 31.12.09 Regulatory net credit exposure- weighted average risk weight (%) 31.12.08 Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Average 31.12.09 Average 31.12.08 1 Internal rating-based. 15 3 8 1 5 8 17 32 11 2 3 3 12 13 36 60 40 5 11 6 19 28 59 65 79 12 6 51 28 35 83 106 154 29 30 24 68 87 42 17 15 10 4 42 20 39 19 17 10 6 43 24 t n e m e g a n a m y r u s a e r t d n a k s i R 171 Risk and treasury management Basel II Pillar 3 Standardized approach The standardized approach is generally applied where it is not possible to use the advanced IRB approach and / or where an exemption from the advanced IRB has been grant- ed 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 we use 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. We selected three FINMA-recognized external credit assess- ment institutions for this purpose – Moody’s Investors Service, Standard and Poor’s Ratings Group and Fitch Group. The map- ping of external ratings to the standardized approach risk weights is determined by FINMA and published on its website. Regulatory gross and net credit exposure by risk weight under the standardized approach 1 This table provides a breakdown of the regulatory gross and net credit exposure by risk-weight for our credit portfolio expo- sures treated under the standardized approach, according to Basel II defined exposure segments. CHF million 0% >0 – 35% 36 – 75% 76 – 100% 150% 31.12.09 31.12.08 Total exposure Total exposure Regulatory gross credit exposure Corporates Sovereigns 2 Banks Retail Residential mortgages Lombard lending Other retail Total 31.12.09 Total 31.12.08 Regulatory net credit exposure 3 Corporates Sovereigns 2 Banks Retail Residential mortgages Lombard lending Other retail Total 31.12.09 Total 31.12.08 1 92,174 1 12,988 300 4,156 92,176 23,884 17,444 14,773 1 92,174 1 12,988 300 4,140 92,176 23,884 17,428 14,165 904 27,179 1,087 2,640 961 2,704 7,209 8,732 369 23 685 28,256 47,731 27 1,115 1,612 904 22,120 1,087 1,605 961 2,688 6,157 7,550 320 23 685 23,148 42,630 27 1,115 1,611 42,159 92,843 6,821 1,646 2,731 146,200 37,100 92,794 5,769 1,646 2,715 140,024 53,651 24,885 13,654 2,065 2,476 96,731 48,618 24,818 11,979 2,001 2,424 89,841 1 The risk weights are based on regulatory values or external ratings. 2 Includes high-quality liquid short-term securities issued by governments and government-controlled institutions following our strategic decision to rebalance our liquidity reserve, which led to a shift from repurchase agreements and trading positions into debt instruments available-for-sale. 3 For traded products, the regula- tory gross credit exposure is equal to the regulatory net credit exposure. 172 Eligible financial collateral recognized under standardized approach This table provides a breakdown of the financial collateral, which is eligible for recognition in the regulatory capital calcula- tion under the standardized approach, according to Basel II defined exposure segments. CHF million Exposure segment Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Total 31.12.09 31.12.08 Regulatory net credit exposure under standardized approach Eligible financial collateral recognized in capital calculation 1 Regulatory net credit exposure under standardized approach Eligible financial collateral recognized in capital calculation 1 37,100 92,794 5,769 1,646 2,715 140,024 20,852 60 4,916 18 25,847 48,618 24,818 11,979 2,001 2,424 89,841 8,911 1,148 5,942 64 648 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 IFRS reported values and the regulatory net credit exposure. Impairment, default and credit loss Impaired assets by region This table 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, secu- rities financing transactions and derivative contracts. Regulatory gross credit exposure 187,283 154,601 204,709 5,344 52,550 5,548 610,036 715,064 Impaired assets 1 1,480 2,364 7,375 37 575 90 11,920 13,947 3 Specific allowances, provisions and credit valuation adjustments Exposure net of specific allowances, provisions and credit valuation adjustments (836) (1,185) (3,584) (25) (121) (80) (5,831) (7,252) 644 1,179 3,791 12 454 10 6,090 6,695 Collective allowances and provisions (49) (49) (23) Total allowances, provisions and specific credit valuation adjustments Total allowances, provisions and specific credit valuation adjustments 31.12.08 (885) (1,185) (3,584) (25) (121) (80) (5,881) (873) (1,138) (4,808) (56) (361) (41) (7,275) CHF million Switzerland Other Europe North America 2 Latin America Asia / Pacific Africa / Middle East Total 31.12.09 Total 31.12.08 1 Values of defaulted derivative contracts (CHF 4,607 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. 3 Restated from CHF 15,658 million originally reported in Annual Report 2008. In 2009, we implemented a threshold for designating a reclassified security as an “impaired loan”. Under this policy, a reclassified security is considered impaired if the carrying value at balance sheet date is on a cumulative basis 5% or more below the carrying value at reclassification date adjusted for redemptions. t n e m e g a n a m y r u s a e r t d n a k s i R 173 Risk and treasury management Basel II Pillar 3 Impaired assets by exposure segment This table shows a breakdown of credit exposures arising from impaired assets and allowances / provisions according to Basel II defined exposure segments. Impaired asset exposures include loans, off-balance sheet claims, securities financing transac- tions, and derivative contracts. CHF million Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Not allocated segment 4 Total 31.12.09 Total 31.12.08 Regulatory gross credit exposure 200,573 130,060 96,851 119,980 58,798 3,774 610,036 715,064 of which impaired assets 1 11,201 14 53 320 262 71 11,920 13,947 5 Specific allowances, provisions and credit valuation adjustments Collective allowances and provisions 2 (5,470) (10) (42) (92) (147) (71) (5,831) (7,252) (49) (49) (23) Total allowances, provisions and specific credit valuation adjustments 2 (5,470) (10) (42) (92) (147) (71) (49) (5,881) (7,275) Total allowances, provisions and specific credit valuation adjustments 31.12.08 (6,777) (12) (20) (103) (340) (23) (7,275) Write-offs 3 (1,990) (2) (7) (42) (5) (2,046) (868) 1 Values of defaulted derivative contracts (CHF 4,607 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 1.3 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 2009 to 31 December 2009. 4 Collective loan loss allowances and provisions are not allocated to individual counterparties and thus also not to exposure segments. 5 Restated from CHF 15,658 million originally reported in Annual Report 2008. Effective 1 April 2009, we implemented a threshold for designating a reclassified security as an “impaired loan”. Under this policy, a reclassified security is considered impaired if the carrying value at balance sheet date is on a cumulative basis 5% or more below the carrying value at reclassification date adjusted for redemptions. Changes in allowances, provisions and specific credit valuation adjustments This table 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. Specific allowances and provisions for banking products and securities financing 3,047 (2,046) 52 1,806 (37) (51) Specific credit valuation adjustments for derivatives 4,205 (722) (423) CHF million Opening balance as at 1.1.09 Write-offs Recoveries (on written-off positions) Increase / (decrease) in allowances, provisions and specific credit valua- tion adjustments 2 Foreign currency translations and other adjustments Transfers Closing balance as at 31.12.09 2,771 3,060 Total specific allowances, provisions and credit valuation adjustments 7,252 (2,046) 52 1,084 (460) (51) 5,831 Collective allowances and provisions 1 23 For the twelve-month period ended 31.12.09 For the twelve-month period ended 31.12.08 7,275 Opening balance as at 1.1.08 1,981 (2,046) 52 26 1,110 (460) (51) (868) 44 7,545 (867) (561) 49 5,881 Closing balance as at 31.12.08 7,275 1 Collective credit valuation adjustments of CHF 1.3 billion are partially included in the upper tier 2 capital and therefore not included in this table. 2 Total actual credit loss (credit loss expense and changes in specific credit valuation adjustments recognized in net trading income). 174 Total expected loss and actual credit loss This table provides a breakdown of the one-year expected loss estimate on our credit portfolios (including lending, de- rivative and securities financing portfolios) calculated at 31 December 2008 and the actual IFRS credit loss amount (including credit valuation adjustments on derivatives) charged against our income statement in 2009, according to Basel II defined exposure segments of the advanced IRB ap- proach. Comparison between our expected and actual loss- es has certain limitations as the two measures are not di- rectly comparable. In particular our expected loss estimate is an annualized average expected loss measure which takes into account our historical loss experience whereas actual loss represents our credit loss expense charged to the in- come statement incurred in the financial year. The difference in our expected and actual loss amounts resulted primarily from credit losses incurred on the portfolio of multi-asset-backed securities held by the Investment Bank that were reclassified from Held-for-trading to Loans and re- ceivables in fourth quarter 2008 and first quarter 2009. The related actual credit losses on these assets are reported un- der “Corporate” exposures in the table below and are not considered part of our core lending portfolio for the purpose of our expected loss estimation. Excluding the credit losses related to the reclassified securities portfolio, our expected and actual losses were more closely aligned. We regularly assess the performance of our expected loss estimate and do not consider it necessary to materially alter our estimation process for expected loss for 2010. CHF million Corporates 1 Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Not specified 2 Total Expected loss 31.12.08 Total expected loss Actual credit loss Actual credit loss and credit valuation adjustments 31.12.09 Specific credit valuation adjustments for defaulted derivatives Total actual credit loss and credit valuation adjustments 610 13 57 87 34 11 1,815 (722) 1,093 (1) 22 1 (52) 30 17 (1) 22 1 (52) 30 17 31.12.08 Total actual credit loss and credit valuation adjustments 6,681 547 (1) 308 34 (24) 812 3 1,832 (722) 1,110 7,545 1 Includes credit losses from reclassified securities, which amounted to CHF 425 million. 2 Includes changes in collective loan loss allowances and provisions. 3 Does not include CHF 43 million IRB equity EL treated under the simple risk-weight method. t n e m e g a n a m y r u s a e r t d n a k s i R 175 Other credit risk tables Credit exposure of derivative instruments This table provides an overview of our 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 deduc- tions used for accounting and regulatory capital purposes. Specifically, net current credit exposure is derived from gross positive replacement values, whereas regulatory net credit exposure is calculated using our internal credit valuation models. CHF million Gross positive replacement values Netting benefits recognized 1 Collateral held Net current credit exposure Regulatory net credit exposure (total counterparty credit risk) 2 of which treated with internal models (effective expected positive exposure (EPE)) 2 of which treated with supervisory approaches (current exposure method) 2 Breakdown of the collateral held Cash collateral Securities collateral and debt instruments collateral (excluding equity) Equity instruments collateral Other collateral Total collateral held 31.12.09 424,548 (313,172) (38,012) 73,364 96,063 79,111 16,952 34,049 3,243 95 625 38,012 31.12.08 860,943 (651,756) (51,765) 157,422 190,047 164,707 25,340 46,967 4,246 121 430 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 1 This table provides an overview of our credit derivative portfolio by product group using notional values. The table also pro- vides a breakdown of credit derivative positions used to manage our own credit portfolio (banking book for regulatory pur- poses) risks and those arising through intermediation activities (trading book for regulatory capital purposes). Notional amounts, CHF million Credit Default Swaps Total Return Swaps Total 31.12.09 Regulatory banking book Regulatory trading book Total Protection bought 22,043 22,043 Protection sold Total Protection bought Protection sold Total 31.12.09 31.12.08 527 62 589 22,571 1,262,541 1,181,843 2,444,383 2,466,954 3,617,457 62 6,354 4,707 11,061 11,123 24,044 22,633 1,268,895 1,186,550 2,455,445 2,478,077 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. 176 Our credit derivative trading is predominately on a collat- eralized basis. This means that our credit exposures arising from our derivatives activities with collateralized counterpar- ties are typically closed out in full or reduced to nominal lev- els on a regular basis by the use of collateral. Derivatives trading with counterparties with higher credit ratings (for example a large bank or broker-dealer) is typi- cally under an ISDA master trading agreement (MTA) and credit exposures to those counterparties from CDS, together with exposures from other OTC derivatives, are netted and included in the calculation of the collateral required to be posted. Trading with lower rated counterparties (for exam- ple, hedge funds) would also generally require an initial mar- gin to be posted by the counterparty. We therefore receive collateral from or post collateral to our counterparties based on our open net receivable or net payable from OTC derivative activities. Under the terms of the ISDA MTA and like forms, that collateral (which gener- ally takes the form of cash or highly liquid fixed income se- curities) is available to cover any amounts due under those derivative contracts. Settlement risk (including payment risk) of CDS has been mitigated to some extent by the development of a market wide credit event auction process which has resulted in a widespread shift to the cash settlement of CDS following a credit event on a reference entity. During 2009 and 2008, we participated in various industry-wide compression and “tear up” initiatives which reduced notional values and operational risks by terminating existing transactions and in certain cases replacing them with a smaller number of new transactions. We have not experienced any significant losses from failed settlements on CDS contracts in 2009 and 2008. The vast majority of our CDS trading activity is conducted by the Investment Bank. The “CDS Portfolio (split by coun- terparty)” table provides further analysis of the Investment Bank’s CDS counterparties based on notional amount of CDS protection purchased and sold. The analysis shows that the vast majority of the Investment Bank’s CDS counterpar- ties are market professionals. Based on the same notional measure, approximately 98% of these counterparties were rated investment grade and approximately 98% of the CDS activity was traded on a collateralized basis. CDS portfolio (split by counterparty) 1 Portfolio segment Developed markets commercial banks Broker-dealers, investment and merchant banks Hedge funds All other 1 Counterparty analysis based on notional CDS exposures of Investment Bank sourced from credit risk systems. % of total notional % of buy notional % of sell notional 64 28 1 7 63 28 1 8 66 28 2 4 t n e m e g a n a m y r u s a e r t d n a k s i R 177 Investment positions Equities disclosure for banking book positions This table provides an overview of our equity investments held in the banking book for regulatory capital purposes. The cal- culation 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. CHF million Equity investments Financial investments available-for-sale Financial assets designated at fair value Investments in associates Total equity investments under IFRS Realized gains and (losses), net Unrealized gains and (losses), net Consolidation scope adjustment Other positions designated equity exposures under BIS Total equity exposure under BIS of which: to be risk weighted publicly traded privately held of which: deducted from equity Capital requirement according to simple risk weight method Total capital charge Unrealized gains included in tier 2 Book value 31.12.09 31.12.08 1,351 841 870 3,062 77 466 (30) 743 3,774 1,452 1,110 1,212 373 1,585 50 1,681 1,079 892 3,653 815 421 (80) 405 3,978 1,423 1,681 874 612 1,486 69 The IFRS view differs from the regulatory capital view primar- ily due to: (i) differences in the basis of valuation in that IFRS is based on “fair value accounting” whereas “lower of cost or market value” (LOCOM) or “cost less impairment” are used for regulatory capital purposes; (ii) positions may be treated under a different framework to determine regulatory capital (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 shown in the table are realized and unrealized gains and losses. The firm had 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. 178 Securitization Sources and control of risks resulting from securitization structures The majority of our exposures that are categorized as securiti- zations (according to the regulatory definition of such expo- sures) were held by the Investment Bank in the portfolio of assets reclassified to Loans and receivables from Held-for- trading in fourth quarter 2008 and first quarter 2009. As at 31 December 2009, this portfolio included CDOs and CLOs with CDS protection purchased from monoline insurers, US commercial mortgage-backed securities, the US reference- linked note program and student loan ARS. We also contin- ued to repurchase student loan ARS from its clients in 2009 as a result of the firm’s commitment to restore liquidity to client holdings of these securities. Repurchased student loan ARS were also categorized as securitization exposures. From a risk control perspective these portfolios are subject to specific monitoring which may include interest rate and credit spread sensitivity analysis, as well as inclusion in firm-wide earnings- at-risk, capital-at-risk and combined stress test metrics. ➔ Refer to the “Exposure to auction rate securities” sidebar in the “Risk management and control” section of this report for more information ➔ Refer to “Note 29b Reclassification of financial assets” in the “Financial information” section of this report for more information We also held certain securitization positions (according to the regulatory definition of securitizations) that were man- aged under the market risk framework at 31 December 2009. A market risk treatment was applied to these posi- tions for determining regulatory capital. Regulatory treatment of securitization structures The disclosures in this section include exposures related to student loan ARS, CDOs and CLOs with CDS protection pur- chased from monoline insurers, US commercial mortgage- backed securities and the global reference-linked note programs, as these exposures were treated under the secu- ritization approach for determining regulatory capital at 31 December 2009. We generally applied the Ratings Based Approach to se- curitization exposures in the banking book using Moody’s, Standard & Poor’s and Fitch’s Ratings. Under the Ratings Based Approach, the amount of capital is capped at the cap- ital requirement that would be assessed against the underly- ing assets had they not been securitized. This treatment has been applied mainly to the US reference-linked note pro- gram and for the purposes of determining regulatory capital and Pillar 3 disclosure they are reported under the standard- ized approach. The related exposures are therefore not in- cluded in the tables below. The counterparty risk of interest rate or foreign currency derivatives with securitization vehicles are treated under the advanced Internal Ratings Based approach and are therefore not part of this disclosure. Accounting Policies For IFRS purposes, we treat originated securitized exposures as sales, i.e. they are derecognized from our balance sheet provided that specific de-recognition criteria are met and we do not consolidate the transferee (as described in “Note 1 Summary of significant accounting policies” in the “Finan- cial information” section of this report). A gain or loss on sale is recognized when exposures are derecognized. Deriva- tives used for synthetic securitizations are accounted for in line with the abovementioned note. Securitization positions that are classified as trading as- sets for IFRS purposes are valued at fair value as described in “Note 27 Fair value of financial instruments” in the “Finan- cial information” section of this report. Securitization posi- tions that have been redesignated from trading assets to loans and receivables are valued at amortized cost less im- pairment as described in “Note 1 Summary of significant ac- counting policies” in the “Financial information” section of this report. t n e m e g a n a m y r u s a e r t d n a k s i R 179 Risk and treasury management Basel II Pillar 3 Securitization exposures retained or purchased This table provides a breakdown of securitization exposures purchased or retained, split by asset type and risk weighting band, irrespective of our role (i.e. originator or investor) in the securitization transaction. The table shows securitization exposures used to determine regulatory capital, which generally equates to the IFRS book value. Additional granularity by asset type has been provided for securitization exposures at 31 December 2009. Where available, exposures at 31 December 2008 are shown on a similar basis. The increase in capital charges in 2009 compared to 2008 resulted mainly from downgrades. Exposure Type CHF million Commercial mortgages CDOs and CLOs Student Loans Other Total 1 Also contains commercial mortgages, CDOs and CLOs. Capital charge for securitization exposures retained or purchased Exposure amount 31.12.09 31.12.08 3,316 9,565 18,010 2,182 33,074 N/A N/A 21,543 13,592 1 35,135 CHF million over 0–10% over 10–15% over 15–20% over 20–35% over 35–50% over 50–75% over 75–100% over 100–250% over 250–1,250% deducted from capital Total Exposure amount Capital charge Exposure amount Capital charge 31.12.09 31.12.09 9,047 13,236 4,511 2,560 222 295 504 289 613 1,797 33,074 57 139 75 71 9 17 43 61 209 1,797 2,478 31.12.08 10,492 16,551 5,533 464 253 321 1,181 24 10 306 35,135 31.12.08 62 176 94 13 11 19 100 5 17 306 803 Securitization activity during the period We did not securitize any exposures during 2009. In 2008 we securitized exposures totaling CHF 1.5 billion. These were part of traditional securitization structures which com- prised residential and commercial mortgages. Exposure val- ues are based on the transaction date and were accounted for at fair value pre-securitization, hence the resulting gain or loss was not significant. At the point of securitization, we retained certain securitization exposures (typically senior tranches) for all traditional and synthetic securitizations we transacted. Total outstanding exposures securitized via synthetic securitizations Prior to 2008 we securitized exposures via synthetic se- curitizations as part of our global reference linked note program. The global reference linked note program mainly consisted of multi-asset securitization structures which refer- enced residential mortgages, credit card receivables, corpo- rate debt and other asset backed securities. Total outstand- ing exposures (based on exposures used to determine regulatory capital) that were part of synthetic securitizations decreased to CHF 3.2 billion at 31 December 2009 com- pared with CHF 10.7 billion at 31 December 2008. This de- crease mainly related to a reduction of the underlying secu- ritization pools from asset sales. Amount of impaired / past due assets securitized – synthetic securitizations CHF 102 million of outstanding impaired or past due expo- sures had been securitized by UBS via a synthetic securitiza- tion as of 31 December 2009 compared with CHF 212 mil- lion as of 31 December 2008. The exposure values are based on the amounts referenced in the transaction and are in- cluded when a credit event has occurred. Losses recognized on originated transactions during the period Losses of CHF 34 million as of 31 December 2009 (CHF 1.2 billion as of 31 December 2008) had been recognized by UBS on securitization tranches purchased or retained that result from a securitization originated by us, after taking into 180 account the offsetting effects of any credit protection that is an eligible risk mitigation instrument for the retained or re- purchased tranche. We partially report such exposures on a fair value and partially on an amortized cost less impairment basis. These losses mainly include losses related to the global reference-linked note program. Interest rate risk in the banking book Sources and control of interest rate risk in the banking book Our largest non-trading interest rate risk exposures arise pri- marily from activities such as retail banking and lending in our Wealth Management & Swiss Bank division, as well as our treasury activities. The Investment Bank’s portfolio of as- sets that were reclassified to Loans and receivables from Held-for-trading in fourth quarter 2008 and first quarter 2009, and certain other debt securities held as Loans and receivables also give rise to non-trading interest rate risk. The interest rate risks arising from the Wealth Manage- ment & Swiss Bank are transferred either by means of back- to-back transactions or a replicating portfolio from the origi- nating business into one of two centralized interest rate risk management units: Group Treasury or the Investment Bank’s FICC unit. These units manage the risks on an integrated basis, exploiting the full netting potential across interest rate risks from different sources. All interest rate risk is subject to independent risk control. When not included in our VaR measure, interest rate risk is subject to specific monitoring, which may include interest rate sensitivity analysis, earnings-at-risk, capital-at-risk and combined stress test metrics. Risk profile Interest rate risk sensitivity figures are provided for the im- pact of a one basis point change in interest rates, which is one of the ways in which non-trading interest rate risks are assessed for internal risk management purposes. In addition, the impacts of an adverse parallel shift in interest rates of 200 basis points on our non-trading interest rate risk expo- sures is significantly below the threshold of 20% of eligible regulatory capital specified by regulators to identify banks that may be required to hold additional regulatory capital against this risk. Impact of one basis point parallel increase of the yield curves This table shows the impact of a one basis point parallel increase of the yield curves on our interest-rate-sensitive banking book positions as at 31 December 2009. CHF million CHF EUR GBP USD Other Total impact on interest-rate-sensitive banking book positions 31.12.09 (0.3) (0.2) (0.3) (0.8) (0.1) (1.8) 181 t n e m e g a n a m y r u s a e r t d n a k s i R Corporate governance and compensation Information according to articles 663b bis and 663c (paragraph three) of the Swiss Code of Obligations Disclosures provided in line with the requirements of articles 663b bis and 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 financial statements of this report. This information is marked by a bar on the left-hand side throughout this section. Corporate governance – Our corporate governance principles are designed to support UBS towards sustainable profitability and protect the interests of our shareholders, as well as to create value for shareholders and stakeholders Dual-board structure UBS operates under a strict dual board structure: the Board of Directors (BoD) and the Group Executive Board (GEB). This results in a clear separation of duties and responsibili- ties. The BoD is responsible for the Group’s direction as well as monitoring and supervising the business. All members of the BoD are independent with the exception of the full-time Chairman. Shareholders elect each member of the BoD, which in turn appoints the Chairman. The GEB is responsible for the executive management and is accountable to the BoD for the overall financial results of the Group. The GEB is led by the Group Chief Executive Officer (Group CEO). Developments in 2009 that strengthened our leadership capacity The “Organization Regulations of UBS AG and its annexes” were revised to enhance the authority of the executive management and simultaneously accentuate the super- visory role of the BoD and its committees. The BoD is ultimately responsible for the financial success of the Group, and thus decides on the business strategy of the Group upon recommendation of the Group CEO and the GEB. The BoD is responsible for approving the annual report and quarterly financial statements of UBS and the Group, reviewed and proposed by the Audit Committee together with management, external auditors and Group Internal Audit. Furthermore, the BoD is responsible for approving the firm’s risk capacities and appetite, taking into account the proposals and alternatives suggested by the Risk Committee. Operational Group structure The operational structure of the Group is comprised of the Corporate Center and four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank. Shareholder participation At the Extraordinary General Meeting held on 27 February 2008, our shareholders approved the creation of condition- al capital through the issuance of a maximum of 277,750,000 shares to satisfy the settlement in shares of CHF 13 billion in mandatory convertible notes, with a maturity date of 5 March 2010. To satisfy the conversion, we expect to deliver 272,651,005 shares on 5 March 2010 to two financial investors. At the Annual General Meeting (AGM) held on 15 April 2009, our shareholders approved the creation of condition- al capital through the issuance of 100,000,000 shares for the potential exercise of warrants granted to the Swiss National Bank (SNB), in connection with the loan granted by the SNB to the SNB StabFund. In addition, at the AGM held on 15 April 2009, our shareholders approved the creation of authorized capital, out of which 293,258,050 new shares where issued on 25 June 2009 and were placed with a small number of institutional investors. According to International Financial Reporting Standards (IFRS), equity attributable to UBS shareholders amounted to CHF 41.0 billion on 31 December 2009. 184 Compensation and shareholdings – Revised Total Reward Principles were approved by the Board of Directors and implemented during 2009 – New compensation guidelines were implemented to focus on risk awareness, deferred pay, variable compensation and forfeiture conditions Total Reward Principles The Total Reward Principles summarize the compensation structure for all UBS employees, building on our strategy of enhancing reputation, integration and execution. They are designed to align employees’ interests with those of shareholders – the creation of long-term value and sustainable shareholder returns. They reflect recent regulatory developments but also focus on long-standing drivers including reward for performance, sustainable profitability, effective risk and capital manage- ment, outstanding client focus and teamwork and sound governance practices. Compensation for 2009 New compensation guidelines were implemented for the Group Executive Board (GEB) including awards granted under the Cash Balance Plan, Performance Equity Plan and Incentive Performance Plan. Following the announcement of our financial results for 2009, the first tranche of the Conditional Variable Compensation Plan has been forfeited as the critical performance condition – a net profit for 2009 – was not met. Key talent, risk and performance management We are focusing on attracting and retaining key talent throughout the business divisions using a “pay for perfor- mance” guiding principle. Our new compensation guide- lines also take into account a range of performance factors including delivering sustainable profitability, effective risk and capital management, client focus and teamwork. The guidelines will align compensation with the creation of sustainable shareholder returns through sound risk taking and promote a performance-driven culture. The 2010 non-binding vote on the compensation report We value the opinions of our shareholders and, at the AGM to be held in April 2010, we will provide shareholders with an opportunity to express their views through a non-binding vote on this compensation report. We believe that this vote presents a meaningful way of involving our shareholders in compensation matters. Compensation authorities Recipients Compensation recommendations developed by Approved by Communicated by Chairman of the BoD Chairman of the HRCC 1 Group CEO Chairman of the BoD / HRCC Members of the GEB Group CEO Independent BoD members (remuneration system and fees) Chairman of the BoD / HRCC HRCC BoD HRCC BoD HRCC HRCC Group CEO Chairman of the BoD Recipients Variable compensation recommendations developed by Approved by Communicated by Employees (excl. GEB) Respective member of the GEB together with functional management team Divisional pools: HRCC Overall: Board of Directors Line Manager 1 The Human Resources and Compensation Committee. 185 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Corporate governance and compensation Corporate governance Corporate governance Our corporate governance principles are designed to support UBS towards sustainable profitability and protect the interests of our shareholders, as well as to create value for shareholders and stakeholders. We use the term “corporate governance” when referring to the organizational structure and operational practices of our management. We are subject to, and fully comply with, the following regu- latory requirements regarding corporate governance: the Swiss Code of Obligations (CO) articles 663bbis and 663c (paragraph three) regarding transparency of compensation paid to members of the BoD and senior management; the SIX Swiss Exchange’s (SIX) “Directive on Information Relating to Corporate Governance”, and the standards established in the Swiss Code of Best Practice for Corporate Governance, including the appendix on executive compensation. In addition, as a foreign company with shares listed on the New York Stock Exchange (NYSE), we comply with all corporate governance standards applicable to foreign listed companies. This section of our annual report provides the information required by the following regulatory requirements: – The SIX “Directive on Information Relating to Corporate Governance”, with regard to: Group structure and share- holders; capital structure; Board of Directors (BoD); Group Executive Board (GEB); compensation, shareholdings and loans; shareholders’ participation rights; change of control and defense measures; auditors and information policy. – Articles 663bbis and 663c (paragraph three) of the CO, “Supplementary disclosures for companies whose shares are listed on a stock exchange: compensations and par- ticipations”, with regard to share and option ownership and loans. – The NYSE “Corporate Governance Listing Standards” with regard to foreign listed companies: independence of directors, BoD committees and differences from the NYSE standards applicable to US domestic issuers. In addition to the regulatory requirements mentioned above, this section of the report summarizes the regulatory and supervisory environment of UBS in our principal loca- tions, and provides a list of all members of our BoD and Group Executive Board (GEB). Updates have been made to the sections discussing the BoD, GEB, compensation and shareholdings. These updates follow a revision of the “Or- ganization Regulations of UBS AG and its annexes” (Orga- nization Regulations), which was conducted by the BoD throughout the summer and autumn of 2009. On 1 No- vember 2009, the revised Organization Regulations came into effect. The Organization Regulations enhance the au- thority of the executive management and simultaneously accentuate the supervisory role of the BoD. The BoD’s Strat- egy Committee, always intended to be a temporary com- mittee, has been dissolved with its responsibilities distrib- uted to the full BoD. In addition, the Executive Committee (EC) of the GEB was disbanded in October 2009 at which time the full GEB assumed its responsibilities. The Organiza- tion Regulations additionally specify which powers of the GEB are delegated to the new Group Asset and Liability Management Committee (Group ALCO). The Group ALCO is responsible for setting strategies to maximize the finan- cial performance of the Group, and is subject to the guide- lines, constraints and risk tolerances set by the BoD. It is also responsible for managing the balance sheet of the business divisions through allocation and for the monitor- ing of limits as well as managing liquidity, funding and cap- ital; and is responsible for promoting a one-firm financial management culture. The Group Chief Operating Officer (Group COO) role has been added to the GEB level, inte- grating the Group-wide infrastructure and service functions into the Corporate Center, and the roles and responsibilities of the Group functional heads have been adapted to reflect the integration of control function management (finance, risk, legal & compliance) across the Group. ➔ Refer to www.ubs.com/governance for more details on the Organization Regulations 186 Group structure and shareholders UBS Group legal entity structure Under Swiss company law, UBS AG is organized as a limited company, a corporation that has issued shares of common stock to investors. UBS AG is the Parent Bank of the UBS Group (Group). Our legal entity structure is designed to support our busi- nesses within an efficient legal, regulatory, tax and funding framework. Neither the business divisions of UBS nor the Corporate Center are separate legal entities: they primarily operate out of the Parent Bank, UBS AG, through its branch- es 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 oper- ate through local subsidiaries. This can be the case when le- gal, tax or regulatory rules require it or as a result of addi- tional legal entities joining the Group through acquisition. Operational Group structure On 31 December 2009, the operational structure of the Group comprised the Corporate Center and the four busi- ness divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank. In this report, performance is reported ac- cording to this structure. 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. ➔ Refer to “Note 34 Significant subsidiaries and associates” in the “Financial information” section of this report for details of significant operating subsidiary companies of the Group Significant shareholders On 1 January 2010, The Capital Group Companies, Inc., Los Angeles, disclosed according to the Swiss Stock Exchange Act a holding of 5.09% of the total share capital of UBS AG. On 1 December 2009, BlackRock Inc., New York, disclosed according to the Swiss Stock Exchange Act, a holding of 3.45% of the total share capital of UBS AG. The “Significant shareholders” table on the next page provides information about shareholders who, acting in their capacity as nominees for other investors or beneficial owners, were registered in our share register with 3% or more of the total share capital on 31 December 2009, 2008 and 2007. According to our “Regulation on the Registration of Shares”, voting rights of nominees are restricted to 5%, but clearing and settlement organizations are exempt from this restriction. Ownership of UBS shares is widely spread. The additional tables on the following page provide information about the distribution of our shareholders by category and geographical location. This information relates only to regis- tered shareholders and cannot be assumed to be representa- tive of our entire 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 holding 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, 33 1⁄3, 50, or 66 2⁄3% of the voting rights, whether they are exer- cisable 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”. In particular, the ordinance prohibits the netting of so-called acquisition posi- tions (in particular shares, conversion rights and acquisition rights or obligations) with disposal positions (i.e. rights or obli- gations to sell). It further requires that each such position be calculated separately and be reported as soon as it reaches a threshold. At year-end 2009, we owned UBS registered shares cor- responding to less than 3% of the total share capital of UBS AG. At the same time, we had disposal positions relating to 643,788,775 voting rights of UBS AG, corresponding to 18.09% of the total voting rights of UBS AG. They consisted mainly of 8.84% of voting rights attached to employee op- tions and 7.66% of voting rights arising from the mandatory convertible notes issued by UBS in March 2008. Cross shareholdings We have no cross shareholdings in excess of a reciprocal 5% of capital or voting rights with any other company. 187 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Corporate governance and compensation Corporate governance d e t i d u A Significant shareholders 1 In % of shares issued Chase Nominees Ltd, London DTC (Cede & Co.), New York 2 Mellon Bank N.A., Everett Nortrust Nominees Ltd, London 31.12.09 11.63 8.42 3.21 3.07 31.12.08 31.12.07 7.19 9.89 less than 3 less than 3 7.99 14.15 less than 3 less than 3 1 Lists shareholders registered in our share register with 3% or more of the total share capital at the relevant reference dates. 2 DTC (Cede & Co.), New York, “The Depository Trust Company” is a US securities clearing organization. Distribution of UBS shares On 31 December 2009 Number of shares registered 1–100 101–1,000 1,001–10,000 10,001–100,000 100,001–1,000,000 1,000,001–5,000,000 5,000,001–35,581,127 (1%) 1–2% 2–3% 3–4% 4–5% Over 5% Total registered Unregistered 2 Total shares issued Shareholders registered Shares registered Number % of shares issued Number 42,351 208,118 103,827 8,025 608 94 32 1 0 2 0 2 1 363,060 % 11.7 57.3 28.6 2.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2,497,703 94,609,316 278,983,450 191,103,931 169,169,180 202,775,659 313,629,304 54,622,566 0 223,676,913 0 713,346,857 100.0 2,244,414,879 1,313,697,874 3,558,112,753 3 0.1 2.7 7.8 5.4 4.8 5.7 8.8 1.5 0.0 6.3 0.0 20.0 63.1 36.9 100.0 1 On 31 December 2009, Chase Nominees Ltd., London, was entered as a trustee / nominee holding 11.63% of all shares issued. DTC (Cede & Co.), New York, the US securities clearing organization, was registered with 8.42% of all shares issued. 2 Shares not entered in the share register at 31 December 2009. 3 400,665,834 registered shares do not carry voting rights. Shareholders: type and geographical distribution On 31 December 2009 Individual shareholders Legal entities Nominees, fiduciaries Unregistered Total Switzerland Europe North America Other countries Unregistered Total 188 Shareholders Shares Number 353,827 8,682 551 % 97.5 2.4 0.1 Number 562,329,116 469,388,746 1,212,697,017 1,313,697,874 % 15.8 13.2 34.1 36.9 363,060 100.0 3,558,112,753 100.0 327,674 20,436 7,316 7,634 90.3 5.6 2.0 2.1 836,731,688 831,206,788 499,420,433 77,055,970 1,313,697,874 23.5 23.4 14.0 2.2 36.9 363,060 100.0 3,558,112,753 100.0 Capital structure Capital Under Swiss company law, shareholders must approve in a shareholders’ meeting any increase in the total number of issued shares which may arise from an ordinary share capital increase, or the creation of conditional or authorized capital. At year-end 2009, 3,558,112,753 shares were issued with a par value of CHF 0.10 each, leading to ordinary share capital of CHF 355,811,275.30. This includes 293,258,050 shares issued for a capital increase out of authorized capital, 332,225,913 shares issued to the Swiss Confederation upon conversion of the MCNs and 48,241 shares issued for em- ployee option exercises out of conditional capital, all of which took effect in 2009. Conditional share capital At year-end 2009, conditional share capital of CHF 15,002,364.60 was available to settle employee option exer- cises, corresponding to a maximum of 150,023,646 shares. In 2000, conditional capital was created in connection with the acquisition of PaineWebber Group Inc. (PaineWeb- ber), to cover option rights previously granted by PaineWeb- ber to its employees. Additionally, at the Annual General Meeting (AGM) held in 2006, shareholders approved condi- tional capital in the amount of 150 million UBS shares to be used for employee option grants. Options under both plans are exercisable at any time between their vesting and expi- ration date. Shareholders have no pre-emptive rights. In 2009, options on 48,241 shares were exercised under the PaineWebber option plans, and 22,824 options expired un- der the PaineWebber option plans without being exercised. No options were settled with conditional capital shares in 2009 under our employee stock option plans. At the Extraordinary General Meeting (EGM) held on 27 February 2008, our shareholders approved the creation of conditional capital through the issuance of a maximum of 277,750,000 shares to satisfy the settlement in shares of CHF 13 billion in MCNs, with a maturity date of 5 March 2010. To satisfy the conversion, we expect to deliver 272,651,005 shares on 5 March 2010 to two financial investors. At the AGM held on 15 April 2009, our shareholders ap- proved the creation of conditional capital through the issu- ance of 100,000,000 shares for the potential exercise of war- rants granted to the Swiss National Bank (SNB), in connection with the loan granted by the SNB to the SNB StabFund. ➔ Refer to “Note 38 Reorganizations and disposals” in the “Financial information” section of this report for more information Authorized share capital At the 27 February 2008 EGM, our shareholders authorized the creation of 103,700,000 shares, and of that, 98,698,754 shares were issued in 2008 as stock dividends for 2007 to UBS shareholders, with a remaining authorization to issue 5,001,246 shares until 27 February 2010. Changes of shareholders’ equity According to International Financial Reporting Standards (IFRS), equity attributable to UBS shareholders amounted to CHF 41.0 billion on 31 December 2009. ➔ Refer to the “Statement of changes in equity” in the “Financial information” section of this report for more information on changes in shareholders’ equity over the last three years Shares, participation certificates and capital securities Our shares are issued in registered form, and are traded and settled as global registered shares. Each registered share has a par value of CHF 0.10 and carries one vote. Voting rights may, however, only be exercised if the holder expressly de- clares that 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 sharehold- ers, irrespective of the country and stock exchange on which they are traded. ➔ Refer to the “Shareholders’ participation rights” section of this report for more information On 31 December 2009, 1,843,749,045 shares carried voting rights, 400,665,834 shares were entered in the share Ordinary share capital On 31 December 2007 On 31 December 2008 Issue of shares for capital increase (MCNs conversion) Issue of shares for capital increase (private placement) Issue of shares out of employee options exercised from conditional capital On 31 December 2009 Share capital in CHF Number of shares Par value in CHF 207,354,734 293,258,055 33,222,591 29,325,805 4,824 2,073,547,344 2,932,580,549 332,225,913 293,258,050 48,241 355,811,275 3,558,112,753 0.10 0.10 0.10 0.10 0.10 0.10 189 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Corporate governance and compensation Corporate governance register without voting rights, and 1,313,697,874 shares were not registered. All 3,558,112,753 shares were fully paid up and eligible for dividends. There are no preferential rights for shareholders, and no other classes of shares are issued by the Parent Bank directly. We did not issue any participation certificates or capital instruments in 2009. At year-end 2009, we had CHF 7,224 million in preferred securities outstanding, which count as hybrid tier 1 capital under Swiss regulatory rules. Outstanding tier 2 capital secu- rities accounted for CHF 11,231 million in total capital on 31 December 2009. Transferability, voting rights and nominee registration We do not apply any restrictions or limitations on the trans- ferability of shares. Voting rights may be exercised without any restrictions by shareholders entered into the share regis- ter, if they expressly render a declaration of beneficial owner- ship according to the provisions of the “Articles of Associa- tion of UBS AG” (Articles of Association). We have special provisions for the registration of fiducia- ries 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 our request ben- eficial owners holding 0.3% or more of all UBS shares. An exception to the 5% voting limit rule exists for securities clearing organizations such as The Depository Trust Compa- ny in New York. Convertible bonds and options On 31 December 2009, there were employee options and stock appreciation rights outstanding to purchase 290 mil- lion shares, of which options to purchase 142 million shares were exercisable. We satisfy share delivery obligations under our option-based participation plans either by purchasing UBS shares in the market, or through the issuance of new shares, out of conditional capital. Shares held in treasury or newly issued shares are delivered to the employee at exer- cise. On 31 December 2009, 27.7 million shares were avail- able to cover 27.2 million employee share delivery obliga- tions, and an additional 150 million unissued shares in conditional share capital were assigned to cover future em- ployee option exercises. At year-end 2009, the shares avail- able covered all exercisable employee obligations. The Investment Bank, acting as liquidity provider to the equity futures market and as a market-maker in UBS shares and derivatives, issues 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 eco- nomic exposure, a limited number of UBS shares are held by the Investment Bank. On 5 March 2008, we issued CHF 13 billion of MCNs as approved at the 27 February 2008 EGM. The notes were placed with two financial investors (Government of Singa- pore Investment Corporation and one other investor), and pay interest of 9% per annum until conversion into UBS shares, which must take place on or before 5 March 2010. The conversion of the MCNs is expected to increase the number of shares issued on 5 March 2010 by 272,651,005, reflecting adjustments due to the ordinary capital increase approved by our shareholders at the 23 April 2008 AGM, assuming no further dilutive events occur 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, an excess amount of dividends in cash or in specie, and similar events. ➔ Refer to the discussion on shares and capital instruments in the “Treasury management” section of the 2008 annual report for more information on the MCNs 190 Board of Directors The BoD, under the leadership of the Chairman, decides on the strategy of the Group upon recommendation of the Group Chief Executive Officer (Group CEO), exercises the ul- timate supervision over the management and elects all members of the GEB. The BoD also approves the financial statements for issue. Shareholders elect each member of the BoD, which in turn appoints its Chairman, at least one Vice Chairman and the members of its various committees. Members of the Board of Directors This section provides information on the composition of the BoD on 31 December 2009. It shows each member’s func- tions in UBS, nationality, year of initial appointment to the BoD, professional history, education, and date of birth. Also included are 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. At the AGM held on 15 April 2009, Peter R. Voser, David Sidwell, Sally Bott, Rainer-Marc Frey, Bruno Gehrig and Wil- liam G. Parrett were reelected as their terms of office ex- pired. Peter Kurer did not stand for reelection. Ernesto Ber- tarelli, Gabrielle Kaufmann-Kohler and Joerg Wolle tendered their resignation. Kaspar Villiger, Michel Demaré, Ann F. Godbehere and Axel P. Lehmann were elected to their first term on the BoD, and Kaspar Villiger replaced Peter Kurer as full-time Chairman of the BoD. On 29 September 2009, Sergio Marchionne, Vice Chairman and Senior Independent Director, and Peter R. Voser announced that they will not stand for reelection at the AGM on 14 April 2010. On 7 De- cember 2009 UBS nominated Wolfgang Mayrhuber, Chief Executive Officer of Deutsche Lufthansa AG, for election to its Board of Directors at its 2010 Annual General Meeting. On 31 December 2009, with the exception of the non-inde- pendent Chairman, Kaspar Villiger, all members of the BoD were considered independent by the BoD. Kaspar Villiger Swiss, born 5 February 1941 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Chairman of the Board of Directors / chair of the Governance and Nominating Committee / chair of the Corporate Responsibility Committee Year of initial appointment: 2009 Sergio Marchionne Canadian and Italian, born 17 June 1952 Fiat S.p.A., Via Nizza 250, I-10126 Turin Functions in UBS Independent Vice Chairman and Senior Independent Director / member of the Governance and Nominating Committee Year of initial appointment: 2007 Professional history and education Kaspar Villiger was elected to the BoD at the 2009 AGM and was thereafter appointed Chairman of the BoD. He chairs the Governance and Nominating Committee and the Corporate Responsibility Committee. Mr. Villiger was elected Federal Councilor in 1989, and served as the Minister of Defense and Head of the Federal Military Department. He served as Finance Minister and Head of the Federal Department of Finance from 1995 until he stepped down at the end of 2003. Simultaneously, he served as President of the Swiss Confederation in 1995 and 2002. In 2004, he was elected to the boards of Nestlé, Swiss Re and the Neue Zürcher Zeitung, all of which he resigned from in 2009, when he took on the position of Chairman of UBS. As co-owner of the Villiger Group, Mr. Villiger managed the Swiss parent firm, Villiger Söhne AG, from 1966 until 1989. In addition, Mr. Villiger held several political positions, first in the parliament of the canton of Lucerne and, from 1982, in the Swiss Parliament. He graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a degree in mechanical engineering in 1966. Professional history and education Sergio Marchionne was elected to the BoD at the 2007 AGM, and was appointed independent Vice Chairman and Senior Independent Director in 2008. He is a member of the Governance and Nominating Committee. Mr. Marchionne is the Chief Executive Officer (CEO) of Fiat S.p.A., where he has been a member of the board since 2003. He is the CEO of Fiat Group Automobiles as well as of Chrysler Group LLC. He is also the Chairman of CNH Case New Holland, a Fiat Group company. From 1983 to 1985, he worked as a chartered accountant and tax specialist for Deloitte & Touche in Canada. From 1985 to 1988, he was Group Controller and then became Director of Corporate Development at Lawson Mardon Group of Toronto. In 1989 and 1990, he served as the Executive Vice President of Glenex Industries. In the following two years, Mr. Marchionne acted as Vice President of Finance and Chief Financial Officer (CFO) of Acklands Ltd. He returned to Lawson Mardon Group in 1992 as the Vice President of Legal and Corporate Development and CFO. The company was acquired by Alusuisse Lonza in 1994. Following the acquisition, he became CEO in 1996. Upon the completion of the merger of Alusuisse with Alcan Inc., he acted as CEO and Chairman of the spin-off, Lonza Group, until 2002. In 2002, Mr. Marchionne was appointed CEO of the Société Générale de Surveillance (SGS) Group of Geneva. Mr. Marchionne studied philosophy at the University of Toronto, business at the University of Windsor, and law at Osgoode Hall Law School in Toronto. He is a lawyer and a chartered accountant. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Marchionne is the Chairman of SGS and a member of the BoD of Philip Morris International Inc. He is also a member of the European Automobile Manufacturers’ Association (ACEA). 191 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Corporate governance and compensation Corporate governance Professional history and education Sally Bott was elected to the BoD at the October 2008 EGM. She chairs the Human Resources and Compensation Committee and is a member of the Corporate Responsibility Committee. Sally Bott serves as the Group Human Resources (HR) Director of BP plc, which she joined in early 2005, and is a member of BP’s Group Executive Committee. Ms. Bott has spent most of her career in financial services. Between 2000 and 2005, she was a Managing Director at Marsh & McLennan Companies, 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 Barclays de Zoete Wedd HR Director and then as 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 worked in the finance function. She moved into HR in 1978 and worked as an HR Director in most of Citibank’s wholesale bank and investment banking businesses for the next 15 years. She was the Global HR Director of the wholesale bank from 1990 to 1993. Ms. Bott studied at Manhattanville College in the US and graduated with a bachelor’s degree in economics. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Ms. Bott is a member of the board of the Royal College of Music in London and the Carter Burden Center for the Aging in New York City. Professional history and education Michel Demaré was elected to the BoD at the 2009 AGM and is a member of the Audit Committee. Mr. Demaré joined ABB in 2005 as CFO and as a member of the Group Executive Committee. In addition, he became President of Global Markets in November 2008. Between February and September 2008, he acted as the interim CEO of ABB. Mr. Demaré joined ABB from Baxter International Inc., a global healthcare com- pany, where he was CFO Europe from 2002 to 2005. Prior to this role, he spent 18 years at the Dow Chemical Company holding various treasury and risk management positions in Belgium, France, the US and Switzerland. Between 1997 and 2002 he was the CFO of the Global Polyolefins and Elastomers division. Mr. Demaré be- gan his career as an officer in the multinational banking division of Continental Illinois National Bank of Chicago, based in Antwerp. He graduated with an MBA from the Katholieke Universiteit Leuven, Belgium, and holds a degree in applied economics from the Université Catholique de Louvain, Belgium. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Demaré is a member of the IMD Foundation Board, Lausanne. Professional history and education Rainer-Marc Frey was elected to the BoD at the October 2008 EGM and is a member of the Risk Committee. Mr. Frey is the founder and Chairman of the investment management company Horizon21. In 1992, he founded RMF Investment Group, one of the first hedge fund groups in Europe, and was appointed CEO. RMF was acquired by Man Group plc in 2002. Between 2002 and 2004, he held a number of senior roles within Man Group and was the largest individual shareholder. From 1989 to 1992, Mr. Frey served as a director at Salomon Brothers in Zurich, Frankfurt and London, where he was primarily involved with equity derivatives. Between 1987 and 1989, he worked for Merrill Lynch covering equity, fixed income and swaps markets. He holds a degree in economics from the University of St. Gallen. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. 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. Sally Bott American (US), born 11 November 1949 BP plc, 1 St. James’s Square, GB-London SW1Y 4PD Functions in UBS Chair of the Human Resources and Compensation Committee / member of the Corporate Responsibility Committee Year of initial appointment: 2008 Michel Demaré Belgian, born 31 August 1956 ABB Ltd., Affolternstrasse 44, P.O. Box 5009, CH-8050 Zurich Function in UBS Member of the Audit Committee Year of initial appointment: 2009 Rainer-Marc Frey Swiss, born 10 January 1963 Horizon21, Poststrasse 4, CH-8808 Pfäffikon Function in UBS Member of the Risk Committee Year of initial appointment: 2008 192 Bruno Gehrig Swiss, born 26 December 1946 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Member of the Governance and Nominating Committee / member of the Human Resources and Compensation Committee Year of initial appointment: 2008 Ann F. Godbehere Canadian and British, born 14 April 1955 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Member of the Audit Committee / member of the Corporate Responsibility Committee Year of initial appointment: 2009 Axel P. Lehmann Swiss, born 23 March 1959 Zurich Financial Services, Mythenquai 2, CH-8002 Zurich Function in UBS Member of the Risk Committee Year of initial appointment: 2009 Professional history and education Bruno Gehrig was elected to the BoD at the October 2008 EGM and is a member of the Governance and Nominating Committee and the Human Resources and Compensation Committee. From 2003 to 2009, Mr. Gehrig was Chairman of Swiss Life Holding. Between 1996 and 2003, he worked 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. 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 a chief economist before assuming responsibility for securities sales and trad- ing. He studied economics at the University of Bern, where he completed his PhD studies, and then continued on to postgraduate studies at the University of Rochester, New York. He was an assistant professor at the University of Bern and received an honorary doctorate from the University of Rochester. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Gehrig is the Vice Chairman of the BoD of Roche Holding Ltd., Basel, and the Chairman of the Swiss Air Transport Foundation, Zug. Professional history and education Ann F. Godbehere was elected to the BoD at the 2009 AGM and is a member of the Audit Committee and the Corporate Responsibility Committee. Ms. Godbehere was appointed CFO and Executive Director of Northern Rock in February 2008, serving in these roles during the initial phase of the business’ public ownership – she left at the end of January 2009. Prior to this role, she served as CFO of Swiss Re Group from 2003 to 2007. Ms. Godbehere was CFO of the Property and Casualty division in Zurich for two years, before this she served as CFO of the Life & Health division in London for three years. From 1997 to 1998, Ms. Godbehere was CEO of Swiss Re Life & Health in Canada. In 1996 and 1997, she was CFO of Swiss Re Life & Health North America. She is a certified general accountant and was made a fellow of the Certified General Accountants Association of Canada in 2003. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Ms. Godbehere is a board member of Prudential plc, Rio Tinto plc and Rio Tinto Limited. She is on the board of Lloyd’s managing agency, Atrium Underwriters Ltd. and Atrium Underwriting Group Ltd., which were ac- quired in 2007 by Ariel Holdings Ltd. She is also a member of the board of Ariel Holdings, an insurance and reinsurance company. Professional history and education Axel P. Lehmann was elected to the BoD at the 2009 AGM and is a member of the Risk Committee. He has been the Group Chief Risk Officer of Zurich Financial Services (Zurich) since January 2008. In addition, he is responsible for Group IT. In September 2004, Mr. Lehmann was appointed CEO of Zurich North America Commercial in Schaumburg, Illinois. He became a member of Zurich’s Group Executive Committee and CEO of its Continental Europe business division in 2002. He was subsequently put in charge of integrating Continental Europe, the UK and Ireland to create, in 2004, the Europe General Insurance business division, of which he was the CEO. Mr. Lehmann became a member of the Group Management Board, responsible for Group-wide business development functions in 2000. A year later, he took over the responsibility for Northern, Central and Eastern Europe and was appointed CEO of the Zurich Group Germany. Before he joined Zurich in 1996, he was Head of Corporate Planning and Controlling for Swiss Life in Zurich. Mr. Lehmann was a lecturer at several universities and institutes. In 1990, he became Vice President of the Institute of Insurance Economics and the European Center at the University of St. Gallen, responsible for consulting and manage- ment development. He holds a PhD and a master’s degree in business administration and economics from the University of St. Gallen. He is a graduate of the Wharton Advanced Management Program and an honorary professor of business administration and service management at the University of St. Gallen. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Lehmann is Chairman of the Board of the Institute of Insurance Economics at the University of St. Gallen and Vice Chairman of the Chief Risk Officer Forum. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 193 Corporate governance and compensation Corporate governance Helmut Panke German, born 31 August 1946 BMW AG, Petuelring 130, D-80788 Munich Functions in UBS Member of the Human Resources and Compensation Committee / member of the Risk Committee Year of initial appointment: 2004 William G. Parrett American (US), born 4 June 1945 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Chair of the Audit Committee Year of initial appointment: 2008 David Sidwell American (US) and British, born 28 March 1953 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Chair of the Risk Committee Year of initial appointment: 2008 Peter R. Voser Swiss, born 29 August 1958 Royal Dutch Shell plc, 2501 AN, NL-The Hague Function in UBS Member of the Governance and Nominating Committee Year of initial appointment: 2005 194 Professional history and education Helmut Panke was elected to the BoD at the 2004 AGM and is a member of the Human Resources and Compensation Committee and the Risk Committee. Between 2002 and 2006, Mr. Panke was Chairman of the Board of Management at BMW, Munich. In 1982, he joined BMW’s Research and Development division as Head of Planning and Controlling. He subsequently assumed management functions in corporate planning, organization and corporate strategy. Before his appointment as Chairman, he was a member of BMW’s Board of Management from 1996. Between 1993 and 1996, he was Chairman and CEO of BMW Holding Corporation in the US. Mr. Panke graduated from the University of Munich with a PhD in physics and was on special research assignment at the University of Munich and the Swiss Institute for Nuclear Research before joining McKinsey & Company in Dusseldorf and Munich as a consultant. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Panke is a member of the BoD of Microsoft Corporation and Singapore Airlines Ltd. He is a member of the Supervisory Board of Bayer AG, Germany. Professional history and education William G. Parrett was elected to the BoD at the October 2008 EGM and chairs the Audit Committee. Mr. Parrett served his entire career with Deloitte Touche Tohmatsu, a global organization of member firms that employs 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 Deloitte’s US National Financial Services Industry Group in 1995 and its Global Financial Services Industry Group in 1997, both of which he led as Chairman. In his 40 years of experience in professional 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 bachelor’s degree in accounting from St. Francis College, New York, and is a certified public accountant. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Parrett is an independent Director of the Eastman Kodak Company, the Blackstone Group LP, and Thermo Fisher Scientific Inc. He is also the Chairman of the BoD of the United States Council for International Business and United Way Worldwide. He is a Carnegie Hall Board of Trustees member and is also a member of the International Chamber of Commerce Executive Committee. Professional history and education David Sidwell was elected to the BoD at the 2008 AGM and chairs the Risk Committee. Mr. 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., New York, where in his 20 years of ser- vice, he held a number of different positions including Controller and CFO of the Investment Bank. Prior to this, he was with Price Waterhouse in both London and New York. Mr. Sidwell graduated from Cambridge University and is a chartered accountant qualifying in the Institute of Chartered Accountants in England and Wales. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Sidwell is a Director of the Federal National Mortgage Association (Fannie Mae) and a Senior Advisor at Oliver Wyman. He is a trustee of the International Accounting Standards Committee Foundation, London, the Chairman of the BoD of Village Care of New York, a not-for-profit organization, and a Director of the National Council on Aging. Professional history and education Peter R. Voser was elected to the BoD at the 2005 AGM and is a member of the Governance and Nominating Committee. As of July 2009, Mr. Voser has been serving as the CEO and an executive BoD member of Royal Dutch Shell plc, where he also acted as CFO from 2004 to 2009. Between 2002 and 2004, he was CFO of 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. Mr. Voser graduated in business administration from the University of Applied Sciences in Zurich. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Voser is a member of the BoD of the Swiss Federal Audit Oversight Authority. Elections and terms of office In accordance with article 19 (paragraph one) of the “Arti- cles of Association of UBS AG” (Articles of Association), all BoD members are to be elected on an individual basis for a one-year term of office. As a result, shareholders must con- firm the entire membership of the BoD on a yearly basis be- ginning with the AGM on 14 April 2010. BoD members are normally expected to serve for a mini- mum of three years. No BoD member should continue to serve beyond the AGM held in the calendar year following his or her sixty-fifth birthday; however, the BoD can extend this age limit. Organizational principles and structure The competencies of executive management have been increased and simultaneously, the supervisory role of the BoD has been accentuated, due to the revised Organization Regulations. The BoD’s ultimate responsibility for strategic and financial success includes deciding on the business strategy of the Group upon recommendation of the Group CEO, and taking into account the proposals and alterna- tives presented by the GEB. Furthermore, the BoD is re- sponsible for appointing and dismissing all GEB members, the Company Secretary and the Head of Group Internal Au- dit, and approving the firm’s risk capacities and appetite, taking into account the proposals and alternatives suggest- ed by the Risk Committee (RC). The following committees assist the BoD in the perfor- mance of its responsibilities. These committees and their charters are described in the Organization Regulations which are published on www.ubs.com/governance. Audit Committee The Audit Committee (AC) comprises at least three indepen- dent BoD members, with all members having been deter- mined by the BoD to be fully independent and financially literate. On 31 December 2009, the AC consisted of William G. Parrett, the chairperson, as well as Michel Demaré and Ann F. Godbehere. All members have accounting and finan- cial management expertise and are considered to be “finan- cial experts” according to the rules established by the US Sarbanes-Oxley Act of 2002. The committee does not itself perform audits, but moni- tors the work of the auditors who in turn, are responsible for auditing UBS’s and the Group’s financial statements and for reviewing the quarterly financial statements. The function of the AC is to serve as an independent and objective body with oversight of: (i) the Group’s accounting policies, finan- cial reporting and disclosure controls and procedures, (ii) the quality, adequacy and scope of external audit, (iii) UBS’s compliance with financial reporting requirements, (iv) man- agement’s approach to internal controls with respect to the production and integrity of the financial statements and disclosure of the financial performance, and (v) the perfor- mance of Group Internal Audit in conjunction with the Chairman and the RC. Following each AGM, the BoD meets to appoint its Chair- man, one or more Vice 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 committees. The AC reviews the annual report and quarterly financial statements of UBS and the Group as proposed by the manage- ment with external auditors, management and Group Internal Audit in order to recommend their approval, including any ad- justments the committee considers appropriate, to the BoD. According to the Articles of Association, the BoD meets as often as business requires, but must meet at least six times a year. A total of 23 meetings were held in 2009, of which seven included GEB members and 16 were without GEB participation. On average, 93% of BoD members were present at BoD meetings without GEB participation and 95% at meetings with GEB participation. The duration of these meetings was 3½ hours on average. In addition, the BoD met for a one-day BoD seminar. Each committee chair provides the BoD with regular up- dates on the current activities of his or her committee and on important committee issues. At least once per year, the BoD reviews its own perfor- mance as well as the performance of each of its committees. This review is based on an assessment of the BoD conducted by the Governance and Nominating Committee (GNC) as well as a self-assessment of the BoD committees, and seeks to determine whether the BoD and its committees are func- tioning effectively and efficiently. Periodically and at least annually, the AC assesses the qualifications, expertise, effectiveness, independence and performance of the external auditors and their lead audit partner, in order to support the BoD in reaching a decision in relation to the appointment or removal of the external audi- tors and the rotation of the lead audit partner. The BoD then submits these proposals at the AGM. The AC met 14 times in 2009 for an average duration of 2½ hours, in the presence of the Group Chief Financial Of- ficer (CFO) each time, and with the Head of Group Internal Audit, the representatives of the external auditors and other GEB members participating in most of the meetings. Partici- pation at the meetings averaged 98%. The committee reports back to the BoD about its discus- sions with our external auditors. Once per year, the lead represen tatives of the external auditors take part in a BoD meeting, presenting the long-form report of our external auditors, as required by the Swiss Financial Market Super- visory Authority (FINMA). 195 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Corporate governance and compensation Corporate governance Corporate Responsibility Committee The Corporate Responsibility Committee supports the 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 committee comprises at least three BoD members and, on 31 December 2009, Kaspar Vil- liger chaired the committee with Sally Bott and Ann F. God- behere as its additional members. The committee is advised and supported by a number of senior business representa- tives. It met twice for 90 minutes in 2009, and all committee members were present. ➔ Refer to the “Corporate responsibility” section of this report for more information on corporate responsibility Governance and Nominating Committee The GNC supports the BoD in fulfilling its duty to establish best practices in corporate governance across the Group; to conduct an annual assessment of the Chairman and the BoD as a whole; to establish and maintain a process for appointing new BoD members; and to manage the succession of the Group CEO. The committee comprises at least three independent BoD members and, on 31 December 2009, Kas- par Villiger chaired the committee with Bruno Gehrig, Sergio Marchionne and Peter R. Voser as its additional members. In 2009, 11 meetings were held with an average participation of 86% and a duration averaging over one hour. Of these 11 meetings, one was held with external advisors. Human Resources and Compensation Committee The Human Resources and Compensation Committee (HRCC) is responsible for the following functions: (i) to sup- port the BoD in its duties to set guidelines on compensation and benefits, (ii) to approve the total individual compensa- tion for the Chairman and the GEB members as well as the Company Secretary and Head of Group Internal Audit, (iii) together with the Chairman, to provide the BoD with a pro- posal for total individual compensation for the independent BoD members, and (iv) to scrutinize executive performance and to supervise succession planning for all GEB members (other than the Group CEO). The HRCC also reviews the compensation disclosure included in this report. The committee comprises at least three independent BoD members and, on 31 December 2009, Sally Bott chaired the committee with Bruno Gehrig and Helmut Panke as its ad- ditional members. In 2009, 14 meetings were held with an average participation of 98% and a duration of over one hour. Of those meetings, nine were held with external advi- sors and one was held as a seminar with the participation of the Chairman and the Group Head HR. ➔ Refer to the “Compensation and shareholdings” section of this report for more information on the Human Resources and Compensation Committee’s decision-making proce- dures Risk Committee The RC is responsible for assisting the BoD in reviewing the bank’s risk management and control framework, including (i) credit, market, country and operational risks (ii) treasury and capital management, including funding and liquidity, and (iii) balance sheet management, including in each case any consequent reputational risk. The RC assists the BoD in establishing the bank’s risk capacity and risk appetite, and in overseeing the bank’s risk profile. For these purposes, the RC receives relevant information from the GEB and other mem- bers of management. The committee comprises four independent BoD mem- bers and, on 31 December 2009, David Sidwell chaired the committee with Rainer-Marc Frey, Axel P. Lehmann and Helmut Panke as its additional members. The committee met 14 times with an average participation of 98%, averaging over four hours in duration. The Group CEO, Group CFO and Group CRO were present at all meetings. Other regular at- tendees included the CEO or co-CEOs of the Investment Bank, and CEO of Wealth Management & Business Banking or co-CEOs of Wealth Management & Swiss Bank. Eight of these meetings were held with representatives of the exter- nal auditors also in attendance. Two special sessions were held with the Governing Board of the SNB, and at least one session will continue to be held on an annual basis. In addi- tion, one special session was held with FINMA, and at least one meeting will continue to be held on an annual basis. Strategy Committee The Strategy Committee was constituted on 1 July 2008, taking over the strategic responsibilities of the former Chair- man’s Office. While it met extensively in 2008, no meetings took place in 2009. As it was always intended to be a tem- porary committee, it was disbanded on 25 June 2009 and its responsibilities were transferred to the full BoD. Roles and responsibilities of the Chairman of the Board of Directors Kaspar Villiger, the Chairman, has entered into a full-time employment contract with UBS in connection with his ser- vice on the BoD. The Chairman coordinates the tasks within the BoD, calls BoD meetings and sets their agendas. Under the leadership of the Chairman, the BoD decides on the strategy of the 196 Group upon recommendation of the Group CEO, exercises the ultimate supervision over the executives and elects all GEB members. The 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 ensuring effective communication with shareholders and other stakeholders, including government officials and regulators. This is in addition to establishing and maintaining a close working relationship with the Group CEO and the other GEB members, providing advice and sup- port while 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 orga- nizes and leads a meeting of the independent BoD members without the presence of the Chairman. In 2009, six indepen- dent BoD meetings were held averaging 90 minutes. The Senior Independent Director reports to the Chairman on the evaluation of the Chairman’s performance, and acts as a contact point for shareholders wishing to engage in discus- sions with an independent BoD member. Important business connections of independent members of the Board of Directors with UBS As a global financial services provider and a major bank in Switzerland, we have business relationships with many large companies, including those in which our BoD members as- sume management or independent board responsibilities. The nature of the relationships between UBS and com panies whose chair, chief executive or other officer is a member of our BoD is not considered to compromise the BoD members’ capacity for independent judgment. Furthermore, no inde- pendent BoD member has personal business relationships with UBS that could compromise his or her independence. All relationships and transactions with UBS BoD members and their affiliated companies are conducted in the ordinary course of business, and are on the same terms as those pre- vailing at the time for comparable transactions with non- affiliated persons. Checks and balances: Board of Directors and Group Executive Board We operate under a strict dual board structure, as mandated by Swiss banking law. The separation of responsibilities be- tween the BoD and executive management is clearly defined in the Organization Regulations. The BoD decides on the strategy of the Group upon recommendation of the Group CEO, and supervises and monitors the business, whereas the GEB, headed by the Group CEO, has executive management responsibility. The functions of Chairman of the BoD and Group CEO are assigned to two different people, thus ensur- ing a separation of power. This structure establishes checks and balances and preserves the institutional independence of the BoD from the day-to-day management of the firm, for which responsibility is delegated to the GEB under the lead- ership of the Group CEO. No member of one board may be a member of the other. Supervision and control of executive management re- mains with the BoD. The authorities and responsibilities of the two bodies are governed by the Articles of Association and the Organization Regulations, including the latter docu- ment’s “Annex B – Responsibilities and authorities”. ➔ Refer to www.ubs.com/governance for more details 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 vari- ous ways. The minutes of the GEB meetings are made avail- able to the BoD members. At BoD meetings, the Group CEO and GEB members regularly update the BoD on important issues. At BoD meetings, BoD members may request from BoD or GEB members any information about matters concerning UBS that they require to fulfill their duties. Outside meetings, BoD members may request information from other BoD and GEB members, in which case such requests must be ap- proved by the Chairman. Group Internal Audit independently, objectively and sys- tematically assesses the adherence to our strategy, effective- ness of governance, risk management and control processes at Group, divisional and regional levels, and monitors com- pliance with legal, regulatory and statutory requirements, as well as with internal policies and contracts. This internal au- dit organization, which is independent from management, reports significant findings to the Chairman and the RC. The AC must be informed of the results of the internal audit. In February 2009, our internal compliance function pro- vided an annual compliance report to the BoD. This report is required by sections 109 and 112 of Circular 08 / 24 of FIN- MA on the supervision and internal controls at banks. ➔ Refer to the “Risk management and control” section of this report for more information 197 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Corporate governance and compensation Corporate governance Group Executive Board UBS operates under a strict dual board structure, as required by Swiss banking law. The management of the business is delegated by the BoD to the GEB. Members of the Group Executive Board The information in the boxes below provides details on the composition of the GEB on 31 December 2009. It shows each member’s functions within UBS, nationality, year of initial ap- pointment to the GEB, professional history, education, and date of birth. It also includes other activities and functions, such as mandates on boards of important corporations, orga- nizations and foundations, permanent functions for important interest groups as well as official functions and political man- dates. Changes to the Group Executive Board in 2009 Oswald J. Grübel was named Group CEO on 26 February 2009, replacing Marcel Rohner who stepped down as Group CEO on that date. On 1 April 2009, Ulrich Körner was appointed Group COO and Walter H. Stürzinger stepped down from the GEB on that date. In this newly created role, Ulrich Körner is re- sponsible for the management and performance of the in- frastructure as well as service functions for the Group and leads the Corporate Center. The Group control functions (finance, risk, and legal and compliance) were centralized as part of the integration of the Group-wide infrastructure, ser- vices and control functions. This transformation took place in several steps and was finalized in October 2009. On 27 April 2009, Jerker Johansson resigned as CEO of the Investment Bank. Carsten Kengeter and Alexander Wilmot-Sitwell became co-CEOs of the Investment Bank. On 25 June 2009, Chi-Won Yoon became Chairman and CEO Asia Pacific, replacing Rory Tapner. On 27 October 2009, Marten Hoekstra stepped down as CEO of Wealth Manage- ment Americas and was replaced by Robert J. McCann. Professional history and education Oswald J. Grübel was named UBS Group CEO in February 2009. Before joining UBS he was the CEO of Credit Suisse Group and Credit Suisse. He stepped down from this role in May 2007. From 2002 to 2004, he was CEO of Credit Suisse Financial Services and co-CEO of Credit Suisse Group from 2003 until 2004. Mr. Grübel was a member of the Credit Suisse Group Executive Board from 1997 to 2001 and again from 2002 to 2007. From 1991 until 1997 he was a member of the Group Executive Board of Credit Suisse, responsible for equi- ties, fixed income, global foreign exchange, money markets and asset / liability management in Zurich. Before that he was a member of the Financière Credit Suisse First Boston Group Executive Board in Zug. In 1970, Mr. Grübel joined White Weld Securities and became its CEO in 1978. From 1961 to 1970 he worked for Deutsche Bank, where he completed his training as a banker. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Grübel is a board member of the Spanish residential estate La Zagaleta, of the Swiss American Chamber of Commerce, the Institute of International Finance and the Financial Services Forum. He is a member of the Shanghai International Financial Advisory Council, the Institut International d’Etudes Bancaires and the International Monetary Conference. Professional history and education John Cryan was appointed Group CFO and became a member of the Group Executive Board (GEB) in September 2008. In 2002 he became the European Head of the Financial Institutions Group of the UBS Investment Bank and three years later he was made its Global Head. A former employee of Arthur Andersen LLP, Mr. Cryan joined S.G. Warburg & Co. 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. Mr. Cryan graduated in 1981 with an MA with honors from the University of Cambridge. Oswald J. Grübel German, born 23 November 1943 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Group CEO Year of initial appointment: 2009 John Cryan British, born 16 December 1960 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Group CFO Year of initial appointment: 2008 198 Markus U. Diethelm Swiss, born 22 October 1957 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Group General Counsel Year of initial appointment: 2008 John A. Fraser Australian, born 8 August 1951 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Chairman and CEO Global Asset Management Year of initial appointment: 2002 Carsten Kengeter German, born 31 March 1967 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Co-CEO Investment Bank Year of initial appointment: 2009 Ulrich Körner German and Swiss, born 25 October 1962 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Group Chief Operating Officer CEO Corporate Center Year of initial appointment: 2009 Professional history and education Markus U. Diethelm was appointed Group General Counsel of UBS in September 2008. From 1998 until 2008, he served as Swiss Re’s Group Chief Legal Officer and was appointed to its Group Executive Board in 2007. Prior to that, he was at the Los Angeles-based law firm Gibson, Dunn & Crutcher, focusing on corporate matters, securities transactions, litigation and regulatory investigations while working out of the firm’s Brussels and Paris offices. From 1989 until 1992, he practiced at New York’s Shearman & Sterling law firm, specializing in mergers and acquisitions, and in 1988, he worked at Paul, Weiss, Rifkind, Wharton & Garrison in New York as a foreign associate. He started his career in 1983 with Bär & Karrer. Mr. Diethelm holds a law degree from the University of Zurich and a master’s degree and PhD from Stanford Law School. He is a qualified attorney-at-law in Switzerland and admitted to the Zurich and New York Bar. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Diethelm is the Chairman of the Legal Committee of the Swiss American Chamber of Commerce. Professional history and education John A. Fraser was appointed Chairman and CEO of the Global Asset Management business division in late 2001. Prior to that, he was President and Chief Operating Officer (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 the 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 in Washington DC, first, at the International Monetary Fund and second, as a minister (economic) at the Australian Embassy. He was the 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. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Fraser is a non-executive Chairperson of the Victorian Funds Management Corporation, Melbourne, and is a member of the Board of Governors of the Marymount International School at Kingston-upon-Thames in the UK. Professional history and education Carsten Kengeter was appointed co-CEO of the UBS Investment Bank and became a member of the GEB in April 2009. He joined UBS in December 2008 and served as the joint Global Head of Fixed Income, Currencies & Commodities (FICC) of the UBS Investment Bank until January 2010. Previously, Mr. Kengeter worked for Goldman Sachs as the co-Head of Asia (ex-Japan) Securities division in Hong Kong. In 2003, he co-headed the European FICC and Structured Equities Distribution in London, and in 2002 he became partner and Head of the FICC German Region in Frankfurt. In 2000 he was made Head of the European and Asian CDO business in London, and before that he was in derivatives marketing in Frankfurt. From 1992 to 1997, Mr. Kengeter worked for Barclays de Zoete Wedd, setting up its credit derivatives trading desk. He graduated as Diplom- Betriebswirt from FH Reutlingen, holds a bachelor’s in business administration from Middlesex University and a finance and accounting MS from the London School of Economics and Political Science. Professional history and education Ulrich Körner was appointed Group Chief Operating Officer (COO) and CEO Corporate Center and was made a member of the GEB in April 2009. In this function, he leads the Corporate Center. Mr. Körner was previ- ously with Credit Suisse from 1998 and served as a member of the Credit Suisse Group executive manage- ment in his last six years where he held various management positions, including CFO and COO. Most re- cently, he was responsible for the entire Swiss client business as CEO of the Switzerland region. Mr. Körner received a PhD from the University of St. Gallen in business administration and served several years as an auditor for Price Waterhouse and management consultant for McKinsey & Company. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Körner is the Chairman of the Widder Hotel, Vice President of the BoD of Lyceum Alpinum Zuoz, member of the Foundation Board of the UBS Pension Fund, member of the Financial Service Chapter Board of the Swiss-American Chamber of Commerce and member of the board of the Swiss Banking Institute of the University of Zurich. 199 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Corporate governance and compensation Corporate governance Philip J. Lofts British, born 9 April 1962 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Group Chief Risk Officer Year of initial appointment: 2008 Robert J. McCann American (US), born 15 March 1958 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS CEO Wealth Management Americas Year of initial appointment: 2009 Francesco Morra Swiss and Italian, born 31 August 1967 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS CEO UBS Switzerland, Wealth Management & Swiss Bank Year of initial appointment: 2009 Alexander Wilmot-Sitwell British, born 16 March 1961 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Co-CEO Investment Bank Year of initial appointment: 2008 200 Professional history and education Philip J. Lofts was appointed Group Chief Risk Officer (CRO) in November 2008. He has been with UBS for over 20 years. In 2008, he became the Group Risk COO, after having previously been the 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 successfully completed his A-levels at Cranbrook School. From 1981 to 1984 he was a trainee at Charterhouse Japhet plc, a merchant bank acquired by the Royal Bank of Scotland in 1985. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Lofts is a board member of the University of Connecticut Foundation. Professional history and education Robert J. McCann was appointed CEO of Wealth Management Americas and became a member of the GEB in October 2009. Before joining UBS, he worked for Merrill Lynch & Company as Vice Chairman and President of the Global Wealth Management Group. In 2003 he served as Vice Chairman of Distribution and Marketing for AXA Financial. He started his career with Merrill Lynch in 1982, working in various positions in capital markets and research. From 1998 to 2000, he was the Global Head of Global Institutional Debt and Equity Sales. In 2000 he became the COO of Global Markets and Investment Banking, and from 2001 to 2003, he was the Head of Global Securities Research and Economics. Mr. McCann graduated with a bachelor’s in economics from Bethany College, West Virginia. He holds an MBA from Texas Christian University, Fort Worth, and completed the Advanced Management Program at Harvard Business School. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. McCann is a board member of the American Ireland Fund and is Vice Chairman of the Bethany College Board of Trustees. He is a member of the No Greater Sacrifice Advisory Board and is Chairman of the Executive Advisory Board of Sponsors for Educational Opportunity. Professional history and education Francesco Morra was appointed CEO of UBS Switzerland, Wealth Management & Swiss Bank, and became a member of the GEB in 2009. In November 2007 he was appointed Head of Wealth Management Western Europe, Mediterranean, Middle East and Africa. In addition, as of September 2008, he was responsible for the business unit Latin America, Caribbean & Canada. Mr. Morra joined UBS in 2005 as the Head of Wealth Management Italy and as a member of the former Group Managing Board (GMB). Before joining UBS, he held various management positions at the Boston Consulting Group between 1992 and 2005. He holds a master’s and PhD in economics from the University of St. Gallen. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Morra is Vice Chairman of the Swiss Bankers Association and Swiss Finance Institute. He is on the Committee of the Zurich Chamber of Commerce. Professional history and education Alexander Wilmot-Sitwell was appointed co-CEO of the UBS Investment Bank in April 2009. He became a member of the GEB in February 2008 and served as the joint Global Head of Investment Banking and Chairman and CEO of UBS Group Europe, Middle East & Africa. In 2006, Mr. Wilmot-Sitwell became a mem- ber of the former GMB. He joined the firm in 1996 as the Head of Corporate Finance in South Africa and moved to London in 1998 as Head of UK Investment Banking. Mr. Wilmot-Sitwell previously worked for Warburg Dillon Read and served as the Head of Corporate Finance at SBC Warburg in South Africa. Mr. Wilmot-Sitwell graduated from Bristol University with a degree in modern history. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Wilmot-Sitwell is Vice President of the Save the Children Fund, London. Professional history and education Robert Wolf was appointed President of the UBS Investment Bank in 2007 and was COO of the UBS Investment Bank from 2004 to 2008. Since 2007, he has also served as Chairman and CEO of UBS Group Americas. Prior to that, Mr. Wolf served as the Global Head of Fixed Income from 2002 to 2004 and previ- ously as Global Head of Credit Trading, Research and Distribution. He joined Union Bank of Switzerland (UBS) in 1994, after spending approximately 10 years at Salomon Brothers in fixed income. In 1984, Mr. Wolf graduated from the Wharton School of the University of Pennsylvania with a degree in economics. Robert Wolf American (US), born 8 March 1962 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Chairman and CEO, UBS Group Americas / President Investment Bank Year of initial appointment: 2008 Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Wolf is a member of President Obama’s Economic Recovery Advisory Board. He is a member of the Undergraduate Executive Board of the Wharton School, the University of Pennsylvania Athletics Board of Overseers and the Financial Services Round Table. Mr. Wolf is also a member of the Council on Foreign Relations and the Committee Encouraging Corporate Philanthropy. He is in the Leadership Council of the Multiple Myeloma Research Foundation, Norwalk, on the Board of Trustees of the Children’s Aid Society, New York, and the Partnership New York City. He is a member of the Robert F. Kennedy Center for Justice & Human Rights Leadership Council. Professional history and education Chi-Won Yoon became Chairman and CEO of UBS, Asia Pacific (APAC) and a member of the GEB in June 2009. He continues to serve APAC’s securities businesses such as Equities, which he headed from 2004 to 2009 and FICC, which he was brought in to lead in February 2009. Mr. Yoon, who joined UBS in 1997, began his career in financial services eleven years earlier. He worked first at Merrill Lynch in New York and then at Lehman Brothers in New York and Hong Kong. Before embarking on a Wall Street career, Mr. Yoon worked as an electrical engineer in satellite communications. In 1982, Mr. Yoon earned a bachelor’s degree in electrical engineering from the Massachusetts Institute of Technology (MIT) and in 1986, a master’s degree in manage- ment from MIT’s Sloan School of Management. He was born in Korea. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Yoon is on the Asian Executive Board of MIT’s Sloan School of Management. Professional history and education Jürg Zeltner was appointed CEO Wealth Management, Wealth Management & Swiss Bank, 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 former GMB in the same year. From 2005 to 2007, he was CEO of UBS Deutschland, Frankfurt. Prior to that, he held various management positions in the Wealth Management division of UBS. Between 1987 and 1998, Mr. Zeltner was with SBC in various roles within the Private and Corporate Client division in Berne, New York and Zurich. He graduated from the School of Economics and Business Administration in Berne and completed the Advanced Management Program at Harvard Business School. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Zeltner is a board member of the German Swiss Chamber of Commerce and the UBS Optimus Foundation. Chi-Won Yoon American (US), born 2 June 1959 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Chairman and CEO Asia Pacific Year of initial appointment: 2009 Jürg Zeltner Swiss, born 4 May 1967 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS CEO Wealth Management, Wealth Management & Swiss Bank Year of initial appointment: 2009 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 201 Corporate governance and compensation Corporate governance Responsibilities, authorities and organizational principles of the Group Executive Board Responsibilities and authorities of the former Executive Committee and the new Group Asset and Liability Management Committee Under the leadership of the Group CEO, the GEB has ex- ecutive management responsibility for the Group and its business. It assumes overall responsibility for the develop- ment of the Group and business division strategies and the implementation of approved strategies. The GEB consti- tutes itself as the risk council of the Group. In this function, the GEB has overall responsibility for establishing and su- pervising the implementation of risk management and con- trol principles, for approving the core risk policies as pro- posed by the Group Chief Risk Officer (Group CRO), the Group CFO and the Group General Counsel (Group GC) as well as for controlling the risk profile of the Group as a whole as determined by the BoD and the RC. The GEB plays a key role in proposing the human resources policy and the compensation principles of the Group. In 2009, the GEB held in total 21 meetings of which 11 were jointly with the Executive Committee and 4 were jointly with the EC and the Group ALCO. ➔ Refer to the Organization Regulations, which are available at www.ubs.com/governance, for more information on the authorities of the GEB The EC, established in January 2009, was disbanded in Octo- ber 2009. The EC consisted of the Group CEO, the Group CFO, the Group COO, the Group CRO and the Group GC. Under the leadership of the Group CEO, the EC was respon- sible for allocating the Group’s financial resources to the business divisions – i.e. capital, terms and availability of funding, risk capacity and parameters – in each case within the limits set by the BoD. Additionally, the EC set the perfor- mance targets of the business divisions, monitored and eval- uated them. Under the guidance of the Group CEO, the EC prepared proposals for approval by the BoD and supported the BoD in its decision-making process. The EC had overall responsibility for implementing our risk management and control principles, allocating risk capacity to the business di- visions and controlling our overall risk profile. In 2009, the EC held eight meetings on its own; 11 jointly with the GEB and four with the GEB and the Group ALCO. The GEB has delegated certain duties and responsibilities to the new Group ALCO, as specified in the Organization Regulations. The Group ALCO promotes the usage of our assets and liabilities in line with our strategy, regulatory com- mitments and interests of shareholders and other stakehold- ers. In 2009, the Group ALCO held one meeting on its own and four jointly with the GEB and the EC. Management contracts We have not entered into management contracts with any third parties. 202 Shareholders’ participation rights We are committed to shareholder participation in our deci- sion-making process and aim to make such participation as easy as possible. More than 300,000 directly registered shareholders, as well as some 90,000 US shareholders regis- tered via nominee companies, regularly receive written infor- mation about our activities and performance and are per- sonally invited to shareholder meetings. ➔ Refer to the “Information policy” section of this report for further information on these documents Relationships with shareholders We fully subscribe to the principle of equal treatment of all shareholders, who range from large investment institu- tions to individual investors, and regularly inform them about the development of the company of which they are co-owners. The AGM offers shareholders the opportunity to raise any questions regarding our development and the events of the year that are under review. Members of the BoD and GEB, as well as the internal and external auditors, are present to an- swer these questions. Voting rights, restrictions and representation We place no restrictions on share ownership and voting rights. Nominee companies and trustees, who normally rep- resent a large 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 be- ing entered in the share register. Securities clearing organiza- tions, such as The Depository Trust Company in New York, are not 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. Nomi- nee companies and trustees are required to sign an agree- ment confirming their willingness to disclose, upon our re- quest, 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 giving instructions to an independent proxy desig- nated by UBS, as required under Swiss company law, or by appointing UBS, another bank or another registered share- holder of their choice to vote on their behalf. Nominee com- panies normally submit the proxy material to the beneficial owners and transmit the collected votes to UBS. Statutory quorums Shareholder resolutions, the election and reelection of members of the BoD and the appointment of the Group and statutory auditors are decided at the AGM by an abso- lute 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 must vote in favor of the resolution. These is- sues include, among others, the creation of shares with priv- ileged voting right, the introduction of restrictions on the transferability of registered shares, conditional and autho- rized capital increases, and restrictions or exclusion of share- holders’ pre-emptive rights. The Articles of Association also requires a two-thirds ma- jority 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 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 that a vote or election take place electronically or by written ballot. In order to al- low shareholders to clearly express their views on all indi- vidual topics, each item on the agenda is put to vote sepa- rately and BoD elections are made on a person-by-person basis. Convocation of general meetings of shareholders The AGM normally takes place each year in April, but in any case within six months of the close of the financial year. A personal invitation including a detailed agenda and explana- tion 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 newspapers and on the internet at www.ubs.com/agm. EGMs may be convened whenever the BoD or the statu- tory 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 203 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Corporate governance and compensation Corporate governance with a specific issue put forward by them. Such a request may also be brought forward during the AGM. together with a short explanation, if necessary. The BoD for- mulates opinions on the proposals, which are published to- gether with the motions. Placing of items on the agenda Registrations in the share register 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 at the shareholders’ meeting. We publish the deadline for submitting such proposals in the Swiss Official Gazette of Commerce and on our website www.ubs.com/agm. Requests for items to be placed on the agenda must include the actual motions to be put forward, The general rules for being entered with voting rights in our Swiss or US share registers also apply before general meet- ings of shareholders. There is no “closing of the share regis- ter” in the days before the meeting. Registrations, including the transfer of voting rights, are processed for as long as technically possible, normally until two days before the meeting. 204 Change of control and defense measures We refrain from restrictions that would hinder developments initiated in or supported by the financial markets. We also do not have any specific defenses in place to prevent hostile takeovers. Duty to make an offer An investor who acquires more than 33 1⁄3% of all voting rights (directly, indirectly or in concert with third parties), whether they are exercisable or not, is required to submit a takeover offer for all shares outstanding, according to Swiss stock exchange law. We have not elected to change or opt out of this rule. Clauses on change of control The service agreements and employment contracts with the Chairman of the BoD and with the GEB members do not contain change of control clauses, except for two agree- ments with GEB members. In one clause, a change of control would reduce the employment notice of termination period from six to two months, and in the other clause, which was applicable only until 1 March 2010, compensation plan awards would be treated as if employment had ceased due to “mutually agreed termination”. All new employment agreements with GEB members contain a notice of termination period of six months and no existing GEB member has a notice of termination period lon- ger than 12 months. During the notice of termination peri- od, GEB members are entitled to their salary and continua- tion of existing employment benefits. In case of a change of control, the HRCC may, how- ever, accelerate the vesting of restricted shares and amend the vesting date or lapse date of options for all employees. According to the agreement we have entered into with the Swiss National Bank (SNB) in connection with the transfer of certain illiquid and other positions to a fund owned and controlled by the SNB, in the event of a change in control of UBS the SNB has the right but not the obligation to require that we purchase the loan the SNB provided to the fund at its outstanding principal amount plus accrued interest, and that we purchase the fund’s equity at 50% of its value at the time. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 205 Corporate governance and compensation Corporate governance Auditors Audit is an integral part of corporate governance. While safeguarding their independence, the external auditors closely coordinate their work with Group Internal Audit. The AC, and ultimately the BoD, supervises the effectiveness of audit work. External, independent auditors At the 2009 AGM, Ernst & Young Ltd., Basel, (Ernst & Young) were reelected as principal auditors for the Group for a further one-year term of office. Ernst & Young assume virtually all auditing functions according to laws, regulatory requests and the “Articles of Association of UBS AG”. The Ernst & Young lead partner in charge of the UBS audit has been Andrew McIntyre since 2005, who will be replaced in 2010 by Jonathan Bourne due to a five-year rotation re- quirement; Andreas Blumer has acted as the global en- gagement partner since 2004, and his incumbency is lim- ited to seven years. Ernst & Young will be proposed for reelection at the AGM in 2010. At the 2009 AGM, the former BDO Visura, Zurich, now BDO AG, was appointed as special auditor for a three-year term of office. The special auditors provide audit opinions independently from the principal auditors in connection with capital increases. Fees paid to external independent auditors The fees (including expenses) paid to our principal auditors Ernst & Young, are set forth in the table below. In addition, Ernst & Young received CHF 37,030,000 in 2009 (CHF 31,561,000 in 2008) for services performed on behalf of our 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 ac- cepted auditing standards, as well as other assurance ser- vices that conventionally only the principal auditor can pro- vide. These include statutory and regulatory audits, attest services, and the review of documents to be filed with regu- latory bodies. Audit-related work comprises assurance and related ser- vices that traditionally are performed by the principal audi- tor, such as attest services related to financial reporting, internal control reviews, performance standard reviews, con- sultation concerning financial accounting and reporting standards and due diligence investigations on transactions in which we propose to engage. Tax work involves services performed by professional staff in Ernst & Young’s tax division, and includes tax com- pliance, tax consultation and tax planning in respect to our own affairs. Fees paid to external auditors UBS paid the following fees (including expenses) to its external auditors Ernst & Young Ltd.: in CHF thousand Audit Global audit fees Additional services classified as audit (services required by law or statute, including work of a non-recurring nature mandated by regulators) Total audit Non-audit Audit-related fees of which assurance and attest services of which control and performance reports of which advisory on accounting standards, transaction consulting including due diligence, other Tax advisory Other Total non-audit 206 For the year ended 31.12.09 31.12.08 45,276 8,856 54,132 7,405 3,142 4,023 240 509 279 8,193 45,848 9,918 55,766 8,430 3,143 4,622 665 504 1,246 10,180 “Other” services are approved on an exceptional basis only. In 2008 and 2009, they mainly comprised on-call advi- sory services. Pre-approval procedures and policies To ensure Ernst & Young’s independence, all services provid- ed by them have to be pre-approved by the AC. A pre-ap- proval may be granted either for a specific mandate, or in the form of a bucket pre-approval authorizing a limited and well-defined type and amount of services. The AC has delegated pre-approval authority to its Chair- man; hence the Group CFO submits all proposals for services by Ernst & Young to the Chairman of the AC for approval, unless there is a bucket pre-approval in place. At each quar- terly meeting, the AC is informed of the approvals granted by its Chairman and of services authorized under bucket pre- approvals. Group Internal Audit Group Internal Audit, with 313 personnel worldwide on 31 December 2009, performs the internal auditing func- tion for the entire Group. Group Internal Audit supports the BoD and its committees in discharging their gover- nance responsibilities by independently assessing the ef- fectiveness of our system of internal controls and our com- pliance with statutory, legal and regulatory requirements. All reports with key issues are provided to the Group CEO, the members of the GEB responsible for the business divi- sions and other responsible management. In addition, the Chairman of the BoD, the RC and the AC are regularly in- formed 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 Head of Group Internal Audit reports directly to the Chair- man of the BoD and to the RC. Group Internal Audit has unrestricted access to all accounts, books, records, systems, property and personnel, and must be provided with all infor- mation and data needed to fulfill its auditing duties. The RC may order special audits to be conducted. BoD members, BoD committees or the Group CEO may submit requests for such audits to the RC. Coordination and close cooperation with the auditors en- hance the efficiency of Group Internal Audit’s work. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 207 Corporate governance and compensation Corporate governance Information policy We provide regular information to our shareholders and to the financial community. Financial results will be published as follows First quarter 2010 Second quarter 2010 Third quarter 2010 4 May 2010 27 July 2010 26 October 2010 The Annual General Meeting of shareholders will take place as follows 2010 2011 14 April 2010 20 April 2011 We meet with institutional investors worldwide throughout the year and regularly hold results presentations, special in- vestor seminars, road shows, individual and group meet- ings. Where possible, meetings involve senior management as well as members of the investor relations team. We make use of diverse technologies such as webcasting, au- dio links and cross-location video-conferencing to widen our audience and maintain contact with shareholders around the world. Once a year, unless they explicitly choose not to, regis- tered shareholders receive a summary of our annual report in the form of an annual review. It provides an overview of the firm and our activities during the year as well as key financial information. Each quarter, shareholders are mailed a brief update on our quarterly financial performance. Shareholders can also request our complete financial reports, produced on a quarterly and annual basis, free of charge. To ensure fair access to and dissemination of our financial information, we make our publications available to all share- holders at the same time. ➔ Refer to www.ubs.com/investors for a complete set of published reporting documents, the corporate calendar, access to recent webcasts and a selection of senior management industry conference presentations Financial disclosure principles Based on discussions with analysts and investors, we believe that the market rewards companies that provide clear, con- sistent and informative disclosure about their business. Therefore, we aim to communicate our strategy and results in a manner that allows shareholders and investors to gain an understanding of how our company works, what our growth prospects are and what risks our strategy and results might entail. Feedback from analysts and investors is con- tinually assessed and, where relevant, reflected in our quar- terly and annual reports. To continue to achieve these goals, we apply the following principles in our financial reporting and disclosure: – Transparency in disclosure enhances understanding of the economic drivers and builds trust and credibility. – Consistency in disclosure within each reporting period and between reporting periods. – Simplicity in disclosure allows readers to gain an under- standing of the performance of our businesses. – Relevance in disclosure avoids information overload by focusing on what is required by regulation or statute and is relevant to our stakeholders. – Best practice in line with industry norms, leading the way to improved standards where possible. Financial reporting policies We report our results after the end of every quarter, includ- ing a breakdown of results by business division and extensive disclosures relating to credit and market risk. Our financial statements are prepared according to IFRS as issued by the International Accounting Standards Board. ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for a detailed explanation of the basis of UBS’s accounting We are committed to maintaining the transparency of our reported results and to ensuring that analysts and investors can make meaningful comparisons with previous periods. If there is a major reorganization of our business divisions, or if changes to accounting standards or interpretations lead to a material change in the Group’s reported results, our results are restated for previous periods when required by applica- ble accounting standards, to show how they would have been reported according to the new basis and provide clear explanations of all relevant changes. US regulatory disclosure requirements As a “foreign private issuer”, we must file reports and other information, including certain financial reports, with the US Securities and Exchange Commission (SEC) under the US federal securities laws. We file an annual report on Form 20- F, and submit our quarterly financial reports under cover of Form 6-K to the SEC. These reports, as well as materials sent to shareholders in connection with AGMs and EGMs, are all available at www.ubs.com/investors. 208 On 31 December 2009, an evaluation was carried out un- der the supervision of management including the Group CEO and Group CFO, of the effectiveness of our 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 our disclosure controls and procedures were effective as of that date. No significant changes have been made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. In accordance with Section 404 of the US Sarbanes-Oxley Act of 2002, our management is responsible for establishing and maintaining adequate internal control over financial re- porting. The financial statements of this report contain man- agement’s assessment of the effectiveness of internal control over financial reporting, as per 31 December 2009. The ex- ternal auditors’ report on this assessment is also included in this report. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 209 Corporate governance and compensation Corporate governance Regulation and supervision As a Swiss-registered company, our home country regulator and consolidated supervisor is FINMA. However, our opera- tions are global and are therefore regulated and supervised by the relevant authorities in each of the jurisdictions in which we conduct business. The next sections describe the regulation and supervision of our business in Switzerland, our home market, and the regulatory and supervisory envi- ronments in the US and the UK, our next two largest areas of operations. Regulation and supervision in Switzerland Swiss Federal Legislation We are regulated 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 Bank- ing 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, invest- ment 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 internationally agreed capital adequacy rules of the Basel Capital Accord (Basel II) by means of the Capital Adequacy Ordinance of 29 Sep- tember 2006, and subsequent FINMA circulars. Switzerland imposes a more differentiated and tighter regime than the internationally agreed rules, including more stringent risk weights. Capital requirements for the two large banks, UBS and Credit Suisse, exceed the Swiss minimum due to a mandatory capital buffer under 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 bal- ance sheet assets. Regulation by the Swiss Financial Market Supervisory Authority FINMA is strongly involved in the shaping of the legislative framework for banks, especially through the following mechanisms: – FINMA has substantial influence on the drafting of Swiss federal acts and ordinances from the Federal Council or the parliament (e.g. the Ordinance on the Money Launder- ing Reporting Office dated 25 August 2004, as amended). – On a more technical level, FINMA is empowered to issue its own ordinances and circulars, 55 of which are pres- ently effective. These include, for example, FINMA-Circu- lar 08 / 38 on Market Behavior, FINMA-Circular 08 / 24 on Supervision and Internal Controls at Banks, and FINMA- Circular 09 / 1 on Guidelines on Asset Management. Self-regulation by the SIX Swiss Exchange and the Swiss Bankers Association Certain aspects of securities brokering, such as the organi- zation of trading, are subject to self-regulation through the SIX Swiss Exchange, under the overall supervision of FINMA. Examples are: – the Listing Regulations of 24 January 1996, as amended on 1 July 2009, and the General Conditions dated 31 March 2009; and – the Directive on the Disclosure of Management Transac- tions of 29 October 2008. FINMA also officially endorses self-regulatory guidelines is- sued by the banking industry (through the Swiss Bankers As- sociation), making them an integral part of banking regula- tion. Examples are: – Directives on Fiduciary Investments, 2009; – Agreement on the Swiss banks’ Code of Conduct with regard to the Exercise of Due Diligence, 2008; – Directives on the Independence of Financial Research, 2008; – Guidelines on the Simplified Prospectus for Structured ➔ Refer to the “Capital management” section of this report Products, 2007; for more details about capital requirements – Agreement of Swiss Banks on Deposit Insurance, 2005; The Federal Act of 10 October 1997 on the Prevention of Money Laundering in the Financial Sector (Anti-Money Laun- dering Act, AMLA) lays down a common standard for due diligence obligations for the whole financial sector which must be met to prevent money laundering. and – Guidelines on the Handling of Dormant Accounts, Cus- tody Accounts and Safe-Deposit Boxes Held in Swiss Banks, 2000. In our capacity as a securities broker, we are governed by the Swiss Federal Law on Stock Exchanges and Securities Trading of 24 March 1995, as amended. FINMA is the com- petent supervisory authority. Two-tier system of supervision and direct supervision of UBS and Credit Suisse Generally, supervision in Switzerland is based on a division of tasks between FINMA and a number of authorized audit 210 firms. Under this two-tier supervisory system, FINMA has the responsibility for overall supervision and enforcement measures while the authorized audit firms carry out official duties on behalf of, and subject to, sanctions imposed by FINMA. The responsibility of external auditors encompasses the audit of financial statements, the reviewing of banks’ compliance with all prudential requirements and on-site audits. Because of their importance to the Swiss financial system, UBS and Credit Suisse are directly supervised by dedicated teams at FINMA. The regime of direct supervision is regulat- ed by the FINMA-Circular 08 / 9 on the Supervision of Large Banking Groups. Supervisory tools include schedules of meetings with management and information exchange en- compassing all control and business areas, independent as- sessments through review activities, and a regular exchange of views with internal audit functions, external auditors and important host supervisors. Direct supervision is performed by FINMA’s Supervision of Large Banks section, which assigns a dedicated supervisory team to each of the two large banking groups. These firm- specific teams are supported by teams specifically monitor- ing the investment banking, wealth management and asset management businesses across the large banking groups, and the Risk Management, and Solvency and Capital sec- tions. Disclosures to the Swiss National Bank While Switzerland’s banks are primarily supervised by FIN- MA, compliance with liquidity rules is monitored by the SNB. The SNB also takes a direct interest in the stress testing prac- tice of both large banks. Liquidity regulation is currently be- ing reformed. ➔ Refer to the “Liquidity and funding management” section of this report for more details about liquidity requirements Regulation and supervision in the US Banking regulation Our operations in the US are subject to a variety of regula- tory regimes. We maintain branches of UBS AG in California, Connecticut, Florida, Illinois and New York. The branches lo- cated in California, Florida and New York are federally li- censed by the Office of the Comptroller of the Currency. 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 ex- amination by its licensing authority. We also maintain 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 exer- cises examination and regulatory authority over our state- licensed US branches. Only the deposits of our subsidiary bank located in the state of Utah are insured by the Federal Deposit Insurance Corporation. The regulation of our US branches and subsidiaries imposes restrictions on the activi- ties 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 author- ity, in certain circumstances, to take possession of the busi- ness and property of UBS located in the state of the office it licenses. Such circumstances generally include violations of law, unsafe business practices and insolvency. As long as we maintain 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 pre-empt the state insolvency regimes that would otherwise be applicable to our 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 assets of the US branches of UBS AG would most likely be applied first to satisfy creditors of these US branches as a group, and then made available for application pursuant to any Swiss insolvency proceeding. In addition to the direct regulation of our US banking offices, because we operate US branches, we are subject 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). On 10 April 2000, UBS AG was designated a “financial holding company” under the Bank Holding 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 our financial holding com- pany status, (i) UBS, our US subsidiary federally chartered trust company and our US subsidiary bank located in Utah are required to meet certain capital ratios, (ii) our US branch- es, our US subsidiary federally chartered trust company, and our US subsidiary bank located in Utah are required to meet certain examination ratings, and (iii) our subsidiary bank in Utah is required to maintain a rating of at least “satisfacto- ry” under the Community Reinvestment Act of 1997. A ma- jor focus of US governmental policy relating to financial in- stitutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to UBS and our subsidiaries impose obligations to maintain ef- fective policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their clients. Failure of a financial institu- tion to maintain and implement adequate programs to com- bat money laundering and terrorist financing could have se- rious consequences for the firm, both in legal terms and in terms of our reputation. 211 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Corporate governance and compensation Corporate governance US regulation of other US operations In the US, UBS Securities LLC and UBS Financial Services Inc., as well as our other US-registered broker-dealer entities, are subject to regulations that cover all aspects of the securities business, including: sales methods; trade practices among broker-dealers; use and safekeeping of clients’ funds and securities; capital structure; record-keeping; the financing of clients’ purchases; and the conduct of directors, officers and employees. These entities are regulated by a number of different gov- ernment agencies and self-regulatory organizations, includ- ing the SEC and the Financial Industry Regulatory Authority (FINRA). Depending on the specific nature of a broker-deal- er’s business, it may also be regulated by some or all of the NYSE, the Municipal Securities Rulemaking Board, the US Department of the Treasury, the Commodities Futures Trad- ing 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 regula- tors have a variety of sanctions available, including the au- thority 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 direc- tors, officers or employees. Created in July 2007 through the consolidation of the National Association of Securities Dealers and the member regulation, enforcement and arbitration functions of the NYSE, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and com- plementary 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 educat- ing the investing public; providing trade reporting and other industry utilities; and administering a dispute resolution fo- rum for investors and registered firms. It also performs mar- ket regulation under contract for the NASDAQ Stock Mar- ket, the American Stock Exchange and the Chicago Climate Exchange. Regulation and supervision in the UK Our operations in the UK are regulated by the Financial Ser- vices Authority (FSA), 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 supervi- sion 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-spe- cific) 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 ex- tremely 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 our subsidiaries and affiliates are also regulated by the London Stock Exchange and other UK securities and commodities exchanges of which we are a member. We are also subject to the requirements of the UK Panel on Take- overs and Mergers, where relevant. Financial services regulation in the UK is conducted in ac- cordance with European Union directives which require, among other things, compliance with certain capital ade- quacy standards, client protection requirements and conduct of business rules (such as Markets in Financial Instruments Directive). These directives apply throughout the European Union and are reflected in the regulatory regimes of the var- ious member states. The standards, rules and requirements established under these directives are broadly comparable in scope and purpose to the regulatory capital and client pro- tection requirements imposed under applicable US law. 212 Compliance with NYSE listing standards on corporate governance As a Swiss company listed on the NYSE, we comply with the NYSE corporate governance standards for foreign private issuers. ➔ Refer to the “Board of Directors” section of this report for further information on these committees – including their mandates, responsibilities and authorities – as well as their Independence of directors Based on the listing standards of the NYSE, our BoD has es- tablished specific criteria for defining the independence of our external members. Each external director has to person- ally confirm his or her compliance with the criteria, which are published on our website under www.ubs.com/governance. All current external members have been confirmed by the BoD as 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. Currently all members of the BoD are external, with the exception of the Chairman. Each of the external members has also met all the BoD and NYSE requirements with respect to independence. The NYSE has more stringent independence requirements for members of audit committees. All three members of our AC are external BoD members who, in addition to satisfying the above criteria, do not: receive, directly or indirectly, any consulting, advisory or other compensatory fees from UBS other than in their capacity as directors; hold, directly or in- directly, UBS shares in excess of 5% of the outstanding ca- pital; or (except as noted below) serve on the audit com- mittees of more than two other public companies. These members are William G. Parrett, Ann F. Godbehere and Mi- chel Demaré. The NYSE guidelines allow for an exemption for AC members to sit on more than three audit committees of public companies, provided that all members of the BoD determine that the candidate has the time and the availabil- ity to fulfill his or her obligations. Considering the credentials of William G. Parrett, and the fact that he has retired from his executive functions, the BoD has granted this exemption in his case. Board of Directors and its committees We operate under a strict dual board structure mandated by Swiss banking law. No member of the GEB may also be a member of the BoD and vice versa. This structure ensures the institutional independence of the entire BoD from the day-to-day management. UBS has established committees for the following BoD mandates: audit; human resources and compensation; governance and nominating; risk and corporate responsibility. activities during 2009 In addition, the BoD elects at least one Vice Chairman who must be independent and who acts as the Senior Indepen- dent Director. Sergio Marchionne assumed these roles in 2009. Mr. Marchionne will not stand for reelection to the BoD at the AGM in April 2010. The BoD may elect another Vice Chairman who does not need to be independent, but has not done so this time. More details about the Vice Chair- man function can be found in the Organization Regulations, which are published on www.ubs.com/governance. The BoD has adopted Organization Regulations that con- stitute our corporate governance guidelines, which include all matters required by the NYSE rules. The BoD has also ad- opted a “Code of Business Conduct and Ethics”. Both the Organization Regulations and the “Code of Business Con- duct and Ethics” are available on our website at www.ubs. com/governance. In addition, the AC has established rules for the handling of complaints related to accounting and auditing matters, the internal policies on “Whistleblowing Protection for Employees” and “Compliance with Attorney Standards of Professional Conduct”. Differences from corporate governance standards relevant to US listed companies According to the NYSE listing standards on corporate gover- nance, foreign private issuers have to disclose any significant ways in which their corporate governance practices differ from those to be followed by domestic companies. Responsibility of the Audit Committee for appointment, compensation, retention and oversight of the independent auditors Our AC has been assigned all the abovementioned respon- sibilities, except for appointment of the independent audi- tors, which are elected by the shareholders as per Swiss company law. The AC assesses the performance and qua- lification of the external auditors and submits its proposal for appointment, re-appointment or removal to the full BoD, which brings its proposal to the shareholders for vote at the AGM. 213 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Corporate governance and compensation Corporate governance Discussion of risk assessment and risk management policies by the Risk Committee In accordance with our Organization Regulations, the RC has the authority to define our risk principles and risk capac- ity. The RC is responsible for monitoring our adherence to those risk principles and for monitoring whether business and control units run appropriate systems for the manage- ment and control of risks. Assistance by Risk Committee of the internal audit function Both the Chairman and the RC have the responsibility for and authority to supervise the internal audit function. Responsibility of the Human Resources and Compensation Committee for oversight of management and evaluation by the Board of Directors Performance evaluations of our senior management, com- prising the Group CEO and the members of the GEB, are completed by the Chairman of the BoD and the HRCC 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 Audit and Human Resources and Compensation Committees Under Swiss company law, all reports addressed to share- holders are provided and signed by the full BoD, which has ultimate responsibility vis-à-vis shareholders. The commit- tees submit their reports to the full BoD. Shareholders’ votes on Equity Compensation Plans Swiss company law authorizes the BoD to approve compen- sation plans. Though Swiss law does not allocate such au- thority to the AGM, it requires that Swiss companies deter- mine capital in their articles of association and each increase of capital is required to be submitted for shareholders’ ap- proval. This means that, if equity-based compensation plans result in a need for a capital increase, AGM approval is man- datory. If, however, shares for such plans are purchased in the market, shareholders do not have the authority to vote on their approval. 214 Advisory vote Compensation and shareholdings The UBS Total Reward Principles are designed to align employees’ interests with those of shareholders – the creation of long-term value and sustainable shareholder returns. These principles, reproduced in full at the end of the report, are established by the Human Resources and Compensation Committee of the Board of Directors, and provide the basis for 2009 compensation practices. Letter from the Human Resources and Compensation Committee of the Board of Directors Dear Shareholders Throughout 2009, the new UBS has faced the crucial challenge of rebuild- ing its key businesses, regaining the trust of shareholders and clients and establishing and developing the pursuit of its longer term strategy to bring about sustained profitability. All these factors taken together have under- scored the need to attract and retain key talent, which is critical to attaining our strategic goals. At the same time, the increased competitive market pressures, extensive regulatory oversight and a rapidly changing commercial environment have also continued. Our approach to providing both a robust and impactful compen- sation and talent framework has certainly been affected by these often competing pressures. At the start of 2009, in response to lessons learned from the financial crisis, UBS acted as a forerunner in implementing a new executive compensation framework. The framework, which is now in place, incorporates significant deferral for senior management and places more emphasis on compensation at risk. We also integrated the focus on “economic profit” as a key driver of compensation accruals. During the year, and building on work already started in 2008, we revised the Total Reward Principles, which summarize the compensation principles for all UBS employees. These principles focus on a number of long-standing drivers including risk awareness, effective risk and capital management, sustainable profitability, and client focus. They also highlight the importance of deferred pay, and include additional forfeiture clauses in order to better align employee compensation with medium and longer-term shareholder value. Rewards based on longer-term risk- adjusted performance, especially for key senior management, has increased in importance. Thus for 2009 perfor- mance year, the first awards have recently been granted to GEB members under the Performance Equity Plan and the Cash Balance Plan introduced at last year’s AGM. In addition the Incentive Performance Plan has been introduced as a key long-term perfor- mance and retention tool in 2010. The IPP is specifically designed to reward participants whose performance can be linked to adding sustainable value to UBS over the next five years. We will again hold an advisory vote on compensation at the AGM in April 2010. Shareholder participation in compensation matters remains crucial and, as such, shareholders will be asked to vote on the 2009 compensa- tion report. long-term performance. We continu- ally assess the alignment of our compensation framework with shareholder interests, the ability of that framework to withstand a fluctuating market and its effective- ness at supporting the execution of the firm’s people strategy. We have closely followed international develop- ments in compensation, and are compliant with the frameworks defined by the Financial Stability Board and FINMA, as well as those in other jurisdictions where we have a substan- tial presence. In 2009, we extended our HRCC charter to reflect a greater scope of responsibility, particularly in relation to business risks. While developments in this area continue, we are confident that our compensation framework for 2009, and the resultant overall compensa- tion program achieved the appropriate balance between the demands of our strategic goals, our economic position- ing, general market conditions and the need to effectively reward and incent our talent – the most important resource to achieving our long-term goals. The HRCC and the full BoD are committed to reinforcing the relation- ship between compensation and Sally Bott Chairman of the HRCC 215 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Advisory vote Corporate governance and compensation Compensation and shareholdings Compensation governance Human Resources and Compensation Committee The HRCC is composed of three independent members of the BoD. On 31 December 2009, the members were Sally Bott (committee chair), Bruno Gehrig and Helmut Panke. Hostettler & Partner AG provided independent external ad- vice to the committee and Towers Perrin supported the com- mittee with market data during the year. Authorities and responsibilities The HRCC is responsible for reviewing the Total Reward Prin- ciples and for submitting them to the BoD. Additionally, on behalf of the BoD, the committee has the following key areas of responsibility: – reviewing and approving the design of the total compen- sation framework, including compensation strategy, pro- grams and plans, and proposing significant changes to plans and new plans to the BoD for approval; – defining the relationship between compensation and per- formance; – reviewing variable incentive funding throughout the year and proposing the final outcome to the BoD for approval; – approving base salaries and annual incentive awards for GEB members, excluding the Group CEO whose compen- sation needs to be approved by the BoD upon recommen- dation by the HRCC; – proposing individual GEB appointments to the BoD and approving the associated employment agreements; and – working with the Governance and Nominating Commit- tee and the full BoD on reviewing succession plans for GEB members including the Group CEO. In addition, the HRCC charter was amended in 2009 to reflect the changing regulatory environment, in particular the need to review compensation structures with human re- sources (HR) and the risk management function to ensure they do not encourage excessive or unnecessary risk-taking. Authorities for compensation-related decisions are gov- erned by the “Organization Regulations of UBS AG” (Organi- zation Regulations), “Annex B – Responsibilities and authori- ties”, and “Annex C – Charter for the committees of the Board of Directors of UBS AG”. The structure is shown below. Compensation authorities Recipients Compensation recommendations developed by Approved by Communicated by Chairman of the BoD Chairman of the HRCC 1 Group CEO Chairman of the BoD / HRCC Members of the GEB Group CEO Independent BoD members (remuneration system and fees) Chairman of the BoD / HRCC HRCC BoD HRCC BoD HRCC HRCC Group CEO Chairman of the BoD Recipients Variable compensation recommendations developed by Approved by Communicated by Employees (excl. GEB) Respective member of the GEB together with functional management team Divisional pools: HRCC Overall: Board of Directors Line Manager 1 The Human Resources and Compensation Committee. 216 Advisory vote The 2010 non-binding vote on the compensation report We value the opinions of our shareholders and, at the AGM to be held in April 2010, we will provide shareholders with an opportunity to express their views through a vote on this compensation report. As the ultimate decision on compen- sation is legally within the powers of the BoD, such a vote is non-binding and advisory in nature. We believe that this vote presents a meaningful way of involving our sharehold- ers in compensation matters. We also encourage sharehold- ers to share their views regarding our compensation pro- grams and related matters directly with BoD members by contacting the Company Secretary. Decision-making process for Group Executive Board Member Total Compensation One of the most important responsibilities of the HRCC is to decide and approve the actual amount of variable cash and equity compensation to be awarded to each GEB member for performance during 2009. This relies on a detailed and balanced review of not only Group per- formance, but also that of the relevant business division and also the impact of specific individuals. It considers Group and divisional performance information (economic profit, other financial and non-financial factors such as leadership effectiveness, strategy execution, reputation impact, etc.) performance assessments from the Board, ini- tial compensation recommendations from the Group CEO, contractual and related commitments and relevant market data. Final decisions regarding compensation for each of the members reflected both management and the HRCC’s desire to appropriately recognize performance in this difficult year but also to be necessarily constrained in light of absolute and relative overall performance. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 217 Advisory vote Corporate governance and compensation Compensation and shareholdings Total Reward Principles In September 2009, revised Group-wide Total Reward Prin- ciples were approved by the BoD following a review by the GEB and a proposal by the HRCC. The Total Reward Princi- ples summarize the compensation structure for all UBS em- ployees. While the principles reflect recent regulatory devel- opments, they also focus on long-standing drivers including reward for performance, sustainable profitability, effective risk and capital management, outstanding client focus and teamwork as well as sound governance practices. They also build on our strategy of enhancing reputation, integration and execution. The reward structure aims to: – align reward with sustainable performance; – support appropriate and controlled risk taking; – foster effective individual performance management and communication; and – attract and engage a diverse, talented workforce. Align reward with sustainable performance Within the context of UBS as a whole and the markets in which we operate, the sustainable performance of an em- ployee’s business division is a key component of reward. In considering the Group and business division performance, a range of factors will be taken into account including finan- cial results, risk, capital usage, market positioning and the views of shareholders and other stakeholders. Assessment will focus on both current key performance indicators, and the long-term actions that preserve and improve our ability to deliver value in the future. Business division reward recommendations are deter- mined in consultation between the Group CEO and the CEO(s) of each division, as advised by the Group CFO, Group Head HR and, where appropriate, Group Risk. Proposals rec- ommended by the Group CEO are reviewed by the HRCC and final approval is provided by the BoD. Support appropriate and controlled risk taking Rewards are consistent with our risk framework and toler- ance. Performance reviews recognize the different risk pro- file and nature of each business, including additional fac- tors such as the quality and time-horizon of earnings, the nature of the relevant industry segment and competitive trends. Employees are rewarded for achievement against a range of financial and non-financial objectives, and not only on the basis of individual revenues. Extraordinary profits, as well as losses, are examined in the context of the track re- cord of an employee’s performance, risk management and market conditions, and measurement of performance will be adjusted for activities and future risks that are not ade- quately reflected in annual profits. Rewards determined for risk, compliance and control functions are determined inde- pendently from the revenue producers they supervise and support. Foster effective individual performance management and communication Beyond contribution to business results and achievement of individual performance objectives, rewards also take into ac- count: – observing our corporate values and principles; – implementing our strategy of enhancing reputation, inte- gration and execution; – demonstrating leadership of clients, business, people and change; – leading and supporting effective collaboration and team- work; – actively managing risk and professional behavior; and – finding the appropriate balance between risk and re- ward. 218 Advisory vote Attract and engage a diverse, talented workforce Our reward structure is designed to provide talented em- ployees with rewards that are appropriately balanced be- tween fixed and variable elements, that are competitive within the market and are paid out over an appropriate pe- riod of time. Given the importance of these principles, they are repro- duced in their entirety at the end of this report. As previ- ously mentioned, these principles form the foundation for our overall compensation framework and program in 2009. Components of compensation In general, total compensation comprises an annual base sal- ary, reflecting the individual’s role, skills and knowledge, local market-based benefits and, where applicable, a discretionary incentive award. Base salary levels are sufficient to allow for a flexible discretionary incentive policy. Discretionary annual incentives may vary from year to year, particularly for senior revenue producers and more highly paid employees. Discre- tionary incentive awards may be split between immediate cash and long-term awards to be granted in the form of ei- ther deferred UBS equity or deferred cash. The proportion of deferred incentive awards generally vest over three years, and increase with total compensation in order to maintain focus on our long-term profitability and continued responsi- ble behavior of the employee. Stock options and / or appre- ciation rights may be awarded as part of total reward to rec- ognize the capabilities of key employees who are expected to carry out our strategic objectives. For employees in senior po- sitions, reward focus is founded on sustainable long-term profitability that may require the application of multi-year performance conditions to recognize outstanding perfor- mance. Guaranteed incentive awards are used only excep- tionally and are generally limited to a one-year duration. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 219 Advisory vote Corporate governance and compensation Compensation and shareholdings Cash and equity incentives Compensation plan awards This section describes key features of the deferred compen- sation plans that are used to deliver variable incentive awards to members of the GEB and other employees. Cash Balance Plan The CBP applies to GEB members only and is designed as one of several tools to ensure that GEB compensation is directly and tightly linked to performance over the longer term. This ensures that the effect of risk events which occur after grant are fully captured “over the life of the instrument”. As such, the CBP relies on a cash deferral system. Generally, 50% of a GEB member’s variable incentive is delivered via the CBP. Of that amount, the plan allows for a maximum payout of only 60% in March 2010, and is subject to an additional cash-cap. A minimum of 40% of a cash incentive award is deferred and paid out during the two following years subject to forfeiture, i.e. the entire cash incentive is only paid out over a three-year period. The forfeiture provisions allow for unvested awards to be reduced (including to nil) in certain events including termina- tion for cause, certain financial losses, behavior that contrib- utes substantially to a material restatement of financial results or to harm to UBS’s reputation, breaches of legal or regulatory requirements or of risk and compliance policies, and a number of other events such as solicitation of staff or clients and dis- closure of proprietary information. Therefore, if an executive leaves UBS, any remaining balance in the plan will be kept at risk until the time called for by the plan. Performance Equity Plan The PEP applies to GEB members and is one of two deferred equity components that comprise the remaining 50% of their variable incentive award. This plan focuses on creating mid- to long-term added value over a three-year period. At the start of the performance period, executives are granted a certain num- ber of restricted performance shares that, subject to the achievement of predefined economic profit and total share- holder return targets at a Group level cliff vest after three years. The number of vested shares can be between zero and two times the number of the initially granted shares, and depends on achievement against two referenced performance targets: – Economic profit (EP) is a market-recognized standard for measuring risk-adjusted profit. It is an internal measure which is broadly calculated by subtracting the cost of eq- uity from the annual net profit attributable to UBS share- holders. EP is only realized when the return on capital achieved is greater than the firm’s cost of capital. – Total shareholder return (TSR) measures the total return of a UBS share, i.e. both the dividend yield and the capital appreciation of the share price. TSR is measured over a three-year period relative to the Dow Jones Banks Titans 30 Index©, a global index comprising the top 30 compa- nies in the banking sector as defined by Dow Jones. The Dow Jones Banks Titans 30 Index© has been chosen as a TSR measure because of its relevance to UBS (banking), its transparency (known listed companies), and its sector cov- erage (30 leading global banks assessed by market capi- talization, revenues, and net profit), as well as for its ob- jectivity and independence (managed by Dow Jones). The three-year target performance levels were set after consideration of our strategic business plan. Vesting is subject to continued employment with UBS. The awards are also subject to forfeiture in certain circum- stances, including in the event of certain harmful acts, such as breaches of legal, regulatory and compliance standards or behavior that contributes substantially to a material financial loss, restatement or reputational risk. Incentive Performance Plan The IPP, which applies to GEB members and certain other senior employees, is designed to be aligned with the long- term performance and value of UBS shares. The award is granted to senior key talent who are actively leading the drive to achieve sustained profitability at UBS and who are expected to contribute most significantly to our long-term future and economic success. The IPP acknowledges the strategic importance of retaining our key talents, returning to leading performance levels in all of our businesses and growing the UBS share price. Participants are granted a certain number of restricted performance shares that cliff vest after five years. The num- ber of vested shares can be between one and three times the number of initially granted performance shares, depending on the achievement of the share price target (i.e. share price at the end of the five-year performance period adjusted for dividends). Vesting is subject to continued employment with UBS. The awards are subject to the same forfeiture provi- sions outlined above in relation to PEP awards. Equity Ownership Plan / Senior Executive Equity Ownership Plan Eligible employees receive a portion of their annual variable compensation above a certain threshold in the form of a mandatory Equity Ownership Plan (EOP) award. This award can be in actual UBS shares or in notional UBS shares. For 220 Advisory vote certain employees in the Global Asset Management business only, a percentage of their variable incentive award that would have been delivered in UBS shares was instead grant- ed over a specifically created Alternative Investment Vehicle. The vesting and forfeiture provisions of these awards mirror those of EOP. EOP awards vest in one-third increments over a three-year vesting period, subject to certain conditions. In early 2009, and again in 2010, a small number of senior employees received a portion of their variable compensation in UBS shares or notional UBS shares under the related Senior Ex- ecutive Equity Ownership Plan (SEEOP). These shares vest in one-fifth increments over a five-year vesting period, subject to certain conditions. For awards granted in 2010 for the 2009 performance year, we decided to raise the deferral level in keeping with industry trends and regulatory considerations and our desire to enhance further the link between pay and longer term performance and alignment with shareholder interests. Par- ticipation in the deferral program affected all employees with total compensation over a threshold. Further a “cash- cap” on variable cash payments was also introduced for this year. In addition, the forfeiture provisions of EOP and SEEOP have been broadened to include forfeiture in the event of certain harmful acts, such as breach of legal, regulatory and compliance standards or individual behavior that contributes substantially to a material financial loss, restatement or repu- tational risk. Conditional Variable Compensation Plan As part of the constrained 2008 compensation program, the firm implemented CVCP as a one-time forward looking com- pensation plan. Under this program awards were granted to certain employees (excluding GEB members) in second quar- ter 2009. These awards constituted a contingent right to re- ceive cash at vesting, subject to the satisfaction of predefined performance conditions, and were scheduled to vest in three equal tranches over a three-year period. Under the CVCP, a tranche is forfeited if either the Group or the relevant business division has no profit in the financial year preceding the year of vesting (or if there is any govern- ment recapitalization during the vesting period). Following the announcement of the UBS financial results for 2009, the first tranche of the CVCP award has been forfeited as the critical performance condition – a net profit for 2009 defined according to IFRS – was not met. For 2009, 9,500 employees forfeited CVCP awards amounting to approximately CHF 300 million. The remaining two tranches will continue to vest, subject generally to continued employment with UBS and to the defined requirements being met in subsequent years. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 221 Advisory vote Corporate governance and compensation Compensation and shareholdings Variable compensation funding framework Overview Following approval of the revised Total Reward Principles, we also reviewed the framework used to fund variable compen- sation. This year, we amended our variable compensation funding framework to explicitly further take into consider- ation factors such as profitability after deducting cost of cap- ital and also the underlying business risk. The variable compensation pool for each division is based on the fully costed economic profit performance together with relevant key performance indicators and other qualita- tive measures. This includes market-driven needs mainly evaluated by competitive benchmarking. These adjustments are necessary in certain business areas where the economic contribution is currently insufficient, but where we decide, based on our long-term strategy, to remain and build our business. The use of performance-driven pool funding, based on risk-adjusted profit, is in line with our view of how to set the most effective compensation strategies and also with new regulatory requirements. Market driven pool funding Within UBS, not all units achieved a satisfactory level of eco- nomic contribution in 2009. However, achievement of our strategic goals including offering a greater integrated firm to our clients calls for us to continue investment in these lines of business. Different businesses are at different stages of development and different places on a profitability spec- trum. Further, competitors are emerging from the global economic crisis at differing paces which is creating signifi- cant compensation tension. Our compensation system needs to be able to anticipate and respond to these pressures in order to maintain our ability to attract and retain key talent. We need to be able to react decisively by maintaining the flexibility to pay top-performing individuals adequately and appropriately by taking into account predefined personal objectives, and achievements against other relevant key performance indicators, as set out in the Total Reward Prin- ciples. Benchmarking against peers Compensation and benefit levels are primarily result-driven and further benchmarked against appropriate peers. 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. Typically, these are also the companies from which we are most likely to hire and to which we are most likely to lose employees. When benchmarking GEB members, generally ten peers are consid- ered to represent the most relevant labor market for compen- sation namely Bank of America Merrill Lynch, Barclays, Citi- group, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley and RBS. In the view of the HRCC, our executive compensation structure is positioned ap- propriately relative to these peers. For certain positions, in par- ticular those below the GEB, additional competitors may be taken into account including other major international banks, the large Swiss private banks, private equity firms and hedge funds, which are increasingly becoming attractive alternatives for our employees. However, market data is only one of several factors in the compensation decision-making process. Market data in- forms but does not directly drive any individual decision on compensation. 222 Advisory vote Compensation framework Compensation structure Chairman of the Board of Directors Since 2009, the Chairman of the BoD has, in principle, re- ceived a fixed base salary comprising cash and the right to receive a pre-determined number of UBS shares that vest after four years. This compensation package does not in- clude any variable or performance-dependent component, but does keep the Chairman’s pay aligned with sustainable added value through its share component. However, al- though the initial quantity of shares is pre-determined, those shares nevertheless remain subject to forfeiture if there is a loss-making year during the vesting period. ➔ Refer to the “2009 compensation for the Board of Directors and Group Executive Board” section of this report for details of the Chairman’s compensation for 2009 The process to determine the overall compensation for the Chairman of the BoD starts with an annual performance assessment by the full BoD (excluding the Chairman) and is then based on a recommendation to the full Board from the HRCC. Pay levels for comparable roles outside of UBS are also taken into account. Independent members of the Board of Directors Reflecting their independent status, the remuneration of inde- pendent members of the BoD includes no variable compo- nent, and is therefore not dependent on the financial perfor- mance of the Group. Fees for independent members are reviewed annually. The HRCC reviews a proposal by the Chair- man of the BoD, and then submits a recommendation to the full BoD. Fees are paid 50% in cash and 50% in blocked UBS shares. However, members can elect to have 100% of their remuneration paid in blocked UBS shares. These shares are at- tributed with a price discount of 15% and restricted from sale for four years from the date they are granted. None of the in- dependent members of the BoD have a contract with UBS that provides benefits upon the termination of their term of office. Group Executive Board Members of the GEB are entitled to a fixed salary. In addi- tion, they may receive variable compensation under the CBP, the PEP and / or the IPP to be granted in 2010. The table below gives an overview of the compensation structure, including details of awards granted in February 2010, with regard to the 2009 performance year. All UBS employees Base salary Base salaries reflect each individual’s role, skills and knowl- edge, as well as our need to remain competitive in the rele- vant labor market. Base salaries comprise a fixed amount of cash, and any adjustments are limited to significant changes in job responsibility or market conditions. Compensation structure Elements of compensation Chairman of the Board Independent members of the Board Members of the GEB Other senior employees Fixed pay Base salary in cash Fixed quantity of UBS shares Fixed fee (min. 50%; max. 100% in restricted share awards) Base salary in cash Base salary in cash Variable cash compensation No Variable equity compensation No No No Yes, subject to the Cash Balance Plan (CBP) Yes Performance Equity Plan (PEP) Incentive Performance Plan (IPP) Equity Ownership Plan (EOP) Incentive Performance Plan (IPP) 223 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Advisory vote Corporate governance and compensation Compensation and shareholdings During 2009, the banking industry faced increasing regu- latory pressure to ensure that salaries comprise a sufficient proportion of total remuneration, while still allowing a firm to operate a flexible incentive policy. We recognized this risk- based requirement and increased employee base salary lev- els in certain parts of the business where this was deemed both necessary and appropriate. While we need to pay com- petitively in relation to the market, nevertheless, we believe that a policy which encourages a general increase in fixed remuneration simply in order to reduce the proportion of variable remuneration would only increase fixed costs, and is not in the long-term interest of shareholders. Benefits In order to help attract and retain the best employees in each local market where we operate, we provide employee ben- efits that are competitive within each of these markets. Changes, terminations and the introduction of new benefits are governed by the procedures contained in the Organiza- tion Regulations. We consider benefits to be a supplemental element of total compensation and those offered may vary substantially from location to location. Generally there are no special benefits for GEB members; they receive the same benefits as all other employees in the location and business where they work. Pensions In Switzerland, our general pension plan is made up of two defined contribution elements: one plan covering base salary and the other covering variable compensation. Management shares the same retirement plan benefits as all other employ- ees. Outside Switzerland, we provide appropriately-designed local pension plans in which employees and executives par- ticipate on an equal basis. In the US, employees and man- agement can choose to participate in a 401(k)-defined con- tribution plan which is open to all employees. In addition, some employees and management participate in legacy de- fined benefit plans that are no longer available to new hires. In the UK, employees and 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 now unavailable for new hires. ➔ Refer to “Note 30 Pension and other post-retirement benefit plans” in the “Financial information” section of this report for details on the various retirement benefit plans established in Switzerland and other major markets Cash and equity incentives “Pay for performance” is the guiding principle of the UBS reward policy. In accordance with the Total Reward Prin- ciples, variable compensation awards take into account a range of performance factors including delivering sus- tainable profitability, effective risk and capital management, client focus, teamwork and sound governance. Since perfor- mance can vary, the amount of variable compensation an individual receives can also vary considerably from year to year. For many years, we have awarded a portion of variable remuneration in the form of UBS shares that are deferred over three (and, in case of senior management, five) years. This approach applies to all employees earning above a cer- tain threshold, not only to executives and other senior em- ployees. These awards align employees’ interests with those of shareholders by fully exposing employees to fluctuations in the UBS share price. In 2008, we announced the develop- ment of the CBP and PEP for management, and the first awards under these plans were granted in 2010 with regard to the 2009 performance year. During 2009, a further review was carried out and as a result, the following changes are being introduced in spring 2010 (for the 2009 performance year): – an increase in the amount to be deferred into UBS shares for higher-paid staff above a fixed threshold; – a reduction in the fixed threshold; – a limit on the amount of the incentive that may be paid out immediately in cash; – the inclusion of additional forfeiture provisions applying to unvested shares in the event of material financial loss- es, restatement, breach of risk or compliance parameters, and reputational risk; and – the introduction of the IPP with a five-year performance period for senior employees (including GEB members). Employment contracts Employment contracts are determined locally within each ju- risdiction, and do not contain any extended notice periods or special severance terms. Provisions are regularly reviewed in accordance with changing legislation and market conditions. During 2009, notice periods in employment contracts for new GEB members were reduced from twelve to six months in line with international trends. Under the new contracts, any variable incentive paid up to the date of termination is fully discretionary and based on Group, business division and personal performance during the executive’s period of em- ployment. Any variable cash incentive will generally be deliv- ered via the CBP. Equity awards delivered in prior years are not accelerated at termination, except in case of death or disability, but continue to vest on a pro-rata basis and are subject to a range of forfeiture provisions after the period of employment has ended. We do not include “golden para- chutes” – ex gratia payments due to termination of employ- ment – in contracts with GEB members. Regulatory framework Emerging and increasingly complex regulations in a number of jurisdictions now impact the way in which UBS and our peers are able to pay employees. We believe that our com- 224 Advisory vote pensation practices for 2009 already materially comply with the relevant rules and guidelines issued by the G-20, as well as by FINMA, the US Federal Reserve, the UK FSA and other jurisdictions in which we have a substantial presence. These rules require that material portions of compensation, in par- ticular for senior management and risk-takers, are principally deferred into UBS shares over at least a three-year period. These awards are also required to be subject to forfeiture linked to conduct that contributes to substantial future un- derperformance or restatement of financial results. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 225 Advisory vote Corporate governance and compensation Compensation and shareholdings 2009 performance Besides total UBS and market performance, business division and individual performance are key criteria in our employee reward process. Business division performance When considering compensation funding for 2009, the HRCC took into account a thorough assessment of business divisional performance as well as the improvement in the stability, security and risk position of the firm and overall im- provement in underlying Group profitability throughout the year. In December 2009, each divisional CEO met individually with the Group CEO, Group CFO and Group Head HR for a detailed assessment of their incentive accruals in light of the above data, expected business results and other factors such as market positioning and business protection. Based on the outcomes of these discussions as well as the results and trends evidenced by the Group and divisional fi- nancial results, the HRCC proposed to the BoD the final an- nual variable compensation pool for 2009 and approved the individual divisional pools. ➔ Refer to the “UBS business divisions and Corporate Center” section of this report for more information on the performance of UBS’s business divisions Individual performance Individual performance is formally assessed each year by measuring achievement against personal objectives. These objectives are focused on a range of financial and non-finan- cial areas such as: – contribution to Group and business division results; – exceptional contribution in cooperating across all busi- nesses; – strategic leadership skills and potential; – outstanding professional and technical expertise; – a commitment to UBS; – adherence to corporate values and principles; – active risk management; and – the creation of shareholder value. For employees in senior or key positions, performance against each objective and key performance indicators is rig- orously evaluated, not only by an individual’s immediate su- perior but also by peers and subordinates. This 360-degree assessment is qualitative and quantitative – comprising fi- nancial and operational results for the year, as well as indica- tors of future performance. 226 Advisory vote 2009 compensation for the Board of Directors and Group Executive Board Board of Directors remuneration Chairman of the Board of Directors The total compensation awarded to the Chairman of the BoD, Kaspar Villiger, who was elected at the mid-April AGM 2009, for the 2009 financial year was CHF 676,571. Although the compensation framework provides for the Chairman of the BoD to receive a pre-determined fixed num- ber of UBS shares in addition to his base salary, Kaspar Vil- liger has elected not to receive a share award and he has decided to voluntarily reduce his annual base salary from CHF 2 million to CHF 850,000. Highest paid member of the Board of Directors Due to the voluntary reduction by the Chairman of the Board, the highest paid member of the BoD is David Sidwell, Chairman of the RC, with total fees of CHF 725,000 (base fee of CHF 325,000 and RC retainer of CHF 400,000). Remuneration for the former Chairman of the Board of Directors Peter Kurer, former Chairman of the BoD, did not stand for reelection at the AGM on 15 April 2009, and retired from UBS as of April 2009. He received his base salary until the termina- tion date of 30 April 2009. For ongoing advisory requirements and assistance in the handover to his successor, Peter Kurer received a flat salary of CHF 1,000,000. For 2009, as was the case for 2007 and 2008, he did not receive any discretionary incentive or fixed share awards. After assessing his tenure as Chairman and the specific organizational transition require- ments, the HRCC deemed it appropriate to approve a one- time contribution of CHF 3,332,000 into the UBS pension fund on his behalf to cover the deficit in his pension fund. Independent members of the Board of Directors The table “Remuneration details and additional information for independent members of the BoD” shows remuneration for independent members of the BoD between the 2009 and 2010 AGMs. Fees for 2009 to 2010 remained un- changed except for the chair of the HRCC, whose remunera- tion was increased due to the additional workload associat- ed with the extensive plan, policy and regulatory changes introduced during 2009. Group Executive Board compensation In 2009, total compensation for members of the GEB in their capacity as such, reflected not only the individual performance of each executive, but also the improved operating perfor- mance of each business division and the overall UBS Group. The HRCC also considered the relevant external competitive mar- ket and the steps required to ensure that the firm makes fur- ther significant strives in 2010 towards its strategic objectives. The total compensation for the highest-paid member of the GEB this year, Carsten Kengeter, amounted to CHF 13 million for the financial year 2009. The majority of this was granted in the form of notional shares that vest over 3–5 years. After Carsten Kengeter was hired in September 2008, he joined in December 2008 as a member of the former Group Managing Board and Global co-Head of Fixed In- come, Currencies and Commodities (FICC). He was further promoted to the GEB as co-CEO of the Investment Bank, together with Alexander Wilmot-Sitwell, on 27 April 2009, and maintained his FICC role in parallel until early 2010. He was previously a Partner and Co-Head of Goldman Sachs’ Securities division for Asia (ex-Japan), and represented a d e t i d u A Compensation details and additional information for executive members of the BoD CHF, except where indicated a Name, function 1 Kaspar Villiger, Chairman Peter Kurer, former Chairman Marcel Ospel, former Chairman Stephan Haeringer, former Executive Vice Chairman For the year ended 2009 2008 2009 2008 2009 2008 2009 2008 Base salary 602,083 666,667 1,333,333 666,667 1,125,000 Annual incentive award (cash) 0 0 0 0 0 Annual incentive award (shares – fair value) c 0 Discretionary award (options – fair value) d 0 Benefits in kind e 74,488 Contributions to retirement benefits plans f 0 Total 676,571 0 0 0 0 0 0 0 0 37,561 58,267 89,780 794,008 174,047 1,565,647 80,755 87,023 834,445 108,846 195,802 1,429,648 1 2009: Kaspar Villiger was the only non-independent member in office on 31 December 2009; Peter Kurer did not stand for reelection at the AGM on 15 April 2009. 2008: Peter Kurer was the only executive member in office on 31 December 2008; Marcel Ospel did not stand for reelection at the AGM on 23 April 2008 and Stephan Haeringer stepped down during the year as a member of the BoD, and both of these payments are pro-rata for the four and nine months, respectively, in their functions. 227 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Advisory vote Corporate governance and compensation Compensation and shareholdings very strong strategic hire for the Investment Bank. Carsten Kengeter’s drive, leadership and impact have materially contributed to the turnaround in the FICC business, to the effective unwinding of a large portion of the legacy posi- tions and to the overall effort to transform the Investment Bank as a whole. The resulting compensation is fully sup- ported by the HRCC in light of the skills and experience that he possesses, the commitments made at his hiring in December 2008, and the accomplishments achieved dur- ing 2009. The Group CEO, Oswald J. Grübel, would have been en- titled contractually to an incentive award. However, in light of UBS’s performance, he decided not to accept any incen- tive awards for 2009, a decision which was endorsed by the HRCC. Remuneration for members of the Group Executive Board who stepped down during 2009 During 2009, Marcel Rohner, Jerker Johansson, Raoul Weil, Walter H. Stürzinger, Rory Tapner and Marten Hoekstra stepped down from the GEB. Their total awards of approxi- mately CHF 39 million are heavily influenced by contractual obligations. Marcel Rohner stepped down as Group CEO on 26 Febru- ary 2009. In honoring the twelve-month notice period of his contract, he received his annual salary of CHF 1,500,000. For 2009, as also for 2008, he did not receive any discretionary incentive awards. After assessing his tenure as Group CEO and the specific organizational transition requirements, the HRCC deemed it appropriate to approve a one-time contri- bution of CHF 1,200,000 into the UBS pension fund on his behalf to cover the deficit in his pension fund. Base salary Base salaries are fixed for all GEB members and reviewed an- nually by the HRCC. Any adjustments are limited to significant changes in market rates or to movements in the foreign ex- change (FX) rate relative to the Swiss franc. Following its re- view in 2009, the committee decided not to change the Swiss franc amount, but adjusted the salary for GEB members who are paid in other currencies due to movements in the FX rates. Benefits There were no material changes to GEB benefits during 2009. ➔ Refer to “Note 30 Pension and other post-retirement benefit plans“ in the “Financial information” section of this report for details on the various retirement benefit plans established in Switzerland and other major markets ➔ Refer to the “2009 performance” and “Variable compensa- tion funding framework” sections for information concerning the committee’s determination of variable incentive awards for 2009, and to the “Cash and equity incentives” section for details of the compensation plans awarded to GEB members Compensation to former members of the Board of Directors and Group Executive Board Compensation and benefits in kind paid to former members of the BoD and the GEB reflect legacy agreements still honored by UBS. These benefits have been discontinued for any member of the BoD and the GEB who stepped down after 1 January 2008. d e t i d u A Explanation of the tables outlining compensation details of 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 informa- tion” section of this report. b. The entire cash incentive is only paid out over a three-year period and is subject to forfeiture. c. Values per performance share at grant: CHF 16.30 for PEP awards and CHF 22.20 for IPP awards granted in 2010 related to the performance year 2009. These are based on the performance share valuation which will be used for accounting purposes under IFRS 2. The valuation was carried out by PricewaterhouseCoopers and takes into account the relevant performance conditions, targets set, and the range of possible outcomes for these. d. No options were granted in 2010 for the performance year 2009. e. Benefits in kind – car leasing, company car allowance, staff discount on banking products and services, health and welfare benefits and gen- eral expense allowances – are all valued at market price. f. Swiss 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 contribu- tion is included in the base salary and annual incentive award components. In both the US and the UK, executives participate in the same plans as all other employees. In the US the plans differ between the two business divisions. For each business division there are two different plans. The grandfathered plans, which are no longer open to new hires, operate, de- pending on the business division, either on a cash balance basis or a career average salary basis and participants accrue a pension based on their annual compensation limited to USD 250,000 (or USD 150,000 for Wealth Management Americas employees). In the defined contribution plan, participants receive company contributions to the plan based on compensation limited to USD 245,000. US management may also participate in a 401(k) defined contribution plan (open to all employees), which provides a company matching contribution for employee contributions. In the UK, management participates in either the principal pension plan, which operates on a defined contribution basis and 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). 228 Advisory vote d e t i d u A Remuneration details and additional information for independent members of the BoD CHF, except where indicated a n o i t a s n e p m o C e e t t i m m o C & e c n a n r e v o G g n i t a n m o N i e e t t i m m o C e t a r o p r o C y t i l i b i s n o p s e R e e t t i m m o C e e t t i m m o C t i d u A & R H e e t t i m m o C k s i R y g e t a r t S e t t i e For the period AGM to AGM m m o C Base fee Committee retainer(s) Benefits in kind M M M M C M M M M M M C M M M M M M 2009/2010 325,000 M 2008/2009 325,000 100,000 200,000 2009/2010 2008/2009 325,000 2009/2010 325,000 2008/2009 162,500 200,000 350,000 75,000 2009/2010 325,000 200,000 2008/2009 M M 2009/2010 325,000 M 2008/2009 162,500 2009/2010 325,000 2008/2009 162,500 2009/2010 325,000 2008/2009 2009/2010 200,000 150,000 200,000 100,000 250,000 2008/2009 325,000 M 2009/2010 325,000 250,000 200,000 M M C C 2008/2009 2009/2010 2008/2009 162,500 2009/2010 325,000 2008/2009 325,000 2009/2010 325,000 2008/2009 162,500 2009/2010 325,000 2008/2009 325,000 2009/2010 2008/2009 162,500 2009/2010 325,000 M 2008/2009 325,000 2009/2010 150,000 300,000 300,000 300,000 100,000 400,000 450,000 0 100,000 400,000 C M 2008/2009 325,000 300,000 2008/2009 162,500 100,000 2009/2010 M M M M C M C M 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Additional payments 250,000 6 250,000 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Share percen- tage 3 100 Number of shares 4,5 51,845 100 76,228 100 50 50 50 100 50 50 50 50 51,596 27,261 12,280 21,203 40,301 16,158 21,203 13,572 23,222 Total 675,000 775,000 525,000 675,000 237,500 525,000 525,000 312,500 525,000 262,500 575,000 575,000 525,000 50 100 29,731 40,301 312,500 625,000 625,000 625,000 262,500 725,000 775,000 162,500 425,000 725,000 50 50 50 50 50 50 50 100 50 50 16,158 25,242 32,316 25,242 13,572 29,281 40,072 15,945 17,164 37,487 262,500 50 13,572 50 32,316 625,000 6,425,000 6,437,500 Name, function 1 Sergio Marchionne, Senior Independent Director, Vice Chairman Ernesto Bertarelli, former member Sally Bott, member2 Michel Demaré, member Rainer-Marc Frey, member2 Bruno Gehrig, member2 Ann F. Godbehere, member Gabrielle Kaufmann- Kohler, former member Axel P. Lehmann, member Rolf A. Meyer, former member2 Helmut Panke, member William G. Parrett, member2 David Sidwell, member Peter Spuhler, former member2 Peter R. Voser, member Lawrence A. Weinbach, former member2 Joerg Wolle, former member Total 2009 Total 2008 Legend: C = Chairperson of the respective committee; M = Member of the respective committee 1 There were 11 independent BoD members in office on 31 December 2009. Michel Demaré, Ann F. Godbehere and Axel P. Lehmann were appointed at the AGM on 15 April 2009 and Ernesto Berta relli, Gabrielle Kaufmann-Kohler and Joerg Wolle stepped down from the BoD at the AGM on 15 April 2009. 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 William G. Parrett were appointed at the EGM on 2 October 2008. 2 Remuneration for 2008 / 2009 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 2009, shares valued at CHF 14.57 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2010) included a price discount of 15%, for a new value of discount price CHF 12.38. These shares are blocked for four years. For 2008, shares valued at CHF 11.38 (average price of UBS shares at virt-x, now SIX Swiss Exchange, over the last 10 trading days of February 2009) included a price discount of 15%, discount price for a new value of CHF 9.67. These 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 / withholding tax. 6 This payment is associated with the Senior Independent Director function. In addition, for 2008 / 2009 only, one-off cash payments were made to the Chairmen of the RC (CHF 500,000), the GNC (CHF 300,000) and the HRCC (CHF 200,000). These payments reflect the sub- stantial workload of setting up the new RC, and expanding the mandate of the GNC and the HRCC. 229 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Advisory vote Corporate governance and compensation Compensation and shareholdings d e t i d u A d e t i d u A d e t i d u A Total payments to all members of the BoD CHF, except where indicated a Aggregate of all members of the BoD Aggregate of all members of the BoD For the year ended 2009 2008 Total 7,895,579 10,267,240 Total compensation for all members of the GEB CHF, except where indicated a Name, function For the year ended Base salary Annual incentive award CBP and cash b Annual incentive award PEP c Annual incentive award IPP c Contributions to retirement benefits plans f Benefits in kind e Total Carsten Kengeter, co-CEO Investment Bank (highest-paid) Marcel Rohner, Group Chief Executive Officer (highest-paid) Aggregate of all members of the GEB who were in office on 31 December 2009 1 Aggregate of all members of the GEB who were in office on 31 December 2008 1 Aggregate of all members of the GEB who stepped down during 2009 2 Aggregate of all members of the GEB who stepped down during 2008 2 2009 2008 2009 2008 2009 2008 669,092 5,003,470 6,155,869 1,349,336 0 12,545 13,190,312 1,500,000 0 0 0 161,768 152,934 1,814,702 12,000,055 25,734,711 13,453,424 3 15,696,333 270,971 1,551,068 68,706,562 7,815,943 0 2,447,544 38,443,097 1,614,871 0 0 0 0 0 0 0 457,652 817,315 9,090,911 215,151 171,122 41,276,914 234,838 258,423 2,108,132 1 Numbers and distribution of GEB members in 2009: 13 GEB members in office on 31 December. 2008: 12 GEB members in office on 31 December. 2 Number and distribution of GEB members in 2009: includes two months in office as a GEB member for Marcel Rohner, three months in office for Walter H. Stürzinger and Raoul Weil, four months in office for Jerker Johansson, six months in office for Rory Tapner and ten for Marten Hoekstra. 2008: includes four months in office as a GEB member for Peter Kurer, eight months in office for Marco Suter and ten months for Joe Scoby. 3 Included in the share awards are SEEOP awards at a fair value of GBP 4,655,950 and EOP awards at a fair value of GBP 1,594,250. Compensation paid to former members of the BoD and GEB1 CHF, except where indicated a Name, function Georges Blum, former member of the BoD (Swiss Bank Corporation) Franz Galliker, former member of the BoD (Swiss Bank Corporation) Walter G. Frehner, former member of the BoD (Swiss Bank Corporation) Hans (Liliane) Strasser, former member of the BoD (Swiss Bank Corporation) Robert Studer, former member of the BoD (Union Bank of Switzerland) Alberto Togni, former member of the BoD (UBS) Philippe (Alix) de Weck, former member of the BoD (Union Bank of Switzerland) Aggregate of all former members of the GEB 2 Aggregate of all former members of the BoD and GEB For the year ended Compensation 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 320,136 318,461 0 0 320,136 318,461 Benefits in kind 92,399 101,579 10,659 69,596 25,371 74,663 9,758 32,673 18,751 126,208 355,983 427,949 93,135 109,703 18,293 171,180 624,349 Total 92,399 101,579 10,659 69,596 25,371 74,663 9,758 32,673 18,751 126,208 676,119 746,410 93,135 109,703 18,293 171,180 944,485 1,113,551 1,432,012 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. 230 Advisory vote d e t i d u A Shares and options held by the Board of Directors and Group Executive Board (at end of 2009) Share and option ownership of members of the BoD on 31 December 2008 / 2009 Name, function 1 Kaspar Villiger, Chairman Sergio Marchionne, Senior Independent Director, Vice Chairman Ernesto Bertarelli, former member 4 Sally Bott, member Michel Demaré, member Rainer-Marc Frey, member Bruno Gehrig, member Ann F. Godbehere, member Gabrielle Kaufmann-Kohler, former member 4 Peter Kurer, former Chairman 4 Axel P. Lehmann, member Helmut Panke, member William G. Parrett, member David Sidwell, member Peter R. Voser, member Joerg Wolle, former member 4 For the year ended Number of shares held Voting rights in % Number of options held 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 22,500 – 164,154 87,926 – 89,434 12,281 1 2,500 – 16,158 0 16,572 3,000 0 – – 18,713 – 416,088 18,151 – 64,287 31,971 17,573 4,000 40,073 1 68,310 30,823 – 41,509 0.001 0.009 0.005 0.005 0.001 0.000 0.000 0.001 0.000 0.001 0.000 0.000 0.001 0 – 0 0 – 0 0 0 0 – 0 0 0 0 0 – – 0 – 0.025 372,995 0.001 0.003 0.002 0.001 0.000 0.002 0.000 0.004 0.002 0.002 0 – 0 0 0 0 0 0 0 0 – 0 Potentially conferred voting rights in % 2 0.000 Type and quantity of options 3 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.022 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 xli: xlvii: lvi: lxiv: 85,256 95,913 95,913 95,913 1 This 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 information” section of this report for more information on stock option plans. 4 Members of the BoD who stepped down at the AGM 2009. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 231 Advisory vote Corporate governance and compensation Compensation and shareholdings Share and option ownership of members of the GEB on 31 December 2008 / 2009 d e t i d u A Name, function 1 Oswald J. Grübel, Group Chief Executive Officer Marcel Rohner, former Group Chief Executive Officer 4 2009 2008 2009 2008 For the year ended Number of shares held Voting rights in % Number of options held Potentially conferred voting rights in % 2 0.217 Type and quantity of options 3 lxx: 4,000,000 0 – – 0.000 4,000,000 – – 711,366 0.042 1,055,043 0.063 John Cryan, Group Chief Financial Officer 2009 235,929 0.013 382,673 0.021 2008 235,929 0.014 382,673 0.023 Markus U. Diethelm, Group General Counsel John A. Fraser, Chairman and CEO Global Asset Management 2009 2008 2009 112,245 112,245 480,464 0.006 0.007 0.027 0 0 1,088,795 0.000 0.000 0.059 232 31,971 xxxii: xli: 213,140 xlvii: 277,082 lvi: 319,710 lxiv: 213,140 21,362 iii: 20,731 iv: 20,725 vii: 5,454 xii: 5,294 xiii: 5,292 xvi: 23,626 xxi: 23,620 xxiii: 23,612 xxvi: 5,526 xxviii: 5,524 xxix: xxx: 5,524 xxxviii: 17,072 17,068 xl: 17,063 xlii: 14,210 xliv: 14,210 xlv: 14,207 xlvi: 5,330 liii: 5,328 liv: 5,326 lv: 17,762 lxi: 17,762 lxii: 17,760 lxiii: 53,285 lxvi: iii: 21,362 iv: 20,731 vii: 20,725 xii: 5,454 xiii: 5,294 xvi: 5,292 xxi: 23,626 xxiii: 23,620 xxvi: 23,612 xxviii: 5,526 xxix: 5,524 5,524 xxx: xxxviii: 17,072 17,068 xl: 17,063 xlii: 14,210 xliv: 14,210 xlv: 14,207 xlvi: 5,330 liii: 5,328 liv: 5,326 lv: 17,762 lxi: 17,762 lxii: 17,760 lxiii: 53,285 lxvi: viii: 76,380 127,884 xix: xxv: 127,884 xliii: 170,512 xlviii: 202,483 lvi: 213,140 lxiv: 170,512 Advisory vote Share and option ownership of members of the GEB on 31 December 2008 / 2009 (continued) d e t i d u A Name, function 1 John A. Fraser, Chairman and CEO Global Asset Management For the year ended 2008 Number of shares held 561,216 Voting rights in % Number of options held 0.035 1,144,808 Potentially conferred voting rights in % 2 0.068 Marten Hoekstra, former CEO Wealth Management US 4 2009 2008 – 245,397 – 0.015 684,168 0.041 Type and quantity of options 3 56,013 i: 76,380 viii: xix: 127,884 xxv: 127,884 xliii: 170,512 xlviii: 202,483 lvi: 213,140 lxiv: 170,512 ii: 8,679 vi: 8,421 ix: 8,421 xi: 8,823 xiv: 4,262 xv: 8,563 8,561 xviii: xxxiii: 42,628 53,285 xliii: 53,285 xlviii: lvi: 85,256 lxiv: 154,931 lxvii: 239,053 Jerker Johansson, former Chairman and CEO Investment Bank 4 Carsten Kengeter, co-CEO Investment Bank Ulrich Körner, Group Chief Operating Officer Philip J. Lofts, Group Chief Risk Officer 2009 2008 2009 2008 2009 2008 2009 – 521,544 516,909 – 0 – 0.031 0.028 0.000 – 753,410 905,000 – 0 – 179,234 0.010 577,723 0.045 lxviii: 745,990 7,420 lxix: 0.049 lxxi: 905,000 0.000 0.031 2008 186,434 0.011 577,723 0.034 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 11,445 iii: 11,104 iv: 11,098 vii: 1,240 xii: 5,464 xiii: 1,199 xvi: 9,985 xxi: 9,980 xxiii: 9,974 xxvi: 1,833 xxviii: 1,830 xxix: xxx: 1,830 xxxviii: 35,524 35,524 xl: xlii: 35,521 xlvii: 117,090 117,227 lvi: 85,256 lxiv: 74,599 lxvii: 11,445 iii: 11,104 iv: 11,098 vii: 1,240 xii: 5,464 xiii: 1,199 xvi: 9,985 xxi: 9,980 xxiii: 9,974 xxvi: 1,833 xxviii: 1,830 xxix: xxx: 1,830 xxxviii: 35,524 35,524 xl: xlii: 35,521 xlvii: 117,090 117,227 lvi: 85,256 lxiv: 74,599 lxvii: 233 Advisory vote Corporate governance and compensation Compensation and shareholdings Share and option ownership of members of the GEB on 31 December 2008 / 2009 (continued) d e t i d u A Name, function 1 Robert J. McCann, CEO Wealth Management Americas Franco Morra, CEO UBS Switzerland Walter H. Stürzinger, former Chief Operating Officer, Corporate Center 4 Rory Tapner, former Chairman and CEO Asia Pacific 4 Raoul Weil, former Chairman and CEO Global Wealth Management & Business Banking 4 Alexander Wilmot-Sitwell, co-CEO Investment Bank For the year ended 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 Number of shares held 602,481 – 153,860 Voting rights in % Number of options held 0.033 0 – Potentially conferred voting rights in % 2 0.000 0.008 325,086 0.018 – – – – 296,886 0.018 372,995 0.022 – 827,809 – 315,698 – 0.049 1,379,533 0.082 – 0.019 432,409 0.026 2009 286,767 0.016 353,807 0.019 2008 304,655 0.018 353,807 0.021 Robert Wolf, Chairman and CEO, UBS Group Americas / President Investment Bank 2009 785,631 0.043 948,473 0.051 2008 827,307 0.049 948,473 0.056 Type and quantity of options 3 43,911 lvi: lxiv: 66,866 lxvii: 114,309 lxxii: 100,000 xx: xli: xlvii: lvi: lxiv: 31,971 63,942 85,256 95,913 95,913 281,862 vii: xix: 213,140 xxxi: 213,140 xli: 170,512 xlvii: 159,855 170,512 lvi: lxiv: 170,512 xix: 53,285 xlvii: 102,281 127,884 lvi: lxiv: 148,959 xlvi: 53,282 xlix: 2,130 liii: 35,524 liv: 35,524 35,521 lv: lxiv: 106,570 85,256 lxvii: 53,282 xlvi: 2,130 xlix: 35,524 liii: 35,524 liv: lv: 35,521 lxiv: 106,570 85,256 lxvii: xxv: 287,739 xliii: 213,140 xlviii: 127,884 lvi: 106,570 lxiv: 106,570 lxvii: 106,570 xxv: 287,739 xliii: 213,140 xlviii: 127,884 lvi: 106,570 lxiv: 106,570 lxvii: 106,570 234 Advisory vote Share and option ownership of members of the GEB on 31 December 2008 / 2009 (continued) d e t i d u A Name, function 1 Chi-Won Yoon, Chairman and CEO Asia Pacific For the year ended 2009 Number of shares held 367,573 Voting rights in % Number of options held 0.020 623,253 Potentially conferred voting rights in % 2 0.034 Jürg Zeltner, CEO Wealth Management 2008 2009 – 16,502 – 0.001 205,470 0.011 Type and quantity of options 3 11,577 i: 11,229 v: 11,227 viii: 2,252 x: 6,446 xiv: 2,184 xvii: 8,648 xxii: 8,642 xxiv: 8,635 xxvii: 4,262 xxxiv: 3,374 xxxv: 3,371 xxxvi: xxxvii: 3,371 xxxviii: 6,200 4,262 xxxix: 6,198 xl: 6,195 xlii: 10,659 xliv: 10,657 xlv: 10,654 xlvi: 21,316 liii: 21,314 liv: 21,311 lv: 8,881 lxi: 8,880 lxii: 8,880 lxiii: lxvi: 42,628 lxxii: 350,000 iii: iv: vii: xlii: xliv: xlv: xlvi: xlix: l: li: lii: liii: liv: lv: lvii: lviii: lix: lx: lxi: lxii: lxiii: lxv: lxvii: lxxii: 809 784 784 4,972 7,106 7,103 7,103 93 161 149 127 7,106 7,103 7,103 110 242 230 221 7,105 7,105 7,103 223 42,628 90,000 1 This 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 information” section of this report for more information. 4 GEB members who stepped down during 2009. 2008 – – 235 n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C Advisory vote Corporate governance and compensation Compensation and shareholdings d e t i d u A Vested and unvested options held by independent members of the BoD and by members of the GEB on 31 December 2008 / 2009 Type Number of options Year of grant Vesting date Expiry date Subscription ratio i ii iii iv v vi vii viii ix x xi xii xiii xiv xv xvi xvii xviii xix xx xxi xxii xxiii xxiv xxv xxvi xxvii xxviii xxix xxx xxxi xxxii xxxiii xxxiv xxxv xxxvi xxxvii xxxviii xxxix xl xli xlii xliii xliv xlv xlvi xlvii xlviii xlix l li 236 11,577 8,679 33,616 32,619 11,229 8,421 314,469 87,607 8,421 2,252 8,823 6,694 10,758 10,708 8,563 6,491 2,184 8,561 394,309 31,971 33,611 8,648 33,600 8,642 415,623 33,586 8,635 7,359 7,354 7,354 213,140 31,971 42,628 4,262 3,374 3,371 3,371 58,796 4,262 58,790 532,850 63,751 436,937 31,975 31,970 85,246 837,477 383,652 2,223 161 149 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2004 2004 2004 2004 2004 2004 2005 2005 2005 2005 2005 2005 2005 2005 31.01.2002 31.01.2002 31.01.2003 31.01.2004 31.01.2004 31.01.2004 31.01.2005 31.01.2005 31.01.2005 28.02.2002 28.02.2002 28.02.2003 28.02.2004 29.02.2004 29.02.2004 28.02.2005 28.02.2005 28.02.2005 28.06.2005 28.06.2005 01.03.2004 01.03.2004 01.03.2005 01.03.2005 31.01.2006 01.03.2006 01.03.2006 01.03.2004 01.03.2005 01.03.2006 31.01.2006 31.01.2006 31.01.2006 28.02.2005 01.03.2004 01.03.2005 01.03.2006 01.03.2005 27.02.2006 01.03.2006 28.02.2007 01.03.2007 01.03.2007 01.03.2006 01.03.2007 01.03.2008 01.03.2008 01.03.2008 04.03.2007 06.06.2007 09.09.2007 31.01.2012 31.07.2012 31.01.2012 31.01.2012 31.01.2012 31.07.2012 31.01.2012 31.01.2012 31.07.2012 28.02.2012 28.08.2012 28.02.2012 28.02.2012 28.02.2012 28.08.2012 28.02.2012 28.02.2012 28.08.2012 28.06.2012 28.12.2012 31.01.2013 31.01.2013 31.01.2013 31.01.2013 31.01.2013 31.01.2013 31.01.2013 28.02.2013 28.02.2013 28.02.2013 31.01.2013 31.07.2013 31.07.2013 28.02.2013 28.02.2013 28.02.2013 28.02.2013 27.02.2014 27.02.2014 27.02.2014 27.02.2014 27.02.2014 27.02.2014 28.02.2015 28.02.2015 28.02.2015 28.02.2015 28.02.2015 04.03.2015 06.06.2015 09.09.2015 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 Strike price USD 21.24 USD 21.24 CHF 36.49 CHF 36.49 USD 21.24 USD 21.24 CHF 36.49 USD 21.24 USD 21.24 USD 21.70 USD 21.70 CHF 36.65 CHF 36.65 USD 21.70 USD 21.70 CHF 36.65 USD 21.70 USD 21.70 CHF 37.90 CHF 37.90 CHF 27.81 USD 20.49 CHF 27.81 USD 20.49 USD 22.53 CHF 27.81 USD 20.49 CHF 26.39 CHF 26.39 CHF 26.39 CHF 30.50 CHF 30.50 USD 22.53 USD 19.53 USD 19.53 USD 19.53 USD 19.53 CHF 44.32 CHF 44.32 CHF 44.32 CHF 48.69 CHF 44.32 USD 38.13 CHF 47.58 CHF 47.58 CHF 47.58 CHF 52.32 USD 44.81 CHF 47.89 CHF 45.97 CHF 50.47 Advisory vote d e t i d u A Vested and unvested options held by independent members of the BoD and by members of the GEB on 31 December 2008 / 2009 (continued) Type lii liii liv lv lvi lvii lviii lix lx lxi lxii lxiii lxiv lxv lxvi lxvii lxviii lxix lxx lxxi lxxii Number of options Year of grant Vesting date Expiry date Subscription ratio Strike price 127 69,276 69,269 69,261 1,376,036 110 242 230 221 33,748 33,747 33,743 1,415,142 223 95,913 662,415 745,990 7,420 4,000,000 905,000 540,000 2005 2006 2006 2006 2006 2006 2006 2006 2006 2007 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 05.12.2007 01.03.2007 01.03.2008 01.03.2009 01.03.2009 03.03.2008 09.06.2008 08.09.2008 08.12.2008 01.03.2008 01.03.2009 01.03.2010 01.03.2010 02.03.2009 01.03.2011 01.03.2011 01.03.2011 01.03.2011 26.02.2009 01.03.2012 01.03.2012 05.12.2015 28.02.2016 28.02.2016 28.02.2016 28.02.2016 03.03.2016 09.06.2016 08.09.2016 08.12.2016 28.02.2017 28.02.2017 28.02.2017 28.02.2017 02.03.2017 28.02.2018 28.02.2018 07.04.2018 06.06.2018 25.02.2014 27.12.2019 27.02.2019 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 CHF 59.03 CHF 65.97 CHF 65.97 CHF 65.97 CHF 72.57 CHF 65.91 CHF 61.84 CHF 65.76 CHF 67.63 CHF 67.00 CHF 67.00 CHF 67.00 CHF 73.67 CHF 67.08 CHF 32.45 CHF 35.66 CHF 36.46 CHF 28.10 CHF 10.10 CHF 40.00 CHF 11.35 d e t i d u A Total of all blocked and unblocked shares held by independent members of the BoD 1 Total Of which unblocked Of which blocked until Shares held on 31 December 2009 420,059 123,053 Shares held on 31 December 2008 307,378 177,027 1 Includes related parties. No individual BoD member holds 1% or more of all shares issued. 2010 6,232 2009 12,126 2011 13,352 2010 13,592 2012 35,737 2011 30,193 2013 241,685 2012 74,440 d e t i d u A Total of all vested and unvested shares held by the non-independent members of the BoD and members of the GEB 1 Shares held on 31 December 2009 3,760,095 1,971,557 1,078,664 2010 2011 397,046 2012 222,601 2013 90,227 2014 0 Total Of which vested Of which vesting Shares held on 31 December 2008 5,562,574 2,955,211 1,058,881 1 Includes related parties. 2009 2010 595,638 2011 461,376 2012 319,776 2013 171,692 Total Of which vested Of which vesting No individual BoD or GEB member holds 1% or more of all shares issued. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 237 Advisory vote Corporate governance and compensation Compensation and shareholdings Group Executive Board Replacement of forfeited awards for former employer compensation Oswald J. Grübel and Robert J. McCann joined UBS during 2009. Oswald J. Grübel voluntarily waived his deferred PIP awards from Credit Suisse upon joining UBS in order to avoid any possible conflicts of interest in his new role. The HRCC decided to grant new awards of a similar value at the time in recognition of his commitment to UBS. In order to partly re- flect the highly leveraged Credit Suisse PIP units, he received 4 million UBS stock appreciation rights, with a strike price of CHF 10.10 and fair value of CHF 13,120,000 at grant date of 26 February 2009. Robert J. McCann was granted 602,481 shares with a grant date fair market value of USD 10 million. In line with market practice, the award for Robert J. McCann was grant- ed as a replacement for compensation and benefits forfeited from his previous employment, as a result of joining UBS. Transactions in 2009 In accordance with applicable rules and regulations, man- agement transactions in UBS shares by members of the BoD and the GEB are publicly disclosed. Transactions which re- quire reporting are those involving all types of financial in- struments whose price is primarily influenced by UBS shares. As the SIX Swiss Exchange repatriated the share trading of the SWX Europe from London to Zurich as of 4 May 2009, the Swiss reporting regime for management transactions became applicable, while up to that date the EU requirements (para- graph 15a of the German Securities Trading Act) regarding the reporting of management transactions, were applicable. From 1 January to 3 May 2009, no share purchases or sales were reported by either BoD or GEB members or closely associated persons. From 4 May until 31 December 2009, two share purchas- es were disclosed with a total value of CHF 401,219 as well as one share sale with a total value of CHF 1,200,800. Indi- viduals’ names and transactions made by persons closely as- sociated with the BoD or GEB are not required to be dis- closed anymore under the Swiss reporting regime. UBS executives generally receive a substantial portion of their compensation in UBS equity-based awards. For this rea- son, management transactions generally see sales outweigh- ing purchases. Blackout periods and synchronized dates for unblocking or vesting of shares or options granted as com- pensation may lead to transactions being concentrated in short time periods. In addition, three members of the BoD chose to receive their full remuneration in UBS shares. These shares, represent- ing a value of CHF 1,929,753, will be allocated in March 2010. Loans The members of the BoD and GEB are granted loans, fixed advances and mortgages at arm’s length market terms. ➔ Refer to “Note 32 Related parties” in the “Financial information” section of this report for information concerning loans granted to current and former executives 238 Advisory vote Corporate governance and compensation Total Reward Principles Total Reward Principles The Total Reward Principles summarize the compensation structure for all UBS employees. While they reflect recent regulatory developments, they also focus on long-standing drivers including reward for performance, sustainable profitability, strong management of risk and capital, outstand- ing client focus and teamwork, and sound governance. They also build on the UBS strategy of enhancing reputation, integration and execution. These Principles have been reviewed by the Group Executive Board and by the Board of Directors’ Human Resources and Compensation Committee and were approved by the UBS Board of Directors on 28 September 2009. Overview Align reward with sustainable performance Reward is a key driver of behavior, motivation and culture, and can materially impact both reputation and financial results. Within the context of UBS as a whole and the markets in which we operate, the sustainable performance of an employee’s business division is a key component of reward. Within UBS our reward structure is aligned with our strategic priorities which bind the interests of employees with those of our shareholders. Employees are encouraged to identify and create sustainable value and profitability, and to build a strong client franchise both for their business and for UBS as a whole. In considering UBS and business division performance, a range of factors will be taken into account including risk, capital usage, and market positioning. Assessment will focus on both current key performance indicators and the long-term actions that preserve and improve UBS’s ability to deliver future value. Reward funding is not purely formulaic; discretion and judgment will be applied to ensure all relevant factors including market conditions are taken into account. – Business division reward recommendations are deter- mined in consultation between the UBS Group CEO and the CEO(s) of each division as advised by the Group CFO, Group Head HR and, where appropriate, Group Risk. – Proposals recommended by the Group CEO are reviewed by the independent Human Resources and Compensa- tion Committee of the Board of Directors. – Final approval is provided by the UBS Board of Directors. – The UBS Group CEO and Board of Directors take into account the Group and business division financial results as well as the views of shareholders and other stake- holders. At UBS we reward behavior that helps to build and protect the firm’s reputation by focusing on sound risk and management practices. We believe in strong integration and excellence of execution, within an environment where all employees are able to achieve the highest standards of performance. All UBS employees will be rewarded on the basis of their individual and team performance, and that of their business division, within the context of UBS as a whole and the markets in which we operate. UBS’s reward structure aims to: Align reward with sustainable performance by encouraging a culture of integration and collaboration, a sense of engagement and long-term alignment with clients and shareholders, and quality execution of their orders. Support appropriate and controlled risk taking consistent with UBS’s risk tolerance thereby protecting our capital, investors and reputation, and enhancing the quality of our financial results. Foster effective individual performance management and communication by rigorously evaluating performance and ensuring the appropriate use of reward. Attract and engage a diverse, talented workforce by providing attractive career opportunities underpinned by reward that is competitive in the market. n o i t a s n e p m o c d n a e c n a n r e v o g e t a r o p r o C 239 Advisory vote Corporate governance and compensation Total Reward Principles Support appropriate and controlled risk taking Attract and engage a diverse, talented workforce Reward will be consistent with UBS’s risk framework and tolerance. Performance reviews recognize the different risk profile and nature of each business including additional factors such as the quality and time horizon of earnings, the nature of the relevant industry segment, and competitive trends. – Employees are rewarded for achievement against a range of financial and non-financial objectives and not only on the basis of individual revenues. – Extraordinary profits, as well as losses, are examined in the context of the track record of an employee’s performance, risk management and market conditions. – Measurement of performance will be adjusted for activities and future risks that are not adequately reflected in annual profits. – Reward for risk, compliance and control functions is determined independently from the revenue producers they supervise and support. Foster effective individual performance management and communication Rigorous evaluation of individual performance combined with effective communication ensures a link between achievement of business objectives and reward across UBS. Beyond contribution to business results and achievement of individual performance objectives, rewards will also take into account: – observing UBS’s corporate values and principles; – implementing UBS’s strategy of enhancing reputation, integration and execution; – demonstrating leadership of our clients, business, people and change; – leading or supporting effective collaboration and teamwork; – operating with strong integrity and complying with UBS policies; – actively managing risk and professional behavior; and – finding the appropriate balance between risk and reward. The UBS reward structure is designed to provide talented employees with reward that is appropriately balanced between fixed and variable elements, competitive in the market, and paid out over an appropriate period. In general, total compensation comprises an annual base salary, reflecting the individual’s role, skills and knowledge, local market-based benefits and, where applicable, a discretionary incentive award. – Base salary levels should be sufficient to allow a flexible discretionary incentive policy. – Discretionary annual incentives can be highly variable from year to year particularly for senior revenue producers and more highly paid employees. Discretionary incentive awards may be split between immediate cash and long-term awards that can be granted in the form of either deferred UBS equity or deferred cash. – The proportion of deferred incentive generally increases with total compensation in order to maintain focus on long-term profitability of the firm and continued responsible behavior. – Deferred awards generally vest over at least three years. – Deferred awards are subject to forfeiture under certain circumstances, including if an employee’s conduct or judgment results in material financial loss or restatement of results, breach of risk or compliance policies, or significant harm to the firm’s business or reputation. Stock options and / or stock appreciation rights may be awarded as part of total reward, to recognize the potential of key employees who are expected to drive the achieve- ment of our strategic objectives. Other reward programs may also be considered to further support the needs of our diverse global business, subject to considerations such as cost, risk and prevailing market and regulatory requirements. As such: – For senior leaders, our reward focus is founded on sustainable long-term profitability that may require the application of multi-year performance conditions to recognize outstanding performance. – Guaranteed incentive awards are used only exceptionally and are generally limited to one-year duration. This document provides a summary only and may be supplemented by more detailed global or local policies. At UBS we are committed to full and proper disclosure of our remuneration policies, of which these Principles form a part, and we provide an annual advisory vote to shareholders at our AGM. UBS AG P.O. Box CH-8098 Zurich www.ubs.com 240 Financial information Financial information Table of contents 244 245 Introduction and accounting principles Critical accounting policies 249 Consolidated financial statements 249 250 252 255 256 257 258 261 263 263 283 287 288 288 289 290 290 290 291 292 292 293 293 294 295 296 296 297 298 300 Management’s report on internal control over financial reporting Report of independent registered public accounting firm on internal control over financial reporting Report of the statutory auditor and the independent registered public accounting firm on the consolidated financial statements Income statement Statement of comprehensive income Balance sheet Statement of changes in equity Statement of cash flows Notes to the consolidated financial statements 1 Summary of significant accounting policies 2a Segment reporting 2b Segment reporting by geographic location Income statement notes 3 Net interest and trading income 4 Net fee and commission income 5 Other income 6 Personnel expenses 7 General and administrative expenses 8 Earnings per share (EPS) and shares outstanding Balance sheet notes: assets 9a Due from banks and loans (held at amortized cost) 9b Allowances and provisions for credit losses 10 Cash collateral on securities borrowed and lent, repurchase and reverse repurchase agreements 11 Trading portfolio 12 Financial assets designated at fair value 13 Financial investments available-for-sale 14 Investments in associates 15 Property and equipment 16 Goodwill and intangible assets 17 Other assets 242 301 301 301 303 303 307 309 316 316 316 318 318 318 330 331 335 341 347 350 350 354 355 358 360 361 362 363 Balance sheet notes: liabilities 18 Due to banks and customers 19 Financial liabilities designated at fair value and debt issued 20 Other liabilities 21 Provisions and litigation 22 Income taxes 23 Derivative instruments and hedge accounting Off-balance-sheet information 24 Pledgeable off-balance-sheet securities 25 Operating lease commitments Additional information 26 Capital increases and mandatory convertible notes 27 Fair value of financial instruments 28 Pledged assets and transferred financial assets which do not qualify for derecognition 29 Measurement categories of financial assets and financial liabilities 30 Pension and other post-employment benefit plans 31 Equity participation and other compensation plans 32 Related parties 33 Events after the reporting period 34 Significant subsidiaries and associates 35 Invested assets and net new money 36 Business combinations 37 Discontinued operations 38 Reorganizations and disposals 39 Currency translation rates 40 Swiss banking law requirements 41 Supplemental guarantor information required under SEC rules 371 UBS AG (Parent Bank) 399 Additional disclosure required under SEC regulations 371 Parent Bank review 399 A – Introduction 400 401 402 403 403 404 404 405 405 405 407 409 410 410 411 412 413 414 415 416 417 418 B – Selected financial data Key figures Income statement data Balance sheet data Ratio of earnings to fixed charges C – Information on the company Property, plant and equipment D – Information required by industry guide 3 Selected statistical information Average balances and interest rates Analysis of changes in interest income and expense Deposits Short-term borrowings Contractual maturities of debt investments available-for-sale Due from banks and loans (gross) Due from banks and loan maturities (gross) Impaired and non-performing loans Cross-border outstandings Summary of movements in allowances and provisions for credit losses Allocation of the allowances and provisions for credit losses Due from banks and loans by industry sector (gross) Loss history statistics 372 372 373 373 374 374 376 376 376 377 377 377 378 379 379 379 379 380 380 380 380 380 380 381 381 382 383 383 384 385 386 390 392 392 393 395 Parent Bank financial statements Income statement Balance sheet Statement of appropriation of retained earnings Notes to the Parent Bank financial statements Accounting policies Additional income statement information Net trading income Extraordinary income and expenses Additional balance sheet information Allowances and provisions Statement of shareholders’ equity Share capital Off-balance-sheet and other information Assets pledged or assigned as security for own obligations and assets subject to reservation of title Commitments and contingent liabilities Derivative instruments Fiduciary transactions Due to UBS pension plans Transactions with related parties Outsourcing Personnel Significant shareholders Corporate governance and compensation report Compensation details and additional information for executive members of the BoD Remuneration details and additional information for independent members of the BoD Total payments to all members of the BoD Total compensation for all members of the GEB Share and option ownership of members of the BoD Compensation paid to former members of the BoD and GEB Share and option ownership of members of the GEB Vested and unvested options held by independent members of the BoD and by members of the GEB Loans granted to members of the BoD Loans granted to members of the GEB Report of the statutory auditor on the financial statements Confirmations of the auditors concerning conditional capital increase n o i t a m r o f n i l a i c n a n i F 243 Financial information Introduction and accounting principles The financial information section of UBS’s Annual Report 2009 comprises: a) the critical accounting policies applied when preparing the consolidated financial statements of UBS Group, b) audited consolidated financial statements of UBS Group for 2009, 2008 and 2007, prepared according to International Financial Reporting Standards (IFRS) as is- sued by the International Accounting Standards Board (IASB), c) audited financial statements of UBS AG, the Par- ent Bank, for 2009 and 2008, prepared in order to meet Swiss regulatory requirements and in compliance with Swiss Federal Banking Law, and d) additional disclosures required under SEC regulations. The basis of accounting of UBS’s Group financial state- ments is described in Note 1 to the financial statements. Ex- cept where otherwise explicitly stated, all financial data are in Swiss francs (CHF), all financial information is presented on a consolidated basis under IFRS, and all references to “UBS” re- fer to the UBS Group and not to the Parent Bank. UBS AG, the Swiss Parent Bank, includes branches worldwide and owns all the UBS companies, directly or indirectly. All references to 2009, 2008 and 2007 refer to UBS Group and the Parent Bank’s fiscal years ended 31 December 2009, 2008 and 2007, respectively. The financial statements for UBS Group and the Parent Bank have been audited by Ernst & Young Ltd. 244 Critical accounting policies Basis of preparation and selection of policies UBS prepares its Financial Statements in accordance with IFRS as issued by the International Accounting Standards Board. The application of certain of these accounting principles re- quires considerable judgment based upon estimates and as- sumptions that involve significant uncertainty at the time they are made. Estimates and judgments are continually evaluated and are based on historical experience and other factors, in- cluding expectations of future events that are believed to be reasonable under the circumstances. Changes in assumptions may have a significant impact on the Financial Statements in the periods where assumptions are changed. Accounting pol- icies that are deemed critical to UBS’s results and financial po- sition, in terms of materiality of the items to which the policy is applied, and which involve significant assumptions and es- timates are discussed in this section. A broader and more de- tailed description of the accounting policies UBS 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 the re- ported results to differ. UBS believes that the assumptions it has made are appropriate, and that UBS’s Financial State- ments therefore present the financial position and results fairly in all material respects. The alternative outcomes dis- cussed below are presented solely to assist the reader in un- derstanding UBS’s Financial Statements, and are not intend- ed to suggest that other assumptions would be more appropriate. Many of the judgments UBS makes when applying ac- counting principles depend on an assumption, which UBS believes to be correct, that UBS maintains sufficient liquidity to hold positions or investments until a particular trading strategy matures – i.e. that UBS does not need to realize po- sitions at unfavorable prices in order to fund immediate cash needs. Liquidity is discussed in more detail in the “Liquidity and funding management” section of this report. Fair value of financial instruments The fair values of financial instruments where no active mar- ket exists or where quoted prices are not otherwise available are determined by using valuation techniques. In these cas- es, the fair values are estimated from observable data in re- spect of similar financial instruments or using models. Where market observable inputs are not available, inputs are esti- mated based on appropriate assumptions. Where valuation techniques or models are used to determine fair values, they are periodically reviewed and validated by qualified person- nel independent of those that sourced them. Models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable data; however, areas such as default rates, volatilities and correlations require management to make estimates. The valuation techniques or models employed may not fully reflect all factors relevant to the positions UBS holds. Valuations are therefore adjusted, where appropriate, to al- low for additional factors including model risks, liquidity risk and credit risk. UBS uses different approaches to calculate the credit risk, depending on the classification of a financial instrument at fair value. A credit valuation adjustment (CVA) approach based on an expected exposure profile is used to adjust the fair value of Positive replacement values to reflect counterparty credit risk if necessary. Correspondingly, a deb- it valuation adjustment (DVA) approach is applied to incor- porate the own credit risk in the fair value of uncollateralized Negative replacement values. The own credit risk for Finan- cial liabilities designated at fair value is calculated using UBS’s senior debt curve. As of 31 December 2009, financial assets and financial li- abilities for which valuation techniques or models are used and whose inputs are observable (level 2) amounted to CHF 487 billion and CHF 505 billion, respectively. Financial assets and financial liabilities whose valuations include significant unobservable inputs (level 3) amounted to CHF 38 billion and CHF 28 billion, respectively. Changes in assumptions for input factors would affect the reported fair value of financial instruments. If manage- ment had used reasonably possible alternative assumptions for UBS’s level 3 instruments accounted for at fair value through profit or loss, the fair value of these assets would have been up to CHF 4.1 billion higher or lower and the fair value of these liabilities would have been up to CHF 3.3 bil- lion higher or lower than the amounts recognized on UBS’s balance sheet at 31 December 2009. Favorable valuation changes for assets would be offset to a significant degree by unfavorable changes in liabilities and vice versa as a consis- tent use of different assumptions and estimates would pre- vent a simultaneous favorable or unfavorable valuation change of assets and liabilities. The valuation of financial instruments is described in de- tail in Note 27. Goodwill impairment test The situation in the financial markets made it necessary dur- ing 2009 to monitor closely whether there was indication 245 n o i t a m r o f n i l a i c n a n i F Financial information that goodwill allocated to its cash-generating units was im- paired. At 31 December 2009, equity attributable to UBS shareholders stood at CHF 41 billion. UBS’s market capital- ization, excluding the shares to be issued upon conversion of the MCNs, amounted to CHF 57 billion at 31 December 2009. On the basis of the impairment testing methodology described in Note 16 and Note 1a) 20), UBS concluded that the year-end 2009 balances of goodwill allocated to all its segments remain recoverable. Goodwill allocated to the In- vestment Bank at 31 December 2009 amounted to CHF 3.3 billion (CHF 4.3 billion at 31 December 2008), to Wealth Management Americas CHF 3.7 billion (CHF 3.8 billion at 31 December 2008), to Wealth Management & Swiss Bank CHF 1.5 billion (CHF 1.5 billion at 31 December 2008) and to Global Asset Management CHF 1.6 billion (CHF 2.0 billion at 31 December 2008). In its review of the year-end 2009 goodwill balance, UBS specifically considered the performance outlook of its Invest- ment Bank and Wealth Management Americas divisions and the underlying business operations to resolve whether the recoverable amounts for these units cover their carrying amounts. Based on the estimated cash flows these units are expected to generate from their businesses, discounted back to their present value using a discount rate that reflects the risk profiles of the underlying activities, UBS concluded that goodwill allocated to the Investment Bank and Wealth Man- agement Americas remained recoverable on 31 December 2009. The conclusion was reached on the basis of the fore- cast results included in the latest 5 year business plan. The forecasts are based on an expectation that the economic en- vironment 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 percent- age points. The stress values covered the book value of the Investment Bank and Wealth Management Americas. How- ever, if the regulatory pressure on the banking industry in- tensifies and conditions in the financial markets further de- teriorate and turn out to be worse than anticipated in UBS’s performance forecasts, the goodwill carried in these busi- ness divisions may need to be impaired in future periods. The same model is applied to all segments carrying good- will. It is most sensitive to changes in the forecast earnings available to shareholders in years one to five, to the cost of equity and to changes in the long-term growth rate. The ap- plied long-term growth rate is based on actual growth rates and expected inflation. Both applied growth rates and dis- count rates are disclosed by cash-generating units in Note 16. Earnings available to shareholders are estimated based on forecast results, business initiatives and planned capital investments and returns to shareholders. Valuation parame- ters used within the Group’s impairment test model are linked to external market information, where applicable. Management believes that reasonable changes in key as- sumptions used to determine the recoverable amounts of all segments will not result in an impairment situation. Impairment of loans and receivables measured at amortized cost Loan impairment allowances represent management’s best estimate of losses incurred in the lending portfolio at the bal- ance sheet date. The lending portfolio, which is measured at amortized cost less impairment, is comprised of financial as- sets presented on the balance sheet line items Due from banks and Loans, including reclassified securities. In addi- tion, irrevocable loan commitments are also tested for im- pairment as described below. Credit loss expense is recognized if there is objective evi- dence that the Group will be unable to collect all amounts due according to the original contractual terms or the equiv- alent value. A financial asset or group of financial assets is impaired only if a loss event occurred after initial recognition of the financial asset(s) but not later than at balance sheet date (“incurred loss model”). Management is required to ex- ercise judgment in making assumptions and estimations when calculating impairment losses both on a counterparty- specific level and collectively. The impairment loss is the difference between the carry- ing value of the financial asset and the estimated recover- able amount. The estimated recoverable amount is the pres- ent value, using the loan’s original effective interest rate, of expected future cash flows, including amounts that may re- sult from restructuring or the liquidation of collateral. An allowance for credit losses is reported as a reduction of the carrying value of the financial asset on the balance sheet. UBS periodically revises its estimated cash flows associated with the portfolio of reclassified securities backed by multiple assets. Adverse revisions in cash flow estimates related to cred- it events are recognized in profit or loss as credit loss expenses. Increases in estimated future cash receipts as a result of in- creased recoverability are recognized as an adjustment to the effective interest rate on the loan from the date of change. At 31 December 2009, UBS’s gross lending portfolio was CHF 356 billion; the related allowances amounted to CHF 2.7 billion. Impairment charges presented as credit loss expense were CHF 1.8 billion in 2009, of which CHF 1.0 bil- lion related to reclassified financial assets. Refer to Note 9b for details. UBS’s policy on allowances and provisions for credit losses is described in Note 1a) 11). Reclassification of financial assets The International Accounting Standards Board published an amendment to International Accounting Standard 39 (IAS 39 Financial Instruments: Recognition and Measurement) on 13 246 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 abil- ity to hold them for the foreseeable future or until maturity. In 2008 and first quarter 2009, financial assets with a fair value on their reclassification dates of CHF 26 billion and CHF 0.6 billion, respectively, were reclassified out of “Trading portfolio assets” to “Loans and receivables”. In 2009, the reclassified financial assets generated inter- est and other income of CHF 1.6 billion, which was partially offset by an impairment charge of CHF 1.0 billion recog- nized as credit loss expense. Had these financial assets not been reclassified, a trading gain of CHF 4.7 billion would have been recognized instead. Refer to Note 29b for details. Consolidation of Special Purpose Entities UBS sponsors the formation of Special Purpose Entities (SPEs) primarily to allow clients to hold investments in sepa- rate legal entities, to allow clients to jointly invest in alter- native assets, for asset securitization transactions and for buying or selling credit protection. In accordance with IFRS, UBS does not consolidate SPEs that it does not control. In order to determine whether UBS controls an SPE or not, UBS has to make judgments about risks and rewards and assess the 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 UBS has to consolidate an SPE it evaluates a range of factors, including whether (a) the activities of the SPE are being conducted on UBS’s behalf according to its specific business needs so that UBS obtains the benefits from the SPE’s op- erations, or (b) UBS 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 set- ting up an autopilot mechanism, or (c) UBS 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 ac- tivities of the SPE, or (d) UBS retains the majority of the re- sidual or ownership risks related to the SPE or its assets in order to obtain the benefits from its activities. UBS consoli- dates an SPE if its assessment of the relevant factors indi- cates that UBS controls the SPE. SPEs used to allow clients to hold investments are struc- tures 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 rewards of the assets held by the SPE reside with the clients. Typically, UBS will receive service and commis- sion fees for creation of the SPE, or because it acts as in- vestment 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 di- versified asset base through a single share or certificate. These latter SPEs range from mutual funds to trusts invest- ing in real estate. The majority of UBS’s SPEs are created for client investment purposes and are not consolidated. How- ever, UBS consolidates investment funds in certain cases where it provides financial support to a fund. In these in- stances UBS generally assumes the majority or a significant portion of the risks of the fund, which, combined with UBS’s role as investment manager, makes it the party that can exercise control over the entity. SPEs used to allow clients to jointly invest in alternative assets, e.g. feeder funds, for which generally no active mar- kets exist, are often in the form of limited partnerships. In- vestors are the limited partners and contribute all or the ma- jority of the capital, whereas UBS serves as the general partner. In that capacity, UBS is the investment manager and has sole discretion over investment and other administrative decisions, but has no or only a nominal amount of capital invested. UBS typically receives service and commission fees for UBS’s services as general partner but does not, or only to a minor extent, participates in the risks and rewards of the vehicle, which reside with the limited partners. In most in- stances, limited partnerships are not c onsolidated under IFRS because UBS’s legal and con tractual rights and obligations indicate that UBS does not have the power to govern the financial and operating policies of these entities and concur- rently does not have the objective of obtaining benefits from its activities through such power. SPEs used for securitization are created when UBS has as- sets (for example, a portfolio of loans) which it sells to an SPE, and the SPE in turn sells interests in the assets as securi- ties to investors. Consolidation of these SPEs depends main- ly on whether UBS retains the majority of the benefits or risks of the assets in the SPE. UBS does not consolidate SPEs for securitization if it has no control over the assets and no longer retains any signifi- cant 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 re- course to UBS. SPEs for credit protection are set up to allow UBS to sell the credit risk on portfolios, which may or may not be held by UBS, to investors. They exist primarily to allow UBS to have a single counterparty (the SPE), which sells credit pro- tection to 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. UBS generally consolidates SPEs used for credit protection. UBS’s policy on consolidation of SPEs is further described in Note 1a) 3). 247 n o i t a m r o f n i l a i c n a n i F Financial information Equity compensation Deferred taxes UBS recognizes options and share-settled stock appreciation rights (SARs) awarded to employees as compensation expense based on their fair value at grant date. The options and SARs UBS issues to its employees have features that make them in- comparable to options and SARs on UBS’s shares traded in active markets. Accordingly, UBS cannot determine fair value by reference to a quoted market price, but UBS rather esti- mates it using an option valuation model. The model, a Mon- te Carlo simulation, requires inputs such as interest rates, ex- pected dividends, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the model inputs UBS uses are not market ob- servable and have to be estimated or derived from available data. Use of different estimates would produce different op- tion and SAR values, which in turn would result in higher or lower compensation expense being recognized. Several recognized valuation models exist, but none can be singled out as the best or most correct. The model UBS applies has been selected because it is able to handle some of the specific features included in the options and SARs granted to UBS’s employees. If UBS was to use a different model, the option and SAR values produced would be differ- ent, even if it used the same inputs. Using both different inputs and a different valuation model could have a significant impact on the fair value of employee options and SARs, which could be either higher or lower than the values produced by the model UBS applies and the inputs it has used. Further information on UBS equity compensation plans is disclosed in Note 1a) 24) and Note 31 to the Financial Statements. 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 UBS’s income statement but disallowed in the tax return until the associated cash flow occurs. UBS records a valuation allowance to reduce its deferred tax assets to the amount which can be recognized in line with the relevant accounting standards. The level of deferred tax asset recognition is influenced by management’s assessment of UBS’s future profitability having regard to relevant business plan forecasts. At each balance sheet date, existing assess- ments are reviewed and, if necessary, revised to reflect changed circumstances. In a situation where recent losses have been incurred, the relevant accounting standards require convincing evidence that there will be sufficient future profitability. At 31 December 2009, the recognized deferred tax assets amounted to CHF 8.9 billion, which included an amount of CHF 8.2 billion in respect of tax losses (mainly in Switzerland and the US) that can be utilized to offset taxable income in future years. Swiss tax losses can be carried forward for seven years and US federal tax losses for twenty years. The deferred tax assets recognized at 31 December 2009 have been based on future profitability assumptions over a five-year horizon, as adjusted to take into account the recognition criteria of IAS 12. The level of deferred tax assets recognized may, howev- er, need to be adjusted in the future in the event of changes to those profitability assumptions. Refer to Note 22 for fur- ther details. UBS’s policy on deferred taxes is further described in Note 1a) 21). 248 Financial information Consolidated financial statements Consolidated financial statements Management’s report on internal control over financial 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 con- trol over financial reporting is designed to provide reason- able assurance regarding the preparation and fair presenta- tion 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 dispo- sitions of assets; – Provide reasonable assurance that transactions are re- corded as necessary to permit preparation and fair pre- sentation of financial statements, and that receipts and expenditures of the company are being made only in ac- cordance with authorizations of UBS management; and – Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or dis- position of the company’s assets that could have a mate- rial 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 in- adequate because of changes in conditions, or that the de- gree of compliance with the policies or procedures may de- teriorate. UBS management assessed the effectiveness of UBS’s in- ternal control over financial reporting as of 31 December 2009 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 Decem- ber 2009, UBS’s internal control over financial reporting was effective. The effectiveness of UBS’s internal control over financial reporting as of 31 December 2009 has been audited by Ernst & Young Ltd, UBS’s independent registered public account- ing firm, as stated in their report appearing on pages 250 to 251, which expressed an unqualified opinion on the effec- tiveness of UBS’s internal control over financial reporting as of 31 December 2009. n o i t a m r o f n i l a i c n a n i F 249 Financial information Consolidated financial statements 250 n o i t a m r o f n i l a i c n a n i F 251 Financial information Consolidated financial statements 252 n o i t a m r o f n i l a i c n a n i F 253 254 Financial information Consolidated financial statements Income statement CHF million, except per share data Note 31.12.09 31.12.08 31.12.07 31.12.08 For the year ended % change from Continuing operations Interest income Interest expense Net interest income Credit loss (expense) / recovery Net interest income after credit loss expense Net fee and commission income Net trading income Other income Total operating income Personnel expenses General and administrative expenses Depreciation of property and equipment Impairment of goodwill Amortization of intangible assets Total operating expenses Operating profit from continuing operations before tax Tax expense Net profit from continuing operations Discontinued operations Profit from discontinued operations before tax Tax expense Net profit from discontinued operations Net profit Net profit attributable to minority interests from continuing operations from discontinued operations Net profit attributable to UBS shareholders from continuing operations from discontinued operations Earnings per share (CHF) Basic earnings per share from continuing operations from discontinued operations Diluted earnings per share from continuing operations from discontinued operations 3 3 3 4 3 5 6 7 15 16, 38 22 37 22 8 8 23,461 (17,016) 6,446 (1,832) 4,614 17,712 (324) 599 22,601 16,543 6,248 1,048 1,123 200 25,162 (2,561) (443) (2,118) (7) 0 (7) 65,679 (59,687) 5,992 (2,996) 2,996 22,929 (25,820) 692 796 16,262 10,498 1,241 341 213 28,555 (27,758) (6,837) (20,922) 198 1 198 109,112 (103,775) 5,337 (238) 5,099 30,634 (8,353) 4,341 31,721 25,515 8,429 1,243 0 276 35,463 (3,742) 1,369 (5,111) 145 (258) 403 (2,125) (20,724) (4,708) 610 600 10 (2,736) (2,719) (17) (0.75) (0.74) 0.00 (0.75) (0.74) 0.00 568 520 48 (21,292) (21,442) 150 (7.63) (7.68) 0.05 (7.63) (7.69) 0.05 539 539 0 (5,247) (5,650) 403 (2.40) (2.59) 0.18 (2.41) (2.59) 0.18 (64) (71) 8 (39) 54 (23) 99 (13) 2 (40) (16) 229 (6) (12) 91 94 90 (100) 90 7 15 (79) 87 87 90 90 (100) 90 90 (100) 255 n o i t a m r o f n i l a i c n a n i F Financial information Consolidated financial statements Statement of comprehensive income CHF million Net profit Other comprehensive income Foreign currency translation Foreign currency translation movements, before tax Foreign exchange amounts reclassified to the income statement from equity Income tax relating to foreign currency translation movements Subtotal foreign currency translation movements, net of tax Financial investments available-for-sale Net unrealized gains / (losses) on financial investments available-for-sale, before tax Impairment charges reclassified to the income statement from equity Realized gains reclassified to the income statement from equity Realized losses reclassified to the income statement from equity Income tax relating to net unrealized gains / (losses) on financial investments available-for-sale Subtotal net unrealized gains / (losses) on financial investments available-for-sale, net of tax Cash flow hedges Effective portion of changes in fair value of derivative instruments designated as cash flow hedges, before tax Net unrealized (gains) / losses reclassified to the income statement from equity Income tax effects relating to cash flow hedges Subtotal changes in fair value of derivative instruments designated as cash flow hedges Total other comprehensive income Total comprehensive income Total comprehensive income attributable to minority interests Total comprehensive income attributable to UBS shareholders For the year ended 31.12.09 (2,125) 31.12.08 (20,724) 31.12.07 (4,708) (35) (259) 22 (272) 157 70 (147) 1 (54) 27 78 (756) 257 (421) (667) (2,792) 484 (3,276) (4,509) 202 (17) (4,324) (903) 47 (645) 6 341 (1,154) 2,001 178 (520) 1,659 (3,818) (24,542) (77) (24,465) (1,405) 108 39 (1,258) 1,578 14 (3,423) 7 421 (1,403) 369 172 (130) 411 (2,250) (6,958) 269 (7,227) 256 Balance sheet CHF million Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Trading portfolio assets pledged as collateral Positive replacement values Financial assets designated at fair value Loans Financial investments available-for-sale Accrued income and prepaid expenses Investments in associates Property and equipment Goodwill and intangible assets Deferred tax assets Other assets Total assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Financial liabilities designated at fair value Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total liabilities Equity Share capital Share premium Net income recognized directly in equity, net of tax Revaluation reserve from step acquisitions, net of tax Retained earnings Equity classified as obligation to purchase own shares Treasury shares Equity attributable to UBS shareholders Equity attributable to minority interests Total equity Total liabilities and equity Note 31.12.09 31.12.08 31.12.08 % change from 9 10 10 11 11 23 12 9 13 14 15 16 22 17 18 10 10 11 23 19 18 19 20, 21, 22 20,899 46,574 63,507 116,689 188,037 44,221 421,694 10,223 306,828 81,757 5,816 870 6,212 11,008 8,868 7,336 32,744 64,451 122,897 224,648 271,838 40,216 854,100 12,882 340,308 5,248 6,141 892 6,706 12,935 8,880 9,931 1,340,538 2,014,815 65,166 7,995 64,175 47,469 409,943 112,653 410,475 8,689 131,352 33,986 125,628 14,063 102,561 62,431 851,864 101,546 465,741 10,196 197,254 42,998 1,291,905 1,974,282 356 34,786 (4,875) 38 11,751 (2) (1,040) 41,013 7,620 48,633 293 25,250 (4,335) 38 14,487 (46) (3,156) 32,531 8,002 40,533 1,340,538 2,014,815 (36) (28) (48) (48) (31) 10 (51) (21) (10) (5) (2) (7) (15) 0 (26) (33) (48) (43) (37) (24) (52) 11 (12) (15) (33) (21) (35) 22 38 (12) 0 (19) 96 67 26 (5) 20 (33) 257 n o i t a m r o f n i l a i c n a n i F Financial information Consolidated financial statements Statement of changes in equity CHF million Balance at 1 January 2007 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Cancellation of second trading line treasury shares Net premium / (discount) on treasury share and own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax benefits from deferred compensation awards Dividends Equity classified as obligation to purchase own shares (185) Treasury shares (10,214) (7,169) 4,605 2,415 Share capital 211 (4) Share premium 12,640 (560) 12 898 (557) Equity classified as obligation to purchase own shares – movements 111 (2,411) (4,275) Retained earnings 47,728 Foreign currency translation (1,614) Financial investments available- for-sale 2,876 Cash flow hedges (443) Revaluation reserve from step acquisitions 38 Total equity attributable to UBS shareholders 51,037 Minority interests 6,089 Total equity 57,126 Preferred securities New consolidations and other increases Deconsolidations and other decreases Total comprehensive income for the year recognized in equity Balance at 31 December 2007 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Net premium / (discount) on treasury share and own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax benefits from deferred compensation awards Transaction costs related to share issuances, net of tax Dividends Equity classified as obligation to purchase own shares – movements Preferred securities New consolidations and other increases Deconsolidations and other decreases Total comprehensive income for the year recognized in equity Balance at 31 December 2008 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Net premium / (discount) on treasury share and own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax benefits from deferred compensation awards Transaction costs related to share issuances, net of tax Dividends 1 Equity classified as obligation to purchase own shares – movements Preferred securities New consolidations and other increases Deconsolidations and other decreases Total comprehensive income for the year recognized in equity Balance at 31 December 2009 1 Includes dividend payment obligations for preferred securities. 258 12,433 (10,363) (74) (5,247) 35,795 (986) (2,600) (1,405) 1,471 411 (32) 38 (367) 7,574 (4,626) 20,003 (1,961) (176) (423) 28 (16) 25,250 (3,156) (46) (21,292) 14,487 (3,709) (6,309) (1,124) 347 1,659 1,627 38 207 86 293 63 (476) 2,592 (1,268) 10,599 291 1 (87) 44 356 34,786 (1,040) (2) (2,736) 11,751 (136) (6,445) 17 364 (421) 1,206 38 (3,276) 41,013 (7,169) 4,605 (560) 12 898 (557) (4,275) 111 0 0 0 0 0 (7,227) 36,875 86 (367) 7,574 (4,626) 20,003 (1,961) (176) (423) (16) 28 0 0 0 (24,465) 32,531 63 (476) 2,592 (1,268) 10,599 291 (87) 44 1 0 0 0 0 0 0 (7,169) 4,605 (560) 12 898 (557) (4,675) 111 996 101 (104) (6,958) 43,826 86 (367) 7,574 (4,626) 20,003 (1,961) (176) (423) (377) 1,618 28 12 (141) (24,542) 40,533 63 (476) 2,592 (1,268) 10,599 291 1 (87) (849) 44 (7) 3 (13) (2,792) 48,633 (400) 996 101 (104) 269 6,951 (361) 1,618 12 (141) (77) 8,002 (849) (7) 3 (13) 484 7,620 Statement of changes in equity CHF million Balance at 1 January 2007 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Cancellation of second trading line treasury shares Net premium / (discount) on treasury share and own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax benefits from deferred compensation awards Dividends Total comprehensive income for the year recognized in equity Preferred securities New consolidations and other increases Deconsolidations and other decreases Balance at 31 December 2007 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Net premium / (discount) on treasury share and own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax benefits from deferred compensation awards Transaction costs related to share issuances, net of tax Dividends Equity classified as obligation to purchase own shares – movements Total comprehensive income for the year recognized in equity Preferred securities New consolidations and other increases Deconsolidations and other decreases Balance at 31 December 2008 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Net premium / (discount) on treasury share and own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax benefits from deferred compensation awards Transaction costs related to share issuances, net of tax Dividends 1 Equity classified as obligation to purchase own shares – movements Preferred securities New consolidations and other increases Deconsolidations and other decreases Total comprehensive income for the year recognized in equity Balance at 31 December 2009 1 Includes dividend payment obligations for preferred securities. Share capital 211 (4) 207 86 293 63 Share premium 12,640 (560) 12 898 (557) (4,626) 20,003 (1,961) (176) (423) (1,268) 10,599 291 1 (87) Equity classified as obligation to purchase own shares (185) Treasury shares (10,214) (7,169) 4,605 2,415 (367) 7,574 (476) 2,592 28 44 Retained earnings 47,728 Foreign currency translation (1,614) Financial investments available- for-sale 2,876 Cash flow hedges (443) Revaluation reserve from step acquisitions 38 (2,411) (4,275) Equity classified as obligation to purchase own shares – movements 111 12,433 (10,363) (74) (5,247) 35,795 (986) (2,600) (1,405) 1,471 411 (32) 38 (16) 25,250 (3,156) (46) (21,292) 14,487 (3,709) (6,309) (1,124) 347 1,659 1,627 38 Total equity attributable to UBS shareholders 51,037 0 (7,169) 4,605 0 (560) 12 898 (557) (4,275) 111 0 0 0 (7,227) 36,875 86 (367) 7,574 (4,626) 20,003 (1,961) (176) (423) (16) 28 0 0 0 (24,465) 32,531 63 (476) 2,592 (1,268) 10,599 291 1 (87) 0 44 0 0 0 356 34,786 (1,040) (2) (2,736) 11,751 (136) (6,445) 17 364 (421) 1,206 38 (3,276) 41,013 Minority interests 6,089 Total equity 57,126 (400) 996 101 (104) 269 6,951 (361) 1,618 12 (141) (77) 8,002 (849) (7) 3 (13) 484 7,620 0 (7,169) 4,605 0 (560) 12 898 (557) (4,675) 111 996 101 (104) (6,958) 43,826 86 (367) 7,574 (4,626) 20,003 (1,961) (176) (423) (377) 28 1,618 12 (141) (24,542) 40,533 63 (476) 2,592 (1,268) 10,599 291 1 (87) (849) 44 (7) 3 (13) (2,792) 48,633 259 n o i t a m r o f n i l a i c n a n i F Financial information Consolidated financial statements Statement of changes in equity (continued) Preferred securities 1 CHF million Balance at the beginning of the year Issuances Redemptions Foreign currency translation Balance at the end of the year 31.12.09 7,381 (7) (120) 7,254 For the year ended 31.12.08 31.12.07 6,381 1,618 (618) 7,381 5,633 996 (248) 6,381 1 Represents equity attributable to minority interests. Increases and offsetting decreases of equity attributable by minority interests due to dividends are excluded from this table. Number of shares Shares issued Balance at the beginning of the year Issuance of share capital Cancellation of second trading line treasury shares Balance at the end of the year Treasury shares Balance at the beginning of the year Acquisitions Disposals Cancellation of second trading line treasury shares Balance at the end of the year For the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 2,932,580,549 2,073,547,344 2,105,273,286 625,532,204 859,033,205 1,294,058 (33,020,000) 3,558,112,753 2,932,580,549 2,073,547,344 61,903,121 33,566,097 158,105,524 13,398,118 (57,915,346) (109,600,521) 164,475,699 102,074,942 (75,425,117) (33,020,000) 37,553,872 61,903,121 158,105,524 41 (27) 21 (61) 151 47 (39) Shares issued On 25 June 2009, UBS increased its share capital by issuing 293,258,050 new registered shares. The shares were placed with a small number of large institutional investors. The shares were issued out of authorized capital which had been approved at the Annual General Meeting of shareholders (AGM) on 15 April 2009. On 19 August 2009, the Swiss Confederation announced the conversion of its UBS mandatory convertible notes (MCNs). Upon conversion on 25 August 2009, UBS issued 332,225,913 new shares from existing conditional capital. 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. That resulted in the issuance of 98,698,754 shares. On 23 April 2008, the AGM of shareholders approved a capital increase that resulted in the issuance of 760,295,181 fully paid registered shares. All issued shares are fully paid. For further information on the capital increase and the conversion of the MCNs in 2009, refer to “Note 26 Capital increases and mandatory convertible notes” in the financial statements. Conditional share capital On 31 December 2009, a maximum of 29,350 shares could have been issued against the future exercise of options from former PaineWebber employee option plans and 149,994,296 shares could have been issued to fund UBS‘s employee share option programs. In addition, conditional capital of up to 277,750,000 shares was available for the UBS share delivery obligation due to the issuance of the March 2008 mandatory convertible notes (MCNs) and con- ditional capital of up to 100,000,000 shares is available in connection with the transaction with the Swiss National Bank (SNB). These shares are shown as conditional share capital in the UBS AG (Parent Bank) disclosure. 260 Statement of cash flows CHF million Cash flow from / (used in) operating activities Net profit 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 Impairment of goodwill / amortization of intangible assets Credit loss expense / (recovery) Share of net profits of associates Deferred tax expense / (benefit) Net loss / (gain) from investing activities Net loss / (gain) from financing activities Net (increase) / decrease in operating assets: Net due from / to banks Reverse repurchase agreements and cash collateral on securities borrowed Trading portfolio, net replacement values and financial assets designated at fair value Loans / due to customers Accrued income, prepaid expenses and other assets Net increase / (decrease) in operating liabilities: Repurchase agreements, cash collateral on securities lent Accrued expenses, deferred income and other liabilities Income taxes paid Net cash flow from / (used in) operating activities Cash flow from / (used in) investing activities Purchase of subsidiaries and associates Disposal of subsidiaries and associates Purchase of property and equipment Disposal of property and equipment Net (investment in) / divestment of financial investments available-for-sale Net cash flow from / (used in) investing activities Cash flow from / (used in) financing activities Net money market papers issued / (repaid) Net movements in treasury shares and own equity derivative activity Capital issuance Dividends paid Issuance of long-term debt, including financial liabilities designated at fair value Repayment of long-term debt, including financial liabilities designated at fair value Increase in minority interests 1 Dividends paid to / decrease in minority interests Net cash flow from / (used in) financing activities Effects of exchange rate differences Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents comprise: Cash and balances with central banks Money market papers 2 Due from banks with original maturity of less than three months Total For the year ended 31.12.09 31.12.08 31.12.07 (2,125) (20,724) (4,708) 1,048 1,323 1,832 (37) (960) 425 8,355 (57,328) 162,822 11,118 (23,705) 2,214 (41,351) (8,629) (505) 54,497 (42) 296 (854) 163 (20,127) (20,563) (60,040) 673 3,726 0 67,062 (65,024) 3 (583) (54,183) 5,529 (14,721) 179,693 164,973 20,899 98,432 45,642 164,973 1,241 554 2,996 6 (7,020) (797) (47,906) (16,561) 236,497 350,099 (183,476) 7,512 (220,935) (23,592) (887) 77,007 (1,502) 1,686 (1,217) 69 (712) (1,676) (40,637) 623 23,135 0 103,087 (92,894) 1,661 (532) (5,557) (39,186) 30,588 149,105 179,693 32,744 86,732 60,217 179,693 1,253 282 238 (120) (371) (4,085) 3,779 (60,762) 173,433 60,729 36,168 (2,408) (271,060) 19,217 (3,663) (52,078) (2,337) 885 (1,910) 134 5,981 2,753 32,672 (2,771) 0 (4,275) 110,874 (62,407) 1,094 (619) 74,568 (12,228) 13,015 136,090 149,105 18,793 77,215 53,097 149,105 1 Includes issuance of preferred securities of CHF 1,617 million and CHF 996 million for the years ended 31 December 2008 and 31 December 2007, respectively. 2 Money market papers are included in the balance sheet under “Trading portfolio assets”, “Trading portfolio assets pledged as collateral” and “Financial investments available-for-sale”. CHF 57,116 million, CHF 19,912 million and CHF 7,881 million were pledged at 31 December 2009, 31 December 2008 and 31 December 2007, respectively. The previously disclosed amounts of pledged money market papers have been adjusted to include positions recognized in the balance sheet under “Trading portfolio assets pledged as collateral”. 261 n o i t a m r o f n i l a i c n a n i F For the year ended 31.12.09 31.12.08 31.12.07 23,844 19,597 1,090 68,232 62,284 2,779 103,828 97,489 5,313 For the year ended 31.12.09 31.12.08 31.12.07 14 31 731 1,393 33 22 5 405 114 2 173 24 3 262 2 224 60 Financial information Consolidated financial statements Statement of cash flows (continued) CHF million Additional information Cash received as interest Cash paid as interest Cash received as dividends on equities (incl. associates) Significant non-cash investing and financing activities CHF million Deconsolidation of UBS Pactual Financial investments available -for-sale Property and equipment Goodwill and intangible assets Debt issued Deconsolidation of private equity investments Property and equipment Goodwill and intangible assets Acquisition of Caisse Centrale de Réescompte Group (CCR) Property and equipment Goodwill and intangible assets Debt issued Acquisition of VermogensGroep Property and equipment Goodwill and intangible assets Acquisition of McDonald Investments branch network Property and equipment Goodwill and intangible assets Acquisition of Daehan Investment Trust Management Company Property and equipment Goodwill and intangible assets Minority interests 262 Financial information Notes to the consolidated financial statements Notes to the consolidated financial statements Note 1 Summary of significant accounting policies a) Significant accounting policies The principal accounting policies applied in preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 1) Basis of accounting UBS AG and subsidiaries (“UBS” or the “Group”) provide a broad range of financial services including advisory services, underwriting, financing, market making, asset management and brokerage on a global level, and retail banking in Swit- zerland. The Group was formed on 29 June 1998 when Swiss Bank Corporation and Union Bank of Switzerland merged. The merger was accounted for using the uniting of interests method of accounting. The consolidated financial statements of UBS (the “Finan- cial Statements”) are prepared in accordance with Interna- tional 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 4 March 2010, the Board of Directors approved them for issue. Disclosures under IFRS 7 Financial Instruments: Disclo- sures about the nature and extent of risks and capital disclo- sures under IAS 1 Presentation of Financial Statements have been included in the audited parts of the “Risk and treasury management” section. Several IFRS 7 credit risk related dis- closures are provided in Note 29c and several market risk related disclosures are provided in Note 27c. 2) Use of estimates in the preparation of Financial Statements In preparing the Financial Statements in conformity with IFRS, management is required to make estimates and as- sumptions that affect reported income, expenses, assets, li- abilities 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 The Financial Statements comprise those of the parent com- pany (UBS AG) and its subsidiaries, including special purpose entities (SPEs), presented as a single economic entity. UBS con- trols an entity if it has the power to govern the financial and operating policies generally accompanying a shareholding of more than one-half of the voting rights. Subsidiaries, including special purpose entities, that are directly or indirectly controlled by the Group are consolidated from the date on which control is transferred to the Group. Subsidiaries to be divested are con- solidated up to the date of disposal (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 profit attribut- able to minority interests is shown separately in the income statement. When UBS acquires a subsidiary, the purchase method of accounting is used to account for the acquisition of a subsid- iary. The cost of acquisition is measured at the fair value of the consideration given at the date of exchange, together with costs directly attributable to that acquisition. The acquired identifiable assets or liabilities and contingent liabilities are measured at fair value at the date of acquisition. Any excess of the cost of acquisition over the fair value of UBS’s share of the identifiable assets, liabilities and contingent liabilities is re- corded as goodwill. If the cost of acquisition is less than the fair value of UBS’s share of identifiable assets, liabilities and contingent liabilities of the business acquired, the difference is recognized immediately 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 struc- tured 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. UBS also has employee benefit trusts that are used in connection with share-based payment ar- rangements and deferred compensation schemes. Such trusts and other special purpose entities are consolidated in the Group’s Financial Statements when the substance of the relationship between the Group and the company indi- cates that the company is controlled by the Group. The following circumstances may indicate a relationship in which, in substance, UBS controls and consequently con- solidates the SPE: – the activities of the SPE are being conducted on behalf of UBS according to its specific business needs so that UBS obtains benefits from the SPE’s operations; 263 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements – UBS has the decision-making powers to obtain the major- ity of the benefits of the activities of the SPE or, by setting up an “autopilot” mechanism, UBS has delegated these decision making powers; – UBS has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incident to the activities of the SPE; or – UBS retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities. UBS continuously evaluates whether triggering events re- quire the reconsideration of the consolidation conclusions made at inception of its involvement with special purpose entities, especially securitization vehicles and collateralized debt obligations (CDOs). Triggering events generally include items such as restructurings, the vesting of potential rights and acquisition, disposal or expiration of interests. In these circumstances, special purpose entities may be consolidated depending on how the conditions have changed. Intercompany transactions, balances and unrealized gains or losses on transactions between the Group companies are eliminated. Consolidated financial statements are prepared using uni- form accounting policies for like transactions and other events in similar circumstances. Assets and liabilities of subsidiaries are classified as “held for sale” if their carrying amount will be recovered princi- pally through a sale transaction rather than through continu- ing use – see parts 19) and 28). Major lines of business and subsidiaries that were acquired exclusively with the intent for resale are presented as discontinued operations in the state- ment of comprehensive income in the period when the sale occurred or it becomes highly probable that a sale will occur within 12 months – see part 28). 4) Associates and jointly controlled entities Investments in associates in which UBS has a significant in- fluence are accounted for under the equity method of ac- counting. Significant influence is normally evidenced when UBS owns between 20% to 50% of a company’s voting rights. Investments in associates are initially recorded at cost, and the carrying amount is increased or decreased to recog- nize the Group’s share of the investee’s net profit or loss (in- cluding 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 un- der 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 ac- tivities. Interests in such entities are reflected under Invest- ments in associates on the balance sheet, and the related dis- closures are included in the disclosures for associates. UBS holds certain interests in jointly controlled real estate entities. Investments in associates and interests in jointly con- trolled entities are classified as “held for sale” if their carry- ing amount will be recovered principally through a sale transaction rather than through continuing use – see parts 19) and 28). 5) Recognition and derecognition of financial instruments UBS recognizes financial instruments on its balance sheet when the Group becomes a party to the contractual provi- sions of the instrument. Financial assets UBS enters into transactions where it transfers financial as- sets recognized on its balance sheet but retains either all risks and rewards of the transferred financial assets or a por- tion of them. If all or substantially all risks and rewards are retained, the transferred financial assets are not derecog- nized from the balance sheet. Transfers of financial assets with retention of all or substantially all risks and rewards in- clude, for example, securities lending and repurchase trans- actions described in this Note under parts 13) and 14). 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 re- wards of ownership of a financial asset are neither retained nor transferred, UBS derecognizes the financial asset if con- trol over the asset is lost. The rights and obligations retained in the transfer are recognized separately as assets and liabili- ties as appropriate. In transfers where control over the finan- cial asset is retained, the Group continues to recognize the asset to the extent of its continuing involvement, deter- mined 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. Financial liabilities 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. Where an ex- isting financial liability is exchanged for a new one from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an ex- change or modification is treated as a derecognition of the original liability and recognition of a new liability. The differ- ence in the respective carrying amounts is recognized in profit or loss. UBS acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of indi- viduals, trusts, retirement benefit plans and other institu- 264 tions. These assets and income arising therefrom are exclud- ed from UBS’s financial statements, as they are not assets of UBS, provided the recognition criteria are not satisfied. 6) Determination of fair value The fair value principles applied when determining fair value are considered significant accounting policies. Fair value is the amount for which an asset could be exchanged or a lia- bility settled between knowledgeable, willing parties in an arm’s length transaction. Details of the determination of fair value of financial instruments, fair value hierarchy, valuation techniques and inputs by products, day 1 profit or loss and other related fair value disclosures are disclosed in Note 27. 7) Trading portfolio assets and liabilities Trading portfolio assets consist of debt instruments (including those in the form of securities, money market paper, traded corporate and bank loans), equity instruments (including those in the form of securities), assets held under unit-linked contracts and precious metals and other commodities owned by the Group (“long” positions). Trading portfolio liabilities consist of obligations to deliver financial instruments such as debt and equity instruments which the Group has sold to third parties but does not own (“short” positions). The trad- ing portfolio includes non-derivative financial instruments (including those with embedded derivatives) and commodi- ties. Financial instruments which are considered derivatives in their entirety are generally presented on the balance sheet as Positive and Negative replacement values, refer to part 15). UBS’s trading portfolio assets and liabilities (refer to Note 11) include proprietary positions, hedge positions and client busi- ness-related positions (provided the recognition criteria men- tioned in part 5) are satisfied). 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 in- come. Interest and dividend income and expense on trading portfolio assets or liabilities are included in Interest and divi- dend 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 record- ing trading financial asset transactions. From the date the purchase transaction is entered into (trade date), UBS recog- nizes any unrealized profits and losses arising from revaluing that contract to fair value in Net trading income. The corre- sponding 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 fi- nancial asset is recognized on 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 fi- nancial 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 derecog- nizes 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 5)) are reclas- sified on UBS‘s balance sheet from Trading portfolio assets to Trading portfolio assets pledged as collateral, if the transfer- ee has received the right to sell or repledge them. Following an amendment to IAS 39 in 2008 (refer to Note 1b and Note 29b), subject to certain conditions being met, financial assets may be reclassified from the “Held for trad- ing” category to the “Loans and receivables” category if the firm has the intent and ability to hold them for the foresee- able future or until maturity. UBS applied this option in fourth quarter 2008 and first quarter 2009 and reclassified several illiquid financial assets (such as purchased asset- backed securities, including mortgage-backed securities (MBS), originated by third parties) to the category “loans and receivables”, as a result of which these instruments to be no longer fair valued through profit or loss but rather ac- counted for at amortized cost less impairment. 8) 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 can- not subsequently be changed. Financial assets (refer to Note 12) and financial liabilities (refer to Note 19) 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 when 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 elimi- nates an accounting mismatch that would otherwise arise. Hybrid instruments which fall under criterion a) above in- clude i) bonds and compound debt liabilities issued, ii) com- pound debt liabilities – OTC, and iii) hybrid financial assets from reverse repurchase agreements. Bonds and compound debt liabilities issued and OTC generally include embedded derivative components which, for example, refer to an underlying equity price, interest rate, commodities price or index. 265 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements UBS has designated most of its issued hybrid debt instru- ments as Financial liabilities designated at fair value through profit or loss. These instruments include predominantly the following categories of underlyings: – Credit-linked: bonds, notes linked to the performance (cou- pon and / or redemption amount) of single names (such as a company or a country) or a basket of reference entities. – Equity-linked: bonds, notes that are linked to a single stock, a basket of stocks or an equity index. – Rates-linked: bonds, notes linked to a reference interest rate, interest rate spread or formula. 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 ac- counting mismatch, as loans would have been otherwise ac- counted for at amortized cost or as financial investments available-for-sale (refer to part 9)), whereas the hedging credit protection is accounted for as a derivative instrument at fair value through profit or loss. UBS has also applied the fair value option to a hedge fund investment and structured reverse repurchase agreement which are part of portfolios managed on a fair value basis. Fair value changes related to financial instruments designat- ed at fair value through profit or loss are recognized in Net trading income. Interest 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 designat- ed at fair value or Interest on financial liabilities designated at fair value. Refer to Note 3. UBS applies the same recognition and derecognition prin- ciples to financial instruments designated at fair value as to financial instruments held for trading (refer to parts 5) and 7)). 9) Financial investments available-for-sale Financial investments available-for-sale are non-derivative fi- nancial assets that are not classified as held for trading, des- ignated at fair value through profit or loss, or loans and re- ceivables. They are recognized on a settlement date basis. Financial investments available-for-sale include highly liquid short term debt securities, strategic equity investments, cer- tain investments in real estate funds 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 in- vestments available-for-sale consist mainly of highly liquid short term debt securities issued by government and govern- ment-controlled institutions, generally with residual maturi- ties of less than three months. In addition, certain equity in- struments, including private equity investments as well as 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 initially recog- nized at fair value including direct transaction costs and are subsequently measured at fair value. Unrealized gains or losses are reported in Equity, net of applicable income taxes, until such investments are sold, collected or otherwise dis- posed 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 aver- age cost method and are included in the income statement. Interest and dividend income on financial investments available-for-sale are included in Interest and dividend in- come from financial investments available-for-sale. UBS assesses at each balance sheet date whether there are in- dicators of impairment of an available-for-sale investment. An available-for-sale investment is impaired when there is objective evidence that as a result of one or more events that occurred after the initial recognition of the investment, the estimated future cash flows of the investment have been affected. For equity investments available-for-sale, a significant or prolonged decline in fair value below its original cost is considered to be objective evidence of impairment. For debt investments avail- able-for-sale, objective evidence of impairment includes for ex- ample a significant financial difficulty of the issuer or counter- party, default or delinquency in interest or principal payments or probability that the borrower will enter bankruptcy or finan- cial re-organization. If a financial investment available-for-sale is determined to be impaired, the cumulative net unrealized loss previously recognized in Equity is included in Net profit for the period and reported as a deduction from Other income. To the extent impairments of financial investments available-for- sale are covered by fair value decreases of the current year-to- date period, impairments are directly recognized in the income statement. To the extent impairments relate to fair value de- creases of previous periods, amounts are released from other comprehensive income to the income statement and separate- ly presented in the statement of comprehensive income. After the recognition of impairment on a financial invest- ment available-for-sale, increases in fair value of equity in- struments are reported in Equity and 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). UBS applies the same recognition and derecognition prin- ciples to financial assets available-for-sale as “Financial instru- ments designated at fair value” or “Held-for-trading”, except that unrealized gains or losses between trade date and settle- ment date recognized in Equity (refer to parts 5) and 7)). 10) Loans and receivables For an overview of financial assets and financial liabilities ac- counted for as “Loans and receivables”, refer to the mea- surement categories presented in Note 29. 266 “Loans and receivables” are non-derivative financial as- sets with fixed or determinable payments which are not classified as held-for-trading, not designated as at fair value through P&L or available-for-sale and are not those for which the Group may not recover substantially all of its initial net investment, other than because of credit dete- rioration. “Loans and receivables” include: – originated loans where money is provided directly to the borrower, participation in a loan from another lender and purchased loans (certain purchased non-performing loans are also classified as financial investment available-for- sale at inception) initially classified as “loans and receiv- ables”; – securities initially classified as “Loans and receivables” due to illiquid markets such as Auction Rate Securities; – reclassified securities previously “Held-for-trading” (refer to Note 29b; and – reclassified loans such as leverage finance loans previous- ly “held-for-trading” (refer to Note 29b). In fourth quarter 2008 and first quarter 2009, UBS re- classified 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, Note 29b and Note 9a and 9b). When a financial asset is reclassified from “held-for-trading” to “loans and receiv- ables”, the financial asset is reclassified at its fair value on the date of reclassification. Any gain or loss recognized in the income statement before reclassification is not reversed. The fair value of a financial asset on the date of reclassifica- tion becomes its cost basis or amortized cost basis, as ap- plicable. Loans are recognized when cash is advanced to borrow- ers. They are initially recorded at fair value, which is the cash given to originate or purchase the loan, plus any direct trans- action 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 approx- imates 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. Renegotiated loans Subject to assessment on a case by case basis, UBS may ei- ther restructure a loan or take possession of collateral. Re- structuring may involve extending the payment arrange- ments and agreeing to new loan conditions. Once the terms have been renegotiated any impairment is measured using the effective interest rate (EIR) as calculated before the mod- ification of terms and the loan is not considered as past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to impair- ment assessment, calculated using the loan’s original EIR. Commitments Letters of credit, guarantees and similar instruments com- mit UBS to make payments on behalf of third parties under specific circumstances. These instruments, as well as un- drawn irrevocable credit facilities, carry credit risk and are included in the exposure to credit risk table in Note 29c, with their gross maximum exposure to credit risk less provi- sions. 11) Allowance and provision for credit losses An allowance or provision for credit losses (refer to Note 9b) is established if there is objective evidence that the Group will be unable to collect all amounts due on a claim accord- ing 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. Objective evidence of impairment include: – significant financial difficulty of the issuer or counterparty; or – default or delinquency in interest or principal payments; or – probability that the borrower will enter bankruptcy or financial re-organization. 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 al- lowances 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 fi- nancially 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 267 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements 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 esti- mated 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. 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 ex- pense. 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 in- terest 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 pre- viously 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 writ- ten off are credited to Credit loss expense. A restructuring of a financial asset could result in the original loan being derec- ognized and a new loan being recognized. The new loan is measured at fair value at initial recognition. Any allowance taken against the original loan is removed by increasing write-offs. The gross counterparty exposure, however, may remain unaffected, if the rights existing prior to the restruc- turing have not been legally waived. 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, insolvency proceedings have commenced against the firm, or obliga- tions have been restructured on concessionary terms. Collectively: All loans for which no impairment is identi- fied on a counterparty-specific level are grouped into sub- portfolios with similar credit risk characteristics to collectively assess whether impairment exists within a portfolio. Allow- ances from collective assessment of impairment are recog- nized as Credit loss expense and result in an offset to the aggregated loan position. As the allowance cannot be allo- cated to individual loans, the loans are not considered to be impaired and interest is accrued on each loan according to its contractual terms. Reclassified securities: UBS periodically revises its estimat- ed cash flows associated with the portfolio of reclassified securities backed by multiple assets. Adverse revisions in cash flows estimates related to credit events are recognized in profit or loss as credit loss expenses. Increases in estimated future cash receipts as a result of increased recoverability are recognized as an adjustment to the effective interest rate on the loan from the date of change. 12) Securitization structures set up by UBS UBS securitizes various financial assets, which generally re- sults 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 and remained low in 2009. UBS applies the policies set out in part 3) in determining whether the respective special pur- pose entity must be consolidated and those set out in part 5) in determining whether derecognition of transferred finan- cial 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 re- tained 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 in- come, 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. Synthetic securitization structures typically involve deriva- tive financial instruments for which the principles set out in part 15) apply. UBS acts as structurer and placement agent in various MBS and other ABS securitizations. In such capacity, UBS purchases collateral on its own behalf or on behalf of cus- tomers during the period prior to securitization. UBS typi- cally sold the collateral into designated trusts at the close of the securitization and underwrites the offerings to investors, earning fees for its placement and structuring services. Con- sistent with the valuation of similar inventory, fair value of retained tranches is initially and subsequently determined using market price quotations where available or internal pricing models that utilize variables such as yield curves, pre- payment speeds, default rates, loss severity, interest rate vol- atilities and spreads. Where possible, assumptions based on observable transactions are used to determine the fair value of retained tranches, but for several of them, substantially no observable information is available. 13) Securities borrowing and lending Securities borrowing and securities lending transactions are generally entered into on a collateralized basis. In such trans- actions, 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 in- volve bonds and notes. The transactions are conducted un- 268 der standard agreements employed by financial market par- ticipants 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 dai- ly basis and requests or provides additional collateral or re- turns or recalls surplus collateral in accordance with the un- derlying agreements. The securities which have been transferred, whether in a borrowing / lending transaction or as collateral, are not rec- ognized 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 re- ceive it back (Cash collateral on securities borrowed). Securi- ties received in a lending or borrowing transaction are dis- closed 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 lia- bility (short sale). Consideration exchanged in financing transactions (i.e. interest received or paid) is recognized on an accrual basis and recorded as Interest income or Interest expense. 14) Repurchase and reverse repurchase transactions Securities purchased under agreements to resell (Reverse re- purchase 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 instru- ments, such as bonds, notes or money market paper. The transactions are conducted under standard agreements em- ployed by financial market participants and are undertaken with counterparties subject to UBS’s normal credit risk con- trol processes. UBS monitors the market value of the securi- ties received or delivered on a daily basis and requests or provides additional collateral or returns or recalls surplus col- lateral in accordance with the underlying agreements. In a reverse repurchase agreement, the cash delivered is derecognized and a corresponding receivable, including ac- crued interest, is recorded in the balance sheet line Reverse repurchase agreements, recognizing UBS’s right to receive it back. In a Repurchase agreement, the cash received is recog- nized and a corresponding obligation, including accrued in- terest, is recorded in the balance sheet line Repurchase agreements. Securities received under reverse repurchase agreements and securities delivered under repurchase agree- ments are not recognized on or derecognized from the bal- ance 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. Secu- rities received in a reverse repurchase agreement are dis- closed as off-balance sheet items if UBS has the right to re- sell 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 repur- chase transactions triggers the recognition of a trading liabil- ity (short sale). Interest earned on reverse repurchase agreements and in- terest 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 re- purchase agreements with the same counterparty, maturity, currency and Central Securities Depository (CSD) for transac- tions covered by legally enforceable master netting agree- ments when net or simultaneous settlement is intended. 15) Derivative instruments and hedge accounting Derivatives are initially recognized at fair value at the date the derivative contract is entered into and are subsequently remeasured to fair value. The resulting gain or loss is recog- nized in profit or loss unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. Derivative instruments are reported on the balance sheet as Positive replacement values or Negative replacement val- ues (except for futures, 100% daily-margined exchange traded options and London Clearing House (LCH) interest rate swaps). Where the Group enters into derivatives for trading purposes, 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. Futures and LCH Interest rate swaps with daily margining and 100% daily margined exchange traded options are trans- acted and measured at fair value. They do not have a replace- ment value as the variation margin, expressing the cumulative market movements each day, is settled daily on a cash basis. Any unpaid variation margin represents a receivable or payable with fixed amount and settlement date and is presented on the balance sheet under Due from banks and loans or Due to banks and customers. The daily cash settlement (i.e. change in market value) is booked to Net trading income. Hedge accounting The Group also uses derivative instruments as part of its as- set and liability management activities to manage exposures 269 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions. The Group ap- plies either fair value or cash flow hedge accounting when transactions meet the specified criteria to obtain hedge ac- counting treatment. At the time a financial instrument is designated as a hedge, the Group formally documents the relationship be- tween the hedging instrument(s) and hedged item(s), includ- ing the risk management objectives and strategy in under- taking 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 off- setting changes in the fair value or cash flows of the hedged items. UBS regards a hedge as highly effective if the follow- ing criteria are met: a) at inception of the hedge and throughout its life, the hedge is expected to be highly effec- tive 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 is not, or has ceased to be, highly effective as a hedge; when the de- rivative 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 earn- ings in Net trading income. Fair value hedges For qualifying fair value hedges, the change in fair value of the hedging derivative is recognized in the income state- ment. Those changes in fair value of the hedged item that are attributable to the risks hedged with the derivative in- strument 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 instru- ments, amortized to the income statement over the remain- ing term of the original hedge, while for non-interest-bear- ing instruments that amount is immediately recognized in earnings. If the hedged item is derecognized, e.g. due to sale or repayment, the unamortized fair value adjustment is rec- ognized immediately in 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 simul- taneously transferred from Equity to the corresponding in- come 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 termi- nated, the cumulative gain or loss on the hedging derivative previously reported in Equity remains there until the commit- ted or forecast transaction occurs or is no longer expected to occur, at which point it is transferred to profit or loss. Hedges of net investments in foreign operations Hedges of net investments in foreign operations are ac- counted for similarly to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognized directly in Equity (and presented in the statement of equity and statement of comprehensive in- come under Foreign currency translation), while any gains or losses relating to the ineffective portion are recognized in the income statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognized directly in Equity is reclassified to the income statement. 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. realized and unrealized gains and losses are recognized in Net trading income except that, in certain cas- es, the forward points on short duration foreign exchange contracts are reported in Net interest income. Refer to Note 23 for more information on “economic hedges”. 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 sepa- rated from the host contract and accounted for as a stand- alone derivative instrument at fair value through profit or 270 loss if the economic characteristics and risks of the embed- ded derivative are not closely related to the economic char- acteristics and risks of the host contract, and the embedded derivative actually meets the definition of a derivative. Bifur- cated embedded derivatives are presented on the same bal- ance sheet line as the host contract, and are shown in Note 29 in the “Held for trading” category, reflecting the mea- surement and recognition principles applied. Typically, UBS applies the fair value option to hybrid in- struments (see part 8)), in which case bifurcation of an em- bedded derivative component is not required. 16) Loan commitments Loan commitments are defined amounts (unutilized credit lines or undrawn portions of credit lines) against which cus- tomers can borrow money at defined terms and conditions. Loan commitments that can be cancelled by UBS at any time (without giving a reason) according to their general terms and conditions are neither recognized on-balance sheet nor off-balance sheet. Upon a loan draw down by the counterparty, the amount of the loan is accounted for as “Loans and receivables” (refer to part 10). Irrevocable loan commitments (where UBS has no right to withdraw the loan commitment once communicated to the beneficiary or that is revocable only due to automatic cancel- lation upon the deterioration in a borrower’s creditworthi- ness) are classified into the following categories: – Derivative loan commitments (loan commitments that can be settled net in cash or by delivering or issuing an- other financial instrument) or if there is evidence that UBS is selling similar loans resulting from its loan commit- ments before or shortly after origination (refer to part 15). – Loan commitments designated at fair value through prof- it and loss (“Fair value option”) (refer to part 8). – Below market loan commitments. Below market loan commitments are recognized at fair value and subse- quently measured at the higher of the initially recognized liability at fair value less cumulative amortization and a provision (refer to part 26). UBS uses them only in specific situations (e.g. restructuring, insolvency). – Other loan commitments. Other loan commitments are not recorded in the balance sheet. However, a provision is recognized if it is probable that a loss has been incurred and a reliable estimate of the amount of the obligation can be made (refer to part 26). 17) Cash and cash equivalents For purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition including cash and non-restricted balances with central banks, treasury bills, balances included in Due from banks, as well as money mar- ket paper included in Trading portfolio assets and Financial investments available-for-sale. 18) Physical commodities Physical commodities (precious metals, base metals, energy and other commodities) held by UBS as a result of its broker- trader activities are accounted for at fair value less costs to sell and recognized within the Trading portfolio. Changes in fair value less costs to sell are recorded in Net trading income. 19) Property and equipment Property and equipment includes own-used properties, in- vestment properties, leasehold improvements, IT, software and communication and other machines and equipment. With the exception of investment properties, Property and equipment is carried at cost, less accumulated deprecia- tion 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 utiliza- tion 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 pur- poses, whereas investment property is defined as property held to earn rental income 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 ac- counted 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 custom- ize 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 lia- bility is recognized to reflect the obligation incurred. Rein- statement costs are recognized in profit and loss through depreciation of the capitalized leasehold improvements over their estimated useful lives. 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. 271 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements 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 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 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 book 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 change. UBS employs internal real estate experts to deter- mine the fair value of investment property by applying rec- ognized valuation techniques. In cases where prices of re- cent market transactions of comparable properties are available, fair value is determined by reference to these transactions. Estimated useful life of property and equipment Property and equipment is depreciated on a straight-line ba- sis over its estimated useful life as follows: Properties, excluding land Leasehold improvements Other machines and equipment IT, software and communication Not exceeding 50 years Residual lease term, but not exceeding 10 years Not exceeding 10 years Not exceeding 5 years 20) 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 impair- ment exists. The impairment test is conducted at the seg- ment level as reported in Note 2a. The segment has been determined as the cash-generating unit for impairment test- ing 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 intangi- ble items arising from business combinations and certain pur- chased trademarks and similar items. Intangible assets are recognized at cost. The cost of an intangible asset acquired in a business combination is its fair value at the date of acquisi- tion. 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. Intangible assets with an indefinite useful life are not amortized. Gener- ally, all identified intangible assets of UBS have a definite use- ful life. At each balance sheet date, intangible assets are re- viewed for indications of impairment or changes in estimated future benefits. If such indications exist, the intangible assets are analyzed to assess whether their carrying amount is fully recoverable. An impairment loss is recognized if the carrying amount exceeds the recoverable amount. Intangible assets are classified into two categories: a) in- frastructure, and b) customer relationships, contractual rights and other. Infrastructure consists of an intangible asset recognized in connection with the acquisition of PaineWeb- ber Group, Inc. Customer relationships, contractual rights and other includes mainly intangible assets for client rela- tionships, non-compete agreements, favorable contracts, proprietary software, trademarks and trade names acquired in business combinations. 21) 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 de- ferred 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 dif- ferences between the carrying amounts of assets and liabili- ties 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 differ- ences 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 de- ferred) are offset when they arise from the same tax report- ing 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 rec- ognized (i) upon the acquisition of a subsidiary, (ii) for unreal- ized 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 cur- rency 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 rec- ognized in a business combination (item (i)) are considered when determining goodwill. Items (ii), (iii) and (iv) are re- corded in Net income recognized directly in equity. 272 22) Debt issued Money Market paper 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, us- ing the effective interest rate method to amortize cost at inception to the redemption value over the life of the debt. Debt without embedded derivative Issued debt instruments without embedded derivatives are accounted for at amortized cost. However, it is the Group’s policy to apply fair value hedge accounting to its fixed-rate debt instruments when the interest rate risk is managed on a mark-to-market basis. When fair value hedge accounting is applied to fixed-rate debt instruments, the carrying values of debt issued are adjusted for changes in fair value related to the hedged exposure rather than carried at amortized cost – refer to part 15) for further discussion. Debt with embedded derivatives (related to UBS AG shares) Debt instruments issued with embedded derivatives that are re- lated to UBS AG shares (e.g. mandatory convertible notes) are separated into a liability and an equity component at issue date if the derivative is settled by UBS receiving or delivering a fixed number of its own shares in exchange for a fixed amount of cash or another financial asset. When a 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 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 compo- nent and reported in Share premium. Subsequent changes in fair value of the separated equity component are not recog- nized. 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 cash or net share settlement alternative, then the sep- arated 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 (“Fair Value Option”) – refer to part 8). Debt with embedded derivatives (not related to UBS AG shares) Debt instruments issued with embedded derivatives that are related to non-UBS AG equity instruments, foreign ex- change, interest rate, credit instruments or indices are con- sidered structured debt instruments. UBS has designated most of its structured debt instruments at fair value through profit or loss (“Fair Value Option”) – see part 8). If such in- struments 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 sub- sequently measured at amortized cost. The fair value option is not applied to certain hybrid instruments which contain bifurcatable embedded derivatives with references to for- eign 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. 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. Interest expense on debt instruments is included in Inter- est on debt issued. Refer to Note 19 for further details on debt issued. 23) Post-employment benefits UBS sponsors a number of post-employment benefit plans for its employees worldwide, which include defined benefit and defined contribution plans, and other post-retirement benefits such as medical and life insurance benefits. Defined benefit plans Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of ser- vice and compensation. The defined benefit liability recognized in the balance sheet is the present value of the defined obligation at the bal- ance sheet date less the fair value of the plan assets at the balance sheet date, together with adjustments for any unrec- ognized actuarial gains and losses and unrecognized past ser- vice cost. If the defined benefit liability is negative (i.e. a de- fined benefit asset) measurement of the asset is limited to the lower of the defined benefit asset and the total of any cumu- lative unrecognized net actuarial losses plus unrecognized past service cost plus the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. UBS applies the projected unit credit method to determine the present value of its de- fined benefit obligation and the related current service cost and, where applicable, past service cost. These amounts are calculated annually by independent actuaries. The principal actuarial assumptions used are set out in Note 30. UBS recognizes a portion of its actuarial gains and losses as income or expense if the net cumulative unrecognized ac- tuarial gains and losses at the end of the previous reporting period are outside the corridor defined as the greater of: a) 10% of the present value of the defined benefit obligation at that date (before deducting the fair value of plan assets); and b) 10% of the fair value of any plan assets at that date. 273 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements 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. 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 materi- al, and reductions of less than 5% are generally not recog- nized. Defined contribution plans A defined contribution plan is a pension plan under which UBS pays fixed contributions into a separate entity. UBS has no legal or constructive obligation to pay further contribu- tions if the plan does not hold sufficient assets to pay em- ployees the benefits relating to employee service in the cur- rent and prior periods. UBS’s contributions are expensed when the employees have rendered services in exchange for such contributions; this is generally in the year of contribu- tion. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future pay- ments is available. Other post-retirement benefits UBS also provides post-retirement medical and life insurance benefits to retirees in the US and the UK. The expected costs of these benefits are recognized over the period of employ- ment using the same accounting methodology used for the defined benefit plans. 24) Equity participation and other compensation plans Equity participation plans UBS has established several equity participation plans in the form of share plans, option plans and share-settled stock ap- preciation right (SAR) plans. UBS’s equity participation plans are mandatory, discretionary, or voluntary plans. UBS recog- nizes the fair value of share, option and SAR awards, deter- mined 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 pro- visions (i.e. good leaver clauses) and no vesting conditions are considered vested at the grant date because no future service is required. Compensation expense is fully recognized on the grant date or is recognized in a period prior to the grant date if the bank can substantiate that the award is attributable to past service and the amount of the award can be reasonably and reliably estimated. The awards remain forfeitable until the legal vesting date if certain conditions are not met. Forfeiture events occurring after the grant date do not result in a reversal of compensation expense because the related services have been received. Forfeiture events occurring before the grant date result in the reversal of compensation expense. Plans containing vesting conditions have either a tiered vesting structure, which vest in increments over that period or a cliff vesting structure, which vest at the end of the pe- riod. Such plans may contain provisions that shorten the re- quired service period due to retirement eligibility. In such in- stances, UBS recognizes compensation expense over the shorter of the legal vesting period and the period from grant to the retirement eligibility date of the employee. Forfeiture of these awards during the service period results in a reversal of compensation expense. The fair value of a share is determined as the average of the high and low UBS share price at the date of grant ad- justed, where applicable, for an employee’s non-entitlement to dividends during the vesting period, any post-vesting sale and hedge restrictions, and non-vesting conditions. The fair value of an option and a SAR is determined by means of a Monte Carlo simulation which takes into account the spe- cific terms and conditions under which the options and SARs are granted. Equity settled awards are classified as equity instruments. The fair value of an equity-settled award is not remeasured subsequent to the grant date, unless an award is modified such that its fair value immediately after modification ex- ceeds its fair value immediately prior to modification. Any increase in fair value resulting from a modification is recog- nized as compensation expense, either over the remaining service period or immediately for vested awards. Cash settled awards are classified as liabilities and remea- sured to fair value at each balance sheet date as long as the award is outstanding. Decreases in fair value reduce compen- sation expense, and no compensation expense, on a cumu- lative basis, is recognized for awards that expire worthless or remain unexercised. Other compensation plans UBS has established other fixed and variable deferred cash compensation plans, the value of which is not linked to UBS’s own equity. UBS’s deferred cash compensation plans are mandatory or discretionary plans. The grant date fair value of fixed deferred cash awards is recognized as compensation expense over the service peri- od, which is the period the employee is obligated to work in order to become entitled to the award. Variable deferred cash compensation is generally awarded in the form of alternative investment vehicles (AIVs). The grant date fair value for AIVs 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. Refer to Note 31 for further details on equity participation and other compensation plans. 274 25) Amounts due under unit-linked investment contracts UBS’s financial liabilities from unit-linked contracts are pre- sented 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 associ- ated with the reference asset pool. The financial liability rep- resents the amount due to unit holders and is equal to the fair value of the reference asset pool. Assets held under unit-linked investment contract are presented as trading portfolio assets. 26) Provisions Provisions are recognized when UBS has a present legal or constructive obligation as a result of past events, it is prob- able that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. 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 and restructuring costs. 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 re- flects 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. 27) 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 cost. Treasury shares are deducted from total shareholders’ equity until they are cancelled or reissued. The difference between the proceeds from sales of Treasury shares and their weighted average cost (net of tax, if any) is reported as Share premium. Contracts with gross physical settlement (except physically settled written put options and forward share purchase contracts) Contracts that require gross physical settlement in UBS AG shares are classified in Equity as Share premium (provided a fixed amount of shares are exchanged against a fixed amount of cash) and accounted for at cost. They are added to or deducted from equity until settlement of such con- tracts. Upon settlement of such contracts, the difference be- tween the proceeds received and their cost (net of tax, if any) are reported as Share premium. Transaction cost related to share issuance of equity instruments Incremental costs directly attributable to the issue of new shares or contracts with physical settlement (classified as eq- uity instruments) are shown in equity as “transaction cost related to share issuance” and are a deduction of equity, net of tax, from the proceeds. Contracts with net cash settlement or net cash settlement option Contracts on UBS AG shares that require net cash settle- ment, or provide the counterparty or UBS with a settlement option which includes a choice of settling net in cash are classified as trading instruments, with changes in fair value reported in the income statement as “net trading income”, except for written put options and forward share purchase contracts. Physically settled written put options and forward share purchase contracts Physically settled written put options and forward share pur- chase contracts, including contracts where physical settle- ment is a settlement 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 lia- bility. The liability is subsequently accreted, using the effec- tive interest rate method, over the life of the contract to the nominal purchase obligation by recognizing interest ex- pense. Upon settlement of the contract, the liability is derec- ognized, and the amount of equity originally recognized as a liability is reclassified within Equity to Treasury shares. The premium received for writing put options is recognized di- rectly in Share premium. Minority interests Net profit and Equity are presented including minority inter- ests. Net profit is split into Net profit attributable to UBS shareholders and Net profit attributable to minority inter- ests. Equity is split into Equity attributable to UBS sharehold- ers and Equity attributable to minority interests. Trust preferred securities issued UBS has issued trust preferred securities through consolidat- ed 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 sub- ordinated 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 held by third parties and treated as minority interests in UBS’s con- solidated financial statements. The full dividend payment obligation on these trust preferred securities issued is reclas- sified from Equity to a corresponding liability once a coupon payment becomes mandatory, i.e. when it is triggered by a contractually determined event. In the income statement the full dividend payment is reclassified from Net profit attribut- able to UBS shareholders to Net profit attributable to minor- 275 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements ity interests at that time. UBS bonds held by preferred fund- ing trusts are eliminated in consolidation. finance lease, while the non-existence of such conditions nor- mally leads to a classification as an operating lease. 28) 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 such assets or disposal groups are available for immediate sale in their present con- dition 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 buy- er, 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 Oth- er 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 coordinated plan to dispose of a separate major line of business or geographical area of operations, or c) is a subsidiary acquired exclusively with a view to resale (e.g. certain private equity investments). Net profit from discontinued operations includes the net total of operating profit and loss before tax from operations, in- cluding net gain or loss on sale before tax or measurement to fair value less costs to sell and discontinued 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 opera- tions 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. Refer to Note 37 for details. 29) Leasing UBS enters into lease contracts, predominantly of premises and equipment, as a lessor and a lessee. The terms and condi- tions of these contracts are assessed and the leases are classi- fied 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 owner- ship 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) whether 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; 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 conditions are met, the lease is generally classified as a Lease contracts classified as operating leases where UBS is the lessee are disclosed in Note 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 bene- fits to be received under it, which requires that a lease contract is considered onerous in its entirety. A provision for onerous lease contracts often includes significant vacant rental space. 30) Fee income UBS earns fee income from a diverse range of services it pro- vides to its customers. Fee income can be divided into two broad categories: income earned from services that are pro- vided over a certain period of time, for which customers are generally billed on an annual or semi-annual basis, and in- come 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 recog- nized when the service has been completed. Performance- linked fees or fee components are recognized when the rec- ognition 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 un- til the loan is drawn down, and then recognized as an ad- justment 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 commissions received up-front. Fees predominantly earned from providing transaction-type ser- vices include underwriting fees, corporate finance fees and brokerage fees. 31) Foreign currency translation Transactions denominated in foreign currency are translated into the functional currency of the reporting unit at the spot exchange rate on the date of the transaction. At the balance sheet date, all assets and liabilities denominated in foreign cur- rency except non-monetary items are translated using the clos- ing exchange rate. Non-monetary items measured in terms of historical cost are translated at the exchange rate at the date of the transaction. Resulting foreign exchange differences are recognized in Net trading income, except for non-monetary financial investments available-for-sale which are recorded di- rectly in Equity until the asset is sold or becomes impaired. 276 Upon consolidation, assets and liabilities of foreign oper- ations are translated into Swiss francs (CHF) – UBS’s presen- tation currency – at the closing exchange rate at the balance sheet date, and income and expense items are translated at the average rate for the period. Differences resulting from the use of different exchange rates are recognized directly in Foreign currency translation within Equity. Upon disposal of foreign operations the related foreign currency translation impact previously deferred in equity is reclassified to Other income. 32) Earnings per share (EPS) Basic earnings per share are calculated by dividing the net profit or loss for the period attributable to ordinary share- holders 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 and adjusting the net 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, war- rants, convertible debt securities or other contracts to issue ordinary shares were converted or exercised into ordinary shares. 33) Segment reporting In 2009, UBS‘s businesses, i.e. wealth management and Swiss banking business, asset management and investment banking were organized on a worldwide basis into four busi- ness divisions and the Corporate Center, taken into consid- eration the economic characteristics of the businesses. The four business divisions, also known as the operating seg- ments or reportable segments, were Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and Investment Bank. In the internal manage- ment report to the Group Executive Board (GEB) or the chief operating decision maker, the financial information about the four reportable segments and Corporate Center was separately presented. This internal management view was the basis for the external segment reporting. Corporate Cen- ter predominantly includes certain costs relating to Group functions and elimination items and it is not considered an operating segment under IFRS 8. The costs of shared service functions like risk management and control, finance, legal and compliance, marketing and communications, human re- sources, information technology infrastructure and service centres are charged out to the business divisions based on internal accounting policies. UBS’s internal accounting policies determine the revenues and expenses directly attributable to each business division. Internal charges and transfer pricing adjustments are reflect- ed in the business division performances. Revenue-sharing agreements are used to allocate exter- nal customer revenues to business divisions on a reasonable basis. Due to the present arrangement of revenue-sharing agreements, the total intersegment revenues for UBS are im- material. The costs of shared services and control functions man- aged by Corporate Center are allocated to the direct cost lines of personnel expenses, general and administrative ex- penses and depreciation in the respective business division income statements, based on internally determined alloca- tion keys. Net interest income is allocated to the business divisions based on their balance sheet positions. Assets and liabili- ties of the business divisions are funded through and invest- ed with the central treasury department, with the net mar- gin reflected in the results of each business division. To complete the allocation, Corporate Center transfers interest income earned from managing UBS’s consolidated equity back to the reportable segments based on the average at- tributed equity. Commissions are credited to the business division based on the corresponding customer relationship. Revenue-shar- ing agreements are used for the allocation of customer rev- enues where several business divisions are involved in the value-creation chain. In line with the internal management reporting, segment assets are reported without intercompany balances or on a third-party view basis. Refer to Note 2a “Segment report- ing”. For the purpose of segment reporting under IFRS 8, the non-current assets consist of investment in associates and joint ventures, goodwill, other intangible assets as well as plant, property and equipment. 34) 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. Netted positions include positive and negative replacement values of OTC in- terest rate swaps transacted with London Clearing House. The positions are netted by currency and across maturities. Furthermore, amounts included in Loans and Due to cus- tomers related to UBS’s Prime Brokerage Business have been netted, where possible. n o i t a m r o f n i l a i c n a n i F 277 Financial information Notes to the consolidated financial statements b) Changes in accounting policies, comparability and other adjustments Restatements made to the financial statements 2008 UBS has restated its 2008 financial statements to correct identified accounting errors related to the 2008 financial statements. These errors were not material to the annual or quarterly 2008 financial statements, but related corrections would have been material to first quarter 2009 financial statements. On 21 May 2009, UBS re-filed its US Form 20-F for the year 2008, which included the restated 2008 finan- cial statements. The restatement comprises three items in excess of CHF 100 million as follows: The fair value of auction rate securities purchase commit- ments at 31 December 2008, which are recognized as nega- tive replacement values on UBS’s balance sheet, was in- creased by CHF 112 million, resulting in a corresponding charge to net trading income. For certain assets reclassified from “Held-for-trading” to “Loans and receivables” in fourth quarter 2008, recognition of interest income based on the effective interest rate meth- od was reduced by CHF 180 million. Other assets were re- duced accordingly as of 31 December 2008. The partial disposals of an investment in a consolidated investment fund in 2008 gave rise to the realization of the related foreign currency translation loss deferred in share- holders’ equity. This adjustment reduced other income for the year 2008 by CHF 192 million but did not have a net impact on UBS’s equity. In addition to the abovementioned items, a number of misstatements individually below CHF 65 million were adjusted. The aggregate net effect of these items on net profit attributable to UBS shareholders was an increase of net profit attributable to shareholders of CHF 79 million. The total net impact of all restated items on the 2008 re- sults was a reduction of net profit and net profit attributable to UBS shareholders of CHF 405 million, a reduction of eq- uity and equity attributable to UBS shareholders of CHF 269 million, and a reduction of basic and diluted earnings per share by CHF 0.15 and CHF 0.14 respectively. There was no effect on income tax expense. Effective 2009 IAS 1 (revised) Presentation of Financial Statements Effective 1 January 2009, the revised International Account- ing Standard (IAS) 1 affected the presentation of owner changes in equity and of comprehensive income. UBS con- tinued to present owner changes in equity in the “statement of changes in equity”, but detailed information relating to non-owner changes in equity, such as foreign exchange translation, cash flow hedges and financial investments available-for-sale, were presented in the “Statement of com- prehensive income”. When implementing these amendments effective 1 Janu- ary 2009, UBS also adjusted the format of its “statement of changes in equity” and replaced the “statement of recog- nized income and expense” in the financial statements of previous years with a “statement of comprehensive in- come”. Preferred securities issued by consolidated trusts are reported as “equity attributable to minority interests”, as they are equity instruments held by third parties. As these securities make up the largest part of UBS’s equity attribut- able to minority interests, UBS discloses movement informa- tion in a separate table. UBS also re-assessed its accounting treatment of divi- dends from trust preferred securities. In line with the classifi- cation of trust preferred securities as equity instruments, UBS recognizes liabilities for the full dividend payment obli- gation once a coupon payment becomes mandatory, i.e., when it is triggered by a contractually determined event. In the income statement, the same amount is reclassified from net profit attributable to UBS shareholders to net profit at- tributable to minority interests. IAS 1 (revised) Presentation of Financial Statements, and IAS 32 (revised) Financial Instruments: Presentation The IASB issued a further amendment to IAS 1 and an amendment to IAS 32 regarding puttable financial instru- ments and obligations arising on liquidation. The IAS 32 amendment clarifies under which circumstances puttable fi- nancial 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 addi- tional information about puttable financial instruments and obligations arising on liquidations which have to be treated as equity instruments. UBS adopted the amend- ments on 1 January 2009. The adoption of the amendments did not have a significant impact on UBS’s Financial State- ments. IFRS 8 Operating Segments Effective as of 1 January 2009, UBS adopted IFRS 8 Operat- ing Segments which replaced IAS 14 Segment Reporting. Under the requirements of the new standard, UBS’s external segmental reporting is now based on the internal manage- ment 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. In accordance with the new UBS structure announced in February 2009, UBS disclosed four reportable segments. These segments are the business divisions – Wealth Manage- ment & Swiss Bank, Wealth Management Americas, Global 278 Asset Management and Investment Bank. While the Corpo- rate Center does not meet the requirements of an operating segment, it is also shown separately. Segment information from prior periods in Note 2a has been restated to conform to the requirements of this new standard. In addition, good- will and intangible assets presented in Note 16 have also been reallocated in order to reflect the revised segment re- porting structure. As UBS’s reportable segment operations are mainly finan- cial, the total interest income and expense for all reportable segments are presented on a net basis. Based on the present arrangement of revenue-sharing agreements, the total inter- segment revenues for UBS are immaterial. Apart from that, the segment assets are disclosed without the intercompany balances and this basis is in line with the internal manage- ment reporting. For more details on the basis on which the segment information is prepared and reconciled to the amounts presented in UBS’s income statement and balance sheet, refer to Note 2a. IFRS 7 (revised) Financial Instruments: Disclosures This standard was revised in March 2009 when the Interna- tional Accounting Standards Board (IASB) published the amendment “Improving Disclosures about Financial Instru- ments”. Effective 1 January 2009, the amendment requires enhanced disclosures about fair value measurements and li- quidity risk. The enhanced fair value measurement disclosure require- ments include: a fair value hierarchy (i.e. categorization of all financial instruments into levels 1, 2 and 3 based on the rele- vant definitions); significant transfers between level 1 and level 2; reconciliation of level 3 instruments at the beginning of the period to the ending balance (level 3 movement table); level 3 profit or loss for positions still held at balance sheet date; and sensitivity information for the total position of level 3 instru- ments and the basis for the calculation of such information. The amended liquidity risk disclosure requirements largely confirm the previous rules for providing maturity informa- tion for non-derivative financial liabilities, but amend the rules for providing maturity information for derivative finan- cial liabilities. Reassessment of Embedded Derivatives The International Financial Reporting Interpretations Com- mittee (IFRIC) issued in March 2009 the supplement Embed- ded Derivatives: Amendments to IFRIC 9 and IAS 39. This guidance amends IFRIC 9 Reassessment of Embedded De- rivatives, and IAS 39 Financial Instruments: Recognition and Measurement. The amendments clarify that on reclassifica- tion of a financial asset out of the “Held for trading” catego- ry, all embedded derivatives have to be assessed and, if nec- essary, separately accounted for in the financial statements. The application of this guidance did not materially impact UBS’s financial statements. IFRIC 15 Agreements 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 pro- vides guidance on the accounting for agreements for the con- struction of real estate where entities enter into agreements with buyers before construction has been completed and the timing of revenue recognition. The application of this guidance did not materially impact UBS’s financial statements. IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 16 was issued on 1 October 2008 and became effec- tive on 1 January 2009. IFRIC 16 provides guidance in iden- tifying the foreign currency risks that qualify as a hedged risk in the hedge of a net investment in a foreign operation; where, within a group, hedging instruments that are hedges of a net investment in a foreign operation can be held to qualify for hedge accounting, and how an entity should de- termine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item. The impact of this interpretation on UBS’s financial statements was immaterial. IAS 24 Related Party Disclosures In November 2009, the IASB amended IAS 24 Related Party Disclosures with latest possible effective date 1 January 2011. UBS has early adopted the revised requirements in its annual financial statements 2009. The revised standard amends the definition of related parties, in particular the relationship be- tween UBS and associated companies of UBS’s key manage- ment personnel or their close family members. Transactions between UBS and associated companies of UBS key manage- ment personnel over which UBS key management personnel does not have control or joint control are no longer consid- ered related party transactions. Due to the application of the revised guidance, related party transactions disclosed in Note 32e of the annual financial statements 2008 have been significantly reduced. Balances and movements of loans to related parties have been reduced by CHF 668 million at 31 December 2008 and CHF 530 million at 31 December 2007; and fees received for services provided by UBS have been reduced by CHF 11 million in 2008 and CHF 10 million in 2007. Allocation of Shared Services Costs in Segment Disclosures From 2009 onwards, ITI and Group Off-shoring costs man- aged by the Corporate Center are allocated to the direct cost lines personnel expenses, general and administrative expens- es, and depreciation, in the respective business division in- come statements, based on appropriate internally deter- mined allocation keys. In the Corporate Center income statement, costs allocated to the business divisions are de- ducted from the respective cost lines. In previous reports, these costs were presented as an expense on the line “Services (to) / from other business divisions” within each 279 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Impact on income statement lines For the comparative 12-month period in 2008, the following allocations were made: CHF million Personnel expenses General and administrative expenses Depreciation of property and equipment Services (to) / from other business divisions Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Corporate Center 228 328 163 (719) 85 121 60 (267) 20 28 15 (62) 300 431 216 (949) (633) (909) (455) 1,997 business division and an offsetting corresponding amount on that line in the Corporate Center. The new presentation format provides greater transparency by allocating shared service costs to direct cost lines in divisional income state- ments. Comparative periods have been adjusted. Group results and business division performance before tax in previous periods were not impacted by this policy change. Unit-linked Investment Contracts In fourth quarter 2009, UBS decided to present Wealth Man- agement & Swiss Banking’s obligations under unit-linked in- vestment contracts under Other liabilities in order to align the treatment with similar contracts issued by Global Asset Management. In the past, the respective obligations of Wealth Management & Swiss Banking have been reported under Due to customers. UBS has retrospectively applied this change in presentation. The change in presentation resulted in the following effects on the balance sheet for 1 January 2008 and 31 December 2008: a decrease of Due to custom- ers and a corresponding increase in amounts due under Oth- er liabilities on the balance sheet (unit-linked investment contracts) of CHF 11,787 million and CHF 9,033 million, re- spectively. The change in presentation did not impact UBS’s total liabilities, income statements or earnings per share for these periods. Effective in 2008 and earlier 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 Cancellations and fully restated the two comparative prior years. The amended standard clarifies the definition of vesting condi- tions and the accounting treatment of cancellations. Under the amended standard, UBS is required to distinguish be- tween vesting conditions (such as service and performance conditions) and non-vesting conditions. The amended standard no longer considers vesting con- ditions 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 re- tained 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 ap- proximately 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 perfor- mance 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 de- ferred tax liabilities) increased by approximately CHF 0.6 bil- lion 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 ret- rospective 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-com- pete provisions and sale and hedge restrictions that no longer qualify as vesting conditions under the amended standard. Reclassifications of Financial Assets 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 reclassified out of the “Held for trading” category if the firm had the intent and abil- ity to hold them for the foreseeable future or until maturity. 280 Although the amendment could have been applied retro- spectively from 1 July 2008, UBS decided at the end of Octo- ber 2008 to apply the amendment with effect from 1 Octo- ber 2008 following an assessment of the implications on its financial statements. Refer to Note 29b for further details on reclassification of financial assets. 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 invest- ments. Starting first quarter 2008, UBS presented the re- maining activities from this business, mainly financial invest- ments available-for-sale, under Corporate Center. c) International Financial Reporting Standards and Interpretations to be adopted in 2010 and later Effective in 2010 International Accounting Standards Board Improvements to IFRS 2009 The issued amendments to twelve IFRS standards as part of its annual improvements project in April 2009. The adoption of the amendments could result in accounting changes for presen- tation, recognition or measurement purposes. The improve- ments to IFRS 2009 will be adopted by UBS as of 1 January 2010. UBS does not expect these amendments to have a significant impact on UBS’s financial statements. Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items The amendment to IAS 39 was issued in July 2008. The amendments provide additional guidance on the designa- tion of a hedged item. The amendment 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. The amendments to IAS 39 will be adopted by UBS as of 1 Janu- ary 2010. UBS does not expect the amendments to have a significant impact on UBS’s financial statements. − Transaction costs incurred by the acquirer will no longer be part of the acquisition cost but will have to be ex- pensed as incurred. The revised IFRS 3 and IAS 27 are effective for annual pe- riods beginning on 1 January 2010 and have to be applied prospectively from the date of adoption. Business combina- tions consummated prior to that date will not be impacted. The amendments to IAS 27 (including the consequential amendments to IAS 21) require the effects (including foreign exchange translation) of all transactions with non-control- ling interests to be recorded in equity if there is no change in control. The standards also specify the accounting when control is lost: any remaining interest in the entity is remea- sured to fair value, and a gain or loss (including foreign ex- change translation) is recognized in profit or loss. The amendments to IAS 21 further clarify that no deferred for- eign currency translation gains and losses are to be released upon a partial repayment of share capital of a subsidiary without a loss of control. The IAS 21 amendments are effec- tive on 1 January 2010 and have to be applied prospectively from the date of adoption. Effective in 2011 and later, if not adopted early 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 27 Consoli- dated and Separate Financial Statements. The most signifi- cant 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 recog- nized once it meets the probability and reliably measur- able 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. IFRS 9 Financial Instruments In November 2009, the IASB issued IFRS 9 Financial instru- ments, which includes revised guidance on the classifica- tion and measurement of financial assets. The publication of IFRS 9 represents the completion of the first part of a multi-stage project to replace IAS 39 Financial instruments: recognition and measurement. Under the revised guidance, a financial asset is to be accounted for at amortized cost only if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Non-traded equity instruments may be accounted for at fair value through equity, but the subsequent release of amounts booked directly to equity into the income state- 281 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements ment is no longer permitted. All other financial assets are measured at fair value through profit or loss. UBS is cur- rently assessing the impact of the new standard on its fi- nancial statements. It is likely that a number of financial assets currently accounted for at amortized cost will be ac- counted for at fair value through profit or loss under the new standard because a) their contractual cash flows do not comprise solely payments of principal and interest on the principal, and / or b) UBS does not hold the assets with the intention to collect contractual cash flows they gener- ate. Certain debt securities currently classified as available- for-sale may satisfy the criteria for “amortized cost” ac- counting; debt securities available-for-sale failing these criteria will be accounted for at fair value. The effective date for mandatory adoption is 1 January 2013, with early adoption permitted. UBS did not adopt IFRS 9 for the year ended 31 December 2009. IFRIC 14 Prepayments of a Minimum Funding Requirement In November 2009, the IASB issued the amended IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Require- ments and their Interaction, which itself is an interpretation of IAS 19 Employee Benefits. The amendment applies in the lim- ited circumstances when an entity is subject to minimum funding requirements and makes an early payment of contri- butions to cover those requirements. The amendment permits an entity to treat the benefit of such an early payment as an asset. The amendment is effective on 1 January 2011. Early application is permitted. UBS does not expect to have an im- pact from this interpretation on its financial statements. 282 Note 2a Segment reporting In 2009, UBS’s businesses were reorganized on a worldwide basis into four business divisions and the Corporate Center. The business divisions Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank constitute one segment each. In to- tal, UBS reports four business segments and the Corporate Center in 2009. The Corporate Center includes all corporate functions, elimination items as well as the remaining industrial holdings activities and is not considered a business segment. Global Asset Management Global Asset Management is a large-scale asset manager with well diversified businesses across regions, capabilities and distribution channels. It offers investment capabilities and investment styles across all major traditional and alter- native asset classes. These include equities, fixed income, currency, hedge fund, real estate, infrastructure and private equity investment capabilities that can also be combined in multi-asset strategies. Wealth Management & Swiss Bank Wealth Management & Swiss Bank focuses on delivering comprehensive financial services to high net worth and ultra high net worth individuals around the world – except to those served by Wealth Management Americas – as well as private and corporate clients in Switzerland. UBS provides clients in over 40 countries, including Switzerland, with financial ad- vice, products and tools to fit their individual needs. UBS has a leading position across all client segments in Switzerland. Wealth Management Americas Wealth Management Americas provides advice-based relation- ships through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of ultra high net worth, high net worth and core af- fluent individuals and families. It includes the former Wealth Management US business unit, as well as the domestic Cana- dian business and the international business booked in the United States. Investment Bank The Investment Bank provides securities and other financial products and research in equities, fixed income, rates, for- eign exchange and precious metals. It also provides advisory services and access to the world’s capital markets for corpo- rate, institutional, intermediary and alternative asset man- agement clients. Corporate Center The Corporate Center seeks to ensure that the business divisions operate as a coherent and effective whole by pro- viding and managing support and control functions for the business divisions and the Group in such areas as risk con- trol, finance, legal and compliance, funding, capital and balance sheet management, management of foreign cur- rencies, communication and branding, human resources, in- formation technology, real estate, procurement, corporate development and service centres. n o i t a m r o f n i l a i c n a n i F 283 Financial information Notes to the consolidated financial statements Note 2a Segment reporting (continued) Internal charges and transfer pricing adjustments are reflected in the performance of each business. Revenue-sharing agree- ments 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. CHF million For the year ended 31 December 2009 Net interest income 1 Non-interest income Income 2 Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services to / from other business divisions Depreciation of property and equipment Impairment of goodwill 3 Amortization of intangible assets 3 Total operating expenses Performance from continuing operations before tax Performance from discontinued operations before tax Performance before tax 4 Tax expense on continuing operations Tax expense on discontinued operations Net profit Additional information 5 Total assets Additions to non-current assets Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Corporate Center 4,533 6,989 11,523 (133) 11,390 5,197 2,017 (90) 289 0 67 7,480 3,910 0 3,910 800 4,746 5,546 3 5,550 4,231 1,017 4 170 34 62 5,518 32 0 32 2 2,134 2,137 0 2,137 996 387 (74) 36 340 13 1,698 438 0 438 2,339 2,494 4,833 (1,698) 3,135 5,568 2,628 (147) 360 749 59 9,216 (6,081) 0 (6,081) (1,229) 1,623 394 (5) 389 551 199 306 193 0 0 1,250 (860) (7) (867) UBS 6,446 17,987 24,433 (1,832) 22,601 16,543 6,248 0 1,048 1,123 200 25,162 (2,561) (7) (2,569) (443) 0 (2,125) 248,140 43 53,197 59 20,238 11 991,964 81 26,999 745 1,340,538 939 1 Net interest income is disclosed to comply with the IFRS requirements. Refer to “Note 3 Net interest and trading income” for the information which corresponds to the view of management. 2 Impairments of financial investments available-for-sale for the year ended 31 December 2009 were as follows: Wealth Management & Swiss Bank CHF 158 million; Global Asset Management CHF 20 million; Investment Bank CHF 142 million; Corporate Center CHF 29 million. The total inter-segment revenues for the Group are immaterial as the majority of the revenues are allocated across the busi- ness divisions by means of revenue-sharing agreements. 3 Refer to “Note 16 Goodwill and intangible assets” of this report for further information regarding goodwill and other intangible assets by business division. 4 Refer to “Note 38 Reorganizations and disposals” for further information on the impact on performance before tax of the disposal of UBS Pactual and restructuring charges, and to “Note 27 Fair value of financial instruments” for further information on the allocation on own credit charges. 5 The segment assets are based on a third-party view and this is in line with the report- ing to the management, i.e. the amounts do not include inter-company balances. 284 Note 2a Segment reporting (continued) Internal charges and transfer pricing adjustments are reflected in the performance of each business. Revenue-sharing agree- ments 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. CHF million For the year ended 31 December 2008 Net interest income Non-interest income Income 1 Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services to / from other business divisions Depreciation of property and equipment Impairment of goodwill 2 Amortization of intangible assets 2 Total operating expenses Performance from continuing operations before tax Performance from discontinued operations before tax Performance before tax Tax expense on continuing operations Tax expense on discontinued operations Net profit Additional information 3 Total assets Additions to non-current assets Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Corporate Center 5,424 9,989 15,413 (392) 15,021 5,430 3,295 (73) 323 0 33 9,008 6,013 0 6,013 938 5,340 6,278 (29) 6,249 4,271 2,558 16 162 0 65 7,072 (823) 0 (823) (2) 2,906 2,905 0 2,904 946 462 88 44 0 33 1,572 1,333 0 1,333 2,007 (23,808) (21,800) (2,575) (24,375) 5,182 3,830 41 447 341 83 9,925 (34,300) 0 (34,300) (2,375) 3,373 998 0 998 433 353 (73) 265 0 0 979 19 198 217 UBS 5,992 (2,200) 3,792 (2,996) 796 16,262 10,498 0 1,241 341 213 28,555 (27,758) 198 (27,560) (6,837) 1 (20,724) 251,487 275 39,039 135 24,640 430 1,680,257 809 19,392 961 2,014,815 2,609 1 Impairments of financial investments available-for-sale for the year ended 31 December 2008 were as follows: Wealth Management & Swiss Bank CHF 19 million; Wealth Management Americas CHF 1 million; Global Asset Management CHF 22 million; Investment Bank CHF 121 million; Corporate Center CHF 40 million. 2 Refer to “Note 16 Goodwill and intangible assets” of this report for further information regarding goodwill and other intangible assets by business division. 3 The segment assets are based on a third-party view and this is in line with the reporting to the management, i.e. the amounts do not include inter-company balances. n o i t a m r o f n i l a i c n a n i F 285 Financial information Notes to the consolidated financial statements Note 2a Segment reporting (continued) Internal charges and transfer pricing adjustments are reflected in the performance of each business. Revenue-sharing agree- ments 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. CHF million For the year ended 31 December 2007 Net interest income Non-interest income Income 2 Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services to / from other business divisions Depreciation of property and equipment Amortization of intangible assets 4 Total operating expenses Performance from continuing operations before tax Performance from discontinued operations before tax Performance before tax Tax expense on continuing operations Tax expense on discontinued operations Net profit Additional information 5 Total assets Additions to non-current assets Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Corporate Center1 5,600 12,089 17,689 30 17,718 6,356 2,514 (43) 334 15 9,176 8,543 0 8,543 824 6,329 7,153 (2) 7,151 5,060 1,209 28 163 70 6,530 621 0 621 (76) 4,170 4,094 0 4,094 1,883 593 73 72 19 2,640 1,454 0 1,454 209 (747) (538) (266) (804) 11,633 3,800 (171) 431 3 172 15,865 (16,669) 0 (16,669) (1,220) 4,782 3,562 (0) 3,562 583 312 114 243 0 1,252 2,310 145 2,455 UBS 5,337 26,622 31,959 (238) 31,721 25,515 8,429 0 1,243 276 35,463 (3,742) 145 (3,597) 1,369 (258) (4,708) 256,738 223 34,730 416 43,500 553 1,922,815 1,111 17,109 1,927 2,274,891 4,230 1 Includes data from Industrial Holdings which was considered a reportable segment in 2007. Results of Industrial Holdings: Total operating income CHF 689 million, total operating expenses CHF 163 million, performance from continuing operations before tax CHF 526 million, profit from discontinued operations before tax CHF 138 million. 2 Impairments of financial investments available-for- sale for the year ended 31 December 2007 were as follows: Wealth Management & Swiss Bank CHF 11 million; Global Asset Management CHF 39 million; Investment Bank CHF 22 million; Corporate Center CHF 2 million. 3 Includes CHF 34 million for impairments of leasehold improvements and other machines and equipment. 4 Refer to “Note 16 Goodwill and intangible assets” of this report for further information regarding goodwill and other intangible assets by business division. 5 The segment assets are based on a third-party view and this is in line with the reporting to the management, i.e. the amounts do not include inter-company balances. 286 Note 2b Segment reporting by geographic location The geographic analysis of operating income and non-current assets is based on the location of the entity in which the trans- actions and assets are recorded. The divisions of the Group are managed on an autonomous basis worldwide with a focus on cross-divisional collaboration and the interest of UBS’s clients to yield the maximum possible profitability by product line for the Group. The geographical analysis of operating income and non-current assets is provided in order to comply with IFRS. For the year ended 31 December 2009 Switzerland United Kingdom Rest of Europe United States Asia Pacific Rest of the world Total For the year ended 31 December 2008 Switzerland United Kingdom Rest of Europe United States Asia Pacific Rest of the world Total For the year ended 31 December 2007 Switzerland United Kingdom Rest of Europe United States Asia Pacific Rest of the world Total Total operating income Total non-current assets CHF million Share % CHF million Share % 11,939 (3,999) 1,264 9,333 3,770 294 22,601 53 (18) 6 41 17 1 100 5,137 743 1,266 9,928 451 565 18,090 28 4 7 55 3 3 100 Total operating income Total non-current assets CHF million Share % CHF million Share % 11,564 (9,219) 6,132 (10,519) 3,122 (284) 796 1,453 (1,158) 770 (1,321) 392 (36) 100 5,207 805 1,337 10,505 495 2,184 20,533 25 4 7 51 2 11 100 Total operating income Total non-current assets CHF million Share % CHF million Share % 18,787 (1,671) 2,541 880 6,393 4,791 31,721 59 (5) 8 3 20 15 100 5,355 2,336 1,006 11,686 388 2,980 23,751 22 10 4 49 2 13 100 n o i t a m r o f n i l a i c n a n i F 287 Financial information Notes to the consolidated financial statements Income statement notes Note 3 Net interest and trading income Accounting standards require separate disclosure of “Net in- terest 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 in- come are generated by a range of different businesses. In many cases, a particular business can generate both net in- terest and trading income. Fixed income trading activity, for example, generates both trading profits and coupon in- come. UBS considers it to be more meaningful to analyze net interest and trading income according to the businesses that drive it. The second table below (“Breakdown by busi- CHF million Net interest and trading income Net interest income Net trading income Total net interest and trading income Breakdown by businesses Net income from trading businesses 1 Net income from interest margin businesses Net income from treasury activities and other Total net interest and trading income Net interest income 2 Interest income Interest earned on loans and advances 3 Interest earned on securities borrowed and reverse repurchase agreements Interest and dividend income from trading portfolio Interest income on financial assets designated at fair value Interest and dividend income from financial investments available-for-sale Total Interest expense Interest on amounts due to banks and customers Interest on securities lent and repurchase agreements Interest and dividend expense from trading portfolio Interest on financial liabilities designated at fair value Interest on debt issued Total Net interest income nesses”) provides information that corresponds to this view: “Net income from trading businesses” includes both interest and trading income generated by the Investment Bank, in- cluding its lending activities, and trading income generated by the other business divisions; “Net income from interest margin businesses” comprises interest income from the loan portfolios of Wealth Management & Swiss Bank and Wealth Management Americas; “Net income from treasury activities and other” reflects all income from the Group’s centralized treasury function. For the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 6,446 (324) 6,122 382 5,053 687 6,122 13,202 2,629 7,150 316 164 23,461 3,873 2,179 3,878 2,855 4,231 17,016 6,446 5,992 (25,820) (19,828) (27,203) 6,160 1,214 (19,828) 20,213 22,521 22,397 404 145 65,679 18,150 16,123 9,162 7,298 8,954 59,687 5,992 5,337 (8,353) (3,016) (10,658) 6,230 1,412 (3,016) 21,263 48,274 39,101 298 176 109,112 29,318 40,581 15,812 7,659 10,405 103,775 5,337 8 99 (18) (43) (35) (88) (68) (22) 13 (64) (79) (86) (58) (61) (53) (71) 8 1 Includes lending activities of the Investment Bank. 2 Interest includes forward points on foreign exchange swaps used to manage short-term interest rate risk on foreign currency loans and deposits. 3 Includes interest income on impaired loans and advances of CHF 95 million for 2009, CHF 99 million for 2008 and CHF 110 million for 2007. 288 Note 3 Net interest and trading income (continued) Net trading income 1 CHF million Investment Bank equities Investment Bank fixed income, currencies and commodities Other business divisions Net trading income of which: net gains / (losses) from financial assets designated at fair value of which: net gains / (losses) from financial liabilities designated at fair value 2 For the year ended 31.12.09 31.12.08 2,462 (5,455) 2,668 (324) 678 (6,741) 4,694 (35,040) 4,525 (25,820) (974) 44,284 31.12.07 9,048 (21,424) 4,023 (8,353) (30) (3,779) % change from 31.12.08 (48) 84 (41) 99 1 Refer to the table Net interest and trading income on the previous page for the Net income from trading businesses (for an explanation, read the corresponding introductory comment). 2 Financial liabilities designated at fair value are to a large extent economically hedged with derivatives and other instruments whose change in fair value is also reported in Net trading income. Refer to Note 27 for further information. Significant impacts on net trading income Net trading income in 2009 includes a loss of CHF 0.8 billion from credit valuation adjustments for monoline credit pro- tection (CHF 8.2 billion loss in 2008); refer to the “Risk man- agement and control” section of this report for more infor- mation on exposure to monolines. Additional losses of CHF 23.7 billion related to positions previously considered risk concentrations were included in 2008. The SNB transaction resulted in gains of CHF 0.1 billion from the valuation of UBS’s option to acquire the SNB StabFund’s equity and losses of CHF 0.2 billion due to price adjustments for positions transferred to the fund (losses of CHF 5.2 billion in 2008). A gain of CHF 0.3 billion (CHF 4.6 billion gain in 2008) was recorded on the valuation of the embedded derivative of the MCNs issued in 2008. Note 4 Net fee and commission income CHF million Equity underwriting fees Debt underwriting fees Total underwriting fees M&A and corporate finance fees Brokerage fees 1 Investment fund fees Portfolio management and advisory fees 2 Insurance-related and other fees Total securities trading and investment activity fees Credit-related fees and commissions Commission income from other services Total fee and commission income Brokerage fees paid 1 Other Total fee and commission expense Net fee and commission income of which: net brokerage fees For the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 1,590 796 2,386 881 6,217 4,000 5,863 264 19,611 339 878 20,827 1,748 1,368 3,116 17,712 4,469 1,138 818 1,957 1,662 8,209 5,583 7,667 317 25,394 273 1,010 26,677 1,763 1,984 3,748 22,929 6,445 2,564 1,178 3,742 2,768 10,211 7,422 9,454 423 34,020 279 1,017 35,316 2,540 2,142 4,682 30,634 7,671 40 (3) 22 (47) (24) (28) (24) (17) (23) 24 (13) (22) (1) (31) (17) (23) (31) 1 In 2009, UBS restated the amounts presented in previous periods on the lines Brokerage fees and Brokerage fees paid. Amounts previously disclosed for both lines have been decreased by CHF 146 mil- lion for the year ended 31 December 2008 and by CHF 70 million for the year ended 31 December 2007. Net fee and commission income is not affected. 2 Includes fiduciary and custodian fees, which were presented as separate lines in previous reports. n o i t a m r o f n i l a i c n a n i F 289 Financial information Notes to the consolidated financial statements Note 5 Other income CHF million Associates and subsidiaries Net gains from disposals of consolidated subsidiaries 1 Net gains from disposals of investments in associates Share of net profits of associates Total Financial investments available-for-sale Net gains from disposals Impairment charges Total Net income from investments in property 5 Net gains from investment properties 6 Other income from Industrial Holdings Other Total other income For the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 96 (1) 37 133 110 (349) 4 (239) 72 (39) 0 672 7 599 (184) 199 (6) 9 615 2 (202) 413 88 0 0 183 692 (70) 28 145 103 3,338 3 (71) 3,267 108 31 689 143 4,341 (82) (73) (18) 267 (13) 1 Includes foreign exchange amounts reclassified from equity upon disposal or deconsolidation of subsidiaries. 2009 includes a loss of CHF 498 million on sale of UBS Pactual. 2 Includes a gain of approximately CHF 360 million for the disposal of UBS’s equity stake in Bank of China. 3 Includes a pre-tax gain of CHF 1,950 million from UBS’s sale of its 20.7% stake in Julius Baer. 4 Includes impairments for a global real estate fund of CHF 155 million, Asian debt instruments of CHF 86 million and private equity investments of CHF 55 million. 5 Includes net rent received from third parties and net operating expenses. 6 Includes unrealized and realized gains from investment properties at fair value and foreclosed assets. 7 Includes a gain of CHF 304 million from the public tender offer for four subordinated bonds of UBS. Note 6 Personnel expenses CHF million Salaries and variable compensation Contractors Insurance and social security contributions Contribution to retirement plans Other personnel expenses Total personnel expenses of which: share-based personnel expense Note 7 General and administrative expenses CHF million Occupancy Rent and maintenance of IT and other equipment Telecommunications and postage Administration Marketing and public relations Travel and entertainment Professional fees Outsourcing of IT and other services Other Total general and administrative expenses 31.12.09 12,801 275 851 941 1,675 16,543 913 For the year ended 31.12.08 12,207 423 706 926 2,000 16,262 (94) % change from 31.12.08 5 (35) 21 2 (16) 2 31.12.07 20,715 630 1,290 922 1,958 25,515 3,173 For the year ended 31.12.09 1,420 31.12.08 1,516 31.12.07 1,569 623 697 695 225 412 830 836 512 6,248 669 888 926 408 728 1,085 1,029 3,249 1 10,498 701 948 991 585 1,029 1,106 1,233 267 8,429 % change from 31.12.08 (6) (7) (22) (25) (45) (43) (24) (19) (84) (40) 1 Includes 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. 290 Note 8 Earnings per share (EPS) and shares outstanding As of or for the year ended % change from 31.12.09 31.12.08 31.12.07 31.12.08 Basic earnings (CHF million) Net profit attributable to UBS shareholders from continuing operations from discontinued operations Diluted earnings (CHF million) Net profit attributable to UBS shareholders Less: (profit) / loss on equity derivative contracts Net profit attributable to UBS shareholders for diluted EPS from continuing operations from discontinued operations Weighted average shares outstanding Weighted average shares outstanding for basic EPS Potentially dilutive ordinary shares resulting from unvested exchangeable shares, in-the-money options and warrants outstanding 1 Weighted average shares outstanding for diluted EPS Potential ordinary shares from unexercised employee shares and in-the-money options not considered due to the anti-dilutive effect Earnings per share (CHF) Basic from continuing operations from discontinued operations Diluted from continuing operations from discontinued operations Shares outstanding Ordinary shares issued Treasury shares Shares outstanding Retrospective adjustments for stock dividend 3 Retrospective adjustments for rights issue 2 Retrospective adjustment for capital increase 4 Mandatory convertible notes and exchangeable shares 5 Shares outstanding for EPS (2,736) (2,719) (17) (2,736) (5) (2,741) (2,724) (17) (21,292) (21,442) 150 (21,292) (28) (21,320) (21,470) 150 (5,247) (5,650) 403 (5,247) (16) (5,263) (5,666) 403 3,661,086,266 2,792,023,098 2,182,836,078 754,948 1,151,556 3,661,841,214 2,793,174,654 1,467,326 2 2,184,303,404 20,166,373 27,909,964 53,668,047 (0.75) (0.74) 0.00 (0.75) (0.74) 0.00 (7.63) (7.68) 0.05 (7.63) (7.69) 0.05 (2.40) (2.59) 0.18 (2.41) (2.59) 0.18 3,558,112,753 2,932,580,549 2,073,547,344 37,553,872 61,903,121 158,105,524 3,520,558,881 2,870,677,428 1,915,441,820 23,252,487 273,264,461 605,547,748 95,772,091 141,850,917 17,439,825 518,711 3,793,823,342 3,499,477,663 2,171,023,364 87 87 87 82 87 87 31 (34) 31 (28) 90 90 (100) 90 90 (100) 21 (39) 23 (55) 8 1 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 288,915,585; 283,263,330 and 119,309,645 for the years ended 31 December 2009, 31 December 2008 and 31 December 2007 respectively. An additional 100 million ordinary shares (“contingent share issue”) related to the SNB transaction were not dilutive for the years ended 31 December 2009 and 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 carried out in 2008. 3 Shares outstanding are increased by 5% to reflect the 1:20 ratio of the stock dividend dis- tributed in 2008 for the financial year 2007. 4 Shares outstanding increased by 0.81% due to the capital increase in 2009. 5 31 December 2009 and 31 December 2008 include 272,651,005 shares for the mandatory convertible notes issued to two investors in March 2008. 31 December 2008 includes 332,225,913 shares for the mandatory convertible notes issued to the Swiss Confederation in December 2008. Remaining amounts related to exchangeable shares. All adjusted for the dilution effect of the stock dividend, the rights issue and the capital increase where applicable. n o i t a m r o f n i l a i c n a n i F 291 Financial information Notes to the consolidated financial statements Balance sheet notes: assets Note 9a Due from banks and loans (held at amortized cost) CHF million By type of exposure Banks, gross Allowance for credit losses Net due from banks Loans, gross Residential mortgages Commercial mortgages Other loans 1 Securities 2 Subtotal Allowance for credit losses of which: related to securities Net loans Net due from banks and loans (held at amortized cost) By geographical region (based on the location of the borrower) Switzerland United Kingdom Rest of Europe United States Asia Pacific Rest of the world Subtotal Allowance for credit losses Net due from banks, loans (held at amortized cost) and loans designated at fair value 3 By type of collateral Secured by real estate Collateralized by securities Guarantees and other collateral Unsecured Subtotal Allowance for credit losses Net due from banks, loans (held at amortized cost) and loans designated at fair value 3 31.12.09 31.12.08 46,606 (32) 46,574 121,031 19,970 141,237 27,237 309,475 (2,648) (179) 306,828 353,402 163,397 24,038 35,482 85,411 19,531 32,231 360,090 (2,680) 357,410 142,617 56,783 75,589 85,101 360,090 (2,680) 357,410 64,473 (22) 64,451 121,811 21,270 173,812 26,320 343,213 (2,905) (126) 340,308 404,759 166,798 30,540 47,724 105,907 23,279 38,590 412,838 (2,927) 409,911 145,491 56,312 113,032 98,003 412,838 (2,927) 409,911 1 Includes current accounts, loans and cash collateral for derivatives. 2 On 31 December 2009, includes reclassified US student loan auction rate securities (ARS) of CHF 7.8 billion (CHF 8.4 billion on 31 December 2008), other reclassified securities of CHF 11.5 billion (CHF 13.4 billion on 31 December 2008) and CHF 8.0 billion ARS acquired from clients (CHF 4.5 billion on 31 December 2008). 3 Includes loans designated at fair value of CHF 4.0 billion on 31 December 2009 and CHF 5.2 billion on 31 December 2008. For further details refer to “Note 12 Financial assets designated at fair value”. 292 Note 9b Allowances and provisions for credit losses CHF million Balance at the beginning of the year Write-offs Recoveries Increase / (decrease) in credit loss allowances and provisions recognized in the income statement Disposals Foreign currency translation and other adjustments Balance at the end of the year CHF million As a reduction of due from banks As a reduction of loans 1 As a reduction of securities borrowed Subtotal Included in other liabilities related to provisions for contingent claims Total allowances and provisions for credit losses Specific allowances and provisions Collective loan loss allowances and provisions Total 31.12.09 Total 31.12.08 3,047 (2,046) 52 1,806 (51) (37) 2,771 1 23 0 0 26 0 0 49 3,070 (2,046) 52 1,832 (51) (37) 2,820 1,164 (868) 44 2,996 (223) (43) 3,070 Specific allowances and provisions Collective loan loss allowances and provisions Total 31.12.09 Total 31.12.08 32 2,598 51 2,681 90 2,771 0 49 0 49 0 49 32 2,648 51 2,730 90 2,820 22 2,905 112 3,039 31 3,070 1 CHF 1,192 million are related to reclassified assets on 31 December 2009 and CHF 1,331 million on 31 December 2008. Note 10 Cash collateral on securities borrowed and lent, repurchase and reverse repurchase agreements The Group enters into collateralized reverse repurchase and repurchase agreements and securities borrowing and securi- ties 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 counter- 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 assets CHF million By counterparty Banks Customers Total Balance sheet liabilities CHF million By counterparty Banks Customers Total Cash collateral on securities borrowed 31.12.09 Reverse repurchase agreements 31.12.09 Cash collateral on securities borrowed 31.12.08 Reverse repurchase agreements 31.12.08 17,143 46,364 63,507 71,051 45,638 116,689 17,523 105,374 122,897 Cash collateral on securities lent 31.12.09 Repurchase agreements 31.12.09 Cash collateral on securities lent 31.12.08 7,268 727 7,995 26,167 38,008 64,175 12,181 1,881 14,063 110,254 114,393 224,648 Repurchase agreements 31.12.08 36,088 66,473 102,561 293 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 11 Trading portfolio The Group trades in debt instruments (including money market papers and tradeable loans), equity instruments, pre- cious metals, other commodities and derivatives to meet the financial needs of its clients and to generate revenue. Non-derivative traded instruments are included in the table below. For derivative instruments, refer to “Note 23 Deriva- tive instruments and hedge accounting”. The table below represents an IFRS accounting view. It does not reflect hedges and other risk mitigating factors, and the amounts therefore may not be reflective for risk exposures. CHF million Trading portfolio assets Debt instruments Level 1 Level 2 Level 3 Total 31.12.09 31.12.08 Government and government agencies 59,731 21,656 742 of which: Switzerland of which: United States of which: Japan Banks Corporates and other Total debt instruments of which: pledged as collateral of which: pledged as collateral and can be repledged or resold by counterparty Equity instruments of which: pledged as collateral of which: pledged as collateral and can be repledged or resold by counterparty Subtotal Precious metals and other commodities Total trading portfolio assets Trading portfolio liabilities Debt instruments Government and government agencies of which: Switzerland of which: United States of which: Japan Banks Corporates and other Total debt instruments Equity instruments Total trading portfolio liabilities 578 3,293 63,601 13,768 28,123 63,546 678 10,462 11,882 61,788 14,317 258 125,389 77,864 12,141 20,389 5,917 0 753 298 21,441 12,014 33,454 2,617 4,989 13,523 70 13,593 102 161 262 160 422 82,129 155 22,498 25,795 15,024 41,878 139,030 46,348 30,622 76,364 18,400 13,599 215,393 16,864 232,258 26,306 85 10,351 3,384 3,472 5,447 35,226 12,243 47,469 115,696 121 31,366 46,049 23,175 85,991 224,862 62,153 30,903 77,258 15,849 9,312 302,120 9,934 312,054 34,043 129 18,914 2,344 4,354 10,945 49,342 13,089 62,431 294 Note 12 Financial assets designated at fair value CHF million Loans Structured loans Reverse repurchase and securities borrowing agreements Banks Customers Other financial assets Total financial assets designated at fair value 31.12.09 3,052 957 3,712 1,662 840 10,223 31.12.08 4,500 653 4,321 2,329 1,079 12,882 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 9,383 million at 31 December 2009 and CHF 11,803 million at 31 December 2008). 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 2009 and 31 December 2008 is mitigated by collateral of CHF 4,845 million and CHF 6,335 million, respectively. The amount by which credit derivatives or similar instru- ments mitigate the maximum exposure to credit loss of loans and structured loans designated at fair value is as follows: CHF million Notional amount of loans and structured loans Credit derivatives related to loans and structured loans – notional amounts 1 Credit derivatives related to loans and structured loans – fair value 1 Additional Information 31.12.09 4,224 2,699 90 31.12.08 6,186 4,314 547 For the year ended Cumulative from inception until the year ended CHF million 31.12.09 31.12.08 31.12.09 31.12.08 Change in fair value of loans and structured loans designated at fair value, attributable to changes in credit risk 2 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 value 2 530 (435) (668) 486 (128) 90 (659) 547 1 Credit derivatives contracts include credit default swaps, total return swaps, 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 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 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. n o i t a m r o f n i l a i c n a n i F 295 Financial information Notes to the consolidated financial statements Note 13 Financial investments available-for-sale CHF million Debt instruments Level 1 Level 2 Level 3 Total 31.12.09 31.12.08 Government and government agencies 72,510 3,591 41 of which: Switzerland of which: United States of which: Germany of which: France of which: United Kingdom of which: Japan Banks Corporates and other Total debt instruments 1 Equity instruments Total financial investments available-for-sale Net unrealized gains (losses) – before tax Net unrealized gains (losses) – after tax 1,748 14 74,271 35 74,307 1,981 95 5,667 405 6,073 4 422 467 910 1,378 76,142 232 46,906 7,958 7,936 4,774 3,950 3,732 531 80,406 1,351 81,757 500 391 2,349 3 281 0 0 2,014 0 180 1,038 3,567 1,681 5,248 403 349 1 The increase in 2009 is mainly related to UBS’s strategic decision to rebalance its liquidity reserve which led to a shift from reverse repurchase agreements and trading portfolio assets into debt instru- ments available-for-sale. These instruments include high quality liquid short-term securities issued by governments and government-controlled institutions in various currencies, mainly US dollar and euro. Note 14 Investments in associates CHF million Carrying amount at the beginning of the year Additions Disposals Transfers Income Impairments Dividends paid Foreign currency translation Carrying amount at the end of the year 31.12.09 31.12.08 892 14 (38) (1) 42 (4) (30) (5) 870 1,979 807 (1,307) (422) 12 (18) (34) (125) 892 Significant associated companies of the Group had the following balance sheet and income statement totals on an aggre- gated basis, not adjusted for the Group’s proportionate interest. Refer to “Note 34 Significant subsidiaries and associates”. 31.12.09 31.12.08 5,155 3,248 1,468 319 4,272 3,448 1,211 198 CHF million Assets Liabilities Revenues Net profit 296 Note 15 Property and equipment At historical cost less accumulated depreciation CHF million Historical cost Own-used properties Leasehold improve- ments IT, software and com- munication Other machines and equipment Projects in progress Balance at the beginning of the year 9,289 3,393 4,086 Additions Additions from acquired companies Disposals / write-offs 1 Reclassifications Foreign currency translation Balance at the end of the year Accumulated depreciation Balance at the beginning of the year Depreciation 2 Disposals / write-offs 1 Reclassifications Foreign currency translation Balance at the end of the year Net book value at the end of the year 3 259 0 (15) (78) 13 9,468 77 0 (309) 76 (10) 3,227 5,272 2,031 247 (13) (94) 6 5,417 4,051 358 (263) 3 (20) 2,109 1,118 265 0 (346) 132 12 4,150 3,612 371 (325) 2 9 3,669 481 867 24 0 (65) (34) (7) 784 546 72 (42) (14) (7) 555 229 317 229 0 0 (323) (6) 217 0 0 0 0 0 0 217 31.12.09 31.12.08 17,952 854 0 (736) (227) 2 18,723 1,181 7 (792) (222) (945) 17,846 17,952 11,461 1,048 (644) (104) (12) 11,750 6,096 11,679 1,241 (697) (164) (598) 11,461 6,491 1 Includes write-offs of fully depreciated assets. 2 In 2009, amounts include CHF 26 million impairments of own-used property, CHF 30 million impairments of leasehold improvements and CHF 2 million impairments of IT, software and communication. 3 Fire insurance value of property and equipment is CHF 13,800 million (2008: CHF 14,166 million). Investment properties at fair value CHF million Balance at the beginning of the year Additions Sales Revaluations Foreign currency translation Balance at the end of the year 31.12.09 215 0 (60) (37) (2) 116 31.12.08 189 37 0 (6) (5) 215 n o i t a m r o f n i l a i c n a n i F 297 Financial information Notes to the consolidated financial statements Note 16 Goodwill and intangible assets Introduction At 31 December 2009, the following four segments carried goodwill: Wealth Management & Swiss Bank (CHF 1.5 bil- lion), Wealth Management Americas (CHF 3.7 billion), Glob- al Asset Management (CHF 1.6 billion), and Investment Bank (CHF 3.3 billion). For the purpose of testing goodwill for im- pairment, UBS considers each of these segments as separate cash-generating units, and determines the recoverable amount of a segment on the basis of value in use. At 31 December 2009, equity attributable to UBS share- holders stood at CHF 41 billion, up from CHF 33 billion at 31 December 2008. UBS’s market capitalization, excluding the shares to be issued upon conversion of the MCNs, amounted to CHF 57 billion at 31 December 2009 compared with CHF 44 billion at 31 December 2008. On the basis of the impairment testing methodology described below, UBS concluded that the year-end 2009 balances of goodwill al- located to its segments remain recoverable. Methodology for goodwill impairment testing The recoverable amount is determined using a proprietary model based on discounted cash 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 five years, discounted to their present values. The terminal value reflecting all periods beyond the fifth year is calculated on the basis of the fore- cast of fifth-year profit, the cost of equity and the long-term growth rate. During the year 2009, the discount rates used to calculate the present values were reduced to reflect the improved capital basis and the realized de-risking of the bal- ance sheet, and the long-term growth rate was also margin- ally reduced. The recoverable amount of a segment is the sum of earnings available to shareholders from the first five individually forecast years and the terminal value. The carrying amount for each segment is determined by a roll-forward of historic carrying amounts based on the eq- uity attributed to UBS shareholders, as full balance sheets are not available for the segments. For each segment the beginning-of-the-period balance of equity is rolled forward by accounting for the items that affect a segment’s carrying amount, e.g. allocation of transactions with shareholders at Group level, to arrive at the end-of-the-period balance. Assumptions The model to determine the recoverable amount is most sensitive to changes in the forecast earnings available to shareholders in years one to five, the cost of equity and changes in the long-term growth rate. The applied long- term growth rate is based on real growth rates and expect- ed inflation. Earnings available to shareholders are estimat- ed based on forecast results, which take into account business initiatives and planned capital investments, and re- turns to shareholders, which take into account amounts of capital that could be distributed or used for share buy- backs. Valuation parameters used in the Group’s impair- ment test model are linked to external market information, where applicable. Management believes that reasonable changes in key assumptions used to determine the recover- able amounts of all segments will not result in an impair- ment situation. Discount and growth rates In % Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Discount rates Growth rates 31.12.09 31.12.08 31.12.09 31.12.08 9.0 9.0 9.0 11.0 9.5 11.5 11.0 13.0 1.2 2.4 2.4 2.4 1.3 2.6 2.6 2.6 298 Note 16 Goodwill and intangible assets (continued) Investment Bank / Wealth Management Americas On 31 December 2009, the assessment of the goodwill of the Investment Bank and Wealth Management Americas continued to be a key focus. Goodwill allocated to the In- vestment Bank amounted to CHF 3.3 billion at 31 December 2009 (CHF 4.3 billion at 31 December 2008). The reduction is due to the derecognition of CHF 0.9 billion goodwill re- lated to UBS Pactual, of which CHF 749 million was subject to an impairment (refer to Note 38 for details). Goodwill al- located to Wealth Management Americas amounted to CHF 3.7 billion at 31 December 2009 (CHF 3.8 billion at 31 De- cember 2008). In 2009, CHF 40 million goodwill related to UBS Pactual was derecognized, of which CHF 34 million was subject to an impairment (refer to Note 38 for details). In its review of the year-end 2009 goodwill balance, UBS considered the performance outlook of its Investment Bank and Wealth Management Americas business divisions and the underlying business operations to resolve whether the recoverable amounts for these units covers their carrying amounts, based on the methodology described above. On this basis, UBS concluded that goodwill allocated to the In- vestment Bank and Wealth Management Americas remained recoverable at 31 December 2009. The conclusion was reached based on the current forecast results and the under- lying assumption that the economic environment will gradu- ally 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 in- creasing the discount rate by 3.5 percentage points. The stress values so obtained covered the book values of the In- vestment Bank and Wealth Management Americas. Howev- er, if the regulatory pressure on the banking industry intensi- fies and conditions in the financial markets turn out to be worse than anticipated in UBS’s performance forecasts, the goodwill carried in the Investment Bank and Wealth Man- agement Americas business divisions might need to be im- paired 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 well as the BIS tier 1 capital, BIS total capital, and capital ratios of the UBS Group, as goodwill is required to be deducted from capital under the Basel II capital framework. Goodwill Total Infrastructure Intangible assets Customer relationships, contractual rights and other Total 31.12.09 31.12.08 CHF million Historical cost Balance at the beginning of the year Additions and reallocations Disposals Write-offs 1 Foreign currency translation Balance at the end of the year Accumulated amortization and impairment Balance at the beginning of the year Amortization Impairment of goodwill and intangible assets Disposals Write-offs 1 Foreign currency translation Balance at the end of the year Net book value at the end of the year 11,585 32 (1,631) 0 128 10,115 0 0 1,123 2 (1,199) 0 76 0 10,115 824 0 (13) 0 (24) 787 337 42 0 (6) 0 (12) 361 425 1,308 38 (546) 0 95 894 444 102 57 (211) 0 34 426 468 1 Represents write-offs of fully amortized intangible assets. 2 Represents goodwill impairment related to UBS Pactual. 2,131 38 (559) 0 71 13,716 70 (2,190) 0 199 1,680 11,795 781 144 57 (217) 0 23 787 893 781 144 1,180 (1,416) 0 99 787 15,324 585 (33) (472) (1,688) 13,716 786 193 361 (7) (472) (80) 781 11,008 12,935 n o i t a m r o f n i l a i c n a n i F 299 Financial information Notes to the consolidated financial statements Note 16 Goodwill and intangible assets (continued) The following table presents goodwill and intangible assets by business unit for the year ended 31 December 2009. CHF million Goodwill Wealth Management & Swiss Bank Weath Management Americas Global Asset Management Investment Bank UBS Intangible assets Wealth Management & Swiss Bank Weath Management Americas Global Asset Management Investment Bank UBS Balance at the beginning of the year Additions and reallocations Disposals Amortization Impairment Foreign currency translation Balance at the end of the year 1,523 1 3,803 1 1,982 4,277 11,585 203 1 674 1 186 286 1,350 (2) (1) 4 31 32 0 0 0 38 38 0 (14) (130) (287) (432) 0 (83) (160) (99) (342) 0 (34) (340) (749) (1,123) (56) (1) 0 0 (57) (11) (100) 94 68 52 1 (4) 36 15 48 1,510 3,655 1,610 3,341 10,115 137 526 49 182 893 (11) (61) (13) (59) (144) 1 Goodwill of CHF 125 million and intangible assets of CHF 48 million have been reallocated from Wealth Management & Swiss Bank to Wealth Management Americas due to the restructuring announced in February 2009. Intangible assets 105 103 97 89 82 417 893 31.12.09 31.12.08 915 209 3,053 568 2,590 7,336 1,203 330 2,922 981 4,495 9,931 The estimated, aggregated amortization expenses for intangible assets are as follows: CHF million Estimated, aggregated amortization expenses for: 2010 2011 2012 2013 2014 2015 and thereafter Total Note 17 Other assets CHF million Settlement and clearing accounts VAT and other tax receivables Prepaid pension costs Properties held for sale Other receivables Total other assets 300 Balance sheet notes: liabilities Note 18 Due to banks and customers CHF million Due to banks Due to customers in savings and investment accounts Other amounts due to customers Total due to customers Total due to banks and customers Note 19 Financial liabilities designated at fair value and debt issued Financial liabilities designated at fair value CHF million Bonds and compound debt instruments issued Equity linked Credit linked Rates linked Other Total Compound debt instruments – OTC Loan commitments 2 Total 31.12.09 65,166 101,573 308,903 410,475 475,641 31.12.08 125,628 91,614 374,127 465,741 591,369 31.12.09 31.12.08 54,856 25,663 16,367 2,286 99,173 13,306 174 112,653 92,446 1 7,468 1,632 101,546 1 Breakdown by product type has been implemented with the 2009 disclosure. 2 Loan commitments recognized as Financial liabilities designated at fair value, until drawn down by counterparty and recognized as loans. See Note 1a) 8) for additional information. At 31 December 2009, the contractual redemption amount at maturity of Financial liabilities designated at fair value through profit or loss was CHF 7.6 billion higher than the carrying value. At 31 December 2008, the contractual re- demption amount at maturity of such liabilities was CHF 12.2 billion higher than the carrying value. Refer to Note 1a) 8) for details. Debt issued (held at amortized cost) CHF million Money market papers Debt: Senior bonds Subordinated bonds Bonds issued by the central bond institutions of the Swiss regional or cantonal banks Medium-term notes Total 31.12.09 51,579 57,653 11,244 7,909 2,967 131,352 31.12.08 111,619 67,298 12,769 2,418 3,150 197,254 n o i t a m r o f n i l a i c n a n i F 301 Financial information Notes to the consolidated financial statements Note 19 Financial liabilities designated at fair value and debt issued (continued) The Group uses interest rate and foreign exchange deriva- tives to manage the risks inherent in certain debt issues (held at amortized cost). In certain cases, the Group applies hedge accounting for interest rate risk as discussed in Note 1a) 15) and “Note 23 Derivative Instruments and Hedge Account- ing”. As a result of applying hedge accounting, at 31 De- cember 2009 and 31 December 2008, the carrying value of debt issued was CHF 600 million higher and CHF 904 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 2009 and 31 De- cember 2008, the Group had CHF 11,244 million and CHF 12,769 million, respectively, in subordinated debt. Subordi- nated debt usually pays fixed interest annually or floating rate interest based on three-month or six-month London In- terbank Offered Rate (LIBOR) and provides for single princi- pal payments upon maturity. At 31 December 2009 and 31 December 2008, the Group had CHF 167,702 million and CHF 165,312 million, respec- tively, in unsubordinated debt (excluding money market pa- per, compound debt instruments – OTC and loan commit- ments 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 dates CHF million, except where indicated 2010 2011 2012 2013 2014 2015 – 2019 Thereafter Total 31.12.09 Total 31.12.08 UBS AG (Parent Bank) Senior debt Fixed rate Interest rates (range in %) 1 Floating rate Subordinated debt Fixed rate Interest rates (range in %) Floating rate Subtotal Subsidiaries Senior debt Fixed rate Interest rates (range in %) 1 Floating rate Subordinated debt Fixed rate Interest rates (range in %) Floating rate Subtotal Total 66,450 13,600 0 – 10.46 0 – 10.00 16,341 11,154 7,839 0 – 7.0 10,463 10,609 0 – 9.44 5,653 8,132 0 – 8.84 4,368 17,517 0 – 9.5 8,631 6,209 0 – 8.0 11,765 130,356 103,579 68,375 81,000 0 0 0 0 0 0 0 0 397 3.34 0 82,792 24,754 18,303 16,262 12,897 5,488 1,282 7,167 8,875 2.38 – 7.38 6.38 – 8.75 3,578 35,214 499 4,077 3,820 19,754 209,975 197,274 8,335 0 – 9.0 1,160 1,012 308 0 – 9.49 0 – 7.74 1,451 1,354 340 0 – 9.0 1,108 180 0 – 7.63 713 944 0 – 5.54 4,650 8,375 0 – 12.0 4,102 19,494 83,003 14,537 18,449 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 74 0 9,495 2,463 1,661 1,448 893 92,287 27,217 19,964 17,710 13,789 5,594 40,808 12,476 32,230 34,030 244,005 101,526 298,800 1 The contractual interest rates on some minor positions of structured products were not considered in the interest rate ranges. The interest rate of these products is up to 69.5%. The table above indicates fixed interest rate coupons 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 stated 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 ap- plication of hedge accounting. 302 Note 20 Other liabilities CHF million Provisions Provisions for contingent claims Current tax liabilities Deferred tax liabilities VAT and other tax payables Settlement and clearing accounts Amounts due under unit-linked investment contracts Other payables 1 Total other liabilities Note 31.12.09 31.12.08 21 9b 22 2,311 90 1,082 142 612 1,430 21,740 6,579 33,986 2,727 31 1,192 1,470 1,022 3,089 22,084 11,384 42,998 1 Includes third-party interest of consolidated limited partnerships of CHF 1.6 billion (2008 CHF 3.1 billion) and liabilities from cash settled employee compensation plans of CHF 2.5 billion (2008 CHF 3.6 billion). Contingent payments (net present value as of 31 December 2008 CHF 1.4 billion) for the acquisition of Pactual in 2006 were finally derecognized in 2009 due to the sale of UBS Pac- tual in September 2009. Note 21 Provisions and litigation CHF million Balance at the beginning of the year Additions from acquired companies Increase in provisions recognized in the income statement Release of provisions recognized in the income statement Provisions used in conformity with designated purpose Capitalized reinstatement costs Disposal of subsidiaries Reclassifications Foreign currency translation Balance at the end of the year Operational 1 270 Litigation 2 Restructuring 183 1,418 0 293 (94) (352) 0 (32) 0 (3) 82 0 265 (22) (516) 0 (3) 0 (113) 1,028 0 649 (6) (415) 0 0 92 (14) 488 Other 4 856 0 139 (187) (92) 3 0 (1) (5) 713 Total 31.12.09 2,727 0 1,346 (309) (1,375) 3 (35) 90 (135) 2,311 Total 31.12.08 3 1,716 1 4,002 (528) (1,381) (21) 0 (979) (83) 2,727 1 Includes provisions for litigation resulting from security risks and transaction processing risks. 2 Includes litigation resulting from legal, liability and compliance risks. 3 In 2008 Global Wealth Management & 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 fourth quarter 2008, 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. In addition, a provision of CHF 917 million (USD 780 million) was made in connection with UBS’s US cross-border case. 4 Includes reinstatement costs for leasehold improvement which amounted to CHF 161 million on 31 December 2009 (CHF 167 million on 31 December 2008), provisions for onerous lease contracts, provisions for employee benefits (service anniversaries and sabbatical leave) and other items. Litigation The UBS Group operates in a legal and regulatory environ- ment that exposes it to significant litigation risks. As a result, UBS is involved in various disputes and legal proceedings, in- cluding litigation, arbitration, and regulatory and criminal in- vestigations. Such cases are subject to many uncertainties, and their outcome is often difficult to predict, including the impact on operations or on the financial statements, particu- larly 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 when, in the opinion of management after seeking legal advice, it is probable that a liability exists, and the amount can be reasonably estimated. Certain potentially significant legal proceedings as of 31 December 2009 are described below: a) Municipal Bonds: In November 2006, UBS and others re- ceived subpoenas from the US Department of Justice, An- (SEC) seeking titrust Division, and the US Securities and Exchange Com- information relating to the mission investment of proceeds of municipal bond issuances and associated derivative transactions. 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 Febru- ary 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. The discussions with the SEC are on- going. b) Auction Rate Securities: UBS was the subject of an SEC investigation and state regulatory actions relating to the marketing and sale of auction rate securities (ARSs) to clients, and to UBS’s role and participation in ARS auc- tions and underwriting of ARSs. UBS was also named in several putative class actions and individual civil suits and 303 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 21 Provisions and litigation (continued) arbitrations. The regulatory actions and investigations and the civil proceedings followed the disruption in the markets for these securities and related auction failures since mid-February 2008. At the end of 2008 UBS en- tered into settlements with the SEC, the New York Attor- ney General (NYAG) and the Massachusetts Securities Di- vision whereby UBS agreed to offer to buy back ARSs from eligible customers within certain time periods, the last of which begins on 30 June 2010, and to pay penal- ties of USD 150 million (USD 75 million to the NYAG, USD 75 million to the other states). UBS’s settlement is largely in line with similar industry regulatory settlements. UBS is continuing to finalize agreements with other state regu- lators. The SEC continues to investigate individuals affili- ated with UBS who traded in ARSs or who had responsi- bility for disclosures. c) US Cross-Border: UBS AG has been the subject of a num- ber of governmental inquiries and investigations relating to its cross-border private banking services to US private clients during the years 2000 – 2007. On 18 February 2009, UBS AG announced that it had entered into a De- ferred Prosecution Agreement (DPA) with the US Depart- ment of Justice Tax Division (DOJ) and the United States Attorney’s Office for the Southern District of Florida, and a Consent Order with the SEC relating to these investiga- tions. As part of the settlement agreements UBS agreed to, among other things, (i) pay a total of USD 780 million to the United States, (ii) complete the exit of the US cross- border business out of non-SEC registered entities, and (iii) implement and maintain an effective program of in- ternal controls with respect to compliance with its obliga- tions under the Qualified Intermediary (QI) Agreement with the US Internal Revenue Service (IRS), as well as a revised legal and compliance governance structure in or- der to strengthen independent legal and compliance con- trols. Pursuant to the DPA, the DOJ agreed that any fur- ther prosecution of UBS will be deferred for a period of at least 18 months, subject to extension under certain cir- cumstances such as UBS needing more time to complete the implementation of the exit of its US cross-border busi- ness. 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 resolution of an SEC claim that UBS acted as an unregulated broker dealer and in- vestment advisor in connection with its US cross-border business, UBS consented to a settlement that provides, among other things, that: (i) UBS will pay USD 200 million to the SEC (included in the USD 780 million payment de- scribed above); and (ii) UBS will complete its exit of the US cross-border business and will be permanently enjoined from violating certain SEC registration requirements. 304 The agreements with the DOJ and SEC did not resolve the “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 enforce- ment of this summons in the US Federal District Court for the Southern District of Florida, through which it sought 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 19 August 2009, UBS executed a settlement agree- ment with the IRS and the DOJ, to resolve the “John Doe” summons litigation (UBS-US Settlement Agree- ment). At the same time, the United States and Switzer- land entered into a separate but related agreement (Swiss-US Agreement). Among other things, these agree- ments provide that: (i) UBS and the IRS would promptly file a stipulation dismissing the “John Doe” summons en- forcement action then pending in federal court in Miami, which occurred the same day; (ii) the IRS would submit a request for information regarding accounts of US clients maintained at UBS in Switzerland, on the basis that such clients appear to have committed tax fraud or the like within the meaning of the existing 1996 Swiss-US Double Taxation Treaty, to the Swiss Federal Tax Administration (SFTA), which it did on 31 August 2009; (iii) UBS would send a notice to US accountholders that appear to be within the scope of the treaty request and produce to the SFTA information on the corresponding accounts both in accordance with a specified schedule, which UBS has done in compliance with an order issued by the SFTA on 1 September 2009; and (iv) UBS and the IRS would agree to amend UBS’s QI Agreement, whereupon the IRS would withdraw the previously disclosed QI Notice of Default dated 15 May 2008. The UBS-US Settlement Agreement does not call for any monetary payment by UBS. Because UBS has complied with all of its obligations set forth in the UBS-US Settlement Agreement required to be completed by 31 December 2009, the IRS has withdrawn the summons with prejudice as to all accounts not cov- ered by the treaty request. Subject to UBS’s compliance with its further notification and information processing obligations set forth in the UBS-US Settlement Agreement, the IRS will withdraw the “John Doe” summons with prejudice as to the remaining accounts – i.e. those subject to the treaty request – no later than 24 August 2010 upon the actual or anticipated delivery to the IRS of information relating to accounts covered by the treaty request that does not differ signifi- cantly from the expected results. Alternatively, the sum- mons will be withdrawn with prejudice as to the remain- ing accounts if at any time on or after 1 January 2010 the Note 21 Provisions and litigation (continued) IRS has received information from any source relating to at least 10,000 accounts of US persons maintained at UBS in Switzerland. On 21 January 2010, the Swiss Federal Administrative Court ruled that the SFTA did not have a proper legal ba- sis to grant the IRS request for information with respect to accounts of US persons who had failed to report substan- tial amounts of income over an extended period, but had not engaged in fraudulent activity within the meaning of Swiss law. The decision does not invalidate the UBS-US Settlement Agreement or the Swiss-US Agreement and it does not affect the treaty request to the extent it is di- rected at accounts in relation to which such fraudulent activity occurred. Following consultations with the US Government about measures to ensure the further imple- mentation of the Swiss-US Settlement Agreement, the Swiss Government decided on 24 February 2010 that it will seek to amend the Swiss-US Agreement and submit it to Parliament for approval. UBS continues, as in the past, to fulfill all of its obligations under the settlements, including, among other things, the exit of the US cross-border business out of non-SEC registered entities and the provision of relevant account information to the SFTA under the treaty process. d) Inquiries Regarding Non-US Cross-Border Businesses: Fol- lowing the disclosure of the US cross-border matter and the settlements with the DOJ and the SEC, tax and regula- tory authorities in a number of countries have requested information relating to the cross-border wealth manage- ment services provided by UBS and other financial institu- tions. In particular, the revenue services of Canada, the UK and Australia have served requests upon, or made inquiries of, UBS and other Swiss and non-Swiss financial institu- tions providing cross-border wealth management services for information relating to such services that is located in their respective jurisdictions. UBS is cooperating with these requests strictly within the limits of financial privacy obliga- tions under Swiss and other applicable laws. It is premature to speculate on the outcome of any such inquiries. e) Matters Related to the Credit Crisis: UBS is responding to a number of governmental inquiries and investigations, and is involved in a number of litigations, arbitrations and disputes, related to the credit crisis and in particular mort- gage-related securities and other structured transactions and derivatives. These matters concern, among other things, UBS’s valuations, accounting classifications, dis- closures, writedowns, and contractual obligations, as well as its role as underwriter in securities offerings for other issuers. In particular, UBS has communicated with and has responded to inquiries by FINMA, its home country con- solidated regulator, as well as the SEC, the Financial In- dustry Regulatory Authority and the United States Attor- ney’s Office for the Eastern District of New York, regarding some of these issues and others, including the role of in- ternal control units, governance and processes around risk control and valuation of mortgage-related instru- ments, compliance with public disclosure rules, and the business rationales for the launching and the reintegra- tion of Dillon Read Capital Management. FINMA conclud- ed its investigation in October 2008. f) Claims Related to UBS Disclosure: A putative consolidated class action has been filed against UBS and a number of current and former directors and senior officers in the Southern District of New York alleging securities fraud in connection with the firm’s disclosures relating to its losses in the subprime mortgage markets, its losses and positions in auction rate securities, and its US cross-border business. Defendants have moved to dismiss the complaint for lack of jurisdiction and for failure to state a claim. UBS and a number of senior officers and directors have also been sued in a putative consolidated class action brought on behalf of holders of UBS Employee Retirement Income Se- curity Act (ERISA) retirement plans in which there were purchases of UBS stock. UBS has moved to dismiss the ERISA complaint for failure to state a claim. g) Madoff: In relation to the Madoff investment fraud, UBS, UBS (Luxembourg) SA and certain other UBS subsidiaries have been subject to inquiries by a number of regulators, including FINMA and the Luxembourg Commission de Surveillance du Secteur Financier (CSSF). Those inquiries concerned two third-party funds established under Lux- embourg law substantially all assets of which were with Bernard L. Madoff Investment Securities LLC (BMIS), as well as certain funds established under offshore jurisdic- tions with either direct or indirect exposure to BMIS. These funds now face severe losses. The last reported net asset value of the two Luxembourg funds before the rev- elation of the Madoff scheme was approximately USD 1.7 billion in the aggregate. The documentation estab- lishing both funds identifies UBS entities in various roles including custodian, administrator, manager, distributor and promoter, and indicates that UBS employees serve as board members. On 25 February 2009, the CSSF issued a communiqué with respect to the larger of the two 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 in- frastructure and procedures relating to its supervisory obligations as custodian bank, but did not order it to compensate investors. On 25 May 2009, UBS (Luxem- bourg) SA submitted a comprehensive final report to the CSSF, which resulted in the CSSF publishing a new com- muniqué saying that UBS (Luxembourg) SA has provided evidence demonstrating that it has the infrastructure and 305 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 21 Provisions and litigation (continued) internal organization in place in accordance with profes- sional standards appli cable to custodian banks in Luxem- bourg. In addition, on 17 December 2009, a claim in the amount of EUR 890 million was filed on behalf of the larger of the two Luxembourg funds by the liquidators of that fund against 15 defendants, including UBS entities, Access Management Luxembourg SA, Ernst & Young, the CSSF and various individuals. A large number of al- leged beneficiaries have filed claims against UBS entities (and non-UBS entities) for purported losses relating to the Madoff scheme. Further, certain clients of UBS in Germany are exposed to Madoff-managed positions through third-party funds and funds administered by UBS entities in Germany. h) City of Milan Transactions: In January 2009, the City of Milan filed civil proceedings against UBS Limited, UBS Italia SIM Spa and three other international banks in relation to a 2005 bond issue and associated derivatives transactions entered into with the City of Milan be- tween 2005 and 2007. The claim is to recover alleged damages in an amount which will compensate for terms of the related derivatives which the City claims to be objectionable. In the alternative, the City seeks to recover alleged hidden profits alleged to have been made by the banks in the amount of EUR 88 million (of which UBS Limited is alleged to have received EUR 16 million) together with further damages of not less than EUR 150 million. The claims are made against all of the banks on a joint and several basis. UBS is vigorously de- fending the claim. In addition, a criminal investigation by a Prosecutor in Milan has been ongoing in relation to the same transactions. In November 2009, the Prosecu- tor filed a request for committal for trial of two current UBS employees and one former UBS employee, togeth- er with employees from other banking institutions. The request alleges that the banks’ employees engaged in criminal conduct in order to allow the banks to earn al- legedly concealed profits on the June 2005 bond issue and related derivative transactions. The Prosecutor also requested committal for trial of UBS Limited and the other banks in relation to the administrative charge of failing to have in place a business organization model to prevent crime. Preliminary court hearings are taking place through March 2010. 306 Note 22 Income taxes CHF million Tax expense from continuing operations Domestic Current Deferred Foreign Current Deferred Total income tax expense from continuing operations Tax expense from discontinued operations Domestic Total income tax expense from discontinued operations Total income tax expense For the year ended 31.12.09 31.12.08 31.12.07 55 23 462 (983) (443) 0 0 (336) (7,282) 519 262 (6,837) 1 1 (443) (6,836) 409 (25) 1,061 (76) 1,369 (258) (258) 1,111 The deferred tax benefit reflects the recognition of addition- al deferred tax assets in respect of tax losses and temporary differences in a number of locations including the US (CHF 373 million) and Japan (CHF 127 million), taking into ac- count updated forecast profit assumptions over the five-year horizon used for recognition purposes. In addition, it reflects the release of a deferred tax liability of CHF 243 million relat- ing to UBS Pactual prior to its sale during the year. The cur- rent tax charge mainly relates to tax expenses in respect of entities with taxable profits. The current tax expense for 2009 includes tax costs re- lated to prior years of CHF 50 million. In addition, there was a tax benefit of CHF 116 million relating to prior years in re- spect of the release of a net deferred tax liability. The net tax benefits relating to prior years were therefore CHF 65 mil- lion. The Group made net corporate income tax payments, in- cluding domestic and foreign taxes, of CHF 505 million, CHF 887 million and CHF 3,663 million in 2009, 2008 and 2007 respectively. The components of operating profit before tax, and the differences between income tax expense reflected in the fi- nancial statements and the amounts calculated at the Swiss statutory rate, are as follows: CHF million Operating profit from continuing operations before tax Domestic Foreign Income taxes at Swiss statutory rate of 21.5% for 2009, 22% for 2008 and 2007 Increase / (decrease) resulting from: Applicable tax rates differing from Swiss statutory rate Tax effects of losses not recognized Previously unrecorded tax losses now utilized Non-taxable and lower taxed income Non-deductible goodwill and intangible asset amortization Non-deductible expenses Adjustments related to prior years Change in deferred tax valuation allowance Other items Income tax expense from continuing operations 31.12.09 (2,561) 4,871 (7,433) (551) (1,636) 1,188 (79) (932) 7 1,005 (65) 552 69 (443) For the year ended 31.12.08 (27,758) 3,269 (31,027) (6,107) (7,056) 7,412 (10) (773) 160 737 (490) (692) (17) 31.12.07 (3,742) 10,337 (14,079) (823) (3,054) 6,327 (257) (1,587) 15 227 (72) 279 314 (6,837) 1,369 n o i t a m r o f n i l a i c n a n i F 307 Financial information Notes to the consolidated financial statements Note 22 Income taxes (continued) Significant components of the Group’s deferred income tax assets and liabilities are as follows: CHF million Deferred tax assets Compensation and benefits Tax loss carry-forwards Trading assets Other Total deferred tax assets Deferred tax liabilities Compensation and benefits Property and equipment Financial investments and associates Trading assets Goodwill and intangible assets Other Total deferred tax liabilities 31.12.09 Valuation allowance Recognized (1,561) (24,259) (403) (2,215) 221 8,246 158 243 Gross 1,782 32,505 561 2,458 31.12.08 Valuation allowance (1,213) (24,708) (365) (69) Gross 1,534 32,834 608 258 37,305 (28,437) 8,868 35,234 (26,354) 5 1 60 0 61 15 142 Recognized 321 8,126 243 190 8,880 111 29 206 244 289 591 1,470 The change in the net of deferred tax assets and liabilities in 2009 and 2008 does not equal the deferred tax benefit in those years. This is because certain deferred tax asset and liability movements are recognized directly in the state- ment of changes in equity and also because of the effects of exchange rate changes on tax assets and liabilities de- nominated in currencies other than Swiss francs. During the year, deferred tax liabilities of CHF 0.7 billion were offset against deferred tax assets in accordance with IAS 12. In the table above, the valuation allowance represents amounts that are not expected to provide future benefits due to insufficiency of future taxable income (and at 31 De- cember 2008, also amounts offset against potential tax ad- justments). UBS AG Switzerland and certain overseas branches and subsidiaries of the Group have deferred tax assets related to tax loss carry-forwards and other items. For entities that in- curred losses in either the current or preceding year, an amount of CHF 8,773 million is recognized as deferred tax assets at 31 December 2009 (CHF 8,463 million at 31 De- cember 2008). These deferred tax assets mainly relate to Swiss tax losses (primarily due to the write-down of invest- ments in US subsidiaries in 2007 and 2008) and US tax losses. Swiss tax losses can be carried forward for seven years and US federal tax losses for 20 years. The deferred tax assets recognized at 31 December 2009 in respect of tax losses have been based on profitability as- sumptions over a five-year horizon. The expected future profitability is based on business plan assumptions, as ad- justed to take into account the recognition criteria of IAS 12. If the business plan earnings and assumptions in following quarters substantially deviate from the current assumptions, the amount of deferred tax assets may need to be adjusted in the future. At 31 December 2009, tax losses totaling CHF 72,313 million which are not recognized as deferred tax assets are available to be offset against potential tax adjustments or future taxable income. The tax losses expire as follows: CHF million Within 1 year From 2 to 4 years After 4 years Total 31.12.09 1 4 72,308 72,313 The Group provides for deferred income taxes on undistributed earnings of subsidiaries except to the extent that those earn- ings are indefinitely invested. At 31 December 2009, no such earnings were treated as indefinitely invested. 308 Note 23 Derivative instruments and 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, price and how the trade is to be settled in the future between UBS and its counterparties, which may be other professionals or customers (over-the- counter (OTC) contracts). OTC contracts are usually traded under an International Swaps and Derivatives Association (ISDA) master trading agreement (MTA) between UBS and its counterparties. Oth- er derivative contracts are standardized in terms of their amounts and settlement dates and are bought and sold on organized exchanges (exchange-traded contracts (ETD)). With ETDs, the exchange also acts as a central counterparty. The notional amount of a derivative is generally the quantity of the underlying instrument on which the derivative con- tract 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 necessarily any measure of risk. Derivative instruments are carried at fair value (refer to Note 27 for fair value measurement of derivative instru- ments), shown in the balance sheet as Separate totals of Positive replacement values (assets) and Negative replace- ment values (liabilities), except for futures, 100% daily mar- gined exchange traded options and interest rate swaps with the London Clearing house (LCH) with daily margining, which are presented on the balance sheet as Due from banks, Loans and Due to banks and customers. Positive replacement values represent the cost to the Group of replacing all transactions with a fair value in the Group’s favor, assuming transactions could be replaced in- stantaneously. Negative replacement values represent the cost to the Group’s counterparties of replacing all their trans- actions with the Group with a fair value in their favor. Posi- tive and Negative replacement values on different transac- tions are only netted if the transactions are with the same counterparty with a legally enforceable right to set off. Posi- tive and Negative replacement values are denominated in the same currency, and the cash flows are intended to be settled on a net basis. Changes in replacement values of de- rivative instruments are recognized in the income statement unless they meet the criteria for certain hedge accounting relationships, as explained in Note 1a) 15) Derivative instru- ments and hedge accounting. Types of derivative instruments The Group uses the following derivative financial instru- ments 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 agree- ments 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 predeter- mined period. Most swaps are traded OTC. The major types of swap transactions undertaken by the Group are as fol- lows: – Interest rate swap contracts generally entail the contrac- tual exchange of fixed-rate and floating-rate interest pay- ments in a single currency, based on a notional amount and a reference interest rate, e.g. LIBOR. – Cross-currency swaps involve the exchange of interest payments based on two different currency principal bal- ances and reference interest rates and generally also en- tail 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 pro- 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 cred- it 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 pro- tection buyer has actually suffered a loss. After a credit event and settlement, the contract is terminated. An elaboration of credit derivatives is included in a separate section below. – 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. LIBOR. The total return payer has an equal and opposite position. – Metal swaps (precious metal swaps and base metal swaps) involve the purchase and sale of specific metals. A precious metal swap involves the purchase and sale of a specified metal 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 and warrants 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. 309 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 23 Derivative instruments and hedge accounting (continued) 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). Credit derivatives UBS’s credit derivative portfolio consists of credit default swaps, total return swaps and options and warrants. As of 31 December 2009, the total notional value of protection bought was CHF 1,288 billion (CHF 56 billion and CHF 23 billion Positive replacement values and Negative replace- ment values, respectively) and the total notional value of protection sold was CHF 1,187 billion (CHF 23 billion and CHF 47 billion Positive replacement values and Negative re- placement values, respectively), in 2009. UBS’s credit deriva- tives are usually traded as OTC contracts. During 2009 a number of initiatives were launched in both the US and Europe to establish centralized clearing solutions for OTC CDS contracts (exchange cleared derivatives), with the aim of reducing counterparty risk. UBS, along with other dealer members, has been an active participant in these initiatives. A significant portion of UBS’s credit derivatives are traded under an ISDA MTA between UBS and its counterparty. UBS’s CDS trades are also documented using industry standard forms of documentation published by ISDA or equivalent terms documented in a bespoke (i.e. tailored) agreement. Those forms and agreements use standardized terms that form the basis for market conventions related to the types of credit events that would trigger performance (i.e. payment) under a CDS. The types of credit events that would require UBS to per- form under a CDS contract are subject to agreement be- tween the parties at the time of the transaction. However, nearly all transactions are traded using credit events that are applicable under certain market conventions based on the type of reference entity to which the transaction relates. Applicable credit events by market conventions include “bankruptcy”, “failure to pay”, “restructuring”, “obligation acceleration” and “repudiation / moratorium”. Recourse provisions UBS uses standardized agreements and forms as the basis for its credit derivative contracts. Those agreements and forms do not contain recourse provisions that would enable UBS to recover from third parties any amounts paid out by UBS (i.e. this is the case where a credit event occurs and UBS is required to make payment under a CDS). Economic hedges and strategy UBS actively utilizes CDS to economically hedge specific coun- terparty credit risks in its banking book loans portfolio (includ- ing loan commitments) with the aim of reducing concentra- tions in individual names, sectors or specific portfolios. In addition, UBS actively utilizes CDS to economically hedge spe- cific counterparty credit risks in its OTC derivative port folios. UBS is an active dealer in fixed income instruments and CDS and related products with respect to a large number of securities issuers. The primary purpose of these activities is for the benefit of UBS’s clients (market making) and to a lesser extent creating new credit exposures taken for UBS’s own trading purposes (proprietary trading). Market making activity consists of buying and selling sin- gle-name CDS, index CDS, loan CDS and related referenced cash instruments to facilitate client trading activity. Proprie- tary trading consists of trading in single-name CDS, index CDS and loan CDS to capitalize on pricing discrepancies be- tween various credit instruments (bonds, loans and equities) across investment grade, high-yield and emerging markets. As a general matter, risk to the relevant issuers arising from fixed income instruments, CDS and related products are reviewed and risk-managed on a net exposure basis (i.e. taking into account all exposures to a particular issuer aris- ing from fixed income instruments, CDS and related prod- ucts) across market making and proprietary trading activi- ties. UBS’s strategy with respect to CDS trading was the re- duction in scope and scale of the firm’s structured credit, proprietary credit and asset securitization (including syn- thetic securitization) activities during 2009 and 2008. Contingent features of derivative liabilities Based on UBS’s credit ratings as of 31 December 2009, ad- ditional collateral or termination payments pursuant to bi- lateral agreements with certain counterparties of approxi- mately CHF 1.2 billion and CHF 2.8 billion would have been required in the event of a one-notch and two-notch reduc- tion, respectively, in UBS’s long-term credit ratings. In eval- uating UBS’s liquidity requirements, UBS considers addi- tional collateral or termination payments that would be required in the event of a reduction in UBS’s long-term credit ratings. 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 en- able them to take, transfer, modify or reduce current or ex- pected risks. Trading activities include market making, posi- tioning 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 posi- tions with the expectation of profiting from favorable move- 310 Note 23 Derivative instruments and hedge accounting (continued) ments in prices, rates or indices. Arbitrage activities involve identifying and profiting from price differentials between the same product in different markets or the same econom- ic factor in different products. The Group has also used equity futures, options and, to a lesser extent, swaps for economically hedging in a variety of equities trading strategies to offset underlying equity and equity volatility exposure. Derivatives transacted for hedging purposes The Group enters into derivative transactions for the pur- poses 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 account- ing purposes. These are described under the corresponding headings in this note. The Group’s accounting policies for derivatives designated and accounted for as hedging instru- ments are explained in Note 1a) 15) Derivative instruments and hedge accounting, where terms used in the following sections are explained. The Group has also entered into interest rate swaps and other interest rate derivatives (e.g. futures) for day-to-day economic interest rate risk management purposes, but with- out applying hedge accounting. Fair value hedges of interest rate risk CHF million Gains / (losses) on hedging instruments Gains / (losses) on hedged items attributable to the hedged risk Net gains / (losses) representing ineffective portions of fair value hedges The Group has also entered into CDS’s that provide eco- nomic hedges for credit risk exposures (refer to the credit derivatives section). Fair value changes of derivatives that are part of econom- ic relationships, but do not qualify for hedge accounting treatment, 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 CHF 526 million and CHF 71 mil- lion Positive replacement values and Negative replacement values, respectively, at 31 December 2009 and a CHF 883 mil- lion net Positive replacement values at 31 December 2008. For the year ended 31.12.09 31.12.08 31.12.07 (171) 182 11 778 (796) (18) 15 (11) 4 Fair value hedges of portfolio interest rate risk The Group also applies fair value hedge accounting of port- folio interest rate risk. The change in fair value of the hedged items is recorded separately from the hedged item and is included in Other assets on the balance sheet. The fair value of derivatives designated for this hedge method at 31 De- cember 2009 was CHF 956 million Negative replacement value, 31 December 2008 was a CHF 765 million net Nega- tive replacement value. During 2008, UBS expanded the use of Fair Value hedge accounting for portfolio interest rate risk to include other Swiss mortgage loan portfolios. In 2009 no further scope expansion was made. Fair value hedge of portfolio of interest rate risk1 CHF million Gains / (losses) on hedging instruments Gains / (losses) on hedged items attributable to the hedged risk Net gains / (losses) representing ineffective portions of fair value hedges 1 Hedge effectiveness is calculated on a cumulative basis. For the year ended 31.12.09 31.12.08 31.12.07 (48) 11 (37) (644) 688 44 (37) 30 (7) 311 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 23 Derivative instruments and hedge accounting (continued) Cash flow hedges of forecasted 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 19 years. The schedule of forecasted principal balances on which the expected interest cash flows arise as of 31 December 2009 is shown below. Forecasted cash flows CHF billion Cash inflows (assets) Cash outflows (liabilities) Net cash flows < 1 year 1–3 years 3–5 years 5–10 years over 10 years 205 69 136 352 136 216 202 96 106 141 78 63 20 4 16 Gains and losses on the effective portions of derivatives designated as cash flow hedges of forecasted transactions are initially recorded in Equity as Net income recognized directly in equity and are transferred to current period earnings when the forecasted 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 183 million loss, a CHF 108 million loss and a CHF 443 million gain was recognized in 2009, 2008 and 2007, respectively, due to hedge ineffectiveness. As of 31 December 2009, the fair values of outstanding derivatives designated as cash flow hedges of forecasted transactions were CHF 5,180 million and CHF 2,736 million Positive replacement values and Negative replacement val- ues, respectively, and as of 31 December 2008 the amount was CHF 2,539 million net Positive replacement values. At the end of 2009 and 2008, gains of CHF 46 million and CHF 86 million associated with de-designated inter- est rate swaps were deferred in Equity. They will be re- moved from Equity when the previously hedged fore- casted cash flows have an impact on net profit or loss, or when the forecasted cash flows are no longer expected to occur. Amounts reclassified from Equity to Net inter- est income of de-designated swaps were CHF 40 million net gain in 2009, CHF 49 million net gain in 2008 and CHF 79 million net gain in 2007. In 2008, due to reductions in the volume of short-term financial instruments, some of the forecasted cash flows previously included in the hedge relationships were deter- mined to no longer be expected to occur. Hedges of net investments in foreign operations The Group applies hedge accounting for certain consoli- dated net investments in USD-denominated operations. At 31 December 2009 the fair values of the financial liabilities (predominantly structured products issued by UBS) designat- ed as hedging instruments in net investment hedges was CHF 2.5 billion. Gains or losses on the translation of these hedging instruments are transferred directly to Equity to offset any gains or losses on translation of the net invest- ments in the subsidiaries, which are also recognized in Equity. No ineffectiveness from hedges of net investments in foreign operations was recognized in the income statements during 2009. Contractual maturities of derivatives designated as hedging instruments in hedge accounting relationships The contractual maturities of derivatives designated as hedging instruments in hedge accounting relationships are considered “essential” for an understanding of the timing of their cash flows. Derivatives designated in hedge accounting relationships (undiscounted cash flows) CHF billion Interest rate swaps 1 Cash outflows Cash inflows Total 31.12.09 On demand Due within 1 month Due between 1 and 3 months Due between 3 and 12 months Due between 1 and 5 years Due after 5 years 0 0 0 0 0 0 (0) 0 (0) (1) 0 (1) (3) 2 (1) (15) 18 3 Total (19) 20 1 1 Interest rate swaps are gross settled. The table includes all cash inflows and outflows of interest rate swaps with Positive and Negative replacement values. 312 Note 23 Derivative instruments and hedge accounting (continued) Risks of derivative instruments Derivative instruments are transacted in many trading port- folios, which generally include several types of instruments, not just derivatives. The market risk of derivatives is predom- inantly 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 of this report. Derivative instruments are transacted with many differ- ent 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 over- all credit exposure to each counterparty. The Group’s ap- proach to credit risk is described in the audited “Credit risk” section 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, for ex- ample, 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 arrange- ments with counterparties. Both the exposure measures used by the Group internally to control credit risk and the capital requirements imposed by regulators reflect these ad- ditional factors. The replacement values presented on UBS’s balance sheet and in the tables on the next two pages include netting in accordance with IFRS requirements (refer to Note 1a) 34), which is more restrictive than netting in accordance with Swiss Federal Banking law. The main difference of Swiss Fed- eral Banking law to IFRS is that Swiss Federal Banking law netting is generally based on close-out netting arrangements which are enforceable in case of insolvency. The Positive and Negative replacement values based on netting in accordance with Swiss Federal Banking law (factoring in cash collateral) are presented on the bottom of the tables on the next two pages. n o i t a m r o f n i l a i c n a n i F 313 Financial information Notes to the consolidated financial statements Note 23 Derivative instruments and hedge accounting 1 (continued) As of 31 December 2009 Term to maturity Within 3 months 3–12 months 1–5 years over 5 years CHF billion PRV 2 NRV 3 PRV NRV PRV NRV PRV NRV Notional values related to PRVs Total PRV Notional values related to NRVs Total NRV Other notional values 4 Interest rate contracts Over-the-counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts 5 Futures Options Total Credit derivative contracts Over-the-counter (OTC) contracts Credit default swaps Total rate of return swaps Options and warrants Total Foreign exchange contracts Over-the-counter (OTC) contracts Forward contracts Interest and currency swaps Options Exchange-traded contracts 5 Futures Options Total Equity / index contracts Over-the-counter (OTC) contracts Forward contracts Options Exchange-traded contracts 5 Futures Options Total Commodities contracts Over-the-counter (OTC) contracts Forward contracts Options Exchange-traded contracts 5 Futures Options Total Total derivative instruments, based on IFRS netting Replacement value netting, based on capital adequacy rules Cash collateral netting Total derivative instruments, based on capital adequacy netting 6 1.8 8.2 1.0 1.6 6.8 1.1 0.7 18.7 3.5 0.8 16.9 3.0 0.1 89.7 10.1 0.1 82.6 11.9 0.0 69.5 11.3 0.0 65.0 13.5 2.5 186.2 25.9 1,343.7 7,110.7 543.2 2.5 1,286.5 0.0 171.4 6,802.7 15,949.2 29.4 611.8 0.0 0.1 11.1 0.1 9.6 0.2 23.1 0.2 0.2 20.8 100.0 0.2 94.8 0.0 80.8 0.0 78.6 0.5 3.9 0.4 3.5 271.9 0.0 215.1 9,001.5 203.7 8,704.5 16,221.2 0.1 0.1 0.0 0.2 0.3 0.1 0.0 0.4 0.9 0.0 0.0 1.0 0.9 0.0 0.0 0.9 33.1 32.1 42.9 36.4 77.1 1,254.7 69.7 1,208.9 1.0 0.0 0.3 0.0 0.4 0.0 0.4 0.0 1.5 0.0 5.7 9.3 0.9 0.0 5.4 6.6 34.1 32.4 43.3 36.9 78.6 1,269.6 70.6 1,220.9 7.5 31.2 1.8 6.3 30.3 1.7 2.4 13.1 2.1 2.6 15.3 2.0 0.8 18.9 1.2 0.6 23.5 1.2 0.0 17.3 0.9 0.0 16.8 0.8 10.6 80.5 5.9 453.2 2,279.8 609.7 9.5 85.8 5.7 403.7 2,209.6 560.2 0.0 40.4 0.0 38.3 0.0 17.6 0.0 20.0 0.0 20.9 0.0 25.2 0.0 18.2 0.0 17.6 0.1 1.5 0.1 0.1 97.1 3,344.2 101.1 3,173.5 0.9 0.4 4.9 6.2 0.6 0.3 0.4 1.3 0.8 0.9 4.6 6.3 0.6 0.2 0.4 1.2 1.1 2.1 4.7 8.0 0.7 0.7 0.7 2.0 1.2 2.7 4.9 8.8 0.6 0.6 0.7 1.9 0.5 2.4 0.8 4.1 5.2 8.1 5.8 10.7 0.7 0.9 0.8 2.4 0.7 0.9 0.8 2.4 0.4 2.1 0.2 2.7 0.1 0.1 0.0 0.2 0.9 1.7 0.1 2.8 0.1 0.2 0.0 0.4 2.9 7.0 56.6 60.9 3.7 9.5 46.9 73.7 15.1 25.1 30.5 148.0 15.5 28.7 36.2 156.8 2.0 1.9 1.9 5.9 20.6 21.7 0.6 42.9 2.0 1.9 1.9 5.8 15.0 23.6 2.0 40.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.5 0.0 1.5 0.0 0.0 6.8 0.0 6.8 0.0 0.0 2.7 0.0 2.7 59.3 55.9 51.7 52.4 165.5 165.5 145.2 136.2 421.7 13,806.2 409.9 13,296.5 16,232.2 (313.2) (37.2) (313.2) (32.7) 71.3 64.1 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 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 Receivables resulting from derivatives are recognized on UBS’s balance sheet under Due from banks and Loans: CHF 1.6 billion. Payables resulting from these derivatives are recognized on UBS’s balance sheet under Due to banks and Due to customers: CHF 1.6 billion. 5 Notional values of exchange-traded products include own account trades only. 6 Includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking Law, based on the IFRS scope of consolidation. 314 Note 23 Derivative instruments and hedge accounting 1 (continued) As of 31 December 2008 Term to maturity Within 3 months 3–12 months 1–5 years over 5 years CHF billion PRV 2 NRV 3 PRV NRV PRV NRV PRV NRV Notional values related to PRVs Total PRV Notional values related to NRVs Total NRV Other notional values 4 2.1 9.5 4.0 2.2 9.9 3.7 3.8 23.6 6.6 4.1 24.3 7.0 0.3 0.4 0.0 0.0 152.1 140.5 144.8 142.9 14.3 15.7 12.6 16.5 6.2 330.0 37.4 1,544.9 8,543.3 498.4 6.7 1,584.5 0.0 317.6 8,260.0 15,002.0 43.0 595.5 0.0 0.8 16.4 0.8 16.6 0.5 34.5 0.5 0.1 0.1 0.0 0.0 1.4 6.4 1.4 8.7 527.5 0.0 36.0 166.8 156.7 157.4 159.5 375.1 10,593.1 368.7 10,448.7 15,529.6 0.5 3.4 0.3 0.4 3.4 0.2 3.5 0.1 95.4 3.1 91.2 0.5 89.8 1.6 88.2 0.5 189.1 1,856.1 183.3 1,754.0 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 0.0 0.0 0.0 0.0 0.0 0.0 1.7 0.0 1.7 0.0 0.0 33.5 0.0 33.5 0.0 0.0 14.1 0.0 14.1 21.0 72.1 7.5 22.8 74.5 7.6 8.4 36.2 10.0 10.6 33.8 9.1 1.6 34.9 2.1 1.1 39.2 1.8 0.1 27.1 0.0 0.1 26.5 0.0 31.2 468.1 34.5 485.6 170.3 2,047.4 173.9 1,868.4 19.7 610.1 18.6 524.8 0.2 0.3 101.0 105.2 0.0 54.6 0.0 53.5 0.0 38.7 0.0 42.1 0.0 27.2 0.0 26.6 0.2 12.8 0.3 6.1 221.5 3,138.3 227.3 2,884.8 1.9 1.7 1.6 3.2 2.0 4.8 1.8 7.4 2.2 4.7 2.0 8.5 5.0 8.6 5.2 10.0 5.3 12.1 6.7 16.0 4.8 11.7 5.6 16.1 3.0 0.8 2.1 5.8 2.4 1.0 4.3 2.6 3.7 2.5 2.2 5.6 3.8 10.7 3.9 10.1 1.9 2.6 2.7 7.1 1.6 2.3 2.7 6.6 0.2 1.7 0.9 2.9 0.9 0.3 0.0 1.2 0.3 4.0 1.2 5.5 1.1 0.2 0.0 1.4 6.4 12.9 68.5 108.9 5.7 23.0 40.1 106.1 16.1 35.3 97.9 275.2 18.7 47.4 110.5 256.7 10.0 6.3 39.1 36.3 8.7 6.1 33.1 42.4 8.6 24.9 74.7 150.1 8.7 23.6 95.6 171.1 135.7 138.1 115.5 119.2 322.8 313.1 280.0 281.6 854.1 16,043.9 851.9 15,528.0 15,578.9 (651.7) (41.3) (651.7) (52.8) 161.1 147.4 Interest rate contracts Over-the-counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts 5 Futures Options Total Credit derivative contracts Over-the-counter (OTC) contracts Credit default swaps Total rate of return swaps Options and warrants Foreign exchange contracts Over-the-counter (OTC) contracts Forward contracts Interest and currency swaps Options Exchange-traded contracts 5 Futures Options Total Equity / index contracts Over-the-counter (OTC) contracts Forward contracts Options Exchange-traded contracts 5 Futures Options Total Commodities contracts Over-the-counter (OTC) contracts Forward contracts Options Exchange-traded contracts 5 Futures Options Total Total derivative instruments, based on IFRS netting Replacement value netting, based on capital adequacy rules Cash collateral netting Total derivative instruments, based on capital adequacy netting 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 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 Receivables resulting from derivatives are recognized on UBS’s balance sheet under Due from banks and Loans: CHF 0.2 billion. Payables resulting from these derivatives are recognized on UBS’s balance sheet under Due to banks and Due to customers: CHF 0.1 billion. 5 Notional values of exchange-traded products include own account trades only. 6 Includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking Law, based on the IFRS scope of consolidation. 315 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Off-balance-sheet information 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 Fair value of securities received which can be sold or repledged under reverse repurchase, securities borrowing and lending arrangements, derivative transactions and other transactions in unsecured borrowings thereof sold or repledged in connection with financing activities to satisfy commitments under short sale transactions in connection with derivative and other transactions 31.12.09 528,856 515,314 13,542 398,883 335,371 47,469 16,043 31.12.08 651,380 621,981 29,399 430,670 343,252 62,431 24,987 Note 25 Operating lease commitments At 31 December 2009, UBS was obligated under a number of non-cancellable operating leases for premises and equip- ment used primarily for banking purposes. The significant premises leases usually include renewal options and escala- tion clauses in line with general office rental market condi- tions as well as rent adjustments based on price indices. However, the lease agreements do not contain contingent rent payment clauses and purchase options, nor do they im- pose any restrictions on UBS’s ability to pay dividends, en- gage 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 Operating leases due 2010 2011 2012 2013 2014 2015 and thereafter Subtotal commitments for minimum payments under operating leases Less: Sublease rentals under non-cancellable leases Net commitments for minimum payments under operating leases 31.12.09 989 870 786 658 555 2,113 5,971 690 5,281 316 Note 25 Operating lease commitments (continued) CHF million Gross operating lease expense from continuing operations from discontinued operations Sublease rental income from continuing operations Net operating lease expense from continuing operations from discontinued operations 31.12.09 31.12.08 31.12.07 1,191 1,191 0 57 1,134 1,134 0 1,215 1,215 0 50 1,165 1,165 0 1,251 1,233 18 54 1,197 1,179 18 Operating lease contracts include non-cancellable long-term leases of office buildings in most UBS locations. At 31 De- cember 2009, the minimum lease commitments for each of 11 office locations exceeded CHF 100 million and non-can- cellable minimum lease commitments for the office location in New York exceeded CHF 500 million. n o i t a m r o f n i l a i c n a n i F 317 Financial information Notes to the consolidated financial statements Additional information Note 26 Capital increases and mandatory convertible notes June 2009 share capital increase On 25 June 2009, UBS increased its share capital by issuing 293,258,050 new registered shares with a par value of CHF 0.10 each. The shares were placed with a small number of large institutional investors at a price of CHF 13.00 per share. Net proceeds from the capital increase were CHF 3.8 billion. The shares were issued upon decision by the Board of Di rectors out of authorized capital which had been approved at the annual general meeting of shareholders on 15 April 2009. Conversion of the mandatory convertible notes (MCNs) issued to the Swiss Confederation On 19 August 2009, the Swiss Confederation announced the conversion of its UBS CHF 6 billion mandatory convert ible notes (MCNs). Upon conversion on 25 August 2009, UBS issued 332,225,913 new shares with a nominal value of CHF 0.10 each from existing conditional capital. The liability and the Negative replacement value recorded on the bal ance sheet for the principal amount and the embedded de rivative component of the MCNs were reclassified to equity. The conversion of the MCNs resulted in an overall increase in equity of CHF 6,718 million for 2009, reflecting an increase in share capital of CHF 33 million and an increase in share premium of CHF 6,685 million. Prior to the conversion of the MCNs, the embedded derivative component was remea sured to fair value resulting in a gain of CHF 341 million for 2009. In addition, the Swiss Confederation waived its right to receive future coupon payments on the converted MCNs for a cash amount of approximately CHF 1.8 billion. The impact on UBS’s income statement resulting from this waiver was not material. Note 27 Fair value of financial instruments a) Valuation principles Fair value is the amount for which an asset could be ex changed, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Financial in struments classified as held for trading or designated at fair value through profit or loss and financial assets classified as available for sale are recognized in the financial statements at fair value. All derivatives are measured at fair value. Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available. Fair value of a financial asset or financial liability in an active market is the current bid or of fer price times the number of units of the instrument held. Where a trading portfolio contains both financial assets and financial liabilities with offsetting market risks, fair value is determined by valuing the gross long and short positions at current midmarket prices, with an adjustment at portfolio level to the net open long or short position to amend the valuation to bid or offer as appropriate. Where the market for a financial instrument is not active, fair value is established using a valuation technique or pric ing model. These valuation techniques and models involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of marketbased data. Valuation adjustments may be made to allow for ad ditional factors including model risks, liquidity risk and credit risk. Based on the established fair value and model gover nance policies and related controls and procedures applied, the 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. 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 (“Deferred day 1 profit or loss”). The timing of the recognition in profit and loss of this initial difference in fair value depends on the individual facts and circumstances of each transaction but is never later than when the market data become observable. Pricing models and valuation techniques The most frequently applied pricing models and valuation techniques include discounted cash flow models, relative 318 Note 27 Fair value of financial instruments (continued) a) Valuation principles (continued) value models and option pricing models. Discounted cash flows determine the value by estimating the expected future cash flows from assets or liabilities discounted to their pres ent value. Relative value models determine the value based on the market prices of similar assets or liabilities. Option pricing models are complex present value models, such as binomial options pricing models. UBS uses widely recognized valuation models for deter mining fair values of financial instruments of lower complex ity, such as interest rate and currency swaps. For more com plex instruments, UBS uses internally developed models, which are usually based on valuation methods and tech niques generally recognized as standard within the industry. Such valuation models are used primarily to value derivatives transacted in the overthecounter (OTC) market, unlisted equity and debt securities (including those with embedded derivatives), and other fair valued debt instruments for which markets were illiquid in 2009. Marketobservable assump tions and inputs are used where available, and derived from similar assets in similar and active markets, from recent trans action prices for comparable items or from other ob servable market data. Little, if any, weight is placed on trans action prices when calculating the fair value if there is no active market and the transactions are not orderly (i.e. dis tressed or forced). For positions where observable reference data are not available for some or all parameters, UBS cali brates the nonmarketobservable inputs used in its valua tion models based on a combination of judgment, historical experience and knowledge of current market conditions. As sumptions and inputs used in valuation techniques and models include benchmark interest rates, credit spreads and other premia used in estimating discount rates, bond and equity prices, equity index prices, foreign exchange rates and volatilities and correlations. The output of a model is always an estimate or approxi mation of a value that cannot be determined with cer tainty, and valuation techniques employed may not fully reflect all factors relevant to the positions UBS holds. Valu ations are therefore adjusted, where appropriate, to bring the fair value derived from the model towards the appro priate bid / offer price and cover close out costs, credit exposure and model uncertainty. 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. Interest rate curves UBS uses various interest rate curves for valuing its financial instruments. Financial liabilities designated at fair value are measured using UBS’s senior debt curve. Financial assets designated at fair value are valued consistent with the curve used for the particular business. Uncollateralized credit exposure is reserved through normal credit rating and re serving methods. For the valuation of derivative instruments, UBS generally employs a LIBOR flat curve. If the derivatives are only partially collateralized, or uncollateralized, the credit exposure is adjusted through a credit valuation adjustment (CVA) or a debit valuation adjustment (DVA). For the valua tion of overnight interestrate swaps, the overnight interest rate swap curve is applied. Counterparty credit risk in the valuation of OTC derivative instruments, derivatives embedded in funded assets designated at fair value and derivatives embedded in traded debt instruments In order to arrive at fair value, credit valuation adjustments (CVA) are necessary to reflect the credit risk of the counter party inherent in overthecounter (OTC) derivatives trans actions, derivatives embedded in funded assets designated at fair value and derivatives embedded in traded debt instru ments. This amount represents the estimated market value of protection required to hedge against credit risk from counterparties in these instruments. CVA depends on ex pected future exposures, default probability and recovery rate. The calculation takes into account whether collateral or netting arrangements or break clauses are in place. The most significant component of the overall CVA is the portion re lated to monoline credit protection, discussed further below. UBS’s own credit risk in the valuations of derivative financial liabilities (Negative replacement values) In 2009, the Group revised its methodology for estimating debit valuation adjustments (DVA) to incorporate own credit in the valuation of derivatives, predominantly to align it with the CVA methodology described above. Under the pre vious approach, the Libor flat valuation of uncollateralized deriva tive liabilities after consideration of any netting agreement was revalued using UBS’s senior debt curve. The difference between the valuation at Libor flat and the valuation at the senior debt curve provided the lifetodate DVA, and the change in the lifetodate DVA between periods provided the own credit gain or loss in each period. Under the new approach, the Group applies a methodology consistent with that used to calculate CVA. The calculation takes into ac count negative expected exposure profiles for the derivative portfolio, collaterals, netting agreements, expected future 319 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 27 Fair value of financial instruments (continued) a) Valuation principles (continued) marktomarket movements, and UBS’s credit default spreads to determine the UBS counterparty exposure from the perspective of holders of UBS debt. The debit valuation adjustments (DVA) so calculated represent the theoretical costs to counterparties of hedging their UBS credit exposure or the credit risk reserve that a counterparty could reason ably be expected to hold against their credit risk exposure to UBS, if they applied the same methodology as used to calcu late UBS’s CVA. The impact of this methodology change is included in the financial impact of the valuation changes for derivative liabilities and financial liabilities designated at fair value described below. As of 31 December 2009, the CVA and DVA for derivative financial instruments (replacement values) were as follows: CHF billion Life-to-date of which: CVA on monoline credit protection – negative basis trades of which: CVA on monoline credit protection – other of which: CVA on other instruments Year-to-date 2 of which: CVA on monoline credit protection – negative basis trades of which: CVA on monoline credit protection – other of which: CVA on other instruments 1 Amounts do not include reserves against defaulted counterparties. 2 CVA amounts do not include commutations. 31.12.09 DVA 0.4 N/A N/A N/A (1.9) N/A N/A N/A CVA 1 (4.3) (2.9) (0.2) (1.2) 0.6 (0.8) 0.4 1.1 UBS’s own credit risk in the valuations of financial liabilities designated at fair value The Group’s own credit changes are reflected in valuations for those financial liabilities designated at fair value, where the Group’s own credit risk would be considered by market participants. They are discounted for fully collateralized trans actions and other instruments for which it is established mar ket practice not to include an entityspecific adjustment for own credit. Own credit changes were calculated based on a senior 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 longterm UBS debt. The senior debt curve is considered to be representative of the credit risk which reflects the premi um (or discount) that market participants require to acquire UBS debt. In the absence of an observable senior debt curve, credit default swap spreads would be considered as well. The own credit results for Financial liabilities designated at fair value (predominantly issued structured products) were as follows: Own credit on financial liabilities designated at fair value CHF million Total gain / (loss) for the year ended of which: credit spread related only Life-to-date gain 31.12.09 1 (2,023) (1,958) 890 As of or for the year ended 31.12.08 31.12.07 2,032 3,993 2,953 659 659 663 1 Includes the following impacts from valuation changes as of 1 January 2009: increase in own credit of CHF 823 million on a year-to-date and life-to-date basis; increase of CHF 441 million in own credit related to credit spread only. 320 Note 27 Fair value of financial instruments (continued) a) Valuation principles (continued) The yeartodate amounts represent the portion of the change in fair value of the financial liabilities designated at fair value that is related to own credit. The lifetodate amount reflects the gain related to own credit by which the fair value of financial liabilities designated at fair value has changed since inception. Included in these amounts is the quantification of changes in fair value attributable to chang es in UBS’s credit spread during the periods. In addition, the total own credit changes include the credit effect of “volume changes”, i.e. the credit effect of period changes in fair val ues attributable to factors other than credit spreads, such as redemptions, effects from time decay, changes in the value of referenced instruments issued by third parties, or, in the case of the lifetodate amount, changes in the foreign ex change rates. Changes to the valuation of derivative financial instruments and financial instruments designated at fair value In 2009, UBS reviewed its approach to calculating and booking own credit of derivative liabilities and financial liabilities designated at fair value. The following paragraph describes the impacts of the changes on UBS’s 2009 re sults and balance sheet as of the transition date 1 January 2009. UBS’s 2009 net profit and net trading income increased by CHF 143 million, made up of a charge of CHF 222 million to the Corporate Center and a CHF 365 million credit to the Investment Bank. The net impact on the Investment Bank comprises a credit of CHF 823 million related to own credit and a debit of CHF 458 million to the fixed income, curren cies and commodities business. Financial liabilities designat- ed at fair value decreased by CHF 1,080 million, Financial assets designated at fair value increased by CHF 198 million, Negative replacement values increased by CHF 1,119 mil lion, and Positive replacement values decreased by CHF 16 million. Reflection of market liquidity risk in fair value determinations Fair value estimates incorporate the effects of market liquid ity risk in the relevant markets. Market liquidity risk is the risk that a loss is incurred in neutralizing the exposures within a position or portfolio by either liquidating the position or establishing an offsetting position. A liquidity adjustment is therefore made to provide against the expected cost of cov ering open market risk positions within a portfolio or posi tion. Bid / Offer adjustments are taken where a net open risk position is retained and the model on which it is valued is calibrated to mid market. Valuations based on models in corporate liquidity or risk premiums either implicitly (e.g. by calibrating to market prices that incorporate such premiums) or explicitly. Reflection of model uncertainty in fair value determinations Uncertainties associated with the use of modelbased valua tions are predominantly addressed through the use of model reserves. These reserves reflect the amounts that UBS esti mates are appropriate to deduct from the valuations pro duced 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 prac tice and how it believes other market participants would assess these uncertainties. Model reserves are periodically re assessed in light of information from market transactions, pricing utilities, and other relevant sources. Valuation processes UBS’s fair value and model governance structure includes numerous controls and procedural safeguards that are in tended to maximize the quality of fair value measurements reported in the financial statements. New products need to be reviewed and approved by all stakeholders relevant to risk and financial control. Responsibility for the ongoing mea surement of financial instruments at fair value resides with the business but is independently validated by risk and finan cial control functions. In carrying out their valuation respon sibilities, the businesses are required to consider the avail ability and quality of available external market information and to provide justification and rationale for their fair value estimates. Independent price verification of financial instru ments measured at fair value is undertaken by the product control function which is independent from the risk taking businesses. The objective of the independent price verifica tion process is to independently corroborate the business’ estimates of fair value against available market information. By benchmarking the business’ fair value estimates with ob servable market prices or other independent sources, the de gree of valuation uncertainty embedded in these measure ments can be assessed and managed as required in the governance framework. A critical aspect of the independent price verification process is evaluation of the appropriateness of modeling approaches and input assumptions which yield fair value estimates derived from valuation models. An inde pendent model review group reviews UBS’s valuation models on a regular basis or if specific triggers occur and approves them for valuing specific products. As a result of the valua tion controls employed, valuation adjustments may be made to the business’ estimate of fair value to either align with independent market information or financial accounting standards. 321 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 27 Fair value of financial instruments (continued) b) Fair value hierarchy All financial instruments at fair value are categorized into one of three fair value hierarchy levels at yearend, based upon the lowest level input that is significant to the prod uct’s fair value measurement in its entirety: – Level 1 – quoted prices (unadjusted) in active markets for – Level 2 – valuation techniques for which all significant inputs are market observable, either directly or indirectly; and – Level 3 – valuation techniques which include significant inputs that are not based on observable market data. identical assets and liabilities Determination of fair values from quoted market prices or valuation techniques CHF billion Trading portfolio assets Trading portfolio assets pledged as collateral Positive replacement values of which: Interest rate contracts Credit derivative contracts Foreign exchange contracts Equity / index contracts Commodities contracts Financial assets designated at fair value Financial investments available-for-sale Total assets Trading portfolio liabilities Negative replacement values of which: Interest rate contracts Credit derivative contracts Foreign exchange contracts Equity / index contracts Commodities contracts Financial liabilities designated at fair value Total liabilities Level 1 110.9 31.3 4.0 0.8 0.0 0.3 2.9 0.0 0.8 74.3 221.4 33.5 3.7 0.7 0.0 0.3 2.8 0.0 0.0 37.2 31.12.09 Level 2 Level 3 65.5 12.3 393.8 213.7 58.0 95.9 20.5 5.8 9.2 6.1 487.0 13.6 389.2 203.1 55.8 99.4 25.0 5.8 102.4 505.2 11.6 0.6 23.8 0.6 20.5 0.9 1.7 0.1 0.3 1.4 37.6 0.4 17.0 0.0 14.7 1.4 1.0 0.0 10.3 27.7 31.12.08 Total 188.0 44.2 421.7 215.1 78.6 97.1 25.1 5.9 10.2 81.8 745.9 47.5 409.9 203.7 70.6 101.1 28.7 5.8 112.7 570.1 Level 1 128.1 25.4 5.1 0.1 0.0 0.4 4.6 0.0 1.1 2.4 162.1 33.9 4.9 0.0 0.0 0.3 4.5 0.0 0.0 38.8 Level 2 128.4 13.2 811.2 372.0 166.7 221.0 26.7 24.8 11.2 1.2 965.2 27.5 812.0 366.9 153.7 227.0 40.7 23.6 91.2 930.7 Level 3 15.3 1.6 37.8 3.0 30.7 0.0 4.1 0.0 0.6 1.6 57.0 1.0 35.0 1.8 31.0 0.0 2.1 0.0 10.3 46.3 Total 271.8 40.2 854.1 375.1 197.4 221.5 35.3 24.8 12.9 5.2 1,184.3 62.4 851.9 368.7 184.8 227.3 47.4 23.6 101.5 1,015.8 Detailed breakdowns of UBS’s trading portfolio and financial investments availableforsale by fair value hierarchy levels are shown in Note 11 and 13, respectively. 322 Note 27 Fair value of financial instruments (continued) b) Fair value hierarchy (continued) Transfers between level 1 and level 2 of the fair value hierarchy Trading assets of approximately CHF 9 billion, of which CHF 5 billion are debt instruments, and trading liabilities of ap proximately CHF 4 billion, of which almost all are debt in struments, were transferred from level 2 to level 1 due to increased trading activities and volumes, respectively. Trading assets and liabilities with amounts of approxi mately CHF 8 billion and approximately CHF 3 billion were transferred from level 1 to level 2. The assets largely related to government bonds (CHF 3 billion) and equity instruments (CHF 3 billion). The trading liabilities transferred from level 1 to level 2 consisted equally of short sold debt and equity in struments. These assets and liabilities transferred from level 1 to level 2 no longer met the average market activity UBS considers necessary when determining whether an instru ment is traded in an active market. Movements of level 3 instruments The table below includes a rollforward of the balance sheet amounts of the significant classes of financial instru ments classified within level 3. Movements of level 3 instruments and gains / losses for level 3 instruments held at the end of the reporting period CHF billion Balance at 31 December 2008 Total gains / losses included in the income statement Net trading income Other Purchases, sales, issuances and settlements Purchases Sales Issuances Settlements Transfers into and/or out of level 3 Transfers into level 3 Transfers out of level 3 Foreign currency translation Balance at 31 December 2009 Total gains / losses for the period included in the income statement for level 3 instruments held at the end of the reporting period Net trading income Other Trading portfolio assets (including those pledged as collateral) 1 16.9 Derivative instruments (net replacement values) 1 2.8 Financial liabilities designated at fair value 1 10.3 (3.9) (3.7) (0.2) (6.3) 5.6 (11.9) 0.0 0.0 5.4 12.5 (7.1) 0.1 12.2 (0.5) (1.0) 0.5 2.4 2.2 0.2 (1.0) 0.0 0.0 2.0 (3.0) 2.8 3.3 (0.5) (0.2) 6.8 (0.6) (0.6) 0.0 (1.7) (1.1) (0.6) (4.6) 0.0 0.0 2.7 (7.3) 5.3 8.0 (2.7) 1.0 10.3 (0.7) (0.7) 0.0 1 Where financial instruments moved into or out of level 3 level during 2009, this change is reflected as if the financial instrument had been in the new level as of the beginning of the quarter in which the movement took place. n o i t a m r o f n i l a i c n a n i F 323 Financial information Notes to the consolidated financial statements Note 27 Fair value of financial instruments (continued) b) Fair value hierarchy (continued) Material changes in level 3 instruments As of 31 December 2009, financial instruments measured with valuation techniques using significant nonmarket observable inputs (level 3) mainly included the following instruments: – structured rates and credit trades, including bespoke collateralized debt obligations (CDOs), – instruments linked to the US residential and US commer cial real estate markets, – nonUS referencelinked notes, and – equitylinked notes issued by UBS. Trading portfolio assets Trading portfolio assets transferred into and out of level 3 amounted to CHF 12.5 billion and CHF 7.1 billion, respec tively. On a net basis, approximately CHF 3 billion of transfers into level 3 were related to certain nonUS referencelinked notes held in Asia as price determining factors for these instruments, such as prices of the underlying assetbacked securities, including residential and commercial realestate securities, became unobservable. Other credit positions (largely puttable bonds) of approximately CHF 2 billion were transferred into level 3 since the embedded options could not be price tested. In addition, leverage finance instru ments, assetbacked securities and other instruments of ap proximately CHF 1 billion in total, were transferred into level 3 due to prices becoming unobservable. Transfers out of lev el 3, on a net basis, largely comprised structured rates and credit trades of approximately CHF 1 billion, since liquidity had returned to the underlying markets, as well as corporate bonds of approximately CHF 1 billion, for which indepen dent pricing sources became observable. Level 3 trading assets purchased in 2009 largely include leverage finance products of approximately CHF 2 billion and other credit instruments of approximately CHF 1 billion. Due to sales and settlements, level 3 instruments de creased by approximately CHF 12 billion. The following in struments were affected: structured rates and credit trades by approximately CHF 1 billion, bespoke CDOs by approxi mately CHF 2 billion, instruments linked to the US sub prime residential and US commercial real estate markets by approximately CHF 3 billion, instruments linked to the non US real estate market by approximately CHF 2 billion, and leverage finance instruments, referencelinked notes, non real estate assetbacked securities, and other credit instru ments by approximately CHF 1 billion for each of these categories. Derivative instruments Net replacement values transferred into and out of level 3 amounted to approximately CHF 3 billion and approximately CHF 1 billion, respectively. Transfers into level 3 instruments included Positive replacement values of CHF 26 billion and neg ative replacement values of CHF 23 billion. Transfers out of lev el 3 instruments included Positive replacement values of CHF 20 billion and negative replacement values of CHF 19 billion. Transfers into level 3 of replacement values mainly includ ed bespoke CDOs, whose correlation was not observable through models or through reference data, singlename cor porate credit default swaps (CDS), for which credit curves were not available from pricing sources, and home equity loans CDSs and other instruments linked to the US residen tial real estate market, whose recovery values became unob servable due to the illiquidity of the underlying positions. In addition, certain structured rates and credit trades whose loan and credit curves were unobservable have been trans ferred to level 3. Transfers of replacement values out of level 3 consisted mainly of structured rates and credit trades, for which inde pendent pricing sources (e.g. reliable quotes from pricing services) became available, and other credit instruments for which recovery rates and credit spreads could be observed in the market. Financial liabilities designated at fair value Level 3 financial liabilities designated at fair value reclassified into level 3 in 2009 of CHF 8 billion predominantly related to hybrid financial liabilities, including equitylinked notes is sued by UBS, and funded credit derivatives. The main driver for the reclassification was the lack of market data for un derlying credit default swap curves. Level 3 sensitivity information Financial instruments carried at fair value on UBS’s balance sheet include a subset of instruments for which fair value is measured in full or in part using valuation techniques based on assumptions that are not supported by market observ able prices or rates. There may be uncertainty about a valuation, resulting from the choice of the 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 or model. At 31 December 2009, UBS performed a sensitivity analy sis to assess the range of reasonably possible alternative val 324 Note 27 Fair value of financial instruments (continued) b) Fair value hierarchy (continued) uations for level 3 instruments. In undertaking this analysis, UBS evaluated these instruments by classifying them into low, medium and high categories of valuation uncertainty based on the assessment of instrument level characteristics and available market information. Instrument level charac teristics include the model from which the valuation was de rived, the degree of impact on fair value by unobservable parameters, reserves and valuation adjustments. Market in formation includes any data that supports the classification such as reference to similar instruments and observable pa rameter information. Based on the valuation uncertainty as signed to an instrument, the market value was adjusted up ward and downward and summed across the level 3 financial assets and liabilities to arrive at the estimated range of rea sonably possible alternative valuations, as shown in the table below: Favorable valuation changes for assets would be off set to a significant degree by unfavorable changes in liabili ties and vice versa as a consistent use of different assump tions and estimates would prevent a simultaneous favorable or unfavorable valuation change of assets and liabilities. As of 31 December 2009, CHF billion Financial assets 1 of which: trading portfolio assets (including those pledged as collateral) of which: positive replacement values Financial liabilities of which: financial liabilities designated at fair value of which: negative replacement values 1 Includes level 3 sensitivity for financial instruments accounted for at fair value through profit or loss. c) Valuation techniques by product and market risk sensitivity Favorable changes Unfavorable changes 4.1 1.0 3.1 (3.3) (1.6) (1.7) (4.1) (1.0) (3.1) 3.3 1.6 1.7 This section includes a description of the valuation of certain significant product categories and related valuation tech niques and models. In addition, sensitivity information for certain significant instrument categories that are excluded from Management ValueatRisk as disclosed in the Risk and treasury management section of this report is provided. Credit valuation adjustments on monoline credit protection UBS previously entered into negative basis trades with mono lines, whereby they provided credit default swap pro tection against UBSheld underlyings, including residential mortgagebacked securities collateralized debt obligations (RMBS CDO), transactions with collateralized loan obligation (CLO) and assetbacked securities collateralized debt obliga tions (ABS CDO). Since the start of the financial crisis, the credit valuation adjustments (CVA) relating to these mono line exposures have been a source of valuation uncertainty, given market illiquidity and the terms of these exposures rel ative to other monolinerelated instruments. CVA amounts related to monoline credit protection are based on a methodology that uses credit default swap (CDS) spreads on the monolines as a key input in determining an implied level of expected loss. Where a monoline has no ob servable CDS spread, a judgment is made on the most com parable monoline or combination of monolines and the cor responding spreads are used instead. For RMBS CDO, CMBS CDO, and CLO asset categories, cash flow projections are used in conjunction with current fair values of the underlying assets to provide estimates of expected future exposure lev els. For other asset categories, future exposure is based on current exposure. To assess the sensitivity of the monoline CVA calculation to alternative assumptions, the impact of a 10% increase in mon oline credit default swap spreads (e.g. from 2,000 basis points to 2,200 basis points for a specific monoline) was considered. At 31 December 2009, such an increase would have resulted in an increase in the monoline credit valuation adjustment of approximately USD 77 million (CHF 80 million; 31 December 2008: USD 206 million or 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 20% to 19% for a specific monoline, conditional on default occurring) is estimated to result in an increase of approximately USD 26 million (CHF 27 million) in the CVA (31 December 2008: USD 58 million or CHF 62 million). The sensitivity to recovery rates is substantially linear. Instruments linked to US residential real estate market As of 31 December 2009, instruments linked to the US resi dential real estate market (e.g., US RMBS CDO) are present ed as Positive or Negative replacement values, or trading portfolio assets. The Group applies a fundamental model, 325 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 27 Fair value of financial instruments (continued) c) Valuation techniques by product and market risk sensitivity (continued) based on contractual cash flows of the underlying bonds due to the absence of liquidity, and therefore pricing infor mation. The contractual cash flows are adjusted for the ex pected rate of underlying defaults. Losses in the underlying mortgage pools are derived from the development of de fault and prepayment curves to which loss severity and inter est curves are applied. The projected lifetime losses are ad ditionally calibrated to ABX market indices. The default adjusted mortgage bond cash flows are then aggregated across all bond positions in the CDO, to arrive at the overall expected cash flows from the mortgage pool, used for the discounting process. The principles of this model are applied to both cash and synthetic instruments. Commitments to acquire auction rate securities (ARSs) Following the settlement agreements reached regarding ARS, UBS has fair valued its commitment to repurchase eli gible ARS from customers at par. The commitment is treated as a derivative and fair valued through profit or loss. The value of the derivative has three main variables: (1) forward fair market value of the ARS underlying the remaining out standing commitments, (2) client put behavior, and (3) fore casted issuer redemptions at par. The model to value the commitment considers the cash flows of the trusts them selves, and where the predicted cash flows are expected to create a surplus, the trust is assumed to redeem at par, be cause its choices of alternative actions, primarily to issue new loans or redeem, are severely restricted. UBS assumes that all clients will put their eligible ARS back to UBS at par on the first eligible day pursuant to the agreement with the US authorities. The discount rates in this model embed risk premiums that are calibrated to observed market trans actions. UBS estimates that a 50% increase or decrease in the risk premiums would result in a loss of approximately USD 287 million (CHF 297 million) or gain of approximately USD 303 million (CHF 314 million). As of 31 December 2008 a similar model was applied, however, at the beginning of 2009 revisions were made to better reflect assumptions about when the clients are expected to exercise their put options. US reference-linked notes (US RLNs) The US referencelinked notes (US RLNs) consist of a series of transactions whereby UBS purchased credit protection, pre dominantly in note form, on a notional portfolio of fixed in come assets. The referenced assets are comprised of USD Asset-Backed Securities (ABSs) (primarily commercial mort gagebacked securities and subprime residential mortgage backed securities) and / or corporate bonds and loans across all rating categories. The credit protection embodied in the RLNs is fair valued using a market standard approach to the valuation of portfolio credit protection (Gaussian copula). This approach effectively is intended to simulate correlated defaults within the portfolio, where the expected losses and defaults of the individual assets are closely linked to the ob served market prices (spread levels) of those assets. Key as sumptions 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 part ly 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 correla tion, recovery and spreads are set to various levels depend ing on the asset type and / or region and may vary over time depending on the best judgment of the relevant trading and control personnel. Correlation and recovery shocks are gen erally in the reasonably possible range of 5 to 15 percentage points. Spread shocks vary more widely and depend on whether the underlying protection is funded or unfunded to reflect cash or synthetic basis effects. As of 31 December 2009, the fair value of the US RLN credit protection (pre reserve) is approximately USD 1,502 million (CHF 1,555 mil lion; 31 December 2008: USD 3,284 million or CHF 3,502 million). The fair value adjustments calculated by applying the shocks described above are approximately USD 71 mil lion (CHF 74 million; 31 December 2008: USD 299 million or CHF 319 million) as of 31 December 2009. This adjustment may also be considered a measurement of sensitivity. Non-US reference-linked notes (Non-US RLNs) The same valuation model and the same approach to calcu lation of fair value adjustments are applied to the nonUS referencelinked note (nonUS RLN) credit protection as to the US RLN credit protection described above, except that the spread is shocked by 10% for European corporate names. As of 31 December 2009, the fair value of the non US RLN credit protection is approximately USD 1,155 million (CHF 1,196 million; 31 December 2008: USD 1,971 million or CHF 2,102 million). The fair value adjustments (up and down) calculated by applying the shocks described above are approximately USD 105 million (CHF 109 million; 31 De cember 2008: USD 155 million or CHF 165 million). This adjustment may also be considered a measurement of sen sitivity. Option to acquire equity of the SNB StabFund Under IFRS, UBS’s option to purchase the SNB StabFund’s equity is recognized on the balance sheet as a derivative at 326 Note 27 Fair value of financial instruments (continued) c) Valuation techniques by product and market risk sensitivity (continued) fair value (Positive replacement values) with changes to fair value recognized in profit and loss. As of 31 December 2009, the fair value (after adjustments) of UBS’s call option was ap proximately USD 1,174 million (CHF 1,216 million; 31 De cember 2008: CHF 1,100 million). The model adopted in 2009 incorporates cash flow pro jections for all assets within the fund across various scenarios and is calibrated to market levels by setting the spread above onemonth Libor rates used to discount future cash flows such that the modelgenerated price of the underlying asset pool equals UBS’s assessed fair value of the asset pool. The model incorporates a model reserve (fair value adjustment) to address potential uncertainty in this calibration. For 31 December 2009, this adjustment was USD 262 million (CHF 271 million; 30 September 2009: USD 229 million or CHF 237 million). As of 31 December 2009, a 100 basis points increase in the discount rate would have decreased the option value by approximately USD 126 million (CHF 130 million) and a 100 basis points decrease would have in creased the option value by approximately USD 143 million (CHF 148 million). Bespoke collateralized debt obligations (CDOs) Significant positions of bespoke CDOs are classified as level 3 instruments (31 December 2009: Positive replacement value of CHF 6,067 million and Negative replacement value of CHF 6,208 million; 31 December 2008: Positive replacement value of CHF 15,118 million and Negative replacement value of CHF 16,137 million). The instruments represent customized collateralized debt obligations. These products are sold in ‘tranches’ whereby the tranche’s seniority and attachment points reflect the size of the risk being taken. One of the main risks that the investor is exposed to is the correlation behavior of the names in the tranche. The primary market inputs to the valuation approach are observed in the vanilla credit markets, being the vanilla credit indices and single name credit curves. A widelyused modeling approach is applied, which first constructs the correlation from the index information and then values the transaction by comparing it to the index. Equity-linked notes issued by UBS As of 31 December 2009, equitylinked notes issued by UBS of CHF 3,398 million (31 December 2008: CHF 3,316 mil lion) accounted for as financial liabilities designated at fair value were classified as level 3. The valuation models used for these types of notes are a market standard BlackScholes model for the more standard vanilla type returns and a “Local Volatility Monte Carlo” based approach for more complex instruments. While some of the parameter inputs to these models will be observable, for example equity and FX spot prices and interest rates, others will be based on valuation techniques or will re quire the extrapolation of observable data, which may result in an instrument being required to be classified in level 3. The main parameters which may not be directly observ able are equity volatilities and dividend assumptions for longerdated trades which will normally be extrapolated from observable shorterterm market information. Correla tion inputs, required for instruments where the value is based upon multiple underlyings, will be calculated by a modeling technique which uses historic data to estimate future correlation levels, the model output being bench marked against available information. n o i t a m r o f n i l a i c n a n i F 327 Financial information Notes to the consolidated financial statements Note 27 Fair value of financial instruments (continued) d) Deferred day 1 profit or loss The table reflects financial instruments for which fair value is determined using valuation models where not all signifi cant inputs are market observable. Such financial instru ments are initially recognized at their transaction price al though 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 begin ning and end of the period and a reconciliation of changes in the balance of this difference (movement of deferred day 1 profit or loss). Deferred day 1 profit or loss CHF million Balance at the beginning of the year Deferred profit / (loss) on new transactions Recognized (profit) / loss in the income statement Foreign currency translation Balance at the end of the year For the year ended 31.12.09 31.12.08 627 231 (240) (19) 599 550 588 (459) (52) 627 On 31 December 2009, deferred day 1 profit or loss of ap proximately CHF 0.3 billion (31 December 2008: approxi mately CHF 0.4 billion) pertains to multiname credit default swaps (largely structured rates and credit trades, including bespoke CDOs), and of approximately CHF 0.3 billion (31 December 2008: approximately CHF 0.2 billion) to over thecounter (OTC) equity options. Both instruments are pre sented as replacement values on UBS’s balance sheet. e) Financial instruments accounted for at amortized cost The following table reflects the estimated fair values for UBS’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. CHF billion Assets Due from banks Loans Cash collateral on securities borrowed Reverse repurchase agreements Accrued income and prepaid expenses, other assets Liabilities Due to banks Due to customers Cash collateral on securities lent Repurchase agreements Debt issued Accrued expenses and deferred income, other liabilities Off-balance-sheet financial instruments Loan commitments 1 Guarantees and similar instruments 2 31.12.09 31.12.08 Carrying value Fair value Carrying value Fair value 46.6 305.1 63.5 116.7 5.1 65.2 410.5 8.0 64.2 134.5 15.9 0.3 0.1 46.6 306.0 63.5 116.7 5.1 65.1 410.5 8.0 64.2 133.6 15.9 0.4 (0.1) 64.5 338.5 122.9 224.6 9.1 125.6 465.7 14.1 102.5 201.2 22.8 64.5 338.1 122.9 224.8 9.1 125.6 465.7 14.1 102.5 199.7 22.8 1 Loan commitments include derivative loan commitments, loan commitments accounted for as financial liabilities designated at fair value and other loan commitments not recognized on balance sheet, unless a provision is required. 2 The fair value of financial guarantees is positive as the present value of the expected fees exceeds the present value of the expected outflows. 328 Note 27 Fair value of financial instruments (continued) e) Financial instruments accounted for at amortized cost (continued) The fair values included in the table above were calcu lated 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 amor tized cost. However, because other institutions may use dif ferent methods and assumptions for their fair value esti mation, such fair value disclosures cannot necessarily be compared from one financial institution to another. UBS ap plies significant judgments and assumptions to arrive at these fair values, which are more holistic and less sophisti cated than UBS’s established fair value and model gover nance policies and processes applied for financial instru ments accounted for at fair value, whose fair values impact UBS’s balance sheet and net profit. The following principles were applied when determining fair value estimates for financial instruments accounted for at amortized cost: – For financial instruments with remaining maturities greater than three months, the fair value was determined from quoted market prices, where available. – Where quoted market prices were not available, the fair values were estimated by discounting contractual cash flows using current market interest rates or appropriate yield curves for instruments with similar credit risk and maturity. These estimates generally include adjustments for counterparty credit or UBS’s own credit. have remaining maturities of three months or less: 99% of loans due from banks; 55% of loans due from cus tomers; 100% of cash collateral on securities borrowed; 100% of reverse repurchase agreements; 96% of amounts due to banks; 100% of amount due to custom ers; 100% of cash collateral on securities lent; 100% of repurchase agreements; and 49% of debt issued. – The fair value of variableinterest bearing financial instru ments 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 or UBS’s own credit movements. – The fair value estimates for repurchase and reverse repur chase agreements with variable and fixed interest rates, for all maturities, include the valuation of the interest rate component of these instruments. Credit and debit valua tion adjustments have not been included in the valuation due to the shortterm nature of these instruments. – Loans include Wealth Management assets, mainly mort gage loans, where fair values exceed related carrying val ues by CHF 3.3 billion, and Investment Bank assets where fair values fall below related carrying values by CHF 2.4 billion, of which CHF 0.9 billion relate to reclassified fi nancial assets. – For shortterm financial instruments with remaining ma turities of three months or less, the carrying amount, which is net of credit loss allowances, is generally consid ered a reasonable estimate of fair value. The following financial instruments accounted for at amortized cost – The estimated fair values of offbalance sheet financial instruments are based on market prices for similar facili ties and guarantees. Where this information is not avail able, fair value is estimated using discounted cash flow analysis. n o i t a m r o f n i l a i c n a n i F 329 Financial information Notes to the consolidated financial statements Note 28 Pledged assets and transferred financial assets which do not qualify for derecognition Financial assets are mainly pledged in securities borrowing and lending transactions, in repurchase and reverse repur chase transactions, under collateralized credit lines with cen tral banks, against loans from mortgage institutions, in con nection with derivative transactions, as security deposits for stock exchanges and clearinghouse memberships, or trans ferred for security purpose in connection with the issuance of covered bonds. Assets pledged CHF million Financial assets held for trading pledged to third parties for liabilities with and without the right of rehypothecation of which: pledged to third parties with right of rehypothecation Mortgage loans 1 Other 2 Total Carrying amount 31.12.09 31.12.08 64,748 44,221 21,741 65,775 152,264 78,002 40,216 3,699 21,040 102,741 1 Book value includes mortgage loans transferred for security purpose in preparation of upcoming covered bond issuances. 2 Includes financial investments available-for-sale of CHF 53 billion (2008: CHF 0 billion) and reclassified financial assets of CHF 10 billion (2008: CHF 16 billion). 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 dis cussed in Note 1a) 5). Transfer of financial assets which do not qualify for derecognition CHF billion Nature of transaction Securities lending agreements Repurchase agreements Other financial asset transfers Total Continued asset recognition in full – Total assets 31.12.09 31.12.08 17.1 24.6 110.9 152.6 22.0 13.1 46.6 81.7 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 rec ognized are typically transferred in exchange for cash or oth er financial assets. The associated liabilities can therefore be assumed to be approximately the carrying amount of the transferred financial assets except for certain positions pledged with central banks. UBS retains substantially all risks and rewards of the trans ferred 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 agree ments are discussed in Notes 1a) 13) and 1a) 14). Other fi nancial 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 2009 and 2008. The carrying amounts of the partially recognized transferred financial assets are included in the table. 330 Note 29 Measurement categories of financial assets and financial 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 in the table below, which causes certain balances to differ from those presented on the balance sheet. Refer to “Note 27 Fair value of financial instruments” for more information on how fair value of financial instruments is determined. Financial assets 1 Held for trading Trading portfolio assets Trading portfolio assets pledged as collateral Debt issued 2 Positive replacement values Total Fair value through profit or loss Financial assets designated at fair value Cash, loans and receivables Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Loans Accrued income and prepaid expenses Other assets Total Available-for-sale Financial investments available-for-sale Total financial assets Financial liabilities Held for trading Trading portfolio liabilities Debt issued 2 Negative replacement values Total Fair value through profit or loss, other Financial liabilities designated at fair value Amounts due under unit-linked contracts Total Financial liabilities at amortized cost Due to banks Cash collateral on securities lent Repurchase agreements Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total Total financial liabilities 31.12.09 31.12.08 171,173 44,221 3,109 421,694 640,197 261,904 40,216 4,152 854,100 1,160,372 10,223 12,882 20,899 46,574 63,507 116,689 305,061 1,465 3,594 557,789 32,744 64,451 122,897 224,648 338,520 3,238 5,901 792,399 81,757 1,289,966 5,248 1,970,901 47,469 8 409,943 457,420 112,653 21,740 134,393 65,166 7,995 64,175 410,475 8,522 134,453 7,415 698,201 62,431 185 851,864 914,480 101,546 22,084 123,630 125,628 14,063 102,561 465,741 10,012 201,221 12,765 931,991 1,290,014 1,970,101 1 CHF 138 billion of Loans, CHF 0 billion of Due from banks, CHF 8 billion of Financial investments available-for-sale and CHF 7 billion of Financial assets designated at fair value are expected to be recovered or settled after twelve months. 2 Embedded derivatives presented on the balance sheet line Debt issued. 331 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 29 Measurement categories of financial assets and financial liabilities (continued) b) Reclassification of financial assets The reclassification of financial assets reflected 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 financial assets were reclassified using their fair value on the date of the reclassification, which became their new cost basis at that date. In 2008 and first quarter 2009, financial assets with fair values on their reclassification dates of CHF 26 billion and CHF 0.6 billion, respectively, were reclassified out of Trading portfolio assets to Loans. The table below shows the carrying values and fair values of these financial assets. Trading portfolio assets reclassified to loans CHF billion Carrying value of trading portfolio assets reclassified Fair value of trading portfolio assets reclassified Pro-forma fair value gain / (loss) 31.12.09 31.12.08 19.9 19.0 (0.9) 24.2 20.8 (3.4) In 2009, carrying values decreased by approximately CHF 4.3 billion mainly due to sales of approximately CHF 2.6 bil lion. Redemptions, credit loss expenses of CHF 1 billion and the appreciation of the Swiss franc against the US dollar re sulted in a decrease of approximately CHF 3.3 billion. The decrease was partially offset by financial assets of CHF 0.6 billion reclassified in 2009, and the accretion of interest of approximately CHF 0.9 billion from the amortization of the discount between carrying values and the expected recover able amounts. Fair values of reclassified financial assets decreased as well by approximately CHF 1.8 billion in 2009, which includes a fair value gain of approximately CHF 4.7 billion and financial assets reclassified in 2009 of CHF 0.6 billion, offset by de creases of approximately CHF 2.6 billion related to sales and decreases of approximately CHF 4.5 billion related to re demptions and the decline of the CHF/USD exchange rate. The table below provides notional values, fair values, and carrying values by product category, as well as the ratio of carrying value to notional value. Reclassified assets 31.12.09, CHF billion US student loan and municipal auction rate securities Monoline-protected assets 1 Leveraged finance CMBS / CRE (excluding interest-only strips) US reference-linked notes Other assets Total (excluding CMBS interest-only strips) CMBS interest-only strips Total reclassified assets Notional value Fair value Carrying value Ratio of carrying to notional value 9.3 7.5 2.6 2.0 1.1 1.1 23.6 23.6 8.0 6.1 0.9 1.5 0.9 0.9 18.2 0.8 19.0 8.2 6.5 0.8 1.6 1.0 1.0 19.0 0.9 19.9 88% 86% 30% 82% 86% 90% 80% 1 Includes CDOs (notional value of approximately CHF 0.45 billion; carrying value and fair value of approximately CHF 0.3 billion) which are no longer hedged by CDS with monoline insurers following the commutation of these CDS trades in prior periods. Reclassified financial assets impacted UBS’s income statement as presented in the table below. Contribution of the reclassified assets to the income statement CHF billion Net interest income Credit loss (expense) / recovery Other income Impact on operating profit before tax 332 For the year ended 31.12.09 31.12.08 1.5 (1.0) 0.1 0.6 0.1 (1.3) 0.0 (1.2) Note 29 Measurement categories of financial assets and financial liabilities (continued) c) Maximum exposure to credit risk and credit quality information The table below presents the Group’s maximum exposure to credit risk without taking account of any collateral held or other credit enhancements. The amounts included in the table represent the carrying amounts of financial instruments sub ject to credit risk which were determined under the guidance of IFRS. Financial instruments have been netted only if and to the extent a) legally enforceable rights to offset exist, and b) UBS has the intention to settle the underlying transactions on a net basis. As such, the amounts disclosed in the table below should not necessarily be considered a “risk measure”. Maximum exposure to credit risk 1 CHF million Balances with central banks Due from banks Loans Cash collateral on securities borrowed WM&SB WMA 8,589 2,651 0 1,074 194,410 21,492 0 0 31.12.09 IB 9,525 42,568 89,057 63,507 Other 2 0 282 101 0 Reverse repurchase agreements 1,107 4,302 109,896 1,384 116,689 UBS WM&SB WMA 18,114 46,574 17,628 5,499 0 1,096 31.12.08 IB 11,528 57,475 305,061 203,758 23,956 110,056 63,507 0 0 0 122,897 4,223 219,580 Other 2 0 381 750 0 844 UBS 29,156 64,451 338,520 122,897 224,648 Accrued income, other assets and debt under- writing commitments subject to credit risk Financial instruments measured at amortized cost on balance sheet Positive replacement values Trading portfolio assets (including pledged positions) – debt instruments Financial assets designated at fair value – debt instruments Financial investments available-for-sale – debt intruments Financial instruments measured at fair value on balance sheet Credit guarantees, performance guarantees, documentary credits and similar instruments 3 Undrawn irrevocable credit facilities Irrevocable commitments to acquire ARS Commitments Total at the year-end 1,319 147 2,436 1,185 5,087 1,955 183 4,526 2,479 9,144 208,076 27,015 316,989 2,534 520 416,862 2,952 1,778 555,032 421,694 228,840 29,458 526,062 5,610 491 847,158 4,454 841 788,816 854,100 16,341 1,107 117,047 4,535 139,030 85 1,343 219,739 3,695 224,862 65 0 9,317 0 9,383 0 0 11,803 0 11,803 5,393 16,515 52,183 6,315 80,406 615 278 2,451 223 3,567 24,333 18,142 595,409 12,628 650,513 6,310 2,112 1,081,151 4,759 1,094,332 11,888 7,236 0 385 498 0 4,569 51,593 8,700 137 0 0 19,124 883 64,862 137 16,979 59,328 8,700 85,007 14,258 2,775 0 17,033 405 13 0 418 4,856 57,528 16,571 78,955 149 0 0 149 19,668 60,316 16,571 96,555 251,533 46,040 977,260 15,717 1,290,552 252,183 31,988 1,686,168 9,362 1,979,703 1 The exposures are considered the best representation of “maximum exposure to credit risk” as defined by IFRS, without taking into account additional netting potentials, collaterals and other credit risk mitigation measures. 2 Other includes Global Asset Management and the Corporate Center. 3 The related provision of CHF 90 million (CHF 31 million for 2008) has been deducted. The table above does not include written credit protection, which is generally recognized on UBS’s balance sheet under Negative replacement values. It also excludes UBS’s obligations under the Swiss Deposit Insurance. The maximum exposure to credit risk determined under IFRS guidance and disclosed in the table above is actively man aged and subject to credit risk management such as collater alization and hedging. Collateral held and credit risk mitiga tion is described in the section “Risk management and control”. n o i t a m r o f n i l a i c n a n i F 333 Financial information Notes to the consolidated financial statements Note 29 Measurement categories of financial assets and financial liabilities (continued) c) Maximum exposure to credit risk and credit quality information (continued) Financial assets subject to credit risk by rating category CHF million Rating category Balances with central banks Due from banks Loans Cash collateral on securities borrowed and reverse repur- chase agreements Positive replacement values Trading portfolio assets (including pledged) – debt instruments Financial investments available-for-sale – debt instruments Other financial instruments Commitments 1 Guarantees and similar instruments 2 Undrawn irrevocable credit facilities Total CHF million Rating category Balances with central banks Due from banks Loans Cash collateral on securities borrowed and reverse repurchase agreements Positive replacement values Trading portfolio assets (including pledged) – debt instruments Financial investments available-for-sale – debt instruments Other financial instruments Commitments 1 Guarantees and similar instruments 2 Undrawn irrevocable credit facilities Total 0–1 14,491 3,392 21,000 47,928 18,138 61,492 75,363 696 87 962 2–3 3,615 39,256 82,204 100,127 357,590 57,128 5,007 9,211 8,391 40,682 4–5 9 2,526 81,791 24,108 31,511 10,081 3 2,435 4,129 8,441 6–8 9–13 defaulted 1,108 98,611 7,444 10,316 4,523 25 945 2,931 3,357 186 18,544 537 2,682 5,090 8 559 1,475 5,463 106 2,910 52 1,456 716 624 56 422 31.12.09 Total 18,114 46,574 305,061 180,196 421,694 139,030 80,406 14,470 17,070 59,328 243,550 703,210 165,033 129,262 34,546 6,341 1,281,942 6–8 9–13 defaulted 0–1 23,619 5,697 26,210 95,379 46,805 98,836 3,271 1,253 2–3 5,534 43,075 97,300 218,644 602,505 89,508 131 13,085 4–5 3 13,847 82,431 19,841 172,865 20,780 110 2,846 36 238 9,496 33,820 4,944 15,285 1,418 108,076 327 20,204 12,528 24,333 7,103 35 2,048 3,654 2,840 711 5,081 8,031 16 890 1,497 7,719 31.12.08 Total 29,156 64,451 87 4,298 338,520 441 2,511 604 3 824 72 415 347,544 854,100 224,862 3,567 20,947 19,699 60,316 301,344 1,113,099 332,952 162,035 44,477 9,254 1,963,161 1 Excludes commitments to acquire ARS of CHF 8,700 million for 2009 (CHF 16,571 million 2008). 2 The provisions of CHF 90 million for 2009 (CHF 31 million 2008) are not deducted from the notional value of “guarantees and similar instruments”. 334 Note 30 Pension and other post-employment benefit plans a) Defined benefit plans UBS 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 valua tions are performed for the plans in these locations. The measurement date of these plans is 31 December for each year presented. The overall investment policy and strategy for UBS’s de fined benefit pension plans is guided by the objective of achieving an investment return which, together with the contributions paid, is sufficient to maintain reasonable con trol over the various funding risks of the plans. The invest ment advisors appointed by plan fiduciaries are responsible for determining the mix of asset types and target allocations which are reviewed by the plan fiduciaries on a regular 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 longterm rates of return on plan assets are based on longterm expected inflation, interest rates, risk premiums and targeted asset class allocations. These esti mates take into consideration historical asset class returns and are determined together with the plans’ investment and actuarial advisors. Swiss pension plan The Swiss pension plan covers all UBS employees in Switzer land and exceeds the minimum benefit requirements under Swiss law. The Swiss plan allows employees a choice in the level of annual contributions paid by the employee. The pension plan provides benefits which are based on annual contributions as a percentage of salary and accrue at an interest rate that is defined annually by the Pension Foun dation Board. Contributions to the pension plan are paid by employees and the employer. The employee contributions are calculat ed as a percentage of covered salary and are deducted monthly. The percentages deducted from salary for the full standard level of benefit coverage depend on age and vary between 1% and 9% of covered base salary and 3% and 8% of covered variable compensation. The employer pays a contribution that ranges between 100% and 375% of em ployees’ contributions for the standard level of benefit cov erage. The benefits covered include retirement benefits; dis ability, death and survivor pensions; and employment termination benefits. The employer contributions expected to be made in 2010 to the Swiss pension plan are CHF 560 million. Foreign pension plans The foreign locations of UBS operate various pension plans in accordance with local regulations and practices. 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 re flect the net funded positions of the material foreign plans. The pension plans provide benefits in the event of retire ment, death or disability. The level of benefits provided de pends on the defined rate of benefit accrual and level of com pensation. The plans are funded entirely by UBS. The employer contributions expected to be made in 2010 to these pension plans are CHF 107 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) 23). n o i t a m r o f n i l a i c n a n i F 335 Financial information Notes to the consolidated financial statements Note 30 Pension and other post-employment benefit plans (continued) a) Defined benefit plans (continued) CHF million For the year ended Swiss Foreign 31.12.09 31.12.08 31.12.07 31.12.09 31.12.08 31.12.07 Defined benefit obligation at the beginning of the year (21,311) (20,877) (21,506) (3,642) (4,928) (5,207) Service cost Interest cost Plan participant contributions Amendments Actuarial gain / (loss) Benefits paid Termination benefits Acquisitions Foreign currency translation Defined benefit obligation at the end of the year Fair value of plan assets at the beginning of the year Expected return on plan assets Actuarial gain / (loss) Employer contributions Plan participant contributions Benefits paid Foreign currency translation Fair value of plan assets at the end of the year Funded status Unrecognized net actuarial (gains) / losses Unrecognized assets (Accrued) / prepaid pension cost Movement in the net (liability) or asset (Accrued) / prepaid pension cost at the beginning of the year Net periodic pension cost Employer contributions Acquisitions Foreign currency translation (432) (672) (195) 0 231 1,314 (54) (21,119) 19,029 846 963 567 195 (336) (710) (233) 0 (288) 1,158 (25) (21,311) 22,181 990 (3,820) 603 233 (1,314) (1,158) 20,286 (833) 2,996 0 2,163 2,123 (527) 567 19,029 (2,282) 4,405 0 2,123 2,123 (603) 603 (367) (633) (236) (414) 1,508 792 (21) (20,877) 21,336 1,067 (250) 584 236 (792) 22,181 1,304 2,123 (1,304) 2,123 1,953 (414) 584 (Accrued) / prepaid pension cost 2,163 2,123 2,123 Amounts recognized in the balance sheet Prepaid pension cost Accrued pension liability (Accrued) / prepaid pension cost 2,163 2,123 2,123 2,163 2,123 2,123 (41) (230) (471) 153 0 (122) (4,353) 2,866 202 266 232 (153) 104 3,517 (836) 1,475 (63) (251) 318 148 0 1,134 (3,642) 4,579 282 (1,027) 194 (148) (1,014) 2,866 (776) 1,324 (88) (264) 236 151 (54) 298 (4,928) 4,602 313 (97) 200 (151) (288) 4,579 (349) 975 639 548 626 548 (167) 232 0 26 639 890 (251) 639 626 (69) 194 0 (203) 548 798 (250) 548 633 (97) 200 (54) (56) 626 887 (261) 626 336 Note 30 Pension and other post-employment benefit plans (continued) a) Defined benefit plans (continued) CHF million For the year ended Components of net periodic pension cost Service cost Interest cost Expected return on plan assets Amortization of unrecognized net (gains) / losses Immediate recognition of net actuarial (gains) / losses in current period Immediate recognition of past service cost in current period Special termination benefits Limit of defined benefit asset Net periodic pension cost Funded and unfunded plans CHF million Defined benefit obligation from funded plans Plan assets Surplus / (deficit) Experience gains / (losses) on plan liabilities Experience gains / (losses) on plan assets CHF million Defined benefit obligation from funded plans Defined benefit obligation from unfunded plans Plan assets Surplus / (deficit) Experience gains / (losses) on plan liabilities Experience gains / (losses) on plan assets Swiss Foreign 31.12.09 31.12.08 31.12.07 31.12.09 31.12.08 31.12.07 432 672 (846) 215 0 0 54 0 527 336 710 (990) 0 367 633 (1,067) 0 1,826 (1,258) 0 25 (1,304) 603 414 21 1,304 414 Swiss 41 230 (202) 98 63 251 (282) 37 88 264 (313) 58 167 69 97 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 (21,506) 21,336 (170) (20,972) 20,229 (743) (21,119) 20,286 (833) 214 963 (21,311) 19,029 (2,282) 0 (3,820) (20,877) 22,181 1,304 0 (250) Foreign 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 (4,078) (275) 3,517 (836) (12) 266 (3,402) (240) 2,866 (776) 62 (1,027) (4,654) (274) 4,579 (349) (32) (97) (5,002) (205) 4,602 (605) (4,635) (385) 4,288 (732) n o i t a m r o f n i l a i c n a n i F 337 Financial information Notes to the consolidated financial statements Note 30 Pension and other post-employment benefit plans (continued) a) Defined benefit plans (continued) Principal weighted average actuarial assumptions used (%) Assumptions used to determine defined benefit obligations at the end of the year Swiss Foreign 31.12.09 31.12.08 31.12.07 31.12.09 31.12.08 31.12.07 Discount rate Expected rate of salary increase Rate of pension increase Assumptions used to determine net periodic pension cost for the year ended Discount rate Expected rate of return on plan assets Expected rate of salary increase Rate of pension increase Plan assets (weighted average) Actual plan asset allocation (%) Equity instruments Debt instruments Real estate Other Total Long-term target plan asset allocation (%) Equity instruments Debt instruments Real estate Other Actual return on plan assets (%) Additional details to fair value of plan assets UBS financial instruments and UBS bank accounts UBS AG shares 1 Securities lent to UBS included in plan assets Other assets used by UBS included in plan assets 3.3 2.5 0.5 3.3 4.5 2.5 0.5 35 51 13 1 100 18–44 41–65 9–17 0–5 9.7 205 66 0 218 5.7 5.0 2.5 6.0 6.6 4.5 1.9 46 35 3 16 100 6.0 4.5 1.9 5.8 7.1 4.8 2.4 46 35 3 16 100 5.8 4.8 2.4 5.2 7.0 4.6 2.1 50 38 4 8 100 42–45 37–44 3–7 11–12 15.5 45–48 37–38 3–7 10–12 (18.2) 49–52 38–44 4–6 1–3 4.8 3.3 2.5 0.5 3.5 4.5 2.5 0.8 26 55 13 6 100 20–48 37–63 10–20 0–5 (12.8) 782 55 0 148 3.5 2.5 0.8 3.0 5.0 2.5 0.8 38 47 11 4 100 33–51 31–50 10–19 0 3.9 336 128 9,379 111 1 The number of UBS AG shares was 4,095,850, 3,734,000 and 2,436,257 as of 31 December 2009, 31 December 2008 and 31 December 2007, respectively. Mortality tables and life expectancies for major plans Mortality table BVG 2005 PA 2000 G, medium cohort with adjustment Dr. K. Heubeck 2005 G RP 2000 with projections Mortality table BVG 2005 PA 2000 G, medium cohort with adjustment Dr. K. Heubeck 2005 G RP 2000 with projections Life expectancy at age 65 for a male member currently 31.12.09 aged 65 31.12.08 31.12.07 31.12.09 aged 45 31.12.08 31.12.07 17.9 22.8 19.1 18.4 17.8 22.7 19.0 18.4 17.8 21.9 18.9 18.3 17.9 25.7 21.9 18.4 17.8 25.6 21.8 18.4 17.8 23.0 21.6 18.3 Life expectancy at age 65 for a female member currently 31.12.09 aged 65 31.12.08 31.12.07 31.12.09 aged 45 31.12.08 31.12.07 21.0 24.6 23.3 20.6 21.1 24.5 23.1 20.6 21.1 24.8 23.0 20.5 21.0 26.5 25.8 20.6 21.1 26.4 25.7 20.6 21.1 25.8 25.6 20.5 Country Switzerland UK Germany US Country Switzerland UK Germany US 338 Note 30 Pension and other post-employment benefit plans (continued) b) Post-retirement medical and life plans In the US and the UK, UBS offers retiree medical benefits that contribute to the health care coverage of employees and ben eficiaries after retirement. The UK plan is closed to new en trants. In addition to retiree medical benefits, UBS in the US also provides retiree life insurance benefits. The benefit obli gation in excess of the fair value of plan assets for these plans amounts to CHF 186 million as of 31 December 2009 (2008: CHF 159 million; 2007: CHF 190 million) and the total ac crued postretirement cost amounts to CHF 163 million as of 31 December 2009 (2008: CHF 164 million; 2007: CHF 181 million). The net periodic postretirement costs for the years ended 31 December 2009, 31 December 2008, and 31 De cember 2007 were CHF 9 million (including a curtailment gain of CHF 8 million), CHF 9 million (including a curtailment gain of CHF 11 million), and CHF 26 million, respectively. The employer contributions expected to be made in 2010 to the postretirement medical and life plans are CHF 7 million. CHF million 31.12.09 31.12.08 31.12.07 Post-retirement benefit obligation at the beginning of the year Service cost Interest cost Plan participant contributions Actuarial gain / (loss) Amendments Benefits paid Curtailments Foreign currency translation (159) (7) (10) (2) (31) 0 10 9 4 Post-retirement benefit obligation at the end of the year (186) (190) (8) (11) (0) 14 0 7 9 20 (159) 0 6 1 (7) 0 (219) (12) (11) (1) 39 (8) 8 0 14 (190) 0 7 1 (8) 0 0 8 2 (10) 0 Fair value of plan assets at the beginning of the year Employer contributions Plan participant contributions Benefits paid Fair value of plan assets at the end of the year CHF million Defined benefit obligation Plan asset Surplus / (deficit) Experience gains / (losses) on plan liabilities 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 (186) 0 (186) 8 (159) 0 (159) 3 (190) 0 (190) 8 (219) 0 (219) 1 (216) 0 (216) (3) The assumed average health care cost trend rate used in de termining postretirement benefit expense is assumed to be 9% for 2009 and to decrease to an ultimate trend rate of 5% in 2015. On a countrybycountry basis, the same dis count rate is used for the calculation of the postretirement benefit obligation from medical and life plans as for the de fined benefit obligations arising from pension plans. Assumed average health care cost trend rates have a sig nificant 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 postretirement benefit obligation and the service and interest cost compo nents of the net periodic postretirement benefit costs as follows: CHF million Effect on total service and interest cost Effect on the post-retirement benefit obligation 1% increase 1% decrease 4 26 (3) (21) n o i t a m r o f n i l a i c n a n i F 339 Financial information Notes to the consolidated financial statements Note 30 Pension and other post-employment benefit plans (continued) c) Defined contribution plans UBS also sponsors a number of defined contribution plans in its foreign locations. The locations with defined contri bution plans of a material nature are in the UK and the US. Certain plans permit employees to make contributions and earn matching or other contributions from UBS. The em ployer contributions to these plans recognized as expense for the years ended 31 December 2009, 31 December 2008, and 31 December 2007 were CHF 246 million, CHF 312 million, and CHF 285 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 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 mil lion. UBS and its Swiss pension fund entered simultaneously into leaseback arrangements for some of the properties with 25year lease terms and two renewal options for ten years each. At 31 December 2008 the minimum commit ment towards the Swiss pension fund under the related leases was approximately CHF 41 million. During 2009, UBS renegotiated one of the lease contracts which reduced UBS’s remaining lease commitment. At 31 December 2009 the minimum commitment towards the Swiss pension fund under the related leases is approximately CHF 27 million. The rent paid by UBS under these leases amounted to CHF 5 million in 2009. The following fees and interest have been received or paid by UBS: Related party disclosure CHF million Received by UBS Fees Paid by UBS Interest Dividends and capital repayments The transaction volumes in UBS shares and other UBS securities are as follows: Transaction volumes – related parties Financial instruments bought by pension funds UBS AG shares (in thousands of shares) UBS financial instruments (nominal values in CHF million) Financial instruments sold by pension funds or matured UBS AG shares (in thousands of shares) UBS financial instruments (nominal values in CHF million) For the year ended 31.12.09 31.12.08 31.12.07 34 2 0 44 1 4 58 2 38 For the year ended 31.12.09 31.12.08 31.12.07 3,869 35 4,116 14 6,925 78 1,881 10 1,728 950 1,930 976 UBS has also leased buildings from its pension funds. The rent paid by UBS under these leases amounted to CHF 12 million in 2009, CHF 7 million in 2008, and CHF 6 million in 2007. There were no financial instruments due from UBS pen sion plans outstanding as of 31 December 2009 (2008: CHF 0 million; 2007: CHF 0 million). The amounts due to UBS defined benefit pension plans are included in the additional details to the fair value of plan assets. Furthermore, UBS de fined contribution plans hold 17,259,203 UBS shares with a market value of CHF 278 million as of 31 December 2009 (2008: 17,866,949 shares with a market value of CHF 272 million; 2007: 14,121,239 shares with a market value of CHF 736 million). 340 Note 31 Equity participation and other compensation plans a) Plans offered UBS has established several equity participation and other compensation plans to further align the interests of execu tives, 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. UBS’s compensation plans are mandatory, discretionary or voluntary. The explanations below provide a general description of the terms of the most significant plans offered, however specific plan rules may vary by country. Re fer to Note 1a) 24) for a description of the accounting policy related to equity participation and other compensation plans. Mandatory sharebased compensation plans Equity Ownership Plan (EOP): Certain employees receive a portion of their annual performancerelated compensation, which exceeds a certain threshold, in the form of an EOP award of UBS shares, notional UBS shares, or of alternative investment vehicles (AIVs)1 instead of cash, on a mandatory basis. The awards granted in UBS shares or notional UBS shares are settled by delivering UBS shares, except in coun tries where this is not permitted for legal reasons. Awards granted in the form of AIVs are settled in cash. The majority of EOP awards continue to be granted in UBS shares and notional UBS shares. EOP awards generally vest in onethird increments over a threeyear vesting period. These awards are generally forfeitable upon voluntary termination of em ployment with UBS. Compensation expense for these awards is generally recognized over the shorter of the legal vesting period and the period from grant to the date the employee satisfies certain retirement eligibility requirements. Compen sation expense is recognized in the performance year if the employee meets these retirement eligibility requirements at the date of grant. During 2009, UBS only granted EOP awards to certain employees for which it had a contractual commitment. During 2008, UBS granted to certain employees EOP awards with a ninemonth vesting period. Compensation ex pense for these awards was fully recognized in 2007. Senior Executive Equity Ownership Plan (SEEOP): Senior executives receive a portion of their performancerelated 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 by delivering UBS shares. SEEOP awards generally vest in onefifth increments over a fiveyear vesting period. These awards are forfeitable if certain conditions are not met. Compensation expense for 1 Selected employees are granted a contingent right to receive a cash payment, the value of which is based on the value of underlying investment funds, rather than the value of UBS’s equity. all SEEOP awards is recognized during the performance year, which is generally the period prior to the grant date. During 2009, UBS only granted SEEOP awards to certain employees for which it had a contractual commitment. During 2008, UBS granted to certain employees SEEOP awards with a ninemonth vesting period. Compensation ex pense for these awards was fully recognized in 2007. Mandatory deferred cash compensation plans Conditional Variable Compensation Plan (CVCP): CVCP was a onetime forward looking compensation plan under which awards were granted to certain employees on a mandatory basis in the second quarter of 2009. Under this plan, UBS awarded a contingent right to receive cash payments at vesting subject to forfeiture provisions. These awards are generally forfeitable upon termination of employment with UBS and additionally require profitability and recapitaliza tion performance hurdles to be met in order for the awards not to forfeit. The awards vest in onethird increments over a threeyear vesting period. Compensation expense is rec ognized over the shorter of the vesting period and the pe riod from the service inception date to the retirement eligi bility date of the employee. No further grants will be made under this plan. WMUS Partner Plus Plan: Wealth Management Americas sponsors a compulsory deferred cash compensation plan for selected eligible employees in the US. Under this plan, UBS awards amounts based on a predefined formula during the performance year. Participants are also allowed to voluntarily contribute additional amounts earned during the year into the plan up to a percentage of UBS’s contributions. The amounts awarded earn an abovemarket rate of interest during the initial fouryear period and a market rate of inter est thereafter. Partner Plus awards vest in 20% increments 6 to 10 years after the grant date. The 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. Cash Balance Plan (CBP): This plan applies to members of the Group Executive Board and allows for a maximum pay out of 60% of an executive’s variable cash incentive at the beginning of the following year (subject to an additional cashcap). A minimum of 40% of an executive’s cash incen tive awarded for 2009 is deferred and paid out during the two subsequent years subject to forfeiture, i.e. the entire cash incentive is paid out over a threeyear period. The for feiture provisions allow for unvested awards to be reduced (including to nil) in certain events including termination for 341 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 31 Equity participation and other compensation plans (continued) a) Plans offered (continued) cause, certain fi nancial losses, behavior that contributes sub stantially to a material restatement of financial results or to harm to UBS’s reputation, breaches of legal or regu latory re quirements or of risk/compliance policies, and a number of other events. Compensation expense is recognized in the performance year, which is generally the year prior to the grant date. Discretionary sharebased compensation plans Key Employee Stock Appreciation Rights Plan (KESAP) and Key Employee Stock Option Plan (KESOP): Key and high po tential employees may be granted discretionary sharesettled Stock Appreciation Rights (SARs) or UBS options with a strike price not less than the fair market value of a UBS share on the date the SAR or option is granted. In certain cases, an option or SAR may be granted at a higher strike price. A SAR gives employees the right to receive such number of UBS shares equal to the value of any appreciation in the market price of a UBS share between the grant date and the exercise date. One option gives the right to acquire one registered UBS share at the option’s strike price. KESAP and KESOP awards are settled by delivering UBS shares, except in countries where this is not permitted for legal reasons. Options granted prior to 2008 generally vest in onethird increments over a threeyear vesting period and generally expire ten years from the grant date. SARs2 and options granted from 2008 onwards vest in full following a threeyear vesting period and generally expire ten years from the grant date. These awards are generally forfeitable upon termination of employment with UBS. Compensation ex pense is recognized over the shorter of the legal vesting pe riod and the period from grant to the retirement eligibility date of the employee. Senior Executive Stock Appreciation Rights Plan (SESAP) and Senior Executive Stock Option Plan (SESOP): senior ex ecutives may be granted discretionary SARs or UBS options with a strike price set at 110% of the fair market value of a UBS share on the date the SAR or option is granted. A SAR gives employees the right to receive such number of UBS shares equal to the value of any appreciation over 110% of the market price of a UBS share between grant date and the exercise date. One option gives the right to acquire one reg istered UBS share at the option’s strike price. SESAP and SES OP awards are settled by delivering UBS shares. These awards vest in full following a threeyear vesting period and gener ally expire ten years from the grant date. These awards are forfeitable if certain conditions are not met. Compensation expense for all SESAP and SESOP awards is recognized dur ing the performance year, which is generally the period prior to the grant date. During 2009, UBS only granted SESOP awards to certain employees for which it had a contractual commitment. Voluntary sharebased compensation plans Equity Plus Plan (Equity Plus): This voluntary plan gives eligi ble 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 an nual limit. Share purchases can be made annually from bo nus compensation and / or quarterly based on regular de ductions 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 twoyear vesting period and generally expire ten years from the date of grant. The options are forfeitable in certain circumstances and are settled by delivering UBS shares, except in countries where this is not permitted for legal reasons. Compensation expense related to the UBS options is recognized over the shorter of the legal vesting period and the period from grant to the retirement eligibility date of the employee. UBS satisfies share delivery obligations under its option based and SARbased participation plans either by purchas ing UBS shares in the market or through the issuance of new shares. For UBS’s optionbased plans, shares held in treasury or newly issued shares are delivered to the employee against receipt of the strike price at exercise. Under its SARbased plans, UBS does not receive payment of a strike price at ex ercise but rather delivers to the employee shares held in trea sury or newly issued shares equal to the difference between the market value of a UBS share at exercise and the strike price. As of 31 December 2009, UBS was holding approxi mately 27.7 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 and SAR exercises. The shares available cover all vested (i.e. exercisable) employee options and SARs. Other plans Executive Capital Accumulation Plan (ECAP): UBS sponsors a voluntary deferred compensation plan for selected eligible employees. Under this plan, participants are allowed to no tionally invest a portion of their cash bonus in money market funds, UBS and nonUBS mutual funds and other UBS spon sored funds. No additional company match is granted, the awards are generally not forfeitable and are settled in cash. This plan does not result in compensation expense for UBS. 2 The first grants made under KESAP were in 2009. 342 Note 31 Equity participation and other compensation plans (continued) b) Effect on income statement Mandatory, discretionary and voluntary sharebased compensation plans The total sharebased compensation expense, including amounts for AIVs granted under EOP, recognized for the years ended 31 December 2009, 31 December 2008 and 31 December 2007 was CHF 913 million, negative CHF 94 million and CHF 3,173 million, respectively. For the years ended 31 December 2009, 31 December 2008 and 31 De cember 2007, the compensation expense recognized for sharebased payments was primarily related to equitysettled plans. At 31 December 2009, total compensation expense related to nonvested mandatory, discretionary and volun tary sharebased awards, including amounts for AIVs issued under EOP, granted in 2009 and previous years which will be recognized as an expense in the income statement from 2010 and later is CHF 832 million. This amount is expected to be recognized in Personnel expenses over a weighted average period of 3.6 years. Payments to participants of cashsettled sharebased plans, including amounts for AIVs granted under EOP, for the years ended 31 December 2009, 31 December 2008 and 31 December 2007 were CHF 83 million, CHF 80 million and CHF 42 million, respectively. The total carrying amount of the liability related to these cashsettled plans amounted to CHF 206 million as of 31 December 2009. Mandatory deferred cash compensation plans The total deferred cash compensation expense, related to CBP and CVCP (as described in previous section), recognized for the year ended 31 December 2009 was CHF 63 million. At 31 December 2009, total compensation expense related to CVCP awards granted in 2009 which will be recognized as an expense in the income statement from 2010 and later is CHF 570 million. This amount is expected to be recognized in Personnel expenses over a weighted average period of 1.8 years. c) UBS share awards Movements in shares granted under the equity participation plans described in Note 31a) are as follows: Forfeitable, at the beginning of the year Shares awarded during the year Distributions during the year Forfeited during the year Forfeitable, at the end of the year of which: shares vested for accounting purposes Number of shares 31.12.09 Weighted average grant date fair value CHF 84,736,935 39,067,130 (31,293,824) (5,621,615) 86,888,626 40,148,461 53 12 66 38 31 Weighted average grant date fair value CHF 66 32 61 54 53 Number of shares 31.12.08 59,102,580 90,895,594 (60,105,109) (5,156,131) 84,736,935 65,767,017 Number of shares 31.12.07 56,141,102 30,271,820 (25,031,819) (2,278,523) 59,102,580 47,700,903 Weighted average grant date fair value CHF 58 70 55 66 66 UBS measures compensation expense based on the average market price of the UBS share on the grant date as quoted on the SIX Swiss Exchange less a discount for postvesting sale and hedge restrictions and nonvesting conditions, in accordance with IFRS 2 Share-based Payment: Vesting Con- ditions and Cancellations. The grant date fair value of no tional UBS shares without dividend entitlements also in cludes 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 postvesting sale and hedge restrictions is discounted based upon the duration of the postvesting restriction and is referenced to the cost of purchasing an atthemoney plain vanilla Euro pean put option for the term of the transfer restriction. The weighted average discount for share awards granted in 2009 is approximately 31.7% of the market price of the UBS share. Discounts for nonvesting conditions are based on the probability that the nonvesting conditions will be achieved and the award will become exercisable. The fair value of sharebased awards granted prior to 2008 was not discounted for postvesting sale and hedge restrictions, as there was no distinction between vesting and nonvesting conditions until the IASB amended IFRS 2 Share-based Pay- ment: Vesting Conditions and Cancellations. The market value of shares legally vested was CHF 346 million, CHF 1,385 million, and CHF 1,737 million for the years ended 31 December 2009, 31 December 2008, and 31 December 2007, respectively. n o i t a m r o f n i l a i c n a n i F 343 Financial information Notes to the consolidated Financial information Note 31 Equity participation and other compensation plans (continued) d) UBS option awards Movements in options granted under the equity participation plans described in Note 31a) are as follows: Outstanding, at the beginning of the year Granted during the year Exercised during the year Forfeited during the year Expired unexercised Outstanding, at the end of the year Exercisable, at the end of the year Number of options 31.12.09 236,055,545 22,525,624 (48,241) (7,245,512) (22,663,530) 228,623,886 137,797,186 Weighted average exercise price CHF 2 47 Number of options 31.12.08 1 198,213,092 Weighted average exercise price CHF 1,2 52 Number of options 31.12.07 1 188,393,473 Weighted average exercise price CHF 1,2 47 13 16 37 48 43 51 62,973,879 (3,673,657) (6,732,080) (14,725,689) 236,055,545 124,054,442 30 26 52 46 47 46 48,094,483 (34,331,511) (3,650,942) (292,411) 198,213,092 96,396,428 67 36 62 58 52 39 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 of- fering. 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 op tions were exercised during the year was CHF 18, CHF 34, and CHF 72 for the years ended 31 December 2009, 31 De cember 2008, and 31 December 2007, respectively. The fol lowing table provides additional information about option awards: Intrinsic value of options exercised during the year (CHF million) Weighted average grant date fair value of options granted (CHF) 31.12.09 31.12.08 31.12.07 0.2 6.00 29 7.53 1,046 10.43 The following table summarizes additional information about options outstanding and options exercisable at 31 Decem ber 2009: Options outstanding Options exercisable Number of options outstanding Weighted average exercise price (CHF / USD) Aggregate intrinsic value (CHF / USD million) Weighted average remaining contractual term (years) Number of options exercisable Weighted average exercise price (CHF / USD) Aggregate intrinsic value (CHF / USD million) Weighted average remaining contractual term (years) Range of exercise price per share CHF awards 10.21–15.00 15.01–25.00 25.01–35.00 35.01–45.00 45.01–55.00 55.01–65.00 65.01–75.00 10.21–75.00 USD awards 4.61–15.00 15.01–25.00 25.01–35.00 35.01–45.00 45.01–51.99 4.61–51.99 344 18,599,225 11,560,852 45,514,537 25,831,524 21,961,024 4,945,136 67,395,232 195,807,530 15,632 10,288,746 3,037,460 16,052,302 3,422,216 32,816,356 11.33 18.70 31.10 39.04 49.34 60.26 67.89 44.98 13.53 21.11 27.95 38.12 44.89 32.54 87.8 1.8 0.0 0.0 0.0 0.0 0.0 9.1 9.3 7.3 5.0 5.4 7.0 6.7 2,001 93,767 8,319,508 16,931,901 21,539,533 4,509,038 53,616,749 89.6 6.9 105,012,497 0.0 0.0 0.0 0.0 0.0 0.0 0.3 2.7 3.7 4.8 5.4 15,632 10,268,746 3,037,355 16,040,740 3,422,216 4.1 32,784,689 14.47 20.07 28.31 40.58 49.26 59.96 67.27 55.83 13.53 21.11 27.95 38.12 44.89 32.54 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 8.9 8.7 3.4 3.3 5.3 6.9 6.6 5.6 0.3 2.7 3.7 4.8 5.4 4.1 Note 31 Equity participation and other compensation plans (continued) e) UBS SAR awards Movements in SARs granted under the equity participation plans described in Note 31a) are as follows: Outstanding, at the beginning of the year Granted during the year Exercised during the year Forfeited during the year Expired unexercised Outstanding, at the end of the year Exercisable, at the end of the year Number of rights Weighted average 31.12.09 exercise price (CHF) 0 66,126,830 0 (5,219,655) 0 60,907,175 4,000,000 0 12 0 11 0 12 10 The following table summarizes additional information about SARs outstanding at 31 December 2009. Range of exercise price per SAR CHF awards 9.35–12.50 12.51–15.00 15.01–17.50 17.51–20.00 37.51– 40.00 9.35– 40.00 SARs outstanding Number of SARs outstanding Weighted average exercise price (CHF) Aggregate intrinsic value (CHF) Weighted average remaining contractual term (years) 59,273,505 53,410 268,330 406,930 905,000 60,907,175 11.26 14.57 16.47 19.25 40.00 11.77 283.9 0.1 0.0 0.0 0.0 284.0 8.8 9.5 9.5 9.7 9.2 8.8 n o i t a m r o f n i l a i c n a n i F 345 Financial information Notes to the consolidated financial statements Note 31 Equity participation and other compensation plans (continued) f) Valuation The fair value of options and SARs (instruments) is deter mined by means of a Monte Carlo simulation. The simula tion 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 instruments are granted, such as the vesting period, forced exercises during the lifetime, and gain and timedependent exercise behavior. The expected term of each instrument is calculated as the probability weighted average period of the time between grant and ex ercise. The term structure of volatility is derived from the im plied volatilities of traded UBS options in combination with the observed longterm historic share price volatility. Expect ed future dividends are derived from the historical dividend pattern. The fair value of options and SARs granted in 2009 and the fair value of options granted in 2008 and 2007 was de termined using the following assumptions: CHF awards 48.22 2.16 0.27 11.88 11.64 CHF awards 33.86 2.83 1.85 30.11 28.05 CHF awards 23.86 2.58 3.13 71.31 70.25 31.12.09 range low 40.91 1.50 0.00 9.35 9.35 31.12.08 range low 30.00 1.74 1.10 14.47 14.47 31.12.07 range low 22.51 2.46 2.20 55.48 55.48 range high 53.47 2.57 0.29 40.00 19.27 range high 49.32 3.27 2.57 46.02 43.61 range high 29.23 3.27 4.56 78.80 78.80 Expected volatility (%) Risk-free interest rate (%) Expected dividend (CHF) Strike price (CHF) Share price (CHF) Expected volatility (%) Risk-free interest rate (%) Expected dividend (CHF) Strike price (CHF) Share price (CHF) Expected volatility (%) Risk-free interest rate (%) Expected dividend (CHF) Strike price (CHF) 1 Share price (CHF) 1 1 Not adjusted for stock dividend and rights offering in 2008. 346 Note 32 Related parties The Group defines related parties as associated companies (entities which are controlled or significantly influenced by UBS), postemployment benefit plans for the benefit of UBS employees, key management personnel, close family members of key management personnel and entities which are, directly or indirectly, controlled or jointly controlled by key management personnel or their close family mem bers. Key management personnel is defined as members of the Board of Directors (BoD) and Group Executive Board (GEB). This definition is based on the revised requirements of IAS 24 Related Party Disclosures issued in November 2009. a) Remuneration of key management personnel The nonindependent members of the BoD have top man agement employment contracts and receive pension bene fits upon retirement. Total remuneration of the noninde pendent members of the BoD, and GEB including those who stepped down during, 2009 1 is as follows: CHF million Base salaries and other cash payments Incentive awards – cash Employer’s contributions to retirement benefit plans Benefits in kind, fringe benefits (at market value) Equity compensation benefits 2 Total 31.12.09 31.12.08 31.12.07 16 64 2 1 29 112 12 0 2 1 0 15 14 38 2 2 22 78 1 During 2009, Marcel Rohner, Jerker Johansson, Raoul Weil, Walter H. Stürzinger, Rory Tapner, and Marten Hoekstra stepped down from the GEB. The total awards of approximately CHF 39 million are heavily influenced by contractual obligations. 2 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. Peter Kurer, former Chairman of the BoD, did not stand for reelection at the AGM on 15 April 2009, and retired from UBS as of April 2009. He received his base salary until the termination date of 30 April 2009. For ongoing advisory re quirements and assistance in the handover to his successor, Peter Kurer received a flat salary of CHF 1,000,000. For 2009, as was the case for 2007 and 2008, he did not receive any discretionary incentive or fixed share awards. After as sessing his tenure as Chairman and the specific organiza tional transition requirements, the Human Resources and Compensation Committee (HRCC) deemed it appropriate to approve a onetime contribution of CHF 3,332,000 into the UBS pension fund on his behalf to cover the deficit in his pension fund. Marcel Rohner stepped down as Group CEO on 26 Febru ary 2009. In honoring the twelvemonth notice period of his contract, he received his annual salary of CHF 1,500,000. For 2009, as also for 2008, he did not receive any discretionary incentive awards. After assessing his tenure as Group CEO and the specific organizational transition requirements, the HRCC deemed it appropriate to approve a onetime contri bution of CHF 1,200,000 into the UBS pension fund on his behalf to cover the deficit in his pension fund. The independent members of the BoD do not have em ployment 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 exter nal board members amounted to CHF 6.4 million in 2009, CHF 6.4 million in 2008 and CHF 5.7 million in 2007. n o i t a m r o f n i l a i c n a n i F 347 Financial information Notes to the consolidated financial statements Note 32 Related parties (continued) b) Equity holdings Number of stock options from equity participation plans held by non-independent members of the BoD and the GEB 1 Number of shares held by members of the BoD, GEB and parties closely linked to them 1 Further information about UBS’s equity participation plans can be found in Note 31. 31.12.09 31.12.08 31.12.07 9,410,280 4,180,154 8,458,037 5,869,952 6,828,152 6,693,012 Of the share totals above, at 31 December 2009, 31 Decem ber 2008 and 31 December 2007, 0 shares, 15,878 shares and 4,852 shares, respectively, were held by close family members of key management personnel and 0 shares, 103,841 shares and 2,200,000 shares, respectively, were held by entities which are directly or indirectly controlled or jointly controlled by key management personnel or their close family members. Further information about UBS’s equity participation plans can be found in Note 31. No mem ber of the BoD or GEB is the beneficial owner of more than 1% of the Group’s shares at 31 December 2009. c) Loans, advances and mortgages to key management personnel Nonindependent 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. Independent BoD members are granted loans and mortgages at general mar ket conditions. Movements in the loan, advances and mortgage balances are as follows: CHF million Balance at the beginning of the year Additions Reductions Balance at the end of the year 31.12.09 31.12.08 11 12 (5) 18 15 8 (12) 11 No unsecured loans were granted to key management personnel as of 31 December 2009 and 31 December 2008. d) Associated companies CHF million Balance at the beginning of the year Additions Reductions Credit loss (expense) / recovery Foreign currency translation Balance at the end of the year of which: unsecured loans of which: allowances for credit losses All loans to associated companies are transacted at arm’s length. 31.12.09 31.12.08 301 295 (222) (1) 0 373 42 1 220 171 (77) 0 (13) 301 82 3 348 Note 32 Related parties (continued) d) Associated companies (continued) Other transactions with associated companies transacted at arm’s length are as follows: CHF million Payments to associates for goods and services received Fees received for services provided to associates Commitments and contingent liabilities to associates Note 34 provides a list of significant associates. e) Other related party transactions During 2008 and 2007, UBS entered into transactions at arm’s length with entities which are directly or indirectly con trolled or jointly controlled by UBS’s key management per sonnel or their close family members. In 2009, UBS did not enter into any such transactions. The 2008 and 2007 num bers included into the table below have been restated to reflect the revised guidance in IAS 24 Related Party Disclo- sures. Refer to Note 1b for details. Movements in loans to other related parties are as follows: CHF million Balance at the beginning of the year Additions Reductions Balance at the end of the year 1 As of or for the year ended 31.12.09 31.12.08 31.12.07 130 2 156 90 6 40 87 20 33 In 2008 these entities included: Aebi + Co. AG (Switzer land), Kedge Capital Selected Funds Ltd. (Jersey), Löwenfeld AG (Switzerland), Martown Trading Ltd. (Isle of Man), Ome ga Fund I Ltd (Jersey), Omega Fund IV Ltd (Jersey), Stadler Rail Group (Switzerland), Team Alinghi (Switzerland) and Team Alinghi (Spain). 31.12.09 31.12.08 31.12.07 6 0 (6) 0 158 0 (152) 6 539 77 (458) 158 1 In 2009 includes loans, guarantees and contingent liabilities of CHF 0 million and unused committed facilities of CHF 0 million but excludes unused uncommitted working capital facilities and unused guarantees of CHF 0 million. In 2008 includes loans, guarantees and contingent liabilities of CHF 6 million and unused committed facilities of CHF 0 million but excludes unused un committed working capital facilities and unused guarantees of CHF 320 million. In 2007 includes loans, guarantees and contingent liabilities of CHF 158 million and unused committed facilities of CHF 0 million but excludes unused uncommitted working capital facilities and unused guarantees of CHF 57 million. Other transactions with these related parties include: CHF million Goods sold and services provided to UBS Fees received for services provided by UBS 31.12.09 31.12.08 31.12.07 0 0 1 11 8 6 As part of its sponsorship of Team Alinghi, UBS paid CHF 828,090 (EUR 538,000) in basic sponsoring fees for 2008. Team Alinghi’s controlling shareholder is UBS former Board member Ernesto Bertarelli. f) Additional information UBS also engages in trading and risk management activities (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. n o i t a m r o f n i l a i c n a n i F 349 Financial information Notes to the consolidated financial statements Note 33 Events after the reporting period In January 2010, UBS closed the sale of its investments in several associated entities owning office space in New York. A significant portion of the office space is leased by UBS Group until 2018. The sales price is USD 180 million, with a resulting gain on sale of approximately USD 173 million, which will be recognized in 2010. There have been no further material events after the re porting period which would require disclosure or adjustment to the 31 December 2009 Financial Statements. On 4 March 2010, 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 on 14 April 2010 for approval. Note 34 Significant subsidiaries and associates The legal entity group structure of UBS is designed to sup port the Group’s businesses within an efficient legal, tax, regulatory and funding framework. Neither the business di visions of UBS (namely Investment Bank, Wealth Manage ment Americas, Wealth Management & Swiss Bank and Global Asset Management) nor Corporate Center are repli cated 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 Bank structure allows UBS to use one legal platform for all the business divisions. 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 compa nies in the Group are listed below: Significant subsidiaries Company Caisse Centrale de Réescompte CCR Asset Management S.A. Fondcenter AG OOO UBS Bank PT UBS Securities Indonesia Topcard Service AG UBS (Bahamas) Ltd. UBS (France) S.A. UBS (Grand Cayman) Limited UBS (Italia) S.p.A. UBS (Luxembourg) S.A. UBS (Luxembourg) SA Austria Branch UBS (Monaco) S.A. Jurisdiction of incorporation Paris, France Paris, France Zurich, Switzerland Moscow, Russia Jakarta, Indonesia Glattbrugg, Switzerland Nassau, Bahamas Paris, France Business division 1 Global AM Global AM Global AM IB IB WM&SB WM&SB WM&SB George Town, Cayman Islands IB Milan, Italy Luxembourg, Luxembourg Vienna, Austria Monte Carlo, Monaco UBS Alternative and Quantitative Investments Limited London, Great Britain UBS Alternative and Quantitative Investments LLC UBS Americas Inc UBS Asesores SA UBS Bank (Canada) UBS Bank Mexico, S.A. Institucion de Banca Multiple, UBS Grupo Financiero UBS Bank USA UBS Bank, S.A. UBS Belgium SA/NV UBS Capital Securities (Jersey) Limited Delaware, USA Delaware, USA Panama, Panama Toronto, Canada Mexico City, Mexico Utah, USA Madrid, Spain Brussels, Belgium St. Helier, Jersey WM&SB WM&SB WM&SB WM&SB Global AM Global AM IB WM&SB WMA IB WMA WM&SB WM&SB CC Share capital in millions Equity interest accumulated in % EUR EUR CHF RUB IDR CHF USD EUR USD EUR CHF CHF EUR GBP USD USD USD CAD MXN USD EUR EUR EUR 5.0 4.8 0.1 1,250.0 118,000.0 0.2 4.0 125.7 25.0 60.0 150.0 0.0 9.2 0.3 0.1 0.0 0.0 8.5 706.4 1,880.0 2 82.2 23.0 0.0 100.0 100.0 100.0 100.0 98.6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1 WMA: Wealth Management Americas, WM&SB: Wealth Management & Swiss Bank, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center. 2 Share capital and share premium. 350 Note 34 Significant subsidiaries and associates (continued) Significant subsidiaries (continued) Company UBS Card Center AG UBS Casa de Bolsa, S.A. de C.V. UBS Convertible Securities (Jersey) Limited UBS Custody Services Singapore Pte. Ltd. UBS Derivatives Hong Kong Limited UBS Deutschland AG UBS Fiduciaria S.p.A. UBS Finance (Curação) N.V. UBS Finance (Delaware) LLC UBS Financial Services Inc. Jurisdiction of incorporation Glattbrugg, Switzerland Business division 1 WM&SB Mexico City, Mexico St. Helier, Jersey Singapore, Singapore Hong Kong, China Frankfurt am Main, Germany Milan, Italy Willemstad, Netherlands Antilles Delaware, USA Delaware, USA UBS Financial Services Incorporated of Puerto Rico Hato Rey, Puerto Rico UBS Fund Advisor, L.L.C. UBS Fund Holding (Luxembourg) S.A. UBS Fund Holding (Switzerland) AG UBS Fund Management (Switzerland) AG UBS Fund Services (Cayman) Ltd UBS Fund Services (Ireland) Limited Delaware, USA Luxembourg, Luxembourg Basel, Switzerland Basel, Switzerland George Town, Cayman Islands Dublin, Ireland UBS Fund Services (Luxembourg) S.A. Luxembourg, Luxembourg UBS Fund Services (Luxembourg) S.A. Poland Branch Zabierzow, Poland UBS Futures Singapore Ltd. UBS Global Asset Management (Americas) Inc UBS Global Asset Management (Australia) Ltd UBS Global Asset Management (Canada) Co Singapore, Singapore Delaware, USA Sydney, Australia Toronto, Canada UBS Global Asset Management (Deutschland) GmbH Frankfurt am Main, Germany UBS Global Asset Management (Hong Kong) Limited Hong Kong, China UBS Global Asset Management (Italia) SGR SpA UBS Global Asset Management (Japan) Ltd Milan, Italy Tokyo, Japan UBS Global Asset Management (Singapore) Ltd Singapore, Singapore UBS Global Asset Management (Taiwan) Ltd Taipei, Taiwan UBS Global Asset Management (UK) Ltd UBS Global Asset Management (US) Inc UBS Global Asset Management Funds Ltd UBS Global Asset Management Holding Ltd UBS Global Asset Management Life Ltd UBS Global Life AG UBS Global Trust Corporation UBS Hana Asset Management Company Ltd UBS Hypotheken AG UBS International Holdings B.V. UBS International Life Limited UBS Investment Management Canada Inc. UBS Investments Philippines, Inc. UBS Italia SIM SpA UBS Leasing AG UBS Life AG UBS Life Insurance Company USA UBS Limited UBS Loan Finance LLC UBS Menkul Degerler AS London, Great Britain Delaware, USA London, Great Britain London, Great Britain London, Great Britain Vaduz, Liechtenstein St. John, Canada Seoul, South Korea Zurich, Switzerland Amsterdam, the Netherlands Dublin, Ireland Toronto, Canada Makati City, Philippines Milan, Italy Zurich, Switzerland Zurich, Switzerland California, USA London, Great Britain Delaware, USA Istanbul, Turkey Share capital in millions Equity interest accumulated in % CHF MXN CHF SGD HKD EUR EUR USD USD USD USD USD CHF CHF CHF USD EUR CHF PLN USD USD AUD CAD EUR HKD EUR JPY SGD TWD GBP USD GBP GBP GBP CHF CAD KRW CHF EUR EUR CAD PHP EUR CHF CHF USD GBP USD TRY 0.1 114.9 50.0 5.5 880.0 176.0 0.2 0.1 37.3 2 3,505.8 2 31.0 2 0.0 2 42.0 18.0 1.0 5.6 1.3 2.5 0.1 39.8 2 0.0 8.0 117.0 2 7.7 25.0 5.1 2,200.0 4.0 340.0 93.0 17.2 2 26.0 109.4 5.0 5.0 0.1 45,000.0 0.1 6.8 1.0 0.0 360.0 15.1 10.0 25.0 39.3 2 63.3 16.7 2 30.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 51.0 98.0 100.0 100.0 100.0 99.4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 IB CC WM&SB IB WM&SB WM&SB CC IB WMA WMA WMA Global AM Global AM Global AM Global AM Global AM Global AM CC IB Global AM Global AM Global AM Global AM Global AM Global AM Global AM Global AM Global AM Global AM Global AM Global AM Global AM Global AM WM&SB WM&SB Global AM WM&SB CC WM&SB WMA IB IB WM&SB WM&SB WMA IB IB IB 1 WMA: Wealth Management Americas, WM&SB: Wealth Management & Swiss Bank, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center. 2 Share capital and share premium. 351 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 34 Significant subsidiaries and associates (continued) Significant subsidiaries (continued) Company UBS New Zealand Limited UBS O’Connor Limited UBS O’Connor LLC UBS Preferred Funding (Jersey) Limited UBS Preferred Funding Company LLC I UBS Preferred Funding Company LLC II UBS Preferred Funding Company LLC IV UBS Preferred Funding Company LLC V UBS Real Estate Kapitalanlagegesellschaft mbH UBS Real Estate Securities Inc UBS Realty Investors LLC Jurisdiction of incorporation Auckland, New Zealand London, Great Britain Delaware, USA St. Helier, Jersey Delaware, USA Delaware, USA Delaware, USA Delaware, USA Munich, Germany Delaware, USA Massachusetts, USA UBS Sauerborn Private Equity Komplementär GmbH Bad Homburg, Germany Business division 1 IB Global AM Global AM CC CC CC CC CC Global AM IB Global AM WM&SB UBS Securities (Thailand) Ltd UBS Securities Asia Limited UBS Securities Australia Ltd UBS Securities Canada Inc UBS Securities España Sociedad de Valores SA UBS Securities France S.A. UBS Securities Hong Kong Limited UBS Securities India Private Limited UBS Securities International Limited UBS Securities Japan Ltd UBS Securities LLC UBS Securities Malaysia Sdn. Bhd. UBS Securities Philippines Inc UBS Securities Pte. Ltd. UBS Securities Pte. Ltd. Seoul Branch UBS Service Centre (Poland) Sp. z o.o. UBS South Africa (Proprietary) Limited UBS Swiss Financial Advisers AG UBS Trust Company National Association UBS Trustees (Bahamas) Ltd UBS Trustees (Cayman) Ltd UBS Trustees (Jersey) Ltd. UBS Trustees (Singapore) Ltd UBS UK Properties Limited UBS Wealth Management (UK) Ltd UBS Wealth Management Australia Ltd Vermogens Advies Holding B.V. Bangkok, Thailand Hong Kong, China Sydney, Australia Toronto, Canada Madrid, Spain Paris, France Hong Kong, China Mumbai, India London, Great Britain George Town, Cayman Islands Delaware, USA Kuala Lumpur, Malaysia Makati City, Philippines Singapore, Singapore Seoul, South Korea Krakow, Poland Sandton, South Africa Zurich, Switzerland New York, USA Nassau, Bahamas George Town, Cayman Islands St. Helier, Jersey Singapore, Singapore London, Great Britain London, Great Britain Melbourne, Australia Amsterdam, the Netherlands IB IB IB IB IB IB IB IB IB IB IB IB IB IB IB CC IB WM&SB WMA WM&SB WM&SB WM&SB WM&SB IB WM&SB WM&SB WM&SB Share capital in millions Equity interest accumulated in % NZD GBP USD EUR USD USD USD USD EUR USD USD EUR THB HKD AUD CAD EUR EUR HKD INR GBP JPY USD MYR PHP SGD KRW PLN ZAR CHF USD USD USD GBP SGD GBP GBP AUD EUR 7.5 8.8 1.0 0.0 0.0 0.0 0.0 0.0 7.5 1,300.4 9.3 0.0 400.0 20.0 209.8 2 10.0 15.0 22.9 430.0 140.0 18.0 60,000.0 22,205.6 2 80.0 190.0 311.5 150,000.0 0.1 0.0 1.5 105.0 2 2.0 2.0 0.0 3.3 132.0 2.5 53.9 0.3 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 51.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1 WMA: Wealth Management Americas, WM&SB: Wealth Management & Swiss Bank, Global AM: Global Asset Management, IB: Investment Bank, CC: Corporate Center. 2 Share capital and share premium. 352 Note 34 Significant subsidiaries and associates (continued) Changes in the consolidation scope 2009 Newly significant, fully consolidated companies Topcard Service AG – Glattbrugg, Switzerland UBS (Luxembourg) SA Austria Branch – Vienna, Austria UBS Capital Securities (Jersey) Limited – St. Helier, Jersey UBS Casa de Bolsa, S.A. de C.V. – Mexico City, Mexico UBS Custody Services Singapore Pte. Ltd. – Singapore, Singapore UBS Hypotheken AG – Zurich, Switzerland UBS Preferred Funding (Jersey) Limited – St. Helier, Jersey Significant deconsolidated companies Banco UBS Pactual S.A. – Rio de Janeiro, Brazil CCR Actions S.A. – Paris, France CCR Gestion S.A. – Paris, France UBS Factoring AG – Zurich, Switzerland UBS Finance (Cayman Islands) Ltd. – George Town, Cayman Islands UBS International Inc. – Delaware, USA UBS Pactual Asset Management S.A. DTVM – Rio de Janeiro, Brazil UBS Service Centre (India) Private Limited – Mumbai, India UBS Services USA LLC – Delaware, USA Significant associates Company SIX Group AG – Zurich, Switzerland 1 UBS Securities Co. Limited – Beijing, China 1 UBS is represented in the Board of Directors. Reason for deconsolidation Sold Merged Merged Merged Liquidated Merged Sold Sold Merged Industry Financial Financial Equity interest in % 17.3 20.0 n o i t a m r o f n i l a i c n a n i F 353 Financial information Notes to the consolidated financial statements Note 35 Invested assets and net new money Invested assets include all client assets managed by or de posited with UBS for investment purposes. Invested assets include 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 nonbankable assets (e.g. art collections) and deposits from thirdparty banks for funding or trading purposes. Discretionary assets are defined as client assets which UBS decides how to invest. Other invested assets are those where the client ultimately decides how the assets are invested. When a single product is created in one business division and sold in another, it is counted in both the business divi sion that manages the investment and the one that distrib utes it. This results in double counting within UBS total in vested assets, as both business 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 ter minated their relationship with UBS. Net new money is calculated using the direct method, by which inflows and outflows to / from invested assets are de termined at the client level based on transactions. 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 interest 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 cli ent assets as a result of a change in the service level delivered are treated as net new money flows. CHF billion Fund assets managed by UBS Discretionary assets Other invested assets Total invested assets (double counts included) of which: double count of which: acquisitions (divestments) Net new money (double counts included) As of or for the year ended 31.12.09 31.12.08 319 590 1,325 2,233 254 (48.2) (147.3) 339 528 1,307 2,174 273 19.1 (226.0) 354 Note 36 Business combinations Business combinations completed in 2009 Acquisition of the commodity index business of AIG Financial Products Corp. In May 2009, UBS completed the acquisition of the com modity index business of AIG Financial Products Corp., in cluding AIG’s rights to the DJAIG Commodity index. This commodity index business comprises a product platform of commodity index swaps and funded notes based on the benchmark Dow JonesAIG Commodity Index (DJAIGCI). The cost of the business combination, including directly at tributable transaction costs, amounted to CHF 74 million (USD 65 million) of which CHF 17 million (USD 15 million) was paid in cash upon closing. The remaining payments, based upon future earnings of the purchased business, are expected to be made by September 2010. The cost of the business combination was allocated to Intangible assets of CHF 40 million (USD 35 million) and Goodwill of CHF 34 mil lion (USD 30 million). The business of AIG was integrated into UBS’s Investment Bank. AIG Commodity Index 2009 CHF million Assets Intangible assets Goodwill All other assets Total assets Liabilities and equity Liabilities Equity Total liabilities and equity Book value Step-up to fair value Fair value 0 0 598 598 598 0 598 40 34 0 74 0 74 74 40 34 598 672 598 74 672 n o i t a m r o f n i l a i c n a n i F 355 Financial information Notes to the consolidated financial statements Note 36 Business combinations (continued) 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 relation ships of CHF 36 million (EUR 23 million), net assets of CHF 209 million (EUR 131 million) and Goodwill of CHF 368 mil lion (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 business es in France. Caisse Centrale de Réescompte Group (CCR) 2008 CHF million Assets Intangible assets Property and equipment Goodwill All other assets Total assets Liabilities and equity Liabilities Equity Total liabilities and equity Book value Step-up to fair value Fair value 0 5 0 513 518 297 221 518 36 0 368 1 405 13 392 405 36 5 368 514 923 310 613 923 In 2009, the allocations were finalized and the intangible assets and goodwill were allocated to the divisions as follows: Caisse Centrale de Réescompte Group (CCR) 2008 Wealth Management & Swiss Bank Global Asset Management 10 33 26 335 Total 36 368 CHF million Assets Intangible assets Goodwill 356 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 at tributable transaction costs, amounted to approximately CHF 173 million (EUR 107 million) out of which approxi mately CHF 81 million (EUR 50 million) was paid in cash upon closing. The remaining cost of the business combina tion is expected to be paid in installments over 3 years. The cost of the business combination was allocated to Intangi- ble assets of CHF 49 million (EUR 30 million), Net liabilities of CHF 2.1 million (EUR 1.3 million) and Goodwill of CHF 126 million (EUR 78 million). VermogensGroep serve 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. Vermogens Groep was integrated into UBS’s wealth management business. VermogensGroep 2008 CHF million Assets Intangible assets Property and equipment Goodwill All other assets Total assets Liabilities and equity Liabilities Equity Total liabilities and equity Book value Step-up to fair value Fair value 0 2 0 10 12 2 10 12 49 0 126 0 175 12 163 175 49 2 126 10 187 14 173 187 Pro-forma information (unaudited) The following proforma information shows UBS’s total op erating income, net profit attributable to UBS shareholders and basic earnings per share as if all of the acquisitions com pleted in 2009 had been made as of 1 January 2008 and all acquisitions completed in 2008 had been made as of 1 Janu ary 2007. 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) CHF million, except where indicated Total operating income Net profit Basic earnings per share (CHF) 31.12.09 22,606 (2,737) (0.75) For the year ended 31.12.08 910 (21,251) (7.61) 31.12.07 31,932 (5,233) (2.40) n o i t a m r o f n i l a i c n a n i F 357 Financial information Notes to the consolidated financial statements Note 37 Discontinued operations 2009 2007 In 2009, private equity investments sold in prior years con tributed a subsequent loss of CHF 7 million to UBS’s net prof it from discontinued 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 in cluded aftertax gains on sale of CHF 120 million and an af tertax operating profit of CHF 34 million. The cash consider ation received for the equity investment sold in 2008 amounted to CHF 141 million. These private equity invest ments were held within the Industrial Holdings segment, in tegrated within the Corporate Center since the beginning of 2008, and were sold in line with UBS’s strategy to exit the private equity business. Industrial holdings 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 138 million to UBS’s net profit from discontinued opera tions, which included aftertax gains on sale of CHF 102 mil lion and an aftertax operating profit of CHF 36 million. The cash consideration received for the two investments sold in 2007 amounted to CHF 14 million. These private equity in vestments were all held within the Industrial Holdings seg ment and were sold in line with UBS’s strategy to exit the private equity business. Private Banks & GAM The tax benefit on gain from sales of CHF 258 million in cludes 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 ul timately 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 op erations in 2005, and therefore the release has also been reflected in discontinued operations. 358 Note 37 Discontinued operations (continued) CHF million Operating income Operating expenses Operating profit from discontinued operations before tax Pre-tax gain on sale Profit from discontinued operations before tax Tax expense on operating profit from discontinued operations before tax Tax expense on gain from sale Tax expense from discontinued operations Net profit from discontinued operations Net cash flows from operating activities investing activities financing activities For the year ended 31.12.08 Private Banks & GAM 1,2 0 0 0 44 44 0 1 1 43 0 0 0 Industrial Holdings 2 19 (15) 34 120 155 0 0 0 155 (1) 3 0 1 Gain resulting from a purchase price adjustment related to the sale of Private Banks & GAM in 2005. 2 Included in Corporate Center in Note 2a. CHF million Operating income Operating expenses Operating profit from discontinued operations before tax Pre-tax gain on sale Profit from discontinued operations before tax Tax expense on operating profit from discontinued operations before tax Tax expense on gain from sale Tax expense from discontinued operations Net profit from discontinued operations Net cash flows from operating activities investing activities financing activities 1 Included in Corporate Center in Note 2a. For the year ended 31.12.07 Private Banks & GAM 1 0 Industrial Holdings 1 394 0 0 7 7 0 (258) (258) 265 0 0 0 358 36 102 138 0 0 0 138 32 (1) (42) 359 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 38 Reorganizations and disposals Sale of UBS Pactual On 18 September 2009, UBS completed the sale of its Bra zilian financial services business, UBS Pactual, to BTG Invest ments, LP. The sale consideration consisted of a combina tion of cash and transfer of liabilities by BTG Investments. The total cash consideration amounted to USD 620 million, of which USD 420 million was paid at closing of the trans action and the remaining USD 200 million, plus accrued in terest, will be payable 12 months after the closing. The lia bilities transferred to BTG Investments consisted primarily of the present value of the residual payment obligation of USD 1.6 billion owed to former Pactual partners, which was in curred by UBS upon acquisition of Pactual in 2006 and was due in 2011. Overall, the impact of the transaction on UBS’s profit before tax was a net charge of CHF 1,403 million, including a goodwill impairment charge of CHF 1,123 million and a pretax loss on sale of CHF 498 million reported in the Cor porate Center, partly offset by UBS Pactual’s pretax opera tional profits for 2009 of CHF 218 million. In addition, de ferred tax benefits of CHF 243 million have been recognized. The goodwill impairment charge of CHF 1,123 million was allocated to the business divisions as follows: Invest ment Bank, CHF 749 million; Global Asset Management, CHF 340 million; and Wealth Management Americas CHF 34 million. It includes an impairment of CHF 492 million primarily relating to the effects from foreign exchange losses that were pre viously deferred in equity and from the translation of the US dollar denominated sales price into Swiss francs. For management and segment reporting pur poses, consistent with UBS’s internal policy that foreign ex change exposures related to investments in subsidiaries are managed by Group Treasury, related gains and losses are recognized in the Corporate Center. This impairment was charged through the “Services (to) / from other business di- visions” line item to the Corporate Center with respective credits to the Investment Bank of CHF 328 million, Global Asset Management of CHF 149 million and Wealth Man agement Americas of CHF 15 million. The operational results of UBS Pactual of CHF 218 million were included in the business divisions Investment Bank, Global Asset Management and Wealth Management Ameri cas and the Corporate Center. Sale of 56 branches in Wealth Management Americas Following an agreement announced in March 2009, UBS sold 56 branches in Wealth Management Americas to Stifel, Nicolaus & Company, Incorporated for an upfront cash pay ment of approximately USD 29 million. In addition, UBS re ceived aggregate payments of USD 18 million for net fixed 360 assets and employee forgivable loans, and net USD 154 mil lion for customer loans that were transferred. Under the terms of the agreement, UBS may also receive additional consideration contingent on the performance of the busi ness sold during the two years following the closing of the transaction. The transaction was closed in four separate clos ings during the second half of 2009. Overall, for 2009 the impact of the transaction on UBS’s profit before tax was a net charge of approximately USD 12 million. Sale of UBS’s India Service Centre (ISC) On 30 December 2009, UBS completed the sale of its India Service Centre (ISC) to Cognizant Technology Solutions for a sale consideration of USD 82 million, which was paid in cash at closing. The net impact of the transaction on UBS’s profit before tax was a gain of CHF 36 million recognized in the fourth quarter in Other income. In addition, the ISC contributed a pretax profit of CHF 11 million for 2009. 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 Stab Fund limited partnership for collective investments (the “fund”), which is fully owned and controlled by the SNB. For each transfer of assets, the SNB financed 90% of the purchase price by providing a loan to the fund and the re maining 10% by making an equity contribution to the fund. Upon each asset transfer, UBS purchased, for an amount equal to the SNB’s equity contribution to the fund on that date, an option to repurchase the fund’s equity (all such op tions referred to collectively as the “call option”). The exer cise price of the call option was set at USD 1 billion plus 50% of the fund’s equity value exceeding USD 1 billion at the time of exercise. The call option will be exercisable upon repay ment in full of the loan provided by the SNB. The loan is se cured by the assets of the fund and bears interest at a rate of one month USDLIBOR plus 250 basis points. Service of the loan is 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 loan it provided 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 antidilution adjustments, in exchange for Note 38 Reorganizations and disposals (continued) payment of the par value of these shares (the “contingent share issue”). The positions were transferred to the fund at fair value determined at 30 September 2008. UBS’s estimated fair val ues as of 30 September 2008 were subject to review by in dependent thirdparty valuation agents and the positions transferred to the SNB were priced at the lower of UBS’s estimated fair value and the value determined by the SNB based on the valuation estimated by the valuation agents. The total market value (net exposure) transferred to the SNB StabFund’s portfolio amounted to USD 38.7 billion (net of pricing adjustments). USD 16.4 billion of positions were transferred to the fund in December 2008, followed by the remaining USD 22.2 billion of positions, of which USD 6.6 billion were transferred in March and USD 15.7 billion in ear ly April 2009. The purchase price for the overall portfolio was, in the aggregate, USD 1 billion lower than the market value UBS assigned to these positions on 30 September 2008. Of this USD 1 billion, USD 0.7 billion was accounted for in UBS’s results for 2008. The remaining USD 0.3 billion price differ ence was recognized in the income statement in 2009. Under IFRS, UBS’s call option to acquire equity of the SNB StabFund is recognized on the balance sheet as a derivative (Positive replacement values) at fair value (CHF 1.2 billion at 31 December 2009), with changes in fair value recognized in profit or loss. The put option was valued as a contingent li ability that has been deemed remote at 31 December 2009 and 2008. The contingent share issue was treated as an eq uity instrument and was recognized at fair value in equity as an increase to share premium and an expense in net trading income in 2008. The fair value of the contingent share issue was estimated at approximately CHF 607 million and not thereafter remeasured to fair value. Overall, the impact of the SNB transaction on the income statement in 2009 was a loss of CHF 115 million, which in cludes a CHF 232 million loss due to the price difference recognized in first quarter 2009 and a CHF 117 million net gain on UBS’s option to acquire the fund’s equity. Restructuring In 2009, UBS incurred restructuring charges of CHF 791 mil lion, including CHF 491 million in Personnel expenses, main ly for severance payments, CHF 256 million in General and administrative expenses, primarily for realestate related costs, and CHF 45 million of depreciation and impairment losses on property and equipment. These restructuring charges were allocated to the business divisions as follows: Wealth Management & Swiss Bank, CHF 322 million; Wealth Management Americas, CHF 152 million; Global Asset Man agement, CHF 48 million; Investment Bank, CHF 226 million; and the Corporate Center, CHF 45 million. Note 39 Currency translation rates The following table shows the principal rates used to translate the financial information of foreign entities into Swiss francs: 1 USD 1 EUR 1 GBP 100 JPY Spot rate As of Average rate Year ended 31.12.09 31.12.08 31.12.09 31.12.08 31.12.07 1.04 1.48 1.67 1.11 1.07 1.49 1.56 1.17 1.08 1.51 1.70 1.16 1.06 1.58 1.96 0.98 1.22 1.65 2.31 1.02 n o i t a m r o f n i l a i c n a n i F 361 Financial information Notes to the consolidated financial statements Note 40 Swiss banking law requirements The consolidated Financial Statements of UBS are prepared in accordance with International Financial Reporting Stan dards (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. In cluded in this note are the significant differences in regard to recognition and measurement between IFRS and the provi sions of the Banking Ordinance and the Guidelines of the FINMA 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 gener ally recorded as financial investments. 2. Financial investments availableforsale Under IFRS, financial investments availableforsale are carried at fair value. Changes in fair value are recorded di rectly in equity until an investment is sold, collected or oth erwise disposed of, or until an investment is determined to be impaired. At the time an availableforsale 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 availableforsale, 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 or at amortized cost less im pairment with changes in measurement recorded in the in come 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 car ried on the balance sheet at cost less impairment with im pairment losses recorded in the income statement. Perma nent investments are classified on the balance sheet as investments in associated companies. 3. Cash flow hedges The Group uses derivative instruments to hedge the expo sure from varying cash flows. Under IFRS, when hedge ac counting is applied the fair value gain or loss on the effective portion of the derivative designated as a cash flow hedge is recognized in equity. When the hedged cash flows material ize, the accumulated unrecognized gain or loss is realized and released to income. Under Swiss law, the effective portion of the fair value change of the derivative instrument used to hedge cash flow exposures is deferred on the balance sheet as other assets or other liabilities. The deferred amounts are released to in come when the hedged cash flows materialize. 4. Investment property Under IFRS, investment property is carried at fair value, with changes in fair value recognized in the income statement. Under Swiss law, investment property is carried at amor tized cost less any accumulated depreciation less impairment losses unless the investment property is classified as held for sale. Investment property classified as held for sale is carried at the lower of cost or market. 5. Fair value option Under IFRS, the Group applies the fair value option to cer tain 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 re flected in net trading income. Furthermore, UBS designat ed 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. 6. Goodwill and intangible assets Under IFRS, goodwill acquired in a business combination is not amortized but tested annually for impairment. Intangible assets acquired in a business combination with an indefinite useful life are also not amortized but tested annually for im pairment. Under Swiss law, goodwill and intangible assets with in definite useful lives are amortized over a period not exceed ing 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 noncurrent as sets or disposal groups be 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 reclassification takes place. 362 Note 40 Swiss banking law requirements (continued) 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 discon tinued 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 and the related cash collateral are reported on a net basis, provided the master netting and the related collateral agreements are legally enforceable. Note 41 Supplemental guarantor information required under SEC rules Guarantee of PaineWebber securities Following the acquisition of Paine Webber Group Inc., UBS made a full and unconditional guarantee of the senior and subordinated notes and trust preferred securities (“Debt Securities”) of PaineWebber. Prior to the acquisition, Paine Webber was an, SEC Registrant. Upon the acquisition, Paine Webber 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 ceeding 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. The information presented in this note is prepared in ac cordance with IFRS and should be read in conjunction with the Consolidated Financial Statements of UBS of which this information is a part. Supplemental guarantor consolidated income statement CHF million For the year ended 31 December 2009 UBS AG Parent Bank 1 UBS Americas Inc. Subsidiaries Consolidating entries UBS Group Operating income Interest income Interest expense Net interest income Credit loss (expense) / recovery Net interest income after credit loss expense Net fee and commission income Net trading income Income from subsidiaries Other income Total operating income Operating expenses Personnel expenses General and administrative expenses Depreciation of property and equipment Impairment of goodwill Amortization of intangible assets Total operating expenses Operating profit from continuing operations before tax Tax expense Net profit from continuing operations Net profit from discontinued operations Net profit Net profit attributable to minority interests Net profit attributable to UBS shareholders 18,798 (16,860) 1,939 (937) 1,002 7,912 (1,487) 1,114 550 9,092 8,577 2,351 686 0 3 11,617 (2,526) 210 (2,736) 0 (2,736) 0 (2,736) 4,432 (1,982) 2,450 (897) 1,553 6,025 (423) 0 (872) 6,282 5,566 2,512 171 0 96 8,345 (2,063) (549) (1,514) 0 (1,514) (3) (1,511) 6,715 (4,657) 2,058 2 2,060 3,774 1,586 0 921 8,341 2,400 1,385 191 1,123 101 5,200 3,141 (104) 3,245 (7) 3,238 613 2,625 (6,484) 6,484 0 0 0 0 0 (1,114) 0 (1,114) 0 0 0 0 0 0 (1,114) 0 (1,114) 0 (1,114) 0 (1,114) 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. 23,461 (17,016) 6,446 (1,832) 4,614 17,712 (324) 0 599 22,601 16,543 6,248 1,048 1,123 200 25,162 (2,561) (443) (2,118) (7) (2,125) 610 (2,736) 363 n o i t a m r o f n i l a i c n a n i F Financial information Notes to the consolidated financial statements Note 41 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated balance sheet CHF million As of 31 December 2009 Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Trading portfolio assets pledged as collateral Positive replacement values Financial assets designated at fair value Loans Financial investments available-for-sale Accrued income and prepaid expenses Investments in associates Property and equipment Goodwill and intangible assets Deferred tax assets Other assets Total assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Financial liabilities designated at fair value Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total liabilities Equity attributable to UBS shareholders Equity attributable to minority interests Total equity Total liabilities and equity UBS AG Parent Bank 1 UBS Americas Inc. Subsidiaries entries UBS Group Consolidating 15,177 67,640 39,807 113,891 122,801 47,954 413,822 5,831 296,497 63,459 1,664 61,551 4,920 494 6,352 7,131 75 8,597 56,402 37,914 18,224 11,422 8,260 5,876 45,774 15,441 3,880 24 791 9,101 2,037 2,115 5,647 100,909 10,700 82,474 48,739 859 145,265 11,283 22,749 2,857 1,100 49 501 1,413 479 2,169 1,268,991 225,933 437,194 110,418 17,662 38,563 41,884 400,432 100,768 341,200 5,155 126,965 8,229 1,191,276 77,715 0 77,715 1,268,991 53,751 22,993 66,545 10,792 8,173 276 54,470 2,269 493 3,380 223,142 (234) 3,025 2,791 225,933 31,569 10,742 76,657 610 146,992 27,953 72,999 2,093 12,242 26,455 408,312 24,287 4,595 28,882 437,194 0 (130,572) (43,402) (117,590) (1,727) (16,014) (145,654) (12,768) (58,193) 0 (828) (60,754) 0 0 0 (4,078) (591,580) (130,572) (43,402) (117,590) (5,817) (145,654) (16,344) (58,193) (828) (8,348) (4,078) (530,826) (60,754) 0 (60,754) (591,580) 20,899 46,574 63,507 116,689 188,037 44,221 421,694 10,223 306,828 81,757 5,816 870 6,212 11,008 8,868 7,336 1,340,538 65,166 7,995 64,175 47,469 409,943 112,653 410,475 8,689 131,352 33,986 1,291,905 41,013 7,620 48,633 1,340,538 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. 364 Note 41 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated statement of cash flows CHF million For the year ended 31 December 2009 Net cash flow from / (used in) operating activities Cash flow from / (used in) investing activities Purchase of subsidiaries and associates Disposal of subsidiaries and associates Purchase of property and equipment Disposal of property and equipment Net (investment in) / divestment of financial investments available-for-sale Net cash flow from / (used in) investing activities Cash flow from / (used in) financing activities Net money market papers issued / (repaid) Net movements in treasury shares and own equity derivative activity Capital issuance Issuance of long-term debt, including financial liabilities designated at fair value Repayment of long-term debt, including financial liabilities designated at fair value Increase in minority interests Dividends paid to / decrease in minority interests Net activity in investments in subsidiaries Net cash flow from / (used in) financing activities Effects of exchange rate differences Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents comprise: Cash and balances with central banks Money market papers 2 Due from banks with original maturity of less than three months Total UBS AG Parent Bank 1 4,841 UBS Americas Inc. Subsidiaries UBS Group (6,469) 56,126 54,497 (42) 296 (656) 104 (22,319) (22,616) (7,020) 673 3,726 64,956 (55,616) 0 0 (4,032) 2,686 5,886 (9,202) 132,782 123,580 15,177 78,025 30,378 123,580 0 0 (124) 53 (12,484) (12,555) 0 0 (75) 6 14,677 14,608 (42) 296 (854) 163 (20,127) (20,563) (1,596) (51,424) (60,040) 0 0 0 (1,548) 0 (8) 2,419 (733) 574 (19,183) 24,421 5,238 75 3,714 1,450 5,238 0 0 2,106 (7,861) 3 (576) 1,614 (56,136) (933) 13,664 22,490 36,154 5,647 16,694 13,814 36,154 673 3,726 67,062 (65,024) 3 (583) 0 (54,183) 5,529 (14,721) 179,693 164,973 20,899 98,432 45,642 164,973 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 papers are included in the balance sheet under “Trading portfolio assets”, “Trading portfolio assets pledged as collateral” and “Financial investments available-for-sale”. CHF 57,116 million were pledged as of 31 December 2009. n o i t a m r o f n i l a i c n a n i F 365 Financial information Notes to the consolidated financial statements Note 41 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated income statement CHF million For the year ended 31 December 2008 UBS AG Parent Bank 1 UBS Americas Inc. Subsidiaries Consolidating entries UBS Group Operating income Interest income Interest expense Net interest income Credit loss (expense) / recovery Net interest income after credit loss expense Net fee and commission income Net trading income Income from subsidiaries Other income Total operating income Operating expenses Personnel expenses General and administrative expenses Depreciation of property and equipment Impairment of goodwill Amortization of intangible assets Total operating expenses Operating profit from continuing operations before tax Tax expense Net profit from continuing operations Net profit from discontinued operations Net profit Net profit attributable to minority interests Net profit attributable to UBS shareholders 49,699 (48,686) 1,013 (861) 152 9,709 (8,129) (19,882) 2,836 (15,314) 8,738 3,918 770 0 1 13,427 (28,741) (7,407) (21,335) 43 (21,292) 0 (21,292) 21,343 (17,436) 3,907 (2,050) 1,857 7,910 (19,847) 0 1,058 (9,022) 5,169 4,604 205 341 93 10,412 (19,434) (4) (19,430) 0 (19,430) (9) (19,421) 27,354 (26,282) 1,072 (85) 987 5,310 2,156 0 (3,202) 5,251 2,355 1,976 266 0 119 4,716 535 574 (39) 155 116 577 (461) (32,717) 32,717 0 0 0 0 0 19,882 0 19,882 0 0 0 0 0 0 19,882 0 19,882 0 19,882 0 19,882 65,679 (59,687) 5,992 (2,996) 2,996 22,929 (25,820) 0 692 796 16,262 10,498 1,241 341 213 28,555 (27,758) (6,837) (20,922) 198 (20,724) 568 (21,292) 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. 366 Note 41 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated balance sheet CHF million As of 31 December 2008 Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Trading portfolio assets pledged as collateral Positive replacement values Financial assets designated at fair value Loans Financial investments available-for-sale Accrued income and prepaid expenses Investments in associates Property and equipment Goodwill and intangible assets Deferred tax assets Other assets Total assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Financial liabilities designated at fair value Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total liabilities Equity attributable to UBS shareholders Equity attributable to minority interests Total equity Total liabilities and equity UBS AG Parent Bank 1 UBS Americas Inc. Subsidiaries Consolidating entries UBS Group 27,030 111,563 48,874 206,087 145,012 71,736 862,459 5,120 326,548 1,237 3,684 66,255 5,093 250 6,607 8,934 332 11,490 109,783 79,178 47,558 12,655 18,215 7,755 53,774 638 2,700 58 971 9,393 1,757 2,148 5,382 192,206 16,914 145,851 57,230 1,531 293,896 12,741 35,193 3,373 2,666 50 642 3,292 516 6,333 0 (250,808) (52,674) (206,468) 22,038 (45,706) (320,470) (12,734) (75,207) 0 (2,909) (65,473) 0 0 0 (7,484) 32,744 64,451 122,897 224,648 271,838 40,216 854,100 12,882 340,308 5,248 6,141 892 6,706 12,935 8,880 9,931 1,896,489 358,405 777,816 (1,017,895) 2,014,815 196,723 25,248 30,988 51,034 855,005 88,505 422,688 7,417 127,408 12,598 1,817,614 78,875 0 78,875 1,896,489 68,213 32,884 140,197 17,086 16,792 1,716 70,242 2,584 2,439 4,313 356,466 (1,097) 3,036 1,939 358,405 111,500 8,605 137,844 903 300,537 35,973 48,018 3,104 72,569 33,571 752,624 20,226 4,966 25,192 777,816 (250,808) (52,674) (206,468) (6,592) (320,470) (24,648) (75,207) (2,909) (5,162) (7,484) (952,422) (65,473) 0 (65,473) (1,017,895) 125,628 14,063 102,561 62,431 851,864 101,546 465,741 10,196 197,254 42,998 1,974,282 32,531 8,002 40,533 2,014,815 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. n o i t a m r o f n i l a i c n a n i F 367 Financial information Notes to the consolidated financial statements Note 41 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated statement of cash flows CHF million For the year ended 31 December 2008 Net cash flow from / (used in) operating activities Cash flow from / (used in) investing activities Purchase of subsidiaries and associates Disposal of subsidiaries and associates Purchase of property and equipment Disposal of property and equipment Net (investment in) / divestment of financial investments available-for-sale Net cash flow from / (used in) investing activities Cash flow from / (used in) financing activities Net money market papers issued / (repaid) Net movements in treasury shares and own equity derivative activity Capital issuance Issuance of long-term debt, including financial liabilities designated at fair value Repayment of long-term debt, including financial liabilities designated at fair value Increase in minority interests Dividends paid to / decrease in minority interests Net activity in investments in subsidiaries Net cash flow from / (used in) financing activities Effects of exchange rate differences Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents comprise: Cash and balances with central banks Money market papers 2 Due from banks with original maturity of less than three months Total UBS AG Parent Bank 1 69,799 (1,502) 1,686 (819) 37 330 (268) (52,815) 623 23,135 91,961 (62,822) 0 0 (11,978) (11,896) (33,963) 23,672 109,110 132,782 27,030 62,777 42,975 132,782 UBS Americas Inc. (438) 0 0 (258) 27 156 (75) 914 0 0 0 (14,500) 842 (112) 21,816 8,960 442 8,889 15,532 24,421 332 19,875 4,214 24,421 Subsidiaries 7,646 UBS Group 77,007 0 0 (140) 5 (1,198) (1,333) 11,264 0 0 11,126 (15,572) 819 (420) (9,838) (2,621) (5,665) (1,973) 24,463 22,490 5,382 4,080 13,028 22,490 (1,502) 1,686 (1,217) 69 (712) (1,676) (40,637) 623 23,135 103,087 (92,894) 1,661 (532) 0 (5,557) (39,186) 30,588 149,105 179,693 32,744 86,732 60,217 179,693 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 papers are included in the balance sheet under “Trading portfolio assets”, “Trading portfolio assets pledged as collateral” and “Financial investments available-for-sale”. CHF 19,912 million were pledged as of 31 December 2008. The previously disclosed amount of pledged money market papers has been adjusted to include positions recognized in the balance sheet under “Trading portfolio assets pledged as collateral”. 368 Note 41 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated income statement CHF million For the year ended 31 December 2007 UBS AG Parent Bank 1 UBS Americas Inc. Subsidiaries Consolidating entries UBS Group Operating income Interest income Interest expense Net interest income Credit loss (expense) / recovery Net interest income after credit loss expense Net fee and commission income Net trading income Income from subsidiaries Other income Total operating income Operating expenses Personnel expenses General and administrative expenses Depreciation of property and equipment Amortization of intangible assets Total operating expenses Operating profit from continuing operations before tax Tax expense Net profit from continuing operations Net profit from discontinued operations Net profit Net profit attributable to minority interests Net profit attributable to UBS shareholders 77,306 (74,689) 2,617 11 2,628 12,852 3,467 464 (4,273) 15,138 13,239 5,684 930 3 19,856 (4,718) 794 (5,512) 265 (5,247) 0 (5,247) 47,747 (46,420) 1,327 (234) 1,093 10,119 (9,932) 0 8,369 9,649 8,329 3,446 138 101 12,014 (2,365) (486) (1,879) 0 (1,879) 18 (1,897) 51,985 (50,592) 1,393 (15) 1,378 7,663 (1,888) 0 245 7,398 3,947 (701) 175 172 3,593 3,805 1,061 2,744 138 2,882 521 2,361 (67,926) 67,926 109,112 (103,775) 0 0 0 0 0 (464) 0 (464) 0 0 0 0 0 (464) 0 (464) 0 (464) 0 (464) 5,337 (238) 5,099 30,634 (8,353) 0 4,341 31,721 25,515 8,429 1,243 276 35,463 (3,742) 1,369 (5,111) 403 (4,708) 539 (5,247) 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. n o i t a m r o f n i l a i c n a n i F 369 Financial information Notes to the consolidated financial statements Note 41 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated statement of cash flows CHF million For the year ended 31 December 2007 Net cash flow from / (used in) operating activities Cash flow from / (used in) investing activities Purchase of subsidiaries and associates Disposal of subsidiaries and associates Purchase of property and equipment Disposal of property and equipment Net (investment in) / divestment of financial investments available-for-sale Net cash flow from / (used in) investing activities Cash flow from / (used in) financing activities Net money market papers issued / (repaid) Net movements in treasury shares and own equity derivative activity Dividends paid Issuance of long-term debt, including financial liabilities designated at fair value Repayment of long-term debt, including financial liabilities designated at fair value Increase in minority interests Dividends paid to / decrease in minority interests Net activity in investments in subsidiaries Net cash flow from / (used in) financing activities Effects of exchange rate differences Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents comprise: Cash and balances with central banks Money market papers 2 Due from banks with original maturity of less than three months Total UBS AG Parent Bank 1 (65,749) UBS Americas Inc. 19,670 Subsidiaries (5,999) UBS Group (52,078) (2,337) 885 (1,022) 40 4,027 1,593 35,017 (2,771) (4,275) 105,197 (54,251) 0 0 871 79,788 (9,070) 6,562 102,548 109,110 8,530 60,266 40,314 109,110 0 0 (581) 28 34 (519) (1,426) 0 0 1,022 (7,022) 32 (665) (6,627) (14,686) (3,062) 1,403 14,129 15,532 109 13,202 2,221 15,532 0 0 (307) 66 1,920 1,679 (919) 0 0 4,655 (1,134) 1,062 46 5,756 9,466 (96) 5,050 19,413 24,463 10,154 3,747 10,562 24,463 (2,337) 885 (1,910) 134 5,981 2,753 32,672 (2,771) (4,275) 110,874 (62,407) 1,094 (619) 0 74,568 (12,228) 13,015 136,090 149,105 18,793 77,215 53,097 149,105 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 papers are included in the balance sheet under “Trading portfolio assets”, “Trading portfolio assets pledged as collateral” and “Financial investments available-for-sale”. CHF 7,881 million were pledged as of 31 December 2007. The previously disclosed amount of pledged money market papers has been adjusted to include positions recognized in the balance sheet under “Trading portfolio assets pledged as collateral”. Guarantee of other securities UBS AG, acting through whollyowned finance subsidiaries, issued the following trust preferred securities: USD billion, unless otherwise indicated Issuing entity UBS Preferred Funding Trust I UBS Preferred Funding Trust II UBS Preferred Funding Trust IV UBS Preferred Funding Trust V Type of security Trust preferred securities Trust preferred securities 1 Floating rate non-cumulative trust preferred securities Trust preferred securities Outstanding as of 31.12.09 Date issued Interest (%) Amount October 2000 June 2001 May 2003 May 2006 8.622 7.247 one-month LIBOR + 0.7 6.243 1.5 0.5 0.3 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 secu rities guarantee are subordinated to the prior payment in full of the deposit liabilities of UBS and all other liabilities of UBS. At 31 December 2009, the amount of senior liabilities of UBS to which the holders of the subordinated debt securities would be subordinated is approximately CHF 1,280 billion. 370 Financial information UBS AG (Parent Bank) UBS AG (Parent Bank) Parent Bank review Income statement The Parent Bank UBS AG net loss decreased by CHF 31,448 million from a loss of CHF 36,489 million to a loss of CHF 5,041 million. Net trading income improved by CHF 8,990 million from negative CHF 9,466 million to negative CHF 476 million. 2008 reflects mainly losses in the fixed income business and charges associated with the SNB transaction. Income from investments in associated companies de- creased to CHF 1,154 million from CHF 3,763 million in 2008 mainly due to lower dividend distributions received. Personnel expenses were up to CHF 9,101 million from CHF 6,707 million in 2008 mainly due to recognition of a defined pension asset in 2008. Depreciation decreased to CHF 2,405 million from CHF 26,900 million in 2008 which included write-downs of in- vestments in associated US companies. Allowances, provisions and losses decreased to CHF 1,432 million from CHF 3,071 million in 2008, which includ- ed costs related to the US cross-border case and costs associ- ated with the repurchase of auction rate securities. The decrease in Extraordinary income and in Extraordi- nary expenses are explained in additional income statement information. Balance sheet In 2009, UBS’s overall balance sheet reduction initiatives led also to lower Parent Bank total assets. In particular UBS sub- sidiaries and third party banks in the Americas, European region, and to lesser extent in Asia, reduced their assets and therefore their funding needs from the Parent Bank. The Par- ent Bank total assets stood at CHF 848 billion at 31 Decem- ber 2009, a drop of CHF 342 billion from CHF 1,189 billion at 31 December 2008. The reductions occurred in inter-bank lending (loans and collateral trading), which declined by 165 billion, pos- itive replacement values (down CHF 133 billion), customer loans and collateral trading (down CHF 37 billion), trading balances (down CHF 21 billion), and liquid assets (down CHF 12 billion). These declines however were partially off- set by higher positions in money market papers (up CHF 29 billion) and financial investments (up CHF 4 billion). Mortgage loans remained stable in 2009 at CHF 141 bil- lion. Interbank lending During 2009, due from banks on time declined by CHF 53 billion, predominately due to lower funding needs of third party banks in the Americas and European region as well as UBS subsidiaries in the European region. Due from banks on demand declined by CHF 12 billion due to lower funding to bank subsidiaries in the European region. In addition, inter- bank collateral trading declined by CHF 100 billion, attribut- able to lower trading volumes and a shift into money market paper within UBS subsidiaries in the Americas, European re- gion and Asia. Customer lending The customer loan drop of CHF 37 billion was the result of lower funding needs by clients in the Americas and in the European region, as well as UBS subsidiaries (non-banks), predominately in the Americas region. Money market papers The increase in money market papers is due to UBS’s strate- gic decision to rebalance its investment portfolio, which led to a shift from reverse repurchase agreements into money market papers available-for-sale. These instruments include highly liquid short-term securities issued by governments and government-controlled institutions in various currencies, mainly US dollar and euro. n o i t a m r o f n i l a i c n a n i F 371 Financial information UBS AG (Parent Bank) Parent Bank financial statements Income statement CHF million Interest and discount income Interest and dividend income from trading portfolio Interest and dividend income from financial investments Interest expense Net interest income Credit-related fees and commissions Fee and commission income from securities and investment business Other fee and commission income Fee and commission expense Net fee and commission income Net trading income Net income from disposal of financial investments Income from investments in associated companies Income from real estate holdings Sundry income from ordinary activities Sundry ordinary expenses Other income from ordinary activities Operating income Personnel expenses General and administrative expenses Operating expenses Operating profit Depreciation and write-offs on investments in associated companies and fixed assets Allowances, provisions and losses Profit before extraordinary items and taxes Extraordinary income Extraordinary expenses Tax expense Profit / (loss) for the period 372 For the year ended % change from 31.12.09 31.12.08 31.12.08 13,764 4,911 92 (16,901) 1,866 255 9,294 624 (2,264) 7,909 (476) 123 1,154 26 4,761 (3,604) 2,460 11,759 9,101 4,421 13,522 (1,763) 2,405 1,432 (5,600) 688 (49) (80) 37,825 12,014 76 (49,022) 893 208 11,668 610 (2,849) 9,637 (9,466) 176 3,763 29 3,384 (2,767) 4,584 5,648 6,707 5,822 12,528 (6,880) 26,900 3,071 (36,852) 1,002 (482) (157) (5,041) (36,489) (64) (59) 21 (66) 109 23 (20) 2 (21) (18) 95 (30) (69) (10) 41 30 (46) 108 36 (24) 8 74 (91) (53) 85 (31) (90) (49) 86 Balance sheet CHF million Assets Liquid assets Money market papers Due from banks Due from customers Mortgage loans Trading balances in securities and precious metals Financial investments Investments in associated companies Fixed assets Accrued income and prepaid expenses Positive replacement values Other assets Total assets Total subordinated assets Total amounts receivable from Group companies Liabilities and equity Money market papers issued Due to banks Due to customers on savings and deposit accounts Other amounts due to customers Medium-term bonds Bonds issued and loans from central mortgage institutions Accruals and deferred income Negative replacement values Other liabilities Allowances and provisions Share capital General statutory reserve Reserve for own shares Other reserves Profit / (loss) for the period Total liabilities and equity Total subordinated liabilities Total amounts payable to Group companies 31.12.09 31.12.08 % change from 31.12.08 15,177 91,988 191,002 153,893 140,671 138,160 15,206 19,225 4,986 1,754 68,977 6,504 847,543 2,617 242,617 45,043 184,010 72,985 287,156 2,967 155,907 7,520 54,468 6,641 2,277 356 30,377 835 2,042 (5,041) 847,543 19,410 145,268 27,030 62,777 355,679 191,308 141,328 158,741 11,085 22,001 5,032 3,877 201,801 8,697 1,189,356 3,924 435,721 52,063 292,730 61,872 388,338 3,150 143,589 7,895 193,108 14,181 2,724 293 40,910 2,877 22,115 (36,489) 1,189,356 21,228 271,434 (44) 47 (46) (20) 0 (13) 37 (13) (1) (55) (66) (25) (29) (33) (44) (13) (37) 18 (26) (6) 9 (5) (72) (53) (16) 22 (26) (71) (91) 86 (29) (9) (46) Statement of appropriation of retained earnings The Board of Directors proposes that the Annual General Meeting (AGM) on 14 April 2010 approves the following appropriation: CHF million Profit / (loss) for the financial year 2009 as per the Parent Bank’s Income Statement Appropriation to other reserves Appropriation to general statutory reserves: Share premium (5,041) (2,042) (2,999) 373 n o i t a m r o f n i l a i c n a n i F Financial information UBS AG (Parent Bank) Notes to the Parent Bank financial statements Accounting policies The Parent Bank Financial Statements are prepared in accor- dance with Swiss Federal banking law. The accounting poli- cies are principally the same as for the Group Financial State- ments outlined in Note 1, Summary of Significant Accounting Policies. Major differences between the Swiss Federal bank- ing law requirements and International Financial Reporting Standards are described in Note 40 to the financial state- ments. The accounting policies applied for the statutory ac- counts of the Parent Bank are discussed below. The risk management of UBS AG is described in the context of the risk management for UBS Group. Refer to “Risk and treasury management” section. Treasury shares Treasury shares are own equity instruments held by an entity. Under Swiss law, treasury shares are recognized in the bal- ance sheet as trading balances. Short positions in treasury shares are recognized in “Due to banks”. Treasury shares recognized as trading balances and short positions in trea- sury shares are measured at fair value with unrealized gains or losses from remeasurement to fair value included in the income statement. Realized gains and losses on the sale or acquisition of treasury shares are recognized in the income statement. A Reserve for own shares must be created within equity equal to the cost value of the treasury shares held through reclassification from Other reserves. Repurchase of treasury shares is only allowed if sufficient Other reserves are avail- able. The Reserve for own shares is not available for distribu- tion to shareholders. Foreign currency translation Assets and liabilities of foreign branches are translated into CHF at the spot exchange rate at the balance sheet date. In- come and expense items are translated at weighted average exchange rates for the period. Gains resulting from exchange differences on the translation of each of these foreign branches are credited to a provision account (other liabilities). Losses resulting from exchange differences are debited firstly to the 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 subsidiar- ies and are carried at cost less impairment, if applicable. Deferred taxes Deferred tax assets are not recognized in the Parent Bank Financial Statements. Deferred tax liabilities are recognized for all taxable temporary differences. The change in the de- ferred tax liability is recognized in profit or loss. Equity participation and other compensation plans Equity participation plans Under Swiss law, employee share awards are recognized as compensation expense and accrued over the performance year, which is generally the period prior to the grant date. Employee option awards which do not contain voluntary ter- mination non-compete provisions are recognized as compen- sation expense on the grant date. If the award is performance based and contains substantive future service / vesting period conditions, compensation expense is recognized over the per- formance period. Employee option awards which contain vol- untary termination non-compete provisions (i.e. good leaver clause) are recognized as compensation expense over the per- formance year. Equity- and cash-settled awards are classified as liabilities. The employee share option awards are remea- sured to fair value at each balance sheet date. However, for 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 em- ployee options, cash received for payment of the strike price is 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 conditions, compensation expense is recognized over the performance period. 374 Changes in accounting policies, comparability and other adjustments Netting of cash collateral against replacement values In 2009, UBS concluded that the cash collateral provided or received can be offset against the negative or positive replacement values if the cash collateral is provided or re- ceived under the same legally enforceable master netting and related collateral agreement. The change in account- ing policy resulted in the following effects on the balance sheet for 31 December 2009: a decrease of approximately CHF 28.3 billion in Positive replacement values, a decrease of approximately CHF 29.4 billion in Negative replacement values and a corresponding decrease in Due from banks / Due from customers and Due to banks / Due to customers. There was no impact to the income statement for the pe- riod. Subordinated liabilities In the balance sheet 2009, total subordinated liabilities presented for 31 December 2008 have been adjusted from CHF 24,427 million to CHF 21,228 million. n o i t a m r o f n i l a i c n a n i F 375 Financial information UBS AG (Parent Bank) Additional income statement information Net trading income CHF million Investment Bank equities Investment Bank fixed income, currencies and commodities 1 Other business divisions 1 Total 1 The prior year amounts have been adjusted to conform to the current year’s presentation. Extraordinary income and expenses For the year ended % change from 31.12.09 31.12.08 31.12.08 3,005 (4,496) 1,014 (476) 3,930 (12,678) (718) (9,466) (24) 65 95 Extraordinary income includes gains from sale of subsidiaries and associated companies of CHF 393 million in 2009, where- as 2008 included a gain on sale of Bank of China investment of approximately CHF 360 million. Further, 2009 includes write-up of investments in associated companies of CHF 265 million (2008: CHF 30 million). Amounts in 2008 included a release on reserves on investments in subsidiaries of CHF 490 million and a release of provisions of CHF 72 million. Extraordinary expenses in 2009 include losses from sale of subsidiaries and associated companies of CHF 48 million. 2008 included CHF 478 million related to an overstatement of trading income in 2007. 376 Additional balance sheet information Allowances and provisions 1 CHF million Default risks (credit and country risk) Litigation risks Operational risks Retirement benefit plans Restructuring provisions Deferred taxes Other Total allowances and provisions Allowances deducted from assets Total provisions as per balance sheet Provisions applied in accordance with their specified purpose Recoveries, doubtful interest, currency translation differences Balance at 31.12.08 Provisions released to income New provisions charged to income Balance at 31.12.09 (1,408) (280) (203) (29) (205) 0 (522) (2,647) 196 (100) 0 (1) 45 (15) 2 127 (493) (22) (57) 0 (3) (12) (173) (760) 1,405 134 145 32 303 0 458 2,477 1,556 1,078 157 94 74 36 1,259 4,254 1,530 2,724 1,256 810 42 96 214 9 1,024 3,451 1,174 2,277 1 In previous years, the table included “Trading portfolio risks” (CHF 14,858 million at 31 December 2008). “Trading portfolio risks” includes credit, liquidity and model adjustments to financial instruments accounted for at fair value through profit or loss. As these adjustments are components of fair value rather than allowances and provisions, and respective profit or loss impacts are presented as net trading income rather than credit loss expense / (recovery), “Trading portfolio risks” are no longer included. Statement of shareholders’ equity CHF million As of 31.12.07 and 1.1.08 Capital increase 1 Capital increase related to MCNs Increase in reserves Prior year dividend Profit / (loss) for the period Changes in reserves for own shares Transfers As of 31.12.08 and 1.1.09 Capital increase Capital increase related to MCNs Increase in reserves Prior year dividend Profit / (loss) for the period Changes in reserves for own shares Transfers 2 As of 31.12.09 General statutory reserves: Share premium General statutory reserves: Retained earnings Reserves for own shares 6,303 15,911 16,223 (11,901) 26,536 3,783 58 (2,999) 27,378 2,472 9,441 (2,472) 0 (6,564) 2,877 (2,042) 0 835 Share capital 207 86 293 30 33 356 Total shareholders’ equity (before distribution of profit) 33,990 15,982 16,223 0 0 (36,489) 0 0 29,706 3,813 91 0 0 (5,041) 0 0 28,569 Other reserves 15,567 (15) (36,489) 6,564 14,373 0 (5,041) 2,042 2,999 0 1 Includes stock dividend. 2 Subject to approval by the Annual General Meeting on 14 April 2010. n o i t a m r o f n i l a i c n a n i F 377 Financial information UBS AG (Parent Bank) Share capital As of 31.12.09 Issued and paid up Conditional share capital As of 31.12.08 Issued and paid up Conditional share capital Shares issued On 25 June 2009, UBS increased its share capital by issuing 293,258,050 new registered shares. The shares were placed with a small number of large institutional investors. The shares were issued out of authorized capital which had been approved at the Annual General Meeting of shareholders (AGM) on 15 April 2009. On 19 August 2009, the Swiss Confederation announced the conversion of its UBS mandatory convertible notes (MCNs). Upon conversion on 25 August 2009, UBS issued 332,225,913 new shares from existing conditional capital. 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. That resulted in the issuance of 98,698,754 shares. On 23 April 2008, the AGM of shareholders approved a capital increase that resulted in the issuance of 760,295,181 fully paid registered shares. All issued shares are fully paid. Par value Ranking for dividends No. of shares Capital in CHF No. of shares Capital in CHF 3,558,112,753 355,811,275 3,558,112,753 355,811,275 527,773,646 52,777,365 2,932,580,549 293,258,055 2,932,580,549 293,258,055 792,844,711 79,284,471 For further information on the capital increase and the conversion of the MCNs in 2009, refer to “Note 26 Capital increases and mandatory convertible notes” in the financial statements. Conditional share capital On 31 December 2009, a maximum of 29,350 shares could have been issued against the future exercise of options from former PaineWebber employee option plans and 149,994,296 shares could have been issued to fund UBS’s employee share option programs. In addition, conditional capital of up to 277,750,000 shares was available for the UBS share delivery obligation due to the issuance of the March 2008 mandatory convertible notes (MCNs) and con- ditional capital of up to 100,000,000 shares is available in connection with the transaction with the Swiss National Bank (SNB). 378 Off-balance-sheet and other information Assets pledged or assigned as security for own obligations and assets subject to reservation of title CHF million Money market papers Mortgage loans 1 Securities Other Total 31.12.09 31.12.08 Change in % Book value Effective liability Book value Effective liability Book value Effective liability 42,898 21,741 47,289 8,578 120,506 1,368 12,321 31,862 0 45,551 7,429 3,699 50,223 8,149 69,500 1,300 2,418 37,083 0 40,801 477 488 (6) 5 73 5 410 (14) 12 1 Book value includes mortgage loans transferred for security purpose in preparation of upcoming covered bond issuances. Financial assets are mainly pledged in securities borrowing and lending transactions, in repurchase and reverse repur- chase transactions, under collateralized credit lines with cen- tral banks, against loans from mortgage institutions, in con- nection with derivative transactions, as security deposits for stock exchanges and clearinghouse memberships, or trans- ferred for security purpose in connection with the issuance of covered bonds. Commitments and contingent liabilities CHF million Contingent liabilities Irrevocable commitments Liabilities for calls on shares and other equities Confirmed credits 31.12.09 139,319 73,270 151 2,083 31.12.08 286,451 68,660 145 2,079 % change from 31.12.08 (51) 7 4 0 UBS AG is jointly and severally liable for the value added tax (VAT) liability of Swiss subsidiaries that belong to its VAT group. Derivative instruments CHF million, except where indicated Interest rate contracts Credit derivative contracts Foreign exchange contracts Precious metal contracts Equity / index contracts Commodities contracts, excluding precious metals contracts Total derivative instruments Replacement value netting Replacement values after netting 1 PRV: Positive replacement value. 2 NRV: Negative replacement value. 31.12.09 31.12.08 Notional amount CHF billion 33,787 2,525 6,523 79 251 6 43,171 PRV 1 187,506 80,008 97,925 3,442 17,314 761 386,956 317,979 68,977 NRV 2 174,632 70,586 101,800 3,378 21,353 697 372,447 317,979 54,468 Notional amount CHF billion 36,476 3,712 6,005 108 473 160 46,934 PRV 1 377,307 202,357 222,178 5,804 28,502 27,055 863,203 661,402 201,801 NRV 2 370,346 187,216 229,656 5,697 36,208 25,387 854,510 661,402 193,108 n o i t a m r o f n i l a i c n a n i F 379 Financial information UBS AG (Parent Bank) Fiduciary transactions CHF million Deposits: with third-party banks with subsidiaries Total 31.12.09 31.12.08 % change from 31.12.08 17,088 1,810 18,898 36,452 2,738 39,190 (53) (34) (52) Due to UBS pension plans CHF million Due to UBS pension plans and UBS debt instruments held by pension plans For the year ended % change from 31.12.09 397 31.12.08 876 31.12.08 (55) Transactions with related parties Transactions with related parties (such as securities transactions, payment transfer services, borrowing and compensation for deposits) are conducted at internally agreed transfer prices or at arm’s length. Outsourcing Outsourcing of IT and other services through agreements with external service providers is in compliance with FINMA circu- lar 08 / 7 “Outsourcing banks”. Personnel The Parent Bank employed 36,182 personnel on 31 December 2009 and 40,998 personnel on 31 December 2008. Significant shareholders In % of shares issued Chase Nominees Ltd, London DTC (Cede & Co.), New York 1 Mellon Bank N.A., Everett Nortrust Nominees Ltd, London 1 DTC (Cede & Co.), New York, “The Depository Trust Company” is a US securities clearing organization. 31.12.09 11.63 8.42 3.21 3.07 31.12.08 31.12.07 7.19 9.89 less than 3 less than 3 7.99 14.15 less than 3 less than 3 380 Corporate governance and compensation report Compensation details and additional information for executive members of the BoD CHF, except where indicated a Name, function 1 Kaspar Villiger, Chairman Peter Kurer, former Chairman Marcel Ospel, former Chairman Stephan Haeringer, former Executive Vice Chairman For the year ended 2009 2008 2009 2008 2009 2008 2009 2008 Base salary 602,083 666,667 1,333,333 666,667 1,125,000 Annual incentive award (cash) 0 0 0 0 0 Annual incentive award (shares – fair value) c 0 Discretionary award (options – fair value) d 0 Benefits in kind e 74,488 Contributions to retirement benefits plans f 0 Total 676,571 0 0 0 0 0 0 0 0 37,561 58,267 89,780 794,008 174,047 1,565,647 80,755 87,023 834,445 108,846 195,802 1,429,648 1 2009: Kaspar Villiger was the only non-independent member in office on 31 December 2009; Peter Kurer did not stand for reelection at the AGM on 15 April 2009. 2008: Peter Kurer was the only executive member in office on 31 December 2008; Marcel Ospel did not stand for reelection at the AGM on 23 April 2008 and Stephan Haeringer stepped down during the year as a member of the BoD, and both of these payments are pro-rata for the four and nine months, respectively, in their functions. Explanation of the tables outlining compensation details of 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 informa- tion” section of this report. b. The entire cash incentive is only paid out over a three-year period and is subject to forfeiture. c. Values per performance share at grant: CHF 16.30 for PEP awards and CHF 22.20 for IPP awards granted in 2010 related to the performance year 2009. These are based on the performance share valuation which will be used for accounting purposes under IFRS 2. The valuation was carried out by PricewaterhouseCoopers and takes into account the relevant performance conditions, targets set, and the range of possible outcomes for these. d. No options were granted in 2010 for the performance year 2009. e. Benefits in kind – car leasing, company car allowance, staff discount on banking products and services, health and welfare benefits and gen- eral expense allowances – are all valued at market price. f. Swiss 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 contribu- tion is included in the base salary and annual incentive award components. In both the US and the UK, executives participate in the same plans as all other employees. In the US the plans differ between the two business divisions. For each business division there are two different plans. The grandfathered plans, which are no longer open to new hires, operate, de- pending on the business division, either on a cash balance basis or a career average salary basis and participants accrue a pension based on their annual compensation limited to USD 250,000 (or USD 150,000 for Wealth Management Americas employees). In the defined contribution plan, participants receive company contributions to the plan based on compensation limited to USD 245,000. US management may also participate in a 401(k) defined contribution plan (open to all employees), which provides a company matching contribution for employee contributions. In the UK, management participates in either the principal pension plan, which operates on a defined contribution basis and 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). 381 n o i t a m r o f n i l a i c n a n i F Financial information UBS AG (Parent Bank) Remuneration details and additional information for independent members of the BoD CHF, except where indicated a n o i t a s n e p m o C e e t t i m m o C & e c n a n r e v o G g n i t a n m o N i e e t t i m m o C e t a r o p r o C y t i l i b i s n o p s e R e e t t i m m o C e e t t i m m o C t i d u A & R H e e t t i m m o C k s i R y g e t a r t S e t t i e For the period AGM to AGM m m o C Base fee Committee retainer(s) Benefits in kind M M M M C M M M M M M C M M M M M M 2009/2010 325,000 M 2008/2009 325,000 100,000 200,000 2009/2010 2008/2009 325,000 2009/2010 325,000 2008/2009 162,500 200,000 350,000 75,000 2009/2010 325,000 200,000 2008/2009 M M 2009/2010 325,000 M 2008/2009 162,500 2009/2010 325,000 2008/2009 162,500 2009/2010 325,000 2008/2009 2009/2010 200,000 150,000 200,000 100,000 250,000 2008/2009 325,000 M 2009/2010 325,000 250,000 200,000 M M C C 2008/2009 2009/2010 2008/2009 162,500 2009/2010 325,000 2008/2009 325,000 2009/2010 325,000 2008/2009 162,500 2009/2010 325,000 2008/2009 325,000 2009/2010 2008/2009 162,500 2009/2010 325,000 M 2008/2009 325,000 2009/2010 150,000 300,000 300,000 300,000 100,000 400,000 450,000 0 100,000 400,000 C M 2008/2009 325,000 300,000 2008/2009 162,500 100,000 2009/2010 M M M M C M C M 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Additional payments 250,000 6 250,000 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Share percent- age 3 100 Number of shares 4,5 51,845 100 76,228 100 50 50 50 100 50 50 50 50 51,596 27,261 12,280 21,203 40,301 16,158 21,203 13,572 23,222 Total 675,000 775,000 525,000 675,000 237,500 525,000 525,000 312,500 525,000 262,500 575,000 575,000 525,000 50 100 29,731 40,301 312,500 625,000 625,000 625,000 262,500 725,000 775,000 162,500 425,000 725,000 50 50 50 50 50 50 50 100 50 50 16,158 25,242 32,316 25,242 13,572 29,281 40,072 15,945 17,164 37,487 262,500 50 13,572 50 32,316 625,000 6,425,000 6,437,500 Name, function 1 Sergio Marchionne, Senior Independent Director, Vice Chairman Ernesto Bertarelli, former member Sally Bott, member2 Michel Demaré, member Rainer-Marc Frey, member2 Bruno Gehrig, member2 Ann F. Godbehere, member Gabrielle Kaufmann- Kohler, former member Axel P. Lehmann, member Rolf A. Meyer, former member2 Helmut Panke, member William G. Parrett, member2 David Sidwell, member Peter Spuhler, former member2 Peter R. Voser, member Lawrence A. Weinbach, former member2 Joerg Wolle, former member Total 2009 Total 2008 Legend: C = Chairperson of the respective committee; M = Member of the respective committee 1 There were 11 independent BoD members in office on 31 December 2009. Michel Demaré, Ann F. Godbehere and Axel P. Lehmann were appointed at the AGM on 15 April 2009 and Ernesto Berta relli, Gabrielle Kaufmann-Kohler and Joerg Wolle stepped down from the BoD at the AGM on 15 April 2009. 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 William G. Parrett were appointed at the EGM on 2 October 2008. 2 Remuneration for 2008 / 2009 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 2009, shares valued at CHF 14.57 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2010) included a price discount of 15%, for a new value of discount price CHF 12.38. These shares are blocked for four years. For 2008, shares valued at CHF 11.38 (average price of UBS shares at virt-x, now SIX Swiss Exchange, over the last 10 trading days of February 2009) included a price discount of 15%, discount price for a new value of CHF 9.67. These 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 / withholding tax. 6 This payment is associated with the Senior Independent Director function. In addition, for 2008 / 2009 only, one-off cash payments were made to the Chairmen of the RC (CHF 500,000), the GNC (CHF 300,000) and the HRCC (CHF 200,000). These payments reflect the sub- stantial workload of setting up the new RC, and expanding the mandate of the GNC and the HRCC. 382 Total payments to all members of the BoD CHF, except where indicated a Aggregate of all members of the BoD Aggregate of all members of the BoD For the year ended 2009 2008 Total 7,895,579 10,267,240 Total compensation for all members of the GEB CHF, except where indicated a Name, function For the year ended Base salary Annual incentive award CBP and cash b Annual incentive award PEP c Annual incentive award IPP c Contributions to retirement benefits plans f Benefits in kind e Total Carsten Kengeter, co-CEO Investment Bank (highest-paid) Marcel Rohner, Group Chief Executive Officer (highest-paid) Aggregate of all members of the GEB who were in office on 31 December 2009 1 Aggregate of all members of the GEB who were in office on 31 December 2008 1 Aggregate of all members of the GEB who stepped down during 2009 2 Aggregate of all members of the GEB who stepped down during 2008 2 2009 2008 2009 2008 2009 2008 669,092 5,003,470 6,155,869 1,349,336 0 12,545 13,190,312 1,500,000 0 0 0 161,768 152,934 1,814,702 12,000,055 25,734,711 13,453,424 3 15,696,333 270,971 1,551,068 68,706,562 7,815,943 0 2,447,544 38,443,097 1,614,871 0 0 0 0 0 0 0 457,652 817,315 9,090,911 215,151 171,122 41,276,914 234,838 258,423 2,108,132 1 Numbers and distribution of GEB members in 2009: 13 GEB members in office on 31 December. 2008: 12 GEB members in office on 31 December. 2 Number and distribution of GEB members in 2009: includes two months in office as a GEB member for Marcel Rohner, three months in office for Walter H. Stürzinger and Raoul Weil, four months in office for Jerker Johansson, six months in office for Rory Tapner and ten for Marten Hoekstra. 2008: includes four months in office as a GEB member for Peter Kurer, eight months in office for Marco Suter and ten months for Joe Scoby. 3 Included in the share awards are SEEOP awards at a fair value of GBP 4,655,950 and EOP awards at a fair value of GBP 1,594,250. n o i t a m r o f n i l a i c n a n i F 383 Financial information UBS AG (Parent Bank) Share and option ownership of members of the BoD on 31 December 2008 / 2009 Name, function 1 Kaspar Villiger, Chairman Sergio Marchionne, Senior Independent Director, Vice Chairman Ernesto Bertarelli, former member 4 Sally Bott, member Michel Demaré, member Rainer-Marc Frey, member Bruno Gehrig, member Ann F. Godbehere, member Gabrielle Kaufmann-Kohler, former member 4 Peter Kurer, former Chairman 4 Axel P. Lehmann, member Helmut Panke, member William G. Parrett, member David Sidwell, member Peter R. Voser, member Joerg Wolle, former member 4 For the year ended Number of shares held Voting rights in % Number of options held 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 22,500 – 164,154 87,926 – 89,434 12,281 1 2,500 – 16,158 0 16,572 3,000 0 – – 18,713 – 416,088 18,151 – 64,287 31,971 17,573 4,000 40,073 1 68,310 30,823 – 41,509 0.001 0.009 0.005 0.005 0.001 0.000 0.000 0.001 0.000 0.001 0.000 0.000 0.001 0 – 0 0 – 0 0 0 0 – 0 0 0 0 0 – – 0 – 0.025 372,995 0.001 0.003 0.002 0.001 0.000 0.002 0.000 0.004 0.002 0.002 0 – 0 0 0 0 0 0 0 0 – 0 Potentially conferred voting rights in % 2 0.000 Type and quantity of options 3 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.022 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 xli: xlvii: lvi: lxiv: 85,256 95,913 95,913 95,913 1 This 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 information” section of this report for more information on stock option plans. 4 Members of the BoD who stepped down at the AGM 2009. 384 Compensation paid to former members of the BoD and GEB1 CHF, except where indicated a Name, function Georges Blum, former member of the BoD (Swiss Bank Corporation) Franz Galliker, former member of the BoD (Swiss Bank Corporation) Walter G. Frehner, former member of the BoD (Swiss Bank Corporation) Hans (Liliane) Strasser, former member of the BoD (Swiss Bank Corporation) Robert Studer, former member of the BoD (Union Bank of Switzerland) Alberto Togni, former member of the BoD (UBS) Philippe (Alix) de Weck, former member of the BoD (Union Bank of Switzerland) Aggregate of all former members of the GEB 2 Aggregate of all former members of the BoD and GEB For the year ended Compensation 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 320,136 318,461 0 0 320,136 318,461 Benefits in kind 92,399 101,579 10,659 69,596 25,371 74,663 9,758 32,673 18,751 126,208 355,983 427,949 93,135 109,703 18,293 171,180 624,349 Total 92,399 101,579 10,659 69,596 25,371 74,663 9,758 32,673 18,751 126,208 676,119 746,410 93,135 109,703 18,293 171,180 944,485 1,113,551 1,432,012 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. n o i t a m r o f n i l a i c n a n i F 385 Financial information UBS AG (Parent Bank) Share and option ownership of members of the GEB on 31 December 2008 / 2009 Name, function 1 Oswald J. Grübel, Group Chief Executive Officer Marcel Rohner, former Group Chief Executive Officer 4 2009 2008 2009 2008 For the year ended Number of shares held Voting rights in % Number of options held Potentially conferred voting rights in % 2 0.217 Type and quantity of options 3 lxx: 4,000,000 0 – – 0.000 4,000,000 – – 711,366 0.042 1,055,043 0.063 John Cryan, Group Chief Financial Officer 2009 235,929 0.013 382,673 0.021 2008 235,929 0.014 382,673 0.023 Markus U. Diethelm, Group General Counsel John A. Fraser, Chairman and CEO Global Asset Management 2009 2008 2009 112,245 112,245 480,464 0.006 0.007 0.027 0 0 1,088,795 0.000 0.000 0.059 386 31,971 xxxii: xli: 213,140 xlvii: 277,082 lvi: 319,710 lxiv: 213,140 21,362 iii: 20,731 iv: 20,725 vii: 5,454 xii: 5,294 xiii: 5,292 xvi: 23,626 xxi: 23,620 xxiii: 23,612 xxvi: 5,526 xxviii: 5,524 xxix: xxx: 5,524 xxxviii: 17,072 17,068 xl: 17,063 xlii: 14,210 xliv: 14,210 xlv: 14,207 xlvi: 5,330 liii: 5,328 liv: 5,326 lv: 17,762 lxi: 17,762 lxii: 17,760 lxiii: 53,285 lxvi: iii: 21,362 iv: 20,731 vii: 20,725 xii: 5,454 xiii: 5,294 xvi: 5,292 xxi: 23,626 xxiii: 23,620 xxvi: 23,612 xxviii: 5,526 xxix: 5,524 5,524 xxx: xxxviii: 17,072 17,068 xl: 17,063 xlii: 14,210 xliv: 14,210 xlv: 14,207 xlvi: 5,330 liii: 5,328 liv: 5,326 lv: 17,762 lxi: 17,762 lxii: 17,760 lxiii: 53,285 lxvi: viii: 76,380 127,884 xix: xxv: 127,884 xliii: 170,512 xlviii: 202,483 lvi: 213,140 lxiv: 170,512 Share and option ownership of members of the GEB on 31 December 2008 / 2009 (continued) Name, function 1 John A. Fraser, Chairman and CEO Global Asset Management For the year ended 2008 Number of shares held 561,216 Voting rights in % Number of options held 0.035 1,144,808 Potentially conferred voting rights in % 2 0.068 Marten Hoekstra, former CEO Wealth Management US 4 2009 2008 – 245,397 – 0.015 684,168 0.041 Type and quantity of options 3 56,013 i: 76,380 viii: xix: 127,884 xxv: 127,884 xliii: 170,512 xlviii: 202,483 lvi: 213,140 lxiv: 170,512 ii: 8,679 vi: 8,421 ix: 8,421 xi: 8,823 xiv: 4,262 xv: 8,563 8,561 xviii: xxxiii: 42,628 53,285 xliii: 53,285 xlviii: lvi: 85,256 lxiv: 154,931 lxvii: 239,053 Jerker Johansson, former Chairman and CEO Investment Bank 4 Carsten Kengeter, co-CEO Investment Bank Ulrich Körner, Group Chief Operating Officer Philip J. Lofts, Group Chief Risk Officer 2009 2008 2009 2008 2009 2008 2009 – 521,544 516,909 – 0 – 0.031 0.028 0.000 – 753,410 905,000 – 0 – 179,234 0.010 577,723 0.045 lxviii: 745,990 7,420 lxix: 0.049 lxxi: 905,000 0.000 0.031 2008 186,434 0.011 577,723 0.034 11,445 iii: 11,104 iv: 11,098 vii: 1,240 xii: 5,464 xiii: 1,199 xvi: 9,985 xxi: 9,980 xxiii: 9,974 xxvi: 1,833 xxviii: 1,830 xxix: xxx: 1,830 xxxviii: 35,524 35,524 xl: xlii: 35,521 xlvii: 117,090 117,227 lvi: 85,256 lxiv: 74,599 lxvii: 11,445 iii: 11,104 iv: 11,098 vii: 1,240 xii: 5,464 xiii: 1,199 xvi: 9,985 xxi: 9,980 xxiii: 9,974 xxvi: 1,833 xxviii: 1,830 xxix: xxx: 1,830 xxxviii: 35,524 35,524 xl: xlii: 35,521 xlvii: 117,090 117,227 lvi: 85,256 lxiv: 74,599 lxvii: 387 n o i t a m r o f n i l a i c n a n i F Financial information UBS AG (Parent Bank) Share and option ownership of members of the GEB on 31 December 2008 / 2009 (continued) Name, function 1 Robert J. McCann, CEO Wealth Management Americas Franco Morra, CEO UBS Switzerland Walter H. Stürzinger, former Chief Operating Officer, Corporate Center 4 Rory Tapner, former Chairman and CEO Asia Pacific 4 Raoul Weil, former Chairman and CEO Global Wealth Management & Business Banking 4 Alexander Wilmot-Sitwell, co-CEO Investment Bank For the year ended 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 Number of shares held 602,481 – 153,860 Voting rights in % Number of options held 0.033 0 – Potentially conferred voting rights in % 2 0.000 0.008 325,086 0.018 – – – – 296,886 0.018 372,995 0.022 – 827,809 – 315,698 – 0.049 1,379,533 0.082 – 0.019 432,409 0.026 2009 286,767 0.016 353,807 0.019 2008 304,655 0.018 353,807 0.021 Robert Wolf, Chairman and CEO, UBS Group Americas / President Investment Bank 2009 785,631 0.043 948,473 0.051 2008 827,307 0.049 948,473 0.056 Type and quantity of options 3 43,911 lvi: lxiv: 66,866 lxvii: 114,309 lxxii: 100,000 xx: xli: xlvii: lvi: lxiv: 31,971 63,942 85,256 95,913 95,913 281,862 vii: xix: 213,140 xxxi: 213,140 xli: 170,512 xlvii: 159,855 170,512 lvi: lxiv: 170,512 xix: 53,285 xlvii: 102,281 127,884 lvi: lxiv: 148,959 xlvi: 53,282 xlix: 2,130 liii: 35,524 liv: 35,524 35,521 lv: lxiv: 106,570 85,256 lxvii: 53,282 xlvi: 2,130 xlix: 35,524 liii: 35,524 liv: lv: 35,521 lxiv: 106,570 85,256 lxvii: xxv: 287,739 xliii: 213,140 xlviii: 127,884 lvi: 106,570 lxiv: 106,570 lxvii: 106,570 xxv: 287,739 xliii: 213,140 xlviii: 127,884 lvi: 106,570 lxiv: 106,570 lxvii: 106,570 388 Share and option ownership of members of the GEB on 31 December 2008 / 2009 (continued) Name, function 1 Chi-Won Yoon, Chairman and CEO Asia Pacific For the year ended 2009 Number of shares held 367,573 Voting rights in % Number of options held 0.020 623,253 Potentially conferred voting rights in % 2 0.034 Jürg Zeltner, CEO Wealth Management 2008 2009 – 16,502 – 0.001 205,470 0.011 Type and quantity of options 3 11,577 i: 11,229 v: 11,227 viii: 2,252 x: 6,446 xiv: 2,184 xvii: 8,648 xxii: 8,642 xxiv: 8,635 xxvii: 4,262 xxxiv: 3,374 xxxv: 3,371 xxxvi: xxxvii: 3,371 xxxviii: 6,200 4,262 xxxix: 6,198 xl: 6,195 xlii: 10,659 xliv: 10,657 xlv: 10,654 xlvi: 21,316 liii: 21,314 liv: 21,311 lv: 8,881 lxi: 8,880 lxii: 8,880 lxiii: lxvi: 42,628 lxxii: 350,000 iii: iv: vii: xlii: xliv: xlv: xlvi: xlix: l: li: lii: liii: liv: lv: lvii: lviii: lix: lx: lxi: lxii: lxiii: lxv: lxvii: lxxii: 809 784 784 4,972 7,106 7,103 7,103 93 161 149 127 7,106 7,103 7,103 110 242 230 221 7,105 7,105 7,103 223 42,628 90,000 1 This 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 information” section of this report for more information. 4 GEB members who stepped down during 2009. 2008 – – n o i t a m r o f n i l a i c n a n i F 389 Financial information UBS AG (Parent Bank) Vested and unvested options held by independent members of the BoD and by members of the GEB on 31 December 2008 / 2009 Type Number of options Year of grant Vesting date Expiry date Subscription ratio i ii iii iv v vi vii viii ix x xi xii xiii xiv xv xvi xvii xviii xix xx xxi xxii xxiii xxiv xxv xxvi xxvii xxviii xxix xxx xxxi xxxii xxxiii xxxiv xxxv xxxvi xxxvii xxxviii xxxix xl xli xlii xliii xliv xlv xlvi xlvii xlviii xlix l li 390 11,577 8,679 33,616 32,619 11,229 8,421 314,469 87,607 8,421 2,252 8,823 6,694 10,758 10,708 8,563 6,491 2,184 8,561 394,309 31,971 33,611 8,648 33,600 8,642 415,623 33,586 8,635 7,359 7,354 7,354 213,140 31,971 42,628 4,262 3,374 3,371 3,371 58,796 4,262 58,790 532,850 63,751 436,937 31,975 31,970 85,246 837,477 383,652 2,223 161 149 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2004 2004 2004 2004 2004 2004 2005 2005 2005 2005 2005 2005 2005 2005 31.01.2002 31.01.2002 31.01.2003 31.01.2004 31.01.2004 31.01.2004 31.01.2005 31.01.2005 31.01.2005 28.02.2002 28.02.2002 28.02.2003 28.02.2004 29.02.2004 29.02.2004 28.02.2005 28.02.2005 28.02.2005 28.06.2005 28.06.2005 01.03.2004 01.03.2004 01.03.2005 01.03.2005 31.01.2006 01.03.2006 01.03.2006 01.03.2004 01.03.2005 01.03.2006 31.01.2006 31.01.2006 31.01.2006 28.02.2005 01.03.2004 01.03.2005 01.03.2006 01.03.2005 27.02.2006 01.03.2006 28.02.2007 01.03.2007 01.03.2007 01.03.2006 01.03.2007 01.03.2008 01.03.2008 01.03.2008 04.03.2007 06.06.2007 09.09.2007 31.01.2012 31.07.2012 31.01.2012 31.01.2012 31.01.2012 31.07.2012 31.01.2012 31.01.2012 31.07.2012 28.02.2012 28.08.2012 28.02.2012 28.02.2012 28.02.2012 28.08.2012 28.02.2012 28.02.2012 28.08.2012 28.06.2012 28.12.2012 31.01.2013 31.01.2013 31.01.2013 31.01.2013 31.01.2013 31.01.2013 31.01.2013 28.02.2013 28.02.2013 28.02.2013 31.01.2013 31.07.2013 31.07.2013 28.02.2013 28.02.2013 28.02.2013 28.02.2013 27.02.2014 27.02.2014 27.02.2014 27.02.2014 27.02.2014 27.02.2014 28.02.2015 28.02.2015 28.02.2015 28.02.2015 28.02.2015 04.03.2015 06.06.2015 09.09.2015 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 Strike price USD 21.24 USD 21.24 CHF 36.49 CHF 36.49 USD 21.24 USD 21.24 CHF 36.49 USD 21.24 USD 21.24 USD 21.70 USD 21.70 CHF 36.65 CHF 36.65 USD 21.70 USD 21.70 CHF 36.65 USD 21.70 USD 21.70 CHF 37.90 CHF 37.90 CHF 27.81 USD 20.49 CHF 27.81 USD 20.49 USD 22.53 CHF 27.81 USD 20.49 CHF 26.39 CHF 26.39 CHF 26.39 CHF 30.50 CHF 30.50 USD 22.53 USD 19.53 USD 19.53 USD 19.53 USD 19.53 CHF 44.32 CHF 44.32 CHF 44.32 CHF 48.69 CHF 44.32 USD 38.13 CHF 47.58 CHF 47.58 CHF 47.58 CHF 52.32 USD 44.81 CHF 47.89 CHF 45.97 CHF 50.47 Vested and unvested options held by independent members of the BoD and by members of the GEB on 31 December 2008 / 2009 (continued) Type lii liii liv lv lvi lvii lviii lix lx lxi lxii lxiii lxiv lxv lxvi lxvii lxviii lxix lxx lxxi lxxii Number of options Year of grant Vesting date Expiry date Subscription ratio Strike price 127 69,276 69,269 69,261 1,376,036 110 242 230 221 33,748 33,747 33,743 1,415,142 223 95,913 662,415 745,990 7,420 4,000,000 905,000 540,000 2005 2006 2006 2006 2006 2006 2006 2006 2006 2007 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 05.12.2007 01.03.2007 01.03.2008 01.03.2009 01.03.2009 03.03.2008 09.06.2008 08.09.2008 08.12.2008 01.03.2008 01.03.2009 01.03.2010 01.03.2010 02.03.2009 01.03.2011 01.03.2011 01.03.2011 01.03.2011 26.02.2009 01.03.2012 01.03.2012 05.12.2015 28.02.2016 28.02.2016 28.02.2016 28.02.2016 03.03.2016 09.06.2016 08.09.2016 08.12.2016 28.02.2017 28.02.2017 28.02.2017 28.02.2017 02.03.2017 28.02.2018 28.02.2018 07.04.2018 06.06.2018 25.02.2014 27.12.2019 27.02.2019 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 1:1 CHF 59.03 CHF 65.97 CHF 65.97 CHF 65.97 CHF 72.57 CHF 65.91 CHF 61.84 CHF 65.76 CHF 67.63 CHF 67.00 CHF 67.00 CHF 67.00 CHF 73.67 CHF 67.08 CHF 32.45 CHF 35.66 CHF 36.46 CHF 28.10 CHF 10.10 CHF 40.00 CHF 11.35 n o i t a m r o f n i l a i c n a n i F 391 Financial information UBS AG (Parent Bank) Loans granted to members of the BoD on 31 December 2008 / 2009 CHF, except where indicated a Name, function 1 Kaspar Villiger, Chairman Sergio Marchionne, Senior Independent Director, Vice Chairman Ernesto Bertarelli, former member 3 Sally Bott, member Michel Demaré, member Rainer-Marc Frey, member Bruno Gehrig, member 2 Ann F. Godbehere, member Gabrielle Kaufmann-Kohler, former member 3 Peter Kurer, former Chairman 2,3 Axel P. Lehmann, member Helmut Panke, member William G. Parrett, member 2 David Sidwell, member Peter R. Voser, member Joerg Wolle, former member 3 Aggregate of all members of the BoD Aggregate of all members of the BoD For the year ended Secured loans Other loans granted 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 0 0 0 0 – 0 0 0 850,000 0 0 0 798,000 798,000 0 0 – 0 – 1,261,000 0 0 0 0 1,260,731 1,167,659 0 0 0 0 – 0 2,908,731 3,226,659 0 0 0 0 – 0 0 0 0 0 0 0 0 0 0 0 – 0 – 0 0 0 0 0 0 0 0 0 0 0 – 0 0 0 Total 0 0 0 0 – 0 0 0 850,000 0 0 0 798,000 798,000 0 0 – 0 – 1,261,000 0 0 0 0 1,260,731 1,167,659 0 0 0 0 – 0 2,908,731 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. 3 Including those members of the BoD who stepped down at the AGM 2009. Loans granted to members of the GEB on 31 December 2008 / 2009 CHF, except where indicated a Name, function 1 Jürg Zeltner, CEO Wealth Management Markus U. Diethelm, Group General Counsel Aggregate of all members of the GEB 3 Aggregate of all members of the GEB 4 For the year ended 2009 2008 2009 2008 Secured loans 5,800,202 3,900,000 15,356,483 7,740,562 Other loans granted 2 0 0 0 0 Total 5,800,202 3,900,000 15,356,483 7,740,562 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 Including those members of the GEB who stepped down during 2009. 4 Including those members of the GEB who stepped down during 2008. 392 n o i t a m r o f n i l a i c n a n i F 393 Financial information UBS AG (Parent Bank) 394 n o i t a m r o f n i l a i c n a n i F 395 Financial information UBS AG (Parent Bank) 396 n o i t a m r o f n i l a i c n a n i F 397 Additional disclosure required under SEC regulations A – Introduction The following pages contain additional disclosures about UBS Group which are required under SEC regulations. UBS’s consolidated Financial Statements have been pre- pared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and are denominated in Swiss francs (CHF), the reporting currency of the Group. n o i t a m r o f n i l a i c n a n i F 399 Financial information Additional disclosure required under SEC regulations B – Selected financial data The tables below set forth, for the periods and dates indi- cated, 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 26 February 2010 the noon buying rate was 0.9336 USD per 1 CHF. Year ended 31 December 2005 2006 2007 2008 2009 Month September 2009 October 2009 November 2009 December 2009 January 2010 February 2010 1 The average of the noon buying rates on the last business day of each full month during the relevant period. Average rate 1 (USD per 1 CHF) At period end 0.8010 0.8034 0.8381 0.9298 0.9260 0.7606 0.8200 0.8827 0.9369 0.9654 High 0.8721 0.8396 0.9087 1.0142 1.0016 High 0.9768 0.9936 0.9996 1.0016 0.9848 0.9472 Low 0.7544 0.7575 0.7978 0.8171 0.8408 Low 0.9387 0.9593 0.9703 0.9532 0.9472 0.9210 400 Key figures CHF million, except where indicated 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 As of or for the year ended Balance sheet data Total assets Equity attributable to UBS shareholders Average equity to average assets (%) Market capitalization Shares Registered ordinary shares Treasury shares BIS capital ratios Tier 1 (%) Total BIS (%) Risk-weighted assets Invested assets (CHF billion) Personnel (full-time equivalents) Switzerland United Kingdom Rest of Europe Middle East / Africa United States Rest of Americas Asia Pacific Total Long-term ratings 2 Fitch, London Moody’s, New York Standard & Poor’s, New York 1,340,538 2,014,815 2,274,891 2,348,733 2,001,099 41,013 1.9 57,108 32,531 1.5 43,519 36,875 1.8 108,654 51,037 2.0 154,222 45,633 1.9 131,949 3,558,112,753 2,932,580,549 2,073,547,344 2,105,273,286 2,177,265,044 37,553,872 61,903,121 158,105,524 164,475,699 208,519,748 15.4 19.8 206,525 2,233 24,050 6,204 4,145 134 22,702 1,132 6,865 65,233 A+ Aa3 A+ 11.0 15.0 302,273 2,174 26,406 7,071 4,817 145 27,362 1,984 9,998 77,783 A+ Aa2 A+ 9.1 1 12.2 1 374,421 1 3,189 27,884 8,813 4,776 139 29,921 2,054 9,973 83,560 AA Aaa AA 12.2 1 15.0 1 344,015 1 2,989 27,022 8,243 4,338 102 29,076 1,743 7,616 78,140 AA+ Aa2 AA+ 13.3 1 14.5 1 312,532 1 2,652 26,029 7,135 3,759 112 25,999 1,137 5,398 69,569 AA+ Aa2 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. n o i t a m r o f n i l a i c n a n i F 401 Financial information Additional disclosure required under SEC regulations Income statement data CHF million, except where indicated 31.12.09 31.12.08 Interest income Interest expense Net interest income Credit loss (expense) / recovery Net interest income after credit loss (expense) / recovery Net fee and commission income Net trading income Other income Total operating income Total operating expenses Operating profit from continuing operations before tax Tax expense Net profit from continuing operations Net profit from discontinued operations Net profit Net profit attributable to minority interests Net profit attributable to UBS shareholders Cost / income ratio (%) 1 Per share data (CHF) Basic earnings per share 2 Diluted earnings per share 2 Operating profit before tax per share Cash dividends declared per share (CHF) 3,4 Cash dividend declared per share (USD) 3,4 Dividend payout ratio (%) 3,4 Rates of return (%) Return on equity attributable to UBS shareholders 5 Return on average equity Return on average assets 23,461 (17,016) 6,446 (1,832) 4,614 17,712 (324) 599 22,601 25,162 (2,561) (443) (2,118) (7) (2,125) 610 (2,736) 103.0 (0.75) (0.75) (0.70) N/A N/A N/A (7.8) (7.9) (0.1) 65,679 (59,687) 5,992 (2,996) 2,996 22,929 (25,820) 692 796 28,555 (27,758) (6,837) (20,922) 198 (20,724) 568 (21,292) 753.0 (7.63) (7.63) (9.94) N/A N/A N/A (58.7) (60.6) (0.9) For the year ended 31.12.07 109,112 (103,775) 31.12.06 87,401 (80,880) 31.12.05 59,286 (49,758) 5,337 (238) 5,099 30,634 (8,353) 4,341 31,721 35,463 (3,742) 1,369 (5,111) 403 (4,708) 539 (5,247) 111.0 (2.40) (2.41) (1.71) N/A N/A N/A (10.5) (10.6) (0.2) 6,521 156 6,677 25,456 13,743 1,608 47,484 33,365 14,119 2,998 11,121 899 12,020 493 11,527 70.5 5.15 4.95 6.30 2.20 1.83 42.7 23.8 24.0 0.5 9,528 375 9,903 21,184 8,248 1,135 40,470 28,533 11,937 2,270 9,667 4,526 14,193 661 13,532 71.2 5.93 5.70 5.23 1.60 1.26 27.0 34.0 34.4 0.7 1 Operating expenses / operating income before credit loss expense. 2 For EPS calculation, refer to Note 8 in 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 For the business year 2007 a stock dividend was distributed for which 98,698,754 new shares were issued on 19 May 2008 to UBS shareholders with an exchange ratio of 20:1. 5 Net profit attributable to UBS shareholders / average equity attributable to UBS shareholders. Calculation excludes expected deductions for dividend distributions. 402 Balance sheet data CHF million Assets Total assets Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Trading portfolio assets pledged as collateral Positive replacement values Loans Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Financial liabilities designated at fair value Due to customers Debt issued Equity attributable to UBS shareholders 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 For the year ended 1,340,538 2,014,815 2,274,891 2,348,733 2,001,099 46,574 63,507 116,689 188,037 44,221 421,694 306,828 65,166 7,995 64,175 47,469 409,943 112,653 410,475 131,352 41,013 64,451 122,897 224,648 271,838 40,216 854,100 340,308 125,628 14,063 102,561 62,431 851,864 101,546 465,741 197,254 32,531 60,907 207,063 376,928 660,182 114,190 428,217 335,864 145,762 31,621 305,887 164,788 443,539 191,853 630,105 222,077 36,875 50,426 351,590 405,834 648,346 230,168 292,975 297,842 203,689 63,088 545,480 204,773 297,063 145,687 546,154 190,143 51,037 33,644 288,435 404,432 499,297 154,759 273,889 279,910 124,328 59,938 478,508 188,631 277,770 117,401 461,425 160,710 45,633 Ratio of earnings to fixed 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. 31.12.09 0.82 31.12.08 0.53 31.12.07 0.96 31.12.06 1.17 31.12.05 1.23 For the year ended n o i t a m r o f n i l a i c n a n i F 403 Financial information Additional disclosure required under SEC regulations C – Information on the company Property, plant and equipment At 31 December 2009, UBS operated about 973 business and banking locations worldwide, of which about 42% were in Switzerland, 41% in the Americas, 12% in the rest of Europe, Middle East and Africa and 5% in Asia-Pacific. Of the business and banking locations in Switzerland, 37% were owned directly by UBS, with the remainder, along with most of UBS’s offices outside Switzerland, being held under commercial leases. These premises are subject to continuous maintenance and upgrading and are considered suitable and adequate for current and anticipated operations. 404 D – Information required by industry guide 3 Selected statistical information The tables below set forth selected statistical information re- garding the Group’s banking operations extracted from the Financial Statements. Unless otherwise indicated, average balances for the years ended 31 December 2009, 31 Decem- ber 2008 and 31 December 2007 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 balances and interest 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 2009, 2008 and 2007. CHF million, except where indicated Assets Due from banks Domestic Foreign Cash collateral on securities borrowed and reverse repurchase agreements Domestic Foreign Trading portfolio assets Domestic Foreign taxable Foreign non-taxable Foreign total Financial assets designated at fair value Domestic Foreign Loans Domestic Foreign Financial investments available-for-sale Domestic Foreign taxable Foreign non-taxable Foreign total Total interest-earning assets Net interest on swaps Interest income and average interest-earning assets Non-interest-earning assets Positive replacement values Fixed assets Other Total average assets Average balance 31.12.09 Interest Average rate (%) Average balance 31.12.08 Interest Average rate (%) Average balance 31.12.07 Interest Average rate (%) 3,420 52,668 200 321 10,029 381,049 10,976 270,674 2,160 244 2,385 228 6,915 7 272,834 6,922 5.8 0.6 2.4 0.6 2.1 2.6 0.3 2.5 7,243 58,287 421 1,559 31,642 669,010 15,104 522,804 8,070 1,208 21,313 520 21,494 383 530,874 21,877 548 11,674 0 316 945 2.7 11,024 179,680 151,584 5,532 4,946 991 28,295 0 28,295 1,103,748 21 143 143 21,258 2,203 3.1 3.3 2.1 0.5 0.5 1.9 188,950 147,034 1,599 3,370 0 3,370 1,665,082 0 404 6,840 8,304 72 73 73 62,591 3,088 5.8 2.7 3.8 3.2 3.4 4.1 4.7 4.1 3.7 3.6 5.6 4.5 2.2 2.2 3.8 11,784 46,049 664 2,344 31,473 977,302 11,866 861,923 5,754 1,693 46,581 696 38,206 199 867,677 38,405 588 9,114 187,073 146,040 3,930 2,934 0 2,934 0 298 6,565 9,359 66 110 110 2,295,830 106,781 2,331 5.6 5.1 5.4 4.8 5.9 4.4 3.5 4.4 3.3 3.5 6.4 1.7 3.7 3.7 4.7 1,103,748 23,461 2.1 1,665,082 65,679 3.9 2,295,830 109,112 4.8 654,651 6,609 86,133 1,851,141 600,073 7,091 82,357 2,354,603 373,229 7,090 82,739 2,758,888 n o i t a m r o f n i l a i c n a n i F 405 Financial information Additional disclosure required under SEC regulations Average balances and interest rates (continued) CHF million, except where indicated Liabilities and equity Due to banks Domestic Foreign Cash collateral on securities lent and repurchase agreements Domestic Foreign Trading portfolio liabilities Domestic Foreign Financial liabilities designated at fair value Domestic Foreign Due to customers Domestic demand deposits Domestic savings deposits Domestic time deposits Domestic total Foreign Short-term debt Domestic Foreign Long-term debt Domestic Foreign 36,278 76,305 219 457 11,321 195,991 1,411 58,091 934 106,690 64,877 68,042 13,075 145,994 304,641 689 86,186 11,152 76,961 200 1,979 55 3,823 17 2,838 98 521 451 1,070 2,127 27 2,234 153 1,817 Total interest-bearing liabilities 1,112,644 17,016 Non-interest-bearing liabilities Negative replacement values Other Total liabilities Total equity Total average liabilities and equity Net interest income Net yield on interest-earning assets 641,028 54,720 1,808,392 42,749 1,851,141 Average balance 31.12.09 Interest Average rate (%) Average balance 31.12.08 Interest Average rate (%) Average balance 31.12.07 Interest Average rate (%) 0.6 0.6 1.8 1.0 3.9 6.6 1.8 2.7 0.2 0.8 3.4 0.7 0.7 3.9 2.6 1.4 2.4 1.5 51,027 88,798 1,503 3,423 31,269 397,453 1,026 15,097 5,525 132,901 1,444 151,324 56,730 65,073 35,575 157,378 394,151 1,735 134,920 5,766 74,531 256 8,906 69 7,229 495 604 1,081 2,180 11,044 63 6,216 148 2,527 1,628,222 59,687 605,990 77,476 2,311,688 42,915 2,354,603 2.9 3.9 3.3 3.8 4.6 6.7 4.8 4.8 0.9 0.9 3.0 1.4 2.8 3.6 4.6 2.6 3.4 3.7 60,858 146,286 2,477 8,008 47,041 752,616 1,902 38,680 5,561 328 214,326 15,484 1,503 173,162 64,568 75,587 41,056 181,211 418,558 2,228 144,546 4,235 70,079 79 7,580 736 502 1,206 2,444 16,388 98 8,643 115 1,549 2,222,210 103,775 382,115 98,951 2,703,276 55,612 2,758,888 4.1 5.5 4.0 5.1 5.9 7.2 5.3 4.4 1.1 0.7 2.9 1.3 3.9 4.4 6.0 2.7 2.2 4.7 6,446 5,992 5,337 0.6 0.4 0.2 The percentage of total average interest-earning assets at- tributable to foreign activities was 81% for 2009 (85% for 2008 and 89% for 2007). The percentage of total average interest-bearing liabilities attributable to foreign activities was 81% for 2009 (84% for 2008 and 86% for 2007). All assets and liabilities are translated into CHF at uniform month-end rates. Interest income and interest 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 inter- est rates in general, but are also affected by changes in the currency mix included in the assets and liabilities. This is espe- cially 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 insignifi- cant and the impact from such income is therefore negligible. 406 Analysis of changes in interest income and expense The following tables allocate, by categories of interest-earn- ing assets and interest-bearing liabilities, the changes in in- terest income and expense due to changes in volume and interest rates for the year ended 31 December 2009 com- pared with the year ended 31 December 2008, and for the year ended 31 December 2008 compared with the year end- ed 31 December 2007. 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. CHF million Interest income from interest-earning assets Due from banks Domestic Foreign Cash collateral on securities borrowed and reverse repurchase agreements Domestic Foreign Trading portfolio assets Domestic Foreign taxable Foreign non-taxable Foreign total Financial assets designated at fair value Domestic Foreign Loans Domestic Foreign Financial investments available-for-sale Domestic Foreign taxable Foreign non-taxable Foreign total Interest income Domestic Foreign Total interest income from interest-earning assets Net interest on swaps Total interest income 2009 compared with 2008 2008 compared with 2007 Increase / (decrease) due to changes in Increase / (decrease) due to changes in Average volume Average rate Net change Average volume Average rate Net change (222) (152) 1 (1,086) (221) (1,238) (254) 624 11 (1,409) (243) (785) (821) (9,215) (143) (964) 9 (494) (485) (9,713) (18,928) (14,798) (10,470) (25,268) (140) (152) (292) 191 (10,337) (4,242) (14,579) (14,921) (278) (98) (376) 81 (367) (1,791) 103 (176) (16,712) 184 (10,615) (4,340) (14,955) (14,840) (1,688) (16,528) 0 24 (334) 255 (27) 548 0 548 0 (112) 0 (88) (974) (3,613) (1,308) (3,358) (24) (478) 0 (478) (51) 70 0 70 (2,836) (38,497) (41,333) (885) (42,218) (1,544) (19,155) (20,699) (1,292) (19,342) (20,634) 0 63 66 64 (40) 16 0 16 (28) (28,871) (28,899) 0 43 0 106 209 (1,119) 275 (1,055) 46 (53) 0 (53) (595) (14,696) (15,291) 6 (37) 0 (37) (623) (43,567) (44,190) 757 (43,433) n o i t a m r o f n i l a i c n a n i F 407 Financial information Additional disclosure required under SEC regulations Analysis of changes in interest income and expense (continued) 2009 compared with 2008 2008 compared with 2007 Increase / (decrease) due to changes in Increase / (decrease) due to changes in Average volume Average rate Net change Average volume Average rate Net change (428) (487) (856) (2,479) (1,284) (2,966) (403) (3,162) (168) (826) (631) (5,462) (13,118) (18,113) (658) (7,656) (189) (5,012) (24) (12) (71) (28) (201) (5,083) (52) (2,142) (2,249) (4,391) 73 27 (675) (575) (470) (110) 45 (535) (2,506) (6,411) (397) (83) (630) (1,110) (8,917) (38) 2 (36) (2,242) (1,740) (3,982) 140 83 (135) (793) 5 (710) (2) (5,863) (3) (961) (86) (74) (159) (319) (952) (22) (578) 41 98 (1,772) (19,962) (21,734) (1,732) (19,205) (20,937) (3,504) (39,167) (42,671) (1,339) (29,531) (30,870) (571) (1,423) (245) (5,470) (70) (715) (7) 610 (155) 176 34 55 (974) (4,585) (876) (23,583) (72) (6,578) (10) (351) (241) 102 (125) (264) (4,392) (5,344) (13) (1,849) (35) (2,427) (8) 880 (859) (12,359) (13,218) 33 978 (2,198) (41,890) (44,088) CHF million Interest expense on interest-bearing liabilities Due to banks Domestic Foreign Cash collateral on securities lent and repurchase agreements Domestic Foreign Trading portfolio liabilities Domestic Foreign Financial liabilities designated at fair value Domestic Foreign Due to customers Domestic demand deposits Domestic savings deposits Domestic time deposits Domestic total Foreign Short-term debt Domestic Foreign Long-term debt Domestic Foreign Interest expense Domestic Foreign Total interest expense 408 Deposits The following table analyzes average deposits and the aver- age rates on each deposit category listed below for the years ended 31 December 2009, 2008 and 2007. 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 55,171 million, CHF 45,082 mil- lion and CHF 72,849 million at 31 December 2009, 31 De- cember 2008 and 31 December 2007, respectively. CHF million, except where indicated 31.12.09 31.12.08 31.12.07 Average deposit Average rate (%) Average deposit Average rate (%) Average deposit Average rate (%) Banks Domestic offices Demand deposits Time deposits Total domestic offices Foreign offices Interest-bearing deposits 1 Total due to banks Customer accounts Domestic offices Demand deposits Savings deposits Time deposits Total domestic offices Foreign offices Demand deposits Time and savings deposits 1 Total foreign offices Total due to customers 1 Mainly time deposits. 1,154 2,266 3,420 52,668 56,088 64,877 68,042 13,075 145,994 93,520 211,121 304,641 450,635 0.1 0.9 0.6 0.6 0.6 0.2 0.8 3.4 0.7 0.4 0.8 0.7 0.7 2,341 4,902 7,243 58,287 65,530 56,730 65,073 35,575 157,378 111,168 282,983 394,151 551,529 0.5 3.8 2.7 3.9 3.7 0.9 0.9 3.0 1.4 2.4 2.9 2.8 2.4 2,474 9,310 11,784 46,049 57,833 64,568 75,587 41,056 181,211 110,839 307,719 418,558 599,769 0.6 5.1 4.2 5.5 5.2 1.1 0.7 2.9 1.3 1.1 4.9 3.9 3.1 At 31 December 2009, the maturity of time deposits exceeding CHF 150,000, or an equivalent amount in other currencies, was as follows: CHF million Within 3 months Over 3 up to 6 months Over 6 up to 12 months Over 1 up to 5 years Over 5 years Total time deposits Domestic 27,398 773 655 358 160 Foreign 82,800 9,315 3,242 827 80 29,344 96,264 n o i t a m r o f n i l a i c n a n i F 409 Financial information Additional disclosure required under SEC regulations Short-term borrowings The following table presents the period-end, average and maximum month-end outstanding amounts for short-term borrow- ings, along with the average rates and period-end rates at and for the years ended 31 December 2009, 2008 and 2007. CHF million, except where indicated 31.12.09 31.12.08 31.12.07 31.12.09 31.12.08 31.12.07 Money market papers issued Due to banks Repurchase agreements 1 31.12.08 31.12.07 31.12.09 Period-end balance Average balance Maximum month-end balance Average interest rate during the period (%) Average interest rate at period-end (%) 51,579 86,875 125,812 2.6 0.9 111,619 136,655 170,503 4.6 2.9 152,256 146,774 167,637 6.0 6.1 18,560 56,495 74,044 0.6 0.6 61,155 74,295 87,233 3.5 2.3 84,826 136,811 149,311 195,613 175,233 272,443 5.1 4.5 0.7 0.3 140,039 404,512 591,005 3.5 1.4 487,455 739,138 848,401 5.0 4.9 1 For the purpose of this disclosure, balances are presented on a gross basis. Contractual maturities of debt investments available-for-sale 1,2 CHF million, except percentages 31 December 2009 Swiss national government and agencies Swiss local governments US Treasury and agencies Foreign governments and official institutions Corporate debt securities 3 Mortgage-backed securities Other debt instruments Total fair value CHF million, except percentages 31 December 2008 Swiss national government and agencies Swiss local governments US Treasury and agencies Foreign governments and official institutions Corporate debt securities Mortgage-backed securities Other debt instruments Total fair value CHF million, except percentages 31 December 2007 Swiss national government and agencies Swiss local governments US Treasury and agencies Foreign governments and official institutions Corporate debt securities Mortgage-backed securities Other debt instruments Total fair value Within 1 year Over 1 up to 5 years Over 5 up to 10 years Over 10 years Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) 209 0 3,475 2,861 5,227 27 98 11,898 0.47 0.00 0.05 0.98 0.11 0.00 2.80 16 0 1,831 96 5,021 3 3 6,970 2.27 0.00 0.02 2.75 0.10 4.87 1.21 1.11 0.00 0.00 1.88 21.80 3.75 0.00 6 0 0 25 0 25 0 56 4.00 0.00 0.00 3.66 21.80 0.43 0.00 1 0 0 18 3 752 0 774 Within 1 year Over 1 up to 5 years Over 5 up to 10 years Over 10 years Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) 0.00 0.00 0.00 1.31 23.35 0.00 9.06 0 0 0 33 3 0 188 224 3.46 0.00 0.00 0.00 3.38 0.00 13.47 2 0 0 0 88 0 3 93 0 0 0 33 38 42 0 113 0.00 0.00 0.00 2.81 3.12 4.00 0.00 1 0 0 34 12 455 37 539 4.00 0.00 0.00 5.22 1.74 5.28 7.42 Within 1 year Over 1 up to 5 years Over 5 up to 10 years Over 10 years Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) 0 0 0 50 50 0 14 114 0.00 0.00 0.00 1.87 5.66 0.00 4.20 2.02 0.00 0.00 2.54 4.11 0.00 12.41 2 0 0 2 44 0 216 264 0.00 0.00 0.00 4.48 0.00 4.48 0.00 0 0 0 75 0 3 0 78 1 0 0 0 0 561 0 562 4.00 0.00 0.00 0.00 0.00 5.28 0.00 1 Money market papers of CHF 60,317 million (2008: CHF 2,165 million) and debt instruments without fixed maturities are not disclosed in this table. Refer to Note 13. 2 Average yields are calculated on an amortized cost basis. 3 Absolute Return Bonds (ARBs) had been purchased below par and therefore generated a yield of 21.8% in maturities above 5 years. 410 Due from banks and loans (gross) The Group’s lending portfolio is widely diversified across in- dustry sectors with no significant concentrations of credit risk. CHF 152.8 billion (42.4% of the total) consists of loans to thousands of private households, predominantly in Swit- zerland, and mostly secured by mortgages, financial collat- eral or other assets. Exposure to Banks and Financial institu- tions amounted to CHF 132.6 billion (36.8% of the total). This includes cash posted as collateral by UBS against nega- tive 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 as of December 2009 is CHF 16.3 billion (4.5% of the total) to Public authorities. For fur- ther discussion of the loan portfolio, refer to credit risk in the “Risk and treasury management” section. CHF million Domestic Banks 1 Construction Financial institutions Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services 2 Other 3 Total domestic Foreign Banks 1 Chemicals Construction Electricity, gas and water supply Financial institutions Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other 4 Total foreign Total gross 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 819 1,381 7,458 1,882 3,374 119,432 3,785 11,745 4,299 5,702 3,520 1,734 1,377 8,113 1,811 4,020 119,285 4,042 12,097 4,818 6,172 3,329 1,237 1,393 5,525 1,824 3,887 121,536 4,734 11,691 5,138 6,170 3,300 561 1,535 5,542 1,957 3,643 117,852 4,972 11,356 4,569 6,758 4,345 1,407 1,816 4,213 2,044 4,134 111,549 5,494 11,792 4,808 8,088 3,119 163,397 166,798 166,435 163,090 158,464 46,452 2,403 741 1,024 77,838 3,606 3,177 33,392 12,472 1,305 1,772 8,629 3,085 797 196,693 360,090 63,708 2,816 448 2,995 100,779 5,026 4,394 33,242 11,094 4,240 2,515 9,816 3,894 1,073 246,040 412,838 60,333 635 624 1,888 96,370 4,678 4,509 42,828 4,172 5,056 2,239 9,294 1,752 1,105 50,124 1,321 522 951 67,676 3,006 3,177 35,031 2,175 4,360 1,815 16,436 1,528 564 32,287 2,716 295 1,637 62,344 3,784 3,431 38,283 1,686 2,707 1,257 5,593 1,419 272 235,483 401,918 188,686 351,776 157,711 316,175 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. 2 Includes com- munication, health and social work, education and other social and personal service activities. 3 Includes chemicals, food and beverages, transportation, storage, mining, electricity, gas and water supply. 4 Includes food and beverages, hotels and restaurants. The table above also includes loans designated at fair value. n o i t a m r o f n i l a i c n a n i F 411 Financial information Additional disclosure required under SEC regulations Due from banks and loans (gross) (continued) The following table analyzes the Group’s mortgage portfolio by geographic origin of the client and type of mortgage at 31 December 2009, 2008, 2007, 2006 and 2005. Mortgag- es are included in the industry categories mentioned on the previous page. CHF million Mortgages Domestic Foreign Total gross mortgages Mortgages Residential Commercial Total gross mortgages 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 136,029 4,972 141,001 121,031 19,970 141,001 134,700 8,381 143,081 121,811 21,270 143,081 135,341 8,152 143,493 122,435 21,058 143,493 134,468 10,069 144,537 124,548 19,989 144,537 130,880 15,619 146,499 127,990 18,509 146,499 Due from banks and loan maturities (gross) 1 CHF million Domestic Banks Mortgages Other loans Total domestic Foreign Banks Mortgages Other loans Total foreign Total gross Within 1 year Over 1 up to 5 years Over 5 years Total 728 53,436 20,405 74,569 45,444 2,845 93,965 142,254 216,823 90 58,961 4,832 63,883 212 1,611 12,491 14,314 78,197 0 23,632 1,314 24,946 132 516 35,467 36,115 61,061 818 136,029 26,551 163,398 45,788 4,972 141,923 2 192,683 356,081 1 Loans designated at fair value are not included. 2 On 31 December 2009, includes reclassified US student loan auction rate securities (ARS) of CHF 7.8 billion (CHF 8.4 billion on 31 December 2008), other reclassified securities of CHF 11.5 billion (CHF 13.4 billion on 31 December 2008) and CHF 8.0 billion ARS acquired from clients (CHF 4.5 billion on 31 December 2008). At 31 December 2009, the total amount of Due from banks and Loans due after one year granted at fixed and floating rates is as follows: CHF million Fixed-rate loans Adjustable or floating-rate loans Total 1 to 5 years Over 5 years 75,064 3,132 78,196 27,623 33,439 61,062 Total 102,687 36,571 139,258 412 Impaired and non-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 it will be made good by later payments or the liquidation of collateral; 2) when insolvency proceedings have commenced; or 3) when obligations have been restruc- tured on concessionary terms. CHF million 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 Gross interest income that would have been recorded on non-performing loans: Domestic Foreign Interest income included in net profit for non-performing loans: Domestic Foreign 13 9 41 9 16 3 32 4 39 4 40 2 50 10 56 8 81 8 72 9 The table below provides an analysis of the Group’s non-performing loans. For further information see credit risk in the “Risk and treasury management” section. CHF million Non-performing loans: Domestic Foreign Total non-performing loans 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 1,462 3,940 5,402 1,431 3,272 4,703 1,349 132 1,481 1,744 174 1,918 2,106 257 2,363 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 see 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 2009, 2008, 2007, 2006 or 2005. In addition to the non-performing loans shown above, the Group has CHF 1,463 million, CHF 4,442 million, CHF 911 million, CHF 710 million and CHF 1,071 million in “oth- er impaired loans” for the years ended 31 December 2009, 2008, 2007, 2006 and 2005, respectively. Other impaired loans are loans where the Group’s credit officers have expressed doubts as to the ability of the bor- rowers to repay the loans. For the years ended 31 Decem- ber 2009, 2008, 2007, 2006 and 2005, they are loans not considered “non-performing” in accordance with Swiss regulatory guidelines. As of 31 December 2009, 31 Decem- ber 2008, 31 December 2007, 31 December 2006 and 31 December 2005, specific allowances of CHF 410 million, CHF 941 million, CHF 124 million, CHF 106 million, CHF 200 million, respectively, had been established against these loans n o i t a m r o f n i l a i c n a n i F 413 Financial information Additional disclosure required under SEC regulations Cross-border outstandings Cross-border outstandings consist of general banking prod- ucts such as loans and deposits with third parties, credit equivalents of over-the-counter (OTC) derivatives and securi- ties 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 excep- tion of the 32 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 re- corded against the guarantor’s country of domicile. Out- standings 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 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 2009, 2008 and 2007. At 31 December 2009, 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 abil- ity to service its obligations. For more information on country exposure, see credit risk in the “Risk and treasury management” section. Banks Private sector Public sector Total % of total assets 31.12.09 14,915 14,612 625 9,672 4,700 4,425 1,694 3,950 Banks 13,869 2,093 19,098 11,469 9,599 2,883 Banks 13,110 1,761 21,384 6,624 173 10,620 52,305 9,114 4,280 5,672 9,293 7,023 2,296 8,509 62,224 12,648 22,888 10,848 7,310 2,940 8,729 20 31.12.08 129,444 36,374 27,793 26,192 21,303 14,388 12,719 12,479 9.7 2.7 2.1 2.0 1.6 1.1 0.9 0.9 Private sector Public sector Total % of total assets 71,584 13,159 10,418 7,048 8,608 17,586 14,234 38,922 6,010 6,807 2,625 0 31.12.07 99,687 54,174 35,526 25,324 20,832 20,469 4.9 2.7 1.8 1.3 1.0 1.0 Private sector Public sector Total % of total assets 192,049 12,883 12,354 14,647 27,715 7,075 16,545 36,717 2,249 8,552 74 4,605 221,704 51,361 35,988 29,823 27,963 22,300 9.8 2.3 1.6 1.3 1.2 1.0 CHF million United States Germany Japan France United Kingdom Netherlands Italy Luxembourg CHF million United States Japan Germany France United Kingdom Luxembourg CHF million United States Japan Germany United Kingdom Cayman Islands France 414 Summary of movements in allowances and provisions for credit losses The following table provides an analysis of movements in al- lowances and provisions for credit losses. UBS writes off loans against allowances only on final set- tlement of bankruptcy proceedings, the sale of the underly- ing assets 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 forgiv- en through a formal agreement. CHF million Balance at beginning of year Domestic Write-offs Banks Construction Financial institutions Hotels and restaurants Manufacturing 1 Private households Public authorities Real estate and rentals Retail and wholesale Services 2 Other 3 Total domestic write-offs Foreign Write-offs Banks Chemicals Construction Electricity, gas and water supply Financial institutions Manufacturing 4 Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other 5 Total foreign write-offs Total write-offs Recoveries Domestic Foreign Total recoveries Net write-offs Increase / (decrease) in credit loss allowance and provision Collective loan loss provisions Other adjustments Balance at end of year Net foreign exchange Other adjustments Total adjustments 31.12.09 3,070 31.12.08 1,164 31.12.07 1,332 31.12.06 1,776 31.12.05 2,802 0 (16) (2) (2) (21) (61) 0 (19) (41) (3) (12) (177) (8) (111) (10) 0 (685) (138) (5) (40) (25) (196) (121) (413) (37) (80) (1,869) (2,046) 44 8 52 (1,994) 1,806 26 (88) 2,820 (37) (51) 6 (88) 0 (6) (37) (3) (31) (112) 0 (10) (4) (7) 0 (210) (13) (1) 0 0 (623) (6) 0 (5) (2) 0 0 0 (7) (1) (658) (868) 43 1 44 (824) 3,007 (11) (266) 3,070 (43) (223) 6 (266) 0 (9) (8) (7) (45) (68) (1) (27) (62) (20) (21) (268) (1) 0 0 0 (15) (21) 0 (14) (2) 0 0 0 0 0 (53) (321) 52 3 55 (266) 242 (4) (140) 1,164 (9) (131) (140) 0 (14) (11) (16) (40) (89) 0 (44) (20) (47) (2) (283) (3) 0 0 0 0 (11) (1) (7) (58) 0 0 0 0 0 (80) (363) 51 11 62 (301) (108) (48) 13 1,332 10 3 13 0 (16) (14) (26) (39) (131) 0 (56) (25) (35) (4) (346) (164) 0 0 0 (50) (8) (23) (21) (22) (3) (9) 0 0 (5) (305) (651) 53 10 63 (588) (298) (76) (64) 1,776 50 (114) (64) 1 Until 2008 this position includes chemicals, food and beverages. 2 Includes communication, health and social work, education and other social and personal service activities and until 2008 trans- portation. 3 Includes mining and electricity, gas and water supply and in 2009 additionally chemicals, food and beverages, transportation. 4 Until 2008 this position includes food and beverages. 5 Includes hotels and restaurants and in 2009 additionally food and beverages. 6 In 2009 the other adjustments was due to the sale of UBS Pactual. In 2008 a loan was forgiven in exchange for the collateral. 415 n o i t a m r o f n i l a i c n a n i F Financial information Additional disclosure required under SEC regulations Allocation of the allowances and provisions for credit losses The following table provides an analysis of the allocation of the allowances and provisions for credit loss by industry sec- tor and geographic location at 31 December 2009, 2008, 2007, 2006 and 2005. For a description of procedures with respect to allowances and provisions for credit losses, see credit risk in the “Risk and treasury management” section. CHF million Domestic Banks Construction Financial institutions Hotels and restaurants Manufacturing 1 Private households Public authorities Real estate and rentals Retail and wholesale Services 2 Other 3 Total domestic Foreign Banks 4 Chemicals Construction Electricity, gas and water supply Financial institutions Manufacturing 5 Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other 6 Total foreign Collective loan loss provisions 7 Total allowances and provisions for credit losses 8 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 1 27 126 6 104 119 20 21 221 99 43 787 31 1,037 1 0 414 83 0 171 87 36 17 100 7 0 1,984 49 2,820 16 39 18 8 71 121 1 50 262 78 92 756 6 960 8 2 542 25 4 233 19 208 80 19 185 0 2,291 23 3,070 10 43 52 10 113 190 1 57 247 112 76 911 18 1 1 3 112 20 0 15 20 8 4 4 1 12 219 34 1,164 10 72 61 27 155 187 3 99 311 113 107 10 91 75 49 174 262 8 168 330 196 61 1,145 1,424 20 4 2 8 9 37 0 26 21 4 4 7 1 6 35 5 2 16 8 57 1 30 72 3 1 27 0 8 149 38 1,332 265 86 1,775 1 Until 2008 this position includes chemicals, food and beverages. 2 Includes communication, health and social work, education and other social and personal service activities and until 2008 transportation. 3 Includes mining, electricity, gas and water supply and in 2009 additionally chemicals, food and beverages, transportation. 4 Counterparty allowances and provisions only. 5 Until 2008 this position includes food and beverages. 6 Includes hotels and restaurants and in 2009 additionally food and beverages. 7 The 2009, 2008, 2007, 2006 and 2005 amounts include CHF 0 million, CHF 0 million, CHF 0 million, CHF 0 million and CHF 48 million, respectively, of country provisions. 8 The 2009, 2008, 2007, 2006 and 2005 amounts include CHF 90 million, CHF 31 million, CHF 63 million, CHF 76 million, CHF 109 million, respectively, of provisions for unused commitments and contingent liabilities. 416 Due from banks and loans by industry 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 % Domestic Banks 1 Construction Financial institutions Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services 2 Other 3 Total domestic Foreign Banks 1 Chemicals Construction Electricity, gas and water supply Financial institutions Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other 4 Total foreign Total gross 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 0.2 0.4 2.1 0.5 0.9 33.2 1.0 3.3 1.2 1.6 1.0 45.4 12.9 0.7 0.2 0.3 21.6 1.0 0.9 9.3 3.4 0.4 0.5 2.4 0.8 0.2 0.4 0.3 2.0 0.4 1.0 28.9 1.0 2.9 1.2 1.5 0.8 40.4 15.4 0.7 0.1 0.7 24.4 1.2 1.1 8.1 2.7 1.0 0.6 2.4 0.9 0.3 0.3 0.3 1.4 0.5 1.0 30.2 1.2 2.9 1.3 1.5 0.8 41.4 15.0 0.2 0.2 0.5 24.0 1.2 1.1 10.7 1.0 1.3 0.6 2.3 0.4 0.1 0.2 0.4 1.6 0.6 1.0 33.5 1.4 3.2 1.3 1.9 1.3 46.4 14.2 0.4 0.1 0.3 19.2 0.9 0.9 10.0 0.6 1.2 0.5 4.7 0.4 0.2 0.4 0.6 1.3 0.6 1.3 35.3 1.7 3.7 1.5 2.6 1.1 50.1 10.2 0.9 0.1 0.5 19.7 1.2 1.1 12.1 0.5 0.9 0.4 1.8 0.4 0.1 54.6 100.0 59.6 100.0 58.6 100.0 53.6 100.0 49.9 100.0 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, and CHF 728 million at 31 December 2005. 2 Includes communication, health and social work, education and other social and personal service activities. 3 Includes chemicals, food and beverages, transportation, storage, mining, electricity, gas and water supply. 4 Includes food and beverages, hotels and restaurants. n o i t a m r o f n i l a i c n a n i F 417 Financial information Additional disclosure required under SEC regulations Loss history 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 Gross loans 1 Impaired loans Non-performing loans Allowances and provisions for credit losses 2 Net write-offs Credit loss (expense) / recovery Ratios Impaired loans as a percentage of gross loans Non-performing loans as a percentage of gross loans Allowances and provisions for credit losses as a percentage of: Gross loans Impaired loans Non-performing loans Allocated allowances as a percentage of impaired loans 3 Allocated allowances as a percentage of non-performing loans 4 Net write-offs as a percentage of: Gross loans Average loans outstanding during the period Allowances and provisions for credit losses Allowance and provisions for credit losses as a multiple of net write-offs 31.12.09 356,081 6,865 5,402 2,820 1,994 (1,832) 31.12.08 407,685 9,145 4,703 3,070 824 (2,996) 31.12.07 397,802 2,392 1,481 1,164 266 (238) 31.12.06 349,524 2,628 1,918 1,332 301 156 1.9 1.5 0.8 41.1 52.2 38.3 41.6 0.6 0.5 70.7 1.41 2.2 1.2 0.8 33.6 65.3 31.8 41.8 0.2 0.2 26.8 3.73 0.6 0.4 0.3 48.7 78.6 41.7 58.9 0.1 0.0 22.9 4.38 0.8 0.5 0.4 50.7 69.4 46.3 58.0 0.1 0.1 22.6 4.43 31.12.05 315,210 3,434 2,363 1,776 588 375 1.1 0.7 0.6 51.7 75.2 46.4 59.0 0.2 0.1 33.1 3.02 1 Includes Due from banks and Loans from Industrial Holdings in the amount of CHF 27 million for 2007, CHF 93 million for 2006 and CHF 728 million for 2005. 2 Includes collective loan loss provi- sions. 3 Allowances relating to impaired loans only. 4 Allowances relating to non-performing loans only. 418 Cautionary statement regarding forward-looking statements | This report contains statements that constitute “forward-looking statements”, including but not limited to management’s outlook for UBS’s financial performance and statements relating to the anticipated effect of transactions and strategic initiatives on UBS’s business and future development. While these forward-looking statements represent UBS’s judgments and expectations concerning the matters described, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from UBS’s expectations. These factors include, but are not limited to: (1) future develop- ments in the markets in which UBS operates or to which it is exposed, including movements in securities markets, credit spreads, currency exchange rates and interest rates; (2) the effect of the current economic environment or other developments on the financial position or creditworthiness of UBS’s customers and counterparties; (3) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings; (4) the consequences of the recent Swiss court decision relating to the provision of certain UBS client data to the US Internal Revenue Service, including possible effects on UBS’s 2009 settlements with US authorities and on its businesses; (5) the outcome and possible consequences of pending or future actions or inquiries concerning UBS’s cross-border banking business by tax or regulatory authorities in various other jurisdictions; (6) the degree to which UBS is successful in effecting organizational changes and implementing strategic plans, and whether those changes and plans will have the effects intended; (7) UBS’s ability to retain and attract the employees that are necessary to generate revenues and to manage, support and control its businesses; (8) possible political, legal and regulatory developments, including the effect of more stringent capital and liquidity requirements, constraints on remuneration and the imposition of additional legal or regulatory constraints on UBS’s activities; (9) changes in accounting standards or policies, and accounting determinations affecting the recognition of gain or loss, the valuation of goodwill and other matters; (10) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (11) changes in the size, capabilities and effectiveness of UBS’s competitors; (12) the occurrence of operational failures, such as fraud, unauthorized trading and systems failures, either within UBS or within a counterparty; and (13) technological developments. In addition, actual results could depend on other factors that we have previ- ously indicated could adversely affect our business and financial performance which are contained in our past and future filings and reports, including those filed with the SEC. More detailed information about those factors is set forth 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 2009. UBS is not under any obligation to (and expressly disclaims any 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 and text. 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: UBS AG, P.O. Box, CH-8098 Zurich, Switzerland; P.O. Box, CH-4002 Basel, Switzerland; www.ubs.com | Language: English / German | SAP-No. 80531E-1001 © UBS 2010. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
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