UBS AG
Annual Report 2011

Plain-text annual report

Annual Report 2011 Our performance in 2011  Contents Letter to shareholders 2 6 Key figures 7 UBS and its businesses 8 Our Board of Directors 10 Our Group Executive Board 12 The making of UBS 1. Operating environment and strategy 16 Current market climate and industry drivers 19 Regulatory developments 22 Our strategy 27 Measurement of performance 30 Wealth Management 33 Retail & Corporate 35 Wealth Management Americas 38 Global Asset Management Investment Bank 42 45 Corporate Center 47 Regulation and supervision 50 Risk factors 2. Financial and operating performance 58 Critical accounting policies 62 UBS results 72 Balance sheet 76 Off-balance sheet 80 Cash flows 83 Wealth Management 86 Retail & Corporate 89 Wealth Management Americas 95 Global Asset Management Investment Bank 102 108 Corporate Center 3. Risk, treasury and capital management 112 Risk management and control 116 Credit risk 133 Market risk 140 Operational risk 142 Treasury management 144 Liquidity and funding management Interest rate and currency management 151 153 Capital management 161 Basel 2.5 Pillar 3 4. Corporate governance, responsibility and compensation 196 Corporate governance 222 Corporate responsibility 234 Our employees 242 Compensation 5. Financial information 284 Consolidated financial statements 297 Notes to the consolidated financial statements 411 UBS AG Parent Bank financial statements 439 Additional disclosure required under SEC regulations (including industry guide 3) Appendix 461 UBS registered shares 462 464 Cautionary statement Information sources Annual Report 2011 Letter to shareholders Dear shareholders, For the financial year 2011 we report a net profit attributable to UBS shareholders of CHF 4.2 billion and diluted earnings per share of CHF 1.08. During the year we strengthened our indus- try-leading capital position, with our Basel II tier 1 capital ratio increasing significantly to 19.6% from 17.8%, and our Basel 2.5 tier 1 capital ratio rising to 15.9%. We attracted significant net new money inflows despite the challenging operating environ- ment, recording combined net inflows in our wealth- and asset- gathering businesses of almost CHF 40 billion. We have also made progress in reducing both risk-weighted assets and costs and, taking into account the challenges we faced, the perfor- mance of our businesses gives us great confidence in the firm’s future. We are therefore proposing to pay a dividend1 to our shareholders for the financial year 2011 of CHF 0.10 per share, subject to shareholder approval at our Annual General Meeting of Shareholders (AGM) in May. 2011 was challenging for the firm and the industry as a whole. Markets were affected by ongoing concerns surrounding euro- zone sovereign debt, the European banking system, the US fed- eral budget deficit and economic growth issues, all of which af- fected client confidence. Activity levels were very subdued as many investors sought out safe haven investments, including in the Swiss franc, and remained on the sidelines of markets for most of the second half of the year. We also faced our own chal- lenges, as in September we discovered unauthorized trading that led to a loss of CHF 1.8 billion. During the year, it became increasingly clear that higher regula- tory capital and liquidity requirements would put pressure on structures and business models throughout the industry, funda- mentally impacting many business areas, most notably for invest- ment banks. In light of the changed market environment and more stringent regulatory requirements, the Board of Directors and Group Executive Board re-evaluated the Group’s strategy to ensure we continue to place our clients at the center of everything we do and with the ultimate goal of delivering more attractive and sustainable returns in future. The results of this re-evaluation were presented at our Investor Day 2011. Our future strategic course has now been set: our wealth man- agement businesses globally and our universal bank in Switzer- land are central to our strategy. In order to serve the needs of our core wealth management clients, our Global Asset Management business and our Investment Bank must each be strong and suc- cessful in meeting the needs of their clients. Going forward, our Investment Bank will be less complex and less capital intensive. It will focus firmly on its corporate, institutional, sovereign, ultra high net worth, wealth management and other clients and will be an important partner to them. Only a competitive and successful Investment Bank will enable us to take our wealth management businesses to the next level. Our plans build on the strengths of all of our businesses together with our leading capital and sound liquidity and funding profile. The new operating environment will require the industry to build capital and improve capital efficiency. In line with our desire to reduce complexity and drive high-quality risk-adjusted returns, by 2016 we aim to reduce risk-weighted assets in the Investment Bank and in the legacy portfolio together by 50% compared with 30 September 2011 levels calculated on a pro forma Basel III basis. We believe our leading capital position gives us a distinct competi- tive advantage, and we are determined to build on this strength to maintain that advantage in the Basel III banking environment. FIN- MA, our Swiss regulator, will require that systemically important banks such as UBS hold significantly higher levels of total capital in future. We made good progress towards achieving our strategic tar- get of a common equity tier 1 ratio of 13% under Basel III, well above FINMA’s minimum requirements, ending the year with an es- timated ratio of 10.8%. As a further step towards meeting these more stringent requirements, we also initiated an issuance program of loss-absorbing capital in February 2012, with a USD 2 billion in- augural issue. We continued to reduce risk-weighted assets and, in the fourth quarter alone, we achieved a 5% reduction in pro forma Basel III risk-weighted assets2. We are determined to build on this progress over coming quarters, and we are confident that our tar- geted capital structure, which is well in excess of international core capital requirements, will bolster confidence further in the firm. The more stringent Basel III capital and liquidity requirements will likely lead to greater competition for stable sources of funding, both se- cured funding and deposits, and to increased funding costs. Our sound funding position, derived from our wealth management busi- nesses and our Retail & Corporate business, reinforces our financial position further. In line with our new strategy, we updated our financial targets for our business divisions and the Group, underlined our determina- 1 The term “dividend” is used throughout the report, notwithstanding that for Swiss tax purposes the distribution is characterized as a payment from capital contribution reserves. Refer to the “Statement of appropriation of retained earnings” of the Parent Bank in the “Financial information” section of this report for more information. 2 Our pro forma Basel III risk-weight- ed assets calculation is a combination of the existing Basel 2.5 risk-weighted assets, a revised treatment for securitization exposures which applies a fixed risk weighting, as well as several new capital charges which require the development of new models and calculation engines. Our pro forma Basel III risk-weighted assets are based on estimates of the impact of these new capital charges, and will be refined as we progress with our implementation of the new models and associated systems. 2 Sergio P. Ermotti Group Chief Executive Officer Kaspar Villiger Chairman of the Board of Directors 3 Annual Report 2011 Letter to shareholders tion to control costs and announced our intention to implement a progressive capital returns policy, beginning with the CHF 0.10 dividend we propose to pay this year. We are well advanced in implementing our CHF 2 billion cost re- duction program announced in July, and we expect to see more of the benefits as a result of these measures coming through in 2012 and 2013. We remain vigilant on costs and will continue to seek additional efficiencies by exploring opportunities to lower the structural cost base of the firm. As already stated, our capacity for further tactical cost-cutting measures is limited and we must fo- cus on strategic changes which go to the heart of our organiza- tional design and structures. In addition, we will monitor markets actively and, if conditions deteriorate materially, we will take fur- ther measures to reduce our cost base. Despite the challenges we faced in 2011, most of our businesses delivered improved profitability compared with the prior year. Wealth Management reported a pre-tax profit of CHF 2.7 billion, up from CHF 2.3 billion in 2010. Wealth Management Americas made notable progress reporting a pre-tax profit of CHF 534 mil- lion compared with a loss of CHF 130 million in the prior year, and our Retail & Corporate business recorded a pre-tax profit of CHF 1.9 billion, up from CHF 1.8 billion, attracting the highest level of new client assets since 2007. Together, these businesses delivered a 30% increase in pre-tax profits compared with the previous year. We also saw a marked improvement in our net new money performance across our wealth management businesses. Wealth Management’s net new money improved significantly, with net inflows of CHF 23.5 billion compared with net outflows of CHF 12.1 billion in 2010, reflecting improvements in all regions and client segments. Wealth Management Americas attracted net new money inflows of CHF 12.1 billion compared with outflows of CHF 6.1 billion in 2010. This turnaround reflects the success we have had in both retaining and recruiting experienced financial advisors during the year. In a difficult year for the asset management industry, our Global Asset Management business reported a pre-tax profit of CHF 428 million. Although de-risking continued to dominate investors’ de- cisions, the business achieved an increase in total net new money during 2011. Notably, we attracted net inflows from third-party clients of CHF 12.2 billion, excluding money market flows. Clients continued to recognize the strengths of the business’s diversified product range and, in particular, its leading alternative investment offerings and fast-growing passive capabilities. Expanding these areas remains a key strategic objective for the business in order to capture the opportunities presented by the longer-term industry trends. A reduction in volumes and client activity as well as the strength- ening of the Swiss franc impacted the Investment Bank’s result for the year, as did the CHF 1.8 billion loss associated with the unau- thorized trading incident in September. As soon as this incident was discovered we acted swiftly to mitigate its effects on the firm and our shareholders. We were deeply disappointed by this occur- rence and we have already taken action designed to reinforce our control framework and we remain committed to ensuring that we address any further recommendations that come out of the ongo- ing independent investigations quickly and decisively. Despite these circumstances, the business reported a pre-tax profit of CHF 154 million, and a number of our businesses in the Investment Bank delivered notable performances. Our cash equities exchange market share rose slightly compared with 2010 levels, and reve- nues in our macro business rose to CHF 2.6 billion, an increase of 15% reflecting higher revenues across all interest rates business lines. Our foreign exchange business took advantage of market volatility in the second half of 2011, bolstered by the investments we have made in our new e-trading platform. In our advisory business, our market share and revenues increased as our efforts to build client relationships bore fruit. Additionally, the business successfully reduced its risk-weighted assets, something that is fundamental to its overall strategy and that will enable the busi- ness to deliver attractive and sustainable returns in future. In September, the Board of Directors accepted the resignation of Oswald J. Grübel. We would like to reiterate our gratitude to him for the outstanding contribution he made to the firm. In Novem- ber, the Board confirmed the appointment of Sergio P. Ermotti as Group Chief Executive Officer with immediate effect. Chairman of the Board Kaspar Villiger announced his decision not to stand for reelection and, as a result, Axel Weber has been proposed to succeed as Chairman, subject to his election at this year’s AGM. In addition, we announced that Beatrice Weder di Mauro and Isabelle Romy will be nominated for election to the Board and, if  elected, they will bring with them invaluable experience and 4  expertise to strengthen the Board further. Bruno Gehrig has de- cided not to stand for reelection and we would like to express our thanks to Bruno for his exceptional contribution and great com- mitment since joining the Board in 2008 during some testing times for the firm. Over the coming months, we will continue to mark our 150th an- niversary by expressing our gratitude to all those who have sup- ported us over the years, and by giving back to the communities we belong to across the globe, with a particular focus on projects promoting education and entrepreneurship. Our employees will be able to share this experience and will have the opportunity to volunteer for regional fundraising and other events that will bring long-lasting benefits to the communities in which they live and work. Looking ahead, 2012 will be a year of progress for the Group. We will continue our efforts to drive efficiencies throughout the firm, we will drive home our distinct competitive advantages by con- tinuing to strengthen our capital position and we will ensure that we continue to place our clients at the center of everything we do. We believe our clients will continue to place great value in safety and stability and will look to us more than ever to provide the best possible advice and solutions to help them achieve their investment aims. 2012 will also be a year of transition for the Investment Bank as we continue the process of reducing risk- weighted assets and reshaping the business to ensure its future success. By achieving our strategic objectives in a disciplined and timely manner, we are confident we will be able to provide more attractive and sustainable returns to our shareholders. 15 March 2012 Yours sincerely, UBS Kaspar Villiger Chairman of the Board of Directors Sergio P. Ermotti Group Chief Executive Officer 5 Annual Report 2011 Key figures CHF million, except where indicated Group results Operating income Operating expenses Operating profit from continuing operations before tax 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, Basel II, 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, Basel 2.5 (%) 5 BIS tier 1 ratio, Basel II (%) 5 FINMA leverage ratio (%) 6 Balance sheet and capital management Total assets Equity attributable to UBS shareholders Total book value per share (CHF) 6 Tangible book value per share (CHF) 6 BIS total ratio, Basel 2.5 (%) 5 BIS total ratio, Basel II (%) 5 BIS risk-weighted assets, Basel 2.5 5 BIS risk-weighted assets, Basel II 5 BIS tier 1 capital, Basel 2.5 5 BIS tier 1 capital, Basel II 5 Additional information Invested assets (CHF billion) Personnel (full-time equivalents) Market capitalization 7 As of or for the year ended 31.12.11 31.12.10 31.12.09 27,788 22,439 5,350 4,159 1.08 8.5 13.7 2.1 (44.8) 42.4 80.5 15.9 19.6 5.4 1,419,162 53,447 14.26 11.68 17.2 21.6 240,962 198,494 38,370 38,980 2,167 64,820 42,843 31,994 24,539 7,455 7,534 1.96 16.7 15.5 2.3 N/A (14.3) 76.5 17.8 4.4 22,601 25,162 (2,561) (2,736) (0.75) (7.8) 9.9 1.5 N/A (147.3) 103.0 15.4 3.9 1,317,247 46,820 12.35 9.76 1,340,538 41,013 11.65 8.52 20.4 19.8 198,875 206,525 35,323 31,798 2,152 64,617 58,803 2,233 65,233 57,108 1 Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report for more information. 2 For the definitions of our key performance indicators, refer to the “Mea- surement of performance” section of this report. 3 Not meaningful and not included if either the reporting period or the comparison period is a loss period. 4 Excludes interest and dividend income. 5 Capital man- agement data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The com- parative information under the Basel II framework is therefore provided. Refer to the “Capital management” section of this report for more information. 6 Refer to the “Capital management” section of this report for more information. 7 Refer to the appendix “UBS registered shares” in this report for more information. The 2011 results and the balance sheet in this report differ from those presented in our fourth quarter 2011 report issued on 7 Feb- ruary 2012. The net impact of adjustments made subsequent to the publication of the unaudited fourth quarter 2011 financial re- port on net profit attributable to UBS shareholders was a loss of CHF 74 million, which decreased basic and diluted earnings per share by CHF 0.02. ➔ Refer to the “Certain items affecting our results in 2011” sidebar in the “Group results” section and to “Note 32 Events after the reporting period” in the “Financial information” section of this report for more information 6 UBS and its businesses We draw on our 150-year heritage to serve private, institutional and corporate clients worldwide, as well as retail clients in Switzerland. Our business strategy is centered on our pre-eminent global wealth management businesses and our universal bank in Switzerland. Together with a client-focused Investment Bank and a strong, well-diversified Global Asset Management business, we will drive further growth and expand our premier wealth management franchise. Headquartered in Zurich and Basel, Switzerland, we have offices in more than 50 countries, including all major financial centers, and employ approximately 65,000 people. Under Swiss company law, we are organized as an Aktiengesellschaft (AG), a corporation that has issued shares of common stock to investors. UBS AG is the parent company of the UBS Group (Group). The operational structure of the Group comprises the Corporate Center and four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank. The Investment Bank provides a broad range of products and ser- vices in equities, fixed income, foreign exchange and commodities to corporate and institutional clients, sovereign and government bodies, financial intermediaries, alternative asset managers and UBS’s wealth management clients. The Investment Bank is an active participant in capital markets flow activities, including sales, trading and market-making across a broad range of securities. It provides financial solutions to a wide range of clients, and offers advisory and analytics services in all major capital markets. The Corporate Center provides treasury services, and manages support and control functions for the business divisions and the Group in such areas as risk control, finance, legal and compliance, funding, capital and balance sheet management, management of  non-trading risk, communications and branding, human re- sources, information technology, real estate, procurement, corpo- rate development and service centers. It allocates most of the treasury income, operating expenses and personnel associated with these activities to the businesses based on capital and service consumption levels. The Corporate Center also encompasses cer- tain centrally managed positions, including the SNB StabFund option and (starting with the first quarter 2012 reporting) the legacy portfolio formerly in the Investment Bank. Wealth Management & Swiss Bank focuses on delivering compre- hensive 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. Our Wealth Management business unit provides clients in over 40 countries, including Switzerland, with financial advice, products and tools to fit their individual needs. Our Retail & Corporate business unit provides individual and busi- ness clients with an array of banking services, such as deposits and lending, and maintains a leading position across its client seg- ments in Switzerland. Starting with the first quarter of 2012, we will report Wealth Management and Retail & Corporate as sepa- rate business divisions, and will no longer report Wealth Manage- ment & Swiss Bank which will cease to be a business division. Wealth Management Americas provides advice-based solutions through financial advisors who deliver a fully integrated set of products and services specifically designed to address the needs of ultra high net worth and high net worth individuals and fami- lies. It includes the domestic US business, the domestic Canadian business and international business booked in the US. Global Asset Management is a large-scale asset manager with businesses diversified across regions, capabilities and distribution channels. It offers investment capabilities and styles across all major traditional and alternative asset classes including equities, fixed income, currency, hedge fund, real estate, infrastructure and private equity that can also be combined into multi-asset strate- gies. The fund services unit provides professional services, includ- ing legal fund set-up, accounting and reporting for traditional investment funds and alternative funds. 7 Annual Report 2011 Our Board of Directors The Board of Directors (BoD) is our most senior body. Under the leadership of the Chairman, it determines the strategy of the Group based upon the recommendations of the Group Chief Executive Officer (Group CEO). It exercises ultimate supervision of 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 supervising and setting appropriate risk management and control principles for the firm. With the exception of its current Chairman, Kaspar Villiger, all mem- bers of the BoD are independent. 8 1 2 7 3 8 4 9 5 10 6 11 1 Kaspar Villiger Chairman of the Board of Directors, Chairperson of the Governance and Nominating Committee and member of the Corporate Responsibility Committee 2 Michel Demaré Independent Vice Chairman, member of the  Audit Committee and the Governance and Nominating Committee 3 David Sidwell Senior Independent Director, Chairperson of the Risk Committee and member of the Governance and Nominating Committee 4 Rainer-Marc Frey Member of the Audit Committee and the Risk Committee 5 Bruno Gehrig Member of the Governance and Nominating Committee and the Human Resources and Compen sation Committee 6 Ann F. Godbehere Chairperson of the Human Resources and Compensation Committee, member of the Audit Committee and the Corporate Responsibility Committee 7 Axel P. Lehmann Member of the Governance and Nominating Committee and the Risk Committee 8 Wolfgang Mayrhuber Chairperson of the Corporate Responsibility Committee and member of the Human Resources and Compensation Committee 9 Helmut Panke Member of the Human Resources and Compensation Committee, member of the Risk  Committee 10 William G. Parrett Chairperson of the Audit Committee 11 Joseph Yam Member of the Corporate Responsibility Committee and the Risk Committee 9 Annual Report 2011 Our Group Executive Board The management of the firm is delegated by the BoD to the GEB. Under the leadership of the Group CEO, the GEB has executive management responsibility for the Group and its businesses. It assumes overall responsibility for the development of the Group and business division strategies and the implementation of approved strategies. 10 1 7 2 8 3 9 4 10 5 11 6 12 1 Sergio P. Ermotti Group Chief Executive Officer 2 Markus U. Diethelm Group General Counsel 3 John A. Fraser Chairman and CEO Global Asset Management 4 Lukas Gähwiler CEO UBS Switzerland and co-CEO Wealth Management & Swiss Bank 5 Carsten Kengeter Chairman and CEO Investment Bank 6 Ulrich Körner Group Chief Operating Officer, CEO Corporate Center and CEO UBS Group Europe, Middle East and Africa 7 Philip J. Lofts Group Chief Risk Officer 8 Robert J. McCann CEO Wealth Management Americas and CEO UBS Group Americas 9 Tom Naratil Group Chief Financial Officer 10 Alexander Wilmot-Sitwell Co-Chairman and co-CEO of UBS Group Asia Pacific 11 Chi-Won Yoon Co-Chairman and co-CEO of UBS Group Asia Pacific 12 Jürg Zeltner CEO UBS Wealth Management and co-CEO Wealth Management & Swiss Bank 11 Annual Report 2011 The making of UBS In 2012, UBS celebrates its 150th anniversary. This important milestone in our long history serves to demonstrate the firm’s established and pivotal role in the development and growth of Swiss banking traditions. The heritage of the banking industry in Switzerland can be traced back to its origins in medieval times. This long history may help ex- plain the widespread impression, reinforced in popular fiction, that Switzerland has always possessed a strong financial sector. In reality, the size and international reach of the Swiss banking sector we know today is largely a product of the second half of the 20th century, strongly influenced by two banks: Union Bank of Switzerland and Swiss Bank Corporation (SBC), which merged to form UBS in 1998. At the time of the merger, both banks were already well estab- lished and successful in their own right. Union Bank of Switzerland celebrated its 100th anniversary in 1962, tracing its origins back to the Bank in Winterthur. SBC marked its centenary in 1972 with cel- ebrations in honor of its founding forebear, the Basler Bankverein. The historical roots of Paine Webber, acquired by UBS in 2000, go back to 1879, while S.G. Warburg, the central pillar upon which to- day’s Investment Bank was built, commenced operations in 1946. 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(cid:53)(cid:16)(cid:41)(cid:16)(cid:2)(cid:57)(cid:67)(cid:84)(cid:68)(cid:87)(cid:84)(cid:73)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82) (cid:19)(cid:27)(cid:22)(cid:23) (cid:19)(cid:27)(cid:22)(cid:23) (cid:19)(cid:27)(cid:27)(cid:25) (cid:19)(cid:27)(cid:26)(cid:25) (cid:19)(cid:27)(cid:27)(cid:23) (cid:19)(cid:27)(cid:26)(cid:27) (cid:36)(cid:84)(cid:75)(cid:80)(cid:85)(cid:81)(cid:80)(cid:2) (cid:50)(cid:67)(cid:84)(cid:86)(cid:80)(cid:71)(cid:84)(cid:85) (cid:19)(cid:27)(cid:27)(cid:22) (cid:19)(cid:27)(cid:25)(cid:25) (cid:49)(cid:111)(cid:37)(cid:81)(cid:80)(cid:80)(cid:81)(cid:84)(cid:2)(cid:8)(cid:2)(cid:35)(cid:85)(cid:85)(cid:81)(cid:69)(cid:75)(cid:67)(cid:86)(cid:71)(cid:85) (cid:19)(cid:27)(cid:27)(cid:20) (cid:19)(cid:27)(cid:27)(cid:25) (cid:19)(cid:27)(cid:26)(cid:24) (cid:19)(cid:27)(cid:27)(cid:26) In the early 1990s, SBC and Union Bank of Switzerland were both commercial banks operating mainly out of Switzerland. The banks shared a similar vision: to become a world leader in wealth management, a successful global investment bank, and a top-tier global asset manager while remaining an important commercial and retail bank in their home market of Switzer- land. Union Bank of Switzerland, the largest and best-capitalized Swiss bank of its time, pursued these goals primarily through a strategy of organic growth. In contrast, SBC, then the third- largest Swiss bank, grew through a combination of partnership and acquisition. In 1989, SBC started a joint venture with O’Connor, a leading US derivatives firm noted for its dynamic and innovative culture, its meritocracy and its team-oriented approach. O’Connor brought state-of-the-art risk management and derivatives technology to SBC, and in 1992 SBC moved to fully acquire O’Connor. In 1994, SBC added to its capabilities when it acquired Brinson Partners, a leading US-based institu- tional asset management firm. The next major milestone was in 1995, when SBC acquired S.G. Warburg, the British merchant bank. The deal helped SBC fill a stra- tegic gap in its corporate finance, brokerage, and research capabili- ties and, most importantly, brought with it an institutional client franchise that remains crucial to our equities business to this day. The 1998 merger of SBC and Union Bank of Switzerland into the firm we know today created a world-class wealth manager and the biggest universal bank in Switzerland complemented by a strong investment bank and a leading global institutional asset manager. In 2000, UBS grew further with the acquisition of PaineWebber, establishing the firm as a significant player in the US. Since 2000, UBS has built a strong presence in the Asia Pacific region and the emerging markets. Our new global reach found expression through our new global UBS brand identity introduced in 2003. 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(cid:19)(cid:27)(cid:26)(cid:24) (cid:19)(cid:27)(cid:27)(cid:26) (cid:19)(cid:27)(cid:20)(cid:26)(cid:2) (cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:74)(cid:67)(cid:80)(cid:70)(cid:71)(cid:78) (cid:19)(cid:27)(cid:24)(cid:25) (cid:19)(cid:27)(cid:22)(cid:20)(cid:2) (cid:50)(cid:67)(cid:75)(cid:80)(cid:71)(cid:14)(cid:2)(cid:57)(cid:71)(cid:68)(cid:68)(cid:71)(cid:84)(cid:14)(cid:2)(cid:44)(cid:67)(cid:69)(cid:77)(cid:85)(cid:81)(cid:80)(cid:2)(cid:8)(cid:2)(cid:37)(cid:87)(cid:84)(cid:86)(cid:75)(cid:85) (cid:19)(cid:27)(cid:25)(cid:22)(cid:2)(cid:50)(cid:67)(cid:75)(cid:80)(cid:71)(cid:57)(cid:71)(cid:68)(cid:68)(cid:71)(cid:84)(cid:14)(cid:2)(cid:43)(cid:80)(cid:69)(cid:16) (cid:20)(cid:18)(cid:18)(cid:18) (cid:19)(cid:27)(cid:25)(cid:27) (cid:19)(cid:27)(cid:25)(cid:25) 13 Annual Report 2011 The firm’s progress was reflected by the fact that 2006 was the most successful year in our history. However, in 2007 the effects of the global financial crisis started to be felt across the financial industry. This crisis had its origins in the structured financial product business linked to the US residential real es- tate market. Between the third quarter of 2007 and the fourth quarter of 2009, UBS incurred losses of more than CHF 50 billion on these assets and received an equity investment from the Swiss Confederation concurrent with the Swiss National Bank’s establishment of a fund to purchase illiquid securities and other positions from UBS. UBS responded with decisive action designed to reduce its risk exposures and stabilize its businesses. More recently, UBS increased its capital strength to meet new and enhanced industry-wide regulatory require- ments, as well as better equipping the firm for the new post- crisis market realities. Over the past few years, we have successfully reduced our bal- ance sheet and legacy positions: compared with the end of 2008, our balance sheet is over half a trillion Swiss francs smaller and our Basel II risk-weighted assets are approximately 35% lower. Today, our Basel 2.5 tier 1 capital ratio is one of the highest in the industry. We will continue to build on this strength as well as on our stable funding and sound liquidity positions by leveraging the comple- mentary capabilities of all our businesses to generate sustainable returns. With our focus on putting clients at the center of every- thing we do, increasing collaboration across the firm, building cap- ital and continuing to reduce risk-weighted assets, while remaining vigilant on costs, we believe UBS will be able to deliver sustainable earnings and increasingly attractive returns to our shareholders. We have every reason to be confident about our future. ➔ For a full overview of UBS’s history, please see the interactive timeline at http://www.ubs.com/history Celebrating our 150th anniversary In 2012, we are celebrating our firm’s 150th anniversary. Our celebrations focus on enhancing our social and charitable commitments around the world. We want to build on our legacy by strengthening and deepening our business relationships, and by helping the communities in which we live and work through long-lasting and valuable programs. Last but not least, our activities in 2012 signal that UBS is looking to the future with optimism and confidence. There are a wide range of activities planned during the year, including celebrations for selected guests in Switzer- land and our main business locations around the globe. Overall, we are hosting 25 client events in the Asia Pacific region, Europe, the US and South America. Additionally, we are using this opportunity to launch our global “Excellence in Volunteering” award. Employees around the world who give of their time freely to help their local community are eligible to receive one of 150 awards in recognition of outstanding achievement. We are focusing on projects that promote education and entrepreneurship, the two umbrella themes for our community affairs activities. These include the Young Enterprise Switzerland project, The Bridge Academy in Hackney in London, Investing for Success in the Americas as well as community employee engagement programs in the Asia Pacific region. actual date of UBS’s founding 150 years ago. The bank will present an anniversary leisure offering to both clients and the general public. In addition, the UBS Kids Cup is holding a special competition and will distribute gifts to young Swiss athletes who participated in the competi- tion. Through our partnership with Stiftung Landschaftsschutz Schweiz, UBS volunteers can engage in a variety of projects designed to protect and conserve the natural beauty of the Swiss country- side. In Switzerland UBS is also offering social, environmental and educational charities additional help both through financial support and volunteers. In Switzerland, our home market, we will host a small birthday celebration in all UBS branches on 25 June 2012, the If you would like to find out more about our 150th anniversary celebrations then go to http://www.ubs.com/150years. 14 Operating environment and strategy Operating environment and strategy Current market climate and industry drivers Current market climate and industry drivers Sovereign debt stress continues to test financial stability The start of 2011 was characterized by a modest global econom- ic recovery. Thereafter, the markets were affected by ongoing concerns surrounding eurozone sovereign debt, the European banking system and US federal budget deficit issues, as well as renewed uncertainty about the global economic outlook in gen- eral. As a result, volatility increased in the markets and investor activity levels fell significantly, especially in the second half of the year. Switzerland was perceived as a safe haven by investors and the resulting appreciation of the Swiss franc led the Swiss National Bank (SNB) to intervene in early September, announcing that it would not tolerate an exchange rate of less than CHF 1.20 per euro. Growth in 2011: subdued initial recovery stymied by macro- economic and sovereign concerns In the early part of 2011, the world experienced a subdued, two- speed recovery. Developed economies continued to grow mod- estly but steadily, though unemployment remained high. At the same time, activity in many emerging markets, which came out of the crisis relatively unscathed, was buoyant, though coupled with some inflationary pressures and risks of overheating. Monetary policy was highly accommodative, especially in advanced econo- mies (central bank interest rates remained low) and fiscal policy provided additional stimulus globally. Bond and equity markets generally rebounded. From the second quarter onwards, the global economy en- tered a new phase. Economic activity slowed markedly, as the earthquake and tsunami in Japan affected the global supply chain, unrest in the Middle East caused oil prices to rise and the sovereign debt crisis escalated considerably. In the US, growth lagged behind that of previous recoveries, especially as difficulties in the housing market persisted, dampen- ing consumer demand, while in Europe, the debt crisis spread increasingly beyond weaker countries and began to challenge core countries as well. As the “Arab spring” changed the political landscape in the Middle East and North Africa, it also impacted economic activity in the region. Finally, growing concerns over problems affecting China’s real estate market and banking sector in particular increased fears of a possible hard landing for the country’s economy. After the financial crisis of 2008 and 2009, the public sector replaced the private sector in sustaining aggregate demand. In 2011, however, the public sector also started to retrench in many countries due to heightened pressure on public finances. At the same time, the macroeconomic environment and forthcoming regulatory overhaul prompted banks to deleverage, exacerbating the situation further. Sovereign stress: eurozone debt crisis and political deadlock around the US debt ceiling The European sovereign debt crisis was one of the most signifi- cant factors influencing global financial markets through most of 2011, with market pressure eventually reaching the eurozone core countries. Following initial stabilization packages for Greece and Ireland in 2010, the early part of the year saw European leaders agreeing to a bail-out of Portugal and negotiations on a second support package for Greece. However, these actions, combined with the creation of a permanent stabilization fund, failed to pre- vent yields on Spanish and Italian bonds from rising sharply from August onward. In autumn, a reinforced “three-pronged” agreement on mea- sures to alleviate the pressure on Greece by European leaders, in- cluding a reduction in the net present value of Greek sovereign debt held by the private sector, a top-up for the eurozone bailout fund and requirements for European banks to hold more capital, also proved to be insufficient in preventing a further escalation of the crisis. While yields for debt issued by Spain and Italy rose fur- ther, core countries, including France, were also challenged. Fol- lowing another round of talks, eurozone countries and other EU members agreed to press ahead with an intergovernmental treaty enshrining new budgetary rules to tackle the crisis. Towards the end of the year, the European Central Bank announced two lon- ger-term refinancing operations which contributed to the stabili- zation of financial markets going into the early part of 2012. Nonetheless, discussions on measures and support for Greece were ongoing in early 2012. As a consequence of these developments, 12 out of 17 euro- zone countries were downgraded by rating agencies; France and Austria lost their Standard & Poor’s AAA status in early 2012. Meanwhile, politicians from the Democratic and Republican parties in the US struggled to reach an agreement to increase the US debt ceiling, the limit beyond which the US Department of the Treasury may not borrow. After the debt ceiling was initially reached in April without a political solution, extraordinary mea- sures were taken to allow the government to continue function- ing. A last-minute agreement was finally reached at the end of July. The political stalemate prompted Standard & Poor’s to down- grade the US from AAA to AA+ in August, quoting reduced con- fidence in the government’s ability to manage its finances. As the deadlock continued, the Congressional super committee set up to find ways to reduce the budget deficit also failed to reach an agreement. Nevertheless, the US dollar remained the world’s main reserve currency and yields on US 10-year government bonds fell to be- low 2% by the end of the year, while the labor market showed signs of slow improvements. 16 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O Foreign exchange markets: Swiss franc appreciation leads to Swiss National Bank intervention Switzerland was seen as a safe haven by investors amid a dete- riorating economic environment. The Swiss franc appreciated strongly against most major currencies during the first half of 2011. By early August, it neared parity with the euro. In light of these developments, on 6 September 2011 the SNB set a minimum rate of CHF 1.20 per euro, arguing that the massive overvaluation of the Swiss franc posed an acute threat to the Swiss economy and carried the risk of deflation. The SNB stressed that it would defend this rate with the utmost deter- mination and was prepared to buy foreign currency in unlimit- ed quantities. Since the announcement, the Swiss franc has fluctuated but remained slightly above the rate of CHF 1.20 per euro. However, the SNB has said the franc’s value remains high even at a rate of CHF 1.20 per euro, and unless the Swiss franc weakens further, additional SNB measures cannot be ruled out. Outlook Sovereign debt concerns will continue to dominate the market environment in 2012. While the world economy is expected to grow slightly below 3% for the year, high uncertainty in the eurozone remains the main factor weighing on growth pros- pects in the region, leading to a recessionary outlook. However, this should not be sufficient to derail recovery in the US and emerging economies. Against this backdrop and as inflation pressures remain limited, monetary policy in developed econo- mies will probably remain very accommodative up to at least well into 2013. Industry drivers banks, and this will have a fundamental impact on the investment banking business. Over time, this is likely to lead to a new equi- librium characterized by greater industry concentration, higher pricing, and reduced levels of compensation. Meanwhile, the i ncreased liquidity needs resulting from the Basel III liquidity cover- age ratio and net stable funding ratio are likely to lead to in- creased competition for both secured funding and deposits as a stable source of funding, thus leading to higher funding costs. As a consequence, banks are expected to focus even more on fee- generating businesses that require less capital and funding, with the resulting increased competition in these businesses putting pressure on returns as well. Regulation is putting pressure on banking models to become simpler and more transparent, more risk-averse and less lever- aged. As an indirect consequence of reform, consumers are likely to pay higher costs for banking services, while credit ex- tended to companies is already being constrained or made more expensive. ➔ Refer to the “Regulatory developments” section of this report for more information Macroeconomic environment impacting the industry A low-yield environment and flat yield curve, as well as very low growth, put pressure on net interest margins, while clients be- came more risk averse, undermining activity levels and trading volumes, especially in the second part of 2011. At the same time, investors adopted a risk-on, risk-off approach, resulting in in- creased correlation and volatility in the market. Together with regulatory changes, this made the operating environment particu- larly challenging for the banking industry which led to lower rev- enues and earnings, resulting in many banks taking measures to reduce costs, including redundancies. Regulation driving structural and business model changes Following the 2008 / 2009 financial crisis, regulators and legisla- tors in major financial centers embarked on a path toward signifi- cantly stricter regulation of financial services. This remains the big- gest driver of structural and business model changes in the industry. At the same time, regulatory uncertainty persists, hinder- ing the necessary adaptation process and presenting a major ob- stacle to future growth. On the one hand, such far-reaching legal reforms as the Inde- pendent Commission on Banking’s recommendations for the ring- fencing of retail activities in the UK, the US Volcker rule pro hibiting proprietary trading and, to some extent, the Swiss “too-big-to- fail” law are forcing substantial structural changes on banks. While implementation timetables extend over the next few years, banks must already start considering the implications, plan ahead and adjust their business models accordingly. On the other hand, new rules requiring banks to hold more capital and liquidity, starting with the Basel III international stan- dards, are impacting the relative attractiveness of certain busi- nesses and will generally pressure banks’ returns on equity. More than ever, regulatory capital is becoming a key constraint for Funding stability: a key near-term market challenge Obtaining sufficient medium- and long-term funding across all tenors to maintain a cost efficient and properly balanced liquidity and funding position was one of the key challenges for banks in 2011’s difficult market conditions, particularly in the second half of the year. Market turmoil, especially in Europe, disrupted both short-term and long-term unsecured funding markets. The cost of raising new long-term unsecured funding remained well above pre-crisis levels, while the securitization markets were partially closed. Many banks that were challenged to fulfill their appropriate funding requirements sourced liquidity from central banks. Start- ing in summer 2011, some European banks experienced a rather acute shortage of USD funding, as US money market funds sig- nificantly reduced their exposure to European banks. Differences in funding costs between the strongest banks and those perceived by the market as weaker are already increasing, and financial strength will continue to be a strong competitive advantage for the foreseeable future. ➔ Refer to the “Liquidity and funding management” section of this report for more information 17 Operating environment and strategy Current market climate and industry drivers Pressure on client confidentiality is materially changing the environment for Swiss banks Pressure on client confidentiality continues to increase world- wide. In this context, Switzerland signed withholding tax agree- ments with Germany and the UK in 2011. Under the agree- ments, persons resident in Germany and in the UK can have their existing banking relationships in Switzerland retrospec- tively taxed either by making a one-time tax payment or by dis- closing their accounts. If implemented, future investment in- come and capital gains of German and British bank clients in Switzerland (which are not disclosed) will be subject to a final withholding tax, with Switzerland transferring the proceeds to the German and British authorities. The tax agreements are cur- rently pending approval of the parliaments in all three countries and, if approved, should enter into force in early 2013. Addi- tional discussions are likely to occur between Switzerland and other countries. The pressure on client confidentiality will have an impact on the business of banks serving cross-border clients, particularly in Switzerland. As a consequence, banks such as UBS will need to adapt to new client demands, rethink their cross-border value propositions and make significant efforts to ensure operational readiness and compliance. This is likely to be a challenge for smaller banks and is expected to lead to further consolidation in the sector. 18 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O Regulatory developments In 2011, designing policy measures to address the “too-big-to-fail” issue was the key regulatory focus. Switzerland’s parliament adopted a law to define the regulatory framework for the country’s largest banks, while the G20 heads of states endorsed a set of measures for global systemically important banks, including additional loss absorbency require- ments, standards on effective resolution regimes and stricter supervision. Swiss “too-big-to-fail” law Following the recommendations presented in October 2010 by the Commission of Experts appointed by the Swiss Federal Government, the political process continued around the “too-big- to-fail” law to define the framework for the largest banks in Switzerland. The Federal Council issued an initial text for consultation be- tween December 2010 and March 2011 and presented the draft law and explanatory notes to the Swiss parliament in April 2011. Following the parliamentary process, the law (a revision of the Swiss banking law or Bankengesetz) was finally adopted on 30 September 2011. This revision applies to systemically important Swiss banks as designated by the Swiss National Bank, currently only UBS and Credit Suisse. Finally, in December 2011, the Swiss Federal Department of Finance (FDF) launched a consultation on the changes to the banking and capital adequacy ordinances nec- essary to implement the “too-big-to-fail” law. This consultation lasted until 16 January 2012. Key elements of the law and of the draft ordinances as pro- posed for consultation include the following: 1. Capital: higher capital requirements than for other banks, to be determined by the Swiss Financial Market Supervisory Au- thority (FINMA). We expect the capital requirements to consist of (i) a minimum of 4.5% (of risk-weighted assets (RWA)) in the form of common equity tier 1, (ii) a buffer of 8.5% com- posed of a minimum of 5.5% common equity tier 1 and up to 3% of high-trigger contingent capital, and (iii) a progressive component based on market share and aggregate exposure that can be fulfilled with low-trigger contingent capital. Ac- cordingly, the progressive component is currently expected to amount to 6%, bringing total capital requirements to 19%. The ordinances also contain provisions for a leverage ratio. 2. Organization: each systemically important bank is required to produce an emergency plan, demonstrating how their system- ically important functions within Switzerland can be main- tained in case of impending insolvency. 3. Liquidity and risk: banks will be subject to tighter liquidity and enhanced risk diversification requirements. The law contains a review clause to allow for future interna- tional policy developments to be taken into account. Also, the largest banks are eligible for a capital rebate, if they take actions that facilitate recovery and resolvability beyond ensuring that systemically important functions are maintained in case of insol- vency. The ordinances implementing the “too-big-to-fail” law must now be presented to the Swiss parliament for approval during the course of 2012. They are expected to come into force on 1 Janu- ary 2013. Thereafter, UBS must comply with the new rules, based on a transitional timetable lasting until the beginning of 2019. ➔ Refer to the “Capital management” section of this report for more information Proposals for the introduction of macroprudential mea- sures in Switzerland In November 2011, the FDF issued a consultation for the intro- duction of a countercyclical capital buffer in Switzerland. Accord- ing to the proposal, the buffer would apply in principle to all risk-weighted positions in Switzerland, but its scope can be lim- ited to certain sectors of the economy, for example, to credit positions related to the Swiss mortgage market. It would be capped at 2.5% of the risk-weighted positions in Switzerland. It would be the Swiss National Bank’s responsibility to request acti- vation of the buffer, spelling out its scope and the size in percent- age terms applicable to each affected category of risk-weighted positions. The Federal Council would have to take the ultimate decision on any proposed activation. These capital requirements would have to be satisfied with common equity tier 1. The FDF estimates the impact on the two large banks in terms of addi- tional capital requirements to be between 0.1% and 0.6% of RWA, depending on the scope and size of the buffer. These cap- ital requirements would be in addition to all other capital require- ments to which banks in Switzerland are subject. Following the FDF’s review of the various consultation responses, the effective date of implementation of the proposal – not synonymous with the potential activation date of the buffer – could be in the first half of 2012. Separately, the FDF issued a consultation paper outlining pro- posed changes to the capital adequacy ordinance focusing on increased capital requirements for mortgage loans secured by resi- dential properties. The proposal includes higher risk weights for residential mortgages under the Basel standard approach, where the loan-to-value or income coverage ratio exceeds prudent stan- dards. For banks using the advanced internal ratings-based ap- 19 Operating environment and strategy Regulatory developments proach, including UBS, the FDF proposes the introduction of an ad- ditional capital charge that corresponds to the difference between the determined RWA and an amount that corresponds to 80% of the RWA that the bank would report, if it adopted the standard ap- proach. If implemented as proposed, this would significantly in- crease the capital requirements for our Swiss mortgage book. International regulatory framework for large banks In December 2010, the Basel Committee on Banking Supervision (BCBS) launched “Basel III: A global regulatory framework for more resilient banks and banking systems” that set internation- ally agreed capital and liquidity standards. Since the beginning of 2011, international regulatory discussions have focused principally on an additional regulatory framework to solve the “too-big-to- fail” issue. On 25 June 2011, the Group of Governors and Heads of Supervision (GHOS), the oversight body of the BCBS, announced measures for global systemically important banks (G-SIB). Based on the results of a related consultation process over the summer, the heads of state at the G20 Summit in November 2011 endorsed a series of measures developed by the BCBS and the Financial Sta- bility Board (FSB). These measures must now be implemented in national regulatory frameworks and comprise the following: 1. A methodology to determine G-SIB and additional loss absor- bency requirements for G-SIB. The methodology uses an indi- cator-based measurement approach. Once implemented, banks identified as G-SIB would be required to hold additional capital requirements of 1% to 2.5% of RWA in the form of common equity tier 1 over and above the Basel III international standards. An additional, though currently empty, bucket with requirements of 3.5% of RWA has been created to discourage banks from increasing their systemic relevance further. These additional loss absorbency requirements will be phased-in in parallel with the capital conservation and countercyclical buf- fers of the Basel III framework, i.e. between 2016 and 2018, becoming fully effective on 1 January 2019. 2. The FSB’s “Key attributes of effective resolution regimes” are intended to set minimum international standards that will en- able authorities to resolve financial institutions in the case of insolvency, while maintaining the continuation of their vital economic functions and without exposing taxpayers to losses. The measures proposed are targeted at national authorities and comprise an international standard for national resolution regimes, requirements for recovery and resolution planning and resolvability assessments as well as institution-specific cross-border cooperation agreements. 3. More intensive and effective supervision of systemically impor- tant financial institutions (SIFI), including stronger supervisory mandates, resources and powers, and higher supervisory ex- pectations for risk management functions, data aggregation capabilities, risk governance and internal controls. Based on the G-SIB methodology put forward by the BCBS, an initial list of 29 G-SIFI was published by the FSB. The list includes UBS. While the term G-SIB applies specifically to banks and the list currently contains only banking groups, SIFI refers to financial in- stitutions in general. In the future, the list will be updated and could include G-SIFI that are not banking groups. The additional loss absorption measures referred to above are not expected to affect UBS, given that UBS will already be subject to the elevated capital requirements to be imposed by FINMA. Basel 2.5 market risk framework The primary effect of revisions to the Basel II market risk frame- work (commonly referred to as Basel 2.5) issued by the BCBS in 2009 was to introduce new requirements to incorporate the effects of stressed markets. The new requirements have led to lower Bank for International Settlements (BIS) tier 1 and total capital and to higher BIS RWA, thereby lowering UBS’s BIS tier 1 and total capital ratios. In line with the BIS transition requirement, the impact of Basel 2.5 is included in our disclosures from 31 De- cember 2011 onwards. ➔ Refer to the “Capital management” and “Basel 2.5 Pillar 3” sections for more information on the Basel 2.5 framework Regulatory developments in other jurisdictions Developments in US regulatory initiatives are focused on rule- making stemming from the Dodd-Frank Act passed in July 2010. Regulators have made significant progress with implementation of many provisions to occur in 2012. A key topic remains the so-called “Volcker Rule,” which would prohibit banking entities from engaging in proprietary trading, subject to a defined set of permitted exceptions, including market-making, hedging, and 20 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O underwriting activities. The rule would also limit banking entities from investing in hedge funds, private equity funds and other similar “covered funds” except under limited circumstances. The two-year transition period to comply with the Volcker Rule’s pro- hibition commences in July 2012. US regulators have proposed regulations to further implement the Volcker Rule, which are expected to be issued in final form later in 2012. UBS expects that certain of its historical trading activities will be considered prohibited proprietary trading. UBS Investment Bank’s decision to exit equities proprietary trading business segments, an- nounced during our Investor Day on 17 November 2011, in- cludes businesses likely to be prohibited. For principal trading activity permitted under one of the exemptions, UBS anticipates that it will be required to implement a compliance regime in- cluding calculation of required metrics for each trading book. As proposed, the implementing regulations may effectively require the Investment Bank to implement its compliance program glob- ally. Depending on the nature of the final rules, as well as the manner in which they are implemented, the Volcker Rule could have a substantial impact on market liquidity and the economics of market-making. UBS is not able to estimate the effect of im- plementation of the Volcker Rule compliance program on per- mitted trading activities until regulations (including the required metrics) are finalized and the required metrics are calculated and calibrated. The Volcker Rule also broadly limits investments and other transactional activities between banks and covered funds. The proposed implementing regulations both expand the scope of covered funds and provide only a very limited exclusion for activities of UBS outside the US. If adopted as proposed, the regulations could limit certain activities of UBS in relation to funds, particularly outside the US. US regulators have also begun to issue final regulations gov- erning swaps and derivatives markets as contemplated by the Dodd-Frank Act. UBS expects that UBS AG’s swaps activities will require it to register as a swap dealer with the US Commodity Futures Trading Commission and the Securities and Exchange Commission during 2012. The regulations will impose substantial new requirements for clearing, trade execution, recordkeeping, transaction reporting, compliance and conduct in relations to swaps activities. US regulators have not yet issued guidance on the application of US regulation to activities of registered swap dealers outside the US. The potential extraterritorial application of swap dealer regulatory requirements could impose a significant operational and compliance burden and creates the potential for duplicative and conflicting regulation. In the EU, 2011 saw many important legislative proposals from the European Commission (including a review of the Markets in Fi- nancial Instruments Directive (MiFID), Capital Requirements Directive IV, a review of the Market Abuse Directive and Credit Rating Agen- cies Regulation III), political agreement by the Council and European Parliament on the Short Selling Regulation, which has now moved to the rule-making phase, negotiations on the European Market In- frastructure Regulation, and consultations on secondary legislation on the Alternative Investment Fund Managers Directive. Of particular note are the legislative proposals on the review of MiFID, which contains a very broad reform agenda encompassing the trading market structure, transparency regime, regulation of commodity derivatives, investor protection and third-country ac- cess to the EU single market. The dossier is now being considered by EU legislators, with political agreement only expected in the first half of 2013. Significant progress was also made on the Eu- ropean Market Infrastructure Regulation, which once it comes into force in 2012, will mandate the clearing of all standardized over-the-counter derivative contracts through central counterpar- ties and reporting of over-the-counter derivative contracts to trade repositories in line with commitments made at the G20 summit in Pittsburgh in 2009. In the UK, in September 2011, the Independent Commission of Banking issued its final recommendations on reforms of the UK banking sector to promote financial stability and competition. These included the ring-fencing of retail activities and additional loss absorbency requirements for banks. The UK government responded in December 2011, agreeing with the thrust of the recommendations, but amending some points and subjecting a set of issues to a further consultation scheduled for the second quarter of 2012. On the reform of the UK regulatory architec- ture, the government is moving closer to transferring regulatory responsibility to the Financial Policy Committee (macroprudential regulator), the Prudential Regulation Authority (PRA) (prudential regulator for certain deposit-takers and investment banks) and the Financial Conduct Authority (conduct and markets regulator as well as prudential regulator for non-PRA firms). The related Financial Services Bill was introduced to Parliament in Janu- ary 2012, and is expected to receive Royal Assent by the end of 2012, with full implementation of the new architecture by the middle of 2013. 21 Operating environment and strategy Our strategy Our strategy UBS is a client-focused financial services firm that aims to provide superior financial advice and solutions to clients. Our strategy is shaped by our commitment to deliver attractive and sustainable risk-adjusted returns and takes into account the changing business environment and more stringent capital regulatory requirements. We believe the successful execution of this strategy will enable us to implement a progressive capital returns policy starting with the dividend of CHF 0.10 per share we propose to pay to our shareholders for the financial year 2011. At our Investor Day in November 2011, we provided a compre- hensive update on our strategic plans, which center on our pre- eminent wealth management businesses and our universal bank in Switzerland supported by our Global Asset Management busi- ness and the Investment Bank. Our strategy builds on the strengths of all of these businesses, and at the same time targets a signifi- cant reduction in risk-weighted assets and improvements to our strong capital position. At the end of 2011, our Basel 2.5 capital ratio was one of the highest in the industry at 15.9%, and our Basel III pro forma common equity ratio, calculated on the phased- in basis that will become applicable as of January 2013, stood at an estimated 10.8%. We will build on this strength as well as on our stable funding and sound liquidity positions by capitalizing on the complementary capabilities of all our businesses to generate more sustainable returns. This requires us to make changes to our risk profile and to focus and simplify some aspects of our Invest- ment Bank. In line with our desire to reduce complexity and drive high-quality risk-adjusted returns, we aim to reduce risk-weighted assets. To facilitate this objective and as announced during our Investor Day in November 2011, we transferred a portfolio of legacy assets from the Investment Bank to the Corporate Center. By 2016, we aim to reduce risk-weighted assets in the Investment Bank and in the legacy portfolio together by 50% from 30 Sep- tember 2011 levels calculated on a pro forma Basel III basis. Since the last financial crisis, we have turned around the perfor- mance of Wealth Management and Wealth Management Ameri- cas. When adjusted for restructuring costs, the gain made on the sale of our strategic investment portfolio in 2011 and a provision related to an arbitration matter in 2010, our wealth management businesses increased their 2011 aggregate profits by 19% to CHF 2.9 billion despite challenging market conditions. This progress also led to increased confidence amongst our clients and we re- corded combined net new money of CHF 35.6 billion compared with net outflows of CHF 18.2 billion in 2010. Combined invested assets increased by CHF 2 billion to CHF 1,459 billion. Improved profitability and our ability to attract new assets have enabled us both to retain and recruit high-quality advisors, as evidenced in particular by the significant reduction in advisor attrition rates in our Wealth Management Americas business. We remain commit- ted to our home market and to growing the profitability of our leading Retail & Corporate business, which is critical to the Group in terms of both revenue and profitability, as well as delivering growth to other businesses. The more stringent Basel III capital and liquidity requirements are likely to lead to increased competition for both secured funding and deposits as a stable source of fund- ing, and to higher funding costs. Our solid funding position, de- rived from our wealth management businesses and our Retail & Corporate business, as well as the stable earnings generated by our Retail & Corporate business, reinforces our financial position fur- ther. Our strategy centers on these businesses and we are commit- ted to building on the progress we have made in the last few years. Our strategy puts our clients at the center of everything we do and close collaboration between our businesses allows us to de- liver the very best of UBS to them. Today, our clients benefit from the comprehensive range of complementary capabilities offered by the Group as a whole. While collaboration has always been part of our corporate ethos, we believe there are further benefits to be delivered both for our clients and our shareholders. As a key part of this, the Investment Bank will work more closely with UBS’s wealth management businesses and increase its emphasis on the execution, advisory and research capabilities it provides to wealth management clients. The Investment Bank is critical to the success of our wealth management businesses and the Group as a whole. The comple- mentary needs of clients of the Investment Bank and of our wealth management businesses means we can maximize value for them and for the firm. Making connections between clients, markets and ideas is the essence of value creation, and these con- nections between private wealth and wholesale markets are espe- cially close in areas where we already have a strong presence, such as the Asia Pacific region. There, for example, we have the strongest combination of wealth management and investment banking businesses and through closer collaboration we can build further on our leading position. However, new regulations require us to build and improve the quality of our capital base, and so we are adjusting our Investment Bank to make it simpler, more fo- cused, less capital-intensive and able to deliver improved risk- adjusted returns. We will build on its strengths in equities, foreign exchange and advisory, while shaping the business in favor of the products and services that our clients demand, that offer the best growth opportunities and that are less capital-intensive. We will continue to invest in key geographies and products where we identify opportunities across the Group. In practice, this means that our Wealth Management business will work to 22 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O strengthen its industry-leading positioning, while accelerating de- velopment within growth markets. Our Wealth Management Americas business will continue with its strategic banking initia- tives, including its mortgage lending initiatives, to ensure contin- ued growth in balances coming from credit lines to our target high net worth and ultra high net worth client base. It will also sharpen the focus on “delivering the bank”, as we aim to become the provider of choice for companies, their employees and fami- lies for all their wealth management needs. Our Retail & Corpo- rate business will further enhance the range of life cycle products and services we offer our clients, while capitalizing on additional growth opportunities in advisory and execution. Our Global Asset Management business will expand its alternatives platform fur- ther and invest in fast-growing passive capabilities, while continu- ing to grow its third-party wholesale business. Finally, the Invest- ment Bank will work to service our core clients competitively, optimize capital allocation and reduce risk-weighted assets in core businesses with the goal of delivering attractive and sustainable risk-adjusted returns. Capital strength remains the foundation for our success and we will continue to build capital to achieve our targeted Basel III tier 1 common equity ratio of 13%. This target is above the regu- latory requirements for both the Swiss Financial Market Super- visory Authority (FINMA) and the Basel Committee on Banking Supervision and we believe this will provide even greater comfort to our clients and increase confidence further in the firm as a whole. We have built a strong track record both in balance sheet and legacy asset reductions. Over the past few years, we have successfully reduced our balance sheet and legacy positions: com- pared with the end of 2008, our balance sheet is over half a tril- lion Swiss francs smaller and our Basel II risk-weighted assets are approximately 35% lower. We have achieved significant reduc- tions in legacy positions in the Investment Bank since the end of 2008. We will continue to reduce risk by exiting or shrinking busi- nesses within our Investment Bank that deliver unattractive re- turns relative to their capital consumption, particularly in our fixed income, currencies and commodities operations. Vigilance on costs remains paramount in an industry undergo- ing fundamental change, and since the financial crisis of 2007– 2009 we have successfully reduced expenses, with costs for 2011 around 20% below 2008 levels. As concerns mounted around issues in the eurozone and the US during 2011, we took further action to prepare our cost base for more challenging market con- ditions. In August 2011, we announced a CHF 2 billion cost reduc- tion program. We have already seen some benefits as a result of these measures, and we expect more of the benefits to become apparent in our results over coming quarters. Given the cost re- ductions we have implemented and announced, scope for further material tactical cuts is limited. Thus we are focused on making strategic changes which go to the heart of our organization’s structure and design. While we believe these changes will be ad- equate to resize our cost base to the current environment and to meet our financial targets, we will monitor markets actively and, if conditions deteriorate materially, we will take further action. Our reputation remains our most valuable asset, and retain- ing the trust and confidence of all our stakeholders is critical to the long-term success of UBS. We have set ourselves the key strategic objective of strengthening our operational risk frame- work to ensure that all of our employees, at every level of the organization, pay even greater attention to safeguarding and reinforcing our reputation. As a first step, we are enhancing our performance management processes to ensure operational risk has a stronger weighting in the assessment of individuals, teams and business performance. This assessment will be fundamental to the success, compensation and career prospects of all UBS employees. We are confident that our focus, placing our clients at the cen- ter of everything we do, increasing collaboration across the firm, continuing to reduce risk-weighted assets and build capital, while remaining vigilant on costs, constitutes the right strategy to en- able us to deliver sustainable earnings and increasingly attractive capital returns to our shareholders. The strategic priorities for our businesses Our strategy centers on our Wealth Management and Wealth Management Americas businesses and our universal bank in Swit- zerland supported by our Global Asset Management business and the Investment Bank. Wealth management is a growth business area with attractive profit margins and high barriers to entry in many markets. Our preeminent Wealth Management business has a strong global footprint in all major financial centers, making it ideally placed to take advantage of these conditions and the opportunities they present. Wealth Management Americas is a client-focused and advisor-centric business. We believe the long-term growth pros- pects of the wealth management business are attractive in the Americas, with the high net worth and ultra high net worth mar- kets expected to be the fastest growing segments in terms of in- vested assets. Our strategy for Wealth Management builds on the consider- able progress we have made and aims to extend our industry- leading position. We plan to achieve this through a combination of targeted investments and the expansion of client advisor capa- bilities in markets we believe present attractive growth opportuni- ties. We aim to increase efficiency by consolidating our on- and offshore European businesses to reflect the convergence of client needs in this market, and we will focus our investment in regions with the highest potential for growth, particularly Asia Pacific and the emerging markets where we expect to see the fastest market growth in the global ultra high net worth and high net worth cli- ent segments. We also aim to enhance the business’s gross mar- gin through pricing initiatives and increasing lending opportuni- ties. Our transformation from a traditional private bank into a more dynamic investment manager with strong advisory capabili- ties will help to meet our clients’ needs whatever the market en- vironment. Our clients will continue to benefit from the access our Investment Bank gives them to execution, capital markets, invest- 23 Operating environment and strategy Our strategy ment insight and research, as well as advisory and other capabili- ties. In Wealth Management Americas we remain committed to our client-focused and advisor-centric strategy. We will build on our achievements by continuing to focus on delivering advice-based so- lutions and by seeking to capture more banking and lending oppor- tunities in the high net worth and ultra high net worth client seg- ments through our unique position in the market and our force of high-quality financial advisors. We will bolster our financial advisors’ productivity through increased training and platform enhance- ments, and work to strengthen our partnership with the Investment Bank further. We believe we are uniquely positioned to serve high net worth and ultra high net worth investors in the world’s largest wealth market. We are large enough to be relevant, but small enough to be nimble, enabling us to combine the advantages of both large and boutique wealth managers. We aim to differentiate ourselves from competitors by being a trusted and leading provider of financial advice and solutions to our clients by enabling our finan- cial advisors to leverage the full resources of UBS, including unique access to wealth management research and global solutions from our asset-gathering businesses and the Investment Bank. Our leading Retail & Corporate business constitutes a central building block for the universal bank model in Switzerland and is critical to the Group in terms of both revenue and profitability, as well as delivering growth to other businesses. Our goal is to deliver value-added services that make us the bank of choice for retail cli- ents. We will continue to refine our suite of life cycle-based offerings which provide our clients with products and dedicated services to fulfill their evolving needs. Through systematic and consistent sales management, we will continue to ensure an efficient and seamless sales process. We will continue to put our clients first by investing in our branches and electronic channels, using technology to comple- ment, rather than replace, our traditional branch network. Our diversity and size puts us in a unique position to serve all our clients’ complex financial needs. We aim to be the main bank of Swiss corporate and institutional clients ranging from small- and medium-size enterprises to multinationals, and from pension funds and commodity traders to banks and insurers. We strive to further expand and leverage our trans action banking capabilities and increase our presence and grow in the commodities trade fi- nance business. Combining the universal bank approach with our local market expertise will enable us to provide access to all UBS capabilities, while generating opportunities to cross-sell and in- crease referrals. Achieving these goals for the business will allow the firm to continue to benefit from the advantages this success brings to our global brand in general and to our leading wealth management business in particular. We have shaped our Global Asset Management strategy ac- cording to the changing needs of clients by developing a diversi- fied business model across investment capabilities, regions and distribution channels. The diversification of our business places us in a good position to benefit from shifting market dynamics and provides a solid foundation for capturing industry growth oppor- tunities. With long-term performance as our focus, we will work close- ly with clients in pursuit of their investment goals. In particular, we are continuing to expand our strong third-party institutional busi- ness both in developed and emerging markets; while expanding third-party wholesale distribution in the Americas and Europe, building on our strengths in areas including Asia Pacific and Swit- zerland. We also remain committed to delivering distinctive prod- ucts and solutions to the clients of UBS’s wealth management businesses. We aim to expand our successful alternatives plat- form, building on our established positions in real estate and fund of hedge fund businesses, and invest in our fast-growing passive capabilities, including exchange-traded funds and strategies tracking non-standard indices. The Investment Bank is critical to the success of UBS, and its strategy is built on the principles of client relevance, capital effi- ciency and close collaboration with our Wealth Management and Wealth Management Americas businesses. The business is focused firmly on meeting the needs of our corporate, institutional, sover- eign, ultra high net worth, wealth management and other clients while adapting to more stringent capital requirements. 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(cid:19)(cid:36)(cid:38)(cid:19)(cid:18)(cid:18)(cid:65)(cid:71) the first half of 2011 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O competitive and successful Investment Bank is critical to the suc- cess of our wealth management businesses. To achieve this we will build on our current strengths in providing flow, solutions and advisory services. We aim to grow our leading equities franchise through targeted technology investments and to reshape our fixed income, currencies and commodities business to materially reduce its level of risk and capital consumption and to make the business more client-focused. We also aim to increase market share in our investment banking department and global capital markets businesses by leveraging our client relationships and global footprint further. To ensure we are able to deliver effec- tively, we will be highly disciplined in executing, trading, actively managing our portfolio and using our resources to the best pos- sible advantage. To support our goal of becoming more focused and less complex while taking on less risk, we will continue with our efforts to increase our capital efficiency and to actively reduce risk-weighted assets. We will do this by optimizing our business mix in favor of products and services that have the highest rele- vance to clients, offer the best growth opportunities and are less capital-intensive. Reducing risk and building capital the firm. Our capital strength is the foundation for the future suc- cess of our businesses and today our Basel 2.5 capital ratio is one of the highest in the industry. We will continue derisking our bal- ance sheet and building our capital base to ensure we remain among the world’s best-capitalized banks under Basel III. Our strategic imperative to achieve our targets for Basel III cap- ital ratios requires a rapid and prudent reduction of risk deployed in our Investment Bank and in the legacy portfolio in the Corpo- rate Center. We intend to reduce the Group’s Basel III risk-weight- ed assets by a third with a targeted reduction of risk-weighted assets in the Investment Bank and the legacy portfolio of around half by 2016. These plans to improve capital efficiency in the In- vestment Bank involve a reduction in risk-weighted assets in our core businesses of approximately 35% and a reduction of around 90% in legacy risk-weighted assets by 2016. We will continue to invest in growth businesses where we have strong market posi- tions and in areas critical to the success of the Group as a whole. ➔ Refer to the “Capital management” section of this report for more information on Basel III Measuring our performance We benefit from a strong liquidity position as measured under the proposed Basel III guidelines, and our mix of funding sources is stable and well diversified by market, product and currency, with client deposits providing the single largest source of funding for To track our progress in executing our strategy, we have estab- lished annual target performance ranges for each of our business divisions and for the Group as a whole. These ranges focus on the key performance metrics of growth, profitability and efficiency. 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(cid:89)(cid:75)(cid:78)(cid:78)(cid:2)(cid:68)(cid:71)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:70)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:84)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:71)(cid:70)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:71)(cid:72)(cid:72)(cid:71)(cid:69)(cid:86)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:386)(cid:84)(cid:85)(cid:86)(cid:2)(cid:83)(cid:87)(cid:67)(cid:84)(cid:86)(cid:71)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:20)(cid:18)(cid:19)(cid:20)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:75)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(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:16) 25 500 400 300 200 100 0 (cid:19)(cid:36)(cid:38)(cid:19)(cid:18)(cid:20)(cid:65)(cid:71) Operating environment and strategy Our strategy judge our future success. While any target framework will natu- rally be subject to the vagaries of the market, we believe these ranges are realistic and achievable on an annual basis over the next five years. As we have previously stated, we have taken 2013 as the starting point for the Group’s return on equity target and the Investment Bank’s return on attributed equity target, because 2012 will be a year of transition for the Investment Bank in which we will focus on reducing risk-weighted assets in the business. The target performance ranges for all other business divisions ap- ply from 2012. Achieving these divisional targets should enable the Group to deliver a return on equity of 12–17% starting in 2013 and a cost / income ratio of 65–75%. UBS Switzerland UBS is the largest and strongest universal bank in Switzerland. Switzerland is the only country where we operate in retail, corporate and institutional banking, wealth and asset management as well as investment banking. Our strong position in the Swiss home market is crucial to sustain our global brand and further grow our global core business. We are fully committed to our home market, and by building on our 150 years of banking heri- tage, UBS Switzerland maintains a leading position in all five business areas. With approximately 300 branches and 4,700 client-facing staff, we are able to reach approximately 80% of Swiss wealth, one in three households, one in every three wealthy individuals and almost half of all Swiss companies. We strive to be the leading bank in Switzerland with regard to client satisfaction, employee engagement and sustainable profitability. UBS Switzer- land’s unique universal bank model is central to our success. Our dedicated Swiss management team has representa- tives from all five business areas, and ensures a uniform approach to the market when offering our full range of banking products, expertise and services. Our cross-divisional management approach allows us to utilize efficiently our existing resources, promotes cross-divisional thinking and enables seamless collaboration across all business areas. As a result, we are in a unique position to efficiently serve our clients with a comprehensive range of banking products and services to fit their needs. We are able to differentiate ourselves through leveraging our strengths across all segments while ensuring stability and continuity throughout the client’s life cycle. Our universal bank model has proven itself to be highly effective in Switzerland and provides a substantial part of the Group’s revenues. Given the strength of the economy and stable political environment in Switzerland, the country remains an attractive and growing financial market. This inherent stability and growth has been the basis for our success and the constant contribution from UBS Switzerland to the Group financial performance. Thanks to our universal bank model, vast client base and branch network, we are well-positioned to capture future market growth and strengthen our leading position in our home market. 26 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O Measurement of performance Performance measures Key performance indicators Our key performance indicators (KPI) framework focuses on key drivers of total shareholder return, which measures the total re- turn of a UBS share, i.e. both the dividend yield and the capital appreciation of the share price. The KPI framework is reviewed by our senior management on a regular basis to ensure that it is al- ways aligned to the changing business conditions. The Group and business divisions are managed based on this KPI framework, which emphasizes risk awareness, effective risk and capital management, sustainable profitability, and client focus. Both Group and business division KPI are taken into account in determining variable compensation of executives and personnel. ➔ Refer to the “Compensation” section of this report for more information on total shareholder return The Group and business division KPI are explained in the “Group / business division key performance indicators” table. In keeping our focus on the key performance metrics of growth, profitability and efficiency, a few enhancements will be made to the KPI framework with effect from the first quarter of 2012 reporting onwards. ➔ Refer to the “Changes to key performance indicators in 2012” sidebar for more information Group / business division key performance indicators Key performance indicators Definition Net profit growth (%) Pre-tax profit growth (%) Cost / income ratio (%) Return on equity (RoE) (%) Return on attributed equity (RoaE) (%) Return on assets, gross (%) Return on risk-weighted 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 con- tinuing 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) 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 (%) FINMA tier 1 capital / average adjusted assets as per definition by the Swiss Financial Market Supervisory Authority (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 outflow 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 loans portfolio as a % of total loans portfolio, gross (%) Impaired loans portfolio, gross / total loans portfolio, gross Average VaR (1-day, 95% con- fidence, five years of historical data) 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 Wealth Management & Swiss Bank t n e m e g a n a M h t l a e W e t a r o p r o C & l i a t e R p u o r G t n e m e g a n a M h t l a e W s a c i r e m A t e s s A l a b o G l t n e m e g a n a M k n a B t n e m t s e v n I 27 Operating environment and strategy Our strategy Client / invested assets reporting We report two distinct metrics for client funds: – The measure “client assets” encompasses all client assets man- aged 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 only 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 port- folios, managed institutional assets, managed fund assets and wealth management securities or brokerage accounts. It excludes all assets held for purely transactional and custody-only purposes, as we only administer the assets and do not offer advice on how these assets should be invested. Non-bankable assets (for exam- ple, art collections) and deposits from third-party banks for fund- ing or trading purposes are excluded from both measures. Net new money in a reported period is the amount of invested assets that are entrusted to us by new or existing clients less those withdrawn by existing clients or clients who terminated their rela- tionship 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. However, in Wealth Management Americas we also show net new money including interest and dividend income to facilitate comparison with a US peer. Market and currency movements, as well as fees, commissions and interest 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 invest- ed assets and client assets as a result of a change in the service level delivered are treated as net new money inflows or outflows. The Investment Bank does not track invested assets and net new money. However, when a client is transferred from the Investment Bank to another business division, this produces net new money even though client assets were already with UBS. 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 indepen- dent service to their respective client, add value and generate revenues. Most double counting arises when mutual funds are managed by Global Asset Management and sold by Wealth Management & Swiss Bank and Wealth Management Americas. The business divisions involved count these funds as invested as- sets. 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 216 billion of invested assets were double counted in 2011 (CHF 225 billion in 2010). ➔ Refer to “Note 34 Invested assets and net new money” in the “Financial information” section of this report for more informa- tion Seasonal characteristics Our main businesses do not generally show significant seasonal patterns, although the Investment Bank’s revenues have been af- fected in some years by the seasonal characteristics of general fi- nancial market activity and deal flows in investment banking. Other business divisions are only slightly impacted by seasonal components, such as asset withdrawals that tend to occur in the fourth quarter and by lower client activity levels related to the summer and end-of-year holiday seasons. 28 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O Changes to key performance indicators in 2012 Commencing in the first quarter of 2012, we will implement two new key perfor- mance indicators for our Retail & Corporate segment; namely, “Net new business volume growth (%)” and “Net interest margin (%)”. Both new key performance indicators will be used to assess and monitor the performance of this business. “Net new business volume growth (%)” will capture our success in expanding our business volume from lending to clients as well as acquiring client assets. The “Net interest margin (%)” is a key profit driver as net interest income contributes to more than half of our total operating income. Wealth Management Americas will also report a new key performance indicator “Share of recurring revenue (%)” to measure its business performance. The currently disclosed KPI “Net new money (CHF billion)” for the Group and the segments Wealth Management, Wealth Management Americas and Global Asset Management will be replaced by “Net new money growth (%)”. Our senior management considers the change from an absolute to a growth rate of net new money to be a more meaningful key performance indicator. Group / business division key performance indicators Key performance indicators Definition Net new business volume growth (%) Net interest margin (%) Net new business volume (i.e. total net inflows and outflows of client assets and loans) for the period (annualized as applicable) / business volume (i.e. total of client assets and loans) at the beginning of the period Net interest income on a year-to-date basis (annualized as applicable) / average loans (year-to-date basis) Share of recurring revenue (%) Total recurring fees and net interest income / total operating income Net new money growth (%) Net new money for the period (annualized as applicable) / invested assets at the beginning of the period t n e m e g a n a M h t l a e W e t a r o p r o C & l i a t e R t n e m e g a n a M s a c i r e m A h t l a e W t e s s A l a b o G l t n e m e g a n a M p u o r G 29 Operating environment and strategy Our strategy Wealth Management Headquartered in Switzerland, with a presence in over 40 countries, Wealth Management provides wealthy private clients with financial advice, products and tools to fit their individual needs. Business Wealth Management delivers comprehensive financial services to wealthy private clients around the world – except those served by Wealth Management Americas. With CHF 750 billion of invested assets at the end of 2011, we are one of the largest wealth man- agers in the world. Our clients benefit from the entire spectrum of UBS resources, ranging from asset management to estate plan- ning and corporate finance advice, in addition to the specific wealth management products and services outlined below. An open product platform provides clients with access to a wide array of products from third-party providers that complement our own product lines. Strategy and clients Our goal is to be the bank of choice for wealthy individuals worldwide. We offer products and services to private clients, fo- cusing in particular on the ultra high net worth (clients with investable assets of more than CHF 50 million) and high net worth client segments (clients with investable assets between CHF 2 million and CHF 50 million). In addition, we also provide wealth management solutions, products and services to financial intermediaries. We remain confident on the long-term growth prospects of our wealth management business, and we expect the wealth management market to grow twice as fast as the gross domestic product in all regions of the globe. From a client segment per- spective, the global ultra high net worth market shows the high- est growth potential, followed by the high net worth market. Our broad client base and strong global footprint put us in an excel- lent position to take advantage of the substantial growth oppor- tunities this expected wealth creation presents. This applies in particular to Asia, Latin America, the Middle East and Central and Eastern Europe, the areas where we expect to see the fastest mar- ket growth based on economic development and entrepreneurial wealth creation. In the key onshore locations in which we are ex- panding, our Wealth Management business benefits from our established local Investment Bank and Global Asset Management business relationships. We continue to build on our integrated client service model, bundling competencies across the Group to identify investment opportunities in all market conditions and tailor products to indi- vidual client needs. We intend to increase our client advisor base to about 4,700 advisors in the medium term, with a particular emphasis on the emerging markets and Asia Pacific growth re- gions. Our global booking centers give us a strong local presence that enables us to book client assets in multiple locations. In an increasingly complex regulatory environment, we aim to differen- tiate ourselves from competitors through our sophisticated and robust compliance framework. In our pursuit of the highest pos- sible levels of compliance, we make ongoing investments to opti- mize our risk management processes and conduct extensive employee training. We strive to adapt quickly to changes to regu- Invested assets by client domicile(cid:15) In %, except where indicated Total: CHF 750 billion (cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:2)(cid:68)(cid:91)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:89)(cid:71)(cid:67)(cid:78)(cid:86)(cid:74)(cid:124)(cid:2) (cid:43)(cid:80)(cid:2)(cid:7)(cid:14)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:71)(cid:70) (cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:25)(cid:23)(cid:18)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) On 31.12.11 22 10 30 22 Europe, Middle East and Africa Switzerland Americas Asia Pacific 46 (cid:49)(cid:80)(cid:2)(cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:23)(cid:19) 1BD014_e (cid:19)(cid:23) (cid:19)(cid:19) (cid:20)(cid:21) (cid:30)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:19)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:37)(cid:42)(cid:40)(cid:2)(cid:19)(cid:115)(cid:23)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:23)(cid:115)(cid:19)(cid:18)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:2) (cid:32)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:19)(cid:18)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:2) (cid:19)(cid:36)(cid:38)(cid:18)(cid:19)(cid:23)(cid:65)(cid:71) y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O latory and suitability requirements in every region, drawing on our local know-how and experience. In Asia Pacific, we continue to focus on Hong Kong and Singa- pore, the leading financial centers in the region, as well as on se- lective presences in the major onshore markets. Today, we are present in seven markets and have already established sizeable businesses in several onshore locations such as Japan and Taiwan. We continue to invest in our local presences in China and India to capture long-term growth opportunities. In the emerging markets, we are focusing on the Middle East, Latin America, as well as Central and Eastern Europe, and we al- ready have local presences in more than 20 countries. As the major- ity of our clients from emerging markets prefer to book their assets in established financial centers, we are strengthening our emerging markets coverage through our booking centers in the US, the UK and Switzerland. We will continue to expand our local presence where appropriate, for example, through the establishment of new advisory offices, such as the one recently opened in Israel. In Europe, our growth ambition is underpinned by an estab- lished European footprint in all major booking centers and a broad franchise. We are combining the management of our Euro- pean offshore and onshore businesses to reflect the converging needs of clients in the region. This reorganization enables us to leverage our extensive Swiss product offering, while creating economies of scale and helping us to deal more efficiently with increased regulatory requirements. In Switzerland, our wealth management operations’ close col- laboration with our leading retail, corporate, asset management and investment banking businesses gives us the foundation to grow market share in our Wealth Management franchise, and pro- vides our clients access to investment insight and research, prod- ucts, capital markets and execution as well as to advisory and other capabilities. Our extensive branch network, including over 100 wealth management offices, fosters referrals from the Swiss corpo- rate and retail client base as well as retail clients’ development to our wealth management operations as their wealth increases. We aim to build on our position as market leader in the ultra high net worth segment, which we regard as having considerable growth potential, by continuously enhancing our service and product offering. We have, for example, recently introduced a new product group in our philanthropy offering called “Impact Investing”, which aims to make measurable, positive social and environmental impacts at the same time as generating financial returns for the investor. Moreover, to cover the needs of the larg- est 250 family offices worldwide, we have created the Global Family Office Group as a joint venture between Wealth Manage- ment and the Investment Bank. With its dedicated specialist teams from both Wealth Management and the Investment Bank, the Global Family Office Group delivers the full range of capabili- ties our integrated bank has to offer this highly sophisticated cli- ent group. Our Global Financial Intermediaries (Global FIM) business serves approximately 1,700 asset managers. Based on defined business models, Global FIM supports financial intermediaries as a strategic business partner, offering professional investment advi- sory services and tailored solutions that enable them to advise their clients more effectively. Global FIM is represented in 11 Swiss locations and 14 international locations. We regard financial in- termediaries as an attractive client segment offering high growth potential. Organizational structure Wealth Management is headquartered in Switzerland, with a presence in over 40 countries and approximately 200 wealth management and representative offices, half of which are outside Switzerland, mostly in Europe, Asia Pacific, Latin America and the Middle East. As of the end of 2011, Wealth Management em- ployed roughly 16,000 people worldwide, of whom approximate- ly 4,200 were client advisors. The Wealth Management business unit is governed by an executive committee and is primarily orga- nized along regional lines with the business areas Asia Pacific, (cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:2)(cid:68)(cid:91)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:124)(cid:2) (cid:43)(cid:80)(cid:2)(cid:7)(cid:14)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:71)(cid:70) (cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:2)(cid:68)(cid:91)(cid:2)(cid:69)(cid:87)(cid:84)(cid:84)(cid:71)(cid:80)(cid:69)(cid:91)(cid:124)(cid:2) 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(cid:18)(cid:16)(cid:23)(cid:18) (cid:18)(cid:16)(cid:20)(cid:23) (cid:18)(cid:16)(cid:18)(cid:18) (cid:19)(cid:16)(cid:18)(cid:18) (cid:18)(cid:16)(cid:25)(cid:23) (cid:18)(cid:16)(cid:23)(cid:18) (cid:18)(cid:16)(cid:20)(cid:23) (cid:18)(cid:16)(cid:18)(cid:18) Operating environment and strategy Our strategy Europe, Global Emerging Markets, Switzerland and Global Ultra High Net Worth Clients. Our business is supported by a Chief In- vestment Officer and a global Investment Products & Services unit as well as central functions. Competitors Our major global competitors include Credit Suisse, Julius Bär, HSBC, Deutsche Bank, JP Morgan and Citigroup. In the European domestic markets, we primarily compete with the private banking operations of such large local banks as Barclays in the UK, Deutsche Bank in Germany and Unicredit in Italy. The private banking franchises of HSBC, Citigroup and Credit Suisse are our main competitors in Asia Pacific. Products and services As a global, integrated firm, UBS has the necessary expertise to identify appropriate investment opportunities for clients and the local presence to advise them in a timely manner. We provide our clients with the financial advice, products and tools that best fit their individual needs. We accommodate the individual needs of  our clients by offering services across the full investment spectrum, from execution only to discretionary mandates. Clients who opt for a discretionary mandate delegate the management of their assets to a team of professional portfolio managers. Cli- ents who prefer to be actively involved in the management of their assets can choose an advisory mandate, in which invest- ment professionals provide analysis and monitoring of portfolios, together with tailor-made proposals to support investment deci- sions. Our clients can trade the full range of financial instruments from single securities, such as equities and bonds, to various in- vestment funds, structured products and alternative investments. Additionally, we offer structured lending, corporate finance and wealth planning advice on client needs such as funding for edu- cation, inheritance and succession. For our ultra high net worth clients, we offer institutional-like servicing that provides special access to our Investment Bank and Global Asset Management offerings. Financial markets have changed fundamentally over the last few years and are characterized by a high degree of uncertainty and volatility. In these difficult market conditions our clients have become increasingly focused on protecting their assets and ex- pect strong advisory support for their investment decisions. We are, therefore, continuing to evolve our wealth management business model from a traditional private bank towards an invest- ment manager with strong advisory capabilities. This implies ac- tive relationships between our highly qualified client advisors and their clients. Fast and focused communication, new investment ideas, access to growth markets and wealth protection are critical for our clients’ success. To this end, and with the ultimate goal of improving our clients’ investment performance, we have set up a new team under the leadership of our Chief Investment Officer that formulates our investment view by integrating the research 32 and expertise of our investment specialists across all business divi- sions and from all around the globe. Based on this “UBS house view”, our client advisors actively and regularly inform our clients about our opinion on developments in the financial markets. Cli- ents receive investment proposals directly related to our house view, as well as solutions for alternative scenarios should clients have diverging views on market trends. Our Investment Products & Services unit ensures our offering is consistently adapted to market conditions by aligning our products with the investment views of our Chief Investment Officer. Wealth Management also gives clients access to the knowledge, and product and service offerings from Global Asset Management and the Investment Bank, complemented by  an open product platform providing access to a wide array of prod- ucts from third-party providers. By aggregating private invest- ment flows into institutional-size flows, we are in a position to offer our Wealth Management clients access to investments that would otherwise only be available to institutional clients. Our integrated client service model allows client advisors to analyze their clients’ financial situation, and develop and imple- ment systematic, tailored investment strategies. These strategies are regularly reviewed and based on individual client profiles, which comprise all important investment criteria such as a given client’s life cycle needs, risk appetite and performance expecta- tions. We continuously train our client advisors and provide them with ongoing support to ensure they present the best solutions to our clients. 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comprehensive financial products and services to our retail, corporate and institutional clients, provide stable and substantial profits for the Group and create revenue opportunities for other businesses within the Group. Business Strategy and clients Our Retail & Corporate business unit delivers comprehensive fi- nancial products and services to our retail, corporate and institu- tional clients in Switzerland, and maintains a leading position in these client segments. As shown in the “Business mix” chart, Re- tail & Corporate has generated stable profits which have contrib- uted substantially to the overall financial performance of the Group. We are market leaders in the retail and corporate loan market in Switzerland, with a highly collateralized lending port- folio of CHF 135 billion on 31 December 2011, as shown in the “Loans, gross” chart. This portfolio is managed for profitability rather than for market share. Our Retail & Corporate unit constitutes a central building block for the universal bank model of UBS Switzerland. Retail & Corpo- rate supports our other business divisions by referring clients to them and assisting retail clients to build their wealth to a level at which we can transfer them to our Wealth Management unit. Furthermore, Retail & Corporate leverages the cross-selling poten- tial of products and services provided by our asset-gathering and investment banking businesses. Together, these actions contrib- ute strongly to our Group profitability. In addition, Retail & Corpo- rate provides and pays for a substantial part of the Swiss infra- structure, including nearly 300 branches, and the Swiss banking product platform. Our goal is to deliver value-added services that make us the bank of choice for retail clients in Switzerland. With a network of around 300 branches, 1,250 automated teller machines, self-ser- vice terminals and customer service centers, alongside e-banking and mobile banking, we serve one in three households in Switzer- land. We are continuously refining our suite of life cycle-based offerings which provide our clients with products and dedicated services to fulfill their evolving needs. Through systematic and consistent sales management, we ensure an efficient and seam- less sales process. In order to improve our clients’ experience of banking with us, we will continue to invest in our branches and electronic channels, using technology to complement, rather than replace, our traditional branch network. Our size in Switzerland and the diversity of businesses we operate put us in a unique position to serve all our clients’ complex financial needs. We aim to be the main bank of corpo- rate and institutional clients ranging from small- and medium- size enterprises to multinationals, and from pension funds and commodity traders to banks and insurers. We serve almost one in two Swiss companies, including more than 85% of the 1,000 largest Swiss corporations, as well as one in three pension funds in Switzerland, including 75 of the largest 100. 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(cid:86)(cid:74)(cid:71)(cid:2)(cid:78)(cid:67)(cid:86)(cid:71)(cid:85)(cid:86)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:2)(cid:84)(cid:71)(cid:88)(cid:75)(cid:71)(cid:89)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:21)(cid:2)(cid:43)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(cid:2)(cid:73)(cid:87)(cid:67)(cid:84)(cid:67)(cid:80)(cid:86)(cid:71)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:81)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:69)(cid:81)(cid:78)(cid:78)(cid:67)(cid:86)(cid:71)(cid:84)(cid:67)(cid:78)(cid:16) (cid:19)(cid:36)(cid:38)(cid:18)(cid:20)(cid:20)(cid:65)(cid:71) (cid:19)(cid:36)(cid:38)(cid:18)(cid:20)(cid:19)(cid:65)(cid:71) 33 Operating environment and strategy Our strategy bilities (e.g. payment and cash management services, custody solutions, trade and export finance). In addition, we plan to increase our presence and grow in the commodities trade finance business. Combining the universal bank approach with our local market expertise across all Swiss regions enables us to optimize our client service by providing access to all UBS capa- bilities while generating opportunities to cross-sell and increase referrals. As the leading retail and corporate banking business in Swit- zerland, we understand the importance of our role in supporting the needs of our clients. In 2011, we initiated the necessary steps to hone and simplify our service commitments across the busi- ness, including streamlining our processes, reducing the adminis- trative burden on our client advisors and enhancing their produc- tivity without compromising our risk standards. Organizational structure The Retail & Corporate unit is a core element of UBS Switzerland’s universal bank delivery model, which allows us to extend the expertise of the entire bank to our Swiss retail, corporate and institutional clients. To ensure consistent delivery throughout Switzerland, the Swiss network is organized into ten geographical regions. Dedi- cated management teams in the regions and in the branches derived from all business areas are responsible for executing the universal bank model, fostering cross-divisional collaboration and ensuring that the public and clients have a uniform experience based on a single corporate image and shared standards of service. Competitors In the Swiss retail banking business, our competitors are Credit Suisse, Raiffeisen, the cantonal banks and PostFinance, as well as other regional and local Swiss banks. In the Swiss corporate and institutional business, our main competitors are Credit Suisse, the cantonal banks and foreign banks in Switzerland. Products and services Our retail clients have access to a life cycle-based, comprehensive offering including cash accounts, payments, savings and retirement solutions, investment fund products, residential mortgages, as well as life insurance and advisory services. These are tailored to clients’ individual needs and requirements. We provide financing solutions to our corporate clients, offering access to capital markets (equity and debt capital), syndicated and structured credit, private place- ments, leasing and traditional financing. Our transaction banking offers solutions for payments and cash management services, trade and export finance, receivable finance, as well as global custody solutions to institutional clients. Our close collaboration with the Investment Bank enables us to offer capital market products such as foreign exchange offerings, hedging strategies (currency, interest rates, and commodities) and trading (equities and fixed income, currencies and commodities), and to provide corporate finance ad- vice in fields such as mid-market mergers and acquisitions, corpo- rate succession planning and real estate. We also cater to the asset management needs of institutional clients by offering portfolio management mandates, strategy execution and fund distribution. 34 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O Wealth Management Americas 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 high net worth and ultra high net worth individuals and families. Business Wealth Management Americas is among the leading wealth man- agers in the Americas in terms of financial advisor productivity and invested assets, and includes the domestic US and Canadian businesses as well as international business booked in the US. On 31 December 2011, the business division had CHF 709 billion in invested assets. Strategy and clients Our goal is to be the best wealth management business in the Americas. In order to achieve this, we must continue to be both client-focused and advisor-centric. We deliver a fully integrated set of advice-based wealth management solutions and banking services through our financial advisors in key metropolitan mar- kets to meet the needs of our target client segments: high net worth clients (USD 1 million to USD 10 million in investable assets) and ultra high net worth clients (more than USD 10 million in in- vestable assets), while also serving the needs of the core affluent (USD 250,000 to USD 1 million in investable assets). We are com- mitted to providing high-quality advice to our clients across all their financial needs by employing the best professionals in the industry, delivering the highest standard of execution, and run- ning a streamlined and efficient business. We believe we are uniquely positioned to serve high net worth and ultra high net worth investors in the world’s largest wealth market. With a network of almost 7,000 financial advisors and CHF 709 billion in invested assets, we are large enough to be rel- evant, but small enough to be nimble, enabling us to combine the (cid:41)(cid:71)(cid:81)(cid:73)(cid:84)(cid:67)(cid:82)(cid:74)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:82)(cid:84)(cid:71)(cid:85)(cid:71)(cid:80)(cid:69)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:77)(cid:71)(cid:91)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:85)(cid:124)(cid:2) (cid:2) (cid:37)(cid:67)(cid:78)(cid:73)(cid:67)(cid:84)(cid:91)(cid:2)(cid:10)(cid:37)(cid:35)(cid:48)(cid:11)(cid:28)(cid:2)(cid:19)(cid:2)(cid:81)(cid:72)(cid:386)(cid:69)(cid:71) (cid:56)(cid:67)(cid:80)(cid:69)(cid:81)(cid:87)(cid:88)(cid:71)(cid:84)(cid:2)(cid:10)(cid:37)(cid:35)(cid:48)(cid:11)(cid:28)(cid:2)(cid:19)(cid:2)(cid:81)(cid:72)(cid:386)(cid:69)(cid:71) (cid:35)(cid:46)(cid:35)(cid:53)(cid:45)(cid:35) (cid:57)(cid:35)(cid:53)(cid:42)(cid:43)(cid:48)(cid:41)(cid:54)(cid:49)(cid:48) 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(cid:48)(cid:39)(cid:57)(cid:2)(cid:47)(cid:39)(cid:58)(cid:43)(cid:37)(cid:49) (cid:49)(cid:45)(cid:46)(cid:35)(cid:42)(cid:49)(cid:47)(cid:35) (cid:35)(cid:52)(cid:45)(cid:35)(cid:48)(cid:53)(cid:35)(cid:53) (cid:54)(cid:39)(cid:48)(cid:48)(cid:39)(cid:53)(cid:53)(cid:39)(cid:39) (cid:48)(cid:49)(cid:52)(cid:54)(cid:42)(cid:2)(cid:37)(cid:35)(cid:52)(cid:49)(cid:46)(cid:43)(cid:48)(cid:35) (cid:53)(cid:49)(cid:55)(cid:54)(cid:42)(cid:2) (cid:37)(cid:35)(cid:52)(cid:49)(cid:46)(cid:43)(cid:48)(cid:35) (cid:47)(cid:43)(cid:53)(cid:53)(cid:43)(cid:53)(cid:53)(cid:43)(cid:50)(cid:50)(cid:43) (cid:35)(cid:46)(cid:35)(cid:36)(cid:35)(cid:47)(cid:35) (cid:41)(cid:39)(cid:49)(cid:52)(cid:41)(cid:43)(cid:35) (cid:54)(cid:39)(cid:58)(cid:35)(cid:53) (cid:46)(cid:49)(cid:55)(cid:43)(cid:53)(cid:43)(cid:35)(cid:48)(cid:35) (cid:42)(cid:35)(cid:57)(cid:35)(cid:43)(cid:43) (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:2)(cid:81)(cid:72)(cid:386)(cid:69)(cid:71)(cid:85)(cid:28) (cid:30)(cid:2)(cid:23)(cid:2) (cid:23)(cid:115)(cid:19)(cid:23) (cid:32)(cid:2)(cid:19)(cid:23) (cid:40)(cid:46)(cid:49)(cid:52)(cid:43)(cid:38)(cid:35) (cid:50)(cid:55)(cid:39)(cid:52)(cid:54)(cid:49)(cid:2)(cid:52)(cid:43)(cid:37)(cid:49) (cid:20)(cid:36)(cid:38)(cid:18)(cid:19)(cid:18)(cid:65)(cid:71) 35 Operating environment and strategy Our strategy advantages of both large and boutique wealth managers. We aim to differentiate ourselves from competitors and be a trusted and leading provider of financial advice and solutions to our clients by enabling our financial advisors to leverage the full resources of UBS, including unique access to wealth management research and global solutions from our asset-gathering businesses and the Investment Bank. These resources are augmented by our commit- ment to an open architecture and our partnerships with many of the world’s leading third-party institutions. Moreover, our wealth management offerings are complemented by banking, mortgage, and financing solutions that enable us to provide advice on both the asset and liability sides of our clients’ financial balance sheets. We believe the long-term growth prospects of the wealth management business are attractive in the Americas, with high net worth and ultra high net worth expected to be the fastest growing segments in terms of invested assets in the region. In 2011, our strategy and focus led to an improvement in financial results, retention of high-quality financial advisors and net new money growth. Building on this progress, we aim for continued growth in our business by developing our financial advisors’ focus toward advice-based solutions, leveraging the global capabilities of UBS to clients by partnering with the Investment Bank and Global Asset Management, and delivering banking and lending services that complement our wealth management solutions. We also plan to continue investing in improved platforms and tech- nology. We expect these efforts to  enable us to achieve higher levels of client satisfaction, strengthen our client relationships, and lead to greater revenue productivity among our financial ad- visors and a more profitable business. Organizational structure Wealth Management Americas consists of branch networks in the US, Puerto Rico and Canada, with 6,967 financial advisors as of 31 December 2011. Most corporate and operational functions of the business division are located in the home office in Wee- hawken, New Jersey. In the US and Puerto Rico, Wealth Management Americas operates through direct and indirect subsidiaries of UBS AG. Secu- rities and operations activities are conducted primarily through two registered broker-dealers, UBS Financial Services Inc. and UBS Financial Services Incorporated of Puerto Rico. Our banking ser- vices in the US include those conducted through the UBS AG branches and UBS Bank USA, a federally regulated Utah bank, which provides Federal Deposit Insurance Corporation (FDIC)- insured deposit accounts, enhanced collateralized lending services and mortgages. Canadian wealth management and banking operations are conducted through UBS Bank (Canada). Significant business transfers in the past few years included the  2009 sales of 56 branches to Stifel, Nicolaus & Company, Incorporated and UBS’s Brazilian financial services business, UBS Pactual, to BTG Investments, LP. Competitors Wealth Management Americas competes with national full-ser- vice brokerage firms, domestic and global private banks, regional broker-dealers, independent broker-dealers, registered invest- (cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:2)(cid:68)(cid:91)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:124)(cid:2) (cid:43)(cid:80)(cid:2)(cid:7)(cid:14)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:71)(cid:70) (cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:2)(cid:68)(cid:91)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:89)(cid:71)(cid:67)(cid:78)(cid:86)(cid:74)(cid:124)(cid:2) (cid:43)(cid:80)(cid:2)(cid:7)(cid:14)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2) (cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:25)(cid:18)(cid:27)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:18)(cid:27)(cid:2) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:18)(cid:2) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:49)(cid:80)(cid:2)(cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:24)(cid:27)(cid:18)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:24)(cid:26)(cid:27)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:25)(cid:18)(cid:27)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2) (cid:49)(cid:80)(cid:2) (cid:19)(cid:18)(cid:18) (cid:2)(cid:25)(cid:23) (cid:2)(cid:23)(cid:18) (cid:2)(cid:20)(cid:23) (cid:2)(cid:2)(cid:2)(cid:18) (cid:26) (cid:20)(cid:27) (cid:20)(cid:21) (cid:27) (cid:20)(cid:24) (cid:23) (cid:27) (cid:20)(cid:27) (cid:20)(cid:25) (cid:26) (cid:20)(cid:21) (cid:22) (cid:27) (cid:20)(cid:26) (cid:20)(cid:25) (cid:26) (cid:20)(cid:21) (cid:23) (cid:35)(cid:69)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:85)(cid:17)(cid:79)(cid:81)(cid:80)(cid:71)(cid:91)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:85) (cid:36)(cid:81)(cid:80)(cid:70)(cid:85) (cid:55)(cid:36)(cid:53)(cid:2)(cid:79)(cid:87)(cid:86)(cid:87)(cid:67)(cid:78)(cid:2)(cid:72)(cid:87)(cid:80)(cid:70)(cid:85) (cid:39)(cid:90)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:79)(cid:87)(cid:86)(cid:87)(cid:67)(cid:78)(cid:2)(cid:72)(cid:87)(cid:80)(cid:70)(cid:85) (cid:39)(cid:83)(cid:87)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85) (cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:19) (cid:19)(cid:2)(cid:43)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(cid:2)(cid:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:87)(cid:84)(cid:71)(cid:70)(cid:2)(cid:82)(cid:84)(cid:81)(cid:70)(cid:87)(cid:69)(cid:86)(cid:85)(cid:14)(cid:2)(cid:67)(cid:78)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:386)(cid:70)(cid:87)(cid:69)(cid:75)(cid:67)(cid:84)(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:85)(cid:16) 36 (cid:21)(cid:20) (cid:20)(cid:23) (cid:30)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:19)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:37)(cid:42)(cid:40)(cid:2)(cid:19)(cid:115)(cid:23)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:23)(cid:115)(cid:19)(cid:18)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:2) (cid:32)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:19)(cid:18)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:2) (cid:19)(cid:20) (cid:21)(cid:19) (cid:19)(cid:36)(cid:38)(cid:18)(cid:19)(cid:20)(cid:65)(cid:71) (cid:19)(cid:36)(cid:38)(cid:18)(cid:19)(cid:21)(cid:65)(cid:71) (cid:19)(cid:16)(cid:18)(cid:18) (cid:18)(cid:16)(cid:25)(cid:23) (cid:18)(cid:16)(cid:23)(cid:18) (cid:18)(cid:16)(cid:20)(cid:23) (cid:18)(cid:16)(cid:18)(cid:18) y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O ment advisors, trust companies, and other financial services firms offering wealth management services to US and Canadian private clients, as well as foreign non-resident clients seeking wealth management services within the US. Our main competitors in- clude the wealth management businesses of Bank of America, Morgan Stanley, and Wells Fargo. Products and services Wealth Management Americas offers clients a full array of solu- tions that focus on the individual financial needs of each client. Comprehensive planning supports clients through the various stages of their lives, including education funding, charitable giving, tax management strategies, estate strategies, insurance, retirement, and trusts and foundations with corresponding prod- uct offerings for each stage. Our advisors work closely with inter- nal consultants in areas such as wealth planning, port folio strate- gy, retirement and annuities, alternative investments, managed accounts, structured products, banking and lending, equities, and fixed income. Clients also benefit from our dedicated Wealth Management Research team, which provides research guidance to help support the clients’ investment decisions. Our offerings are designed to meet a wide variety of invest- ment objectives, including wealth accumulation and preservation, income generation and portfolio diversification. To address the full range of our clients’ financial needs, we also offer competitive lending and cash management services such as securities-backed lending, the resource management account, FDIC-insured depos- its, mortgages and credit cards. Additionally, our Corporate Employee Financial Services unit provides a comprehensive, personalized stock benefit plan and related services to many of the largest US corporations and their executives. For corporate and institutional clients, we offer a ro- bust suite of solutions, including equity compensation, adminis- tration, investment consulting, defined benefit and contribution programs and cash management services. Our clients can choose asset-based pricing, transaction-based pricing or a combination of both. Asset-based accounts have access to both discretionary and non-discretionary investment advisory programs. Non-discretionary advisory programs enable the client to maintain control over all account transactions, while clients with discretionary advisory programs direct investment professionals to manage a portfolio on their behalf. Depending on the type of dis- cretionary program, the client can give investment discretion to a qualified financial advisor, a team of our investment professionals or a third-party investment manager. Separately, mutual fund advi- sory programs are also offered, whereby a financial advisor works with the client to create a diversified portfolio of mutual funds guided by a research-driven asset allocation framework. For clients who favor individual securities, we offer a broad range of equity and fixed income instruments. In addition, qualified clients may take advantage of structured products and alternative investment offerings to complement their portfolio strategies. All of these solutions are supported by a dedicated markets execution group. This group partners with the Investment Bank and Global Asset Management in order to access the resources of the entire firm as well as third-party investment banks and asset management firms. 37 Operating environment and strategy Our strategy Global Asset Management Global Asset Management is a large-scale asset manager with businesses well diversified across regions, capabilities and distribution channels. We serve third-party institutional and wholesale clients and the clients of UBS’s wealth management businesses with a broad range of investment capabilities and styles across all major traditional and alternative asset classes. Business Global Asset Management’s investment capabilities encompass equities, fixed income, currency, hedge funds, real estate, infra- structure and private equity. We also enable clients to invest in a combination of different asset classes through multi-asset strate- gies. Our fund services unit, a global fund administration busi- ness, provides professional services including legal fund set-up, accounting and reporting. Invested assets totaled CHF 574 billion and assets under administration were CHF 375 billion on 31 De- cember 2011. Global Asset Management is a leading fund house in Europe, the largest mutual fund manager in Switzerland and one of the largest fund of hedge funds and real estate investment managers in the world. Strategy With long-term performance as our focus, we work closely with clients in pursuit of their investment goals. In particular, we are continuing to expand our strong third-party institutional business both in developed and emerging markets while also expanding third-party wholesale distribution in the Americas and Europe, building on our strengths in this channel in Asia Pacific and Swit- zerland. We also remain committed to delivering distinctive prod- ucts and solutions to the clients of UBS’s wealth management businesses. In the highly volatile market environment, investors are in- creasingly looking for market-like returns (“beta”) from passive investments, complemented by higher potential returns (“al- pha”) from higher-risk investments, including alternatives. In response to this, we continue to expand our successful alterna- tives platform, building on our established positions in real estate and fund of hedge funds businesses. In addition, we con- tinue to invest in our fast-growing passive capabilities, including exchange-traded funds and strategies tracking non-standard indices. The current environment and near-term outlook are character- ized by market uncertainty, investor risk aversion and lower inter- est rates. In this environment, the diversification of our business places us in a good position to benefit from shifting market dy- namics and provides a solid foundation for capturing industry growth opportunities. 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g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O The long-term outlook for the asset management industry re- mains strong, with three main drivers: (i) the financial crisis has reduced the assets of both the retired and the working popula- tion, creating a pressing need for increased savings rates; (ii) emerging markets will continue to drive growth in the mutual funds industry and retirement schemes in these markets; and (iii) as governments focus on reducing deficits, they will need to re- duce support for benefits and pensions and will face increased pressure to privatize infrastructure assets. Competitors Our competitors include global firms with wide-ranging capabili- ties, such as Fidelity Investments, AllianceBernstein Investments, BlackRock, JP Morgan Asset Management and Goldman Sachs Asset Management. Most of our other competitors are more re- gional or local specialist niche players that focus mainly on one asset class, particularly in the real estate, hedge fund or infrastruc- ture investment areas. Organizational structure Clients and markets The “Business structure” chart shows the investment, distribution and support structure of the business division. We employ around 3,800 personnel in 26 countries, and have our principal offices in London, Chicago, Frankfurt, Hartford, Hong Kong, New York, Paris, Singapore, Sydney, Tokyo and Zurich. Global Asset Manage- ment operates through UBS AG or its subsidiaries. Significant recent acquisitions, business transfers and other developments – In November 2011, investment management responsibility for a private equity fund of funds was transferred to Global Asset Management from Wealth Management & Swiss Bank. – In October 2011, Global Asset Management completed the acquisition of the ING Investment Management Limited busi- ness in Australia. This currently operates as a subsidiary of UBS Global Asset Management (Australia) Ltd and will be fully inte- grated during 2012. – In July 2011, the infrastructure and private equity fund of funds businesses were transferred from our alternative and quantita- tive investment area to our infrastructure investment area which, as a result, was renamed infrastructure and private eq- uity. – In January 2011, investment management responsibility for a multi-manager alternative fund was transferred to Global Asset Management from Wealth Management & Swiss Bank. – In October 2010, UBS increased from 51.0% to 94.9% its holding in UBS Real Estate Kapitalanlagegesellschaft mbH (KAG), a Global Asset Management joint venture with Siemens in Munich, Germany. – In September 2010, investment management responsibility for Wealth Management Americas’ US hedge fund business was transferred to Global Asset Management’s alternative and quantitative investments area. A joint venture between the two business divisions aims to deliver attractive hedge fund and fund of hedge funds solutions to Wealth Management Americas’ clients. – In December 2009, the real estate investment management business of Wealth Management & Swiss Bank was transferred to Global Asset Management. – In September 2009, UBS completed the sale of its Brazilian fi- nancial services business, including its asset management busi- ness, UBS Pactual Asset Management. Global Asset Management serves third-party institutional and wholesale clients, and the clients of UBS’s wealth management businesses. As shown in the chart of invested assets by channel, at 31 December 2011, approximately 66% of invested assets originated from third-party clients, including institutional clients (e.g. corporate and public pension plans, governments and their central banks) and wholesale clients (e.g. financial intermediaries and distribution partners). A further 34% originated from UBS’s wealth management businesses. Products and services Global Asset Management’s business lines are as follows: tradi- tional investments (equities, fixed income and global investment solutions); alternative and quantitative investments; global real estate; infrastructure and private equity; and fund services. Reve- nues and key performance indicators are reported according to these business lines and a breakdown of invested assets by busi- ness line is shown in the chart on the next page. 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 1,000 registered investment funds, exchange-traded funds and other investment vehicles in a wide variety of jurisdictions and across all major asset classes. 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spectrum of investment styles with varying risk and return objectives. It has three investment pillars with distinct strategies, including core / value (portfolios managed according to a price-to-intrinsic-value philosophy), growth (portfolios of quality growing companies that we believe to be undervalued in the market) and structured (strategies that em- ploy proprietary analytics and quantitative methods, including passive). – Fixed income offers a diverse range of global, regional and lo- cal market-based investment strategies. Its capabilities include single-sector strategies such as government and corporate bond portfolios, multi-sector strategies such as core and core plus bond, and extended-sector strategies such as high-yield and emerging market debt. In addition to this suite of tradi- tional fixed income offerings, the team also manages uncon- strained fixed income, currency strategies and customized so- lutions. – Global investment solutions offers active asset allocation, cur- rency, multi-manager, structured solutions, risk advisory and strategic investment advisory services. It manages a wide array of regional and global multi-asset investment strategies across the full investment universe and risk / return spectrum, struc- tured portfolios, convertible bonds and absolute-return strate- gies. Through its risk management and strategic investment advisory services, it supports clients in a wide range of invest- ment-related functions. 40 – Alternative and quantitative investments has two primary business lines – Alternative Investment Solutions (AIS) and O’Connor. AIS offers a full spectrum of hedge fund solutions and advisory services including multi-manager strategies. O’Connor is a key provider of single-manager global hedge funds. – Global real estate actively manages real estate investments globally and regionally within Asia, Europe, Switzerland and (cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:2)(cid:68)(cid:91)(cid:2)(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:78)(cid:75)(cid:80)(cid:71) (cid:43)(cid:80)(cid:2)(cid:7)(cid:14)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:71)(cid:70) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:18)(cid:27)(cid:2) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:18)(cid:2) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:23)(cid:26)(cid:21)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:23)(cid:23)(cid:27)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:23)(cid:25)(cid:22)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2) (cid:25) (cid:25) (cid:25) (cid:24) (cid:19) (cid:25) (cid:23) (cid:26)(cid:24) (cid:26)(cid:25) (cid:26)(cid:25) (cid:49)(cid:80)(cid:2) (cid:19)(cid:18)(cid:18) (cid:2)(cid:25)(cid:23) (cid:2)(cid:23)(cid:18) (cid:2)(cid:20)(cid:23) (cid:2)(cid:2)(cid:2)(cid:18) (cid:54)(cid:84)(cid:67)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85) (cid:35)(cid:78)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:83)(cid:87)(cid:67)(cid:80)(cid:86)(cid:75)(cid:86)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85) (cid:41)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:67)(cid:78)(cid:2)(cid:71)(cid:85)(cid:86)(cid:67)(cid:86)(cid:71) (cid:43)(cid:80)(cid:72)(cid:84)(cid:67)(cid:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:87)(cid:84)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:82)(cid:84)(cid:75)(cid:88)(cid:67)(cid:86)(cid:71)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91) (cid:19)(cid:36)(cid:38)(cid:18)(cid:22)(cid:22)(cid:65)(cid:71) (cid:19)(cid:16)(cid:18)(cid:18) (cid:18)(cid:16)(cid:25)(cid:23) (cid:18)(cid:16)(cid:23)(cid:18) (cid:18)(cid:16)(cid:20)(cid:23) (cid:18)(cid:16)(cid:18)(cid:18) the US, 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. It offers direct and indirect investment, multi-manager and real estate securi- ties strategies. – Infrastructure and private equity manages direct infrastructure investment and multi-manager infrastructure and private eq- uity strategies for both institutional and high net worth inves- tors. Infrastructure asset management manages direct invest- ments in core infrastructure assets globally. Alternative Fund Advisory (AFA) infrastructure and AFA private equity construct broadly diversified fund of funds portfolios across the infra- structure and private equity asset classes, respectively. – Fund services, the global fund administration business, pro- vides professional services, including legal set-up, reporting and accounting for retail and institutional investment funds, hedge funds and other alternative products. Distribution Our capabilities and services are distributed through our regional business structure (Americas, Asia Pacific, Europe and Switzer- land) as detailed in the “Business structure” chart. A breakdown of invested assets across these regions is shown in the bar chart. Through regional distribution, we are able to leverage the full resources of our global investment platforms and functions to provide clients with relevant investment management products and services, client servicing and reporting at a local level. We also have a dedicated global sovereign markets group to deliver an integrated approach to this client segment and ensure that sovereign institutions receive the focused advisory, invest- ment and training solutions they require. (cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:2)(cid:68)(cid:91)(cid:2)(cid:84)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:19) (cid:43)(cid:80)(cid:2)(cid:7)(cid:14)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:71)(cid:70) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:18)(cid:27)(cid:2) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:18)(cid:2) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:23)(cid:26)(cid:21)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:23)(cid:23)(cid:27)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:23)(cid:25)(cid:22)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2) (cid:21)(cid:23) (cid:20)(cid:18) (cid:19)(cid:20) (cid:21)(cid:21) (cid:21)(cid:21) (cid:20)(cid:18) (cid:19)(cid:24) (cid:21)(cid:19) (cid:21)(cid:21) (cid:19)(cid:26) (cid:20)(cid:18) (cid:20)(cid:27) (cid:49)(cid:80)(cid:2) (cid:19)(cid:18)(cid:18) (cid:2)(cid:25)(cid:23) (cid:2)(cid:23)(cid:18) (cid:2)(cid:20)(cid:23) (cid:2)(cid:2)(cid:2)(cid:18) (cid:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85) (cid:35)(cid:85)(cid:75)(cid:67)(cid:2)(cid:50)(cid:67)(cid:69)(cid:75)(cid:386)(cid:69) (cid:39)(cid:87)(cid:84)(cid:81)(cid:82)(cid:71)(cid:14)(cid:2)(cid:47)(cid:75)(cid:70)(cid:70)(cid:78)(cid:71)(cid:2)(cid:39)(cid:67)(cid:85)(cid:86)(cid:14)(cid:2)(cid:35)(cid:72)(cid:84)(cid:75)(cid:69)(cid:67) (cid:53)(cid:89)(cid:75)(cid:86)(cid:92)(cid:71)(cid:84)(cid:78)(cid:67)(cid:80)(cid:70) (cid:19)(cid:36)(cid:38)(cid:18)(cid:22)(cid:20)(cid:65)(cid:71) (cid:19)(cid:2)(cid:35)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:2)(cid:84)(cid:71)(cid:82)(cid:84)(cid:71)(cid:85)(cid:71)(cid:80)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(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:2)(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:70)(cid:75)(cid:88)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:2)(cid:89)(cid:81)(cid:84)(cid:78)(cid:70)(cid:89)(cid:75)(cid:70)(cid:71)(cid:16)(cid:2) (cid:54)(cid:74)(cid:71)(cid:2)(cid:84)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:85)(cid:82)(cid:78)(cid:75)(cid:86)(cid:2)(cid:75)(cid:85)(cid:2)(cid:82)(cid:84)(cid:75)(cid:79)(cid:67)(cid:84)(cid:75)(cid:78)(cid:91)(cid:2)(cid:68)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:2)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:75)(cid:80)(cid:73)(cid:2)(cid:78)(cid:81)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:16) y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O 41 (cid:19)(cid:16)(cid:18)(cid:18) (cid:18)(cid:16)(cid:25)(cid:23) (cid:18)(cid:16)(cid:23)(cid:18) (cid:18)(cid:16)(cid:20)(cid:23) (cid:18)(cid:16)(cid:18)(cid:18) Operating environment and strategy Our strategy Investment Bank The Investment Bank provides a broad range of products and services in equities, fixed income, foreign exchange and commodities to corporate and institutional clients, sovereign and government bodies, financial intermediaries, alterna- tive asset managers and UBS’s wealth management clients. The Investment Bank is an active participant in capital markets flow activities, including sales, trading and market-making across a broad range of securities. It provides financial solutions to a wide range of clients, and offers advisory and analytics services in all major capital markets. Business The Investment Bank is organized into three distinct business ar- eas to align the delivery of our services and the execution of our strategy with the needs of our clients: – equities – fixed income, currencies and commodities (FICC) – the investment banking department The equities and FICC businesses are aligned within securities to foster a higher degree of cooperation across sales and trading. Together, they offer access to the primary and secondary securi- ties markets, foreign exchange and prime brokerage services as well as research on equities, fixed income, commodities, and eco- nomic and quantitative research. The investment banking depart- ment provides advice on mergers and acquisitions and raises capital for corporate, institutional and sovereign clients in the debt and equity markets. In addition, the investment banking de- partment plays a lead role in marketing UBS to corporates by le- veraging senior client relationships. Strategy The Investment Bank is critical to the success of UBS’s strategy. It is well positioned across many businesses and regions – for ex- ample, we are among the market leaders in equities, equity de- rivatives and foreign exchange and we have a strong presence across all businesses in Asia. We are repositioning the Investment Bank to align our busi- nesses more closely with the needs of our core clients and the wealth management franchise, and to address economic and regulatory changes that affect the entire industry. Our business model aims to be simpler and more focused, with the goal of optimizing returns predicated on the efficient execution of our strategy across three strategic pillars: (i) flow; (ii) solutions; and (iii) advisory and analytics. Each pillar represents businesses that have similar transactional characteristics and success factors. We believe that while none of the three pillars can support our franchise or deliver adequate returns on its own, a carefully bal- anced combination can better protect our profitability against fluctuations in client demand, costs or market movements. To support our goal of becoming more focused and less com- 42 plex while taking on less risk, we have intensified efforts to in- crease our capital efficiency and to actively reduce risk-weighted assets. In line with this strategy, we plan on reducing risk-weight- ed assets in the core businesses by approximately one-third and reducing our legacy portfolio (managed and reported in the Cor- porate Center starting with the first quarter of 2012) by close to 90% by the end of 2016. In our operating plan, we estimate the potential revenue loss from the risk-weighted assets reduction in our core businesses to be approximately CHF 500 million per an- num. To this end, we will optimize our business mix in favor of products and services that have the highest relevance to clients, offer the best growth opportunities and are less capital intensive. – In reshaping our securities business, we are exiting certain ar- eas, including FICC asset securitization, complex structured products, FICC macro directional and equities proprietary trading. With the exception of macro directional and equities proprietary trading, the assets associated with the areas we intend to exit will be managed in a legacy asset portfolio, which will be reported in the Corporate Center starting with the first quarter of 2012. – We have also revised our approach to other businesses with high capital intensity relative to returns, such as long-dated rates derivatives in flow rates, which will be scaled back sig- (cid:49)(cid:87)(cid:84)(cid:2)(cid:85)(cid:86)(cid:84)(cid:67)(cid:86)(cid:71)(cid:73)(cid:91) (cid:57)(cid:74)(cid:67)(cid:86)(cid:33) (cid:37)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:85)(cid:33) (cid:40)(cid:78)(cid:81)(cid:89) (cid:53)(cid:81)(cid:78)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85) (cid:39)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80) (cid:47)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:15)(cid:79)(cid:67)(cid:77)(cid:75)(cid:80)(cid:73) (cid:37)(cid:78)(cid:71)(cid:67)(cid:84)(cid:75)(cid:80)(cid:73) (cid:53)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:77)(cid:71)(cid:91)(cid:2)(cid:69)(cid:78)(cid:75)(cid:71)(cid:80)(cid:86)(cid:85) (cid:53)(cid:71)(cid:78)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:15)(cid:86)(cid:67)(cid:77)(cid:75)(cid:80)(cid:73) (cid:47)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:71)(cid:90)(cid:82)(cid:71)(cid:84)(cid:86)(cid:75)(cid:85)(cid:71) (cid:35)(cid:70)(cid:88)(cid:75)(cid:85)(cid:81)(cid:84)(cid:91)(cid:2) (cid:67)(cid:80)(cid:70)(cid:2)(cid:67)(cid:80)(cid:67)(cid:78)(cid:91)(cid:86)(cid:75)(cid:69)(cid:85) (cid:52)(cid:71)(cid:85)(cid:71)(cid:67)(cid:84)(cid:69)(cid:74)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:85)(cid:75)(cid:73)(cid:74)(cid:86) (cid:35)(cid:70)(cid:88)(cid:75)(cid:85)(cid:81)(cid:84)(cid:91) (cid:35)(cid:80)(cid:67)(cid:78)(cid:91)(cid:85)(cid:75)(cid:85) (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:14)(cid:2) (cid:75)(cid:80)(cid:85)(cid:86)(cid:75)(cid:86)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78) (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:14)(cid:2) (cid:69)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:85)(cid:14)(cid:2)(cid:85)(cid:81)(cid:88)(cid:71)(cid:84)(cid:71)(cid:75)(cid:73)(cid:80)(cid:85)(cid:14)(cid:2) (cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:81)(cid:84)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:85)(cid:86)(cid:75)(cid:86)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78) (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:14)(cid:2) (cid:69)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:85)(cid:14)(cid:2)(cid:85)(cid:81)(cid:88)(cid:71)(cid:84)(cid:71)(cid:75)(cid:73)(cid:80)(cid:85)(cid:14)(cid:2) (cid:85)(cid:82)(cid:81)(cid:80)(cid:85)(cid:81)(cid:84)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:85)(cid:86)(cid:75)(cid:86)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78) (cid:42)(cid:81)(cid:89)(cid:33) (cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:73)(cid:84)(cid:81)(cid:89) (cid:49)(cid:82)(cid:86)(cid:75)(cid:79)(cid:75)(cid:92)(cid:71) (cid:47)(cid:81)(cid:80)(cid:71)(cid:86)(cid:75)(cid:92)(cid:71) (cid:37)(cid:17)(cid:43)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81) (cid:37)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:80)(cid:85)(cid:75)(cid:86)(cid:91) (cid:52)(cid:81)(cid:39) (cid:42)(cid:75)(cid:73)(cid:74) (cid:46)(cid:81)(cid:89) (cid:46)(cid:81)(cid:89) (cid:47)(cid:71)(cid:70)(cid:75)(cid:87)(cid:79)(cid:115)(cid:42)(cid:75)(cid:73)(cid:74) (cid:42)(cid:75)(cid:73)(cid:74) (cid:46)(cid:81)(cid:89) (cid:47)(cid:71)(cid:70)(cid:75)(cid:87)(cid:79) (cid:42)(cid:75)(cid:73)(cid:74) (cid:47)(cid:71)(cid:70)(cid:75)(cid:87)(cid:79)(cid:115)(cid:42)(cid:75)(cid:73)(cid:74) (cid:19)(cid:36)(cid:38)(cid:18)(cid:23)(cid:19)(cid:65)(cid:71) y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O nificantly. We will nevertheless continue to invest in businesses in which we have a strong presence and those that offer at- tractive risk-return characteristics, such as cash and equity de- rivatives, foreign exchange, certain credit businesses and com- modities. – In advisory and capital markets, we are increasing the intensity of our coverage to leverage our global footprint more effec- tively. This includes strengthening our presence in the Ameri- cas, restoring our position in Europe, the Middle East and Af- rica and extending our leading market position in Asia Pacific. Across the Investment Bank, we will continue to invest in in- frastructure, technology, the retention and development of our people and hiring of talent in key areas to ensure the successful execution of our strategy. The Investment Bank is also investing to improve its internal risk control systems and increasing its fo- cus on corporate governance. In 2011, we continued to focus on the efficiency of our cost base through a number of initiatives, and we expect the full impact of our activities to be realized dur- ing the course of 2012 and 2013. These initiatives include head- count reductions, refocusing of discretionary spending on client revenue generating activities and increasing efficiency of our op- erating model and processes. ➔ Please refer to the “Our strategy” section of this report for further information about our strategy and targets Organizational structure The Investment Bank comprises the three business areas described in the “Business” section above. Additionally, the global capital markets business is a joint venture between securities and the in- vestment banking department, which consists of two separate areas: equity capital markets and debt capital markets. Global leveraged finance is a joint venture between the investment bank- ing department and FICC and includes the global syndicated finance business. We employ approximately 17,000 personnel in over 30 coun- tries. We operate through branches and subsidiaries of UBS AG. Securities activities in the US are conducted through UBS Securi- ties LLC, a registered broker-dealer. Significant recent acquisitions, disposals and business transfers In September 2009, UBS completed the sale of its Brazilian finan- cial services business, UBS Pactual. In April 2010, UBS entered into an agreement to acquire Link Investimentos, a Brazilian financial services firm. Competitors Our main competitors are the major global investment banks, in- cluding Bank of America / Merrill Lynch, Barclays Capital, Citi- group, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase and Morgan Stanley. Other competing firms are active in many of the businesses and markets in which we participate. Products and services Securities The securities segment provides a coordinated distribution plat- form with enhanced cross-asset delivery and specialist skills. Secu- rities research is a consistently top-ranked research house, which provides in-depth investment analysis across various asset classes of more than 3,400 companies worldwide, or about 85% of the global market capitalization, in over 50 markets. In addition, we have a specialist research function offering quantitative analysis, socially responsible investing, alternative research, valuation and accounting, and special situations analysis. Equities We are one of the world’s largest participants in the primary and secondary markets for cash equity and equity-related prod- ucts, including listed options, structured products, equity-linked securities, swaps, futures and over-the-counter (OTC) derivative contracts. Our equities franchise utilizes a client-centric model to serve hedge funds, asset managers, wealth management ad- visors, banks, pension funds and corporations globally. We structure, execute, distribute, finance and clear cash equity and equity-related products, in addition to distributing new equity and equity-related issues. Our prime services franchise includes prime brokerage and execution and clearing services, which en- ables clients to address regulatory changes in the OTC deriva- tive markets. The main business lines of the equities business area are out- lined below: – Cash equities provides clients with liquidity, investment advi- sory, trade execution and related consultancy services, togeth- er with comprehensive access to primary markets, corporate management and subject matter experts. We offer full-service trade execution for single stocks and portfolios, including cap- ital commitment, block trading, small-cap execution and com- mission management services. In addition, we provide clients with a full suite of advanced electronic trading algorithms, strategies and analytical tools. – Derivatives and equity-linked provides a full range of flow, structured, synthetic and equity-linked products with global access to primary and secondary markets. The franchise en- ables clients to hedge and manage risk through a wide range of exchange-traded, OTC, securitized and fund– wrapped products. We create customized structured prod- ucts for institutional and retail investors with returns linked to individual companies, sectors and indices across multiple asset classes. – Prime services offers an integrated global prime brokerage business, including multi-asset class clearing and custody, cap- ital consultancy, financing, securities lending and equity swaps execution. In addition, we provide clients with execution and clearing capabilities on futures and options contracts across all asset classes, including equities, fixed income and commodi- ties, on more than 70 exchanges globally. 43 Operating environment and strategy Our strategy Fixed income, currencies and commodities The FICC business area delivers products and solutions to corpo- rate, institutional and public-sector clients in all major markets, as well as to private clients via targeted intermediaries. The main business lines of the FICC business area are outlined below: – Macro consists of the foreign exchange, money market and interest rate sales and trading businesses, as well as cash and collateral trading. We provide a range of foreign exchange, precious metals, treasury, and liquidity management solutions to institutional and private clients via targeted intermediaries. Interest rate activities include standardized rate-driven prod- ucts and services such as interest rate derivatives trading, un- derwriting and trading of government and agency securities. – Credit sales and trading encompasses the origination, under- writing, trading and distribution of cash and synthetic products across the credit spectrum – bonds, derivatives, notes and loans. We are active across all major markets in secondary trad- ing and market making of flow and structured credit instru- ments, securitized products and loans, and are focused on providing market liquidity and tailored solutions to our clients. In partnership with the investment banking department, we also provide capital markets debt financing and liability risk management solutions to corporates and institutions. – The emerging markets business offers investors in Central and Eastern Europe, the Middle East, Latin America and selected Asian countries access to international markets, and provides international investors with an opportunity to add exposure through our onshore presence in key locations. We also pro- vide liquidity in local markets across foreign exchange, credit, rates and structured products. institutional and corporate clients from risk management to di- rect or structured investments, enabling them to structure deals at all levels of complexity and to access liquidity during and out- side exchange times and across time zones. From the first quar- ter of 2012, this business will be part of the macro business. Investment banking department The investment banking department provides strategic advice and a range of capital markets execution services to corporate clients, financial institutions, financial sponsors, sovereign clients and hedge funds. With a presence in all major financial markets, in- vestment banking coverage is based on a matrix of country, sector and product banking professionals. The main business lines of the investment banking department business area are outlined below: – The advisory group assists in acquisitions and sale processes, and also advises on strategic reviews and corporate restructur- ing solutions. – Global capital markets is a joint venture with the securities business. It offers financing and advisory services that cover all forms of capital raising as well as risk management solutions. It comprises the equity capital markets business, aligned with equities, whose products include initial public offerings, sec- ondary offerings and equity-linked transactions; and the debt capital markets business, aligned with FICC, whose products include commercial paper, medium-term notes, senior debt, high-yield debt, subordinated debt and hybrid capital. All our financing products are provided alongside risk management solutions, which include derivatives, structured finance, ratings advisory services and liability management. – Our commodities business includes market-leading indices and precious metals offerings, combined with flow trading in agri- culture, base metals and energy. We service a broad spectrum of – Global leveraged finance provides event-driven (acquisition, leveraged buyout) loans, and bond and mezzanine leveraged finance to corporate clients and financial sponsors. 44 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O Corporate Center The Corporate Center enables UBS to operate coherently and effectively by providing and managing support and control functions for the business divisions and the Group. It provides services in the areas of risk, finance (including funding, capital and balance sheet management, and management of non-trading risk), legal and compliance, information technology, human resources, real estate, procurement, communication and branding, corporate develop- ment, security and offshoring. Aims and objectives The Corporate Center provides the business divisions with Group- level control in the areas of finance, risk, legal and compliance, and a global corporate shared services organization comprising support and logistics functions. We strive to maintain effective corporate governance processes, including compliance with rele- vant regulations, ensuring an appropriate balance between risk and return. Each functional head in the Corporate Center has authority over all businesses in their area of responsibility, includ- ing the authority to issue Group-wide policies for that area. The integration of Group-wide shared service functions (infor- mation technology, human resources, real estate, procurement, communication and branding, corporate development, security and offshoring) into the Corporate Center under the leadership of the Group Chief Operating Officer (Group COO) was completed in 2009. At the same time, the control functions were centralized under the Group Chief Financial Officer (Group CFO), the Group Chief Risk Officer (Group CRO), and the Group General Counsel (Group GC), respectively. The Corporate Center has improved efficiency, execution and service quality. We have upgraded our cost management for glob- al and Group-wide cost responsibilities, and have implemented simple service delivery models with clear responsibilities. Our in- vestment governance process provides oversight, review and ap- proval of programs in the project portfolio and of those in the pipeline. This is part of a global service level agreement frame- work, ensuring investments are aligned with the Group’s strategic priorities. Overall, the integrated structure helps us to maintain independent control functions and a core platform from which we can create synergies for revenue growth and enhance share- holder value. The Corporate Center also encompasses certain centrally man- aged positions, including the SNB StabFund option and (with ef- fect from the first quarter of 2012) the legacy portfolio formerly in the Investment Bank. In 2011, the Corporate Center focused on further streamlining the organization, implementing strategic change programs and improving operational excellence. At the end of the year, there were approximately 19,300 employees across all of the Corporate Center functions. The majority of the Corporate Center’s treasury income, costs and headcount are re-allocated to the business divi- sions for which the respective services are performed. Organizational structure The Corporate Center consists of the control functions Group Finance, Group Risk, and Group General Counsel, in addition to the shared services functions. Group Chief Financial Officer The Group CFO is responsible for transparency in, and appraisal of, the financial performance of the Group and its business divi- sions; the Group’s financial reporting; forecasting, planning and controlling processes; and for providing advice on financial as- pects of strategic projects and transactions. The Group CFO manages the divisional and Group financial control functions. He manages and controls our tax affairs and treasury and capital management, including management and control of funding and liquidity risk as well as regulatory capital ratios. After consultation with the Board of Directors’ Audit Committee, the Group CFO makes proposals to the Board of Directors (BoD) regarding the policies for accounting we have adopted, and defines the policies for financial reporting and disclosure. Together with the Group Chief Executive Officer (CEO), the Group CFO provides external certifications under sections 302 and 404 of the Sarbanes-Oxley Act 2002, and, in coordination with the Group CEO, manages relations with analysts, investors and rating agencies. Group Chief Operating Officer The Group COO is responsible for the management and perfor- mance of the shared service functions of the Group, including the management and control of Group-wide information technology, procurement, real estate and corporate administrative services, human resources, strategy, communications and branding as well as for physical and information security and offshoring. In addi- tion, the Group COO supports the Group CEO in developing our strategy and addressing key strategic issues. The Group COO also acts as the CEO of the Corporate Center, and oversees the busi- ness and strategic planning of shared services. 45 Operating environment and strategy Our strategy Group Chief Risk Officer The Group CRO is responsible for developing and implementing principles and appropriate independent control frameworks for credit, market, country and operational risks within the Group. In particular, the Group CRO formulates and implements the frame- works for risk capacity and appetite, risk measurement, portfolio controls and risk reporting; and has management responsibility over the divisional and Group risk control functions. He imple- ments the risk control mechanisms as determined by the BoD, the BoD Risk Committee or the Group CEO. In addition, the Group CRO approves transactions, positions, exposures, portfolio limits and provisions in accordance with the delegated risk control au- thorities, and monitors and challenges the firm’s risk-taking ac- tivities. Group General Counsel The Group GC is responsible for legal and compliance matters, policies and processes, and for managing the legal and com- pliance function for the UBS Group. The Group GC assumes responsibility for establishing a Group-wide management and control process for our relationship with regulators, in close co- operation with the Group CRO and the Group CFO where rel- evant, and for maintaining the relationships with our key regu- lators with respect to legal and compliance matters. 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. 46 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O Regulation and supervision As a Swiss-registered company, our home country regulator and consolidated supervisor is the Swiss Financial Market Supervi- sory Authority (FINMA). However, our operations are global and are therefore regulated and supervised by the relevant authori- ties in each of the jurisdictions in which we conduct business. The next sections describe the regulation and supervision of our business in Switzerland and the regulatory and supervisory en- vironments in the US and the UK, our next two largest areas of operation. 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 Banking Law. Depending on the license obtained under this law, banks in Switzerland may engage in a full range of financial services activities, including commercial banking, investment banking and asset management. Banking groups may also engage in insurance activities, but these must be undertaken through a separate subsidiary. The Federal Banking Law establishes a framework for supervision by FINMA. Switzerland implemented the internationally agreed capital ad- equacy rules of the Basel Capital Accord (Basel II) by means of the Capital Adequacy Ordinance of 29 September 2006, and subse- quent FINMA circulars. Switzerland imposes a more differentiated and tighter regime than the internationally agreed rules, including more stringent risk weights. The revised decree on capital require- ments issued at the end of 2008 increased the risk-based buffer and complemented it with a leverage ratio requirement, i.e. a minimum ratio of capital and balance sheet assets. In the course of 2010, the Swiss Federal Council and FINMA incorporated the Basel II enhancements issued by the Basel Committee on Banking Supervision on 13 July 2009 into the Capital Adequacy Ordinance and related circulars. The enhancements strengthen the Basel II rules governing trading book capital, and enhance the three pil- lars of the Basel II framework. The revised Capital Adequacy Ordi- nance, together with the FINMA circulars, entered into force on 1 January 2011. These requirements are being upgraded to reflect the Basel III framework issued by the Basel Committee on Banking Supervision as implemented in Switzerland. ➔ Refer to the “Capital management” section of this report for more information about capital requirements In autumn 2011, the Swiss parliament amended the Federal Banking Law to address the lessons learned from the financial crisis and to address the “too big to fail” issue. The amended sections are applicable to the largest Swiss banks including UBS and contain specific capital requirements and provisions to en- sure that systemically relevant functions can be maintained in case of insolvency. In addition, and in line with global require- ments, UBS is required to produce and update recovery and resolution plans that will help the firm and the regulator pre- vent another crisis or to mitigate its effects on both clients and counterparties. These new sections are expected to enter into force during 2012. The Federal Act of 10 October 1997 on the Prevention of Mon- ey Laundering in the Financial Sector lays down a common stan- dard for due diligence obligations for the whole financial sector, which must be met to prevent money laundering. The legal basis for the investment funds business in Switzer- land is the Swiss Federal Act on Collective Investment Schemes (Collective Investment Schemes Act) of 23 June 2006, which came into force on 1 January 2007. The supervisory authority for investment funds in Switzerland is FINMA, which is responsible for the authorization and supervision of the institutions and invest- ment funds subject to its control. In our capacity as a securities broker, we are governed by the Swiss Stock Exchange Act; FINMA is the competent supervisory authority. Regulation by the Swiss Financial Market Supervisory Authority FINMA is strongly involved in the shaping of the legislative frame- work for banks: – FINMA has substantial influence on the drafting of Swiss federal acts and ordinances from the Federal Council or the parliament. – On a more technical level, FINMA is empowered to issue its own ordinances and circulars. Self-regulation by the SIX Swiss Exchange and the Swiss Bankers Association Certain aspects of securities brokering, such as the organization of trading, are subject to self-regulation through the SIX Swiss Exchange (SIX), under the overall supervision of FINMA. Further- more, we are also an issuer of listed shares subject to self-regula- tion by the SIX. FINMA also officially endorses self-regulatory guidelines issued by the banking industry (through the Swiss Bankers Association), making them an integral part of banking regulation. Two-tier system of supervision and direct supervision of UBS Generally, supervision in Switzerland is based on a division of tasks between FINMA and a number of authorized audit firms. Under this two-tier supervisory system, FINMA has the responsibil- ity for overall supervision and enforcement measures while the authorized audit firms carry out official duties on behalf of FINMA. 47 Operating environment and strategy Regulation and supervision The responsibility of external auditors encompasses the audit of financial statements, the review of banks’ compliance with all prudential requirements and on-site audits. Because of its importance to the Swiss financial system, UBS is directly supervised by dedicated teams at FINMA. The regime of direct supervision is regulated by FINMA Circular 08 / 9 on the Supervision of Large Banking Groups. Supervisory tools include scheduled meetings with management and information exchange encompassing all control and business areas, independent assess- ments through review activities, and a regular exchange of views with internal audit functions, external auditors and important host supervisors. We are directly supervised by the FINMA team “Supervision of UBS,” which is supported by teams specifically monitoring invest- ment banking activities, risk management, and solvency and cap- ital aspects. Role of the Swiss National Bank and division of tasks between FINMA and the Swiss National Bank While the Swiss National Bank (SNB) does not exercise any bank- ing supervision and is not responsible for enforcing banking legis- lation, it is mandated to contribute to the stability of the financial system, is responsible for the supply of liquidity and conducts the monetary policy. In fulfilling its mandate, the SNB monitors devel- opments in the banking sector from the perspective of the system as a whole. Accordingly, FINMA and the SNB work together in the following areas: (i) assessment of the soundness of systemically important banks; (ii) regulations that have a major impact on the soundness of banks, including liquidity, capital adequacy and risk distribution provisions, where they are of relevance for financial stability; and (iii) contingency planning and crisis management. FINMA and the SNB exchange information and share opinions about the soundness of the banking sector and systemically im- portant banks, and are authorized to exchange information and documents that are not publicly accessible if they require these in order to fulfill their tasks. With regard to systemically important banks, the SNB may also carry out its own enquiries and may request that these banks provide information as required. ➔ Refer to the “Regulatory developments” and “Risk factors” sections of this report for more information Regulation and supervision in the US Banking regulation Our operations in the US are subject to a variety of regulatory re- gimes. We maintain branches in several states including Connect- icut, Illinois, Florida and New York. These branches are licensed either by the Office of the Comptroller of the Currency or the state banking authority of the state in which the branch is locat- ed. Each US branch is subject to regulation and examination by its licensing authority. We also maintain state and federally chartered trust companies and other limited purpose banks, which are regu- lated by state regulators or the Office of the Comptroller of the Currency. In addition, the Board of Governors of the Federal Re- serve System exercises examination and regulatory authority over our state-licensed US branches. Only the deposits of our subsid- iary 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 activities of those branches and subsidiaries, as well as prudential restrictions, such as limits on extensions of credit to a single borrower, including UBS subsidiaries and affiliates. The licensing authority of each US branch of UBS AG has the authority, 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 under generally similar circumstances, as well as in the event that a judgment against a federally licensed branch remains unsatisfied, 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 Comp- troller of the Currency exercised its authority over the US branches of UBS, pursuant to federal law in the event of a UBS insolvency, all US assets of UBS would generally be applied first to satisfy creditors of these US branches as a group, and then made avail- able 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 was designated a “financial holding compa- ny” under the Bank Holding Company Act of 1956. Financial holding companies may engage in a broader spectrum of activi- ties than bank holding companies or foreign banking organiza- tions that are not financial holding companies, including under- writing and dealing in securities. To maintain our financial holding company 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 branches, our US subsidiary federally chartered trust company, and our US subsid- iary bank located in Utah are required to meet certain examina- tion ratings, and (iii) our subsidiary bank in Utah is required to maintain a rating of at least “satisfactory” under the Community Reinvestment Act of 1997. A major focus of US governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to UBS and our subsidiaries impose obligations to maintain effective poli- cies, 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 institution to maintain and im- plement adequate programs to combat money laundering and terrorist financing could have serious consequences for the firm, both in legal terms and in terms of our reputation. 48 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 impacts the financial services industry by addressing, among other issues, the following: (i) systemic risk oversight, (ii) bank capital standards, (iii) the liquidation of failing systemically significant financial institutions, (iv) OTC derivatives, (v) the ability of deposit-taking banks to engage in proprietary trading activities and invest in hedge funds and private equity (the so-called Vol- cker rule), (vi) consumer and investor protection, (vii) hedge fund registration, (viii) securitization, (ix) investment advisors, (x) share- holder “say on pay,” (xi) the role of credit-rating agencies, and more. The details of the legislation and its impact on UBS’s opera- tions will depend on the final regulations ultimately adopted by various agencies and oversight boards. 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, in- cluding: 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 con- duct of directors, officers and employees. These entities are regulated by a number of different govern- ment agencies and self-regulatory organizations, including the SEC and the Financial Industry Regulatory Authority (FINRA). Each entity is also regulated by some or all of the following: the NYSE, the Municipal Securities Rulemaking Board, the US Department of the Treasury, the Commodities Futures Trading Commission and other exchanges of which it may be a member, depending on the specific nature of the respective broker-dealer’s business. In addi- tion, the US states, provinces and territories have local securities commissions that regulate and monitor activities in the interest of investor protection. These regulators have a variety of sanctions available, including the authority to conduct administrative pro- ceedings that can result in censure, fines, the issuance of cease- and-desist orders or the suspension or expulsion of the broker- dealer or its directors, officers or employees. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA covers a broad spectrum of securities businesses, including: registering and edu- cating industry participants; examining securities firms; writing rules; enforcing those rules and the federal securities laws; in- forming and educating the investing public; providing trade re- porting and other industry utilities; and administering a dispute resolution forum for investors and registered firms. It also per- forms market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange and the Chicago Climate Exchange. Many of the provisions of the Dodd-Frank Act discussed above will affect the operation of these non-banking entities, as well as UBS’s US banking operations. Again, the impact of this statute on UBS’s operations will depend on the final regulations ultimately adopted by various agencies and oversight boards. ➔ Refer to the “Regulatory developments” and “Risk factors” sections of this report for more information Regulation and supervision in the UK Our operations in the UK are mainly regulated by the Financial Ser- vices Authority (FSA), which establishes a regime of rules and guid- ance governing all relevant aspects of financial services businesses. UBS AG, London Branch is regulated by both the FSA and FINMA. The FSA has established a risk-based approach to supervision and has a wide variety of supervisory tools available to it, includ- ing regular risk assessments, on-site inspections (which may relate to an industry-wide theme or be firm-specific) and the ability to commission reports by skilled persons (who may be the firm’s au- ditors, IT specialists, lawyers or other consultants as appropriate). The FSA also has an extremely wide set of sanctions which it may impose under the Financial Services and Markets Act 2000, broadly similar to those available to US regulators. Some of 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 Takeovers and Mergers, where relevant. Financial services regulation in the UK is conducted in accor- dance with EU directives which require, among other things, com- pliance with certain capital adequacy standards, client protection requirements and conduct of business rules (such as the Markets in Financial Instruments Directive). These directives apply through- out the EU and are reflected in the regulatory regimes of the vari- ous member states. The UK government has committed to changing the current regulatory structures, including splitting responsibility for pruden- tial regulation and conduct of business regulation and the re- placement of the FSA with new regulatory bodies reporting to the Bank of England. These proposals are currently the subject of con- sultation and legislative consideration. ➔ Refer to the “Regulatory developments” and “Risk factors” sections of this report for more information 49 Operating environment and strategy Risk factors Risk factors Certain risks, including those described below, may impact our ability to execute our strategy and directly affect our business ac- tivities, financial condition, results of operations and prospects. Because the business of a broad-based international financial ser- vices firm such as UBS is inherently exposed to risks that become apparent only with the benefit of hindsight, risks of which we are not presently aware or which we currently do not consider to be material could also materially affect our business activities, finan- cial 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. Regulatory and legislative changes may adversely affect our business and ability to execute our strategic plans Fundamental changes in the laws and regulations affecting fi- nancial institutions could have a material and adverse effect on our business. In the wake of the recent financial crisis, and in light of the current instability in global financial markets, regu- lators and legislators have proposed, adopted, or are actively considering, a wide range of changes to these laws and regula- tions. The measures are generally designed to address the per- ceived causes of the crisis and to limit the systemic risks posed by major financial institutions. These measures include the fol- lowing: – significantly higher regulatory capital requirements; – changes in the definition and calculation of regulatory capital, including the capital treatment of certain capital instruments issued by UBS and other banks; – changes in the calculation of risk-weighted assets (RWA); – new or significantly enhanced liquidity requirements; – requirements to maintain liquidity and capital in multiple juris- dictions where activities are conducted and booked; – limitations on principal trading and other activities; – new licensing, registration and compliance regimes; – limitations on risk concentrations and maximum levels of risk; – taxes and government levies that would effectively limit bal- ance sheet growth; – a variety of measures constraining, taxing or imposing addi- tional requirements relating to compensation; – requirements to adopt structural and other changes designed to reduce systemic risk and to make major financial institutions easier to wind down or disassemble. A number of measures have been adopted and will be imple- mented in the next several years; some are subject to legislative action or to further rulemaking by regulatory authorities before final implementation. As a result, there is a high level of uncer- tainty regarding a number of the measures referred to above, in- cluding the timing of their implementation. Notwithstanding attempts by regulators to coordinate their ef- forts, the proposals differ by jurisdiction and therefore enhanced regulation may be imposed in a manner that makes it more diffi- cult to manage a global institution. The absence of a coordinated approach is also likely to disadvantage certain banks, such as UBS, as they attempt to compete with less strictly regulated financial institutions and unregulated non-bank competitors. In September 2011, the Swiss parliament adopted the “too- big-to-fail” law to address the issues posed by large banks. The law became effective on 1 March 2012. Accordingly, Swiss regu- latory change efforts are generally proceeding more quickly than those in other major jurisdictions, and the Swiss Financial Market Supervisory Authority (FINMA), the Swiss National Bank (SNB) and the Swiss Federal Council are implementing requirements that are significantly more onerous and restrictive for major Swiss banks, such as UBS, than those adopted, proposed or publicly espoused by regulatory authorities in other major global banking centers. The Swiss Federal Department of Finance has consulted on pro- posed changes to the banking ordinance and capital adequacy or- dinance. These ordinances, when final, could in effect result in higher capital adequacy requirements than the 19% of RWA that has been publicly discussed. In particular, de facto higher capital requirements (to be fulfilled at the level of the Group and the par- ent holding systemically relevant functions) may be the result of the leverage ratio if implemented as currently proposed, or of the planned early implementation in Switzerland of the anticyclical buf- fer requirement recommended by the Basel Committee on Banking Supervision. In addition, the Swiss Government’s proposed changes to the risk weighting of residential mortgages would significantly increase the capital requirements for our Swiss mortgage book. The new ordinances will, among other things, contain provisions regarding emergency plans for systemically important functions, recovery and resolution planning and intervention measures that may be triggered when certain capital thresholds are breached. Those intervention levels may be set at higher capital levels than under current law, and may depend upon the capital structure and type of buffer capital the bank will have to issue to meet the spe- cific Swiss requirements (6% to cover systemic risk in addition to the 13% to be required due to the combination of Basel III and the “Swiss finish”). The Swiss Federal Council will have to present the revised ordinances to the Swiss parliament for approval; the ordi- nances are expected to come into force on 1 January 2013. If we are not able to demonstrate that our systemically relevant functions in Switzerland can be maintained even in case of a threatened insolvency, FINMA may impose more onerous require- ments on us. Although the actions that FINMA may take in such circumstances are not yet defined, we could be required directly 50 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O or indirectly, for example, to alter our legal structure (e.g., sepa- rate lines of business into dedicated entities, possibly with limita- tions on intra-group funding and guarantees), or in some manner to reduce business risk levels. Regulatory changes in other locations in which we operate may subject us to requirements to move activities from UBS AG branches into subsidiaries, which in turn creates operational, risk control, capital and tax inefficiencies, as well as higher local capi- tal requirements and potentially client and counterparty concerns about the credit quality of the subsidiary. Such changes could also negatively impact our funding model and severely limit our book- ing flexibility. For example, we have significant operations in the UK and use London as a global booking center for many types of products. The UK Independent Commission on Banking (ICB) has recommended structural and non-structural reform of the bank- ing sector to promote financial stability and competition. Key measures proposed include the ring-fencing of retail activities in the UK, additional common equity tier 1 capital requirements of up to 3% of RWA for retail banks, and the issuance of debt sub- ject to “bail-in” provisions. Such measures could have a material effect on our businesses located or booked in the UK, although the applicability and implications of such changes to offices and subsidiaries of foreign banks are not yet entirely clear. Already, we  are being required by regulatory authorities to increase the capitalization of our UK bank subsidiary, UBS Limited, and expect to be required to change our booking practices to reduce or even eliminate our utilization of UBS AG London branch as a global booking center for the Investment Bank. The adoption of the Dodd-Frank Act in the US will also affect a number of our activities as well as those of other banks. The implementation of the Volcker Rule as of July 2012, for example, is one reason for our announced decision to exit equities propri- etary trading business segments within the Investment Bank. For other trading activity, we will be required to implement a compli- ance regime, including the calculation of detailed metrics for each trading book, and may be required to implement a compli- ance plan globally. Depending on the nature of the final rules, as well as the manner in which they are implemented, the Volcker Rule could have a substantial impact on market liquidity and the economics of market-making activities. The Volcker Rule broadly limits investments and other transactional activities between banks and covered funds. The proposed implementing regula- tions both expand the scope of covered funds and provide only a very limited exclusion for activities of UBS outside the US. If ad- opted as proposed, the regulations could limit certain of our ac- tivities in relation to funds, particularly outside the US. Because many of the regulations that must be adopted to implement the Dodd-Frank Act have not yet been finalized, the effect on business booked or conducted by UBS in whole or in part outside the US cannot yet be determined fully. In addition, in 2009 the G20 countries committed to move all standardized over-the-counter (OTC) derivative contracts on ex- change and clear them through central counterparties by the end of 2012. This commitment is being implemented through the Dodd-Frank Act in the US and corresponding legislation in the Eu- ropean Union and other jurisdictions, and will have a significant impact on our OTC derivatives business, primarily in the Invest- ment Bank. For example, most OTC derivatives trading will move toward a central clearing model, increasing transparency through trading on exchanges or swap execution facilities. Although we are preparing for these thematic market changes, they are likely to reduce the revenue potential of certain lines of business for market participants generally, and we may be adversely affected. In connection with the rules being adopted on swaps and de- rivative markets in the US as part of the Dodd-Frank Act, UBS AG could be required to register as a swap dealer in the US during 2012. The new regulations will impose substantial new require- ments on registered swap dealers, but no guidance has been is- sued yet on their application to the activities of swap dealers out- side the US. The potential extra-territorial application of the new rules could create a significant operational and compliance bur- den and potential for duplicative and conflicting regulation. We are currently required to produce recovery and resolution plans in the US, UK and Switzerland. Resolution plans may in- crease the pressure for structural change if our analysis identifies impediments that are not acceptable to regulators. Such struc- tural changes may negatively impact our ability to benefit from synergies between business units. The planned and potential regulatory and legislative develop- ments 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 cer- tain business lines globally or in particular locations, and in some cases on our ability to compete with other financial institutions. They are likely to be costly to implement and could also have a negative impact on our legal structure or business model. Finally, the uncertainty related to legislative and regulatory changes may have a negative impact on our relationships with clients and our success in attracting client business. Due to recent changes in Swiss regulatory requirements, and due to liquidity requirements imposed by certain jurisdictions in which we operate, we have been required to maintain substantially higher lev- els of liquidity overall than had been our usual practice in the past. Like increased capital requirements, higher liquidity requirements make certain lines of business, particularly in the Investment Bank, less attractive and may reduce our overall ability to generate profits. Our reputation is critical to the success of our business Damage to our reputation can have fundamental negative effects on our business and prospects. Our reputation is critical to the suc- cess of our strategic plans. Reputational damage is difficult to re- verse, and improvements tend to be slow and difficult to measure. This was demonstrated in recent years as our very large losses dur- ing the financial crisis, the US cross-border matter and other events seriously damaged our reputation. Reputational damage was an important factor in our loss of clients and client assets across our asset-gathering businesses, and contributed to our loss of and dif- 51 Operating environment and strategy Risk factors ficulty in attracting staff, in 2008 and 2009. These developments had short-term and also more lasting adverse effects on our finan- cial performance. We recognized that restoring our reputation would be essential to maintaining our relationships with clients, investors, regulators and the general public, as well as with our employees. The unauthorized trading incident that we announced in September 2011 also adversely affected our reputation. Any fur- ther reputational damage could have a material adverse effect on our operational results and financial condition and on our ability to achieve our strategic goals and financial targets. ➔ Refer to the “Certain items affecting our results in 2011” sidebar for more information on the unauthorized trading incident Our capital strength is important in supporting our strategy, client franchise and competitive position Our capital position, as measured by the BIS tier 1 and total capital ratios, is determined by (i) RWA (credit, non-counterparty related, market and operational risk positions, measured and risk-weight- ed according to regulatory criteria) and (ii) eligible capital. Both RWA and eligible capital are subject to change. Eligible capital would be reduced if we experience net losses, as determined for the purpose of the regulatory capital calculation. Eligible capital can also be reduced for a number of other reasons, including cer- tain reductions in the ratings of securitization exposures, adverse currency movements directly affecting the value of equity and prudential adjustments that may be required due to the valuation uncertainty associated with certain types of positions. RWA, on the other hand, are driven by our business activities and by chang- es in the risk profile of our exposures. For instance, substantial market volatility, a widening of credit spreads (the major driver of our value-at-risk), a change in regulatory treatment of certain po- sitions (such as the application of market stresses in accordance with Basel 2.5 adopted in the last quarter of 2011), adverse cur- rency movements, increased counterparty risk or a deterioration in the economic environment could result in a rise in RWA. Any such reduction in eligible capital or increase in RWA could materi- ally reduce our capital ratios. The required levels and calculation of our regulatory capital and the calculation of our RWA are also subject to changes in regula- tory requirements or their interpretation. We are subject to regula- tory capital requirements imposed by FINMA, under which we have higher RWA than would be the case under BIS guidelines. Forth- coming changes in the calculation of RWA under Basel III and FIN- MA requirements will significantly increase the level of our RWA and, therefore, have an adverse effect on our capital ratios. We have announced plans to reduce RWA very substantially and to mitigate the effects of the changes in the RWA calculation. How- ever, there is a risk that we will not be successful in pursuing our plans, either because we are unable to carry out fully the actions we have planned or because other business or regulatory develop- ments to some degree counteract the benefit of our actions. In addition to the risk-based capital requirements, FINMA has introduced a minimum leverage ratio, which must be achieved by 1 January 2013. The leverage ratio operates separately from the risk-based capital requirements, and, accordingly, under certain circumstances could constrain our business activities even if we are able to satisfy the risk-based capital requirements. Changes in the Swiss requirements for risk-based capital or le- verage ratios, whether pertaining to the minimum levels required for large Swiss banks or to the calculation thereof (including changes of the banking law under the “too-big-to-fail” measures), could have a material adverse effect on our business and could affect our competitive position internationally compared with in- stitutions that are regulated under different regimes. Moreover, although we have recently identified certain businesses that we plan to exit in response to regulatory and business changes, chang- es in the calculation and level of capital requirements or other regu- latory changes may render uneconomic certain other businesses conducted in our Investment Bank or in other business divisions, or may undermine their viability in other ways. The reduction or elimi- nation of lines of business could adversely affect our competitive position, particularly if competitors are subject to different require- ments under which those activities continue to be sustainable. Performance in the financial services industry is affected by market conditions and the economic climate The financial services industry prospers in conditions of economic growth; stable geopolitical conditions; transparent, liquid and buoyant capital markets and positive investor sentiment. An eco- nomic downturn, inflation or a severe financial crisis can nega- tively 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, pandemics, civil unrest, war or terrorism. Because financial markets are global and highly intercon- nected, even local and regional events can have widespread impacts well beyond the countries 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 political developments, or as a result of the failure of a major market participant. We have material exposures to certain emerging market economies, both as a wealth manager and as an investment bank. As our presence and business in emerging markets increases, and as our strategic plans depend more heavily upon our ability to generate growth and reve- nue in the emerging markets, we become more exposed to these risks. The ongoing eurozone crisis demonstrates that such develop- ments, even in more developed markets, can have similarly unpredict- able and destabilizing effects. Adverse developments of these kinds 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 volumes, as we have experienced in recent quarters, affects fees, com- missions and margins from market-making and client-driven transactions and activities; local or regional economic factors, such as the ongoing eurozone sovereign debt and banking industry concerns, could also have an effect on us; 52 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O – a market downturn is likely to reduce the volume and valua- tions of assets we manage on behalf of clients, reducing our asset- and performance-based fees; – reduced market liquidity limits trading and arbitrage opportu- nities and impedes our ability to manage risks, impacting both trading income and performance-based fees; We hold positions related to real estate in various countries, including a very substantial Swiss mortgage portfolio, and we could suffer losses on these positions. In addition, we are 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. – assets we own and account for as investments or trading posi- tions could fall in value; – impairments and defaults on credit exposures and on trading and investment positions could increase, and losses may be exacerbated by falling collateral values; and – if individual countries impose restrictions on cross-border pay- ments or other exchange or capital controls, or change their currency (for example, if one or more countries should leave the euro), we could suffer losses from enforced default by counterparties, be unable to access our own assets, or be im- peded in – or prevented from – managing our risks. Because we have very substantial exposures to other major fi- nancial institutions, the failure of one or more of such institutions could have a material effect on us. The developments mentioned above can materially affect the performance of our business units and of UBS as a whole, and ulti- mately our financial condition. There is also a somewhat related risk that the carrying value of goodwill of a business unit might suffer impairments and deferred tax assets levels may need to be adjusted. We hold legacy and other risk positions that may be adversely affected by conditions in the financial markets; legacy risk positions may be difficult to liquidate UBS, like other financial market participants, was severely affected by the financial crisis that began in 2007. The deterioration of finan- cial markets since the beginning of the crisis was extremely severe by historical standards, and we recorded substantial losses on fixed income trading positions, particularly in 2008 and to a lesser extent in 2009. Although we have significantly reduced our risk exposures starting in 2008, in part through transfers in 2008 and 2009 to a fund controlled by the SNB, we continue to hold substantial legacy risk positions, the value of which was reduced significantly by the financial crisis. In many cases these risk positions continue to be il- liquid and have not recovered much of their lost value. In the fourth quarter of 2008 and the first quarter of 2009, certain of these posi- tions were reclassified for accounting purposes from fair value to amortized cost; these assets are subject to possible impairment due to changes in market interest rates and other factors. We have announced and begun to carry out plans to reduce drastically the risk-weighted assets associated with the legacy risk positions, but the continued illiquidity and complexity of many of these legacy risk positions could make it difficult to sell or otherwise liquidate these exposures. At the same time, our strategy rests heavily on our ability to reduce sharply the risk-weighted assets as- sociated with these exposures in order to meet our future capital targets and requirements without incurring unacceptable losses. Our global presence subjects us to risk from currency fluctuations We prepare our consolidated financial statements in Swiss francs. However, a substantial portion of our assets, liabilities, invested as- sets, revenues and expenses are denominated in other currencies, particularly the US dollar, the euro and the British pound. Accord- ingly, changes in foreign exchange rates, particularly between the Swiss franc and the US dollar (US dollar revenue accounts for the largest portion of our non-Swiss franc revenue) have an effect on our reported income and expenses, and on other reported figures such as invested assets, balance sheet assets, RWA and tier 1 capi- tal. For example, the strengthening of the Swiss franc especially against the US dollar and euro, which occurred during 2011, had an adverse effect on our revenues and invested assets. Since ex- change rates are subject to constant change, sometimes for com- pletely unpredictable reasons, our results are subject to risks associ- ated with changes in the relative values of currencies. 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 financial services firm. Credit is an integral part of many of our retail, wealth management and Investment Bank activities. This includes lending, underwriting and derivatives businesses and positions. Changes in interest rates, credit spreads, equity prices and liquid- ity, foreign exchange levels and other market fluctuations can ad- versely affect our earnings. Some losses from risk-taking activities are inevitable, but to be successful over time, we must balance the risks we take against the returns we generate. We must, therefore, diligently identify, assess, manage and control our risks, not only in normal market conditions but also as they might de- velop under more extreme (stressed) conditions, when concentra- tions of exposures can lead to severe losses. As seen during the financial crisis of 2007–2009, we are not always able to prevent serious losses arising from extreme or sudden market events that are not anticipated by our risk mea- sures and systems. Value-at-risk, a statistical measure for mar- ket risk, is derived from historical market data, and thus by definition could not have anticipated the losses suffered in the stressed conditions of the financial crisis. Moreover, stress loss and concentration controls and the dimensions in which we aggregate risk to identify potentially highly correlated exposures proved to be inadequate. Notwithstanding the steps we have taken to strengthen our risk management and control frame- 53 Operating environment and strategy Risk factors work, we could suffer further losses in the future if, for example: – we do not fully identify the risks in our portfolio, in particular risk concentrations and correlated risks; – our assessment of the risks identified or our response to nega- tive trends proves to be inadequate or incorrect; – markets move in ways that we do not expect – in terms of their speed, direction, severity or correlation – and our ability to man- age risks in the resultant environment is, therefore, affected; – third parties to whom we have credit exposure or whose secu- rities we hold for our own account are severely affected by events not anticipated by our models, and accordingly we suf- fer 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 activi- ties could be harmed by the same factors. If clients suffer losses or the performance of their assets held with us is not in line with rel- evant benchmarks against which clients assess investment perfor- mance, we may suffer reduced fee income and a decline in assets under management, or withdrawal of mandates. If we decide to support a fund or another investment that we sponsor in our asset or wealth management businesses (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 material levels. Investment positions, such as equity holdings made as a part of strategic initiatives and seed investments made at the inception of funds that we manage, may also be affected by market risk factors. These investments are often not liquid and generally are intended or required to be held beyond a normal trading horizon. They are sub- ject 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; models have inherent limitations and may use inputs which have no observable source Where possible, we mark our trading book assets at their quoted market price in an active market. Such price information may not be available for certain instruments and, therefore, we apply valuation techniques to measure such instruments. Valuation techniques use “market observable inputs” where available, derived from similar as- sets in similar and active markets, from recent transaction prices for comparable items or from other observable market data. In the case of positions for which some or all of the inputs required for the valu- ation techniques are not observable or have limited observability, we use valuation models with non-market observable inputs. There is no single market standard for valuation models of this type. Such mod- els have inherent limitations; different assumptions and inputs would generate different results, and these differences could have a signifi- cant impact on our financial results. We regularly review and update our valuation models to incorporate all factors that market partici- pants would consider in setting a price, including factoring in current market conditions. Judgment is an important component of this pro- cess. Changes in model inputs or in the models themselves, or failure to make the changes necessary to reflect evolving market conditions, could have a material adverse effect on our financial results. We are exposed to possible outflows of client assets in our wealth management and asset management businesses We experienced substantial net outflows of client assets in our wealth management and asset management businesses in 2008 and 2009. The net outflows resulted from a number of different factors, including our substantial losses, the damage to our reputation, the loss of client advisors, difficulty in recruiting qualified client advisors and developments concerning our cross-border private banking business. Many of these factors have been successfully addressed, as evidenced by our overall net new money inflows in 2011, but others, such as the long-term changes affecting the cross-border private banking business model, will continue to affect client flows for an extended period of time. If we experience again material net out- flows of client assets, the results of our wealth management and asset management businesses are likely to be adversely affected. Liquidity and funding management are critical to our  ongoing performance The viability of our business depends upon the availability of funding sources, and its success depends upon our ability to obtain funding at times, in amounts, for tenors and at rates that enable us to effi- ciently support our asset base in all market conditions. A substantial part of our liquidity and funding requirements is met using short- term unsecured funding sources, including wholesale and retail de- posits and the regular issuance of money market securities. The vol- ume of our funding sources has generally been stable, but could change in the future due to, among other things, general market disruptions, which could also influence the cost of funding. A change in the availability of short-term funding could occur quickly. Reductions in our credit ratings can increase our funding costs, in particular with regard to funding from wholesale unsecured sources, and can affect the availability of certain kinds of funding. In addition, as we experienced in recent years, ratings downgrades can require us to post additional collateral or make additional cash payments under master trading agreements relating to our de- rivatives businesses. Our credit ratings, together with our capital strength and reputation, also contribute to maintaining client and counterparty confidence and it is possible that ratings changes could influence the performance of some of our businesses. The more stringent Basel III capital and liquidity requirements will likely lead to increased competition for both secured funding and deposits as a stable source of funding, and to higher funding costs. ➔ Refer to the “Risk, treasury and capital management” section of this report for more information on our approach to liquidity and funding management 54 y g e t a r t s d n a t n e m n o r i v n e g n i t a r e p O 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 diverse markets in different currencies, to comply with requirements of many differ- ent legal and regulatory regimes to which we are subject and to prevent, or promptly detect and stop, unauthorized, fictitious or fraudulent transactions. Our operational risk management and con- trol systems 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, system failures, cyber-attacks and failure of security and physical protection, are ap- propriately controlled. If our internal controls fail or prove ineffective in identifying and remedying such risks we could suffer operational failures that might result in material losses, such as the loss from the unauthorized trading incident announced in September 2011. Certain types of operational control weaknesses and failures could also adversely affect our ability to prepare and publish ac- curate and timely financial reports. We identified control deficien- cies following the unauthorized trading incident announced in September 2011, and management determined that we had a material weakness in our internal control over financial reporting as of the end of 2010 and 2011, although this has not affected the reliability of our financial statements for either year. ➔ Refer to the “Update on internal control over financial report- ing” and the “Management’s report on internal control over financial reporting” in the “Financial information” section of this report for more information Legal claims and regulatory risks and restrictions arise in the conduct of our business Due to the nature of our business, we are subject to regulatory oversight and liability risk. We are involved in a variety of claims, disputes, legal proceedings and government investigations in ju- risdictions where we are active. These proceedings expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil penalties, in addition to potential regu- latory restrictions on our businesses. The outcome of these mat- ters cannot be predicted and they could adversely affect our fu- ture business or financial results. We continue to be subject to government inquiries and investigations, and are involved in a number of litigations and disputes, many of which arose out of the financial crisis of 2007–2009. The unauthorized trading inci- dent announced in September 2011 has triggered a joint investi- gation by FINMA and the UK Financial Services Authority and separate enforcement proceedings by the two authorities. We are also subject to potentially material exposure in connection with claims relating to US RMBS and mortgage loan sales, the Madoff investment fraud, Lehman principal protection notes, LIBOR rate submissions and other matters. We are in active dialogue with our regulators concerning the actions that we are taking to improve our operational and risk man- agement controls, processes and systems. Ever since our losses in 2007 and 2008, we have been subject to a very high level of regu- latory scrutiny and to certain regulatory measures that constrain our strategic flexibility. While we believe that we have largely reme- diated the deficiencies that led to the material losses during the recent financial crisis, the unauthorized trading incident announced in September 2011 has revealed different shortcomings that we are also urgently addressing. The unauthorized trading incident has presented us with further challenges and potential constraints on the execution of our business strategy, as we seek once again to enhance our operational and control framework and demonstrate its effectiveness to regulatory authorities. Notwithstanding the re- mediation we have already completed and which is in process, the consequences of the ongoing regulatory review and enforcement proceedings arising from the incident cannot be predicted. ➔ Refer to “Note 21 Provisions and contingent liabilities” in the “Financial information” section of this report for more informa- tion on litigation and regulatory matters and other contingent liabilities We might be unable to identify or capture revenue or competitive opportunities, or retain and attract qualified employees The financial services industry is characterized by intense competi- tion, continuous innovation, detailed (and sometimes fragment- ed) regulation and ongoing consolidation. We face competition at the level of local markets and individual business lines, and from global financial institutions that are comparable to UBS in their size and breadth. Barriers to entry in individual markets are being eroded by new technology. We expect these trends to continue and competition to increase. Our competitive strength and market position could be eroded if we are unable to identify market trends and developments, do not respond to them by devising and implementing adequate business strategies or are unable to attract or retain the qualified people needed to carry them out. The amount and structure of our employee compensation are affected not only by our business results but also by competitive factors and regulatory considerations. Constraints on the amount of employee compensation, higher levels of deferral and claw- backs and performance conditions may adversely affect our ability to retain and attract key employees, and may in turn negatively affect our business performance. Starting with the performance year 2009, the portion of variable compensation granted in the form of deferred shares was much higher than in the past. Al- though our peers have over time also increased their deferral per- centages, we continue to be subject to the risk that key employ- ees will be attracted by competitors and decide to leave UBS, or that we may be less successful than our competitors in attracting qualified employees. Regulatory constraints and pressure from regulators and other stakeholders affect not only UBS but also the other major international banks, but some of our peers may have a competitive advantage due to differences in the requirements and intensity of pressure among different jurisdictions. 55 Operating environment and strategy Risk factors Our financial results may be negatively affected by changes to accounting standards We are required to report our results and financial position in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Changes to IFRS may mean that our reported results and financial position differ in the future from those expected. Such changes also may affect our regulatory capital and ratios. When account- ing changes are finalized, UBS assesses the potential impact and discloses significant future changes in its financial statements. Currently, there are a number of finalized and potential account- ing changes that are expected to impact our reported results, financial position and regulatory capital in the future. ➔ Refer to the “Financial Information” section of this report for more information on changes in accounting requirements Our financial results may be negatively affected by changes to assumptions supporting the value of our goodwill The goodwill we have recognized on our balance sheet is tested for impairment at least annually. Our impairment test in respect of the assets recognized as of 31 December 2011 indicated that the value of our goodwill is not impaired. The impairment test is based on assumptions regarding estimated earnings, discount rates and long-term growth rates impacting the recoverable amount of each segment and on estimates of the carrying amounts of the segments to which the goodwill relates. If the estimated earnings and other assumptions in future periods deviate from the current outlook, the value of our goodwill may become impaired in the future, giving rise to losses in the income statement. We are exposed to risks arising from the different regulatory, legal and tax regimes applicable to our global businesses We operate in more than 50 countries, earn income and hold as- sets and liabilities in many different currencies and are subject to many different legal, tax and regulatory regimes. Our ability to execute our global strategy depends on obtaining and maintain- ing local regulatory approvals. This includes the approval of acqui- sitions or other transactions and the ability to obtain and maintain the necessary licenses to operate in local markets. Changes in lo- cal tax laws or regulations and their enforcement may affect the ability or the willingness of our clients to do business with us or the viability of our strategies and business model. The effects of taxes on our financial results are signi- ficantly influenced by changes in our deferred tax assets and final determinations on audits by tax authorities The deferred tax assets we have recognized on our balance sheet as of 31 December 2011 in respect of prior years’ tax losses are based on profitability assumptions over a five-year horizon. If the business plan earnings and assumptions in future periods sub- stantially deviate from the current outlook, the amount of de- ferred tax assets may need to be adjusted in the future. This could include write-offs of deferred tax assets through the income statement if actual results come in substantially below the busi- ness plan forecasts and / or if future business plan forecasts are revised downward substantially. In the coming years, our effective tax rate will be highly sensi- tive both to our performance and to the development of new business plan forecasts. Currently unrecognized deferred tax as- sets in the UK and especially the US could be recognized if our actual and forecasted performance in those countries is strong enough to justify further recognition of deferred tax assets under the governing accounting standard. Our results in recent periods have demonstrated that changes in the recognition of deferred tax assets can have a very significant effect on our reported results. If, for example, the Group’s performance in the UK and especially in the US is strong, we could be expected to write up additional US and / or UK deferred tax assets in the coming years. The effect of doing so would significantly reduce the Group’s effective tax rate in years in which any write ups are made. Conversely, if our performance in those countries does not justify additional deferred tax recognition, but nevertheless supports our maintaining current deferred tax levels, we expect the Group’s effective tax rate to be in the range of 20–25% (although the tax rate may differ if there are significant book tax adjustments, which generally mainly affect Swiss taxable profits, for example own credit gains / losses). Our effective tax rate is also sensitive to any future reductions in tax rates, particularly in the US and Switzerland, which would cause the expected future tax saving from items such as tax loss carry-forwards in those locations to diminish in value. This in turn would cause a write-down of deferred tax assets. Additionally, the final effect of income taxes we accrue in the accounts is often only determined after the completion of tax au- dits (which generally takes a number of years) or the expiry of statutes of limitations. In addition, changes to, and judicial inter- pretation of, tax laws or policies and practices of tax authorities could cause the amount of taxes ultimately paid by UBS to materi- ally differ from the amount accrued. In 2011, the UK government introduced a balance sheet based levy payable by banks operating and / or resident in the UK. An expense for the year of CHF 109 million has been recognized in operating expenses (within pre-tax profit) in the fourth quarter of 2011. In November 2011 the UK government announced its inten- tion to increase the rate of the levy by 17% from 1 January 2012. The Group’s bank levy expense for future years will depend on both the rate and the Group’s taxable UK liabilities at each year end: changes to either factor could increase the cost. Whilst not yet certain, we expect that the annual bank levy expense will con- tinue to be recognized for IFRS purposes as a one-off cost arising in the final quarter of each financial year, rather than being accrued throughout the year, as it is charged by reference to the year-end balance sheet position. 56 Financial and operating performance Financial and operating performance Critical accounting policies Critical accounting policies Basis of preparation and selection of policies We prepare our Financial statements in accordance with Inter- national Financial Reporting Standards (IFRS) as issued by the Inter- national Accounting Standards Board. The application of certain of these accounting principles requires considerable judgment based upon estimates and assumptions that involve significant uncer- tainty at the time they are made. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are be- lieved to be reasonable under the circumstances. Changes in as- sumptions may have a significant impact on the Financial state- ments in the periods when assumptions are changed. Accounting policies that are deemed critical to our results and financial po- sition, in terms of materiality of the items to which the policy is applied, and which involve significant assumptions and estimates, are discussed in this section. A broader and more detailed descrip- tion of the accounting policies that we use is included in “Note 1 Summary of significant accounting policies” in the “Financial in- formation” section of this report. The application of assumptions and estimates means that any selection of different assumptions could cause the reported re- sults to differ. We believe that the assumptions we have made are appropriate, and that our Financial statements therefore present the financial position and results fairly in all material respects. The alternative outcomes discussed below are presented solely to assist the reader in understanding our Financial statements. They are not intended to suggest that other assumptions would be more appropriate. Fair value of financial instruments The fair values of financial instruments where no active market exists or where quoted prices are not otherwise available are determined by using valuation techniques. In these cases, the fair values are estimated using observable data in respect of similar fi- nancial instruments as well as models. Where market observable inputs are not available, inputs are estimated based on appropriate assumptions. Where valuation techniques or models are used to determine fair values, they are periodically reviewed and validated by qualified personnel independent of those who sourced them. Models are calibrated to ensure that outputs reflect actual data and comparative market prices. Where practicable, models use only observable data; however, areas such as default rates, vola- tilities and correlations require management to make estimates. The valuation techniques or models employed may not fully re- flect all the factors relevant to the positions we hold. Valuations are therefore adjusted, where appropriate, to allow for additional fac- tors, including model risk, liquidity risk and credit risk. We use dif- ferent approaches to calculate the credit risk, depending on the classification of a financial instrument at fair value. A credit valua- tion adjustment approach based on an expected exposure profile is used to adjust the fair value of Positive replacement values to re- flect counterparty credit risk if deemed necessary. Correspondingly, a debit valuation adjustment approach is applied to incorporate own credit risk in the  fair value of uncollateralized Negative re- placement values. Own credit risk for Financial liabilities designated at fair value is calculated using the funds transfer price curve. As of 31 December 2011, financial assets and financial liabilities for which valuation techniques or models are used and whose in- puts are observable (level 2) amounted to CHF 550 billion and CHF 561 billion, respectively. Financial assets and financial liabilities whose valuations include significant unobservable inputs (level 3) amounted to CHF 25 billion and CHF 24 billion, respectively. Changes in assumptions for input factors would affect the re- ported fair value of financial instruments. If management had used reasonably possible alternative assumptions for our level 3 instruments accounted for at fair value through profit or loss, the net fair value of non-derivative instruments would have been up to CHF 0.6 billion higher or lower on 31 December 2011. Simi- larly, the net fair value of derivative instruments would have been up to CHF 1.1 billion higher or lower than the amounts recog- nized on our balance sheet on 31 December 2011. ➔ Refer to “Note 26 Fair value of financial instruments” in the “Financial information” section of this report for more informa- tion on valuation of financial instruments Goodwill impairment test UBS performs an impairment test on its goodwill assets on an an- nual basis, or when indicators of a potential impairment exist. The impairment test is performed for each segment for which good- will is allocated and compares the recoverable amount and the carrying amount of the segment. An impairment charge is recog- nized if the carrying amount exceeds the recoverable amount. The impairment test is based on a number of assumptions, as de- scribed further below. The recoverable amount is determined using a discounted cash flow model, which uses inputs that consider features of the bank- ing business and its regulatory environment. The recoverable amount of a segment is the sum of the discounted earnings at- tributable to shareholders from the first five individually forecast- ed years and the terminal value. The terminal value reflecting all periods beyond the fifth year is calculated on the basis of the forecast of fifth-year profit, the discount rate and the long-term growth rate. The carrying amount for each segment is determined by refer- ence to the equity attribution framework. Within this framework, 58 e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F which is described in the “Capital management” section of this report, management attributes equity to the businesses after con- sidering their risk exposure, risk-weighted assets usage, asset size, goodwill and intangible assets. The framework is used primarily for purposes of measuring the performance of the businesses and includes certain management assumptions. Attributed equity equates to the capital that a segment requires to conduct its busi- ness and is considered an appropriate starting point from which to determine the carrying value of the segments. The attributed equity methodology is aligned with the business planning pro- cess, the inputs from which are used in calculating the recover- able amounts of the respective cash-generating units. Valuation parameters used within the Group’s impairment test model are linked to external market information, where applica- ble. The model used to determine the recoverable amount is most sensitive to changes in the forecast earnings available to share- holders in years one to five, to changes in the discount rates, and to changes in the long-term growth rate. The applied long-term growth rate is based on long-term economic growth rates for dif- ferent regions worldwide. Earnings available to shareholders are estimated based on forecast results, which are part of the busi- ness plan approved by the Board of Directors. The discount rates are determined by applying a capital-asset-pricing-model-based approach, as well as considering quantitative and qualitative in- puts from both internal and external analysts and the view of UBS’s management. If the estimated earnings and other assumptions in future peri- ods deviate from the current outlook, the value of our goodwill may become impaired in the future, giving rise to losses in the income statement. This may be the case if the regulatory pressure on the banking industry further intensifies and conditions in the financial markets diminish our performance relative to forecast. Recognition of any impairment of goodwill would reduce IFRS eq- uity attributable to UBS shareholders and net profit. It would not impact cash flows and, as goodwill is required to be deducted from capital under the Basel capital framework, there would be no impact to the BIS tier 1 capital ratio or BIS total capital ratio of the UBS Group. As of 31 December 2011, the following four segments carried goodwill: Wealth Management (CHF 1.3 billion), Wealth Manage- ment Americas (CHF 3.3 billion), Global Asset Management (CHF 1.4 billion), and the Investment Bank (CHF 3.0 billion). On the basis of the impairment testing methodology described above, UBS concluded that the year-end 2011 balances of goodwill allo- cated to its segments remain recoverable. ➔ Refer to “Note 1a) 21) Goodwill and intangible assets” and “Note 16 Goodwill and intangible assets” in the “Financial information” section of this report for more information Impairment of loans and receivables measured at amortized cost Loan impairment allowances represent management’s best esti- mate of losses incurred in the lending portfolio at the balance sheet date. The loan portfolio, which is measured at amortized cost less impairment, consists of financial assets presented on the balance sheet lines Due from banks and Loans, including reclassi- fied securities. In addition, irrevocable loan commitments are tested for impairment as described below. Credit loss expense is recognized if there is objective evidence that the Group will be unable to collect all amounts due according to the original contractual terms or the equivalent value. A finan- cial asset or group of financial assets is impaired only if a loss event occurred after the initial recognition of the financial asset(s), but not later than at the balance sheet date (“incurred loss mod- el”). Management is required to exercise judgment in making assumptions and estimations when calculating impairment losses both on a counterparty-specific level and collectively. The impairment loss is the excess of the carrying value of the financial asset over the estimated recoverable amount. The esti- mated recoverable amount is the present value, using the loan’s original effective interest rate, of expected future cash flows, in- cluding amounts that may result from restructuring or the liquida- tion of collateral. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. An allowance for credit losses is reported as a re- duction of the carrying value of the financial asset on the balance sheet. Estimated cash flows associated with financial assets reclassi- fied from Held for trading to Loans and receivables in accordance with the requirements in “Note 1a) 10) Loans and receivables” in the “Financial information” section of this report and other simi- lar assets acquired subsequently, are revised periodically. Adverse revisions in cash flow estimates related to credit events are recog- nized in profit or loss as credit loss expenses. For reclassified secu- rities, 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. ➔ Refer to “Note 9a Due from banks and loans”, “Note 9b Allowances and provisions for credit losses” and “Note 28 Measurement categories of financial assets and financial liabilities” in the “Financial information” section of this report for more information On 31 December 2011, our gross loan portfolio was CHF 267 billion and the related allowances amounted to CHF 0.8 billion, of which CHF 83 million related to reclassified and similar acquired securities. ➔ Refer to “Note 1a) 11) Allowance and provision for credit losses” in the “Financial information” section of this report for more information Consolidation of special purpose entities We sponsor the formation of special purpose entities (SPE) and interact with non-sponsored SPE for a variety of reasons, in- cluding allowing clients to obtain or be exposed to specific risk and reward profiles, to provide funding or to sell or purchase 59 Financial and operating performance Critical accounting policies credit risk. In accordance with IFRS, we do not consolidate spe- cial purpose entities that we do not control. In order to deter- mine whether or not we control an SPE, we evaluate a range of factors, including whether (i) the activities of the SPE are being conducted on our behalf according to our specific business needs so that we obtain the benefits from the SPE operations, or (ii) we have decision-making powers to obtain the majority of the benefits of the activities of the SPE, or we have delegat- ed these decision-making powers by setting up an autopilot mechanism, or (iii) we have the right to obtain the majority of the benefits of the activities of an SPE and, therefore, may be exposed to risks arising from the activities of the SPE, or (iv) we retain the majority of the residual or ownership risks related to the SPE or its assets in order to obtain the benefits from its activities. In many instances, elements are present that, con- sidered in isolation, indicate control or lack of control over an SPE, but when considered together require a significant degree of judgment to reach a conclusion. The exposure to volatility in profits and the absorption of risks and rewards, as well as the ability to make operational decisions for the SPE in question, are general ly the factors to which most weight is given in reaching a conclusion. ➔ Refer to “Note 1a) 3) Subsidiaries” in the “Financial information” section of this report for more information Equity compensation We recognize shares, performance shares, options and share- settled stock appreciation rights awarded to employees as com- pensation expense based on their fair value at grant date. The fair value of UBS shares issued to employees is determined by ref- erence to quoted market prices, adjusted, where appropriate, to take into account the terms and conditions inherent in the award. Options, stock appreciation rights, and certain performance shares issued by UBS to its employees have features which are not directly comparable with our shares and options traded in active markets. Accordingly, we determine the fair value using suitable valuation models. The models require inputs such as expected dividends, share price volatility and historical employee exercise behavior patterns. Some of the model inputs we use are not market observable and have to be estimated or derived from available data. Use of different estimates would produce different valuations, which in turn would result in recognition of higher or lower compensation expense. Several recognized valuation models exist. The models we a pply have been selected because they are able to handle the specific features included in the various instruments granted to our employees. If we were to use different models, the values produced would differ, even if the same inputs were used. ➔ Refer to “Note 1a) 25) Equity participation and other compen sation plans” and “Note 30 Equity participation and other compensation plans” in the “Financial information” section of this report for more information 60 Deferred taxes Deferred tax assets arise from a variety of sources, the most sig- nificant being the following: (i) tax losses that can be carried for- ward to be utilized against profits in future years; and (ii) expenses recognized in our income statement that are not deductible until the associated cash flows occur. We record a valuation allowance to reduce our 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 our fu- ture profitability regarding relevant business plan forecasts. Exist- ing assessments are reviewed and, if necessary, revised to reflect changed circumstances. This review is conducted annually, in the second half of each year, but adjustments may be made at other times, if required. In a situation where recent losses have been incurred, the relevant accounting standards require convincing evidence that there will be sufficient future profitability. Swiss tax losses can be carried forward for seven years, US federal tax losses for 20 years and UK and Jersey tax losses for an unlimited period. The deferred tax assets recognized on 31 De- cember 2011 have been based on future profitability assumptions over a five-year time horizon, adjusted to take into account the recognition criteria of IAS 12 Income Taxes. The level of deferred tax assets recognized may, however, need to be adjusted in the future in the event of changes in those profitability assumptions. On 31 December 2011, the deferred tax assets amounted to CHF 8.5 billion, which included an amount of CHF 8.0 billion in respect of tax losses (mainly in Switzerland and the US) that can be utilized to offset taxable income in future years. ➔ Refer to “Note 22 Income taxes” and “Note 1a) 22) Income taxes” in the “Financial information” section of this report for more information Hedge accounting The Group uses derivative instruments as part of its asset and liability management activities to manage exposures particularly to interest rate and foreign currency risks, including exposures arising from forecast transactions. If derivative and non-derivative instruments meet certain criteria, they are designated as hedging instruments in fair value hedges, cash flow hedges or net invest- ment hedges. The designation of derivative or non-derivative hedging instruments is at our discretion. At the time a financial instrument is designated in a hedge rela- tionship, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction and the methods that will be used to assess the effec- tiveness of the hedging relationship. Accordingly, the Group as- sesses, both at the inception of the hedge and on an ongoing basis, whether the hedging instruments, primarily derivatives, have been “highly effective” in offsetting changes in the fair value or cash flows associated with the designated risk of the hedged items. e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F Changes in the fair value of derivatives that qualify as fair value hedges are recorded in the income statement along with the change in the fair value of the hedged item attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that qualify as cash flow hedges is recognized in equity and transferred to profit or loss in the same periods in which the hedged cash flows affect profit or loss. Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. The Group discontinues hedge accounting when it determines that a hedging instrument is not, or has ceased to be, highly effec- tive as a hedge; when the derivative expires or is sold, terminated or exercised; when the hedged item matures, is sold or repaid; or when a forecast transaction is no longer deemed highly probable. In certain circumstances, the Group may decide to discontinue hedge accounting voluntarily, even though the mentioned criteria for discontinuing are not fulfilled. De-designated hedging deriva- tives from hedge relationships are treated as held for trading from the de-designation date. ➔ Refer to “Note 1a) 15) Derivative instruments and hedge accounting” and “Note 23 Derivative instruments and hedge  accounting” in the “Financial information” section of this  report for more information Provisions Provisions are recognized when we have a present legal or con- structive obligation as a result of past events, if it is probable that an outflow of resources will be required to settle or discharge the obligation and a reliable estimate of the obligation can be made. Recognition of provisions often requires use of an estimate as the exact amount of the obligation is often unknown. The esti- mate is based on all available information and reflects the amount that in management’s opinion represents the best estimate of the expenditure required to settle or discharge the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Future events that may affect the amount required to settle or discharge the obliga- tion are reflected in the amount provided, whenever there is suf- ficient objective evidence that such future events will occur. We revise existing provisions up or down when additional informa- tion becomes available which allows the estimates to be quanti- fied more accurately. Management necessarily exercises judg- ment in making assumptions and estimates when calculating provisions. Provisions are classified in “Note 21 Provisions and contingent liabilities” in the “Financial information” section of this report into the following categories: operational risks, litigation and reg- ulatory matters, restructuring, provisions for loan commitments and guarantees, and other. Operational risks include provisions resulting from security risks and transaction processing risks. Liti- gation and regulatory matters includes provisions for claims re- lated to legal, liability and compliance risks. Provisions for rein- statement costs for leasehold improvements, provisions for onerous lease contracts, provisions for employee benefits and other items are disclosed under Other. ➔ Refer to “Note 1a) 27) Provisions” in the “Financial information” section of this report for more information Pension and other post-employment benefit plans The defined benefit obligation at the end of the year and the net periodic pension cost for the year depend on the expected future benefits to be provided, determined using a number of economic and demographic assumptions. The assumptions include life ex- pectancy, the discount rate, expected salary increases, expected returns on plan assets and pension rates. Life expectancy is determined by reference to published mor- tality tables. The discount rate is determined by reference to rates of return on high-quality fixed-income investments of appropriate term at the measurement date. The assumption for salary in- creases reflects the long-term expectations for salary growth and takes into account inflation, seniority, promotion and other rele- vant factors such as supply and demand in the labor market. The expected return on plan assets is the long-term average return that management believes is expected on the pension assets, based on class of asset. The most significant plan is the Swiss pension plan. Life ex- pectancy for this plan has been based on the 2010 BVG genera- tional mortality tables. This change has resulted in higher life expectancies than the prior year, which was based on the 2005 BVG mortality table that preceded the 2010 tables. The assump- tions for the discount rate and the expected return on plan as- sets also changed from the prior year, to 2.3% and 3.5%, re- spectively. ➔ Refer to “Note 29 Pension and other post-employment benefit plans” and “Note 1a) 24) Pension and other post-employment benefit plans” in the “Financial information” section of this report for more information 61 Financial and operating performance UBS results UBS results Net profit attributable to UBS shareholders was CHF 4,159 million in 2011 compared with CHF 7,534 million in 2010. Pre-tax profit declined to CHF 5,350 million from CHF 7,455 million, reflecting lower operating income primarily in the Investment Bank, partly offset by cost reductions. In 2011, we recorded a net tax expense of CHF 923 million com- pared with a net tax benefit of CHF 381 million in 2010. 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 / (benefit) 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 non-controlling interests from continuing operations from discontinued operations Net profit attributable to UBS shareholders from continuing operations from discontinued operations Comprehensive income Total comprehensive income Total comprehensive income attributable to non-controlling interests Total comprehensive income attributable to UBS shareholders 62 For the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 17,969 (11,143) 6,826 (84) 6,742 15,236 4,343 1,467 27,788 15,591 5,959 761 0 127 22,439 5,350 923 4,426 0 0 0 4,427 268 268 0 4,159 4,158 0 7,457 560 6,896 18,872 (12,657) 6,215 (66) 6,149 17,160 7,471 1,214 31,994 16,920 6,585 918 0 117 24,539 7,455 (381) 7,836 2 0 2 7,838 304 303 1 7,534 7,533 1 6,484 609 5,875 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) (2,125) 610 600 10 (2,736) (2,719) (17) (2,792) 484 (3,276) (5) (12) 10 27 10 (11) (42) 21 (13) (8) (10) (17) 9 (9) (28) (44) (100) (100) (44) (12) (12) (100) (45) (45) (100) 15 (8) 17 e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 2011 Performance before tax Profit from continuing operations before tax was CHF 5,350 mil- lion down from CHF 7,455 million, mainly due to a decline in op- erating income of CHF 4,206 million, partly offset by cost reduc- tions of CHF 2,100 million. Operating income Total operating income was CHF 27,788 million in 2011, down CHF 4,206 million from CHF 31,994 million in 2010. This decline was mainly due to a reduction of CHF 1,924 million in net fee and commission income on lower underwriting fees and a decline in asset-based fees, the loss of CHF 1,849 million related to the un- authorized trading incident, and (even excluding the effect of the unauthorized trading incident) lower trading revenues in our equi- ties and fixed income, currencies and commodities (FICC) busi- nesses. These declines were partly offset by an own credit gain on financial liabilities designated at fair value of CHF 1,537 million, compared with a loss of CHF 548 million in the prior year. In addi- tion, in 2011 we incurred a loss of CHF 133 million on the valua- tion of our option to acquire the SNB StabFund’s equity compared with a gain of CHF 745 million in 2010. Furthermore, in 2011 we recorded a gain of CHF 722 million on the sale of our strategic investment portfolio. ➔ Refer to the “Certain items affecting our results in 2011” sidebar in this section of this report for more information on the ➔ Refer to “Note 26 Fair value of financial instruments” in the “Financial information” section of this report for more information on own credit Equities interest and trading revenues, excluding own credit and the unauthorized trading incident, declined by CHF 523 mil- lion reflecting the strengthening of the Swiss franc, and lower revenues in the derivatives and equity-linked businesses. Net interest income in Wealth Management increased by CHF 231 million, mainly as higher treasury-related income and a 10% growth in average lending volumes compensated for margin pres- sure resulting from low market interest rates. In addition, net inter- est income benefited from income derived from the strategic invest- ment portfolio in the first nine months of 2011. Income derived from the strategic investment portfolio was significantly lower in 2010 as the portfolio was only established during the fourth quarter of that year. Net trading income in Wealth Management also in- creased by CHF 231 million, partly due to treasury-related revenues. Net interest income in Retail & Corporate declined by CHF 94 million due to margin pressure that was partly offset by higher volumes. Net trading revenues in Wealth Management Americas fell by CHF 120 million, impacted by the strengthening of the Swiss franc, lower taxable fixed income and municipal trading income, partly offset by higher trading income from structured notes. Corporate Center trading revenues included a loss of CHF 133 million on the valuation of our option to acquire the SNB Stab- Fund’s equity compared with a gain of CHF 745 million in 2010. ➔ Refer to the “Risk management and control section” section of this report for more information on our option to acquire the unauthorized trading incident, the sale of our strategic SNB StabFund’s equity investment portfolio and our cost reduction program Net interest and trading income Net interest and trading income was CHF 11,169 million, down CHF 2,517 million from the prior year. In 2011, we recorded a loss of CHF 1,849 million related to the unauthorized trading incident, which was partly offset by an own credit gain of CHF 1,537 mil- lion due to the widening of our credit spreads during the year. Own credit in 2010 was a loss of CHF 548 million as credit spreads tightened during the year. Net interest and trading income in FICC, excluding own cred- it, was down by CHF 1,621 million, partly reflecting the strength- ening of the Swiss franc. Credit trading revenues declined due to concerns surrounding the eurozone and the global economic outlook in general, which led to increased market volatility and significantly impacted liquidity and client activity. Emerging mar- ket interest and trading revenues also declined. Furthermore, in 2011 we recorded a loss of CHF 284 million related to credit valuation adjustments for monoline credit protection compared with a gain of CHF 667 million in 2010. These declines were partly offset by higher macro net interest and trading revenues which increased across interest rates and foreign exchange busi- ness lines. Credit loss expense / recovery In 2011, we recorded a net credit loss expense of CHF 84 million, mainly reflecting an increase in collective loan loss allowances due to increased credit risks arising predominantly from Swiss corpo- rate clients that had become exposed to significant foreign cur- rency related risk as a result of the impact of the strength ening Swiss franc on their financial position. In 2010, we reported net credit loss expenses of CHF 66 million, which included CHF 172 million of impairment charges taken on reclassified and acquired securities, partially offset by recoveries on certain loan positions. ➔ Refer to the “Risk management and control section” section of this report for more information on our risk management approach, method of credit risk measurement and the develop- ment of credit risk exposures Net fee and commission income Net fee and commission income was CHF 15,236 million com- pared with CHF 17,160 million in the previous year. Underwriting fees decreased by CHF 732 million or 38% to CHF 1,180 million, reflecting a decline in both equity and debt underwriting fees. The decline in equity underwriting fees result- ed in part from an overall market slowdown due to volatility in 63 Financial and operating performance UBS results Net interest and trading income CHF million Net interest and trading income Net interest income Net trading income Total net interest and trading income Credit loss (expense) / recovery CHF million Wealth Management Retail & Corporate Wealth Management & Swiss Bank Wealth Management Americas Investment Bank of which: related to reclassified securities 1 of which: related to acquired securities Corporate Center Total For the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 6,826 4,343 11,169 6,215 7,471 13,686 6,446 (324) 6,122 10 (42) (18) For the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 11 (101) (90) (6) 12 37 (28) (1) (84) 11 (76) (64) (1) 0 (133) (39) 0 (66) 45 (178) (133) 3 (1,698) (425) (18) (5) (1,832) 0 33 41 500 (28) 27 1 Refer to “Note 28b Reclassification of financial assets” in the “Financial information” section of this report. capital markets and a reduced market fee pool. Debt underwrit- ing fees declined due to lower revenues in the Investment Bank’s debt capital market business, in part reflecting the market impact of European sovereign debt concerns. A decline of CHF 601 million in net brokerage fees reflected a downturn in the market, with lower transactional volumes and reduced level of client activity. Portfolio management and advisory fees for the Group fell 7%, or CHF 408 million, to CHF 5,551 million, mainly due to the strengthening of the Swiss franc. Investment fund fees decreased CHF 321 million, or 8%, to CHF 3,577 million, due to lower asset-based fees resulting from a lower average invested asset base, primarily as a result of the strengthening of the Swiss franc. Merger and acquisition and corporate finance fees increased by CHF 135 million, or 16%, reflecting a somewhat improved merger and acquisition environment in 2011 with the completion of several large deals. ➔ Refer to “Note 4 Net fee and commission income” in the “Financial Other income in 2011 also included gains of CHF 344 million from the sale of loans and receivables compared with CHF 324 million in 2010. The 2011 gains mainly related to the sale of col- lateralized loan obligations, which had been reclassified previ- ously from Held for trading to Loans and receivables, and were partly offset by related hedge termination losses recorded in net trading income. Additionally, in 2011 we recorded a gain of CHF 78 million on sale of a property in Switzerland, compared with a gain of CHF 158 million on sale of a property in Switzerland in 2010. Net gains from disposals of investments in associates were down CHF 236 million, mainly as 2010 included a gain of CHF 180 million from the sale of investments in associates owning office space in New York. Other income in 2010 further included a CHF 69 million demutualization gain from our stake in the Chicago Board Options Exchange. ➔ Refer to “Note 5 Other income” in the “Financial information” section of this report for more information information” section of this report for more information Operating expenses Other income Other income was CHF 1,467 million compared with CHF 1,214 million in the previous year. In 2011, net gains from financial investments available-for-sale were CHF 887 million compared with 132 million in 2010. Gains in 2011 included CHF 722 million from the sale of our strategic investment portfolio as well as gains of CHF 81 million in Wealth Management Americas’ available-for-sale portfolio. Total operating expenses were CHF 22,439 million in 2011 com- pared with CHF 24,539 million in 2010. Operating expenses in 2011 included CHF 380 million of net restructuring charges com- pared with CHF 113 million in 2010. Personnel expenses Personnel expenses decreased by CHF 1,329 million, or 8%, to CHF 15,591 million due to strengthening of the Swiss franc. 64 e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F In  2011, we recorded CHF 261 million in personnel-related net restructuring charges, compared with a net release of CHF 2 mil- lion in the prior year. Salary costs decreased by CHF 174 million, or 2%, as a result Outsourcing of IT and other services increased by CHF 73 mil- lion, or 7%, due to higher IT business demand and capacity ex- pansion needed for control functions related to increased regula- tory requirements. of the strengthening of the Swiss franc. Expenses for discretionary variable compensation were CHF 3,392 million, a decrease of CHF 690 million, or 17%, from the prior year. Expenses relating to 2011 bonus awards recognized in the performance year 2011 were CHF 1,807 million, down CHF 804 million or 31% from the prior year, reflecting a 40% decrease in the overall bonus pool for the 2011 performance year. The amortization of deferred compensation awards from prior years increased by CHF 114 million, or 8%, to CHF 1,585 million. Other variable compensation increased by CHF 86 million, mainly reflecting an increase in restructuring-related severance charges. Expenses for litigation and regulatory matters decreased by CHF 355 million, or 56%, mainly due to lower charges for litigation pro- visions in Wealth Management Americas and the Investment Bank. Other general and administrative expenses decreased by CHF 53 million, or 30%, due to a release of provisions for value-added tax in Switzerland and favorable currency translation effects, par- tially offset by increased real restate related restructuring charges which were CHF 93 million in 2011 compared with CHF 79 million in the prior year. ➔ Refer to “Note 7 General and administrative expenses” in the “Financial information” section of this report for more information Financial advisor compensation in Wealth Management Amer- icas decreased by CHF 149 million to CHF 2,518 million. In US dollar terms, financial advisor compensation increased, reflecting higher revenue production and higher compensation commit- ments and advances related to recruited financial advisors. Depreciation and amortization Depreciation of property and equipment was CHF 761 million, a decrease of CHF 157 million, or 17%, from the prior year. The strengthening of the Swiss franc contributed substantially to the overall decrease. Other personnel expenses decreased by CHF 369 million, mainly as the prior year included a charge of CHF 200 million for the UK bank payroll tax. ➔ Refer to “Note 6 Personnel expenses” and “Note 30 Equity participation and other compensation plans” in the “Financial information” section of this report and to the “Compensation” section of this report for more information General and administrative expenses General and administrative expenses were CHF 5,959 million in 2011 compared with CHF 6,585 million in 2010. The strengthen- ing of the Swiss franc contributed substantially to the overall de- crease. Occupancy costs decreased by CHF 193 million or 15% mainly as vacant office space was provisioned for in the prior year, and also as a result of reduced rental expenses and favorable currency translation effects. Rent and maintenance of machines and equipment decreased by CHF 126 million, or 23%, mainly due to reduced costs for IT maintenance services. Expenses for communications and market data services decreased by CHF 48 million, or 7%, mainly as a result of reduced costs for market data services. Administration costs decreased by CHF 48 million, or 7%, as a result of a release of value added tax accruals in the UK and the favorable effect of the strengthening of the Swiss franc, largely offset by a CHF 109 million charge related to the UK bank levy. The prior year included a charge of CHF 40 million to reimburse the Swiss government for costs incurred in connection with the US cross-border matter. Marketing and public relations expenses increased by CHF 54 million, or 16%, primarily due to higher costs associated with sponsoring activities and marketing. Professional fees increased by CHF 68 million, or 9%, mainly due to higher legal fees. Depreciation of IT and other equipment decreased partly as the useful life of some assets was extended. In 2011 we recorded a reversal of impairment losses on a property of CHF 34 million, partly offset by CHF 26 million restructuring related impairments of real estate assets. The prior year included CHF 37 million im- pairment charges related to restructuring in Wealth Manage- ment Americas. Amortization of intangible assets was CHF 127 million com- pared with CHF 117 million in 2010. Higher impairment charges on intangible assets, mainly resulting from the impairment of in- tangible assets related to a past acquisition in the UK, were only partially offset by lower amortization of intangible assets due to favorable currency impacts. Income tax We recognized a net income tax expense in the income statement for the year of CHF 923 million. This includes a Swiss net deferred tax expense of CHF 1,063 million, which reflects a tax expense of CHF 949 million for the amortization of deferred tax assets, as tax losses are used against profits arising from business operations. In addition, it reflects a tax charge of CHF 245 million relating to the revaluation of deferred tax assets (reflecting updated profit fore- cast assumptions including the expected geographical mix) partly offset by a CHF 131 million tax effect relating to the unauthorized trading incident. Additionally, it includes a foreign net deferred tax benefit of CHF 246 million, including a US tax benefit of CHF 400 million, which mainly relates to a write-up of deferred tax assets for US tax losses incurred in previous years, predominantly in the parent bank, UBS AG. This was partly offset by a tax ex- pense of CHF 41 million relating to the downward revaluation of deferred tax assets for Japan, following a change in statutory tax rates and loss offset rules, and a tax expense of CHF 113 million 65 Financial and operating performance UBS results for the amortization of deferred tax assets, as tax losses are used against profits in various locations. It also includes a current tax expense of CHF 106 million, which reflects tax expenses of CHF 277 million for taxable profits of Group entities, partly offset by current tax benefits of CHF 171 million relating to prior periods. During 2010, we recognized a net income tax benefit in our income statement of CHF 381 million. This reflected a deferred tax benefit mainly relating to the recognition of additional de- ferred tax assets in respect of tax losses, partly offset by current tax expenses relating to taxable profits of Group entities. In the first half of 2012, we expect our tax rate to be in the region of 20–25%. However, the tax rate may differ if there are significant book tax adjustments, which generally mainly affect Swiss taxable profits – for example, own credit gains / losses. In the second half of 2012, consistent with past practice, we expect to revalue our deferred tax assets based on a reassessment of future profitability taking into account updated business plan forecasts. ➔ Refer to “Note 22 Income taxes” in the “Financial information” section of this report for more information Net profit attributable to non-controlling interests Net profit attributable to non-controlling interests for 2011 was CHF 268 million, compared with CHF 304 million in 2010. This mainly reflected dividends paid on preferred securities and divi- dend accruals triggered by the call of a hybrid tier 1 instrument in 2011. Comprehensive income attributable to UBS shareholders Comprehensive income attributable to UBS shareholders includes all changes in equity (including net profit) attributed to UBS share- holders during a period, except those resulting from investments by and distributions to shareholders as well as equity-settled share-based payments. Items included in comprehensive income, but not in net profit, are reported under other comprehensive in- come (OCI). Most of those items will be recognized in net profit when the underlying item is sold or realized. Comprehensive income attributable to UBS shareholders in 2011 was CHF 6,896 million, including net profit attributable to UBS shareholders of CHF 4,159 million, and other comprehensive income attributable to UBS shareholders of CHF 2,737 million. OCI attributable to UBS shareholders included foreign currency translation gains of CHF 706 million, fair value gains on financial investments available-for-sale of CHF 495 million, and fair value gains of CHF 1,537 million on interest rate swaps designated as cash flow hedges. Foreign currency translation gains of CHF 706 million were pre- dominantly related to net investments in US foreign operations, which led to gains as the US dollar appreciated in the second half of 2011. Fair value gains of CHF 495 million on financial invest- ments available-for-sale were almost entirely driven by net gains of CHF 545 million related to the strategic investment portfolio. De- clining market interest rates resulted in an increase in fair values of CHF 1,267 million and other comprehensive income gains prior to the sale of the portfolio in the third quarter of 2011, more than offsetting unrealized losses of CHF 545 million recognized in OCI in 2010. Upon sale, a realized gain of CHF 722 million was recog- nized in the income statement within other income, which re- duced other comprehensive income accordingly. Fair value gains of CHF 1,537 million on net fixed receiver interest rate swaps desig- nated as cash flow hedges resulted from declining long-term inter- est rates across all major currencies. OCI attributable to UBS shareholders in 2010 was negative CHF 1,659 million, mainly reflecting foreign currency translation losses of CHF 909 million and fair value losses on financial invest- ments available-for-sale of CHF 607 million. ➔ Refer to the “Statement of comprehensive income” in the “Fi- nancial information” section of this report for more information Performance by reporting segment The management discussion and analysis by reporting segment is provided in the following sections of this report. Development of invested assets Net new money In Wealth Management, net new money improved significantly, with net inflows of CHF 23.5 billion compared with net outflows of CHF 12.1 billion in 2010 due to improvements in all regions Performance from continuing operations before tax CHF million Wealth Management Retail & Corporate Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Corporate Center Operating profit from continuing operations before tax 66 For the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 2,676 1,919 4,596 534 428 154 (363) 5,350 2,308 1,772 4,080 (130) 516 2,197 793 7,455 2,280 1,629 3,910 32 438 (6,081) (860) (2,561) 16 8 13 (17) (93) (28) Net new money 1 CHF billion Wealth Management Wealth Management Americas Global Asset Management of which: money market flows 1 Excludes interest and dividend income. Invested assets CHF billion Wealth Management Retail & Corporate Wealth Management & Swiss Bank Wealth Management Americas Traditional investments of which: money market funds Alternative and quantitative investments Global real estate Infrastructure and private equity 1 Global Asset Management Total For the year ended 31.12.11 31.12.10 31.12.09 23.5 12.1 4.3 (4.7) (12.1) (6.1) 1.8 (6.4) (87.1) (11.6) (45.8) (12.1) 31.12.11 As of 31.12.10 % change from 31.12.09 31.12.10 750 134 883 709 497 92 31 38 8 574 2,167 768 136 904 689 487 96 34 36 1 559 2,152 825 135 960 690 502 111 41 39 1 583 2,233 (2) (1) (2) 3 2 (4) (9) 6 700 3 1 e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 1 With effect from 2011, the Infrastructure and private equity fund of funds businesses were transferred from Alternative and quantitative investments to Infrastructure, which following the transfer was renamed Infra- structure and private equity. As the amounts were not material, prior periods were not restated. and client segments. The strongest net inflows were recorded in Asia Pacific and the emerging markets as well as globally from ultra high net worth clients. Europe reported net outflows, mainly related to the offshore business with countries neighboring Swit- zerland partly offset by net inflows from the European onshore business. Net new money inflows in Wealth Management Americas were CHF 12.1 billion compared with net outflows of CHF 6.1 billion in 2010. This turnaround was due to improved net inflows from net recruiting of financial advisors, including higher inflows from recruitment of experienced financial advisors, and lower outflows from financial advisor attrition. Net new money from financial advisors employed with UBS for more than one year remained positive, but declined from 2010. In Global Asset Management, excluding money market flows, net new money inflows from third parties were CHF 12.2 billion in 2011 compared with net inflows of CHF 16.2 billion in 2010, and net outflows from clients of UBS’s wealth management businesses were CHF 3.1 billion compared with net outflows of CHF 8.1 billion. The flows from UBS’s wealth management businesses included two transfers of investment management and research responsibility from Wealth Management & Swiss Bank to Global Asset Manage- ment: a CHF 1.8 billion multi-manager alternative fund was trans- ferred to alternative and quantitative investments, and CHF 2.9 bil- lion in private equity funds of funds were transferred to infrastructure and private equity. It should be noted that these assets are reported as invested assets in both business divisions, as Wealth Manage- ment & Swiss Bank continues to advise the clients of the funds. Money market net inflows from third parties were CHF 0.2 bil- lion compared with CHF 2.0 billion in 2010, and money market net outflows from clients of UBS’s wealth management business- es were CHF 5.0 billion compared with CHF 8.3 billion. Invested assets Total invested assets were CHF 2,167 billion on 31 December 2011, up slightly from CHF 2,152 billion on 31 December 2010. Net new money inflows of CHF 42 billion and the addition of CHF 25 billion in invested assets related to the ING Investment Management ac- quisition were largely offset by adverse market impacts. ➔ Refer to the “Wealth Management”, “Wealth Management Americas” and “Global Asset Management” sections of this report for more information 67 Financial and operating performance UBS results Certain items affecting our results in 2011 Cost reduction program In July 2011, we announced a cost reduction program intended to align our cost base with changes in the market environment. As part of this program, in August we announced that we would reduce our headcount by approximately 3,500 and rationalize our real estate requirements. As a result, we expect to recognize restructuring charges totaling approximately CHF 550 million, of which CHF 403 million was recognized in 2011. Staff reductions announced in August included redundancies as well as natural attrition. Of the expected 3,500 staff reductions, approximately 45% will come from the Investment Bank, 35% from Wealth Management & Swiss Bank, 10% from Global Asset Management, and 10% from Wealth Management Ameri- cas. The majority of affected staff departed in 2011. UBS will continue to be vigilant in man- aging its cost base while remaining committed to investing in growth areas. ➔ Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information Unauthorized trading incident In September 2011, we announced that the Investment Bank had incurred a loss of CHF 1,951 million (USD 2,229 million) due to an unauthorized trading incident. Large stock index futures positions were offset in our systems with fictitious, forward-settling exchange-traded funds (ETF) positions. These fictitious ETF positions masked the risk related to the futures positions, and ultimately the substantial losses incurred on them. Our risk and operational systems detected unauthorized or unexplained activity, but this was not sufficiently investigated nor was appropriate action taken to ensure that existing controls were enforced. The resulting loss adversely impacted the Group’s pre-tax profit for the year by CHF 1,849 million. The remainder of the loss, CHF 102 million, was a foreign currency translation loss recognized directly in equity (other comprehensive income) as a result of the fact that the activity took place in a foreign operation in a func- tional currency other than the Swiss franc. A special committee of the Board of Directors was established and is conduct- ing an investigation of the unauthorized trading activity and its relation to the control environment. A second investiga- tion is being carried out jointly by the Swiss Financial Market Supervisory Authority (FINMA) and the UK Financial Services Authority (UK FSA); they have retained KPMG for this purpose. In addition, FINMA and the UK FSA have announced that they have commenced enforcement proceedings against UBS in relation to this matter. We are cooperat- ing fully with these investigations and are committed to addressing all findings to ensure that we have a risk management framework that better protects the firm and its shareholders. ➔ Refer to the “Impact of the unauthorized trading” sidebar in the “Compensation” section of this report for more information Sale of our strategic investment portfolio In the third quarter of 2011, we sold our strategic investment portfolio comprised of long-term fixed-interest-rate US Treasury securities with a face value of USD 9.4 billion and UK Government bonds with a face value of GBP 2.9 billion. The gain on sale of CHF 722 million was recognized as other income. Of this gain, CHF 433 million was allocated to Wealth Management and CHF 289 million to Retail & Corporate. This portfolio was established in the fourth quarter of 2010 to hedge negative effects on the bank’s net 68 interest income stemming from the prolonged period of very low interest rate yields. As the market yields of the positions were declining below targeted levels, we closed these positions to realize gains. ➔ Refer to the “Interest rate and currency management” section of this report for more information on our management of non-trading interest rate risk Adjustments to 2011 results after issuance of fourth quarter report After the publication of our fourth quarter 2011 financial report on 7 February 2012, management adjusted the 2011 results to account for subsequent events. The net, after-tax effect of these adjustments was to reduce net profit attributable to UBS shareholders by CHF 74 million, which decreased basic and diluted earnings per share by CHF 0.02. The principal change relates to an agreement in principle that we entered into with a monoline insurer in March 2012, under which we agreed to the commutation of certain credit default swap contracts in exchange for a net cash payment. This had the effect of reducing the Investment Bank’s 2011 net trading income by CHF 167 million. The settle- ment, if consummated, would also include the resolution of litigation and the mutual release of claims, as well as the removal of certain existing impediments to the restructuring or sale by UBS of legacy assets which account for aggregate Basel III risk-weighted assets of almost CHF 15 billion. The transaction is in keeping with our strategy to reduce our Basel III risk-weighted assets in anticipa- tion of future capital requirements. We cannot predict when or at what prices the underlying assets may be restructured or sold. ➔ Refer to “Note 32 Events after the reporting period” in the “Financial information” section of this report for more information e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 2010 Results In 2010, we reported a Group net profit attributable to sharehold- ers of CHF 7,534 million, a profit before tax from continuing opera- tions of CHF 7,455 million and a profit before tax from discontin- ued operations of CHF 2 million. In 2009, we recorded a net loss attributable to shareholders of CHF 2,736 million. Operating income Total operating income was CHF 31,994 million in 2010, up from CHF 22,601 million in 2009. Net interest income was CHF 6,215 million compared with CHF 6,446 million in the prior year. Net interest and trading income Net interest and trading income was CHF 13,686 million com- pared with CHF 6,122 million in 2009. The Investment Bank’s fixed income, currencies and commodi- ties’ (FICC) trading revenues improved due to an increase in cred- it trading revenues, which was partially offset by decreases in trading revenues in our macro and emerging markets businesses. A major part of the improvement was due to de-risking and re- duction of the residual positions portfolio. Equities trading reve- nues, excluding own credit, decreased compared with the previ- ous year, primarily in the derivatives and equity-linked business. An own credit loss on financial liabilities designated at fair value of CHF 548 million was recorded in 2010, compared with a CHF 2,023 million loss in 2009. This was due to continuing but comparatively less tightening of our credit spreads in 2010. Deb- it valuation adjustments on derivatives in the Investment Bank’s FICC business were positive CHF 155 million compared with negative CHF 1,882 million in 2009. This resulted from the wid- ening of overall credit spreads in the second quarter, partially offset by a tightening of the credit spreads in the third and fourth quarters. Interest income in Wealth Management was down CHF 116 million, or 6%, due to pressure from the low interest rate environ- ment and the decrease in value of the euro and US dollar against the Swiss franc in 2010. Interest income in Retail & Corporate was down 259 million, or 10%, partly as low market interest rates continued to exert downward pressure on interest margins. In Wealth Management Americas, interest income declined by CHF 105 million, or 13%, to CHF 695 million due to lower investment portfolio interest income, partly offset by higher income from se- curities-backed lending. Net trading income in Wealth Manage- ment Americas declined CHF 193 million to CHF 570 million, partly due to lower municipal trading income. Net interest and trading income in the Corporate Center in- creased and included a CHF 745 million gain on the valuation of our option to acquire the SNB StabFund’s equity compared with a CHF 117 million gain in the prior year. Credit loss expenses In 2010, we reported net credit loss expenses of CHF 66 million. This included CHF 172 million of impairment charges taken on reclassified and acquired securities, partially offset by recoveries on certain loan positions. The net credit loss expenses in 2009 amounted to CHF 1,832 million. The net credit loss expenses of the Investment Bank were nil in 2010, compared with net credit loss expenses of CHF 1,698 mil- lion in 2009. Credit loss expenses of CHF 172 million in relation to reclassified and acquired securities were primarily related to im- pairments on our student loan auction rate securities inventory, offset by recoveries on certain loan positions. Wealth Management & Swiss Bank reported net credit loss ex- penses of CHF 64 million for 2010, compared with CHF 133 million in 2009. ➔ Refer to the “Risk, treasury and capital management” section of this report for more information on our risk management approach, method of credit risk measurement and the develop- ment of credit risk exposures Net fee and commission income Net fee and commission income was CHF 17,160 million, com- pared with CHF 17,712 million in the previous year. Income de- clined slightly in all major fee categories except for portfolio man- agement and advisory fees, as outlined below: – Underwriting fees were CHF 1,912 million compared with CHF 2,386 million in the prior year, due to a decline in both equity and debt underwriting fees. The decrease in equity underwrit- ing fees resulted from an overall market slowdown. Debt un- derwriting fees declined due to lower revenues in the Invest- ment Bank’s debt capital market business. – Mergers and acquisitions and corporate finance fees were CHF 857 million, a decrease from CHF 881 million in the prior year. This was due to reduced market activity as deal appetite remained subdued in the first half of 2010. – Net brokerage fees fell 8% to CHF 3,837 million mainly due to low transaction volumes and margin compression in 2010. – Investment fund fees were CHF 3,898 million, a 3% decrease compared with the prior year. Lower asset based commission fees on UBS funds were partly offset by higher fees on third- party funds and sales-based commission income. – Portfolio management and advisory fees increased 2% to CHF 5,959 million, mainly due to higher portfolio manage- ment fees in our Wealth Management Americas business di- vision. This was partly offset by lower portfolio management fees in Global Asset Management, primarily resulting from lower performance fees in its alternative and quantitative in- vestments business, and by lower portfolio management and advisory fees in Wealth Management & Swiss Bank and the Investment Bank. – Other commission expense fell 10% to CHF 964 million, main- ly due to lower commissions paid for payment transactions, other services and management advisory. 69 Financial and operating performance UBS results Other income Other income was CHF 1,214 million in 2010, compared with CHF 599 million in the previous year. Other income in 2010 included a CHF 180 million gain from the sale of investments in associates owning real estate in New York, a gain of CHF 158 million from the sale of a property in Zurich, gains of CHF 324 million from the  disposal of loans and receivables (including sales and issuer redemptions of auction rate securities), a CHF 69 million demu- tualization gain from our stake in the Chicago Board Options Exchange, and a negative CHF 45 million valuation adjustment on a property fund held by Wealth Management & Swiss Bank. ➔ Refer to “Note 5 Other income” in the “Financial information” section of this report for more information other equipment, communication and market data services, ad- ministration and professional fees. ➔ Refer to “Note 7 General and administrative expenses” in the “Financial information” section of this report for more informa- tion Depreciation, amortization and impairment of goodwill Depreciation was CHF 918 million in 2010, compared with CHF 1,048 million in 2009. Amortization of intangible assets was CHF 117 million compared with CHF 200 million in the prior year. No goodwill impairment charges were recorded in 2010. A goodwill impairment charge of CHF 1,123 million relating to the sale of UBS Pactual was recorded in 2009. Operating expenses Income tax Total operating expenses were CHF 24,539 million in 2010, com- pared with CHF 25,162 million in 2009. Operating expenses in 2010 included CHF 113 million of net restructuring charges, while operating expenses in 2009 included goodwill impairment charg- es of CHF 1,123 million and restructuring charges of CHF 791 million. Personnel expenses Personnel expenses were CHF 16,920 million, up from CHF 16,543 million in the prior year. Personnel expenses recorded in 2010 included discretionary variable compensation expenses of CHF 4.1 billion, of which CHF 1.5 billion relates to variable com- pensation brought forward from prior years. The discretionary bonus pool granted to employees for the performance year 2010 was CHF 4.2 billion, 11% lower than in the previous year. Of this amount, CHF 2.6 billion is recognized in the income statement in 2010, and CHF 1.6 billion will be deferred to future periods. Oth- er personnel expenses in 2010 included a charge of CHF 0.2 bil- lion for the UK bank payroll tax. Other variable compensation was CHF 230 million in 2010 com- pared with CHF 699 million in 2009. The decrease was mainly due to restructuring-related severance costs recognized in 2009. ➔ Refer to “Note 6 Personnel expenses” and “Note 30 Equity participation and other compensation plans” in the “Financial information” section of this report and to the “Compensation” We recognized a net income tax benefit in our income statement of CHF 381 million for 2010. This included a deferred tax benefit of CHF 605 million and current tax expenses of CHF 224 million. The deferred tax benefit reflects the recognition of additional deferred tax assets in respect of tax losses and temporary differ- ences in a number of foreign locations including the US (tax benefit of CHF 1,161 million) and Japan (tax benefit of CHF 98 million), taking into account the updated taxable profit forecast assump- tions over the five-year time horizon used for recognition purposes. This was partly offset by a Swiss net deferred tax expense. Swiss tax losses, for which deferred tax assets have previously been recog- nized, were used against profits for the year (tax expenses of CHF 1,409 million). This was partly offset by an upward revaluation of Swiss deferred tax assets taking into account revised profit forecast assumptions (tax benefit of CHF 741 million). The current tax expenses relate to tax expenses in respect of taxable profits of Group entities, partially offset by tax benefits arising from the agreement on prior year positions with tax au- thorities in various locations. During 2009, we recognized a net income tax benefit in our income statement of CHF 443 million. This reflected a deferred tax benefit mainly relating to the recognition of additional de- ferred tax assets in respect of tax losses, partly offset by current tax expenses relating to taxable profits of Group entities. section of this report for more information Net profit attributable to non-controlling interests General and administrative expenses General and administrative expenses were CHF 6,585 million in 2010 compared with CHF 6,248 million in 2009. Marketing and public relations expenses increased primarily due to the costs as- sociated with sponsoring and branding campaigns related to the global re-launch of the UBS brand. Other general and administra- tive expenses increased due to higher litigation provisions, partially offset by lower restructuring provisions. Costs of outsourcing IT and other services as well as travel and entertainment were higher compared with the prior year. These increases were partly offset by reduced spending on occupancy, rent and maintenance of IT and Net profit attributable to non-controlling interests for 2010 was CHF 304 million, compared with CHF 610 million for 2009. This decrease was primarily the consequence of the attribution in 2009, rather than in 2010, of CHF 132 million of net profit to non-controlling interests in connection with certain dividends payable in 2010 on hybrid capital instruments classified as non- owner equity. This attribution was made out of 2009’s net profit following a determination that a triggering event had occurred that caused the 2010 dividend payments to become obligatory under the terms of these hybrid capital instruments. The trigger- ing event was the cash payment made by UBS in 2009 to the 70 Swiss Confederation in consideration of the Confederation’s waiver of its right to receive future coupon payments on the man- datory convertible notes due in 2011. Had the 2010 dividend payments been applied to net profit in 2010 rather than in 2009, the net profit attributed to non-con- trolling interests would have been CHF 478 million in 2009 and CHF 436 million in 2010. Comprehensive income attributable to UBS shareholders Comprehensive income attributable to UBS shareholders in 2010 was CHF 5,875 million, including net profit attributable to UBS shareholders of CHF 7,534 million, partially offset by other com- prehensive income attributable to UBS shareholders of negative CHF 1,659 million. OCI attributable to UBS shareholders was negative in 2010 due to: (i) losses in the currency translation account of CHF 909 million (net of tax) related to the Swiss franc carrying value of investments in subsidiaries whose reporting currencies are other than Swiss francs; (ii) fair value losses on financial investments available-for-sale of CHF 607 million (net of tax); and (iii) changes in the replacement values of interest rate swaps designated as hedging instruments of negative CHF 143 million (net of tax). Foreign currency translation-related OCI losses attributable to UBS shareholders of CHF 1,501 million (net of tax) in 2010 large- ly resulted from the strengthening of the Swiss franc against the US dollar, British pound and euro. We have foreign operations conducted through entities with these functional currencies. These losses in foreign currency translation were partially offset by an out-of-period credit of CHF 592 million resulting from the correction of prior period misstatements. Fair value losses on fi- nancial investments available-for-sale predominantly relate to our fixed-interest bearing long-term bond portfolio, which consists of US and UK government bonds. During the fourth quarter, the fair value of this portfolio decreased, mostly due to rising market interest rates. On a net basis, the fair value movement of US dol- lar, euro and British pound fix-receiver and fixed-payer interest rate swaps designated in cash flow hedges was slightly negative during the year. ➔ Refer to the “Statement of comprehensive income” and “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for more information Invested assets Total invested assets were CHF 2,152 billion on 31 December 2010, a decrease of 4% from CHF 2,233 billion on 31 December 2009. Positive market developments were more than offset by negative currency effects and net new money outflows. ➔ Refer to the “Wealth Management”, “Wealth Management Americas” and “Global Asset Management” sections of this report for more information e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 71 Financial and operating performance UBS results Balance sheet 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 of which: pledged as collateral Positive replacement values Cash collateral receivables on derivative instruments 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 Cash collateral payables on derivative instruments 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 Treasury shares Equity classified as obligation to purchase own shares Retained earnings Cumulative net income recognized directly in equity, net of tax Equity attributable to UBS shareholders Equity attributable to non-controlling interests Total equity Total liabilities and equity 72 31.12.11 31.12.10 31.12.09 31.12.10 % change from 40,638 23,218 58,763 213,501 181,525 39,936 486,584 41,322 10,336 266,604 53,174 6,327 795 5,688 9,695 8,526 26,939 17,133 62,454 142,790 228,815 61,352 401,146 38,071 8,504 262,877 74,768 5,466 790 5,467 9,822 9,522 12,465 1,419,162 22,681 1,317,247 30,201 8,136 102,429 39,480 473,400 67,114 88,982 342,409 6,850 140,617 61,692 41,490 6,651 74,796 54,975 393,762 58,924 100,756 332,301 7,738 130,271 63,719 20,899 16,804 63,507 116,689 232,258 44,221 421,694 53,774 10,223 266,477 81,757 5,816 870 6,212 11,008 8,868 23,682 1,340,538 31,922 7,995 64,175 47,469 409,943 66,097 112,653 339,263 8,689 131,352 72,344 1,361,309 1,265,384 1,291,905 383 34,614 (1,160) (39) 23,603 (3,955) 53,447 4,406 57,852 383 34,393 (654) (54) 19,444 (6,693) 46,820 5,043 51,863 356 34,824 (1,040) (2) 11,910 (5,034) 41,013 7,620 48,633 1,419,162 1,317,247 1,340,538 51 36 (6) 50 (21) (35) 21 9 22 1 (29) 16 1 4 (1) (10) (45) 8 (27) 22 37 (28) 20 14 (12) 3 (11) 8 (3) 8 0 1 77 (28) 21 (41) 14 (13) 12 8 (cid:20)(cid:18)(cid:19)(cid:19)(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:18)(cid:19)(cid:19)(cid:2)(cid:78)(cid:75)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(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:23) (cid:24)(cid:25) (cid:10)(cid:22)(cid:25)(cid:11) (cid:19)(cid:14)(cid:22)(cid:19)(cid:27) (cid:10)(cid:20)(cid:27)(cid:11) (cid:26)(cid:23) (cid:19)(cid:14)(cid:21)(cid:19)(cid:25) (cid:19)(cid:14)(cid:23)(cid:18)(cid:18) (cid:19)(cid:14)(cid:22)(cid:18)(cid:18) (cid:19)(cid:14)(cid:21)(cid:18)(cid:18) (cid:19)(cid:14)(cid:20)(cid:18)(cid:18) (cid:18) (cid:19)(cid:14)(cid:21)(cid:19)(cid:25) (cid:19)(cid:14)(cid:23)(cid:18)(cid:18) (cid:19)(cid:14)(cid:22)(cid:18)(cid:18) (cid:19)(cid:14)(cid:21)(cid:18)(cid:18) (cid:19)(cid:14)(cid:20)(cid:18)(cid:18) (cid:18) (cid:20)(cid:27) (cid:19)(cid:19) (cid:26)(cid:18) (cid:10)(cid:19)(cid:23)(cid:11) (cid:10)(cid:21)(cid:11) (cid:19)(cid:14)(cid:22)(cid:19)(cid:27) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:18) (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) (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:46)(cid:71)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:19) (cid:54)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2) (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:75)(cid:80)(cid:88)(cid:16)(cid:2)(cid:67)(cid:72)(cid:85)(cid:17) (cid:81)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85)(cid:20) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:18) (cid:19)(cid:36)(cid:53)(cid:18)(cid:20)(cid:18)(cid:65)(cid:71) (cid:48)(cid:71)(cid:73)(cid:67)(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) (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:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2) (cid:78)(cid:75)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:19)(cid:17) (cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91) (cid:54)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73) (cid:78)(cid:75)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85) (cid:36)(cid:81)(cid:84)(cid:84)(cid:81)(cid:89)(cid:75)(cid:80)(cid:73) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:19)(cid:2)(cid:43)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:67)(cid:85)(cid:74)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:68)(cid:67)(cid:78)(cid:67)(cid:80)(cid:69)(cid:71)(cid:85)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:69)(cid:71)(cid:80)(cid:86)(cid:84)(cid:67)(cid:78)(cid:2)(cid:68)(cid:67)(cid:80)(cid:77)(cid:85)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:20)(cid:2)(cid:43)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:67)(cid:85)(cid:74)(cid:2)(cid:69)(cid:81)(cid:78)(cid:78)(cid:67)(cid:86)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:69)(cid:71)(cid:75)(cid:88)(cid:67)(cid:68)(cid:78)(cid:71)(cid:85)(cid:2)(cid:81)(cid:80)(cid:2)(cid:70)(cid:71)(cid:84)(cid:75)(cid:88)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2) (cid:75)(cid:80)(cid:85)(cid:86)(cid:84)(cid:87)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:16) (cid:19)(cid:2)(cid:43)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:67)(cid:85)(cid:74)(cid:2)(cid:69)(cid:81)(cid:78)(cid:78)(cid:67)(cid:86)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:82)(cid:67)(cid:91)(cid:67)(cid:68)(cid:78)(cid:71)(cid:85)(cid:2)(cid:81)(cid:80)(cid:2)(cid:70)(cid:71)(cid:84)(cid:75)(cid:88)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:75)(cid:80)(cid:85)(cid:86)(cid:84)(cid:87)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:16) Balance sheet development 31.12.11 vs. 31.12.10 Our total assets stood at CHF 1,419 billion on 31 December 2011, up CHF 102 billion or 8% from CHF 1,317 billion on 31 December 2010. The increase occurred mainly in positive replacement val- ues, which grew by CHF 85 billion to CHF 487 billion. Our funded assets volume, which excludes positive replace- ment values, rose by CHF 16 billion to CHF 933 billion. Collateral trading assets grew by CHF 67 billion to CHF 272 billion, while lending assets, which include cash deposits at central banks, rose by CHF 25 billion to CHF 341 billion. These increases were partially offset by lower trading portfolio assets, which dropped CHF 47 billion to CHF 182 billion, reduced financial investments available- for-sale positions, which fell by CHF 22 billion to CHF 53 billion, and prime brokerage receivables in other assets, which declined by CHF 10 billion to CHF 6 billion. (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) Currency movements between 31 December 2010 and 31 De- cember 2011 had only a small effect on our funded balance sheet assets, which led to a net increase of CHF 2 billion. To a large extent, the total asset increase occurred in the Invest- ment Bank, as the abovementioned change in positive replace- ment values and collateral trading assets significantly contributed to the business division’s CHF 107 billion increase to CHF 1,074 bil- lion. Wealth Management and Wealth Management Americas increased their lending activities resulting in balance sheet assets growth of CHF 7 billion to CHF 101 billion and CHF 4 billion to CHF 54 billion, respectively. The Corporate Center’s balance sheet (cid:36)(cid:67)(cid:78)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:85)(cid:74)(cid:71)(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:2)(cid:115)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:85) (cid:37)(cid:42)(cid:40)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:36)(cid:67)(cid:78)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:85)(cid:74)(cid:71)(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:2)(cid:115)(cid:2)(cid:78)(cid:75)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91) (cid:37)(cid:42)(cid:40)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) e c n a m r o f r e p g n i t a r e p o d n a (cid:19)(cid:40)(cid:50)(cid:18)(cid:19)(cid:22)(cid:68)(cid:65)(cid:71) l 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(cid:19)(cid:2)(cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:68)(cid:67)(cid:78)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:85)(cid:74)(cid:71)(cid:71)(cid:86)(cid:2)(cid:71)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:80)(cid:71)(cid:73)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:84)(cid:71)(cid:82)(cid:78)(cid:67)(cid:69)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:85)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:20)(cid:2)(cid:50)(cid:71)(cid:84)(cid:69)(cid:71)(cid:80)(cid:86)(cid:67)(cid:73)(cid:71)(cid:85)(cid:2)(cid:68)(cid:67)(cid:85)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:68)(cid:67)(cid:78)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2) (cid:85)(cid:74)(cid:71)(cid:71)(cid:86)(cid:2)(cid:85)(cid:75)(cid:92)(cid:71)(cid:2)(cid:71)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:80)(cid:71)(cid:73)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:84)(cid:71)(cid:82)(cid:78)(cid:67)(cid:69)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:85)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:21)(cid:2)(cid:43)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:67)(cid:85)(cid:74)(cid:2)(cid:69)(cid:81)(cid:78)(cid:78)(cid:67)(cid:86)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:82)(cid:67)(cid:91)(cid:67)(cid:68)(cid:78)(cid:71)(cid:85)(cid:2)(cid:81)(cid:80)(cid:2)(cid:70)(cid:71)(cid:84)(cid:75)(cid:88)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2) (cid:75)(cid:80)(cid:85)(cid:86)(cid:84)(cid:87)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:22)(cid:2)(cid:43)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(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:78)(cid:75)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:70)(cid:71)(cid:85)(cid:75)(cid:73)(cid:80)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:86)(cid:2)(cid:72)(cid:67)(cid:75)(cid:84)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:16)(cid:2) 73 (cid:20)(cid:23)(cid:18)(cid:18) (cid:19)(cid:26)(cid:25)(cid:23) (cid:19)(cid:20)(cid:23)(cid:18) (cid:24)(cid:20)(cid:23) (cid:18) (cid:20)(cid:23)(cid:18)(cid:18) (cid:19)(cid:26)(cid:25)(cid:23) (cid:19)(cid:20)(cid:23)(cid:18) (cid:24)(cid:20)(cid:23) (cid:18) Financial and operating performance UBS results declined by CHF 10 billion to CHF 27 billion following the sale of our strategic investment portfolio in the third quarter of 2011. Retail & Corporate’s assets declined by a net CHF 4 billion to CHF 149 billion, as the reduction in cash deposits at central banks outweighed the growth in the lending book. The balance sheet size of Global Asset Management remained relatively stable at CHF 15 billion. Balance sheet positions disclosed in this section represent year-end positions. Intra-quarter balance sheet positions may be different. ➔ Refer to the table “FINMA leverage ratio calculation” in the “Capital management” section of this report for our average month-end balance sheet size for the fourth quarter of 2011 and 2010 Lending and borrowing Lending (including cash and balances with central banks) Cash and balances with central banks was CHF 41 billion on 31 December 2011, an increase of CHF 14 billion from the prior year-end. Interbank lending rose by CHF 6 billion to CHF 23 bil- lion, mainly on higher short-term lending activities by the Invest- ment Bank. Loans to customers increased by a net CHF 4 billion to CHF 267 billion, predominantly in our wealth management busi- nesses, which contributed a CHF 14 billion volume growth across several products, including fixed term, Lombard and call loans as well as LIBOR-based mortgages. This increase was partly offset by the continued sale of our Investment Bank’s residual risk positions of approximately CHF 10 billion. ➔ Refer to the “Risk, treasury and capital management” section for more information Borrowing Overall, our unsecured funding remained relatively stable, declin- ing by CHF 3 billion to CHF 602 billion, however with some shifts in products. Reduced balances were recorded in the following categories: (i) financial liabilities designated at fair value with a decrease of CHF 12 billion to CHF 89 billion on 31 December 2011 on lower valuations of equity-linked notes issued and to a lesser extent on maturities of credit-linked notes issued; (ii) short-term interbank borrowings (Due to banks), which was CHF 30 billion on 31 De- cember 2011, were down CHF 11 billion from 31 December 2010 due to lower bank borrowings by the Investment Bank; and (iii) long-term debt declined CHF 5 billion to CHF 69 billion, as matur- ing senior bonds and lower tier 2 subordinated bonds outweighed new covered bond issuances. These declines were almost offset by higher client deposits (Due to customers) and increased money market paper issuances. Client deposits amounted to CHF 342 billion on 31 December 2011, a net increase of CHF 10 billion compared with 31 Decem- ber 2010 due to cash deposits inflows in our wealth management and retail businesses of CHF 23 billion mainly in current, savings and personal accounts, partly offset by lower wholesale client de- posits in the Investment Bank of CHF 11 billion. Money market paper issued was CHF 71 billion at year-end 2011, an increase of CHF 15 billion from the prior year-end, mainly due to a higher level of outstanding commercial paper and increased issuance of yield enhancement products for our wealth management clients. ➔ Refer to the “Liquidity and funding management” section for more information on long-term debt issuance Trading portfolio Trading portfolio assets dropped by CHF 47 billion to stand at CHF 182 billion on 31 December 2011. The Investment Bank reduced certain debt instruments and increased liquid collateral trading investments. The following products were reduced: CHF 20 billion of money market papers mainly in Swiss and Japanese govern- ment bills, CHF 12 billion of corporate and bank debt instruments and CHF 10 billion of equity instruments, mainly due to lower valuations on equity-linked notes issued hedges. Reverse repurchase agreements and cash collateral on securities borrowed Cash collateral on securities borrowed and reverse repurchase agreements increased by CHF 67 billion to CHF 272 billion, main- ly due to the aforementioned shift from trading portfolio assets and general higher trading activities in the Investment Bank. Replacement values The positive and the negative replacement values of derivative instruments rose by similar amounts on both sides of the balance sheet, increasing by CHF 85 billion (21%) and CHF 80 billion 74 (20%), respectively, and ending 2011 at CHF 487 billion and CHF  473 billion, respectively. Increases in positive replacement values occurred mainly in interest rate contracts, which rose by CHF 92 billon due to a flattening of the interest yield curves, and credit derivative contracts, which rose by CHF 11 billion due to a general widening of credit spreads. These increases were partially offset by lower foreign exchange contracts, which declined by CHF 16 billion, mainly due to currency movements. Financial investments available-for-sale Financial investments available-for-sale declined by CHF 22 billion to CHF 53 billion in 2011, primarily reflecting the sale of our stra- tegic investment portfolio in the third quarter of 2011. Other assets / other liabilities Prime brokerage receivables declined by CHF 10 billion to CHF 6 billion, mainly due to continued client concerns related to the eurozone and other uncertainties. Cash collateral payables on de- rivatives increased by CHF 8 billion on higher current accounts arising from over-the-counter derivatives. Equity On 31 December 2011, equity attributable to UBS shareholders was CHF 53.4 billion, representing an increase of CHF 6.6 billion compared with 31 December 2010. This increase reflected (i) an- nual net profit of CHF 4.2 billion; (ii) net positive effects recog- nized in equity of CHF 2.7 billion related to fair value gains of CHF 1.5 billion on interest rate swaps designated as cash flow hedges, currency translation effects of CHF 0.7 billion and fair value gains of CHF 0.5 billion on financial investments available-for-sale; and (iii) a net increase of CHF 0.2 billion in share premium, mainly re- lated to equity compensation plans. These increases were partially offset by net treasury share repurchases of CHF 0.5 billion. Equity attributable to non-controlling interests decreased by CHF 0.6 bil- lion to CHF 4.4 billion, mainly related to the redemption of trust preferred securities. ➔ Refer to the “Statement of changes in equity” in the “Financial information” section, and to “Comprehensive income attribut- able to UBS shareholders” in the “UBS results” section of this report for more information e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 75 Financial and operating performance UBS results Off-balance sheet Off-balance sheet arrangements In the normal course of business, we enter into transactions that are not recognized on the balance sheet in accordance with Interna- tional Financial Reporting Standards (IFRS) because we have either transferred or have not assumed the related risks and rewards (financial assets), and / or because we did not become party to the contractual provisions of the financial instruments. These off-bal- ance sheet arrangements are transacted to either meet the financial needs of clients or offer investment opportunities through entities that are not controlled by us. These transactions include derivative instruments, guarantees and similar arrangements, retained or contingent interests in assets transferred to non-consolidated enti- ties and obligations and liabilities (including contingent obligations and liabilities) from retained interests in non-consolidated entities. When we, through these arrangements, incur an obligation or become entitled to an asset, we recognize them on the balance sheet. It should be noted that in certain instances the amount recognized on the balance sheet does not represent the full gain or loss potential inherent in such arrangements. We continuously evaluate whether triggering events require re- consideration of the consolidation conclusions made at the incep- tion of our involvement with special purpose entities (SPE). As of 31 December 2011, there were no holdings which required recon- sideration of the consolidation assessment. Refer to “Note 1a) 3) Subsidiaries” and “Note 1a) 5) Recognition and derecognition of financial instruments” in the “Financial infor- mation” section of this report for more information on accounting policies regarding consolidation and deconsolidation of subsidiar- ies, including SPE, and recognition and derecognition of financial instruments, respectively. The following paragraphs discuss several distinct areas of off- balance sheet arrangements. Additional relevant off-balance sheet information is primarily provided in “Note 21 Provisions and contingent liabilities”, “Note 23 Derivative instruments and hedge accounting” and “Note 25 Operating lease commitments” in the “Financial information” section of this report. Risk disclosures, including our involvement with off-balance sheet vehicles Refer to the “Risk, treasury and capital management” section of this report for comprehensive liquidity, market and credit risk in- formation related to risk positions, including our exposure to off- balance sheet involvements. Non-consolidated securitization vehicles and collateralized debt  obligations Our involvement (in the form of purchased or retained interests or derivatives) in non-consolidated securitization vehicles and collateral- ized debt obligations (CDO) is outlined within the table on the follow- ing page under the column “Involvements in non-consolidated SPE held by UBS”. As of 31 December 2011, the carrying value of our purchased and retained interests relating to non-consolidated SPE and CDO totaled CHF 10.7 billion, of which CHF 7.1 billion was held in Trading portfolio assets and measured at fair value and CHF 3.6 billion was held at amortized cost within Loans. In addition, we had involvements in SPE in the form of net Negative replacement values, mainly interest rate swaps and credit default swaps, of CHF 0.6 bil- lion as of 31 December 2011. The total pool of assets held by these non-consolidated investment vehicles in which UBS has involvement are reflected in the column “Total SPE assets”. These total SPE assets represent the total size and exposure of the SPE and are not indica- tive of our risk of loss. Our maximum loss potential is generally lim- ited to our involvements in the non-consolidated SPE. During 2011 we sponsored the creation of a limited number of special purpose entities that principally facilitated the securitization of commercial mortgage loans. These securitization transactions generally involved the transfer of assets into a trust or corporation, which in turn issued beneficial interests in the form of securities. Financial assets transferred to such trusts and corporations are no longer reported in our consolidated financial statements once the accounting requirements for derecognition are met, including the transfer of substantially all of the risks and rewards related to such assets. UBS retained certain involvements in these special purpose entities, which are included in the disclosure on the next page. UBS did not consolidate these special purpose entities as of 31 Decem- ber 2011 as we did not control them. ➔ Refer to “Note 1a) 12) Securitization structures set up by UBS” in the “Financial information” section of this report for more information on accounting policies regarding securitization vehicles established by UBS ➔ Refer to the securitization disclosures in the “Basel 2.5 Pillar 3” section of this report for a more comprehensive overview of our securitization activities In addition to our retained involvement in 2011 securitization ac- tivities, we also continue to hold involvement in earlier securitization issuances, mainly legacy positions, which were originated by UBS or by third-parties. The volume and size of these positions, a majority of which are linked to the US mortgage market, have been further re- duced as of 31 December 2011 when compared with the prior year. Our involvement in non-consolidated securitization vehicles and collateralized debt obligations disclosed in this section are typically managed on a portfolio basis alongside hedges and other offsetting financial instruments. The numbers presented do not include these offsetting factors. Purchased and retained trading portfolio assets included in the table on the next page exclude residential and commercial mort- 76 gage-backed securities which are backed by a US government agency or instrumentality or US government-sponsored enter- prise (for example the Government National Mortgage Associa- tion, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation). These positions are excluded due to the comprehensive involvement of the US government in these organizations and their significantly lower risk profile. Loans held at amortized cost included in the table below are mainly comprised of student loan auction rate securities, to the extent these are not backed by a US government agency or US government sponsored enterprise, as well as assets which were previously Held for trading and later reclassified to Loans and re- ceivables, including monoline-protected assets, US reference linked notes and other assets. Refer to “Note 28b Reclassified fi- nancial assets” in the “Financial information” section of this report for further information on reclassified financial assets. The numbers outlined in the table below deviate from the se- curitization positions presented in the “Basel 2.5 Pillar 3” section of this report, primarily due to: (i) different scopes, mainly exclu- sion of certain government-backed and synthetic securitization transactions from the table below, (ii) a different measurement basis in certain cases, IFRS carrying value within the table below compared with net exposure amount at default for Basel 2.5 Pillar 3 disclosures, and (iii) different classification of originated and sponsored activities. “Originated by UBS” amounts presented be- low include both securitization activities which we originated and those in which we acted as the lead manager for the transaction (i.e. sponsored). For Basel 2.5 Pillar 3 disclosures, originated and sponsored activities are presented separately. Liquidity facilities and similar obligations On 31 December 2011 and 2010, we had no significant exposure through liquidity facilities and guarantees to structured investment vehicles, conduits and other similar types of SPE. Losses resulting from such obligations were not significant in 2011 and 2010. Support to non-consolidated investment funds In the ordinary course of business, we issue investment certificates to third parties that are linked to the performance of non-consoli- dated investment funds. Such investment funds are originated ei- ther by us or by third parties. For hedging purposes, we generally invest in the funds to which our obligations from the certificates are e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F Non-consolidated securitization vehicles and collateralized debt obligations CHF billion Involvements in non-consolidated SPE held by UBS Total SPE assets 2 Purchased and retained interests held by UBS 1 Derivatives held by UBS As of 31 December 2011 Carrying value Fair value Nominal value Original principal outstanding Current principal outstanding Delinquency amounts Originated by UBS CDO Residential mortgage Commercial mortgage Other ABS Securitizations Residential mortgage Commercial mortgage Other ABS Total Not originated by UBS CDO Residential mortgage Commercial mortgage Other ABS Securitizations Residential mortgage Commercial mortgage Other ABS Total 0.0 0.4 0.1 0.0 0.2 0.0 0.7 0.4 1.4 1.7 0.9 3.2 2.5 10.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 (0.7) 0.0 0.0 (0.6) 0.7 1.2 0.0 1.3 0.0 0.0 3.2 0.0 0.0 0.9 2.6 0.4 0.0 3.9 9.6 7.1 7.8 19.9 61.1 1.2 106.7 39.9 79.4 49.8 427.5 1,007.3 397.7 2,001.6 3.2 5.3 7.4 4.0 42.9 0.5 63.3 18.1 75.9 52.7 105.0 622.5 191.8 1,066.0 0.0 0.0 0.0 1.1 3.2 0.1 4.4 0.3 0.3 0.1 23.5 54.7 4.3 83.2 1 Includes loans and receivables measured at amortized cost in the amount of CHF 0.1 billion originated by UBS and CHF 3.5 billion not originated by UBS as well as trading assets measured at fair value in the amount of CHF 0.6 billion originated by UBS and CHF 6.5 billion not originated by UBS. 2 “Total SPE assets” includes information which UBS could gather after making exhaustive efforts but excludes data which UBS was un- able to obtain (in sufficient quality), especially for structures originated by third parties. 77 Financial and operating performance UBS results linked. Risks resulting from these contracts are considered minimal, as the full performance of the funds, whether positive or negative, is passed on to third parties. In a limited number of cases and primarily stemming from the financial markets crisis, UBS has provided support to certain non- consolidated investment funds in the form of collateralized fi- nancing, direct acquisition of fund units and purchases of assets from the funds. These funds are managed in our wealth and asset management businesses, and support was provided in cases where there were regulatory requirements, legal requirements or other exceptional circumstances. Throughout 2011 we have continued to reduce our positions in these acquired fund units or assets, and as of 31 December 2011 the carrying value of fund units acquired and assets purchased from such funds totaled CHF 0.3 billion. Direct acquisitions of fund units were not material in 2011. Pur- chases of assets from the funds that we manage and guarantees granted to third parties in the context of such non-consolidated funds were also not material. Collateralized financing provided in the ordinary course of business to non-consolidated investment funds was CHF 0.7 billion as of 31 December 2011. Net losses in- curred on fund units, which are generally accounted as financial investments available-for-sale, were not material in 2011. In accordance with standard industry practice, our wealth and asset management businesses occasionally also provide short-term funding facilities to certain investment funds to cover timing gaps in the redemption and subscription processes. These facilities did not result in any losses in 2011. Guarantees and similar obligations In the normal course of business, we issue various forms of guaran- tees, commitments to extend credit, standby and other letters of credit to support our clients, commitments to enter into forward starting transactions, note issuance facilities and revolving under- writing facilities. With the exception of related premiums, generally these guarantees and similar obligations are kept as off-balance sheet items unless a provision to cover probable losses is required. On 31 December 2011, the exposure to credit risk (gross values less sub-participations) for credit guarantees and similar instru- ments was CHF 17.4 billion compared with CHF 15.4 billion as of 31 December 2010. Fee income from issuing guarantees was not significant to total revenues in 2011. Guarantees represent irrevocable assurances, subject to the satisfaction of certain conditions, that we will make payment in the event that clients fail to fulfill their obligations to third par- ties. We also enter into commitments to extend credit in the form of credit lines that are available to secure the liquidity needs of clients. The majority of these unutilized credit lines range in maturity from one month to five years. If customers fail to meet their obligations, our maximum exposure to credit 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 2011, we recognized net credit  loss recoveries of CHF 22 million, compared with net credit loss ex- penses of CHF 43 million for the year ended 31 December 2010, related to obligations incurred for guarantees and loan commit- ments. Provisions recognized for guarantees and loan commit- ments were CHF 93 million as of 31 December 2011, and CHF 130 million as of 31 December 2010. For certain obligations, we enter into partial sub-participations to mitigate various risks from guarantees and loan commitments. A sub-participation is an agreement by another party to take a share of the loss in the event that the obligation is not fulfilled by the obligor and, where applicable, to fund a part of the credit facility. We retain the contractual relationship with the obligor, 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 ob- ligor. Furthermore, we provide representations, warranties and in- demnifications to third parties in the normal course of business. Clearinghouse and exchange memberships We are a member of numerous securities and derivative 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, 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. 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 2011 to 30 June 2012, the Swiss Financial Market Supervisory Authority (FINMA) estimates our share in the deposit insurance system to be CHF 1.0 billion. The deposit insur- ance is a guarantee and exposes us to additional risk. This is not reflected in the table on the following page due to its unique characteristics. As of 31 December 2011, we consider the prob- ability of a material loss from our obligation to be remote. Underwriting commitments Gross equity underwriting commitments on 31 December 2011 and 31 December 2010 amounted to CHF 1.1 billion and CHF 0.4 billion, respectively. Gross debt and private equity underwrit- ing commitments on 31 December 2011 and 31 December 2010 were not material. 78 Financial instruments not recognized on the balance sheet The table below shows the maximum irrevocable amount of guarantees, commitments and forward starting transactions. CHF million Guarantees Credit guarantees and similar instruments Performance guarantees and similar instruments Documentary credits Total guarantees Commitments Loan commitments Underwriting commitments Total commitments Forward starting transactions 1 Reverse repurchase agreements Securities borrowing agreements Repurchase agreements Securities lending agreements 31.12.11 Gross Sub- participations Net Gross 31.12.10 Sub- participations (315) (493) (737) (1,545) (1,640) (278) (1,918) 8,356 2,845 6,160 17,360 56,552 882 57,434 8,671 3,337 6,897 18,905 58,192 1,160 59,352 27,113 502 21,134 0 (401) (506) (255) (1,162) (1,475) (196) (1,671) 8,612 3,362 4,561 16,535 56,851 404 57,255 39,036 454 22,468 0 2 Net 8,212 2,856 4,306 15,374 55,376 208 55,584 e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 1 Cash to be paid in the future by either UBS or the counterparty. 2 In 2011, we corrected the value presented on the line securities lending agreements by CHF 783 million. Contractual obligations The table below includes contractual obligations by period as of 31 December 2011. All contracts included in this table, with the exception of purchase obligations (those in which 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 Operating lease commitments” in the “Financial information” section of this report. The following liabilities are recognized on the balance sheet and are excluded from the table: (i) provisions (as disclosed in “Note 21 Provisions and contingent liabilities” in the “Financial information” section of this report); (ii) current and deferred tax liabilities (refer to “Note 22 Income taxes” in the “Financial information” section of this report for more information); (iii) liabilities to employees for equity participation plans; (iv) settlement and clearing accounts; and (v) amounts due to banks and customers. Within purchase obligations, the obligation to employees under mandatory notice periods is excluded (i.e. the period in which we must pay contractually-agreed salaries to employees leaving the firm). Contractual obligations CHF million Long-term debt obligations Finance lease obligations Operating lease obligations Purchase obligations Other liabilities Total Payment due by period < 1 year 31,315 46 819 1,010 492 33,682 1–3 years 45,073 30 1,332 827 2 47,264 3–5 years 28,041 > 5 years 53,793 977 199 2 2,591 3 2 29,219 56,389 79 Financial and operating performance UBS results Cash flows As a global financial institution, our cash flows are complex and bear little relation to our net earnings and net assets. Conse- quently, we believe that traditional cash flow analysis is less mean- ingful in evaluating our liquidity position than the liquidity, fund- ing and capital management polices described within the “Risk, treasury and capital management” section of this report. Cash flow analysis may, however, be helpful in highlighting certain macro trends and strategic initiatives in our businesses. With regard to the cash flow activities described below, refer to the “Statement of cash flows” in the “Financial information” section of this report for more information. In 2011, we have re- fined our definition of cash and cash equivalents to restrict it to balances with an original maturity of three months or less. Prior period amounts have been restated. ➔ Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” in the “Financial information” section of increase in operating assets. This cash consumption was mainly due to an increase in secured collateral trading positions (reverse repurchase agreements and cash collateral on securities bor- rowed) of CHF 67.0 billion and an increase in net due from / to banks of CHF 14.3 billion. These outflows were partially offset by cash inflows from operating assets of CHF 34.0 billion resulting from lower net trading portfolio, net replacement values and financial assets designated at fair value as well as reduced net loans / due to customers and accrued income, prepaid expenses and other assets including prime brokerage activities. Net cash inflows of CHF 33.8 billion resulted from an overall increase in operating liabilities including net payments for income taxes, mainly reflecting an increase in repurchase agreements and cash collateral on securities lent (secured collateral trading) of CHF 29.1 billion. this report for more information Investing activities 2011 As of 31 December 2011, cash and cash equivalents totaled CHF 85.6 billion, an increase of CHF 5.7 billion from 31 December 2010. Net cash flow generated from investing activities was CHF 19.4 billion compared with CHF 4.1 billion in 2010. The 2011 cash in- flow primarily reflected the net divestment of financial invest- ments available-for-sale of CHF 20.3 billion, which included CHF 14.2 billion from the sale of our strategic investment portfolio. Operating activities Financing activities For the year ended 31 December 2011, net cash flows used in operating activities were CHF 14.2 billion compared with net cash flow generated from operating activities of CHF 13.4 billion in 2010. Net operating cash flow used (before changes in operating assets and liabilities and income taxes paid, net of refunds) totaled CHF 0.7 billion in 2011, compared with net cash flow generated in 2010 of CHF 8.8 billion. In 2011, net cash of CHF 47.3 billion was utilized by an overall Net cash flow from UBS’s funding activities was CHF 2.7 billion, re- flecting net cash inflow from short-term debt issuances of CHF 15.3 billion, offset by cash outflows for the net redemption of long-term debt (repayments less issuances) of CHF 10.0 billion, net acquisition of treasury shares and own equity derivative activity of CHF 1.9 bil- lion and redemptions and dividends paid on preferred securities reflected in non-controlling interests of CHF 0.7 billion. In 2010, fi- nancing activities generated net cash inflows of CHF 1.8 billion. 80 2010 As of 31 December 2010, cash and cash equivalents increased to CHF 79.9 billion, CHF 7.0 billion higher than CHF 72.9 billion at the end of 2009. Operating activities Operating activities generated a cash inflow of CHF 13.4 billion in 2010 compared with a cash inflow of CHF 86.7 billion in 2009. Operating cash inflows (before changes in operating as- sets and liabilities and income taxes paid, net of refunds) to- taled CHF 8.8  billion  in 2010, a decrease of CHF 1.0 billion from 2009. Net profit improved CHF 10.0 billion compared with 2009. Cash inflow of CHF 3.8 billion was generated by the net de- crease in operating assets and cash inflow of CHF 1.3 billion was generated from the net increase in operating liabilities. Net pay- ments to tax authorities related to income taxes were CHF 0.5 bil- lion in 2010, almost unchanged from the previous year. Investing activities Net cash flow from investing activities was CHF 4.1 billion com- pared with cash flow used in investing activities of CHF 78.8 billion in 2009. The net divestment of financial investments available-for-sale was CHF 4.2 billion. Financing activities In 2010, financing activities generated net cash inflows of CHF 1.8 billion. This reflected the cash outflow for redemptions and dividends paid on preferred securities reflected in non-controlling interests of CHF 2.1 billion, the issuance of CHF 78.4 billion of long-term debt and long-term debt repayments that totaled CHF 77.5 billion. Net short-term debt issued generated a net cash in- flow of CHF 4.5 billion. In 2009, UBS had a net cash outflow of CHF 54.2 billion from financing activities. e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 81 Financial and operating performance Wealth Management & Swiss Bank Wealth Management & Swiss Bank Business division reporting CHF million, except where indicated Net interest income Net fee and commission income Net trading income Other income 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 Business division performance before tax Key performance indicators 3 Pre-tax profit growth (%) Cost / income ratio (%) Additional information Average attributed equity (CHF billion) 4 Return on attributed equity (RoaE) (%) BIS risk-weighted assets, Basel II (CHF billion) 5 BIS risk-weighted assets, Basel 2.5 (CHF billion) 5 Return on risk-weighted assets, Basel II, gross (%) 5 Goodwill and intangible assets (CHF billion) Invested assets (CHF billion) Client assets (CHF billion) Loans, gross (CHF billion) Due to customers (CHF billion) Personnel (full-time equivalents) As of or for the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 4,296 5,537 1,211 776 1 11,820 1 (90) 11,730 1 4,924 2,026 (152) 300 37 7,135 2 4,596 1 12.6 60.4 10.0 46.0 41.8 41.8 28.1 1.4 883 1,723 210.4 288.1 27,334 4,159 6,142 895 94 11,291 (64) 11,226 4,778 2,101 (61) 309 19 7,147 4,080 4.3 63.3 9.0 45.3 43.4 N/A 24.3 1.5 904 1,799 201.9 268.5 27,752 4,533 6,259 819 (88) 11,523 (133) 11,390 5,197 2,017 (90) 289 67 7,480 3,910 (35.0) 64.9 9.0 43.4 48.6 N/A 21.7 1.6 960 1,844 197.2 282.7 27,548 3 (10) 35 726 5 41 4 3 (4) (149) (3) 95 0 13 11 (4) (7) (2) (4) 4 7 (2) 1 Includes revenues from the sale of our strategic investment portfolio of CHF 722 million. 2 Operating expenses include restructuring charges of CHF 114 million. Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information. 3 For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report. 4 Refer to the “Cap- ital management” section of this report for more information about the equity attribution framework. 5 Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital man- agement” section of this report for more information. 82 Wealth Management Business unit reporting CHF million, except where indicated Net interest income Net fee and commission income Net trading income Other income 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 Business division performance before tax Key performance indicators 3 Pre-tax profit growth (%) Cost / income ratio (%) Net new money (CHF billion) 4 Gross margin on invested assets (bps) 5 Swiss wealth management Income Net new money (CHF billion) 4 Invested assets (CHF billion) Gross margin on invested assets (bps) International wealth management Income Net new money (CHF billion) 4 Invested assets (CHF billion) Gross margin on invested assets (bps) 5 Additional information Average attributed equity (CHF billion) 6 Return on attributed equity (RoaE) (%) BIS risk-weighted assets, Basel II (CHF billion) 7 BIS risk-weighted assets, Basel 2.5 (CHF billion) 7 Return on risk-weighted assets, Basel II, gross (%) 7 Goodwill and intangible assets (CHF billion) Invested assets (CHF billion) Client assets (CHF billion) Loans, gross (CHF billion) Due to customers (CHF billion) Personnel (full-time equivalents) Client advisors (full-time equivalents) e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F As of or for the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 1,968 4,363 878 425 1 7,634 1 11 7,645 1 3,258 1,192 318 165 37 4,969 2 2,676 1 15.9 65.1 23.5 101 1,585 1.1 126 121 6,049 22.4 624 97 5.0 53.5 16.6 16.6 45.7 1.4 750 875 75.1 170.2 15,904 4,202 1,737 4,964 647 (3) 7,345 11 7,356 3,153 1,264 449 163 19 5,049 2,308 1.2 68.7 (12.1) 92 1,543 0.8 137 112 5,802 (12.9) 631 88 4.4 52.5 16.9 N/A 41.4 1.5 768 920 67.1 156.8 15,663 4,172 1,853 5,137 625 (189) 7,427 45 7,471 3,360 1,182 428 154 67 5,191 2,280 (37.2) 69.9 (87.1) 91 1,488 (7.2) 140 110 5,939 (79.9) 685 88 4.4 51.8 17.9 N/A 37.4 1.6 825 1,005 61.9 182.6 15,408 4,286 13 (12) 36 4 0 4 3 (6) (29) 1 95 (2) 16 10 3 (8) 8 4 (1) 10 14 (2) (7) (2) (5) 12 9 2 1 1 Includes revenues from the sale of our strategic investment portfolio: Wealth Management CHF 433 million, of which CHF 79 million relate to Swiss wealth management and CHF 354 million relate to International wealth management. 2 Operating expenses include restructuring charges of CHF 82 million. Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more informa- tion. 3 For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report. 4 Excludes interest and dividend income. 5 Excludes any effect on profit or loss from a property fund (2011: loss of 22 million, 2010: loss of CHF 45 million, 2009: loss of CHF 155 million). 6 Refer to the “Capital management” section of this report for more information about the equity attribution framework. 7 Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital management” section of this report for more information. 83 Financial and operating performance Wealth Management & Swiss Bank Business performance 2011 Results Pre-tax profit was CHF 2,676 million in 2011 compared with CHF 2,308 million in 2010, and included a gain of CHF 433 million from the sale of our strategic investment portfolio and CHF 82 mil- lion of restructuring charges associated with our cost reduction program. When adjusted for these two items, pre-tax profit was CHF 2,325 million, slightly up from the previous year as adverse currency effects and reduced client activity were more than offset by ongoing cost management. ➔ Refer to the “Certain items affecting our results in 2011” sidebar for more information on our cost reduction program and the sale of our strategic investment portfolio Operating income Operating income was CHF 7,645 million compared with CHF 7,356 million. When adjusted for the sale of our strategic invest- ment portfolio, total operating income declined 2% to CHF 7,212 million. Net interest income increased 13% which included higher treasury-related income, partially due to interest income stem- ming from the strategic investment portfolio (which was acquired in late 2010) and an adjustment to the allocation of treasury- related income between Wealth Management and Retail & Cor- porate. Further, net interest income benefited from 10% higher average lending volumes. This was offset by margin pressure as a result of low market interest rates. Net fee and commission income declined 12%. This was main- ly due to lower asset-based fees, reflecting a CHF 44 billion lower average invested asset base, primarily as a result of the strength- ening Swiss franc and negative equity market performance. A de- terioration in client activity, primarily in the second half of the year, impacted fee income. Trading income increased 36%, due to higher income linked to foreign exchange and precious metal client trading activities as well as changes in the revenue-sharing agreement related to the Investment Products & Services unit and higher treasury-related revenues. Other income was CHF 425 million in 2011 due to the abovementioned sale of our strategic investment portfolio. Operating expenses Operating expenses were down 2% from the prior year, or 3% excluding restructuring charges associated with our cost reduc- tion program. 84 Personnel expenses increased 3% compared with the prior year. Excluding restructuring costs, personnel expenses were up 1%, primarily reflecting a 4% increase in average headcount, which was partially offset by lower bonus accruals. General and administrative expenses were CHF 1,192 million compared with CHF 1,264 million in 2010, which included a CHF 40 million litiga- tion provision and a CHF 40 million charge to reimburse the Swiss government for costs incurred in connection with the US cross- border matter. Charges for services from other business divisions were down significantly to CHF 318 million from CHF 449 million, mainly due to higher charges to other businesses in relation to the Investment Products & Services unit. Depreciation was CHF 165 million compared with CHF 163 million one year earlier. Amortiza- tion of intangible assets was CHF 37 million, up from CHF 19 million in 2010, mainly due to the impairment of intangible assets related to a past acquisition in the UK. Development of invested assets Net new money Net new money improved significantly, with net inflows of CHF 23.5 billion compared with net outflows of CHF 12.1 billion in 2010, due to improvements in all regions and client segments. International wealth management net new money was CHF 22.4  billion compared with outflows of CHF 12.9 billion in the prior year. The strongest net inflows were recorded in Asia Pacific and emerging markets as well as globally from ultra high net worth clients. Europe reported net outflows, mainly related to the offshore business with countries neighboring Switzerland partly offset by net inflows from the European onshore business. Swiss wealth management reported net inflows of CHF  1.1 billion in 2011 compared with CHF 0.8 billion net inflows the year before. Invested assets Invested assets were CHF 750 billion on 31 December 2011, a decrease of CHF 18 billion from 31 December 2010. Negative equity market performance as well as adverse currency effects, mainly resulting from a 3% decline in the value of the euro against the Swiss franc, more than offset net new money inflows and positive bond market performance. Gross margin on invested assets The gross margin on invested assets was 101 basis points. When adjusted for the abovementioned sale of our strategic investment portfolio, the gross margin was 96 basis points, an improvement of 4 basis points from the prior year. The gross margin calculation excludes any effect on profit or loss from a property fund. e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 2010 Results In 2010, pre-tax profit increased 1% to CHF 2,308 million from CHF 2,280 million in 2009, mainly due to a 3% decrease in operat- ing expenses. Operating income was down 2%, and was nega- tively affected by low market interest rates and the strengthening of the Swiss franc against major currencies. Operating income Total operating income was CHF 7,356 million, down 2% from CHF 7,471 million one year earlier. Interest income was down 6% due to pressure from the low interest rate environment and the decrease in value of the euro and US dollar against the Swiss franc. Fee income decreased 3% primarily due to lower asset- based fees, reflecting a 4% lower average asset base. Lower inter- est income was partly offset by a shift of treasury-related revenues from Retail & Corporate to Wealth Management in the second quarter of 2010, impacting interest and trading income. Other income improved from negative CHF 189 million in 2009 to nega- tive CHF 3 million in 2010 as CHF 155 million of revaluation ad- justments on a property fund were included in 2009. Credit loss recoveries were CHF 11 million in 2010, down from CHF 45 mil- lion in 2009. Operating expenses Operating expenses declined 3% to CHF 5,049 million from CHF 5,191 million. Personnel expenses decreased 6% reflecting a re- duction of average personnel levels by 9% and restructuring ex- penses of CHF 190 million in 2009. General and administrative expenses, at CHF 1,264 million, were up CHF 82 million from CHF 1,182 million a year earlier, mainly due to a CHF 40 million charge to reimburse the Swiss government for costs incurred in connection with the US cross-border matter, CHF 40 million liti- gation provision, and higher sponsorship and branding costs re- lated to the global re-launch of the UBS brand. Charges for ser- vices from other business divisions, at CHF 449 million in 2010, were slightly up from CHF 428 million in the previous year. De- preciation was CHF 163 million compared with CHF 154 million a year earlier. Amortization of intangible assets was CHF 19 mil- lion, down from CHF 67 million, mainly reflecting the impairment of intangible assets related to invested asset outflows in UBS (Ba- hamas) Ltd. in 2009. ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of our Annual Report 2010 for more information on allocation of additional Corporate  Center costs to the business divisions in 2010 Development of invested assets Net new money During 2010, all regions and client segments saw an improvement in net new money as net outflows declined to CHF 12.1 billion from CHF 87.1 billion in 2009. International wealth management net new money outflows declined significantly to CHF 12.9 billion from CHF 79.9 billion. While Europe saw ongoing net outflows, partially due to discussions regarding tax treaties, net inflows were recorded in the Asia Pacific region as well as globally from ultra high net worth clients. Swiss wealth management reported net inflows of CHF 0.8 billion in 2010 compared with CHF 7.2 billion net outflows the year before. Net new money for 2010 included inflows of CHF 3.7 billion resulting from transfers of Investment Bank clients to Wealth Management, as part of the Global Family Office initiative. Invested assets Invested assets were CHF 768 billion on 31 December 2010, a de- crease of CHF 57 billion from 31 December 2009, as positive equity market performance was more than offset by adverse currency ef- fects including a 16% decline in value of the euro and an 11% decline in value of the US dollar against the Swiss franc, and net new money outflows in 2010. In Wealth Management, 31% of invested assets were denominated in euro and 31% in US dollars at the end of 2010. Gross margin on invested assets The gross margin on invested assets increased 1 basis point to 92 basis points, reflecting 3% lower income (excluding any effect on profit or loss from a property fund), compared with a 4% de- cline in average invested assets. 85 Financial and operating performance Wealth Management & Swiss Bank Retail & Corporate Business unit reporting CHF million, except where indicated Net interest income Net fee and commission income Net trading income Other income 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 Business division performance before tax Key performance indicators 3 Pre-tax profit growth (%) Cost / income ratio (%) Impaired loans portfolio as a % of total loans portfolio, gross (%) 4 Additional information Average attributed equity (CHF billion) 5 Return on attributed equity (RoaE) (%) BIS risk-weighted assets, Basel II (CHF billion) 6 BIS risk-weighted assets, Basel 2.5 (CHF billion) 6 Return on risk-weighted assets, Basel II, gross (%) 6 Goodwill and intangible assets (CHF billion) Invested assets (CHF billion) Client assets (CHF billion) Loans, gross (CHF billion) Due to customers (CHF billion) Personnel (full-time equivalents) As of or for the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 2,328 1,175 333 350 1 4,186 1 (101) 4,085 1 1,666 834 (470) 136 0 2,166 2 1,919 1 8.3 51.7 0.7 5.0 38.4 25.2 25.2 16.5 0.0 134 848 135.3 117.9 11,430 2,422 1,178 249 97 3,946 (76) 3,870 1,625 836 (509) 146 0 2,098 1,772 8.8 53.2 0.9 4.6 38.5 26.5 N/A 13.7 0.0 136 879 134.8 111.7 12,089 2,681 1,121 194 100 4,096 (178) 3,918 1,836 835 (518) 136 0 2,289 1,629 (31.6) 55.9 1.1 4.6 35.4 30.8 N/A 12.3 0.0 135 840 135.2 100.1 12,140 (4) 0 34 261 6 33 6 3 0 8 (7) 3 8 9 (5) (1) (4) 0 6 (5) 1 Includes revenues from the sale of our strategic investment portfolio of CHF 289 million. 2 Operating expenses include restructuring charges of CHF 32 million. Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information. 3 For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report. 4 Refer to the “Risk management and control” section of this report for more information on impairment ratios. 5 Refer to the “Capital management” section of this report for more information about the equity attribution frame- work. 6  Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital management” section of this report for more information. 86 Business performance 2011 Results Pre-tax profit for 2011 was CHF 1,919 million, and included a CHF 289 million gain on the sale of our strategic investment portfolio as well as CHF 32 million in restructuring charges associated with our cost reduction program. When adjusted for these two items, pre-tax profit was CHF 1,662 million, down from CHF 1,772 mil- lion in 2010, primarily as a result of lower interest income caused by the ongoing low interest rate environment. ➔ Refer to the “Certain items affecting our results in 2011” sidebar in this section of this report for more information on our cost reduction program and the sale of our strategic investment portfolio funds were mostly offset by higher credit related fees and in- creased transaction-based revenues. Net trading income increased to CHF 333 million from CHF 249 million, mainly reflected higher treasury-related income and higher foreign exchange income linked to client trading activities. Other income was CHF 350 mil- lion compared with CHF 97 million in 2010 due to the abovemen- tioned sale of our strategic investment portfolio. Credit loss ex- penses were CHF 101 million in 2011 compared with CHF 76 million in 2010. This was mostly due to a CHF 82 million increase in collective loan loss allowances, which were booked mainly in the third quarter of 2011. ➔ Refer to the “Interest rate and currency management” section of this report for more information on our replication portfolio ➔ Refer to “Note 1a) 11) Allowance and provision for credit losses” in the “Financial information” section of this report section for more information on collective loan loss allowances e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F Operating income Total operating income increased to CHF 4,085 million from CHF 3,870 million, and included the abovementioned sale of our stra- tegic investment portfolio. When adjusted for this gain, operating income was CHF 3,796 million, down 2% from the previous year. Net interest income decreased 4% from the prior period, pri- marily due to a significant decline in the deposit margin as a result of low market interest rates, which more than offset growth of deposit volumes. In addition, net interest income was impacted by an adjustment to the allocation of treasury-related income be- tween Wealth Management and Retail & Corporate. Low market interest rates also impacted income from our replication portfolio, resulting in lower net interest income. These effects more than offset higher interest income derived from the strategic invest- ment portfolio which was acquired in late 2010. Net fee and com- mission income was CHF 1,175 million, virtually unchanged from CHF 1,178 million in 2010, as lower fees related to investment Operating expenses Operating expenses were CHF 2,166 million compared with CHF 2,098 million, partially impacted by the abovementioned restruc- turing charges. Excluding these charges, operating expenses in- creased by 2%. Personnel expenses increased to CHF 1,666 million from CHF 1,625 million. Excluding restructuring charges, person- nel expenses were CHF 1,637 million, broadly unchanged from 2010 as salary increases were mostly offset by a 4% reduction in average personnel during 2011 and lower variable compensation accruals compared with 2010. General and administrative expens- es were CHF 834 million compared with CHF 836 million in 2010. Net charges to other business divisions were CHF 470 million, down 8% from CHF 509 million the previous year, mainly due to a refinement of internal cost allocations reflecting a review of service level agreements and allocations between Retail & Corporate, Wealth Management and other parts of the organization. Depre- ciation was CHF 136 million compared with CHF 146 million. 87 Financial and operating performance Wealth Management & Swiss Bank 2010 Results In 2010, pre-tax profit increased 9% to CHF 1,772 million com- pared with CHF 1,629 million in 2009, mainly due to an 8% de- crease in operating expenses. Operating income was slightly lower compared with the previous year as reduced interest income was only partly offset by lower credit loss expenses. Operating income Total operating income in 2010 was CHF 3,870 million, down 1% from CHF 3,918 million a year earlier. Interest income was down 10%, mainly as low market interest rates continued to exert down- ward pressure on interest margins. In addition, interest income de- creased as approximately 30% of treasury related revenues were allocated from Retail & Corporate to Wealth Management starting in the second quarter of 2010. These effects were only partially compensated by higher volumes in certain products and improved margins on new mortgage loans. Fee and commission income increased 5% to CHF 1,178 million from CHF 1,121 million, partly reflecting pricing initiatives initiated in 2010. Trading income in- creased from CHF 194 million to CHF 249 million, largely due to higher treasury related income. Net credit loss expenses were CHF 76 million in 2010, a decline of CHF 102 million. Operating expenses Operating expenses declined 8% to CHF 2,098 million from CHF 2,289 million due to cost-cutting measures initiated in 2009. Per- sonnel expenses decreased 11%, reflecting a 4% reduction in average personnel levels and related restructuring expenses in 2009. General and administrative expenses were stable at CHF 836 million. Net charges to other business divisions were down 2% to CHF 509 million from CHF 518 million the previous year, largely due to business realignments between Wealth Manage- ment and Retail & Corporate. Depreciation was CHF 146 million compared with CHF 136 million. ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of our Annual Report 2010 for more information on allocation of additional Corporate Center costs to the business divisions in 2010 88 Wealth Management Americas Business division reporting CHF million, except where indicated Net interest income Net fee and commission income Net trading income Other income Income Credit loss (expense) / recovery Total operating income Personnel expenses Financial advisor compensation 1 Compensation commitments and advances related to recruited financial advisors 2 Salaries and other personnel costs 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 4 Pre-tax profit growth (%) 5 Cost / income ratio (%) Net new money (CHF billion) 6 Net new money including interest and dividend income (CHF billion) 7 Gross margin on invested assets (bps) Additional information Average attributed equity (CHF billion) 8 Return on attributed equity (RoaE) (%) BIS risk-weighted assets, Basel II (CHF billion) 9 BIS risk-weighted assets, Basel 2.5 (CHF billion) 9 Return on risk-weighted assets, Basel II, gross (%) 9 Goodwill and intangible assets (CHF billion) Invested assets (CHF billion) Client assets (CHF billion) Loans, gross (CHF billion) Due to customers (CHF billion) of which: deposit accounts (CHF billion) Personnel (full-time equivalents) Financial advisors (full-time equivalents) e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F As of or for the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 729 4,018 450 103 5,300 (6) 5,295 3,840 1,982 536 1,322 783 (9) 99 0 48 4,760 3 534 N/A 89.8 12.1 30.4 79 8.0 6.7 24.4 26.1 22.3 3.7 709 746 27.9 38.9 28.5 695 4,244 570 56 5,565 (1) 5,564 4,225 2,068 599 1,558 1,223 (6) 198 0 55 5,694 (130) N/A 102.3 (6.1) 13.0 80 8.0 (1.6) 23.8 N/A 23.8 3.7 689 738 22.5 35.8 26.0 800 3,948 763 36 5,546 3 5,550 4,231 1,828 599 1,804 1,017 4 170 34 62 5,518 32 N/A 99.5 (11.6) 8.7 81 8.8 0.4 22.8 N/A 23.5 4.2 690 737 21.5 39.4 28.2 16,207 6,967 16,330 6,796 16,925 7,084 5 (5) (21) 84 (5) (500) (5) (9) (4) (11) (15) (36) (50) (50) (13) (16) (1) 0 3 0 3 1 24 9 10 (1) 3 1 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor pro- ductivity, firm tenure, assets and other variables. 2 Compensation commitments and advances related to recruited financial advisors represents costs related to compensation commitments and advances granted to financial advisors at the time of recruitment which are subject to vesting requirements. 3 Operating expenses include restructuring charges of CHF 10 million. Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information. 4 For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report. 5 Not meaningful and not included if either the reporting period or the comparison period is a loss period. 6 Excludes interest and dividend income. 7 For purposes of comparison with a US peer. 8 Refer to the “Capital management” section of this report for more information about the equity attribution framework. 9 Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital management” section of this report for more information. 89 Financial and operating performance Wealth Management Americas Business division reporting (continued) CHF million, except where indicated Business division reporting excluding PaineWebber acquisition costs 1 Business division performance before tax Cost / income ratio (%) Average attributed equity (CHF billion) 2 As of or for the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 620 88.3 5.1 (21) 100.4 4.6 155 97.3 5.2 11 1 Acquisition costs represent goodwill and intangible assets funding costs and intangible asset amortization costs related to UBS’s 2000 acquisition of the PaineWebber retail brokerage business. 2 Refer to the “Capital management” section of this report for more information about the equity attribution framework. 90 Business performance 2011 Results Wealth Management Americas reported a pre-tax profit of CHF 534 million in 2011 compared with a pre-tax loss of CHF 130 mil- lion in 2010. This improved performance resulted from a 12% increase in revenue in US dollar terms due to increases in fees and commissions, interest income and gains on investments in our available-for-sale portfolio. Operating expenses declined 1% in US dollar terms as a result of significantly lower litigation provision charges and lower restructuring charges. In 2011, Wealth Man- agement Americas incurred restructuring charges of CHF 10 mil- lion, while 2010 included restructuring charges of CHF 162 mil- lion. In addition, 2011 included a pre-tax gain of CHF 30 million, net of compensation charges related to a change in accounting estimates for certain mutual fund fees on an accrual basis. Operating income Operating income decreased 5% to CHF 5,295 million from CHF 5,564 million in 2010, but increased 12% in US dollar terms. Net fee and commission income decreased CHF 226 million to CHF 4,018 million, but increased 12% in US dollar terms. Recurring fees increased 15% in US dollar terms due to higher fees on managed accounts and mutual funds corresponding to higher invested asset levels. In addition, recurring fees included CHF 45 million related to the abovementioned change in accounting estimates for certain mutual fund fee income recognition. Transaction-based revenues declined 10%, but increased 6% in US dollar terms, due to higher income from insurance and annuities, alternative investments, and equities products. Interest income increased 5% to CHF 729 mil- lion, or 24% in US dollar terms, due to higher client balances in securities-based lending and mortgages, as well as from higher yields on lending products. In addition, 2011 included an upward adjustment reclassifying CHF 20 million from other comprehensive income relating to mortgage-backed securities in our available-for- sale portfolio to properly reflect estimated future cash flows under the effective interest method. This adjustment was not material to prior periods. Trading income declined 21% to CHF 450 million, or 7% in US dollar terms, due to lower taxable fixed income and mu- nicipal trading income, partly offset by higher trading income from structured notes. Other income increased 84% to CHF 103 million due to a CHF 81 million increase in realized gains on sales of finan- cial investments held in UBS Bank USA’s available-for-sale portfolio, compared with CHF 4 million in the prior year. These gains resulted from rebalancing the investment portfolio for risk adjustment pur- poses within the parameters of our investment policy during the year. In addition, other income in 2010 included a CHF 7 million e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F demutualization gain from Wealth Management Americas’ stake in the Chicago Board Options Exchange. Operating expenses Operating expenses decreased 16% to CHF 4,760 million from CHF 5,694, 1% in US dollar terms, due to lower non-personnel expenses. In 2011, operating expenses included CHF 10 million in restructuring charges compared with CHF 162 million in restruc- turing charges in 2010. Personnel expenses were CHF 3,840 million, down 9% from CHF 4,225 million. Personnel expenses included CHF 5 million in restructuring charges compared with CHF 35 million in 2010. In US dollar terms, personnel expenses increased 7% due to a 13% in- crease in financial advisor compensation corresponding to higher revenue production, and a 6% increase in expenses for compensa- tion commitments and advances related to recruited financial advi- sors. Salaries and other personnel costs declined 15%, but were broadly flat compared with 2010 in US dollar terms. Compensation advance balances were CHF 3,584 million as of 31 December 2011, up 15% from 31 December 2010, or 14% in US dollar terms. This increase included scheduled payments in early 2011 related to the second tranche of the GrowthPlus program. Compensation ad- vances continue to be expensed over the life of the employees’ agreements on a straight-line amortization basis. Non-personnel expenses decreased 37% to CHF 920 million from CHF 1,470 million, or 26% in US dollar terms. Non-personnel-related restructuring charges were CHF 5 million compared with CHF 127 million. General and administrative costs declined 36%, or 24% in US dollar terms, due to lower litigation provisions, which decreased to CHF 70 million from CHF 320 million, as well as lower restructuring charges related to real estate writedowns. This decline was partly off- set by higher professional legal and consulting fees. Depreciation ex- penses declined 50%, or 41% in US dollar terms, due to lower re- structuring charges related to the impairment of real estate assets and lower allocations from shared services areas in the Corporate Center. Development of invested assets Net new money Net new money inflows were CHF 12.1 billion compared with outflows of CHF 6.1 billion in 2010. This turnaround was due to improved net inflows from net recruiting of financial advisors, in- cluding higher inflows from recruitment of experienced financial advisors, and lower outflows from financial advisor attrition. Net new money from financial advisors employed with UBS for more than one year remained positive, but declined from 2010. Includ- ing interest and dividend income, Wealth Management Americas had net new money inflows of CHF 30.4 billion in 2011 compared with CHF 13.0 billion in 2010. 91 Financial and operating performance Wealth Management Americas Invested assets Wealth Management Americas had CHF 709 billion in invested assets on 31 December 2011, up 3% from CHF 689 billion on 31 December 2010. In US dollar terms, invested assets in- creased 2% due to positive net new money including interest and dividend income, partly offset by negative market perfor- mance. As of 31 December 2011, managed account assets were 7% higher than one year earlier at CHF 190 billion. In US dollar terms, managed account assets increased 6% and com- prised 27% of invested assets compared with 26% on 31 De- cember 2010. Gross margin on invested assets The gross margin on invested assets was 79 basis points in 2011, down from 80 basis points in 2010. This reflected a 5% decrease in income compared with a 3% decrease in average invested as- sets. In US dollar terms, the gross margin on invested assets in- creased by 2 basis points to 80 basis points in 2011, reflecting a 12% increase in income compared with a 10% increase in aver- age invested assets. Growth in net interest income, net fee and commission income, and other income each contributed a 1 basis point increase to the gross margin, partly offset by a decline of 1 basis point attributable to lower trading income. 92 e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 2010 Results Wealth Management Americas reported a pre-tax loss of CHF 130 million in 2010 compared with a pre-tax profit of CHF 32 million in 2009. In 2010, Wealth Management Americas incurred restructur- ing charges of CHF 162 million, while 2009 included restructuring charges of CHF 152 million and net goodwill impairment charges of CHF 19 million related to the sale of UBS Pactual. Excluding these items, pre-tax performance would have declined to a profit of CHF 32 million in 2010 from CHF 203 million in 2009, primarily resulting from a significant increase in litigation provisions in 2010 to CHF 320 million from CHF 54 million in 2009. Operating income Operating income of CHF 5,564 million was essentially flat com- pared with CHF 5,550 million in 2009, but increased 4% in US dollar terms. Net fee and commission income increased 7%, 12% in US dollar terms, to CHF 4,244 million due to a 15% rise in recur- ring fees, as a result of higher fees from managed accounts and mutual funds related to higher invested assets, and a 6% increase in transaction-based revenue. Interest income declined 13% to CHF 695 million, a decrease of 10% in US dollar terms, due to lower investment portfolio interest income, partly offset by higher income from securities-backed lending. Net trading income de- clined 25% to CHF 570 million, 22% in US dollar terms, due to lower municipal trading income. Other income increased 56% to CHF 56 million, and included a reclassification of revenues from net trading income as well as a CHF 7 million demutualization gain from Wealth Management Americas’ stake in the Chicago Board Options Exchange. Operating expenses Operating expenses increased 3% to CHF 5,694 million from CHF 5,518 million. In 2010, operating expenses included CHF 162 mil- lion in restructuring charges compared with CHF 152 million in 2009. Additionally, 2009 included CHF 34 million in goodwill im- pairment charges related to the sale of UBS Pactual (of which CHF 15 million was charged to the Corporate Center, as this was re- lated to foreign exchange exposures managed by Group Treasury). Personnel expenses were CHF 4,225 million in 2010, down slightly from CHF 4,231 million in the previous year. In US dollar terms, personnel expenses increased 4%. Excluding CHF 35 mil- lion in restructuring charges in 2010 and CHF 71 million in re- structuring charges in 2009, personnel expenses would have in- creased 1% from the previous year. This increase was due primarily to higher financial advisor compensation related to high- er revenue production and the introduction of the GrowthPlus incentive compensation program in 2010, partly offset by lower salaries and other personnel costs, resulting from restructuring ini- tiatives in 2010 and 2009. Expenses for compensation commit- ments and advances related to recruited financial advisors were flat from 2009, but increased 4% in US dollar terms. Compensa- tion advance balances were CHF 3,112 million as of 31 December 2010, down 4% from 31 December 2009, but increased 7% in US dollar terms. Non-personnel expenses increased 14% to CHF 1,470 million from CHF 1,287 million, principally due to higher litigation provi- sions, which increased to CHF 320 million from CHF 54 million. Non-personnel expenses included CHF 127 million in restructuring charges in 2010 related to real estate writedowns, while 2009 in- cluded restructuring charges of CHF 82 million and the abovemen- tioned goodwill impairment charges. In addition, non-personnel costs included a shift of expenses from the Corporate Center to the business divisions in 2010. ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of our Annual Report 2010 for more information on allocation of additional Corporate Center costs to the business divisions in 2010 Development of invested assets Net new money Net new money outflows for Wealth Management Americas were CHF 6.1 billion compared with CHF 11.6 billion in the prior year. We experienced net new money outflows during the first half of 2010, mainly due to financial advisor attrition and lim- ited recruiting of experienced financial advisors. Net new mon- ey turned positive in the second half of 2010 due to improved financial advisor retention and improved net new money in- flows from financial advisors employed with UBS for more than one year. Including interest and dividend income, net new mon- ey inflows of CHF 13.0 billion in 2010 improved from CHF 8.7 billion in 2009. In 2010, Wealth Management Americas recorded CHF 2.2 bil- lion of net new money inflows related to the inclusion of invested assets of certain retirement plan assets not custodied at UBS, as discussed below in the “Invested assets” section. Invested assets Invested assets were CHF 689 billion on 31 December 2010, broadly flat compared with CHF 690 billion on 31 December 2009. In US dollar terms, invested assets increased 12%, primarily due to positive market performance in the second half of 2010. During the course of the year, Wealth Management Americas conducted a review of its invested assets reporting and determined that, go- ing forward, certain retirement plan assets custodied away from UBS should be included in invested assets. As a result, invested assets increased by CHF 22 billion at year end and net new money inflows increased by CHF 2.2 billion. Managed account assets in- creased 5% to CHF 177 billion as of 31 December 2010, from CHF 168 billion on 31 December 2009. In US dollar terms, managed account assets increased 18% and comprised 26% of invested assets compared with 24% on 31 December 2009. 93 Financial and operating performance Wealth Management Americas Gross margin on invested assets The gross margin on invested assets was 80 basis points, down from 81 basis points, as income increased only slightly, while aver- age invested assets increased 2%. In US dollar terms, the gross margin on invested assets decreased 3 basis points to 78 basis points, as income growth of 4% was outpaced by an 8% rise in average invested assets. This margin decrease was due to declines in net trading income and interest of 3 basis points and 2 basis points, respectively, partly offset by an increase of 2 basis points from net fees and commissions. 94 Global Asset Management Business division reporting CHF million, except where indicated Net management fees 1 Performance 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 3 Pre-tax profit growth (%) Cost / income ratio (%) Information by business line Income Traditional investments Alternative and quantitative investments Global real estate Infrastructure and private equity 4 Fund services Total operating income Gross margin on invested assets (bps) Traditional investments Alternative and quantitative investments Global real estate Infrastructure and private equity 4 Total gross margin Net new money (CHF billion) 5 Traditional investments Alternative and quantitative investments Global real estate Infrastructure and private equity 4 Total net new money Net new money excluding money market flows of which: from third parties of which: from UBS’s wealth management businesses Money market flows of which: from third parties of which: from UBS’s wealth management businesses e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F As of or for the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 (11) (30) (12) (13) (6) 80 (12) 0 (11) (17) (13) (22) 2 71 (18) (12) (8) (14) 6 (36) (8) 1,704 99 1,803 955 375 (1) 38 0 8 1,375 2 428 (17.1) 76.3 1,097 253 263 24 165 1,803 23 76 72 83 33 0.0 (0.8) 1.6 3.5 4.3 9.0 12.2 (3.1) (4.7) 0.2 (5.0) 1,918 141 2,058 1,096 400 (5) 43 0 8 1,542 516 17.8 74.9 1,259 325 258 14 202 2,058 25 88 68 130 36 4.2 (3.2) 0.6 0.1 1.8 8.2 16.2 (8.1) (6.4) 2.0 (8.3) 1,904 233 2,137 996 387 (74) 36 340 13 1,698 438 (67.1) 79.5 1,319 405 185 13 214 2,137 26 102 47 114 37 (40.6) (6.7) 1.4 0.1 (45.8) (33.7) (6.8) (26.9) (12.1) 1.7 (13.8) 1 Net management fees include transaction fees, fund administration revenues (including interest and trading income from lending business and foreign exchange hedging as part of the fund services offering), gains or losses from seed money and co-investments, funding costs and other items that are not performance fees. 2 Operating expenses include restructuring charges of CHF 26 million. Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information. 3 For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report. 4 With effect from 2011, the Infrastructure and private equity fund of funds businesses were transferred from Alternative and quantitative investments to Infrastructure. Following the transfer it was renamed Infrastructure and private equity. As the amounts were not material, prior periods were not restated. 5 Excludes interest and dividend income. 95 Financial and operating performance Global Asset Management Business division reporting (continued) CHF million, except where indicated Invested assets (CHF billion) Traditional investments of which: money market funds Alternative and quantitative investments Global real estate Infrastructure and private equity 1 Total invested assets Assets under administration by fund services Assets under administration (CHF billion) 2 Net new assets under administration (CHF billion) 3 Gross margin on assets under administration (bps) Additional information Average attributed equity (CHF billion) 4 Return on attributed equity (RoaE) (%) BIS risk-weighted assets, Basel II (CHF billion) 5 BIS risk-weighted assets, Basel 2.5 (CHF billion) 5 Return on risk-weighted assets, Basel II, gross (%) 5 Goodwill and intangible assets (CHF billion) Personnel (full-time equivalents) As of or for the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 497 92 31 38 8 574 375 (5.5) 4 2.5 17.1 3.6 3.6 50.6 1.5 3,750 487 96 34 36 1 559 390 (0.8) 5 2.5 20.6 3.5 N/A 56.8 1.5 3,481 502 111 41 39 1 583 406 (59.7) 5 2.8 15.9 4.1 N/A 37.7 1.7 3,471 2 (4) (9) 6 700 3 (4) (20) 0 3 0 8 1 With effect from 2011, the Infrastructure and private equity fund of funds businesses were transferred from Alternative and quantitative investments to Infrastructure. Following the transfer it was renamed Infrastruc- ture and private equity. As the amounts were not material, prior periods were not restated. 2 This includes UBS and third-party fund assets, for which the fund services unit provides legal fund set-up and registration services, valuation, accounting and reporting and shareholder services. 3 Inflows of assets under administration from new and existing funds less outflows from existing funds or fund exits. 4 Refer to the “Capital management” section of this report for more information about the equity attribution framework. 5 Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Com- parative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital manage- ment” section of this report for more information. 96 Business performance 2011 Results Pre-tax profit for 2011 was CHF 428 million compared with CHF 516 million in 2010. Lower net management fees and lower per- formance fees, primarily in alternative and quantitative invest- ments, were only partially offset by lower expenses, which includ- ed CHF 26 million in restructuring charges associated with both our cost reduction program and the acquisition of the ING Invest- ment Management business in Australia. Operating income Total operating income was CHF 1,803 million in 2011 compared with CHF 2,058 million in 2010. This decrease was mainly due to lower net management fees, primarily as a result of negative mar- ket performance and the strengthening of the Swiss franc over most of the year leading to lower average invested assets. Perfor- mance fees were also lower, primarily in alternative and quantita- tive investments. Operating expenses Total operating expenses were CHF 1,375 million in 2011 com- pared with CHF 1,542 million in 2010, mainly due to lower per- sonnel costs as well as lower general and administrative expenses, both partly due to the strengthening of the Swiss franc and savings associated with our cost reduction program. A total of CHF 26 mil- lion in restructuring charges was incurred in 2011, of which CHF 19 million related to our cost reduction program and CHF 7 million related to the ING Investment Management business acquisition. Personnel expenses were CHF 955 million in 2011 compared with CHF 1,096 million in 2010, mainly due to lower accruals for variable compensation as a result of lower profits, the strengthen- ing of the Swiss franc and savings associated with our cost reduc- tion program. General and administrative expenses were CHF 375 million in 2011 compared with CHF 400 million in 2010, mainly due to lower premises, IT and advertising costs as well as the reversal of previously recognized expenses of CHF 9 million related to a past business closure. Net charges to other business divisions were CHF 1 million in 2011 compared with CHF 5 million in 2010. Development of invested assets e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F of CHF 16.2 billion in 2010, and net outflows from clients of UBS’s wealth management businesses were CHF 3.1 billion compared with net outflows of CHF 8.1 billion. The flows from UBS’s wealth management businesses included two transfers of investment management and research responsibility from Wealth Manage- ment & Swiss Bank to Global Asset Management: a CHF 1.8 bil- lion multi-manager alternative fund was transferred to alternative and quantitative investments, and CHF 2.9 billion in private equity funds of funds were transferred to infrastructure and private eq- uity. It should be noted that these assets are reported as invested assets in both business divisions, as Wealth Management & Swiss Bank continues to advise the clients of the funds. Money market net inflows from third parties were CHF 0.2 bil- lion compared with CHF 2.0 billion in 2010, and money market net outflows from clients of UBS’s wealth management business- es were CHF 5.0 billion compared with CHF 8.3 billion in 2010. Invested assets Total invested assets increased to CHF 574 billion on 31 December 2011 from CHF 559 billion on 31 December 2010, mainly due to the addition of CHF 25 billion from the ING Investment Manage- ment business acquisition, which was partly offset by negative market performance. As agreed prior to the acquisition, portions of the acquired invested assets are being sold or redeemed in the first half of 2012. These further actions are expected to result in a net divestment of approximately half of the acquired invested as- sets in the first half of 2012. Invested assets varied considerably during the year but were on average lower due to market volatility and currency movements. Taking the year as a whole, the currency impact on invested assets was flat, while positive net new money was more than offset by negative market performance. Gross margin on invested assets The gross margin was 33 basis points in 2011 compared with 36 basis points in 2010, reflecting lower performance fees, primarily in alternative and quantitative investments. Results by business line Traditional investments Revenues were CHF 1,097 million compared with CHF 1,259 mil- lion, predominantly reflecting lower average invested assets as a result of negative market performance and the strengthening of the Swiss franc over most of the year. The gross margin was 23 basis points compared with 25 basis Net new money Excluding money market flows, net new money inflows from third parties were CHF 12.2 billion in 2011 compared with net inflows points in 2010, mainly due to changes in the asset mix. Net new money inflows were nil compared with CHF 4.2 bil- lion inflows in the prior year. Excluding money market flows, net 97 Financial and operating performance Global Asset Management new money inflows were CHF 4.7 billion compared with CHF 10.6 billion. Equities net inflows were CHF 4.7 billion compared with CHF 7.5 billion. Fixed income net inflows were CHF 5.7 billion compared with CHF 9.7 billion. Multi-asset net outflows (which included flows related to alternative investments not managed by the alternative and quantitative investments, global real estate or infrastructure and private equity investment areas) were CHF 5.7 billion compared with CHF 6.6 billion. Invested assets were CHF 497 billion on 31 December 2011 compared with CHF 487 billion on 31 December 2010, mainly due to the ING Investment Management business acquisition, partially offset by negative market performance. By mandate type, CHF 141 billion of invested assets related to equities, CHF 141 billion to fixed income, CHF 92 billion to money markets and CHF 123 billion to multi-asset mandates (including CHF 6 billion of alternative investments not managed by the alternative and quantitative investments, global real estate or infrastructure and private equity investment areas). Alternative and quantitative investments Revenues were CHF 253 million compared with CHF 325 million, mainly due to performance fees being lower by CHF 50 million, which also contributed to the decline in the gross margin to 76 basis points from 88 basis points. Management fees were also lower, primarily due to lower average invested assets. Net new money outflows were CHF 0.8 billion compared with net outflows of CHF 3.2 billion. The flows included a CHF 1.8 billion inflow related to the transfer of investment management and re- search responsibility for a multi-manager alternative fund from Wealth Management & Swiss Bank. Invested assets were CHF 31 billion on 31 December 2011 com- pared with CHF 34 billion on 31 December 2010. The transfer within Global Asset Management of infrastructure and private equity fund of funds businesses to infrastructure and private equity with effect from 1 July 2011 was partially offset by the abovemen- tioned transfer from Wealth Management & Swiss Bank. Global real estate Revenues were CHF 263 million compared with CHF 258 million, mainly due to higher transaction and performance fees, which more than offset the currency impact from the strengthening of the Swiss franc. As a result, the gross margin increased to 72 basis points compared with 68 basis points. Net new money inflows were CHF 1.6 billion compared with CHF 0.6 billion in 2010. Invested assets were CHF 38 billion on 31 December 2011, increased from CHF 36 billion on 31 December 2010, mainly due to net new money inflows. Infrastructure and private equity Revenues were CHF 24 million compared with CHF 14 million. The increase was mainly due to a one-time distribution fee from a co- investment in the UBS International Infrastructure Fund and the transfer of infrastructure and private equity fund of funds busi- nesses from alternative and quantitative investments. As a result of this transfer, the name of this business line changed to infrastruc- ture and private equity. Net new money inflows were CHF 3.5 billion compared with CHF 0.1 billion in 2010, mainly due to a CHF 2.9 billion inflow resulting from a transfer of investment management and research responsibilities for private equity funds of funds from Wealth Management & Swiss Bank. Invested assets were CHF 8 billion on 31 December 2011 com- pared with CHF 1 billion on 31 December 2010. This increase mainly related to the abovementioned transfer from Wealth Man- agement & Swiss Bank and to the transfer within Global Asset Management of infrastructure and private equity fund of funds businesses from alternative and quantitative investments with ef- fect from 1 July 2011. Fund services Revenues were CHF 165 million compared with CHF 202 million, mainly due to lower administrative fees resulting from lower aver- age assets under administration and lower interest income. The gross margin on assets under administration was 4 basis points compared with 5 basis points. Net new assets under administration outflows were CHF 5.5 bil- lion compared with CHF 0.8 billion. Total assets under administration were CHF 375 billion com- pared with CHF 390 billion due to negative market performance and currency impact as well as net outflows. Investment performance Widespread macro-economic uncertainty led to heightened mar- ket volatility in 2011, making it a challenging year for fundamen- tally-based managers. Our actively-managed traditional strategies struggled in this environment, but alternative strategies generally performed well. Core / value equity strategies generally underperformed their benchmarks in 2011, largely as most were less favorably posi- tioned for the market stresses that dominated in the third quar- ter. Key global, European and US large cap strategies performed below benchmarks and peer averages. By contrast, the concen- trated pan-European strategy beat its benchmark and peer aver- age, as did most Asian and emerging markets strategies. Notably, concentrated pan-European, emerging markets and global sus- tainable and responsible strategies all exceeded their benchmarks in each of the last three calendar years. Among small cap strate- gies, Australia performed especially well in 2011 and, in common with European and Swiss small cap equity, also exceeded bench- mark in each of the last three calendar years. Over three years, on an annualized basis, key global, global ex-US, pan-European, Asian, emerging markets and Australian large cap equity capa- bilities were clearly ahead of their benchmarks, while US large cap was behind. After performing well in 2010, the majority of growth equity strategies struggled to match those gains in 2011. The flagship 98 e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F US large cap growth select strategy finished well ahead of peers in 2011, despite being modestly behind its benchmark for the year. A notable leader versus benchmark and peers was US small cap growth, which has exceeded its benchmark in each of the last three calendar years. The majority of key growth equity strategies were well ahead of benchmarks over three years to end of 2011. Performance of structured equity strategies was mixed in 2011, with some global, US, UK and Japan active strategies beating benchmarks. US active, a quantitative large cap strategy, comfort- ably outperformed both benchmark and peers, and exceeded its benchmark in each of the last three calendar years. US market neutral, an alternative fundamentally-based large cap strategy, provided a solid positive return above cash for the year. The ma- jority of active structured equity strategies were ahead of bench- marks over three years. Passive strategies and exchange traded funds met their objectives in 2011 by maintaining high tracking accuracy despite volatile markets. During the year, uncertainty surrounding peripheral European sovereigns was a dominant factor in fixed income markets. Many of our fixed income strategies underperformed their benchmarks for the year but remained relatively strong over three years. The one-year underperformance was consistent across most regions and strategies and was evident in both traditional global and local bond strategies (such as Australian, Canadian, Swiss, UK and US) and in some extended sectors (such as emerging markets, high yield and Asian bonds). Some higher alpha strategies (such as global fixed income opportunities and US core plus) as well as some individual regional strategies (such as euro corporates and Japanese bond) outperformed benchmarks for the year. Many strategies lagged peer averages over the year, although three-year peer rankings were better. Money market funds continued to achieve their capital preservation objectives. Absolute performance of key multi-asset strategies managed by global investment solutions was negative in 2011 and relative performance was slightly negative versus benchmark. Longer-term track records remained strong and, over three years, key strategies were predominantly in the first quartile versus peers. After a solid first half of 2011, the strategies were positioned defensively in the second half of the year, leading to relative underperformance when markets rebounded. The stand-alone active currency strate- gy posted negative returns for the year but was positive over lon- ger periods. Absolute return strategies managed by global investment solu- tions continued to strengthen their position and were in the first quartile versus peers over three years. Business cycle-driven strate- gies delivered solid, close-to-flat one-year performance and were in the first quartile versus peers. For convertibles, the strategies had a difficult year overall in both absolute and relative terms, although longer-term track records remained strong. In alternative and quantitative investments, hedge funds con- tinued to navigate a challenging market environment. Core O’Connor single manager funds posted positive returns and out- performed most peers on an absolute and risk-adjusted basis. In the multi-manager business, returns were mixed across strategies. Non-market neutral portfolios were slightly negative, while relative value and fixed income arbitrage-oriented portfolios were positive for the year. In global real estate, the majority of direct European strategies generated positive absolute returns for 2011. The Swiss compos- ite outperformed its benchmark for the year. The flagship UK fund outperformed its benchmark for the year and retained its upper quartile position versus peers. US real estate and farmland strategies produced strong positive absolute returns for 2011. In Japan, the flagship J-REIT underperformed its benchmark. In real estate securities strategies, the global strategy underperformed benchmark while the Swiss flagship strategy outperformed. Multi-manager strategies produced positive absolute returns for the year. In infrastructure and private equity, the acquisition in June 2011 of a material stake in Gassled, the world’s largest offshore gas transmission system, meant the flagship direct infrastructure strategy was close to fully invested. The strategy performed in line with its return objectives. Infrastructure fund of funds performance continued to improve throughout the year. Private equity fund of funds strategies performed broadly in line with expectations. 99 Financial and operating performance Global Asset Management 2010 Results Pre-tax profit for 2010 was CHF 516 million compared with CHF 438 million in 2009. Excluding a net goodwill impairment charge of CHF 191 million related to the sale of UBS Pactual in 2009, pre-tax profit decreased by CHF 113 million. Operating income Total operating income was CHF 2,058 million compared with CHF 2,137 million. Lower performance fees and revenues follow- ing the sale of UBS Pactual were partly offset by reduced co- investment losses in real estate and lower operational losses. Operating expenses Total operating expenses were CHF 1,542 million compared with CHF 1,698 million. Excluding the abovementioned goodwill im- pairment and restructuring charges of CHF 48 million in 2009, operating expenses increased by CHF 83 million in 2010, mainly due to increased personnel expenses. This increase was partly off- set by reduced non-personnel expenses as a result of cost-saving initiatives in 2009 and lower expenses following the sale of UBS Pactual. In addition, non-personnel costs included an additional allocation of expenses to the business divisions from the Corpo- rate Center in 2010. Personnel expenses were CHF 1,096 million compared with CHF 996 million, mainly due to increased expenses for deferred variable compensation in prior years, partly offset by lower fixed compensation costs as a result of headcount reductions in 2009 and reduced expenses following the sale of UBS Pactual. General and administrative expenses were CHF 400 million compared with CHF 387 million, mainly due to higher sponsoring and branding costs. The increase was partly offset by lower ex- penses following the sale of UBS Pactual. Net charges to other business divisions were CHF 5 million compared with CHF 74 million. Excluding a charge to the Corpo- rate Center of CHF 149 million in 2009, we recorded net charges from other business divisions of CHF 75 million. The total 2009 goodwill  impairment charge related to the sale of UBS Pactual was CHF 340 million, of which CHF 149 million was charged to the Corporate Center. ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of our Annual Report 2010 for more information on allocation of additional Corporate  Center costs to the business divisions in 2010 Development of invested assets ents of UBS’s wealth management businesses were CHF 8.1 bil- lion compared with CHF 26.9 billion. The flows from UBS’s wealth management businesses included a CHF 2.5 billion transfer of investment management responsibility for the US hedge fund of funds business from Wealth Management Americas to Global Asset Management’s alternative and quantitative investments business. Money market net inflows from third parties were CHF 2.0 bil- lion compared with CHF 1.7 billion, and money market net out- flows from clients of UBS’s wealth management businesses were CHF 8.3 billion compared with CHF 13.8 billion in 2009. Invested assets Total invested assets were CHF 559 billion on 31 December 2010 compared with CHF 583 billion on 31 December 2009. Negative currency effects were only partly offset by positive market move- ments and net new money inflows. Gross margin on invested assets The gross margin was 36 basis points in 2010 compared with 37 basis points in 2009, reflecting lower performance fees primarily in alternative and quantitative investments, partly offset by lower co-investment losses in real estate and lower operational losses. Results by business line Traditional investments Revenues were CHF 1,259 million compared with CHF 1,319 mil- lion, as lower operational losses were more than offset by de- creased revenues following the sale of UBS Pactual in 2009. The gross margin was 25 basis points compared with 26 basis points in the prior year, mainly due to lower performance fees and decreased revenues following the sale of UBS Pactual. Net new money inflows were CHF 4.2 billion compared with net outflows of CHF 40.6 billion in the prior year. Excluding mon- ey market flows, net new money inflows were CHF 10.6 billion compared with net outflows of CHF 28.4 billion in the prior year. Equities net inflows were CHF 7.5 billion compared with net out- flows of CHF 8.2 billion. Fixed income net inflows were CHF 9.7 billion compared with net outflows of CHF 5.6 billion. Multi-asset net outflows (which included flows related to alternative invest- ments not managed by the alternative and quantitative invest- ments, global real estate or infrastructure and private equity in- vestment areas) were CHF 6.6 billion compared with net outflows of CHF 14.6 billion. Invested assets were CHF 487 billion on 31 December 2010 compared with CHF 502 billion on 31 December 2009. The net decrease reflects negative currency effects, partly offset by posi- tive market movements and net new money inflows. Net new money Excluding money market flows, net new money inflows from third parties were CHF 16.2 billion in 2010 compared with net outflows of CHF 6.8 billion in 2009, and net outflows from cli- Alternative and quantitative investments Revenues were CHF 325 million compared with CHF 405 million due to lower performance fees, which also resulted in a gross margin of 88 basis points compared with 102 basis points. 100 Net new money outflows were CHF 3.2 billion compared with net outflows of CHF 6.7 billion. Net new money in 2010 included CHF 2.5 billion related to the transfer of investment management responsibility for US hedge fund business from Wealth Manage- ment Americas to alternative and quantitative investments. These assets are reported as invested assets in both business divisions as Wealth Management Americas continues to advise the clients of these funds. Invested assets were CHF 34 billion on 31 December 2010 compared with CHF 41 billion on 31 December 2009 due to neg- ative currency effects and net new money outflows, partly offset by positive market movements. Global real estate Revenues were CHF 258 million compared with CHF 185 million, mainly due to lower co-investment losses and higher performance fees. As a result, the gross margin was higher at 68 basis points compared with 47 basis points. Net new money inflows were CHF 0.6 billion compared with net inflows of CHF 1.4 billion. Invested assets were CHF 36 billion on 31 December 2010, a decrease of CHF 3 billion from 31 December 2009, due to nega- tive currency effects and market movements, partly offset by net new money inflows. Infrastructure Revenues were CHF 14 million compared with CHF 13 million. Net new money inflows were CHF 0.1 billion, unchanged from the prior year. Invested assets were CHF 1 billion on 31 December 2010, mostly unchanged from 31 December 2009. Fund services Revenues were CHF 202 million compared with CHF 214 million, mainly due to lower administrative fees due to lower average assets under administration and lower interest income. The gross margin on assets under administration was 5 basis points, unchanged from the prior year. Net new assets under administration outflows were CHF 0.8 bil- lion compared with net outflows of CHF 59.7 billion in 2009. Total assets under administration were CHF 390 billion com- pared with CHF 406 billion, due to negative currency effects and net new assets outflows, partly offset by positive market move- ments. e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 101 Financial and operating performance Investment Bank Investment Bank Business division reporting CHF million, except where indicated Investment banking Advisory revenues Capital market revenues Equities Fixed income, currencies and commodities Other fee income and risk management Securities Equities Fixed income, currencies and commodities Total income Credit loss (expense) / recovery 3 Total operating income excluding own credit and unauthorized trading incident Own credit 4 Total operating income excluding unauthorized trading incident Unauthorized trading incident Total 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 Business division performance before tax excluding own credit Key performance indicators 6 Pre-tax profit growth (%) 7 Cost / income ratio (%) Return on attributed equity (RoaE) (%) Return on assets, gross (%) Average VaR (1-day, 95% confidence, 5 years of historical data) As of or for the year ended % change from Excluding unauthorized trading incident 31.12.11 2 31.12.11 1 1,371 964 1,329 574 755 (921) 7,969 3,698 4,271 9,340 12 9,352 1,537 10,889 (1,849) 9,040 5,801 2,637 161 254 0 34 8,886 5 154 (1,383) (93.0) 98.4 0.5 0.9 75 10,889 8,886 2,003 466 81.7 6.4 1.1 N/A 31.12.10 31.12.09 31.12.10 2,414 846 1,994 1,020 974 (426) 10,144 4,469 5,675 12,558 0 12,558 (548) 12,010 6,743 2,693 64 278 0 34 9,813 2,197 2,745 N/A 81.7 8.7 1.2 56 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) (4,058) N/A 190.7 (24.1) 0.4 55 (43) 14 (33) (44) (22) (116) (21) (17) (25) (26) (26) (25) (14) (2) 152 (9) 0 (9) (93) 34 1 Income and expenses related to the SNB StabFund investment management team, who are employed by UBS, were transferred from the Investment Bank to the Corporate Center. The impact on performance from con- tinuing operations before tax is not material in the current or any prior period. Comparative prior periods have not been adjusted. 2 Excludes the impact from the unauthorized trading incident of CHF 1,849 million in the income statement, and its risk-weighted assets impact of CHF 10.1 billion on both a Basel II and Basel 2.5 basis. 3 Includes credit loss (expense) / recovery on reclassified and acquired securities (2011: recovery of CHF 9 million; 2010: credit loss expense of CHF 172 million). 4 Represents own credit changes on financial liabilities designated at fair value through profit or loss. The cumulative own credit gain for such debt held on 31 December 2011 amounts to CHF 1.9 billion; the cumulative own credit gain for such debt held at 31 December 2010 amounts to CHF 0.2 billion. The gains have reduced the fair value of financial liabilities desig- nated at fair value through profit or loss recognized on our balance sheet. Refer to “Note 26 Fair value of financial instruments” in the “Financial information” section of this report for more information. 5 Operating expenses include restructuring charges of CHF 216 million. Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information. 6 For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report. 7 Not meaningful and not included if either the reporting period or the comparison period is a loss period. 102 Business division reporting (continued) As of or for the year ended % change from CHF million, except where indicated 31.12.11 1 Additional information Total assets (CHF billion) 3 Average attributed equity (CHF billion) 4 BIS risk-weighted assets, Basel II (CHF billion) 5 BIS risk-weighted assets, Basel 2.5 (CHF billion) 5 Return on risk-weighted assets, Basel II, gross (%) 5 Goodwill and intangible assets (CHF billion) Compensation ratio (%) Impaired loans portfolio as a % of total loans portfolio, gross (%) Personnel (full-time equivalents) 1,073.6 31.3 119.1 155.7 7.2 3.2 64.2 3.8 17,256 Excluding unauthorized trading incident 31.12.11 2 109.0 145.6 9.0 31.12.10 31.12.09 31.12.10 966.9 25.3 119.3 N/A 9.7 3.2 56.1 7.2 16,860 992.0 25.3 122.4 N/A 3.1 3.5 115.2 10.0 15,666 11 24 0 N/A 0 2 e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 1 Income and expenses related to the SNB StabFund investment management team, who are employed by UBS, were transferred from the Investment Bank to the Corporate Center. The impact on performance from con- tinuing operations before tax is not material in the current or any prior period. Comparative prior periods have not been adjusted. 2 Excludes the impact from the unauthorized trading incident of CHF 1,849 million in the income statement, and its risk-weighted assets impact of CHF 10.1 billion on both a Basel II and Basel 2.5 basis. 3 Based on third-party view, i.e. without intercompany balances. 4 Refer to the “Capital manage- ment” section of this report for more information about the equity attribution framework. 5 Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital management” sec- tion of this report for more information. 103 Financial and operating performance Investment Bank Business performance 2011 Results Pre-tax profit of CHF 154 million was recorded in 2011 compared with a pre-tax profit of CHF 2,197 million in 2010. Excluding an own credit gain of CHF 1,537 million and a loss relating to the unauthorized trading incident of CHF 1,849 million in 2011 and an own credit loss of CHF 548 million in 2010, pre-tax profit was CHF 466 million compared with a profit of CHF 2,745 million in 2010. This was due to lower revenues across all business areas and the strengthening of the Swiss franc. Total operating income as reported Total operating income was CHF 9,040 million compared with CHF 12,010 million in the prior year, a decrease of 25%, or 11% in US dollar terms. During the year, we incurred a loss from the unauthorized trading incident of CHF 1,849 million in the equities business area. After a strong start to the year, increasing instabil- ity in the eurozone and the US government debt rating down- grade contributed to lack of liquidity, impacting the credit busi- ness, while the macro businesses benefited from increased volatility. In addition, subdued volumes and lower client activity affected the equities business. Credit loss expense / recovery Net credit loss recoveries in 2011 were CHF 12 million com- pared with a net credit loss expense of zero in 2010. In 2011, recoveries mainly related to reclassified and similar acquired se- curities. ➔ 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 Own credit An own credit gain on financial liabilities designated at fair value of CHF 1,537 million was recorded in 2011, mainly due to a wid- ening of our credit spreads during the year. An own credit loss of CHF 548 million was recorded in 2010, mainly due to a tightening of our credit spreads. ➔ Refer to “Note 26 Fair value of financial instruments” in the “Financial information” section of this report for more informa- tion on own credit Operating income by business area In 2011, we implemented two structural changes in our business division: allocating risk management premiums from equities and 104 fixed income, currencies and commodities (FICC) to investment banking; and transferring the commodities business, formerly booked in equities, to FICC. The changes were not material and therefore did not necessitate restatement at a divisional level. However, we have made reference to these changes where rele- vant to aid explanation of the business area results. Investment banking Investment banking revenues decreased 43% to CHF 1,371 mil- lion in 2011 from CHF 2,414 million in the previous year. This was mainly due to a reduction in global capital markets activity and the revised allocation of the risk management premiums, which were higher compared with 2010, as well as the effects of the strengthening of the Swiss franc. In US dollar terms, revenues de- clined 33%. Advisory revenues increased 14% to CHF 964 million from CHF 846 million, as a result of a more robust market in the first half of 2011. Our market share increased slightly compared with 2010. Capital market revenues were CHF 1,329 million compared with CHF 1,994 million due in part to the deepening of the sover- eign debt crisis in Europe as well as slower US economic growth which depressed activity levels. Equities capital market revenues were CHF 574 million, down 44% from CHF 1,020 million as rev- enues and market share decreased across all regions against a 25% reduction in the fee pool in US dollar terms. Fixed income capital market revenues decreased 22% to CHF 755 million from CHF 974 million as our market share declined while the market fee pool increased 12% in US dollar terms. Other fee income and risk management revenues were negative CHF 921 million compared with negative CHF 426 million, primar- ily due to an increase in risk management premiums and the effect of their revised allocation to investment banking. Securities Securities revenues were CHF 7,969 million compared with CHF 10,144 million in 2010. In US dollar terms, revenues decreased 7%. Equities Revenues in equities were CHF 3,698 million, down 17% from CHF 4,469 million in 2010, primarily due to the strengthening of the Swiss franc. In US dollar terms, revenues declined 2%. Cash revenues decreased 17% to CHF 1,480 million compared with CHF 1,776 million. In US dollar terms, revenues declined 2%. The decrease was primarily due to a reduction in volumes and client activity. However, our cash equities exchange market share was slightly up on 2010. Derivatives and equity-linked revenues were CHF 1,035 million compared with CHF 1,580 million. Within derivatives, revenues in e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F Europe, the Middle East and Africa declined and more than offset higher revenues in Asia Pacific and the Americas. In addition, trad- ing revenues were impacted by ongoing market volatility. In equity- linked, revenues declined due to lower valuations and volumes as  well as reduced primary market activity, which impacted the secondary markets. In the prime services business, revenues declined 3% to CHF 1,009 million, reflecting the Swiss franc appreciation as the ma- jority of our balances are US dollar denominated. In US dollar terms, revenues were up 15% as a result of improved securities lending revenues. Other FICC revenues were negative CHF 288 million in 2011 and positive CHF 581 million in 2010 largely due to losses from residual risk positions. Revenues in 2011 included negative CHF 296 million from residual risk positions due to a widening in credit valuation adjustment spreads and increased credit valuation ad- justments following an agreement in principle with a monoline insurer on a potential commutation, compared with positive CHF 737 million in 2010. ➔ Refer to “Note 32 Events after the reporting period” in the “Financial information” section of this report for more information Other equities revenues were CHF 175 million compared with CHF 77 million, mainly due to the abovementioned revised alloca- tion of risk management premiums. Proprietary trading reported positive revenues, though these were lower than 2010. In 2011, we recorded a gain of CHF 244 million from debit valuation adjustments on our derivatives portfolio compared with a gain of CHF 155 million from debit valuation adjustments as UBS’s credit default swap spreads widened in both periods. Fixed income, currencies and commodities FICC revenues decreased 25% to CHF 4,271 million in 2011 from CHF 5,675 million in 2010, primarily due to the strengthening of the Swiss franc. In US dollar terms, revenues declined 11%. The combined revenues from credit, macro and emerging markets de- creased 11% to CHF 4,558 million from CHF 5,093 million, but rose 6% in US dollar terms due to improved results in macro. In credit, revenues decreased to CHF 1,548 million from CHF 2,304 million in 2010, primarily due to mark-to-market losses in the flow business. Concerns surrounding the eurozone and the global economic outlook significantly impacted market volatility, liquidity and client activity, resulting in challenging conditions for flow trad- ing, partly offset by an improved performance by credit solutions. In macro, revenues rose to CHF 2,615 million from CHF 2,268 million in 2010. Revenues increased across all interest rates busi- ness lines. Foreign exchange benefited from market volatility in the second half of 2011 and from the contributions of our new e-trading platform. Non-linear interest rates reported a turn- around from negative to positive revenues in 2011. Emerging markets revenues decreased to CHF 395 million from CHF 521 million, as increased foreign exchange revenues were more than offset by lower revenues in credit and rates. Latin America saw an improvement in revenues whereas both Asia and Europe reported a decrease. Operating expenses Total operating expenses decreased 9% to CHF 8,886 million from CHF 9,813 million, mostly due to the strengthening of the Swiss franc. Excluding restructuring costs of CHF 216 million associated with our cost reduction program, operating expenses decreased 12%. In US dollar terms, operating expenses increased 4%. Personnel expenses decreased 14% to CHF 5,801 million from CHF 6,743 million due to lower variable compensation accruals and the favorable effect of the strengthening Swiss franc. Further, 2010 included a UK bank payroll tax charge of CHF 190 million. General and administrative expenses decreased to CHF 2,637 million from CHF 2,693 million due to the strengthening Swiss franc and UK value added tax releases, partially offset by the UK bank levy of CHF 106 million. Net charges from other business divisions were CHF 161 mil- lion compared with CHF 64 million due to transfer of approxi- mately 280 personnel to Wealth Management & Swiss Bank as part of forming the Investment Products & Services unit in early 2011. Depreciation decreased 9% to CHF 254 million from CHF 278 million, largely due to lower charges for IT hardware. Amortization of intangible assets was in line with 2010 at CHF 34 million. 105 Financial and operating performance Investment Bank 2010 Results In 2010, we recorded a pre-tax profit of CHF 2,197 million com- pared with a pre-tax loss of CHF 6,081 million in 2009, primarily as a result of increased revenues in FICC, a significant reduction in net credit loss expenses and lower own credit losses on financial liabilities designated at fair value. Total operating income as reported Total operating income in 2010 was CHF 12,010 million compared with CHF 3,135 million in the prior year. This was mainly a result of increased revenues in the FICC business, a significant reduction in net credit loss expense and lower own credit losses on financial liabilities designated at fair value, and was partly offset by lower revenues in the equities business. Credit loss expense / recovery The net credit loss expense in 2010 was nil compared with net credit loss expense of CHF 1,698 million in 2009. In 2010, we re- corded CHF 172 million credit loss expenses related to reclassified and acquired securities which were offset by recoveries on certain legacy leveraged finance and asset backed loan positions. ➔ Refer to the “Risk management and control” section of our Annual Report 2010 for more information on our risk manage- ment approach, method of credit risk measurement and the development of credit risk exposures Own credit The own credit on financial liabilities designated at fair value re- duced significantly to a loss of CHF 548 million from a loss of CHF 2,023 million. While our credit spreads tightened in both years, the effect in 2010 was less pronounced than in 2009. ➔ Refer to “Note 26 Fair value of financial instruments” in the “Financial information” section of this report for more information Operating income by business area due to reduced market activity in the first half of 2010 follow- ing uncertainty over sovereign risk in Europe, and lower reve- nues in Asia Pacific as domestic Chinese banks took a greater share of fees than in 2009. Fixed income capital market reve- nues were CHF 974 million, up 8% from CHF 904 million, main- ly due to a strong leverage capital market fees pool and market share gain. Other fee income and risk management revenues were neg- ative CHF 426 million compared with negative CHF 906 million, primarily due to the absence in 2010 of large losses recorded in 2009 in relation to an overall stabilization of the credit mar- kets. Securities Securities revenues were CHF 10,144 million, compared with CHF 4,390 million in 2009. Revenues of equities and FICC are analyzed in the respective sections below. Equities Revenues in equities were CHF 4,469 million, down 9% from CHF 4,937 million in 2009. Cash revenues were CHF 1,776 million, compared with CHF 1,959 million due to lower commission income as a result of decreased client activity in the US, offsetting stronger perfor- mance in Europe, the Middle East and Africa. Derivatives and equity-linked revenues were CHF 1,580 million, in line with last year. Derivatives revenues were up as a result of improved client flows and structured products performance in Asia Pacific, partly offset by lower revenues in Europe, the Middle East and Africa due to the sovereign debt crisis, creating a lack of both liquidity and client flow. Equity-linked revenues were down after a strong performance in 2009. Within the prime services business, revenues were CHF 1,036 million compared with CHF 1,058 million. Prime brokerage reve- nues declined due to lower average spreads while exchange-trad- ed derivatives revenues marginally improved. Other equities revenues were CHF 77 million compared with CHF 341 million, largely due to lower proprietary trading revenues partially offset by reduced funding and hedging costs. Investment banking Investment banking revenues were CHF 2,414 million in 2010, marginally down from CHF 2,466 million in the previous year. Advisory revenues decreased slightly to CHF 846 million from CHF 858 million. While the overall market fee pool increased year on year, our market share declined. Capital markets revenues were down 21% to CHF 1,994 mil- lion from CHF 2,514 million. Equity capital markets revenues were CHF 1,020 million, down 37% from CHF 1,609 million Fixed income, currencies and commodities Revenues were positive CHF 5,675 million in 2010 compared with negative CHF 547 million in 2009, when the FICC business was materially affected by losses on residual risk positions. In credit, revenues rose significantly to positive CHF 2,304 mil- lion, up from negative CHF 1,932 million. The turnaround was largely due to the rebuild across the trading and sales businesses, particularly in structured credit and client solutions, as well as lowering of negative revenues from the legacy risk portfolio (the 106 exposure to which was also reduced during this period), and the selective re-entry into previously exited products. number of employees and a UK bank payroll tax charge of CHF 190 million. In macro, revenues of CHF 2,268 million were down from CHF 2,933 million in 2009. The decrease mainly stemmed from lower revenues in the rates and foreign exchange businesses, which were affected by a significant decline in market spreads, low inter- est rate volatility, reduced client activity and general de-risking, particularly in the second half of 2010. General and administrative expenses increased to CHF 2,693 million in 2010 from CHF 2,628 million in 2009. This was largely due to an increase in legal provisions as well as higher sponsoring and branding costs related to the global re-launch of the UBS brand. These costs were partially offset by a reduction in profes- sional fees. Emerging markets revenues decreased to CHF 521 million from CHF 1,162 million as divesture of UBS Pactual, spread compres- sion experienced across foreign exchange and credit markets, and uncertainties over European sovereign debt impacted liquidity and overall client volumes. Other FICC revenues were positive CHF 581 million com- pared with negative CHF 2,710 million. The 2010 revenues in- cluded CHF 737 million from residual risk positions due to a reduced credit valuation adjustment requirement and net gains on sale. Operating expenses Operating expenses increased 6% to CHF 9,813 million in 2010 from CHF 9,216 million in the previous year. Personnel expenses increased 21% to CHF 6,743 million from CHF 5,568 million, mainly due to increased variable compensa- tion as a result of amortization of prior years’ awards, increased Net charges from other business divisions were CHF 64 million, compared with a net charge to other business divisions of CHF 147 million. Depreciation reduced 23% to CHF 278 million in 2010 from CHF 360 million in 2009. Depreciation in 2009 included costs associated with a restructuring charge. Goodwill impairment charges were nil in 2010 compared with a charge of CHF 749 million in 2009, related to the sale of UBS Pactual. Amortization of intangible assets was CHF 34 million compared with CHF 59 million in 2009. In addition, non-personnel costs included an additional allo- cation of expenses from the Corporate Center to the business di- visions in 2010. ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of our Annual Report 2010 for more information on allocation of additional Corporate  Center costs to the business divisions in 2010 e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F 107 Financial and operating performance Corporate Center Corporate Center Treasury activities and other corporate items 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 Performance from continuing operations before tax Performance from discontinued operations before tax Performance before tax Additional information BIS risk-weighted assets, Basel II (CHF billion) 3 BIS risk-weighted assets, Basel 2.5 (CHF billion) 3 Personnel (full-time equivalents) Allocations to business divisions (full-time equivalents) Personnel after allocations (full-time equivalents) Corporate Center expenses before service allocation to business divisions 4 Personnel expenses General and administrative expenses Depreciation of property and equipment Total operating expenses before service allocation to business divisions Net allocations to business divisions Total operating expenses 31.12.11 1 (80) (1) (80) 71 139 3 70 0 283 2 (363) 0 (363) 9.7 13.7 19,270 (18,996) 274 3,684 3,351 728 7,762 (7,479) 283 As of or for the year ended % change from 31.12.10 31.12.09 31.12.10 1,135 0 1,135 78 168 8 89 0 343 793 2 795 8.9 N/A 19,472 (19,278) 194 3,870 3,523 809 8,202 (7,859) 343 394 (5) 389 551 199 306 193 0 1,250 (860) (7) (867) 8.5 N/A 20,054 (18,430) 1,624 4,043 3,516 943 8,501 (7,251) 1,250 (9) (17) (63) (21) (17) 9 (1) 1 41 (5) (5) (10) (5) 5 (17) 1 Income and expenses related to the SNB StabFund investment management team, who are employed by UBS, were transferred from Investment Bank to Corporate Center in 2011. The impact on performance from continuing operations before tax is not material in the current or any prior period. Comparative prior periods have not been adjusted. 2 Operating expenses include restructuring charges of CHF 15 million. Refer to “Note 37 Reorganizations and disposals” in the “Financial information” section of this report for more information. 3 Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for 31 December 2010 and 31 December 2009. The comparative information under the Basel II framework is therefore provided. Refer to the “Capital management” section of this report for more information. 4 Please note that some of the comparative figures in this table may differ from those originally published in quarterly and annual reports (for example due to adjustments following organizational changes). 108 2011 Results The Corporate Centre recorded a pre-tax loss of CHF 363 million in 2011 compared with a gain of CHF 795 million in 2010. This mostly reflects a decline in the value of our option to acquire the SNB StabFund’s equity and lower proceeds from the sale of real estate in 2011. Operating income The Corporate Center’s operating income was negative CHF 80 mil- lion in 2011 compared with positive CHF 1,135 million in 2010. The revaluation of our option to acquire the SNB StabFund’s equity resulted in a loss of CHF 133 million in 2011, reflecting lower fore- cast cash flows and increased risk premia for the fund’s assets, compared with a gain of CHF 745 million in 2010. ➔ Refer to the discussion of “Non-trading portfolios – valuation and sensitivity information by instrument category” in the “Risk  management and control” section of this report for more information on changes in the value of our option to acquire the SNB StabFund’s equity Treasury income remaining in the Corporate Center after alloca- tions to the business divisions amounted to a gain of CHF 38 million in 2011, compared with a gain of CHF 152 million in 2010. Further- more, 2011 included a gain of CHF 78 million from the sale of a property in Switzerland, while 2010 included a CHF 180 million gain from the sale of investments in associates owning office space in New York as well as a gain of CHF 158 million from a sale of property in Switzerland. e c n a m r o f r e p g n i t a r e p o d n a l a i c n a n i F Personnel expenses decreased by CHF 186 million to CHF 3,684 million, primarily due to favorable currency effects of CHF 298 mil- lion, partially offset by CHF 55 million personnel-related restructur- ing expenses associated with our cost reduction program in the second half of 2011, capacity increases for regulatory require- ments and personnel transfers from other business divisions. General and administrative expenses decreased by CHF 172 million to CHF 3,351 million due to favorable currency effects of CHF 300 million, partly offset by restructuring charges of CHF 113 million due to the consolidation of our real estate portfolio as part of our cost reduction program. Furthermore, the effects of effi- ciency initiatives and other cost reductions were offset by the abovementioned increased business demand affecting Group Technology and the consolidation of services in the Corporate Center. Depreciation expenses decreased by CHF 81 million to CHF 728 million, primarily due to favorable currency effects of CHF 49 million and the reversal of an impairment loss. These decreases were partly offset by CHF 28 million in restructuring charges, mainly related to the abovementioned real estate consolidation in 2011. The business divisions were charged net CHF 7,479 million for shared services, a decrease of CHF 380 million. Total operating expenses remaining after allocations to the business divisions were CHF 283 million compared with CHF 343 million in the prior year. This decrease was due to a value added tax provision release of CHF 22 million and a discretionary compensation accrual release of CHF 19 million in 2011. Furthermore, 2011 included lower litigation provisions, partially offset by additional expenses related to the SNB StabFund investment management team trans- ferred from the Investment Bank and the “too-big-to-fail” pro- gram. Operating expenses On a gross basis before service allocations to the business divi- sions, the Corporate Center reported operating expenses of CHF 7,762 million, down from CHF 8,202 million in 2010. This de- crease was due to favorable currency effects of CHF 647 million resulting from the depreciation of the US dollar and British pound against the Swiss franc, as well as the effects of efficiency initia- tives and other cost reductions of approximately CHF 400 million resulting from the execution of the UBS real estate consolidation strategy and lower IT costs. This was partially offset by restructur- ing charges of CHF 196 million as well as an increase of approxi- mately CHF 400 million in expenses due to focused investments in technology, capacity expansion needed for control functions to be able to satisfy increased regulatory requirements, and the con- tinuing consolidation of services in the Corporate Center. Personnel At the end of the year 2011, the Corporate Center employed 19,270 personnel, of which 18,996 were allocated to the busi- ness divisions based on the services used. The reduction of 202 personnel from the prior year related mainly to the abovemen- tioned cost reduction program in the second half of 2011, partly offset by higher personnel required to meet additional regulatory requirements, and further consolidation of services in the Corpo- rate Center. The 274 personnel remaining in the Corporate Center were related to Group governance functions and other corporate items. The increase of 80 personnel compared with the prior year was mainly due to the SNB StabFund investment management team transferred from the Investment Bank and the “too-big-to-fail” program. 109 Financial and operating performance Corporate Center 2010 Results The pre-tax result in 2010 was a gain of CHF 795 million, compared with a loss of CHF 867 million in 2009, mainly due to a higher revaluation gain of our option to acquire the SNB StabFund’s equity as well as lower operating expenses as a result of additional charg- es to the business divisions reflecting a change in allocation meth- odology. Operating income The Corporate Center’s operating income was positive CHF 1,135 million in 2010 compared with positive CHF 389 million in 2009. The revaluation of our option to acquire the SNB StabFund’s eq- uity resulted in a gain of CHF 745 million in 2010, compared with a gain of CHF 117 million in 2009. ➔ Refer to the discussion of “Non-trading portfolios – valuation and sensitivity information by instrument category” in the “Risk  management and control” section of our Annual Report 2010 for more information on changes in the value of our option to acquire the SNB StabFund’s equity A CHF 180 million gain from the sale of investments in asso- ciates owning office space in New York as well as a gain of CHF 158 million from a sale of property in Switzerland was recorded in 2010. In comparison, 2009 included own credit related alloca- tions of negative revenues to the Corporate Center and a CHF 498 million loss on the closing of the UBS Pactual sale in 2009, which was largely related to foreign exchange losses. These losses were partly offset by a net gain of CHF 297 million on the valua- tion of the mandatory convertible notes issued in December 2008 and converted in August 2009, an additional foreign exchange gain of CHF 430 million due to the de-consolidation and liquida- tion of subsidiaries and a gain of CHF 304 million on the buyback of subordinated debt. Operating expenses Total operating expenses decreased to CHF 343 million from CHF 1,250 million in 2009, mainly due to a goodwill impairment charge of CHF 492 million in 2009 relating to the sale of UBS Pactual, which was reallocated to the Corporate Center from the business divisions, partly offset by the credit related to the UBS Pactual operating result which was transferred from the business divisions. In addition, from 2010 onwards, almost all costs incurred by the Corporate Center related to shared services and control functions were allocated to the reportable segments, which directly and in- directly receive the value of the services, either based on a full cost recovery or on a periodically agreed flat fee. Up to and including 2009, certain costs incurred by the Corporate Center were pre- sented as Corporate Center expenses and not charged to the busi- ness divisions. This change in allocation policy has been applied prospectively and prior year numbers have not been restated. The incremental charges to the business divisions made in 2010 mainly relate to control functions. If figures of 2009 had been presented on the basis of the allocation methodology applied for 2010, the estimated impact on operating expenses and performance before tax would have been CHF 640 million. In 2010, the Corporate Center was able to reduce its cost base excluding variable compensation before allocation by CHF 605 million from the previous year, primarily as a result of lower per- sonnel costs in IT and lower real estate-related costs. The business divisions fully benefited from the reduced cost base through low- er allocations. Personnel At the end of the year 2010, the Corporate Center employed 19,472 personnel, of whom 19,278 were allocated to the business divisions based on the services used. The reduction of 582 person- nel mainly related to the restructuring program in 2009. The re- maining 194 personnel related to Group governance functions and other corporate items. The decrease of 1,430 personnel com- pared with the prior year was due to the abovementioned change in allocation methodology, mainly related to control functions. 110 Risk, treasury and capital management t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 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 Instru- ments: 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 our 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 within this section of the report and is incorporated by cross-reference into the financial statements of this report. Risk, treasury and capital management Risk management and control Risk management and control During 2011 we continued to focus on aligning the firm’s risk profile with our client-centric strategy. In the second half of 2011, we took measures to reduce market risk exposures significantly. Value-at-risk decreased by almost half to CHF 36 million on 31 December 2011 from CHF 68 million the prior year. Credit risk exposure saw a modest rise, reflecting increased lending within our international wealth management businesses, particularly in Asia Pacific. We also made further progress in reducing our exposures to monoline insurers and student loan auction rate securities. During 2011 while our risk under a number of stress scenarios was reduced in line with these reduced positions, we still remain significantly exposed to the impact of potential stress scenarios on our market, credit, operational and business risk. Disciplined risk management and control are essential to our suc- cess. In 2011, we continued to make significant investments in our infrastructure, processes, methodologies and people to ensure that our risk frameworks are sufficiently robust to support our business aspirations and risk appetite. Our risk appetite is estab- lished within our risk capacity as determined by a complementary set of firm-wide risk metrics, and is approved under Board of Di- rectors (BoD) authority. It is administered and enforced by a de- tailed framework of portfolio and position limits at both Group and business division levels. Each element of our risk control framework plays a key role in the decision-making processes with- in the firm. All material risks are reported to the respective author- ity holders at least monthly. The unauthorized trading incident underscored the impor- tance of ensuring a robust operational risk framework. A number of weaknesses identified in the wake of the incident have been fully or largely remediated, but there is more to be done to im- prove the broader internal control environment. We initiated a programme in 2011 to enhance our operational risk framework and internal controls; this extensive programme will continue through 2012. Summary of key developments in 2011 The most important developments that took place in 2011 with regard to risk management and control include the following: – Our year-end value-at-risk reduced to CHF 36 million on 31 December 2011 from CHF 68 million on 31 December 2010. This significant decrease was mainly attributed to concerted risk reductions within our trading business, in line with our strategy of running a more focused, less complex and less cap- ital-intensive Investment Bank, but also reflected market condi- tions prevalent at the end of 2011. – Residual risk exposures in the Investment Bank were further reduced during 2011. This followed the commutation of monoline insurance combined with sales of the underlying assets, predominantly collateralized loan obligations, and the sales of certain student loan auction rate securities portfolios. Net exposure to monoline insurers relating to negative basis trades and after credit valuation adjustments reduced to USD 1.0 billion from USD 1.6 billion. Our student loan auction rate securities portfolio reduced to USD 5.7 billion from USD 9.8 billion. – New credit loss expenses minus credit loss recoveries for the Group totaled CHF 84 million, up from CHF 66 million in 2010. The change resulted primarily from an increase in collective loan loss allowances in the third quarter 2011, mainly due to heightened credit risks arising predominantly from Swiss cor- porate clients that had become exposed to significant foreign currency-related risk as a result of the impact of the strength- ening Swiss franc on their financial position. – Our impaired loan portfolio decreased by CHF 2.0 billion to CHF 2.1 billion on 31 December 2011, primarily due to sales of residual risk exposures. – We continued to make significant investments in our risk IT platforms during 2011, particularly in the Investment Bank, where we refined our new platform for risk aggregation. The roll-out of standardized methodologies, processes and tools for credit monitoring across our wealth management locations also progressed well, and we completed the deployment of a third-party risk measurement application within Global Asset Management. – Significant developments of the UBS Advanced Measurement Approach model for operational risk were approved by the Swiss Financial Market Supervisory Authority (FINMA) in the first quarter of 2011 and have been implemented for regula- tory capital reporting. – We established a dedicated firm-wide treasury risk control function with a direct reporting line into the Group Chief Risk Officer. – FINMA conducts semi-annual macro-economic stress tests on the two large Swiss banks. Their scenario assumes a severe global recession together with very sharp, specific shocks for certain countries. The most recent assessment was done in the third quarter of 2011, when FINMA analyzed the impact of the stress test on our capital ratios and confirmed that we exceed- ed their regulatory minimum requirements under the specified scenario. – Over the course of last year, we further embedded risk consid- erations within our compensation framework. In particular and 112 in line with evolving industry practice, we adapted our ap- proach to identifying our key risk-takers, individuals in our or- ganization who, by the nature of their role, can materially set, commit or control the firm’s resources, or exert influence over the firm’s risk profile. ➔ Refer to the “Credit risk“, “Market risk“, “Operational risk“ and “Liquidity and funding management“ sections of this report for d e t i d u A more information Risk management and control principles d e t i d u A Five pillars support our efforts to achieve an appropriate balance between risk and return: 1. Protecting the financial strength of UBS by controlling our risk exposures and avoiding potential risk concentrations at the level of individual exposures, at specific portfolio levels and at an aggregate firm-wide level across all risk types. 2. Reputation protection through a sound risk culture character- ized by a holistic and integrated view of risk, performance and reward, and by full compliance with our standards and principles, particularly our Code of Business Conduct and Ethics. 3. Management accountability whereby business management, as opposed to risk control, owns all risks assumed throughout the firm and is responsible for the continuous and active man- agement of all risk exposures to ensure that risk and return are balanced. 4. Independent control functions which monitor the effectiveness of the business’s risk management and oversee risk-taking ac- tivities. 5. Comprehensive and transparent disclosure of risks to senior management, the BoD, shareholders, regulators, rating agen- cies and other stakeholders. Our risk management and control principles are implemented through a risk management and control framework. This frame- work comprises qualitative elements such as policies, procedures and authorities, and quantitative components including risk mea- surement methodologies and risk limits. The framework is dynamic and continuously adapted to our evolving businesses and the market environment. It includes clear- ly defined processes to deal with new business initiatives as well as large and complex transactions. Risk management and control responsibilities d e t i d u A The key roles and responsibilities for risk management and control are as follows: – The BoD is responsible for determining the firm’s risk princi- ples, risk appetite and major portfolio limits, including their allocation to the business divisions. The risk assessment and management oversight performed by the BoD considers evolv- ing best practices and is intended to conform to statutory re- quirements, as is the related disclosure in this section. The BoD d e t i d u A is supported by the BoD Risk Committee, which monitors and oversees the firm’s risk profile and the implementation of the risk framework as approved by the BoD. The BoD Risk Commit- tee also assesses and approves the firm’s key risk measurement methodologies. – The Group Executive Board (GEB) implements the risk frame- work, controls the firm’s risk profile and approves all major risk policies. – The Group Chief Executive Officer (Group CEO) is responsible for the results of the firm, has risk authority over transactions, positions and exposures, and also allocates portfolio limits ap- proved by the BoD within the business divisions. – The divisional Chief Executive Officers are accountable for the results of their business divisions. This includes actively manag- ing their risk exposures, and ensuring that risks and returns are balanced. – The Group Chief Risk Officer reports directly to the Group CEO and has functional and management authority over risk con- trol throughout the firm. Risk Control provides independent oversight of risk and is responsible for implementing the risk control processes for credit, country, market, investment and operational risks. This includes establishing methodologies to measure 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 Control Officers ac- cording to their expertise, experience and responsibilities. – The Group Chief Financial Officer (Group 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 the management of firm-wide treasury risks and for implementing the risk management and control framework for tax. – The Group General Counsel is responsible for implementing the firm’s risk management and control principles for legal and compliance matters. Risk categories The risks faced by our businesses can be broken down into three different categories: primary risks, consequential risks and busi- ness risks. Primary and consequential risks result from our busi- ness activities and are subject to independent risk control. Primary risks consist of credit risk, country risk, market risk, issuer risk and investment risk. Consequential risks consist of operational risk, which includes legal, compliance and tax risks, and liquidity and funding risks. Certain business risks arise from the commercial, strategic and economic risks inherent in our business activities. These are overseen and managed by the firm’s respective business and group management. Definitions of primary and consequential risks are the follow- ing: – Credit risk: the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations. 113 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Risk, treasury and capital management Risk management and control d e t i d u A – 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 developments. – Market risk, issuer risk and investment risk: the risk of loss re- sulting from changes in market variables, whether to our trad- ing positions or financial investments. – Operational risk: the risk of loss resulting from inadequate or failed internal processes, people and systems, or the risk of a loss resulting from external causes, whether deliberate, acci- dental or natural. This includes risks related to legal, compli- ance and tax matters. – Liquidity and funding risk: the risk of being unable either to meet our payment obligations when due or to borrow funds in the market at an acceptable price to fund actual or proposed commitments. ➔ 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 d e t i d u A A variety of methodologies and measurements are applied to quantify the risks of our portfolios and our risk concentrations. Risks that are not fully reflected within standard measures are subject to additional controls, which may include pre-approval of transactions and specific restrictions. Models to quantify risk are generally developed by dedicated units within control functions. Valuations and risk models that could impact the firm’s books and records are independently verified, and subjected to ongoing monitoring and control by the Group CRO and Group CFO orga- nizations. The base measures are position level market risk sensitivities and credit risk exposures which, on aggregate, provide an over- view of our risk across trades. These measures are supplemented with portfolio level statistical and stress loss measures, which are two complementary types of risk measures we use to assess po- tential future losses at an aggregate level. Statistical loss Statistical loss measures include value-at-risk (VaR), expected loss and earnings-at-risk (EaR). VaR estimates the losses arising from market risk, which could potentially be realized over a set time period at an established level of confidence. Expected loss mea- sures the average annual costs that are expected to arise from our credit portfolios and operational risks. EaR measures the potential shortfall in our earnings that could be realized over a set time period at an established level of confidence, and is comprised of core statistical measures complemented by management assess- ment. ➔ Refer to the “Credit risk”, “Market risk” and “Operational risk” sections of this report for a description of our key statistical loss measures 114 Stress loss Stress loss is the loss that could result from extreme events under specified scenarios. We perform stress testing to complement our statistical loss measures and to give us a better understanding of our risk capacity and appetite. Stress testing quantifies our expo- sures to plausible yet extreme and unusual market movements, and enables us to identify, understand and manage our potential vulnerabilities and risk concentrations. Our stress testing frame- work 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 the risks of specific portfolios within the business divisions. Our portfolio stress loss measures are characterized by past events but also in- clude forward-looking elements. The stress scenarios for trading risks capture the liquidity characteristics of different markets and positions. Our stress frameworks include, for example a scenario which reflects the extreme market conditions that were experienced at the height of the financial crisis in the fourth quarter of 2008. Our combined stress test (CST) framework captures firm-wide exposures to a number of global systemic events, including a se- vere global recession triggered by severe market events similar to those observed in 2008. Other topical forward-looking scenarios developed over the past two years include a eurozone crisis. These stress tests are based on forward-looking market event and mac- roeconomic scenarios calibrated to different levels of severity. The evolution of market indicators and economic variables under these scenarios is defined and applied to our entire risk portfolio. The impact of primary, consequential and business risks is as- sessed with the aim of calculating the loss and capital implications should these stress scenarios occur. Stress test results are included in risk reporting and are impor- tant inputs for the risk control, risk appetite and business planning processes of the firm. Our firm-wide stress testing, which captures all major identified risks across our business divisions, is one of the key inputs for discussions between senior management, the BoD and regulators with regard to our risk profile. We continue to provide detailed stress analyses to FINMA in accordance with their requirements. The stress scenarios are reviewed, updated and expanded reg- ularly in the context of the macroeconomic and geopolitical envi- ronment by a committee of representatives from the business divi- sions, Risk Control and economic research. Our stress testing therefore attempts to provide a control framework that is for- ward-looking and responsive to changing market conditions. However, the market moves experienced in real stress events may differ from moves envisaged in our scenario specifications. Most major financial firms employ stress tests, but their ap- proaches vary significantly, and there are no industry standards defining stress scenarios or the way they are applied to a firm’s positions. Consequently, comparisons of stress results between firms can be misleading and, therefore, like most of our peers, we do not publish quantitative stress test results. ➔ Refer to the “Credit risk” and “Market risk” sections of this report for a description of our key stress loss measures Group risk appetite framework Our risk appetite framework establishes risk appetite objectives with respect to earnings and capital levels that we seek to main- tain, even after experiencing severe losses over a defined time horizon. In order to monitor our risk profile against our risk ap- petite, we use our two complementary firm-wide risk measure- ment frameworks: EaR (together with its extension, capital-at–risk (CaR)) and CST. Both frameworks seek to capture risks across all of our business divisions and from all major risk categories, includ- ing primary risks, consequential risks and business risks. These measures are significant components of our risk control, capital management and business planning processes, which are de- scribed in more detail below: – EaR is measured as the potential shortfall in earnings at a 95% confidence level and is evaluated over both three-month and one-year periods. – CaR extends EaR to consider the impact on BIS tier 1 capital of a more severe earnings shortfall and is measured at confidence levels from 95% to 99.9%. – Combined stress testing complements EaR and CaR. As de- scribed in the “Stress loss” section above, our firm-wide stress tests evaluate the potential impact of stress scenarios across our risk portfolios, and thereby on our earnings and capital, based on specified stress scenarios. d e t i d u A ally and collectively. These elements include: the shared character- istics of the instruments and counterparties; the size of the posi- tion or group of positions; the sensitivity of the position or group of positions to changes in risk factors; and the volatility and cor- relations of those factors. Also important in our assessment is the liquidity of the markets where the instruments are traded, and the availability and effectiveness of hedges or other potential risk- mitigating factors. The value of a hedge instrument may not al- ways move in line with the position being hedged, and this mis- match is referred to as basis risk. If we identify a risk concentration, we assess it to determine whether it should be reduced or mitigated, and we also evaluate the available means to do so. Once identified, risk concentrations are subject to increased monitoring. Based on our assessment of portfolios and asset classes with the potential for material loss in a stress scenario relating to the current environment, we believe that our exposures to monoline insurers and student loan auction rate securities shown and dis- cussed in the following sections were considered risk concentra- tions as of 31 December 2011, in accordance with the abovemen- tioned definition. ➔ Refer to the discussions of “Exposure to student loan auction rate securities” and “Exposure to monoline insurers” within the “Composition of credit risk – business divisions” section of the report for more information d e t i d u A Our risk appetite is approved by the BoD. Risk appetite is based on our risk capacity, which is in turn based on our capital and forecasted earnings resources. Our overall risk appetite is set as an upper limit covering the aggregate risk exposure for each risk ap- petite objective, taking into account inherent limitations in the precision of risk exposure measures focusing on extreme market and economic events. The risk limit framework takes into account a comparison of the firm’s risk exposure with our risk capacity under prevailing operating conditions and according to prospec- tive business plans. This comparison is a key tool supporting man- agement decisions on potential adjustments to the risk profile of our firm. ➔ Refer to the “Credit risk” and “Market risk” sections of this report It is possible that material losses could occur on asset classes, positions and hedges other than those previously mentioned, particularly if the correlations that emerge in a stressed environ- ment differ markedly from those we anticipated. We are exposed to price risk, basis risk, credit spread risk and default risk as well as other idiosyncratic and correlation risks on both our equities and fixed income inventories. We are also exposed to price risk on our option to acquire the SNB StabFund’s equity. In addition, we have lending, counterparty and country risk exposures that could result in significant losses if economic conditions were to worsen. ➔ Refer to the discussion of credit risk, market risk and operational risk below for more information on the risks to which we are for more information on our risk exposures exposed Risk concentrations Risk disclosures d e t i d u A A risk concentration exists where (i) a position in financial instru- ments is affected by changes in a group of correlated factors, or a group of positions are 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 sig- nificant losses. 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 individu- Our measures of risk exposure may differ depending on the pur- pose for which exposures are calculated, for example, for financial accounting purposes under International Financial Reporting Standards (IFRS), determination of our required regulatory capital or our internal management purposes. The exposures detailed in the “Credit risk” and “Market risk” sections are typically based on our internal management view of risk exposure. ➔ Refer to the “Basel 2.5 Pillar 3” section of this report for more information on the exposures we use in the deter mination of our required regulatory capital 115 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R d e t i d u A d e t i d u A Risk, treasury and capital management Risk management and control Credit risk Credit risk is the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations. This includes settlement risk, an example of which would be a counterparty failing to deliver the counter-value of a foreign exchange transac- tion in which we have fulfilled our obligation. In addition a credit loss can be triggered by economic or political difficulties in the country in which a counterparty or issuer of a security is based or has substantial assets (country risk). Sources of credit risk d e t i d u A 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, for example if their ability to meet contractual obligations would be similarly affected by changes in economic, political or other conditions. To avoid credit risk concentrations, we establish limits and / or operational controls that constrain risk concentrations at portfolio and sub- portfolio levels with regard to sector exposures, country risk and specific product exposures. d e t i d u A Credit risk arises from traditional banking products such as loans, loan commitments and guarantees (for example, letters of credit). It also arises from traded products, including over-the-counter (OTC) derivative transactions and exchange-traded derivatives, as well as securities financing transactions such as repurchase agree- ments (repos and reverse repos), securities borrowing and lending transactions. The same general risk control processes are applied to these products, although the accounting treatment may vary, as products can be carried at amortized cost (loans and receiv- ables), at fair value through profit and loss (instruments held for trading, instruments designated at fair value) or at fair value through other comprehensive income (available-for-sale instru- ments) depending on the product type and the nature of the ex- posure. Securities and other obligations in tradable form also pose credit risk, as their fair values are affected by changing expecta- tions regarding the probability of issuers failing to meet these ob- ligations or when issuers actually fail to meet these obligations. Where these securities and obligations are held in connection with a trading activity, we view the risk as an issuer risk. Debt se- curities not held in connection with a trading activity are reported as debt investments and discussed at the end of this section. Many of the business activities of Wealth Management & Swiss Bank and the Investment Bank expose us to credit risk. Credit risk exposures from Wealth Management Americas and Global Asset Management are less material. Credit risk control d e t i d u A Limits and controls Limits are established for individual counterparties and their coun- terparty groups covering banking and traded products, as well as settlement amounts. These limits apply not only to the current outstanding amount, but also to contingent commitments and the potential future exposure of traded products. Credit engage- ments may not be entered into without the appropriate approvals and adherence to these limits. Risk mitigation We actively manage the credit risk in our portfolios by taking col- lateral 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 es- tate. 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 market- able securities, guarantees and other forms of collateral. 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 the market value of the collateral reflecting the quality, liquidity and volatility of the underlying collateral. Exposure and collateral values are con- tinuously monitored, and margin calls or close-out procedures are enforced when the market value of collateral falls below a pre- defined 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 bilat- eral International Swaps and Derivatives Association (ISDA), or ISDA-equivalent, master netting agreements, which allow for the close-out and netting of all transactions in the event of default. We also have two-way collateral agreements with major market participants under which either party can be required to provide collateral in the form of cash or marketable securities when the exposure exceeds a predefined level. For certain counterparties like hedge funds we may also use two-way collateral agreements. We have clearly defined processes for entering into netting and collateral agreements, including the requirement to have a legal opinion on the enforceability of contracts in relevant jurisdictions in the case of insolvency. In the Investment Bank, a distinction is made between expo- sures intended to be held to maturity (take-and-hold exposures) Primarily in the Investment Bank, we actively manage the cred- it risk of our portfolios with the aim of reducing concentrations of 116 d e t i d u A risk from specific counterparties, sectors or portfolios. Hedging measures used include single-name credit default swaps (CDS), index CDS 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 recognizing credit hedges. For example, when monitoring expo- sures against limits, we do not usually recognize credit risk miti- gants such as proxy hedges (credit protection on a correlated but different name) or index CDS. Buying credit protection creates credit exposure against the hedge provider. We monitor our expo- sures to credit protection providers and the effectiveness of credit hedges as part of our overall credit exposures to the relevant counterparties. In addition, we identify and monitor positions where we believe there is significant exposure and correlation be- tween the counterparty and the hedge provider (so-called wrong- way risk). Our policy is to discourage such activity, but in any event or as market correlations may change, not to recognize wrong- way-risk hedge benefit within counterparty limits and capital cal- culations. ➔ Refer to the “Basel 2.5 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. Ex- posures 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 credit risk, and are key inputs for the regulatory capital calculation under the advanced internal ratings-based approach of the Basel 2.5 framework gov- erning international convergence of capital. We also use models to derive the portfolio credit risk measures of expected loss, statis- tical loss and stress loss. medium enterprise segment using statistically developed score- cards. The underlying data used in our scorecards is predominant- ly based on a combination of clients’ financial information, quali- tative criteria and credit loss history over several years. To rate our large corporate clients domiciled in Switzerland, Wealth Manage- ment & Swiss Bank uses templates established for this segment by our Investment Bank. We assess the probability 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 simulating potential changes in the value of the collateral, and the probability that it may become lower than the loan amount. Our masterscale expresses default probabilities that we deter- mine 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 map- ping to our internal rating masterscale, are shown in the “UBS internal rating scale and mapping of external ratings” table. The mapping is based on the long-term average of one-year default rates available from the rating agencies. For each external rating category, the average default rate is compared to our internal de- fault probability bands to derive a mapping to our internal rating scale. Our internal rating of a counterparty may, therefore, di- verge from one or both of the correlated external ratings shown in the table. Observed defaults by rating agencies may vary through economic cycles, and we do not necessarily expect the actual number of defaults in our equivalent rating band to equal the rating agencies’ average in any given period. We periodically assess the long-term average default rates of credit rating agen- cies’ grades, and we adjust their mapping to our masterscale as necessary to reflect any material changes. d e t i d u A Probability of default The probability of default is an estimate of the likelihood of a counterparty defaulting on its contractual obligations. This prob- ability is assessed using rating tools tailored to the various catego- ries of counterparties. These categories are also calibrated to our internal credit rating scale (masterscale), which is designed to en- sure a consistent assessment of default probabilities across coun- terparties. We regularly assess the performance of our rating tools and adjust our model parameters as necessary. In addition to us- ing ratings for credit risk measurement, we use them as an impor- tant input for determining credit risk approval authorities. In the Investment Bank, rating tools are applied to broad seg- ments including banks, sovereigns, corporates, funds, hedge funds and commercial real estate. We determine our choice of the rele- vant assessment criteria, for example, financial ratios and qualita- tive 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 Switzer- land, we rate our business and corporate clients in the small to Internal UBS rating scale and mapping of external ratings Internal UBS rating Description Moody’s Investors Service mapping Standard & Poor’s mapping 0 and 1 Investment grade Aaa 2 3 4 5 6 7 8 9 10 11 12 13 14 Aa1 to Aa3 A1 to A3 Baa1 to Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa Ca to C Sub-investment grade Defaulted AAA AA+ to AA– A+ to A– BBB+ to BBB BBB– BB+ BB BB– B+ B B– CCC CC to C D 117 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Risk, treasury and capital management Risk management and control Exposure at default Exposure at default (EaD) represents the amount we expect to be owed by a counterparty at the time of a possible 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 guarantees, 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 various points in time. For secu- rities 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 would take to close out all our positions. For exchange-traded derivatives, our calculation of EaD takes into account initial and daily variation margin. We derive the EaD for OTC derivatives by modeling the potential development of replacement values of the portfolio of trades by counterparty (potential credit exposure) less the values of legally enforceable netting agreements. For collateralized OTC derivatives, our potential credit exposure is based on modeling the potential development of replacement values and collateral values, and the price correlation between the various instruments. When measuring individual counterparty exposure against credit limits, we consider the maximum likely exposure measured to a high level of confidence of outstanding obligations. However, when aggregating exposures to different counterparties for port- folio 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 back- testing and benchmarking them, whereby model outcomes are compared against actual results based on our internal experience as well as externally observed results. We assess our exposures where there is a material correlation 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 con- trols to address these risks. Loss given default Loss given default (LGD) is the magnitude of the likely loss in case of default. LGD estimates include loss of principal, interest and other amounts (such as workout costs, including the cost of car- rying an impaired position during the workout process) less recov- ered amounts. We determine LGD based on the likely recovery rate of claims against defaulted counterparties, which depends on the type of counterparty and any credit mitigation by way of collateral or guarantees. In our Investment Bank, LGD estimates are based on an assessment of key risk drivers such as industry segment, collateral and seniority of a claim as well as a country’s legal environment and bankruptcy procedures, supported by our internal loss data and external information where available. In our other lending portfolios, the LGD differs by counterparty and col- lateral type and is statistically estimated based on our internal loss data. Where we hold collateral, such as marketable securities or a mortgage on a property, loan-to-value ratios are a key factor in determining LGD. Expected loss Credit losses are an inherent cost of doing business, but the oc- currence and amount of credit losses can be erratic. In order to quantify future credit losses that may be implicit in our current portfolio, we use the concept of expected loss. Expected loss is a statistical measure used to estimate the average annual costs we expect to experience from positions in  our current credit portfolio that become impaired. The ex- pected loss for a given credit facility is a function of the three components described above: probability of default, exposure at default and LGD. We aggregate the expected loss for indi- vidual counterparties to derive our expected portfolio credit losses. Expected loss is the basis for quantifying credit risk in all our portfolios. It is also the starting point for the measurement of our portfolio statistical loss and stress loss and may be used as an in- put 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 ex- pected loss. The loss estimates deviate from the mean due the statistical uncertainty on the defaulting counterparties and to sys- tematic default relationships among counterparties  within, and between segments. It is sensitive to concentration risks on indi- vidual counterparties and groups of counterparties. The outcome provides 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 complements our statistical modeling approach. We use it to assess our poten- tial loss in various stress scenarios based on the assumption that one or more of the three key credit risk parameters will deterio- rate substantially. We run stress tests on a regular basis and use them to monitor our portfolios and identify potential risk concen- trations. For certain portfolios and segments, stress loss may also be subject to limits. ➔ Refer to the discussion on stress loss in this section for more information Composition of credit risk – UBS Group The exposures detailed in the tables in this section are based on our internal management view of credit risk. The “Credit exposure by business division” table shows a breakdown of our banking and traded product exposures before and after allowances and provisions for credit losses, 118 credit valuation adjustment (CVA) on traded products and specific credit hedges. Portfolio hedges, such as index CDS, are not included in this analysis. Banking product exposures are shown on an amortized cost or notional basis, without applying credit conversion factors. Exposures to OTC derivatives are gen- erally shown in the table as net positive replacement values (RV) after the application of legally enforceable netting agreements and the deduction of cash collateral. In some cases, however, the exposures are based on a more simplistic RV plus add-on approach. Exchange-traded derivatives (ETD) exposures take into account initial and daily variation margins. Securities fi- nancing exposures are shown net of the collateral received. Our lending business saw increased levels in 2011, following to CHF 82 billion. The largest com ponent of our credit expo- sure before deductions as of 31 December 2011 was our loan portfolio, accounting for CHF 257 billion or 54% of our total credit exposure. Of this, CHF 210 billion was attributable to Wealth Management & Swiss Bank. Additional information on the composition and credit quality of Wealth Management & Swiss Bank’s loan portfolio and the Investment Bank’s banking products and OTC derivatives port- folios is provided further on in this section. Analysis of our Invest- ment Bank and Wealth Management & Swiss Bank portfolios is based on net exposure (i.e. after deduction of credit hedges, allowances and provisions, CVA) because we actively utilize credit hedging to manage our risks in these portfolios. material client deleveraging in the prior year. Total credit exposure before deductions amounted to CHF 476 billion on 31 December 2011 compared with CHF 445 bil- lion at the end of 2010. Our banking product exposures in- creased to CHF 394 billion from CHF 356 billion, mainly due to increases in the balances with central banks and in  the loan books of Wealth Management & Swiss Bank and Wealth Man- agement Americas. Our traded products exposures, which arise largely in our Investment Bank, declined by CHF 7 billion ➔ Refer to the “Basel 2.5 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 28c Measurement categories of financial assets and liabilities“ in the “Financial information” section of this report for further information on IFRS required disclosures on derivatives and credit risk t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R d e t i d u A Credit exposure by business division CHF million Balances with central banks Due from banks Loans Guarantees Loan commitments Banking products 3 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 Other1 UBS 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 3,370 4,395 10,727 2,678 2,161 1,594 210,375 201,942 27,894 11,797 7,955 10,505 7,276 237,893 233,128 5,709 984 4,048 978 6,693 244,585 243,476 5,026 238,155 236,488 406 1,076 33,131 74 877 155 1,106 34,238 34,235 2,157 22,472 370 1,066 26,065 56 1,114 156 1,326 27,391 27,389 31,743 18,182 18,552 2 5,551 46,927 120,955 45,759 7,938 20,051 73,748 194,703 163,057 13,732 13,924 17,679 2 4,820 46,216 96,371 47,452 14,599 20,279 82,330 178,701 143,364 1,290 655 155 129 2,229 330 330 2,559 2,559 38,565 24,826 256,977 2 17,884 55,958 394,209 51,871 9,799 20,206 81,877 476,086 443,328 24,459 19,075 242,250 2 15,819 54,558 356,161 51,840 16,691 20,435 88,966 445,127 408,117 315 158 123 596 284 284 880 876 1 Includes Global Asset Management and Corporate Center. 2 Does not include reclassified securities and similar acquired securities. 3 Excludes loans designated at fair value. 4 Net of allowances, provisions, CVA and hedges. 119 Risk, treasury and capital management Risk management and control Composition of credit risk – business divisions Wealth Management & Swiss Bank The total gross banking products exposure of Wealth Manage- ment & Swiss Bank was CHF 238 billion on 31 December 2011, compared with CHF 233 billion on 31 December 2010. The high quality of this portfolio is illustrated by the rating and loss given default distributions shown in the table “Wealth Management & Swiss Bank: distribution of net banking products exposure across UBS internal rating and loss given default buckets”. Approximate- ly 75% of Wealth Management & Swiss Bank’s banking product portfolio is rated investment grade, with over 85% of this portion categorized in the lowest LGD bucket of 0–25%. The table below shows a shift from sub-investment to investment grade, mainly due to the introduction of a new rating methodology for the retail mortgage segment in 2011. Wealth Management & Swiss Bank’s gross loan portfolio in- creased to CHF 210 billion, from CHF 202 billion in the prior year. The increase came mainly from our Wealth Management business in the Asia Pacific region and in Switzerland. Of Wealth Manage- ment & Swiss Bank’s loan portfolio, 93% was secured by collat- eral, of which 75% was secured by real estate and the remaining 25% by marketable securities, guarantees and other forms of col- lateral. The majority of the real estate exposure is secured by Swiss residential 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 14.9 billion, 45% of which was rated investment grade. Furthermore, 67% of the unsecured portfolio related to cash-flow-based lending to corporate counterparties, and 20% to public authorities, mainly in Switzerland. Wealth Management Americas The total gross banking products exposure of Wealth Manage- ment Americas increased to CHF 33 billion on 31 December 2011 compared with CHF 26 billion on 31 December 2010. This expo- sure arose from three main product categories: loans secured by marketable securities, residential mortgage loans and credit cards. The majority of loans secured by marketable securities were of high quality, with 88% (93% in 2010) rated investment grade. Our Wealth Management Americas mortgage loan portfolio con- sists primarily of residential mortgages offered in all US states. Exposure continued to grow to CHF 1.8 billion as of 31 Decem- ber 2011 from CHF 1.1 billion the prior year. The overall quality of this portfolio remains high and we have experienced no credit losses since the inception of the mortgage program. The credit risk exposure arising from the credit card business was CHF 135 million on 31 December 2011. 120 Wealth Management & Swiss Bank: distribution of net banking products exposure across internal UBS ratings and loss given default buckets CHF million, except where indicated Internal UBS ratings Investment grade Sub-investment grade of which: 6–9 of which: 10–12 of which: 13 Total non-defaulted Defaulted 1 Net banking products exposure 2 Moody’s Investors Service mapping Standard & Poor’s mapping 31.12.11 LGD buckets Exposure 0–25% 26–50% 51–75% 76–100% Aaa to Baa3 AAA to BBB– 177,355 154,085 22,520 Ba1 to B1 B2 to Caa BB+ to B+ B to CCC Ca & lower CC & lower 58,232 55,257 2,686 289 48,453 45,921 2,249 283 7,531 7,112 414 5 10 1,010 1,010 740 1,238 1,214 23 1 235,587 202,538 30,051 1,978 1,020 1,196 236,783 Weighted average LGD (%) 13 15 15 15 6 13 31.12.10 Weighted average LGD (%) 16 12 11 17 20 14 Exposure 140,194 89,888 86,867 2,967 55 230,082 1,379 231,461 1 Due to the applied risk calculation approach for default positions, no LGD is assigned. 2 Gross exposure before deduction of allowances and provisions for credit losses of CHF 709 million (31 December 2010: CHF 817 ­million)­and­credit­hedges­of­CHF­400­million­(31­December­2010:­CHF­849­million)­is­CHF­237,893­million­(31­December­2010:­CHF­233,128­million). Wealth Management & Swiss Bank: composition of loan portfolio, gross CHF million, except where indicated Secured by residential property Secured by commercial / industrial property Secured by securities 1 Unsecured loans Total loans, gross Total loans, net of allowances and credit hedges 1 Includes guarantees and other collateral. Wealth Management & Swiss Bank: unsecured loans by industry sector 31.12.11 31.12.10 124,639 21,347 49,521 14,867 210,375 209,572 59.2% 10.1% 23.5% 7.1% 100.0% 122,815 20,766 42,993 15,367 201,942 201,012 60.8% 10.3% 21.3% 7.6% 100.0% t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R CHF million Construction Financial institutions Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services Other Total 31.12.11 31.12.10 120 919 327 2,542 1,785 2,938 1,112 1,715 3,113 296 252 642 59 2,172 1,842 4,895 889 1,551 2,776 288 14,867 15,367 121 Risk, treasury and capital management Risk management and control Investment Bank The “Investment Bank: banking products and OTC derivatives exposure” table shows the Investment Bank’s credit exposures to banking products and OTC derivatives before and after allowances and provisions, CVA and specific hedges based on our internal risk view. Portfolio hedges, such as index CDS, are not included in this analysis. The gross banking product expo- sures shown in this table exclude exposure to central banks, due from banks, nostro accounts and money market balances, which are included in the “Credit exposure by business divi- sion” table. Approximately 94% of the Investment Bank’s net OTC deriva- tive portfolio was traded with counterparties rated investment grade, the vast majority of which were banks and regulated finan- cial institutions with which trading was conducted primarily on a collateralized basis. Approximately 67% of the Investment Bank’s net banking products portfolio was rated investment grade, with the majority of the exposures related to its lending activities as- sociated with corporates and other non-banks. The tables shown on the next page provide additional analysis of the portfolio by our internal rating and LGD, industry sector and geographical region. Investment Bank: banking products and OTC derivatives exposure 1 CHF million Total exposure, before deduction of allowances and provisions, CVA and hedges Less: allowances, provisions and CVA Less: credit protection bought (credit default swaps, notional) Net exposure after allowances and provisions, CVA and hedges Banking products OTC derivatives 31.12.11 75,380 2 (93) 31.12.10 70,885 2 (124) (22,886) (29,154) 52,401 41,608 31.12.11 31.12.10 45,759 (2,917) (5,637) 37,205 47,452 (2,224) (3,683) 41,546 1 Banking products: risk view, excludes balances with central banks, due from banks, reclassified and similar acquired securities and internal risk adjustments; OTC derivatives: net replacement value includes the impact of­­netting agreements­(including­cash­collateral)­in­accordance­with­Swiss­Federal­Banking­Law.­ ­ 2 Banking products including money market and nostro accounts amount to CHF 120,955 million (31 December 2010: CHF 96,371 million). Investment Bank: distribution of net banking products exposure, across internal UBS ratings and loss given default (LGD) buckets CHF million, except where indicated Internal UBS ratings Investment grade Sub-investment grade of which: 6–9 of which: 10–12 Moody’s Investors Service mapping Standard & Poor’s mapping Aaa to Baa3 AAA to BBB– Ba1 to B1 B2 to Caa BB+ to B+ B to CCC of which: 13 & defaulted Ca & lower CC & lower Net banking products exposure, after application of credit hedges 1 31.12.11 LGD buckets Exposure 35,017 17,384 9,717 7,121 547 0–25% 10,426 8,363 4,406 3,544 413 26–50% 51–75% 76–100% 15,269 6,002 2,852 3,073 77 4,101 1,728 1,322 357 49 5,221 1,291 1,137 146 7 52,401 18,790 21,271 5,829 6,511 31.12.10 Weighted average LGD (%) 43 33 36 31 35 39 Exposure 25,603 16,005 6,812 8,285 908 41,608 Weighted average LGD (%) 43 31 35 27 21 39 1 Banking products: risk view, excludes balances with central banks, due from banks, reclassified and similar acquired securities and internal risk adjustments. Investment Bank: distribution of net OTC derivatives exposure, across internal UBS ratings and loss given default (LGD) buckets CHF million, except where indicated Internal UBS ratings Investment grade Sub-investment grade of which: 6–9 of which: 10–12 Ba1 to B1 B2 to Caa BB+ to B+ B to CCC of which: 13 & defaulted Ca & lower CC & lower Net OTC derivatives exposure, after application of credit hedges 1 Moody’s Investors Service mapping Standard & Poor’s mapping 31.12.11 LGD buckets Exposure 0–25% 26–50% 51–75% 76–100% Aaa to Baa3 AAA to BBB– 34,898 8,096 2,307 1,650 356 301 420 258 24 138 23,966 1,126 697 294 135 1,925 152 115 30 7 912 607 580 7 20 37,205 8,516 25,092 2,077 1,519 31.12.10 Weighted average LGD (%) 36 54 55 53 70 39 Exposure 37,552 3,994 2,302 889 803 41,546 Weighted average LGD (%) 32 51 56 48 32 33 1 OTC derivatives: net replacement value includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking Law. 122 The Investment Bank’s net banking products exposure in- creased to CHF 52.4 billion as of 31 December 2011 from CHF 41.6 billion at the end of 2010. The Investment Bank continued to actively manage the credit risk of this portfolio and, as of 31 De- cember 2011, held CHF 23 billion of single-name CDS hedges against its exposures to corporates and other non-banks. The Investment Bank’s net banking products exposure to cor- porates and other non-banks continued to be diversified across industry sectors. Based on our assessment, the vast majority of the sub-investment grade exposures in this portfolio had an LGD of 0–50% on 31 December 2011. ➔ Refer to “Note 28b Reclassification of financial assets” in the “Financial information” section of this report for more informa- tion on reclassified securities Loan to BlackRock fund In the second quarter of 2008, we sold a portfolio of US residential mortgage-backed securities (RMBS) for USD 15 billion to the RMBS Opportunities Master Fund, LP (RMBS fund), a special purpose en- tity 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 from the underlying assets. These collections 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. Allocations to equity holders may be reduced or suspended in the event of specified declines in the aggregate notional balance of the portfo- lio, and we may assume control of the underlying assets in the event of a further specified decline in the notional balance. As of 31 December 2011, the loan had a balance outstanding of USD 4.7 billion compared with USD 5.7 billion on 31 Decem- ber 2010, taking into account amounts held in escrow. This loan balance is reflected in the Investment Bank’s credit exposures shown in the tables of this section. The aggregate notional bal- ance of the RMBS fund’s assets collateralizing the loan on 31 De- cember 2011 was USD 11.5 billion. By notional balance, the port- folio primarily comprised of Alt-A (54%) and sub-prime (33%) credit grades. In terms of priority, the portfolio was dominated by senior positions (96%). 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 dete- rioration of the underlying RMBS mortgage pools indicates that Investment Bank: net banking products and OTC derivatives exposure by industry sector 1 CHF million Banks Chemicals Electricity, gas, water supply Non-bank financial institutions Manufacturing Mining Public authorities Retail and wholesale Transport, storage and communication Other Total Banking products OTC derivatives 31.12.11 31.12.10 5,082 1,866 3,760 17,735 6,354 5,990 1,369 1,791 4,041 4,413 2,608 1,046 2,380 13,054 8,021 3,707 1,611 1,921 2,722 4,537 31.12.11 10,935 31.12.10 13,409 188 252 16,068 626 211 7,233 43 943 707 179 155 20,778 524 94 4,916 49 861 581 52,401 41,608 37,205 41,546 1 Banking products: exposure to commercial counterparties after risk transfer and application of credit hedges. OTC derivatives: net replacement value includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking Law. Investment Bank: net banking products and OTC derivatives exposure by geographical region t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R CHF million Switzerland Rest of Europe North America Latin America Asia Pacific Middle East and Africa Total Banking products OTC derivatives 31.12.11 31.12.10 31.12.11 31.12.10 758 7,943 38,507 653 4,269 271 52,401 348 5,291 32,721 34 2,658 556 41,608 1,263 18,884 13,003 278 3,345 433 37,205 1,804 19,874 15,764 185 3,338 580 41,546 123 Risk, treasury and capital management Risk management and control 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. Develop- ments through the year ended 31 December 2011 did not alter our conclusion that the loan is not impaired and that consolida- tion is not required. d e t i d u A Exposure to student loan auction rate securities We continue to regard our inventory of student loan auction rate securities as a “risk concentration”. The overall exposure de- creased to USD 5.7  billion on 31 December 2011 from USD 9.8 billion on 31 December 2010 following sales during the year. At the end of 2011, 77% of the collateral underlying the re- maining student loan auction rate securities inventory was backed by Federal Family Education Loan Program guaranteed collateral, which is reinsured by the US Department of Education for no less than 97% of principal and interest. All of our student loan auction rate securities positions are held as Loans and receivables and are subject to a quarterly impairment test that includes a review of performance reports for each issuing trust. ➔ Refer to the “Risk concentrations” section of this report for more information Exposure to monoline insurers We continue to regard our exposure to monoline insurers as a “risk concentration”. The vast majority of this exposure arises d e t i d u A d e t i d u A from OTC derivative contracts, mainly credit default swap (CDS) protection purchased to hedge specific positions. The table “Ex- posure to monoline insurers, by rating” shows this exposure cal- culated as the sum of the fair values of individual CDS after credit valuation adjustments (CVA). On 31 December 2011, based on fair values, 41% of the insured assets were commercial mortgage-backed securities (CMBS), 31% were collateralized loan obligations, 21% were other asset-backed securities and 7% were asset-backed securi- ties high-grade collateralized debt obligations of US sub-prime residential mortgage-backed securities. The total fair value of CDS protection purchased from mono- line insurers was USD 1.0 billion after cumulative CVA of USD 1.4 billion. The changes reported in the table “Exposure to mono- line insurers, by rating” do not equal the profit or loss associated with this portfolio as a significant portion of the underlying assets  are classified as Loans and receivables for accounting purposes. In addition to credit protection purchased on the posi- tions detailed in the table, we held direct derivative exposure to monoline insurers of USD 264 million after CVA of USD 216 mil- lion, on 31 December 2011. ➔ Refer to the “Non-trading portfolios – valuation and sensitivity information by instrument category” section below for more information ➔ Refer to the “Risk concentrations” section of this report for more information d e t i d u A d e t i d u A Student loan ARS inventory USD million US student loan ARS of which rated BB– and above of which rated below BB– Carrying value 31.12.11 5,683 1 5,154 529 31.12.10 9,784 8,374 1,410 1 Includes USD 2.9 billion (CHF 2.7 billion) at carrying value of student loan ARS that were reclassified to Loans and receivables from Held for trading in the fourth quarter 2008. Refer to “Note 28b Reclassification of financial assets” in the “Financial information” section of this report for more information. Exposure to monoline insurers, by rating 1 USD million Credit protection on US sub-prime residential mortgage- backed securities (RMBS) CDO high grade, from monolines rated sub-investment grade (BB and below) 2 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 31.12.11 Total 31.12.10 Notional amount 3 Fair value of ­underlying­ assets Column 1 Column 2 31.12.11 Fair value of CDS prior to credit valuation adjustment Column 3 (=1–2) Credit valuation adjustment Fair value of CDS after ­credit valuation­ adjustment Column 4 Column 5 (=3–4) 726 4,392 658 3,734 5,118 11,906 188 2,585 4 483 2,103 2,773 9,206 538 1,807 175 1,631 2,345 2,699 470 912 48 864 1,382 1,087 68 895 127 767 963 1,612 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 (CDS) purchased as credit protection. 4 Includes USD 0.8 billion (CHF 0.7 billion) at fair value / USD 0.9 billion (CHF 0.8 billion) at carrying value of assets that were reclassified to Loans and receivables from Held for trading in the fourth quarter of 2008. Refer to “Note 28b Reclassification of financial assets” in the “Financial information” section of this report. 124 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 those that are “impaired”. We consider a loan to be past due when a con- tractual payment has been missed. We consider a loan as im- paired if it is probable that we will not fully recover all contractual payments due under the loan as a result of the borrower’s inabil- ity, or unwillingness, to meet its obligations after realization of available collateral. Loans in arrears for 90 days are evaluated in- dividually for impairment. However, an impairment analysis would be carried out irrespective of whether the loan was in arrears if other objective evidence indicates that a loan may be impaired. Past due but not impaired loans are those that have suffered missed payments, but are not considered impaired because we expect to collect all amounts due under the contractual terms of the loans or the equivalent value from liquidation of collateral. We also assess claims from securities financing transactions for de- fault and impairment using the same principles and processes we use for banking products. We have established processes to ensure that the carrying val- ues of impaired claims are determined in compliance with IFRS requirements. Our credit controls applied to valuation and work- out are the same for both amortized cost and fair-valued credit products. With the exception of a part of the mortgage portfolio and small unsecured retail account overdrafts, we assess each identified case individually. Our workout strategy and estimation of recoverable amounts are independently approved. We also assess our portfolios of claims carried at amortized cost with similar credit risk characteristics for collective impair- ment in order to consider if these portfolios contain impaired ob- ligations where the individual impaired items cannot yet be identi- fied. In our retail and corporate banking business in Switzerland, we typically review individual positions for impairment only after they have been in arrears for a certain time as described above. To cover the time lag between the occurrence of an impairment event and its identification, we establish collective loan loss allow- ances based on the expected loss for the portfolio over the aver- age period between trigger events and the identification of indi- vidual impairment. Collective loan loss allowances of this kind are typically not required for our investment banking businesses be- cause we continuously monitor individual counterparties and ex- posures to identify impairment events at an early stage. None of the portfolios with collective loan loss allowances are included in the totals of impaired loans in the tables shown in the composition of credit risk for business divisions in the “Credit risk” section of this report. d e t i d u A Additionally, for all of our portfolios we assess whether there have been any unforeseen developments which might result in impairments but that are not immediately observable. 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 regularly use a set of global d e t i d u A economic drivers to assess the most vulnerable countries and re- view the impact of any potential impairment event. The recognition of impairment in our financial statements de- pends on the accounting treatment of the claim. For products carried at amortized cost, impairment is recognized through the creation of an allowance or provision charged to the income statement as a credit loss expense. For products recorded at fair value, such as derivatives, a deterioration of the credit quality is recognized through a CVA charged to the income statement through the Net trading income line. ➔ Refer to “Note 26a 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 table “Allowances and provisions for credit losses” represent the IFRS balance sheet view of our gross banking products portfolio. This comprises the bal- ance sheet line items Balances with central banks, Due from banks and Loans as well as the off-balance sheet items Guaran- tees and Loan commitments. The table also shows the IFRS re- ported allowances and provisions for credit losses and impair- ments. The table shows that our allowances and provisions for credit losses, excluding collective loan loss allowances of CHF 131 mil- lion, decreased 33% to CHF 804 million on 31 December 2011 from CHF 1,193 million (excluding collective loan loss allowances of CHF 47 million) at the end of 2010. We consider a reclassified security an impaired loan if the car- rying value at the balance sheet date is, on a cumulative basis, 5% or more below the carrying value at the reclassification date ad- justed for redemptions. Our gross impaired loan portfolio decreased to CHF 2,135 mil- lion of 31 December 2011 from CHF 4,172 million. The ratio of the impaired loan portfolio to the total loan port- folio (both measured gross) reduced by half to 0.8% compared with 1.6% on 31 December 2010, mainly due to sales of impaired reclassified assets. For loans excluding securities the ratio was 0.6% compared with 0.9%. We reclassified loans and receivables with carrying amounts of CHF 186 million and CHF 242 million from impaired to per- forming during 2011 and 2010, respectively. The 2010 number has been corrected from CHF 39 million to CHF 242 million. These reclassifications occurred because the loans had either been renegotiated and the new terms and conditions met nor- mal market criteria for the quality of the obligor and type of loan, or because the financial position of the obligor improved, enabling it to repay any past due amounts such that we deemed future principal and interest to be fully collectible in accordance with the original contractual terms. Collateral held against our impaired loan portfolio mainly con- sisted of real estate and securities on 31 December 2011. It is our policy to dispose of foreclosed real estate as soon as practicable. The carrying amount of foreclosed property recorded d e t i d u A 125 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R of which: related to other loans 255,909 242,572 1,589 Risk, treasury and capital management Risk management and control Allowances and provisions for credit losses 1 CHF million, except where indicated IFRS exposure, gross Impaired exposure 2 Specific allowances and ­provisions­for­ credit­ ­losses­3 Estimated liquidation proceeds of collateral Impairment ratio (%) 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 As of Group Balances with central banks Due from banks Loans of which: related to reclassified securities 4 of which: related to similar acquired securities Guarantees Loan commitments Banking products Investment Bank Balances with central banks Due from banks Loans of which: related to reclassified securities 4 of which: related to similar acquired securities of which: related to other loans Guarantees Loan commitments Banking products Wealth Management & Swiss Bank Balances with central banks Due from banks Loans Guarantees Loan commitments Banking products Wealth Management Balances with central banks Due from banks Loans Guarantees Loan commitments Banking products Retail & Corporate Balances with central banks Due from banks Loans Guarantees Loan commitments Banking products 21 4,172 1,574 351 2,247 160 142 38,565 23,235 24,459 17,158 267,429 263,964 4,996 6,524 11,719 9,673 20 2,135 450 95 18,905 58,192 16,535 56,851 94 70 406,326 378,967 2,318 4,495 31,743 16,592 29,005 4,996 6,524 17,485 6,572 49,161 13,732 12,007 39,392 11,719 9,673 18,000 5,536 48,509 11 1,114 450 95 569 69 67 2,838 1,574 351 913 67 95 17 694 68 15 611 87 6 804 5 157 68 15 74 61 1 24 1,039 221 52 766 96 34 893 389 81 423 3 1 2,286 1,376 313 597 7 5 1,193 897 2,298 642 389 81 172 1,926 1,376 313 237 348 221 52 76 43 26 133,073 119,177 1,261 3,000 223 417 642 1,926 3,370 4,395 10,727 2,678 9 210,375 201,942 1,020 11,797 7,955 10,505 7,276 25 3 21 1,333 93 47 237,893 233,128 1,057 1,494 12 537 26 5 581 24 689 49 8 770 1,165 555 463 456 75,056 67,104 45 166 42 126 2,641 1,220 2,391 983 80,637 71,397 45 166 42 126 2,205 3,840 10,265 2,222 135,320 134,838 9,156 6,735 8,114 6,293 9 975 25 3 21 1,167 93 47 157,256 161,732 1,012 1,328 12 495 26 5 539 24 563 49 8 644 251 3 1 255 6 6 246 3 1 250 360 7 5 372 45 45 315 7 5 327 0.0 0.1 0.8 9.0 1.5 0.6 0.5 0.1 0.6 0.0 0.1 3.8 9.0 1.5 3.3 1.1 0.1 0.9 0.0 0.2 0.5 0.2 0.0 0.4 0.0 0.0 0.1 0.0 0.0 0.1 0.0 0.2 0.7 0.3 0.0 0.6 0.0 0.1 1.6 13.4 3.6 0.9 1.0 0.2 1.2 0.0 0.0 7.2 13.4 3.6 5.1 1.2 0.2 2.5 0.0 0.8 0.7 0.9 0.6 0.6 0.0 0.0 0.2 0.0 0.0 0.2 0.0 0.9 0.9 1.1 0.7 0.8 1 Excludes allowances for securities borrowed. 2 Excludes reclassified securities that are not considered impaired. 3 Excludes CHF 131 million collective loan loss allowances (31 December 2010: CHF 47 million). 4 Refer to “Note 28b Reclassification of financial assets” in the “Financial information” section of this report. 126 Impaired assets by type of financial instrument d e t i d u A CHF million Impaired exposure Specific allowances, provisions and CVA adjustments Estimated liquidation proceeds of collateral Net impaired exposure Impaired loans (incl. due from banks) Impaired guarantees and loan commitments Defaulted derivatives contracts Defaulted securities financing transactions Total 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 2,155 164 2,143 3 4,465 4,193 301 1,915 59 6,468 (711) 1 (93) (1,457) (3) (2,263) (1,064) 1 (130) (1,130) (46) (2,370) (893) (4) (897) (2,286) (12) (13) (2,310) 551 67 686 844 159 785 1,304 1,788 1 Excludes CHF 131 million collective loan loss allowances (31 December 2010: CHF 47 million). d e t i d u A in our balance sheet under Other assets at the end of 2011 and 2010 amounted to CHF 58 million and CHF 90 million, respec- tively. We seek to liquidate collateral held in the form of financial as- sets 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 instrument” in- cludes impaired loans, impaired loan commitments, guarantees and defaulted derivative and securities financing transactions, which are subject to the same workout and recovery processes. Our impaired assets decreased by CHF 2.0 billion to CHF 4.5 billion on 31 December 2011, mainly due to sales of legacy loan positions. After deducting allocated specific allowances, provisions and CVA of CHF 2.3 billion and the estimated liquidation proceeds of collateral of CHF 0.9 billion, net impaired assets amounted to CHF 1.3 billion as of 31 December 2011. ➔ Refer to “Note 9a Due from banks and loans” in the “Financial information” section of this report for more information Past due but not impaired loans The table below shows a breakdown of our total loan balances where payments have been missed but which we do not consider impaired because we expect to collect the full amounts due. The loan balances in the table relate entirely to our Wealth Manage- ment & Swiss Bank division, where delayed payments are rou- tinely observed. We currently have no past due but not impaired loans in the Investment Bank. The increase in our past due but not impaired loan exposures resulted primarily from a slight growth in the categories 1–60 days. 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 sig- nificant compared with the overall size of the mortgage portfolio. Settlement risk Settlement risk arises in transactions involving exchange of value where we must fulfill our obligation to deliver without first being t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Past due but not impaired loans d e t i d u A CHF million 1–10 days 11–30 days 31–60 days 61–90 days > 90 days of which: mortgage loans Total Past due but not impaired mortgage loans CHF million Total 31.12.11 31.12.10 105 54 57 9 670 486 895 62 59 30 20 678 468 849 31.12.11 31.12.10 Total mortgage exposure 135,237 of which: past­due­> 90­days­ but not impaired 486 Total mortgage exposure 133,343 of which: past­due­> 90 days­ but not­impaired 468 127 Risk, treasury and capital management Risk management and control able to determine with certainty that we will receive the counter- value. We use multilateral and bilateral agreements with counter- parties to reduce our actual settlement volumes. Our most significant source of settlement risk is foreign ex- change transactions. UBS is a member of Continuous Linked Set- tlement, a foreign exchange clearing house which allows transac- tions to be settled on a delivery-versus-payment basis, thereby significantly reducing foreign exchange-related settlement risk relative to the volume of business. The mitigation of settlement risk through Continuous Linked Settlement membership and other means, such as payment net- ting, does not eliminate our credit risk in foreign exchange trans- actions resulting from changes in exchange rates prior to settle- ment. We measure and control such counterparty risk in forward foreign exchange transactions as part of our overall credit risk management of OTC derivatives. Country risk Country risk is the risk of loss arising from country-specific events. We have a well established country risk control framework to en- sure that our exposure to certain countries is commensurate with the credit ratings we assign to them, and that it is not dispropor- tionate to the respective country risk profile. We assign ratings to all countries where we have exposure. Sovereign ratings express the probability of a country risk event that would lead to impairment of our claims. The default prob- abilities we use, and our mapping of external ratings of the major rating agencies, are based on our counterparty rating classes as described in the “Probability of default” section above. For all countries rated 3 and below, we set country risk ceilings approved either by the BoD or under delegated author- ity by the Group CEO or Group Chief Risk Officer. A country risk ceiling applies to all our exposures to counterparties or is- suers of securities and financial investments in the respective country. We may limit the extension of credit, transactions in traded products or positions in securities based on a country ceiling, even if our exposure to a counterparty is otherwise ac- ceptable. Losses due to counterparty or issuer defaults resulting from multiple insolvencies (systemic risk) or general prevention or re- striction of payments by authorities (transfer risk) are the most sig- nificant effects of a country crisis. For internal measurement and control of country risk, we also consider the financial impact of market disruptions arising prior to, during and following a country crisis. These may take the form of a severe deterioration in a coun- try’s debt and equity markets and asset prices or a sharp deprecia- tion of the currency. We use stress testing to assess the potential financial impact of a severe emerging markets crisis. This involves identifying countries that may potentially be subject to a crisis event, determining potential losses and making assumptions about recovery rates depending on the types of credit transactions involved and their economic importance to the affected countries. Our exposures to market risks are subject to stress tests that cover major global scenarios whereby we apply market shock fac- tors to equity indices, interest and currency rates in all relevant countries and consider the potential liquidity of the instruments. In light of the ongoing European sovereign debt crisis, we in- creased the monitoring and focus on the quality of collateral we hold. Country risk exposure Product categories The presentation of exposures follows our internal risk manage- ment view without recognizing any expected recovery values. Banking products are loans (at amortized cost), unfunded loan commitments (notional basis) and financial guarantees (notional basis) and include an immaterial amount of available-for-sale debt and equity positions (at fair value). Traded products include the counterparty risk arising from OTC derivatives and securities financing transactions, presented at net positive replacement value after taking into account valid master netting agreements. Trading inventory includes securities such as bonds and equi- ties, as well as the risk relating to the underlying reference assets for derivative positions, including those linked to credit protection we buy or sell. Trading inventory exposures represent the change in fair value, if the value of a security or, in the case of derivatives, 128 the underlying reference asset, fell instantaneously to zero. As we manage the trading inventory on a net basis, we also net the value of long positions against short positions with the same un- derlying issuer. This is a conservative approach as the reported sum of net long exposures per legal entity does not recognize the offsetting benefit of certain hedges and short positions across is- suers. This is especially relevant when estimating the potential exposure to moves in general country credit spreads. Country allocation methodology The basis for the presentation of the country exposure from bank- ing products or traded products exposures is the domicile alloca- tion used in our internal risk view. In general, the country of domi- cile of the legal entity (parent or subsidiary) that is our contractual counterparty determines the country against which the exposure is shown. For example, a loan to a bank domiciled in country X would be shown against country X, while the exposure to a Y-do- miciled subsidiary of that bank would be shown against country Y. For some counterparties whose economic substance in terms of assets or source of revenues is primarily located in a different country, the exposure is allocated to the risk domicile of that different country. This is the case, for example, with legal entities incorporated in finan- cial offshore centers, which have their main assets and revenue streams outside the country of domicile. The same principle applies to exposures for which we hold third-party guarantees or collateral. In such cases, we report the exposure against the country of domicile of either the guarantor or the issuer of the underlying security, or against the country where pledged physical assets are located. Special rules apply for banking products exposures (money market deposits, loans) to branches of financial institutions which are located in a country other than that of the domicile of the le- gal entity. In such cases, exposures are recorded in full against the country of domicile of the firm, and additionally in full against the country in which the branch is located. ed against the (risk) domicile of the legal entity which issued the relevant reference asset. As a basic example: if a CDS protection for a notional value of 100 bought from a counterparty domiciled in country X referencing debt of an issuer domiciled in country Y has a positive replacement value of 20, we record: (i) the fair value of the CDS (20) against country X (within traded products) and (ii) the hedge benefit (notional minus fair value) of the CDS (100 – 20 = 80) against country Y (within trading inventory). In the example of protection bought, the 80 hedge benefit would offset against any exposure arising from securities held and issued by the same entity as the reference asset, floored at zero per issuer. In the case of protection sold, this would be reflected as a risk exposure of 80 in addition to any exposure arising from securities held and issued by the same entity as the reference asset. Country risk in relation to securities held within trading inven- tory is allocated based on our internal risk domicile view. In general, the country of domicile of issuer determines the country against which the exposure is shown. For example, an equity issued by a company domiciled in country X would be shown against country X, independent of the exchange on which it is registered. In some cases where the economic substance of an issuer is primarily locat- ed in a different country, or in the case where we hold third-party guarantees, the same principles apply to trading inventory expo- sures as described above for banking products. Risk mitigants The risk-reducing effect of collateral, either in the form of cash or portfolios of diversified marketable securities is taken into ac- count when determining the “Exposure before hedges” in the table “Exposure to selected European countries”. Within banking products and traded products, the risk-reduc- ing effect of any credit protection is taken into account on a no- tional basis when determining the “Net of hedges” exposures. For derivative exposures, we show the counterparty risk against the country of (risk) domicile of the counterparty within traded products. In addition, we reflect the benefits / liabilities arising from changes in fair value of the derivative due to changes in the value of the underlying reference asset within trading inventory, reflect- Exposures to selected European countries The table “Exposures to selected European countries” includes all eurozone countries rated lower than AAA / Aaa by at least one of the major rating agencies. The overview provides an internal risk view of gross and net exposures split by sovereign, local govern- t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 129 Risk, treasury and capital management Risk management and control ment, bank, and other counterparties. The “sovereign” category includes agencies and central banks. Corporates, insurance com- panies and funds are included within the “other” category. The gross exposures to Andorra, Cyprus, Estonia, Malta, Monaco, Montenegro, San Marino, Slovakia, and Slovenia are grouped into “other” and totaled CHF 185 million on 31 December 2011. Exposure to emerging market countries The table “Emerging markets net exposure by major geographical region and product type” shows the five largest emerging market country exposures in each major geographical area by product type on 31 December 2011 compared with 31 December 2010. Based on the main country rating categories, on 31 December 2011, Exposures to selected European countries CHF million Total 31.12.11 France Sovereign, agencies and central banks Local governments Banks Other Italy Sovereign, agencies and central banks Local governments Banks Other Spain Sovereign, agencies and central banks Local governments Banks Other Austria Sovereign, agencies and central banks Local governments Banks Other Ireland 2 Sovereign, agencies and central banks Local governments Banks Other Belgium Sovereign, agencies and central banks Local governments Banks Other Portugal Sovereign, agencies and central banks Local governments Banks Other Greece Sovereign, agencies and central banks Local governments Banks Other Other Net of hedges 1 9,861 3,611 78 1,499 4,673 3,652 951 113 1,467 1,121 3,517 6 19 2,084 1,409 1,586 859 15 553 159 1,584 0 0 541 1,043 841 409 0 291 141 266 0 1 29 236 104 37 0 34 32 185 11,505 3,732 78 1,499 6,197 6,993 3,836 129 1,474 1,554 4,414 6 19 2,084 2,305 1,867 1,104 15 553 195 1,585 0 0 541 1,044 876 443 0 291 141 363 0 1 29 334 141 37 0 34 70 185 of which: unfunded 659 84 544 168 Banking products (loans, unfunded commitments, guarantees) Net of collateral Net of hedges 1 1,714 73 59 627 956 996 4 0 589 403 1,991 5 0 1,825 160 133 0 0 59 74 581 0 0 429 152 312 0 0 227 85 15 0 0 11 3 19 0 0 19 0 92 Exposure ­before hedges 3,147 73 59 627 2,389 1,429 4 0 589 837 2,692 5 0 1,825 861 169 0 0 59 110 581 0 0 429 152 312 0 0 227 85 112 0 0 11 101 57 0 0 19 38 92 18 35 45 30 9 Traded products (counterparty risk from deriva- tives and securities financing) After master netting agreements and net of collateral Trading­inventory (securities and potential benefits / remaining ex- posure from derivatives) Exposure ­before hedges 3,524 784 1 730 2,009 4,311 3,832 89 156 234 381 0 18 77 286 1,325 1,101 15 178 31 532 0 0 38 495 528 443 0 59 25 12 0 0 4 8 47 5 0 16 26 45 Net of hedges 3,312 663 1 730 1,918 1,404 947 74 149 234 186 0 18 77 91 1,081 857 15 178 31 532 0 0 38 494 493 409 0 59 25 12 0 0 4 8 47 5 0 16 26 45 Net long per issuer 4,834 2,874 18 143 1,799 1,252 0 40 729 484 1,341 0 0 182 1,158 372 3 0 315 54 471 0 0 74 397 36 0 0 5 31 239 0 1 13 225 38 32 0 0 6 49 1 Not deducted are total allowances and provisions of CHF 25 million (of which: Austria CHF 15 million and France CHF 8 million). 2 The majority of the Ireland exposure relates to funds and foreign bank subsidiaries. 130 86% of our emerging market country exposures were rated invest- ment grade compared with 87% on 31 December 2010. Debt investments The overall credit and market risk exposure in the Middle East and North Africa remained modest. Of the CHF 2.5 billion shown for the Middle East and Africa in the table below, CHF 2 billion relate specifically to Middle Eastern and North African countries, which includes the larger positions in Saudi Arabia and the United Arab Emirates. d e t i d u A Debt investments classified according to IFRS as Financial invest- ments available-for-sale are measured at fair value with changes in fair value recorded through equity, and can be broadly cate- gorized as money market instruments and debt securities pri- marily held for statutory, regulatory or liquidity reasons. Debt investments available-for-sale may also include non-performing Emerging markets net exposure 1 by internal UBS country rating category CHF million Investment grade Sub-investment grade Total 31.12.11 31.12.10 19,341 3,053 22,394 17,567 2,521 20,088 1 Net of credit hedges (for banking products and for traded products); net long per issuer (for trading inventory). Total allowances and provisions of CHF 61 million are not deducted (31 December 2010: CHF 40 million). Emerging market exposures by major geographical region and product type Banking products (loans, unfunded commitments, guarantees) Net of collateral Net of hedges 1 Traded products (counterparty risk from derivatives and securities financing) After master netting agreements and net of collateral Net of hedges Trading­inventory (securities and potential benefits / remaining exposure from derivatives) Net long per issuer Total Net of hedges 1 31.12.11 2,500 905 843 31.12.10 2,177 1,090 249 31.12.11 939 355 310 31.12.10 681 212 158 31.12.11 337 117 45 31.12.10 178 29 42 31.12.11 1,224 433 488 31.12.10 1,318 849 49 CHF million As of Emerging Europe Russia Turkey Hungary Ukraine Poland Other Emerging Asia Hong Kong China India South Korea Taiwan Other Emerging Americas Brazil Colombia Mexico Chile Argentina Other Middle East and Africa Saudi Arabia South Africa United Arab Emirates Israel Qatar Other Total 159 140 110 343 13,671 3,048 2,978 2,620 2,037 1,459 1,529 3,692 1,538 597 487 258 233 580 2,531 649 526 451 149 114 642 22,394 318 87 156 277 11,937 2,597 2,267 2,519 1,495 1,433 1,626 3,387 1,699 61 951 155 134 387 2,587 606 589 608 214 26 544 20,088 3 61 29 182 5,240 983 1,373 1,158 513 458 754 656 168 122 125 154 39 48 1,094 170 137 214 85 47 441 7,929 20 59 17 215 4,905 950 1,127 919 592 451 866 293 119 2 59 42 31 40 969 110 163 223 125 4 344 6,848 95 0 52 28 2,390 602 733 172 432 310 142 791 527 37 134 75 0 18 807 438 61 142 10 32 124 4,325 39 0 62 6 2,443 565 605 32 588 343 310 620 471 15 95 38 0 1 819 488 39 130 40 3 119 4,060 61 79 30 133 6,041 1,462 872 1,290 1,091 692 634 2,245 842 438 228 29 194 514 630 41 328 95 55 35 77 10,140 1 Not deducted are total allowances and provisions of CHF 61 million (31 December 2010: CHF 40 million). t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 259 28 77 56 4,589 1,082 535 1,568 315 639 450 2,474 1,109 44 797 75 103 346 799 8 387 255 49 19 81 9,180 131 Risk, treasury and capital management Risk management and control d e t i d u A loans purchased in the secondary market by the Investment Bank. d e t i d u A The risk control framework applied to debt instruments classi- fied as Financial investments available-for-sale depends on the nature of the instruments and the purpose for which we hold them. Our exposures may be included in market risk limits or be subject to specific monitoring such as interest rate sensitivity anal- ysis, 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 decreased to CHF 52.5 billion on 31 December d e t i d u A 2011 compared with CHF 73.9 billion on 31 December 2010. These instruments primarily comprised highly liquid short-term securities issued by governments and government-controlled in- stitutions. The reduction is mainly due to the sale of our strategic investment portfolio. ➔ Refer to “Note 13 Financial investments available-for-sale” in the “Financial information” section of this report for more information ➔ Refer to the “Non-trading portfolios” section of this report for more information ➔ Refer to the “Treasury management” section of this report for more information 132 Market risk d e t i d u A Market risk is the risk of loss resulting from changes in market variables. There are two broad categories of market variables: general market risk factors and specific components. General market risk factors include interest rates, equity index levels, e xchange rates, commodity prices and general credit spreads. The volatility of these risk factors and the correlations 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. Sources of market risk d e t i d u A We take general and specific market risks both in our trading ac- tivities and in some non-trading businesses. d e t i d u A Trading portfolios Most of our market risk arises from trading activities in the Invest- ment Bank, including market-making, facilitating client business and associated position-taking in cash and derivative markets for equities, fixed income, interest rates, foreign exchange and com- modities. Our trading businesses are subject to multiple market risk lim- its. Traders are required to manage their risks within these limits, which may involve utilizing hedging and risk mitigation strategies. These strategies can expose the firm to additional 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. Management and Risk Control may also give instructions to reduce the risk, even when limits are not ex- ceeded. Our asset management and wealth management businesses carry small trading positions, principally to support client activity. The market risk from these positions is not material to UBS as a whole. d e t i d u A Non-trading portfolios Market risk exposures, primarily general interest rate and foreign exchange risks, may arise from non-trading activities such as retail banking and lending in our wealth management businesses, our retail and corporate banking business in Switzerland, the Invest- ment Bank’s lending businesses and our treasury activities, primar- ily from funding, balance sheet, liquidity and capital management needs. Equity and certain debt investments can also give rise to specific market risks. Non-trading foreign exchange risks are managed under mar- ket risk limits, with the exception of Group Treasury management of consolidated capital activity. Non-trading interest rate risk is either managed under market risk limits or subject to specific d e t i d u A d e t i d u A monitoring and is reported in firm-wide earnings-at-risk, capital- at-risk and combined stress testing metrics. ➔ Refer to the “Non-trading portfolios” and “Treasury manage- ment” sections of this report for more information Market risk limits d e t i d u A We use a limit framework to control our market risks. We have two major portfolio measures of market risk: value-at-risk (VaR) and stress loss. Both are common to all our business divisions and subject to limits that are approved by the BoD. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R In the Investment Bank, these portfolio measures are comple- mented by concentration and other supplementary limits on port- folios, asset classes and products, and also cover exposures to general market risk factors and single-name risk. Single-name risk (or issuer risk) is a measure of our exposure to the tradable instru- ments (debt, equity and derivatives) of a single issuer (or issuer group) were that issuer to be subject to a credit event, including default. Our concentration and other supplementary limits take a variety of forms, including 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 ex- tent of market liquidity and volatility, available operational capac- ity, valuation uncertainty, and, for our single-name exposures, the credit quality of issuers. Our exposures from security underwriting commitments are subject to the same concentration measures and controls as sec- ondary market positions. Underwriting commitments are ap- proved under delegated risk management and risk control au- thorities. As such, certain larger or more complex transactions are required to be approved by our Commitment Committee, which includes representatives from both business and control functions. Market risk limits are set for each of the business divisions and Corporate Center. The limit framework in the Investment Bank is more detailed than in the other business divisions, reflecting the nature and magnitude of the risks it takes. Trading portfolios For the purposes of our disclosure, VaR is used to quantify market risk exposures in our trading portfolios. Value-at-risk definition and limitations We use a single VaR model for both internal management purposes and for determining market risk regulatory capital requirements, although the confidence levels and time horizons differ. 133 Risk, treasury and capital 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 Our VaR model is approved by FINMA and ongoing significant revisions of our VaR methodology and model are also subject to regulatory approval. d e t i d u A The model uses historical data covering a five-year period and is calibrated to a 1-day 95% measure for our internal manage- ment purposes. However, in accordance with Basel 2.5 and FIN- MA 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 directly to our current positions – a method known as historical simulation. As part of a regular update of time series data used in VaR, an improved source of credit spread time series, based on a more com- prehensive coverage population and more closely tracking external benchmark series, was introduced in the third quarter of 2011. 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 include the following: – The use of a five-year window means that sudden 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 confidence 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 market risk of positions that cannot be closed out or hedged within the spec- ified period. – In certain cases, VaR calculations approximate the impact of changes in risk factors on the values of positions and portfoli- os. This may happen because the number of risk factors in- cluded 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 movements is subject to estima- tion errors which may result from non-linear risk sensitivities, as well as the potential for actual volatility and correlation levels to differ from assumptions implicit in the VaR calculations. We continue to review the performance of our VaR implemen- tation, including a review of risks not included in VaR. We will continue to enhance our VaR model in order to capture more ac- curately the relationships between the market risks associated Group: value-at-risk (1-day, 95% confidence, 5 years of historical data) CHF million, except where indicated Min. Max. Average 31.12.11 Min. Max. Average 31.12.10 For the year ended 31.12.11 For the year ended 31.12.10 Business divisions Investment Bank Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Corporate Center Diversification effect Total management VaR, Group Diversification effect (%) Total management VaR, Group, excluding the ef- fect of unauthorized trading incident 30 0 1 0 4 1 31 31 219 0 2 0 14 1 222 97 75 0 1 0 7 (7) 76 (8) 60 34 0 2 0 4 (4) 36 (9) 36 1 As the minimum and maximum occur on different days for different business divisions, it is not meaningful to calculate a portfolio diversification effect. 42 0 1 0 2 1 42 78 0 3 0 22 1 76 56 0 2 0 8 (10) 57 (15) 68 0 1 0 5 (7) 68 (9) Investment Bank: value-at-risk (1-day, 95% confidence, 5 years of historical data) CHF million, except where indicated Min. Max. Average 31.12.11 Min. Max. Average 31.12.10 For the year ended 31.12.11 For the year ended 31.12.10 Risk type Equities Interest rates Credit spreads Foreign exchange Energy, metals and commodities Diversification effect Total management VaR, Investment Bank Diversification effect (%) 10 13 26 3 2 1 30 205 31 83 17 10 1 219 34 23 54 8 4 (48) 75 (39) 13 19 26 4 3 (32) 34 (49) 11 13 42 2 2 1 42 37 44 70 15 8 78 1 19 24 55 7 3 (51) 56 (48) 17 23 59 6 7 (43) 68 (39) 1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect. 134 with our risk positions, as well as the revenue impact of large market movements on particular trading positions. (cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77)(cid:28)(cid:2)(cid:67)(cid:78)(cid:78)(cid:2)(cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:2)(cid:70)(cid:75)(cid:85)(cid:86)(cid:84)(cid:75)(cid:68)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:149) (cid:40)(cid:84)(cid:71)(cid:83)(cid:87)(cid:71)(cid:80)(cid:69)(cid:91)(cid:2)(cid:75)(cid:80)(cid:2)(cid:80)(cid:87)(cid:79)(cid:68)(cid:71)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:70)(cid:67)(cid:91)(cid:85)(cid:2) (cid:19)(cid:2)(cid:44)(cid:67)(cid:80)(cid:87)(cid:67)(cid:84)(cid:91)(cid:2)(cid:20)(cid:18)(cid:19)(cid:19)(cid:115) (cid:21)(cid:19)(cid:2)(cid:38)(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:19) (cid:26)(cid:18) (cid:24)(cid:18) (cid:22)(cid:18) (cid:20)(cid:18) (cid:2)(cid:2)(cid:18) (cid:142) (cid:11) (cid:18) (cid:18) (cid:20) (cid:10) (cid:30) (cid:11) (cid:18) (cid:26) (cid:19) (cid:10) 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(cid:20)(cid:2)(cid:36)(cid:67)(cid:69)(cid:77)(cid:86)(cid:71)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:67)(cid:85)(cid:2)(cid:67)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:87)(cid:80)(cid:67)(cid:87)(cid:86)(cid:74)(cid:81)(cid:84)(cid:75)(cid:92)(cid:71)(cid:70)(cid:2)(cid:86)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:69)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:16) Value-at-risk developments in 2011 The tables on the previous page show our management VaR for the Group and the Investment Bank. Positional risks relating to the unauthorized trading incident have been included within the summary figures shown and account for the sizable increase in the average and maximum. An additional total row is provided to show the equivalent summary statistics excluding the effects of the unauthorized trading incident. The Group’s management VaR decreased to CHF 36 million on 31 December 2011 compared with CHF 68 million on 31 Decem- ber 2010. This significant decrease was mainly due to concerted risk reduction across businesses in the second half of 2011, in line with our strategy of running a more focused, less complex and capital-intensive Investment Bank, but also reflected market con- ditions prevalent at the end of 2011. Average management VaR excluding the effects of the unauthorized trading incident in the third quarter of 2011 was CHF 60 million for 2011 compared with CHF 57 million in 2010. Credit spread risk continued to be one of the dominant components of our VaR. Interest rate risk has be- come an additional significant component of our VaR as a result of the reduced dominance of credit spread risk. 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 intra- day trading. A backtesting exception occurs when backtesting revenues are negative and the absolute value of those revenues is greater than the previous day’s VaR. We experienced three backtesting exceptions in 2011 com- pared with one backtesting exception in 2010. All three excep- tions occurred in the third quarter 2011 due to extreme market moves and the unauthorized trading incident. The chart “Investment Bank: development of backtesting rev- enues against value-at-risk” shows the 12-month development of 1-day 99% VaR against backtesting revenues in the Investment Bank for the whole year of 2011. The histogram “Investment Bank: all revenue distribution” shows the Investment Bank’s full trading revenues distribution in 2011. We investigate all backtesting exceptions and any exceptional revenues on the profit side of the VaR distribution. In addition, we report all backtesting results to senior business management, the Group Chief Risk Officer and business division Chief Risk Officers. Backtesting exceptions are also reported to internal and exter- nal auditors and to the relevant regulators. d e t i d u A d e t i d u A d e t i d u A 135 (cid:26)(cid:18) (cid:24)(cid:18) (cid:22)(cid:18) (cid:20)(cid:18) (cid:18) 100 -50 -125 -200 25 Risk, treasury and capital management Risk management and control Non-trading portfolios d e t i d u A d e t i d u A For the purposes of our disclosure, the market risks associated with our non-trading portfolios are quantified using sensitivity analysis. This includes an aggregate measure of our exposures to interest rate risk in the banking book and additional information for certain significant portfolios and positions that are not included in our management VaR or in our interest risk in the banking book table. Interest rate risk in the banking book The banking book consists of Available-for-sale instruments, Loans and receivables, certain Instruments designated at fair val- ue through profit or loss, derivatives measured at fair value through profit or loss and derivatives employed for cash flow hedge accounting purposes, as well as related funding transac- tions. These positions may impact other comprehensive income or profit or loss, due to differences in accounting treatment. 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- ing metrics. Interest rate risk sensitivity figures are provided for the impact of a 1-basis-point parallel increase and the +/–100-basis- points parallel moves in yield curves on present values of future cash flows, irrespective of accounting treatment. d e t i d u A Our largest banking book 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 trea- sury activities, which are mainly hedged. Interest rate risks arising in Wealth Management & Swiss Bank are transferred either by means of back-to-back transactions or, in the case of products with no contractual maturity date or direct market-linked rate, by “replicating” portfolios from the originat- ing business into one of two centralized interest rate risk manage- ment units of Group Treasury or the Investment Bank’s fixed in- come, currencies and commodities (FICC) unit. These units manage these risks as part of their risk portfolios within their al- located market risk limits and controls, exploiting the netting po- tential across interest rate risks from different sources. The Investment Bank’s portfolio of assets that were reclassified to Loans and receivables from Held-for-trading in the fourth quar- d e t i d u A ter of 2008 and the first quarter of 2009, and certain other debt securities held as Loans and receivables, also give rise to non- trading interest rate risk. Interest rate risk within Wealth Management Americas arises from the business division’s investment portfolio in addition to its lending and deposit products offered to clients. This interest rate risk is closely measured, monitored and managed within approved risk limits and controls, taking into account Wealth Management Americas balance sheet items that naturally offset risk. The interest sensitivity of non-contractual maturity products is modeled using historical behavior patterns from a complete interest rate cycle. d e t i d u A Group Treasury manages two main types of interest rate risk positions. One type is the risk transferred from Wealth Manage- ment & Swiss Bank’s banking operations (mentioned above). The other type arises from investing or funding non-monetary corpo- rate balance sheet items that have indefinite lives, such as equity and goodwill. For these items we have defined specific target du- rations based on which we fund and invest as applicable. These targets are defined by replication portfolios, which establish roll- ing benchmarks to execute against. The table below includes any residual risk in the Group Treasury books against these bench- marks. This activity and associated sensitivities of these replication portfolios are further discussed in the Group Treasury section. In addition to its regular risk management activities, Group Treasury manages portfolios that aim to economically hedge negative effects on the firm’s net interest income stemming from the extraordinarily low yield environment. These activities included our strategic investment portfolio which we sold dur- ing the third quarter of 2011. The sale of this portfolio was the main driver behind the decrease in sensitivity compared with year end 2010. ➔ Refer to the “Interest rate and currency management” section of this report for more information The table “Interest rate sensitivity – banking book” shows the impact on present value for an immediate + / –100-basis-points parallel move in yield curves. Due to the low level of interest rates the downward moves are capped to ensure that the resulting in- terest rates are not negative. This effect, combined with pre-pay- ment risk on US mortgage products and impact of low interest d e t i d u A Impact of a 1-basis-point parallel increase in yield curves on present value of future cash flows 1 CHF million CHF EUR GBP USD Other Total impact on interest rate-sensitive banking book positions 31.12.11 31.12.10 (0.7) (1.6) 0.1 (3.7) (0.1) (6.0) (0.7) (2.1) (2.9) (10.7) (0.3) (16.6) 1 Does not include interest rate sensitivities for CVA on monoline credit protection, US and non-US RLN and our option to acquire equity of the SNB StabFund for which the interest rate sensitivities are separately disclosed. Also not included are the interest rate sensitivities of our inventory of student loan ARS, as from an economic perspective these exposures are not materially affected by parallel shifts in USD interest rates, holding other factors constant. 136 rates on client deposit behavior, results in non-linear behavior of the exposure. Non-trading portfolios – valuation and sensitivity information by instrument category The impact of an adverse parallel shift in interest rates of 200 basis points on our banking book interest rate risk exposures is significantly below the threshold of 20% of eligible regulatory capital set by regulators. d e t i d u A d e t i d u A Interest rate sensitivity of available-for-sale debt investments Debt financial instruments classified as Financial investments avail- able-for-sale amounted to CHF 52.5 billion on 31 December 2011 compared with CHF 73.9 billion on 31 December 2010. From an accounting perspective, the sensitivity of this position (excluding hedges) to a 1-basis-point parallel increase in the yields of the re- spective instruments is approximately negative CHF 6 million, which would be posted to other comprehensive income. The interest rate sensitivity of this position including the associated hedges is includ- ed within the table “Impact of a 1-basis-point parallel increase in yield curves on present value of future cash flows”, some elements of which are additionally disclosed in VaR. d e t i d u A ➔ Refer to “Note 13 Financial investments available-for-sale” in the “Financial information” section of this report for more information ➔ Refer to “Debt investments” in the “Credit risk” section of this report for more information d e t i d u A Interest rate sensitivity of interest rate swaps designated in cash flow hedges To the extent effective, interest rate swaps designated in cash flow hedges are accounted for at fair value through equity under IFRS. Amounts deferred in equity are released to the income statement on the occurrence of the underlying hedged interest cash flows. Interest rate swaps designated in cash flow hedges are denominated in US dollar, euro, British pound, Swiss franc and Canadian dollar. As of 31 December 2011, the fair value of interest rate swaps amounted to CHF 7.5 billion (positive replacement values) and CHF 3.6 billion (neg- ative replacement values). The impact on other comprehensive in- come under IFRS of a 1-basis-point increase of underlying LIBOR curves would have decreased equity by approximately CHF 25 million. This estimate excludes economically offsetting positions and is includ- ed in the above table on interest rate sensitivities in the banking book, together with hedge and funding effects that are partially offsetting. This section includes a description of the valuation of certain sig- nificant product categories and related valuation techniques and models. In addition, sensitivity information is provided for certain significant instrument categories that are excluded from manage- ment VaR and the interest rate risk in the banking book as disclosed in the “Risk and treasury management” section of this report. Numbers are stated in US dollar, with the Swiss franc equivalent shown in brackets for comparative purposes. Credit valuation adjustments on monoline credit protection Included within our residual risk positions are negative basis trades, whereby we purchased credit default swap (CDS) protec- tion from monolines against UBS-held underlyings, including resi- dential mortgage-backed securities (RMBS) collateralized debt obligations (CDO) and commercial mortgage-backed securities (CMBS) CDO, transactions with collateralized loan obligations, and asset-backed securities CDO. Since the start of the financial crisis, the credit valuation adjustments (CVA) relating to these monoline exposures have been a source of valuation uncertainty, given market illiquidity, and the contractual terms of these expo- sures relative to other monoline-related instruments. CVA amounts related to monoline credit protection are based on a methodology that uses CDS spreads on the monolines as a key input in determining an implied level of expected loss. Where a monoline has no observable CDS spread, a judgment is made on the most comparable monoline or combination of monolines, and the corresponding spreads are used instead. For RMBS CDO, CMBS CDO, and collateralized loan obligations asset categories, cash flow projections are used in conjunction with current fair values of the underlying assets to provide estimates of expected future exposure levels. For other asset categories, future exposure is derived from current exposure levels. To assess the sensitivity of the monoline CVA calculation to al- ternative assumptions, the impact of a 10% increase in monoline credit default swaps spreads (e.g. from 1,000 basis points to 1,100 basis points for a specific monoline) was considered. On 31 December 2011, such an increase would have resulted in an increase in the monoline CVA of approximately USD 39 million t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Interest rate sensitivity – banking book 1 CHF million CHF EUR GBP USD Other Total impact on interest rate-sensitive banking book positions 31.12.11 –100 bps +100 bps 17.5 169.6 (9.4) (105.5) (7.2) 65.0 (66.9) (160.3) 13.2 (364.9) (5.5) (584.3) 1 Does not include interest rate sensitivities for CVA on monoline credit protection, US and non-US RLN and our option to acquire equity of the SNB StabFund for which the interest rate sensitivities are separately disclosed. Also not included are the interest rate sensitivities of our inventory of student loan ARS, as from an economic perspective these exposures are not materially affected by parallel shifts in USD interest rates, holding other factors constant. 137 Risk, treasury and capital management Risk management and control d e t i d u A (CHF 37 million) compared with USD 45 million (CHF 42 million) on 31 December 2010. After taking into account the impact of the potential commutation transaction discussed in “Note 32 Events after the reporting period” in the “Financial Information” section, this sensitivity reduces from USD 39 million (CHF 37 mil- lion) to USD 33 million (CHF 31 million), respectively. The sensitivity of the monoline CVA to a decrease of one per- centage point in the monoline recovery rate assumptions (e.g. from 30% to 29% for a specific monoline, conditional on default occurring) was estimated to result in an increase of approximately USD 11 million (CHF 10 million) in the CVA, compared with USD 9 million (CHF 8 million) on 31 December 2010. After taking into account the impact of the potential commutation transaction discussed in “Note 32 Events after the reporting period” in the “Financial Information” section, this sensitivity reduces from USD 11 million (CHF 10 million) to USD 3 million (CHF 3 million), re- spectively. The sensitivity to credit spreads and recovery rates is substantially linear. d e t i d u A US reference-linked notes The US reference-linked notes (RLN) consist of a series of transac- tions whereby UBS purchased credit protection, predominantly in note form, on a notional portfolio of fixed income assets. The referenced assets are comprised of USD asset-backed securities. These are primarily CMBS and subprime RMBS and / or corporate bonds and loans across all rating categories. While the assets in the portfolio are marked to market, the credit protection embed- ded in the RLN is fair valued using a market standard approach to the valuation of portfolio credit protection (Gaussian copula). This approach is intended to effectively simulate correlated defaults within the portfolio, where the expected losses and defaults of the individual assets are closely linked to the observed market prices (spread levels) of those assets. Key assumptions of the mod- el include correlations and recovery rates. We apply fair value ad- justments related to potential uncertainty in each of these param- eters, which are only partly observable. In addition, we apply fair value adjustments for uncertainties associated with the use of observed spread levels as the primary inputs. These fair value ad- justments are calculated by applying shocks to the relevant pa- rameters and revaluing the credit protection. These shocks for correlation, recovery and spreads are set to various levels depend- ing on the asset type and / or region and may vary over time de- pending on the best judgment of the relevant trading and control personnel. Correlation and recovery shocks are generally in the rea- sonably possible range of 5 to 15 percentage points. Spread shocks vary more widely and depend on whether the underlying protec- tion is funded or unfunded to reflect cash or synthetic basis effects. On 31 December 2011, the fair value of the US RLN credit pro- tection was approximately USD 319 million (CHF 299 million) com- pared with USD 629 million (CHF 588 million) on 31 December 2010. The reduction in protection value was due to the reduction of notional of the notes primarily due to writedowns of the refer- ence assets across the RLN deals. This fair value included fair value adjustments which were calculated by applying the shocks de- d e t i d u A d e t i d u A d e t i d u A scribed above of approximately USD 22 million (CHF 21 million). This compared with USD 31 million (CHF 29 million) on 31 Decem- ber 2010. The fair value adjustments may also be considered a measurement of sensitivity. Non-US reference-linked notes The same valuation model and approach to the calculation of fair value adjustments are applied to the non-US RLN credit protection and the US RLN credit protection as described above, except that the spread is shocked by 10% for European corporate names. On 31 December 2011, the fair value of the non-US RLN credit protection was approximately USD 468 million (CHF 439 million) compared with USD 660 million (CHF 616 million) on 31 Decem- ber 2010. This fair value included fair value adjustments which were calculated by applying the shocks described above of ap- proximately USD 46 million (CHF 43 million) compared with USD 72 million (CHF 67 million) on 31 December 2010. This adjust- ment may also be considered a measurement of sensitivity. Option to acquire equity of the SNB StabFund Our option to purchase the SNB StabFund’s equity is recognized on the balance sheet as a derivative at fair value (positive replace- ment values) with changes to fair value recognized in profit or loss. On 31 December 2011, the fair value (after adjustments) of the call option held by UBS was approximately USD 1,736 million (CHF 1,629 million) compared with USD 1,906 million (CHF 1,781 million) on 31 December 2010. The decline in the value of the option reflected lower forecast cash flows and increased risk pre- mia for the fund’s assets. The model incorporates cash flow projections for all assets within the fund across various scenarios. It is calibrated to market levels by setting the spread above the one-month Libor rates used to discount future cash flows such that the model-generated price of the under- lying asset pool equals our assessed fair value of the asset pool. The model incorporates a model reserve (fair value adjustment) to ad- dress potential uncertainty in this calibration. On 31 December 2011, this adjustment was USD 131 million (CHF 123 million) compared with USD 250 million (CHF 234 million) on 31 December 2010. The decline in the reserve amount reflects greater convergence of valua- tions across the scenarios, consistent with lesser dependence of the valuation on projections of future cash flows On 31 December 2011, a 100-basis-point increase in the dis- count rate would have decreased the option value by approxi- mately USD 139 million (CHF 130 million) compared with USD 167 million (CHF 156 million) on 31 December 2010; and a 100-basis-point decrease would have increased the option value by approximately USD 155 million (CHF 145 million) compared with USD 188 million (CHF 176 million). Market risk – stress loss To complement VaR and other measures of market risk, we run macro stress scenarios, combining various market moves to reflect the most common types of potential stress events, as well as more 138 targeted stress tests for our concentrated exposures and vulnera- ble portfolios. Targeted stress tests are typically applied to specific asset classes or to specific markets and products. We continued to enhance our market risk stress framework in 2011, in order to in- crease the scope and detail of the analysis. Our scenarios capture the liquidity characteristics of different markets, asset classes and positions. d e t i d u A Our market risk stress testing framework is designed to pro- vide a control framework that is forward-looking and responsive to changing market conditions. Our stress scenarios are there- fore reviewed regularly in the context of the macroeconomic and geopolitical environment by a committee comprised of represen tatives from the business divisions, Risk Control and Economic Research. In response to changing market conditions and new developments around the world, we develop and run ad hoc stress scenarios to assess the potential impact on our portfolio. ➔ Refer to the discussion on stress loss in this section for to be dominated by factors specific to the individual stocks, and our equity investments are generally intended to be held for the medium or long term and may be subject to lockup agreements. For these reasons, we generally do not control these exposures using the market risk measures applied to trading activities. Such equity investments are, however, subject to a different range of controls, including pre-approval of new investments by business management and Risk Control and regular monitoring and re- porting. They are also included in our firm-wide earnings-at-risk, capital-at-risk and combined stress testing metrics. Investments made as part of an ongoing business are also sub- ject to our standard controls, including portfolio and concentra- tion limits. Seed money and co-investments in UBS-managed funds made by Global Asset Management are, for example, sub- ject to a portfolio limit. All investments must be approved by del- egated authorities and are monitored and reported to senior management. more information Equity investments d e t i d u A Under IFRS, equity investments not in the trading book may be classified as Financial investments available-for-sale, Financial as- sets designated at fair value through profit or loss or Investments in associates. We make investments for a variety of purposes, including rev- enue generation or as part of strategic initiatives. Other invest- ments, such as exchange and clearing house memberships, are held to support our business activities. We may also make invest- ments in funds that we manage, in order to fund or “seed” them at inception, or to demonstrate that our interests concur with those of investors. We also buy, and are sometimes required by agreement to buy, securities and units from funds that we have sold to clients. These may include purchases of illiquid 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, if such in- vestments are illiquid. The fair value of equity investments tends t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R d e t i d u A Composition of equity investments On 31 December 2011, we held equity investments totaling CHF 2.2 billion, of which CHF 0.7 billion were classified as Financial investments available-for-sale, CHF 0.7 billion as Financial assets designated at fair value and CHF 0.8 billion as Investments in as- sociates. This compares with 31 December 2010, when we held equity investments totaling CHF 2.6 billion, of which CHF 0.9 billion clas- sified as financial investments available-for-sale, CHF 0.9 billion as financial assets designated at fair value and CHF 0.8 billion as in- vestments in associates. The vast majority of the CHF 0.7 billion of Financial assets des- ignated at fair value represented the assets of trust entities associ- ated with employee compensation schemes. They are broadly offset by liabilities to plan participants included in Other liabilities. The equivalent positions on 31 December 2010 amounted to CHF 0.9 billion. ➔ Refer to “Note 12 Financial assets designated at fair value”, “Note 13 Financial investments available-for-sale” and “Note 14 Investments in associates” in the “Financial information” section of this report for more information 139 Risk, treasury and capital management Risk management and control Operational risk Operational risk is the risk resulting from inadequate or failed in- ternal processes, human error and systems failure, or from exter- nal causes (deliberate, accidental or natural). Such events may cause direct financial losses or manifest themselves indirectly as revenue forgone due to the suspension of business. They may also result in damage to our reputation and to our franchise, causing longer-term financial implications. Operational risk is an inevitable consequence of being in business, and managing it is a core ele- ment of our business activities. It is not possible to eliminate every source of operational risk, but our aim is to provide a framework that supports the identifica- tion and assessment of all material operational risks and their po- tential concentrations in order to achieve an appropriate balance between risk and return. We seek to develop a firm-wide risk- conscious culture where all employees identify, discuss, manage and remediate potential and actual operational risks. Organizational structure and governance The business division Chief Executive Officers and the Corporate Center function heads are ultimately accountable for the effec- tiveness of operational risk management and implementation of the required framework. Management in all functions (business, logistics and control functions) is responsible for establishing an appropriate opera- tional risk management environment, including the establish- ment and maintenance of robust internal controls and a strong risk culture. Controls must be regularly assessed, utilizing both positive and negative evidence to confirm design and operating effectiveness. Operational risk control provides an independent and objective view on whether management is adequately managing material operational risk. It is governed by the Operational Risk Manage- ment Committee, which is chaired by the Global Head of Opera- tional Risk Control, who reports to the Group Chief Risk Officer and is a member of the Risk Executive Committee. The Opera- tional Risk Management Committee oversees operational risk fo- rums and work streams, ensures oversight of the implementation of the operational risk framework, and provides an effective and independent assessment of the operational risk profile. Operational risk framework The operational risk framework describes general requirements for managing and controlling operational risk at UBS. This framework was significantly enhanced in 2011, and the imple- mentation process remains ongoing. The major elements of the enhanced framework are described below and are built on four pillars: 1. Identification of inherent risks through the operational risk taxonomy 2. Assessment of the design and operating effectiveness of con- trols through the internal control assessment process 3. Assessment of residual risk through the operational risk assess- ment process 4. Remediation to address identified deficiencies which are out- side accepted levels of residual risk The operational risk taxonomy defines the universe of inherent operational risks that arise as a consequence of our business ac- tivities. It provides a clear and logical classification of operational risk and facilitates a common understanding of operational risk across all business divisions. The framework requires that for each element of the operational risk taxonomy, core controls are de- fined which are linked to key procedural controls within the orga- nization. The completeness of core controls can be tested using scenarios through which the inherent risk, including stress and tail risk, may materialize. Core controls are the critical controls that, if designed and op- erating effectively, will materially ensure that our operational risk profile stays within acceptable boundaries. Functions are required to identify key procedural controls relevant to their activities that support the core controls. These key procedural controls are a main aspect of the functional control environment enabling func- tions to control their assigned roles and responsibilities. Full imple- mentation and integration of scenarios, core and key procedural controls will lead to a complete hierarchy of control from firm-wide inherent risk (operational risk taxonomy) to functionally operated procedural controls. The unauthorized trading incident announced in September 2011 has given added impetus to the implementa- tion of the revised operational risk framework, specifically the need to finalize the work on definition of core controls, linkage to key procedural controls and implementation of quarterly positive evidence based assessment of control operation. Significant control deficiencies surfaced during the assessment of the design and operational effectiveness of key procedural con- trols (ICAP) must be reported in the operational risk inventory and remediation instigated. The aggregated impact of the control defi- ciencies and the adequacy of remediation efforts are assessed by operational risk control for all relevant operational risk taxonomy categories as part of the operational risk assessment process. This front-to-back process, complemented with expert opinion, pro- vides a transparent assessment of the current operational risk expo- sure or residual operational risk. We are currently working to deter- mine the acceptable levels of residual operational risk for each operational risk taxonomy category. The resulting operational risk appetite can be expressed through the establishment of quantita- tive constraints such as operating limits or qualitative statements in 140 the form of policies. Where the residual operational risk exceeds our operational risk appetite, management must adapt its business activities or adjust the internal control environment accordingly. The operational risk assessment process also holds manage- ment accountable for timely, sufficient and, above all, sustainable remediation. To assess the overall operational risk management performance across UBS and provide effective management in- centives, quarterly operational risk performance metrics are pro- duced, which focus on unidentified control deficiencies and insuf- ficient remediation performance. The assessment processes described above culminate in regu- lar and substantial reporting to various stakeholders and gover- nance bodies of operational risk exposure against the appetite for each operational risk taxonomy category. Financial and non-finan- cial events considered to be the crystallization of existing opera- tional risk are also considered for risk assessment and reporting purposes. Our Group Executive Board and Board of Directors Risk and Audit Committees reporting was extended in 2011 to include reporting of operational risk performance metrics and Group Sig- nificant Operational Risk Issues. These are issues which have the largest risk impact on UBS or a high degree of regulatory focus and therefore require prioritization and sponsorship at the top hierarchical level. Operational risk quantification The enhanced operational risk framework is aligned to an efficient capital calculation which represents a major step forward in our approach to quantifying operational risk and setting effective management incentives. The processes detailed above are integral to the quantification of operational risk and integration of the op- erational risk framework and the capital calculation. We measure operational risk exposure and calculate opera- tional risk regulatory capital by utilizing the advanced measure- ment approach (AMA) in accordance with FINMA requirements. For regulated subsidiaries, the basic indicator or standardized ap- proaches are adopted as agreed with local regulators. Following the unauthorized trading incident an ad-hoc review of the relevant AMA category was completed and this led to an increase of operational risk RWA of CHF 9.5 billion, which was implemented in the fourth quarter of 2011. Advanced measurement approach model The AMA model has two main components. The historical com- ponent is a retrospective view based on our history of opera- tional risk losses since January 2002, excluding extreme internal losses, which are assigned to the scenario component to avoid duplication. The key assumption within this component is that past events form a reasonable proxy for future events. A distri- bution of aggregated losses over one year is derived by model- ling severities and frequencies separately and combining them. Therefore, it is referred to as a loss distribution approach. It is used to project future total losses based on historical experience and determine the expected loss portion of our capital require- ment. The scenario component is a forward-looking view of poten- tial operational losses that may occur based on the operational risk issues facing the bank. The intent is to reach a reasonable estimate of unexpected or tail loss exposure (corresponding to a low frequency / high severity event). We use 20 AMA catego- ries, and for each of these categories three frequency / severity pairs are defined, representing the base, stress and worst cases. Calibration is based on internal extreme losses, loss data from 99 peer banks, business environment and internal control fac- tors, as well as extensive annual verification by internal subject matter experts based on their view of our particular exposure to risk taxonomies. Our AMA model adds the sampled losses from the historical and scenario component to derive the regulatory capital figure which equals the 99.9% quantile of the overall loss distribution. Currently, we do not reflect mitigation through insurance or any other risk transfer mechanism in our AMA model. In the course of 2010 and 2011, the AMA model was further enhanced by improving data quality, removing the remaining du- plication between components, reviewing data-dependencies and by improving / widening the use of subject matter experts for taxonomy assessments. ➔ Refer to the “Capital management” section of this report for more information on the development of risk-weighted assets for operational risk ➔ Refer to the “Certain items affecting our results in 2011” sidebar in the “UBS results” section of this report for more information on the unauthorized trading incident t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 141 Risk, treasury and capital management Treasury management Treasury management Group Treasury oversees the balance sheet and the usage of our critical financial resources including capital, liquidity and funding. Treasury manages key portions of these resources, including interest rate and currency risks arising from balance sheet and capital management activities. Liquidity management Interest rate and currency management In 2011, we continued to maintain a sound liquidity position and a diversified portfolio of funding sources, despite the significant mar- ket volatility caused by uncertainties regarding the global macroeco- nomic environment, including European fiscal and sovereign debt concerns and the potential impact of financial regulatory reforms. We manage our liquidity position to provide adequate time and fi- nancial flexibility to respond to a UBS-specific liquidity crisis in a gen- erally stressed market environment. On 31 December 2011, our pro- visional net stable funding ratio and liquidity coverage ratio remained generally in line with the minimum Basel III requirements. Funding management Our funding activities are planned after analyzing the overall liquidity and funding profile of our balance sheet, taking into account the amount of stable funding that would be needed to support ongoing business activities through prolonged periods of difficult operating conditions. Our liability portfolio is broadly diversified by market, product and currency, contributing to our funding stability and financial flexibility. During 2011, we raised CHF 5.8 billion equivalent of public benchmark bonds with an average maturity of 3.5 years, whilst a similar amount of public bonds matured during 2011. We contin- ued to raise medium- and long-term funds through medium-term notes and private placements throughout the year, and recorded CHF 23 billion net cash inflows into our wealth management and retail deposits. Group Treasury is responsible for the interest rate risk manage- ment of Wealth Management & Swiss Bank transactions executed in the majority of its locations. The consolidation of these flows allows for the optimization of risk management and netting po- tential arising from different sources of interest rate risk. In re- sponse to prolonged low yields, Group Treasury continued to manage measures to improve Wealth Management & Swiss Bank’s margin income through income-generating fixed receiver swap portfolios. Additionally, Group Treasury continued to earn interest income on equity through its portfolio of interest rate products and managed the currency effects on equity and key capital ratios. Profits and losses in foreign currencies were hedged to protect shareholder value. Capital management On 31 December 2011, our Basel II tier 1 capital ratio stood at 19.6%, compared with 17.8% on 31 December 2010. As a re- sult of changing the relevant capital framework to the enhanced Basel II market risk framework (commonly known as Basel 2.5), our tier 1 ratio on this basis on 31 December 2011 was 15.9%. This was the result of Basel 2.5 risk-weighted assets being sig- nificantly higher than under Basel II and due to higher tier 1 deductions. We continued to manage our capital structure to- ward our target total capital ratio of 19% under Basel III consist- ing of 13% tier 1 common equity capital and up to 6% loss- absorbing capital. 142 Equity attribution We use an equity attribution framework to evaluate the perfor- mance of our businesses and to guide our businesses in the allo- cation of resources to the current and prospective opportunities that are expected to provide the best risk-adjusted profit ability. In 2011, the amount of average equity attributed to the business divisions and the Corporate Center increased by CHF 7  billion. This rise was mainly due to the increases in risk-weighted assets related to the implementation of the Basel 2.5 framework, which was included on a forward-looking basis to prepare the business- es for future capital market standards. Shares As of 31 December 2011, we had a total of 3,832,121,899 shares issued. In 2011, the issued shares were increased by a total of 1,281,386 shares due to exercises of employee options. We intend to propose a dividend for the financial year 2011 of CHF 0.10 per share. Financial resource governance The Group Asset and Liability Management Committee (Group ALCO) ensures that our assets and liabilities are used in line with our overall Group strategy as defined by the Board of Di- rectors (BoD) and the Group Executive Board (GEB), as well as our regulatory commitments, and the interests of shareholders and other stakeholders. The Group ALCO manages the business divisions’ balance sheet targets, which are set by the BoD. It also manages our capital, liquidity and funding, taking into ac- count the business divisions’ actual performance, strategic di- rection and overall prevailing and prospective risk profile as well as market conditions. Group Treasury provides the Group ALCO with monthly report- ing on our financial resources (e.g. balance sheet, capital, liquidity and funding) needed to monitor our asset and liability manage- ment policies and processes, and to ensure they are effective un- der prevailing and prospective conditions. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 143 Risk, treasury and capital management Treasury management Liquidity and funding management d e t i d u A We define liquidity risk as the risk of being unable to generate sufficient funds from assets to meet payment obligations when they fall due. Funding risk is the risk of being unable to borrow funds in the market on an ongoing basis at an acceptable price to fund actual or proposed commitments, thereby supporting our current business and strategic direction. d e t i d u A Our major sources of liquidity are channeled through entities that are fully consolidated. We consider the possible impact on our access to markets from stress events affecting some or all parts of our business. The results of this analysis are factored into our overall contingency plans for a liquidity crisis, which are then incorporated into our wider crisis management process. Liquidity and funding are critical for a financial institution. They must be managed continuously to ensure they can be adjusted to sudden changes in market conditions or the operating environ- ment, whether widespread or relatively small. An institution that is unable to meet its liabilities when they fall due may fail without becoming insolvent, because it is unable to borrow sufficient funds on an unsecured basis, has insufficient high-quality assets to borrow against or has insufficient liquid assets it can sell to raise the cash it needs immediately. ➔ Refer to “Current market climate and industry drivers” in the “Operating environment and strategy” section for more information Liquidity and funding management d e t i d u A Our liquidity and funding strategy is proposed by Group Treasury, approved by Group ALCO and overseen by the BoD Risk Commit- tee. Liquidity and funding limits are set at Group and business division levels, and are reviewed and approved at least once a year by the BoD, the Group ALCO, the Group Chief Financial Officer (Group CFO) and the Group Treasurer. Group Treasury monitors and oversees the implementation and execution of our liquidity and funding strategy, and ensures adherence to our liquidity and funding policies including limits, and reports the bank’s overall li- quidity and funding position at least monthly to the Group ALCO and the BoD Risk Committee. We aim to maintain a sound liquidity position to meet all our liabilities when due, whether under normal or stressed conditions, without incurring unacceptable losses or risking sustained dam- age to our various businesses. We employ an integrated liquidity and funding framework to govern the liquidity management of all our branches and subsidiaries. We perform stress analysis to determine the asset / liability structure that allows us to maintain an appropriately balanced liquidity and funding position under various scenarios. Further- more, we manage our liquidity and funding risk with the overall objective of optimizing the value of our business franchise across a broad range of temporal market conditions. d e t i d u A We monitor both the contractual and behavioral maturity profile of the balance sheet (as described under “Liquidity model- ing“). In the behavioral maturity profile, we model the liquidity exposures of the firm under a variety of potential scenarios that encompass normal and stressed market conditions. We continuously refine the assumptions used in our crisis sce- nario and maintain a robust, actionable and tested contingency plan. A key component of this framework is an assessment and regular testing of all material, known and expected cash flows as well as the level and availability of high-grade collateral that could be used to raise additional funding if required. d e t i d u A Liquidity management We manage our liquidity position to provide adequate time and financial flexibility to respond to a UBS-specific liquidity crisis in a generally stressed market environment. Complementing this, our funding risk management aims for the optimal liability structure to finance our businesses reliably and cost-efficiently. Our business activities generate asset and liability portfolios that are highly diversified with respect to market, product, tenor and cur- rency. This reduces our exposure to individual funding sources and provides a broad range of investment opportunities, reducing liquid- ity risk. Our funding diversification and global scope help protect our liquidity position in the event of a crisis. The liquidity and funding process is undertaken jointly by Group Treasury and the treasury trading and the short term interest rate units in the Investment Bank’s fixed income, currencies and commodities (FICC) business. Group Treasury establishes a control framework, while the Invest- ment Bank manages operational cash and collateral within the established limits. This permits close control of both our cash position and our stock of high-quality liquid securities. Our treasury processes also ensure that the firm’s general access to wholesale cash markets is concentrated in the Investment Bank’s FICC unit. Funds raised ex- ternally are largely channeled into FICC, including the proceeds of debt securities issued by UBS, an activity for which Group Treasury is responsible. FICC in turn meets the Investment Bank’s internal demands for funding by channeling funds from units generating surplus cash to those in need of financing. d e t i d u A Liquidity modeling For the purpose of monitoring our liquidity situation, we employ the following main measures: – An operational cash ladder which is used to monitor our fund- ing requirements on a daily basis within limits set by Group ALCO, the Group CFO and the Group Treasurer. This cumula- tive cash ladder shows the projected daily funding position – 144 d e t i d u A the net cumulative funding requirement for a specific day – from the current day to three months forward. d e t i d u A – A stressed version of the operational cash ladder which uses behavioral assumptions that model a severe liquidity crisis sce- nario in a generally stressed market environment. This stress scenario is run daily and used to project potential outflows over a one-month time horizon. – A maturity gap analysis which is comprised of a contractual maturity gap analysis of our assets and liabilities over a one- year time horizon, and a behavioral maturity gap analysis un- der an assumed UBS-specific liquidity crisis in combination with a generally stressed market environment over a one-year time horizon. – A cash capital model which measures the amount of long-term funding- or stable customer deposits, long term debt (over one year) and equity- available to fund illiquid assets. Cash capital consumption 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 haircut) 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. Our 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 our customer deposits that are deemed to have a behavioral maturity of at least one year. d e t i d u A A breakdown of the contractual maturities of our assets and li- abilities serves as the starting point for stress testing analyses. This contractual view is adjusted to include behavioral components as well as a more detailed breakdown of asset and liability types. The liquidity crisis scenario combines a UBS-specific crisis with market disruption and focuses on a time horizon of up to one year. This scenario assumes large drawdowns on otherwise stable client deposits mainly due on demand; inability to renew or re- place maturing unsecured wholesale funding; unusually large drawdowns on loan commitments; reduced capacity to generate liquidity from trading assets; liquidity outflows corresponding to a three-notch downgrade triggering contractual obligations to un- wind derivative positions or to deliver additional collateral; and additional collateral needs due to adverse movements in the mar- ket values of derivatives. All these models and their assumptions are reviewed regularly to incorporate the latest business and mar- ket developments. d e t i d u A Contingency planning Liquidity crisis scenario analysis and contingency planning sup- port the liquidity management process, which ensures that im- mediate corrective measures to absorb potential sudden liquidity shortfalls can be put into effect. 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 prod- ucts. The liquidity status indicators combine internal metrics from the liquidity stress models with market data to provide a dash- board of early warning indicators reflecting the current liquidity situation. The liquidity status indicators are used both on a Group level to assess the overall global as well as regional situation. Our Group contingency funding plan is an integral part of our global crisis management concept, which covers various types of crisis events. The contingency funding plan contains an assess- ment of the contingent funding sources in a stressed environ- ment, liquidity status indicators and metrics and contingency pro- cedures. Should a crisis require contingency funding measures to be invoked, Group Treasury is responsible for coordinating liquid- ity generation with representatives of the relevant business areas. Our contingent funding sources include: a large multi-currency portfolio of high-quality, short-term unencumbered assets; avail- able and unutilized liquidity facilities at several major central banks; and contingent reductions of liquid trading portfolio as- sets. Liquidity limits and controls Liquidity and funding limits and targets are set by the BoD, the Group ALCO, the Group CFO, the Group Treasurer and the busi- ness divisions, taking into consideration current and projected business strategy and risk tolerance. The principles underlying our limit and target framework aim to maximize and sustain the value of our business franchise and maintain an appropriate balance in the asset/liability structure. Structural limits and targets focus on the structure and composition of the balance sheet, while supple- mentary limits and targets are designed to drive the utilization, diversification and allocation of funding resources. Together the limits and targets focus on liquidity and funding risk for periods out to one year, including stress testing. Group Treasury is respon- sible for the oversight of the liquidity and funding limits and tar- gets. Performance is monitored against limits and targets and regularly communicated to senior management. These limits and targets are, at least annually, reviewed and reconfirmed by the respective authorities. To complement and support the limit framework, Group Trea- sury and members of our regional and divisional treasuries moni- tor the markets in which we operate for potential threats. Funds transfer pricing Funding costs and benefits are allocated to our business divisions according to our liquidity and funding risk management frame- work. Our internal funds transfer pricing system is designed to provide the proper liability structure to support the assets and planned activities of each business division while minimizing cross-divisional subsidies. The funds transfer pricing mechanism aims to allocate funding and liquidity costs to the activities gen- erating the liquidity and funding risks and deals with the move- ment of funds from those businesses in surplus to those that have a shortfall. Funding is internally transferred or allocated among businesses at rates and tenors that reflect each business’ asset composition, liquidity and reliable external funding. We continue to review and improve our internal funds transfer pric- ing system. 145 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Risk, treasury and capital management Treasury management Liquidity Regulation In December 2010, the Basel Committee on Banking Supervision published the “International framework for liquidity risk measure- ment, standards and monitoring” (Basel III Liquidity). The frame- work comprises two liquidity ratios: the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). Both ratios are sub- ject to an observation period that began in 2011. Both LCR and NSFR will become established standards by 2015 and 2018, re- spectively. During the observation period, both standards are un- der review by the Basel Committee on Banking Supervision. The Swiss liquidity regime that was introduced in 2010 by the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) for large banks is generally aligned with international proposals for liquidity regulations. The core ele- ment of the liquidity regime is a severe stress scenario that com- bines a general financial market crisis with creditors’ loss of trust in the bank. The new liquidity regulations require that banks hold high quality liquid assets sufficient to offset any projected out- flows under the stress scenario for a period of 30 days. d e t i d u A In 2011, FINMA issued a circular outlining the implementation plan of the new international liquidity standards. In 2012, a na- tional working group will consult and propose new draft legisla- tion, which is expected to become law by 2013. FINMA will intro- duce test reporting in 2012 for certain institutions, which will become a general reporting requirement for all banks and brokers in 2013. The results of the test reporting will be used to specify the detailed minimum requirements in 2013. The actual require- ments are expected to be effective in 2015 (LCR) and 2018 (NSFR), the same as the international timeline. Our provisional NSFR and LCR ratios at year-end 2011 remained generally in line with the minimum Basel III requirements. Cur- rently, banks employ a wide range of interpretations to calculate the LCR and the NSFR, given that the precise definition of these ratios is still to be finalized. We believe we have adopted a gener- ally conservative approach in estimating these ratios. ➔ Refer to the “Regulatory developments“ section of this report for more information Funding management Our funding activities are planned by analyzing the overall liquidity and funding profile of our balance sheet, taking into account the amount of stable funding that would be needed to support ongoing business activities through periods of difficult market conditions. Our liability portfolio is broadly diversified by market, product and currency. Our wealth management businesses represent a significant, cost-efficient and reliable source of funding. In addi- tion, we have numerous short-, medium- and long-term funding programs that issue senior unsecured and structured notes. These programs allow institutional and private investors in Europe, the US and Asia Pacific to customize their investments in UBS’s debt securities. We also generate long-term funding by pledging a por- tion of our portfolio of Swiss residential mortgages as collateral for the Swiss Pfandbriefe and our own covered bond program. A short-term secured funding program sources funding globally, generally for the highest quality assets. Collectively, these broad product offerings, and the global scope of our business activities, contribute to our funding stability and financial flexibility. Group Treasury regularly monitors our funding status including concentration risks to ensure we maintain a well-balanced and diversified liability structure and reports its findings on a monthly basis to the Group ALCO. d e t i d u A (cid:55)(cid:36)(cid:53)(cid:2)(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:2)(cid:72)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73) (cid:37)(cid:42)(cid:40)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:14)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:2)(cid:89)(cid:74)(cid:71)(cid:84)(cid:71)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:71)(cid:70) (cid:35)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:24)(cid:22) (cid:23)(cid:21) (cid:20)(cid:25)(cid:20) 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(cid:36)(cid:81)(cid:80)(cid:70)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:80)(cid:81)(cid:86)(cid:71)(cid:85)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:70) (cid:37)(cid:67)(cid:85)(cid:74)(cid:2)(cid:79)(cid:67)(cid:84)(cid:73)(cid:75)(cid:80)(cid:142) (cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:68)(cid:67)(cid:80)(cid:77) (cid:47)(cid:81)(cid:80)(cid:71)(cid:91)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:82)(cid:67)(cid:82)(cid:71)(cid:84)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:70) (cid:52)(cid:71)(cid:82)(cid:81)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:53)(cid:71)(cid:69)(cid:87)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:78)(cid:71)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73) Funding position and diversification As stated, both of our wealth management business divisions represent valuable and cost-efficient sources of funding. At year- end 2011, these businesses contributed CHF 327 billion, or 95%, of the CHF 342 billion total customer deposits shown in  the “UBS asset funding” graph. Compared with the CHF 267  billion of net loans as of 31 December 2011, customer deposits provided 128% coverage compared with 126% on 31 December 2010. In terms of secured funding (i.e. repurchase agreements and securities lent against cash collateral received), at year-end 2011, we borrowed less cash on a collateralized basis than we lent out, leading to a surplus of net securities sourced – shown as the CHF 162 billion collateral surplus in the “UBS asset funding” graph. The overall composition of our funding sources at the end of 2011 is shown in the “UBS: funding by product and currency” table and the pie-charts illustrate the funding sources by curren- cy. These funding sources amounted to CHF 817 billion on the balance sheet, up from CHF 782 billion the year before, and comprise repurchase agreements, securities lending against cash collateral received, due to banks, money market paper issued, due to customers and long-term debt including financial liabili- ties at fair value, cash collateral payables on derivative instru- ments and prime brokerage payables. Despite the increase in customer deposits, the relative funding composition shifted from unsecured funding to secured funding during the year, as the percentage funding contribution of repurchase agreements and securities lending increased from 10.4% to 13.5% (as shown in the “UBS: funding by product and currency” table). The increase in secured funding mainly related to higher business activities in  our Investment Bank. Our overall customer deposits, which UBS: funding by product and currency (cid:40)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:68)(cid:91)(cid:2)(cid:69)(cid:87)(cid:84)(cid:84)(cid:71)(cid:80)(cid:69)(cid:91)(cid:2)(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:35)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:22)(cid:23)(cid:7)(cid:2)(cid:55)(cid:53)(cid:38)(cid:149)(cid:2)(cid:31)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:21)(cid:24)(cid:24)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:20)(cid:19)(cid:7)(cid:2)(cid:39)(cid:55)(cid:52)(cid:149)(cid:2)(cid:31)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:19)(cid:25)(cid:20)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:19)(cid:19)(cid:21) (cid:19)(cid:23) (cid:19)(cid:20) (cid:22) (cid:21)(cid:23) (cid:26)(cid:25) (cid:22)(cid:27) (cid:25) (cid:23)(cid:20) (cid:23)(cid:26) (cid:20)(cid:18)(cid:7)(cid:2)(cid:37)(cid:42)(cid:40)(cid:149)(cid:2)(cid:31)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:19)(cid:24)(cid:22)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:19)(cid:22)(cid:7)(cid:2)(cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:149)(cid:2)(cid:31)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:19)(cid:19)(cid:22)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:24) (cid:20) (cid:21) (cid:20)(cid:18) (cid:26) (cid:26) (cid:19)(cid:22) (cid:19)(cid:22) (cid:19)(cid:21)(cid:21) (cid:20)(cid:20) (cid:22)(cid:27) (cid:23)(cid:26) (cid:22)(cid:25) (cid:37)(cid:87)(cid:85)(cid:86)(cid:81)(cid:79)(cid:71)(cid:84)(cid:2)(cid:70)(cid:71)(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:85) (cid:36)(cid:81)(cid:80)(cid:70)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:80)(cid:81)(cid:86)(cid:71)(cid:85)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:70) (cid:37)(cid:67)(cid:85)(cid:74)(cid:2)(cid:79)(cid:67)(cid:84)(cid:73)(cid:75)(cid:80)(cid:142) (cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:68)(cid:67)(cid:80)(cid:77) (cid:47)(cid:81)(cid:80)(cid:71)(cid:91)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2)(cid:82)(cid:67)(cid:82)(cid:71)(cid:84)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:70) (cid:52)(cid:71)(cid:82)(cid:81)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:71)(cid:69)(cid:87)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:78)(cid:71)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73) (cid:19)(cid:2)(cid:53)(cid:86)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:85)(cid:2)(cid:67)(cid:2)(cid:82)(cid:71)(cid:84)(cid:69)(cid:71)(cid:80)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:72)(cid:87)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:85)(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:26)(cid:19)(cid:25)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:67)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:21)(cid:19)(cid:2)(cid:38)(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:19)(cid:14)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:84)(cid:75)(cid:85)(cid:75)(cid:80)(cid:73)(cid:2) (cid:84)(cid:71)(cid:82)(cid:87)(cid:84)(cid:69)(cid:74)(cid:67)(cid:85)(cid:71)(cid:2)(cid:67)(cid:73)(cid:84)(cid:71)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:14)(cid:2)(cid:85)(cid:71)(cid:69)(cid:87)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:78)(cid:71)(cid:80)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:73)(cid:67)(cid:75)(cid:80)(cid:85)(cid:86)(cid:2)(cid:69)(cid:67)(cid:85)(cid:74)(cid:2)(cid:69)(cid:81)(cid:78)(cid:78)(cid:67)(cid:86)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:69)(cid:71)(cid:75)(cid:88)(cid:71)(cid:70)(cid:14)(cid:2)(cid:70)(cid:87)(cid:71)(cid:2)(cid:86)(cid:81)(cid:2)(cid:68)(cid:67)(cid:80)(cid:77)(cid:85)(cid:14)(cid:2)(cid:79)(cid:81)(cid:80)(cid:71)(cid:91)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:2) (cid:82)(cid:67)(cid:82)(cid:71)(cid:84)(cid:2)(cid:75)(cid:85)(cid:85)(cid:87)(cid:71)(cid:70)(cid:14)(cid:2)(cid:70)(cid:87)(cid:71)(cid:2)(cid:86)(cid:81)(cid:2)(cid:69)(cid:87)(cid:85)(cid:86)(cid:81)(cid:79)(cid:71)(cid:84)(cid:85)(cid:14)(cid:2)(cid:78)(cid:81)(cid:80)(cid:73)(cid:15)(cid:86)(cid:71)(cid:84)(cid:79)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)(cid:2)(cid:10)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(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:78)(cid:75)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:86)(cid:2)(cid:72)(cid:67)(cid:75)(cid:84)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:11)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:69)(cid:67)(cid:85)(cid:74)(cid:2) (cid:69)(cid:81)(cid:78)(cid:78)(cid:67)(cid:86)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:81)(cid:80)(cid:2)(cid:70)(cid:71)(cid:84)(cid:75)(cid:88)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:86)(cid:84)(cid:67)(cid:80)(cid:85)(cid:67)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:82)(cid:84)(cid:75)(cid:79)(cid:71)(cid:2)(cid:68)(cid:84)(cid:81)(cid:77)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71)(cid:2)(cid:82)(cid:67)(cid:91)(cid:67)(cid:68)(cid:78)(cid:71)(cid:85)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:20)(cid:2)(cid:37)(cid:81)(cid:80)(cid:85)(cid:75)(cid:85)(cid:86)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:69)(cid:67)(cid:85)(cid:74)(cid:2)(cid:69)(cid:81)(cid:78)(cid:78)(cid:67)(cid:86)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:82)(cid:67)(cid:91)(cid:67)(cid:68)(cid:78)(cid:71)(cid:85)(cid:2) (cid:81)(cid:80)(cid:2)(cid:70)(cid:71)(cid:84)(cid:75)(cid:88)(cid:67)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:75)(cid:80)(cid:85)(cid:86)(cid:84)(cid:87)(cid:79)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:82)(cid:84)(cid:75)(cid:79)(cid:71)(cid:2)(cid:68)(cid:84)(cid:81)(cid:77)(cid:71)(cid:84)(cid:67)(cid:73)(cid:71)(cid:2)(cid:82)(cid:67)(cid:91)(cid:67)(cid:68)(cid:78)(cid:71)(cid:85)(cid:16) In % 1 Securities lending Repurchase agreements Interbank Money market paper Retail savings / deposits Demand deposits Fiduciary Time deposits Long-term debt Cash collateral payables on derivative instruments Prime brokerage payables Total All currencies CHF EUR USD Others 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 1.0 12.5 3.7 8.7 14.0 16.7 3.5 7.8 19.4 8.2 4.5 0.9 9.6 5.3 7.2 13.4 15.6 3.9 9.6 22.4 7.5 4.7 0.0 0.0 0.7 0.2 9.7 6.2 0.1 0.3 2.4 0.3 0.1 0.0 1.0 1.1 0.2 9.3 5.9 0.2 0.5 3.2 0.2 0.1 0.2 1.7 0.5 1.4 0.7 2.9 1.0 1.4 7.1 3.7 0.5 0.2 1.4 0.6 0.7 0.8 3.1 1.1 1.2 8.0 3.2 0.5 0.6 10.0 0.9 6.0 3.5 5.0 1.9 3.5 7.1 3.4 3.0 0.6 6.4 1.3 5.7 3.3 4.5 2.1 5.3 8.0 3.2 3.4 0.2 0.9 1.7 1.0 0.0 2.6 0.5 2.7 2.7 0.9 0.9 0.1 0.8 2.3 0.6 0.0 2.1 0.6 2.6 3.2 0.9 0.7 100.0 100.0 20.1 21.5 21.1 20.7 44.8 43.9 14.0 13.9 1 Stated as a percent of the total funding sources of CHF 817 billion as of 31 December 2011, comprising repurchase agreements, securities lending against cash collateral received, due to banks, money market paper issued, due to customers, long-term debt (including financial liabilities at fair value) and cash collateral on derivative transactions and prime brokerage payables. t n e m e g a n a m l a t i p a c d n a y r u (cid:21)(cid:41)(cid:54)(cid:18)(cid:20)(cid:20)(cid:65)(cid:71) s a e r t , k s i R 147 Risk, treasury and capital management Treasury management include time, retail savings, demand and fiduciary deposits, in- creased by CHF 10 billion to CHF 342 billion, while remaining stable at 42% of our funding sources. Cash deposits in Wealth Management & Swiss Bank rose by CHF 20 billion to CHF 288 bil- lion, while Wealth Management Americas deposits were up CHF 3 billion to CHF 39 billion, partially offset by lower wholesale cli- ent deposits in the Investment Bank (CHF 11 billion). Wealth management and retail client deposits represented approximate- ly 95% of our total customer deposits, up from 92% at 31 De- cember 2010. Our outstanding long-term debt, including financial liabilities at fair value, decreased by CHF 17 billion during the year to CHF 158 billion, mainly due to the lower valuation of equity-linked notes issued, and to a lesser extent, matured credit-linked notes issued as well as a decline in long-term debt issued. This resulted in long-term debt decreasing from 22.4% to 19.4% in relation to our funding sources. During 2011, we raised CHF 5.8 billion equivalent of public benchmark bonds with an average maturity of 3.5 years, including CHF 2.6 billion equivalent of covered bond issuance. The amount of public bond issuance roughly offset the CHF 6.0 billion equivalent of public benchmark bonds that ma- tured or were redeemed during 2011, CHF 4.1 billion of which was from public unsecured bonds and CHF 1.9 billion from subor- dinated / hybrid tier 1 debt. Additionally, we continued to raise medium- and long-term funds through medium-term notes and private placements throughout the year. In January 2012, we suc- cessfully issued covered bonds (EUR 1.5 billion 2.25% 5-year and USD 1.5 billion 1.875% 3-year) as well as EUR 1.5 billion 3.125% 4-year senior unsecured public bonds. Our Investment Bank reduced short-term interbank borrowing year-over-year by CHF 8 billion, which was more than compen- sated by a CHF 13 billion increase in money market paper issued. Cash collateral payables on derivative instruments and prime bro- kerage payables remained relatively stable with a one percentage point increase to 13% of our funding sources. Maturity breakdown of long-term straight debt portfolio The “Long-term straight debt – contractual maturities” graph 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 des- ignated at fair value. The long-term straight debt portfolio amounted to CHF 67.3 billion on 31 December 2011. It is com- posed of CHF 60.3 billion of senior debt including both publicly and privately placed notes and bonds as well as Swiss cash bonds, and CHF 7.0 billion of subordinated debt. Of the posi- tions shown in the graph, CHF 9.8 billion, or 15%, will mature within one year. There are no subordinated debt positions with an early-call date during 2012. The long-term straight debt forms part of the CHF 141 billion shown on the Debt issued line on the balance sheet. ➔ Refer to “Note 19 Financial liabilities designated at fair value and debt issued” in the “Financial information” section of this report for more information 148 (cid:46)(cid:81)(cid:80)(cid:73)(cid:15)(cid:86)(cid:71)(cid:84)(cid:79)(cid:2)(cid:85)(cid:86)(cid:84)(cid:67)(cid:75)(cid:73)(cid:74)(cid:86)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)(cid:2)(cid:115)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:67)(cid:69)(cid:86)(cid:87)(cid:67)(cid:78)(cid:2)(cid:79)(cid:67)(cid:86)(cid:87)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85) (cid:37)(cid:42)(cid:40)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:35)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:20)(cid:18) (cid:19)(cid:23) (cid:19)(cid:18) (cid:2)(cid:23) (cid:2)(cid:2)(cid:2) (cid:2)(cid:18) (cid:20)(cid:18)(cid:19)(cid:20) (cid:20)(cid:18)(cid:19)(cid:21) (cid:20)(cid:18)(cid:19)(cid:22) (cid:20)(cid:18)(cid:19)(cid:23)(cid:115)(cid:19)(cid:24) (cid:20)(cid:18)(cid:19)(cid:25)(cid:115)(cid:20)(cid:19) (cid:20)(cid:18)(cid:20)(cid:20)(cid:115)(cid:21)(cid:19) (cid:67)(cid:72)(cid:86)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:21)(cid:19) (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:21)(cid:41)(cid:54)(cid:18)(cid:21)(cid:18)(cid:65)(cid:71) (cid:53)(cid:71)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86) (cid:53)(cid:87)(cid:68)(cid:81)(cid:84)(cid:70)(cid:75)(cid:80)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86) d e t i d u A Maturity analysis of financial liabilities Contractual maturity information about our assets and liabilities serves as a starting point for the stress testing analyses described earlier. Our liquidity risk management framework includes a be- havioral stress analysis, which involves a more detailed assessment of asset and liability cash flows as well as outflows from off-bal- ance sheet exposures. The contractual maturities of our non-derivative and non-trad- ing financial liabilities as of 31 December 2011 presented in the table below are based on the earliest date on which we could be required to pay. The total amounts that contractually mature in each time-band are also shown for 31 December 2010. Derivative positions and trading liabilities, predominantly made up of short sale transactions, are assigned to the column “On demand” as this provides a conservative reflection of the nature of these trad- ing activities. The contractual maturities may extend over signifi- cantly longer periods. Credit ratings Credit ratings can affect the cost and availability of funding, espe- cially funding from wholesale unsecured sources. Our credit rat- ings can also influence the performance of some of our business- es and levels of client and counterparty confidence. Rating agencies take into account a range of factors when assessing creditworthiness and setting credit ratings. These include the sta- bility and quality of earnings, capital adequacy, risk profile and management, liquidity management, diversification of funding sources, asset quality and corporate governance. Credit ratings reflect the opinions of the rating agencies and can therefore change at any time. Following the announcement of the unauthorized trading inci- dent on 15 September 2011, Standard & Poor’s and Moody’s placed our long-term ratings on negative watch and under review for possible downgrade, respectively. On 13 October 2011, Fitch Ratings downgraded our long-term issuer default rating from “A+” to “A” with a stable outlook based upon its assessment of diminishing government support. This decision was based on (cid:20)(cid:18) (cid:19)(cid:24) (cid:19)(cid:20) (cid:26) (cid:22) (cid:18) Maturity analysis of financial liabilities 1 d e t i d u A CHF billion Financial liabilities recognized on balance sheet 2 Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities 3, 4 Negative replacement values 3 Cash collateral payables on derivative instruments Financial liabilities designated at fair value Due to customers Accrued expenses and deferred income Debt issued Other liabilities Total 31.12.11 Total 31.12.10 Financial liabilities not recognized on balance sheet 5 Commitments Loan commitments Underwriting commitments Total commitments Guarantees Forward starting transactions Reverse repurchase agreements Securities borrowing agreements Total 31.12.11 Total 31.12.10 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 18.5 6.1 8.8 39.5 473.4 66.9 235.7 0.2 53.2 902.4 762.1 56.5 0.0 56.5 18.8 75.3 80.4 7.3 0.9 86.8 0.1 5.0 90.0 2.8 39.3 3.8 236.1 250.2 1.4 0.3 1.7 0.1 26.9 0.5 29.2 29.2 2.3 1.1 5.1 6.4 8.4 2.1 27.1 52.4 47.9 0.1 0.8 0.9 0.0 0.2 1.1 0.9 1.0 1.7 17.2 7.5 17.4 44.7 64.1 0.1 0.0 0.1 0.0 0.1 0.2 1.9 1.1 0.0 37.1 0.7 41.9 80.7 82.2 0.0 0.1 0.1 0.0 0.1 0.8 0.1 0.1 28.7 0.2 28.5 57.5 54.8 0.0 0.0 0.0 0.1 Total 30.3 8.1 102.5 39.5 473.4 67.1 94.3 342.5 5.1 154.2 57.1 1,374.1 1,261.3 58.2 1.2 59.4 18.9 27.1 0.5 105.9 113.3 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 1 Non-financial liabilities such as deferred income, deferred tax liabilities, provisions and liabilities on employee compensation plans are not included in this analysis. 2 Except for trading portfolio liabilities and negative re- placement values (see footnote 3), amounts as of 31 December 2011 generally represent undiscounted cash flows of future interest and principal payments. This is a change from prior year, when these amounts represented the carrying values. Although undiscounted cash flow amounts may differ from the carrying values on the balance sheet, amounts as of 31 December 2010 have not been restated as these differences were not material. 3 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 relationships. 4 Contractual maturities of trading portfolio liabilities are: CHF 36.7 billion due within one month (2010: CHF 53.7 billion); and CHF 2.8 billion due between one month and one year (2010: CHF 1.2 billion). 5 Comprises the maximum irrevocable amount of guarantees, commitments and forward starting transactions. 149 Risk, treasury and capital management Treasury management changes in assumptions that are part of Fitch’s rating method- ology for banks, and is part of its broader review of changing sovereign support in developed countries. On 29 November 2011, Standard & Poor’s announced rating changes for 37 of the largest rated banks as a consequence of significant changes to its rating methodology for banks. As part of this review process, our long-term senior unsecured debt rat- ing was lowered to “A” (from “A+”) with a negative outlook. With this action, Standard & Poor’s removed the negative credit watch on our long-term rating, which was introduced on 16 Sep- tember 2011 after the announcement of the unauthorized trading incident. Our short-term rating of “A–1” was affirmed. Standard & Poor’s had no discernible impact on our overall liquidity and funding position. If our credit ratings were to be downgraded, “rating trigger” clauses, especially in derivative transactions, could result in an immediate cash outflow due to the unwinding of derivative positions, the need to deliver ad- ditional collateral or other ratings-based requirements. On 15 February 2012, as part of an announcement of ratings reviews affecting 114 financial institutions in Europe, Moody’s placed UBS’s short-term ratings under review for a possible downgrade. ➔ Refer to “Note 23 Derivative instruments and hedge accounting” in the “Financial information” section of this report for The abovementioned ratings actions by Fitch Ratings and more information relating to one or two notch downgrades 150 Interest rate and currency management Management of non-trading interest rate risk d e t i d u A Our largest non-trading interest rate exposures arise within our wealth management business divisions. With the exception of Wealth Management Americas, the inherent interest rate risk ex- posures 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 business. These units manage the risks on an integrated basis, which allows for netting across different sources. d e t i d u A ➔ Refer to “Market risk” section of this report for more informa- tion on non-trading interest rate risk exposures d e t i d u A Group Treasury is responsible for the interest rate risk manage- ment of Wealth Management & Swiss Bank transactions executed in the majority of locations. The fixed-rate products do not con- tain embedded options, such as early prepayment, which would allow clients to prepay at par. All prepayments are therefore sub- ject to market-based unwinding costs. Current and savings accounts as well as many other retail prod- ucts of Wealth Management & Swiss Bank have no contractual ma- turity date or direct market-linked rate, and therefore their interest rate risk cannot be transferred by simple back-to-back transactions. Instead, they are managed on a pooled basis by replicating portfo- lios which seek to immunize originating business units as much as possible against market interest rate movements, while allowing the business units to retain and manage their own product margin. A replicating portfolio is a series of loans or deposits at market rates and fixed terms between the originating business unit and Group Treasury, and is structured to approximate the implied be- havioral interest rate cash flow and repricing behavior of simple back-to-back transactions. The portfolios are rebalanced monthly. Their structure and parameters are based on long-term market observations and client behavior, and are regularly reviewed and adjusted as necessary. A significant amount of interest rate risk also arises from the fi- nancing of non-monetary-related balance sheet items, such as the financing of bank property and equity investments in associated companies. These risks are generally transferred to  Group Trea- sury through replicating portfolios, which in this case are aligned with the tenor mandated by senior management. Group Treasury manages its residual open interest rate expo- sures, taking advantage of any offsets that arise between posi- tions from different sources within its approved market risk limits, which include value-at-risk (VaR) and stress loss. The preferred risk management instruments are interest rate swaps, for which there is a liquid and flexible market. All transactions are executed through the Investment Bank. Group Treasury does not directly access the external market for swap transactions. In addition to its regular risk management activities, Group Trea- sury executes transactions that aim to economically hedge negative effects on our net interest income stemming from the prolonged period of extraordinarily low yields, mainly through income-gener- ating fixed receiver swap portfolios. Further, as part of this strategy, in  October and November 2010 we acquired approximately CHF 10  billion face value of US Treasury securities and approximately CHF 5 billion face value of UK Government bonds, with a weighted average maturity at the end of 2010 of approximately 8 years. This strategic investment portfolio was held on the balance sheet and was classified for accounting purposes as available-for-sale. The difference between the market value of these securities and their amortized cost did not affect net profit, but was included in the calculation of comprehensive income and accordingly affected our shareholders’ equity and our regulatory capital. In the third quarter of 2011, we sold these positions following a decline in long-term US dollar interest rates after the announce- ment of the US Federal Reserve’s “Operation Twist” (in this matu- rity extension program, the Federal Reserve intends to sell USD 400 billion of shorter-term Treasury securities by the end of June 2012 and use the proceeds to buy longer-term Treasury securities). The gain on sale amounted to CHF 722 million and was recognized as other income. Of this gain, CHF 433 million was allocated to Wealth Management and CHF 289 million to Retail & Corporate. ➔ Refer to the “Market risk“ section of this report for more information on our market risk measures and controls Market risk arising from management of consolidated capital t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R d e t i d u A Key ratios on capital and risk-weighted assets (RWA) are moni- tored by regulators and analysts and are key indicators of our fi- nancial strength. The majority of our capital and many of our assets are de- nominated in Swiss francs, but we also hold RWA and some eli- gible capital in other currencies, primarily US dollars, euros and British pounds. Any significant depreciation of the Swiss franc against these currencies would adversely impact our key ratios. Group Treasury’s mandate is to minimize adverse currency impacts on these ratios. The Group ALCO’s target to hedge these key ratios is based on a currency mix of capital that broadly reflects the currency distri- bution of our consolidated RWA. As the Swiss franc depreciates or appreciates against these currencies, the consolidated RWA increases or decreases relative to our capital. These currency fluc- tuations also lead to foreign currency translation gains or losses on consolidation, which are recorded through equity. Thus, our consolidated equity rises or falls in line with the fluctuations in the RWA. The capital of UBS AG (Parent Bank) itself is held predomi- 151 Risk, treasury and capital management Treasury management d e t i d u A nantly in Swiss francs in order to avoid any significant effects of currency fluctuations on its standalone financial results. Furthermore, Group Treasury has the mandate to generate a stable interest income flow from capital. The capital of the Parent Bank and its subsidiaries is placed via interest-bearing cash depos- its internally within our entity network. Group Treasury maintains a further portfolio of fixed receiver transactions to achieve a tar- get tenor profile and return on invested equity. To provide a benchmark for investments of equity, senior man- agement defines a replicating portfolio of target tenors by currency. The effective investment positions created by both internal cash de- posits and interest rate swaps are then measured against this bench- mark tenor replication portfolio. Mismatches between the two are measured, together with other non-trading interest rate risk posi- tions, against Group Treasury’s market risk limits (VaR and stress loss). On 31 December 2011, our consolidated equity was invested as follows: in Swiss francs (including most of the capital of the Parent Bank) with an average duration of approximately four years and fair value sensitivity of CHF 10.5 million per basis point; in US dollars with an average duration of approximately four years and a sensitivity of CHF 6.8 million per basis point; in euros with an average duration of approximately three years and a sensitivity of CHF 0.7 million per basis point; and in British pounds with a duration of approximately three years and a sensitivity of CHF 0.3 million per basis point. The sensitivities directly relate to the chosen durations. Corporate currency management d e t i d u A Our corporate currency management activities are designed to reduce adverse currency effects on our reported financial results in Swiss francs, within regulatory constraints. We focus on three principal areas of currency risk management: currency-matched funding of investments in non-Swiss franc assets and liabilities; sell-down of non-Swiss franc profits and losses; and selective hedging of anticipated non-Swiss franc profits and losses. Non- trading foreign exchange risks are managed under market risk limits, with the exception of Group Treasury management of con- solidated capital activity. Currency-matched 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 assets with the same currency of the liabilities from which they are funded, as far as it is practical and efficient to do so. A US dollar asset is thus typically funded in US dollars, while a euro liability is typi- cally 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. In 2011, we changed our approach to foreign currency transla- tion risk from match funding to net investment hedge account- ing. Net investment hedge accounting is now applied to core in- vestments in foreign currency to reduce exposures exceeding the level needed to provide the desired off-set to currency fluctua- tions in our key-capital ratios. ➔ Refer to “Note 23 Derivative instruments and hedge accounting” in the “Financial information” section of this report for more information d e t i d u A Sell-down of reported profits and losses Reported profit and losses are translated each month from their original transaction currencies into Swiss francs at exchange rates fixed at the prevailing month-end. Monthly income statement items of foreign subsidiaries and branches with a functional cur- rency other than Swiss franc are translated with month-end rates into Swiss franc. Weighted average rates for a year represent an average of twelve month-end rates, weighted according to the income and expense volumes of all foreign subsidiaries and branches with the same functional currency for each month. To eliminate earnings volatility on the retranslation of previously rec- ognized 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 simi- lar monthly sell-down process into their own reporting currencies. Retained earnings in operating entities with a reporting currency other than the Swiss franc are integrated and managed as part of our consolidated equity. Hedging of anticipated future reported profits and losses At any time, the Group ALCO may instruct Group Treasury to ex- ecute hedges to protect anticipated future profit and losses in foreign currencies against possible adverse trends of foreign ex- change rates from one reporting period to the next. Although intended to hedge future earnings, these transactions are ac- counted for as open currency positions and are subject to internal market risk VaR and stress loss limits. 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 31.12.11 Year ended 31.12.10 Min. Max. Average 31.12.11 Min. Max. Average 31.12.10 3 0 4 1 11 11 14 1 5 3 0 7 3 1 0 4 2 0 2 1 18 18 22 1 6 5 (2) 8 4 2 (1) 5 1 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect. 152 Capital management d e t i d u A Eligible capital must be available to support business activities, in accordance with both our own internal assessment and the require- ments of our regulators, in particular our lead regulator FINMA. We aim to maintain sound capital ratios at all times and therefore consider not only the current situation but also projected business and regulatory developments. The main tools we employ to manage our capital ratios are the active management of own shares, capital instruments, dividends and risk-weighted assets (RWA). d e t i d u A Capital adequacy management d e t i d u A Ongoing compliance with regulatory capital requirements and target capital ratios is central to our capital adequacy manage- ment. In this process, we manage our capital according to tier 1 and total capital target ratios. In the target-setting process, we take into account the current and future minimum requirements set by regulators as well as their buffer expectations. Furthermore, we consider our own internal assessment of aggregate risk expo- sure in terms of capital-at-risk, the views of rating agencies and comparisons with peer institutions, as well as the impact of ex- pected accounting policy changes. ➔ Refer to the “Risk management and control“ section and “Note 1c International Financial Reporting Standards and Interpretations to be adopted in 2012 and later” in the “Financial information” section of this report for more information Regulatory requirements We have published our 31 December 2011 capital and RWA in accordance with the Basel 2.5 market risk framework. These new requirements imposed additional deductions from our Bank for International Settlements (BIS) tier 1 and total capital and higher calculated BIS RWA as of 31  December 2011. The prior-period comparisons are however still shown according to the Basel II framework. To make a comparison possible, we also provide the 31 December 2011 amounts under the Basel II framework. FINMA regulatory capital requirements result in higher RWA than under the published BIS guidelines. There were no differ- ences in eligible capital between BIS guidelines and FINMA regula- tions as of 31 December 2011. During 2011, however, we were already subject to the Basel 2.5 framework under the FINMA regulation, which resulted in lower eligible capital than under BIS Basel II guidelines. During 2011, we complied with all externally imposed capital requirements. The Basel III revisions will have an impact on capital, mainly due to the exclusion of deferred tax assets, pension assets and hybrid tier 1 capital instruments for the calculation of common equity. They will also result in significantly higher RWA. Consequently, our common equity ratio on a Basel III basis would be materially lower than our current Basel 2.5 tier 1 ratio, if those requirements were effective immediately. It is therefore important to also con- sider the Basel III transitional arrangements, which effectively phase-in certain impacts on capital between 2014–2018. We continue to manage toward the 19% Swiss total capital requirement applicable in 2019 with a target capital structure consisting of 13% common equity tier 1 capital and 6% loss ab- sorbing capital. As of 31 December 2011, our estimated Basel III common equity tier 1 ratio based on a phased-in calculation stood at 10.8 %. This is expected to further improve by a combination of profit retention and efforts to reduce our RWA. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Capital ratios and RWA CHF billion 9 0 . 9 . 0 3 19.4 211 15.0 9 0 . 2 1 . 1 3 19.8 207 15.4 Basel II 0 1 . 6 . 0 3 20.4 16.4 205 0 1 . 9 . 0 3 20.2 16.7 208 0 1 . 3 . 1 3 20.0 16.0 209 8 0 . 2 1 . 1 3 302 15.0 11.0 9 0 . 6 . 0 3 248 17.7 13.2 9 0 . 3 . 1 3 278 14.7 10.5 Ratio in % Basel 2.5 0 1 . 2 1 . 1 3 20.4 17.8 199 1 1 . 3 . 1 3 19.4 17.9 203 1 1 . 6 . 0 3 19.5 18.1 206 1 1 . 9 . 0 3 20.0 18.4 207 1 1 . 2 1 . 1 3 21.6 19.6 198 1 1 . 2 1 . 1 3 241 17.2 15.9 1 1 . 9 . 0 3 284 14.2 13.2 2.5 2.7 3.5 3.5 3.9 4.1 4.1 4.4 4.4 4.6 4.8 5.4 5.4 5.4 5.4 Credit risk Non-counterparty related risk Market risk Operational risk BIS total capital ratio BIS tier 1 ratio FINMA leverage ratio 350 280 210 140 70 0 25 20 15 10 5 0 153 Risk, treasury and capital management Capital management Further, we have issued our first Basel III compliant note in Feb- ruary 2012 (USD 2 billion) or approximately 0.5% of our estimated Basel III RWA of CHF 380 billion as of 31 December 2011, which contributes to the targeted 6% loss absorbing capital. ➔ Refer to the “Regulatory developments“ section of this report for more information BIS capital ratios The BIS capital ratios compare eligible capital with total RWA. On 31 December 2011, our Basel II tier 1 capital ratio stood at 19.6%, compared with 17.8% on 31 December 2010. On a Basel 2.5 basis, our tier 1 ratio was 15.9%. This is the result of Basel 2.5 RWA being significantly higher than under Basel II and due to increased tier 1 deductions for securitization expo- sures. ➔ Refer to the discussions on “Capital adequacy management” 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 financial statements in accordance with International Financial Reporting Standards (IFRS), adjusted for regulatory differences. Under IFRS, subsidiaries and special purpose entities that are directly or indi- rectly controlled by UBS must be consolidated, whereas for regu- latory capital purposes, 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 2.5 Pillar 3” section of this report for more information On 31 December 2011, our Basel 2.5 RWA were CHF 241.0 billion compared with CHF 198.9 billion on a Basel II basis at the end of 2010, as an increase in RWA of CHF 42.5 billion due to the introduction of Basel 2.5 eclipsed a reduction of CHF 0.4 billion in RWA under Basel II. Credit risk The Basel II RWA for credit risk amounted to CHF 124.3 billion on 31 December 2011, compared with Basel II RWA of CHF 119.9 billion on 31 December 2010. This increase of CHF 4.4 billion was mainly attributable to derivatives and the repo-style exposures, partly offset by reduced securitization exposures. The introduction of Basel 2.5 added a further CHF 2.5 billion of RWA due to higher risk weights for securitization positions held for trading that at- tract banking book capital charges as well as higher risk weights for re-securitization exposures. ➔ Refer to the “Credit risk” section of this report for more information Non-counterparty related assets The Basel II RWA for non-counterparty related assets amounted to  CHF 6.1 billion on 31 December 2011 compared with CHF 6.2 billion on 31 December 2010. The Basel 2.5 framework had no impact on this RWA category. Market risk The Basel II market risk RWA decreased by CHF 11.6 billion to CHF 9.2 billion on 31 December 2011, mainly due to reduced credit spread risk. The new Basel 2.5 regulations increased RWA by CHF 40.0 billion to CHF 49.2 billion. The CHF 40.0 billion RWA increase between the Basel II and Basel 2.5 framework was composed of the following: (i) a new incremental risk charge for default and rating migration risk of trading book positions (CHF 19.6 billion of RWA); (ii) an additional stressed VaR requirement, taking into account a one-year observation period relating to significant losses (CHF 13.1 billion of RWA); (iii) a comprehensive risk measure requirement for correlation trad- ing (CHF 8.6 billion of RWA); and (iv) a negative adjustment of CHF 1.3 billion for RWA relief in VaR. ➔ Refer to the “Market risk” section of this report for more information Capital adequacy CHF million, except where indicated BIS core tier 1 capital BIS tier 1 capital BIS total capital BIS core tier 1 capital ratio (%) 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). 154 Basel 2.5 31.12.11 34,014 38,370 41,564 14.1 15.9 17.2 240,962 126,804 6,050 49,241 58,867 Basel II 31.12.11 34,623 38,980 42,783 17.4 19.6 21.6 198,494 124,337 6,050 9,240 58,867 Basel II 31.12.10 30,420 35,323 40,542 15.3 17.8 20.4 198,875 119,919 6,195 20,813 51,948 Reconciliation of IFRS equity to BIS capital d e t i d u A CHF million IFRS equity attributable to UBS shareholders Treasury shares at cost / equity classified as obligation to purchase own shares Own credit, net of tax 1 Unrealized gains from Financial investments available-for-sale 1 Unrealized (gains) / losses from cash flow hedges 1 Other 2 BIS core tier 1 capital prior to deductions of which: paid-in share capital of which: share premium, retained earnings, currency translation differences and other elements Less: treasury shares / deduction for own shares 3 Less: goodwill & intangible assets Less: securitization exposures 4 Less: other deduction items 5 BIS core tier 1 capital Hybrid tier 1 capital of which: non-innovative capital instruments of which: innovative capital instruments BIS tier 1 capital Upper tier 2 capital Lower tier 2 capital Less: securitization exposures 4 Less: other deduction items 5 BIS total capital Basel 2.5 31.12.11 Basel II 31.12.11 53,447 1,198 (1,842) (228) (2,600) (798) 49,177 383 48,794 (2,131) (9,695) (2,627) (711) 34,014 4,356 1,490 2,866 38,370 388 6,145 (2,627) (711) 41,564 53,447 1,198 (1,842) (228) (2,600) (798) 49,177 383 48,794 (2,131) (9,695) (2,017) (711) 34,623 4,356 1,490 2,866 38,980 388 6,145 (2,017) (711) 42,783 Basel II 31.12.10 46,820 708 (205) (181) (1,063) 286 46,365 383 45,982 (2,993) (9,822) (2,385) (744) 30,420 4,903 1,523 3,380 35,323 110 8,239 (2,385) (744) 40,542 1 IFRS equity components which are not recognized for capital purpose, adjusted for changes in foreign exchange. 2 Consists of: i) qualifying non-controlling interests; ii) the netted impact of the change in scope of con- solidation; iii) other adjustments due to reclassifications and revaluations of participations and prudential valuation and anticipated dividend payment. 3 Consists of: i) net long position in own shares held for trading pur- poses; ii) own shares bought for unvested or upcoming share awards; iii) and accruals built for upcoming share awards. 4 Includes a 50% deduction of the fair value of our option to acquire the SNB StabFund’s equity (CHF 1,629 million on 31 December 2011 and CHF 1,781 million on 31 December 2010). 5 Positions to be deducted as 50% from tier 1 and 50% from total capital mainly consist of: i) net long position of non-consoli- dated participations in the finance sector; ii) expected loss on advanced internal ratings-based portfolio less general provisions (if difference is positive); iii) expected loss for equities (simple risk weight method). Operational risk Basel II RWA for operational risk increased to CHF 58.9 billion on 31 December 2011 from CHF 51.9 billion on 31 December 2010, as agreed with FINMA. This increase is primarily attributable to changes made to scenario assumptions, following the unauthor- ized trading incident in the third quarter of 2011, partially offset by enhancements made to our models. The Basel 2.5 framework had no impact on this RWA category. d e t i d u A ➔ Refer to the “Operational risk” section of this report for more information Eligible capital Tier 1 capital Our Basel II tier 1 capital amounted to CHF 39.0 billion on 31 De- cember 2011, compared with CHF 35.3 billion on 31 Decem- ber 2010, an increase of CHF 3.7 billion. The main positive con- tributor to this increase was the CHF 4.2 billion net profit attributable to UBS shareholders. Further increases were due to positive currency effects, own share related components and a reduction of low rated securitization exposures, mainly resulting from sales. These effects were partially offset by the reversal of own credit gains of CHF 1.5 billion, a redemption of hybrid tier 1 capital of CHF 0.5 billion, dividend accruals, prudential valuation adjustments and other items. The Basel 2.5 framework resulted in additional tier 1 deductions of CHF 0.6 billion. 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 cap- ital, specific adjustments must be made to equity attributable to our shareholders as defined by IFRS. The most notable adjust- ments are the deductions for goodwill, intangible assets, invest- ments in unconsolidated entities engaged in banking and finan- cial activities and own credit effects on liabilities designated at fair value (see further details in the “Reconciliation of IFRS equity to BIS capital” table). d e t i d u A Hybrid tier 1 capital Hybrid tier 1 instruments represent innovative and non-innovative perpetual instruments. Hybrid tier 1 instruments are perpetual in- struments which can only be redeemed if they are called by the issuer after having received regulatory approval. If such a call is not exercised at the call date, the terms might include a change from fixed to floating coupon payments and, in the case of inno- vative instruments only, a limited step-up of the interest rate. 155 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Risk, treasury and capital management Capital management d e t i d u A Non-innovative instruments do not have a step-up of the interest rate and are therefore viewed as having a higher equity character- istic for regulatory capital purposes. The instruments are issued either through trusts or our subsidiaries and rank senior to our equity in dissolution. Payments under the instruments are subject to adherence to our minimum capital ratios and other require- ments. Any missed payment is non-cumulative. As of 31 December 2011, our hybrid tier 1 instruments amounted to CHF 4.4 billion, down from CHF 4.9 billion as of 31 December 2010, mainly resulting from the redemption of a USD 0.5 billion hybrid tier 1 instrument in June 2011. Under IFRS, these instruments are accounted for as equity attributable to non-controlling interests. d e t i d u A Tier 2 capital The major element in tier 2 capital is subordinated long-term debt. Tier 2 instruments have been issued in various currencies and with a range of maturities across capital markets globally. Tier 2 instruments rank senior to both our shares and to hybrid tier 1 instruments but are subordinated to all our senior obligations. Our Basel II tier 2 capital, net of tier 2 deductions amounted to  CHF 3.8 billion on 31 December 2011, compared with CHF 5.2 billion on 31 December 2010, a decrease of CHF 1.4 billion. In 2011, we redeemed a floating-rate USD 1.6 billion subordinated bond. The change is further impacted by currency fluctuations, a reduction of low rated securitization exposures, mainly resulting from sales, and an excess of general provisions over expected losses. The Basel 2.5 framework resulted in additional tier 2 de- ductions of CHF 0.6 billion. In order to improve the quality of capital, regulators have pro- posed new requirements for capital instruments and created a new category of contingent capital instruments. The changes pro- posed are designed to increase resilience against a financial crisis, and are expected to provide a buffer to maintain the banks as going concerns or allow for an orderly liquidation. Regulators view these instruments as additional protection against the sys- temic risks of large banks. On 22 February 2012, we issued USD 2 billion of tier 2 notes at an initial rate of 7.25%. This 10-year security, which does not dilute the value of the equity held by the bank’s shareholders, qualifies as a loss-absorbing instrument that complies with Basel III regulations and counts as progressive buffer capital under the Swiss draft regu- lations for its systemically relevant banks. The notes will remain as debt throughout their life, subordinate to the bank’s senior debt. Their principal amount would be written down to zero if at any time the bank’s core tier 1 / common equity ratio falls below 5%, if FINMA determines that a writedown is necessary to ensure UBS’s viability as defined, or if UBS receives a commitment of governmental support that FINMA determines to be necessary to ensure UBS’s viability. ➔ Refer to the “Regulatory developments” section of this report for more information with regard to regulation on systemically important banks and “Note 32 Events after the reporting period” in the “Financial Information” section of this report for more  information on the issuance of these tier 2 notes Transfer of capital within UBS Group Under Swiss company law, UBS is organized as an “Aktiengesell- schaft”, a corporation that has issued shares of common stock to investors. UBS AG is the parent company of the Group. The legal entity structure of the Group is designed to support our business- es within an efficient legal, tax, regulatory and funding frame- work. We enter into intragroup transactions to provide funding and capital to individual UBS entities. As of 31 December 2011, UBS has not been subject to any material restrictions or other major impediments concerning the transfer of funds or regulatory capital within the Group apart from those which apply to these entities by way of local laws and regulations. FINMA leverage ratio FINMA requires a minimum leverage ratio of 3% at a Group level and expects that, in normal times, the ratio will be well above this. This target is to be achieved by 1 January 2013 at the latest. On 31 December 2011, our Group FINMA leverage ratio im- proved to 5.4%, compared with the 31 December 2010 ratio of 4.4%. During the year, average total assets prior to deductions de- creased by CHF 5.5 billion to CHF 1,392.9 billion. The average total adjusted assets fell by CHF 80 billion to CHF 714.2 billion. The table FINMA leverage ratio CHF billion, except where indicated Total balance sheet assets (IFRS) 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 FINMA tier 1 capital (at year-end) 5 FINMA leverage ratio (%) Average 4Q11 Average 4Q10 1,392.9 (436.6) (163.6) (65.8) (12.8) 714.2 38.4 5.4 1,398.5 (410.1) (161.6) (20.1) (12.4) 794.2 35.3 4.4 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 “Reconciliation of IFRS equity to BIS capital” table for more information on deductions of assets from FINMA tier 1 capital corresponding to Basel 2.5 tier 1 capital on 31 December 2011 and to Basel II tier 1 capital on 31 December 2010. 5 FINMA tier 1 capital corresponds to Basel 2.5 tier 1 capital as of 31 December 2011 and to Basel II tier 1 capital as of 31 December 2010. 156 “FINMA leverage ratio” shows the FINMA leverage ratio calculation for the Group. d e t i d u A Equity attribution framework The equity attribution framework reflects our objectives of main- taining a strong capital base and guiding businesses toward ac- tivities with the best balance of profit potential, risk and capital usage. d e t i d u A Within this framework, the BoD attributes equity to the busi- nesses after considering their risk exposure, risk-weighted assets (RWA) usage, asset size, goodwill and intangible assets. The design of the equity attribution framework enables us to do the following: – calculate and assess return on attributed equity (RoaE) in each of our business divisions; RoaE is disclosed for all business divi- sions and units; – integrate Group-wide capital management activities with those at business division and business unit levels; – measure current period and historical performance in a consis- tent manner across business divisions and business units; and – make better comparisons between our businesses and those of our competitors. d e t i d u A In our capital allocation methodology, we use three drivers to allocate tangible equity to our business divisions in order to pro- vide a comprehensive view of the resource usage and risk profile of our businesses. We use capital ratio and leverage ratio targets as well as risk-based capital, which is an internal measure of risk similar to economic capital. In addition to tangible equity, we allocate equity to support goodwill and intangibles. After reviewing the results of this formulaic approach, the Group ALCO recommends and the BoD makes discretionary ad- justments to the final equity attribution to reflect our views of the likely future risk profile and resource usage of the businesses. The BoD currently makes equity attribution decisions on a quarterly basis. The amount of equity attributed to all businesses corresponds to the amount we believe is required to maintain a strong capital base and support our businesses adequately. If the total equity attributed to the business divisions and the Corporate Center differs from the Group’s actual equity during a given period, the difference (positive or negative) is reflected as a separate line item. Further, the equity attribution framework continues to be forward-looking. Therefore, with regard to the RWA and asset drivers, we will be taking into account the impacts of planned Basel III requirements in 2012. In November 2011, the BoD approved a refinement in the methodology of equity attribution. The intent of this refinement is to measure the RoaE of each business in a way which is more comparable to the business segments of international competi- tors and reflects the returns generated by businesses on resources under their direct control. Accordingly, in the future equity attributed to the Corporate Center is expected to grow due to several factors, including our decision to allocate equity related to our deferred tax assets and deferred pension expenses centrally. This expected increase also includes the capital related to our legacy portfolio assets following the transfer from the Investment Bank to the Corporate Center, as well as capital related to our option to purchase equity in the SNB StabFund. In addition, with regard to the RWA driver, in the future the Corporate Center will carry incremental common equity not allo- cated to the business divisions, reflecting additional equity that we have targeted above a 10% Basel III common equity tier 1 ratio. The amount of equity attributed to each business division is an important input into the calculation of economic profit for that business division. Broadly speaking, economic profit equals profit minus the product of attributed equity and the cost of equity. As outlined in the table “Average attributed equity”, the amount of average equity attributed to the Investment Bank, Wealth Man- agement & Swiss Bank and the Corporate Center increased by CHF 5 billion, CHF 1 billion and CHF 1 billion, respectively, from the fourth quarter of 2010 to the fourth quarter of 2011. The increase in the Investment Bank was influenced by RWA increases related to the implementation of the Basel 2.5 frame- t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Average attributed equity CHF billion Wealth Management Retail & Corporate Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Corporate Center Average equity attributed to the business divisions and Corporate Center Difference Average equity attributable to UBS shareholders 4Q11 5.0 5.0 10.0 8.0 2.5 32.0 1 4.0 56.5 (3.9) 52.6 4Q10 4.4 4.6 9.0 8.0 2.5 27.0 3.0 49.5 (2.2) 47.3 1 Approximately CHF 4.5 billion of the average equity attributed to the Investment Bank relates to the legacy portfolio that was transferred to the Corporate Center before the end of 2011 and will be managed and reported with effect from the first quarter of 2012 as a separate segment within the Corporate Center. 157 Risk, treasury and capital management Capital management work. The increase in Wealth Management & Swiss Bank was due to the expectation that the capital requirement for this business division will increase, taking into account current regulatory trends and capital positions of relevant competitors. The increase in the Corporate Center was related to the trends in risk-based capital and RWA seen under this segment. 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. The table below lists all shareholder-approved issuances of shares at year-end 2011. UBS shares Holding of UBS shares The majority of our tier 1 capital comprises share premium and retained earnings attributed to UBS shareholders. As of 31 De- cember 2011, total IFRS equity attributable to our shareholders amounted to CHF 53,447 million, and was represented by a to- tal of 3,832,121,899 shares issued, of which 2.2% were held by UBS. In 2011, shares issued were increased by a total of 1,281,386 shares due to exercises of employee options. Each share has a par value of CHF 0.10 and generally entitles the holder to one vote at the shareholders’ meeting as well as a proportionate share of dis- tributed dividends. There are no preferential rights for shareholders and no other classes of shares are issued by the Parent Bank. ➔ Refer to the “Shareholders’ participation rights” section of this report for more information UBS holds own shares for two main purposes: in Group Treasury to cover employee share and option programs; and in the Invest- ment Bank, to a limited extent, for trading purposes where the Investment Bank engages in market-making activities in UBS shares and related derivative products. The holding of treasury shares on 31 December 2011 increased to 84,955,551, or 2.2% of shares issued, from 38,892,031, or 1.0%, on the same date one year prior. As of 31 December 2011, employee options and stock appre- ciation rights to receive 10.5 million shares were exercisable. Shares held in treasury or newly shares issued are delivered to the employee at exercise. On 31 December 2011, 75.7 million shares were available for this purpose, and an additional 148.6 million unissued shares in conditional share capital were assigned to Shareholder-approved issuance of shares Conditional capital SNB warrants Employee equity participation plans of UBS AG Conversion rights / warrants granted in connection with bonds Total UBS shares Shares outstanding Ordinary shares issued of which: issue of shares for employee option plans for the year ended Treasury shares Shares outstanding Shareholders equity (CHF million) Equity attributable to UBS shareholders Less: goodwill and intangible assets Tangible shareholders’ equity Book value per share (CHF) Total book value per share Tangible book value per share 158 Maximum number of shares to be issued Year approved by shareholder general meeting % of shares issued 31.12.11 100,000,000 148,639,326 380,000,000 628,639,326 2009 2006 2010 2.61 3.88 9.92 16.44 31.12.11 31.12.10 3,832,121,899 3,830,840,513 1,281,386 84,955,551 76,755 38,892,031 3,747,166,348 3,791,948,482 53,447 9,695 43,752 14.26 11.68 46,820 9,822 36,998 12.35 9.76  cover future employee option exercises. At the end of 2011, the shares available covered all exercisable employee obligations. The presentation in the table “Treasury share activities” shows the purchase of our shares by Group Treasury and does not in- clude the activities of the Investment Bank. by the BoD to the shareholders and is subject to their approval at the Annual General Meeting in May 2012. We intend to pro- pose a dividend for the financial year 2011 of CHF 0.10 per share. Share liquidity Treasury shares held by the Investment Bank The Investment Bank, acting as a liquidity provider to the equity index futures market and as a market-maker in our shares and derivatives, has issued derivatives linked to UBS stock. Most of these instruments are classified as cash-settled derivatives and are primarily issued to meet client demand and for trading purposes. To hedge the economic exposure, a limited number of our shares are held by the Investment Bank. ➔ Refer to Note 8 “Earnings per share and shares outstanding” for more information Distributions to shareholders The decision whether to pay a dividend, and the level of the dividend, are dependent on our targeted capital ratios and cash flow generation. The decision on dividend payments is proposed During 2011, the daily average volume traded in UBS shares on the SIX Swiss Exchange (SIX) was 15.6 million shares. On the New York Stock Exchange (NYSE), it was 1.0 million shares. As the SIX trades a higher volume of UBS shares, it is expected to remain the main factor determining the movement in our share price. During the hours in which both the SIX and NYSE are simulta- neously open for trading (currently 3:30 p.m. to 5:30 p.m. Central European Time), price differences are likely to be arbitraged away by professional market-makers. The NYSE price will therefore typ- ically be expected to depend on both the SIX price and the prevail- ing US dollar / Swiss franc exchange rate. When the SIX is closed for trading, traded volumes will typically be lower. However, the specialist firm making a market in UBS shares on the NYSE is re- quired to facilitate sufficient liquidity and maintain an orderly market in UBS shares. Treasury share activities Month of purchase January 2011 February 2011 March 2011 April 2011 May 2011 June 2011 July 2011 August 2011 September 2011 October 2011 November 2011 December 2011 Treasury shares purchased for employee share and option  participation plans and acquisitions 1 Total number of shares Number of shares Average price in CHF Number of shares (cumulative) Average price in CHF 0 19,040,000 42,870,000 0 1,914,494 34,015,961 4,200,000 9,840,000 13,256,947 0 0 0 0.00 18.53 17.48 0.00 15.83 15.27 13.06 11.69 9.96 0.00 0.00 0.00 0 19,040,000 61,910,000 61,910,000 63,824,494 97,840,455 102,040,455 111,880,455 125,137,402 125,137,402 125,137,402 125,137,402 0.00 18.53 17.80 17.80 17.74 16.88 16.73 16.28 15.61 15.61 15.61 15.61 1 This table excludes market-making and related hedging purchases by UBS. The table also excludes UBS shares purchased by investment funds managed by UBS for clients in accordance with specified investment strategies that are established by each fund manager acting independently of UBS; and also excludes UBS shares purchased by pension and retirement benefit plans for UBS employees, which are managed by a board of UBS management and employee representatives in accordance with Swiss law guidelines. UBS’s pension and retirement benefit plans purchased 378,000 UBS shares during the year and held 2,014,000 UBS shares as of 31 December 2011. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Trading volumes 1,000 shares SIX Swiss Exchange total SIX Swiss Exchange daily average NYSE total NYSE daily average Source: Reuters 31.12.11 3,974,639 15,648 239,713 951 For the year ended 31.12.10 4,166,417 16,403 296,517 1,177 31.12.09 5,105,358 20,340 222,052 881 159 Risk, treasury and capital management Capital management 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) 19.13 12.23 11.62 11.41 12.23 15.75 11.80 12.76 15.75 17.60 16.55 17.43 17.60 19.13 18.60 19.13 17.57 18.60 17.83 18.53 18.60 17.50 19.65 19.34 19.65 17.51 17.00 45.98 24.00 25.76 35.11 45.98 71.95 61.05 66.88 71.55 71.95 9.34 9.80 10.60 9.80 9.84 9.34 9.34 9.93 12.70 14.37 14.37 15.66 15.93 15.43 16.26 16.86 15.43 13.31 14.92 13.94 14.15 13.31 8.20 14.76 12.50 10.56 8.20 10.67 10.67 15.18 20.96 21.52 42.69 42.69 53.67 63.72 59.76 11.18 11.18 11.18 11.18 11.21 10.54 10.54 11.67 13.11 15.33 15.33 16.34 17.29 16.48 16.48 18.45 16.93 15.35 15.35 16.68 14.46 17.14 16.05 16.05 18.97 13.29 10.70 14.84 14.84 18.46 21.44 25.67 46.60 46.60 55.67 65.46 64.21 20.08 14.21 12.55 12.79 14.21 18.63 14.75 16.84 18.63 20.03 19.62 20.01 20.03 20.08 19.99 20.08 18.54 18.48 18.48 18.47 17.75 16.84 19.31 19.18 19.31 15.82 15.31 46.40 21.30 23.07 36.02 46.40 66.26 58.01 62.34 66.26 64.30 10.42 10.47 11.33 10.60 10.47 10.42 10.42 13.18 16.08 17.20 17.20 17.82 17.76 16.11 17.73 18.05 16.11 12.26 14.99 13.04 12.26 12.40 7.06 15.03 11.25 9.40 7.06 8.33 8.33 12.22 20.41 22.33 43.50 43.50 49.84 58.73 55.40 11.83 11.83 11.83 12.47 12.62 11.43 11.43 14.48 16.48 18.26 18.26 19.32 20.00 18.05 18.05 19.85 17.96 16.47 16.47 17.03 13.22 16.28 15.51 15.51 18.31 12.21 9.43 14.30 14.30 17.54 20.66 28.80 46.00 46.00 53.25 60.01 59.43 2011 Fourth quarter 2011 December November October Third quarter 2011 September August July Second quarter 2011 June May April First quarter 2011 March February January 2010 Fourth quarter 2010 Third quarter 2010 Second quarter 2010 First quarter 2010 2009 Fourth quarter 2009 Third quarter 2009 Second quarter 2009 First quarter 2009 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 1 Historical share price adjusted for the rights issue and stock dividend 2008. 160 Basel 2.5 Pillar 3 Introduction Basel 2.5 The capital adequacy framework consists of three pillars, each of which focuses on a different aspect of capital adequacy. Pillar 1 provides 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 review process, emphasizing the need for a qualitative approach to supervising banks. The aim of Pillar 3 is to encourage market discipline by re- quiring banks to publish a range of disclosures on risk and capital. The Swiss Financial Market Supervisory Authority (FINMA) re- quires us to publish comprehensive quantitative and qualitative Pillar 3 disclosures at least annually, as well as an update of quan- titative disclosures and any significant changes to qualitative in- formation at least semi-annually. In certain cases, our Pillar 3 disclosures may differ from the way we manage our risks and to how these risks are disclosed in our quarterly reports and in other sections of this annual report. Revisions to the Basel II market risk framework published in July 2009 and the enhancements to the Basel II framework (commonly referred to as Basel 2.5), introduced new capital requirements to increase the amount of regulatory capital in the banking system. The new measures under Basel 2.5 include: – a stressed value-at-risk (VaR) requirement taking into account a one year observation period relating to significant losses; – an incremental risk charge, which accounts for default and rat- ing migration risk of trading book positions; – a comprehensive risk measure to capture correlated defaults and other complex price risk in the correlation portfolio; – a revised requirement for the other securitization positions held for trading, in line with the banking book capital charges; and – higher risk weights for re-securitization exposures across the trading and banking book to better reflect the inherent risk in these products. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Overview of disclosures The following table provides an overview of our Basel 2.5 Pillar 3 disclosures in our Annual Report 2011: Basel 2.5 Pillar 3 requirement Disclosure in the Annual Report 2011 Capital structure Capital adequacy Risk management objectives, policies and methodologies ­(qualitative ­disclosures) Credit risk Investment positions Market risk Securitization Operational risk Interest rate risk in the banking book “Capital management” section “Capital management” and “Basel 2.5 Pillar 3” sections “Risk management and control” section “Risk management and control” and “Basel 2.5 Pillar 3” section “Basel 2.5 Pillar 3” section “Risk management and control” and “Basel 2.5 Pillar 3” sections “Basel 2.5 Pillar 3” section “Risk management and control” section “Risk management and control” section 161 Risk, treasury and capital management Basel 2.5 Pillar 3 These additional measurements are described and reported be- low. The first public disclosure of this information was required as of 31 December 2011; comparatives are not required. Besides introducing these additional charges, Basel 2.5 also had an impact on how VaR is converted into market risk RWA: (i) there is only a single multiplier applied to VaR compared with separate multipliers for general market risk and specific market risk that were applied under Basel II; and (ii) the securitization positions in the trading book captured under the revised treatment, in line with banking book rules, may be excluded from the specific risk calculation in VaR. Each of these led to a reduction in the baseline VaR charge, and therefore also have to be taken into account when looking at the effect of the introduction of Basel 2.5. Risk exposure measures and derivation of risk-weighted assets As noted above, measures of risk exposure may differ depending on the purpose for which exposures are calculated: financial ac- counting under International Financial Reporting Standards (IFRS), determination of our regulatory capital or internal management of the firm. Our Basel 2.5 Pillar 3 disclosures are generally based on the measures of risk exposure that are used to calculate the regulatory capital that is required to underpin those risks. the BIS naming convention equate to “central governments and central banks” as used under the Swiss and EU regulations. Similarly, “banks” equate to “institutions” and “residential mort- gages” equate to “claims secured on residential real estate.” Although we determine published risk-weighted assets (RWA) according to BIS guidelines, our calculation of the regulatory cap- ital requirement is based on the regulations of FINMA, which are more conservative and therefore result in higher RWA. Generally, the scope of consolidation for purposes of calculat- ing these regulatory capital requirements follows the IFRS con- solidation 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 subsidiaries in the Group consolidated for IFRS purposes are listed in “Note 33 Significant subsidiaries and associates” in the “Finan- cial information” section of this report. The main differences in the basis of consolidation for IFRS and regulatory capital purposes relate to the following entity types, and apply regardless of our level of control: – Real estate and commercial companies and investment schemes are not consolidated for regulatory capital purposes but are risk-weighted. – Insurance companies are not consolidated for regulatory capi- tal purposes but are deducted from capital. The table on the next page provides a more detailed summary of the approaches we use for the main risk categories for the de- termination of regulatory capital. – Securitization vehicles are not consolidated for regulatory cap- ital purposes but are treated under the securitization frame- work. The naming conventions for the exposure segments used in the following tables are based on BIS rules and differ from those under Swiss and EU regulations. For example, “sovereigns” under – Joint ventures that are controlled by two ventures are fully consolidated for regulatory capital purposes, whereas they are accounted for under the equity method for IFRS. 162 Category Credit risk UBS approach Under the advanced internal ratings-based 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 to measure the credit risk exposures to third parties on over-the-counter derivatives and repurchase-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 under- pinning 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 framework. Equity exposures outside trading book Simple risk weight method under the advanced internal ratings-based approach. Market risk Operational risk Securitization exposures Regulatory capital requirement is derived from our VaR. It includes regulatory VaR, stressed VaR, an incremental risk charge and the comprehensive risk measure. We have developed a model to quantify operational risk, which meets the regulatory capital standard under the advanced measurement approach. Securitization exposures in the banking book are assessed using advanced internal ratings-based approach, applying risk weights based on external ratings. Securitization exposures in the trading book are assessed for their general market risk as well as for their specific risk. The capital charged for the general market risk is determined by the VaR method, whereas the capital charge for the specific risk is determined using the comprehensive risk measure method or the internal ratings-based approach applying risk weights based on external ratings. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 163 Risk, treasury and capital management Basel 2.5 Pillar 3 Risk-weighted assets The “Detailed segmentation of BIS risk-weighted assets” table provides a granular breakdown of our risk-weighted assets. The table also shows the net exposure at default (EaD) per category for the current disclosure period, which forms the basis for the calculation of the risk-weighted assets. ➔ Refer to the “Capital management” section of this report for more information ➔ Refer to the table “Derivation of regulatory net credit exposure” for BIS exposure segment definitions Credit risk requirements. These include, for example, the application of regulatory prescribed floors and multipliers, and differences with respect to eligibility criteria and exposure definitions. The exposure information presented in this section differs therefore from that disclosed in the “Risk management and control” sec- tion of this report. Similarly the regulatory capital prescribed measure of credit risk exposure also differs from that required under IFRS. For the calculation of derivative exposures to determine our required regulatory capital, we apply the effective expected posi- tive exposure as defined in Annex 4 to the Basel framework. For a small portion of the derivatives portfolio, we also apply the current exposure method based on the replacement value of de- rivatives in combination with a regulatory prescribed add-on. The tables in this section provide details on the exposures used to determine the firm’s credit risk regulatory capital. The para­ meters applied under the advanced internal ratings-based ap- proach are generally based on the same methodologies, data and systems we use for internal credit risk quantification, ex- cept where certain treatments are specified by regulatory The regulatory net credit exposure detailed in the tables in this section is shown as the regulatory exposure at default after apply- ing collateral, netting and other eligible risk mitigants permitted by the relevant regulations. This section also presents information on impaired and defaulted assets in a segmentation which is con- sistent with the regulatory capital calculation. Detailed segmentation of BIS risk-weighted assets CHF million Credit risk Sovereigns Banks Corporates Retail Residential mortgages Lombard lending Other retail Securitization / Re-securitization exposures 1 Banking book exposures Trading book exposures Non-counterparty related risk Settlement­risk­(failed­trades) Equity exposures outside trading book 2 Market risk Value-at-risk (VaR) Stressed value-at-risk (sVaR) Incremental risk charge (IRC) Comprehensive risk measure (CRM) Operational risk 3 Total BIS Additional RWA according to FINMA regulations 4 Total FINMA RWA 5 31.12.11 Net EaD Basel 2.5 RWA Advanced IRB ­approach Standardized approach 556,577 107,479 63,651 183,816 201,632 123,650 73,681 4,300 19,684 10,165 9,519 17,417 80 881 23,440 331 2,158 16,617 4,334 1,854 0 2,481 6,050 58 92,688 8,959 11,848 58,768 13,112 9,311 3,345 457 7,287 4,147 3,139 21 3,310 49,241 7,935 13,117 19,564 8,625 58,867 594,639 211,414 29,548 31.12.10 Basel II RWA Total 109,096 6,577 14,528 71,542 16,450 10,871 3,074 2,504 7,085 7,085 6,195 47 3,691 20,813 20,813 51,948 198,875 16,135 215,010 Total 116,129 9,290 14,006 75,385 17,447 11,164 3,345 2,937 7,287 4,147 3,139 6,050 79 3,310 49,241 7,935 13,117 19,564 8,625 58,867 240,962 15,475 256,437 1 On 31 December 2011, CHF 5.3 billion of the securitization exposures, including CHF 1.6 billion for the option to acquire the SNB StabFund equity, were deducted from capital and therefore did not generate RWA (on 31­December­2010­a­total­of­CHF­4.8­billion­of­securitization­exposures­were­deducted­as­well­as­CHF­1.8­billion­for­the­option­to­acquire­the­SNB­StabFund).­ ­ 2 Simple risk weight method. 3 Advanced measure- ment approach. 4­Reflects­an­additional­charge­of­10%­on­credit­risk­RWA for exposures­treated­under­the­standardized­approach,­a­surcharge­of­200%­for­RWA­of­non-counterparty­related­assets­and­additional­ requirements for market risk. 5­As­of­31­December­2011,­the­FINMA­tier 1­ratio­amounts­to­15.0%­(15.6%­for­2010,­Basel­II)­and­the­FINMA­total­capital­ratio­to­16.2%­(18.0%­for­2010,­Basel­II). 164 Credit risk exposures and RWA This table shows the average exposure and the derivation of RWA from the regulatory gross credit exposure. 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 Cash collateral receivables on derivative instruments Securities financing Traded products Trading portfolio assets Financial investments available-for-sale 4 Accrued income and prepaid expenses Other assets Other products Total 31.12.11 Total 31.12.10 Exposure Average regulatory risk weighting 2 RWA Average regulatory gross credit exposure Regulatory gross credit exposure Less: regulatory credit risk offsets and adjustments 1 Regulatory net credit exposure 38,266 20,026 254,595 7,373 43,258 363,518 75,172 8,521 58,614 38,550 21,102 259,474 9,093 43,435 371,654 72,558 6,633 55,954 142,307 135,144 6,874 57,891 6,053 25,000 95,818 601,644 605,386 7,145 51,589 6,040 13,792 78,565 585,364 573,174 (9,185) (3,460) (5,090) (3,252) (20,986) (67) (53) (7,680) (7,800) (28,786) (31,608) 38,550 11,917 256,014 4,003 40,184 350,668 72,558 6,633 55,954 135,144 7,077 51,589 5,987 6,112 70,765 556,577 541,565 3% 24% 14% 52% 33% 16% 50% 16% 11% 32% 59% 3% 80% 99% 23% 21% 20% 1,217 2,827 36,905 2,084 13,317 56,350 36,280 1,034 5,947 43,260 4,152 1,507 4,778 6,081 16,518 116,129 109,096 1 Mainly includes margin accounts for derivatives. 2 The derivation of RWA is based on the various credit risk parameters of the advanced IRB approach and the standardized approach. 3 Includes guarantees, loan commitments and forward starting transactions. 4 Excludes equity positions. 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 instruments and also by geographical regions. The latter distribution is based on the legal domicile of the counterparty. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Latin America Asia Pacific Middle East and Africa Total regulatory gross credit exposure Total regulatory net credit exposure CHF million Cash and balances with central banks Due from banks Loans Financial assets designated at fair value Off-balance sheet 2 Banking products Derivatives Cash collateral receivables on derivative instruments Securities financing Traded products Trading portfolio assets Financial investments available-for-sale 3 Accrued income and prepaid expenses Other assets Other products Total 31.12.11 Total 31.12.10 Switzerland 24,872 522 160,322 7,097 192,814 6,916 228 5,004 12,148 319 402 4,498 5,219 Rest of Europe 6,778 10,602 20,900 1,885 8,299 48,464 31,227 4,451 17,575 53,253 2,260 12,928 1,191 2,516 North America 1 3,572 3,835 55,337 6,802 23,389 92,936 25,034 1,508 27,073 53,615 2,820 29,153 4,250 6,424 18,895 42,647 210,181 120,612 189,198 199,486 127,115 182,340 3,328 5,770 13,825 328 3,813 195 5,480 54 395 178 3,610 23 442 6,124 27,064 4,253 836 28 444 7,774 145 4,860 1,308 12,778 126 2 18 3 150 7,582 6,149 1,833 9,151 167 319 11,470 51,312 51,874 772 272 996 2,041 107 35 12 31 184 6,479 6,209 38,550 21,102 259,474 9,093 43,435 371,654 72,558 6,633 55,954 135,144 7,145 51,589 6,040 13,792 78,565 585,364 573,174 1 Includes the Caribbean. 2 Includes guarantees, loan commitments and forward starting transactions. 3 Excludes equity positions. 38,550 11,917 256,014 4,003 40,184 350,668 72,558 6,633 55,954 135,144 7,077 51,589 5,987 6,112 70,765 556,577 541,565 165 Risk, treasury and capital management Basel 2.5 Pillar 3 Regulatory gross credit exposure by counterparty type This table provides a breakdown of our portfolio by major types of credit exposure according to classes of financial instruments and also by counterparty type. The classification of counterparty type applied here is also used for the grouping of the balance sheet. The counterparty type is different from the exposure segments defined under the Basel framework and used in certain other tables in this section. CHF million Cash and balances with central banks Due from banks Loans Financial assets designated at fair value Off-balance sheet 2 Banking products Derivatives Cash collateral receivables on derivative financial instruments Securities financing Traded products Trading portfolio assets Financial investments available-for-sale 3 Accrued income and prepaid expenses Other assets Other products Total 31.12.11 Total 31.12.10 Private individuals Corporates 1 2 165,269 2,601 167,871 1,653 168 1,820 3 4,050 1,618 5,671 175,361 167,150 89,325 5,756 38,583 133,667 35,771 2,762 41,597 80,129 4,589 9,140 1,161 11,543 26,433 240,229 221,206 Public entities (including sovereigns and central­banks) Banks and multilateral institutions Total regulatory gross credit exposure 38,166 317 4,879 564 43,926 17,796 445 4,082 22,323 1,847 36,903 173 148 39,070 105,319 118,556 382 20,785 3,337 1,687 26,191 17,338 3,426 10,107 30,872 708 5,543 656 485 7,391 64,454 66,261 38,550 21,102 259,474 9,093 43,435 371,654 72,558 6,633 55,954 135,144 7,145 51,589 6,040 13,792 78,565 585,364 573,174 Total regulatory net credit exposure 38,550 11,917 256,014 4,003 40,184 350,668 72,558 6,633 55,954 135,144 7,077 51,589 5,987 6,112 70,765 556,577 541,565 1 Also includes non-bank financial institutions. 2 Includes guarantees, loan commitments and forward starting transactions. 3 Excludes equity positions. 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 instruments and also by maturity. The latter distribution is based on the residual contractual maturity. CHF million Cash and balances with central banks Due from banks Loans Financial assets designated at fair value Off-balance sheet 2 Banking products Derivatives Cash collateral receivables on derivative financial instruments Securities financing Traded products Trading portfolio assets Financial investments available-for-sale 3 Accrued income and prepaid expenses Other assets Other products Total 31.12.11 Total 31.12.10 Due in 1 year or less Due over 1 year to 5 years Due over 5 years 3,849 114,790 1,717 11,652 132,009 26,619 11,954 38,573 2,516 32,238 34,754 205,337 201,173 703 78,193 5,875 28,945 113,715 13,460 576 14,036 2,242 9,814 12,056 139,807 134,036 77 32,476 1,483 2,569 36,604 32,475 30 32,505 2,378 9,537 11,915 81,024 91,542 Total regulatory gross credit exposure 38,550 21,102 259,474 9,093 43,435 371,654 72,558 6,633 55,954 135,144 7,145 51,589 6,040 13,792 78,565 585,364 573,174 Other 1 38,550 16,473 34,015 18 270 89,326 4 6,633 43,393 50,030 8 6,040 13,792 19,841 159,196 146,423 Total regulatory net credit exposure 38,550 11,917 256,014 4,003 40,184 350,668 72,558 6,633 55,954 135,144 7,077 51,589 5,987 6,112 70,765 556,577 541,565 1 Includes positions without an agreed residual contractual maturity, for example loans without a fixed term and cash collateral receivables on derivative financial instruments, on which notice of termination has not been given. 2 Includes guarantees, loan commitments and forward starting transactions. 3 Excludes equity positions. 166 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 internal ratings-based approach and the standardized approach. The table also provides a breakdown according to BIS defined expo- sure 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 commer- cial entities such as corporations, partnerships or proprietorships, insurance companies, funds, exchanges and clearing houses. – Sovereigns (central governments and central banks as defined under Swiss and EU regulations): consists of exposures relating to sovereign states and their central banks, the BIS, the Inter- national Monetary Fund, the EU including the European Cen- tral Bank and eligible multilateral development banks. – Banks (as defined under Swiss and EU regulations): consists of exposures towards banks, i.e. legal entities holding a banking license. It also includes those securities firms that are subject to supervisory and regulatory arrangements comparable to those applied to banks according to the framework, including, in particular, risk­based capital requirements. BIS also defines this regulatory exposure segment to include exposures to public sector entities with tax-raising power or whose liabilities are fully guaranteed by a public entity. – Residential mortgages (claims secured on residential real estate as defined 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. CHF million Total regulatory gross credit exposure Less: regulatory credit risk offsets and adjustments 1 Total regulatory net credit exposure Total 31.12.10 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 31.12.10 1 Mainly includes margin accounts for derivatives. Advanced IRB approach Standardized approach Total 31.12.11 Total 31.12.10 492,089 (23,292) 468,796 436,214 159,853 58,727 55,953 119,565 73,681 1,018 468,796 436,214 93,275 (5,494) 87,781 105,352 23,963 48,752 7,698 4,085 3,283 87,781 105,352 585,364 (28,786) 556,577 183,816 107,479 63,651 123,650 73,681 4,300 556,577 573,174 (31,608) 541,565 167,718 112,036 75,469 120,298 62,355 3,688 541,565 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 167 Risk, treasury and capital management Basel 2.5 Pillar 3 Regulatory gross credit exposure covered by guarantees and credit derivatives This table provides a breakdown of collateral information, show- ing exposures covered by guarantees as well as those covered by credit derivatives, according to BIS defined exposure segments. to reduce concentrated exposure to individual names or sectors or in specific portfolios, which is not fully reflected in the regulatory numbers in this section. The collateral amounts in the table reflect the values used for determining regulatory capital. However, we utilize credit hedging ➔ Refer to the “Credit risk” section of this report for more information on credit risk mitigation CHF million Exposure segment Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Total 31.12.11 Total 31.12.10 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 5,864 92 504 6 493 44 7,003 4,697 17,132 63 102 17,297 20,103 168 Advanced IRB approach Advanced IRB approach: regulatory net credit exposure by internal UBS ratings This table provides a breakdown of the regulatory net credit exposure of our credit portfolio (including loan commitments) using the advanced internal ratings-based approach according to our internal rating classes. CHF million, except where indicated Internal UBS ratings Regulatory net credit exposure-weighted average probability of default Regulatory net credit exposure Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Total 31.12.11 of which: loan commitments Total 31.12.10 of which: loan commitments Internal UBS ratings Investment grade Sub-investment grade Defaulted 1 Total regulatory net credit exposure of which: loan commitments Total regulatory net credit exposure of which: loan commitments 0 / 1 2 / 3 4 / 5 6–8 9–13 31.12.11 31.12.10 0.004% 0.057% 0.293% 0.971% 5.662% 0.471% 0.542% 2,875 35,511 3,170 70,978 16,164 40,367 1,780 66,788 146 36,272 6,299 8,843 90,739 3,817 61 41,555 196,225 146,031 201 33,148 388 17,982 189,919 18,293 5,517 101,893 3,901 33,704 707 3,122 23,853 2,174 793 64,353 2,244 85,436 2,294 14,116 1,908 159,853 15 401 2,709 898 12 18,151 3,268 22,192 3,659 31 50 58,727 55,953 484 119,565 4 5 73,681 1,018 2,482 468,796 56 3,626 98 16,005 237 12,509 255 262 1 29,269 140,979 43,562 69,809 118,604 62,355 905 436,214 12,034 135 15,407 890 167 28,633 1 Values of defaulted derivative contracts are based on replacement values including “add-ons” used in the calculation of regulatory capital. Advanced IRB approach: regulatory net exposure-weighted average loss given default (LGD) by internal UBS ratings This table provides a breakdown of the net exposure-weighted average loss given default for our credit portfolio exposures calculated using the advanced internal ratings-based approach, according to our internal rating classes. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R in % Internal UBS ratings Regulatory net credit exposure-weighted average LGD Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Average 31.12.11 Average 31.12.10 Internal UBS ratings Investment grade Sub-investment grade Regulatory net credit exposure-weighted ­average LGD 0 / 1 2 / 3 4 / 5 6–8 9–13 31.12.11 31.12.10 43 19 16 21 35 25 41 31 10 20 20 26 28 30 68 34 10 20 5 19 20 29 39 39 10 20 44 22 17 28 21 35 10 20 14 25 23 28 34 31 10 20 38 23 30 42 31 10 20 35 24 169 Risk, treasury and capital management Basel 2.5 Pillar 3 Advanced IRB approach: regulatory net exposure-weighted average risk weight by internal UBS ratings This table provides a breakdown of the net exposure-weighted average risk weight for our credit portfolio exposures calculated using the advanced internal ratings-based approach according to our internal rating classes. in % Internal UBS ratings Regulatory net credit exposure-weighted average risk weight Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Average 31.12.11 Average 31.12.10 Internal UBS ratings Investment grade Sub-investment grade Regulatory net credit exposure-weighted average risk weight 0 / 1 2 / 3 4 / 5 6–8 9–13 31.12.11 31.12.10 15 1 5 2 4 11 11 13 1 3 3 9 10 43 93 33 6 10 3 20 17 52 85 71 10 19 53 37 25 87 78 134 30 30 23 77 74 35 14 20 7 4 42 19 35 13 18 8 5 41 18 Standardized approach The standardized approach is generally applied where it is not possible to use the advanced internal ratings-based approach and / or where an exemption from the advanced internal ratings-based approach has been granted by FINMA. The standardized approach requires banks to use risk assessments prepared by External Credit Assessment Institutions (ECAI) or Export Credit Agencies to determine the risk weightings applied to rated counterparties. We use ECAI risk assessments 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 – corporates We use three FINMA-recognized ECAI for this purpose: Moody’s Investors Service, Standard & Poor’s Ratings Group and Fitch Group. The mapping of external ratings to the standardized approach risk weights is determined by FINMA and published on its website. 170 Regulatory gross and net credit exposure by risk weight under the standardized approach This table provides a breakdown of the regulatory gross and net credit exposure by risk weight for our credit portfolio exposures treated under the standardized approach, according to BIS defined exposure segments. CHF million Risk weight Regulatory gross credit exposure Corporates Sovereigns 1 Banks Retail Residential mortgages Lombard lending Other retail Total 31.12.11 Total 31.12.10 Regulatory net credit exposure 2 Corporates Sovereigns 1 Banks Retail Residential mortgages Lombard lending Other retail Total 31.12.11 Total 31.12.10 0% >0–35% 36–75% 76–100% 150% 31.12.11 31.12.10 Total exposure Total exposure 48,315 8,748 111 5,714 1,265 48,315 68,201 15,838 13,075 48,315 8,748 111 5,714 1,265 48,315 68,201 15,838 12,968 863 35 2,009 2,848 3,260 9,015 6,104 863 35 1,958 2,820 3,258 8,935 6,113 18,445 300 5 1,126 19,877 23,161 14,182 291 5 14,479 17,673 183 20 1 25 229 411 169 20 1 25 215 397 28,241 48,761 7,749 5,240 3,285 93,275 23,963 48,752 7,698 4,085 3,283 87,781 31,541 68,500 5,767 2,359 2,785 110,953 26,739 68,475 5,660 1,694 2,784 105,352 1 Includes high-quality liquid short-term securities issued by governments and government-controlled institutions. 2 For traded products, the regulatory gross credit exposure is equal to the regulatory net credit exposure. 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 calculation under the standardized approach, according to BIS defined exposure segments. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R CHF million Exposure segment Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Total 1 Reflects the impact of the application of regulatory haircuts. For traded products, these haircuts are the difference between the IFRS reported values and the regulatory net credit exposure. Regulatory net credit exposure under standardized approach Eligible financial collateral recognized in capital calculation1 31.12.11 31.12.10 31.12.11 31.12.10 23,963 48,752 7,698 26,739 68,475 5,660 4,085 1,694 3,283 87,781 2,784 105,352 5,211 40 1,188 1,155 3 7,596 7,252 26 1,948 664 2 9,891 171 Risk, treasury and capital management Basel 2.5 Pillar 3 Impairment, default and credit loss As illustrated in the tables below, our impaired assets decreased 18% on 31 December 2011 compared with 31 December 2010, mainly due to sales of legacy loan positions. Impaired assets by region This table shows a breakdown of credit exposures arising from impaired assets and allowances / provisions according to BIS defined exposure segments. Impaired asset exposures include loans, off­balance sheet claims, securities financing transactions, and derivative transactions. Regulatory gross credit exposure 210,181 120,612 189,198 7,582 51,312 6,479 585,364 573,174 Impaired assets 1 870 735 2,739 37 66 17 4,465 6,468 Specific allowances, provisions and credit valuation adjustments Impaired assets net of specific allowances, provisions and credit valuation adjustments (475) (220) (1,461) (27) (45) (34) (2,263) (2,370) 394 515 1,278 10 21 (17) 2,201 4,097 Total allowances, provisions and specific credit valuation adjustments 2 (604) Collective allowances and provisions 2 (128) (220) (1,465) (27) (45) (34) (2,395) (3) (131) (47) Total allowances, provisions and specific credit valuation adjustments 31.12.10 (609) (267) (1,444) (25) (41) (32) (2,418) CHF million Switzerland Rest of Europe North America 3 Latin America Asia Pacific Middle East and Africa Total 31.12.11 Total 31.12.10 1­Values­of­defaulted­derivative­contracts­(CHF­2,143­million)­are­based­on­replacement­values­and­do­not­include­“add-ons”­used­in­the­calculation­of­regulatory­capital.­ ­ 2 Collective credit valuation adjustments of CHF 1,073 million are partially included in the upper tier 2 capital and therefore not included in this table. 3 Includes the Caribbean. Impaired assets by exposure segment 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, provisions and credit valuation adjustments (2,081) Impaired assets 1 4,058 Collective allowances and provisions 2 Total allowances, provisions and specific credit valuation adjustments 2 (2,081) 14 22 232 42 97 (10) (15) (66) (37) (54) 4,465 6,468 (2,263) (2,370) (131) (131) (47) (10) (15) (66) (37) (54) (131) (2,395) (2,418) Total allowances, provisions and specific credit valuation adjustments 31.12.10 Write-offs for the year ended 31.12.11 (267) (1) (4) (27) (299) (1,505) (2,083) (10) (30) (68) (120) (59) (47) (2,418) Regulatory gross credit exposure 197,622 107,666 77,287 124,805 73,681 4,303 585,364 573,174 CHF million Corporates Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Not allocated segment 3 Total 31.12.11 Total 31.12.10 1­Values­of­defaulted­derivative­contracts­(CHF­2,143­million)­are­based­on­replacement­values­and­do­not­include­“add-ons”­used­in­the­calculation­of­regulatory­capital.­ ­ 2 Collective credit valuation adjustments of CHF 1,073 million are partially included in the upper tier 2 capital and therefore not included in this table. 3 Collective loan loss allowances and provisions are not allocated to individual counterparties. 172 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 defaulted derivatives. CHF million Opening balance as of 1.1.11 Write-offs Recoveries­(on­written-off­positions) Increase­/­(decrease)­in­allowances,­ provisions and specific credit valuation adjustments 2 Foreign currency translations and other adjustments Transfers Specific allowances and provisions for banking­products­ and securities financing 1,240 (500) 51 17 Specific credit valuation adjustments for derivatives 1,130 303 56 (32) Total specific allowances, provisions and credit valuation adjustments Collective allowances and provisions 1 For the year ended­ 31.12.11 2,370 (500) 51 303 73 (32) 47 (1) 84 2,418 (501) 51 387 73 (32) Opening balance as of 1.1.10 Closing balance as of 31.12.11 807 1,457 2,263 131 2,395 Closing balance as of­31.12.10 For the year ended­ 31.12.10 5,881 (1,505) 79 (1,615) (421) 2,418 1 Collective credit valuation adjustments of CHF 1,073 million are partially included in the upper tier 2 capital and therefore not included in this table. 2 Represents total actual credit loss (credit loss expense and changes­in­­specific­credit­valuation­adjustments­recognized­in­net­trading­income). 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, derivative and securities financing portfolios) calculated as of 31 December 2010, and the actual IFRS credit loss amount (including credit valuation adjustments on derivatives) charged against our in- come statement in 2011, according to BIS defined exposure segments of the advanced internal ratings-based approach. Comparison between our expected and actual losses has certain limitations as the two measures are not directly 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 income statement in the financial year. The difference in our expected and actual loss amounts resulted from credit recoveries and from lower-than-expected actual losses in 2011. Expected loss Actual­credit­(loss)­/­recovery­and­credit­valuation­adjustments t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R CHF million 31.12.10 Total expected loss Actual credit (loss) / recovery For the year ended 31.12.11 Specific credit valuation adjust- ments for defaulted derivatives Total actual credit (loss) / recovery and credit­valuation­ adjustments Corporates 1 Sovereigns Banks Retail Residential mortgages Lombard lending Other retail Not allocated 2 Total (336) (27) (40) (62) (30) (494) (18) (1) 3 12 (5) (75) (84) (303) (303) (321) (1) 3 12 (5) (75) (387) 1 Includes actual credit recovery from securities, which amounted to CHF 9 million. 2 Includes changes in collective loan loss allowances and provisions. For the year ended 31.12.10 Total actual credit (loss)­/­recovery­ and credit­valuation­ adjustments 1,577 26 1 5 (2) 7 1,615 173 Risk, treasury and capital management Basel 2.5 Pillar 3 Other credit risk information Our credit derivatives trading is predominantly on a collateral- ized basis. This means that our credit exposures arising from our derivatives activities with collateralized counterparties are typi- cally closed out in full or reduced to nominal levels on a regular basis by the use of collateral. Derivatives trading with counterparties with high credit ratings (for example a large bank or broker-dealer) is typically under an International Swaps and Derivatives Association master trading agreement and credit exposures to those counterparties from credit default swaps (CDS), together with exposures from other over-the-counter derivatives, are netted and included in the calculation of the collateral required to be posted. Trading with lower rated counterparties (for example, hedge funds) would also generally require an initial margin to be posted by the counterparty. We receive collateral from or post collateral to our counter- parties based on our open net receivable or net payable  from over-the-counter derivative activities. Under the terms of the In- ternational Swaps and Derivatives Association master trading agreement and similar agreements, this collateral, which gener- ally takes the form of cash or highly liquid fixed income securi- ties, is available to cover any amounts due under those deriva- tive transactions. Settlement risk (including payment risk) of CDS has been mitigated to some extent by the development of a market-wide credit event auction process. This has resulted in a widespread shift to the cash settlement of CDS following a credit event on a reference entity. We did not experience any significant losses from failed settlements on CDS contracts in 2011. The vast majority of our CDS trading activity is conducted by the Investment Bank. The “Credit derivatives portfolio (split by counterparty)” 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 counterparties were mar- ket professionals. Based on the same notional measure, approxi- mately 98% of these counterparties were rated investment grade and approximately 99% of the CDS activity was traded on a collateralized basis. 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 cred- it exposures. The net balance sheet credit exposure differs from the regulatory net credit exposures because of differences in valu- ation methods and the netting and collateral deductions used for accounting and regulatory capital purposes. Specifically, net cur- rent credit exposure is derived from gross positive replacement values, whereas regulatory net credit exposure is calculated using our internal credit valuation models. CHF million Gross­positive­replacement­values Netting benefits recognized for regulatory purposes Collateral held Net current credit exposure Regulatory net credit exposure (total counterparty credit risk) of which: determined by internal models (effective expected positive exposure [EPE]) of which: determined by supervisory approaches (current exposure method) Breakdown of the collateral held Cash collateral Securities­collateral­and­debt­instruments­collateral­(excluding­equity) Equity instruments collateral Other collateral Total collateral held 174 31.12.11 486,584 (383,338) (50,955) 52,291 72,558 57,874 14,684 45,572 5,055 109 218 50,955 31.12.10 401,146 (301,515) (41,592) 58,039 73,879 60,843 13,036 36,520 4,837 120 115 41,592 Credit derivatives 1, 2 This table provides an overview of our credit derivative portfolio by product group using notional values. The table also provides a breakdown of credit derivative positions used to manage our own credit portfolio risks (banking book for regulatory purposes) and those arising through intermediation activities (trading book for regulatory capital purposes). Notional amounts, CHF million Credit default swaps Total return swaps Total 31.12.11 Total 31.12.10 Regulatory banking book Regulatory trading book Total Protection bought 22,348 Protection sold Total Protection bought Protection sold Total 31.12.11 31.12.10 3,719 26,067 1,279,326 1,236,239 2,515,565 2,541,632 2,304,549 22,348 28,650 3,719 2,602 26,067 1,283,606 1,236,362 2,519,968 2,546,035 31,252 1,167,228 1,115,000 2,282,228 2,313,480 4,280 123 4,403 4,403 8,931 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 positive­exposure­(or­exposure­according­to­current­exposure­method)­is­taken.­ ­ 2 Notional amounts are reported based on regulatory scope of consolidation and do not include options and warrants. Credit derivatives portfolio (split by counterparty) 1 Portfolio segment Developed markets commercial banks Broker-dealers, investment and merchant banks Hedge funds All other % of total notional % of buy notional % of sell notional 31.12.11 31.12.10 31.12.11 31.12.10 31.12.11 31.12.10 60 23 1 16 59 25 2 15 59 23 1 18 58 25 1 17 61 23 2 14 60 25 3 12 1 Counterparty analysis based on notional CDS exposures of the Investment Bank sourced from credit risk systems. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 175 Risk, treasury and capital management Basel 2.5 Pillar 3 Investment positions The regulatory capital view for investment positions differs from the IFRS view primarily due to the following: (i) differences in the basis of valuation, e.g. financial investments available for sale are subject to fair value accounting under IFRS but have to be treated under the “lower-of-cost-or-mar- ket” concept for regulatory capital purposes; (ii) the use of different frameworks to determine regulatory capi- tal, e.g. tradable assets are treated under market risk value-at- risk (VaR); and (iii) differences in the scope of consolidation, e.g. certain special purpose entities are consolidated for IFRS but not for regula- tory capital. Equities disclosure for banking book positions The table below shows the three different equity investment categories held in the banking book with their amounts as disclosed for IFRS, followed by the regulatory capital adjustment amount. This adjustment considers the above mentioned differences to IFRS result- ing in the total regulatory equity exposure under BIS, the corresponding risk-weighted assets and the capital charge. The table also shows net realized gains and losses and unrealized revaluation gains relating to the equity investments. We had no unrealized revaluation losses that had not been recognized for available-for-sale investments.. CHF million Equity investments Financial investments available-for-sale Financial assets designated at fair value Investments in associates Total equity investments under IFRS Regulatory capital adjustment Total equity exposure under BIS of which: to be risk-weighted publicly traded privately held 1 of which: deducted from equity RWA according to simple risk weight method Capital requirement according to simple risk weight method Total capital charge Net realized gains / (losses) and unrealized gains from equities Net­realized­gains­/­(losses)­from­disposals Unrealized revaluation gains of which: included in tier 2 capital 1­Includes­CHF­717­million­exposure­booked­in­trust­entities­that­did­not­generate­RWA­(CHF­842­million­on­31­December­2010). Book value 31.12.11 31.12.10 873 730 795 2,397 604 3,001 173 1,427 1,402 3,310 265 1,667 (9) 49 22 1,359 856 790 3,006 281 3,287 390 1,513 1,384 3,691 295 1,679 270 68 31 176 Market risk As a result of the implementation of Basel 2.5, risk-weighted assets (RWA) attributable to market risk increased to CHF 49.2 billion as of 31 December 2011 compared with CHF 20.8 billion under Basel II as of 31 December 2010. The increased RWA are composed of a new incremental risk charge (CHF 19.6 billion of RWA), stressed VaR requirement (CHF 13.1 billion of RWA) and comprehensive risk measure requirement (CHF 8.6 billion of RWA). These increases were partially offset by a RWA relief in VaR of CHF 1.3 billion due to the exclusion of the specific market risk for securitization in the trading book under Basel 2.5 and a decrease in exposure of CHF 11.6 billion. The market risk regula- tory capital requirement is 8% of the respective risk-weighted assets. Market risk regulatory capital and risk-weighted assets are based on our VaR model and subject to regulatory deter- mined multipliers. The following VaR tables for 2011 include positional risks relat- ing to the unauthorized trading incident announced in the third quarter of 2011. Group: regulatory value-at-risk (10-day, 99% confidence, 5 years of historical data) This table provides a breakdown of the Group’s minimum, maximum, average and period­end regulatory VaR by business division. CHF million Business divisions Investment Bank Wealth Management & Swiss Bank Wealth Management Americas Global­Asset­Management Corporate Center Diversification effect Total regulatory VaR, Group Diversification­effect­(%) Basel II – for the year ended 31.12.11 Basel 2.5 – for the year ended Basel II – for the year ended 31.12.10 Min. Max. Average 31.12.11 31.12.11 Min. Max. Average 31.12.10 131 0 11 0 8 1 1,374 1 25 1 47 1 139 1,386 449 1 16 1 17 (20) 463 (4) 394 142 0 24 0 9 (25) 150 (14) 150 132 0 24 0 9 (24) 142 (14) 132 0 13 0 5 1 140 546 1 30 1 71 1 561 306 1 21 1 22 (27) 323 (8) 389 1 14 1 13 (17) 401 (4) t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Total regulatory VaR, Group, excluding the effect of unauthorized trading incident 139 819 1 As the minimum and maximum occur on different days for different business divisions, it is not meaningful to calculate a portfolio diversification effect. 177 Risk, treasury and capital management Basel 2.5 Pillar 3 Investment Bank: regulatory value-at-risk (10-day, 99% confidence, 5 years of historical data) This table provides a breakdown of the Investment Bank’s minimum, maximum, average and period­end regulatory VaR by risk type. CHF million Risk type Equities Interest rates Credit spreads Foreign exchange Energy, metals and commodities Diversification effect Total regulatory VaR, Investment Bank Diversification­effect­(%) Basel II – for the year ended 31.12.11 1 Basel 2.5 – for the year ended­ Basel II – for the year ended 31.12.10 Min. Max. Average 31.12.11 31.12.11 Min. Max. Average 31.12.10 42 42 189 16 7 2 131 1,171 182 860 121 51 2 1,374 150 103 471 53 18 (346) 449 (44) 52 64 189 57 17 (237) 142 (63) 52 64 189 57 17 (247) 132 (65) 47 54 225 8 5 2 132 133 138 635 88 44 2 546 68 95 422 28 12 (319) 306 (51) 64 96 386 41 43 (242) 389 (38) 1 Excluding the effect of the unauthorized trading incident, the Investment Bank and equities regulatory maximum VaR figures were CHF 799 million and CHF 303 million, respectively. 2 As the minimum and maximum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification effect. Group: regulatory value-at-risk (1-day, 99% confidence, 5 years of historical data)1 This table provides a breakdown of the Group’s minimum, maximum, average and period­end regulatory backtesting VaR by business division. CHF million Investment Bank Group Group, excluding the effect of unauthorized trading incident Basel II – for the year ended 31.12.11 Basel 2.5 – for the year ended­ Min. Max. Average 31.12.11 31.12.11 Regulatory VaR 2 Regulatory VaR 2 Regulatory VaR 50 50 48 388 390 154 118 120 90 56 58 58 55 58 Basel II – for the year ended 31.12.10 Min. 57 58 Max. 110 114 Average 31.12.10 82 84 93 94 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. 178 Stressed value-at-risk Stressed VaR is a 10­day 99% measure calibrated to a 1 year period of significant financial stress relevant to the current portfolio of UBS Group. Stressed VaR adopts broadly the same methodology as VaR with modifications as required to calibrate the model to a historical stress period. Group: stressed value-at-risk (10-day, 99% confidence, 5 years of historical data) This table provides a breakdown of the Group’s period­end regulatory stressed VaR by business division. For the year ended 31.12.11 Min. 1 Max. 1 Average 1 31.12.11 CHF million Business divisions Investment Bank Wealth Management & Swiss Bank Wealth Management Americas Global­Asset­Management Corporate Center Diversification effect Total stressed VaR, Group Diversification­effect­(%) CHF million Risk type Equities Interest rates Credit spreads Foreign exchange Energy, metals and commodities Diversification effect Total stressed VaR, Investment Bank Diversification­effect­(%) Total stressed VaR, Group, excluding the effect of unauthorized trading incident 1 Because this is a new requirement under Basel 2.5, which only became effective as of 31 December 2011, the minimum, maximum and average values are therefore not shown. Investment Bank: stressed value-at-risk (10-day, 99% confidence, 5 years of historical data) This table provides a breakdown of the Investment Bank’s period­end regulatory stressed VaR by risk type. For the year ended 31.12.11 Min. 1 Max. 1 Average 1 31.12.11 1 Because this is a new requirement under Basel 2.5, which only became effective as of 31 December 2011, the minimum, maximum and average values are therefore not shown. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 173 0 31 0 14 (39) 181 (18) 181 65 54 355 88 22 (410) 173 (70) 179 Risk, treasury and capital management Basel 2.5 Pillar 3 Incremental risk charge The incremental risk charge (IRC) represents an estimate of the default and migration risk of unsecuritized credit products held in the trading book, measured over a one­year time horizon at  a 99.9% confidence level. To capture the risk over a one­year peri- od, a constant position assumption is applied; i.e. all positions in the IRC portfolio have a one-year liquidity horizon and hence are kept unchanged over this time period. The portfolio default and credit migrations loss distribution is estimated using a Monte Carlo simulation of correlated credit migration events (defaults and credit rating changes) for all issuers in the IRC portfolio, based on a Merton-type model. For each posi- tion, default losses are calculated based on the maximum default exposure measure (loss on a current position in case of an imme- diate default event and assuming zero recovery) and a random re- covery concept. To account for the default basis risk different re- covery values may be generated for different instruments even if they belong to the same issuer. To calculate credit migration losses a linear (delta) approximation is used: a loss due to a migration event is calculated as the credit spread change multiplied by the corresponding sensitivity of a position to the credit spread changes. Our IRC methodology and implementation is approved by FINMA, with ongoing methodology improvements also subject to regulatory approval. Group: incremental risk charge This table provides a breakdown of the Group’s period­end regulatory incremental risk charge by business division. CHF million Business divisions Investment Bank Wealth Management & Swiss Bank Wealth Management Americas Global­Asset­Management Corporate Center Diversification effect Total incremental risk charge, Group Diversification­effect­(%) For the year ended 31.12.11 Min. 1 Max. 1 Average 1 31.12.11 1,349 82 306 (303) 1,435 (17) 1 Because this is a new requirement under Basel 2.5, which only became effective as of 31 December 2011, the minimum, maximum and average values are therefore not shown. Comprehensive risk charge Comprehensive risk measure (CRM) represents an estimate of the default and complex price risk including the convexity and cross convexity of the correlation trading portfolio across spread, correlation and recovery; measured over a one­year time horizon at a 99.9% confidence level. To capture the risk over a one­year period, a constant position assumption is applied; i.e. all posi- tions in the CRM portfolio have a one-year liquidity horizon and hence are kept unchanged over this time period. The CRM loss distribution is estimated using Monte Carlo simulation of real-world defaults between the spot and the end of the one-year horizon date, and calculates resulting cash flows in the CRM portfolio. The portfolio is then revalued on the one-year horizon date, with inputs such as credit spreads and index basis being migrated from spot to horizon date. The 99.9% worst percentile is then taken from the resulting profit or loss distribution, which is the CRM model result. Our CRM methodology and implementation is approved by FINMA, with ongoing methodology improvements also subject to regulatory approval. It is subject to qualitative minimum standards as well as stress testing requirements. The calculated CRM measure for regulatory capital purposes is subject to a floor calculation equal to 8% of the equivalent capital charge under a the securitization framework Group: comprehensive risk charge This table provides a breakdown of the Group’s period­end regulatory comprehensive risk charge for the Investment Bank. CHF million Investment Bank Group For the year ended 31.12.11 Min. 1 Max. 1 Average 1 31.12.11 636 636 1 Because this is a new requirement under Basel 2.5, which only became effective as of 31 December 2011, the minimum, maximum and average values are therefore not shown. 180 Securitization This section provides details on traditional and synthetic securiti- zation exposures held in the banking and trading book and the regulatory capital associated with these exposures, based on the revised Basel II market risk framework (commonly referred to as Basel 2.5). In a traditional securitization, a pool of loans (or other debt obligations) is typically transferred to a special purpose entity which is established to own the loan pool and to issue tranched securities to third-party investors referencing the pool of loans. In a synthetic securitization, we retain legal ownership of the securi- tized pools of assets, but transfer the associated credit risk (typi- cally) to a special purpose entity through guarantees, credit deri- vates or credit-linked notes. Hybrid structures with a mix of traditional and synthetic features are disclosed as synthetic securi- tizations. We act in different roles in securitization transactions. As originator we create or purchase financial assets which are then securitized in traditional or synthetic securitization transac- tions, achieving a significant risk transfer to third party investors. As sponsor we manage or advise securitization programs. In line with the Basel framework sponsoring includes underwriting, i.e. placing securities into the market. In 2011 under Basel 2.5, trading book securitization posi- tions were added to the securitization framework in addition to the securitization positions held in the banking book. Also high- er risk weights have been introduced for re-securitization posi- tions. Risk-weighted assets attributable to securitization positions in- creased to CHF 7.3 billion as of 31 December 2011 compared with CHF 7.1 billion as of 31 December 2010. The increase was mainly due to the abovementioned changes. Risk-weighted assets attributable to trading book positions contributed CHF 3.1 billion and re-securitizations in the banking book CHF 0.5 billion to the increase. This was offset by CHF 3.4 billion of reductions in secu- ritization positions in the banking book during the year. Objectives, roles and involvement or advised securitization programs and helped to place the securi- ties into the market. Securitization and re-securitization positions in the banking book are valued either at fair value or at amortized cost less impair- ment. Impairment is assessed based on the basis of the net present value of future cash flows expected from the instrument, which are derived from underlying pool. Securitization in the trading book Securitizations (including correlation products) held in the trading book are part of the trading activities within the Investment Bank, which typically include market-making and client facilitation. Dur- ing the year, we were also involved in the placement of securitiza- tions of assets originated by other institutions in the market, i.e. acted in a sponsor role. Included in the trading book are positions in our correlation book, legacy positions in leveraged super senior tranches as well as re-securitizations of corporate credit exposure. In the trading book, securitization and re-securitization positions are reported at either market value or the aggregate of notional amount and the associated replacement value of the exposures securitized at the balance sheet date. Type of special purpose entities and affiliated entities involved in the securitization transactions For the securitization of third party exposures, the type of special purpose entities is selected as appropriate based on the type of transaction being undertaken. Examples of this include limited li- ability corporations, common law trusts and depositor entities. We manage or advise the following significant groups of af­ filiated entities that invest in exposures we have securitized or in special purpose entities that we sponsor: North Street, Brookla- nds, and East Street are involved in the US, European and Asia Pacific reference­linked note programs. The Mortgage Backed Se- curities Consolidated Trust is an entity used to consolidate both UBS / non-UBS issued securitizations if it is determined that we hold the majority of the risk and rewards of a deal retained within the trading portfolio. Securitization in the banking book The majority of our securitization positions held in the banking book are legacy risk positions, a significant amount of which were reclassified under IFRS from Held for trading to Loans and receiv- ables in the fourth quarter of 2008 and the first quarter of 2009. As of 31 December 2011, this portfolio included mainly collateral- ized debt obligations and collateralized loan obligations with credit default swap protection purchased from monoline insurers as well as US commercial mortgage-backed securities, residential mortgage-backed securities, the global reference-linked note pro- gram and student loan auction rate securities. We also have a synthetic securitization structure over part of the credit risk in our over the counter derivatives portfolio. During 2011, we have acted in both originator and sponsor roles. As originator, we sold originated commercial mortgage loans into a third party securitization program. As sponsor, we managed Managing and monitoring of the credit and market risk of securitization positions The banking book securitization portfolio is subject to specific monitoring, which may include interest rate and credit spread sensitivity analysis, as well as inclusion in firm wide earnings­at­ risk, capital-at-risk and combined stress test metrics. The trading book securitization positions are subject to multiple risk limits. As part of managing risks within the pre- defined risk limits, traders may utilize hedging and risk mitiga- tion strategies. Hedging may however expose the firm to basis risks as the hedge instrument and the position being hedged may not always move in parallel. Such basis risks are considered within the overall limits measurement. Any retained securitiza- tion from origination activities and any purchased securitization positions are governed by risk limits as with any other trading activities. 181 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Risk, treasury and capital management Basel 2.5 Pillar 3 Regulatory capital treatment of securitization structures Except in the cases described below, in both the banking and trad- ing book we generally apply the ratings-based approach to securi- tization positions using Moody’s, Standard & Poor’s and Fitch rat- ings. Under the ratings-based approach, the amount of capital required for securitization and re-securitization exposures in the banking book is capped at the level of the capital requirement that would have been assessed against the underlying assets had they not been securitized. This treatment has been applied in particular to the US and European reference-linked note program. ➔ Refer to the “Market risk” section of this report for more information on reference-linked notes For purposes of determining regulatory capital and the Pillar 3 disclosure, the underlying exposures are reported under the stan- dardized approach, the advanced internal ratings-based approach or the securitization approach depending on the category of the underlying security itself. If the underlying security was reported under the standardized approach or the advanced internal rat- ings-based approach, the related positions are excluded from the tables on the following pages. The supervisory formula approach is applied to the synthetic secu- ritization of a portfolio of counterparty credit risk resulting from over- the-counter derivatives where an external rating was not sought. The supervisory formula approach is also applied for leveraged super senior tranches. In the trading book the comprehensive risk measure (CRM) is used for the correlation portfolio as defined by Basel 2.5 require- ments. This broadly covers securitizations of liquid corporate un- derlying assets as well as associated hedges that are not securiti- zations (e.g. credit default swap and credit default swap indices). We do not apply the concentration ratio approach or the inter- nal assessment approach for securitization positions. The counterparty risk of interest rate or foreign currency de- rivatives with securitization vehicles is treated under the advanced internal ratings-based approach, and is therefore not part of this disclosure. Accounting policies Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for informa- tion on our accounting policies that relate to our securitization activities – primarily item 3 of Note 1 on “Special purpose enti- ties” and item 12 on “Securitization structures set up by UBS”. For the purposes of disclosure under the Basel 2.5 Pillar 3 re- quirements, we disclose in this section our intention to securitize exposures as an originator after the pricing of a deal has been fixed. Exposures intended to be securitized continue to be val- ued in the same way until such time as the securitization trans- action takes place. We recognize liabilities on our balance sheet for arrangements that require us to provide financial support for securitized assets. Presentation principles It is our policy to present Pillar 3 disclosures for securitization transactions and balances in line with the capital adequacy treatments which have been applied under Pillar 1 in the respec- tive period presented. Furthermore, as of 31 December 2011 we have implemented a new presentation policy. Under this policy, we will not amend comparative prior period numbers for presentational changes which are triggered by new and revised information from third party providers, provided that the updated information does not impact the Pillar 1 treatments of prior periods. Good practice guidelines On 18 December 2008, the European Banking Federation, the Association for Financial Markets in Europe, the European Sav- ings Banks Group and the European Association of Public Banks and Funding Agencies published the “Industry good practice guidelines on Pillar 3 disclosure requirement for securitization”. These guidelines were slightly revised in 2009 / 2010 and this report is in compliance with all material aspects of the publica- tion. 182 Securitization in the banking book Banking book – securitization activity of the year This table outlines the exposures (i.e. deal size at inception) we securitized in the banking book in 2011 and 2010, respectively. Gains or losses recognized on sales of underlying assets into tradi- tional securitization structures where we acted as the originator of the underlying assets are also disclosed. Securitized exposures are split into two parts, those where we have retained any securitization positions and / or continue to be involved on an ongoing basis (e.g. credit enhancement, implicit support) and those where we have no retained securitization posi- tions and / or have no further involvement. Traditional securitization amounts disclosed in this table reflect the total outstanding notes at par value issued by the securitiza- tion vehicle at issuance. For synthetic securitization transactions, the amounts disclosed generally reflect the balance sheet carrying values of the securitized exposures at issuance. Where we acted as both originator and sponsor to a securitiza- tion, originated assets are reported under “Originator”, and the total amount of the underlying assets securitized is reported under “Sponsor”. As a result, CHF 2.8 billion has been disclosed twice in 2011, once under “Originator” and once under “Sponsor”. Originator Sponsor CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.11 Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.10 Traditional Synthetic Securitization positions retained No securitization positions retained Securitization positions retained No securitization positions retained Realized gains / losses on traditional securitizations Traditional Synthetic 2,789 80 6,232 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 2,789 0 0 0 80 6,232 0 0 0 1,715 1,715 0 0 0 0 183 Risk, treasury and capital management Basel 2.5 Pillar 3 Banking book – total outstanding securitized exposures Traditional securitization amounts disclosed in this table reflect the total outstanding notes at par value issued by the securitiza- tion vehicle. For synthetic securitization transactions, we disclose either the balance sheet carrying values of the exposures securi- tized or, for hybrid structures, the outstanding notes at par value issued by the securitization vehicle. Disclosure is made where we have retained or originated securitization positions at the balance sheet date in the bank- ing book and / or are otherwise involved on an ongoing basis (e.g. credit enhancement, implicit support). Where we have retained positions in both the banking book and the trading book, the outstanding exposure is presented in the banking book. The table also includes securitization activities of the year 2011 where we retained / purchased positions (these are also included in the table on the previous page). After the year of inception, the securitization activities in which we acted both as originator and sponsor will be reported solely under “Sponsor”, provided we have continuously retained / pur- chased positions. All values in this table are as of the balance sheet date. CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.11 31.12.10 1 Originator Sponsor Originator Sponsor Traditional Synthetic Traditional Synthetic Traditional Synthetic Traditional Synthetic 2,589 2,767 150 5,034 597 10,987 3,594 1,861 5,605 6,071 22,210 341 872 20,295 3,210 1,760 54,759 1,526 149 3,462 0 4,988 2,126 4,401 6,676 2,960 31,339 341 3,401 32,368 3,498 3,811 77,718 0 1 2010 numbers have been restated to align the disclosure with our securitization presentation and disclosure policy which requires Pillar 3 disclosures to follow the capital adequacy treatment under Pillar 1 in the respective period presented and to include certain transactions which we have sponsored but which were erroneously not included in previous disclosures. Total amounts for “Originator / Traditional” and “Originator / Synthetic” have been reduced by CHF 3,908 million and CHF 1,176 million, respectively. The total amount for “Sponsor / Traditional” has been increased by CHF 1,338 million compared with the numbers disclosed for 31 December 2010 in the report “Our Basel II Pillar 3 disclosure for first half 2011”. Banking book – impaired or past due securitized exposures This table provides a breakdown of the outstanding impaired or past due exposures at the balance sheet date for transactions where we acted as originator or sponsor in the banking book. Where we did not retain positions, impaired or past due information is only re- ported in the year of inception. Where available, past due informa- tion was derived from investor reports. Past due is generally defined as delinquency above 60 days. Where investor reports do not pro- vide this information, alternative methods have been applied, which may include an assessment of the fair value of the retained position or reference assets, or identification of any credit events. CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.11 31.12.10 1 Originator Sponsor Originator Sponsor Securitization positions retained No securitiza- tion positions retained Securitization positions retained No securitiza- tion positions retained 1,531 43 5,547 1,010 8,131 1,486 975 1,122 30 3,613 778 41 4,490 316 5,625 0 453 2,041 1,571 46 4,111 0 1 2010 numbers have been restated to align the disclosure with our securitization presentation and disclosure policy which requires Pillar 3 disclosures to follow the capital adequacy treatment under Pillar 1 in the respective period presented and to include certain transactions which we have sponsored but which were erroneously not included in previous disclosures. Total amounts for “Originator / Securitization positions retained” and “Sponsor” have been reduced by CHF 3,705 million and CHF 2,073 million, compared with the numbers disclosed for 31 December 2010 in the report “Our Basel II Pillar 3 disclosure for first half 2011”. 184 Banking book – losses recognized from retained securitization positions This table provides a breakdown of year-to-date losses we have recognized on securitization positions retained or purchased in the banking book. Losses are reported after taking into account the offsetting effects of any credit protection that is an eligible risk mitigation instrument under the Basel 2.5 framework for the retained or purchased position. We report such positions partially on a fair value and partially on an amortized cost less impairment basis. CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.11 31.12.10 Originator Sponsor Originator Sponsor 2 4 1 7 1 11 1 4 5 4 26 2 1 1 3 6 1 14 21 41 Banking book – outstanding exposures intended to be securitized We only disclose our intention to securitize exposures when we act as originator and after the pricing of a deal has been fixed. On this basis, as of 31 December 2011, no exposures in the banking book were intended to be securitized. Banking book – securitization positions retained or purchased This table provides a breakdown of securitization positions which we have retained or purchased in the banking book, irrespective of our role in the securitization transaction. The value disclosed is either the net exposure amount at default subject to risk-weighting or the carrying value subject to capital deduction at the balance sheet date. CHF million Residential mortgages 1 Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations 2 Other Total 31.12.11 31.12.10 On balance sheet Off balance sheet On balance sheet Off balance sheet 810 584 62 331 1 5,468 1,632 3,303 12,189 1,000 1,000 1,045 2,100 53 130 1,855 4 9,475 4,824 4,715 24,201 0 1 As of 31 December 2010, Alt-A, subprime residential mortgage-backed exposures of CHF 1,651 million were underpinned on the basis of the standardized approach. Hence these exposures were not disclosed in this table for 31 December 2010, instead they were disclosed in the credit risk exposure section. In 2011, these positions were subject to the securitization framework and included in the table in the line “Residential mort- gages” for 31 December 2011. 2 It is our policy to present Pillar 3 disclosures in line with the respective capital adequacy treatment under Pillar 1. In 2010, the capital adequacy treatment under Pillar 1 for banking book securitization and re-securitization structures was identical. In 2011, following the implementation of Basel 2.5, the differentiation between securitizations and re-securitizations became relevant for Pillar 1 capital adequacy purposes. As a consequence, we have refined our processes to differentiate between securitization types and applied the revised presentation principles prospectively. Securitization transactions of CHF 2,332 million­presented­under­re-securitizations­as­of­31­December­2010­are­presented­in­the­line­“Other”­(CHF­970­million)­and­“Loans­to­corporates­or­SME”­(CHF­1,362­million)­on­31­December­2011. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 185 Risk, treasury and capital management Basel 2.5 Pillar 3 Banking book – capital charge for securitization / re-securitization positions retained or purchased These tables provide the capital charge for securitization / re-secu- ritization positions we have purchased or retained in the banking book, irrespective of our role in the securitization transaction, split by risk weight bands and regulatory capital approach. Neither ta- ble contains capital deductions. With the introduction of Basel 2.5, re-securitization positions require a higher capital charge. No com- parative numbers for 31 December 2010 are provided as this infor- mation is disclosed for the first time under Basel 2.5. Capital charge for securitization positions retained or purchased 31.12.11 Capital charge ratings-based approach Capital charge supervisory formula approach 2 45 27 7 4 7 10 47 87 237 15 15 31.12.11 Capital charge ratings-based approach Capital charge supervisory formula approach 1 1 38 2 1 4 14 61 0 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% Total Capital charge for re-securitization positions retained or purchased 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% Total 186 Banking book – deductions from eligible capital related to securitization positions retained or purchased This table outlines the capital deductions related to securitization positions we have retained or purchased in the banking book irrespective of our role in the securitization transaction. At the balance sheet dates, we neither had securitization positions which would be required to be deducted entirely from BIS tier 1 capital, nor did we hold credit-enhancing interest-only strips that were required to be deducted. CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.11 31.12.10 Positions deducted­ from­ BIS tier­1­­capital­and­ BIS tier 2 capital Positions deducted from BIS tier 1 capital­and­ BIS tier 2 capital 672 242 38 27 1 496 432 1,116 3,024 238 266 57 1 1,489 808 131 2,990 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 187 Risk, treasury and capital management Basel 2.5 Pillar 3 Banking book – securitization exposures subject to early amortizations We currently do not have securitization structures in the banking book that are subject to early amortization treatment. Banking book – re-securitization positions retained or purchased and broken down according to guarantor credit- worthiness categories The upper part of this table shows the total of re-securitization positions (cash as well as synthetic) held in the banking book broken down into positions for which credit risk mitigation has been recognized versus positions where no credit risk mitigation has been recognized. Credit risk mitigation includes protection bought by entering into credit derivates with third party protec- tion sellers as well as financial collateral received. Both protection sellers and financial collateral must be eligible under Basel 2.5 regulations. The lower part of this table shows the re-securitization posi- tions which have an integrated insurance wrapper, split into posi- tions with investment grade, sub-investment grade and defaulted insurance. The values disclosed in both tables are the net expo- sure amount at default at the balance sheet date. Banking book – re-securitization positions retained or purchased CHF million Total 31.12.11 With credit risk mitigation Without credit risk mitigation 0 1,632 Total 1,632 Banking book – re-securitization positions broken down according to guarantor creditworthiness categories 1 CHF million 3 3 34 16 57 0/1 2 3 4 5 6 7 8 9 10 11 12 13 14 Total 31.12.11 1 Internal UBS rating scale. Investment grade Sub-investment grade Defaulted 188 Securitization in the trading book Trading book – securitization activity of the year This table outlines the total exposures (i.e. deal size at inception) which were securitized in the trading book in 2011. The activity is further broken down by our role (originator / sponsor) and by type (traditional / synthetic). During 2011, we only acted as sponsor by either advising securitization programs or placing securities into the market. Originator Sponsor Traditional Synthetic Securitization positions retained No securitization positions retained Securitization positions retained No securitization positions retained Realized gains / losses on traditional­ securitizations Traditional Synthetic 55 495 422 2,796 2,074 5,780 11,622 0 0 0 0 0 0 CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.11 Trading book – total outstanding securitized exposures This table outlines exposures (i.e. outstanding deal size) in the trading book where we have acted as originator and / or sponsor and have retained securitization positions in the trading book. Where we have not retained positions, the outstanding deal size is only disclosed in the year of inception. The value disclosed is the notional of the outstanding notes issued by the securitization vehicle at the balance sheet date. t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R Originator Sponsor Synthetic Traditional Synthetic Traditional 897 CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.11 897 0 14,223 15,010 282 920 2,796 2,074 10,375 45,681 0 189 Risk, treasury and capital management Basel 2.5 Pillar 3 Trading book – total outstanding exposures intended to be securitized We disclose our intention to securitize exposures only when we act as originator and after the pricing of a deal has been fixed. On this basis, as of 31 December 2011, no exposures in the trading book were intended to be securitized. Trading book – aggregated amount of securitized exposures subject to the market risk approach This table provides a split of the total outstanding exposures which we have securitized in the trading book in the role of originator and / or sponsor. Disclosure is made only where we have retained positions in the trading book. The amount disclosed is the notional amount of the outstanding notes issued by the securitization vehicle at the balance sheet date. CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.11 Traditional 897 Originator Sponsor Synthetic Traditional Synthetic 14,223 14,955 282 920 897 0 4,595 34,975 0 Trading book – securitization positions retained or purchased subject to the securitization framework for specific risk This table provides a breakdown of securitization positions which we have purchased or retained in the trading book, irrespective of our role in the securitization transaction. Gross long and gross short amounts reflect the positions prior to the eligible off­setting of cash and derivative positions. Net long and net short amounts are the result of off-setting cash and derivative positions to the extent eligible under Basel 2.5. The amounts disclosed are either the market value or the aggregate of notional amount and the associated replacement value of the exposures securitized at the balance sheet date. CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.111 Cash positions Derivative positions Total Gross­long Gross­short Gross­long Gross­short 212 482 3 4 6 1 4 4 396 299 1,410 2 12 4 14 8 40 7,197 77 84 17 7,376 7,432 695 939 150 200 9,416 Net long 1,352 491 3 3 5 1 3 4 480 199 2,542 Net short 2,037 637 469 4 163 197 3,506 1­Leveraged­super­senior­tranches­and­re-securitized­corporate­credit­exposure­(both­subject­to­the­securitization­framework)­are­not­included­in­this­table,­but­disclosed­in­the­table­“Trading­Book­–­Correlation­products­ subject to the comprehensive risk measure or the securitization framework for specific risk” together with the CRM positions. 190 Trading book – correlation products subject to the comprehensive risk measure or the securitization framework for  specific risk This table outlines products in the correlation port folio which we retained or purchased in the trading book, irrespective of our role in the securitization transaction. They are either subject to the comprehensive risk measure or the securitization framework for specific risk. Correlation products subject to the securitization framework are leveraged super senior and certain re-securitized corporate credit exposure positions. As per IFRS, the values dis- closed are market values for cash positions, replacement values and notionals for derivative positions. Gross long risk trades across the portfolio have an overall negative replacement value and gross short trades have an overall positive replacement value. CHF million Gross long Gross short Gross long Gross short Gross long Gross short Positions subject to comprehensive risk measure Positions subject to securitization framework 1 167 44 1,067 0 6,256 131 5,621 188 111,681 12,511 100,343 22,936 1 Includes leveraged super senior tranches and re-securitized corporate credit exposure. Cash positions Market values Derivative positions Replacement values Notionals Trading book – securitization positions retained or purchased subject to the securitization framework for specific risk This table outlines securitization positions which we have purchased or retained in the trading book subject to the securitization frame- work for specific risk, irrespective of our role in the securitization transaction, broken down by risk weight bands and regulatory capital approach. The amounts disclosed are market values at the balance sheet date after eligible netting under Basel 2.5. 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% Ratings-based approach Supervisory formula approach Net short 2,998 1 Net long Net short Net long 332 80 348 372 118 139 297 78 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R over 250 – 1,250% Total 31.12.112 1 As per FINMA Circular “Market risk banks” only the higher of the net long or the net short securitization positions require a capital charge. The interim relief is granted until 31 December 2013. After the transition period both net long and net short positions require a capital charge. The amount disclosed under net short is for information only i.e. a 0% riskweight was applied. 2 Leveraged super senior tranches and re-securitized corporate credit­exposure­(both­subject­to­the­securitization­framework)­are­not­included­in­this­table,­but­disclosed­in­the­table­“Trading­Book­–­Correlation­products­subject­to­the­comprehensive­risk­measure­or­the­securitization­ framework for specific risk” together with the CRM positions. 2,998 1,950 185 0 0 191 Risk, treasury and capital management Basel 2.5 Pillar 3 Trading book – capital charge / deductions for securitization positions related to correlation products This table outlines the capital treatment for securitization positions in the trading book for correlation products, including positions subject to comprehensive risk measure and positions related to leveraged super senior and certain re-securitized corporate credit expo- sures positions subject to the securitization framework. Our model does not distinguish between “default risk”, “migration risk” and “correlation risk”. CHF million Positions subject to comprehensive risk measure Positions subject to securitization framework 1 1 Includes leveraged super senior tranches and re-securitized corporate credit exposure 31.12.11 Capital charge 690 121 31.12.11 Deduction 9 Trading book – capital charge for securitization positions subject to the securitization framework This table outlines the capital charge for securitization positions subject to the securitization framework for specific risk in the trading book, split by risk weight bands and regulatory capital approach. This table does not contain capital deductions. 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% Total 31.12.111 Ratings-based approach Supervisory formula approach 2 0 6 9 4 8 13 12 75 130 0 1 Leveraged super senior tranches subject to the securitization framework are not included in this table, but disclosed in table “Trading Book – Capital charge / Deductions for securitization positions related to correlation products” together with the CRM positions. Trading book – deductions from eligible capital related to securitization positions This table outlines the capital deductions related to securitization positions we have retained or purchased in the trading book, irrespec- tive of our role in the securitization transaction. As of 31 December 2011, we had no securitization positions which would need to be entirely deducted from tier 1 capital, and no deduction positions related to credit enhancing interest only strips. CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or SME Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.111 Positions deducted from BIS tier 1 ­capital­and­BIS­tier­2­capital 262 89 4 1 230 6 591 1 Deductions related to re-securitized corporate credit exposure are captured in table “Capital charge / deductions for securitization positions related to correlation products”. 192 Trading book – securitization exposures subject to early amortizations We currently do not have securitization structures that are subject to early amortization treatment. Trading book – re-securitization positions retained or purchased and broken down according to guarantor creditworthiness categories The upper part of the table below outlines re-securitization posi- tions retained or purchased which are held in the trading book on a gross long and gross short basis, including synthetic long and short positions resulting from derivative transactions. It also includes positions on a net long and net short basis, i.e. after applying off-setting to the extent it is eligible under Basel 2.5. The lower part of the table discloses the total re-securitization positions which have an integrated insurance wrapper split by positions with investment grade, sub-investment grade and de- faulted insurance. Trading book – re-securitization positions retained or purchased CHF million Total 31.12.11 Gross­long Gross­short 480 163 Net long 480 Net short 163 Trading book – re-securitization positions broken down according to guarantor creditworthiness categories 1 CHF million 0/1 Investment grade 2 3 4 5 6 7 8 9 10 11 12 13 14 Total 31.12.11 1 Internal UBS rating scale. Sub-investment grade Defaulted 3 3 31 31 3 3 31 31 t n e m e g a n a m l a t i p a c d n a y r u s a e r t , k s i R 193 Corporate governance, responsibility and compensation Audited information according to the Swiss Code of Obligations and applicable regu- latory requirements and guidance Disclosures provided in line with the requirements of articles 663bbis and 663c para. 3 of the Swiss Code of Obligations (supplemen- tary disclosures for companies whose shares are listed on a stock exchange: compensations and participations) and applicable regula- tions and guidance are also included in the audited financial statements of this report. Tables containing such information are marked by a bar “audited” throughout this section. Information assured according to the Global Reporting Initiative (GRI) Content of the sections “Corporate responsibility” and “Our employees” has been reviewed by Ernst & Young Ltd against the GRI Sustainability Reporting Guidelines for application level A+, as evidenced in the Ernst & Young assurance report on pages 240–241. The assurance by Ernst & Young also covered relevant text and data in the Annual Report 2011 and on the website of UBS which is referenced in the GRI Index (www.ubs.com/gri) 195 Corporate governance, responsibility and compensation Corporate governance Corporate governance Our corporate governance principles are designed to support our objective of sustainable profitability, as well as to create value and protect the interests of our shareholders and stakeholders. We use the term “corporate governance” when referring to the organizational structure of UBS and operational practices of our management. We are subject to, and in compliance with, all relevant Swiss legal and regulatory requirements regarding corporate governance, in particular with all applicable laws, the SIX Swiss Exchange’s (SIX) Directive on Information Relating to Corporate Governance as well as the standards established in the Swiss Code of Best Prac- tice for Corporate Governance, including the appendix on execu- tive compensation. In addition, as a foreign company with shares listed on the New York Stock Exchange (NYSE), we are in compliance with all relevant corporate governance standards applicable to foreign listed companies. The Board of Directors (BoD) has adopted the revised Organi- zation Regulations of UBS AG (Organization Regulations) that came into effect on 1 January 2012 and constitute our corporate governance guidelines. The BoD has also adopted the UBS Code of Business Conduct and Ethics (the Code). ➔ Refer to www.ubs.com/governance for more details on both, the Organization Regulations and the Code Differences from corporate governance standards relevant to US-listed companies According to the NYSE listing standards on corporate governance, foreign private issuers are required 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 The Audit Committee (AC) has been assigned all the abovemen- tioned responsibilities, except for appointment of the indepen- dent auditors, who are elected by the shareholders as per Swiss company law. The AC assesses the performance and qualification of the external auditors and submits its proposal for appointment, reappointment or removal to the full BoD, which brings its pro- posal to the shareholders for vote at the Annual General Meeting of Shareholders (AGM). Discussion of risk assessment and risk management policies by the Risk Committee In accordance with our Organization Regulations, the Risk Commit- tee (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 divisions and control units run appropriate systems for risk management and control. Supervision of the internal audit function The Chairman of the BoD (Chairman), the RC and the AC share 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, comprising the Group Chief Executive Officer (Group CEO) and Group Execu- tive Board (GEB) members, are completed by the Chairman and the Human Resources and Compensation Committee, and are 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 Committee and Human Resources and Compensation Committee Under Swiss company law, all reports addressed to shareholders are provided and signed by the full BoD, which has ultimate re- sponsibility vis-à-vis shareholders. The Committees submit their reports to the full BoD. Shareholders’ votes on Equity Compensation Plans Swiss company law authorizes the BoD to approve compensation plans. Though Swiss law does not allocate such authority to the AGM, it requires that Swiss companies determine the nature and components of capital in their articles of association, and each increase of capital is required to be submitted for shareholders’ approval. 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. ➔ Refer to the section “Board of Directors” for more information about the Board of Directors Committees ➔ Refer to the section “Capital structure” for more information on capital 196 Group structure and shareholders UBS Group legal entity structure Significant shareholders Under Swiss company law, UBS AG is organized as a limited com- pany; 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 businesses within an efficient legal, regulatory, tax and funding framework. Neither our business divisions nor the Corporate Center are sepa- rate legal entities; they primarily operate out of the Parent Bank, UBS AG, through its branches worldwide. This structure is de- signed 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 nei- ther possible nor efficient to operate out of the Parent Bank, busi- nesses operate through local subsidiaries. This can be the case when required for legal, tax or regulatory purposes, or when ad- ditional legal entities join the Group through acquisition. Operational Group structure On 31 December 2011, the operational structure of the Group comprised the Corporate Center and four business divisions: Wealth Management & Swiss Bank, Wealth Management Ameri- cas, Global Asset Management and the Investment Bank. ➔ Refer to the “Financial and operating performance” section of this report for more information Listed and non-listed companies belonging to the Group The Group includes a number of consolidated entities, none of which, however, are listed companies other than UBS AG. ➔ Refer to “Note 33 Significant subsidiaries and associates” in the “Financial information” section of this report for details of significant operating subsidiary companies of the Group Under the Federal Act on Stock Exchanges and Securities Trading of 24 March 1995, as amended (the Swiss Stock Exchange Act), anyone holding shares in a company listed in Switzerland, or hold- ing derivative rights related to shares of such a company, must notify the company and the SIX Swiss Exchange (SIX) if the hold- ing attains, falls below or exceeds one of the following threshold percentages: 3, 5, 10, 15, 20, 25, 331⁄3, 50, or 662⁄3% 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 (FINMA) on Stock Exchanges and Securities Trading (the Ordinance). In particular, the Ordinance takes into account all future potential share obligations irrespec- tive of their possible contingent nature, and prohibits the netting of acquisition positions (in particular shares, conversion rights and acquisition rights or obligations) with disposal positions (i.e. rights or obligations to sell). It further requires that each such position be calculated separately and reported as soon as it reaches one of the abovementioned thresholds. Nominee companies which can- not autonomously decide how voting rights are exercised, are not obligated to notify UBS and the SIX if they reach, exceed or fall below the threshold percentages. In addition, pursuant to the Swiss Code of Obligations, UBS must disclose in its notes to the financial statements the identity of any shareholder with a holding of more than 5% of the total share capital of UBS AG. According to disclosure notifications filed with UBS AG and the SIX, on 30 September 2011, Norges Bank (the Central Bank of Norway), Oslo, disclosed under the Swiss Stock Exchange Act, a holding of 3.04% of the total share capital of UBS AG. On 15 April 2011, the Capital Group Companies, Inc., Los Angeles, disclosed under the Swiss Stock Exchange Act, that their holding d e t i d u A Shareholders registered in the UBS share register with 3% or more of shares issued In % of shares issued Chase Nominees Ltd., London DTC (Cede & Co.), New York 1 Government of Singapore Investment Corp., Singapore Nortrust Nominees Ltd., London 1 DTC (Cede & Co.), New York, “The Depository Trust Company”, is a US securities clearing organization. 31.12.11 10.95 7.07 6.41 4.20 31.12.10 10.70 7.32 6.41 3.79 31.12.09 11.63 8.42 less than 3 3.07 197 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Corporate governance, responsibility and compensation Corporate governance of 4.90% of the total share capital of UBS AG, disclosed on 8  June 2010, fell below the threshold of 3%. On 12 March 2010, the Government of Singapore, Singapore, as beneficial owner, disclosed under the Swiss Stock Exchange Act, a holding by the Government of Singapore Investment Corp. of 6.45% of the total share capital of UBS AG. On 17 December 2009, Black- Rock Inc., New York, disclosed under the Swiss Stock Exchange Act, a holding of 3.45% of the total share capital of UBS AG. In accordance with the Swiss Stock Exchange Act, the percentages indicated above were calculated in relation to the share capital reflected in the Articles of Association of UBS AG (Articles of Association) at the time of the respective disclosure notification. Information on disclosures under the Swiss Stock Exchange Act can be found on the following website of the SIX: http://www. six-exchange-regulation.com/obligations/disclosure/major_ shareholders_en.html. According to our share register, the shareholders (acting in their own name or in their capacity as nominees for other inves- tors or beneficial owners) listed in the table on the previous page were registered with 3% or more of the total share capital on 31 December 2011, 2010 and 2009. Cross shareholdings We have no cross shareholdings in excess of a reciprocal 5% of capital or voting rights with any other company. 198 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 2011, 3,832,121,899 shares were issued with a par value of CHF  0.10 each, leading to ordinary share capital of CHF 383,212,189.90. Conditional share capital At year-end 2011, the following conditional share capital was available to the BoD: – At the Annual General Meeting (AGM) held in 2006, share- holders approved conditional capital in the maximum amount of 150,000,000 fully paid registered shares, with a nominal value of CHF 0.10 each, to be used for employee option grants. Options are exercisable at any time between their vesting and expiration dates. Shareholders have no pre-emp- tive rights. In 2011, options on 1,281,386 shares were exer- cised under the option plans with a total of 148,639,326 conditional capital shares being available to satisfy further exercises of options. – At the AGM held in 2009, our shareholders approved the creation of conditional capital for the potential issuance of 100,000,000 fully paid registered shares, with a nominal value of CHF 0.10 each, in the event of the exercise of warrants granted to the Swiss National Bank (SNB) in connection with the loan granted by the SNB to the SNB StabFund. – At the AGM held in 2010, shareholders approved conditional capital in the amount of up to 380,000,000 fully paid regis- tered shares, with a nominal value of CHF 0.10 each, through the exercise of conversion rights and / or warrants granted in connection with the issuance of bonds or similar financial instruments by UBS. Shareholders have no pre-emptive rights. The owners of conversion rights and / or warrants would be entitled to subscribe to the new shares. At year-end 2011, the BoD had not made use of the allowance to issue bonds or warrants with conversion rights covered by conditional share capital. the delivery of shares out of the conditional capital to satisfy awards granted under employee share plans. ➔ Refer to the discussion of “UBS shares” in the “capital manage- ment” section of this report for more information on conditional share capital Authorized share capital The BoD has no authorized share capital available. Changes of shareholders’ equity and shares According to International Financial Reporting Standards (IFRS), equity attributable to UBS shareholders amounted to CHF 53.4 billion on 31 December 2011 (2010: CHF 46.8 billion; 2009: CHF 41.0 billion). The UBS Group shareholders’ equity was represent- ed by 3,832,121,899 issued shares on 31 December 2011 (2010: 3,830,840,513; 2009: 3,558,112,753). ➔ Refer to the “Statement of changes in equity” in the “Financial information (consolidated financial statements)” section of this report for more information on changes in shareholders’ equity over the last three years Shares and participation certificates We have only one unified class of shares issued. 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 subject to the restrictions set out under “Transferability, voting rights and nominee registration”. Global registered shares provide direct and equal ownership for all share- holders, irrespective of the country and stock exchange on which they are traded. Ownership of UBS shares is widely spread. The tables on the fol- lowing page provide information about the distribution of our share- holders by category and geographical location. This information re- lates only to registered shareholders and cannot be assumed to be representative of our entire investor base nor the actual beneficial ownership. Only shareholders registered in the share register as “shareholders with voting rights” are entitled to exercise voting rights. ➔ Refer to the “Shareholders’ participation rights” section of this report for more information For the AGM 2012, the BoD proposes to increase the size of the existing conditional capital of Article 4a para. 1 of the Articles of Association, originally approved at the AGM held in 2006, from CHF 14,863,932.60 to CHF 30,000,000 which allows the BoD to issue up to 300 million UBS shares. At the same time, the BoD proposes to amend the current wording of said article to permit On 31 December 2011, 2,181,819,724 shares carried voting rights, 396,311,882 shares were entered in the share register without voting rights, and 1,253,990,293 shares were not regis- tered. All 3,832,121,899 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. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 199 Corporate governance, responsibility and compensation Corporate governance Distribution of UBS shares On 31 December 2011 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 5,000,001–38,321,218 (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 38,987 190,899 104,519 10,448 749 96 28 1 1 0 1 3 1 345,732 % 11.3 55.2 30.3 3.0 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2,274,547 88,190,965 290,072,681 263,182,320 187,940,646 204,778,874 273,827,225 72,243,657 98,879,288 0 160,917,513 935,823,890 100.0 2,578,131,606 1,253,990,293 3,832,121,899 3 0.1 2.3 7.6 6.9 4.9 5.3 7.1 1.9 2.6 0.0 4.2 24.4 67.3 32.7 100.0 1 On 31 December 2011, Chase Nominees Ltd., London, entered as a trustee / nominee, was registered with 10.95% of all UBS shares issued. However, according to the provisions of UBS, voting rights of a trustee / nom- inee are limited to a maximum of 5% of all UBS shares issued. The US securities clearing organization DTC (Cede & Co.), New York, was registered with 7.07% of all UBS shares issued and is not subject to this 5% vot- ing limit as securities clearing organization. The same applies to the Government of Singapore Investment Corp., Singapore, which is registered as beneficial owner with 6.41% of all UBS shares issued. 2 Shares not entered in the share register on 31 December 2011. 3 Of the total shares issued, 396,311,882 registered shares do not carry voting rights. Shareholders: type and geographical distribution On 31 December 2011 Individual shareholders Legal entities Nominees, fiduciaries Unregistered Total Switzerland Europe North America Other countries Unregistered Total Ordinary share capital On 31 December 2009 Issue of shares for capital increase (conversion of mandatory convertible notes) Issue of shares out of conditional capital due to employee options exercised On 31 December 2010 Issue of shares out of conditional capital due to employee options exercised On 31 December 2011 200 Shareholders Shares Number 337,602 7,569 561 % 97.6 2.2 0.2 Number 665,300,452 704,903,448 1,207,927,706 1,253,990,293 % 17.4 18.4 31.5 32.7 345,732 100.0 3,832,121,899 100.0 309,443 19,060 9,252 7,977 89.5 5.5 2.7 2.3 835,304,519 915,253,433 489,932,937 337,640,717 1,253,990,293 21.8 23.9 12.8 8.8 32.7 345,732 100.0 3,832,121,899 100.0 Share capital in CHF Number of shares Par value in CHF 355,811,275 3,558,112,753 27,265,100 272,651,005 7,676 76,755 383,084,051 3,830,840,513 128,139 1,281,386 383,212,190 3,832,121,899 0.10 0.10 0.10 0.10 0.10 0.10 At year-end 2011, we owned UBS registered shares cor- responding to 2.2% of the total share capital of UBS AG. At  the  same time, we had disposal positions relating to 467,465,923 voting rights of UBS AG, corresponding to 12.20% of the total voting rights of UBS AG. They consisted mainly of 9.12% of voting rights on shares deliverable in respect of em- ployee awards. The calculation methodology for the disposal position is based on the Ordinance by FINMA on Stock Exchang- es and Securities Trading, which takes into account all future potential share delivery obligations irrespective of the contin- gent nature of the delivery. We have no participation certificates outstanding. new shares. We had CHF 4.4 billion principal amount of deeply subordinated capital instruments outstanding, which count as hy- brid tier 1 capital under Swiss regulatory rules, and CHF 7.1 billion principal amount of outstanding tier 2 capital securities (mainly subordinated bonds). As the regulatory requirements on the structure of capital instruments were evolving, we did not issue any capital instruments in 2011. On 22 February 2012, UBS issued USD 2 billion Basel III compli- ant loss-absorbing tier 2 notes. The 7.25% 10-year security does not dilute the value of the equity held by the bank’s shareholders, and counts as progressive buffer capital under the Swiss regula- tions for its systemic banks. ➔ Refer to the “Capital management” section for more information Transferability, voting rights and nominee registration on this loss- absorbing instrument We do not apply any restrictions or limitations on the transfer- ability of shares. Voting rights may be exercised without any re- strictions by shareholders entered into the share register, if they expressly render a declaration of beneficial ownership according to the provisions of the Articles of Association. We have special provisions for the registration of fiduciaries and nominees. Fiduciaries and nominees are entered in the share register with voting rights up to a total of 5% of all shares issued, if they agree to disclose upon our request, beneficial owners hold- ing 0.3% or more of all UBS shares. An exception to the 5% vot- ing limit rule exists for securities clearing organizations, such as The Depository Trust Company in New York. ➔ Refer to the “Shareholders’ participation rights” section of this report for more information Capital instruments Options In connection with the loan granted by the Swiss National Bank (SNB) to the SNB StabFund, we have issued warrants granted to the SNB sourced by conditional capital for which 100,000,000 shares were approved by our shareholders. The warrants are exer- cisable only if the SNB incurs a loss on its loan to the fund. On 31 December 2011, there were 235,017,185 employee op- tions, including stock appreciation rights outstanding. Delivery obligations equivalent to 10,544,604 shares were exercisable. We source our option-based compensation plans either by purchasing UBS shares in the market, or through the issuance of new shares out of conditional capital. On 31 December 2011, 75,674,805 treasury shares were available for this purpose, and an additional 148,639,326 unissued shares in conditional share capital were as- signed to future employee option exercises. At year-end 2011, the shares available covered all exercisable employee obligations. On 31 December 2011, there were no contingent capital securi- ties or convertible bonds outstanding requiring the issuance of ➔ Refer to the discussion of “UBS shares” in the ”capital manage- ment” section of this report for more information on options y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 201 Corporate governance, responsibility and compensation Corporate governance Shareholders’ participation rights We are committed to shareholder participation in our decision- making process. More than 340,000 directly registered sharehold- ers, as well as some 90,000 US shareholders registered via nomi- nee companies, regularly receive written information about our activities and performance and are personally invited to share- holder meetings. ➔ Refer to the “Information policy” section of this report for more information Relationships with shareholders We fully subscribe to the principle of equal treatment of all share- holders, who range from large investment institutions to individu- al investors, and regularly inform them about the development of the company of which they are co-owners. The Annual General Meeting (AGM) offers shareholders the opportunity to raise any questions regarding our development and the events of the year that is under review. Board of Directors (BoD) and Group Executive Board members, as well as the internal and external auditors, are present to answer these questions. Voting rights, restrictions and representation We place no restrictions on share ownership and voting rights. However, nominee companies and trustees, who normally repre- sent a large number of individual shareholders and may hold an unlimited number of shares, have voting rights limited to a maxi- mum of 5% of outstanding UBS shares to avoid the risk of un- known shareholders with large stakes being entered in the share register. Securities clearing organizations, 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. Nominee companies and trustees are required to sign an agreement confirming their will- ingness to disclose, upon our request, individual beneficial owners holding more than 0.3% of all issued shares. All shareholders registered with voting rights are entitled to participate in shareholder meetings. If they do not wish to attend in person, they can issue instructions to accept, reject or abstain on each individual item on the meeting agenda, either by giving instructions to an independent proxy designated by UBS, as required under Swiss company law, or by appointing UBS, another bank or another registered shareholder of their choice to  vote on their behalf. Nominee companies normally submit the proxy material to the beneficial owners and transmit the col- lected votes to UBS. Statutory quorums Shareholder resolutions, including the election and reelection of BoD members and the appointment of the auditors are decided at the AGM by an absolute majority of the votes cast, excluding blank and invalid ballots. Swiss company law requires that, for certain specific issues, a majority of two-thirds of the votes repre- sented at the AGM, and the absolute majority of the par value of shares represented at the AGM, must vote in favor of the resolu- tion. These issues include, among others, the creation of shares with privileged voting rights, the introduction of restrictions on the transferability of registered shares, conditional and authorized capital increases, and restrictions or exclusions of shareholders’ pre-emptive rights. The Articles of Association also requires a two-thirds majority of votes represented for any change to its provisions regarding the number of BoD members, and any decision to remove one-fourth or more of the BoD members. Votes and elections are normally conducted electronically to as- certain the exact number of votes cast. Voting by a show of hands remains possible if a clear majority is predictable. Shareholders rep- resenting at least 3% of the votes represented may still request that a vote or election takes place electronically or by written bal- lot. In order to allow shareholders to clearly express their views on all individual topics, each item on the agenda is put to a vote sepa- rately and BoD elections are made on a person-by-person basis. 202 Convocation of general meetings of shareholders The AGM normally takes place each year in late April or early May, but in any case within six months of the close of the financial year. A personal invitation including a detailed agenda and explanation of each motion is sent to every registered shareholder at least 20 days ahead of the scheduled AGM. The meeting agenda is also published in the Swiss Official Gazette of Commerce and in  selected Swiss newspapers as well as on the internet at www.ubs.com/agm. Extraordinary General Meetings may be convened whenever the BoD or the statutory auditors consider it necessary. Shareholders individually or jointly representing at least 10% of the share capital may, at any time, ask in writing that an Extraordinary General Meet- ing be convened to deal with a specific issue put forward by them. Such a request may also be brought forward during the AGM. Placing of items on the agenda Shareholders individually or jointly representing shares with an ag- gregate par value of CHF 62,500 may submit proposals for mat- ters to be placed on the agenda for consideration at the next 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, together with a short explanation, if necessary. The BoD formulates opinions on the proposals, which are published together with the motions. Registrations in the share register The general rules for being entered with voting rights in our Swiss or US share registers also apply before general meetings of share- holders. There is no “closing of the share register” 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. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 203 Corporate governance, responsibility and compensation Corporate governance Board of Directors The Board of Directors (BoD), under the leadership of the Chair- man, decides on the strategy of the Group upon recommenda- tion of the Group Chief Executive Officer (Group CEO), exercises the ultimate supervision over senior management, and appoints all Group Executive Board (GEB) members. The BoD also ap- proves all financial statements for issue. Shareholders elect each member of the BoD, which in turn appoints its Chairman, Vice Chairmen, Senior Independent Director, the members of the BoD Committees, their respective Chairpersons and the Company Secretary. Members of the Board of Directors Sally Bott tendered her resignation taking effect on 11 February 2011. At the Annual General Meeting (AGM) held on 28 April 2011, Kaspar Villiger, Michel Demaré, David Sidwell, Rainer-Marc Frey, Bruno Gehrig, Ann F. Godbehere, Axel P. Lehmann, Wolf- gang Mayrhuber, Helmut Panke and William G. Parrett were re- elected as their terms of office expired. Joseph Yam was elected to his first term on the BoD. Following their election, the BoD appointed Michel Demaré as Vice Chairman and David Sidwell as Senior Independent Director. On 1 July 2011, the BoD nominated Axel A. Weber, former President of the Deutsche Bundesbank, for election to the BoD at the 3 May 2012 AGM and planned, in expectation of his election, to appoint him as non-independent Vice Chairman. In November 2011, the Chairman of the BoD Kas- par Villiger decided to accelerate the leadership change at UBS by not standing for reelection to the BoD at the 2012 AGM. Axel A. Weber was then proposed to succeed Mr. Villiger as the Chair- man should he be elected at the AGM 2012. On 3 February 2012, UBS announced that Bruno Gehrig will not stand for reelection. The BoD nominated Beatrice Weder di Mauro, professor of eco- nomics, economic policy and international macroeconomics at the Johannes Gutenberg University of Mainz, and Isabelle Romy, partner at the Swiss law firm Niederer Kraft & Frey, for election to the BoD at the 2012 AGM. 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 BoD members are external, with the exception of the Chairman. On 31 Decem- ber 2011, with the exception of the non-independent Chairman, Kaspar Villiger, all BoD members were considered independent by the BoD. The following biographies provide information on the BoD mem- bers and the Company Secretary, valid as of 31 December 2011. Professional history and education Kaspar Villiger was elected to the Board of Directors (BoD) at the 2009 Annual General Meeting (AGM) and was thereafter appointed Chairman of the BoD. He chairs the Governance and Nominating Committee and has been a member of the Corporate Responsibility Committee since 2009. Mr. Villiger was elected Federal Councillor in 1989, and served as the Minister of Defence and Head of the Federal Military Department until 1995. Subsequently, he served as Finance Minister and Head of the Federal Department of Finance until he stepped down at the end of 2003. In addition to Federal Councillor, 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 at UBS. As co-owner of the Villiger Group, Mr. Villiger managed the Swiss parent firm, Villiger Söhne AG, from 1966 until 1989. In addition, he held several political positions, first in the parliament of the canton of Lucerne and, from 1982 until 1989, in the Swiss Parliament. Mr. Villiger graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a degree in mechanical engineering in 1966. Kaspar Villiger Swiss, born 5 February 1941 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Chairman of the Board of Directors / member of the Corporate Responsibility Committee / Chairperson of the Governance and Nominating Committee Year of initial appointment: 2009 204 Professional history and education Michel Demaré was elected to the BoD at the 2009 AGM, and in April 2010 was appointed independent Vice Chairman. He has been a member of the Audit Committee since 2009 and the Governance and Nominating Committee since 2010. Mr. Demaré joined ABB in 2005 as Chief Financial Officer (CFO) and as a member of the Group Executive Committee. Between February and September 2008, he acted as the interim CEO of ABB. From September 2008 to March 2011, he combined the CFO responsibility with the role of President of Global Markets. Mr. Demaré joined ABB from Baxter International Inc., 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, Mr. Demaré was the CFO of the Global Polyolefins and Elastomers division. He began his career as an of- ficer in the multinational banking division of Continental Illinois National Bank of Chicago, and was based in Antwerp. Mr. Demaré graduated with an MBA from the Katholieke Universiteit Leuven, Belgium, and holds a degree in applied eco- nomics 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 in Lausanne. Professional history and education David Sidwell was elected to the BoD at the 2008 AGM. In April 2010, he was appointed Senior Independent Director. He has chaired the Risk Committee since 2008 and has been a member of the Governance and Nominating Committee since 2011. Mr. Sidwell was Executive Vice President and CFO of Morgan Stanley between 2004 and 2007. Before joining Morgan Stanley, he worked for JPMorgan Chase & Co., where in his 20 years of service, he held a number of different positions in- cluding controller, and from 2000 to 2004 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 with 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 and Chairperson of the Risk Policy and Capital Committee of Fannie Mae, Washington D.C., and is a Senior Advisor at Oliver Wyman, New York. He is a trustee of the International Accounting Standards Committee Foundation, London, the Chairman of the Board of Village Care, New York, and is a Director of the National Council on Aging, Washington D.C. Professional history and education Rainer-Marc Frey was elected to the BoD at the October 2008 Extraordinary General Meeting and has been a member of the Audit Committee since 2010 and the Risk Committee since 2008. Mr. Frey is the founder of the investment management company Horizon21 AG. He is the Chairman of Horizon21 AG as well as of its holding company and related entities and subsidiaries. In 1992, he founded and was appointed CEO of RMF Investment Group. RMF was acquired by Man Group plc in 2002. Between 2002 and 2004, he held a number of senior roles within Man Group. 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. Mr. Frey 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 board of DKSH Group, Zurich, as well as of the Frey Charitable Foundation, Freienbach. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Michel Demaré Belgian, born 31 August 1956 ABB Ltd., Affolternstrasse 44, P.O. Box 5009, CH-8050 Zurich Functions in UBS Independent Vice Chairman / member of the Audit Committee / member of the Governance and Nominating Committee Year of initial appointment: 2009 David Sidwell American (US) and British, born 28 March 1953 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Senior Independent Director / Chairperson of the Risk Committee / member of the Governance and Nominating Committee Year of initial appointment: 2008 Rainer-Marc Frey Swiss, born 10 January 1963 Office of Rainer-Marc Frey, Seeweg 39, CH-8807 Freienbach Functions in UBS Member of the Audit Committee / member of the Risk Committee Year of initial appointment: 2008 205 Corporate governance, responsibility and compensation Corporate governance Professional history and education Bruno Gehrig was elected to the BoD at the October 2008 Extraordinary General Meeting and has been a member of the Governance and Nominating Committee and the Human Resources and Compensation Committee since 2009. 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 Bank Cantrade AG. Mr. Gehrig worked for Union Bank of Switzerland between 1981 and 1989, where he started as a chief economist before assuming responsibility for securities sales and trading. 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. Mr. Gehrig 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 Chairman of the Board of Swiss International Air Lines and the Vice Chairman and Chairperson of the Remuneration Committee of Roche Holding Ltd., Basel. Professional history and education Ann F. Godbehere was elected to the BoD at the 2009 AGM. She has chaired the Human Resources and Compensation Committee since 2011 and has been a member of the Audit Committee and the Corporate Responsibility Committee since 2009. 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’s 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 & 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, she was CEO of Swiss Re Life & Health in Canada. In 1996 and 1997, she was CFO of Swiss Re Life & Health North America. Ms. Godbehere is a certified general accountant, and in 2003, was made a fellow of the Certified General Accountants Association of Canada. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Ms. Godbehere is a board member and Chairperson of the Audit Committees of Prudential plc, Rio Tinto plc and Rio Tinto Limited in London. She is on the board of Atrium Underwriters Ltd. and Atrium Underwriting Group Ltd., London. She chairs both its Audit Committee and Conflicts Committee. She is also a member of the board and is Chairperson of the Audit Committee of Ariel Holdings Ltd., Bermuda. In addition, she is a board member of British American Tobacco plc. Professional history and education Axel P. Lehmann was elected to the BoD at the 2009 AGM and has been a member of the Governance and Nominating Committee since 2011 and the Risk Committee since 2009. He is a member of the Group Executive Committee of Zurich Financial Services (Zurich) and has been Group Chief Risk Officer since January 2008 and Regional Chairman Europe since October 2011. In July 2011, he was appointed as Chairman of the Board of Farmers Group, Inc., and was responsible for Group IT from 2008 until 2010. In September 2004, Mr. Lehmann was appointed CEO of Zurich American Insurance Company and the North America Commercial business division in Schaumburg, Illinois. He became a member of Zurich’s Group Executive Committee and CEO of its Continental Europe business division in 2002, and subsequently was in charge, in 2004, of integrating it with UK, Ireland and South Africa. In 2001, he took over the responsibility for Northern, Central and Eastern Europe and was appointed CEO of the Zurich Group Germany. In 2000, Mr. Lehmann became a member of the Group Management Board where he was responsible for Group-wide business development functions. Before he joined Zurich in 1996, he was Head of Corporate Planning and Controlling for Swiss Life in Zurich. Mr. Lehmann holds a PhD and a master’s degree in business administration and economics from the University of St. Gallen and 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. He is a mem- ber and past Chairman of the Chief Risk Officer Forum and is a member of the executive committee of the International Financial Risk Institute Foundation. Bruno Gehrig Swiss, born 26 December 1946 Swiss International Air Lines AG, Obstgartenstrasse 25, CH-8302 Kloten 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 Chairperson of the Human Resources and Compensation Committee / 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 Functions in UBS Member of the Governance and Nominating Committee / member of the Risk Committee Year of initial appointment: 2009 206 Professional history and education Wolfgang Mayrhuber was elected to the BoD at the 2010 AGM. He has chaired the Corporate Responsibility Committee since 2011 and has been a member of the Human Resources and Compensation Committee since 2010. He was Chairman of the Executive Board and CEO of Deutsche Lufthansa AG from 2003 to 2010. In 2002, he was elected Deputy Chairman of the Executive Board, and in 2001, he was appointed to the Executive Board with responsibility for the passenger airline business. From 1994 to the end of 2000, he was Chairman of the Executive Board of the newly founded Lufthansa Technik AG. After holding a variety of management positions in the maintenance, repair and overhaul division, he was appointed Executive Vice President and Chief Operating Officer Technical in 1992. In 1970, he joined Lufthansa as an engineer at the engine overhaul facility in Hamburg. Mr. Mayrhuber studied mechanical engineering (dipl. Ing.) at the Technical College in Steyr, Austria, and at the Bloor Collegiate Institute in Canada. In 1990, he completed an Executive Management Training course at the Massachusetts Institute of Technology. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Mayrhuber is Chairman of the Supervisory Board and Chairperson of the Mediation Committee, the Nomination Committee and the Executive Committee of Infineon Technologies AG, as well as a member of the supervisory boards of Munich Re Group, BMW Group, Lufthansa Technik AG and Austrian Airlines AG. Furthermore, he serves on the board of HEICO Corporation, Hollywood, FL, the executive board of Acatech (Deutsche Akademie der Technikwissenschaften) and is a trustee of the American Academy of Berlin. Professional history and education Helmut Panke was elected to the BoD at the 2004 AGM. He has been a member of the Human Resources and Compensation Committee and the Risk Committee since 2008. Between 2002 and 2006, Mr. Panke was Chairman of the Board of Management of BMW Group. 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 board of Microsoft Corporation (Chairperson of the Antitrust Compliance Committee) and Singapore Airlines Ltd. (Chairperson of the Board Safety & Risk Committee). He is a member of the supervisory board of Bayer AG. Professional history and education William G. Parrett was elected to the BoD at the October 2008 Extraordinary General Meeting and has chaired the Audit Committee since 2009. Mr. Parrett served his entire career with Deloitte Touche Tohmatsu. 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 between 1999 and 2007. 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 cli- ents worldwide. 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., in all of which he chairs the Audit Committee. He is also the Past Chairman of the Board of the United States Council for International Business and United Way Worldwide. He is a Carnegie Hall Board of Trustees member. Wolfgang Mayrhuber Austrian, born 22 March 1947 Deutsche Lufthansa AG, Flughafen Frankfurt am Main 302, D-60546 Frankfurt am Main Functions in UBS Chairperson of the Corporate Responsibility Committee / member of the Human Resources and Compensation Committee Year of initial appointment: 2010 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 Chairperson of the Audit Committee Year of initial appointment: 2008 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 207 Corporate governance, responsibility and compensation Corporate governance Professional history and education Joseph Yam was elected to the BoD at the 2011 AGM. He has been a member of the Corporate Responsibility Committee and the Risk Committee since 2011. He is Executive Vice President of the China Society for Finance and Banking, and in that capacity, has served as an advisor to the People’s Bank of China since 2009. He was instrumental in the establishment of the Hong Kong Monetary Authority and served as its Chief Executive from 1993 until his retirement in 2009. He began his career in Hong Kong as a statistician in 1971 and served the public for over 38 years. During his service he occupied sev- eral positions such as Director of the Office of the Exchange Fund in 1991, Deputy Secretary for Monetary Affairs in 1985 and Principal Assistant Secretary for Monetary Affairs in 1982. Mr. Yam graduated from the University of Hong Kong in 1970 with first class honors in economics and statistics. He holds honorary doctorate degrees and professorships from a number of universities in Hong Kong and overseas. He is a Distinguished Research Fellow of the Institute of Global Economics and Finance at the Chinese University of Hong Kong. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Yam is Chairman of the Board of Macroprudential Consultancy Limited and sits on the International Advisory Councils of a number of government and academic institutions. He is a board member and chairs the Risk Committee of the China Construction Bank. He is on the board of Johnson Electric Holdings Limited. Professional history and education Luzius Cameron was appointed Company Secretary by the BoD in 2005. He is a Group Managing Director and was appointed to the former Group Managing Board in 2002. From 2002 to 2005, Mr. Cameron was the Director of Strategic Planning and New Business Development, Wealth Management USA. Prior to this role, he was Head of Group Strategic Analysis, and before that, Head of Corporate Business Analysis. Mr. Cameron joined Swiss Bank Corporation in 1989, where he started in Corporate Controlling before assuming a number of senior roles in the Investment Bank Warburg Dillon Read, such as Chief of Staff to the Chief Operating Officer in London and Business Manager of the Global Rates Business in Zurich. From 1984 to 1989, he was a lecturer in astrophysics at the University of Basel. Between 1980 and 1989, he was a research analyst at the Institute of Astronomy at the University of Basel and European Southern Observatory. Mr. Cameron holds a PhD in astrophysics from the University of Basel. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Cameron is the Chairman of the Zurich Symphony Orchestra. Joseph Yam Chinese and Hong Kong citizen, born 9 September 1948 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Member of the Corporate Responsibility Committee / member of the Risk Committee Year of initial appointment: 2011 Company Secretary Luzius Cameron Australian and Swiss, born 11 September 1955 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Company Secretary since 2005 Elections and terms of office In accordance with article 19 para. 1 of the 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 confirm the entire membership of the BoD on a yearly basis at the next AGM, which will take place on 3 May 2012. BoD members are normally expected to serve for a minimum of three years. No BoD member should continue to serve beyond the AGM held in the calendar year following his or her 65th birth- day. The BoD granted the extension of age limit to Kaspar Villiger and William G. Parrett. Organizational principles and structure The Organization Regulations were revised and are valid as of 1 Jan- uary 2012. Changes included a closer alignment of the language of our provisions on the regulation and supervision of the internal con- trol to the Swiss Financial Market Supervisory Authority (FINMA) Cir- cular 08 / 24 on supervision and internal control at banks and intro- ducing the appointment of a deputy CEO from within the GEB. Following each AGM, the BoD meets to appoint its Chairman, Vice Chairman, Senior Independent Director, BoD Committee members and their respective Chairpersons. At the same meeting, the BoD appoints a Company Secretary, who acts as secretary to the BoD and its Committees. According to the Articles of Association, the BoD meets as of- ten as business requires, but must meet at least six times a year. A total of 23 meetings were held in 2011, of which nine included GEB members and 14 were without GEB participation. On aver- age, 96% of BoD members were present at BoD meetings with- out GEB participation, and 97% at meetings with GEB participa- tion. The duration of each meeting was three hours on average. In addition, the BoD met for a one-day BoD seminar. At every BoD meeting, each Committee Chairperson provides the full BoD with regular updates on current activities of his or her Committee as well as important Committee issues. At least once per year, the BoD reviews its own performance as well as the performance of each of its Committees. This review is based on an assessment of the BoD under the auspices of the Governance and Nominating Committee, as well as a self-assess- ment of the BoD Committees, and seeks to determine whether 208 the BoD and its Committees are functioning effectively and effi- ciently. The Committees listed below assist the BoD in the perfor- mance of its responsibilities. These Committees and their charters are described in the Organization Regulations, published on www.ubs.com/governance. Audit Committee The Audit Committee (AC) comprises at least three BoD mem- bers, with all members having been determined by the BoD to be fully independent and financially literate. On 31 December 2011, William G. Parrett chaired the AC with Michel Demaré, Rainer- Marc Frey and Ann F. Godbehere as additional members. All members have accounting and financial management expertise and are considered to be “financial experts” according to the rules established under the US Sarbanes-Oxley Act of 2002. The AC itself does not perform audits, but monitors the work of the external auditors, Ernst & Young Ltd., Basel (Ernst & Young), 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 the following: (i) the Group’s accounting policies, financial reporting and disclosure controls and procedures; (ii) the quality, adequacy and scope of external audit; (iii) UBS’s compliance with financial reporting requirements; (iv) management’s approach to internal controls with respect to the production and integrity of the financial statements and dis- closure of the financial performance; and (v) the performance of Group Internal Audit in conjunction with the Chairman and the Risk Committee (RC). For these purposes, the AC has the author- ity to meet with regulators and external bodies in consultation with the Group CEO. The AC reviews the annual and quarterly financial statements of UBS and the Group, as proposed by management, with the external auditors and Group Internal Audit in order to recom- mend their approval (including any adjustments the AC considers appropriate) to the BoD. Periodically, and at least annually, the AC assesses the qualifi- cations, 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 appoint- ment or dismissal of the external auditors and the rotation of the lead audit partner. The BoD then submits these proposals to the AGM. During 2011, the AC held a total of seven meetings and eleven telephone conferences. The meetings had an average duration of four hours and the telephone conferences lasted approximately one hour. Participation was 100%. Also present at the meetings were the Group Chief Financial Officer (Group CFO), the Head of Group Internal Audit, the Head of Group Tax & Ac- counting Policy, the Head of Group Controlling & Accounting and Ernst & Young. The conference calls were conducted in the pres- ence of the AC members, the Group CFO and selected manage- ment members. Joint AC / RC sessions were held at least every quarter. In addition, the AC held one session with FINMA. The AC reports back to the BoD about its discussions with our external auditors. Once per year, the lead representatives of our external auditors present their long-form report to the BoD, as required by FINMA. The NYSE has more stringent independence requirements for audit committee members. Each of the four members of our AC is an external BoD member who, in addition to satisfying our in- dependence criteria, does not receive, directly or indirectly, any consulting, advisory or other compensatory fees from UBS other than in its capacity as director; does not hold, directly or indirectly, UBS shares in excess of 5% of the outstanding capital; and (ex- cept as noted below) does not serve on audit committees of more than two other public companies. The NYSE guidelines allow for an exemption for AC members to sit on more than three audit committees of public companies, provided that all BoD members determine that the candidate has the time and the availability to fulfill his or her obligations. Considering the credentials of William G. Parrett, and the fact that he has retired from his executive func- tions, the BoD has granted this exemption in his case. Corporate Responsibility Committee The Corporate Responsibility Committee (CRC) supports the BoD in fulfilling its duty to safeguard and advance the Group’s reputa- tion for responsible corporate conduct. It reviews and assesses stakeholder concerns and expectations for responsible corporate conduct and their possible consequences for UBS, and recom- mends appropriate actions to the BoD. The CRC comprises at least three independent BoD members and, on 31 December 2011, was chaired by Wolfgang Mayrhuber with Kaspar Villiger, Ann F. Godbehere and Joseph Yam as additional members. The CRC is advised and supported by a number of senior business representatives. It met twice for approximately two hours on aver- age in 2011, and 100% of CRC members were present. ➔ Refer to the “Corporate responsibility” section of this report for more information Governance and Nominating Committee The Governance and Nominating Committee (GNC) supports the BoD in fulfilling its duty to establish best practices in corporate governance across the Group, to conduct a BoD annual self-as- sessment, to establish and maintain a process for appointing new BoD members, and to manage the succession of the Chairman and the Group CEO. The GNC comprises four independent BoD members and, on 31 December 2011, Kaspar Villiger chaired the GNC, with Michel Demaré, Bruno Gehrig, Axel P. Lehmann and David Sidwell as additional members. In 2011, nine meetings and three telephone conferences were held with an average participa- tion of 94% of members and a duration averaging one hour and a half. Two meetings were held with external advisors. Human Resources and Compensation Committee The Human Resources and Compensation Committee (HRCC) is responsible for the following functions: (i) supporting the BoD in its duties to set guidelines on compensation and benefits; (ii) ap- 209 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Corporate governance, responsibility and compensation Corporate governance proving the total compensation for the Chairman and the non- independent BoD members; (iii) proposing, together with the Chairman, total individual compensation for the independent BoD members and Group CEO for approval by the BoD; and (iv) proposing to the BoD for approval, upon recommendation of the Group CEO, the total individual compensation for GEB members. The HRCC also reviews the compensation disclosure included in this report. The HRCC comprises four independent BoD members and, on 31 December 2011, Ann F. Godbehere chaired the HRCC with Bruno Gehrig, Wolfgang Mayrhuber and Helmut Panke as addi- tional members. In 2011, eight meetings and five telephone con- ferences were held with an average duration of 100 minutes and participation of 96%. Of those meetings and calls, nine were held with external advisors, 10 with the Chairman and 11 with the Group CEO. ➔ Refer to the “Compensation governance” section of this report for more information on the Human Resources and Compensation Committee’s decision-making procedures Risk Committee The Risk Committee (RC) is responsible for overseeing and sup- porting the BoD in fulfilling its duty to supervise and set appropri- ate risk management and control principles in the following areas: (i) risk management and control, including credit, market, country and operational risks; (ii) treasury and capital management, in- cluding funding, liquidity and equity attribution; and (iii) balance sheet management, including in each case any consequent repu- tational risk. For these purposes, the RC receives all relevant infor- mation from the GEB and has the authority to meet with regula- tors and external bodies in consultation with the Group CEO. On 31 December 2011, the RC comprised five independent BoD members. David Sidwell chaired the RC with Rainer-Marc Frey, with Axel P. Lehmann, Helmut Panke and Joseph Yam as addi- tional members. During 2011, the RC held a total of eight meet- ings and five calls, with an average participation rate of 95% of members. The average meeting duration was five and a half hours and the calls lasted approximately one hour and a half. The Audit Committee Chairperson regularly attends part or all of the RC’s meetings. In 2011, the Chairman, the Group CEO, the Group CFO, the Group Chief Risk Officer, the Group General Counsel, the CEO of the Investment Bank, the Head of Group In- ternal Audit and Ernst & Young were also regularly present. In addition, the RC and HRCC meet jointly to discuss topics on which they have shared responsibility. Annually, one session is held with the Governing Board of the SNB and one with FINMA. One meet- ing was held with the Federal Reserve Bank of New York. Special Committee conducting an independent internal investigation In light of the unauthorized trading incident identified on 14  September 2011, the BoD created a Special Committee on 16 September 2011 comprised of three independent Risk Com- mittee and Audit Committee members. The role of the Special Committee is, with assistance from Group Internal Audit, to con- duct an independent internal investigation of the event, its causes, disciplinary consequences and the proposed remedial actions, and to report on this to the BoD. A second investigation is being car- ried out jointly by FINMA and the UK FSA; they have retained KPMG for this purpose. The Special Committee, on behalf of the BoD, serves as the FINMA and UK FSA regulatory contact regard- ing the incident, and received regular updates from KPMG on its investigation at the request of the abovementioned regulatory bodies. On 31 December 2011, David Sidwell chaired the Special Com- mittee with Ann F. Godbehere and Joseph Yam as additional members. Since its creation, the Special Committee has held 10 conference calls and four meetings, and the Special Committee Chairperson independently met with the UK FSA on one occa- sion. During these calls and meetings, 100% of the Special Com- mittee members were present and the meetings lasted for one hour on average. In addition, the Special Committee also met with FINMA on one occasion. Roles and responsibilities of the Chairman of the Board of Directors Kaspar Villiger, the Chairman of the Board (the Chairman), has entered into a full-time employment contract with UBS in connec- tion with his service 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 Group upon the recommendation of the Group CEO, exercises the ultimate super- vision over management and appoints all GEB members. The Chairman presides over all Annual and Extraordinary Gen- eral Meetings, and works with the Committee Chairpersons to coordinate the work of all Committees. Together with the Group CEO, the Chairman is responsible for ensuring effective commu- nication with shareholders and other stakeholders, including gov- ernment officials, regulators and public organizations. This is in addition to establishing and maintaining a close working relation- ship with the Group CEO and the other GEB members, providing advice and support while respecting the fact that day-to-day man- agement responsibility is delegated to the GEB. Roles and responsibilities of the Vice Chairmen and the Senior Independent Director The BoD appoints one or more Vice Chairmen and a Senior Inde- pendent Director. If the BoD appoints more than one Vice Chair- man, one of them must be independent. A Vice Chairman is re- quired to lead the BoD in the absence of the Chairman and to provide support and advice to the Chairman. At least twice a year, the Senior Independent Director organizes and leads a meeting of the independent BoD members in the absence of the Chairman. In 2011, two independent BoD meetings were held for a duration 210 of three and a half hours each. The Senior Independent Director relays any issues or concerns of independent BoD members to the Chairman and acts as a contact point for shareholders and stake- holders wishing to engage in discussions 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 Swit- zerland, we have business relationships with many large com- panies, including those in which our BoD members assume management or independent board responsibilities. The GNC has determined that the nature of the relationships between UBS and companies whose chair, chief executive or other officer is a member of our BoD does not compromise the BoD members’ ca- pacity for independent judgment. Furthermore, no independent 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 prevailing 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 between the BoD and the GEB is clearly defined in the Organization Regula- tions. The BoD decides on the strategy of the Group upon the recommendation of the Group CEO, and supervises and moni- tors the business, whereas the GEB, headed by the Group CEO, has executive management responsibility. The functions of Chair- man of the BoD and Group CEO are assigned to two different people, thus ensuring a separation of power. This structure es- tablishes 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 leadership of the Group CEO. No member of one board may be a member of the other. Supervision and control of the GEB remains 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 document’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 various ways. The minutes of the GEB meetings are made available to the BoD members. At BoD meetings, the Group CEO and GEB mem- bers 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 mem- bers may request information from other BoD and GEB members, in which case such requests must be approved by the Chairman. Group Internal Audit independently, objectively and systemati- cally assesses the adherence to our strategy, effectiveness of gov- ernance, risk management and control processes at Group, divi- sional and regional levels, and monitors compliance with legal, regulatory and statutory requirements, as well as with internal policies and contracts. This internal audit organization, which is independent from management, reports significant findings to the Chairman and the Risk Committee. The Audit Committee must be informed of the results of internal audits. In February 2011, our internal compliance function provided an annual compliance report to the BoD. This report is required by sections 109 and 112 of the FINMA Circular 08 / 24 on the super- vision and internal controls at banks. ➔ Refer to the “Risk management and control” section of this report for more information y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 211 Corporate governance, responsibility 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 Group Executive Board (GEB). Executive Officer (Group CEO) on an interim basis following the resignation of Oswald J. Grübel. On 15 November 2011, the BoD appointed Mr. Ermotti as permanent Group CEO. Members of the Group Executive Board and changes in 2011 On 3 December 2010, the BoD appointed Sergio P. Ermotti as Chairman and Chief Executive Officer of UBS Group Europe, Middle East and Africa and GEB member as of 1 April 2011, and Tom Naratil as Group Chief Financial Officer (Group CFO) and a GEB member as of 1 June 2011. John Cryan stepped down from the Group CFO position and from the GEB on 1 June 2011. On 24  September 2011, Sergio P. Ermotti was named Group Chief On 1 December 2011, UBS announced the following several senior executive changes: Philip J. Lofts, CEO UBS Group Ameri- cas, resumed his former role as Group Chief Risk Officer as Maureen Miskovic stepped down; Robert J. McCann assumed the role of CEO UBS Group Americas in addition to his current role as CEO Wealth Management Americas; and Ulrich Körner took over the role of CEO UBS Group Europe, Middle East and Africa in ad- dition to his current role as Group Chief Operating Officer and CEO Corporate Center. The following biographies provide information on the GEB members on 31 December 2011. Professional history and education Sergio P. Ermotti was appointed Group CEO in November 2011. He had held the position of Group CEO on an interim basis since September 2011. Mr. Ermotti became a member of the GEB in April 2011 and was Chairman and CEO of UBS Group Europe, Middle East and Africa from April to November 2011. From 2007 to 2010, he was the Group Deputy Chief Executive Officer at UniCredit, Milan, and was responsible for the Corporate and Investment Banking as well as Private Banking strategic business areas. He joined UniCredit in 2005 as the Head of the Markets & Investment Banking Division. Between 2001 and 2003, he worked at Merrill Lynch, and served as co-Head of Global Equity Markets and as a member of the Executive Management Committee for Global Markets & Investment Banking. He began his career with Merrill Lynch in 1987, and held various positions within equity derivatives and capital markets. Mr. Ermotti is a Swiss-certified banking expert and is a graduate of the Advanced Management Program at Oxford University. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Ermotti is a non-executive Director of the London Stock Exchange Group. Professional history and education Markus U. Diethelm was appointed Group General Counsel of UBS and became a member of the GEB in September 2008. From 1998 until 2008, he served as Group Chief Legal Officer at Swiss Re, 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, and focused 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 the Shearman & Sterling law firm in New York, specializing in mergers and acquisi- tions. In 1988, he worked at Paul, Weiss, Rifkind, Wharton & Garrison in New York, after starting 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. Mr. Diethelm is a qualified attorney-at-law admitted to the Zurich and New York State Bar Associations. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Diethelm is the Chairman of the Swiss-American Chamber of Commerce’s Legal Committee and member of the Swiss Advisory Council of the American Swiss Foundation. Sergio P. Ermotti Swiss, born 11 May 1960 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Group CEO Year of initial appointment: 2011 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 212 Professional history and education John A. Fraser was appointed Chairman and CEO of the Global Asset Management business division in December 2001, and became a member of the GEB in July 2002. Since 2008, he has been the Chairman of UBS Saudi Arabia. From 1998 to 2001, he was President and Chief Operating Officer of UBS Asset Management and Head of Asia Pacific. 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 D.C., first, at the International Monetary Fund, and second, as the Economic Minister at the Australian Embassy in Washington, D.C. He was the Deputy Secretary (Economic) of the Australian Treasury from 1990 to 1993. Mr. Fraser graduated from Monash University, Melbourne, 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 member of the President’s Advisory Council of the European Fund and Asset Management Association, a member of the Advisory Council of AccountAbility and a member of the Board of Governors of the Marymount International School at Kingston-upon-Thames in the UK, and Chairman of the Victorian Funds Management Corporation in Melbourne. Professional history and education Lukas Gähwiler became a member of the GEB and was appointed CEO of UBS Switzerland and co-CEO of Wealth Management & Swiss Bank in April 2010. In his role as CEO of UBS Switzerland he is responsible for all businesses in UBS’s home market. From 2003 to 2010, he was the Chief Credit Officer at Credit Suisse and was accountable for the worldwide credit business of Private Banking, including Commercial Banking in Switzerland. In 1998, Mr. Gähwiler was appointed as Chief of Staff to the CEO of the Credit Suisse Private and Corporate Business Unit, and previous to that, he held various front-office positions in Switzerland and North America. He earned a bachelor’s degree in business administration from the University of Applied Sciences in St. Gallen. Mr. Gähwiler completed an MBA program in corporate finance at the International Bankers School in New York, as well as 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. Gähwiler is a member of the board of the Zurich Chamber of Commerce and the Opernhaus AG as well as Vice Chairman of the Swiss Finance Institute. He is a member of the Foundation Board of the UBS pension fund. Professional history and education Carsten Kengeter was appointed Chairman and CEO of the Investment Bank in November 2010, after having been ap- pointed co-CEO in April 2009, when he became a member of the GEB. He joined UBS in December 2008, and served as the joint Global Head of Fixed Income, Currencies & Commodities (FICC) in the Investment Bank until January 2010. He has been on the Governing Board of UBS Limited since March 2009. Mr. Kengeter worked for Goldman Sachs as the co-Head of Asia (ex-Japan) Securities Division in Hong Kong from 2006. 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, Mr. Kengeter was made Head of the European and Asian Collateralized Debt Obligation business in London, and before that he was in derivatives marketing in Frankfurt. From 1992 to 1997, he worked for Barclays de Zoete Wedd, and was respon- sible for credit derivatives trading. Mr. Kengeter graduated as Diplom-Betriebswirt from Fachhochschule Reutlingen, holds a bachelor’s in business administration from Middlesex University as well as an MSc in finance and accounting from the London School of Economics. John A. Fraser Australian and British, 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 Lukas Gähwiler Swiss, born 4 May 1965 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS CEO UBS Switzerland and co-CEO Wealth Management & Swiss Bank Year of initial appointment: 2010 Carsten Kengeter German, born 31 March 1967 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Chairman and CEO Investment Bank Year of initial appointment: 2009 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 213 Corporate governance, responsibility and compensation Corporate governance Professional history and education Ulrich Körner was appointed Group Chief Operating Officer and CEO Corporate Center, and became a member of the GEB in April 2009. Additionally to this function he was appointed CEO of UBS Group Europe, Middle East and Africa in December 2011. In 1998, Mr. Körner joined Credit Suisse. He served as a member of the Credit Suisse Group Executive Board from 2003 to 2008, holding various management positions including CFO and Chief Operating Officer. From 2006 to 2008, he was responsible for the entire Swiss client business as CEO Credit Suisse Switzerland. Mr. Körner received a PhD from the University of St. Gallen in business administration, and served for several years as an auditor for Price Waterhouse and as a management consultant for McKinsey & Company. Other activities and functions Mandates on boards of important corporations, organizations and foundations or interest groups: Mr. Körner is Vice Chairman of the Committee of the Governing Board of the Swiss Bankers Association, Chairman of the Widder Hotel in Zurich, and is Vice President of the Board of Lyceum Alpinum Zuoz. He is the Deputy Chairman of the Supervisory Board of UBS Deutschland AG, Chairman of the Foundation Board of the UBS pension fund, a member of the Financial Service Chapter Board of the Swiss-American Chamber of Commerce and is a member of the Advisory Board of the Department of Banking and Finance at the University of Zurich. Professional history and education Philip J. Lofts became a GEB member in 2008, and was re-appointed as Group Chief Risk Officer in December 2011 after serving in the same role from 2008 to 2010. He was CEO of UBS Group Americas from January to November 2011. Mr. Lofts began his career with UBS over 25 years ago. In 2008, he became the Group Risk Chief Operating Officer 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. Mr. Lofts joined Union Bank of Switzerland in 1984 as a credit analyst and was appointed Head of Structured Finance in Japan in 1998. Philip J. Lofts successfully completed his A-levels at Cranbrook School. From 1981 to 1984, he was a trainee at Charterhouse Japhet plc, a merchant bank, which was 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. In addition, he has been CEO UBS Group Americas since December 2011. From 2003 to 2009, he worked for Merrill Lynch 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 began his career with Merrill Lynch in 1982, working in various positions in capital markets and research. From 2001 to 2003, he was the Head of Global Securities Research and Economics. In 2000, he was appointed the Chief Operating Officer of Global Markets and Investment Banking. From 1998 to 2000, he was the Global Head of Global Institutional Debt and Equity Sales. Mr. McCann graduated with a bachelor’s in economics from Bethany College, West Virginia and holds an MBA from Texas Christian University. 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 in Washington D.C. Ulrich Körner German and Swiss, born 25 October 1962 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Group Chief Operating Officer and CEO Corporate Center CEO UBS Group Europe, Middle East and Africa Year of initial appointment: 2009 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) and Irish, born 15 March 1958 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS CEO Wealth Management Americas CEO UBS Group Americas Year of initial appointment: 2009 214 Professional history and education Tom Naratil was appointed Group CFO and became a member of the GEB in June 2011. He served as CFO and Chief Risk Officer of Wealth Management Americas from 2009 until his current appointment. Before 2009, he held various senior management positions within UBS, including heading the Auction Rate Securities Solutions Group during the financial crisis in 2008. He was named Global Head of Marketing, Segment & Client Development in 2007, Global Head of Market Strategy & Development in 2005, and Director of Banking and Transactional Solutions, Wealth Management USA in 2002. During this time, he was a member of the Group Managing Board. He joined Paine Webber Incorporated in 1983, and after the merger with UBS became Director of the Investment Products Group. Mr. Naratil holds an MBA in economics from New York University and a Bachelor of Arts degree in history from Yale University. Professional history and education Alexander Wilmot-Sitwell was appointed co-Chairman and co-CEO of UBS Group Asia Pacific in November 2010. He be- came a member of the GEB in February 2008. From 2009 to 2010, he served as co-CEO of the Investment Bank, and from 2005 to 2009 as the joint Global Head of Investment Banking. From 2008 to 2010, he was the Chairman and CEO of UBS Group Europe, the Middle East and Africa. Mr. Wilmot-Sitwell joined the firm in 1996 as the Head of Corporate Finance in South Africa and moved to London in 1998 as the Head of UK Investment Banking. He 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 bachelor’s 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 Chi-Won Yoon has been co-Chairman and co-CEO of UBS Group Asia Pacific since November 2010. From June 2009 to November 2010, he served as sole Chairman and CEO of UBS AG, Asia Pacific and has been a member of the GEB since June 2009. Prior to his current role, Mr. Yoon served as Head of UBS’s securities business in Asia Pacific: Asia Equities, which he oversaw from 2004, and Asia Pacific FICC which he was brought in to lead in 2009. In 1997, when he first joined the firm, he served as Head of Equity Derivatives. Mr. Yoon began his career in financial services in 1986, working 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, he 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 management from MIT’s Sloan School of Management. 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. Tom Naratil American (US), born 1 December 1961 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Function in UBS Group CFO Year of initial appointment: 2011 Alexander Wilmot-Sitwell British, born 16 March 1961 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Co-Chairman and co-CEO UBS Group Asia Pacific Year of initial appointment: 2008 Chi-Won Yoon Korean, born 2 June 1959 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS Co-Chairman and co-CEO UBS Group Asia Pacific Year of initial appointment: 2009 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 215 Corporate governance, responsibility and compensation Corporate governance Professional history and education Jürg Zeltner was appointed CEO UBS Wealth Management and co-CEO of Wealth Management & Swiss Bank, and became a member of the GEB in February 2009. In November 2007, he was appointed as Head of Wealth Management North, East & Central Europe. From 2005 to 2007, he was the CEO of UBS Deutschland, Frankfurt, and prior to that, he held various management positions in the former Wealth Management division of UBS. Between 1987 and 1998, he was with Swiss Bank Corporation in various roles within the Private and Corporate Client division in Berne, New York and Zurich. Mr. Zeltner 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. Jürg Zeltner Swiss, born 4 May 1967 UBS AG, Bahnhofstrasse 45, CH-8098 Zurich Functions in UBS CEO UBS Wealth Management and co-CEO Wealth Management & Swiss Bank Year of initial appointment: 2009 Responsibilities, authorities and organizational principles of the Group Executive Board Responsibilities and authorities of the Group Asset and Liability Management Committee Under the leadership of the Group CEO, the GEB has executive management responsibility for the Group and its business. It as- sumes overall responsibility for the development of the Group and business division strategies and the implementation of ap- proved strategies. The GEB constitutes itself as the risk council of the Group. In this function, the GEB has overall responsibility for the following: establishing and supervising the implementa- tion of risk management and control principles; approving core risk policies; and controlling the risk profile of the Group as a whole as determined by the  BoD and the Risk Committee. In 2011, the GEB held a total of 18 meetings. ➔ Refer to the Organization Regulations, which are available at www.ubs.com/governance, for more information on the authorities of the Group Executive Board The Group Asset and Liability Management Committee (Group ALCO), established by the GEB in 2009, is responsible for setting strategies to maximize the financial performance of the Group, and is subject to the guidelines, constraints and risk tolerances set by the BoD. The Group ALCO is also responsible for managing the balance sheet of the business divisions through allocation and monitoring of limits as well as managing capital, liquidity and funding; and promot- ing a one-firm financial management culture. The Organization Reg- ulations additionally specify which powers of the GEB are delegated to the Group ALCO. In 2011, the Group ALCO held nine meetings. Management contracts We have not entered into management contracts with any third parties. 216 Change of control and defense measures We refrain from restrictions that would hinder developments initi- ated 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 331⁄3% 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 Neither the employment agreement with the Chairman of the Board of Directors, nor the employment contracts with the Group Executive Board (GEB) members, contain change of control clauses. All employment contracts with GEB members contain a notice period of six months, except for one which contains a 12-month notice period. During the notice period, GEB members are enti- tled to their salary and continuation of existing employment benefits. In case of a change of control, the Human Resources and Com- pensation Committee may, at its discretion, accelerate the vesting of restricted shares and amend the vesting date or lapse date of options. According to the agreement we have entered into with the Swiss National Bank (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 SNB Stab- Fund at its outstanding principal amount plus accrued interest, and that we purchase the StabFund’s equity at 50% of its value at the time. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 217 Corporate governance, responsibility and compensation Corporate governance Auditors Audit is an integral part of corporate governance. While safe- guarding their independence, the external auditors closely coordi- nate their work with Group Internal Audit. The Audit Committee (AC), and ultimately the Board of Directors (BoD), supervises the effectiveness of audit work. ➔ Refer to the “Board of Directors” section of this report for more information on the Audit Committee External independent auditors At the 2011 Annual General Meeting (AGM), Ernst & Young were reelected as auditors for the Group for a further one-year term of office. Ernst & Young assume virtually all auditing functions ac- cording to laws, regulatory requests and the Articles of Associa- tion. The Ernst & Young lead partner in charge of the UBS financial audit has been Jonathan Bourne since 2010 and his incumbency is limited to five years. The Lead Auditor and Signing Partner leading the FINMA regulatory audit in 2011 was Iqbal Khan, and Andreas Loetscher was co-signing Partner, for both the financial and the FINMA regulatory audit. Both have been in charge for UBS since 2011 with an incumbency of seven years. Ernst & Young will be proposed for reelection at the AGM in 2012. At the 2009 AGM, BDO AG was appointed as special auditor for a three-year term of office. The special auditors provide audit opinions independently from the auditors in connection with cap- ital increases. BDO AG will be proposed for reelection at the AGM in 2012. Fees paid to external independent auditors The fees (including expenses) paid to our auditors Ernst & Young are set forth in the table on the next page. In addition, Ernst & Young received CHF 30,106,000 in 2011 (CHF 33,206,000 in 2010) 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 accepted audit- ing standards, as well as other assurance services that convention- ally only the auditor can provide. These include statutory and regulatory audits, attest services, and the review of documents to be filed with regulatory bodies. Audit-related work comprises assurance and related servic- es that traditionally are performed by the auditor, such as at- test services related to financial reporting, internal control re- views, performance standard reviews, consultation concerning financial accounting and reporting standards and due dili- gence 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 compliance, tax consultation and tax planning with respect to our own af- fairs. “Other” services are approved on an exceptional basis only. They mainly comprise on-call advisory services. In addition, 2010 and 2011 included non-recurring expenses. Pre-approval procedures and policies To ensure Ernst & Young’s independence, all services provided by them have to be pre-approved by the AC. A pre-approval 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 Chairper- son, hence the Group Chief Financial Officer (Group CFO) submits all proposals for services by Ernst & Young to the Chairperson of the AC for approval, unless there is a bucket pre-approval in place. At each quarterly meeting, the AC is informed of the ap- provals granted by its Chairperson and of services authorized un- der bucket pre-approvals. 218 Fees paid to external independent 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 31.12.11 31.12.10 52,600 5,240 57,840 8,190 3,123 4,626 441 1,021 1,483 10,694 46,939 11,604 58,543 7,225 3,073 4,058 94 521 1,152 8,898 Tax advisory Other Total non-audit Group Internal Audit With 339 personnel worldwide on 31 December 2011, Group Internal Audit performs the internal auditing function for the en- tire Group. Group Internal Audit supports the BoD and its Com- mittees in discharging their governance responsibilities by inde- pendently assessing risk management, control and governance processes; assessing the reliability of financial and operational in- formation; and ensuring we are compliant with legal, regulatory and statutory requirements. All reports with key issues are provided to the Group Chief Executive Officer (Group CEO), the Group Executive Board members responsible for the business divisions and other responsible management. In addition, the Chairman, the Risk Committee (RC) and the AC are regularly in- formed about important issues. Group Internal Audit closely co- operates 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, James P. Oates, reports directly to the Chair- man of the BoD and to the RC. Group Internal Audit has unre- stricted access to all accounts, books, records, systems, property and personnel, and must be provided with all information and data needed to fulfill its auditing duties. The RC and the AC may order special audits to be conducted. Other BoD members, Com- mittees or the Group CEO may request such audits with the ap- proval of the AC or the RC. Coordination and close cooperation with the external auditors enhance the efficiency of Group Internal Audit’s work. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 219 Corporate governance, responsibility and compensation Corporate governance Information policy We provide regular information to our shareholders and to the financial community. Financial disclosure principles Financial results will be published as follows First quarter 2012 Second quarter 2012 Third quarter 2012 2 May 2012 31 July 2012 30 October 2012 The Annual General Meeting of shareholders will take place as follows 2012 2013 3 May 2012 2 May 2013 We meet with institutional investors worldwide throughout the year, and regularly hold results presentations, special investor seminars, road shows, and individual and group meetings. Where possible, meetings involve senior management as well as mem- bers of the investor relations team. We make use of diverse tech- nologies such as webcasting, audio 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, registered shareholders receive a summary of our annual report in the form of a review booklet. It provides an overview of the firm, our strat- egy as well as our activities during the year and some key financial information. Each quarter, shareholders are mailed a brief update on our quarterly financial performance. Shareholders can also re- quest our complete financial reports, produced on a quarterly and annual basis, free of charge. To ensure fair access to and dissemination of our financial in- formation, we make our publications available to all shareholders at the same time. Based on discussions with analysts and investors, we believe that the market rewards companies that provide clear, consis- tent and informative disclosure about their business. There- fore, we aim to communicate our strategy and results in a manner that allows shareholders and investors to gain an un- derstanding 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 continually as- sessed and, when we consider it appropriate, reflected in our quarterly and annual reports. To continue to achieve these goals, we apply the following principles in our financial report- ing and disclosure: – Transparency in disclosure enhances understanding of the eco- nomic drivers and builds trust and credibility – Consistency in disclosure within each reporting period and be- tween reporting periods – Simplicity in disclosure allows readers to gain an understanding of the performance of our businesses – Relevance in disclosure avoids information overload by focus- ing 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, including a breakdown of results by business division and disclosures relating to risk management and control, capital, liquidity and funding management. Our financial statements are prepared according to IFRS as is- sued by the International Accounting Standards Board. ➔ Refer to www.ubs.com/investors for a complete set of published reporting documents and a selection of senior ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Financial information” section of this report for a detailed management industry conference presentations explanation of the basis of UBS’s accounting ➔ Refer to the corporate calendar at www.ubs.com/investors for future financial report publication dates 220 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 applicable accounting standards, to show how they would have been reported accord- ing to the new basis and provide clear explanations of all rele- vant changes. US regulatory disclosure requirements As a “foreign private issuer”, we must file reports and other infor- mation, 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 quar- terly financial reports and other material information, including materials sent to shareholders in connection with Annual and Extraordinary General Meetings, under cover of Form 6-K to the SEC. These reports are all available at www.ubs.com/investors and also on the SEC’s website at www.sec.gov. An evaluation was carried out under the supervision of management including the Group Chief Executive Officer (Group CEO) and Group Chief Financial Officer (Group CFO), of the effec- tiveness 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 ineffective as of 31 December 2011, solely because of the deficiencies described in “Management’s Report on Internal Control over Financial Report- ing” in the “Financial information” section of this report. 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 reporting. The financial statements of this report contain management’s as- sessment of the effectiveness of internal control over financial reporting, as of 31 December 2011. The external auditors’ report on this assessment is also included in this report. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 221 Corporate governance, responsibility and compensation Corporate responsibility Corporate responsibility In 2011, we continued working towards meeting the demanding societal goals and commitments we have set ourselves, guided by our Code of Business Conduct and Ethics (the Code). While we undoubtedly faced significant challenges in 2011, this has only served to strengthen our resolve to ensure that all our people at every level follow the Code unre- servedly both in letter and spirit. By adhering to the Code, we demonstrate our desire to be a responsible corporate institution and to act with integrity in all our interactions with our stakeholders. In 2011, we continued to make a valuable contribution to the fight against money laundering, corruption and terrorist financing (AML). We strengthened our management of environmental and social (including human rights) risks, intensified our sustainability- related business activities (notably via the further development of our values-based investing), and continued with the execution of our supply chain program and our investment in community activi- ties as well as our in-house environmental management program. As an illustration of the progress made regarding environmental management, we have already reduced our global CO2 emissions by 39% compared with 2004 levels, and we are confident that we will very shortly meet our 40% reduction target for 2012. We also strengthened senior management accountability in relation to particular corporate responsibility activities, most nota- bly through the oversight provided by two Group Executive Board (GEB) Committees concerned with environmental and social risks and community investment. These, and other corporate responsi- bility developments at UBS, were monitored and reviewed by the UBS Corporate Responsibility Committee (CRC), a Board of Direc- tors (BoD) Committee. Governance, strategy and commitments Corporate responsibility governance At UBS, the BoD is responsible for formulating our values and standards to ensure we meet our obligations to all our stakehold- ers. Both the Chairman of the BoD and the Group Chief Exe- cutive Officer (Group CEO) play a key role in safeguarding our reputation and ensuring we communicate effectively with all our stakeholders. All BoD Committees are focused on achieving our goal of cre- ating sustainable value. Of the five BoD Committees, the CRC shoulders the main undertaking for corporate responsibility. It ac- tively reviews and assesses how we meet the existing and evolving corporate responsibility expectations of our stakeholders. It also monitors and reviews our corporate responsibility policies and regulations, as well as the implementation of our corporate re- sponsibility activities and commitments. Moreover, it regularly re- views the Code. In 2011, no changes were made to the Code as the CRC concluded that it continues to appropriately reflect the relevant commitments. ➔ Refer to www.ubs.com/responsibility for more information on ➔ Refer to www.ubs.com/code for a copy of the UBS Code of the contents of this section Business Conduct and Ethics (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:67)(cid:80)(cid:70)(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:67)(cid:80)(cid:70)(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:67)(cid:80)(cid:70)(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) 222 In 2011, BoD member Wolfgang Mayrhuber became chair of the CRC. In addition to the Chairperson, the Committee has three members, including the Chairman of the BoD. The committee is advised by a panel of seven members of the GEB, including the Group CEO, and other senior managers. The members of the advi- sory panel participate in CRC meetings and are responsible for im- plementing its recommendations. The advisory panel’s membership also ensures that we benefit from a direct connection to opera- tional corporate responsibility activities with, for instance, the Group Environmental Representative being a member of the panel. The GEB is responsible for the development and implementa- tion of our Group and business division strategies including strate- gies pertaining to corporate responsibility. At, or directly below, GEB level there are various committees or boards concerned with tasks and activities relating to particular aspects of corporate re- sponsibility. In 2011, the Global Environmental & Social Risk Committee was established to address transactional and policy matters relat- ing to environmental and social (including human rights) risks and associated reputational risks. The Committee is chaired by the Group Environmental Representative and includes five GEB mem- bers. Additionally, our Environmental & Human Rights Committee oversees the operational execution of UBS’s Environmental Policy and Statement on Human Rights. The Committee consists of senior environmental representatives drawn from each business division and is supported by dedicated functions. ➔ Refer to www.ubs.com/environment for more information on our environmental and human rights governance Our efforts to combat money laundering, corruption and ter- rorist financing are led by the Head of Global AML Compliance and supported by a network of expert global business teams. To enhance consistency and cooperation between our business divi- sions we are working to streamline our policies and processes, and to bolster the ways in which we assess threats and risks with- in the business. We are determined to protect the firm and our reputation from those who would use UBS to legitimize illicit as- sets and we have put in place extensive and robust policies de- signed to prevent, detect and report money laundering, corrup- tion and terrorist financing. ➔ Refer to the discussion on combating financial crime below for more information on our AML activities Our global diversity and inclusion team supports senior man- agement and Human Resources business partners in developing diversity and inclusion-related strategies and plans for each busi- ness division. The implementation of these strategies and plans is monitored by the GEB. The global diversity team also coordinates efforts to integrate diversity and inclusion awareness and content into the Human Resources process. Regional diversity and inclusion heads, along with senior business managers, consider and design diversity and inclusion and business-aligned plans that are linked to regional and divisional business and talent strategies. They also provide regional support for divisional management in assessing the progress made on relevant diversity and inclusion objectives. Additionally, they support our numerous employee networks, in- cluding the development and coordination of diversity-related events, which support regional diversity and inclusion initiatives. ➔ Refer to the “Our employees” section of this report for more information on labor standards and diversity programs Following a strategic review of UBS’s Community Affairs activi- ties, the governance structure has been streamlined and given a more strategic focus with the creation of the Global Community Affairs Steering Committee, chaired by the Group CEO and com- posed of several members of our senior management. The Steer- ing Committee sets the overall strategic direction and aims of our community affairs. Furthermore, the Committee is ultimately re- (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:2) (cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:52)(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: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:52)(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: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) y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a (cid:19)(cid:37)(cid:52)(cid:18)(cid:18)(cid:20)(cid:65)(cid:71) 223 Corporate governance, responsibility and compensation Corporate responsibility sponsible for deciding on our response to worldwide disasters. Community activities are governed by a central framework based on our Group community affairs guidelines overseen by the Steer- ing Committee. These guidelines are supplemented by additional regional guidelines, which are embedded in UBS’s regional struc- tures. Each region has a dedicated Community Affairs team, which coordinates charitable commitments by the firm and our employees. The Corporate Center ensures global coordination of these activities and provides a central reporting structure to col- lect community investment data from across UBS as a whole. The Steering Committee reports to the CRC regarding the most im- portant decisions on strategy and funding. ➔ Refer to the discussion on community investment below for more information on our charitable and related activities External commitments and initiatives By incorporating environmental and social standards and conven- tions in our business practices we benefit from participation in various external initiatives. These include the UN Global Compact and its local network in Switzerland, the Wolfsberg Group, the UNEP Finance Initiative (UNEP FI), the UN Principles for Responsi- ble Investment, and the VfU (Association for Environmental Man- agement and Sustainability in Financial Institutes). In June 2011, the UN Human Rights Council endorsed the Guiding Principles for the Implementation of the United Nations “Protect, Respect and Remedy” Framework on business and hu- man rights (the Guiding Principles). The Guiding Principles provide a blueprint for companies to know and show that they respect human rights, and reduce the risk of causing or contributing to human rights harm. In May, directly prior to the UN’s endorse- ment of the Guiding Principles, UBS convened a meeting in Thun, Switzerland, of a number of universal banks (subsequently re- ferred to as the Thun Group) to consider the Guiding Principles. During the meeting the Thun Group initiated a process to interpret the Guiding Principles with specific reference to their application to the banking sector. A short statement on the Guiding Principles was released by this group at the UNEP FI global sustainability roundtable in October 2011. Subsequently, a practical guidance tool, which sets out the challenges and best practice examples of operationalizing the Guiding Principles in universal banks, has been drafted and is currently under discussion within the group. External ratings, assurance and awards Our performance and success in the area of sustainability is re- flected in the key external ratings and rankings we have achieved. UBS was once again named as an index component for the Dow Jones Sustainability Index (DJSI) World, increasing our total DJSI score, and we are a member of the FTSE4Good index series. We have been a continuous member of both the DJSI World and the FTSE4Good since their inception. We continue to be included in the Carbon Performance Lead- ership Index, which is produced by the Carbon Disclosure Project. The Index features companies that have distinguished themselves through their efforts to reduce emissions and their strategies for combating climate change. We are also represented in the Car- bon Disclosure Leadership Index, figuring among the companies which are setting the standards in reporting on the risks and op- portunities arising for businesses in connection with climate change. We are among the few financial sector companies repre- sented in both Carbon Disclosure Project indices. In 1999, we were the first bank to obtain ISO 14001 certifica- tion for our worldwide environmental management system. The management system covers all products, services and in-house operations which may have an environmental impact. It is audited annually and recertified every three years by SGS, a leading in- spection, verification, testing and certification company. These comprehensive audits verify that appropriate policies and process- es are in place to manage environmental issues, and that they are being implemented on a day-to-day basis. In 2011, UBS passed the extensive ISO 14001 recertification audit, which consisted of 17 audit days and involved 170 employees in six countries. SGS confirmed that we have a well-performing and fully integrated environmental management system that is suitable for managing environmental risks and helps to promote continuous improve- ments to our environmental performance. We achieved a top-four ranking in each of the key rankings for brokerage firms in the 2011 Thomson Reuters Extel and UKSIF Socially Responsible Investing & Sustainability Survey: Socially Responsible Investment Research, Thematic Research, Corporate Governance Research, and Renewable Energy Research. In the UK, we received two major accolades for our work in this field. We were ranked joint number one in The Environment Agency’s new performance league table. This table ranks over 2,000 organizations according to early actions metrics that reflect the installation of smart meters, as well as to what degree the organization has satisfied the requirements of the Carbon Trust Standard for good energy management. In December, UBS and its Bridge Academy partnership (refer to the “Community invest- ment” section below) won the UK Big Society Award established by the UK Prime Minister, David Cameron. Commenting on the award, the Prime Minister said: “The Bridge Academy is a brilliant example of business working with their local community to make a difference and create something really special for their area. The innovative ideas, enthusiasm and skills of the UBS volunteers have had a clear impact on the Academy, inspiring students and help- ing them reach their potential.” Furthermore, we were ranked third in Lundquist’s CSR Online Awards Switzerland 2011, maintaining our top three ranking for the third consecutive year. The CSR Online Awards consider how well a corporate website is used as a platform for CSR communi- cations and stakeholder engagement. Stakeholder dialogue Dialogue with external parties is crucial to our overall understand- ing and approach to corporate responsibility. In 2011, we engaged with experts and stakeholders on a range of topics. These includ- ed discussions with investors on a wide range of environmental, social and governance (ESG) topics and discussions with non-gov- 224 ernmental organizations on the subjects of deforestation, human rights and coal. In addition, we sought input from our employees regarding our corporate responsibility strategy and associated ac- tivities. An internal, cross-divisional and cross-regional network of experts continues to play a particularly important role, with its members providing critical input on stakeholder expectations and concerns. These contributions are relayed back to the CRC and pro- vide a very valuable addition to information gathered through other monitoring channels. To enhance further our provision of corporate responsibility information to our stakeholders, we published a UBS Health & Safety statement on our corporate responsibility website following a review of our health and safety activities and efforts. The statement demonstrates our long-standing commitment to creating a work and business environment that safeguards the health and safety of employees, business partners and clients. Training and awareness-raising Through induction, education and broader awareness-raising ac- tivities we ensure that our employees are in no doubt as to the importance of our societal commitments. General information is published on our intranet and on our corporate responsibility website. In 2011, training and awareness-raising activities for all employees continued to focus on the Code, notably via the Lead- ing UBS Forward program and through induction events for new employees. Employees were also made aware of the firm’s corpo- rate responsibility strategy and activities through other training and awareness raising activities. Furthermore, some 19,300 em- ployees received training on environmental issues. Of these, 15,700 received a general education on our environmental policy and programs and 3,600 participated in specialist training target- ed within their area of expertise and influence. Employee speaker sessions, exhibitions and lunchtime training sessions have been delivered in all regions alongside specific technical training for the regional environmental team. Employees are also required to un- dergo regular refresher training in AML-related issues. This in- cludes online training, awareness campaigns and seminars. ➔ Refer to the “Education and talent development” section of this report for more information Responsible banking We are focused on gaining and retaining the trust of all our stake- holders alongside our goal of generating sustainable earnings and creating long-term shareholder value. Our shareholders, clients, employees and society in general demand that our banking ac- tivities are undertaken in a responsible manner, and that our prod- ucts and services are best suited to the needs and requirements of our clients. Through our corporate responsibility efforts we dem- onstrate that we are listening to our stakeholders and constantly striving to meet their expectations. Continuous improvement Our commitment to responsible banking requires us to undertake a regular and critical assessment of our policies and practices. This, in turn, requires the careful consideration and assessment of societal issues of potential relevance to UBS. With the Global En- vironmental & Social Risk Committee, a GEB-level Committee, and the CRC, a BoD-level Committee, we have demonstrated that we have firmly established responsibility for the oversight of this important and complex task at the highest level of the firm. Combating financial crime We will always act decisively to prevent potentially irresponsible or harmful actions. First and foremost, this means that our employ- ees must uphold the law, adhere to relevant regulations, and be- have in a responsible and principled manner. We continue to strengthen our efforts to both prevent and combat financial crime. By taking responsibility to preserve the integrity of the financial system, and our own operations, we are committed to assisting in the fight against money laundering, cor- ruption and terrorist financing. We employ a rigorous risk-based approach to ensure our policies and procedures are able to detect risks, and that relationships which are classified as higher risk are dealt with appropriately. We adhere to strict know-your-clients regulations but without undermining clients’ legitimate right to privacy. Ongoing due diligence and monitoring assists in the iden- tification of suspicious activities, including the use of advanced technology to help identify transaction patterns or unusual deal- ings. If discovered, they are promptly escalated to management or control functions. During 2011, Global AML Compliance worked closely with the Environmental and Social Risk group to develop and introduce new and more effective ways to screen potential business partners, vendors and clients in respect of any potential issue regarding environmental and social risk. As part of our extensive and ongoing efforts to prevent money laundering, corruption and terrorist financing, additional enhance- ments to address more specific risks in relation to corruption and terrorist financing were implemented globally during 2011. We are a founding member of the Wolfsberg Group, an asso- ciation of 11 global banks established in 2000, which aims to de- velop financial services industry standards and related products for Know-Your-Customer, Anti-Money Laundering and Counter Ter- rorist Financing policies. The Group continues to update its existing (cid:49)(cid:87)(cid:84)(cid:2)(cid:71)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid:67)(cid:78)(cid:2)(cid:82)(cid:81)(cid:78)(cid:75)(cid:69)(cid:91) (cid:39)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid:67)(cid:78)(cid:2)(cid:82)(cid:81)(cid:78)(cid:75)(cid:69)(cid:91) (cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86) (cid:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:81)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:87)(cid:80)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85) (cid:43)(cid:80)(cid:15)(cid:74)(cid:81)(cid:87)(cid:85)(cid:71)(cid:2)(cid:81)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2) (cid:67)(cid:80)(cid:70)(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:37)(cid:71)(cid:84)(cid:86)(cid:75)(cid:386)(cid:71)(cid:70)(cid:2)(cid:71)(cid:80)(cid:88)(cid:75)(cid:84)(cid:81)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid:67)(cid:78)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:85)(cid:91)(cid:85)(cid:86)(cid:71)(cid:79) (cid:54)(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:69)(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:2) y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a (cid:22)(cid:37)(cid:52)(cid:18)(cid:18)(cid:21)(cid:65)(cid:71) 225 Corporate governance, responsibility and compensation Corporate responsibility publications and a revised version of the Trade Finance Principles and Anti-Corruption Guidance was published in 2011. Together with the other members of the Group, we continue to work close- ly with the Financial Action Task Force, an inter-governmental body that develops and promotes national and international policies to combat money laundering and terrorist financing through consul- tation processes with the private sector. Managing environmental and social risks across UBS Environmental and social (including human rights) risks are broadly defined as the possibility that UBS is harmed reputa- tionally or financially as a result of transactions, products, ser- vices or activities such as lending, capital raising, advisory ser- vices or investments that involve a party associated with environmentally or socially sensitive activities, or exposed to risks such as environmental liabilities, human rights infringements or changes in environmental regulations. For products, services and activities identified as having significant environmental and social risk potential, procedures and tools for the timely identifi- cation, assessment, approval and monitoring of such risks are applied and integrated into standard risk, compliance and op- erations processes. – Client onboarding: new corporate clients are assessed for envi- ronmental and social risks associated with their business activities – Transaction due diligence: before proceeding with a transac- tion, environmental and social risks are identified and analyzed as part of standard transaction due diligence processes – In-house environmental management: our operational activi- ties and employees (or contractors working on UBS premises) are assessed for compliance with relevant environmental and labor rights regulations – Supply chain management: prior to any new or renewed con- tract being awarded, standardized checks are completed to as- sess supplier and commodity specific environmental, labor and human rights risks Some of our clients operate in sectors characterized by ongoing environmental and social challenges. To support the consistent identification and assessment of such risks, we developed internal industry sector guidelines in 2009. These guidelines, adopted by each of our business divisions in their transactional and client due diligence processes, provide an overview of key environmental and human rights issues that arise in the various life cycles of the sector, and summarize industry standards in dealing with them. The guide- lines currently cover six sectors: chemicals; forestry products and biofuels; infrastructure; metals and mining; oil and gas, and utilities. In 2011, we strengthened further our environmental and social risk management (including human rights) by executing the “UBS position on relationships with clients and suppliers associated with controversial activities” that was published in January. This stipulates activities that we will not engage in, or will only engage in under stringent pre-established guidelines. We will not know- ingly provide financial services to corporate clients, nor will we purchase goods or services from suppliers, where the use of pro- ceeds, primary business activity, or acquisition target involves the following environmental and social risks: Extractive industries, heavy infrastructure, forestry and plantations operations that risk severe environmental damage to or through: – endangered species of wild flora and fauna listed in Appendix 1 of the Convention on International Trade in Endangered Species; – high conservation value forests as defined by the six categories of the Forest Stewardship Council; – illegal use of fire: uncontrolled and / or illegal use of fire for land clearance; – illegal logging including purchase of illegal harvested timber (logs or roundwood); – palm oil production unless a member in good standing of the Roundtable on Sustainable Palm Oil and actively seeking to enhance certification of its production; – wetlands: on the RAMSAR list; and – world heritage sites as classified by UNESCO. Managing environmental and social risks Environmental and social risk assessments 2 Requests by region Americas Asia Pacific Europe, Middle East and Africa Switzerland Requests by business division 2 Investment Bank Wealth Management & Swiss Bank Wealth Management Americas For the year ended % change from GRI 1 FS2 FS2 FS2 FS2 FS2 FS2 FS2 FS2 31.12.11 416 111 136 119 50 330 81 5 31.12.10 194 48 84 32 30 147 44 3 31.12.09 31.12.10 93 20 32 20 21 69 24 n/a 114 131 62 272 67 124 84 67 1 Global Reporting Initiative (see also www.globalreporting.org). FS stands for the performance indicators defined in the GRI Financial Services Sector Supplement. 2 Transactions and onboarding requests referred to environmental and social risk functions. 226 All commercial activities that: – engage in child labor: according to ILO Conventions 138 (min- imum age) and 182 (worst forms); – engage in forced labor: according to ILO Convention 29; – threaten indigenous peoples’ rights in accordance with IFC Performance Standard 7; and – engage in diamond mining and trading of rough diamonds unless Kimberley Process certified. We also require enhanced due diligence and approval processes in certain other areas, such as coal mining practices that use mountain top removal in the US Appalachian Mountains as an extraction method. As part of this review, we assess to what extent companies rely on mountain top removal mining for their revenue generation, and we need to be satisfied that the client is commit- ted to reducing its exposure to this form of mining over time. Following the execution of our position on relationships with clients and suppliers associated with controversial activities by the business divisions, the number of cases referred for assessment to the environmental and social risk units in 2011 more than doubled as shown by the table “Managing environmental and social risks” on the previous page. Environmental and social business opportunities Equally as important as managing environmental and social risks is providing financial products and services which help our clients manage their environmentally and socially related business opportu- nities. We seek to help investors benefit from such opportunities by integrating environmental and social considerations, where relevant, in our investment, research, ownership and financing processes. This applies across our businesses in asset management, wealth management, retail and corporate banking and investment bank- ing. It includes funds, research and advisory services provided to pri- vate and institutional clients, access to the world’s capital markets for renewable energy firms and, in Switzerland, “eco” mortgages. Investment products and advisory Taking environmental, social and governance (ESG) issues into ac- count in investment processes is becoming of increasing interest to clients and consultants across all of our investment areas. Since 2009, Global Asset Management has demonstrated commitment to ESG integration as a signatory to the UN Principles for Respon- sible Investment. The Principles provide a voluntary framework by which all investors can incorporate ESG issues into their decision- making and ownership practices to better align their objectives with those of society at large. A dedicated Sustainable & Responsible Investment (SRI) team within Global Asset Management offers a wide range of products to their institutional clients, including thematic SRI funds which are focused on innovative companies that provide solutions to the challenges of climate change, water scarcity and demographic change. They offer a range of products focusing on each individ- ual theme and the UBS (Lux) Equity Fund Global Innovators, which spans all three themes. In 2011, UBS broke new ground by listing four exchange-traded funds (ETF) on the German Stock Exchange that track sustainability leaders identified by socially responsible indices, such as the new MSCI ESG Indices. Additionally, the team offers customized client portfolios in the form of segregated mandates / institutional accounts based on “negative” screening, which exclude certain controversial stocks or sectors based on their negative social or environmental impact, as perceived by the client. Our global platform and investment research capabilities enable us to offer such tailor-made solutions. Furthermore, Global Asset Management’s Global Real Estate business has defined and implemented a Sustainability and Re- sponsible Property Investment strategy for its real estate products and mandates. As a responsible property investor the financial objectives of clients remain the primary focus, but we also con- sider long-term social and environmental aspects. In 2011, combined teams from philanthropy and values-based investing (VBI) and sustainable investing developed further our Socially responsible investments (SRI) invested assets 1 As of % change from CHF billion, except where indicated GRI 2 31.12.11 31.12.10 31.12.09 31.12.10 UBS total invested assets UBS SRI products and mandates positive criteria positive criteria / RPI 3 exclusion criteria 4 exclusion criteria / policy-based restrictions 5 Third-party 6 Total SRI invested assets Proportion of total invested assets (%) 8 2,167 2,152 2,233 FS11 FS11 FS11 FS11 FS11 FS11 1.84 28.19 27.46 181.49 2.59 241.57 7 11.15 2.00 na 21.27 na 2.40 25.67 1.19 2.72 na 22.44 na 1.69 26.85 1.20 1 (8) na 29 na 8 841 1 The terms Socially Responsible Investing and Values-Based Investing are used interchangeably. All figures are based on the level of knowl- edge as of January 2012. 2 FS stands for the performance indicators defined in the Global Reporting Initiative Financial Services Sector Sup- plement. 3 Responsible Property Investment (RPI) strategy. 4 Includes customized screening services (single or multiple exclusion criteria). 5 Assets subject to restrictions under UBS policy on the prohibition of investments in companies related to anti-personnel mines and cluster munitions. 6 SRI products from third-party providers apply either positive and exclusion criteria or a combination thereof. 7 Due to adjust- ments in the reporting boundaries, 78.3% of reported assets have newly been included in 2011. 8 Total SRI / UBS’s invested assets. Socially responsible investments are products that consider environmental, social or ethical criteria alongside financial returns. SRI can take various forms, including positive screening, exclusion or engagement. 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 one or several 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. 227 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Corporate governance, responsibility and compensation Corporate responsibility holistic service offering in our wealth management businesses. These teams provide thought leadership, advice, products and so- lutions to assist our private clients and prospects who wish to in- vest all or part of their portfolio according to their values and in- vestment objectives and want to deliver positive change through their philanthropy and investments. These services include sus- tainability-focused alternatives to conventional products, mission- related investing for donor-advised funds and private founda- tions. They also include values-based portfolio management, such as mandate solutions for private clients with a strong focus on sustainability across all asset classes, portfolio review and propos- als for the integration of sustainability into stock or bond selec- tion. In the US, this offering also includes managed accounts where ESG criteria are embedded into the fundamental invest- ment process, or where clients have the ability to identify and exclude securities from ownership based on issue-oriented screens. This allows our private clients to customize mandates to their particular social policy criteria. In response to increased client demand we have expanded our own offering and, through our open architecture, we can offer clients the chance to invest in SRI bonds, equity and microfinance products from leading third-party providers. The table “Socially responsible investments (SRI) invested assets” on the previous page shows that, as of 31 December 2011, our total SRI / VBI in- vested assets were CHF 241.57 billion, representing 11.2% of our total invested assets. The increase in our reported SRI / VBI invested assets in 2011 is largely due to the expansion of our SRI / VBI report- ing framework, which now includes products subject to our Sus- tainability and Responsible Property Investment strategy. It also in- cludes assets subject to restrictions under the UBS policy on the prohibition of investments in companies related to anti-personnel mines and cluster munitions, which applies to actively managed retail and institutional funds domiciled in Switzerland, Luxembourg and Ireland. Research Client interest in ESG issues has grown and, correspondingly, so has our research coverage in this area. Specialized research teams focus on a range of ESG issues, with a view to understanding what impact developing trends such as climate change / energy efficien- cy, water scarcity, demographics, and other potential environmen- tal and social constraints might have upon the sectors and compa- nies covered by our analysts. They collaborate closely with other teams to write about emerging themes and relevant research con- tent is regularly published by a growing number of mainstream analysts. Specialized teams have been established within each of our business divisions to serve their respective clients. The ESG Analyzer is an Investment Bank publication that helps clients take ESG issues into consideration at every stage of the investment process. The ESG Analyzer was published several times during 2011, but was only available for Europe and South Africa. As a result of client demand, we now plan to make the Analyzer available for other regions starting in 2012. The Q-se- ries® reports focus on thought-provoking discussions, leading to a firm-wide drive for more thoughtful, proprietary and valuable research. The report “Q-series®: Water Risks to Business” achieved the second-highest readership of any UBS Equity Re- search publication in 2011. Additionally, during the year the Investment Bank hosted both the annual UBS SRI Conference, which was focused primarily on sustainable supply chains, and the UBS Q-series® Sustainable Innovation Conference. Wealth Management Research published a paper on Impact Investing, a new investment philosophy that is attracting interest from our clients. Reports under the “Greentech” label covered investment ideas such as electric cars (more efficient cars and bet- ter battery technology) and energy efficiency (smart grids, LED, the future of energy). Furthermore, the Wealth Management & Swiss Bank research magazine “UBS outlook on energy” included an analysis of renewable forms of energy. Clients also benefited from a series of bulletins from our senior scientific advisor, Sir David King, director of the Smith School of Enterprise and Environment at the University of Oxford and for- merly the UK Government’s Chief Scientific Advisor and Head of the Government Office of Science. These bulletins provided cli- ents with an insight into a variety of current topics, including bio- fuels and actions various countries were taking in relation to cli- mate change. Engagement and voting rights We believe that voting rights have an economic value and should be treated accordingly. Global Asset Management, wherever ap- propriate, seeks to influence the corporate responsibility and corpo- rate governance practices of the companies it invests 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 be most favorable to the value of their in- vestments. We are strongly supportive of the Stewardship Code published by the UK Financial Reporting Council in 2010. This aims to enhance the quality of engagement between institutional inves- tors and companies. Good corporate governance should, in the long term, result in better corporate performance and improved shareholder value. As such, we expect board members of compa- nies in which we have invested to act in the best interests of their shareholders, and to view themselves as stewards of the company by exercising appropriate judgment and by undertaking diligent oversight of the management of the company. In 2011, we voted on more than 48,000 separate resolutions at over 4,600 company meetings. In addition, we are active members of a number of share- holder bodies and are keen to work with like-minded shareholders. Since 2010, Global Asset Management in Switzerland has of- fered UBS Voice, a free service enabling holders of Swiss institu- tional funds to express voting preferences ahead of the sharehold- ers’ meeting of major Swiss corporations. This allows additional shareholder input into the voting decisions of the funds’ manage- ment company. The Global Asset Management SRI team in Switzerland engages in dialogue with companies represented in the SRI funds they manage. The analysts and portfolio managers provide posi- 228 tive and negative feedback on relevant ESG issues that may im- pact investment performance. This is carried out as part of the regular communication process with corporate management teams. When controversial information on a company’s environ- mental or social performance is received, the SRI analysts contact the company and provide management with a chance to demon- strate what measures have been taken to resolve the issues. If the company can demonstrate how it is dealing with the problem, and what progress has already been achieved, an investment is possible. These engagement activities are applied to SRI funds in addition to the positive screening processes. Renewable energy and clean technology financing and advisory In 2010, we created the Renewable Energy & Clean Technology team (RE&CT) within our Investment Bank to focus our efforts and build upon our successes in this important sector. RE&CT, which includes five senior employees from four continents, provides capital raising and strategic advisory services to renewable energy and clean technology companies globally, including those in the solar, wind, energy efficiency, biofuels and renewable chemicals sectors. In 2011, our global RE&CT team raised approximately USD 2.6 billion from fourteen equity and debt transactions and advised on seven deals, establishing RE&CT as one of the leading clean technology practices globally. Recent transactions include the USD 123 million initial public offering (IPO) of Gevo, the first suc- cessful IPO in next-generation biochemical and advanced bio- fuels, the USD 220 million IPO of BYD Company, the largest A-share IPO in the renewable energy sector in 2011, and the USD 162 million IPO of KiOR, the largest market cap of any pre-reve- nue clean technology company upon IPO. 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 produce. Com- panies that are able to reduce their emissions below their cap can sell their unused quota to other entities, thereby creating an emis- sions market. Through the use of financial instruments, we are able to help our clients manage their exposure to the emissions markets. UBS Exchange Traded Derivatives is an active member of the major emission exchanges in Europe and North America, and offers execution and full service clearing for contracts on EU ETS allowances, UN Certified Emissions Reductions, Regional Green- house Gas Initiative allowances, and permits for nitrogen oxide and sulfur dioxide. Corporate responsibility in operations Our operational targets continue to focus on the direct environmen- tal impact of the firm, including energy, paper, waste and water. Having deployed a new carbon reporting system and rolled out training to our local, regional and global specialists, we have en- hanced further the quality of data capture (verified to ISO 14064) and increased the speed with which management information can be released. Environmental and CO2 footprints We have a direct impact on the environment in a number of ways: our businesses consume electricity, notably through our IT systems, and fossil fuels; employees travel, use paper and generate waste in the course of their work; and offices require heating and comfort cooling systems. Improving the ways we use these resources can both reduce our operational costs and improve our environmental performance. Therefore, we have put in place a series of measures to efficiently manage our environmental impact. Climate change strategy and emission reduction In February 2006, the GEB decided to establish 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 reduce the energy consumption of our buildings while increasing the proportion of renewable energy used. This limits emissions at source. Emissions that cannot be reduced by other means (e.g. business air travel) are offset. As a result, we have reduced further our 2011 CO2 emissions, with an overall global reduction of 39% below 2004 levels, and we are close to achieving our targets for 2012. Energy consumption and efficiency Energy consumption has a significant environmental impact and is the biggest contributor to our overall greenhouse gas emis- sions. In line with our wider business strategy, improvements in energy efficiency have helped to reduce both emissions and costs. Our energy consumption is down 14% on the baseline year of 2009 through a combination of building portfolio man- agement, better building controls, data center efficiency and im- proved employee housekeeping. Our IT-driven initiatives contrib- uted significantly to these energy savings, most notably through a server consolidation program, and the Desktop Transformation Program that is deploying the latest in business PC hardware and software globally. Renewable energy In addition to our energy efficiency programs, we are reducing our use of carbon-intensive energy by including a high proportion of renewable energy. In 2011, 45% of our energy consumption came from renewable energy and district heating. Business travel and offsetting CO2 emissions Our levels of business air travel naturally mirror our client advisor activity. In 2011, this resulted in a significant increase in business air travel. We seek to reduce the environmental impact of air trav- el and therefore actively promote and invest in video conferencing where volumes have increased substantially. For travel within Europe, we encourage an ongoing move to- wards high speed rail travel in preference to air. The marketing and events team has adopted the environmental guidelines for 229 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Corporate governance, responsibility and compensation Corporate responsibility (cid:49)(cid:87)(cid:84)(cid:2)(cid:73)(cid:84)(cid:71)(cid:71)(cid:80)(cid:74)(cid:81)(cid:87)(cid:85)(cid:71)(cid:2)(cid:73)(cid:67)(cid:85)(cid:2)(cid:10)(cid:41)(cid:42)(cid:41)(cid:11)(cid:2)(cid:72)(cid:81)(cid:81)(cid:86)(cid:82)(cid:84)(cid:75)(cid:80)(cid:86)(cid:124)(cid:2) (cid:43)(cid:80)(cid:2)(cid:86)(cid:81)(cid:80)(cid:85)(cid:2)(cid:37)(cid:49)(cid:20) (cid:71)(cid:2) (cid:53)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:84)(cid:71)(cid:80)(cid:71)(cid:89)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:71)(cid:80)(cid:71)(cid:84)(cid:73)(cid:91)(cid:2)(cid:10)(cid:75)(cid:80)(cid:2)(cid:7)(cid:11) (cid:22)(cid:18)(cid:18)(cid:14)(cid:18)(cid:18)(cid:18) (cid:21)(cid:18)(cid:18)(cid:14)(cid:18)(cid:18)(cid:18) (cid:20)(cid:18)(cid:18)(cid:14)(cid:18)(cid:18)(cid:18) (cid:19)(cid:18)(cid:18)(cid:14)(cid:18)(cid:18)(cid:18) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:18) (cid:2) (cid:21)(cid:24)(cid:18)(cid:14)(cid:23)(cid:18)(cid:20) (cid:21)(cid:25)(cid:20)(cid:14)(cid:19)(cid:26)(cid:22) (cid:20)(cid:27)(cid:21)(cid:14)(cid:19)(cid:24)(cid:27) (cid:20)(cid:26)(cid:19)(cid:14)(cid:25)(cid:18)(cid:23) (cid:20)(cid:24)(cid:22)(cid:14)(cid:19)(cid:27)(cid:25) (cid:20)(cid:22)(cid:27)(cid:14)(cid:19)(cid:18)(cid:19) (cid:2)(cid:20)(cid:21)(cid:27)(cid:14)(cid:24)(cid:20)(cid:22)(cid:2) (cid:2)(cid:20)(cid:20)(cid:18)(cid:14)(cid:23)(cid:27)(cid:25) (cid:22)(cid:26) (cid:23)(cid:19) (cid:22)(cid:23) (cid:22)(cid:21) (cid:22)(cid:23) (cid:21)(cid:22) (cid:20)(cid:22) (cid:20)(cid:21) (cid:20)(cid:18)(cid:18)(cid:22)(cid:2) (cid:20)(cid:18)(cid:18)(cid:23)(cid:2) (cid:20)(cid:18)(cid:18)(cid:24)(cid:2) (cid:20)(cid:18)(cid:18)(cid:25)(cid:2) (cid:20)(cid:18)(cid:18)(cid:26)(cid:2) (cid:20)(cid:18)(cid:18)(cid:27)(cid:2) (cid:20)(cid:18)(cid:19)(cid:18)(cid:2) (cid:20)(cid:18)(cid:19)(cid:19) (cid:38)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:2)(cid:41)(cid:42)(cid:41)(cid:2)(cid:71)(cid:79)(cid:75)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:10)(cid:81)(cid:75)(cid:78)(cid:14)(cid:2)(cid:73)(cid:67)(cid:85)(cid:14)(cid:2)(cid:72)(cid:87)(cid:71)(cid:78)(cid:85)(cid:11) (cid:43)(cid:80)(cid:70)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:2)(cid:41)(cid:42)(cid:41)(cid:2)(cid:71)(cid:79)(cid:75)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:10)(cid:71)(cid:78)(cid:71)(cid:69)(cid:86)(cid:84)(cid:75)(cid:69)(cid:75)(cid:86)(cid:91)(cid:14)(cid:2)(cid:74)(cid:71)(cid:67)(cid:86)(cid:11) (cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:2)(cid:41)(cid:42)(cid:41)(cid:2)(cid:71)(cid:79)(cid:75)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:10)(cid:86)(cid:84)(cid:67)(cid:88)(cid:71)(cid:78)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:16)(cid:2)(cid:81)(cid:72)(cid:72)(cid:85)(cid:71)(cid:86)(cid:86)(cid:75)(cid:80)(cid:73)(cid:14)(cid:2)(cid:82)(cid:67)(cid:82)(cid:71)(cid:84)(cid:14)(cid:2)(cid:89)(cid:67)(cid:85)(cid:86)(cid:71)(cid:11) (cid:53)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:84)(cid:71)(cid:80)(cid:71)(cid:89)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:71)(cid:80)(cid:71)(cid:84)(cid:73)(cid:91)(cid:2)(cid:10)(cid:75)(cid:80)(cid:2)(cid:7)(cid:11) (cid:2)(cid:2)(cid:2)(cid:19)(cid:18)(cid:18) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:25)(cid:23) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:23)(cid:18) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:20)(cid:23) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:18) client conferences and now considers the impact of delegate trav- el, hotels, venue features and catering as part of their logistics and planning. Once again in 2011, we offset all CO2 emissions resulting from agency booked business air travel. Working with reputable inter- mediaries and a panel of internal specialists, we select projects which meet the requirements of the Gold Standard for voluntary emissions reductions while providing positive community bene- fits. Schemes selected include wind power projects in Taiwan and Turkey and a community biofuel project in China. Paper, waste and water We are making steady progress towards achieving our 2012 pa- per consumption, waste generation and water usage reduction targets (please refer to the tables “Environmental indicators per full-time employee” below and “Environmental indicators” on the next page). Double-sided printing and copying is now the de- fault setting for most of our employees and, combined with an ongoing shift towards the distribution of electronic documents, has resulted in a 6% reduction in paper used per employee against baseline year 2009. The share of office paper from Forest Stewardship Council or recycled sources increased from 34% in 2009 to 44% in 2011. The continued implementation of bin-less offices in many larger locations has reduced the waste per em- ployee by 9% since 2009. However, our waste recycling ratio re- Environmental indicators per full-time employee Direct and intermediate energy Business travel Paper consumption Waste mained flat at 54%. Paradoxically, this is due to our success in reducing paper consumption, which is a significant recyclable waste stream. Our water consumption decreased 22% compared with 2009 levels. (cid:21)(cid:24)(cid:14)(cid:21)(cid:20)(cid:21) (cid:21)(cid:19)(cid:14)(cid:24)(cid:21)(cid:23) (cid:27)(cid:26)(cid:14)(cid:27)(cid:19)(cid:26) (cid:20)(cid:19)(cid:26)(cid:14)(cid:24)(cid:26)(cid:19) (cid:19)(cid:19)(cid:19)(cid:14)(cid:25)(cid:25)(cid:21) (cid:20)(cid:19)(cid:27)(cid:14)(cid:25)(cid:20)(cid:25) (cid:20)(cid:21)(cid:18)(cid:14)(cid:18)(cid:19)(cid:23) (cid:20)(cid:20)(cid:23)(cid:14)(cid:26)(cid:23)(cid:22) Supply chain management In 2011, UBS spent over CHF 6.7 billion purchasing products and services ranging from office maintenance services across IT infra- structure to components such as stationery. Responsible supply chain management (RSCM) principles serve to embed our ethics and values with our suppliers, contractors, service partners and project teams. As part of this commitment we are continuing to improve our ability to identify, assess and monitor supplier practices in the areas of human and labor rights, the environment and cor- ruption. In 2011, over 600 suppliers were screened according to our social and environmental criteria. We also trained 42 procure- ment and sourcing officers to help with this work, and responsible supply chain requirements were included in the agreements with relevant suppliers who were awarded contracts. Also in 2011, sup- ply & demand management developed a risk rating concept to al- low us to focus better on the potential risks of products and ser- vices and increase our impact in the area of RSCM. Finally, we engaged in a full strategic review of our RSCM operations and de- veloped an action plan for 2012 to ensure best practice in this area. (cid:22)(cid:37)(cid:52)(cid:18)(cid:18)(cid:24)(cid:65)(cid:71) (cid:22)(cid:19)(cid:14)(cid:26)(cid:23)(cid:26) (cid:21)(cid:22)(cid:14)(cid:23)(cid:23)(cid:24) (cid:21)(cid:19)(cid:14)(cid:23)(cid:19)(cid:27) (cid:20)(cid:24)(cid:14)(cid:25)(cid:18)(cid:19) Community investment We are continuing with our well-established tradition of support- ing the advancement and empowerment of organizations and individuals within the communities in which we do business. Our initial focus was centered on direct cash donations, but we have progressed to a position where our community investment pro- gram encompasses employee volunteering, matched-giving schemes, in-kind donations, disaster relief efforts and partner- ships with community groups, educational institutions and cul- tural organizations in all of our business regions. Community Affairs In 2011, UBS and our affiliated foundations made direct cash donations totaling CHF 31.1 million to carefully selected non- profit partner organizations and charities. These donations were directed primarily towards achieving our Community Affairs key 500000 437500 375000 312500 250000 187500 125000 62500 0 Unit kWh / FTE Pkm / FTE kg / FTE kg / FTE m3 / FTE t / FTE 2011 12,459 11,489 122 242 30.1 3.32 Trend ➙ ➙ ➙ ➘ ➘ 2010 12,633 8,743 119 251 33.3 3.66 2009 11,986 7,016 130 265 31.9 3.12 Water consumption CO2 footprint Legend: FTE = full-time employee; kWh = kilowatt hour; Pkm = person kilometer; kg = kilogram; m3 = cubic meter; t = tonne 230 Environmental indicators 1 Total direct and intermediate energy consumption 7 Total direct energy consumption 8 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 Total business travel 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 GRI 3 Absolute normalized 4 827 GWh EN3 128 GWh 84.2% 13.1% 2.6% 0.03% EN4 699 GWh 18.1% 2.3% 15.8% 10.8% 29.5% 13.9% 9.7% 45% EN29 762 m Pkm EN1 EN2 EN22 EN8 EN16 EN16 EN17 1.5% 0.4% 98.1% 337,573 8,093 t 18.2% 26.1% 55.6% 0.1% 16,083 t 54.2% 20.0% 25.8% 2.00 m m3 25,235 t 227,978 t 110,010 t 363,223 t 53,759 t 88,867 t 2011 2 Data quality 5 *** Trend 6 ➙ ** ** *** *** *** *** ** *** ** ** *** *** *** *** *** *** ** *** *** *** *** *** *** ** *** *** *** ** ** ** *** *** *** *** *** ➙ ➙ ➙ ➚ ➙ ➙ ➙ ➙ ➙ ➙ ➙ ➙ ➘ ➙ ➙ ➘ ➙ ➘ ➙ ➘ 2010 2 Absolute normalized 4 859 GWh 137 GWh 82.6% 15.0% 2.3% 0.02% 2009 2 Absolute normalized 4 957 GWh 132 GWh 84.6% 10.9% 4.5% 0.05% 722 GWh 825 GWh 16.3% 4.1% 17.1% 11.5% 29.1% 13.5% 8.5% 43% 10.6% 2.9% 17.5% 9.5% 28.0% 23.6% 7.8% 51% 595 m Pkm 560 m Pkm 1.9% 0.5% 97.6% 258,766 8,076 t 21.9% 20.9% 57.0% 0.3% 3.7% 1.0% 95.3% 258,396 10,349 t 16.7% 17.1% 65.9% 0.4% 17,053 t 21,183 t 53.7% 18.1% 28.2% 2.27 m m3 27,153 t 248,893 t 89,957 t 366,003 t 57,226 t 69,152 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 220,597 t Total net GHG emissions (GHG footprint) 15 Legend: GWh = gigawatt hour; Pkm = person kilometer; t = tonne; m3 = cubic meter; m = million; CO2e = CO2 equivalents 1 All figures are based on the level of knowledge as of January 2012. 2 Reporting period: 2011 (1 July 2010–30 June 2011), 2010 (1 July 2009–30 June 2010), 2009 (1 July 2008–30 June 2009). 3 Global Report- ing 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 operational 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 converting 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 / purchased 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 emissions from our business air travel. 15 GHG footprint equals gross GHG emissions minus GHG reductions from renewable energy and CO2e offsets. 239,624 t 249,101 t *** ➘ y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 231 Corporate governance, responsibility and compensation Corporate responsibility themes of “education” and “entrepreneurship”. Contributions were also made to other activities, in particular disaster relief, including CHF 3.2 million in Japan. These donations, combined with other significant activities, notably the volunteering activi- ties of employees, have continued to provide substantial bene- fits to projects and people around the world (see examples below). Across all business regions, our employees continue to play a very active role in our community investment efforts, in particu- lar through their volunteering activities. In 2011, 11,678 employ- ees spent 105,000 hours volunteering. We support their com- mitment by offering up to two working days a year for volunteering efforts, and also match employee donations to se- lected charities. In Switzerland, our community investment efforts are also ad- vanced by the UBS Culture Foundation, the UBS Foundation for Social Issues and Education, and the association “A Helping Hand from UBS Employees”. In 2011, these organizations have Examples of UBS’s community investment activities across the globe Americas – In 2011, we developed a unique community partnership with artist Stephen Wiltshire and student artists from The Children’s Aid Society, The Harlem School of the Arts, and the YMCA of Greater New York. New York City: Through our eyes was a special exhibition focusing on the New York City skyline from varying perspectives. It was used as a foundation for the young artists to reflect on their own feelings about their community. The program allowed students to draw their own interpretation of the skyline as a way to learn and engage in discussions about 9 / 11 and their neighborhoods in general. The main feature of the exhibition is Wiltshire’s intricate panorama of the New York City skyline. This panorama can be seen on a 160-foot long UBS billboard greeting passengers arriving at the JFK Interna- tional Airport terminal. To commemorate the 10th anniversary of 11 September 2001, UBS published Reflections of Recovery and Resurgence: UBS 9 / 11 Humanitarian Relief Fund, a booklet which highlights the firm’s commitment and support of the National September 11 Memorial & Museum. Immediately following the events of 9 / 11, UBS created the UBS 9 / 11 Humanitarian Relief Fund to provide assistance to victims as well as long-term grants for the children of victims. This booklet also provides helpful information related to support groups, guidance for talking to your family about 9 / 11, and other resources. Our mentor programs, which operate in four US cities, continue to be our main volunteer initiatives. In 2011, employees volunteered to become mentors to hundreds of children – helping students build the confidence and skills they need for future success. Our mentor programs empower students of all ages and range from the Power Lunch reading program designed to increase elementary school literacy through to college preparatory and career skills development for high school students through our iMentor program. To encourage the development of quality education, the Americas region is supporting innovative and collaborative after-school programs for Beacon centers in New York City. These high school after-school programs aim to integrate children’s learning experiences in and outside the classroom as well as offering career skills development, job training and computer literacy that contribute to greater opportunities for success after graduation. Asia Pacific – The Community Leadership Experience, developed in partnership with Charities Aid Foundation India, was held in June 2011 in Mumbai. It focused on women leaders and the 20 participants came away with fresh perspectives on how to tackle the challenges of leading and managing a not-for-profit organiza- tion in India. Launched in 2008, the annual three-day program has been welcomed by the non-profit sector as a much-needed platform to bring leaders together. Participants get to share and learn from each other and help to improve their own organization’s capacity to deliver services to their own commu- nity. Across the Asia Pacific region, UBS employees continued to volunteer in record numbers and, in 2011, significantly increased the number of hours contrib- uted to our community partners. In Japan, volunteers from the Investment Bank worked with Social Venture Partners Tokyo to develop financial accounting 232 Examples of UBS’s community investment activities across the globe again made valuable contributions to important social causes, including fostering the humanities and the creative arts, sup- porting communities in need, and helping disabled and disad- vantaged people. Client foundation The UBS Optimus Foundation is one of Switzerland’s largest char- itable foundations. It is a non-profit organization which offers UBS clients a broad range of opportunities to improve the lives of children around the globe and has contributed over CHF 118 mil- lion to 250 projects in 73 countries since its foundation. Employ- ing the highest standards of quality when selecting or monitoring its projects and project partners, the Foundation plays a key role in bringing about positive social change in the areas in which it targets, including healthcare, education and child protection. As UBS bears all the administrative costs related to the UBS Optimus Foundation, clients can be sure that 100% of every donation goes directly to the projects themselves. processes for 10 new start-up not-for- profit organizations. In Singapore, more than 200 employees and interns helped to organize the International Association for Volunteer Effort’s biannual World Volunteer Conference which attracted more than 1,000 participants from around the globe. At this event, UBS continued its support for a unique program which aims to increase the capability of not-for-profit organizations to secure funding from the private sector. Called “The Pitch”, five finalists taken from more than 100 applicants from around the globe competed before a live audience and panel of expert judges to secure funding for innovative volunteer management projects. Europe, Middle East and Africa – Throughout the region, we continue to support educational and entrepreneurial activities, particularly in areas close to where we conduct our business. We now have active Community Affairs programs in the UK, France, Italy, South Africa, Poland, UAE, Russia, Ireland and Jersey. The regional flagship program is our partnership with the Bridge Academy, a mixed, non-denominational school for 11–18 year olds in Hackney, one of the most deprived boroughs in London and adjacent to UBS’s London base. In 2003, UBS agreed to sponsor a new secondary school under the UK government’s “Acad- emy” program. UBS volunteers helped develop the vision and plans for the devel- opment of the Bridge Academy which opened in 2007. A fundamental principle of the partnership is that all activity must directly improve student attainment and achievement. To date, 1,700 volunteers have contributed over 18,000 hours in a range of activities. – Governance: five UBS Managing Directors form a majority on the governing body, contributing strategic expertise and taking responsibility for the Bridge Academy’s direction and results – Literacy and numeracy: intervention schemes involving 80 volunteers per week – Work-related learning program: providing an introduction to the world of work, a focus on relevant skills and the motivation to think positively about the working world – Bespoke activities range from design- ing a virtual trading project with 54 top maths students from the Academy working with equities traders, through to engaging with Stonewall and the UBS Pride Network to work with 180 students to help tackle homo- phobic bullying – UBS volunteers provide support for Bridge staff learning and development, finance, operations, communications, fundraising and IT Switzerland – During the European Year of Volunteering in 2011, UBS launched a unique national volunteering project to restore Swiss hiking trails. UBS em ployees replaced broken or inaccurate signposts, restored sections of the network of hiking trails and constructed new ones. Through their volunteering efforts UBS employees helped to ensure the continued quality and safety of the hiking trails. This, in turn, helps to ensure that hiking remains a popular and healthy leisure activity. The volun- teering activities took place in six loca- tions across Switzerland. In total, 319 em ployees participated in this important project volunteering 3,805 hours. ➔ Refer to www.ubs.com/community y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 233 Corporate governance, responsibility and compensation Our employees Our employees Our employees’ drive, skill and dedication are key to meeting the needs of our clients and building our businesses. We are committed to investing in our talent and to attracting, developing and retaining highly qualified people, while maintaining our reputation as a leading employer. We are also dedicated to promoting a performance-oriented culture that values and encourages collaboration across the entire Group. This helps to maximize opportunities to create value for the firm and support our employees’ success. Our workforce Our competitive strength depends on the quality of our people. Hiring, developing and retaining high-quality employees are pri- orities for the firm, as our workforce is fundamental to the success of our strategy. Due to ongoing market challenges, we had to make some difficult business decisions in 2011 that impacted our workforce, including personnel reductions. Throughout this pro- cess, we endeavored to act as a responsible employer, making full use of our internal labor market and, where necessary, career transition support services. We also continued to invest in the de- velopment and training of talented employees who can help us to grow our businesses. In general, employee levels were stable in 2011, with the num- ber of people employed on 31 December 2011 at 64,820, up 203 or 0.3% from year-end 2010. In 2011, our employees worked in 57 countries, with approximately 36% of our staff employed in Swit- zerland, 35% in the Americas, 17% in the rest of Europe, the Middle East and Africa and 12% in Asia Pacific. Employee turnover, as a percentage of average overall headcount, was 13.8% in 2011. Employee-initiated turnover was 6.9%, down 0.2% from 2010. Internal mobility encourages integration, collaboration and in- novation, as well as individual career development. In 2011, we continued to support employee mobility across all regions and business divisions. In 2011, 472 employees moved to roles in a different region, compared with 489 in 2010. In 2011, 1,228 em- Personnel by region Full-time equivalents Switzerland UK Rest of Europe Middle East and Africa USA Rest of the Americas Asia Pacific Total Personnel by reporting segment Full-time equivalents Wealth Management Retail & Corporate Wealth Management & Swiss Bank Wealth Management Americas Global Asset Management Investment Bank Corporate Center Total of which: Corporate Center personnel (before allocations) 1 31.12.11 23,188 6,674 4,182 162 21,746 1,177 7,690 64,820 31.12.11 15,904 11,430 27,334 16,207 3,750 17,256 274 64,820 19,270 As of 31.12.10 23,284 6,634 4,122 137 22,031 1,147 7,263 64,617 31.12.09 24,050 6,204 4,145 134 22,702 1,132 6,865 65,233 % change from 31.12.10 0 1 1 18 (1) 3 6 0 As of 31.12.10 % change from 31.12.09 31.12.10 15,663 12,089 27,752 16,330 3,481 16,860 194 64,617 19,472 15,408 12,140 27,548 16,925 3,471 15,666 1,624 65,233 20,054 2 (5) (2) (1) 8 2 41 0 (1) 1 Please note that some of the figures in this table may differ from those originally published in quarterly and annual reports (for example due to adjustments following organizational changes). 234 ployees transferred between business divisions, compared with 1,290 in 2010. (cid:41)(cid:71)(cid:80)(cid:70)(cid:71)(cid:84)(cid:2)(cid:70)(cid:75)(cid:85)(cid:86)(cid:84)(cid:75)(cid:68)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:68)(cid:91)(cid:2)(cid:73)(cid:71)(cid:81)(cid:73)(cid:84)(cid:67)(cid:82)(cid:74)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:84)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:19)(cid:124)(cid:2) (cid:49)(cid:80)(cid:2)(cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:19) (cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2) (cid:20)(cid:21)(cid:14)(cid:21)(cid:25)(cid:21)(cid:2) (cid:25)(cid:14)(cid:26)(cid:22)(cid:21)(cid:2) (cid:22)(cid:14)(cid:24)(cid:21)(cid:21)(cid:2) (cid:20)(cid:22)(cid:14)(cid:19)(cid:22)(cid:20)(cid:2) (cid:24)(cid:14)(cid:26)(cid:24)(cid:22) (cid:2) (cid:20)(cid:26)(cid:14)(cid:18)(cid:18)(cid:18) (cid:20)(cid:19)(cid:14)(cid:18)(cid:18)(cid:18) (cid:19)(cid:22)(cid:14)(cid:18)(cid:18)(cid:18) (cid:26)(cid:14)(cid:25)(cid:27)(cid:22) (cid:2)(cid:2)(cid:25)(cid:14)(cid:18)(cid:18)(cid:18) (cid:19)(cid:22)(cid:14)(cid:23)(cid:25)(cid:27) (cid:21)(cid:14)(cid:23)(cid:21)(cid:20) (cid:22)(cid:14)(cid:21)(cid:19)(cid:19) (cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:18) (cid:54)(cid:74)(cid:71)(cid:2)(cid:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85) (cid:35)(cid:85)(cid:75)(cid:67)(cid:2)(cid:50)(cid:67)(cid:69)(cid:75)(cid:386)(cid:69) (cid:47)(cid:67)(cid:78)(cid:71) (cid:40)(cid:71)(cid:79)(cid:67)(cid:78)(cid:71) (cid:19)(cid:14)(cid:27)(cid:19)(cid:22) (cid:20)(cid:14)(cid:25)(cid:19)(cid:27) (cid:39)(cid:87)(cid:84)(cid:81)(cid:82)(cid:71)(cid:14) (cid:47)(cid:75)(cid:70)(cid:70)(cid:78)(cid:71)(cid:2)(cid:39)(cid:67)(cid:85)(cid:86) (cid:67)(cid:80)(cid:70)(cid:2)(cid:35)(cid:72)(cid:84)(cid:75)(cid:69)(cid:67) (cid:26)(cid:14)(cid:24)(cid:24)(cid:18) (cid:19)(cid:23)(cid:14)(cid:22)(cid:26)(cid:20) (cid:53)(cid:89)(cid:75)(cid:86)(cid:92)(cid:71)(cid:84)(cid:78)(cid:67)(cid:80)(cid:70) (cid:20)(cid:14)(cid:19)(cid:19)(cid:21) (cid:22)(cid:14)(cid:25)(cid:23)(cid:19) (cid:55)(cid:80)(cid:75)(cid:86)(cid:71)(cid:70) (cid:45)(cid:75)(cid:80)(cid:73)(cid:70)(cid:81)(cid:79) (cid:22)(cid:42)(cid:52)(cid:18)(cid:18)(cid:24)(cid:65)(cid:71) Recruiting new employees Despite the challenging operating environment, we continued to recruit new talent to help strengthen and grow our businesses. In 2011, there was a strong focus on recruiting experienced client advisors in our asset-gathering businesses and making targeted hires in our investment banking and centrally managed functions. We continued to invest in talent for the future by hiring graduates and interns in each of our operating regions. We reduced hiring costs further in 2011 by increasing internal hires and making the most of employee referrals, both of which reduced the need to use outside agencies to fill positions. We continued to be an attractive employer in 2011. Globally, 94% of candidates accepted our offer of employment, with 97% of individuals in Switzerland accepting. UBS ranked third among Swiss business students in the 2011 Universum Switzerland’s Ideal Employers survey. In 2011, we filled 6,459 positions across the firm. This was a decrease of 29% compared with 2010, largely due to significant- ly less recruiting in the Investment Bank and in centrally managed functions. Wealth Management & Swiss Bank hired 414 client ad- visors globally; 686 financial advisors were hired in Wealth Man- agement Americas in 2011. Referrals from current employees were an important source for these hires; for example, in Asia Pacific, employee referrals accounted for 49% of the client advi- sors we hired. In addition, specialized client advisor associate pro- grams were launched in Switzerland and Asia Pacific to recruit professionals from other industries into client advisory roles. Several new recruiting initiatives were launched in 2011 to en- sure there is a continuous and visible presence on our target cam- puses, consistent with our commitment to graduate hiring. We continue to provide unique educational opportunities for gradu- ates that include business-specific activities. As part of our under- graduate and MBA graduate training programs, 1,111 university graduates joined UBS in 2011. An additional 1,215 interns were hired globally over the course of the year. Our apprenticeship pro- gram in Switzerland continued to be strong in 2011, hiring 300 apprentices. Strengthening and sustaining our diverse workforce and inclusive work environment In today’s global business environment, we believe it is essential to have a workforce of individuals from widely differing back- grounds, cultures and life experiences. Diversity in gender, ethnic- ity, nationality, religion, age, disability, sexual orientation and other factors supports the firm in meeting the needs of our in- creasingly diverse client base. We also believe a diverse employee base and inclusive work environment increases employees’ en- gagement. Ultimately, our success depends on equal employment opportunities and having the best person in each role. We are committed to increasing the diversity of our workforce at all levels of the organization, as well as increasing our retention of diverse (cid:19)(cid:2)(cid:37)(cid:67)(cid:78)(cid:69)(cid:87)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:68)(cid:67)(cid:85)(cid:75)(cid:85)(cid:2)(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:67)(cid:2)(cid:82)(cid:71)(cid:84)(cid:85)(cid:81)(cid:80)(cid:2)(cid:10)(cid:89)(cid:81)(cid:84)(cid:77)(cid:75)(cid:80)(cid:73)(cid:2)(cid:72)(cid:87)(cid:78)(cid:78)(cid:15)(cid:86)(cid:75)(cid:79)(cid:71)(cid:2)(cid:81)(cid:84)(cid:2)(cid:82)(cid:67)(cid:84)(cid:86)(cid:15)(cid:86)(cid:75)(cid:79)(cid:71)(cid:11)(cid:2)(cid:75)(cid:85)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:75)(cid:70)(cid:71)(cid:84)(cid:71)(cid:70)(cid:2)(cid:81)(cid:80)(cid:71)(cid:2)(cid:74)(cid:71)(cid:67)(cid:70)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:2)(cid:75)(cid:80)(cid:2) (cid:86)(cid:74)(cid:75)(cid:85)(cid:2)(cid:73)(cid:84)(cid:67)(cid:82)(cid:74)(cid:2)(cid:81)(cid:80)(cid:78)(cid:91)(cid:16)(cid:2)(cid:54)(cid:74)(cid:75)(cid:85)(cid:2)(cid:67)(cid:69)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:71)(cid:80)(cid:70)(cid:15)(cid:20)(cid:18)(cid:19)(cid:19)(cid:2)(cid:71)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:71)(cid:71)(cid:2)(cid:80)(cid:87)(cid:79)(cid:68)(cid:71)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:24)(cid:24)(cid:14)(cid:26)(cid:23)(cid:23)(cid:2)(cid:75)(cid:80)(cid:2)(cid:86)(cid:74)(cid:75)(cid:85)(cid:2)(cid:73)(cid:84)(cid:67)(cid:82)(cid:74)(cid:14)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2) (cid:71)(cid:90)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(cid:2)(cid:85)(cid:86)(cid:67)(cid:72)(cid:72)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:37)(cid:67)(cid:84)(cid:70)(cid:2)(cid:37)(cid:71)(cid:80)(cid:86)(cid:71)(cid:84)(cid:14)(cid:2)(cid:42)(cid:81)(cid:86)(cid:71)(cid:78)(cid:2)(cid:53)(cid:71)(cid:71)(cid:82)(cid:67)(cid:84)(cid:77)(cid:2)(cid:54)(cid:74)(cid:87)(cid:80)(cid:14)(cid:2)(cid:57)(cid:81)(cid:78)(cid:72)(cid:85)(cid:68)(cid:71)(cid:84)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:57)(cid:75)(cid:70)(cid:70)(cid:71)(cid:84)(cid:2)(cid:42)(cid:81)(cid:86)(cid:71)(cid:78)(cid:16) employees. At the same time, we seek to strengthen and sustain an inclusive work environment that encourages employee devel- opment and enhances client relationships. Our workforce is truly global. We have 895 offices in 57 coun- tries, and our employees are citizens of 146 countries. In 2011, the average age of our employees was 38 years and the average length of employment at the firm was 8.6 years. In Switzerland, more than 51% of employees have worked at UBS for more than 10 years. Our global strategy is delivered through concrete action plans for each business, the integration of diversity and inclusion into our people management processes, and regional initiatives that reinforce our global strategy. For example, we integrated informa- tion regarding “unconscious bias” into our performance manage- ment processes in 2011. In 2011, regional diversity teams continued to work with busi- ness and human resource leaders on plans linked to regional tal- ent strategies. For example, in 2011, a cross-divisional gender ini- tiative in parts of Europe that aims to build a culture in which men and women thrive equally in their careers was extended to Asia Pacific and rolled out across the Investment Bank. Components include training for managers, providing sponsoring opportunities for senior-level women, enhancing support for employees on ma- ternity leave and a focus on flexible working options for all em- ployees. Over 50% of the business areas or regions in the initial group have shown a proportionate increase in the number of fe- male Executive and Managing Directors due to hiring, promotion or retention since the program launched in 2009. In 2011, we relaunched a mentoring program in Switzerland for women Associate Directors and Directors to help women fo- cus on their career progression. The second annual UK Diversity & Inclusion Week, designed to raise awareness about the value of a diverse and inclusive workplace and what it takes to build one, featured a wide range of employee events, awards, and presenta- tions on workplace diversity and inclusion issues. In Asia Pacific, we worked with our businesses to sponsor marketing events 235 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a (cid:20)(cid:26)(cid:18)(cid:18)(cid:18) (cid:20)(cid:19)(cid:18)(cid:18)(cid:18) (cid:19)(cid:22)(cid:18)(cid:18)(cid:18) (cid:25)(cid:18)(cid:18)(cid:18) (cid:18) Corporate governance, responsibility and compensation Our employees Gender distribution by employee category 1 As of 31.12.11 Male Female Total Officers (Director and above) Officers (other officers) Non-officers Total Number 18,319 4,850 23,169 % 79.1 20.9 100.0 Number 14,563 8,214 22,777 % 63.9 36.1 100.0 Number 8,960 11,949 20,909 % 42.9 57.1 100.0 Number 41,842 25,013 66,855 % 62.6 37.4 100.0 1 Calculated on the basis that a person (working full-time or part-time) is considered one headcount (in this table only). This accounts for the total UBS end-2011 employee number of 66,855, which excludes staff from UBS Card Center, Hotel Seepark Thun, Wolfsberg and Hotel Widder. targeted specifically toward female clients. In the US, we launched a recruiting initiative to hire a number of financial advisors to pro- vide insight and access to underserved, diverse market opportuni- ties. Online “harassment free” workplace training also was intro- duced in the US, in addition to existing classroom training. provide a framework for performance management that features regular opportunities for employee-manager dialogue, consis- tent and transparent assessment processes and a clear link be- tween performance, demonstrated achievements and compen- sation. More than 11,500 employees are members of over 25 employ- ee networks across UBS that help build cross-business relation- ships and strengthen our inclusive culture. In the US, for example, a “straight ally” initiative significantly raised participation from the firm’s leaders and increased membership in our lesbian, gay, bisexual and transgender (LGBT) employee network by promoting an inclusive and supportive workplace environment. A straight ally member is encouraged to proactively support the inclusive treatment of LGBT colleagues, and participate in community ser- vice, networking and educational events to demonstrate their support. Our global network guidelines enable employees to set up or join employee networks / affinity groups in all our operating regions. Additionally, our human resource policies and processes have global coverage and outline our commitment to nondiscrim- ination, a harassment-free workplace and equal opportunity for all employees. Managing performance We are committed to giving employees the tools and support they need to be effective in their jobs and advance their careers. We (cid:49)(cid:87)(cid:84)(cid:2)(cid:67)(cid:82)(cid:82)(cid:84)(cid:81)(cid:67)(cid:69)(cid:74)(cid:2)(cid:86)(cid:81)(cid:2)(cid:82)(cid:71)(cid:81)(cid:82)(cid:78)(cid:71)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:2) (cid:40)(cid:81)(cid:69)(cid:87)(cid:85)(cid:75)(cid:80)(cid:73)(cid:2)(cid:81)(cid:80)(cid:2)(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:82)(cid:84)(cid:75)(cid:81)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:14)(cid:2)(cid:84)(cid:75)(cid:73)(cid:81)(cid:84)(cid:81)(cid:87)(cid:85)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:68)(cid:87)(cid:75)(cid:78)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:78)(cid:71)(cid:67)(cid:70)(cid:71)(cid:84)(cid:85)(cid:74)(cid:75)(cid:82)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:80)(cid:73)(cid:86)(cid:74) (cid:73) (cid:79) (cid:50) (cid:67) (cid:71) (cid:84) (cid:80) (cid:67) (cid:73) (cid:71) (cid:79) (cid:71) (cid:80) (cid:86) (cid:72) (cid:81) (cid:84) (cid:79) (cid:67) (cid:80) (cid:69) (cid:71) (cid:80) (cid:80) (cid:75) (cid:80) (cid:73) (cid:75) (cid:80) (cid:73) (cid:69) (cid:52)(cid:71)(cid:85)(cid:81) (cid:87)(cid:84)(cid:69) (cid:71) (cid:2) (cid:82) (cid:78) (cid:67) (cid:67)(cid:80) (cid:70)(cid:2)(cid:85) (cid:81) (cid:87) (cid:84) (cid:75) (cid:80) (cid:71) (cid:85) (cid:85)(cid:2)(cid:85)(cid:86)(cid:84)(cid:67)(cid:86)(cid:71)(cid:73)(cid:91) (cid:85) (cid:87) (cid:36) (cid:49)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:85) (cid:71) (cid:86) (cid:86)(cid:75) (cid:80) (cid:80) (cid:75)(cid:81) (cid:85) (cid:85) (cid:71) (cid:69) (cid:69) (cid:87) (cid:85) (cid:17) (cid:86) (cid:80) (cid:71) (cid:86) (cid:80) (cid:71) (cid:79) (cid:71) (cid:73) (cid:67) (cid:80) (cid:67) (cid:79) (cid:40)(cid:81)(cid:85)(cid:86)(cid:71)(cid:84)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67) (cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:14)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:85) (cid:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:79)(cid:82)(cid:78)(cid:81)(cid:91)(cid:71)(cid:71) (cid:70)(cid:71)(cid:88)(cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86) (cid:69)(cid:87)(cid:78)(cid:86)(cid:87)(cid:84)(cid:71) (cid:78) (cid:67) (cid:54) (cid:38) (cid:39) (cid:79) (cid:82) (cid:78) (cid:81) (cid:91)(cid:71)(cid:71)(cid:2)(cid:82)(cid:81)(cid:78)(cid:75)(cid:69)(cid:75)(cid:71)(cid:85) (cid:2) (cid:67) (cid:80) (cid:70) (cid:2) (cid:82) (cid:84) (cid:67)(cid:69)(cid:86)(cid:75)(cid:69)(cid:71)(cid:85) (cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86) (cid:67) (cid:84) (cid:70) (cid:89) (cid:52) (cid:71) (cid:71) (cid:88) 236 In 2010, we made some significant changes to our perfor- mance management processes to increase transparency, support employee development and better reward employees in line with their contributions. These goals have not changed. However, based on employee feedback and a comprehensive review of the impact, we amended some aspects of the evaluation process in 2011. These changes were made to increase efficiency, improve the business focus of assessments and put more emphasis on in- dividual development. Our underlying goal remains: to strengthen our performance culture and focus on our strategy so we can achieve long-term, sustainable profitability. Employees’ performance reviews are based on their contribu- tion and whether their individual performance appropriately re- flects factors like leadership, collaboration and teamwork, client focus and professional behavior. In 2011, 99% of the employees eligible to participate in the firm’s global performance assessment received a performance review. Performance management for our senior executives and cer- tain other key employees is especially rigorous. Senior leaders, including all Group Executive Board (GEB) members, receive a comprehensive evaluation based on key achievements, business performance, risk management, leadership skills and meeting specific financial targets. Direct peer input is also required. In 2011, our “key risk takers and controllers” were again sub- ject to extended performance management procedures. These individuals may work in front office, logistics or control functions, and, due to their role are able to materially commit, use or control the firm’s resources and exert significant influence over our risk profile. We therefore ensure that a holistic evaluation is conduct- ed by relevant control functions on an annual basis. A sample of senior management and key risk-taker performance objectives are also reviewed annually. We have Group-wide ranks and salary ranges that are appli- cable to all employees. We also have a standardized role classifi- cation model across the firm. Many human resource processes are based on these global role profiles, and this enables more clearly defined career paths and development plans for all em- ployees. Education and talent development We take a structured approach to leadership and professional de- velopment, business education and talent management. This helps ensure that our employees and senior leaders have the knowledge, skills and experience required to succeed in their roles and support our strategic goals. The UBS Business University is our global corporate university, composed of nine physical locations, several smaller in-house facilities and a comprehensive online training library. It manages all of UBS’s learning activities, ensuring that they are aligned with Group-wide, divisional and regional business strategies. One of the Business University’s primary objectives is to help our senior leaders and our key talent build an effective leadership culture so that they can work together to attain the firm’s goals. A series of leadership development offerings, management skills training and new hire programs equip our current and future leaders with the skills to lead UBS forward. Collaborative, cross- divisional learning is a hallmark of our leadership development and talent programs. As a firm, we must be able to offer our private, corporate and institutional clients a broad range of products and services. Client Leadership Experience (CLE) workshops bring together client-fac- ing employees from all divisions to build the knowledge, skills and networks needed to deliver the best solutions from the entire firm to our clients. In 2011, 33 workshops were held in 13 cities in the Americas, Europe, Asia Pacific and Switzerland and attended by 1,200 Directors, Executive Directors and Managing Directors. Since 2008, nearly 3,000 employees have participated in a CLE. A comprehensive business education offering is provided through more than 90 role-specific learning pathways. These pathways are a structured sequence of activities that help ensure consistent training across similar job roles worldwide. Client-fac- ing staff participate in specialized advisory and sales training to more effectively meet clients’ needs. A GEB-sponsored “Leading UBS forward” training program was launched in 2010 and continued through mid-2011. More than 53,000 employees attended one of 1,400 face-to-face work- shops led by senior leaders from across the firm. These sessions gave employees the opportunity to improve their understanding of key components of our strategy, identity and strategic princi- ples, and to embed our values in their daily work. A further 5,000 employees completed an online version of the course. All employees can access a broad range of professional devel- opment training. Our eLearning portfolio, which consists of more than 2,000 courses, enables all employees to build skills at their own pace. In 2011, 34,200 employees participated in voluntary web-based learning on topics such as professional skills, leader- ship and management, understanding our business, IT and finan- cial markets. Mandatory web-based training modules helped en- sure that compliance and regulatory requirements were met by the relevant employees. Each year, we invest in talent development and succession planning for the most critical roles across the firm. An annual Strengthening the accountability of our leadership In December 2010, the GEB approved specific leadership behaviors for the firm’s leaders, who are expected to be role models, to lead authentically and to collaborate with other senior managers across the firm. These “leadership accountabilities” commit our Managing Directors and members of the GEB to deliver results, develop talent and drive collaboration. Starting with the firm’s performance management and educa- tion processes, these standards were integrated into all of the firm’s human resource processes in 2011. For example, all newly promoted Managing Directors were required to take action to strength- en two of the three accountabilities within their teams. Ninety days later, they were asked to quantify the impact of their actions. For example, increased collaboration was reported by 55% of respondents, with 41% reporting better client relationships. Leadership accountabilities Deliver sustainable results Develop and engage talent Drive business collaboration Accept full accountability for your actions and make clear and timely decisions. Lead by being a role model for UBS’s values and strate- gic principles with authenticity. Promote cross-business collaboration and a mind-set to put the client’s interest first. Lead your business by building a strong performance- oriented culture and reward the right actions and behavior. Ensure consistent high-quality delivery and execution. Hire, develop and retain the best talent while respecting diversity. Engage your people through inspiring, open and honest communication. Develop a vision for your business aligned with UBS’s identity and communicate clear priorities and a plan for your function. Align your organization and people to drive change. Manage risk prudently to ensure long-term sustainable results. Provide constructive feedback and coaching guidance to enhance performance. Build high-trust relationships. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 237 Corporate governance, responsibility and compensation Our employees firm-wide talent review helps to identify and build the skills and competencies of employees who are identified as having leader- ship potential. In addition, possible successors for senior leader- ship roles are identified and tracked on a firm-wide basis, and they are offered specialized development opportunities in addi- tion to on-the-job training. Compensation We strive to provide our employees with competitive pay and in- centives, while carefully considering our obligations to sharehold- ers and regulators. Our approach recognizes the need to compen- sate individuals for their performance within the context of competitive market conditions, a fast-changing commercial envi- ronment and evolving regulatory oversight. Our foremost priority is to encourage and reward behavior that contributes to sustain- able profitability, and thereby the long-term success of the firm. In 2011, we increased our efforts to actively consider risk and ac- count for risk-adjusted profitability in our compensation ap- proach. Our compensation structure is designed to be appropriately balanced between fixed and variable elements. We emphasize the variable component as an incentive to excel and to foster a performance-driven culture, while supporting appropriate and controlled risk taking. We always take a holistic view of em- ployee compensation within a total reward framework that takes into account base salary, discretionary incentives and benefits. Our Total Reward Principles are the foundation of our compen- sation framework, particularly for integrating risk control and managing performance, as well as specifying how we structure our compensation and bonus pool funding. They reflect our long- standing focus on pay for performance, sustained profitability, risk awareness and sound governance. Employee share ownership We support employee share ownership in principle because we believe that personal accountability for business actions and de- cisions can be encouraged through equity-based awards. As an example, through Equity Plus, our voluntary equity-based pro- gram, employees purchase shares at market price and receive one share for every three shares purchased. These shares vest within three years, subject to continued employment at UBS. On 31 December 2011, current employees held an estimated 6% of UBS shares outstanding (including approximately 4% in un- vested / blocked shares), based on all known shareholdings from employee participation plans, personal holdings and individual retirement plans. At the end of 2011, an estimated 51% of all employees held UBS shares, while an estimated 39% held UBS stock options. ➔ Refer to the “Compensation” section of this report for more information Our commitment to being a responsible employer Relationships based on respect, trust and mutual understanding are the foundation for all of our business activities. The firm’s Code of Business Conduct and Ethics (the Code) demonstrates the importance we place on responsible workplace behavior. The Code sets out the principles and practices employees are expect- ed to follow and forms the basis for the policies and guidelines that govern employees’ behavior. We provided training on the Code to all employees in 2010 and all staff who joined the firm in 2011. We are committed to upholding our corporate values. They are integrated into our corporate decision-making and people man- agement processes, and are aimed at shaping the daily actions of our employees. Benefits and well-being We strive to be a responsible employer and invest in all of our employees, whether they are full- or part-time staff, by offering a comprehensive suite of benefits such as insurance, pension, re- tirement and time off that are competitive in our markets. We also offer additional benefits to employees where practical. For exam- ple, flexible working arrangements are available to employees in many of our major markets, and we encourage and support our employees’ efforts to volunteer in the many communities in which we operate. To help employees manage life and work issues, we offer em- ployee assistance programs (EAP) in a number of locations. In the UK, the EAP provides access to specialist support on topics such 238 as finances, family, bereavement and legal / consumer rights. A health and well-being program provides an on-site general prac- titioner, physiotherapist and dentist as well as occupational health services and an emergency back-up childcare and elder- care facility. In the US, the Work Life Assistance Program offers around-the- clock counseling and referral services to employees and their fam- ilies to help resolve issues that may affect their health, personal life, or job performance. The program also provides information about work-life effectiveness and offers referral services for child care, prenatal care, adoption, academic services and adult care. We also provide on-site childcare at our Stamford, Connecticut site and emergency / back-up child care in most other US locations. Employee assistance initiatives in Asia Pacific are generally con- ducted on a country-by-country basis. In Hong Kong, for exam- ple, consultants from an external EAP provider help employees and their immediate family manage work and life stress, family, mental health, personal development or other challenges. In Ja- pan, these services are available through an outside team of con- sultants trained in fields such as counseling, law, accounting and psychology. In Switzerland, assistance for current and retired employees, as well as their family members, is provided through our Social Counseling and Retiree Services functions. Services include coun- seling for personal issues, difficulties in the workplace, sickness, financial difficulties and retirement. Employees also have access to an internal ombudsman’s office. An HR Health Care function con- siders local health and safety matters. Work days lost to accident or illness are tracked, with 20,835 and 128,668 days respectively accounted for in 2011. This amounts to six work days per em- ployee in Switzerland. Programs are in place in every region to provide transitional support to employees impacted by restructuring exercises. For ex- ample, in Switzerland, we have a long-standing initiative called COACH to help redeploy employees within UBS, or help them find jobs outside the firm in the event of a restructuring. COACH advisors provide support and assistance in finding a new job by working closely with our internal recruitment center and outside employment services. During the COACH process, employees re- tain full salary and benefits, and financial assistance is available for job-related training, if needed. Employees below the level of Director were eligible for the So- cial Partnership Agreement for employees in Switzerland (SOVIA CH) in 2011. A new social plan became valid on 1 January 2012, replacing SOVIA CH, which had expired. This social plan lays out the terms and conditions for making redundancies among em- ployees whose jobs are subject to the Agreement on Conditions of Employment for Bank Staff (ACEBS). It governs the require- ments and procedures for internal hiring, job transfers, and, when needed, severance. The aim is to make any necessary job cuts or operational changes in a responsible manner, making full use of our internal labor market, and to offer support and career advice to these employees. ➔ Refer to www.ubs.com/health-safety for more information on our health and safety statement Employee representation As part of our commitment to being a responsible employer, we partner with all of our employee representation groups to main- tain an active dialogue between employees and management. The UBS Employee Forum (UBSEF) was established in 2002 and has representatives from 18 countries across Europe. The UBSEF facilitates an open exchange of views and information on pan- European issues that have the potential to impact our regional performance, prospects or operations. Additionally, local forums address issues such as health and safety, changes to workplace conditions, pension arrangements and consultation on collective redundancies and business transfers. In Switzerland, for example, the Employee Representation Committee (ERC) partners with UBS management in annual salary negotiations and represents em- ployee interests on specific topics outlined in the collaboration and co-determination clauses of staff policies. It also supports open dialogue through a variety of channels and activities. ERC representatives are elected to represent employees whose work contracts are governed by Swiss law and the ACEBS. The UK Em- ployee Forum (UKEF), which is formed by elected representatives from all of our UK businesses and appointed management repre- sentatives, focuses on local economic, financial and social activi- ties of concern to UK employees. It may also be used for defining workforce agreements affecting UK employees. Collectively, the UBSEF, including the ERC and UKEF, represents over 40% of our global workforce. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 239 Corporate governance, responsibility and compensation Our employees 240 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 241 Advisory vote Corporate governance, responsibility and compensation Compensation Compensation Letter from the Human Resources and Compensation Committee of the Board of Directors Dear shareholders, As the new chair of the Human Resources and Compensation Committee (HRCC), I am pleased to submit our compensation report for 2011, for which we will seek your support at our Annual General Meet- ing in May 2012. I would like to take this opportunity to thank my predecessor, Sally Bott, for her contribution to the Committee in the past, and to Helmut Panke, who stepped in as interim chair of the HRCC after Sally’s departure and prior to my appointment. I also welcome Wolfgang Mayrhuber, who joined the Committee in 2011. We firmly believe that successfully implementing our business strategy and improving our profitability can only be achieved by having the right people at the firm. As such, compensation remains of key strategic importance for us. By offering compensation that is competitive and features a balanced mix of fixed and variable elements, we can attract the talented professionals that we seek, as well as motivate them to perform well and encourage them to stay. At the same time, we want to ensure that our employees’ interests are aligned with those of our shareholders. Accordingly, a significant part of the incentives that we award is deferred over several years and may be forfeited when employees act against the interests of the firm or when any applicable performance conditions are not met. These incentives reward our employees for performing well and, together with the risk considerations that are integrated within the compensation process, keep them focused on the long- term profitability of the firm. unsustainable in the future if profitability declines throughout the industry. In this new environment, we must find the right balance between the sometimes conflict- ing objectives related to compensation, namely, ensuring that we retain the qualified, competent people needed to deliver sustained success, keeping pay aligned with performance, and building up sufficient capital to meet the new regulatory requirements with which we must comply. Adapting to a new market environment Last year was a turbulent one for our industry, and many of the challenges that were present in 2011 will remain in 2012 and beyond. Financial firms, including UBS, continue to face volatility in the financial markets, which has dampened earnings in a number of businesses. Banks must also cope with the impact of substantial new capital requirements, which are widely expected to lead to lower returns on capital in the industry in the future. We are keenly aware that the environ- ment in which we operate is changing dramatically. It is therefore imperative that we adapt accordingly. We recognize that past levels of compensation will be Applying our approach successfully in 2011 Despite the new realities that we face, we are convinced that our approach to compensation remains appropriate. In 2011, our compensation framework responded effectively to the decline in the firm’s overall performance as well as the impact of the unauthorized trading incident within the Investment Bank. Our significantly smaller bonus pool reflects our weaker performance last year, in particular at the Investment Bank, and demonstrates our commitment to ensuring that pay is appropriate in relation to performance. Appropriately, our lower profitability affected compensation at an individual level. In addition to the impact that our 242 Advisory vote Letter from the Human Resources and Compensation Committee of the Board of Directors weaker share price performance had on the value of their awards, employees saw their share-based incentives further reduced last year due to the application of performance conditions in our variable compensation plans that enabled us to claw back unvested bonuses that had been awarded in previous years. At the Investment Bank, 50% of bonuses granted under the Senior Executive Equity Ownership Plan and the Performance Equity Ownership Plan in 2011 that were due to vest in 2012 have been forfeited. The unauthorized trading within the Investment Bank represented a setback for us. Given the serious nature of this incident, we took disciplinary action against certain employees involved, including some in supervisory roles and in the relevant control functions. Such action included appropriate measures regarding their compensation. The substantial financial and reputational damage contributed to a 60% reduction in the bonus pool for the Investment Bank. Continuing to integrate risk perspectives The unauthorized trading incident served to underscore the importance of ensuring that risk perspectives are adequately considered in making compensation deci- sions. Over the course of last year, we undertook more work to ensure that risk controls are integrated within our compensation framework. In line with evolving practice in the industry, we adapted our approach to identifying our key risk-takers, individuals in our organi- zation who, by the nature of their role, can materially set, commit or control the firm’s resources, and / or exert influence over the firm’s risk profile, and to whom specific stringent compensation measures apply. As a result, the number of identi- fied key risk-takers more than doubled to around 450 last year from around 200 in 2010. An effective and enduring approach Our compensation system was fundamen- tally revised in 2009, and we have made only minor adjustments to our variable compensation plans to reflect new requirements that have emerged in the years since. While a number of improve- ments were made to strengthen how we identify key risk-takers and measure their performance, no specific changes were made to the overall framework in 2011. It thus offers stability and continuity, as well as the necessary features that allow us, on one hand, to motivate our employees by rewarding strong perfor- mance, and on the other hand, to withdraw or reduce incentives where performance has been weak or where employees act against the interests of the firm. Nonetheless, we will keep our framework under review to ensure that it continues to meet our key goal of aligning employ- ee and shareholder interests by rewarding people for delivering sustainable long- term profitability. While we are certain that it will evolve in response to new regulations and increased capital require- ments, we are convinced that the approach we have adopted is fundamen- tally sound and that it will continue to serve us well as we position ourselves for the future. Ann F. Godbehere Chair of the Human Resources and Compensation Committee of the Board of Directors y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 243 Advisory vote Corporate governance, responsibility and compensation Compensation Compensation governance Given the significant role that compensation plays in attracting and retaining talent, and the strong impact that it thus has on the firm’s future success, it is critical that we have appropriate com- pensation principles. Our compensation governance principles are designed to support long-term value creation and include appro- priate checks and balances. They ensure that we continue to keep compensation aligned with the long-term interests of our share- holders and that we incentivize appropriate risk-taking. The Human Resources and Compensation Committee (HRCC), as a committee of the Board of Directors (BoD), is mandated to develop recommendations regarding our compensation plans and programs and overall bonus funding. ➔ Refer to the “Board of Directors” section of this report for further information about the Human Resources and Compen- sation Committee UBS’s corporate governance principles are in compliance with the relevant laws, rules and regulations, including the Swiss Finan- cial Market Regulatory Authority (FINMA) Circular 2010 / 1 that sets minimum standards for the design, implementation and dis- closure of remuneration schemes at financial firms. Human Resources and Compensation Committee The HRCC is composed of four independent BoD members. On 31 December 2011, the HRCC members were Ann F. Godbehere, who chaired the committee following her reelection to the BoD at the Annual General Meeting (AGM) in April 2011, Bruno Geh- rig, Wolfgang Mayrhuber and Helmut Panke. The committee held 13 meetings in 2011. Each meeting had an average attendance of 96%. External advisors attended nine of those meetings. The Chairman of the BoD and the Group Chief Executive Officer (Group CEO) were present at 10 and 11 of those meetings, re- spectively. During the year, the HRCC reappointed Hostettler, Kramarsch & Partner to provide impartial external advice on compensation- related matters. The company has no other mandates with UBS. Compensation consulting firm Towers Watson, which was ap- pointed by Group Human Resources, continued to provide the HRCC with data on market trends and benchmarks, including in relation to Group Executive Board (GEB) and BoD compensation. Various subsidiaries of Towers Watson provide similar data to Group Human Resources in relation to compensation at lower Compensation authorities The BoD has the ultimate responsibility for approving the compensation strategy proposed by the HRCC, a BoD committee that determines the appropriate level of resources for compensation matters. Recipients Compensation recommendations developed by Chairman of the BoD Chairperson of the HRCC Approved by HRCC Group CEO Chairman of the BoD and HRCC GEB members HRCC and Group CEO BoD BoD Key risk-takers (excluding GEB members)1 Responsible GEB member together with functional management team Divisional pools: HRCC Overall pool: BoD Communicated by HRCC Chairman of the BoD Group CEO Line manager Independent BoD members (remuneration system and fees) Chairman of the BoD and HRCC BoD Chairman of the BoD Recipients Variable compensation recommendations developed by Approved by Employees (excluding GEB members) Responsible GEB member together with functional management team Divisional pools: HRCC Overall pool: BoD Communicated by Line manager 1 Additional performance condition applies. 244 Advisory vote levels of the organization. Towers Watson has no other compen- sation-related mandates with UBS. Responsibilities and authorities of the Human Resources and Compensation Committee The HRCC reviews the Total Reward Principles – on which our approach to compensation is founded – annually, and submits any amendments to the BoD for final approval. In addition, the HRCC: – reviews and approves the design of the total compensation framework, including compensation strategy, programs and plans, on behalf of the BoD; – reviews variable compensation funding throughout the year on behalf of the BoD and proposes the final bonus pool to the BoD for approval; – together with the Group CEO, proposes base salaries and an- nual bonuses for GEB members to the BoD, which approves the total compensation of the GEB; – together with the Chairman of the BoD, proposes the compen- sation for the Group CEO; and – approves the total compensation for the Chairman of the BoD. Members of the GEB and BoD do not attend meetings at which decisions are taken about their individual compensation and have no right to a say in or to otherwise influence such decisions. The responsibilities and authorities for compensation-related decisions, illustrated in the table on the preceding page, are set out in “Annex B – Responsibilities and authorities,” and “Annex C – Charter of the Committees of the Board of Directors of UBS AG” of the Organization Regulations of UBS AG. cess and how Group Risk Control has been involved in imple- menting compensation programs. In addition, the committee re- views whether the risk-related aspects of the compensation process have been adhered to. The HRCC and Risk Committee meet periodically to discuss topics on which they have shared responsibility. Furthermore, Mr. Panke sits on both these committees, thereby providing a valu- able risk perspective in considering compensation-related issues. Decision-making process for Group Executive Board member compensation One of the HRCC’s main responsibilities is to make recommenda- tions for the actual amount of variable cash and equity compen- sation awarded to each GEB member in each performance year. Its recommendations are submitted to the BoD for approval. This process relies on a detailed and balanced review, not only of the performance of the Group, but of the relevant business division and the impact of specific individuals. It considers Group and divisional performance information, including risk-adjusted prof- itability and other financial and non-financial factors such as cli- ent focus, leadership effectiveness, risk management and reme- diation, strategy execution and reputational impact. It also takes into account performance information from the businesses, ini- tial compensation recommendations from the Group CEO, terms of employment contracts, regulatory requirements and relevant market data, such as that relating to industry compensation trends. Shareholders’ advisory vote Risk Committee’s involvement in compensation matters The Risk Committee assumes an essential role in supporting the HRCC to ensure that compensation plans are aligned with our business strategy, and that policies are designed to enhance risk awareness and compliance with risk policies. The Risk Committee supervises and sets appropriate risk management and control principles, including those relating to credit, market, country and operational risks; treasury and capital management; and balance sheet management. In doing so, it also examines the possibility of reputational risk. The committee is also briefed by management regarding how risk has been factored into the compensation pro- We value the opinions of our shareholders. As such, we will pro- vide, as we have done the past three years, an opportunity for shareholders to express their views through an advisory vote on this compensation report at the AGM in May 2012. While such a vote is advisory in nature, we encourage our shareholders to par- ticipate in it as we regard it as a meaningful way of involving them in the compensation discussion and take its outcome seriously. Shareholders also have the opportunity to raise questions at the AGM, and can address their questions about compensation or related issues at any time to BoD members by contacting the Company Secretary. Contact details are provided at the end of this report. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 245 Advisory vote Corporate governance, responsibility and compensation Compensation Total Reward Principles Our approach to compensation is based on our “Total Reward Principles.” These principles establish a framework for ensuring that performance is the key consideration behind our compensa- tion policies and that risk control is appropriately integrated within our compensation processes. At the same time, they specify how we structure compensation and provide funding for our bonus pool. They reflect our focus on pay for performance, sustainable profitability, sound governance and risk awareness, and build on the UBS strategy of enhancing the firm’s reputation, increasing client focus and teamwork, and improving integration and execu- tion. At the same time, they give full effect to the relevant regula- tory requirements. The Total Reward Principles apply to all employees across the Group globally. We provide specific guidance as to how the prin- ciples are implemented in practice, which may vary in certain loca- tions due to local laws and regulations. We remain fully committed to these principles. Over the course of the year, we continued to apply them to ensure that our per- formance and compensation objectives were achieved and that the governance processes with respect to compensation were firmly in place. The Total Reward Principles were reaffirmed by the Human Resources and Compensation Committee (HRCC) and reconfirmed by the BoD on 1 December 2011. Total Reward Principles The four Total Reward Principles establish a framework for managing performance and integrating risk control. They also specify how we structure compensation and provide necessary funding for our bonus pool. Attract and engage a diverse, talented workforce Foster effective individual performance management and communication Total Reward Principles Support appropriate and controlled risk-taking Align reward with sustainable performance Attract and engage a diverse, talented workforce Our need to attract and retain talented, competent employees to help implement our business strategy and create sustainable value for our shareholders over the long term underpins our compen- sation policies. We offer market-competitive compensation that strikes an appropriate balance between fixed and variable ele- ments. Base salaries should be sufficient to allow for a flexible policy when it comes to variable compensation. We set award levels that incentivize employees to perform and to be entrepre- neurial, while at the same time placing an emphasis on strong risk management and measured risk-taking. ➔ Refer to the “Overview of our compensation model” section of this report for more information about our compensation system Foster effective individual performance management and communication We evaluate performance rigorously to ensure that compensation is fairly and appropriately allocated. Employees are assessed against a range of financial and non-financial objectives. In deter- mining the annual bonus for employees, we not only consider their contribution to UBS’s business results and whether they have achieved their individual performance objectives, but also take into account whether they: – observe our corporate values and principles; – implement our strategic goals of enhancing reputation and im- proving integration and execution; – demonstrate leadership when it comes to our clients, business, people and change; – lead or support effective collaboration and teamwork; – operate with a high level of integrity and in compliance with UBS policies; – actively manage risk, including operational risk, and strike an appropriate balance between risk and reward; and – exhibit professional and ethical behavior. Employees are assessed not just absolutely against defined objectives, but also on a relative basis against their peers within UBS. This enables us to further differentiate performance, and consequently compensation, in a more objective, transparent and disciplined manner. ➔ Refer to the “Our employees” section of this report for more information on our performance management processes Align reward with sustainable performance Funding based on profitability Allocation of bonus based on performance At least 60% of bonus deferred and at risk of for- feiture for senior employees Throughout UBS, sustainable performance is a key factor in de- termining compensation. Our assessment of performance goes beyond whether financial objectives have been achieved and 246 Advisory vote takes into account the long-term risk impact of employee ac- tions and reputational issues. Variable compensation funding is primarily based on risk-ad- justed profitability, that is, a measure of profitability adjusted to consider risks associated with particular transactions. This per- formance metric, which takes into account the cost of capital, not only supports our objectives and business strategy, but is also in line with regulatory requirements. Our framework is sufficiently flexible to allow management to apply its judgment if it deems it appropriate. Adjustments may be made based on considerations relating to risk, quality and reliability of earnings, relative industry performance, future strategic plans, and market competitiveness. The divisional Chief Executive Officers, the Group CEO and the HRCC regularly re- view and monitor progress against business performance targets and the foregoing considerations that affect annual variable compensation funding. The bonus pool proposed by the Group CEO is reviewed by the HRCC and ultimately approved by the BoD. To ensure that any risk-related issues are fully considered, risk control functions are involved in the performance reviews of key risk-takers, who are individuals who can materially set, com- mit or control significant amounts of the firm’s resources, and other senior employees. ➔ Refer to the “Compensation governance” section of this report for more information about responsibilities and authorities for compen sation-related decisions Support appropriate and controlled risk-taking We place a strong emphasis on sound risk control in our com- pensation policies as our long-term sustainable performance de- pends on prudent and balanced risk-taking. Accordingly, our compensation system provides incentives that take specific account of risk. Our performance reviews rec- ognize that different businesses have different risk profiles, and that additional factors should be considered, including the fact that earnings may vary in quality over time based on the risks taken, the full impact of which may only emerge in subsequent years. All employees are expected to demonstrate an appropri- ate understanding of the nature of their business and its associ- ated risks, including operational risks, to consider their actions in light of UBS’s reputation and risk appetite, and to accept respon- sibility for all risks that arise, which includes taking steps to man- age and  mitigate them. As part of their compliance training, employees are required to certify annually that they are compli- ant with various UBS policies. In determining bonus funding, whether on a Group, division- al or business area level, we take the following key risks into account, where applicable: market risk; credit risk; liquidity risk; compliance risk; operational risk; and reputational risk. In 2010, our control functions introduced these quantitative risk mea- sures for each business area that are relevant in determining their bonus pools. The risk metrics we use include, but are not limited to, the level of impaired lending, the number of days on which the daily value at risk is exceeded, and the number of operational risks and audit recommendations that are effectively resolved. Our risk measures are supplemented by qualitative as- sessments conducted by Risk and Legal & Compliance regarding how the businesses manage such issues. To keep our employees focused on the long-term profitabili- ty of the firm, we require that a significant part of their bonus be deferred for up to three years if their total compensation exceeds CHF / USD 250,000. In the case of GEB members, the deferral period is up to five years to reflect the additional com- mitment and  long-term performance that is expected from them. Some or all of the unvested deferred portion may be for- feited in certain cases, including if an employee has acted con- trary to the firm’s interests by contributing to significant finan- cial losses or restatements, causing reputational harm, or breaching risk policy, legal or regulatory requirements, all of which constitute “harmful acts”. In addition, we take measures regarding the compensation of our key risk-takers, who, as previously stated, are individuals who can materially set, commit or control significant amounts of the firm’s resources. They are the most senior members of management, together with selected individuals who, by the nature of their role, exert significant influence over the firm’s risk profile. We identify these individuals, whether they are in front office, control or logistics functions (such as IT) consistent with best practice in the industry and in line with specific regu- latory guidance. During 2011 the number of individuals identi- fied as key risk-takers more than doubled to around 450. Key risk-takers are subject to more rigorous scrutiny, which they receive in the form of performance evaluations from the con- trol functions, and part of their compensation is subject to per- formance conditions. These compensation measures for key risk-takers, introduced in 2010, remained unchanged in 2011. Following the unauthorized trading incident within the Invest- ment Bank, we reviewed these measures and determined that they remain appropriate. To monitor risk, our control functions, primarily Legal & Com- pliance, Risk Control, Finance and Operational Risk, must be able to make independent decisions in overseeing our business- es. As such, compensation for these functions is determined in- dependently from the revenue producers that they oversee, su- pervise or support. Bonus pool funding for our control functions is not based on the performance of the businesses that they support but reflects the performance of the firm as a whole. In addition, we consider other factors such as how well the func- tion has in fact performed, together with our market positioning and the pre vailing market trends. We do not permit bonus fund- ing for these functions to be supplemented by funds from the business divisions. Decisions regarding individual compensation for the leaders of these functions are made by the function heads and approved by the Group CEO. ➔ Refer to the “Overview of our compensation model” section of this report for more information about key performance indicators and key risk-takers 247 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Advisory vote Corporate governance, responsibility and compensation Compensation Benchmarking against peers We benchmark Group compensation and benefit levels against those of our peers. With respect to compensation for GEB members, we refer to a peer group of companies that are selected based on the comparability of their size, geographic spread, product and services scope, and staffing and pay strategy, among other factors. These companies, which are large European and US banks operating inter- nationally, are our main competitors when it comes to hiring. They are Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JP Morgan Chase and Morgan Stanley. In the view of the HRCC and the BoD, our executive compensation structure is appro- priate relative to our peer group. We review the peer group regularly to ensure that the firms that constitute it remain relevant benchmarks for our purposes. With regard to compensation for other employees, given the diversity of our businesses, the companies we use as benchmarks vary with and are dependent on the relevant business divisions and locations, as well as the nature of the positions involved. For certain businesses or positions, we may take into account other major international banks, the large Swiss private banks, private equity firms, hedge funds and non-financial firms. Furthermore, we also benchmark em- ployee compensation internally for comparable roles within and across business divisions and locations. Comparability assessment against main peers1 Benchmarking ensures that our executive compensation is appropriate relative to our peer group. The key benchmarking criteria are summarized in the following table. Size2 Products and services scope3 Geographic scope4 Headquarters location5 Competitors for talent6 Regulatory / political environment7 Staffing and pay strategy8 Firm Bank of America Barclays Citigroup Credit Suisse Deutsche Bank HSBC JP Morgan Chase Morgan Stanley Comparable Mostly comparable Moderately comparable Less comparable 1  Source: Towers Watson. 2  Size: impacts management complexity regardless of product and geographic scope. Expressed in terms of revenue, profitability, assets and employee base. 3  Product and services scope: impacts pay strategy, pay levels / approach and importantly, risk profile. 4 Geographic scope: impacts the definition of executive roles and management complexity. 5 Headquarters location: a key fac- tor in determining peer group choices. 6 Competitors for talent: influences decisions relating to competitive requirements for pay structure and levels. 7 Regulatory environment: increasingly impacts pay structures (including deferral requirements) for executives. 8 Staffing and pay strategy: identifies peers with similar pay and staffing strategies. 248 Advisory vote Overview of our compensation model Our compensation model is consistent with and supports our Total Reward Principles. It rewards appropriate risk-taking and behavior that produces sustainable results. percentage terms. All monetary figures stated in the “Compensa- tion” section are gross figures (compensation before applicable withholdings and deductions). All UBS employees The total compensation employees receive has two elements: a fixed element, which is generally the base salary; and a discretion- ary variable element, which is the bonus. In determining employ- ees’ pay, and in benchmarking pay both internally and externally, we focus on total compensation, rather than its individual ele- ments, as it presents a more comprehensive picture of an employ- ee’s pay. The amount of bonus that an employee receives depends on various factors, including our overall performance, the perfor- mance of the employee’s business division, and his or her indi- vidual performance. We do not impose an absolute cap on total compensation or set a maximum multiple between the lowest and highest total compensation levels in our organization. To do so would under- mine our commitment to providing market-competitive and per- formance-related compensation. This approach allows us to have the flexibility required to respond to different circumstances, such as changing business and market conditions or retention needs. We do, however, set a cap on the maximum amount of cash that is paid out immediately in any year. Furthermore, each of our de- ferred variable compensation plans is capped in the sense that the maximum payout under each plan is fixed, either in absolute or Base salary The base salary reflects an employee’s particular skills, role and experience while taking market practices into consideration. Base salaries are fixed amounts of cash, typically paid monthly or semi- monthly. We review base salaries annually to ensure they remain competitive, comparing them with the relevant internal and ex- ternal benchmarks. Adjustments are made when there is a significant change in job responsibility. Furthermore, we make annual adjustments to base salaries that reflect performance and respond to movements in the marketplace. Following our annual base salary review, we have decided to very selectively increase base salaries for 2012. With effect from March 2012, base salaries were increased by a total of CHF 86 mil- lion or 1% of the monthly salary run rate for February 2012. This compares with a base salary increase made for 2011 of approxi- mately 5%. The increases for 2012 apply primarily to employees who were promoted and those whose base salary fell signifi- cantly  short of the market benchmark for their role. This is in contrast to 2011 when, in line with changes that were being made in the industry, increases were made in certain cases to effect a shift in the mix between base salary and bonus. Our total salary expense for 2011 was CHF 6,859 million, down 2% from 2010 and down 7% from 2009. Compensation overview A balanced mix of fixed and variable compensation ensures appropriate risk-taking and behavior that produces sustainable business results. A significant part of our compensation is paid in the form of deferred equity. Chairman of the BoD1 Board of Directors Group Executive Board Key risk-takers2 Other employees Base salary Cash bonus Cash Balance Plan (CBP) Performance Equity Plan (PEP) Senior Executive Equity Ownership Plan (SEEOP) Equity Ownership Plan (EOP) Base fee and committee retainer(s) 5 4 3, 4 1 The base salary of the Chairman of the BoD consists of cash and a fixed number of shares. 2 Bonuses granted to key risk-takers are also based on an additional evaluation of these employees’ performance, in which their risk-taking activities are specifically considered. 3 All employees with a total compensation of CHF/USD 250,000 or more are eligible. 4 Additional profitability performance condition for key risk-takers, Group Managing Directors and other employees with total bonus exceeding CHF/USD 2 million. 5 At least 50% of the base fee is paid in blocked UBS shares. 249 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Advisory vote Corporate governance, responsibility and compensation Compensation Bonus The majority of permanent employees are con sidered for an an- nual discretionary bonus. The amount of bonus awarded depends on an individual’s performance and role, as well  as the perfor- mance of the Group and the relevant business division – on an absolute as well as relative basis. part of the Corporate Center, we apply broader qualitative indica- tors, while taking into account our market position and the pre- vailing market trends. In addition, we look at the organization’s risk profile and culture, including the extent to which operational risks and audit issues are identified and resolved and the quality of its engagement in risk initiatives. Key performance indicators Group and business division performance are relevant in de- termining the size of the divisional bonus pools, while the size of the business area pools depends on business division and business area performance. Although the amount of bonus that an indi- vidual is awarded necessarily depends on the available funding for his or her business area and business division, as well as on the achievement of his or her individual goals, we do not apply a for- mula or assign weightings to specific performance indicators in determining individual bonuses. Bonus levels can fluctuate signifi- cantly from year to year, such that it is possible that an individual receives no bonus in a given year. For example, for 2011, 17% of eligible employees at the Investment Bank received no bonus mainly as a result of the Investment Bank’s poor performance, in- cluding the impact of the unauthorized trading incident. By way of comparison, 10% of eligible employees across the Group as a whole received no bonus for 2011. ➔ Refer to the “Compensation funding and expenses” section of this report for more information We assess Group performance using key criteria such as risk- adjusted profits, its performance relative to the industry and its general market competitiveness. Key performance indicators for the business divisions vary. We assess the financial performance of business areas in our wealth management businesses using criteria such as the level of net new money over the year and the return on assets. At the Invest- ment Bank, we consider factors such as revenue and profitability, the cost-income ratio and the return on risk-weighted assets, while at Global Asset Management the financial performance of business areas is assessed using criteria such as the level of assets under management and investment performance. Risk-related objectives include, in our wealth management businesses, the level of impaired lending and operational costs; in investment banking, the number of days during which the daily value at risk is exceeded; and in Global Asset Management, whether risk in- vestment guidelines and Group and risk policies have been ad- hered to, and whether significant risk events occur. For a large Members of the GEB have key performance indicators that are tied to Group and divisional goals. The Group CEO’s bonus depends on the performance of the Group as a whole, while GEB members who are divisional Chief Executive Officers are assessed based on Group and divisional profitability. Those who lead Group control functions or who are regional Chief Executive Officers are assessed based on the performance of the Group and the regions that they oversee. We also apply various qualitative criteria in evaluating the performance of GEB members. These include their ability to manage risk, bring about change in the organization, establish strong teams and develop new leadership. GEB members are also assessed based on how effectively they adhere to our strategic principles and apply our values. We evaluate performance on an ongoing basis. If performance is weak, we reduce our bonus pool accruals as appropriate. Deferral of bonuses We pay a significant part of our variable compensation in the form of equity that is deferred over several years. The unvested deferred amounts are forfeited if employees have committed harmful acts or if any applicable performance conditions are not met. Bonuses awarded to employees with a total compensation, that is, a base salary and bonus, of CHF / USD 250,000 or more, are partially deferred. Above this level, employees receive a por- tion of their annual bonus in shares granted under the Equity Ownership Plan (EOP). Furthermore, we place a cap of CHF / USD 2 million on the amount that can be paid out immediately in cash. For the 2011 performance year, for employees across all busi- ness divisions and locations, the bonus was, on average, approxi- mately 37% of the base salary. Among GEB members, it was, on average, 331% of a GEB member’s base salary. In 2010, these figures were 60% and 510%, respectively. As previously stated, bonuses are fully discretionary and we do not set a fixed ratio between the bonus and base salary. The percentages stated above are based on the size of the bonus pools for 2011 and 2010, re- spectively. ➔ Refer to the “Deferred variable compensation plans” section of this report for more information 250 Advisory vote Impact of the unauthorized trading incident The serious nature of the unauthorized trading incident that was uncovered at the Investment Bank in September 2011 and the strong negative financial and reputational impact it had on the firm called for a thorough review of what happened and for disciplinary action to be taken against the employees involved. These include Kweku Adoboli, who has been charged with fraud and false accounting in connection with the unauthorized transactions, and those who supervised or worked alongside him in his specific business area. As our internal investigations revealed deficiencies in our operational risk controls, certain indi- viduals in the relevant support and control functions were also disciplined. Following this incident, we terminated the employment of certain individuals, including Mr. Adoboli. Several others chose to resign. In the case of most other employees involved, we determined the appropriate financial and non-financial measures to be taken by means of the firm’s internal disciplinary processes. Our regulators in Switzerland and the UK are conducting a joint investigation into the unauthorized trading incident and have commenced separate enforcement pro- ceedings against UBS in relation to this mat- ter. We are cooperating fully with them. Bonus pool funding This incident had a significant effect on the financial performance of UBS, and of the Investment Bank in particular, in 2011. Accordingly, it led to substantially lower bonuses for 2011, in particular at the Investment Bank. The bonus pools for all other business divisions and the Corporate Center were considerably less affected, largely in line with their business performance, and, in the case of the Corporate Center, overall Group perfor- mance. ➔ Refer to the “Compensation funding and expenses” section of this report for more information Deferred compensation and bonuses A key feature of our compensation frame- work is the inclusion of forfeiture provi- sions in our deferred compensation plans which enable the firm to forfeit the unvested, deferred portion of an employ- ee’s bonus if he or she resigns voluntarily, is terminated for cause, or commits certain harmful acts that cause financial or reputational damage to the firm. Incident & Consequences Process Any disciplinary action taken against an employee as a result of poor performance, inappropriate behavior and violations of controls or policies is considered during the year-end performance review, and may give rise to financial or non-financial consequences. Financial consequences include a reduced or no bonus, a reduced or no base salary increase and potential for feiture of unvested deferred compensation. Non-financial consequences include a less favorable performance evaluation and cancellation of a promotion. These decisions are audited through an internal disciplinary process known as the “Incident & Consequences Process”. If the measures to be applied in a case with regard to base salary, bonus, promotion and performance rating are outside the established guidelines, the business is asked to review its decisions. Exception requests are presented to the Incident & Conse- quences Committee, which is comprised of the Group Chief Financial Officer, the Group Chief Risk Officer, the Group Head of Human Resources and the Global Head of Compliance. Requests are accompanied by a factual justification for the exception. The committee can grant or decline to grant an exception. In 2011, 400 employees were subject to disciplinary reviews, though disciplinary action was not taken in all cases. These employees include those who were considered to have been potentially involved in the unauthorized trading incident. Accordingly, certain employees whose employment was terminated in connection with the unauthorized trading incident have forfeited their unvested deferred compensation. In addition, we are currently reviewing whether the unvested deferred compensation of additional employees should be forfeited in connection with the incident. Some of these decisions will also depend on the outcome of investigations by our regulators. The vesting of certain awards granted in prior years that are subject to divisional profitability requirements has been  affected as a result of the impact that the unauthorized trading incident has had on the Investment Bank’s financial perfor- mance in 2011. As a result, 50% of the first installment of the Senior Executive Equity Ownership Plan (SEEOP) award granted in 2011 to Carsten Kengeter, CEO of the Investment Bank, was forfeited, as was 50% of the first installment of EOP awards granted in 2011 to Investment Bank employees who are key risk-takers, Group Managing Directors, or whose total bonus for 2010 exceeded CHF / USD 2 mil- lion. Consequently, these employees only received 50% of these unvested awards that were due to vest in March 2012. Impact on the GEB The unauthorized trading incident was also considered in evaluating the perfor- mance of certain members of the GEB. Former Group CEO Oswald J. Grübel, who assumed full responsibility for the matter, resigned at the end of September 2011. He elected not to be considered for a bonus and did not receive one for 2011. Likewise, Mr. Kengeter elected to receive no bonus for 2011. ➔ Refer to the discussion in the “2011 compensation for the Group Executive Board and Board of Directors” section of this report for more information 251 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Advisory vote Corporate governance, responsibility and compensation Compensation Compensation for financial advisors in Wealth Management Americas In line with market practice in the US for the brokerage business, the compensation system for financial advisors in Wealth Manage- ment Americas is based on commissions. The commissions, paid monthly, are based on revenue and other strategic performance measures and objectives. We reduce payout rates if financial ad- visors make repeated or significant client account or transaction errors. In addition to these commissions, advisors may also qualify for year-end awards, most of which are deferred over either a six- or 10-year period. The size of these awards may be based on length of service, the amount of net new money brought in, or the amount of revenue generated from Wealth Management-based services or products. For 2011, we paid a total of CHF 2,866 mil- lion in compensation to financial advisors in Wealth Management Americas. Other variable compensation To support hiring or retention, particularly at senior levels, we may offer certain incentives. These include the following: – replacement payments, which compensate employees for deferred awards forfeited as a result of joining UBS; – guarantees, which are fixed incentives, either in cash or in equity awarded under a plan, paid regardless of future events, and are limited to one year; – sign-on payments, offered to important top-level candidates to increase the chances of their accepting an offer; and – retention payments, made to key senior employees to induce them to stay, particularly during critical periods for the firm. Replacement payments, guarantees and sign-on payments are usually agreed at the time of hiring. The table on the following page shows the amount of such payments made in 2011, to- gether with the number of beneficiaries. Employment contracts for those holding the rank of Director and above generally contain a notice period of between one and six months, depending on the location, which such employees must serve and during which time they are paid their base salary. We provide for severance payments in redundancy cases when employees are asked to leave as part of a retrenchment program or a reduction in workforce. These are governed by location-spe- cific severance policies. At a minimum, we offer severance terms which comply with the applicable local laws (“legally obligated severance”). In certain locations, we may provide severance pack- ages that are negotiated with our local social partners that go beyond these minimum legal requirements (“standard sever- ance”). In addition, we may make severance payments that ex- ceed legally obligated or standard severance payments (“supple- mental severance”) where we believe that they are appropriate under the circumstances. For example, we may award bonuses on a pro-rated basis to employees who have performed well but have been made redundant after the third quarter of the year. In the exceptional cases that special payments are made outside the cir- cumstances described above, or where substantial severance pay- ments are made, a further stringent approval process applies. With the exception of severance payments made in redundancy cases, all the payments described above, though typical in our in- dustry, are only offered in special circumstances. They are highly restricted, take into account the specific circumstances of each case and are normally one-time payments with substantial deferral. They generally require the approval of the divisional Chief Executive Officers and Human Resources heads, and, in certain circumstanc- es, the Group Head of Human Resources, Group CEO or the Hu- man Resources and Compensation Committee. Furthermore, such payments may be forfeited or reduced should an employee subse- quently act in a manner detrimental to the interests of the firm. 2012 Special Plan Award Program for the Investment Bank Making the Investment Bank more focused and less complex and substantially reducing our risk-weighted assets are key elements of our business strategy. To ensure that we succeed in doing so, it is crucial that we retain key staff at the Investment Bank to help us execute our plans. As part of our efforts to motivate senior managers and encourage them to stay, we have decided to make a one-off strategic award to certain Managing Directors and Group Managing Directors in the Investment Bank in April 2012. The award, made in UBS shares, will vest three years after the date of grant (that is, in 2015). Vesting is subject to performance conditions, strict forfeiture conditions and continued employment with the firm. Consistent with our strategy of reducing our risk-weighted as- sets, the vesting of Special Plan awards is subject to performance conditions based on the level of reduction in risk-weighted assets achieved and the average published return on risk-weighted assets in the Investment Bank in 2012, 2013 and 2014. We will award a total of CHF 300 million under this program, the financial impact of which will be reflected in 2012 and in subsequent years. Special Plan awards represent an investment in critical staff. As such, they do not relate to or arise from perfor- mance in 2011, and do not form part of our 2011 bonus pool. Members of the Investment Bank’s Executive Committee received a significant part of their variable compensation in the form of Special Plan Awards, thereby further aligning their interests with those of our shareholders. 252 Advisory vote Sign-on payments, severance payments and guarantees d e t i d u A CHF million, except where indicated Total sign-on payments 1 Amount Number of beneficiaries of which Group Executive Board (GEB) members 2 Amount Number of beneficiaries of which key risk-takers 3 Amount Number of beneficiaries Total guarantees Amount Number of beneficiaries of which GEB members 2 Amount Number of beneficiaries of which key risk-takers 3 Amount Number of beneficiaries Total severance payments 4 Amount Number of beneficiaries of which GEB members 2 Amount Number of beneficiaries of which key risk-takers 3 Amount Number of beneficiaries Of which expenses recognized in 2011 5 Of which expenses to be recognized in 2012 and later 50 0 13 102 0 33 239 0 5 133 0 49 135 0 51 0 0 0 Total 183 828 0 0 62 36 237 359 0 0 84 34 239 1,530 0 0 5 4 1 For the purpose of this table we consider replacement payments as sign-on payments. 2 Expenses for GEB members are reported on a pro rata basis. As for 2011, no severance or sign-on payments were made to GEB members for 2010. 3 Expenses for key risk-takers are full-year amounts for individuals in office on 31 December 2011. 4 Includes legally obligated and standard severance payments, as well as supplemental sever- ance payments of CHF 23 million which are expensed as discretionary bonus. 5 Expenses before post vesting transfer restrictions. Pensions and benefits As part of our efforts to attract and retain the best employees, our total compensation includes, in addition to a base salary and bo- nus, certain benefits such as health insurance and retirement ben- efits. These benefits vary depending on the location, but are com- petitive within each of the markets in which we operate. The main aim of pensions is to give employees and their de- pendents a level of security after their retirement or in the event of disability or death. While pension plans may vary across loca- tions in accordance with local requirements, pension plan rules in any one location are generally the same for all employees in that lo cation, including management. We recently announced changes to our Swiss pension plan. These changes, which were made to reflect higher future life ex- pectancy and the changed market environment, will take effect in 2013 and will apply in their entirety to all employees in 2021. The main changes are an increase in the retirement age and a reduc- tion in the conversion rate used to calculate the pension on retire- ment. ➔ Refer to “Note 29 Pension and other post-employment benefit plans” in the “Financial Information” section of this report for more information Employee share purchase program To enable our employees to invest in UBS and have a personal stake in the success of the firm, our employee share purchase program, the Equity Plus Plan, allows employees to contribute be- tween 1%–30% of their base salary and / or 1%–35% of their bonus toward the purchase of UBS shares. All employees except those holding the rank of Managing Director and above are eli- gible to participate. Employees purchase UBS shares at market price, but receive one free share for every three purchased through the program. These free shares vest after three years, with vesting subject to continued employment at UBS. 253 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Advisory vote Corporate governance, responsibility and compensation Compensation Key risk-takers As it constitutes sound business practice, particularly in relation to our efforts to ensure that we incentivize appropriate risk-taking, and in compliance with regulatory requirements in major jurisdic- tions, we identify the key risk-takers at our firm. These are around 450 individuals who, by the nature of their role, have been deter- mined to be able to materially set, commit or control significant amounts of the firm’s resources and / or exert significant influence over its risk profile, whether they are in the front office, logistics or control functions. All GEB members are key risk-takers. Key risk-takers are subject to an additional level of perfor- mance evaluation by the control functions. Additionally, the vest- ing of their deferred awards is partially contingent on the profit- ability of the business division in which they work, or, in the case of Corporate Center employees, on the profitability of the Group as a whole. Like all other employees, key risk-takers also face for- feiture or reduction of the deferred portion of their compensation if they commit harmful acts. The same compensation measures apply to all Group Managing Directors regardless of whether they are determined to be key risk- takers or not, and to all employees with a total bonus exceeding CHF / USD 2 million. These two groups of employees receive their annual bonuses under the EOP, with the vesting of their deferred awards partially contingent on the same performance conditions to which key risk-takers are subject. With effect from 2012, employees with a bonus exceeding CHF / USD 2 million will also be considered key risk-takers if they have not already been identified as such based on our overall criteria for identifying key risk-takers. This category of employees, who, as mentioned, are already subject to the deferral measures that apply to key risk-takers, will in future also receive performance evaluations from the control functions. ➔ Refer to the discussion “Support appropriate and controlled risk-taking” in the “Total Reward Principles” section of this report for more information While we comply with the relevant FINMA requirements re- garding risk-takers, we also consult with our other regulators on this topic. In accordance with guidance from the UK Financial Services Authority (UK FSA), we have identified senior manage- ment and employees whose professional activities could have a material impact on the firm’s risk profile in the UK, so-called “Code staff”. Of the approximately 180 Code staff, about two- thirds are also part of our wider population of key risk-takers. Compensation measures that apply to Code staff are generally similar to those applied to key risk-takers. However, due to spe- cific UK FSA requirements, 50% of Code staff bonuses that are paid out immediately are delivered in shares. Furthermore, any shares granted to Code staff under the EOP for their perfor- mance in 2011 will be subject to an additional six-month block- ing period upon vesting. In the US, the Federal Reserve has recommended a more expan- sive approach for identifying such employees. Based on guidance from the Federal Reserve Bank of New York we have identified those employees, known as “covered employees”. They are ap- Fixed and variable compensation 1 d e t i d u A CHF million, except where indicated Group Executive Board (GEB) members 2 Total compensation Amount Number of beneficiaries Fixed compensation Base salary Variable compensation Cash Balance Plan (CBP) Performance Equity Plan (PEP) Senior Executive Equity Ownership Plan (SEEOP) Key risk-takers Total compensation Amount Number of beneficiaries Fixed compensation Base salary Variable compensation Total for the year ended 2011 Not deferred Deferred 3 amount % amount % amount % 75 15 20 55 23 10 22 656 448 194 462 100 33 44 42 56 27 73 20 13 13 0 0 100 24 56 0 0 0 42 10 10 22 100 362 55 294 30 70 194 168 100 36 0 294 0 76 44 100 100 45 0 64 1 The compensation of GEB members who assumed their role in 2011 is reflected in the GEB and key risk-taker numbers above on a pro-rated basis. 2 The figures refer to all GEB members in office as of 31 Decem- ber 2011 and all GEB members who stepped down during 2011. 3 This is based on the specific plan vesting which may differ from the accounting expensing. 254 Advisory vote proximately 1,000 senior executives, employees who manage revenue-producing lines of business and revenue producers in the US who individually or collectively expose the firm to material amounts of risk. About 100 of these covered employees identified using the wider Federal Reserve Bank of New York definition also form part of our global population of key risk-takers. Group Executive Board Base salary and bonus GEB members receive a base salary. In addition, they are eligible to receive a bonus. While GEB bonuses are at the discretion of the BoD, they are tied to the overall performance of the Group and dependent on the available bonus pool funding. ➔ Refer to the discussion in the “2011 compensation for the Group Executive Board and Board of Directors” and “Compen- At least 76% of a GEB member’s bonus is deferred. Of the annual bonus, 40% is awarded in cash under the Cash Balance Plan (CBP): a maximum of 24% is paid out immediately, subject to a cash cap of CHF / USD 2 million. Vesting of the deferred cash portion is in equal installments over the following two years, with the amount vesting dependent on the return on equity achieved by the Group (Group RoE) in the financial year prior to vesting. The remaining 60% of a GEB member’s bonus is paid in equity, with 20% delivered under the Performance Equity Plan (PEP) and 40% under the Senior Executive Equity Ownership Plan (SEEOP). CBP awards vest over two years, PEP awards after three years, and SEEOP awards over five years. The deferred por- tion of all these awards is subject to forfeiture under certain conditions. The overall reduction in the leverage element in our compensation plans since 2009 further discourages excessive risk-taking. sation funding and expenses” sections of this report for more ➔ Refer to the “Deferred variable compensation plans” section of information this report for more information 2011 compensation framework for GEB members Of the annual bonus, 40% is paid in cash and 60% in equity; 76% of a GEB member’s bonus is deferred. Illustrative example Payout of bonus SEEOP 40% PEP 20% CBP 40% 60% 1 Base salary y t i u q e n i d i a p s u n o B s u n o b l a t o t f o % 0 6 h s a c n i d i a p s u n o B s u n o b l a t o t f o % 0 4 20% 20% 20% 20% 20% 20%1 20%1 0–200%1 e r u t i e f r o f f o k s i r t a s u n o b f o % 6 7 s u n o b f o % 4 2 e t a i d e m m i n i d i a p ² h s a c • UBS shares awarded • Award vests in one-fifth installments over five years • Subject to forfeiture in the event of financial loss, harmful acts or termination of employment • Performance shares awarded1 • Award vests after three years. Number of shares that vest may be between 0–2x the original number of performance shares awarded, depending on whether certain targets have been met • Subject to forfeiture in the event of a harmful act or termination of employment • 60%paid out immediately, subject to cash cap of USD/CHF 2 million, remainder paid out in equal installments of 20% over subsequent two years • Annual adjustment in line with Group RoE: upward adjustment only if RoE exceeds 6%. Maximum adjustment capped at 20% • Subject to forfeiture in the event of harmful acts or termination of employ- ment y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 2011 2012 2013 2014 2015 2016 2017 Share retention 300,000 shares for Group CEO 200,000 shares for other GEB members 1 Subject to possible change, dependent on plan rules. 2 Subject to cash cap of CHF /USD 2 million. • GEB members are required to hold a certain number of UBS shares as long as they are in office. This holding has to be built up within a maximum period of five years from the date of their appointment to the GEB. 255 Advisory vote Corporate governance, responsibility and compensation Compensation Share retention To further align their interests with those of our shareholders, GEB members are required to retain long-term ownership of UBS shares. Each must hold a minimum of 200,000 shares, while the Group CEO is required to hold 300,000 shares. These sharehold- ings are to be built up within a maximum period of five years from the date a GEB member is appointed and must be retained for as long as he or she remains in office. The number of UBS shares held by each GEB member is determined by adding any vested or unvested shares to privately held shares. years. There is no variable or performance-related component in the Chairman’s compensation package. However, the share com- ponent ensures that his pay is aligned with the long-term perfor- mance of the firm. The Chairman’s employment agreement does not provide for special severance terms, including supplementary contributions to pension plans. The Chairman’s compensation is at the discretion of the Hu- man Resources and Compensation Committee (HRCC), which conducts an annual assessment and takes into consideration pay levels for comparable roles outside of UBS. Employment contract terms Employment contracts for GEB members do not provide for “golden parachutes”, that is, special severance terms, including supplementary contributions to pension plans. All employment contracts with GEB members contain a notice period of six months, except for one which contains a 12-month notice period. Under employment contracts for GEB members, any bonus paid up to the date of termination is fully discretionary, and based on Group, business division and personal performance during the pe- riod of employment. Any discretionary cash bonus will generally be awarded under the CBP. Vesting of deferred bonuses to GEB members is not accelerated when they leave the firm, although exceptions may be made in cases of death or disability. Benefits Benefits for GEB members are in line with local practices for other employees. Board of Directors Independent Board of Directors members With the exception of the Chairman, all BoD members are inde- pendent. Independent BoD members receive fixed base fees for their services in line with those of our peers globally, with 50% of their fees in cash and the other 50% in blocked UBS shares that are restricted from sale for four years and thus granted with a 15% discount. Alternatively, they may choose to have 100% of their remuneration paid in blocked UBS shares. In addition, inde- pendent BoD members receive fees known as committee retain- ers dependent on their workload in serving on the firm’s various board committees. The Senior Independent Director and the Vice Chairman of the BoD each receive an additional payment of CHF 250,000. In accordance with their role, independent BoD mem- bers do not receive bonuses or benefits. Base fees and committee retainers received by independent BoD members are subject to an annual review: a proposal is submitted by the Chairman of the BoD to the HRCC, which then submits a recommendation to the full BoD. ➔ Refer to the “2011 compensation for the Group Executive Board and the Board of Directors” section of this report for more Chairman of the Board of Directors The Chairman of the BoD receives a base salary that consists of cash and a fixed number of UBS shares that are blocked for four information 256 Advisory vote Deferred variable compensation plans Apart from the need to attract talented and motivated profession- als, the key focus in designing our variable compensation plans is on maintaining a close link between pay and long-term sustain- able performance. To ensure that our employees’ interests are aligned with those of our shareholders, we pay a large part of our bonuses in shares. To keep our employees focused on the long-term profitability of the firm, all of our variable compensation plans require a significant part of an employee’s bonus to be deferred over three to five years. Our plans include forfeiture provisions that enable the firm to for- feit some or all of the unvested deferred portion if an employee has committed certain harmful acts, as well as performance conditions that make the vesting of awards partially conditional on a certain level of performance being achieved. Consequently, while an em- ployee’s individual performance is a key factor in determining the amount of bonus (including deferred equity awards) he or she re- ceives, the amount that is finally paid out under our deferred vari- able compensation plans largely depends on Group or divisional performance, subject to forfeiture provisions as previously noted. Once an award has vested, we do not make any adjustments to it. ➔ Refer to “Note 30 Equity participation and other compensation plans” in the “Financial Information” section of this report for more information on valuation principles and valuation of the awards granted Overview of variable compensation plans Compensation is closely linked to long-term sustainable performance. All of our variable compensation plans feature performance provisions. A substantial part of variable compensation is deferred and at risk of forfeiture for several years. Cash Balance Plan Performance Equity Plan Senior Executive Equity Ownership Plan Equity Ownership Plan Beneficiaries GEB GEB GEB Key risk-takers, Group Managing Directors and employees with total bonus greater than CHF / USD 2 million Other employees with total com- pensation greater than CHF / USD 250,000 Vesting schedule 60% vests immediately. Remainder in installments of 20% each over following two years Vests after three years. Number of shares that vest subject to fulfillment of performance conditions Vests in equal installments over five years Vests in equal installments over three years Share price Forfeiture clauses Performance conditions g n i c n e u fl n i s n o i t i d n o C t u o y a p Profitability as funding driver Amount of cash delivered at vesting depends on the return on equity achieved by the Group during the vesting period Number of shares that vest is subject to the achievement of economic profit and total share- holder return Final number of shares delivered may be between 0 – 2 times the number of performance shares granted Exposure to share price develop- ment Exposure to share price development Vesting of awards is contingent on the profitability of a GEB member’s business division, or on the profitability of the Group as a whole, if the GEB member in question does not head a division Exposure to share price develop- ment Only vests in full if employee‘s busi- ness division is profitable (or the Group as a whole in the case of Corporate Center employees) Exposure to share price development Payout instrument Cash UBS shares UBS shares UBS shares 1 1 Deferred cash plan for Global Asset Management employees. 257 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Advisory vote Corporate governance, responsibility and compensation Compensation Cash Balance Plan Plan type – Deferred cash plan How the CBP works: an illustration Eligible employees: Cash Balance Plan (CBP) awards are granted annually to GEB members. Description: Generally, 40% of a GEB member’s annual bonus consists of cash awarded under the CBP. A maximum of 24% of the total bonus is paid out immediately, subject to a cap of CHF / USD 2 million. The balance is deferred and paid out in two equal installments over two years, subject to the performance condition described below. The amount of cash delivered on vesting depends on the return on equity achieved by the Group (Group RoE) during the vesting period. If the Group RoE is below 6%, no adjustment will be made to the amount of cash delivered upon vesting. If the Group RoE exceeds 6%, the unvested amount will be increased. The in- crease will correspond in percentage terms to the Group RoE achieved, though it may not exceed 20%. If the Group RoE is negative, the unvested amount will be decreased accordingly, up to a maximum of 100%. Bonus granted under CBP for 2011 performance year 20% 20% 40% of variable cash bonus is deferred & subject to forfeiture Actual amount paid out depends on Group RoE of the financial year prior to vesting 60% Paid out immediately (subject to cash cap) February 2012 March 2012 March 2013 March 2014 No changes were made to the plan design in 2011. Restrictions: The CBP contains forfeiture provisions so that the deferred amount is partially or fully forfeited if a harmful act is committed. Even after a GEB member has left the firm, the de- ferred portion of the CBP award continues to be at risk of for- feiture. In addition, the deferred unvested portion of the award is forfeited if a GEB member voluntarily terminates his or her employment and joins another financial services organization. Vesting for 2011: The second installment of the CBP award grant- ed in 2010 for the performance year 2009 vested in full in March 2012. The amount that vested was not adjusted as the RoE re- quirement described above only applies from 2011. The first installment of the CBP award granted in 2011 for the performance year 2010 vested in March 2012. The amount that vested was increased by 8.6% in line with the Group RoE of 8.6% in the 2011 financial year. 258 Advisory vote Performance Equity Plan Plan type – UBS share plan How the PEP works: an illustration Eligible employees: Performance Equity Plan (PEP) awards are granted annually to GEB members. Description: At the beginning of the three-year performance period, GEB members are granted a certain number of restricted performance shares. The actual number of UBS shares delivered at the end of the period can be between zero and two times the number of performance shares granted initially, depending on whether performance targets relating to economic profit (EP) and relative total shareholder return (TSR) have been achieved. EP is a measure of risk-adjusted profit that takes into account the cost of risk capital and is only realized when the entire return on capital that is achieved is higher than the firm’s cost of capital. TSR mea- sures the total return of a share to an investor, that is, both capital appreciation of the share price and the dividend yield. We mea- sure our TSR over a three-year period relative to the companies in  the Dow Jones Bank Titans 30 Index, an index representing 30 leading companies in the global banking sector. To determine the number of UBS shares delivered at vesting, an EP multiplier, which changes in line with the level of three-year cumulative EP achieved, and ranges from 50%–150%, is multi- plied with a TSR multiplier, which ranges from 50%–133%. If both are below the lowest threshold no shares will vest. If both are at or above the highest threshold the number of UBS shares delivered at the end of the performance period is twice that of the performance shares granted initially. 200% Final number of shares received depends on TSR and EP performance over three-year performance period Vesting of between 0–200% of initial number of shares granted Value of PEP award further depends on share price at vesting Bonus granted in performance shares Performance period February 2012 March 2012 March 2013 March 2014 0% March 2015 No changes were made to the plan design in 2011. Restrictions: PEP awards are subject to forfeiture in the event of a harmful act or if employment has been terminated voluntarily or for cause. Vesting for 2011: No vesting will take place in 2012. As the PEP was introduced in 2010, it is due to vest for the first time in March 2013. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 259 Advisory vote Corporate governance, responsibility and compensation Compensation Senior Executive Equity Ownership Plan Plan type – UBS share plan How the SEEOP works: an illustration Eligible employees: Senior Executive Equity Ownership Plan (SEEOP) awards are granted annually to GEB members. Description: SEEOP awards are granted in the form of UBS shares that vest in equal installments over five years. The SEEOP is similar to the EOP, described on the next page, but has a longer vesting period to reflect the additional level of commitment and long- term performance expected of GEB members. Bonus in UBS shares granted under SEEOP for 2011 performance year 0–20% vests with employee 0–20% vests with employee Shares vest equally over five years and are subject to forfeiture Shares vest depending on profitability of the bank Payout value depends on share price 0–20% vests with employee 0–20% vests with employee 0–20% vests with employee February 2012 March 2012 March 2013 March 2014 March 2015 March 2016 March 2017 Vesting for 2011: The SEEOP profitability requirement was intro- duced starting from the performance year 2010. The first install- ment of the award granted in 2011 for the performance year 2010, which was due to vest in March 2012, vested in full for all GEB members except Carsten Kengeter, CEO of the Investment Bank. As the Investment Bank did not meet its profitability re- quirement in 2011, 50% of his SEEOP award installment was for- feited. No changes were made to the plan design in 2011. Restrictions: SEEOP awards are subject to partial or full forfeiture in the event of a harmful act or if the business division to which a GEB member belongs makes a loss. Under the SEEOP, profitability is defined as an operating profit before tax adjusted for certain items such as disclosed own credit, restructuring charges, the profit and loss impact of strategic divestments or investments, goodwill-related foreign currency translation charges and certain unique, non-recurring costs that are not within the control of divisional or Group management. The amount forfeited depends on the extent of the loss and generally ranges from 10%–50% of the award portion due to vest. SEEOP awards will be fully forfeited if employment is terminated voluntarily or for cause. 260 Advisory vote Equity Ownership Plan Plan type – UBS share plan (deferred cash plan for Global Asset Management employees) How the EOP works: an illustration Eligible employees: The Equity Ownership Plan (EOP) is a manda- tory bonus deferral plan for all employees with total compen sation of CHF / USD 250,000 or more. For 2011, around 7,000 employees received EOP awards. These employees include key risk-takers, Group Managing Directors and employees whose total bonus ex- ceeds CHF / USD 2 million. EOP awards are granted annually. Bonus in UBS shares granted under EOP for 2011 performance year Description: Employees with total compensation (that is, base sal- ary and bonus) of CHF / USD 250,000 or more receive 60% of their bonus above that level in UBS shares that are deferred over three years under the EOP. To align their compensation with the performance of the funds that they manage, Global Asset Management employees receive their EOP awards in the form of deferred cash, the amount of which depends on the value of the relevant underlying Global Asset Management funds in a designated alternative investment vehicle at the time of vesting. The vesting and forfeiture pro- visions of these awards are the same as for EOP awards made in the form of UBS shares. No changes were made to the plan design in 2011. Restrictions: The unvested portion of EOP awards is subject to forfeiture in the event of a harmful act or if employment is termi- nated voluntarily or for cause. EOP awards granted to key risk-takers, Group Managing Directors and employees whose total bonus exceeds CHF / USD 2 million are known as Performance EOP awards. They vest in full only if the business division to which the employee belongs is profitable. If the business division incurs an operating loss in a given year, then the deferred portion of the EOP award due to vest in the follow- ing year will be partially forfeited. Under the EOP, profitability is defined as an operating profit before tax adjusted for certain items such as disclosed own credit, restructuring charges, the 0–33% vests with employee Shares vest equally over three years and are subject to forfeiture Shares vest depending on profitability of the bank1 Payout value depends on share price 0–33% vests with employee 0–33% vests with employee February 2012 March 2012 March 2013 March 2014 March 2015 1(cid:31)Profitability performance conditions are in place for key risk-takers, Group Managing Directors and other employees with a total bonus exceeding CHF/ USD 2 million. profit and loss impact of strategic divestments or investments, goodwill-related foreign currency translation charges and certain unique, non-recurring costs that are not within the control of divisional or Group management. The amount forfeited depends on the extent of the loss and generally ranges from 10%–50% of the award portion due to vest. In the case of Corporate Center employees, the vesting of their awards is partially conditional on the profitability of the Group as a whole. Vesting for 2011: Performance EOP awards were granted for the first time in 2011 for the 2010 performance year. The first install- ment of that award, which was due to vest in March 2012, vested in full for employees in all divisions except the Investment Bank. For Investment Bank employees, 50% of their award installments were forfeited as the Investment Bank did not meet its profitability requirement in 2011. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 261 Advisory vote Corporate governance, responsibility and compensation Compensation Discontinued deferred compensation plans The following table sets out the details of discontinued compensation plans, including those under which stock options, stock appre- ciation rights and other instruments were granted in the past. UBS has not granted any options since 2009. The strike price for stock options awarded under prior compensation plans has not been reset. ➔ Refer to “Note 30 Equity participation and other compensation plans” in the “Financial Information” section of this report for more information Plan Conditional Variable Compensation Plan (CVCP) Deferred Cash Plan (DCP) Incentive Performance Plan (IPP) Key Employee Stock Appreciation Rights Plan (KESAP) and Key Employee Stock Option Plan (KESOP) Senior Executive Stock Appreciation Rights Plan (SESAP) and Senior Executive Stock Option Plan (SESOP) Year granted 2009 only 2011 only 2010 only 2002 – 2009 2002 – 2009 Eligible employees Selected employees (approximately 9,500 employees), excluding GEB members Investment Bank employees whose total compensation exceeded CHF 1 million GEB members and other senior employees (approxi- mately 900 employees) Instrument Cash Cash Performance shares Selected employees (approximately 17,000 employees between 2002 and 2009) Share-settled stock appreci- ation rights (SAR) or stock options with a strike price not less than the fair mar- ket value of a UBS share on the date of grant GEB members and Group Managing Board SAR or stock options with a strike price not less than 110% of the fair market value of a UBS share on the date of grant None Dependent on share price at the end of the five-year period None None Subject to continued em- ployment and harmful acts provisions Subject to continued employment and harmful act provisions Subject to continued employment, non-solicitation of clients and employees and non- disclosure of proprietary information Subject to continued employment, non-solicitation of clients and employees and non- disclosure of proprietary information Performance conditions Restrictions / other conditions No financial loss incurred (vesting based on disclosed full-year results) and no need for additional capital injection by government Subject to continued em- ployment, non-solicitation of clients and employees and non-disclosure of proprietary information The first tranche of the CVCP was forfeited in its entirety as the Group was not profit- able in 2009 The second tranche of the CVCP vested on 12 April 2011 following the an- nouncement of UBS’s 2010 profit (paid to employees in all business divisions except Wealth Management Americas, which recorded a full-year loss) The third tranche of the CVCP vested in April 2012 following the announce- ment of UBS’s 2011 profit. It was paid to employees in all divisions Vesting period Vests in one-third install- ments over a three-year period Vests in one-third install- ments over a three-year- period Vests in full at the end of five years. Number of shares that vest can be between one and three times the number of performance shares initially granted Vests in full three years af- ter grant. SAR and options expire 10 years from the date of grant Vests in full three years after grant. SAR and options expire 10 years from the date of grant 262 Advisory vote Compensation funding and expenses How we determine our bonus pool Each business division plans its bonus pool annually based on the funding framework and process that has been reviewed by the Human Resources and Compensation Committee (HRCC). Over the course of the year, each division makes accruals to ensure that sufficient funds are available to pay bonuses at the end of the year. However, the actual size of the final bonus pool depends on the various factors outlined below and is subject to the approval of the BoD. Business performance is the basis of our compensation funding framework. At business division level, performance is measured by a variety of factors, including profit, or contribution before bonus and economic contribution before bonus. Economic contribution before bonus deducts the cost of capital based on the equity allo- cated to a business, which is a reflection of the relative riskiness of that business. We derive the initial divisional bonus pools by multiplying the so-called divisional compensation funding rate with the divisional adjusted contribution before bonus. In determining our funding rates, we consider various factors such as the appropriate change in pay that reflects the change in performance over the year, af- fordability and our need to be competitive in the market. Funding rates are directly linked to the level of profitability in each division. As profits within a business division increase, the proportion of profits allocated for the payment of bonuses is reduced. This ap- proach allows us to protect the firm in years of downturn or re- covery by retaining key employees, while providing additional shareholder return in good years by preventing excessive capital usage for compensation. Although profitability is the main factor in determining the size of our bonus pool, and while we apply funding rates that provide an initial basis for determining divisional bonus pools, manage- ment may still apply its judgment and make adjustments to fur- ther assess the overall quality of earnings by looking at relevant key performance indicators and other qualitative measures, in- cluding risk factors. If the bonus pool for a business division is deemed not to fully reflect its performance, the Group CEO may apply his discretion and make recommendations to increase or reduce the size of the pool. These recommendations are reviewed by the HRCC. Such discretionary adjustments may be made, for example, where a business division is in the process of restructur- ing or investing heavily in growth, both of which have a strong negative short-term financial impact, but provide for sustained profitability over the longer term. Furthermore, we recognize the strategic importance of maintaining a competitive position in the labor market, and may also make adjustments to variable com- pensation funding determined by competitive benchmarking. This involves considering our market position, both from a perfor- mance and a compensation perspective, together with industry compensation trends, including at senior management levels, based on a comparison among peer groups and across regions. Finally, particularly given our need to build up capital to meet new, more stringent capital requirements, we also consider the capital impact when determining the size of our bonus pool. At a business division level, each CEO proposes funding and allocation, taking into account input from Group Risk. These are discussed with the Group CEO together with the underlying con- tribution before bonus and other relevant performance indicators. The HRCC reviews the rationale provided for the divisional bonus pools. It also considers performance indicators and risk factors specific to each business division when assessing performance and earnings quality, before recommending the size of the final bonus pool to the BoD. Sustainable profitability is key to compensation funding Primary basis for funding across UBS is profitability. The following describes how we determine our bonus pools. Contribution before bonus as the main basis for business division pool funding Includes charge for cost of equity capital Compensation funding rates applied to contri- bution before bonus at business division level Initial business division bonus pools proposed Management discretion applied in determining divisional bonus pools Adjustments for relative business performance, risk factors, quality of earnings and market compensation HRCC provides independent oversight Risk is assessed at each phase of the process Proposed pools reviewed by the Group CEO and HRCC Final approval by the BoD 263 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Advisory vote Corporate governance, responsibility and compensation Compensation 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(cid:37)(cid:42)(cid:40)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2) (cid:59)(cid:71)(cid:67)(cid:84)(cid:2)(cid:81)(cid:80)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:69)(cid:74)(cid:67)(cid:80)(cid:73)(cid:71) (cid:41)(cid:84)(cid:81)(cid:87)(cid:82) (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:52)(cid:71)(cid:86)(cid:67)(cid:75)(cid:78)(cid:2)(cid:8)(cid:2)(cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71) (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:2)(cid:36)(cid:67)(cid:80)(cid:77) (cid:20)(cid:18)(cid:19)(cid:18) (cid:20)(cid:18)(cid:19)(cid:19) (cid:10)(cid:19)(cid:14)(cid:18)(cid:18)(cid:18)(cid:11) (cid:18) (cid:22)(cid:14)(cid:18)(cid:18)(cid:18) (cid:10)(cid:20)(cid:14)(cid:19)(cid:18)(cid:23)(cid:11) (cid:13)(cid:21)(cid:24)(cid:26) (cid:13)(cid:19)(cid:22)(cid:25) (cid:13)(cid:23)(cid:19)(cid:24) (cid:13)(cid:24)(cid:24)(cid:22) (cid:10)(cid:26)(cid:26)(cid:11) (cid:10)(cid:20)(cid:14)(cid:18)(cid:22)(cid:21)(cid:11) (cid:26)(cid:14)(cid:18)(cid:18)(cid:18) Bonus pools for 2011 were determined based on the financial performance as reported in the Group’s fourth quarter 2011 fi- nancial report which was published 7 February 2012. The 2011 results have since been adjusted to account for subsequent events. These adjustments decreased the Group’s pre-tax profit by CHF 103 million (from CHF 5,453 million to CHF 5,350 million). The Investment Bank’s operating profit decreased by a net CHF 150 million (from CHF 304 million to CHF 154 million), including the benefit of CHF 17 million lower personnel expenses resulting from the HRCC decision to forfeit more of the Performance EOP tranche due to vest for the year 2011. Partially offsetting the net reduction in operating profit in the Investment Bank were increas- es in Wealth Management Americas of CHF 30 million (from CHF 504 million to CHF 534 million) and in Corporate Center of CHF 17 million (from a loss of CHF 380 million to a loss of CHF 363 million). ➔ Refer to “Note 32 Events after the reporting period” in the “Financial information” section of this report for more information Bonuses granted for the 2011 performance year Our bonus pool for 2011 is CHF 2.6 billion, 40% lower than it was for 2010 (compared with adjusted contribution before bonus which was 37% lower), consistent with a marked decline in our overall profitability last year in a demanding market environment. The bonus pool for the Investment Bank was reduced by approxi- mately 60% due to the combined impact of the unauthorized trad- ing incident and substantially weaker divisional performance last year. In other business divisions, where performance was stronger, the reduction in the bonus pool was less significant. The “Total variable compensation” table shows the amount of variable compen sation awarded to employees for the performance year 2011, together with the number of beneficiaries for each type of award granted. We define variable compensation as the discre- tionary, performance-based bonus pool for the given year. In the case of deferred cash and share awards, the final amount paid to an employee is influenced by forfeiture provisions and the performance conditions to which these awards are subject. The deferred share award amount is based on the fair value of these awards on the date of grant. The accounting adjustment column in the “Total variable com- pensation” table shows the difference between the bonus amount granted to employees and the expensed fair value amount accord- ing to the Inter national Financial Reporting Standards (IFRS) 2 ac- counting standard. This adjustment is made to reflect that the fair value of shares that have vested for accounting purposes, but are still subject to sale or transfer restrictions, is lower than the market value of un restricted shares. For example, an EOP award vests for accounting purposes immediately when an employee retires, while the shares remain blocked over the original vesting period. In this case, the fair value of the blocked EOP award is less than the current market value of an unrestricted share. Where a performance condi- tion under EOP applies, the expensed amount reflects a discount for expected forfeitures which is trued-up to reflect the actual outcome. The “Deferred compensation” table shows the current intrinsic value of unvested outstanding deferred variable compensation awards that are subject to ex-post adjustments. For share-based plans, the intrinsic value is determined based on the closing share price on 30 December 2011. For fund-linked plans, it is deter- mined using the latest available market price for the underlying funds, and for cash-settled awards, it is determined based on the outstanding amount of cash owed to award recipients. All awards made under our deferred compensation plans listed in the “Deferred compensation” table on the following page are subject to ex-post adjustments, whether implicitly, through expo- sure to share price movements, or explicitly, for example, through forfeitures made by the firm. Accordingly, their value can change over time. The amounts shown in the column “Relating to awards for prior years” in fact already take into account ex-post implicit adjustments that have occurred as a result of share price move- ments between the respective dates on which these awards were granted and 30 December 2011. ➔ Refer to “Note 30 Equity participation and other compensation plans” in the “Financial Information” section of this report for more information 264 (cid:15)(cid:19)(cid:18)(cid:18)(cid:18)(cid:16)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18) (cid:15)(cid:22)(cid:18)(cid:18)(cid:16)(cid:18)(cid:18)(cid:18)(cid:18)(cid:25)(cid:24)(cid:19)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:26)(cid:22)(cid:25)(cid:25)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:25)(cid:25)(cid:19)(cid:19)(cid:21)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:24)(cid:27)(cid:23)(cid:19)(cid:27)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:24)(cid:19)(cid:27)(cid:20)(cid:23)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:23)(cid:22)(cid:20)(cid:21)(cid:19)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:22)(cid:24)(cid:24)(cid:21)(cid:25)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:21)(cid:27)(cid:18)(cid:22)(cid:21)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:21)(cid:19)(cid:21)(cid:22)(cid:27)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:20)(cid:21)(cid:25)(cid:23)(cid:23)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:19)(cid:24)(cid:19)(cid:24)(cid:19)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:18)(cid:26)(cid:22)(cid:24)(cid:25)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:27)(cid:18)(cid:18)(cid:26)(cid:25)(cid:21)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:26)(cid:27)(cid:21)(cid:20)(cid:25)(cid:27)(cid:27)(cid:27)(cid:16)(cid:27)(cid:27)(cid:26)(cid:26)(cid:23)(cid:24) Advisory vote d e t i d u A d e t i d u A Total variable compensation 1 CHF million, except where indicated Cash discretionary bonus Deferred cash plans UBS share plans UBS share option plans Equity Ownership Plan – fund-linked Total discretionary bonus pool Total variable compensation – other 2 Total WMA financial advisor compensation 3 Expenses Expenses deferred to future periods Accounting adjustment Total Number of beneficiaries 2011 1,514 34 234 0 25 1,807 335 1,842 2010 2,079 64 440 0 28 2,611 399 1,980 2011 0 3 635 0 69 707 247 1,024 2010 0 236 1,271 0 67 1,574 337 698 2011 2010 0 0 54 0 0 54 0 0 0 0 60 0 0 60 0 2 2011 1,514 37 923 0 94 2,568 582 2,866 2010 2,079 300 1,771 0 95 4,245 736 2,680 2011 50,620 62 6,514 0 515 2010 51,522 576 7,516 0 579 50,635 51,535 1 The total “discretionary bonus” awarded to employees for the performance years 2011 (CHF 2,568 million) and 2010 (CHF 4,245 million). Expenses under “total variable compensation – other” and “Total WMA financial advisor compensation” are not part of UBS’s discretionary bonus pool. 2 Replacement payments, guarantees for new hires, forfeiture credits, severance payments and retention plan payments. 3 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements. Deferred compensation 1, 2 CHF million, except where indicated Cash discretionary bonus Cash Balance Plan Equity Ownership Plan Senior Executive Equity Ownership Plan Performance Equity Plan Equity Ownership Plan – fund-linked Discontinued deferred compensation plans Total Relating to awards for 2011 0 10 884 22 10 94 0 Relating to awards for prior years3 0 19 2,298 46 14 576 577 Total 0 29 3,182 68 24 670 577 of which exposed to ex-post adjustments 0% 100% 100% 100% 100% 100% 100% 1,020 3,530 4,550 1 This is based on the specific plan vesting which may differ to the accounting expensing. 2 For more information, refer to “Note 30 Equity participation and other compensation plans” in the “Financial Information” section of this report. 3 This takes into account the ex-post implicit adjustments, given the share price movements since grant. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 265 Advisory vote Corporate governance, responsibility and compensation Compensation Bonus expense in the 2011 performance year 2011 bonus pool down 40% year on year1 CHF million The bonus pool for a given performance year includes all discre- tionary, performance-based variable awards for that performance year. Certain awards that form part of the bonus pool, mainly discretionary cash awards, are already expensed in the same year while deferred awards are largely expensed in subsequent years. The chart “2011 bonus pool down 40% year on year” illustrates how the bonus pool for the 2011 performance year reconciles with the bonus expense in the 2011 financial year. The bonus expense includes all immediate expenses related to 2011 com- pensation awards and expenses related to awards made in prior years. As illustrated in the chart, the bonus pool declined by CHF 1,677 million or 40% in 2011, while the 2011 bonus expense under the IFRS accounting rules declined by CHF 690 million or 17%. The reduction in the size of the bonus pool is more pro- nounced than the reduction in the bonus expense for the follow- ing reasons: – The amount of new deferred awards granted in 2012 for the performance year 2011 is CHF 867 million lower than the amount of new deferred awards granted in 2011 for the per- formance year 2010. – Amortization for prior year awards in 2011 increased by CHF 114 million from 2010. This reflects an increase in amorti- zations of deferred awards, which have become a more sig- nificant part of our compensation system. Since 2010, a larger part of compensation has consisted of deferred awards grant- ed primarily under the EOP. – The impact of accounting adjustments is lower for 2011 than it was for 2010. At the end of 2011, the amount of unrecognized awards to be amortized in subsequent years was CHF 1.7 billion. Together with the Special Plan awards to be granted to senior managers at the Investment Bank in spring 2012, the total sum of unrec- ognized awards is CHF 2.0 billion, compared with CHF 2.8 bil- lion at the end of 2010. The chart “Amortization of deferred compensation” shows that this reduction is due to the reduction in unamortized awards and significantly lower new awards granted for 2011. ➔ Refer to the “Overview of our compensation model” section of this report for more information about the Special Plan Award Program The table on the next page shows the value of actual ex-post explicit and implicit adjustments to outstanding deferred compen- sation in the 2011 financial year. Ex-post adjustments occur after an award has been granted. Ex-post explicit adjustments occur when we adjust compensation by forfeiting deferred awards. By contrast, ex-post implicit adjustments are unrelated to action tak- en by the firm and occur as a result of share price movements that impact the value of an award. The total value of ex-post explicit adjustments made to UBS 266 IFRS expense down 17% year on year Down 40% 60 Accounting adjustment2 1,574 2010 bonus pool 4,245 2010 IFRS expense 4,082 Amortiza- tion of prior year awards 1,471 Awards for 2010 performance year deferred to future periods3 Bonus expense for 2010 performance year 2,611 (cid:31) 2011 bonus pool 2,568 (cid:31) 2011 IFRS expense 3,392 Amortization of prior year awards 1,5854 54 Accounting adjustment2 707 Awards for 2011 performance year deferred to future periods3 Bonus expense for 2011 performance year 1,807 2010 2011 of which Investment Bank 1 Excluding bonus add-ons such as social security. 2 Post vesting transfer restrictions and adjustments related to performance conditions. 3 Estimate. The actual amount to be expensed in future years may vary, for example due to forfeitures. 4 Includes CHF 54 million of restructuring costs related to these awards. Amortization of deferred compensation We expect a CHF 0.5 billion reduction in the awards to be amortized in 2012 (CHF 1.1 billion) vs 2011 (CHF 1.6 billion)¹ CHF billion Unrecognized awards to be amortized² 2.8 Amortized 1.6 Special plan awards 0.3 to be granted in 2012 Unrecognized awards to be amortized¹, ³ 2.0 Unrecognized awards to be amortized¹,² 1.7 Forfeited 0.2 Annual awards to be expensed in future years 0.7 Including awards to be granted in 1Q12 for the performance year 2011 31.12.10 Including awards granted in 1Q11 for the performance year 2010 31.12.11 Including awards granted in 1Q12 for the performance year 2011 1 Estimate. The actual amount to be expensed in future years may vary, for example due to forfeitures. 2 Related to discretionary bonus. 3 Estimate. Includes Special Plan awards to be granted in 2012. shares in 2011, based on the 15,132,302 shares forfeited during 2011, is CHF 171 million. The total value of ex-post explicit adjust- ments made to UBS options in 2011, based on the 3,756,444 options forfeited during 2011, is CHF 22 million. The size of im- plicit adjustments is mainly due to a decline in the share price. The lower share price also means that many of the options previously granted are out of the money. Hence, the majority of outstanding option awards currently hold no intrinsic value. Advisory vote d e t i d u A Ex-post explicit and implicit adjustments to deferred compensation in 2011 1 CHF million UBS shares (EOP, IPP, PEP, SEEOP) 2 UBS options (KESOP) and SAR (KESAP) 2 UBS fund-linked plan (EOP) 3 Ex-post explicit adjustments 4 (171) adjustments to unvested awards 5 (1,432) Ex-post implicit (22) (11) (290) (50) 1 Compensation (discretionary bonus and other variable compensation) relating to awards for previous performance years. 2 IPP, KESOP and KESAP are discontinued deferred compensation plans. For CBP no ex-post ad- justments were made in 2011. 3 Awards granted under this plan are cash-settled and 100% susceptible to ex-post implicit adjustments. 4 Ex-post explicit adjustments are calculated as units forfeited during the year, valued at the share price on 30 December 2011 (CHF 11.18). For the UBS fund-linked plan this represents the forfeiture credits recognized in 2011. 5 Ex-post implict adjustments for UBS shares are calculated based on the difference between the weighted average grant date fair value and the share price on 30 December 2011. For UBS options they are calculated based on the difference between the fair value at grant and the aggregated intrinsic value on 30 December 2011. For the fund-linked plan they are calculated using the mark-to-market change during 2011. Total personnel expenses for 2011 The following table shows our total personnel expenses in 2011 for our 64,820 employees and includes salaries, pension and other personnel costs, social security contributions and variable compensation. Variable compensation includes discretionary cash bonuses paid in 2012 for the 2011 performance year, the amorti- zation of unvested deferred awards granted in previous years and the cost of deferred awards granted to employees who are eligi- ble for retirement at the date of grant. The bonus pool reflects the value of discretionary bonuses granted relating to the 2011 performance year, including awards that are paid out immediately and those that are deferred. To determine our variable compensation expense, several adjust- ments are required in order to reconcile the bonus pool to the accounting costs recognized in the Group’s financial statements prepared under IFRS: – reduction for the unrecognized future amortization of unvest- ed deferred awards granted in 2012 for the performance year 2011; and – addition for the amortization of unvested deferred awards granted in previous years. As a large part of compensation consists of deferred awards, the amortization of unvested deferred awards granted in previous years forms a significant part of both the 2010 and 2011 accounting costs. ➔ Refer to “Note 30 Equity participation and other compensation plans” in the “Financial information” section of this report for more information Personnel expenses d e t i d u A CHF million Salaries Variable compensation – discretionary bonus 1 Variable compensation – other 1, 2 of which replacement payments 3 of which guarantees for new hires of which forfeiture credits of which severance payments 4 of which retention plan payments 5 Contractors Social security Pension and other post-employment benefit plans 6 Wealth Management Americas: financial advisor compensation 1, 7 Other personnel expenses 2 Total personnel expenses Relating to awards for 2011 Relating to awards for prior years Total 2011 Expenses 6,859 1,807 335 31 88 0 216 0 217 697 788 1,842 726 13,271 0 1,585 (19) 90 85 (215) 0 21 0 46 0 676 32 2,320 6,859 3,392 316 121 173 (215) 216 21 217 743 788 2,518 758 15,5918 2010 7,033 4,082 230 107 135 (167) 69 85 232 826 724 2,667 1,127 16,920 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 2009 7,383 2,809 699 41 56 (81) 433 250 275 804 988 2,426 1,159 16,543 1 Refer to “Note 30 Equity participation and other compensation plans” of this report for more information. 2 In 2011, we reclassified the costs related to our voluntary employee share ownership plan (Equity Plus) from Variable compensation – other to Other personnel expenses. Prior periods were adjusted for this change. As a result, Other personnel expenses were increased by CHF 80 million and CHF 132 million for the year ended 31 December 2010 and for the year ended 31 December 2009, respectively, with a corresponding decrease in Variable compensation – other. 3 Replacement payments are payments made to compensate employees for deferred awards forfeited as a result of joining UBS. 4 Includes legally obligated and standard severance payments. 5 Retention plan payments related to strategic retention programs. 6 Refer to “Note 29 Pension and other post-employment benefit plans” of this report for more information. 7 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements. 8 Includes restructuring charges of CHF 261 million. Refer to “Note 37 Reorganizations and disposals” for more information. 267 Advisory vote Corporate governance, responsibility and compensation Compensation 2011 compensation for the Group Executive Board and Board of Directors Group Executive Board compensation In 2011, total compensation for Group Executive Board (GEB) mem- bers reflected the performance of each executive in the context of each business division’s operating performance, overall Group prog- ress towards our medium-term strategic goals and each GEB mem- ber’s individual contribution to effecting change, building high-per- forming teams and managing risk. We consider specific key performance indicators for individual GEB members that are relevant to their role, including risk-adjusted profitability, management of risk-weighted assets, growth in net new money and cost efficiency. In setting compensation levels for GEB members, the Human Re- sources and Compensation Committee (HRCC) and the Board of Directors (BoD) also considered their collective achievements in ad- vancing our strategy, together with the compensation structure and levels of our main peers and the firm’s relative performance. The overall total compensation of GEB members in office on 31 December 2011 was CHF 70.1 million, compared with a total of CHF 91.0 million in 2010. Following a re-organization in the fourth quarter of 2011, which resulted in the combination of certain roles, there were 12 GEB members in office on 31 December 2011, com- pared with 13 on 31 December 2010. Aggregate compensation for the three GEB members who stepped down in 2011 was CHF 7.0 million, compared with CHF 3.3 million for the one GEB member who did so in 2010. The highest paid GEB member in 2011 was Robert J. McCann, with total compensation of CHF 9.2 million. As shown in the table “Total compensation for GEB members”, 76% of his bonus was de- ferred, with 16% in deferred cash and 60% in deferred equity vest- ing over three to five years. In 2011, Mr. McCann led the turnaround in profitability in Wealth Management Americas, despite market volatility and a challenging market environment, with significant net new money, a significant reduction in financial advisor attrition rates and the leading position in financial advisor productivity. In 2011, the Group Chief Executive Officer (Group CEO), Sergio P. Ermotti, was granted a bonus of CHF 4.6 million. As such, his total compensation was CHF 6.4 million. As shown in the table “Total compensation for GEB members”, 88% of his bonus was deferred, with 28% in deferred cash and blocked shares and 60% in deferred equity vesting over three to five years. In considering this award, the HRCC and the BoD considered both his contribution and his achieve- ment against stated objectives as Group CEO since the end of Sep- tember 2011 and his prior performance as Chairman and CEO for Europe, the Middle East and Africa following his joining the firm in April 2011. As Group CEO, Mr. Ermotti has been quick to grasp the leadership challenges presented, including finalizing and presenting the Group strategy on Investor Day and reestablishing investor and regulatory confidence in the wake of the unauthorized trading inci- dent within the Investment Bank. A number of transformation initia- tives have been launched within the firm related to both the operat- ing environment and controls and to promoting the delivery of the full firm across our client franchises in each region. Before assuming the role of Group CEO, Mr. Ermotti was instrumental in further im- proving the firm’s impact in a number of our Europe, Middle East and Africa locations and advancing an enhanced regional governance strategy. The previous Group CEO, Oswald J. Grübel, who assumed full responsibility for the unauthorized trading incident, stepped down at the end of September 2011 and elected not to be con- sidered for a bonus for 2011. The HRCC accepted and the BoD agreed with his decision. Base salary Base salaries are fixed for all GEB members and reviewed annually by the HRCC. Early in 2011, following a review of market trends with regard to the mix between fixed and variable compensation and the balance of awards within the compensation framework, the HRCC set the base pay at an annual level of CHF 1.5 million or equivalent in relevant local currency for GEB members other than the Group CEO. With respect to the Group CEO, the HRCC reviewed his base salary level upon his appointment and set it at an annual level of CHF 2.5 million. Following a further review in the first quarter of 2012, the HRCC decided that there will be no adjustment in base salary levels for the GEB in 2012. Base salaries received over the year by GEB members are fully taken into ac- count when considering their total compensation levels. Benefits There were no changes to the terms of GEB benefits. ➔ Refer to “Note 29 Pension and other post-employment benefit plans” in the “Financial Information” section of this report for details on the various post-employment benefit plans estab- lished in Switzerland and other major markets ➔ Refer to the “Compensation funding and expenses” and “Overview of our compensation model” sections for information concerning the Human Resources and Compensation Commit- tee’s determination of the discretionary bonus for 2011, and to the “Deferred variable compensation plans” section for details of the compensation plans awarded to Group Executive Board members Board of Directors compensation Chairman of the Board of Directors For 2011, the total compensation awarded to the Chairman of the BoD, Kaspar Villiger, was CHF 1,494,568. Our compensation 268 Advisory vote framework provides for the Chairman to receive a base salary and 200,000 UBS shares, blocked for four years, as well as benefits in kind. Such shares are not designed or intended as variable com- pensation. Mr. Villiger chose to waive a substantial part of the share award and instead to accept a limited number of 38,700 UBS shares with a fair value of CHF 500,000. In addition, he de- cided to maintain the voluntary reduction in his annual base sal- ary from CHF 2 million to CHF 850,000. The HRCC gratefully ac- cepted and agreed with Mr. Villiger’s decision. Highest paid Board of Directors member The Chairman of the BoD, Mr. Villiger, is the highest paid BoD member, with total compensation of CHF 1,494,568. Axel A. Weber’s compensation In July 2011, we announced that Axel A. Weber would be nomi- nated for election to the BoD as non-independent Vice-Chairman at the 2012 Annual General Meeting (AGM) and that if reelected in 2013, he would likely succeed Mr. Villiger as Chairman of the BoD. In November 2011, Mr. Villiger decided that he would not stand for reelection to the BoD at the AGM in 2012. As such, should Mr. Weber be elected to the BoD in 2012, he will succeed Mr. Villiger as Chairman of the BoD in 2012. In line with the BoD’s compensation structure, Mr. Weber will receive a base salary, blocked UBS shares and benefits in kind. In the event that he is elected to the BoD at the AGM in 2012 and suc- ceeds Mr. Villiger as Chairman of the BoD, his annual compensation will be CHF 2 million, together with 200,000 UBS shares that are blocked for four years. As previously announced, the BoD agreed that Mr. Weber will receive a one-time payment upon his election to the BoD at the 2012 AGM. This consists of one year’s total compensation or CHF 2 mil- lion and 200,000 UBS shares that are blocked for one year. Independent Board of Directors members The table “Remuneration details and additional information for independent BoD members” shows the compensation received by independent BoD members between the 2011 and 2012 AGM. Fees for 2010 to 2011 remained unchanged. As the chair of the Corporate Responsibility Committee is now held by an indepen- dent BoD member, a retainer of CHF 100,000 has been awarded to that function. Compensation for former Board of Directors and Group Executive Board members No compensation or benefits in kind were paid to former BoD and GEB members for 2011. In 2010, part of such compensation paid related to legacy agreements with GEB members who left several years ago that were still honored by UBS. Benefits provided for under such agreements have been discontinued for all BoD and GEB members who stepped down after 1 January 2008. Transactions in 2011 In accordance with the applicable rules and regulations, manage- ment transactions in UBS shares by BoD and GEB members are publicly disclosed. From 1 January until 31 December 2011, five share sales were disclosed with a total value of CHF 7,760,461.35. Swiss stock ex- change rules do not require disclosure of individual names of GEB or BoD members making such transactions. UBS executives receive a substantial portion of their compensa- tion in UBS equity-based awards. For this reason, management transactions generally see sales outweighing purchases. Blackout periods and synchronized dates for unblocking or vesting of shares or options granted as compensation may lead to transac- tions being concentrated in short time periods. In addition, and in accordance with normal practice, two BoD members chose to receive their full pay in UBS shares. These shares, representing a value of CHF 650,000, will be allocated in March 2012. Loans BoD and GEB members are granted loans, fixed advances and mortgages. Such loans are made in the ordinary course of busi- ness, on substantially the same terms as those granted to other employees, including interest rates and collateral, and do not in- volve more than the normal risk of collectability or contain other unfavorable features. ➔ Refer to “Note 31 Related parties” in the “Financial information” section of this report for information concerning loans granted to current and former executives List of tables Total compensation for GEB members Share and option ownership / entitlements of GEB members on 31 December 2010 / 2011 Compensation details and additional information for non-independent BoD members Remuneration details and additional information for independent BoD members Total payments to BoD members Number of shares of BoD members on 31 December 2010 / 2011 Compensation paid to former BoD and GEB members Total of all vested and unvested shares of GEB members Total of all blocked and unblocked shares of BoD members Vested and unvested options of GEB members on 31 December 2010 / 2011 Loans granted to GEB members on 31 December 2010 / 2011 Loans granted to BoD members on 31 December 2010 / 2011 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Page 270 271 272 272 273 273 274 274 274 275 278 278 269 Advisory vote Corporate governance, responsibility and compensation Compensation Total compensation for GEB members d e t i d u A CHF, except where indicated a Variable cash compensation under CBP Name, function Sergio P. Ermotti, Group CEO 1 Oswald J. Grübel, former Group CEO 2 Oswald J. Grübel, former Group CEO Robert J. McCann, CEO Wealth Management Americas (highest-paid) Carsten Kengeter, CEO Investment Bank (highest-paid) Aggregate of all GEB members who were in office on 31 December 2011 3 Aggregate of all GEB members who were in office on 31 December 2010 3 Aggregate of all GEB members who stepped down during 2011 4 Aggregate of all GEB members who stepped down during 2010 4 2011 2011 2010 2011 2010 2011 2010 2011 2010 For the year Base salary Immediate cash b 553,200 Deferred cash 5, b 1,290,800 Annual bonus under PEP c 922,000 Annual bonus under SEEOP d 1,844,000 0 0 0 0 0 0 0 0 Benefits in kind e 195,450 35,971 25,600 Contributions to retirement benefit plans f 150,816 0 0 Total 6,350,711 2,227,638 3,025,600 1,394,445 2,191,667 3,000,000 1,321,538 1,869,233 1,246,155 1,557,694 3,115,388 67,053 6,264 9,183,325 874,626 1,002,496 2,339,158 1,670,827 3,341,654 92,547 0 9,321,308 15,962,737 11,929,365 8,874,910 10,402,137 20,804,274 1,165,601 995,290 70,134,314 14,705,894 15,588,145 14,451,756 15,019,951 30,039,901 381,851 843,402 91,030,900 4,155,602 509,201 1,166,759 755,950 1,380,000 920,000 0 0 962,768 171,954 80,499 7,046,783 0 78,817 118,334 3,253,101 1 Sergio P. Ermotti was appointed on 1 April 2011 as GEB member and regional CEO of Europe, the Middle East and Africa. He was appointed on 24 September 2011 the new Group CEO ad interim and confirmed on 15 November 2011. 2 Oswald J. Grübel stepped down on 24 September 2011 as Group CEO. 3 Number and distribution of GEB members: 12 GEB members were in office on 31 December 2011, 13 GEB members were in office on 31 December 2010. 4 Number and distribution of former GEB members: 2011: includes five months in office as a GEB member for John Cryan, nine months for Oswald J. Grübel and 11 months for Maureen Miskovic. 2010: includes three months in office as a GEB member for Francesco Morra. 5 In 2011, for Sergio P. Ermotti, due to applicable UK FSA regulations, deferred cash includes blocked shares. In 2010, for John Cryan, Carsten Kengeter and Alexander Wilmot-Sitwell, due to applicable UK FSA regulations, deferred cash includes blocked shares. d e t i d u A Explanation of the tables outlining compensation details for GEB and BoD members a. Local currencies are converted into CHF using the exchange rates as detailed in Note 38 “Currency translation rates” in the “Financial information” section in this report. b. Of the cash award, 60% is paid out immediately (representing 24% of a GEB member’s total annual bonus). The balance is paid out in equal installments of 20%, each over the subsequent two years, and is subject to forfeiture. c. Value of each performance share at grant: CHF 13.26 for PEP awards granted in 2012 relating to the performance year 2011; CHF 18.70 for PEP awards granted in 2011 relating to the performance year 2010. These values are based on valuations for accounting purposes which take into account the per- formance conditions and the range of possible outcomes for these conditions. d. SEEOP awards vest in equal installments over five years and are subject to forfeiture. The grant date accounting value per share granted under SEEOP is: CHF 12.76 or USD 14.14 (actual shares) and CHF 12.36 or USD 13.70 (notional shares) for SEEOP awards granted in 2012 relating to the performance year 2011; CHF 18.43 or USD 19.94 (actual shares) and CHF 18.30 or USD 19.80 (notional shares) for SEEOP awards granted in 2011 relating to the performance year 2010. e. Benefits in kind are all valued at market price, for example, health and welfare benefits and general expense allowances. f. Swiss executives participate in the same pension plan as all other employees. Under this plan, UBS makes contributions to the plan, which covers compen- sation of up to CHF 835,200. 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 attrib- uted to the employer’s portion of the legal BVG requirement. The employee contribution is included in the base salary and annual incentive award com- ponents. In both the US and the UK, senior management participates in the same pension plans as all other employees. In the US, there are separate pension plans for Wealth Management Americas compared with the other business divisions. There are generally two different types of pension plans: grandfathered plans and principal plans. The grandfathered plans, which are no longer open to new hires, operate (depending on the abovementioned distinction by business division) either on a cash balance basis or a career average salary basis. Participants accrue a pension based on their annual com- pensation limited to USD 250,000 (or USD 150,000 for Wealth Management Americas employees). The principal plans for new hires are defined contribu- tion plans. In the defined contribution plans, UBS makes contributions to the plan based on compensation and limited to USD 245,000 (USD 250,000 as from 1 January 2012). US management may also participate in a 401(k) defined contribution plan (open to all employees), which provides a limited company matching contribution for employee contributions. As from 2 January 2012 the match is not available anymore for Wealth Management Americas employees with compensation in excess of USD 250,000. In the UK, management participates in either the principal pension plan, which oper- ates 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 upon retirement based on career average base salary (individual caps introduced as of 1 July 2010). 270 Advisory vote d e t i d u A Share and option ownership / entitlements of GEB members on 31 December 2010 / 2011 1 Number of vested shares Total number of shares Potentially conferred voting rights in % Name, function For the year Sergio P. Ermotti, Group Chief Executive Offcier Oswald J. Grübel, former Group Chief Executive Officer 5 John Cryan, former Group Chief Financial Officer 5 Markus U. Diethelm, Group General Counsel 2011 2010 2011 2010 2011 2010 2011 2010 John A. Fraser, Chairman and CEO Global Asset Management 2011 Lukas Gähwiler, CEO UBS Switzerland and co-CEO Wealth Management & Swiss Bank Carsten Kengeter, Chairman and CEO Investment Bank Ulrich Körner, Group Chief Operating Officer and CEO Corporate Center Philip J. Lofts, Group Chief Risk Officer Robert J. McCann, CEO Wealth Management Americas Maureen Miskovic, former Group Chief Risk Officer 5 Tom Naratil, Group Chief Financial Officer Alexander Wilmot-Sitwell, co-Chairman and co-CEO Group Asia Pacific Robert Wolf, former Chairman and CEO, UBS Group Americas / President Investment Bank Chi-Won Yoon, co-Chairman and co-CEO Group Asia Pacific Jürg Zeltner, CEO UBS Wealth Management and co-CEO Wealth Management & Swiss Bank 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Number of unvested shares / at risk 2 0 – – 0 – 221,879 358,042 178,619 460,707 326,702 252,293 110,000 971,575 916,201 389,090 177,592 377,614 200,009 330,047 138,598 – – 0 – – 0 – 185,975 91,506 75,700 280,414 316,541 37,517 850 556,016 363,047 95,597 95,597 150,772 144,603 0 540,866 – – 0 – – 0 – 407,854 449,548 254,319 741,121 643,243 289,810 110,850 1,527,591 1,279,248 484,687 273,189 528,386 344,612 330,047 679,464 – – 221,238 193,836 415,074 – 495,553 274,739 – 242,805 306,515 184,858 306,487 113,609 – 220,955 213,613 – 635,382 350,311 318,332 11,756 9,405 – 716,508 488,352 – 878,187 656,826 503,190 318,243 123,014 Number of options 3 0 Potentially conferred voting rights in % 4 0.000 – – 4,000,000 – 382,673 0 0 1,088,795 1,088,795 0 0 905,000 905,000 0 0 577,723 577,723 0 0 – – 1,046,122 – 353,807 353,807 – 948,473 623,253 623,253 205,470 205,470 – – 0.181 – 0.017 0.000 0.000 0.050 0.049 0.000 0.000 0.041 0.041 0.000 0.000 0.026 0.026 0.000 0.000 – – 0.048 – 0.016 0.016 – 0.043 0.029 0.028 0.009 0.009 0.000 – – 0.000 – 0.018 0.021 0.012 0.034 0.029 0.013 0.005 0.070 0.058 0.022 0.012 0.024 0.016 0.015 0.031 – – 0.019 – 0.033 0.022 – 0.040 0.030 0.023 0.015 0.006 1 This table includes all vested and unvested shares and options of GEB members, including related parties. 2 Includes shares granted under variable compensation plans with forfeiture provisions. The actual number of shares vesting in the future will be calculated under the terms of the plans. Refer to “Deferred variable compensation plans” in this section for more information on the plans. 3 Refer to “Note 30 Equity participa- tion and other compensation plans” in the “Financial information” section of this report for more information. 4 No conversion rights are outstanding. 5 GEB members who stepped down during 2011. 271 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a d e t i d u A d e t i d u A Advisory vote Corporate governance, responsibility and compensation Compensation Compensation details and additional information for non-independent BoD members CHF, except where indicated a Name, function 1 Kaspar Villiger, Chairman For the year Base salary 2011 2010 850,000 850,000 Annual bonus (cash) 0 0 Annual share award 500,000 2 500,000 2 Benefits in kind e 144,568 141,308 Contributions to retirement benefit plans f 0 0 Total 1,494,568 1,491,308 1 Kaspar Villiger was the only non-independent member in office on 31 December 2011 and 31 December 2010, respectively. 2 These shares are blocked for four years. Remuneration details and additional information for independent BoD members CHF, except where indicated a e e t t i m m o C t i d u A M M M M M M C C & s e c r u o s e R n a m u H 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 y t i l i b i s n o p s e R e e t t i m m o C e t a r o p r o C e e t t i m m o C k s i R For the period AGM to AGM Base fee Committee retainer(s) Benefits in kind M M M M M M M C M M C M M M M 2011 / 2012 325,000 2010 / 2011 325,000 C 2011 / 2012 325,000 C 2010 / 2011 325,000 2011 / 2012 – M 2010 / 2011 325,000 M 2011 / 2012 325,000 M 2010 / 2011 325,000 M M C M 2011 / 2012 325,000 2010 / 2011 325,000 2011 / 2012 325,000 2010 / 2011 325,000 M 2011 / 2012 325,000 M 2010 / 2011 325,000 2011 / 2012 325,000 2010 / 2011 325,000 M 2011 / 2012 325,000 M 2010 / 2011 325,000 2011 / 2012 325,000 2010 / 2011 325,000 M M 2011 / 2012 325,000 2010 / 2011 – 300,000 300,000 500,000 400,000 – 450,000 400,000 400,000 200,000 200,000 550,000 250,000 250,000 200,000 200,000 150,000 300,000 300,000 300,000 300,000 250,000 – Name, function 1 Michel Demaré, Vice Chairman David Sidwell, Senior Independent Director Sally Bott, former member Rainer-Marc Frey, member Bruno Gehrig, member Ann F. Godbehere, member Axel P. Lehmann, member Wolfgang Mayrhuber, member Helmut Panke, member William G. Parrett, member Joseph Yam, member Total 2011 Total 2010 Share percen- tage 2 50 100 50 50 – 50 100 100 50 50 50 50 100 100 50 50 50 50 50 50 50 – Number of shares 3, 4 39,845 52,631 48,952 30,893 – 24,556 62,635 43,583 23,907 16,634 39,845 18,219 49,632 31,519 23,907 15,050 28,460 19,803 28,460 19,803 26,183 – Total 875,000 Additional payments 250,000 5 250,000 5 875,000 250,000 5 1,075,000 250,000 5 975,000 – 775,000 725,000 725,000 525,000 525,000 875,000 575,000 575,000 525,000 525,000 475,000 625,000 625,000 625,000 625,000 575,000 – 7,000,000 6,700,000 Legend: C = Chairperson of the respective Committee; M = Member of the respective Committee 1 There were 10 independent BoD members in office on 31 December 2011. Joseph Yam was appointed at the AGM on 28 April 2011 and Sally Bott stepped down on 11 February 2011. There were 10 independent BoD members in office on 31 December 2010. Wolfgang Mayrhuber was appointed at the AGM on 14 April 2010, and Sergio Marchionne and Peter Voser stepped down from the BoD at the AGM on 14 April 2010. 2 Fees are paid 50% in cash and 50% in blocked UBS shares. However, independent BoD members can elect to have 100% of their remuneration paid in blocked UBS shares. 3 For 2011, shares valued at CHF 12.92 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2012), included a price discount of 15%, for a new value of discount price CHF 10.98. These shares are blocked for four years. For 2010, shares valued at CHF 18.56 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2011), included a price discount of 15%, for a new value of discount price of CHF 15.78. These shares are blocked for four years. 4 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 / with- holding tax. 5 This payment is associated with the Vice Chairman or the Senior Independent Director function, respectively. 272 Advisory vote d e t i d u A d e t i d u A Total payments to BoD members CHF, except where indicated a Aggregate of all BoD members For the year 2011 2010 Total 8,494,568 8,191,310 Number of shares of BoD members on 31 December 2010 / 2011 1 Name, function Kaspar Villiger, Chairman Michel Demaré, Vice Chairman David Sidwell, Senior Independent Director Sally Bott, former member 2 Rainer-Marc Frey, member Bruno Gehrig, member Ann F. Godbehere, member Axel P. Lehmann, member Wolfgang Mayrhuber, member Helmut Panke, member William G. Parrett, member Joseph Yam, member For the year Number of shares held Voting rights in % 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 49,440 22,500 76,334 23,703 100,247 69,354 – 39,542 100,042 56,459 54,409 37,775 41,441 23,222 89,971 58,452 15,050 0 109,332 89,529 62,618 42,815 0 – 0.002 0.001 0.003 0.001 0.005 0.003 – 0.002 0.005 0.003 0.002 0.002 0.002 0.001 0.004 0.003 0.001 0.000 0.005 0.004 0.003 0.002 0.000 – 1 This table includes blocked and unblocked shares held by BoD members, including related parties. No options were granted in 2010 and 2011. 2 Sally Bott stepped down on 11 February 2011 as BoD member. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 273 Advisory vote Corporate governance, responsibility and compensation Compensation d e t i d u A d e t i d u A d e t i d u A Compensation paid to former BoD and GEB members1 CHF, except where indicated a Name, function Alberto Togni, former BoD member Aggregate of all former GEB members 2 Aggregate of all former BoD and GEB members For the year Compensation Benefits in kind 2011 2010 2011 2010 2011 2010 0 0 0 0 0 0 0 20,493 0 57,229 0 77,722 Total 0 20,493 0 57,229 0 77,722 1 Compensation or remuneration connected with the former member’s activity on the BoD or GEB that is not at market conditions. 2 Includes zero former GEB member in 2011 and one former GEB member in 2010. Total of all vested and unvested shares of GEB members 1, 2 Shares on 31 December 2011 2,863,887 1,988,680 408,037 290,631 Total Of which vested 2012 2013 Of which vesting 2014 88,269 2015 88,269 2011 2012 2013 2014 2016 0 2015 Shares on 31 December 2010 4,409,345 3 2,922,411 3 582,787 411,339 282,754 105,027 105,027 1 Includes related parties. 2 Excludes shares granted under variable compensation plans with forfeiture provisions. 3 Includes 22,500 vested shares of the Chairman. No individual GEB member holds 1% or more of all shares issued. Total of all blocked and unblocked shares of BoD members 1 Shares on 31 December 2011 Total Of which unblocked 698,884 72,775 Shares on 31 December 2010 440,851 2 46,010 2 1 Includes related parties. 2 Excludes 22,500 vested shares of the Chairman. No individual BoD member holds 1% or more of all shares issued. 2012 9,349 2011 4,266 Of which blocked until 2013 2014 2015 115,690 225,995 275,075 2012 9,349 2013 2014 127,970 253,256 274 Advisory vote d e t i d u A Vested and unvested options of GEB members on 31 December 2010 / 2011 1 For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price Sergio P. Ermotti, Group Chief Executive Officer John A. Fraser, Chairman and CEO Global Asset Management (continued) 2011 2010 0 – Oswald J. Grübel, former Group Chief Executive Officer 4 2011 – 2010 4,000,000 4,000,000 2009 26/02/2009 25/02/2014 CHF 10.10 John Cryan, former Group Chief Financial Officer 4 2011 – 2010 1,088,795 76,380 2002 31/01/2005 31/01/2012 USD 21.24 127,884 2002 28/06/2005 28/06/2012 CHF 37.90 127,884 2003 31/01/2006 31/01/2013 USD 22.53 170,512 2004 01/03/2007 27/02/2014 USD 38.13 202,483 2005 01/03/2008 28/02/2015 USD 44.81 213,140 2006 01/03/2009 28/02/2016 CHF 72.57 170 512 2007 01/03/2010 28/02/2017 CHF 73.67 Lukas Gähwiler, CEO UBS Switzerland and co-CEO Wealth Management & Swiss Bank 2002 31/01/2003 31/01/2012 CHF 36.49 2002 31/01/2004 31/01/2012 CHF 36.49 2002 31/01/2005 31/01/2012 CHF 36.49 2011 2010 0 0 2010 382,673 21,362 20,731 20,725 5,454 5,294 5,292 23,626 23,620 23,612 5,526 5,524 5,524 17,072 17,068 17,063 14,210 14,210 14,207 5,330 5,328 5,326 17,762 17,762 17,760 53,285 2002 28/02/2003 28/02/2012 CHF 36.65 2002 28/02/2004 28/02/2012 CHF 36.65 2002 28/02/2005 28/02/2012 CHF 36.65 2003 01/03/2004 31/01/2013 CHF 27.81 2003 01/03/2005 31/01/2013 CHF 27.81 2003 01/03/2006 31/01/2013 CHF 27.81 2003 01/03/2004 28/02/2013 CHF 26.39 2003 01/03/2005 28/02/2013 CHF 26.39 2003 01/03/2006 28/02/2013 CHF 26.39 2004 01/03/2005 27/02/2014 CHF 44.32 2004 01/03/2006 27/02/2014 CHF 44.32 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2006 28/02/2015 CHF 47.58 2005 01/03/2007 28/02/2015 CHF 47.58 2005 01/03/2008 28/02/2015 CHF 47.58 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 2007 01/03/2008 28/02/2017 CHF 67.00 2007 01/03/2009 28/02/2017 CHF 67.00 2007 01/03/2010 28/02/2017 CHF 67.00 2008 01/03/2011 28/02/2018 CHF 32.45 Carsten Kengeter, Chairman and CEO Investment Bank 2011 2010 905,000 905,000 2009 01/03/2012 27/12/2019 CHF 40.00 905,000 905,000 2009 01/03/2012 27/12/2019 CHF 40.00 Ulrich Körner, Group Chief Operating Officer and CEO Corporate Center 2011 2010 0 0 Philip J. Lofts, Group Chief Risk Officer 2011 577,723 11,445 11,104 11,098 1,240 5,464 1,199 9,985 9,980 9,974 1,833 1,830 1,830 35,524 35,524 35,521 2002 31/01/2003 31/01/2012 CHF 36.49 2002 31/01/2004 31/01/2012 CHF 36.49 2002 31/01/2005 31/01/2012 CHF 36.49 2002 28/02/2003 28/02/2012 CHF 36.65 2002 28/02/2004 28/02/2012 CHF 36.65 2002 28/02/2005 28/02/2012 CHF 36.65 2003 01/03/2004 31/01/2013 CHF 27.81 2003 01/03/2005 31/01/2013 CHF 27.81 2003 01/03/2006 31/01/2013 CHF 27.81 2003 01/03/2004 28/02/2013 CHF 26.39 2003 01/03/2005 28/02/2013 CHF 26.39 2003 01/03/2006 28/02/2013 CHF 26.39 2004 01/03/2005 27/02/2014 CHF 44.32 2004 01/03/2006 27/02/2014 CHF 44.32 2004 01/03/2007 27/02/2014 CHF 44.32 117,090 2005 01/03/2008 28/02/2015 CHF 52.32 117,227 2006 01/03/2009 28/02/2016 CHF 72.57 85,256 74,599 11,445 11,104 11,098 1,240 5,464 1,199 2007 01/03/2010 28/02/2017 CHF 73.67 2008 01/03/2011 28/02/2018 CHF 35.66 2002 31/01/2003 31/01/2012 CHF 36.49 2002 31/01/2004 31/01/2012 CHF 36.49 2002 31/01/2005 31/01/2012 CHF 36.49 2002 28/02/2003 28/02/2012 CHF 36.65 2002 28/02/2004 28/02/2012 CHF 36.65 2002 28/02/2005 28/02/2012 CHF 36.65 y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a Markus U. Diethelm, Group General Counsel 2011 2010 0 0 John A. Fraser, Chairman and CEO Global Asset Management 2011 1,088,795 76,380 2002 31/01/2005 31/01/2012 USD 21.24 127,884 2002 28/06/2005 28/06/2012 CHF 37.90 2010 577,723 127,884 2003 31/01/2006 31/01/2013 USD 22.53 170,512 2004 01/03/2007 27/02/2014 USD 38.13 202,483 2005 01/03/2008 28/02/2015 USD 44.81 213,140 2006 01/03/2009 28/02/2016 CHF 72.57 170,512 2007 01/03/2010 28/02/2017 CHF 73.67 1 This table includes all options of GEB members, including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 30 Equity participation and other compensation plans” in the “Financial informa- tion” section of this report for more information. 4 GEB members who stepped down during 2011. 275 Advisory vote Corporate governance, responsibility and compensation Compensation d e t i d u A Vested and unvested options of GEB members on 31 December 2010 / 2011 1 (continued) For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price Philip J. Lofts, Group Chief Risk Officer (continued) Alexander Wilmot-Sitwell, co-Chairman and co-CEO Group Asia Pacific (cont.) 9,985 9,980 9,974 1,833 1,830 1,830 35,524 35,524 35,521 2003 01/03/2004 31/01/2013 CHF 27.81 2003 01/03/2005 31/01/2013 CHF 27.81 2003 01/03/2006 31/01/2013 CHF 27.81 2003 01/03/2004 28/02/2013 CHF 26.39 2003 01/03/2005 28/02/2013 CHF 26.39 2003 01/03/2006 28/02/2013 CHF 26.39 2004 01/03/2005 27/02/2014 CHF 44.32 2004 01/03/2006 27/02/2014 CHF 44.32 2004 01/03/2007 27/02/2014 CHF 44.32 117,090 2005 01/03/2008 28/02/2015 CHF 52.32 117,227 2006 01/03/2009 28/02/2016 CHF 72.57 85,256 74,599 2007 01/03/2010 28/02/2017 CHF 73.67 2008 01/03/2011 28/02/2018 CHF 35.66 Robert J. McCann, CEO Wealth Management Americas 2011 2010 0 0 Maureen Miskovic, former Group Chief Risk Officer 4 2011 – 2010 – Tom Naratil, Group Chief Financial Officer 2011 1,046,122 35,524 35,524 35,521 2002 31/01/2003 31/01/2012 USD 21.24 2002 31/01/2004 31/01/2012 USD 21.24 2002 31/01/2005 31/01/2012 USD 21.24 4,262 2002 29/02/2004 28/02/2012 USD 21.70 63,942 2003 31/01/2006 31/01/2013 USD 22.53 4,262 2003 28/02/2005 28/02/2013 USD 19.53 145,962 2004 01/03/2007 27/02/2014 USD 38.13 166,010 2005 01/03/2008 28/02/2015 USD 44.81 142,198 2006 01/03/2009 28/02/2016 CHF 72.57 131,277 2007 01/03/2010 28/02.2017 CHF 73.67 181,640 2008 01/03/2011 28/02/2018 CHF 35.66 100,000 2009 01/03/2012 27/02/2019 CHF 11.35 35,524 35,521 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 106,570 2007 01/03/2010 28/02/2017 CHF 73.67 85,256 2008 01/03/2011 28/02/2018 CHF 35.66 Robert Wolf, former Chairman and CEO, UBS Group Americas / President Investment Bank 2011 2010 – 948,473 287,739 2003 31/01/2006 31/01/2013 USD 22.53 213,140 2004 01/03/2007 27/02/2014 USD 38.13 127,884 2005 01/03/2008 28/02/2015 USD 44.81 106,570 2006 01/03/2009 28/02/2016 CHF 72.57 106,570 2007 01/03/2010 28/02/2017 CHF 73.67 106,570 2008 01/03/2011 28/02/2018 CHF 35.66 Chi-Won Yoon, co-Chairman and co-CEO Group Asia Pacific 2011 623,253 11,577 11,229 11,227 2002 31/01/2002 31/01/2012 USD 21.24 2002 31/01/2004 31/01/2012 USD 21.24 2002 31/01/2005 31/01/2012 USD 21.24 2,252 6,446 2,184 8,648 8,642 8,635 4,262 3,374 3,371 3,371 6,200 4,262 6,198 6,195 10,659 10,657 10,654 21,316 21,314 21,311 8,881 8,880 8,880 2002 28/02/2002 28/02/2012 USD 21.70 2002 29/02/2004 28/02/2012 USD 21.70 2002 28/02/2005 28/02/2012 USD 21.70 2003 01/03/2004 31/01/2013 USD 20.49 2003 01/03/2005 31/01/2013 USD 20.49 2003 01/03/2006 31/01/2013 USD 20.49 2003 28/02/2005 28/02/2013 USD 19.53 2003 01/03/2004 28/02/2013 USD 19.53 2003 01/03/2005 28/02/2013 USD 19.53 2003 01/03/2006 28/02/2013 USD 19.53 2004 01/03/2005 27/02/2014 CHF 44.32 2004 27/02/2006 27/02/2014 CHF 44.32 2004 01/03/2006 27/02/2014 CHF 44.32 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2006 28/02/2015 CHF 47.58 2005 01/03/2007 28/02/2015 CHF 47.58 2005 01/03/2008 28/02/2015 CHF 47.58 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 2007 01/03/2008 28/02/2017 CHF 67.00 2007 01/03/2009 28/02/2017 CHF 67.00 2007 01/03/2010 28/02/2017 CHF 67.00 42,628 2008 01/03/2011 28/02/2018 CHF 32.45 350,000 2009 01/03/2012 27/02/2019 CHF 11.35 11,577 11,229 11,227 2002 31/01/2002 31/01/2012 USD 21.24 2002 31/01/2004 31/01/2012 USD 21.24 2002 31/01/2005 31/01/2012 USD 21.24 2,252 2002 28/02/2002 28/02/2012 USD 21.70 2010 – Alexander Wilmot-Sitwell, co-Chairman and co-CEO Group Asia Pacific 2011 353,807 53,282 2005 01/03/2008 28/02/2015 CHF 47.58 2,130 2005 04/03/2007 04/03/2015 CHF 47.89 35,524 35,524 35,521 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 106,570 2007 01/03/2010 28/02/2017 CHF 73.67 2010 353,807 85,256 53,282 2008 01/03/2011 28/02/2018 CHF 35.66 2010 623,253 2005 01/03/2008 28/02/2015 CHF 47.58 2,130 2005 04/03/2007 04/03/2015 CHF 47.89 35,524 2006 01/03/2007 28/02/2016 CHF 65.97 1 This table includes all options of GEB members, including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 30 Equity participation and other compensation plans” in the “Financial informa- tion” section of this report for more information. 4 GEB members who stepped down during 2011. 276 Advisory vote d e t i d u A Vested and unvested options of GEB members on 31 December 2010 / 2011 1 (continued) For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price Chi-Won Yoon, co-Chairman and co-CEO Group Asia Pacific (continued) 6,446 2,184 8,648 8,642 8,635 4,262 3,374 3,371 3,371 6,200 4,262 6,198 6,195 10,659 10,657 10,654 21,316 21,314 21,311 8,881 8,880 8,880 2002 29/02/2004 28/02/2012 USD 21.70 2002 28/02/2005 28/02/2012 USD 21.70 2003 01/03/2004 31/01/2013 USD 20.49 2003 01/03/2005 31/01/2013 USD 20.49 2003 01/03/2006 31/01/2013 USD 20.49 2003 28/02/2005 28/02/2013 USD 19.53 2003 01/03/2004 28/02/2013 USD 19.53 2003 01/03/2005 28/02/2013 USD 19.53 2003 01/03/2006 28/02/2013 USD 19.53 2004 01/03/2005 27/02/2014 CHF 44.32 2004 27/02/2006 27/02/2014 CHF 44.32 2004 01/03/2006 27/02/2014 CHF 44.32 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2006 28/02/2015 CHF 47.58 2005 01/03/2007 28/02/2015 CHF 47.58 2005 01/03/2008 28/02/2015 CHF 47.58 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 2007 01/03/2008 28/02/2017 CHF 67.00 2007 01/03/2009 28/02/2017 CHF 67.00 2007 01/03/2010 28/02/2017 CHF 67.00 42,628 2008 01/03/2011 28/02/2018 CHF 32.45 350,000 2009 01/03/2012 27/02/2019 CHF 11.35 Jürg Zeltner, CEO UBS Wealth Management and co-CEO Wealth Management & Swiss Bank 2011 205,470 809 784 784 4,972 7,106 7,103 7,103 93 161 149 127 2002 31/01/2003 31/01/2012 CHF 36.49 2002 31/01/2004 31/01/2012 CHF 36.49 2002 31/01/2005 31/01/2012 CHF 36.49 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2006 28/02/2015 CHF 47.58 2005 01/03/2007 28/02/2015 CHF 47.58 2005 01/03/2008 28/02/2015 CHF 47.58 2005 04/03/2007 04/03/2015 CHF 47.89 2005 06/06/2007 06/06/2015 CHF 45.97 2005 09/09/2007 09/09/2015 CHF 50.47 2005 05/12/2007 05/12/2015 CHF 59.03 Jürg Zeltner, CEO UBS Wealth Management and co-CEO Wealth Management & Swiss Bank (continued) 2010 205,470 7,106 7,103 7,103 110 242 230 221 7,105 7,105 7,103 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 2006 03/03/2008 03/03/2016 CHF 65.91 2006 09/06/2008 09/06/2016 CHF 61.84 2006 08/09/2008 08/09/2016 CHF 65.76 2006 08/12/2008 08/12/2016 CHF 67.63 2007 01/03/2008 28/02/2017 CHF 67.00 2007 01/03/2009 28/02/2017 CHF 67.00 2007 01/03/2010 28/02/2017 CHF 67.00 223 2007 02/03/2009 02/03/2017 CHF 67.08 42,628 90,000 809 784 784 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 2008 01/03/2011 28/02/2018 CHF 35.66 2009 01/03/2012 27/02/2019 CHF 11.35 2002 31/01/2003 31/01/2012 CHF 36.49 2002 31/01/2004 31/01/2012 CHF 36.49 2002 31/01/2005 31/01/2012 CHF 36.49 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2006 28/02/2015 CHF 47.58 2005 01/03/2007 28/02/2015 CHF 47.58 2005 01/03/2008 28/02/2015 CHF 47.58 2005 04/03/2007 04/03/2015 CHF 47.89 2005 06/06/2007 06/06/2015 CHF 45.97 2005 09/09/2007 09/09/2015 CHF 50.47 2005 05/12/2007 05/12/2015 CHF 59.03 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 2006 03/03/2008 03/03/2016 CHF 65.91 2006 09/06/2008 09/06/2016 CHF 61.84 2006 08/09/2008 08/09/2016 CHF 65.76 2006 08/12/2008 08/12/2016 CHF 67.63 2007 01/03/2008 28/02/2017 CHF 67.00 2007 01/03/2009 28/02/2017 CHF 67.00 2007 01/03/2010 28/02/2017 CHF 67.00 223 2007 02/03/2009 02/03/2017 CHF 67.08 42,628 90,000 2008 01/03/2011 28/02/2018 CHF 35.66 2009 01/03/2012 27/02/2019 CHF 11.35 1 This table includes all options of GEB members, including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 30 Equity participation and other compensation plans” in the “Financial informa- tion” section of this report for more information. 4 GEB members who stepped down during 2011. y t i l i b i s n o p s e r , e c n a n r e v o g e t a r o p r o C n o i t a s n e p m o c d n a 277 d e t i d u A d e t i d u A Advisory vote Corporate governance, responsibility and compensation Compensation Loans granted to GEB members on 31 December 2010 / 2011 1 CHF, except where indicated a Name, function Jürg Zeltner, CEO UBS Wealth Management, co-CEO of Wealth Management & Swiss Bank 3 Jürg Zeltner, CEO UBS Wealth Management, co-CEO of Wealth Management & Swiss Bank 3 Aggregate of all GEB members For the year 2011 2010 2011 2010 Loans 2 5,387,500 5,739,862 17,539,601 4 20,696,569 1 No loans have been granted to related parties of the GEB members at conditions not customary in the market. 2 All loans granted are secured loans, except for CHF 45,435 in 2011. 3 GEB member with the high- est loan granted. 4 Includes a loan of CHF 3.3 million that will be forgiven in three equal installments over the next three years, subject to the GEB member’s continued full-time employment with UBS and his perfor- mance being satisfactory and commensurate with his responsibilities. Loans granted to BoD members on 31 December 2010 / 2011 1 CHF, except where indicated a Name, function Kaspar Villiger, Chairman Michel Demaré, Vice Chairman David Sidwell, Senior Independent Director Sally Bott, former member 3 Rainer-Marc Frey, member Bruno Gehrig, member 4 Ann F. Godbehere, member Axel P. Lehmann, member Wolfgang Mayrhuber, member Helmut Panke, member William G. Parrett, member Joseph Yam, member Aggregate of all BoD members For the year 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Loans 2 0 0 850,000 850,000 0 0 – 0 0 0 798,000 798,000 0 0 0 0 0 0 0 0 0 0 0 – 1,648,000 1,648,000 1 No loans have been granted to related parties of the BoD members at conditions not customary in the market. 2 All loans granted are secured loans. 3 Sally Bott stepped down on 11 February 2011 as BoD member. 4 Secured loan granted prior to his election to the BoD. 278 Financial information Financial information Table of contents 282 Introduction and accounting principles 283 Update on internal control over financial reporting 284 Consolidated financial statements 284 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, reverse repurchase and repurchase agreements, and derivative instruments 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 285 287 289 290 291 292 295 297 297 319 323 324 324 325 326 327 327 328 329 329 330 330 331 333 334 335 335 336 338 280 339 339 339 341 341 349 351 358 358 358 359 359 369 Balance sheet notes: liabilities 18 Due to banks and customers 19 Financial liabilities designated at fair value and debt issued held at amortized cost 20 Other liabilities 21 Provisions and contingent liabilities 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 Fair value of financial instruments 27 Pledged assets and transferred financial assets which do not qualify for derecognition 370 28 Measurement categories of financial assets and 375 381 391 393 394 397 398 398 399 399 400 402 financial liabilities 29 Pension and other post-employment benefit plans 30 Equity participation and other compensation plans 31 Related parties 32 Events after the reporting period 33 Significant subsidiaries and associates 34 Invested assets and net new money 35 Business combinations 36 Discontinued operations 37 Reorganizations and disposals 38 Currency translation rates 39 Swiss banking law requirements 40 Supplemental guarantor information required under SEC rules 411 UBS AG (Parent Bank) 411 Parent Bank review 414 414 415 416 417 417 Parent Bank financial statements Income statement Balance sheet Statement of appropriation of retained earnings Notes to the Parent Bank financial statements Business activities, risk assessment, 1 outsourcing and personnel 417 2 Accounting policies 420 420 420 421 421 421 421 422 422 423 424 425 425 425 425 426 426 427 428 428 429 429 430 430 430 431 434 434 Additional income statement information 3 Net trading income 4 Extraordinary income and expenses Additional balance sheet information 5 Other assets and other liabilities 6 Assets pledged or assigned as security for own obligations and assets subject to reservation of title 7 Due to UBS pension plans 8 Allowances and provisions 9 Statement of shareholders’ equity 10 Share capital and significant shareholders 11 Transactions with related parties Off-balance-sheet and other information 12 Commitments and contingent liabilities 13 Derivative instruments 14 Fiduciary transactions Compensation of the members of the Board of Directors and the Group Executive Board Total compensation for all GEB members Share and option ownership / entitlements of GEB members on 31 December 2010 / 2011 Compensation details and additional information for non-independent BoD members Remuneration details and additional information for  independent BoD members Total payments to BoD members Number of shares of BoD members on 31 December 2010 / 2011 Compensation paid to former BoD and GEB members Total of all vested and unvested shares of GEB members Total of all blocked and unblocked shares of BoD members Vested and unvested options of GEB members on 31 December 2010 / 2011 Loans granted to GEB members on 31 December 2010 / 2011 Loans granted to BoD members on 31 December 2010 / 2011 435 437 Report of the statutory auditor on the financial statements Confirmation of the auditors concerning conditional capital increase 439 Additional disclosure required under SEC regulations 439 A – Introduction 440 441 442 443 443 444 444 445 445 446 448 450 451 451 452 453 454 455 456 457 458 459 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 investments in debt instruments 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 n o i t a m r o f n i l a i c n a n i F 281 Financial information Introduction and accounting principles The financial information section of UBS’s Annual Report 2011 comprises: a) the audited consolidated financial statements of UBS Group (the “Financial Statements”) for 2011, 2010 and 2009, prepared in accordance with International Financial Report- ing Standards (IFRS) as issued by the International Accounting Standards Board (IASB), b) the audited financial statements of UBS AG, the Parent Bank, for 2011 and 2010, prepared in order to meet Swiss regulatory requirements and in compliance with Swiss Federal Banking Law, and c) additional disclosures required under SEC regulations. The basis of accounting of UBS’s Group financial statements is described in Note 1 to the financial statements. Except where oth- erwise explicitly stated in these financial statements, all financial information is in Swiss francs (CHF) and presented on a consoli- dated basis under IFRS, and all references to “UBS” refer to the UBS Group and not to the Parent Bank. UBS AG, the Swiss Parent Bank, includes branches worldwide and owns all the UBS Group companies, directly or indirectly. All references to 2011, 2010 and 2009 refer to the fiscal years ended 31 December 2011, 2010 and 2009, respectively. The financial statements for the UBS Group and the Parent Bank have been audited by Ernst & Young Ltd. 282 Update on internal control over financial reporting Requirement to assess internal control over financial reporting As a US-listed company, UBS is required under the Sarbanes-Oxley Act to evaluate the effectiveness of its “internal control over finan- cial reporting” on an annual basis. Management is required to de- termine, as of the end of each fiscal year, whether UBS’s internal control over financial reporting was effective or whether there was a material weakness in such controls. A material weakness is a de- ficiency or combination of deficiencies in internal control over fi- nancial reporting such that there is a reasonable possibility that a material misstatement of a registrant’s financial statements will not be prevented or detected on a timely basis. Further information concerning the purpose, scope and inherent limitations of internal controls over financial reporting is included in Management’s Re- port on Internal Control over Financial Reporting on the next page. Evaluation following discovery of unauthorized trading Following the discovery in September 2011 of unauthorized and fictitious trading in our Global Synthetic Equity business unit in London, management determined that certain controls designed to prevent or detect the use of unauthorized and fictitious trans- actions on a timely basis were not operating effectively, and had not been operating effectively as of 31 December 2010. Specifi- cally (i) the control requiring bilateral confirmation with counter- parties of trades within our Investment Bank’s equities business with settlement dates of greater than 15 days after trade date was not operating, and when such trades were cancelled, re- booked or amended, the related monitoring control to ensure the validity of these changes ceased to operate effectively, and (ii) the controls in the inter-desk reconciliation process within the Invest- ment Bank’s equities and fixed income, currencies and commodi- ties businesses to ensure that internal transactions are valid and accurately recorded in our books and records, including controls over cancellations and amendments of internal trades that require supervisor review, intervention and resolution, did not operate ef- fectively. The controls described in clauses (i) and (ii) are referred to below as the “Confirmation and Reconciliation Controls”. Management at the same time confirmed that the financial effect of the unauthorized trading activity was fully reflected in UBS’s third quarter 2011 financial report, and reconfirmed the reliability of the consolidated financial statements included in UBS’s 2010 Annual Report. Evaluation as of 31 December 2011 UBS management has assessed the effectiveness of UBS’s internal control over financial reporting as of 31 December 2011. Based on the remedial work conducted during the fourth quarter of 2011, management confirmed that the Confirmation and Recon- ciliation Controls had been designed effectively and were in op- eration on 31 December 2011. While significant progress had been made, management recognized that, particularly given the relatively brief period since the unauthorized trading incident was discovered, a longer period of operational testing and further re- finement would be necessary before it could conclude that the Confirmation and Reconciliation Controls were operating effec- tively. Based on this assessment, management concluded that the remediation of the material weakness in UBS’s internal control over financial reporting was not yet complete, and accordingly assessed UBS’s internal control over financial reporting as ineffec- tive, as of 31 December 2011. Notwithstanding the foregoing, we have determined that UBS’s consolidated financial statements in- cluded in this report fairly pre sent, in all material respects, our fi- nancial position on 31 December 2009, 2010 and 2011 and our results of operations and cash flows for the years then ended in accordance with IFRS. Remediation of identified control deficiencies As soon as we identified the control deficiencies referred to above, we initiated work to remediate them. The confirmation control and the monitoring control over the validity of changes to trades have been reactivated and refined, and we are extensively modifying our front-to-back control process with a view to ensur- ing that the transactions identified by the inter-desk reconcilia- tion process referred to above are effectively reviewed, investi- gated and resolved on a timely basis. We have also developed new monitoring reports and processes as part of a broader pro- gram we have initiated to strengthen the effectiveness of super- visory oversight. The confirmation control and the monitoring control over the validity of changes to trades were placed into operation in the fourth quarter of 2011, and their operational effectiveness has been tested for each month from November 2011 through February 2012. Before we confirm that the Confir- mation and Reconciliation Controls are effective, we will perform additional testing of their operational effectiveness, and further refine them as appropriate. In view of the progress that has been made through the date of this report, management believes that in the near future it will be able to determine that the Confirmation and Reconciliation Controls are operating effectively. Any such determination in the near future would be made on an interim basis, as management’s required annual assessment for 2012 will be made only after the end of the year. In addition, our auditor, Ernst & Young Ltd, will audit our internal controls over financial reporting as of 31 De- cember 2012. 283 n o i t a m r o f n i l a i c n a n i F Financial information Financial information Consolidated financial statements Consolidated financial statements Consolidated financial statements Management’s Report on Internal Control over Financial Reporting registrant’s financial statements will not be prevented or detected on a timely basis. Management’s responsibility for internal control over financial reporting The Board of Directors and management of UBS are responsible for establishing and maintaining adequate internal control over financial reporting. UBS’s internal control over financial reporting is designed to provide reasonable assurance regarding the prepa- ration and fair presentation of published financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). UBS’s internal control over financial reporting includes those policies and procedures that: – Pertain to the maintenance of records that, in reasonable de- tail, accurately and fairly reflect transactions and dispositions of assets; – Provide reasonable assurance that transactions are recorded as necessary to permit preparation and fair presentation of finan- cial statements, and that receipts and expenditures of the com- pany are being made only in accordance with authorizations of UBS management; and – Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the fi- nancial statements. Because of its inherent limitations, internal control over finan- cial reporting may not prevent or detect misstatements. Also, pro- jections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management is required to determine, as of the end of each fiscal year, whether UBS’s internal control over financial reporting was effective or whether there was a material weakness in such controls. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a Management’s assessment of internal control over financial reporting at 31 December 2011 Following the discovery in September 2011 of unauthorized and fictitious trading in our Global Synthetic Equity business unit in London, management determined that certain controls designed to prevent or detect the use of unauthorized and fictitious trans- actions on a timely basis were not operating effectively. Specifi- cally (i) the control requiring bilateral confirmation with counter- parties of trades within our Investment Bank’s equities business with settlement dates of greater than 15 days after trade date was not operating, and when such trades were cancelled, re- booked or amended, the related monitoring control to ensure the validity of these changes ceased to operate effectively, and (ii) the controls in the inter-desk reconciliation process within the Invest- ment Bank’s equities and fixed income, currencies and commodi- ties businesses to ensure that internal transactions are valid and accurately recorded in our books and records, including controls over cancellations and amendments of internal trades that require supervisor review, intervention and resolution, did not operate ef- fectively. UBS management has assessed the effectiveness of UBS’s in- ternal control over financial reporting as of 31 December 2011 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, man- agement concluded that the remediation of the material weak- ness in UBS’s internal control over financial reporting arising from the control deficiencies noted above was not yet complete, and accordingly assessed UBS’s internal control over financial report- ing as ineffective, as of 31 December 2011. The effectiveness of UBS’s internal control over financial re- porting as of 31 December 2011 has been audited by Ernst & Young Ltd, UBS’s independent registered public accounting firm, as stated in their report appearing in pages 285 to 286 below, which, consistent with management’s assessment, expressed an adverse opinion on the effectiveness of UBS’s internal control over financial reporting as of 31 December 2011. 284 n o i t a m r o f n i l a i c n a n i F 285 Financial information Consolidated financial statements 286 n o i t a m r o f n i l a i c n a n i F 287 Financial information Consolidated financial statements 288 Income statement CHF million, except per share data Note 31.12.11 31.12.10 31.12.09 31.12.10 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 / (benefit) 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 non-controlling 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 16 22 36 22 8 8 17,969 (11,143) 6,826 (84) 6,742 15,236 4,343 1,467 27,788 15,591 5,959 761 0 127 22,439 5,350 923 4,426 0 0 0 4,427 268 268 0 4,159 4,158 0 1.10 1.10 0.00 1.08 1.08 0.00 18,872 (12,657) 6,215 (66) 6,149 17,160 7,471 1,214 31,994 16,920 6,585 918 0 117 24,539 7,455 (381) 7,836 2 0 2 7,838 304 303 1 7,534 7,533 1 1.99 1.99 0.00 1.96 1.96 0.00 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) (2,125) 610 600 10 (2,736) (2,719) (17) (0.75) (0.74) 0.00 (0.75) (0.74) 0.00 (5) (12) 10 27 10 (11) (42) 21 (13) (8) (10) (17) 9 (9) (28) (44) (100) (100) (44) (12) (12) (100) (45) (45) (100) (45) (45) (45) (45) n o i t a m r o f n i l a i c n a n i F 289 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 1 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 1 Cash flow hedges Effective portion of changes in fair value of derivative instruments designated as cash­flow­hedges,­before­tax Net (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 hedges­1 Total other comprehensive income Total comprehensive income Total comprehensive income attributable to non-controlling interests Total comprehensive income attributable to UBS shareholders For the year ended 31.12.11 31.12.10 31.12.09 UBS shareholders Non-controlling interests 4,159 268 7,838 (2,125) 703 8 (6) 706 1,458 39 (950) 24 (76) 495 3,093 (1,140) (417) 1,537 2,737 6,896 292 292 292 560 (951) 2 237 121 (593) 2 (499) 72 (357) 153 13 (618) 927 (1,108) 38 (143) (1,354) 2 6,484 2 609 2 5,875 (35) (259) 22 (272) 157 70 (147) 1 (54) 27 78 (756) 257 (421) (667) (2,792) 484 (3,276) Total 4,427 995 8 (6) 998 1,458 39 (950) 24 (76) 495 3,093 (1,140) (417) 1,537 3,030 7,457 560 6,896 1 Other comprehensive income attributable to UBS shareholders related to foreign currency translations was negative CHF 909 million in 2010 and negative CHF 136 million in 2009. Other comprehensive income attributable to UBS shareholders related to financial investments available-for-sale was negative CHF 607 million in 2010 and positive CHF 17 million in 2009. Other comprehensive income related to cash flow hedges was attributable to UBS shareholders for all periods presented. 2 Presentational changes have been made to the prior period related to the redemption of preferred securities; refer to “Note 1b Changes in accounting policies, comparability and other adjustments” for more information. 290 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 of which: assets pledged as collateral Positive replacement values Cash collateral receivables on derivative instruments 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 Cash collateral payables on derivative instruments 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 Treasury shares Equity classified as obligation to purchase own shares Retained earnings Cumulative net income recognized directly in equity, net of tax Equity attributable to UBS shareholders Equity attributable to non-controlling interests Total equity Total liabilities and equity Note 31.12.11 31.12.10 31.12.09 31.12.10 % change from 9a 10 10 11 23 10 12 9a 13 14 15 16 22 17 18 10 10 11 23 10 19 18 19 20, 21 40,638 23,218 58,763 213,501 181,525 39,936 486,584 41,322 10,336 266,604 53,174 6,327 795 5,688 9,695 8,526 26,939 17,133 62,454 142,790 228,815 61,352 401,146 38,071 8,504 262,877 74,768 5,466 790 5,467 9,822 9,522 12,465 1,419,162 22,681 1,317,247 30,201 8,136 102,429 39,480 473,400 67,114 88,982 342,409 6,850 140,617 61,692 41,490 6,651 74,796 54,975 393,762 58,924 100,756 332,301 7,738 130,271 63,719 20,899 16,804 63,507 116,689 232,258 44,221 421,694 53,774 10,223 266,477 81,757 5,816 870 6,212 11,008 8,868 23,682 1,340,538 31,922 7,995 64,175 47,469 409,943 66,097 112,653 339,263 8,689 131,352 72,344 1,361,309 1,265,384 1,291,905 383 34,614 (1,160) (39) 23,603 (3,955) 53,447 4,406 57,852 383 34,393 (654) (54) 19,444 (6,693) 46,820 5,043 51,863 356 34,824 (1,040) (2) 11,910 (5,034) 41,013 7,620 48,633 1,419,162 1,317,247 1,340,538 51 36 (6) 50 (21) (35) 21 9 22 1 (29) 16 1 4 (1) (10) (45) 8 (27) 22 37 (28) 20 14 (12) 3 (11) 8 (3) 8 0 1 77 (28) 21 (41) 14 (13) 12 8 291 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 as of 1 January 2009 Change in accounting policy 1 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Treasury shares gains / (losses) and net premium / (discount) on own equity derivative activity, net of tax 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 2 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 as of 31 December 2009 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Treasury shares gains / (losses) and net premium / (discount) on own equity derivative activity, net of tax Premium / (discount) 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 2 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 as of 31 December 2010 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Treasury shares gains / (losses) and net premium / (discount) on own equity derivative activity, net of tax 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 2 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 as of 31 December 2011 Share capital Share premium Treasury shares Equity classified as obligation to purchase own shares 25,288 (3,156) (46) 293 63 Retained earnings 14,487 159 Foreign currency Financial investments translation available-for-sale (6,309) (159) 347 Total equity attributable to UBS shareholders Cash flow hedges 1,627 Non-controlling interests 8,002 Total equity 40,533 (476) 2,592 (1,040) (1,574) 1,960 (654) (2,455) 1,949 (1,268) 10,599 291 1 (87) 356 27 34,824 (43) (27) (104) (8) (113) (136) 383 34,393 188 10 19 9 (5) 44 (2) (52) (54) 15 383 34,614 (1,160) (39) 4,159 23,603 706 (6,807) 495 252 1,537 2,600 6,896 53,447 (2,736) 11,910 (136) (6,604) 17 364 (421) 1,206 7,534 19,444 (909) (7,513) (607) (243) (143) 1,063 32,531 0 63 (476) 2,592 (1,268) 10,599 291 (87) 44 1 0 0 0 0 (3,276) 41,013 27 (1,574) 1,960 (43) (27) (104) (8) (113) (52) (136) 0 0 0 0 5,875 46,820 (2,455) 1,949 188 10 19 9 0 0 0 0 15 (5) 0 63 (476) 2,592 (1,268) 10,599 291 1 (87) (849) 44 (7) 3 (13) (2,792) 48,633 27 (1,574) 1,960 (43) (27) (104) (8) (113) (305) (52) (2,622) (130) (264) 6,484 51,863 0 (2,455) 1,949 188 10 19 9 0 15 (269) (882) (4) (47) 7,457 57,852 (849) (7) 3 (13) 484 7,620 (305) (2,622) 3 6 (264) 609 3 5,043 (269) (882) 1 (47) 560 4,406 1 In 2011, we adjusted the 2009 opening balance of retained earnings by a credit of CHF 159 million and foreign currency translation by a corresponding debit of CHF 159 million to reflect a change in accounting policy. Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” for more information. 2 Represents dividend payment obligations for preferred securities. 3 Presentational changes have been made to the prior period related to the redemption of preferred securities; refer to “Note 1b Changes in accounting policies, comparability and other adjustments” for more information. 292 Statement of changes in equity CHF million Balance as of 1 January 2009 Change in accounting policy 1 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Treasury shares gains / (losses) and net premium / (discount) on own equity derivative activity, net of tax 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 2 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 as of 31 December 2009 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Treasury shares gains / (losses) and net premium / (discount) on own equity derivative activity, net of tax Premium / (discount) 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 2 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 as of 31 December 2010 Issuance of share capital Acquisition of treasury shares Disposition of treasury shares Treasury shares gains / (losses) and net premium / (discount) on own equity derivative activity, net of tax 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 2 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 as of 31 December 2011 Share capital Share premium Treasury shares purchase own shares 25,288 (3,156) (46) Equity classified as obligation to 293 63 Retained earnings 14,487 159 Foreign currency translation Financial investments available-for-sale (6,309) (159) 347 Cash flow hedges 1,627 356 27 34,824 (2,736) 11,910 (136) (6,604) 17 364 (421) 1,206 383 34,393 7,534 19,444 (909) (7,513) (607) (243) (143) 1,063 (476) 2,592 (1,040) (1,574) 1,960 (654) (2,455) 1,949 (1,268) 10,599 291 1 (87) (43) (27) (104) (8) (113) (136) 188 10 19 9 (5) 44 (2) (52) (54) 15 Total equity attributable to UBS shareholders 32,531 0 63 (476) 2,592 (1,268) 10,599 291 1 (87) 0 44 0 0 0 (3,276) 41,013 27 (1,574) 1,960 (43) (27) (104) (8) (113) 0 (52) 0 (136) 0 5,875 46,820 0 (2,455) 1,949 188 10 19 9 0 0 15 0 (5) 0 1 In 2011, we adjusted the 2009 opening balance of retained earnings by a credit of CHF 159 million and foreign currency translation by a corresponding debit of CHF 159 million to reflect a change in accounting policy. Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” for more information. 2 Represents dividend payment obligations for preferred securities. 3 Presentational changes have been made to the prior period related to the redemption of preferred securities; refer to “Note 1b Changes in accounting policies, comparability and other adjustments” for more information. 383 34,614 (1,160) (39) 4,159 23,603 706 (6,807) 495 252 1,537 2,600 6,896 53,447 Non-controlling interests 8,002 Total equity 40,533 0 63 (476) 2,592 (1,268) 10,599 291 1 (87) (849) 44 (7) 3 (13) (2,792) 48,633 27 (1,574) 1,960 (43) (27) (104) (8) (113) (305) (52) (2,622) (130) (264) 6,484 51,863 0 (2,455) 1,949 188 10 19 9 0 (269) 15 (882) (4) (47) 7,457 57,852 293 n o i t a m r o f n i l a i c n a n i F (849) (7) 3 (13) 484 7,620 (305) (2,622) 3 6 (264) 609 3 5,043 (269) (882) 1 (47) 560 4,406 Financial information Consolidated financial statements Equity attributable to non-controlling interests CHF million Preferred securities 1 Balance at the beginning of the year Redemptions 2 Foreign currency translation 3 Balance at the end of the year Other non-controlling interests at the end of the year Total equity attributable to non-controlling interests For the year ended 31.12.11 31.12.10 31.12.09 4,907 (882) 334 4,359 47 4,406 7,254 (2,622) 4 275 4 4,907 136 5,043 7,381 (7) (120) 7,254 366 7,620 1 Increases and offsetting decreases due to dividends are excluded from this table. 2 Represents nominal amount translated at the historical currency exchange rate. 3 In 2011, foreign currency translation losses of CHF 121 million were offset by the derecognition of cumulative foreign currency translation losses of CHF 455 million related to the redemption of trust preferred securities, which represent the difference between the historical currency exchange rate at issuance and the currency exchange rate prevailing at the redemption date. 4 Presentational changes have been made to the prior period related to the redemption of preferred securities; refer to “Note 1b) Changes in accounting policies, comparability and other adjustments” for more information. Number of shares Shares issued Balance at the beginning of the year Issuance of shares Balance at the end of the year Treasury shares Balance at the beginning of the year Acquisitions Disposals Balance at the end of the year Conditional share capital On 31 December 2011, 148,639,326 additional shares could have been issued to fund UBS’s employee share option programs. Fur- ther conditional capital of up to 100,000,000 shares was avail- able in connection with an arrangement with the Swiss National Bank (SNB). The SNB provided a loan to a fund owned and con- trolled by the SNB (the SNB StabFund), to which UBS transferred certain illiquid securities and other positions. As part of this ar- For the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 3,830,840,513 3,558,112,753 2,932,580,549 1,281,386 272,727,760 625,532,204 3,832,121,899 3,830,840,513 3,558,112,753 38,892,031 37,553,872 155,636,639 105,824,816 61,903,121 33,566,097 (109,573,119) (104,486,657) (57,915,346) 84,955,551 38,892,031 37,553,872 8 (100) 0 4 47 5 118 rangement, UBS granted warrants on shares to the SNB and these warrants become exercisable if the SNB incurs a loss on its loan to the SNB StabFund. On 14 April 2010 the annual general meeting of UBS AG shareholders approved the creation of conditional capital to a maximum amount of 380,000,000 shares for conversion rights / warrants granted in connection with the issuance of bonds or similar financial instruments. These positions are shown as conditional share capital in the UBS AG (Parent Bank) disclosure. 294 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 Net cash collateral on derivative instruments Accrued expenses, deferred income and other liabilities Income taxes paid, net of refunds Net cash flow from / (used in) operating activities Cash flow from / (used in) investing activities Purchase of subsidiaries, associates and intangible assets Disposal of subsidiaries, associates and intangible assets 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 short-term debt 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 non-controlling interests Dividends paid to / decrease in non-controlling 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: 1 Cash and balances with central banks Money market paper 2 Due from banks 3 Total For the year ended 31.12.11 31.12.10 31.12.09 4,427 7,838 (2,125) 761 127 84 (42) 817 (996) (5,856) (14,296) (67,020) 17,257 6,298 10,428 29,119 7,050 (2,049) (349) (14,241) (58) 50 (1,129) 233 20,281 19,377 15,338 (1,885) 0 52,590 (62,626) 1 (749) 2,670 (2,129) 5,678 79,934 85,612 40,638 3,900 41,074 85,612 918 117 66 (81) (605) (531) 1,125 9,022 (25,048) 22,634 (3,429) 608 9,277 (988) (7,039) (498) 13,385 (75) 307 (541) 242 4,164 4,097 4,459 (1,456) (113) 78,418 (77,497) 6 (2,053) 1,764 (12,181) 7,066 72,868 79,934 26,939 17,110 35,885 79,934 1,048 1,323 1,832 (37) (960) 425 8,355 (41,766) 162,822 43,344 (316) (4,208) (41,351) (11,916) (29,242) (505) 86,723 (42) 296 (854) 163 (78,376) (78,812) (60,040) 673 3,726 67,062 (65,024) 3 (583) (54,183) 5,529 (40,744) 113,611 72,868 20,899 6,327 45,642 72,868 1 In 2011, we have refined our definition of cash and cash equivalents. Prior periods have been adjusted accordingly. Refer to “Note 1 Summary of significant accounting policies” for more information. 2 Money market paper is included in the balance sheet under Trading portfolio assets (31 December 2011: CHF 1,783 million, 31 December 2010: CHF 11,750 million) and Financial investments available-for-sale (31 December 2011: CHF 2,117 mil- lion, 31 December 2010: CHF 5,360 million). CHF 0 million and CHF 9,941 million of money market paper was pledged as of 31 December 2011 and 31 December 2010, respectively. 3 Includes positions recognized in the balance sheet under Due from banks (31 December 2011: CHF 18,733 million, 31 December 2010: CHF 15,655 million) and Cash collateral receivables on derivative instruments with bank counterparties (31 December 2011: CHF 22,341 million, 31 December 2010: CHF 20,230 million, refer to Note 10). 295 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 cash flows (continued) CHF million Additional information Cash received as interest Cash paid as interest Cash received as dividends on equity investments (including associates) Significant non-cash investing and financing activities No significant items in 2011 and 2010. CHF million Deconsolidation of UBS Pactual Financial investments available-for-sale Property and equipment Goodwill and intangible assets Debt issued 31.12.11 For the year ended 31.12.10 31.12.09 16,669 9,845 1,343 17,344 12,606 1,395 23,844 19,597 1,090 For the year ended 31.12.09 14 31 731 1,393 296 Notes to the consolidated fi nancial statements Note 1 Summary of significant accounting policies a) Significant accounting policies The principal accounting policies applied in the preparation of these consolidated fi nancial 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 fi nancial services including: advisory services, underwrit- ing, fi nancing, market-making, asset management and brokerage on a global level and retail banking in Switzerland. The Group was formed on 29 June 1998 when Swiss Bank Corporation and Union Bank of Switzerland merged. The merger was accounted for using the uniting of interests method of accounting. The consolidated fi nancial statements of UBS (the “Financial Statements”) are prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the Internation- al  Accounting Standards Board (IASB), and are stated in Swiss francs (CHF), the currency of Switzerland where UBS AG is incor- porated. On 13 March 2012, the consolidated fi nancial state- ments were authorized  for issue1. Consolidated fi nancial state- ments are prepared using uniform accounting policies for like transactions and other events in similar circumstances. Transac- tions and balances between Group companies are eliminated. Disclosures incorporated in the “Risk, treasury and capital man- agement” section which are part of these fi nancial statements are marked as audited. These disclosures relate to requirements under IFRS 7 Financial Instruments: Disclosures and IAS 1 Presentation of Financial Statements and are not repeated in the “Financial informa- tion - consolidated fi nancial statements” section. 2) Use of estimates in the preparation of the Financial Statements In preparing the Financial Statements in conformity with IFRS, management is required to make estimates and assumptions that affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of available information and application of judgment are inherent in the formation of esti- mates. 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 company (UBS AG) and its subsidiaries, including controlled special purpose entities (SPEs), presented as a single economic entity. UBS controls an entity when it has the power to govern the fi nancial and oper- ating policies of the entity. Generally this is indicated by a direct shareholding of more than one-half of the voting rights. Subsid- iaries, including SPEs that are controlled by the Group, are con- solidated from the date control is transferred to the Group and are deconsolidated from the date control ceases. Equity attributable to non-controlling interests is presented on the consolidated balance sheet within equity, and is separate from equity attributable to UBS shareholders. Net profi t attributable to non-con- trolling interests is shown separately in the income statement. Special purpose entities The Group sponsors the formation of SPEs for a variety of reasons in order to accomplish certain narrow and well-defi ned objectives. Many SPEs are established as bankruptcy remote, meaning that only the assets in the SPE are available for the benefi t of the inves- tors in the SPE and such investors have no other recourse to UBS. SPEs including trusts are consolidated when the substance of the relationship between the Group and the SPE indicates that the SPE is controlled by the Group. The following circumstances may indicate a relationship in which, in substance, UBS controls and consequently consolidates the SPE: – the activities of the SPE are being conducted on behalf of UBS according to its specifi c business needs so that UBS obtains benefi ts from the SPE’s operations; – UBS has the decision-making powers to obtain the majority of the benefi ts of the activities of the SPE or, through setting up an “autopilot” mechanism, UBS has delegated these decision- making powers; – UBS has rights to obtain the majority of the benefi ts of the SPE and, therefore, may be exposed to risks associated with 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 benefi ts from its activities. SPEs that are established to facilitate clients holding investments are structures that allow one or more clients to invest in specifi c assets or risk and reward profi les. Typically, UBS will receive service and commission fees for the creation of the SPE, or for its services as investment manager, custodian or some other capacity. Some of these SPEs are single-investor or family trusts while others allow a 1 The Board of Directors authorizes the issuance of the consolidated financial statements. On 8 March 2012 the Board convened to review and authorize the issuance of the consolidated financial statements, and delegated to the Chairman of the Audit Committee authority to give final approval based on whether or not an agreement in principle with a monoline insurer (then in the final stages of negotiation) would be signed. The agreement in prin- ciple was signed on 12 March 2012, and the consolidated financial statements were authorized for issuance on 13 March 2012. Refer to “Note 32 Events after the reporting period” for more information. 297 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) large number of investors to invest in a diversifi ed asset base through shares, notes or certifi cates. The majority of UBS’s SPEs created for client investment purposes are not consolidated. How- ever, UBS will consolidate such SPEs when a control relationship exists, for example when UBS absorbs the majority of the risks and rewards, or when UBS has unilateral liquidation rights. SPEs used for securitization are established when UBS sells as- sets to an SPE (for example, a portfolio of loans) or facilitates the purchase of assets on behalf of an SPE, and the SPE in turn sells interests in the assets as securities to investors. Consolidation of these SPEs depends mainly on whether UBS retains the majority of the risks and rewards of the assets in the SPE. UBS does not con- solidate SPEs used for securitization if it has no control over the assets and if it 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. SPEs used for credit protection are established to allow UBS to sell to and purchase from one or more investors the credit risk on portfolios, which may or may not be held by UBS. UBS generally consolidates SPEs that are used for credit protection when, for instance, UBS receives benefi ts from funding or has unilateral liq- uidation rights. Employee benefi t trusts are used in connection with share- based payment arrangements and deferred compensation schemes. Such trusts are consolidated when the substance of the relationship between UBS and the entity indicates that the entity is controlled by UBS. UBS continuously evaluates whether triggering events require the reconsideration of consolidation decisions that were made at inception of its involvement with any particular SPE. This is espe- cially relevant for securitization vehicles. Triggering events are usu- ally caused by restructuring, the vesting of potential rights and the acquisition, disposal or expiration of interests. SPEs may be con- solidated or deconsolidated depending on the facts and circum- stances of any change. Business combinations Following the adoption of IFRS 3 Business Combinations, business combinations completed after 31 December 2009 are accounted for using the acquisition method. As of the acquisition date UBS recognizes the identifi able assets acquired and the liabilities as- sumed at their acquisition-date fair values. For each business combination, UBS measures the non-controlling interests in the acquiree (being present ownership interests providing entitlement to a proportionate share of the net assets of the acquiree in the event of liquidation) either at fair value or at their proportionate share of the acquiree’s identifi able net assets. The cost of an acquisition is the aggregate of the assets trans- ferred, the liabilities incurred to former owners of the acquiree and the equity instruments issued, measured at acquisition-date fair values. Acquisition-related costs are expensed as incurred. Any contingent consideration that may be transferred by UBS is recognized at fair value at the acquisition date. If the contingent consideration is classifi ed as an asset or liability, subsequent changes in the fair value of the contingent consideration are rec- ognized in the income statement. If the contingent consideration is classifi ed as equity, it is not re-measured until it is fi nally settled. Any excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests over the net identifi able assets acquired and liabilities assumed is consid- ered goodwill and is recognized as a separate asset on the bal- ance sheet, initially measured at cost. If the fair value of the net assets of the subsidiary acquired exceeds the aggregate of the consideration transferred and the amount recognized for non- controlling interests, the difference is recognized in the income statement on the acquisition date. The accounting treatment for business combinations complet- ed prior to 1 January 2010 differed primarily in the following re- spects: – Transaction costs directly attributable to the acquisition formed part of the acquisition costs. – Any non-controlling interest were measured as a proportion of the acquiree’s identifi able net assets. – Contingent consideration was recognized if, and only if, UBS had a present obligation, economic outfl ow was likely and a reliable estimate of the amount was determinable. Subsequent adjustments to the contingent consideration were recognized as part of goodwill. 4) Associates and jointly controlled entities Investments in associates in which UBS has signifi cant infl uence are accounted for under the equity method of accounting. Nor- mally, signifi cant infl uence is indicated when UBS owns more than 20% of a company’s voting rights. Investments in associates are initially recorded at cost, and the carrying amount is increased or decreased after the date of acquisition to recognize the Group’s share of the investee’s net profi t or loss (including net profi t or loss recognized directly in equity). Interests in jointly controlled entities also are accounted for under the equity method of accounting. A jointly controlled entity is subject to a contractual agreement be- tween UBS and one or more third parties, which establishes joint control over its economic activities. Interests in such entities are classifi ed as Investments in associates on the balance sheet and for disclosure purposes. If the reporting date of an associate or joint venture is different to UBS’s reporting date, the most recently available fi nancial state- ments of the associate or joint venture are used to apply the eq- uity method. Adjustments are made for effects of signifi cant transactions or events that may occur between that date and the UBS reporting date. Investments in associates and interests in jointly controlled en- tities are classifi ed as “held for sale” if their carrying amount will be recovered principally through a sale transaction rather than through continuing use – see items 20) and 29). 298 Note 1 Summary of significant accounting policies (continued) 5) Recognition and derecognition of fi nancial instruments UBS recognizes fi nancial instruments on its balance sheet when the Group becomes a party to the contractual provisions of the instrument. UBS acts as trustee and in other fi duciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefi t plans and other institutions. Unless the recog- nition criteria for the assets are satisfi ed, these assets and the re- lated income are excluded from UBS’s fi nancial statements, as they are not assets of UBS. Financial assets UBS enters into certain transactions where it transfers fi nancial assets recognized on its balance sheet but retains either all or a portion of the risks and rewards of the transferred fi nancial assets. If all or substantially all risks and rewards are retained, the trans- ferred fi nancial assets are not derecognized from the balance sheet. Transactions where transfers of fi nancial assets result in UBS retaining all or substantially all risks and rewards include se- curities lending and repurchase transactions described under items 13) and 14). They also include transactions where fi nancial assets are sold to a third party together with a total return swap that results in UBS retaining all or substantially all the risks and rewards of the transferred assets. These types of transactions are accounted for as secured fi nancing transactions. In transactions where substantially all of the risks and rewards of ownership of a fi nancial asset are neither retained nor trans- ferred, UBS derecognizes the fi nancial asset if control over the asset is lost. The rights and obligations retained in the transfer are recognized separately as assets and liabilities, respectively. In transfers where control over the fi nancial asset is retained, the Group continues to recognize the asset to the extent of its con- tinuing involvement, determined by the extent to which it is ex- posed to changes in the value of the transferred asset. Examples of such transactions include written put options, acquired call options, or other instruments linked to the performance of the asset. Financial liabilities UBS removes a fi nancial liability from its balance sheet when it is extinguished, i.e., when the obligation specifi ed in the contract is discharged, cancelled or expired. When an existing fi nancial liabil- ity is exchanged for a new one from the same lender on substan- tially different terms, or the terms of an existing liability are sub- stantially modifi ed, such an exchange or modifi cation is treated as the derecognition of the original liability and the recognition of a new liability. Any difference in the respective carrying amounts is recognized in the income statement. arm’s length transaction. Determining fair value is considered a signifi cant accounting policy for the Group and further details are disclosed in Note 26. 7) Trading portfolio assets and liabilities Non-derivative fi nancial assets and liabilities are classifi ed at ac- quisition as held for trading and presented in the trading portfolio if they are (a) acquired or incurred principally for the purpose of selling or repurchasing in the near term; or (b) part of a portfolio of identifi ed fi nancial instruments that are managed together and for which there is evidence of a recent actual pattern of short- term profi t-taking. The trading portfolio includes non-derivative fi nancial instru- ments (including those with embedded derivatives) and commod- ities. Financial instruments which are considered derivatives in their entirety generally are presented on the balance sheet as Positive replacement values or Negative replacement values (see item 15)). The trading portfolio includes recognized assets and li- abilities relating to proprietary, hedging and client related busi- ness (refer to Note 11 for more details). Trading portfolio assets include debt instruments (including those in the form of securities, money market paper and traded corporate and bank loans); equity instruments, assets held under unit-linked contracts and precious metals and other commodities owned by the Group (“long” positions). Trading portfolio liabili- ties include obligations to deliver fi nancial instruments such as debt and equity instruments which the Group has sold to third parties, but does not own (“short” positions). Assets and liabilities in the trading portfolio are measured at fair value. Gains and losses realized on disposal or redemption of these assets and liabilities and unrealized gains and losses from changes in the fair value of these assets and liabilities are reported as Net trading income. Interest and dividend income and expense on these assets and liabilities are included in Interest and dividend income or Interest and dividend expense. The Group uses settlement date accounting when recognizing assets and liabilities in the trading portfolio. From the date a pur- chase transaction is entered into (trade date) until settlement date, UBS recognizes any unrealized profi ts and losses arising from re-measuring the transaction to fair value in Net trading income. The corresponding receivable or payable is presented on the balance sheet as a Positive replacement value or Negative replacement value, respectively. On settlement date, the 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. From the trade date of a sales transaction, unrealized profi ts and losses are no longer recognized and the asset is derecognized on settlement date. 6) Determination of fair value Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an Trading portfolio assets transferred to external parties that do not qualify for derecognition (see item 5)) and where the trans- feree has obtained the right to sell or re-pledge the assets are 299 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) classifi ed on the UBS balance sheet as Trading portfolio assets and identifi ed as Trading portfolio assets pledged as collateral. Such assets continue to be measured at fair value. UBS applies the same recognition and derecognition principles to fi nancial instruments designated at fair value as to fi nancial instruments in the trading portfolio (refer to items 5) and 7)). 8) Financial assets and Financial liabilities designated at fair value through profi t or loss (“Fair Value Option”) A fi nancial instrument may only be designated at fair value through profi t or loss at inception and this designation cannot be changed subsequently. Financial assets (refer to Note 12) and fi - nancial liabilities (refer to Note 19) designated at fair value are presented on separate lines on the face of the balance sheet. There are restrictions as to when the fair value option can be ap- plied. The conditions for applying the fair value option are met when: – the fi nancial instrument is a hybrid instrument which includes an embedded derivative; or – the fi nancial instrument is part of a portfolio which is risk man- aged on a fair value basis and reported to senior management on that basis; or – the application of the fair value option reduces or eliminates an accounting mismatch that would otherwise arise. UBS has used the fair value option to designate most of its is- sued hybrid debt instruments as Financial liabilities designated at fair value through profi t or loss, on the basis that such fi nancial instruments include embedded derivatives or are managed on a fair value basis, predominantly as follows: – Credit-linked bonds or 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 or notes: linked to a single stock, a basket of stocks or an equity index – Rates-linked bonds or notes: linked to a reference interest rate, interest rate spread or formula The fair value option is also applied to certain loans and loan com- mitments which are hedged predominantly with credit derivatives. The application of the fair value option to these instruments reduces an accounting mismatch, as the credit derivatives are accounted for as derivative instruments at fair value through profi t or loss. UBS has also applied the fair value option to certain structured loans and reverse repurchase and securities borrowing agree- ments which are part of portfolios managed on a fair value basis, and to assets held to hedge deferred cash-settled employee com- pensation awards, in order to reduce an accounting mismatch. Fair value changes related to fi nancial instruments designated at fair value through profi t or loss are recognized in Net trading income. Interest income and interest expense on fi nancial assets and liabilities designated at fair value through profi t or loss are recognized in Interest income on fi nancial assets designated at fair value or Interest expense on fi nancial liabilities designated at fair value (refer to Note 3). 9) Financial investments available-for-sale Financial investments available-for-sale are non-derivative fi nan- cial assets that are not classifi ed as held for trading, designated at fair value through profi t or loss, or loans and receivables. They are recognized on a settlement date basis. Financial investments available-for-sale include debt securities held as part of the liquidity reserve (mainly issued by government and government-controlled institutions); strategic equity invest- ments; certain investments in real estate funds; certain equity in- struments, including private equity investments; and debt instru- ments and non-performing loans acquired in the secondary market. Financial investments available-for-sale are recognized initially at fair value less direct transaction costs and are measured subse- quently at fair value. Unrealized gains or losses are reported in Equity, net of applicable income taxes, until such investments are sold, collected or otherwise disposed of, or until any such invest- ment is determined to be impaired. Unrealized gains or losses be- fore tax are presented separately in Note 13. For monetary instru- ments (such as debt securities) foreign exchange translation gains and losses determined by reference to the instrument’s amortized cost basis are recognized in Net trading income. Foreign exchange translation gains and losses related to other changes in fair value are recognized in Other comprehensive income. Foreign exchange translation gains or losses associated with non-monetary instru- ments (such as equity securities) are part of the overall fair value change of the assets and are recognized directly in Other compre- hensive income. On disposal of an investment, any related accu- mulated unrealized gains or losses included in Equity are trans- ferred to the income statement and reported in Other income; gains and losses on disposal are determined using the average cost method. Interest and dividend income on fi nancial invest- ments available-for-sale are included in Interest and dividend in- come from fi nancial investments available-for-sale; interest in- come is determined by reference to the instrument’s amortized cost basis using the effective interest rate. At each balance sheet date, UBS assesses whether there are indicators 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 af- ter the initial recognition of the investment, the estimated future cash fl ows from the investment have decreased. For equity invest- ments, a signifi cant or prolonged decline in fair value below the original cost (e.g. 20% or six months) can be considered as an objective evidence of impairment. For debt investments, objective evidence of impairment includes signifi cant fi nancial diffi culty for the issuer or counterparty; default or delinquency in interest or principal payments; or probability that the borrower will enter bankruptcy or fi nancial re-organization. If a fi nancial investment 300 Note 1 Summary of significant accounting policies (continued) available-for-sale is determined to be impaired, the related cumu- lative net unrealized loss previously recognized in Equity is includ- ed in the income statement within Other income. For equity in- struments, any further loss is recognized directly in the income statement, whereas for debt instruments, any further loss is rec- ognized in the income statement if there is additional objective evidence of impairment. After the recognition of an impairment on a fi nancial investment available-for-sale, increases in the fair value of equity instruments are reported in Equity and increases in the fair value of debt instruments up to amortized cost in original currency are recognized in Other income, provided that the fair value increase is related to an event occurring after the impair- ment loss was recorded. UBS applies the same recognition and derecognition principles to fi nancial assets available-for-sale as to fi nancial instruments in the trading portfolio (refer to items 5) and 7)), except that unreal- ized gains or losses between trade date and settlement date are recognized in Equity rather than the income statement. 10) Loans and receivables Loans and receivables are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted in an active market, not classifi ed as held-for-trading, not designated as at fair value through profi t and loss or available-for-sale, and are not assets for which the Group may not recover substantially all of its initial net investment, other than because of a credit dete- rioration. Financial assets classifi ed as Loans and receivables in- clude: – originated loans where funding is provided directly to the bor- rower; participation in a loan from another lender and pur- chased loans; – securities which are classifi ed as loans and receivables at acqui- sition date, such as auction rate securities; – securities previously in the trading portfolio and reclassifi ed to loans receivables (refer to Note 28b); – loans such as leverage fi nance loans previously in the trading portfolio and reclassifi ed (refer to Note 28b). is advanced, any fees are recognized as follows: For loan commit- ments that are not expected to result in a loan being advanced, the fees are recognized in Credit-related fees and commissions over the commitment period. For loan syndication fees where UBS does not retain a portion of the syndicated loan, fees are credited to Commission income from other services when the services have been provided. Financial assets reclassifi ed to loans and receivables When a fi nancial asset is reclassifi ed from held for trading to loans and receivables, the fi nancial asset is reclassifi ed at its fair value on the date of reclassifi cation. Any gain or loss recognized in the in- come statement before reclassifi cation is not reversed. The fair value of a fi nancial asset on the date of reclassifi cation becomes its cost basis going forward. In 2008 and 2009 UBS determined that certain fi nancial assets classifi ed as held for trading were no longer held for the purpose of selling or repurchasing in the near term and that the Group had the intention and ability to hold these as- sets for the foreseeable future, considered to be a period of ap- proximately twelve months from the reclassifi cation. Therefore, these assets were reclassifi ed from held for trading to loans and receivables. (Refer to Note 28b and Notes 9a and 9b). Renegotiated loans Subject to assessment on a case-by-case basis, UBS may restruc- ture a loan, or take possession of collateral. Restructuring may involve extending the payment arrangements or agreeing to new loan conditions. Once the terms have been renegotiated, any im- pairment is measured using the EIR as calculated before the mod- ifi cation of terms. Because the terms and conditions of the loan were renegotiated the loan is not considered as past due. Man- agement 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 impairment assessment, cal- culated using the loan’s original EIR. If a loan has a variable inter- est rate, the discount rate for measuring any impairment loss is the current EIR. For an overview of fi nancial assets accounted for as loans and receivables, refer to the measurement category Financial assets at amortized cost presented in Note 28. Loans and receivables are recognized when funding is ad- vanced to borrowers. They are recorded initially at fair value, based on the amount given to originate or purchase the loan, together with any direct transaction costs. Subsequently they are measured at amortized cost using the effective interest rate (EIR) method. Interest on loans and receivables is included in Interest earned on loans and advances and is recognized on an accrual basis. Fees and direct costs relating to loan origination, refi nanc- ing 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 EIR method. Where no loan is expected to or 11) Allowances and provisions for credit losses An allowance or provision for credit losses is established if there is objective evidence that the Group will be  unable to collect all amounts due (or the equivalent value) on a claim according to the original contractual terms (refer to Note 9b). A “claim” means a loan or receivable carried at amortized cost, or a commitment such as a letter of credit, a guarantee, or another similar instru- ment. Objective evidence of impairment includes signifi cant fi nancial diffi culty for the issuer or counterparty; default or delin- quency in interest or principal payments; or probability that the borrower will enter bankruptcy or fi nancial reorganization. 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 301 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) reported in Other liabilities. Additions to allowances and provi- sions for credit losses are recognized as a Credit loss expense. analysis may occur sooner if other objective evidence indicates that a loan may be impaired. Allowances and provisions for credit losses are evaluated at a counterparty-specifi c level and collectively based on the following principles: Counterparty-specifi c: A claim is considered impaired when management determines that it is probable that the Group will not be able to collect all amounts due (or the equivalent value) according to the original contractual terms. Individual credit ex- posures are evaluated based on the borrower’s character, overall fi nancial 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 esti- mated recoverable amount is the present value, using the loan’s original EIR, of expected future cash fl ows, including amounts that may result from restructuring or the liquidation of collateral. Impairment is measured and allowances for credit losses are es- tablished for the difference between the carrying amount and the estimated recoverable amount. Upon impairment, the ac- crual 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. Generally all impaired claims are reviewed and analyzed at least annually. Any subsequent changes to the amounts and tim- ing of the expected future cash fl ows compared with prior esti- mates result in a change in the allowance for credit losses and are charged or credited to Credit loss expense / recovery. An allow- ance for impairment is reversed only when the credit quality has improved to such an extent that there is reasonable assurance of timely collection of principal and interest in accordance with the original contractual terms of the claim, or the equivalent value. A write-off is made when all or part of a claim is deemed uncollect- ible or forgiven. Write-offs reduce the principal amount of a claim and are charged against previously established allowances for credit losses or, if no allowance has been established previously, directly to Credit loss expense / recovery. Recoveries, in part or in full, of amounts previously written off are credited to Credit loss expense / recovery. A restructuring of a fi nancial asset could result in the original loan being derecognized and a new loan being recognized. The new loan is measured at fair value at initial recognition. Any al- lowance taken against the original loan is removed and recog- nized as a write-off. If the rights existing prior to the restructuring have not been legally waived, the original gross counterparty ex- posure still exists, although a new loan has been recognized. A loan is classifi ed as non-performing when the payment of interest, principal or fees is overdue by more than 90 days and there is no fi rm evidence that it will be made good by later pay- ments or the liquidation of collateral; insolvency proceedings have commenced against the fi rm; or obligations have been restruc- tured on concessionary terms. Loans in arrears for 90 days are evaluated individually for impairment; however, an impairment Collectively: All loans for which no impairment is identifi ed at a counterparty-specifi c level are grouped on the basis of the bank’s internal credit grading system that considers credit risk character- istics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors, to collectively assess whether impairment exists within a portfolio. Future cash fl ows for a group of fi nancial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experi- ence for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to refl ect the effects of current conditions of the group of fi nancial assets on which the historical loss experi- ence is based and to remove the effects of conditions in the his- torical period that do not exist currently in the portfolio. Estimates of changes in future cash fl ows for the group of fi nancial assets refl ect, and are directionally consistent with, changes in related observable data from year to year. The methodology and assump- tions used for estimating future cash fl ows for the group of fi nan- cial assets are reviewed regularly to reduce any differences be- tween loss estimated and actual loss experience. Allowances from collective assessment of impairment are recognized as Credit loss expense / recovery and result in an offset to the aggregated loan position. As the allowance cannot be allocated to individual loans, the loans are not considered to be impaired and interest is ac- crued on each loan according to its contractual terms. If objective evidence becomes available that indicates that an individual fi - nancial asset is impaired, it is removed from the group of fi nancial assets assessed for impairment on a collective basis and is as- sessed separately as a counterparty-specifi c claim. Reclassifi ed securities and acquired securities carried at amor- tized cost: Estimated cash fl ows associated with fi nancial assets reclassifi ed from the held for trading to loans and receivables in accordance with the requirements in item 10 above and other similar assets acquired subsequently, are revised periodically. Ad- verse revisions in cash fl ow estimates related to credit events are recognized in profi t or loss as credit loss expenses. For reclassifi ed securities, increases in estimated future cash receipts as a result of increased recoverability are recognized as an adjustment to the EIR on the loan from the date of change (refer to Notes 9a, 9b and 28b). 12) Securitization structures set up by UBS UBS securitizes various fi nancial assets, which generally results in the sale of these assets to special purpose entities, which in turn issue securities to investors. UBS applies the policies set out in item 3) in determining whether the respective special purpose en- tity must be consolidated and those set out in item 5) in determin- ing whether derecognition of transferred fi nancial assets is ap- propriate. The following statements mainly apply to transfers of fi nancial assets, which qualify for derecognition. 302 Note 1 Summary of significant accounting policies (continued) Gains or losses related to the sale of fi nancial assets involving a securitization are generally recognized when the derecognition criteria are satisfi ed and are classifi ed in Net trading income. Interests in the securitized fi nancial assets may be retained in the form of senior or subordinated tranches, interest-only strips or other residual interests (“retained interests”). Retained interests are primarily recorded in Trading portfolio assets and carried at fair value. Synthetic securitization structures typically involve de- rivative fi nancial instruments for which the principles set out in item 15) apply. UBS acts as structurer and placement agent in various mort- gage-backed securities (MBS) and other asset-backed securities (ABS) securitizations. In such capacity, UBS may purchase collat- eral on its own behalf or on behalf of customers during the pe- riod prior to securitization. UBS then typically sells the collateral into designated trusts upon closing of the securitization. In other securitizations, UBS may only provide fi nancing to a designated trust in order to fund the purchase of collateral by the trust prior to securitization. UBS underwrites the offerings to investors, earning fees for its placement and structuring services. Consis- tent 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, prepayment speeds, default rates, loss severity, interest rate volatilities and spreads. Where possible, assumptions based on observable transactions are used to  determine the fair value of retained interests, but for some interests substantially no observable information is available. 13) Securities borrowing and lending Securities borrowing and securities lending transactions are gen- erally entered into on a collateralized basis. In such transactions, UBS typically lends or borrows equity and debt securities in ex- change for securities or cash collateral. Additionally, UBS borrows securities from its clients’ custody accounts in exchange for a fee. The transactions are normally conducted under standard agree- ments employed by fi nancial market participants and are under- taken with counterparties subject to UBS’s normal credit risk con- trol processes. UBS monitors the market value of the securities received or delivered on a daily basis and requests or provides additional collateral or returns or recalls surplus collateral in ac- cordance with the underlying agreements. Cash collateral received is recognized with a corresponding ob- ligation to return it (Cash collateral on securities lent) and cash collateral delivered is derecognized and a corresponding receiv- able refl ecting UBS’s right to receive it back is recorded (Cash col- lateral on securities borrowed). The securities which have been transferred are not recognized on or derecognized from the bal- ance sheet unless the risks and rewards of ownership are also transferred (see item 5). In those transactions where UBS transfers owned securities and where the borrower is granted the right to sell or re-pledge the transferred securities, the securities are pre- sented on the balance sheet as Trading portfolio assets, of which: assets pledged as collateral. Securities received in a borrowing transaction are disclosed as off-balance sheet items if UBS has the right to resell or re-pledge them, with additional disclosure for securities that UBS has actually re-sold or re-pledged (see Note 24). The sale of securities received in a borrowing or lending transaction generally triggers the recognition of a trading liability (short sale). Interest receivable or payable for fi nancing transactions is rec- ognized in the income statement on an accrual basis and is re- corded as Interest income or Interest expense. 14) Repurchase and reverse repurchase transactions Securities purchased under agreements to resell (Reverse repur- chase agreements) and securities sold under agreements to re- purchase (Repurchase agreements) are treated as collateralized fi nancing transactions. Nearly all repurchase and reverse repur- chase agreements involve debt instruments, such as bonds, notes or money market paper. The transactions are normally conducted under standard agreements employed by fi nancial market participants and are undertaken with counterparties subject to UBS’s normal credit risk control processes. UBS moni- tors the market value of the securities received or delivered on a daily basis and requests or provides additional collateral or re- turns or recalls surplus collateral in accordance with the underly- ing agreements. In a reverse repurchase agreement, the cash delivered is derec- ognized and a corresponding receivable, including accrued inter- est, is recorded in the balance sheet line Reverse repurchase agreements, recognizing UBS’s right to receive the cash back. In a repurchase agreement, the cash received is recognized and a cor- responding obligation, including accrued interest, is recorded in the balance sheet line Repurchase agreements. Securities received under reverse repurchase agreements and securities delivered un- der repurchase agreements are not recognized on or derecog- nized from the balance sheet, unless the risks and rewards of ownership are obtained or transferred. In repurchase agreements where UBS transfers owned securities and where the recipient is granted the right to resell or re-pledge them, the securities are presented on the balance sheet as Trading portfolio assets, of which: assets pledged as collateral. Securities received in reverse repurchase agreements are disclosed as off-balance sheet items if UBS has the right to resell or re-pledge them, with additional dis- closure for securities that UBS has actually resold or re-pledged (see Note 24). Additionally, the sale of securities received in re- verse repurchase transactions generally triggers the recognition of a trading liability (short sale). Interest earned on reverse repurchase agreements and interest incurred on repurchase agreements is recognized as interest in- come or interest expense over the life of each agreement. The Group offsets reverse repurchase agreements and repur- chase agreements with the same counterparty, maturity, currency 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) and Central Securities Depository (CSD) in accordance with the relevant accounting requirements. 15) Derivative instruments and hedge accounting Derivatives are initially recognized at fair value at the date the derivative contract is entered into and are remeasured subse- quently to fair value. The method of recognizing fair value gains or losses depends on whether derivatives are held for trading or are designated and effective as hedging instruments. If designat- ed as hedging instruments, the method of recognizing gains or losses depends on the nature of the risk being hedged. Derivative instruments are generally reported on the balance sheet as Positive replacement values or Negative replacement val- ues. Derivative instruments that trade on an exchange or through a clearing house are generally classifi ed as Cash collateral receiv- ables or payables on derivative instruments. They are not classifi ed within replacement values because the change in fair value of these instruments is economically settled each day through the cash payment of variation margin. Products that receive this treat- ment are futures contracts, 100% daily margined exchange trad- ed options, interest rate swaps transacted with the London Clear- ing House and certain credit derivative contracts. Changes in the fair values of derivatives are recorded in Net trading income, un- less the derivatives are designated and effective as hedging instru- ments in certain types of hedge accounting relationships. Hedge accounting The Group also uses derivative instruments as part of its asset and liability management activities to manage exposures particularly to interest rate and foreign currency risks, including exposures arising from forecast transactions. If derivative and non-derivative instruments meet certain criteria specifi ed below, they are desig- nated as hedging instruments in hedges of the change in fair value of recognized assets or liabilities (‘fair value hedges’); hedg- es of the variability in future cash fl ows attributable to a recog- nized asset or liability, or a highly probable forecast transaction (‘cash fl ow hedges’); or hedges of a net investment in a foreign operation (‘net investment hedges’). At the time a fi nancial instrument is designated in a hedge re- lationship, the Group formally documents the relationship be- tween the hedging instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the hedge transaction and 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 instruments, primarily derivatives, have been “highly effective” in offsetting changes in the fair val- ue or cash fl ows associated with designated risk of the hedged items. UBS regards a hedge as highly effective if the following criteria are met: a) at inception of the hedge and throughout its life, the hedge is expected to be highly effective in achieving off- setting changes in fair value or cash fl ows 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 fl ows that could ultimately affect the reported net profi t or loss. The Group discon- tinues hedge accounting voluntarily or when it determines that a hedging instrument is not, or has ceased to be, highly effective as a hedge; when the derivative expires or is sold, terminated or ex- ercised; 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 instrument differ from changes in the fair value of the hedged item attributable to the hedged risk or the amount by which changes in the present value of future cash fl ows of the hedging instrument exceed changes (or expected changes) in the present value of future cash fl ows of the hedged item. Such ineffectiveness is recorded in current peri- od earnings in Net trading income. Interest income and expense on derivatives designated as hedging instruments in effective hedge relationships is included in Net interest income. Fair value hedges For qualifying fair value hedges, the change in the fair value of the hedging instrument is recognized in the income statement along with the change in the fair value of the hedged item that is at- tributable to the hedged risk. In fair value hedges of interest rate risk, the fair value change of the hedged item attributable to the hedged risk is refl ected in the carrying value of the hedged item. For a portfolio hedge of interest rate risk, the equivalent change in fair value is refl ected in a separate line within Other assets or Other liabilities. 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 amor- tized to the income statement over the remaining term until ma- turity. Cash fl ow hedges A fair value gain or loss associated with the effective portion of a derivative designated as a cash fl ow hedge is recognized initially in Equity. When the cash fl ows that the derivative is hedging ma- terialize, resulting in income or expense, then the associated gain or loss on the hedging derivative is simultaneously transferred from Equity to the corresponding income or expense line item. If a cash fl ow hedge for a forecasted transaction is deemed to be no longer effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative previously reported in Equity remains there until the committed or forecast- ed transaction occurs. If the forecasted transaction is no longer expected to occur, the deferred gain or loss is transferred immedi- ately to profi t or loss. 304 Note 1 Summary of significant accounting policies (continued) Hedges of net investments in foreign operations Hedges of net investments in foreign operations are accounted for similarly to cash fl ow hedges. Gains or losses on the hedging in- strument relating to the effective portion of the hedge are recog- nized directly in Equity (and presented in the statement of changes in equity and statement of comprehensive income under Foreign currency translation), while any gains or losses relating to the inef- fective and / or undesignated portion (for example, the interest ele- ment of a forward contract) are recognized in the income state- ment. On disposal of the foreign operation, the cumulative value of any such gains or losses associated with the entity recognized directly in Equity is reclassifi ed 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 cases, the forward points on short duration foreign exchange contracts are reported in Net interest income. Re- fer to Note 23 for more information on “economic hedges”. Irrevocable loan commitments (where UBS has no right to withdraw the loan commitment once communicated to the ben- efi ciary, or which are revocable only due to automatic cancellation upon deterioration in a borrower’s creditworthiness) are classifi ed into the following categories: – Derivative loan commitments (loan commitments that can be settled net in cash or by delivering or issuing another fi nancial instrument), or if there is evidence that UBS is selling similar loans resulting from its loan commitments before or shortly after origination (refer to item 15). – Loan commitments designated at fair value through profi t and loss (“Fair value option”) (refer to item 8). – All other loan commitments, which are not recorded in the balance sheet. However, a provision is recognized if it is prob- able that a loss has been incurred and a reliable estimate of the amount of the obligation can be made (refer to item 27). Oth- er loan commitments include irrevocable forward starting re- verse repurchase and irrevocable securities borrowing agree- ments. Any increase in the liability relating to these other loan commitments is recorded in the income statement in Credit loss expense / recovery. Embedded derivatives A derivative may be embedded in a “host contract”. Such combi- nations are known as hybrid instruments and arise predominantly from the issuance of certain structured debt instruments. The em- bedded derivative is generally required to be separated from the host contract and accounted for as a standalone derivative instru- ment at fair value through profi t or loss, if (a) the host contract is not carried at fair value with changes in fair value reported in the income statement, (b) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, and (c) the embed- ded derivative actually meets the defi nition of a derivative. Bifur- cated embedded derivatives are presented on the same balance sheet line as the host contract, and are shown in Note 28 in the “Held for trading” category, refl ecting the measurement and rec- ognition principles applied. Typically, UBS applies the fair value option to hybrid instru- ments (see item 8)), in which case bifurcation of an embedded derivative component is not required. 16) Loan commitments Loan commitments are defi ned amounts (unutilized credit lines or undrawn portions of credit lines) against which customers can borrow money at defi ned 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 not recognized on the balance sheet and are not included in the off balance sheet disclosures. Upon a loan draw- down by the counterparty, the amount of the loan is accounted for in accordance with Loans and receivables (refer to item 10)). 17) Financial guarantee contracts Financial guarantee contracts are contracts that require the issuer to make specifi ed payments to reimburse the holder for an in- curred loss because a specifi ed debtor fails to make payments when due in accordance with the terms of a specifi ed debt instru- ment. UBS issues such fi nancial guarantees to banks, fi nancial institutions and other parties on behalf of customers to secure loans, overdrafts and other banking facilities. Certain written fi nancial guarantees that are managed on a fair value basis are designated at fair value through profi t or loss (refer to item 8). Financial guarantees that are not managed on a fair value basis are initially recognized in the fi nancial statements at fair value. Subsequent to initial recognition, these fi nancial guarantees are measured at the higher of the amount initially recognized less cumulative amortization, and the best estimate of the expenditure required to settle the fi nancial obligation at the balance sheet date. Any increase in the liability relating to guarantees is recorded in the income statement in Credit loss expense / recovery. 18) Cash and cash equivalents For the purposes of the statement of cash fl ows, cash and cash equivalents comprise balances with an original maturity of three months or less including cash, money market paper and balances with central and other banks. Refer to Note 1b for more informa- tion on our defi nition of cash and cash equivalents. 19) 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 rec- 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) ognized within the Trading portfolio assets. Changes in fair value less costs to sell are recorded in Net trading income. 20) Property and equipment Property and equipment includes own-used properties, invest- ment properties, leasehold improvements, IT hardware, externally purchased and internally developed software and communication and other similar equipment. With the exception of investment properties, Property and equipment is carried at cost, less accu- mulated depreciation and accumulated impairment losses, and is reviewed periodically for impairment. The useful lives of property and equipment are estimated on the basis of the economic utiliza- tion of the asset. Classifi cation of own-used property Own-used property is defi ned as property held by the Group for use in the supply of services or for administrative purposes, whereas investment property is defi ned 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 classifi cation is based on whether or not these portions can be sold separately. If the portions of the property can be sold sepa- rately, they are separately accounted for as own-used property and investment property. If the portions cannot be sold separately, the whole property is classifi ed as own-used property unless the portion used by the Group is minor. The classifi cation of property is reviewed on a regular basis to account for major changes in its usage. When the use of a property changes from own-used to investment property, the property is remeasured to fair value and reclassifi ed as investment property. Any gain arising on remea- surement is recognized in profi t or loss to the extent that it re- verses a previous impairment loss on the specifi c property, with any remaining gain recognized in other comprehensive income and presented in the revaluation reserve in equity. Any loss is rec- ognized immediately in profi t or loss. Investment property Investment property is carried at fair value with changes in fair value recognized in the income statement in Other income in the period of change. UBS uses its internal real estate experts to de- termine the fair value of investment property by applying recog- nized valuation techniques. In cases where prices of recent market transactions of comparable properties are available, fair value is determined by reference to these transactions. When the use of a property changes such that it is reclassifi ed as own-used property, its fair value at the date of reclassifi cation becomes its cost for subsequent accounting. make them suitable for the intended purpose. If required, the present value of estimated reinstatement costs to bring a leased property back into its original condition at the end of the lease, is capitalized as part of total leasehold improvements with a corresponding liability recognized to refl ect the obligation in- curred. Reinstatement costs are recognized in profi t and loss through depreciation of the capitalized leasehold improvements over their estimated useful lives. Property held for sale Where UBS has decided to sell non-current assets such as prop- erty or equipment and the sale of these assets is highly probable to happen within 12 months, these assets are classifi ed as non- current assets held for sale and are recorded in Other assets. Upon classifi cation as held for sale, they are no longer depreciated and are carried at the lower of book value or fair value less cost to sell. Software Software development costs are capitalized when we are able to assess how a program generates future economic benefi ts for UBS, determine the period over which these economic benefi ts will accrue to UBS and track those costs that can be capitalized to determine a reliable measurement. Internally generated software that meets these criteria and purchased software are classifi ed within IT, software and communication. Estimated useful life of property and equipment Property and equipment is depreciated on a straight-line basis over its estimated useful life as follows: Properties, excluding land Leasehold improvements Other machines and equipment IT hardware, software and communication Not exceeding 50 years Residual lease term, but not exceeding 10 years Not exceeding 10 years Not exceeding 5 years 21) 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 identifi able assets of the acquired entity at the date of acquisition. Goodwill is not amor- tized; it is tested annually for impairment and, additionally, when a reasonable indication of impairment exists. For the purpose of testing goodwill for impairment, UBS considers the segments as reported in Note 2a Segment reporting as separate cash-generat- ing units, since this is the level at which the performance of in- vestments is reviewed and assessed by management. The recover- able amount of a segment is determined on the basis of its value in use. Refer to Note 16 for details. Leasehold improvements Leasehold improvements are investments made to customize buildings and offi ces occupied under operating lease contracts to Intangible assets comprise separately identifi able intangible items arising from business combinations and certain purchased trademarks and similar items. Intangible assets are recognized at 306 Note 1 Summary of significant accounting policies (continued) cost. The cost of an intangible asset acquired in a business com- bination is its fair value at the date of acquisition. Intangible as- sets with a defi nite useful life are amortized using the straight- line method over their estimated useful economic life, generally not exceeding 20 years. Intangible assets with an indefi nite use- ful life are not amortized. Generally, all identifi ed intangible as- sets of UBS have a defi nite useful life. At each balance sheet date, intangible assets are reviewed for indications of impair- ment or changes in estimated future benefi ts. 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 classifi ed into two categories: a) infra- structure, and b) customer relationships, contractual rights and other. Infrastructure consists of an intangible asset recognized in connection with the acquisition of PaineWebber Group, Inc. Cus- tomer relationships, contractual rights and other includes mainly intangible assets for client relationships, non-compete agree- ments, favorable contracts, trademarks and trade names acquired in business combinations. 22) Income taxes Income tax payable on profi ts is recognized as an expense based on the applicable tax laws in each jurisdiction in the period in which profi ts arise. The tax effects of income tax losses available for carry forward are recognized as a deferred tax asset if it is probable that future taxable profi t (based on profi t forecast as- sumptions) will be available against which those losses can be utilized. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future periods, but only to the extent that it is probable that suffi cient taxable profi ts will be available against which these differences can be utilized. De- ferred tax liabilities are recognized for temporary differences be- tween the carrying amounts of assets and liabilities in the balance sheet and their amounts as measured for tax purposes, which will result in taxable amounts in future periods. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the asset will be realized or the liability will be settled based on enacted rates. Tax assets and liabilities of the same type (current or deferred) are offset when they arise from the same tax reporting group, they relate to the same tax authority, the legal right to offset ex- ists, and they are intended to be settled net or realized simultane- ously. Current and deferred taxes are recognized as income tax ben- efi t or expense except for current and deferred taxes recognized (i) upon the acquisition of a subsidiary, (ii) for unrealized gains or losses on fi nancial investments available-for-sale, for changes in fair value of derivative instruments designated as cash fl ow hedg- es, and for certain foreign currency translations of foreign opera- tions, (iii) for certain tax benefi ts on deferred compensation awards, and (iv) for gains and losses on the sale of treasury shares. Deferred taxes recognized in a business combination (item (i)) are considered when determining goodwill. Items (ii), (iii) and (iv) are recorded in Net income recognized directly in equity. 23) Debt issued Debt issued is carried at amortized cost. In cases where, as part of the Group’s asset and liability management activity, fair value hedge accounting is applied to fi xed-rate debt instruments carried at amortized cost, their carrying amount is adjusted for changes in fair value related to the hedged exposure – refer to item 15) for further details on hedge accounting. Generally, structured notes issued are designated at fair value through profi t or loss using the fair value option, on the basis that they are managed on a fair value basis and / or that the structured notes contain an embed- ded derivative – refer to item 8) for further details on the fair value option. The fair value option is not applied to certain structured notes that contain embedded derivatives that reference foreign exchange rates and precious metal prices. For these instruments, the embedded derivative component is measured on a fair value basis and the related underlying debt host component is mea- sured on an amortized cost basis, with both components present- ed together within Debt issued. All debt issued and then repurchased by UBS in relation to mar- ket making or other activities is treated as redeemed. A gain or loss on redemption is recorded depending on whether the repur- chase 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 reis- suance of debt. Interest expense on debt instruments measured at amortized cost is included in Interest on debt issued. Refer to Note 19 for further details on debt issued. 24) Pension and other post-employment benefi t plans UBS sponsors a number of post-employment benefi t plans for its employees worldwide, which include defi ned benefi t and defi ned contribution plans, and other post-retirement benefi ts such as medical and life insurance benefi ts. Defi ned benefi t plans Typically, defi ned benefi t plans defi ne an amount of pension ben- efi t that an employee will receive on retirement, usually depen- dent on one or more factors such as age, years of service and compensation. The defi ned benefi t liability recognized in the balance sheet is the present value of the defi ned obligation at the balance sheet date less the fair value of the plan assets at the balance sheet date, together with adjustments for any unrecognized actuarial gains and losses and unrecognized past service cost. If the de- fi ned benefi t liability is negative (i.e., a defi ned benefi t asset), measurement of the asset is limited to the lower of a) the de- fi ned benefi t asset and b) the total of any cumulative unrecog- 307 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) nized net actuarial losses plus unrecognized past service cost plus the present value of economic benefi ts 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 deter- mine the present value of its defi ned benefi t obligation and the related current service cost and, where applicable, past service cost. These amounts are calculated annually by independent ac- tuaries. The principal actuarial assumptions used are set out in Note 29. UBS recognizes a portion of its actuarial gains and losses as income or expense if the net cumulative unrecognized actuarial gains and losses at the beginning of the reporting period are out- side the corridor defi ned as the greater of: a) 10% of the present value of the defi ned benefi t 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. The unrecognized actuarial gains and losses exceeding the greater of these two values are recognized in the income state- ment over the expected average remaining working lives of the employees participating in the plans. Defi ned contribution plans A defi ned contribution plan is a pension plan under which UBS pays fi xed contributions into a separate entity. UBS has no legal or constructive obligation to pay further contributions if the plan does not hold suffi cient assets to pay employees the benefi ts re- lating to employee service in the current 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 contribution. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future pay- ments is available. Other post-retirement benefi ts UBS also provides post-retirement medical and life insurance ben- efi ts to certain retirees in the US and the UK. The expected costs of these benefi ts are recognized over the period of employment using the same accounting methodology used for defi ned benefi t pension plans. 25) 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 appreciation right (SAR) plans. UBS’s equity participation plans include manda- tory, discretionary, and voluntary plans. UBS recognizes the fair value of share, option and SAR awards, determined at the date of grant, as compensation expense over the period that the employ- ee is required to provide services in order to earn the award. Awards that do not require the employee to provide future service to become entitled to the award, such as those granted to retirement eligible employees, are considered vested at the grant date. Compensation expense is fully recognized on the grant date or 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. Such 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 re- lated services have been received. Plans containing vesting conditions have either a tiered vesting structure, which vest in increments over a specifi ed period or a cliff vesting structure, which vest at the end of a specifi ed period. Compensation expense is recognized on a tiered basis for awards that have a tier vesting structure and on a straight-line basis for awards with a cliff vesting structure. Plans may contain provisions that shorten the required service period due to achievement of retirement eligibility or upon termination due to redundancy. In such instances, UBS recognizes compensation expense over the period from grant to the retirement eligibility or redundancy date. Forfeiture of these awards that occur during the service period results in a reversal of compensation expense. Equity-settled awards are classifi ed as equity instruments. The fair value of an equity-settled award is determined at the date of grant and is not subsequently remeasured, unless its terms are modifi ed such that the fair value immediately after modifi cation exceeds the fair value immediately prior to modifi cation. Any in- crease in fair value resulting from a modifi cation is recognized as compensation expense, either over the remaining service period or immediately for vested awards. Cash-settled awards are classifi ed as liabilities and remeasured to fair value at each balance sheet date as long as the award is outstanding. Decreases in fair value reduce compensation expense and, on a cumulative basis, no compensation expense is recog- nized for awards that expire worthless or remain unexercised. Details of the determination of fair value of equity participation plans are disclosed in Note 30d). Other compensation plans UBS has established other fi xed and variable deferred compensa- tion plans, the value of which is not linked to UBS’s own equity. UBS’s deferred cash compensation plans are either mandatory or discretionary plans. Deferred compensation plans include awards based on a notional cash amount, where ultimate payout is fi xed or may vary based on achievement of performance conditions. UBS recognizes compensation expense over the period that the employee is required to provide services in order to earn the award. The amount recognized during the service period is based on an estimate of the amount the bank expects to pay-out under the plan, such that cumulative expense recognized ultimately equals the cash distributed to employees. UBS also awards de- 308 Note 1 Summary of significant accounting policies (continued) ferred compensation plans in the form of alternative investment vehicles (AIVs). The grant date fair value for AIVs is based on the fair value on the grant date of the underlying assets (i.e., money market funds, UBS and non-UBS mutual funds and other UBS- sponsored funds) 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 30 for further details on equity participation and other compensation plans. 26) Amounts due under unit-linked investment contracts UBS’s fi nancial liabilities from unit-linked contracts are presented as Other liabilities (refer to Note 20) on the balance sheet. These contracts allow investors to invest in a pool of assets through in- vestment units issued by a UBS subsidiary. The unit holders receive all rewards and bear all risks associated with the reference asset pool. The fi nancial liability represents the amount due to unit holders and is equal to the fair value of the reference asset pool. Assets held under unit-linked investment contracts are pre- sented as Trading portfolio assets. Refer to Note 11. 27) Provisions Provisions are recognized when UBS has a present legal or con- structive obligation as a result of past events, it is probable that an outfl ow of resources will be required to settle or discharge the obligation and the amount can be reliably estimated. Provisions for restructuring are recognized when UBS has approved a de- tailed and formal restructuring plan and also has raised a valid expectation of the restructuring, either through commencement of the plan or announcements to the affected employees. When a provision is recognized, its amount needs to be esti- mated as the exact amount of the obligation is generally unknown. The estimate is based on all available information and refl ects the amount that in management’s opinion represents the best esti- mate of the expenditure required to settle or discharge the obliga- tion. UBS revises existing provisions up or down as soon as it is able to quantify the amounts more accurately. If the effect of the time value of money is material, provisions are discounted and mea- sured at the present value of the expenditure expected to settle or discharge the obligation, using a rate that refl ects the current mar- ket assessments of the time value of money and the risks specifi c to the obligation. The majority of UBS’s provisions relate to operational risks, liti- gation and regulatory matters, restructuring costs and provisions for loan commitments and guarantees. Provisions are refl ected under Other liabilities on the balance sheet. A provision is not recognized, but a contingent liability is disclosed, when it has yet to be confi rmed whether UBS has a present obligation as a result of past events; when it is not probable that an outfl ow of re- sources will be required to settle or discharge a present obligation, or when a suffi ciently reliable estimate of the amount of the obli- gation cannot be made. Refer to Note 21. 28) Equity, treasury shares and contracts on UBS AG shares Transaction costs related to share issuances Incremental transaction costs directly attributable to the issue of new shares or contracts with mandatory gross physical settlement classifi ed as equity instruments are recognized in Equity as “Trans- action costs related to share issuances, net of tax” and are de- ducted from Equity. Non-controlling interests Net profi t and Equity are presented including non-controlling in- terests. Net profi t is split into Net profi t attributable to UBS share- holders and Net profi t attributable to non-controlling interests. Equity is split into Equity attributable to UBS shareholders and Equity attributable to non-controlling interests. UBS AG shares held (“treasury shares”) UBS AG shares held by the Group are presented in Equity as Trea- sury shares at their acquisition cost which includes transaction costs. Treasury shares are deducted from Equity until they are can- celled 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 net cash settlement or net cash settlement option Contracts on UBS AG shares that require net cash settlement, or provide the counterparty or UBS with a settlement option which includes a choice of settling net in cash, are classifi ed as trading instruments, with changes in fair value reported in the income statement as Net trading income. Contracts with mandatory gross physical settlement (except for written put options and forward share purchase contracts) Contracts that require gross physical settlement in UBS AG shares are presented in Equity as Share premium (provided a fi xed amount of shares is exchanged against a fi xed amount of cash or another fi nancial asset) and accounted for at cost, which is added to or deducted from Equity as appropriate. Upon settlement of such contracts, the difference between the proceeds received and their cost (net of tax, if any) is reported as Share premium. Written put options and forward share purchase contracts with gross physical settlement Written put options and forward share purchase contracts with gross physical settlement, including contracts where gross physi- cal settlement is a settlement alternative, result in the recognition of a fi nancial liability booked against Equity. At the inception of the contract, the present value of the obligation to purchase own shares in exchange for cash is transferred out of Equity and recog- nized as a liability. The liability is subsequently accreted, using the EIR method, over the life of the contract to the nominal purchase obligation by recognizing interest expense. Upon settlement of 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) the contract, the liability is derecognized, and the amount of eq- uity originally recognized as a liability is reclassifi ed within Equity to Treasury shares. The premium received for writing put options is recognized directly in Share premium. and cash fl ows. If an entity or a component of an entity is classifi ed as a discontinued operation, UBS restates prior periods in the in- come statement. Refer to Note 36 for further details. Trust preferred securities issued UBS has issued trust preferred securities through consolidated pre- ferred funding trusts which hold debt issued by UBS. UBS AG has fully and unconditionally guaranteed all of these securities. UBS’s obligations under these guarantees are subordinated to the full pri- or payment 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 non-controlling inter- ests in UBS’s consolidated fi nancial statements. Once a coupon pay- ment becomes mandatory, i.e., when it is triggered by a contractu- ally defi ned event, the full dividend payment obligation on these trust preferred securities issued is reclassifi ed from Equity to a cor- responding liability. In the income statement the full dividend pay- ment is reclassifi ed from Net profi t attributable to UBS shareholders to Net profi t attributable to non-controlling interests at that time. 29) Discontinued operations and non-current assets held for sale UBS classifi es individual non-current non-fi nancial assets and dis- posal groups as held for sale if such assets or disposal groups are available for immediate sale in their present condition subject to terms that are usual and customary for sales of such assets or dis- posal groups and their sale is considered highly probable. For a sale to be highly probable, management must be committed to a plan to sell such assets and must be actively looking for a buyer. Further- more, the assets must be actively marketed at a reasonable sales price in relation to their fair value and the sale must be expected to be completed within one year. 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 are presented in Other assets and Other liabilities (see Notes 17 and 20). Non-current assets and liabilities of subsidiaries are classifi ed as “held for sale” if their carrying amount will be recovered principally through a sale transac- tion rather than through continuing use. 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 classifi ed as held for sale and a) represents a sepa- rate 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 profi t from discontinued operations includes the net total of operating profi t and loss before tax from discontinued operations (including net gain or loss on sale before tax or mea- surement to fair value less costs to sell) and discontinued opera- tions tax expense. A component of an entity comprises operations and cash fl ows that can be clearly distinguished, operationally and for fi nancial reporting purposes, from the rest of UBS’s operations 310 30) Leasing UBS enters into lease contracts, predominantly of premises and equipment, as a lessor and a lessee. The terms and conditions of these contracts are assessed and the leases are classifi ed as oper- ating leases or fi nance leases according to their economic sub- stance. When making such an assessment, the Group focuses on the following aspects: a) transfer of ownership of the asset to the lessee at the end of the lease term; b) existence of a bargain pur- chase 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 modifi cations being made. If one or more of the conditions are met, the lease is generally clas- sifi ed as a fi nance lease, while the non-existence of such condi- tions normally leads to a classifi cation as an operating lease. Lease contracts classifi ed as operating leases where UBS is the lessee are disclosed in Note 25. These contracts include non-can- cellable long-term leases of offi ce buildings in most UBS locations. Operating lease rentals payable are recognized as an expense on a straight-line basis over the lease term, which commences when the lessee controls the physical use of the property. Lease incen- tives are treated as a reduction of rental expense and are also recognized over the lease term on a straight-line basis. Certain arrangements do not take the legal form of a lease but convey a right to use an asset in return for a payment or series of payments. For such arrangements, UBS determines at inception date of the arrangement whether the fulfi llment of the arrange- ment is dependent on the use of a specifi c asset or assets. If the arrangement conveys a right to use the asset, the arrangement is accounted for as a lease. When UBS enters into contractual arrangements which are not considered leases in their entirety, but which include lease ele- ments, then the general lease requirements are applied to the lease element of the arrangement. Lease contracts classifi ed as operating leases where UBS is the lessor, and fi nance lease contracts where UBS is the lessor or the lessee, are not material. UBS recognizes provisions for premises leases if the unavoid- able costs of a contract exceed the benefi ts to be received under it (onerous lease contracts). This may occur, for instance, when a signifi cant portion of a rental space is expected to be vacant for an extended period. 31) Fee income UBS earns fee income from a diverse range of services it provides to its clients. Fee income can be divided into two broad categories: Note 1 Summary of significant accounting policies (continued) fees earned from services that are provided over a certain period of time and fees 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, with the exception of performance-linked fees or fee components with spe- cifi c performance criteria, which are recognized when the perfor- mance criteria are fulfi lled. Fees earned from providing transac- tion-type services are recognized when the service has been completed. Loan commitment fees on lending arrangements are deferred until the loan is drawn down and are then recognized as an adjustment to the effective yield over the life of the loan. If the commitment expires and the loan is not drawn down, the fees are recognized as revenue when the commitment expires. The following fee income is earned predominantly from ser- vices that are provided over a period of time: investment fund fees, portfolio management and advisory fees, insurance-related fees and credit-related fees. Fees earned predominantly from pro- viding transaction-type services include underwriting fees, corpo- rate fi nance fees and brokerage fees. 32) 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 currency, except for non-monetary items, are translated using the closing exchange rate. Non-monetary items measured at historical cost are trans- lated at the exchange rate on the date of the transaction. Gener- ally, resulting foreign exchange differences are recognized in Net trading income. Foreign exchange differences from non-monetary fi nancial investments available-for-sale are recorded directly in Eq- uity until the asset is sold or becomes impaired, unless the non- monetary fi nancial investment is subject to a fair value hedge of foreign exchange risk, in which case changes in fair value attribut- able to the hedged risk are reported in Net trading income. Upon consolidation, assets and liabilities of foreign operations are translated into Swiss francs (CHF) – UBS’s presentation cur- rency – at the closing exchange rate on 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 ex- change rates are recognized directly in Foreign currency transla- tion within Equity. When a foreign operation is disposed of such that control, sig- nifi cant infl uence or joint control is lost, the cumulative amount in Foreign currency translation within Equity related to that foreign operation attributable to UBS is reclassifi ed to profi t or loss as part of the gain or loss on disposal. When UBS disposes of a portion of its interest in a subsidiary that includes a foreign operation without losing control, the related portion of the cumulative currency trans- lation balance is reattributed to non-controlling interests. When UBS disposes of a portion of its investment in an associate or joint venture that includes a foreign operation while retaining signifi - cant infl uence or joint control, the related portion of the cumulative currency translation balance is reclassifi ed to profi t or loss. 33) Earnings per share (EPS) Basic earnings per share are calculated by dividing the net profi t or loss for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share are calculated using the same meth- od as for basic EPS and adjusting the net profi t or loss for the period attributable to ordinary shareholders and the weighted av- erage number of ordinary shares outstanding to refl ect the poten- tial dilution that could occur if options, warrants, convertible debt securities or other contracts to issue ordinary shares were con- verted or exercised into ordinary shares. 34) Segment reporting UBS‘s businesses are organized on a worldwide basis into four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the In- vestment Bank, supported by the Corporate Center. For the purpose of segment reporting, the business division Wealth Management & Swiss Bank is split into two separate re- portable segments, namely; Wealth Management and Retail & Corporate. The fi ve reportable segments, together with the Cor- porate Center, refl ect the internal management structure and re- sponsibilities. Financial information about the fi ve reportable seg- ments and the Corporate Center is presented separately in the internal management report to the Group Executive Board (con- sidered the “chief operating decision maker” within the context of IFRS 8 Operating Segments). The Corporate Center is not considered an operating segment un- der IFRS 8 Operating Segments. It includes predominantly the results of treasury activities, e.g., from the management of structural foreign exchange risks and interest rate risks, residual operating expenses such as those associated with the functioning of the Group Executive Board and the Board of Directors, other costs related to organiza- tional management, as well as a limited number of specifi cally de- fi ned items. These items include UBS’s option to acquire the SNB StabFund’s equity and expenses such as capital taxes. As the Corpo- rate Center agrees fl at fees to be charged to the business divisions, adjusted on a periodic basis, there will be differences between actual costs incurred and those recharged. All other costs incurred by the Corporate Center related to shared services and control functions like risk control, fi nance, legal and compliance, communications and branding, human resources, information technology, real estate, pro- curement, corporate development and service centers are charged out to the reportable segments based on internal accounting policies. The costs of shared services and control functions managed by the Corporate Center are allocated to the direct cost lines of personnel expenses, general and administrative expenses and depreciation in the respective reportable segment income statements, based on in- 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) ternally determined allocations. UBS’s internal accounting policies, which include management accounting policies and service level agreements, determine the revenues and expenses directly attribut- able to each reportable segment. Internal charges and transfer pricing adjustments are refl ected in the reportable segment performances. Revenue-sharing agreements are used to allocate external cli- ent revenues to reportable segments. Due to the present arrange- ment of revenue-sharing agreements, the total inter-segment revenues for UBS are not considered material. Net interest income is allocated to the reportable segments based on their balance sheet positions. Assets and liabilities of the reportable segments are funded through and invested with the treasury departments located in each business division. The trea- sury departments are supported by Group Treasury in the Corpo- rate Center, with the net margin refl ected in the results of each reportable segment. The Corporate Center transfers interest in- come earned from managing UBS’s consolidated equity back to the reportable segments based on average attributed equity. Commissions are credited to the reportable segments based on the corresponding client relationship. Revenue-sharing agree- b) Changes in accounting policies, comparability and other adjustments ments are used for the allocation of customer revenues where sev- eral reportable segments are involved in the value-creation chain. In line with internal management reporting, segment assets are reported without intercompany balances on a third-party view basis. Refer to Note 2a “Segment reporting” for further details. For the purpose of segment reporting under IFRS 8, the non-current assets consist of investments in associates and joint ventures, goodwill, other intangible assets and plant, property and equipment. 35) Netting UBS nets assets and liabilities on its balance sheet if it has a cur- rently enforceable legal 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: OTC in- terest rate swaps (IRS) transacted with the London Clearing House, netted by currency and across maturity dates and repurchase and reverse repurchase transactions entered into with the both the Lon- don Clearing House and the Fixed Income Clearing Corporation, netted by counterparty, currency, central securities depository (CSD) and maturity. Effective in 2011 Interests in consolidated investment funds In 2011, UBS changed its accounting policy for investments in consolidated investment funds that are not considered equity in- struments as defi ned in IAS 32. Effective 2011, foreign currency gains and losses from translation of our investments in such funds are recorded in the income statement on the basis that the invest- ment interests are fi nancial liabilities of the consolidated invest- ment fund. Previously, foreign currency translation gains and losses from these investments were presented in Foreign currency translation within Other comprehensive income on the basis that the investment interests represented a right to the residual assets and were therefore previously considered non-monetary items. The revised accounting policy is considered more relevant as it better aligns the treatment of the foreign currency differences arising on the investments in the subsidiaries with the treatment of the investment interests. This change in accounting policy was applied retrospectively, re- sulting in an adjustment to the opening balance sheet as of 1 January 2009. Foreign currency translation within Cumulative net income recognized directly in equity, net of tax was debited by CHF 159 mil- lion and Retained earnings was credited by CHF 159 million, with a corresponding impact on the statement of changes in equity. There was no impact on the reported net profi t of 2009, 2010 and 2011. Interests in non-consolidated investment funds In connection with the above change in accounting policy, the classifi cation of investments in non-consolidated funds in Note 11 Trading portfolio and Note 13 Financial investments available-for- sale has been amended to align to the criteria in IAS 32 Financial Instruments: Presentation. The reclassifi cation of these interests from equity instruments to debt instruments has no impact on UBS’s income statement and balance sheet. Prior periods in Note 11 and Note 13 have been restated accordingly. Capitalization of internally generated software Following the approval of a new long-term IT investment plan, in the third quarter 2011 UBS reviewed the capitalization practice for internally generated computer software. As a result of this review, UBS implemented a process whereby UBS improved the ability to assess how software programs generate future economic benefi ts for UBS, determine the period over which these economic benefi ts will accrue to UBS, and track the capitalizable costs associated with the various programs to determine a reliable measurement of an amortizable asset. The change has been applied prospectively and led to capitalizing additional computer software development costs of CHF 106 million in the second half of 2011. Presentation of redemption of preferred securities In the third quarter of 2010, UBS redeemed trust preferred securi- ties of USD 1.5 billion classifi ed as non-controlling interests, which had accumulated foreign currency translation (FCT) losses of CHF 1,093 million. At the time of the redemption, the reversal of these accumulated FCT losses was presented as part of the change to Preferred securities in non-controlling interests in the Statement of Changes in Equity. This reversal of the FCT loss would have been better presented as a foreign currency translation move- 312 Note 1 Summary of significant accounting policies (continued) ment within non-controlling interests within the Statement of Comprehensive Income. The change also impacts the related Pre- ferred securities table. This was only a presentational matter with- in non-controlling interests on the Statement of Changes in Eq- uity and the Statement of Comprehensive income; balance sheet and income statement lines were not affected and the equity at- tributable to UBS shareholders was unchanged. Comparative amounts for 2010 have been amended to refl ect the improved presentation, as follows: – In the Statement of comprehensive income, Foreign currency translation movements during the year, before tax was changed by CHF 1,093 million to negative CHF 951 million for year ended 31 December 2010. Total comprehensive income attributable to non-controlling interests was changed by CHF 1,093 million to positive CHF 609 million for the year ended 31 December 2010. – In the non-controlling interests component of the Statement of changes in equity for the year ended 31 December 2010, Preferred securities were reduced by CHF 1,093 million and Total comprehensive income for the year recognized in equity was increased by CHF 1,093 million. – In the table on preferred securities for the year ended 31 Decem- ber 2010, Redemptions were changed by CHF 1,093 million to negative CHF 2,622 million and Foreign currency translation was changed by CHF 1,093 million to positive CHF 275 million. Defi nition of cash and cash equivalents For the purposes of the statement of cash fl ows, UBS has refi ned its defi nition of cash and cash equivalents to restrict it to balances with an original maturity of three months or less including cash, money market paper and balances with central and other banks. This refi ned defi nition is considered to result in more relevant and comparable information for the purposes of the statement of cash fl ows. Cash and cash equivalents have been reduced by CHF 60,888 million at 31 December 2010 and by CHF 92,105 million at 31 December 2009, to CHF 79,934 million and CHF 72,868 million, respectively, with related changes to cash fl ows from op- erating activities and investing activities. Nevertheless, the amounts now excluded from cash and cash equivalents in the statement of cash fl ows continue to be part of our liquidity posi- tion. Transfer of legacy portfolio from the Investment Bank to the Corporate Center On 30 December 2011, a portfolio of legacy assets was trans- ferred from the Investment Bank to the Corporate Center. Togeth- er with the option to buy the equity of the SNB StabFund, UBS will report the legacy portfolio as a separate segment in the Corporate Center beginning in the fi rst quarter of 2012, when all necessary internal reporting changes will have been put into place. Restated historical segment information will be provided prior to the publi- cation of our fi rst quarter 2012 fi nancial report. Personnel expenses In 2011, UBS reclassifi ed the costs related to the voluntary employee share ownership plan (Equity Plus) from Variable compensation – other to Other personnel expenses in order to align the presentation with the FINMA defi nition of variable compensation. Prior periods in “Note 6 Personnel expenses” have been restated accordingly. As a result, Other personnel expenses were increased by CHF 80 million and CHF 132 million for the year ended 31 December 2010 and for the year ended 31 December 2009, respectively, with a correspond- ing decrease in Variable compensation – other. The change in pre- sentation did not affect the total Personnel expenses. Improvements to IFRS 2010 In May 2010, the IASB issued amendments to seven IFRS stan- dards as part of its annual improvements project. UBS adopted the Improvements to IFRS 2010 on 1 January 2011. The adoption of the amendments resulted only in changes to the disclosure of maximum exposure to credit risk, as shown in Note 28c. This is the only amendment to accounting standards that sig- nifi cantly impacts UBS effective 2011. Effective in 2010 and earlier Wealth Management & Swiss Bank reorganization From 2010 onwards, the internal reporting of Wealth Manage- ment & Swiss Bank to the Group Executive Board was revised in order to better refl ect the management structure and responsi- bilities. Segregated fi nancial information is now reported for: – “Wealth Management”, encompassing all wealth manage- ment business conducted out of Switzerland and in the Asian and European booking centers; – “Retail & Corporate”, including services provided to Swiss re- tail private clients, small and medium enterprises and corpo- rate and institutional clients. In line with this revised internal reporting structure and IFRS 8 Operating Segments, Wealth Management and Retail & Corporate are now presented in the external fi nancial reports as separate business units and reportable segments. Prior periods presented have been restated to conform to the new presentation format. Allocation of additional Corporate Center costs to reportable segments From 2010 onwards, almost all costs incurred by the Corporate Center related to shared services and control functions are allo- cated to the reportable segments which directly and indirectly re- ceive the value of the services, either based on a full cost recovery or on a periodically agreed fl at fee. The allocated costs are shown in the respective expense lines of the reportable segments in Note 2a “Segment reporting”, and in the “Financial and operating per- formance” section of this report. Up to and including 2009, certain costs incurred by the Corpo- rate Center were presented as Corporate Center expenses and 313 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) not charged to the business divisions. This change in allocation policy has been applied prospectively and prior year numbers have not been restated. following separate lines: Salaries, Variable compensation – discre- tionary bonus, Variable compensation – other and Wealth Man- agement Americas: Financial advisor compensation. The incremental charges to the business divisions made in 2010 mainly relate to control functions. If fi gures for each quarter of 2009 had been presented on the basis of the allocation meth- odology applied for 2010, the estimated impact on operating ex- penses and performance before tax would have been as shown in the table below. Furthermore, UBS reclassifi ed the pension costs related to bo- nus to Pension and other post-employment benefi t plans. Previ- ously, those amounts were reported under Social security. Prior period amounts have been adjusted accordingly. The change in the presentation did not impact UBS’s personnel expenses. Equity and Other comprehensive income In 2010, UBS reviewed certain components of its equity and made adjustments to correct immaterial misstatements that related to periods several years back. The following paragraphs describe the impacts of the changes on UBS’s fi nancial statements as of 31 December 2010. UBS’s Foreign currency translation balance was adjusted by a credit of CHF 592 million. The adjustment increased total Other comprehensive income by CHF 592 million and total Comprehen- sive income by CHF 429 million because a loss of CHF 163 million was transferred to the income statement. In addition, UBS reclassifi ed an amount of CHF 213 million from Equity attributable to non-controlling interests to Other liabilities as this amount has been identifi ed as redeemable and therefore not satisfying the criteria for an equity instrument under IFRS. Also, an amount of CHF 134 million relating to an equity participation plan was reclassifi ed from Share premium to Other liabilities as it was identifi ed that the amount is not related to equity settled awards. The impact on the income statement for both items was insignifi cant. Furthermore, UBS merged the balance of the balance sheet line Revaluation reserve from step acquisitions, net of tax into Share premium, resulting in an increase of Share premium by CHF 38 million. The balance sheet as of 31 December 2009 and 2008 and the statement of changes in equity for 2009 and 2008, were adjusted accordingly. Improvements to IFRS 2009 The IASB issued amendments to twelve IFRS standards as part of its annual improvements project in April 2009. UBS adopted the Improvements to IFRS 2009 on 1 January 2010. The adoption of the amendments did not have a signifi cant impact on UBS’s fi nan- cial statements. Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items The amendments to IAS 39 were issued in July 2008. The amend- ments provided additional guidance on the designation of a hedged item. The amendments clarifi ed how the existing princi- ples underlying hedge accounting should be applied in two par- ticular situations: a) a one-sided risk in a hedged item and b) in- fl ation in a fi nancial hedged item. UBS adopted the amendments to IAS 39 on 1 January 2010. The adoption of the amendments to IAS 39 did not have a signifi cant impact on UBS’s fi nancial statements. IFRS 3 Business Combinations, IAS 27 Consolidated and Sepa- rate Financial Statements, and IAS 21 The Effects of Changes in Foreign Exchange Rates In January 2008, the IASB issued the revised IFRS 3 Business Com- binations and amendments to IAS 27 Consolidated and Separate Financial Statements, and IAS 21 The effects of Changes in For- eign Exchange Rates. The most signifi cant changes under revised IFRS 3 were as fol- Personnel expenses In 2010, UBS reclassifi ed certain elements of Other personnel ex- penses to Variable compensation – other in order to align the pre- sentation with the new FINMA defi nition of variable compensation. In addition, amounts previously reported under Salaries and variable compensation were presented for the fi rst time on the lows: – Contingent consideration should be recognized at fair value as part of the consideration transferred at the acquisition date. Previously, contingent consideration was recognized if, and only if, UBS had a present obligation, the economic outfl ow was more likely than not and a reliable estimate was determinable. Corporate Center cost allocation impact on 2009 figures CHF million Estimated increase in 2009 operating expenses and decrease in performance before tax 314 Wealth Management & Swiss Bank Wealth Management Retail & Corporate Wealth Management Americas Global Asset Management Investment Bank Total business divisions Corporate Center 128 96 84 44 288 640 (640) Note 1 Summary of significant accounting policies (continued) – Non-controlling interests in an acquiree that are present owner- ship interests and provide entitlement to a proportionate share of the net assets in the event of liquidation should either be measured at fair value or as the non-controlling interest’s pro- portionate share of the fair value of net identifi able assets of the entity acquired. All other components of the non-control- ling interests are measured at their acquisition-date fair values. The option is available on a transaction-by-transaction basis. – Transaction costs incurred by the acquirer should be expensed as incurred. The amendments to IAS 27 and the consequential amend- ments to IAS 21 required the effects (including foreign exchange translation) of all transactions with non-controlling 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 should be re-measured to fair value, and a gain or loss (including foreign exchange translation) should be recognized in profi t or loss. The amendments to IAS 21 further clarifi ed that no deferred foreign currency translation gains and losses are to be released upon a partial repayment of share capital of a subsidiary without a loss of control. UBS adopted the amendments to IFRS 3, IAS 27 and IAS 21 with prospective effect on 1 January 2010. The adoption of the revised guidance did not materially impact UBS’s fi nancial statements. IAS 1 (revised) Presentation of Financial Statements Effective 1 January 2009, the revised International Accounting Standard (IAS) 1 affected the presentation of owner changes in equity and of comprehensive income. UBS continued 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 fl ow hedges and fi nan- cial investments available-for-sale, were presented in the “state- ment of comprehensive income”. When implementing these amendments as of 1 January 2009, UBS also adjusted the format of its “statement of changes in eq- uity” and replaced the “statement of recognized income and ex- pense” in the fi nancial statements of previous years with a “state- ment of comprehensive income”. UBS also re-assessed its accounting treatment of dividends 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 obligation once a coupon payment becomes mandatory, i.e., when it is triggered by a con- tractually determined event. In the income statement, the same amount is reclassifi ed from net profi t attributable to UBS share- holders to net profi t attributable to non-controlling interests. IFRS 8 Operating Segments Effective as of 1 January 2009, UBS adopted IFRS 8 Operating Segments which replaced IAS 14 Segment Reporting. Under the requirements of the new standard, UBS’s external segmental re- porting is now based on the internal management reporting to the Group Executive Board (or the “chief operating decision mak- er”), which makes decisions on the allocation of resources and assesses the performance of the reportable segments. Refer to item 34) and Note 2 for further details. IFRS 7 (revised) Financial Instruments: Disclosures This standard was revised in March 2009 when the International Accounting Standards Board (IASB) published the amendment “Improving Disclosures about Financial Instruments”. Effective 1 January 2009, the amendment requires enhanced disclosures about fair value measurements and liquidity risk. The enhanced fair value measurement disclosure requirements included: a fair value hierarchy (i.e. categorization of all fi nancial instruments into levels 1, 2 and 3 based on the relevant defi ni- tions); signifi cant transfers between level 1 and level 2; reconcilia- tion of level 3 instruments at the beginning of the period to the ending balance (level 3 movement table); level 3 profi t or loss for positions still held at balance sheet date; and sensitivity informa- tion for the total position of level 3 instruments and the basis for the calculation of such information. The amended liquidity risk disclosure requirements largely confi rm the previous rules for providing maturity information for non-derivative fi nancial liabilities, but amended the rules for providing maturity information for derivative fi nancial lia- bilities. IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 16 was issued on 1 October 2008 and became effective on 1 January 2009. IFRIC 16 provides guidance in identifying 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 invest- ment in a foreign operation can be held to qualify for hedge accounting, and how an entity should determine the amounts to be reclassifi ed from equity to profi t or loss for both the hedg- ing instrument and the hedged item. The impact of this inter- pretation on UBS’s fi nancial 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 fi nancial statements 2009. The revised standard amends the defi nition 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 considered related-party transactions. 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) c) International Financial Reporting Standards and Interpretations to be adopted in 2012 and later Amendments to IAS 12 Income Taxes In December 2010, the IASB issued amendments to IAS 12 In- come Taxes which incorporate the principles of previous guidance in SIC Interpretation 21 Income Taxes - Recovery of Revalued Non- Depreciable Assets and that Interpretation was withdrawn. IAS 12 generally requires an entity to measure the deferred tax related to assets refl ecting the tax consequences that would fol- low from the manner in which the entity expects to recover their carry amount (e.g. sale or use). However, under the amendments, there is a rebuttable presumption that investment property will be recovered through sale. The amendments provide a practical ap- proach for measuring deferred tax liabilities and deferred tax as- sets when investment property is measured using the fair value model. The amendments are effective for annual periods beginning on or after 1 January 2012, with early adoption permitted and will not have a material impact on UBS’s fi nancial statements. IFRS 9 Financial Instruments In November 2009, the IASB issued IFRS 9 Financial Instruments, which includes revised guidance on the classifi cation and mea- surement of fi nancial assets. In October 2010, the IASB updated IFRS 9 to include guidance on fi nancial liabilities and derecogni- tion of fi nancial instruments. The publication of IFRS 9 repre- sented the completion of the fi rst part of a multi-stage project to replace IAS 39 Financial Instruments: Recognition and Mea- surement. The standard requires all fi nancial assets to be classifi ed as fair value through profi t or loss or at amortized cost on the basis of the entity’s business model for managing the fi nancial assets and the contractual cash fl ow characteristics of the fi nancial asset. If a fi nancial asset meets the criteria to be measured at amortized cost, it can be designated at fair value through profi t or loss under the fair value option if doing so would signifi cantly reduce or eliminate an accounting mismatch. Equity instruments that are not held for trading may be accounted for at fair value through other comprehensive income (OCI). The accounting guidance for fi nancial liabilities is unchanged with one exception: changes in fair value due to changes in an entity’s own credit risk associated with fi nancial liabilities desig- nated at fair value through profi t or loss are directly recognized in OCI instead of in profi t and loss. There is no subsequent recy- cling of realized gains or losses from OCI to profi t or loss. UBS is currently assessing the impact of the new standard on the fi nancial statements. In December 2011, the IASB issued amend- ments to IFRS 9 Financial Instruments that defer the mandatory ef- fective date from 1 January 2013 to 1 January 2015. The amend- ments also provide relief from the requirement to restate comparative fi nancial statements for the effect of applying IFRS 9. Early applica- tion of IFRS 9 is still permitted. Amendments to IFRS 7 Financial instruments: Disclosures In October 2010, the IASB issued revised IFRS 7 Financial Instru- ments: Disclosures to provide additional disclosures around trans- fers of fi nancial assets, including those transfers in which an en- tity retains a continuing interest in the transferred asset(s) at the reporting date. The amendments are intended to allow users of fi nancial statements to improve their understanding of transfer transactions of fi nancial assets, including understanding the pos- sible effects of any risks that may remain with the entity that transferred the assets. The effective date for mandatory adoption is for annual periods beginning on or after July 2011, with early adoption permitted. UBS will adopt the new standard as of 1 January 2012. IFRS 10 Consolidated Financial Statements In May 2011, the IASB issued IFRS 10 Consolidated Financial State- ments, which establishes a single control-based model for assessing whether one entity should consolidate another. IFRS 10 applies to all types of entities and will replace SIC-12 Consolidation – Special Purpose Entities, and portions of IAS 27 Consolidated and Separate Financial Statements. IFRS 10 is based on the existing principle that an entity should consolidate all other entities that it controls. The defi nition of control in IFRS 10 focuses on the presence of power, exposure to variable returns and the ability to utilize power to affect an entity’s own returns. The determination of control is based on current facts and circumstances and is continuously assessed. Vot- ing rights or contractual rights may be evidence of power, or a combination of the two may give an investor power. Power does not need to be exercised for control to exist. An investor with more than half the voting rights would meet the power criteria in the absence of restrictions or other circumstances. The standard provides additional guidance to assist in the de- termination of control in circumstances this assessment is diffi cult to make. For example, IFRS 10 introduces guidance on assessing whether an entity with decision-making rights is a principal or an agent; only entities that are principals can have control. UBS is currently assessing the impact of the new standard on its fi nancial statements. The effective date for mandatory adop- tion is 1 January 2013, with early adoption permitted. IFRS 11 Joint Arrangements In May 2011, the IASB issued IFRS 11 Joint arrangements, which supersedes IAS 31 Interests in Joint Ventures, and SIC 13 Jointly Controlled Entities – Non-monetary Contributions by Venturers. The classifi cation of a joint arrangement under IFRS 11 depends upon the rights and obligations of the arrangement, rather than its legal form (as is currently the case). The standard addresses incon- sistencies in the reporting of joint arrangements by eliminating the proportionate consolidation approach and requiring the equity method to account for interests in jointly controlled entities. 316 Note 1 Summary of significant accounting policies (continued) UBS does not expect the new standard to have a signifi cant impact on its fi nancial statements, as we do not currently apply the proportionate consolidation approach. The effective date for mandatory adoption is 1 January 2013, with early adoption per- mitted. IFRS 12 Disclosures of Interests in Other Entities In May 2011, the IASB issued IFRS 12 Disclosure of Interests in Other Entities, which provides new and comprehensive guidance on disclosure requirements for all entities reporting under the two new standards, IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements. It replaces the disclosure require- ments currently included in IAS 28 Investment in Associates. The standard requires entities to disclose information that helps users to evaluate the nature, risks and fi nancial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and, in particular, unconsolidated structured entities. UBS is currently assessing the impact of the new standard on its fi nancial statements. The effective date for mandatory adop- tion is 1 January 2013, with early adoption permitted. IFRS 13 Fair Value Measurement In May 2011, the IASB issued IFRS 13 Fair Value Measurement, which completes a major project of the IASB and the US Financial Accounting Standards Board (FASB) to improve IFRS and US GAAP and bring about their convergence. The new standard defi nes fair value, provides guidance on its determination and introduces con- sistent requirements for disclosures on fair value measurements. The standard does not introduce new fair value measurements, nor does it eliminate practicability exceptions to fair value measurements. IFRS 13 improves consistency and reduces complexity by pro- viding, for the fi rst time, a precise defi nition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, i.e., an exit price. The defi nition empha- sizes that fair value is a market-based measurement, not an enti- ty-specifi c measurement. As such, an entity’s intention to hold an asset or to settle or otherwise fulfi ll a liability is not relevant when measuring fair value. IFRS 13 allows a limited exception to the basic fair value measurement principles for a reporting entity that holds a group of fi nancial assets and fi nancial liabilities with off- setting positions in particular market risks or counterparty credit risk and manages those holdings on the basis of the entity’s net exposure to either risk. This exception allows the reporting entity, if certain criteria are met, to measure the fair value of the net as- set or liability position in a manner consistent with how market participants would price the net risk position. The standard setters did not achieve convergence with respect to the treatment of “Day 1” profi ts as the IAS 39 guidance is still applicable. UBS is currently assessing the impact of the new stan- dard on its fi nancial statements. The effective date for mandatory adoption is 1 January 2013, with early adoption permitted. IAS 1 Presentation of Financial Statements In June 2011, the IASB issued the revised IAS 1 Presentation of Financial Statements. The revised standard requires the grouping together for presentation purposes of items within other compre- hensive income (OCI) into those that may be recycled to profi t or loss in subsequent periods and those that may not be. The revised standard reaffi rms existing requirements that items in OCI and profi t or loss should be presented as either a single statement or two consecutive statements. Currently, all items in our OCI may be recycled to profi t or loss, but this will change with the adop- tions of IAS 19 (revised) Employee Benefi ts and IFRS 9 Financial Instruments, as both of these accounting standards will generate OCI items that will not be recycled to profi t or loss in subsequent periods. The effective date for mandatory adoption is 1 January 2013, with early adoption permitted. IAS 19 (revised) Employee Benefi ts In June 2011, the IASB issued revisions to IAS 19 Employee Ben- efi ts (‘IAS 19R’ or ‘the revised standard’). The revised standard introduces changes to the recognition, presentation and disclo- sure of post-employment benefi ts. IAS 19R eliminates the “corri- dor method”, under which the recognition of actuarial gains and losses was deferred. Instead, all actuarial gains and losses are rec- ognized immediately in Other Comprehensive Income (OCI). In addition, IAS 19R requires the income statement recognition to be based on the net interest on the net defi ned benefi t obligation (asset), using the discount rate that is used to measure the de- fi ned benefi t obligation. The effect of this is to remove the current concept of recognizing an expected return on plan assets. The revised standard also enhances the disclosure requirements for defi ned benefi t plans, providing more information about the characteristics of defi ned benefi t plans and the risks to which en- tities are exposed through participation in those plans. The effec- tive date for mandatory adoption is 1 January 2013, with early adoption permitted. UBS is assessing whether to adopt IAS 19R earlier than its mandatory date. The main impact of adopting IAS 19R will be that UBS will derecognize the deferred pension expenses and accrued pension liabilities included in Other assets and Other liabilities and will rec- ognize the aggregate accounting defi cits of the defi ned benefi t plans in Other liabilities. The income statement will be changed to remove the interest cost, expected return on plan assets and amortization of actuarial variances. This will be replaced with a net interest amount that is calculated by applying the discount rate to the net defi ned benefi t obligation. If UBS had applied IAS 19R in its 2011 fi nancial statements, as at the year end Other assets would have been lower by ap- proximately CHF 3.3 billion, Other liabilities would have been higher by approximately CHF 3.1 billion and Deferred tax assets would have been higher by approximately CHF 1.2 billion. The impact of these changes will fl ow through a component of eq- uity at the time of adoption. These estimates do not take into 317 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 fi nancial statements Note 1 Summary of significant accounting policies (continued) account any potential reduction in the defi ned benefi t obliga- tion to refl ect the risk-sharing features of the Swiss pension plan, as it is not yet practicable to determine this. In addition, the impact of these changes on UBS’s regulatory capital remains subject to clarifying guidance from FINMA. Should UBS choose to adopt IAS 19R earlier than its mandatory date, UBS will dis- close further information later in 2012. IAS 32 Financial Instruments: Presentations and IFRS 7 Financial Instruments: Disclosures In December 2011, the IASB amended the accounting require- ments and disclosures related to offsetting fi nancial assets and fi nancial liabilities by issuing amendments to IAS 32 Financial In- struments: Presentation and IFRS 7 Financial Instruments: Disclo- sures. The amendments to IAS 32 change current practice by requir- ing that, to achieve offsetting on the balance sheet, an arrange- ment must be legally enforceable in the event of default, bank- ruptcy or insolvency in addition to the normal course of business. Further, it must be demonstrated that the right of offset is recipro- cal among all parties. The amendments also provide incremental guidance for determining when gross settlement systems effec- tively achieve the functional equivalent of net settlement. Additionally, the IASB simultaneously issued disclosure require- ments intended to enable users to assess the effect (or potential effect) of offsetting arrangements on an entity’s fi nancial position. The amendments to IFRS 7 Financial Instruments: Disclosures re- quire that entities disclose both gross and net amounts associated with master netting agreements and similar arrangements, in- cluding the effects of fi nancial collateral, whether or not present- ed net on the face of the balance sheet. UBS is currently assessing the impact of the revised standards on its fi nancial statements. The amendments to IAS 32 are effec- tive for annual periods beginning on or after 1 January 2014. The amendments to IFRS 7 are effective for annual periods beginning on or after 1 January 2013. 318 Note 2a Segment reporting UBS AG is the parent company of the UBS Group (Group). The operational structure of the Group comprises the Corporate Cen- ter and four business divisions: Wealth Management & Swiss Bank, Wealth Management Americas, Global Asset Management and the Investment Bank. For the purpose of segment reporting, the business division Wealth Management & Swiss Bank is split into two separate reportable segments, namely Wealth Manage- ment and Retail & Corporate. There are therefore fi ve reportable segments altogether, in addition to the Corporate Center present- ed in the fi nancial statements, which refl ects the internal man- agement structure and responsibilities. The Corporate Center is not considered an operating segment. Wealth Management & Swiss Bank Wealth Management & Swiss Bank focuses on delivering com- prehensive fi nancial 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 cor- porate clients in Switzerland. Our Wealth Management business unit provides clients in over 40 countries, including Switzerland, with fi nancial advice, products and tools to fi t their individual needs. Our Retail & Corporate business unit provides individual and business clients with an array of banking services, such as deposits and lending, and maintains a leading position across its client segments in Switzerland. Starting with the fi rst quarter of 2012, we will report Wealth Management and Retail & Corpo- rate as separate business divisions and will no longer report Wealth Management & Swiss Bank which will cease to be a busi- ness division. Wealth Management Americas Wealth Management Americas provides advice-based solutions through fi nancial advisors who deliver a fully integrated set of products and services specifi cally designed to address the needs of ultra high net worth and high net worth individuals and fami- lies. It includes the domestic US business, the domestic Canadian business and international business booked in the US. Global Asset Management Global Asset Management is a large-scale asset manager with businesses diversifi ed across regions, capabilities and distribution channels. It offers investment capabilities and styles across all ma- jor traditional and alternative asset classes including equities, fi xed income, currency, hedge fund, real estate, infrastructure and private equity that can also be combined into multi-asset strate- gies. The fund services unit provides professional services includ- ing legal fund set-up, accounting and reporting for traditional in- vestment funds and alternative funds. Investment Bank The Investment Bank provides a broad range of products and ser- vices in equities, fi xed income, foreign exchange and commodities to corporate and institutional clients, sovereign and government bodies, fi nancial intermediaries, alternative asset managers and UBS’s wealth management clients. The Investment Bank is an ac- tive participant in capital markets fl ow activities, including sales, trading and market-making across a broad range of securities. It provides fi nancial solutions to a wide range of clients, and offers advisory and analytics services in all major capital markets. Corporate Center The Corporate Center provides treasury services, and manages support and control functions for the business divisions and the Group in such areas as risk control, fi nance, legal and compliance, funding, capital and balance sheet management, management of non-trading risk, communications and branding, human resourc- es, information technology, real estate, procurement, corporate development and service centers. It allocates most of the treasury income, operating expenses and personnel associated with these activities to the businesses based on capital and service consump- tion levels. The Corporate Center also encompasses certain cen- trally managed positions, including the SNB StabFund option and (starting with the fi rst quarter 2012 reporting) the legacy portfolio formerly in the Investment Bank. n o i t a m r o f n i l a i c n a n i F 319 Financial information Notes to the consolidated financial statements Note 2a Segment reporting (continued) Transactions between the reportable segments are carried out at internally agreed rates or at arm’s length and are reflected in the performance of each segment. Revenue-sharing agreements are used to allocate external client revenues to a segment, and cost- allocation agreements are used to allocate shared costs between the segments. CHF million For the year ended 31 December 2011 Net interest income Non-interest income Income 1, 2, 3 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 5, 6 Performance from continuing operations before tax Performance from discontinued operations before tax Performance before tax Tax expense / (benefit) on continuing operations Tax expense on discontinued operations Net profit Additional information Total assets 7, 8 Additions to non-current assets Wealth Management & Swiss Bank Wealth Management Retail & Corporate Wealth Management Americas Global Asset Management Investment Bank Corporate Center UBS 1,968 5,666 7,634 11 7,645 3,258 1,192 318 165 37 4,969 2,676 0 2,676 2,328 1,858 4,186 (101) 4,085 1,666 834 (470) 136 0 2,166 1,919 0 1,919 729 4,571 5,300 (6) 5,295 3,840 783 (9) 99 48 (15) 1,817 1,803 0 1,803 955 375 (1) 38 8 4,760 1,375 534 0 534 428 0 428 1,933 7,096 9,029 12 9,040 5,801 2,637 161 254 34 8,886 154 0 154 (117) 37 (80) (1) (80) 71 139 3 70 0 283 (363) 0 (363) 6,826 21,046 27,872 (84) 27,788 15,591 5,959 0 761 127 22,439 5,350 0 5,350 923 0 4,427 100,598 148,697 5 22 54,150 25 15,352 1,073,590 18 110 26,775 1,012 1,419,162 1,192 1 Impairments of financial investments available-for-sale for the year ended 31 December 2011 were as follows: Wealth Management & Swiss Bank CHF 28 million; Investment Bank CHF 12 million. 2 The­total­inter- segment revenues for the Group are immaterial as the majority of the revenues are allocated across the business divisions by means of revenue-sharing agreements. 3 Refer­to­“Note­26­Fair­value­of­financial­instru- ments” for further information on own credit in the Investment Bank. 4 Refer­to­“Note­16­Goodwill­and­intangible­assets”­for­further­information­regarding­goodwill­and­other­intangible­assets­by­business­divi- sion. 5 Refer­to­“Note­37­Reorganizations­and­disposals”­for­further­information­on­restructuring­charges.­ ­ 6 Refer­to­“Note­1b)­Changes­in­accounting­policies,­comparability­and­other­adjustments”­for­more­ information on the allocation of additional Corporate Center costs to business divisions from 2010 onwards. 7 The­segment­assets­are­based­on­a­third-party­view,­i.e.­the­amounts­do­not­include­inter-company­bal- ances. 8 On­30­December­2011,­an­agreement­was­reached­to­transfer­the­legacy­portfolio­from­the­Investment­Bank­to­Corporate­Center.­The­legacy­portfolio­will­be­presented­as­a­reportable­segment­within­Corpo- rate Center beginning in the first quarter of 2012, when all necessary internal reporting changes will have been put into place. 320 Note 2a Segment reporting (continued) Transactions between the reportable segments are carried out at internally agreed rates or at arm’s length and are reflected in the performance of each segment. Revenue-sharing agreements are used to allocate external client revenues to a segment, and cost- allocation agreements are used to allocate shared costs between the segments. CHF million For the year ended 31 December 2010 Net interest income Non-interest income Income 1, 2, 3 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 5 Performance from continuing operations before tax Performance from discontinued operations before tax Performance before tax Tax expense / (benefit) on continuing operations Tax expense on discontinued operations Net profit Additional information Total assets 6 Additions to non-current assets Wealth Management & Swiss Bank Wealth Management Retail & Corporate Wealth Management Americas Global Asset Management Investment Bank Corporate Center UBS 1,737 5,608 7,345 11 7,356 3,153 1,264 449 163 19 5,049 2,308 0 2,308 2,422 1,524 3,946 (76) 3,870 1,625 836 (509) 146 0 2,098 1,772 0 1,772 695 4,870 5,565 (1) 5,564 4,225 1,223 (6) 198 55 5,694 (130) 0 (130) (17) 2,075 2,058 0 2,058 1,096 400 (5) 43 8 1,542 516 0 516 2,235 9,775 12,010 0 12,010 6,743 2,693 64 278 34 9,813 2,197 0 2,197 (858) 1,993 1,135 0 1,135 78 168 8 89 0 343 793 2 795 6,215 25,845 32,060 (66) 31,994 16,920 6,585 0 918 117 24,539 7,455 2 7,457 (381) 0 7,838 94,056 25 153,101 12 50,071 48 15,894 8 966,945 32 37,180 467 1,317,247 593 1 Impairments of financial investments available-for-sale for the year ended 31 December 2010 were as follows: Wealth Management & Swiss Bank CHF 45 million; Global Asset Management CHF 2 million; Investment Bank CHF 41 million; Corporate Center CHF (16) million. 2 The­total­inter-segment­revenues­for­the­Group­are­immaterial­as­the­majority­of­the­revenues­are­allocated­across­the­business­divisions­by­means­of­revenue- sharing agreements. 3 Refer­to­“Note­26­Fair­value­of­financial­instruments”­for­further­information­on­own­credit­in­the­Investment­Bank.­ ­ 4 Refer­to­“Note­16­Goodwill­and­intangible­assets”­for­further­information­ regarding goodwill and other intangible assets by business division. 5 Refer­to­“Note­1b)­Changes­in­accounting­policies,­comparability­and­other­adjustments”­for­more­information­on­the­allocation­of­additional­ Corporate Center costs to business divisions from 2010 onwards. 6 The­segment­assets­are­based­on­a­third-party­view,­i.e.­the­amounts­do­not­include­inter-company­balances. n o i t a m r o f n i l a i c n a n i F 321 Financial information Notes to the consolidated financial statements Note 2a Segment reporting (continued) Transactions between the reportable segments are carried out at internally agreed rates or at arm’s length and are reflected in the performance of each segment. Revenue-sharing agreements are used to allocate external client revenues to a segment, and cost- allocation agreements are used to allocate shared costs between the segments. CHF million For the year ended 31 December 2009 Net interest income Non-interest income Income 1, 2, 3 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 Amortization of intangible assets Total operating expenses 4 Performance from continuing operations before tax Performance from discontinued operations before tax Performance before tax Tax expense / (benefit) on continuing operations Tax expense on discontinued operations Net profit Additional information Total assets 5 Additions to non-current assets Wealth Management & Swiss Bank Wealth Management Retail & Corporate Wealth Management Americas Global Asset Management Investment Bank Corporate Center UBS 1,853 5,574 7,427 45 7,471 3,360 1,182 428 154 0 67 5,191 2,280 0 2,280 2,681 1,415 4,096 (178) 3,918 1,836 835 (518) 136 0 0 2,289 1,629 0 1,629 800 4,746 5,546 3 5,550 4,231 1,017 4 170 34 62 2 2,134 2,137 0 2,137 996 387 (74) 36 340 13 5,518 1,698 32 0 32 438 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) 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) 109,627 138,513 13 30 53,197 59 20,238 11 991,964 81 26,999 745 1,340,538 939 1 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; Invest- ment Bank CHF 142 million; Corporate Center CHF 29 million. 2 The­total­inter-segment­revenues­for­the­Group­are­immaterial­as­the­majority­of­the­revenues­are­allocated­across­the­business­divisions­by­means­of­ revenue-sharing agreements. 3 Refer­to­“Note­26­Fair­value­of­financial­instruments”­for­further­information­on­own­credit­in­the­Investment­Bank.­ ­ 4 Refer­to­“Note­1b)­Changes­in­accounting­policies,­comparabil- ity and other adjustments” for more information on the allocation of additional Corporate Center costs to business divisions from 2010 onwards. 5 The­segment­assets­are­based­on­a­third-party­view,­i.e.­the­amounts­ do not include inter-company balances. 322 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 transactions 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 our clients to yield the maximum possible profitability by product line for the Group. The geographic analysis of operating income and non-current assets is provided in order to comply with IFRS. For the year ended 31 December 2011 Switzerland United Kingdom Rest of Europe United States Asia Pacific Rest of the world Total For the year ended 31 December 2010 Switzerland United Kingdom Rest of Europe United States Asia Pacific Rest of the world Total For the year ended 31 December 2009 Switzerland United Kingdom Rest of Europe United States Asia Pacific Rest of the world Total Total operating income Total non-current assets CHF million 11,494 1,385 1,638 9,324 3,689 258 27,788 Share % CHF million Share % 41 5 6 34 13 1 100 5,045 653 1,026 8,617 407 429 16,177 31 4 6 53 3 3 100 Total operating income Total non-current assets CHF million Share % CHF million Share % 12,670 2,791 1,514 10,752 3,796 470 31,994 40 9 5 34 12 1 100 4,922 594 1,078 8,673 394 418 16,080 31 4 7 54 2 3 100 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 2 3 100 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 fi nancial statements Income statement notes Note 3 Net interest and trading income The “Breakdown by businesses” table below analyzes net interest and trading income according to the businesses that drive it: Net  income from trading businesses includes both interest and trading income generated by the Investment Bank, including 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 refl ects all income from the Group’s centralized treasury function. 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, 4 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 5 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 For the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 6,826 4,343 11,169 5,964 4,874 332 11,169 9,925 1,716 5,466 248 615 17,969 2,040 1,352 2,851 1,993 2,907 11,143 6,826 6,215 7,471 13,686 7,508 4,624 1,554 13,686 10,603 1,436 6,015 262 557 18,872 1,984 1,282 3,794 2,392 3,206 12,657 6,215 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 10 (42) (18) (21) 5 (79) (18) (6) 19 (9) (5) 10 (5) 3 5 (25) (17) (9) (12) 10 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 20 million for 2011, CHF 37 million for 2010 and CHF 66 million for 2009. 4 Includes interest income on Cash collateral receivables on derivative instruments. 5 Includes interest expense on Cash collateral payables on derivative instruments. 324 Note 3 Net interest and trading income (continued) CHF million Net trading income 1 Investment Bank equities and investment banking Investment Bank fixed income, currencies and commodities Other business divisions and Corporate Center 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 % change from 31.12.11 31.12.10 31.12.09 31.12.10 601 2,183 1,559 4,343 419 7,437 2,356 2,000 3,115 7,471 465 (1,001) 2,462 (5,455) 2,668 (324) 678 (6,741) (74) 9 (50) (42) (10) 1 Refer to the table “Net interest and trading income” on the previous page for the Net income from trading businesses (for an explanation, refer to the corresponding introductory comment). 2 Fair value changes of hedges related to financial liabilities designated at fair value are also reported in Net trading income. For more information on own credit refer to “Note 26 Fair value of financial instruments”. Net trading income in 2011 included a loss of CHF 1,849 million due to the unauthorized trading incident reflected in Investment Bank equities. Net trading income in 2011 included a loss of CHF 284 million from credit valuation adjustments for monoline credit protection reflected in the Investment Bank’s fixed income, currencies and commodities business, compared with a CHF 667 million gain in 2010. ➔ Refer to the “Risk management and control” section of this report for more information on exposure to monolines Net trading income in 2011 included a loss of CHF 133 million from the valuation of our option to acquire the SNB StabFund’s equity reflected in Other business divisions and Corporate Center, compared with a CHF 745 million gain in 2010. ➔ Refer to the “Risk management and control” section of this report for more information on the valuation of our option to acquire the SNB StabFund’s equity 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 Investment fund fees Portfolio management and advisory fees 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 Other Total fee and commission expense Net fee and commission income of which: net brokerage fees For the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 626 554 1,180 992 4,169 3,577 5,551 368 15,837 438 827 17,102 933 933 1,866 15,236 3,236 1,157 755 1,912 857 4,930 3,898 5,959 361 17,918 448 850 19,216 1,093 964 2,057 17,160 3,837 1,590 796 2,386 881 5,400 4,000 5,863 264 18,794 339 878 20,010 1,231 1,068 2,299 17,712 4,169 (46) (27) (38) 16 (15) (8) (7) 2 (12) (2) (3) (11) (15) (3) (9) (11) (16) 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 5 Other income CHF million Associates and subsidiaries Net gains / (losses) from disposals of consolidated subsidiaries 1 Net gains / (losses) from disposals of investments in associates Share of net profits of associates Total Financial investments available-for-sale Net gains / (losses) from disposals Impairment charges Total Net income from properties 2 Net gains / (losses) from investment properties 3 Other 4 Total other income For the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 (18) 20 42 44 926 (39) 887 38 9 490 1,467 (7) 256 81 331 204 (72) 132 53 8 690 1,214 96 (1) 37 133 110 (349) (239) 72 (39) 672 599 157 (92) (48) (87) 354 (46) 572 (28) 13 (29) 21 1 Includes foreign exchange gains / losses reclassified from equity upon disposal or deconsolidation of subsidiaries. 2 Includes net rent received from third parties and net operating expenses. 3 Includes unrealized and realized gains / losses from investment properties at fair value and foreclosed assets. 4 Includes net gains / losses from disposals of loans and receivables and own-used property. Net gains from disposals of Financial investments available- for- sale in 2011 includes a gain of CHF 722 million from the sale of our strategic investment portfolio as well as gains of CHF 81 mil- lion in Wealth Management Americas’ available-for-sale portfolio. The line Other included gains from sale of loans and receiv- ables of CHF 344 million in 2011, CHF 324 million in 2010 and CHF 205 million in 2009. The 2011 gains were mainly due to the sale of collateralized loan obligations, which were reclassified from held-for-trading to loans and receivables in 2008, and were largely offset by related hedge termination losses recorded in net trading income. Additionally, it included a gain of CHF 78 million on sale of a property in Switzerland in 2011, compared with a gain of CHF 158 million on sale of a property in Switzerland in 2010. 2009 included a gain of CHF 304 million on the buyback of subordinated bonds for a total consideration below the principal amount. Net gains from disposals of investments in associates in 2010 included a gain of CHF 180 million from the sale of invest- ments in associates owning office space in New York. Impairment charges on Financial investments available-for-sale in 2009 included 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. 326 Note 6 Personnel expenses CHF million Salaries Variable compensation – discretionary bonus 1 Variable compensation – other 1, 2 of which: replacement payments 3 of which: guarantees for new hires of which: forfeiture credits of which: severance payments 4 of which: retention plan payments 5 Contractors Social security Pension and other post-employment benefit plans 6 Wealth Management Americas: Financial advisor compensation 1, 7 Other personnel expenses 2 Total personnel expenses For the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 6,859 3,392 316 121 173 (215) 216 21 217 743 788 2,518 758 15,591 8 7,033 4,082 230 107 135 (167) 69 85 232 826 724 2,667 1,127 16,920 7,383 2,809 699 41 56 (81) 433 250 275 804 988 2,426 1,159 16,543 (2) (17) 37 13 28 29 213 (75) (6) (10) 9 (6) (33) (8) 1 Refer to “Note 30 Equity participation and other compensation plans” of this report for more information. 2 In 2011, we reclassified the costs related to our voluntary employee share ownership plan (Equity Plus) from Variable compensation – other to Other personnel expenses. Prior periods were adjusted for this change. As a result, Other personnel expenses were increased by CHF 80 million and CHF 132 million for the year ended 31 December­2010­and­for­the­year­ended­31­December­2009,­respectively,­with­a­corresponding­decrease­in­Variable­compensation­–­other.­ ­ 3 Replacement payments are payments made to compensate employees for deferred­awards­forfeited­as­a­result­of­joining­UBS.­ ­ 4 Includes legally obligated and standard severance payments. 5 Retention plan payments related to strategic retention programs. 6 Refer to “Note 29 Pension and other post-employment benefit plans” of this report for more information. 7 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements. 8 Includes restructuring charges of CHF 261 million. Refer to “Note 37 Reorganizations and disposals” for more information. Note 7 General and administrative expenses CHF million Occupancy Rent and maintenance of IT and other equipment Communication and market data services Administration Marketing and public relations Travel and entertainment Professional fees Outsourcing of IT and other services Litigation and regulatory matters 1 Other 2 Total general and administrative expenses For the year ended 31.12.11 1,059 31.12.10 1,252 31.12.09 1,420 429 616 621 393 470 822 1,151 276 122 5,959 555 664 669 339 466 754 1,078 631 175 6,585 623 697 695 225 412 830 836 233 279 6,248 % change from 31.12.10 (15) (23) (7) (7) 16 1 9 7 (56) (30) (10) 1 Reflects the net increase / release of provisions for Litigation and regulatory matters recognized in the income statement and recoveries from third parties. 2 Includes mainly real estate related restructuring charges of CHF­93­million,­CHF­79­million­and­CHF­256­million­for­the­years­ended­31­December­2011,­31­December­2010­and­31­December­2009,­respectively.­Refer­to­“Note­37­Reorganizations­and­disposals”­for­more­ 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 8 Earnings per share (EPS) and shares outstanding As of or for the year ended % change from 31.12.11 31.12.10 31.12.09 31.12.10 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 Mandatory convertible notes and exchangeable shares 2 Shares outstanding for EPS 4,159 4,158 0 4,159 (3) 4,156 4,155 0 7,534 7,533 1 7,534 (2) 7,532 7,531 1 (2,736) (2,719) (17) (2,736) (5) (2,741) (2,724) (17) 3,774,036,437 3,789,732,938 3,661,086,266 61,259,378 48,599,111 754,948 3,835,295,815 3,838,332,049 3,661,841,214 0 1.10 1.10 0.00 1.08 1.08 0.00 0 20,166,373 1.99 1.99 0.00 1.96 1.96 0.00 (0.75) (0.74) 0.00 (0.75) (0.74) 0.00 3,832,121,899 3,830,840,513 3,558,112,753 84,955,551 38,892,031 37,553,872 3,747,166,348 3,791,948,482 3,520,558,881 509,243 580,261 273,264,461 3,747,675,591 3,792,528,743 3,793,823,342 (45) (45) (100) (45) 50 (45) (45) (100) 0 26 0 (45) (45) (45) (45) 0 118 (1) (12) (1) 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 244,151,646; 241,320,185 and 288,915,585 for the years ended 31 December 2011, 31 December 2010 and 31 December 2009, respectively. An additional 100 million ordinary shares (“contingent share issue”) related to the SNB transaction were not dilutive for any periods presented, but could potentially dilute earnings per share in the future. 2 31 December 2009 includes 272,651,005 shares for the mandatory convertible notes issued to two investors in March 2008. All other numbers related to exchangeable shares. 328 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 Current accounts and 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) 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) 31.12.11 31.12.10 23,235 (17) 23,218 125,775 21,247 108,887 11,520 267,429 (825) (83) 266,604 289,822 161,365 8,222 24,396 48,542 20,645 27,494 290,664 (842) 289,822 148,319 56,613 32,201 53,532 290,664 (842) 289,822 17,158 (24) 17,133 122,499 20,362 99,710 21,392 263,964 (1,087) (273) 262,877 280,010 161,108 6,978 21,257 50,701 16,614 24,464 281,121 (1,111) 280,010 144,403 46,565 29,303 60,851 281,121 (1,111) 280,010 1 Includes leveraged finance loans of CHF 0.4 billion (gross of allowances) reclassified from held-for trading as of 31 December 2011 (31 December 2010: CHF 0.5 billion). Refer to Note 1a)10) and Note 28b for more information on reclassified assets. Refer to Note 9b for more information on allowances for reclassified assets. 2 Includes US student loan auction rate securities (ARS) of CHF 2.8 billion (gross of allowances) reclassi- fied from held-for-trading as of 31 December 2011 (31 December 2010: CHF 4.3 billion), other securities of CHF 2.2 billion (gross of allowances) reclassified from held-for-trading as of 31 December 2011 (31 December 2010: CHF 7.4 billion) and CHF 6.5 billion (gross of allowances) similar acquired securities from clients as of 31 December 2011 (31 December 2010: CHF 9.7 billion). Refer to Note 1a)10) and Note 28b for more infor- mation on reclassified assets. Refer to Note 9b for more information on allowances for reclassified assets. 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 9b Allowances and provisions for credit losses CHF million Balance at the beginning of the year Write-offs / usage of provisions Recoveries Increase / (decrease) in credit loss allowances and provisions recognized in the income statement Foreign currency translation and other adjustments Balance at the end of the year of which: a reduction of due from banks of which: a reduction of loans of which: a reduction of cash collateral on securities borrowed Specific allowances Collective loan loss allowances 1,109 (486) 51 22 18 714 17 694 2 3 47 (1) 0 84 0 131 0 131 0 Provisions 1 130 (14) 0 (22) (2) 93 Total 31.12.11 Total 31.12.10 1,287 (501) 51 84 17 938 17 825 3 2,820 (1,505) 79 66 (173) 1,287 24 1,087 46 1 Provisions for loan commitments and guarantees, which are included in Other liabilities. Refer to “Note 21 Provisions and contingent liabilities” for more information. Refer to the “Financial and operating performance” section of this report for the maximum irrevocable amount of loan commitments and guarantees. 2 Includes allowances of CHF 43 million (31 December 2010: CHF 157 million) related to US student loan auction rate securities reclassified from held-for-trading, CHF 25 million (31 December 2010: CHF 63 million) related to other securities reclassified from held-for-trading, CHF 15 million (31 December 2010: CHF 52 million) related to similar acquired securities and CHF 32 million (31 December 2010: CHF 33 million) related to leveraged finance loans reclassified from held-for-trading. Refer to Note 1a)10) and Note 28b for more information on reclassified assets. Note 10 Cash collateral on securities borrowed and lent, reverse repurchase and repurchase agreements, and derivative instruments The Group enters into collateralized reverse repurchase and repur- chase agreements, securities borrowing and securities lending transactions and derivative 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. Cash collateral on securities borrowed 31.12.11 Reverse repurchase agreements 31.12.11 Cash collateral receivables on  derivative instruments 31.12.11 Cash collateral on securities borrowed 31.12.10 Reverse repurchase agreements 31.12.10 Cash collateral receivables on  derivative instruments 31.12.10 17,236 41,527 58,763 133,010 80,491 213,501 22,341 18,980 41,322 20,302 42,153 62,454 91,788 51,002 142,790 20,230 17,841 38,071 Cash collateral on securities lent 31.12.11 Repurchase agreements 31.12.11 Cash collateral payables on  derivative instruments 31.12.11 Cash collateral on securities lent 31.12.10 Repurchase agreements 31.12.10 Cash collateral payables on  derivative instruments 31.12.10 7,601 536 8,136 16,986 85,443 102,429 38,890 28,224 67,114 5,820 831 6,651 28,201 46,595 74,796 34,930 23,994 58,924 Balance sheet assets CHF million By counterparty Banks Customers Total Balance sheet liabilities CHF million By counterparty Banks Customers Total 330 Note 11 Trading portfolio CHF million Trading portfolio assets by issuer type Debt instruments Government and government agencies of which: Switzerland of which: United States of which: Japan of which: United Kingdom of which: Germany of which: Australia Banks Corporates and other 1 Total debt instruments 1 Equity instruments 1 Financial assets for unit-linked investment contracts Financial assets held for trading Precious metals and other physical commodities Total trading portfolio assets Trading portfolio liabilities by issuer type Debt instruments Government and government agencies of which: Switzerland of which: United States of which: Japan of which: United Kingdom of which: Germany of which: Australia Banks Corporates and other 1 Total debt instruments 1 Equity instruments 1 Total trading portfolio liabilities 31.12.11 31.12.10 62,118 418 22,958 14,258 3,709 3,547 3,540 10,597 36,330 109,045 37,400 16,376 162,821 18,704 181,525 18,913 261 5,634 3,894 1,946 2,492 756 1,913 4,716 25,542 13,937 39,480 83,952 13,292 19,843 25,996 2,707 3,679 4,463 14,711 48,818 147,481 44,335 18,056 209,873 18,942 228,815 29,628 237 11,729 7,699 3,103 2,350 953 3,107 5,474 38,209 16,765 54,975 1 From 2011 onwards, investment fund units have been classified as Corporates and other debt instruments; previously these investment fund units were classified as equity instruments. The comparative period has been adjusted accordingly; refer to “Note 1b) Changes in accounting policies, comparability and other adjustments” for more information. n o i t a m r o f n i l a i c n a n i F 331 Financial information Notes to the consolidated financial statements Note 11 Trading portfolio (continued) CHF million Level 1 Level 2 Level 3 Total 31.12.11 31.12.10 Trading portfolio assets by product type Debt instruments Government bills / bonds Corporate bonds, municipal bonds, including bonds issued by financial institutions Loans Investment fund units 1 Asset-backed securities of which: mortgage-backed securities Total debt instruments 1 Equity instruments 1 Financial assets for unit-linked investment contracts Financial assets held for trading Precious metals and other physical commodities Total trading portfolio assets Trading portfolio liabilities by product type Debt instruments Government bills / bonds Corporate bonds, municipal bonds, including bonds issued by financial institutions Investment fund units 1 Asset-backed securities of which: mortgage-backed securities Total debt instruments 1 Equity instruments 1 Total trading portfolio liabilities 34,449 695 0 3,779 9,513 9,513 48,436 35,312 15,616 99,363 15,418 471 921 0 0 16,809 13,621 30,430 10,753 29,699 2,698 6,048 3,785 2,673 52,983 1,933 760 55,677 1,608 6,315 161 17 9 8,101 313 8,414 95 2,371 1,390 33 3,737 1,684 7,625 155 0 7,781 0 335 1 296 278 632 3 636 45,297 32,765 4,088 9,859 17,035 13,868 109,045 37,400 16,376 162,821 18,704 181,525 17,026 7,122 1,083 312 287 25,542 13,937 39,480 66,435 47,237 5,543 13,171 15,098 10,355 147,481 44,335 18,056 209,873 18,942 228,815 26,650 10,525 834 200 123 38,209 16,765 54,975 1 From 2011 onwards, investment fund units have been classified as debt instruments; previously these investment fund units were classified as equity instruments. The comparative period has been adjusted accordingly; refer to “Note 1b) Changes in accounting policies, comparability and other adjustments” for more information. 332 Note 12 Financial assets designated at fair value CHF million Loans Structured loans Reverse repurchase and securities borrowing agreements of which: banks of which: customers Other debt instruments Financial assets designated at fair value – debt instruments Investment fund units and other Total financial assets designated at fair value 31.12.11 2,358 960 6,071 3,514 2,557 218 9,607 730 10,336 31.12.10 1 2,173 833 4,383 3,038 1,345 258 7,647 856 8,504 1 In 2011, we corrected the amounts presented for 31 December 2010. As a result, Loans were reduced by CHF 158 million, Structured loans were reduced by CHF 96 million and Reverse repurchase and securities bor- rowing agreements of which: banks were increased by CHF 254 million. The maximum exposure to credit risk of financial assets desig- nated at fair value – debt instruments is equal to the fair value, except for Other debt instruments. The maximum exposure is mitigated by collateral, which mainly relates to structured loans and reverse repurchase and securities borrowing agreements of CHF 6,919 million and CHF 3,929 million for 31 December 2011 and 31 December 2010, respectively. These collateral values are capped at the maximum exposure to credit risk for which they serve as security. Other debt instruments mainly reflect loan commitments and letters of credit designated at fair value which have a maximum exposure to credit risk of CHF 4,423 million and CHF 2,198 mil- lion as of 31 December 2011 and as of 31 December 2010, respectively. The maximum exposure to credit risk of these in­ struments is generally hedged through derivative transactions. Investment fund units and other are not directly exposed to credit risk. The maximum exposure to credit risk of loans, but not struc- tured loans, is generally mitigated by credit derivatives or similar instruments. Information regarding these instruments and the exposure which they mitigate is provided in the table below on a notional basis. Notional amounts of loans designated at fair value and related credit derivatives CHF million Loans – notional amount Credit derivatives related to loans – notional amount 1 Credit derivatives related to loans – fair value 1 1 Credit derivatives contracts include credit default swaps, total return swaps and similar instruments. 31.12.11 31.12.10 2,595 1,404 37 2,204 1,730 (5) The table below provides the impact to the fair values of loans from changes in credit risk for the periods presented and cumulatively since inception. Similarly, the change in fair value of credit derivatives and similar instruments which are used to hedge these loans is also provided. Changes in fair value attributable to changes in credit risk CHF million Changes in fair value of loans designated at fair value, attributable to changes in credit risk 1 Changes in fair value of credit derivatives and similar instruments which mitigate the maximum exposure to credit risk of loans designated at fair value 1 For the year ended Cumulative from inception until the year ended 31.12.11 31.12.10 31.12.11 31.12.10 (15) 35 100 (94) (49) 37 (27) (5) 1 Current and cumulative changes in the fair value of loans designated at fair value, attributable to changes in their credit risk are only calculated for those loans outstanding at balance sheet date. Current and cumula- tive changes in the fair value of credit derivatives hedging such loans include all 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 333 Financial information Notes to the consolidated financial statements Note 13 Financial investments available-for-sale CHF million Financial investments available-for-sale by issuer type Debt instruments Government and government agencies of which: Switzerland of which: United States of which: Japan of which: United Kingdom of which: France Banks Corporates and other 1 Total debt instruments 1 Equity instruments 1 Total financial investments available-for-sale Unrealized gains – before tax Unrealized (losses) – before tax 2 Net unrealized gains / (losses) – before tax Net unrealized gains / (losses) – after tax 31.12.11 31.12.10 47,144 357 25,677 8,854 3,477 2,170 4,271 1,060 52,475 699 53,174 477 (55) 422 250 67,552 3,206 38,070 6,541 8,303 3,005 5,091 1,206 73,850 918 74,768 514 (662) (148) (243) 1 From 2011 onwards, investment fund units have been classified as Corporates and other debt instruments; previously these investment fund units were classified as equity instruments. The comparative period has been adjusted accordingly; refer to “Note 1b) Changes in accounting policies, comparability and other adjustments” for more information. 2 Includes losses of CHF 28 million with a duration of more than 12 months as of 31 December 2011 (31 December 2010: CHF 31 million). CHF million Level 1 Level 2 Level 3 Total 31.12.11 31.12.10 Financial investments available-for-sale by product Debt instruments Government bills / bonds Corporate bonds, municipal bonds, including bonds issued by financial institutions Investment fund units 1 Asset-backed securities of which: mortgage-backed securities Total debt instruments 1 Equity instruments Shares Private Equity investments Total equity instruments 1 Total financial investments available-for-sale 33,999 632 24 0 0 868 7,881 416 8,541 8,541 34,654 17,706 155 0 155 30 1 32 34,810 17,738 33 77 5 0 0 115 296 216 512 627 34,899 8,590 445 8,541 8,541 52,475 481 218 699 57,642 11,670 441 4,097 4,093 73,850 690 227 918 53,174 74,768 1 From 2011 onwards, investment fund units have been classified as debt instruments; previously these investment fund units were classified as equity instruments. The comparative period has been adjusted accordingly. Refer to “Note 1 Summary of significant accounting policies” for more information. 334 Note 14 Investments in associates CHF million Carrying amount at the beginning of the year Additions Disposals Income Other comprehensive income Impairments Dividends paid Foreign currency translation Carrying amount at the end of the year 31.12.11 790 1 (4) 42 (27) 0 (28) 21 795 31.12.10 870 19 (93) 86 (1) (6) (29) (55) 790 Significant associated companies of the Group had the following balance sheet and income statement totals on an aggregated basis, not adjusted for the Group’s proportionate interest. Refer to “Note 33 Significant subsidiaries and associates”. CHF million Assets Liabilities Revenues Net profit 31.12.11 5,806 3,789 1,356 181 31.12.10 6,391 4,391 1,371 239 Note 15 Property and equipment At historical cost less accumulated depreciation CHF million Historical cost Balance at the beginning of the year Additions Additions from acquired companies Disposals / write-offs 2 Reclassifications Foreign currency translation Balance at the end of the year Accumulated depreciation Balance at the beginning of the year Depreciation 3 Disposals / write-offs 2 Reclassifications Foreign currency translation Balance at the end of the year Net book value at the end of the year 4 Own-used properties Leasehold improvements IT hardware, software and communication Other machines and equipment Projects in progress 31.12.11 31.12.10 8,617 62 0 (69) 67 1 8,679 4,844 194 (69) (34) (2) 4,934 3,745 2,832 76 1 (336) 93 8 2,674 2,005 217 (327) 23 12 1,930 744 4,002 393 1 (357) 5 5 4,049 3,625 293 (328) 0 5 3,596 453 700 55 0 (29) 11 (1) 736 518 57 (28) (1) 1 546 190 213 542 0 0 (216) 6 545 0 0 0 0 0 0 545 16,364 1,129 2 (791) (40) 19 16,683 10,991 761 (752) (12) 16 11,005 5,678 17,169 1 538 0 (629) 1 (132) (583) 16,364 1 11,073 1 918 (575) 1 12 (437) 10,991 1 5,373 1 In 2011, we corrected the amounts presented for 2010 for both historical cost and accumulated depreciation. Net book value at the end of the year was not impacted. 2 Includes write-offs of fully depreciated assets. 3 In 2011, amounts presented include a CHF 22 million net reversal of impairments of own used property, CHF 29 million net impairments of leasehold improvements and CHF 3 million net impairments of other machines and equipment. 4 Fire insurance value of property and equipment is CHF 13,075 million (2010: CHF 13,092 million), predominantly related to real estate. Investment properties at fair value CHF million Balance at the beginning of the year Additions Sales Revaluations Reclassifications Foreign currency translation Balance at the end of the year 31.12.11 94 0 (87) 4 (1) (1) 10 31.12.10 116 3 (23) 2 6 (10) 94 335 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 16 Goodwill and intangible assets Introduction As of 31 December 2011, the following four segments carried goodwill: Wealth Management (CHF 1.3 billion), Wealth Man- agement Americas (CHF 3.3 billion), Global Asset Management (CHF 1.4 billion), and the Investment Bank (CHF 3.0 billion). For the purpose of testing goodwill for impairment, UBS considers the segments as reported in “Note 2a Segment reporting” as separate cash-generating units, and determines the recoverable amount of a segment on the basis of the value in use. On the basis of the impairment testing methodology described below, UBS concluded that the year­end 2011 balances of goodwill allo- cated to its segments remain recoverable. Methodology for goodwill impairment testing The recoverable amount is determined using a discounted cash flow model, which uses inputs that consider features of the banking busi- ness and its regulatory environment. The recoverable amount of a segment is the sum of the discounted earnings attributable to share- holders from the first five individually forecasted years and the ter- minal value. The terminal value reflecting all periods beyond the fifth year is calculated on the basis of the forecast of fifth­year profit, the discount rate and the long­term growth rate. The carrying amount for each segment is determined by refer- ence to the equity attribution framework. Within this framework, which is described in the “Capital management” section of this re- port, management attributes equity to the businesses after consid- ering their risk exposure, RWA usage, asset size, goodwill and intan- gible assets. The framework is used primarily for purposes of measuring the performance of the businesses and includes certain management assumptions. Attributed equity equates to the capital that a segment requires to conduct its business and is considered an appropriate starting point from which to determine the carrying value of the segments. The attributed equity methodology is aligned with the business planning process, the inputs from which are used in calculating the recoverable amounts of the respective cash-gener- ating units. Assumptions Valuation parameters used within the Group’s impairment test model are linked to external market information, where applicable. The model used to determine the recoverable amount is most sensitive to changes in the forecast earnings available to shareholders in years one to five, to changes in the discount rates, and to changes in the long-term growth rate. The applied long­term growth rate is based on long­term economic growth rates for different regions worldwide. Earn- ings available to shareholders are estimated based on forecast results, which are part of the Business plan approved by the Board of Directors. The discount rates are determined by ap- plying a capital-asset-pricing-model-based approach, as well as considering quantitative and qualitative inputs from both internal and external analysts and the view of UBS’s manage- ment. Key assumptions used to determine the recoverable amounts of each segment are tested for sensitivity by apply- ing a reasonably possible change to those assumptions. Fore- cast earnings available to shareholders were changed by up to 20%, the discount rates were changed by 1% and the long- term growth rates were changed by 0.5%. Under all but one scenario, the recoverable amounts for each of the segments exceeded their respective carrying amounts such that the rea- sonably possible changes in key assumptions would not result in impairment. When forecast earnings from the Investment Bank are changed by 20%, the Investment Bank’s carrying amount exceeds the recoverable amount. At 31 December 2011, the Investment Bank’s recoverable amount exceeds its carrying amount by CHF 3.8 billion. If forecast earnings for the Investment Bank were changed by approximately 12%, then the Investment Bank’s recoverable amount would be equal to its carrying amount. If the estimated earnings and other assumptions in future periods deviate from the current outlook, the value of our goodwill may become impaired in the future, giving rise to losses in the income statement. This may be the case if the regulatory pressure on the banking industry further intensifies and conditions in the financial markets diminish our perfor- mance relative to forecast. Recognition of any impairment of goodwill would reduce IFRS Equity attributable to UBS share- holders and net profit. It would not impact cash flows and, as  goodwill is required to be deducted from capital under the  Basel capital framework, there would be no impact to the BIS tier 1 capital ratio or BIS total capital ratio of the UBS Group. Discount and growth rates In % Wealth Management Wealth Management Americas Global Asset Management Investment Bank 336 Discount rates Growth rates 31.12.11 31.12.10 31.12.11 31.12.10 10.7 10.0 10.0 12.0 9.0 9.0 9.0 11.0 1.7 2.4 2.4 2.4 1.2 2.4 2.4 2.4 Note 16 Goodwill and intangible assets (continued) CHF million Historical cost Balance at the beginning of the year Additions and reallocations Disposals Write-offs 2 Foreign currency translation Balance at the end of the year Accumulated amortization and impairment Balance at the beginning of the year Amortization Impairment Disposals Write-offs 2 Foreign currency translation Balance at the end of the year Goodwill Total Infrastructure Intangible assets Customer relationships, contractual rights and other 9,115 (7) 1 0 0 (35) 9,074 0 0 0 0 0 0 0 710 0 0 0 3 713 362 34 0 0 0 4 399 314 809 47 (2) 0 0 854 450 56 37 0 0 4 547 307 Total 31.12.11 31.12.10 1,519 10,634 11,795 47 (2) 0 3 40 (2) 0 (32) 1,567 10,641 812 90 37 0 0 8 946 621 812 90 37 0 0 8 946 9,695 34 (3) (1) (1,190) 10,634 787 105 12 0 (1) (91) 812 9,822 Net book value at the end of the year 9,074 1 Mainly includes the addition of CHF 11 million related to two business acquisitions completed in 2011, more than offset by a downward purchase price adjustment of CHF 20 million for an acquisition completed prior to the adoption of IFRS 3 revised. Refer to “Note 35 Business combinations” for more information. 2 Represents write-offs of fully amortized intangible assets. 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 16 Goodwill and intangible assets (continued) The following table presents the disclosure of goodwill and intangible assets by business unit for the year ended 31 December 2011. Balance at the beginning of the year Additions and reallocations Disposals Amortization Impairment Foreign currency translation Balance at the end of the year CHF million Goodwill Wealth Management Wealth Management Americas Global Asset Management Investment Bank UBS Intangible assets Wealth Management Wealth Management Americas Global Asset Management Investment Bank UBS 1,351 3,303 1,448 3,013 9,115 100 425 40 143 707 (20) 1 7 7 (7) 1 6 9 30 47 (6) (48) (7) (30) (90) (31) (1) (4) (37) (2) (2) 1 Reflects a downward purchase price adjustment of CHF 20 million for an acquisition completed prior to the adoption of IFRS 3 revised. The estimated, aggregated amortization expenses for intangible assets are as follows: CHF million Estimated, aggregated amortization expenses for: 2012 2013 2014 2015 2016 2017 and thereafter Not amortized due to indefinite useful life Total Note 17 Other assets CHF million Prime brokerage receivables Deferred pension expenses 1 Settlement and clearing accounts Properties and other non-current assets held for sale VAT and other tax receivables Other receivables Total other assets 1 Refer to “Note 29 Pension and other post-employment benefit plans” of this report for more information. 338 (12) (10) (13) 0 (35) (2) (1) (1) (1) (5) 1,319 3,293 1,442 3,019 9,074 62 382 41 136 621 Intangible assets 90 83 76 75 63 212 22 621 31.12.11 6,103 3,300 482 183 176 2,222 12,465 31.12.10 16,395 3,174 708 302 275 1,827 22,681 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 held at amortized cost Financial liabilities designated at fair value CHF million Bonds and structured debt instruments issued Equity linked Credit linked Rates linked Other Total Structured debt instruments – OTC Repurchase agreements Loan commitments 2 Total 31.12.11 30,201 114,079 228,330 342,409 372,610 31.12.10 41,490 104,607 227,694 332,301 373,791 31.12.11 31.12.10 1 40,104 10,481 22,561 1,912 75,059 13,001 477 445 47,810 13,100 23,462 3,671 88,043 12,475 93 145 88,982 100,756 1 In 2011, we corrected the classification of bonds and structured debt instruments issued. 2 Loan commitments recognized as “Financial liabilities designated at fair value” until drawn down and recognized as loans. See Note 1a) 8) for additional information. As of 31 December 2011, the contractual redemption amount at maturity of Financial liabilities designated at fair value through profi t or loss was CHF 6.1 billion higher than the carrying value. As of 31 December 2010, the contractual redemption amount at maturity of such liabilities was CHF 3.7 billion higher than the car­ rying value. The 2010 number has been corrected from CHF 11.1 billion to CHF 3.7 billion. Refer to Note 1a) 8) for details on Finan­ cial liabilities designated at fair value through profi t or loss. Debt issued (held at amortized cost) CHF million Short-term debt Long-term debt: Senior bonds Subordinated bonds Debt issued through the central bond institutions of the Swiss regional or cantonal banks Medium-term notes Total1 1 Net of bifurcated embedded derivatives with a net fair value of CHF 955 million as of 31 December 2011 (31 December 2010: CHF 1,357 million). 31.12.11 71,377 53,113 7,035 7,141 1,951 140,617 31.12.10 56,039 54,627 8,547 8,455 2,605 130,271 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 19 Financial liabilities designated at fair value and debt issued held at amortized cost (continued) The Group uses interest rate and foreign exchange derivatives 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 De- rivative instruments and hedge accounting”. As a result of apply- ing hedge accounting, as of 31 December 2011 and 31 December 2010, the carrying value of debt issued was CHF 2,051 million and CHF 913 million higher, respectively, reflecting changes in fair value due to interest rate movements. The Group issues both CHF­ and non­CHF­ denominated fixed­ rate and floating­rate 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. As of 31 December 2011 and 31 December 2010, the Group had CHF 7,035 million and CHF 8,547 million in subordi- nated debt, respectively. A majority of the subordinated debt out- standing as of 31 December 2011 pays a fixed rate of interest, with the remainder paying floating­rate interest based on three­ month or six­month London Interbank Offered Rate (LIBOR). Both the fixed and floating rate instruments provide for a single princi- pal payment upon maturity. As of 31 December 2011 and 31 December 2010, the Group had CHF 137,263 million and CHF 153,730 million in unsubordi- nated debt (excluding short-term debt, compound debt instru- ments – OTC, repurchase agreements and loan commitments designated at fair value), respectively. The following table shows the split between fixed­rate and floating­rate debt issues based on the contractual terms and does not consider early redemption features. It should be noted that the Group uses interest rate swaps to hedge many of the fixed­ rate debt issues, which changes their re-pricing characteristics into those of floating­rate debt. Contractual maturity dates CHF million, except where indicated 2012 2013 2014 2015 2016 2017–2021 Thereafter UBS AG (Parent Bank) Senior debt Fixed rate Interest rates (range in %) Floating rate Subordinated debt Fixed rate Interest rates (range in %) Floating rate Subtotal Subsidiaries Senior debt Fixed rate Interest rates (range in %) Floating rate Subtotal Total 61,969 0–10.0 19,620 15,694 0–10.0 10,244 0 0 0 0 10,443 0–8.8 6,471 386 3.1 0 8,193 0–8.4 6,087 1,064 2.4–7.4 0 4,865 0–10.0 4,235 1,422 3.1–5.9 0 81,589 25,938 17,300 15,344 10,522 Total 31.12.11 Total 31.12.10 127,015 116,1931 64,339 81,9461 6,350 6,412 5,486 0–8.0 11,403 1,022 6.4–8.8 0 17,911 198,390 685 2,134 206,685 20,365 0–8.4 6,280 2,457 4.1–7.4 685 29,787 3,411 0–8.1 1,328 4,739 17,961 0–8.2 605 18,566 100,155 266 0–2.8 1,327 1,593 137 0–7.6 624 762 104 0–7.4 1,076 1,181 713 0–8.3 313 1,027 849 0–6.2 2,492 3,341 23,443 14,396 7,766 31,208 9,947 24,342 27,531 18,062 16,525 11,548 34,526 21,252 229,599 231,027 1 In 2011, we corrected the split of fixed rate and floating rate senior debt. Total fixed rate senior debt was corrected from CHF 138,767 million to CHF 116,193 million. Total floating rate senior debt was corrected from CHF 59,372 million to CHF 81,946 million. Total senior debt was not impacted. 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 de- rivatives. 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 application of hedge accounting. 340 Note 20 Other liabilities CHF million Prime brokerage payables Amounts due under unit-linked investment contracts Provisions 1 Settlement and clearing accounts Current tax liabilities Deferred tax liabilities 2 VAT and other tax payables Accrued pension and post-employment benefit liability 3 Other payables 4 Total other liabilities 31.12.11 31.12.10 36,746 16,481 1,626 874 505 79 492 406 4,482 61,692 36,383 18,125 1,704 961 750 97 579 395 4,726 63,719 1 Presentational changes have been made in 2011. Total provisions now also include provisions for loan commitments and guarantees. Refer to “Note 21 Provisions and contingent liabilities” for more information. 2 Refer to “Note 22 Income taxes” for more information. 3 Refer to “Note 29 Pension and other post-employment benefit plans” for more information.  4 2011 includes third-party interest in consolidated limited partnerships of CHF 1.4 billion (2010: CHF 0.9 billion) and liabilities from cash settled employee compensation plans of CHF 1.6 billion (2010: CHF 1.7 billion). Note 21 Provisions and contingent liabilities a) Provisions 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 / Unwind of discount Balance at the end of the year Operational risks 1 56 Litigation and  regulatory matters 2 618 0 60 (9) (50) 0 0 0 2 58 0 396 (87) (455) 0 0 0 10 482 Loan commitments and guarantees Restructuring 281 0 393 (55) (115) 0 0 (49) 5 13 467 130 0 6 (28) (14) 0 0 (2) 1 93 Other 3 619 2 92 (109) (82) (2) (1) 0 7 Total 31.12.11 1,704 Total 31.12.10 4 2,401 2 947 (288) (716) (2) (1) (52) 32 0 1,126 (286) (1,341) (24) (1) 8 (180) 1,704 525 1,626 1 Includes provisions for litigation resulting from security risks and transaction processing risks. 2 Includes litigation resulting from legal, liability and compliance risks. Additionally, includes a provision established in connection with demands for repurchase of US mortgage loans sold or securitized by UBS as described in section c) of this Note. 3 Includes reinstatement costs for leasehold improvements which amounted to CHF 109 million on 31 December 2011 (CHF 122 million on 31 December 2010), provisions for onerous lease contracts, provisions for employee benefits (service anniversaries and sabbatical leave) and other items. 4 Presentational changes have been made in 2011. Total provisions now also include provisions for loan commitments and guarantees. These provisions were previously separately disclosed in “Note 20 Other liabilities”. 5 Reflects a reclassification to share premium of the restructuring provisions related to share-based compensation. 341 Financial informationFinancial information Notes to the consolidated fi nancial statements Note 21 Provisions and contingent liabilities (continued) b) Litigation and regulatory matters The Group operates in a legal and regulatory environment that exposes it to signifi cant litigation risks. As a result, UBS (which for purposes of this note may refer to UBS AG and / or one or more of its subsidiaries, as applicable) is involved in various disputes and legal proceedings, including litigation, arbitration, and regulatory and criminal investigations. Such cases are subject to many uncer­ tainties, and the outcome is often diffi cult to predict, including the impact on operations or on the fi nancial 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 cost­benefi t analysis, enter into a settlement even though denying 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 reliably estimated. Certain potentially signifi cant legal proceedings or threatened proceedings as of 31 December 2011 are described below. In some cases we provide the amount of damages claimed, the size of a transaction or other information in order to assist investors in considering the magnitude of any potential exposure. We are unable to provide an estimate of the possible fi nancial effect of particular claims or proceedings (where the possibility of an out- fl ow is more than remote) beyond the level of current reserves established. Doing so would require us to provide speculative le­ gal assessments as to claims and proceedings which involve unique fact patterns or novel legal theories, which have not yet been initiated or are at early stages of adjudication, or as to which alleged damages have not been quantifi ed by the claim­ ants. In many cases a combination of these factors impedes our ability to estimate the fi nancial effect of contingent liabilities. We also believe that such estimates could seriously prejudice our po- sition in these matters. 1) Municipal bonds On 4 May 2011, UBS announced a USD 140.3 million settlement with the US Securities and Exchange Commission (SEC), the Anti­ trust Division of the US Department of Justice (DOJ), the Internal Revenue Service (IRS) and a group of state attorneys general relat­ ing to the investment of proceeds of municipal bond issuances and associated derivative transactions. The settlement resolves the investigations by those regulators which had commenced in November 2006. Several related putative class actions, which were fi led in Federal District Courts against UBS and numerous other fi rms, remain pending. However, approximately USD 63 mil­ lion of the regulatory settlement will be made available to poten- tial claimants through a settlement fund, and payments made through the fund should reduce the total monetary amount at issue in the class actions for UBS. In December 2010, three former UBS employees were indicted in connection with the Federal crim­ 342 inal antitrust investigation; those individual matters also remain pending. 2) Auction rate securities In late 2008, UBS entered into settlements with the SEC, the New York Attorney General (NYAG) and the Massachusetts Securities Di­ vision whereby UBS agreed to offer to buy back Auction Rate Secu­ rities (ARS) from eligible customers, and to pay penalties of USD 150 million (USD 75 million to the NYAG and USD 75 million to the other states). UBS has since fi nalized settlements with all of the states. The settlements resolved investigations following the indus­ try­wide disruption in the markets for ARS and related auction fail­ ures beginning in mid­February 2008. The SEC continues to investi­ gate individuals affi liated with UBS regarding the trading in ARS and disclosures. UBS was also named in (i) several putative class actions; (ii) arbitration and litigation claims asserted by investors relating to ARS, including a pending consequential damages claim by a former customer for damages of USD 76 million; and (iii) arbitration and litigation claims asserted by issuers, including a pending litigation under state common law and a state racketeering statute seeking at least USD 40 million in compensatory damages, plus exemplary and treble damages, and several recently fi led arbitration claims al­ leging violations of state and federal securities law that seek com- pensatory and punitive damages, among other relief. 3) Inquiries regarding cross-border wealth management businesses Following the disclosure and the settlement of the US cross­bor­ der matter, tax and regulatory authorities in a number of coun- tries have made inquiries and served requests for information lo- cated in their respective jurisdictions relating to the cross-border wealth management services provided by UBS and other fi nancial institutions. UBS is cooperating with these requests within the limits of fi nancial privacy obligations under Swiss and other ap­ plicable laws. 4) Matters related to the credit crisis UBS is responding to a number of governmental inquiries and in­ vestigations and is involved in a number of litigations, arbitrations and disputes related to the credit crisis and in particular mortgage- related securities and other structured transactions and derivatives. In particular, the SEC is investigating UBS’s valuation of super se­ nior tranches of collateralized debt obligations (CDO) during the third quarter of 2007, UBS’s structuring and underwriting of cer­ tain CDOs during the fi rst and second quarters of 2007, and UBS’s reclassifi cation of fi nancial assets pursuant to amendments to IAS 39 during the fourth quarter of 2008. UBS has provided docu­ Note 21 Provisions and contingent liabilities (continued) ments and testimony to the SEC and is continuing to cooperate with the SEC in its investigations. UBS has also communicated with and has responded to other inquiries by various governmental and regulatory authorities, including the Swiss Financial Market Super­ visory Authority (FINMA), the UK Financial Services Authority (FSA), the SEC, the US Financial Industry Regulatory Authority (FINRA), the Financial Crisis Inquiry Commission (FCIC), the New York At­ torney General, and the US Department of Justice, concerning various matters related to the credit crisis. These matters concern, among other things, UBS’s (i) disclosures and writedowns, (ii) inter­ actions with rating agencies, (iii) risk control, valuation, structuring and marketing of mortgage­related instruments, and (iv) role as underwriter in securities offerings for other issuers. 5) Lehman principal protection notes From March 2007 through September 2008, UBS Financial Services Inc. (UBSFS) sold approximately USD 1 billion face amount of struc­ tured notes issued by Lehman Brothers Holdings Inc. (Lehman), a majority of which were referred to as “principal protection notes,” refl ecting the fact that while the notes’ return was in some manner linked to market indices or other measures, some or all of the inves- tor’s principal was an unconditional obligation of Lehman as issuer of the notes. UBSFS has been named along with other defendants in a putative class action alleging materially misleading statements and omissions in the prospectuses relating to these notes and as- serting claims under US securities laws. UBSFS has also been named in numerous individual civil suits and customer arbitrations (some of which have resulted in settlements or adverse judgments), was named in a proceeding brought by the New Hampshire Bureau of Securities which was settled for USD 1 million, and is responding to investigations by other state regulators relating to the sale of these notes to UBSFS’s customers. The customer litigations and regula­ tory investigations relate primarily to whether UBSFS adequately disclosed the risks of these notes to its customers. In April 2011, UBSFS entered into a settlement with FINRA related to the sale of these notes, pursuant to which UBSFS agreed to pay a USD 2.5 mil­ lion fi ne and approximately USD 8.25 million in restitution and in­ terest to a limited number of investors in the US. 6) Claims related to sales of residential mortgage-backed securities and mortgages From 2002 through about 2007, UBS was a substantial under­ writer and issuer of US residential mortgage­backed securities (RMBS). UBS has been named as a defendant relating to its role as underwriter and issuer of RMBS in a large number of lawsuits relating to approximately USD 45 billion in original face amount of RMBS underwritten or issued by UBS. Many of the lawsuits are in their early stages, and have not advanced beyond the motion to dismiss phase; others are in varying stages of discovery. Of the original face amount of RMBS at issue in these cases, approxi­ mately USD 9 billion was issued in offerings in which a UBS sub­ sidiary transferred underlying loans (the majority of which were purchased from third­party originators) into a securitization trust and made representations and warranties about those loans (UBS­sponsored RMBS). The remaining USD 36 billion of RMBS to which these cases relate was issued by third parties in securitiza- tions in which UBS acted as underwriter (third­party RMBS). In connection with certain of these lawsuits, UBS has indemnifi ca­ tion rights against surviving third-party issuers or originators for losses or liabilities incurred by UBS, but UBS cannot predict the extent to which it will succeed in enforcing those rights. These lawsuits include an action brought by the Federal Housing Finance Agency (FHFA), as conservator for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac and collectively with Fannie Mae, the GSEs) in connection with the GSEs’ investments in USD 4.5 billion in original face amount of UBS­sponsored RMBS and USD 1.8 billion in original face amount of third­party RMBS. These suits, which were initially fi led in July 2011 and then amended in Septem­ ber 2011, assert claims for damages and rescission under federal and state securities laws and state common law and allege losses of ap- proximately USD 1.2 billion. The FHFA also fi led suits in September 2011 against UBS and other fi nancial institutions relating to their role as underwriters of third­party RMBS purchased by the GSEs as­ serting claims under various legal theories, including violations of the federal and state securities laws and state common law. Addi­ tionally, UBS is named as a defendant in three lawsuits brought by insurers of RMBS seeking recovery of insurance paid to RMBS inves­ tors. These insurers allege that UBS and other RMBS underwriters aided and abetted misrepresentations and fraud by RMBS issuers, and claim equitable and contractual subrogation rights. On 29 September 2011 a federal court in New Jersey dismissed on statute of limitations grounds a putative class action lawsuit that asserted violations of the federal securities laws against vari- ous UBS entities, among others, in connection with USD 2.6 bil­ lion in original face amount of UBS­sponsored RMBS. The plaintiff fi led an amended complaint on 31 October 2011, which UBS has again moved to dismiss on statute of limitations grounds, among others. The motion remains pending. As described below under “c) Other contingent liabilities”, UBS has also received demands to repurchase US residential mort­ gage loans as to which UBS made certain representations at the time the loans were transferred to the securitization trust. On 2 February 2012, Assured Guaranty Municipal Corp. (As­ sured Guaranty), a fi nancial guaranty insurance company, fi led suit against UBS Real Estate Securities Inc. (UBS RESI) in a New York State Court asserting claims for breach of contract and de­ claratory relief based on UBS RESI’s alleged failure to repurchase allegedly defective mortgage loans with an original principal bal- ance of at least USD 997 million that serve as collateral for UBS­ sponsored RMBS insured by Assured Guaranty. Assured Guaranty also claims that UBS RESI breached representations and warran­ 343 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 fi nancial statements Note 21 Provisions and contingent liabilities (continued) ties concerning the mortgage loans and breached certain obliga- tions under commitment letters. Assured Guaranty seeks unspec­ ifi ed damages that include payments on current and future claims made under Assured Guaranty insurance policies totaling approx- imately USD 308 million to date, compensatory and consequen­ tial losses, fees, expenses and pre­judgment interest. 7) Claims related to UBS disclosure A putative consolidated class action has been fi led in the United States District Court for the Southern District of New York against UBS, a number of current and former directors and senior offi cers and certain banks that underwrote UBS’s May 2008 Rights Offering (including UBS Securities LLC) alleging violation of the US securities laws in connection with UBS’s disclosures relating to UBS’s positions and losses in mortgage­related securities, UBS’s positions and losses in auction rate securities, and UBS’s US cross­ border business. In September 2011, the court dismissed all claims based on purchases or sales of UBS ordinary shares made outside the US. On 15 December 2011, Defendants moved to dismiss the claims based on purchases or sales of UBS ordinary shares made in the US for failure to state a claim. UBS, a number of senior offi cers and employees and various UBS committees have also been sued in a putative consolidated class action for breach of fi duciary duties brought on behalf of current and former participants in two UBS Employee Retirement Income Security Act (ERISA) retirement plans in which there were pur­ chases of UBS stock. In March 2011, the court dismissed the ERISA complaint. The plaintiffs have sought leave to fi le an amended complaint. 8) Madoff In relation to the Bernard L. Madoff Investment Securities LLC (BMIS) investment fraud, UBS AG, UBS (Luxembourg) SA and cer­ tain 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 BMIS, as well as certain funds established in offshore jurisdictions with ei- ther direct or indirect exposure to BMIS. These funds now face severe losses, and the Luxembourg funds are in liquidation. The last reported net asset value of the two Luxembourg funds before revelation of the Madoff scheme was approximately USD 1.7 bil­ lion in the aggregate, although that fi gure likely includes fi cti­ tious profi t reported by BMIS. The documentation establishing both funds identifi es UBS entities in various roles including custo­ dian, administrator, manager, distributor and promoter, and indi- cates that UBS employees serve as board members. Between February and May 2009, UBS (Luxembourg) SA responded to criticisms made by the CSSF in relation to its responsibilities as 344 custodian bank and demonstrated to the satisfaction of the CSSF that it has the infrastructure and internal organization in place in accordance with professional standards applicable to custodian banks in Luxembourg. UBS (Luxembourg) SA and certain other UBS subsidiaries are also responding to inquiries by Luxembourg investigating authorities, without however being named as par- ties in those investigations. In December 2009 and March 2010, the liquidators of the two Luxembourg funds fi led claims on be­ half of the funds against UBS entities, non­UBS entities and cer­ tain individuals including current and former UBS employees. The amounts claimed are approximately EUR 890 million and EUR 305 million, respectively. The liquidators have fi led supplemen­ tary claims for amounts that the funds may possibly be held liable to pay the BMIS Trustee. The amounts claimed by the liquidator are approximately EUR 564 million and EUR 370 million, respec­ tively. In addition, a large number of alleged benefi ciaries have fi led claims against UBS entities (and non­UBS entities) for pur­ ported losses relating to the  Madoff scheme. The majority of these cases are pending in Luxembourg, where appeals have been fi led against the March 2010 decisions of the court in which the claims in a number of test cases were held to be inadmissible. In the US, the BMIS Trustee has fi led claims against UBS entities, among others, in relation to the two Luxembourg funds and one of the offshore funds. A claim was fi led in November 2010 against 23 defendants including UBS entities, the Luxembourg and offshore funds concerned and various individuals, including current and former UBS employees. The total amount claimed against all defendants was not less than USD 2 billion. A second claim was fi led in December 2010 against 16 defendants includ­ ing UBS entities and the Luxembourg fund concerned. The total amount claimed against all defendants was not less than USD 555 million. Following a motion by UBS, in November 2011 the District Court dismissed all of the Trustee’s claims other than claims for recovery of fraudulent conveyances and preference payments that were allegedly transferred to UBS on the ground that the Trustee lacks standing to bring such claims. In Germany, certain clients of UBS are exposed to Madoff­managed positions through third­party funds and funds administered by UBS entities in Germany. A small number of claims have been fi led with re­ spect to such funds. 9) Transactions with City of Milan and other Italian public sector entities In January 2009, the City of Milan (City) fi led civil proceedings against UBS Limited, UBS Italia SIM Spa and three other interna­ tional banks in relation to a 2005 bond issue and associated de- rivatives transactions entered into with the City between 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 re­ cover alleged hidden profi ts asserted to have been made by the Note 21 Provisions and contingent liabilities (continued) banks in an amount of approximately EUR 88 million (of which UBS Limited is alleged to have received approximately EUR 16 mil­ lion) together with further damages of not less than EUR 150 mil­ lion. The claims are made against all of the banks on a joint and several basis. The case is currently stayed following a petition fi led by the four banks to the Italian Court of Cassation challenging the jurisdiction of the Italian courts but is likely to be resumed follow- ing the recent decision of the Court which confi rmed jurisdiction of the Italian courts. In addition, two current UBS employees and one former employee, together with employees from other banks, a former City offi cer and a former adviser to the City, are facing a criminal trial for alleged “aggravated fraud” in relation to the City’s 2005 bond issue and the execution, and subsequent restruc- turing, of certain related derivative transactions. The primary alle­ gation is that UBS Limited and the other international banks ob­ tained hidden and / or illegal profi ts by entering into the derivative contracts with the City. In the criminal proceedings, UBS Limited also faces an administrative charge of failing to have in place a business organizational model to avoid the alleged misconduct by employees, the sanctions for which could include a limitation on activities in Italy. The City has separately asserted claims for dam­ ages against UBS Limited and UBS individuals in those proceed­ ings. UBS is engaged in discussions with the City in relation to a possible settlement of the City’s claims. A number of transactions with other public entity counterparties in Italy have also been called into question or become the subject of legal proceedings and claims for damages and other awards. These include deriva­ tive transactions with the Regions of Calabria, Tuscany, Lombardy and Lazio and the City of Florence. Florence and Tuscany have also attempted to invoke Italian administrative law remedies which pur- port to allow a public entity to challenge its own decision to enter into the relevant contracts and avoid their obligations thereunder. UBS is resisting these attempts. UBS has itself commenced proceedings before English courts against the City of Milan and certain other Italian public entities in connection with various derivative transactions with Italian public entities. These proceedings are aimed at obtaining declaratory judgments as to the validity and enforceability of UBS’s English law contractual arrangements with its counterparties and, to the extent relevant, the legitimacy of UBS’s conduct in respect of those counterparties. The English proceedings against the City of Milan and the Region of Tuscany have been stayed by agreement of the parties. 10) HSH Nordbank AG (HSH) HSH has fi led an action against UBS in New York State court relat­ ing to USD 500 million of notes acquired by HSH in a synthetic CDO transaction known as North Street Referenced Linked Notes, 2002­4 Limited (NS4). The notes were linked through a credit de­ fault swap between the NS4 issuer and UBS to a reference pool of corporate bonds and asset­backed securities. HSH alleges that UBS knowingly misrepresented the risk in the transaction, sold HSH notes with “embedded losses”, and improperly profi ted at HSH’s expense by misusing its right to substitute assets in the ref­ erence pool within specifi ed parameters. HSH is seeking USD 500 million in compensatory damages plus pre­judgment interest. The case was initially fi led in 2008. Following orders issued in 2008 and 2009, in which the court dismissed most of HSH’s claims and its punitive damages demand and later partially denied a motion to dismiss certain repleaded claims, the claims remaining in the case are for fraud, breach of contract and breach of the implied covenant of good faith and fair dealing. Both sides have appealed the court’s most recent partial dismissal order, and a decision on the appeal is pending. 11) Kommunale Wasserwerke Leipzig GmbH (KWL) In 2006 and 2007, KWL entered into a series of Credit Default Swap (CDS) transactions with bank swap counterparties, includ­ ing UBS. Under the CDS contracts between KWL and UBS, the last of which were terminated by UBS in October 2010, a net sum of approximately USD 138 million has fallen due from KWL but not been paid. In January 2010, UBS issued proceedings in the English High Court against KWL seeking various declarations from the English court, in order to establish that the swap trans­ action between KWL and UBS is valid, binding and enforceable as against KWL. In October 2010, the English court ruled that it has jurisdiction and will hear the proceedings, and UBS issued a further claim seeking declarations concerning the validity of its early termination of the remaining CDS transactions with KWL. KWL withdrew its appeal from that decision and the civil dispute is now proceeding before the English court. UBS has served Par­ ticulars of Claim and KWL has served its Defence and Counter- claim which also joins UBS Limited and another bank to the pro­ ceedings. In March 2010, KWL commenced proceedings in Leipzig, Ger- many, against UBS and other banks involved in these contracts, claiming that the swap transactions are void and not binding on the basis of KWL’s allegation that KWL did not have the capacity or the necessary internal authorization to enter into the transac- tions and that the banks knew this. Upon and as a consequence of KWL withdrawing its appeal on jurisdiction in England, KWL has also withdrawn its civil claims against UBS and one of the other banks in the German courts and no civil claim will proceed against either of them in Germany. The proceedings brought by KWL against the third bank are now proceeding before the Ger- man courts. In December 2011, the Leipzig court ruled that it is for the London court and not the Leipzig court to determine the validity and effect of a Third Party Notice served by Landesbank Baden­Wurttemberg on UBS in the Leipzig proceedings. The other two banks that entered into CDS transactions with KWL entered into back­to­back CDS transactions with UBS. In April 2010, UBS commenced separate proceedings in the English 345 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 fi nancial statements Note 21 Provisions and contingent liabilities (continued) High Court against those bank swap counterparties seeking dec- larations as to the parties’ obligations under those transactions. The back­to­back CDS transactions were terminated in April and June 2010. The aggregate amount that UBS contends is outstand­ ing under those transactions is approximately USD 183 million plus interest. The stay of the court proceedings against one of the bank swap counterparties has been terminated by UBS, and UBS has added a money claim to the proceedings. The other swap counterparty has terminated the stay of the proceedings brought against it by UBS Limited and has added a claim against KWL to those proceedings, which will now proceed. In January 2011, the former managing director of KWL and two fi nancial advisers were convicted on criminal charges related to certain KWL transactions, including swap transactions with UBS and other banks. In November 2011, the SEC commenced an inquiry regarding the KWL transactions and UBS is providing information to the SEC relating to those transactions. 12) Puerto Rico The SEC has been investigating UBS’s secondary market trading and associated disclosures involving shares of closed-end funds managed by UBS Asset Managers of Puerto Rico, principally in 2008 and 2009. In November 2010, the SEC issued a “Wells no­ tice” to two UBS subsidiaries, advising them that the SEC staff is considering whether to recommend that the SEC bring a civil ac­ tion against them relating to these matters. UBS is engaged in settlement discussions with the SEC staff; however, there is no assurance that a settlement will be reached. UBS and several un­ related parties were also sued in Puerto Rico superior court in October 2011 in a purported civil derivative action seeking to bring claims on behalf of the Employee Retirement System of Puerto Rico related to, among other things, the issuance of the bonds underwritten by UBS and the investment of the proceeds of those bond issuances. 13) LIBOR Several government agencies, including the SEC, the US Com­ modity Futures Trading Commission, the DOJ and the FSA, are conducting investigations regarding submissions with respect to British Bankers’ Association LIBOR rates. We understand that the investigations focus on whether there were improper attempts by UBS (among others), either acting on our own or together with others, to manipulate LIBOR rates at certain times. In addition, the Swiss Competition Commission (WEKO) has commenced an in­ vestigation of numerous banks and fi nancial intermediaries con­ cerning possible collusion relating to LIBOR and TIBOR reference rates and certain derivatives transactions. UBS has been granted conditional leniency or conditional immunity from authorities in certain jurisdictions, including the 346 Antitrust Division of the DOJ and WEKO, in connection with po­ tential antitrust or competition law violations related to submis- sions for Yen LIBOR and Euroyen TIBOR. WEKO has also granted UBS conditional immunity in connection with potential competi­ tion law violations related to submissions for Swiss franc LIBOR and certain transactions related to Swiss franc LIBOR. The Cana­ dian Competition Bureau has granted UBS conditional immunity in connection with potential competition law violations related to submissions for Yen LIBOR. As a result of these conditional grants, we will not be subject to prosecutions, fi nes or other sanctions for antitrust or competition law violations in the jurisdictions where we have conditional immunity or leniency in connection with the matters we reported to those authorities, subject to our continu- ing cooperation. How ever, the conditional leniency and condition­ al immunity grants we have received do not bar government agen- cies from asserting other claims against us. In addition, as a result of the conditional leniency agreement with the DOJ, we are eligi­ ble for a limit on liability to actual rather than treble damages were damages to be awarded in any civil antitrust action under US law based on conduct covered by the agreement and for relief from potential joint-and-several liability in connection with such civil an- titrust action, subject to our satisfying the DOJ and the court pre­ siding over the civil litigation of our cooperation. The conditional leniency and conditional immunity grants do not otherwise affect the ability of private parties to assert civil claims against us. On 16 December 2011, the Japan Financial Services Agency (JFSA) commenced an administrative action against UBS Securities Japan Ltd (UBS Securities Japan) based on fi ndings by the Japan Securities and Exchange Surveillance Commission (SESC) that (i) a trader of UBS Securities Japan engaged in inappropriate conduct relating to Euroyen TIBOR (Tokyo Interbank Offered Rate) and Yen LIBOR, including approaching UBS AG, Tokyo Branch, and other banks to ask them to submit TIBOR rates taking into account requests from the trader for the purpose of benefi ting trading positions; and (ii) serious problems in the internal controls of UBS Securities Japan resulted in its failure to detect this conduct. Based on the fi ndings, the JFSA issued a Business Suspension Order re­ quiring UBS Securities Japan to suspend trading in derivatives transactions related to Yen LIBOR and Euroyen TIBOR from 10 January to 16 January 2012 (excluding transactions required to perform existing contracts). The JFSA also issued a Business Im­ provement Order that requires UBS Securities Japan to (i) develop a plan to ensure compliance with its legal and regulatory obliga- tions and to establish a control framework that is designed to prevent recurrences of the conduct identifi ed in the JFSA’s admin­ istrative action, and (ii) provide periodic written reports to the JFSA regarding the company’s implementation of the measures required by the order. On the same day the JFSA also commenced an administrative action against UBS AG, Tokyo Branch, based on a fi nding that an employee of the Tokyo branch “continuously received approaches” from an employee of UBS Securities Japan regarding Euroyen TIBOR rate submissions, which was determined Note 21 Provisions and contingent liabilities (continued) to be an inappropriate practice that was not reported to the branch’s management. Pursuant to this administrative action, the JFSA issued an order under the Japan Banking Act which imposes requirements similar to those imposed under the Business Im­ provement Order directed to UBS Securities Japan. A number of putative class actions and other actions have been fi led in federal courts in the US against UBS and numerous other banks on behalf of certain parties who transacted in LIBOR­ based derivatives. The complaints allege manipulation, through various means, of the US dollar LIBOR rate and prices of US dollar LIBOR­based derivatives in various markets. Claims for damages are asserted under various legal theories, including violations of the US Commodity Exchange Act and antitrust laws. 14) SinoTech Energy Limited Since August 2011, multiple putative class action complaints have been fi led, and have since been consolidated, in the United States District Court for the Southern District of New York against SinoTech Energy Limited (SinoTech), its offi cers and directors, its auditor at the time of the offering, and its underwriters, including UBS, alleging, among other claims, that the registration state­ ment and prospectus in connection with SinoTech’s 3 November 2010 USD 168 million initial public offering of American Deposi­ tary Shares contained materially misleading statements and c) Other contingent liabilities omissions, in violation of the US federal securities laws. UBS un­ derwrote 70% of the offering. Plaintiffs seek unspecifi ed com­ pensatory damages, among other relief. 15) Swiss retrocessions The Zurich High Court decided in January 2012, in a test case, that fees received by a bank for the distribution of fi nancial prod­ ucts issued by third parties should be considered to be “retroces- sions” unless they are received by the bank for genuine distribu- tion services. Fees considered to be retrocessions would have to be disclosed to the affected clients and, absent specifi c client con­ sent, surrendered to them. If the holding in this case is not re­ versed on appeal and is followed in other cases, UBS (like other banks in Switzerland) could be subject to reimbursement claims by certain clients for fees retained in the past. 16) Unauthorized trading incident FINMA and the FSA have been conducting a joint investigation of the unauthorized trading incident that occurred in the In- vestment Bank and was announced in September 2011. In ad­ dition, FINMA and the FSA have announced that they have commenced enforcement proceedings against UBS in relation to this matter. Demands related to sales of mortgages and RMBS For several years prior to the crisis in the US residential mortgage loan market, we sponsored securitizations of US residential mort­ gage­backed securities (RMBS) and were a purchaser and seller of US residential mortgages. A subsidiary of UBS, UBS RESI, acquired pools of residential mortgage loans from originators and (through an affi liate) deposited them into securitization trusts. In this man­ ner, from 2004 through 2007 UBS RESI sponsored approximately USD 80 billion in RMBS, based on the original principal balances of the securities issued. The overall market for privately issued US RMBS during this period was approximately USD 3.9 trillion. UBS RESI also sold pools of loans acquired from originators to third­party purchasers. These whole loan sales during the period 2004 through 2007 totaled approximately USD 19 billion in origi­ nal principal balance. We were not a signifi cant originator of US residential loans. A  subsidiary of UBS originated approximately USD 1.5 billion in US residential mortgage loans during the period in which it was ac­ tive from 2006 to 2008, and securitized less than half of these loans. When we acted as an RMBS sponsor or mortgage seller, we generally made certain representations relating to the characteris- tics of the underlying loans. In the event of a material breach of these representations, we were in certain circumstances contrac- tually obligated to repurchase the loans to which they related or to indemnify certain parties against losses. We have been notifi ed by certain institutional purchasers and insurers of mortgage loans and RMBS, including a GSE, that possible breaches of representa­ tions may entitle the purchasers to require that UBS repurchase the loans or to other relief. We have tolling agreements with some of these institutional purchasers and insurers concerning their potential claims. The table below summarizes repurchase de­ mands received by UBS and UBS’s repurchase activity from 2006 through 29 February 2012. 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 fi nancial statements Note 21 Provisions and contingent liabilities (continued) Loan repurchase demands by year received – original principal balance of loans 1 USD million Actual or agreed loan repurchases / make whole payments by UBS Demands resolved or expected to be resolved through enforcement of indemnification rights against third party originators Demands resolved in litigation Demands in litigation 2 Demands rebutted by UBS but not yet rescinded by counterparty Demands rescinded by counterparty Demands in review by UBS Total 2006–2008 11.7 0.6 110.2 2009 1.4 77.4 20.7 4.0 99.6 2.1 122.5 205.1 2010 2011 through 29 February 2012 1.8 46.2 5.3 345.6 1.8 18.8 0.1 368.2 652.1 368.5 8.1 9.1 1,084.1 12.1 85.6 103.1 Total 13.1 130.7 21.3 997.1 386.4 236.8 97.5 1,882.9 1 Loans submitted by multiple counterparties are counted only once. This is a change from our prior practice in the presentation of this information. For this reason, the comparable table in our fourth quarter 2011 report included double-counted loans with an original principal balance of approximately USD 42.4 million. 2 Includes (i) USD 124.9 million of demands in litigation which were previously classified as Demands resolved or expected to be resolved through enforcement of UBS’s indemnification rights against third-party originators; and (ii) USD 47.7 million of demands in litigation which were previously classified as Actual or agreed loan repurchases / make whole payments by UBS. Our balance sheet as of 31 December 2011 refl ected a provision of USD 104 million (adjusted from USD 93 million previously re­ ported) based on our best estimate of the loss arising from certain loan repurchase demands received since 2006 to which we have agreed or which remain unresolved, and for certain anticipated loan repurchase demands of which we have been informed. As­ sured Guaranty advised UBS in 2011 that it intended to make loan repurchase demands that were estimated to be at least USD 900 million in original principal balance. Of the USD 598 million (by original principal balance) of purported loan repurchase demands received in the fourth quarter of 2011 and through 29 February 2012, approximately USD 489 million of such demands were re­ ceived from Assured Guaranty. As described above under “b) Liti­ gation and regulatory matters”, Assured Guaranty fi led a lawsuit against UBS RESI on 2 February 2012 relating to certain of these repurchase demands, among others. It is not clear when or to what extent additional demands will be made by Assured Guar- anty or others. UBS also cannot reliably estimate when or to what extent the provision will be utilized in connection with actual loan repurchases or payments for liquidated loans, because both the submission of loan repurchase demands and the timing of resolu- tion of such demands are uncertain. Payments made by UBS to date to resolve repurchase de­ mands have been for liquidated adjustable rate mortgages that provide the borrower with a choice of monthly payment options (Option ARM loans). These payments were equiva lent to ap­ proximately 62% of the original principal balance of the Option ARM loans. The corresponding percentages for other loan types can be expected to vary. With respect to unliquidated Option ARM loans that UBS has agreed to repurchase, UBS expects se­ verity rates will be similar to payments made for liquidated loans. Actual losses upon repurchase will refl ect the estimated value of the loans in question at the time of repurchase as well as, in some cases, partial repayment by the borrowers or advances by servicers prior to repurchase. It is not possible to predict future indemnity rates or percentage losses upon repurchase for rea- sons including timing and market uncertainties as well as pos- sible differences in the characteristics of loans that may be the subject of future demands compared with those that have been the subject of past demands. In most instances in which we would be required to repurchase loans or indemnify against losses due to misrepresentations, we would be able to assert demands against third-party loan origina- tors who provided representations when selling the related loans to UBS. However, many of these third parties are insolvent or no longer exist. We estimate that, of the total original principal bal­ ance of loans sold or securitized by UBS from 2004 through 2007, less than 50% was purchased from surviving third-party origina- tors. In connection with approximately 60% of the loans (by orig­ inal principal balance) for which UBS has made payment or agreed to make payment in response to demands received in 2010 and 2011, UBS has in turn asserted indemnity or repurchase demands against originators. Only a small number of our demands have been resolved, and we have not recognized any asset on our bal- ance sheet in respect of the unresolved demands. UBS has also advised certain surviving originators of repurchase demands made against UBS for which UBS would be entitled to indemnity and has asserted that such demands should be resolved directly by the originator and the party making the demand. We cannot reliably estimate the level of future repurchase de- mands, and do not know whether our rebuttals of such demands will be a good predictor of future rates of rebuttal. We also can­ not reliably estimate the timing of any such demands. As described above under “b) Litigation and regulatory mat­ ters”, we are also subject to claims and threatened claims in con- nection with our role as underwriter and issuer of RMBS. 348 Note 22 Income taxes CHF million Tax expense / (benefit) from continuing operations Swiss Current Deferred Foreign Current Deferred Total income tax expense / (benefit) from continuing operations Tax expense from discontinued operations Swiss Total income tax expense from discontinued operations Total income tax expense / (benefit) For the year ended 31.12.11 31.12.10 31.12.09 23 1,063 83 (246) 923 0 0 923 (75) 668 300 (1,273) (381) 0 0 (381) 55 23 462 (983) (443) 0 0 (443) The Swiss net deferred tax expense of CHF 1,063 million reflects a tax expense of CHF 949 million for the amortization of deferred tax assets, as tax losses are used against profits arising from business operations. In addition, it reflects a tax charge of CHF 245 million relating to the revaluation of deferred tax assets (reflecting updat- ed profit forecast assumptions including the expected geographi- cal mix) partly offset by a CHF 131 million tax effect relating to the unauthorized trading incident. The foreign net deferred tax benefit of CHF 246 million re- flects a US tax benefit of CHF 400 million, which mainly relates to a write­up of deferred tax assets for US tax losses incurred in previous years, predominantly in the parent bank, UBS AG. This was partly offset by a tax expense of CHF 41 million relating to the downward revaluation of deferred tax assets for Japan, fol- lowing a change in statutory tax rates and loss offset rules, and a tax expense of CHF 113 million for the amortization of de- ferred tax assets, as tax losses are used against profits in various locations. The net current tax expense of CHF 106 million (Swiss CHF 23 million, foreign CHF 83 million) reflects tax expenses of CHF 277 million in relation to taxable profits of Group entities, partly offset by current tax benefits of CHF 171 million relating to prior periods. A deferred tax expense of CHF 17 million related to prior years re- duces the net tax benefits related to prior years to CHF 155 million. The Group made net corporate income tax payments, including Swiss and foreign taxes, of CHF 349 million, CHF 498 million and CHF 505 million in 2011, 2010, and 2009 respectively. The compo- nents of operating profit before tax, and the differences between income tax expense reflected in the financial statements and the amounts calculated at the Swiss tax rate, are as follows: CHF million Operating profit from continuing operations before tax of which: Swiss of which: foreign Income taxes at Swiss tax rate of 21.5% for 2011, 2010 and 2009 Increase / (decrease) resulting from: Applicable tax rates differing from Swiss tax rate Tax effects of losses not recognized Previously unrecorded tax losses now utilized Non-taxable and lower taxed income Non-deductible expenses and additional taxable income Adjustments related to prior years Change in deferred tax valuation allowances Adjustments to deferred tax balances arising from changes in tax rates Other items Income tax expense / (benefit) from continuing operations For the year ended 31.12.11 31.12.10 31.12.09 5,350 4,743 607 1,150 106 939 (8) (1,189) 674 (155) (676) 42 39 923 7,455 5,999 1,456 1,603 (49) 275 (1,225) (889) 1,985 (258) (1,820) 11 (14) (381) (2,561) 4,871 (7,433) (551) (1,636) 1,188 (79) (932) 1,012 (65) 552 14 55 (443) 349 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 fi nancial statements Note 22 Income taxes (continued) Certain deferred tax asset and liability movements are recognized directly in equity, including the effects of exchange rate changes on tax assets and liabilities denominated in currencies other than Swiss francs. In particular, in 2011, a net deferred tax charge of CHF 218 million was refl ected directly in equity. This included a tax charge refl ected in other comprehensive income of CHF 498 million, which mainly related to an increase in a Swiss deferred tax liability for cash fl ow hedges, partly offset by a tax benefi t in the share premium account of CHF 280 million, which mainly refl ects an increase in recognized Swiss tax losses incurred in previous years that are of an equity nature for IFRS accounting purposes. In the table below, the valuation allowance represents amounts that are not expected to provide future benefi ts due to insuffi ­ cient projected future taxable income. UBS AG Switzerland and certain overseas branches and sub­ sidiaries of the Group have deferred tax assets related to tax loss carry­forwards and other items as shown in the table below. For entities that incurred losses in either the current or preced- ing year, CHF 564 million is recognized as deferred tax assets as of 31 December 2011 (CHF 9,147 million as of 31 December 2010). 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 31.12.11 Valuation allowance (1,564) (19,122) (813) (1,447) (22,946) Gross 1,780 27,171 880 1,641 31,471 Recognized 216 8,049 67 194 8,526 31.12.10 Valuation allowance (1,791) (19,258) 1 (999) (1,776) (23,823) Gross 1,993 28,186 1 1,164 2,002 33,345 Recognized 201 8,929 165 226 9,522 0 1 32 1 37 6 79 0 0 25 1 40 31 97 1 In 2011, we corrected the amounts presented for gross deferred tax assets for tax loss carry-forwards as of 31 December 2010 from CHF 28,474 million to CHF 28,186 million and valuation allowance correspond- ingly from CHF 19,546 million to CHF 19,258 million. Total recognized deferred tax assets were not affected. The deferred tax assets recognized as of 31 December 2011 in respect of tax losses have been based on profi tability assumptions over a fi ve­year horizon. The expected future profi tability is based on business plan assumptions, as adjusted to take into account the recognition criteria of IAS 12. If the business plan earnings and assumptions in future periods substantially deviate from the current assumptions, the amount of deferred tax assets may need to be adjusted in the future. As of 31 December 2011, tax losses totaling CHF 52,073 mil- lion which are not recognized as deferred tax assets, are available to be offset against future taxable income. The tax losses not rec­ ognized as deferred tax assets expire as follows: CHF million Within 1 year From 2 to 5 years From 6 to 10 years From 11 to 20 years No expiry Total 31.12.11 31.12.10 3 29 85 38,647 13,309 52,073 0 3,184 54 38,761 1 11,174 53,173 1 In 2011, we corrected the tax losses not recognized as deferred tax assets as of 31 December 2010 from CHF 36,943 million to CHF 38,761 million. In general, Swiss tax losses can be carried forward for seven years, US federal tax losses for 20 years and UK and Jersey tax losses for an unlimited period. earnings of subsidiaries except to the extent that those earnings are indefi nitely invested. As of 31 December 2011, no such earnings were treated as The Group provides for deferred income taxes on undistributed indefi nitely invested. 350 Note 23 Derivative instruments and hedge accounting Derivatives: overview A derivative is a fi nancial instrument, the value of which is derived from the value of a variable (“underlying”). Underlyings may be in­ dices, exchange or interest rates, or the value of shares, commodi- ties, bonds, or other fi nancial instruments. A derivative commonly requires no initial investment by either counterparty to the trade. The majority of derivative contracts are negotiated with re- spect to notional amounts, tenor, price and settlement mecha- nisms, as is customary with other fi nancial instruments. The no­ tional amount of a derivative is generally the quantity of the underlying instrument on which the derivative contract is based and is the reference against which changes in the value of the derivative are measured. Notional values, in themselves, are gen­ erally not a direct indication of the values which are exchanged between parties, and are therefore not a direct measure of risk or fi nancial exposure, but are viewed as an indication of the scale of the different types of derivatives entered into by the Group. Over­the­counter (OTC) contracts are usually traded under a standardized International Swaps and Derivatives Association (ISDA) master trading agreement (MTA) between UBS and its counterparties. Terms are negotiated directly with counterparties and the contracts will have industry-standard settlement mecha- nisms prescribed by ISDA. Other derivative contracts are standard­ ized in terms of their amounts and settlement dates, and are bought and sold on organized exchanges; these are commonly referred to as exchange­traded derivatives (ETD) contracts. Ex­ changes offer the benefi ts of pricing transparency, standardized daily settlement of changes in value, and consequently reduced credit risk. During 2011, the industry continued to promote the use of Central Counterparties (CCP) to clear OTC trades. The trend toward CCP clearing and settlement will generally facilitate the reduction of systemic credit exposures. Derivative instruments are measured at fair value and generally classifi ed as Positive replacement values and Negative replace- ment values on the face of the balance sheet. Derivative instru­ ments that trade on an exchange or through a clearing house are generally classifi ed as Cash collateral receivable or payable on de- rivative instruments. They are not classifi ed within replacement values because the change in fair value of these instruments is economically settled each day through the cash payment of varia- tion margin. Products that receive this treatment are futures con­ tracts, 100% daily margined exchange traded options, interest rate swaps transacted with the London Clearing House and cer- tain credit derivative contracts. Additionally, for presentation purposes, the Group is subject to the IFRS netting provisions for other derivative contracts, if all the following conditions exist: contracts are with the same legal coun- terparty; the Group has legally enforceable rights to set off amounts due; the contracts have common maturity dates; and the parties intend to settle net, which may be evidenced by cur- rent practice. Changes in the replacement values of derivatives are recorded in net trading income, unless the derivatives are des- ignated and effective as hedging instruments in certain types of hedge accounting relationships as described in “Note 1a) 15) De­ rivative instruments and hedge accounting”. Valuation principles and techniques applied in the measure- ment of fair value derivative instruments are discussed in “Note 26a) Valuation principles”. Positive replacement values repre- sent the estimated amount the Group would receive if the de- rivative contract were settled in full on the balance sheet date. Negative replacement values indicate the value at which the Group would extinguish its obligations in respect of the under- lying contract, were it required or entitled to do so on the bal- ance sheet date. Types of derivative instruments The Group uses the following derivative fi nancial instruments for both trading and hedging purposes. Through the use of the prod­ ucts listed below, the Group is engaged in extensive high volume market-making and client facilitation trading referred to as the fl ow business. Measurement techniques applied to determine the fair value of each product type are described in “Note 26c Valua- tion techniques by product”. The main types of derivative instruments used by the Group are: – Options and warrants: 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) at, or before, a set date, a spec­ ifi ed quantity of a fi nancial instrument or commodity at a pre­ determined price. The purchaser pays a premium to the seller for this right. Options involving more complex payment struc­ tures are also transacted. Options may be traded in the OTC market, or on a regulated exchange, and may be traded in the form of a security (warrant). – Swaps: Swaps are transactions in which two parties exchange cash fl ows on a specifi ed notional amount for a predetermined period. – Forwards and futures: Forwards and futures are contractual obligations to buy or sell fi nancial instruments or commodities on a future date at a specifi ed price. Forward contracts are tailor-made agreements that are transacted between counter- parties in the OTC market, whereas futures are standardized contracts transacted on regulated exchanges. – Cross-currency swaps: Cross-currency swaps involve the ex- change of interest payments based on two different currency principal balances and reference interest rates and generally also entail exchange of principal amounts at the start or end of the contract. Most cross­currency swaps are traded in the OTC market. The main products and underlyings, that the Group uses are: – Interest rate contracts: Interest rate products include interest rate swaps, swaptions and caps and fl oors. 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 fi nancial statements Note 23 Derivative instruments and hedge accounting (continued) – Credit derivatives: Credit default swaps (CDSs) are the most common form of a credit derivative, under which the party buying protection 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 the occurrence of a contractually defi ned credit event with respect to a specifi ed third­party credit entity. Settlement following a credit event may be a net cash amount, or cash in return for physical deliv- ery of one or more obligations of the credit entity, and is made regardless of whether the protection buyer has actually suf- fered a loss. After a credit event and settlement, the contract is generally terminated. An elaboration of credit derivatives is included in a separate section below. – Total return swaps (TRSs): TRSs are employed in both the In­ vestment Bank’s fi xed income and equity trading businesses with underlyings which are generally equity or fi xed income indices, loans or bonds. TRSs are structured with one party making payments based on a set rate, either fi xed or variable, and the other party making payments based on the return of an underlying asset, which includes both the profi t or loss it generates and any changes in its value. – Foreign exchange contracts: Foreign exchange contracts will include spot, forward and cross-currency swaps and options and warrants. Forward purchase and sale currency contracts are typically executed to meet client needs and for trading and hedging purposes. – Equity / Index contracts: The Group uses equity derivatives linked to single names, indices and baskets of single names and indices. The indices used may be based on a standard mar­ ket index, or may be defi ned by UBS. The product types traded include vanilla listed derivatives, both options and futures, total return swaps, forwards and exotic OTC contracts. – Commodities contracts: The Group has an established com- modity derivatives trading business, which includes the com- modity index, the structured business and the fl ow business. The index and structured business are client facilitation busi- nesses trading exchange traded funds, OTC swaps and options on commodity indices. The underlying indices cover third party and UBS defi ned indices such as the UBS Bloomberg Constant Maturity Commodity Index and the Dow Jones UBS Commod­ ity indices. The fl ow business is investor led and incorporates both ETD and vanilla OTC products, for which the underlying covers the agriculture, base metals and energy sectors. All of the fl ow trading is cash settled with no physical delivery of the underlying. – Precious metals: The Group has an established precious metals ability in both fl ow and non­vanilla OTC products incorporat­ ing both physical and non­physical trading. The fl ow business is investor led and products include ETD, vanilla OTCs and cer­ tain non­vanilla OTCs. The vanilla OTCs are in forwards, swaps and options. The non­vanilla OTC business relates to cash­set­ tled forwards similar in nature to non-deliverable forwards, meaning there is no physical delivery of the underlying. Risks of derivative instruments Derivative instruments are transacted in many trading portfolios, which generally include several types of instruments, not just derivatives. The market risk of derivatives is predominantly man­ aged and controlled as an integral part of the market risk of these portfolios. The Group’s approach to market risk is de­ scribed in the audited portions of the “Market risk” section of this report. Derivative instruments are transacted with many different counterparties, most of whom are also counterparties for other types of business. The credit risk of derivatives is managed and controlled in the context of the Group’s overall credit exposure to each counterparty. The Group’s approach to credit risk is described in the audited portions of the “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 refl ection of the Group’s credit exposure in its derivatives business with that counterparty. This is, for example, because on one hand, replacement values can increase over time (“potential future exposure”), while on the other hand, exposure may be mitigated by entering into master netting agreements and bilateral collateral arrangements with other counterparties. Both the exposure measures used by the Group internally to control credit risk and the capital requirements imposed by regulators refl ect these additional factors. The replacement values presented on UBS’s balance sheet in­ clude netting in accordance with IFRS requirements (refer to “Note 1a) 35) Netting”), which is more restrictive than netting in accordance with Swiss Federal Banking law. Swiss Federal Banking law netting is generally based on close­out netting arrangements that 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 table on the next page. The notional amounts presented in the tables indicate a nomi- nal value of transactions outstanding at the reporting date but do not necessarily indicate the amounts of future cash fl ows involved or the current fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or market risks. 352 Note 23 Derivative instruments and hedge accounting (continued) Derivative instruments 1 CHF billion Interest rate contracts Over-the-counter (OTC) contracts Forward contracts 7 Swaps Options Exchange-traded contracts Futures Options Agency transactions 8 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 Futures Options Agency transactions 8 Total Equity / index contracts Over-the-counter (OTC) contracts Forward contracts Options Exchange-traded contracts Futures Options Agency transactions 8 Total Table continues on the next page. 31.12.11 31.12.10 6 Notional values related to PRVs 3 Total PRV 2 Notional values related to NRVs 3 Total NRV 4 Other notional values 3, 5 Notional values related to PRVs 3 Total PRV 2 Notional values related to NRVs 3 Total NRV 4 Other notional values 3, 5 2.0 247.3 46.7 1,610.0 6,661.7 1,173.2 2.3 226.1 48.0 0.0 1,637.4 6,561.5 15,771.7 0.0 1,185.2 1.9 170.4 31.2 1,320.7 7,527.0 785.3 2.3 154.3 32.5 1,233.6 7,423.7 822.8 0.0 13,076.0 0.0 0.0 0.1 296.1 124.0 9,569.0 0.0 0.1 276.4 1,450.5 0.0 127.8 9,511.9 17,222.2 0.0 0.2 203.7 43.7 9,676.7 0.0 0.2 189.3 778.3 0.0 49.4 9,529.5 13,854.3 66.6 0.6 0.1 67.3 1,292.2 2.4 3.6 1,298.1 62.9 0.5 0.1 63.5 1,238.0 2.0 4.6 1,244.6 172.4 0.0 0.0 172.4 15.7 75.7 5.8 648.3 2,177.4 367.8 14.9 85.5 5.8 610.5 2,165.5 346.4 0.0 0.0 97.2 0.1 3,193.7 0.0 0.0 106.3 0.6 3,123.0 12.2 52.2 3.5 0.1 55.8 16.3 88.5 8.7 1,189.8 6.1 11.9 1,207.8 531.1 2,279.9 515.1 49.8 1.3 0.1 51.2 17.1 97.0 8.8 1,091.2 4.2 9.5 1,104.9 554.1 2,190.5 483.4 0.0 0.0 113.5 0.0 3,326.1 0.0 0.0 123.0 0.1 3,228.1 0.0 0.0 0.0 12.2 0.0 2.8 8.7 38.3 69.0 3.3 3.9 18.8 84.6 191.8 3.0 8.9 3.7 4.2 19.8 39.0 86.9 85.2 0.0 0.0 14.7 0.0 211.1 14.7 2.5 8.1 3.8 7.5 21.9 31.5 67.0 94.4 192.9 3.5 8.6 3.7 7.6 23.4 40.5 81.0 98.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.0 0.0 9.0 0.0 0.0 23.3 0.0 219.7 23.3 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 23 Derivative instruments and hedge accounting (continued) Table continued from previous page. CHF billion Commodities contracts Over-the-counter (OTC) contracts Forward contracts Options Exchange-traded contracts Futures Forward contracts 9 Options Agency transactions 8 Total Unsettled purchases of non-derivative financial assets 10 Unsettled sales of non-derivative financial assets 10 31.12.11 31.12.10 6 Notional values related to PRVs 3 Total PRV 2 Notional values related to NRVs 3 Total NRV 4 Other notional values 3, 5 Notional values related to PRVs 3 Total PRV 2 Notional values related to NRVs 3 Total NRV 4 Other notional values 3, 5 2.8 1.6 0.1 0.0 2.3 6.9 0.2 0.1 29.9 30.4 36.7 4.4 101.3 39.8 17.9 2.3 2.1 0.2 0.0 2.4 7.0 0.2 0.2 21.4 28.1 35.0 6.3 90.9 10.7 30.2 0.0 0.0 17.7 0.0 0.0 17.7 0.0 0.0 2.8 1.5 0.0 1.7 6.0 0.2 0.1 19.5 19.3 0.7 39.5 36.5 34.9 3.2 1.8 0.0 1.7 6.6 0.1 0.1 21.7 16.0 1.2 38.9 18.8 13.0 0.0 0.0 37.8 0.0 0.0 37.8 0.0 0.0 Total derivative instruments, based on IFRS netting 486.6 14,411.6 473.4 14,222.4 17,439.2 401.1 14,514.3 393.8 14,152.9 13,924.4 Replacement value netting, based on capital adequacy rules Cash collateral netting, based on capital adequacy rules Total derivative instruments, based on capital adequacy netting 11 (383.3) (45.6) 57.7 (383.3) (28.0) 62.1 (301.5) (36.5) 63.1 (301.5) (23.9) 68.3 1 Bifurcated embedded derivatives are presented in the same balance sheet line as the host contract and are excluded from the table; these derivatives amount to a PRV of CHF 1.1 billion (2010: CHF 2.7 billion) (re- lated notional values of CHF 24.8 billion (2010: CHF 8.6 billion)) and an NRV of CHF 0.2 billion (2010: CHF 1.3 billion) (related notional values of CHF 9.3 billion (2010: CHF 10.4 billion)). 2 PRV: Positive replacement value. 3 For 31 December 2011: in case of netting of replacement values on the balance sheet, notional values of gross derivatives are presented in accordance with the gross positive replacement value and gross negative replacement value of the netted derivatives, respectively. For 31 December 2010: in case of netting of replacement values on the balance sheet, the sum of the notional values of netted derivatives is presented in accordance with the related net positive replacement value or net negative replacement value of the netted derivatives. 4 NRV: Negative replacement value. 5 Receivables resulting from these derivatives are rec- ognized on our balance sheet under Due from banks, Loans and Cash collateral receivables on derivative instruments totaling CHF 2.4 billion (2010: CHF 0.7 billion). Payables resulting from these derivatives are recog- nized on our balance sheet under Due to banks, Due to customers and Cash collateral payables on derivative instruments totaling CHF 2.7 billion (2010: CHF 2.7 billion). 6 In 2011, we corrected notional values for Interest rate and Equity / index contracts. In addition, we reclassified certain PRVs, NRVs and related notional amounts from Equity / index contracts to Commodities contracts. 7 Negative replacement values as of 31  December 2011 include CHF 0.2 billion related to derivative loan commitments (31 December 2010: 0.3 billion). The maximum irrevocable amount related to these commitments was CHF 6.1 billion as of 31 Decem- ber 2011 (31 December 2010: CHF 1.0 billion), which is not reflected in the reported notional amounts. 8 Notional values of exchange-traded agency transactions are not disclosed due to their significantly different risk profile. 9 In 2010, these forward contracts were not reported as PRVs and NRVs, but on the balance sheet lines Loans and Due to customers, respectively. Notional values were reported as Other notional val- ues. 10 Changes in the fair value of purchased and sold non-derivative financial assets between trade date and settlement date are recognized as replacement values. 11 Includes the impact of netting agreements (including cash collateral) in accordance with Swiss Federal Banking law. On a notional value basis, credit protection bought and sold held as  of 31 December 2011 matures in a range of approximately 18% (2010: 10%) within one year, approximately 69% (2010: 70%) within 1 to 5 years and approximately 13% (2010: 20%) after 5 years. The maturity profile of OTC interest rate contracts held as of 31 December 2011, based on notional values, is as fol- lows: approximately 42% (2010: 45%) mature within one year, 35% (2010: 33%) within 1 to 5 years and 23% (2010: 22%) over 5 years. Notional values of interest rate contracts cleared with The London Clearing House are presented under “other notional values” and are categorized into maturity buckets on the basis of contractual maturities of the cleared underlying derivative con- tracts. Derivatives transacted for trading purposes Most of the Group’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and mar- keting of derivative products to customers to enable them to take, transfer, modify, or reduce, current or expected risks. Trading ac- tivities include market making, positioning and arbitrage activi- ties. 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 mar- ket risk positions with the expectation of profiting from favorable movements in prices, rates or indices. Arbitrage activities involve identifying and profiting from price differentials between the same product in different markets or the same economic factor in different products. Detailed example: Credit derivatives UBS is an active dealer in the fixed income market, including CDSs and related products, with respect to a large number of issuer’s securities. The primary purpose of these activities is for the benefit of UBS’s clients through market making activities and for the on- going hedging of trading book exposures. Market making activity consists of buying and selling single- name CDSs, index CDSs, loan CDSs and related referenced cash 354 Note 23 Derivative instruments and hedge accounting (continued) instruments to facilitate client trading activity. UBS also actively utilizes CDSs to economically hedge specifi c counterparty credit risks in its accrual loan portfolio and off balance sheet loan port- folio (including loan commitments) with the aim of reducing con­ centrations in individual names, sectors or specifi c portfolios. In addition, UBS actively utilizes CDSs to economically hedge specifi c counterparty credit risks in its OTC derivative portfolios including fi nancial instruments which are designated at fair value through profi t or loss. In 2010, market innovation and client de­ mand for exposure to related products resulted in an expansion of structured activities and continuation of the Bank’s CDS fl ow trad­ ing. These activities included market making on behalf of clients in index, multi­name index, swap index option and fi rst­to­default CDS products. 2011 saw a continuation of this client driven busi­ ness. Where applicable, these products form part of structured arrangements and solutions, with clients seeking exposure to spe- cifi c risks. The value of protection bought and sold is not, in isolation, a measure of UBS’s credit risk. Counterparty relationships are viewed in terms of the total outstanding credit risk, which relates to other instruments in addition to CDSs, and in connection with collateral arrangements in place. As of 31 December 2011, the total notional value of protection bought was CHF 1,393 billion (CHF 63 billion Positive replace- ment values, CHF 3 billion Negative replacement values) and the total notional value of protection sold was CHF 1,322 billion (CHF 4 billion Positive replacement values, CHF 61 billion Negative re- placement values). UBS’s credit derivatives are usually traded as OTC contracts. Since 2009, in line with the broader derivatives industry, a number of initiatives have been launched in both the US and Europe to establish CCP solutions for OTC CDS contracts with the aim of reducing counterparty risk. UBS, along with other dealer mem­ bers, has participated in these initiatives and continued to do so throughout 2011. A signifi cant 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 documenta- tion published by ISDA or equivalent terms documented in a be­ spoke (i.e. tailored) agreement. Those forms and agreements use standardized terms that form the basis for market conventions re- lated to the types of credit events that would trigger performance (i.e. payment default, bankruptcy, etc. – see below) under a CDS. 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). The types of credit events that would require UBS to perform under a CDS contract are subject to agreement between the par­ ties 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”, “restructur- ing”, “obligation acceleration” and “repudiation / moratorium”. Contingent collateral and termination features of derivative   liabilities Certain derivative payables contain contingent collateral or termi- nation features triggered upon a downgrade of the published cred- it rating of the Group in the normal course of business. Based on UBS’s credit ratings as of 31 December 2011, additional collateral or termination payments pursuant to bilateral agreements with cer- tain counterparties of approximately CHF 0.7 billion and CHF 2.1 billion would have been required in the event of a one-notch and two­notch reduction, respectively, in UBS’s long­term credit ratings. In evaluating UBS’s liquidity requirements, UBS considers additional collateral or termination payments that would be required in the event of a reduction in UBS’s long­term credit ratings. Derivatives transacted for hedging purposes Derivatives used for structural hedging The Group enters into derivative transactions for the purposes of hedging assets, liabilities, forecast transactions, cash fl ows and credit exposures. The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and whether the hedge qualifi es as such for account­ ing purposes. Derivative transactions that qualify and are designated as hedges for accounting purposes are described under the corre- sponding headings in this note (fair value hedges, cash fl ow hedges and hedges of net investments in foreign operations). The Group’s accounting policies for derivatives designated and ac- counted for as hedging instruments are explained in “Note 1a) 15) Derivative instruments and hedge accounting”, under which terms used in the following sections are explained. The Group has also entered into various hedging strategies uti- lizing derivatives for which hedge accounting has not been ap- plied. These include interest rate swaps and other interest rate derivatives (e.g. futures) for day­to­day economic interest rate risk management purposes. In addition, the Group has used equity futures, options and, to a lesser extent, swaps for economical hedging in a variety of equity trading strategies to offset underly- ing equity and equity volatility exposure. The Group has also en­ tered into CDSs that provide economic hedges for credit risk ex­ posures (refer to the credit derivatives section). Fair value changes of derivatives that are part of economic relationships, but do not qualify for hedge accounting treatment, are reported in Net trad- ing income, except for forward points on certain FX swaps used to manage short-term interest rate risk on foreign currency loans and deposits. 355 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 fi nancial statements Note 23 Derivative instruments and hedge accounting (continued) Fair value hedges of interest rate risk The Group’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fi xed­rate instruments (e.g. long­term fi xed­rate debt issues) due to movements in market interest rates. The fair values of out­ standing interest rate swaps designated as fair value hedges were assets of CHF 2,422 million and liabilities of CHF 16 million as of 31 December 2011 and assets of CHF 1,171 million and liabilities of CHF 46 million as of 31 December 2010. 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 For the year ended 31.12.11 31.12.10 31.12.09 1,203 (1,172) 31 402 (383) 19 (171) 182 11 Fair value hedges of portfolio of interest rate risk The Group also applies fair value hedge accounting to mortgage loan portfolio 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 outstanding interest rate swaps designated for these hedges as of  31 December 2011 was a liability of CHF 1,389 million (31 December 2010: liability of CHF 972 million). Fair value hedges of portfolio of interest rate risk 1 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. Fair value hedges of foreign currency risk The Group hedges foreign exchange exposures arising from cer- tain foreign currency denominated non­monetary fi nancial invest­ ments available-for-sale using the spot component of foreign ex- change forward contracts. As of 31 December 2011 the aggregate notional amount of hedging instruments designated as fair value hedges of foreign currency risk was CHF 244 million (CHF 393 million as of 31 December 2010). The fair values of these hedging instruments were CHF 22 million assets as of 31 December 2011 and CHF 30 million assets as of 31 December 2010. The gains and losses on the hedging instruments and the hedged items, as well as the ineffectiveness of these hedges, were all not material in the periods presented in the fi nancial statements. Forecasted cash flows CHF billion Cash inflows Cash outflows Net cash flows 356 For the year ended 31.12.11 31.12.10 31.12.09 (461) 452 (9) 35 (60) (25) (48) 11 (37) Cash fl ow hedges of forecasted transactions The Group is exposed to variability in future interest cash fl ows on non­trading fi nancial 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 fl ows, representing both principal and interest fl ows, are projected for each portfolio of  fi nancial assets and liabilities, based on contractual terms and other relevant factors including estimates of prepayments and defaults. The aggregate principal balances and interest cash fl ows 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 16 years. The schedule of forecasted principal balances on which the expected interest cash fl ows arise as of 31 December 2011 is shown below. < 1 year 1–3 years 3–5 years 5–10 years over 10 years 366 70 296 500 91 409 309 45 264 232 58 174 18 18 Note 23 Derivative instruments and hedge accounting (continued) To the extent the designated cash fl ow hedging relationship meets the qualifying criteria, the effective portion of the fair value changes of the designated derivative hedging instruments is rec- ognized in Equity. These gains and losses are transferred from Eq­ uity to current period earnings in the same period in which the hedged cash fl ows affect net profi t or loss. The ineffective portion of the fair value changes of the derivative hedging instruments is recognized immediately in the income statement. A CHF 38 mil­ lion loss, a CHF 22 million loss and a CHF 183 million loss were recognized in 2011, 2010 and 2009, respectively, in Net trading income due to hedge ineffectiveness. As of 31 December 2011, the fair values of outstanding deriva- tives designated as cash fl ow hedges of forecasted transactions were CHF 7,450 million assets and CHF 3,583 million liabilities and as of 31 December 2010 the amounts were CHF 5,397 mil- lion assets and CHF 3,392 million liabilities. At the end of 2011 and 2010, gains of CHF 7 million and CHF 18 million associated with de-designated interest rate swaps were deferred in Equity. They will be removed from Equity when the previously hedged forecasted cash fl ows have an impact on net profi t or loss, or when the forecasted cash fl ows are no longer expected to occur. Amounts reclassifi ed from Equity to Net inter­ est income of de-designated swaps were CHF 11 million net gain in 2011, CHF 28 million net gain in 2010 and CHF 40 million net gain in 2009. ing instruments in net investment hedge accounting arrange- ments were CHF 10 million and CHF 40 million, respectively. The corresponding notional amount was CHF 9.6 billion in total. The effective portion of gains and losses of these FX swaps is trans- ferred directly to Equity to offset foreign currency translation (FCT) gains and losses on the net investments in foreign branches and subsidiaries. As such, these FX swaps hedge the structural FX ex­ posure resulting in the accumulation of FCT on the level of indi- vidual foreign branches and subsidiaries and hence on the total FCT other comprehensive income (OCI) of the Group. Also with effect from the fourth quarter 2011, UBS began to designate certain non­derivative foreign currency fi nancial assets and liabilities of foreign branches or subsidiaries as hedging in- struments in net investment hedge accounting arrangements. The FX translation difference recorded in Equity (FCT OCI) of the non-derivative hedging instrument of one foreign entity offsets the structural FX exposure of another foreign entity. Therefore, the aggregated FCT OCI of the Group is unchanged from this hedge designation. As of 31 December 2011, the nominal amount of non­derivative fi nancial assets and liabilities designat­ ed as hedging instruments in such net investment hedges was CHF 16.9 billion and CHF 16.9 billion, respectively. No material in effectiveness of hedges of net investments in foreign operations was recognized in the income statement in 2011. Refer also to Note 1b) Interests in consolidated investment funds. Hedges of net investments in foreign operations With effect from the fourth quarter 2011, the Group started to apply hedge accounting for certain net investments in foreign op- erations. As of 31 December 2011, the positive replacement value and negative replacement value of FX swaps designated as hedg- 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 “es- sential” for the understanding of the timing of their cash fl ows. Derivatives designated in hedge accounting relationships (undiscounted cash flows) CHF billion Interest rate swaps 1 Cash Inflows Cash Outflows FX swaps / forwards Cash Inflows Cash Outflows Net cash flows 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 10 10 0 0 0 0 3 2 1 11 8 3 4 4 0 0 1 The table includes cash inflows and cash outflows of all interest rate swaps designated in hedge accounting relationships, which are either assets or liabilities of UBS at 31 December 2011. Total 19 15 10 10 4 357 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 fi nancial 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 as collateral 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 Note 25 Operating lease commitments 31.12.11 551,590 550,023 1,567 398,110 331,415 39,480 27,216 31.12.10 573,852 571,970 1,882 428,347 352,668 54,975 20,705 As of 31 December 2011, UBS was obligated under a number of non-cancellable operating leases for premises and equipment used primarily for operational purposes. The signifi cant premises leases usually include renewal options and escalation clauses in line with general offi ce rental market conditions, as well as rent adjustments based on price indices. None of our lease agree­ ments contain volume-based or leveraged contingent rent pay- ment clauses or purchase options, or impose any restrictions on UBS’s ability to pay dividends, engage in debt fi nancing trans­ actions or enter into further lease agreements. The minimum commitments for non-cancellable leases of premises and equipment and the Group’s operating lease expenses are as follows: CHF million Operating leases due 2012 2013 2014 2015 2016 2017 and thereafter Subtotal commitments for minimum payments under operating leases Less: Sublease rental commitments under non-cancellable leases Net commitments for minimum payments under operating leases CHF million Gross operating lease expense Sublease rental income Net operating lease expense 358 31.12.11 819 705 627 532 445 2,591 5,719 453 5,266 31.12.11 31.12.10 31.12.09 837 84 754 1,057 97 960 1,191 57 1,134 Additional information Note 26 Fair value of financial instruments a) Valuation principles Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Financial instruments classifi ed as held for trad- ing or designated as at fair value through profi t or loss, and fi nancial assets classifi ed as available for sale are recognized in the fi nancial statements at fair value. All derivatives are measured at fair value. Fair values are determined from quoted prices in active markets for identical fi nancial assets or fi nancial liabilities where these are available. Fair value of a fi nancial asset or fi nancial liability in an ac- tive market is the current bid or offer price times the number of units of the instrument held. Where a trading portfolio contains both fi - nancial assets and fi nancial liabilities with offsetting market risks, fair value is generally estimated by valuing the gross long and short posi- tions at current mid market 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 fi nancial instrument is not active, fair value is established using a valuation technique or pricing model. Valuation techniques and models involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data. Valuation adjustments may be made to allow for additional factors including model risks, liquidity risk as refl ected in the bid / offer spread and credit risk. Based on the established fair value and model governance policies and related controls and proce- dures applied, management believes that these valuation adjust- ments are necessary and appropriate to fairly refl ect the values of fi - nancial instruments carried at fair value on the balance sheet. When entering into a transaction where model inputs are not market observable, the fi nancial 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. Refer to “Note 26d) Deferred day-1 profi t or loss” for more information. The timing of the recognition in profi t 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. clude such probability-based techniques as binomial and Monte Carlo pricing. UBS uses widely recognized valuation techniques for determining fair values of less complex fi nancial instruments such as interest rate and currency swaps. For more complex instruments, values may be estimated using a combination of observed transaction prices, inde- pendent pricing services and relevant quotes. Consideration is given to the nature of the quotes (e.g., indicative or fi rm) and the relation- ship of recently evidenced market activity to the prices provided from independent pricing services. UBS also uses internally devel- oped models, which are usually based on valuation methods and techniques generally recognized as standard within the industry. Such valuation models are used primarily to value derivatives transacted in the over-the-counter (OTC) market, unlisted equity and debt securities (including those with embedded derivatives), and other fair valued debt instruments for which markets were il- liquid. Market-observable assumptions and inputs are used where available, and derived from similar assets in similar and active mar- kets, from recent transaction prices for comparable items or from other observable market data. Little, if any, weight is placed on transaction prices when calculating the fair value if there is no active market and the transactions are not orderly (i.e., distressed or forced). For positions where observable reference data are not avail- able for some or all parameters, UBS determines the non-market- observable inputs to be used in its valuation models based on a combination of historical experience and knowledge of current mar- ket conditions. Assumptions and inputs used in valuation techniques and models include benchmark interest rate curves, credit spreads and other premiums used in estimating discount rates, bond and equity prices, equity index prices, foreign exchange rates and levels of market volatility and correlation. The output of a model is always an estimate or approximation of a value that cannot be estimated with certainty. As a result, valuations are adjusted, where appropriate, to refl ect close-out costs, credit ex- posure, model-driven-valuation adjustments and trading restrictions when such factors would be considered by market participants. Pricing models and valuation techniques The most frequently applied valuation techniques and pricing models include discounted cash fl ow models, relative value models and option pricing models. Discounted cash fl ow models determine the value by estimating the expected future cash fl ows from assets or liabilities discounted to their present value. Relative value models determine the value based on the market prices  of similar assets or liabilities. Option pricing models in- Interest rate curves UBS uses various interest rate curves for valuing its fi nancial instru- ments. Financial liabilities designated at fair value are measured us- ing UBS’s funds transfer price curve. Financial assets designated at fair value are valued in line with the curve used for the particular product. Uncollateralized credit exposure is evaluated under our credit risk control framework. For the valuation of uncollateralized derivative instruments, UBS generally employs a LIBOR fl at curve. 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 fi nancial statements Note 26 Fair value of financial instruments (continued) Valuation curve changes During 2011, we incorporated the use of differentiated valuation curves in the underlying risk management systems which value the substantial portion of our collateralized derivatives. These curves are linked to the terms of our Credit Support Annex (CSA) for the majority of our collateralized discounting exposure. This change in estimate resulted in a pre-tax loss of CHF 134 million recorded in Net trading income. 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 estimate fair value, credit valuation adjustments (CVA) are necessary to refl ect the credit risk of the counterparty inherent in OTC derivatives transactions, derivatives embedded in funded assets designated at fair value and derivatives embedded in trad- ed debt instruments. This amount represents the estimated mar- ket value of protection required to hedge counterparty credit risk from counterparties in UBS’s OTC derivatives portfolio, derivatives embedded in funded assets designated at fair value and traded debt instruments. CVA depends on expected future exposures, default probabilities and recovery rates. The CVA takes into con- sideration collateral or netting arrangements, break clauses and other contractual factors. UBS’s own credit risk in the valuations of derivative fi nancial liabilities (Negative replacement values) The Group estimates debit valuation adjustments (DVA) to incor- porate own credit in the valuation of derivatives, predominately, to align it with the CVA methodology as described above. The DVA represents the theoretical cost to counterparties of hedging their UBS credit risk exposure or the credit risk reserve that a counter- party could reasonably be expected to hold against their credit risk exposure to UBS, if they applied the same methodology used to calculate UBS’s CVA. The DVA takes into account negative expect- ed exposure profi les for the derivatives portfolio, collateral, netting agreements, expected future mark-to-market movements and UBS’s credit default spreads to determine the UBS counterparty exposure from the perspective of holders of UBS debt. As of 31 December 2011 and 2010, the CVA and DVA for de- rivative fi nancial instruments (replacement values) were as follows: CVA and DVA for derivative financial instruments CHF billion DVA Gain / (loss) for the year ended Life-to-date gain / (loss) CVA1 Gain / (loss) for the year ended 2 of which: Monoline credit protection – negative basis trades of which: Monoline credit protection – other of which: Other instruments Life-to-date gain / (loss) of which: Monoline credit protection – negative basis trades of which: Monoline credit protection – other of which: Other instruments 1 Amounts do not include reserves against defaulted counterparties. 2 Amounts do not include commutations. 31.12.11 31.12.10 0.2 0.8 (0.8) (0.3) (0.1) (0.4) (2.9) (1.3) (0.2) (1.4) 0.2 0.5 1.0 0.7 0.1 0.2 (2.2) (1.1) (0.1) (1.0) UBS’s own credit risk in the valuations of fi nancial liabilities designated at fair value Changes in UBS’s own credit are refl ected in the valuation of those fi nancial liabilities designated at fair value, for which UBS’s own credit risk would be considered by market participants. Own credit effects are not refl ected in the valuations of fully collateral- ized transactions and other instruments for which it is established market practice not to include them. Own credit changes are calculated based on a funds transfer price (FTP) curve, which provides a single level of discounting for uncollateralized funded instruments within UBS. The FTP curve is used by UBS to value uncollateralized and partially collateralized funding transactions designated at fair value, and for relevant ten- ors is set by reference to the level at which newly issued UBS me- dium-term notes (MTNs) are priced. The FTP curve spread is consid- ered to be representative of the credit risk which refl ects the premium that market participants require to purchase UBS MTNs. As of 31 December 2011 and 2010, respectively, the own cred- it results for Financial liabilities designated at fair value (predomi- nantly issued structured products) were as follows: 360 Note 26 Fair value of financial instruments (continued) Own credit on financial liabilities designated at fair value CHF million Total gain / (loss) for the period ended of which: credit spread related only Life-to-date gain Year-to-date amounts represent the change during the year and life-to-date amounts refl ect the cumulative change since initial recognition. The change in own credit for the period can be ana- lyzed in two components: (1) changes in fair value that are attrib- utable to the change in UBS’s credit spreads during the period and (2) the effect of volume changes, which is the change in fair val- ues attributable to factors other than credit spreads, such as re- demptions, effects from time decay, changes in interest rates and changes in the value of referenced instruments issued by third parties. The disclosed own credit amounts are also impacted by foreign currency movements. A 1 basis point increase in the UBS credit spread over LIBOR is expected to result in an own credit gain of approximately CHF 18.5 million. Refl ection of market liquidity risk in fair value estimates Fair value estimates incorporate the effects of market liquidity risk in the relevant markets. Market liquidity risk is the risk that a loss is incurred in neutralizing the exposures within a position or port- folio by either liquidating the position or establishing an offsetting market risk position. A liquidity adjustment is therefore made to provide against the expected cost of covering open market risk positions within a portfolio or position. Liquidity adjustments are bid / offer adjustments taken where a net open risk position is re- tained and the model on which it is valued is calibrated to mid market. Valuations based on models incorporate liquidity or risk premiums either implicitly (e.g., by calibrating to market prices that incorporate such premiums) or explicitly. Refl ection of model uncertainty in fair value estimates Uncertainties associated with the use of model-based valuations are predominantly addressed through the use of model reserves. These reserves refl ect the amounts that UBS estimates are appro- priate to deduct from the valuations produced directly by the models to refl ect uncertainties in the relevant modeling assump- tions, inputs used, calibration of the output, or choice of model. In arriving at these estimates, UBS considers a range of market practice and how it believes other market participants would assess these uncertainties. Model reserves are periodically reas- sessed in light of information from market transactions, pricing utilities and other relevant sources. As of or for the year ended 31.12.11 31.12.10 31.12.09 1,537 1,526 1,934 (548) (471) 237 (2,023) (1,958) 890 Valuation processes UBS’s fair value and model governance structure includes numerous controls and procedural safeguards that are intended to maximize the quality of fair value measurements reported in the fi nancial statements. New products must be reviewed and approved by all stakeholders relevant to risk and fi nancial con- trol. Responsibility for the ongoing measurement of fi nancial instruments at fair value resides with the business, but is inde- pendently validated by risk and fi nancial control functions. In carrying out their valuation responsibilities, the businesses are required to consider the availability and quality of external mar- ket information and to provide justifi cation and rationale for their fair value estimates. Independent price verifi cation of fi - nancial instruments 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 verifi - cation process is to independently corroborate the business’s estimates of fair value against available market information. By benchmarking the business’s fair value estimates with observ- able market prices or other independent sources, the degree of valuation uncertainty embedded in these measurements can be assessed and managed as required in the governance frame- work. A critical aspect of the independent price verifi cation pro- cess is the evaluation of the appropriateness of modeling ap- proaches and input assumptions which yield fair value estimates derived from valuation models. The output of modeling ap- proaches is also compared to observed prices and market levels for the specifi c instrument being priced if possible and appropri- ate. This calibration analysis is performed to assess the ability of the model and its inputs (which are frequently based upon a combination of price levels of observable hedge instruments and diffi cult to observe parameters) to price a specifi c product in its own specifi c market. An independent model review group re- views UBS’s valuation models on a regular basis or if specifi c triggers occur and approves them for valuing specifi c products. As a result of the valuation controls employed, valuation adjust- ments may be made to the business’ estimate of fair value to either align with independent market information or fi nancial accounting standards. 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 fi nancial statements Note 26 Fair value of financial instruments (continued) b) Fair value hierarchy All fi nancial instruments at fair value are categorized into one of three fair value hierarchy levels at year-end, based upon the low- est level input that is signifi cant to the product’s fair value mea- surement in its entirety: – Level 1 – quoted prices (unadjusted) in active markets for iden- tical assets and liabilities; – Level 2 – valuation techniques for which all signifi cant inputs are market observable, either directly or indirectly; and – Level 3 – valuation techniques which include signifi cant inputs that are not based on observable market data. Determination of fair values from quoted market prices or valuation techniques 1 CHF billion Financial assets held for trading 2 of which: 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 Other liabilities – amounts due under unit-linked investment contracts Total liabilities 31.12.11 Level 1 Level 2 Level 3 99.4 33.2 3.4 0.4 0.0 0.4 2.6 0.0 0.7 34.8 138.4 30.4 3.5 0.4 0.0 0.4 2.7 0.0 0.0 0.0 34.0 55.7 6.2 469.2 294.9 58.4 94.8 14.2 6.9 6.9 17.7 549.5 8.4 459.1 275.7 56.3 103.6 16.5 6.9 76.9 16.4 560.8 7.8 0.5 13.9 0.9 8.8 2.0 2.2 0.0 2.7 0.6 25.0 0.6 10.8 0.3 7.1 2.3 0.9 0.1 12.1 0.0 23.5 Total 162.8 39.9 486.6 296.2 67.3 97.2 19.1 6.9 10.3 53.2 712.9 39.5 473.4 276.5 63.4 106.3 20.1 7.0 89.0 16.4 618.2 31.12.10 Level 1 116.1 38.3 3.6 0.9 0.0 0.3 2.3 0.0 0.8 52.9 173.4 42.9 3.5 1.0 0.0 0.3 2.2 0.0 0.0 0.0 46.4 Level 2 83.0 22.2 385.1 201.5 48.1 112.2 17.5 5.8 7.3 21.0 496.4 11.8 379.9 187.8 44.9 120.9 20.5 5.8 86.7 18.1 496.5 Level 3 10.8 0.8 12.4 1.3 7.7 1.0 2.4 0.0 0.5 0.9 24.5 0.3 10.4 0.7 6.2 1.8 1.5 0.1 14.0 0.0 24.7 Total 209.9 61.4 401.1 203.8 55.8 113.5 22.2 5.9 8.5 74.8 694.3 55.0 393.8 189.4 51.1 123.0 24.2 6.0 100.8 18.1 567.6 1 Bifurcated embedded derivatives, which are presented on the same balance sheet lines as their host contracts, are excluded from this table. As of 31 December 2011, net bifurcated embedded derivative assets held at fair value, totaling CHF 1.0 billion (of which CHF 0.8 billion were net level 3 assets and CHF 0.2 billion net level 2 assets), were recognized on our balance sheet within Debt issued. As of 31 December 2010, net bifurcated embedded derivative assets held at fair value, totaling CHF 1.4 billion (of which CHF 1.7 billion were net level 3 assets and CHF 0.3 billion net level 2 liabilities), were recognized on our balance sheet within Debt issued. 2 Financial assets held for trading do not include precious metals and commodities. Transfers between level 1 and level 2 of the fair value hierarchy Trading assets of approximately CHF 0.3 billion, of which CHF 0.2 billion are debt instruments, and trading liabilities of approxi- mately CHF 0.4 billion, of which CHF 0.3 billion are debt instru- ments, were transferred from level 2 to level 1, respectively, due to increased trading activities and volumes. ments of CHF 1.3 billion and CHF 0.5 billion, respectively. These positions were transferred from level 1 to level 2 because actual trading activity no longer met the average market activity as de- fi ned in UBS’s valuation governance principles in determining whether an instrument is traded in an active market. Trading assets and liabilities with amounts of approximately CHF 1.4 billion and approximately CHF 0.7 billion were trans- ferred from level 1 to level 2, respectively. Trading assets and trad- ing liabilities transferred were primarily comprised of debt instru- Movements of level 3 instruments The table below includes a roll-forward of the balance sheet amounts of the signifi cant classes of fi nancial instruments classi- fi ed within level 3. 362 Note 26 Fair value of financial instruments (continued) Movements of level 3 instruments CHF billion Balance at 31 December 2009 Total gains / losses included in the income statement 1 Net trading income Other Purchases, sales, issuances and settlements Purchases Sales Issuances Settlements Transfers into or out of level 3 Transfers into level 3 Transfers out of level 3 Foreign currency translation Balance at 31 December 2010 Balance at 31 December 2010 Total gains / losses included in the income statement 1 Net trading income Other Purchases, sales, issuances and settlements Purchases Sales Issuances Settlements Transfers into or out of level 3 Transfers into level 3 Transfers out of level 3 Foreign currency translation Balance at 31 December 2011 Derivative instruments Financial assets held for trading Positive replacement values Negative replacement values Financial liabilities designated at fair value 12.2 0.2 (0.2) 0.4 0.0 3.7 (3.7) 0.0 0.0 (0.4) 2.4 (2.8) (1.0) 10.8 10.8 (0.4) (0.6) 0.2 (2.2) 2.5 (4.7) 0.0 0.0 (0.4) 1.0 (1.4) 0.1 7.8 23.8 1.2 1.1 0.1 (7.0) 0.0 0.0 1.6 (8.6) (2.7) 1.6 (4.3) (3.0) 12.4 12.4 1.9 1.9 0.0 (1.1) 0.0 0.0 3.3 (4.4) 0.6 1.7 (1.1) 0.1 13.9 17.0 1.8 1.8 0.0 (5.4) 0.0 0.0 1.4 (6.8) (1.1) 1.8 (2.9) (1.9) 10.4 10.4 0.7 0.7 0.0 (0.5) 0.0 0.0 1.7 (2.2) 0.1 1.3 (1.2) 0.1 10.8 10.3 0.3 0.1 0.2 (1.4) 0.0 0.0 3.3 (4.7) 4.7 5.8 (1.1) 0.1 14.0 14.0 (0.5) (0.5) 0.1 0.4 0.0 0.0 5.2 (4.8) (2.0) 1.8 (3.8) 0.0 12.0 1 Reflects gains and losses included in the income statement for instruments which were classified as level 3 instruments at both the beginning and the end of the period as well as gains and losses for the entire period for instruments which were transferred into level 3 during the period. n o i t a m r o f n i l a i c n a n i F 363 Financial information Notes to the consolidated fi nancial statements Note 26 Fair value of financial instruments (continued) Material changes in level 3 instruments As of 31 December 2011, fi nancial instruments measured with valuation techniques using signifi cant non-market observable in- puts (level 3) mainly included the following: – structured rates and credit positions, including bespoke collat- eralized debt obligations (CDO) and collateralized loan obliga- tions (CLO); – reference-linked notes (RLN); – fi nancial instruments linked to the US and European residential and US and non-US commercial real estate markets; – corporate bonds and corporate credit default swaps (CDS); and – lending-related products Financial assets held for trading Financial assets held for trading transferred into and out of level 3 amounted to CHF 1.0 billion and CHF 1.4 billion, respectively. Transfers into level 3 were comprised primarily of CHF 0.4 billion of corporate bonds, CHF 0.2 billion of fi nancial instruments linked to the Asian real estate market, CHF 0.1 billion of fi nancial instru- ments related to the European real estate market, CHF 0.1 billion of fi nancial instruments linked to student loans, and CHF 0.1 bil- lion of US RLN where no independent price verifi cation was pos- sible given reduced observability of market inputs. Transfers out of level 3 were comprised primarily of CHF 0.4 billion of fi nancial instruments linked to the Asian real estate market, CHF 0.3 billion of corporate bonds, CHF 0.2 billion of sovereign bonds, CHF 0.2 billion of asset backed securities, and CHF 0.1 of lending-related products as independent price sources became available by which to verify fair values. Level 3 fi nancial assets held for trading purchased during the year amounted to CHF 2.5 billion. These purchases mainly includ- ed CHF 1.1 billion of lending-related products, CHF 0.9 billion of corporate bonds and CHF 0.2 billion of fi nancial instruments linked to the US commercial real estate market. Sales of level 3 fi nancial assets held for trading amounted to CHF 4.7 billion, which included CHF 1.6 billion of lending-related products, CHF 0.7 billion of fi nancial instruments linked to the US commercial real estate market, CHF 0.7 billion of corporate bonds, CHF 0.5 billion of fi nancial instruments linked to the Asian real estate market, CHF 0.3 billion CLO, and CHF 0.2 billion of equities. Derivative instruments Derivative instruments transferred into level 3 include positive re- placement values of CHF 1.7 billion and negative replacement values of CHF 1.3 billion. Transfers out of level 3 instruments in- cluded positive replacement values of CHF 1.1 billion and negative replacement values of CHF 1.2 billion. Transfers into level 3 positive replacement values were com- prised primarily of CHF 0.8 billion corporate CDS positions as credit curves and recovery rates could no longer be independently verifi ed, CHF 0.4 billion of structured credit bespoke CDO posi- 364 tions due to a reduction in the correlation between the portfolio held and the representative market portfolio used to indepen- dently verify market data and CHF 0.2 billion of sovereign CDS positions as credit curves could no longer be independently veri- fi ed. Transfers into level 3 negative replacement values were com- prised primarily of CHF 0.7 billion structured credit bespoke CDO positions due to a reduction in the correlation between the port- folio held and the representative market portfolio used to inde- pendently verify market data, CHF 0.3 billion of corporate CDS positions as credit curves and recovery rates could no longer be independently verifi ed and CHF 0.1 billion of sovereign CDS posi- tions as credit curves could no longer be independently verifi ed. Transfers out of level 3 positive replacement values were com- prised primarily of CHF 0.2 billion of corporate CDS positions where credit curves and recovery rates could be independently verifi ed, CHF 0.2 billion of US residential CDS positions as the reli- ability of independent underlying market data increased, CHF 0.2 billion of equity options where volatility could be independently verifi ed, CHF 0.2 billion of US commercial real estate CDS posi- tions as the reliability of independent underlying market data in- creased and CHF 0.1 billion of structured credit bespoke CDO positions due to an increase in the correlation between the port- folio held and the representative market portfolio used to inde- pendently verify market data. Transfers out of level 3 negative replacement values were comprised primarily of CHF 0.4 billion of equity options where volatility could be independently verifi ed, CHF 0.2 billion of US residential CDS positions as the reliability of independent underlying market data increased, CHF 0.2 billion of structured credit bespoke CDO positions due to an increase in the correlation between the portfolio held and the representative market portfolio used to independently verify market data, CHF 0.1 billion of US commercial real estate CDS positions as the reli- ability of independent underlying market data increased, and CHF 0.1 billion of structured rates positions where volatility could be independently verifi ed. Issuances of level 3 positive replacement values were CHF 3.3 billion, which included CHF 1.4 billion of structured credit be- spoke CDO positions, CHF 0.7 billion of corporate CDS positions and CHF 0.6 billion of structured rates positions. Issuances of level 3 negative replacement values were CHF 1.7 billion, which included CHF 0.8 billion of structured credit bespoke CDO posi- tions, CHF 0.6 billion of corporate CDS positions, and CHF 0.2 billion of structured rates positions. Settlements of level 3 positive replacement values were CHF 4.4 billion, which included CHF 1.9 billion of structured credit po- sitions, CHF 0.6 billion of structured rates positions, CHF 0.5 bil- lion of CLO CDS positions, CHF 0.5 billion of US commercial real estate CDS positions, and CHF 0.4 billion of corporate CDS posi- tions. Settlements of level 3 negative replacement values were CHF 2.2 billion, which included CHF 0.9 billion of structured cred- it bespoke CDO positions, CHF 0.4 billion of structured rate trades, CHF 0.2 billion of equity options, CHF 0.2 billion of corpo- Note 26 Fair value of financial instruments (continued) rate CDS positions and CHF 0.1 billion of European real estate CDS positions. Financial assets designated at fair value Issuances of structured fi nance level 3 fi nancial assets designated at fair value were approximately CHF 2.2 billion. Financial liabilities designated at fair value Transfers of fi nancial liabilities designated at fair value into level 3 of CHF 1.8 billion consisted primarily of CHF 0.7 billion credit- linked notes where the underlying credit curve could no longer be independently verifi ed, CHF 0.6 billion of equity-linked notes and CHF 0.5 billion of interest rate-linked notes as the volatility of the embedded option could not be independently verifi ed. Transfers of fi nancial liabilities designated at fair value out of level 3 were CHF 3.8 billion, which included CHF 1.5 billion of interest rate-linked notes, CHF 1.5 billion of equity-linked notes where the volatility of the embedded option could be indepen- dently verifi ed and CHF 0.5 billion of credit-linked notes as the underlying credit curve could be independently verifi ed. Issuances of level 3 fi nancial liabilities designated at fair value were CHF 5.2 billion, consisting primarily of CHF 3.6 billion of credit- linked notes and CHF 1.0 billion of equity-linked notes. Settlements of level 3 fi nancial liabilities designated at fair val- ue were approximately CHF 4.8  billion, which consisted of CHF 2.1 billion of credit-linked notes, CHF 1.4 billion of equity-linked notes and CHF 1.3 billion of interest rate-linked notes. Sensitivity information Included in the fair value estimates of fi nancial instruments car- ried at fair value on the balance sheet are those estimated in full or in part using valuation techniques based on assumptions that are not supported by market observable prices, rates, or other inputs. In addition, there may be uncertainty about a valu- ation which results from the choice of valuation technique or model used, the assumptions embedded in those models, the  extent to which inputs are not market observable, or as a consequence of other elements affecting the valuation tech- nique or model. To show the effect when changing the unobservable inputs to a reasonably possible alternative assumption, UBS performed a sensitivity analysis of its fi nancial instruments classifi ed as level 3, which are valued using model-based techniques, and for which signifi cant model inputs are unobservable in the markets in which the underlying products are transacted. The fair values as of 31 December 2011 of cash instruments were adjusted by 3% to 20% and of derivative instruments by 1% to 40% as deemed adequate for the applicable product in the professional judg- ment of management. Cash instruments referred to in the table relate to long and short inventory, if applicable, of the respective product type. For purposes of the presentation, derivative instruments will include positive and negative replacement values, as well as issued notes with embedded equity or interest rate derivative features, which are presented on the UBS balance sheet as fi nancial assets or liabilities designated at fair value. For all instruments, favorable changes are increases in asset values and decreases in liability values, as a consequence of applying the relevant sensitivity per- centage. Unfavorable changes are decreases in asset values, and increases in liability values, as a consequence of applying the rel- evant sensitivity percentage for the respective fi nancial instru- ments. Sensitivity of level 3 financial assets and liabilities As of CHF billion Cash instruments Mortgage securities Debt securities Traded loans Total cash instruments Derivative instruments Equity derivatives Interest rate derivatives Credit derivatives Other Total derivative instruments 31.12.11 31.12.10 Favorable changes Unfavorable changes Favorable changes Unfavorable changes 0.3 0.2 0.1 0.6 0.1 0.3 0.5 0.2 1.1 (0.3) (0.2) (0.1) (0.6) (0.1) (0.3) (0.5) (0.2) (1.1) 0.3 0.2 0.1 0.6 0.4 0.7 0.1 0.4 1.6 (0.3) (0.2) (0.1) (0.6) (0.4) (0.7) (0.1) (0.4) (1.6) 365 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 fi nancial statements Note 26 Fair value of financial instruments (continued) c) Valuation techniques by product This section includes a description of main product categories and related valuation techniques employed by the bank. Government and corporate bonds, bills and loans Government bonds and bills are generally actively traded with quoted prices in liquid markets. Should market prices not be avail- able, the securities are valued against yield curves implied from similar issuances. Corporate bonds are priced at market levels, which are based on recent trades or broker and dealer quotes. In cases where no directly comparable price is available, the bonds are tested against yields derived from other securities by the same issuer or bench- marked against similar securities adjusting for seniority, maturity and liquidity. For illiquid securities, credit modeling may be used, which considers the features of the security and discounts cash- fl ows using observable or implied credit spreads and prevailing interest rates. Loans held at fair value are priced at market levels refl ecting re- cent transactions or quoted dealer prices. For illiquid loans where no market price is available, alternative valuation techniques are used which may include relative value benchmarking using pricing derived from debt instruments in comparable entities or different products in the same entity. The corporate lending portfolio is valued using either directly observed market prices typically from consensus providers or us- ing a credit-default-swap pricing model, which requires credit spreads, recovery and interest rate inputs. Equity securities, hedge fund and investment fund units, convertible bonds, and derivatives The majority of equity securities are traded on public stock exchanges where quoted prices are readily and regularly avail- able. Hedge funds are measured at fair value based on their pub- lished net asset values (NAV). The bank will consider the avail- ability of NAV from the funds or restrictions imposed upon the redemption of these funds when determining the fi nal fair value. Convertible bonds are mostly valued using observable pricing sources, which are generally available given frequency of trading in the market. Investment fund units are predominantly exchange traded, with quoted prices in liquid markets. Should market prices not be available these instruments may be valued based on their NAV. UBS has positions in both exchange-traded derivatives (ETD) and  OTC derivatives. ETD generally have observable prices and the bank considers market prices for its fair value assessment. OTC derivatives are measured using either industry standard mod- els or internally developed proprietary models. 366 Residential Mortgage-Backed Securities (RMBS), Commercial Mortgage-Backed Securities (CMBS), Asset-Backed Securities (ABS) and Collateralized Debt Obligations (CDO) Values of RMBS, CMBS, ABS and CDO are estimated by traded prices and independently verifi ed market data when available. In the absence of direct market data, values will be derived from traded and quoted prices on one or more securities with similar characteristics or indices through benchmarking or triangula- tion. Securities with plain vanilla features but limited observable market data are valued through industry standard valuation mod- els, while those with complex structures are valued through pro- prietary models and fundamental analysis. Key inputs to such models include management’s quantitative and qualitative assess- ment of current and future economic conditions, the securities’ projected performance under such conditions, as well as liquidity in the market, among other factors. Credit derivatives related to RMBS, CMBS, ABS and CDO Credit derivatives are in the form of credit default swaps, total return swaps and balance guaranteed swaps referencing an in- dex, single-name securities or a basket of single-name securities. Single name contracts are primarily priced using reliable market data or are derived from traded and quoted prices on similar ex- posures to determine their value. More illiquid and bespoke cred- it derivatives are valued through proprietary models and inputs to such models are derived via market data and calibration to similar transactions, reference indices and securities. Credit derivatives Single-name and -index credit default swaps, and any derivation or combination which can be classifi ed as complex structured credit products, are valued by using market available credit spreads and recovery rates from either consensus pricing services or other market participants. These data are used in industry stan- dard models in order to derive fair value. Complex structured credit products are valued using proprie- tary models, which are calibrated to data derived from market data obtained. Inputs to these models include single-name credit spreads, recovery rates, implied correlations, credit volatilities, cash-synthetic basis spreads and quanto basis spreads. Rates swaps and forwards OTC swap products include interest rate swaps, basis swaps, cross currency swaps, infl ation swaps and interest rate for- wards, often referred to as forward rate agreements (FRA). All these products are valued by estimating future interest cash fl ows (both fi xed and future index levels) and then discounting these fl ows using an interest rate that refl ects the appropriate funding rate for that portion of the portfolio. Interest rates and Note 26 Fair value of financial instruments (continued) future index levels used in the above calculations are generated from observing current market interest rates associated with typical OTC interest rate derivatives (swap rates, basis swap spreads, futures prices, FRA rates) and converting these into rates specifi c to the portfolio using market standard yield curve models. FX spot and forward Open spot and settled FX positions are valued using the observed market FX spot rate. Forward FX positions are valued using the spot rate adjusted for forward pricing points observed from stan- dard market sources. Rates options Interest rate caps and fl oors, swaptions, and other more complex non-linear interest-rate products are valued using market stan- dard option models. These models use inputs that include (but are not limited to) interest rate yield curves, infl ation curves, interest rates volatilities, FX rate volatilities and infl ation volatilities, corre- lations (between different interest rates or between rates and FX or infl ation). The models are calibrated so that they are able to recover market observed prices for standard option instruments trading within the market and the calibrated model is then used to revalue the portfolio. FX options OTC options on FX rates are valued using market standard option models. These models include inputs that include (but are not limited to) FX spot rates, FX forward points, FX volatilities, interest rate yield curves and correlations between FX rates and interest rates. The models are calibrated so that they are able to recover market observed prices for standard option instruments trading within the market and the calibrated model is then used to reval- ue the portfolio. ➔ Refer to the “Risk, treasury and capital management” section for more information on certain fi nancial instruments with signifi cant valuation uncertainty (CVA monolines, US and non-US reference-linked notes, option to acquire equity of the SNB StabFund) d) Deferred day-1 profit or loss The table refl ects the activity in deferred profi t or loss attributable to fi nancial instruments for which fair value is estimated using valu- ation models and not all signifi cant inputs are market observable. Such fi nancial instruments are initially recognized at their trans- action price, even if the values obtained from the relevant valuation model on day 1 differ. Day 1 reserves are released and  gains or losses are recorded in trading profi t or loss as either the underlying parameters become observable or the transaction is closed out or by an appropriate amortization methodology. The table shows the aggregate difference yet to be recognized in profi t or loss at the beginning and end of the period and a reconciliation of changes in the balance (movement of deferred day-1 profi t 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 31.12.11 31.12.10 565 221 (354) 1 433 599 282 (260) (56) 565 On 31 December 2011, deferred day-1 profi t or loss of approxi- mately CHF 0.1 billion (31 December 2010: approximately CHF 0.3 billion) pertains largely to structured rates positions and of approximately CHF 0.3 billion (31 December 2010: approximately CHF 0.3 billion) to OTC equity options. Both instruments are pre- sented as replacement values on UBS’s balance sheet. 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 fi nancial statements Note 26 Fair value of financial instruments (continued) e) Financial instruments accounted for at amortized cost The following table refl ects the estimated fair values for UBS’s instruments accounted for at amortized cost. Refer to “Note 28 Mea- surement categories of fi nancial assets and fi nancial liabilities” for an overview of fi nancial assets classifi ed as “loans and receivables” and fi nancial liabilities accounted for at amortized cost. Financial instruments accounted for at amortized cost CHF billion Assets Due from banks Loans Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments Accrued income, other assets Liabilities Due to banks Due to customers Cash collateral on securities lent Repurchase agreements Cash collateral payables on derivative instruments Debt issued Accrued expenses, other liabilities Guarantees / loan commitments 1 Guarantees Loan commitments 31.12.11 31.12.10 Carrying value Fair value Carrying value Fair value 23.2 266.6 58.8 213.5 41.3 10.2 30.2 342.4 8.1 102.4 67.1 141.6 47.2 0.1 0.0 23.2 268.2 58.8 213.3 41.3 10.2 30.2 342.4 8.1 102.4 67.1 140.6 47.2 0.1 0.7 17.1 261.3 62.5 142.8 38.1 20.6 41.5 332.3 6.7 74.8 58.9 131.6 49.2 0.1 0.0 17.1 263.4 62.5 142.8 38.1 20.6 41.5 332.5 6.7 74.7 58.9 131.4 49.2 0.1 0.4 1 From 2011 onwards, only reflects loan commitments and guarantees not recognized on the balance sheet, unless a provision is required. Previously, derivative loan commitments and loan commitments accounted for as financial liabilities designated at fair value were also included. The prior period has been adjusted. Loans include Wealth Management assets, mainly mortgage loans, where fair values exceeded related carrying values by CHF 3.4 billion, and Investment Bank assets where fair values were below related carrying values by CHF 1.5 billion. The fair values included in the table above were calculated for disclosure purposes only. The valuation techniques and assump- tions described below provide a measurement of fair value of UBS’s fi nancial instruments accounted for at amortized cost. However, because other institutions may use different methods and assumptions for their fair value estimation, such fair value disclosures cannot necessarily be compared from one fi nancial in- stitution to another. UBS applies signifi cant judgments and as- sumptions to arrive at these fair values, which are more holistic and less sophisticated than UBS’s established fair value and model governance policies and processes applied to fi nancial instru- ments accounted for at fair value, whose fair values impact UBS’s balance sheet and net profi t. The following principles were ap- plied when determining fair value estimates for fi nancial instru- ments accounted for at amortized cost: – For fi nancial instruments with remaining maturities greater than three months, the fair value was determined from quoted market prices, if available. – Where quoted market prices were not available, the fair values were estimated by discounting contractual cash fl ows using current market interest rates or appropriate yield curves for in- struments with similar credit risk and maturity. These estimates generally include adjustments for counterparty credit or UBS’s own credit. – For short-term fi nancial instruments with remaining maturities of three months or less, the carrying amount, which is net of credit loss allowances, is generally considered a reasonable es- timate of fair value. The following fi nancial instruments ac- counted for at amortized cost have remaining maturities of three months or less: 85% of amounts due from banks; 100% of cash collateral on securities borrowed; 94% of reverse re- purchase agreements; 100% of cash collateral receivables on derivatives; 46% of loans; 93% of amounts due to banks; 100% of cash collateral on securities lent; 98% of repurchase agreements; 100% of cash collateral payable on derivatives; 98% of amount due to customers; and 47% of debt issued. – The fair value of variable interest-bearing fi nancial instru- ments accounted for at amortized cost is assumed to be 368 Note 26 Fair value of financial instruments (continued) approximated by their carrying amounts, which are net of credit loss allowances, and does not refl ect fair value changes in the credit quality of counterparties or UBS’s own credit movements. – The fair value estimates for repurchase and reverse repurchase agreements with variable and fi xed interest rates, for all ma- turities, include the valuation of the interest rate component of these instruments. Credit and debit valuation adjustments have not been included in the valuation due to the short-term nature of these instruments. – The estimated fair values of off-balance sheet fi nancial instru- ments are based on market prices for similar facilities and guar- antees. Where this information is not available, fair value is estimated using discounted cash fl ow analysis. Note 27 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 repurchase transactions, under collateralized credit lines with central banks, against loans from mortgage institutions, in connection with derivative transactions, as security deposits for stock ex- changes and clearinghouse memberships, or transferred for se- curity purposes in connection with the issuance of covered bonds. Assets pledged CHF million Financial assets held for trading portfolio assets pledged to third parties of which: pledged to third-parties with right of rehypothecation Financial investments available-for-sale pledged to third parties Mortgage loans Other loans and receivables of which: pledged to third parties with right of rehypothecation Total financial assets pledged Carrying amount 31.12.11 31.12.10 58,463 39,936 26,022 27,841 5,971 43 79,742 61,352 38,106 27,119 10,235 559 118,296 155,202 The following table presents details of fi nancial assets which have been sold or otherwise transferred, but which do not qualify for derecognition. Criteria for derecognition are discussed in “Note 1a) 5) Recognition and derecognition of fi nancial instruments”. 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 31.12.11 31.12.10 22.9 15.6 80.0 118.5 30.9 28.6 96.6 156.1 The transactions are mostly conducted under standard agree- ments employed by fi nancial market participants and are under- taken with counterparties subject to UBS’s normal credit risk con- trol processes. The resulting credit risk exposures are controlled by daily monitoring and collateralization of the positions. The fi nan- cial assets which continue to be recognized are typically trans- ferred in exchange for cash or other fi nancial assets. The associ- ated liabilities can therefore be assumed to be approximately the same as the carrying amount of the transferred fi nancial assets except for certain positions pledged with central banks. assets in each situation of continued recognition. These may in- clude credit risk, settlement risk, country risk and market risk. Repurchase agreements and securities lending agreements are discussed in Notes 1a) 13) and 1a) 14). Other fi nancial asset trans- fers include fi nancial assets pledged in fi nancial transactions as described above, other than those pledged in securities lending arrangements and repurchase agreements. It also includes sales of fi nancial assets while concurrently entering into a total return swap with the same counterparty. Transferred fi nancial assets which are subject to partial con- UBS retains substantially all risks and rewards of the transferred tinuing involvement were not material in 2011 and 2010. 369 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 fi nancial statements Note 28 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 fi nancial instruments within the measurement categories of fi nancial assets and fi nancial liabilities as defi ned in IAS 39. Only those assets and liabilities which are deemed to be fi nancial instruments are included in the table be- low, which causes certain balances to differ from those presented on the balance sheet. ➔ Refer to “Note 26 Fair value of fi nancial instruments” for more information on how fair value of fi nancial instruments is determined CHF million Financial assets 1 Held for trading Trading portfolio assets of which: pledged as collateral Debt issued 2 Positive replacement values Total Fair value through profit or loss Financial assets designated at fair value Financial assets at amortized costs Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments Loans Accrued income 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 Cash collateral payables on derivative instruments Due to customers Accrued expenses Debt issued Other liabilities Total Total financial liabilities 31.12.11 31.12.10 162,821 39,936 1,149 486,584 650,554 209,873 61,352 2,665 401,146 613,684 10,336 8,504 40,638 23,218 58,763 213,501 41,322 266,604 1,464 8,757 654,267 26,939 17,133 62,454 142,790 38,071 261,263 1,404 19,175 569,229 53,174 1,368,331 74,768 1,266,185 39,480 194 473,400 513,074 88,982 16,481 105,462 30,201 8,136 102,429 67,114 342,409 6,646 141,572 40,512 739,019 1,357,555 54,975 1,308 393,762 450,045 100,756 18,125 118,881 41,490 6,651 74,796 58,924 332,301 7,581 131,628 41,622 694,993 1,263,918 1 As of 31 December 2011, CHF 118 billion of Loans, CHF 1 billion of Due from banks, CHF 1 billion of Reverse repurchase agreements, CHF 20 billion of Financial investments available-for-sale and CHF 8 billion of Financial assets designated at fair value are expected to be recovered or settled after twelve months. 2 Represents the embedded derivative component of structured debt issued for which the fair value option has not been used. The amounts shown here as positive and negative replacement values are presented within Debt issued on the balance sheet. 370 Note 28 Measurement categories of financial assets and financial liabilities (continued) b) Reclassified financial assets In fourth quarter 2008 and fi rst quarter 2009, fi nancial assets were reclassifi ed out of held-for-trading to loans and receivables (refer to Note 1a) 10) for more information). On their reclassifi cation date these assets had fair values of CHF 26 billion and CHF 0.6 billion, respectively. Held-for-trading assets reclassified to loans and receivables CHF billion US student loan and municipal auction rate securities Monoline-protected assets Leveraged finance US reference-linked notes Other assets Total (excluding CMBS interest-only strips) CMBS interest-only strips Total reclassified assets Held-for-trading assets reclassified to loans and receivables CHF billion Carrying value Fair value Pro-forma fair value gain / (loss) The table below provides notional values, fair values and carrying values by product category for remaining reclassifi ed fi nancial assets. 31.12.11 Notional value Fair value Carrying value 3.3 1.0 0.5 0.3 0.9 5.9 5.9 2.7 0.7 0.4 0.2 0.8 4.8 0.1 4.9 3.0 0.8 0.4 0.2 0.8 5.2 0.1 5.3 Ratio of carrying to notional value 92% 84% 78% 69% 85% 88% 31.12.11 31.12.10 5.3 4.9 (0.4) 11.9 12.1 0.2 In 2011, carrying values of reclassifi ed fi nancial assets de- creased by CHF 6.6 billion, mainly due to sales of assets with a carrying value of CHF 6.9 billion at the time of the sale. Redemp- tions of CHF 0.2 billion and the appreciation of the Swiss franc against the US dollar of CHF 0.2 billion resulted in further de- creases. The impact on operating profi t before tax from these fi nancial assets was a profi t of CHF 0.7 billion (see table below). If the fi nancial assets had not been reclassifi ed, the impact on 2011 operating profi t before tax would have been a profi t of ap- proximately CHF 0.2 billion. Contribution of the reclassified assets to the income statement CHF million Net interest income Credit loss (expense) / recovery Other income 1 Impact on operating profit before tax 1 Includes net gains on the disposal of reclassified financial assets. For the year ended 31.12.11 31.12.10 381 36 306 723 453 (63) 134 525 n o i t a m r o f n i l a i c n a n i F 371 Financial information Notes to the consolidated fi nancial statements Note 28 Measurement categories of financial assets and financial liabilities (continued) c) Maximum exposure to credit risk and credit quality information The table below represents the Group’s maximum exposure to credit risk by class of fi nancial instrument and the respective col- lateral and other credit enhancements mitigating credit risk for these classes of fi nancial instruments. The maximum exposure to credit risk includes the carrying amounts of fi nancial instruments recognized on the balance sheet subject to credit risk and the notional amounts for off-balance sheet arrangements. Where available, collateral is presented at fair value; for other collateral such as real estate, a best estimate of fair value is used. Credit enhancements (credit derivative contracts / guarantees) are included at their notional amounts. Both are capped at the maxi- mum exposure to credit risk for which they serve as security. The section “Risk management and control” describes man- agement’s view of credit risk and the related exposures. These differ in certain respects to the requirements of the accounting standard. Maximum exposure to credit risk CHF billion Financial assets measured at amortized cost on the balance sheet Balances with central banks Due from banks Loans 2, 3 Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments 4 Accrued income, other assets Total financial assets measured at amortized cost Financial assets measured at fair value on the balance sheet Positive replacement values 5 Trading portfolio assets – debt instruments 6, 7 Financial assets designated at fair value – debt instruments Financial investments available-for-sale – debt instruments Total financial assets measured at fair value Total maximum exposure to credit risk reflected on the balance sheet Guarantees Loan commitments Forward starting transactions, reverse repurchase and securities borrowing agreements Total maximum exposure to credit risk not reflected on the balance sheet Total at the year-end 31.12.11 Collateral Credit enhancements Maximum exposure to credit risk Cash collateral received Collateral- ized by securities Secured by real estate Other collateral 1 Netting Credit derivative contracts Guarantees 148.2 0.5 16.4 0.6 0.6 2.6 38.6 23.2 266.6 58.8 213.5 41.3 10.2 652.2 486.6 99.2 9.6 52.3 647.7 1,299.9 18.8 58.2 27.6 104.6 1,404.5 0.0 11.4 11.5 0.0 11.5 1.5 0.3 1.8 13.2 2.7 53.9 58.8 213.5 6.2 335.1 6.7 6.7 148.2 16.9 0.0 341.8 148.2 1.9 0.4 27.6 29.9 371.7 0.2 1.1 1.3 149.5 0.2 0.2 17.1 1.5 8.8 10.3 27.5 28.0 28.0 428.9 428.9 456.9 456.9 0.6 3.2 1.4 1.4 2.0 1.8 18.1 19.8 21.8 0.0 3.2 1.9 3.0 5.0 8.2 1 Includes but not limited to life insurance contracts, inventory, accounts receivable, patents, and copyrights. 2 Loans include a balance outstanding of USD 4.7 billion to the BlackRock fund. This loan is collateralized by a portfolio of US residential mortgage-backed securities included within “Other collateral”. Refer to the “Risk, treasury and capital management” section of this report for more information. 3 Loans include mono- line-protected assets which were reclassified from held-for-trading to loans and receivables in fourth quarter 2008. The remaining carrying value of these assets was CHF 0.8 billion as of 31 December 2011. The fair value of credit default swap protection after credit valuation adjustments related to these assets was CHF 0.2 billion, which is not included in the column “Credit derivative contracts”. Refer to the “Risk, treasury and capital management” section of this report for more information. 4 Included within cash collateral receivables on derivative instruments are margin balances due from exchanges or clearing houses. The amount shown in the netting column represents the netting with related negative replacement values in accordance with Swiss Federal Banking Law. 5 The amount shown in the netting column represents the netting with related negative replacement values and cash collateral payables in accordance with Swiss Federal Banking Law. 6 These positions are generally managed under the market risk framework and are included in VaR. For the purpose of this disclosure, collateral and credit enhancements were not considered. 7 Does not include debt instruments held for unit-linked investment contracts and investment fund units. 372 Note 28 Measurement categories of financial assets and financial liabilities (continued) Maximum exposure to credit risk (continued) CHF billion Financial assets measured at amortized cost on the balance sheet Balances with central banks Due from banks Loans 2, 3 Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments 4 Accrued income, other assets Total financial assets measured at amortized cost Financial assets measured at fair value on the balance sheet Positive replacement values 5 Trading portfolio assets – debt instruments 6, 7 Financial assets designated at fair value – debt instruments Financial investments available-for-sale – debt instruments Total financial assets measured at fair value Total maximum exposure to credit risk reflected on the balance sheet Guarantees Loan commitments Irrevocable commitments to acquire ARS Forward starting transactions, reverse repurchase and securities borrowing agreements Total maximum exposure to credit risk not reflected on the balance sheet Total at the year-end 31.12.10 Collateral Credit enhancements Maximum exposure to credit risk Cash collateral received Collateral- ized by securities Secured by real estate Other collateral 1 Netting Credit derivative contracts Guarantees 24.5 17.1 261.3 62.5 142.8 38.1 20.6 566.7 401.1 134.3 7.6 73.4 616.5 1,183.3 16.4 56.9 0.1 39.5 112.9 1,296.1 8.4 8.4 0.0 8.4 1.5 0.2 1.7 10.1 0.2 46.3 62.5 142.8 16.9 268.7 3.7 3.7 272.4 1.8 0.2 39.5 41.4 313.8 144.3 0.0 17.2 1.1 0.3 2.3 144.3 17.3 0.2 0.2 17.5 2.3 8.1 10.4 27.9 0.0 144.3 0.3 0.9 1.2 145.5 23.9 23.9 338.0 338.0 361.9 361.9 1.1 2.5 1.7 1.7 2.8 1.6 22.5 24.1 26.9 0.0 2.5 1.4 2.4 3.8 6.4 1 Includes but not limited to life insurance contracts, inventory, accounts receivable, patents, and copyrights. 2 Loans include a balance outstanding of USD 5.7 billion to the BlackRock fund. This loan is collateralized by a portfolio of US residential mortgage-backed securities included within “Other collateral”. Refer to the “Risk, treasury and capital management” section of this report for more information. 3 Loans include mono- line-protected assets which were reclassified from held-for-trading to loans and receivables in fourth quarter 2008. The remaining carrying value of these assets was CHF 5.3 billion as of 31 December 2010. The fair value of credit default swap protection after credit valuation adjustments related to these assets was CHF 0.5 billion, which is not included in the column “Credit derivative contracts”. Refer to the “Risk, treasury and capital management” section of this report for more information. 4 Included within cash collateral receivables on derivative instruments are margin balances due from exchanges or clearing houses. The amount shown in the netting column represents the netting with related negative replacement values in accordance with Swiss Federal Banking Law. 5 The amount shown in the netting column represents the netting with related negative replacement values and cash collateral payables in accordance with Swiss Federal Banking Law. 6 These positions are generally managed under the market risk framework and are included in VaR. For the purpose of this disclosure, collateral and credit enhancements were not considered. 7 Does not include debt instruments held for unit-linked investment contracts and investment fund units. n o i t a m r o f n i l a i c n a n i F 373 Financial information Notes to the consolidated fi nancial statements Note 28 Measurement categories of financial assets and financial liabilities (continued) Financial assets subject to credit risk by rating category CHF billion Rating category 1 Balances with central banks Due from banks Loans Cash collateral on securities borrowed and reverse repurchase agreements Positive replacement values Cash collateral receivables on derivative instruments Trading portfolio assets – debt instruments 2 Financial investments available-for-sale – debt instruments Other financial instruments Financial instruments not recognized on the balance sheet 3 Guarantees Loan commitments Forward starting reverse repurchase agreements Forward starting securities borrowing agreements Total CHF billion Rating category 1 Balances with central banks Due from banks Loans Cash collateral on securities borrowed and reverse repurchase agreements Positive replacement values Cash collateral receivables on derivative instruments Trading portfolio assets – debt instruments 2 Financial investments available-for-sale – debt instruments Other financial instruments Financial instruments not recognized on the balance sheet 3 Guarantees Loan commitments Forward starting reverse repurchase agreements Forward starting securities borrowing agreements 0–1 27.3 0.4 6.9 1.3 11.9 7.0 45.6 43.3 0.1 2.0 0.3 0.1 146.2 0–1 14.6 0.3 11.8 59.4 15.2 6.2 52.5 66.8 0.1 0.1 0.7 2–3 11.2 16.0 78.6 215.9 400.6 25.8 36.5 9.0 5.8 9.9 31.7 26.1 0.5 867.6 2–3 9.8 11.7 75.6 112.9 331.7 22.6 59.4 6.6 6.1 7.2 32.8 4–5 0.0 3.5 110.6 29.2 53.4 3.8 8.0 0.0 3.0 3.2 13.2 0.6 0.0 228.5 4–5 0.0 2.6 76.2 23.1 38.4 4.5 10.2 3.7 4.5 10.3 31.12.11 6–8 0.0 3.0 57.4 22.7 17.4 4.6 3.8 0.0 7.9 2.7 5.8 0.4 9–13 defaulted not rated 0.2 11.9 3.1 2.5 0.1 5.2 0.0 2.7 1.1 7.1 0.0 1.1 0.0 0.7 0.0 0.1 0.3 0.1 Total 38.6 23.2 266.6 272.3 486.6 41.3 99.2 52.3 19.9 18.8 58.2 27.1 0.5 125.7 34.0 2.4 0.0 1,404.5 31.12.10 6–8 9–13 defaulted not rated 4 2.3 79.8 8.2 12.6 4.5 5.5 0.0 16.3 3.1 4.8 0.2 16.2 1.7 2.2 0.3 6.4 0.0 1.6 1.4 8.1 0.0 1.6 0.0 1.1 0.0 0.3 0.3 0.0 0.1 39.0 0.5 39.5 Total 24.5 17.1 261.3 205.2 401.1 38.1 134.3 73.4 28.2 16.4 56.9 39.0 0.5 1,296.0 Total 227.9 676.4 173.4 137.3 38.1 3.4 1 Refer to the “UBS internal rating scale and mapping of external ratings” table in the “Risk, treasury and capital management” section of this report for more information on rating categories. 2 Does not include debt instruments held for unit-linked investment contracts and investment fund units. 3 Commitments to acquire ARS of CHF 0.0 billion as of 31 December 2011 (31 December 2010: CHF 0.1 billion) are excluded. 4 These ratings were not available for 2010. 374 Note 29 Pension and other post-employment benefit plans The following table provides information relating to pension costs for defi ned benefi t plans and defi ned contribution plans. These costs are part of Personnel expenses. CHF million Net periodic pension cost for defined benefit plans of which: related to major pension plans 1 of which: related to post-retirement medical and life insurance plans 2 of which: related to remaining plans of which: related to accrued pension costs not yet paid 3 Pension cost for defined contribution plans 4 Total pension and other post-employment benefit plans 31.12.11 31.12.10 31.12.09 534 461 13 36 24 254 788 477 430 22 25 0 246 724 742 694 9 39 0 246 988 1 Refer to “Note 29a Defined benefit pension plans” for more information. 2 Refer to “Note 29b Post-retirement medical and life insurance plans” for more information. 3 Accrued pension costs not yet paid in rela- tion to the restructuring program communicated in 2011, included in provision for restructuring. Refer to “Note 37 Reorganizations and disposals” and “Note 21 Provisions and contingent liabilities” for more informa- tion. 4 Refer to “Note 29c Defined contribution plans” for more information. The following table provides information relating to deferred pension expenses and accrued pension and post-employment benefi t liability. These are recognized on the balance sheet within Other assets and Other liabilities, respectively. Deferred pension expenses CHF million Major pension plans 1 Total deferred pension expenses Accrued pension and post-employment benefit liability CHF million Major pension plans 1 Post-retirement medical and life insurance plans 2 Remaining plans Total accrued pension and post-employment benefit liability 31.12.11 31.12.10 31.12.09 3,300 3,300 3,174 3,174 3,053 3,053 31.12.11 31.12.10 31.12.09 (224) (166) (16) (406) (220) (158) (17) (395) (251) (163) (25) (439) 1 Refer to “Note 29a Defined benefit pension plans” for more information. 2 Refer to “Note 29b Post-retirement medical and life insurance plans” for more information. a) Defined benefit pension 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 valuations for the plans in these countries are performed as required. The overall investment policy and strategy for UBS’s defi ned benefi t pension plans are guided by the objective of achieving an investment return which, together with the contributions paid, is suffi cient to maintain reasonable control over the various funding risks of the plans. Depending on the country, the pension fund trustees and / or UBS are responsible for the determination of the mix of asset types and target allocations. Actual asset allocation is determined by a variety of current and expected economic and market conditions and in consideration of specifi c asset class risk, the risk profi le and the maturity pattern of the plan. The expected long-term rates of return on plan assets are based on long-term expected infl ation, interest rates, risk premi- ums and targeted asset class allocations. These estimates take into consideration historical asset class returns and are deter- mined together with the plans’ investment and actuarial advisors. Swiss pension plan The Swiss pension plan covers all UBS employees in Switzerland and exceeds the minimum benefi t 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 benefi ts which are based on annual contributions as a percentage of salary and accrue at an interest rate that is defi ned annually by the Pension Foundation Board. Although the Swiss pension plan is a defi ned contribution plan under Swiss pension law, it is account- ed for as a defi ned benefi t plan under IAS 19 Employee benefi ts. Contributions to the pension plan are paid by employees and the employer. The employee contributions are calculated as a per- centage of covered salary and are deducted monthly. The percent- ages deducted from salary depend on age and vary between 1% and 13.5% of covered base salary and 0% and 9% of covered variable compensation. The employer pays a contribution that ranges between 1% and 27.5% of covered salary. The benefi ts covered include retirement benefi ts; disability, death and survivor pensions; and employment termination benefi ts. 375 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 fi nancial statements Note 29 Pension and other post-employment benefit plans (continued) A key assumption in determining the defi ned benefi t obliga- tion is life expectancy. In 2011 the Swiss pension plan adopted the new BVG 2010 generational mortality table, replacing the BVG 2005 periodic table. This contributed signifi cantly to the overall increase to the defi ned benefi t obligation relating to the Swiss pension plan. The BVG 2010 generational table takes into ac- count longer life expectancies. The employer contributions expected to be made to the Swiss pension plan in 2012 are CHF 530 million. International pension plans The international locations of UBS operate various pension plans in accordance with local regulations and practices. The locations with defi ned benefi t plans of a signifi cant nature are the UK, the US and Germany. The UK and the US defi ned benefi t plans are closed to new entrants, who are covered by defi ned contribution plans. The amounts shown for international plans refl ect the net funded positions of the signifi cant international plans. The pension plans provide benefi ts in the event of retirement, death or disability. The level of benefi ts provided depends on the defi ned rate of benefi t accrual and level of compensation. The plans are funded entirely by UBS. The employer contributions expected to be made to these pension plans in 2012 are CHF 108 million. The funding policy for these plans is consistent with local government and tax requirements. The assumptions used in international plans are based on local economic conditions. ➔ Refer also to Note 1a) 24). Defined benefit pension plans CHF million For the year ended Swiss International 31.12.11 31.12.10 31.12.09 31.12.11 31.12.10 31.12.09 Defined benefit obligation at the beginning of the year (21,299) (21,119) (21,311) (4,053) (4,353) (3,642) Service cost Interest cost Plan participant contributions Actuarial gain / (loss) Benefits paid Termination benefits 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 Employer contributions – termination benefits Plan participant contributions Benefits paid Foreign currency translation Fair value of plan assets at the end of the year Surplus / (deficit) Unrecognized net actuarial (gains) / losses Deferred pension expenses / (Accrued pension liability) Movement in the net (liability) or asset Deferred pension expenses / (Accrued pension liability) at the beginning of the year Net periodic pension cost Employer contributions Employer contributions – termination benefits Foreign currency translation (410) (569) (211) (1,452) 985 (11) 0 (22,967) 20,690 715 (523) 495 11 211 (985) 0 20,614 (2,353) 4,916 2,562 2,418 (362) 495 11 0 (384) (657) (197) (149) (432) (672) (195) 231 1,252 1,314 (45) 0 (21,299) 20,286 850 54 510 45 197 (54) 0 (21,119) 19,029 846 963 513 54 195 (1,252) (1,314) 0 0 20,690 20,286 (609) 3,028 2,418 2,163 (300) 510 45 0 (833) 2,996 2,163 2,123 (527) 513 54 0 Deferred pension expenses / (Accrued pension liability) 2,562 2,418 2,163 (33) (210) 0 (259) 145 0 (4) (4,414) 3,406 217 (94) 71 0 0 (145) 3 3,458 (956) 1,470 514 536 (99) 71 0 6 514 (41) (237) 0 (119) 148 0 549 (4,053) 3,517 237 163 86 0 0 (148) (449) 3,406 (647) 1,183 536 639 (130) 86 0 (59) 536 (41) (230) 0 (471) 153 0 (122) (4,353) 2,866 202 266 232 0 0 (153) 104 3,517 (836) 1,475 639 548 (167) 232 0 26 639 376 Note 29 Pension and other post-employment benefit plans (continued) Defined benefit pension plans (continued) Amounts recognized in the balance sheet CHF million For the year ended Deferred pension expenses Accrued pension liability Deferred pension expenses / (Accrued pension liability) 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 Termination benefits Limit of defined benefit asset Net periodic pension cost Swiss funded plan CHF million Defined benefit obligation Plan assets Surplus / (deficit) Experience gains / (losses) on plan liabilities Experience gains / (losses) on plan assets International funded and unfunded plans CHF million Defined benefit obligation from funded plans Defined benefit obligation from unfunded plans Plan assets from funded plans Surplus / (deficit) Experience gains / (losses) on plan liabilities Experience gains / (losses) on plan assets Swiss International 31.12.11 31.12.10 31.12.09 31.12.11 31.12.10 31.12.09 2,562 0 2,562 410 569 (715) 87 0 11 0 362 2,418 0 2,418 384 657 (850) 64 0 45 0 300 2,163 0 2,163 432 672 (846) 215 0 54 0 527 738 (224) 514 33 210 (217) 73 0 0 0 99 756 (220) 536 41 237 (237) 89 0 0 0 890 (251) 639 41 230 (202) 98 0 0 0 130 167 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 (22,967) 20,614 (2,353) 0 (523) (21,299) 20,690 (609) 253 54 (21,119) 20,286 (833) 214 963 (21,311) 19,029 (2,282) 0 (3,820) (20,877) 22,181 1,304 0 (250) 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 (4,174) (240) 3,458 (956) (46) (94) (3,813) (240) 3,406 (647) (17) 163 Swiss (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) International 31.12.11 31.12.10 31.12.09 31.12.11 31.12.10 31.12.09 Principal weighted average actuarial assumptions used (%) Assumptions used to determine defined benefit obligations at the end of the year Discount rate Expected rate of salary increase Rate of pension increase Assumptions used to determine net periodic pension cost recognized during the year Discount rate Expected rate of return on plan assets Expected rate of salary increase Rate of pension increase 2.3 2.5 0.0 2.8 3.5 2.5 0.3 2.8 2.5 0.3 3.3 4.3 2.5 0.5 3.3 2.5 0.5 3.3 4.5 2.5 0.5 4.8 4.1 2.1 5.4 6.5 4.9 2.3 5.4 4.9 2.3 5.7 6.9 5.0 2.5 5.7 5.0 2.5 6.0 6.6 4.5 1.9 377 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 Pension and other post-employment benefit plans (continued) Defined benefit pension plans (continued) 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 on fair value of plan assets UBS financial instruments and UBS bank accounts UBS AG shares 1 Derivative financial instruments, counterparty UBS Other assets used by UBS Swiss International 31.12.11 31.12.10 31.12.09 31.12.11 31.12.10 31.12.09 39 46 3 12 100 39–42 43–45 3–5 10–13 3.8 45 38 3 14 100 40–42 38–44 3–6 11–15 11.7 46 35 3 16 100 42–45 37–44 3–7 11–12 15.5 31 53 14 2 100 18–44 46–70 10–18 0–5 1.0 516 23 20 157 32 54 13 1 100 15–39 44–68 10–18 0–5 4.6 258 25 298 188 35 51 13 1 100 18–44 41–65 9–17 0–5 9.7 205 66 25 193 1 The number of UBS AG shares was 2,014,000, 1,638,000 and 4,095,850 as of 31 December 2011, 31 December 2010 and 31 December 2009, respectively. Mortality tables and life expectancies for major plans Country Switzerland UK Germany US Country Switzerland UK Germany US Mortality table BVG 2010 G 1 S1NA_L CMI 2010 G, with projections 2 Dr. K. Heubeck 2005 G PPA mandated mortality table per IRC 1.430(h)(3) 3 Mortality table BVG 2010 G 1 S1NA_L CMI 2010 G, with projections 2 Dr. K. Heubeck 2005 G PPA mandated mortality table per IRC 1.430(h)(3) 3 Life expectancy at age 65 for a male member currently aged 65 31.12.10 17.9 23.0 19.3 19.0 31.12.09 31.12.11 aged 45 31.12.10 31.12.09 17.9 22.8 19.1 18.4 22.8 27.3 22.1 19.1 17.9 25.9 22.0 19.0 17.9 25.7 21.9 18.4 Life expectancy at age 65 for a female member currently aged 65 31.12.10 21.0 24.7 23.4 20.9 31.12.09 31.12.11 aged 45 31.12.10 31.12.09 21.0 24.6 23.3 20.6 25.3 27.8 26.1 21.0 21.0 26.6 26.0 20.9 21.0 26.5 25.8 20.6 31.12.11 21.1 24.3 19.4 19.1 31.12.11 23.6 25.5 23.5 21.0 1 In 2010 and 2009 the mortality table BVG 2005 was used; the mortality tables are updated every five years. 2 In 2010 and 2009 the mortality table PA 2000 G, medium cohort with adjustment was used. 3 In 2009 the mortality table RP 2000 with projections was used. 378 Note 29 Pension and other post-employment benefit plans (continued) b) Post-retirement medical and life insurance plans In the US and the UK, UBS offers retiree medical benefi ts that contribute to the health care coverage of certain employees and benefi ciaries after retirement. The UK plan is closed to new en- trants. In addition to retiree medical benefi ts, UBS in the US also provides retiree life insurance benefi ts to certain employees. The benefi t obligation for these plans amounts to CHF 219 million as of  31 December 2011 (31 December 2010: CHF 209 million; 31 December 2009: CHF 186 million). There are no retained plan assets for these plans. The total accrued post-retirement cost amounts to CHF 166 million as of 31 December 2011 (31 Decem- ber 2010: CHF 158 million; 31 December 2009: CHF 163 million). The periodic post-retirement costs for the years ended 31 Decem- ber 2011, 31 December 2010 and 31 December 2009 were CHF 13  million (net of a curtailment gain of CHF 9 million), CHF 22 million and CHF 9 million (net of a curtailment gain of CHF 8 mil- lion), respectively. The employer contributions expected to be made  to the post- retirement medical and life insurance plans in 2012 are CHF 7 million. Post-retirement medical and life insurance plans CHF million 31.12.11 Post-retirement benefit obligation at the beginning of the year Service cost Interest cost Plan participant contributions Actuarial gain / (loss) Benefits paid Curtailments Foreign currency translation Post-retirement benefit obligation at the end of the year 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 assets Surplus / (deficit) Experience gains / (losses) on plan liabilities (209) 0 1 (11) (2) (17) 9 13 (2) (219) 0 7 2 (9) 0 31.12.10 (186) 31.12.09 (159) (9) (11) (2) (35) 10 0 24 (7) (10) (2) (31) 10 9 4 (209) (186) 0 8 2 (10) 0 0 8 2 (10) 0 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 (219) 0 (219) 0 (209) 0 (209) 6 (186) 0 (186) 8 (159) 0 (159) 3 (190) 0 (190) 8 1 Current service cost of CHF 9 million in 2011 was offset by a plan amendment which resulted in a negative past service cost of CHF 9 million. The post-retirement benefi t expense is determined by using the assumed average health care cost trend rate. The rate for 2012 is assumed to be 8% and is assumed to decrease gradually to 5% by 2023. On a country-by-country basis, the same discount rate is used for the calculation of the post-retirement benefi t obligation from medical and life plans as for the defi ned benefi t obligations arising from pension plans. Assumed average health care cost trend rates have a signifi - cant effect on the amounts reported for health care plans. A one percentage point change in the assumed health care cost trend rates would change the US post-retirement benefi t obligation and the total service and interest cost components of the periodic post-retirement benefi t costs as follows: CHF million Effect on total service and interest cost Effect on the post-retirement benefit obligation 1% increase 1% decrease 4 38 (3) (30) n o i t a m r o f n i l a i c n a n i F 379 Financial information Notes to the consolidated fi nancial statements Note 29 Pension and other post-employment benefit plans (continued) c) Defined contribution plans UBS also sponsors a number of defi ned contribution plans in its international locations. The locations with defi ned contribution plans of a signifi cant nature are the UK and the US. Certain plans permit employees to make contributions and earn matching or other contributions from UBS. The employer contributions to these plans recognized as an expense for the years ended 31 December 2011, 31 December 2010 and 31 December 2009 were CHF 254 million, CHF 246 million and CHF 246 million, respectively. d) Related party disclosure UBS is the principal bank for the pension fund of UBS in Switzer- land. In this function, UBS is engaged to execute most of the pension fund’s banking activities. These activities can include, but are not limited to, trading and securities lending and borrowing. All transactions have been executed on arm’s length conditions. The international UBS pension funds do not have a similar banking relationship with UBS, but they may hold and trade UBS AG shares and / or securities. In 2008, UBS sold certain bank-occupied properties to the Swiss pension fund. Simultaneously, UBS and the Swiss pension fund entered into lease-back arrangements for some of the prop- erties with 25-year lease terms and two renewal options for ten years each. During 2009, UBS renegotiated one of the lease con- tracts which reduced UBS’s remaining lease commitment. As of 31 December 2011, the minimum commitment towards the Swiss pension fund under the related leases is approximately CHF 16 million (31 December 2010: CHF 21 million). The following amounts have been received or paid by UBS from and to the pension funds in respect of these activities and arrangements: Related party disclosure CHF million Received by UBS Fees Paid by UBS Rent Interest The transaction volumes in UBS AG 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 31.12.11 31.12.10 31.12.09 24 10 3 21 11 3 34 12 2 For the year ended 31.12.11 31.12.10 31.12.09 2,713 7 2,374 18 2,684 40 4,735 10 3,869 35 4,116 14 Details of the fair value of the plan assets of the defi ned pension plans are disclosed in “Note 29a Defi ned benefi t pension plans”. Furthermore, UBS defi ned contribution pension funds hold 17,628,845 UBS AG shares with a market value of CHF 196 mil- lion as of 31 December 2011 (31 December 2010: 17,665,621 UBS AG shares with a market value of CHF 272 million; 31 De- cember 2009: 17,259,203 UBS AG shares with a market value of CHF 278 million). 380 Note 30 Equity participation and other compensation plans a) Plans offered UBS operates several equity participation and other compensation plans to further align the interests of executives, managers and staff with the interests of shareholders. Some plans (e.g. Equity Plus and EOP) are offered to eligible employees in approximately 50 countries and are designed to meet the legal, tax and regulatory requirements of each country in which they are offered. Some plans are used in specifi c countries (e.g. awards granted to Wealth Man- agement Americas fi nancial advisors) or only offered to members of the Group Executive Board (GEB) (e.g. PEP). UBS’s compensa- tion plans are mandatory, discretionary or voluntary. The explana- tions below provide a general description of the terms of the most signifi cant plans operated for 2011 and those from prior years that are partly expensed in 2011. Refer to Note 1a) 25) for a de- scription of the accounting policy related to equity participation and other compensation plans. Mandatory share-based compensation plans Equity Ownership Plan (EOP): Selected employees receive a por- tion of their annual performance-related compensation above a certain threshold in the form of an EOP award of UBS shares, notional UBS shares or UBS performance shares (i.e. notional shares which are subject to performance conditions). Since 2011 (for performance year 2010), performance shares have been granted to EOP participants who are risk-takers, Group Managing Directors or employees whose incentive exceeds a certain thresh- old. These performance shares will only vest in full if the partici- pant’s business division is profi table (for Corporate Center partici- pants, the Group as a whole needs to be profi table) in the fi nancial year preceding scheduled vesting. Adjustments to reported profi t- ability may be made based on considerations relating to risk, qual- ity and reliability of earnings, as well as achievement of specifi c targets. To align their compensation with the performance of the funds that they manage, the majority of Global Asset Manage- ment employees receive their EOP awards in the form of cash but the amount depends on the value of the relevant underlying Global Asset Management funds at the time of vesting (Alterna- tive Investment Vehicles, or AIVs). Awards of UBS shares allow for voting and dividend rights during the vesting period, whereas no- tional and performance shares represent a promise to receive UBS shares at vesting and do not allow for voting rights or dividends during the vesting period. Awards granted in the form of UBS shares, notional UBS shares and performance shares are settled by delivering UBS shares at vesting, except in countries 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, notional UBS shares, or performance shares. EOP awards generally vest in increments over a three-year vesting period. The awards are generally forfeitable upon volun- tary termination of employment with UBS. Compensation ex- pense is recognized in the performance year if the employee meets the retirement eligibility requirements at the date of grant. Otherwise, compensation expense is recognized from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee, on a tiered basis. Senior Executive Equity Ownership Plan (SEEOP): GEB members receive a portion of their mandatory deferral in UBS shares or notional shares, which vest in one-fi fth increments over a fi ve- year vesting period and are forfeitable if certain conditions are not met. Awards granted since 2011 are subject to the same perfor- mance conditions as performance shares granted under the EOP, i.e. will only vest in full if the participant’s business division is prof- itable (for Corporate Center participants, the Group as a whole must be profi table) in the fi nancial year preceding scheduled vest- ing. During 2010 UBS only granted SEEOP awards to certain se- nior executives to whom it had a contractual commitment. Awards granted under SEEOP are settled by delivering UBS shares at vesting. Compensation expense is recognized on the same ba- sis as for share-settled EOP awards. Incentive Performance Plan (IPP): In 2010 GEB members and certain other senior employees received part of their annual in- centive in the form of performance shares granted under the IPP. Each performance share granted is a contingent right to receive between one and three UBS shares at vesting, depending on the achievement of share price targets. The IPP awards vest after fi ve years in 2015 and are subject to continued employment with UBS. Compensation expense is recognized on a tiered basis from the grant date to the earliest of the vesting date or the retirement eli- gibility date of the employee. IPP was a forward looking one-time plan granted in 2010 only. Performance Equity Plan (PEP): In 2011 and 2010 GEB members received part of their annual incentive in the form of performance shares granted under the PEP. Each performance share is a contin- gent right to receive between zero and two UBS shares at vesting, depending on the achievement of Economic Profi t (EP) and Total Shareholder Return (TSR) targets. PEP awards vest after three years. EP is a risk-adjusted profi t measure that takes into account the cost of risk capital. TSR measures the total return to UBS share- holders (in the form of share price appreciation and dividends) as compared to the constituents of a banking index. Vesting is subject to continued employment with UBS. Compensation expense is recognized on a tiered basis from the grant date to the earliest of the vesting date or the retirement eligibility date of the employee. Mandatory deferred cash compensation plans Conditional Variable Compensation Plan (CVCP): In 2009 certain employees received part of their incentive in the form of a manda- tory deferred cash award that vests in increments over a three- year vesting period subject to performance conditions. The award consists of a contingent right to receive cash payments at vesting. The awards are forfeitable upon voluntary termination of employ- 381 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 fi nancial statements Note 30 Equity participation and other compensation plans (continued) ment. Compensation expense is recognized over the individual performance periods. Compensation expense is accelerated to the retirement eligibility date for those employees who are, or become retirement eligible during the service period. CVCP was a one-time plan granted in 2009. Cash Balance Plan (CBP): In 2011 and 2010 Group Executive Board (GEB) members received part of their annual incentive in the form of a mandatory deferred cash award. CBP awards are paid out in two equal installments during the two years follow- ing the year of grant, subject to performance conditions. Awards granted since 2011 (for performance year 2010) are subject to a Group return on equity performance conditions, whereas awards granted in 2010 (for performance year 2009) are subject to prof- itability hurdles. After a GEB member has left the fi rm, the de- ferred portion of the CBP award continues to be at risk of forfei- ture and awards granted under the CBP from 2011 onwards are forfeited if a GEB member voluntarily terminates his or her em- ployment and joins another fi nancial services organization. Compensation expense is recognized in the performance year, which is generally the fi nancial year prior to the grant date. Deferred Cash Plan (DCP): In 2011, DCP awards were granted to Investment Bank employees whose total compensation ex- ceeded a certain threshold (CHF 1 million). DCP awards vest in one-third increments over a three-year vesting period following the grant date. Compensation expense is recognized ratably over the vesting period. DCP was a one-time plan granted in 2011. Long-Term Deferred Retention Senior Incentive Scheme (LTDRSIS): Awards granted under the LTDRSIS are granted to em- ployees in Australia only and represent a profi t share amount based on the profi tability of the Australian business. Awards vest and are paid in equal installments over three years and include an arrange- ment which allows for unpaid installments to be reduced if the business has a loss during the calendar year preceding vesting. The awards are generally forfeitable upon voluntary termination of em- ployment with UBS. Compensation expense is recognized in the performance year if the employee meets the retirement eligibility requirements at the date of the grant. Otherwise, compensation expense is recognized ratably from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. Wealth Management Americas fi nancial advisor compensation Financial advisor compensation – cash payments consist primarily of a formula-based compensation plan, which fl uctuates in pro- portion to the level of business activity. UBS enters into compensation arrangements with fi nancial ad- visors primarily as a recruitment incentive and to incentivize fi nan- cial advisors to achieve certain production and other performance thresholds. The compensation is earned and paid to the employee during a period of continued employment and may be forfeited under certain circumstances. In certain cases, UBS makes loans to fi nancial advisors in connection with these compensation ar- rangements. GrowthPlus is a program for fi nancial advisors who were hired before 1 January 2005 and whose production exceeds defi ned thresholds from 2009 through 2012. Compensation arrange- ments were granted in 2010 and 2011 with potential arrange- ments to be granted in 2015 and 2018. Expense is recognized over seven years with the exception of the 2018 commitment which will be expensed over fi ve years commencing upon grant. In certain cases, UBS makes loans to fi nancial advisors in connec- tion with this program. PartnerPlus is a mandatory deferred cash compensation plan for selected employees. Awards (UBS contributions) are based on a predefi ned formula during the performance year. Partici- pants are also allowed to voluntarily contribute additional amounts earned during the year, up to a percentage of UBS’s contributions. Awards and voluntary contributions earn an above-market rate of interest during the initial four-year period and a market rate of interest thereafter. The awards vest in 20% increments six to ten years following grant date. Awards and interest earned on both UBS and voluntary contributions are for- feitable under certain circumstances. Compensation expense is recognized in the performance year if the employee meets the retirement eligibility requirements at the date of grant. Other- wise, compensation expense is recognized ratably commencing in the performance year to the earlier of the vesting date or the retirement eligibility date of the employee. Discretionary share-based compensation plans Key Employee Stock Appreciation Rights Plan (KESAP) and Key Employee Stock Option Plan (KESOP): Until 2009 key and high potential employees were granted discretionary share-settled 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 was granted. A SAR gives employees the right to receive a 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. SARs and options are settled by delivering UBS shares, except in countries where this is not permitted for legal reasons. These awards are generally forfeitable upon termination of employment with UBS. Compensation expense is recognized on a tiered basis from the grant date to the earlier of the vesting date or the retirement eli- gibility date of the employee. No KESAP or KESOP awards were granted in 2011 and 2010. Voluntary share-based compensation plans Equity Plus Plan (Equity Plus): Equity Plus is a voluntary plan that provides eligible employees with the opportunity to purchase UBS shares at market value and receive at no additional cost one free notional UBS share for every three shares purchased, up to a max- imum annual limit. Share purchases may be made annually from bonus compensation and / or quarterly through regular deduc- 382 Note 30 Equity participation and other compensation plans (continued) tions from salary. Shares purchased under Equity Plus are restrict- ed from sale for a maximum of three years from the time of pur- chase. Equity Plus awards vest after up to three years. Prior to 2010, instead of notional shares participants received two UBS options for each share they purchased under this plan. The op- tions had a strike price equal to the fair market value of a UBS share on the grant date, a two-year vesting period and generally expired ten years from the grant date. 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 for the Equity Plus plan is recognized from the grant date to the earliest of the vesting date or the retirement eligibility date of the employee. UBS satisfi es share delivery obligations under its share-based plans either by purchasing UBS shares in the market or through the issuance of new shares. As of 31 December 2011, UBS was holding approximately 77 million shares in treasury and approxi- mately 149 million unissued shares in conditional share capital, which are available and can be used to satisfy the exercising of options and SAR awards by employees. The shares available cover all vested and in-the-money (i.e. exercisable) employee options, SARs and notional shares. b) Effect on income statement Effect on income statement for the fi nancial year and future periods The following table summarizes the compensation expenses rec- ognized for the year ended 31 December 2011 and the compen- sation expenses, that will be recognized as an expense in the in- come statements for 2012 and later. The deferred compensation expenses in the table also include non-vested awards granted in February and March 2012, which relate to the compensation core cycle 2011. Personnel expenses – recognized and deferred 1 Personnel expenses for the year 2011 Personnel expenses deferred to 2012 and later CHF million Variable bonus awards Cash discretionary bonus Conditional Variable Compensation Plan (CVCP) Cash Balance Plan (CBP) and other cash plans Total deferred cash plans Equity Ownership Plan (EOP / SEEOP / Performance) – UBS shares Performance Equity Plan (PEP) Incentive Performance Plan (IPP) Total UBS share plans UBS share option plans (KESAP / KESOP) Equity Ownership Plan (EOP) – AIVs Total discretionary bonus Variable compensation Variable compensation – other 2 Financial advisor compensation – cash payments Compensation commitments and advances related to  recruited  financial advisors GrowthPlus and other deferral plans UBS share plans Wealth Management Americas: Financial advisor compensation 3 Total Expenses relating to awards for 2011 1,514 0 34 34 231 3 0 234 0 25 1,807 335 1,695 37 90 20 1,842 3,984 Expenses relating to awards for prior years (88) 204 105 309 1,069 5 97 1,171 100 93 1,585 (19) 0 499 89 88 676 2,242 Relating to awards for 2011 Relating to awards for prior years 0 0 3 3 625 10 0 635 0 69 707 247 0 561 377 86 1,024 1,978 0 42 137 179 641 4 134 779 15 48 1,021 190 0 2,131 422 261 2,814 4,025 Total 1,426 204 139 343 1,300 8 97 1,405 100 118 3,392 316 1,695 536 179 108 2,518 6,226 Total 0 42 140 182 1,266 14 134 1,414 15 117 1,728 437 0 2,692 799 347 3,838 6,003 1 Total share-based personnel expenses recognized for the year ended 31 December 2011 of CHF 1,789 million comprise UBS share plans of CHF 1,405 million, UBS share option plans of CHF 100 million, Equity Own- ership Plan – AIVs of CHF 118 million, related social security costs of CHF 39 million and Variable compensation – other of CHF 127 million. 2 Includes replacement payments of CHF 121 million, forfeiture credits of negative CHF 215 million, guarantees for new hires of CHF 173 million, severance payments of CHF 216 million and retention plan payments of CHF 21 million. 3 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements. Amounts reflected as deferred expenses represent the maximum deferred exposure as of the balance sheet date. 383 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 fi nancial statements Note 30 Equity participation and other compensation plans (continued) Personnel expenses – recognized and deferred 1 Personnel expenses for the year 2010 Personnel expenses deferred to 2011 and later CHF million Variable bonus awards Cash discretionary bonus Conditional Variable Compensation Plan (CVCP) Cash Balance Plan (CBP) and other cash plans Total deferred cash plans Equity Ownership Plan (EOP / SEEOP) – UBS shares Performance Equity Plan (PEP) Incentive Performance Plan (IPP) Total UBS share plans UBS share option plans (KESAP / KESOP) Equity Ownership Plan (EOP) – AIVs Total discretionary bonus Variable compensation Variable compensation – other 2 Financial advisor compensation – cash payments Compensation commitments and advances related to recruited financial advisors GrowthPlus and other deferral plans UBS share plans Wealth Management Americas: Financial advisor compensation 3 Total Expenses relating to awards for 2010 2,079 0 64 64 434 6 0 440 0 28 Expenses relating to awards for prior years 5 179 71 250 852 5 131 988 145 83 2,611 1,471 399 1,813 29 127 11 1,980 4,990 (169) 0 570 35 82 687 1,989 Relating to awards for 2010 Relating to awards for prior years 0 0 236 236 1,249 16 6 1,271 0 67 1,574 337 0 388 221 89 698 2,609 0 292 19 311 515 2 221 738 114 57 1,220 0 0 2,186 302 266 2,754 3,974 Total 2,084 179 135 314 1,286 11 131 1,428 145 111 4,082 230 1,813 599 162 93 2,667 6,979 Total 0 292 255 547 1,764 18 227 2,009 114 124 2,794 337 0 2,574 523 355 3,452 6,583 1 1 Total share-based personnel expenses recognized for the year ended 31 December 2010 of CHF 1,843 million comprise UBS share plans of CHF 1,428 million, UBS share option plans of CHF 145 million, Equity Own- ership Plan – AIVs of CHF 111 million, related social security costs of CHF 90 million and Variable compensation – other of CHF 69 million. In 2011, we reclassified the costs related to our voluntary employee share own- ership plan (Equity Plus) from Variable compensation – other to Other personnel expenses. Prior periods were adjusted for this change. Refer to “Note 1b) Changes in accounting policies, comparability and other adjust- ments for more information. 2 Includes replacement payments of CHF 107 million, forfeiture credits of negative CHF 167 million, guarantees for new hires of CHF 135 million, severance payments of CHF 69 million and retention plan payments of CHF 85 million. 3 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental com- pensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements. Amounts reflected as deferred expenses represent the maximum deferred exposure as of the balance sheet date. 384 Note 30 Equity participation and other compensation plans (continued) Personnel expenses – recognized and deferred 1 CHF million Variable bonus awards Cash discretionary bonus Conditional Variable Compensation Plan (CVCP) Cash Balance Plan (CBP) and other cash plans Total deferred cash plans Equity Ownership Plan (EOP / SEEOP / Performance) – UBS shares Performance Equity Plan (PEP) Incentive Performance Plan (IPP) Total UBS share plans UBS share option plans (KESAP / KESOP) Equity Ownership Plan (EOP) – AIVs Total discretionary bonus Variable compensation Variable compensation – other 2 Financial advisor compensation – cash payments Compensation commitments and advances related to recruited financial advisors GrowthPlus and other deferral plans UBS share plans Wealth Management Americas: Financial advisor compensation 3 Total Personnel expenses for the year 2009 Personnel expenses deferred to 2010 and later Expenses relating to awards for 2009 Expenses relating to awards for prior years Relating to awards for 2009 Relating to awards for prior years Total 2,245 (169) 2,076 0 44 44 276 0 0 276 33 34 2,632 816 1,712 127 28 0 1,867 5,315 19 0 19 283 0 0 283 23 21 177 (117) 0 471 (7) 95 559 619 19 44 63 559 0 0 559 56 55 2,809 699 1,712 598 21 95 2,426 5,934 0 0 45 45 1,352 8 467 1,827 34 134 2,040 0 0 1,198 124 110 1,432 3,472 0 558 12 570 97 0 0 97 286 13 966 0 0 1,744 241 236 2,221 3,187 Total 0 558 57 615 1,449 8 467 1,924 320 147 3,006 0 0 2,942 365 346 3,653 6,659 1 Total share-based personnel expenses recognized for the year ended 31 December 2009 of CHF 913 million comprise UBS share plans of CHF 559 million, UBS share option plans of CHF 56 million, Equity Ownership Plan – AIVs of CHF 55 million, related social security costs of CHF 16 million and Variable compensation – other of CHF 227 million. In 2011, we reclassified the costs related to our voluntary employee share ownership plan (Eq- uity Plus) from Variable compensation – other to Other personnel expenses. Prior periods were adjusted for this change. Refer to “Note 1b) Changes in accounting policies, comparability and other adjustments for more in- formation. 2 Includes replacement payments of CHF 41 million, forfeiture credits of CHF negative 81 million, guarantees for new hires of CHF 56 million, severance payments of CHF 433 million and retention plan payments of CHF 250 million. 3 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes costs related to compensation commitments and advances granted to financial advisors at the time of recruitment, which are subject to vesting requirements. Amounts reflected as deferred expenses represent the maximum deferred exposure as of the balance sheet date. Additional disclosures on mandatory, discretionary and voluntary share-based compensation plans (including AIVs granted under EOP) The total share-based personnel expenses recognized for the years ended 31 December 2011, 2010 and 2009 were CHF 1,789 million, CHF 1,843 million, and CHF 913 million, respectively. This includes the current period expense amortization and related social security costs for awards issued in prior periods and performance year ex- pensing for awards granted to retirement eligible employees where the terms of the awards do not require the employee to provide future services. The total compensation expenses for non-vested share-based awards granted up to 31 December 2011 relating to prior years to be recognized in future periods is CHF 1,319 million and will be recognized in Personnel expenses over a weighted average period of 2.1 years. This includes UBS share plans, UBS share option plans, the Equity Ownership Plan (AIVs), other variable compensa- tion and the Equity Plus Plan. Total deferred compensation amounts included in the 2011 table differ from this amount as the deferred compensation amounts also include non-vested awards granted in February and March 2012 related to the compensation core cycle 2011. Actual payments to participants in cash-settled share-based plans, including amounts granted as AIVs issued under the EOP, for the years ended 31 December 2011, 2010 and 2009 were CHF 93 million, CHF 79 million and CHF 83 million, respectively. The total carrying amount of the liability related to these plans was CHF 262 million at 31 December 2011. n o i t a m r o f n i l a i c n a n i F 385 Financial information Notes to the consolidated fi nancial statements Note 30 Equity participation and other compensation plans (continued) c) Movements during the year UBS share and performance share awards Movements in UBS share and notional share awards were as follows: UBS share awards Outstanding, at the beginning of the year Shares awarded during the year Distributions during the year Forfeited during the year Outstanding, at the end of the year of which: shares vested for accounting purposes Weighted average grant date fair value  CHF 18 18 21 18 17 Number of shares 2011 171,085,140 111,254,968 (54,443,660) (13,197,909) 214,698,539 59,154,235 Number of shares 2010 86,888,626 125,133,310 (29,669,688) (11,267,108) 171,085,140 47,366,286 Weighted average grant date fair value  CHF 31 15 42 21 18 Number of shares 2009 84,736,935 39,067,130 (31,293,824) (5,621,615) 86,888,626 40,148,461 Weighted average grant date fair value  CHF 53 12 66 38 31 The market value of shares that became legally vested and were distributed (i.e. all restrictions were fulfi lled) during the years ended 31 December 2011, 2010 and 2009 was CHF 980 million, CHF 421 million and CHF 346 million, respectively. Movements in performance shares granted under the IPP are as follows: Incentive Performance Plan Forfeitable, at the beginning of the year Awarded during the year Distributions during the year Forfeited during the year Increase / decrease of UBS shares to be delivered upon vesting, based on conditions at the end of the year Forfeitable, at the end of the year Number of performance shares 2011 18,157,242 31,848 0 (2,051,624) N/A 16,137,466 of which: performance shares vested for accounting purposes 6,727,398 Weighted average fair value of IPP performance shares at grant date CHF 1 22 Representative of UBS shares 2011 2 18,157,242 Number of performance shares 2010 0 Weighted average fair value of IPP performance shares at grant date CHF 1 0 21 0 22 N/A 22 31,848 19,629,916 0 0 (2,051,624) (1,472,674) 0 16,137,466 6,727,398 N/A 18,157,242 4,073,546 22 0 22 N/A 22 Representative of UBS shares 2010 2 0 19,629,916 0 (1,472,674) 0 18,157,242 4,073,546 1 Valuations take into account the relevant performance conditions, targets set, and the range of possible outcomes. 2 Based on conditions existing at the relevant balance sheet date. 386 Note 30 Equity participation and other compensation plans (continued) Movements in performance shares granted under the PEP are as follows: Performance Equity Plan Forfeitable, at the beginning of the year Awarded during the year Distributions during the year Forfeited during the year Increase / decrease of UBS shares to be delivered upon vesting, based on conditions at the end of the year Forfeitable, at the end of the year of which: performance shares vested for accounting purposes Weighted average fair value of PEP performance shares at grant date CHF 1 16 19 0 19 N/A 18 Number of performance shares 2011 518,837 754,530 0 (62,769) N/A 1,210,598 594,235 Representative of UBS shares 2011 2 518,837 754,530 0 (62,769) (732,364) 478,234 244,332 Number of performance shares 2010 0 545,642 0 (26,805) N/A 518,837 221,638 Weighted average fair value of PEP performance shares at grant date CHF 1 0 16 0 16 N/A 16 Representative of UBS shares 2010 2 0 545,642 0 (26,805) (251,636) 267,201 114,143 1 Valuations take into account the relevant performance conditions, targets set, and the range of possible outcomes. 2 Based on conditions existing at the relevant balance sheet date. UBS option awards Movements in option awards were as follows: UBS option awards 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 2011 205,545,575 Weighted average exercise price CHF 1 42 0 (1,306,764) (810,094) (23,436,356) 179,992,361 178,008,644 0 12 24 42 43 43 Number of  options 2010 228,623,886 0 (40,894) (5,814,986) (17,222,431) 205,545,575 155,302,104 Weighted average exercise price CHF 1 43 0 14 33 54 42 48 Number of  options 2009 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 1 47 13 16 37 48 43 51 1 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 following table provides additional information about option exercises, grants and intrinsic values: For the year ended Weighted average share price of options exercised (CHF) Intrinsic value of options exercised during the year (CHF million) Weighted average grant date fair value of options granted (CHF) 31.12.11 31.12.10 31.12.09 17 7.5 N/A 16 0.1 N/A 18 0.2 6.0 n o i t a m r o f n i l a i c n a n i F 387 Financial information Notes to the consolidated fi nancial statements Note 30 Equity participation and other compensation plans (continued) The following table provides additional information about options outstanding and options exercisable as of 31 December 2011: 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) 15,990,737 10,393,029 36,676,438 15,668,285 17,649,676 4,720,736 52,941,724 154,040,625 9,300,906 6,442,441 7,720,186 2,488,203 25,951,736 11.33 18.76 31.00 39.90 49.32 60.15 67.65 20.30 31.87 37.73 42.14 9.8 0.0 0.0 0.0 0.0 0.0 0.0 9.8 0.0 0.0 0.0 0.0 0.0 7.1 7.3 5.4 2.1 3.5 5.0 4.7 0.8 2.3 3.0 3.4 13,757,437 10,348,029 36,649,903 15,720,190 17,612,701 4,720,736 53,280,727 152,089,723 9,280,906 6,436,795 7,713,017 2,488,203 25,918,921 11.33 18.76 30.98 39.89 49.32 60.15 67.69 20.30 31.87 37.73 42.14 9.8 0.0 0.0 0.0 0.0 0.0 0.0 9.8 0.0 0.0 0.0 0.0 0.0 7.1 7.3 5.4 2.1 3.5 5.0 4.7 0.8 2.3 3.0 3.4 Range of exercise prices 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 15.58–25.00 25.01–35.00 35.01–40.00 40.01–47.12 15.58–47.12 UBS SAR awards Movements in SAR awards were as follows: UBS SAR awards 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 SARs 2011 58,015,041 0 (44,333) (2,946,350) (3,120) 55,021,238 4,018,634 Weighted average exercise price CHF 12 0 15 11 16 12 10 Number of SARs 2010 60,907,175 0 (160,334) (2,721,700) (10,100) 58,015,041 4,005,317 Weighted average exercise price CHF Number of SARs 2009 Weighted average exercise price CHF 12 0 12 11 11 12 10 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 provides additional information about SARs exercises, grants and intrinsic values: For the year ended Weighted average share price of SARs exercised (CHF) Intrinsic value of SARs exercised during the year (CHF million) Weighted average grant date fair value of SARs granted (CHF) 31.12.11 31.12.10 31.12.09 18 0.1 N/A 16 0.6 N/A N/A N/A 5.0 388 Note 30 Equity participation and other compensation plans (continued) The following table provides additional information about SARs outstanding as of 31 December 2011: SARs outstanding SARs exercisable Number of SARs outstanding Weighted average exercise price (CHF) Aggregate intrinsic value (CHF million) Weighted average remaining contractual term (years) Number of SARs exercisable Weighted average exercise price (CHF) Aggregate intrinsic value (CHF million) Weighted average remaining contractual term (years) 53,508,855 47,000 181,783 378,600 905,000 55,021,238 11.25 14.53 16.63 19.25 40.00 4.4 0.0 0.0 0.0 0.0 6.8 7.5 7.4 7.7 7.2 4,007,400 0 10,634 600 0 4,018,634 10.10 0.00 16.80 19.27 0.00 4.3 0.0 0.0 0.0 0.0 2.2 0.0 7.4 7.7 0.0 Range of exercise prices CHF 9.35–12.50 12.51–15.00 15.01–17.50 17.51–20.00 20.01–40.00 9.35–40.00 d) Valuation UBS share awards 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 taking into consideration post-vesting sale and hedge re- strictions, non-vesting conditions and market conditions where ap- plicable. The fair value of the share awards subject to post-vesting sale and hedge restrictions is discounted based upon the duration of the post-vesting restriction and is referenced to the cost of pur- chasing an at-the-money European put option for the term of the transfer restriction. The weighted average discount for share and performance share awards granted during 2011 is approximately 13.9 % of the market price of the UBS share. The grant date fair value of notional UBS shares without dividend entitlements also includes a deduction for the present value of future expected divi- dends to be paid between the grant date and distribution. UBS options and SARs awards Since 2010, the fair values of options and SARs have been deter- mined using a standard closed-formula option valuation model. The expected term of each instrument is calculated based on his- torical employee exercise behavior patterns, taking into account the share price, strike price, vesting period and the contractual life  of the instrument. The term structure of volatility is derived from the implied volatilities of traded UBS options in combination with the observed long-term historical share price volatility. Ex- pected future dividends are derived from traded UBS options or from the historical dividend pattern. No options or SARs were granted in 2010 and 2011. In 2009 the fair value of options and SARs was determined by means of a Monte Carlo simulation. The simulation technique used a mix of implied and historical volatility and specifi c em- ployee exercise behavior patterns based on statistical data, taking into account the specifi c terms and conditions under which the instrument was granted, such as the vesting period, forced exer- cises during the lifetime, and gain- and time-dependent exercise behavior. The expected term of each instrument was calculated as the probability-weighted average period of the time between grant and exercise. The term structure of volatility was derived from the implied volatilities of traded UBS options in combination with the observed long-term historical share price volatility. Ex- pected future dividends were derived from traded UBS options or from the historical dividend pattern. The fair values of options and SARs granted during 2009 were determined using the following assumptions: Expected volatility (%) Risk-free interest rate (%) Expected dividend (CHF) Strike price (CHF) Share price (CHF) CHF awards 48.22 2.16 0.27 11.88 11.64 31.12.09 Range low 40.91 1.50 0.00 9.35 9.35 Range high 53.47 2.57 0.29 40.00 19.27 389 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 fi nancial statements Note 30 Equity participation and other compensation plans (continued) Incentive Performance Plan (IPP) and Performance Equity Plan (PEP) For performance share awards granted in 2011 and 2010, UBS obtained independent third-party valuations based on the market conditions at the date of grant. The valuation method- ology applied was a Monte Carlo simulation. The approach to determining input parameters and valuing the post-vesting transfer restriction is in line with that used for options. The fair value of IPP units granted in 2010 and PEP units granted in 2011 and 2010 was determined using the following assump- tions: 31.12.11 PEP CHF awards 62.00 52.00 0.62 0.03 18.43 31.12.10 IPP CHF awards PEP CHF awards 38.07 N/A 1.06 0.12 14.80 63.00 57.00 0.60 0.10 14.80 Expected TSR volatility (%) Expected EP volatility (%) Risk-free interest rate (%) Expected dividend (CHF) Share price (CHF) Expected TSR volatility (%) Expected EP volatility (%) Risk-free interest rate (%) Expected dividend (CHF) Share price (CHF) 390 Note 31 Related parties The Group defi nes related parties as associated companies (enti- ties which are signifi cantly infl uenced by UBS), post-employment benefi t plans for the benefi t 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 members. Key management personnel is defi ned as members of the Board of Directors (BoD) and Group Executive Board (GEB). This defi nition is based on the revised requirements of IAS 24 Re- lated Party Disclosures issued in November 2009. a) Remuneration of key management personnel The non-independent members of the BoD have top management employment contracts and receive pension benefi ts upon retire- ment. Total remuneration of the non-independent members of the BoD and GEB members, including those who stepped down during 20111, is as follows: Remuneration of key management personnel CHF million Base salaries and other cash payments Incentive awards – cash Employer’s contributions to retirement benefit plans 31.12.11 31.12.10 31.12.09 21 22 3 1 16 30 3 1 16 64 2 Benefits in kind, fringe benefits (at market value) Equity compensation benefits 2 Total 1 During 2011, John Cryan, Oswald J. Grübel and Maureen Miskovic stepped down from the GEB. 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. 3 In 2011 and 2010, incentive awards include immediate and deferred cash. 4 In 2011 and 2010, equity compensation benefits include PEP, SEEOP and blocked shares due to applicable UK FSA regulations. 1 33 4 79 1 48 4 96 112 29 1 The independent members of the BoD do not have employment or service contracts with UBS, and thus are not entitled to benefi ts upon termination of their service on the BoD. Payments to these individuals for their services as external board members amount- ed to CHF 7.0 million in 2011, CHF 6.7 million in 2010 and CHF 6.4 million in 2009. b) Equity holdings Number of stock options from equity participation plans held by non-independent members of the BoD and the GEB members 1 Number of shares held by members of the BoD, GEB and parties closely linked to them 2 31.12.11 4,800,170 3,562,771 31.12.10 9,085,194 4,850,196 31.12.09 9,410,280 4,180,154 1 Refer to “Note 30 Equity participation and other compensation plans” for more information. 2 Excludes shares granted under variable compensation plans with forfeiture provisions. Of the share totals above, as of 31 December 2011, 31 December 2010 and 31 December 2009, 5,597 shares, 5,597 shares and 0 shares respectively were held by close family members of key management personnel. No shares were held by entities which are directly or indirectly controlled or jointly controlled by key management personnel or their close family members on 31 De- cember 2011, 31 December 2010 and 31 December 2009. Refer to “Note 30 Equity participation and other compensation plans” in this section for more information. No member of the BoD or GEB is the benefi cial owner of more than 1% of UBS AG’s shares at 31 December 2011. n o i t a m r o f n i l a i c n a n i F 391 Financial information Notes to the consolidated fi nancial statements Note 31 Related parties (continued) c) Loans, advances and mortgages to key management personnel Non-independent members of the BoD and GEB members have been granted loans, fi xed 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 re- duced credit risk. Independent BoD members are granted loans and mortgages at general market conditions. Movements in the loan, advances and mortgage balances are as follows: Loans, advances and mortgages to key management personnel1 CHF million Balance at the beginning of the year Additions Reductions Balance at the end of the year 2011 2010 22 0 (3) 192 18 8 (4) 22 1 All loans are secured loans, except for CHF 45,435 in 2011. 2 Includes a loan of CHF 3.3 million that will be forgiven in three equal installments over the next three years, subject to the GEB member’s continued full- time employment with UBS and his performance being satisfactory and commensurate with his responsibilities. d) Associated companies All loans to associated companies are transacted at arm’s length: Loans to 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 Other transactions with associated companies are transacted at arm’s length: CHF million Payments to associates for goods and services received Fees received for services provided to associates Commitments and contingent liabilities to associates 2011 259 3 (33) 0 1 231 28 1 2010 373 2 (118) 0 2 259 39 1 2009 301 295 (222) (1) 0 373 42 1 As of or for the year ended 31.12.11 31.12.10 31.12.09 131 1 9 139 1 68 130 2 156 Refer to “Note 33 Signifi cant subsidiaries and associates” for an overview of signifi cant associates. 392 Note 31 Related parties (continued) e) Other related party transactions During 2011 and 2010, UBS entered into transactions at arm’s length with entities which are directly or indirectly controlled or jointly controlled by UBS’s key management personnel or their close family members. In 2011, these entities included H21 Macro Fund Ltd (Cayman Islands) and Immo Heudorf AG (Swit- zerland). In 2010, UBS provided services for H21 Macro Fund Ltd (Cayman Islands). In 2009, UBS did not enter into any such trans- actions. Other related party transactions CHF million Balance at the beginning of the year Additions Reductions Balance at the end of the year 1 2011 2010 2009 0 15 (4) 11 0 0 0 0 6 0 (6) 0 1 In 2011 includes loans and guarantees of CHF 11 million and unused committed facilities of CHF 0 million but excludes unused uncommitted working capital facilities and unused guarantees of CHF 0 million. Other transactions with these related parties include: CHF million Goods sold and services provided to UBS Fees received for services provided by UBS f) Additional information 2011 0 3 2010 0 1 2009 0 0 UBS also engages in trading and risk management activities (e.g. swaps, options and forwards) with various related parties men- tioned 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. These transactions are generally entered into on arms length terms. Note 32 Events after the reporting period After the issuance of the unaudited fourth quarter 2011 fi nancial report on 7 February 2012, management adjusted the 2011 results to account for subsequent events. The net impact of these adjust- ments on net profi t attributable to UBS shareholders was a loss of CHF 74 million, which decreased basic and diluted earnings per share by CHF 0.02. The principal change arises due to an agreement in principle that we entered into with a monoline insurer in March 2012 fol- lowing discussions that commenced in December 2011. Under the agreement, if consummated, certain credit default swap contracts would be commuted in exchange for a net payment of cash. Based on these discussions, UBS has increased its credit valuation adjust- ments in respect of these derivative contracts, resulting in a reduc- tion of Net trading income in 2011 of CHF 167 million and a re- lated tax benefi t of CHF 28 million. Other adjustments made to the income statement in 2011 in- creased net profi t by CHF 65 million and included mutual fund fee income (credit of CHF 45 million in Wealth Management Ameri- cas), the amortization of debt issuance fees (credit of CHF 17 mil- lion in Corporate Center); a credit to personnel expenses of CHF 2 million (credit of CHF 17 million in the Investment Bank and CHF 15 million charge in Wealth Management Americas) and a net tax benefi t of CHF 1 million in relation to these other adjustments. On 22 February 2012, UBS issued USD 2 billion loss-absorbing subordinated tier 2 notes (the “Notes”) due in 2022. The Notes carry a fi xed annual coupon of 7.25% for the fi rst fi ve years, which will be reset at the initial credit spread of 606.1 bps plus the 5-year mid-market USD swap rate for the remaining 5 years. UBS has the option to redeem the Notes at the fi fth anniversary, con- ditional on approval from the Swiss regulator, FINMA. Under Basel III capital rules, the Notes increase our tier 2 capital and count towards the progressive capital component for systemi- cally relevant institutions in Switzerland. Upon the occurrence of a defi ned trigger event, the Notes will be written down to zero and cancelled. The Notes will be classifi ed as debt instruments issued and will be accounted for at amortized cost. On 7 February 2012, UBS announced certain changes to its Swiss pension plan. The main changes, being the reduction in conver- 393 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 fi nancial statements Note 32 Events after the reporting period (continued) sion rate on retirement and an increase to the regular retirement age, serve in part to offset the impact of the increased life expec- tancy refl ected in the defi ned benefi t obligation as at 31 Decem- ber 2011. However, unlike the increase to the defi ned benefi t obligation, which is largely deferred as unrecognized actuarial losses, the changes to the pension plan will result in a reduction to personnel expenses in fi rst quarter 2012 of CHF 485 million and a reduction to unrecognized actuarial losses of CHF 245 mil- lion. If UBS were to early adopt IAS 19R, the full impact of CHF 730 million would be recognized as a reduction to personnel ex- penses for the year ended 31 December 2012. Note 33 Significant subsidiaries and associates Significant subsidiaries as of 31 December 2011 Company APPIA General Partner S.à.r.l. CCR Asset Management S.A. Fondcenter AG ING Investment Management Limited Luxembourg Financial Group A.G. Luxembourg Financial Group Asset Management S.A. OOO UBS Bank PT UBS Securities Indonesia Topcard Service AG Trumbull Property Growth & Income Fund GP LLC 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. UBS AFS Controlled Subsidiary 1 Ltd. UBS AFS Controlled Subsidiary 2 Ltd Registered office Luxembourg, Luxembourg Paris, France Zurich, Switzerland Sydney, Australia Luxembourg, Luxembourg Luxembourg, Luxembourg Moscow, Russia Jakarta, Indonesia Glattbrugg, Switzerland Wilmington, Delaware, USA Nassau, Bahamas Paris, France George Town, Cayman Islands Milan, Italy Luxembourg, Luxembourg Vienna, Austria Monte Carlo, Monaco George Town, Cayman Islands George Town, Cayman Islands UBS Alternative and Quantitative Investments Limited London, Great Britain UBS Alternative and Quantitative Investments LLC UBS Americas Inc UBS Asesores Mexico, S.A. de C.V. UBS Asesores SA UBS Bank (Canada) UBS Bank (Netherlands) B.V. UBS Bank Mexico, S.A. Institucion de Banca Multiple, UBS Grupo Financiero UBS Bank USA UBS Bank, S.A. UBS Belgium SA / NV UBS Brasil Administradora de Valores Mobiliarios Ltda UBS Capital Securities (Jersey) Limited UBS Card Center AG UBS Casa de Bolsa, S.A. de C.V. UBS Commercial Mortgage Securitization Corp. UBS Custody Services Singapore Pte. Ltd. UBS Derivatives Hong Kong Limited UBS Deutschland AG Wilmington, Delaware, USA Wilmington, Delaware, USA México City, México Panama, Panama Toronto, Canada Amsterdam, the Netherlands México City, México Salt Lake City, Utah, USA Madrid, Spain Brussels, Belgium São Paulo, Brazil St. Helier, Jersey Glattbrugg, Switzerland México City, México Wilmington, Delaware, USA Singapore, Singapore Hong Kong, China Frankfurt am Main, Germany Business division 1 Global AM Global AM Global AM Global AM IB IB IB IB WM&SB Global AM WM&SB WM&SB IB WM&SB WM&SB WM&SB WM&SB Global AM Global AM Global AM Global AM IB WM&SB WM&SB WMA WM&SB IB WMA WM&SB WM&SB WM&SB CC WM&SB IB IB WM&SB IB WM&SB EUR EUR CHF AUD EUR EUR RUB IDR CHF USD USD EUR USD EUR CHF CHF EUR USD USD GBP USD USD MXN USD CAD EUR MXN USD EUR EUR BRL EUR CHF MXN USD SGD HKD EUR Share capital in million Equity interest accumulated in % 0.0 5.3 0.1 7.7 2.1 0.2 3 450.0 118 000.0 0.2 0.3 4.0 125.7 0.0 60.0 150.0 0.0 9.2 0.0 0.0 0.3 0.1 0.0 233.6 0.0 8.5 0.2 706.4 1 880.0 2 82.2 28.0 46.5 0.0 0.1 114.9 0.0 5.5 880.0 176.0 60.0 100.0 100.0 100.0 100.0 100.0 100.0 98.6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 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. 394 Share capital in million Equity interest accumulated in % Note 33 Significant subsidiaries and associates (continued) Significant subsidiaries as of 31 December 2011 (continued) Company UBS Fiduciaria S.p.A. UBS Finance (Curação) N.V. UBS Finance (Delaware) LLC Registered office Milan, Italy Willemstad, Netherlands Antilles Wilmington, Delaware, USA UBS Financial Services (Uruguay) Sociedad de Responsabilidad Limitada Montevideo, Uruguay UBS Financial Services Inc. UBS Financial Services Incorporated of Puerto Rico UBS Fund Advisor, L.L.C. UBS Fund Management (Luxembourg) SA UBS Fund Management (Switzerland) AG UBS Fund Services (Cayman) Ltd UBS Fund Services (Ireland) Limited UBS Fund Services (Luxembourg) S.A. UBS Funds Australia Limited UBS Futures Singapore Ltd. UBS Global Asset Management (Americas) Inc UBS Global Asset Management (Australia) Ltd UBS Global Asset Management (Canada) Inc UBS Global Asset Management (China) Limited Wilmington, Delaware, USA Hato Rey, Puerto Rico Wilmington, Delaware, USA Luxembourg, Luxembourg Basel, Switzerland George Town, Cayman Islands Dublin, Ireland Luxembourg, Luxembourg Sydney, Australia Singapore, Singapore Wilmington, Delaware, USA Sydney, Australia Toronto, Canada Beijing, China 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 UBS Global Asset Management (Singapore) Ltd UBS Global Asset Management (Taiwan) Ltd 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 Hong Kong Limited UBS International Life Limited UBS Investment Management Canada 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 UBS New Zealand Limited UBS O’Connor Limited UBS O’Connor LLC UBS Preferred Funding (Jersey) Limited UBS Preferred Funding Company LLC IV Milan, Italy Tokyo, Japan Singapore, Singapore Taipei, Taiwan London, Great Britain Wilmington, Delaware, USA London, Great Britain London, Great Britain London, Great Britain Vaduz, Liechtenstein St. John, Canada Seoul, South Korea Zurich, Switzerland Amsterdam, the Netherlands Hong Kong, China Dublin, Ireland Toronto, Canada Milan, Italy Zurich, Switzerland Zurich, Switzerland Sacramento, California, USA London, Great Britain Wilmington, Delaware, USA Istanbul, Turkey Auckland, New Zealand London, Great Britain Dover, Delaware, USA St. Helier, Jersey Wilmington, Delaware, USA Business division 1 WM&SB CC IB WMA WMA WMA WMA Global AM Global AM Global AM Global AM Global AM IB 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 Global AM WM&SB WM&SB Global AM WM&SB CC WMA WM&SB WMA IB WM&SB WM&SB WMA IB IB IB IB Global AM Global AM CC CC EUR USD USD UYU USD USD USD EUR CHF USD EUR CHF AUD USD USD AUD CAD CNY EUR HKD EUR JPY SGD TWD GBP USD GBP GBP GBP CHF CAD KRW CHF EUR USD EUR CAD EUR CHF CHF USD GBP USD TRY NZD GBP USD EUR USD 0.2 0.1 37.3 2 0.1 4,172.52 31.0 2 0.0 2 10.0 1.0 5.6 1.3 2.5 5.0 39.8 2 0.0 40.0 117.0 20.5 7.7 25.0 5.1 2,200.0 4.0 340.0 125.0 17.2 2 26.0 151.4 15.0 5.0 0.1 45,000.0 0.1 6.8 1.7 1.0 0.0 15.1 10.0 25.0 39.3 2 153.7 16.7 2 30.0 7.5 8.8 1.0 0.0 0.0 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. 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 98.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 395 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 33 Significant subsidiaries and associates (continued) Significant subsidiaries as of 31 December 2011 (continued) Company UBS Preferred Funding Company LLC V UBS Private Equity Komplementär GmbH UBS Real Estate Kapitalanlagegesellschaft mbH UBS Real Estate Securities Inc UBS Realty Investors LLC UBS Saudi Arabia 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 Israel Limited UBS Securities Japan Ltd UBS Securities Japan Preparation Co., 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 Australia Ltd UBS Wealth Management Israel Ltd Registered office Wilmington, Delaware, USA Bad Homburg, Germany Munich, Germany Wilmington, Delaware, USA Business division 1 CC WM&SB Global AM IB Boston, Massachusetts, USA Global AM Riyadh, Saudi Arabia Bangkok, Thailand Hong Kong, China Sydney, Australia Toronto, Canada Madrid, Spain Paris, France Hong Kong, China Mumbai, India London, Great Britain Herzliya Pituach, Israel George Town, Cayman Islands Tokyo, Japan Wilmington, Delaware, USA Kuala Lumpur, Malaysia Makati City, Philippines Singapore, Singapore Seoul, South Korea Krakow, Poland Sandton, South Africa Zurich, Switzerland Wilmington, Delaware, USA Nassau, Bahamas George Town, Cayman Islands St. Helier, Jersey Singapore, Singapore London, Great Britain Sydney, Australia Herzliya Pituach, Israel IB IB IB 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 Share capital in million Equity interest accumulated in % USD EUR EUR USD USD SAR THB HKD AUD CAD EUR EUR HKD INR GBP ILS JPY JPY USD MYR PHP SGD KRW PLN ZAR CHF USD USD USD GBP SGD GBP AUD ILS 0.0 0.0 7.5 1 300.4 2 9.3 110.0 500.0 20.0 209.8 2 10.0 15.0 22.9 430.0 140.0 18.0 0.0 60 000.0 8 505.0 22 205.6 2 80.0 190.0 311.5 150 000.0 1.4 0.0 1.5 55.0 2 2.0 2.0 0.0 3.3 132.0 53.9 3.5 100.0 100.0 94.9 100.0 100.0 73.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 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. 396 Note 33 Significant subsidiaries and associates (continued) Changes in the consolidation scope 2011 New significant, fully consolidated companies APPIA General Partner S.à.r.l. ING Investment Management Limited Luxembourg Financial Group A.G. Luxembourg Financial Group Asset Management S.A. Trumbull Property Growth & Income Fund GP LLC UBS AFS Controlled Subsidiary 1 Ltd. UBS AFS Controlled Subsidiary 2 Ltd. UBS Commercial Mortgage Securitization Corp. Registered office Luxembourg, Luxembourg Sydney, Australia Business division 1 Global AM Global AM Luxembourg, Luxembourg Luxembourg, Luxembourg IB IB Wilmington, Delaware, USA Global AM George Town, Cayman Islands Global AM George Town, Cayman Islands Global AM Wilmington, Delaware, USA IB UBS Financial Services (Uruguay) Sociedad de Responsabilidad Limitada Montevideo, Uruguay UBS Funds Australia Limited – Sydney, Australia UBS Global Asset Management (China) Limited UBS Securities Japan Preparation Co., Ltd. Sydney, Australia Beijing, China Tokyo, Japan 1 WMA: Wealth Management Americas, Global AM: Global Asset Management, IB: Investment Bank. WMA IB Global AM IB Share capital in million Equity interest accumulated in % EUR AUD EUR EUR USD USD USD USD UYU AUD CNY JPY 0.0 7.7 2.1 0.2 0.3 0.0 0.0 0.0 0.1 5.0 0.0 8 505.0 60.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Significant deconsolidated companies UBS Fund Services (Luxembourg) S.A. Poland Branch UBS Preferred Funding Company LLC II Registered office Zabierzow, Polen Wilmington, Delaware, USA Reason for deconsolidation Liquidated Liquidated Significant associates as of 31 December 2011 Company SIX Group AG 1 UBS Securities Co. Limited 1 UBS is represented in the Board of Directors. Note 34 Invested assets and net new money Registered office Zurich, Switzerland Beijing, China Industry Financial Financial Equity interest in % 17.3 20.0 Invested assets include all client assets managed by or deposited with UBS for investment purposes. Invested assets include man- aged fund assets, managed institutional assets, discretionary and advisory wealth management portfolios, fi duciary deposits, time deposits, savings accounts and wealth management securities or brokerage accounts. All assets held for purely transactional pur- poses and custody-only assets, including corporate client assets held for cash management and transactional purposes, are exclud- ed from invested assets as the Group only administers the assets and does not offer advice on how the assets should be invested. Also excluded are non-bankable assets (e.g. art collections) and deposits from third-party banks for funding or trading purposes. Discretionary assets are defi ned as client assets which UBS de- cides 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 an- other, it is counted in both the business division that manages the investment and the one that distributes it. This results in double counting within UBS total invested assets, as both business divi- sions are providing a service independently to their respective cli- ents, and both add value and generate revenue. Net new money in a reporting period is the amount of invested assets that are entrusted to UBS by new and existing clients less those withdrawn by existing clients and clients who terminated their relationship with UBS. Net new money is calculated using the direct method, by which infl ows and outfl ows to / from invested assets are determined at the client level based on transactions. Interest and dividend in- come from invested assets is not counted as net new money in- fl ow. Market and currency movements as well as fees, commis- sions and interest on loans charged are excluded from net new money, as are the effects resulting from any acquisition or divest- ment of a UBS subsidiary or business. Reclassifi cations between invested assets and custody-only assets as a result of a change in the service level delivered are treated as net new money fl ows. The Investment Bank does not track invested assets and net new money. However, when a client is transferred from the Investment Bank to another business division, this produces net new money even though client assets were already with UBS. Net new money for 2010 included infl ows of CHF 3.7 billion resulting from transfers of Investment Bank clients to Wealth Management, as part of the Global Family Offi ce initiative, compared with zero in 2011. 397 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 fi nancial statements Note 34 Invested assets and net new money (continued) 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) Note 35 Business combinations As of or for the year ended 31.12.11 31.12.10 270 619 1,278 2,167 216 24.6 42.4 282 596 1,274 2,152 225 0.0 (14.3) Business combinations completed in 2011 Business combinations completed in 2009 In 2011, UBS completed acquisitions in Global Asset Manage- ment and in the equities business of the Investment Bank. The aggregated acquisition costs of these two acquisitions amounted to approximately CHF 54 million of which CHF 11 million related to goodwill, CHF 20 million to intangible assets, and CHF 23 mil- lion to other net assets. Intangible assets from both business ac- quisitions included customer relationships and benefi cial con- tracts. The aggregated acquisition costs included cash payments of CHF 44 million and contingent consideration of CHF 10 million, including CHF 8 million in restricted UBS AG shares. Business combinations in 2010 In 2010, no signifi cant business combinations were completed. Acquisition of the commodity index business of AIG Financial Products Corp. In May 2009, UBS completed the acquisition of the commodity index business of AIG Financial Products Corp., including AIG’s rights to the DJ-AIG Commodity index. This commodity index business comprises a product platform of commodity index swaps and funded notes based on the benchmark Dow Jones-AIG Com- modity Index (DJ-AIGCI). The cost of the business combination, including directly attributable transaction costs, amounted to CHF 74 million (USD 65 million) of which CHF 17 million (USD 15 mil- lion) was paid in cash upon closing. The remaining payments, based upon future earnings of the purchased business, were made in 2010. The cost of the business combination was allocat- ed to Intangible assets of CHF 40 million (USD 35 million) and Goodwill of CHF 34 million (USD 30 million). The business of AIG was integrated into UBS’s Investment Bank. Note 36 Discontinued operations 2011 2009 In 2011, there were no discontinued operations. 2010 In 2009, private equity investments sold in prior years contributed a subsequent loss of CHF 7 million to UBS’s net profi t from discon- tinued operations. In 2010, private equity investments sold in prior years contributed a subsequent gain of CHF 2 million to UBS’s net profi t from dis- continued operations. 398 Note 37 Reorganizations and disposals Restructuring 2011 In 2011, we recognized restructuring charges of CHF 403 million associated with our cost reduction program. These charges refl ect costs related to both personnel and real estate. Further, 2011 in- cludes restructuring charges of CHF 7 million in Global Asset Management related to the ING Investment Management busi- ness acquisition and the reversal of prior restructuring-related provisions of CHF 30 million (whereof CHF 10 million in the Investment Bank, CHF 9 million in Wealth Management Americas, CHF 8 million in the Corporate Center, CHF 2 million in Wealth Management and CHF 1 million in Global Asset Management). The table below shows the detailed breakdown of restructuring charges booked in 2011. CHF million For the year ended 31 December 2011 Personnel expenses General and administrative expenses 1 Depreciation of property and equipment 2 Total Wealth Management & Swiss Bank Wealth Management Retail & Corporate Wealth Management Americas Global Asset Management Investment Bank Corporate Center 64 16 2 82 29 3 0 32 5 2 2 10 19 6 1 26 143 55 18 216 2 12 1 15 UBS 261 93 26 380 1 Mainly reflecting real estate related provisions for onerous leases. 2 Reflecting the impairment of real estate assets. Note 38 Currency translation rates The following table shows the rates of the main currencies used to translate the fi nancial information of our foreign operations into Swiss francs: 1 USD 1 EUR 1 GBP 100 JPY Spot rate As of Average rate 1 Year ended 31.12.11 31.12.10 31.12.11 31.12.10 31.12.09 0.94 1.21 1.46 1.22 0.93 1.25 1.46 1.15 0.88 1.23 1.45 1.11 1.04 1.37 1.62 1.18 1.08 1.51 1.70 1.16 1 Monthly income statement items of foreign operations with a functional currency other than Swiss franc are translated with month-end rates into Swiss franc. Disclosed average rates for a year represent an average of twelve month-end rates, weighted according to the income and expense volumes of all foreign operations with the same functional currency for each month. n o i t a m r o f n i l a i c n a n i F 399 Financial information Notes to the consolidated fi nancial statements Note 39 Swiss banking law requirements The consolidated Financial Statements of UBS are prepared in ac- cordance with International Financial Reporting Standards (IFRS). The Guidelines of the Swiss Financial Market Supervisory Author- ity (FINMA) require banks which present their fi nancial statements under IFRS to provide a narrative explanation of the main differ- ences between IFRS and Swiss GAAP (FINMA circular 08 / 2) and the Banking Ordinance. Included in this note are the signifi cant differences in regard to recognition and measurement between IFRS and the provisions of the Banking Ordinance and the Guide- lines of the FINMA governing fi nancial statement reporting pursu- ant 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 con- solidated. Under Swiss law, only entities that are active in the fi eld of banking and fi nance and real estate entities are subject to con- solidation. Entities which are held temporarily are generally re- corded as fi nancial investments. 2. Financial investments available-for-sale Under IFRS, Financial investments available-for-sale are carried at fair value. Changes in fair value are recorded directly in equity until an investment is sold, collected or otherwise disposed of, or until an investment is determined to be impaired. At the time an available-for-sale investment is determined to be impaired, the cumulative unrealized loss previously recognized in equity is in- cluded in net profi t or loss for the period. On disposal of a fi nan- cial investment available-for-sale, the cumulative unrecognized gain or loss previously recognized in equity is recognized in the income statement. Under Swiss law, fi nancial investments are carried either at the lower of cost or market or at amortized cost less impairment with changes in measurement recorded in the income statement. Re- ductions to market value below cost and reversals of such reduc- tions up to original cost as well as gains and losses on disposal are included in Other income. Permanent equity investments are clas- sifi ed on the balance sheet as Investments in subsidiaries and other participations and are measured at cost less impairment with impairment losses recorded in the income statement. 3. Cash fl ow hedges When the hedged cash fl ows materialize, the accumulated unrec- ognized 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 fl ow exposures is deferred on the balance sheet as other assets or other liabilities. The deferred amounts are released to income when the hedged cash fl ows 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 amortized cost less any accumulated depreciation less impairment losses un- less the investment property is classifi ed as held for sale. Invest- ment property classifi ed 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 certain fi - nancial assets and fi nancial liabilities, mainly to hybrid debt instru- ments. Instruments, for which the fair value option is applied, are accounted for at fair value with changes in fair value refl ected in Net trading income. Furthermore, UBS designated certain loans, loan commitments and fund investments as fi nancial assets desig- nated at fair value through profi t and loss. Under Swiss accounting rules, the fair value option is not avail- able except for issued structured products that consist of a debt host contract and a bifurcatable embedded derivative(s). Howev- er, changes in fair value attributable to changes in own credit are not recognized in the income statement. 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 indefi nite useful life are also not amortized but tested annually for impairment. Under Swiss law, goodwill and intangible assets with indefi nite useful lives are amortized over a period not exceeding fi ve years, unless a longer useful life, which may not exceed twenty years, can be justifi ed. 7. Discontinued operations The Group uses derivative instruments to hedge the exposure from varying cash fl ows. Under IFRS, when hedge accounting is applied the fair value gain or loss on the effective portion of the derivative designated as a cash fl ow hedge is recognized in equity. Under certain conditions, IFRS requires that non-current assets or disposal groups be classifi ed 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. 400 Note 39 Swiss banking law requirements (continued) Under Swiss law, the concept of discontinued operations does 9. Netting of replacement values not exist, therefore no such reclassifi cation takes place. 8. Extraordinary income and expense Certain items of income and expense are classifi ed as extraordinary items under Swiss law, whereas in the Group Income Statement the amounts are classifi ed as operating income or expense or are included in net profi t from discontinued operations, if required. Under IFRS, replacement values are reported on a gross basis, un- less certain restrictive requirements are met. Under Swiss law, re- placement values and the related cash collateral are reported on a net basis, provided the master netting and the related collateral agreements are legally enforceable. n o i t a m r o f n i l a i c n a n i F 401 Financial information Notes to the consolidated fi nancial statements Note 40 Supplemental guarantor information required under SEC rules Guarantee of PaineWebber securities Following the acquisition of Paine Webber Group Inc. (“Paine- Webber”), UBS AG entered into a full and unconditional guaran- tee of the senior and subordinated notes and trust preferred securities (“Debt Securities”) of PaineWebber. Prior to the acqui- sition, PaineWebber was a SEC registrant. Upon the acquisition, PaineWebber was merged into UBS Americas Inc., a wholly- owned subsidiary of UBS AG. 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 AG without fi rst proceeding against UBS Americas Inc. UBS AG’s obligations under the subordinated note guarantee are subordinated to the prior payment in  full of the deposit and all other liabilities of UBS AG. The information presented in this note is prepared in accor- dance with IFRS and should be read in conjunction with the Con- solidated Financial Statements of UBS of which this information is a part. Supplemental guarantor consolidated income statement CHF million For the year ended 31 December 2011 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 / (benefit) Net profit from continuing operations Net profit from discontinued operations Net profit Net profit attributable to non-controlling interests Net profit attributable to UBS shareholders 15,311 (10,854) 4,457 (96) 4,361 6,351 4,155 659 1,427 16,954 8,712 2,577 564 0 26 11,879 5,075 917 4,159 0 4,159 0 4,159 2,910 (1,102) 1,808 18 1,826 5,757 (81) 0 728 8,230 5,216 2,283 117 0 80 7,696 534 61 473 0 473 2 471 2,952 (2,391) 561 (6) 555 3,128 269 0 (689) 3,263 1,664 1,099 81 0 21 2,864 399 (55) 454 0 454 266 188 (3,203) 3,203 0 0 0 0 0 (659) 0 (659) 0 0 0 0 0 0 (659) 0 (659) 0 (659) 0 (659) 17,969 (11,143) 6,826 (84) 6,742 15,236 4,343 0 1,467 27,788 15,591 5,959 761 0 127 22,439 5,350 923 4,426 0 4,427 268 4,159 1 UBS AG Parent Bank prepares its audited financial statements in accordance with Swiss banking law requirements. Amounts presented in this column serve as a basis for preparing Group Financial Statements under IFRS. 402 Note 40 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated balance sheet CHF million As of 31 December 2011 Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets of which: pledged as collateral Positive replacement values Cash collateral receivables on derivative instruments Financial assets designated at fair value Loans Financial investments available-for-sale Accrued income and prepaid expenses Investments in subsidiaries and 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 Cash collateral payables on derivative instruments 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 non-controlling interests Total equity Total liabilities and equity UBS AG Parent Bank 1 UBS Americas Inc. Subsidiaries Consolidating entries UBS Group 38,094 26,085 41,783 161,663 130,585 50,064 482,528 44,906 6,290 263,927 39,431 1,971 59,809 4,757 329 5,177 12,405 1,319,740 63,340 16,498 38,030 32,299 467,112 55,378 84,386 321,393 4,530 125,251 24,226 1,232,444 87,297 0 87,297 1,319,740 1,977 4,866 57,893 123,923 30,864 2,801 8,244 4,640 4,537 37,836 9,877 4,046 4 523 8,172 2,839 2,459 568 80,863 3,040 88,167 33,451 609 146,545 25,894 7,515 11,391 3,866 872 0 408 1,194 511 1,689 302,699 405,971 41,669 32,622 141,005 8,437 8,312 11,188 533 31,934 2,203 407 19,345 297,655 5,043 0 5,043 302,699 13,787 2,969 83,646 5,751 148,708 34,666 13,522 35,632 678 19,873 22,209 381,440 20,126 4,406 24,532 405,971 0 (88,596) (43,953) (160,252) (13,374) (13,537) (150,732) (34,118) (8,005) (46,549) 0 (561) (59,018) 0 0 0 40,638 23,218 58,763 213,501 181,525 39,936 486,584 41,322 10,336 266,604 53,174 6,327 795 5,688 9,695 8,526 (4,089) (609,248) 12,465 1,419,162 (88,596) (43,953) (160,252) (7,007) (150,732) (34,118) (9,459) (46,549) (561) (4,914) (4,089) (550,230) (59,017) 0 (59,017) (609,248) 30,201 8,136 102,429 39,480 473,400 67,114 88,982 342,409 6,850 140,617 61,692 1,361,309 53,447 4,406 57,852 1,419,162 1 UBS AG Parent Bank prepares its audited financial statements in accordance with Swiss banking law requirements. Amounts presented in this column serve as a basis for preparing Group Financial Statements under IFRS. n o i t a m r o f n i l a i c n a n i F 403 Financial information Notes to the consolidated fi nancial statements Note 40 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated statement of cash flows CHF million For the year ended 31 December 2011 Net cash flow from / (used in) operating activities Cash flow from / (used in) investing activities Purchase of subsidiaries, associates and intangible assets Disposal of subsidiaries, associates and intangible assets 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 short-term debt issued / (repaid) Net movements in treasury shares and own equity derivative activity 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 non-controlling interests Dividends paid to / decrease in non-controlling 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: 2 Cash and balances with central banks Money market paper 3 Due from banks 4 Total 2 UBS AG Parent Bank 1 (12,251) UBS Americas Inc. Subsidiaries UBS Group (933) (1,057) (14,241) (58) 50 (917) 137 19,125 18,336 5,459 (1,885) 48,844 (55,668) 0 0 640 (2,610) (2,587) 889 65,592 66,481 38,094 3,804 24,582 66,481 0 0 (114) 91 1,165 1,142 0 0 197 (8) 0 0 (366) (177) 299 333 4,003 4,336 1,977 29 2,330 4,336 0 0 (98) 5 (9) (101) 9,879 0 3,549 (6,950) 1 (748) (274) 5,457 159 4,457 10,339 14,796 568 67 14,162 14,796 (58) 50 (1,129) 233 20,281 19,377 15,338 (1,885) 52,590 (62,626) 1 (749) 0 2,670 (2,129) 5,678 79,934 85,612 40,638 3,900 41,074 85,612 1 UBS AG Parent Bank prepares its audited financial statements in accordance with Swiss banking law requirements. Amounts presented in this column serve as a basis for preparing Group Financial Statements under IFRS. 2 In 2011, we have refined the definition of cash and cash equivalents. Prior periods have been adjusted accordingly. Refer to “Note 1 Summary of significant accounting policies” for more information. 3 Money market paper is included in the balance sheet under Trading portfolio assets and Financial investments available-for-sale. 4 Includes positions recognized in the balance sheet under Due from banks and Cash col- lateral receivables on derivative instruments. 404 Note 40 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated income statement CHF million For the year ended 31 December 2010 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 / (benefit) Net profit from continuing operations Net profit from discontinued operations Net profit Net profit attributable to non-controlling interests Net profit attributable to UBS shareholders 15,732 (12,153) 3,579 (2) 3,577 7,293 6,979 1,384 1,515 20,749 9,220 2,729 628 0 3 12,581 8,168 633 7,534 0 7,534 0 7,534 3,388 (1,409) 1,980 (16) 1,964 6,465 (117) 0 1,296 9,608 5,850 2,691 172 0 90 8,804 804 (1,150) 1,954 0 1,954 0 1,954 2,723 (2,067) 656 (48) 608 3,401 609 0 (1,597) 3,022 1,850 1,164 117 0 24 3,154 (132) 136 (268) 2 (266) 304 (570) (2,971) 2,971 0 0 0 0 0 (1,384) 0 (1,384) 0 0 0 0 0 0 (1,384) 0 (1,384) 0 (1,384) 0 (1,384) 18,872 (12,657) 6,215 (66) 6,149 17,160 7,471 0 1,214 31,994 16,920 6,585 918 0 117 24,539 7,455 (381) 7,836 2 7,838 304 7,534 1 UBS AG Parent Bank prepares its audited financial statements in accordance with Swiss banking law requirements. Amounts presented in this column serve as a basis for preparing Group Financial Statements under IFRS. n o i t a m r o f n i l a i c n a n i F 405 Financial information Notes to the consolidated fi nancial statements Note 40 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated balance sheet CHF million As of 31 December 2010 Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets of which: pledged as collateral Positive replacement values Cash collateral receivables on derivative instruments Financial assets designated at fair value Loans Financial investments available-for-sale Accrued income and prepaid expenses Investments in subsidiaries and 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 Cash collateral payables on derivative instruments 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 non-controlling interests Total equity Total liabilities and equity UBS AG Parent Bank 1 UBS Americas Inc. Subsidiaries Consolidating entries UBS Group 26,372 30,941 39,315 130,977 170,106 61,428 393,565 42,940 4,778 258,378 59,269 1,450 62,095 4,493 448 6,054 18,504 1,249,683 79,842 20,374 40,713 45,191 383,892 45,024 94,864 301,976 5,071 125,113 23,286 1,165,349 84,334 0 84,334 1,249,683 69 5,038 61,314 53,203 32,265 9,412 8,624 5,010 4,788 37,828 11,647 3,612 6 614 8,150 2,897 5,938 498 68,198 9,572 85,331 39,814 2,162 115,618 23,861 8,850 12,778 3,853 942 0 360 1,224 571 1,914 241,001 373,384 47,430 23,613 79,920 13,433 8,667 10,543 295 29,266 2,433 398 20,580 236,578 4,408 15 4,423 241,001 1,261 10,410 80,883 1,215 117,863 37,097 18,457 47,166 773 10,315 23,529 348,968 19,388 5,028 24,416 373,384 0 (87,044) (47,746) (126,721) (13,368) (11,649) (116,661) (33,740) (9,911) (46,107) 0 (538) (61,311) 0 0 0 (3,675) (546,822) (87,044) (47,746) (126,721) (4,865) (116,661) (33,740) (12,859) (46,107) (538) (5,555) (3,675) (485,511) (61,311) 0 (61,311) (546,822) 26,939 17,133 62,454 142,790 228,815 61,352 401,146 38,071 8,504 262,877 74,768 5,466 790 5,467 9,822 9,522 22,681 1,317,247 41,490 6,651 74,796 54,975 393,762 58,924 100,756 332,301 7,738 130,271 63,719 1,265,384 46,820 5,043 51,863 1,317,247 1 UBS AG Parent Bank prepares its audited financial statements in accordance with Swiss banking law requirements. Amounts presented in this column serve as a basis for preparing Group Financial Statements under IFRS. 406 Note 40 Supplemental guarantor information required under SEC rules (continued) Supplemental guarantor consolidated statement of cash flows CHF million For the year ended 31 December 2010 Net cash flow from / (used in) operating activities Cash flow from / (used in) investing activities Purchase of subsidiaries, associates and intangible assets Disposal of subsidiaries, associates and intangible assets 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 short-term debt 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 non-controlling interests Dividends paid to / decrease in non-controlling 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: 2 Cash and balances with central banks Money market paper 3 Due from banks 4, 5 Total UBS AG Parent Bank 1 10,719 UBS Americas Inc. (2,772) Subsidiaries 5,440 UBS Group 13,385 (75) 307 (367) 196 2,123 2,185 3,241 (1,456) (113) 75,842 (65,968) 0 0 (122) 11,424 (10,218) 14,110 51,482 65,592 26,372 15,798 23,422 65,592 0 0 (88) 22 3,474 3,408 0 0 0 8 (82) 0 (6) 235 154 1,482 2,272 1,731 4,003 69 1,190 2,744 4,003 0 0 (86) 24 (1,433) (1,497) 1,218 0 0 2,568 (11,447) 6 (2,047) (113) (9,815) (3,444) (9,315) 19,654 10,339 498 123 9,719 10,339 (75) 307 (541) 242 4,164 4,097 4,459 (1,456) (113) 78,418 (77,497) 6 (2,053) 0 1,764 (12,181) 7,066 72,868 79,934 26,939 17,110 35,885 79,934 1 UBS AG Parent Bank prepares its audited financial statements in accordance with Swiss banking law requirements. Amounts presented in this column serve as a basis for preparing Group Financial Statements under IFRS. 2 In 2011, we have refined the definition of cash and cash equivalents. Prior periods have been adjusted accordingly. Refer to “Note 1 Summary of significant accounting policies” for more information. 3 Money market paper is included in the balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 9,941 million was pledged as of 31 December 2010. 4 Includes positions recognized in the balance sheet under Due from banks and Cash collateral receivables on derivative instruments. 5 In 2011, we corrected the amounts presented for Due from banks with related changes impacting cash flows from operating activities. Due from banks was increased by CHF 775 million and CHF 4,669 million for UBS AG Parent Bank and Subsidiaries, respectively, with a corresponding decrease in UBS Americas Inc. of CHF 5,444 million. There was no change to amounts presented for UBS Group related to this correction. n o i t a m r o f n i l a i c n a n i F 407 Financial information Notes to the consolidated fi nancial statements Note 40 Supplemental guarantor information required under SEC rules (continued) 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 / (benefit) Net profit from continuing operations Net profit from discontinued operations Net profit Net profit attributable to non-controlling 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) 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) 1 UBS AG Parent Bank prepares its audited financial statements in accordance with Swiss banking law requirements. Amounts presented in this column serve as a basis for preparing Group Financial Statements under IFRS. 408 Note 40 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, associates and intangible assets Disposal of subsidiaries, associates and intangible assets 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 short-term debt 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 non-controlling interests Dividends paid to / decrease in non-controlling 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: 2 Cash and balances with central banks Money market paper 3 Due from banks 4 Total UBS AG Parent Bank 1 30,833 UBS Americas Inc. (1,716) Subsidiaries 57,607 UBS Group 86,723 (42) 296 (656) 104 (63,535) (63,832) (7,020) 673 3,726 64,956 (55,616) 0 0 (4,032) 2,686 5,886 (24,426) 75,908 51,482 15,177 5,927 30,378 51,482 0 0 (124) 53 (15,228) (15,299) 0 0 (75) 6 387 318 (1,596) (51,424) 0 0 0 (1,548) 0 (8) 2,419 (733) 574 (17,174) 18,905 1,731 75 207 1,450 1,731 0 0 2,106 (7,861) 3 (576) 1,614 (56,136) (933) 855 18,799 19,654 5,647 194 13,814 19,654 (42) 296 (854) 163 (78,376) (78,812) (60,040) 673 3,726 67,062 (65,024) 3 (583) 0 (54,183) 5,529 (40,744) 113,611 72,868 20,899 6,327 45,642 72,868 1 UBS AG Parent Bank prepares its audited financial statements in accordance with Swiss banking law requirements. Amounts presented in this column serve as a basis for preparing Group Financial Statements under IFRS. 2 In 2011, we have refined the definition of cash and cash equivalents. Prior periods have been adjusted accordingly. Refer to “Note 1 Summary of significant accounting policies” for more information. 3 Money market paper is included in the balance sheet under Trading portfolio assets and Financial investments available-for-sale. CHF 4,841 million was pledged as of 31 December 2009. 4 Includes positions recognized in the balance sheet under Due from banks and Cash collateral receivables on derivative instruments. n o i t a m r o f n i l a i c n a n i F 409 Financial information Notes to the consolidated fi nancial statements Note 40 Supplemental guarantor information required under SEC rules (continued) Guarantee of other securities UBS AG, acting through wholly-owned US-domiciled fi nance subsidiaries, has issued the following outstanding trust preferred securities: Guarantee of other securities USD billion, unless otherwise indicated Issuing entity Type of security UBS Preferred Funding Trust IV UBS Preferred Funding Trust V Floating rate non-cumulative trust preferred securities Trust preferred securities Outstanding as of 31.12.11 Date issued May 2003 May 2006 Interest (%) one-month LIBOR +0.7 6.243 Amount 0.3 1.0 UBS AG has fully and unconditionally guaranteed these securities. UBS’s obligations under the trust preferred securities guarantee are subordinated to the prior payment in full of the deposit and all other liabilities of UBS. At 31 December 2011, the amount of se- nior liabilities of UBS to which the holders of the subordinated debt securities would be subordinated is approximately CHF 1,354 billion. Guarantee to UBS Ltd. UBS AG has issued a guarantee to each counterparty of UBS Ltd. Under the guarantee UBS AG irrevocably and unconditionally guarantees, for the benefi t of each counterparty, each and every obligation that UBS Ltd. entered into. UBS AG promises to pay to that counterparty on demand any unpaid balance of such liabili- ties under the terms of the guarantee. 410 UBS AG (Parent Bank) Parent Bank review Income statement Net profit for UBS AG (Parent Bank) was CHF 5,440 million, a decrease of CHF 683 million from a profit of CHF 6,123 million in 2010. Net interest income Net interest income increased by CHF 1,171 million, or 34%, to CHF 4,597 million. Interest and discount income increased by CHF 234 million, or 2%, mainly attributable to higher interest income from securities borrowing and reverse repurchase agree- ments. Interest and dividend income from our trading portfolio decreased by CHF 452 million, or 10%. Interest and dividend income from financial investments increased by CHF 155 million, or 50%, mainly relating to income from our strategic investment portfolio in the first nine months of 2011. Interest expense decreased by CHF 1,235 million, or 10%, due to lower interest expenses on paper issued and on trading liabilities. Net fee and commission income Net fee and commission income decreased by CHF 931 million, or 13%, to CHF 6,373 million. Fee and commission income from securities and investment business decreased by CHF 1,631 million, or 19%. Underwriting fees decreased due to an overall market slowdown resulting from volatility in the capital markets and a reduced market fee pool. Portfolio management and advisory fees as well as investment fund fees decreased mainly due to a lower average invested asset base and the strengthening of the Swiss franc. A decrease in bro- kerage fees resulted from an overall market slowdown, with low- er transactional volumes and reduced levels of client activity. These decreases were partly offset by an increase in merger and acquisition and corporate finance fees, which reflected an im- proved mergers and acquisitions environment including the com- pletion of several large deals. Fee and commission expense decreased by CHF 699 million, or 34%, mainly due to lower brokerage fees paid. Net trading income Net trading income was CHF 3,545 million compared with CHF 6,501 million in 2010. Investment Bank equities and investment banking net trading income was negative CHF 53 million, com- pared with positive CHF 1,890 million, mainly as we recorded a loss of CHF 1,951 million related to the unauthorized trading incident in 2011. Investment bank fixed income, currencies and commodities net trading income was down CHF 14 million, or 1%, to CHF 2,312 million. Net trading income in other business divisions and Corporate Center was CHF 1,286 million com- pared with CHF 2,285 million, mainly because in 2011 we re- corded a loss of CHF 102 million on the valuation of our option to acquire the SNB StabFund’s equity compared with a gain of CHF 745 million in 2010. Other income from ordinary activities Other income from ordinary activities was CHF 3,508 million, up CHF 1,336 million, or 62%. Net income from disposals of financial investments increased by CHF 605 million, mainly due to a gain of CHF 652 million from the sale of our strategic investment portfolio. Dividend income from investments in subsidiaries and other participations decreased by CHF 945 million. Sundry income from ordinary activities was up CHF 809 mil- lion, or 22%, to CHF 4,441 million. Sundry income included income received from subsidiaries for services rendered of CHF 3,676 million, an increase of CHF 176 million, or 5%, com- pared with the prior year. In addition, sundry income included valuation gains from financial investments of CHF 464 million, which mainly reflected the reversal of unrealized losses incurred on the strategic investment portfolio in 2010 which were re- corded as sundry ordinary expenses. Gains from disposals of loans and receivables were CHF 233 million, up CHF 189 million from the prior year. Sundry ordinary expenses were down CHF 868 million, or 25%, to CHF 2,554 million. Charges from subsidiaries for services received were down CHF 283 million, or 10%, to CHF 2,522 million. In addition, the prior year included unreal- ized losses on financial investments of CHF 573 million, mainly related to our strategic investment portfolio. Operating expenses Personnel expenses decreased by CHF 1,991 million, or 19%, to CHF 8,309 million. Discretionary variable compensation decreased by CHF 1,448 million to CHF 1,821 million. Expenses for social security decreased by CHF 216 million as a result of the lower vari- able compensation. Other personnel expenses decreased by CHF 239 million, mainly as the prior year included a charge of CHF 200 million for the UK bank payroll tax. 411 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) Impairment of investments in subsidiaries and other participations Impairment of investments in subsidiaries and other participations decreased by CHF 1,269 million, or 88%, to CHF 165 million. Impairments in 2010 were mainly related to unfavorable foreign currency impacts on US subsidiaries as well as subsidiaries in vari- ous other countries. Extraordinary income Extraordinary income decreased by CHF 2,069 million, or 52%, to CHF 1,888 million. Gains from sale of subsidiaries and other participations decreased by CHF 409 million due to fewer dispos- als in 2011. Reversals of impairments and provisions of subsidiar- ies and other participations decreased to CHF 1,352 million in 2011 from CHF 2,337 million in 2010. In 2011, net impairment reversals were to a large extent related to positive foreign cur- rency impacts on the valuation of US subsidiaries. Prior period re- lated income decreased to CHF 280 million from CHF 968 million and mainly related to equity compensation plans, hedge account- ing and financial liabilities designated at fair value. Extraordinary expenses Extraordinary expenses increased by CHF 471 million to CHF 649 million, mainly related to increased prior period related expenses, which increased CHF 479 million and mainly related to hedge accounting charges, valuation corrections on issued structured products and investments in subsidiaries and other participations. Tax expense Tax expense for 2011 was CHF 232 million compared with CHF 25 million in the prior year and consisted of CHF 192 million in in- come tax expenses, mainly related to prior years, and CHF 40 mil- lion in capital tax expenses. Deferred tax assets are not accounted for and reported in the Parent Bank’s financial statements which are prepared in accor- dance with Swiss Federal banking law. As a consequence, there is no amortization of deferred tax assets for tax losses used against profits arising from business operations. Balance sheet Assets Total assets of the UBS AG (Parent Bank) stood at CHF 846 billion on 31 December 2011, down CHF 17 billion from CHF 863 billion on 31 December 2010. This decrease mainly reflected lower mon- ey market paper and trading instruments held, as well as the sale of the strategic investment portfolio which was held as a financial investment. These decreases were partially offset by increased re- verse repurchase agreements with banks and other customers as well as higher liquid assets held at the Swiss National Bank (SNB). Liquid assets and money market paper Liquid assets increased by CHF 12 billion to CHF 38 billion on 31 December 2011, predominantly reflecting higher balances with the SNB. Money market paper decreased by CHF 32 billion to CHF 41 billion on 31 December 2011, primarily due to decreases in Swiss, Japanese and US government bills. Due from banks and due from customers Total due from banks increased by CHF 25 billion to CHF 231 bil- lion on 31 December 2011, mainly reflecting increased reverse repurchase agreements with UBS bank subsidiaries, in particular in the Americas and Asia. This was partly offset by lower bank deposits, predominantly with UBS bank subsidiaries in the Ameri- cas and Asia. Due from customers increased by CHF 6 billion to CHF 148 bil- lion, due to an increase of CHF 7 billion in the loan book (excluding mortgage loans) as a result of higher demand from Asian and Amer- ican clients. Reverse repurchase agreements and securities borrow- ings with customers increased by CHF 6 billion, equally across all regions. These increases were partially offset by client-driven lower prime brokerage loan balances, which were down CHF 7 billion, mainly in the Americas and to a lesser extent in Europe. Trading balances and financial investments Trading balances in securities and precious metals decreased by CHF 19 billion to CHF 120 billion on 31 December 2011, with debt instruments down by CHF 12 billion. Equity instruments were down by CHF 3 billion. Financial investments declined by CHF 15 billion to CHF 20 bil- lion on 31 December 2011, primarily due to the sale of our stra- tegic investment portfolio. Investment in subsidiaries Investments in subsidiaries increased by CHF 2.9 billion to CHF 24.0 billion on 31 December 2011. This was mainly due to net capital injections of CHF 2.4 billion, as well as reversals of impairments of CHF 1.4 billion which were attributable to positive foreign currency translation impacts. These increases were partly offset by reductions of CHF 0.8 billion as a result of foreign cur- rency translation losses recorded in net trading income on bor- rowings used to fund the respective investments, and the impair- ment of investments in subsidiaries of CHF 0.2 billion. The termination of the match-funding concept as of 31 October 2011 and the change in accounting policy with regard to the foreign currency translation of investments in subsidiaries resulted in an increase of CHF 0.2 billion. Positive replacement values Positive replacement values, which are reported on a net basis provided the master netting and the related collateral agreements are legally enforceable, were stable at CHF 65 billion. Liabilities Money market paper issued increased by CHF 6 billion to CHF 57 billion on 31 December 2011, mainly on higher yield enhance- ment products for our wealth management clients. Due to banks decreased by CHF 22 billion to CHF 125 billion on 31 December 2011, and reflected lower unsecured interbank-bor- 412 rowing of CHF 14 billion as well as reduced securities lending of CHF 4 billion. Trading portfolio liabilities declined by CHF 13 billion to CHF 33 billion, mainly related to debt instruments. Total due to customers increased by CHF 25 billion to CHF 363 billion, mostly due to higher balances on current, savings and personal accounts. Finan- cial liabilities designated at fair value fell by CHF 17 billion. Equity Total equity attributable to shareholders stood at CHF 40.2 billion at year-end 2011, compared with CHF 34.7 billion at year-end 2010, due to the 2011 Parent Bank profit of CHF 5.4 billion. The general statutory reserve increased by CHF 5.0 billion to CHF 32.4 billion as of 31 December 2011, reflecting the appropriation of 2010 earnings of CHF 4.5 billion as well as a transfer of CHF 0.4 billion in capital contribution reserves from the reserve for own shares. The reserve for own shares increased by CHF 0.6 billion to CHF 1.1 billion, due to the net purchase of 46 million treasury shares in order to meet future delivery obligations related to share-based compensation awards. CHF 0.4 billion in capital contribution reserves were transferred from the reserve for own shares to the general statutory reserve. Other reserves in- creased by CHF 0.5 billion, reflecting the appropriation of 2010 earnings of CHF 1.6 billion, partly offset by a CHF 1.1 billion transfer to the reserve for own shares. n o i t a m r o f n i l a i c n a n i F 413 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 Dividend income from investments in subsidiaries and other participations 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 Impairment of investments in subsidiaries and other participations Depreciation of fixed assets Allowances, provisions and losses Profit before extraordinary items and taxes Extraordinary income Extraordinary expenses Tax expense Profit / (loss) for the period 414 For the year ended % change from Note 31.12.11 11,087 3,989 467 (10,946) 31.12.10 10,853 4,441 312 (12,181) 4,597 326 6,802 616 (1,371) 6,373 3,545 833 758 30 4,441 (2,554) 3,508 18,023 8,309 4,380 12,690 5,333 165 581 153 4,434 1,888 (649) (232) 5,440 3,426 295 8,433 645 (2,070) 7,304 6,501 228 1,703 31 3,632 (3,422) 2,172 19,402 10,300 4,502 14,802 4,601 1,434 617 181 2,369 3,957 (178) (25) 6,123 3 4 4 31.12.10 2 (10) 50 (10) 34 11 (19) (4) (34) (13) (45) 265 (55) (3) 22 (25) 62 (7) (19) (3) (14) 16 (88) (6) (15) 87 (52) 265 828 (11) Balance sheet CHF million Assets Liquid assets Money market paper Due from banks Due from customers Mortgage loans Trading balances in securities and precious metals Financial investments Investments in subsidiaries and other participations Fixed assets Accrued income and prepaid expenses Positive replacement values Other assets Total assets of which: subordinated assets of which: amounts receivable from subsidiaries Liabilities Money market paper issued Due to banks Trading portfolio liabilities Due to customers on savings and deposit accounts Other amounts due to customers Medium-term bonds Bonds issued and loans from central mortgage institutions Financial liabilities designated at fair value Accruals and deferred income Negative replacement values Other liabilities Allowances and provisions Total liabilities Equity Share capital General statutory reserve thereof capital contribution reserves thereof retained earnings Reserve for own shares thereof capital contribution reserves thereof retained earnings Other reserves Profit / (loss) for the period Equity attributable to shareholders Total liabilities and equity of which: subordinated liabilities of which: amounts payable to subsidiaries Note 31.12.11 31.12.10 % change from 31.12.10 38,094 41,222 231,401 148,474 144,346 120,312 20,193 23,990 4,807 2,114 64,580 6,552 846,085 1,894 288,870 56,788 124,625 32,522 85,393 278,096 1,951 89,361 62,976 6,671 58,994 7,122 1,412 26,372 73,049 206,162 142,634 141,708 139,685 34,788 21,075 4,557 1,643 65,449 6,373 863,495 2,287 254,762 50,729 146,961 45,550 78,322 260,404 2,605 89,860 79,847 7,634 60,723 4,717 1,424 805,911 828,776 383 32,350 42,537 (10,187) 1,066 1,066 934 5,440 40,174 846,085 12,339 133,696 383 27,379 42,091 (14,712) 432 432 402 6,123 34,719 863,495 14,689 129,243 13 5 13 5 8 9,10 9 44 (44) 12 4 2 (14) (42) 14 5 29 (1) 3 (2) (17) 13 12 (15) (29) 9 7 (25) (1) (21) (13) (3) 51 (1) (3) 0 18 1 (31) 147 132 (11) 16 (2) (16) 3 415 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) Statement of appropriation of retained earnings Proposed appropriation of retained earnings The Board of Directors proposes that the Annual General Meeting (AGM) on 3 May 2012 approves the following appropriation of retained earnings. CHF million Profit for the period Total available for appropriation Appropriation to other reserves Total appropriation For the year ended 31.12.11 5,440 5,440 5,440 5,440 Proposed distribution of capital contribution reserves The Board of Directors proposes that the AGM on 3 May 2012 approves the pay-out of CHF 0.10 per share of CHF 0.10 par value out of capital contribution reserves. Provided that the pay-out is approved, the payment of CHF 0.10 per share would be made on 10 May 2012 to holders of record on 9 May 2012. The shares will be traded ex-dividend as of 7 May 2012, and accordingly the last trading day on which the shares may be traded with entitlement to receive a pay-out will be 4 May 2012. CHF million, except where indicated Total capital contribution reserves before proposed distribution Proposed distribution of capital contribution reserves within general statutory reserves: CHF 0.10 per dividend-bearing share 3 Total capital contribution reserves after proposed distribution For the year ended 31.12.11 42,537 1, 2 (383) 42,154 1 As presented on the balance sheet, the capital contribution reserves of CHF 42,537 million are a component of the general statutory reserves of CHF 32,350 million after taking into account negative retained earnings of CHF 10,187 million. 2 Effective 1 January 2011, the Swiss withholding tax law provides that payments out of capital contribution reserves are not subject to withholding tax. The new law has led to interpretational differences between the Swiss Federal Tax Authorities and companies about the qualifying amounts of capital contribution reserves and the disclosure in the financial statements. In view of this, the Swiss Federal Tax Au- thorities have confirmed that UBS would be able to repay to shareholders CHF 27.4 billion of disclosed capital contribution reserves without being subject to the withholding tax deduction that applies to dividends paid out of retained earnings. The decision about the remaining amount has been deferred to a future point in time. 3 Dividend-bearing shares are all shares issued except for treasury shares held by UBS AG on the record date 9 May 2012. 416 Notes to the Parent Bank financial statements Note 1 Business activities, risk assessment, outsourcing and personnel Business Activities Outsourcing The business activities of UBS AG are described in the context of the description of the activities of the UBS Group in the “Operat- ing environment and strategy” section of this report. Outsourcing of IT and other services through agreements with external service providers is in compliance with FINMA circular 08 / 7 “Outsourcing banks”. Risk assessment Personnel UBS AG, as the ultimate parent company of UBS Group, is fully integrated into the group wide internal risk assessment process described in the audited part of the “Risk, treasury and capital management” section of this report. The Parent Bank employed 36,693 personnel on a full time equiv- alent basis 31 December 2011 compared with 36,381 personnel on 31 December 2010. Note 2 Accounting policies The Parent Bank financial statements are prepared in accordance with Swiss Federal banking law. The accounting policies are prin- cipally the same as for the Group Financial Statements outlined in “Note 1 Summary of significant accounting policies.” Major dif- ferences between the Swiss Federal banking law requirements and International Financial Reporting Standards are described in “Note 39 Swiss banking law requirements” to the consolidated financial statements. The accounting policies applied for the stat- utory accounts of the Parent Bank are discussed below. The risk management of UBS AG is described in the context of the risk management of UBS Group. Treasury shares Treasury shares are own equity instruments held by an entity. Under Swiss law, treasury shares are recognized in the balance sheet as trading balances or as Financial investments. Short po- sitions in treasury shares are presented as Trading portfolio lia- bilities. Treasury shares recognized as trading balances and short positions in treasury shares are measured at fair value with unrealized gains or losses from remeasurement to fair val- ue included in the income statement. Treasury shares recog- nized as Financial investments are valued according to the prin- ciples of lower of cost or market value. Realized gains and losses on the sale or acquisition of treasury shares are recog- nized in the income statement. A reserve for own shares held for other than trading pur- poses must be created in equity through reclassification of free reserves equal to the cost value of the treasury shares held. Re- purchases of treasury shares held for other than trading pur- poses can be made to the extent sufficient free reserves are available. The Reserve for own shares is not available for distri- bution 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. Income and expense items are translated at weighted average exchange rates for the period. All exchange differences are recognized in the in- come statement. The main currency translation rates used by the Parent Bank can be found in “Note 38 Currency translation rates” to the con- solidated financial statements. Investments in subsidiaries and other participations Investments in subsidiaries and other participations are equity in- terests which are held for the purpose of the Parent Bank’s busi- ness activities or for strategic reasons. They include all directly held subsidiaries through which UBS AG conducts its business on a global basis. The investments are carried at cost less impairment. The carrying value is tested for impairment when indications for a decrease in value exist, which include incurrence of significant op- erating losses or a severe depreciation of the currency in which the investment is denominated. If an investment in subsidiary is impaired, its value is generally written down to the net asset val- ue. Subsequent recoveries in value are recognized up to the origi- 417 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) Note 2 Accounting policies (continued) nal cost value based on either the increased net asset value or to a value above the net asset value if in the opinion of management forecasts of future profitability provide sufficient evidence that a carrying value above net asset value is supported. Management may exercise its discretion as to what extent and in which period a recovery in value is recognized. penses mainly include costs for hard revenue transfers between UBS AG Parent Bank and its subsidiaries and expenses from lower of cost or market accounting of financial investments. Hard transfers of costs and revenues are performed on an arm’s length basis and are settled in cash between UBS AG and its subsidiaries. Reversals of impairments are presented as Extraordinary in- come in the income statement. Impairments of investments are presented in Profit before extraordinary items and taxes under Impairment of investments in subsidiaries and other participations, except for prior period related amounts which are presented as Extraordinary income or expense. The classi- fication as extraordinary income or expense of prior period related amounts is dependent on whether the investment in the respective subsidiary, on a net basis, is a partial or full re- versal of impairment (extraordinary income) or an impairment (extraordinary expenses). Deferred taxes Deferred tax assets are not recognized in the Parent Bank financial statements under Swiss Federal banking law. However, deferred tax liabilities may be recognized for taxable temporary differenc- es. The change in the deferred tax liability balance is recognized in profit or loss. Equity participation and other compensation plans Equity participation plans Under Swiss law, employee share and option awards are recog- nized as compensation expense and accrued over the perfor- mance year, which is generally the financial year prior to the grant date. Equity- and cash-settled awards are classified as liabilities. The employee share option awards are remeasured to fair value at each balance sheet date. However, for employee share options that UBS intends to settle in shares from conditional capital, no compensation expense is recognized in the income statement as these awards are not a liability of UBS. Upon exercise of employee 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 expenses over the performance year. Sundry income from ordinary activities and sundry ordinary expenses Sundry income from ordinary activities mainly includes income from hard cost and revenue transfers between UBS AG Parent Bank and its subsidiaries and income from lower of cost or mar- ket accounting of financial investments. Sundry ordinary ex- 418 Dispensations in statutory financial statements As UBS Group prepares consolidated financial statements in ac- cordance with IFRS, UBS AG (Parent Bank) is dispensed from vari- ous disclosures in the statutory financial statements. Refer to the IFRS “Consolidated financial statements” in the “Financial Infor- mation” section of this report for more information. Changes in accounting policies, comparability and other adjustments Termination of the match funding concept Match funding was a concept employed by UBS to offset the cur- rency risk from subsidiaries denominated in a foreign currency by borrowing the invested amount in that foreign currency. As of 31 October 2011, UBS has terminated this concept and started to make the borrowings in Swiss francs for subsidiaries denominated in a foreign currency. Under the match funding concept, UBS has translated the match funded foreign investments at the spot exchange rate at the balance sheet date into Swiss francs. The related foreign cur- rency gains and losses were reflected in the balance sheet line Investment in subsidiaries and other participations and recognized in the income statement; the foreign currency gains and losses of the borrowing in a foreign currency were also reflected in the in- come statement. After the termination of the match funding concept UBS changed the accounting policy for the foreign currency transla- tion of investments in subsidiaries. Under the revised policy, the investments in subsidiaries are reported at cost less impairment and any life-to-date foreign currency gains and losses are no lon- ger reflected in the investment in subsidiaries account unless the investment is considered impaired. At transition date, the difference between the reversal of the life-to-date foreign currency gains and losses on investments in subsidiaries and the consequential and largely offsetting effects from increased impairments of investment values was recognized in a deferral account and reported in the balance sheet lines Oth- er asset (for losses) and Other liabilities (for gains). A small popula- tion of investments in subsidiaries was written up to cost values based on historical foreign currency rates in a prior year. Respec- tive prior year write-ups resulted in a reclassification from the in- come statement to the deferral accounts. This change in accounting policy resulted in the following effects on the balance sheet: an increase of CHF 121 million in Note 2 Accounting policies (continued) Investments in subsidiaries and other participations, an in- crease of CHF 15 million in Other assets and an increase of CHF 176 million in Other liabilities. The impact to the income statement for 2011 was CHF 41 million additional expenses presented as Impairment of investments in subsidiaries and other participations. Performance based equity awards In 2011, UBS changed the accounting policy for the recogni- tion of compensation expense for performance-based awards which contain substantive future service / vesting conditions. Compensation expense for these awards is no longer recog- nized over the future service period, but is recognized in the performance year, which is generally the financial year prior to grant date. The change in accounting policy resulted in the following effects on the balance sheet and income statement for 31 December 2011: an increase of CHF 101 million in Other Liabilities and a corresponding increase of Personnel Expenses. Change in the presentation of the Balance sheet – Trading portfolio liabilities and comparison period From 2011 onwards, UBS has changed the presentation of Trad- ing portfolio liabilities to improve transparency. Trading portfolio liabilities are presented in a separate balance sheet line by trans- ferring the amounts out of Due to Banks. The presentation of comparative figures was adjusted accordingly. This change in pre- sentation impacted neither the income statement nor total assets and liabilities. Change in the presentation of the Income statement From 2011 onwards, UBS has split the income statement line Depreciation and write-offs on investments in associated compa- nies and fixed asset into two separate income statement lines Im- pairment of investments in subsidiaries and other participations and Depreciation of fixed assets to improve transparency. The pre- sentation of comparative figures was adjusted accordingly. This change in presentation impacted neither the income statement nor total assets and liabilities. n o i t a m r o f n i l a i c n a n i F 419 Financial information UBS AG (Parent Bank) Additional income statement information Note 3 Net trading income CHF million Investment Bank equities and investment banking Investment Bank fixed income, currencies and commodities Other business divisions and Corporate Center Total Note 4 Extraordinary income and expenses CHF million Gains from sale of subsidiaries and other participations Reversal of impairments and provisions of subsidiaries and other participations 1 Prior period related income 2 Other extraordinary income Total extraordinary income Losses on the disposal of subsidiaries and other participations Prior period related expenses 3 Total extraordinary expenses For the year ended % change from 31.12.11 31.12.10 31.12.10 (53) 2,312 1,286 3,545 1,890 2,326 2,285 6,501 (1) (44) (45) For the year ended % change from 31.12.11 31.12.10 31.12.10 192 1,352 280 64 1,888 (10) (639) (649) 601 2,337 968 51 3,957 (18) (160) (178) (68) (42) (71) 25 (52) (44) 299 265 1 2011 includes prior period related adjustments. 2 In 2011 mainly related to equity compensation plans, hedge accounting and financial liabilities designated at fair value. 3 In 2011 mainly related to valuation cor- rections on issued structured products, investments in subsidiaries and other participations, hedge accounting and other valuation adjustments, as well as a release of amounts recognized in other liabilities. 420 Additional balance sheet information Note 5 Other assets and other liabilities CHF million Other assets Deferred pension expenses Settlement and clearing accounts VAT and other tax receivables Other receivables Total other assets Other liabilities Deferral position for hedging instruments Settlement and clearing accounts VAT and other tax payables Other payables Total other liabilities 31.12.11 31.12.10 2,980 376 99 3,096 6,552 4,400 600 360 1,762 7,122 2,839 499 203 2,832 6,373 1,443 581 444 2,250 4,717 Note 6 Assets pledged or assigned as security for own obligations and assets subject to reservation of title CHF million Money market paper 1 Mortgage loans 2 Securities 1 Other Total 31.12.11 31.12.10 Change in % Book value Effective liability Book value Effective liability Book value Effective liability 10,034 27,841 54,869 4,897 97,640 788 16,966 21,027 0 38,781 31,575 27,119 60,989 5,790 125,473 7,876 15,706 26,308 0 49,890 (68) 3 (10) (15) (22) (90) 8 (20) (22) 1 Includes positions pledged to central banks for credit facilities which are committed but undrawn. 2 Includes mortgage loans transferred for security purposes in preparation of existing and upcoming covered bond issuances. Financial assets are mainly pledged in securities borrowing and lending transactions, in repurchase and reverse repurchase trans- actions, under collateralized credit lines with central banks, against loans from mortgage institutions, in connection with de- rivative transactions, as security deposits for stock exchanges and clearinghouse memberships or transferred for security purposes in connection with the issuance of covered bonds. Note 7 Due to UBS pension plans CHF million Obligations due to UBS pension plans For the year ended % change from 31.12.11 650 31.12.10 682 31.12.10 (5) n o i t a m r o f n i l a i c n a n i F 421 Financial information UBS AG (Parent Bank) Note 8 Allowances and provisions CHF million Default risks Litigation risks Operational risks Retirement benefit plans Restructuring provisions Deferred taxes Other provisions 1 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 31.12.10 Provisions released to income New provisions charged to income Balance at 31.12.11 (212) (144) (14) (43) (49) (59) (522) 18 5 2 3 (9) 0 4 23 (211) (34) (9) 0 (40) (153) (447) 243 122 17 48 210 2 158 801 964 151 25 90 80 4 982 2,296 872 1,424 802 101 22 98 191 6 931 2,150 738 1,412 1 Includes provisions of CHF 258 million as of 31 December 2011 (31 December 2010: CHF 230 million) related to parental support provided by UBS AG to subsidiaries in the form of indemnities, letters of support, letters of undertaking and similar arrangements. Also includes reinstatement cost provisions for leasehold improvements of CHF 70 million as of 31 December 2011 (31 December 2010: CHF 83 million), provisions for onerous lease contracts and for employee benefits (service anniversaries and sabbatical leave). Note 9 Statement of shareholders’ equity CHF million As of 31.12.09 and 1.1.10 Capital increase Capital increase related to Mandatory Convert- ible Notes (MCNs) Profit / (loss) allocation Prior year dividend Profit / (loss) for the period Changes in reserves for own shares As of 31.12.10 and 1.1.11 Capital increase Profit / (loss) allocation Prior year dividend Profit / (loss) for the period Changes in reserves for own shares1 As of 31.12.11 Share capital General statutory reserves 356 27 383 383 30,377 1 (2,999) 27,379 14 4,525 432 32,350 Reserves for own shares 835 Other reserves 2,042 Profit / (loss) for the year (5,041) Total shareholders’ equity (before distribution of profit) 28,569 (402) 432 (2,042) 402 402 5,041 6,123 6,123 1,598 (6,123) 634 1,066 (1,066) 934 5,440 5,440 1 27 0 0 6,123 0 34,719 14 0 0 5,440 0 40,174 1 The reserve for own shares of CHF 432 million at 31 December 2010 consisting of capital contribution reserves was transferred to general statutory reserves following the issue of own shares to settle employee share awards. Purchases of new shares during 2011 required the transfer of CHF 1,066 million from other reserves to reserves for own shares. 422 Note 10 Share capital and significant shareholders As of 31.12.11 Issued and paid up of which: shares outstanding of which: treasury shares held by UBS AG Par value Dividend bearing No. of shares Capital in CHF No. of shares Capital in CHF 3,832,121,899 383,212,190 3,747,166,348 374,716,635 3,747,166,348 374,716,635 84,751,096 8,475,110 of which: treasury shares held by subsidiaries of UBS AG 204,455 20,446 204,455 20,446 Conditional share capital As of 31.12.10 Issued and paid up of which: shares outstanding of which: treasury shares held by UBS AG of which: treasury shares held by subsidiaries of UBS AG Conditional share capital Conditional share capital On 31 December 2011, additional 148,639,326 shares could have been issued to fund UBS‘s employee share option programs. Further conditional capital of up to 100,000,000 shares was avail- able in connection with an arrangement with the Swiss National Bank (SNB). The SNB provided a loan to a fund owned and con- trolled by the SNB (the SNB StabFund), to which UBS transferred certain illiquid securities and other positions. As part of this ar- rangement, UBS granted warrants on shares to the SNB and these warrants become exercisable if the SNB incurs a loss on its loan to the SNB StabFund. On 14 April 2010 the annual general meeting of UBS AG shareholders approved the creation of conditional capital to a maximum amount of 380,000,000 shares for conver- sion rights / warrants granted in connection with the issuance of bonds or similar financial instruments. Significant shareholders According to disclosure notifications filed with UBS AG and the SIX, on 30 September 2011, Norges Bank (the Central Bank of Norway), Oslo, disclosed under the Swiss Stock Exchange Act, a holding of 3.04% of the total share capital of UBS AG. On 16 April 2011, the Capital Group Companies, Inc., Los Angeles, dis- 628,639,326 62,863,933 3,830,840,513 383,084,051 3,791,948,482 379,194,848 3,791,948,482 379,194,848 38,487,074 404,957 3,848,707 40,496 629,920,712 62,992,071 404,957 40,496 closed under the Swiss Stock Exchange Act, that their holding of 4.90% of the total share capital of UBS AG, disclosed on 8 June 2010, fell below the threshold of 3%. On 12 March 2010, the Government of Singapore as beneficial owner, disclosed under the Swiss Stock Exchange Act, a holding by the Government of Singapore Investment Corp. of 6.45% of the total share capital of UBS AG. On 17 December 2009, BlackRock Inc., New York, dis- closed under the Swiss Stock Exchange Act a holding of 3.45% of the total share capital of UBS AG. In accordance with the Swiss Stock Exchange Act, the percentages indicated above were calcu- lated in relation to the share capital reflected in the Articles of Association of UBS AG (Articles of Association) at the time of the respective disclosure notification. Information on disclosures under the Swiss Stock Exchange Act can be found on the follow- ing website of the SIX: http://www.six-exchange-regulation.com/ obligations/disclosure/major_shareholders_en.html. According to our share register, the shareholders (acting in their own name or in their capacity as nominees for other inves- tors or beneficial owners) listed in the “Significant shareholders” table below, were registered with 3% or more of the total share capital on 31 December 2011 and 2010. ➔ Refer to the “Corporate governance” section of this report for more information on significant shareholders’ and shareholders participation rights Shareholders registered in the UBS shares register with 3% or more of shares issued 31.12.11 Total nominal Quantity value CHF million Chase Nominees Ltd, London DTC (Cede & Co.), New York 1 Government of Singapore Investment Corp., Singapore Nortrust Nominees Ltd, London 419,533,402 270,808,806 245,481,682 160,917,513 42 27 25 16 1 DTC (Cede & Co.), New York, “The Depository Trust Company”, is a US securities clearing organization. Share % 10.95 7.07 6.41 4.20 Quantity 409,822,353 280,355,684 245,481,682 145,038,407 31.12.10 Total nominal value CHF million 41 28 25 15 Share % 10.70 7.32 6.41 3.79 423 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) Note 11 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. 424 Off-balance-sheet and other information Note 12 Commitments and contingent liabilities CHF million Contingent liabilities Irrevocable commitments Irrevocable securities delivery obligations related to forward starting repos and securities lending transactions Liabilities for calls on shares and other equities Documentary credits 31.12.11 131,510 90,102 23,279 126 6,151 31.12.10 102,820 106,304 27,215 168 4,278 % change from 31.12.10 28 (15) (14) (25) 44 The table above includes indemnities and guarantees issued by UBS AG for the benefit of subsidiaries and creditors of subsidiaries. In instances where the indemnity amount issued by the Parent Bank is not defined, the indemnity relates to the solvency or minimum capitalization of a subsidiary, and therefore no amount is included in the table above. irrevocable commitments include cash payment obligations from forward starting reverse repurchase agreements and securities borrowing transactions. Irrevocable securities delivery obligations related to forward-starting repos and securities lending transac- tions are presented on a separate line. UBS AG is jointly and severally liable for the value added tax Irrevocable commitments and securities delivery obligations: (VAT) liability of Swiss subsidiaries that belong to its VAT group. Note 13 Derivative instruments 1 CHF million Interest rate contracts Credit derivative contracts Foreign exchange contracts Precious metal contracts Equity / Index contracts Commodities contracts, excluding precious metal contracts Total derivative instruments Replacement value netting Replacement values after netting 31.12.11 NRV 3 252,725 62,704 106,117 3,924 18,105 1,012 444,587 385,593 58,994 Notional amount CHF billion 36,209 2,737 6,323 99 416 110 45,894 PRV 2 264,146 67,364 97,158 4,193 16,538 775 450,173 385,593 64,580 31.12.10 NRV 3 166,919 50,578 122,843 3,755 19,455 927 364,477 303,754 60,723 Notional amount CHF billion 32,963 2,345 6,561 71 483 41 42,463 PRV 2 176,918 57,812 113,514 3,784 16,281 894 369,203 303,754 65,449 1 Bifurcated embedded derivatives are presented in the same balance sheet line as the host contract and are excluded from this table 2 PRV: Positive replacement value. 3 NRV: Negative replacement value. Note 14 Fiduciary transactions CHF million Deposits: with third-party banks with subsidiaries Total 31.12.11 31.12.10 % change from 31.12.10 9,375 2,346 11,721 11,529 1,740 13,269 (19) 35 (12) 425 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) Compensation of the members of the Board of Directors and the Group Executive Board Total compensation for GEB members CHF, except where indicated a Variable cash compensation under CBP Name, function Sergio P. Ermotti, Group CEO 1 Oswald J. Grübel, former Group CEO 2 Oswald J. Grübel, former Group CEO Robert J. McCann, CEO Wealth Management Americas (highest-paid) Carsten Kengeter, CEO Investment Bank (highest-paid) Aggregate of all GEB members who were in office on 31 December 2011 3 Aggregate of all GEB members who were in office on 31 December 2010 3 Aggregate of all GEB members who stepped down during 2011 4 Aggregate of all GEB members who stepped down during 2010 4 2011 2011 2010 2011 2010 2011 2010 2011 2010 For the year Base salary Immediate cash b 553,200 Deferred cash 5, b 1,290,800 Annual bonus under PEP c 922,000 Annual bonus under SEEOP d 1,844,000 0 0 0 0 0 0 0 0 Benefits in kind e 195,450 35,971 25,600 Contributions to retirement benefit plans f 150,816 0 0 Total 6,350,711 2,227,638 3,025,600 1,394,445 2,191,667 3,000,000 1,321,538 1,869,233 1,246,155 1,557,694 3,115,388 67,053 6,264 9,183,325 874,626 1,002,496 2,339,158 1,670,827 3,341,654 92,547 0 9,321,308 15,962,737 11,929,365 8,874,910 10,402,137 20,804,274 1,165,601 995,290 70,134,314 14,705,894 15,588,145 14,451,756 15,019,951 30,039,901 381,851 843,402 91,030,900 4,155,602 509,201 1,166,759 755,950 1,380,000 920,000 0 0 962,768 171,954 80,499 7,046,783 0 78,817 118,334 3,253,101 1 Sergio P. Ermotti was appointed on 1 April 2011 as GEB member and regional CEO of Europe, the Middle East and Africa. He was appointed on 24 September 2011 the new Group CEO ad interim and confirmed on 15 November 2011. 2 Oswald J. Grübel stepped down on 24 September 2011 as Group CEO. 3 Number and distribution of GEB members: 12 GEB members were in office on 31 December 2011, 13 GEB members were in office on 31 December 2010. 4 Number and distribution of former GEB members: 2011: includes five months in office as a GEB member for John Cryan, nine months for Oswald J. Grübel and 11 months for Maureen Miskovic. 2010: includes three months in office as a GEB member for Francesco Morra. 5 In 2011, for Sergio P. Ermotti, due to applicable UK FSA regulations, deferred cash includes blocked shares. In 2010, for John Cryan, Carsten Kengeter and Alexander Wilmot-Sitwell, due to applicable UK FSA regulations, deferred cash includes blocked shares. Explanation of the tables outlining compensation details for GEB and BoD members a. Local currencies are converted into CHF using the exchange rates as detailed in Note 38 “Currency translation rates” to the consolidated financial state- ments. b. Of the cash award, 60% is paid out immediately (representing 24% of a GEB member’s total annual bonus). The balance is paid out in equal installments of 20%, each over the subsequent two years, and is subject to forfeiture. c. Value of each performance share at grant: CHF 13.26 for PEP awards granted in 2012 relating to the performance year 2011; CHF 18.70 for PEP awards granted in 2011 relating to the performance year 2010. These values are based on valuations for accounting purposes which take into account the per- formance conditions and the range of possible outcomes for these conditions. d. SEEOP awards vest in equal installments over five years and are subject to forfeiture. The grant date accounting value per share granted under SEEOP is: CHF 12.76 or USD 14.14 (actual shares) and CHF 12.36 or USD 13.70 (notional shares) for SEEOP awards granted in 2012 relating to the performance year 2011; CHF 18.43 or USD 19.94 (actual shares) and CHF 18.30 or USD 19.80 (notional shares) for SEEOP awards granted in 2011 relating to the performance year 2010. e. Benefits in kind are all valued at market price, for example, health and welfare benefits and general expense allowances. f. Swiss executives participate in the same pension plan as all other employees. Under this plan, UBS makes contributions to the plan, which covers compen- sation of up to CHF 835,200. 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 attrib- uted to the employer’s portion of the legal BVG requirement. The employee contribution is included in the base salary and annual incentive award com- ponents. In both the US and the UK, senior management participates in the same pension plans as all other employees. In the US, there are separate pension plans for Wealth Management Americas compared with the other business divisions. There are generally two different types of pension plans: grandfathered plans and principal plans. The grandfathered plans, which are no longer open to new hires, operate (depending on the abovementioned distinction by business division) either on a cash balance basis or a career average salary basis. Participants accrue a pension based on their annual com- pensation limited to USD 250,000 (or USD 150,000 for Wealth Management Americas employees). The principal plans for new hires are defined contribu- tion plans. In the defined contribution plans, UBS makes contributions to the plan based on compensation and limited to USD 245,000 (USD 250,000 as from 1 January 2012). US management may also participate in a 401(k) defined contribution plan (open to all employees), which provides a limited company matching contribution for employee contributions. As from 2 January 2012 the match is not available anymore for Wealth Management Americas employees with compensation in excess of USD 250,000. In the UK, management participates in either the principal pension plan, which oper- ates 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 upon retirement based on career average base salary (individual caps introduced as of 1 July 2010). 426 Share and option ownership / entitlements of GEB members on 31 December 2010 / 2011 1 Number of vested shares Total number of shares Potentially conferred voting rights in % Name, function For the year Sergio P. Ermotti, Group Chief Executive Offcier Oswald J. Grübel, former Group Chief Executive Officer 5 John Cryan, former Group Chief Financial Officer 5 Markus U. Diethelm, Group General Counsel 2011 2010 2011 2010 2011 2010 2011 2010 John A. Fraser, Chairman and CEO Global Asset Management 2011 Lukas Gähwiler, CEO UBS Switzerland and co-CEO Wealth Management & Swiss Bank Carsten Kengeter, Chairman and CEO Investment Bank Ulrich Körner, Group Chief Operating Officer and CEO Corporate Center Philip J. Lofts, Group Chief Risk Officer Robert J. McCann, CEO Wealth Management Americas Maureen Miskovic, former Group Chief Risk Officer 5 Tom Naratil, Group Chief Financial Officer Alexander Wilmot-Sitwell, co-Chairman and co-CEO Group Asia Pacific Robert Wolf, former Chairman and CEO, UBS Group Americas / President Investment Bank Chi-Won Yoon, co-Chairman and co-CEO Group Asia Pacific Jürg Zeltner, CEO UBS Wealth Management and co-CEO Wealth Management & Swiss Bank 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Number of unvested shares / at risk 2 0 – – 0 – 221,879 358,042 178,619 460,707 326,702 252,293 110,000 971,575 916,201 389,090 177,592 377,614 200,009 330,047 138,598 – – 0 – – 0 – 185,975 91,506 75,700 280,414 316,541 37,517 850 556,016 363,047 95,597 95,597 150,772 144,603 0 540,866 – – 0 – – 0 – 407,854 449,548 254,319 741,121 643,243 289,810 110,850 1,527,591 1,279,248 484,687 273,189 528,386 344,612 330,047 679,464 – – 221,238 193,836 415,074 – 495,553 274,739 – 242,805 306,515 184,858 306,487 113,609 – 220,955 213,613 – 635,382 350,311 318,332 11,756 9,405 – 716,508 488,352 – 878,187 656,826 503,190 318,243 123,014 Number of options 3 0 Potentially conferred voting rights in % 4 0.000 – – 4,000,000 – 382,673 0 0 1,088,795 1,088,795 0 0 905,000 905,000 0 0 577,723 577,723 0 0 – – 1,046,122 – 353,807 353,807 – 948,473 623,253 623,253 205,470 205,470 – – 0.181 – 0.017 0.000 0.000 0.050 0.049 0.000 0.000 0.041 0.041 0.000 0.000 0.026 0.026 0.000 0.000 – – 0.048 – 0.016 0.016 – 0.043 0.029 0.028 0.009 0.009 0.000 – – 0.000 – 0.018 0.021 0.012 0.034 0.029 0.013 0.005 0.070 0.058 0.022 0.012 0.024 0.016 0.015 0.031 – – 0.019 – 0.033 0.022 – 0.040 0.030 0.023 0.015 0.006 1 This table includes all vested and unvested shares and options of GEB members, including related parties. 2 Includes shares granted under variable compensation plans with forfeiture provisions. The actual number of shares vesting in the future will be calculated under the terms of the plans. Refer to “Deferred variable compensation plans” in this section for more information on the plans. 3 Refer to “Note 30 Equity participa- tion and other compensation plans” to the consolidated financial statements for more information. 4 No conversion rights are outstanding. 5 GEB members who stepped down during 2011. n o i t a m r o f n i l a i c n a n i F 427 Financial information UBS AG (Parent Bank) Compensation details and additional information for non-independent BoD members CHF, except where indicated a Name, function 1 Kaspar Villiger, Chairman For the year Base salary 2011 2010 850,000 850,000 Annual bonus (cash) 0 0 Annual share award 500,000 2 500,000 2 Benefits in kind e 144,568 141,308 Contributions to retirement benefit plans f 0 0 Total 1,494,568 1,491,308 1 Kaspar Villiger was the only non-independent member in office on 31 December 2011 and 31 December 2010, respectively. 2 These shares are blocked for four years. Remuneration details and additional information for independent BoD members CHF, except where indicated a e e t t i m m o C t i d u A M M M M M M C C & s e c r u o s e R n a m u H 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 y t i l i b i s n o p s e R e e t t i m m o C e t a r o p r o C e e t t i m m o C k s i R For the period AGM to AGM Base fee Committee retainer(s) Benefits in kind M M M M M M M C M M C M M M M 2011 / 2012 325,000 2010 / 2011 325,000 C 2011 / 2012 325,000 C 2010 / 2011 325,000 2011 / 2012 – M 2010 / 2011 325,000 M 2011 / 2012 325,000 M 2010 / 2011 325,000 M M C M 2011 / 2012 325,000 2010 / 2011 325,000 2011 / 2012 325,000 2010 / 2011 325,000 M 2011 / 2012 325,000 M 2010 / 2011 325,000 2011 / 2012 325,000 2010 / 2011 325,000 M 2011 / 2012 325,000 M 2010 / 2011 325,000 2011 / 2012 325,000 2010 / 2011 325,000 M M 2011 / 2012 325,000 2010 / 2011 – 300,000 300,000 500,000 400,000 – 450,000 400,000 400,000 200,000 200,000 550,000 250,000 250,000 200,000 200,000 150,000 300,000 300,000 300,000 300,000 250,000 – Name, function 1 Michel Demaré, Vice Chairman David Sidwell, Senior Independent Director Sally Bott, former member Rainer-Marc Frey, member Bruno Gehrig, member Ann F. Godbehere, member Axel P. Lehmann, member Wolfgang Mayrhuber, member Helmut Panke, member William G. Parrett, member Joseph Yam, member Total 2011 Total 2010 Share percen- tage 2 50 100 50 50 – 50 100 100 50 50 50 50 100 100 50 50 50 50 50 50 50 – Number of shares 3, 4 39,845 52,631 48,952 30,893 – 24,556 62,635 43,583 23,907 16,634 39,845 18,219 49,632 31,519 23,907 15,050 28,460 19,803 28,460 19,803 26,183 – Total 875,000 Additional payments 250,000 5 250,000 5 875,000 250,000 5 1,075,000 250,000 5 975,000 – 775,000 725,000 725,000 525,000 525,000 875,000 575,000 575,000 525,000 525,000 475,000 625,000 625,000 625,000 625,000 575,000 – 7,000,000 6,700,000 Legend: C = Chairperson of the respective Committee; M = Member of the respective Committee 1 There were 10 independent BoD members in office on 31 December 2011. Joseph Yam was appointed at the AGM on 28 April 2011 and Sally Bott stepped down on 11 February 2011. There were 10 independent BoD members in office on 31 December 2010. Wolfgang Mayrhuber was appointed at the AGM on 14 April 2010, and Sergio Marchionne and Peter Voser stepped down from the BoD at the AGM on 14 April 2010. 2 Fees are paid 50% in cash and 50% in blocked UBS shares. However, independent BoD members can elect to have 100% of their remuneration paid in blocked UBS shares. 3 For 2011, shares valued at CHF 12.92 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2012), included a price discount of 15%, for a new value of discount price CHF 10.98. These shares are blocked for four years. For 2010, shares valued at CHF 18.56 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2011), included a price discount of 15%, for a new value of discount price of CHF 15.78. These shares are blocked for four years. 4 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 / with- holding tax. 5 This payment is associated with the Vice Chairman or the Senior Independent Director function, respectively. 428 Total payments to BoD members CHF, except where indicated a Aggregate of all BoD members For the year 2011 2010 Total 8,494,568 8,191,310 Number of shares of BoD members on 31 December 2010 / 2011 1 Name, function Kaspar Villiger, Chairman Michel Demaré, Vice Chairman David Sidwell, Senior Independent Director Sally Bott, former member 2 Rainer-Marc Frey, member Bruno Gehrig, member Ann F. Godbehere, member Axel P. Lehmann, member Wolfgang Mayrhuber, member Helmut Panke, member William G. Parrett, member Joseph Yam, member For the year Number of shares held Voting rights in % 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 49,440 22,500 76,334 23,703 100,247 69,354 – 39,542 100,042 56,459 54,409 37,775 41,441 23,222 89,971 58,452 15,050 0 109,332 89,529 62,618 42,815 0 – 0.002 0.001 0.003 0.001 0.005 0.003 – 0.002 0.005 0.003 0.002 0.002 0.002 0.001 0.004 0.003 0.001 0.000 0.005 0.004 0.003 0.002 0.000 – 1 This table includes blocked and unblocked shares held by BoD members, including related parties. No options were granted in 2010 and 2011. 2 Sally Bott stepped down on 11 February 2011 as BoD member. n o i t a m r o f n i l a i c n a n i F 429 Financial information UBS AG (Parent Bank) Compensation paid to former BoD and GEB members1 CHF, except where indicated a Name, function Alberto Togni, former BoD member Aggregate of all former GEB members 2 Aggregate of all former BoD and GEB members For the year Compensation Benefits in kind 2011 2010 2011 2010 2011 2010 0 0 0 0 0 0 0 20,493 0 57,229 0 77,722 Total 0 20,493 0 57,229 0 77,722 1 Compensation or remuneration connected with the former member’s activity on the BoD or GEB that is not at market conditions. 2 Includes zero former GEB member in 2011 and one former GEB member in 2010. Total of all vested and unvested shares of GEB members 1, 2 Shares on 31 December 2011 2,863,887 1,988,680 408,037 290,631 Total Of which vested 2012 2013 Of which vesting 2014 88,269 2015 88,269 2011 2012 2013 2014 2016 0 2015 Shares on 31 December 2010 4,409,345 3 2,922,411 3 582,787 411,339 282,754 105,027 105,027 1 Includes related parties. 2 Excludes shares granted under variable compensation plans with forfeiture provisions. 3 Includes 22,500 vested shares of the Chairman. No individual GEB member holds 1% or more of all shares issued. Total of all blocked and unblocked shares of BoD members 1 Shares on 31 December 2011 Total Of which unblocked 698,884 72,775 Shares on 31 December 2010 440,851 2 46,010 2 1 Includes related parties. 2 Excludes 22,500 vested shares of the Chairman. No individual BoD member holds 1% or more of all shares issued. 2012 9,349 2011 4,266 Of which blocked until 2013 2014 2015 115,690 225,995 275,075 2012 9,349 2013 2014 127,970 253,256 430 Vested and unvested options of GEB members on 31 December 2010 / 2011 1 For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price Sergio P. Ermotti, Group Chief Executive Officer John A. Fraser, Chairman and CEO Global Asset Management (continued) 2011 2010 0 – Oswald J. Grübel, former Group Chief Executive Officer 4 2011 – 2010 4,000,000 4,000,000 2009 26/02/2009 25/02/2014 CHF 10.10 John Cryan, former Group Chief Financial Officer 4 2011 – 2010 1,088,795 76,380 2002 31/01/2005 31/01/2012 USD 21.24 127,884 2002 28/06/2005 28/06/2012 CHF 37.90 127,884 2003 31/01/2006 31/01/2013 USD 22.53 170,512 2004 01/03/2007 27/02/2014 USD 38.13 202,483 2005 01/03/2008 28/02/2015 USD 44.81 213,140 2006 01/03/2009 28/02/2016 CHF 72.57 170 512 2007 01/03/2010 28/02/2017 CHF 73.67 Lukas Gähwiler, CEO UBS Switzerland and co-CEO Wealth Management & Swiss Bank 2002 31/01/2003 31/01/2012 CHF 36.49 2002 31/01/2004 31/01/2012 CHF 36.49 2002 31/01/2005 31/01/2012 CHF 36.49 2011 2010 0 0 2010 382,673 21,362 20,731 20,725 5,454 5,294 5,292 23,626 23,620 23,612 5,526 5,524 5,524 17,072 17,068 17,063 14,210 14,210 14,207 5,330 5,328 5,326 17,762 17,762 17,760 53,285 2002 28/02/2003 28/02/2012 CHF 36.65 2002 28/02/2004 28/02/2012 CHF 36.65 2002 28/02/2005 28/02/2012 CHF 36.65 2003 01/03/2004 31/01/2013 CHF 27.81 2003 01/03/2005 31/01/2013 CHF 27.81 2003 01/03/2006 31/01/2013 CHF 27.81 2003 01/03/2004 28/02/2013 CHF 26.39 2003 01/03/2005 28/02/2013 CHF 26.39 2003 01/03/2006 28/02/2013 CHF 26.39 2004 01/03/2005 27/02/2014 CHF 44.32 2004 01/03/2006 27/02/2014 CHF 44.32 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2006 28/02/2015 CHF 47.58 2005 01/03/2007 28/02/2015 CHF 47.58 2005 01/03/2008 28/02/2015 CHF 47.58 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 2007 01/03/2008 28/02/2017 CHF 67.00 2007 01/03/2009 28/02/2017 CHF 67.00 2007 01/03/2010 28/02/2017 CHF 67.00 2008 01/03/2011 28/02/2018 CHF 32.45 Markus U. Diethelm, Group General Counsel 2011 2010 0 0 John A. Fraser, Chairman and CEO Global Asset Management 2011 1,088,795 76,380 2002 31/01/2005 31/01/2012 USD 21.24 Carsten Kengeter, Chairman and CEO Investment Bank 2011 2010 905,000 905,000 2009 01/03/2012 27/12/2019 CHF 40.00 905,000 905,000 2009 01/03/2012 27/12/2019 CHF 40.00 Ulrich Körner, Group Chief Operating Officer and CEO Corporate Center 2011 2010 0 0 Philip J. Lofts, Group Chief Risk Officer 2011 577,723 11,445 2002 31/01/2003 31/01/2012 CHF 36.49 11,104 11,098 1,240 5,464 1,199 9,985 9,980 9,974 1,833 1,830 1,830 35,524 35,524 35,521 117,090 117,227 85,256 74,599 2002 31/01/2004 31/01/2012 CHF 36.49 2002 31/01/2005 31/01/2012 CHF 36.49 2002 28/02/2003 28/02/2012 CHF 36.65 2002 28/02/2004 28/02/2012 CHF 36.65 2002 28/02/2005 28/02/2012 CHF 36.65 2003 01/03/2004 31/01/2013 CHF 27.81 2003 01/03/2005 31/01/2013 CHF 27.81 2003 01/03/2006 31/01/2013 CHF 27.81 2003 01/03/2004 28/02/2013 CHF 26.39 2003 01/03/2005 28/02/2013 CHF 26.39 2003 01/03/2006 28/02/2013 CHF 26.39 2004 01/03/2005 27/02/2014 CHF 44.32 2004 01/03/2006 27/02/2014 CHF 44.32 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2008 28/02/2015 CHF 52.32 2006 01/03/2009 28/02/2016 CHF 72.57 2007 01/03/2010 28/02/2017 CHF 73.67 2008 01/03/2011 28/02/2018 CHF 35.66 127,884 2002 28/06/2005 28/06/2012 CHF 37.90 2010 577,723 11,445 2002 31/01/2003 31/01/2012 CHF 36.49 127,884 2003 31/01/2006 31/01/2013 USD 22.53 170,512 2004 01/03/2007 27/02/2014 USD 38.13 202,483 2005 01/03/2008 28/02/2015 USD 44.81 213,140 2006 01/03/2009 28/02/2016 CHF 72.57 170,512 2007 01/03/2010 28/02/2017 CHF 73.67 11,104 11,098 1,240 5,464 1,199 2002 31/01/2004 31/01/2012 CHF 36.49 2002 31/01/2005 31/01/2012 CHF 36.49 2002 28/02/2003 28/02/2012 CHF 36.65 2002 28/02/2004 28/02/2012 CHF 36.65 2002 28/02/2005 28/02/2012 CHF 36.65 1 This table includes all options of GEB members, including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 30 Equity participation and other compensation plans” to the consolidated finan- cial statements for more information. 4 GEB members who stepped down during 2011. 431 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) Vested and unvested options of GEB members on 31 December 2010 / 2011 1 (continued) For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price Philip J. Lofts, Group Chief Risk Officer (continued) Alexander Wilmot-Sitwell, co-Chairman and co-CEO Group Asia Pacific (cont.) 9,985 9,980 9,974 1,833 1,830 1,830 35,524 35,524 35,521 2003 01/03/2004 31/01/2013 CHF 27.81 2003 01/03/2005 31/01/2013 CHF 27.81 2003 01/03/2006 31/01/2013 CHF 27.81 2003 01/03/2004 28/02/2013 CHF 26.39 2003 01/03/2005 28/02/2013 CHF 26.39 2003 01/03/2006 28/02/2013 CHF 26.39 2004 01/03/2005 27/02/2014 CHF 44.32 2004 01/03/2006 27/02/2014 CHF 44.32 2004 01/03/2007 27/02/2014 CHF 44.32 117,090 2005 01/03/2008 28/02/2015 CHF 52.32 117,227 2006 01/03/2009 28/02/2016 CHF 72.57 85,256 74,599 2007 01/03/2010 28/02/2017 CHF 73.67 2008 01/03/2011 28/02/2018 CHF 35.66 Robert J. McCann, CEO Wealth Management Americas 2011 2010 0 0 Maureen Miskovic, former Group Chief Risk Officer 4 2011 – 2010 – Tom Naratil, Group Chief Financial Officer 2011 1,046,122 35,524 35,524 35,521 2002 31/01/2003 31/01/2012 USD 21.24 2002 31/01/2004 31/01/2012 USD 21.24 2002 31/01/2005 31/01/2012 USD 21.24 4,262 2002 29/02/2004 28/02/2012 USD 21.70 63,942 2003 31/01/2006 31/01/2013 USD 22.53 4,262 2003 28/02/2005 28/02/2013 USD 19.53 145,962 2004 01/03/2007 27/02/2014 USD 38.13 166,010 2005 01/03/2008 28/02/2015 USD 44.81 142,198 2006 01/03/2009 28/02/2016 CHF 72.57 131,277 2007 01/03/2010 28/02.2017 CHF 73.67 181,640 2008 01/03/2011 28/02/2018 CHF 35.66 100,000 2009 01/03/2012 27/02/2019 CHF 11.35 35,524 35,521 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 106,570 2007 01/03/2010 28/02/2017 CHF 73.67 85,256 2008 01/03/2011 28/02/2018 CHF 35.66 Robert Wolf, former Chairman and CEO, UBS Group Americas / President Investment Bank 2011 2010 – 948,473 287,739 2003 31/01/2006 31/01/2013 USD 22.53 213,140 2004 01/03/2007 27/02/2014 USD 38.13 127,884 2005 01/03/2008 28/02/2015 USD 44.81 106,570 2006 01/03/2009 28/02/2016 CHF 72.57 106,570 2007 01/03/2010 28/02/2017 CHF 73.67 106,570 2008 01/03/2011 28/02/2018 CHF 35.66 Chi-Won Yoon, co-Chairman and co-CEO Group Asia Pacific 2011 623,253 11,577 11,229 11,227 2002 31/01/2002 31/01/2012 USD 21.24 2002 31/01/2004 31/01/2012 USD 21.24 2002 31/01/2005 31/01/2012 USD 21.24 2,252 6,446 2,184 8,648 8,642 8,635 4,262 3,374 3,371 3,371 6,200 4,262 6,198 6,195 10,659 10,657 10,654 21,316 21,314 21,311 8,881 8,880 8,880 2002 28/02/2002 28/02/2012 USD 21.70 2002 29/02/2004 28/02/2012 USD 21.70 2002 28/02/2005 28/02/2012 USD 21.70 2003 01/03/2004 31/01/2013 USD 20.49 2003 01/03/2005 31/01/2013 USD 20.49 2003 01/03/2006 31/01/2013 USD 20.49 2003 28/02/2005 28/02/2013 USD 19.53 2003 01/03/2004 28/02/2013 USD 19.53 2003 01/03/2005 28/02/2013 USD 19.53 2003 01/03/2006 28/02/2013 USD 19.53 2004 01/03/2005 27/02/2014 CHF 44.32 2004 27/02/2006 27/02/2014 CHF 44.32 2004 01/03/2006 27/02/2014 CHF 44.32 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2006 28/02/2015 CHF 47.58 2005 01/03/2007 28/02/2015 CHF 47.58 2005 01/03/2008 28/02/2015 CHF 47.58 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 2007 01/03/2008 28/02/2017 CHF 67.00 2007 01/03/2009 28/02/2017 CHF 67.00 2007 01/03/2010 28/02/2017 CHF 67.00 42,628 2008 01/03/2011 28/02/2018 CHF 32.45 350,000 2009 01/03/2012 27/02/2019 CHF 11.35 11,577 11,229 11,227 2002 31/01/2002 31/01/2012 USD 21.24 2002 31/01/2004 31/01/2012 USD 21.24 2002 31/01/2005 31/01/2012 USD 21.24 2,252 2002 28/02/2002 28/02/2012 USD 21.70 2010 – Alexander Wilmot-Sitwell, co-Chairman and co-CEO Group Asia Pacific 2011 353,807 53,282 2005 01/03/2008 28/02/2015 CHF 47.58 2,130 2005 04/03/2007 04/03/2015 CHF 47.89 35,524 35,524 35,521 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 106,570 2007 01/03/2010 28/02/2017 CHF 73.67 2010 353,807 85,256 53,282 2008 01/03/2011 28/02/2018 CHF 35.66 2010 623,253 2005 01/03/2008 28/02/2015 CHF 47.58 2,130 2005 04/03/2007 04/03/2015 CHF 47.89 35,524 2006 01/03/2007 28/02/2016 CHF 65.97 1 This table includes all options of GEB members, including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 30 Equity participation and other compensation plans” to the consolidated finan- cial statements for more information. 4 GEB members who stepped down during 2011. 432 Vested and unvested options of GEB members on 31 December 2010 / 2011 1 (continued) For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price For the year Total number of options 2 Number of options 3 Year of grant Vesting date Expiry date Strike price Chi-Won Yoon, co-Chairman and co-CEO Group Asia Pacific (continued) 6,446 2,184 8,648 8,642 8,635 4,262 3,374 3,371 3,371 6,200 4,262 6,198 6,195 10,659 10,657 10,654 21,316 21,314 21,311 8,881 8,880 8,880 2002 29/02/2004 28/02/2012 USD 21.70 2002 28/02/2005 28/02/2012 USD 21.70 2003 01/03/2004 31/01/2013 USD 20.49 2003 01/03/2005 31/01/2013 USD 20.49 2003 01/03/2006 31/01/2013 USD 20.49 2003 28/02/2005 28/02/2013 USD 19.53 2003 01/03/2004 28/02/2013 USD 19.53 2003 01/03/2005 28/02/2013 USD 19.53 2003 01/03/2006 28/02/2013 USD 19.53 2004 01/03/2005 27/02/2014 CHF 44.32 2004 27/02/2006 27/02/2014 CHF 44.32 2004 01/03/2006 27/02/2014 CHF 44.32 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2006 28/02/2015 CHF 47.58 2005 01/03/2007 28/02/2015 CHF 47.58 2005 01/03/2008 28/02/2015 CHF 47.58 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 2007 01/03/2008 28/02/2017 CHF 67.00 2007 01/03/2009 28/02/2017 CHF 67.00 2007 01/03/2010 28/02/2017 CHF 67.00 42,628 2008 01/03/2011 28/02/2018 CHF 32.45 350,000 2009 01/03/2012 27/02/2019 CHF 11.35 Jürg Zeltner, CEO UBS Wealth Management and co-CEO Wealth Management & Swiss Bank 2011 205,470 809 784 784 4,972 7,106 7,103 7,103 93 161 149 127 2002 31/01/2003 31/01/2012 CHF 36.49 2002 31/01/2004 31/01/2012 CHF 36.49 2002 31/01/2005 31/01/2012 CHF 36.49 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2006 28/02/2015 CHF 47.58 2005 01/03/2007 28/02/2015 CHF 47.58 2005 01/03/2008 28/02/2015 CHF 47.58 2005 04/03/2007 04/03/2015 CHF 47.89 2005 06/06/2007 06/06/2015 CHF 45.97 2005 09/09/2007 09/09/2015 CHF 50.47 2005 05/12/2007 05/12/2015 CHF 59.03 Jürg Zeltner, CEO UBS Wealth Management and co-CEO Wealth Management & Swiss Bank (continued) 2010 205,470 7,106 7,103 7,103 110 242 230 221 7,105 7,105 7,103 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 2006 03/03/2008 03/03/2016 CHF 65.91 2006 09/06/2008 09/06/2016 CHF 61.84 2006 08/09/2008 08/09/2016 CHF 65.76 2006 08/12/2008 08/12/2016 CHF 67.63 2007 01/03/2008 28/02/2017 CHF 67.00 2007 01/03/2009 28/02/2017 CHF 67.00 2007 01/03/2010 28/02/2017 CHF 67.00 223 2007 02/03/2009 02/03/2017 CHF 67.08 42,628 90,000 809 784 784 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 2008 01/03/2011 28/02/2018 CHF 35.66 2009 01/03/2012 27/02/2019 CHF 11.35 2002 31/01/2003 31/01/2012 CHF 36.49 2002 31/01/2004 31/01/2012 CHF 36.49 2002 31/01/2005 31/01/2012 CHF 36.49 2004 01/03/2007 27/02/2014 CHF 44.32 2005 01/03/2006 28/02/2015 CHF 47.58 2005 01/03/2007 28/02/2015 CHF 47.58 2005 01/03/2008 28/02/2015 CHF 47.58 2005 04/03/2007 04/03/2015 CHF 47.89 2005 06/06/2007 06/06/2015 CHF 45.97 2005 09/09/2007 09/09/2015 CHF 50.47 2005 05/12/2007 05/12/2015 CHF 59.03 2006 01/03/2007 28/02/2016 CHF 65.97 2006 01/03/2008 28/02/2016 CHF 65.97 2006 01/03/2009 28/02/2016 CHF 65.97 2006 03/03/2008 03/03/2016 CHF 65.91 2006 09/06/2008 09/06/2016 CHF 61.84 2006 08/09/2008 08/09/2016 CHF 65.76 2006 08/12/2008 08/12/2016 CHF 67.63 2007 01/03/2008 28/02/2017 CHF 67.00 2007 01/03/2009 28/02/2017 CHF 67.00 2007 01/03/2010 28/02/2017 CHF 67.00 223 2007 02/03/2009 02/03/2017 CHF 67.08 42,628 90,000 2008 01/03/2011 28/02/2018 CHF 35.66 2009 01/03/2012 27/02/2019 CHF 11.35 1 This table includes all options of GEB members, including related parties. 2 No conversion rights are outstanding. 3 Refer to “Note 30 Equity participation and other compensation plans” to the consolidated finan- cial statements for more information. 4 GEB members who stepped down during 2011. n o i t a m r o f n i l a i c n a n i F 433 Financial information UBS AG (Parent Bank) Loans granted to GEB members on 31 December 2010 / 2011 1 CHF, except where indicated a Name, function Jürg Zeltner, CEO UBS Wealth Management, co-CEO of Wealth Management & Swiss Bank 3 Jürg Zeltner, CEO UBS Wealth Management, co-CEO of Wealth Management & Swiss Bank 3 Aggregate of all GEB members For the year 2011 2010 2011 2010 Loans 2 5,387,500 5,739,862 17,539,601 4 20,696,569 1 No loans have been granted to related parties of the GEB members at conditions not customary in the market. 2 All loans granted are secured loans, except for CHF 45,435 in 2011. 3 GEB member with the high- est loan granted. 4 Includes a loan of CHF 3.3 million that will be forgiven in three equal installments over the next three years, subject to the GEB member’s continued full-time employment with UBS and his perfor- mance being satisfactory and commensurate with his responsibilities. Loans granted to BoD members on 31 December 2010 / 2011 1 CHF, except where indicated a Name, function Kaspar Villiger, Chairman Michel Demaré, Vice Chairman David Sidwell, Senior Independent Director Sally Bott, former member 3 Rainer-Marc Frey, member Bruno Gehrig, member 4 Ann F. Godbehere, member Axel P. Lehmann, member Wolfgang Mayrhuber, member Helmut Panke, member William G. Parrett, member Joseph Yam, member Aggregate of all BoD members For the year 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Loans 2 0 0 850,000 850,000 0 0 – 0 0 0 798,000 798,000 0 0 0 0 0 0 0 0 0 0 0 – 1,648,000 1,648,000 1 No loans have been granted to related parties of the BoD members at conditions not customary in the market. 2 All loans granted are secured loans. 3 Sally Bott stepped down on 11 February 2011 as BoD member. 4 Secured loan granted prior to his election to the BoD. 434 n o i t a m r o f n i l a i c n a n i F 435 Financial information UBS AG (Parent Bank) 436 n o i t a m r o f n i l a i c n a n i F 437 Additional disclosure required under SEC regulations A – Introduction The following pages contain additional disclosures about the UBS Group which are required under SEC regulations. UBS’s consoli- dated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and are denominated in Swiss francs (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 439 Financial information Additional disclosure required under SEC regulations B – Selected financial data The tables below provide information concerning the noon pur- chase rate for the Swiss franc, expressed in United States dollars, or USD, per one Swiss franc. The noon purchase rate is the rate in New York City for cable transfers in foreign currencies as cer- tified for customs purposes by the Federal Reserve Bank of New York. On 29 February 2012, the noon purchase rate was 1.1083 USD per 1 CHF. Year ended 31 December 2007 2008 2009 2010 2011 Month September 2011 October 2011 November 2011 December 2011 January 2012 February 2012 1 The average of the noon purchase rates on the last business day of each full month during the relevant period. Average rate 1 (USD per 1 CHF) At period end 0.8381 0.9298 0.9260 0.9670 1.1398 0.8827 0.9369 0.9654 1.0673 1.0668 High 0.9087 1.0142 1.0016 1.0673 1.3706 High 1.2719 1.1616 1.1353 1.0947 1.0939 1.1174 Low 0.7978 0.8171 0.8408 0.8610 1.0251 Low 1.1022 1.0837 1.0765 1.0493 1.0466 1.0842 440 Key figures CHF million, except where indicated Balance sheet data Total assets Equity attributable to UBS shareholders Average equity to average assets (%) Market capitalization Shares Registered ordinary shares Treasury shares Capital strength BIS tier 1 ratio, Basel 2.5 (%) 1 BIS tier 1 ratio, Basel II (%) 1 BIS total ratio, Basel 2.5 (%) 1 BIS total ratio, Basel II (%) 1 BIS risk-weighted assets, Basel 2.5 1 BIS risk-weighted assets, Basel II 1 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 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 As of or for the year ended 1,419,162 1,317,247 1,340,538 2,014,815 2,274,891 53,447 3.5 42,843 46,820 3.0 58,803 41,013 1.9 57,108 32,531 1.5 43,519 36,875 1.8 108,654 3,832,121,899 3,830,840,513 3,558,112,753 2,932,580,549 2,073,547,344 84,955,551 38,892,031 37,553,872 61,903,121 158,105,524 15.9 19.6 17.2 21.6 240,962 198,494 2,167 23,188 6,674 4,182 162 21,746 1,177 7,690 64,820 17.8 20.4 15.4 19.8 11.0 15.0 9.1 12.2 198,875 2,152 206,525 2,233 302,273 2,174 374,421 3,189 23,284 6,634 4,122 137 22,031 1,147 7,263 64,617 24,050 6,204 4,145 134 22,702 1,132 6,865 65,233 26,406 7,071 4,817 145 27,362 1,984 9,998 77,783 27,884 8,813 4,776 139 29,921 2,054 9,973 83,560 1 Capital management data as of 31 December 2011 is disclosed in accordance with the Basel 2.5 framework. Comparative data under the new framework is not available for the prior periods. The comparative information under the Basel II framework is therefore provided. Refer to “Capital management” in the “Risk, treasury and capital management” section of this report for more information. The calculation as of 31 December 2007 is based on the Basel I approach. n o i t a m r o f n i l a i c n a n i F 441 Financial information Additional disclosure required under SEC regulations Income statement data CHF million, except where indicated 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 / (benefit) Net profit from continuing operations Net profit from discontinued operations Net profit Net profit attributable to non-controlling 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 Cash dividends declared per share (CHF) 3,4 Cash dividends 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 31.12.11 17,969 (11,143) 6,826 (84) 6,742 15,236 4,343 1,467 27,788 22,439 5,350 923 4,426 0 4,427 268 4,159 80.5 1.10 1.08 0.10 9.1 8.5 8.5 0.3 31.12.10 18,872 (12,657) 6,215 (66) 6,149 17,160 7,471 1,214 31,994 24,539 7,455 (381) 7,836 2 7,838 304 7,534 76.5 1.99 1.96 N/A N/A N/A 16.7 16.6 0.5 For the year ended 31.12.09 31.12.08 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) 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) N/A N/A N/A (58.7) (60.6) (0.9) 31.12.07 109,112 (103,775) 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) N/A N/A N/A (10.5) (10.6) (0.2) 1 Operating expenses / operating income before credit loss expense. 2 For EPS calculation, refer to "Note 8 Earnings per share" in the consolidated Financial Statements. 3 Distributions paid in the form of dividends or capital contributions reserves are normally approved and paid in the year subsequent to the reporting period. 4 For the year 2011, an amount of CHF 0.10 per share will be paid out of capital contribution reserves on 10 May 2012, subject to approval by shareholders at the Annual General Meeting on 3 May 2012. The USD amount per share will be determined on 7 May 2012. For the 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. The calculation excludes expected deductions for distributions paid in form of dividends or capital contribution reserves. 442 Balance sheet data CHF million Assets Total assets Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets of which: pledged as collateral Positive replacement values Cash collateral receivables on derivative instruments Loans Financial investments available-for-sale Other assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Cash collateral payables on derivative instruments Financial liabilities designated at fair value Due to customers Debt issued Other liabilities Equity attributable to UBS shareholders Ratio of earnings to fixed charges 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 1,419,162 1,317,247 1,340,538 2,014,815 2,274,891 23,218 58,763 213,501 181,525 39,936 486,584 41,322 266,604 53,174 12,465 30,201 8,136 102,429 39,480 473,400 67,114 88,982 342,409 140,617 61,692 53,447 17,133 62,454 142,790 228,815 61,352 401,146 38,071 262,877 74,768 22,681 41,490 6,651 74,796 54,975 393,762 58,924 100,756 332,301 130,271 63,719 46,820 16,804 63,507 116,689 232,258 44,221 421,694 53,774 266,477 81,757 23,682 31,922 7,995 64,175 47,469 409,943 66,097 112,653 339,263 131,352 72,344 41,013 17,694 122,897 224,648 312,054 40,216 854,100 85,703 291,456 5,248 19,837 76,822 14,063 102,561 62,431 851,864 92,937 101,546 362,639 197,254 101,969 32,531 25,976 207,063 376,928 774,372 114,190 428,217 64,978 271,492 4,966 51,417 121,983 31,621 305,887 164,788 443,539 77,781 191,853 496,279 222,077 153,107 36,875 The following table sets forth UBS’s ratio of earnings to fi xed charges on an IFRS basis for the periods indicated. The ratios are cal- culated based on earnings from continuing operations. Ratios of earnings to combined fi xed charges and preferred stock dividend requirements are not presented as there were no preferred share dividends in any of the periods indicated. 31.12.11 1.43 31.12.10 1.53 31.12.09 0.82 31.12.08 0.53 31.12.07 0.96 For the year ended n o i t a m r o f n i l a i c n a n i F 443 Financial information Additional disclosure required under SEC regulations C – Information on the company Property, plant and equipment At 31 December 2011, UBS operated about 877 business and banking locations worldwide, of which about 42% were in Swit- zerland, 42% in the Americas, 11% in the rest of Europe, Middle East and Africa and 5% in Asia-Pacific. Of the business and bank- ing locations in Switzerland, 36% were owned directly by UBS, with the remainder, along with most of UBS’s offices outside Swit- zerland, being held under commercial leases. These premises are subject to continuous maintenance and upgrading and are con- sidered suitable and adequate for current and anticipated opera- tions. 444 D – Information required by industry guide 3 Selected statistical information The following tables set forth selected statistical information re- garding the Group’s banking operations extracted from the Finan- cial Statements. Unless otherwise indicated, average balances for the years ended 31 December 2011, 31 December 2010 and 31 December 2009 are calculated from monthly data. The distinc- tion between domestic and foreign is generally based on the booking location. For loans, this method is not significantly differ- ent from an analysis based on the domicile of the borrower. n o i t a m r o f n i l a i c n a n i F 445 Financial information Additional disclosure required under SEC regulations Average balances and interest rates The following table sets forth average interest-earning assets and average interest-bearing liabilities, along with the average yield, for the years ended 31.12.11 31.12.10 31.12.09 Average balance Interest income Average yield (%) Average balance Interest income Average yield (%) Average balance Interest income Average yield (%) 3,465 17,623 22 142 8,025 281,544 12,821 189,861 1,313 191,174 21 37,696 493 8,262 15 1,485 299 5,163 4 5,167 0 324 0 248 182,125 82,755 4,604 2,409 4 611 611 501 15,830 1,923 216 17,969 3,465 60,026 60,026 12,001 901,496 901,496 410,839 5,420 88,900 1,406,655 13 60 8 1,221 231 5,769 15 5,784 306 0 262 18 539 539 0 484 16,431 2,234 207 18,872 0.6 0.8 0.2 0.5 2.3 2.7 0.3 2.7 3,037 14,280 11,277 296,252 14,150 212,430 2,033 214,463 0.9 49,095 568 9,128 1,712 74,821 3.0 2.5 2.9 0.1 1.0 1.0 74,821 0 15,227 973,206 4.2 1.8 2.0 973,206 471,046 5,884 81,876 1,532,012 56 260 30 2,385 228 6,915 7 6,922 282 0 316 21 143 143 0 517 21,044 2,203 214 23,461 0.4 0.4 0.1 0.4 1.6 2.7 0.7 2.7 3,420 16,194 10,029 381,049 10,976 270,674 2,160 272,834 0.6 68,482 548 11,674 2.9 2.7 2.9 1.1 0.7 0.7 3.2 1.7 991 28,295 0 28,295 0 13,785 1,103,748 1.9 1,103,748 654,651 6,609 86,133 1,851,141 179,164 90,032 4,921 2,584 179,680 105,791 5,676 4,208 1.6 1.6 0.3 0.6 2.1 2.6 0.3 2.5 0.4 2.7 3.2 4.0 2.1 0.5 0.5 3.8 1.9 2.1 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 Cash collateral receivables on derivative instruments Domestic Foreign Financial assets designated at fair value Domestic Foreign Loans Domestic Foreign Financial investments available-for-sale Domestic Foreign taxable Foreign non-taxable Foreign total Other interest-earning assets Domestic Foreign Total interest-earning assets Net interest income on swaps Interest income on off-balance sheet securities Interest income and average interest-earning assets Non-interest-earning assets Positive replacement values Fixed assets Other Total average assets 446 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 Cash collateral payables on derivative instruments 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 1 Short-term debt Domestic Foreign Long-term debt Domestic Foreign Other interest-bearing liabilities Domestic Foreign Total interest-bearing liabilities Interest expense on off-balance sheet securities Interest expense and average interest-bearing liabilities 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 1 Due to customers in foreign offices consists mainly of time deposits. 31.12.11 31.12.10 31.12.09 Average balance Interest expense Average interest rate (%) Average balance Interest expense Average interest rate (%) Average balance Interest expense Average interest rate (%) 25,672 10,250 8,836 168,429 1,095 52,373 357 58,731 1,548 91,920 95,679 82,004 6,672 184,355 145,772 1,303 57,873 12,705 57,830 36,926 915,975 259 93 12 969 26 2,826 281 10 1,982 132 422 41 595 696 4 382 126 2,394 116 10,772 371 1.0 0.9 0.1 0.6 2.3 5.4 0.5 0.7 2.2 0.1 0.5 0.6 0.3 0.5 0.3 0.7 1.0 4.1 0.3 1.2 29,400 10,318 12,089 176,098 1,068 59,672 361 69,223 878 108,405 85,838 75,802 7,977 169,617 168,099 1,140 53,454 13,462 68,267 0 37,996 979,547 253 99 8 893 37 3,757 0 242 3 2,389 106 409 49 564 756 9 394 142 2,661 0 69 12,276 381 0.9 1.0 0.1 0.5 3.5 6.3 0.3 0.3 2.2 0.1 0.5 0.6 0.3 0.4 0.8 0.7 1.1 3.9 0.2 1.3 36,248 34,205 11,321 195,991 1,411 58,091 30 84,747 934 106,690 64,872 68,042 13,075 145,989 220,860 971 85,904 11,152 76,961 219 245 37 1,760 55 3,823 0 278 17 2,838 98 521 451 1,070 1,971 27 1,280 153 2,771 0 41,139 1,112,644 0 90 16,634 382 0.6 0.7 0.3 0.9 3.9 6.6 0.3 1.8 2.7 0.2 0.8 3.4 0.7 0.9 2.8 1.5 1.4 3.6 0.2 1.5 915,975 11,143 979,547 12,657 1,112,644 17,016 402,535 34,590 1,353,100 53,555 1,406,655 459,987 40,418 1,479,952 52,060 1,532,012 641,028 54,720 1,808,392 42,749 1,851,141 6,826 6,215 6,446 0.8 0.6 0.6 The percentage of total average interest-earning assets attrib- utable to foreign activities was 77% for 2011 (78% for 2010 and 81% for 2009). The percentage of total average interest- bearing liabilities attributable to foreign activities was 74% for 2011 (77% for 2010 and 81% for 2009). All assets and liabili- ties are translated into CHF at uniform month-end rates. Inter- est income and expense are translated at monthly average rates. Average rates earned and paid on assets and liabilities can change from period to period based on the changes in interest rates in general, but are also affected by changes in the currency mix in- cluded in the assets and liabilities. This is especially true for foreign assets and liabilities. Tax-exempt income is not recorded on a tax- equivalent basis. For all three years presented, tax-exempt income is considered to be insignificant and the impact from such income is therefore negligible. 447 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 Analysis of changes in interest income and expense The following tables allocate, by categories of interest-earning assets and interest-bearing liabilities, the changes in interest in- come and expense due to changes in volume and interest rates for the year ended 31 December 2011 compared with the year ended 31 December 2010, and for the year ended 31 Decem- ber 2010 compared with the year ended 31 December 2009. 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 pro- portionally. Refer to the appropriate section of Industry Guide 3 for a discussion of the treatment of impaired and non-perform- ing loans. 2011 compared with 2010 2010 compared with 2009 Increase / (decrease) due to changes in Increase / (decrease) due to changes in Average volume Average interest rate Net change Average volume Average interest rate Net change 2 13 (3) (59) (21) (609) (5) (614) 0 (68) 0 (25) 80 (211) 19 (104) 0 (104) 0 (103) 77 (1,171) (1,094) 7 69 10 323 89 3 (6) (3) 0 86 0 11 (397) 36 (33) 176 0 176 0 120 (325) 818 493 (6) (31) 4 (509) 67 (1,514) 0 (1,514) 0 (78) 0 (69) (17) (630) 15 233 0 233 0 55 63 (2,543) (2,480) (37) (169) (26) (655) (64) 368 8 376 0 102 0 15 (738) (994) (18) 163 0 163 0 (88) (883) (1,250) (2,133) 9 82 7 264 68 (606) (11) (617) 0 18 0 (14) (317) (175) (14) 72 0 72 0 17 (248) (353) (601) (311) 9 (903) (43) (200) (22) (1,164) 3 (1,146) 8 (1,138) 0 24 0 (54) (755) (1,624) (3) 396 0 396 0 (33) (820) (3,793) (4,613) 31 (7) (4,589) 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 Cash collateral receivables on derivative instruments Domestic Foreign Financial assets designated at fair value Domestic Foreign Loans Domestic Foreign Financial investments available-for-sale Domestic Foreign taxable Foreign non-taxable Foreign total Other interest-bearing assets Domestic Foreign Interest income Domestic Foreign Total interest income from interest-earning assets Net interest on swaps Interest income on off-balance sheet securities Total interest income 448 Analysis of changes in interest income and expense (continued) 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 Cash collateral payables on derivative instruments 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 Other interest-bearing liabilities Domestic Foreign Interest expense Domestic Foreign Total interest-bearing liabilities Interest expense on off-balance sheet securities Total interest expense 2011 compared with 2010 2010 compared with 2009 Increase / (decrease) due to changes in Increase / (decrease) due to changes in Average volume Average interest rate Net change Average volume Average interest rate Net change (34) (1) (3) (38) 1 (460) 0 (31) 2 (363) 10 31 (8) 33 (89) 1 31 (8) (407) 0 (2) (8) (1,360) (1,368) 40 (5) 7 114 (12) (471) 0 70 5 (44) 16 (18) 0 (2) 29 (6) (43) (8) 140 0 49 25 (161) (136) 6 (6) 4 76 (11) (931) 0 39 7 (407) 26 13 (8) 31 (60) (5) (12) (16) (267) 0 47 17 (1,521) (1,504) (10) (1,514) (41) (167) 2 (179) (13) 104 0 (47) (1) 46 42 62 (173) (69) (475) 5 (487) 32 (313) 0 (6) 75 21 (31) (688) (5) (170) 0 11 (13) (495) (34) (174) (229) (437) (740) (23) (399) (43) 203 0 (15) (85) (1,524) (1,609) (477) (2,272) (2,749) 34 (146) (29) (867) (18) (66) 0 (36) (14) (449) 8 (112) (402) (506) (1,215) (18) (886) (11) (110) 0 (21) (562) (3,796) (4,358) (1) (4,359) n o i t a m r o f n i l a i c n a n i F 449 Financial information Additional disclosure required under SEC regulations Deposits The following table analyzes average deposits and average rates on each deposit category listed below for the years ended 31 December 2011, 2010 and 2009. 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 66,540 million, CHF 63,953 million and CHF 54,957 million at 31 December 2011, 31 December 2010 and 31 December 2009, respectively. CHF million, except where indicated Banks Domestic offices Demand deposits Time deposits Total domestic offices Foreign offices Interest-bearing deposits 1 Total due to banks 2 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 31.12.11 31.12.10 31.12.09 Average deposits Average rate (%) Average deposits Average rate (%) Average deposits Average rate (%) 1,402 2,063 3,465 17,623 21,088 95,679 82,004 6,672 184,355 34,414 111,358 145,772 330,127 0.0 2.8 1.6 1.0 1.1 0.1 0.5 0.6 0.3 0.1 0.6 0.5 0.4 1,315 1,722 3,037 14,280 17,317 85,838 75,802 7,977 169,617 35,588 132,511 168,099 337,716 0.0 2.1 1.2 1.0 1.0 0.1 0.5 0.6 0.3 0.2 0.5 0.4 0.4 1,154 2,266 3,420 16,194 19,614 64,872 68,042 13,075 145,989 29,725 191,135 220,860 366,849 0.1 0.9 0.6 0.7 0.7 0.2 0.8 3.4 0.7 0.8 0.9 0.9 0.8 1 Mainly time deposits. 2 Due to banks is considered to represent short-term borrowings to the extent these liabilities exceed Due from banks. The remainder of Due to banks is considered to represent deposits for the purpose of this disclosure. At 31 December 2011, the maturity of time deposits was as follows: Domestic 6,479 1,066 437 285 103 Foreign 80,330 5,870 2,971 972 96 8,370 90,239 CHF million Within 3 months 3 to 6 months 6 to 12 months 1 to 5 years Over 5 years Total time deposits 450 Short-term borrowings The following table presents the period-end, average and maximum month-end outstanding amounts for short-term borrowings, along with the average rates and period-end rates at and for the years ended 31 December 2011, 2010 and 2009. Short-term debt CHF million, except where indicated 31.12.11 31.12.10 31.12.09 31.12.11 Period-end balance Average balance Maximum month-end balance Average interest rate during the period (%) Average interest rate at period-end (%) 71,377 59,175 71,377 0.7 0.7 56,039 54,594 64,941 0.7 0.7 51,579 86,875 125,812 1.5 0.9 6,966 14,834 20,080 1.0 1.0 Due to banks 1 31.12.10 24,332 22,401 37,886 0.9 1.0 31.12.09 15,086 50,838 70,985 0.7 0.6 Repurchase agreements 2 31.12.10 31.12.11 31.12.09 152,121 170,442 194,684 0.4 0.3 150,024 178,458 207,828 0.4 0.4 136,811 195,613 272,443 0.7 0.3 1 Presented net of Due from banks to reflect short-term borrowings. The difference between the gross Due to banks amount and the amount disclosed here is presented as deposits from banks on the preceding page. 2 Repurchase agreements are presented on a gross basis, and therefore, for the purpose of this disclosure, do not reflect the effect of netting permitted under IFRS. Contractual maturities of investments in debt instruments available-for-sale 1, 2 CHF million, except percentages 31 December 2011 Swiss national government and agencies US Treasury and agencies Foreign governments and official institutions Corporate debt securities Mortgage-backed securities Other debt instruments Total fair value 3 CHF million, except percentages 31 December 2010 Swiss national government and agencies US Treasury and agencies Foreign governments and official institutions Corporate debt securities 4 Mortgage-backed securities Other debt instruments Total fair value CHF million, except percentages 31 December 2009 Swiss national government and agencies US Treasury and agencies Foreign governments and official institutions Corporate debt securities 4 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 (%) 226 10,082 18,751 3,267 32,326 0.21 0.24 0.42 0.73 130 5,891 2,338 1,592 9,951 0.88 0.21 0.83 1.47 0.76 3.04 10.87 4.47 1,157 2 6 1 1,166 4.00 6.76 10.54 2.42 1 24 7 8,540 8,573 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 (%) 3,048 18,500 20,916 5,119 51 47,633 0.54 0.41 0.55 1.02 14.52 95 6,687 843 652 3 3 8,284 1.34 1.11 0.78 0.81 4.83 14.52 8,792 4,552 1 1 13,345 1.62 3.28 5.38 13.09 4.00 5.20 15.84 3.04 1 28 4 4,089 4,122 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 (%) 623 41,451 28,861 1,139 27 98 72,199 0.47 0.16 0.30 0.11 0.00 2.80 16 5,044 96 1,808 3 3 6,970 2.27 0.02 2.75 0.10 4.87 1.21 1.11 1.88 21.80 3.75 6 25 0 25 56 1 4.00 3.66 21.80 0.43 18 3 752 774 1 Debt instruments without fixed maturities are not disclosed in this table. 2 Average yields are calculated on an amortized cost basis. 3 Includes CHF 25,677 million of investments in debt instruments issued by US government and government agencies and CHF 8,854 million of investments in debt instruments issued by Japanese government and government agencies as of 31 December 2011. 4 Absolute Return Bonds (ARBs) had been purchased below par and therefore generated a yield of 15.8% in 2010 (21.8% in 2009). 451 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 Due from banks and loans (gross) The Group’s lending portfolio is widely diversified across indus- try sectors with no significant concentrations of credit risk. CHF 161.7 billion (55.6% of the total) consists of loans to thou- sands of private households, predominantly in Switzerland, and mostly secured by mortgages, financial collateral or other assets. Exposure to Banks and Financial institutions amounted to CHF 66.3 billion (22.8% of the total). Exposure to banks includes money market deposits with highly rated institutions. Excluding Banks and Financial institutions, the largest industry sector exposure as of December 2011 is CHF 14.3 billion (4.9% of the total) to Services. For further discussion of the loan port- folio, refer to the “Risk management and control” section of this report. The following table illustrates the diversification of the loan portfolio among industry sectors at 31 December 2011, 2010, 2009, 2008 and 2007. The industry categories presented are con- sistent with the classification of loans for reporting to the Swiss Financial Market Supervisory Authority (FINMA) and Swiss Nation- al Bank. Loans designated at fair value and loans held in the trad- ing portfolio are excluded from the tables below. CHF million Domestic Banks 1 Construction Financial institutions Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services Other 2 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 3 Total foreign Total gross 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 566 1,292 4,257 1,831 3,252 120,671 2,992 13,169 4,433 5,770 3,131 1,130 1,356 3,735 1,803 3,192 119,796 4,908 12,252 4,101 5,718 3,117 609 1,381 4,370 1,882 3,374 119,432 3,785 11,745 4,288 5,702 3,423 1,056 1,554 5,984 1,811 3,739 119,285 4,042 11,921 4,781 5,935 3,523 735 1,594 5,322 1,824 3,768 121,536 4,734 11,489 4,647 5,875 3,712 161,364 161,108 159,991 163,632 165,235 22,669 16,028 392 750 746 38,802 1,955 1,979 41,045 5,459 2,158 2,044 8,529 2,068 703 129,300 290,664 351 952 525 41,307 2,010 2,463 31,361 9,858 1,420 1,711 9,534 1,652 841 120,014 281,121 16,227 2,358 741 653 43,345 2,547 2,217 33,166 10,781 1,110 1,438 8,180 2,474 734 16,659 2,765 566 1,064 60,198 4,126 2,859 33,216 8,075 3,821 1,873 9,530 3,115 577 25,269 635 848 789 36,389 3,743 3,412 42,219 2,739 4,595 1,807 8,502 1,345 970 125,969 285,960 148,444 312,076 133,263 298,498 1 Includes Due from banks and Loans from Industrial Holdings of CHF 27 million at 31 December 2007. 2 Includes chemicals, food and beverages, transportation, storage, mining, electricity, gas and water supply. 3 Includes food and beverages, hotels and restaurants. 452 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 2011, 2010, 2009, 2008 and 2007. Mortgages 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 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 138,204 8,818 147,022 125,775 21,247 147,022 136,687 6,174 142,861 122,499 20,362 142,861 136,029 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 Due from banks and loan maturities (gross) CHF million Domestic Banks Mortgages Other loans Total domestic Foreign Banks Mortgages Other loans Total foreign Total gross Within 1 year 1­to 5 years Over 5 years Total 520 56,619 17,474 74,613 21,894 6,214 69,237 97,345 171,958 27 56,473 3,890 60,390 716 1,598 16,354 18,668 79,058 19 25,112 1,230 26,361 59 1,006 12,222 13,287 39,648 566 138,204 22,594 161,364 22,669 8,818 97,813 129,300 290,664 At 31 December 2011, the total amount of Due from banks and Loans due after one year granted at fixed and floating rates are as follows: CHF million Fixed-rate loans Adjustable or floating-rate loans Total 1 to 5 years Over 5 years 71,884 7,174 79,058 28,232 11,416 39,648 Total 100,116 18,590 118,706 n o i t a m r o f n i l a i c n a n i F 453 Financial information Additional disclosure required under SEC regulations 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 evi- dence that it will be made good by later payments or the liqui- dation of col lateral; 2) when insolvency proceedings have com- menced; or 3) when obligations have been restructured on concessionary terms. The table below provides an analysis of the Group’s non-per- forming loans. For further information, see “Credit risk” in the “Risk, treasury and capital management” section of this report. CHF million Non-performing loans: Domestic Foreign Total non-performing loans CHF million 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 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. Refer to the “Credit risk” section of this report for more information. Instead, specific loan allowances are established as necessary. Unrecog- nized interest related to restructured loans was not material to the results of operations in 2011, 2010, 2009, 2008 or 2007. In addition to the non-performing loans shown above, the Group has CHF 626 million, CHF 2,466 million, CHF 1,463 mil- lion, CHF 4,442 million and CHF 911 million in “other impaired loans” for the years ended 31 December 2011, 2010, 2009, 2008 and 2007, respectively. 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 1,199 329 1,529 1,164 563 1,727 1,462 3,940 5,402 1,431 3,272 4,703 1,349 132 1,481 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 10 9 29 6 11 35 35 19 13 89 41 30 16 7 32 6 39 6 40 2 Other impaired loans are loans where the Group’s credit offi- cers have expressed doubts as to the ability of the borrowers to repay the loans. For the years ended 31 December 2011, 2010, 2009, 2008 and 2007, they are loans not considered “non-per- forming” in accordance with Swiss regulatory guidelines. As of 31  December 2011, 31 December 2010, 31 December 2009, 31 December 2008 and 31 December 2007, specific allowances of CHF 308 million, CHF 536 million, CHF 410 million, CHF 941 million and CHF 124 million, respectively, had been established against these loans. 454 Cross-border outstandings Cross-border outstandings consist of balances with central banks and other financial institutions, loans, reverse repurchase agree- ments and cash collateral on securities borrowed with counter- parties domiciled outside Switzerland. Guarantees and commit- ments are provided separately in the table below. Effective 2011, UBS has revised its basis for the disclosure of cross-border outstandings. Cross-border outstandings presented below generally reflect our gross exposure. Previously, our disclo- sures were based on UBS’s internal risk view, which considered the risk-reducing effect of collateral and other credit enhancements. In previous years, cross-border outstandings also included exposures in relation to over-the-counter (OTC) derivatives and exchange- traded (ETD) derivatives, which were represented as a credit equiva- lent based on UBS’s internal risk measures, as well as exposures related to debt securities. UBS revised these disclosures in order to better align with the financial statement presentation. Prior periods have been restated to reflect the new basis for disclosure. The following tables list those countries for which cross-border outstandings exceeded 0.75% of total IFRS assets at 31 December 2011, 2010 and 2009. As of 31 December 2011, there were no outstandings that exceeded 0.75% of total IFRS assets in any coun- try currently facing debt restructuring or liquidity problems that the Group expects would materially impact the country’s ability to ser- vice its obligations. Aggregate country risk exposures are moni- tored and reported on an ongoing basis by the risk control organi- zation, based on an internal framework. The internal risk view is not directly comparable to the cross-border outstandings in the ta- ble below due to different approaches to netting, differing trade populations and differing approach to allocation of exposures to countries. For more information on the country framework within risk control, refer to the “Credit risk” section of this report. CHF million United States United Kingdom Japan France CHF million United States United Kingdom Japan France Canada Germany CHF million United States United Kingdom Germany France Private sector Public sector outstandings % of total assets 31.12.11 Total 107,132 37,945 13,566 12,830 10,000 6,116 3,020 72 31.12.10 232,084 57,740 20,385 18,122 16.4 4.1 1.4 1.3 Private sector Public sector Total outstandings % of total assets 88,297 36,044 3,467 8,245 2,049 5,883 11,879 3,635 9,299 71 0 195 31.12.09 158,326 60,529 17,049 12,223 11,332 10,506 12.0 4.6 1.3 0.9 0.9 0.8 Private sector Public sector Total outstandings % of total assets 100,098 37,363 5,542 4,170 16,978 1,931 5,120 226 158,370 55,917 14,660 14,230 11.8 4.2 1.1 1.1 Guarantees and Commitments1 46,285 13,487 7,090 8,034 Guarantees and Commitments2 40,606 4,010 94 2,140 1,336 2,463 Guarantees and Commitments2 38,140 5,088 4,045 2,659 Banks 114,952 13,679 3,799 5,220 Banks 58,151 20,850 4,284 3,907 9,283 4,427 Banks 41,295 16,622 3,997 9,834 1 Includes forward starting transactions (reverse repurchase agreements and securities borrowing agreements). 2 Excludes forward starting transactions. n o i t a m r o f n i l a i c n a n i F 455 Financial information Additional disclosure required under SEC regulations Summary of movements in allowances and provisions for credit losses The following table provides an analysis of movements in allow- ances and provisions for credit losses. UBS writes off loans against allowances only on final settle- ment of bankruptcy proceedings, the sale of the underlying assets and / or in the case of debt forgiveness. Under Swiss law, a credi- tor can continue to collect from a debtor who has emerged from bankruptcy, unless the debt has been forgiven through a formal agreement. CHF million Balance at beginning of year 31.12.11 1,287 31.12.10 2,820 31.12.09 3,070 31.12.08 1,164 31.12.07 1,332 Domestic Write-offs Construction Financial institutions Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services Other 1 Total gross domestic write-offs Foreign Write-offs Banks Chemicals Construction Financial institutions Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other 2 Total gross foreign write-offs Total usage of provisions Total write-offs / usage of provisions Recoveries Domestic Foreign Total recoveries (8) (17) 0 (31) (59) 0 (3) (37) (21) (6) (183) (8) 0 0 (39) 0 0 (72) (175) (7) 0 (1) 0 0 (303) (14) (501) 50 1 51 (8) (47) (1) (28) (66) 0 (2) (117) (49) (16) (332) (2) (846) 0 (267) (22) 0 (21) (1) (1) (1) (9) (3) 0 (1,173) 0 (1,505) 38 41 79 Total net write-offs / usage of provisions (450) (1,427) Increase / (decrease) in specific allowances and provisions recognized in the ­income­statement Increase / (decrease) in collective loan loss allowances recognized in the ­income statement Foreign currency transaction Other adjustments recognized in the income statement Balance at end of year 4 0 84 17 0 938 67 (2) (173) 0 1,287 (15) (2) (2) (21) (61) 0 (19) (41) (3) (12) (177) (8) (111) (10) (685) (138) (5) (40) (20) (196) (122) (413) (37) (80) (1,865) (5) (2,046) 44 8 52 (1,994) 1,806 26 (37) (51) 3 2,820 (6) (37) (3) (24) (112) 0 (10) (4) (7) (8) (210) (134) (1) 0 (501) (6) 0 (4) (2) (1) 0 0 (6) (1) (658) 0 (868) 43 1 44 (824) 3,007 (11) (43) (223) 3 3,070 (9) (9) (8) (14) (69) (1) (26) (62) (17) (54) (268) (1) 0 0 (15) (21) 0 (14) (2) 0 0 0 0 0 (53) 0 (321) 52 3 55 (266) 242 (4) (9) (131) 1,164 1 Includes chemicals, food and beverages, transportation, storage, mining, electricity, gas and water supply. 2 Includes food and beverages, hotels and restaurants. 3 In 2009, the other adjustment was due to the sale of UBS Pactual. In 2008, a loan was forgiven in exchange for the collateral. 4 Included allowances for cash collateral on securities borrowed. 456 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 sector and geographic location at 31 December 2011, 2010, 2009, 2008 and 2007. For a description of procedures with respect to allow- ances and provisions for credit losses, refer to the “Risk manage- ment and control” section of this report. CHF million Domestic Banks Construction Financial services Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services Other 1 Total domestic specific allowances Foreign Banks 2 Chemicals Construction Electricity, gas and water supply Financial services Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other 3 Total foreign specific allowances Collective loan loss allowances Provisions for loan commitments and guarantees Total allowances and provisions for credit losses 4 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 1 15 19 6 65 77 0 14 131 24 28 379 16 8 6 1 96 23 0 60 33 10 15 28 39 0 335 131 93 938 1 23 28 5 93 91 0 19 165 45 27 497 23 8 2 0 190 15 0 139 171 15 8 12 29 0 613 47 130 1,287 1 27 126 6 104 119 1 21 221 99 43 768 31 1,037 1 0 414 83 0 171 18 36 17 100 7 0 1,913 49 90 2,820 16 39 18 8 84 125 1 50 262 79 47 729 6 960 8 2 530 25 4 226 19 208 81 205 1 12 2,287 23 31 3,070 10 43 52 10 98 190 1 57 247 87 53 848 35 1 1 3 96 13 0 13 20 8 4 7 1 17 219 34 63 1,164 1 Includes chemicals, food and beverages, transportation, storage, mining, electricity, gas and water supply. 2 Counterparty allowances only. 3 Includes food and beverages, hotels and restaurants. 4 Includes allow- ances for cash collateral on securities borrowed. n o i t a m r o f n i l a i c n a n i F 457 Financial information Additional disclosure required under SEC regulations 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 services Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services Other 2 Total domestic Foreign Banks 1 Chemicals Construction Electricity, gas and water supply Financial services Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other 3 Total foreign Total gross 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 0.2 0.4 1.5 0.6 1.1 41.5 1.0 4.5 1.5 2.0 1.1 55.5 7.8 0.1 0.3 0.3 13.3 0.7 0.7 14.1 1.9 0.7 0.7 2.9 0.7 0.2 0.4 0.5 1.3 0.6 1.1 42.6 1.7 4.4 1.5 2.0 1.1 57.3 5.7 0.1 0.3 0.2 14.7 0.7 0.9 11.2 3.5 0.5 0.6 3.4 0.6 0.3 0.2 0.5 1.5 0.7 1.2 41.8 1.3 4.1 1.5 2.0 1.2 55.9 5.7 0.8 0.3 0.2 15.2 0.9 0.8 11.6 3.8 0.4 0.5 2.9 0.9 0.3 0.3 0.5 1.9 0.6 1.2 38.2 1.3 3.8 1.5 1.9 1.1 52.4 5.3 0.9 0.2 0.3 19.3 1.3 0.9 10.6 2.6 1.2 0.6 3.1 1.0 0.2 0.2 0.5 1.8 0.6 1.3 40.7 1.6 3.8 1.6 2.0 1.2 55.4 8.5 0.2 0.3 0.3 12.2 1.3 1.1 14.1 0.9 1.5 0.6 2.8 0.5 0.3 44.5 100.0 42.7 100.0 44.1 100.0 47.6 100.0 44.6 100.0 1 Includes Due from banks and Loans from industrial holdings of CHF 27 million at 31 December 2007. 2 Includes chemicals, food and beverages, transportation, storage, mining, electricity, gas and water supply. 3 Includes food and beverages, hotels and restaurants. 458 Loss history statistics CHF million, except where indicated Due from banks and loans (gross) Impaired loans (including due from banks) Non-performing loans (including due from banks) Allowances and provisions for credit losses 1, 2 of which: allowances for due from banks and loans 1 Net write-offs 3 of which: net write-offs for due from banks and loans Credit loss (expense) / recovery 4 of which: credit loss (expense) / recovery for due from banks and loans Ratios Impaired loans as a percentage of due from banks and loans (gross) Non-performing loans as a percentage of due from banks and loans (gross) Allowances as a percentage of due from banks and loans (gross) Net write-offs as a percentage of average due from banks and loans (gross) outstanding during the period 31.12.11 290,664 2,155 1,529 938 842 449 413 (84) (126) 0.7 0.5 0.3 0.1 31.12.10 281,121 31.12.09 285,960 31.12.08 312,076 31.12.07 298,498 4,193 1,727 1,287 1,111 1,427 1,428 (66) (24) 1.5 0.6 0.4 0.5 6,865 5,402 2,820 2,680 1,994 1,882 (1,832) (1,776) 2.4 1.9 0.9 0.6 9,145 4,703 3,070 2,927 824 212 (2,996) (2,329) 2.9 1.5 0.9 0.1 2,392 1,481 1,164 1,031 266 266 (238) (172) 0.8 0.5 0.3 0.1 1 Includes collective loan loss allowances. 2 Includes provisions for loan commitments and allowances for securities borrowing transactions. 3 Includes net write-offs for loan commitments and securities borrowing transactions. 4 Includes credit loss (expense) / recovery for loan commitments and securities borrowing transactions. n o i t a m r o f n i l a i c n a n i F 459 UBS registered shares (cid:55)(cid:36)(cid:53)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:82)(cid:84)(cid:75)(cid:69)(cid:71)(cid:2)(cid:69)(cid:74)(cid:67)(cid:84)(cid:86)(cid:2)(cid:88)(cid:85)(cid:2)(cid:38)(cid:81)(cid:89)(cid:2)(cid:44)(cid:81)(cid:80)(cid:71)(cid:85)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77)(cid:85)(cid:2)(cid:54)(cid:75)(cid:86)(cid:67)(cid:80)(cid:85)(cid:2)(cid:21)(cid:18)(cid:2)(cid:43)(cid:80)(cid:70)(cid:71)(cid:90) (cid:75)(cid:80)(cid:2)(cid:7)(cid:2) (cid:19)(cid:2)(cid:44)(cid:67)(cid:80)(cid:87)(cid:67)(cid:84)(cid:91)(cid:2)(cid:20)(cid:18)(cid:18)(cid:27)(cid:124)(cid:115)(cid:124)(cid:21)(cid:19)(cid:2)(cid:38)(cid:71)(cid:69)(cid:71)(cid:79)(cid:68)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:19) (cid:19)(cid:23)(cid:18) (cid:19)(cid:20)(cid:23) (cid:19)(cid:18)(cid:18) (cid:2)(cid:2)(cid:25)(cid:23) (cid:2)(cid:2)(cid:23)(cid:18) (cid:2)(cid:2)(cid:20)(cid:23) (cid:19)(cid:51)(cid:18)(cid:27) (cid:20)(cid:51)(cid:18)(cid:27) (cid:21)(cid:51)(cid:18)(cid:27) (cid:22)(cid:51)(cid:18)(cid:27) (cid:19)(cid:51)(cid:19)(cid:18) (cid:20)(cid:51)(cid:19)(cid:18) (cid:21)(cid:51)(cid:19)(cid:18) (cid:22)(cid:51)(cid:19)(cid:18) (cid:19)(cid:51)(cid:19)(cid:19) (cid:20)(cid:51)(cid:19)(cid:19) (cid:21)(cid:51)(cid:19)(cid:19) (cid:22)(cid:51)(cid:19)(cid:19) (cid:55)(cid:36)(cid:53)(cid:2)(cid:84)(cid:71)(cid:73)(cid:75)(cid:85)(cid:86)(cid:71)(cid:84)(cid:71)(cid:70)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:37)(cid:42)(cid:40) (cid:38)(cid:81)(cid:89)(cid:2)(cid:44)(cid:81)(cid:80)(cid:71)(cid:85)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77)(cid:85)(cid:2)(cid:54)(cid:75)(cid:86)(cid:67)(cid:80)(cid:85)(cid:2)(cid:21)(cid:18)(cid:2)(cid:43)(cid:80)(cid:70)(cid:71)(cid:90)(cid:2)(cid:37)(cid:42)(cid:40) (cid:40)(cid:81)(cid:84)(cid:2)(cid:69)(cid:87)(cid:84)(cid:84)(cid:71)(cid:80)(cid:86)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:82)(cid:84)(cid:75)(cid:69)(cid:71)(cid:2)(cid:84)(cid:71)(cid:72)(cid:71)(cid:84)(cid:2)(cid:86)(cid:81)(cid:28)(cid:2)(cid:89)(cid:89)(cid:89)(cid:16)(cid:87)(cid:68)(cid:85)(cid:16)(cid:69)(cid:81)(cid:79)(cid:17)(cid:83)(cid:87)(cid:81)(cid:86)(cid:71)(cid:85) UBS shares and market capitalization Share price (CHF) Market capitalization (CHF million) 1 31.12.11 11.18 42,843 As of 31.12.10 15.35 58,803 31.12.09 16.05 57,108 % change from 31.12.10 (27) (27) 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 do not reflect the 272.7 million UBS shares issued through the conversion of mandatory convertible notes placed with two investors in March 2008 and converted in March 2010. Refer to “Note 8 Earnings per share (EPS) and shares outstanding” in the “Financial information” section of this report for more information. UBS ordinary shares are registered shares with a par value of CHF 0.10 per share. They are issued in the form of global registered shares. A global registered share is a security that provides direct and equal ownership for all shareholders. It can be traded and transferred across applicable borders without the need for con- version, with identical shares traded on different stock exchanges in different currencies. The shares are currently listed on the SIX Swiss Exchange and the New York Stock Exchange. ➔ Refer to the “Capital structure” section of this report for more information on our shares, including par value, type and rights of security Over the course of 2011, UBS shares declined 27% on the SIX and 28% in US dollar terms on the NYSE. The global banking sec- tor as measured by the Dow Jones Banks Titans 30 Index declined 24% in Swiss franc terms and 25% in US dollar terms. Ticker symbols Trading exchange SIX NYSE Bloomberg UBSN VX UBS UN Reuters UBSN.VX UBS.N Security identification codes ISIN Valoren Cusip CH0024899483 2 489 948 CINS H89231 33 8 461 (cid:19)(cid:23)(cid:18)(cid:16)(cid:18)(cid:18) (cid:19)(cid:19)(cid:26)(cid:16)(cid:25)(cid:23) (cid:26)(cid:25)(cid:16)(cid:23)(cid:18) (cid:23)(cid:24)(cid:16)(cid:20)(cid:23) (cid:20)(cid:23)(cid:16)(cid:18)(cid:18) Result presentations: Our quarterly results presentations are webcast live. A playback of most presentations is downloadable at www.ubs.com/presenta- tions. Messaging service / UBS news alert: On the www.ubs.com/newsalerts website, it is possible to sub- scribe to receive news alerts about UBS via SMS or e-mail. Mes- sages are sent in English, German, French or Italian and it is pos- sible 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). Prin- cipal 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 encour- aged 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 informa- tion on the operation of its public reference room. Please visit http://www.ubs.com/investors for more information. Information sources Reporting publications Annual publications Annual report (SAP no. 80531): Published in both English and German, this single volume report provides a description of: our UBS Group strategy and performance; the strategy and perfor- mance of the business divisions and the Corporate Center; risk, treasury and capital management; corporate governance, respon- sibility and senior management and Board of Directors compensa- tion; and financial information, including the financial statements. Review (SAP no. 80530): The booklet contains key information on our strategy and financials. It is published in English, German, French and Italian. Compensation Report (SAP no. 82307): The report discusses compensation for senior management and the Board of Directors (non-independent and independent). It is pub- lished in English and German. Quarterly publications: Letter to shareholders: The letter provides a quarterly update from executive management on our strategy and performance. The let- ter is published in English, German, French and Italian. Financial report (SAP no. 80834): The quarterly financial report provides an update on our strategy and performance for the respective quar- ter. It is published in English. How to order reports: The annual and quarterly publications are available in PDF format on the internet at www.ubs.com/investors in the “Financial infor- mation” section. Printed copies can be ordered from the same website by accessing the “Order print publications” panel on the left-hand side of the screen. Alternatively, they can be ordered by quoting the SAP number and the language preference where applicable, from UBS AG, F4UK–AUL, P.O. Box, CH-8098 Zurich, Switzerland. Other information Website The “Investor Relations” website at www.ubs.com/investors pro- vides the following information on UBS: press releases; financial information (including results-related filings with the US Securities and Exchange Commission); corporate information, including UBS share price charts and data and dividend information; the UBS corporate calendar; and presentations by management for investors and financial analysts. Information on the internet is available in English and German. 462 Annual Report 2011Corporate information The legal and commercial name of the company is UBS AG. The company was formed on 29 June 1998, when Union Bank of Switzerland (founded 1862) and Swiss Bank Corporation (founded 1872) merged to form UBS. UBS AG is incorporated and domiciled in Switzerland and operates under Swiss Company Law and Swiss Federal Banking Law as an Aktieng- esellschaft, a corporation that has issued shares of common stock to investors. The addresses and telephone numbers of 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 and the New York Stock Exchange. Contacts Switchboards For all general queries. Zurich +41-44-234 1111 London +44-20-7568 0000 New York +1-212-821 3000 Hong Kong +852-2971 8888 www.ubs.com/contact Investor Relations UBS’s Investor Relations team supports institu- tional, professional and retail investors from our offices in Zurich and New York. UBS AG, Investor Relations P.O. Box, CH-8098 Zurich, Switzerland sh-investorrelations@ubs.com www.ubs.com/investors Hotline +41-44-234 4100 New York +1-212-882 5734 Fax (Zurich) +41-44-234 3415 Media Relations UBS’s Media Relations team supports global media and journalists from offices in Zurich, London, New York and Hong Kong. Shareholder Services UBS’s Shareholder Services team, a unit of the Company Secretary office, is responsible for the registration of the global registered shares. www.ubs.com/media Zurich +41-44-234 8500 mediarelations@ubs.com London +44-20-7567 4714 ubs-media-relations@ubs.com New York +1-212-882 5857 mediarelations-ny@ubs.com Hong Kong +852-2971 8200 sh-mediarelations-ap@ubs.com Office of the Company Secretary The Company Secretary receives queries on compensation and related issues addressed to members of the Board of Directors. UBS AG, Office of the Company Secretary P.O. Box, CH-8098 Zurich, Switzerland sh-company-secretary@ubs.com Hotline +41-44-234 3628 Fax +41-44-234 6603 UBS AG, Shareholder Services P.O. Box, CH-8098 Zurich, Switzerland sh-shareholder-services@ubs.com Hotline +41-44-235 6202 Fax +41-44-235 3154 US Transfer Agent For all global registered share-related queries in the US. Computershare 480 Washington Boulevard Jersey City, NJ 07310-1900, USA sh-relations@melloninvestor.com www.bnymellon.com/shareowner/equityaccess Calls from the US +866-541 9689 Calls outside the US +1-201-680 6578 Fax +1-201-680 4675 Corporate calendar Imprint Publication of first quarter 2012 results Wednesday, 2 May 2012 Publisher: UBS AG, Zurich and Basel, Switzerland | www.ubs.com Languages: English / German | SAP-No. 80531E Annual General Meeting Thursday, 3 May 2012 Publication of second quarter 2012 results Tuesday, 31 July 2012 Publication of third quarter 2012 results Tuesday, 30 October 2012 © UBS 2012. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. www.multiclimate.ch 463 Annual Report 2011 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) developments in the markets in which UBS operates or to which it is exposed, including movements in securities prices or liquidity, credit spreads, currency exchange rates and interest rates and the effect of economic conditions and market developments on the financial position or creditworthiness of UBS’s clients and counterparties; (2) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings; (3) the ability of UBS to reduce its Basel III risk-weighted assets in order to comply with future Swiss capital requirements without materially ad- versely affecting its profitability; (4) changes in financial regulation in Switzerland, the US, the UK and other major financial centers which may impose constraints on or necessitate changes in the scope and location of UBS’s business activities and in its legal and booking structures, including the imposition of more stringent capital and liquidity requirements, incremental tax requirements and constraints on remuneration; (5) possible constraints or sanctions that regulatory authorities might impose on UBS, including as a consequence of the unauthorized trading incident announced in September 2011; (6) changes in UBS’s competitive position, including whether differences in regulatory capital and other requirements among the major financial centers will adversely affect UBS’s ability to compete in certain lines of business, (7) the liability to which UBS may be exposed due to litigation, contractual claims and regulatory investigations, some of which stem from the market events and losses incurred by clients and counterparties during the financial crisis of 2007–2009; (8) the effects on UBS’s cross-border banking business of international tax treaties recently negotiated by Switzerland and future tax or regulatory developments; (9) 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; (10) UBS’s ability to retain and attract the employees necessary to generate revenues and to manage, support and control its businesses; (11) changes in accounting standards or policies, and accounting determinations affecting the recognition of gain or loss, the valuation of goodwill and other matters; (12) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (13) whether UBS will be successful in keep- ing pace with competitors in updating its technology, particularly in trading businesses; and (14) the occurrence of operational failures, such as fraud, unauthor- ized trading and systems failures, either within UBS or within a counterparty. Our business and financial performance could be affected by other factors identified 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 2011. UBS is not under any obliga- tion to (and expressly disclaims any obligation to) update or alter its forward-looking statements, whether as a result of new information, future events, or oth- erwise. 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. UBS AG P.O. Box, CH-8098 Zurich P.O. Box, CH-4002 Basel www.ubs.com 

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