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UBS AGUBS Group AG and UBS AG Annual Report 2015 Contents Letter to shareholders 2 5 UBS Group AG key figures 8 UBS and its businesses 10 Our Board of Directors 11 Our Group Executive Board 12 The making of UBS 15 The legal structure of UBS Group 17 External reporting concept 1. Operating environment and strategy 20 Current market climate 22 Regulation and supervision 26 Regulatory and legal developments 33 Our strategy 39 Measurement of performance 41 Wealth Management 45 Wealth Management Americas 48 Personal & Corporate Banking 51 Asset Management Investment Bank 54 57 Corporate Center 59 Risk factors 2. Financial and operating performance 76 Critical accounting policies 81 Significant accounting and financial reporting changes 85 Group performance 102 Balance sheet 107 Off-balance sheet 110 Cash flows 111 Wealth Management 117 Wealth Management Americas 122 Personal & Corporate Banking 125 Asset Management Investment Bank 132 138 Corporate Center 3. Risk, treasury and capital management Implementation of EDTF recommendations 152 160 Key developments 163 Risk management and control 234 Treasury management 248 Capital management 282 UBS Shares 4. Corporate governance, responsibility and compensation 288 Corporate governance 325 UBS and Society 335 Our employees 342 Compensation 5. Consolidated financial statements 393 UBS Group AG consolidated financial statements 563 UBS AG consolidated financial statements 6. Legal entity financial and regulatory information 743 UBS Group AG 766 Establishment of UBS Switzerland AG 772 UBS AG 800 UBS Switzerland AG 823 UBS Limited 7. Additional regulatory information 831 UBS Group AG consolidated supplemental disclosures required under SEC regulations 853 UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations 908 UBS AG consolidated supplemental disclosures required under SEC regulations Appendix 931 Abbreviations frequently used in our financial reports 933 934 Cautionary statement Information sources Annual Report 2015 Letter to shareholders Dear shareholders, In 2015, many of the macroeconomic and geopolitical issues we highlighted in our outlook statements materialized, and in some cases became more pressing. A number of developments contin- ued to create uncertainty in global economic and financial mar- kets: the mixed outlook on global growth; the absence of credible improvements in the eurozone; fiscal and monetary uncertainty, including the impact of negative rates; instability resulting from falling commodity and energy prices, as well as rising geopolitical tensions. In addition, a number of specific macroeconomic events had a particular impact on UBS, including the Swiss National Bank’s (SNB) decision in January to abandon its euro currency floor, and the relative weakness of the Chinese economy in the second half of the year. Against this backdrop we stayed close to our clients while pru- dently managing risk and resources to deliver a net profit attribut- able to shareholders of CHF 6.2 billion, up 79% on the previous year, our best full-year result in eight years. We also achieved a full-year adjusted1 return on tangible equity of 13.7%, above our full-year 2015 target of around 10%. In addition, we continued to strengthen our capital position and reported a fully-applied Swiss systemically relevant bank (SRB) common equity tier 1 capi- tal ratio of 14.5% and a Swiss SRB leverage ratio of 5.3% at year end, leaving us well-positioned to deal with both challenging market conditions and the future requirements of the revised Swiss too big to fail (TBTF) framework. This strong performance was driven by the dedication of our employees and the disciplined execution of our strategy and has allowed us to deliver on our capital return commitment to share- holders, even in a difficult environment. As previously announced in our fourth-quarter earnings release, we are proposing an ordi- nary dividend of CHF 0.60 per share, as well as a special dividend of CHF 0.25 per share, reflecting a significant net upward revalu- ation of deferred tax assets in 2015. In 2015, Wealth Management’s adjusted1 profit before tax was up 13% on the prior year to CHF 2.8 billion (reported CHF 2.7 billion), its best annual pre-tax adjusted1 profit since 2008. Wealth Management Americas’ adjusted1 profit before tax was USD 874 million (reported USD 754 million) with record operating income, and solid net new money of USD 21.4 billion. Personal & Corporate Banking posted its best adjusted1 profit before tax since 2010 with CHF 1.7 billion (reported CHF 1.6 billion) and attracted a record number of new clients. Asset Management’s adjusted1 profit before tax of CHF 610 million (reported CHF 584 million) was up 20% year on year, making progress towards its medium-term profit target. The Investment Bank delivered a strong performance with an adjusted1 profit before tax of CHF 2.3 billion (reported CHF 1.9 billion), and achieved an adjusted1 return on attributed equity of 31% for the full year. Over the past two years, we made significant investments to exe- cute on a series of measures to improve the resolvability of the Group in response to TBTF requirements in Switzerland and other countries. In 2015, we transferred our Personal & Corporate Banking and Wealth Management businesses booked in Switzer- land from UBS AG to UBS Switzerland AG, and implemented a more self-sufficient business and operating model for UBS Lim- ited, our investment banking subsidiary in the UK. We established UBS Business Solutions AG as a direct subsidiary of UBS Group AG, to act as the Group service company. Also during 2015, UBS AG established a new subsidiary, UBS Americas Holding LLC, which we intend to designate as our intermediate holding com- pany for our US subsidiaries in accordance with the new Dodd- Frank rules for foreign banks in the US. The successful completion of these measures not only improves the firm’s resolvability, but should also allow us to qualify for a capital rebate under the pro- posed new Swiss TBTF rules. We were honored with a number of prestigious awards for opera- tional excellence throughout the year. UBS dominated the recently announced 2015 Euromoney awards, reclaiming the title “Best Private Banking Services Overall” and “Best Global Wealth Man- ager”. In July, UBS Switzerland confirmed its status as the coun- try’s premier universal bank, taking the Euromoney prize for “Best Bank in Switzerland” for the fourth year running. Our Investment Bank was named “Bank of the Year” by the International Financ- ing Review for the first time. The publication singled out the Investment Bank’s remarkable transformation over the last few years and the success of its client-centric model. UBS was also named “Outstanding Global Private Bank – Overall” as well as “Outstanding Global Private Bank – Asia Pacific” by Private Banker International. 1 Refer to “Group performance” in the “Financial and operating performance” section of this report for more information on adjusted results. 2 Axel A. Weber Chairman of the Board of Directors Sergio P. Ermotti Group Chief Executive Officer 3 Annual Report 2015 Letter to shareholders We also continued to build on our position and reputation as a sustainability leader. UBS was named industry group leader in the Dow Jones Sustainability Indices (DJSI). DJSI praised our role in offering a variety of sustainability-focused portfolios, as well as creating a reporting framework to help clients better understand these investments. As of 31 December 2015, sustainable invest- ments increased to CHF 934 billion, representing over a third of total invested assets. As the United Nations’ COP21 Climate Change Summit convened in Paris in November, we added our voice in support of a comprehensive agreement of all parties to combat climate change and reduce greenhouse gas emissions. At the same time, UBS reaffirmed its own commitment to limit the effects of climate change and enable the transition to a low- carbon economy. In 2015, we expanded our program of community engagement. Our global volunteer program saw 16,356 (27%) of our employees contribute over 130,000 hours to community projects. In addition, we donated over CHF 37 million to foundations in Switzerland, and made direct cash contributions of over CHF 27 million to a variety of global projects, more than 90% of which were in support of education and entrepreneurial initiatives. Technology and innovation remained a priority in 2015. We fur- ther upgraded our IT infrastructure and enhanced our technology offering for customers with our e- and mobile-banking solutions. This included the award-winning Swiss peer-to-peer mobile pay- ments application “Paymit,” and Wealth Management Online – a new digital platform for Wealth Management clients in Switzer- land and Europe International. Our Investment Bank continued to upgrade UBS Neo, its highly innovative, award-winning client platform, with further features and enhancements. UBS also opened its own innovation lab at Level39, Europe’s larg- est technology accelerator and incubator. The lab is exploring potential applications for Blockchain and other disruptive digital technologies in financial services. UBS received awards for “Most Innovative Digital Offering” from Private Banker International and “Most Innovative Investment Bank for Financial Institutions” by The Banker. UBS’s commitment to and interest in innovation was also highlighted by the launch of the first ever UBS Future of Finance Challenge, an international competition for entrepre- neurs and technology startups developing ideas and solutions for the financial services industry. The competition attracted over 600 entrants from 50 countries. We would like to take this opportunity to thank both our sharehold- ers and our clients for their continued support. We are confident that by striving for excellence and putting our clients at the center of everything we do, we can grow our business profitably over the long term and continue to deliver attractive returns to shareholders. We look forward to seeing many of you at this year’s AGM. 18 March 2016 Yours sincerely, UBS Axel A. Weber Chairman of the Board of Directors Sergio P. Ermotti Group Chief Executive Officer 4 UBS Group AG key figures1 CHF million, except where indicated Group results Operating income Operating expenses Operating profit / (loss) before tax Net profit / (loss) attributable to UBS Group AG shareholders Diluted earnings per share (CHF)2 Key performance indicators3 Profitability Return on tangible equity (%) Return on assets, gross (%) Cost / income ratio (%) Growth Net profit growth (%) Net new money growth for combined wealth management businesses (%)4 Resources Common equity tier 1 capital ratio (fully applied, %)5 Leverage ratio (phase-in, %)6 Additional information Profitability Return on equity (RoE) (%) Return on risk-weighted assets, gross (%)7 Resources Total assets Equity attributable to UBS Group AG shareholders Common equity tier 1 capital (fully applied)5 Common equity tier 1 capital (phase-in)5 Risk-weighted assets (fully applied)5 Risk-weighted assets (phase-in)5 Common equity tier 1 capital ratio (phase-in, %)5 Total capital ratio (fully applied, %)5 Total capital ratio (phase-in, %)5 Leverage ratio (fully applied, %)6 Leverage ratio denominator (fully applied)6 Leverage ratio denominator (phase-in)6 Liquidity coverage ratio (%)8 Other Invested assets (CHF billion)9 Personnel (full-time equivalents) Market capitalization10 Total book value per share (CHF)10 Tangible book value per share (CHF)10 As of or for the year ended 31.12.15 31.12.14 31.12.13 30,605 25,116 5,489 6,203 1.64 13.7 3.1 81.8 79.0 2.2 14.5 6.2 11.8 14.1 942,819 55,313 30,044 40,378 207,530 212,302 19.0 22.9 26.8 5.3 897,607 904,014 124 2,689 60,099 75,147 14.75 13.00 28,027 25,567 2,461 3,466 0.91 8.2 2.8 91.0 9.3 2.5 13.4 5.4 7.0 12.4 1,062,478 50,608 28,941 42,863 216,462 220,877 19.4 18.9 25.5 4.1 997,822 1,004,869 123 2,734 60,155 63,526 13.94 12.14 27,732 24,461 3,272 3,172 0.83 8.0 2.5 88.0 3.4 12.8 4.7 6.7 11.4 1,013,355 48,002 28,908 42,179 225,153 228,557 18.5 15.4 22.2 3.4 1,015,306 1,022,924 110 2,390 60,205 65,007 12.74 11.07 1 Represents information for UBS Group AG (consolidated). Comparative information as of 31 December 2013 is the same as previously reported for UBS AG (consolidated) as UBS Group AG (consolidated) is considered to be the continuation of UBS AG (consolidated). Refer to the “The legal structure of UBS Group” section and to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information. 2 Refer to “Note 9 Earnings per share (EPS) and shares outstanding” in the “Consolidated financial statements” section of this report for more information. 3 Refer to the “Measure- ment of performance” section of this report for the definitions of our key performance indicators. 4 Based on adjusted net new money, which excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital optimization program. 5 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 6 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, the Swiss SRB leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 7 Based on phase-in risk-weighted assets. 8 Refer to the “Liquidity and funding management” section of this report for more information. Figures reported for 31 December 2015 represent a 3-month average. Figures for 31 December 2014 and 31 Decem- ber 2013 were calculated on a pro forma basis and represent spot numbers. 9 Includes invested assets for Personal & Corporate Banking. 10 Refer to the “UBS shares” section of this report for more information. 5 Annual Report 2015 Creating value Annual Review 2015 The Annual Review 2015 will be available from mid-April 2016 as a tablet publication in UBS Newsstand / Annual Review (AppStore or Google Play Store). Corporate information UBS Group AG is incorporated and domiciled in Switzerland and operates under the Swiss Code of Obligations as an Aktiengesellschaft, a stock corporation. Its registered office is at Bahnhofstrasse 45, CH-8001 Zurich, Switzerland, phone +41–44-234 11 11, and its corporate identification number is CHE-395.345.924. UBS Group AG was incorporated on 10 June 2014 and was established in 2014 as the holding company of the UBS Group. UBS Group AG shares are listed on the SIX Swiss Exchange and on the New York Stock Exchange (ISIN: CH0244767585; CUSIP: H42097107). UBS AG is incorporated and domiciled in Switzerland and operates under the Swiss Code of Obligations as an Aktiengesellschaft, a stock corporation. The addresses and telephone numbers of the two registered offices of UBS AG 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. The corporate identification number is CHE-101.329.561. UBS AG is a bank. 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 AG 6 Contacts Switchboards For all general inquiries. 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 institutional, professional and retail investors from our offices in Zurich, London, New York and Singapore. UBS Group AG, Investor Relations P.O. Box, CH-8098 Zurich, Switzerland www.ubs.com/investors Hotline Zurich +41-44-234 4100 Hotline 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. 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 Group Company Secretary The Group Company Secretary receives inquiries on compensation and related issues addressed to members of the Board of Directors. UBS Group AG, Office of the Group Company Secretary P.O. Box, CH-8098 Zurich, Switzerland sh-company-secretary@ubs.com Hotline +41-44-235 6652 Fax +41-44-235 8220 Shareholder Services UBS’s Shareholder Services team, a unit of the Group Company Secretary office, is responsible for the registration of the global registered shares. UBS Group AG, Shareholder Services P. O. Box, CH-8098 Zurich, Switzerland sh-shareholder-services@ubs.com Hotline +41-44-235 6652 Fax +41-44-235 8220 US Transfer Agent For global registered share-related inquiries in the US. Computershare Trust Company NA P.O. Box 30170 College Station TX 77842–3170, USA Shareholder online inquiries: https://www-us.computershare.com/ investor/Contact Shareholder website: www.computershare.com/investor Calls from the US +1-866-305-9566 Calls from outside the US +1-781-575-2623 TDD for hearing impaired +1–800-231-5469 TDD Foreign Shareholders +1–201-680-6610 Corporate calendar UBS Group AG Imprint Publication of the first quarter 2016 report: Tuesday, 3 May 2016 Publisher: UBS Group AG, Zurich, Switzerland | www.ubs.com Annual General Meeting 2016: Thursday, 10 May 2016 Language: English Publication of the second quarter 2016 report: Friday, 29 July 2016 Publication of the third quarter 2016 report: Tuesday, 1 November 2016 © UBS 2016. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. Corporate calendar UBS AG Publication of the first quarter 2016 report: Friday, 6 May 2016 Additional publication dates of quarterly and annual reports will be made available as part of the corporate calendar of UBS AG at www.ubs.com/investors. 7 Annual Report 2015 UBS and its businesses We provide financial advice and solutions to private, institutional and corporate clients worldwide, as well as private clients in Switzerland. The operational structure of the Group is comprised of our Corporate Center and five business divisions: Wealth Management, Wealth Management Americas, Personal & Corporate Banking, Asset Management and the Investment Bank. Our strategy builds on the strengths of all of our businesses and focuses our efforts on areas in which we excel, while seeking to capitalize on the compelling growth prospects in the businesses and regions in which we operate, in order to generate attractive and sustainable returns for our shareholders. All of our businesses are capital-efficient and benefit from a strong competitive position in their targeted markets. Wealth Management Personal & Corporate Banking Wealth Management provides comprehensive advice and finan- cial services to wealthy private clients around the world, with the exception of those served by Wealth Management Americas. UBS is a global firm with global capabilities, and its clients benefit from a full spectrum of resources, including wealth planning, invest- ment management solutions and corporate finance advice, bank- ing and lending solutions, as well as a wide range of specific offer- ings. Wealth Management’s guided architecture model gives clients access to a wide range of products from the world’s lead- ing third-party institutions that complement its own products. Wealth Management Americas Wealth Management Americas is one of the leading wealth man- agers in the Americas in terms of financial advisor productivity and invested assets. Its business includes UBS’s domestic US and Canadian wealth management businesses, as well as interna- tional business booked in the US. It provides a fully integrated set of wealth management solutions designed to address the needs of ultra high net worth and high net worth clients. Effective January 2016, the business division Retail & Corporate was renamed Personal & Corporate Banking. This change is reflected throughout this report. Personal & Corporate Banking provides comprehensive finan- cial products and services to UBS’s private, corporate and institu- tional clients in Switzerland, maintaining a leading position in these segments and embedding its offering in a multi-channel approach. The business is a central element of UBS’s universal bank delivery model in Switzerland, supporting other business divisions by referring clients and growing the wealth of the firm’s private clients so they can be transferred to Wealth Management. Personal & Corporate Banking leverages the cross-selling poten- tial of UBS’s asset-gathering and investment bank businesses, and manages a substantial part of UBS’s Swiss infrastructure and banking products platform. 8 Asset Management Corporate Center Corporate Center is comprised of Services, Group Asset and Liability Management (Group ALM) and Non-core and Legacy Portfolio. Services includes the Group’s control functions such as finance, risk control (including compliance) and legal. In addition, it provides all logistics and support services, including operations, information technology, human resources, regulatory relations and strategic initiatives, communications and branding, corporate services, physical security, information security as well as out- sourcing, nearshoring and offshoring. Group ALM is responsible for centrally managing the Group’s liquidity and funding position, as well as providing other balance sheet and capital management services to the Group. Non-core and Legacy Portfolio is comprised of the non-core businesses and legacy positions that were part of the Investment Bank prior to its restructuring. Effective October 2015, the business division Global Asset Man- agement was renamed Asset Management. This change is reflected throughout this report. Asset Management is a large-scale asset manager, with a pres- ence in 22 countries. It offers investment capabilities and invest- ment styles across all major traditional and alternative asset classes to institutions, wholesale intermediaries and wealth management clients around the world. It is a leading fund house in Europe, the largest mutual fund manager in Switzerland, the third-largest international asset manager in Asia, the second largest fund of hedge funds manager and one of the largest real estate invest- ment managers in the world. Investment Bank The Investment Bank provides corporate, institutional and wealth management clients with expert advice, innovative solutions, exe- cution and comprehensive access to international capital markets. It offers advisory services and provides in-depth cross-asset research, along with access to equities, foreign exchange, precious metals and selected rates and credit markets, through its business units, Corporate Client Solutions and Investor Client Services. The Investment Bank is an active participant in capital markets flow activities, including sales, trading and market-making across a range of securities. 9 Annual Report 2015 Our Board of Directors as of 31 December 2015 5 9 8 1 10 3 7 6 2 4 1 Axel A. Weber Chairman of the Board of Directors / Chairperson of the Corporate Culture and Responsibility Committee / Chairper- son of the Governance and Nominating Committee 2 David Sidwell Senior Independent Director / Chairperson of the Risk Commit- tee / member of the Governance and Nominating Committee 3 Reto Francioni Member of the Compensation Committee / member of the Corporate Culture and Responsibility Committee / member of the Risk Committee 4 Ann F. Godbehere Chairperson of the Compensation Committee / member of the Audit Committee 5 William G. Parrett Chairperson of the Audit Committee / member of the Compensation Committee / member of the Corporate Culture and Responsibility Committee 6 Isabelle Romy Member of the Audit Committee / member of the Governance and Nominating Committee 7 Beatrice Weder di Mauro Member of the Audit Committee / member of the Risk Committee 8 Joseph Yam Member of the Corporate Culture and Responsibility Commit- tee / member of the Risk Committee 9 Axel P. Lehmann Member of the Risk Committee until 31 December 2015 10 Jes Staley (resigned as of 28 October 2015) Michel Demaré (not on this picture) Independent Vice Chairman / member of the Audit Committee / member of the Compensation Committee / member of the Governance and Nominating Committee The Board of Directors (BoD) of UBS Group AG and UBS AG, each under the leadership of the Chairman, consists of six to twelve members as per our Articles of Association (AoA). The BoD decides on the strategy of the Group upon recommendation of the Group Chief Executive Officer (Group CEO) and is responsible for the overall direction, supervision and control of the Group and its management as well as for supervising compliance with appli- cable laws, rules and regulations. The BoD exercises oversight over UBS Group AG and its subsidiaries and is responsible for ensuring the establishment of a clear Group governance frame- work to ensure effective steering and supervision of the Group, taking into account the material risks to which UBS Group AG and its subsidiaries are exposed. The BoD has ultimate responsibility for the success of the Group and for delivering sustainable share- holder value within a framework of prudent and effective con- trols, approves all financial statements for issue and appoints and removes all Group Executive Board (GEB) members. 10 Our Group Executive Board as of 31 December 2015 7 10 8 1 9 3 2 6 4 5 1 Sergio P. Ermotti Group Chief Executive Officer 2 Markus U. Diethelm Group General Counsel 3 Lukas Gähwiler President Personal & Corporate Banking and President UBS Switzerland 4 Ulrich Körner President Asset Management and President UBS Europe, Middle East and Africa 5 Tom Naratil Group Chief Financial Officer and Group Chief Operating Officer until 31 Decem- ber 2015 / President Wealth Management Americas and President UBS Americas as of 1 January 2016 6 Andrea Orcel President Investment Bank 7 Jürg Zeltner President Wealth Management 8 Philip J. Lofts Group Chief Risk Officer until 31 December 2015 9 Robert J. McCann President Wealth Management Americas and President UBS Americas until 31 December 2015 10 Chi-Won Yoon President UBS Asia Pacific until 31 December 2015 UBS Group AG and UBS AG operate under a strict dual board structure, as mandated by Swiss banking law, and therefore the BoD delegates the management of the business to the GEB. Under the leadership of the Group CEO, the GEB has executive management responsibility for the steering of the Group and its business. It assumes overall responsibility for developing the Group and business division strategies and the implementation of approved strategies. ➔ Refer to “Board of Directors” and “Group Executive Board” in the “Corporate governance” section of this report or to www.ubs.com/bod and www.ubs.com/geb, for the full biographies of our BoD and GEB members 11 Annual Report 2015 The making of UBS UBS has played a pivotal role in the development and growth of Switzerland’s banking tradition since the firm’s origins in the mid-19th century. The origins of the banking industry in Switzerland can be traced back to medieval times. This long history may help explain the widespread impression, reinforced in popular fiction, that Switzerland has always possessed a strong financial sector. In real- ity, the size and international reach of the Swiss banking sector 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 Switzer- land celebrated its 100th anniversary in 1962, tracing its origins back to the Bank in Winterthur. SBC marked its centenary in 1972 with celebrations in honor of its founding forebear, the Basler Bankverein. The historical roots of PaineWebber, acquired by UBS in 2000, go back to 1879, while S.G. Warburg, the historical pillar of UBS’s Investment Bank, commenced operations in 1946. 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(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:21)(cid:24)(cid:2)(cid:2) (cid:50)(cid:81)(cid:86)(cid:86)(cid:71)(cid:84)(cid:2)(cid:50)(cid:67)(cid:84)(cid:86)(cid:80)(cid:71)(cid:84)(cid:85) (cid:19)(cid:27)(cid:22)(cid:24)(cid:2) (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) 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 Switzerland. Union Bank of Switzerland, the largest 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 mainly through a combination of partnerships and acquisitions. In 1989, SBC started a joint venture with O’Connor, a leading US derivatives firm, before fully acquiring it in 1992. In 1994, SBC added to its capabilities when it acquired Brinson Partners, a lead- ing US-based institutional 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 strategic gap in its corporate finance, brokerage, and research capabilities and, most importantly, brought with it an institutional client franchise that remains crucial to our equities business to this day. 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(cid:39)(cid:75)(cid:70)(cid:73)(cid:71)(cid:80)(cid:210)(cid:85)(cid:85)(cid:75)(cid:85)(cid:69)(cid:74)(cid:71)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77) (cid:19)(cid:26)(cid:24)(cid:21) (cid:54)(cid:81)(cid:73)(cid:73)(cid:71)(cid:80)(cid:68)(cid:87)(cid:84)(cid:73)(cid:71)(cid:84)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77) (cid:19)(cid:26)(cid:24)(cid:20)(cid:2)(cid:2) (cid:2)(cid:36)(cid:67)(cid:80)(cid:77)(cid:2)(cid:75)(cid:80)(cid:2)(cid:57)(cid:75)(cid:80)(cid:86)(cid:71)(cid:84)(cid:86)(cid:74)(cid:87)(cid:84) (cid:19)(cid:26)(cid:24)(cid:21)(cid:2) (cid:36)(cid:67)(cid:80)(cid:77)(cid:2)(cid:75)(cid:80)(cid:2)(cid:36)(cid:67)(cid:70)(cid:71)(cid:80) (cid:19)(cid:26)(cid:25)(cid:20)(cid:2) (cid:35)(cid:67)(cid:84)(cid:73)(cid:67)(cid:87)(cid:75)(cid:85)(cid:69)(cid:74)(cid:71)(cid:2)(cid:45)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:67)(cid:80)(cid:85)(cid:86)(cid:67)(cid:78)(cid:86) (cid:19)(cid:26)(cid:26)(cid:18) (cid:50)(cid:67)(cid:75)(cid:80)(cid:71)(cid:2)(cid:8)(cid:2)(cid:57)(cid:71)(cid:68)(cid:68)(cid:71)(cid:84) (cid:19)(cid:26)(cid:25)(cid:27) (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) Annual Report 2015 The 1998 merger of SBC and Union Bank of Switzerland into the firm we know today created a world-class wealth manager and the largest 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. Over the last 50+ years, UBS has established a strong pres- ence in the Asia Pacific region, where it is the leading wealth man- ager and a top-tier investment bank, as well as in the emerging markets. In 2007, the effects of the global financial crisis started to be felt across the financial industry. This crisis had its origins in the securitized financial product business linked to the US residential real estate market. Between the third quarter of 2007 and the fourth quarter of 2009, we incurred significant losses on these types of assets. We responded with decisive action, designed to reduce risk exposures and stabilize our businesses, including rais- ing capital. Since then, we have continued to improve the firm’s capital strength to meet new and enhanced industry-wide regu- latory requirements. Our position as one of the world’s best-capi- talized banks, together with our stable funding and sound liquid- ity positions, provides us with a solid foundation for our success. In 2012, the year of our 150th anniversary, we accelerated the strategic transformation to create a business model that is better adapted to the new regulatory and market conditions and that we believe results in more consistent and high-quality returns. To this effect, we launched the Pillars, Principles and Behaviors in 2014 as a foundation for our new corporate strategy, identity and culture. In the same year, we established UBS Group AG as the Group holding company and, in 2015, we transferred the Per- sonal & Corporate Banking and the Wealth Management busi- ness booked in Switzerland from UBS AG to the wholly owned subsidiary UBS Switzerland AG, with its own banking license, thereby significantly advancing our strategic transformation process. We remain committed to executing our strategy aimed at ensuring the firm’s long-term success and delivering sustainable returns for our shareholders. ➔ Refer to www.ubs.com/history for more information on UBS’s history of more than 150 years 14 The legal structure of UBS Group Over the past two years, we have undertaken a series of measures to improve the resolvability of the Group in response to too big to fail (TBTF) requirements in Switzerland and other countries in which the Group operates. In December 2014, UBS Group AG completed an exchange offer for the shares of UBS AG and established UBS Group AG as the holding company for UBS Group. During 2015, UBS Group AG filed and completed a court procedure under article 33 of the Swiss Stock Exchange Act (SESTA procedure) resulting in the cancellation of the shares of the remaining minority shareholders of UBS AG. As a result, UBS Group AG now owns 100% of the outstanding shares of UBS AG. In June 2015, we transferred our Personal & Corporate Bank- ing and Wealth Management business booked in Switzerland from UBS AG to UBS Switzerland AG. In the second quarter of 2015, we also completed the imple- mentation of a more self-sufficient business and operating model for UBS Limited, our investment banking subsidiary in the UK, under which UBS Limited bears and retains a larger proportion of the risk and reward in its business activities. (cid:46)(cid:71)(cid:73)(cid:67)(cid:78)(cid:2)(cid:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:87)(cid:84)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(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:23) (cid:55)(cid:36)(cid:53)(cid:2)(cid:35)(cid:41)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:81)(cid:78)(cid:75)(cid:70)(cid:67)(cid:86)(cid:71)(cid:70) (cid:55)(cid:36)(cid:53)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:35)(cid:41) (cid:19)(cid:18)(cid:18)(cid:7) (cid:55)(cid:36)(cid:53)(cid:2)(cid:35)(cid:41) (cid:19)(cid:18)(cid:18)(cid:7)(cid:19) (cid:55)(cid:36)(cid:53)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:35)(cid:41)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:81)(cid:78)(cid:75)(cid:70)(cid:67)(cid:86)(cid:71)(cid:70) (cid:19)(cid:18)(cid:18)(cid:7) (cid:55)(cid:36)(cid:53)(cid:2)(cid:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:53)(cid:81)(cid:78)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:35)(cid:41) (cid:55)(cid:36)(cid:53)(cid:2) (cid:53)(cid:89)(cid:75)(cid:86)(cid:92)(cid:71)(cid:84)(cid:78)(cid:67)(cid:80)(cid:70)(cid:2) (cid:35)(cid:41) (cid:55)(cid:36)(cid:53)(cid:2) (cid:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85)(cid:2) (cid:42)(cid:81)(cid:78)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:46)(cid:46)(cid:37) (cid:55)(cid:36)(cid:53)(cid:2)(cid:46)(cid:75)(cid:79)(cid:75)(cid:86)(cid:71)(cid:70) (cid:55)(cid:36)(cid:53)(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:35)(cid:41) (cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2) (cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85)(cid:20) (cid:19)(cid:18)(cid:18)(cid:7) (cid:55)(cid:36)(cid:53)(cid:2) (cid:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85)(cid:2) (cid:43)(cid:80)(cid:69)(cid:16) (cid:21)(cid:18)(cid:7) 141.553 mm (cid:19)(cid:18)(cid:18)(cid:7) (cid:19)(cid:18)(cid:18)(cid:7) (cid:25)(cid:18)(cid:7) (cid:55)(cid:36)(cid:53)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77)(cid:2) (cid:55)(cid:53)(cid:35) (cid:55)(cid:36)(cid:53)(cid:2) (cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2) (cid:53)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:2) (cid:43)(cid:80)(cid:69)(cid:16) (cid:55)(cid:36)(cid:53)(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:46)(cid:46)(cid:37) (cid:19)(cid:2)(cid:38)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:70)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:2)(cid:74)(cid:81)(cid:78)(cid:70)(cid:75)(cid:80)(cid:73)(cid:85)(cid:16)(cid:2)(cid:2)(cid:2)(cid:2)(cid:20)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(cid:35)(cid:41)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:386)(cid:69)(cid:67)(cid:80)(cid:86)(cid:2)(cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85)(cid:2)(cid:85)(cid:74)(cid:81)(cid:89)(cid:80)(cid:2)(cid:75)(cid:80)(cid:2)(cid:86)(cid:74)(cid:75)(cid:85)(cid:2)(cid:69)(cid:74)(cid:67)(cid:84)(cid:86)(cid:2)(cid:74)(cid:81)(cid:78)(cid:70)(cid:2)(cid:75)(cid:80)(cid:2)(cid:67)(cid:73)(cid:73)(cid:84)(cid:71)(cid:73)(cid:67)(cid:86)(cid:71)(cid:2)(cid:19)(cid:18)(cid:18)(cid:7)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:85)(cid:71)(cid:2)(cid:81)(cid:86)(cid:74)(cid:71)(cid:84)(cid:2)(cid:85)(cid:87)(cid:68)(cid:85)(cid:75)(cid:70)(cid:75)(cid:67)(cid:84)(cid:75)(cid:71)(cid:85)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:88)(cid:71)(cid:84)(cid:91)(cid:2)(cid:72)(cid:71)(cid:89)(cid:2)(cid:71)(cid:90)(cid:69)(cid:71)(cid:82)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:16) 15 Annual Report 2015 In the third quarter, we established UBS Business Solutions AG as a direct subsidiary of UBS Group AG to act as the Group service company. We will transfer the ownership of the majority of our existing service subsidiaries to this entity. We expect that the transfer of shared service and support functions into the service company structure will be implemented in a staged approach through 2018. The purpose of the service company structure is to improve the resolvability of the Group by enabling us to maintain operational continuity of critical services should a recovery or res- olution event occur. Also during 2015, UBS AG established a new subsidiary, UBS Americas Holding LLC, which we intend to designate as our inter- mediate holding company for our US subsidiaries prior to the 1 July 2016 deadline under new rules for foreign banks in the US pursu- ant to the Dodd-Frank Wall Street Reform and Consumer Protec- tion Act (Dodd-Frank). During the third quarter of 2015, UBS AG contributed its equity participation in the principal US operating subsidiaries to UBS Americas Holding LLC to meet the requirement under Dodd-Frank that the intermediate holding company own all of our US operations, except branches of UBS AG. ➔ Refer to the “Legal entity financial and regulatory information” section of this report for more information We have also established a new subsidiary of UBS AG, UBS Asset Management AG, into which we expect to transfer the majority of the operating subsidiaries of Asset Management dur- ing 2016. We continue to consider further changes to the legal entities used by Asset Management, including the transfer of operations conducted by UBS AG in Switzerland into a subsidiary of UBS Asset Management AG. Our strategy, our business and the way we serve the vast majority of our clients are not affected by these changes. These plans do not create the need to raise additional common equity capital and are not expected to materially affect the firm’s capital- generating capability. We are confident that the establishment of UBS Group AG and UBS Switzerland AG, along with our other announced measures, will substantially enhance the resolvability of the Group. The Swiss Financial Market Supervisory Authority (FINMA) has confirmed that these measures are in principle suitable to warrant a capital requirement rebate under the current Swiss capital regulation. Therefore, the Group should qualify for a rebate on the gone con- cern requirements under the new Swiss TBTF proposal, which should result in lower overall capital requirements for the Group. The amount and timing of any such rebate will depend on the actual execution of these measures and can therefore only be specified once all measures have been implemented. We continue to consider further changes to the Group’s legal structure in response to capital and other regulatory require- ments, and in order to obtain any rebate in capital requirements for which the Group may be eligible. Such changes may include the transfer of operating subsidiaries of UBS AG to become direct subsidiaries of UBS Group AG, consolidation of operating sub- sidiaries in the European Union, and adjustments to the booking entity or location of products and services. These structural changes are being discussed on an ongoing basis with FINMA and other regulatory authorities, and remain subject to a number of uncertainties that may affect their feasibility, scope or timing. Terms used in this report, unless the context requires otherwise “UBS,” “UBS Group,” “UBS Group AG (consolidated),” “Group,” “the Group,” “we,” “us” and “our” UBS Group AG and its consolidated subsidiaries “UBS AG (consolidated)” UBS AG and its consolidated subsidiaries “UBS Group AG” and “UBS Group AG (standalone)” UBS Group AG on a standalone basis “UBS AG” and “UBS AG (standalone)” UBS AG on a standalone basis “UBS Switzerland AG” “UBS Limited” UBS Switzerland AG on a standalone basis UBS Limited on a standalone basis 16 External reporting approach General requirements Our Annual Reports and Form 20-F Our external reporting requirements and the scope of our external reports are defined by general accounting law and principles, relevant stock and debt listing rules, specific legal and regulatory requirements, as well as by our own financial reporting policies. As a global firm with shares listed both on the SIX Swiss Exchange and the NYSE, we have to prepare and publish consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) on at least a half-yearly basis. How- ever, we have decided to publish our results on a quarterly basis in order to provide shareholders with more timely disclosures than required by law. Additionally, statutory financial statements are prepared annually as the basis for our Swiss tax return, the appro- priation of retained earnings and a potential distribution of divi- dends, subject to shareholder approval at the Annual General Meeting (AGM). Management’s discussion and analysis (MD&A) complements our annual financial statements by providing infor- mation on (i) our strategy and the environment in which we operate, (ii) the financial and operating performance of our busi- ness divisions and Corporate Center, (iii) our risk, treasury and capital management and (iv) our corporate governance, corporate responsibility and compensation frameworks. Content of our external reporting documents Information on UBS Group AG and on UBS AG is available on www.ubs.com/investors as follows: – A combined Annual Report providing all relevant and required disclosures for both UBS Group AG and UBS AG, which is also the basis for our combined Form 20-F filing, and – An Annual Report for UBS Group AG only. The MD&A included in the combined Annual Report is on a UBS Group AG consolidated basis, unless otherwise specified. In particular, specific UBS AG (consolidated) information is provided with respect to risk profile, capital and leverage ratio, as well as corporate governance. Financial information for UBS AG (consoli- dated) does not differ materially from UBS Group AG on a con- solidated basis. Refer to the table “Comparison UBS Group AG (consolidated) versus UBS AG (consolidated)” in the “Consolidated financial statements” section of this report for more information. Section All electronic versions of our reports are available on www.ubs.com/ investors Prepared in accordance with 1. Operating environment and strategy 2. Financial and operating performance 3. Risk, treasury and capital manage- ment 4. Corporate governance, responsibility and com- pensation 5. UBS Group AG consolidated financial statements 6. UBS Group AG standalone financial statements 7. UBS Group AG consolidated SEC disclosures 5. UBS AG consolidated financial statements 6. UBS AG standalone financial statements 3 7. UBS AG consolidated SEC disclosures 7. UBS Group AG consolidated Basel III Pillar 3 disclosures GRI / Ordinance2 IFRS Swiss Code of Obliga- tions SEC require- ments Basel III IFRS Swiss federal banking law SEC require- ments 6. UBS Lim- ited selected financial information 3 6. UBS Switzerland AG stand- alone finan- cial state- ments 3 Swiss federal banking law Audited / unaudited Unaudited1 Audited Unaudited Unaudited Audited Unaudited Audited Unaudited These sections are based on the consolidated UBS Group. Language Publication English Electronic UBS Group AG and UBS AG Annual Report 2015 English German Electronic and printed Electronic and printed UBS Group AG Annual Report 2015 4 4 4 4 1 Certain disclosures in the “Risk, treasury and capital management” section are required by IFRS and subject to audit, and are an integral part of the Financial Statements. In section 4, only the compensation report is audited. Content of the sections “UBS and Society” and “Our employees” is reviewed by Ernst & Young (EY) to ensure information has been prepared according to the Global Reporting Initiative (GRI). 2 Content of the sections “UBS and Society” and “Our employees” was prepared in accordance with Global Reporting Initiative (GRI) Sustainability Reporting Guidelines. The “Compensation” section was prepared in accordance with the Swiss Ordinance against Excessive Compensation in Stock Exchange Listed Companies (“Ordinance”). 3 This section includes legal entity regulatory information prepared in accordance with Basel III. 4 The printed version of this report only contains summarized financial statements for UBS AG (standalone) and UBS Switzerland AG (standalone). 17 Operating environment and strategy Signposts Throughout the Annual Report, signposts that are displayed at the beginning of a section, table or chart – Audited | EDTF | Pillar 3 | – indicate that those items have been audited, have addressed the recommendations of the Enhanced Disclosure Task Force, or satisfy Basel Pillar 3 disclosure requirements, respectively. A “triangle” symbol – – indicates the end of the signpost. Operating environment and strategy Current market climate Current market climate The global economy expanded in aggregate, but divergent growth trends were in evidence, and disinflationary factors persisted. Global economic developments in 2015 2015 was a year of expanding global output, characterized by gradual improvement in advanced economies, set against a con- tinued slowing in emerging economies. Many large advanced economies – in particular, the eurozone and Japan – enjoyed a stronger pace of economic activity, under- pinned by continued loose monetary policy. However, global infla- tion rates remained unexpectedly low, as a result of a rebalancing of the Chinese economy, ongoing deleveraging in corporate sec- tors with excessive debt and oversupply, and continued commod- ity price declines driven by supply / demand imbalances. A number of macroeconomic and geopolitical shocks impacted the path of global economic expansion. Particularly noteworthy were the fear of a Greek exit from the eurozone, a first quantita- tive easing package from the European Central Bank, which was extended later in the year, extreme volatility in Chinese onshore equity markets, uncertainty around the timing and speed of US interest rate rises, and policy decisions by the Swiss National Bank (SNB). Switzerland In UBS’s home market, the year began with a decision by the SNB to discontinue the minimum targeted exchange rate for the Swiss franc versus the euro, which had been in place since September 2011. At the same time, the SNB lowered the interest rate on deposit account balances at the SNB that exceed a given exemp- tion threshold by 50 basis points to negative 0.75%. This move created difficult conditions for Swiss franc deposi- tors, and reduced the profitability of many financial market trans- actions in Swiss francs. In aggregate, continued Swiss franc strength against the euro, as well as the British pound, led to material deflationary pressures on the local economy and nega- tively affected the contribution of net exports and inventories to Swiss economic growth. However, strong domestic consumption trends continued, aided in part by an annual population growth of 1.2%. United States The US economy expanded modestly and consumer spending remained the biggest contributor to economic growth. However, a strong US dollar dampened the growth contribution from net exports. Business sentiment and investment intentions remained cautious, given concerns over worldwide growth in demand. US labor markets showed significant improvements, as the unemployment rate declined and real labor income increased. The Board of Governors of the Federal Reserve System (Federal Reserve) determined labor market and core inflation data to be sufficiently strong to raise the target range of the federal funds rate in December 2015 from 0–0.25% to 0.25–0.5%, the first interest rate hike in nine years. Eurozone In the eurozone, economic growth gained momentum, as mone- tary policy efforts fostered lending growth. The European Central Bank announced monetary policy-easing measures in January 2015, specifically a quantitative easing program of EUR 60 billion per month to lower economy-wide borrowing costs. The resulting euro depreciation also offered significant support to export-ori- ented eurozone economies. Significant easing in financial conditions in the first quarter of 2015 supported stronger monetary growth and real activity. This was corroborated by stronger lending growth via the banking sector. However, despite these positive developments, concerns over the economic slowdown and rebalancing in emerging mar- kets, notably China, led to some softening in real activity and con- fidence indicators in the latter half of the year. Fiscal conditions moved from significant austerity toward a neutral position with respect to growth impact. 20 Japan The pace of Japanese economic growth improved compared to the recession in 2014, but was constrained by relatively low wage growth. An increase in sales taxes implemented in April 2014 con- tinued to weigh on consumer demand through 2015, and lower energy prices were not sufficient to offset slow wage growth. Additionally, the aforementioned sales tax increase did not raise core inflation, which lingered well below the Bank of Japan’s 2% target throughout the second half of 2015. Concerns over the impact of slower growth in China, and the reluctance of the Bank of Japan to further loosen its monetary policy, also impacted international demand for Japanese goods and services. China In China, policymakers responded to private-sector debt imbal- ances and excess industrial capacity with material easing in mon- etary and banking financial conditions. However, GDP growth continued to slow compared with prior years. High private-sector leverage, a large policy-induced switch from investment-driven to consumption-driven growth, and a deceleration in property market activity resulted in slowing indus- trial output, tightening of onshore financing conditions, and building domestic deflationary pressures. Lower demand for com- modities also reflected global disinflationary forces, which were supplemented by a surprise devaluation of the Chinese yuan against the US dollar in August. A mixture of tighter macroprudential policy and less state sup- port for overindebted businesses led to higher credit spreads and sharp equity market declines as a speculation bubble in the stock market unwound. The Chinese authorities responded with several interest rate and reserve ratio requirement cuts, which resulted in some evidence of a stabilizing real economic growth trend, albeit at a lower level, by year-end. In late November, the Chinese yuan was accepted for inclusion in the International Monetary Fund’s Special Drawing Rights bas- ket, with effect from October 2016. Other emerging markets Other major emerging markets continued to face challenges ranging from overly tight domestic financial conditions, inflation pressures arising from currency depreciation, and lower commod- ity prices. Large depreciation in local currencies and higher costs of bor- rowing were seen in select emerging countries, as the prospect and eventual decision from the Fed to raise US interest rates resulted in a strengthening US dollar and elevated costs of exter- nal funding. The Russian economy was particularly impacted by ongoing economic sanctions, negative ramifications of a lower oil price on government finances and the weakness of the Russian ruble against the US dollar. Local financial conditions remained tight, following the Central Bank of Russia’s moves to stem the declin- ing international value of the currency by raising domestic policy interest rates late in 2014. Geopolitical developments, such as corruption allegations in Brazil and tensions between oil-producing Saudi Arabia and Iran, highlighted the idiosyncratic risks of doing business and investing in emerging economies. Economic and market outlook for 2016 Based on UBS Research’s economic models, we expect a modest slowing in the pace of global economic expansion in 2016, with significant underlying differences in growth rates dependent on the degree of economy-wide deleveraging. The US, where private sector deleveraging is most advanced, should enjoy higher labor income gains and robust domestic con- sumer activity. However, inventory effects and lower investment due to oil price declines may offset this positive consumer out- look. Additionally, the US high-yield bond market may experience an increase in defaults, concentrated particularly in the energy sector. In the eurozone, we observe persistent support from loose monetary policy and expect a rise in real disposable spending power, more readily available credit, and mildly expansionary fis- cal policy. Together, these factors should support a moderate improvement in growth prospects. Swiss economic growth should continue at a pace similar to 2015, and we expect downward pressure on year-on-year infla- tion to persist due to the ongoing impact of low commodity prices. Japan’s economic growth will likely remain heavily dependent on domestic demand. The negative impact of lower oil prices on consumer price inflation should abate, but inflation is expected to miss the Bank of Japan’s 2% inflation target in 2016. We expect emerging markets to stabilize in aggregate, but exhibit heterogeneous growth paths. We believe China is likely to avoid a hard landing as a result of continued monetary policy loosening and fiscal stimulus. However, the broader Asia region may remain under pressure from slower trade growth, high levels of debt, and disinflationary pressures. We are closely monitoring a number of potential geopolitical risks. These include, but are not limited to, uncertainty over the UK’s status in the EU; the impact of migration on European poli- tics; disruptions to political systems driven by emergent political parties or organizations; an escalation of geopolitical tension in the Middle East and North Africa; and acts of terrorism or cyberat- tacks. The realization of any of these risks could pose wider chal- lenges to the global economic outlook. 21 Operating environment and strategy Operating environment and strategy Regulation and supervision Regulation and supervision The Swiss Financial Market Supervisory Authority is UBS’s home country regulator and consolidated supervisor. As a financial services provider with a global footprint, we are also regulated and supervised by the relevant authorities in each of the jurisdictions in which we conduct business. The following sections summarize the key regulatory requirements and supervision of our business in Switzerland as well as in the US and the UK, our next two largest areas of operations. UBS Group AG and its subsidiaries are subject to consolidated supervision by the Swiss Financial Market Supervisory Authority (FINMA) under the Swiss Federal Law on Banks and Savings Banks (Banking Act), and the related ordinances which impose require- ments, including minimum capital, liquidity, risk concentration and organizational requirements. Through UBS AG and UBS Swit- zerland AG, which are licensed as banks in Switzerland, we may engage in a full range of financial services activities in Switzerland and abroad, including personal banking, commercial banking, investment banking and asset management. We are also subject to supervision and functional regulation in the markets in which we operate outside of Switzerland, includ- ing the US, the UK and the EU. Since the financial crisis of 2007– 2009, regulation of financial services firms has been undergoing significant changes both in Switzerland and in the other countries where we operate. These changes, which continue to require sig- nificant resources to implement, have a significant effect on how we conduct our business and result in increased ongoing costs. ➔ Refer to the “Regulatory and legal developments” and “Risk factors” sections of this report for more information Regulation and supervision in Switzerland Capital regulation A revised banking ordinance and capital adequacy ordinance implementing the Basel III capital standards and the Swiss too big to fail (TBTF) law became effective on 1 January 2013. In 2015, the Swiss Federal Council published proposed revi- sions to the Swiss TBTF framework. For Swiss systemically relevant banks (SRBs) that operate internationally, including UBS, the pro- posal would increase the existing Swiss SRB capital requirements based on risk-weighted assets (RWA) and the leverage ratio denominator and would establish an additional “gone concern” requirement, which, together with the going concern require- ment, represents the total loss-absorbing capacity (TLAC) required for Swiss SRBs. The new requirements would be phased in and become fully applicable by 1 January 2020. The proposal would make the Swiss capital regime among the most demanding in the world. In addition, Swiss authorities have exercised authority to impose countercyclical capital buffers for real estate related expo- sures in Switzerland and we have agreed with FINMA to an incre- mental operational risk capital buffer. The Basel Committee on Banking Supervision (BCBS) has issued far-reaching proposals on changes to the standardized approach to credit risk and to the calculation of operational risk, as well as a revised market risk framework. It has introduced man- datory disclosure of RWA based on a harmonized approach. It is also conducting a review of the risk-based capital framework and is expected to issue proposals on the design of a capital floor framework. We expect that Switzerland will incorporate the revi- sions to the BCBS framework in its capital requirements following completion of the proposals. ➔ Refer to the “Regulatory and legal developments,” “Risk factors” and “Capital management” sections of this report for more information Liquidity and funding As a Swiss SRB, we are required to maintain a liquidity coverage ratio (LCR) of high-quality liquid assets to estimated stressed net short-term funding outflows, and will be required to maintain a net stable funding ratio (NSFR), which are intended to ensure that we are not overly reliant on short-term funding and that we have sufficient long-term funding for illiquid assets. ➔ Refer to the “Treasury management” and “Risk factors” sections of this report for more information Resolution planning and resolvability The revised Swiss Banking Act and capital adequacy ordinances provide FINMA with additional powers to intervene in order to prevent a failure or resolve a failing financial institution, including UBS Group, UBS AG and UBS Switzerland AG. These measures may be triggered when certain thresholds are breached and per- mit the exercise of considerable discretion by FINMA in determin- ing whether, when or in what manner to exercise such powers. In case of a possible insolvency, FINMA may impose more onerous requirements on us, including restrictions on the payment of divi- dends and interest. Although the actions that FINMA may take in such circumstances are not yet defined, we could be required directly or indirectly, for example, to alter our legal structure (e.g., to separate lines of business into dedicated entities, with limita- tions on intra-group funding and certain guarantees), or to reduce business risk in some manner. The Swiss Banking Act also provides FINMA with the ability to extinguish or convert to common equity the liabilities of a bank in connection with its resolution. 22 Swiss TBTF requirements require Swiss SRBs, including UBS, to put in place viable emergency plans to preserve the operation of systemically important functions despite a failure of the institu- tion, to the extent that such activities are not sufficiently sepa- rated in advance. The current Swiss TBTF law provides for the possibility of a limited rebate on capital requirements for Swiss SRBs that adopt measures to reduce resolvability risk beyond what is legally required. Such measures include changes to the legal structure of a bank group in a manner that would insulate parts of the group to exposure from risks arising from other parts of the group, thereby making it easier to dispose of certain parts of the group in a recovery scenario, to liquidate or dispose of certain parts of the group in a resolution scenario or to execute a debt bail-in. The proposal for a revised TBTF ordinance also contem- plates a limited rebate on the proposed TLAC requirement based on improvements to resolvability. However, there is no certainty with respect to timing or size of a potential rebate. ➔ Refer to the “Regulatory and legal developments” section of this report for more information on proposed revisions to the Swiss TBTF framework ➔ Refer to “If we experience financial difficulties, FINMA has the power to open resolution or liquidation proceedings or impose protective measures in relation to UBS Group AG, UBS AG or UBS Switzerland AG, and such proceedings or measures may have a material adverse effect on our share- holders and creditors” in the “Risk factors” section of this report for more information ➔ Refer to the “The legal structure of UBS Group” section of this report for more information Supervision FINMA fulfills its statutory supervisory responsibilities through licensing, regulation, monitoring and enforcement. Generally, prudential supervision in Switzerland is based on a division of tasks between FINMA and authorized audit firms. Under this two- tier supervisory system, FINMA has responsibility for overall super- vision and enforcement measures while the authorized audit firms carry out official duties on behalf of FINMA. The responsibilities of external auditors encompass the audit of financial statements, the risk-based assessment of banks’ compliance with prudential requirements and on-site audits. As we are considered systemically relevant in Switzerland, we are subject to more rigorous supervision than most other Swiss banks. To promote supervisory cooperation and coordination, FINMA has implemented a Supervisory College and a Crisis Man- agement College with US and UK authorities and an expanded General Supervisory College, including more than a dozen of our host regulators. The Swiss National Bank (SNB) contributes to the stability of the financial system through macro-prudential measures and monetary policy, while also providing liquidity to the banking sys- tem. It does not exercise any banking supervision authority and is not responsible for enforcing banking legislation, but works together with FINMA to assist in the regulation of Swiss systemi- cally relevant banks. ➔ Refer to the “Regulatory and legal developments” and “Risk factors” sections of this report for more information Regulation and supervision outside of Switzerland Regulation and supervision in the US We maintain branches of UBS AG in the US and as a result, our operations in the US are subject to overall regulation and supervi- sion by the Board of Governors of the Federal Reserve (Federal Reserve Board) under a number of laws. UBS AG has been desig- nated a financial holding company under the Bank Holding Com- pany Act of 1956, as amended (BHCA). Financial holding compa- nies may engage in a broader spectrum of activities than holding companies of US banks or foreign banking organizations that are not financial holding companies. These activities include expanded authority to underwrite and deal in securities and commodities and to make merchant banking investments in commercial and real estate entities. To maintain our financial holding company status, (i) the Group and UBS Bank USA (a Federal Deposit Insur- ance Corporation (FDIC)-insured depository institution subsidiary), are required to meet certain capital ratios, (ii) the US branches of UBS AG and UBS Bank USA are required to maintain certain examination ratings, and (iii) UBS Bank USA is required to main- tain a rating of at least “satisfactory” under the Community Rein- vestment Act of 1977. We are subject to Federal Reserve Board regulations issued under the Dodd-Frank Act that from 1 July 2016 will require for- eign banking organizations (FBO) operating in the US to hold all US subsidiary operations through a single US intermediate hold- ing company (IHC). The regulations require our IHC to meet risk- based capital, leverage ratio and liquidity requirements, subject the IHC to Federal Reserve Board stress test and capital plan requirements and impose governance requirements on the IHC and our operations in the US. Regulations implementing the “Volcker Rule” became effec- tive in July 2015. In general, the Volcker Rule prohibits any bank- ing entity from engaging in proprietary trading and from owning interests in hedge funds and other private fund vehicles. The Vol- cker Rule also broadly limits investments and other transactional activities between a bank and funds that the bank has sponsored or with which the bank has certain other relationships. The Vol- cker Rule permits us and other non-US banking entities to engage in certain activities that would otherwise be prohibited to the extent that they are conducted entirely outside the US and certain other conditions are met. We have established a global compli- ance and reporting framework to ensure compliance with the Vol- cker Rule and the available exemptions. Although the full effect of the Volcker Rule remains uncertain given the complexity of the implementing regulations and the required compliance frame- work, it could have a substantial impact on market liquidity and the economics of market-making activities. 23 Operating environment and strategy Operating environment and strategy Regulation and supervision UBS AG maintains branches and representative offices in sev- eral states, including Connecticut, Illinois, New York, California and Florida. These branches are authorized and supervised either by the Office of the Comptroller of the Currency (OCC) or the state banking authority of the state in which the branch is located. We also maintain a trust company and UBS Bank USA, which are licensed and regulated by state regulators. Only the deposits of UBS Bank USA, headquartered in the state of Utah, are insured by the FDIC. The regulation of our US branches and subsidiaries imposes activity and prudential restrictions on the business and operations of those branches and subsidiaries, including limits on extensions of credit to any single borrower and on transactions with affiliates. The licensing authority of each state-licensed US branch may, in certain circumstances, take possession of the business and property of UBS located in the state of the UBS offices it licenses. These cir- cumstances generally include violations of law, unsafe business practices and insolvency. As long as we maintain one or more fed- eral branches licensed by the OCC, the OCC also has the authority to take possession of all the US operations of UBS under broadly similar circumstances, as well as in the event that a judgment against a federally licensed branch remains unsatisfied. If exercised, this federal power would pre-empt the state insolvency regimes that would otherwise be applicable to our state-licensed branches. As a result, if the OCC 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 UBS’s US branches as a group, and then made available for appli- cation pursuant to any Swiss insolvency proceeding. UBS Financial Services Inc. and UBS Securities LLC, as well as our other US-registered broker-dealer subsidiaries, are subject to laws and regulations that cover all aspects of the securities and futures business. These entities are regulated by a number of dif- ferent government agencies and self-regulatory organizations, including the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority, the Commodities Futures Trading Commission (CFTC), the Municipal Securities Rulemaking Board and the exchanges of which it is a member, depending on the specific nature of the respective broker-dealer’s business. In addition, the US states and territories have local securities com- missions 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. UBS Asset Management (Americas) Inc. and our other US-reg- istered investment advisor entities are regulated primarily by the SEC and are subject to regulations that cover all aspects of the investment advisory business. Some of these entities are also reg- istered with the CFTC as commodity trading advisors (CTAs) and / or commodity pool operators (CPOs) and in connection with their activities as CTAs and / or CPOs are regulated by the CFTC. To the extent these entities manage plan assets of employee benefit plans subject to the Employee Retirement Income Security Act of 1974, their activities are subject to regulation by the US Depart- ment of Labor. ➔ Refer to the “Regulatory and legal 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 two bodies: the Prudential Regulation Authority (PRA), an affiliated authority of the Bank of England, and the Financial Conduct Authority (FCA). The PRA’s main objective relating to the banking sector is to promote the safety and soundness of UK-regulated financial firms. The FCA is responsible for securing an appropriate degree of consumer protection, protecting the integrity of the UK finan- cial system and promoting effective competition in the interest of consumers. The PRA and FCA operate a risk-based approach to supervision and have a wide variety of supervisory tools available to them, including regular risk assessments, on-site inspections, which may relate to an industry-wide theme or be firm-specific, and the ability to commission reports by skilled persons, who may be the firm’s auditors, information technology specialists, lawyers or other consultants as appropriate. The UK regulators also have a wide set of sanctions at their disposal, which may be imposed under the Financial Services and Markets Act. Some of our subsidiaries and affiliates are also regulated by the London Stock Exchange and other UK securities and commodities exchanges of which they 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 and liquidity adequacy standards, client protection requirements and conduct of business rules, such as the Markets in Financial Instruments Directive I and recov- ery planning and other related requirements from the Bank Recovery and Resolution Directive. These directives apply through- out the EU and are reflected in the regulatory regimes of the various member states. ➔ Refer to the “Regulatory and legal developments” and “Risk factors” sections of this report for more information Market regulation Substantial changes in the laws and regulations governing markets and trading activity have been enacted or are being considered. In June 2015, the Swiss Parliament adopted new regulation of the financial market infrastructure in Switzerland which came into effect on 1 January 2016 (subject to phase-in provisions) and mandates the clearing of over-the-counter (OTC) derivatives with a central counterparty. 24 In the EU, similar changes have been introduced largely through the new Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR), that will make significant changes to the OTC derivative markets, to the regulation and operation of markets for other financial instruments, as well as to other related laws. These directives and more detailed implementing measures are expected to take effect in 2017. They will make significant changes to the provision of financial services in and into the Euro- pean Economic Area, including increased pre- and post-trade transparency, further restrictions on the provision of inducements, introduction of a new discretionary trading venue with the aim of regulating broker crossing networks; increased regulation of algo- rithmic trading activities; increased conduct of business require- ments; and strengthened supervisory powers which include powers for authorities to ban products or services in particular situations. In the US, several aspects of market regulation have been addressed in the Dodd-Frank Act and subsequent additional rule- making by the SEC and CFTC, including money market mutual fund reforms, electronic trading platform disclosure, regulation imposing systems and controls requirements, and new cybersecu- rity requirements, under their respective authorities. OTC derivatives regulation In 2009, the G20 countries committed to require all standardized OTC derivative contracts to be traded on exchanges or trading facilities and cleared through central counterparties. This commit- ment is being implemented through Dodd-Frank in the US and corresponding legislation in the EU, Switzerland and other juris- dictions, and has and will continue to have a significant effect on our OTC derivatives business, which is conducted primarily in the Investment Bank. For example, we expect that, as a rule, the shift of OTC derivatives trading to a central clearing model will tend to reduce profit margins in these products, although some market participants may be able to offset this effect with higher trading volumes in commoditized products. These market changes are likely to reduce the revenue potential of certain lines of business for market participants generally, and we may be adversely affected. UBS AG registered as a swap dealer with the CFTC in the US at the end of 2012, enabling the continuation of its swaps business with US persons. We expect to register UBS AG as a security- based swap dealer with the SEC, when its registration is required. Regulations issued by the CFTC and those proposed by the SEC impose substantial new requirements on registered swap dealers for clearing, trade execution, transaction reporting, recordkeep- ing, risk management and business conduct. Certain of the CFTC’s regulations, including those relating to swap data reporting, recordkeeping, compliance and supervision, apply to UBS AG globally. Application of the CFTC and SEC regulations continues to present a substantial implementation burden, will likely dupli- cate or conflict with legal requirements applicable to us outside the US, including in Switzerland, and may put us at a competitive disadvantage to firms that are not required to register as swap dealers with the SEC or CFTC. Anti-money laundering and anti-corruption A major focus of US government policy relating to financial insti- tutions in recent years has been combating money laundering and terrorist financing. The US Bank Secrecy Act and other laws and regulations applicable to UBS require the maintenance of effective policies, procedures and controls to detect, prevent and report money laundering and terrorist financing, and to verify the iden- tity of our clients. As a result, failure to maintain and implement adequate programs to prevent money laundering and terrorist financing could result in significant legal and reputational risk. We are subject to laws and regulations in jurisdictions in which we operate, including the US Foreign Corrupt Practices Act and the UK Bribery Act, prohibiting corrupt or illegal payments to gov- ernment officials and others. We maintain policies, procedures and internal controls intended to comply with these laws and regulations. Data protection We are subject to laws and regulations concerning the use and protection of customer, employee and other personal information and confidential information, including provisions under Swiss law, the EU Data Protection Directive and laws of other jurisdictions. Compensation practices We are subject to laws and regulations and regulatory oversight that significantly affect our compensation practices, including the Minder initiative in Switzerland, which requires a shareholder vote on the aggregate compensation of each of our Board of Directors and Group Executive Board, FINMA ordinances and EU regulation. These laws and regulations are intended to curb compensation deemed excessive or to ensure that the compensation structure of financial institutions does not encourage excessive risk-taking. We have made significant changes to the structure of our compensa- tion arrangements to comply with these requirements and may make future changes as these requirements evolve. 25 Operating environment and strategy Operating environment and strategy Regulatory and legal developments Regulatory and legal developments Key developments in Switzerland EDTF | Proposed new requirements for Swiss systemically relevant banks In December 2015, the Federal Department of Finance published for consultation a revised too big to fail (TBTF) ordinance based on the cornerstones announced by the Swiss Federal Council in October 2015. For Swiss systemically relevant banks (SRBs) that operate internationally, the proposal would revise existing Swiss SRB capital requirements and would establish additional gone concern requirements, which, together with the going concern requirement, represents the total loss-absorbing capacity, or TLAC. TLAC encompasses regulatory capital such as common equity tier 1 (CET1), additional tier 1 (AT1) and tier 2 capital as well as liabilities that can be written down or converted into equity in case of resolution or recovery measures. The proposal would make the Swiss capital regime among the most demanding in the world. The proposed going concern capital requirements consist of basic requirements for all Swiss SRBs to maintain a leverage ratio of 4.5% and a ratio of capital to risk-weighted assets (RWA) of 12.9%. A progressive buffer would be added on top of the basic requirements, reflecting the degree of systemic importance. The progressive buffer for UBS is expected to be 0.5% of its leverage ratio denominator (LRD) and 1.4% of RWA, resulting in total going concern capital requirements of 5.0% of LRD and 14.3% of RWA (excluding countercyclical buffer requirements). The going concern leverage ratio proposal would require a minimum CET1 capital ratio of 3.5% of LRD and of up to 1.5% in high-trigger AT1 capital instruments. The minimum CET1 capital requirement will remain unchanged at 10% of RWA, and the balance of the RWA-based capital requirement, i.e., 4.3%, may be met with high-trigger AT1 instruments. The gone concern requirements would be 5.0% of LRD and 14.3% of RWA for internationally active Swiss SRBs and may be met with senior debt that is TLAC eligible. Banks would be eligible for a reduction of the gone concern requirements if they demon- strate improved resolvability. The proposal envisages transitional arrangements for out- standing low- and high-trigger tier 2 instruments to qualify as going concern capital until the earlier of 31 December 2019 or their maturity or first call date. Thereafter, they may be used to meet the gone concern requirement until one year before matu- rity. Low-trigger AT1 capital instruments will continue to qualify as going concern capital until the first call date and thereafter may also be used to meet the gone concern requirement. The pro- posed Swiss TBTF ordinance would permit a reduction of up to 2% of the LRD and 5.7% of RWA gone concern requirements for measures taken to improve resolvability. The amount and timing of any such reduction will be determined by FINMA as such mea- sures are implemented. The new capital rules are expected to come into force as of 1 July 2016. We intend to use the four-year phase-in period to fully implement the new requirements. We intend to meet the new CET1 leverage ratio requirement of 3.5% by retaining suffi- cient earnings while maintaining our commitment to total capital returns to shareholders of at least 50% of net profit attributable to shareholders, provided that we maintain a fully applied CET1 capital ratio of at least 13%, and consistent with our objective of maintaining a post-stress fully applied CET1 capital ratio of at least 10%. Furthermore, we plan to continue our issuance of AT1 instruments and TLAC-eligible senior debt to meet the new requirements without increasing overall liabilities. ➔ Refer to “If we are unable to maintain our capital strength, this may adversely affect our ability to execute our strategy, client franchise and competitive position” in the “Risk factors” section of this report for more information In addition to defining the new capital requirements, the Swiss Federal Council has proposed that the implementation of a Swiss emergency plan be completed by the end of 2019. The Swiss emergency plan defines the measures required to ensure a continuation of systemically relevant functions in Switzerland. 26 EDTF | Comparison of current and proposed requirements Capital ratio1 Leverage ratio2 28.6%3, 4 14.3% Gone concern4 Going concern 0.8% 3.5% 5.5% 4.5% 1.1.2020 (proposed) Gone concern Going concern 17.5%3 4.5% 3.0% 5.5% 4.5% 31.12.19 (current) Gone concern Going concern 4.2% 1.1% 0.7% 1.3% 1.1% 31.12.19 (current) 10%4 5.0% 1.5% 2.0% 1.5% 1.1.2020 (proposed) Gone concern4 Going concern Base: CET1 capital Buffer: CET1 capital Buffer: high-trigger loss-absorbing capital5 Base: high-trigger additional tier 1 capital6 Buffer: high-trigger additional tier 1 capital6 Progressive buffer: low-trigger loss-absorbing capital TLAC-eligible senior unsecured debt7 1 In percent of risk-weighted assets. 2 In percent of the leverage ratio denominator. 3 Does not include a countercyclical buffer requirement as potential future requirements cannot be accurately predicted. 4 This requirement may be reduced by a resolvability rebate. 5 CET1 capital can be substituted by high-trigger loss-absorbing capital up to the stated percentage. 6 Low-trigger additional tier 1 capital instruments will continue to qualify as going concern capital until first call date. 7 Any high- and low-trigger tier 2 capital instruments remaining after 2019 will qualify for the gone concern requirement until one year before maturity. ▲ Implementation of the global Automatic Exchange of Information standard underway In December 2015, the Swiss Parliament adopted proposals to create the legal basis for the implementation of the global auto- matic exchange of information (AEI) standard in tax matters. At the same time, it ratified the joint Organization for Economic Cooperation and Development (OECD) and Council of Europe Convention on Mutual Administrative Assistance, as well as the Multilateral Competent Authority Agreement. Separately, the Swiss Parliament rejected in December 2015 a draft law from the Swiss Federal Council for banks and other financial intermediaries in Switzerland to comply with enhanced due diligence requirements when accepting assets from clients resident in states without an AEI agreement. In November 2015, the Swiss Federal Council submitted the EU-Swiss and the Australia-Swiss agreements on the AEI to Parlia- ment for approval. In early 2016, consultations were initiated on the implementation of the AEI with the British crown dependen- cies of Jersey, Guernsey and the Isle of Man, as well as with Japan, South Korea, Canada, Iceland and Norway. In the past, we have experienced outflows of cross-border client assets from our Swiss booking center as a result of changes in local tax regimes or their enforcement. ➔ Refer to the “Risk factors” section of this report for more information 27 30 25 20 15 10 5 0 Operating environment and strategy Operating environment and strategy Regulatory and legal developments Swiss Parliament adopts Financial Market Infrastructure Act In June 2015, the Swiss Parliament adopted the Financial Market Infrastructure Act (FMIA). The FMIA changes the regulation of financial market infrastructure in Switzerland, to provide an inter- national level playing field, and implements the G20 commit- ments on over-the-counter (OTC) derivatives in Switzerland, including (i) mandating clearing via a central counterparty, (ii) transaction reporting to a trade repository, (iii) risk mitigation measures and (iv) mandatory trading of derivatives on a stock exchange or other trading facility once this has been introduced in partner states. The FMIA also (i) introduces new licensing requirements for stock exchanges, multilateral and organized trading facilities, central counterparties, central securities deposi- taries, trade repositories and payment systems, (ii) imposes trans- parency requirements for securities trading on platforms and (iii) establishes a basis for regulating high-frequency trading. The FMIA also empowers the Swiss Federal Council to impose position limits for commodity derivatives, should this be deemed necessary at a later date. The new law entered into force in January 2016 together with the Swiss Federal Council’s Financial Market Infra- structure Ordinance, the respective FINMA ordinance and amend- ments to the SNB’s National Bank Ordinance. For some require- ments, transitional periods are provided up to January and August 2017. The FMIA is expected to affect the way UBS trades securi- ties and derivatives, particularly OTC derivatives, leading over time to standardized OTC derivatives being centrally cleared to reduce counterparty risk, and may have other effects on markets. In addi- tion, the FMIA creates additional reporting obligations and will require foreign financial market infrastructure to obtain FINMA approval for providing services in Switzerland. UBS is taking the necessary steps to prepare for implementation, including the ful- fillment of organizational requirements, risk mitigation and OTC trade reporting. Financial Services Act and Financial Institutions Act to enter parliamentary debate On 4 November 2015, the Swiss Federal Council adopted the dis- patch on the Financial Services Act (FinSA) and the Financial Insti- tutions Act (FinIA). Both items will jointly enter parliamentary debate in 2016. The FinSA primarily aims to improve client protec- tion and has far-reaching consequences for the provision of finan- cial services in Switzerland. The FinIA will provide a differentiated supervisory regime for financial institutions and introduce a pru- dential supervision of managers of individual client assets, man- agers of the assets of occupational benefits schemes, and trust- ees. A final assessment for both acts can only be made once the parliamentary debate has been concluded. Key developments in the EU Bank Recovery and Resolution Directive The Bank Recovery and Resolution Directive (BRRD) came into force during 2014. This directive seeks to achieve a harmonized approach to the recovery and resolution of banks in the EU and broadly covers measures relating to recovery and resolution plan- ning, early intervention powers for authorities and resolution tools should a bank fail or be deemed likely to fail. The majority of the Directive has been applicable from 1 Janu- ary 2015, while the bail-in tool became applicable on 1 January 2016. UBS’s EU subsidiaries that are credit institutions or invest- ment firms are subject to the requirements of the Directive, while EU member states have the right to apply the provisions of the Directive to UBS’s EU-based branches in certain circumstances. The Single Resolution Mechanism (SRM) implements the BRRD in the eurozone. The SRM became fully operational on 1 January 2016. The SRM is an important step in the completion of the European Banking Union. The aim of the SRM is to ensure an orderly resolution of failing banks with minimum impact on the real economy and public finances of the participating member states and beyond. The SRM establishes uniform rules and proce- dures for the resolution of entities, removes obstacles to resolu- tion in order to make the European banking system more secure, and ensures a unified decision-making process for resolution within the European Banking Union to foster market confidence. UBS (Luxembourg) S.A. is directly supervised by the European Central Bank (ECB) under the Single Supervisory Mechanism and thereby automatically falls under the SRM. The Single Resolution Board is expected to determine minimum requirements for eligi- ble liabilities (MREL) for UBS (Luxembourg) S.A. over the course of 2016. As MREL are set on a case–by-case basis, the potential impact on UBS is not yet clear. It is possible that we will need to increase loss-absorbing capacity at the UBS (Luxembourg) S.A. level as a result of the new requirements. In the UK, the Bank of England (BoE) issued a consultation paper in December 2015 on the UK implementation of the BRRD’s MREL. These requirements are expected to be established on a case-by-case basis and will apply directly to UBS Limited. The BoE states that where the resolution strategy of a UK subsidiary of a non-UK headquartered bank is based on the home resolution authority taking the lead with the BoE in a supporting role (as is the case for UBS Limited), it will set MREL for the subsidiary to reflect the agreed resolution strategy. MREL for such institutions will generally need to be satisfied through capital or subordinated liabilities issued to the foreign parent company and therefore will be subordinated to senior operating liabilities. UBS Limited is required to be fully compliant with its applicable MREL by 1 Janu- ary 2020. MREL is conceptually similar to the Financial Stability Board’s (FSB) total loss absorbing capacity (TLAC) standards and the two are broadly compatible although not identical. 28 EU Markets in Financial Instruments Directive II and Regulation package application date expected to be delayed to January 2018 The European Commission (EC) has formally proposed a one-year delay to the EU Markets in Financial Instruments Directive II and Regulation package (MiFID II / MiFIR), postponing its application to 3 January 2018. Any delay is subject to the approval of the Euro- pean Parliament and the Council of the EU. Once applied, MiFID II / MiFIR will have significant impact in five broad areas: (i) market structure, (ii) transparency, (iii) European Securities and Market Authority (ESMA) powers; (iv) conduct of business / investor pro- tection, and (v) third-country market access. Final implementing measures are expected to be adopted by the EC in the first half of 2016. MiFID II / MiFIR is expected to significantly affect processes and practices in UBS’s asset management, investment banking and wealth management businesses. Areas of significant change include requirements for higher levels of non-equity transparency, restrictions on the volume of equity trading that can take place on a non-pre-trade transparent basis, increased levels of best execution transparency, potential restrictions on the current model for payment for investment research, increased product governance requirements, and the introduction of commodities position reporting. European Market Infrastructure Regulation clearing obligations and non-cleared derivative risk mitigation requirements to become applicable during 2016 The G20 leaders agreed in 2009 that all standardized OTC deriva- tive contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through Central Coun- terparties (CCPs) by the end of 2012. In the EU, the clearing and reporting requirements are being implemented via European Mar- ket Infrastructure Regulation (EMIR), while the trading obligations are being implemented via the review of MiFID. EMIR came into force on 16 August 2012. On 21 December 2015, rules requiring mandatory clearing of OTC derivatives through a CCP came into force for certain OTC interest rate swaps. The clearing obligation will be phased in and will apply from 21 June 2016 for Category 1 counterparties, including UBS Limited. The rules include a three- year transitional period for intra-group transactions between an EU and a non-EU group counterparty. The EC has also adopted a clearing obligation for certain credit default swaps (CDSs). This proposed clearing obligation still requires approval by the Euro- pean Parliament and the Council of the EU before it becomes applicable. UBS Limited and other UBS entities will be impacted by the clearing obligations, as we will be required to clear our own in-scope OTC derivative transactions as well as provide clear- ing services to some of our clients. The risk mitigation require- ments for non-cleared derivatives (including mandatory exchange of initial margin and variation margin) will apply from 1 Septem- ber 2016. These new requirements are expected to have a signifi- cant impact on the operations of, and collateral requirements for, UBS Limited. Preliminary Agreement on Data Protection Regulation reached In December 2015, the European Parliament and the Council of the EU reached a political agreement on the European Data Pro- tection framework, which consists of a regulation on personal data protection and a directive dealing with data protection in law enforcement contexts. The new framework regulates the process- ing of personal data of our clients and employees located (i) in the EU, irrespective of whether or not we process the personal data in the EU, and (ii) outside the EU to the extent that such processing is effected by a natural or legal person, public authority, agency or any other body established in the EU. As such, it has extensive extraterritorial impact. The framework includes new rights for individuals, including a right to have personal data removed from records, and to request access to the data stored by banks at no cost and within a short timeframe. Moreover, significant financial penalties have been introduced for non-compliance with the new framework. The new framework is expected to become effective in the first quarter of 2018, and is likely to impact UBS’s global data processing activities. Agreement on EU Benchmarks Regulation reached The European Parliament and Council of the EU have reached political agreement on the EU Benchmarks Regulation (EBR), which aims to improve the accuracy and integrity of benchmarks. New rules apply to administrators, contributors and users of benchmarks. The regulation is likely to have a cross-divisional impact and potentially a cross-regional impact, as it affects UBS at three lev- els: (i) as administrator of UBS indices, (ii) as contributor to various benchmarks, and (iii) as a user of benchmarks. The definition of benchmarks is broad. The governance, control and transparency requirements for administrators and contributors may carry cost implications. The new authorization requirement and third-coun- try regime may have a significant impact across the industry and will likely result in a reduction of available benchmarks for use in financial instruments and financial contracts. The use of EU benchmarks (captured by the EBR) in financial contracts or finan- cial instruments, or to measure the performance of investment funds may impact our product strategy. The EBR is expected to enter into force in the third quarter of 2016 and become effective in 2018. 29 Operating environment and strategy Operating environment and strategy Regulatory and legal developments Senior Managers and Certification Regime to apply from March 2016 The UK Banking Reform Act, which entered into force in March 2015, implements key recommendations of the Parliamentary Commission on Banking Standards (PCBS). As part of implement- ing the PCBS recommendations, the UK Prudential Regulation Authority and the Financial Conduct Authority (FCA) are introduc- ing the Senior Managers and Certification regimes (SMCR). The Senior Managers Regime will focus accountability on a small number of senior managers specified by the PRA or FCA, whether physically based in the UK or overseas. The Certification Regime will require relevant firms to assess the fitness and propriety of certain employees who could pose a risk of significant harm to the firm or any of its clients. The SMCR for banks applies from 7 March 2016. The SMCR applies directly to UBS Limited and the London branch of UBS AG. Key developments in the US US Securities and Exchange Commission releases final and proposed rules for security-based swaps In 2015, the US Securities and Exchange Commission (SEC) final- ized or proposed a number of rules relating to security-based swaps (SBSs). In January 2015, the SEC proposed additional security-based swap (SBS) transaction reporting rules and guidance. The Report- ing and Dissemination of Security-Based Swap Information Regu- lation (Regulation SBSR) outlines the information that must be reported and publicly disseminated for SBS transactions and assigns reporting duties. The final rules address the cross-border application of Regulation SBSR and specify that any SBS transac- tion involving a US person, registered SBS dealer or registered major SBS participant, whether as a direct counterparty or as a guarantor, must be reported regardless of where the transaction is executed. The compliance date for these new rules, which will increase reporting requirements and associated costs, will depend on the finalization of the proposed rule and on the date the first SBS data repository becomes effective. In February 2016, the SEC finalized rules that apply registration, reporting, public dissemination and business conduct require- ments to SBS transactions of non-US companies that use US per- sonnel to arrange, negotiate or execute SBSs in connection with their dealing activity. The finalized rules specify, among other things, that such transactions be counted toward the requirement to register as an SBS dealer. The rules do not impose mandatory clearing or mandatory trade execution on an SBS between two non-US persons solely because one or both counterparties arrange, negotiate or execute the SBS using personnel located in the US. In August 2015, the SEC finalized its rules describing the regis- tration application process for SBS dealers. Among other things, the rules require non-resident SBS dealers to obtain a legal opinion that concludes that the SBS dealer can, as a matter of law, provide the SEC with access to its books and records and submit to on-site examination, as well as a certification that it can and will do so. UBS intends to register at least UBS AG as an SBS dealer. SEC proposes clawback rules for incentive-based compensation In July 2015, the SEC proposed rules that would require national securities exchanges and associations to establish additional list- ing standards. These would require listed companies, such as UBS, to develop and enforce clawback policies stipulating that if a listed company has to make a material restatement of its financial statements resulting from an error, it must reclaim incentive-based compensation from current and former executive officers that they would not have received on the basis of such restatement. US Department of Labor re-proposes fiduciary rule In April 2015, the US Department of Labor (DOL) re-proposed a fiduciary rule (first proposed in 2010) that would expand the defi- nition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA). Under the revised proposal, all advi- sors, including broker-dealers, would be required to abide by an ERISA fiduciary standard in dealings with qualified retirement plans and individual retirement accounts. The revised proposal would result in a prohibition on a variety of customary transac- tions and fee arrangements in the financial services industry with respect to retirement investors. In addition to providing narrow carve-outs for certain activities, the DOL also issued exemptions from the prohibited transaction rules. Wealth Management Americas and Asset Management would be required to make material changes to their businesses, for example by implement- ing a new fee structure, if the rule is adopted as proposed. US Federal Reserve Board proposes total loss-absorbing capacity rules, as well as long-term debt and clean holding company requirements In October 2015, the Federal Reserve Board proposed a rule for total loss-absorbing capacity (TLAC) and long-term debt (LTD) requirements for covered bank holding companies and the Inter- mediate Holding Companies (IHCs) of foreign banks. The pro- posal would require IHCs, such as that of UBS, to hold internal LTD based on the greatest of 7% of RWA, 3% of total leverage exposure if subject to the supplementary leverage ratio (SLR), and 4% of average total consolidated assets. The internal TLAC requirement would depend on whether the IHC is a non-resolu- tion entity or a resolution entity, as defined in the rule. Non-reso- lution IHCs, which require certification from the home country regulator, would be required to hold the greatest of 16% of RWA, 6% of total leverage exposure if subject to the SLR, and 8% of average total consolidated assets. Resolution IHCs would be required to hold the greatest of 18% of RWA, 6.75% of total leverage exposure if subject to the SLR, and 9% of average total consolidated assets. We intend to seek the certification necessary to classify our IHC as a non-resolution IHC. 30 The proposal also applies an internal TLAC buffer of 2.5% plus any applicable countercyclical capital buffer. A breach would sub- ject the IHC to restrictions on distributions and discretionary bonus payments. The proposal’s clean holding company require- ments would prohibit or limit IHCs from entering into certain financial arrangements that could create obstacles to orderly reso- lution. The UBS IHC would be subject to the requirements under the proposal. US regulators finalize margin rules for non-cleared swaps The prudential regulators, including the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (together, Agencies) approved a final rule to establish margin and capital requirements for covered swap entities for non-cleared swaps. The rule establishes the min- imum amount of initial and variation margin that a covered swap entity must exchange with its counterparties, based on the cate- gory of the counterparty, as defined in the rule. Under the rule, substituted compliance is allowed if the Agencies determine a foreign regulatory framework is comparable. The final rule differs from the proposal by creating specific rules for affiliate transac- tions. The rule will become effective as of 1 April 2016, but com- pliance dates will be phased in from September 2016 to Septem- ber 2020. UBS will be subject to the Agencies’ final rules. Far-reaching regulatory revisions and reform proposals on the international level Basel Committee on Banking Supervision proposes changes to the standardized approach for credit risk The Basel Committee on Banking Supervision (BCBS) released a second consultative document on revisions to the standardized approach for credit risk in December 2015. The proposal would reintroduce the use of external credit ratings for exposures to banks and corporates and would adopt a loan-to-value approach to risk weighting of real estate loans. The consultation ran until 11 March 2016 and the BCBS intends to finalize the revisions by the end of 2016. BCBS issues revised market risk framework In January 2016, the BCBS published a revised market risk frame- work, which defines minimum capital requirements for market risk exposures. The market risk framework includes stricter rules on the designation of instruments as either trading or banking book, a more prescriptive internal-model approach aimed at increasing consistency across banks, as well as a revised and more risk-sensitive standardized approach, which may also be used as a fall back to the internal-model approach. The BCBS will conduct further quantitative impact studies in order to monitor the effect of the capital requirements and to ensure consistency in the appli- cation of the framework. We expect Switzerland to finalize these changes in the domestic regulations no later than 1 January 2019, the deadline set by the BCBS. BCBS continues review of risk-based capital framework The BCBS also published two consultation papers during 2015 as part of its review of the capital framework to balance simplicity and risk sensitivity, and to promote comparability. The first paper is a consultation on the risk management, capital treatment and supervision of interest rate risk in the banking book, expanding upon and intending to ultimately replace the Basel Committee’s 2004 principles for the management and supervision of interest rate risk. The second paper is a consultation on the Credit Valua- tion Adjustment (CVA) Risk Framework, intending to ensure that all important drivers of credit valuation adjustment risk and its hedges are covered in the Basel regulatory capital standard, in order to align the capital standard with the fair value measure- ment of CVA employed under various accounting regimes, and to ensure consistency with the proposed revisions to the market risk framework under the Basel Committee’s fundamental review of the trading book. In addition, as part of its quarterly review, the Bank for Interna- tional Settlements (BIS) published a paper on the leverage ratio calibration. Subject to various caveats, the paper finds that there is considerable room to raise the leverage ratio requirement above its original 3% “test” level, to within a range of about 4–5%. The BCBS intends to complete the final calibration of the leverage ratio, and any further adjustments to its definition, by 2017, with a view to migrating to a Pillar 1 (minimum capital requirement) treatment on 1 January 2018. Financial Stability Board defines a regulatory framework for haircuts on non-centrally cleared securities financing transactions In November 2015, the Financial Stability Board (FSB) issued the final framework for haircuts on non-centrally cleared securities financing transactions, defining haircut floors to non-bank-to- non-bank transactions. This completes the FSB’s policy recom- mendations in the framework for haircuts on certain non-centrally cleared securities financing transactions that were published in October 2014. The framework of numerical haircut floors applies to non-centrally cleared securities financing transactions in which financing against collateral other than government securities is provided to non-banks. The framework is intended to limit the build-up of excessive leverage outside the banking system. 31 Operating environment and strategy Operating environment and strategy Regulatory and legal developments BCBS and G20 work on corporate governance principles The BCBS published updated principles on corporate governance for banks in July 2015. These principles are intended to provide a framework within which banks and supervisors should operate. The framework consists of 13 principles, describing the roles and responsibilities of the directors and senior management, including (i) the role of directors in overseeing the implementation of effec- tive risk management systems, (ii) directors’ collective compe- tence and obligation to dedicate sufficient time to their mandates, (iii) strengthen the guidance on risk governance and the impor- tance of a sound risk culture , and (iv) compensation systems form a key component of the governance and incentive structure through which the board and senior management of a bank con- vey acceptable risk-taking behavior and reinforce the bank’s oper- ating and risk culture. The G20 finance ministers also endorsed the revised G20 / OECD Principles of Corporate Governance in September 2015. We continue to strive for and maintain a high standard of corporate governance. We note that national imple- mentation of these standards and application of the standards to specific jurisdictions and entities, including the aforementioned senior management regimes in the UK and the governance regu- lations for our IHC, will present challenges to the overall gover- nance of the Group. 32 Our strategy We are committed to providing our clients with superior financial advice and solutions while generating attractive and sustainable returns for shareholders. Capital strength is the foundation of our success. Our strategy builds on the strengths of all our businesses and focuses our efforts on areas in which we excel, while seeking to capitalize on the growth prospects in the businesses and regions in which we operate. Our strategy centers on our leading wealth management businesses and our premier universal bank in Switzerland, enhanced by our asset management business and our Investment Bank. These businesses share three key characteristics: they benefit from a strong competitive position in their targeted markets, are capital efficient, and offer an attractive structural growth and profitability outlook. Our strategic priorities are the continued execution of our strategy to enable us to deliver on our performance targets, improving our effectiveness and efficiency, and making further investments to take advantage of growth opportunities. Who we are We are the world’s largest and fastest growing wealth manager and the only bank with a truly global wealth management fran- chise at the center of its strategy. Our footprint is unique, and we benefit from significant scale in an industry with attractive growth prospects in excess of GDP-growth and rising barriers to entry. We have a leading position across the attractive high net worth and ultra high net worth client segments. Our value proposition is highly scalable and can be tailored to our clients’ financial needs and preferences. The partnership between our wealth manage- ment businesses and Personal & Corporate Banking in Switzer- land, Asset Management and the Investment Bank is a key dif- ferentiating factor and a competitive advantage of our wealth management franchise. The world’s largest and fastest growing wealth manager1, 2 Strong capital position and capital efficient business model Capital strength is the foundation of our success. It provides our clients and all other stakeholders with a strong sense of comfort, creating a distinct competitive advantage for our businesses. Our fully applied common equity tier 1 (CET1) capital ratio is the high- est among our peer group of large global banks, and we are well- positioned to meet the proposed requirements of the revised Swiss too big to fail (TBTF) framework. Our highly capital-accretive and efficient business model helps us adapt to changes in regula- tory requirements, while pursuing growth opportunities without the need for significant earnings retention. We believe that our business model can generate an adjusted return on tangible equity of more than 15%, which we aim to achieve in 2018. Invested assets CHF billion Operating income3 CHF billion Profit before tax3 CHF billion + 8 % CAGR4 + 6 % CAGR4 + 11 % CAGR4 1,751 886 1,593 821 2,014 987 1,982 947 772 865 1,027 1,035 14.1 7.6 14.9 7.9 15.4 8.0 6.5 7.0 7.4 12.9 7.0 5.9 31.12.12 31.12.13 31.12.14 31.12.15 2012 2013 2014 2015 Wealth Management Americas Wealth Management 3.3 2.4 0.9 2013 3.5 2.5 0.9 2014 2.7 2.1 0.6 2012 3.7 2.8 0.8 2015 1 Based on Scorpio Partnership Global Private Banking Benchmark 2015, on reporting base currency basis for institutions with AuM > USD 500 billion. 2 Data represents information for the combined wealth management businesses, presented on an adjusted basis, where applicable. Refer to our Annual Report 2014 for information on the adjusted results for full-year 2012, and to the “Group performance” section of this report for subsequent periods. 3 Based on adjusted numbers. 4 Compound annual growth rate. 33 15.40 11.55 7.70 3.85 3.700 2.775 1.850 0.925 2.0 1.5 1.0 0.5 0.0 0.00 0.000 Operating environment and strategy Operating environment and strategy Our strategy We are committed to an attractive capital returns policy EDTF | Our earnings capacity, capital efficiency and low-risk profile support our objective to deliver sustainable and growing returns to our shareholders. We are committed to a total capital return to shareholders of at least 50% of net profit attributable to share- holders, provided that we maintain a fully applied CET1 capital ratio of at least 13% and consistent with our objective of main- taining a post-stress fully applied CET1 capital ratio of at least 10%. Total capital returns will consist of an ordinary dividend, which we intend to grow steadily over time, and other forms of capital returns. Our ordinary dividend was established at CHF 0.50 for the financial year 2014. For the financial year 2015, our Board of Directors intends to propose a total dividend payment of CHF 0.85 per share, comprised of an ordinary dividend of CHF 0.60 per share, up 20% compared with 2014, and a special dividend of CHF 0.25 per share, reflecting a significant net upward revalu- ation of deferred tax assets in 2015. The total dividend of CHF 0.85 per share represents a payout ratio of 52%. Industry trends Business transformation In response to the evolving market and regulatory environment, the industry is continuing to observe adjustments to strategies and business portfolios, particularly across large European banks. We communicated our strategy in 2011 and accelerated its exe- cution in 2012. We focused on creating a business model that is better adapted to the new regulatory and market environment and that we believe results in more consistent and high-quality returns. Having completed our business transformation in 2014, we are now capitalizing on our strong strategic position by focus- ing on growing the profitability of our core businesses and deliv- ering attractive returns to our shareholders. As a consequence, we believe we are well-positioned to adapt to the changing mar- ket environment and capture the benefits of new and evolving industry trends. We are confident with our capabilities and mar- ket position, but we will not be complacent. Wealth accumulation The wealth management industry offers fundamentally attractive economics with a forecast for robust wealth accumulation around the world. According to the Boston Consulting Group Global Wealth Report 2015, the ultra high net worth segment is expected to expand by about 11% annually from 2014 to 2019, and the high net worth segment by about 7% annually. Asia Pacific and the emerging markets are expected to be the fastest-growing regions, with an estimated average annual market growth rate of approximately 11% for the high net worth and ultra high net worth segments combined. Even mature markets, such as West- ern Europe and North America, are forecast to see wealth accu- mulation grow within the high net worth and ultra high net worth segments at an annual rate exceeding expected GDP growth. Despite the attractiveness of a capital-light and highly cash flow- generative business, we believe that wealth management is likely to remain a highly fragmented industry and barriers to entry are expected to increase, partly due to significant investments needed to meet current and proposed regulatory requirements. Our unique investment engine is an essential component of our holistic wealth management offering and sets us apart from our peers. The combination of our strategic focus on wealth man- agement, our unique footprint and capabilities, and our leading position across the attractive ultra high net worth and high net worth client segments, enable us to benefit from significant scale, which we expect will help us capture market growth and increase share of wallet. Demographics, wealth transfer and retirement funding Demographic changes, including the increasing average age of the world’s population, escalating costs associated with the care of an ageing population and the funding challenges faced by public pension systems, will be a key long-term driver for both wealth consumption and wealth transfer, which will also impact retirement funding. The strong reliance on public pension schemes will make reform especially urgent in certain countries. Although each country will follow its own regulatory agenda, a general and gradual shift from public to privately funded pension schemes seems inevitable. 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(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:79)(cid:81)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80)(cid:2)(cid:55)(cid:53)(cid:38)(cid:2)(cid:20)(cid:18)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:75)(cid:80)(cid:2)(cid:82)(cid:84)(cid:75)(cid:88)(cid:67)(cid:86)(cid:71)(cid:2)(cid:89)(cid:71)(cid:67)(cid:78)(cid:86)(cid:74)(cid:16)(cid:2) 34 These developments are expected to benefit our businesses, as individuals and privately funded pension schemes seek invest- ment advice and tailored service offerings with a relevant product range. Our strong capabilities in asset management, as well as our ability to tailor our service offerings to our clients’ financial needs and preferences, put us in a position of strength to address these emerging needs. Digitalization Over the last few years, investments in financial technology have multiplied, and the market expects continued digital disruption in the financial industry, driven by consumer preferences and expec- tations. We expect that core technologies, such as automated investment advice, mobile access to banking services, distributed ledger technology and natural language user interfaces, will be ready for application in the financial services industry in the near future. Digital capabilities are likely to play a significant role in transforming not only how banks operate internally, but also how banks interact with clients. The financial services industry will have to adapt to a new digital reality driven by evolving client needs, increasing demand for efficiency, accelerating technologi- cal innovation and the emergence of new market participants. UBS acknowledged early on that there is a need for constant innovation, and has launched several initiatives to meet evolving client expectations in personalization, convenience and transpar- ency. Our technology is used extensively by our clients, and it allows us to increase market share and customer loyalty, and to attract new business. We are focused on leveraging our technol- ogy not only to improve the services for our clients, but also to increase scalability by providing more efficient methods for deliv- ering content, to directly access clients, to improve automation in the back office to increase efficiency, and to derive the most meaningful information from vast amounts of data to better man- age our business. We have also created innovation labs in London, Singapore and Zurich to research how UBS can further foster innovation as a key driver for business growth and improved efficiency. Recogniz- ing that innovation is not something UBS can do on its own, we have engaged with a wide range of startup companies, venture capitalists and academic institutions, for example, with the “Future of finance” challenge, which involved 600 participants world-wide. In another example, UBS launched an initiative to explore blockchain technology, and has become one of the thought leaders in this fundamental new technology and its appli- cations for financial services. Furthermore, in 2015, UBS, together with the SIX and Zürcher Kantonalbank, successfully launched the new peer-to-peer mobile payments application “Paymit” in Swit- zerland, winning the “Master of Swiss Apps” award. Further adaptation of operating models Operating models in the financial services industry are expected to continue to evolve, given an increase in operational cost pressure, reflecting higher regulatory costs, together with a subdued reve- nue environment. This persistent push for efficiency is forcing banks to reassess front-to-back processes, focus on identifying potential for standardization, and to rethink the ownership of value chain components, which will be supported by a continuous increase in straight-through processing capabilities and reduced repetitive human intervention. Over the past few years, a diverse network of suppliers has emerged that is both disaggregating the service and supply chain and changing the dynamics of demand and supply in the banking sector. In 2015, we established UBS Business Solutions AG to act as the Group’s service company subsidiary and we plan to transfer the majority of our middle- and back-office processes into the service company structure. The transfer is a first step in enabling us to commercialize middle- and back-office processes and ben- efit from economies of scale. In addition, it allows us to take advantage of opportunities to share regulatory investments. Banking intermediation Against the backdrop of digitalization and new market partici- pants, the banking sector’s role as a facilitator of economic policy and an enabler of domestic growth may come under threat, as well as renewed discussion and scrutiny. The combination of enhanced regulatory requirements, reduced risk appetite and sub- dued macroeconomic prospects continues to curb the lending appetite of banks. Other financial industry players, such as asset managers, insurers and hedge funds, are increasingly stepping into banking intermediation and risk-taking areas, even though they are currently still focused on more specific or niche areas, such as long-dated assets and high-risk lending. It is expected that this trend will continue with its extent and pace dependent on regulatory developments. Despite these challenges, we believe banks still have the neces- sary capital and the competitive ability to preserve their core role in the economy and to have continued access to their traditional revenue sources. 35 Operating environment and strategy Operating environment and strategy Our strategy Regulation There has been continuous regulatory pressure on the financial services industry to become simpler, more transparent and more resilient, and it is expected that regulation will remain a major driver of change for the industry. We believe we have the right business model to comply with the new, more demanding regulations without the need to change our strategy. We have the highest fully applied CET1 cap- ital ratio among our peer group of large global banks and we have made substantial progress in our efforts to improve resolv- ability. We are well prepared to meet the requirements of the pro- posed revised Swiss too big to fail framework over the phase-in period and by the effective date in 2020, and we intend to use the four-year period to fully implement the new requirements. ➔ Refer to the “Regulatory and legal developments” section of this report for more information on the proposed revised Swiss too big to fail framework Our strategic priorities EDTF | We intend to build on our successful track record and focus on three key strategic priorities as set out below. 1. Continue to execute our strategy and deliver on our performance targets EDTF | The strategic change we initiated in 2011 was driven by our decision to focus on our strengths and by anticipation of more demanding regulation. We outlined a strategy that works in a number of business environments. Having successfully completed our transformation, we now continue to execute our strategy in a focused and disciplined manner. 2. Improve effectiveness and efficiency EDTF | At year-end 2015, we achieved CHF 1.1 billion of net cost reductions versus full-year 2013 and we remain fully committed to achieving our net cost reduction target of CHF 2.1 billion by year-end 2017. Our effectiveness and efficiency improvements are centered on creating the right infrastructure and cost framework for the future, including workforce and footprint. In addition, we will continue to invest heavily in technology, compliance and risk control, as our initiatives create more stable IT platforms, reduce the need for manual intervention, and enable faster upgrades and overall stronger controls. 3. Invest for growth EDTF | We will continue to build our capabilities in technology and digitalization with a focus on further strengthening our position, particularly in regions such as the Americas and Asia Pacific. Our investments in technology are attracting broad industry recogni- tion, but, more importantly, they are used extensively by our cli- ents and allow us to capture market share and attract business. We also remain committed to investing in the development of our existing employees and to hiring the best available talent. The ability to take advantage of growth opportunities in technology and our continued focus on attracting the right people and devel- oping the talent we have in order to achieve their full potential will help us to better serve our clients. Our performance targets and expectations The tables on the next page show our performance targets and expectations for the Group, the business divisions and Corporate Center for 2016 and beyond. The performance targets and expec- tations are calculated on an annual basis, except for adjusted pre-tax profit growth for our combined wealth management businesses, which represents a through the cycle target. Our per- formance targets and expectations are based on adjusted results that exclude items that management believes are not representa- tive of the underlying performance of our businesses, such as restructuring expenses and gains and losses on sales of businesses and real estate, and assume constant foreign currency translation rates, unless otherwise indicated. 36 Group Adjusted cost / income ratio Adjusted return on tangible equity Target: 60–70% Expectation: 65–75% over short / medium term Target: >15% Expectation: approximately at 2015 level in 2016, approximately 15% in 2017 and >15% in 2018 Common equity tier 1 capital ratio (fully applied)1 At least 13% 2 Risk-weighted assets (fully applied)1 Expectation: around CHF 250 billion short / medium term Leverage ratio denominator (fully applied)1 Expectation: around CHF 950 billion short / medium term 1 Based on the currently applicable rules. Refer to the “Capital management” section of this report for more information. 2 Our capital returns policy is also subject to our objective of maintaining a post-stress fully applied CET1 capital ratio of at least 10%. Business divisions and Corporate Center Wealth Management Wealth Management Americas1 Net new money growth rate Adjusted cost / income ratio Net new money growth rate Adjusted cost / income ratio 3–5% 55–65% 2–4% 75–85% Combined wealth management businesses Annual adjusted pre-tax profit growth 10–15% through the cycle Personal & Corporate Banking Net new business volume growth rate 1–4% (personal banking) Asset Management Investment Bank Net interest margin Adjusted cost / income ratio Net new money growth rate Adjusted cost / income ratio Adjusted annual pre-tax profit Adjusted annual pre-tax RoAE Adjusted cost / income ratio Risk-weighted assets (fully applied)2 Leverage ratio denominator (fully applied)2 140–180 bps 50–60% 3–5% excluding money market flows 60–70% CHF 1 billion in the medium term >15% 70–80% Expectation: around CHF 85 billion short / medium term Expectation: around CHF 325 billion short / medium term Corporate Center Net cost reduction 3 CHF 2.1 billion by 20174 1 Based on USD. 2 Based on the currently applicable rules. Refer to the “Capital management” section of this report for more information. 3 Measured by year-end exit rate versus full year 2013 adjusted operating expenses, net of changes in charges for provisions for litigation, regulatory and similar matters, foreign currency movements and changes in regulatory demand of a temporary nature. 4 We currently expect to achieve the previously announced CHF 1.4 billion of net cost reduction by mid-2016. 37 Operating environment and strategy Operating environment and strategy UBS – leading universal bank in Switzerland Leading positions in all five business areas in Switzerland Personal Banking Wealth Management Switzerland Corporate & Institutional Banking Investment Bank Switzerland Asset Management Switzerland of banking products and services drawn from across our business segments. Our universal bank model has proven itself to be highly effective and consistently contributes substantially to the Group. Our distribution model is based on a multichannel strategy. We strive to offer a unique client experience, giving clients the choice in how to interact with us – via branches, customer service centers or digital channels. Our expanding elec- tronic and mobile banking offering is very well-regarded and we continue to see a steadily rising number of users and client interactions. In 2015, users of our e-banking service exceeded the 1.5 million mark, while we reached the milestone of 500,000 downloads of our Mobile Banking app earlier in 2015. We strengthened our segment-specific offering with the introduction of Wealth Management Online and Corporate Financial Management. We also increased the ways clients can interact with us by launching Live Chat and the new retirement calculators on ubs.com. The joint introduction of Paymit with SIX and Zürcher Kantonalbank has made UBS the leader in the Swiss mobile payment space: UBS Paymit achieved more than 150,000 downloads by the end of 2015, received excellent client feedback in the Apple App Store and earned external recognition with the ”Master of Swiss Apps 2015” award. We will continue to build on our position as the leading multi-channel bank in Switzerland and as an innovator in digital services to improve our client experience, capture market share and increase efficiency. (cid:55)(cid:36)(cid:53)(cid:2)(cid:79)(cid:81)(cid:68)(cid:75)(cid:78)(cid:71)(cid:2)(cid:68)(cid:67)(cid:80)(cid:77)(cid:75)(cid:80)(cid:73)(cid:2)(cid:70)(cid:81)(cid:89)(cid:80)(cid:78)(cid:81)(cid:67)(cid:70)(cid:85)(cid:2) (cid:75)(cid:80)(cid:2)(cid:86)(cid:74)(cid:81)(cid:87)(cid:85)(cid:67)(cid:80)(cid:70)(cid:85) (cid:13)(cid:20)(cid:21)(cid:21)(cid:7) (cid:24)(cid:18)(cid:18) (cid:22)(cid:23)(cid:18) (cid:21)(cid:18)(cid:18) (cid:19)(cid:23)(cid:18) (cid:2)(cid:2)(cid:2)(cid:2)(cid:18) (cid:23)(cid:22)(cid:20) (cid:22)(cid:20)(cid:19) (cid:20)(cid:26)(cid:24) (cid:19)(cid:24)(cid:21) (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) UBS is the preeminent universal bank in Switzerland, the only country where we operate in all five of our business areas: personal banking, wealth management, corporate and institutional banking, investment bank and asset management. We are fully committed to our home market, as our leading position in Switzer- land is crucial in terms of sustaining our global brand and profit stability. Drawing on our network of around 300 branches and 4,500 client-facing staff, complemented by modern digital banking services and customer service centers, we are able to reach approximately 80% of Swiss wealth and serve one in three households, high net worth individuals and pension funds, more than 120,000 companies, and around 80% of banks domiciled in Switzerland. In 2015, Euromoney acknowledged our preeminent position in Switzerland with its presti- gious Best Bank in Switzerland award for the fourth consecutive year. Our universal bank model is central to our success. We differentiate ourselves by leveraging our strengths across all segments. Our management approach promotes cross-divisional thinking, enables effective collaboration across all business areas and allows us to utilize our resources efficiently. As a result, we are in an excellent position to meet our clients’ needs with a comprehensive range 38 (cid:24)(cid:18)(cid:18) (cid:23)(cid:20)(cid:23) (cid:22)(cid:23)(cid:18) (cid:21)(cid:25)(cid:23) (cid:21)(cid:18)(cid:18) (cid:20)(cid:20)(cid:23) (cid:19)(cid:23)(cid:18) (cid:25)(cid:23) (cid:18) (cid:20)(cid:26)(cid:18) (cid:20)(cid:19)(cid:18) (cid:19)(cid:22)(cid:18) (cid:25)(cid:18) (cid:18) Measurement of performance Performance measures Key performance indicators EDTF | Our key performance indicator (KPI) framework focuses on key drivers of total shareholder return, measured by the dividend yield and price appreciation of our shares. The Group and busi- ness divisions are managed based on this KPI framework, which emphasizes risk awareness, effective risk and capital manage- ment, sustainable profitability and client focus. Both Group and business division KPIs are taken into account in determining vari- able compensation. Our senior management reviews the KPI framework on a regu- lar basis by considering prevailing strategy, business conditions and the environment in which we operate. The KPIs are disclosed consistently in our quarterly and annual reporting to facilitate comparison of our performance over the reporting periods. In addition to KPIs, we disclose our performance targets. These performance targets, which are defined in order to track the achievement of our strategic plan, are based on our KPIs as well as on additional balance sheet and capital management perfor- mance measures. ➔ Refer to the “Our strategy” section of this report for more information on performance targets New key performance indicators in 2016 EDTF | In 2016, the revised Swiss too big to fail going concern lever- age ratio will replace the Swiss SRB leverage ratio as a Group KPI, as it is expected to become the relevant regulatory measure in 2016. Client / invested assets reporting We report two distinct metrics for client funds: – The metric client assets encompasses all client assets managed by or deposited with us, including custody-only assets. – The metric invested assets is more restrictive and includes only client assets managed by or deposited with us for investment purposes. Of the two, invested assets is the more important metric. 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 with- drawn by existing clients or clients who terminated their relation- ship with us. Wealth Management Americas also reports net new money including interest and dividend income, in line with his- torical reporting practice in the US market. 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 inde- pendent service to their client, add value and generate revenues. Most double-counting arises when mutual funds are managed by Asset Management and sold by Wealth Management or Wealth Management Americas. The business divisions involved count these funds as invested assets. This approach is in line with both finance industry practices and our open-architecture strategy, and allows us to accurately reflect the performance of each individual business. Overall, CHF 185 billion of invested assets were double- counted as of 31 December 2015 (CHF 173 billion as of 31 Decem- ber 2014). ➔ Refer to “Note 35 Invested assets and net new money” in the “Consolidated financial statements” section of this report for more information Seasonal characteristics Our main businesses may show seasonal patterns. The Investment Bank’s revenues have been affected in some years by the seasonal characteristics of general financial market activity and deal flows in investment banking. Other business divisions may also be impacted by seasonal components, such as lower client activity levels related to the summer and end-of-year holiday seasons, annual income tax payments (which are concentrated in the sec- ond quarter in the US) and asset withdrawals that tend to occur in the fourth quarter. 39 Operating environment and strategy Operating environment and strategy Measurement of performance EDTF | Pillar 3 | Group / business division key performance indicators Key performance indicators Definition Net profit growth (%) Pre-tax profit growth (%) Cost / income ratio (%) Return on tangible equity (RoTE) (%) Change in net profit attributable to UBS Group AG shareholders from continuing operations between current and comparison periods / net profit attributable to UBS Group AG shareholders from continuing operations of comparison period Change in business division performance before tax between current and comparison periods / business division performance before tax of comparison period Operating expenses / operating income before credit loss (expense) or recovery Net profit attributable to UBS Group AG shareholders before amortization and impairment of goodwill and intangible assets (annualized as applicable) / average equity attributable to UBS Group AG shareholders less average goodwill and intangible assets of UBS Group AG Return on attributed equity (RoaE) (%) Business division performance before tax (annualized as applicable) / average attributed equity Return on assets, gross (%) Leverage ratio (phase-in, %) Operating income before credit loss (expense) or recovery (annualized as applicable) / average total assets Swiss SRB common equity tier 1 capital and loss-absorbing capital / leverage ratio denominator Common equity tier 1 capital ratio (fully applied, %) Swiss SRB common equity tier 1 capital / Swiss SRB risk-weighted assets Net new money growth (%) Net new money for the period (annualized as applicable) / invested assets at the beginning of the period. Group net new money growth is reported as net new money growth for combined wealth management businesses. Asset Management net new money growth excludes money market flows Gross margin on invested assets (bps) Net margin on invested assets (bps) Operating income before credit loss (expense) or recovery (annualized as applicable) / average invested assets Business division performance before tax (annualized as applicable) / average invested assets Net new business volume growth for personal banking (%) 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 margin (%) Net interest income (annualized as applicable) / average loans Average VaR (1-day, 95% confidence, 5 years of historical data) Value at Risk (VaR) expresses maximum potential loss measured to a 95%confidencelevel,overa1-daytimehorizonandbased on fiveyearsofhistoricaldata EDTF | Pillar 3 | New key performance indicators in 2016 Key performance indicators Definition Going concern leverage ratio (%) Common equity tier 1 capital and additional tier 1 capital / leverage ratio denominator1 t n e m e g a n a M h t l a e W t n e m e g a n a M s a c i r e m A h t l a e W p u o r G i g n k n a B e t a r o p r o C & l a n o s r e P t n e m e g a n a M t e s s A k n a B t n e m t s e v n I t n e m e g a n a M h t l a e W t n e m e g a n a M s a c i r e m A h t l a e W p u o r G g n i k n a B e t a r o p r o C & l a n o s r e P t n e m e g a n a M t e s s A k n a B t n e m t s e v n I 1 Based on the proposed Swiss too big to fail requirements. Refer to “Proposed new requirements for Swiss systemically relevant banks” in the “Regulatory and legal developments” section of this report for more information. 40 Wealth Management Wealth Management provides wealthy private clients with investment advice and solutions tailored to their individual needs. At the end of 2015, we had a presence in more than 40 countries and invested assets of CHF 947 billion. Business We provide comprehensive advice and financial services to wealthy private clients around the world, with the exception of those served by Wealth Management Americas. UBS is a global firm with global capabilities, and our clients benefit from a full spectrum of resources, including wealth planning, investment management solutions and corporate finance advice, banking and lending solutions, as well as the specific offerings outlined below. Our guided architecture model gives clients access to a wide range of products from the world’s leading third-party insti- tutions that complement our own products. Strategy and clients The wealth management business has attractive long-term growth prospects and we expect its growth to outpace that of gross domestic product globally. From a client segment perspec- tive, the global ultra high net worth market, including family offices, has the highest growth potential, followed by the high net worth and affluent markets. Our broad client base and strong global footprint put us in an excellent position to capture the growth opportunities across regions and segments. We are the preeminent wealth manager globally and aim to provide our clients with comprehensive, tailored advice. We serve private clients, particularly in the ultra high net worth (generally considered to be clients with more than CHF 50 million in invest- able assets, with some market-driven differentiation), high net worth (generally considered to be clients with CHF 2 million to CHF 50 million in investable assets, with some market-driven dif- ferentiation) and affluent (generally considered to be clients with CHF 250 thousand to CHF 2 million in investable assets, with some market-driven differentiation) segments. We have unique scale, an industry-leading platform, and a broad-based setup, being active in the most diverse wealth management markets and segments. We measure the performance of our business against five key performance indicators: pre-tax profit growth, cost / income ratio, net new money growth, gross margin on invested assets and net margin on invested assets. We also evaluate our performance against our annual performance targets, which comprise a cost / income ratio of 55–65%, a net new money growth rate of 3–5%, and together with Wealth Management Americas, a pre- tax profit growth of 10–15%, as defined in the “Our strategy” section of this report. We have defined a set of strategic priorities to enable us to drive profitable growth and be at the forefront of shaping the wealth management industry. As the industry trans- forms, our aim is to increasingly translate our competitive advan- tages into profitable market share gains. ➔ Refer to the “Our strategy” section of this report for more information on our targets Invested assets by client domicile(cid:15) % Total: CHF 947 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:7) (cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:27)(cid:22)(cid:25)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) As of 31.12.15 9 22 41 (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:23) (cid:27) Americas Asia Pacific 28 Europe, Middle East and Africa Switzerland (cid:24)(cid:20) (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:27) (cid:19)(cid:18) 68-161_1 WM_IA by client domicile_e 41 (cid:25)(cid:18)(cid:15)(cid:19)(cid:24)(cid:19)(cid:65)(cid:20)(cid:2)(cid:57)(cid:47)(cid:65)(cid:43)(cid:35)(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) Operating environment and strategy Operating environment and strategy Wealth Management Investment management and portfolio construction are at the heart of our offering. Clients who opt for a discretionary invest- ment mandate delegate the management of their assets to a team of professional portfolio managers. Clients who prefer to be actively involved can choose an advisory mandate. The portfolios of advisory mandate clients are monitored and analyzed closely, and they receive tailored proposals to help them make informed investment decisions. We aspire to reach a mandate penetration of approximately 40% of Wealth Management’s invested assets, to provide a greater selection of value-added services to our cli- ents. Growing our mandates business also contributes to higher recurring revenues. We seek to capitalize on our market-leading position in the ultra high net worth business and to increase share considerably in this high-growth segment. We also invest significantly in growing our high net worth and affluent client segments, especially by leverag- ing and further strengthening our leading competence in invest- ment management, as well as investing in our digital capabilities. We cater to the specific needs of our diverse client segments. Our ultra high net worth clients have access to the infrastructure we offer to our institutional clients. Through our Global Family Office Group, our most sophisticated ultra high net worth clients benefit from tailored institutional coverage and global execution provided by dedicated specialist teams from both Wealth Man- agement and the Investment Bank. We offer our high net worth clients the full range of our investment management capabilities. For example, UBS Advice, which forms part of our advisory man- date offering, provides our clients with tailored investment advice. It is an industry leader in terms of how it uses state-of-the-art technology to systematically monitor client portfolios to detect risks as well as deviations from their selected investment strate- gies. We believe that both our advisory and discretionary mandate offerings provide a superior value proposition as they both pro- vide our clients with the best of our investment management capabilities. All clients can invest in the full range of financial instruments, from single securities such as equities and bonds to various invest- ment funds, structured products and alternative investments. Additionally, we offer clients advice on structured lending and corporate finance. Our integrated client service model allows us to bundle capabilities from across the Group to identify invest- ment opportunities in all market conditions and create solutions that suit individual client needs. This collaboration is also crucial to our focused expansion in key onshore markets, where we con- tinue to benefit from the established business relationships of our local Investment Bank and Asset Management teams. We invest significantly in digitalization and innovation to meet the evolving needs of our client base. To support the rapid devel- opment of state-of-the-art banking services and to ensure that these are delivered consistently, we are further consolidating and extending our IT platform globally. In addition, we are developing new solutions to deliver our leading content through digital chan- nels. For example, in 2015, we launched Wealth Management Online, giving our clients electronic access to our offering, includ- ing our portfolio management and advisory services. We also introduced My House View, an interactive filter for our investment research, enabling users to easily find the content most relevant to them. Our operating model is continually adapted to focus on effi- ciency, simplicity and digital innovation. For example, we will leverage our Swiss platform across our most important markets in Asia and Europe following successful deployment in Germany in 2015. In addition, we continue to make focused investments in our onshore businesses to capture growth opportunities. Our booking centers across the globe give us a strong local presence that allows us to book client assets in multiple locations, in response to client preferences. The strength and scope of our franchise also help us adapt swiftly to a changing legal and regu- latory environment. In Asia Pacific, we have accelerated our growth with a particu- lar focus on Hong Kong and Singapore, the leading financial cen- ters in the region, and China. In 2015, we opened a branch in Kowloon, our first branch in Hong Kong outside the central busi- ness district, and we continue to expand our local onshore pres- ence in China to help capture long-term growth opportunities. We are also developing our presence in major onshore markets such as Japan and Taiwan. In the emerging markets, we are focused on markets such as Mexico, Brazil, Turkey, Russia, Israel and Saudi Arabia. We regu- larly assess our local presence to ensure proximity to our clients in key markets, aiming to serve them most efficiently out of key hubs in the major emerging regions. Many emerging market cli- ents prefer to book their assets in established financial centers and, to that end, we are strengthening our coverage for such cli- ents through our booking centers in Switzerland and the UK, as well as in the US through Wealth Management Americas. In Europe, our long-established local presence in all major mar- kets supports our growth ambition. We recognized the converg- ing needs of clients early and combined our offshore and onshore businesses. This gives clients across the region access to our extensive Swiss product offering, and creates economies of scale, enabling us to deal efficiently with increased regulatory and fiscal requirements. In Switzerland, based on our integrated business model, we collaborate closely with our colleagues in the personal and corpo- rate banking, asset management, and investment banking busi- nesses. This creates opportunities to expand our business through client referrals and generates efficiencies by enabling us to make use of UBS’s extensive branch network, which includes around 100 wealth management offices. 42 (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: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: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: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:21)(cid:2) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:22)(cid:2) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:23) (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:21)(cid:2) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:22)(cid:2) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:23) (cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:28)(cid:2) (cid:37)(cid:42)(cid:40)(cid:2)(cid:26)(cid:26)(cid:24)(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:27)(cid:26)(cid:25)(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:27)(cid:22)(cid:25)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(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:26)(cid:26)(cid:24)(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:27)(cid:26)(cid:25)(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:27)(cid:22)(cid:25)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(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:19)(cid:21) (cid:19)(cid:20) (cid:20)(cid:25) (cid:19)(cid:18) (cid:19)(cid:23) (cid:20)(cid:21) (cid:19)(cid:21) (cid:19)(cid:21) (cid:20)(cid:27) (cid:19)(cid:19) (cid:19)(cid:22) (cid:20)(cid:18) (cid:19)(cid:20) (cid:19)(cid:22) (cid:21)(cid:18) (cid:19)(cid:19) (cid:19)(cid:22) (cid:19)(cid:27) (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:14)(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: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: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: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:19)(cid:2)(cid:43)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(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:2)(cid:67)(cid:80)(cid:70)(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:16) Our global financial intermediaries business supports our growth ambitions by providing us with access to markets and cli- ents beyond our own client advisor network. Additionally, it acts as a strategic business partner for more than 2,000 financial inter- mediaries in all major financial centers. It offers them professional investment advisory services, a global banking infrastructure and tailored solutions, helping financial intermediaries to advise their end-clients more effectively. Organizational structure Headquartered in Switzerland, we have a presence in more than 40 countries with approximately 190 offices, of which around 100 are in Switzerland. As of the end of 2015, we employed 10,239 people worldwide, of which 4,019 were client advisors. We are governed by executive, operating and risk committees and are primarily organized along regional lines with our business areas being Asia Pacific, Europe, Global Emerging Markets, Swit- zerland and Global Ultra High Net Worth. Our business is sup- ported by the Chief Investment Office and a global Investment Products and Services unit, as well as central functions managed by the Chief Operating Officer, and shared services provided by Corporate Center. Competitors Our major global competitors include the private banking opera- tions of Credit Suisse, JP Morgan, Deutsche Bank, BNP Paribas, HSBC, Citigroup and Julius Bär. In the European domestic mar- kets, we primarily compete with the local private banking opera- tions of large banks such as RBS in the UK, Deutsche Bank in Germany and UniCredit in Italy. In Asia Pacific, the private banking franchises of Citigroup, Credit Suisse and HSBC are our main competitors. (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:19)(cid:25) (cid:23) (cid:19)(cid:27) (cid:20)(cid:23) (cid:21)(cid:22) (cid:19)(cid:25) (cid:24) (cid:19)(cid:26) (cid:20)(cid:21) (cid:21)(cid:24) (cid:19)(cid:25) (cid:23) (cid:19)(cid:27) (cid:20)(cid:20) (cid:21)(cid:25) (cid:25)(cid:20)(cid:15)(cid:19)(cid:24)(cid:19)(cid:65)(cid:21)(cid:2)(cid:57)(cid:47)(cid:65)(cid:43)(cid:35)(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:55)(cid:53)(cid:38) (cid:41)(cid:36)(cid:50) (cid:39)(cid:55)(cid:52) (cid:37)(cid:42)(cid:40) (cid:49)(cid:86)(cid:74)(cid:71)(cid:84)(cid:85) Investment advice and solutions As part of a global, integrated firm, we are a dynamic wealth manager with investment management capabilities at our core. Our approach focuses on a fundamental understanding of our clients’ lifecycle needs and financial objectives. Based on this approach, we seek to provide superior investment advice and solutions. Our client advisors are proactive in their relationships with clients, and we have a systematic process for developing a thorough understanding of our clients’ financial objectives and risk appetite. Our wealth planners – part of our specialist product team – often support client advisors as they guide their clients in making financial decisions based on their lifecycle needs. With this comprehensive service, we offer them wealth planning advice and products, and we ascertain their investment strategy, which serves as the foundation for the investment solutions we offer them. Client advisors regularly review their clients’ investor pro- files to make sure they correspond to their evolving priorities and changing risk tolerance. Our bespoke training programs and the ongoing support the firm provides to our client advisors enable them to deliver superior advice and solutions to our clients. All our client advisors must obtain the Wealth Management Diploma, a program accredited by Switzerland’s State Secretariat for Economic Affairs that ensures a high level of knowledge and expertise. For our most senior client advisors, we offer extensive training through the Wealth Management Master program. Our global Chief Investment Office synthesizes the research and expertise of our global network of economists, strategists, analysts and investment specialists across all business divisions worldwide. These experts closely monitor and assess financial market developments. This allows us to deliver real-time insights and to include local expertise in our global investment process. Using these analyses, and in consultation with our external part- ner network at the UBS Investor Forum, which includes many of the world’s most successful money managers, the Chief Invest- ment Office establishes a clear, concise and consistent investment view, known as “the UBS House View”. 43 (cid:25)(cid:22)(cid:15)(cid:19)(cid:24)(cid:19)(cid:65)(cid:20)(cid:2)(cid:57)(cid:47)(cid:65)(cid:43)(cid:35)(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: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) (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 Operating environment and strategy Wealth Management The UBS House View identifies and communicates investment opportunities and market risks to help protect and grow our cli- ents’ wealth, and we aim to apply and implement it consistently in our clients’ portfolios. The UBS House View is also reflected in our strategic and tactical asset allocations, both of which under- pin the investment strategies for our flagship discretionary man- dates. The strategic asset allocation is an essential part of our disciplined style of managing our clients’ wealth, and strives to ensure that our clients remain on course to meet their financial goals over the long term. It is complemented by our tactical asset allocation, which uses our global expertise to help our clients navigate markets and ultimately improve the risk and return trade-off potential of their portfolios. Our Investment Products and Services unit ensures our solu- tions are in step with market conditions by aligning our discre- tionary and advisory offerings with our UBS House View. To help our clients address the challenges of an increasingly complex financial world, we continue to develop innovative products. For example, in 2015, we introduced new discretionary investment solutions based on a new Chief Investment Office asset allocation framework. Our products are aimed at achieving positive relative perfor- mance in various market scenarios. They are developed from a wide range of sources, including Investment Products and Ser- vices, Asset Management, the Investment Bank and third parties, as we operate within a guided architecture model. By aggregating private investment flows into institutional-size flows, we can offer our clients access to investments normally available only to insti- tutional clients. 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Business We are one of the leading wealth managers in the Americas in terms of financial advisor productivity and invested assets. Our business includes UBS’s domestic US and Canadian wealth man- agement businesses, as well as international business booked in the US. We have attractive growth opportunities and a clear strat- egy focused on serving our target client segments. As of 31 December 2015, invested assets totaled USD 1,033 billion. Strategy and clients Our goal is to be the best wealth management business in the Americas. With our client-focused, advisor-centric strategy, we deliver advice-based wealth management solutions and banking services through our financial advisors in key metropolitan mar- kets, providing a fully integrated set of products and services to meet the needs of our target client segments – high net worth clients and ultra high net worth clients – while also serving the needs of core affluent clients. We define high net worth clients as those with investable assets of between USD 1 million and USD 10 million, and ultra high net worth clients as those with invest- able assets of more than USD 10 million. Core affluent clients are defined as those with investable assets of between USD 250,000 and USD 1 million. The Global Family Office – Americas, a joint venture between Wealth Management Americas and the Invest- ment Bank, provides integrated, comprehensive wealth manage- ment and institutional-type services to selected Family Office cli- ents. Our Wealth Advice Center serves emerging affluent clients with investable assets of less than USD 250,000. We are commit- ted to providing high-quality advice to our clients across all their financial needs by employing the best professionals in the indus- try, delivering the highest standard of execution, and running a streamlined and efficient business. 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performance indicators: pre-tax profit growth, cost / income ratio, net new money growth, gross margin on invested assets and net margin on invested assets. We also evaluate our performance against our annual performance targets, which comprise a cost / income ratio of 75–85%, a net new money growth rate of 2–4% and, together with Wealth Management, a pre-tax profit growth of 10–15%, as defined in the “Our strategy” section of this report. ➔ Refer to the “Our strategy” section of this report for more information on our targets 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 7,140 financial advisors and over USD 1 trillion in invested assets, we are large enough to be meaning- ful, but focused enough to be nimble, which enables us to com- bine the advantages of 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 cli- ents by enabling our financial advisors to leverage the full resources of UBS, including access to wealth management research, our global Chief Investment Office, and solutions from our asset-gathering businesses and the Investment Bank. These resources are augmented by our commitment to an open archi- tecture platform and supported by our partnerships with many of the world’s leading third-party institutions. Moreover, our wealth management offering is complemented by banking, mortgage and financing solutions that enable us to provide advice on both the asset and liability sides of our clients’ 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 2015, our strategy and focus led to continued 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 delivering holistic advice across the full spectrum of client needs, leveraging the global capabilities of UBS to clients by continuing to expand our cross-business collaboration efforts throughout the firm, and delivering banking and lending services that complement our wealth management solutions. We also plan to continue investing in improved platforms and technology, while remaining disci- plined on cost. We expect these efforts to enable us to achieve higher levels of client satisfaction, strengthen our client relation- ships, and lead to greater revenue productivity among our finan- cial advisors. Organizational structure Wealth Management Americas consists of branch networks in the US, Puerto Rico, Canada and Uruguay, with 7,140 financial advi- sors as of 31 December 2015. Most corporate and operational functions are located in the Wealth Management Americas home office in Weehawken, New Jersey and the UBS Business Solutions Center in Nashville, Tennessee. In the US and Puerto Rico, we operate primarily through UBS subsidiaries. Securities and operations activities are conducted pri- marily through two registered broker-dealers, UBS Financial Ser- vices Inc. and UBS Financial Services Incorporated of Puerto Rico. Our banking services in the US include those conducted through the UBS AG branches and UBS Bank USA, a federally regulated bank in Utah, which offers Federal Deposit Insurance Corporation (FDIC)-insured deposit accounts, collateralized lending services, mortgages and credit cards. Canadian wealth management and banking operations are conducted through UBS Bank (Canada), and Uruguayan wealth management operations are conducted through UBS Financial Services Montevideo. 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(cid:25)(cid:18)(cid:15)(cid:19)(cid:24)(cid:19)(cid:65)(cid:20)(cid:2)(cid:57)(cid:47)(cid:65)(cid:43)(cid:35)(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:35)(cid:69)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:85)(cid:2)(cid:17)(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: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) 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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 include the wealth management businesses of Bank of America, Morgan Stanley and Wells Fargo. Products and services We offer clients a full array of solutions that focus on their indi- vidual financial needs. Comprehensive planning supports clients through the various stages of their lives, including education funding, charitable giving, estate strategies, insurance, retirement and trusts, and foundations, with corresponding product offer- ings for each stage. Our advisors work closely with internal con- sultants in areas such as wealth planning, portfolio strategy, 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 our clients’ investment decisions. Our offering is designed to meet a wide variety of investment 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, resource management accounts, FDIC-insured deposits, mortgages and credit cards. Additionally, our UBS Equity Plan Advisory Services is a leading provider of equity compensation plan services and advice to more than 150 US corporations, representing one million participants worldwide. For corporate and institutional clients, we offer a robust 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 authorize investment professionals to manage a portfolio on their behalf. Depending on the type of discretionary program, the client can give invest- ment discretion to a qualified financial advisor, a team of our investment professionals or a third-party investment manager. Separately, we also offer mutual fund advisory programs, whereby a financial advisor works with the client to create a diversified portfolio of mutual funds guided by a research-driven asset allo- cation framework. For clients who favor individual securities, we offer a broad range of equity and fixed income instruments. In addition, quali- fied clients may invest in structured products and alternative investment offerings to complement their portfolio strategies. All of these solutions are supported by a dedicated capital mar- kets group. This group collaborates with the Investment Bank and Asset Management in order to access the resources of the entire firm, as well as with third-party investment banks and asset man- agement firms. 47 Operating environment and strategy Operating environment and strategy Personal & Corporate Banking Personal & Corporate Banking As the leading personal and corporate banking business in Switzerland, our goal is to deliver comprehensive financial products and services to private, 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 We provide comprehensive financial products and services to our private, corporate and institutional clients in Switzerland, main- taining a leading position in these client segments and embed- ding our offering in a multi-channel approach. As shown in the “Business mix” chart below, our personal and corporate banking business generates stable profits which contribute substantially to the overall financial performance of the Group. We are among the leading players in the private and corporate loan market in Switzerland, with a well-collateralized lending portfolio of CHF 136 billion as of 31 December 2015, as shown in the “Loans, gross” chart below. This portfolio is managed conservatively, focusing on profitability and credit quality rather than market share. Our personal and corporate banking business is a central ele- ment of UBS’s universal bank delivery model in Switzerland, sup- porting other business divisions by referring clients to them and assisting private clients to build their wealth to a level at which we can transfer them to our Wealth Management unit. Furthermore, we leverage the cross-selling potential of products and services provided by our asset-gathering and investment bank businesses. In addition, we manage a substantial part of UBS’s Swiss infra- structure and Swiss banking products platform, which are both leveraged across the Group. (cid:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:79)(cid:75)(cid:90) (cid:7)(cid:2) (cid:40)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:71)(cid:80)(cid:70)(cid:71)(cid:70)(cid:2)(cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:23) (cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:75)(cid:80)(cid:69)(cid:81)(cid:79)(cid:71)(cid:28)(cid:2)(cid:37)(cid:42)(cid:40)(cid:2)(cid:21)(cid:14)(cid:27)(cid:19)(cid:21)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:52)(cid:71)(cid:69)(cid:87)(cid:84)(cid:84)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:84)(cid:71)(cid:85)(cid:86) (cid:52)(cid:71)(cid:69)(cid:87)(cid:84)(cid:84)(cid:75)(cid:80)(cid:73)(cid:2)(cid:72)(cid:71)(cid:71)(cid:85) (cid:23)(cid:26) (cid:48)(cid:81)(cid:80)(cid:15)(cid:84)(cid:71)(cid:69)(cid:87)(cid:84)(cid:84)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:69)(cid:81)(cid:79)(cid:71) (cid:20)(cid:26) (cid:19)(cid:22) 48 Our strategy focuses on profitable and qualitative growth in Swit- zerland. In the personal banking business we continue to pursue our strategy of growing our business in high-quality loans moder- ately and selectively and to further leverage the potential from digitalization. We aspire to be the bank of choice for private clients in Switzer- land by delivering value-added services. Currently, we serve one in three Swiss households. Our distribution network is comprised of around 300 branches, 1,250 automated teller machines, including self-service terminals, and 4 customer service centers, as well as state-of-the-art digital banking services. Technology is fundamen- tally transforming the way we deliver our products and services. We are, therefore, continuously expanding and enhancing our multi-channel offering and will continue to build on our long tradi- tion as a leader and innovator in digital services to deliver superior client experience, capture market share and increase efficiency. Moreover, we follow a life-cycle-based product approach to pro- vide our clients with tailored solutions to meet their particular needs in their different stages of life. With regard to execution, we ensure a client-focused and efficient sales process. Loans, gross % As of 31.12.15 6 5 1 14 74 Total: CHF 136 billion1 Secured by residential property2 Secured by commercial/ industrial property3 Secured by securities Secured by guarantees and other collateral Unsecured loans 1 Total includes less than 1% secured by cash. 2 53% average loan-to-value. 3 54% average loan-to-value. (cid:19)(cid:36)(cid:38)(cid:18)(cid:20)(cid:20)(cid:65)(cid:71) 1BD021_e We measure the performance of our business against four key performance indicators: pre-tax profit growth, cost / income ratio, net new business volume growth for personal banking and net interest margin. We also evaluate our performance against our annual performance targets, which comprise a cost / income ratio of 50–60%, a net new business volume growth rate of 1–4% for personal banking, and a net interest margin of 140–180 basis points, as defined in the “Our strategy” section of this report. ➔ Refer to the “Our strategy” section of this report for more information on our targets In the corporate and institutional business we focus on a qual- itative growth strategy. Our key strategic focus is centered on con- tinuous improvement of our profitability and capital efficiency. Through cross-divisional collaboration, we deliver our full value proposition to our clients, leveraging our capabilities across all business divisions. Our size in Switzerland and the diversity of businesses we oper- ate put us in an advantageous position to serve all our clients’ complex financial needs in an integrated and efficient way. We aim to be the main bank of corporate and institutional clients ranging from small and medium-sized enterprises to multination- als, and from pension funds and insurers to commodity traders and banks. We serve more than 120,000 companies, including more than 85% of the 1,000 largest Swiss corporations, one in three pension funds in Switzerland including 75 of the largest 100, and around 80% of banks domiciled in Switzerland. We strive to selectively expand our market share in Switzerland with a focus on cash flow-based lending and fee and trading business. Additionally, we systematically expand our international footprint, leveraging our product capabilities to optimally serve Swiss corpo- rate clients with activities abroad as well as global corporate cli- ents with headquarters in Switzerland. Our clients value the good work we do and have rewarded it once again. In 2015, for the fifth consecutive year, the interna- tional finance magazine Euromoney named UBS “Best Domestic Cash Manager Switzerland” on the basis of a survey of cash man- agers and chief financial officers. Additionally, in 2015, UBS was rated as a leading asset servicing provider across several catego- ries according to the R&M Survey, one of the industry’s most important client surveys, recognizing UBS as the “Best Custodian for Asset Managers”. As the leading private and corporate banking business in Swit- zerland, we understand the importance of our role in supporting our clients’ needs. We continuously review structures and pro- cesses in order to simplify our service commitments across the business, including streamlining our processes, reducing the administrative burden on our client advisors and enhancing their long-term productivity without compromising our risk standards. Continuous development, particularly of our client-facing staff, is a crucial element of our strategy, as this is our key to ensuring superior client service. UBS is a front-runner in the Swiss market in terms of the certification of its client advisors and has set a standard with its state-accredited ISO certification program. Other banking groups in Switzerland have followed UBS in adopt- ing the standard for their own certification programs. Organizational structure We are a core element of UBS’s universal bank delivery model in Switzerland, which allows us to extend the expertise of the entire bank to our Swiss private, corporate and institutional clients. Switzerland is the only country where we operate in private, cor- porate and institutional banking, wealth and asset management, as well as investment bank services. To ensure consistent delivery throughout Switzerland, the Swiss network is organized into 10 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 ser- vice. Competitors In the Swiss retail business, our competitors are Raiffeisen, Credit Suisse, the cantonal banks, PostFinance, and 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. 49 Operating environment and strategy Operating environment and strategy Personal & Corporate Banking Products and services Our private clients have access to a comprehensive life-cycle- based offering, comprising easy-to-understand products, includ- ing cash accounts, payments, savings and retirement solutions, investment fund products, residential mortgages, a loyalty pro- gram and advisory services. We provide financing and investment solutions to our corporate and institutional clients, offering access to equity and debt capital markets, syndicated and structured credit, private placements, leasing and traditional financing. Our transaction banking offers solutions for payment and cash man- agement services, trade and export finance, receivable finance, as well as global custody solutions to institutional clients. In 2015, we implemented a number of product and service innovations. Examples include the launch of our innovative Corporate Financial Management for our small and medium-sized clients, the devel- opment of an electronic document presentation service for trade finance transactions, as well as the continued extension of our corporate banking capabilities targeted at subsidiaries and branches of Swiss clients in Singapore and Hong Kong. Addition- ally, we further extended our Multi-channel Center to optimally steer clients across digital and non-digital channels and to create a unique client experience. To best leverage our value proposition to clients, close collaboration with our investment bank and asset management businesses are key building blocks in our universal bank strategy. This enables us to offer capital market products, foreign exchange products, hedging strategies and trading capa- bilities, as well as to provide corporate finance advice through the Investment Bank and state-of-the-art fund solutions and portfolio management through Asset Management. Our distribution model is based on a solid, balanced multi- channel strategy. Our expanding electronic and mobile banking offering is very well-regarded and we continue to see a steadily rising number of users and client interactions. The joint introduc- tion of Paymit with SIX and Zürcher Kantonalbank has made UBS the leader in the Swiss mobile payment space. UBS Paymit achieved more than 150,000 downloads by the end of 2015. We will con- tinue to build on our position as the leading multi-channel bank in Switzerland and as an innovator in digital services to improve client experience, capture market share and increase efficiency. 50 Asset Management Asset Management is a large-scale asset manager, with a presence in 22 countries. We offer investment capabilities and investment styles across all major traditional and alternative asset classes to institutions, wholesale intermediaries and wealth management clients around the world. Business We are a leading fund house in Europe, the largest mutual fund manager in Switzerland, the third-largest international asset man- ager in Asia, the second largest fund of hedge funds manager and one of the largest real estate investment managers in the world. We provide investment management products and ser- vices to a broad range of clients around the world, including: cor- porate and public pension plans; sovereign institutions such as governments and central banks; supranationals; endowments, municipalities and charities; insurance companies; wholesale intermediaries; financial institutions; and private clients. Our global investment capabilities include equities, fixed income, currency, hedge funds, real estate, infrastructure and pri- vate equity, which can also be combined into customized solu- tions and multi-asset strategies. Complementing our investment offering, our fund services business provides administration ser- vices for traditional UBS and third-party funds. We have a diverse client base located throughout the world. As of 31 December 2015, invested assets totaled CHF 650 billion and assets under administration were CHF 407 billion. Approxi- mately 66% of invested assets were from institutional clients and the remainder was from wholesale clients, including UBS’s wealth management businesses and third parties. 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Strategy and clients We aspire to provide our clients with the best ideas and superior investment performance by drawing on the breadth and depth of our insights and capabilities to deliver high-quality solutions and services. Our aim is to drive profitable and sustainable growth across our client segments. For third-party clients, we are focusing our growth ambitions on key markets, strengthening our institutional business and accelerating the growth of our wholesale business. We are also intensifying our coverage and collaboration with UBS’s wealth management businesses to continue to deliver prod- ucts that meet their clients’ needs. Our global business model has proven resilient to challenging market conditions, and provides a solid foundation to capture growth opportunities despite shifting market dynamics. In 2015 we sold our Alternative Fund Services (AFS) business to Mitsubishi UFJ Financial Group, as part of our strategy to focus on delivering best-in-class investment management capabilities to our clients. We intend to build on our areas of strength in traditional, alter- native and passive investments. In alternatives, we will continue to expand our established positions in real estate and hedge funds, leveraging our expertise and best practice across all invest- ment areas. To further develop our solutions offering to meet cli- ent needs across alternative and traditional asset classes, we have brought together our customized client solutions capabilities. In passive investments, we continue to develop our well-established capabilities, including indexed strategies and exchange-traded funds (ETFs). To support the successful execution of our strategy, we are investing in our operating platform and in attracting, developing and retaining world-class professionals. We measure the performance of our business against five key performance indicators: pre-tax profit growth, cost / income ratio, net new money growth, gross margin on invested assets and net margin on invested assets. We also evaluate our performance against our annual performance targets, which include an annual pre-tax profit of CHF 1 billion in the medium term, a cost / income ➔ Refer to the “Our strategy” section of this report for more information on our targets The asset management industry has seen continued asset inflows. The long-term outlook is positive, with three main driv- ers: (i) populations are aging in developed countries and this will increase future savings requirements; (ii) governments are con- tinuing to reduce support for pensions and benefits, leading to a greater need for private funding; and (iii) emerging regulation is creating opportunities for asset managers that have the scale to deliver new value-added services. Organizational structure Following the sale of our AFS business, at the end of 2015 we employed 2,277 personnel in 22 countries, and have our principal offices in Chicago, Frankfurt, Hartford, Hong Kong, London, New York, Singapore, Sydney, Tokyo and Zurich. Effective 1 January 2016, our structure is organized around the following investment areas and functions: – Investment and business areas: Equities, Multi-Asset & O’Connor; Fixed Income; Global Real Estate; Infrastructure and Private Equity; Solutions; and Fund Services. – Distribution: global and regional teams responsible for client servicing and coverage; – Products: global and regional teams responsible for product development and lifecycle management – Support functions, including the Chief Operating Officer area and shared services provided by Corporate Center. Competitors Our competitors include global firms with wide-ranging capabili- ties and distribution channels, such as BlackRock, JP Morgan Asset Management, BNP Paribas Investment Partners, Amundi, Goldman Sachs Asset Management, AllianceBernstein Invest- ments, Schroders and Morgan Stanley Investment Management. Our other competitors include firms with a specific market or asset class focus. 52 (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:14)(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:2)(cid:67)(cid:80)(cid:70)(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:69)(cid:74)(cid:67)(cid:80)(cid:80)(cid:71)(cid:78) (cid:7) (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:23) (cid:52)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:85)(cid:19) (cid:35)(cid:85)(cid:75)(cid:67)(cid:2)(cid:50)(cid:67)(cid:69)(cid:75)(cid:386)(cid:69) (cid:20)(cid:19) (cid:35)(cid:79)(cid:71)(cid:84)(cid:75)(cid:69)(cid:67)(cid:85) (cid:20)(cid:21) 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(cid:67)(cid:80)(cid:70)(cid:2)(cid:50)(cid:84)(cid:75)(cid:88)(cid:67)(cid:86)(cid:71)(cid:2)(cid:39)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(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:75)(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:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:55)(cid:36)(cid:53)(cid:2)(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:2)(cid:69)(cid:74)(cid:67)(cid:80)(cid:80)(cid:71)(cid:78)(cid:16) Products and services We offer clients a wide range of investment products and services in different asset class capabilities, which can be delivered through segregated, pooled or advisory mandates as well as registered investment funds in a variety of jurisdictions. Our active traditional and alternative capabilities are: – Equities – investment strategies with varying risk and return objectives, including global, region-focused and thematic strategies, as well as high alpha, growth and quantitative styles. – Multi-Asset – global and regional asset allocation and currency investment strategies across the risk / return spectrum. – O’Connor – a global, relative value-focused, single-manager hedge fund platform providing investors with absolute and risk-adjusted returns. – Fixed Income – global, regional and local market-based single- sector, multi-sector and extended sector strategies such as high yield and emerging market debt. The team also manages unconstrained fixed income and currency strategies. – Global Real Estate – global and regional strategies across the major real estate sectors, mainly focused on core and value- added strategies, and also including other strategies across the risk / return spectrum. – Infrastructure and Private Equity – direct infrastructure invest- ment in core infrastructure assets globally, and multi-manager infrastructure and private equity strategies in broadly diversi- fied fund of funds portfolios. Our Solutions business offers: – Multi-manager hedge fund solutions and advisory services, providing exposure to hedge fund investments with tailored risk and return profiles. – Customized multi-asset solutions and advisory services, includ- ing risk-managed and structured strategies, manager selec- tion, pension risk management, risk advisory and global tacti- cal asset allocation. Our passive capabilities include indexed, alternative beta and rules-based strategies across equities, fixed income, commodities, real estate and alternatives with benchmarks ranging from main- stream to highly customized indices and rules-driven solutions. Products are offered in a variety of structures, including ETFs, pooled funds, structured funds and mandates. 53 Operating environment and strategy Operating environment and strategy Investment Bank Investment Bank The Investment Bank provides corporate, institutional and wealth management clients with expert advice, innovative solutions, execution and comprehensive access to international capital markets. We offer advisory services and provide in-depth cross-asset research, along with access to equities, foreign exchange, precious metals and selected rates and credit markets, through our business units, Corporate Client Solutions and Investor Client Services. The Investment Bank is an active participant in capital markets flow activities, including sales, trading and market-making across a range of securities. Business The Investment Bank is organized as two distinct but aligned busi- ness units: Corporate Client Solutions Corporate Client Solutions includes all advisory and financing solutions businesses, origination, structuring and execution, including equity and debt capital markets in service of corporate, financial institution, sponsor clients and UBS’s wealth manage- ment businesses. Investor Client Services Investor Client Services includes execution, distribution and trading for institutional investors and provides support to Corporate Client Solutions and UBS’s wealth management businesses. It includes our equities businesses, including cash, derivatives and financing services, cross-asset class research capabilities, and our foreign exchange franchise, precious metals, rates and credit businesses. The Investor Client Services unit also provides distribution and risk management capabilities required to support all of our businesses. Strategy and clients We aspire to provide best-in-class services and solutions to our corporate, institutional and wealth management clients, through an integrated, solutions-led approach, driven by intellectual capi- tal and leveraging our award-winning electronic platforms. With our client-centric business model, we are an ideal partner for our wealth management, personal & corporate banking and asset management businesses, and we are well-positioned to provide our clients with deep market insight as well as global coverage and execution. We continue to focus on our traditional strengths in advisory, capital markets, equities and foreign exchange businesses, com- plemented by a re-focused rates and credit platform, in order to deliver attractive, sustainable, risk-adjusted returns. Supported by world-class research and technology capabilities, we continue to pioneer innovative and integrated solutions across asset classes. We are thus able to support our clients as they adapt to evolving market structures, driven by regulatory and technological changes. 54 Our Corporate Client Solutions business unit includes our advi- sory and capital markets businesses and financing solutions, which are geared toward industries and regions that offer the best opportunities to meet our long-term strategic goals. We are present in all major financial markets, with coverage based on a comprehensive matrix of country, sector and product banking professionals. Within Investor Client Services, we are one of the leading equi- ties franchises in the world. The business continues to leverage its global distribution platform and comprehensive product capabili- ties, to support a broad client base, including UBS’s wealth man- agement businesses, and institutional and retail investors, provid- ing access to primary and secondary equity markets globally. Our foreign exchange and precious metals businesses, underpinned by a world-class distribution platform, continue to be a corner- stone of our services. Consistent with our strategy, our rates and credit businesses are focused on client flow and solutions, in addi- tion to executing and clearing exchange-traded fixed income and commodities derivatives. In line with the equities and foreign exchange businesses, the rates and credit businesses serve our capital markets business through an intermediation model. 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Furthermore, we remain focused on our ongoing cost reduction programs and on strengthening our operational risk framework. In 2015, we continued to further optimize internal efficiencies by implementing a targeted technol- ogy plan. This plan is based on a long-term portfolio approach across businesses aimed at enhancing the effectiveness of our platform for clients. In addition, we continue to take measures to simplify our production processes, achieve leaner front-to-back processes and operate with a reduced real-estate footprint. To support our goal of earning attractive returns on our allo- cated capital, we operate within a tightly controlled framework of balance sheet, risk-weighted assets and leverage ratio denomina- tor. Consistent with this, we assess both the Corporate Client Solutions and the Investor Client Services business units based on the returns they generate individually, as well as considering the support and contribution they provide to each other. We assess the performance of our business through five key performance indicators: pre-tax profit growth, cost / income ratio, return on attributed equity (RoaE), gross return on assets and average value-at-risk (VaR). We also evaluate our performance against our performance targets, which comprise a cost / income ratio of 70–80% and an annual pre-tax RoaE of greater than 15%, as defined in the “Our strategy” section of this report. In addition, we have short- to medium-term expectations for fully applied risk-weighted assets of CHF 85 billion, and a fully applied leverage ratio denominator of CHF 325 billion. ➔ Refer to the “Our strategy” section of this report for more information on our targets and expectations Organizational structure At the end of 2015, we employed 5,243 personnel in over 35 countries, and had our principal offices in Hong Kong, London, New York, Singapore, Sydney, Tokyo and Zurich. To ensure that our corporate and institutional clients benefit from our global reach and capabilities in tailoring solutions to meet their individual needs, we are organized into two client- centric business units: Corporate Client Solutions and Investor Cli- ent Services. Dedicated management teams in these business units complement our global product capabilities with their regional expertise to foster cross-product and cross-divisional col- laboration, enabling us to deliver the firm’s comprehensive range of services to our clients. We are governed by executive, operating and risk committees and operate through UBS AG branches, and other subsidiaries of UBS Group. Securities activities in the US are conducted through UBS Securities LLC, a registered broker-dealer. In the UK, Invest- ment Bank activities are conducted mainly out of UBS AG London Branch and UBS Limited, consistent with the modified operating model implemented during 2014 and 2015 for UBS Limited. Competitors Competing firms are active in many of the businesses and markets in which we participate, but our Investment Bank’s strategy is unique. The main competitors of our equities, foreign exchange and corporate advisory businesses are the major global invest- ment banks, including Bank of America Merrill Lynch, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Mor- gan Chase and Morgan Stanley. Products and services Corporate Client Solutions This unit provides client coverage, advisory, debt and equity capi- tal market solutions and financing solutions for corporate, finan- cial institution, financial sponsor clients and clients of UBS’s wealth management businesses. Corporate Client Solutions works closely with Investor Client Services in the distribution and risk manage- ment of capital markets products and financing solutions. With a presence in all major financial markets, Corporate Client Solutions is managed by region and is organized on a matrix of product, industry sector and country banking professionals. Its main busi- ness lines are as follows: – Advisory provides bespoke solutions for our clients’ most com- plex strategic challenges. This includes domestic and cross- border mergers and acquisitions, as well as spin-offs, exchange offers, leveraged buyouts, joint ventures, exclusive sales, restructurings, takeover defense, corporate broking and other advisory services. – Equity capital markets offers equity capital-raising services, as well as related derivative products and risk management solu- tions. Its services include managing initial public offerings, fol- low-ons, including rights issues and block trades, as well as private placements, equity-linked transactions and other stra- tegic equities solutions. – Debt capital markets works closely with corporate and finan- cial institution clients in raising debt capital, including invest- ment-grade and emerging market bonds, high-yield bonds, subordinated debt and hybrid capital. It also offers event- driven (acquisition, leveraged buy-out) loans, bonds and mez- zanine financing. All debt products are provided alongside risk management solutions, including derivatives in close collabo- ration with our foreign exchange, rates and credit businesses. – Financing solutions serves corporate and investor clients across the globe by providing customized solutions across asset classes via a wide range of financing capabilities, including structured financing, real estate finance and special situations. – Risk management includes corporate lending and associated hedging activities. 55 Operating environment and strategy Operating environment and strategy Investment Bank Investor Client Services Investor Client Services, which includes our equities business and our foreign exchange, rates and credit business, provides a com- prehensive distribution platform with enhanced cross-asset deliv- ery as well as specialist skills to our corporate, institutional and wealth management clients. Equities We are one of the world’s largest equities houses and one of the leading participants in the primary and secondary markets for cash equities and equity derivatives. We provide a full front-to- back product suite globally, including financing, execution, clear- ing and custody services. Our franchise takes a client-centric approach in serving hedge funds, asset managers, wealth man- agement advisors, financial institutions and sponsors, pension funds, sovereign wealth funds and corporations globally. We dis- tribute, structure, execute, finance and clear cash equity and equity derivative products. Our research franchise provides in- depth investment analysis on companies, sectors, regions, macro- economic trends, public policy and asset-allocation strategies. The main business lines of the equities unit are: – Cash provides clients with liquidity, investment advisory, trade execution and consultancy services, together with comprehen- sive access to primary and secondary markets, corporate man- agement 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 products, direct market access to over 100 venues worldwide, including low- latency execution, innovative algorithms and pre-trade, post- trade and real-time analytical tools. Our broker and intermedi- ary services franchise offers execution and price improvement to retail wholesalers. – Derivatives provides a full range of flow and structured prod- ucts, convertible bonds and strategic equity solutions with global access to primary and secondary markets. It enables cli- ents to manage risk and meet funding requirements through a wide range of listed, over-the-counter, securitized and fund- wrapped products. We create and distribute structured prod- ucts and notes for institutional and retail investors with invest- ment returns linked to companies, sectors and indices across multiple asset classes, including commodities. – Financing services provides a fully integrated platform for our hedge fund clients, including prime brokerage, capital intro- duction, clearing and custody, synthetic financing and securi- ties lending. In addition, we execute and clear exchange-traded equity derivatives in more than 45 markets globally. Foreign exchange, rates and credit Foreign exchange, rates and credit consists of our foreign exchange franchise, which ranks in the top tier globally, and our market-leading precious metals business, as well as select rates and credit businesses. These businesses support the execution, distribution and risk management related to corporate and insti- tutional client businesses, and they also meet the needs of UBS’s wealth management clients via targeted intermediaries. We are focused on building a leading agency execution and electronic trading business, and continue to maintain high levels of balance sheet velocity. The main business lines are: – Foreign exchange provides a full range of G10 and emerging markets currency and precious metals services globally. We are one of the leading foreign exchange market-makers in the pro- fessional spot, forwards and options markets. We provide cli- ents worldwide with first-class execution facilities (voice, elec- tronic, algorithmic) coupled with our robust advisory and structuring capabilities when tailored solutions best fit our cli- ents’ positioning, hedging or liquidity management. We have been present in physical and non-physical precious metals mar- kets for almost a century, providing trading, investing and hedging across the precious metals spectrum. – Rates and credit encompasses sales, trading and market-mak- ing in a selected number of rates and credit products, including standardized rates-driven products, interest rate swaps, medium-term notes, government and corporate bonds, bank notes, credit derivatives and the execution and clearing of exchange-traded fixed income and commodities derivatives. In addition, we work closely with Corporate Client Solutions, pro- viding support to our debt capital markets businesses and tai- loring customized financing solutions for our clients. Research UBS Securities Research offers its clients key insights on multiple securities in major financial markets around the globe. Designed to be closely aligned with the needs of its clients, UBS Securities Research’s approach to sell-side financial research starts with identifying the issues that drive market prices. In our flagship ’Q-series’ reports, which are based on questions received from our clients, UBS Securities Research analysts, economists and strategists address issues with a coordinated perspective across regions, sectors, and asset classes. With insightful evidence being a continued need for our cli- ents, we have established UBS Evidence Lab, which is now the sell-side’s largest team of experienced primary research experts. Working in collaboration with UBS Securities Research analysts, UBS Evidence Lab helps uncover new evidence on key issues that inform clients on investment decisions, facilitated by its cutting- edge toolkit of techniques. 56 Corporate Center Corporate Center is comprised of Services, Group Asset and Liability Management (Group ALM) and Non-core and Legacy Portfolio. Services includes the Group’s control functions and provides all logistics and support services to our businesses. Group ALM is responsible for centrally managing the Group’s liquidity and funding position, as well as providing other balance sheet and capital management services to the Group. Non-core and Legacy Portfolio is com- prised of the non-core businesses and legacy positions that were part of the Investment Bank prior to its restructuring. Strategic priorities and initiatives Corporate Center – Services Achieving greater effectiveness and efficiency is the primary focus of our strategy across the whole of Corporate Center. At year-end 2015, we achieved CHF 1.1 billion of net cost reductions com- pared with full-year 2013 and we remain fully committed to achieving our net cost reduction target of CHF 2.1 billion by year- end 2017. We continue to focus our efforts on the strategic levers that can be categorized into workforce and footprint, organiza- tion and process optimization, and technology. Today, 27% of employees and contractors are in offshore or nearshore locations compared with 18% two years ago. In addi- tion to lower future personnel expenses, this allows us to tap growing talent pools and realize efficiencies by reducing our foot- print in high-cost real estate locations. Through organization and process optimization, we seek to increase effectiveness and efficiency by leveraging common capa- bilities and creating centralized functions. Within Group Technol- ogy, we continue to modernize our infrastructure and simplify our portfolio of applications. Group Asset and Liability Management continues to focus on optimizing our asset and liability positions across the Group. The key drivers of these activities are the management of our struc- tural risks, including foreign exchange sensitivity, counterparty credit risk and interest rate risk in the banking book; the ongoing evolution of the global regulatory landscape; and changes to the financial resource requirements of our business divisions. Non-core and Legacy Portfolio continues a wind-down strat- egy that balances the further disciplined reduction of both our risk-weighted assets and our leverage ratio denominator, weighed against the ultimate benefit for shareholders. ➔ Refer to the “Our strategy” section of this report for more information At the end of 2015, 23,470 personnel were employed in Corpo- rate Center – Services. Corporate Center – Services allocates the majority of its operating expenses associated with shared services functions to the business divisions and other Corporate Center units for which the respective services are performed based on service consumption, including operations, information technol- ogy, human resources, regulatory relations and strategic initia- tives, communications and branding, corporate services, physical security, information security as well as outsourcing, nearshoring and offshoring. Additionally, operating expense associated with control functions, including Group Finance, Group Risk and Group General Counsel, is allocated to the business divisions and other Corporate Center units based on utilization. Each year, as part of the annual business planning cycle, Cor- porate Center – Services agrees with the business divisions, Non- core and Legacy Portfolio as well as Group ALM cost allocations for services at fixed amounts or at variable amounts based on fixed formulas, depending on capital and service consumption levels as well as the nature of the service performed. However, as actual costs incurred may differ from those expected, Corporate Center – Services may recognize significant under- or over-allo- cations depending on various factors, including Corporate Cen- ter – Services’ ability to manage the delivery of its services and achieve cost savings. Operating expenses remaining in Corporate Center – Services after allocations relate mainly to Group governance functions and other corporate activities, certain strategic and regulatory projects and certain retained restructuring expenses. 57 Operating environment and strategy Operating environment and strategy Corporate Center Group Chief Financial Officer Our Group Chief Financial Officer (Group CFO) is responsible for ensuring transparency in, and the assessment of, the financial performance of our Group and business divisions and for the Group’s financial accounting, controlling, forecasting, planning and reporting processes. The Group CFO also provides advice on financial aspects of strategic projects and transactions. The Group CFO is also responsible for management and control of the Group’s tax affairs and for treasury and capital management, including management and control of our regulatory capital ratios, as well as funding and liquidity risk with independent over- sight from the Group Chief Risk Officer (Group CRO). After con- sultation with the Audit Committee of the Board of Directors (BoD), our Group CFO makes proposals to the BoD regarding the accounting standards adopted by the Group, and defines finan- cial reporting and disclosure standards. Together with the Group Chief Executive Officer (Group CEO), the Group CFO provides external certifications under sections 302 and 404 of the Sar- banes-Oxley Act of 2002, and, in coordination with the Group CEO, manages relations with investors and external analysts. The Group CFO supports the Group CEO in strategy development and key strategic topics. The Corporate Development function sup- ports UBS’s senior management in the definition, implementation and monitoring of UBS’s strategy. Group Chief Operating Officer Our Group Chief Operating Officer (Group COO) is responsible for Group Technology, Group Operations and Group Corporate Ser- vices. The Group COO is responsible for providing high-quality, cost-effective and differentiating Group-wide IT services and tools in line with the needs of the business divisions and Corporate Cen- ter and for the delivery of a wide range of operational services across all business divisions and regions. The Group COO is also responsible for supplying real estate infrastructure and general administrative services, and for directing and controlling all supply and demand management activities for the entire firm. He sup- ports the firm with its third-party sourcing strategies and takes responsibility for the bank’s nearshore, offshore, outsourcing and supplier-related processes. The Group COO supports the Group in enabling change and transition by improving the effectiveness and efficiency of UBS’s operating model and processes, reducing com- plexity and enhancing the flexibility and agility of the organization. Group Chief Risk Officer The Group Chief Risk Officer (Group CRO) is responsible for the development of the Group’s risk appetite framework, its risk man- agement and control principles and risk policies. In accordance with the risk appetite framework approved by the BoD, the Group CRO is responsible for the implementation of appropriate inde- pendent control frameworks for the Group’s credit, market, trea- sury, country, compliance and operational risks. The Group CRO is also responsible for the development and implementation of the frameworks for risk measurement, aggregation, portfolio controls and, jointly with the Group CFO, for risk reporting. The Group CRO has approval authority for transactions, positions, exposures, portfolio limits and credit risk provisions / allowances in accor- dance with the risk control authorities delegated to this role. The Group CRO has management responsibility over the divisional, regional and firm-wide risk control functions, and monitors and challenges the bank’s risk-taking activities. Our Group Security Services function is also part of the Group CRO area. Group General Counsel Our Group General Counsel (Group GC) is responsible for legal matters, policies and processes, and for managing the legal func- tion of our Group. In addition, the Group GC is responsible for legal oversight in respect of the Group’s key regulatory interac- tions and for maintaining the relationships with our key regulators with respect to legal matters. The Group GC is also responsible for reporting legal risks and material litigation, as well as managing internal, special and regulatory investigations. Corporate Center – Group ALM Group ALM manages the structural risks of our balance sheet including pricing and managing the Group’s structural interest rate and currency risk, funding and liquidity risk, currency basis and interest rate basis risk and collateral risk. Group ALM also seeks to optimize the Group’s financial performance by better matching assets and liabilities within the context of the Group’s liquidity, funding and capital targets. Group ALM serves all business divi- sions and other Corporate Center units, and its risk management is fully integrated into the Group’s risk governance framework. The results of certain hedging activities, including any non- economic volatility caused by the applicable accounting treat- ment, are retained by Group ALM. Revenues generated by the Group ALM’s banking book inter- est rate risk management activities performed on behalf of Wealth Management and Personal & Corporate Banking are fully allo- cated to the originating business divisions. Funding and liquidity costs are allocated to the business divisions and other Corporate Center units based on their consumption, which is driven by vari- ous internal funding and liquidity models. The Group seeks to maintain liquidity and funding levels at, or above, the minimum regulatory requirements. Corporate Center – Non-core and Legacy Portfolio Corporate Center – Non-core and Legacy Portfolio is comprised of the positions from businesses that were part of the Investment Bank prior to its restructuring, and is overseen by a committee consisting of the Group Chief Executive Officer, the Group Chief Financial Officer and the Group Chief Risk Officer. Non-core and Legacy Portfolio’s positions are managed and exited over time with the objective of maximizing shareholder value, in line with our strategic plan. 58 Risk factors EDTF | Certain risks, including those described below, may impact our ability to execute our strategy or otherwise affect our business activities, 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 impact our ability to execute our strategy. In addition, these risks could affect our business activities, financial condition, results of operations and prospects. The order of pre- sentation of the risk factors below does not indicate the likelihood of their occurrence or the potential magnitude of their conse- quences. Fluctuation in foreign exchange rates and continuing low or negative interest rates may have a detrimental effect on our capital strength, our liquidity and funding position, and our profitability EDTF | We prepare our consolidated financial statements in Swiss francs. However, a substantial portion of our assets, liabilities, invested assets, revenues and expenses, equity of foreign opera- tions and risk-weighted assets (RWA) are denominated in other currencies, particularly the US dollar, the euro and the British pound. Accordingly, changes in foreign exchange rates have an effect on our reported income and expenses, and on other reported figures such as other comprehensive income, invested assets, balance sheet assets, RWA and common equity tier 1 (CET1) capital. These effects may adversely affect our income, bal- ance sheet, capital, leverage and liquidity ratios. The portion of our operating income denominated in non- Swiss franc currencies is greater than the portion of operating expenses denominated in non-Swiss franc currencies. Moreover, a significant portion of the equity of our foreign operations is denominated in US dollars, euros, British pounds and other for- eign currencies. Therefore, the appreciation of the Swiss franc against other currencies generally has an adverse effect on our earnings and equity, including on deferred tax assets, in the absence of any mitigating actions. Similarly, a significant portion of our capital and RWA is denominated in US dollars, euros, British pounds and other for- eign currencies. In order to hedge the CET1 capital ratio, CET1 capital needs to have foreign currency exposure, leading to cur- rency sensitivity of CET1 capital. As a consequence, it is not pos- sible to simultaneously fully hedge the capital and the capital ratio. As the proportion of RWA denominated in foreign curren- cies outweighs the capital in these currencies, a significant appre- ciation of the Swiss franc against these currencies could benefit our capital ratios, while a significant depreciation of the Swiss franc against these currencies could adversely affect our Basel III capital ratios. On 15 January 2015, the Swiss National Bank (SNB) discontin- ued the minimum targeted exchange rate for the Swiss franc ver- sus the euro, which had been in place since September 2011. At the same time, the SNB lowered the interest rate on deposit account balances at the SNB that exceed a given exemption threshold. These decisions resulted in an immediate, considerable strengthening of the Swiss franc against the euro, US dollar, Brit- ish pound, Japanese yen and several other currencies, as well as a reduction in Swiss franc interest rates. The longer-term exchange rate of the Swiss franc against these other currencies is not certain, nor is the future direction of Swiss franc interest rates. Several other central banks have also adopted a negative-interest- rate policy. Swiss counterparties are, in general, highly reliant on the domestic economy and the economies to which they export, in particular the EU and the US. In addition, the EUR / CHF exchange rate is an important risk factor for Swiss corporates. The stronger Swiss franc may have a negative effect on the Swiss economy, particularly on exporters, which could adversely affect some of the counterparties within our domestic lending portfolio and lead to an increase in the level of credit loss expenses in future periods from the low levels recently observed. Moreover, our equity and capital are also affected by changes in interest rates. In particular, the calculation of our net defined ben- efit assets and liabilities is sensitive to the discount rate applied. Any further reduction in interest rates would lower the discount rates and result in an increase in pension plan deficits due to the long duration of corresponding liabilities. This would lead to a cor- responding reduction in our equity and fully applied CET1 capital. 59 Operating environment and strategy Operating environment and strategy Risk factors A continuing low or negative interest rate environment would likely have an adverse effect on the repricing of UBS’s assets and liabilities, and may significantly impact the net interest income generated from our wealth management businesses and Personal & Corporate Banking. The low or negative interest rate environ- ment may affect customer behavior and hence the overall balance sheet structure. It may also affect the performance of our wealth management businesses, particularly given the associated cost of maintaining the high-quality liquid assets (HQLA) required to cover regulatory outflow assumptions embedded in the liquidity coverage ratio (LCR), which could be exacerbated by a reduction of the aforementioned SNB deposit exemption threshold for banks. Mitigating actions that we have taken, or may take in the future, to counteract these effects, such as the introduction of selective deposit fees or minimum lending rates, have resulted and could further result in the loss of customer deposits, a key source of our funding, net new money outflows and / or a declin- ing market share in our domestic lending. Regulatory and legal changes may adversely affect our business and our ability to execute our strategic plans EDTF | Fundamental changes in the laws and regulations affecting financial institutions can have a material and adverse effect on our business. In the wake of the 2007–2009 financial crisis and the subsequent instability in global financial markets, regulators and legislators have proposed, have adopted, or are actively consider- ing, a wide range of changes to these laws and regulations. These measures are generally designed to address the perceived causes of the crisis and to limit the systemic risks posed by major financial institutions. They include the following: – significantly higher regulatory capital requirements; – changes in the definition and calculation of regulatory capital; – changes in the calculation of RWA, including potential require- ments to calculate or disclose RWA using less risk-sensitive standardized approaches rather than the internal models approach we currently use as required by the Swiss Financial Market Supervisory Authority (FINMA) under the Basel III framework; – prudential adjustments to valuation of assets at the discretion of regulators; – changes in the calculation of the leverage ratio and the intro- duction of a more demanding leverage ratio; – new or significantly enhanced liquidity and stable funding requirements; – requirements to maintain liquidity and capital in jurisdictions in which 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 or reduce the profitability of trading and other activities; – cross-border market access restrictions; – a variety of measures constraining, taxing or imposing addi- tional requirements relating to compensation; – adoption of new liquidation regimes intended to prioritize the preservation of systemically significant functions; – requirements to maintain loss-absorbing capital or debt instru- ments subject to write-down as part of recovery measures or a resolution of the Group or a Group company, including require- ments for subsidiaries to maintain such instruments; – requirements to adopt structural and other changes designed to reduce systemic risk and to make major financial institutions easier to manage, restructure, disassemble or liquidate, includ- ing ring-fencing certain activities and operations within sepa- rate legal entities; and – requirements to adopt risk and other governance structures at a local jurisdiction or entity level. Many of these measures have been adopted and their imple- mentation has had a material effect on our business. Others will be implemented over the next several years; some are subject to legislative action or to further rulemaking by regulatory authori- ties before final implementation. As a result, there remains sig- nificant uncertainty regarding a number of the measures referred to above, including whether, or the form in which, they will be adopted, the timing and content of implementing regulations and interpretations, and the dates of their effectiveness. In addition, the cumulative effect of the changes in laws and regulations in Switzerland and the other jurisdictions in which we operate remains uncertain. The implementation of such measures and fur- ther, more restrictive changes may materially affect our business and our ability to execute our strategic plans, impose additional implementation, compliance and other costs on us, or require us to increase prices for, or cease offering of, certain services and products. Notwithstanding attempts by regulators to align their efforts, the measures adopted or proposed differ significantly across the major jurisdictions, making it increasingly difficult to manage a global institution. Moreover, the absence of a coordinated approach puts institutions headquartered in jurisdictions that impose relatively more stringent standards at a disadvantage. Switzerland has adopted capital and liquidity requirements for its major international banks that are among the strictest of the major financial centers. This could put Swiss banks, such as UBS, at a disadvantage when they compete with peer financial institu- tions subject to more lenient regulation or with unregulated non- bank competitors. ➔ Refer to the “Regulatory and legal developments” section of this report for more information 60 Regulatory and legislative changes in Switzerland EDTF | Swiss regulatory changes with regards to capital, liquidity and other areas have generally proceeded more quickly than those in other major jurisdictions. FINMA, the SNB and the Swiss Federal Council are implementing requirements that are signifi- cantly more onerous and restrictive for major Swiss banks, such as UBS, than those adopted or proposed by regulatory authorities in other major global financial centers. Capital and TBTF regulation: A revised banking ordinance and capital adequacy ordinance implementing the Basel III capital stan- dards and the Swiss TBTF law became effective on 1 January 2013. As a systemically relevant Swiss bank, we are subject to base capi- tal requirements, as well as a progressive buffer that scales with our total exposure (a metric that is based on our balance sheet size) and market share in Switzerland. In 2015, the Swiss Federal Council published proposed revisions to the Swiss TBTF framework that would significantly increase our capital requirements based on RWA and impose a significantly higher leverage ratio requirement. In addition, the proposed revisions to the TBTF ordinance would impose a total loss absorbing capital requirement. Moreover, Swiss governmental authorities have, and have exercised, the authority to impose an additional countercyclical buffer capital requirement and have further required banks using the internal ratings-based (IRB) approach to use a bank-specific multiplier when calculating RWA for Swiss residential mortgages, income-producing residen- tial and commercial real estate (IPRE) and credit exposures to cor- porates for the Investment Bank. In addition, UBS has mutually agreed with FINMA to an incremental operational capital require- ment to be held against litigation, regulatory and similar matters and other contingent liabilities, which added CHF 13.3 billion to our RWA as of 31 December 2015. There is no assurance that we will not be subject to increases in capital requirements in the future, from the imposition of further add-ons in the calculation of RWA or other components of minimum capital requirements. Switzerland has implemented new Basel Committee on Bank- ing Supervision (BCBS) requirements for the mandatory Pillar 3 disclosures of RWA based on a harmonized approach, and we expect it will implement, when finalized, the BCBS revisions relat- ing to (i) modifications of the internal ratings-based approach for credit risk, (ii) the fundamental review of the trading book, includ- ing a standardized approach, for market risk, (iii) the standardized approach for credit risk, (iv) the introduction of a floor based on the standardized approach, and (v) the calculation of operational risks. The revisions to the BCBS standards are likely to increase our credit risk and market risk RWA and, based on initial analysis, also our operational risk RWA. Implementation of these revisions would result in significant implementation costs to us. In addition, a floor based on a standardized approach would likely be less risk sensitive and may result in significantly higher RWA. Liquidity and funding: As a Swiss SRB, we are required to main- tain an LCR of high-quality liquid assets to estimated stressed short-term net cash outflows, and we will also be required to maintain a net stable funding ratio (NSFR). Both of these require- ments are intended to ensure that we are not overly reliant on short-term funding and that we have sufficient long-term funding for illiquid assets. These requirements, together with liquidity and funding requirements imposed by other jurisdictions in which we operate, oblige us to maintain substantially higher levels of overall liquidity than was previously the case, or limit our efforts to optimize inter- est expense. Increased capital, funding and liquidity requirements make certain lines of business less attractive and may reduce our overall ability to generate profits. The LCR and NSFR calculations make assumptions about the relative likelihood and amount of outflows of funding and available sources of additional funding in a market or firm-specific stress situation. There can be no assur- ance that in an actual stress situation our funding outflows would not exceed the assumed amounts. Resolution planning and resolvability: The Swiss banking act and capital adequacy ordinances provide FINMA with significant pow- ers to intervene in order to prevent a failure of, or resolve, a failing financial institution. FINMA has considerable discretion in deter- mining whether, when, or in what manner to exercise such powers. In case of a threatened insolvency, FINMA may impose more onerous requirements on us, including restrictions on the pay- ment of dividends and interest. FINMA could also require us, directly or indirectly, for example, to alter our legal structure, including by separating lines of business into dedicated entities, with limitations on intra-group funding and certain guarantees, or to further reduce business risk levels in some manner. The Swiss banking act also provides FINMA with the ability to extinguish or convert to common equity the capital instruments and liabilities of UBS Group AG, UBS AG and UBS Switzerland AG in connection with a resolution. FINMA has broad powers and significant discretion in the exercise of its powers in connection with a resolution proceeding. Certain classes of creditors, such as Swiss deposits, are protected. As a result, holders of obligations of an entity subject to a Swiss restructuring proceeding may have their obligations extinguished or converted to equity even though obligations ranking on a parity with or junior to such obligations are not restructured. Swiss TBTF requirements require Swiss SRBs, including UBS, to put in place viable emergency plans to preserve the operation of systemically important functions in the event of a failure of the institution, to the extent that such activities are not sufficiently separated in advance. The current Swiss TBTF law provides for the possibility of a limited reduction of capital requirements for Swiss SRBs that adopt measures to reduce resolvability risk beyond what is legally required. Such actions include changes to the legal struc- ture of a bank group in a manner that would insulate parts of the group to exposure from risks arising from other parts of the group, thereby making it easier to dispose of certain parts of the group in a recovery scenario, to liquidate or dispose of certain parts of the group in a resolution scenario or to execute a debt bail-in. The aforementioned proposal for a revised TBTF ordinance contem- plates a limited reduction of the proposed gone concern require- ment based on improvements to resolvability. However, there is no certainty with respect to timing or size of a potential rebate. 61 Operating environment and strategy Operating environment and strategy Risk factors Movement of businesses to subsidiaries, which we refer to in this section as subsidiarization, will require significant time and resources to implement. As also discussed below, subsidiarization in Switzerland and elsewhere may create operational, capital, liquidity, funding and tax inefficiencies and may increase our own and our counterparties’ credit risk. There can be no assurance that the execution of the changes we have undertaken, planned or may implement in the future, will result in a material reduction in capital or gone concern requirements or that these changes will satisfy existing or future requirements for resolvability or mandatory structural change in banking organizations. Market regulation: In June 2015, the Swiss Parliament adopted new regulation of the financial market infrastructure in Switzer- land which came into effect on 1 January 2016, subject to phase- in provisions, and mandates, among other things, the clearing of OTC derivatives with a central counterparty. These laws may have a material impact on the market infrastructure that we use, avail- able platforms, collateral management and the way we interact with clients. In addition, these initiatives may cause us to incur material implementation costs. Regulatory and legislative changes outside Switzerland EDTF | Regulatory and legislative changes in other locations in which we operate may subject us to a wide range of new restric- tions both in individual jurisdictions and, in some cases, globally. Banking structure and activity limitations: Regulatory and leg- islative changes may subject us to requirements to move activities from UBS AG branches into subsidiaries. Such subsidiarization can create operational, capital, liquidity, funding and tax inefficien- cies, increase our aggregate credit exposure to counterparties as they transact with multiple entities within our Group, expose our businesses to local capital, liquidity and funding requirements, and potentially give rise to client and counterparty concerns about the credit quality of individual subsidiaries. Such changes could also negatively affect our funding model and severely limit our booking flexibility. For example, we have significant operations in the UK and currently use UBS AG’s London branch as a global booking center for many types of products. We have been required by the Pru- dential Regulatory Authority (PRA) and by FINMA to very sub- stantially increase the capitalization of our UK bank subsidiary, UBS Limited, and may be required to change our booking prac- tices to reduce, or even eliminate, our utilization of UBS AG’s London branch as a global booking center for the ongoing busi- ness of the Investment Bank. We are subject to the US “Volcker Rule” under the Dodd-Frank Act and may become subject to other regulations substantively limiting the types of activities in which we may engage. We have incurred substantial costs to implement a compliance and moni- toring framework to comply with the Volcker Rule and have been required to modify our business activities both inside and outside of the US to conform to its activity limitations. The Volcker Rule may also have a substantial impact on market liquidity and the economics of market-making activities. OTC derivatives regulation: In 2009, the G20 countries com- mitted to require all standardized over-the-counter (OTC) deriva- tive contracts to be traded on exchanges or trading facilities and cleared through central counterparties. This commitment is being implemented through Dodd-Frank in the US and corresponding legislation in the EU, Switzerland – where the new regulation came into effect on 1 January 2016 – and other jurisdictions, and has and will continue to have a significant effect on our OTC derivatives business, which is conducted primarily in the Invest- ment Bank. For example, we expect that, as a rule, the shift of OTC derivatives trading to a central clearing model will tend to reduce profit margins in these products. These market changes are likely to reduce the revenue potential of certain lines of busi- ness for market participants generally, and we may be adversely affected. UBS AG registered as a swap dealer with the Commodity Futures Trading Commission (CFTC) in the US at the end of 2012, enabling the continuation of its swaps business with US persons. We expect to register UBS AG as a security-based swap dealer with the SEC, when its registration is required. Some of these regulations, including those relating to swap data reporting, recordkeeping, compliance and supervision, apply to UBS AG globally. The changes in OTC derivative regulation in the US, the EU, Switzerland and elsewhere continue to present a substantial implementation burden, and in some cases US rules will likely duplicate or conflict with legal requirements applicable to us else- where, including in Switzerland, and may place us at a competi- tive disadvantage to firms that are not required to register as swap dealers in the US with the SEC or CFTC. Regulation of cross-border provision of financial services: In many instances, we provide services on a cross-border basis. We are therefore sensitive to barriers restricting market access for third-country firms. In particular, efforts in the EU to harmonize the regime for third-country firms to access the European market may have the effect of creating new barriers that adversely affect our ability to conduct business in these jurisdictions from Switzer- land. In addition, a number of jurisdictions are increasingly regu- lating cross-border activities on the basis of some notion of comity, e.g., substituted compliance and equivalence determination. A negative determination in certain jurisdictions could limit our access to the market in those jurisdictions and may negatively influence our ability to act as a global firm. In addition, as jurisdic- tions tend to apply such determinations on a jurisdictional level rather than on an entity level, we will generally need to rely on jurisdictions’ willingness to collaborate. 62 Resolution and recovery; bail-in EDTF | We are currently required to produce recovery and resolution plans in the US, the UK, Switzerland and Germany and are likely to face similar requirements for our operations in other jurisdic- tions, including our operations in the EU as a whole as part of the proposed EU Bank Recovery and Resolution Directive. If a recovery or resolution plan is determined by the relevant authority to be inadequate or not credible, relevant regulation may authorize the authority to place limitations on the scope or size of our business in that jurisdiction, oblige us to hold higher amounts of capital or liquidity, or to change our legal structure or business in order to remove the relevant impediments to resolution. Resolution plans may increase the pressure on us to make structural changes, such as the creation of separate legal entities, if the resolution plan in any jurisdiction identifies impediments that are not acceptable to the relevant regulators. Such structural changes may negatively affect our ability to benefit from synergies between business units, and if they include the creation of separate legal entities, may have the other negative consequences mentioned above with respect to subsidiarization more generally. Regulatory requirements for banks to maintain minimum TLAC, such as those contemplated under the proposed revised Swiss TBTF ordinance, or requirements to maintain TLAC at sub- sidiaries, e.g., those proposed by the Federal Reserve Board for US IHC, as well as the power of resolution authorities to bail in TLAC and other debt obligations and uncertainty as to how such pow- ers will be exercised, will likely increase our cost of funding and could potentially increase the total amount of funding required absent other changes in our business. Possible consequences of regulatory and legislative developments EDTF | 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. The developments have been, and will likely continue to be costly to implement. They could also have a negative effect on our legal structure or business model, potentially generating capital ineffi- ciencies and affecting our profitability. Finally, the uncertainty related to, or the implementation of, legislative and regulatory changes may have a negative impact on our relationships with clients and our success in attracting client business. If we are unable to maintain our capital strength, this may adversely affect our ability to execute our strategy, client franchise and competitive position EDTF | Our capital position, as measured by our risk-weighted capi- tal and leverage ratios under Swiss SRB Basel III requirements, is determined by our RWA, our leverage ratio denominator and our eligible capital. RWA, leverage ratio denominator and eligible capital may fluctuate based on a number of factors. RWA are credit, non-counterparty related, market and opera- tional risk positions, measured and risk-weighted according to regulatory criteria. They are driven by our business activities and by changes in the risk profile of our exposures, as well as the effect of currency and methodology changes and regulatory requirements. For instance, substantial market volatility, a widen- ing of credit spreads, which is a major driver of our value-at-risk, adverse currency movements, increased counterparty risk, deteri- oration in the economic environment, or increased operational risk could result in a rise in RWA. Our eligible capital would be reduced if we experienced losses recognized within net profit or other comprehensive income, as determined for the purpose of the regulatory capital calculation, which may also render it more difficult or more costly for us to raise new capital. In addition, eligible capital can be reduced for a number of other reasons, including certain reductions in the ratings of securitization expo- sures, acquisitions and divestments changing the level of good- will, adverse currency movements affecting the value of equity, prudential adjustments that may be required due to the valuation uncertainty associated with certain types of positions, and changes in the value of certain pension fund assets and liabilities or in the interest rate and other assumptions used to calculate the changes in our net defined benefit obligation recognized in other comprehensive income. Refer to “Fluctuation in foreign exchange rates and continuing low or negative interest rates may have a detrimental effect on our capital strength, our liquidity and fund- ing position, and our profitability” above for more information on the effect on capital of changes to pension plan defined benefit obligations. Any such increase in RWA or reduction in eligible capital could materially reduce our capital ratios. Risks captured in the operational risk component of RWA have become increasingly significant as a component of our overall RWA. We have significantly reduced our market risk and credit risk RWA as we have executed our strategy, however, operational risk events, particularly those arising from litigation, regulatory and similar matters have resulted in significant increases in opera- tional risk RWA. We have agreed on a supplemental analysis with FINMA that is used to calculate an incremental operational risk capital charge to be held for litigation, regulatory and similar mat- ters and other contingent liabilities which as of 31 December 2015 was CHF 13.3 billion. There can be no assurance that UBS will be successful in settling these matters at existing or future provision levels, and reducing or eliminating the incremental operational risk component of RWA. 63 Operating environment and strategy Operating environment and strategy Risk factors The required levels and calculation of our regulatory capital and the calculation of our RWA are also subject, in Switzerland or in other jurisdictions in which we operate, to changes in regula- tory requirements or their interpretation, as well as the exercise of regulatory discretion. Changes in the calculation of RWA, or, as already discussed above, the imposition of additional supplemen- tal RWA charges or multipliers applied to certain exposures, or the imposition of a RWA floor based on the standardized approach or other methodology changes could substantially increase our RWA. In addition, we may not be successful in our plans to further reduce RWA, either because we are unable to carry out fully the actions we have planned or because other business or regulatory developments or actions counteract to some degree the benefit of our actions. In addition to the risk-based capital requirements, we are sub- ject to a minimum leverage ratio requirement for Swiss SRBs and expect to become subject to significantly higher leverage ratio- based capital and TLAC requirements under the proposed revi- sions to the Swiss TBTF framework. The leverage ratio operates separately from the risk-based capital requirements. It is a simple balance sheet measure and therefore limits balance sheet-inten- sive activities, such as lending, more than activities that are less balance sheet-intensive, and it may constrain our business activi- ties even if we satisfy other risk-based capital requirements. Increases in the minimum leverage ratio or the imposition of other LRD-based requirements, such as in the current Swiss proposal, may adversely affect the profitability of some of our businesses, make these businesses less competitive and adversely affect our profitability. ➔ Refer to the “Regulatory and legal developments” section of this report for more information We may not be successful in completing our announced strategic plans EDTF | In October 2012, we announced a significant acceleration in the implementation of our strategy. The strategy included trans- forming our Investment Bank to focus it on its traditional strengths, very significantly reducing Basel III RWA and further strengthening our capital position, and significantly reducing costs and improving efficiency. We have substantially completed the transformation of our business. As part of our strategy, we have also announced annual performance expectations and targets for the Group, the business divisions and Corporate Center. In the third quarter of 2015 we amended some of these for 2016 and future years, in light of actual and forecasted changes in macroeconomic condi- tions, the announcement of the new Swiss TBTF proposal and the continuing costs of meeting new regulatory requirements. A risk remains that we may need to further amend our targets and expectations, that we may not succeed in executing the rest of our plans, that our plans may be delayed, that market events or other factors may adversely affect the implementation of our plans or that their effects may differ from those intended. In particular, we have substantially reduced the RWA and LRD usage of our Non-core and Legacy Portfolio positions, but there is no assurance that we will continue to be able to exit the remain- ing positions as quickly as our plans suggest or that we will not incur significant losses in doing so. The continued illiquidity and complexity of many of our legacy risk positions in particular could make it difficult to sell or otherwise exit these positions and reduce the RWA and LRD usage associated with these exposures. As part of our strategy, we also have a program underway to achieve significant incremental cost reductions. Delivering on our cost reduction initiatives is one of our key priorities, but a number of factors could negatively impact our plans. Higher permanent regulatory costs and business demand than we had originally anticipated have partly offset our gross cost reductions, and although we currently expect to achieve the net cost reduction that we had targeted for 2015 by around the middle of 2016, we could be further challenged in the execution of this and our fur- ther cost reduction plans. Moreover, the success of our strategy and our ability to reach some of our announced targets depends on the success of the effectiveness and efficiency measures we are able to carry out. As is often the case with major effectiveness and efficiency programs, our plans involve significant risks. Included among these are the risks that restructuring costs may be higher and may be recognized sooner than we have projected, that we may not be able to identify feasible cost reduction opportunities that are also consistent with our business goals, and that cost reductions may be realized later or may be less than we antici- pate. Changes in our work force as a result of outsourcing, near- shoring or offshoring or staff reductions may introduce new oper- ational risks that, if not effectively addressed could affect our ability to recognize the desired cost and other benefits from such changes or could result in operational losses. Changes in work- force location or reductions in workforce can lead to expenses recognized in the income statement well in advance of the cost savings intended to be achieved through such workforce strategy. For example, under International Financial Reporting Standards (IFRS) we are required to recognize provisions for real estate lease contracts when the unavoidable costs of meeting the obligations under the contracts exceed the benefits expected to be received under them. Additionally, closure or disposal of operations may result in foreign currency translation losses (or gains) previously recorded in other comprehensive income being reclassified to the income statement. As we implement our effectiveness and efficiency programs we may also experience unintended consequences such as the loss or degradation of capabilities that we need in order to maintain our competitive position and achieve our targeted returns. 64 Material legal and regulatory risks arise in the conduct of our business EDTF | The nature of our business subjects us to significant regula- tory oversight and liability risk. As a global financial services firm operating in more than 50 countries, we are subject to many dif- ferent legal, tax and regulatory regimes. We are involved in a vari- ety of claims, disputes, legal proceedings and government inves- tigations and inquiries, including matters related to our cross border business and licensing, trading practices, securities offer- ings including residential mortgage-backed securities, sales prac- tices and suitability, accounting matters, anti-money laundering, sanctions and anti-corruption laws and investment management practices. These proceedings expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil penalties, in addition to potential regulatory restrictions on our businesses. The outcome of most of these matters, and their potential effect on our future business or financial results, is extremely difficult to predict. In December 2012, we announced settlements totaling approximately CHF 1.4 billion in fines by and disgorgements to US, UK and Swiss authorities to resolve investigations by those authorities relating to LIBOR and other benchmark interest rates. We entered into a non-prosecution agreement (NPA) with the US Department of Justice (DOJ) and UBS Securities Japan Co. Ltd. also pleaded guilty to one count of wire fraud relating to the manipulation of certain benchmark interest rates. In May 2015, the DOJ exercised its discretion to terminate the NPA based on its determination that we had committed a US crime in relation to foreign exchange matters. As a consequence, UBS AG has pleaded guilty to one count of wire fraud for conduct in the LIBOR matter, and has agreed to pay a USD 203 million fine and accept a three- year term of probation. Our settlements with governmental authorities in connection with foreign exchange and LIBOR and benchmark interest rates starkly illustrate the much-increased level of financial and reputa- tional risk now associated with regulatory matters in major juris- dictions. Very large fines and disgorgement amounts were assessed against us, and we were required to enter guilty pleas, despite our full cooperation with the authorities in the investiga- tions relating to LIBOR and other benchmark interest rates, and despite our receipt of conditional leniency or conditional immu- nity from antitrust authorities in a number of jurisdictions, includ- ing the US and Switzerland. We understand that, in determining the consequences for us, the authorities considered the fact that it had in the recent past been determined that we had engaged in serious misconduct in several other matters. We continue to be subject to a large number of claims, dis- putes, legal proceedings and government investigations, includ- ing the matters described in the notes to the consolidated finan- cial statements included in this report and we expect that our ongoing business activities will continue to give rise to such mat- ters in the future. The extent of our financial exposure to these and other matters is material and could substantially exceed the level of provisions that we have established. We are not able to predict the financial and other terms on which some of these mat- ters may be resolved. Litigation, regulatory and similar matters may also result in non-monetary penalties and consequences. Among other things, a guilty plea to, or conviction of, a crime (including as a result of termination of the NPA) could have mate- rial consequences for us. Resolution of regulatory proceedings may require us to obtain waivers of regulatory disqualifications to maintain certain operations, may entitle regulatory authorities to limit, suspend or terminate licenses and regulatory authorizations and may permit financial market utilities to limit, suspend or ter- minate our participation in such utilities. Failure to obtain such waivers, or any limitation, suspension or termination of licenses, authorizations or participations, could have material conse- quences for us. Ever since our material losses arising from the 2007 to 2009 financial crisis, we have been subject to a very high level of regula- tory scrutiny and to certain regulatory measures that constrain our strategic flexibility. While we believe that we have remediated the deficiencies that led to those losses as well as the unauthorized trading incident announced in September 2011, the LIBOR-related settlements of 2012 and settlements with some regulators of matters related to our foreign exchange and precious metals busi- ness, the resulting effects of these matters on our reputation and relationships with regulatory authorities have proven to be more difficult to overcome. We are determined to address the issues that have arisen in these and other matters in a thorough and constructive manner. We are in active dialog with our regulators concerning the actions that we are taking to improve our opera- tional risk management and control framework, but there can be no assurance that our efforts will have the desired effects. As a result of this history, our level of risk with respect to regulatory enforcement may be greater than that of some of our peers. ➔ Refer to “Note 22 Provisions and contingent liabilities” in the “Consolidated financial statements” of this report for more information 65 Operating environment and strategy Operating environment and strategy Risk factors Operational risks affect our business EDTF | Our businesses depend on our ability to process a large num- ber 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. We also rely on access to, and on the functioning of, systems maintained by third parties, including clearing systems, exchanges, information processors and central counterparties. Failure of our systems or third party systems could have an adverse effect on us. Our operational risk management and control systems and processes are designed to help ensure that the risks associated with our activities, including those arising from process error, failed execution, misconduct, unauthorized trading, fraud, system failures, financial crime, cyber-attacks, breaches of information security and failure of security and physi- cal protection, are appropriately controlled. We devote significant resources to maintain systems and pro- cesses that are designed to protect our systems, networks and software and to protect the confidentiality of information belong- ing to our customers and us. However, we and other financial services firms have been subject to breaches of security and to cyber and other forms of attack, some of which are sophisticated and targeted attacks intended to gain access to confidential infor- mation or systems, disrupt service or destroy data. It is possible that we may not be able to anticipate, detect or recognize threats to our systems or data or that our preventative measures will not be effective to prevent an attack or a security breach. A successful breach or circumvention of security of our systems or data could have significant negative consequences for us, including disrup- tion of our operations, misappropriation of confidential informa- tion concerning us or our customers, damage to our systems, financial losses for us or customers, violations of data privacy and similar laws, litigation exposure and damage to our reputation. A major focus of US governmental policy relating to financial institutions in recent years has been fighting money laundering and terrorist financing. Regulations applicable to us impose obli- gations to maintain effective policies, procedures and controls to detect, prevent and report money laundering and terrorist financ- ing, and to verify the identity of our clients. We are also subject to laws and regulations related to corrupt and illegal payments to government officials by others, such as the US Foreign Corrupt Practices Act and the UK Bribery Act. We have implemented poli- cies, procedures and internal controls that are designed to comply with such laws and regulations. Failure to maintain and imple- ment adequate programs to combat money laundering, terrorist financing or corruption, or any failure of our programs in these areas, could have serious consequences both from legal enforce- ment action and from damage to our reputation. Although we seek to continuously adapt our capability to detect and respond to the risks described above, if our internal controls fail or prove ineffective in identifying and remedying these 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. Our wealth and asset management businesses operate in an environment of increasing regulatory scrutiny and changing stan- dards. Legislation and regulation have changed and are likely to continue to change fiduciary and other standards of care for asset managers and advisors and have increased focus on mitigating or eliminating conflicts of interest between a manager or advisor and the client. These changes have presented, and likely will con- tinue to present, regulatory and operational risks if not imple- mented effectively across the global systems and processes of investment managers and other industry participants. If we fail to effectively implement controls to ensure full compliance with new, more stringent standards in the wealth and asset manage- ment industry, we could be subject to additional fines and sanc- tions as a result. These could have an impact on our ability to operate or grow our wealth and asset management businesses in line with our strategy. Certain types of operational control weaknesses and failures could also adversely affect our ability to prepare and publish accu- rate and timely financial reports. Following the unauthorized trad- ing incident announced in September 2011, management deter- mined that we had a material weakness in our internal control over financial reporting as of the end of 2010 and 2011, although this did not affect the reliability of our financial statements for either year. In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our businesses and the communities in which we are located. This may include a dis- ruption due to natural disasters, pandemics, civil unrest, war or terrorism and involve electrical, communications, transportation or other services used by us or third parties with whom we con- duct business. 66 Our reputation is critical to the success of our business EDTF | Our reputation is critical to the success of our strategic plans. Damage to our reputation can have fundamental negative effects on our business and prospects. Reputational damage is difficult to reverse, and improvements tend to be slow and difficult to mea- sure. This was demonstrated in recent years, as our very large losses during the financial crisis, the US cross-border matter (relat- ing to the governmental inquiries and investigations relating to our cross-border private banking services to US private clients dur- ing the years 2000–2007 and the settlements entered into with US authorities with respect to this matter) and other events seri- ously 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 difficulty in attracting staff in 2008 and 2009. These develop- ments had short-term and also more lasting adverse effects on our financial performance, and 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. More recently, the unauthorized trading incident announced in September 2011 and our involvement in the LIBOR matter and investigations relating to our foreign exchange and precious metals business have also adversely affected our reputation. Any further 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. Performance in the financial services industry is affected by market conditions and the macroeconomic climate EDTF | Our businesses are materially affected by market and eco- nomic conditions. Adverse changes in interest rates, credit spreads, securities’ prices, market volatility and liquidity, foreign exchange levels, commodity prices, and other market fluctua- tions, as well as changes in investor sentiment, can affect our earnings and ultimately our financial and capital positions. A market downturn and weak macroeconomic conditions can be precipitated by a number of factors, including geopolitical events, changes in monetary or fiscal policy, trade imbalances, natural disasters, pandemics, civil unrest, war or terrorism. Because financial markets are global and highly interconnected, even local and regional events, such as the ongoing European sovereign debt concerns or concerns around the potential exit from the EU by the UK or a significant slowing of economic growth in China can have widespread impact well beyond the countries in which they occur. A crisis could develop, regionally or globally, as a result of dis- ruptions in emerging markets as well as developed markets that are susceptible to macroeconomic and political developments, or as a result of the failure of a major market participant. Macroeco- nomic and political developments can have unpredictable and destabilizing effects, as reflected in our Global Recession scenario, which we implemented in 2015 as the binding scenario in our combined stress-testing framework, and which assumes a hard landing in China leading to severe contagion of Asian and emerg- ing markets economies and at the same time multiple debt restructurings in Europe, related direct losses for European banks and fear of a eurozone breakup severely affecting developed mar- kets such as Switzerland, the UK and the US. We have material exposures to a number of markets, both as a wealth manager and as an investment bank. Moreover, our strategic plans depend more heavily on our ability to generate growth and revenue in emerging markets, including China, caus- ing us to be more exposed to the risks associated with them. Toward the end of 2015, uncertainties regarding macroeconomic developments in China, and emerging markets more broadly, as well as weakening of commodity prices, particularly oil, have given rise to increased market volatility, which could well persist throughout 2016. A reduction in business and client activity and market volumes, as significant market volatility can determine and, as we have recently experienced, affects transaction fees, commissions and margins, particularly in our wealth management businesses and our Investment Bank. A market downturn is likely to reduce the volume and valuations of assets we manage on behalf of clients, reducing our asset and performance-based fees. On the other side, reduced market liquidity or volatility limits trading and arbi- trage opportunities and impedes our ability to manage risks, impacting both trading income and performance-based fees. Additionally, deteriorating market conditions could cause a decline in the value of assets that we own and account for as investments or trading positions. The regional balance of our business mix also exposes us to risk. Our Investment Bank equities business, for example, is more heavily weighted to Europe and Asia, and therein our derivatives business is more heavily weighted to structured products for wealth management clients, in particular with European and Asian underlyings. Turbulence in these markets can therefore affect us more than other financial service providers. The ongoing low interest rate environment will further erode interest margins in several of our businesses and adversely affect our net defined benefit obligations in relation to our pension plans. Moreover, negative interest rates announced by central banks in Switzerland or elsewhere may also affect client behavior. Also, changes to our deposit and lending pricing and structure that we have made and may make to respond to negative interest rates and client behavior may cause deposit outflows (as hap- pened with Wealth Management’s balance sheet and capital opti- mization program in 2015), reduce business volumes or otherwise adversely affect our businesses, particularly given the associated cost of maintaining the high-quality liquid assets required to cover regulatory outflow assumptions embedded in the LCR. 67 Operating environment and strategy Operating environment and strategy Risk factors Credit risk is an integral part of many of our activities, including lending, underwriting and derivatives activities. Worsening eco- nomic conditions and adverse market developments could lead to impairments and defaults on credit exposures and on our trading and investment positions. Losses may be exacerbated by declines in the value of collateral we hold. We are exposed to risk in, among others, our prime brokerage, reverse repurchase and Lom- bard lending activities, as the value or liquidity of the assets against which we provide financing may decline rapidly. Because we have very substantial exposures to other major financial institutions, the failure of one or more such institutions could also have a material effect on us. We are a member of numerous securities and derivative exchanges and clearing houses. 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 we may be other- wise exposed to additional financial obligations. Moreover, if individual countries impose restrictions on cross- border payments 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 counter- parties, be unable to access our own assets, or be impeded in, or prevented from, managing our risks. The developments mentioned above have in the past affected and could materially affect the performance of the business units and of UBS as a whole, and ultimately our financial and capital position. There are related risks that, as a result of the factors listed above, the carrying value of goodwill of a business unit might suffer impairment and deferred tax asset levels may need to be adjusted. We may not be successful in implementing changes in our wealth management businesses to meet changing market, regulatory and other conditions EDTF | We are exposed to possible outflows of client assets in our asset-gathering businesses and to changes affecting the profit- ability of our wealth management businesses and we may not be successful in implementing the business changes needed to address them. 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, damage to our reputa- tion, the loss of client advisors, difficulty in recruiting qualified client advisors and tax, legal and regulatory developments con- cerning our cross-border private banking business. Many of these factors have been successfully addressed. However, long-term changes affecting the cross-border private banking business model will continue to affect client flows in the wealth manage- ment businesses for an extended period of time. One of the important drivers behind the longer-term reduction in the amount of cross-border private banking assets, particularly in Europe but increasingly also in other regions, including emerg- ing markets, is the heightened focus of fiscal authorities on cross- border investments. For the last several years, UBS has experienced net withdrawals in its Swiss booking center from clients domiciled elsewhere in Europe, in many cases related to the negotiation of tax treaties between Switzerland and other countries. Changes in local tax laws or regulations and their enforcement, the implemen- tation of cross-border tax information exchange regimes, includ- ing international agreements for automatic tax information exchange, national tax amnesty or enforcement programs or simi- lar actions, in Europe or elsewhere in the world, may affect the ability or the willingness of our clients to do business with us, and result in additional, and possibly material, cross-border outflows, or affect the viability of our strategies and business model. The net new money inflows in recent years in our Wealth Man- agement business division have come predominantly from clients in Asia Pacific and in the ultra high net worth segment globally. Over time, inflows from these lower-margin segments and mar- kets have been replacing outflows from higher-margin segments and markets, in particular cross-border clients. This dynamic, com- bined with changes in client product preferences as a result of which low-margin products account for a larger share of our rev- enues than in the past, put downward pressure on our return on invested assets and adversely affect the profitability of our Wealth Management business division. We will continue our efforts to adjust to client trends, regula- tory and market dynamics as necessary, in an effort to overcome the effects of changes in the business environment on our profit- ability, balance sheet and capital positions, but there is no assur- ance that we will be able to counteract those effects. Moreover, initiatives we may carry out for this purpose may cause net new money outflows and reductions in client deposits, as happened with Wealth Management’s balance sheet and capital optimiza- tion program in 2015. In addition, we have made changes to our business offerings and pricing practices in line with the Swiss Supreme Court case concerning retrocessions (fees paid to a bank for distributing third-party and intra-group investment funds and structured products) and other industry developments. These changes may adversely affect our margins on these products and the current offering may be less attractive to clients than the products it replaces. There is no assurance that we will be success- ful in our efforts to offset the adverse impact of these or similar trends and developments. ➔ Refer to “Wealth Management” in the “Financial and operating performance” section of this report for more information 68 We may be unable to identify or capture revenue or competitive opportunities, or retain and attract qualified employees inability to attract qualified replacements, depending on which and how many roles are affected, could seriously compromise our ability to execute our strategy and to successfully improve our operating and control environment. EDTF | The financial services industry is characterized by intense competition, continuous innovation, detailed, and sometimes fragmented, regulation and ongoing consolidation. We face com- petition at the level of local markets and individual business lines, and from global financial institutions that are comparable to us in their size and breadth. Barriers to entry in individual markets and pricing levels are being eroded by new technology. We expect these trends to continue and competition to increase. Our com- petitive 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 busi- ness strategies, adequately developing or updating our technol- ogy, particularly in trading businesses, 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 or structure of employee compensation, higher levels of deferral, performance conditions and other circumstances triggering the forfeiture of unvested awards may adversely affect our ability to retain and attract key employees, and may in turn negatively affect our business performance. We have made changes to the terms of compensation awards to reflect the demands of various stakeholders, including regula- tory authorities and shareholders. These terms include the intro- duction of a deferred contingent capital plan with many of the features of the loss-absorbing capital that we have issued in the market but with a higher capital ratio write-down trigger for members of the Group Executive Board, increased average defer- ral periods for stock awards, and expanded forfeiture, and to a more limited extent claw-back, provisions for certain awards linked to business performance. In the EU we are subject to legislation that caps the amount of variable compensation in proportion to the amount of fixed com- pensation for employees in key risk-taker roles, and whose appli- cation could potentially extend to a wider group of employees, on the basis of the revised guidelines on sound remuneration policies published by the European Banking Authority in December 2015. Moreover, from the 2015 annual general meeting, Swiss law requires UBS to submit to the binding vote of the shareholders the aggregate compensation of each of the board of directors and the executive board on an annual basis. These requirements, while intended to better align the inter- ests of our staff with those of other stakeholders, increase the risk that key employees will be attracted by competitors and decide to leave us, and that we may be less successful than our competitors in attracting qualified employees. The loss of key staff and the 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 EDTF | Like other financial market participants, we were severely affected by the financial crisis that began in 2007. The deteriora- tion of financial markets since the beginning of the crisis was extremely severe by historical standards, and we recorded sub- stantial losses on fixed income trading positions, particularly in 2008 and 2009. Although we have significantly reduced our risk exposures starting in 2008, and more recently as we progress our strategy and focus on complying with Swiss TBTF standards, we continue to hold substantial legacy risk positions, primarily in Corporate Center – Non-core and Legacy Portfolio. In many cases, these risk positions remain illiquid, and we continue to be exposed to the risk that the remaining positions may again dete- riorate in value. Moreover, we hold positions related to real estate in various countries, and could suffer losses on these positions. These positions include a substantial Swiss mortgage portfolio. Although management believes that this portfolio has been very prudently managed, we could nevertheless be exposed to losses if the concerns expressed by the Swiss National Bank and others about unsustainable price escalation in the Swiss real estate market come to fruition. Other macroeconomic develop- ments, such as the implications on export markets of the appre- ciation of the Swiss franc, the adoption of negative interest rates by the Swiss National Bank or other central banks or any return of crisis conditions within the eurozone, or the EU, and the potential implications of the decision in Switzerland to rein- state immigration quotas for EU / EEA countries, could also adversely affect the Swiss economy, our business in Switzerland in general and, in particular, our Swiss mortgage and corporate loan portfolios. We depend on our risk management and control processes to avoid or limit potential losses in our businesses EDTF | Controlled risk-taking is a major part of the business of a financial services firm. 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, there- fore, diligently identify, assess, manage and control our risks, not only in normal market conditions but also as they might develop under more extreme, stressed conditions, when concentrations of exposures can lead to severe losses. 69 Operating environment and strategy Operating environment and strategy Risk factors As seen during the financial crisis of 2007–2009, we are not always able to prevent serious losses arising from extreme or sud- den market events that are not anticipated by our risk measures and systems. Value-at-risk, a statistical measure for market 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 con- trols and the dimensions in which we aggregated risk to identify potentially highly correlated exposures proved to be inadequate. Notwithstanding the steps we have taken to strengthen our risk management and control framework, 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 untimely, inadequate, insufficient or incorrect; – markets move in ways that we do not expect – in terms of their speed, direction, severity or correlation – and our ability to manage risks in the resulting 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. The performance of assets we hold for our clients in these activities could be adversely affected by the same factors. If clients suffer losses or the performance of their assets held with us is not in line with relevant benchmarks against which clients assess investment performance, we may suffer reduced fee income and a decline in assets under manage- ment, or withdrawal of mandates. If we decide to support a fund or another investment that we sponsor in our asset or wealth management businesses, we might, depending on the facts and circumstances, incur expenses that could increase to material levels. Investment positions, such as equity investments made as 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 subject to a distinct control framework. Deteriorations in the fair value of these positions would have a negative impact on our earnings. Valuations of certain positions rely on models; models have inherent limitations and may use inputs that have no observable source EDTF | If available, the fair value of a financial instrument or non- financial asset or liability is determined using quoted prices in active markets for identical assets or liabilities. Where the market is not active, fair value is established using a valuation technique, including pricing models. Where available, valuation techniques use market observable assumptions and inputs. If such informa- tion is not available, inputs may be derived by reference to similar instruments in active markets, from recent prices for comparable transactions or from other observable market data. If market observable data is not available, we select non-market observable inputs to be used in our valuation techniques. We also use internally developed valuation models. Such mod- els have inherent limitations; different assumptions and inputs would generate different results, and these differences could have a significant impact on our financial results. We regularly review and update our valuation models to incorporate all factors that market participants would consider in setting a price, including factoring in current market conditions. Judgment is an important component of this process, and failure to make the changes nec- essary to reflect evolving market conditions could have a material adverse effect on our financial results. Moreover, evolving market practice may result in changes to valuation techniques that could have a material impact on our financial results. Changes in model inputs or calibration, changes in the valua- tion methodology incorporated in models, or failure to make the changes necessary to reflect evolving market conditions could have a material adverse effect on our financial results. Liquidity and funding management are critical to our ongoing performance EDTF | The viability of our business depends on the availability of funding sources, and our success depends on our ability to obtain funding at times, in amounts, for tenors and at rates that enable us to efficiently 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 retail and wholesale deposits and the regular issuance of money market securities. The volume of our funding sources has generally been stable, but could change in the future due to, among other things, general market disruptions or widening credit spreads, which could also influence the cost of funding. A change in the avail- ability of short-term funding could occur quickly. 70 Reductions in our credit ratings can increase our funding costs, in particular with regard to funding from wholesale unse- cured sources, and can affect the availability of certain kinds of funding. In addition, as we experienced in connection with Moody’s downgrade of our long-term rating in June 2012, rating downgrades can require us to post additional collateral or make additional cash payments under master trading agreements relat- ing to our derivatives businesses. Our credit ratings, together with our capital strength and reputation, also contribute to main- taining client and counterparty confidence and it is possible that ratings changes could influence the performance of some of our businesses. More stringent capital and liquidity and funding requirements will likely lead to increased competition for both secured funding and deposits as a stable source of funding, and to higher funding costs. The addition of loss-absorbing debt as a component of capital requirements and the potential future requirements to maintain senior unsecured debt that could be written down in the event of our insolvency or other resolution, may increase our funding costs or limit the availability of funding of the types required. Our financial results may be negatively affected by changes to accounting standards EDTF | We report our results and financial position in accordance with IFRS as issued by the International Accounting Standards Board (IASB). Changes to IFRS or interpretations thereof, may cause our future reported results and financial position to differ from current expectations, or historical results to differ from those previously reported due to the adoption of accounting standards on a retrospective basis. Such changes may also affect our regula- tory capital and ratios. We monitor potential accounting changes and when these are finalized by the IASB, we determine the potential impact and disclose significant future changes in our financial statements. Currently, there are a number of issued but not yet effective IFRS changes, as well as potential IFRS changes, some of which could be expected to impact our reported results, financial position and regulatory capital in the future. For exam- ple, IFRS 9, when fully adopted, will require us to record loans at inception net of expected losses instead of recording credit losses on an incurred loss basis. Our financial results may be negatively affected by changes to assumptions supporting the value of our goodwill EDTF | The goodwill that we have recognized on the respective bal- ance sheets of our operating segments is tested for impairment at least annually. Our impairment test in respect of the assets recog- nized as of 31 December 2015 indicated that our respective goodwill balances are 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 the goodwill in any one or more of our busi- nesses may become impaired in the future, giving rise to losses in the income statement. The effect of taxes on our financial results is significantly influenced by reassessments of our deferred tax assets EDTF | The deferred tax assets (DTAs) that we have recognized on our balance sheet as of 31 December 2015 based on prior years’ tax losses reflect the probable recoverable level based on future taxable profit as informed by our business plans. If the business plan earnings and assumptions in future periods substantially deviate from current forecasts, the amount of recognized DTAs may need to be adjusted in the future. These adjustments may include write-downs of DTAs through the income statement. Our effective tax rate is highly sensitive both to our perfor- mance as well as our expectation of future profitability as reflected in our business plans. Our results in recent periods have demon- strated that changes in the recognition of DTAs can have a very significant effect on our reported results. If our performance is expected to improve, particularly in the US, or the UK, we could potentially recognize additional DTAs as a result of that assess- ment. The effect of doing so would be to significantly reduce our effective tax rate in years in which additional DTAs are recognized and to increase our effective tax rate in future years. Conversely, if our performance in those countries is expected to produce dimin- ished taxable profit in future years, we may be required to write down all or a portion of the currently recognized DTAs through the income statement. This would have the effect of increasing our effective tax rate in the year in which any write-downs are taken. 71 Operating environment and strategy Operating environment and strategy Risk factors For 2016, notwithstanding the effects of any potential reas- sessment of the level of deferred tax assets, we expect the effec- tive tax rate to be in the range of 22% to 25%. Consistent with past practice, we expect to revalue our deferred tax assets in the second half of 2016 based on a reassessment of future profitabil- ity taking into account updated business plan forecasts. The full- year effective tax rate could change significantly on the basis of this reassessment. It could also change if aggregate tax expenses in respect of profits from branches and subsidiaries without loss coverage differ from what is expected. Part of the aforemen- tioned reassessment of future profitability includes consideration of a possible further extension of the forecast period used for US deferred tax asset recognition purposes to eight years from the seven years used as of 31 December 2015. The determination of whether to extend the forecast period by an additional year will be made on the basis of all relevant facts and circumstances exist- ing at that time. Inasmuch as the ex-ante parameters we have established for further extending the forecast period are more challenging to satisfy than in prior years, it is therefore less prob- able that we will add an eighth year to the forecast period in 2016 for purposes of revaluing our US deferred tax assets. UBS’s effective tax rate is also sensitive to any future reductions in statutory tax rates, particularly in the US and Switzerland. Reductions in the statutory tax rate would cause the expected future tax benefit from items such as tax loss carry-forwards in the affected locations to diminish in value. This in turn would cause a write-down of the associated DTAs. In addition, statutory and regulatory changes, as well as changes to the way in which courts and tax authorities interpret tax laws could cause the amount of taxes ultimately paid by UBS to materially differ from the amount accrued. Moreover, we have undertaken, or are considering, changes to our legal structure in the US, the UK, Switzerland and other coun- tries in response to regulatory changes. Tax laws or the tax author- ities in these countries may prevent the transfer of tax losses incurred in one legal entity to newly organized or reorganized subsidiaries or affiliates or may impose limitations on the utiliza- tion of tax losses that relate to businesses formerly conducted by the transferor. Were this to occur in situations where there were also limited planning opportunities to utilize the tax losses in the originating entity, the DTAs associated with such tax losses could be written down through the income statement. 72 As UBS Group AG is a holding company, its operating results, financial condition and ability to pay dividends and other distributions and / or to pay its obligations in the future depend on funding, dividends and other distributions received directly or indirectly from its subsidiaries, which may be subject to restrictions EDTF | UBS Group AG’s ability to pay dividends and other distribu- tions and to pay its obligations in the future will depend on the level of funding, dividends and other distributions, if any, received from UBS AG and any new subsidiaries established by UBS Group AG in the future. The ability of such subsidiaries to make loans or distributions (directly or indirectly) to UBS Group AG may be restricted as a result of several factors, including restrictions in financing agreements, the requirements of applicable law and regulatory, fiscal or other restrictions. UBS Group AG’s direct and indirect subsidiaries, including UBS AG, UBS Switzerland AG, UBS Limited and the US IHC (when designated) are subject to laws and regulations that restrict dividend payments, authorize regulatory bodies to block or reduce the flow of funds from those subsidiar- ies to UBS Group AG, or limit or prohibit transactions with affili- ates. Restrictions and regulatory actions of this kind could impede access to funds that UBS Group AG may need to make payments. In addition, UBS Group AG’s right to participate in a distribu- tion of assets upon a subsidiary’s liquidation or reorganization is subject to all prior claims of the subsidiary’s creditors. Subordinated debt and capital instruments issued by UBS Group AG that contribute to its regulatory capital contractually prevent UBS Group AG to propose the distribution of dividends to shareholders, other than in the form of shares, if we do not pay interest on these instruments. UBS Group AG’s credit rating could be lower than the rating of UBS AG, which may adversely affect the market value of the securi- ties and other obligations of UBS Group AG on a standalone basis. Furthermore, we expect that UBS Group AG may guarantee some of the payment obligations of certain of our subsidiaries from time to time. These guarantees may require UBS Group AG to provide substantial funds or assets to subsidiaries or their cred- itors or counterparties at a time when UBS Group AG is in need of liquidity to fund its own obligations. Our stated capital returns objective is based, in part, on capital ratios that are subject to regulatory change and may fluctuate significantly EDTF | We are committed to a total capital return to shareholders of at least 50% of net profit attributable to our shareholders, pro- vided that we maintain a fully applied CET1 capital ratio of at least 13%, and consistent with our objective of maintaining a post- stress fully applied CET1 capital ratio of at least 10%. Our ability to maintain a fully applied CET1 capital ratio of at least 13% is subject to numerous risks, including the financial results of our businesses, changes to capital standards such as the changes currently proposed in Switzerland, methodologies and interpretation that may adversely affect the calculation of our fully applied CET1 capital ratio, and the imposition of risk add-ons or capital buffers. Refer to "Fluctuation in foreign exchange rates and continuing low or negative interest rates may have a detri- mental effect on our capital strength, our liquidity and funding position, and our profitability“ and to ”If we are unable to main- tain our capital strength, this may adversely affect our ability to execute our strategy, client franchise and competitive position" above for more information on certain factors that could cause our capital ratios to fluctuate significantly, including the effect on capital of changes to pension plan defined benefit obligations. Moreover, changes in the methodology, assumptions, stress scenario, market conditions, business volumes and other factors may result in material changes in our post-stress fully applied CET1 capital ratio. These factors may lead to material fluctuations in our post-stress fully applied CET1 capital ratio during any period. In assessing whether our post-stress fully applied CET1 capital ratio objective has been met at any time, we may consider both the current ratio and our expectation as to future develop- ments in the ratio. To calculate our post-stress CET1 capital ratio, we forecast capital one year ahead based on internal projections of earnings, expenses, distributions to shareholders and other factors affecting CET1 capital, including our net defined benefit plan assets and liabilities. We also forecast one-year developments in RWA. We adjust these forecasts based on assumptions as to how they may change as a result of a severe stress event. We then further deduct from capital the stress loss estimated using our combined stress test (CST) framework to arrive at the post-stress fully applied CET1 capital ratio. Changes to our results, business plans and forecasts, in the assumptions used to reflect the effect of a stress event on our business forecasts or in the results of our CST, could have a material effect on our stress scenario results and on the calcula- tion of our post-stress fully applied CET1 capital ratio. Our CST framework relies on various risk exposure measure- ment methodologies which are predominantly proprietary, on our selection and definition of potential stress scenarios and on our assumptions regarding estimates of changes in a wide range of macroeconomic variables and certain idiosyncratic events for each of those scenarios. We periodically review these methodologies, and assumptions are subject to periodic review and change on a regular basis. Our risk exposure measurement methodologies may change in response to developing market practice and enhance- ments to our own risk control environment, and input parameters for models may change due to changes in positions, market parameters and other factors. Our stress scenarios, the events comprising a scenario and the assumed shocks and market and economic consequences applied in each scenario are subject to periodic review and change. A change in the CST scenario used to calculate the post-stress fully applied CET1 capital ratio, or in the assumptions used in a par- ticular scenario, may cause the post-stress fully applied CET1 cap- ital ratio to fluctuate materially. Our business plans and forecasts are subject to inherent uncer- tainty, our choice of stress test scenarios and the market and mac- roeconomic assumptions used in each scenario are based on judg- ments and assumptions about possible future events. Our risk exposure measurement methodologies are subject to inherent limitations, rely on numerous assumptions as well as on data which may have inherent limitations. In particular, certain data is not available on a monthly basis and we may therefore rely on prior month / quarter data as an estimate. All of these factors may result in our post-stress fully applied CET1 capital ratio, as calculated using our methodology for any period, being materially higher or lower than the actual effect of a stress scenario. If we experience financial difficulties, FINMA has the power to open resolution or liquidation proceedings or impose protective measures in relation to UBS Group AG, UBS AG or UBS Switzerland AG, and such proceedings or measures may have a material adverse effect on our shareholders and creditors EDTF | Under the Swiss Banking Act, FINMA is able to exercise broad statutory powers with respect to Swiss banks and Swiss parent companies of financial groups, such as UBS AG, UBS Group AG and UBS Switzerland AG, if there is justified concern that the entity is over-indebted, has serious liquidity problems or, after the expiration of any relevant deadline, no longer fulfils capital ade- quacy requirements. Such powers include ordering protective measures, instituting restructuring proceedings (and exercising any Swiss resolution powers in connection therewith), and insti- tuting liquidation proceedings, all of which may have a material adverse effect on our shareholders and creditors or may prevent UBS Group AG or UBS AG from paying dividends or making pay- ments on debt obligations. Protective measures may include, but are not limited to, certain measures that could require or result in a moratorium on, or the deferment of, payments. We would have limited ability to chal- lenge any such protective measures. Additionally, creditors would have no right under Swiss law or in Swiss courts to reject, seek the suspension of, or challenge the imposition of any such protective measures, including those that require or result in the deferment of payments owed to creditors. 73 Operating environment and strategy Operating environment and strategy Risk factors If restructuring proceedings are opened with respect to UBS Group AG, UBS AG or UBS Switzerland AG, the resolution pow- ers, which FINMA may exercise, include the power to (i) transfer all or some of the assets, debt and other liabilities, and contracts of the entity subject to proceedings to another entity, (ii) stay for a maximum of two business days the termination of, or the exer- cise of rights to terminate, netting rights, rights to enforce or dis- pose of certain types of collateral or rights to transfer claims, lia- bilities or certain collateral, under contracts to which the entity subject to proceedings is a party, and / or (iii) partially or fully write down the equity capital and, if such equity capital is fully written down, convert into equity or write down the capital and other debt instruments of the entity subject to proceedings. Sharehold- ers and creditors would have no right to reject, or to seek the suspension of, any restructuring plan pursuant to which such resolution powers are exercised. They would have only limited rights to challenge any decision to exercise resolution powers or to have that decision reviewed by a judicial or administrative pro- cess or otherwise. Upon full or partial write-down of the equity and of the debt of the entity subject to restructuring proceedings, the relevant shareholders and creditors would receive no payment in respect of the equity and debt that is written down, the write-down would be permanent, and the investors would not, at such time or at any time thereafter, receive any shares or other participation rights, or be entitled to any write-up or any other compensation in the event of a potential recovery of the debtor. If FINMA orders the conversion of debt of the entity subject to restructuring pro- ceedings into equity, the securities received by the investors may be worth significantly less than the original debt and may have a significantly different risk profile, and such conversion would also dilute the ownership of existing shareholders. In addition, credi- tors receiving equity would be effectively subordinated to all cred- itors in the event of a subsequent winding up, liquidation or dis- solution of the entity subject to restructuring proceedings, which would increase the risk that investors would lose all or some of their investment. FINMA has broad powers and significant discretion in the exer- cise of its powers in connection with a resolution proceeding. Cer- tain categories of debt obligations, such as certain types of depos- its, are protected. As a result, holders of obligations of an entity subject to a Swiss restructuring proceeding may have their obliga- tions written down or converted into equity even though obliga- tions ranking on par with or junior to such obligations are not written down or converted. Moreover, FINMA has expressed its preference for a “single- point-of-entry” resolution strategy for global systemically impor- tant financial groups, led by the bank’s home supervisory and resolution authorities and focused on the top-level group com- pany. This would mean that, if UBS AG or one of UBS Group AG’s other subsidiaries faces substantial losses, FINMA could open restructuring proceedings with respect to UBS Group AG only and order a bail-in of its liabilities if there is a justified concern that in the near future such losses could impact UBS Group AG. In that case, it is possible that the obligations of UBS AG or any other subsidiary of UBS Group AG would remain untouched and out- standing, while the equity capital and the capital and other debt instruments of UBS Group AG would be written down and / or converted into equity of UBS Group AG in order to recapitalize UBS AG or such other subsidiary. 74 Financial and operating performance . Financial and operating performance Critical accounting policies Critical accounting policies Basis of accounting We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The application of these accounting standards requires the use of judgment, based on estimates and assumptions that may involve significant uncertainty at the time they are made. Such judg- ments, including the underlying estimates and assumptions, which encompass historical experience, expectations of the future and other factors are regularly evaluated to determine their con- tinuing relevance based on current conditions. Using different assumptions could cause the reported results to differ. Changes in assumptions may have a significant impact on the financial state- ments in the periods when changes occur. We believe that the assumptions we have made are appropri- ate under the circumstances, and that our financial statements therefore fairly present, in all material respects, the financial posi- tion of UBS as of 31 December 2015, and the results of our oper- ations and cash flows for the period then ended in accordance with IFRS. Alternative outcomes and sensitivity analyses discussed or referred to in this section are included solely to assist the reader in understanding the uncertainty inherent in the estimates and assumptions used in our financial statements. They are not intended to suggest that other estimates and assumptions would be more appropriate. This section discusses accounting policies that are deemed critical to our financial position, the results of our operations and cash flows, because they are material in terms of the items to which they apply, and they involve significant assumptions and estimates. A broader and more detailed description of our signifi- cant accounting policies is included in “Note 1 Summary of sig- nificant accounting policies” in the “Consolidated financial state- ments” section of this report. Fair value of financial instruments We account for a significant portion of our assets and liabilities at fair value. Under IFRS, the relative degree of uncertainty associ- ated with the measurement of fair value is reflected by use of a three-level valuation hierarchy. The best evidence of fair value is a quoted price in an actively traded market (Level 1). In the event that the market for a financial instrument is not active, or where quoted prices are not otherwise available, a valuation technique is used. In these cases, fair value is estimated using observable data in respect of similar financial instruments as well as financial mod- els. Level 2 of the hierarchy pertains to instruments for which inputs to a valuation technique are principally based on observ- able market data. Level 3 applies to instruments that are mea- sured by a valuation technique that incorporates one or more significant unobservable inputs. Valuation techniques that rely to a greater extent on unobservable inputs require a higher level of judgment to calculate a fair value than those based entirely on observable inputs. Substantially all of our financial assets and financial liabilities are based on observable prices and inputs and hence are classified in Levels 1 and 2 of the hierarchy. Where valuation techniques, including models, are used to determine fair values, they are periodically reviewed and validated by qualified personnel, independent of those who created them. Models are calibrated to ensure that outputs reflect actual data and comparable market prices. Also, models prioritize the use of observable inputs, when available, over unobservable inputs. Judgment is required in selecting appropriate models as well as inputs for which observable data is less readily or not available. Our valuation techniques may not fully reflect all the factors relevant to the positions we hold. Valuations are therefore adjusted, where appropriate, to allow for additional factors, including model risk, liquidity risk and credit risk. We use different approaches to calculate the credit risk, depending on the nature of the instrument. A credit-valuation-adjustment approach based on an expected exposure profile is used to adjust the fair value of derivative instruments, including funded derivative instruments which are classified as Financial assets designated at fair value, to reflect counterparty credit risk. Correspondingly, a debit-valua- tion-adjustment approach is applied to incorporate our own credit risk, where applicable, in the fair value of derivative instruments. We incorporate funding valuation adjustments into the valuation estimates for certain OTC derivatives, reflecting the market cost of unsecured funding in the valuation of such instruments. In 2015, we made further enhancements to our valuation methodology for the own credit component of fair value of finan- cial liabilities designated at fair value. This change in accounting estimate resulted in a gain of CHF 260 million. ➔ Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” in the “Consolidated financial statements” section of this report for more information 76 As of 31 December 2015, financial assets and financial liabili- ties for which valuation techniques are used and whose signifi- cant inputs are considered observable (Level 2) amounted to CHF 216 billion and CHF 230 billion, respectively, (61% and 85% of total financial assets measured at fair value and total financial liabilities measured at fair value, respectively). Financial assets and financial liabilities whose valuations include significant unobserv- able inputs (Level 3) amounted to CHF 9 billion and CHF 14 bil- lion, respectively, (3% and 5% of total financial assets measured at fair value and total financial liabilities measured at fair value, respectively). These amounts reflect the effect of offsetting, wher- ever such presentation is required under IFRS. Uncertainty inherent in estimating unobservable market inputs can affect the amount of gain or loss recorded for a particular position. While we believe our valuation techniques are appropri- ate and consistent with those of other market participants, the use of different techniques or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. As of 31 December 2015, the total favorable and unfavorable effects of changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions for financial instruments classified as Level 3 were CHF 809 million and CHF 640 million, respectively. ➔ Refer to “Note 24 Fair value measurement” in the “Consolidated financial statements” section of this report for more information Allowances for credit losses on loans and receivables measured at amortized cost Allowances for credit losses represent management’s best esti- mate of credit losses incurred in the loan portfolio at the balance sheet date due to credit deterioration of the issuer or counter- party. The portion of the Group’s loan portfolio that is measured at amortized cost less impairment consists of financial assets pre- sented on the balance sheet lines Due from banks and Loans. A credit loss expense is recognized if there is objective evidence that we will be unable to collect all amounts due (or the equiva- lent thereof) on a claim based on the original contractual terms due to credit deterioration of the issuer or counterparty. Allow- ances for credit losses are evaluated at both a counterparty-spe- cific level and collectively. Under this incurred loss model, a finan- cial asset or group of financial assets is impaired if there is objective evidence that a credit loss has occurred by the balance sheet date. Judgment is used in making assumptions when calculating impair- ment losses both on a counterparty-specific level and collectively. The impairment loss for a loan is the excess of the carrying value of the financial asset over the estimated recoverable amount. The estimated recoverable amount is the present value, calculated using the loan’s original effective interest rate, of expected future cash flows, including amounts that may result from restructuring or the liquidation of collateral. If a loan has a variable interest rate, the discount rate for calculating the recover- able amount is the current effective interest rate. An allowance for credit losses is reported as a reduction of the carrying value of the financial asset on the balance sheet. Collective allowances for credit losses are calculated for portfo- lios with similar credit risk characteristics, taking into account his- torical loss experience and current conditions. The methodology and assumptions used are reviewed regularly to reduce any differ- ences between estimated and actual loss experience. For all of our portfolios, we also assess whether there have been any unfore- seen developments which might result in impairments but which are not immediately observable. To determine whether such an event-driven collective allowance for credit losses is required, we consider global economic drivers to assess the most vulnerable countries and industries. As of 31 December 2015, the gross loan portfolio was CHF 313 billion and the related allowances for credit losses amounted to CHF 0.7 billion, consisting of specific and collective allowances of CHF 683 million and CHF 6 million, respectively. ➔ Refer to “Note 1a item 11 Allowances and provisions for credit losses,” “Note 10 Due from banks and loans (held at amortized cost),” and “Note 12 Allowances and provisions for credit losses” in the “Consolidated financial statements” section of this report for more information ➔ Refer to “Policies for past due, non-performing and impaired claims” in the “Risk management and control” section of this report for more information Goodwill impairment test We perform an impairment test on our goodwill assets on an annual basis, or when indicators of impairment exist. We consider the segments, as reported in “Note 2 Segment reporting,” as separate cash-generating units. The impairment test is performed for each segment to which goodwill is allocated by comparing the recoverable amount, based on its value-in-use, to the carrying amount of the respective segment. An impairment charge is rec- ognized if the carrying amount exceeds the recoverable amount. The impairment test is based on the assumptions described below. The recoverable amounts are determined using a discounted cash flow model, adapted to use inputs that consider features of the banking business and its regulatory environment. The recover- able amount of a segment is the sum of the discounted earnings attributable to shareholders from the first three forecasted years and the terminal value. 77 Financial and operating performance Financial and operating performance Critical accounting policies The carrying amount for each segment is determined by refer- ence to our equity attribution framework described in the “Capi- tal management” section of this report. Attributed equity equals the capital that a segment requires to conduct its business and is considered an appropriate starting point to determine the carry- ing 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-generating units. Valuation parameters used within our impairment test model are linked to external market information, where applicable. The model used to determine the recoverable amount is most sensi- tive to changes in the forecast earnings available to shareholders in years one to three, to changes in the discount rates, and to changes in the long-term growth rate. Key assumptions used to determine the recoverable amounts of each segment are tested for sensitivity by applying a reasonably possible change to those assumptions. Forecast earnings available to shareholders were changed by 10%, the discount rates were changed by 1.0 percentage point and the long-term growth rates were changed by 0.5 percentage point. Under all scenarios, the recoverable amounts for each segment exceeded the respective carrying amount, such that the reasonably possible changes in key assumptions would not result in impairment with respect to the goodwill balances of any of our cash-generating units as of 31 December 2015. 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. Recognition of any impairment of goodwill would reduce IFRS equity 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, no impact is expected on the Group’s total capital ratios. As of 31 December 2015, total goodwill recognized on the balance sheet was CHF 6.2 billion, of which CHF 1.3 billion, CHF 3.5 billion and CHF 1.4 billion was carried by Wealth Manage- ment, Wealth Management Americas and Asset Management, respectively. On the basis of the impairment testing methodology described above, we concluded that the year-end 2015 balances of goodwill allocated to our segments remain recoverable and thus were not impaired. ➔ Refer to “Note 1a item 21 Goodwill and intangible assets,” “Note 2 Segment reporting” and “Note 17 Goodwill and intangible assets” in the “Consolidated financial statements” section of this report for more information Deferred taxes Deferred tax assets arise from a variety of sources, with the most significant being: (i) tax losses that can be carried forward and utilized against profits in future years and (ii) expenses recognized in our income statement that are not deductible until the associ- ated cash flows occur. We record a valuation allowance to reduce our deferred tax assets to the amount which can be recognized under IAS 12, Income Taxes. The level of deferred tax asset recognition is influ- enced by management’s assessment of our future profitability based on relevant business plan forecasts. Existing assessments are reviewed and, if necessary, revised to reflect changed circum- stances. This review is conducted annually, in the second half of each year when the business planning process is undertaken, but adjustments may be made at other times, if required. In a situa- tion where recent losses have been incurred, IAS 12 requires con- vincing evidence that there will be sufficient future profits against which the deferred tax assets can be utilized. If the estimated earnings and other assumptions in future peri- ods deviate from the current outlook, the value of our deferred tax assets may become impaired in the future, giving rise to losses in the income statement. Recognition of any impairment of deferred tax assets would reduce IFRS equity attributable to UBS shareholders and net profit. It would not impact cash flows and, as tax loss carry-forward deferred tax assets, as well as temporary difference deferred tax assets in excess of 10% of common equity tier 1 (CET1) capital, are required to be deducted for the purposes of calculating Basel III fully-applied CET1 capital, the capital ratio may not be significantly affected. Swiss tax losses may be carried forward for seven years, US federal tax losses for 20 years and UK and Jersey tax losses for an unlimited period. As of 31 December 2015, our deferred tax assets amounted to CHF 12.8 billion, which included CHF 7.1 bil- lion in respect of tax losses carried forward and CHF 5.7 billion of deductible temporary differences (mainly in Switzerland and the US) that may be utilized to offset taxable income in future years. ➔ Refer to “Note 1a item 22 Income taxes” and “Note 8 Income taxes” in the “Consolidated financial statements” section and “The effect of taxes on our financial results is significantly influenced by reassessments of our deferred tax assets” in the “Risk factors” section of this report for more information 78 Provisions Pension and other post-employment benefit plans Provisions are liabilities of uncertain timing or amount, and are recognized when we have a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. An established provision for an item or class is representative of the best estimate of the outflow of economic benefits required to settle the present obli- gation as of the balance sheet date. Recognition of provisions often involves significant judgment in assessing the existence of an obligation resulting from past events and in estimating the probability, timing and amount of any outflows of resources. This is particularly the case for litiga- tion, regulatory and similar matters, which, because of their nature, are subject to many uncertainties, making their outcome difficult to predict. Such matters may involve unique fact patterns or novel legal theories, proceedings which have not yet been ini- tiated or are at early stages of adjudication, or as to which alleged damages have not been quantified by the claimants. Determin- ing whether an obligation exists as a result of a past event and estimating the probability, timing and amount of any potential outflows is based on a variety of assumptions, variables, and known and unknown uncertainties. The amount of any provision recognized can be very sensitive to the assumptions used and there could be a wide range of possible outcomes for any par- ticular matter. Statistical or other quantitative analytical tools are of limited use in determining whether to establish or determine the amount of provisions for litigation, regulatory and similar matters. Furthermore, information currently available to manage- ment may be incomplete or inaccurate, increasing the risk of erroneous assumptions with regards to the future developments of such matters. Management regularly reviews all the available information regarding such matters, including advice from legal advisors, to assess whether the recognition criteria for provisions have been satisfied for those matters and, if not, to evaluate whether such matters represent contingent liabilities. Legal advice is a significant consideration in determining whether it is more likely than not that an obligation exists as a result of a past event and in assessing the probability, timing and amount of any potential outflows. As of 31 December 2015, total provisions amounted to CHF 4,164 million, of which CHF 2,983 million related to litigation, regulatory and similar matters. Since the future outflow of resources in respect of these matters cannot be determined with certainty based on currently available information, the actual out- flows may ultimately prove to be substantially greater (or may be less) than the provisions recognized. ➔ Refer to “Note 22 Provisions and contingent liabilities” and “Note 1a item 27 Provisions” in the “Consolidated financial statements” section of this report for more information The full defined benefit obligation, net of plan assets, relating to our pension and other post-employment benefits is recognized on the balance sheet, with changes resulting from re-measurements recorded immediately in other comprehensive income. If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reduc- tions in future contributions to the plan. The net defined benefit liability or asset at the end of the year and the related personnel expense depend on the expected future benefits to be provided, determined using a number of financial and demographic assumptions. The most significant assumptions include life expec- tancy, the discount rate, expected salary increases, pension rates, and in addition, for the Swiss plan and one of the US defined benefit pension plans, interest credits on retirement savings account balances. We regularly review the actuarial assumptions used in calculating our defined benefit obligations to ensure the most appropriate estimate of our obligation. As part of the review, we also consult with independent actuarial firms. Life expectancy is determined by reference to published mor- tality tables. The discount rate is determined by reference to the rates of return on high-quality fixed-income investments of appro- priate currency and term at the measurement date. The assump- tion for salary increases reflects the long-term expectations for salary growth and takes into account inflation, seniority, promo- tion and other relevant factors such as supply and demand in the labor market. For a sensitivity analysis of the defined benefit obli- gation to these significant actuarial assumptions, refer to “Note 28 Pension and other post-employment benefit plans” in the “Con- solidated financial statements” section of this report. The most significant plan is the Swiss pension plan. Consistent with 2014, life expectancy for this plan has been based on the 2010 BVG generational mortality tables. The assumption for the discount rate has changed to 1.09% in 2015 from 1.15% in the prior year. Additional information on the update to assumptions for both the Swiss and non-Swiss plans during the year are included in “Note 28 Pension and other post-employment ben- efit plans.” ➔ Refer to “Note 1a item 24 Pension and other post-employment benefit plans” and “Note 28 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information 79 Financial and operating performance Financial and operating performance Critical accounting policies Equity compensation We recognize share-based compensation awarded to employees as compensation expense based on their fair value at grant date. The fair value of UBS Group AG shares issued to employees is determined by reference to quoted market prices, adjusted, when relevant, to take into account the terms and conditions inherent in the award. Certain performance shares issued by UBS to its employees have features that are not directly comparable with our shares traded in active markets. Accordingly, we determine the fair value using suitable valuation models. Several recognized valuation models exist. The models we apply have been selected because they are able to accommodate the specific features included in the instruments granted to our employees. If we were to use different models, the values produced would differ, even if the same inputs were used. The models we use require inputs, such as expected dividends and share price volatility, as well as adjustments for certain non- vesting conditions. Some of the model inputs we use are not mar- ket observable and have to be estimated or derived from available data. Use of different estimates would produce different valua- tions, which in turn would result in recognition of higher or lower compensation expense. ➔ Refer to “Note 1a item 25 Equity participation and other compensation plans” and “Note 29 Equity participation and other compensation plans” in the “Consolidated financial statements” section of this report for more information Consolidation of structured entities We sponsor the formation of structured entities (SEs) and interact with non-sponsored SEs for a variety of reasons, including allow- ing clients to obtain or be exposed to particular risk profiles, to provide funding or to sell or purchase credit risk. An SE is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Such entities generally have a narrow and well-defined objective and include those historically referred to as special purpose entities and some investment funds. In accordance with IFRS, UBS consolidates only SEs that it con- trols, with control being defined as a function of three elements: power over the relevant activities of the entity, exposure to vari- able returns and an investor’s ability to use its power to affect its returns. UBS consolidates an entity when all three elements of control are present. Where UBS has an interest in an SE that absorbs variability, we consider whether UBS has power over the SE which allows it to affect the variability of its returns. Consider- ation is given to all facts and circumstances to determine whether the Group has power over the SE; that is, the current ability to direct the relevant activities of the SE when decisions about those activities need to be made. Determining whether we have power to direct the relevant activities requires a significant degree of judgment in light of all facts and circumstances. In making that determination, we consider a range of factors, including the pur- pose and design of the SE, any rights held through contractual arrangements such as call rights, put rights or liquidation rights, as well as potential decision-making rights. Where the Group has power over the relevant activities, a further assessment is made to determine whether, through that power, it has the ability to affect its own returns; that is, assessing whether power is held in a prin- cipal or agent capacity. Consideration is given to the overall rela- tionship between UBS, the SE and other parties involved in the SE. In particular, we assess the following: (i) the scope of decision- making authority, (ii) rights held by other parties, including removal or other participating rights and (iii) exposure to variabil- ity, including remuneration, relative to the total variability of the SE, as well as whether UBS’s exposure is different from that of other investors. Appropriate weightings are applied to each of these factors on the basis of the particular facts and circum- stances. ➔ Refer to “Note 1a item 3 Subsidiaries and structured entities” and “Note 30 Interests in subsidiaries and other entities” in the “Consolidated financial statements” section of this report for more information 80 Significant accounting and financial reporting changes Significant accounting changes Financial reporting changes Own credit In 2015, we further enhanced our valuation methodology for the own credit component of fair value of financial liabilities desig- nated at fair value. This change in accounting estimate resulted in a gain of CHF 260 million. ➔ Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” in the “Consolidated financial statements” section of this report for more information Review of actuarial assumptions used in calculating defined benefit obligations In 2015, we carried out a methodology review of the actuarial assumptions used in calculating our defined benefit obligation (DBO) for our Swiss pension plan and as a result, we enhanced our methodology for estimating the discount rate. Furthermore, we refined our approach to estimating the rate of salary increases, the rate of interest credit on retirement savings, the employee turnover rate, the rate of employee disabilities and the rate of marriage. These improvements in estimates resulted in a total net decrease of CHF 2.1 billion in the DBO of the Swiss pension plan and a corresponding gain of CHF 2.0 billion recognized within other comprehensive income (OCI) attributable to UBS Group AG shareholders. Furthermore, we enhanced methodologies and refined approaches used to estimate various actuarial assumptions for our UK pension plan, which resulted in a total net decrease of CHF 0.2 billion in the DBO of the UK pension plan and a corresponding gain of CHF 0.2 billion recognized within OCI attributable to UBS Group AG shareholders. ➔ Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” in the “Consolidated financial statements” section of this report for more information New structure of Corporate Center As of 1 January 2015, Corporate Center – Core Functions was reorganized into two new units, Corporate Center – Services and Corporate Center – Group Asset and Liability Management (Group ALM). Therefore, we now report: (i) Corporate Center – Services, (ii) Corporate Center – Group ALM and (iii) Corporate Center – Non-Core and Legacy Portfolio separately, which enhances the transparency of Corporate Center activities. Group ALM is responsible for centrally managing the Group’s liquidity and funding position, as well as providing other balance sheet and capital management services to the Group. Most of the income generated and expenses incurred by Group ALM from these activities continues to be allocated to the business divisions and other Corporate Center units. Own credit gains and losses on financial liabilities designated at fair value are presented in Group ALM. Corporate Center – Services includes the Group’s control func- tions and all logistics and support functions serving the business divisions and other Corporate Center units. Most of the expenses of Corporate Center – Services are allocated to the business divi- sions and other Corporate Center units. Service and personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units In 2015, we revised the presentation of service allocations from Corporate Center – Services to the business divisions and other Corporate Center units to better reflect the economic relationship between them. These cost allocations were previously presented within the Personnel expenses, General and administrative expenses and Depreciation and impairment of property, equip- ment and software line items and are newly presented in the Ser- vices (to) / from business divisions and Corporate Center line items. Prior-period information has been restated to reflect this change. This change in presentation did not affect total operating expenses or performance before tax of the business divisions and Corporate Center units for any period presented. Similarly, personnel of Cor- porate Center – Services are no longer allocated to the business divisions and other Corporate Center units. Prior-period informa- tion has been restated accordingly. 81 Financial and operating performance Financial and operating performance Significant accounting and financial reporting changes Change in segment reporting related to fair value gains and losses on certain internal funding transactions Consistent with changes in the manner in which operating seg- ment performance is assessed, beginning in 2015, we have applied fair value accounting for certain internal funding transac- tions between Corporate Center – Group ALM and the Invest- ment Bank and Corporate Center – Non-core and Legacy Portfo- lio, rather than applying amortized cost accounting. This treatment better aligns with the mark-to-market basis on which these inter- nal transactions are risk managed within the Investment Bank and Corporate Center – Non-core and Legacy Portfolio. The terms of the funding transactions remain otherwise unchanged. Prior peri- ods have been restated to reflect this change. As a result, the Investment Bank’s operating income and performance before tax decreased by CHF 37 million for the year ended 31 December 2014 and by CHF 162 million for the year ended 31 December 2013, with offsetting increases in Corporate Center. This change did not affect the Group’s total operating income or net profit for any period presented. ➔ Refer to “Note 1b Changes in accounting policies, comparability and other adjustments” in the “Consolidated financial state- ments” section of this report for more information Retail & Corporate renamed Personal & Corporate Banking Effective 2016, the business division Retail & Corporate was renamed Personal & Corporate Banking. This change is reflected throughout this report. Global Asset Management renamed Asset Management In 2015, the business division Global Asset Management was renamed Asset Management. This change is reflected throughout this report. A&Q hedge fund solutions renamed Hedge Fund Solutions In 2015, A&Q hedge funds solutions, the multi-manager hedge fund business, was renamed Hedge Fund Solutions (HFS). This business continues to be reported together with the O’Connor business under the business line name O’Connor and Hedge Fund Solutions, within the business division Asset Management. Non-core and Legacy portfolio disclosures Following a substantial reduction in risk exposure over the past years, we have merged our disclosures for Non-core and Legacy Portfolio and included them in the Corporate Center section of our reports, including the disclosures previously provided in the “Risk management and control” section. Details on risk-weighted assets, leverage ratio denominator and balance sheet assets for the remaining Non-core and Legacy Portfolio exposures are now provided in one combined table. Change in Asset Management business lines As of 1 January 2016, Asset Management was reorganized into the following business lines: (i) Equities, Multi-asset & O’Connor, (ii) Fixed Income, (iii) Global Real Estate, (iv) Infrastructure & Private Equity, (v) Solutions and (vi) Fund Services. In our first quarter 2016 report, we will reflect this change and provide more information. Accounting for expected credit losses under IFRS 9, Financial Instruments EDTF | In July 2014, the IASB published the final version of IFRS 9, Financial Instruments, with a mandatory effective date of 1 Janu- ary 2018. The standard reflects the classification and measure- ment, impairment and hedge accounting phases of the IASB’s project to replace IAS 39, Financial instruments: Recognition and Measurement. The standard includes the introduction of a for- ward-looking expected credit loss (ECL) approach, replacing the incurred loss impairment approach for financial instruments in IAS 39, and the loss-provisioning approach for financial guarantees and lending commitments in IAS 37, Provisions, contingent liabil- ities and contingent assets. In November 2015, the Enhanced Disclosure Task Force (EDTF) published disclosure recommendations for IFRS 9 in its report “Impact of Expected Credit Loss Approaches on Bank Risk Disclo- sures.” Disclosures are recommended during the transition period and once IFRS 9 is fully adopted, to ensure that changes and impacts arising from using an expected loss model are transpar- ent, understandable and consistently applied. We address these recommendations below. More granular information will be pro- vided as we approach the adoption of IFRS 9 on 1 January 2018. IFRS 9 is a key strategic initiative for UBS and is currently being implemented under the joint sponsorship of the Group Chief Risk Officer and the Group Chief Financial Officer. The implementa- tion project structure has been defined to address the critical requirements of the standard and to manage the appropriate involvement of key stakeholders, including Risk Control, Finance, Group Technology and the business divisions. Steering and Oper- ating Committees, a Technical Board and individual workstreams have been created to ensure a streamlined implementation with appropriate controls and governance over all decisions. We have finalized key technical accounting and risk methodology deci- sions and are currently focusing on model development, IT archi- tecture, and consequential implementation work. We are also undertaking an impact assessment, and intend to perform a par- allel run in 2017. 82 Moving from an incurred loss to an expected credit loss impairment approach EDTF | Under the current incurred loss impairment approach in IAS 39, a financial asset or group of financial assets is impaired if there is objective evidence as a result of one or more events (so-called trigger events) having occurred since the financial asset was rec- ognized, that we will be unable to collect all amounts under the contract. Once a trigger event has occurred, allowances for credit losses are established based on the difference between the carry- ing amount and the present value of future estimated cash flows. IFRS 9 no longer requires a trigger event to have occurred before credit loss allowances are recognized. Instead, entities are required to recognize a 12-month, or less if the exposure period is less than 12 months, allowance for financial assets measured at amortized cost, debt instruments fair valued through other com- prehensive income, lease receivables, financial guarantees and loan commitments from initial recognition. The ECL should reflect an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes and that incorporates reasonable and supportable information about past events, cur- rent conditions, forecasts of future economic conditions and the time value of money. If a significant increase in credit risk (SICR) arises after the instrument is initially recognized, a lifetime ECL allowance is required. Life-time ECL allowances are always recognized for credit-impaired financial assets. A SICR may be assessed at an individual financial asset level, or, where appropriate, on a collective basis. Assessments on a collec- tive basis will only be made where the in-scope financial instru- ments share the same credit risk characteristics. We will determine whether a SICR has occurred at the report- ing date by assessing changes in an instrument’s risk of default since initial recognition. A range of indicators will be considered, including, but not limited to, significant changes in the actual or expected credit rating of the borrower, internal indicators of credit risk and external market indicators of credit risk or general eco- nomic conditions. The SICR assessment and the ECL calculation will use point in time (PIT) based parameters, including probability of default (PD), leveraging the respective parameters determined under the Basel III through the cycle (TTC) based approach, with adjust- ments made to account for current conditions and to incorporate forward-looking economic information which will include interest and foreign exchange rates, gross domestic product forecasts, unemployment rates, real estate price indices and other relevant risk parameters. Although ECL is not a stress loss concept, we plan to leverage our existing stress testing models to capture the effects of forward-looking economic information. The definition and assessment of what constitutes a SICR, and in particular the incorporation of forward-looking information is inherently subjective and will involve the use of significant judg- ment. We are establishing effective and robust governance and controls around the ECL calculation process, including what con- stitutes a SICR and the use of forward-looking information. Our economists, risk methodology personnel and credit risk officers will be involved in developing the forward-looking macroeco- nomic assumptions to be used in the ECL calculation, which will be validated and approved through a new governance process that will provide for a consistent use of forward-looking informa- tion throughout UBS. Implementation of the IFRS 9 ECL approach is generally expected to result in an increase in recognized credit loss allow- ances, as compared to the current incurred-loss approach. This is due in part to the 12-month ECL allowance that must be reported for all in-scope instruments, and to the lifetime ECL allowance that will apply to positions following a SICR and prior to an incurred credit loss event. Upon adoption, any change in credit loss allowances will be booked as an adjustment to retained earn- ings. In addition, increased income statement volatility is expected on an ongoing basis, due to the application of forward-looking assumptions and the SICR approach. We are currently assessing the impact of the IFRS 9 ECL requirements on our financial state- ments and we intend to disclose the potential impact no later than in our Annual Report 2017. In addition, we are monitoring the potential effects on our regulatory capital requirements. The Swiss Financial Market Supervisory Authority (FINMA) and the Basel Committee on Banking Supervision (BCBS) have not yet issued guidance on how IFRS 9 expected credit losses will be treated for regulatory capital purposes. 83 Financial and operating performance Financial and operating performance Significant accounting and financial reporting changes The table below sets out certain key differences between the definitions we apply in determining expected losses under the current Basel III framework and those planned to be used in deter- mining ECL for IFRS 9 purposes. We do not expect the definition of default under IFRS 9 to be different from the definition used for the purpose of our advanced internal ratings-based approach, and the term is therefore not included in the table below. ➔ Refer to “Credit risk models” in the “Risk management and control” section of this report for more information EDTF | Scope Current Basel III (advanced internal ratings-based (A-IRB) approach) The Basel III A-IRB treatment applies to the majority of credit risk exposures. It includes transactions measured at amortized cost, at fair value through profit and loss and at fair value through other comprehensive income (OCI). 12-month versus lifetime expected loss The Basel III A-IRB approach takes into account lifetime expected losses resulting from expected default events over a 12-month period. IFRS 9 treatment The IFRS 9 expected loss calculation mainly applies to financial assets measured at amortized cost and debt instruments measured at fair value through OCI, as well as loan commitments and financial guarantee contracts not at fair value through profit and loss. In the absence of a significant increase in credit risk (SICR) event, IFRS 9 takes into account lifetime expected losses considering expected default events over a maximum period of 12 months. Once a SICR event has occurred, expected default events over the lifetime of a transaction have to be considered. Exposure at default (EAD) EADrepresentstheamountweexpecttobeowedby acounterpartyatthe time of a possible default. For banking products, the EAD equals the book value as of the reporting date, whereas for traded products, such as securities financing transactions, the EAD is modeled. The EAD is expected to remain constant over the 12-month period. For loan commitments, a credit conversion factor is applied to model expected future drawdowns over the 12-month period. The EAD for IFRS 9 purposes is generally calculated based on the cash flows that are expected to be outstanding at the individual points in time during the period over which UBS is exposed to credit risk, discounted to the reporting date using the effective interest rate. For loan commitments, a credit conversion factor is applied to model expected future drawdowns over the period that UBS is exposed to credit risk, which is capped at 12 months, unless a SICR would occur. Probability of default (PD) PD estimates are determined on a through the cycle (TTC) basis. They represent historical average PDs, taking into account observed losses over a prolonged historical period, and are therefore less sensitive to move- mentsintheunderlying economy. Loss given default (LGD) LGD includes prudential adjustments, such as downturn LGD assumptions and floors. Similar to PD, LGD is determined on a TTC basis. PD estimates will be determined on a point in time (PIT) basis, based on current conditions and incorporating forecasts of future economic condi- tions at the reporting date. LGD should reflect those losses which are reasonably expected and therefore prudential adjustments should not be applied. Similar to PD, LGD is determined based on a PIT approach. 84 Group performance Net profit attributable to UBS Group AG shareholders was CHF 6,203 million in 2015 compared with CHF 3,466 million in 2014. We recorded an operating profit before tax of CHF 5,489 million compared with CHF 2,461 million, largely reflecting an increase of CHF 2,578 million in operating income, mainly due to increased net interest and trading income in the Investment Bank and our wealth management businesses, as well as reduced losses in Corporate Center – Non- core and Legacy Portfolio. Operating expenses decreased by CHF 451 million, mainly driven by a CHF 1,507 million lower net charge for provisions for litigation, regulatory and similar matters, partly offset by higher restructuring expenses and increased personnel expenses. We recorded a net tax benefit of CHF 898 million compared with CHF 1,180 million, reflecting net upward revaluations of deferred tax assets in both years, which more than offset tax expenses for taxable profits. Income statement CHF million Net interest income Credit loss (expense) / recovery Net interest income after credit loss expense Net fee and commission income Net trading income of which: net trading income excluding own credit of which: own credit on financial liabilities designated at fair value Other income Total operating income of which: net interest and trading income Personnel expenses General and administrative expenses Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) attributable to preferred noteholders Net profit / (loss) attributable to non-controlling interests Net profit / (loss) attributable to UBS Group AG shareholders Comprehensive income Total comprehensive income Total comprehensive income attributable to preferred noteholders Total comprehensive income attributable to non-controlling interests Total comprehensive income attributable to UBS Group AG shareholders For the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 6,732 (117) 6,615 17,140 5,742 5,190 553 1,107 30,605 12,474 15,981 8,107 920 107 25,116 5,489 (898) 6,386 183 6,203 5,781 83 5,698 6,555 (78) 6,477 17,076 3,842 3,551 292 632 28,027 10,397 15,280 9,387 817 83 25,567 2,461 (1,180) 3,640 142 32 3,466 5,220 221 79 4,920 5,786 (50) 5,736 16,287 5,130 5,413 (283) 580 27,732 10,915 15,182 8,380 816 83 24,461 3,272 (110) 3,381 204 5 3,172 2,524 559 4 1,961 3 50 2 0 49 46 89 75 9 20 5 (14) 13 29 (2) 123 (24) 75 (100) 472 79 11 (100) 5 16 85 Financial and operating performance Financial and operating performance Group performance Adjusted results1, 2 CHF million Operating income as reported of which: own credit on financial liabilities designated at fair value4 of which: gains on sales of real estate of which: gains on sales of subsidiaries and businesses5 of which: net foreign currency translation gain6 of which: gain related to our investment in the SIX Group of which: gain from a further partial sale of our investment in Markit of which: net losses related to the buyback of debt For the year ended 31.12.15 Wealth Manage- ment 8,155 Wealth Manage- ment Americas 7,381 Personal & Corporate Banking 3,877 Asset Manage- ment 2,057 Investment Bank 8,821 CC – Services3 241 CC – Group ALM 277 CC – Non- core and Legacy Portfolio (203) 169 15 56 66 378 11 553 88 (257) (107) (5) 0 0 0 (203) 1,301 14 0 43 Operating income (adjusted) 7,971 7,381 3,811 2,001 8,810 (137) Operating expenses as reported of which: personnel-related restructuring expenses5 of which: non-personnel-related restructuring expenses5 of which: restructuring expenses allocated from CC – Services5 of which: gain related to a change to retiree benefit plans in the US7 of which: impairment of an intangible asset 5,465 20 38 265 6,663 0 2,231 2 1,474 4 6,929 14 1,059 406 0 99 11 68 7 719 376 (986) 0 137 (21) Operating expenses (adjusted) 5,142 6,547 2,130 1,392 Operating profit / (loss) before tax as reported Operating profit / (loss) before tax (adjusted) 2,689 2,828 718 834 1,646 1,681 584 610 919 (5) 1,245 (818) (1,056) 282 (102) (1,503) (1,447) 5,489 5,635 For the year ended 31.12.14 Wealth Manage- ment 7,901 Wealth Manage- ment Americas 6,998 Personal & Corporate Banking 3,741 Asset Manage- ment 1,902 Investment Bank 8,308 CC – Services3 37 CC – Group ALM 2 CC – Non- core and Legacy Portfolio (862) CHF million Operating income as reported of which: own credit on financial liabilities designated at fair value4 of which: gains on sales of real estate of which: gain from the partial sale of our investment in Markit of which: impairment of a financial investment available-for-sale Operating income (adjusted) 7,901 6,998 3,741 1,902 Operating expenses as reported of which: personnel-related restructuring expenses5 of which: non-personnel-related restructuring expenses5 of which: restructuring expenses allocated from CC – Services5 of which: gain related to changes to retiree benefit plans in US7 Operating expenses (adjusted) Operating profit / (loss) before tax as reported Operating profit / (loss) before tax (adjusted) 5,574 18 49 119 0 5,389 2,326 2,511 6,099 0 2,235 4 1,435 19 0 55 (9) 6,053 900 946 0 60 0 2,171 1,506 1,570 2 30 (8) 1,393 467 509 86 292 44 (7) (290) (862) 688 221 263 (454) 0 658 (652) (666) 1,144 1 0 29 0 0 0 0 0 0 (3) 1,116 (41) 24,931 2 (290) (2,005) (1,977) 2,461 2,766 UBS 30,605 553 378 225 88 81 11 (257) 29,526 25,116 460 775 0 (21) 11 23,891 UBS 28,027 292 44 43 (48) 27,696 25,567 327 350 0 11 6,522 1,892 2,288 43 (48) 8,313 8,392 64 36 161 (20) 8,151 (84) 162 Adjusted results1, 2 (continued) CHF million Operating income as reported of which: own credit on financial liabilities designated at fair value4 of which: gains on sales of real estate of which: net losses related to the buyback of debt of which: gains on sales of subsidiaries and businesses of which: net foreign currency translation loss6 For the year ended 31.12.13 Wealth Manage- ment Wealth Manage- ment Americas Personal & Corporate Banking Asset Manage- ment Investment Bank 7,563 6,538 3,756 1,935 8,438 CC – Non- core and Legacy Portfolio 166 CC – Services3 178 CC – Group ALM (841) (283) 288 34 55 (194) 27 Operating income (adjusted) 7,563 6,538 3,756 1,901 8,383 (110) Operating expenses as reported 5,316 5,680 2,298 1,359 6,300 of which: personnel-related restructuring expenses5 of which: non-personnel-related expenses expenses5 of which: restructuring expenses allocated from CC – Services5 Operating expenses (adjusted) Operating profit / (loss) before tax as reported Operating profit / (loss) before tax (adjusted) 40 35 104 5,138 2,247 2,425 0 0 59 5,621 858 917 0 0 54 2,244 1,458 1,512 2 2 38 1,316 576 585 (38) 1 247 6,090 2,138 2,293 804 129 578 (714) 810 (626) (920) UBS 27,732 (283) 288 (167) 89 (24) 156 616 0 23,689 3,272 4,141 (24) (340) 43 0 0 0 43 139 27,829 2,660 24,461 23 0 211 2,425 (884) (383) (2,494) (2,286) 1 Adjusted results are non-GAAP financial measures as defined by SEC regulations. 2 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 3 Corporate Center – Services operating expenses presented in this table are after service allocations to business divisions and other Corporate Center units. 4 Refer to “Note 24 Fair value measurement” in the “Consolidated financial statements” section of this report for more information. 5 Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information. 6 Related to the disposal of subsidiaries. 7 Refer to “Note 28 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information. 87 Financial and operating performance Financial and operating performance Group performance 2015 compared with 2014 Results We recorded an operating profit before tax of CHF 5,489 million compared with CHF 2,461 million, largely reflecting an increase of CHF 2,578 million in operating income, mainly due to increased net interest and trading income in the Investment Bank and our wealth management businesses, as well as reduced losses in Cor- porate Center – Non-core and Legacy Portfolio. Operating expenses decreased by CHF 451 million, mainly driven by a CHF 1,507 million lower net charge for provisions for litigation, regula- tory and similar matters, partly offset by higher restructuring expenses and increased personnel expenses. In addition to reporting our results in accordance with IFRS, we report adjusted results that exclude items that management believes are not representative of the underlying performance of our businesses. Such adjusted results are non-GAAP financial measures as defined by SEC regulations. For 2015, the items we excluded were an own credit gain of CHF 553 million, gains on sales of real estate of CHF 378 million which primarily related to the sale of a property in Geneva, Switzerland, net gains on sales of subsidiaries and businesses of CHF 225 million, a net foreign currency translation gain from the disposal of subsidiaries of CHF 88 million, a gain of CHF 81 million related to our investment in the SIX Group, a gain of CHF 11 million from a further partial sale of our investment in Markit, net losses related to the buyback of debt in a tender offer of CHF 257 million, net restructuring expenses of CHF 1,235 million, a gain of CHF 21 million related to a change to retiree benefit plans in the US and an impairment of an intangible asset of CHF 11 million. For 2014, the items we excluded were an own credit gain of CHF 292 million, gains on sales of real estate of CHF 44 million, a gain of CHF 43 million from the partial sale of our investment in Markit, a loss of CHF 48 million related to the impairment of a financial investment avail- able-for-sale, net restructuring expenses of CHF 677 million and a gain of CHF 41 million related to changes to retiree benefit plans in the US. On this adjusted basis, profit before tax was CHF 5,635 million compared with CHF 2,766 million in the prior year. Adjusted operating income increased by CHF 1,830 million to CHF 29,526 million, largely due to an increase of CHF 1,816 mil- lion in adjusted net interest and trading income, reflecting increases in the Investment Bank and our wealth management businesses, as well as reduced losses in Corporate Center – Non- core and Legacy Portfolio. Adjusted operating expenses decreased by CHF 1,040 million to CHF 23,891 million, mainly due to a CHF 1,507 million lower net charge for provisions for litigation, regulatory and similar mat- ters, partly offset by CHF 548 million higher personnel expenses. 88 As a result of ongoing efforts to optimize our legal entity struc- ture, we anticipate that some foreign currency translation gains and losses previously booked directly into equity through other comprehensive income will be reclassified to the income state- ment in future periods due to the sale or closure of UBS AG branches and subsidiaries. In this respect, we currently expect to record net foreign currency translation losses of around CHF 130 million in the first quarter of 2016. These losses will be treated as adjusting items and recorded in Corporate Center – Group Asset and Liability Management (Group ALM). The reclassification of foreign currency translation losses to the income statement will not affect shareholders’ equity or regulatory capital. Operating income Total operating income was CHF 30,605 million compared with CHF 28,027 million. On an adjusted basis, total operating income increased by CHF 1,830 million to CHF 29,526 million. Adjusted net interest and trading income increased by CHF 1,816 million, reflecting increases in the Investment Bank and our wealth man- agement businesses, as well as reduced losses in Corporate Center – Non-core and Legacy Portfolio. Net fee and commission income increased by CHF 64 million, mainly in Wealth Manage- ment Americas and Asset Management. Adjusted other income was broadly unchanged. Net interest and trading income Net interest and trading income increased by CHF 2,077 million to CHF 12,474 million. 2015 included an own credit gain on finan- cial liabilities designated at fair value of CHF 553 million, com- pared with a gain of CHF 292 million. In 2015, we made further enhancements to our valuation methodology for the own credit component of fair value of financial liabilities designated at fair value. This change in accounting estimate resulted in a gain of CHF 260 million. Excluding the effect of own credit in both years, net interest and trading income increased by CHF 1,816 million to CHF 11,921 million, reflecting increases in the Investment Bank and our wealth management businesses, as well as reduced losses in Corporate Center – Non-core and Legacy Portfolio. We will adopt the own credit presentation requirements of IFRS 9 in the first quarter of 2016. Under this aspect of IFRS 9, changes in the fair value of financial liabilities designated at fair value through profit and loss related to own credit will be recog- nized in other comprehensive income and will not be reclassified to the Income statement. We will adopt the other requirements of IFRS 9 as of the mandatory effective date of 1 January 2018. ➔ Refer to the “Significant accounting and financial reporting changes” section for more information on the enhancements to our valuation methodology for own credit In Wealth Management, net interest and trading income increased by CHF 189 million. Net interest income increased by CHF 161 million, mainly due to higher lending revenues and an increase in allocated revenues from Group ALM, and net trading income increased by CHF 28 million. In Wealth Management Americas, net interest and trading income increased by CHF 185 million to CHF 1,537 million, mainly due to higher net interest income, reflecting continued growth in loan and deposit balances. In Personal & Corporate Banking, net interest and trading income increased by CHF 77 million to CHF 2,613 million, mainly due to higher net interest income from loans and deposits, reflect- ing our pricing measures. In the Investment Bank, net interest and trading income increased by CHF 669 million to CHF 5,186 million, mainly due to higher revenues in our Foreign Exchange and Rates businesses within Investor Client Services, reflecting elevated client activity and higher volatility, particularly heightened following the Swiss National Bank’s actions of 15 January 2015. Furthermore, also within Investor Client Services, Financing services revenues were higher driven primarily by increased client activity in Prime Broker- age and Equity Financing. Corporate Center – Group ALM net interest and trading income, excluding the effect of own credit in both years, increased by CHF 148 million, mainly reflecting higher income related to high-quality liquid assets. In Corporate Center – Non-core and Legacy Portfolio, net interest and trading income improved by CHF 591 million, primar- ily reflecting reduced losses from novation and unwind activities. Furthermore, 2014 included a net loss of CHF 345 million related to funding and debit valuation adjustments (FVA / DVA) on deriva- tives, of which CHF 252 million was recorded upon the implemen- tation of FVA. ➔ Refer to “Note 3 Net interest and trading income” in the “Consolidated financial statements” section of this report for more information ➔ Refer to the “Significant accounting and financial reporting changes” section for more information on a change in segment reporting related to fair value gains and losses on certain internal funding transactions Credit loss expense / recovery Net credit loss expense was CHF 117 million compared with CHF 78 million. The Investment Bank recorded a net credit loss expense of CHF 68 million, mainly related to the energy sector, compared with a net recovery of CHF 2 million. Net credit loss expense in Personal & Corporate Banking was CHF 37 million compared with CHF 95 million, predominantly due to lower expenses for newly impaired positions. ➔ Refer to the “Investment Bank, Personal & Corporate Banking and Risk management and control” sections of this report for more information Net interest and trading income CHF million Net interest and trading income Net interest income Net trading income Total net interest and trading income Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank of which: Corporate Client Solutions of which: Investor Client Services Corporate Center of which: Services of which: Group ALM of which: own credit on financial liabilities designated at fair value of which: Non-core and Legacy Portfolio Total net interest and trading income For the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 6,732 5,742 12,474 3,034 1,537 2,613 (5) 5,186 1,001 4,185 110 (3) 426 553 (313) 6,555 3,842 10,397 2,845 1,352 2,536 0 4,517 1,030 3,487 (854) 34 16 292 (904) 5,786 5,130 10,915 2,868 1,323 2,485 9 4,852 1,146 3,707 (622) (166) (535) (283) 79 12,474 10,397 10,915 3 49 20 7 14 3 15 (3) 20 89 (65) 20 89 Financial and operating performance Financial and operating performance Group performance Credit loss (expense) / recovery CHF million Wealth Management Wealth Management Americas Personal & Corporate Banking Investment Bank Corporate Center of which: Non-core and Legacy Portfolio Total For the year ended 31.12.15 31.12.14 31.12.13 0 (4) (37) (68) (8) (8) (117) (1) 15 (95) 2 2 2 (78) (10) (27) (18) 2 3 3 (50) % change from 31.12.14 (100) (61) 50 Net fee and commission income Net fee and commission income increased by CHF 64 million to CHF 17,140 million. Portfolio management and advisory fees increased by CHF 515 million to CHF 7,858 million, primarily in Wealth Management Americas, largely due to an increase in managed account fees, reflecting higher invested asset levels. Portfolio management and advisory fees also increased in Wealth Management and Asset Management. Underwriting fees decreased by CHF 224 million, reflecting lower equity and debt underwriting fees, largely in the Investment Bank. Investment fund fees declined by CHF 150 million, primarily reflecting a decrease in mutual fund related fees in Wealth Man- agement Americas and lower transaction-based income in Wealth Management. This was partly offset by an increase in Asset Man- agement. ➔ Refer to “Note 4 Net fee and commission income” in the “Consolidated financial statements” section of this report for more information Other income Other income was CHF 1,107 million compared with CHF 632 million. On an adjusted basis, other income decreased by CHF 12 million. Adjusted income related to associates and subsidiaries decreased by CHF 124 million, mainly as 2014 included a gain of CHF 65 million on an investment in an associate which was reclas- sified to a financial investment available-for-sale following its ini- tial public offering, as well as a gain of CHF 58 million related to the release of a provision for litigation, regulatory and similar mat- ters which was recorded as other income. This was partly offset by CHF 92 million higher adjusted income from financial investments classified as available-for-sale, primarily related to net gains on sales of equity investments in 2015, mainly within the Investment Bank. ➔ Refer to “Note 5 Other income” in the “Consolidated financial statements” section of this report for more information Recurring net fee and transaction-based income in Wealth Management, Wealth Management Americas and Personal & Corporate Banking Recurring net fee income for Wealth Management, Wealth Man- agement Americas and Personal & Corporate Banking includes fees for services provided on an ongoing basis such as portfolio management fees, asset-based investment fund fees, custody fees and account-keeping fees, which are generated on the respective business divisions’ client assets. This is part of total net fee and commission income in the UBS Group financial state- ments. Transaction-based income includes the non-recurring por- tion of net fee and commission income for these business divi- sions, mainly consisting of brokerage and transaction-based investment fund fees, as well as credit card fees and fees for pay- ment transactions, together with the respective divisional net trading income. ➔ Refer to the “Wealth Management,” “Wealth Management Americas” and “Personal & Corporate Banking” sections of this report for more information Operating income Wealth Management, Wealth Management Americas and Personal & Corporate Banking CHF million Net interest income Recurring net fee income Transaction-based income Other income Income Credit loss (expense) / recovery Total operating income 90 Wealth Management Wealth Management Americas Personal & Corporate Banking For the year ended 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 2,326 3,820 1,778 231 8,155 0 2,165 3,783 1,928 25 7,902 (1) 8,155 7,901 2,061 3,567 1,887 57 7,573 (10) 7,563 1,174 4,623 1,555 31 7,384 (4) 7,381 983 4,294 1,678 30 6,984 15 6,998 936 3,796 1,800 33 6,565 (27) 6,538 2,270 544 959 140 3,913 (37) 3,877 2,184 556 1,022 75 3,836 (95) 3,741 2,144 511 1,034 86 3,774 (18) 3,756 Operating expenses Total operating expenses decreased by CHF 451 million to CHF 25,116 million. Restructuring expenses were CHF 1,235 million compared with CHF 677 million, largely related to our transition- ing activities to nearshore and offshore locations. Personnel- related restructuring expenses increased by CHF 133 million to CHF 460 million, while non-personnel-related restructuring expenses increased by CHF 425 million to CHF 775 million. On an adjusted basis, excluding restructuring expenses and gains related to changes to retiree benefit plans in the US in both years and an impairment of an intangible asset in 2015, total operating expenses decreased by CHF 1,040 million to CHF 23,891 million. This decrease was mainly due to a CHF 1,507 mil- lion lower net charge for provisions for litigation, regulatory and similar matters, partly offset by CHF 548 million higher adjusted personnel expenses, primarily reflecting an increase in expenses for variable compensation. ➔ Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for more information on restructuring expenses Personnel expenses Personnel expenses increased by CHF 701 million to CHF 15,981 million and included restructuring expenses of CHF 460 million compared with CHF 327 million, largely related to our transition- ing activities to nearshore and offshore locations. On an adjusted basis, excluding restructuring expenses and gains related to changes to retiree benefit plans in the US, personnel expenses increased by CHF 548 million to CHF 15,542 million. Expenses for salaries, excluding restructuring expenses, decreased by CHF 154 million to CHF 5,970 million, primarily reflecting a reduction in staff levels. Excluding restructuring expenses, total variable compensation expenses increased by CHF 297 million. Expenses for current-year awards increased by CHF 272 million, reflecting improved busi- ness performance. Expenses relating to the amortization of prior years’ awards increased by CHF 24 million. Financial advisor compensation in Wealth Management Amer- icas increased by CHF 167 million to CHF 3,552 million, primarily due to unfavorable foreign currency translation effects. Operating expenses CHF million Personnel expenses (adjusted)1 Salaries Total variable compensation of which: relating to current year2 of which: relating to prior years3 Wealth Management Americas: Financial advisor compensation4 Other personnel expenses5 Total personnel expenses (adjusted)1 Non-personnel expenses (adjusted)1 General and administrative expenses of which: provisions for litigation, regulatory and similar matters of which: other general and administrative expenses Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total non-personnel expenses (adjusted)1 Total operating expenses (adjusted)1 Adjusting items of which: personnel-related restructuring expenses of which: non-personnel-related restructuring expenses of which: gains related to changes to retiree benefit plans in the US6 of which: impairment of an intangible asset For the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 5,970 3,410 2,610 799 3,552 2,613 6,124 3,113 2,338 775 3,385 2,372 6,203 3,201 2,369 832 3,140 2,481 15,542 14,994 15,026 7,346 1,087 6,259 908 94 8,349 23,891 1,225 460 775 (21) 11 9,068 2,594 6,474 788 81 9,937 24,931 636 327 350 (41) 7,832 1,701 6,132 748 83 8,662 23,689 772 156 616 (3) 10 12 3 5 10 4 (19) (58) (3) 15 16 (16) (4) 93 41 121 (49) (2) Total operating expenses as reported 25,116 25,567 24,461 1 Excluding adjusting items. 2 Includes expenses relating to performance awards and other variable compensation for the respective performance year. 3 Consists of amortization of prior years’ awards relating to performance awards and other variable compensation. 4 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues generated by financial advisors and supplemen- tal compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes expenses related to compensation commitments with financial advisors entered into at the time of recruitment which are subject to vesting requirements. 5 Consists of expenses related to contractors, social security, pension and other post-employment benefit plans and other personnel expenses. Refer to “Note 6 Personnel expenses” in the “Consolidated financial statements” section of this report for more information. 6 Refer to “Note 28 Pension and other post-employment benefit plans” in the “Consolidated financial state- ments” section of this report for more information. 91 Financial and operating performance Financial and operating performance Group performance Other personnel expenses, excluding restructuring expenses and the aforementioned gains related to changes to retiree ben- efit plans in the US, increased by CHF 241 million to CHF 2,613 million, mainly due to an increase of CHF 113 million in costs for pension and other post-employment benefits plans and CHF 113 million higher expenses for contractors. ➔ Refer to “Note 6 Personnel expenses” in the “Consolidated financial statements” section of this report for more information ➔ Refer to “Note 28 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information Depreciation, impairment and amortization Depreciation and impairment of property, equipment and soft- ware increased by CHF 103 million to CHF 920 million. Excluding restructuring expenses of CHF 12 million compared with CHF 29 million, depreciation expenses increased by CHF 120 million, largely driven by higher depreciation expenses related to internally generated capitalized software. Amortization and impairment of intangible assets was CHF 107 million compared with CHF 83 million. On an adjusted basis, these expenses increased by CHF 13 million. ➔ Refer to “Note 16 Property, equipment and software” ➔ Refer to “Note 29 Equity participation and other compensation in the “Consolidated financial statements” section of this plans” in the “Consolidated financial statements” section report for more information of this report for more information ➔ Refer to “Note 17 Goodwill and intangible assets” ➔ Refer to the “Compensation” section of this report for more in the “Consolidated financial statements” section of this information report for more information General and administrative expenses General and administrative expenses decreased by CHF 1,280 mil- lion to CHF 8,107 million. Net restructuring expenses increased to CHF 761 million from CHF 319 million, largely related to our tran- sitioning activities to nearshore and offshore locations. On an adjusted basis, excluding net restructuring expenses, general and administrative expenses decreased by CHF 1,722 million, mainly due to a CHF 1,507 million lower net charge for provisions for litigation, regulatory and similar matters. At this point in time, we believe that the industry continues to operate in an environment in which expenses associated with liti- gation, regulatory and similar matters will remain elevated for the foreseeable future and we continue to be exposed to a number of significant claims and regulatory matters. Excluding restructuring expenses, other general and adminis- trative expenses decreased by CHF 215 million, primarily as 2014 included net expenses of CHF 120 million related to certain dis- puted receivables. Furthermore, occupancy costs and expenses for outsourcing of IT and other services decreased. General and administrative expenses also included a net expense of CHF 166 million for the annual UK bank levy in 2015, mainly in the Investment Bank and in Non-core and Legacy Port- folio, compared with a net expense of CHF 123 million in 2014. ➔ Refer to “Note 7 General and administrative expenses” in the “Consolidated financial statements” section of this report for more information ➔ Refer to “Note 22 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information Tax We recognized a net income tax benefit of CHF 898 million for 2015, which included a net Swiss tax expense of CHF 569 million and a net non-Swiss tax benefit of CHF 1,467 million, primarily relating to the upward revaluation of US deferred tax assets. The Swiss tax expense included a current tax expense of CHF 239 million related to taxable profits, against which no losses were available to offset, mainly earned by Swiss subsidiaries. In addition, it included a net deferred tax expense of CHF 330 mil- lion, which mainly reflected a net decrease in deferred tax assets previously recognized in relation to tax losses carried forward, par- tially offset by an increase in recognized deferred tax assets in relation to temporary differences. The net non-Swiss tax benefit included a current tax expense of CHF 476 million in respect of taxable profits earned by non- Swiss subsidiaries and branches, against which no losses were available to offset. This was more than offset by a net deferred tax benefit of CHF 1,943 million, primarily due to an increase in our US deferred tax assets, reflecting updated profit forecasts and an extension of the relevant taxable profit forecast period used in valuing our deferred tax assets. Based on the performance of our businesses, and the accuracy of historical forecasts, the deferred tax asset forecast period for US taxable profits was extended to seven years from six. We also consider other factors in evaluating the recoverability of our deferred tax assets, including the remain- ing tax loss carry-forward period, and our confidence level in assessing the probability of taxable profit beyond the current fore- cast period. Estimating future profitability is inherently subjective and is particularly sensitive to future economic, market and other conditions which are difficult to predict. 92 For 2016, notwithstanding the effects of any potential reas- sessment of the level of deferred tax assets, we expect the effec- tive tax rate to be in the range of 22% to 25%. Consistent with past practice, we expect to revalue our deferred tax assets in the second half of 2016 based on a reassessment of future profitabil- ity taking into account updated business plan forecasts. The full- year effective tax rate could change significantly on the basis of this reassessment. It could also change if aggregate tax expenses in respect of profits from branches and subsidiaries without loss coverage differ from what is expected. Part of the aforemen- tioned reassessment of future profitability includes consideration of a possible further extension of the forecast period used for US deferred tax asset recognition purposes to eight years from the seven years used as of 31 December 2015. The determination of whether to extend the forecast period by an additional year will be made on the basis of all relevant facts and circumstances exist- ing at that time. Inasmuch as the ex-ante parameters we have established for further extending the forecast period are more challenging to satisfy than in prior years, it is therefore less prob- able that we will add an eighth year to the forecast period in 2016 for purposes of revaluing our US deferred tax assets. On 16 March 2016, the UK Government announced a pro- posed change in law which would reduce the proportion of banks’ annual taxable profits that can be offset by UK tax losses carried forward from 50% to 25% with effect from 1 April 2016. The proposed change in law would also reduce the UK corporate income tax rate from 18% to 17% with effect from 1 April 2020. To the extent that these changes are enacted in 2016, we would expect to incur a reduction in recognized deferred tax assets of approximately CHF 125 million. ➔ Refer to “Note 8 Income taxes” in the “Consolidated financial statements” section of this report for more information Total comprehensive income attributable to UBS Group AG shareholders Total comprehensive income attributable to UBS Group AG share- holders includes all changes in equity (including net profit) attrib- uted to UBS Group AG shareholders during a period, except those resulting from investments by and distributions to UBS Group AG shareholders, as well as equity-settled share-based payments. Items included in comprehensive income, but not in net profit, are reported within other comprehensive income (OCI). These items will be reclassified to net profit when the underlying item is sold or realized, with the exception of gains and losses on defined benefit plans and certain property revaluations. In 2015, total comprehensive income attributable to UBS Group AG shareholders was CHF 5,698 million, reflecting net profit of CHF 6,203 million, partly offset by negative OCI of CHF 506 million. In 2015, OCI related to cash flow hedges was negative CHF 509 million compared with positive CHF 689 million in 2014, pri- marily reflecting lower unrealized gains on hedging derivatives from decreases in long-term interest rates. Foreign currency translation OCI was negative CHF 231 mil- lion, primarily resulting from the significant weakening of the euro and British pound against the Swiss franc, combined with the reclassification of net gains totaling CHF 90 million to the income statement. OCI associated with financial investments classified as avail- able-for-sale was negative CHF 63 million, mainly as previously unrealized net gains were reclassified from OCI to the income statement upon sale of investments, partly offset by net unreal- ized gains following decreases in long-term interest rates. We cur- rently expect to recognize in the income statement gains of approximately CHF 100 million, deferred in OCI, during the first half of 2016, as transactions involving certain equity investments classified as available-for-sale are closed. These expected gains will be recorded in Personal & Corporate Banking and Wealth Management and, consistent with past practice, treated as adjust- ing items. The reclassification of gains from OCI to the income statement will not affect shareholders’ equity, but will increase CET1 capital. Defined benefit plan OCI was CHF 298 million. In 2015, we carried out a methodology review of the actuarial assumptions used in calculating our defined benefit obligations (DBOs). This resulted in an OCI gain of CHF 2,002 million related to the Swiss pension plan and an OCI gain of CHF 188 million related to the UK pension plan. Total pre-tax OCI related to UK defined benefit plans was CHF 321 million, reflecting a net reduction in the DBO of CHF 444 million, primarily resulting from aforementioned changes in assumptions and an increase in the applicable discount rate, partly offset by a decrease of CHF 123 million in the fair value of the underlying plan assets. In addition, we recorded total net pre-tax OCI gains of CHF 53 million on our Swiss pension plan. This reflected an OCI gain of CHF 1,212 million related to a net DBO reduction, primarily due to aforementioned changes in assumptions, partly offset by a market-driven decline in the appli- cable discount rate, as well as an OCI gain of CHF 105 million due to an increase in the fair value of the underlying plan assets. These OCI gains were almost entirely offset by an OCI reduction of CHF 1,265 million representing the excess of the pension surplus over the estimated future economic benefit. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on our review of actuarial assumptions in calculating defined benefit obligations ➔ Refer to the “Statement of comprehensive income” in the “Consolidated financial statements” section of this report for more information ➔ Refer to “Note 28 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information on OCI related to defined benefit plans 93 Financial and operating performance Financial and operating performance Group performance Net profit attributable to preferred noteholders and non-controlling interests Key figures Net profit attributable to preferred noteholders was zero in 2015 compared with CHF 142 million in the prior year. Subsequent to the exchange offer in the fourth quarter of 2014, the preferred notes issued by UBS AG were reclassified in 2015 to equity attrib- utable to non-controlling interests in the UBS Group AG consoli- dated financial statements. Net profit attributable to non-controlling interests was CHF 183 million in 2015 compared with CHF 32 million in the prior year. This mainly related to net profit attributable to non-control- ling interests in UBS AG which was CHF 103 million in 2015. As a result of the completion of the SESTA procedure in the third quar- ter of 2015, UBS Group AG owns 100% of the issued shares of UBS AG. Since then, profits of UBS AG were fully attributable to UBS Group AG shareholders. Furthermore, dividends of CHF 76 million were paid to preferred noteholders, for which no accrual was required in a prior period. We currently expect to attribute net profit to non-controlling interests related to preferred notes issued by UBS AG of approxi- mately CHF 80 million in 2016, all in the second quarter, approxi- mately CHF 70 million in 2017 and less than CHF 10 million per year from 2018. Cost / income ratio The cost / income ratio was 81.8% in 2015 compared with 91.0% in the prior year. On an adjusted basis, the cost / income ratio was 80.6% compared with 89.8% and was above our short- to medium-term expectation of 65% to 75%. Return on tangible equity The return on tangible equity (RoTE) was 13.7% in 2015 com- pared with 8.2% in the prior year. On an adjusted basis, the RoTE was 13.7% compared with 8.6% and was above our target of around 10% in 2015. Common equity tier 1 capital ratio Our fully applied CET1 capital ratio increased 1.1 percentage points to 14.5% as of 31 December 2015, exceeding our target ratio of 13.0%. This increase was driven by a CHF 9.0 billion decrease in risk-weighted assets and a CHF 1.1 billion increase in CET1 capital. Return on equity CHF million, except where indicated Net profit Net profit attributable to UBS Group AG shareholders Amortization and impairment of intangible assets Pre-tax adjusting items1 Tax effect on adjusting items2 Adjusted net profit attributable to UBS Group AG shareholders3 Equity Equity attributable to UBS Group AG shareholders Less: goodwill and intangible assets4 Tangible equity attributable to UBS Group AG shareholders Return on equity Return on equity (%) Return on tangible equity (%) Adjusted return on tangible equity (%) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 6,203 107 135 (140) 6,305 55,313 6,568 48,745 11.8 13.7 13.7 3,466 83 305 (125) 3,729 50,608 6,564 44,044 7.0 8.2 8.6 3,172 83 869 (135) 3,989 48,002 6,293 41,709 6.7 8.0 9.8 79 29 (56) 12 69 9 0 11 1 Refer to the table “Adjusted results” in this section for more information. 2 Generally reflects an indicative tax rate of 22% on pre-tax adjusting items, apart from own credit on financial liabilities designated at fair value, which has a lower indicative tax rate of 2%. 3 Net profit attributable to UBS Group AG shareholders excluding amortization and impairment of intangible assets, pre-tax adjusting items and tax effect on pre-tax adjusting items. 4 Goodwill and intangible assets used in the calculation of tangible equity attributable to UBS Group AG shareholders as of 31 December 2014 have been adjusted to reflect the non-controlling inter- ests in UBS AG. 94 Risk-weighted assets Our risk-weighted assets (RWA) decreased by CHF 9.0 billion to CHF 207.5 billion on a fully applied basis as of 31 December 2015, below our short- to medium-term expectation of around CHF 250 billion. Credit risk RWA decreased by CHF 4.2 billion, primarily due to derivative trade unwinds and novations in Corpo- rate Center – Non-core and Legacy Portfolio. Market risk RWA decreased by CHF 4.4 billion driven by risk reductions due to mar- ket movements. Operational risk RWA decreased by CHF 1.6 bil- lion driven by lower incremental operational risk RWA based on the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA. ➔ Refer to the “Investment Bank,” “Corporate Center” and “Capital management” sections of this report for more information Leverage ratio denominator Our fully-applied LRD decreased by CHF 80 billion to CHF 898 bil- lion as of 31 December 2015 from the pro forma comparative number of CHF 978 billion as of 1 January 2015 and was below our short- to medium-term expectation of around CHF 950 bil- lion. The decrease during 2015 mainly reflected incremental net- ting and collateral mitigation benefits of CHF 39 billion, currency effects of CHF 24 billion and a decrease of CHF 13 billion related to methodology changes. ➔ Refer to the “Investment Bank,” “Corporate Center” and “Capital management” sections of this report for more information Net new money and invested assets Management’s discussion and analysis on net new money and invested assets is provided in the “Wealth Management”, “Wealth Management Americas” and “Asset Management” sec- tions of this report. Net new money1 CHF billion Wealth Management Wealth Management (adjusted)2 Wealth Management Americas Asset Management of which: excluding money market flows of which: money market flows For the year ended 31.12.15 31.12.14 31.12.13 12.9 22.8 21.3 (5.4) (0.7) (4.7) 34.4 34.4 9.6 15.9 22.6 (6.7) 35.9 35.9 17.6 (19.9) (4.8) (15.1) 1 Net new money excludes interest and dividend income. 2 Adjusted net new money excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital optimization program. Invested assets CHF billion Wealth Management Wealth Management Americas Asset Management of which: excluding money market funds of which: money market funds As of % change from 31.12.15 31.12.14 31.12.13 31.12.14 947 1,035 650 592 58 987 1,027 664 600 64 886 865 583 518 65 (4) 1 (2) (1) (9) 95 Financial and operating performance Financial and operating performance Group performance Regional performance The operating regions shown in the “Regional performance” table below correspond to the regional management structure of the Group. The allocation of income and expenses to these regions reflects, and is consistent with, the basis on which the business is managed and its performance evaluated. These alloca- tions involve assumptions and judgments that management con- siders to be reasonable, and may be refined to reflect changes in estimates or management structure. The main principles of the allocation methodology are that client revenues are attributed to the domicile of the client, and trading and portfolio management revenues are attributed to the country where the risk is managed. This revenue attribution is consistent with the mandate of our country and regional Presi- dents. Expenses are allocated in line with revenues. Certain reve- nues and expenses, such as those related to Corporate Center – Non-core and Legacy Portfolio, certain litigation expenses and restructuring expenses and other items, are managed at the Group level. These revenues and expenses are included in the Global column. Americas Asia Pacific For the year ended Europe, Middle East and Africa Switzerland Total Global For the year ended 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 2.1 0.0 0.0 0.3 2.6 0.0 5.0 1.5 0.0 0.0 0.2 1.7 0.0 3.4 0.6 0.0 0.0 0.1 0.9 0.0 1.6 1.9 0.0 0.0 0.3 2.4 0.0 4.6 1.3 0.0 0.0 0.2 1.7 0.0 3.2 0.6 0.0 0.0 0.1 0.7 0.0 1.4 1.7 0.0 0.0 0.3 2.6 0.0 4.5 1.2 0.0 0.0 0.2 1.6 0.0 3.0 0.5 0.0 0.0 0.1 1.0 0.0 1.5 3.8 0.0 0.0 0.4 2.5 0.0 6.8 2.8 0.0 0.0 0.4 2.1 0.0 5.2 1.1 0.0 0.0 0.1 0.4 0.0 1.5 4.0 0.0 0.0 0.4 2.4 0.0 6.8 3.0 0.0 0.0 0.4 1.9 0.0 5.2 1.0 0.0 0.0 0.0 0.5 0.0 1.5 3.9 0.0 0.0 0.4 2.2 0.0 6.6 2.9 0.0 0.0 0.4 1.8 0.0 5.0 1.1 0.0 0.0 0.0 0.4 0.0 1.5 1.6 0.0 3.9 0.6 1.0 0.0 7.1 0.9 0.0 2.2 0.3 0.6 0.0 4.0 0.7 0.0 1.6 0.2 0.4 0.0 3.1 1.5 0.0 3.7 0.5 1.0 0.0 6.8 0.9 0.0 2.2 0.3 0.7 0.0 4.1 0.7 0.0 1.5 0.2 0.3 0.0 2.7 1.5 0.0 3.8 0.5 1.1 0.0 6.8 0.8 0.0 2.3 0.3 0.7 0.0 4.1 0.6 0.0 1.5 0.2 0.4 0.0 2.7 0.2 0.0 0.0 0.1 (0.1) 0.3 0.5 0.0 0.0 0.0 0.0 0.4 2.4 2.8 0.2 0.0 0.0 0.0 (0.5) (2.0) (2.3) 0.0 0.0 0.0 0.0 (0.1) (0.8) (0.9) 0.0 0.0 0.0 0.1 2.1 1.8 4.1 0.0 0.0 0.0 (0.1) (2.2) (2.7) (5.0) 0.1 0.0 0.0 0.0 0.0 (0.5) (0.4) 0.0 0.0 0.0 0.0 0.3 3.5 3.8 0.0 0.0 0.0 0.0 (0.2) (4.0) (4.2) 8.2 7.4 3.9 2.1 8.8 0.3 30.6 5.5 6.7 2.2 1.5 6.9 2.4 25.1 2.7 0.7 1.6 0.6 1.9 (2.0) 5.5 7.9 7.0 3.7 1.9 8.3 (0.8) 28.0 5.6 6.1 2.2 1.4 8.4 1.8 25.6 2.3 0.9 1.5 0.5 (0.1) (2.7) 2.5 7.6 6.5 3.8 1.9 8.4 (0.5) 27.7 5.3 5.7 2.3 1.4 6.3 3.5 24.5 2.2 0.9 1.5 0.6 2.1 (4.0) 3.3 Regional performance CHF billion Operating income Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center 0.5 7.4 0.0 0.7 2.8 0.0 0.5 7.0 0.0 0.7 2.6 0.0 0.4 6.5 0.0 0.7 2.5 0.0 Total operating income 11.3 10.7 10.2 Operating expenses Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center Total operating expenses Operating profit / (loss) before tax Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center Operating profit / (loss) before tax 0.4 6.7 0.0 0.5 2.1 0.0 9.6 0.1 0.7 0.0 0.2 0.7 0.0 1.7 0.4 6.1 0.0 0.5 2.0 0.0 9.0 0.1 0.9 0.0 0.2 0.6 0.0 1.8 0.4 5.7 0.0 0.5 2.0 0.0 8.5 0.1 0.9 0.0 0.2 0.6 0.0 1.7 96 Total operating income 11.3 10.7 10.2 Regional performance CHF billion Operating income Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center Operating expenses Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center Total operating expenses Operating profit / (loss) before tax Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center Operating profit / (loss) before tax 0.5 7.4 0.0 0.7 2.8 0.0 0.4 6.7 0.0 0.5 2.1 0.0 9.6 0.1 0.7 0.0 0.2 0.7 0.0 1.7 0.5 7.0 0.0 0.7 2.6 0.0 0.4 6.1 0.0 0.5 2.0 0.0 9.0 0.1 0.9 0.0 0.2 0.6 0.0 1.8 0.4 6.5 0.0 0.7 2.5 0.0 0.4 5.7 0.0 0.5 2.0 0.0 8.5 0.1 0.9 0.0 0.2 0.6 0.0 1.7 2.1 0.0 0.0 0.3 2.6 0.0 5.0 1.5 0.0 0.0 0.2 1.7 0.0 3.4 0.6 0.0 0.0 0.1 0.9 0.0 1.6 1.9 0.0 0.0 0.3 2.4 0.0 4.6 1.3 0.0 0.0 0.2 1.7 0.0 3.2 0.6 0.0 0.0 0.1 0.7 0.0 1.4 1.7 0.0 0.0 0.3 2.6 0.0 4.5 1.2 0.0 0.0 0.2 1.6 0.0 3.0 0.5 0.0 0.0 0.1 1.0 0.0 1.5 3.8 0.0 0.0 0.4 2.5 0.0 6.8 2.8 0.0 0.0 0.4 2.1 0.0 5.2 1.1 0.0 0.0 0.1 0.4 0.0 1.5 4.0 0.0 0.0 0.4 2.4 0.0 6.8 3.0 0.0 0.0 0.4 1.9 0.0 5.2 1.0 0.0 0.0 0.0 0.5 0.0 1.5 3.9 0.0 0.0 0.4 2.2 0.0 6.6 2.9 0.0 0.0 0.4 1.8 0.0 5.0 1.1 0.0 0.0 0.0 0.4 0.0 1.5 Americas Europe, Middle East and Africa Switzerland Asia Pacific For the year ended Global For the year ended Total 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 31.12.15 31.12.14 31.12.13 1.6 0.0 3.9 0.6 1.0 0.0 7.1 0.9 0.0 2.2 0.3 0.6 0.0 4.0 0.7 0.0 1.6 0.2 0.4 0.0 3.1 1.5 0.0 3.7 0.5 1.0 0.0 6.8 0.9 0.0 2.2 0.3 0.7 0.0 4.1 0.7 0.0 1.5 0.2 0.3 0.0 2.7 1.5 0.0 3.8 0.5 1.1 0.0 6.8 0.8 0.0 2.3 0.3 0.7 0.0 4.1 0.6 0.0 1.5 0.2 0.4 0.0 2.7 0.2 0.0 0.0 0.1 (0.1) 0.3 0.5 0.0 0.0 0.0 0.0 0.4 2.4 2.8 0.2 0.0 0.0 0.0 (0.5) (2.0) (2.3) 0.0 0.0 0.0 0.0 (0.1) (0.8) (0.9) 0.0 0.0 0.0 0.1 2.1 1.8 4.1 0.0 0.0 0.0 (0.1) (2.2) (2.7) (5.0) 0.1 0.0 0.0 0.0 0.0 (0.5) (0.4) 0.0 0.0 0.0 0.0 0.3 3.5 3.8 0.0 0.0 0.0 0.0 (0.2) (4.0) (4.2) 8.2 7.4 3.9 2.1 8.8 0.3 30.6 5.5 6.7 2.2 1.5 6.9 2.4 25.1 2.7 0.7 1.6 0.6 1.9 (2.0) 5.5 7.9 7.0 3.7 1.9 8.3 (0.8) 28.0 5.6 6.1 2.2 1.4 8.4 1.8 25.6 2.3 0.9 1.5 0.5 (0.1) (2.7) 2.5 7.6 6.5 3.8 1.9 8.4 (0.5) 27.7 5.3 5.7 2.3 1.4 6.3 3.5 24.5 2.2 0.9 1.5 0.6 2.1 (4.0) 3.3 97 Financial and operating performance Financial and operating performance Group performance 2014 compared with 2013 Results We recorded an operating profit before tax of CHF 2,461 million compared with CHF 3,272 million, largely reflecting an increase of CHF 1,106 million in operating expenses, driven by a CHF 893 million higher net charge for provisions for litigation, regulatory and similar matters. Operating income increased by CHF 295 mil- lion, due to CHF 789 million higher net fee and commission income, largely offset by a CHF 518 million decline in net interest and trading income. We recorded a net tax benefit of CHF 1,180 million compared with a net tax benefit of CHF 110 million in the prior year, reflecting net upward revaluations of deferred tax assets in both years, which more than offset tax expenses in respect of taxable profits. In addition to reporting our results in accordance with IFRS, we report adjusted results that exclude items that management believes are not representative of the underlying performance of our businesses. Such adjusted results are non-GAAP financial measures as defined by SEC regulations. For 2014, the items we excluded were an own credit gain of CHF 292 million, gains on sales of real estate of CHF 44 million, a gain of CHF 43 million from the partial sale of our investment in Markit, a loss of CHF 48 million related to the impairment of a financial investment avail- able-for-sale, net restructuring expenses of CHF 677 million and a gain of CHF 41 million related to changes to retiree benefit plans in the US. For 2013, the items we excluded were an own credit loss of CHF 283 million, gains on sales of real estate of CHF 288 million, net losses related to the buyback of debt in tender offers of CHF 167 million, gains on sales of subsidiaries and businesses of CHF 89 million, a net foreign currency translation loss from the disposal of subsidiaries of CHF 24 million and net restructuring expenses of CHF 772 million. On this adjusted basis, profit before tax was CHF 2,766 million compared with CHF 4,141 million in the prior year. Adjusted operating income decreased by CHF 133 million to CHF 27,696 million, mainly reflecting a decline of CHF 1,066 mil- lion in adjusted net interest and trading income, largely offset by an increase in net fee and commission income of CHF 789 million and CHF 172 million higher adjusted other income. Adjusted operating expenses increased by CHF 1,242 million to CHF 24,931 million, mainly due to a CHF 893 million higher net charge for provisions for litigation, regulatory and similar matters, as well as CHF 381 million higher other non-personnel expenses. Adjusted personnel expenses were largely unchanged. Operating income Total operating income was CHF 28,027 million compared with CHF 27,732 million. On an adjusted basis, total operating income 98 decreased by CHF 133 million to CHF 27,696 million. Adjusted net interest and trading income declined CHF 1,066 million, largely in Corporate Center – Non-core and Legacy Portfolio and in the Investment Bank, partly offset by an increase in Corporate Center – Services. Net fee and commission income increased by CHF 789 million, mainly in our wealth management businesses, as well as in the Investment Bank. Adjusted other income increased by CHF 172 million. Net interest and trading income Net interest and trading income decreased by CHF 518 million to CHF 10,397 million. 2014 included an own credit gain on finan- cial liabilities designated at fair value of CHF 292 million, primarily as life-to-date own credit losses partially reversed due to time decay. The prior year included an own credit loss on financial lia- bilities of CHF 283 million. Excluding the effect of own credit in both years and a gain related to the buyback of debt in tender offers of CHF 27 million in 2013, net interest and trading income decreased by CHF 1,066 million to CHF 10,105 million, mainly in Non-core and Legacy Portfolio and in the Investment Bank. In the Investment Bank, net interest and trading income decreased by CHF 335 million to CHF 4,517 million. Within Inves- tor Client Services, Foreign Exchange, Rates and Credit net inter- est and trading income decreased by CHF 214 million, with lower revenues across most products as client activity and volatility levels decreased compared with 2013, reflecting the ongoing macro- economic uncertainty. Corporate Client Solutions net interest and trading income declined by CHF 116 million, largely due to lower revenues within Equities Capital Markets, which included reve- nues from a large private transaction in 2013. This was partly off- set by higher revenues in Debt Capital Markets, due to higher revenues from leveraged finance, as well as reduced negative risk management revenues, mainly due to the positive effect of wid- ening credit spreads during 2014. In Corporate Center – Non-core and Legacy Portfolio, net interest and trading income decreased by CHF 983 million. Non- core net interest and trading income decreased by CHF 304 mil- lion, partly as 2014 included a net loss of CHF 175 million from the implementation of funding valuation adjustments (FVA) on derivatives. Further, 2014 included losses in Rates of CHF 197 mil- lion, mainly from novation and unwind activities compared with gains of CHF 23 million in the prior year. Legacy Portfolio net interest and trading income decreased by CHF 680 million. In 2013, we exercised our option to acquire the SNB StabFund’s equity and recorded total option revaluation gains of CHF 431 million prior to the exercise. 2014 included a loss of CHF 108 mil- lion resulting from the termination of certain credit default swap (CDS) contracts and a net loss from the implementation of FVA on derivatives of CHF 77 million. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on a change in segment reporting related to fair value gains and losses on certain internal funding transactions Credit loss expense / recovery We recorded net credit loss expenses of CHF 78 million compared with CHF 50 million in the prior year. Net credit loss expenses in Personal & Corporate Banking were CHF 95 million compared with CHF 18 million in the prior year. 2014 included net specific credit loss allowances of CHF 105 mil- lion compared with CHF 113 million in the prior year, which was primarily related to corporate clients in both periods. In addition, 2014 included a release of CHF 10 million in collective loan loss allowances compared with a release of CHF 95 million in 2013, which partly reflected the overall improved outlook for relevant industries. Wealth Management Americas recorded a net credit loss recovery of CHF 15 million in 2014, mainly reflecting the full release of a loan loss allowance for a single client, as well as releases of loan loss allowances on securities-backed lending facil- ities collateralized by Puerto Rico municipal securities and related funds. In the prior year, Wealth Management Americas recorded a net credit loss expense of CHF 27 million, largely due to loan loss allowances on securities-backed lending facilities collateralized by Puerto Rico municipal securities and related funds. Net fee and commission income Net fee and commission income increased by CHF 789 million to CHF 17,076 million. Portfolio management and advisory fees increased by CHF 718 million to CHF 7,343 million, primarily in Wealth Management Americas, largely due to an increase in managed account fees, reflecting higher invested asset levels. Portfolio management and advisory fees also increased in Wealth Management, primarily due to an increase in invested assets, the positive effect of pricing measures and continued growth in discretionary and advisory mandates. These increases were partly offset by lower income due to the effect of ongoing outflows of assets from cross-border clients and due to the migration into retrocession-free products for investment mandates during 2013. Merger and acquisitions and corporate finance fees increased by CHF 118 million to CHF 731 million, predominantly in the Investment Bank, mainly reflecting an increased volume of merg- ers and acquisition transactions in 2014. Underwriting fees rose by CHF 96 million, mainly reflecting higher equity underwriting fees, largely in the Investment Bank, due to higher revenues from public offerings as the fee pool increased. Other income Other income was CHF 632 million compared with CHF 580 mil- lion in the prior year. Adjusted other income increased by CHF 172 million. Income related to associates and subsidiaries increased by CHF 90 million when excluding a net gain of CHF 31 million on the sale of our remaining proprietary trading business in 2013. 2014 included a gain of CHF 65 million in Corporate Client Solutions within the Investment Bank on an investment in an associate which was reclassified to a financial investment available-for-sale following its initial public offering. 2014 also included a gain of CHF 58 million related to the release of a provision for litigation, regulatory and similar matters, which was recorded as other income in Corporate Center – Services, compared with a gain of CHF 21 million in 2013. Excluding a gain of CHF 43 million from the partial sale of our investment in Markit and a loss of CHF 48 million related to the impairment of a financial investment available-for-sale, both in 2014, adjusted income from financial investments classified as available-for-sale decreased by CHF 20 million. Adjusted other income other than income related to associates and subsidiaries and from financial investments classified as avail- able-for-sale increased by CHF 102 million when excluding gains on sales of real estate of CHF 44 million in 2014 and CHF 288 million in 2013, net losses related to the buyback of debt in ten- der offers of CHF 194 million in 2013 and a gain on the sale of Asset Management’s Canadian domestic business of CHF 34 mil- lion in 2013. Operating expenses Total operating expenses increased by CHF 1,106 million to CHF 25,567 million. Restructuring expenses were CHF 677 million compared with CHF 772 million in the prior year. Personnel- related restructuring expenses increased by CHF 171 million to CHF 327 million, while non-personnel-related restructuring expenses decreased by CHF 266 million to CHF 350 million. On an adjusted basis, excluding restructuring expenses in both years as well as gains related to changes to retiree benefit plans in the US of CHF 41 million in 2014, total operating expenses increased by CHF 1,242 million to CHF 24,931 million. This increase was mainly due to a CHF 893 million higher net charge for provisions for litigation, regulatory and similar matters as well as CHF 381 million higher other non-personnel expenses, due to higher costs for outsourcing of IT and other services as well as higher professional fees. Adjusted personnel expenses were largely unchanged. 99 Financial and operating performance Financial and operating performance Group performance Personnel expenses Personnel expenses increased by CHF 98 million to CHF 15,280 million and included CHF 327 million personnel-related restruc- turing expenses compared with CHF 156 million in the prior year. On an adjusted basis, excluding restructuring expenses and the aforementioned gains related to changes to retiree benefit plans in the US in 2014, personnel expenses decreased slightly by CHF 32 million to CHF 14,994 million. Expenses for salaries, excluding restructuring expenses, decreased by CHF 79 million to CHF 6,124 million, mainly reflect- ing an increase in the capitalization of personnel expenses related to internally generated computer software, partly offset by expenses for role-based allowances. Excluding restructuring expenses, total variable compensation expenses decreased by CHF 88 million to CHF 3,113 million. Expenses for current year awards decreased by CHF 31 million and expenses for prior-year awards by CHF 57 million. Financial advisor compensation in Wealth Management Amer- icas increased by CHF 245 million to CHF 3,385 million, corre- sponding with higher compensable revenues. Other personnel expenses, excluding restructuring expenses and the aforementioned gains related to changes to retiree ben- efit plans in the US, decreased by CHF 109 million to CHF 2,372 million, largely due to a decline of CHF 98 million in costs for pen- sion and other post-employment benefits plans. year. Further, 2014 included net expenses of CHF 120 million in Non-core and Legacy Portfolio related to certain disputed receiv- ables compared with an impairment charge of CHF 87 million in the prior year. Tax We recognized a net income tax benefit of CHF 1,180 million for 2014, which included a Swiss tax expense of CHF 1,395 million and a net foreign tax benefit of CHF 2,574 million. The Swiss tax expense included a current tax expense of CHF 46 million related to taxable profits, against which no losses were available to offset, mainly earned by Swiss subsidiaries. In addi- tion, it included a deferred tax expense of CHF 1,348 million, mainly reflecting the net decrease of deferred tax assets previously recognized in relation to tax losses carried forward. The net foreign tax benefit included current tax expense of CHF 409 million in respect of taxable profits earned by non-Swiss subsidiaries and branches, against which no losses were available to offset. This was more than offset by a net deferred tax benefit of CHF 2,983 million, primarily reflecting an increase in US deferred tax assets. Total comprehensive income attributable to UBS Group AG shareholders General and administrative expenses General and administrative expenses increased by CHF 1,007 mil- lion to CHF 9,387 million. On an adjusted basis, excluding net restructuring expenses of CHF 319 million in 2014 compared with CHF 548 million in the prior year, general and administrative expenses increased by CHF 1,236 million, mainly due to a CHF 893 million higher net charge for provisions for litigation, regula- tory and similar matters, as well as higher costs for outsourcing of IT and other services and higher professional fees. Outsourcing of IT and other services, excluding restructuring expenses, increased by CHF 240 million. General and administrative expenses also included a net expense of CHF 123 million for the annual UK bank levy for 2014, mainly in the Investment Bank and in Non-core and Legacy Port- folio, compared with a net expense of CHF 124 million in the prior Total comprehensive income attributable to UBS Group AG share- holders was CHF 4,920 million, reflecting net profit attributable to UBS Group AG shareholders of CHF 3,466 million and OCI attrib- utable to UBS Group AG shareholders of CHF 1,453 million. In 2014, OCI included foreign currency translation gains of CHF 1,795 million, primarily related to the significant strengthen- ing of the US dollar against the Swiss franc. OCI related to cash flow hedges was positive CHF 689 million, mainly reflecting decreases in long-term interest rates across all major currencies. OCI associated with financial investments classified as available- for-sale was positive CHF 141 million, mainly due to an increase in net unrealized gains following decreases in long-term interest rates, partly offset by previously unrealized net gains that were reclassified from OCI to the income statement upon sale of investments. 100 These OCI gains were partly offset by negative OCI on defined benefit plans of CHF 1,172 million. A pre-tax OCI loss of CHF 995 million was recorded for the Swiss pension plan, which was mainly due to an increase in the defined benefit obligation, resulting from a significant decline in the applicable discount rate, which is linked to the returns on Swiss AA-rated corporate bonds and decreased from 2.3% as of 31 December 2013 to 1.2% as of 31 December 2014. This was partly offset by an increase in the fair value of the underlying plan assets and the reversal of the asset ceiling effect. Net pre-tax OCI losses on non-Swiss pension plans amounted to CHF 414 million and primarily related to the UK and US pension plans. Net profit attributable to preferred noteholders and non-controlling interests Net profit attributable to preferred noteholders was CHF 142 mil- lion in 2014 compared with CHF 204 million in the prior year. Dividends of CHF 81 million were paid to preferred noteholders, for which no accrual was required in a prior period. In addition, 2014 included an accrual of CHF 30 million for future dividend payments. Furthermore, the purchase of UBS AG shares by UBS Group AG pursuant to the exchange offer caused a trigger event which resulted in accruals for future distributions to preferred noteholders of CHF 31 million. Subsequent to the exchange offer, the preferred notes issued by UBS AG were reclassified to equity attributable to non-controlling interests from a UBS Group AG perspective. Net profit attributable to non-controlling interests was CHF 32 million in 2014, which largely reflected net profit attributable to non-controlling interests in UBS AG and was related to the non- tendered or not subsequently exchanged UBS AG shares. 101 Financial and operating performance Financial and operating performance Balance sheet Balance sheet As of 31 December 2015, our balance sheet assets stood at CHF 943 billion, a decrease of CHF 120 billion or 11% from 31 December 2014, mainly due to reductions in positive replacement values (PRV) in both Corporate Center – Non-core and Legacy Portfolio and the Investment Bank. Funded assets, which represent total assets excluding PRV and collateral delivered against over-the-counter derivatives, decreased by CHF 19 billion to CHF 756 billion, primarily due to currency effects resulting from the strengthening of the Swiss franc against the euro and British pound. Excluding these currency effects, funded assets were broadly unchanged. 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 which may be sold or repledged by counterparties Positive replacement values Cash collateral receivables on derivative instruments Financial assets designated at fair value Loans Financial investments available-for-sale Investments in associates Property, equipment and software 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 Debt issued Provisions Other liabilities Total liabilities 102 31.12.15 31.12.14 31.12.14 % change from 91,306 11,948 25,584 67,893 124,035 51,943 167,435 23,763 6,146 311,954 62,543 954 7,695 6,568 12,835 22,160 942,819 11,836 8,029 9,653 29,137 162,430 38,282 62,995 390,185 93,147 4,164 75,652 104,073 13,334 24,063 68,414 138,156 56,018 256,978 30,979 4,951 315,757 57,159 927 6,854 6,785 11,060 22,988 1,062,478 10,492 9,180 11,818 27,958 254,101 42,372 75,297 410,207 91,207 4,366 71,112 885,511 1,008,110 (12) (10) 6 (1) (10) (7) (35) (23) 24 (1) 9 3 12 (3) 16 (4) (11) 13 (13) (18) 4 (36) (10) (16) (5) 2 (5) 6 (12) Balance sheet (continued) CHF million Equity Share capital Share premium Treasury shares Retained earnings Other comprehensive income recognized directly in equity, net of tax Equity attributable to UBS Group AG shareholders Equity attributable to non-controlling interests Total equity Total liabilities and equity 31.12.15 31.12.14 31.12.14 % change from 385 31,164 (1,693) 29,504 (4,047) 55,313 1,995 57,308 372 32,590 (1,393) 22,134 (3,093) 50,608 3,760 54,368 942,819 1,062,478 3 (4) 22 33 31 9 (47) 5 (11) Assets development by business division and Corporate Center unit Investment Bank Investment Bank total assets decreased by CHF 39 billion to CHF 253 billion, primarily due to a CHF 26 billion reduction in PRV, mainly within our Foreign Exchange, Rates and Credit business and largely resulting from net maturities of foreign exchange derivative contracts. Funded assets decreased by CHF 11 billion to CHF 160 billion, mainly due to lower trading portfolio assets in our Foreign Exchange, Rates and Credit business, driven by a reduction in client activity in the fourth quarter. Corporate Center – Non-core and Legacy Portfolio Non-core and Legacy Portfolio total assets decreased by CHF 75 billion to CHF 94 billion, mainly reflecting CHF 62 billion lower PRV. Within our rates portfolio, PRV decreased by CHF 57 billion, driven by fair value decreases following interest rate movements, as well as by our ongoing reduction activity including negotiated bilateral settlements, third-party novations, including transfers to central clearing houses, and agreements to net down trades with other dealer counterparties. Collateral delivered against OTC derivatives decreased by CHF 9 billion. Funded assets decreased by CHF 4 billion to CHF 7 billion, mainly due to the sale of the last remaining structured bond position in the non-linear rates port- folio and the last collateralized loan obligation bond positions within the securitizations portfolio, as well as a partial loan repay- ment in credit. Corporate Center – Group ALM Corporate Center – Group ALM total assets were broadly unchanged at CHF 238 billion, as a reduction in cash and balances with central banks was mostly offset by increases in financial investments classified as available-for-sale and reverse repurchase agreements, mainly due to a rebalancing of our high-quality liquid assets. Total assets and funded assets CHF billion Total assets Less: positive replacement values Less: collateral delivered against OTC derivatives1 Funded assets Investment Bank CC – Group ALM 253.5 (83.4) (10.2) 159.9 237.5 (0.1) (0.1) 237.3 31.12.15 CC – Non- core and Legacy Portfolio 94.4 (78.5) (8.9) 7.0 Other 357.4 (5.4) 0.0 352.0 UBS 942.8 (167.4) (19.2) 756.2 Investment Bank CC – Group ALM 292.3 (109.2) (12.5) 170.7 237.9 (0.1) (0.4) 237.4 31.12.14 CC – Non- core and Legacy Portfolio 169.8 (140.7) (17.9) 11.3 Other 362.4 (7.0) 0.00 355.4 UBS 1,062.5 (257.0) (30.7) 774.8 1 Mainly consists of cash collateral receivables on derivative instruments and reverse repurchase agreements. 103 Financial and operating performance Financial and operating performance Balance sheet 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Other business divisions Wealth Management and Personal & Corporate Banking total assets decreased CHF 8 billion and CHF 3 billion to CHF 120 billion and CHF 141 billion, respectively, mainly reflecting lower lending balances. Wealth Management Americas total assets increased by CHF 5 billion to CHF 61 billion primarily due to increased lending activi- ties. Corporate Center – Services total assets increased by CHF 3 billion to CHF 23 billion, primarily due to increases in recognized deferred tax assets and in property, equipment and software. Asset Management total assets were broadly unchanged at Collateral trading Collateral trading assets, which consist of reverse repurchase agreements and cash collateral on securities borrowed, were broadly unchanged at CHF 93 billion as an increase in reverse repurchase agreements in Corporate Center – Group ALM, mainly due to the aforementioned rebalancing of our high-quality liquid assets, was mostly offset by a client-driven reduction in reverse repurchase agreements in the Investment Bank. Collateral trading liabilities, which consist of repurchase agree- ments and cash collateral on securities lent, reduced by CHF 3 bil- lion to CHF 18 billion. CHF 13 billion. Assets and liabilities development by product category Cash and balances with central banks Cash and balances with central banks decreased by CHF 13 billion to CHF 91 billion as of 31 December 2015, primarily due to the aforementioned rebalancing of our high-quality liquid assets in Corporate Center – Group ALM. Lending Loans decreased by CHF 4 billion to CHF 312 billion, predominantly in Wealth Management, partly offset by an increase in Wealth Management Americas. Interbank lending and financial assets des- ignated at fair value were broadly unchanged at CHF 12 billion and CHF 6 billion, respectively. Trading portfolio Trading portfolio assets decreased CHF 14 billion to CHF 124 bil- lion, primarily within the Investment Bank, in both our Equities and Rates and Credit businesses, mainly reflecting client-driven reductions and currency effects. Trading portfolio assets within Non-core and Legacy Portfolio continued to decline, primarily due to the aforementioned sales and unwinds. Trading portfolio liabilities were broadly unchanged at CHF 29 billion. 104 1300 1040 780 520 260 0 Long-term debt issued Long-term debt outstanding, which consists of financial liabilities designated at fair value and long-term debt issued, decreased by CHF 4 billion to CHF 135 billion primarily resulting from the repur- chase of certain senior and subordinated debt and covered bonds with an aggregate principal amount equivalent to CHF 6.1 billion through a tender offer, combined with decreases in financial lia- bilities designated at fair value, reflecting client-driven reductions in the Investment Bank and maturities in Non-core and Legacy Portfolio. These decreases were partly offset by issuances of addi- tional tier 1 capital perpetual notes and senior unsecured debt. ➔ Refer to the “Treasury management” section of this report for more information Other Other assets decreased by CHF 6 billion, primarily due to a CHF 7 billion reduction in cash collateral receivables on derivative instru- ments following the reduction in replacement values, partly offset by a CHF 2 billion increase in recognized deferred tax assets. Other liabilities were broadly unchanged, as a reduction in cash collateral payables on derivative instruments was offset by an increase in prime brokerage payables. Replacement values Positive and negative replacement values were lower on both sides of the balance sheet, decreasing by CHF 90 billion and CHF 92 billion to CHF 167 billion and CHF 162 billion, respectively, resulting from aforementioned reductions in the Investment Bank and Non-core and Legacy Portfolio. Financial investments classified as available-for-sale Financial investments available-for-sale increased by CHF 5 billion to CHF 63 billion, mainly reflecting the aforementioned rebalanc- ing of our high-quality liquid assets. Short-term borrowings Short-term borrowings, which include short-term debt issued and interbank borrowing, decreased by CHF 5 billion to CHF 33 bil- lion, mainly due to a CHF 6 billion reduction in short-term debt issued, primarily reflecting net maturities of both certificates of deposit and commercial paper, partly offset by a CHF 1 billion increase in interbank lending. ➔ Refer to the “Treasury management” section of this report for more information Due to customers Customer deposits decreased by CHF 20 billion to CHF 390 bil- lion, primarily reflecting our balance sheet and capital optimiza- tion program in Wealth Management, lower demand deposits in Personal & Corporate Banking and currency effects, partly offset by net inflows in Wealth Management Americas. ➔ Refer to the “Treasury management” section of this report for more information 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(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) 105 1300 1040 780 520 260 0 Financial and operating performance Financial and operating performance Balance sheet Equity development Equity attributable to UBS Group AG shareholders increased by CHF 4,705 million to CHF 55,313 million as of 31 December 2015 from CHF 50,608 million a year earlier. Total comprehensive income attributable to UBS Group AG shareholders was CHF 5,698 million, reflecting net profit of CHF 6,203 million, partly offset by negative other comprehensive income (OCI) of CHF 506 million. The negative OCI included foreign currency translation losses of CHF 231 million combined with negative OCI related to cash flow hedges and financial investments available-for-sale of CHF 509 million and CHF 63 million, respectively, partly offset by net gains on defined benefit plans of CHF 298 million. Share premium decreased primarily due to the distribution of CHF 2,760 million out of the capital contribution reserve of UBS Group AG, partly offset by employee share-based compensation of CHF 302 million, mainly reflecting the amortization of deferred equity compensation awards. Net treasury share activity decreased equity attributable to UBS Group AG shareholders by CHF 263 million, mainly reflecting the net acquisition of treasury shares in relation to employee share- based compensation awards. In 2015, UBS Group AG increased its ownership interest in UBS AG to 100% following the completion of the SESTA procedure. This resulted in an increase of CHF 1,724 million in equity attribut- able to UBS Group AG shareholders. ➔ Refer to the “The legal structure of UBS Group” section of this report for more information on the establishment of UBS Group AG ➔ Refer to the “Statement of changes in equity” in the “Consolidated financial statements” section of this report for more information ➔ Refer to “Total comprehensive income attributable to UBS Group AG shareholders” in the “Group performance“ section of this report for more information Intra-period balances Balance sheet positions disclosed in this section represent year- end positions. Intra-period balance sheet positions fluctuate in the ordinary course of business and may differ from quarter-end and year-end positions. Equity attributable to UBS Group AG shareholders: development during 2015 CHF million 6,203 298 302 (231) (63) (509) (2,760) (263) 3 1,724 55,313 50,608 57,000 52,000 45,000 38,000 0 31.12.14 Net profit Foreign currency translation (OCI) Financial investments available- for-sale (OCI) Cash flow hedges (OCI) Defined benefit plans (OCI) Employee share and share options plans (within share premium) Distribution of capital contri- bution reserve (within share premium) Treasury shares¹ Other 31.12.15 Increase in UBS Group AG’s ownership interest in UBS AG 1 Excludes a decrease of CHF 37 million related to the increase in UBS Group AG’s ownership interest in UBS AG. 57000 52250 47500 42750 38000 106 Off-balance sheet Off-balance sheet arrangements In the normal course of business, we enter into transactions that may not be recognized in whole or in part on our balance sheet as a result of applying International Financial Reporting Standards (IFRS). These transactions include derivative instruments, guaran- tees and similar arrangements, as well as some purchased and retained interests in non-consolidated structured entities (SEs), which are transacted for a number of reasons, including market- making and hedging activities, to meet specific needs of our cli- ents or to offer investment opportunities to clients through enti- ties that are not controlled by us. When we, through these arrangements, incur an obligation or become entitled to an asset, we recognize these 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. ➔ Refer to “Note 1a Significant accounting policies items 3 and 5” and “Note 30 Interests in subsidiaries and other entities” in the “Consolidated financial statements” section of this report for more information The following paragraphs provide more information on several distinct off-balance sheet arrangements. Additional off-balance sheet information is primarily provided in Notes 14, 22, 25, 30 and 33 in the “Consolidated financial statements” section of this report, as well as in the “UBS Group AG consolidated supplemen- tal disclosures required under Basel III Pillar 3 regulations” 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 credit, market and liquidity risk information related to our exposures, which includes exposures to off-balance sheet vehicles. Support provided to non-consolidated investment funds In 2015, the Group did not provide material support, financial or otherwise, to unconsolidated investment funds when the Group was not contractually obligated to do so, nor does the Group have an intention to do so. Guarantees and similar arrangements In the normal course of business, we issue various forms of guar- antees, commitments to extend credit, standby and other letters of credit to support our clients, commitments to enter into for- ward starting transactions, note issuance facilities and revolving underwriting 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. As of 31 December 2015, the net exposure (gross values less sub-participations) from guarantees and similar instruments was CHF 13.3 billion, compared with CHF 14.9 billion as of 31 Decem- ber 2014. Fee income from issuing guarantees was not significant to total revenues in 2015. Guarantees represent irrevocable assurances that, subject to the satisfaction of certain conditions, require that we make pay- ments in the event that our clients fail to fulfill their obligations to third parties. We also enter into commitments to extend credit in the form of credit lines that are available to secure the liquidity needs of our 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. In 2015, we rec- ognized a net credit loss expense of CHF 2 million related to loan commitments and guarantees compared with a net credit loss recovery of CHF 49 million in 2014. Provisions recognized for guarantees and loan commitments were CHF 35 million as of 31 December 2015 and CHF 23 million as of 31 December 2014. ➔ Refer to “Note 12 Allowances and provisions for credit losses” in the “Consolidated financial statements” section of this report for more information on provisions for loan commitments and guarantees 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 only enter into sub-participation agreements with banks to which we ascribe a credit rating equal to or better than that of the obligor. Furthermore, we provide representations, warranties and indemnifications to third parties in the normal course of business. 107 Financial and operating performance Financial and operating performance Off-balance sheet Guarantees, commitments and forward starting transactions 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 Loan commitments Forward starting transactions1 Reverse repurchase agreements Securities borrowing agreements Repurchase agreements 1 Cash to be paid in the future by either UBS or the counterparty. 31.12.15 31.12.14 Gross Sub-participations Net Gross Sub-participations Net 6,708 3,035 6,276 16,019 56,067 6,577 6 6,323 (315) (699) (1,707) (2,721) (1,559) 6,393 2,336 4,569 13,298 54,508 7,126 3,285 7,283 17,694 50,688 10,304 125 5,368 (346) (706) (1,740) (2,792) (1,256) 6,780 2,579 5,543 14,902 49,431 Clearing house and exchange memberships We are a member of numerous securities and derivative exchanges and clearing houses. In connection with some of those member- ships, we may be required to pay a share of the financial obliga- tions of another member who defaults or we may be otherwise exposed to additional financial obligations. While the member- ship rules vary, obligations generally would arise only if the exchange or clearing house had exhausted its resources. We con- sider 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. The Swiss Financial Market Supervisory Authority (FINMA) estimates our share in the deposit insurance system to be CHF 0.9 billion. The deposit insurance is a guarantee and exposes us to additional risk. This is not reflected in the table above due to its unique character- istics. As of 31 December 2015, we considered the probability of a material loss from our obligation to be remote. Contractual obligations The table below summarizes payments due by period under con- tractual obligations as of 31 December 2015. All contracts included in this table, with the exception of pur- chase obligations (i.e., those in which we are committed to pur- chasing 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 33 Operating leases and finance leases” in the “Consolidated financial statements” section of this report. Contractual obligations CHF million Long-term debt obligations Finance lease obligations Operating lease obligations Purchase obligations Total 108 Within 1 year 55,186 15 746 1,556 57,503 1–3 years 35,320 18 1,250 1,269 Payment due by period 3–5 years Over 5 years 17,316 5 894 397 44,293 0 1,869 589 46,751 37,858 18,612 Total 152,116 38 4,759 3,811 160,725 Long-term debt obligations as of 31 December 2015 were CHF 152 billion and consisted of financial liabilities designated at fair value (CHF 68 billion) and long-term debt issued (CHF 84 billion) and represent both estimated future interest and principal pay- ments on an undiscounted basis. Refer to “Note 27b Maturity analysis of financial liabilities” in the “Consolidated financial statements” section of this report for more information. Approxi- mately half of total long-term debt obligations had a variable rate of interest. Amounts due on interest rate swaps used to hedge interest rate risk inherent in fixed-rate debt issued, and desig- nated in fair value hedge accounting relationships, are not included in the table on the previous page. The notional amount of these interest rate swaps was CHF 48 billion as of 31 December 2015. Financial liabilities designated at fair value mostly consist of structured notes and are generally economically hedged, but it would not be practicable to estimate the amount and / or timing of the payments on interest swaps used to hedge these instru- ments as interest rate risk inherent in respective liabilities is gener- ally risk managed on a portfolio level. 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). Our liabilities recognized on the balance sheet as Due to banks, Cash collateral on securities lent, Repurchase agreements, Trading portfolio liabilities, Negative replacement values, Cash collateral payables on derivative instruments, Due to customers, Provisions and Other liabilities are excluded from the table on the previous page. Refer to the respective Notes in the “Consolidated financial statements” section of this report for more information on these liabilities. 109 Financial and operating performance Financial and operating performance Cash flows Cash flows As a global financial institution, our cash flows are complex and often may bear little relation to our net earnings and net assets. Consequently, we believe that a traditional cash flow analysis is less meaningful in evaluating our liquidity position than the liquidity, funding and capital management frameworks and measures described within the “Risk, treasury and capital management” section of this report. Statement of cash flows (condensed) CHF million Net cash flow from / (used in) operating activities Net cash flow from / (used in) investing activities Net cash flow from / (used in) financing activities Effects of exchange rate differences on cash and cash equivalents Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the end of the year For the year ended 31.12.15 31.12.14 3,109 (8,441) (6,595) (1,742) (13,670) 103,044 7,205 2,596 2,108 8,522 20,430 116,715 2015 As of 31 December 2015, cash and cash equivalents totaled CHF 103.0 billion, a decrease of CHF 13.7 billion from 31 December 2014, driven by net cash outflows from investing and financing activities, as described below, as well as foreign currency transla- tion effects of CHF 1.7 billion. Operating activities In 2015, net cash inflows from operating activities were CHF 3.1 billion, mainly reflecting net operating cash inflows (before changes in operating assets and liabilities and income taxes paid, net of refunds) of CHF 7.0 billion, partly offset by net cash out- flows of CHF 3.4 billion resulting from an overall decrease in operating liabilities which more than offset a net decrease in operating assets. Net operating cash inflows of CHF 7.0 billion (before changes in operating assets and liabilities and income taxes paid, net of refunds) were comprised of the net profit of CHF 6.4 billion and non-cash adjusting items which were largely offsetting. Net cash outflows related to changes in operating assets and liabilities of CHF 3.4 billion were attributable to a reduction in customer deposits of CHF 18.4 billion and outflows of CHF 5.6 billion resulting from securities financing transactions, partly offset by net cash inflows of CHF 7.8 billion from an increase in Other liabilities, namely prime brokerage payables, a reduction of CHF 8.1 billion in trading portfolio assets and a decrease of CHF 3.3 billion of cash collateral receivables on deriv- ative instruments, net of payables. In 2014, net cash inflows from operating activities of CHF 7.2 billion were primarily driven by significant reductions in cash col- 110 lateral on securities borrowed and reverse repurchase agreements, which resulted in a net cash inflow of CHF 32.3 billion, and a net cash inflow from customer deposits of CHF 8.8 billion, partly off- set by a net cash outflow of CHF 20.4 billion from an increase in loans, as well as other net cash outflows. Investing activities Investing activities resulted in a net cash outflow of CHF 8.4 billion in 2015, primarily related to a net cash outflow of CHF 7.6 billion related to net increases in financial investments classified as avail- able-for-sale. Compared with 2014, the net cash flow from investing activi- ties declined to a net outflow of CHF 8.4 billion from a net inflow of CHF 2.6 billion, mainly related to the aforementioned increase in financial investments classified as available-for-sale. Financing activities Financing activities resulted in a net cash outflow of CHF 6.6 bil- lion in 2015, mainly due to net redemptions of short-term debt of CHF 6.4 billion and the distribution of capital contribution reserves to shareholders of CHF 2.8 billion, partly offset by net issuances of long-term debt, including financial liabilities designated at fair value, of CHF 3.6 billion. Compared with 2014, the net cash flow from financing activi- ties decreased to a net outflow of CHF 6.6 billion from a net inflow of CHF 2.1 billion, mainly due to a CHF 3.5 billion increase in net redemptions of short-term debt, CHF 3.2 billion lower net issuances of long-term debt and a CHF 1.8 billion higher distribu- tion of capital contribution reserves to shareholders. Wealth Management Profit before tax was CHF 2,689 million in 2015 compared with CHF 2,326 million in 2014. Adjusted profit before tax increased by CHF 317 million to CHF 2,828 million, mainly due to a CHF 290 million lower net charge for provisions for litigation, regulatory and similar matters and CHF 70 million higher operating income, mainly due to higher net interest income. Adjusted net new money inflows were CHF 22.8 billion compared with CHF 34.4 billion, resulting in a net new money growth rate of 2.3% compared with 3.9%. Wealth Management1 CHF million, except where indicated Net interest income Recurring net fee income Transaction-based income Other income Income Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses2 Business division operating profit / (loss) before tax Key performance indicators3 Pre-tax profit growth (%) Cost / income ratio (%) Net new money growth (%)4 Gross margin on invested assets (bps) Net margin on invested assets (bps) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 2,326 3,820 1,778 231 8,155 0 8,155 2,532 637 2,289 2,209 5 3 5,465 2,689 15.6 67.0 2.3 86 28 2,165 3,783 1,928 25 7,902 (1) 7,901 2,467 918 2,180 2,122 4 5 5,574 2,326 3.5 70.5 3.9 85 25 2,061 3,567 1,887 57 7,573 (10) 7,563 2,433 708 2,165 2,074 3 7 5,316 2,247 (6.6) 70.2 4.4 88 26 7 1 (8) 824 3 (100) 3 3 (31) 5 4 25 (40) (2) 16 1 12 111 Financial and operating performance Financial and operating performance Wealth Management Wealth Management (continued)1 CHF million, except where indicated Additional information Recurring income5 Recurring income as a percentage of income (%) Average attributed equity (CHF billion)6 Return on attributed equity (%) Risk-weighted assets (fully applied, CHF billion)7 Risk-weighted assets (phase-in, CHF billion)7 Return on risk-weighted assets, gross (%)8 Leverage ratio denominator (fully applied, CHF billion)9 Goodwill and intangible assets (CHF billion) Net new money (CHF billion) Net new money adjusted (CHF billion)10 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) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 6,146 75.4 3.5 77.4 25.3 25.3 31.5 119.0 1.3 12.9 22.8 947 1,122 105.2 172.3 10,239 4,019 5,949 75.3 3.4 67.9 25.4 25.8 33.8 138.3 1.4 34.4 34.4 987 1,160 112.7 191.3 10,337 4,250 5,628 74.3 3.5 64.2 20.9 21.4 38.7 122.1 1.3 35.9 35.9 886 1,023 96.8 189.4 9,988 4,164 3 3 0 (2) (14) (7) (4) (3) (7) (10) (1) (5) 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 3 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 4 Based on adjusted net new money. 5 Recur- ring income consists of net interest income and recurring net fee income. 6 Refer to the “Capital management” section of this report for more information on the equity attribution framework. 7 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). 8 Based on phase-in risk-weighted assets. 9 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital manage- ment” section of this report for more information. 10 Adjusted net new money excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital optimization program. Regional breakdown of key figures1, 2 As of or for the year ended 31.12.15 Net new money (CHF billion) Net new money adjusted (CHF billion)4 Net new money growth (%)5 Invested assets (CHF billion) Gross margin on invested assets (bps) Client advisors (full-time equivalents) Europe Asia Pacific Switzerland Emerging markets of which: ultra high net worth 1.9 3.5 1.0 343 80 13.7 15.7 5.8 272 78 1,367 1,092 3.6 5.5 3.1 174 92 771 (5.7) (1.4) (0.8) 156 96 705 16.5 23.4 4.7 505 56 7287 of which: Global Family Office3 (0.6) 1.0 1.4 76 426 1 Refer to the "Measurement of performance” section of this report for the definitions of our key performance indicators. 2 Based on the Wealth Management business area structure, and excluding minor functions with 84 client advisors, CHF 2 billion of invested assets, and CHF 0.5 billion of adjusted net new money outflows in 2015. 3 Joint venture between Wealth Management and the Investment Bank. Global Family Office is reported as a sub-segment of ultra high net worth and is included in the ultra high net worth figures. 4 Adjusted net new money excludes the negative effect on net new money from our balance sheet and capital optimization program. 5 Based on adjusted net new money. 6 Gross margin includes income booked in the Investment Bank. Gross margin only based on income booked in Wealth Management is 25 basis points. 7 Represents client advisors who exclusively serve ultra high net worth clients. In addition to these, other client advisors may also serve certain ultra high net worth clients, but not exclusively. 112 2015 compared with 2014 Results Operating income Total operating income increased by CHF 254 million to CHF 8,155 million. Excluding net gains of CHF 169 million on the sale of subsidiaries and businesses and a CHF 15 million gain related to our investment in the SIX Group, adjusted operating income increased by CHF 70 million to CHF 7,971 million, mainly due to higher net interest income and recurring net fee income, partly offset by lower transaction-based income. Net interest income increased by CHF 161 million to CHF 2,326 million, mainly due to higher lending revenues and an increase in allocated revenues from Corporate Center – Group Asset and Liability Management (Group ALM). Recurring net fee income increased by CHF 37 million to CHF 3,820 million, reflecting the positive effects of a continued increase in discretionary and advisory mandate penetration and pricing measures, partly offset by lower income due to the ongo- ing effects of cross-border outflows. Transaction-based income decreased by CHF 150 million to CHF 1,778 million across all regions, mainly due to reduced client activity, most notably in Europe and emerging markets. The over- all decrease was mainly related to investment funds, fixed income cash products and structured products, partly offset by higher for- eign exchange trading and mandate revenues. Transaction-based revenues allocated from Group ALM also decreased. These decreases were partly offset by a fee of CHF 45 million received from Personal & Corporate Banking for the shift of certain clients from Wealth Management to Personal & Corporate Banking as a result of a detailed client segmentation review. Other income increased by CHF 206 million to CHF 231 million, mainly related to the aforementioned net gains. Operating expenses Total operating expenses decreased by CHF 109 million to CHF 5,465 million. Excluding restructuring expenses of CHF 323 mil- lion compared with CHF 185 million, adjusted operating expenses decreased by CHF 247 million to CHF 5,142 million, mainly as the net charge for provisions for litigation, regulatory and similar mat- ters declined to CHF 104 million from CHF 394 million. Personnel expenses increased by CHF 65 million to CHF 2,532 million. Excluding restructuring expenses of CHF 20 million com- pared with CHF 18 million, adjusted personnel expenses increased by CHF 63 million, mainly due to higher pension-related costs and increased expenses for variable compensation, as well as salary increases, partly offset by favorable foreign currency translation effects and the effect of personnel reductions. General and administrative expenses decreased by CHF 281 million to CHF 637 million. Excluding restructuring expenses of CHF 38 million compared with CHF 48 million, adjusted general and administrative expenses decreased by CHF 271 million, mainly due to the aforementioned decreased net charge for provisions for litigation, regulatory and similar matters. Net expenses for services from other business divisions and Corporate Center increased by CHF 109 million to CHF 2,289 mil- lion. Excluding restructuring expenses of CHF 265 million com- pared with CHF 119 million, adjusted net expenses for services decreased by CHF 37 million to CHF 2,024 million, mainly due to lower expenses from Group Operations and Group Corporate Services, partly offset by higher expenses from Group ALM. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Cost / income ratio The cost / income ratio was 67.0% compared with 70.5%. On an adjusted basis, the cost / income ratio was 64.5% compared with 68.2% and was within our target range of 55% to 65%. Net new money Adjusted net new money, which excludes net outflows of CHF 9.9 billion from our balance sheet and capital optimization program, was CHF 22.8 billion and was driven by inflows in Asia Pacific, Switzerland and Europe, partly offset by outflows in emerging markets. This resulted in a net new money growth rate of 2.3% compared with 3.9%, below our target range of 3% to 5%. Adjusted net new money was negatively affected by client de- leveraging and cross-border outflows. On a global basis, adjusted net new money from ultra high net worth clients was CHF 23.4 billion compared with CHF 29.8 billion. On a reported basis, total net new money was CHF 12.9 billion compared with CHF 34.4 billion. For 2016, we expect to be able to absorb the currently anticipated headwinds, including cross-border-related outflows, within our net new money target growth range of 3% to 5%. Invested assets Invested assets decreased by CHF 40 billion to CHF 947 billion as of 31 December 2015 due to negative foreign currency transla- tion effects of CHF 25 billion, a CHF 16 billion reduction due to the aforementioned sale of subsidiaries and businesses that did not affect net new money, and negative market performance of CHF 9 billion, partly offset by net new money inflows of CHF 13 billion, which include the net outflows of CHF 10 billion from our balance sheet and capital optimization program. Mandate pene- tration increased to 26.4% of invested assets as of 31 December 2015 compared with 24.4% as of 31 December 2014. 113 Financial and operating performance Financial and operating performance Wealth Management Margins on invested assets The net margin on invested assets increased 3 basis points to 28 basis points. On an adjusted basis, the net margin on invested assets increased 3 basis points to 30 basis points. The gross mar- gin on invested assets increased 1 basis point to 86 basis points and decreased 1 basis point to 84 basis points on an adjusted basis. Personnel Wealth Management employed 10,239 personnel as of 31 Decem- ber 2015 compared with 10,337 as of 31 December 2014. The number of client advisors decreased by 231 to 4,019 with reductions in Europe, Asia Pacific and emerging markets, mainly due to a reduction in the number of lower-producing advisors and the reclassification of certain staff from client advisors to non-client facing staff. The number of non-client facing staff increased by 133 to 6,220, mainly due to hiring for our strategic and regulatory priorities, the shift of a team of real estate financing experts from Personal & Corporate Banking to Wealth Management, and the aforemen- tioned reclassification, partly offset by the effect of the sale of sub- sidiaries and businesses in 2015. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units Balance sheet and capital optimization program In the first half of 2015, Wealth Manage- ment launched a global program intended to optimize its leverage ratio denominator (LRD) and liquidity coverage ratio (LCR), adapting its business to the new regulatory and interest rate environments. The program was launched to mitigate the impact of reduced and, in some cases, negative interest rates on our performance, particularly given the associated cost of maintaining the high-quality liquid assets (HQLA) required to cover regulatory outflow assumptions embedded in the LCR. We have changed pricing for a num- ber of clients with a high proportion of short-term deposits relative to invested assets, particularly focusing on non-operational deposits. We offered these clients options to redeploy deposit balances into cash alternatives and invest- ment products, or consider repricing their existing products. The vast majority of these clients have chosen to retain their relationship with us, but we recorded a reduction in customer deposits of CHF 14 billion from affected clients. In the second and third quarter, we recorded total net new money outflows of CHF 9.9 billion, which we have treated as an adjusting item. In the aggregate, the program has reduced the LRD and HQLA requirements for our business. The clients in scope for this program generated minimal economic profit for the bank, and subsequent to our efforts, economic profit on retained relationships has materially improved. 114 2014 compared with 2013 Results Operating income Total operating income was CHF 7,901 million compared with CHF 7,563 million, primarily due to higher recurring net fee income and net interest income. Net interest income increased by CHF 104 million to CHF 2,165 million, mainly due to higher net interest income from Lombard loans and mortgages as well as a positive effect from methodol- ogy changes in the allocation of liquidity and funding costs and benefits for loans and deposits between Wealth Management and Corporate Center – Group Asset and Liability Management (Group ALM). These effects were partly offset by lower net inter- est income from client deposits and lower allocated revenues from Group ALM. Recurring net fee income increased by CHF 216 million to CHF 3,783 million, primarily due to an increase in invested assets, the positive effect of pricing measures and continued growth in dis- cretionary and advisory mandates. These increases were partly offset by lower income due to ongoing outflows of assets from cross-border clients and the migration into retrocession-free prod- ucts for investment mandates during 2013. Transaction-based income increased by CHF 41 million to CHF 1,928 million. The overall increase was mainly related to struc- tured products, mandates, wealth planning services and hedge funds, partly offset by lower income from foreign exchange trad- ing and investment funds. In addition, 2014 included first-time fees paid to Personal & Corporate Banking for net client shifts and referrals. Other income decreased by CHF 32 million to CHF 25 million, mainly due to a decline in revenues for other services and as the prior year included a gain of CHF 25 million related to the divest- ment of our participation in Euroclear Plc. Operating expenses Total operating expenses were CHF 5,574 million, an increase of CHF 258 million from the prior year. Excluding restructuring expenses of CHF 185 million compared with CHF 178 million, adjusted operating expenses increased by CHF 251 million to CHF 5,389 million, mainly due to an increased net charge for provi- sions for litigation, regulatory and similar matters to CHF 394 mil- lion from CHF 89 million, while the prior year included a charge in relation to the Swiss-UK tax agreement of CHF 107 million. Personnel expenses increased by CHF 34 million to CHF 2,467 million. Excluding restructuring expenses of CHF 18 million com- pared with CHF 40 million, adjusted personnel expenses increased by CHF 56 million, mainly due to salary increases, higher variable compensation expenses and staff hiring, partly offset by reduced pension-related expenses. General and administrative expenses increased by CHF 210 million to CHF 918 million. Excluding restructuring expenses of CHF 48 million compared with CHF 35 million, adjusted general and administrative expenses increased by CHF 197 million, mainly due to the aforementioned increased net charge for provisions for litigation, regulatory and similar matters, while the prior year included a charge in relation to the aforementioned Swiss-UK tax agreement. Net expenses for services from other business divisions and Corporate Center increased by CHF 15 million to CHF 2,180 mil- lion. Excluding restructuring expenses of CHF 119 million com- pared with CHF 104 million, adjusted net expenses were unchanged at CHF 2,061 million. Higher charges from Group Technology and Group Operations were offset by reduced charges from Personal & Corporate Banking, lower pension-related expenses and lower charges from Group Corporate Services. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Cost / income ratio The cost / income ratio was 70.5% compared with 70.2%. The adjusted cost / income ratio was 68.2% compared with 67.8%. Net new money The net new money growth rate decreased to 3.9% from 4.4% and was within our target range of 3% to 5%. Net new money was CHF 34.4 billion with the strongest net inflows in Asia Pacific, followed by Switzerland and emerging markets. Net outflows in Europe mainly reflected cross-border asset outflows, partly offset by net inflows from domestic markets. On a global basis, net new money from ultra high net worth clients was CHF 29.8 billion compared with CHF 33.6 billion. 115 Financial and operating performance Financial and operating performance Wealth Management Invested assets Invested assets were CHF 987 billion as of 31 December 2014, representing an increase of CHF 101 billion from 31 December 2013, due to positive market performance of CHF 38 billion, net new money inflows of CHF 34 billion and positive foreign cur- rency translation effects of CHF 32 billion. Margins on invested assets The net margin on invested assets decreased 1 basis point to 25 basis points. On an adjusted basis, the net margin on invested assets decreased 1 basis point to 27 basis points. The gross mar- gin on invested assets decreased 3 basis points to 85 basis points on both a reported and an adjusted basis. Personnel Wealth Management employed 10,337 personnel as of 31 Decem- ber 2014 compared with 9,988 as of 31 December 2013, reflect- ing an increase in both non-client facing staff and client advisors. The number of client advisors increased by 86 to 4,250, mainly reflecting an increase in Asia Pacific, our key strategic growth area, partly offset by reductions in Europe. The number of non- client facing staff increased by 263 to 6,087, mainly due to staff hires for our strategic and regulatory priorities. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 116 Wealth Management Americas Profit before tax was USD 754 million compared with USD 981 million, mainly reflecting a higher net charge for provi- sions for litigation, regulatory and similar matters, and other provisions. Adjusted profit before tax decreased to USD 874 million from USD 1,030 million. Net new money inflows were USD 21.4 billion compared with USD 10.0 billion in the prior year, resulting in a net new money growth rate of 2.1% compared with 1.0%. Wealth Management Americas – in US dollars1 USD million, except where indicated Net interest income Recurring net fee income Transaction-based income Other income Income Credit loss (expense) / recovery Total operating income Personnel expenses Financial advisor compensation2 Compensation commitments with recruited financial advisors3 Salaries and other personnel costs General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses4 Business division operating profit / (loss) before tax Key performance indicators5 Pre-tax profit growth (%) Cost / income ratio (%) Net new money growth (%) Gross margin on invested assets (bps) Net margin on invested assets (bps) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 1,215 4,795 1,614 32 7,657 (4) 7,653 4,746 2,921 761 1,064 845 1,252 1,236 3 53 6,899 754 (23.1) 90.1 2.1 74 7 1,067 4,666 1,825 33 7,590 16 7,606 4,741 2,944 733 1,063 597 1,234 1,217 0 52 6,625 981 5.8 87.3 1.0 76 10 1,014 4,109 1,946 36 7,105 (30) 7,075 4,439 2,708 690 1,041 415 1,239 1,220 0 53 6,147 927 45.3 86.5 2.3 79 10 14 3 (12) (3) 1 1 0 (1) 4 0 42 1 2 2 4 (23) (3) (30) 117 Financial and operating performance Financial and operating performance Wealth Management Americas Wealth Management Americas – in US dollars (continued)1 USD million, except where indicated Additional information Recurring income6 Recurring income as a percentage of income (%) Average attributed equity (USD billion)7 Return on attributed equity (%) Risk-weighted assets (fully applied, USD billion)8 Risk-weighted assets (phase-in, USD billion)8 Return on risk-weighted assets, gross (%)9 Leverage ratio denominator (fully applied, USD billion)10 Goodwill and intangible assets (USD billion) Net new money (USD billion) Net new money including interest and dividend income (USD billion)11 Invested assets (USD billion) Client assets (USD billion) Loans, gross (USD billion) Due to customers (USD billion) Recruitment loans to financial advisors Other loans to financial advisors Personnel (full-time equivalents) Financial advisors (full-time equivalents) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 6,010 5,733 5,122 78.5 2.6 29.3 21.9 21.9 33.9 62.8 3.7 21.4 47.8 1,033 1,084 48.7 83.1 3,179 418 13,611 7,140 75.5 2.9 33.8 21.8 22.0 29.2 63.7 3.8 10.0 37.2 1,032 1,087 44.6 73.5 2,925 374 13,322 6,997 72.1 3.0 30.9 27.3 27.5 30.0 64.1 3.8 19.0 44.2 970 1,025 39.1 67.3 3,063 401 13,545 7,137 5 (10) 0 0 (1) (3) 0 0 9 13 9 12 2 2 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 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. 3 Compensation commitments with recruited financial advisors repre- sents charges related to compensation commitments granted to financial advisors at the time of recruitment which are subject to vesting requirements. 4 Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 5 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 6 Recurring income consists of net interest income and recurring net fee income. 7 Refer to the “Capital management” section of this report for more information on the equity attribution frame- work. 8 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). 9 Based on phase-in risk-weighted assets. 10 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 11 Presented in line with historical reporting practice in the US market. 118 Wealth Management Americas – in Swiss francs1 CHF million, except where indicated Net interest income Recurring net fee income Transaction-based income Other income Income Credit loss (expense) / recovery Total operating income Personnel expenses Financial advisor compensation2 Compensation commitments with recruited financial advisors3 Salaries and other personnel costs General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses4 Business division operating profit / (loss) before tax Key performance indicators5 Pre-tax profit growth (%) Cost / income ratio (%) Net new money growth (%) Gross margin on invested assets (bps) Net margin on invested assets (bps) Additional information Recurring income6 Recurring income as a percentage of income (%) Average attributed equity (CHF billion)7 Return on attributed equity (%) Risk-weighted assets (fully applied, CHF billion)8 Risk-weighted assets (phase-in, CHF billion)8 Return on risk-weighted assets, gross (%)9 Leverage ratio denominator (fully applied, CHF billion)10 Goodwill and intangible assets (CHF billion) Net new money (CHF billion) Net new money including interest and dividend income (CHF billion)11 Invested assets (CHF billion) Client assets (CHF billion) Loans, gross (CHF billion) Due to customers (CHF billion) Recruitment loans to financial advisors Other loans to financial advisors Personnel (full-time equivalents) Financial advisors (full-time equivalents) As of or for the year ended 31.12.15 31.12.14 31.12.13 % change from 31.12.14 1,174 4,623 1,555 31 7,384 (4) 7,381 4,579 2,817 735 1,027 822 1,209 1,193 3 51 6,663 718 (20.2) 90.2 2.1 74 7 983 4,294 1,678 30 6,984 15 6,998 4,363 2,710 675 979 550 1,137 1,121 0 48 6,099 900 4.9 87.3 1.1 76 10 936 3,796 1,800 33 6,565 (27) 6,538 4,102 2,503 638 962 383 1,145 1,127 0 49 5,680 858 43.7 86.5 2.3 79 10 5,798 5,276 4,732 78.5 2.5 29.0 21.9 21.9 33.7 62.9 3.7 21.3 46.9 1,035 1,085 48.8 83.2 3,184 418 13,611 7,140 75.5 2.7 33.6 21.7 21.9 29.4 63.3 3.7 9.6 35.0 1,027 1,081 44.4 73.1 2,909 372 13,322 6,997 72.1 2.8 30.9 24.3 24.5 30.0 57.2 3.4 17.6 40.8 865 914 34.8 60.0 2,733 358 13,545 7,137 19 8 (7) 3 6 5 5 4 9 5 49 6 6 6 9 (20) (3) (30) 10 (7) 1 0 (1) 0 1 0 10 14 9 12 2 2 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 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. 3 Compensation commitments with recruited financial advisors represents charges related to compensation commitments granted to financial advisors at the time of recruitment which are subject to vesting requirements. 4 Refer to “Note 32 Changes in organization and disposals” in the “ Consolidated financial statements” section of this report for information on restructuring expenses. 5 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 6 Recurring income consists of net interest income and recurring net fee income. 7 Refer to the “Capital management” section of this report for more information on the equity attribution framework. 8 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). 9 Based on phase-in risk-weighted assets. 10 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 11 Presented in line with historical reporting practice in the US market. 119 Financial and operating performance Financial and operating performance Wealth Management Americas 2015 compared with 2014 Results Operating income Total operating income increased by USD 47 million to USD 7,653 million due to higher net interest income and continued growth in managed account fees, partly offset by lower transaction-based income and a net credit loss expense in 2015 compared with a net credit loss recovery in 2014. Net interest income increased by USD 148 million to USD 1,215 million, reflecting continued growth in loan and deposit balances. The average mortgage portfolio balance increased 16% and the average securities-backed lending portfolio balance increased 12%. Recurring net fee income increased by USD 129 million to USD 4,795 million, mainly due to increased managed account fees, reflecting higher invested asset levels. Transaction-based income decreased by USD 211 million to USD 1,614 million, primarily due to lower client activity. We incurred a net credit loss expense of USD 4 million com- pared with a net recovery of USD 16 million. The 2014 net recov- ery included the full release of a loan loss allowance for a single client as well as releases of loan loss allowances on securities- backed lending facilities collateralized by Puerto Rico municipal securities and related funds. ➔ Refer to the “Risk management and control” section of this report for more information on our exposure to Puerto Rico municipal securities and related funds Operating expenses Operating expenses increased by USD 274 million to USD 6,899 million. Excluding restructuring expenses of USD 141 million com- pared with USD 59 million, and a gain of USD 21 million com- pared with USD 10 million related to a change to retiree benefit plans in the US, adjusted operating expenses increased by USD 203 million to USD 6,779 million. This was primarily due to a USD 178 million higher net charge for provisions for litigation, regula- tory and similar matters, and an increase in other provisions and legal fees, partly offset by lower expenses from Corporate Center – Services. Excluding a gain of USD 20 million related to a change to retiree benefit plans in the US compared with USD 8 million, adjusted personnel expenses increased by USD 18 million to USD 4,766 million, mainly due to higher compensation commitments for recruited financial advisors, partly offset by lower financial advisor compensation, reflecting lower compensable revenues. General and administrative expenses increased by USD 248 million to USD 845 million, mainly as the net charge for provisions for litigation, regulatory and similar matters increased to USD 356 million from USD 178 million. Furthermore, we recorded higher expenses for other provisions and increased legal fees. 120 Excluding restructuring expenses of USD 141 million, compared with USD 59 million, and a gain of USD 2 million for both years related to a change to retiree benefit plans, adjusted net expenses for services from other business divisions and Corporate Center decreased by USD 64 million to USD 1,113 million, reflecting lower expenses from Corporate Center – Services. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Cost / income ratio The cost / income ratio was 90.1% compared with 87.3%. On an adjusted basis, the cost / income ratio was 88.5% compared with 86.6% and was above our target range of 75% to 85%. Net new money Net new money was USD 21.4 billion, reflecting strong inflows from advisors who have been with the firm for more than one year, as well as net inflows from newly recruited advisors. Net new money growth was 2.1% compared with 1.0%, within our target range of 2% to 4%. Including interest and dividend income, net new money inflows were USD 47.8 billion compared with USD 37.2 billion in the prior year. Invested assets Invested assets were USD 1,033 billion as of 31 December 2015, an increase of USD 1 billion from 31 December 2014, reflecting strong net new money inflows of USD 21 billion, mostly offset by negative market performance of USD 20 billion. Managed account assets increased by USD 5 billion to USD 351 billion, and comprised 34% of invested assets, unchanged from 31 December 2014. Margins on invested assets The net margin on invested assets was 7 basis points compared with 10 basis points and the adjusted net margin on invested assets decreased 2 basis points to 8 basis points. The gross margin on invested assets decreased 2 basis points to 74 basis points. Personnel As of 31 December 2015, Wealth Management Americas employed 13,611 personnel, an increase of 289 from 31 Decem- ber 2014. Financial advisor headcount increased by 143 to 7,140 reflecting the hiring of experienced financial advisors and contin- ued low financial advisor attrition. Non-financial advisor head- count increased by 146 to 6,471, due to an increase in financial advisor support staff. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 2014 compared with 2013 Results Operating income Total operating income increased by USD 531 million to USD 7,606 million due to continued growth in managed account fees within recurring net fee income and higher net interest income, partly offset by lower transaction-based income. Excluding restructuring expenses of USD 59 million compared with USD 64 million, and a gain of USD 2 million in 2014 related to a change to retiree benefit plans, net expenses for services from other business divisions and Corporate Center increased by USD 2 million. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Net interest income increased by USD 53 million to USD 1,067 million due to continued growth in loan and deposit balances. The average mortgage portfolio balance increased 37% and the aver- age securities-backed lending portfolio balance increased 12%. Cost / income ratio The cost / income ratio was 87.3% compared with 86.5%. On an adjusted basis, the cost / income ratio was 86.6% compared with 85.6%. Recurring net fee income increased by USD 557 million to USD 4,666 million, mainly due to a 21% increase in managed account fees, reflecting higher invested asset levels. Transaction-based income decreased by USD 121 million to USD 1,825 million, mainly due to lower client activity. We recorded a net credit loss recovery of USD 16 million com- pared with a net expense of USD 30 million in the prior year. The 2014 net recovery included the full release of a loan loss allow- ance for a single client as well as releases of loan loss allowances on securities-backed lending facilities collateralized by Puerto Rico municipal securities and related funds. The expenses in the prior year were largely due to loan loss allowances on securities-backed lending facilities collateralized by Puerto Rico municipal securities and related funds. ➔ Refer to the “Risk management and control” section of this report for more information on our exposure to Puerto Rico municipal securities and related funds Operating expenses Operating expenses increased by USD 478 million to USD 6,625 million from USD 6,147 million. Excluding restructuring expenses of USD 59 million compared with USD 64 million and a gain of USD 10 million related to a change to retiree benefit plans in the US, adjusted operating expenses increased by USD 493 million to USD 6,576 million. This was primarily due to higher financial advi- sor compensation, as well as a higher net charge for provisions for litigation, regulatory and similar matters. Personnel expenses increased by USD 302 million to USD 4,741 million. Excluding a gain of USD 8 million related to changes to retiree benefit plans in the US in 2014, adjusted personnel expenses increased by USD 309 million to USD 4,748 million, mainly due to USD 236 million higher financial advisor compensa- tion resulting from higher compensable revenues. General and administrative expenses increased by USD 182 million to USD 597 million, mainly due to an increased net charge for provisions for litigation, regulatory and similar matters of USD 178 million compared with USD 36 million. Net new money In 2014, net new money totaled USD 10.0 billion and was pre- dominantly comprised of net inflows from financial advisors employed with UBS for more than one year. Net new money was USD 19.0 billion in the prior year. The net new money growth rate was 1.0% in 2014. Including interest and dividend income, net new money inflows were USD 37.2 billion compared with USD 44.2 billion in the prior year. Invested assets Invested assets were USD 1,032 billion as of 31 December 2014, an increase of USD 62 billion from 31 December 2013, reflecting positive market performance of USD 52 billion and net new money inflows of USD 10 billion. During 2014, managed account assets increased by USD 38 billion to USD 346 billion as of 31 December 2014, and comprised 34% of invested assets com- pared with 32% as of 31 December 2013. Margins on invested assets The net margin on invested assets was 10 basis points, unchanged from 2013 and the adjusted net margin on invested assets decreased 1 basis point to 10 basis points. The gross margin on invested assets decreased 3 basis points to 76 basis points. Personnel As of 31 December 2014, Wealth Management Americas employed 13,322 personnel, a decrease of 223 from 31 Decem- ber 2013. Financial advisor headcount decreased by 140 to 6,997 mainly due to attrition of lower-producing advisors. Non-financial advisor headcount decreased by 83 to 6,325. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 121 Financial and operating performance Financial and operating performance Personal & Corporate Banking Personal & Corporate Banking Profit before tax was CHF 1,646 million in 2015 compared with CHF 1,506 million in 2014. Adjusted profit before tax increased by CHF 111 million to CHF 1,681 million, reflecting a lower net credit loss expense and reduced operating expenses, as well as higher income. The net new business volume growth rate for our personal banking business increased to 2.4% from 2.3%. Personal & Corporate Banking1 CHF million, except where indicated Net interest income Recurring net fee income Transaction-based income Other income Income Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses2 Business division operating profit / (loss) before tax Key performance indicators3 Pre-tax profit growth (%) Cost / income ratio (%) Net interest margin (bps) Net new business volume growth for personal banking (%) Additional information Average attributed equity (CHF billion)4 Return on attributed equity (%) Risk-weighted assets (fully applied, CHF billion)5 Risk-weighted assets (phase-in, CHF billion)5 Return on risk-weighted assets, gross (%)6 Leverage ratio denominator (fully applied, CHF billion)7 Goodwill and intangible assets (CHF billion) Business volume for personal banking (CHF billion) Net new business volume for personal banking (CHF billion) Client assets (CHF billion) Due to customers (CHF billion) Loans, gross (CHF billion) Secured loan portfolio as a percentage of total loan portfolio, gross (%) Impaired loan portfolio as a percentage of total loan portfolio, gross (%) Personnel (full-time equivalents) As of or for the year ended 31.12.15 2,270 544 959 140 3,913 (37) 3,877 873 264 1,077 1,180 17 0 2,231 1,646 9.3 57.0 167 2.4 3.9 41.9 34.6 34.6 11.2 153.8 0.0 148 3.4 444 132.4 135.6 93.9 0.6 5,058 31.12.14 2,184 556 1,022 75 3,836 (95) 3,741 850 293 1,074 1,196 17 0 2,235 1,506 3.3 58.3 159 2.3 4.1 36.7 33.1 34.4 11.3 165.9 0.0 143 3.2 434 137.3 137.4 93.1 0.8 5,206 31.12.13 2,144 511 1,034 86 3,774 (18) 3,756 843 297 1,140 1,301 19 0 2,298 1,458 (20.2) 60.9 156 1.9 4.1 35.6 29.7 31.4 11.7 164.7 0.0 141 2.6 404 133.2 136.5 93.1 0.7 5,209 % change from 31.12.14 4 (2) (6) 87 2 (61) 4 3 (10) 0 (1) 0 0 9 5 (5) 5 1 (7) 3 2 (4) (1) (3) 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 3 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 4 Refer to the “Capital management” section of this report for more information on the equity attribution framework. 5 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). 6 Based on phase-in risk-weighted assets. 7 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 122 2015 compared with 2014 Results Operating income Total operating income increased by CHF 136 million to CHF 3,877 million and included a gain of CHF 66 million related to our investment in the SIX Group. Excluding this gain, adjusted operat- ing income increased by CHF 70 million to CHF 3,811 million, reflecting higher net interest income and a lower net credit loss expense, partly offset by decreased transaction-based and recur- ring net fee income. Net interest income increased by CHF 86 million to CHF 2,270 million, primarily due to higher income from loans and deposits, reflecting our pricing measures. Recurring net fee income decreased by CHF 12 million to CHF 544 million, mainly reflecting lower fee income allocated from Corporate Center – Group Asset and Liability Management (Group ALM) for the provision of collateral in relation to issued covered bonds, as well as decreased revenues from non-asset- based products. This was partly offset by increased revenues for account keeping, banking packages and custody services. Transaction-based income decreased by CHF 63 million to CHF 959 million, mainly driven by a fee of CHF 45 million paid to Wealth Management for the shift of certain clients from Wealth Manage- ment to Personal & Corporate Banking as a result of a detailed cli- ent segmentation review, as well as lower credit card fees. Other income increased by CHF 65 million to CHF 140 million, mainly due to the aforementioned gain related to our investment in the SIX Group. We recorded a net credit loss expense of CHF 37 million com- pared with CHF 95 million, predominantly due to lower expenses for newly impaired positions. ➔ Refer to the “Risk management and control” section of this report for more information Operating expenses Operating expenses decreased by CHF 4 million to CHF 2,231 mil- lion. Excluding restructuring expenses of CHF 101 million com- pared with CHF 64 million, adjusted operating expenses decreased by CHF 41 million to CHF 2,130 million. Personnel expenses increased by CHF 23 million to CHF 873 million, mainly reflecting increased expenses for variable compen- sation and higher pension-related costs. General and administrative expenses decreased by CHF 29 mil- lion to CHF 264 million, mainly reflecting a net release of CHF 2 million of provisions for litigation, regulatory and similar matters compared with a net charge of CHF 59 million in the prior year. This was partly offset by higher marketing expenses, which included a one-time reversal of an accrual in 2014. Net expenses for services from Corporate Center and other business divisions increased by CHF 3 million to CHF 1,077 mil- lion. Excluding restructuring expenses of CHF 99 million com- pared with CHF 60 million, adjusted net expenses decreased by CHF 36 million to CHF 978 million, reflecting lower expenses from Group Operations and Group Corporate Services, partly offset by higher expenses from Group Technology. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Cost / income ratio The cost / income ratio was 57.0% compared with 58.3%. On an adjusted basis, the cost / income ratio was 55.4% compared with 56.6% and remained within our target range of 50% to 60%. Net interest margin The net interest margin increased 8 basis points to 167 basis points and remained within the target range of 140 to 180 basis points. Net new business volume growth for personal banking The net new business volume growth rate for our personal bank- ing business was 2.4% compared with 2.3% and remained within the target range of 1% to 4%. Net new client assets were positive while net new loans were slightly negative. It is our strategy to grow our business in high-quality loans moderately and selectively. Personnel Personal & Corporate Banking employed 5,058 personnel as of 31 December 2015, a decrease of 148 compared with 5,206 per- sonnel as of 31 December 2014, reflecting the shift of a team of real estate financing experts from Personal & Corporate Banking to Wealth Management, as well as staff reductions, including those related to our ongoing cost reduction programs. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 123 Financial and operating performance Financial and operating performance Personal & Corporate Banking 2014 compared with 2013 Results Operating income Total operating income decreased by CHF 15 million to CHF 3,741 million, reflecting an increased net credit loss expense, as well as lower transaction-based and other income, largely offset by higher recurring net fee income and increased net interest income. Net interest income increased by CHF 40 million to CHF 2,184 million, mainly due to higher revenues allocated from Group ALM and a higher loan margin. This was partly offset by a decline in the deposit margin, despite selective pricing measures, as the persis- tently low interest rate environment continued to have an adverse effect on our replication portfolios. Recurring net fee income increased by CHF 45 million to CHF 556 million, mainly as certain fees related to personal bank accounts were recorded as recurring net fee income in 2014, totaling CHF 58 million in 2014, while these fees were recorded as transaction-based income in 2013. Transaction-based income decreased by CHF 12 million to CHF 1,022 million, mainly reflecting the aforementioned change in classification of certain fees related to personal bank accounts. This was partly offset by first-time fees received from Wealth Management for net client shifts and referrals. Personnel expenses increased by CHF 7 million to CHF 850 mil- lion. Excluding restructuring expenses, adjusted personnel expenses increased by CHF 3 million to CHF 846 million, reflecting higher expenses for variable compensation and a smaller release of accruals for untaken vacation, partly offset by lower pension- related costs. General and administrative expenses decreased by CHF 4 mil- lion to CHF 293 million, as lower marketing expenses, which included a one-time reversal of an accrual in 2014, were partly offset by higher professional fees. Net expenses for services from other business divisions and Corporate Center decreased by CHF 66 million to CHF 1,074 mil- lion. Excluding restructuring expenses of CHF 60 million com- pared with CHF 54 million, adjusted net expenses decreased by CHF 72 million to CHF 1,014 million, reflecting lower expenses from Group Technology and Group Operations. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Cost / income ratio The cost / income ratio was 58.3% compared with 60.9%. On an adjusted basis excluding restructuring expenses, the cost / income ratio was 56.6% compared with 59.5%. Other income decreased by CHF 11 million to CHF 75 million, mainly as 2013 included a CHF 27 million gain related to the divestment of our participation in Euroclear Plc., partly offset by higher income from our participation in the SIX Group in 2014. Net interest margin The net interest margin increased 3 basis points to 159 basis points, reflecting the aforementioned increase in net interest income partly offset by a slightly higher average loan volume. The net credit loss expense was CHF 95 million in 2014 com- pared with CHF 18 million. The 2014 net expense included net specific credit loss allowances of CHF 105 million compared with CHF 113 million in the prior year, which was primarily related to corporate clients in both periods. In addition, 2014 included a release of CHF 10 million in collective loan loss allowances com- pared with a release of CHF 95 million in 2013, which partly reflected the overall improved outlook for relevant industries. Operating expenses Operating expenses decreased by CHF 63 million to CHF 2,235 million. Excluding restructuring expenses of CHF 64 million com- pared with CHF 54 million, adjusted operating expenses decreased by CHF 73 million to CHF 2,171 million. Net new business volume growth for personal banking The net new business growth rate for our personal banking busi- ness was 2.3% compared with 1.9%. Both net new client assets and, to a lesser extent, net new loans were positive. The slight increase in loans reflected our strategy to grow our business in high-quality loans moderately and selectively. Personnel Personal & Corporate Banking employed 5,206 personnel as of 31 December 2014, almost unchanged from 5,209 as of 31 December 2013. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 124 Asset Management Profit before tax was CHF 584 million in 2015 compared with CHF 467 million in 2014. Adjusted profit before tax was CHF 610 million compared with CHF 509 million, primarily reflecting higher management fees. Excluding money market flows, net new money outflows were CHF 0.7 billion compared with net inflows of CHF 22.6 billion. 2015 included CHF 33 billion of outflows driven by client liquidity needs, largely from lower-margin passive products. Asset Management1 CHF million, except where indicated Net management fees2 Performance fees Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses3 Business division operating profit / (loss) before tax Key performance indicators4 Pre-tax profit growth (%) Cost / income ratio (%) Net new money growth excluding money market flows (%) Gross margin on invested assets (bps) Net margin on invested assets (bps) Information by business line Operating income Traditional Investments O’Connor and Hedge Fund Solutions Global Real Estate Infrastructure and Private Equity Fund Services Total operating income Gross margin on invested assets (bps) Traditional Investments O’Connor and Hedge Fund Solutions Global Real Estate Infrastructure and Private Equity Total gross margin As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 1,903 154 2,057 729 232 502 523 2 8 1,474 584 25.1 71.7 (0.1) 32 9 1,143 198 403 57 257 2,057 21 53 84 62 32 1,756 146 1,902 643 305 478 495 2 9 1,435 467 (18.9) 75.4 4.4 31 8 1,118 210 353 42 178 1,902 21 66 84 49 31 1,739 196 1,935 609 218 521 535 4 8 1,359 576 1.2 70.2 (1.0) 33 10 1,144 266 317 38 171 1,935 22 95 76 48 33 8 5 8 13 (24) 5 6 0 (11) 3 25 3 13 2 (6) 14 36 44 8 0 (20) 0 27 3 125 Financial and operating performance Financial and operating performance Asset Management Asset Management (continued)1 CHF million, except where indicated Net new money (CHF billion) Traditional Investments O’Connor and Hedge Fund Solutions Global Real Estate Infrastructure and Private Equity 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 Invested assets (CHF billion) Traditional Investments O’Connor and Hedge Fund Solutions Global Real Estate Infrastructure and Private Equity Total invested assets of which: excluding money market funds of which: money market funds Assets under administration by Fund Services Assets under administration (CHF billion)5 Net new assets under administration (CHF billion)6 Gross margin on assets under administration (bps) Additional information Average attributed equity (CHF billion)7 Return on attributed equity (%) Risk-weighted assets (fully applied, CHF billion)8 Risk-weighted assets (phase-in, CHF billion)8 Return on risk-weighted assets, gross (%)9 Leverage ratio denominator (fully applied, CHF billion)10 Goodwill and intangible assets (CHF billion) Personnel (full-time equivalents) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 (13.0) 4.3 3.4 (0.2) (5.4) (0.7) (7.7) 7.0 (4.7) (3.4) (1.3) 550 39 52 10 650 592 58 407 24.0 5 1.6 36.5 2.6 2.6 62.1 2.7 1.4 10.7 3.3 2.3 (0.5) 15.9 22.6 11.3 11.3 (6.7) 0.0 (6.7) 574 35 46 9 664 600 64 520 43.9 4 1.7 27.5 3.8 3.9 51.2 14.9 1.5 (18.5) (2.5) 1.2 0.0 (19.9) (4.8) 0.7 (5.5) (15.1) (1.5) (13.6) 506 27 42 8 583 518 65 432 3.8 4 1.8 32.0 3.7 3.8 51.1 14.0 1.4 2,277 2,323 2,217 (4) 11 13 11 (2) (1) (9) (22) (45) 25 (6) (32) (33) (82) (7) (2) 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 Net management fees include transaction fees, fund administration revenues (including net interest and trading income from lending activities and foreign exchange hedging as part of the fund services offering), gains or losses from seed money and co-investments, funding costs, gains and losses on the sale of subsidiaries and businesses and other items that are not performance fees. 3 Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 4 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 5 This includes UBS and third-party fund assets, for which the fund services unit pro- vides professional services, including fund set-up, accounting and reporting for traditional investment funds and alternative funds. 6 Inflows of assets under administration from new and existing funds less outflows from existing funds or fund exits. 7 Refer to the “Capital management” section of this report for more information on the equity attribution framework. 8 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). 9 Based on phase-in risk-weighted assets. 10 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 126 2015 compared with 2014 Results Operating income Total operating income was CHF 2,057 million compared with CHF 1,902 million. Excluding a gain of CHF 56 million on the sale of our Alternative Fund Services (AFS) business, adjusted operat- ing income was CHF 2,001 million compared with CHF 1,902 mil- lion. Adjusted net management fees increased by CHF 91 million to CHF 1,847 million, primarily in Global Real Estate and Fund Services. Performance fees increased by CHF 8 million to CHF 154 million, mainly in Traditional Investments and Global Real Estate, partly offset by lower revenues in O’Connor and Hedge Fund Solutions. Approximately 25% of O’Connor and Hedge Fund Solutions performance fee-eligible assets exceeded high-water marks as of 31 December 2015, a decline from 65% as of 31 December 2014, reflecting the challenging market conditions in the second half of 2015. tion, regulatory and similar matters of CHF 55 million in 2014, as well as an expense of CHF 14 million in 2014 for a provision for a settlement related to a fund liquidation. Net expenses for services from other business divisions and Corporate Center were CHF 502 million compared with CHF 478 million. Excluding restructuring expenses of CHF 68 million com- pared with CHF 30 million, as well as a CHF 4 million gain related to retiree benefit plans in the prior year, adjusted net expenses for services from other business divisions and Corporate Center decreased by CHF 18 million to CHF 434 million. Lower expenses from Group Operations were partially offset by higher expenses from Group Technology. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Cost / income ratio The cost / income ratio was 71.7% compared with 75.4%. On an adjusted basis, the cost / income ratio was 69.6% compared with 73.2% and was within our target range of 60% to 70%. Operating expenses Total operating expenses were CHF 1,474 million compared with CHF 1,435 million. Excluding restructuring expenses of CHF 82 million compared with CHF 50 million, as well as a gain of CHF 8 million related to changes to retiree benefit plans in the US in the prior year, adjusted operating expenses were CHF 1,392 million, almost unchanged from 2014. Personnel expenses were CHF 729 million compared with CHF 643 million. Excluding restructuring expenses of CHF 4 million compared with CHF 19 million, as well as a CHF 4 million gain related to retiree benefit plans in the prior year, adjusted personnel expenses increased by CHF 97 million to CHF 725 million. This was mainly driven by higher salary-related costs as a result of increased staffing levels, excluding the effect of the aforementioned sale of AFS, as well as higher expenses for variable compensation. General and administrative expenses were CHF 232 million compared with CHF 305 million. Excluding restructuring expenses of CHF 9 million compared with CHF 1 million, adjusted general and administrative expenses decreased by CHF 81 million to CHF 223 million. This decrease was mainly due to a charge for litiga- Net new money Excluding money market flows, net new money outflows were CHF 0.7 billion compared with net inflows of CHF 22.6 billion, which resulted in a negative net new money growth rate of 0.1% compared with a positive growth rate of 4.4%, below our target range of 3% to 5%. By client segment, net outflows from third parties were CHF 7.7 billion compared with net inflows of CHF 11.3 billion. 2015 included CHF 33 billion of outflows driven by client liquidity needs, largely from lower-margin passive products. Net outflows were mainly from clients serviced from Europe. Net new money inflows from clients of UBS’s wealth management businesses were CHF 7.0 billion compared with CHF 11.3 billion, mainly from clients serviced from Asia Pacific and Switzerland. Money market net outflows were CHF 4.7 billion compared with CHF 6.7 billion. By client segment, net new money outflows from third parties were CHF 3.4 billion compared with zero. Net outflows from Americas, Switzerland and Europe, Middle East and Africa were partly offset by net inflows in Asia Pacific. Net outflows from clients of UBS’s wealth management businesses were CHF 1.3 billion compared with CHF 6.7 billion. 127 Financial and operating performance Financial and operating performance Asset Management Invested assets Invested assets were CHF 650 billion as of 31 December 2015 compared with CHF 664 billion as of 31 December 2014, reflect- ing negative foreign currency translation effects of CHF 11 billion and net new money outflows of CHF 5 billion, partly offset by favorable market performance of CHF 4 billion. As of 31 December 2015, CHF 195 billion, or 30%, of invested assets was managed in passive strategies, and CHF 58 billion, or 9%, was money market assets. The remaining 61% of invested assets was managed in active, non-money market strategies. On a regional basis, 34% of invested assets related to clients serviced from Switzerland, 23% from the Americas, 22% from Europe, Middle East and Africa, and 21% from Asia Pacific. Assets under administration Net new assets under administration were CHF 24.0 billion com- pared with CHF 43.9 billion. Total assets under administration decreased to CHF 407 billion as of 31 December 2015 from CHF 520 billion as of 31 December 2014. This was due to a reduction of CHF 132 billion related to the sale of our AFS business and negative foreign currency translation effects of CHF 5 billion, partly offset by the aforementioned inflows of CHF 24 billion. Margins on invested assets The net margin on invested assets was 9 basis points compared with 8 basis points. The adjusted net margin remained unchanged at 9 basis points. The gross margin was 32 basis points compared with 31 basis points and the adjusted gross margin was unchanged at 31 basis points. Personnel Asset Management employed 2,277 personnel as of 31 December 2015 compared with 2,323 personnel as of 31 December 2014, mainly reflecting the aforementioned sale of our AFS business, partly offset by increases in Traditional Investments and Global Real Estate. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units Investment performance Equity market conditions were increasingly volatile as the year progressed with a notable sell-off in the second half of the year. Overall, our active equity funds performed strongly against bench- marks and peers, especially in Europe, Asia and emerging mar- kets. However, a number of our intrinsic-value strategies faced challenges as valuation spreads widened, especially in the US. Pas- sive strategies and our growing range of alternative index or smart beta products tracked indices closely. For fixed income, 2015 was another challenging year for active managers. However, our active funds demonstrated strong rank- ings versus peers during the year. Reducing risk throughout the year in volatile commodity related sectors within high-yield and emerging market debt delivered positive results. Solid results in regional markets such as Swiss bonds and US municipal bonds contributed positively as well. Bond issuer specific risk in invest- ment-grade markets negatively affected our overall performance in some cases. Liquidity and passive strategies continued to achieve their capital preservation and tracking error goals. Our multi-asset strategies had a varied year. Both benchmark- relative and peer-relative strategies had a wide range of active returns, as asset allocation effects were mixed but the implemen- tation of the strategy with specific stocks negatively affected our overall performance. Absolute return strategies suffered from a number of shocks to financial markets. Our risk taking in foreign exchange added positively to our performance. Our multi-asset fund performance remained attractive over longer horizons. Global convertible strategies were modestly behind their bench- marks for the year but, longer-term, continued to retain good peer rankings. O’Connor’s flagship multi-strategy hedge fund performed in line with its multi-strategy peers and was ahead of the broad hedge fund average. In a challenging year for hedge funds, Hedge Fund Solutions (HFS) delivered positive returns in core broad-based diversified portfolios, generally outperforming relevant hedge fund bench- marks. HFS’s performance was particularly strong in diversified neutral portfolios. Global Real Estate’s US composite and UK direct investment strategies all produced double digit returns in 2015. German direct and multi-manager indirect strategies also delivered strong positive absolute returns for the year. Japanese real estate invest- ment trusts produced mostly positive results whereas pan-Euro- pean direct funds produced negative absolute returns. The Swiss composite was slightly negative versus the market index for the year, while the Swiss real estate securities composite was positive. Both composites generated positive absolute returns for the year. For our Private Equity portfolios, the momentum seen in 2014 continued until mid-2015, leading to strong performance and dis- tributions for investors. Despite a considerable slowdown in the second part of the year, overall performance for the year was good. Infrastructure multi-manager portfolios saw vibrant invest- ment activity in 2015 as well as rising distributions driven by cash flows from underlying assets. 128 Investment performance as of 31 December 2015 Active funds versus benchmark Percentage of fund assets equaling or exceeding benchmark Equities1 Fixed income1 Multi-asset1 Total Traditional Investments Real estate2 Active funds versus peers Percentage of fund assets ranking in first or second quartile / equaling or exceeding peer index Equities1 Fixed income1 Multi-asset1 Total Traditional Investments Real estate2 Hedge funds3 Passive funds tracking accuracy Percentage of passive fund assets within applicable tracking tolerance All asset classes4 Annualized 1 year 3 years 5 years 75 56 55 61 37 73 79 43 66 59 89 84 86 56 85 74 42 80 71 75 75 88 85 93 77 65 73 70 42 75 65 78 72 88 84 92 1 Percentage of active fund assets above benchmark (gross of fees) / peer median. Universe of European domiciled active wholesale funds available to UBS’s wealth management businesses and other wholesale inter- mediaries as of 31 December 2015. Source: versus peers: ThomsonReuters LIM (Lipper Investment Management); versus benchmark: UBS. Universe represents approximately 71% of all active fund assets and 27% of all actively managed assets (including segregated accounts) in these asset classes. 2 Percentage of real estate fund assets above benchmark (gross of fess) / peer median. Universe (versus benchmark) includes all fully dis- cretionary real estate funds with a benchmark representing approximately 70% of real estate gross invested assets as at 31 December 2015. Source: IPD, NFI-ODCE, SXI Real Estate Funds TR. Universe (versus peers) includes all real estate funds with externally verifiable peer groups representing approximately 22% of real estate gross invested assets as of 31 December 2015. Source: ThomsonReuters LIM (Lipper Investment Management). 3 Percentage of fund assets above appropriate HFRI peer indices. Universe of key hedge funds and fund-of-fund products managed on a fully discretionary basis representing approximately 35% of total O’Connor and Hedge Fund Solutions invested assets. 4 Percentage of passive fund assets within applicable tracking tolerance on a gross of fees basis. Performance information represents a universe of European domi- ciled institutional and wholesale funds representing approximately 46% of total passive invested assets as of 31 December 2015. Source: UBS. 129 Financial and operating performance Financial and operating performance Asset Management 2014 compared with 2013 Results Operating income Total operating income was CHF 1,902 million compared with CHF 1,935 million in 2013. Performance fees were CHF 50 million lower at CHF 146 million compared with CHF 196 million, mainly in the O’Connor and A&Q business line (now O’Connor and Hedge Fund Solutions). This was partly offset by higher net man- agement fees, which increased to CHF 1,756 million from CHF 1,739 million in 2013. Net management fees in 2013 included a gain of CHF 34 million on the sale of our Canadian domestic busi- ness. Excluding this gain in 2013, adjusted net management fees were CHF 51 million higher in 2014, primarily in Global Real Estate and Traditional Investments. Operating expenses Total operating expenses were CHF 1,435 million in 2014 com- pared with CHF 1,359 million in 2013. Excluding restructuring expenses of CHF 50 million in 2014 and CHF 43 million in 2013, as well as a gain of CHF 8 million in 2014 related to changes to retiree benefit plans in the US, adjusted operating expenses were CHF 77 million higher at CHF 1,393 million compared with CHF 1,316 million. The increase was mainly due to a net charge for provisions for litigation, regulatory and similar matters of CHF 55 million compared with zero in 2013. Personnel expenses were CHF 643 million compared with CHF 609 million. Excluding restructuring expenses of CHF 19 million compared with CHF 2 million, and a CHF 4 million gain related to retiree benefit plans in the US in 2014, adjusted personnel expenses were CHF 21 million higher at CHF 628 million com- pared with CHF 607 million. General and administrative expenses were CHF 305 million compared with CHF 218 million. Excluding restructuring expenses of CHF 1 million compared with zero, adjusted general and administrative expenses were CHF 86 million higher at CHF 304 million compared with CHF 218 million. This increase was mainly due to the aforementioned charge for provisions for litigation, regulatory and similar matters and a provision for a possible set- tlement related to a fund liquidation. Net expenses for services from other divisions and Corporate Center were CHF 478 million compared with CHF 521 million. Excluding restructuring expenses of CHF 30 million compared with CHF 38 million, and a CHF 4 million gain related to retiree benefit plans in the US in 2014, adjusted net services were CHF 31 million lower at CHF 452 million in 2014, mainly due to lower expenses from Group Operations, Group Technology and Group Finance, as well as lower expenses for variable compensation. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Cost / income ratio The cost / income ratio was 75.4% compared with 70.2%. The adjusted cost / income ratio increased to 73.2% from 69.2%. Net new money The net new money growth rate, excluding money market flows, was 4.4% compared with negative 1.0% in the prior year. Excluding money market flows, net new money inflows were CHF 22.6 billion compared with net new money outflows of CHF 4.8 billion. By client segment, net inflows from third parties were CHF 11.3 billion compared with CHF 0.7 billion in 2013. Net inflows were mainly from clients serviced from Switzerland, Asia Pacific and Europe. Net new money inflows from clients of UBS’s wealth management businesses were CHF 11.3 billion compared with net outflows of CHF 5.5 billion in the prior year. This improve- ment mainly resulted from increased transparency around avail- able products and better matching of attractive products to wealth management clients’ needs. The net inflows were mainly from clients serviced from Asia Pacific and Europe. Money market net outflows were CHF 6.7 billion compared with CHF 15.1 billion. By client segment, net flows from third par- ties were zero compared with net outflows of CHF 1.5 billion in the prior year. Net inflows in Asia Pacific and Switzerland were offset by net outflows in the Americas and Europe. Net outflows from clients of UBS’s wealth management businesses were CHF 6.7 billion compared with CHF 13.6 billion in the prior year. In both years, net outflows were primarily due to an ongoing initia- tive by Wealth Management Americas to increase deposit account balances in UBS banking entities. This led to outflows of CHF 3.9 billion from money market funds managed by Asset Management in 2014 and CHF 8.3 billion in 2013. The corresponding increase in deposit account balances in Wealth Management Americas does not constitute net new money. 130 Invested assets Invested assets were CHF 664 billion as of 31 December 2014 compared with CHF 583 billion as of 31 December 2013. Positive foreign currency translation effects of CHF 36 billion, favorable market performance of CHF 30 billion, and net new money inflows of CHF 16 billion all contributed to the overall increase of CHF 81 billion. As of 31 December 2014, CHF 209 billion, or 31%, of invested assets was managed in passive strategies and CHF 64 billion, or 10%, of invested assets was money market assets. The remaining 59% of invested assets was managed in active, non-money mar- ket strategies. On a regional basis, 32% of invested assets related to clients serviced from Switzerland, 24% from Europe, Middle East and Africa, 23% from the Americas, and 21% from Asia Pacific. Assets under administration Net new assets under administration were CHF 43.9 billion com- pared with CHF 3.8 billion in the prior year. Total assets under administration increased to CHF 520 billion as of 31 December 2014 from CHF 432 billion as of 31 December 2013, mainly due to new assets under administration of CHF 44 billion, favorable market performance of CHF 25 billion and positive foreign currency translation effects of CHF 20 billion. Margins on invested assets The net margin on invested assets was 8 basis points compared with 10 basis points. The adjusted net margin was 9 basis points compared with 10 basis points. The gross margin decreased 2 basis points to 31 basis points, mainly due to lower performance fees. Personnel Asset Management employed 2,323 personnel as of 31 December 2014 compared with 2,217 personnel as of 31 December 2013. The net increase of 106 personnel primarily reflected increases in Traditional Investments and Fund Services. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 131 Financial and operating performance Financial and operating performance Investment Bank Investment Bank The Investment Bank recorded a profit before tax of CHF 1,892 million in 2015 compared with a loss before tax of CHF 84 million in 2014. On an adjusted basis, the Investment Bank recorded a profit before tax of CHF 2,288 million compared with CHF 162 million, mainly due to a CHF 1,853 million lower net charge for provisions for litigation, regulatory and similar matters, as well as increased revenues in Investor Client Services, partly offset by lower revenues in Corporate Client Solutions. Fully applied risk-weighted assets decreased by CHF 4 billion to CHF 63 billion as of 31 December 2015. The return on attributed equity for 2015 was 31.3% on an adjusted basis, above our target of over 15%. As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 2,960 709 1,047 691 441 73 5,929 3,962 1,967 8,889 (68) 8,821 3,220 841 2,817 2,731 26 24 6,929 1,892 78.0 25.9 3.2 12 3,189 708 1,021 1,005 497 (42) 5,118 3,659 1,459 8,306 2 8,308 2,964 2,671 2,711 2,658 32 15 8,392 (84) 101.0 (1.1) 3.2 12 2,983 588 1,142 888 603 (239) 5,453 3,765 1,688 8,436 2 8,438 2,899 843 2,517 2,487 28 13 6,300 2,138 481.0 74.7 26.6 3.3 13 (7) 0 3 (31) (11) 16 8 35 7 6 9 (69) 4 3 (19) 60 (17) 0 Investment Bank1 CHF million, except where indicated Corporate Client Solutions Advisory Equity Capital Markets Debt Capital Markets Financing Solutions Risk Management Investor Client Services Equities Foreign Exchange, Rates and Credit Income Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses2 Business division operating profit / (loss) before tax Key performance indicators3 Pre-tax profit growth (%) Cost / income ratio (%) Return on attributed equity (%) Return on assets, gross (%) Average VaR (1-day, 95% confidence, 5 years of historical data) 132 Investment Bank (continued)1 CHF million, except where indicated Additional information Total assets (CHF billion)4 Funded assets (CHF billion)5 Average attributed equity (CHF billion)6 Risk-weighted assets (fully applied, CHF billion)7 Risk-weighted assets (phase-in, CHF billion)7 Return on risk-weighted assets, gross (%)8 Leverage ratio denominator (fully applied, CHF billion)9 Goodwill and intangible assets (CHF billion) Compensation ratio (%) Impaired loan portfolio as a percentage of total loan portfolio, gross (%) Personnel (full-time equivalents) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 253.5 159.9 7.3 62.9 62.9 13.6 268.0 0.1 36.2 1.5 5,243 292.3 170.7 7.6 66.7 67.0 12.9 288.3 0.1 35.7 0.3 5,194 240.0 157.2 8.0 62.3 62.6 13.0 270.3 0.1 34.4 0.2 5,165 (13) (6) (4) (6) (6) (7) 0 1 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 3 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 4 Based on third-party view, i.e., without intercompany balances. 5 Funded assets are defined as total IFRS balance sheet assets less positive replacement values (PRV) and collateral delivered against over-the-counter (OTC) derivatives. 6 Refer to the “Capital management” section of this report for more information on the equity attribution framework. 7 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). 8 Based on phase-in risk-weighted assets. 9 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 133 Financial and operating performance Financial and operating performance Investment Bank 2015 compared with 2014 Results Operating income Total operating income increased by CHF 513 million or 6% to CHF 8,821 million, as revenues in Investor Client Services increased by CHF 811 million, partly offset by CHF 229 million lower reve- nues in Corporate Client Solutions. On an adjusted basis, exclud- ing gains of CHF 11 million in 2015 and CHF 43 million in 2014 related to partial sales of our investment in the financial informa- tion services company Markit, as well as an impairment loss of CHF 48 million on a financial investment in 2014, total operating income increased by CHF 497 million or 6% to CHF 8,810 million from CHF 8,313 million. Net credit loss expense was CHF 68 mil- lion, mainly related to the energy sector, compared with a recov- ery of CHF 2 million in the prior year. In US dollar terms, adjusted operating income increased 1%. ➔ Refer to the “Risk management and control” section of this report for more information ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the matters. The charge for the annual UK bank levy was CHF 98 mil- lion compared with CHF 64 million. Net expenses for services from other business divisions and Corporate Center increased to CHF 2,817 million from CHF 2,711 million. Excluding restructuring costs of CHF 376 million in 2015 and CHF 161 million as well as a gain of CHF 9 million related to changes to retiree benefit plans in the US in 2014, adjusted net expenses for services from other business divisions and Corporate Center decreased to CHF 2,441 million from CHF 2,559 million. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Cost / income ratio The cost / income ratio decreased to 78.0% from 101.0%. On an adjusted basis, the cost / income ratio decreased to 73.5% from 98.1% and was within our target range of 70% to 80%. Return on attributed equity Return on attributed equity (RoAE) for 2015 was 25.9%, and 31.3% on an adjusted basis, above our target of over 15%. ➔ Refer to the “Capital management” section of this report for change in segment reporting related to fair value gains and more information losses on certain internal funding transactions Operating expenses Total operating expenses decreased by CHF 1,463 million or 17% to CHF 6,929 million. Excluding restructuring expenses of CHF 396 million compared with CHF 261 million, an impairment loss of CHF 11 million on an intangible asset in 2015 and gains of CHF 20 million related to changes to retiree benefit plans in the US in 2014, total adjusted operating expenses decreased by CHF 1,629 million or 20% to CHF 6,522 million, mainly as the net charge for provisions for litigation, regulatory and similar matters decreased to CHF 2 million from CHF 1,855 million, partly offset by higher expenses for variable compensation, in line with improved busi- ness performance. In US dollar terms, adjusted operating expenses decreased 23%. Personnel expenses increased to CHF 3,220 million from CHF 2,964 million. Excluding restructuring expenses of CHF 14 million compared with CHF 64 million, as well as an CHF 11 million gain related to changes to retiree benefit plans in the US in 2014, per- sonnel expenses increased to CHF 3,206 million from CHF 2,911 million, mainly due to higher performance-related variable com- pensation expenses. General and administrative expenses decreased to CHF 841 million from CHF 2,671 million. Excluding restructuring expenses of CHF 7 million in 2015 compared with CHF 30 million, general and administrative expenses decreased to CHF 834 million from CHF 2,641 million, mainly due to the aforementioned reduction in the net charge for provisions for litigation, regulatory and similar Funded assets Funded assets decreased by CHF 11 billion to CHF 160 billion as of 31 December 2015, mainly due to lower trading portfolio assets in our Foreign Exchange, Rates and Credit business, driven by a reduction in client activity in the fourth quarter. ➔ Refer to the “Balance sheet“ section of this report for more information Risk-weighted assets Fully applied risk-weighted assets (RWA) decreased by CHF 4 bil- lion to CHF 63 billion as of 31 December 2015, below our limit of CHF 70 billion for 2015 and our short- to medium-term expecta- tion of CHF 85 billion. The decrease was mainly due to CHF 3 billion lower market risk RWA, primarily related to a reduction in stressed value-at-risk and risks-not-in-VaR. ➔ Refer to the “Capital management” section of this report for more information Leverage ratio denominator The fully applied Swiss systemically relevant bank (SRB) leverage ratio denominator (LRD) was CHF 268 billion as of 31 December 2015, below our short- to medium-term expectation of CHF 325 billion. From 31 December 2015 onwards, the Swiss SRB LRD cal- culation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with the former Swiss SRB rules and are therefore not fully comparable. ➔ Refer to the “Capital Management“ section of this report for more information 134 Operating income by business unit higher revenues in Financing Services and, to a lesser extent, in Cash, partly offset by lower revenues in Derivatives. Corporate Client Solutions Corporate Client Solutions revenues decreased by 7% to CHF 2,960 million from CHF 3,189 million, largely due to lower reve- nues in Debt Capital Markets and Financing Solutions. In US dollar terms, revenues decreased 12%. Cash revenues increased to CHF 1,371 million from CHF 1,352 million. Excluding a gain related to a financial investment of CHF 4 million in 2014, adjusted revenues increased to CHF 1,371 mil- lion from CHF 1,348 million, mainly due to higher commission income as client activity levels increased. Advisory and Equity Capital Markets revenues were both broadly in line with 2014 at CHF 709 million and CHF 1,047 mil- lion, respectively. Debt Capital Markets revenues decreased 31% to CHF 691 million from CHF 1,005 million, mainly due to lower revenues from leveraged finance following a global fee pool decline of 23%. Investment grade revenues were broadly in line with 2014. Financing Solutions revenues decreased 11% to CHF 441 mil- lion compared with CHF 497 million, reflecting lower volumes and margin compression in 2015. Risk Management revenues improved to positive CHF 73 mil- lion from negative CHF 42 million, mainly due to gains on portfo- lio macro hedges and lower risk management costs associated with corporate lending. Investor Client Services Investor Client Services revenues increased 16% to CHF 5,929 million from CHF 5,118 million due to higher revenues in both Equities and Foreign Exchange, Rates and Credit. In US dollar terms, revenues increased 11%. Equities Equities revenues increased 8% to CHF 3,962 million from CHF 3,659 million. Excluding the aforementioned gains and impair- ment loss on financial investments in 2014, adjusted revenues increased 7% to CHF 3,962 million from CHF 3,703 million due to Derivatives revenues decreased to CHF 1,046 million from CHF 1,089 million, driven by weaker performance in Europe, Middle East and Africa, partly offset by increased revenues in the Ameri- cas and Asia Pacific. Financing services revenues increased to CHF 1,581 million from CHF 1,289 million, driven primarily by increased client activ- ity in Prime Brokerage and Equity Financing. Foreign Exchange, Rates and Credit Foreign Exchange, Rates and Credit revenues increased 35% to CHF 1,967 million from CHF 1,459 million. Excluding gains related to financial investments of CHF 11 million compared with CHF 39 million, adjusted revenues increased to CHF 1,956 million from CHF 1,420 million, mainly due to higher revenues in our Foreign Exchange and Rates businesses, reflecting elevated client activity and higher volatility, particularly heightened following the Swiss National Bank’s actions of 15 January 2015. Personnel The Investment Bank employed 5,243 personnel as of 31 Decem- ber 2015, slightly up from 5,194 as of 31 December 2014. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 135 Financial and operating performance Financial and operating performance Investment Bank 2014 compared with 2013 Results Operating income Total operating income decreased CHF 130 million or 2% to CHF 8,308 million from CHF 8,438 million, as revenues in Investor Cli- ent Services declined CHF 335 million, partly offset by CHF 206 million higher revenues in Corporate Client Solutions. On an adjusted basis, excluding an impairment loss of CHF 48 million on a financial investment classified as available-for-sale and a gain of CHF 43 million from the partial sale of our investment in the financial information services company Markit, both in 2014, as well as a CHF 55 million gain from the sale of our remaining pro- prietary trading business in 2013, total operating income decreased CHF 70 million or 1% to CHF 8,313 million from CHF 8,383 million. In US dollar terms, adjusted operating income was in line with the prior year. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in segment reporting related to fair value gains and losses on certain internal funding transactions Operating expenses Total operating expenses increased by CHF 2,092 million or 33% to CHF 8,392 million compared with CHF 6,300 million. Excluding restructuring expenses of CHF 261 million in 2014 and CHF 210 million in 2013, and gains of CHF 20 million related to changes to retiree benefit plans in the US in 2014, total operating expenses increased by CHF 2,061 million or 34% to CHF 8,151 million com- pared with CHF 6,090 million. This increase was mainly due to a CHF 1,846 million higher net charge for provisions for litigation, regulatory and similar matters, as well as higher services (to) / from other business units and higher professional fees, and was partly offset by lower personnel expenses. In US dollar terms, adjusted operating expenses increased 34%. Personnel expenses increased to CHF 2,964 million from CHF 2,899 million. Excluding restructuring expenses of CHF 64 million and the aforementioned gains of CHF 11 million related to changes to retiree benefit plans in the US in 2014, as well as a restructuring-related gain of CHF 38 million in 2013, adjusted personnel expenses decreased to CHF 2,912 million from CHF 2,937 million. General and administrative expenses increased to CHF 2,671 million from CHF 843 million. Excluding restructuring expenses of CHF 30 million compared with CHF 1 million, adjusted general and administrative expenses increased to CHF 2,641 million from CHF 842 million, mainly due to the aforementioned increase in the net charge for provisions for litigation, regulatory and similar matters, and higher capital tax expense, partly offset by lower professional fees. Net expenses for services from other business divisions and Corporate Center increased to CHF 2,711 million from CHF 2,517 million. Excluding restructuring expenses of CHF 161 million and a gain of CHF 9 million related to changes to retiree benefit plans in the US in 2014, compared with restructuring expenses of CHF 247 million in 2013, adjusted net expenses for services from other business divisions and Corporate Center increased to CHF 2,559 million from CHF 2,270 million. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Cost / income ratio The cost / income ratio increased to 101% from 75%. On an adjusted basis, the cost / income ratio increased to 98% from 73%. Return on attributed equity RoAE for 2014 was negative 1.1%, and positive 2.1% on an adjusted basis. Funded assets Funded assets increased to CHF 171 billion as of 31 December 2014 from CHF 157 billion as of 31 December 2013, mainly due to foreign currency translation effects. Excluding foreign currency translation effects, funded assets increased by approximately CHF 3 billion, mainly due to higher trading assets in the equities busi- ness. Risk-weighted assets Fully applied risk-weighted assets (RWA) increased to CHF 67 bil- lion as of 31 December 2014 from CHF 62 billion as of 31 Decem- ber 2013. The increase was mainly due to CHF 6 billion higher market risk RWA related to risks-not-in-VaR and stressed value-at- risk, partly offset by CHF 1 billion lower operational risk RWA, resulting from a reduction in the incremental RWA resulting from the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA. 136 Operating income by business unit Corporate Client Solutions Corporate Client Solutions revenues increased 7% to CHF 3,189 million from CHF 2,983 million, largely due to higher revenues in Advisory and Debt Capital Markets and lower Risk Manage- ment charges, partly offset by lower revenues in Equity Capital Markets and Financing Solutions. In US dollar terms, revenues increased 8%. Advisory revenues increased 20% to CHF 708 million from CHF 588 million, mainly reflecting an increased volume of mergers and acquisition transactions in 2014. Equity Capital Markets revenues decreased 11% to CHF 1,021 million from CHF 1,142 million. This decrease was mainly due to a large private transaction recorded in 2013, partly offset by higher revenues from public offerings in 2014 as the fee pool increased 19%. Debt Capital Markets revenues increased 13% to CHF 1,005 million from CHF 888 million, due to higher revenues from lever- aged finance, partly offset by slightly lower investment grade rev- enues. Excluding a gain on an investment in an associate, which was reclassified to a financial investment available-for-sale follow- ing its initial public offering in 2014, adjusted leveraged finance revenues were broadly in line with 2013. Financing Solutions revenues decreased 18% to CHF 497 mil- lion compared with CHF 603 million, mainly due to a reduction in revenues in the real estate finance business. Risk Management revenues improved to negative CHF 42 mil- lion from negative CHF 239 million, mainly due to the positive effect of widening credit spreads during 2014. Investor Client Services Investor Client Services revenues decreased 6% to CHF 5,118 mil- lion from CHF 5,453 million, due to lower revenues in both the equities and foreign exchange, rates and credit businesses. In US dollar terms, revenues decreased 5%. Equities Equities revenues decreased 3% to CHF 3,659 million from CHF 3,765 million. Excluding the aforementioned gains and impair- ment loss on financial investments in 2014, as well as a gain from the sale of our remaining proprietary trading business in 2013, adjusted revenues were CHF 3,703 million compared with CHF 3,710 million due to lower revenues in Derivatives, other equities and Cash, largely offset by higher revenues in Financing Services. Cash revenues decreased to CHF 1,352 million compared with CHF 1,374 million, mainly due to lower commission income as client activity levels declined. Excluding the gain on a financial investment in 2014, adjusted Cash revenues decreased to CHF 1,348 million from CHF 1,374 million. Derivatives revenues decreased to CHF 1,089 million from CHF 1,199 million, mainly as a result of lower trading revenues, reflect- ing lower volatility levels during 2014. Financing Services revenues increased to CHF 1,289 million from CHF 1,084 million, mainly due to higher equity finance revenues. Other equities revenues were negative CHF 70 million com- pared with positive CHF 108 million. Excluding an impairment loss of CHF 48 million on a financial investment in 2014 and a gain from the sale of our former proprietary trading business in 2013, other equities revenues decreased to negative CHF 22 million from positive CHF 53 million. This decrease was mainly due to higher revenues in 2013 related to equity investments prior to their transfer to Corporate Center – Non-core and Legacy Portfo- lio, as well as a gain related to the divestment of our participation in Euroclear Plc. Foreign Exchange, Rates and Credit Foreign Exchange, Rates and Credit revenues decreased 14% to CHF 1,459 million from CHF 1,688 million. Excluding aforemen- tioned gains related to a financial investment, adjusted revenues decreased to CHF 1,420 million from CHF 1,688 million, with lower revenues across most products, as client activity and volatil- ity levels decreased compared with 2013. Foreign Exchange revenues declined, mainly due to lower rev- enues from the foreign exchange spot and options businesses, reflecting lower client activity and volatility levels. Rates and Credit revenues declined, primarily due to weaker trading performance in the credit business. Personnel The Investment Bank employed 5,194 personnel as of 31 Decem- ber 2014, an increase of 29 compared with 5,165 personnel as of 31 December 2013. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 137 Financial and operating performance Financial and operating performance Corporate Center Corporate Center Corporate Center1 CHF million, except where indicated Total operating income Personnel expenses General and administrative expenses Services (to) / from business divisions Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses2 Operating profit / (loss) before tax Additional information Average attributed equity (CHF billion)3 Total assets (CHF billion)4 Risk-weighted assets (fully applied, CHF billion)5 Risk-weighted assets (phase-in, CHF billion)5 Leverage ratio denominator (fully applied, CHF billion)6 Personnel (full-time equivalents) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 315 4,049 5,311 (7,894) 868 21 2,354 (2,040) 25.8 354.5 60.2 65.0 291.2 23,671 (823) 3,993 4,650 (7,580) 762 6 1,832 (2,655) 20.5 427.6 65.8 67.9 327.2 23,773 (498) 4,296 5,931 (7,488) 761 6 3,507 (4,004) 23.3 462.5 84.2 84.9 386.9 24,082 1 14 4 14 250 28 (23) 26 (17) (9) (4) (11) 0 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 32 Changes in organization and disposals“ in the ”Consolidated financial statements“ section of this report for information on restructuring expenses. 3 Refer to the ”Capital management“ section of this report for more information on the equity attribution framework. 4 Based on third-party view, i.e., without inter- company balances. 5 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). 6 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the ”Capital manage- ment" section of this report for more information. 138 Corporate Center – Services Corporate Center – Services recorded a loss before tax of CHF 818 million in 2015 compared with a loss of CHF 652 million in the prior year. Total operating expenses remaining in Corporate Center – Services after allocations to business divisions and other Corporate Center units were CHF 1,059 million. Total operating income was CHF 241 million, mainly reflecting gains on sales of real estate. Corporate Center – Services1 CHF million, except where indicated Total operating income Personnel expenses General and administrative expenses Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses before allocations to business divisions and other CC units Services (to) / from business divisions and other CC units of which: services to Wealth Management of which: services to Wealth Management Americas of which: services to Personal & Corporate Banking of which: services to Asset Management of which: services to Investment Bank of which: services to CC – Group ALM of which: services to CC – Non-core and Legacy Portfolio Total operating expenses2 Operating profit / (loss) before tax Additional information Average attributed equity (CHF billion)3 Total assets (CHF billion)4 Risk-weighted assets (fully applied, CHF billion)5 Risk-weighted assets (phase-in, CHF billion)5 Leverage ratio denominator (fully applied, CHF billion)6 Personnel (full-time equivalents) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 241 3,903 4,483 868 21 9,274 (8,215) (2,209) (1,193) (1,180) (523) (2,731) (95) (314) 1,059 (818) 19.6 22.6 23.6 28.3 4.8 37 3,843 4,123 762 6 8,734 (8,046) (2,122) (1,121) (1,196) (495) (2,658) (82) (411) 688 (652) 12.3 19.9 23.0 25.1 (2.6) 178 4,065 4,249 761 4 9,080 (8,276) (2,074) (1,127) (1,301) (535) (2,487) (87) (693) 804 (626) 9.5 17.2 15.3 16.0 23,470 23,517 23,747 551 2 9 14 250 6 2 4 6 (1) 6 3 16 (24) 54 25 59 14 3 13 0 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 3 Beginning in 2015, Group items are shown within Corporate Center – Services. Prior periods have been restated. Refer to the “Capital management” section of this report for more information on the equity attribution framework. 4 Based on third-party view, i.e., without intercompany balances. 5 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). 6 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calcu- lated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 139 Financial and operating performance Financial and operating performance Corporate Center 2015 compared with 2014 Results Operating income Total operating income was CHF 241 million in 2015 compared with CHF 37 million in 2014, mainly as gains on sales of real estate increased to CHF 378 million from CHF 44 million, primarily due to the sale of a property in Geneva, Switzerland. This was partly offset by lower income from the investment of the Group’s equity allocated from Corporate Center – Group Asset and Liabil- ity Management (Group ALM). Furthermore, 2014 included a gain of CHF 58 million related to the release of a provision for litigation, regulatory and similar matters, which was recorded within other income. Operating expenses Operating expenses before service allocations to business divisions and other Corporate Center units On a gross basis, before service allocations to the business divi- sions and other Corporate Center units, total operating expenses increased by CHF 540 million to CHF 9,274 million. Restructuring expenses were CHF 1,125 million compared with CHF 484 million in the prior year, mainly related to our transitioning activities to nearshore and offshore locations. 2015 also included a gain of CHF 2 million related to a change to retiree benefit plans in the US compared with a gain of CHF 16 million in 2014. Excluding these items, adjusted operating expenses before service allocations were CHF 8,151 million compared with CHF 8,266 million in the prior year. This decrease of CHF 115 million was mainly due to CHF 139 million lower personnel expenses as well as decreased occupancy costs and professional fees. These decreases were partly offset by a net charge for provisions for litigation, regula- tory and similar matters of CHF 15 million compared with a net release of provisions of CHF 125 million. Moreover, 2015 included higher depreciation expenses related to internally generated capi- talized software. Personnel expenses increased by CHF 60 million to CHF 3,903 million and included restructuring expenses of CHF 406 million compared with CHF 221 million. 2015 also included the afore- mentioned gain of CHF 2 million related to retiree benefit plans compared with a gain of CHF 16 million. On an adjusted basis, personnel expenses were CHF 3,499 million compared with CHF 3,638 million, mainly as a result of outsourcing, nearshoring and offshoring initiatives. General and administrative expenses increased by CHF 360 million to CHF 4,483 million. On an adjusted basis, excluding net restructuring expenses of CHF 707 million compared with CHF 240 million, general and administrative expenses decreased by CHF 107 million, mainly due to lower occupancy costs and profes- 140 sional fees. These decreases were partly offset by the aforemen- tioned net charge for provisions for litigation, regulatory and similar matters compared with a net release. Depreciation and impairment of property, equipment and soft- ware increased to CHF 868 million from CHF 762 million, reflect- ing increased depreciation expenses related to internally gener- ated capitalized software. Services to / from business divisions and other Corporate Center units Net expenses for services to business divisions and other Corpo- rate Center units were CHF 8,215 million compared with CHF 8,046 million. Excluding restructuring expenses of CHF 986 mil- lion compared with CHF 454 million and a gain of CHF 2 million related to a change to retiree benefit plans in the US compared with a gain of CHF 16 million, net expenses for services were CHF 7,231 million, compared with CHF 7,608 million, mainly related to lower personnel expenses and occupancy costs, partly offset by increased depreciation expenses. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Operating expenses after service allocations to / from business divisions and other Corporate Center units Operating expenses remaining in Corporate Center – Services, after allocations relate mainly to Group governance functions and other corporate activities, as well as to certain strategic and regu- latory projects and certain restructuring expenses. Total operating expenses remaining in Corporate Center – Ser- vices after allocations increased to CHF 1,059 million compared with CHF 688 million. This increase of CHF 371 million was mainly due to the aforementioned net charge for provisions for litigation, regulatory and similar matters compared with a net release, as well as restructuring expenses of CHF 140 million compared with CHF 30 million. Furthermore, the full-year costs incurred by Cor- porate Center – Services exceeded the cost allocations to the busi- ness divisions and Non-core and Legacy Portfolio which were agreed as part of the annual business planning cycle. Personnel As of 31 December 2015, Corporate Center – Services employed 23,470 personnel compared with 23,517 at the end of the prior year. The net decrease of 47 personnel was mainly related to out- sourcing activities, largely offset by increases in risk control and in our nearshoring and offshoring locations. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 2014 compared with 2013 Operating income Total operating income was CHF 37 million in 2014 compared with CHF 178 million in 2013, mainly due to lower gains on sales of real estate of CHF 44 million compared with CHF 288 million. In addition, 2014 included a gain of CHF 58 million related to the release of a provision for litigation, regulatory and similar matters, which was recorded within other income. Operating expenses Operating expenses before service allocations to business divisions and other Corporate Center units On a gross basis, before service allocations to the business divi- sions and other Corporate Center units, total operating expenses decreased by CHF 346 million to CHF 8,734 million. Restructuring expenses were CHF 484 million compared with CHF 707 million in the prior year. 2014 also included gains of CHF 16 million related to changes to retiree benefit plans in the US. Excluding these items, adjusted operating expenses before service allocations were CHF 8,266 million compared with CHF 8,373 million in the prior year. This decrease of CHF 107 million was mainly due to CHF 298 million lower personnel expenses and a net release of CHF 125 million of provisions for litigation, regulatory and similar matters compared with a net charge of CHF 187 million. These decreases were partly offset by higher professional fees related to our strategic and regulatory priorities and increased outsourcing activities. Personnel expenses decreased by CHF 222 million to CHF 3,843 million. On an adjusted basis, excluding net restructuring expenses of CHF 221 million in 2014 and CHF 129 million in 2013, as well as the aforementioned gains of CHF 16 million related to changes to retiree benefit plans in the US, personnel expenses were CHF 3,638 million in 2014 compared with CHF 3,936 million in the prior year. This decrease of CHF 298 million was mainly due to outsourcing and offshoring initiatives, lower expenses for variable compensation as well as our ongoing cost reduction programs. General and administrative expenses decreased by CHF 126 million to CHF 4,123 million. On an adjusted basis, excluding net restructuring expenses of CHF 240 million compared with CHF 513 million, general and administrative expenses increased by CHF 147 million, mainly due to higher professional fees related to our strategic and regulatory priorities as well as increased outsourcing activities. These increases were partly offset by a net release of CHF 125 million of provisions for litigation, regulatory and similar mat- ters compared with a net charge of CHF 187 million. Depreciation and impairment of property, equipment and soft- ware increased marginally to CHF 762 million, mainly reflecting higher depreciation expenses related to internally generated capi- talized software, largely offset by CHF 42 million lower restructur- ing expenses. Services to / from business divisions and other Corporate Center units Net expenses for services to business divisions and other Corpo- rate Center units were CHF 8,046 million compared with CHF 8,276 million, largely related to lower restructuring expenses. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Operating expenses after service allocations to / from business divisions and other Corporate Center units Operating expenses remaining in Corporate Center – Services relate mainly to Group governance functions and other corporate activities, and certain strategic and regulatory projects. Total operating expenses remaining in Corporate Center – Services, after allocations to the business divisions and other Corporate Center units, decreased to CHF 688 million from CHF 804 million. This decrease of CHF 116 million was mainly due to the aforementioned net release of provisions for litigation, regula- tory and similar matters compared with a net charge, partly offset by additional expenses related to our strategic and regulatory priorities. Risk-weighted assets Fully applied Basel III RWA increased by CHF 8 billion to CHF 23 billion as of 31 December 2014, primarily due to CHF 3 billion higher incremental RWA resulting from the supplemental opera- tional risk capital analysis mutually agreed to by UBS and FINMA and CHF 3 billion higher market risk RWA, mainly reflecting reduced diversification benefits. Personnel As of 31 December 2014, Corporate Center – Services employed 23,517 personnel compared with 23,747 personnel at the end of the prior year. This decrease of 230 personnel was mainly related to our ongoing cost reduction programs and outsourcing activities. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 141 Financial and operating performance Financial and operating performance Corporate Center Corporate Center – Group Asset and Liability Management Corporate Center – Group Asset and Liability Management recorded a profit before tax of CHF 282 million in 2015 compared with CHF 2 million in 2014. Corporate Center – Group ALM1 CHF million, except where indicated Gross income excluding own credit Allocations to business divisions and other CC units of which: Wealth Management of which: Wealth Management Americas of which: Personal & Corporate Banking of which: Asset Management of which: Investment Bank of which: CC – Services of which: CC – Non-core and Legacy Portfolio Own credit2 Total operating income Personnel expenses General and administrative expenses Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Services (to) / from business divisions and other CC units of which: Wealth Management of which: Wealth Management Americas of which: Personal & Corporate Banking of which: Asset Management of which: Investment Bank of which: CC – Services of which: CC – Non-core and Legacy Portfolio Total operating expenses3 Operating profit / (loss) before tax Additional information Average attributed equity (CHF billion)4 Total assets (CHF billion)5 Risk-weighted assets (fully applied, CHF billion)6 Risk-weighted assets (phase-in, CHF billion)6 Leverage ratio denominator (fully applied, CHF billion)7 Personnel (full-time equivalents) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 600 (876) (471) (104) (421) (15) 211 (145) 71 553 277 30 21 0 0 (56) (37) (6) (19) 0 (59) 95 (29) (5) 282 3.3 237.5 6.0 6.0 240.2 125 831 (1,120) (481) (116) (461) (27) 100 (217) 82 292 2 26 21 0 0 (47) (17) (6) (8) (3) (54) 82 (40) 0 2 3.2 237.9 7.1 7.1 236.3 120 363 (921) (486) (193) (396) (23) 217 (218) 179 (283) (841) 26 14 0 0 3 (11) (5) (5) (3) (32) 87 (27) 43 (884) 3.1 230.2 5.4 5.4 113 (28) (22) (2) (10) (9) (44) 111 (33) (13) 89 15 0 19 118 0 138 (100) 9 16 (28) 3 0 (15) (15) 2 4 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 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 2015 amounts to CHF 0.3 billion. This gain has reduced the fair value of financial liabilities designated at fair value recognized on our balance sheet. 3 Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 4 Refer to the “Capital management” section of this report for more information on the equity attribution framework. 5 Based on third-party view, i.e., without intercompany balances. 6 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). 7 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 142 2015 compared with 2014 maturing long-term debt was replaced with new AT1 capital and senior unsecured debt. Results Operating income Gross income excluding own credit Gross income excluding own credit was CHF 600 million in 2015 and included a loss of CHF 257 million related to the buyback of debt in a tender offer, as well as a net foreign currency translation gain of CHF 88 million related to the disposal of subsidiaries. Excluding these items, adjusted gross income excluding own credit was CHF 769 million compared with CHF 831 million. Gross revenues from balance sheet risk management activities were CHF 1,715 million compared with CHF 1,695 million. Income related to high-quality liquid assets (HQLA) increased by CHF 216 million to CHF 296 million and revenues from banking book inter- est rate risk management performed on behalf of Wealth Man- agement and Personal & Corporate Banking increased by CHF 34 million to CHF 758 million. In addition, 2015 included a CHF 38 million higher gain from the Group ALM-managed monthly con- version of non-Swiss franc profits. These increases were partly offset by higher interest expenses arising from the issuance of additional tier 1 (AT1) capital and senior unsecured debt during 2015 and lower income from the investment of the Group’s equity, following the Swiss National Bank actions on 15 January 2015. Hedging activities resulted in a gross gain of CHF 94 million compared with a gain of CHF 73 million, largely related to gains of CHF 169 million on cross-currency basis swaps held as eco- nomic hedges and of CHF 66 million related to our cash flow hedges, compared with gains of CHF 142 million and CHF 55 million, respectively. These gains were partly offset by a loss of CHF 166 million on interest rate derivatives held to hedge HQLA, driven by a decline in US dollar interest rates, compared with a loss of CHF 133 million in the prior year. Unlike fair value changes in hedging interest rate derivatives, which are recognized immedi- ately in the income statement, the HQLA that are hedged are held as financial investments classified as available-for-sale with unreal- ized fair value changes recorded in other comprehensive income within equity. Group ALM incurred funding costs of CHF 1,039 million com- pared with CHF 937 million. This increase was driven by a fair value loss of CHF 19 million on certain internal funding transac- tions compared with a gain of CHF 82 million in the previous year. The net interest expense was stable at CHF 1,020 million as Allocations to business divisions and other Corporate Center units Allocations to the business divisions and other Corporate Center units mainly consist of income generated from interest-rate risk management activities and the investment of the Group’s equity, offset by charges for liquidity and funding, various collateral man- agement activities and costs of issuance of capital instruments. Group ALM allocated revenues of CHF 876 million compared with CHF 1,120 million in the prior year, mainly due to lower income from the investment of the Group’s equity and issuance fees related to AT1 capital and senior unsecured debt. Operating income after allocations Group ALM retains central funding costs, certain income from hedging activities, own credit on financial liabilities designated at fair value, and the aforementioned loss related to the buyback of debt and foreign currency translation gains and losses related to the disposal of subsidiaries. Net operating income remaining in Group ALM was CHF 277 million compared with CHF 2 million. Own credit on financial liabilities designated at fair value was a gain of CHF 553 million compared with a gain of CHF 292 million. In 2015, we made further enhancements to our valuation meth- odology for the own credit component of fair value of financial liabilities designated at fair value. This change in accounting esti- mate resulted in a gain of CHF 260 million. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in own credit valuation methodology ➔ Refer to Note 24 “Fair value measurement” in the “Consolidated financial statements” section of this report for more information on own credit Operating expenses Total operating expenses net of allocations were negative CHF 5 million compared with zero in the prior year, as costs allocated to the business divisions and other Corporate Center units were slightly higher than the actual costs incurred by Group ALM. Balance sheet assets Total assets were broadly unchanged at CHF 238 billion, as a reduction in cash and balances with central banks was mostly off- set by increases in financial investments classified as available-for- sale and reverse repurchase agreements, mainly due to a rebal- ancing of our HQLA. 143 Financial and operating performance Financial and operating performance Corporate Center 2014 compared with 2013 Results Operating income Gross income excluding own credit Gross income excluding own credit was CHF 831 million in 2014 compared with CHF 363 million in the prior year, which included net losses of CHF 194 million related to the buyback of debt as well as a foreign currency translation loss of CHF 24 million related to the disposal of a subsidiary. Excluding these items, adjusted gross income excluding own credit was CHF 831 million com- pared with CHF 581 million. Gross revenues from balance sheet risk management activities were CHF 1,695 million compared with CHF 1,678 million. Income related to HQLA increased by CHF 131 million to CHF 80 million and revenues from the banking book interest rate risk manage- ment performed on behalf of Wealth Management and Personal & Corporate Banking increased by CHF 104 million to CHF 724 million. These increases were partly offset by higher interest expenses due to the issuance of AT1 capital and senior unsecured debt and lower income from the investment of the Group’s equity. Hedging activities resulted in a gross gain of CHF 73 million compared with a loss of CHF 361 million, largely related to gains of CHF 142 million on cross-currency basis swaps held as eco- nomic hedges and of CHF 55 million related to our cash flow hedges, compared with losses of CHF 203 million and CHF 147 million, respectively. These gains were partly offset by a loss of CHF 133 million on interest rate derivatives held to hedge HQLA, compared with a gain of CHF 12 million in the prior year. Group ALM incurred funding costs of CHF 937 million com- pared with CHF 736 million, mainly as 2014 included a fair value gain of CHF 82 million on certain internal funding transactions compared with a gain of CHF 343 million in the previous year. Moreover, funding costs were reduced by CHF 60 million to CHF 1,019 million, mainly related to senior unsecured debt. Allocations to business divisions and other Corporate Center units Allocations to the business divisions and other Corporate Center units mainly consist of income generated from interest-rate risk management activities and the investment of the Group’s equity, offset by charges for liquidity and funding, various collateral man- agement activities and costs of issuance of capital instruments. Group ALM allocated revenues of CHF 1,120 million compared with CHF 921 million in the prior year, mainly due to higher income generated from interest rate risk management activities and decreased funding costs. Operating income after allocations Group ALM retains central funding costs, certain income from hedging activities, own credit on financial liabilities designated at fair value, and the aforementioned loss related to the buyback of debt and foreign currency translation loss related to the disposal of a subsidiary. Net operating income remaining in Group ALM was positive CHF 2 million compared with negative CHF 841 million. Own credit on financial liabilities designated at fair value was a gain of CHF 292 million compared with a loss of CHF 283 million. Operating expenses Total operating expenses net of allocations were zero compared with CHF 43 million in the prior year, as actual costs incurred by Group ALM were allocated to the business divisions and other Corporate Center units in 2014 whereas expenses were retained in 2013. 144 Corporate Center – Non-core and Legacy Portfolio Corporate Center – Non-core and Legacy Portfolio recorded a loss before tax of CHF 1,503 million in 2015 compared with a loss of CHF 2,005 million in 2014. Operating income was negative CHF 203 million, mainly related to losses from unwind and novation activity. Operating expenses increased to CHF 1,301 million from CHF 1,144 million, mainly due to a CHF 427 million higher net charge for provisions for litigation, regulatory and similar matters, partly offset by lower net expenses for services from other Corporate Center units. Corporate Center – Non-core and Legacy Portfolio1 CHF million, except where indicated Income Credit loss (expense) / recovery2 Total operating income Personnel expenses General and administrative expenses Services (to) / from business divisions and other CC units of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses3 Operating profit / (loss) before tax Additional information Average attributed equity (CHF billion)4 Total assets (CHF billion)5 Risk-weighted assets (fully applied, CHF billion)6 Risk-weighted assets (phase-in, CHF billion)6 Leverage ratio denominator (fully applied, CHF billion)7 Personnel (full-time equivalents) As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 (195) (8) (203) 116 807 378 314 0 0 1,301 (1,503) 2.9 94.4 30.7 30.7 46.2 77 (863) 2 (862) 124 507 513 411 0 0 1,144 (2,005) 4.9 169.8 35.7 35.7 93.4 137 163 3 166 205 1,668 785 693 0 2 2,660 (2,494) 10.8 215.1 63.5 63.5 160.0 222 (77) (76) (6) 59 (26) (24) 14 (25) (41) (44) (14) (14) (51) (44) 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. 2 Includes credit loss (expense) / recovery on reclassified and acquired securities. 3 Refer to “Note 32 Changes in orga- nization and disposals” in the “Consolidated financial statements” section of this report for information on restructuring expenses. 4 Refer to the “Capital management” section of this report for more information on the equity attribution framework. 5 Based on third-party view, i.e., without intercompany balances. 6 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). 7 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 145 Financial and operating performance Financial and operating performance Corporate Center 2015 compared with 2014 Results Operating income Operating income was negative CHF 203 million in 2015 and mainly related to losses from novation and unwind activities, and to valuation losses on financial assets designated at fair value. In the prior year, revenues were negative CHF 862 million, mainly due to a net loss of CHF 345 million related to funding and debit valuation adjustments (FVA / DVA) on derivatives, of which CHF 252 million was recorded upon the implementation of FVA. In addition, 2014 included negative revenues of CHF 197 million due to novation und unwind activity in Rates, a loss of CHF 108 million resulting from the termination of certain credit default swap contracts and a loss of CHF 97 million in structured credit as a result of exiting the majority of the correlation trading portfolio. Operating expenses Total operating expenses increased to CHF 1,301 million from CHF 1,144 million in the prior year, largely as the net charge for provisions for litigation, regulatory and similar matters increased by CHF 427 million to CHF 620 million. This increase was partly offset by CHF 135 million lower net expenses for services from business divisions and other Corporate Center units as a result of reduced consumption of shared services. Moreover, 2014 included CHF 120 million in net expenses related to certain disputed receiv- ables. 2015 included a charge of CHF 50 million for the annual UK bank levy compared with CHF 52 million in 2014. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Balance sheet assets During 2015, balance sheet assets decreased to CHF 94 billion from CHF 170 billion, mainly reflecting CHF 62 billion lower posi- tive replacement values (PRV). Within our rates portfolio, PRV decreased by CHF 57 billion, driven by fair value decreases follow- ing interest rate movements, as well as by our ongoing reduction activity including negotiated bilateral settlements (unwinds), third-party novations, including transfers to central clearing houses (trade migrations) and agreements to net down trades with other dealer counterparties (trade compressions). Collateral delivered against over-the-counter (OTC) derivatives decreased by CHF 9 billion. Funded assets decreased by CHF 4 billion to CHF 7 billion, mainly due to the sale of the last remaining structured bond position in the non-linear rates portfolio and the last collat- eralized loan obligation bond positions within the securitizations portfolio, as well as a partial loan repayment in credit. Funded assets and PRV classified as Level 3 in the fair value hierarchy totaled CHF 2 billion as of 31 December 2015. Risk-weighted assets Risk-weighted assets (RWA) decreased by CHF 5 billion to CHF 31 billion, mainly as a result of reductions of outstanding OTC deriva- tive transactions, reflecting negotiated bilateral settlements with specific counterparties, third-party novations and trade compres- sions. Leverage ratio denominator The fully applied Swiss systemically relevant bank (SRB) leverage ratio denominator (LRD) was CHF 46 billion as of 31 December 2015. From 31 December 2015 onwards, the Swiss SRB LRD cal- culation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with the former Swiss SRB rules and are therefore not fully comparable. Personnel As of 31 December 2015, a total of 77 front-office personnel were employed within Non-core and Legacy Portfolio compared with 137 at the end of the prior year. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 146 Composition of Non-core and Legacy Portfolio An overview of the composition of Non-core and Legacy Portfolio is presented in the table below. The groupings of positions by category and the order in which these are listed are not necessarily representative of the magni- tude of the risks associated with them, nor do the metrics shown in the tables necessarily represent the risk measures used to manage and control these positions. The funded assets and PRV measures presented are intended to provide additional transpar- ency regarding progress in the execution of our strategy to exit these positions. CHF billion Exposure category Description RWA 1 Funded assets 2 PRV 3 LRD 4 Rates (linear) Rates (non-linear) Credit Securitizations Consists of linear OTC products (primarily vanilla interest rate, inflation, basis and cross- currency swaps for all major currencies and some emerging markets) and non-linear OTC products (vanilla and structured options). More than 95% of gross PRV is collateralized. Uncollateralized exposures are well diversified across counterparties, of which the majority is rated investment grade. More than 50% of gross PRV is due to mature by end-2021. Consists primarily of a residual structured credit book that is largely hedged against market risk. The remaining counterparty risk is fully collateralized and diversified across multiple names. The residual structured credit book is expected to materially run off by end- 2018. Also includes corporate lending and residual distressed credit positions, with a similar expected run-off profile. Consists primarily of a portfolio of CDS positions referencing ABS assets with related cash and synthetic hedges to mitigate the impact of directional movements. The majority of the positions are expected to run off by end-2018. 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 3.6 6.0 0.9 0.4 48.8 88.3 17.8 47.4 0.7 1.2 0.1 0.7 20.5 38.3 2.8 12.8 0.5 1.0 0.4 1.1 1.4 3.7 7.0 13.7 1.5 3.9 1.2 2.6 0.5 1.1 1.9 4.6 Auction preferred stock (APS) and auction rate securities (ARSs) Portfolio of long-dated APS and municipal ARSs. All APS were rated A or above and all ARS exposures were rated Ba1 or above as of 31 December 2015. Muni swaps and options Other Swaps and options with US state and local governments. Over 95% of the PRV is with counterparties that were rated investment grade as of 31 December 2015. Exposures to CVA and related hedging activity, as well as a diverse portfolio of smaller positions. 0.9 0.9 2.8 3.0 – – 2.8 2.9 0.5 0.6 – – 3.4 4.2 2.5 2.8 1.8 2.8 1.5 3.4 4.0 5.1 11.3 9.2 Operational risk Operational risk RWA allocated to Non-core and Legacy Portfolio. 21.1 19.3 – – – – – – Total 30.7 35.7 7.0 11.3 78.5 140.7 46.2 93.4 1 Fully applied and phase-in Basel III RWA. 2 Funded assets are defined as total balance sheet assets less positive replacement values (PRV) and collateral delivered against OTC derivatives (CHF 8.9 billion as of 2015 and CHF 17.9 billion as of 2014). 3 Positive replacement values (gross exposure excluding the effect of any counterparty netting). 4 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onwards, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 147 Financial and operating performance Financial and operating performance Corporate Center 2014 compared with 2013 Results Operating income Income was negative CHF 862 million in 2014, mainly due to a net loss of CHF 345 million related to funding and debit valuation adjustments (FVA / DVA) on derivatives, of which CHF 252 million was recorded upon the implementation of FVA. In addition, 2014 included negative revenues of CHF 197 million, mainly due to novation and unwind activity in Rates, a loss of CHF 108 million resulting from the termination of certain CDS contracts, as well as a loss of CHF 97 million in structured credit as a result of the exit of the majority of the correlation trading portfolio. This was partly offset by a valuation gain of CHF 68 million on certain equity positions. In the prior year, revenues were CHF 166 million. In 2013, we exercised our option to acquire the SNB StabFund’s equity and recorded total option revaluation gains of CHF 431 million prior to the exercise. Operating expenses Total operating expenses decreased to CHF 1,144 million from CHF 2,660 million in the prior year, largely as the net charge for provisions for litigation, regulatory and similar matters declined by CHF 1,127 million to CHF 193 million. Furthermore, restructuring expenses declined by CHF 204 million to CHF 31 million. 2014 included a charge of CHF 52 million for the annual UK bank levy compared with CHF 68 million in 2013. Also, 2014 included CHF 120 million in net expenses related to certain disputed receivables compared with CHF 88 million in 2013. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on the change in presentation of service allocations from Corporate Center – Services to business divisions and other Corporate Center units Balance sheet assets During 2014, balance sheet assets decreased by CHF 45 billion to CHF 170 billion, largely due to a CHF 33 billion decline in positive replacement values. During 2014, we executed a series of risk transfers to exit the majority of the correlation trading portfolio, which involved entering into a large number of back-to-back trades to transfer market risk. We subsequently derecognized these trades from our balance sheet via novations to third parties, thereby transferring credit risk, and reducing PRV by approxi- mately CHF 11 billion. The originally targeted novations were thus completed. Within our rates portfolio, PRV decreased due to negotiated bilateral settlements with specific counterparties, third-party novations, including transfers to central clearing houses, and agreements to net down trades with other dealer counterparties, partly offset by currency and interest rate move- ments. Funded assets decreased by CHF 10 billion to CHF 11 bil- lion, mainly due to the full loan repayment to the BlackRock fund, the full exit of precious metal holdings held on behalf of clients and the maturing of the last remaining trade in the structured reverse repurchase agreement portfolio. Furthermore, funded assets declined following the final exit from student loan auction rate securities, the sale of CMBS assets used to hedge certain CDS contracts facing monolines that were terminated during 2014 and a number of smaller position reductions. Risk-weighted assets RWA decreased significantly by CHF 28 billion to CHF 36 billion, mainly as a result of reductions of outstanding OTC derivative transactions by means of negotiated bilateral settlements with specific counterparties, third-party novations or trade compres- sions. In addition, the aforementioned exit of the majority of the correlation trading portfolio and termination of certain CDS con- tracts as well as the sale of the remaining student loan auction rate securities positions resulted in lower RWA. Furthermore, incremental RWA resulting from the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA decreased by CHF 4 billion. Leverage ratio denominator The leverage ratio denominator decreased to CHF 93 billion as of 31 December 2014 from CHF 160 billion at the end of the prior year, mainly due to a reduction in average balance sheet assets. Personnel As of 31 December 2014, a total of 137 front-office personnel were employed within Non-core and Legacy Portfolio compared with 222 at the end of the prior year. ➔ Refer to the “Significant accounting and financial reporting changes” section of this report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units 148 Risk, treasury and capital management Audited information according to IFRS 7 and IAS 1 Risk and capital disclosures provided in line with the requirements of International Financial Reporting Standard 7 (IFRS 7) Financial Instruments: Disclosures, and International Accounting Standard 1 (IAS 1) Financial Statements: Presentation form part of the finan- cial statements audited by the independent registered public accounting firm, Ernst & Young Ltd, Basel. Information that has been subject to audit is marked as “Audited” within this section of the report and is considered part of the audited financial statements included in the “Consolidated financial statements” section of this report. Audited information provided in this section applies to both UBS Group AG (consolidated) and UBS AG (consolidated). Differences between these two scopes of consolidation are provided where applicable. Risk, treasury and capital management Table of contents 152 153 Implementation of EDTF recommendations EDTF index 160 Key developments 204 Market risk 204 Main sources of market risk 204 Overview of measurement, monitoring and management techniques 215 214 212 205 Market risk exposures arising from our business activities 207 Market risk stress loss Value-at-risk 207 Stressed VaR Risks-not-in-VaR Incremental risk charge Comprehensive risk measure Securitization positions in the trading book Interest rate risk in the banking book Other market risk exposures Country risk 224 224 Macroeconomic developments during the period 224 216 217 217 222 Country risk framework Country risk exposure Operational risk Compliance and operational risk control developments during the period Operational risk framework Advanced measurement approach model Treasury management Liquidity and funding management Strategy and objectives Governance 224 229 229 230 232 234 234 234 234 163 163 165 166 168 169 170 172 173 173 175 176 176 Risk management and control Overview of risks arising from our business activities Risk categories Top and emerging risks Risk governance Risk appetite framework Risk principles and risk culture Quantitative risk appetite objectives Risk measurement Stress testing Statistical measures Portfolio and position limits Risk concentrations Credit risk 177 177 Main sources of credit risk 177 Overview of measurement, monitoring and management techniques Credit risk profile of the Group – IFRS view Impaired financial instruments Past due but not impaired loans Credit risk profile of the Group – Internal risk view Banking products Traded products Credit risk mitigation Credit risk models Policies for past due, non-performing and impaired claims 177 181 186 187 187 194 196 198 202 150 235 235 238 240 241 241 242 244 244 245 247 247 247 247 248 248 248 249 249 250 250 251 251 251 Liquidity Liquidity coverage ratio Asset encumbrance Stress testing Funding Internal funding and funds transfer pricing Changes in sources of funding during the reporting period Net stable funding ratio Credit ratings Maturity analysis of assets and liabilities Currency management Currency-matched funding and investment of non-Swiss franc assets and liabilities Sell-down of non-Swiss franc reported profits and losses Hedging of anticipated future reported non-Swiss franc profits and losses Capital management Capital management objectives Capital planning Capital management activities Financial resource optimization Active management of sensitivity to currency move- ments Consideration of stress scenarios Swiss SRB capital framework Regulatory framework Proposed changes to capital requirements and regulation 252 Capital requirements 254 254 255 255 257 260 260 261 262 267 267 267 267 267 268 270 271 272 272 275 276 276 279 280 282 282 282 283 284 Swiss SRB capital information (UBS Group) Capital ratios Eligible capital Tier 1 capital Tier 2 capital Advanced measurement approach model Additional capital information Differences between Swiss SRB and BIS Basel III capital Risk-weighted assets (UBS Group) RWA developments in 2015 Credit risk Non-counterparty-related risk Market risk Operational risk Key drivers of RWA movement by risk type Leverage ratio framework Proposed changes to leverage ratio requirements Leverage ratio information Swiss SRB leverage ratio BIS leverage ratio UBS AG (consolidated) capital and leverage ratio information Capital information Leverage ratio information Equity attribution framework UBS shares UBS Group AG shares UBS AG shares Holding of UBS Group AG shares Listing of UBS shares 151 Risk, treasury and capital management Risk, treasury and capital management Implementation of the recommendations of the Enhanced Disclosure Task Force (EDTF) Implementation of EDTF recommendations The Enhanced Disclosure Task Force (EDTF) was established by the Financial Stability Board (FSB) in 2012 to facilitate discussion among users, authors and other interested parties as to how disclosure can be enhanced to help restore investor confidence in banks. In its “Enhancing the Risk Disclosure of Banks” report issued on 29 October 2012, the EDTF set out recommendations designed to guide banks in disclosing their risk, liquidity and funding, and capi- tal management in a more transparent and comprehensible way. The EDTF recommendations are based on seven principles, which emphasize the importance of clear, balanced, comprehen- sive and relevant disclosures. Moreover, they require that disclo- sures be based on the same information that senior management uses for making its strategic decisions and managing the bank’s risks. These principles are closely aligned with our own financial disclosure principles of transparency, consistency, simplicity, rele- vance and best practice. Consistent with our financial disclosure principles, we regard the enhancement of our disclosures as an ongoing commitment. We continue to regularly review our disclosures for further amend- ments that may be necessary to better reflect the developments in our business, as well as the principles and recommendations established by the EDTF. The index on the following pages contains a short summary of each of the 32 EDTF recommendations and the cross-references to the locations in our Annual Report 2015 and Pillar 3 disclosures that support the objectives of each recommendation. ➔ Refer to “Information policy” in the “Corporate governance, responsibility and compensation” section of this report for more information on our financial disclosure principles Signposts Throughout the Annual Report, signposts that are displayed at the beginning of a section, table or chart – Audited | EDTF | Pillar 3 | – indicate that those items have been audited, have addressed the recommenda- tions of the Enhanced Disclosure Task Force, or satisfy Basel Pillar 3 disclosure requirements, respectively. A “triangle” symbol – – indicates the end of the signpost. 152 EDTF index EDTF recommendations and our disclosures Location of the disclosures Operating environment and strategy / risk, treasury and capital management / corporate governance, responsibility and compensation Consolidated financial statements Additional regulatory information General 1. Presentation of related information Table with cross-references to the locations of the disclosures in our Annual Report 2015 and Pillar 3 section ➔ EDTF index p. 153–159 – 2. Risk terminology Definition of the risk terms and risk measures which we use, including indication of key parameters in our risk models Risk terms ➔ Risk definitions p. 165 ➔ Risk concentrations p. 176 ➔ Accounting for expected credit losses under – IFRS 9, Financial Instruments p. 82–84 Risk measures ➔ Risk measurement p. 173–176 Key parameters and measurement models ➔ Credit risk: Credit risk models p. 198; Probability of default p. 199; Key features of our main credit risk models, Internal UBS rating scale and mapping of external ratings p. 198; Loss given default, Exposure at default, Expected loss p. 199, Stress loss p. 200 ➔ Market risks: Market risk stress loss, Value-at-Risk (VaR) p. 207; Stressed VaR p. 212; Incremental risk charge p. 215; Comprehensive risk measure p. 216 ➔ Country risk exposure measure p. 224 ➔ Operational risk: Advanced measurement approach model p. 232–233 ➔ Liquidity coverage ratio 235–237 ➔ Net stable funding ratio p. 244 ➔ Asset funding p. 243 ➔ Business risk: Measurement of performance p. 39–40 ➔ Risk factors p. 59–74 ➔ Risk, treasury and capital management: Key developments p. 160–162 ➔ Top and emerging risks p. 166–167 ➔ Accounting for expected credit losses under IFRS 9, Financial Instruments p. 82–84 Liquidity and funding ➔ Strategy and objectives p. 234 ➔ Liquidity coverage ratio p. 235–237 ➔ Net stable funding ratio p. 244 – – – – Capital ➔ Proposed new requirements for Swiss SRB – p. 26–27 ➔ Capital management activities p. 249 ➔ Our capital requirements p. 252 ➔ Capital ratios p. 254 ➔ Leverage ratio framework p. 270–271 ➔ Leverage ratio information p. 272–274 3. Top and emerging risks Qualitative and quantitative descrip- tion of top and emerging risks in relation to our business activities and developments of such risks during the reporting period 4. Regulatory ratio developments Description of new key regulatory ratios, pro forma disclosures for these ratios in accordance with FINMA guidance, and information on UBS’s implementation plan for adopting the new requirements – – – – – – – 153 Risk, treasury and capital management Risk, treasury and capital management Implementation of the recommendations of the Enhanced Disclosure Task Force (EDTF) EDTF recommendations and our disclosures Location of the disclosures Operating environment and strategy / risk, treasury and capital management / corporate governance, responsibility and compensation Consolidated financial statements Additional regulatory information Risk governance and risk management strategies / business model 5. Risk management organization Summary overview of our key roles and responsibilities for managing risks Organization and responsibilities ➔ Risk definitions p. 165 ➔ Risk governance p. 168–169 Processes for managing key risks ➔ Risk appetite framework p. 169–173 ➔ Overview of measurement, monitoring and management techniques: Credit risk p. 177; Market risk p. 204–205 ➔ Country risk framework p. 224 ➔ Operational risk framework p. 230–231 ➔ Accounting for expected credit losses under IFRS 9, Financial Instruments p. 82–84 – – 6. Risk culture Overview of our principles with respect to risk-taking measures in place to maintain the desired risk culture Risk culture ➔ Risk principles and risk culture p. 170–172 – Procedures and strategies applied to support the culture 7. Business model Risk origination resulting from our business activities and description of how the risks relate to line items in the balance sheet and income statement Sources of risk and risk management ➔ Organizational principles and structure (Audit Committee, Compensation Committee, Risk Committee) p. 307–308 ➔ UBS and Society p. 325–330 ➔ Qualitative measures used in determining compensation p. 348, 354, 359 and 364 – ➔ Risk factors p. 59–74 ➔ Overview of risks arising from our business – activities p. 163 ➔ Key risks, risk measures and performance by business division and Corporate Center unit p. 164 ➔ Risk measures and performance p. 164 ➔ Main sources of credit risk p. 177 ➔ Main sources of market risk p. 204 ➔ Currency management p. 247 Risk appetite in the context of the business model ➔ Risk, treasury and capital management: Key developments p. 160–162 ➔ Risk appetite framework p. 169–173 Market risks: ➔ Market risk exposures arising from our business activities p. 205–206 Risk measures and relation of risk measures to line items in the balance sheet and income statement – – – – – – – – Credit risks: ➔ Table 3: Regulatory credit risk exposure and RWA ➔ Table 4: Regulatory gross credit risk exposure by geographical region ➔ Table 5: Regulatory gross credit risk exposure by counterparty type ➔ Table 6: Regulatory gross credit risk exposure by residual contractual maturity ➔ Table 16: Equity 154 instruments in the banking book EDTF recommendations and our disclosures Location of the disclosures Operating environment and strategy / risk, treasury and capital management / corporate governance, responsibility and compensation Consolidated financial statements Additional regulatory information 8. Stress testing Information on the use of stress testing within our risk governance and appetite framework, on scenarios applied and agreed with the regulators and the linkage of stress testing results to our risk appetite Capital adequacy and risk-weighted assets 9. Minimum capital requirements Pillar 1 capital requirements, including capital surcharges for G-SIBs and the application of counter-cyclical and capital conservation buffers 10. Components of capital Summary of the information as disclosed in the Pillar 3 report on capital 11. Flow statement of capital Tabular information in prescribed format 12. Strategic and capital planning Management’s view on the required or targeted level of capital and how this will be established ➔ Risk appetite framework p. 169–173 ➔ Stress testing p. 173–175 ➔ Credit risk: stress loss p. 200 ➔ Market risk stress loss p. 207 ➔ Stress testing – liquidity and funding p. 240 – ➔ Regulatory framework, Capital requirements – p. 251–253 ➔ Swiss SRB capital information (UBS Group) p. 254–255 ➔ FINMA increment to our AMA based operational risk-related RWA p. 232 ➔ Eligible capital p. 255–257 ➔ Reconciliation IFRS equity to Swiss SRB capital p. 257 ➔ Additional tier 1 and tier 2 capital instruments p. 258–259 ➔ Swiss SRB capital movement p. 256 – – ➔ Proposed new requirements for Swiss SRB – p. 26–27 ➔ Our strategy p. 34–36 ➔ Capital management objectives p. 248 ➔ Capital planning p. 248 ➔ Capital management activities p. 249–250 13. Risk-weighted assets and related business activities Information on our RWA, and related capital requirements together with underlying exposures ➔ Information on Corporate Center RWA in the table Composition of Non-core and Legacy Portfolio p. 147 ➔ Risk-weighted assets (UBS Group) p. 262–269 14. Capital requirements for each risk type Quantitative information accompanied by reference to significant models used Overview: ➔ Risk-weighted assets (UBS Group) p. 262–269 Market risks: ➔ Derivation of regulatory VaR-based RWA and related calculations p. 211–212 ➔ Derivation of SVaR-based RWA and related calculations p. 212 ➔ Derivation of RWA add-on for risks-not-in- VaR and related calculations p. 214 ➔ Derivation of IRC-based RWA and related calculations p. 215 ➔ Derivation of CRM-based RWA and related calculations p. 216 – – – – ➔ Table 30: Composition of capital – – ➔ Table 2: Detailed segmentation of exposures and risk-weighted assets ➔ Table 3: Regulatory credit risk exposure and RWA ➔ Table 2: Detailed segmentation of exposures and risk-weighted assets ➔ Table 3: Regulatory credit risk exposure and RWA 155 Risk, treasury and capital management Risk, treasury and capital management Implementation of the recommendations of the Enhanced Disclosure Task Force (EDTF) EDTF recommendations and our disclosures Location of the disclosures Operating environment and strategy / risk, treasury and capital management / corporate governance, responsibility and compensation Consolidated financial statements Additional regulatory information 15. Credit risk analysis Break-down of the credit risk exposures by regulatory parameters and based on a 14-point UBS internal scale ➔ Internal UBS rating scale and mapping of – external ratings p. 198 Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings: ➔ Table 9a: Sovereigns – Advanced IRB approach ➔ Table 9b: Banks – Ad- vanced IRB approach ➔ Table 9c: Corporates – Advanced IRB approach ➔ Table 9d: Residential mortgages –Advanced IRB approach ➔ Table 9e: Lombard lending – Advanced IRB approach ➔ Table 9f: Qualifying revolving retail exposures – Advanced IRB approach ➔ Table 9g: Other retail – Advanced IRB approach ➔ Standardized approach Regulatory gross and net credit risk exposure: ➔ Table 10a: by risk weight under the standardized approach ➔ Table 10b: under the standardized approach risk-weighted using external ratings – ➔ Table 13: Total actual and expected credit losses 16. Flow statement of risk- weighted assets Tabular information in prescribed format 17. Credit risk model performance Information on credit risk models including back testing of probability of default, loss given default and credit conversion factors as well as expected loss analysis ➔ Risk-weighted assets movement by key – driver – fully applied p. 266 ➔ Risk-weighted assets by exposure segment p. 263–265 ➔ RWA development in 2015, Definition of key RWA movement driver categories p. 267–269 ➔ Credit risk model confirmation p. 200 ➔ Backtesting, Main credit models backtesting by regulatory exposure segment p. 200–201 ➔ Changes to models and model parameters – during the period p. 201 156 EDTF recommendations and our disclosures Location of the disclosures Operating environment and strategy / risk, treasury and capital management / corporate governance, responsibility and compensation Consolidated financial statements Additional regulatory information Liquidity 18. Liquidity needs and reserves Description of our approach to liquidity management during the normal course of business and during crisis events Liquidity risk management framework and components of liquidity 19. Encumbered and unencumbered assets Available and unrestricted assets to support potential funding and collateral needs 20. Contractual maturity analysis Analysis of assets, liabilities and off-balance sheet commitments based on the earliest date on which we could be required to pay / latest maturity date of assets, indicating behavioral characteristics as presumed by UBS in order to adjust contractual maturities for risk management purposes 21. Funding strategy Description of our approach to funding, available funding sources, dependencies and concentrations Market risk 22. Market risk linkage to the balance sheet Presentation of trading and non-trad- ing market risk factors relevant to the UBS business, including quantitative and qualitative information on the risk factors 23. Market risk analysis Qualitative and quantitative break- downs of significant trading and non-trading market risk factors ➔ Strategy and objectives p. 234 ➔ Liquidity p. 235–240 ➔ Stress testing p. 240 ➔ High-quality liquid assets and LCR 235– 237 ➔ Asset encumbrance p. 238–239 ➔ Governance p. 234 ➔ Internal funding and funds transfer pricing – p. 241 ➔ Asset encumbrance p. 238–239 ➔ Credit ratings p. 244 ➔ Note 25 Restricted and transferred financial assets p. 504 – 507 ➔ Maturity analysis of assets and liabilities – p. 245–246 ➔ Long-term debt – contractual maturities p. 242 ➔ Stress testing p. 240 ➔ Funding by product and currency p. 241 ➔ Internal funding and funds transfer pricing – p. 241 ➔ Changes in sources of funding during the reporting period p. 242–243 ➔ Funding by currency p. 242 ➔ Asset funding p. 243 ➔ Market risk exposures arising from our – business activities p. 205–206 ➔ Effect of interest rate changes on shareholders’ equity and CET1 capital p. 218–219 ➔ Refer also to EDTF 7 Business model and EDTF 13 Risk-weighted assets and related business activities above for further cross-references ➔ Trading market risk disclosures for VaR, – SVaR, IRC, CRM and securitization positions p. 207–217 ➔ Interest rate risk in the banking book p. 217–221 ➔ Other market risk exposures p. 222–223 – – – – – – 157 Risk, treasury and capital management Risk, treasury and capital management Implementation of the recommendations of the Enhanced Disclosure Task Force (EDTF) EDTF recommendations and our disclosures Location of the disclosures Operating environment and strategy / risk, treasury and capital management / corporate governance, responsibility and compensation Consolidated financial statements Additional regulatory information ➔ Value-at-Risk p. 207–213 ➔ VaR limitations p. 210 ➔ Backtesting of VaR p. 210–211 ➔ Development of backtesting revenues against backtesting VaR p. 210 ➔ VaR model confirmation p. 211 ➔ Market risk stress loss p. 207 ➔ Stressed VaR p. 212–213 ➔ Risks-not-in-VaR p. 214 ➔ Incremental risk charge p. 215 ➔ Comprehensive risk measure p. 216 – – – – ➔ Credit risk profile of the Group – IFRS view – p. 177–186 ➔ Credit risk profile of the Group – Internal risk view p. 187–195 ➔ Exposures to selected eurozone countries ➔ Due from banks and loans p. 846–847 p. 225–226 ➔ Exposure from single-name credit default swaps referencing to Greece, Italy, Ireland, Portugal or Spain p. 227 ➔ Emerging markets net exposure by internal UBS country rating category p. 227 ➔ Emerging market net exposures by major geographical region and product type p. 228 ➔ Policies for past due, non-performing and ➔ Allowances and – impaired claims p. 202–203 provisions for credit losses in Note 1 Summary of significant accounting policies p. 415–416 ➔ Impaired financial instruments p. 181–185 ➔ Past due but not impaired loans p. 186 ➔ Note 12 Allowances and provisions for credit losses p. 447 ➔ Impaired and non-performing loans p. 848 ➔ Summary of movements in allowances and provisions for credit losses p. 850 ➔ Allocation of the allowances and provisions for credit losses p. 851 24. Market risk measurement model performance Qualitative and quantitative informa- tion on our primary market risk measurement models VaR and market risk stress loss, their methodology, assumptions, model limitations and back testing 25. Other market risk management techniques Qualitative and quantitative informa- tion on each of our complementary market risk measurement models, methodology, assumptions, model limitations and back testing Credit risk 26. Analysis of credit risk exposures Presentation of the credit risk profile and of significant credit risk compo- nents in each business division by relevant parameters such as region, industry sector or banking products 27. Policies for impaired and non- performing loans Treatment of claims where payments are past due or other criteria indicating non-performance are met, or where there is objective evidence that amounts due cannot be fully collected 28. Analysis of impaired and non- performing loans Overview of balances and develop- ment of claims which meet the criteria in our policies for non-performing or impaired loans 158 EDTF recommendations and our disclosures Location of the disclosures Operating environment and strategy / risk, treasury and capital management / corporate governance, responsibility and compensation Consolidated financial statements Additional regulatory information ➔ Traded products p. 194–195 ➔ Note 14 Derivative ➔ Table 14 Credit risk 29. Counterparty credit risk from derivative transactions Quantitative and qualitative analysis of the counterparty credit risk that arises from our derivatives transactions 30. Credit risk mitigation Information on our use of collateral and credit hedging ➔ Maximum exposure to credit risk p. 177–179 ➔ Credit risk mitigation p. 196–197 exposure of derivative instruments instruments and hedge accounting p. 449–456 ➔ Note 26 Offsetting financial assets and financial liabilities p. 507 – ➔ Note 11 Cash collateral on securities borrowed and lent, reverse repurchase and repurchase agreements, and derivative instruments p. 446 ➔ Note 26 Offsetting financial assets and financial liabilities p. 507 Other risks 31. Other risks Description of how we identify, measure and manage risks consequen- tial to our business activities other than credit, market, liquidity, funding, operational and foreign exchange risks 32. Publicly known risk events Information on matters that management considers to be material or otherwise significant due to potential financial, reputation or other effects, together with disclosures on the effect on our business, the lessons learned and the resulting changes to risk processes already implemented or in progress ➔ Risk factors p. 59–74 ➔ UBS and Society p. 325–330 ➔ Risk categories p. 165 – ➔ Operational risk: Compliance and operational risk control developments during the period p. 229–230 ➔ Note 22 Provisions and contingent liabilities p. 466 – 477 ➔ Note 37 Events after the reporting period p. 557 – – 159 Risk, treasury and capital management Risk, treasury and capital management Key developments Key developments Our credit risk profile has remained stable over the year and our net credit loss expense remained low relative to the size of our lending portfolios. We continued to manage market risks at low levels. We concluded our program to combine the Compliance and Operational Risk Control functions and maintained our focus on enhancing our operational risk framework. Notwithstanding these developments, operational risks remain elevated for UBS and the industry. Credit risks EDTF | Gross banking products exposure was CHF 485 billion com- pared with CHF 497 billion at the end of 2014. Gross impaired exposure increased slightly by CHF 0.1 billion to CHF 1.5 billion, and net credit loss expense totaled CHF 117 million for the year compared with CHF 78 million, which continued to be low rela- tive to the size of our lending portfolios. A substantial portion of our lending exposure arises from our Swiss domestic business, which offers corporate loans and mort- gage loans secured against residential properties and income- producing real estate, and is therefore linked to the condition of the Swiss economy. These domestic lending portfolios have con- tinued to perform well, with net credit loss expense and delin- quency levels remaining low. Nevertheless, we remain mindful that the continued strength of the Swiss franc could have a nega- tive effect on the economy, in particular on exporters, and we continue to closely monitor developments in the Swiss economy. Were these negative effects to materialize, they could adversely affect some of our counterparties and lead to an increase in credit loss expense in future periods. Due to the current low-price environment in commodities, exposures to certain counterparties in the energy sector currently carry more risk than in prior periods. As of 31 December 2015, our total net banking products exposure to the oil and gas sector, predominantly recorded within the Investment Bank, was CHF 6.1 billion, including both funded and unfunded exposures, mainly in North America. About half of this exposure was to the integrated and mid-stream segments, which we expect to be less affected by the currently low energy price levels. Exposures potentially vulner- able to low energy prices are closely monitored and we have macro hedges in place to mitigate some of this risk. Specific allowances for these energy-related exposures totaled CHF 40 million as of 31 December 2015. A sustained period of depressed energy prices could result in an increased credit loss expense for this sub-segment of our portfolio in future periods. Loan underwriting activity in the Investment Bank, which gives rise to concentrated exposure of a temporary nature, was muted for much of 2015, but picked up toward the end of the year. The increase in activity was predominantly investment grade business, driven by strategic mergers and acquisitions. While distribution of these investment grade exposures has been sound, conditions in the sub-investment grade markets have remained challenging such that some lower-rated deals have not been distributed as planned, leading to a buildup in the level of our exposures intended for syndication. These exposures are classified as held for trading, with fair values reflecting the market conditions at the end of the year. The global market sell-off in the third quarter of 2015 led to a higher level of margin calls within our security-backed lending businesses, although margin calls were largely resolved within the normal process and did not result in any material losses. ➔ Refer to “Credit risk” in the “Risk management and control” section of this report for more information ➔ Refer to “Investment Bank” under “Credit risk” in the “Risk management and control” section of this report for more information on our exposures to the energy sector Market risks EDTF | We continued to manage market risks in our trading busi- nesses at low levels. We continued to see some volatility in our risk profile and value-at-risk, largely driven by positions arising from client facilitation, as well as option expiries. ➔ Refer to “Market risk” in the “Risk management and control” section of this report for more information 160 Consequential risks EDTF | In 2015, we concluded our program to combine the Compli- ance and Operational Risk Control functions in order to manage the Group’s compliance, conduct and operational risks in a fully integrated manner. This transformation has resulted in a strength- ened control environment, the introduction of globally consistent processes, substantial enhancements to our detective control capabilities, and a well-defined operating model which is aligned to the Group’s strategy and evolving regulatory requirements. We continued to invest significantly in dedicated security pro- grams to strengthen our cyber defense. The threats faced across the financial industry are broadly similar and include data theft, increasingly by criminal organizations, disruption of service, such as so-called distributed denial of service attacks, and cyber fraud, often through business email compromise and phishing attacks. To effectively address the challenges posed by the dynamic exter- nal environment and our own technological innovation, we have recently appointed a Head of Cyber Risk. The role will focus on enterprise governance for cyber-related activities, and will include regular assessments of cyber threat intelligence, analysis of the effectiveness of our controls, and progress in improving our cyber defense capability. We have substantially completed a program of remediation work that has focused on further strengthening our front-office processes and controls within the FX business. In addition, our systems have been enhanced to better segregate sensitive infor- mation, and our monitoring and surveillance capability was sig- nificantly enhanced so that we can more proactively detect unusual patterns of employee behavior and improper business and employee practices. This program also meets the specific undertakings made to the U.S. Commodity Futures Trading Com- mission, the Connecticut Department of Banking, the U.S. Depart- ment of Justice, the UK Financial Conduct Authority, the Swiss Financial Market Supervisory Authority and the Federal Reserve Bank of New York, as part of the resolution of the FX matter. Where applicable we are applying similar control and monitoring enhancements across our other trading businesses including the Rates and Credit, Equities and Non-Core and Legacy businesses. The management of conduct risks has been central to our remediation activities and we have implemented a firm-wide con- duct risk framework that is embedded into the existing opera- tional risk framework. This framework includes conduct-related management information which is reviewed at business and regional governance forums, providing metrics on employee con- duct, clients and markets, with employee conduct a central con- sideration in the annual compensation process. We also signifi- cantly strengthened our oversight controls regarding personal account dealing for our personnel by centralizing all accounts either within UBS, or into a number of defined brokers. Other key developments included the consolidation of related operational resilience disciplines into a single function, continued enhancement of our monitoring and surveillance capabilities with a focus on more powerful and versatile enterprise-wide analytics systems and centralized services, and the completion of a capabil- ity enhancement program for our financial crime risk control envi- ronment. We will maintain our focus on enhancing the operational risk control environment, with our strategy for 2016 focusing on con- tinued development of our core capabilities in the prevention of financial crime, monitoring and surveillance and conduct risk, while strengthening our control frameworks for cyber threats, vendor management and transformational change. Financial crime is particularly noteworthy given the current volatility in the geopolitical and associated sanctions environment, which continues to reinforce the importance of a robust, sophisti- cated and agile anti-financial crime framework. ➔ Refer to “Anti-money laundering and anti-corruption” in the “Regulation and supervision” section of this report for more information ➔ Refer to “Note 22b Litigation, regulatory and similar matters” in the “Consolidated financial statements” section of this report for more information Liquidity management EDTF | We continued to maintain a sound liquidity position through- out the year. Our high-quality liquid assets increased to CHF 208 billion from CHF 188 billion in 2014, and our three-month aver- age liquidity coverage ratio was 124% for the fourth quarter. ➔ Refer to the “Treasury management” section of this report for more information Funding management EDTF | We further strengthened our funding profile through the issuance of loss absorbing capital in the form of additional tier 1 capital and senior unsecured notes. As of 31 December 2015, our pro forma net stable funding ratio was stable at 105% compared with 31 December 2014. As part of optimizing our interest expense, while maintaining our strong liquidity, funding and cap- ital position, in December 2015, we successfully executed a cash tender offer to repurchase certain senior and subordinated debt and covered bonds with an aggregate principal repurchase amount equivalent to approximately CHF 6.1 billion. ➔ Refer to the “Treasury management” section of this report for more information 161 Risk, treasury and capital management Risk, treasury and capital management Key developments Capital management EDTF | Our strong capital position provides us with a solid founda- tion for growing our business and enhancing our competitive positioning. At the end of 2015, our common equity tier 1 (CET1) capital ratio increased to 14.5% on a fully applied basis, the high- est fully applied capital ratio in our peer group of large global banks. On a phase-in basis, our CET1 capital ratio was 19.0%. As of 31 December 2015, our Swiss SRB leverage ratio was 5.3% on a fully applied basis and 6.2% on a phase-in basis. Effective 31 December 2015, our Swiss SRB leverage ratio denominator calculation is fully aligned with the Bank for International Settle- ments (BIS) Basel III definition. In 2015, we issued the equivalent of CHF 5.2 billion of additional tier 1 perpetual capital notes, as well as CHF 5.6 billion of senior unsecured debt which will con- tribute to our total loss-absorbing capacity in anticipation of inter- national regulatory developments, including revisions to the Swiss too big to fail framework. ➔ Refer to the “Capital management” section of this report for more information 162 Risk management and control Overview of risks arising from our business activities EDTF | Our business is constrained by the capital we have available to cover risk-weighted assets (RWA) resulting from the risks in our business, by the size of our on- and off-balance sheet assets through their contribution to our leverage ratio and regulatory liquidity ratios, and by our risk appetite. Together, these con- straints create a close link between our strategy, the risks that our businesses take and the balance sheet and capital resources that we have available. As described in the “Capital management” section of this report, our equity attribution framework reflects our objectives of maintaining a strong capital base and managing our businesses in a way that they appropriately balance profit potential, risk, bal- ance sheet and capital usage. The framework establishes this link through the inclusion of RWA, the Swiss SRB leverage ratio denominator (LRD) and risk-based capital (RBC), an internal mea- sure of risk similar to economic capital, as three key drivers for the allocation of tangible equity to our business divisions and Corpo- rate Center. In addition to tangible equity, we allocate equity to support goodwill and intangible assets as well as certain capital deduction items to arrive at total equity attributed to the business divisions and Corporate Center. For each of our business divisions and Corporate Center units, the table on the next page presents the correlation between their risk exposures, the measures described above and their perfor- mance. In addition to the key risks inherent in each business divi- sion and Corporate Center unit, the table presents an overview of the key drivers of tangible attributed equity (RWA, LRD and RBC), as well as tangible attributed equity, total assets and adjusted operating profit before tax. We present tangible attributed equity, because we consider it to be more closely correlated with the risk measures applied. This helps explain how the activities in our busi- ness divisions and Corporate Center are reflected in our risk mea- sures, and it explains the performance of the business divisions and Corporate Center in the context of these requirements. ➔ Refer to the “Capital management” section of this report for more information on RWA, LRD and our equity attribution framework ➔ Refer to “Statistical measures” in this section for more informa- tion on RBC ➔ Refer to the “Adjusted results” table in the “Group performance” section of this report for more information 163 Risk, treasury and capital management Risk, treasury and capital management Risk management and control EDTF | Key risks, risk measures and performance by business division and Corporate Center unit Business divisions and Corporate Center Key risks arising from business activities Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Services CC – Group ALM Credit risk from lending against securities collateral and mortgages, and a small amount of derivatives trading activity. Minimal contribution to market risk Credit risk from lending against securities collateral and mortgages Market risk from municipal securities and closed-end fund secondary trading Credit risk from retail business, mortgages, secured and unsecured corpo- rate lending, and a small amount of derivatives trading activity. Minimal contribution to market risk Small amounts of creditand market risk Credit risk from lending, derivatives trading and securities financing Market risk from tradingin equities, fixed income, foreign exchange (FX) and commodities No material risk exposures Credit and market risks arising from management of the Group’s balance sheet, capital, and profit and loss Central manage- ment of liqui- dity, funding and structural FX risk CC – Non-core and Legacy Portfolio Credit risk from remaining lending and derivatives exposures Market risk, mainly from Non- core exposures, is materially hedged and primarily relates to liquid market factors Operational risk is an inevitable consequence of being in business, as losses can result from inadequate or failed internal processes, people and systems, or from external events. It can arise as a result of our past and current business activities across all business divisions and Corporate Center. EDTF | Risk measures and performance Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Services CC – Group ALM CC – Non-core and Legacy Portfolio 31.12.15 CHF billion, as of or for the year ended Risk-weighted assets (fully applied)1 of which: credit risk of which: market risk of which: operational risk Leverage ratio denominator (fully applied)3 Risk-based capital4 Average tangible attributed equity5 Total assets Operating profit / (loss) before tax (adjusted)6 25.3 12.6 0.0 12.6 119.0 1.0 2.8 119.9 2.8 21.9 8.5 1.0 12.4 62.9 1.3 1.9 61.0 0.8 34.6 32.9 0.0 1.6 153.8 2.9 3.9 141.2 1.7 2.6 1.7 0.0 0.9 2.7 0.3 0.4 12.9 0.6 62.9 35.5 10.5 16.8 268.0 6.1 7.2 253.5 2.3 23.6 1.3 (2.9)2 9.5 4.8 12.6 15.9 22.6 (1.1) 6.0 5.0 0.9 0.1 240.2 3.6 3.2 237.5 (0.1) 30.7 6.9 2.6 21.1 46.2 2.7 2.9 94.4 (1.4) Group 207.5 104.4 12.1 75.1 897.6 30.3 38.2 942.8 5.6 Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Services CC – Group ALM CC – Non-core and Legacy Portfolio Group 31.12.14 CHF billion, as of or for the year ended Risk-weighted assets (fully applied)1 of which: credit risk of which: market risk of which: operational risk Leverage ratio denominator (fully applied)3 Risk-based capital4 Average tangible attributed equity5 Total assets Operating profit / (loss) before tax (adjusted)6 1 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 2 Negative market risk numbers are due to the diversification effect allocated to CC – Services. 3 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, the leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 4 Refer to “Statistical measures” in the “Risk management and control” section of this report for more information on risk-based capital. 5 Refer to the “Capital management” section of this report for more information on our equity attribution framework. 6 Adjusted results are non-GAAP financial measures as defined by SEC regulations. Refer to the “Adjusted results” table in the “Group performance” section of this report for more infor- mation. 3.8 3.0 0.0 0.8 14.9 0.3 0.5 15.2 0.5 66.7 35.0 13.6 18.1 288.3 6.8 7.4 292.3 0.2 23.0 1.1 (4.5)2 12.1 (2.6) 9.1 8.8 19.9 (0.7) 7.1 4.3 2.7 0.1 236.3 4.3 3.2 237.9 (0.3) 35.7 12.8 3.6 19.3 93.4 3.6 4.9 169.8 (1.9) 216.5 108.6 16.5 76.7 997.8 29.5 33.7 1,062.5 2.8 33.1 31.4 0.0 1.6 165.9 3.0 4.1 143.7 1.6 25.4 12.3 0.0 12.9 138.3 1.3 2.7 127.6 2.5 21.7 8.7 1.0 11.9 63.3 1.1 2.1 56.0 0.9 164 Risk categories We categorize the risks faced by our business divisions and Corporate Center as outlined in the table below. EDTF | Pillar 3 | Risk definitions Primary risks: the risks that our businesses may take in pursuit of their business objectives Audited | Credit risk: the risk of loss resulting from the failure of a client or counterparty to meet its contractual obligations. This includes settlement risk and loan underwriting risk: Settlement risk: the risk of loss resulting from transactions that involve exchange of value where we must fulfill our obligation to deliver without first being able to determine with certainty that we will receive the countervalue Loan underwriting risk: the risk of loss arising during the holding period of financing transactions which are intended for further distribution Audited | Market risk (traded and non-traded): the risk of loss resulting from changes in general market risk factors (e.g., interest rates, equity index levels, exchange rates, commodity prices and general credit spreads) and changes in prices of debt and equity instruments which result from factors and events specific to individual companies or entities. Market risk includes issuer risk and investment risk: Issuer risk: the risk of loss from changes in fair value resulting from credit-related events affecting an issuer or group of related issuers, including sovereigns, to which we are exposed through tradable securities or derivatives referencing the issuer Investment risk: issuer risk associated with positions held as financial investments Country risk: the risk of losses resulting from country-specific events. It includes transfer risk, whereby a country’sauthoritiespreventorrestrictthepaymentofanobligation,aswellassystemicriskevents arising from country-specific political or macroeconomic developments Risk managed by Independent oversight by Captured in our risk appetite framework Business management Risk Control Business management Risk Control Business management Risk Control Consequential risks: the risks to which our businesses are exposed as a consequence of being in business Audited | Liquidity risk: the risk of being unable to generate sufficient funds from assets to meet pay- ment obligations when they fall due, including in times of stress Group Treasury Risk Control Audited | Funding risk: the risk of higher-than-expected funding costs due to higher-than-expected UBS credit spreads when existing funding positions mature and need to be rolled over or replaced by other, more expensive funding sources. If a shortage of available funding sources is expected in a stress event, funding risk also covers potential additional losses from forced asset sales Structural foreign exchange risk: the risk of decreases in our capital due to changes in foreign exchange rates with an adverse translation effect on capital held in currencies other than Swiss francs Group Treasury Risk Control Operational risk: the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events, including cyber risk. Operational risk includes, among others, legal risk, conduct risk and compliance risk: Legal risk: (i) the financial risk resulting from the non-enforceability of a contract or the failure to assert non-contractual rights, or (ii) the financial or reputational risk resulting from UBS being held liable for a contractual or legal claim, or otherwise being subject to a penalty or liability in a legal action, based on a contractual or other legal claim, violation of law, or regulation, or infringement of intellectual property rights, or failing to manage litigation or other actions appropriately or effectively Conduct risk: Conduct risk is the risk that the conduct of the firm or its individuals unfairly impacts clients or counterparties, undermines the integrity of the financial system or impairs effective competition to the detriment of consumers. Compliance risk: the financial or reputational risk incurred by UBS by not adhering to the applicable laws, rules and regulations, local and international best practice (including ethical standards) and UBS’s own internal standards Pension risk: the risk of a negative impact on other comprehensive income as a result of deteriorating funded status from decreases in the fair value of assets held in the defined benefit pension funds and / or changes in the value of defined benefit pension obligations due to changes in actuarial assumptions (e.g., discount rate, life expectancy, rate of pension increase) and / or changes to plan designs Environmental and social risk: the possibility of UBS suffering reputational or financial harm from transactions, products, services or activities that involve a party associated with environmentally or socially sensitive activities ➔ Refer to the “UBS and Society” section of this report for more information Business management Risk Control Legal Risk Control Risk Control Human Resources Risk Control and Finance Business management Risk Control Business risks: the risks arising from the commercial, strategic and economic environment in which our businesses operate Business risks: the potential negative impact on earnings from lower-than-expected business volumes and / or margins, to the extent they are not offset by a decrease in expenses Business management Finance Reputational risks Reputational risk: the risk of a decline in the reputation of UBS from the point of view of its stakeholders – customers, shareholders, staff and the general public All businesses and functions All control functions 165 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Top and emerging risks EDTF | Our approach to identifying and monitoring top and emerg- ing risks is an ongoing part of our risk management framework. The top and emerging risks disclosed below reflect those that we currently think have the potential to significantly affect the Group and which could materialize within one year. Investors should also carefully consider all information set out in the “Risk factors” sec- tion of this report, where we discuss the top and emerging risks in more detail, as well as other risks we currently consider mate- rial, that may impact our ability to execute our strategy and may affect our business activities, financial condition, results of opera- tions and prospects. Regulatory and legislative changes: We continue to be exposed to a number of regulatory and legislative changes, some of which have already been adopted and implemented, but also some that are subject to legislative action or to further rulemaking by regula- tory authorities before final implementation. This results in uncer- tainty as to whether and in which form these regulatory and legis- lative changes will be adopted, the timing and content of implementing regulations and interpretations and / or the dates of their effectiveness. In addition, both adopted and proposed changes differ significantly across the major jurisdictions, making it difficult to manage a global institution and potentially putting us at a disadvantage to those peers operating either in only one jurisdic- tion or in jurisdictions where the regulatory environment is consid- ered to be less stringent. Moreover, managing the risk profile of a subsidiarized organization results in increased effort and complex- ity. While we aim to leverage Group-wide global frameworks and processes, local regulatory requirements can result in potential inef- ficiencies such as, for example, the application of different models for the same risk, the retention of buffer capital in subsidiaries that impede on the free flow of capital across the Group, and the requirement for staff to be resident in the local jurisdiction. We have programs in place to address the risks arising from regulatory and legislative changes, including ongoing monitoring of proposals, providing guidance and feedback to the relevant authorities and developing internal assessment and implementa- tion plans. During 2015, our more active programs included those relating to resolution planning and resolvability, changes to our legal entity structure and operating model, and new and revised capital, liquidity and funding-related regulations, as well as requirements related to risk data aggregation and reporting. We have made good progress across all of these programs in prepar- ing for their implementation, including the establishment of UBS Group AG as the holding company of the UBS Group and the successful establishment of UBS Switzerland AG. ➔ Refer to “Regulatory and legislative changes may adversely affect our business and ability to execute our strategic plans” in the “Risk factors” section of this report for more information Legal and regulatory enforcement risks: EDTF | We are subject to a large number of claims, disputes, legal proceedings and govern- ment investigations and we anticipate that our ongoing business activities will continue to give rise to such matters in the future. We continue to work on enhancing our operational risk frame- work and our relationships with regulatory authorities and on resolving open matters in a manner most beneficial to our stake- holders. Information on those litigation, regulatory and similar matters currently considered significant by management is dis- closed in Note 22 of the “Consolidated financial statements” sec- tion of this report. The extent of our financial exposure to these and other matters could be material and could substantially exceed the level of provisions that we have established, which was CHF 3.0 billion as of 31 December 2015. At this point in time, we believe that the industry continues to operate in an environ- ment where the net charge associated with litigation, regulatory and similar matters will remain elevated for the foreseeable future, and we will continue to be exposed to a number of significant claims and regulatory matters. ➔ Refer to “Material legal and regulatory risks arise in the conduct of our business” in the “Risk factors” section of this report for more information Market conditions and the macroeconomic climate: EDTF | We are exposed to a number of macroeconomic issues as well as gen- eral market conditions. These external pressures may have a sig- nificant adverse effect on our business activities and related finan- cial results, primarily through reduced margins, asset impairments and other valuation adjustments. Accordingly, these macroeco- nomic factors are considered in our development of stress testing scenarios for our ongoing risk management activities. 166 Management continues to consider developments in the euro- zone to be of greatest significance to us, but we also perceive a growing risk from the macroeconomic developments in China and emerging markets more broadly, as well as the weakening of commodity prices, particularly oil. These factors have given rise to increased market volatility in 2015, which could well persist throughout 2016. In addition, as our strategic plans depend heav- ily upon our ability to generate growth and revenue in emerging markets, we are monitoring developments in these regions very closely. The potential effects of a China-led global economic slow- down have been captured in the calculation of our post-stress fully applied common equity tier 1 (CET1) capital ratio following the replacement of the Eurozone Crisis scenario with a new Global Recession scenario as the binding scenario in our combined stress testing framework. Given the limited negative fallout from recent experiences in Europe and Japan, there is a growing perception that negative interest rates have become a conventional policy tool, and there is a strong possibility that rates will be cut further in the coming months. Prolonged negative rates could lead to unpredictable structural shifts in behavior and economic and financial distor- tions. We continue to closely monitor developments in our domestic economy, which is heavily reliant on exports, and for which the continued strength of the Swiss franc could have a negative effect. ➔ Refer to “Interest rate risk in the banking book” in this section and to the “Risk factors” section of this report for more information on negative interest rates ➔ Refer to “Performance in the financial services industry is affected by market conditions and the macroeconomic climate” and “Fluctuation in foreign exchange rates and continuing low or negative interest rates may have a detrimental effect on our capital strength, our liquidity and funding position, and our profitability” in the “Risk factors” section of this report for more information ➔ Refer to “Risk measurement” in this section for more informa- tion on macroeconomic considerations, including stress testing ➔ Refer to “Country risk” in this section for more information on our exposures to selected eurozone and emerging markets countries Reputational risk: EDTF | Our reputation is critical to achieving our strategic goals and financial targets, and damage to it can have fundamental negative effects on our business and prospects. This has been emphasized for us in recent years, following events such as the matters related to LIBOR and investigations into our foreign exchange business. This has triggered an enhanced focus on improving and sustaining a strong risk culture and UBS behaviors across the Group, the implementation of a coherent and holistic conduct risk framework, and the continuing development of our surveillance and monitoring capabilities. ➔ Refer to “Our reputation is critical to the success of our business” in the “Risk factors” section of this report for more information ➔ Refer to “Risk culture” in this section for more information ➔ Refer to “Operational risk” in this section for more information Cyber risk: EDTF | One of the most critical and constantly evolv- ing risks facing the broader industry is the threat of cyber- attacks. Along with the rest of the industry we face ongoing threats, such as data theft, disruption of service and cyber fraud, all of which have the potential for extremely significant impact. We continue to invest significantly in dedicated security programs to strengthen our cyber defense. We have recently appointed a Head of Cyber Risk to effectively address the challenges posed by the dynamic external environment and our own technology innovation. The role will focus on enterprise governance for cyber-related activi- ties, and will include regular assessments of cyber threat intelli- gence, analysis of the effectiveness of our controls, and progress on improving our capability. To further enhance our resilience, our cyber response framework, comprising ”Analyze,“ "Protect,“ ”Detect“ and ”Respond / Recover“ capabilities, will be further strengthened through a dedicated program and will include assessments of our vendor’s capabilities. ➔ Refer to “Operational risk” in this section for more information Other operational risks: EDTF | Due to the operational complexity of all our businesses, we are continually exposed to operational risks such as process error, failed execution and fraud. We believe we have a strong operational risk management framework in place to help ensure that these risks are appropriately controlled. However, in line with the industry, some areas retain an elevated level of inherent risk, specifically financial crime, anti-money laun- dering / know your client, internal and external fraud, and anti- bribery and corruption. Our operational risks management frame- work has been significantly enhanced following the unauthorized trading incident in 2011. In view of the changing nature of opera- tional risks and the environment within which we operate, we continuously review our associated control frameworks to allow us to make enhancements where necessary. Our strategy for 2016 will focus on continued development of our core capabilities in the prevention of financial crime and monitoring and surveil- lance. In addition, conduct risk will remain a high priority to ensure that we treat clients and the markets in which we operate appropriately. We will continue to strengthen our control frame- works for vendor management and transformational change. ➔ Refer to “Operational risks affect our business” in the “Risk factors” section of this report for more information ➔ Refer to “Operational risk” in this section for more information on our management of operational risk 167 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Risk governance EDTF | Pillar 3 | Our risk governance framework operates along three lines of defense. Business management, as the first line of defense, owns its respective risk exposures and is required to maintain effective processes and systems to manage their risks, including robust and comprehensive internal controls and documented pro- cedures. Business management must also have appropriate super- visory controls and review processes in place to identify control weaknesses, inadequate processes and unexpected events. Con- trol functions act as the second line of defense, providing inde- pendent oversight of primary and consequential risks. This includes setting risk limits and protecting against non-compliance with applicable laws and regulations. Group Internal Audit (GIA) forms the third line of defense, evaluating the overall effective- ness of governance, risk management and the control environ- ment, including the assessment of how the first and second lines of defense meet their objectives. These key roles and responsibilities for risk management and control are illustrated in the following chart and described below. 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(cid:47)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71) (cid:52)(cid:71)(cid:73)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2) (cid:69)(cid:81)(cid:79)(cid:79)(cid:75)(cid:86)(cid:86)(cid:71)(cid:71)(cid:85) 168 Audited | EDTF | Pillar 3 | The Board of Directors (BoD) is responsible for determining the risk principles, risk appetite and major portfo- lio limits of the Group, including their allocation to the business divisions and Corporate Center. The risk assessment and manage- ment oversight performed by the BoD considers evolving best practices and is intended to conform to statutory requirements. The BoD is supported by the BoD Risk Committee, which moni- tors and oversees the risk profile of the Group and the implemen- tation of the risk framework as approved by the BoD, as well as assessing the Group’s key risk measurement methodologies. The Corporate Culture and Responsibility Committee supports the BoD in fulfilling its duty to safeguard and advance the Group’s reputation for responsible and sustainable conduct. It reviews and assesses stakeholder concerns and expectations pertaining to the societal performance of UBS and the development of UBS’s cor- porate culture and their possible consequences for UBS, and rec- ommends appropriate actions to the BoD. The Chairman of the BoD and the Audit Committee oversee the performance of Group Internal Audit. The Group Executive Board (GEB) implements the risk frame- work, controls the Group’s risk profile and approves key risk poli- cies. The Group Chief Executive Officer (Group CEO) is responsible for the results of the Group, has risk authority over transactions, positions and exposures, and also allocates portfolio limits approved by the BoD within the business divisions and Corporate Center. Business management comprises business division and regional Presidents. The business division Presidents are accountable for the results of their business divisions. This includes actively man- aging their risk exposures, and ensuring profit potential, risk, bal- ance sheet and capital usage are balanced. The regional Presi- dents coordinate and implement UBS’s strategy in their region, jointly with the business division Presidents and heads of the con- trol and support functions. They have a veto power over decisions with respect to all business activities that may have a negative regulatory or reputational effect in their respective regions. The Group Chief Risk Officer (Group CRO) reports directly to the Group CEO and has functional and management authority over Risk Control throughout the Group. Risk Control provides independent oversight of all primary and most consequential risks as outlined in the “Risk categories” section above. This includes establishing methodologies to measure and assess risk, setting risk limits, and developing and operating an appropriate risk con- trol infrastructure. The risk control process is supported by a framework of policies and authorities. Business division, regional and legal entity Chief Risk Officers have delegated authority for their respective divisions, regions and entities. Moreover, authori- ties are delegated to risk officers according to their expertise, experience and responsibilities. The Group Chief Financial Officer (Group CFO) is responsible for ensuring that disclosure of our financial performance meets regulatory requirements and corporate governance standards with clarity and transparency. The Group CFO is also responsible for the management of UBS’s tax affairs, treasury and capital, including management of funding and liquidity risk and UBS’s regulatory capital ratios. The Group CFO is also responsible for implementation of the associated control frameworks, with the exception of the control framework for treasury activities, for which responsibility is with Risk Control. The Group General Counsel (Group GC) is responsible for implementing the Group’s risk management and control princi- ples for legal matters, and for managing the legal function for the UBS Group. The Group GC is responsible for reporting legal risks and material litigation, and for managing legal, internal, special and regulatory investigations. Group Internal Audit (GIA) independently, objectively and sys- tematically assesses the adherence to our strategy, the effective- ness of governance, risk management and control processes at Group, business division and regional levels, including compliance with legal, regulatory and statutory requirements, as well as with internal policies and contracts. GIA has a functional reporting line to the Audit Committee. Risk appetite framework EDTF | Pillar 3 | Our risk appetite is defined at the aggregate level and reflects the types of risk that we are willing to accept or intend to avoid. It is established via a complementary set of qualitative and quantitative objectives defined on a Group-wide level and embedded throughout our business divisions and legal entities through Group, business division and legal entity policies, limits and authorities. These objectives are a critical foundation to maintaining a robust risk culture throughout our organization. The “Risk appetite framework” chart depicts the key elements of this framework, which are described in more detail below. Qualitative statements, reflected in the Group’s Risk Manage- ment and Control Principles, and various policies and initiatives, aim to ensure we maintain the desired risk culture. Quantitative risk appetite objectives relate Group-wide risk exposure to our risk capacity and are designed to enhance the Group’s resilience against the impact of potential severe adverse economic or geopolitical events. They cover areas such as the Group’s capital buffer, solvency, earnings, leverage, liquidity and funding, and are subject to periodic review, including as part of the annual business planning process. These objectives are complemented by operational risk appe- tite objectives, which are established for each of our operational risk categories, for example market conduct, theft, fraud, data confidentiality, and technology risks. Operational risk events that exceed risk tolerances set according to predetermined percent- ages of the firm’s operating income must be escalated to the busi- ness division President or higher, as appropriate. 169 Risk, treasury and capital management Risk, treasury and capital management Risk management and control (cid:39)(cid:38)(cid:54)(cid:40)(cid:2)(cid:94)(cid:2)(cid:50)(cid:75)(cid:78)(cid:78)(cid:67)(cid:84)(cid:2)(cid:21)(cid:2)(cid:94)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:67)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77) (cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:35)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:40)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77) (cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:35)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:53)(cid:86)(cid:67)(cid:86)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86) (cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:50)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85)(cid:14)(cid:2)(cid:41)(cid:81)(cid:88)(cid:71)(cid:84)(cid:80)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:52)(cid:81)(cid:78)(cid:71)(cid:85)(cid:17)(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:75)(cid:71)(cid:85) (cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:49)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85)(cid:14)(cid:2)(cid:47)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:37)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)(cid:85) (cid:115)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(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:67)(cid:80)(cid:70)(cid:2)(cid:37)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)(cid:2)(cid:50)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85) (cid:115)(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:115)(cid:2)(cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:52)(cid:71)(cid:89)(cid:67)(cid:84)(cid:70)(cid:2)(cid:50)(cid:84)(cid:75)(cid:80)(cid:69)(cid:75)(cid:82)(cid:78)(cid:71)(cid:85) (cid:115)(cid:2)(cid:49)(cid:84)(cid:73)(cid:67)(cid:80)(cid:75)(cid:92)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:52)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:17)(cid:50)(cid:81)(cid:78)(cid:75)(cid:69)(cid:75)(cid:71)(cid:85) (cid:115)(cid:2)(cid:52)(cid:81)(cid:78)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(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:75)(cid:71)(cid:85) (cid:115)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:15)(cid:89)(cid:75)(cid:70)(cid:71)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:35)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:49)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85) (cid:115)(cid:2)(cid:49)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:35)(cid:82)(cid:82)(cid:71)(cid:86)(cid:75)(cid:86)(cid:71)(cid:2)(cid:49)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:88)(cid:71)(cid:85) (cid:115)(cid:2)(cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:47)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:40)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)(cid:85) (cid:115)(cid:2)(cid:35)(cid:87)(cid:86)(cid:74)(cid:81)(cid:84)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:46)(cid:75)(cid:79)(cid:75)(cid:86)(cid:85)(cid:2) (cid:52)(cid:75)(cid:85)(cid:77)(cid:2)(cid:52)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:38)(cid:75)(cid:85)(cid:69)(cid:78)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:14)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:14)(cid:2)(cid:52)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:81)(cid:84)(cid:91)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:39)(cid:90)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:52)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:75)(cid:80)(cid:73) (cid:86)(cid:86) The status of risk appetite objectives is evaluated each month, and reported to the BoD and the GEB. Our risk appetite may change over time and, as a consequence, portfolio limits and risk authorities will be subject to periodic reviews and changes, in par- ticular in the context of the annual business planning process. In addition, escalation triggers embedded in the firm’s Recov- ery Plan are drawn from the set of risk limits that management monitors on a routine basis. Our risk appetite framework is encompassed in a single over- arching policy and conforms to the Financial Stability Board’s “Principles for An Effective Risk Appetite Framework” published on 18 November 2013. Risk principles and risk culture EDTF | A strong and dynamic risk culture is a prerequisite for success in today’s highly complex operating environment. We are focused on fostering and further strengthening our culture as a source of sustainable competitive advantage both from a risk and a perfor- mance point of view. By placing prudent and disciplined risk-tak- ing at the center of every decision, we want to achieve our goals of delivering unrivaled client satisfaction, creating long-term value for stakeholders, and making UBS one of the most attractive com- panies to work for in the world. Our risk appetite framework combines all the important ele- ments of our risk culture, expressed in our Pillars, Principles and Behaviors, our Risk Management and Control Principles, our Code of Business Conduct and Ethics, and our Total Reward Principles. Together, these aim to align the decisions we make with the firm’s strategy, principles and risk appetite. They help define who we are and the way we operate each day, providing a solid foundation for promoting risk awareness, leading to appropriate risk taking and establishing robust risk management and control processes. EDTF | Risk management and control principles Protection of financial strength Protection of reputation Business management accountability Independent controls Risk disclosure Protecting the financial strength of UBS by controlling our risk exposures and avoiding potential risk concentrations at individual exposure levels, at specific portfolio levels and at an aggre- gate firm-wide level across all risk types Protecting our reputation through asoundriskculture characterized by a holistic and integrated view of risk, per- formance and reward, and through full compliance with our standards and principles, particularly our Code of Business Conduct and Ethics Ensuring management account- ability, whereby business management, as opposed to Risk Control, owns all risks assumed throughout the firm and is responsible for the continuous and active management of all risk exposurestoensurethatrisk and return are balanced Independent control functions which monitor the effectiveness of the business’s risk management and oversee risk-taking activities Disclosure of risks to senior management, the Board of Directors, investors, regulators, credit rating agencies and other stakeholders with an appropriate level of comprehensiveness and transparency 170 Pillars, Principles and Behaviors EDTF | Our risk culture is based on our three keys to success – Pillars (capital strength, efficiency and effectiveness, and risk manage- ment), Principles (client focus, excellence and sustainable perfor- mance) and Behaviors (integrity, collaboration and challenge). A strong emphasis is placed on every individual’s accountability for adhering to our principles and behaviors at all times, with an unremitting focus on the long-term objectives and success of UBS, thereby safeguarding the firm’s reputation, our most valu- able asset. Risk Management and Control Principles EDTF | These principles highlight the key aspects of our risk man- agement and control philosophy and are consistent with our three-lines-of-defense model. Code of Business Conduct and Ethics EDTF | The Code of Business Conduct and Ethics (Code) outlines the principles and practices that all our employees and BoD members are required to follow unreservedly, both in letter and in spirit, supported by an annual adherence certification process. Included in the Code are requirements covering laws, rules and regulations, ethical and responsible behavior, information man- agement, the work environment, social responsibility and disci- plinary measures. Total Reward Principles EDTF | Our performance measurement and management process requires that all employees have risk objectives aligned to their roles and responsibilities. This helps reinforce their understanding that rigorous risk management plays an essential role in our efforts to deliver the best possible client experience and achieve our business objectives. In short, everyone at UBS is responsible for anticipating, addressing and managing risks. The performance measurement and management process links into the Group’s compensation framework. Our compensation philosophy is to provide our employees with compensation that recognizes their individual contributions, team, business division and Group performance, and clearly links their pay to performance, not simply the delivery of business tar- gets, but also how those results were achieved through our employees’ behaviors. As explained in more detail in the “Com- pensation” section of this report, the performance of GEB mem- bers is assessed through both quantitative and qualitative factors. Qualitative factors include reinforcing a culture of accountability and responsibility, demonstrating commitment to being a respon- sible corporate citizen and acting with integrity in all interactions with our stakeholders. The “Compensation” section of this report explains how the compensation of each employee is decided and shows how the individual’s contribution to promoting our principles and stan- dards of behaviors is factored into the compensation process. The process includes an examination of the individual’s efforts to actively manage risk, striking an appropriate balance between risk and reward, and to what extent the individual exhibited profes- sional and ethical behavior. Forfeiture provisions enable the firm to forfeit some, or all, of any unvested deferred portion of com- pensation should an employee commit certain harmful acts and in other select circumstances. ➔ Refer to the “Our employees” and “Compensation” sections of this report for more information In embedding the desired risk culture within the Group, these principles are supported by a range of initiatives covering employ- ees at all levels, which include the elements described below. House View on Leadership EDTF | Leadership is a critical component in developing a culture that is a source of pride and competitive advantage. Introduced in September 2014, the UBS House View on Leadership is a set of explicit expectations for leaders that establishes consistent leader- ship standards across UBS. It was developed by a cross-business group of employees and external experts, led by the Group Execu- tive Board. In 2015, the House View of Leadership was integrated into all promotion, hiring and development processes for posi- tions at Director level and higher. The aim is to improve hiring decisions, and to support the development and promotion of present and future UBS leaders. It is also used as a basis for leader- ship development programs and initiatives. Principles of good supervision EDTF | The Group has defined principles of good supervision, which establish clear expectations of managers and employees with respect to supervisory responsibilities, specifically: to take respon- sibility, to organize their business, to know their employees and what they do, to know their business, to create a good compli- ance culture and to respond to and resolve issues. Supervisors are expected to understand and set a good example of professional behavior and to act as role models, to be open about issues, to be alert to unusual behavior and to act on any red flags, ensuring that issues are resolved. We have established frameworks intended to ensure adherence to these principles. Whistleblowing EDTF | We continue to promote a culture of constructive challenge, encouraging employees to speak up. Our whistleblowing policy provides a formal framework and multiple channels for all employ- ees to raise concerns, either openly or anonymously, about sus- pected breaches of laws, regulations, rules and other legal requirements to which the Group is subject, or our Code of Busi- ness Conduct and Ethics, policies, or any relevant professional standards. Raising employee awareness through training and communication is an integral part of our approach. We have established procedures which are intended to ensure that whistle- blowing concerns are investigated, and appropriate and consis- tent action is taken. 171 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Compliance and risk training EDTF | We have a mandatory training program in place for all employees covering a range of compliance and risk-related topics, including anti-money laundering and operational risk. In addition, more specialized training is provided for employees depending on their specific roles and responsibilities, such as training on credit risk and market risk for those working in trading areas. During 2015, our employees and external staff were required to com- plete over 800,000 mandatory training sessions, an increase of approximately 14% from 2014. Approximately 65% of these ses- sions were produced by Compliance and Operational Risk Control (C&ORC), as we continue to focus on strengthening our risk cul- ture. As a rule, the training sessions need to be completed, usually together with an assessment, within a specified deadline. Failure to complete mandatory training sessions satisfactorily within the given deadline results in consequences including disciplinary action. In 2015, our ultimate completion rate for these mandatory training sessions was 100%. Quantitative risk appetite objectives EDTF | Pillar 3 | Through a set of quantitative risk appetite objectives, we aim to ensure that our aggregate risk exposure remains within our desired risk capacity, based on our capital and business plans. The specific definition of risk capacity for each objective seeks to ensure that we have sufficient capital, earnings and funding liquidity to protect our business franchises and exceed minimum regulatory requirements under a severe stress event. The risk appetite objectives are evaluated as part of the annual business planning process, and approved by the BoD. The comparison of risk exposure with risk capacity is a key consideration in manage- ment decisions on potential adjustments to the business strategy and the risk profile of the Group. We make use of both scenario-based stress tests and statistical risk measurement techniques to assess the impact of a severe stress event at a Group-wide level. 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(cid:54)(cid:74)(cid:71)(cid:2)(cid:41)(cid:84)(cid:81)(cid:87)(cid:82)(cid:15)(cid:89)(cid:75)(cid:70)(cid:71)(cid:2)(cid:85)(cid:86)(cid:67)(cid:86)(cid:75)(cid:85)(cid:86)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:86)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:79)(cid:71)(cid:86)(cid:84)(cid:75)(cid:69)(cid:85)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:78)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:71)(cid:70)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:67)(cid:2)(cid:73)(cid:84)(cid:67)(cid:80)(cid:87)(cid:78)(cid:67)(cid:84)(cid:2)(cid:72)(cid:84)(cid:67)(cid:79)(cid:71)(cid:89)(cid:81)(cid:84)(cid:77)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:71)(cid:85)(cid:86)(cid:67)(cid:68)(cid:78)(cid:75)(cid:85)(cid:74)(cid:71)(cid:85)(cid:2)(cid:78)(cid:75)(cid:79)(cid:75)(cid:86)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:84)(cid:71)(cid:85)(cid:74)(cid:81)(cid:78)(cid:70)(cid:85)(cid:2)(cid:67)(cid:86)(cid:2)(cid:67)(cid:2)(cid:82)(cid:81)(cid:84)(cid:86)(cid:72)(cid:81)(cid:78)(cid:75)(cid:81)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:82)(cid:81)(cid:85)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:78)(cid:71)(cid:88)(cid:71)(cid:78) (cid:86)(cid:86) 172 EDTF | Pillar 3 | Risk appetite objectives at the business division level are logically derived from and must conform to the Group-wide objectives. They may also comprise objectives specific to the divi- sion, related to the specific activities and risks in that division. Risk appetite objectives are also set for certain legal entities. These must be consistent with the Group-wide Risk Appetite Framework and approved in accordance with the regulations of the legal entity and the firm’s regulations. Differences may exist that reflect the specific nature, size, complexity and regulations applicable to the relevant legal entity. In determining our risk capacity, we adjust projected earnings from the strategic plan for business risk to reflect lower expected earnings and lower expenses, for example due to the reversal of variable compensation accruals in a severe stress event. We also adjust our capital to take into account the impact of stress on deferred tax assets, pension plan assets and liabilities, and accru- als for capital returns to shareholders. The chart on the previous page provides an overview of our quantitative risk appetite objectives. Risk measurement Audited | EDTF | Pillar 3 | A variety of methodologies and measurements are applied to quantify the risks of our portfolios and potential risk concentrations. Risks that are not fully reflected within standard measures are subject to additional controls, which may include pre-approval of specific transactions and the application of spe- cific restrictions. Models to quantify risk are generally developed by dedicated units within control functions and are subject to independent verification. Applied models and methodologies must be approved and regularly reviewed in accordance with regulatory requirements as well as internal policies to test that models perform as expected, produce results comparable with actual events and values, and reflect best-in-practice approaches as well as recent academic developments. Accordingly, we assess whether the model is per- forming satisfactorily, whether additional analysis is required, and whether recalibration or redevelopment needs to be performed. Results and conclusions are presented to the relevant governance body and, as required, to regulators. The ongoing process of assessing model quality and perfor- mance in the production environment comprises two compo- nents: model verification, being the initial and regular assessment of the model’s conceptual soundness, performed by Quantitative Risk Control (QRC), and model confirmation, representing the regular process of confirming the accuracy and appropriateness of the model output and its application, carried out by the model developers and reviewed by QRC. ➔ Refer to “Credit risk,” “Market risk” and “Operational risk” in this section for more information on model confirmation procedures Stress testing EDTF | We perform stress testing to quantify the loss that could result from extreme, yet plausible macroeconomic and geopolitical stress events. This enables us to identify, better understand and manage our potential vulnerabilities and risk concentrations. Stress testing plays a key role in our limits framework at Group-wide, business division, legal entity and portfolio levels. Stress test results are regu- larly reported to the BoD, the Risk Committee and the GEB. We also provide detailed stress loss analyses to the Swiss Financial Mar- ket Supervisory Authority (FINMA) in accordance with its require- ments. As described in the “Risk appetite framework” section above, stress testing, along with statistical loss measures, plays a central role in our risk appetite and business planning processes. Our stress testing framework incorporates three pillars: (i) com- bined stress tests, (ii) a comprehensive range of portfolio and risk- type-specific stress tests and (iii) reverse stress testing. 173 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Our combined stress test (CST) framework is scenario-based and aims to quantify overall Group-wide losses which could result from a number of potential global systemic events. The frame- work captures all material primary and consequential risks, as well as business risks, as indicated in the “Risk categories” section above. Scenarios are forward-looking and encompass macroeco- nomic and geopolitical stress events calibrated to different levels of potential severity. Each scenario is implemented through the expected evolution of market indicators and economic variables under that scenario. The resulting effect on our primary, conse- quential and business risks is then assessed to estimate the overall loss and capital implications were the scenario to occur. At least once a year, the Risk Committee approves the most relevant sce- nario, known as the binding scenario, to be used as the main scenario for regular CST reporting and for monitoring risk expo- sure against our minimum capital, earnings and leverage ratio objectives in our risk appetite framework. Results are reported to, and discussed with, the Risk Committee and the GEB on a monthly basis and reported to the BoD and FINMA monthly. Within the overall model governance framework overseen by the Group CRO and Group CFO, the Enterprise-wide Stress Com- mittee (ESC) is responsible for ensuring the consistency and ade- quacy of the assumptions and scenarios used for our Group-wide stress measures. As part of these responsibilities, the ESC is charged with ensuring that the suite of stress scenarios adequately reflects current and potential developments in the macroeco- nomic and geopolitical environment, our current and planned business activities, and actual or potential risk concentrations and vulnerabilities in our portfolios. The ESC meets at least quarterly and is comprised of Group, business division and legal entity rep- resentatives of Risk Control. In executing its responsibilities, the ESC considers input from the Risk “Think Tank,” a panel of senior representatives from the business divisions, Risk Control and eco- nomic research, which meets quarterly to review the current and possible future market environment, with the aim of identifying potential stress scenarios which could materially affect the Group’s profitability. This results in a range of internal stress scenarios that are developed and evolve over time, separate from the scenarios mandated by FINMA. Each scenario captures a wide range of macroeconomic vari- ables that are considered relevant to assessing the effect of the stress scenario on our portfolios. These include gross domestic product (GDP), equity indices, interest rates, foreign exchange rates, commodities, property prices and unemployment. Assumed changes in these macroeconomic variables in each scenario are used to stress the key risk drivers of our portfolios. For example, lower GDP growth and rising interest rates may reduce the income of clients to whom we have lent money, leading to changes in the credit risk parameters for probability of default, loss given default and exposure at default, and resulting in higher predicted credit losses in the stress scenario. We also capture the business risk resulting from lower fee, interest and trading income, and lower expenses. These effects are measured across all material risk types and all businesses to calculate the aggregate estimated effect of the scenario on profit and loss, other comprehensive income, RWA, Swiss SRB leverage ratio denominator (LRD) and, ultimately, our capital and leverage ratios. The assumed changes in macro- economic variables are updated periodically to take account of changes in the current and possible future market environment. Through 2015, the binding scenario for CST was the internal Eurozone Crisis scenario, which assumed a sharp deterioration in the eurozone economy triggering sovereign and bank defaults in certain peripheral countries, a downturn in financial markets and contagion to the global economy. CST risk exposure was broadly stable over the year with most of the month-to-month variability in this measure coming from temporary loan underwriting expo- sure in the Investment Bank. As part of the CST framework, five additional stress scenarios were routinely monitored throughout 2015. – Recession scenario represents renewed financial market tur- moil due to the failure of a major global financial institution, leading to prolonged financial deleveraging and dramatically plunging activity around the globe. – US Crisis scenario represents a loss of confidence in the US, leading to international portfolio repositioning out of US dol- lar-denominated assets, sparking an abrupt and substantial US dollar sell-off. The US is pushed back into recession, other industrialized countries replicate this pattern and inflationary concerns lead to an overall higher interest rate level. – China Hard Landing scenario represents an economic correc- tion in China with the resulting impact on the global economy, particularly emerging markets. – Middle East / North Africa scenario represents a spill-over of political upheaval leading to a spike in oil prices and a recession in developed countries. – Depression scenario represents a more pronounced and pro- longed version of the Eurozone Crisis scenario. Additional peripheral countries default and exit the eurozone, and advanced economies are pulled into a prolonged period of economic stagnation. 174 As a result of the recent market developments, the main stress scenario used in our business planning process is a new Global Recession scenario, which combines elements of the Eurozone Crisis and China Hard Landing scenarios. The Global Recession scenario assumes that a hard landing in China would lead to severe contagion of Asian and emerging markets economies, while multiple debt restructurings in Europe, related direct losses for European banks and fear of a eurozone breakup would severely affect developed markets such as Switzerland, the UK and the US. This Global Recession scenario has replaced the Euro- zone Crisis scenario in our suite of combined stress testing sce- narios, and was adopted as the binding scenario at the end of 2015, ensuring that the potential effects of a China-led global economic slowdown are captured in the calculation of our post- stress fully applied common equity tier 1 (CET1) capital ratio. Portfolio-specific stress tests are measures that are tailored to the risks of specific portfolios. Our portfolio stress loss measures are informed by past events, but also include forward-looking ele- ments. For example, the expected market movements within our liquidity adjusted stress metric are derived using a combination of historical market behavior, based on an analysis of historical events, and forward-looking analysis including consideration of defined scenarios that have not occurred historically. Results of portfolio-specific stress tests may be subject to limits to explicitly control risk-taking, or may be monitored without limits to identify vulnerabilities. Reverse stress testing starts from a defined stress outcome (for example, a specified loss amount, reputational damage, a liquidity shortfall, or a breach of regulatory capital ratios) and works back- wards to identify the economic or financial scenarios that could result in such an outcome. As such, reverse stress testing is intended to complement forward stress tests by assuming “what if” outcomes that could extend beyond the range normally con- sidered, and thereby potentially challenge assumptions regarding severity and plausibility. The results of reverse stress testing are reported to relevant governance bodies according to the material- ity and scope of the exercise. Additionally, we routinely analyze the effect of increases or decreases in interest rates and changes in the structure of yield curves. Moreover, Group Treasury perform stress testing to determine the optimum asset and liability structure that allows us to main- tain an appropriately balanced liquidity and funding position under various scenarios. These scenarios differ from those out- lined above, because they are focused on specific situations which could generate liquidity and funding stress, as opposed to the scenarios used in the CST framework, which focus on the impact on profit and loss and capital. Most major financial firms employ stress tests, but their approaches vary significantly, having been tailored to their indi- vidual business models and portfolios. Moreover, there is a lack of industry standards defining stress scenarios or the way they should be applied to a firm’s risk exposures. Consequently, com- parisons of stress test results between firms can be misleading and, therefore, like many of our peers, we do not publish quanti- tative stress test results of our internal stress tests. ➔ Refer to “Credit risk,” and “Market risk” in this section for more information on stress loss measures ➔ Refer to “Our stated capital returns objective is based, in part, on capital ratios that are subject to regulatory change and may fluctuate significantly” in the “Risk factors” section of this report for more information Statistical measures EDTF | In addition to our scenario-based CST measure, we employ a statistical stress framework that allows us to calculate and aggre- gate risks using statistical techniques, enabling us to derive stress events at chosen confidence levels. This framework is used to derive a distribution of potential earnings based on historically observed market changes in combi- nation with the firm’s actual risk exposures, considering effects on both income and expenses. From this we determine earnings-at- risk (EaR), which measures the potential shortfall in earnings (i.e., the deviation from forecasted earnings) at a 95% confidence level and is evaluated over a one-year horizon. EaR is used for the assessment of the earnings objectives in our risk appetite frame- work. We extend the EaR measure by incorporating the effects of gains and losses recognized through other comprehensive income, to derive a distribution of potential effects of stress events on common equity tier 1 (CET1) capital. From this distribution, we derive our capital-at-risk (CaR) buffer measure at a 95% confi- dence level for the assessment of our capital and leverage ratio risk appetite objectives, and we derive our CaR solvency measure at a 99.9% confidence level for the assessment of our solvency risk appetite objective. The CaR solvency measure is also used as the basis to derive the contributions of business divisions and Corporate Center to risk-based capital (RBC), which is a core component of our equity attribution framework. RBC measures the potential capital impairment from an extreme stress event at a 99.9% confidence level to estimate the capital required to absorb unexpected loss while remaining able to fully repay all creditors. We revised sev- eral elements of the RBC model during the year. The net effect of these model changes was a moderate increase in the overall level of RBC. ➔ Refer to the “Capital management” section of this report for more information on the equity attribution framework 175 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Portfolio and position limits EDTF | The Group-wide stress and statistical metrics are comple- mented by lower-level portfolio and position limits, triggers and targets. The combination of these measures provides for a com- prehensive, granular control framework which is applied to our business divisions and Corporate Center, as well as the significant legal entities as relevant to the key risks arising from their business models. We apply limits to a variety of exposures at the portfolio level, using statistical and stress-based measures, such as value-at-risk, liquidity adjusted stress, notional loan underwriting limits, eco- nomic value sensitivity and portfolio default simulations for our loan books. These are complemented with a set of controls for net interest income sensitivity, mark-to-market losses on available- for-sale portfolios, and the effect of foreign exchange movements on capital and capital ratios. Portfolio measures are supplemented with position-level con- trols. Risk measures for position controls are based on market risk sensitivities and counterparty-level credit risk exposures. Market risk sensitivities include sensitivities to changes in general market risk factors such as equity indices, foreign exchange rates and interest rates, and sensitivities to issuer-specific factors such as changes in an issuer’s credit spread or default risk. We monitor a significant number of market risk controls for the Investment Bank and Corporate Center – Group Asset and Liability Manage- ment and Non-core and Legacy Portfolio on a daily basis. Coun- terparty measures capture the current and potential future expo- sure to an individual counterparty taking into account collateral and legally enforceable netting agreements. Risk concentrations Audited | EDTF | Pillar 3 | A risk concentration exists where (i) a position 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 categories in which risk concentrations may occur include counterparties, industries, legal entities, countries or geographical regions, products and businesses. The identification of risk concentrations requires judgment, as potential future developments cannot be accurately predicted and may vary from period to period. In determining whether we have a risk concentration, we consider a number of elements, both individually and collectively. These elements include the shared characteristics of the positions and our counterparties, the size of the position or group of positions, the sensitivity of the position or group of positions to changes in risk factors and the volatility and correlations of those factors. Also important in our assessment is the liquidity of the markets where the positions are traded, and the availability and effectiveness of hedges or other potential risk-mitigating factors. The value of a hedging instru- ment may not always move in line with the position being hedged, and this mismatch is referred to as basis risk. Risk concentrations are subject to increased oversight by Risk Control and are assessed to determine whether they should be reduced or mitigated depending on the available means to do so. It is possible that material losses could occur on asset classes, posi- tions and hedges, particularly if the correlations that emerge in a stressed environment differ markedly from those envisaged by our risk models. ➔ Refer to “Credit risk” and “Market risk” in this section for more information on the compositions of our portfolios ➔ Refer to the “Risk factors” section of this report for more information 176 Credit risk Audited | EDTF | Pillar 3 | Main sources of credit risk – A substantial portion of our lending exposure arises from our Swiss domestic business, which offers corporate loans and mortgage loans secured against residential properties and income-producing real estate, and is therefore tied to the health of the Swiss economy. – Within the Investment Bank, our credit exposure is predomi- nantly investment grade. Loan underwriting activity gives rise to concentrated exposure of a temporary nature. – 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 port- folio and sub-portfolio levels with regard to sector exposure, country risk and specific product exposures. – Our wealth management businesses conduct securities-based Credit risk profile of the Group – IFRS view lending and mortgage lending. – Credit risk within Non-core and Legacy Portfolio relates to derivatives transactions, predominantly carried out on a cash- collateralized basis, and securitized positions. Audited | EDTF | Pillar 3 | Overview of measurement, monitoring and management techniques – Credit risk arising from transactions with individual counter- parties is measured according to our estimates of probability of default, exposure at default and loss given default. Limits are established for individual counterparties and groups of related counterparties covering banking and traded products as well as settlement amounts. Risk control authorities are approved by the Board of Directors and are delegated to the Group Chief Executive Officer, Group Chief Risk Officer and divisional Chief Risk Officers based on risk exposure amounts and internal credit rating. – Limits apply not only to the current outstanding amount, but also to contingent commitments and the potential future exposure of traded products. – For the Investment Bank, our monitoring, measurement and limit framework distinguishes between exposures intended to be held to maturity (take-and-hold exposures) and those which are intended to be held for a short term, pending distribution or risk transfer (temporary exposures). – We also use models to derive portfolio credit risk measures of expected loss, statistical loss and stress loss at the Group-wide and business division levels and establish portfolio level limits at these levels. Maximum exposure to credit risk Audited | EDTF | The tables on the following pages provide the Group’s maximum exposure to credit risk by class of financial instrument and the respective collateral and other credit enhancements miti- gating credit risk for these classes of financial instruments. This view is in accordance with International Financial Reporting Stan- dards (IFRS). The maximum exposure to credit risk includes the carrying amounts of financial instruments recognized on the bal- ance sheet subject to credit risk and the notional amounts for off-balance sheet arrangements. Where information is available, collateral is presented at fair value. For other collateral such as real estate, a reasonable alter- native value is used. Credit enhancements, such as credit deriva- tive contracts and guarantees, are included at their notional amounts. Both are capped at the maximum exposure to credit risk for which they serve as security. Further on in this section, we provide complementary views of credit risk based on our internal management view, which can differ in certain respects from the requirements of IFRS. ➔ Refer to the “UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations” 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 177 Risk, treasury and capital management 31.12.15 Collateral Credit enhancements Maximum exposure to credit risk Cash collateral received Collateral- ized by securities Secured by real estate Other collateral1 Netting Credit derivative contracts Guarantees 13.1 89.8 11.9 312.0 25.6 67.9 23.8 20.0 164.4 15.2 0.4 0.1 2.9 4.6 164.4 19.8 0.2 101.0 25.1 62.8 11.1 200.1 5.8 3.5 9.3 0.0 13.1 1.2 0.0 209.4 164.4 0.2 1.7 2.1 1.8 6.6 1.2 14.3 10.5 220.0 1.9 166.3 0.1 0.1 19.8 1.5 8.7 10.2 30.1 12.4 12.4 142.7 142.7 155.2 0.0 155.2 0.4 3.0 0.6 0.6 1.0 0.1 6.9 7.0 8.1 0.0 3.0 3.0 2.0 5.0 8.0 Total financial assets measured at amortized cost 550.9 13.1 Risk, treasury and capital management Risk management and control Audited | EDTF | Maximum exposure to credit risk CHF billion Financial assets measured at amortized cost on the balance sheet Balances with central banks Due from banks2 Loans Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments3 Other assets Financial assets measured at fair value on the balance sheet Positive replacement values4 Trading portfolio assets – debt instruments5, 6 Financial assets designated at fair value – debt instruments7 Financial investments available-for-sale – debt instruments7 Total financial assets measured at fair value Total maximum exposure to credit risk reflected on the balance sheet Guarantees8 Loan commitments8 Forward starting transactions, reverse repurchase and securities borrowing agreements Total maximum exposure to credit risk not reflected on the balance sheet Total9 167.4 29.0 5.6 61.7 263.7 814.7 16.0 56.1 6.6 78.6 893.3 178 Maximum exposure to credit risk (continued) CHF billion Financial assets measured at amortized cost on the balance sheet Balances with central banks Due from banks2 Loans Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments3 Other assets Total financial assets measured at amortized cost Financial assets measured at fair value on the balance sheet Positive replacement values4 Trading portfolio assets – debt instruments5, 6 Financial assets designated at fair value – debt instruments7 Financial investments available-for-sale – debt instruments7 Total financial assets measured at fair value Total maximum exposure to credit risk reflected on the balance sheet Guarantees8 Loan commitments8 Forward starting transactions, reverse repurchase and securities borrowing agreements 102.3 13.3 315.8 24.1 68.4 31.0 21.2 576.1 257.0 31.8 4.3 56.2 349.4 925.4 17.7 50.7 10.4 Total maximum exposure to credit risk not reflected on the balance sheet Total9 78.8 1,004.2 31.12.14 Collateral Credit enhancements Maximum exposure to credit risk Cash collateral received Collateral- ized by securities Secured by real estate Other collateral1 Netting Credit derivative contracts Guarantees 14.3 14.4 0.0 14.4 1.4 0.1 1.4 15.8 0.2 94.8 23.8 63.2 12.7 194.7 5.7 3.3 9.0 203.6 1.7 3.8 10.4 16.0 219.6 166.1 21.2 4.7 166.1 25.9 0.1 0.1 26.0 1.9 9.2 11.1 37.1 0.0 166.1 0.2 1.9 2.1 168.2 20.4 20.4 223.9 223.9 244.2 0.7 0.7 0.7 0.7 1.4 0.8 8.5 0.0 244.2 9.3 10.7 0.2 2.6 0.0 2.8 0.0 2.8 3.1 1.6 4.7 7.5 1 Includes but not limited to life insurance contracts, inventory, accounts receivable, mortgage loans, patents, and copyrights. 2 Due from banks includes amounts held with third-party banks on behalf of clients. The credit risk associated with these balances may be borne by those clients. 3 Included within cash collateral receivables on derivative instruments are margin balances due from exchanges or clearing houses. Some of these margin balances reflect amounts transferred on behalf of clients who retain the associated credit risk. The amount shown in the netting column represents the netting potential not recognized in the balance sheet. Refer to “Note 26 Offsetting financial assets and financial liabilities” for more information. 4 The amount shown in the netting column represents the netting potential not recognized in the balance sheet. Refer to “Note 26 Offsetting financial assets and financial liabilities” in the “Consolidated financial statements” section of this report for more information. 5 These positions are generally managed under the market risk frame- work and are included in VaR. For the purpose of this disclosure, collateral and credit enhancements were not considered. 6 Does not include debt instruments held for unit-linked investment contracts and investment fund units. 7 Does not include investment fund units. 8 The amount shown in the “Guarantees” column largely relates to sub-participations. Refer to the “Off-balance sheet” section in this report for more informa- tion. 9 As of 31 December 2015, total maximum exposure to credit risk for UBS AG (consolidated) was CHF 0.7 billion higher than for UBS Group, all related to unsecured “Loans”. As of 31 December 2014, total maximum exposure to credit risk for UBS AG (consolidated) was CHF 0.3 billion higher than for UBS Group, of which CHF 0.2 billion related to unsecured “Loans” and CHF 0.1 billion related to unsecured “Other assets.” 179 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Audited | EDTF | Financial assets subject to credit risk by rating category CHF billion Rating category1 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 instruments2 Financial investments available-for-sale – debt instruments3 Other financial instruments4 Guarantees, commitments and forward starting transactions Guarantees Loan commitments Forward starting reverse repurchase agreements Forward starting securities borrowing agreements Total5 CHF billion Rating category1 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 instruments2 Financial investments available-for-sale – debt instruments3 Other financial instruments4 Guarantees, commitments and forward starting transactions Guarantees Loan commitments Forward starting reverse repurchase agreements Forward starting securities borrowing agreements Total5 0–1 87.9 1.3 31.9 21.7 20.7 8.4 14.2 52.4 0.3 2.2 1.8 2–3 1.3 8.8 132.1 40.2 116.9 10.2 8.6 9.2 2.7 7.1 22.4 6.5 4–5 0.6 1.1 67.5 20.1 23.2 4.7 3.1 8.6 3.6 19.6 31.12.15 6–8 9–13 defaulted 0.7 61.4 11.2 5.9 0.4 1.9 11.0 2.2 6.1 0.0 17.7 1.4 0.4 0.7 0.1 1.2 2.7 0.7 6.2 0.4 0.3 0.0 Total 89.8 11.9 312.0 93.5 167.4 23.8 29.0 61.7 25.6 16.0 56.1 6.6 0.0 242.6 366.0 152.1 100.8 29.6 2.2 893.3 0–1 102.0 1.5 29.1 1.9 18.7 4.8 12.2 46.5 0.1 2.8 1.3 2–3 0.3 8.3 140.0 66.2 203.1 20.5 10.9 9.6 3.8 7.5 28.7 9.8 0.1 31.12.14 6–8 0.5 66.6 11.4 7.8 0.7 2.6 13.0 3.1 6.4 4–5 2.9 61.2 11.7 26.3 5.0 3.5 0.1 8.5 3.3 8.1 0.5 9–13 defaulted 0.1 17.8 1.2 0.8 2.6 0.1 0.7 6.4 1.2 0.3 0.1 0.2 Total 102.3 13.3 315.8 92.5 257.0 31.0 31.8 56.2 25.6 17.7 50.7 10.3 0.1 220.9 508.6 131.1 112.0 29.6 2.0 1,004.2 1 Refer to the “Internal UBS rating scale and mapping of external ratings” table in this section for more information on rating categories. 2 Does not include debt instruments held for unit-linked investment contracts and investment fund units. 3 Does not include investment fund units. 4 Comprised of financial assets designated at fair value – debt instruments (excluding investment fund units) and other assets. 5 As of 31 December 2015, total financial assets subject to credit risk for UBS AG (consolidated) was CHF 0.7 billion higher than for UBS Group, all related to “Loans” in rating categories 4–5. As of 31 December 2014, total financial assets subject to credit risk for UBS AG (consolidated) was CHF 0.3 billion higher than for UBS Group, of which CHF 0.2 billion related to “Loans” and CHF 0.1 billion related to “Other assets,” all in rating cat- egories 6–8. 180 Impaired financial instruments Audited | EDTF | Pillar 3 | The following tables show impaired financial instruments, comprising loans, guarantees and loan commit- ments, and securities financing transactions. Gross impaired financial instruments increased slightly by CHF 0.1 billion to CHF 1.5 billion as of 31 December 2015. After deducting the esti- mated liquidation proceeds of collateral and specific allowances and provisions, net impaired financial instruments was CHF 0.6 billion as of 31 December 2015 compared with CHF 0.5 billion at the end of the prior year. The table on the next page provides a breakdown of move- ments in the specific and collective allowances and provisions for impaired financial instruments. ➔ Refer to the “Investment Bank, Non-Core and Legacy Portfolio, and Group ALM: distribution of net OTC derivatives and SFT exposure across internal UBS ratings and loss given default (LGD) buckets” table in this section for OTC derivative exposures in the Investment Bank and Non-core and Legacy Portfolio which are rated at level 13 or in default according to our internal rating scale Audited | EDTF | Pillar 3 | Impaired financial instruments by type CHF million Loans (including due from banks) Guarantees and loan commitments Defaulted securities financing transactions Total impaired financial instruments Gross impaired financial instruments 31.12.15 31.12.14 Allowances and provisions1 31.12.14 31.12.15 Estimated liquidation proceeds of collateral2 31.12.15 31.12.14 Net impaired financial instruments 31.12.15 31.12.14 1,226 292 1,518 1,204 187 5 1,396 (692) (35) (727) (708) (23) (4) (735) (163) (4) (168) (180) (1) (1) (182) 371 252 623 316 162 0 479 1 Includes CHF 6 million in collective loan loss allowances (31 December 2014: CHF 8 million). 2 Does not include oil and gas reserves related to reserve-based lending. EDTF | Pillar 3 | Impaired financial instruments by geographical region CHF million Asia Pacific Latin America Middle East and Africa North America Switzerland Rest of Europe Total 31.12.15 Total 31.12.14 Impaired financial instruments Specific allowances and provisions Impaired financial instruments net of specific allowances and provisions Collective allowances Total allowances and provisions 31.12.15 Total allowances and provisions 31.12.14 92 29 12 229 924 231 1,518 1,396 (58) (21) (6) (107) (364) (165) (721) (727) 34 9 6 123 559 66 797 668 0 0 0 (2) (4) 0 (6) (8) (58) (21) (6) (108) (369) (165) (727) (38) (19) (22) (50) (411) (194) (735) 181 Risk, treasury and capital management Risk, treasury and capital management Risk management and control EDTF | Pillar 3 | Impaired financial instruments by exposure segment CHF million Sovereigns Banks Corporates Central Counterparties Retail Residential mortgages Lombard lending Qualifying revolving other retail exposures Other retail Non allocated segment1 Total 31.12.15 Total 31.12.14 Impaired financial instruments Specific allowances and provisions Collective allowances Total allowances and provisions 31.12.15 Write-offs for the year ended 31.12.15 12 7 1,236 0 125 63 24 51 0 1,518 1,396 (14) (6) (589) 0 (40) (47) (17) (9) (721) (727) 0 0 0 0 0 0 (6) (6) (8) (14) (6) (589) 0 (40) (47) (17) (9) (6) (727) (1) 0 (136) 0 0 (2) (24) (2) 0 (164) (154) Total allowances and provisions 31.12.142 (14) (15) (609) 0 (39) (19) (16) (15) (8) (735) 1 With the exception of Wealth Management Americas Lombard lending, collective loan loss allowances are not allocated to individual counterparties. 2 Following improvements in data sourcing, the allocation to the exposure segments for 31 December 2014 have been restated to ensure comparability with the figures as of 31 December 2015. EDTF | Pillar 3 | Changes in allowances and provisions CHF million Balance at the beginning of the year Write-offs / usage of provisions Recoveries Increase / (decrease) recognized in the income statement Foreign currency translation Other Balance at the end of the year Specific allowances and pro- visions for banking products and securities financing Collective allowances For the year ended 31.12.15 For the year ended 31.12.14 727 (162) 48 117 (11) 2 721 8 (2) 0 0 0 0 6 735 (164) 48 117 (11) 2 727 750 (154) 29 78 21 11 735 182 Impaired loans EDTF | Pillar 3 | Gross impaired loans (including due from banks) increased slightly to CHF 1,226 million as of 31 December 2015 from CHF 1,204 million at the end of the prior year. The majority of this exposure relates to loans in our Swiss domestic business, although also reflects new impairments related to lending to the energy sector in the Investment Bank. The ratio of impaired loans to total loans remained unchanged at 0.4%. Audited | As of 31 December 2015, collateral held against our impaired loan exposure mainly consisted of real estate and securi- ties. It is our policy to dispose of foreclosed real estate as soon as practicable. The carrying amount of foreclosed property recorded in our balance sheet under Other assets at the end of 2015 and 2014 amounted to CHF 44 million and CHF 43 million, respec- tively. We seek to liquidate collateral held in the form of financial assets expeditiously and at prices considered fair. This may require us to purchase assets for our own account, where permitted by law, pending orderly liquidation. Specific and collective allowances and provisions for credit losses decreased slightly by CHF 8 million to CHF 727 million as of 31 December 2015. This includes collective loan loss allowances of CHF 6 million, a reduction of CHF 2 million from the prior year. The “Loss history statistics” table below provides a five-year history of our credit loss experience for loans (including due from banks) relative to our impaired and non-performing loans. ➔ Refer to “Policies for past due, non-performing and impaired claims” in this section, and to “Note 10 Due from banks and loans (held at amortized cost)” and “Note 12 Allowances and provisions for credit losses” in the “Consolidated financial statements” section of this report for more information EDTF | 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 losses1, 2 of which: allowances for due from banks and loans1 Net write-offs3 of which: net write-offs for due from banks and loans Credit loss (expense) / recovery4 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 31.12.15 324,594 1,226 1,630 31.12.14 329,800 1,204 1,602 31.12.13 301,601 1,241 1,582 31.12.12 301,849 1,606 1,516 31.12.11 290,664 2,155 1,529 727 692 116 116 (117) (117) 0.4 0.5 0.2 0.0 735 708 124 124 (78) (78) 0.4 0.5 0.2 0.0 750 686 83 83 (50) (50) 0.4 0.5 0.2 0.0 794 728 250 250 (118) (134) 0.5 0.5 0.2 0.1 938 842 450 413 (84) (126) 0.7 0.5 0.3 0.1 1 Includes collective loan loss allowances. 2 Includes provisions for loan commitments and allowances for securities financing transactions. 3 Includes net write-offs for loan commitments and securities financing transactions. 4 Includes credit loss (expense) / recovery for loan commitments and securities financing transactions. 183 Risk, treasury and capital management Risk, treasury and capital management Risk management and control EDTF | Pillar 3 | Allowances and provisions for credit losses1 CHF million, except where indicated IFRS exposure, gross2 31.12.14 31.12.15 Impaired exposure, gross 31.12.15 31.12.14 Estimated liquidation proceeds of collateral3 31.12.14 31.12.15 Allowances and provisions for credit losses4 Impairment ratio (%) 31.12.15 31.12.14 31.12.15 31.12.14 89,776 11,951 102,303 13,347 1 312,643 316,452 1,225 16,019 17,694 56,067 486,4565 50,688 500,4835 256 36 11 1,192 180 7 1,518 1,391 1,344 1,107 320 1,326 105,167 112,701 109 2,267 1,270 2,021 1,960 111,155 118,328 109 0 1,899 48,754 747 279 0 2,074 44,356 756 293 51,678 47,480 0 0 1,493 1,773 135,616 137,417 7,900 8,463 8,670 8,352 29 29 1 870 255 20 81 81 26 26 11 1,035 180 5 153,473 156,211 1,146 1,231 163 4 168 19 19 180 1 181 3 3 0 0 144 4 149 176 1 178 3 689 32 3 727 89 1 90 28 28 3 496 31 530 13 695 23 731 70 1 70 27 27 13 568 23 603 0.0 0.4 1.6 0.1 0.3 0.1 0.4 1.0 0.0 0.3 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.6 3.2 0.2 0.7 0.6 0.8 2.1 0.1 0.8 0 433 11 0 0 443 345 4,177 13,088 4,958 44,648 67,217 0 566 364 0 0 930 76 4,505 12,033 5,902 36,333 58,848 0 0 0 0 0 0 0.0 0.0 202 1 15 219 38 2 41 62 3 65 24 24 1.5 0.0 0.0 0.3 0.3 0.0 0.1 0 0 Group Balances with central banks Due from banks Loans Guarantees Loan commitments Total Wealth Management Balances with central banks Due from banks Loans Guarantees Loan commitments Total Wealth Management Americas Balances with central banks Due from banks Loans Guarantees Loan commitments Total Personal & Corporate Banking Balances with central banks Due from banks Loans Guarantees Loan commitments Total Asset Management Balances with central banks Due from banks Loans Guarantees Loan commitments Total Investment Bank Balances with central banks Due from banks Loans Guarantees Loan commitments Total 184 Allowances and provisions for credit losses (continued) CHF million, except where indicated IFRS exposure, gross2 31.12.14 31.12.15 Impaired exposure, gross 31.12.15 31.12.14 Estimated liquidation proceeds of collateral3 31.12.14 31.12.15 Allowances and provisions for credit losses4 Impairment ratio (%) 31.12.15 31.12.14 31.12.15 31.12.14 CC – Services Balances with central banks Due from banks Loans Guarantees Loan commitments Total CC – Group ALM Balances with central banks Due from banks Loans Guarantees Loan commitments Total 0 0 0 0 0 0 0 576 36 11 0 623 0 413 31 11 0 454 88,087 101,907 2,210 6,788 0 0 2,563 5,291 0 0 97,086 109,761 0 0 0 0 0 CC – Non-core and Legacy Portfolio Balances with central banks Due from banks Loans Guarantees Loan commitments Total 0 56 3,183 137 1,406 4,782 0 127 4,260 335 3,750 8,471 15 15 12 12 14 14 0 0 0 0 0 6 6 0.0 0.0 0.0 0.0 0.5 0.3 0.3 0.1 1 Excludes allowances for securities financing transactions (31 December 2015: CHF 0 million, 31 December 2014: CHF 4 million). 2 The measurement requirements of IFRS differ in certain respects from our internal management view of credit risk. 3 Does not include oil and gas reserves related to reserve-based lending. 4 Includes CHF 6 million (31 December 2014: CHF 8 million) in collective loan loss allowances for credit losses. 5 As of 31 December 2015, total IFRS exposure of UBS AG (consolidated) was CHF 0.7 billion higher than the exposure of UBS Group, related to receivables of UBS AG and UBS Switzerland AG against UBS Group AG. EDTF | Development of individually impaired loans (including due from banks) CHF million Balance at the beginning of the year New impaired loans Increase in existing impaired loans Repayments / sales / upgrades Write-offs Foreign currency translations and other adjustments Balance at the end of the year 1 Does not include CHF 2 million in write-offs charged directly to collective loan loss allowances. For the year ended 31.12.15 1,204 465 71 (354) (162)1 2 1,226 31.12.14 1,241 388 124 (403) (154) 6 1,204 185 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Past due but not impaired loans EDTF | Pillar 3 | The table below shows a breakdown of total loan bal- ances where payments have been missed, but which we do not consider impaired because we expect to collect all amounts due under the contractual terms of the loans or the equivalent value from liquidation of collateral. The loan balances in the table arise predominantly within Personal & Corporate Banking, where delayed payments are routinely observed and, to a lesser extent, Wealth Management. The amount of past due but not impaired mortgage loans was not significant compared with the overall size of the mortgage portfolio. ➔ Refer to “Policies for past due, non-performing and impaired claims” in this section and “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information on our impairment policies Audited | EDTF | Pillar 3 | Past due but not impaired loans CHF million 1–10 days 11–30 days 31–60 days 61–90 days >90 days of which: mortgage loans Total EDTF | Pillar 3 | Past due but not impaired mortgage loans CHF million Total 31.12.15 31.12.14 141 69 37 16 663 529 927 92 74 18 9 769 646 961 31.12.15 31.12.14 Total mortgage loans 153,044 of which: past due > 90 days but not impaired 529 Total mortgage loans 154,689 of which: past due > 90 days but not impaired 646 186 Credit risk profile of the Group – Internal risk view Banking products EDTF | The exposures detailed in this section are based on our inter- nal management view of credit risk which differs in certain respects from the measurement requirements of IFRS. Internally, we categorize credit risk exposures into two broad categories: banking products and traded products. Banking prod- ucts comprise drawn loans, undrawn guarantees and loan com- mitments, due from banks and balances with central banks. Traded products comprise over-the-counter (OTC) derivatives, exchange-traded derivatives (ETD) and securities financing trans- actions (SFTs), comprised of securities borrowing and lending and repurchase and reverse repurchase agreements. EDTF | The breakdowns of our banking product exposures are shown before and after allowances and provisions for credit losses and related single-name credit hedges. The effect of portfolio hedges, such as index CDSs, is not reflected. Guarantees and loan commitments are shown on a notional basis, without applying credit conversion factors. Total gross banking products exposure decreased to CHF 485 billion as of 31 December 2015 compared with CHF 497 billion at the end of 2014, mainly due to decreases in balances with central banks in Corporate Center – Group ALM, partly offset by an increase in loan underwriting exposure at the end of the year in the Investment Bank. EDTF | Banking products exposure by business division and Corporate Center unit CHF million Balances with central banks Due from banks Loans1 Guarantees Loan commitments Banking products exposure2 Banking products exposure, net4 Wealth Manage- ment 1,344 1,107 105,167 2,267 1,270 111,155 111,065 Wealth Manage- ment Americas 0 1,899 48,754 747 279 51,678 51,650 31.12.15 Personal & Corporate Banking Asset Manage- ment Investment Bank CC – Services CC – Group ALM 0 1,493 135,616 7,900 8,463 153,473 152,943 0 433 11 0 0 443 443 345 9,544 15,464 5,607 37,867 68,828 61,207 31.12.14 0 576 36 11 0 623 623 88,087 2,210 6,788 0 0 97,086 97,086 CHF million Balances with central banks Due from banks Loans1 Guarantees Loan commitments Banking products exposure2 Banking products exposure, net4 Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Services 320 1,326 112,701 2,021 1,960 118,328 118,257 0 2,074 44,356 756 293 47,480 47,453 0 1,773 137,417 8,670 8,352 156,211 155,608 0 566 364 0 0 930 930 76 9,272 15,688 6,501 28,308 59,845 50,986 0 413 31 11 0 454 454 CC – Group ALM 101,907 2,563 5,291 0 0 109,761 109,761 CC – Non-core and Legacy Portfolio 0 35 100 84 1,472 1,692 1,180 CC – Non-core and Legacy Portfolio 0 137 199 234 3,454 4,024 2,622 Group 89,776 17,297 311,937 16,616 49,352 484,9783 476,196 Group 102,303 18,123 316,046 18,193 42,367 497,0333 486,071 1 Does not include reclassified securities and similar acquired securities in our CC – Non-core and Legacy Portfolio. 2 Excludes loans designated at fair value. 3 As of 31 December 2015, total banking products expo- sure of UBS AG (consolidated) was CHF 0.7 billion higher than the exposure of UBS Group, related to receivables of UBS AG and UBS Switzerland AG against UBS Group AG. 4 Net of allowances, provisions, and hedges. 187 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Wealth Management EDTF | Gross banking products exposure within Wealth Manage- ment decreased to CHF 111 billion as of 31 December 2015 com- pared with CHF 118 billion as of 31 December 2014, as a result of client deleveraging in the Lombard book and due to a CHF 2 bil- lion shift of Swiss-booked wealth management mortgage expo- sure to Personal & Corporate Banking. Our Wealth Management loan portfolio is mainly secured by securities, residential property and cash as outlined in the “Wealth Management: loan portfolio, gross” table below. Most of the loans secured by securities were of high quality, with 95% rated investment grade as of 31 December 2015, based on our internal ratings, unchanged from 31 December 2014. The portfolio of mortgage loans secured by properties outside Switzerland increased to CHF 6.0 billion as of 31 December 2015 from CHF 5.8 billion at the end of the prior year. The overall qual- ity of this portfolio remained high, with an average loan-to-value (LTV) ratio of 56% in Europe and 42% in Asia Pacific. EDTF | Wealth Management: loan portfolio, gross Secured by residential property Secured by commercial / industrial property Secured by cash Secured by securities Secured by guarantees and other collateral Unsecured loans Total loans, gross Total loans, net of allowances EDTF | Wealth Management Americas: loan portfolio, gross Secured by residential property Secured by commercial / industrial property Secured by cash Secured by securities Secured by guarantees and other collateral Unsecured loans Total loans, gross Total loans, net of allowances 188 Wealth Management Americas EDTF | Gross banking products exposure within Wealth Manage- ment Americas increased to CHF 52 billion as of 31 December 2015 from CHF 47 billion as of 31 December 2014, driven by increased loan origination. This exposure largely relates to loans secured by securities and residential mortgage loans. Out of the loans secured by securities, 96% were rated invest- ment grade as of 31 December 2015, based on our internal rat- ings, unchanged compared with 31 December 2014. As of 31 December 2015, these investment grade loans reflect 80% of the total loan portfolio, compared with 81% as of 31 December 2014. The mortgage loan portfolio consists primarily of residential mortgages offered in the US. Gross exposure increased to CHF 8.4 billion as of 31 December 2015 from CHF 7.6 billion at the end of the prior year. The overall quality of this portfolio remained high with an average LTV of 58%, unchanged from 2014, and we have experienced negligible credit losses since the inception of the mortgage program in 2009. The five largest geographic concen- trations in the portfolio were in California (30%), New York (16%), Florida (9%), Texas (4%) and New Jersey (4%). The amount of impaired loans increased to CHF 29 million as of 31 December 2015 from CHF 26 million at the end of the prior year, with most of the impairment relating to securities-backed loan facilities collateralized by Puerto Rico municipal securities and related funds. 31.12.15 CHF million 34,004 1,998 11,859 50,123 6,851 333 105,167 105,078 31.12.15 CHF million 8,378 0 1,020 37,092 1,959 305 48,754 48,726 % 32.3 1.9 11.3 47.7 6.5 0.3 100.0 % 17.2 0.0 2.1 76.1 4.0 0.6 100.0 31.12.14 CHF million 36,018 2,205 13,354 49,464 11,147 514 112,701 112,631 31.12.14 CHF million 7,558 0 796 33,983 1,746 274 44,356 44,329 % 32.0 2.0 11.8 43.9 9.9 0.5 100.0 % 17.0 0.0 1.8 76.6 3.9 0.6 100.0 Personal & Corporate Banking EDTF | As of 31 December 2015, gross banking products exposure within Personal & Corporate Banking was CHF 153 billion, a decrease of CHF 3 billion compared with 31 December 2014. Net banking products exposure also decreased by CHF 3 billion to CHF 153 billion, approximately 64% of which was classified as invest- ment grade compared with 63% in the prior year. More than 80% of the exposure is categorized in the lowest loss given default (LGD) bucket of 0% to 25%. The size of Personal & Corporate Banking’s gross loan portfolio decreased slightly by CHF 2 billion to CHF 136 billion. At year-end 2015, 94% of this portfolio was secured by collateral, mainly residential and commercial property. Of the total unsecured amount, 66% related to cash flow-based lending to corporate counterparties and 18% related to lending to public authorities. Based on our internal ratings, 52% of the unsecured loan portfo- lio was rated investment grade compared with 53% in 2014. Our Swiss mortgage portfolio, including Swiss mortgage loans originating from our Wealth Management business, is discussed further below. Our Swiss corporate banking products portfolio, which totaled CHF 24.4 billion as of 31 December 2015 compared with CHF 25.5 billion as of 31 December 2014, consists of loans, guaran- tees and loan commitments to multinational and domestic coun- terparties. Although this portfolio is well diversified across indus- tries, these Swiss counterparties are, in general, highly reliant on the domestic economy and the economies to which they export, in particular the EU and the US. In addition, the EUR / CHF exchange rate is an important risk factor for Swiss corporates. While credit loss expense for this portfolio has remained low in 2015, given the reliance of the Swiss economy on exports, the continuing strength of the Swiss franc may have a negative effect on the Swiss economy, which could affect some of the counter- parties within our domestic lending portfolio and lead to an increase in the level of credit loss expenses in future periods. The delinquency ratio, being the ratio of past due but not impaired loans to total loans, was 0.7% for the corporate loan portfolio as of 31 December 2015 compared with 0.6% as of 31 December 2014. ➔ Refer to “Credit risk models” in this section for more information on LGD, rating grades and rating agency mappings EDTF | Our mortgage loan portfolio secured by residential and commercial real estate in Switzerland continues to be our largest loan portfolio. These mortgage loans, totaling CHF 138 billion as of 31 December 2015, mainly originate from Personal & Corpo- rate Banking, but also include mortgage loans originating from Wealth Management. As of 31 December 2015, the majority of these mortgage loans, CHF 124 billion related to residential prop- erties that the borrower was either occupying or renting out, and where there was full recourse to the borrower. Of this CHF 124 billion, approximately CHF 88 billion related to properties occu- pied by the borrower, with an average LTV ratio of 51% as of 31 December 2015 compared with 52% as of 31 December 2014. The average LTV for newly originated loans for this portion was 62% in 2015, unchanged compared with 2014. The remain- ing CHF 36 billion of the Swiss residential mortgage loan portfolio relates to properties rented out by the borrower and the average LTV of this portfolio was 56% as of 31 December 2015, unchanged compared with 31 December 2014. The average LTV for newly originated Swiss residential mortgage loans was 57% in 2015 compared with 55% in 2014. As illustrated in the “Swiss mortgages: distribution of net expo- sure at default (EAD) across exposure segments and loan-to-value (LTV) buckets,” table, over 99% of the aggregate amount of Swiss residential mortgage loans would continue to be covered by the real estate collateral even if the value assigned to that collateral were to decrease by 20%, and more than 98% would remain cov- ered by the real estate collateral even if the value assigned to that collateral were to decrease 30%. In this table, the amount of each mortgage loan is allocated across the LTV buckets to indicate the portion at risk at the various value levels shown. For example, a loan of CHF 75 billion with an LTV ratio of 75% (collateral value of CHF 100 billion) would result in allocations of CHF 30 billion in the less-than-30% bucket, CHF 20 billion in the 31–50% bucket, CHF 10 billion in the 51–60% bucket, CHF 10 billion in the 61–70% bucket and CHF 5 billion in the 71–80% bucket. EDTF | Personal & Corporate Banking: loan portfolio, gross Secured by residential property Secured by commercial / industrial property Secured by cash Secured by securities Secured by guarantees and other collateral Unsecured loans Total loans, gross Total loans, net of allowances 31.12.15 CHF million 100,181 19,641 242 693 6,607 8,252 135,616 135,120 % 73.9 14.5 0.2 0.5 4.9 6.1 100.0 31.12.14 CHF million 99,839 20,202 163 794 6,884 9,536 137,417 136,848 % 72.7 14.7 0.1 0.6 5.0 6.9 100.0 189 Risk, treasury and capital management Risk, treasury and capital management Risk management and control EDTF | Personal & Corporate Banking: distribution of banking products exposure across internal UBS ratings and loss given default (LGD) buckets CHF million, except where indicated Internal UBS rating1 Investment grade Sub-investment grade of which: 6−9 of which: 10−12 of which: 13 and defaulted Exposure 98,283 55,190 48,543 4,628 2,019 0–25% 83,011 44,298 40,012 4,133 153 Total exposure before deduction of allowances and provisions 153,473 127,309 22,693 Less: allowances and provisions Net banking products exposure (530) 152,943 31.12.15 LGD buckets 26–50% 51–75% 76–100% 13,163 9,531 7,450 414 1,667 1,945 1,312 1,074 39 199 3,257 164 50 7 42 214 Weighted average LGD (%) 16 18 17 14 38 17 31.12.142 Weighted average LGD (%) 16 18 17 14 38 17 Exposure 97,763 58,448 52,254 4,156 2,038 156,211 (603) 155,608 1 The ratings of the major credit rating agencies, and their mapping to our internal rating scale, are shown in the “Internal UBS rating scale and mapping of external ratings” table in the “Credit risk models” section of this report. 2 Following improvements in data sourcing, the rating split and weighted average LGD for 31 December 2014 have been restated to ensure comparability with the figures as of 31 December 2015. EDTF | Personal & Corporate Banking: unsecured loans by industry sector CHF million Construction Financial institutions Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services Other Net exposure 31.12.15 CHF million 113 1,203 69 1,204 1,313 1,461 120 1,181 1,405 183 8,252 % 1.4 14.6 0.8 14.6 15.9 17.7 1.5 14.3 17.0 2.2 100 31.12.14 CHF million 113 916 54 1,627 1,306 1,906 572 1,732 1,184 125 9,536 % 1.2 9.6 0.6 17.1 13.7 20.0 6.0 18.2 12.4 1.3 100.0 EDTF | Swiss mortgages: distribution of net exposure at default (EAD) across exposure segments and loan-to-value (LTV) buckets CHF billion, except where indicated 31.12.15 LTV buckets Exposure segment ≤30% 31–50% 51–60% 61–70% 71–80% 81–100% >100% Net EAD Residential mortgages as a % of row total Income-producing real estate (IPRE) as a % of row total Net EAD Corporates Other segments Net EAD as a % of row total Net EAD as a % of row total Net EAD Mortgage-covered exposure as a % of total Mortgage-covered exposure 31.12.14 as a % of total Net EAD 69.9 61 11.5 61 4.7 60 0.7 68 86.8 61 86.7 60 30.6 27 5.0 26 2.0 26 0.2 20 37.9 27 39.3 27 8.1 7 1.4 8 0.6 7 0.1 5 10.1 7 10.9 8 3.8 3 0.7 4 0.3 3 0.0 3 4.8 3 5.3 4 1.2 1 0.2 1 0.1 2 0.0 2 1.6 1 1.7 1 0.2 0 0.1 0 0.1 1 0.0 1 0.3 0 0.4 0 0.0 0 0.0 0 0.1 1 0.0 0 0.1 0 0.1 0 31.12.14 Total 115.2 19.9 8.2 1.1 144.4 Total 113.8 100 19.0 100 7.9 100 1.0 100 141.6 100 144.4 100 190 Asset Management Gross banking products exposure within Asset Management was less than CHF 1 billion as of 31 December 2015. Investment Bank EDTF | The Investment Bank’s lending activities are largely associ- ated with corporates and non-bank financial institutions. The business is broadly diversified across industry sectors, but concen- trated in North America. The gross banking products exposure of the Investment Bank increased to CHF 69 billion as of 31 December 2015 compared with CHF 60 billion as of 31 December 2014. The increase in exposure was due to an increase in temporary loan underwriting activity toward the end of the year, which was predominantly investment grade and driven by strategic mergers and acquisi- tions. While distribution of these investment grade exposures has been sound, conditions in the sub-investment grade markets have remained challenging, such that some lower-rated deals have not been distributed as planned, leading to a buildup in the level of our exposures intended for syndication. These exposures are clas- sified as held for trading, with fair values reflecting the market conditions at the end of the year. The Investment Bank actively manages the credit risk of this portfolio and, as of 31 December 2015, held CHF 7.6 billion of single-name credit default swaps (CDSs) hedges against its expo- sures to corporates and other non-banks, a decrease of CHF 1.3 billion compared with 2014. In addition, the Investment Bank held CHF 276 million of loss protection from the subordinated tranches of structured credit protection, which is not reflected in the “Investment Bank: banking products” table. Net banking products exposure, excluding balances with cen- tral banks and the vast majority of due from banks, and after allowances, provisions and hedges, increased to CHF 53.0 billion as of 31 December 2015 from CHF 42.9 billion at the end of 2014, driven by the aforementioned higher level of loan under- writing at the end of 2015. At the end of the year, and based on our internal ratings, 63% of the Investment Bank’s net banking products exposure was classified as investment grade compared with 59% at the end of the prior year. The majority of the Invest- ment Bank’s net banking products exposure had estimated LGD of between 0% and 50%. Due to the current low price environment in commodities, exposures to certain counterparties in the energy sector currently carry more risk than in prior periods. As of 31 December 2015 our total net banking products exposure to the oil and gas sector, mainly in North America, was CHF 6.1 billion, including both funded and unfunded exposures, of which CHF 5.9 billion was recorded within the Investment Bank and the remaining exposure within Corporate Center – Non-core and Legacy Portfolio. Of this, CHF 2.5 billion was related to the infrastructure-like mid- stream sub-sector, which we expect to be less affected by lower energy prices, because revenues for transportation are largely fee or volume based. Less than CHF 0.5 billion of this midstream exposure is to counterparties we rate as sub-investment grade. Exposure to the exploration & production (E&P) sub-sector amounted to CHF 2.0 billion, almost evenly split between oil and gas. This is one of the sub-sectors we consider to be most directly exposed to prolonged low commodity prices. The largest compo- nent of this E&P-related exposure is reserve-based lending with counterparties we rate as sub-investment grade, secured by proven reserves, typically revalued on a semi-annual basis. Refin- ing-related exposure totaled CHF 0.8 billion, predominantly in asset-based lending. Our exposure to the integrated sub-sector was CHF 0.5 billion, entirely with counterparties we rate as high investment grade. The exposure to the services & supply sub- sector was CHF 0.4 billion. We also consider this one of the sub- sectors most directly exposed to prolonged low commodity prices, as revenues are driven by the level of exploration and pro- duction activity and as security is typically equipment that has low recovery values in distress. Using an assumed average oil price of USD 25 per barrel through the end of 2017, we estimate that we could incur an additional credit loss expense of approximately CHF 100 million. In arriving at this estimate we have considered, among other things, the estimated effect of the decline in the value of oil and gas reserves pledged in support of reserve-based loans in the exploration and production segment, assumed higher default rates and lower recoveries for the oilfield services segment and made other significant assumptions. We have not taken into account any broader macroeconomic effects of a prolonged period of depressed energy prices, nor have we considered indi- rect effects. All of these factors may result in actual losses being materially higher or lower than this estimate, and there can be no certainty over the timing of recognition of actual losses. Specific allowances for these energy-related exposures totaled CHF 40 million as of 31 December 2015. A sustained period of depressed energy prices could result in an increased credit loss expense for this sub-segment of our portfolio in future periods. ➔ Refer to “Credit risk models” in this section for more information on LGD, rating grades and rating agency mappings 191 Risk, treasury and capital management Risk, treasury and capital management Risk management and control EDTF | Investment Bank: banking products1 CHF million Total exposure, before deduction of allowances, provisions and hedges Less: allowances, provisions Less: credit protection bought (credit default swaps, notional)2 Net exposure after allowances, provisions and hedges 31.12.15 60,628 (59) (7,555) 53,014 31.12.14 51,744 (19) (8,835) 42,890 1 Internal risk view, excludes balances with central banks, internal risk adjustments and the vast majority of due from banks exposures. 2 The effects of portfolio hedges, such as index credit default swaps (CDSs), and of loss protection from the subordinated tranches of structured credit protection are not reflected in this table. EDTF | 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 rating1 Investment grade Sub-investment grade of which: 6−9 of which: 10−12 of which: 13 and defaulted Net banking products exposure, after application of credit hedges 31.12.15 LGD buckets Exposure 33,465 19,548 13,365 5,949 234 0–25% 7,136 12,814 9,698 2,941 175 26–50% 51–75% 76–100% 14,632 8,288 3,409 5,234 2,753 2,428 53 506 486 20 0 994 427 561 6 53,014 19,950 19,866 8,794 4,404 Weighted average LGD (%) 49 22 20 27 14 39 31.12.14 Weighted average LGD (%) 44 19 19 21 23 34 Exposure 25,177 17,713 11,951 5,647 115 42,890 1 The ratings of the major credit rating agencies, and their mapping to our internal rating scale, are shown in the “Internal UBS rating scale and mapping of external ratings“ table in the “Credit risk models“ section of this report. 192 EDTF | Investment Bank: net banking products exposure by geographical region Asia Pacific Latin America Middle East and Africa North America Switzerland Rest of Europe Net exposure 31.12.15 CHF million 2,168 132 27 44,419 163 6,103 53,014 % 4.1 0.2 0.1 83.8 0.3 11.5 100.0 31.12.14 CHF million 1,864 210 84 34,495 214 6,024 42,890 EDTF | Investment Bank: net banking products exposure by industry sector Banks Chemicals Electricity, gas, water supply Financial institutions, excluding banks Manufacturing1 Mining1 Public authorities Real estate and construction Retail and wholesale Technology and communications Transport and storage1 Other Net exposure1 of which: oil and gas1 31.12.15 CHF million 2,468 636 3,173 19,990 6,794 3,331 2,451 4,487 681 3,847 4,005 1,150 53,014 5,930 % 4.7 1.2 6.0 37.7 12.8 6.3 4.6 8.5 1.3 7.3 7.6 2.2 100.0 11.2 31.12.14 CHF million 2,272 1,295 2,465 14,482 4,8582 6,160 1,3022 4,678 855 1,838 1,5602 1,1262 42,890 6,564 % 4.3 0.5 0.2 80.4 0.5 14.0 100.0 % 5.3 3.0 5.7 33.8 11.3 14.4 3.0 10.9 2.0 4.3 3.6 2.6 100.0 15.3 1 As of 31 December 2015, the CHF 5.9 billion Investment Bank net banking product exposure to the oil and gas sector comprised CHF 2.6 billion related to mining, CHF 2.5 billion related to transport and storage and CHF 0.8 billion related to manufacturing. As of 31 December 2014, the CHF 6.6 billion Investment Bank net banking products exposure to the oil and gas sector comprised CHF 5.5 billion related to mining, CHF 0.4 bil- lion related to transport and storage and CHF 0.7 billion related to manufacturing. 2 Prior year numbers were restated to account for enhanced sector granularity. 193 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Corporate Center – Group Asset and Liability Management EDTF | Gross banking products exposure within Corporate Center – Group Asset and Liability Management (Group ALM), which arises primarily in connection with treasury activities, decreased by CHF 13 billion to CHF 97 billion. This was driven by a decrease in balances with central banks of CHF 14 billion, largely due to the rebalancing of our high-quality, liquid assets managed centrally by Group ALM. ➔ Refer to the “Balance sheet” section of this report for more information on the development of balances with central banks Corporate Center – Non-core and Legacy Portfolio ➔ Refer to “Corporate Center – Non-core and Legacy Portfolio” in the “Financial and operating performance” section of this report for more information Traded products EDTF | Traded products include OTC derivatives exposures, as well as SFT and ETD exposures. Credit risk arising from traded products, after the effects of master netting agreements but excluding credit valuation adjustments and hedges, decreased by CHF 4 billion to CHF 45 billion as of 31 December 2015. OTC derivatives accounted for CHF 22 billion, exposures from SFTs were CHF 14 billion, and ETD exposures amounted to CHF 8 billion. OTC derivatives expo- sures are generally measured as net positive replacement values after the application of legally enforceable netting agreements and the deduction of cash and marketable securities held as collateral. SFT exposures are reported taking into account collateral received, and ETD exposures take into account collateral margin calls. The majority of the traded products exposures, totaling CHF 35 billion, were within the Investment Bank, Non-Core and Legacy Portfolio and Group ALM. Of this, CHF 0.3 billion was related to counterparties in the energy sector, predominantly rated invest- ment grade. As counterparty risk for traded products is managed at counterparty level, no further split between exposures in the Investment Bank and those in Non-core and Legacy Portfolio and Group ALM is provided. The traded products exposure includes OTC derivative exposures of CHF 16 billion in the Investment Bank and Non-core and Legacy Portfolio, a decrease of CHF 5 billion from the prior year, primarily due to our ongoing reduction activ- ity in Non-core and Legacy Portfolio and client-driven reductions in the Investment Bank. The SFT exposures, which arise mainly within the Investment Bank and Group ALM, amounted to CHF 14 billion and the ETD exposures were CHF 6 billion. The tables on the following pages provide more information on the OTC deriva- tives and SFT exposures of the Investment Bank, Non-Core and Legacy Portfolio and Group ALM. EDTF | Investment Bank, Non-core and Legacy Portfolio and Group ALM: traded products exposure CHF million Total exposure, before deduction of credit valuation adjustments and hedges Less: credit valuation adjustments and allowances Less: credit protection bought (credit default swaps, notional) Net exposure after credit valuation adjustments, allowances and hedges OTC derivatives1 SFT 31.12.15 ETD Total 15,502 (470) (1,076) 13,955 13,657 6,099 13,657 6,099 35,258 (470) (1,076) 33,712 1 Net replacement value includes the effect of netting agreements (including cash collateral) in accordance with Swiss federal banking law. Total 31.12.14 39,875 (700) (998) 38,177 194 EDTF | Investment Bank, Non-Core and Legacy Portfolio, and Group ALM: distribution of net OTC derivatives and SFT exposure across internal UBS ratings and loss given default (LGD) buckets CHF million, except where indicated Internal UBS rating1 Net OTC derivatives exposure Investment grade Sub-investment grade of which: 6−9 of which: 10−12 of which:13 and defaulted Total net OTC exposure, after credit valuation adjustments and hedges Net SFT exposure Investment grade Sub-investment grade Total net SFT exposure 31.12.15 LGD buckets Exposure 0–25% 26–50% 51–75% 76–100% 13,176 4,380 7,865 558 779 343 92 344 63 31 31 0 655 252 60 342 9 8 0 0 13,955 4,443 8,520 566 13,531 126 13,657 6,520 3 6,524 6,234 9 6,243 269 12 280 373 53 51 0 2 426 508 102 610 Weighted average LGD (%) 30 36 48 30 26 31 27 89 28 31.12.14 Weighted average LGD (%) 29 38 39 31 39 30 33 81 34 Exposure 18,040 913 445 114 355 18,953 11,674 399 12,073 1 The ratings of the major credit rating agencies, and their mapping to our internal rating masterscale, are shown in the “Internal UBS rating scale and mapping of external ratings“ table in the “Credit risk models“ section of this report. EDTF | Investment Bank, Non-Core and Legacy Portfolio, and Group ALM: net OTC derivatives and SFT exposure by geographical region Asia Pacific Latin America Middle East and Africa North America Switzerland Rest of Europe Net exposure Net OTC derivatives Net SFT 31.12.15 31.12.14 31.12.15 31.12.14 CHF million 1,194 51 132 4,878 512 7,189 13,955 % 8.6 0.4 0.9 35.0 3.7 51.5 100.0 CHF million % CHF million % CHF million 2,956 171 157 6,704 811 8,153 15.6 0.9 0.8 35.4 4.3 43.0 1,661 117 740 2,929 1,275 6,935 12.2 0.9 5.4 21.5 9.3 50.8 2,123 122 900 2,927 1,252 4,750 % 17.6 1.0 7.5 24.2 10.4 39.3 18,953 100.0 13,657 100.0 12,073 100.0 % 33.3 EDTF | Investment Bank, Non-Core and Legacy Portfolio, and Group ALM: net OTC derivatives and SFT exposure by industry Net OTC derivatives Net SFT 31.12.15 31.12.14 31.12.15 31.12.14 CHF million % CHF million % CHF million % CHF million Banks Chemicals Electricity, gas, water supply Financial institutions, excluding banks Manufacturing Mining Public authorities Retail and wholesale Transport, storage and communication Other Net exposure 4,621 28 306 5,336 564 178 2,085 15 285 537 33.1 0.2 2.2 38.2 4.0 1.3 14.9 0.1 2.0 3.8 6,152 29 276 7,687 740 128 2,775 72 437 657 32.5 0.2 1.5 40.6 3.9 0.7 14.6 0.4 2.3 3.5 4,995 36.6 4,025 8,151 59.7 7,176 59.4 509 2 1 3.7 0.0 0.0 871 0 1 7.2 0.0 0.0 13,955 100.0 18,953 100.0 13,657 100.0 12,073 100.0 195 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Credit risk mitigation Audited | EDTF | Pillar 3 | We actively manage the credit risk in our port- folios by taking collateral against exposures and by utilizing credit hedging. Lending secured by real estate Audited | EDTF | Pillar 3 | We use a scoring model as part of a standard- ized front-to-back process to support credit decisions for the orig- ination or modification of Swiss mortgage loans. The two key fac- tors within this model are an affordability calculation relative to gross income and the loan-to-value (LTV) ratio. The calculation of affordability takes into account interest pay- ments, minimum amortization requirements, potential property maintenance costs and, in the case of properties expected to be rented out, the level of rental income. Interest payments are esti- mated using a predefined framework, which takes into account the potential for significant increases in interest rates during the lifetime of the loan. For properties occupied by the borrower, the maximum LTV allowed within the standard approval process is 80%. This is reduced to 60% in the case of vacation properties and luxury real estate. For properties rented out by the borrower, the maximum LTV allowed within the standard approval process ranges from 60% to 80%, depending on the type of property, the age of the property and the amount of any renovation work required. Audited | The value assigned by UBS to each property is based on the lowest value determined from internally calculated valuations, the purchase price and, in some cases, an additional external valu- ation. We use two separate models provided by a market-leading external vendor to derive property valuations for owner-occupied residential properties (ORP) and income-producing real estate. For ORP, we estimate the current value of properties by using a regres- sion model (hedonic model) to compare detailed characteristics for each property against a database of property transactions. In addition to the model-derived values, valuations for ORP are updated quarterly throughout the lifetime of the loan by using region-specific real estate price indices. The price indices are sourced from an external vendor and are subject to internal vali- dation and benchmarking against two other external vendors. On an annual basis, we use these valuations to compute indexed LTV for all ORP and consider these together with other risk measures (e.g., rating migration and behavioral information) to identify higher-risk loans, which are then reviewed individually by client advisors and credit officers, with actions taken where they are considered necessary. For income-producing real estate, a capitalization model is used to determine the property valuation by discounting esti- mated sustainable future income using a capitalization rate based on various attributes. These attributes consider regional as well as specific property characteristics such as market and location data (e.g., vacancy rates), benchmarks (e.g., for running costs) and cer- tain other standardized input parameters (e.g., property condi- tion). Rental income from properties is reviewed at a minimum once every three years, but indications of significant changes in the amount of rental income or in the vacancy rate can trigger an interim reappraisal. To take market developments into account for these models, the external vendor regularly updates the parameters and / or refines the architecture for each model. Model changes and parameter updates are subject to the same validation procedures as for our internally developed models. Audited | We similarly apply underwriting guidelines for our Wealth Management Americas mortgage loan portfolio to ensure affordability of the loans and sufficiency of collateral. These include: maximum loan amounts, maturities and LTV limits by type of property, debt-to-income limits, required reserves as a percentage of proposed loan amounts and appropriate credit score guidelines. The maximum LTV allowed within the standard approval process ranges from 45% to 80% depending on prop- erty type and overall loan size. ➔ Refer to “Personal & Corporate Banking” in “Credit risk profile of the Group – Internal risk view” in this section for more informa- tion on LTV in our Swiss mortgage portfolio ➔ Refer to “Wealth Management Americas” in “Credit risk profile of the Group – Internal risk view” in this section for more information on LTV in our Wealth Management Americas mortgage portfolio Exposures secured by other forms of collateral Audited | EDTF | Pillar 3 | Lombard loans and other lending such as secu- rities financing transactions are secured against the pledge of eli- gible marketable securities, guarantees and other forms of col- lateral. Eligible financial securities primarily include transferable securities (such as bonds and equities), which are liquid and actively traded, and other transferable securities such as approved structured products for which regular prices are available and for which the issuer of the security provides a market. We apply discounts (haircuts) to reflect the collateral’s risk and to derive the lending value. Haircuts for eligible marketable securities are calculated to cover the possible change in the market value over a given close- out period and confidence level. For less liquid instruments such as structured products and certain bonds, and for products with long redemption periods, the close-out period might be much longer than that for highly liquid instruments, resulting in a higher haircut. For cash, life insurance policies and guaran- tees / letters of credit, haircuts are determined on a product / cli- ent-specific basis. 196 Audited | EDTF | Pillar 3 | We also consider concentration risks across collateral posted on a divisional level, and additionally perform targeted Group-wide reviews of concentrations. A concentration of collateral in single securities, issuers or issuer groups, industry sectors, countries, regions or currencies may result in higher risk and reduced liquidity. In such cases, the lending value of the col- lateral, margin call and close-out levels are adjusted accordingly. Exposures and collateral values are monitored on a daily basis to ensure that the credit exposure continues to be covered by suf- ficient collateral. A shortfall occurs when the lending value drops below the exposure. If a shortfall exceeds a defined trigger level, a margin call is initiated, requiring the client to provide additional collateral, reduce the exposure or take other action to bring the exposure in line with the lending value of the collateral. If the shortfall widens, or is not corrected within the required period, a close-out is initiated, through which collateral is liquidated, open derivative positions are closed and guarantees or letters of credit are called. We also conduct stress testing of collateralized exposures to simulate market events which increase the risk of collateral short- falls and unsecured exposures by significantly reducing the value of the collateral, increasing the exposure of traded products, or both. ➔ Refer to “Stress loss” in “Credit risk models” in this section for Credit hedging Audited | EDTF | Pillar 3 | We utilize single-name credit default swaps (CDSs), credit index CDSs, bespoke protection, and other instru- ments to actively manage credit risk in the Investment Bank and Non-core and Legacy Portfolio. This is aimed at reducing concen- trations of risk from specific counterparties, sectors or portfolios. We maintain strict guidelines for taking credit hedges into account for credit risk mitigation purposes. For example, when monitoring exposures against counterparty limits, we do not usu- ally recognize credit risk mitigants such as proxy hedges (credit protection on a correlated but different name) or credit index CDSs. Buying credit protection also creates credit exposure against the protection provider. We monitor our exposures to credit pro- tection providers and the effectiveness of credit hedges as part of our overall credit exposures to the relevant counterparties. For credit protection purchased to hedge the lending portfolio, this includes monitoring mismatches between the maturity of the credit protection purchased and the maturity of the associated loan. Such mismatches result in basis risk and may reduce the effectiveness of the credit protection. Mismatches are routinely reported to credit officers and mitigating actions are taken when considered necessary. ➔ Refer to “Note 14 Derivative instruments and hedge accounting” in the “Consolidated financial statements” section of this report more information on our stress testing for more information Mitigation of settlement risk EDTF | Pillar 3 | To mitigate settlement risk, we reduce our actual set- tlement volumes through the use of multilateral and bilateral agreements with counterparties, including payment netting. Our most significant source of settlement risk is foreign exchange transactions. We are a member of Continuous Linked Settlement, a foreign exchange clearing house which allows transactions to be settled on a delivery versus payment basis, thereby significantly reducing foreign exchange-related settle- ment risk relative to the volume of business. However, the mitiga- tion of settlement risk through Continuous Linked Settlement membership and other means does not fully eliminate our credit risk in foreign exchange transactions (resulting from changes in exchange rates prior to settlement), which is managed as part of our overall credit risk management of OTC derivatives. Audited | EDTF | Pillar 3 | Trading in OTC derivatives is conducted through central counterparties (CCPs) where practicable. Where CCPs are not used, we have clearly defined processes for enter- ing into netting and collateral arrangements, including the requirement to have a legal opinion on the enforceability of con- tracts in relevant jurisdictions in the case of insolvency. Trading is generally conducted under bilateral 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. For most major market par- ticipant counterparties, we may in addition use two-way collat- eral agreements under which either party can be required to pro- vide collateral in the form of cash or marketable securities, typically limited to well-rated government debt, when the expo- sure exceeds specified levels. ➔ Refer to “Note 14 Derivative instruments and hedge accounting” in the “Consolidated financial statements” section of this report for more information on our OTC derivatives settled through central counterparties ➔ Refer to “Note 26 Offsetting financial assets and financial liabilities” in the “Consolidated financial statements” section of this report for more information on the effect of netting and collateral arrangements on our derivative exposures 197 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Credit risk models Audited | EDTF | Pillar 3 | We have developed tools and models in order to estimate future credit losses that may be implicit in our current portfolio. Exposures to individual counterparties are measured based on three generally accepted parameters: probability of default (PD), loss given default (LGD) and exposure at default (EAD). For a given credit facility, the product of these three parameters results in the expected loss. 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 EDTF | Pillar 3 | Key features of our main credit risk models ratings-based approach of the Basel III framework governing international convergence of capital. We also use models to derive the portfolio credit risk measures of expected loss, statisti- cal loss and stress loss. The “Key features of our main credit risk models” table sum- marizes the key features of the models that we use to derive PD, LGD and EAD for our main portfolios and is followed by more detailed explanations of these parameters. ➔ Refer to the “UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations” section of this report for more information on the regulatory capital calculation under the advanced internal ratings-based approach Portfolio in scope Model approach Main drivers Number of years loss data Probability of default Loss given default Swiss owner-occupied mortgages Income-producing real estate mortgages Lombard lending Score card Transaction rating Merton type Personal & Corporate Banking – Corporates Score card Investment Bank – Banks Investment Bank – Corporates Score card Score card / market data Swiss owner-occupied mortgages Income-producing real estate mortgages Lombard lending Personal & Corporate Banking – Corporates Actuarial model Actuarial model Actuarial model Actuarial model Investment Bank – all counterparties Actuarial model Exposure at default Banking products Traded products Statistical model Statistical model Audited | EDTF | Pillar 3 | Internal UBS rating scale and mapping of external ratings Behavioral data, affordability relative to income, property type, loan-to-value Loan-to-value, debt-service-coverage Loan-to-value, portfolio volatility Financial data including balance sheet ratios and profit and loss, and behavioral data Financial data including balance sheet ratios and profit and loss Financial data including balance sheet ratios and profit and loss, and market data Historical observed loss rates, loan-to-value, property type Historical observed loss rates Historical observed loss rates Historical observed loss rates Counterparty- and facility-specific, including industry segment, collateral, seniority, legal environment and bankruptcy procedures Exposure type (committed credit lines, revocable credit lines, contingent products) Product-specific market drivers, e.g., interest rates Internal UBS rating 0 and 1 2 3 4 5 6 7 8 9 10 11 12 13 Counterparty is in default (CDF) 198 1-year PD range in % 0.00–0.02 0.02–0.05 0.05–0.12 0.12–0.25 0.25–0.50 0.50–0.80 0.80–1.30 1.30–2.10 2.10–3.50 3.50–6.00 6.00–10.00 10.00–17.00 >17 Default Description Investment grade Sub-investment grade Defaulted Moody’s Investors Service mapping Aaa Aa1 to Aa3 A1 to A3 Baa1 to Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa Ca to C Standard & Poor’s mapping AAA AA+ to AA– A+ to A– BBB+ to BBB BBB– BB+ BB BB– B+ B B– CCC CC to C D 21 21 10–15 21 5–10 5–10 21 21 10–15 17 5–10 >10 n / a Fitch mapping AAA AA+ to AA– A+ to AA– BBB+ to BBB BBB– BB+ BB BB– B+ B B– CCC CC to C D Probability of default EDTF | Pillar 3 | The probability of default (PD) is an estimate of the likelihood of a counterparty defaulting on its contractual obliga- tions over the next 12 months. PD ratings are used for credit risk measurement and are an important input for determining credit risk approval authorities. PD is assessed using rating tools tailored to the various catego- ries of counterparties. Statistically developed score cards, based on key attributes of the obligor, are used to determine PD for many of our corporate clients and for loans secured by real estate. Where available, market data may also be used to derive the PD for large corporate counterparties. For Lombard loans, Merton- type model simulations taking into account potential changes in the value of securities collateral are used in our rating approach. These categories are also calibrated to our internal credit rating scale (masterscale), which is designed to ensure a consistent assessment of default probabilities across counterparties. Our masterscale expresses one-year default probabilities that we determine through our various rating tools by means of distinct classes, whereby each class incorporates a range of default prob- abilities. Counterparties migrate between rating classes as our assessment of their PD changes. The ratings of the major credit rating agencies, and their map- ping to our internal rating masterscale and internal PD bands, are shown in the “Internal UBS rating scale and mapping of external ratings” table on the previous page. The mapping is based on the long-term average of one-year default rates avail- able from the rating agencies. For each external rating category, the average default rate is compared with our internal PD bands to derive a mapping to our internal rating scale. Our internal rat- ing of a counterparty may, therefore, diverge from one or more 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’ aver- age in any given period. We periodically assess the long-term average default rates of credit rating agencies’ grades, and we adjust their mapping to our masterscale as necessary to reflect any material changes. Loss given default EDTF | Pillar 3 | Loss given default (LGD) is the magnitude of the likely loss if there is a default. LGD estimates include loss of principal, interest and other amounts (such as work-out costs, including the cost of carrying an impaired position during the work-out process) less recovered 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. Our estimates are supported by our internal loss data and external information where available. Where we hold collateral, such as marketable securities or a mort- gage on a property, loan-to-value ratios are a key parameter in determining LGD. Exposure at default EDTF | Pillar 3 | 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 counter- party 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 using scenario and statistical techniques. We assess the net amount that may be owed to us or that we may owe to others, taking into account the effect of market moves over the potential time it would take to close out our positions. For exchange-traded derivatives, our calculation of EAD takes into account collateral margin calls. When measuring individual counterparty exposure against credit limits, we consider the maximum likely exposure measured to a high level of confidence. However, when aggre- gating exposures to different counterparties for portfolio risk measurement purposes, we use the expected exposure to each counterparty at a given time period (usually one year) generated by the same model. We 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 mitigate these risks. Expected loss EDTF | Pillar 3 | Credit losses are an inherent cost of doing business, but the occurrence 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 aver- age annual costs we expect to experience from positions that become impaired. The expected loss for a given credit facility is a product of the three components described above: PD, EAD and LGD. We aggregate the expected loss for individual counterpar- ties 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. We use a statistical modeling approach to estimate the loss pro- file of each of our credit portfolios over a one-year period to a specified level of confidence. The mean value of this loss distribu- tion is the expected loss. The loss estimates deviate from the mean value due to statistical uncertainty on the defaulting counterpar- ties and to systematic default relationships among counterparties within and between segments. The statistical measure is sensitive to concentration risks on individual 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. 199 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Stress loss EDTF | Pillar 3 | We complement our statistical modeling approach with scenario-based stress loss measures. Stress tests are run on a regular basis to monitor the potential impact of extreme, but nev- ertheless plausible events on our portfolios, under which key credit risk parameters are assumed to deteriorate substantially. Where we consider it appropriate, we apply limits on this basis. Stress scenarios and methodologies are tailored to the nature of the portfolios, ranging from regionally focused to global sys- temic events, and varying in time horizon. For example, for our loan underwriting portfolio, we apply a global market event under which, simultaneously, the market for loan syndication freezes, market conditions significantly worsen, and credit quality deteriorates. Similarly, for Lombard lending, we apply a range of scenarios representing instantaneous market shocks to all collat- eral and exposure positions, taking into consideration their liquid- ity and potential concentrations. The portfolio-specific stress test for our mortgage lending business in Switzerland reflects a multi- year event, and the overarching stress test for global wholesale and counterparty credit risk to corporates uses a one-year global stress event and takes into account exposure concentrations to single counterparties. ➔ Refer to “Stress testing” in this section for more information on our stress testing framework Credit risk model confirmation EDTF | Pillar 3 | Our approach to model confirmation involves both quantitative methods, including monitoring compositional changes in the portfolios and the results of backtesting, and qual- itative assessments, including feedback from users on the model output as a practical indicator of the performance and reliability of the model. Material changes in a portfolio composition may invalidate the conceptual soundness of the model. We therefore perform regu- lar analysis of the evolution of portfolios to identify such changes in the structure and credit quality of portfolios. This includes anal- ysis of changes in key attributes, changes in portfolio concentra- tion measures, as well as changes in RWA. ➔ Refer to “Risk measurement” in this section for more informa- tion on our approach to model confirmation procedures EDTF | Pillar 3 | Main credit models backtesting by regulatory exposure segment Length of time series used for the calibration (in years) Actual rates in % Average of last 5 years1 Min. of last 5 years2 Max. of last 5 years2 Estimated average rates at the start of the period in % Probability of default Sovereigns Banks3 Corporates4 Retail Residential mortgages Lombard lending Other retail Loss given default Sovereigns Banks3, 5 Corporates Retail Residential mortgages Lombard lending Other retail Credit conversion factor Corporates >10 >10 >10 >20 >10 >10 >10 >10 >10 >20 >10 >10 >10 0.00 0.08 0.22 0.15 0.01 0.29 12.71 24.60 1.60 22.61 18.77 21.53 0.00 0.06 0.19 0.13 0.00 0.16 14.33 0.24 6.23 0.11 9.75 0.00 0.13 0.28 0.19 0.02 0.45 30.28 2.23 6.23 30.69 44.32 0.22 0.61 0.55 0.52 0.13 1.01 41.11 37.71 20.80 6.61 20.00 43.03 33.45 1 Average of all observations over the last five years. 2 Minimum / maximum annual average of observations in any single year from the last five years. Yearly averages are only calculated where five or more observa- tions occurred during that year. 3 Includes central counterparties. 4 Reported averages are low due to the effect of managed funds, which have relatively low default rates. 5 For Banks, no minimum / maximum LGDs are reported, since there were less than 5 observations in each year between 2011 and 2015. 200 Backtesting EDTF | Pillar 3 | We monitor the performance of our models by back- testing and benchmarking them, whereby model outcomes are compared with actual results, based on our internal experience as well as externally observed results. To assess the predictive power of our credit exposure models for traded products such as OTC derivatives and ETD products, we statistically compare the pre- dicted future exposure distributions at different forecast horizons with the realized values. For PD, we use statistical modeling to derive a predicted distri- bution of the number of defaults. The observed number of defaults is then compared with this distribution, allowing us to derive a statistical level of confidence in the model conservative- ness. In addition, we derive a lower and upper bound for the average default rate. If the portfolio average PD lies outside the derived interval, the rating tool is, as a general rule, recalibrated. For LGD, the backtesting statistically tests whether the mean difference between the observed and predicted LGD is zero. If the test rejects, then there is evidence that our predicted LGD is too low. In such cases, models are recalibrated where these differ- ences are outside expectations. Credit conversion factors (CCFs), used for the calculation of EAD for undrawn facilities with corporate counterparties, are dependent on several contractual dimensions of the credit facility. We compare the predicted amount drawn with observed histori- cal utilization of such facilities for defaulted counterparties. If any statistically significant deviation is observed, the relevant CCFs are redefined. The table on the previous page compares the current model calibration for PD, LGD and CCFs with historical observed values over the last five years. Changes to models and model parameters during the period EDTF | Pillar 3 | As part of our continuous efforts to enhance models to reflect market developments and new available data, certain models were modified over the course of 2015. For the Swiss small and medium corporate clients, a revised rating tool was implemented in 2015, which includes behavioral information as an additional rating driver. Moreover, this rating tool was recali- brated based on an extended data history. Revised rating methodologies for banks and leveraged corpo- rates were introduced by combining a purely quantitative rating based on the empirical regression between counterparty financial characteristics and default events with a structured qualitative overlay, which allows for Risk Officers expert opinion to be included in the rating assessment. Where required, changes to models and model parameters were approved by the Swiss Financial Market Supervisory Authority (FINMA) prior to implementation. 201 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Policies for past due, non-performing and impaired claims EDTF | Pillar 3 | The diagram “Exposure categorization” illustrates how we categorize banking products and securities financing transac- tions (SFTs) as performing, non-performing or impaired. Audited | For products accounted for on a fair value basis, such as OTC derivatives, credit deterioration is recognized through a credit valuation adjustment (CVA), and these products are there- fore not subject to the below impairment framework. We consider a claim at amortized cost (loan, guarantee, loan commitment or SFT) to be past due when a contractual payment has not been received by its contractual due date. This includes account overdrafts where the credit limit is exceeded. Past due claims are not considered impaired where we expect to collect all amounts due under the contractual terms of the claims. A past due claim is considered non-performing when the pay- ment of interest, principal or fees is overdue by more than 90 days. Claims are also classified as non-performing when insol- vency proceedings / enforced liquidation have commenced or obli- gations have been restructured on preferential terms, such as preferential interest rates, extension of maturity or subordination. Non-performing claims are rated as being in counterparty default on our internal rating scale. Individual claims are classified as impaired if following an indi- vidual impairment assessment, an allowance or provision for credit losses is established. Accordingly, both performing and non-performing loans may be classified as impaired. Restructured claims Audited | EDTF | We do not operate a general policy for restructuring claims in order to avoid counterparty default. Where restructuring does take place, we assess each case individually. Typical features of terms and conditions granted through restructuring to avoid default may include the provision of special interest rates, post- ponement of interest or principal payments, modification of the schedule of repayments, subordination or amendment of loan maturity. If a loan is restructured with preferential conditions (i.e., new terms and conditions are agreed which do not meet the normal current market criteria for the quality of the obligor and the type of loan), the claim is still classified as non-performing and is rated as being in counterparty default. It will remain so until the loan is collected, written off or non-preferential conditions are granted that supersede the preferential conditions, and will be assessed for impairment on an individual basis. Individual and collective impairment assessments Audited | EDTF | Pillar 3 | Claims are assessed individually for impairment where there are indicators that an impairment may exist. Otherwise claims are included in a collective impairment assessment. Individual impairment assessment Audited | EDTF | Pillar 3 | Non-performing status is considered an indica- tor that a loan may be impaired and therefore non-performing claims are assessed individually for impairment. However, an impairment analysis would be carried out irrespective of non-per- forming status if other objective evidence indicates that a loan may be impaired. Any event that impacts current and future cash flows may be an indication of impairment and trigger an assess- ment by the risk officer. Such events may be (i) significant collat- eral shortfalls due to a fall in lending values (securities and real estate), (ii) increase in loan or derivative exposures, (iii) significant financial difficulties of a client and (iv) high probability of the cli- ent’s bankruptcy, debt moratorium or financial reorganization. Individual claims are assessed for impairment based on the borrower’s overall financial condition, resources and payment record, the prospects of support from contractual guarantors and, where applicable, the realizable value of any collateral. The recov- erable amount is determined from all relevant cash flows and, where this is lower than the carrying amount of the claim, the claim is considered impaired. We have established processes to determine the carrying val- ues of impaired claims in compliance with IFRS requirements. Our credit controls applied to valuation processes and workout agree- ments are the same for credit products measured at amortized cost and fair value. Our workout strategy and estimation of recov- erable amounts are independently approved in accordance with our credit authorities. 202 Collective impairment assessment Audited | EDTF | Pillar 3 | We assess our portfolios of claims carried at amortized cost with similar credit risk characteristics for collective impairment in order to consider if these portfolios contain impaired claims that cannot yet be individually identified. To cover the time lag between the occurrence of an impairment event and its identification based on the policies above, we establish collec- tive loan loss allowances based on the estimated loss for the port- folio over the average period between trigger events and the identification of any individual impairment. These portfolios are not considered impaired loans in the tables shown in this section. Additionally, for all of our portfolios we assess whether there have been any developments which might result in event-driven impairments 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 significant changes in the legal or regulatory environment. To determine whether a collective impair- ment exists, we regularly use a set of global economic drivers to assess the most vulnerable countries and review the impact of any potential impairment event. 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measurement, monitoring and management techniques – Market risks arise from both our trading and non-trading busi- ness activities. – Trading market risks arise mainly in connection with securities and derivatives trading for market-making and client facilita- tion purposes within our Investment Bank, from remaining positions within Non-core and Legacy Portfolio and also from our municipal securities trading business within Wealth Man- agement Americas. – Non-trading market risk arises predominantly in the form of interest rate and foreign exchange risks in connection with personal banking and lending in our wealth management busi- nesses, our personal and corporate banking businesses in Swit- zerland and the Investment Bank’s lending business, in addi- tion to treasury activities. – Corporate Center – Asset and Liability Management (Group ALM) assumes market risks in the process of managing interest rate risk, structural foreign exchange risks and the liquidity and funding profile of the Group. – Equity and debt investments can also give rise to market risks, as can some aspects of our employee benefits such as defined benefit pension schemes. – Market risk limits are set for the Group, the business divisions and Corporate Center and at granular levels within the various business lines, reflecting the nature and magnitude of the mar- ket risks. – Our primary portfolio measures of market risk are liquidity- adjusted stress (LAS) loss and value-at-risk (VaR). Both are com- mon to all our business divisions and subject to limits that are approved by the Board of Directors (BoD). – These measures are complemented by concentration and gran- ular limits for general and specific market risk factors. Our trad- ing businesses are subject to multiple market risk limits. These limits take into account the extent of market liquidity and vola- tility, available operational capacity, valuation uncertainty, and, for our single-name exposures, the credit quality of issuers. – Issuer risk is controlled by limits applied at business division level based on jump-to-zero measures, which estimate our maximum default exposure (the loss in the case of a default event assuming zero recovery). – Non-trading foreign exchange risks are managed under mar- ket risk limits, with the exception of Group ALM’s manage- ment of consolidated capital activity. 204 Our Treasury Risk Control function applies a holistic risk frame- work which sets the appetite for treasury-related risk-taking activ- ities across the Group. A key element of the framework is an over- arching economic value sensitivity limit, set by the BoD. This limit is linked to the level of Basel III common equity tier 1 (CET1) capi- tal and takes into account risks arising from interest rates, foreign exchange and credit spreads. In addition, the sensitivity of net interest income to changes in interest rates is monitored against targets set by the Group Chief Executive Officer in order to ana- lyze the outlook and volatility of net interest income based on market expected interest rates. Limits are also set by the BoD to balance the impact of foreign exchange movements on our CET1 capital and CET1 capital ratio. Non-trading interest rate and for- eign exchange risks are included in our Group-wide statistical and stress testing metrics which flow into our risk appetite framework. Equity and debt investments are subject to a range of risk con- trols including pre-approval of new investments by business man- agement and Risk Control and regular monitoring and reporting. They are also included in our Group-wide statistical and stress test- ing metrics which flow into our risk appetite framework. ➔ Refer to the “Treasury management” section of this report for more information on Group ALM’s management of foreign exchange risks ➔ Refer to the “Capital management” section of this report for more information on the sensitivity of our CET1 capital and CET1 capital ratio to currency movements Market risk exposures arising from our business activities EDTF | The table on the next page highlights the most significant sources of our trading market risk exposures and the interest rate risk in our banking book exposures, categorized according to the business activities that primarily generate the risks and the classi- fication of positions on the balance sheet. In practice, and particu- larly for positions classified in the banking book, we take account of natural risk offsets that occur between balance sheet line items, for example loans and deposits, and manage the residual expo- sures. The table does not show the foreign exchange risks arising from Group ALM’s management of consolidated capital activity discussed in the “Treasury management” section of this report. Also shown in the table is the specific capital treatment for positions classified within the trading book in accordance with regulatory requirements (regulatory trading book). The amount of capital required to underpin market risk in the regulatory trading book is calculated using a variety of methods approved by FINMA. The components of market risk RWA are value-at-risk (VaR), stressed VaR (SVaR), an add-on for risks which are potentially not fully modeled in VaR, the incremental risk charge (IRC), the com- prehensive risk measure (CRM) for the correlation portfolio and the securitization framework for securitization positions in the trading book. More information on each of these components is detailed in the “Market risk exposures arising from our primary business activities” table on the next page. 205 Risk, treasury and capital management Risk, treasury and capital management Risk management and control EDTF | Market risk exposures arising from our primary business activities 31.12.15, in CHF billion Market risk type Trading book market risk RWA category e r u s a e m k s i r e v i s n e h e r p m o C n o i t a z i t i r u c e s k o o b g n i d a r T e g r a h c k s i r l a t n e m e r c n I R a V - n i - t o n - s k s i R s e t a r t s e r e t n I s d a e r p s t i d e r C s e i t i u q E e g n a h c x e n g i e r o F R a V y r o t a l u g e R s e i t i d o m m o C R a V d e s s e r t S 0.0 0.0 0.2 0.4 0.0 0.4 0.0 0.0 0.0 0.0 A W R k s i r t e k r a m l a t o T 0.0 1.0 0.0 0.0 1.6 2.9 3.3 2.5 0.0 0.2 10.5 Trading book / Banking book Banking book Banking book Trading book 2 Business activity Balance sheet line item Wealth Management 1 Wealth Management Americas Client deposits Due to customers Securities backed lending and mortgages Loans Trading portfolio assets and liabilities Municipal securities and closed-end funds trading Personal & Corporate Banking 1 Asset Management Investment Bank Investor Client Services Fixed income, equities, foreign exchange and commodities, securities and derivatives Structured notes Trading portfolio assets and liabilities, positive and negative replacement values Financial liabilities designated at fair value Trading book Corporate Client Solutions Originate to distribute loans and CMBS origination 3 Take and hold loans Loans, structured loans, reverse repurchase agreements and securities borrowing Corporate Center – Group ALM 1 Centralized liquidity and funding Trading portfolio assets Loans Trading book Banking book Financial assets designated at fair value Banking book Debt issued and due to banks Banking book Repurchase and reverse repurchase agreements Trading book Global and local liquidity reserves Balances with central banks and Due from banks Financial investments available-for-sale Trading portfolio assets Mortgage and other loans Loans Client deposits Due to customers Banking book Banking book Trading book Banking book Banking book Hedging instruments and other derivatives Positive and negative replacement values Banking book Corporate Center – Non-core and Legacy Portfolio Assetsandderivativesconsideredto be non-core Structured notes Trading portfolio assets and liabilities, positive and negative replacement values Financialliabilitiesdesignatedatfair value Trading book Counterparty CVA management 4 Positiveandnegativereplacement values Trading book 0.1 0.2 0.1 0.5 0.9 0.4 0.6 0.8 0.2 0.1 0.5 2.6 Reclassified held for trading assets, and corporate and asset-based lending Loans Portfolio diversification effect 5 Total Key contributor Less significant contributor Banking book (0.8) (1.4) 0.0 (0.8) 0.0 0.0 (2.9) 1.5 2.8 4.2 2.7 0.1 0.7 12.1 1 Interest rate risk from Wealth Management and Personal & Corporate Banking loans and deposits is transferred to Corporate Center – Group ALM. 2 Although risk is controlled under the market risk framework, Puerto Rico closed-end fund positions are treated as banking book for capital underpinning purposes due to market illiquidity. 3 Credit risk on loan underwriting is captured through, and reported as part of, credit risk RWA. 4 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 is captured through credit valuation adjustment RWA calculated under the advanced IRB or standardized approach and reported as part of credit risk RWA. 5 Negative market risk RWA are due to diversification effects which are allocated to Corporate Center – Services. 206 Market risk stress loss EDTF | Pillar 3 | Value-at-risk EDTF | Pillar 3 | We measure and manage our market risks primarily through a comprehensive framework of non-statistical measures and related limits. This includes an extensive series of stress tests and scenario analyses, which we continuously evaluate in order to ensure that any losses resulting from an extreme, yet plausible, event do not exceed our risk appetite. Liquidity adjusted stress EDTF | Pillar 3 | Our primary measure of stress loss for Group-wide market risk is liquidity-adjusted stress (LAS). The LAS framework is designed to capture the economic losses that could arise under specified stress scenarios. This is in part achieved by replacing the standard one-day and 10-day holding period assumptions used for management and regulatory VaR with liquidity-adjusted hold- ing periods, as explained below. Shocks are then applied to posi- tions based on the expected market movements over the liquidity- adjusted holding periods resulting from the specified scenario. The holding periods used in LAS are calibrated to reflect the amount of time it would take to reduce or hedge the risk of posi- tions in each major risk factor in a stressed environment, assum- ing maximum utilization of the relevant position limits. Holding periods are also subject to minimum periods, regardless of observed liquidity levels, reflecting the fact that identification of and reaction to a crisis may not always be immediate. The expected market movements are derived using a combina- tion of historical market behavior, based on an analysis of histori- cal events, and forward-looking analysis including consideration of defined scenarios that have not occurred historically. LAS-based limits are applied at a number of levels: Group- wide, business divisions and Corporate Center, business areas and sub-portfolios. In addition, LAS forms the core market risk compo- nent of our combined stress test framework and is therefore inte- gral to our overall risk appetite framework. ➔ Refer to “Risk appetite framework” in this section for more information ➔ Refer to “Stress testing” in this section for more information on our stress testing framework Method applied Historical simulation Data set Five years Holding period 1 day for internal limits, 10 days for regulatory VaR Confidence level Population 95% for internal limits, 99% for regulatory VaR – both based on expected tail loss Regulatory trading book for regulatory VaR, a broader population for internal limits VaR definition Audited | EDTF | Pillar 3 | Value-at-risk (VaR) is a statistical measure of market risk, representing the market risk losses that could poten- tially be realized over a set time horizon (holding period) at an established level of confidence. The measure assumes no change in the Group’s trading positions over the set time horizon. We calculate VaR on a daily basis, based on the direct applica- tion of historical changes in market risk factors to our current positions – a method known as historical simulation. We use a single VaR model for both internal management purposes and for determining market risk regulatory capital requirements, although we consider different confidence levels and time horizons. For internal management purposes, we establish risk limits and mea- sure exposures using VaR at the 95% confidence level with a one- day holding period, aligned to the way we consider the risks asso- ciated with our trading activities. The regulatory measure of market risk used to underpin the market risk capital requirement under Basel III requires a measure equivalent to a 99% confidence level using a 10-day holding period. Additionally, the population of the portfolio within manage- ment and regulatory VaR is slightly different. The population within regulatory VaR meets minimum regulatory requirements for inclusion in regulatory VaR. Management VaR includes a broader population of positions. For example, regulatory VaR excludes the credit spread risks from the securitization portfolio, which are treated instead under the securitization approach for regulatory purposes. 207 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Management VaR for the period EDTF | The tables below show minimum, maximum, average and period-end management VaR by business division and Corporate Center unit, and by general market risk type. Market risk, mea- sured as 1-day, 95% confidence level management VaR continued to be managed at low levels and average VaR remained stable in 2015 compared with the prior year. With VaR at such low levels, we continued to observe large relative changes driven by positions arising from client facilitation, as well as option expiries, the effect of which can be seen in the maximum VaR for the period. Audited | EDTF | Management value-at-risk (1-day, 95% confidence, 5 years of historical data) by business division and Corporate Center unit and general market risk type1 For the year ended 31.12.15 CHF million Total management VaR, Group Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Services CC – Group ALM2 CC – Non-core and Legacy Portfolio Diversification effect3, 4 CHF million Total management VaR, Group Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Core Functions2 CC – Non-core and Legacy Portfolio Diversification effect3, 4 Min. 10 0 0 0 0 7 0 4 5 Min. 10 0 0 0 0 7 3 6 Max. Average 31.12.15 25 0 1 0 0 22 0 16 9 15 0 0 0 0 12 0 8 6 (12) 13 0 0 0 0 10 0 6 5 (9) Interest rates Credit spreads Foreign exchange Commodities 7 18 11 9 4 9 6 4 1 11 4 3 Average (per business division and risk type) 0 1 0 0 6 0 8 4 0 1 0 0 3 0 0 5 0 0 0 0 4 0 1 1 (9) (4) (1) 0 5 2 1 0 0 0 0 2 0 0 0 0 Equity 5 23 9 7 0 0 0 0 9 0 0 0 0 For the year ended 31.12.14 Equity Interest rates Credit spreads Foreign exchange Commodities Max. Average 23 0 2 0 0 24 7 11 31.12.14 17 0 1 0 0 17 5 6 (12) 14 0 1 0 0 12 4 8 (11) 5 24 9 14 0 0 0 0 9 0 2 7 11 9 8 6 12 9 7 2 8 4 4 Average (per business division and risk type) 0 1 0 0 7 4 5 0 2 0 0 5 0 7 0 0 0 0 3 1 1 (2) (8) (5) (1) 1 3 2 1 0 0 0 0 2 0 0 0 1 Statistics at individual levels may not be summed to deduce the corresponding aggregate figures. The minima and maxima for each level may well occur on different days, and likewise, the VaR for each business line or risk type, being driven by the extreme loss tail of the corresponding distribution of simulated profits and losses for that business line or risk type, may well be driven by different days in the historical timeseries, render- ing invalid the simple summation of figures to arrive at the aggregate total. 2 Following changes in the organization of Corporate Center units as of 1 January 2015, amounts previously reported under CC – Core Func- tions are now reported under CC – Group ALM. 3 Difference between the sum of the standalone VaR for the business divisions and Corporate Center units and the VaR for the Group as a whole. 4 As the minimum and maximum occur on different days for different business divisions and Corporate Center, it is not meaningful to calculate a portfolio diversification effect. 208 Regulatory VaR for the period EDTF | Pillar 3 | The tables below show minimum, maximum, average and period-end regulatory VaR by business division and Corporate Center unit, and by general market risk type. Regulatory VaR exhibits a similar pattern to management VaR, with a more pro- nounced variability reflected in the reported maximum levels due to the 10-day holding period used. EDTF | Pillar 3 | Regulatory value-at-risk (10-day, 99% confidence, 5 years of historical data) by business division and Corporate Center unit and general market risk type1 CHF million Total regulatory VaR, Group Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Services CC – Group ALM2 CC – Non-core and Legacy Portfolio Diversification effect3, 4 CHF million Total regulatory VaR, Group Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Core Functions2 CC – Non-core and Legacy Portfolio Diversification effect3, 4 For the year ended 31.12.15 Equity Interest rates Credit spreads Foreign exchange Commodities Average 31.12.15 45 0 5 0 0 43 0 19 14 (36) 32 0 4 0 0 33 0 2 10 (16) 22 66 35 27 0 0 0 0 35 0 0 0 0 14 42 28 16 14 40 24 14 6 72 25 20 Average (per business division and risk type) 0 5 0 0 21 0 17 10 (26) 0 4 0 0 16 0 1 12 (10) 0 0 0 0 24 0 4 4 (7) 4 20 9 6 0 0 0 0 8 0 0 4 (3) For the year ended 31.12.14 Equity Interest rates Credit spreads Foreign exchange Commodities 23 60 33 46 0 0 0 0 33 0 2 (2) 18 48 27 22 32 69 45 34 4 59 24 24 Average (per business division and risk type) 0 5 0 0 26 15 15 (34) 0 7 0 0 31 2 28 (23) 0 0 0 0 21 4 9 (10) 5 32 12 7 0 0 0 0 11 0 2 (1) Average 31.12.14 50 0 5 0 0 45 15 28 (43) 60 0 6 0 0 57 19 16 (38) Min. Max. 28 77 0 3 0 0 26 0 1 8 2 6 1 0 74 0 43 27 Min. Max. 31 104 0 3 0 0 29 6 15 0 11 0 0 87 35 48 1 Statistics at individual levels may not be summed to deduce the corresponding aggregate figures. The minima and maxima for each level may well occur on different days, and likewise, the VaR for each business line or risk type, being driven by the extreme loss tail of the corresponding distribution of simulated profits and losses for that business line or risk type, may well be driven by different days in the historical timeseries, render- ing invalid the simple summation of figures to arrive at the aggregate total. 2 Following changes in the organization of Corporate Center units as of 1 January 2015, amounts previously reported under CC – Core Func- tions are now reported under CC – Group ALM. 3 Difference between the sum of the standalone VaR for the business divisions and Corporate Center units and the VaR for the Group as a whole. 4 As the minimum and maximum occur on different days for different business divisions and Corporate Center, it is not meaningful to calculate a portfolio diversification effect. 209 Risk, treasury and capital management Risk, treasury and capital management Risk management and control VaR limitations Audited | EDTF | Pillar 3 | Actual realized market risk losses may differ from those implied by our VaR for a variety of reasons. – The VaR measure is calibrated to a specified level of confidence and may not indicate potential losses beyond this confidence level. framework which ensures material completeness of risk identifica- tion and measurement. As a statistical aggregate risk measure, VaR supplements our comprehensive stress testing framework. Moreover, we have an established framework to identify and quantify potential risks that are not fully captured by our VaR model. This framework is explained later in this section. – The one-day time horizon used for VaR for internal manage- ment purposes, or 10-day in the case of the regulatory VaR measure, may not fully capture the market risk of positions that cannot be closed out or hedged within the specified period. – In certain cases, VaR calculations approximate the impact of changes in risk factors on the values of positions and portfo- lios. This may happen because the number of risk factors included in the VaR model is necessarily limited. For example, yield curve risk factors do not exist for all future dates. – The effect of extreme market 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 lev- els to differ from assumptions implicit in the VaR calculations. – The use of a five-year window means that sudden increases in market volatility will tend not to increase VaR as quickly as the use of shorter historical observation periods, but the increase will affect our VaR for a longer period of time. Similarly, follow- ing a period of increased volatility, as markets stabilize, VaR predictions will remain more conservative for a period of time influenced by the length of the historical observation period. We recognize that no single measure may encompass the entirety of risks associated with a position or portfolio. Conse- quently, we employ a suite of various metrics with both overlap- ping and complementary characteristics in order to create a holistic Backtesting of VaR EDTF | Pillar 3 | For backtesting purposes, we compute backtesting VaR using a 99% confidence level and one-day holding period for the population included within regulatory VaR. The backtesting process compares backtesting VaR calculated on positions at the close of each business day with the revenues generated by those positions on the following business day. Backtesting revenues exclude non-trading revenues, such as fees and commissions and revenues from intraday trading, to ensure a like-for-like compari- son. A backtesting exception occurs when backtesting revenues are negative and the absolute value of those revenues is greater than the previous day’s backtesting VaR. Statistically, given the confidence level of 99%, two to three backtesting exceptions per year can be expected. More excep- tions than this could indicate that the VaR model is not perform- ing appropriately, as could too few exceptions over a prolonged period of time. However, as noted in the VaR limitations above, a sudden increase or decrease in market volatility relative to the five-year window could lead to a higher or lower number of exceptions, respectively. Accordingly, Group-level backtesting exceptions are investigated, as are exceptional positive backtest- ing revenues, with results being reported to senior business man- agement, the Group Chief Risk Officer and the divisional Chief Risk Officers. Backtesting exceptions are also reported to internal and external auditors and to the relevant regulators. 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(cid:19)(cid:2)(cid:43)(cid:80)(cid:2)(cid:67)(cid:70)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:86)(cid:81)(cid:2)(cid:68)(cid:67)(cid:69)(cid:77)(cid:86)(cid:71)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)(cid:14)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:85)(cid:2)(cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)(cid:2)(cid:85)(cid:87)(cid:69)(cid:74)(cid:2)(cid:67)(cid:85)(cid:2)(cid:69)(cid:81)(cid:79)(cid:79)(cid:75)(cid:85)(cid:85)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:72)(cid:71)(cid:71)(cid:85)(cid:14)(cid:2)(cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:75)(cid:80)(cid:86)(cid:84)(cid:67)(cid:15) (cid:70)(cid:67)(cid:91)(cid:2)(cid:86)(cid:84)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:14)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:81)(cid:89)(cid:80)(cid:2)(cid:69)(cid:84)(cid:71)(cid:70)(cid:75)(cid:86)(cid:16)(cid:2)(cid:86)(cid:86) (cid:19)(cid:24)(cid:18)(cid:16)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18) (cid:19)(cid:21)(cid:21)(cid:16)(cid:21)(cid:21)(cid:21)(cid:21)(cid:21)(cid:21) (cid:19)(cid:18)(cid:24)(cid:16)(cid:24)(cid:24)(cid:24)(cid:24)(cid:24)(cid:25) (cid:23)(cid:21)(cid:16)(cid:21)(cid:21)(cid:21)(cid:21)(cid:21)(cid:21) (cid:20)(cid:24)(cid:16)(cid:24)(cid:24)(cid:24)(cid:24)(cid:24)(cid:25) 150 100 50 0 -50 -100 (cid:26)(cid:18)(cid:16)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18) (cid:18)(cid:16)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18)(cid:18) The “Group: development of backtesting revenues against backtesting VaR” chart on the previous page shows the 12-month development of backtesting VaR against the Group’s backtesting revenues for 2015. The chart shows both the negative and posi- tive tails of the backtesting VaR distribution at 99% confidence intervals representing, respectively, the losses and gains that could potentially be realized over a one-day period at that level of con- fidence. Although less pronounced than in previous years, the asymmetry between the negative and positive tails is due to the long gamma risk profile that has been run historically in the Investment Bank. This long gamma position profits from increases in volatility, which therefore benefits the positive tail of the VaR simulated profit and loss distribution. The histogram “Investment Bank and Corporate Center – Non- core and Legacy Portfolio daily revenue distribution” shows the daily revenue distribution for the Investment Bank and Non-core and Legacy Portfolio for 2015. This includes, in addition to back- testing revenues, revenues such as commissions and fees, reve- nues for intraday trading and own credit. There were four Group VaR negative backtesting exceptions during 2015, all of which occurred in the second half of the year. The trading losses that caused the two exceptions in the period from August to mid-September, as well as the three positive back- testing revenue spikes during this period, were primarily driven by the onshore / offshore Chinese foreign exchange basis risk. UBS is exposed to this risk from its allocated Qualified Foreign Institu- tional Investor (QFII) quota, which allows foreign investors to access the onshore capital markets. The volatility in this currency basis increased substantially after the People’s Bank of China unexpectedly and significantly weakened its daily fixing for the Chinese yuan against the US dollar on 11 August 2015. In response to these extreme market moves outside the 99th per- centile of the historical VaR time series, UBS significantly reduced its Chinese onshore / offshore foreign exchange basis exposure. The two exceptions at the end of September and November were driven by a combination of (i) a contraction in the aforementioned foreign exchange basis and further market moves and (ii) adjust- ments to trading revenues resulting from month-end or other non-daily valuation adjustments which partly map to risks accounted for in the capital underpinning for risk-not-in-VaR. We do not believe that the recent increase in the number of downside exceptions indicates a material deficiency in our VaR model, given the specific circumstances outlined above and the statistical expectation of two to three exceptions per year. The positive backtesting revenue in January, as shown in the chart, resulted from significant market volatility following the Swiss National Bank’s decision to discontinue its exchange rate floor for the Swiss franc against the euro. Extreme market moves, particularly in foreign exchange markets, were observed far out- side the 99th percentile of the historical VaR timeseries. VaR model confirmation EDTF | In addition to model backtesting performed for regulatory purposes, described above, we also conduct extended backtest- ing for our internal model confirmation purposes. This includes observing model performance across the entire profit and loss dis- tribution, not just the tails, and at multiple levels within the busi- ness division and Corporate Center hierarchies. ➔ Refer to “Risk measurement” in this section for more informa- tion on our approach to model confirmation procedures VaR model developments in 2015 Audited | EDTF | Pillar 3 | We made no significant changes to the VaR model during 2015, although we improved the VaR model by integrating selected risks-not-in-VaR items, the impact of which was negligible. Derivation of regulatory VaR-based RWA EDTF | Pillar 3 | Regulatory VaR is used to derive the regulatory VaR component of the market risk Basel III RWA, as shown in the “Capital management” section of this report as well as in “Table 2: Detailed segmentation of Basel III exposures and risk-weighted assets” in the “UBS Group AG consolidated supplemental disclo- sures required under Basel III Pillar 3 regulations” section of this report. This calculation takes the maximum of the period-end regulatory VaR and the average regulatory VaR for the 60 trading days immediately preceding the period end, multiplied by a VaR multiplier set by FINMA. The VaR multiplier, which was three as of 31 December 2015, is dependent upon the number of VaR back- testing exceptions within a 250 business day window. When the number of exceptions is greater than four, the multiplier increases gradually from three to a maximum of four if 10 or more back- testing exceptions occur. This is then multiplied by a risk weight factor of 1,250% to determine RWA. This calculation is set out in the table on the next page. EDTF | Pillar 3 | Backtesting regulatory value-at-risk (1-day, 99% confidence, 5 years of historical data) For the year ended 31.12.15 For the year ended 31.12.14 CHF million Group Min. 14 Max. 35 Average 31.12.15 21 18 Min. 15 Max. 38 Average 31.12.14 22 20 211 Risk, treasury and capital management Risk, treasury and capital management Risk management and control EDTF | Pillar 3 | Calculation of regulatory VaR-based RWA as of 31 December 2015 CHF million Period end regulatory VaR (A) 60-day average regulatory VaR (B) VaR multiplier (C) Max (A, B x C) (D) Risk weight factor (E) Basel III RWA (D x E) 32 41 3.0 122 1,250% 1,528 EDTF | Pillar 3 | Stressed VaR Method applied Data set Holding period Confidence level Population Historical simulation From 1 January 2007 to present 10 days Therefore, although the significant period of stress during the financial crisis is no longer contained in the historical 5-year period used for regulatory VaR, SVaR will continue to use this data. This approach is intended to reduce the procyclicality of the regulatory capital requirements for market risks. We made no significant changes to the SVaR model during 99% based on expected tail loss 2015. Regulatory trading book EDTF | Pillar 3 | Stressed VaR (SVaR) adopts broadly the same methodol- ogy as regulatory VaR and is calculated using the same population, holding period (10-day) and confidence level (99%). However, unlike regulatory VaR, the historical data set for SVaR is not limited to five years. SVaR uses continuous one-year data sets to derive the largest potential loss arising from a one-year period of significant financial stress relevant to the current portfolio of the Group. SVaR is subject to the same limitations as noted for VaR above, but the use of one-year data sets avoids the smoothing effect of the five-year data set used for VaR, and the removal of the five- year window provides for a longer history of potential loss events. SVaR for the period EDTF | Pillar 3 | Over the year, SVaR has exhibited a similar pattern to that noted for management and regulatory VaR above. Derivation of SVaR-based RWA EDTF | Pillar 3 | SVaR is used to derive the SVaR component of the market risk Basel III RWA as shown in the “Capital management“ section of this report as well as in “Table 2: Detailed segmentation of Basel III exposures and risk-weighted assets” in the “UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations” section of this report. The derivation of this component is similar to that explained above for regulatory VaR, and is shown below. EDTF | Pillar 3 | Calculation of SVaR-based RWA as of 31 December 2015 CHF million Period end SVaR (A) 60-day average SVaR (B) 58 76 VaR multiplier (C) 3.0 Max (A, B x C) (D) Risk weight factor (E) Basel III RWA (D x E) 227 1,250% 2,835 212 EDTF | Pillar 3 | Stressed value-at-risk (10-day, 99% confidence, historical data from 1 January 2007 to present) by business division and Corporate Center unit and general market risk type1 For the year ended 31.12.15 CHF million Total stressed VaR, Group Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Services CC – Group ALM2 CC – Non-core and Legacy Portfolio Diversification effect3, 4 CHF million Total stressed VaR, Group Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Core Functions2 CC – Non-core and Legacy Portfolio Diversification effect3, 4 Min. 54 0 7 0 0 48 0 5 15 Min. 63 0 9 0 0 50 29 23 Interest rates Credit spreads Foreign exchange Commodities 25 131 58 56 46 113 74 48 11 156 55 31 Average (per business division and risk type) 0 9 0 0 49 0 40 24 (64) 0 15 0 0 50 0 5 24 (21) 0 0 0 0 56 0 7 7 (15) 7 63 20 16 0 0 0 0 18 0 0 7 (5) Equity 46 274 87 57 0 0 0 0 87 0 0 0 0 Average 31.12.15 96 0 11 0 0 92 0 42 32 (81) 58 0 10 0 0 63 0 8 20 (41) For the year ended 31.12.14 Equity Interest rates Credit spreads Foreign exchange Commodities Average 31.12.14 94 0 14 0 0 86 44 54 (104) 105 0 15 0 0 101 44 30 (85) 46 348 71 103 0 0 0 0 70 0 9 (8) 18 156 67 32 74 233 121 98 9 281 56 45 Average (per business division and risk type) 0 8 0 0 50 41 46 (78) 0 22 0 0 89 6 56 (52) 0 0 0 0 51 6 17 (18) 9 84 29 16 0 0 0 0 28 0 3 (2) Max. 291 3 18 2 0 306 0 75 66 Max. 373 0 22 0 0 381 66 115 1 Statistics at individual levels may not be summed to deduce the corresponding aggregate figures. The minima and maxima for each level may well occur on different days, and likewise, the VaR for each business line or risk type, being driven by the extreme loss tail of the corresponding distribution of simulated profits and losses for that business line or risk type, may well be driven by different days in the historical timeseries, render- ing invalid the simple summation of figures to arrive at the aggregate total. 2 Following changes in the organization of Corporate Center units as of 1 January 2015, amounts previously reported under CC – Core Func- tions are now reported under CC – Group ALM. 3 Difference between the sum of the standalone VaR for the business divisions and Corporate Center units and the VaR for the Group as a whole. 4 As the minimum and maximum occur on different days for different business divisions and Corporate Center, it is not meaningful to calculate a portfolio diversification effect. 213 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Risks-not-in-VaR Risks-not-in-VaR definition EDTF | Pillar 3 | We have an established framework to identify and quantify potential risk factors that are not fully captured by our VaR model. We refer to these risk factors as risks-not-in-VaR (RniV). This framework is used to underpin these potential risk factors with regulatory capital, calculated as a multiple of regula- tory VaR and SVaR. RniV arises from approximations made by the VaR model to quantify the effect of risk factor changes on the profit and loss of positions and portfolios, as well as the use of proxies for certain market risk factors. We categorize RniV by means of items and keep track of which instrument classes are affected by each item. When new types of instruments are included in the VaR popu- lation, we assess whether new items must be added to the inven- tory of RniV items. Risks-not-in-VaR quantification EDTF | Pillar 3 | Risk officers perform a quantitative assessment for each position in the inventory of RniV annually. The assessment is made in terms of a 10-day 99%-VaR measure applied to the dif- ference between the profit and loss scenarios which would have been produced based on our best estimate given available data, and the profit and loss scenarios generated by the current model used for the regulatory VaR calculation. Whenever the available market data allows, a historical simulation approach with five years of historical data is used to estimate the 10-day 99%-VaR for an item. Other eligible methods are based on analytical con- siderations or stress test and worst-case assessments. Statistical methods are used to aggregate the standalone risks, yielding a Group-level 10-day 99%-VaR estimate of the entire inventory of RniV items at the specific date. The ratio of this amount to regula- tory VaR is used to produce estimates for arbitrary points in time by scaling the corresponding regulatory VaR figures with that fixed ratio. An analogous approach is applied for SVaR. Risks-not-in-VaR mitigation EDTF | Pillar 3 | Material RniV items are monitored and controlled by means and measures other than VaR, such as position limits and stress limits. Additionally, there are ongoing initiatives to extend the VaR model to better capture these risks. Derivation of RWA add-on for risks-not-in-VaR EDTF | Pillar 3 | The RniV framework is used to derive the RniV-based component of the market risk Basel III RWA, using the aforemen- tioned approach, which is approved by FINMA and subject to an annual recalibration. As the RWA from RniV are add-ons, they do not reflect any diversification benefits across risks capitalized through VaR and SVaR. Following the annual calibration of the ratios in the third quar- ter of 2015, FINMA confirmed that the RniV VaR and SVaR capital ratios remained unchanged at 105% and 92%, respectively. FINMA continues to require that RniV stressed VaR capital is floored at RniV VaR capital. Based on the regulatory VaR and SVaR RWA noted above, the RniV RWA add-ons as of 31 December 2015 reduced to CHF 1.6 billion and CHF 2.6 billion, respectively, compared with CHF 2.1 billion and CHF 3.8 billion as of 31 December 2014, following the reduction in VaR and SVaR. 214 EDTF | Pillar 3 | Incremental risk charge Method applied Holding period Confidence level Population Expected portfolio loss simulation One-year liquidity horizon 99.9% Regulatory trading book positions subject to issuer risk, excluding equity and securi- tization exposures EDTF | Pillar 3 | The incremental risk charge (IRC) represents an esti- mate of the default and rating migration risk of all trading book positions with issuer risk, except for equity products and securiti- zation exposures, measured over a one-year time horizon at a 99.9% confidence level. The calculation of the measure assumes all positions in the IRC portfolio have a one-year liquidity horizon and are kept unchanged over this period. The portfolio default and rating migration loss distribution is estimated using a Monte Carlo simulation of correlated rating migration events (defaults and 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 (the loss in the case of a default event assum- ing zero recovery) and a random recovery concept. To account for potential basis risk between instruments, different recovery values may be generated for different instruments even if they belong to the same issuer. To calculate rating migration losses, a linear (delta) approximation is used. A loss due to a rating migration event is calculated as the estimated change in credit spread due to the change in rating migration, multiplied by the corresponding sensitivity of a position to changes in credit spreads. The table below provides a breakdown of the Group’s period- end incremental risk charge by business division and Corporate Cen- ter unit. The reduction in the Group’s period-end IRC was mainly driven by a risk reduction in the Group ALM liquidity asset buffer and a model change applied in the fourth quarter of 2015. Derivation of IRC-based RWA EDTF | Pillar 3 | IRC is calculated weekly, the results of which are used to derive the IRC-based component of the market risk Basel III RWA, as shown in the “Capital management” section of this report as well as in “Table 2: Detailed segmentation of Basel III exposures and risk-weighted assets” in the “UBS Group AG con- solidated supplemental disclosures required under Basel III Pillar 3 regulations” section of this report. The derivation is similar to that for VaR and SVaR-based RWA, but without a VaR multiplier, and is shown below. EDTF | Pillar 3 | Incremental risk charge by business division and Corporate Center unit CHF million Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CC – Services CC – Group ALM1 CC – Non-core and Legacy Portfolio Diversification effect2, 3 Total incremental risk charge, Group For the year ended 31.12.15 For the year ended 31.12.14 Min. Max. Average 31.12.15 Min. Max. Average 31.12.14 19 67 40 30 11 28 19 27 128 53 15 159 197 116 51 235 161 81 29 (106) 205 197 60 27 (95) 219 130 102 31 93 300 165 92 264 182 197 131 57 (213) 175 108 46 (135) 243 1 Following changes in the organization of Corporate Center units as of 1 January 2015, amounts previously reported under CC – Core functions are now reported under CC – Group ALM. 2 Difference between the sum of the standalone IRC for the business divisions and Corporate Center units and the IRC for the Group as a whole. 3 As the minimum and maximum occur on different days for different business divisions and Cor- porate Center, it is not meaningful to calculate a portfolio diversification effect. EDTF | Pillar 3 | Calculation of IRC-based RWA as of 31 December 2015 CHF million Period end IRC (A) 219 Average of last 12 weeks IRC (B) 201 Max (A, B) (C) 219 Risk weight factor (D) 1,250% Basel III RWA (C x D) 2,732 215 Risk, treasury and capital management Risk, treasury and capital management Risk management and control EDTF | Pillar 3 | Comprehensive risk measure Method applied Holding period Confidence level Population Expected portfolio loss simulation One-year liquidity horizon 99.9% Positions in the correlation trading portfolio EDTF | Pillar 3 | The comprehensive risk measure (CRM) is an estimate of the default and complex price risk, including the convexity and cross-convexity of the CRM portfolio across credit spread, correla- tion and recovery, measured over a one-year time horizon at a 99.9% confidence level. The calculation of the measure assumes that all positions in the CRM portfolio have a one-year liquidity horizon and are kept unchanged over this time period. The model scope covers collateralized debt obligation (CDO) swaps, credit- linked notes (CLNs), 1st and nth-to-default swaps and CLNs and hedges for these positions, including credit default swaps (CDSs), CLNs and index CDSs. The CRM profit and loss distribution is estimated using a Monte Carlo simulation of defaults over the next 12 months, 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 hori- zon date. The 99.9% negative quantile of the resulting profit and loss distribution is then taken to be the CRM result. Our CRM methodology is subject to minimum qualitative standards as well as stress testing. Since the exit of the Non-core correlation trading portfolio market risk in 2014, the CRM for the Group has remained at low levels, as shown in the table below. ➔ Refer to “Corporate Center – Non-core and Legacy Portfolio” in the “Risk management and control” section of this report for more information on the Non-core correlation trading portfolio Derivation of CRM-based RWA EDTF | Pillar 3 | CRM is calculated weekly, and the results are used to derive the CRM-based component of the market risk Basel III RWA, as shown in the “Capital management” section of this report as well as in “Table 2: Detailed segmentation of Basel III exposures and risk-weighted assets” in the “UBS Group AG con- solidated supplemental disclosures required under Basel III Pillar 3 regulations” section of this report. The calculation is subject to a floor equal to 8% of the equivalent capital charge under the spe- cific risk measure (SRM) for the correlation trading portfolio. The calculation is shown below. EDTF | Pillar 3 | Comprehensive risk measure CHF million Total comprehensive risk measure, Group Min. 4 Max. 12 Average 31.12.15 8 5 Min. 5 Max. 335 Average 31.12.14 120 6 For the year ended 31.12.15 For the year ended 31.12.14 EDTF | Pillar 3 | Calculation of CRM-based RWA as of 31 December 2015 CHF million Period end CRM (A) 5 Average of last 12 weeks CRM (B)1 7 1 CRM = Max (CRM model result, 8% of equivalent charge under the SRM). Max (A, B) (C) Risk weight factor (D) Basel III RWA (C x D) 7 1,250% 84 216 Securitization positions in the trading book EDTF | Pillar 3 | Our exposure to securitization positions in the trad- ing book is limited and relates primarily to positions in Corporate Center – Non-core and Legacy Portfolio which we continue to wind down. A small amount of exposure also arises from sec- ondary trading in commercial mortgage-backed securities in the Investment Bank. Refer to “Table 2: Detailed segmentation of Basel III exposures and risk-weighted assets” in the “UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations” section of this report for more infor- mation. Interest rate risk in the banking book Sources of interest rate risk in the banking book Audited | EDTF | Pillar 3 | Interest rate risk in the banking book arises from balance sheet positions such as Loans and receivables, client deposits and Debt issued, Available-for-sale instruments, certain Instruments designated at fair value through profit or loss, deriva- tives measured at fair value through profit or loss and derivatives utilized for cash flow hedge accounting purposes, as well as related funding transactions. These positions may impact Other comprehensive income or profit or loss, depending on their accounting treatment. Our largest banking book interest rate exposures arise from client deposits and lending products in both our wealth manage- ment businesses and Personal & Corporate Banking. For Wealth Management and Personal & Corporate Banking, the inherent interest rate risks are transferred either by means of back-to-back transactions or, in the case of products with no contractual matu- rity date or direct market-linked rate, by replicating portfolios from the originating business into Group ALM, which manages the risks on an integrated basis allowing for netting interest rate risks across different sources. Any residual interest rate risks in Wealth Management and Personal & Corporate Banking that are not transferred to Group ALM are managed locally and are sub- ject to independent monitoring and control both in the locations by local risk control units as well as centrally by Market Risk Con- trol. To manage the interest rate risk centrally, Group ALM utilizes derivative instruments, most of which are in designated hedge accounting relationships. A significant amount of interest rate risk also arises from Group ALM financing and investing activities, for example the investment and refinancing of non-monetary corpo- rate balance sheet items that have indefinite maturities, such as equity, goodwill and real estate. For these items, senior manage- ment has defined specific target durations based on which we fund and invest as applicable. These targets are defined by repli- cation portfolios, which establish rolling benchmarks to execute against. Group ALM also maintains a portfolio of available-for- sale debt investments to meet the Group’s liquidity needs. In the first quarter of 2015, we shortened the target duration for the investment of our Swiss franc-denominated equity, primarily in response to the prevailing negative Swiss franc interest rate envi- ronment. This resulted in an initial increase in negative interest rate sensitivity in Group ALM. This exposure was subsequently reduced as Group ALM rebalanced the banking book to meet the new target duration of equity. As of 31 December 2015, our con- solidated equity was invested as follows: in Swiss francs with an average duration of approximately two years and fair value sensi- tivity of CHF 4 million per basis point; in US dollars with an aver- age duration of approximately five years and a sensitivity of CHF 10 million per basis point. The sensitivities relate directly to the chosen durations. Interest rate risk within Wealth Management Americas arises from the business division’s portfolio of available-for-sale invest- ments, 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 mutually offset interest rate risk. Banking book interest rate exposure in the Investment Bank arises predominantly from the business of Corporate Client Solu- tions, where transactions are subject to approval on a case-by- case basis. Corporate Center – Non-core and Legacy Portfolio assets that were reclassified to Loans and receivables from Held for trading in the fourth quarter 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. 217 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Effect of interest rate changes on shareholders’ equity and CET1 capital EDTF | The “Accounting and capital effect of changes in interest rates” table below illustrates the accounting and CET1 capital treatment of gains and losses resulting from changes in interest rates. For instruments held at fair value, a change in interest rates results in an immediate fair value gain or loss recognized either in the Income statement or through Other comprehensive income (OCI). For assets and liabilities held at amortized cost, a change in interest rates does not result in a change in the carrying amount of the instruments, but could affect the amount of interest income or expense recognized over time in the Income statement. Typi- cally, increases in interest rates would lead to an immediate reduc- tion in the value of our longer-term assets held at fair value, but we would expect this to be offset over time through higher net interest income (NII) on our core banking products. ➔ Refer to “Reconciliation IFRS equity to Swiss SRB capital” in the “Capital management” section of this report for more informa- tion In addition to the differing accounting treatments, our banking book positions have different sensitivities to different points on the yield curves. For example, our portfolios of available-for-sale debt securities and interest rate swaps designated as cash flow hedges, on the whole, are more sensitive to changes in longer-duration interest rates, whereas our deposits and a significant portion of our loans contributing to net interest income are more sensitive to short-term rates. These factors are important as yield curves may not shift on a parallel basis and could, for example, exhibit an ini- tial steepening, followed by a subsequent flattening over time. By virtue of the accounting treatment and yield curve sensitivi- ties outlined above, in a steepening yield curve scenario we would expect to recognize an initial reduction in shareholders’ equity as a result of fair value losses through OCI. This would be compen- sated over time by increased NII once increases in interest rates affect the shorter end of the yield curve in particular. The effect on CET1 capital would be similar, albeit less pronounced, as gains and losses on interest rate swaps designated as cash flow hedges are not recognized for regulatory capital purposes. We subject the interest rate-sensitive banking book exposures to a suite of interest rate scenarios in order to assess the effect on expected NII over both a 1-year and a 3-year time horizon assum- ing constant business volumes. We also consider the effect of the interest rate movements in each scenario on the fair value recog- nized through OCI of the available-for-sale debt portfolios and cash flow hedges managed by Group ALM. The scenario assess- ment also includes the estimated effect through OCI on share- holders’ equity and CET1 capital from pension fund assets and liabilities. While select standard scenarios, such as a parallel rise in all yield curves of 100 basis points, are retained and regularly used, other scenarios are adopted as a function of changing mar- ket conditions. EDTF | Pillar 3 | Accounting and capital effect of changes in interest rates1 Available-for-sale debt portfolios Economic hedges classified as held for trading Designated cash flow hedges Loans and deposits at amortized costs Timing Immediate Immediate Immediate Gradual Recognition Location OCI Income statement OCI2 Income statement Shareholders’ equity CET1 capital Gains l l l l Losses l l l l Gains l l Losses l l l 1 Refer to the “Reconciliation IFRS equity to Swiss SRB capital” table in the “Capital management” section of this report for more information on the differences between shareholders’ equity and CET1 capital. 2 Exclud- ing hedge ineffectiveness which is recognized in the income statement in accordance with IFRS. 218 At the end of 2015, the following scenarios were analyzed in detail: – Negative IR (NIR) then Recovery: euro and Swiss franc yield curves drop 50 basis points in parallel during the first three months with no zero-floor applied, and therefore become neg- ative, or more negative. Yield curves in US dollars and other currencies, on the other hand, drop 25 basis points in parallel, but remain floored at zero. Thereafter, all rates recover accord- ing to market-implied forward rates. – NIR then Constant: same assumptions as the NIR then Recov- ery scenario, but after the first three months, rates do not recover but remain at the then-prevailing levels until the end of the simulated time horizon. – Eurozone Deflation and Fed Tapering: US dollar yield curve rises and steepens; euro and Swiss franc yield curves develop as in the NIR then Recovery scenario. – Parallel +100 basis points: All yield curves rise 100 basis points in parallel. – 2015 CCAR Adverse: Federal Reserve Comprehensive Capital Analysis and Review (CCAR) – Adverse Scenario. – 2015 CCAR Severely Adverse: Federal Reserve CCAR – Severely Adverse Scenario. – Quantitative Easing then Recovery: Central banks keep mar- kets flooded with liquidity, pinning down short-end rates (zero or negative interest rate policy). Bond markets / investors subse- quently take fright over inflation fears, resulting in long-end rates spiking up sharply (resulting in 5-year forward rates reaching pre-2008 levels); short-end rates eventually follow suit. – Flattener: yield curves across all currencies undergo a sharp rise for short tenors, with only a modest rise in the long end of the yield curve: +200 basis points for tenors up to 1 year, +100 basis points for 5 years and +20 basis points for 8-year to 10-year tenors. – Constant Rates: All rates stay at current levels. The results are compared to a baseline NII, which is calculated assuming interest rates in all currencies develop according to their market-implied forward rates and under the assumption of con- stant business volumes. The calculated effects on baseline NII range between a deterioration of 4% and 17% over a 1-year and 3-year horizon, respectively, and an improvement of approximately 17% over both a 1-year and a 3-year horizon. The most adverse scenario is the NIR then Constant scenario over a 1-year horizon and the CCAR Severely Adverse scenario over a 3-year horizon. The most beneficial scenario over a 1-year scenario is the Flattener and the Parallel +100 basis points scenario over a 3-year horizon. In addition to the above scenario analysis, we also monitor the sensitivity of the NII to immediate parallel shocks of –200 and +200 basis points compared with baseline NII (again, under the assumption of a constant balance sheet volume and structure). Any resulting reduction in first-year NII relative to the baseline NII is subject to predefined threshold levels to monitor the extent to which the NII is exposed to an adverse movement in market rates. As of 31 December 2015, the baseline NII would have been approximately 11% less under a parallel shock of –200 basis points, whereas under a parallel +200 basis point shock, the base- line NII would have been approximately 31% higher. A key factor in our ability to improve our NII throughout 2015, despite the low and negative interest rate environment in Swiss francs in particular, has been the large degree of self-funding of our lending businesses through our deposit base in Wealth Man- agement and Personal & Corporate Banking, along with appropri- ate adjustments to our interest rate product pricing. Should we lose this equilibrium on the balance sheet due to, for example, unattractive pricing relative to our peers for either our mortgages or our deposits, this could have consequences for our ability to maintain our NII at current levels in a persistently low and negative interest rate environment. Because we assume constant business volumes, these risks do not manifest themselves in the above- mentioned interest rate scenarios. Moreover, should the low and negative interest rate environ- ment persist or worsen, this could lead to additional pressure on our NII. While our NII in Swiss francs would remain largely insu- lated from a further decrease in Swiss franc interest rates, assum- ing we succeed in maintaining the aforementioned equilibrium, we could face additional costs to hold our Swiss franc high-quality liquid asset portfolio. A reduction of the Swiss National Bank’s deposit exemption threshold for banks would also lead to increased costs that we might not be able to offset by, for exam- ple, passing on some of the costs to our depositors. Should euro interest rates also become significantly negative, this could like- wise increase our liquidity costs and put our NII generated from euro-denominated loans and deposits at risk to volume imbal- ances occurring. Depending on the overall economic and market environment, sustained and significant negative rates could also lead to our Wealth Management and Personal & Corporate Bank- ing clients paying down their loans together with reducing any excess cash they hold with us as deposits. This would reduce the underlying business volume and lower NII accordingly. A net decrease in deposits would require replacement funding at a relative cost increase that would depend on various factors, including the term and nature of the replacement funding, whether such funding is raised in the wholesale markets, or whether such funding is raised from swapping with available funding denominated in another currency. On the other hand, imbalances leading to an excess deposit position could require investments at negative yields, which we might not be able to sufficiently compensate for as a result of our excess deposit bal- ance charging mechanisms. 219 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Interest rate risk sensitivity to parallel shifts in yield curves Audited | EDTF | Pillar 3 | Interest rate risk in the banking book is not underpinned for capital purposes, but is subject to a regulatory threshold. As of 31 December 2015, the economic-value effect 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 capital recommended by regula- tors. The interest rate risk sensitivity figures presented in the “Inter- est rate sensitivity – banking book” table on the next page repre- sent the effect of +1, ±100 and ±200-basis-point parallel moves in yield curves on present values of future cash flows, irrespective of accounting treatment. For some portfolios, the +1-basis-point sen- sitivity has been estimated by dividing the +100-basis-point sensi- tivity by 100. In the prevailing negative interest rate environment for the Swiss franc in particular, and to a lesser extent for the euro, interest rates for Wealth Management and Personal & Corporate Banking client transactions are generally being floored at non- negative levels. Accordingly, for the purposes of this disclosure table, downward moves of 100 / 200 basis points are floored to ensure that the resulting shocked interest rates do not turn nega- tive. The flooring results in nonlinear sensitivity behavior. The sensitivity of the banking book to rising rates increased year on year by negative CHF 3.4 million per basis point. This was mainly due to an increased negative sensitivity in Wealth Manage- ment Americas due to higher short-term US dollar market rates on its modeled deposit duration, resulting in a lower (i.e., less positive) sensitivity contribution from the liability side of its bank- ing book. The sensitivity of the banking book to rising rates includes the interest rate sensitivities arising from debt invest- ments classified as Financial investments available-for-sale and their associated hedges. The sensitivity of these positions (exclud- ing hedges and excluding investments in funds accounted for as available-for-sale) to a 1-basis-point parallel increase in the yields of the respective instruments is approximately negative CHF 9 mil- lion, which would be recorded in Other comprehensive income if such change occurred. The sensitivity of the banking book to rising rates also includes interest rate sensitivities arising from interest rate swaps desig- nated in cash flow hedges. Fair value gains or losses associated with the effective portion of these swaps are recognized initially in Equity. When the hedged forecast cash flows affect profit or loss, the associated gains or losses on the hedging derivatives are reclassified from Equity to profit or loss. These swaps are predom- inantly denominated in US dollars, euros, British pounds and Swiss francs. As of 31 December 2015, the fair value of these interest rate swaps amounted to CHF 2.3 billion (positive replace- ment values) and CHF 0.2 billion (negative replacement values). The effect of a 1-basis-point increase of underlying LIBOR curves would have decreased equity by approximately CHF 22 million, excluding adjustments for tax. ➔ Refer to “Note 15 Financial investments available-for-sale” in the “Consolidated financial statements” section of this report for more information 220 Audited | EDTF | Pillar 3 | Interest rate sensitivity – banking book1 CHF million CHF EUR GBP USD Other Total effect on interest rate-sensitive banking book positions of which: Wealth Management Americas of which: Investment Bank of which: CC – Group ALM2 of which: CC – Non-core and Legacy Portfolio CHF million CHF EUR GBP USD Other Total effect on interest rate-sensitive banking book positions of which: Wealth Management Americas of which: Investment Bank of which: CC – Core Functions2 of which: CC – Non-core and Legacy Portfolio –200 bps –100 bps +1 bp +100 bps +200 bps 31.12.15 (33.9) 27.0 (165.5) 838.7 (1.2) 665.0 806.5 28.9 (168.6) (2.8) (33.9) 26.2 (42.4) 438.8 (2.1) 386.5 440.1 18.0 (73.6) 1.2 (0.2) (0.3) 0.1 (3.8) 0.1 (4.1) (3.7) (0.2) (0.2) (0.1) (15.5) (29.7) (0.8) (380.4) 8.2 (418.3) (365.3) (18.9) (19.2) (9.6) (29.1) (55.5) (15.6) (763.4) 16.5 (847.0) (732.5) (39.7) (43.7) (20.5) –200 bps –100 bps +1 bp +100 bps +200 bps 31.12.14 (16.2) 72.1 (5.6) 130.7 1.8 182.7 181.7 53.8 (37.3) (11.0) (15.8) 66.0 (8.1) 76.5 (5.1) 113.5 129.9 34.2 (44.3) (3.5) (0.3) (0.6) 0.2 (0.2) 0.2 (0.7) (0.5) (0.5) 0.3 (0.1) (27.3) (57.0) 23.0 (21.0) 17.7 (64.5) (48.5) (52.2) 42.8 (6.2) (51.0) (106.9) 46.3 (52.8) 36.0 (128.5) (110.6) (111.4) 106.8 (12.6) 1 Does not include interest rate sensitivities for credit valuation adjustments on monoline credit protection, US and non-US reference-linked notes. 2 Following changes in the organization of the Corporate Center units as of 1 January 2015, amounts previously reported under CC – Core Functions are now reported under CC – Group ALM. 221 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Other market risk exposures Own credit EDTF | We are exposed to changes in UBS’s own credit which are reflected in the valuation of those financial liabilities designated at fair value, for which UBS’s own credit risk would be considered by market participants. We also estimate debit valuation adjustments (DVA) to incorporate own credit in the valuation of derivatives. Changes in fair value due to changes in own credit are recognized in the income statement and therefore affect shareholders’ equity and CET1 capital. We will adopt the own credit presentation requirements of IFRS 9 in the first quarter of 2016. Under this aspect of IFRS 9, changes in the fair value of financial liabilities designated at fair value through profit and loss related to own credit will be recog- nized in Other comprehensive income (OCI) and will not be reclas- sified to the Income statement. ➔ Refer to “Note 24 Fair value measurement” in the “Consolidated financial statements” section of this report for more information on own credit Structural foreign exchange risk EDTF | On consolidation, assets and liabilities held in foreign opera- tions are translated into Swiss francs at the closing foreign exchange rate on the balance sheet date, and items of income and expense are translated into Swiss francs at the average rate for the period. The resulting foreign exchange differences are rec- ognized in Other comprehensive income and therefore affect shareholders’ equity and CET1 capital. Group ALM employs strategies to manage this foreign cur- rency exposure, including matched funding of assets and liabilities and net investment hedging. ➔ Refer to the “Treasury management” section of this report for more information on our exposure to and management of structural foreign exchange risk Equity investments Audited | EDTF | Under IFRS, equity investments not in the trading book may be classified as financial investments classified as avail- able-for-sale, Financial assets designated at fair value or Invest- ments in associates. We make direct investments in a variety of entities and buy equity holdings in both listed and unlisted companies for a variety of purposes. This includes investments, such as exchange and clearing house memberships that are held to support our business activities. We may also make investments in funds that we man- age in order to fund or “seed” them at inception, or to demon- strate 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. The fair value of equity investments tends to be influenced by factors specific to the individual investments. 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. However, such equity investments are subject to a different range of controls, including pre-approval of new investments by business management and Risk Control, portfolio and concentration limits, and regular mon- itoring and reporting to senior management. They are also included in our Group-wide statistical and stress testing metrics which flow into our risk appetite framework. As of 31 December 2015, we held equity investments totaling CHF 1.6 billion, of which CHF 0.6 billion were classified as Finan- cial investments available-for-sale, and CHF 1.0 billion as Invest- ments in associates. This was broadly unchanged from the prior year. ➔ Refer to “Note 15 Financial investments available-for-sale” and “Note 30 Interests in subsidiaries and other entities” in the “Consolidated financial statements” section of this report for more information Debt investments Audited | EDTF | Debt investments classified as Financial investments available-for-sale are measured at fair value with changes in fair value recorded through Equity, and can broadly be categorized as money market instruments and debt securities primarily held for statutory, regulatory or liquidity reasons. 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 and interest rate sensitivity analysis. They are also included in our Group-wide statistical and stress testing metrics, which flow into our risk appetite framework. Debt instruments classified as Financial investments available- for-sale had a fair value of CHF 61.9 billion as of 31 December 2015 compared with CHF 56.5 billion as of 31 December 2014. ➔ Refer to “Note 15 Financial investments available-for-sale” in the “Consolidated financial statements” section of this report for more information ➔ Refer to “Interest rate risk sensitivity to parallel shifts in yield curves” in this section for more information ➔ Refer to the “Treasury management” section of this report for more information 222 Pension risk EDTF | We provide a number of pension plans for past and current employees, some of which are classified as defined benefit pen- sion plans under IFRS. These defined benefit plans can have a material effect on our IFRS equity and CET1 capital. In order to meet the expected future benefit payments, the plans invest employee and employer contributions in various asset classes. The funded status of the plan is the difference between the fair value of these assets and the present value of the expected future benefit payments to plan members (the defined benefit obligation). Under IFRS, a negative funded status (where the fair value of the assets is insufficient to meet the defined benefit obligation) is recognized on our balance sheet as a liability. It is also deducted from CET1 capital. A positive funded status is recognized as an asset on the balance sheet, but it is capped at the economic benefit available to UBS, as described in “Note 1a item 24 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report. It cannot be recognized in CET1 capital. At each balance sheet date, the fair value of the assets and the defined benefit obligation are remeasured, with changes in value recognized through other comprehensive income, subject to the aforementioned cap on a positive funded status. Important risk factors affecting the present value of the expected future benefit payments include high-grade bonds yields, interest rates, inflation rates and life expectancy. Pension risk is included in our Group-wide statistical and stress testing metrics that flow into our risk appetite framework. The potential effects are thus captured in the calculation of our post- stress fully applied CET1 capital ratio. ➔ Refer to “Note 28 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of this report for more information on defined benefit plans ➔ Refer to “Stress testing” in the “Risk management and control” section of this report for more information on our stress testing framework ➔ Refer to “Consideration of stress scenarios” in the “Capital management” section of this report for more information on our post-stress fully applied CET1 capital ratio ➔ Refer to “Fluctuation in foreign exchange rates and continuing low or negative interest rates may have a detrimental effect on our capital strength, our liquidity and funding position, and our profitability” and “Our stated capital returns objective is based, in part, on capital ratios that are subject to regulatory change and may fluctuate significantly” in the “Risk factors” section of this report for more information Pension risk is the risk that the funded status of defined benefit plans might decrease, negatively affecting our IFRS equity and / or our CET1 capital. This can arise either from a fall in the plan assets’ value or in the investment returns, an increase in defined benefit obligations, or a combination of these. UBS own share exposure EDTF | We hold our own shares primarily to hedge employee share and option participation plans. A smaller number are held by the Investment Bank in connection with market-making and hedging activities. Important risk factors affecting the fair value of the plan assets are, among others, equity market returns, interest rates, bond yields, and real estate prices. ➔ Refer to “Holding of UBS Group AG shares” in the “Capital management” section of this report for more information 223 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Country risk Macroeconomic developments during the period Continued weak commodity prices and the Federal Reserve rate hike put pressure on a number of key emerging markets. Our largest emerging markets exposure is to China, where growth continued to be moderate in 2015, and financial markets experi- enced episodes of extreme volatility. Eurozone concerns and Euro- pean Central Bank policy included the prospect of a Greek exit from the common currency, and a migrant / refugee crisis driven by turmoil in the Middle East and in North Africa. Country risk framework Country risk includes all country-specific events that occur within a sovereign’s jurisdiction and may lead to an impairment of UBS’s exposures. Country risk can take the form of sovereign risk, which refers to the ability and willingness of a government to honor its financial commitments; transfer risk, which would arise if an issuer or counterparty could not acquire foreign currencies follow- ing a moratorium of a central bank on foreign exchange transfers; or “other” country risk. “Other” country risk may manifest itself through increased and multiple counterparty and issuer default risk (systemic risk) on the one hand, and by events that may affect the standing of a country (e.g., political stability, institutional and legal framework) on the other hand. We have a well-established risk control framework, through which we assess the risk profile of all countries where we have exposure. EDTF | We attribute to each foreign country a sovereign rating, which expresses the probability of the sovereign defaulting on its own financial obligations in foreign currency. Our ratings are expressed by statistically derived default probabilities as described in the “Probability of default” section. Based on this internal anal- ysis we also define the probability of a transfer event occurring and establish rules as to how the aspects of “other” country risk should be incorporated into the analysis of the counterparty rat- ing of entities that are domiciled in the respective country. Our risk exposure to foreign countries considers the credit rat- ings assigned to those countries. A country risk ceiling (i.e., maxi- mum aggregate exposure) applies to our exposures to counter- parties or issuers of securities and financial investments in the respective foreign 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 other- wise acceptable. 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 country’s debt, equity or other asset markets, or a sharp depreciation of the currency. We use stress testing to assess the potential financial impact of a severe country and / or sovereign crisis. This involves the development of plausible stress scenarios for combined stress testing and the identification of 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 transac- tions involved and their economic importance to the affected countries. Our exposures to market risks are also subject to regular stress tests that cover major global scenarios, which are used for com- bined stress testing as well, 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. Country risk exposure Country risk exposure measure EDTF | The presentation of country risk follows our internal risk view, whereby the basis for measurement of exposures depends on the product category into which we have classified our expo- sures. In addition to the classification of exposures into banking products and traded products as defined in the “Credit risk profile of the Group – Internal risk view” section, we classify within trad- ing inventory, issuer risk on securities such as bonds and equities, as well as the risk relating to the underlying reference assets for derivative positions, including those linked to credit protection we buy or sell, loan or security underwriting commitments pending distribution and single-stock margin loans for syndication. As we manage the trading inventory on a net basis, we net the value of long positions against short positions with the same underlying issuer. Net exposures are, however, floored at zero per issuer in the figures presented. We therefore do not recognize the potentially offsetting benefit of certain hedges and short positions across issuers. We do not recognize any expected recovery values when reporting country exposures as Exposure before hedges except for the risk-reducing effects of master netting agreements and col- lateral held in the form of either cash or portfolios of diversified marketable securities, which we deduct from the basic positive exposure values. Within banking products and traded products, the risk-reducing effect of any credit protection is taken into account on a notional basis when determining the Net of hedges exposures. 224 Country risk exposure allocation EDTF | In general, exposures are shown against the country of domi- cile of the contractual counterparty or the issuer of the security. 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 country. This is the case, for example, with legal entities incorporated in financial offshore centers, which have their main assets and rev- enue streams outside the country of domicile. The same principle applies to exposures for which we hold third-party guarantees or collateral, where 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. We apply a specific approach for banking products exposures to branches of financial institutions which are located in a country other than that of the domicile of the legal entity. In such cases, exposures are recorded in full against the country of domicile of the counterparty and additionally in full against the country in which the branch is located. In the case of derivatives, we show the counterparty risk asso- ciated with the positive replacement value against the country of domicile of the counterparty (presented within traded products). In addition, the risk associated with the instantaneous fall in value of the underlying reference asset to zero (assuming no recovery) is shown against the country of domicile of the issuer of the refer- ence asset (presented within trading inventory). This approach ensures that we capture both the counterparty and, where appli- cable, issuer elements of risk arising from derivatives and applies comprehensively for all derivatives, including single-name credit default swaps (CDSs) and other credit derivatives. As a basic example: if CDS protection for a notional value of 100 bought from a counterparty domiciled in country X referenc- ing debt of an issuer domiciled in country Y has a positive replace- ment value of 20, we record (i) the fair value of the CDS (20) against country X (within traded products) and (ii) the hedge ben- efit (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 any exposure arising from securities held and issued by the same entity as the refer- ence 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. In the case of derivatives ref- erencing a basket of assets, the issuer risk against each reference entity is calculated as the expected change in fair value of the derivative given an instantaneous fall in value to zero of the cor- responding reference asset (or assets) issued by that entity. Expo- sures are then aggregated by country across issuers, floored at zero per issuer. Exposures to selected eurozone countries EDTF | Our exposure to peripheral European countries remains lim- ited, but we nevertheless remain watchful regarding the potential broader implications of adverse developments in the eurozone. As noted in the “Stress testing” section, a eurozone crisis remains a core part of the new binding Global Recession scenario for Com- bined Stress Test purposes, making it central to the regular moni- toring of risk exposure against the minimum capital, earnings and leverage ratio objectives in our risk appetite framework. The “Exposures to selected eurozone countries” table on the next page provides an overview of our exposures to eurozone countries rated lower than AAA / Aaa by at least one of the major rating agencies as of 31 December 2015. The table shows an internal risk view of gross and net exposures split by sovereign, agencies and central banks, local governments, banks and other counterparties (including corporates, insurance companies and funds). Exposures to Andorra, Cyprus, Estonia, Latvia, Lithuania (after euro adoption on 1 January 2015), Malta, Monaco, Monte- negro, San Marino, Slovakia and Slovenia are grouped in Other. Pillar 3 | CDSs are primarily bought and sold in relation to our trading businesses, but are also used to hedge parts of our risk exposure, including that related to select eurozone countries. As of 31 December 2015, and not taking into account the risk-reduc- ing effect of master netting agreements, we had purchased approximately CHF 20 billion gross notional of single name CDS protection on issuers domiciled in Greece, Italy, Ireland, Portugal or Spain (GIIPS) and had sold CHF 19 billion gross notional of single-name CDS protection. On a net basis, taking into account the risk reducing effect of master netting agreements, this equates to approximately CHF 4 billion notional purchased and CHF 3 bil- lion notional sold. More than 99% of gross protection purchased was from investment grade counterparties (based on our internal ratings) and on a collateralized basis. The vast majority of this was from financial institutions domiciled outside the eurozone. Approximately CHF 0.1 billion of the gross protection purchased was from counterparties domiciled in a GIIPS country with just over CHF 40 million from counterparties domiciled in the same country as the reference entity. 225 Risk, treasury and capital management Risk, treasury and capital management Risk management and control EDTF | Exposures to selected eurozone countries CHF million Total Traded products (counterparty risk from derivatives and securities financing) after master netting agreements and net of collateral Trading inventory (securities and potential benefits / remaining exposure from derivatives) Banking products (loans, guarantees, loan commitments) Exposure before hedges 1,284 14 Net of hedges1 963 14 of which: unfunded 469 Net of hedges 1,392 38 57 209 1,087 933 1 Net of hedges1 6,004 3,577 60 365 2,003 5,895 3,799 Net long per issuer 3,649 3,524 2 19 103 3,921 3,791 Exposure before hedges 1,399 45 57 209 1,087 1,207 1 23 355 216 805 370 893 52 474 732 377 474 458 377 35 998 239 1 370 1,317 52 55 514 1,687 55 183 1,263 35 1,479 570 1 137 1,132 1,522 7 137 812 1,041 7 347 30 350 62 77 32 180 250 108 347 30 293 4 77 32 180 143 0 6,331 3,583 60 365 2,323 6,650 3,799 53 78 674 38 1 61 574 48 1 2 13 33 1,215 1,094 0 118 3 83 18 562 1,534 1,290 39 1 463 788 1,605 5 79 415 1,106 1,410 1,094 0 289 27 1,287 18 562 2,289 1,621 39 1 463 1,119 2,086 62 79 415 1,530 1,518 1,202 0 289 27 1,287 18 31.12.15 France Sovereign, agencies and central bank Local governments Banks Other2 Netherlands Sovereign, agencies and central bank Local governments Banks Other2 Spain Sovereign, agencies and central bank Local governments Banks Other2 Italy Sovereign, agencies and central bank Local governments Banks Other2 Austria Sovereign, agencies and central bank Local governments Banks Other2 Ireland3 Sovereign, agencies and central bank Local governments Banks Other2 Finland Sovereign, agencies and central bank Local governments Banks Other2 Belgium Sovereign, agencies and central bank Local governments Banks Other2 Portugal Sovereign, agencies and central bank Local governments Banks Other2 Greece Sovereign, agencies and central bank Local governments 4 Banks Other2 0 Other4 105 1 Not deducted from the “Net of hedges” exposures are total allowances and provisions for credit losses of CHF 52 million (of which: Malta CHF 37 million, Ireland CHF 6 million and France CHF 5 million). 2 Includes corporates, insurance companies and funds. 3 The majority of the Ireland exposure relates to funds and foreign bank subsidiaries. 4 Represents aggregate exposures to Andorra, Cyprus, Estonia, Latvia, Lithuania, Malta, Monaco, Montenegro, San Marino, Slovakia and Slovenia. 35 1,233 1,091 622 22 329 119 514 218 11 188 97 138 1 35 1,233 1,058 622 22 329 86 514 218 11 188 97 73 1 11 54 883 622 12 243 6 199 183 11 1 4 19 1 9 84 23 116 35 9 84 23 116 35 11 127 9 1 31 21 294 31 21 294 140 3 910 140 3 910 178 21 119 2 56 199 2 89 199 4 4 123 4 4 123 4 0 105 9 901 117 9 901 117 10 109 5 178 21 53 16 279 91 16 279 58 1 18 4 1 11 62 9 1 0 3 15 9 72 0 9 72 0 10 44 5 0 0 0 0 0 0 174 52 0 3 2 3 8 5 0 0 226 EDTF | Exposure from single-name credit default swaps referencing Greece, Italy, Ireland, Portugal or Spain (GIIPS) Protection bought Protection sold of which: counterparty domiciled in GIIPS country of which: counterparty domicile is the same as the reference entity domicile Net position (after application of counterparty master netting agreements) Notional 82 15,163 909 718 3,008 19,879 RV (1) (22) (21) (16) 306 245 Notional 0 52 11 0 70 133 RV 0 (1) 0 0 (1) (1) Notional RV Notional 0 30 0 0 10 40 0 0 0 0 0 0 (129) (14,731) (865) (741) (2,313) (18,779) RV (1) (63) 25 13 29 3 Buy notional Sell notional 0 (47) 2,163 (1,730) 443 260 1,473 4,338 (399) (283) (778) (3,237) PRV 1 59 11 10 385 466 NRV (4) (144) (7) (13) (49) (217) CHF million 31.12.15 Greece Italy Ireland Portugal Spain Total Pillar 3 | Holding CDSs for credit default protection does not nec- essarily protect the buyer of protection against losses, as the con- tracts will only pay out under certain scenarios. The effectiveness of our CDS protection as a hedge of default risk is influenced by a number of factors, including the contractual terms under which the CDS was written. Generally, only the occurrence of a credit event as defined by the CDS terms (which may include among other events, failure to pay, restructuring or bankruptcy) results in a payment under the purchased credit protection contracts. For CDS contracts on sovereign obligations, repudiation can also be deemed as a default event. The determination as to whether a credit event has occurred is made by the relevant International Swaps and Derivatives Association (ISDA) determination commit- tees (comprised of various ISDA member firms) based on the terms of the CDS and the facts and circumstances surrounding the event. Exposure to emerging market countries The “Emerging markets net exposure by major geographical region and product type” table on the following page shows the five largest emerging market country exposures in each major geographical area by product type as of 31 December 2015 com- pared with 31 December 2014. Based on the sovereign rating categories, as of 31 December 2015, 83% of our emerging mar- ket country exposure was rated investment grade compared with 94% as of 31 December 2014. Our direct net exposure to Russia was CHF 0.7 billion as of 31 December 2015, approximately half of which related to mar- gin loans to Russian borrowers which are secured by global depository receipts issued by Russian companies. Our direct net exposure to China was CHF 6.6 billion as of 31 December 2015, approximately 80% of which related to the trading inventory cat- egory, which is measured at fair value. Of that trading inventory exposure, the majority is a result of managing our Qualified For- eign Institutional Investor (QFII) quota through short-term fund placements. EDTF | Emerging markets net exposure1 by internal UBS country rating category CHF million Investment grade Sub-investment grade Total 31.12.15 31.12.14 14,274 2,906 17,180 18,993 1,107 20,101 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 91 million are not deducted (31 December 2014: CHF 83 million). 227 Risk, treasury and capital management Risk, treasury and capital management Risk management and control EDTF | Emerging market net exposures by major geographical region and product type CHF million Emerging America Brazil Mexico Colombia Argentina Venezuela Other Emerging Asia China Hong Kong South Korea India Taiwan Other Emerging Europe Russia Turkey Azerbaijan Croatia Hungary Other Middle East and Africa South Africa Saudi Arabia Kuwait United Arab Emirates Israel Other Total Total Net of hedges1 Banking products (loans, guarantees, loan commitments) Net of hedges1 Traded products (counterparty risk from derivatives and securities financing) after master netting agreements and net of collateral Net of hedges Trading inventory (securities and potential benefits / remaining exposure from derivatives) Net long per issuer 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 1,304 953 168 59 28 23 73 1,850 1,250 300 94 40 20 145 12,023 13,807 6,603 1,224 1,223 1,223 712 1,038 1,611 697 472 135 66 43 198 2,242 678 399 382 243 172 369 6,982 2,000 1,680 1,227 923 996 1,728 886 374 153 11 41 264 2,716 470 576 445 464 203 559 437 213 111 46 21 0 44 4,202 1,020 864 554 988 184 593 962 217 409 122 66 1 147 861 79 169 16 176 87 334 537 227 165 49 23 0 73 4,151 1,341 574 323 949 229 734 922 317 276 147 10 1 171 1,012 80 148 12 247 48 479 396 363 21 9 3 1,134 160 163 405 180 199 27 64 29 15 13 0 7 914 240 231 365 61 5 11 548 400 66 27 54 2,730 378 1,052 713 235 266 85 77 28 27 5 8 9 1,093 52 428 433 122 13 45 472 377 35 3 7 23 26 6,687 5,423 196 264 56 330 418 585 451 48 0 41 44 467 359 5 80 24 765 623 68 19 17 20 19 6,927 5,263 373 643 43 428 177 729 541 70 1 1 32 84 611 339 0 0 95 142 35 17,180 20,101 6,461 6,622 2,508 4,447 8,211 9,032 1 Not deducted are total allowances and provisions for credit losses of CHF 91 million (31 December 2014: CHF 83 million). 228 Operational risk Compliance and operational risk control developments during the period EDTF | In 2015, we concluded our program to combine Compliance and Operational Risk Control (C&ORC) in order to manage the Group’s compliance, conduct and operational risks in a fully inte- grated manner. This transformation has resulted in a strength- ened control environment, the introduction of globally consistent processes, substantial enhancements to our detective control capabilities, and an operating model which is well-defined, agile and aligned to the Group’s strategy and evolving regulatory requirements. Additionally, as an integrated function, we are able to give a broader, more consistent view of the operational risks we face and provide more coherent challenge to the business. Throughout 2015, we took a number of concrete steps to strengthen the management of operational risk, including imple- mentation of a common risk assessment methodology which enables better data analytics and comparisons to be made across and between businesses. We also took on a broader scope of risk assessments led by the business divisions, and strengthened the control environment through review of our key controls across the most critical risk themes. While we have completed many enhancements during the Compliance and Operational Risk Control integration, best prac- tices across the industry are continually evolving, new risks con- tinue to emerge and threats continue to change. Our strategy for 2016 will, therefore, focus on continued development of our core capabilities in the prevention of financial crime, monitoring and surveillance, and conduct risk, while strengthening our control frameworks for cyber threats, vendor management and transfor- mational change. Moreover, we will continue to work proactively to identify and tackle emerging risks, while refining the operating model to increase effectiveness and deliver efficiency. The development of our monitoring and surveillance capabili- ties continues with a focus on more powerful and versatile Group- wide analytics systems and centralized services. The benefits of our automated monitoring capabilities for electronic and audio communications and sophisticated client, trade and cross-border surveillance are starting to become evident. They have allowed us to swiftly identify relevant policy breaches and suspicious patterns of activity. Continuing focus in this area remains vital as regulatory expectations increase and technology capability continues to develop. Our geographical and business coverage will be increased and we will enhance our analytical capabilities to ensure best use of data and optimized delivery of insights. In 2015, we strengthened our operational resilience function with the integration of the Group Technology Risk organization into C&ORC. Increasing the operational resilience of the firm will remain a key focus for 2016 with continued enhancements to our vendor framework, cyber defense and transformational change risk management framework. We continue to invest significantly in dedicated security pro- grams to strengthen our cyber defense. The threats faced across the financial industry are broadly similar and include data theft committed increasingly by criminal organizations, disruption of service, such as distributed denial of service attacks, and cyber fraud, often through business email compromise and phishing attacks. We have recently appointed a Head of Cyber Risk in order to effectively address the challenges posed by the dynamic exter- nal environment and our own technology innovation. The role focuses on the enterprise governance for cyber-related activities, and includes regular assessments of cyber threat intelligence, analysis of the effectiveness of our controls, and progress on improving our cyber defense capability. To further enhance our resilience against one of the most critical, constantly evolving risks facing the broader industry, we continue to strengthen our cyber response framework, comprising “Analyze,” “Protect,” “Detect” and “Respond / Recover” capabilities, through a dedicated pro- gram. The cyber response framework also includes assessments of our vendors’ capabilities. 229 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Ensuring that the financial crime risk control environment remains effective and is constantly updated to reflect new threats is critical to protecting client and firm assets. This is particularly important given the current volatility in the geopolitical and asso- ciated sanctions environment, which continues to reinforce the importance of a robust, sophisticated and agile anti-financial crime framework. The completion of a capability enhancement program in 2015 allowed us to make significant progress, for example through the introduction of enhanced payments moni- toring capability. We continue to develop our core systems for financial crime prevention and protection against fraud, including an enhanced global anti-money laundering risk assessment and control framework, new capabilities in the monitoring of business relationships and improved detection of potential bribery and cor- ruption risks. Given the rapidly changing and developing geopo- litical environment, we will need to further integrate these solu- tions and adapt their ability to detect and respond to changes in clients’ behavior and risk characteristics. The ongoing changes in the geopolitical environment also mean that we continue to closely monitor the international sanctions regimes, and ensure that our anti-terrorist financing controls are as robust as possible. Suitability risk, quality of advice and price transparency will remain areas of heightened focus for the financial industry, as low interest rates and major legislative change programs, such as the Markets in Financial Instruments Directive II in the EU, continue. These developments are in addition to intensified regulatory inter- est in product tailoring and cross-divisional service offerings. We continue to enhance the governance and controls around our suitability and product risk taxonomies to sustainably support the Group’s growth strategy and product innovation. Our suitability and product control frameworks are designed to set clear stan- dards in line with applicable laws and client requirements effec- tively communicate our suitability strategy and continuously mon- itor and enforce adherence to suitability standards and controls. Cross-border risk remains an area of regulatory attention for global financial institutions, with a strong focus on fiscal transpar- ency and increased legislation, such as the automatic exchange of information. We continue to adapt our cross-border control framework in response to regulatory developments and to facili- tate compliant client-driven cross-border business. We have substantially completed a program of remediation work that has focused on further strengthening our front-office processes and controls within the FX business. In addition, our systems have been enhanced to better segregate sensitive infor- mation, and our monitoring and surveillance capability was sig- nificantly enhanced so that we can more proactively detect unusual patterns of employee behavior and improper business and employee practices. This program also meets the specific undertakings made to the U.S. Commodity Futures Trading Com- mission, the Connecticut Department of Banking, the U.S. Depart- ment of Justice, the UK Financial Conduct Authority, the Swiss Financial Market Supervisory Authority (FINMA) and the Federal Reserve Bank of New York, as part of the resolution of the FX mat- ter. Where applicable we are applying similar control and monitor- ing enhancements across our other trading businesses including the Rates and Credit, Equities and Non-Core and Legacy busi- nesses. Achieving the fairest outcomes for our clients and safeguard- ing market integrity are of critical importance to the firm. The management of conduct risks has been central to our remediation activities and we have implemented a firm-wide conduct risk framework that is embedded into the existing operational risk framework. This framework includes conduct-related manage- ment information which is reviewed at business and regional gov- ernance forums, providing metrics on employee conduct, clients and markets, with employee conduct a central consideration in the annual compensation process. We also significantly strength- ened our oversight controls regarding personal account dealing for our personnel by centralizing all accounts either within UBS, or into a number of defined brokers. In addition to the developments and areas of key focus noted above, we have made further progress in supplementing our risk assessment processes with a forward-looking view of the broader risk environment in which UBS operates. Consideration of key drivers of change such as the UBS strategy, the macroeconomic outlook, technical innovation and regulatory developments allow us to refine our global risk assessment and planning activities. In acknowledgement of the dynamic industry and the environment in which we operate, we will continue to refine and strengthen our risk framework to ensure it is agile and aligned with the Group’s strategy, is responsive to regulatory requirements and supports forward-looking risk identification. We are continuously enhancing our stakeholder engagement as an important complement to our risk assessment processes. In 2015, we reinforced and clarified the mission and mandate for C&ORC through the establishment of a comprehensive service delivery and operating model, with clear distinction between the risk responsibilities of the control functions (second line of defense) and the business functions (first line of defense). Work to increase the effectiveness of challenge from the second line of defense and support the first line of defense in their risk manage- ment responsibilities will continue throughout 2016. Part of this strategy is to transform the way we respond to enquiries, manage approvals and handle incidents leveraging firm-wide standard solutions. Operational risk framework EDTF | Pillar 3 | Operational risk is an inherent part of our business. Losses can result from inadequate or flawed internal processes, decisions and systems, or from external events. We provide a framework that supports the identification and assessment of material operational risks and their potential concentrations, in order to achieve an appropriate balance between risk and return. 230 The business division Presidents and the Corporate Center func- tion heads are ultimately accountable for the effectiveness of oper- ational risk management and for the implementation of the opera- tional risk framework. Management in all functions is responsible for ensuring an appropriate operational risk management environ- ment, including the establishment and maintenance of robust internal controls, effective supervision and a strong risk culture. C&ORC provides an independent and objective view of the adequacy of operational risk management across the Group. It is governed by the C&ORC Management Committee, which is chaired by the Global Head of Compliance & Operational Risk Control, who reports to the Group Chief Risk Officer and is a member of the Risk Executive Committee. The operational risk framework describes general requirements for managing and controlling operational risk at UBS. It is built on four main pillars: 1. classification of inherent risks through the operational risk tax- onomy; 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 and busi- ness risk assessment processes, and 4. remediation to address identified deficiencies which are out- side accepted levels of residual risk. The operational risk taxonomy provides a clear and logical clas- sification of our inherent operational risks, across all business divi- sions. Throughout the organizational hierarchy, a level of risk tol- erance must be agreed for each of the taxonomy categories, together with a minimum set of internal controls and associated performance thresholds considered necessary to keep risk expo- sure within acceptable levels. All functions within our firm are required to perform a semi- annual internal control assessment process whereby they assess and evidence the design and operating effectiveness of their key controls. This also forms the basis for the assessment and testing of the controls which oversee financial reporting as required by the Sarbanes-Oxley Act, section 404 (SOX 404). The framework facilitates the identification of SOX 404-relevant controls for inde- pendent testing, functional assessments, management affirma- tion and where necessary, remediation tracking. UBS employs a consistent global framework to assess the aggregated impact of control deficiencies and the adequacy of remediation efforts. The UBS risk assessment approach covers all business activities and internal as well as external factors posing a threat to UBS Group. Aggregated with any weaknesses in the control environ- ment, the risk assessment articulates the current operational risk exposure against agreed risk tolerance levels. Significant control deficiencies that surface during the internal control and risk assessment processes must be reported in the operational risk inventory, and sustainable remediation must be defined and executed. All significant issues are assigned to own- ers at the senior management level and must be reflected in the respective manager’s annual performance measurement and management objectives. To assist with prioritization of all known operational risk issues, irrespective of origin, a common rating methodology is adopted by all internal control functions and both internal and external audit. Group Internal Audit conducts an issue assurance process after a risk issue has been closed, in order to maintain rigorous management discipline in the sustainable mitigation and control of operational risk issues. Responsibility for the front-to-back control environment and risk management is held by the Chief Operating Officers and sup- ported by our transparent reporting. Risk and behaviors remain embedded in our performance and compensation considerations, and as a firm we continue to deliver employee behavioral initiatives such as the “Principles of Good Supervision,” and mandatory compliance and risk training. 231 Risk, treasury and capital management Risk, treasury and capital management Risk management and control Advanced measurement approach model (cid:50)(cid:75)(cid:78)(cid:78)(cid:67)(cid:84)(cid:2)(cid:21)(cid:2)(cid:94)(cid:2)(cid:35)(cid:47)(cid:35)(cid:2)(cid:79)(cid:81)(cid:70)(cid:71)(cid:78)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:81)(cid:80)(cid:71)(cid:80)(cid:86)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:82)(cid:87)(cid:86)(cid:85) EDTF | Pillar 3 | The operational risk framework detailed above is aligned to and underpins the calculation of regulatory capital, which in turn allows us to quantify operational risk and set effec- tive management incentives. We measure operational risk exposure and calculate opera- tional risk regulatory capital by using the advanced measurement approach (AMA) in accordance with FINMA requirements. For regulated subsidiaries, the basic indicator or standardized approaches are adopted as agreed with local regulators. Regula- tory requirements are currently leading to the implementation of AMA models for specific UBS entities. The operational risk regula- tory capital requirements for the new banking subsidiary of UBS AG in Switzerland were determined and finalized in 2015. The design of the AMA model, which has been tailored to meet the new subsidiary’s operational risk exposure, has been aligned with the Group model from a methodological and calibration process perspective, with adaptations where necessary. Following finaliza- tion, the output was presented to FINMA and approved for use. The AMA model consists of a backward-looking historical and a forward-looking scenario component. The historical component takes a retrospective view based on our history of operational risk losses since January 2002, excluding extreme losses incurred by UBS, which are captured within the scenario component. The key assumption within the historical component is that past events form a reasonable proxy for future events. A distribution of aggre- gated losses over one year is derived by modeling severities and frequencies separately and then combining them. This is referred to as a loss distribution approach and is used to project future total losses based on historical experience and to determine the expected loss portion of our capital requirement. The scenario component takes a forward-looking view of potential operational losses that may occur, taking into account the operational risk issues facing the Group. The aim is to deter- mine a reasonable estimate of unexpected or tail loss exposure (corresponding to a low-frequency / high-severity event). At this point, 20 AMA Units of Measures (UoM) are utilized by the cur- rent model and all are aligned to the operational risk framework taxonomy. For each of the models UoM, three frequency / severity pairs are defined, representing the base, stress and worst case. Calibra- tion and adjustments to the scenario component parameters are based on internal extreme losses, loss data from peer banks, out- puts of the integrated risk assessments, including consideration of the business and internal control environment, as well as exten- sive annual verification by internal subject matter experts. The chart below provides a high-level overview of the model compo- nents and their respective inputs into the calculation. The AMA model adds the sampled annual losses from the his- torical and the scenario component to derive the regulatory capi- 232 (cid:42)(cid:75)(cid:85)(cid:86)(cid:81)(cid:84)(cid:75)(cid:69)(cid:67)(cid:78) (cid:69)(cid:81)(cid:79)(cid:82)(cid:81)(cid:80)(cid:71)(cid:80)(cid:86) (cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:78)(cid:81)(cid:85)(cid:85)(cid:71)(cid:85) (cid:52)(cid:71)(cid:73)(cid:87)(cid:78)(cid:67)(cid:86)(cid:81)(cid:84)(cid:91) (cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78) (cid:53)(cid:69)(cid:71)(cid:80)(cid:67)(cid:84)(cid:75)(cid:81) (cid:67)(cid:80)(cid:67)(cid:78)(cid:91)(cid:85)(cid:75)(cid:85) (cid:43)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2) (cid:71)(cid:90)(cid:86)(cid:84)(cid:71)(cid:79)(cid:71)(cid:2) (cid:78)(cid:81)(cid:85)(cid:85)(cid:71)(cid:85) (cid:36)(cid:39)(cid:43)(cid:37)(cid:40)(cid:19) (cid:39)(cid:90)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2) (cid:75)(cid:80)(cid:70)(cid:87)(cid:85)(cid:86)(cid:84)(cid:91)(cid:2) (cid:78)(cid:81)(cid:85)(cid:85)(cid:71)(cid:85) (cid:53)(cid:69)(cid:71)(cid:80)(cid:67)(cid:84)(cid:75)(cid:81) (cid:69)(cid:81)(cid:79)(cid:82)(cid:81)(cid:80)(cid:71)(cid:80)(cid:86) (cid:19)(cid:2)(cid:36)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(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:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:84)(cid:80)(cid:67)(cid:78)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:81)(cid:78)(cid:2)(cid:72)(cid:67)(cid:69)(cid:86)(cid:81)(cid:84)(cid:85)(cid:16)(cid:2)(cid:86) tal figure which equals the 99.9% quantile of the overall annual operational risk loss distribution. Currently, we do not reflect mitigation through insurance or any other risk transfer mechanism in our AMA model. In 2015, the Group AMA model design, methodology and calibration were subject to significant redevelopment. We submit- ted all revisions to FINMA with the intention of implementing them in 2016 following regulatory approval. The changes focus on model construct, initial calibration, business environment and internal control factors, diversification, a litigation specific compo- nent and combining internal / external losses. A FINMA increment to our AMA-based operational risk-related RWA (OR RWA) in relation to known or unknown litigation, com- pliance and other operational risk matters took effect on 1 Octo- ber 2013 and continued to be applied throughout 2015. As mutually agreed between UBS and FINMA, the incremental OR RWA was subject to recalculations based on supplemental analy- sis performed each quarter. The incremental OR RWA calculated based upon this supplemental analysis as of 31 December 2015 was CHF 13.3 billion, a decrease of CHF 4.2 billion compared with 31 December 2014. In 2016, the aim is to replace the incremental OR RWA and have the total OR RWA calculated by the upgraded AMA. Stress litigation assessments will be an inherent part of the upgraded AMA. We continued to allocate operational risk regulatory capital to the business divisions and Corporate Center based on historical losses. AMA model confirmation EDTF | Pillar 3 | The Group AMA model is subject to an annual quan- titative and qualitative review to ensure that model parameters are plausible and reflect the developing operational risk profile of the firm. This review is independently verified by Quantitative Risk Control and supplemented with additional sensitivity and bench- marking analysis. AMA future developments In 2015, the Basel Committee on Banking Supervision announced that significant changes regarding the calculation of operational risk capital were being drafted. In March 2016, a consultation document was issued that proposed replacing the AMA with a Standardized Measurement Approach. UBS is currently reviewing the proposals and will participate in the consultation process. ➔ Refer to the “Capital management” section of this report for more information on the development of risk-weighted assets for operational risk ➔ Refer to “Risk measurement” in this section for more informa- tion on our approach to model confirmation procedures ➔ Refer to “If we are unable to maintain our capital strength, this may adversely affect our ability to execute our strategy, client franchise and competitive position” in the “Risk factors” section of this report for more information 233 Risk, treasury and capital management Risk, treasury and capital management Treasury management Treasury management Liquidity and funding management Strategy and objectives Audited | EDTF | We manage our liquidity and funding risk with the overall objective of optimizing the value of our business franchise across a broad range of market conditions and in consideration of current and future regulatory constraints as described below. We employ a number of measures to monitor our liquidity and fund- ing positions under normal and stressed conditions. In particular, we use stress scenarios to apply behavioral adjustments to our balance sheet and calibrate the results from these internal stress models with external measures, primarily the evolving regulatory requirements for the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). This section provides more detailed information on current and potential future regulatory requirements, our governance struc- ture, our liquidity and funding management, including our sources of liquidity and funding, and our contingency planning and stress testing. Governance Audited | EDTF | Our liquidity and funding strategy is proposed by Group Treasury, approved by the Group Asset and Liability Man- agement Committee (Group ALCO), a committee of the Group Executive Board, and overseen by the Risk Committee of the Board of Directors. 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 targets. Group Treasury reports on the Group’s overall liquid- ity and funding position, including funding status and concentra- tion risks, at least monthly to the Group ALCO and the Risk Com- mittee. This enables close control of both our cash and collateral, including our stock of high-quality liquid assets (HQLA), and ensures that the Group’s general access to wholesale cash mar- kets is centralized in Corporate Center – Group Asset and Liability Management (Group ALM). In addition, should a crisis require contingency funding measures to be invoked, Group Treasury is responsible for coordinating liquidity generation with representa- tives of the relevant business areas. Audited | Liquidity and funding limits and targets are set at a Group and business division level, and are reviewed and recon- firmed at least once a year by the Board of Directors, the Group ALCO, the Group Chief Financial Officer, the Group Treasurer and the business divisions, taking into consideration current and pro- jected business strategy and risk tolerance. The principles underly- ing our limit and target framework are designed to maximize and sustain the value of our business franchise and maintain an appro- priate balance in the asset and liability structure. Structural limits and targets focus on the structure and composition of the balance sheet, while supplementary 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, including stress testing, for periods of up to one year. To comple- ment and support this framework, Group Treasury monitors the markets with a dashboard of early warning indicators reflecting the current liquidity situation. The liquidity status indicators are used at a Group level to assess both the overall global and regional situations for potential threats. Treasury Risk Control provides independent oversight over liquidity and funding risks. ➔ Refer to the “Corporate governance” section of this report for more information 234 Liquidity Audited | EDTF | Our liquidity risk management aims to maintain a sound liquidity position to meet all our liabilities when due and to provide adequate time and financial flexibility to respond to a firm-specific liquidity crisis in a generally stressed market environ- ment, without incurring unacceptable losses or risking sustained damage to our various businesses. Complementing this, our funding risk management aims for the optimal asset and liability structure to finance our businesses reliably and cost-efficiently. Our Group contingency funding plan is an integral part of our global crisis management concept, which covers various types of crisis events. This contingency funding plan contains an assess- ment of contingent funding sources in a stressed environment, liquidity status indicators and metrics, and contingency proce- dures. Our funding diversification and global scope help protect our liquidity position in the event of a crisis. We regularly assess and test 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. Our contingent fund- ing sources include a large, multi-currency portfolio of unencum- bered, high-quality assets managed centrally by Group ALM, a majority of which is short-term, available and unutilized liquidity facilities at several major central banks, and contingent reductions of liquid trading portfolio assets. Liquidity coverage ratio EDTF | The LCR measures the short-term resilience of a bank’s liquidity profile by comparing whether sufficient high-quality liq- uid assets (HQLA) are available to survive expected net cash out- flows from a significant liquidity stress scenario, as defined by the relevant regulator. The Basel Committee on Banking Supervision (BCBS) standards require an LCR of at least 100% by 2019, with a phase-in period starting from 2015. Since 1 January 2015, UBS, as a Swiss sys- temically relevant bank, has been required to maintain a total LCR of at least 100%, as well as a Swiss franc-denominated LCR of at least 100%. In addition, both UBS AG and UBS Switzerland AG are subject to minimum LCR requirements on a standalone basis. In a period of financial stress, the Swiss Financial Market Super- visory Authority (FINMA) may allow banks to use their HQLA and let their LCR temporarily fall below the minimum threshold of 100%. We monitor the LCR in Swiss francs and in all other significant currencies in order to manage any currency mismatches between HQLA and the net expected cash outflows in times of stress. HQLA are low-risk unencumbered assets under the control of the Group Treasurer, which are easily and immediately convertible into cash at little or no loss of value, to meet liquidity needs in a thirty-calendar-day liquidity stress scenario. The HQLA stock at UBS consists primarily of assets that qualify as Level 1 in the LCR framework, including cash, central bank reserves and govern- ment bonds. Beginning in 2015, FINMA rules require us to publicly disclose the LCR on a quarterly basis, calculated based on the three-month average of the LCR components. Our 3-month average LCR for the fourth quarter of 2015 was 124%. Figures disclosed as of 31 December 2014 are provided on a pro forma basis. As these are calculated on a spot basis, prior period figures are not fully comparable. Pillar 3 | Additional information on the UBS Group AG (consoli- dated) LCR can be found in the document “UBS Group AG (con- solidated) regulatory information” which is provided in “Quarterly reporting” at www.ubs.com/investors. ➔ Refer to the “Legal entity financial and regulatory information” section of this report for more information EDTF | Pillar 3 | Liquidity coverage ratio CHF billion, except where indicated High-quality liquid assets Net cash outflows Liquidity coverage ratio (%) Average 4Q151 Total adjusted value2 208 167 124 31.12.14 Pro forma 188 152 123 1 The average fourth quarter 2015 net cash outflows and liquidity coverage ratio disclosed in our fourth quarter 2015 earnings release were adjusted from CHF 163 billion and 128% to CHF 167 billion and 124%, respectively. 2 Calculated after the application of haircuts and cash inflow and outflow rates as well as, where applicable, caps on Level 2 assets and cash inflows. 235 Risk, treasury and capital management Risk, treasury and capital management Treasury management EDTF | High-quality liquid assets CHF billion Cash and balances with central banks Securities recognized as financial investments available-for-sale Securities received as collateral (off-balance sheet) Total high-quality liquid assets 1 Calculated after the application of haircuts. EDTF | Cash outflows and inflows CHF billion, except where indicated Cash outflows Retail deposits and deposits from small business customers of which: stable deposits of which: less stable deposits Unsecured wholesale funding of which: operational deposits (all counterparties) of which: non-operational deposits (all counterparties) of which: unsecured debt Secured wholesale funding Additional requirements: of which: outflows related to derivatives and other transactions of which: outflows related to loss of funding on debt products2 of which: committed credit and liquidity facilities Other contractual funding obligations Other contingent funding obligations Total cash outflows Cash inflows Secured lending Inflows from fully performing exposures Other cash inflows Total cash inflows Level 1 weighted liquidity value 117 50 31 198 Average 4Q15 Level 2 weighted liquidity value1 0 Total weighted liquidity value1 117 6 4 10 55 36 208 Total carrying value 117 56 36 210 Average 4Q15 Unweighted value Weighted value1 218 35 183 200 34 148 18 159 97 0 62 20 222 181 59 23 263 24 1 23 124 8 98 18 39 59 39 0 20 19 10 275 53 31 23 107 1 Calculated after the application of haircuts and cash inflow and outflow rates. 2 Includes outflows related to loss of funding on asset-backed securities, covered bonds, other structured financing instruments, asset- backed commercial papers, structured entities (conduits), securities investment vehicles and other such financing facilities. 236 EDTF | Liquidity coverage ratio The liquidity coverage ratio (LCR) measures the short-term resilience of a bank’s liquidity profile by comparing whether sufficient high-quality liquid assets (HQLA) are available to survive the expected net cash outflows from a significant liquidity stress scenario, as defined by the relevant regulator. Therefore, the LCR is a key metric used by banks and regulators within a liquidity management framework. Components of LCR The LCR consists of the following main components: LCR = HQLA Required: ≥ 100% Expected cash outflows Expected cash inflows 1 1 Capped at 75% of expected cash outflows High-quality liquid assets HQLA must be easily and immediately convertible into cash at little or no loss of value, especially during a time of stress. HQLA are assets which are of low risk and are unencumbered. Further characteristics of HQLA are ease and certainty of valua - tion, low correlation with risky assets, listing on a developed and recognized exchange, an active and sizeable market and low volatility. Based on these charac- teristics, HQLA are categorized as Level 1 (primarily central bank reserves and government bonds) or Level 2 (primarily US and European agency bonds as well as non-financial corporate covered bonds). Level 2 assets are subject to regulatory haircuts and caps. Expected cash outflows and inflows Expected cash outflows and cash inflows are calculated on the basis of balance sheet and off-balance sheet information, as well as stress events, such as outflows from non-contractual obligations or rating downgrades. These data are categorized and weighted depending on the expected effect of a liquidity stress scenario, as defined by the relevant regulator, over a thirty-calendar-day hori- zon. Expected cash inflows can be taken into account up to a cap of 75% of the expected cash outflows. The main cate go ries are described below. The weighting of cash outflows and inflows is prescribed by FINMA, based on Bank for International Settlements (BIS) guidance, and depends on criteria such as maturity, counterparty and industry type, stability of deposits, opera tional purpose of the balance for a client, covering of short positions, encumbrance, netting agreements, volatility and collateral requirements. Consequently, the same balance sheet item may result in a different outcome in the calculation of LCR. For example, a deposit from a financial corpo- rate client has a higher expected cash outflow rate than a deposit of similar size from a non-financial corporate client, which in turn has a higher expected cash outflow rate than a deposit of similar size from a high net worth individual. Expected cash outflows within 30 days from • Retail deposits (e.g., saving accounts of private retail or wealth management customer) • Unsecured wholesale funding (e.g., current account ofanon-financialcorporate) • Secured wholesale funding (e.g., repurchase agreements and securities lending) •Derivativesandcollateral(e.g.,expectedoutflowdue to rating downgrades) •Structuredfinancingtransactions(e.g.,lossoffunding on asset-backed securities) • Committed credit and liquidity facilities • Other contractual obligations (e.g., contractual interest payments) • Other contingent funding obligations (e.g., guarantees, letters of credit) Expected cash inflows within 30 days from • Secured lending (e.g., reverse repurchase agreements, collateral swaps) •Inflowsfromfullyperformingexposures(e.g.,loansand receivables) •Othercashinflows(e.g.,derivativestransactions) 237 Risk, treasury and capital management Risk, treasury and capital management Treasury management Asset encumbrance EDTF | Part of our future funding and collateral needs are supported by assets that are currently available and unrestricted. The table on the next page presents both total International Financial Reporting Standards (IFRS) on-balance sheet assets and off-bal- ance sheet assets received as collateral, allocating these amounts between those assets that are available and those assets that are encumbered or otherwise not available to support future funding and collateral needs. Assets are presented as encumbered if they have been pledged as collateral against an existing liability or if they are otherwise not available for the purpose of securing additional funding. Included within the latter category are assets protected under client asset segregation rules, assets held by the Group’s insurance entities to back related liabilities to the policy holders, assets held in certain jurisdictions to comply with explicit minimum local asset mainte- nance requirements and assets held in consolidated bankruptcy remote entities, such as certain investment funds and other struc- tured entities. ➔ Refer to “Note 25 Restricted and transferred financial assets” in the “Consolidated financial statements” section of this report for more information Assets that cannot be pledged as collateral represent those assets that are not encumbered, but by their nature, are not con- sidered available to secure funding or to meet collateral needs. These mainly include secured financing receivables, positive replacement values for derivatives, cash collateral receivables, deferred tax assets, goodwill and intangible assets. All other assets are presented as Unencumbered. Shown separately are those assets that are considered to be readily available to secure funding or to meet collateral needs, and consist of cash and secu- rities readily realizable in the normal course of business. These include cash and deposits with central banks, our multi-currency portfolio of unencumbered, high-quality assets managed centrally by Group ALM, a majority of which are short term, and unencum- bered positions in our trading portfolio. The majority of unencumbered assets not considered readily available to secure funding or to meet collateral needs are loans. This category also includes assets held by our subsidiaries and branches of UBS AG that are available to meet funding and col- lateral needs in certain jurisdictions, but are not readily available for use by the Group as a whole. This may be as a result of local regulatory requirements, including liquidity requirements and large exposure limitations. Readily available unencumbered assets held by our subsidiaries and branches of UBS AG may also be sub- ject to restrictions that limit the total amount of, or terms under which, assets may be made available to other Group entities. 238 EDTF | Asset Encumbrance CHF million Balance sheet as of 31 December 2015 Cash and balances with central banks Due from banks Financial assets designated at fair value Loans of which: mortgage loans Lending Cash collateral on securities borrowed Reverse repurchase agreements Collateral trading Trading portfolio assets excluding financial assets for unit-linked investment contracts of which: government bills / bonds of which: corporate bonds, municipal bonds, including bonds issued by financial institutions of which: loans of which: investment fund units of which: asset-backed securities of which: mortgage-backed securities of which: equity instruments of which: precious metals and other physical commodities Financial assets for unit-linked investment contracts Positive replacement values Financial investments available-for-sale Cash collateral receivables on derivative instruments Investments in associates Property, equipment and software Goodwill and intangible assets Deferred tax assets Other assets Other Total assets 31.12.15 Total assets 31.12.14 CHF million Off-balance sheet as of 31 December 2015 Fair value of assets received as collateral which can be sold or repledged Total off-balance sheet 31.12.15 Total off-balance sheet 31.12.14 Total balance sheet and off-balance sheet for UBS Group AG (consolidated) as of 31.12.15 of which: fair value of assets available to secure funding in UBS AG (standalone)2 of which: fair value of assets available to secure funding in UBS Switzerland AG (standalone)2, 3 Total balance sheet and off-balance sheet for UBS Group AG (consolidated) as of 31.12.14 of which: fair value of assets available to secure funding in UBS AG (standalone)2 of which: fair value of assets available to secure funding in UBS Switzerland AG (standalone)2, 3 Encumbered Unencumbered Total Group assets (IFRS) Assets pledged as collateral Assets otherwise re- stricted and not avail- able to secure funding Cash and securi- ties available to secure funding Other realizable assets 91,306 11,948 6,146 311,954 163,091 330,048 25,584 67,893 93,477 108,516 16,193 9,026 2,585 11,928 1,159 508 63,984 3,642 15,519 167,435 62,543 23,763 954 7,695 6,568 12,835 22,160 73,975 942,819 1,062,478 24,980 24,980 24,980 57,0231 5,786 2,506 4,237 223 134 44,271 632 82,635 92,144 3,285 337 3,622 1,099 1,099 8,869 4,031 3,130 1,557 152 15,519 502 7,104 480 7,584 37,196 38,997 Assets that cannot be pledged as collateral 3 1 2,130 7,327 9,458 25,584 66,794 92,378 86,325 36,350 5,882 2,332 5,869 786 225 17,840 3,642 4,979 8,662 3,678 279,647 138,112 291,987 6,273 494 1,058 2,585 265 149 149 1,722 51,482 9,927 954 7,695 174,158 179,074 8,648 321,814 330,224 167,435 16,659 6,568 12,835 21,680 57,742 327,017 422,058 Encumbered Unencumbered Fair value of assets received which can be sold or repledged Fair value of assets received that have been sold or re- pledged as collateral Fair value of assets received otherwise re- stricted and not avail- able to secure funding Fair value of as- sets available to secure funding Fair value of other realizable assets 401,511 401,511 388,855 286,757 286,757 271,963 369,392 10,432 10,432 9,681 47,628 80,476 80,476 89,371 23,846 23,846 17,841 254,635 345,659 327,017 157,531 80,282 364,108 48,678 268,444 348,064 422,058 241,661 1 Includes CHF 51,943 million assets pledged as collateral which may be sold or repledged by counterparties. 2 Assets held by subsidiaries and branches of UBS AG may be subject to restrictions that limit the total amount of, or terms under which, assets may be made available to other Group entities. 3 UBS Switzerland AG was established in 2015. Refer to “The legal structure of the UBS Group” section of this report for more information. 239 Risk, treasury and capital management Risk, treasury and capital management Treasury management EDTF | Assets available to secure funding by currency CHF million Swiss franc US dollar Euro Other Total 31.12.15 53,831 85,359 43,259 72,185 254,635 31.12.14 38,525 124,113 39,861 65,945 268,444 Stress testing Audited | EDTF | We perform stress testing to determine the optimum asset and liability structure that allows us to maintain an appropri- ately balanced liquidity and funding position under various sce- narios. Liquidity crisis scenario analysis and contingency funding planning support the liquidity management process. This ensures that immediate corrective measures to absorb potential sudden liquidity shortfalls can be put into effect. We model our liquidity exposures under two main potential scenarios that encompass stressed and acute market conditions, including considering the possible impact on our access to mar- kets from stress events affecting all parts of our business. Stressed scenario EDTF | As a liquidity crisis could have a myriad of causes, the stressed scenario encompasses potential stress effects across all markets, currencies and products but it is not typically firm-specific. In addi- tion to the loss of ability to replace maturing wholesale funding, it assumes a gradual decline of otherwise stable client deposits and liquidity outflows corresponding to a two-notch downgrade. We use a cash capital model, which incorporates the stress scenario and measures the amount of long-term funding available to fund illiquid assets. The illiquid portion of assets is the differ- ence (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. Long-term funding used as cash capital to support illiquid assets is comprised of unsecured fund- ing with a remaining time to maturity of at least one year, share- holders’ equity and core deposits, which are the portion of our customer deposits that are deemed to have a behavioral maturity of at least one year. Acute scenario EDTF | The acute scenario represents an extreme stress event that combines a firm-specific crisis with market disruption. This sce- nario assumes substantial outflows on otherwise stable client deposits, mainly due on demand, inability to renew or replace maturing unsecured wholesale funding, unusually large draw- downs on loan commitments, reduced capacity to generate liquid- ity from trading assets, liquidity outflows corresponding to a three- notch downgrade triggering contractual obligations to unwind derivative positions or to deliver additional collateral and additional collateral needs due to adverse movements in the market values of derivatives. It is run both daily and monthly, with the former used to project potential cash outflows over a one-month time horizon for day-to-day risk management, while the latter involves a more detailed assessment of asset and liability cash flows. These models and their assumptions are reviewed regularly to incorporate the latest business and market developments. We continuously refine the assumptions used in our crisis scenario and maintain a robust, actionable and tested contingency plan. ➔ Refer to “Risk measurement” in the “Risk management and control” section of this report for more information on stress testing 240 Funding Audited | EDTF | Group Treasury regularly monitors our funding status, including concentration risks, to ensure we maintain a well-bal- anced and diversified liability structure. Our funding activities are planned by analyzing the overall liquidity and funding profile of our balance sheet, taking into account the amount of stable fund- ing that would be needed to support ongoing business activities through periods of difficult market conditions. Our business activities generate asset and liability portfolios that are highly diversified with respect to market, product, tenor and currency. This reduces our exposure to individual funding sources and provides a broad range of investment opportunities, reducing liquidity risk. Our wealth management businesses and Personal & Cor- porate Banking provide significant, cost-efficient and reliable sources of funding. These include core deposits and our portfolio of Swiss residential mortgages, a portion of which is pledged as collateral to generate long-term funding through Swiss Pfand- briefe. In addition, we have a number of short-, medium- and long-term funding programs under which we issue senior unse- cured and structured notes, as well as short-term secured debt, generally for the highest-quality assets. These programs allow institutional and private investors in Europe, the US and Asia Pacific to customize their investments in UBS’s debt. Collectively, these broad product offerings and funding sources, together with the global scope of our business activities, support our fund- ing stability. Internal funding and funds transfer pricing EDTF | We employ an integrated liquidity and funding framework to govern the liquidity management of all our branches and subsid- iaries and our major sources of liquidity are channeled through entities that are fully consolidated. Group ALM meets internal demands for funding by channeling funds from units generating surplus cash to those in need of financing. Funding costs and benefits are allocated to our business divi- sions and Non-core and Legacy Portfolio according to our liquidity and funding risk management framework. Our internal funds transfer pricing system is designed to provide the proper liability structure to support the assets and planned activities of each busi- ness division while minimizing cross-divisional subsidies. The funds transfer pricing mechanism aims to allocate funding and liquidity costs to the activities generating the liquidity and funding risks and deals with the movement of funds from those businesses in sur- plus to those that have a shortfall. Funding is internally transferred or allocated among businesses at rates and tenors that reflect each business’s asset composition, liquidity and reliable external fund- ing. We regularly review our internal funds transfer pricing mecha- nisms, and make enhancements where appropriate to help better accomplish our liquidity and funding management objectives. In 2015 we continued to improve our fund transfer pricing methodologies, ensuring that divisions share in the benefits of raising liabilities and originating assets, with the pricing curve incentivizing a balanced funding position from a currency and tenor perspective. Funds transfer pricing falls under the gover- nance of Group Treasury. EDTF | Funding by product and currency Securities lending Repurchase agreements Due to banks Short-term debt issued2 Retail savings / deposits Demand deposits Fiduciary deposits Time deposits Long-term debt issued3 Cash collateral payables on derivative instruments Prime brokerage payables Total In CHF billion All currencies 31.12.15 31.12.14 8.0 9.7 11.8 21.2 161.8 173.2 6.1 49.0 9.2 11.8 10.5 27.4 156.4 186.7 14.8 52.3 134.9 139.1 38.3 45.3 42.4 38.6 All currencies1 31.12.15 31.12.14 CHF1 31.12.15 31.12.14 EUR1 31.12.15 31.12.14 USD1 31.12.15 31.12.14 Others1 31.12.15 31.12.14 1.2 1.5 1.8 3.2 24.5 26.3 0.9 7.4 20.5 5.8 6.9 1.3 1.7 1.5 4.0 22.7 27.1 2.1 7.6 20.2 6.1 5.6 0.0 0.0 0.4 0.1 0.1 0.0 0.4 0.2 13.8 13.4 7.9 0.1 1.7 2.3 0.2 0.1 7.9 0.1 1.3 2.6 0.3 0.0 0.2 0.6 0.1 0.4 0.8 5.2 0.1 0.1 5.7 2.1 1.0 0.2 0.4 0.1 0.3 0.8 5.3 0.5 0.2 5.5 2.6 0.7 0.7 0.7 0.7 2.4 9.9 9.7 0.6 3.8 10.8 2.7 4.4 46.5 0.9 0.5 0.5 3.1 8.5 10.0 1.2 3.8 10.2 2.4 4.0 45.1 0.2 0.2 0.5 0.4 0.0 3.5 0.1 1.8 1.7 0.8 1.3 0.2 0.8 0.5 0.4 0.0 3.9 0.4 2.3 1.9 0.8 0.9 10.6 12.0 659.4 689.2 100.0 100.0 26.6 26.2 16.3 16.7 1 As a percent of total funding sources. 2 Short-term debt issued is comprised of certificates of deposit, commercial paper, acceptances and promissory notes, and other money market paper. 3 Long-term debt issued also includes debt with a remaining time to maturity of less than one year. 241 Risk, treasury and capital management Risk, treasury and capital management Treasury management Changes in sources of funding during the reporting period EDTF | In 2015, total customer deposits decreased to CHF 390 bil- lion from CHF 410 billion, or 59.2% of our total funding sources. Our ratio of customer deposits to outstanding loan balances was 125% compared with 130% as of 31 December 2014. Long-term debt excluding structured debt, which is comprised of senior and subordinated debt and is presented within Debt issued on the balance sheet, increased to CHF 71.9 billion as of 31 December 2015 from CHF 63.8 billion as of 31 December 2014, primarily due to an increase in our senior debt, which is comprised of both publicly and privately placed notes and bonds as well as covered bonds, to CHF 54.2 billion from CHF 47.7 billion. During 2015, we issued senior unsecured debt totaling the equivalent of CHF 13.6 billion, which consisted of USD 7.9 billion and EUR 5.3 billion, with tenors between 18 months and five years without any optional calls, bearing both floating- and fixed- rate coupons. We also contributed to our loss-absorbing capital by issuing additional tier 1 perpetual capital notes equivalent to CHF 3.5 billion and CHF 1.5 billion in February and August 2015, respectively. In September and November 2015, we issued US dol- lar- and euro-denominated senior unsecured debt that will con- tribute to our total loss-absorbing capacity, equivalent to CHF 4.2 billion and CHF 1.4 billion, respectively. During the year, we also continued to raise medium- and long-term funds through medium-term notes and private placements and through CHF 0.8 billion of Swiss Pfandbriefe issuances. These issuances were partly offset by CHF 7.1 billion in redemptions of senior and subordi- nated debt and covered bonds. In addition, as part of optimizing our interest expense, while maintaining our strong liquidity, fund- ing and capital position, we successfully executed a cash tender offer in December 2015 to repurchase certain senior and subordi- nated debt and covered bonds with an aggregate principal repur- chase amount equivalent to approximately CHF 6.1 billion. As shown on the long-term debt contractual maturities chart below, CHF 8.4 billion, or 12%, of outstanding long-term debt excluding structured debt will mature within one year compared with CHF 8.4 billion, or 13%, in the prior year. In addition, CHF 0.2 billion of subordinated debt has an early call date in 2016. 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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) (cid:20)(cid:18) (cid:19)(cid:23) (cid:19)(cid:18) (cid:23) (cid:18) Our short-term interbank deposits (presented as Due to banks on the balance sheet), together with our outstanding short-term debt, represented 5.0% of total funding sources compared with 5.5% as of 31 December 2014. Secured financing, in the form of repurchase agreements and securities lent against cash collateral received, represented 2.7% of our funding sources as of 31 December 2015 compared with 3.0% as of 31 December 2014. As of 31 December 2015, we were borrowing CHF 76 billion less cash on a collateralized basis than we were lending, slightly higher than the difference of CHF 71 billion as of 31 December 2014. 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(cid:86)(cid:81)(cid:2)(cid:79)(cid:67)(cid:86)(cid:87)(cid:84)(cid:75)(cid:86)(cid:91)(cid:2)(cid:81)(cid:72)(cid:2)(cid:78)(cid:71)(cid:85)(cid:85)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80)(cid:2)(cid:81)(cid:80)(cid:71)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(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:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:87)(cid:84)(cid:71)(cid:70)(cid:2)(cid:81)(cid:88)(cid:71)(cid:84)(cid:15)(cid:86)(cid:74)(cid:71)(cid:15)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:71)(cid:84)(cid:2)(cid:70)(cid:71)(cid:68)(cid:86)(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:86) (cid:124)(cid:124) (cid:19)(cid:18)(cid:18)(cid:18) (cid:25)(cid:23)(cid:18) (cid:23)(cid:18)(cid:18) (cid:20)(cid:23)(cid:18) 243 (cid:18) (cid:19)(cid:18)(cid:18)(cid:18) (cid:25)(cid:23)(cid:18) (cid:23)(cid:18)(cid:18) (cid:20)(cid:23)(cid:18) (cid:18) Risk, treasury and capital management Risk, treasury and capital management Treasury management Net stable funding ratio EDTF | In June 2015, the BCBS issued its guidance on “Net stable funding ratio (NSFR) disclosure standards,” which are intended to provide a common disclosure framework for banks to disclose the calculation of the NSFR adopted by the BCBS in October 2014. Internationally active banks must comply with the NSFR and dis- closure requirements from 1 January 2018, subject to national adoption requirements. EDTF | Pro forma net stable funding ratio CHF billion, except where indicated Available stable funding Required stable funding Pro forma net stable funding ratio (%) 31.12.15 426 403 105 31.12.14 372 352 106 EDTF | The NSFR framework is intended to limit over-reliance on short-term wholesale funding to encourage a better assessment of funding risk across all on- and off-balance sheet items, and to promote funding stability. NSFR consists of two components: the available stable funding (ASF) and the required stable funding (RSF). ASF is defined as the portion of capital and liabilities expected to be available over the period of one year. RSF is a func- tion of the maturity, encumbrance and other characteristics of assets held and off-balance sheet exposures. The BCBS NSFR reg- ulatory framework requires a ratio of at least 100% from 2018. We report our estimated pro forma NSFR based on current guid- ance from FINMA and will adjust our NSFR reporting according to the final implementation of the BCBS NSFR disclosure standards in Switzerland. On 31 December 2015, our estimated pro forma NSFR was stable at 105% compared with 31 December 2014. Credit ratings EDTF | Credit ratings can affect the cost and availability of funding, especially funding from wholesale unsecured sources. Our credit ratings can also influence the performance of some of our busi- nesses 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 company’s strategy, its business position and franchise value, 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 change at any time. Pillar 3 | In evaluating our liquidity requirements, we consider the potential impact of a reduction in UBS’s long-term credit ratings and a corresponding reduction in short-term ratings. If our credit ratings were to be downgraded, “rating trigger” clauses, espe- cially in derivative transactions, could result in an immediate cash outflow due to the unwinding of derivative positions, the need to deliver additional collateral or other ratings-based requirements. Based on UBS’s credit ratings as of 31 December 2015, contrac- tual liquidity outflows of approximately CHF 0.7 billion, CHF 2.2 billion and CHF 2.6 billion would have been required in the event of a one-notch, two-notch and three-notch reduction in long- term credit ratings, respectively. Of these outflows, the portion related to over-the-counter transactions is approximately CHF 0.2 billion, CHF 1.6 billion and CHF 1.9 billion, respectively. There were a number of rating actions on UBS AG’s and UBS Group AG’s solicited credit ratings in 2015. Moody’s Investors Ser- vice (Moody’s) placed UBS AG’s long-term senior debt rating on review for possible downgrade following the publication of Moody’s new bank rating methodology on 17 March 2015, but subsequently affirmed UBS AG’s rating on 8 July 2015. On 12 October 2015, Moody’s placed UBS AG’s long-term senior debt rating under review for possible upgrade, and subsequently upgraded it to A1 from A2 (stable outlook) on 11 January 2016. Standard & Poor’s affirmed UBS AG’s long-term counterparty credit rating at A and UBS Group AG’s rating at BBB+, and revised the outlook from stable to positive on 2 December 2015. Fitch Ratings affirmed UBS AG’s and UBS Group AG’s long-term issuer default rating at A, and revised the outlook from stable to positive on 8 December 2015. ➔ Refer to “Liquidity and funding management are critical to our ongoing performance” in the “Risk factors” section of this report for more information 244 Maturity analysis of assets and liabilities EDTF | The table on the next page provides an analysis of consoli- dated total assets, liabilities and off-balance sheet commitments by residual contractual maturity at the balance sheet date. The contractual maturity of liabilities is based on carrying amounts and the earliest date on which we could be required to pay. The contractual maturity of assets is based on carrying amounts and the latest date the asset will mature. This basis of presentation is in accordance with the respective recommendations of the Enhanced Disclosure Task Force and differs from “Note 27b Matu- rity analysis of financial liabilities” in the “Consolidated financial statements” section of this report, which is presented on an undiscounted basis, as required by IFRS. Derivative replacement values and trading portfolio assets and liabilities are assigned to the column Due less than 1 month, although the respective contractual maturities may extend over significantly longer periods. Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the Perpetual / Not appli- cable time bucket. Undated or perpetual instruments are classi- fied based on the contractual notice period which the counter- party of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the Perpetual / Not applicable time bucket. Non-financial assets and liabilities with no contractual maturity (such as property, plant and equipment, goodwill and intangible assets and current and deferred tax assets and liabilities) are gen- erally included in the Perpetual / Not applicable time bucket. Loan commitments are classified on the basis of the earliest date they can be drawn down. 245 Risk, treasury and capital management Risk, treasury and capital management Treasury management EDTF | Maturity analysis of assets and liabilities CHF billion 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 which may be sold or repledged by counterparties Positive replacement values Cash collateral receivables on derivative instruments Financial assets designated at fair value Loans of which: residential mortgages of which: commercial mortgages of which: Lombard loans of which: other loans of which: securities 91.3 10.8 25.6 42.4 124.0 51.9 167.4 23.8 0.4 110.3 13.4 3.4 81.4 12.1 0.6 16.5 0.0 50.1 27.8 7.5 12.0 2.7 Financial investments available-for-sale 0.9 5.2 Investments in associates Property, equipment and software Goodwill and intangible assets Deferred tax assets Other assets Total assets 31.12.15 Total assets 31.12.14 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 Provisions Other liabilities Total liabilities 31.12.15 Total liabilities 31.12.14 17.3 614.3 746.1 8.1 5.7 7.9 29.1 162.4 38.3 14.9 371.8 6.5 4.2 71.6 720.4 823.5 Guarantees, commitments and forward starting transactions Loan commitments Guarantees Reverse repurchase agreements Securities borrowing agreements Total 31.12.15 Total 31.12.14 246 55.7 15.9 6.6 0.0 78.1 78.3 0.0 72.4 67.0 2.3 1.3 1.4 15.8 13.1 9.4 2.7 46.0 50.0 0.2 0.0 0.2 0.1 Due between 1 and 3 months Due between 3 and 6 months Due between 6 and 9 months Due between 9 and 12 months Due between 1 and 2 years Due between 2 and 5 years Due within 1 month Due over 5 years Perpetual/ Not applicable Total 0.2 5.6 0.1 1.3 0.3 13.4 6.1 1.2 4.4 1.7 5.8 0.9 7.1 2.5 0.4 2.5 1.8 14.0 0.1 1.0 0.5 7.8 2.6 0.7 2.8 1.7 6.0 0.0 25.4 25.1 0.0 23.5 16.7 0.0 15.4 18.3 0.8 1.0 0.1 7.0 3.7 9.9 22.6 19.8 0.1 0.0 0.2 0.1 0.1 0.0 3.0 0.6 4.8 8.6 9.6 0.0 0.0 0.0 0.0 0.1 0.0 2.9 0.3 0.3 3.6 8.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.0 0.6 1.1 20.8 13.3 1.5 1.8 4.0 0.1 9.2 0.3 31.8 34.6 0.3 0.0 6.1 0.1 11.1 0.1 17.7 16.9 0.0 0.0 0.1 0.1 2.0 53.8 34.9 4.0 1.9 13.0 0.0 16.9 2.6 75.8 73.2 0.1 5.3 0.4 22.3 0.8 28.8 38.8 0.4 48.7 41.0 2.9 0.1 2.0 2.7 3.8 1.9 54.9 54.2 0.0 0.1 8.0 0.1 23.8 0.2 32.3 39.7 0.1 0.0 0.1 0.1 0.0 0.0 91.3 11.9 25.6 67.9 124.0 51.9 167.4 23.8 6.1 312.0 141.6 21.5 107.0 39.0 2.8 62.5 1.0 7.7 6.6 12.8 22.2 0.5 0.0 0.8 1.0 7.7 6.6 12.8 29.4 27.2 942.8 1,062.5 5.2 0.3 5.4 1.9 11.8 8.0 9.7 29.1 162.4 38.3 63.0 390.2 93.1 4.2 75.7 885.5 1,008.1 56.1 16.0 6.6 0.0 78.7 78.8 Currency management EDTF | Pillar 3 | Our Group currency management activities are designed to reduce adverse currency effects on our reported financial results in Swiss francs, within limits set by the Board of Directors. Corporate Center – Group Asset and Liability Manage- ment (Group ALM) focuses on three principal areas of currency risk management: (i) currency-matched funding of investments in non-Swiss franc assets and liabilities, (ii) sell-down of non-Swiss franc profits and losses and (iii) 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 consolidated capital activity managed by Group ALM. Currency-matched funding and investment of non-Swiss franc assets and liabilities EDTF | Pillar 3 | For monetary balance sheet items and non-core invest- ments, as far as it is practical and efficient, we follow the principle of matching the currencies of our assets and liabilities for funding purposes. This avoids profits and losses arising from the transla- tion of non-Swiss franc assets and liabilities. Net investment hedge accounting is applied to non-Swiss franc core investments to balance the effect of foreign exchange move- ments on both the common equity tier 1 (CET1) capital and CET1 capital ratio on a fully applied basis. ➔ Refer to “Note 1a Summary of significant accounting policies” and “Note 14 Derivative instruments and hedge accounting” in the “Consolidated financial statements” section of this report for more information Sell-down of non-Swiss franc reported profits and losses Pillar 3 | Reported profit and losses are translated each month from their original transaction currencies into Swiss francs using the relevant month-end rate. Income statement items of foreign sub- sidiaries and branches with a functional currency other than the Swiss franc are translated into Swiss francs on a monthly basis using the relevant month-end rate. Weighted average rates for a year represent an average of 12 month-end rates, weighted according to the income and expense volumes of all foreign sub- sidiaries and branches with the same functional currency for each month. To reduce earnings volatility on the translation of previ- ously recognized earnings in foreign currencies, Group ALM cen- tralizes the profits and losses arising in UBS AG and its branches and sells or buys the profit or loss for Swiss francs. Our operating entities follow a similar 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 net investment hedge accounting. Hedging of anticipated future reported non-Swiss franc profits and losses EDTF | Pillar 3 | At any time, the Group ALCO may instruct Group ALM to execute hedges to protect anticipated future profit and losses in foreign currencies against possible adverse trends of foreign exchange rates. Although intended to hedge future earnings, these transactions are accounted for as open currency positions and are subject to internal market risk limits for value at risk and stress loss limits. ➔ Refer to the “Capital management” section of this report for more information on our active management of sensitivity to currency movements and its effect on our key ratios 247 Risk, treasury and capital management Risk, treasury and capital management Capital management Capital management Our strong capital position provides us with a solid foundation for growing our business and enhancing our competitive positioning. At the end of 2015, our common equity tier 1 (CET1) capital ratio1 increased to 14.5% on a fully applied basis, the highest fully applied capital ratio in our peer group of large global banks. On a phase-in basis, our CET1 capital ratio was 19.0%. As of 31 December 2015, our Swiss SRB leverage ratio was 5.3% on a fully applied basis and 6.2% on a phase-in basis. Effective 31 December 2015, our Swiss SRB leverage ratio denominator calculation is fully aligned with the BIS Basel III definition. In 2015, we issued the equivalent of CHF 5.2 billion of additional tier 1 perpetual capital notes, as well as CHF 5.6 billion of senior unsecured debt that will contribute to our total loss-absorbing capacity in anticipation of international regulatory developments, including revisions to the Swiss too big to fail framework. Capital management objectives Audited | EDTF | Adequate capital is a prerequisite to conduct our business activities, in accordance with both our own internal assessment and regulatory requirements. We are committed to maintaining a strong capital position and sound capital ratios at all times, to support the growth of our businesses as well as to meet potential regulatory changes in future capital requirements. We intend to do so mainly through a combination of our retained earnings and the issuance of additional tier 1 (AT1) capital, includ- ing Deferred Contingent Capital Plan (DCCP) grants, as well as the issuance of instruments which will contribute to our total loss- absorbing capacity (TLAC). Ongoing compliance with regulatory capital requirements and target capital ratios is central to our capital adequacy manage- ment. As of 31 December 2015, our fully applied CET1 capital ratio was above our target of at least 13% and was above the Swiss Financial Market Supervisory Authority’s (FINMA) require- ments for Swiss systemically relevant banks (SRBs), which are stricter than the Basel Committee on Banking Supervision (BCBS) requirements. Our capital targets and expectations for 2016 and beyond Group Common equity tier 1 capital ratio (fully applied) 1 Risk-weighted assets (fully applied) 1 Leverage ratio denominator (fully applied) 1 Investment Bank at least 13% 2 Expectation: around CHF 250 billion short / medium term Expectation: around CHF 950 billion short / medium term Risk-weighted assets (fully applied) 1 Leverage ratio denominator (fully applied) 1 1 Based on the currently applicable rules. 2 Our capital returns policy is also subject to our objective of maintaining a post-stress fully applied CET1 capital ratio of at least 10%. Expectation: around CHF 325 billion short / medium term Expectation: around CHF 85 billion short / medium term We believe that our capital strength provides great comfort to our stakeholders, contributes to UBS’s strong credit ratings and is the foundation of our success. ➔ Refer to the “Our strategy” section of this report for more information on our performance targets and expectations ➔ Refer to the “Regulatory and legal developments” section of this report for more information on proposed revisions to the Swiss too big to fail framework ➔ Refer to the “Our stated capital returns objective is based, in part, on capital ratios that are subject to regulatory change and may fluctuate significantly” in the “Risk factors” section of this report for more information on the risks related to our capital ratios Capital planning Audited | EDTF | The annual strategic planning process includes a cap- ital planning component and is key in defining mid and longer- term capital targets. It is based on an attribution of Group risk- weighted assets (RWA) and leverage ratio denominator (LRD) limits to the business divisions. These resource allocations in turn affect business plans and earnings projections, which are then reflected in our capital plans. Capital limits and targets are established at both Group and business division levels, and submitted to the Board of Directors for approval or for information at least annually. Group Treasury plans for and monitors consolidated RWA, LRD and capital devel- opments. Capital planning and monitoring is also done at the legal entity level for those entities subject to prudential supervi- sion. Our monitoring may inform a need for us to make adjust- ments to RWA or LRD limits, to take actions related to the issu- ance or redemption of capital instruments, or to make other decisions. Any breach of the limits in place triggers the imposition of a series of required remediating actions necessary to return the exposures to a limit-compliant level. Monitoring activities also consider developments in capital regulations. 1 Unless otherwise indicated, all information in this section is based on the Basel III framework as applicable for Swiss systematically relevant banks (SRBs). 248 Capital management activities future capital Audited | EDTF | Pillar 3 | During 2015, we managed our capital in accor- dance with our performance targets and expectations. In the tar- get-setting process, we take into account the current and poten- tial including capital buffer requirements. We also consider our aggregate risk exposure in terms of capital-at-risk, the views of rating agencies, comparisons with peer institutions and the effect of expected accounting pol- icy changes. requirements, Our progress in 2015 toward meeting the Swiss SRB fully applied capital requirements was supported by a series of capital transactions, including: – the issuance of AT1 perpetual capital notes, consisting of USD 1.25 billion high-trigger loss-absorbing notes, USD 1.25 billion low-trigger loss-absorbing notes and EUR 1.0 billion low-trig- ger loss-absorbing notes in February 2015, and USD 1.58 bil- lion high-trigger loss-absorbing notes in August 2015; and – an increase of CHF 0.5 billion in high-trigger loss-absorbing capital related to DCCP grants for the performance year 2015, qualifying as Swiss SRB-compliant AT1 capital. In anticipation of international regulatory developments, includ- ing revisions to the Swiss too big to fail (TBTF) framework, we began to issue instruments in 2015 which will contribute to our TLAC and completed our inaugural issuances of TLAC-eligible senior unsecured debt, successfully placing CHF 5.6 billion of notes. We have additionally taken a series of measures intended to improve our resolvability and we expect that the Group will qual- ify for a rebate on the gone concern requirements under the new Swiss TBTF proposal. The amount and timing of any such rebate will depend on the actual execution of these measures and can therefore only be specified once all measures are implemented. Subject to market and other conditions, we currently expect to replace maturing senior debt with TLAC-eligible senior debt, and maturing tier 2 instruments with AT1 instruments. As previously TBTF-compliant AT1 and tier 2 instruments will remain eligible for capital treatment under the new regime on a grandfathering basis, we do not intend to use the proposed changes in the TBTF regime as a trigger to exercise our right to call outstanding tier 2 and low-trigger AT1 instruments. The total amount of TLAC we issue will be affected by any reduction in the gone concern requirement we are granted for improved resolvability. The pro- posed Swiss TBTF ordinance would permit a reduction of up to 2% of the LRD and 5.7% of RWA gone concern requirements for measures taken to improve resolvability. The amount and timing of any such reduction will be determined by FINMA as such mea- sures are implemented. ➔ Refer to the “Treasury management” section of this report for more information on our debt issuances in 2015 ➔ Refer to the “Regulatory and legal developments” section of this report for more information on proposed revisions to the Swiss too big to fail framework ➔ Refer to the “The legal structure of UBS Group” section of this report for more information on changes to our legal structure Financial resource optimization EDTF | Pillar 3 | We manage our balance sheet, RWA and LRD levels within our regulatory limits and internal targets. Our strategic focus continues to be on achieving an optimal attribution and utilization of financial resources between our business divisions and Corporate Center, as well as between our legal entities, while remaining within the prescribed limits on a Group and divisional level. During the year, we managed our RWA and LRD within our defined thresholds. As of 31 December 2015, we were within both our short- to medium-term RWA expectation of around CHF 250 billion and our short- to medium-term LRD expectation of around CHF 950 billion. The Investment Bank was also within the short- to medium-term RWA expectation of around CHF 85 billion and the short- to medium-term LRD expectation of around CHF 325 billion at the end of the year. 249 Risk, treasury and capital management Risk, treasury and capital management Capital management Active management of sensitivity to currency movements EDTF | Pillar 3 | Corporate Center – Group Asset and Liability Manage- ment (Group ALM) is mandated with the task of minimizing adverse effects from changes in currency rates on our fully applied CET1 capital and CET1 capital ratio. A significant portion of our capital and RWA is denominated in US dollars, euros, British pounds and other foreign currencies. In order to hedge the CET1 capital ratio, CET1 capital needs to have foreign currency expo- sure, leading to currency sensitivity of CET1 capital. As a conse- quence, it is not possible to simultaneously fully hedge the capital and the capital ratio. As the proportion of RWA denominated in foreign currencies outweighs the capital in these currencies, a sig- nificant appreciation of the Swiss franc against these currencies could benefit our capital ratios, while a significant depreciation of the Swiss franc against these currencies could adversely affect our capital ratios. The Group Asset and Liability Management Com- mittee, a committee of the UBS Group Executive Board, can adjust the currency mix in capital, within limits set by the Board of Direc- tors, to balance the effect of foreign exchange movements on the fully applied CET1 capital and capital ratio. Limits are in place for the sensitivity of both CET1 capital and the capital ratio to an appreciation or depreciation of 10% in the value of the Swiss franc against other currencies. We estimate that a 10% depreciation of the Swiss franc against other currencies would have increased our fully applied RWA by CHF 9.1 billion and our fully applied CET1 capital by CHF 933 million as of 31 December 2015 (31 December 2014: CHF 10.5 billion and CHF 1,007 million, respectively) and reduced our fully applied CET1 capital ratio by 17 basis points (31 December 2014: 17 basis points). Conversely, we estimate that a 10% appreciation of the Swiss franc against other currencies would have reduced our fully applied RWA by CHF 8.2 billion and our fully applied CET1 capital by CHF 844 million (31 December 2014: CHF 9.5 billion and CHF 911 million, respectively) and increased our fully applied CET1 capital ratio by 17 basis points (31 Decem- ber 2014: 17 basis points). Our leverage ratio is also sensitive to foreign exchange move- ments due to the currency mix of our capital and LRD. When adjusting the currency mix in capital, potential effects on the lever- age ratios are taken into account and the sensitivity of the leverage ratio to an appreciation or depreciation of 10% in the value of the Swiss franc against other currencies is actively monitored. We estimate that a 10% depreciation of the Swiss franc against other currencies would have increased our fully applied leverage ratio denominator (LRD) by CHF 70 billion and reduced our fully applied Swiss SRB leverage ratio by 11 basis points. Con- versely, we estimate that a 10% appreciation of the Swiss franc against other currencies would have reduced our fully applied LRD by CHF 63 billion and increased our fully applied Swiss SRB lever- age ratio by 12 basis points. These sensitivities do not consider foreign currency translation effects related to defined benefit plans other than those related to the currency translation of the net equity of foreign opera- tions. Consideration of stress scenarios EDTF | Through a set of quantitative risk appetite objectives, we aim to ensure that aggregate risk exposure is within our desired risk capacity, based on our capital and business plans. We use both scenario-based stress tests and statistical frameworks to assess the impact of a severe stress event at an aggregate, Group-wide level. We are committed to total capital returns to shareholders of at least 50% of net profit attributable to shareholders, provided that we maintain a fully applied CET1 capital ratio of at least 13% and consistent with our objective of maintaining a post-stress fully applied CET1 capital ratio of at least 10%. Our post-stress CET1 capital ratio exceeded the 10% objective as of 31 December 2015. ➔ Refer to “Our stated capital returns objective is based, in part, on capital ratios that are subject to regulatory change and may fluctuate significantly” in the “Risk factors” section of this report for more information on the calculation of our post-stress CET1 capital ratio and related risks ➔ Refer to the “Risk management and control” section of this report for more information on our risk appetite and combined stress test framework 250 Swiss SRB capital framework EDTF | UBS is considered a systemically relevant bank (SRB) under Swiss banking law and both UBS Group and UBS AG are, on a consolidated basis, required to comply with regulations based on the Basel III framework as applicable for Swiss SRBs. All our capital disclosures therefore focus on Swiss SRB capital information. Dif- ferences between Swiss SRB and BIS capital information on a UBS Group level are outlined in the “Differences between Swiss SRB and BIS capital” section. Proposed changes to capital requirements and regulation EDTF | In December 2015, the Swiss Federal Department of Finance published for consultation a draft revised TBTF ordinance based on the cornerstones announced by the Swiss Federal Council in October 2015. In line with the announced cornerstones, the pro- posal would revise the capital and leverage ratio requirements for Swiss systemically relevant banks and includes new gone concern requirements. ➔ Refer to the “Legal entity financial and regulatory information” section of this report for information on capital requirements for ➔ Refer to the “Regulatory and legal developments” section of this report for more information on the proposed revisions to the UBS AG and UBS Switzerland AG on a standalone basis Swiss TBTF framework Regulatory framework EDTF | The Basel III framework came into effect in Switzerland on 1 January 2013 and includes prudential filters for the calculation of capital. These prudential filters consist mainly of capital deduc- tions for deferred tax assets (DTAs) recognized for tax loss carry- forwards, DTAs on temporary differences that exceed a certain threshold and effects related to defined benefit plans. As these filters are being phased in between 2014 and 2018, their effects are gradually factored into our calculations of capital, RWA and capital ratios on a phase-in basis and are entirely reflected in our capital, RWA and capital ratios on a fully applied basis. In 2015, we deducted from our phase-in CET1 capital 40% (2014: 20%) of: (i) DTAs recognized for tax loss carry-forwards, (ii) DTAs on temporary differences that exceed the threshold of 10% of CET1 capital before deduction of DTAs on temporary differ- ences and (iii) the effects related to net defined benefit pension plan assets under IAS 19 (revised). In 2015, we accelerated the phase-in of the cumulative differ- ence between the IAS 19 (revised) accounting applied for fully applied CET1 calculations and the pro forma IAS 19 treatment applied for CET1 phase-in calculations. Capital instruments that were treated as hybrid tier 1 capital and as tier 2 capital under the Basel 2.5 framework are being phased out under Basel III between 2013 and 2019. On a phase- in basis, our capital and capital ratios include the applicable por- tion of these capital instruments not yet phased out. Our capital and capital ratios on a fully applied basis do not include these capital instruments. In 2015, the BCBS continued its review of the capital frame- work to balance simplicity and risk sensitivity, and to promote comparability. The BCBS released a second consultative document on revisions to the standardized approach for credit risk in Decem- ber 2015. The proposal would reintroduce the use of external credit ratings for exposures to banks and corporates and adopt a loan-to-value approach to risk weighting of real estate loans. The BCBS intends to finalize the revisions by the end of 2016. In January 2016, the BCBS published a revised market risk framework, which defines minimum capital requirements for market risk exposures. The market risk framework includes stricter rules on the designation of instruments as either trading or bank- ing book, a more prescriptive internal-model approach aimed at increasing consistency across banks, as well as a revised and more risk-sensitive standardized approach, which may also be used as a fall back to the internal-model approach. The BCBS will conduct further quantitative impact studies in order to monitor the effect of the capital requirements and to ensure consistency in the appli- cation of the framework. We expect Switzerland to finalize these changes in the domestic regulations no later than 1 January 2019, the deadline set by the BCBS. ➔ Refer to the “Regulatory and legal developments” section of this report for more information 251 Risk, treasury and capital management Risk, treasury and capital management Capital management EDTF | Our capital requirements1 Phase-in Fully applied 28.6%3, 4 14.3% Gone concern4 11.1%2 2.5% 1.8% 2.9% 4.0% 12.6%2 2.8% 2.3% 3.0% 4.5% 14.3%2 14.4%2 3.4% 2.6% 3.8% 4.5% Gone concern Going concern 3.5% 2.6% 3.8% 4.5% Gone concern4 Going concern 17.5%3, 4 4.5% 3.0% 5.5% 4.5% Gone concern4 Going concern 0.8% 3.5% 5.5% 4.5% Going concern 31.12.14 31.12.15 From 1.1.16 (current) 20168 (proposed) 31.12.19 (current) 1.1.2020 (proposed) Base: CET1 capital Buffer: CET1 capital Buffer: high-trigger loss-absorbing capital5 Base: high-trigger additional tier 1 capital6 Buffer: high-trigger additional tier 1 capital6 Progressive buffer: low-trigger loss-absorbing capital TLAC-eligible senior unsecured debt7 1 In percent of risk-weighted assets (RWA). Proposed requirements for Swiss SRBs are based on the draft revised too big to fail ordinance from the Federal Department of Finance. 2 Includes the effect of the countercyclical buffer requirement. 3 Does not include a countercyclical buffer requirement as potential future requirements cannot be accurately predicted. 4 This requirement may be reduced by a resolvability rebate. 5 CET1 capital can be substituted by high-trigger loss-absorbing capital up to the stated percentage. 6 Low-trigger additional tier 1 capital instruments will continue to qualify as going concern capital until their first call date. 7 Any high- and low-trigger tier 2 capital instruments remaining after 2019 will qualify for the gone concern requirement until one year before maturity. 8 Based on the draft ordinance which proposes an effective date of 1 July 2016. ▲ Capital requirements EDTF | As of 31 December 2015, our total capital requirement for both UBS Group and UBS AG (consolidated) was 12.6% of RWA compared with 11.1% as of 31 December 2014. The requirement as of 31 December 2015 consisted of: (i) base capital of 4.5%, (ii) buffer capital of 5.3%, of which 0.2% was attributable to the countercyclical buffer capital requirement and (iii) progressive buf- fer capital of 2.8%. We satisfied the base and buffer capital requirements, including the countercyclical buffer, through our CET1 capital. In addition, since 31 March 2015, high-trigger loss- absorbing capital is included in the buffer capital. Low-trigger loss-absorbing capital satisfied the progressive buffer capital requirement. National regulators can put in place a countercyclical buffer requirement of up to 2.5% of RWA for credit exposures in their jurisdiction. The Swiss Federal Council has activated a countercy- clical buffer requirement of 2% of RWA for mortgage loans on residential property in Switzerland, applicable since 30 June 2014. In 2016, we will begin to apply additional countercyclical buffer requirements introduced for other Basel Committee member jurisdictions. The requirements will be phased-in and become fully effective on 1 January 2019. Our requirement for the progressive buffer is dynamic and depends on our leverage ratio denominator (LRD) and our market share in the loans and deposits business in Switzerland. In the second quarter of 2015, the progressive buffer requirement for 2019 was reduced to 4.5% from 5.4%, reflecting updated LRD and market share information for 2014 provided by FINMA in June 2015. As a result, our total 2015 capital requirement on a phase-in basis decreased to 12.6% from the previously reported 13.0%. 252 30 25 20 15 10 5 0 Moreover, banks governed under the Swiss SRB framework are eligible for a capital rebate on the progressive buffer if they take actions that facilitate recovery and resolvability beyond the mini- mum requirements to ensure the integrity of systemically impor- tant functions in the case of an impending insolvency. We have taken a series of measures to improve our resolvability. We are confident that the establishment of UBS Group AG and UBS Swit- zerland AG, along with our other announced measures as described in the “The legal structure of UBS Group” section of this report, will substantially enhance the resolvability of the Group. FINMA has confirmed that these measures were in principle suit- able to warrant a rebate under the current Swiss capital regula- tion. Therefore, we expect that the Group will qualify for a rebate on the gone concern requirements under the new Swiss TBTF framework proposal. The amount and timing of any such rebate will depend on the actual execution of these measures and can therefore only be specified once all measures are implemented. Similar to the other capital component requirements, the pro- gressive buffer requirement is phased in gradually until 2019. As of 31 December 2015, the progressive buffer requirement was 2.8% compared with 2.5% as of 31 December 2014. ➔ Refer to the “The legal structure of UBS Group” section of this report for more information on changes to our legal structure The Financial Stability Board (FSB) determined that UBS is a global systemically important bank (G-SIB), using an indicator- based methodology adopted by the BCBS. Based on published indicators, G-SIB are subject to additional CET1 capital buffer requirements in the range of 1.0% to 3.5%. These requirements will be phased in from 1 January 2016 to 31 December 2018, and will become fully effective on 1 January 2019. As our aforemen- tioned Swiss SRB capital requirements exceed the BCBS require- ments including the G-SIB buffer, UBS is not affected by the above additional G-SIB requirements. EDTF | Pillar 3 | Swiss SRB capital ratio requirements and information (phase-in) CHF million, except where indicated Base capital (common equity tier 1 capital) Buffer capital (common equity tier 1 capital and high-trigger loss-absorbing capital) of which: effect of countercyclical buffer Progressive buffer capital (low-trigger loss-absorbing capital) Phase-out capital (tier 2 capital) Total Requirement1 31.12.15 Capital ratio (%) Capital Actual2, 3 Requirement Eligible2, 3 31.12.15 31.12.14 4.5 5.34 0.2 2.8 12.6 4.5 16.8 0.2 5.0 0.5 26.8 4.0 15.4 0.1 5.2 0.9 25.5 31.12.15 9,554 31.12.15 9,554 11,236 356 6,011 26,800 35,564 356 10,679 996 56,792 31.12.14 8,835 34,027 322 11,398 2,050 56,310 1 Prior to the implementation of the Swiss SRB framework, FINMA also defined a total capital ratio target for UBS Group of 14.4%, which will be effective until it is exceeded by the Swiss SRB phase-in require- ment. 2 Swiss SRB CET1 capital exceeding the base capital requirement is allocated to the buffer capital. 3 From 31 March 2015 onward, high-trigger loss-absorbing capital (LAC) is included in the buffer capital. Prior to 31 March 2015, high-trigger LAC was included in the progressive buffer capital. 4 CET1 capital can be substituted by high-trigger loss-absorbing capital up to 2.3% in 2015. 253 Risk, treasury and capital management Risk, treasury and capital management Capital management Swiss SRB capital information (UBS Group) In this section, we disclose capital information on a consolidated UBS Group basis. Capital information for UBS AG on a consoli- dated basis is provided in the “UBS AG (consolidated) capital and leverage ratio information” section of this report. Capital ratios EDTF | Our fully applied CET1 capital ratio increased 1.1 percentage points to 14.5% as of 31 December 2015, exceeding our target ratio of 13.0%. This increase was driven by a CHF 9.0 billion decrease in risk-weighted assets (RWA) and a CHF 1.1 billion increase in CET1 capital. On a phase-in basis, our CET1 capital ratio decreased 0.4 percentage points to 19.0% as of 31 Decem- ber 2015, mainly due to a decrease of CHF 2.5 billion in CET1 capital, partly offset by a decrease of CHF 8.6 billion in RWA. Our tier 1 capital ratio increased 3.8 percentage points to 17.4% on a fully applied basis and 1.6 percentage points to 21.0% on a phase-in basis. Both increases resulted from the aforementioned changes in RWA and CET1 capital, as well as the aforementioned issuances of low- and high-trigger loss-absorbing AT1 capital in February and August 2015 and DCCP awards granted for the performance year 2015. Our fully applied total capital ratio increased 4.0 percentage points to 22.9% as of 31 December 2015 and 1.3 percentage points to 26.8% on a phase-in basis. (cid:53)(cid:89)(cid:75)(cid:85)(cid:85)(cid:2)(cid:53)(cid:52)(cid:36)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:85) (cid:43)(cid:80)(cid:2)(cid:7) (cid:37)(cid:81)(cid:79)(cid:79)(cid:81)(cid:80)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(cid:2)(cid:86)(cid:75)(cid:71)(cid:84)(cid:2)(cid:19)(cid:2)(cid:10)(cid:37)(cid:39)(cid:54)(cid:19)(cid:11)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81) (cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:69)(cid:67)(cid:82)(cid:75)(cid:86)(cid:67)(cid:78)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:2) (cid:19)(cid:27)(cid:16)(cid:22) (cid:19)(cid:26)(cid:16)(cid:24) (cid:19)(cid:26)(cid:16)(cid:20) (cid:19)(cid:26)(cid:16)(cid:21) (cid:19)(cid:27)(cid:16)(cid:18) (cid:19)(cid:21)(cid:16)(cid:22) (cid:19)(cid:21)(cid:16)(cid:25) (cid:19)(cid:22)(cid:16)(cid:22) (cid:19)(cid:22)(cid:16)(cid:21) (cid:19)(cid:22)(cid:16)(cid:23) (cid:20)(cid:23)(cid:16)(cid:23) (cid:20)(cid:23)(cid:16)(cid:27) (cid:20)(cid:23)(cid:16)(cid:18) (cid:20)(cid:23)(cid:16)(cid:26) (cid:19)(cid:26)(cid:16)(cid:27) (cid:20)(cid:18)(cid:16)(cid:24) (cid:20)(cid:19)(cid:16)(cid:20) (cid:20)(cid:20)(cid:16)(cid:18) (cid:20)(cid:24)(cid:16)(cid:26) (cid:20)(cid:20)(cid:16)(cid:27) (cid:21)(cid:18) (cid:20)(cid:23) (cid:20)(cid:18) (cid:19)(cid:23) (cid:19)(cid:18) (cid:23) (cid:18) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:22) (cid:21)(cid:19)(cid:16)(cid:21)(cid:16)(cid:19)(cid:23) (cid:21)(cid:18)(cid:16)(cid:24)(cid:16)(cid:19)(cid:23) (cid:21)(cid:18)(cid:16)(cid:27)(cid:16)(cid:19)(cid:23) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:23) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:22) (cid:21)(cid:19)(cid:16)(cid:21)(cid:16)(cid:19)(cid:23) (cid:21)(cid:18)(cid:16)(cid:24)(cid:16)(cid:19)(cid:23) (cid:21)(cid:18)(cid:16)(cid:27)(cid:16)(cid:19)(cid:23) (cid:21)(cid:19)(cid:16)(cid:19)(cid:20)(cid:16)(cid:19)(cid:23) (cid:40)(cid:87)(cid:78)(cid:78)(cid:91)(cid:2)(cid:67)(cid:82)(cid:82)(cid:78)(cid:75)(cid:71)(cid:70) (cid:50)(cid:74)(cid:67)(cid:85)(cid:71)(cid:15)(cid:75)(cid:80) (cid:21)(cid:18) (cid:20)(cid:23) (cid:20)(cid:18) (cid:19)(cid:23) (cid:19)(cid:18) (cid:23) (cid:18) 254 (cid:21)(cid:18) (cid:20)(cid:23) (cid:20)(cid:18) (cid:19)(cid:23) (cid:19)(cid:18) (cid:23) (cid:18) (cid:21)(cid:18) (cid:20)(cid:23) (cid:20)(cid:18) (cid:19)(cid:23) (cid:19)(cid:18) (cid:23) (cid:18) EDTF | Pillar 3 | Swiss SRB capital information CHF million, except where indicated Common equity tier 1 capital Common equity tier 1 capital Additional tier 1 capital High-trigger loss-absorbing capital1 Low-trigger loss-absorbing capital2 Total additional tier 1 capital3 Tier 1 capital Tier 2 capital High-trigger loss-absorbing capital Low-trigger loss-absorbing capital Phase-out capital Total tier 2 capital Total capital Common equity tier 1 capital ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) Risk-weighted assets Phase-in Fully applied 31.12.15 31.12.14 31.12.15 31.12.14 40,378 42,863 30,044 28,941 3,828 353 4,181 44,559 912 10,325 996 12,233 56,792 19.0 21.0 26.8 212,302 0 0 0 42,863 946 10,451 2,050 13,448 56,310 19.4 19.4 25.5 220,877 3,828 2,326 6,154 36,198 912 10,325 11,237 47,435 14.5 17.4 22.9 207,530 467 0 467 29,408 946 10,451 11,398 40,806 13.4 13.6 18.9 216,462 1 As of 31 December 2014, on a phase-in basis, high-trigger loss-absorbing capital of CHF 467 million was fully offset by required deductions for goodwill. 2 Consists on a phase-in basis of low-trigger loss-absorbing capital (31 December 2015: CHF 2,326 million) partly offset by required deductions for goodwill (31 December 2015: CHF 1,973 million). 3 Includes on a phase-in basis hybrid capital subject to phase-out (31 Decem- ber 2015: CHF 1,954 million and 31 December 2014: CHF 3,210 million), fully offset by required deductions for goodwill. Eligible capital Tier 1 capital EDTF | Pillar 3 | Our tier 1 capital consists of CET1 capital and AT1 capital. The analysis of our 2015 tier 1 capital movement is pro- vided in the “Swiss SRB capital movement” table. Audited | Our CET1 capital mainly consists of share capital, share premium, which consists primarily of additional paid-in capital related to shares issued, and retained earnings. A detailed recon- ciliation of IFRS equity to CET1 capital is provided in the “Recon- ciliation IFRS equity to Swiss SRB capital” table. Our fully applied CET1 capital increased by CHF 1.1 billion to CHF 30.0 billion, mainly reflecting the 2015 operating profit before tax excluding own credit, partly offset by accruals for pro- posed dividends to shareholders and current tax effects. Our phase-in CET1 capital decreased by CHF 2.5 billion to CHF 40.4 billion, primarily as the 2015 operating profit before tax excluding own credit was more than offset by accruals for proposed divi- dends to shareholders, a reduction related to the accelerated application of the IAS 19 (revised) treatment of defined benefit plans and a decrease related to the additional phase-in effect of capital deductions on deferred tax assets for tax loss carry- forwards, which increased from 20% to 40% effective 1 January 2015. 255 Risk, treasury and capital management Risk, treasury and capital management Capital management EDTF | Pillar 3 | Swiss SRB capital movement CHF million Common equity tier 1 capital at the beginning of the year Operating profit / (loss) before tax Current tax effect Deferred tax assets recognized for tax loss carry-forwards, additional phase-in effect 1 Deferred tax assets recognized for tax loss carry-forwards Deferred tax assets recognized for temporary differences Defined benefit pension plans, acceleration and phase-in effect Defined benefit pension plans Own credit related to financial liabilities designated at fair value and replacement value, net of tax Compensation and own shares-related capital components (including share premium) Goodwill, net of tax, less hybrid capital and loss-absorbing capital Foreign currency translation effects Accruals for proposed dividends to shareholders Other Total movement Common equity tier 1 capital at the end of the year Additional tier 1 capital at the beginning of the year Issuance of high-trigger loss-absorbing capital Issuance of low-trigger loss-absorbing capital Call of hybrid capital Goodwill, net of tax, offset against hybrid capital and loss-absorbing capital Foreign currency translation effects and other Total movement Additional tier 1 capital at the end of the year Tier 2 capital at the beginning of the year Issuance of loss-absorbing capital Repurchase of capital instruments Foreign currency translation effects and other Total movement Tier 2 capital at the end of the year Total capital at the end of the year 2015 2014 Phase-in Fully applied 42,863 5,306 (715) (1,467) (359) 1,602 (3,334)2 295 (578) (208) 281 (257) (3,188) 136 (2,485) 40,378 0 3,381 2,266 (1,040) (251) (175) 4,181 4,181 13,448 0 (690) (525) (1,214) 12,233 56,792 28,941 5,306 (715) 310 265 (578) (208) 30 (234) (3,188) 114 1,102 30,044 467 3,381 2,266 40 5,687 6,154 11,398 0 (161) (161) 11,237 47,435 Phase-in 42,179 2,286 (476) (1,333) 690 754 (699)1 144 (168) 420 590 1,188 (2,827) 113 683 42,863 0 467 0 0 (563) 96 0 0 8,636 4,567 (1,211) 1,456 4,812 13,448 56,310 Fully applied 28,908 2,286 (476) 150 (461) (168) 420 27 948 (2,827) 133 33 28,941 0 467 0 0 467 467 5,665 4,567 1,166 5,733 11,398 40,806 1 31 December 2015 reflects the 20% additional phase-in effect, resulting in an increase from 20% to 40%. 31 December 2014 reflects the phase-in effect of 20%. 2 Includes the effect of accelerating the phase-in of the cumulative difference between IAS19 (revised) and IAS19, as well as the associated reversal of deferred tax assets recognized for tax loss carry-forwards. Audited | EDTF | Our AT1 capital increased by CHF 5.7 billion to CHF 6.2 billion on a fully applied basis, mainly due to the afore- mentioned issuances of AT1 capital in 2015. As of 31 December 2015, our high-trigger loss-absorbing AT1 capital amounted to CHF 3.8 billion and our low-trigger loss-absorbing AT1 capital amounted to CHF 2.3 billion. High-trigger loss-absorbing AT1 capital as of 31 December 2015 included CHF 1.0 billion of DCCP awards granted for the performance years 2015 and 2014. On a phase-in basis, our AT1 capital was CHF 4.2 billion as of 31 December 2015, consisting of the aforementioned high-trig- ger and low-trigger loss-absorbing capital of CHF 3.8 billion and CHF 2.3 billion, respectively, as well as CHF 2.0 billion in hybrid capital subject to phase-out. Low-trigger loss-absorbing capital and hybrid capital were partly offset by required deductions of CHF 3.9 billion related to goodwill. ➔ Refer to the “Additional tier 1 and tier 2 capital instruments” table on the following pages for details on the write-down triggers of our AT1 and tier 2 capital instruments 256 Tier 2 capital Audited | EDTF | Pillar 3 | During 2015, our tier 2 capital decreased by CHF 0.2 billion to CHF 11.2 billion on a fully applied basis and by CHF 1.2 billion to CHF 12.2 billion on a phase-in basis. The decrease in phase-in tier 2 capital was due to the repurchase of certain tier 2 capital instruments in December 2015 as part of a tender offer, as well as currency translation effects. As of 31 December 2015, tier 2 capital included CHF 10.3 bil- lion of low-trigger loss-absorbing capital, consisting of one euro- denominated and four US dollar-denominated subordinated notes. Moreover, our tier 2 capital included high-trigger loss- absorbing capital of CHF 0.9 billion, as outstanding DCCP awards granted for the performance years 2012 and 2013 qualify as tier 2 loss-absorbing capital. The remainder of phase-in tier 2 capital of CHF 1.0 billion con- sisted of outstanding tier 2 instruments which will be phased out by 2019. ➔ Refer to the “Additional tier 1 and tier 2 capital instruments” table on the following pages for details on the write-down triggers of our tier 2 capital instruments Audited | EDTF | Pillar 3 | Reconciliation IFRS equity to Swiss SRB capital CHF million Equity attributable to UBS Group AG shareholders Equity attributable to non-controlling interests in UBS AG Equity attributable to preferred noteholders and other non-controlling interests Total IFRS equity Equity attributable to preferred noteholders and other non-controlling interests Defined benefit plans (before phase-in, as applicable)1 Defined benefit plans, phase-in2 Deferred tax assets recognized for tax loss carry-forwards (before phase-in, as applicable) Deferred tax assets recognized for tax loss carry-forwards, phase-in2 Deferred tax assets on temporary differences, excess over threshold Goodwill, net of tax, less hybrid capital and loss-absorbing capital3 Intangible assets, net of tax Unrealized (gains) / losses from cash flow hedges, net of tax Compensation and own shares-related capital components (including share premium) Own credit related to financial liabilities designated at fair value and replacement values, net of tax Unrealized gains related to financial investments available-for-sale, net of tax Prudential valuation adjustments Consolidation scope Accruals for proposed dividends to shareholders Other4 Common equity tier 1 capital High-trigger loss-absorbing capital Low-trigger loss-absorbing capital Hybrid capital subject to phase-out Goodwill, net of tax, offset against hybrid capital and loss-absorbing capital Additional tier 1 capital Tier 1 capital Tier 2 capital Total capital Phase-in Fully applied 31.12.15 31.12.14 31.12.15 31.12.14 55,313 1,995 57,308 (1,995) (20) (2,988) (702) (2,618) (323) (1,638) (1,383) (442) (402) (83) (130) (3,188) (1,018) 40,378 3,828 2,326 1,954 (3,927) 4,181 44,559 12,233 56,792 50,608 1,702 2,058 54,368 (2,058) 3,997 (799) (1,605) 0 (3,010) (410) (2,156) (1,219) 136 (384) (123) (88) (2,827) (959) 42,863 467 0 3,210 (3,677) 0 42,863 13,448 56,310 55,313 1,995 57,308 (1,995) (50) 50,608 1,702 2,058 54,368 (2,058) 0 (7,468) (8,047) (2,598) (6,545) (323) (1,638) (1,383) (442) (402) (83) (130) (3,188) (1,018) 30,044 3,828 2,326 6,154 36,198 11,237 47,435 (604) (6,687) (410) (2,156) (1,219) 136 (384) (123) (88) (2,827) (959) 28,941 467 0 467 29,408 11,398 40,806 1 Phase-in number net of tax, fully applied number pre-tax. 2 As of 31 December 2015, the phase-in deduction applied was 40%; as of 31 December 2014, the phase-in deduction applied was 20%. 3 Includes good- will related to significant investments in financial institutions of CHF 360 million. 4 Includes the net charge for the compensation-related increase in high-trigger loss-absorbing capital for tier 2 and additional tier 1 capital and other items. 257 Risk, treasury and capital management Risk, treasury and capital management Capital management EDTF | Pillar 3 | Additional tier 1 and tier 2 capital instruments1 Additional tier 1 capital instruments (Swiss SRB compliant) CHF million, except where indicated No. 1 2 3 4 5 6 Issuer UBS Group AG, Switzerland, or employing subsidiaries3 UBS Group AG, Switzerland UBS Group AG, Switzerland UBS Group AG, Switzerland UBS Group AG, Switzerland UBS Group AG, Switzerland, or employing subsidiaries3 Total additional tier 1 capital ISIN Issue date Outstanding amount as of 31.12.15 Amount recognized in regulatory capital as of 31.12.15 CH0271428309 CH0271428317 CH0271428333 CH0286864027 31.12.14 19.02.15 19.02.15 19.02.15 07.08.15 31.12.15 CHF 474 EUR 1,000 USD 1,250 USD 1,250 USD 1,575 CHF 518 CHF 474 CHF 1,081 CHF 1,249 CHF 1,245 CHF 1,587 CHF 518 CHF 6,154 High-trigger loss-absorbing tier 2 capital instruments (Swiss SRB compliant) CHF million, except where indicated No. 1 2 Issuer UBS Group AG, Switzerland, or employing subsidiaries3, 4 UBS Group AG, Switzerland, or employing subsidiaries3, 4 Total high-trigger loss-absorbing tier 2 capital Low-trigger loss-absorbing tier 2 capital instruments (Swiss SRB compliant) CHF million, except where indicated ISIN Issue date 31.12.12 31.12.13 Outstanding amount as of 31.12.15 Amount recognized in regulatory capital as of 31.12.15 CHF 434 CHF 478 CHF 434 CHF 478 CHF 912 No. Issuer 1 2 3 4 5 UBS AG, Switzerland, Jersey branch UBS AG, Switzerland, Stamford branch UBS AG, Switzerland UBS AG, Switzerland UBS AG, Switzerland Total low-trigger loss-absorbing tier 2 capital Phase-out tier 2 capital instruments CHF million, except where indicated No. Issuer 1 2 3 4 5 6 7 UBS AG, Switzerland, New York branch UBS AG, Switzerland, New York branch UBS AG, Switzerland, New York branch UBS AG, Switzerland, Jersey branch UBS AG, Switzerland, Jersey branch UBS AG, Switzerland, Jersey branch UBS AG, Switzerland Total phase-out tier 2 capital ISIN XS0747231362 US90261AAB89 CH0214139930 CH0236733827 CH0244100266 Issue date 22.02.12 17.08.12 22.05.13 13.02.14 15.05.14 Outstanding amount as of 31.12.15 Amount recognized in regulatory capital as of 31.12.15 USD 2,000 USD 2,000 USD 1,500 EUR 2,000 USD 2,500 CHF 2,004 CHF 1,959 CHF 1,482 CHF 2,279 CHF 2,602 CHF 10,325 ISIN Issue date Outstanding amount as of 31.12.15 Amount recognized in regulatory capital as of 31.12.15 US870836AC77 US870845AC84 US87083KAM45 XS0062270581 XS0257741834 XS0331313055 CH0035789210 21.07.95 03.09.96 20.06.97 18.12.95 21.06.06 19.11.07 27.12.07 USD 251 USD 218 USD 220 GBP 61 GBP 113 GBP 130 CHF 192 CHF 251 CHF 215 CHF 44 CHF 91 CHF 166 CHF 190 CHF 39 CHF 996 1 Refer to “Bondholder information” at www.ubs.com/investors for more information on the key features of the hybrid capital instruments subject to phase-out under Swiss SRB rules and outstanding as of 31 December 2015. 2 The capital instruments would be written down due to a viability event, as defined in the terms and conditions of the instruments, if FINMA determined that a write-down were necessary to ensure UBS’s via- bility, or UBS received a commitment of governmental support that FINMA determined to be necessary to ensure UBS’s viability. Refer to “Bondholder information” at www.ubs.com/investors for more information on the terms and conditions of the instruments and refer to item 23 in “Note 1a Significant accounting polices" in the “Consolidated financial statements” section of this report for more information on the accounting treatment of such instruments. 3 Relates to DCCP awards. 4 Issued by UBS AG and transferred in the fourth quarter of 2014 to UBS Group AG as part of the Group reorganization. 5 CET1 write-down thresholds are set on UBS AG (consolidated) level. 258 Coupon rate and frequency of payment Maturity date Optional call date Issues in CHF: 4%, issues in USD: 7.125%, annually 5.75% / Reset Interest Rate, annually 7.125% / Reset Interest Rate, annually 7.00% / Reset Interest Rate, annually 6.875% / Reset Interest Rate, annually Issues in CHF: 4.15%, issues in USD: 7.35%, annually Perpetual Perpetual Perpetual Perpetual Perpetual Perpetual 01.03.20 19.02.22 19.02.20 19.02.25 07.08.25 01.03.21 Write-down trigger2 CET1 ratio < 7 / 10% or viability event CET1 ratio < 5.125% or viability event CET1 ratio < 7% or viability event CET1 ratio < 5.125% or viability event CET1 ratio < 7% or viability event CET1 ratio < 7 / 10% or viability event Coupon rate and frequency of payment Maturity date Optional call date Issues in CHF: 5.40%, issues in USD: 6.25%, annually Issues in CHF: 3.5%, issues in USD: 5.125%, annually 01.03.18 01.03.19 Write-down trigger2 CET1 ratio < 7% or viability event CET1 ratio < 7 / 10% or viability event Coupon rate and frequency of payment Maturity date Optional call date 7.25% / 6.061% + Mid Market Swap Rate from 22 February 2017, annually 4.75% / 3.765% + Mid Market Swap Rate from 22 May 2018, annually 4.75% / 3.40% + Mid Market Swap Rate from 12 February 2021, annually 7.625%, semi-annually 5.125%, annually Write-down trigger2, 5 CET1 ratio < 5% or viability event CET1 ratio < 5% or viability event CET1 ratio < 5% or viability event CET1 ratio < 5% or viability event CET1 ratio < 5% or viability event 22.02.22 17.08.22 22.05.23 12.02.26 12.05.24 15.07.25 01.09.26 15.06.17 18.12.25 21.06.21 19.11.24 27.12.17 22.02.17 22.05.18 12.02.21 21.06.16 19.11.19 Coupon rate and frequency of payment Maturity date Optional call date 7.5%, semi-annually 7.75%, semi-annually 7.375%, semi-annually 8.75%, annually 5.25% / 3-month Sterling LIBOR + 1.29%, annually / quarterly 6.375% / 3-month Sterling LIBOR + 2.10%, annually / quarterly 4.125%, annually Additional tier 1 and tier 2 capital instruments1 Additional tier 1 capital instruments (Swiss SRB compliant) CHF million, except where indicated No. Issuer UBS Group AG, Switzerland, or employing subsidiaries3 UBS Group AG, Switzerland UBS Group AG, Switzerland UBS Group AG, Switzerland UBS Group AG, Switzerland UBS Group AG, Switzerland, or employing subsidiaries3 Total additional tier 1 capital High-trigger loss-absorbing tier 2 capital instruments (Swiss SRB compliant) CHF million, except where indicated No. Issuer UBS Group AG, Switzerland, or employing subsidiaries3, 4 UBS Group AG, Switzerland, or employing subsidiaries3, 4 Total high-trigger loss-absorbing tier 2 capital Low-trigger loss-absorbing tier 2 capital instruments (Swiss SRB compliant) CHF million, except where indicated 1 2 3 4 5 6 1 2 1 2 3 4 5 1 2 3 4 5 6 7 No. Issuer UBS AG, Switzerland, Jersey branch UBS AG, Switzerland, Stamford branch UBS AG, Switzerland UBS AG, Switzerland UBS AG, Switzerland Total low-trigger loss-absorbing tier 2 capital Phase-out tier 2 capital instruments CHF million, except where indicated No. Issuer UBS AG, Switzerland, New York branch UBS AG, Switzerland, New York branch UBS AG, Switzerland, New York branch UBS AG, Switzerland, Jersey branch UBS AG, Switzerland, Jersey branch UBS AG, Switzerland, Jersey branch UBS AG, Switzerland Total phase-out tier 2 capital ISIN Issue date as of 31.12.15 as of 31.12.15 Outstanding amount in regulatory capital Amount recognized CH0271428309 CH0271428317 CH0271428333 CH0286864027 31.12.14 19.02.15 19.02.15 19.02.15 07.08.15 31.12.15 CHF 474 EUR 1,000 USD 1,250 USD 1,250 USD 1,575 CHF 518 Amount recognized Outstanding amount in regulatory capital as of 31.12.15 as of 31.12.15 ISIN Issue date 31.12.12 31.12.13 CHF 434 CHF 478 ISIN Issue date as of 31.12.15 as of 31.12.15 Outstanding amount in regulatory capital Amount recognized XS0747231362 US90261AAB89 CH0214139930 CH0236733827 CH0244100266 22.02.12 17.08.12 22.05.13 13.02.14 15.05.14 USD 2,000 USD 2,000 USD 1,500 EUR 2,000 USD 2,500 ISIN Issue date as of 31.12.15 as of 31.12.15 Outstanding amount in regulatory capital Amount recognized US870836AC77 US870845AC84 US87083KAM45 XS0062270581 XS0257741834 XS0331313055 CH0035789210 21.07.95 03.09.96 20.06.97 18.12.95 21.06.06 19.11.07 27.12.07 USD 251 USD 218 USD 220 GBP 61 GBP 113 GBP 130 CHF 192 CHF 474 CHF 1,081 CHF 1,249 CHF 1,245 CHF 1,587 CHF 518 CHF 6,154 CHF 434 CHF 478 CHF 912 CHF 2,004 CHF 1,959 CHF 1,482 CHF 2,279 CHF 2,602 CHF 10,325 CHF 251 CHF 215 CHF 44 CHF 91 CHF 166 CHF 190 CHF 39 CHF 996 1 Refer to “Bondholder information” at www.ubs.com/investors for more information on the key features of the hybrid capital instruments subject to phase-out under Swiss SRB rules and outstanding as of 31 December 2015. 2 The capital instruments would be written down due to a viability event, as defined in the terms and conditions of the instruments, if FINMA determined that a write-down were necessary to ensure UBS’s via- bility, or UBS received a commitment of governmental support that FINMA determined to be necessary to ensure UBS’s viability. Refer to “Bondholder information” at www.ubs.com/investors for more information on the terms and conditions of the instruments and refer to item 23 in “Note 1a Significant accounting polices" in the “Consolidated financial statements” section of this report for more information on the accounting treatment of such instruments. 3 Relates to DCCP awards. 4 Issued by UBS AG and transferred in the fourth quarter of 2014 to UBS Group AG as part of the Group reorganization. 5 CET1 write-down thresholds are set on UBS AG (consolidated) level. Coupon rate and frequency of payment Maturity date Optional call date Issues in CHF: 4%, issues in USD: 7.125%, annually 5.75% / Reset Interest Rate, annually 7.125% / Reset Interest Rate, annually 7.00% / Reset Interest Rate, annually 6.875% / Reset Interest Rate, annually Issues in CHF: 4.15%, issues in USD: 7.35%, annually Perpetual Perpetual Perpetual Perpetual Perpetual Perpetual 01.03.20 19.02.22 19.02.20 19.02.25 07.08.25 01.03.21 Write-down trigger2 CET1 ratio < 7 / 10% or viability event CET1 ratio < 5.125% or viability event CET1 ratio < 7% or viability event CET1 ratio < 5.125% or viability event CET1 ratio < 7% or viability event CET1 ratio < 7 / 10% or viability event Coupon rate and frequency of payment Maturity date Optional call date Issues in CHF: 5.40%, issues in USD: 6.25%, annually Issues in CHF: 3.5%, issues in USD: 5.125%, annually 01.03.18 01.03.19 Write-down trigger2 CET1 ratio < 7% or viability event CET1 ratio < 7 / 10% or viability event Coupon rate and frequency of payment Maturity date Optional call date 7.25% / 6.061% + Mid Market Swap Rate from 22 February 2017, annually 4.75% / 3.765% + Mid Market Swap Rate from 22 May 2018, annually 4.75% / 3.40% + Mid Market Swap Rate from 12 February 2021, annually 7.625%, semi-annually 5.125%, annually 22.02.22 17.08.22 22.05.23 12.02.26 12.05.24 22.02.17 22.05.18 12.02.21 Write-down trigger2, 5 CET1 ratio < 5% or viability event CET1 ratio < 5% or viability event CET1 ratio < 5% or viability event CET1 ratio < 5% or viability event CET1 ratio < 5% or viability event Coupon rate and frequency of payment Maturity date Optional call date 7.5%, semi-annually 7.75%, semi-annually 7.375%, semi-annually 8.75%, annually 5.25% / 3-month Sterling LIBOR + 1.29%, annually / quarterly 6.375% / 3-month Sterling LIBOR + 2.10%, annually / quarterly 4.125%, annually 15.07.25 01.09.26 15.06.17 18.12.25 21.06.21 19.11.24 27.12.17 21.06.16 19.11.19 259 Risk, treasury and capital management Risk, treasury and capital management Capital management Advanced measurement approach model Pillar 3 | We have estimated the loss in capital that we could incur as a result of the risks associated with the matters described in “Note 22 Provisions and contingent liabilities” to our consolidated financial statements. For this purpose, we have used the advanced measurement approach (AMA) methodology that we use when determining the capital requirements associated with operational risks, based on a 99.9% confidence level over a 12-month hori- zon. The methodology takes into consideration UBS and industry experience for the AMA operational risk categories to which those matters correspond, as well as the external environment affecting risks of these types, in isolation from other areas. On this stand- alone basis, we estimate the loss in capital that we could incur over a 12-month period as a result of our risks associated with these operational risk categories at CHF 3.7 billion as of 31 Decem- ber 2015. Because this estimate is based upon historical data for the relevant risk categories, it does not constitute a subjective assessment of UBS’s actual exposures in those matters and does not take into account any provisions recognized for those matters. For this reason, and because some of those matters are not expected to be resolved within the next 12 months, any possible losses that we may incur with respect to these matters may be materially more or materially less than this estimated amount. In accordance with FINMA requirements, we reviewed the methodology and calibration of our AMA model for operational risk during 2015. Subject to FINMA approval, we anticipate that we will implement the revised model in the first quarter of 2016 and expect that the estimated capital loss described in the para- graphs above would be greater under the revised model. ➔ Refer to “Note 22 Provisions and contingent liabilities” in the “Consolidated financial statements” section of this report for more information groups to disclose the main features of eligible capital instruments and their terms and conditions. ➔ Refer to “Bondholder information” at www.ubs.com/investors for more information on the capital instruments of UBS Group and of UBS AG both on a consolidated and a standalone basis In order to fulfill BIS and FINMA Pillar 3 composition of capital disclosure requirements, we disclose a full reconciliation of all regulatory capital elements to the published IFRS balance sheet. ➔ Refer to the “UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations” section of this report for more information BIS and Swiss SRB rules require banks to disclose differences between the accounting scope of consolidation and the regula- tory scope of consolidation. The scope of consolidation for the purpose of calculating Group regulatory capital is generally the same as the scope under IFRS and includes subsidiaries directly or indirectly controlled by UBS Group AG that are active in the banking and finance sector. However, subsidiaries consolidated under IFRS that are active in sectors other than banking and finance are excluded from the regulatory scope of consolidation. ➔ Refer to “Note 1 Summary of significant accounting policies” and “Note 30 Interests in subsidiaries and other entities” in the “Consolidated financial statements” section of this report for more information on the IFRS scope of consolidation and the list of significant subsidiaries included as of 31 December 2015 ➔ Refer to the “UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations” section of this report for more information on entities that are treated differently under the regulatory and the IFRS scope of consolida- tion Additional capital information Pillar 3 | In order to ensure the consistency and comparability of regulatory capital instruments disclosures for all market partici- pants, BIS and FINMA Pillar 3 rules require banks and banking Capital information for UBS AG, UBS Switzerland AG and UBS Limited on a standalone basis is disclosed in the “Legal entity financial and regulatory information” section of this report. 260 Differences between Swiss SRB and BIS capital Our Swiss SRB and BIS capital is the same on both a fully applied and a phase-in basis, except for two specific tier 2 capital items. First, as of 31 December 2015, the amount of our tier 2 high- trigger loss-absorbing capital, in the form of DCCP awards for 2012 and 2013, was CHF 452 million higher under Swiss SRB rules than under BIS rules. Second, a portion of unrealized gains on financial investments classified as available-for-sale, totaling CHF 202 million as of 31 December 2015, was recognized as tier 2 capital under BIS rules, but not under Swiss SRB regula- tions. Differences between Swiss SRB and BIS capital information As of 31.12.15 CHF million, except where indicated Common equity tier 1 capital Common equity tier 1 capital Additional tier 1 capital High-trigger loss-absorbing capital Low-trigger loss-absorbing capital Total additional tier 1 capital Tier 1 capital Tier 2 capital High-trigger loss-absorbing capital Low-trigger loss-absorbing capital Phase-out capital and other tier 2 capital Total tier 2 capital Total capital Common equity tier 1 capital ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) Risk-weighted assets Phase-in Fully applied Swiss SRB BIS Differences Swiss SRB versus BIS Swiss SRB BIS Differences Swiss SRB versus BIS 40,378 40,378 3,828 353 4,181 3,828 353 4,181 44,559 44,559 912 10,325 996 12,233 56,792 19.0 21.0 26.8 460 10,325 1,198 11,983 56,542 19.0 21.0 26.6 212,302 212,302 0 0 0 0 0 452 0 (202) 250 250 0.0 0.0 0.2 0 30,044 30,044 3,828 2,326 6,154 3,828 2,326 6,154 36,198 36,198 912 10,325 11,237 47,435 14.5 17.4 22.9 460 10,325 202 10,987 47,185 14.5 17.4 22.7 207,530 207,530 0 0 0 0 0 452 0 (202) 250 250 0.0 0.0 0.2 0 261 Risk, treasury and capital management Fully applied risk-weighted assets CHF billion 300 240 180 120 60 0 216 77 16 15 109 216 79 15 15 108 210 75 13 15 107 216 75 17 16 108 207 75 12 16 104 31.12.14 31.3.15 30.6.15 30.9.15 31.12.15 Credit risk Non-counterparty-related risk Market risk Operational risk Risk, treasury and capital management Capital management Risk-weighted assets (UBS Group) EDTF | Our risk-weighted assets (RWA) are the same under Swiss SRB and BIS rules. Moreover, RWA on a fully applied basis are the same as on a phase-in basis, except for differences related to defined benefit plans and deferred tax assets (DTAs) on temporary differences. On a fully applied basis, any net defined benefit pension asset recognized in accordance with IAS 19 (revised) is fully deducted from CET1 capital. On a phase-in basis, the deduction of net defined benefit pension assets from capital is phased in, and the portion of the net defined benefit pension asset that is not yet deducted from CET1 capital is risk weighted at 100%. On a fully applied basis, DTAs on temporary differences below the fully applied deduction threshold are risk weighted at 250%. On a phase-in basis, the amount that is risk weighted at 250% is higher due to the higher deduction threshold. Due to the aforementioned differences, as of 31 December 2015, our phase-in RWA were CHF 4.8 billion higher than our fully applied RWA, entirely attributable to non-counterparty- related risk RWA. RWA decreased by CHF 9.0 billion to CHF 207.5 billion on a fully applied basis as of 31 December 2015, below our short- to medium-term expectation of around CHF 250 billion. On a phase- in basis, RWA decreased by CHF 8.6 billion to CHF 212.3 billion as of 31 December 2015. The “Risk-weighted assets by exposure segment” and “Risk-weighted assets movement by key driver – fully applied” tables on the following pages provide additional granularity on RWA movements. ➔ Refer to “Table 2: Detailed segmentation of exposures and risk-weighted assets” in the “UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations” section of this report for more information on gross and net exposure at default by exposure segment 262 EDTF | Pillar 3 | Risk-weighted assets by exposure segment CHF billion Credit risk Advanced IRB approach Sovereigns Banks Corporates Retail Other2 Standardized approach Sovereigns Banks Corporates Central counterparties Retail Other2 Non-counterparty-related risk Deferred tax assets recognized for temporary differences Property, equipment and software Other Market risk Value-at-risk (VaR) Stressed value-at-risk (SVaR) Add-on for risks-not-in-VaR Incremental risk charge (IRC) Comprehensive risk measure (CRM) Securitization / re-securitization in the trading book Operational risk of which: incremental RWA4 Total RWA, phase-in Phase-out items5 Total RWA, fully applied Wealth Manage- ment Wealth Manage- ment Americas Personal & Corporate Banking Asset Manage- ment Investment Bank CC – Services CC – Group ALM CC – Non- core and Legacy Portfolio 31.12.15 12.6 8.5 0.0 0.0 0.5 7.4 0.6 4.1 0.2 0.1 1.2 0.0 2.3 0.3 0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.6 5.5 25.3 0.0 25.3 8.5 3.4 0.0 0.0 0.0 3.3 0.1 5.1 0.0 0.4 1.2 0.0 3.4 0.1 0.0 0.0 0.0 0.0 1.0 0.2 0.4 0.0 0.4 0.0 0.0 12.4 1.7 21.9 0.0 21.9 32.9 31.2 0.1 1.1 15.1 13.6 1.4 1.7 0.0 0.1 0.1 0.0 0.1 1.4 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.6 0.5 34.6 0.0 34.6 1.7 1.0 0.0 0.0 0.0 0.0 1.0 0.7 0.0 0.1 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.9 0.0 2.6 0.0 2.6 35.5 32.0 0.5 5.1 23.5 0.0 2.9 3.6 0.0 0.1 1.7 1.8 0.0 (0.1) 0.1 0.0 0.0 0.0 10.5 1.6 2.9 3.3 2.5 0.0 0.2 16.8 0.0 62.9 0.0 62.9 1.3 0.2 0.0 0.0 0.0 0.0 0.1 1.1 0.0 0.1 1.0 0.0 0.0 0.0 20.5 12.9 7.5 0.0 (2.9)3 (0.8) (1.4) 0.0 (0.8) 0.0 0.0 9.5 3.0 28.3 4.7 23.6 5.0 3.9 2.0 0.9 1.0 0.0 0.1 1.0 0.0 0.0 0.3 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.9 0.1 0.2 0.1 0.5 0.0 0.0 0.1 0.0 6.0 0.0 6.0 6.9 5.0 0.1 0.8 1.7 0.0 2.3 2.0 0.0 0.2 1.0 0.3 0.0 0.4 0.0 0.0 0.0 0.0 2.6 0.4 0.6 0.8 0.2 0.1 0.5 21.1 2.6 30.7 0.0 30.7 Total capital requirement1 13.2 10.8 0.3 1.0 5.3 3.1 1.1 2.4 0.0 0.1 0.9 0.4 0.7 0.3 2.6 1.6 1.0 0.0 1.5 0.2 0.4 0.5 0.3 0.0 0.1 9.5 1.7 26.8 Total RWA 104.4 85.2 2.7 7.9 41.8 24.2 8.6 19.2 0.3 1.1 7.1 2.8 5.8 2.1 20.7 12.9 7.6 0.2 12.1 1.5 2.8 4.2 2.7 0.1 0.7 75.1 13.3 212.3 4.8 207.5 1 Calculated based on our Swiss SRB total capital requirement of 12.6% of RWA. 2 Includes securitization / re-securitization exposures in the banking book, equity exposures in the banking book according to the sim- ple risk weight method, credit valuation adjustments, settlement risk and business transfers. 3 Corporate Center – Services market risk RWA were negative, as they included the effect of portfolio diversification across businesses. 4 Incremental RWA reflect the effect of the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA. 5 Phase-out items are entirely related to non-counterparty-related risk RWA. 263 Risk, treasury and capital management Risk, treasury and capital management Capital management EDTF | Pillar 3 | Risk-weighted assets by exposure segment (continued) CHF billion Credit risk Advanced IRB approach Sovereigns Banks Corporates Retail Other2 Standardized approach Sovereigns Banks Corporates Central counterparties Retail Other2 Non-counterparty-related risk Deferred tax assets on temporary differences Property, equipment and software Other3 Market risk Value-at-risk (VaR) Stressed value-at-risk (SVaR) Add-on for risks-not-in-VaR Incremental risk charge (IRC) Comprehensive risk measure (CRM) Securitization / re-securitization in the trading book Operational risk of which: incremental RWA5 Total RWA, phase-in Phase-out items6 Total RWA, fully applied Wealth Manage- ment Wealth Manage- ment Americas Personal & Corporate Banking Asset Manage- ment Investment Bank CC – Services CC – Group ALM CC – Non- core and Legacy Portfolio 31.12.14 12.3 8.2 0.0 0.0 0.4 7.1 0.6 4.1 0.1 0.2 1.1 0.0 2.2 0.5 0.6 0.0 0.0 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.9 5.5 25.8 0.4 25.4 8.7 3.0 0.0 0.0 0.0 2.9 0.1 5.7 0.0 0.9 3.0 0.0 1.7 0.1 0.2 0.0 0.0 0.2 1.0 0.2 0.5 0.0 0.3 0.0 0.0 11.9 1.7 21.9 0.2 21.7 31.4 29.8 0.1 1.1 15.4 11.9 1.3 1.7 0.0 0.1 0.3 0.0 0.1 1.1 1.4 0.0 0.0 1.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.6 0.5 34.4 1.4 33.1 3.0 1.5 0.0 0.0 0.0 0.0 1.5 1.5 0.0 0.1 1.4 0.0 0.0 0.0 0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 0.0 3.9 0.1 3.8 35.0 29.3 0.7 3.7 21.0 0.0 3.9 5.7 0.0 0.2 1.8 0.7 0.0 3.0 0.3 0.0 0.1 0.3 13.6 1.8 4.0 5.0 2.5 0.0 0.3 18.1 1.2 67.0 0.2 66.7 1.1 0.2 0.0 0.1 0.0 0.0 0.1 0.9 0.0 0.1 0.8 0.0 0.0 0.0 16.4 8.9 6.6 0.9 (4.5)4 (1.0) (2.4) 0.0 (1.1) 0.0 0.0 12.1 6.0 25.1 2.1 23.0 4.3 4.2 0.4 1.7 2.0 0.0 0.0 0.1 0.0 0.5 1.2 0.8 0.0 (2.5) 0.0 0.0 0.0 0.0 2.7 0.5 1.2 0.1 1.0 0.0 0.0 0.1 0.0 7.1 0.0 7.1 12.8 10.2 0.1 1.4 2.3 0.0 6.4 2.6 0.0 0.3 1.0 0.0 0.0 1.3 0.0 0.0 0.0 0.0 3.6 0.5 0.8 0.9 0.4 0.1 1.0 19.3 2.6 35.7 0.0 35.7 Total capital requirement1 12.1 9.6 0.1 0.9 4.6 2.4 1.5 2.5 0.0 0.3 1.2 0.2 0.4 0.4 2.1 1.0 0.8 0.4 1.8 0.2 0.5 0.7 0.3 0.0 0.1 8.5 1.9 24.6 Total RWA 108.6 86.3 1.3 8.1 41.1 21.9 13.9 22.3 0.2 2.4 10.6 1.5 4.0 3.6 19.1 8.9 6.8 3.4 16.5 2.0 4.1 5.9 3.0 0.1 1.3 76.7 17.5 220.9 4.4 216.5 1 Calculated based on our Swiss SRB total capital requirement of 11.1% of RWA. 2 Includes securitization / re-securitization exposures in the banking book, equity exposures in the banking book according to the sim- ple risk weight method, credit valuation adjustments, settlement risk and business transfers. 3 Primarily relates to defined benefit plans. 4 Corporate Center – Services market risk RWA were negative, as they included the effect of portfolio diversification across businesses. 5 Incremental RWA reflect the effect of the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA. 6 Phase-out items are entirely related to non-counterparty-related risk RWA. 264 EDTF | Pillar 3 | Risk-weighted assets by exposure segment (continued) CHF billion Credit risk Advanced IRB approach Sovereigns Banks Corporates Retail Other Standardized approach Sovereigns Banks Corporates Central counterparties Retail Other Non-counterparty-related risk Deferred tax assets on temporary differences Property, equipment and software Other Market risk Value-at-risk (VaR) Stressed value-at-risk (SVaR) Add-on for risks-not-in-VaR Incremental risk charge (IRC) Comprehensive risk measure (CRM) Securitization / re-securitization in the trading book Operational risk of which: incremental RWA Total RWA, phase-in Phase-out items Total RWA, fully applied Wealth Manage- ment 0.3 0.3 0.0 0.0 0.1 0.3 0.0 0.0 0.1 (0.1) 0.1 0.0 0.1 (0.2) (0.5) 0.0 0.0 (0.5) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.3) 0.0 (0.5) (0.4) (0.1) Wealth Manage- ment Americas (0.2) 0.4 0.0 0.0 0.0 0.4 0.0 (0.6) 0.0 (0.5) (1.8) 0.0 1.7 0.0 (0.2) 0.0 0.0 (0.2) 0.0 0.0 (0.1) 0.0 0.1 0.0 0.0 0.5 0.0 0.0 (0.2) 0.2 31.12.15 vs. 31.12.14 Personal & Corporate Banking Asset Manage- ment Investment Bank CC – Services CC – Group ALM CC – Non- core and Legacy Portfolio 1.5 1.4 0.0 0.0 (0.3) 1.7 0.1 0.0 0.0 0.0 (0.2) 0.0 0.0 0.3 (1.3) 0.0 0.0 (1.4) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 (1.4) 1.5 (1.3) (0.5) 0.0 0.0 0.0 0.0 (0.5) (0.8) 0.0 0.0 (0.8) 0.0 0.0 0.0 (0.1) 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 (1.3) (0.1) (1.2) 0.5 2.7 (0.2) 1.4 2.5 0.0 (1.0) (2.1) 0.0 (0.1) (0.1) 1.1 0.0 (3.1) (0.2) 0.0 (0.1) (0.3) (3.1) (0.2) (1.1) (1.7) 0.0 0.0 (0.1) (1.3) (1.2) (4.1) (0.2) (3.8) 0.2 0.0 0.0 (0.1) 0.0 0.0 0.0 0.2 0.0 0.0 0.2 0.0 0.0 0.0 4.1 4.0 0.9 (0.9) 1.6 0.2 1.0 0.0 0.3 0.0 0.0 (2.6) (3.0) 3.2 2.6 0.6 0.7 (0.3) 1.6 (0.8) (1.0) 0.0 0.1 0.9 0.0 (0.5) (0.9) (0.1) 0.0 2.5 0.0 0.0 0.0 0.0 (1.8) (0.4) (1.0) 0.0 (0.5) 0.0 0.0 0.0 0.0 (1.1) 0.0 (1.1) (5.9) (5.2) 0.0 (0.6) (0.6) 0.0 (4.1) (0.6) 0.0 (0.1) 0.0 0.3 0.0 (0.9) 0.0 0.0 0.0 0.0 (1.0) (0.1) (0.2) (0.1) (0.2) 0.0 (0.5) 1.8 0.0 (5.0) 0.0 (5.0) Total RWA (4.2) (1.1) 1.4 (0.2) 0.7 2.3 (5.3) (3.1) 0.1 (1.3) (3.5) 1.3 1.8 (1.5) 1.6 4.0 0.8 (3.2) (4.4) (0.5) (1.3) (1.7) (0.3) 0.0 (0.6) (1.6) (4.2) (8.6) 0.4 (9.0) 265 Risk, treasury and capital management Risk, treasury and capital management Capital management EDTF | Pillar 3 | Risk-weighted assets movement by key driver – fully applied Wealth Manage- ment Americas Personal & Corporate Banking Asset Manage- ment 21.7 (0.2) 0.0 0.0 0.0 0.0 (0.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.0 0.5 33.1 1.5 2.3 0.5 0.0 0.0 (1.1) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.8 (1.3) 0.0 0.0 (0.8) 0.0 (0.4) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 Investment Bank 66.7 CC - Services 23.0 0.5 3.4 0.0 0.0 0.0 (2.2) (0.7) (0.1) 0.0 0.0 (3.1) 0.0 (1.5) (0.6) (1.0) (1.3) (1.2) (0.1) 0.2 0.0 0.0 0.0 0.0 0.5 (0.3) 1.4 1.5 (0.1) 1.61 0.0 1.5 0.1 (0.1) (2.6) (3.0) 0.3 0.6 23.6 0.2 21.9 1.5 34.6 (1.2) 2.6 (3.8) 62.9 CC – Group ALM CC – Non- core and Legacy Portfolio 7.1 0.7 0.9 0.0 0.0 0.0 (0.3) 0.1 0.0 0.0 0.0 (1.8) 0.0 0.0 0.0 (1.8) 0.0 0.0 0.1 (1.1) 6.0 35.7 (5.9) 0.0 0.0 0.0 0.8 (6.1) (0.6) 0.0 0.1 (0.1) (1.0) 0.0 0.1 0.5 (1.6) 1.8 0.0 1.8 (5.0) 30.7 Group 216.5 (4.2) 7.1 0.5 (0.8) 0.7 (9.9) (2.0) 1.4 1.5 (0.1) (4.4) 0.0 0.1 0.0 (4.5) (1.6) (4.2) 2.6 (9.0) 207.5 CHF billion Total RWA as of 31.12.14 Credit risk RWA movement during the year 2015: Methodology and policy changes Model updates Acquisitions and disposals of business operations Credit quality Asset size Foreign exchange movements Non-counterparty-related risk RWA movement during the year 2015: Exposure movements Foreign exchange movements Market risk RWA movement during the year 2015: Methodology changes Model updates Regulatory add-ons Movement in risk levels Operational risk RWA movement during the year 2015: Incremental operational risk Other model updates Total movement Total RWA as of 31.12.15 1 Includes the effect of portfolio diversification across businesses. Wealth Manage- ment 25.4 0.3 0.5 0.0 0.0 0.0 0.0 (0.3) (0.1) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 (0.3) 0.0 (0.2) (0.1) 25.3 266 RWA development in 2015 EDTF | Refer to “Definition of key RWA movement driver catego- ries” in this section for information about the definition of key driver categories and underlying judgments and assumptions. Credit risk Credit risk RWA decreased by CHF 4.2 billion to CHF 104.4 billion as of 31 December 2015. The decrease was mainly driven by asset size reductions of CHF 9.9 billion and currency effects of CHF 2.0 billion, partly offset by a CHF 7.6 billion effect from methodology and policy changes mandated by our regulator. Asset size The decrease in credit risk RWA due to asset size reductions of CHF 9.9 billion was driven by decreases in Corporate Center – Non-core and Legacy Portfolio, the Investment Bank and Personal & Corporate Banking. A decrease of CHF 6.1 billion in Corporate Center – Non-core and Legacy Portfolio was mainly due to a decrease of CHF 1.3 bil- lion in credit risk RWA from derivative exposures within the Banks and Corporates exposure segments, mainly due to derivative trade unwinds and novations as part of our ongoing reduction activity, as well as a corresponding decrease of CHF 2.6 billion, reported within the category “Other,” due to lower advanced and standardized credit valuation adjustments (CVAs). A further decrease of CHF 1.7 billion resulted from the sale of banking book securitization positions. In the Investment Bank, a decrease in asset size of CHF 2.2 bil- lion within the category “Other” was mainly due to client-driven exposure reductions, primarily in derivatives, resulting in lower advanced and standardized credit valuation adjustments (CVAs). In addition, credit risk RWA decreased by CHF 1.1 billion in Personal & Corporate Banking, mainly due to lower client activity in 2015, resulting in a reduction in loan exposures. Methodology and policy changes The increase in credit risk RWA from methodology and policy changes of CHF 7.6 billion was driven by an additional CHF 3.4 billion from an increase in the internal ratings-based multiplier on Investment Bank exposures to corporates, and by an additional CHF 2.8 billion in Personal & Corporate Banking resulting from an increase in the multipliers on income-producing real estate and Swiss residential mortgages, with an effect of CHF 1.0 billion and CHF 1.8 billion, respectively. Credit quality A reduction in credit hedges in Corporate Center – Non-core and Legacy Portfolio resulted in an increase in credit risk RWA of CHF 0.8 billion. Acquisitions and disposals of business operations The decrease of CHF 0.8 billion in credit risk RWA in Asset Man- agement was related to the disposal of our Alternative Fund Ser- vices business. Non-counterparty-related risk Phase-in non-counterparty-related risk RWA increased by CHF 1.6 billion to CHF 20.7 billion. This was mainly due to an increase of CHF 4.1 billion in Corporate Center – Services, driven by addi- tional DTAs on temporary differences, as well as property, equip- ment and software recognized in the year. This was partly offset by decreases of CHF 1.4 billion, CHF 0.9 billion and CHF 0.5 billion in Personal & Corporate Banking, Corporate Center – Services and Wealth Management, respectively, driven by the accelerated application of the IAS 19 (revised) treatment of defined benefit plans. Fully applied non-counterparty-related risk RWA increased by CHF 1.4 billion to CHF 15.9 billion, driven by the increase in DTAs on temporary differences and property, equipment and software as noted above. ➔ Refer to the “Group performance” section of this report for more information on deferred tax assets Market risk Market risk RWA decreased by CHF 4.4 billion to CHF 12.1 billion. The decrease was mainly due to reductions in value-at-risk (VaR) and stressed VaR of CHF 0.5 billion and CHF 1.3 billion, respec- tively, related to lower exposure in the 60-day average calculation, as well as a corresponding decrease of CHF 1.7 billion in the add- on for risks-not-in-VaR. These decreases were driven by risk reduc- tions due to market movements, primarily within Group ALM and the Investment Bank, as well as actively reduced securitization and re-securitization exposures in Corporate Center – Non-core and Legacy portfolio. ➔ Refer to the “Risk management and control” section of this report for more information on market risk developments, including stressed VaR and the risks-not-in-VaR framework Operational risk Operational risk RWA decreased by CHF 1.6 billion to CHF 75.1 billion. Incremental operational risk RWA based on the supple- mental operational risk capital analysis mutually agreed to by UBS and FINMA decreased by CHF 4.2 billion to CHF 13.3 billion as of 31 December 2015. Of this decrease, CHF 3.0 billion was attribut- able to Corporate Center – Services and CHF 1.2 billion to the Investment Bank. This effect was partly offset by a CHF 2.6 billion increase in operational risk RWA, mainly arising from an update to the parameters of our advanced measurement approach model used for the calculation of operational risk capital during 2015. 267 Risk, treasury and capital management Risk, treasury and capital management Capital management EDTF | Definition of key RWA movement driver categories We employ a range of analyses in our RWA monitoring framework to identify the key drivers of movements in the positions. This includes a top-down identification approach for several sub-components of the RWA movement, leveraging information available from our monthly detailed calculation, substantia- tion and control processes. Particular attention is paid to identifying and segmenting items within the day-to-day control of the business and those items that are driven by changes in risk models or methodology. Movements Key driver description Credit risk RWA movements Methodology and policy changes Model updates Represents RWA movements due to methodological changes in calculations driven by regulatory policy changes, including revisions to existing regulations, new regulations and add-ons mandated by our regulator. The effect of methodology and policy changes on RWA is estimated based on the portfolio at the time of the implementation of the change. Represents RWA movements arising from the implementation of new models and from parameter changes to existing models. The RWA effect of model updates is estimated based on the portfolio at the time of the implementation of the change. Acquisitions and disposals of business operations Represents the movement in RWA as a result of the disposal or acquisition of business operations, quantified based on the credit risk exposures as at the end of the month preceding a disposal or following an acquisition. Acquisitions and disposals of exposures in the ordinary course of business are reflected under asset size. Credit quality Asset size Represents RWA movements resulting from changes in the underlying credit quality of counterparties. These are caused by changes to risk parameters which arise from actions such as, but not limited to, change in counterparty ratings, loss given default or changes in credit hedges. Represents all RWA movements that are not attributable to the other key drivers. This includes movements arising in the normal course of business, such as growth in credit exposures or reduction in asset size from sales and write-offs. The amounts reported for each business division and Corporate Center unit may also include the effect of transfers and allocations of exposures between business divisions reflected in the period. Foreign exchange movements Represents RWA movements as a result of changes in exchange rates of the transaction currencies versus the Swiss franc. Non-counterparty-related risk RWA movements Exposure movements Represents RWA movements arising from changes in deferred tax assets on temporary differences as well as from the purchase or sale of property, equipment, software and other underlying exposures. Foreign exchange movements Represents RWA movements as a result of changes in exchange rates of the transaction currencies versus the Swiss franc. 268 Market risk RWA movements Methodology changes Model updates Regulatory add-ons Movement in risk levels Operational risk RWA movements Incremental operational risk Represents methodology changes to the calculation driven by regulatory and internal policy decisions. In some cases, the effects of methodology changes are assessed at the time of implementation, and may not reflect the effects for the entire year. Moreover, methodology changes may, on occasion, be implemented at the same time as parameter updates and changes in regulatory add-ons, the effects of which cannot be fully disaggregated. Includes routine updates to model parameters such as the roll-forward of the five-year historical data used for VaR. The effect of each parameter update, assessed at the point of implementation, has been used to approximate the combined effect over the year. Represents the “Risks-not-in-VaR” add-on described in the “Risk management and control” section of this report. The effect of recalibrations are calculated by applying the old and new multiplication factors to the year-end VaR and SVaR-based RWA. Represents changes as a result of movements in risk levels that are derived after accounting for the movements in the abovementioned three specific drivers. This includes changes in positions, effects of market moves on risk levels and currency translation effects. The amounts reported for each business division and Corporate Center unit may also include the effect of transfers and allocations of exposures between business divisions reflected in the period. Represents RWA movements relating to changes in the incremental operational risk RWA based on the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA. Other model updates Represents RWA movements arising from the regular update of the parameters of our advanced measurement approach (AMA) model. 269 Risk, treasury and capital management Risk, treasury and capital management Capital management Leverage ratio framework EDTF | Our total Swiss SRB leverage ratio requirements1 Phase-in Fully applied 2.6% 0.6% 0.4% 0.7% 1.0% 3.0% 0.7% 0.5% 0.7% 1.1% 3.4% 0.8% 0.6% 0.9% 1.1% Gone concern Going concern 4.0% 1.0% 0.7% 0.8% 1.5% Gone concern2 Going concern 4.2%2 1.1% 0.7% 1.3% 1.1% Gone concern2 Going concern 10%2 5.0% 1.5% 2.0% 1.5% Gone concern2 Going concern 31.12.14 31.12.15 From 1.1.16 (current) 20166 (proposed) 31.12.19 (current) 1.1.2020 (proposed) Base: CET1 capital Buffer: CET1 capital Buffer: high-trigger loss-absorbing capital3 Base: high-trigger additional tier 1 capital4 TLAC-eligible senior unsecured debt 5 Progressive buffer: low-trigger loss-absorbing capital 1 In percent of the leverage ratio denominator (LRD). Proposed requirements for Swiss SRBs are based on the draft revised too big to fail ordinance from the Federal Department of Finance. 2 This requirement may be reduced by a resolvability rebate. 3 CET1 capital can be substituted by high-trigger loss-absorbing capital up to the stated percentage. 4 Low-trigger additional tier 1 capital instruments will continue to qualify as going concern capital until their first call date. 5 Any high- and low-trigger tier 2 capital instruments remaining after 2019 will qualify for the gone concern requirement until one year before maturity. 6 Based on the draft ordinance which proposes an effective date of 1 July 2016. ▲ EDTF | In November 2014, FINMA published the circular “Lever- age ratio – banks”, which aligned the calculation of the lever- age ratio denominator (LRD) with the rules issued by the Bank for International Settlements (BIS) in the “Basel III leverage ratio framework and disclosure requirements” document issued in January 2014. Effective 31 December 2015, we implemented the guidance of this FINMA circular, ahead of its mandatory effective date of 1 January 2016. The Swiss SRB leverage ratio and Swiss SRB LRD for periods prior to 31 December 2015 are calculated in accor- dance with the former Swiss SRB denominator definition and are therefore not fully comparable with 31 December 2015 figures. However, comparable figures as of 1 January 2015 are provided on a pro forma basis at the Group level. The new Swiss SRB leverage ratio is calculated by dividing the sum of period-end CET1, AT1 and other loss-absorbing capital by the period-end BIS leverage ratio denominator (LRD). There is no change to the calculation of the leverage ratio numerator under the new Swiss SRB rules. Under BIS rules, only CET1 and AT1 capital are included in the numerator, whereas under Swiss SRB rules, other loss-absorbing capital is also included. The BIS LRD consists of IFRS on-balance sheet assets and off- balance sheet items. Derivative exposures are adjusted for a num- ber of items, including replacement value and eligible cash varia- tion margin netting, the current exposure method add-on and net notional amounts for written credit derivatives. Moreover, the BIS LRD includes an additional charge for counterparty credit risk related to securities financing transactions. 270 10 8 6 4 2 0 The transition to the new Swiss SRB LRD rules resulted in an overall reduction of our LRD calculated on a spot basis, mainly due to positive effects from off-balance sheet items, as well as from changes in the scope of consolidation. These positive effects were partly offset by the effect of more stringent requirements on the treatment of securities financing transactions and deriva- tive exposures. In line with FINMA disclosure requirements, we disclose both the new Swiss SRB leverage ratio and the BIS leverage ratio. The Swiss SRB leverage ratio requirement is equal to 24% of the capital ratio requirements, excluding the countercyclical buf- fer requirement. As of 31 December 2015, the effective total leverage ratio requirement was 3.0%. Our CET1 capital covered the leverage ratio requirements for the base and buffer capital components and the low-trigger loss-absorbing capital satisfied our leverage ratio requirement for the progressive buffer compo- nent. In addition, high-trigger loss-absorbing capital is included in the buffer capital component for UBS Group. ➔ Refer to the “Legal entity financial and regulatory information” section of this report for more information on leverage ratio requirements on a legal entity level Proposed changes to leverage ratio requirements As previously noted, in December 2015, the Swiss Federal Depart- ment of Finance published for consultation a draft revised TBTF ordinance based on the cornerstones announced by the Swiss Federal Council in October 2015. In line with the announced cor- nerstones, the proposal would revise the capital and leverage ratio requirements for Swiss systemically relevant banks and includes new gone concern requirements. ➔ Refer to the “Regulatory and legal developments” section of this report for more information on the proposed revisions to the Swiss TBTF framework EDTF | Swiss SRB leverage ratio requirements and information (phase-in) CHF million, except where indicated Base capital (common equity tier 1 capital) Buffer capital (common equity tier 1 capital and high-trigger loss- absorbing capital) Progressive buffer capital (low-trigger loss-absorbing capital) Total Swiss SRB leverage ratio (%) Actual2, 3, 4 Requirement1 31.12.15 Swiss SRB leverage ratio capital Eligible2, 3, 4 Requirement 31.12.15 31.12.14 31.12.15 31.12.15 31.12.14 1.1 1.25 0.7 3.0 1.1 3.9 1.2 6.2 1.0 3.3 1.1 5.4 9,763 9,763 9,647 11,119 6,143 27,026 35,354 10,679 55,796 33,216 11,398 54,260 1 Requirements for base capital (24% of 4.5%), buffer capital (24% of 5.1%) and progressive buffer capital (24% of 2.8%). The total leverage ratio requirement of 3.0% is the current phase-in requirement according to the Swiss Capital Adequacy Ordinance. In addition, FINMA defined a total leverage ratio target of 3.5%, which will be effective until it is exceeded by the Swiss SRB phase-in requirement. 2 Swiss SRB CET1 capital exceeding the base capital requirement is allocated to the buffer capital. 3 Since 31 March 2015, high-trigger loss-absorbing capital (LAC) is included in the buffer capital. As of 31 December 2014, high-trigger LAC was included in the progressive buffer capital. 4 The leverage ratio denominator (LRD) used to calculate the requirements is calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, these are fully aligned to the BIS Basel III rules and the LRD is reported on a spot basis. Prior to the alignment to BIS rules, the LRD was calculated based on former FINMA rules and reported on a 3-month average basis. 5 CET1 capital can be substituted by high-trigger LAC up to 0.5% in 2015. 271 Risk, treasury and capital management Risk, treasury and capital management Capital management Leverage ratio information Swiss SRB leverage ratio As of 31 December 2015, our Swiss SRB leverage ratio was 5.3% on a fully applied basis and 6.2% on a phase-in basis. The fully- applied LRD decreased by CHF 80 billion to CHF 898 billion from the pro forma comparative number of CHF 978 billion as of 1 Jan- uary 2015 and was below our short- to medium-term expectation of around CHF 950 billion. The decrease during 2015 mainly reflected incremental netting and collateral mitigation benefits of CHF 39 billion, currency effects of CHF 24 billion and a decrease of CHF 13 billion related to other methodology changes. Addi- tional reductions totaling CHF 5 billion were due to changes in book size and other effects. The decrease in LRD related to improvements in incremental netting and collateral mitigation benefits mainly reflected improved netting of long and short written credit derivative posi- tions, as well as increased netting of eligible cash variation mar- gin. In the aggregate, these changes resulted in CHF 22 billion lower derivative exposures. In addition, counterparty credit risk for securities financing transactions decreased by CHF 14 billion due to the consideration of incremental collateral. The methodology changes that contributed to a decrease in LRD relate to the exclusion of uncommitted security-based lend- ing credit facilities in our wealth management businesses, fol- lowing a reassessment that we are not committed to extend credit under these contracts. Moreover, it included the effect from a reassessment of the treatment of forward-starting trans- actions. ➔ Refer to the “Balance sheet” section of this report for more information on balance sheet movements 272 EDTF | Swiss SRB leverage ratio1 Swiss SRB (new) Swiss SRB (former) Pro forma as of 1.1.15 1,062,478 Average 4Q14 1,057,361 CHF million, except where indicated As of 31.12.15 Total IFRS assets Difference between IFRS and regulatory scope of consolidation2 Less derivative exposures and securities financing transactions3 On-balance sheet exposures (excluding derivative exposures and securities financing transactions) Derivative exposures3 Securities financing transactions3 Off-balance sheet items Other adjustments4 Items deducted from Swiss SRB tier 1 capital, phase-in Total exposures (leverage ratio denominator), phase-in5 Additional items deducted from Swiss SRB tier 1 capital, fully applied Total exposures (leverage ratio denominator), fully applied5 942,819 (16,763) (300,834) 625,222 128,866 120,086 41,132 (11,291) 904,014 (6,407) 897,607 (18,602) (396,295) 647,581 161,415 135,707 54,839 (14,879) 984,663 (7,047) 977,617 Phase-in Common equity tier 1 capital Loss-absorbing capital Common equity tier 1 capital including loss-absorbing capital Swiss SRB leverage ratio (%) Fully applied Common equity tier 1 capital Loss-absorbing capital Common equity tier 1 capital including loss-absorbing capital Swiss SRB leverage ratio (%) 31.12.15 31.12.14 40,378 15,418 55,796 6.2 42,863 11,398 54,260 5.5 31.12.15 31.12.14 30,044 17,391 47,435 5.3 28,941 11,865 40,806 4.2 (18,525) (394,192) 644,644 169,267 97,905 88,750 19,184 (14,879) 1,004,869 (7,047) 997,822 31.12.14 42,863 11,398 54,260 5.4 31.12.14 28,941 11,865 40,806 4.1 1 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, the Swiss SRB leverage ratio denominator (LRD) calculation is fully aligned to the BIS Basel III rules and the LRD is reported on a spot basis. For comparison purposes, the equivalent number for 1 January 2015 is provided on a pro forma basis. Prior to the alignment to BIS rules, the LRD was calculated based on former FINMA rules and reported on a 3-month average basis and is therefore not fully comparable to the LRD reported for 31 December 2015, although the presentation format was aligned. 2 Represents the difference between the IFRS and the regula- tory scope of consolidation, which is the applicable scope for the LRD calculation. 3 Consists of positive replacement values, cash collateral receivables on derivative instruments, cash collateral on securities borrowed, reverse repurchase agreements, margin loans and prime brokerage receivables related to securities financing transactions in accordance with the regulatory scope of consolidation, which are presented separately under derivative exposures and securities financing transactions in this table. 4 Includes assets of entities consolidated under IFRS but not in regulatory scope of consolidation, which were included under the former Swiss SRB LRD calculation rules. 5 In accordance with former Swiss SRB LRD calculation rules, the leverage ratio denominator excludes forward starting repos, securities lending indemnifications and CEM add-ons for exchange-traded derivatives (ETD), both proprietary and agency transactions, and for OTC derivatives with a qualifying central counterparty. EDTF | Changes in fully applied leverage ratio denominator by key driver1 CHF billion On-balance sheet exposures (excluding derivative exposures and securities financing transactions)2 Derivative exposures2 Securities financing transactions2 Off-balance sheet items Deduction items Total Pro forma LRD as of 1.1.15 Currency effects Incremental netting and collateral mitigation Other methodology changes Book size and other LRD as of 31.12.15 648 161 136 55 (22) 978 (11) (9) (3) (1) (24) (4) (22) (14) (39) (13) (13) (8) (1) 1 4 (5) 625 129 120 41 (18) 898 1 The leverage ratio denominator (LRD) is calculated in accordance with Swiss SRB rules based on the regulatory scope of consolidation. From 31 December 2015 onward, these are fully aligned to the BIS Basel III rules and the LRD is reported on a spot basis. This table compares the 31 December 2015 LRD with the equivalent 1 January 2015 LRD, provided on a pro forma basis. 2 Excludes positive replacement values, cash collateral receivables on derivative instruments, cash collateral on securities borrowed, reverse repurchase agreements, margin loans and prime brokerage receivables related to securities financing transactions, which are presented separately under derivative exposures and securities financing transactions in this table. 273 Risk, treasury and capital management Risk, treasury and capital management Capital management EDTF | Leverage ratio denominator by business division and Corporate Center unit1 CHF billion Total IFRS assets Difference between IFRS and regulatory scope of consolidation2 Less derivative exposures and securities financing transactions3 On-balance sheet exposures (excluding derivative exposures and securities financing transactions) Derivative exposures3 Securities financing transactions3 Off-balance sheet items Items deducted from Swiss SRB tier 1 capital, phase-in Total exposures (leverage ratio denominator), phase-in Additional items deducted from Swiss SRB tier 1 capital, fully applied Total exposures (leverage ratio denominator), fully applied As of 31.12.15 Wealth Manage- ment Wealth Manage- ment Americas Personal & Corporate Banking Asset Manage- ment 119.9 61.0 141.2 12.9 Invest- ment Bank 253.5 CC – Services CC – Group ALM CC – Non- Core and Legacy Portfolio Total LRD 22.6 237.5 94.4 942.8 (6.0) (2.0) 111.8 4.0 0.0 3.2 (0.2) (1.8) 59.0 1.7 1.1 1.0 0.0 (10.2) (0.7) (2.7) 138.5 3.5 0.0 11.9 0.0 2.7 0.0 0.0 0.0 (139.4) 113.5 81.8 48.6 24.1 0.0 0.0 22.5 0.0 0.0 0.0 (11.3) 0.3 0.0 (16.8) (67.0) (87.9) (300.8) 170.8 1.5 67.8 0.0 6.5 36.3 2.5 0.8 625.2 128.9 120.1 41.1 (11.3) 119.0 62.9 153.8 2.7 268.0 11.3 240.2 46.2 904.0 119.0 62.9 153.8 2.7 268.0 (6.4) 4.8 (6.4) 240.2 46.2 897.6 CHF billion Total IFRS assets Difference between IFRS and regulatory scope of consolidation2 Less derivative exposures and securities financing transactions3 On-balance sheet exposures (excluding derivative exposures and securities financing transactions) Derivative exposures3 Securities financing transactions3 Off-balance sheet items Other adjustments4 Items deducted from Swiss SRB tier 1 capital, phase-in Total exposures (leverage ratio denominator), phase-in5 Additional items deducted from Swiss SRB tier 1 capital, fully applied Total exposures (leverage ratio denominator), fully applied5 Wealth Manage- ment 127.6 (6.5) (2.9) 118.2 4.0 0.0 9.5 6.6 (0.3) (1.6) 52.5 0.9 0.7 9.0 0.2 Average 4Q14 Wealth Manage- ment Amer- icas Personal & Corporate Banking Asset Man- agement Investment Bank 54.4 143.8 14.8 291.5 CC – Non- Core and Legacy Portfolio CC – Group ALM Total LRD 236.3 169.6 1,057.4 CC – Services 19.4 0.0 (11.2) (0.7) (0.1) 0.3 0.0 (18.5) (2.6) (0.2) (155.2) 0.0 (78.7) (153.0) (394.2) 141.2 3.4 0.0 21.2 0.1 3.5 0.2 0.0 0.0 11.2 135.5 74.5 32.8 44.5 0.9 19.2 0.0 0.0 0.0 0.0 (14.9) 4.5 (7.0) 157.9 14.2 64.0 0.0 0.2 16.6 72.0 0.5 4.4 0.0 644.6 169.3 97.9 88.7 19.2 (14.9) 236.3 93.4 1,004.9 (7.0) 138.3 63.3 165.9 14.9 288.3 138.3 63.3 165.9 14.9 288.3 (2.6) 236.3 93.4 997.8 1 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, the Swiss SRB leverage ratio denominator (LRD) calculation is fully aligned to the BIS Basel III rules and the LRD is reported on a spot basis. Prior to the alignment to BIS rules, the LRD was calculated based on former FINMA rules and reported on a 3-month average basis and is therefore not fully comparable to the LRD reported for 31 December 2015, although the presentation format was aligned. 2 Represents the difference between the IFRS and the regulatory scope of consolidation, which is the applicable scope for the LRD calculation. 3 Consists of positive replacement values, cash collateral receivables on derivative instruments, cash collateral on securities borrowed, reverse repurchase agreements, margin loans and prime brokerage receivables related to securities financ- ing transactions in accordance with the regulatory scope of consolidation, which are presented separately under derivative exposures and securities financing transactions in this table. 4 Includes assets of entities con- solidated under IFRS but not in regulatory scope of consolidation, which were included under the former Swiss SRB LRD calculation rules. 5 In accordance with former Swiss SRB LRD calculation rules, the leverage ratio denominator excludes forward starting repos, securities lending indemnifications and CEM add-ons for exchange-traded derivatives (ETD), both proprietary and agency transactions, and for OTC derivatives with a quali- fying central counterparty. 274 BIS leverage ratio More detailed BIS leverage ratio information in line with FINMA disclosure requirements can be found in the document “UBS Group AG (consolidated) regulatory information” which is available in “Quarterly reporting” at www.ubs.com/investors. Pillar 3 | BIS Basel III leverage ratio CHF million, except where indicated Phase-in BIS Basel III tier 1 capital Total exposures (leverage ratio denominator) BIS Basel III leverage ratio (%) Fully applied BIS Basel III tier 1 capital Total exposures (leverage ratio denominator) BIS Basel III leverage ratio (%) 31.12.15 44,559 904,014 4.9 31.12.15 36,198 897,607 4.0 275 Risk, treasury and capital management Risk, treasury and capital management Capital management UBS AG (consolidated) capital and leverage ratio information In this section, we disclose UBS AG (consolidated) capital and leverage ratio information and differences between UBS Group AG (consolidated) and UBS AG (consolidated). Capital information Swiss SRB capital ratio requirements and information (phase-in) – UBS AG (consolidated) CHF million, except where indicated Base capital (common equity tier 1 capital) Buffer capital (common equity tier 1 capital and high-trigger loss-absorbing capital) of which: effect of countercyclical buffer Progressive buffer capital (low-trigger loss-absorbing capital) Phase-out capital (tier 2 capital) Total Capital ratio (%) Capital Requirement1 31.12.15 Actual2 Requirement Eligible2 31.12.15 31.12.14 31.12.15 31.12.15 31.12.14 4.5 5.3 0.2 2.8 12.6 4.5 15.0 0.2 4.9 0.5 24.9 4.0 15.9 0.1 4.7 0.9 25.6 9,567 9,567 8,846 11,252 356 6,020 26,839 31,948 356 10,325 996 52,837 35,244 322 10,451 2,050 56,591 1 The total capital ratio requirement of 12.6% is the current phase-in requirement according to the Swiss Capital Adequacy Ordinance. Prior to the implementation of the Swiss SRB framework, FINMA also defined a total capital ratio target for UBS AG consolidated of 14.4%, which will be effective until it is exceeded by the Swiss SRB phase-in capital requirement. 2 Swiss SRB CET1 capital exceeding the base capital requirement is allocated to the buffer capital. Swiss SRB capital information – UBS AG (consolidated) CHF million, except where indicated Common equity tier 1 capital Common equity tier 1 capital Additional tier 1 capital High-trigger loss-absorbing capital Tier 1 capital Tier 2 capital Low-trigger loss-absorbing capital Phase-out capital Total tier 2 capital Total capital Common equity tier 1 capital ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) Risk-weighted assets Phase-in Fully applied 31.12.15 31.12.14 31.12.15 31.12.14 41,516 44,090 32,042 30,805 01 41,516 10,325 996 11,321 52,837 19.5 19.5 24.9 02 44,090 1,252 33,294 0 30,805 10,451 2,050 12,501 56,591 19.9 19.9 25.6 10,325 10,451 10,325 43,619 15.4 16.0 21.0 10,451 41,257 14.2 14.2 19.0 212,609 221,150 208,186 217,158 1 Includes additional tier 1 capital in the form of high-trigger loss-absorbing capital and hybrid instruments, which were entirely offset by required deductions for goodwill. 2 Includes additional tier 1 capital in the form of hybrid instruments, which was entirely offset by required deductions for goodwill. 276 As of 31 December 2015, fully applied total capital of UBS AG (consolidated) was CHF 3.8 billion lower than for UBS Group AG (consolidated), reflecting CHF 4.9 billion lower AT1 capital and CHF 0.9 billion lower tier 2 capital, partly offset by CHF 2.0 billion higher CET1 capital. The difference of CHF 2.0 billion in fully applied CET1 capital was primarily due to compensation-related regulatory capital accruals, liabilities and capital instruments which are reflected at the UBS Group AG level. The difference of CHF 4.9 billion in fully applied AT1 capital relates to the issuances of AT1 capital notes by UBS Group AG in 2015, as well as CHF 1.0 billion of high-trigger loss-absorbing DCCP awards granted to eligible employees for the performance years 2015 and 2014. The difference of CHF 0.9 billion in tier 2 capital relates to high- trigger loss-absorbing capital, in the form of 2012 and 2013 DCCP awards, held at UBS Group AG level. Differences in capital between UBS Group AG (consolidated) and UBS AG (consolidated) related to employee compensation plans will reverse to the extent underlying services are performed by employees of, and are consequently charged to, UBS AG and its subsidiaries. Such reversal generally occurs over the service period of the employee compensation plans. The difference in RWA between UBS Group AG (consolidated) and UBS AG (consolidated) was less than CHF 1.0 billion on both a phase-in and fully applied basis as of 31 December 2015. Swiss SRB capital information (UBS Group AG vs UBS AG consolidated) As of 31.12.15 Phase-in Fully applied CHF million, except where indicated Common equity tier 1 capital Common equity tier 1 capital Additional tier 1 capital High-trigger loss-absorbing capital Low-trigger loss-absorbing capital Total additional tier 1 capital Tier 1 capital Tier 2 capital High-trigger loss-absorbing capital Low-trigger loss-absorbing capital Phase-out capital Total tier 2 capital Total capital Common equity tier 1 capital ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) Risk-weighted assets UBS Group AG (consolidated) UBS AG (consolidated) Differences UBS Group AG (consolidated) UBS AG (consolidated) Differences 40,378 41,516 (1,138) 30,044 32,042 (1,998) 3,828 353 4,181 44,559 912 10,325 996 12,233 56,792 19.0 21.0 26.8 0 0 0 41,516 10,325 996 11,321 52,837 19.5 19.5 24.9 212,302 212,609 3,828 353 4,181 3,043 912 0 0 912 3,955 (0.5) 1.5 1.9 (307) 3,828 2,326 6,154 36,198 912 10,325 11,237 47,435 14.5 17.4 22.9 1,252 0 1,252 33,294 10,325 10,325 43,619 15.4 16.0 21.0 207,530 208,186 2,576 2,326 4,902 2,904 912 0 912 3,816 (0.9) 1.4 1.9 (656) 277 Risk, treasury and capital management Risk, treasury and capital management Capital management Audited | Reconciliation IFRS equity to Swiss SRB capital (UBS Group AG vs UBS AG consolidated) As of 31.12.15 CHF million Phase-in Fully applied UBS Group AG (consolidated) UBS AG (consolidated) Differences UBS Group AG (consolidated) UBS AG (consolidated) Differences Equity attributable to shareholders Equity attributable to preferred noteholders and other non-controlling interests Total IFRS equity Equity attributable to preferred noteholders and other non-controlling interests Defined benefit plans (before phase-in, as applicable) Defined benefit plans, 40 % phase-in Deferred tax assets recognized for tax loss carry-forwards (before phase- in, as applicable) Deferred tax assets recognized for tax loss carry-forwards, 40% phase-in Deferred tax assets on temporary differences, excess over threshold Goodwill, net of tax, less hybrid capital and loss-absorbing capital Intangible assets, net of tax Unrealized (gains) / losses from cash flow hedges, net of tax Compensation and own shares-related capital components (including share premium) Own credit related to financial liabilities designated at fair value and replacement values, net of tax Unrealized gains related to financial investments available-for-sale, net of tax Prudential valuation adjustments Consolidation scope Accruals for proposed dividends to shareholders Other Common equity tier 1 capital High-trigger loss-absorbing capital Low-trigger loss-absorbing capital Hybrid capital subject to phase-out Goodwill, net of tax, offset against hybrid capital and loss-absorbing capital Additional tier 1 capital Tier 1 capital Tier 2 capital Total capital 55,313 55,248 1,995 57,308 1,995 57,243 (1,995) (1,995) (20) (20) (2,988) (702) (2,618) (323) (1,638) (1,383) (442) (402) (83) (130) (3,188) (1,018) 40,378 3,828 2,326 1,954 (3,927) 4,181 44,559 12,233 56,792 (2,988) (657) (3,339) (323) (1,638) (442) (402) (83) (130) (3,434) (277) 41,516 1,252 1,954 (3,206) 0 41,516 11,321 52,837 65 0 65 0 0 0 (45) 721 0 0 (1,383) 0 0 0 0 246 (741) (1,138) 2,576 2,326 0 (721) 4,181 3,043 912 3,955 55,313 55,248 1,995 57,308 (1,995) (50) 1,995 57,243 (1,995) (50) (7,468) (7,468) (2,598) (6,545) (323) (1,638) (1,383) (442) (402) (83) (130) (3,188) (1,018) 30,044 3,828 2,326 6,154 36,198 11,237 47,435 (2,414) (6,545) (323) (1,638) (442) (402) (83) (130) (3,434) (277) 32,042 1,252 1,252 33,294 10,325 43,619 65 0 65 0 0 0 (184) 0 0 0 (1,383) 0 0 0 0 246 (741) (1,998) 2,576 2,326 4,902 2,904 912 3,816 278 Leverage ratio information Swiss SRB leverage ratio requirements and information (phase-in) – UBS AG (consolidated) CHF million, except where indicated Base capital (common equity tier 1 capital) Buffer capital (common equity tier 1 capital and high-trigger loss-absorbing capital) Progressive buffer capital (low-trigger loss-absorbing capital) Total Swiss SRB leverage ratio (%) Actual2, 3 Requirement1 31.12.15 Swiss SRB leverage ratio capital Requirement Eligible2, 3 31.12.15 31.12.14 31.12.15 31.12.15 31.12.14 1.1 1.2 0.7 3.0 1.1 3.5 1.1 5.7 1.0 3.4 1.0 5.4 9,769 9,769 9,658 11,126 6,146 27,041 31,747 10,325 51,841 34,432 10,451 54,542 1 Requirements for base capital (24% of 4.5%), buffer capital (24% of 5.1%) and progressive buffer capital (24% of 2.8%). The total leverage ratio requirement of 3.0% is the current phase-in requirement according to the Swiss Capital Adequacy Ordinance. In addition, FINMA defined a total leverage ratio target of 3.5%, which will be effective until it is exceeded by the Swiss SRB phase-in requirement. 2 Swiss SRB CET1 capital exceeding the base capital requirement is allocated to the buffer capital. 3 The leverage ratio denominator (LRD) used to calculate the requirements is calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, these are fully aligned to the BIS Basel III rules and the LRD is reported on a spot basis. Prior to the alignment to BIS rules, the LRD was calculated based on former FINMA rules and reported on a 3-month average basis. Consistent with UBS Group AG (consolidated), effective 31 December 2015, we apply the new requirement for the calcu- lation of the Swiss SRB leverage ratio, which is based on the Swiss SRB numerator and the BIS LRD on a spot basis, in accordance with the FINMA Circular “Leverage ratio – banks.” As of 31 December 2015, the Swiss SRB leverage ratio of UBS AG (consolidated) was 0.4 percentage points and 0.5 percentage points lower than that of UBS Group AG (consolidated) on a fully applied and phase-in basis, respectively, mainly as CET1 capital including loss-absorbing capital of UBS AG (consolidated) was CHF 3.8 billion and CHF 4.0 billion lower on a fully applied and phase-in basis, respectively. The difference in LRD between UBS Group AG (consolidated) and UBS AG (consolidated) was less than CHF 1 billion on both a phase-in and fully applied basis as of 31 December 2015. Swiss SRB leverage ratio (UBS Group AG vs UBS AG consolidated) As of 31.12.15 CHF million, except where indicated Total IFRS assets Difference between IFRS and regulatory scope of consolidation1 Less derivative exposures and securities financing transactions2 On-balance sheet exposures (excluding derivative exposures and securities financing transactions) Derivative exposures2 Securities financing transactions2 Off-balance sheet items Items deducted from Swiss SRB tier 1 capital, phase-in Total exposures (leverage ratio denominator), phase-in Additional items deducted from Swiss SRB tier 1 capital, fully applied Total exposures (leverage ratio denominator), fully applied Phase-in Common equity tier 1 capital Loss-absorbing capital Common equity tier 1 capital including loss-absorbing capital Swiss SRB leverage ratio (%) Fully applied Common equity tier 1 capital Loss-absorbing capital Common equity tier 1 capital including loss-absorbing capital Swiss SRB leverage ratio (%) UBS Group AG (consolidated) 942,819 (16,763) (300,834) 625,222 128,866 120,086 41,132 (11,291) 904,014 (6,407) 897,607 UBS AG (consolidated) 943,256 (16,822) (300,834) 625,601 128,866 120,086 41,211 (11,246) 904,518 (6,268) 898,251 Differences (437) 59 0 (379) 0 0 (79) (45) (504) (139) (644) 40,378 15,418 55,796 6.2 30,044 17,391 47,435 5.3 41,516 10,325 51,841 5.7 32,042 11,578 43,619 4.9 (1,138) 5,093 3,955 0.5 (1,998) 5,813 3,816 0.4 1 Represents the difference between the IFRS and the regulatory scope of consolidation, which is the applicable scope for the LRD calculation. 2 Consists of positive replacement values, cash collateral receivables on derivative instruments, cash collateral on securities borrowed, reverse repurchase agreements, margin loans and prime brokerage receivables related to securities financing transactions in accordance with the regulatory scope of consolidation, which are presented separately under derivative exposures and securities financing transactions in this table. 279 Risk, treasury and capital management Risk, treasury and capital management Capital management Equity attribution framework Pillar 3 | The equity attribution framework reflects our objectives of maintaining a strong capital base and managing performance by guiding each business toward activities that appropriately balance profit potential, risk and capital usage. This framework, which includes some forward-looking elements, enables us to integrate Group-wide capital management activities with those at a busi- ness division level and to calculate and assess return on attributed equity (RoAE) for each of our business divisions. Tangible equity is attributed to our business divisions by apply- ing a weighted-driver approach that combines fully applied Basel III capital requirements with internal models to determine the amount of capital required to cover each business division’s risk. Risk-weighted assets (RWA) and leverage ratio denominator (LRD) usage are converted to their common equity tier 1 (CET1) equivalents based on capital ratios as targeted by industry peers. Risk-based capital (RBC) is converted to its CET1 equivalent based on a conversion factor that considers the amount of RBC expo- sure covered by loss-absorbing capital. In addition to tangible equity, we allocate equity to support goodwill and intangible assets as well as certain Basel III capital deduction items. Group items within Corporate Center – Services represents equity not allocated to the business divisions. This includes equity required to align total attributed equity with Group capital targets, as well as attributed equity for PaineWebber goodwill and intangible assets, for centrally held RBC items and for certain Basel III capital deduc- tion items. The amount of equity attributed to all business divi- sions and Corporate Center corresponds to the amount we believe is required to support our businesses adequately, and it can differ from the Group’s actual equity during a given period. ➔ Refer to the “Risk management and control” section of this report for more information on risk-based capital Average total equity attributed to the business divisions and Corporate Center increased to CHF 44.6 billion in 2015 compared with CHF 39.9 billion in 2014. Since 1 January 2015, the equity attribution framework is based on fully applied Basel III capital requirements, rather than on phase-in requirements. As a result, a higher amount of equity is required to underpin certain Basel III capital deductions, primarily related to deferred tax assets. This led to an increase in average attributed equity for Group items within Corporate Center – Services. Attributed equity in Corpo- rate Center – Non-core and Legacy Portfolio decreased, reflecting further RWA and LRD reductions. Average equity attributable to UBS Group AG shareholders increased to CHF 52.4 billion in 2015 from CHF 49.7 billion in 2014. The difference between average equity attributable to UBS Group AG shareholders and average equity attributed to the busi- ness divisions and Corporate Center decreased to CHF 7.8 billion in 2015 compared with CHF 9.8 billion in 2014. Pillar 3 | Effective from the first quarter of 2016, the weighting used for the attribution of tangible equity has been changed from 50% for RWA, 25% for LRD and 25% for RBC to an equal driver weighting of one third each. Moreover, to reflect the higher CET1 ratios of our industry peers, the CET1 ratio used for the RWA driver is increased from 10% to 11%. The CET1 leverage ratio used for the LRD driver remains unchanged at 3.75%. These changes will lead to moderate increases in the business divisions’ attributed equity. Moreover, the equity required to align attrib- uted equity with Group capital targets fully applies the proposed revisions to the Swiss TBTF framework, which is expected to lead to an increase in the average attributed equity for Group items within Corporate Center – Services. ➔ Refer to the “Regulatory and legal developments” section of this report for more information on the proposed revisions to the Swiss TBTF framework 280 Pillar 3 | Average attributed equity CHF billion Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center of which: Services of which: Group items1 of which: Group ALM of which: Non-core and Legacy Portfolio Average equity attributed to the business divisions and Corporate Center Difference Average equity attributable to UBS Group AG shareholders 1 Beginning in 2015, Group items are shown within Corporate Center – Services. Prior periods have been restated. Pillar 3 | Return on attributed equity and return on equity1 In % Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank UBS Group For the year ended 31.12.15 31.12.14 31.12.13 3.5 2.5 3.9 1.6 7.3 25.8 19.6 18.2 3.3 2.9 44.6 7.8 52.4 3.4 2.7 4.1 1.7 7.6 20.5 12.3 11.3 3.2 4.9 39.9 9.8 49.7 3.5 2.8 4.1 1.8 8.0 23.3 9.5 8.6 3.1 10.8 43.5 3.7 47.2 For the year ended 31.12.15 31.12.14 31.12.13 77.4 29.0 41.9 36.5 25.9 11.8 67.9 33.6 36.7 27.5 (1.1) 7.0 64.2 30.9 35.6 32.0 26.6 6.7 1 Return on attributed equity shown for the business divisions and return on equity attributable to UBS Group AG shareholders shown for UBS Group. Return on attributed equity for Corporate Center is not shown, as it is not meaningful. 281 Risk, treasury and capital management Risk, treasury and capital management UBS shares UBS shares UBS Group AG shares Audited | As of 31 December 2015, total IFRS equity attributable to UBS Group AG shareholders amounted to CHF 55,313 million, represented by 3,849,731,535 shares issued. Shares issued increased by 132,603,211 shares in 2015 due to the issuance of 127,650,706 shares out of authorized share capital following pri- vate exchanges of UBS AG shares into UBS Group AG shares, and the successful completion of a court procedure under article 33 of the Swiss Stock Exchange Act (SESTA procedure) to cancel the UBS Group share information Shares issued Treasury shares Shares outstanding Basic earnings per share (CHF)1 Diluted earnings per share (CHF)1 Equity attributable to UBS Group AG shareholders (CHF million) Less: goodwill and intangible assets (CHF million)2 Tangible equity attributable to UBS Group AG shareholders (CHF million) Total book value per share (CHF) Tangible book value per share (CHF) Share price (CHF) Market capitalization (CHF million)3 remaining UBS AG shares that were held by UBS AG shareholders with a non-controlling interest, and the issuance of 4,952,505 shares out of conditional share capital upon exercise of employee share options. Each share has a par value of CHF 0.10 and entitles the holder to one vote at the UBS Group AG shareholders’ meeting, if entered into the share register as having the right to vote, as well as a proportionate share of distributed dividends. As the Articles of Association of UBS Group AG indicate, there are no other classes of shares and no preferential rights for shareholders. As of or for the year ended 31.12.15 31.12.14 3,849,731,535 3,717,128,324 98,706,275 87,871,737 3,751,025,260 3,629,256,587 1.68 1.64 55,313 6,568 48,745 14.75 13.00 19.52 75,147 0.93 0.91 50,608 6,564 44,044 13.94 12.14 17.09 63,526 % change from 31.12.14 4 12 3 81 80 9 0 11 6 7 14 18 1 Refer to “Note 9 Earnings per share (EPS) and shares outstanding” in the “Consolidated financial statements” section of this report for more information on UBS Group AG (consolidated) EPS. 2 Goodwill and intan- gible assets used in the calculation of tangible equity attributable to UBS Group AG shareholders as of 31 December 2014 have been adjusted to reflect the non-controlling interests in UBS AG as of that date. 3 Mar- ket capitalization is calculated based on the total shares issued multiplied by the share price at period end. UBS AG shares Audited | As of 31 December 2015, shares issued by UBS AG totaled 3,858,408,466 shares, of which 100% were held by UBS Group AG. Shares issued by UBS AG increased by 13,847,533 shares in 2015 due to the issuance of new UBS AG shares out of condi- tional share capital upon distribution of an optional share divi- dend in May 2015. Following the successful completion of the SESTA procedure, all UBS AG shares that remained publicly held were canceled and UBS Group AG shares were delivered as compensation. UBS AG share information Shares issued Treasury shares Shares outstanding of which: held by UBS Group AG of which: held by shareholders with non-controlling interests 282 As of 31.12.15 31.12.14 3,858,408,466 3,844,560,913 0 3,858,408,466 3,858,408,466 0 2,115,255 3,842,445,658 3,716,910,207 125,535,451 % change from 31.12.14 0 (100) 0 4 (100) Holding of UBS Group AG shares We hold UBS Group AG own shares primarily to hedge share delivery obligations related to employee share and option partici- pation plans. In addition, the Investment Bank holds a limited number of own shares in its capacity as a liquidity provider to the equity index futures market and as a market-maker in UBS Group AG shares and derivatives on UBS Group AG shares. Moreover, to meet client demand, UBS has issued structured debt instruments, including securitized leverage products, linked to UBS Group AG shares, which are economically hedged by cash-settled deriva- tives and, to a limited extent, by own shares held by the Invest- ment Bank. As of 31 December 2015, total future share delivery obliga- tions in relation to employee share-based compensation awards were 138 million shares (31 December 2014: 131 million shares) taking the respective performance conditions into account. Share delivery obligations related to unvested and vested notional share awards, options and stock appreciation rights. As of 31 December 2015, we held 98 million UBS Group AG treasury shares (31 December 2014: 88 million) which were avail- able to satisfy the share delivery obligations. Additionally, 131 mil- lion UBS Group AG shares (31 December 2014: 136 million) to be issued out of conditional share capital were available to satisfy the share delivery obligation specifically related to options and stock appreciation rights. Treasury shares held or newly issued shares are delivered to employees at exercise or vesting. As of 31 December 2015, we held 98,706,275 treasury shares, or 2.6% of shares issued, compared with 87,871,737, or 2.4% of shares issued, as of 31 December 2014. The table below outlines the market purchases of UBS Group AG shares by Group Treasury. It does not include the activities of the Investment Bank. Treasury share activities1 Month of purchase Number of shares Average price in CHF Number of shares (Cumulative) Average price in CHF Treasury shares purchased for employee share and option participation plans Total number of shares January 2015 February 2015 March 2015 April 2015 May 2015 June 2015 July 2015 August 2015 September 2015 October 2015 November 2015 December 2015 49,175,526 17.61 1,000,000 2,600,000 19.34 18.48 49,175,526 49,175,526 49,175,526 49,175,526 49,175,526 49,175,526 50,175,526 52,775,526 17.61 17.61 17.61 17.61 17.61 17.61 17.65 17.69 1 This table excludes purchases for the purpose of hedging derivatives linked to UBS Group AG shares and for market making in UBS Group AG shares. The table also excludes UBS Group AG shares purchased by pension and retirement benefit funds 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 other post-employment benefit funds purchased 1,544,438 UBS Group AG shares during the year and held 17,737,346 UBS Group AG shares as of 31 December 2015. Trading volumes 1,000 shares SIX Swiss Exchange total SIX Swiss Exchange daily average NYSE total NYSE daily average Source: Reuters 1 2014 data reflects UBS AG trading volumes up to 27 November 2014 and UBS Group AG trading volumes from 28 November 2014 onward. 31.12.15 2,870,766 11,437 102,069 405 For the year ended 31.12.141 2,839,304 11,403 88,792 354 31.12.13 2,763,179 11,053 98,382 390 283 Risk, treasury and capital management Risk, treasury and capital management UBS shares Listing of UBS shares UBS Group AG shares are listed on the SIX Swiss Exchange (SIX) and on the New York Stock Exchange (NYSE). They are traded and settled as global registered shares. Global registered shares pro- vide direct and equal ownership for all shareholders, irrespective of the country and stock exchange on which they are traded. UBS AG shares were delisted from the NYSE on 17 January 2015 and from the SIX on 27 August 2015 following the success- ful completion of the SESTA procedure. During 2015, the average daily trading volume of UBS Group AG shares was 11.4 million shares on the SIX and 0.4 million shares on the NYSE. The SIX is expected to remain the main venue for determining the movement in our share price due to the high volume traded on this exchange. During the hours in which both the SIX and the NYSE are simul- taneously open for trading (generally 3:30 p.m. to 5:30 p.m. Cen- tral European Time), price differences between these exchanges are likely to be arbitraged away by professional market-makers. Accordingly, the share price will typically be similar between the two exchanges when considering the prevailing US dollar / Swiss franc exchange rate. When the SIX is closed for trading, globally traded volumes will typically be lower. However, the specialist firm making a market in UBS Group AG shares on the NYSE is required to facilitate sufficient liquidity and maintain an orderly market in UBS Group AG shares throughout normal NYSE trading hours. 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(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:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:82)(cid:84)(cid:75)(cid:69)(cid:71) Ticker symbols UBS Group AG Trading exchange SIX Swiss Exchange New York Stock Exchange SIX / NYSE Bloomberg Reuters UBSG UBSG UBSG VX UBS UN UBS VX UBS.N Security identification codes ISIN Valoren Cusip CH0244767585 24 476 758 CINS H42097 10 7 (cid:20)(cid:18)(cid:18)(cid:16)(cid:18) (cid:19)(cid:26)(cid:25)(cid:16)(cid:23) (cid:19)(cid:25)(cid:23)(cid:16)(cid:18) (cid:19)(cid:24)(cid:20)(cid:16)(cid:23) (cid:19)(cid:23)(cid:18)(cid:16)(cid:18) (cid:19)(cid:21)(cid:25)(cid:16)(cid:23) (cid:19)(cid:20)(cid:23)(cid:16)(cid:18) (cid:19)(cid:19)(cid:20)(cid:16)(cid:23) (cid:19)(cid:18)(cid:18)(cid:16)(cid:18) (cid:26)(cid:25)(cid:16)(cid:23) (cid:25)(cid:23)(cid:16)(cid:18) (cid:24)(cid:20)(cid:16)(cid:23) (cid:23)(cid:18)(cid:16)(cid:18) (cid:21)(cid:25)(cid:16)(cid:23) (cid:20)(cid:23)(cid:16)(cid:18) (cid:19)(cid:20)(cid:16)(cid:23) (cid:18)(cid:16)(cid:18) Stock exchange prices1 SIX Swiss Exchange New York Stock Exchange High (CHF) Low (CHF) Period end (CHF) High (USD) Low (USD) Period end (USD) 2015 Fourth quarter 2015 December November October Third quarter 2015 September August July Second quarter 2015 June May April First quarter 2015 March February January 2014 Fourth quarter 2014 Third quarter 2014 Second quarter 2014 First quarter 2014 2013 Fourth quarter 2013 Third quarter 2013 Second quarter 2013 First quarter 2013 2012 Fourth quarter 2012 Third quarter 2012 Second quarter 2012 First quarter 2012 2011 Fourth quarter 2011 Third quarter 2011 Second quarter 2011 First quarter 2011 2010 Fourth quarter 2010 Third quarter 2010 Second quarter 2010 First quarter 2010 20.27 20.14 20.16 20.27 22.57 20.54 22.57 22.30 20.78 20.73 20.78 19.54 18.59 18.59 16.78 17.24 19.10 17.84 16.93 18.74 19.10 19.60 19.30 19.60 18.02 16.39 15.62 15.62 12.60 12.79 13.60 19.13 12.23 15.75 17.60 19.13 18.60 17.83 18.53 18.60 17.50 17.87 17.87 18.83 18.09 17.41 17.41 18.52 19.40 18.22 19.28 18.80 18.22 13.58 16.58 15.21 13.58 13.95 13.95 15.20 16.21 16.76 14.09 16.12 15.62 14.09 14.23 9.69 11.39 9.69 10.55 10.64 9.34 9.80 9.34 14.37 15.43 13.31 14.92 13.94 14.15 13.31 19.52 19.52 19.75 19.78 18.01 18.01 20.03 22.25 19.83 19.83 20.22 18.86 18.32 18.32 16.75 15.39 17.09 17.09 16.66 16.27 18.26 16.92 16.92 18.50 16.08 14.55 14.27 14.27 11.45 11.05 12.65 11.18 11.18 10.54 15.33 16.48 15.35 15.35 16.68 14.46 17.14 20.69 19.93 20.44 20.69 23.19 20.92 23.18 23.19 22.16 22.16 22.00 20.31 19.29 19.29 17.69 17.46 21.50 18.22 18.95 21.15 21.50 21.61 21.61 21.48 18.70 17.65 16.99 16.99 13.57 14.15 14.77 20.08 14.21 18.63 20.03 20.08 18.48 18.48 18.47 17.75 16.84 18.19 18.19 18.70 18.55 17.97 17.97 19.96 20.51 19.01 21.07 20.07 19.01 16.02 17.14 16.37 16.02 15.04 15.04 16.78 18.22 18.49 15.09 17.94 16.54 15.09 15.11 9.78 12.32 9.78 10.96 11.17 10.42 10.47 10.42 17.20 16.11 12.26 14.99 13.04 12.26 12.40 1 Based on the share price of UBS AG until 27 November 2014, and of UBS Group AG from 28 November 2014 onward. 19.37 19.37 19.16 20.03 18.52 18.52 20.69 23.06 21.20 21.20 21.58 20.07 18.77 18.77 17.49 16.68 17.05 17.05 17.37 18.32 20.72 19.25 19.25 20.52 16.95 15.39 15.74 15.74 12.18 11.71 14.02 11.83 11.83 11.43 18.26 18.05 16.47 16.47 17.03 13.22 16.28 285 Risk, treasury and capital management Corporate governance, responsibility and compensation Audited information according to the Swiss law and applicable regulatory requirements and guidance Disclosures provided are in line with the requirements of article 663c para. 1 and 3 of the Swiss Code of Obligations (supplementary disclosures for companies whose shares are listed on a stock exchange: shareholdings) and the Ordinance against Excessive Compensation in Listed Stock Corporations (tables containing such information are marked as “Audited” throughout this section), as well as other applicable regulations and guidance. Information assured according to the Global Reporting Initiative (GRI) Content of the sections “UBS and Society” and “Our employees” has been reviewed by Ernst & Young Ltd (EY) against the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines. This content has been prepared in accordance with the comprehensive option of GRI G4 as evidenced in the EY assurance report at www.ubs.com/gri. The assurance by EY also covered other relevant text and data on the website of UBS which is referenced in the GRI Content Index. 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 other stakeholders. We use the term “corporate gover- nance” when referring to the organizational structure of the Group and operational practices of our management. UBS Group AG is subject to, and compliant with, all relevant Swiss legal and regulatory requirements regarding corporate gover- nance, including the SIX Swiss Exchange’s (SIX) Directive on Infor- mation Relating to Corporate Governance, as well as the stan- dards established in the Swiss Code of Best Practice for Corporate Governance, including the appendix on executive compensation. In addition, as a foreign company with shares listed on the New York Stock Exchange (NYSE), UBS Group AG is compliant with all relevant corporate governance standards applicable to foreign private issuers. Based on article 716b of the Swiss Code of Obligations and articles 25 and 27 of the Articles of Association of UBS Group AG and UBS AG (Articles of Association), the Board of Directors (BoD) adopted the Organization Regulations of UBS Group AG and UBS AG (Organization Regulations), which constitute our primary cor- porate governance guidelines. The revised Organization Regula- tions are valid as of 1 January 2016. They primarily implement new governance framework responsibilities appropriate to the new holding structure, and define primary governance guidelines for UBS Group AG and its subsidiaries. After the successful completion of the squeeze-out procedure in the third quarter of 2015, UBS Group AG became sole owner of all shares of UBS AG and, in August 2015, all UBS AG shares were delisted from the SIX Swiss Exchange. Consequently, UBS AG is no longer subject to the SIX Listing Rules requirement to publish information about corporate governance in this report. However, information about UBS AG continues to be presented in response to US Securities and Exchange Commission regulations. To the extent practicable, the governance structure of UBS Group AG mirrors that of UBS AG. The Articles of Association of both entities are substantially similar and the two entities are gov- erned by a combined set of Organization Regulations. The discus- sion of corporate governance in this section, therefore, relates to both entities equally, except where specifically noted to be differ- ent. In this section, references to “our,” “we” and “us” relate to both UBS Group AG and UBS AG, unless otherwise indicated, and when we refer to corporate bodies or functions we mean those of both UBS Group AG and UBS AG. ➔ Refer to the Articles of Association and the Organization Regulations at www.ubs.com/governance for more information 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 required to be followed by domestic companies. Performance evaluation of the BoD committees All BoD committees perform a self-assessment of their activities and report back to the full BoD. 288 Responsibility of the Audit Committee with regard to independent auditors The Audit Committee is responsible for the compensation, reten- tion and oversight of the independent auditors, but not for their appointment. It assesses the performance and qualification of the external auditors and submits its proposal for appointment, reap- pointment or removal of the independent auditors to the full BoD. In line with the Swiss Code of Obligations, the BoD in turn brings its proposal to the shareholders for their vote at the Annual Gen- eral Meeting (AGM). Discussion of risk assessment and risk management policies by the Risk Committee In accordance with our Organization Regulations, the Risk Com- mittee, on behalf of the BoD, oversees our risk principles and risk capacity. The Risk Committee is responsible for monitoring our adherence to those risk principles and for monitoring whether business divisions and control units maintain appropriate systems of risk management and control. Supervision of the internal audit function The Chairman of the BoD (Chairman) and the Audit Committee share the supervisory responsibility and authority with respect to the internal audit function. Responsibility of the Compensation Committee for performance evaluations of senior management The Compensation Committee (formerly Human Resources and Compensation Committee), together with the BoD, proposes for shareholder approval at the AGM the maximum aggregate amount of compensation for the BoD, the maximum aggregate amount of fixed compensation for the Group Executive Board (GEB) and the aggregate amount of variable compensation for the GEB. In line with Swiss law, the shareholders elect the mem- bers of the Compensation Committee at the AGM. Responsibility of the Governance and Nominating Committee for the evaluation of the Board of Directors The BoD has direct responsibility and authority to evaluate its own performance, based on a pre-evaluation by the Governance and Nominating Committee. Proxy statement reports of the Audit Committee and the Compensation Committee NYSE listing standards would require the aforementioned com- mittees to submit their reports directly to shareholders. However, under Swiss law, all our reports addressed to shareholders, includ- ing those from the aforementioned committees, are provided and approved by the BoD, which has ultimate responsibility vis-à-vis the shareholders. Shareholders’ votes on equity compensation plans Swiss law authorizes the BoD to approve compensation plans. Though Swiss law does not allocate such authority to sharehold- ers, it requires that Swiss companies determine the nature and components of capital in their articles of association, and each increase in capital has to be submitted for shareholder approval. This means that shareholder approval is mandatory if equity- based compensation plans require an increase in capital. No shareholder approval is required if shares for such plans are pur- chased in the market. ➔ Refer to “Board of Directors” in this section for more information on the Board of Directors’ committees ➔ Refer to “Capital structure” in this section for more information on UBS Group AG’s capital 289 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Group structure and shareholders UBS Group legal entity structure UBS Group AG is organized as an Aktiengesellschaft (AG), a stock corporation, pursuant to article 620ff. of the Swiss Code of Obli- gations. UBS Group AG is the ultimate parent company of the UBS Group (Group). As the holding company of the Group, UBS Group AG is a non-operating, financial holding company that has issued or guaranteed debt and provides capital to its subsidiaries as required. UBS AG, a fully-owned subsidiary of UBS Group AG, and UBS Switzerland AG, a fully-owned subsidiary of UBS AG, are also organized as AGs pursuant to article 620ff. of the Swiss Code of Obligations. Over the past two years, we have taken a series of measures to improve the resolvability of the Group in response to “too big to fail” requirements in Switzerland and other countries in which the Group operates. After the successful completion of the squeeze-out procedure in the third quarter of 2015, UBS Group AG became the sole owner of all shares of UBS AG and is expected to directly acquire certain other Group companies over time. The Swiss-booked business of Wealth Management and Personal & Corporate Banking (formerly Retail & Corporate) were transferred to UBS Switzerland AG in mid-2015. In 2015, we also completed the implementation of a revised business and operating model for UBS Limited in the UK. During 2015, we also established UBS Business Solutions AG as a direct subsidiary of UBS Group AG, to act as the Group ser- vice company, to which the ownership of the majority of our exist- ing service subsidiaries will be transferred. We established a new subsidiary, UBS Americas Holding LLC, which we intend to desig- nate as our intermediate holding company in the US under the Dodd-Frank Wall Street Reform and Consumer Protection Act. We also established a new subsidiary of UBS AG, UBS Asset Manage- ment AG, into which we expect to transfer the majority of the operating subsidiaries of Asset Management during 2016. ➔ Refer to the “The legal structure of UBS Group” section of this report for more information Operational Group structure As of 31 December 2015, the operational structure of the Group comprised Wealth Management, Wealth Management Americas, Personal & Corporate Banking (formerly Retail & Corporate), Asset Management (formerly Global Asset Management), and the Investment Bank, as well as Corporate Center with its units Corporate Center – Services, Corporate Center – Group Asset and Liability Management and Corporate Center – Non-core and Leg- acy Portfolio. ➔ Refer to the “Financial and operating performance” section and “Note 2 Segment reporting” in the “Consolidated financial statements” section of this report for more information 290 Listed and non-listed companies belonging to the Group The Group includes a number of consolidated entities, of which only UBS Group AG has its shares listed on stock exchanges. ➔ Refer to the “Corporate information” section of this report for UBS Group AG and UBS AG ➔ Refer to “Note 30 Interests in subsidiaries and other entities” in the “Consolidated financial statements” section of this report for more information on the significant subsidiaries of the Group Significant shareholders As of 1 January 2016, the Federal Act on Financial Market Infra- structures and Market Conduct in Securities and Derivatives Trad- ing of 19 June 2015 (Swiss Financial Market Infrastructure Act) replaced certain provisions of the Swiss Federal Act on Stock Exchanges and Securities Trading of 24 March 1995 as amended (Swiss Stock Exchange Act). Under the Swiss Financial Market Infrastructure Act, anyone holding shares in a company listed in Switzerland, or holding derivative rights related to shares of such a company, must notify the company and the SIX if the holding reaches, falls below or exceeds one of the following thresholds: 3, 5, 10, 15, 20, 25, 331⁄3, 50, or 662⁄3% of voting rights, regardless of whether or not such rights may be exercised. The detailed dis- closure requirements and the methodology for calculating the thresholds are defined in the Swiss Financial Market Supervisory Authority Ordinance on Financial Market Infrastructure (FMIO- FINMA), which replaced certain provisions of the Swiss Financial Market Supervisory Authority Ordinance on Stock Exchanges and Securities Trading (SESTO-FINMA) as of 1 January 2016. In partic- ular, the FMIO-FINMA sets forth that nominee companies that cannot autonomously decide how voting rights are exercised are not obligated to notify the company and SIX if they reach, exceed or fall below the threshold percentages. In addition, pursuant to the Swiss Code of Obligations, we must disclose in the notes to our financial statements the identity of any shareholder with a holding of more than 5% of the total share capital of UBS Group AG. According to disclosure notifications filed on 10 December 2014 with UBS Group AG and the SIX under the Swiss Stock Exchange Act and respective FINMA Ordinance, both as in force at that time, GIC Private Limited disclosed a holding of 7.07% of the total share capital of UBS Group AG. The beneficial owner of this holding is the Government of Singapore. On 10 December 2014, Norges Bank, Oslo, the Central Bank of Norway, disclosed a holding of 3.30%. On 15 January 2015, BlackRock Inc., New York, disclosed a holding of 4.89% and on 10 February 2016, MFS Investment Management, Boston, disclosed a holding of 3.05%. In accordance with the Swiss Stock Exchange Act and, as of 1 January 2016, the Swiss Financial Market Infrastructure Act, the aforementioned percentages were calculated in relation to the total share capital of UBS Group AG reflected in the Articles of Association at the time of the respective disclosure notification. Information on disclosures under the Swiss Stock Exchange Act and the Swiss Financial Market Infrastructure Act, respectively, is available on the SIX Disclosure Office website at www.six- exchange-regulation.com/ en/ home/publications/significant- shareholders.html. According to the 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 below were registered with 3% or more of the total share capital of UBS Group AG as of 31 December 2015. Cross-shareholdings We have no cross-shareholdings in excess of a reciprocal owner- ship of 5% of capital or voting rights with any other company. Audited | Shareholders registered in the UBS share register with 3% or more of the total share capital1 % of share capital Chase Nominees Ltd., London GIC Private Limited, Singapore DTC (Cede & Co.), New York2 Nortrust Nominees Ltd., London 1 Numbers for the year 2013 refer to UBS AG. 2 DTC (Cede & Co.), New York, “The Depository Trust Company”, is a US securities clearing organization. 31.12.15 31.12.14 9.14 6.38 6.14 3.60 9.05 6.61 5.76 3.52 31.12.13 11.73 6.39 5.89 3.75 291 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Capital structure Issued ordinary share capital As of 31 December 2014, UBS Group AG’s share capital amounted to CHF 371,712,832, represented by 3,717,128,324 shares with a par value of CHF 0.10 each. In 2015, the UBS Group AG’s Board of Directors (BoD) made use of the authorized capital created by decision of the sharehold- ers in 2014, and increased the ordinary share capital of UBS Group AG by CHF 12,765,070.60 by means of contributions in kind in the form of UBS AG shares in connection with the acquisition of 100% ownership of UBS AG. ➔ Refer to the “The legal structure of UBS Group” section of this report for more information UBS Group AG’s issued share capital also increased by CHF 495,250.50 in 2015, as a result of issuance of shares out of con- ditional capital due to options exercised by employees. At year-end 2015, 3,849,731,535 UBS Group AG shares were issued with a par value of CHF 0.10 each, leading to a share capi- tal of CHF 384,973,153.50. Issued share capital of UBS Group AG As of 31 December 2014 Issue of shares out of conditional capital due to employee options exercised in 2015 Issue of shares out of authorized capital related to the acquisition of 100% ownership of UBS AG As of 31 December 2015 Share capital in CHF Number of shares Par value in CHF 371,712,832 3,717,128,324 495,251 12,765,071 4,952,505 127,650,706 384,973,154 3,849,731,535 0.10 0.10 0.10 0.10 Distribution of UBS shares As of 31 December 2015 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 5,000,001–38,497,315 (1%) 1–2% 2–3% 3–4% 4–5% Over 5% Total registered Unregistered3 Total shares issued Shareholders registered Shares registered Number 29,221 136,820 77,651 6,603 526 90 26 1 2 1 0 31 250,944 % 11.6 54.5 30.9 2.6 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 Number % of shares issued 1,648,134 63,725,129 216,755,778 153,005,195 150,958,478 196,661,505 301,464,993 41,946,308 177,165,956 138,540,340 0 833,880,862 2,275,752,6782 1,573,978,857 3,849,731,535 0.0 1.7 5.6 4.0 3.9 5.1 7.8 1.1 4.6 3.6 0.0 21.7 59.1 40.9 100.0 1 On 31 December 2015, Chase Nominees Ltd., London, entered as a trustee / nominee, was registered with 9.14% of all UBS shares issued. However, according to the provisions of UBS Group AG, voting rights of trust- ees / nominees 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 6.14% of all UBS shares issued and is not subject to this 5% voting limit as a securities clearing organization. The same applies to the GIC Private Limited, Singapore, which was registered as beneficial owner with 6.38% of all UBS shares issued. 2 Of the total shares registered, 405,558,479 shares did not carry voting rights. 3 Shares not entered in the UBS share register as of 31 December 2015. 292 Conditional share capital Authorized share capital At year-end 2015, the following conditional share capital was available to UBS Group AG’s BoD: UBS Group AG had no authorized capital available on 31 Decem- ber 2015. At the Extraordinary General Meeting (EGM) held on 26 November 2014, the shareholders approved the increase of conditional capital to be issued through the voluntary or manda- tory exercise of conversion rights and / or warrants to a maximum of CHF 38,000,000 represented by up to 380,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. In 2015, the BoD has not made use of the allowance to issue such bonds or warrants. At the same EGM, the shareholders also approved the increase of the conditional capital to be issued upon exercise of employ- ees’ options. By 31 December 2015, options on 4,952,505 shares were exercised under the employee option plan with a total of 131,029,690 conditional capital shares being available at the end of 2015 to satisfy further exercises of options. ➔ Refer to article 4a of UBS Group AG’s Articles of Association for more information on the terms and conditions of the issue of shares out of existing conditional capital. The Articles of Association are available on our website at www.ubs.com/ governance On 10 February 2015, UBS Group AG’s BoD increased the ordi- nary share capital of UBS Group AG out of authorized share capi- tal by CHF 1,180,025 by means of a contribution in kind in the form of UBS AG shares acquired subsequent to the end of the exchange offer on a share-for-share basis via private exchanges on the same terms and conditions as the exchange offer. On the same basis, UBS Group AG’s BoD increased the ordinary share capital of UBS Group AG out of authorized share capital on 9 March 2015 and on 12 June 2015 by CHF 952,500 and CHF 1,750,000, respectively. On 28 August 2015, UBS Group AG’s BoD increased the ordi- nary share capital of UBS Group AG out of authorized share capi- tal by CHF 8,882,545.60 by means of a contribution in kind in the form of UBS AG shares. They corresponded to the shares held by the minority shareholders of UBS AG which were canceled follow- ing the Commercial Court of Zurich’s declaration of their invalidity in accordance with the request of UBS Group AG pursuant to article 33 of the Swiss Stock Exchange Act (currently, article 137 of the Swiss Financial Market Infrastructure Act). As a result, hold- ers of UBS AG shares were compensated through the delivery of the newly issued UBS Group AG shares on a share-for-share basis in accordance with the exchange ratio of the 2014 exchange offer. On the same date, the Articles of Association were amended to completely remove the provision on authorized capital. Conditional capital of UBS Group AG Employee equity participation plans Conversion rights / warrants granted in connection with bonds Total Maximum number of shares to be issued Year approved by Extraor- dinary General Meeting % of shares issued 31.12.15 131,029,690 380,000,000 511,029,690 2014 2014 31.12.15 3.40% 9.87% 13.27% 293 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Shareholders, legal entities and nominees: type and geographical distribution As of 31 December 2015 Individual shareholders Legal entities Nominees, fiduciaries Total registered shares Unregistered shares Total Americas of which: USA Asia Pacific Europe, Middle East and Africa of which: Germany of which: UK of which: Rest of Europe of which: Middle East and Africa Switzerland Total registered shares Unregistered shares Total Shareholders registered Number 245,294 5,355 295 % 97.7 2.1 0.1 250,944 100.0 Individual shareholders Legal entities Nominees Total Individual shareholders Legal entities Nominees Total Number 6,775 5,961 5,691 13,432 4,512 4,877 3,807 236 % 2.7 2.4 2.3 5.4 1.8 1.9 1.5 0.1 Number 197 103 168 275 26 14 225 10 219,396 87.4 4,715 % 0.1 0.0 0.1 0.1 0.0 0.0 0.1 0.0 1.9 Number 146 135 18 88 6 7 75 0 43 % 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Number 7,118 6,199 5,877 13,795 4,544 4,898 4,107 246 % 2.8 2.5 2.3 5.5 1.8 2.0 1.6 0.1 224,154 89.3 Number of shares Number of shares Number of shares Number of shares 19,253,355 17,436,861 23,032,675 41,515,370 13,368,267 18,638,367 8,899,611 609,125 343,177,562 426,978,962 0 % 0.5 0.5 0.6 1.1 0.3 0.5 0.2 0.0 8.9 11.1 52,576,724 48,488,553 321,847,156 30,511,029 274,041 2,205,727 27,621,991 409,270 357,022,166 761,957,075 0 % 1.4 1.3 8.4 0.8 0.0 0.1 0.7 0.0 9.3 323,042,407 322,827,025 9,025,021 735,670,963 15,412,578 577,682,051 142,576,334 19,078,250 19.8 1,086,816,641 0 0 245,294 97.7 5,355 2.1 295 0.1 250,944 100.0 426,978,962 11.1 761,957,075 19.8 1,086,816,641 28.2 3,849,731,535 100.0 Shares registered Number 426,978,962 761,957,075 1,086,816,641 2,275,752,678 1,573,978,857 3,849,731,535 394,872,486 388,752,439 353,904,852 807,697,362 29,054,886 598,526,145 179,097,936 1,018,395 719,277,978 2,275,752,678 1,573,978,857 % 8.4 8.4 0.2 19.1 0.3 15.0 3.7 0.0 0.5 28.2 % 11.1 19.8 28.2 59.1 40.9 100.0 % 10.3 10.1 9.2 21.0 0.7 15.5 4.7 0.0 18.7 59.1 40.9 Changes of shareholders’ equity and shares In accordance with International Financial Reporting Standards, Group equity attributable to UBS Group AG shareholders amounted to CHF 55.3 billion as of 31 December 2015 (2014: CHF 50.6 billion) (for reference, equity attributable to UBS AG shareholders as of 31 December 2013 amounted to CHF 48.0 bil- lion). UBS Group AG shareholders’ equity was represented by 3,849,731,535 issued shares as of 31 December 2015 (2014: 3,717,128,324 shares) (for reference, UBS AG shareholders’ equity in 2013: 3,842,002,069 shares). ➔ Refer to the “Statement of changes in equity” in the “Consolidated financial statements” section of this report for more information on changes in shareholders’ equity over the last three years Ownership Ownership of UBS Group AG shares is widely spread. The tables in this section provide information about the distribution of UBS Group AG shareholders by category and geographic location. This information relates only to registered shareholders and cannot be assumed to be representative of UBS Group AG’s entire investor base or the actual beneficial ownership. Only shareholders regis- tered in the share register as “shareholders with voting rights” are entitled to exercise voting rights. ➔ Refer to “Shareholders’ participation rights” in this section for more information As of 31 December 2015, 1,870,194,199 UBS Group AG shares carried voting rights, 405,558,479 shares were entered in the share register without voting rights and 1,573,978,857 shares were not registered. All 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 UBS Group AG. At year-end 2015, we owned 98,706,275 UBS Group AG reg- istered shares corresponding to 2.56% of the total share capital of UBS Group AG. At the same time, we had disposal positions relating to 222,146,535 voting rights of UBS Group AG, corre- sponding to 5.77% of the total voting rights of UBS Group AG. 5.55% thereof consisted of voting rights on shares deliverable in respect of employee awards. The calculation methodology for the disposal position is based on the FMIO-FINMA (formerly SESTO- FINMA), which sets forth that all future potential share delivery obligations irrespective of the contingent nature of the delivery must be taken into account. 294 Shareholders, legal entities and nominees: type and geographical distribution Shareholders registered Shares registered As of 31 December 2015 Individual shareholders Legal entities Nominees, fiduciaries Total registered shares Unregistered shares Total Americas of which: USA Asia Pacific Europe, Middle East and Africa of which: Germany of which: UK of which: Rest of Europe of which: Middle East and Africa Switzerland Total registered shares Unregistered shares Total 250,944 100.0 Number 245,294 5,355 295 Number 7,118 6,199 5,877 13,795 4,544 4,898 4,107 246 % 97.7 2.1 0.1 % 2.8 2.5 2.3 5.5 1.8 2.0 1.6 0.1 Number 6,775 5,961 5,691 13,432 4,512 4,877 3,807 236 % 2.7 2.4 2.3 5.4 1.8 1.9 1.5 0.1 Number 197 103 168 275 26 14 225 10 % 0.1 0.0 0.1 0.1 0.0 0.0 0.1 0.0 1.9 Number 146 135 18 88 6 7 75 0 43 % 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 219,396 87.4 4,715 224,154 89.3 Individual shareholders Legal entities Nominees Total Individual shareholders Legal entities Nominees Number of shares 19,253,355 17,436,861 23,032,675 41,515,370 13,368,267 18,638,367 8,899,611 609,125 343,177,562 426,978,962 0 % 0.5 0.5 0.6 1.1 0.3 0.5 0.2 0.0 8.9 11.1 Number of shares 52,576,724 48,488,553 321,847,156 30,511,029 274,041 2,205,727 27,621,991 409,270 357,022,166 761,957,075 0 % 1.4 1.3 8.4 0.8 0.0 0.1 0.7 0.0 9.3 Number of shares 323,042,407 322,827,025 9,025,021 735,670,963 15,412,578 577,682,051 142,576,334 0 19,078,250 19.8 1,086,816,641 0 Number 426,978,962 761,957,075 1,086,816,641 2,275,752,678 1,573,978,857 3,849,731,535 Total Number of shares 394,872,486 388,752,439 353,904,852 807,697,362 29,054,886 598,526,145 179,097,936 1,018,395 719,277,978 2,275,752,678 1,573,978,857 % 8.4 8.4 0.2 19.1 0.3 15.0 3.7 0.0 0.5 28.2 % 11.1 19.8 28.2 59.1 40.9 100.0 % 10.3 10.1 9.2 21.0 0.7 15.5 4.7 0.0 18.7 59.1 40.9 245,294 97.7 5,355 2.1 295 0.1 250,944 100.0 426,978,962 11.1 761,957,075 19.8 1,086,816,641 28.2 3,849,731,535 100.0 Shares and participation certificates We have only one unified class of UBS Group AG’s shares issued in registered form. These shares are traded and settled as global reg- istered 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. We have no participation certificates outstanding. ➔ Refer to “UBS shares” in the “Capital management” section of this report for more information 295 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Distributions to shareholders The decision to pay a dividend and the amount of any dividend, depend on a variety of factors, including our profits and cash flow generation and on the maintenance of our targeted capital ratios. At the AGM 2016, UBS’s BoD intends to propose to sharehold- ers an ordinary dividend of CHF 0.60 per share, a 20% increase from the previous year’s ordinary dividend payment, reflecting profit for the financial year 2015, and a special dividend of CHF 0.25 per share, reflecting a significant net upward revaluation of deferred tax assets in 2015. The total dividend will be paid out of capital contribution reserves, subject to shareholder approval. Transferability, voting rights and nominee registration We do not apply any restrictions or limitations on the transfer- ability of shares. Voting rights may be exercised without any restrictions 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 issued UBS Group AG shares if they agree to disclose, upon our request, ben- eficial owners holding 0.3% or more of all issued UBS Group AG shares. An exception to the 5% voting limit rule is in place for securities clearing organizations, such as The Depository Trust Company in New York. ➔ Refer to “Shareholders’ participation rights” in this section for more information Convertible bonds and options As of 31 December 2015, there were no contingent capital securi- ties or convertible bonds outstanding requiring the issuance of new shares. ➔ Refer to the “Capital management” section of this report for more information on our outstanding capital instruments As of 31 December 2015, there were 93,367,982 employee options outstanding, including stock appreciation rights. Options and stock appreciation rights equivalent to 18,189,195 shares were in-the-money and exercisable. Option-based compensation plans are sourced by either purchasing UBS Group AG shares in the market or issuing new shares out of conditional capital. As mentioned above, as of 31 December 2015, 131,029,690 unis- sued shares in conditional share capital were available for this purpose. ➔ Refer to “Conditional share capital” in this section for more information on outstanding options 296 Shareholders’ participation rights We are committed to shareholder participation in our decision- making process. Around 250,000 shareholders are directly regis- tered, some 150,000 US shareholders via nominee companies. Shareholders are regularly informed about our activities and per- formance, and are personally invited to the general meetings of shareholders. ➔ Refer to “Information policy” in this section for more information Registered shareholders can access personalized services and important information related to share register entries and our general meetings of shareholders at www.ubs.com/shareholder- portal. They can also enter their voting instructions electronically through the shareholder portal ahead of our general meetings of shareholders, and they can verify their voting instructions before and after the general meetings using cryptography. This method of encryption ensures that the voting instructions remain secret through the entire voting process. In addition, shareholders can order admission cards and register changes to their address details. The website also allows them to manage their subscrip- tions to shareholder-related publications and to communicate directly with UBS Shareholder Services via a secure channel. The shareholder portal is fully integrated into our website. For UBS Group AG’s Annual General Meeting (AGM) 2016, we intend to send to registered shareholders, who have explicitly applied for and accepted the terms of this specific procedure, an email notification informing them of the upcoming AGM and that their personalized AGM invitation and related documentation is available on the shareholder portal. These shareholders will not receive a separate invitation by ordinary mail. Relations with shareholders We fully subscribe to the principle of equal treatment of all share- holders, who range from large institutions to individual investors, and regularly inform them about Group developments. The AGM offers shareholders the opportunity to raise any questions to the Board of Directors (BoD) and Group Executive Board (GEB), as well as to our internal and external auditors. Voting rights, restrictions and representation We place no restrictions on share ownership and voting rights. However, pursuant to general principles formulated by the BoD, nominee companies and trustees, who normally represent a large number of individual shareholders and may hold an unlimited number of shares, have voting rights limited to a maximum of 5% of all issued UBS Group AG shares in order to avoid the risk of unknown 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 this 5% voting limit. In order to be recorded in the share register with voting rights, shareholders must confirm that they acquired UBS Group AG shares in their own name and for their own account. Nominee companies and trustees are required to sign an agreement con- firming their willingness to disclose, upon our request, individual beneficial owners holding more than 0.3% of all issued UBS Group AG shares. All shareholders registered with voting rights are entitled to participate in general meetings of shareholders. 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 elected by the UBS Group AG shareholders or by appointing another regis- tered shareholder of their choice to vote on their behalf. Alterna- tively, registered shareholders can issue their voting instructions to the independent proxy electronically through our shareholder portal. Nominee companies normally submit the proxy material to the beneficial owners and transmit the collected votes to the independent proxy. Statutory quorums Motions, including the election and re-election of BoD members and the appointment of the auditors, are decided at a general meeting of shareholders by an absolute majority of the votes cast, excluding blank and invalid ballots. For the approval of certain specific issues, the Swiss Code of Obligations requires a positive vote from a two-thirds majority of the votes represented at a gen- eral meeting of shareholders, and from the absolute majority of the par value of shares represented at the meeting. Such issues include the creation of shares with privileged voting rights, the introduction of restrictions on the transferability of registered shares, conditional and authorized capital increases, and restric- tions or exclusions of shareholders’ pre-emptive rights. The Articles of Association also require a two-thirds majority of votes represented for approval of any change to provisions of the Articles regarding the number of BoD members and any decision to remove one quarter or more of the BoD members. Votes and elections are normally conducted electronically to ascertain the exact number of votes cast. Voting by a show of hands remains possible if a clear majority is predictable. Share- holders representing at least 3% of the votes represented may request that a vote or election be carried out electronically or by written ballot. In order to allow shareholders to clearly express their views on all individual topics, each item on the agenda is put to a vote separately and BoD members are elected on a person- by-person basis. 297 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Convocation of general meetings of shareholders The AGM must be held within six months of the close of the financial year (31 December) and normally takes place in early May. A personal invitation including a detailed agenda and expla- nation of each motion is made available to every registered share- holder at least 20 days ahead of the scheduled AGM. The meet- ing 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 auditors consider it necessary. Shareholders indi- vidually or jointly representing at least 10% of the share capital may, at any time including during an AGM, ask in writing for an Extraordinary General Meeting to be convened to address a spe- cific issue they put forward. Placing of items on the agenda Pursuant to our Articles of Association, shareholders individually or jointly representing shares with an aggregate minimum par value of CHF 62,500 may submit proposals for matters to be placed on the agenda for consideration at the next AGM. We publish the deadline for submitting such proposals in the Swiss Official Gazette of Commerce and on our website at 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. The BoD formulates opinions on the propos- als, which are published together with the motions. Registrations in the share register The general rules for entry with voting rights into our Swiss share register also apply before general meetings of shareholders. The same rules apply for our US transfer agent that operates the US share register for all UBS Group AG shares in a custodian account in the US. In order to determine the voting rights of each share- holder, our share register generally closes two business days before a shareholder meeting. Our independent proxy agent pro- cesses voting instructions from shareholders with voting power as long as technically possible, generally also until two business days before a shareholder meeting. 298 Board of Directors The Board of Directors (BoD) of UBS Group AG and UBS AG, each under the leadership of the Chairman, consists of six to 12 mem- bers as per our Articles of Association (AoA). The BoD decides on the strategy of the Group upon recommendation of the Group Chief Executive Officer (Group CEO) and is responsible for the overall direction, supervision and control of the Group and its management, as well as for supervising compliance with applica- ble laws, rules and regulations. The BoD exercises oversight over UBS Group AG and its subsidiaries and is responsible for ensuring the establishment of a clear Group governance framework to ensure effective steering and supervision of the Group, taking into account the material risks to which UBS Group AG and its subsidiaries are exposed. The BoD has ultimate responsibility for the success of the Group and for delivering sustainable shareholder value within a framework of prudent and effective controls, approves all finan- cial statements for issue and appoints and removes all Group Executive Board (GEB) members. Members of the Board of Directors On 7 May 2015, Michel Demaré, David Sidwell, Reto Francioni, Ann F. Godbehere, Axel P. Lehmann, William G. Parrett, Isabelle Romy, Beatrice Weder di Mauro and Joseph Yam were re-elected as members of the BoD. Jes Staley, then Managing Partner at BlueMountain Capital Management LLC, was elected as a new member of the BoD, while Helmut Panke did not stand for re- election at the AGM 2015. Following their election, the BoD appointed Michel Demaré as Vice Chairman and David Sidwell as Senior Independent Director of UBS Group AG. At the same time, Axel A. Weber was re-elected Chairman of the Board of Directors, and Ann F. Godbehere, Michel Demaré, Reto Francioni and Jes Staley were elected as members of the Compensation Commit- tee. Additionally, ADB Altorfer Duss & Beilstein AG was elected independent proxy agent. Following the announcement by Barclays Plc that Jes Staley would assume the role of CEO, UBS announced on 28 October 2015 that it had accepted his resignation from all his functions at UBS with immediate effect to avoid conflicts of interest. More- over, on 3 November 2015, we announced various changes to our GEB and BoD, including the appointment of Axel P. Lehmann as Group Chief Operating Officer with effect from 1 January 2016. Consequently, he stepped down from the BoD and will not stand for re-election at the 2016 AGM. Axel P. Lehmann recused himself from the BoD meetings as of November 2015 due to his Group Executive Board nomination. Our AoA limit the number of mandates that members of the BoD may hold outside the UBS Group. Article 31 of the AoA limits the maximum number of permitted mandates of members of the BoD to four board memberships in listed companies and five additional mandates in non-listed companies. Mandates in companies, which are controlled by us or which control us, are not subject to this limitation. In addition, members of the BoD may hold no more than 10 mandates at UBS’s request and 10 mandates in associations, charitable organizations, foundations, trusts, and employee welfare foundations. No member of the BoD reaches the thresholds described in article 31 of the Articles of Association. The following biographies provide information on the BoD members and the Group Company Secretary, including Axel P. Lehmann, as he was a member of the BoD as of 31 December 2015. As mentioned above, as of 1 January 2016 he joined the GEB. For reasons of transparency, the biographies include, in addi- tion to information on mandates, information on memberships or other activities or functions, as required by the SIX Swiss Exchange Corporate Governance Directive. All members of UBS Group AG’s BoD are also members of UBS AG’s BoD, and committee membership is the same for both entities. 299 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Axel A. Weber German, born 1957 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Functions at UBS Group AG Chairman of the Board of Directors / Chairperson of the Corporate Culture and Responsibility Committee / Chairperson of the Governance and Nominating Committee Year of initial election to UBS Group AG: 2014 Year of initial election to UBS AG: 2012 Professional history and education Axel A. Weber was elected to the Board of Directors (BoD) of UBS AG at the 2012 AGM and of UBS Group AG in November 2014. He is Chairman of the BoD of both UBS AG and UBS Group AG. He has chaired the Governance and Nominating Committee since 2012 and became Chair- person of the Corporate Culture and Responsibility Com- mittee in 2013. Mr. Weber was president of the German Bundesbank between 2004 and 2011, during which time he also served as a member of the Governing Council of the European Central Bank, a member of the Board of Di- rectors of the Bank for International Settlements, German governor of the International Monetary Fund, and as a member of the G7 and G20 Ministers and Governors. He was a member of the steering committees of the European Systemic Risk Board in 2011 and the Financial Stability Board from 2010 to 2011. On leave from the University of Cologne, he was a visiting professor at the University of Chicago Booth School of Business from 2011 to 2012. From 2002 to 2004, Mr. Weber served as a member of the German Council of Economic Experts. He was a professor of international economics and Director of the Center for Financial Research at the University of Cologne from 2001 to 2004, and a professor of monetary economics and Di- rector of the Center for Financial Studies at the Goethe University in Frankfurt am Main from 1998 to 2001. From 1994 to 1998, he was a professor of economic theory at the University of Bonn. Mr. Weber holds a PhD in econom- ics from the University of Siegen, where he also received his habilitation. He graduated with a master’s degree in economics at the University of Constance and holds hon- orary doctorates from the universities of Duisburg-Essen and Constance. Other activities and functions – Board member of the Swiss Bankers Association – Member of the Board of Trustees of Avenir Suisse – Advisory Board member Zukunft Finanzplatz – Board member of the Swiss Finance Council – Board member of the Institute of International Finance – Board member of the International Monetary Confer- ence – Member of the European Financial Services Round Table – Member of the European Banking Group – Member of the International Advisory Panel, Monetary Authority of Singapore – Board member of the Financial Services Professional Board, Kuala Lumpur – Member of the Group of Thirty, Washington, DC – Chairman of the DIW Berlin Board of Trustees – Advisory Board member of the Department of Econom- ics at the University of Zurich 300 Michel Demaré Belgian, born 1956 Syngenta International AG Schwarzwaldallee 215 CH-4058 Basel Functions at UBS Group AG Independent Vice Chairman / member of the Audit Committee / member of the Compensation Committee / member of the Governance and Nominating Committee Year of initial election to UBS Group AG: 2014 Year of initial election to UBS AG: 2009 Professional history and education Michel Demaré was elected to the BoD of UBS AG at the 2009 AGM and of UBS Group AG in November 2014. In April 2010, he was appointed independent Vice Chairman. He has been a member of the Audit Committee since 2009 and the Governance and Nominating Committee since 2010. He became a member of the Compensation Com- mittee in 2013. Mr. Demaré joined ABB in 2005 as Chief Financial Officer (CFO) and as a member of the Group Executive Committee. He stepped down from his function in ABB in January 2013. Between February and August 2008, he acted as the interim CEO of ABB. From September 2008 to March 2011, he combined his role as CFO with that 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, 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 CFOoftheGlobalPolyolefinsandElastomers division. He beganhiscareerasanofficerinthe multinationalbanking division of Continental Illinois National Bank of Chicago, andwasbasedinAntwerp.Mr. Demarégraduatedwithan MBA from the Katholieke Universiteit Leuven, Belgium, and holds a degree in applied economics from the Univer- sité Catholique de Louvain, Belgium. Other activities and functions – Chairman of the Board of Syngenta – Board member of Louis-Dreyfus Commodities Holdings BV – Supervisory Board member of IMD, Lausanne – Chairman of the Syngenta Foundation for Sustainable Agriculture – Advisory Board member of the Department of Banking and Finance at the University of Zurich – Advisory Board member of Zukunft Finanzplatz David Sidwell American (US) and British, born 1953 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Functions at UBS Group AG Senior Independent Director / Chairperson of the Risk Committee / member of the Governance and Nominating Committee Year of initial election to UBS Group AG: 2014 Year of initial election to UBS AG: 2008 Professional history and education David Sidwell was elected to the BoD of UBS AG at the 2008 AGM and of UBS Group AG in November 2014. 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 Com- mittee since 2011. Mr. Sidwell was Executive Vice President and CFO of Morgan Stanley between 2004 and 2007. Be- fore joining Morgan Stanley he worked for JPMorgan Chase & Co., where, in his 20 years of service, he held a number of different positions, including controller and, from 2000 to 2004, CFO of the Investment Bank. Prior to this, he was with Price Waterhouse in both London and NewYork.Mr.SidwellgraduatedfromCambridgeUni- versity and qualified as a chartered accountant with the Institute of Chartered Accountants in England and Wales. Other activities and functions – Director and Chairperson of the Risk Policy and Capital Committee of Fannie Mae, Washington, DC – Senior advisor at Oliver Wyman, New York – Board member of Chubb Limited – Board member of GAVI Alliance – Chairman of the Board of Village Care, New York – Director of the National Council on Aging, Washington, DC Reto Francioni Swiss, born 1955 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Functions at UBS Group AG Member of the Compensation Committee / member of the Corporate Culture and Responsibility Committee / member of the Risk Committee Year of initial election to UBS Group AG: 2014 Year of initial election to UBS AG: 2013 Professional history and education Reto Francioni was elected to the BoD of UBS AG at the 2013 AGM and of UBS Group AG in November 2014. He has been a member of the Corporate Culture and Respon- sibility Committee since 2013, the Compensation Commit- tee since 2014 and the Risk Committee since 2015. He was CEO of Deutsche Börse AG from 2005 to 2015. Since 2006, he has been a professor of applied capital markets theory at the University of Basel. From 2002 to 2005, he was Chairman of the Supervisory Board and President of the SWX Group, Zurich. Mr. Francioni was co-CEO and Spokesman for the Board of Directors of Consors AG, Nuremberg, from 2000 to 2002. Between 1993 and 2000, he held various management positions at Deutsche Börse AG, including that of Deputy CEO from 1999 to 2000. From 1992to1993,heservedinthecorporatefinancedivision of Hoffmann-La Roche, Basel. Prior to this, he was on the executive board of Association Tripartite Bourses for sever- al years. From 1985 to 1988, he worked for the former Credit Suisse, holding positions in the equity sales and legal departments. He started his professional career in 1981 in the commerce division of Union Bank of Switzer- land. Mr. Francioni completed his studies in law in 1981 and his PhD in 1987 at the University of Zurich. Other activities and functions – Board member of Francioni AG – Board member Swiss International Air Lines – Board member of MedTech Innovation Partners AG 301 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Ann F. Godbehere Canadian and British, born 1955 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Functions at UBS Group AG Chairperson of the Compensation Committee / member of the Audit Committee Year of initial election to UBS Group AG: 2014 Year of initial election to UBS AG: 2009 Professional history and education Ann F. Godbehere was elected to the BoD of UBS AG at the 2009 AGM and of UBS Group AG in November 2014. She has chaired the Compensation Committee since 2011 and has been a member of the Audit 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 until the end of January 2009. Prior to this role, she served asCFOofSwissReGroupfrom2003to2007.Ms. Godbe- here was CFO of its Property & Casualty division in Zurich for two years. Prior to 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 Canada and head of IT for Swiss Re in North America. Between 1996 and 1997, she was CFO of Swiss Re Life & Health North America.Ms.Godbehereisacertifiedgeneralaccountant and was made a fellow of the Chartered Professional AccountantAssociationin2014andfellowof theCertified General Accountant Association of Canada in 2003. Other activities and functions – Board member of Prudential plc (chairman of the audit committee) – Board member of Rio Tinto plc (chairman of the audit committee) – Board member of Rio Tinto Limited (chairman of the audit committee) – Board member of British American Tobacco plc William G. Parrett American (US), born 1945 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Functions at UBS Group AG Chairperson of the Audit Committee / member of the Compensation Committee / member of the Corporate Culture and Responsibility Committee Year of initial election to UBS Group AG: 2014 Year of initial election to UBS AG: 2008 Professional history and education William G. Parrett was elected to the BoD of UBS AG at the October 2008 Extraordinary General Meeting and of UBS Group AG in November 2014. He has chaired the Audit Committee since 2009, has been a member of the Corpo- rate Culture and Responsibility Committee since 2012 and the Compensation Committee since 2015. 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 pub- lic, private, governmental, and state-owned clients world- wide. Mr. Parrett has a bachelor’s degree in accounting fromSt.FrancisCollege,NewYork,andisacertifiedpublic accountant (New York). Other activities and functions – Board member of the Eastman Kodak Company (chairman of audit committee) – Board member of the Blackstone Group LP (chairman of audit committee and chairman oftheconflictscommittee) – BoardmemberofThermoFisherScientificInc. (chairman of audit committee) – Member of the Committee on Capital Markets Regulation – Member of the Carnegie Hall Board of Trustees – Past Chairman of the Board of the United States Council for International Business – Past Chairman of United Way Worldwide 302 Isabelle Romy Swiss, born 1965 Froriep Bellerivestrasse 201 CH-8034 Zurich Functions at UBS Group AG Member of the Audit Committee / member of the Governance and Nominating Committee Year of initial election to UBS Group AG: 2014 Year of initial election to UBS AG: 2012 Professional history and education Isabelle Romy was elected to the BoD of UBS AG at the 2012 AGM and of UBS Group AG in November 2014. She hasbeenamemberoftheAuditCommitteeandthe Governance and Nominating Committee since 2012. Ms. RomyisapartneratFroriep,alargeSwissbusinesslaw firm. From 1995 to 2012, she worked for another major SwisslawfirmbasedinZurich,whereshewasapartner from 2003 to 2012. Her legal practice includes litigation and arbitration in cross-border cases. Ms. Romy has been an associate professor at the University of Fribourg and at the Federal Institute of Technology in Lausanne (EPFL) since 1996. Between 2003 and 2008, she served as a deputy judge at the Swiss Federal Supreme Court. From 1999 to 2006, she was a member of the Ethics Commis- sion at the EPFL. Ms. Romy earned her PhD in law (Dr. iur.) at the University of Lausanne in 1990 and has been a qualifiedattorney-at-lawadmittedtothebarsince1991. From 1992 to 1994, she was a visiting scholar at Boalt Hall School of Law, University of California, Berkeley, and com- pleted her professorial thesis at the University of Fribourg in 1996. Other activities and functions – Vice Chairman of the Sanction Commission of SIX Swiss Exchange – Member of the Fundraising Committee of the Swiss Na- tional Committee for UNICEF Beatrice Weder di Mauro Italian and Swiss, born 1965 Johannes Gutenberg University Mainz Jakob Welder-Weg 4 D-55099 Mainz Functions at UBS Group AG Member of the Audit Committee / member of the Risk Committee Year of initial election to UBS Group AG: 2014 Year of initial election to UBS AG: 2012 Professional history and education Beatrice Weder di Mauro was elected to the BoD of UBS AG at the 2012 AGM and of UBS Group AG in November 2014. She has been a member of the Audit Committee since 2012 and became a member of the Risk Committee in 2013. She has been a professor of economics, economic policy and international macroeconomics at the Johannes Gutenberg University of Mainz since 2001. Ms. Weder di Mauro was a member of the German Council of Economic Experts from 2004 to 2012. In 2010, she was a resident scholar at the International Monetary Fund (IMF) in Wash- ington, DC, and, in 2006, a visiting scholar at the National Bureau of Economic Research, Cambridge, MA. She was an associate professor of economics at the University of Basel between 1998 and 2001 and a research fellow at the United Nations University in Tokyo from 1997 to 1998. Prior to this, she was an economist at the IMF in Washing- ton, DC. Ms. Weder di Mauro earned her PhD in economics at the University of Basel in 1993 and received her habilita- tion there in 1999. Other activities and functions – Supervisory Board member of Robert Bosch GmbH, Stuttgart – Member of the ETH Zurich Foundation Board of Trustees – Economic Advisory Board member of Fraport AG – Advisory Board member of Deloitte Germany – Deputy Chairman of the University Council of the University of Mainz – Member of the Senate of the Max Planck Society 303 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Joseph Yam Chinese and Hong Kong citizen, born 1948 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Functions at UBS Group AG Member of the Corporate Culture and Responsibility Committee / member of the Risk Committee Year of initial election to UBS Group AG: 2014 Year of initial election to UBS AG: 2011 Professional history and education Joseph Yam was elected to the BoD of UBS AG at the 2011 AGM and of UBS Group AG in November 2014. He has been a member of the Corporate Culture and Responsibil- ity 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. Mr. Yam was in- strumental in the establishment of the Hong Kong Mone- tary Authority and served as 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 several posi- tionssuchasDirectoroftheOfficeoftheExchangeFund from 1991, Deputy Secretary for Monetary Affairs from 1985 and Principal Assistant Secretary for Monetary Affairs from 1982. Mr. Yam graduated from the University of Hong Kongin1970withfirstclasshonorsinsocialsciences. He holds honorary doctorate degrees and professorships from a number of universities in Hong Kong and overseas. Other activities and functions – Board member of Johnson Electric Holdings Limited – Board member of UnionPay International Co., Ltd. – Board member of The Community Chest of Hong Kong – International Advisory Council member of China Invest- ment Corporation – Distinguished Research Fellow at the Institute of Global Economics and Finance at the Chinese University of Hong Kong Group Company Secretary Luzius Cameron Australian and Swiss, born 1955 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Function at UBS Group AG Group Company Secretary for UBS Group AG since 2014 and for UBS AG since 2005 Professional history and education Luzius Cameron was appointed Group Company Secretary ofUBSAGbytheBoDforthefirsttimein2005andofUBS Group AG in November 2014. He has been Company Sec- retary of UBS Switzerland AG and UBS Business Solutions AG since 2015. 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 Stra- tegic 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 Corpo- ration in 1989, where he started out in Corporate Control- ling before assuming a number of senior roles at Warburg Dillon Read, including 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 astro- physics from the University of Basel. 304 Member of the Board of Directors until 31 December 2015 Axel P. Lehmann Swiss, born 1959 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Function at UBS Group AG Member of the Risk Committee until 31 December 2015 Year of initial election to UBS Group AG: 2014 Year of initial election to UBS AG: 2009 Professional history and education Axel P. Lehmann became a member of the GEB and was appointedGroupChiefOperatingOfficerofUBSGroupAG and UBS AG in January 2016. He was a member of the BoD of UBS AG from 2009 to 2015 and of UBS Group AG from 2014 to 2015. During his entire tenure on the Board, he had been a member of the Risk Committee and, from 2011 to 2013, a member of the Governance and Nominating Committee. Mr. Lehmann became a member of Zurich Insurance Group’s (Zurich) Group Executive Committee in 2002, holding various management positions, including CEO for the European and North America businesses, and from 2008 to 2015 as Chief Risk Officer with additional responsibilities for Group IT, as Regional Chairman for Eu- rope, Middle East and Africa and as Chairman for Farmers Group Inc. In 2001 he was appointed CEO for Northern, Central and Eastern Europe and Zurich Group Germany, having served as a member of the company’s Group Man- agement Board since 2000 with responsibility for group- wide business development functions. In 1996, he joined Zurich as a member of the Executive Committee of Zurich Switzerland and subsequently held various executive management and corporate development positions within Zurich Switzerland. Prior to joining Zurich, Mr. Lehmann was head of corporate planning and control- ling at Swiss Life, project manager and Vice President of the Institute of Insurance Economics at the University of St. Gallen and visiting professor at Bocconi University in Milan. Mr. Lehmann holds a PhD and a master’s de- gree in business administration and economics from the University of St. Gallen. He is also a graduate of the Wharton Advanced Management Program and an hon- orary professor of business administration and service management at the University of St. Gallen. Other activities and functions – Chairman of the Global Agenda Council on the Global Financial System of WEF – Chairman of the Board of the Institute of Insurance Economics of the University of St. Gallen – Member of the International and Alumni Advisory Board of the University of St. Gallen – Member of the Swiss-American Chamber of Commerce Chapter Doing Business in USA 305 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Elections and terms of office The BoD proposes the individual nominated to be Chairman, who in turn is elected by shareholders at the AGM. In addition, shareholders elect each member of the BoD indi- vidually, as well as the members of the Compensation Committee on an annual basis. The BoD in turn appoints one or more Vice Chairmen, a Senior Independent Director, the members of the BoD committees and their respective Chairpersons, and the Group Company Secretary. As set out in the Organization Regulations, BoD members are normally expected to serve for a minimum of three years. No BoD member may serve for more than 10 consecutive terms of office or continue to serve beyond the AGM held in the calendar year following their 70th birthday. In exceptional circumstances, the BoD may extend both these limits. Organizational principles and structure Following each AGM, the BoD meets to appoint one or more Vice Chairmen, a Senior Independent Director, the BoD committee members, other than the Compensation Committee members who are elected by the shareholders, and their respective Chairpersons. At the same meeting, the BoD appoints a Group Company Secre- tary, who acts as secretary to the BoD and its committees. According to the Articles of Association, the BoD meets as often as business requires, but must meet at least six times a year. During 2015, a total of 24 BoD meetings and calls were held, 13 of which were attended by GEB members. On average, 97% of BoD members were present at all BoD meetings. In addition to the BoD meetings attended by the GEB, the Group CEO partly attended most meetings of the BoD without GEB participation. The average duration of these meetings and calls was two hours. In 2015, for both UBS Group AG and UBS AG, the frequency and length of meetings were the same. At every BoD meeting, each committee chairperson provides the BoD with an update on current activities of his or her commit- tee as well as important committee issues. At least once a 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 on a self- assessment of the BoD committees, and seeks to determine whether the BoD and its committees are functioning effectively and efficiently. In 2014, the BoD committees performed a self- assessment and concluded that the BoD was operating effectively. At least every three years, the BoD assessments include an appraisal by an external expert. For 2015, such BoD assessments were conducted by a third party and will be completed in spring 2016. The committees listed on the following pages assist the BoD in the performance of its responsibilities. These committees and their charters are described in the Organization Regulations, pub- lished at www.ubs.com/governance. Topics of common interest or affecting more than one committee were discussed at joint committees’ meetings. During 2015, seven joint committees’ meetings were held for UBS Group AG (the same number of meetings were also held for UBS AG). Board and committee meetings in 20151 Total number of meetings Number of meetings with full attendance Number of meetings with one member absent Number of meetings with two or more members absent Overall average meeting attendance11 Minimal attendance at one single meeting BoD2, 3, 4 24 16 8 0 97% 89% AC5 20 12 8 0 92% 80% CCRC6 5 4 1 0 95% 75% Comp Com7, 4 8 5 3 0 91% 75% GNC8 8 5 3 0 91% 75% RC9, 3, 4 14 10 3 1 93% 60% SC10 6 3 3 0 83% 67% Legend: BoD = Board of Directors, AC = Audit Committee, CCRC = Corporate Culture and Responsibility Committee, Comp Com = Compensation Committee, GNC = Governance and Nominating Committee, RC = Risk Committee, SC = Special Committee 1 Includes conference calls. 2 The BoD consisted of 11 members at the beginning of 2015 and 10 at the end of the year: Helmut Panke did not stand for re-election at the AGM on 7 May 2015, Jes Staley was newly elected at the AGM on 7 May 2015 and resigned at the end of October 2015, and Axel P. Lehmann stepped down from the BoD as of 31 December 2015 and joined the GEB on 1 January 2016. 3 Axel P. Lehmann recused himself from the BoD meetings as of November 2015 due to his GEB nomination. 4 Helmut Panke accepted the invitation to remain on the BoD in 2014 but did not stand for re-election at the AGM on 7 May 2015. Due to short-term meeting date changes he was unable to attend several meetings, but was nevertheless a very active member. 5 The Audit Committee consisted of the same five members at the beginning and at the end of 2015. 6 The Corporate Culture and Responsibility Committee consisted of the same four members at the beginning and at the end of 2015. 7 The Compensation Committee consisted of four members at the beginning and at the end of 2015. Two members of the Compensation Committee resigned during the year and were both replaced. 8 The Governance and Nominating Committee consisted of the same four members at the begin- ning and at the end of 2015. 9 The Risk Committee consisted of five members at the beginning of 2015 and five members at the end of the year including one change in the composition. 10 The Special Committee consisted of the same three members at the beginning and at the end of 2015. All meetings were ad hoc. 11 For UBS Group AG and UBS AG the same number of meetings were held. 306 Audit Committee EDTF | The Audit Committee consists of five BoD members, all of whom were determined by the BoD to be fully independent. The Audit Committee members, as a group, must have the necessary qualifications and skills to perform all of their duties and must, together, possess financial literacy and experience in banking and risk management. On 31 December 2015, William G. Parrett chaired the Audit Committee, with Michel Demaré, Ann F. God- behere, Isabelle Romy and Beatrice Weder di Mauro as additional members. The Audit Committee itself does not perform audits, but mon- itors the work of the external auditors, Ernst & Young Ltd (EY), who in turn are responsible for auditing UBS Group AG’s and UBS AG’s consolidated and standalone annual financial statements and for reviewing the quarterly financial statements. The function of the Audit Committee is to serve as an indepen- dent and objective body with oversight of the following: (i) UBS Group AG’s, UBS AG’s and the Group’s accounting policies, finan- cial reporting and disclosure controls and procedures, (ii) the qual- ity, adequacy and scope of external audit, (iii) UBS Group AG’s, UBS AG’s and the Group’s compliance with financial reporting requirements, (iv) senior management’s approach to internal con- trols with respect to the production and integrity of the financial statements and disclosure of the financial performance and (v) the performance of Group Internal Audit in conjunction with the Chairman. For these purposes, the Audit Committee has the authority to meet with regulators and external bodies, in consul- tation with the Group CEO. Senior management is responsible for the preparation, presentation and integrity of the financial state- ments. The Audit Committee reviews the annual financial statements of both UBS Group and UBS AG and the quarterly financial state- ments of UBS Group AG as well as the consolidated annual report of the Group, as proposed by management, with the external auditors and Group Internal Audit in order to recommend their approval (including any adjustments the Audit Committee consid- ers appropriate) to the BoD. Periodically, and at least annually, the Audit Committee assesses the qualifications, expertise, effectiveness, independence and performance of the external auditors and their lead audit partner, in order to support the BoD in reaching a decision in rela- tion to the appointment or dismissal of the external auditors and the rotation of the lead audit partner. The BoD then submits these proposals to the shareholders for approval at the AGM. During 2015, the Audit Committee held seven meetings and 13 calls with a participation rate of 92%. On average the duration of each of the meetings and calls was approximately four and a half hours and one hour, respectively. In 2015, for both UBS Group AG and UBS AG, the frequency and length of meetings were the same. All meetings and calls of the Audit Committee were attended by the Group Chief Financial Officer and most of the meetings were attended by the Group CEO. In addition, the committee met once with the Swiss Financial Market Supervisory Authority (FINMA) and the chair of the committee met with the Federal Reserve Bank of New York (FRBNY) on a periodic basis. The Audit Committee reports to the BoD about its discussions with our external auditors. Once a year, the lead representatives of our external auditors present their long-form report to the BoD, as required by FINMA. All Audit Committee members have accounting or related financial management expertise and in compliance with the rules established pursuant to the US Sarbanes-Oxley Act of 2002, at least one member qualifies as a financial expert. The New York Stock Exchange (NYSE) listing standards on corporate governance set more stringent independence requirements for members of audit committees than for the other members of the BoD. Each of the five members of the Audit Committee is an external BoD member who, in addition to satisfying our independence criteria, does not receive, directly or indirectly, any consulting, advisory or compensatory fees from UBS Group AG other than in his or her capacity as a BoD member, does not hold, directly or indirectly, UBS Group AG shares in excess of 5% of the outstanding capital and (except as noted below) does not serve on the audit commit- tees of more than two other public companies. The NYSE listing standards on corporate governance allow for an exemption for audit committee members to serve on more than three audit committees of public companies, provided that all BoD members determine that such simultaneous service does not impair the member’s ability to effectively serve on each committee and to fulfill his or her obligations. Considering the credentials of William G. Parrett and Ann F. Godbehere, the BoD has granted this exemption in their cases. Compensation Committee EDTF | The Compensation Committee, formerly the Human Resources and Compensation Committee, is responsible, among other things, for the following functions: (i) supporting the BoD in its duties to set guidelines on compensation and benefits, (ii) approving the total compensation for the Chairman and the non- independent BoD members, (iii) establishing, together with the Chairman, financial and non-financial performance targets for the Group CEO and reviewing, upon the recommendation from the Group CEO, financial and non-financial performance targets for the other GEB members, (iv) evaluating, in consultation with the Chairman, the performance of the Group CEO in meeting agreed targets, as well as informing the BoD of the outcome of the performance assessments of the GEB members for approval by the BoD, (v) proposing, together with the Chairman, total indi- vidual compensation for the independent BoD members and Group CEO for approval by the BoD and (vi) proposing to the BoD for approval, upon recommendation by the Group CEO, the total individual compensation for GEB members. The Compensation Committee also reviews the compensation disclosures included in this report. 307 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance The Compensation Committee comprises four independent BoD members and, as of 31 December 2015, Ann F. Godbehere chaired it with Michel Demaré, Reto Francioni and William G. Par- rett as additional members. Jes Staley was a member of the com- mittee from May to October 2015 and, after stepping down, he was succeeded by William G. Parrett. Pillar 3 | During 2015, the Compensation Committee held seven meetings and one call with a participation rate of 91%. On aver- age the duration of each of the meetings and the call was approx- imately 140 minutes. The meetings were conducted in the pres- ence of external advisors, the Chairman and the Group CEO. In 2015, the frequency and length of meetings were the same for both UBS Group AG and UBS AG. The chair met once with FINMA and the UK Financial Conduct Authority (FCA) as well as with the Prudential Regulation Authority (PRA). ➔ Refer to “Our compensation governance framework” and “Total Reward Principles” in the “Compensation” section of this report for more information on the Compensation Committee’s decision-making procedures Corporate Culture and Responsibility Committee The Corporate Culture and Responsibility Committee supports the BoD in fulfilling its duty to safeguard and advance the Group’s reputation for responsible and sustainable conduct. Among other things, it reviews and assesses stakeholder concerns and expecta- tions pertaining to the societal performance of UBS, and recom- mends appropriate actions to the BoD. The majority of the Corpo- rate Culture and Responsibility Committee members must be independent. As of 31 December 2015, the Corporate Culture and Responsibility Committee was chaired by Axel A. Weber, with independent BoD members Reto Francioni, William G. Parrett and Joseph Yam as additional members. The Group CEO and the Global Head of UBS and Society are permanent guests of the Cor- porate Culture and Responsibility Committee, while the regional presidents attend two of the meetings as guests. During 2015, five meetings were held with a participation rate of 95%. On average the duration of each of the meetings was 80 minutes. In 2015, the frequency and length of meetings were the same for both UBS Group AG and UBS AG. ➔ Refer to the “UBS and Society” section of this report for more information Governance and Nominating Committee The Governance and Nominating Committee supports the BoD in fulfilling its duty to establish best practices in corporate gover- nance across the Group, to conduct an annual assessment of the performance and effectiveness of the Chairman and of the Board as a whole (which includes an appraisal by an external expert at least every three years), to establish and maintain a process for appointing new BoD and GEB members (in the latter case, upon proposal by the Group CEO), and to manage the succession plan- ning for all GEB members. The Governance and Nominating Committee comprises three independent BoD members and, as of 31 December 2015, was chaired by Axel A. Weber, with Michel Demaré, Isabelle Romy and David Sidwell as additional members. During 2015, seven meetings and one call were held with a par- ticipation rate of 91%. On average the duration of each of the meetings and the call was 50 minutes. In 2015, the frequency and length of meetings were the same for both UBS Group AG and UBS AG. All meetings of the Governance and Nominating Com- mittee were attended by the Group CEO. Risk Committee EDTF | The Risk Committee 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, coun- try, legal, compliance, operational and conduct risks, (ii) treasury and capital management, including funding, liquidity and equity attribution and (iii) balance sheet management. The Risk Commit- tee considers the potential effects of the aforementioned risks on the Group’s reputation. For these purposes, the Risk Committee receives all relevant information from the GEB and has the author- ity to meet with regulators and external bodies in consultation with the Group CEO. As of 31 December 2015, the Risk Commit- tee comprised five independent BoD members. David Sidwell chaired the Risk Committee with Reto Francioni, Axel P. Lehmann, Beatrice Weder di Mauro and Joseph Yam as additional members. Jes Staley was a member of the committee from May to October 2015 and, after stepping down, he was succeeded by Reto Fran- cioni. Axel P. Lehmann recused himself from the Risk Committee meetings as of November 2015 due to his GEB nomination. Dur- ing 2015, the Risk Committee held nine committee meetings and five calls with a participation rate of 93%. On average the dura- tion of each of the meetings and calls was approximately 220 minutes. In 2015, the frequency and length of meetings were the same for both UBS Group AG and UBS AG. Usually, the Group CEO, the Group CFO, the Group CRO and the Group General Counsel attend the meetings and calls. The committee met once with FINMA and once with the FRBNY and the Connecticut Department of Banking. The chair met with the FCA and the PRA once and with the FRBNY on a periodic basis. 308 Special Committee The Special Committee is an ad-hoc committee with a standing composition and is called and held on an ad-hoc basis. The Special Committee is composed of three independent BoD members and focuses on internal and regulatory investigations related to foreign exchange. As of 31 December 2015, David Sidwell chaired the Special Committee with Isabelle Romy and Joseph Yam as additional members. During 2015, one committee meeting and five telephone conferences were held with a partici- pation of 83%. On average the duration of each of the telephone conferences and the meeting was approximately 50 minutes. In 2015, the frequency and length of meetings were the same for both UBS Group AG and UBS AG. appointed as Vice Chairman and David Sidwell has been appointed as Senior Independent Director. A Vice Chairman is required to lead the BoD in the absence of the Chairman and to provide sup- port and advice to the Chairman. At least twice a year, the Senior Independent Director organizes and leads a meeting of the inde- pendent BoD members in the absence of the Chairman. In 2015, one independent BoD meeting was held for UBS Group AG and UBS AG with a participation of 100% and a duration of one hour. Another meeting was held in the first quarter of 2016. The Senior Independent Director relays to the Chairman any issues or con- cerns brought forth by the independent BoD members and acts as a point of contact for shareholders and stakeholders seeking to engage in discussions with an independent BoD member. Roles and responsibilities of the Chairman of the Board of Directors Important business connections of independent members of the Board of Directors Axel A. Weber, the Chairman of the BoD, serves on the basis of a full-time employment contract. The Chairman coordinates 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 on rec- ommendations by the Group CEO, exercises ultimate supervision over management and appoints all GEB members. The Chairman presides over all general meetings of sharehold- ers, and works with the committee chairpersons to coordinate the work of all BoD committees. Together with the Group CEO, the Chairman is responsible for ensuring effective communication with shareholders and other stakeholders, including government officials, regulators and public organizations. This is in addition to establishing and maintaining a close working relationship with the Group CEO and other GEB members, and providing advice and support when appropriate. The Chairman met on a regular basis with core supervisory authorities, including quarterly meet- ings with FINMA, semi-annual meetings with the Swiss National Bank and the Federal Reserve Bank of New York / Connecticut Department of Banking, as well as annual meetings with the PRA and the FCA in the UK. Meetings with other supervisory authori- ties were scheduled on an ad hoc or needs-driven basis. 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. Michel Demaré has been As a global financial services provider and a major Swiss bank, we enter into business relationships with many large companies, including some in which our BoD members assume management or independent board responsibilities. The Governance and Nom- inating Committee determines in each instance whether the nature of the Group’s business relationship with such a company might compromise our BoD members’ capacity to express inde- pendent judgment. Our Organization Regulations require three-quarters of the BoD members to be independent. For this purpose, independence is determined in accordance with the FINMA circular 08 / 24 “Supervision and Internal Control,” the New York Stock Exchange rules, and the rules and regulations of other securities exchanges on which the UBS Group AG shares are listed, if any, applying the strictest standard. In 2015, our BoD met the standards of the Organization Regu- lations for the percentage of directors that are considered inde- pendent under the criteria described above. Due to our Chair- man’s full-time employment by UBS Group AG he is not considered independent. All relationships and transactions with UBS Group AG’s inde- pendent BoD members 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. All relationships and transactions with BoD members’ associated companies are conducted at arm’s length. ➔ Refer to “Note 34 Related parties” in the “Consolidated financial statements” section of this report for more information 309 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance 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 on recom- mendation by the Group CEO, and supervises and monitors the business, whereas the GEB, headed by the Group CEO, has execu- tive management responsibility. The functions of Chairman of the BoD and Group CEO are assigned to two different people, ensur- ing a separation of power. This structure establishes checks and balances and preserves the institutional independence of the BoD from the day-to-day management of the Group, for which responsibility is delegated to the GEB under the leadership of the Group CEO. No member of one board may simultaneously 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 gov- erned by the Articles of Association and the Organization Regula- tions, including the latter document’s “Annex B – Key approval authorities.” ➔ Refer to www.ubs.com/governance for more information on checks and balances for the Board of Directors and Group Executive Board 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, including minutes of GEB meetings being made available to the BoD. The Group CEO and other GEB members also regularly update the BoD on important issues at BoD meetings. At BoD meetings, BoD members may request from BoD or GEB members any information about matters concerning the Group that they require to fulfill their duties. Outside meetings, BoD members may request information from other BoD and GEB members. Such requests must be approved by the Chairman. Group Internal Audit independently, objectively and systemati- cally assesses: – the effectiveness of processes to define strategy and risk appe- tite as well as the overall adherence to the approved strategy, – the effectiveness of governance processes, risk management and internal controls, – the soundness of the risk and control culture, – the effectiveness and sustainability of remediation activities, – the reliability and integrity of financial and operational infor- mation, i.e., whether activities are properly, accurately and completely recorded, and the quality of underlying data and models, and – the effectiveness to comply with legal, regulatory and statutory requirements, as well as with internal policies and contracts, i.e., assessing whether such requirements are met, and the adequacy of processes to sustainably meet them. The internal audit organization has a functional reporting line to the Audit Committee in line with their responsibilities as set forth in our Organization Regulations. The Audit Committee annually assess and approves the appropriateness of Group Inter- nal Audit’s annual audit plan and annual audit objectives and must be in regular contact with the Head Group Internal Audit. Group Internal Audit regularly informs the Chairman, the Audit Committee and the Risk Committee of the BoD about important issues. In addition, it provides the Audit Committee and the Chair- man with an annual report summarizing the function’s activities and significant audit results. ➔ Refer to the “Risk management and control” section of this report for more information 310 Group Executive Board We operate under a strict dual board structure, as mandated by Swiss banking law, and therefore, the Board of Directors (BoD) delegates the management of the business to the Group Execu- tive Board (GEB). Management contracts We have not entered into management contracts with any com- panies or natural persons that do not belong to the Group. Responsibilities, authorities and organizational principles of the Group Executive Board Members of the Group Executive Board Under the leadership of the Group CEO, the GEB has executive management responsibility for the steering of the Group and its business. It assumes overall responsibility for developing the Group and business division strategies and the implementation of approved strategies. The GEB constitutes itself as the risk council of the Group. In this function, the GEB has overall responsibility for establishing and supervising the implementation of risk man- agement and control principles, as well as for managing the risk profile of the Group as a whole, as determined by the BoD and the Risk Committee. In 2015, the GEB held 22 meetings, includ- ing two ad-hoc calls, and two GEB offsite meetings. In 2015, the frequency of meetings for both UBS Group AG and UBS AG was the same. ➔ Refer to the Organization Regulations at www.ubs.com/ governance for more information on the authorities of the Group Executive Board Responsibilities and authorities of the Group Asset and Liability Management Committee The Group Asset and Liability Management Committee (Group ALCO), established by the GEB, is responsible for supporting the GEB in its responsibility to promote the usage of the Group’s assets and liabilities in line with the Group’s strategy, regulatory commitments and the interests of shareholders and other stake- holders. Group ALCO proposes the framework for capital man- agement, funding and liquidity risk and proposes limits and tar- gets for the Group to the BoD for approval. It oversees the balance sheet management of the Group, its business divisions, and Cor- porate Center. The Organization Regulations additionally specify which powers of the GEB are delegated to the Group ALCO. In 2015, the Group ALCO held 10 meetings for UBS Group AG and UBS AG. On 3 November 2015, we announced changes to our GEB, all effective as of 1 January 2016: Tom Naratil, formerly Group Finan- cial Officer and Group Chief Operating Officer, was appointed President Wealth Management Americas and President UBS Americas, remaining a GEB member; Axel P. Lehmann stepped down from the BoD and joined the GEB as Group Chief Operating Officer; Kirt Gardner, formerly Chief Financial Officer of Wealth Management, joined the GEB and was appointed Group Chief Financial Officer; Christian Bluhm, formerly of FMS Wertmanage- ment, joined the GEB and was appointed Group Chief Risk Offi- cer; Kathryn Shih, formerly Head Wealth Management for Asia Pacific joined the GEB and was appointed President UBS Asia Pacific; and Sabine Keller-Busse, Group Head Human Resources, joined the GEB. Philip J. Lofts and Chi-Won Yoon stepped down from the GEB at year-end 2015. Robert J. McCann assumed the role of Chairman UBS Americas and stepped down from the GEB. In line with Swiss law, our Articles of Association (AoA) limit the number of mandates that members of the GEB may hold out- side the UBS Group. Article 36 of the AoA limits the maximum number of permitted mandates of members of the GEB to one board membership in a listed company (other than UBS Group AG and UBS AG) and five additional mandates in non-listed compa- nies. In addition, GEB members may hold no more than 10 man- dates at the request of the company and eight mandates in asso- ciations, charitable organizations, foundations, trusts, and employee welfare foundations. No member of the GEB reaches the threshold described in article 36 of the Articles of Association. The following biographies provide information on the GEB members as currently in office, and additionally, on those mem- bers whose service on the GEB ended as of 31 December 2015. For reasons of transparency, in addition to information on man- dates, the biographies include memberships or other activities or functions, as required by the SIX Swiss Exchange Corporate Gov- ernance Directive. All members of UBS Group AG’s GEB are also members of UBS AG’s GEB, with the exception of Mr. Gähwiler. 311 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance New GEB member Christian Bluhm German, born 1969 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Function at UBS Group AG GroupChiefRiskOfficer as of 1 January 2016 Year of initial appointment to UBS Group AG and UBS AG: 2016 Professional history and education Christian Bluhm became a member of the GEB and was appointedGroupChiefRiskOfficerofUBSGroupAGand UBS AG in January 2016. He joined UBS from FMS Wert- management, where he had been Chief Risk & Financial Officersince2010andSpokesmanoftheExecutiveBoard from 2012 to 2015. From 2004 to 2009 he worked for Credit Suisse where he was Managing Director responsible for Credit Risk Management in Switzerland and Private Banking worldwide. Mr. Bluhm was Head of Credit Portfo- lio Management until 2008 and then Head of Credit Risk ManagementAnalytics & Instruments after the financial crisis in 2008. From 2001 to 2004 he worked for Hypover- einsbank in Munich in Group Credit Portfolio Manage- ment, heading a team that specialized in Structured Fi- nance Analytics. Before starting his banking career with Deutsche Bank in Credit Risk Management in 1999 he worked as a post doctorate fellow at Cornell University in IthacaandasascientificassistantattheUniversityofGrei- fswald. Mr. Bluhm holds a degree in mathematics and in- formatics from the University of Erlangen-Nuremberg and received his PhD in mathematics in 1996 from the same university. Sergio P. Ermotti Swiss, born 1960 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Function at UBS Group AG GroupChiefExecutiveOfficer Year of initial appointment to UBS Group AG: 2014 Year of initial appointment to UBS AG: 2011 Professional history and education SergioP.ErmottihasbeenGroupChiefExecutiveOfficerof UBS AG since November 2011, having held the position of Group Chief Executive Officer on an interim basis since September2011.HehasbeenGroupChiefExecutiveOffi- cer for UBS Group AG since November 2014. Mr. Ermotti became a member of the GEB in April 2011 and was Chair- man and CEO of UBS Group Europe, Middle East and Africa from April to November 2011. From 2007 to 2010, he was GroupDeputyChiefExecutiveOfficeratUniCredit,Milan, and was responsible for the strategic business areas of Corporate and Investment Banking, and Private Banking. He joined UniCredit in 2005 as Head of Markets & Invest- ment Banking Division. Between 2001 and 2003, he worked at Merrill Lynch, serving as co-Head of Global Equity Mar- kets 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 vari- ous positions within equity derivatives and capital markets. Mr. Ermotti is a Swiss-certified banking expert and is a graduate of the Advanced Management Programme at Oxford University. Other activities and functions – Chairman of the Board of Directors of UBS Switzerland AG – Chairman of the Board of Directors of UBS Business Solutions AG – Chairman of the UBS Optimus Foundation Board – Chairman of the Fondazione Ermotti, Lugano – Board member of the Fondazione Lugano per il Polo Culturale, Lugano – Board member of the Global Apprenticeship Network – Board member of the Swiss-American Chamber of Commerce – Member of the Institut International D’Etudes Bancaires – Member of the Financial Services Forum 312 Lukas Gähwiler Swiss, born 1965 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Functions at UBS Group AG President Personal & Corporate Banking and President UBS Switzerland Year of initial appointment to UBS Group AG: 2014 Year of initial appointment to UBS AG: 2010 Markus U. Diethelm Swiss, born 1957 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Function at UBS Group AG Group General Counsel Year of initial appointment to UBS Group AG: 2014 Year of initial appointment to UBS AG: 2008 Professional history and education Markus U. Diethelm became a member of the GEB and was appointed Group General Counsel of UBS AG in September 2008. He has held the same position for UBS Group AG since November 2014. He has been an Executive Board member of UBS Business Solutions AG since 2015. From 1998to2008,heservedasGroupChiefLegalOfficerat Swiss Re, and was appointed to the company’s Group Ex- ecutive Board in 2007. Prior to this, he was with Los Ange- les-basedlawfirmGibson,Dunn&Crutcher,andfocused on corporate matters, securities transactions, litigation and regulatory investigations while working out of the firm’s BrusselsandParisoffices.From1989to1992,hepracticed at Shearman & Sterling in New York, specializing in merg- ers and acquisitions. In 1988, he worked at Paul, Weiss, Rifkind, Wharton & Garrison in New York. After starting his career in 1983 with Bär & Karrer, he served from 1984 to 1985 as a law clerk at the District Court of Uster in Switzer- land. Mr. Diethelm holds a law degree from the University of Zurich and a master’s degree and PhD from Stanford Law School.Mr.Diethelmisaqualifiedattorney-at-lawadmitted to the bar in Zurich, Geneva and in New York State. Other activities and functions – Board member of UBS Business Solutions AG – Chairman of the Swiss-American Chamber of Commerce’s legal committee – Member of the Swiss Advisory Council of the American Swiss Foundation – Member of the Foundation Council of the UBS International Center of Economics in Society – Member of the Conseil de Fondation du Musée International de la Croix-Rouge et du Croissant-Rouge – Member of the Professional Ethics Commission of the Association of Swiss Corporate Lawyers Professional history and education Lukas Gähwiler is a member of the GEB of UBS Group AG and was appointed President UBS Switzerland (formerly CEO of UBS Switzerland) in April 2010. In his role as Presi- dent UBS Switzerland, he is responsible for all businesses – retail, wealth management, corporate and institutional, investment banking and asset management – in UBS’s home market. In addition, he was appointed President of the Executive Board of UBS Switzerland AG in May 2015. Since January 2012, he has also been President Personal & Corporate Banking (formerly CEO of Retail & Corporate). Between April 2010 and January 2012, he combined the position of CEO of UBS Switzerland with the role of co-CEO of UBS Wealth Management & Swiss Bank. From 2003 to 2010,hewasChiefCreditOfficeratCreditSuisseandwas accountable for the worldwide credit business of Private Banking, including Commercial Banking in Switzerland. In 1998, Mr. Gähwiler was appointed Chief of Staff to the CEO of Credit Suisse’s Private and Corporate business unit and,priortothis,heldvariousfront-officepositionsinSwit- zerland 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 programincorporatefinanceattheInternationalBankers School in New York, as well as the Advanced Management Program at Harvard Business School. Other activities and functions – Foundation Board member of the UBS Pension Fund – Member of the Foundation Council of the UBS International Center of Economics in Society – Board member of Opernhaus Zürich AG – Board member of economiesuisse – Vice Chairman of the Board of the Zurich Chamber of Commerce – Vice Chairman of the Swiss Finance Institute Foundation Board – Second Vice President of the Board of the Zürcher Volkswirtschaftliche Gesellschaft 313 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance New GEB member Kirt Gardner American (US), born 1959 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Function at UBS Group AG GroupChiefFinancialOfficer as of 1 January 2016 Year of initial appointment to UBS Group AG and UBS AG: 2016 Professional history and education Kirt Gardner became a member of the GEB and was appointedGroupChiefFinancialOfficerofUBSGroupAG and UBS AG in January 2016. He was CFO Wealth Man- agement from 2013 to 2015. Prior to this, he held a num- ber of leadership positions at Citigroup, including CFO and Head of Strategy within Global Transaction Services from 2010 to 2013, Head of Strategy, Planning and Risk Strate- gy for the Corporate and Institutional Division from 2006 to 2010 and Head of Global Strategy and Cost Manage- ment for the Consumer Bank from 2004 to 2006. Prior to this, he held the position of Global Head of Financial Ser- vices Strategy for BearingPoint, where he worked in Asia and New York for four years. From 1994 to 2000, he was Managing Director with Barents Group, working in the US, Asia, Latin America and Europe. Mr. Gardner holds a bach- elor’s degree in economics from William’s College, a mas- ter’s degree from the University of Pennsylvania and an MBAinfinancefromWhartonSchool. New GEB member Sabine Keller-Busse German and Swiss, born 1965 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Function at UBS Group AG Group Head Human Resources Year of initial appointment to UBS Group AG and UBS AG: 2016 Professional history and education Sabine Keller-Busse became a member of the GEB in Janu- ary 2016. She has been Group Head Human Resources since August 2014. Having joined UBS in 2010, she served asChiefOperatingOfficerUBSSwitzerlanduntil2014.Prior to this, she led Credit Suisse’s Private Clients Region Zurich division for two years. From 1995 to 2008 Ms. Keller-Busse worked for McKinsey & Company, where she had been Se- nior Partner since 2001. She started her professional career at Siemens AG in a trainee program which she completed with a commercial diploma. Ms. Keller-Busse holds a mas- ter’s degree in business administration from the University of St. Gallen and received a PhD in business administration from the same university. Other activities and functions – Board member of SIX Group (Chairman of risk commit- tee) – Foundation Board member of the UBS Pension Fund 314 New GEB member Axel P. Lehmann Swiss, born 1959 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Function at UBS Group AG GroupChiefOperatingOfficer as of 1 January 2016 Year of initial appointment to UBS Group AG and UBS AG: 2016 Ulrich Körner German and Swiss, born 1962 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Functions at UBS Group AG President Asset Management and President UBS Europe, Middle East and Africa Year of initial appointment to UBS Group AG: 2014 Year of initial appointment to UBS AG: 2009 Professional history and education Ulrich Körner became a member of the GEB in April 2009 and was appointed President Asset Management of UBS AG (formerly CEO Global Asset Management) in January 2014. He has held the same position for UBS Group AG since November 2014. He was Group Chief Operating Officerfrom2009to2013.Inaddition,hewasappointed President UBS Europe, Middle East and Africa (formerly CEO of UBS Group Europe, Middle East and Africa) in De- cember 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,includingCFOandChiefOperatingOfficer.From 2006 to 2008, he was responsible for the entire Swiss client business as CEO Credit Suisse Switzerland. Mr. Körner received a PhD in business administration from the Univer- sity of St. Gallen, and served for several years as an auditor at Price Waterhouse and as a management consultant at McKinsey & Company. Other activities and functions – Deputy Chairman of the Supervisory Board of UBS Deutschland AG – Board member of OOO UBS Bank Russia – Chairman of the Foundation Board of the UBS Pension Fund – Chairman of the Widder Hotel, Zurich – Vice President of the Board of Lyceum Alpinum Zuoz – Member of the Financial Service Chapter Board of the Swiss-American Chamber of Commerce – Advisory Board member of the Department of Banking and Finance at the University of Zurich – Member of the business advisory council of the Laureus Foundation Switzerland Professional history and education Axel P. Lehmann became a member of the GEB and was appointedGroupChiefOperatingOfficerofUBSGroupAG and UBS AG in January 2016. He was a member of the BoD of UBS AG from 2009 to 2015 and of UBS Group AG from 2014 to 2015. During his entire tenure on the Board, he had been a member of the Risk Committee and, from 2011 to 2013, a member of the Governance and Nominating Committee. Mr. Lehmann became a member of Zurich Insurance Group’s (Zurich) Group Executive Committee in 2002, holding various management positions, including CEO for the European and North America businesses, and from 2008 to 2015 as Chief Risk Officer with additional responsibilities for Group IT, as Regional Chairman for Eu- rope, Middle East and Africa and Chairman for Farmers Group Inc. In 2001 he was appointed CEO for Northern, Central and Eastern Europe and Zurich Group Germany, having served as a member of the company’s Group Man- agement Board since 2000 with responsibility for group- wide business development functions. In 1996, he joined Zurich as a member of the Executive Committee of Zurich Switzerland and subsequently held various executive man- agement and corporate development positions within Zu- rich Switzerland. Prior to joining Zurich, Mr. Lehmann was head of corporate planning and controlling at Swiss Life, project manager and Vice President of the Institute of Insurance Economics at the University of St. Gallen and a visiting professor at Bocconi University in Milan. Mr. Lehm- ann holds a PhD and a master’s degree in business admin- istration and economics from the University of St. Gallen. He is also a graduate of the Wharton Advanced Manage- ment Program and an honorary professor of business administration and service management at the University of St. Gallen. Other activities and functions – Chairman of the Global Agenda Council on the Global Financial System of WEF – Chairman of the Board of the Institute of Insurance Economics at the University of St. Gallen – Member of the International and Alumni Advisory Board at the University of St. Gallen – Member of the Swiss-American Chamber of Commerce Chapter Doing Business in USA 315 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Tom Naratil American (US), born 1961 UBS AG 1200 Harbor Boulevard Weehawken, NJ 07086 USA Functions at UBS Group AG GroupChiefFinancialOfficer and Group Chief Operating Officeruntil31December 2015 President Wealth Management Americas and President UBS Americas as of 1 January 2016 Year of initial appointment to UBS Group AG: 2014 Year of initial appointment to UBS AG: 2011 Professional history and education Tom Naratil became President Wealth Management Ameri- cas and President UBS Americas in January 2016. He has been President of the Executive Board of UBS Business Solutions AG since 2015. He became a member of the GEB in June 2011 and was Group CFO of UBS AG from 2011 to 2015. He held the same position for UBS Group AG from 2014 to 2015. In addition to the role of Group CFO, he was Group Chief Operating Officer from 2014 to 2015. He servedasCFOandChiefRiskOfficerofWealthManage- ment Americas from 2009 until his appointment as Group CFO in 2011. Before 2009, he held various senior manage- ment positions within UBS, including heading the Auction RateSecuritiesSolutionsGroupduringthefinancialcrisis in 2008. He was named Global Head of Marketing, Seg- ment & Client Development in 2007, Global Head of Mar- ket Strategy & Development in 2005, and Director of Bank- ing 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 in history from Yale University. Other activities and functions – Chairman of UBS Americas Holding LLC – Board member of UBS Switzerland AG – Board member of UBS Business Solutions AG – Board member of the American Swiss Foundation – Board Member of the Clearing House Supervisory Board – Board of Consultors for the College of Nursing at Villanova University Andrea Orcel Italian, born 1963 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Function at UBS Group AG President Investment Bank Year of initial appointment to UBS Group AG: 2014 Year of initial appointment to UBS AG: 2012 Professional history and education Andrea Orcel became a member of the GEB in July 2012 and was appointed President Investment Bank of UBS AG (formerly CEO Investment Bank) in November 2012. He has held the same position for UBS Group AG since November 2014. Since December 2014, he has additionally taken on the position as Chief Executive for UBS Limited and UBS AG London Branch. He had been appointed co-CEO of the In- vestment Bank in July 2012. He joined UBS from Bank of America Merrill Lynch, where he had been Executive Chair- man since 2009, President of Emerging Markets (excluding Asia) since 2010 and CEO of European Card Services since 2011. Prior to the acquisition of Merrill Lynch by Bank of America, Mr. Orcel was a member of Merrill Lynch’s global management committee and Head of Global Origination, which combined Investment Banking and Capital Markets. He held a number of other leadership positions, including President of Global Markets & Investment Banking for Eu- rope, Middle East and Africa (EMEA) and Head of EMEA Origination beginning in 2004. Between 2003 and 2007, he led the Global Financial Institutions Group, of which he had been part since joining Merrill Lynch in 1992. Prior to this, he worked at Goldman Sachs and the Boston Consult- ing Group. Mr. Orcel holds an MBA from INSEAD and a degree in economics and commerce, summa cum laude, from the University of Rome. Other activities and functions – Board member UBS Limited 316 New GEB member Kathryn Shih British, born 1958 UBS AG 2 International Finance Centre 8 Finance Street Central, Hong Kong Function at UBS Group AG PresidentUBSAsiaPacificas of 1 January 2016 Year of initial appointment to UBS Group AG and UBS AG: 2016 Professional history and education Kathryn Shih became a member of the GEB of UBS Group AG and UBS AG and was appointed President UBS Asia PacificinJanuary2016.ShehasbeenHeadWealthMan- agement Asia Pacific since 2002. She was CEO of UBS Hong Kong from 2003 to 2008. Prior to this, she held vari- ous leadership positions in Wealth Management Asia Pa- cific.Shehasbeenwiththefirmfornearly30years,since joining Swiss Bank Corporation in 1987 as a client advisor and then serving as Head Private Banking from 1994 to 1998. In the 1980s Ms. Shih worked for Citibank in the Consumer Services Group and as an executive trainee with PCICapitalAsiaLtd.SheconferredasaCertifiedPrivate Wealth Professional by the Private Wealth Management Association,HongKongin2015andasaCertifiedFinan- cial Planner from the Institute of Financial Planners, Hong Kong in 2001 and completed the Advanced Executive Pro- gram at Northwestern University in 1999. Ms. Shih holds a bachelor’s degree of arts from Indiana University and a master’s degree in business management from the Asian Institute of Management in the Philippines. Other activities and functions – Member of the Banking Advisory Committee, Hong Kong Jürg Zeltner Swiss, born 1967 UBS Group AG Bahnhofstrasse 45 CH-8001 Zurich Function at UBS Group AG President Wealth Management Year of initial appointment to UBS Group AG: 2014 Year of initial appointment to UBS AG: 2009 Professional history and education Jürg Zeltner became a member of the GEB in February 2009 and is President of Wealth Management of UBS AG (for- merly CEO of UBS Wealth Management). He has held the same position for UBS Group AG since November 2014. Between February 2009 and January 2012, he served as co-CEO of UBS Wealth Management & Swiss Bank. In No- vember 2007, he was appointed as Head of Wealth Man- agement North, East & Central Europe. From 2005 to 2007, he was CEO of UBS Deutschland, Frankfurt, and, prior to this, 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 holds a diploma in busi- ness administration from the College of Higher Vocational Education in Berne and is a graduate of the Advanced Man- agement Program at Harvard Business School. Other activities and functions – Board member of the German-Swiss Chamber of Commerce 317 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Members of the Group Executive Board until 31 December 2015 Philip J. Lofts British, born 1962 UBS AG 677 Washington Boulevard Stamford, CT 06901 USA Function at UBS Group AG GroupChiefRiskOfficeruntil 31 December 2015 Year of initial appointment to UBS Group AG: 2014 Year of initial appointment to UBS AG: 2008 Professional history and education Philip J. Lofts became a member of the GEB in 2008 and wasre-appointedGroupChiefRiskOfficerofUBSAGin December 2011, after having served in the same role from 2008 to 2010. He held the same position for UBS Group AG from November 2014 to December 2015. He decided to step down from his current role and the GEB at the end of December 2015. He has been an Executive Board mem- ber of UBS Business Solutions AG since 2015. He was CEO of UBS Group Americas from January to November 2011. Mr. Lofts, who began his career with UBS more than 25 yearsago,becameGroupRiskChiefOperatingOfficerin 2008afterhavingservedasGroupChiefCreditOfficerfor three years. Prior to this, Mr. Lofts worked for the Invest- ment Bank in a number of business and risk control posi- tions 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 1996. Mr. 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. Robert J. McCann American (US) and Irish, born 1958 UBS AG 1200 Harbor Boulevard Weehawken, NJ 07086 USA Functions at UBS Group AG President Wealth Management Americas and President UBS Americas until 31 December 2015 Year of initial appointment to UBS Group AG: 2014 Year of initial appointment to UBS AG: 2009 Professional history and education Robert J. McCann became a member of the GEB in October 2009 and was President Wealth Management Americas of UBS AG (formerly CEO of Wealth Management Americas) from 2009 to 2015. He held the same position for UBS Group AG from 2014 to 2015. At the end of December 2015, he stepped down from the GEB and was named Chairman UBS Americas as of January 2016. He was Presi- dent UBS Americas from 2011 to 2015 (formerly CEO of UBS Group Americas). 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 Head of Global Securities Research and Economics. In 2000, he was appointed Chief Operating Officer of Global Markets and Investment Banking. From 1998 to 2000, he was Global Head of Global Institutional Debt and Equity Sales. Mr. McCann graduated with a bach- elor’s degree in economics from Bethany College, West Virginia, and holds an MBA from Texas Christian University. Other activities and functions – Board member of UBS Switzerland AG – Board member of UBS Business Solutions AG Other activities and functions – Member of the UBS Optimus Foundation Board – Vice Chairman of the Bethany College Board of Trustees – Member of the Committee Encouraging Corporate Philanthropy – Board member of the American Ireland Fund – Board member of the Catholic Charities of the Archdiocese of New York – Advisory Board member for the Billie Jean King Leadership Initiative 318 Chi-Won Yoon Korean, born 1959 UBS AG 2 International Finance Centre 8 Finance Street Central, Hong Kong Function at UBS Group AG PresidentUBSAsiaPacificuntil 31 December 2015 Year of initial appointment to UBS Group AG: 2014 Year of initial appointment to UBS AG: 2009 Professional history and education Chi-WonYoonwasappointedPresidentUBSAsiaPacificof UBSAG(formerlyCEOofUBSGroupAsiaPacific)inApril 2012 and was a member of the GEB from June 2009 to December 2015. He held the same position for UBS Group AG from November 2014 to December 2015. He decided to step down from his current role and the GEB at the end of December 2015. He held the position of co-Chairman and co-CEOofUBSGroupAsiaPacificfromNovember2010to March 2012. From June 2009 to November 2010, he served as sole Chairman and CEO of UBSAG,Asia Pacific. In a previous role, Mr. Yoon served as Head of UBS’s securities business inAsia Pacific:Asia Equities, which he oversaw from2004;andAsiaPacificFixedIncome,Currenciesand Commodities,whichheledfrom2009.Hejoinedthefirmin 1997, serving as Head of Equity Derivatives. Mr. Yoon began hiscareerinfinancialservicesin1986,workingatMerrill Lynch in New York and Lehman Brothers in New York and Hong Kong. Before embarking on a Wall Street career, he worked as an electrical engineer in satellite communica- tions. In 1982, Mr. Yoon earned a bachelor’s degree in elec- trical engineering from the Massachusetts Institute of Tech- nology (MIT), and a master’s degree in management from MIT’s Sloan School of Management in 1986. Other activities and functions – Board member of UBS Securities Co. Ltd – Chairman of the Asian Executive Board for the MIT Sloan School of Management – Advisory Board member of the MIT Center for Finance and Policy 319 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Change of control and defense measures We refrain from restrictions regarding change of control and defense measures that would hinder developments initiated in, or supported by, the financial markets. We also do not have any specific defenses in place to prevent hostile takeovers. Duty to make an offer According to the Swiss Financial Market Infrastructure Act (which replaced certain provisions of the Swiss Stock Exchange Act as of 1 January 2016), an investor who has acquired more than 331/3% of all voting rights of a company listed in Switzerland (directly, indirectly or in concert with third parties), whether they are exer- cisable or not, is required to submit a takeover offer for all listed shares outstanding. 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 BoD, nor any employment contracts with the GEB members or employees holding key functions within the company (Group Managing Directors), contain change of control clauses. All employment contracts with GEB members stipulate a notice period of six months. During the notice period, GEB members are entitled to their salaries and the continuation of existing employ- ment benefits and may be eligible to be considered for a discre- tionary performance award based on their contribution during the time worked. In case of a change of control, we may, at our discretion, accel- erate the vesting of and / or relax applicable forfeiture provisions of employees’ awards, and defer lapse date of options or stock appreciation rights. 320 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, and ultimately the Board of Directors (BoD), supervises the effec- tiveness of audit work. Special auditor for capital increase At the AGM on 7 May 2015, BDO AG was re-appointed as special auditor for a three-year term of office. The special auditors pro- vide audit opinions independently from the auditors in connection with capital increases. ➔ Refer to “Board of Directors” in this section for more information on the Audit Committee External independent auditors At the Annual General Meeting (AGM) of shareholders in 2015, Ernst & Young Ltd (EY) were re-elected as auditors for the Group for a one-year term of office. EY assume virtually all auditing func- tions according to laws, regulatory requests and the Articles of Association. Beginning 2015, the EY lead partner in charge of the Group financial audit is Marie-Laure Delarue and her incumbency is limited to five years. The co-signing partner for the financial statement audit is Troy J. Butner. He will be succeeded in 2016 by Ira S. Fitlin, with an incumbency limit of seven years. Beginning 2015, Patrick Schwaller is the Lead Auditor to the Swiss Financial Market Supervisory Authority (FINMA) and his incumbency is lim- ited to six years due to prior audit service to UBS in another role. The co-signing partner for the FINMA audit has been Marc Ryser since 2012, with an incumbency limit of seven years. Fees paid to external independent auditors Fees paid to external independent auditors The fees (including expenses) paid to our auditors EY are set forth in the table below. In addition, EY received CHF 29.3 million in 2015 (CHF 29.7 million in 2014) 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 for the Group in accordance with applicable laws and generally accepted auditing standards, as well as other assurance services that conventionally only the auditor can provide. These include statutory and regulatory audits, attest services, and the review of documents to be filed with regulatory bodies. The additional ser- vices classified as audit in 2015 included several engagements for which EY were mandated at the request of FINMA. UBS Group AG and its subsidiaries (including UBS AG) paid the following fees (including expenses) to its external independent auditors. 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: consultation concerning financial accounting and reporting standards Tax services Other Total non-audit 1 Of the total audit and non-audit fees of CHF 72,581 thousand for UBS Group AG (consolidated), CHF 71,766 thousand relates to UBS AG (consolidated). 31.12.15 31.12.14 45,516 14,191 59,7071 8,684 3,327 5,260 96 3,088 1,102 12,8741 47,450 14,374 61,824 7,133 3,205 3,840 87 1,083 1,573 9,789 321 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance Audit-related work comprises assurance and related services that are traditionally performed by the auditor, such as attest ser- vices related to financial reporting, internal control reviews, per- formance standard reviews, and consultation concerning financial accounting and reporting standards. Tax work involves services performed by professional staff in EY’s tax division, and includes tax compliance and tax consultation with respect to our own affairs. ”Other” services are permitted services which include technical IT security control reviews and assessments. Pre-approval procedures To ensure EY’s independence, all services provided by them have to be pre-approved by the Audit Committee. A pre-approval may be granted either for a specific mandate, or in the form of a blan- ket pre-approval authorizing a limited and well-defined type and amount of services. The Audit Committee has delegated pre-approval authority to its Chairperson, and the Group Chief Financial Officer (Group CFO) submits all proposals for services by EY to the Chairperson of the Audit Committee for approval, unless there is a blanket pre-approval in place. At each quarterly meeting, the Audit Com- mittee is informed of the approvals granted by its Chairperson and of services authorized under blanket pre-approvals. Group Internal Audit With 355 personnel worldwide as of 31 December 2015, Group Internal Audit (GIA) performs the internal auditing function for the Group. It is an independent and objective function that sup- ports both the Group, in achieving its defined strategic, opera- tional, financial and compliance objectives, and the BoD, sup- ported by its committees, in discharging their governance responsibilities. GIA provides assurance by assessing the reliability of financial and operational information, as well as the effective- ness of processes to comply with legal, regulatory and statutory requirements. All reports with key issues are provided to the Group CEO, GEB members responsible for the business divisions, and other responsible management. In addition, the Chairman, the Audit Committee and the Risk Committee of the BoD are regularly informed about important issues. GIA further assures the closure and successful remediation of issues, irrespective of the function that identified them, including those that are self- identified by management (first line of defense) or are raised by control functions (second line of defense), GIA (third line of defense), external auditors and regulators. GIA cooperates closely 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 GIA, James P. Oates, reports directly to the Chairman of the BoD as well as to the Audit Committee. In their assessment, GIA is quantitatively and qualitatively well-resourced to perform its func- tion. The role, position, responsibilities and accountability of GIA are set out in our Organization Regulations, in particular in the Charter for Group Internal Audit, published at www.ubs.com/ governance. GIA has unrestricted access to all accounts, books, records, systems, premises and personnel, and must be provided with all information and data needed to fulfill its auditing duties. The Audit Committee may order special audits to be conducted. Other BoD members, committees or the Group CEO may request such audits with the approval of the Audit Committee. Coordination and close cooperation with the external auditors enhance the efficiency of GIA’s work. 322 Information policy We provide regular information to our shareholders and to the financial community. Financial reports for UBS Group AG will be published as follows First quarter 2016 Second quarter 2016 Third quarter 2016 3 May 2016 29 July 2016 1 November 2016 The Annual General Meeting of shareholders of UBS Group AG will take place as follows 2016 2017 10 May 2016 4 May 2017 ➔ Refer to the corporate calendar at www.ubs.com/investors for future financial report publication and other key dates, including UBS AG’s financial report publication dates We meet with institutional investors worldwide throughout the year and regularly hold results presentations, attend and present at investor conferences and, from time to time, host investor days. When possible, investor meetings are hosted by senior management and are always attended by members of our Investor Relations team. We use various technologies such as webcasting, audio links and cross-location video conferencing to widen our audience and maintain contact with shareholders around the world. Registered shareholders may opt to receive a physical copy of our annual report or our annual review, which reflects on specific initiatives and achievements of the Group and provides an over- view of the Group’s activities during the year as well as key finan- cial information. For the first, second and third quarter of the year, shareholders have the option to receive a brief mailed update on the Group’s quarterly financial performance. Shareholders can also request UBS Group AG’s complete financial reports, pro- duced for the first, second and third quarter and for the full year. We make our publications available to all shareholders simultaneously to ensure they have equal access to our financial information. Shareholders can help us achieve our environmental ambitions by opting to read our financial publications electronically through our Investor Relations website rather than receiving printed cop- ies. In addition, shareholders can change their subscription prefer- ences at any time using our shareholder portal (www.ubs.com/ shareholderportal). ➔ Refer to www.ubs.com/investors for a complete set of published reporting documents and a selection of senior management industry conference presentations ➔ Refer to the “Information sources” section of this report for more information Financial disclosure principles We fully support the notion of transparency and consistent and informative disclosure. We aim to communicate our strategy and results in a manner that allows stakeholders to gain a good under- standing of how our Group works, what our growth prospects are and the risks our businesses and our strategy entail. We assess feedback from analysts and investors on a regular basis and, where appropriate, reflect this in our disclosures. To continue achieving these goals, we apply the following principles in our financial reporting and disclosure: – Transparency that enhances the understanding of economic drivers and builds trust and credibility – Consistency within each reporting period and between report- ing periods – Simplicity that allows readers to gain a good understanding of the performance of our businesses – Relevance by focusing not only on what is required by regula- tion or statute but also on what is relevant to our stakeholders – Best practice that leads to improved standards 323 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Corporate governance We endorse the work of the Enhanced Disclosure Task Force (EDTF) and our financial reports contain disclosures aligned with the recommendations issued by the EDTF on 29 October 2012 in its report “Enhancing the Risk Disclosures of Banks.” Consistent with our financial reporting and disclosure principles, we regard the enhancement of disclosures as an ongoing commitment. ➔ Refer to the “Risk, treasury and capital management” section of this report for more information on the EDTF recommendations Financial reporting policies We report our Group’s results at the end of every quarter, includ- ing a breakdown of results by business division and disclosures or key developments relating to risk management and control, capi- tal, liquidity and funding management. As of the fourth quarter of 2015, we have replaced the publication of a fourth-quarter financial report with the publication of an expanded quarterly earnings release. For the first three quarters of the fiscal year, we will continue to supplement the quarterly earnings release with the quarterly financial report for UBS Group AG published on the same day. UBS Group AG’s and UBS AG’s consolidated financial state- ments are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. ➔ Refer to “Note 1 Summary of significant accounting policies” in the “Consolidated financial statements” section of this report for more information on the basis of accounting We are committed to maintaining the transparency of our reported results and to permit analysts and investors to make meaningful comparisons with prior periods. If there is a major reorganization of our business divisions, or if changes to account- ing standards or interpretations lead to a material change in the Group’s reported results, our results are restated for previous peri- ods as required by applicable accounting standards. These restate- ments show how our results would have been reported on the new basis and provide clear explanations of all relevant changes. US disclosure requirements As a foreign private issuer, we must file reports and other informa- tion, 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 furnish our quarterly financial reports and other material information under cover of Form 6-K to the SEC. These reports are available at www.ubs. com/investors and on the SEC’s website at www.sec.gov. An evaluation was carried out under the supervision of man- agement, including the Group CEO and Group CFO, on the effec- tiveness of our disclosure controls and procedures (as defined in Rule 13a–15e) under the US Securities Exchange Act of 1934. Based on that evaluation, the Group CEO and Group CFO con- cluded that our disclosure controls and procedures were effective as of 31 December 2015. No significant changes have been made to our internal controls or to other factors that could significantly affect these controls subsequent to the date of their evaluation. ➔ Refer to the “Consolidated financial statements” section of this report for more information 324 UBS and Society EDTF | We aim to be a leader in sustainability in the financial industry. This requires us to focus on the long term and to work to provide consistent returns to our stakeholders. It also requires us to promote the common good by being proactive, purposeful and accountable. Our key program in this regard is UBS and Society – a cross-divisional umbrella platform covering all our activities and capabilities in sustainable investing and philanthropy, environmental and human rights policies that govern client and supplier relationships, managing our own environmental footprint, as well as our firm’s community investment. In 2015, we made good progress in advancing the ambitious goals we pursue through UBS and Society. We want to maximize our performance to generate long-term, sustainable and measurable benefits for our clients, shareholders and communities. Moreover, we are constantly looking for more environmentally sound and socially responsible ways to do busi- ness. Our concept of stewardship encompasses more than just our clients’ assets, it means taking care of what we leave behind for future generations. This is not measured by financial performance alone, but also by performance relating to the environment, good governance, our social impact and other key components of sustainability and resilience. To this end, we aim to: – make sustainability the everyday standard across the firm, – channel a growing portion of investable client assets through innovative financial mechanisms to address societal challenges, (cid:55)(cid:36)(cid:53)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:53)(cid:81)(cid:69)(cid:75)(cid:71)(cid:86)(cid:91) – make sustainable performance part of every client conversation, – train employees on sustainability, – create a credible sustainability approach, – measure the impact of our community investment activities, and – support the transition to a low-carbon economy through our comprehensive climate change strategy. 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(cid:71)(cid:80)(cid:86)(cid:84)(cid:71)(cid:82)(cid:84)(cid:71)(cid:80)(cid:71)(cid:87)(cid:84)(cid:85)(cid:74)(cid:75)(cid:82)(cid:16) (cid:114)(cid:2)(cid:53)(cid:87)(cid:85)(cid:86)(cid:67)(cid:75)(cid:80)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:43)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73) (cid:114)(cid:2)(cid:37)(cid:81)(cid:79)(cid:79)(cid:87)(cid:80)(cid:75)(cid:86)(cid:91)(cid:2)(cid:35)(cid:72)(cid:72)(cid:67)(cid:75)(cid:84)(cid:85) (cid:114)(cid:2)(cid:41)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:2)(cid:50)(cid:74)(cid:75)(cid:78)(cid:67)(cid:80)(cid:86)(cid:74)(cid:84)(cid:81)(cid:82)(cid:91) (cid:114)(cid:2)(cid:49)(cid:82)(cid:86)(cid:75)(cid:79)(cid:87)(cid:85)(cid:2)(cid:40)(cid:81)(cid:87)(cid:80)(cid:70)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80) 325 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation UBS and Society How we do business Living up to our principles and standards contributes to the wider goal of developing societies sustainably. As a global firm, we rec- ognize our responsibility to go beyond the norm, lead the debate on important societal topics, and contribute to the setting of stan- dards and collaboration in and beyond our industry. Governance EDTF | We have firmly embedded the responsibility for setting the firm’s values and standards at the highest level, to help drive our obligations to stakeholders and our corporate responsibility and sustainability agenda. All Board of Directors (BoD) committees monitor our business performance in the context of creating sus- tainable value. Our BoD’s Corporate Culture and Responsibility Committee (CCRC) supports the BoD in its duties to safeguard and advance the Group’s reputation for responsible and sustain- able conduct and also reviews stakeholder concerns and expecta- tions pertaining to the societal performance of UBS and to the development of its corporate culture. The CCRC reviews the stra- tegic direction taken by UBS on corporate responsibility and sus- tainability, as well as the implementation of our commitments in these areas. The CCRC consists of four members. In 2015, Axel A. Weber, Chairman of the Board of Directors, chaired the CCRC. The Group Chief Executive Officer (Group CEO) and the Global Head of UBS and Society, are permanent guests of the committee, while the regional presidents attended two of the five CCRC meetings as guests. ➔ Refer to the Organization Regulations of UBS at The Code incorporates all components of our UBS and Society program. The scope, principles and responsibilities and structure of UBS and Society are set out in more detail in our UBS and Soci- ety policy, which governs UBS’s interaction with society and the environment, and will supersede our environmental and human rights policy in 2016. The Global Head of UBS and Society leads the execution and further development of the UBS and Society program and is also UBS’s senior representative for sustainability issues. In 2015, we established the UBS and Society Operating Com- mittee to oversee and coordinate the execution of the UBS and Society program at GEB level. The committee is chaired by the Wealth Management and Asia Pacific Presidents, who are also the GEB sponsors of the program. The Global Environmental & Social Risk Committee, also at GEB level, defines the environmental and social risk (ESR) framework and independent controls that align UBS’s ESR appetite with the UBS and Society program. It is chaired by the Group Chief Risk Officer, who is responsible for the devel- opment and implementation of principles and appropriate inde- pendent control frameworks for ESR within UBS. The business divisions are responsible for developing and exe- cuting the UBS and Society program and annual objectives related to client relationship, product development, investment manage- ment, distribution and risk management. Corporate Center is responsible for annual objectives related to in-house environmen- tal and responsible supply chain management. Objectives related to Community Affairs are developed and executed at regional level, within the global framework of the UBS and Society pro- gram. www.ubs.com/governance for the charter of the CCRC ➔ Refer to www.ubs.com/code for more information ➔ Refer to the 2016 GRI objectives of UBS at www.ubs.com/sustainability Key principles & policies EDTF | The Code of Conduct and Ethics (Code), the document that sets out the principles and standards for our firm, clearly empha- sizes that these principles and standards apply to all aspects of our business and the way we engage with our stakeholders. The Code aims to foster an ethical culture where responsible behavior becomes second nature. In 2014, the CCRC initiated an in-depth review of our Code, which was conducted together with the Group Executive Board (GEB) and the BoD. The revised Code was published in March 2015. The CCRC reviews the policies and guidelines of UBS pertaining to corporate culture and corporate responsibility to confirm that these are relevant and up to date. ➔ Refer to the UBS Code of Conduct and Ethics at www.ubs.com/code for more information External commitments and stakeholder relations EDTF | As a global firm, we embrace our responsibility to lead the debate on important societal topics as evidenced, for instance, by the UBS climate change study launched in January 2016. We also contribute to setting the standards and promoting international collaboration across industries. These contributions are part of our efforts to advance in areas that are already mandated by govern- ments and regulators, as well as in areas that are still largely vol- untary, but nonetheless significantly strengthen our sustainability and corporate responsibility agenda. In 2015, in support of international efforts leading into the Paris Climate Change conference, UBS signed the World Economic Forum’s open letter from CEOs to world leaders urging climate action, the European Financial Services Round Table’s statement in support of a strong, ambitious response to climate change, and joined RE100, a global initiative which encourages multinational companies to make a commitment to using 100% renewable power, with a defined time frame for reaching that goal. 326 EDTF | Environmental and social risk assessments Cases referred for assessment2 by region Americas Asia Pacific Europe, Middle East and Africa Switzerland by business division Wealth Management Wealth Management Americas Personal and Corporate Banking Asset Management Investment Bank Corporate Center3 GRI1 FS2 FS2 FS2 FS2 FS2 FS2 FS2 FS2 FS2 FS2 FS2 For the year ended 31.12.15 2,192 31.12.14 1,812 31.12.13 1,716 295 520 257 1,120 396 20 980 0 776 20 354 317 297 844 291 21 749 7 654 90 367 296 373 680 298 46 598 14 657 103 % change from 31.12.14 21 (17) 64 (13) 33 36 (5) 31 (100) 19 (78) 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 and assessed by environmental and social risk function. 3 Relates to procurement / sourcing of products and services. Beyond our engagement in many significant external organiza- tions and initiatives, we also regularly engage with our stakehold- ers through other formal and informal channels and on a wide range of topics. Our relationship with stakeholders is multi- faceted and includes interactions with large groups, regular com- munications with representatives from a particular group, as well as personal interaction with clients and investors. Each year we conduct the UBS Materiality Assessment (as defined by the Global Reporting Initiative (GRI)) to capture the views of our stakeholders on the topics they regard as relevant to our firm. The assessment is drawn from assorted formal and infor- mal monitoring tools we employ, from our dialog with stakehold- ers and from relevant studies and reports. We also undertake tar- geted surveys of stakeholder groups, with the findings included in the Materiality Assessment, including a major survey of students globally in 2015. The results of the assessment are captured in a GRI-based materiality matrix. This matrix distills the views of the stakeholders with whom we interact and it covers 24 topics, the top three being “conduct and culture,” “financial stability and resilience” and “client protection.” ➔ Refer to www.ubs.com/materiality for the UBS 2015 GRI-based materiality matrix and for more information on our stakeholder relations and topics Management of environmental and social risks EDTF | We use an environmental and social risk (ESR) framework to identify and manage potential adverse effects on the environment and human rights, as well as the associated environmental and social risks our clients’ and our own assets are exposed to. Our comprehensive ESR standards are aligned with the UBS and Soci- ety program; they govern client and supplier relationships and are enforced firm-wide. We apply the ESR policy framework to all our activities. We have set ESR standards in product development, investments, financing and for supply chain management decisions. As part of our due diligence process, we engage with clients and suppliers to better understand their processes and policies and to explore how any environmental and social risks may be mitigated. We avoid transactions, products, services, activities or suppliers if they are associated with material environmental and social risks that can- not be properly assessed. Our ESR standards include the stipula- tion of controversial activities and other areas of concern we will not engage in, or will only engage in under stringent criteria, as outlined below. We will not do business with a counterparty or an issuer who we judge is not addressing environmental or social issues in an appropriate and responsible manner. We will not do business, if associ ated with severe environmental or social damage to or through the use of: We will only do business under stringent criteria in the following areas: – UNESCO world heritage sites, wetlands – Endangered species – High conservation value forests, illegal logging and use of fire – Child labor, forced labor, indigenous peoples’ rights – Soft commodities: palm oil, soy, timber – Power generation: coal-fired power plants, large dams, nuclear power – Extractives: hydraulic fracturing, oil sands, Arctic drilling, coal mining, precious metals, diamonds 327 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation UBS and Society In 2015, in support of international efforts to enable a transi- tion to a low-carbon world, we strengthened our ESR standards related to coal. We only support transactions of companies operat- ing coal-fired power plants if they have a strategy to reduce coal exposure or adhere to the strict greenhouse gas emission stan- dards recommended by leading international agencies. Moreover, we do not support certain coal-mining companies and significantly limit lending and capital raising provided to the coal-mining sector. Our standard risk, compliance and operations processes involve procedures and tools for identifying, assessing and monitoring environmental and social risks. This includes client onboarding, transaction due diligence, product development and investment decision processes, own operations, supply chain management and portfolio reviews. These processes are geared toward identi- fying clients, transactions or suppliers potentially in breach of our standards, or otherwise subject to significant environmental and human rights controversies. Advanced data analytics on compa- nies associated with such risks is integrated into the web-based compliance tool we use before we enter into a client or supplier relationship, or a transaction. The systematic nature of this tool significantly enhances our ability to identify potential risk. In 2015, 2,192 referrals were assessed by our environmental and social risk unit, of which 73 were rejected or not pursued, and 371 were approved with qualifications. At portfolio level, we regularly review sensitive sectors and activities prone to bearing environmental and social risks. We assess client exposure and revenue in such sectors and attempt to benchmark the portfolio quality against regional and or sector averages. Such portfolio reviews give us an accurate aggregated exposure profile and an enhanced insight into our transaction and client onboarding processes. The outcomes of these reviews allow us to explore ways to improve the future portfolio profile along a range of risk parameters. As an example, in 2015, we reviewed potential climate change impacts on our energy and real estate loan portfolios using stress testing and portfolio analy- sis methodologies. ➔ Refer to www.ubs.com/esr for the complete definition of our standards and specific assessment criteria Our own operations and supply chain Since 1999, we have managed our environmental program through an Environmental Management System in accordance with ISO 14001. In addition, our greenhouse gas (GHG) emissions data is externally verified by SGS on the basis of ISO 14064 stan- dards. We set quantitative targets to reduce UBS’s Group-wide CO2 emissions and the environmental impact of our operations. In support of our commitment to RE100, we have committed to sourcing 100% of the firm’s electricity from renewable sources by 2020. This will reduce its GHG footprint by 75% by 2020 com- pared with 2004 levels. Environmental programs include investments in sustainable real estate and efficient information technology, energy and water efficiency, paper and waste reduction and recycling, the use of environmentally friendly products (such as renewable energy or recycled paper), business travel and employee commuting. We aim to reduce negative environmental and social effects of the goods and services UBS purchases and we engage with suppliers to promote responsible practices. Environmental targets and performance in our operations1 2015 169,006 Target 2016 GRI2 EN15–17 Total net greenhouse gas emissions (GHG footprint) in t CO2e3 Energy consumption in GWh Progress / Achievement8 l l l l l l l l l Legend: CO2e = CO2 equivalents; FTE = full-time employee; GWh = giga watt hour; kWh = kilo watt hour; km = kilometer; kg = kilogram; m m3 = million cubic meter; t = tonne Share of renewable electricity GHG offsetting (business air travel) in t CO2e Paper consumption in kg per FTE7 Share of recycled and FSC paper Waste in kg per FTE7 Waste recycling ratio Water consumption in m m3 Baseline –50% 360,5014 7745 –10% 43.6%4 100%6 04 100% 1225 55.8%5 2325 53.9%5 1.225 % change from baseline 73,592 54.0% 83.6% 52.8% –13.7 –53.1 –12.3 –21.9 EN18 EN23 EN23 0.96 –5% –5% –5% 60% 60% –2.3 –2.0 23.9 49.7 668 119 203 EN3 EN3 EN1 EN2 EN8 100 2014 181,0669 7079 52.0%9 75,305 121 61.8% 213 54.6%9 1.08 2013 193,8729 7589 51.6%9 72,612 121 57.6% 214 55.3% 1.09 1 Detailed environmental indicators are available on the internet www.ubs.com/environment. Reporting period 2015 (1 July 2014 – 30 June 2015). 2 Related to Global Reporting Initiative (see also www.global- reporting.org). EN stands for the environmental performance indicators as defined in the GRI. 3 GHG footprint equals gross GHG emissions minus GHG reductions from renewable energy and GHG offsets (gross GHG emissions include: direct GHG emissions by UBS; indirect GHG emissions associated with the generation of imported / purchased electricity (grid average emission factor), heat or steam and other indirect GHG emis- sions associated with business travel, paper consumption and waste disposal). 4 Baseline year 2004. 5 Baseline year 2012. 6 Target year 2020. 7 FTEs are calculated on an average basis including FTEs which were employed through third parties on short-term contracts. 8 Green: on track / amber: behind schedule. 9 2013 and 2014 data was restated due to updated consumption data of an additional co-location (colo) datacenter and minor changes in methodology. 328 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(cid:70)(cid:67)(cid:86)(cid:67)(cid:69)(cid:71)(cid:80)(cid:86)(cid:71)(cid:84)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:79)(cid:75)(cid:80)(cid:81)(cid:84)(cid:2)(cid:69)(cid:74)(cid:67)(cid:80)(cid:73)(cid:71)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:79)(cid:71)(cid:86)(cid:74)(cid:81)(cid:70)(cid:81)(cid:78)(cid:81)(cid:73)(cid:91)(cid:16) In 2015, we further reduced UBS’s GHG emissions by 6.7%, or 6.6% per full-time employee, year on year, which means a total reduction of 53% from baseline year 2004. We have thus sur- passed our original target of a 50% reduction of GHG emissions by 2016. We achieved this strong performance by adopting energy efficiency measures and increasing the proportion of renewable energy. Emissions, such as from business travel by air, that cannot be reduced by other means are offset. In 2015, we reduced our energy consumption by more than 13% compared with 2012, thus outperforming our target of a 10% reduction by 2016. We are reducing our use of carbon- intensive energy by replacing fossil-fueled heating infrastructure, where feasible. In 2015, we purchased 54% of UBS’s worldwide electricity consumption from renewable sources. We are committed to further reducing UBS’s environmental footprint and are on track to reach most of our 2016 targets com- pared with 2012 as the baseline. The responsible supply chain management (RSCM) principles embed UBS’s ethics and values in our interactions with our suppli- ers, contractors and service partners. We apply an RSCM frame- work to identify, assess and monitor supplier practices with regard to human and labor rights, the environment, health and safety, and anti-corruption principles. In 2015, remediation measures were requested for 44% of suppliers of newly-sourced goods or services with potentially high impacts to improve their adherence to UBS’s RSCM standards. ➔ Refer to www.ubs.com/environment for more information on our environmental management ➔ Refer to www.ubs.com/rscm for more information on our RSCM Training and raising awareness EDTF | Awareness and expertise play an important role in imple- menting our goals. We promote our employees’ understanding of the goals and actions of UBS and Society through a wide range of training and awareness-raising activities, as well as performance management. Through these activities we ensure that our employ- ees understand their responsibilities in complying with our policies and the importance of our societal commitments. General infor- mation is published on our UBS and Society intranet and Internet sites. In 2015, we continued training and raising employee aware- ness by embracing the Code. All employees have to confirm annually that they have read UBS’s key documents and policies, including the Code. Employees were also informed of the firm’s corporate responsibility and sustainability strategy and activities through other training and awareness-raising activities. We devel- oped a new mandatory conduct and culture training module, which includes a comprehensive section on UBS and Society. The training was rolled out to all employees in December 2015. Ratings and recognitions EDTF | Our performance and success in the area of sustainability is reflected in important external ratings, rankings and recognitions. We received “Industry Leader, Gold Class distinction” for our excellent sustainability performance in 2015, as determined by our score in RobecoSAM’s annual Corporate Sustainability Assess- ment. RobecoSAM, together with S&P Dow Jones Indices, also publishes the Dow Jones Sustainability Indices (DJSI), the most widely recognized sustainability rating. As our key achievement in 2015, our firm took over the leader- ship position in the Diversified Financials industry group of the DJSI. The DJSI evaluates companies’ sustainability practices and recognizes the best performers. The Industry Group Leader report for UBS cites our support to clients and communities and our inte- gration of societal and financial performance. It also pointed to our work to build UBS’s capital strength, improve efficiency and effectiveness, and strengthen risk management through our UBS and Society program. With 100 disclosure points, we also achieved a top result in the CDP organization’s assessment for our efforts in reducing carbon emissions and mitigating the business risks of climate change. Asset Management’s efforts in integrating environmental, social and governance issues into its investment practices have been recognized with strong results in the Principles for Respon- sible Investment’s annual reporting and assessment process. Asset Management was awarded at least an A in half of the categories on which it was assessed, most notably achieving an A+ for the main category, Overarching Approach. The Overarching Approach measures an organization’s overall approach to responsible invest- ment, including governance, responsible investment policy, objec- tives and targets, the resources allocated to responsible invest- ment and the approach to collaboration on responsible investment and public policy-related issues. 329 500000.0936 437500.0819 375000.0702 312500.0585 250000.0468 187500.0351 125000.0234 62500.0117 0.0000 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation UBS and Society Asset Management also improved on its strong 2014 ranking in the Global Real Estate Sustainability Benchmark (GRESB) report. In the 2015 GRESB report, the majority of Asset Management’s participating real estate funds, managed by Global Real Estate, ranked in the first quartile of their respective peer groups and nine funds were awarded Green Star (top ranking) status. The UBS Optimus Foundation and its partner Last Mile Health were among a select group of organizations honored at the pres- tigious Clinton Global Citizen Awards 2015 for their work in tack- ling the recent Ebola outbreak in West Africa. How we support our clients Our clients increasingly care about societal issues and want finan- cial advice as well as the right products in order to use their resources to address them. Many of our clients look to us for sup- port in this regard. As a global firm and the world’s largest wealth manager, we are well placed to provide it. We have, in fact, made it our goal to include sustainable performance in every client con- versation. Sustainable investments As of 31 December 2015, sustainable investments increased to CHF 934 billion from CHF 577 billion at the end of 2014, repre- senting 35% of our total invested assets compared with 21% in 2014. While this increase is primarily attributable to reporting pro- cess enhancements for norms-based screening investments (con- troversial weapons exclusions) and Asset Management’s respon- sible property investment strategy, invested assets also generally increased in our other sustainable investment classes, including integration, exclusionary screening, impact investing, and third- party. Major increases in absolute terms were observed among our institutional clients, in particular for screened mandates. We are committed to testing novel financial solutions across our firm. One recent, innovative development in the area of sus- tainable investing includes the emergence and growth of green bonds. In 2015, Wealth Management Americas contributed to this important development by acting as distributor for the World Bank’s first market-linked green bonds for investors in the US. Moreover, as of 31 December 2015, we held green bonds in the amount of CHF 320 million in our high-quality liquid assets portfolio under the management of Corporate Center – Group Asset and Liability Management. Other examples also demonstrate that we have the financial expertise, networks and access to capital to build or support niche financial products as proofs of concept that can be repli- cated and scaled up. Key 2015 examples for this approach include a Wealth Management-sponsored social investment fund in the UK that enables sophisticated investors to invest in a tax efficient way in social enterprises that are helping to tackle pov- erty, and the launch of a UBS investment mandate for Swiss char- itable foundations. Sustainable investments 1 CHF billion, except where indicated GRI2 31.12.15 31.12.14 31.12.13 31.12.14 For the year ended % change from UBS total invested assets Core SI products and mandates Integration3 Integration / RPI4 Impact investing6 Exclusionary screening7 Third-party8 Norms-based screening9 Total Sustainable investments SI proportion of total invested assets (%) FS11 FS11 FS11 FS11 FS11 FS11 FS11 FS11 2,689 2,734 2,390 3.37 49.06 0.76 79.20 6.06 795.07 933.53 34.72 2.62 34.665 2.18 30.705 68.60 4.34 466.52 576.73 21.09 56.09 3.70 444.62 537.30 22.48 (2) 28 4210 15 4010 7010 6210 1 All figures are based on the level of knowledge as of January 2016. 2 FS stands for the Performance Indicators defined in the Global Report- ing Initiative Financial Services Sector Supplement. 3 Applies 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, thematic investments or the sys- tematic and explicit inclusion of environmental, social and governance (ESG) factors into traditional financial analysis. 4 UBS Asset Manage- ment Responsible Property Investment (RPI) strategy. 5 Invested assets, subject to RPI strategy in 2013 and 2014 were restated. 6 Impact investments are targeted investments with a financial return and a clear social and / or environmental return objective. No data available for 2013 and 2014. 7 Includes customized screening services (single or multiple exclusion criteria). 8 SI products from third-party providers applying either integration and / or exclusionary screening. 9 Reporting scope expanded in 2015 to include all actively managed discretionary segregated mandates. Duplication with other SI categories were subtracted to avoid double counting. 10 Due to changes in reporting scopes, data comparability is limited. Sustainable investing is an approach that seeks to incorporate environmental, social and / or governance considerations into investment decisions. SI strategies seek to achieve one or several of the following objec- tives: achieve a positive environmental or social impact, align investments with an investor’s personal values, or improve portfolio risk and return characteristics. Core SI includes all SI products that involve a strict and diligent asset selection process including exclusions and / or different types of positive selection such as best-in-class, thematic or ESG integration and impact investing. Norms based screening includes all assets that are subject to restrictions under UBS policy on the prohibi- tion of investments in companies related to anti-person- nel mines and cluster munitions (includes all actively managed discretionary segregated mandates and all actively managed retail and institutional funds). 330 Investment advisory and products We define sustainable investing (SI) as a set of investment strate- gies (exclusion; integration; impact investing) that incorporate material environmental, social and governance (ESG) consider- ations into investment decisions. SI strategies usually seek to reach one or several of the following objectives: i) align invest- ments with personal values; ii) reduce portfolio risk / return char- acteristics; and iii) achieve a positive environmental or social impact alongside financial returns. Our wealth management businesses and Asset Management offer SI products and services for wealth management and institu- tional clients. Our teams provide thought leadership, advice and sustainable portfolio management, such as mandate solutions and separately managed accounts. We also offer impact investing products and arrange platforms, roundtables and networking events for our clients to exchange ideas and gather know-how. UBS Portfolio Screening Services are mainly offered to ultra high net worth clients to align their portfolios with their values by assessing portfolios along specific sustainability criteria. In 2015, we launched an investment mandate solution with SI focus for our Swiss core affluent and high net worth clients. UBS Investment Management Mandate Switzerland with SI focus has been constructed primarily investing in instruments with a high sustainability rating. The investment strategy it follows is in line with the UBS House View and is thereby focused on financial per- formance, as well as considering environmental, social and gover- nance factors. In parallel to our SI offering enhancement in Wealth Management, we also conducted extensive training on the topic of “SI for Wealth Management clients” to further bolster the expertise of our client advisors and product experts. Asset Management offers a range of SI funds that combine material sustainability factors with a rigorous fundamental invest- ment process. We apply the concept of shared value, according to which companies pursue sustainability practices and not only cre- ate value for the shareholder, but also for a wider range of stake- holders. Our investment themes include renewable energy, envi- ronmental stewardship, social integration, healthcare, resource efficiency, and demographics. We also manage seven exchange- traded funds (ETFs) that track MSCI’s Socially Responsible Equity Indices (MSCI SRI) and that are listed on the Deutsche Börse (Xetra), SIX Swiss Exchange, London Stock Exchange and Borsa Italiana. In 2015, we launched the world’s first ESG Fixed Income ETF, the Barclays MSCI US Liquid Corporates Sustainable UCITS ETF, which tracks an index jointly developed by Barclays and MSCI. In 2015, Asset Management won a very competitive and cut- ting-edge mandate with a large Dutch Pension Fund to craft a global impact equities portfolio with measureable social impact. As this has not been done before, Asset Management is partner- ing with leading-edge academics on a multi-year research and development effort to develop scientifically based and easy–to- understand social impact metrics that describe how the portfolio is contributing to solving important social themes, while minimiz- ing the negative impact on the environment and society. The themes include climate change, water, health and food security. Once developed and vetted, these social impact metrics will help influence our investment strategies. ➔ Refer to www.ubs.com/sustainableinvesting for more information Corporate and personal banking clients financing and advisory We provide capital-raising and strategic advisory services globally to companies offering products that make a positive contribution to climate change mitigation and adaptation, including those in the solar, wind, hydro, energy efficiency, waste and biofuels, and transport sectors. For clients that contribute to climate change mitigation and adaptation, the Investment Bank provided equity or debt capital market services in 2015 (total deal value CHF 10 bil- lion) or acted as financial advisor (total deal value CHF 35 billion). We invest in Swiss corporations by supporting Swiss small and medium-sized enterprises (SME) in their energy-saving efforts. As promoted by the Swiss Energy Agency’s SME model, clients ben- efit from the agency’s “energy check-up for SMEs” at reduced costs and are granted UBS cash premiums for committing to an energy reduction plan within the scheme. Until the end of 2014, the Swiss Energy Agency recorded double the target for UBS SMEs in their overall energy savings which is equivalent to the energy consumption of approximately 400 single-family homes. UBS clients saved more than 1,800 t / CO2 per annum by the end of 2014. In addition, the UBS environmental bonus, launched in 2015, supports corporate clients when upgrading to more envi- ronmentally friendly commercial vehicles. Swiss private clients continue to benefit from the UBS “eco” mortgage when building energy-efficient homes. Our commitment as a financial partner in the energy transition in Switzerland continues by our sponsorship of the Swiss Energy and Climate Summit. 331 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation UBS and Society Research In response to increasing client demand for integrating sustain- ability issues into fundamental investment analysis and advisory processes, we research the impact of ESG issues on various sec- tors and companies. Our specialized teams regularly publish research on topics that we believe will shape our future. Our experience and sector knowledge help us determine what is material by raising questions about the effects of ESG issues on the competitive landscape in the global sectors we cover, as well as about how companies are affected in relative terms. In 2015, our Chief Investment Office Wealth Management (CIO) published a series of reports on SI commencing in March, with an overarching publication on the topic “Adding value(s) to investing.” This publication set out the why, what and how of SI, highlighting reasons and motivations to become involved in it, presenting three SI strategies, and advising on how to implement them in portfolios. Following on from this, CIO also published a report focused on integration and exclusion which also set out to dispel a common myth that SI must lead to financial underperfor- mance. In September 2015, CIO responded directly to a major global development pertaining to sustainability, the adoption by the UN General Assembly of the Sustainable Development Goals (SDG). CIO published a report spotlighting a number of action- able, sustainability-themed investment ideas well-suited to pursu- ing the SDG. Sustainability-themed investment ideas were also comprehensively covered in the CIO publication “Years Ahead”. For example, CIO outlined areas such as “emerging market healthcare” and “clean air and carbon reduction.” CIO regularly translates key societal and environmental con- cerns into investment themes as part of its Longer Term Invest- ments series and Wealth Management’s global Research-based Advice (RbA). One important example in 2015 was oncology, with the investment theme identifying companies that develop new treatments for cancer. Wealth Management also raised USD 340 million for the initial close of a UBS oncology impact investing col- laboration with MPM Capital. More broadly, in 2015, RbA fea- tured Performance Plus, which signifies our conviction that suc- cess cannot be measured by financial performance alone, but also by performance relating to the environment, good governance, our social impact and other key components of sustainability and resilience. For our sustainability-specific strategies in Asset Management, we have developed a leading-edge database of fundamental sus- tainability data at the company and industry group level that is used alongside valuation data from our analysts to rank the investment universe on both fundamental and sustainability attractiveness. The database mirrors the approach taken by the Sustainability Accounting Standards Board in building its Material- ity Matrix™. We believe that this database gives us a significant proprietary edge in the incorporation of fundamental, material sustainability data in the investment process. This Sustainability key performance indicator database is instrumental in ensuring that both valuation and sustainability factors are taken into account simultaneously and that both receive equal weighting in the decision-making process. Voting rights We believe that voting rights have economic value and should be treated accordingly. Where Asset Management has been given the discretion to vote on behalf of our clients, we will exercise our delegated fiduciary responsibility by voting in the manner we believe will be most favorable to the value of their investments. In the 12-month period ended 31 December 2015, we voted on 87,348 individual resolutions at 8,654 shareholder meetings, for clients that provided us with voting discretion according to Asset Management’s corporate governance principles. Philanthropy As one of the first banks offering philanthropy services to clients, our commitment goes back many years. It is a commitment that is continually reaffirmed, reinforced and expanded. We have decided to strengthen and grow our capacity and capabilities in the field of philanthropy to better support our clients in achieving their philanthropic aspirations through innovative solutions. Build- ing on our track record and experience, we have established a global team of in-house experts offering a one-stop professional approach to all aspects of philanthropy, strategic charitable giving and values-based investing. We support clients as they develop their own philanthropic approach by offering them access to a wide range of sustainable philanthropic engagement options across regions and sectors. The 2015 UBS Global Philanthropy Forum drew a record 150 clients and prospects to St. Moritz, Switzerland, for two days of interactive discussion and exchange around the theme “Daring to innovate.” Many of the Forum discussions centered on the phase of “convulsive change” that the world is currently undergoing. Wealth Management Americas Philanthropic Services convened a one-day client discussion on innovation in the field of autism. The event brought together 30 accomplished experts and families impacted by autism who have the means to make a difference. Following the event, our clients invested in each other’s initiatives in response to autism and signed a collective Unity Statement to unify multiple organizations and leaders around this cause. ➔ Refer to www.ubs.com/sustainableinvesting for more information 332 Optimus Foundation 2015 was an outstanding year for the UBS Optimus Foundation (Optimus). Despite the challenging economic environment, dona- tions rose to an all-time high of CHF 57 million, including a UBS contribution of CHF 11 million, which multiplied donations from clients and employees. This allowed us to approve more than CHF 60 million in grants to our partners who are working to improve the lives and futures of children around the globe. UBS is unique in the financial industry because it has a founda- tion with the philanthropic expertise and offering to help clients achieve their philanthropic goals. As part of UBS, Optimus is also business-minded in its approach to philanthropy and assesses projects with the same rigor that UBS applies to traditional finan- cial investments. Even the best concepts need the right guidance, and Optimus never assumes a project will work just because it seems like the obvious solution. The foundation challenges assumptions rigorously to ensure they live up to its strict stan- dards. Optimus looks for projects where it can add value and that can be scaled to make a fundamental difference to the maximum number of children’s lives. Clients see the benefits of our brand of entrepreneurial philan- thropy. With its start-up mentality, Optimus is able to act fast and adapt swiftly, while relying on the global coverage and backing from UBS’s expertise and resources. It means that the foundation challenges conventional wisdom and learns from failure. This enables the foundation to identify scalable, transformative proj- ects with proven track records that have the greatest potential to produce sustainable results. In short, Optimus brings more of the money to where it can do the most good. The foundation moni- tors projects and measures their results, so it can demonstrate to clients exactly where their donations go and what they achieve. As UBS covers all of the foundation’s administrative costs, 100% of clients’ donations go to the philanthropic projects it supports. ➔ Refer to www.ubs.com/optimus for more information How we support our communities UBS has a responsibility towards our local communities. We know that our long-term success depends on the health and prosperity of the communities in which we operate. Our longstanding global program of community investment focuses on addressing real need by developing skills through our support for education and entrepreneurship. We achieve impact through a combination of strategic funding and employee volunteering. Our approach is founded on building sustainable and success- ful partnerships with non-profit organizations and social enter- prises to ensure we make a lasting impact. We engage beyond just financial support – UBS employees are key to the success of our community program. By providing diverse opportunities for our employees to volunteer their time and skills in support of our community partners, we seek to align our community program with our core business. We encourage employees to support our local communities by: – Facilitating employee volunteering with local charitable partners – Offering employees up to two days a year to volunteer – Matching fundraising endeavors and employee donations to charities Community investment 2015 In 2014 and 2015, we enhanced our focus on measuring the impact of our program by using the London Benchmarking Group’s standard model for measuring and reporting on our com- munity investment globally. This allows us to effectively evaluate and focus our program. In 2015, we strengthened our global program and strategic focus on education and entrepreneurship through the enhance- ment of existing and new partnerships in our local communities. In 2015, UBS made direct cash contributions totaling CHF 27.4 million. 91% of UBS’s strategic donations were made in the areas of education and entrepreneurship. 27% of our employees volun- teered, a 26% increase compared with 2014. Additionally, UBS contributed a total of CHF 37.5 million to its affiliated foundations in Switzerland, to the UBS Optimus Founda- tion and to the UBS Anniversary Education Initiative. 333 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation UBS and Society Community investment 2015 highlights Our global program benefited over 100,000 young people and entrepreneurs across all of the regions in which we operate. Examples of our investments include: – Americas: UBS Americas launched two major initiatives in 2015: Project Entrepreneur, a three-year partnership with Rent the Runway Foundation to grow the pipeline of female found- ers who are building economically impactful companies; and The TalentED Project, a three-year partnership with Tennessee College Access and Success Network and Discovery Education to help increase the number of low-income, first-generation students going to and graduating from competitive four-year colleges. – EMEA: We helped launch the Stepping Stones Fund with the City of London Corporation’s charity, City Bridge Trust to pro- vide targeted support to social enterprises seeking to increase their impact through social investment. UBS employee volun- teers helped coach, assess and then select the grant winners. The first round of funding saw 17 organizations share just over GBP 700,000 to improve their social outcomes with the aim of reaching thousands of beneficiaries. – Switzerland: In Switzerland, UBS continues to support our longstanding charity partner Young Enterprise Switzerland’s Company program. More than 4,000 young students founded and ran real-life companies for a year. UBS supports the national final with volunteers and financial means. UBS has also strongly increased engagement for social entrepreneurs in the country by providing mentoring and supporting respective platforms. – Asia Pacific: UBS partnered with Yayasan Emmanuel in Indone- sia to support international school teachers to raise the capac- ity of local elementary school teaching up to international standards. The program engages teachers in a process of expe- riential learning and reflection, ultimately benefiting school pupils by improving teacher quality. ➔ Refer to www.ubs.com/community for more information Community Investment 2015 overview CHF 27.4 million invested in our local communities 16,356 employees volunteered 137,732 hours on community projects CHF 7.4 million spent matching employee donations 326 community partners supported worldwide 101,604 direct beneficiaries as a result of our community investment 334 Our employees Competitive strength in the financial services industry is greatly influenced by the ability, expertise and commitment of a firm’s employees. In light of this, we endeavor to attract, enable, develop and engage the best people with the right skills, a responsible mindset and diverse backgrounds. We invest in our employees and seek to ensure that we have effective leadership and human resource practices in place, as well as the structures, technology and training necessary for our employees to deliver on our strategy and meet our clients’ needs. These elements, working together, help create sustainable value for all of our stakeholders. Our approach Our workforce We continue to work hard to further strengthen our corporate culture, as we are convinced that the right strategy and a strong, cohesive culture drive excellent performance. First introduced in 2013, the three keys to success – our Pillars, Principles and Behav- iors – are the foundation of our strategy and culture. Our Pillars are: building capital strength, improving efficiency and effective- ness, and sharpening risk management. They are the basis of our business strategy and everything we do. Our Principles: client focus, excellence and sustainable performance define what we stand for as a firm and guide our daily work. Of particular impor- tance in how we manage our workforce and how our employees interact are the firm’s Behaviors: integrity, collaboration and chal- lenge. These expectations influence our entire people manage- ment approach, from whom we hire to how we manage, develop, compensate and support our employees. In 2015, the three keys were embedded into every human resource process at the firm, thus better aligning the way in which we manage our people with the culture that we want to have. Our overall workforce number remained relatively stable in 2015. As of 31 December 2015, we employed 60,099 people (on a full- time equivalent basis), 56 fewer than a year earlier. In 2015, our employees worked in 54 countries, with approximately 35% of our staff employed in Switzerland, 35% in the Americas, 17% in Europe, Middle East and Africa, and 13% in Asia Pacific. Addi- tionally, our employees worked in 897 office locations, spoke more than 130 languages and were citizens of 135 countries. Our workforce spans four generations, with an average age of 41 and an average length of employment at UBS of nine years. In Swit- zerland, more than 48% of employees have worked at UBS for more than 10 years. A mobile workforce helps us better utilize our employees’ know-how and increases collaboration across teams, functions and divisions. Many inter-divisional or regional role changes are informal, short-term arrangements to meet specific project needs. However, we formally transferred 1,125 employees between busi- ness divisions and 574 employees to roles in other regions in 2015. In relation to average overall headcount, employee turnover was 14.6% in 2015, compared with 13.4% in 2014. Employee-initi- ated turnover was 9.0% compared with 8.5% in 2014. The three keys to success Pillars Principles Behaviors Capital strength Efficiency and effectiveness Risk management Client focus Excellence Sustainable performance Integrity Collaboration Challenge 335 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Our employees Personnel by region Full-time equivalents Americas of which: USA Asia Pacific Europe, Middle East and Africa of which: UK of which: Rest of Europe of which: Middle East and Africa Switzerland Total Personnel by business division and Corporate Center unit1 Full-time equivalents Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center of which: Services of which: Group ALM of which: Non-core and Legacy Portfolio Total2 As of 31.12.15 31.12.14 31.12.13 % change from 31.12.14 20,816 19,897 7,539 10,505 5,373 4,957 176 21,238 60,099 20,951 19,715 7,385 10,254 5,425 4,663 166 21,564 60,155 21,317 20,037 7,116 10,052 5,595 4,303 153 21,720 60,205 (1) 1 2 2 (1) 6 6 (2) 0 As of % change from 31.12.15 31.12.14 31.12.13 31.12.14 10,239 13,611 5,058 2,277 5,243 23,671 23,470 125 77 60,099 10,337 13,322 5,206 2,323 5,194 23,773 23,517 120 137 60,155 9,988 13,545 5,209 2,217 5,165 24,082 23,747 113 222 60,205 (1) 2 (3) (2) 1 0 0 4 (44) 0 1 Comparative figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes. Refer to the “Recent developments” section of our third quarter 2015 report for more information on personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units. 2 Represents information for UBS Group AG (consolidated). As of 31 December 2015, UBS AG (consolidated) employed 58,131 full-time equivalent personnel. The difference comprises 4 full-time equivalents in Wealth Management and 1,964 full-time equivalents in Corporate Center – Services. Attracting and recruiting talent We are committed to developing our existing employees’ skills while hiring the best available talent, as required, to sustain and grow our core businesses. In 2015, 34% of all open positions were filled by internal candidates. We also hired 8,988 external candidates across the firm, with Wealth Management hiring 328 client advisors and Wealth Management Americas hiring 389 financial advisors. In 2015, we further integrated the UBS House View on Leader- ship, explicit expectations for what good leadership looks like at UBS, and the Principles and Behaviors into our recruitment pro- cesses. We also want to hire talented women at all levels, espe- cially within middle and senior management. Therefore, we fur- ther strengthened our recruitment procedures in 2015 to help ensure that qualified female candidates are fully considered for open roles. Employees in nearshore or offshore locations comprised a larger percentage of our global workforce in 2015 than in 2014. In particular, the growth of our Business Solution Centers resulted in significant recruiting activities in Nashville (US), Pune (India), and Shanghai (China), as well as in Krakow and Wroclaw (Poland). We expect those hiring trends to continue in 2016. 336 Hiring and training a pipeline of young talent is a priority for us. In 2015, 475 university graduates were hired into one of our undergraduate or MBA graduate talent programs, along with 820 interns. Both groups bring new perspectives and skills to our global teams and comprise a continuous source of high-quality talent. In Switzerland, this was the third consecutive year in which we increased the number of new apprentices in conjunction with the UBS Education Initiative, hiring a total of 296 apprentices for business and information technology roles. We also recruited 193 trainees into our Bank Entry Program for high school graduates in Switzerland. In 2015, we continued to promote the firm’s offerings through online and social media channels, strengthening our one-brand approach on LinkedIn through a global UBS company page and an employees and alumni group. We also engaged with students and young professionals through UBS Careers on Facebook, Google+ and Twitter, and shared UBS stories on our corporate YouTube channel and our UBS Careers blog. In addition, we main- tained our presence on Glassdoor and launched an Instagram channel. For the second consecutive year, Working Mother magazine named UBS among the top 100 US companies for our leadership in establishing policies, programs and a corporate culture that supports working mothers. We were also ranked in the global top 40 in Universum’s 2015 World’s Most Attractive Employers list. In Universum’s 2015 Ideal Employer survey in Switzerland, the firm was ranked in the top five overall, and the number one financial services firm among both business graduates and experienced professionals. In the UK, UBS was recognized as a Top 30 Employer for the second consecutive year by Working Families. In Asia Pacific, among other honors, UBS was ranked number 29 in the top 100 graduate employers in APAC by Universum. ➔ Refer to www.ubs.com/careers for more information and to follow the UBS Careers Blog ➔ Refer to www.ubs.com/awards for information on UBS’s rankings as an employer Developing and managing our talent We value the skill, commitment and experience of our workforce and endeavor to offer career development opportunities to employees at all levels. Our talent pipeline is growing, as we are focusing on identifying and developing talent early in a career. We strongly believe in promoting from within, and, in 2015, more than 150 management meetings took place across the firm to review and expand our business talent pipelines. The focus for 2015 was, and remains in 2016, on increasing the diversity of our pipeline and internal mobility, as well as further improving our talent management tools and processes. Leadership development and training Our leaders are expected to be change agents and ambassadors for the firm’s strategy and culture. In 2015, we again brought together the firm’s top 300 leaders at our Senior Leadership Expe- rience (SLE). This is the pinnacle of our integrated leadership development program and a key way for our leaders to advance our strategic and cultural priorities. This year’s conference was also an “innovation lab,” using the ideas and experience of peo- ple across the firm to make headway on a number of key strategic challenges. The SLE and related initiatives, such as the new Senior Leadership Program for managing directors developed with the International Institute for Management Development, help to ensure our leaders are aligned with the firm’s strategy, the three keys to success, and our expectations for them. Beyond these strategic initiatives, our educational offerings in 2015 comprised leadership and key talent development activi- ties, business and client education, and role-specific education for all employees. For example, our longstanding 12-month ED Accelerate program targets top-talent executive directors in all business divisions. It aims to build the firm’s leadership pipeline and accelerate participants’ readiness for more senior roles. Like- wise, high-potential directors and associate directors are invited to Ascent, a 12-month key talent program featuring intense, col- laborative projects that find solutions to sponsors’ real-time busi- ness challenges. The firm maintains an eLearning portfolio with more than 5,100 courses on a wide range of topics, including financial mar- kets, management, business, risk, compliance, personal skill development and information technology. In 2015, our perma- nent employees, not including external staff, participated in approximately 754,000 development activities, an average of 12.2 trainings per employee or 2.4 training days. All staff, includ- ing external personnel, participate in mandatory training on top- ics such as operational and conduct risk, money laundering pre- vention, risk culture and information security. These courses are valuable learning experiences that also help us meet our regula- tory commitments. Innovations in client advisor training In 2012, UBS defined a set of expecta- tions for its client advisors that developed into a formal certification program. In doing so, we became the first Swiss bank whose diploma holders could place Swiss Certified Client Advisor on their business cards. Since then, more than 3,500 UBS client advisors in the private clients, wealth management Switzerland and corporate and institutional clients businesses have successfully completed the program. In October 2015, UBS, Credit Suisse and the Banques Cantonales Latines agreed on a joint certification standard for client advisors in Switzerland based on UBS’s client advisor certification. Strong advisory skills are a business imperative. Therefore, client-facing employees have numerous opportunities to broaden their capabilities. As examples, all client advisors in Wealth Management must earn a Wealth Management Diploma. High-performing and senior client-facing employees are nominated for the Master in Wealth Management, a strategic partnership between UBS and Rochester-Bern Executive Programs. Our Wealth Planning Analyst program in the US develops the knowledge and skills of future financial advisors through a two-year, apprenticeship-type training program. 337 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Our employees Gender distribution by employee category1 Headcount as of 31.12.15 Male Female Total Officers (Director and above) Officers (other officers) Employees Total Number 18,186 5,249 23,435 % 78 22 100 Number 12,027 7,936 19,963 % 60 40 100 Number 7,753 10,534 18,287 % 42 58 100 Number 37,966 23,719 61,685 % 62 38 100 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 employee number of 61,685 as of 31 December 2015, which excludes staff from UBS Card Center, Hotel Seepark Thun, Wolfsberg and Hotel Widder. Managing performance We know that personal accountability, effective performance management and sound compensation practices are critical for our success as a firm. We therefore strive to ensure that our per- formance management practices are robust and centered on ele- ments that impact our long-term profitability and our culture: namely, performance and behavior. At the beginning of every year, the firm’s business goals are translated into individual performance and behavior goals, strengthening the alignment between corporate and employee priorities. Employees and managers are also encouraged to dis- cuss achievements, development and career goals throughout the year. This feedback enables employees to achieve challenging goals, to be effective in their roles and to grow in their careers while helping managers support employees in reaching their full potential. Our year-end review process measures not only what was achieved, but also how those results were achieved. Since 2013, we have specified the behaviors we expect and have embedded them into performance evaluations. In 2015, we introduced sepa- rate ratings for goals and behaviors to further emphasize the importance of integrity, collaboration and challenge in daily busi- ness activities, as well as transparency in our management and reward processes. Both goal and behavior ratings factor into development, reward and promotion decisions. Helping employees understand and appropriately manage all types of risk continued to be an important part of our manage- ment processes in 2015. Measurable risk objectives were again required for all employees, and those in key risk-taker roles were subject to additional performance review measures. For those employees, at least one independent person in a control function was required to review and provide constructive feedback on their understanding and management of risk in their daily work. This multi-rater approach, focusing on the what and how of perfor- mance, can give us a broad perspective on various aspects of indi- vidual performance and reduce risk. Building diversity and inclusion Our global workforce is already diverse in many aspects and we consider this a competitive strength. We are committed to further increasing diversity and ensuring an inclusive workplace, because both are key to achieving our goals. Diversity is both a cultural and a business imperative. Having a global workforce with wide diver- sity in age, gender, background, experience, education and other factors helps us achieve our business strategy now and in the future, because we strongly believe that: – diverse teams better understand and relate to the needs of our clients – an inclusive work environment attracts high-quality people and helps engage them over the long term – diversity of background, thought, opinion and experience drives better decision making, innovation and leadership We focused the majority of our efforts in 2015 on gender diversity. Across UBS, women occupy almost a quarter of our management roles. For years, our firm-wide gender balance has remained stable. We have the aspiration to increase the ratio of women in management roles to one third. We know this will take time. Like many firms, we face a particular challenge in retaining women at the mid-point of their careers. We continue to develop technology solutions, training, career support and human resource policies and processes that over time will help us increase the number of women who choose to build long-term careers with us. All our human resource policies and processes underscore our commitment to a diverse and inclusive workplace with equal opportunities for all employees. As part of this, each business divi- sion delivers on business-specific action plans. In addition, we sponsor numerous internal and external initiatives in each region, with a particular focus on education, coaching and mentoring. 338 Strengthening diversity in Wealth Management In 2015, Wealth Management focused on improving its representation of women, supporting employee health and creating a more inclusive working environment, with the aim to be the globally recognized employer of choice for women in the industry. Senior management is fully committed to improving gender balance, sponsoring and participating in a range of new programs supporting the edu cation and professional advancement of women in Wealth Management. Examples of these activities are an individ- ualized fast track program, a sponsorship program for senior women and an edu- cational program for women who want to build their personal finance skills. At employee level, we promote inclusion and cross-firm col- laboration through the sponsorship of numerous initiatives such as our annual Diversity Week in the UK. Employee networks in all regions sponsor numerous networking and educational events on topics related to gender, culture, life stage, sexual orientation, and other aspects of diversity. In 2015, we had 30 employee networks globally, with more than 17,500 members. 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(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) Reward We seek to closely align our reward structure with the strategic priorities, principles, and behaviors that help build and protect the firm’s reputation. As such, our approach to reward has a strong focus on conduct as well as sound risk and management practices. We offer fixed compensation that is appropriately linked to a flexible variable compensation policy. Variable compensation is a discretionary element that fluctuates year to year. Variable com- pensation may comprise a shorter-term immediate cash perfor- mance award and a longer-term deferred performance award, which includes provisions that put a significant portion of employ- ees’ total variable compensation at risk of forfeiture for several years. It is based on individual, team, business division, and Group performance, within the context of the markets in which we oper- ate. Overall, total reward includes base salary, role-based allow- ances as appropriate, pension contributions and other benefits in accordance with local requirements and market practices. Total reward may also include a shorter- and longer-term performance award to support our focus on the firm’s sustained profitability. Our approach recognizes the need to compensate individuals for their performance within the context of market conditions, a fast-changing commercial environment, evolving regulatory requirements, and behaviors such as integrity, collaboration and challenge. It takes into account base salaries, discretionary perfor- mance awards and benefits according to the firm’s Total Reward Principles, which aim to: – attract and engage a talented, diverse workforce – foster effective performance management – align reward with sustainable performance – support appropriate and controlled risk taking 339 (cid:20)(cid:22)(cid:18)(cid:18)(cid:18) (cid:19)(cid:26)(cid:18)(cid:18)(cid:18) (cid:19)(cid:20)(cid:18)(cid:18)(cid:18) (cid:24)(cid:18)(cid:18)(cid:18) (cid:18) Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Our employees Employee share ownership Employee share ownership is encouraged and enabled in a variety of ways. One example is our share purchase plan, Equity Plus. This is a voluntary equity-based program that enables eligible employ- ees to purchase UBS shares at market price and receive one free matching share for every three shares purchased. Shares pur- chased under the Equity Plus Plan are generally blocked from sale for up to three years from the time of purchase. Matching shares vest in three years, provided the employee continues to work at UBS and retains the purchased shares. Another example is the Equity Ownership Plan (EOP), which is a mandatory compensation deferral plan for all employees with total compensation greater than CHF / USD 300,000. The plan links the vesting of EOP awards with a return on equity over a two- to five-year time horizon, which helps align employees’ long-term objectives with those of our shareholders. The plan includes provisions that enable the for- feiture of some, or all, of the unvested deferred award if the employee commits certain harmful acts. As of 31 December 2015, current employees held an estimated 6% of UBS shares outstanding (including approximately 4% in unvested / blocked actual and notional shares from our compen- sation programs). These figures are based on all known share- holdings from employee participation plans, personal holdings and individual retirement plans. At the end of 2015, an estimated 39% of all employees held UBS shares. ➔ Refer to the “Compensation” section of this report for more information Our responsibility as an employer We strive to be a responsible employer and to provide a support- ive work environment for our employees. In this respect, the application of our Principles and Behaviors is an important part of how we manage our global workforce. All employees are offered a comprehensive array of market-competitive benefits that can include insurance, pension, retirement and personal leave. In many cases, our available benefits go beyond what is required by law or market practice. For example, we offer all employees up to two days each year to volunteer in their local communities. We also support flexible working arrangements in our major loca- tions. In Switzerland, this includes telecommuting, part-time, job- sharing and partial retirement options. In the UK and the US, part- time, job-sharing and telecommuting opportunities may be available. Efficiency, flexibility and leading-edge collaboration tools are important to our businesses and staff, and we have undertaken several initiatives in recent years to improve our workplaces. For example, in 2010 we introduced UBS Workplace Now in Switzer- land with a dual aim: to reduce unoccupied office space, and to use mobility to increase flexibility and efficiency. In late 2015, the program was expanded to other locations and we now have approximately 11,500 staff using the new workplaces, which fea- ture shared desks, informal areas for ad hoc meetings and private work rooms. 340 At different life stages, employees may need specialized sup- port, and we offer resources to help navigate a wide range of issues. For example, our human resource policies help ensure that employees are able to take parental leave upon the birth or adop- tion of a child and then continue with their careers at UBS upon their return. Parental leave entitlement is governed by local legis- lation, and it varies by country. UBS meets the statutory parental leave requirements in all locations, and in most locations we exceed them. We also offer employee assistance programs in a number of locations, including the UK, the US, Switzerland, Hong Kong, Singapore and Japan. These programs include specialist support and counseling for stress, illness, personal conflict, finances, bereavement, mental health, elderly care and other work-life challenges. In a number of locations, employees can access company-provided or subsidized health services, child care and fitness options. Having a supportive work environment is especially important if organizational restructuring adversely affect teams or individual employees. To this end, we have redeployment and outplacement programs in every region to provide assistance in such cases. In the US, we provide career transition support, in addition to sever- ance pay and health benefits, to eligible employees. In Switzer- land, our COACH program helps affected employees find new roles either within UBS or outside the firm. Swiss employees par- ticipate in a social plan that sets terms for redundancies, internal hiring, job transfers and severance. Our Code of Conduct and Ethics is the basis for the policies, guidelines and procedures that help us manage our workforce. It includes a commitment to support the health and safety of employees and external staff. ➔ Refer to www.ubs.com/healthandsafety for more information on our commitment to health and safety Resolving workplace issues We recognize that workplace issues may sometimes arise, and we are committed to addressing them in a timely and effective man- ner. We have established procedures in every region to resolve work-related grievances and complaints. Employees who have concerns about work-related matters are encouraged to speak with their direct line manager or an HR representative. They are also asked to promptly report any conduct by employees, consul- tants, clients or service providers that may constitute a breach of laws, regulations, rules, policies or procedures. We have a global whistleblowing policy and procedures (including a dedicated web- site and telephone hotline) for submitting, investigating and han- dling reports confidentially. Our policies prohibit adverse action against employees acting in good faith and we make the relevant information available to all employees online, in our employee handbooks, and on our global whistleblowing intranet site. Employee representation As part of our commitment to being a responsible employer, we maintain an open dialog with all of our employee representation groups in Europe. Established in 2002, the UBS Employee Forum for Europe includes representatives from 12 countries. It facilitates open dialog on pan-European issues that may affect our regional performance, prospects or operations. Country-level forums address topics such as health and safety, changes to workplace conditions, pensions, collective redundancies and business trans- fers. For example, in Switzerland, elected Employee Representa- tion Committee members meet with senior management at the annual salary negotiations for Swiss employees below director level and represent employee interests on specific topics. The UK Employee Forum focuses on economic, financial and social activi- ties concerning UK employees. Collectively, the UBS Employee Forum, including the Employee Representation Committee and UK Employee Forum, represents approximately 52% of our global workforce. 341 Corporate governance, responsibility and compensation Corporate governance, responsibility and compensation Compensation Compensation Dear shareholders, Pillar 3 | The firm delivered excellent performance in 2015, against the back- drop of a challenging market environ- ment. Our compensation decisions reflect our commitment to deliver competitive compensation for excellent performance while balancing returns to our investors and meeting global regulatory capital requirements. We have consistently applied our compensation philosophy over the past five years to appropriately reward out- standing performance in order to attract, motivate and retain the very best talent. The approach we take to compensation supports the firm’s commitment to sus- tained longer-term profitability, a strong capital position, and aligns compensation with investors’ interests. 2015 performance In 2015, despite a volatile and uncertain market, we delivered strong net profit attributable to UBS Group AG shareholders of CHF 6.2 billion, a 79% increase compared with a year earlier, and our adjusted1 Group profit before tax more than doubled to CHF 5.6 billion. The firm’s strong capital position was increased further while return on tangible equity exceeded the Group’s target for the year. As a result, the Board of Directors (BoD) intends to propose to shareholders at the Annual General Meeting (AGM) 2016 an increase in the ordinary dividend of 20% compared with 2014, as well as a special dividend of CHF 0.25 per share. Including the proposed dividends for financial year 2015, we will have returned CHF 7.5 billion to shareholders since the acceleration of our strategy in 2012. Compensation for each GEB member is based on a comprehensive assessment of their quantitative, qualitative and relative competitive performance. Awards for 2015 reflect the outstanding performance of the GEB, including the Group CEO, in the context of excellent overall Group per- formance, and our ambition to align our compensation to appropriate external per- formance benchmarks. 2015 performance award and expenses The firm’s total performance award pool for 2015 was CHF 3.5 billion, an increase of 14% compared with the prior year. Determination of the performance award pool was based on a range of perfor- mance metrics, including risk-adjusted profitability and capital strength. The per- formance award pool also reflects the reduced impact on our results of expenses for provisions relating to litigation, regula- tory and similar matters. The Group Executive Board (GEB) perfor- mance award pool, including the Group CEO, was CHF 71.25 million. As a percent- age of the adjusted Group profit before tax, the GEB performance award pool was 1.3%, well below the cap of 2.5%. 2015 compensation framework Our compensation framework has remained largely unchanged since 2012. However, to better align with the market, we have reduced deferral rates for perfor- mance awards for those employees at the lower end of the deferral scale thus increasing the proportion of cash com- pensation awarded to these individuals. Further, regulatory developments have driven several local adjustments of our compensation practices. For instance, we changed role-based allowances, where applicable, to grant blocked shares instead of shares subject to vesting. This structural shift was required to comply with feed- back received from European authorities, and led to an acceleration of the amortiza- tion of the compensation expense relating to deferred compensation. 1 Refer to “Group performance” in the “Financial and operating performance” section of the Annual Report 2015 for more information on adjusted results 342 Advisory vote The firm’s compensation vehicles (i.e., the form of performance awards and the related deferral approach) are designed to reinforce appropriate risk-taking and reward longer-term performance. Com- pared with our peers, we believe UBS has greater alignment with our investors, as we place a greater proportion of variable compensation subject to longer deferral periods in the firm’s own equity and debt instruments. For 2015, on aver- age across the firm, 38% of performance awards were deferred, and for the Group CEO and other GEB members on average 86% of their performance awards were deferred for up to five years. Our compensation structure, including the use of debt instruments, allows us to pay competitively, while also supporting our capital requirements. As of 31 December 2015, CHF 1.9 billion of the Deferred Contingent Capital Plan (DCCP) was included in our eligible capital, making up 0.9% of our total capital ratio. Looking ahead, we will remain abreast of the evolving competitive and regulatory landscape and will adapt our compensation framework and practices where required. Performance management and culture In 2015, we strengthened our emphasis on values to support cultural change within the firm. Therefore, we not only take into account what was achieved, but also how the objectives were achieved. This means that an employee’s behavior forms an integral part of their overall performance evaluation. These performance and behavior assessments have influenced both promotion and compensation decisions. Management also continues to drive cultural change by setting a clear tone from the top and by applying a consistent approach throughout the firm. We rein- forced our Code of Conduct and Ethics and we do not tolerate misconduct. We enhanced mandatory training in risk and conduct matters, and we continued to encourage our employees to speak up and report any concerns under our whistleblowing procedures. We are confident that through good leadership and responsible performance management and compensation pro- cesses, underpinned with regular training programs, we will continue to reinforce a culture of accountability, and thereby provide added value to our shareholders. Annual General Meeting 2016 At the AGM 2016, we will ask sharehold- ers to vote on: – The maximum aggregate amount of compensation for the BoD for the period from AGM 2016 to AGM 2017; Ann F. Godbehere Chair of the Compensation Committee of the Board of Directors – The maximum aggregate amount of fixed compensation for the GEB for 2017; and, – The aggregate amount of variable compensation for the GEB for 2015; – Further, we will ask our shareholders for an advisory vote on the Compen- sation Report outlining our com- pensation strategy and principles, governance and practice. The Board of Directors and I thank you for the encouraging shareholder support at the 2015 AGM and for sharing your views on our compensation practices during the year. On the following pages you will find more information about our 2015 compensation approach. We will seek your support on compensation matters at our AGM on 10 May 2016. Ann F. Godbehere Chair of the Compensation Committee of the Board of Directors 343 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation 2015 Total Reward Principles Our compensation philosophy is to align the interests of our employees with those of our clients and investors. Our Total Reward Principles underpin our approach to compensation by establishing a framework that balances performance with prudent risk taking. Furthermore, our framework builds on our guiding principles of client focus, excellence and sustainable performance. Total Reward Principles Pillar 3 | Our compensation structure is aligned with our strategic priorities. Employees are encouraged to create sustainable value and profitability, and to build a strong client franchise. We reward behavior that helps to build and protect the firm’s reputation. As such, our approach to compensation has a strong focus on con- duct as well as on sound risk and management practices. We strive for excellence and sustainable performance in everything we do, and all employees are encouraged to achieve the highest standards of performance. Compensation for all employees is based on individual, team, business division and Group performance, within the context of the markets in which we operate. The Total Reward Principles establish the framework for determining our performance award pool, and guide the allocation and appropriate delivery mecha- nisms of compensation to employees, including deferred com- pensation programs. Our Total Reward Principles govern the compensation approach and processes across all locations and entities. Total Reward Principles The 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 performance award pool. These principles and compensation frame- work apply to all employees globally, but may vary in certain locations due to local laws and regulations. Attract and engage a diverse, talented workforce We aim to provide talented employees with pay that is appropriately balanced between fixed and variable elements, competitive in the market, and paid out over an appropriate period Foster effective individual performance management and communication Thorough evaluation of individual performance and adherence to our behaviors, combined with effective communication, ensures there is a direct connection between achievement of business objectives and compensation across the firm Align reward with sustainable performance We aim to cultivate a culture of integration and collaboration within the firm. Compensation should help foster a sense of engagement among employees, and serve to align their long-term interests with those of clients and stakeholders Support appropriate and controlled risk-taking Compensation is structured such that employees behave in a manner consistent with the firm’s risk framework and tolerance, thereby protecting our capital and reputation, and enhancing the quality of our financial results, in line with what our investors expect from us 344 Advisory vote Approach to compensation The table below highlights the range of factors that influence our judgment with respect to the performance award pool, and its allocation and delivery to employees. Performance award pool determined Allocated to employees Delivered over time Driven by risk-adjusted and sustainable profitability, including consideration of: Based on Group, divisional, regional and individual performance, including: Substantial awards deferred and aligned with investors: – Risk-adjusted contribution before performance award – Quality of earnings – Progress against strategic initiatives – Affordability – Market competitiveness / positioning – Returns to investors – Client focus – Financial results and capital management –Riskmanagement – People and talent development – Principles and behaviors – At least 50% deferred for Key Risk Takers – Risk of forfeiture –Long-termdeferralofuptofiveyears – Shareholder and debt holder aligned vehicles Compensation authorities The Board of Directors (BoD) has the ultimate responsibility for approving and overseeing the compensation strategy proposed by the Compensation Committee of the Board of Directors, which determines compensation related matters in accordance with the principles set forth in the Articles of Association. Approved by Compensation Committee 1 Communicated by Compensation Committee Recipients Chairman of the BoD Compensation recommendations developed by Chairperson of the Compensation Committee Independent BoD members (remuneration system and fees) Compensation Committee and Chairman of the BoD Group CEO Compensation Committee and Chairman of the BoD BoD 1 BoD 1 Other GEB members Compensation Committee and Group CEO BoD 1 Key Risk Takers (KRTs) / (senior) employees Respective GEB member together with functional management team Individual compensation for KRTs and senior employees: Group CEO Performance award pool for all employees: BoD 1 Aggregate compensation for the GEB and aggregate remuneration for the BoD are subject to shareholder approval. Chairman of the BoD Chairman of the BoD Group CEO Line manager 345 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation 2015 performance and compensation funding Our excellent performance in 2015 reflects our successful execution and disciplined risk and resource management in a very challenging environment. Net profit attributable to UBS Group AG shareholders increased to CHF 6.2 billion, up 79% compared with 2014. In determining the performance award pool, we endeavor to maintain a balanced allocation of profit between shareholders and employees. The performance award pool for 2015 was CHF 3.5 billion. Compared with 2014, the pool increased 14% while profitability increased strongly by 79%. Our performance in 2015 In 2015, we were faced with exceptional levels of volatility, a chal- lenging macroeconomic outlook, escalating geopolitical tension and a continued reduction in the risk appetite of our clients. Throughout the year, we stayed close to our clients, helping them to navigate the volatility in the markets. Despite these headwinds, we delivered net profit of CHF 6.2 billion, a 79% increase com- pared with 2014, and adjusted profit before tax that more than doubled to CHF 5.6 billion. We generated an adjusted return on tangible equity of 13.7%, above our target of approximately 10%. We continued to further strengthen our capital position and improve our leverage ratio, and we ended the year with a fully applied common equity tier 1 (CET1) capital ratio of 14.5%, up 110 basis points from the end of 2014, the highest in our peer group of large global banks. At the end of the year, our fully applied Swiss systemically relevant bank (SRB) leverage ratio1 was 5.3%, up approximately 120 basis points. We also tightly man- aged costs, with net cost reductions in Corporate Center of CHF 1.1 billion delivered since the end of 2013. The continued dedication and hard work of our employees enabled us to provide superior advice and service to our clients and to deliver on our commitment to grow profitability. Our Board of Directors intends to propose an ordinary dividend of CHF 0.60 per share, up 20% compared with 2014, reflecting our strong operating performance, as well as a special dividend of CHF 0.25 per share, reflecting a significant net upward revaluation of deferred tax assets in 2015. The total dividend represents a 13% increase on the total capital returned for 2014 and a payout ratio of 52%2 of reported net profit. Our business divisions delivered strong results in 2015. Our Wealth Management business delivered its highest adjusted pre- tax profit since 2008 at CHF 2.8 billion. Recurring income grew by 3% due to higher net interest income and recurring net fee income, as we made progress on strategic initiatives to grow mandate penetration, and banking and lending products. Man- agement took significant steps to optimize the balance sheet and the quality of assets under management, which impacted reported net new money. Adjusted for these effects, net new money was CHF 22.8 billion, reflecting an annual growth rate of 2.3%, which was below our targeted range of 3–5%. Net new money was negatively impacted by significant client deleveraging caused by difficult market conditions in the second half of the year, as well as cross-border outflows. 1 From 31 December 2015 onwards, the Swiss SRB leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of the Annual Report 2015 for more information. 2 Total dividend per share as a percentage of diluted earnings per share. Net profit attributable to UBS Group AG shareholders CHF million Diluted earnings per share (EPS) CHF Return on tangible equity (RoTE), adjusted in % Full year 2015 / 2014 Full year 2015 / 2014 Full year 2015 / 2014 + 79 % + 80 % + 510 bps 8,000 4,000 0 346 3,466 2014 1.80 0.9 0 0.91 2014 6,203 2015 1.64 15.0 12.0 9.0 6.0 3.0 0.0 8.6 13.7 2015 2014 2015 Advisory vote Wealth Management Americas delivered good underlying per- formance and made excellent progress on its strategic objectives. Recurring income increased 5% on a US dollar basis, as net inter- est and recurring net fee income rose, reflecting our success in growing our banking and lending services and increasing man- aged accounts. Adjusted pre-tax profit decreased 15% on a US dollar basis, primarily due to higher provisions for litigation, regu- latory and similar matters and higher legal fees. Net new money was USD 21.4 billion, driven by advisors who have been with the firm for more than one year as well as new recruits, leading to an annual growth rate of 2.1%. Personal & Corporate Banking delivered its best adjusted profit before tax since 2010, up 7% compared with 2014, and once again achieved its annual targets. Net new business volume growth for personal banking was 2.4% and we attracted a record number of new clients for the second consecutive year. Asset Management progressed towards its medium-term goal, with a 20% increase in adjusted pre-tax profit compared with 2014, driven by higher net management fees. The business divi- sion’s adjusted cost / income ratio improved from 73.2% to 69.6%. Excluding money market flows, net new money outflows were CHF 0.7 billion, impacted by CHF 33 billion of outflows, largely from lower-margin products, driven by client liquidity needs in difficult market conditions. Importantly, the inflows achieved were materially higher in margin than outflows, which are expected to result in a net posi- tive effect on our revenues in 2016. The Investment Bank delivered an adjusted profit before tax of CHF 2.3 billion compared with CHF 162 million in the prior year. Results were driven by growth in revenues in Investor Client Ser- vices as well as a significant decrease in provisions for litigation, regulatory and similar matters. The Investment Bank generated an adjusted return on attributed equity of 31%, well above its target of greater than 15%. The business also maintained strict disci- pline on resource utilization, reducing its leverage ratio denomi- nator (LRD) by 7%1 and risk-weighted assets (RWA) by 6%. Inter- national Financing Review awarded the Investment Bank the “Bank of the Year” accolade, highlighting the recognition of our innovative and sustainable operating model and demonstrating the success of the Investment Bank’s strategic direction embarked upon 3 years ago. Corporate Center reported an adjusted loss before tax of CHF 2.6 billion compared with a loss of CHF 2.9 billion in the prior year, as a significant reduction in negative revenues was partly offset by a higher net charge for litigation, regulatory and similar matters. RWA in Corporate Center – Non-core and Legacy Portfo- lio was CHF 31 billion at year-end. The LRD in Corporate Center – Non-core and Legacy Portfolio was CHF 46 billion or just 5% of the Group’s total LRD. 1 From 31 December 2015 onwards, the Swiss SRB LRD calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully com- parable. Refer to the “Capital management” section of the Annual Report 2015 for more information. 347 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Performance award pool funding Pillar 3 | Our compensation funding framework is based on business performance, which we measure on multiple dimensions. We assess Group performance and also consider performance relative to the industry, general market competitiveness, progress against our strategic initiatives, including RWA and balance sheet effi- ciency, delivery of cost efficiencies, and capital accretion. We look at the firm’s risk profile and culture, the extent to which opera- tional risks and audit issues have been identified and resolved, and the success of risk reduction initiatives. In addition, we use a number of criteria including achievement against a set of targets for our business divisions and Corporate Center, listed in the chart below. EDTF | Certain risk-related objectives are common across all busi- ness divisions and Corporate Center, and include adherence to risk investment guidelines, Group risk policies, value-at-risk limits, and the avoidance of significant operational risk events. Each business division’s performance award pool is initially accrued as a percentage of profit before performance award, which is risk adjusted by factoring in a risk capital charge. In the determination of the final pool, we also consider progress against our strategic initiatives, quality of earnings, affordability and mar- ket positioning. Business division performance is adjusted for items which do not represent underlying performance, including gains or losses related to divestments or sales of real estate, restructuring expenses, and gains or losses on own credit. Our compensation philosophy strives to encourage appropriate risk taking and to protect our talented employee base. To achieve this, as performance increases, we reduce our overall performance award accrual percentage. In strong performance years, this results in an increased proportion of contribution before compensation being available to be delivered to shareholders and prevents exces- sive compensation. In contrast, if performance declines, the per- formance award pool will generally decrease. However, we may increase the accrual rate to provide us with the flexibility to make adequate provisions to retain key employees. Net interest margin 140–180 bps 167 bps Ranges 3–5% 55–65% 2–4% 75–85% 1–4% 2015 results 2.3% 64.5% 2.1% 88.5% 2.4% 50–60% 3–5% 60–70% >15% 70–80% 55.4% (0.1%) 69.6% 31.3% 73.5% ~CHF 85 billion CHF 63 billion ~CHF 325 billion CHF 268 billion 2015 target report card 2015 highlights Wealth Management – Adjusted profit before tax up 13% to CHF 2.8 billion – Continued progress on mandate penetration, up 200 bps 2015 targets and expectations1 Adjusted net new money growth rate Adjusted cost / income ratio – Strong operating performance with recurring income up 5% Net new money growth rate Wealth Management Americas2 Personal & Corporate Banking – Generated USD 21.4 billion in net new money – Adjusted profit before tax up 7% to CHF 1.7 billion – Record net new account openings – Best profit before tax since 2010 despite interest rate and FX headwinds Asset Management – Adjusted profit before tax up 20% to CHF 610 million – Improved efficiency with progress on strategic initiatives Adjusted cost / income ratio Net new business volume growth rate (personal banking) Adjusted cost / income ratio Net new money growth rate excl. money market flows Adjusted cost / income ratio Investment Bank – Adjusted profit before tax of CHF 2.3 billion, up from Adjusted pre-tax RoAE CHF 162 million in 2014 – Strong performance in ICS with revenues up 16% to CHF 5.9 billion – Achieved high risk-adjusted returns within allocated resources – Named "Bank of the Year" by International Financing Review Adjusted cost / income ratio Basel III RWA (fully applied), short / medium term3 LRD (fully applied), short / medium term3 = 2015 target not met = 2015 target met 1 Refer to the “Our strategy” section of the Annual Report 2015 for more information. 2 Based on US dollars. 3 Expectation. 348 Advisory vote Performance award funding process – illustrative overview The chart below illustrates the performance award pool funding process. Financial performance 1 Risk adjustment Consultation of Group CEO with the business divi- sion Presidents Compensation Committee / BoD governance and discretion 3 Levers Adjusted divisional financial performance 2 Risk-adjusted divisional performance award pools Divisional KPIs Qualitative, risk and reg- ulatory as- sessment Relative per- formance vs peers Market posi- tion and trends Recommended divisional per- formance award pools Final performance award pool 4 5 1 2 3 4 5 Adjusted divisional financial performance The preliminary divisional performance award pool amounts are driven by financial performance and assessed in light of a series of financial KPIs. The adjusted divisional performance excludes items which are not reflective of the underlying performance Risk-adjusted divisional performance award pools Predetermined business division-specific performance award pool funding rates are applied to risk-adjusted performance. In addition, credit risk, market risk and operational risk (including conduct) are taken into account Divisional KPIs Each division is assessed based on specific KPIs (e.g., net new money growth rate, return on RWA) Qualitative, risk and regulatory as- sessment Qualitative assessment (e.g., quality of earnings, industry awards), assessment of regulatory compliance and risk assessment (such as operational, legal, compliance, reputational and operational risk). Qualitative assessment also ensures full alignment to our Total Reward Principles Relative performance vs peers Performance is also assessed relative to our peers Market position and trends Market intelligence based on internal and external advisors helps assess the competitiveness of our pay level and compensation struc- ture. It also provides a prospective view of market trends in terms of absolute compensation levels, compensation framework and in- dustry practice Recommended divisional performance award pools The divisional performance award pools determination process results in a performance award pool recommendation from the Group CEO (after consultation with the business division Presidents), which is submitted to the Compensation Committee for consideration Final performance award pool The Compensation Committee considers the recommendation in the context of our overall performance, capital strength, risk profile, prog- ress against strategic initiatives, affordability, market competitiveness / positioning, as well as business and geographic trends. The commit- tee ensures it is in line with our strategies embodied in our Total Reward Principles to create sustainable shareholder value and may alter the recommendations of the Group CEO (upward or downward, including recommending a zero award)beforemakingitsfinalrecom- mendation to the BoD 349 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation 2015 performance award pool and expenses Performance award expenses CHF billion 3.1 0.9 Awards for performance year deferred to future periods2 (incl. accounting adjustments) 14%1 2.8 0.6 2.2 Amortization of prior- year awards Awards expenses for performance year 3.2 0.7 2.5 Amortization of prior- year awards Awards expenses for performance year 3.5 1.0 Awards for performance year deferred to future periods2 (incl. accounting adjustments) Performance award pool 2014 Performance award pool 2015 14% 1 Excluding employer-paid taxes and social security. 2 Estimate. The actual amount to be expensed in future periods may vary; for example, due to forfeitures. The performance award pool, which includes all discretionary performance-based variable awards for 2015, was CHF 3.5 bil- lion, an increase of 14% compared with 2014. 3.5 3.0 2.5 2.0 1.5 Performance award expenses for 2015 increased 14% to CHF 3.2 billion. This increase reflects (a) the increase in the perfor- mance award pool, (b) higher expenses due to the change in the compensation deferral structure and modification in local com- pensation practices due to developments in regulatory require- ments, and (c) expenses related to the amortization of awards from prior years. The “Performance award expenses” chart on this page compares the performance award pool with perfor- mance award expenses. 1.0 0.5 0.0 350 Advisory vote 2015 compensation for the Group CEO and the other GEB members Group Executive Board (GEB) performance awards are at the discretion of the Board of Directors (BoD) based on the assessment of quantitative and qualitative performance measures and, in aggregate, subject to shareholder approval. The overall aggregate performance award pool for the GEB, including the Group CEO, was CHF 71.25 million for 2015. This is reflective of excellent performance and also the fact that, in recent years, the compensation of the most senior members of the Group has, appropriately, been impacted the most, as the firm addressed legacy matters from its past. Base salaries for the GEB and the Group CEO remain unchanged compared with 2014. Base salary, role-based allowance, pensions and benefits Employment contracts The employment contracts of the GEB members do not include severance terms, sometimes referred to as golden parachutes, or supplementary pension plan contributions. All employment con- tracts for GEB members are subject to a notice period of six months. If a GEB member leaves the firm before the end of a performance year, he or she may be considered for a discretionary performance award based on their contribution during that per- formance year in line with the approach outlined in this report. Such awards are at the full discretion of the BoD, which may decide not to grant any awards. ➔ Refer to the “Our compensation governance framework” section of this report for more information on the shareholders’ vote on the GEB compensation Each GEB member receives a fixed base salary, which is reviewed annually by the Compensation Committee. Since the Group CEO’s appointment in 2011, his annual base salary has remained unchanged at CHF 2.5 million. Other GEB members receive a sal- ary of CHF 1.5 million (or local currency equivalent). This level has remained unchanged since 2011. One GEB member is considered a UK Material Risk Taker (MRT) and receives a role-based allowance in addition to his base salary. This allowance reflects the market value of this specific role and is only paid while the GEB member is considered an MRT. Such an allowance represents a shift in the compensation mix between fixed and variable compensation and does not represent an increase in total compensation. The allowance consists of a blocked UBS share award, which is granted annually. Pension contributions and benefits for GEB members are in line with local practices for other employees. No enhanced or supple- mentary pension contributions are made for GEB members. At the AGM, shareholders are required to approve the maxi- mum aggregate amount of fixed compensation for the members of the GEB for the following financial year. ➔ Refer to the “Our compensation model for employees other than GEB members” for more information on MRTs 351 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Overview of GEB compensation determination process The compensation for GEB members, including the Group CEO, is governed by a rigorous process with oversight by the Compensation Committee and the BoD. The illustration below shows how compensation for GEB members, including the Group CEO, is determined. 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(cid:70)(cid:71)(cid:86)(cid:71)(cid:84)(cid:79)(cid:75)(cid:80)(cid:71)(cid:85)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:81)(cid:88)(cid:71)(cid:84)(cid:67)(cid:78)(cid:78)(cid:2)(cid:84)(cid:67)(cid:86)(cid:75)(cid:80)(cid:73) (cid:40)(cid:75)(cid:80)(cid:67)(cid:78)(cid:2)(cid:70)(cid:71)(cid:69)(cid:75)(cid:85)(cid:75)(cid:81)(cid:80)(cid:2)(cid:75)(cid:85)(cid:2)(cid:67)(cid:86)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:70)(cid:75)(cid:85)(cid:69)(cid:84)(cid:71)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2) (cid:36)(cid:81)(cid:38)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:87)(cid:68)(cid:76)(cid:71)(cid:69)(cid:86)(cid:2)(cid:86)(cid:81)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:74)(cid:81)(cid:78)(cid:70)(cid:71)(cid:84)(cid:2)(cid:67)(cid:82)(cid:82)(cid:84)(cid:81)(cid:88)(cid:67)(cid:78) 1 Refer to the “Overview of the quantitative and qualitative measures – balanced scorecard" chart for more information. 352 Advisory vote How we set variable performance award levels for our Group CEO and other GEB members – performance assessment Pillar 3 | Annual performance awards for the Group CEO and other GEB members are at the full discretion of the BoD and, in aggre- gate, subject to shareholder approval at the AGM. Our performance assessment is based on a balanced score- card, which allows us to assess an individual’s performance against a number of quantitative and qualitative key performance indica- tors (KPIs). The quantitative measures for the Group CEO are based on overall Group performance. For other GEB members, they are based on both Group performance and the performance of the relevant business division and / or region. The GEB members who lead Group control functions, or who are solely regional Presi- dents, are assessed on the performance of the Group and the functions / regions they oversee. Quantitative measures include business division financial, regional, and functional measures, and account for 65% of the assessment. Qualitative measures account for 35% of the assess- ment and are the same for all GEB members, including the Group CEO. The table on the following page provides an overview of the quantitative and qualitative KPIs on which the balanced scorecard is based. The weighting between Group, business division, regional, and functional KPIs varies depending on a GEB mem- ber’s role. A significant weight is given to Group KPIs for all GEB members. The degree to which an individual has achieved these quantita- tive measures, coupled with an assessment of performance against qualitative measures, provides an overall rating. This is the starting point for determining a GEB member’s annual perfor- mance award. This approach is not intended to be mechanical, as the Compensation Committee can exercise its judgment with respect to achievement to reflect relative performance versus prior year, versus strategic plan and versus competitors. The Compensation Committee’s recommendations are then reviewed, and must be approved, by the BoD. The Compensation Committee, and then the full BoD, follow a similar process in set- ting the compensation for the Group CEO. While the BoD retains full discretion in determining the vari- able compensation levels for the Group CEO and other GEB mem- bers, the total amount of the awards may not exceed the aggre- gate cap of 2.5% of adjusted Group profit before tax. Additionally individual GEB and Group CEO’s variable compensation should not exceed the specified individual compensation caps (as described later in this section). The final aggregated performance award for the GEB, includ- ing the Group CEO, for a financial year is subject to shareholder approval at the following AGM. The individual variable perfor- mance awards for each GEB member will only be confirmed fol- lowing shareholder approval at the AGM. 353 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Pillar 3 | Overview of the quantitative and qualitative measures – balanced scorecard Measures Weightings Group CEO Business division / regional Presidents Functional heads 65% 35% 30% 35% 45% 20% Quantitative measures (65% weighting) Group A range of financial metrics including adjusted Group return on tangible equity, adjusted Group profit before tax, CET1 capital ratio (fully applied) 65% Business division and / or regional KPIs (if applicable)1 Business division and / or regional KPIs vary but may include: net new money growth rate, gross margin, adjusted cost/income ratio, net new business volume growth rate, net interest margin, adjusted RoAE, Basel III RWA limit, funded assets limit Functional KPIs1 Specific functional KPIs for Corporate Center GEB members EDTF | Qualitative measures (35% weighting) Pillars Capital management Establishes and maintains capital strength and CET1 capital ratio. Generates efficiencies and deploys our capital more efficiently and effectively Efficiency and effectiveness Contributes to the development and execution of our strategy. The measure also Risk management Ensures risk management through an effective control framework. Captures the looks to ensure that there is success across all business lines, functions and regions degree to which risks are self-identified and focuses on the individual’s success in ensuring compliance with all the various regulatory frameworks. Helps shape the firm’s relationships with regulators through ongoing dialog Principles Client focus Increases client satisfaction and mantains high levels of satisfaction over the long term. This includes promoting collaboration across business divisions and fostering the delivery of the whole firm to our clients Sustainable performance Brand and Reputation – protects the Group’s reputation and ensures full compliance with our standards and principles Culture – takes personal role in making Principles and Behaviors front and center of the requirements of business. Furthermore, this measure evaluates the individual’s ability to reinforce a culture of accountability and responsibility, demonstrating our commitment to be a responsible corporate citizen and to act with integrity in all our interactions with our stakeholders 35% 35% 35% Excellence Human Capital Management – develops successors for the most senior positions, facilitates talent mobility within the firm and promotes a diverse and inclusive workforce Product and Service Quality – strives for excellence in the products and services we offer to our clients Behaviors Integrity Is responsible and accountable for what they say and do; cares about clients, investors and colleagues; acts as a role model Collaboration Places the interests of clients and the firm before their own and those of their business; works across the firm; respects and values diverse perspectives Challenge Encourages self and others to constructively challenge the status quo; learns from 1 Both regional and functional KPIs may include qualitative measures. mistakes and experiences 354 Advisory vote Benchmarking against peers When recommending performance awards for the Group CEO and the other GEB members, the Compensation Committee reviews the respective total compensation for each role against the broader market and also a group of peer companies selected for the comparability of their size, business and geographic mix, and the extent to which they compete against us for talent. The Compensation Committee also considers the strategies, practices, pay levels and regulatory environment of our peers. Overall, total compensation for a GEB member’s specific role is targeted to align with market competitive pay of the role for market competitive performance. The Compensation Committee annually reviews and approves the core peer group for executive compensation. As of 2015, the core peer group consists of: Bank of America, Barclays, BlackRock, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase, Julius Baer, Morgan Stanley and Standard Chartered. This group is broadened for the purposes of business division benchmarking and for the review of specific roles, as appropriate. Comparability assessment against main peers Benchmarking ensures that our executives´ compensation is appropriate relative to our industry peer group. The key benchmarking criteria are summarized in the table below: Size 1 Business mix 2 Geographic mix 3 Competitors for talent 4 HQ location: regulatory 5 HQ location: geographical 6 Firm Bank of America Barclays BlackRock BNP Paribas Citigroup Credit Suisse Deutsche Bank Goldman Sachs HSBC JP Morgan Chase Julius Baer Morgan Stanley Standard Chartered Mostly comparable Moderately comparable Less comparable 1 Size: evaluated in terms of revenue, market capitalization, assets and number of employees. This would potentially impact management complexity outside of the impact of product mix and geography. 2 Business mix: in terms of type and size of major businesses. This would impact pay strategy / levels and approach, and, importantly, risk profile. 3 Geographic mix: evaluated not only in terms of mix, but also from a European Headquarters (HQ) perspective. Impacts executive role definition and management complexity. 4 Competitors for talent: firms from which UBS recruits and / or firms which recruit from UBS. 5 HQ location / regulatory: impact of the regulatory environment based on home regulator. 6 HQ location / geographical: culture and practice that impacts pay strategy / levels. 355 Corporate governance, responsibility and compensationAdvisory vote Share ownership requirements: aligning GEB members’ interests with those of our shareholders In addition to our compensation framework, which includes EOP and DCCP, our share ownership policy requires the Group CEO to hold a minimum of 500,000 UBS shares and other GEB members to hold a minimum of 350,000 UBS shares. These shareholdings must be built up within five years from the date a GEB member is appointed and must be retained for as long as the GEB member 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. GEB members are not permitted to sell their UBS shares until the above mentioned thresholds have been reached. At the end of 2015, all GEB members had met the required share ownership level. Caps on the GEB performance award pool The total potential GEB performance award pool is capped at 2.5% of the adjusted Group profit before tax. This links overall GEB compensation to the firm’s profitability. As the Group’s adjusted profit before tax for 2015 was CHF 5.6 billion, the GEB 2015 performance award pool was capped at CHF 141 million. The actual total GEB performance award pool for 2015 was CHF 71.3 million (CHF 58 million in 2014). The performance award pool as a percentage of adjusted Group profit before tax reduced to 1.3% compared with 2.1% in 2014, well below the cap of 2.5%. In line with the individual compensation caps introduced in 2013 on the proportion of fixed pay to variable pay for all GEB members, the Group CEO’s performance award is capped at five times his base salary. Performance awards of other GEB members are capped at seven times their base salaries. For 2015, perfor- mance awards for GEB members and the Group CEO were, on average, 3.7 times their base salaries. The entirety of each GEB member’s performance award that is deferred is subject to perfor- mance conditions. Corporate governance, responsibility and compensation Compensation 2015 Deferred performance awards Pillar 3 | For each GEB member, at least 80% of the performance award is deferred, meaning a maximum of 20% of the GEB mem- ber’s overall performance award can be paid out in the form of immediate cash, subject to a cap of CHF / USD 1 million (or local currency equivalent). Any amount above this cap is granted in notional shares under the Equity Ownership Plan (EOP). For UK Material Risk Takers (MRTs), 50% of any immediate cash is deliv- ered in vested shares, which are blocked for six months as required by regulators. For performance year 2015, a minimum of 50% of the overall performance award is granted under the EOP, which vests in three equal installments from year 3 to 5, subject to performance conditions being met. As noted above, for the GEB member who is considered an MRT, each EOP installment vesting on 1 March of years 3 to 5 will be subject to additional blocking for a further six months. The remaining 30% of the overall performance award is granted under the Deferred Contingent Capital Plan (DCCP). Under the DCCP, GEB members are awarded notional additional tier 1 (AT1) instruments that vest in year 5, with discretionary annual interest payments. The DCCP awards have contributed to the loss-absorbing capital of the Group. In addition to a phase-in common equity tier 1 capital ratio trigger of 10%, DCCP awards granted to GEB members are subject to a further performance condition. If the firm does not achieve an adjusted Group profit before tax for any year during the vesting period, GEB members forfeit 20% of the award for each loss-making year. This means that 100% of the award is subject to risk of forfeiture in addition to the capital ratio trigger. For GEB members, the average 2015 award vests in 4.4 years (in line with 2014). Our compensation plans have no upward leverage, such as multiplier factors, and therefore do not encourage excessive risk-taking. The Compensation Committee has determined that perfor- mance conditions for all GEB members’ awards due to vest in March 2016 have been satisfied. Hence such awards will vest in full, based on the performance conditions having been met. ➔ Refer to the “Our deferred variable compensation plans for 2015” section in this report for more information ➔ Refer to the “Our compensation model for employees other than GEB members” section in this report for more information on MRTs ➔ Refer to the “Vesting of outstanding awards granted in prior years impacted by performance conditions” section in this report for more information 356 Advisory vote Pillar 3 | 2015 compensation framework for GEB members Up to 20% of the annual performance award is paid in the form of immediate cash and at least 80% will be deferred for up to five years, with at least 50% granted under the Equity Ownership Plan (EOP) and the remaining 30% under the Deferred Contingent Capital Plan (DCCP). The framework remains the same as for 2014. The chart below is an illustrative example. Payout of performance award Key features Pay for performance and safeguards DCCP 30% EOP at least 50% 20% Cash up to 20% Base salary2 30% 16% Notional additional tier 1 (AT1) instruments 30% of the performance award is granted under the Deferred Contingent Capital Plan (DCCP). The award vests in year 5, subject to forfeiture if a capital ratio trigger or viability event occurs. The award is subject to 20% forfeiture for each financial year if UBS does not achieve an adjusted Group profit before tax Notional interest payments will be made annually, subject to review and confirmation by the firm The award is subject to continued employment and harmful acts provisions Notional shares At least 50% of the performance award is granted under the Equity Ownership Plan (EOP). The award vests in equal installments in years 3, 4 and 5, subject to both Group and divisional performance. The amount forfeited may be up to 100% of the installment due to vest The award is subject to continued employment and harmful acts provisions Up to 20% of the performance award is paid out in cash1 immediately, subject to a cash cap of CHF / USD 1 million. To the extent that less than 20% is paid in immediate cash, the excess amount will be granted in EOP 17% 17% Our compensation framework is designed to pay for performance. A performance award is based on a balanced scorecard assessing the individual’s performance against a number of quantitative and qualitative key performance indicators At least 80% of performance award is at risk of forfeiture Compensationplanforfeitureprovisionsenablethefirmto reduce the unvested deferred portion if the compensation plans’ relevant performance conditions are not achieved Our compensation framework contains a number of features designed to ensure that risk is appropriately managed with safeguards to limit inappropriate risk-taking: – no upward leverage, such as multiplier factors. Potential realized pay cannot exceed the award granted (excluding potential share price appreciation, dividends and interest payments). The final deferred payout can be forfeited up to 100% in cases where performance conditions are not met or harmful acts provisions apply – a balanced mix of shorter-term and longer-term performance awards with a focus on deferral – a cap on the total GEB performance award pool of 2.5% of adjusted Group profit before tax – individual caps on the proportion of fixed to variable pay for the Group CEO and other GEB members – six-month notice period included in the employment con- tracts – an evaluation of the risk control effectiveness and adher- ence of each GEB member as part of their individual qualitative assessment – provisions that enable the firm to trigger forfeiture of some, or all, of the unvested deferred performance award if an employee commits certain harmful acts, or if the employment is terminated for cause 2015 2016 2017 2018 2019 2020 2021 Share rentention 500,000 shares for Group CEO 350,000 shares for other GEB members 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 1 UK Material Risk Takers (MRTs) receive 50% in the form of blocked shares. 2 May include role-based allowances that have been made in line with market practice in response to regulatory requirements. 357 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation 2015 compensation for the Group Chief Executive Officer The performance awards for the Group CEO, Sergio P. Ermotti, and each member of the GEB are based on the achievement of both quantitative and qualitative performance targets as described earlier in this section. These targets were set to reflect the strate- gic priorities determined by the Chairman and the BoD, including risk-adjusted profitability, our capital position and return on tan- gible equity, as well as a range of qualitative measures to assess the quality and sustainability of the business. In line with the previous year Mr. Ermotti’s performance assess- ment was weighted 65% on quantitative performance based on Group financial performance, and weighted 35% based on quali- tative measures. The table on the following page summarizes the metrics uti- lized by the BoD to assess Mr. Ermotti’s performance as Group CEO for 2015. The BoD recognized that under Mr. Ermotti’s strong steward- ship, the Group financial performance for 2015 was excellent as outlined in the “Performance and compensation funding” section of this report. Adjusted return on tangible equity was 13.7%, above the target for 2015 of approximately 10%. The BoD con- sidered Mr. Ermotti’s active leadership to successfully manage the ambitious capital strategy for 2015. All major capital measures surpassed the targets set for the Group CEO for 2015 on a fully applied basis, including the common equity tier 1 (CET1) capital ratio of 14.5% (significantly above the target of at least 13%), the Swiss SRB leverage ratio of 5.3%, and RWA of CHF 208 billion compared with the target of less than CHF 215 billion. Further, these all represent significant improvements on last year. The firm’s capital position continues to compare favorably to peers, which has been underscored by recent upgrades from rating agencies. Achieving the return and capital targets enables the firm to fulfill its commitment to return at least 50% of its net profit to shareholders. Mr. Ermotti’s stewardship in a challenging market environ- ment was key to supporting each business division to deliver good results for the year. Wealth Management delivered its high- est adjusted pre-tax profit since 2008 and recurring income grew by 3% due to higher net interest income and recurring net fee income, including progress on strategic initiatives and bank- ing / lending products. Wealth Management Americas had a good underlying performance and made excellent progress on its strategic objectives. Personal & Corporate Banking delivered its best adjusted profit before tax since 2010. Asset Management progressed towards its medium-term goal, growing adjusted pre- tax profit by 20% compared with 2014 due to higher net man- agement fees. Our Investment Bank delivered an adjusted profit before tax of CHF 2.3 billion and generated an adjusted return on attributed equity of 31%, well above its target of greater than 15%. Further, significant progress has also been achieved in the continued wind-down of the Corporate Center – Non-core and Legacy Portfolio, and in particular the leverage ratio denominator was significantly reduced, with a CHF 47 billion or 51% reduc- tion in the balance during the year, significantly ahead of the business plan. The BoD also acknowledged the strong qualitative perfor- mance that Mr. Ermotti demonstrated. His focus on execution of our well-defined strategy has made these results possible. Mr. Ermotti continued to set the highest standards and a clear tone from the top regarding the risk and control environment. His initiatives to build a strong risk management culture including operational risk management, a robust compliance function and a comprehensive end-to-end control environment are essential in ensuring the firm’s sustainable success. The BoD considered the significant progress made in the orga- nization’s cultural journey under Mr. Ermotti’s leadership. He con- tinued to pursue culture as a key priority. The Principles and Behaviors have become embedded in the way the firm does busi- ness and an integral part of the firm’s talent management, pro- motion and compensation considerations. Beyond the results and capital position, the BoD also recog- nized Mr. Ermotti’s drive to deliver on key strategic initiatives, including the successful go-live of UBS Switzerland AG and the implementation of a more self-sufficient business model for UBS Limited. Moreover, Mr. Ermotti successfully implemented a smooth transition to strategically realign his Group Executive Board. Reflecting Mr. Ermotti’s execution of the strategy over the past several years, as well as his overall achievements in 2015, the BoD approved the proposal by the Compensation Committee (subject to shareholder approval as part of the aggregate GEB 2015 vari- able compensation) to grant a performance award of CHF 11.5 million, bringing his total compensation for the year (excluding benefits and contributions to his retirement benefit plan) to CHF 14.0 million. The performance award will be delivered with 91% deferred under EOP and DCCP over 5 years subject to achieving performance thresholds and other forfeiture provisions. The remaining 9% will be delivered in immediate cash. ➔ Refer to the “Our deferred variable compensation plans for 2015” section of this report for more information on about the terms of our deferred variable compensation plans 358 Advisory vote 2015 Assessment 100% 2015 Assessment 100% vs. Plan vs. 2014 vs. Plan vs. 2014 vs. Plan vs. 2014 vs. Goals Balanced scorecard for the Group CEO Quantitative1 measures (65%) Weighting 2015 results Adjusted Group RoTE 25% 13.7% Adjusted Group profit before tax 2 25% CHF 6.5 billion Capital management CET1 ratio, fully applied Post stress CET1 ratio, fully applied Swiss SRB leverage ratio, fully applied3 15% 14.5% >10% 4.9% EDTF | Qualitative4 measures (35%) Weighting Main achievements Pillars Capital management, efficiency and effectiveness, and risk management Principles Client focus, sustainable performance and excellence Behaviors Integrity, collaboration and challenge − Further enhanced effectiveness and long-term efficiency through continued disciplined execution of the firm’s ambitious capital strategy − Continued focus on cost control, operational effectiveness, balancing infrastructure investments and supporting strategic initiatives − Demonstrated and built strong risk management culture − Strong execution and personal involvement in regulatory compliance matters − Demonstrated a strong client focus and the importance of a client centric organization 35% − Enhanced UBS’s reputation by further improving relationships with key regulators and by leveraging suitable platforms to promote the firm’s brand value vs. Goals − Further enhanced bench strength, talent management and succession planning − Served as a strong role model and his actions set a strong tone from the top − Collaborative and effective leadership style in promoting collaboration across business divisions and fostering the delivery of the whole firm to our clients vs. Goals − Created an environment that encourages to challenge the status quo, identifies opportunities to raise standards further and learn and act on mistakes and experiences 1 Quantitative measures and target levels were based on internal performance objectives in our 2015 Operating Plan. 2 Adjusted Group profit before tax excluding certain charges for provisions for litigation, regula- tory and similar matters. 3 Swiss SRB leverage ratio, fully applied, as of 31 December 2015, based on the former Swiss SRB rules, which were applicable at time of 2015 planning. On the basis of the new Swiss SRB rules the leverage ratio as of 31 December 2015 is 5.3%. Refer to the “Capital management” section of the Annual Report 2015 for more information. 4 The qualitative measures used to assess the effectiveness of the Group CEO are outlined in detail in the table “Overview of the quantitative and qualitative measures – balanced scorecard” in this report. 359 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Total compensation for GEB members for the performance years 2015 and 2014 The table below shows the total compensation for GEB members for the performance years 2015 and 2014. At the AGM 2016, share- holders will vote on the overall 2015 total variable compensation. Audited | Pillar 3 | Total compensation for GEB members CHF, except where indicated1 Name, function Sergio P. Ermotti, Group CEO (highest-paid) Sergio P. Ermotti, Group CEO (highest-paid) Aggregate of all GEB members who were in office at the end of the year9 Aggregate of all GEB members who stepped down during the year10 For the year Base salary2 Contribution to retirement benefits plan3 Benefits4 Total fixed compensation Immediate cash5 Annual performance award under EOP6 Annual performance award under DCCP7 Total variable compensa- tion Total fixed and vari- able com- pensation8 2015 2,500,000 261,181 50,080 2,811,261 1,000,000 7,050,000 3,450,000 11,500,000 14,311,261 2014 2015 2014 2015 2014 2,500,000 202,822 60,525 2,763,347 0 5,880,000 2,520,000 8,400,000 11,163,347 19,138,288 1,407,042 1,614,998 22,160,327 9,745,110 40,129,890 21,375,000 71,250,000 93,410,328 19,090,186 1,343,168 1,224,633 21,657,987 8,423,177 32,459,299 17,521,060 58,403,535 80,061,523 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 Local currencies are converted into CHF using the exchange rates as detailed in “Note 36 Currency translation rates” in the “Consolidated financial statements" section of the Annual Report 2015 or the performance award currency exchange rate. 2 Includes role-based allowances that have been made in line with market practice in response to the EU Capital Requirements Directive of 2013 (CRD IV). 3 This figure contains the por- tion related to the employer’s contribution to the statutory pension scheme. 4 Benefits are all valued at market price. 5 Due to applicable UK Prudential Regulation Authority remuneration code, the immediate cash includes blocked shares for one GEB member. For 2014, the entire performance award for the Group CEO was deferred. 6 For EOP awards for the performance year 2015, the number of shares to be allocated at grant in May 2016 is determined by dividing the amount by CHF 14.98 or USD 15.09, the average closing share price of UBS shares over the last ten trading days in February 2016. For EOP awards for the performance year 2014, the number of shares allocated in May 2015 was determined by dividing the amount by CHF 16.50 and USD 17.41, the average closing share price of UBS shares over the last ten trading days in February 2015. 7 DCCP awards for 2015 to be granted in May 2016, are due to vest in March 2021. DCCP awards for 2014, granted in May 2015, are due to vest in March 2020. The amounts reflect the amount of the notional additional tier 1 (AT1) instrument excluding future notional interest. For DCCP awards for the performance year 2015, the notional interest rate is set at 7.35% for awards denominated in USD and 4.15% for awards denominated in CHF. For DCCP awards for the performance year 2014, the notional interest rate was set at 7.125% for awards denominated in USD and 4.000% for awards denominated in CHF. 8 This figure excludes the portion related to the legally required employer’s social security contributions for 2015 and 2014, which are estimated at grant for CHF 4,132,667 and CHF 3,689,582 respectively, of which CHF 898,596 and CHF 704,077respectivelyforthehighest-paidGEBmember.Thelegallyrequiredemployee’ssocialsecuritycontributionsareincludedintheamountsshowninthetableabove,asappropriate. 9 10 GEB members were in office on 31 December 2015 and on 31 December 2014, respectively. 10 During the years of 2015 and 2014 no GEB members stepped down. Pillar 3 | Fixed and variable compensation for GEB members1 CHF in million, except where indicated Amount % Amount % Amount % Amount Total for the year ended 2015 Not deferred Deferred2 Total for the Year ended 2014 Total compensation Amount3 Number of beneficiaries Fixed compensation3, 4 Cash-based Equity -based Variable compensation Immediate cash5 Equity Ownership Plan (EOP) Deferred Contingent Capital Plan (DCCP) 90 10 19 17 3 71 10 40 21 100% 21% 18% 3% 79% 11% 44% 24% 29 19 17 3 10 10 0 0 32% 100% 100% 100% 14% 100% 0% 0% 62 0 0 0 62 0 40 21 68% 0% 0% 0% 86% 0% 100% 100% 77 10 19 17 3 58 8 32 18 1 The figures refer to all GEB members in office in 2015. 2 This is based on the specific plan vesting and reflects the total award value at grant which may differ from the accounting expenses. 3 Excludes benefits and employer’s contribution to retirement benefits plan. 4 Includes base salary and role-based allowances, rounded to the nearest million. 5 Includes allocation of vested but blocked shares, in line with UK Prudential Regulation Authority remuneration code. 360 Advisory vote 2015 compensation for the Board of Directors Members of the Board of Directors (BoD) receive fixed fees for their services, 50% of which must be used to purchase blocked UBS shares. The members may elect to purchase blocked UBS shares using up to 100% of their fees. BoD members do not receive variable compensation. This reinforces their focus on long-term strategy, supervision and governance, and helps them remain independent of the firm’s senior management. The Chairman, as a non-independent BoD member, receives a cash payment, UBS blocked shares and benefits. Chairman of the BoD Independent BoD members Under the leadership of the Chairman, Axel A. Weber, the BoD determines the strategy of the Group on recommendations by the Group CEO, exercises ultimate supervision over management and appoints all GEB members. The Chairman presides over all general meetings of sharehold- ers, and works with the committee chairpersons to coordinate the work of all BoD committees. Together with the Group CEO, the Chairman is responsible for ensuring effective communication with shareholders and other stakeholders, including government officials, regulators and public organizations. This is in addition to establishing and maintaining a close working relationship with the Group CEO and other GEB members, and providing advice and support when appropriate, including continuing to support the firm’s cultural change as a key priority on the basis of our Principles and Behaviors. The Chairman’s total compensation is contractually capped at CHF 5.7 million, excluding benefits and pension fund contribu- tions. His total compensation for 2015 consisted of a cash pay- ment of CHF 3.5 million and a share component of CHF 2.2 mil- lion delivered in 146,862 UBS shares blocked from distribution for four years (at a share price of CHF 14.98). Accordingly, his total reward, including benefits and pension fund contributions for his service as Chairman for the full year of 2015, was CHF 6,034,141. The share component ensures that the Chairman’s pay is aligned with the longer-term performance of the firm. The Chair- man’s employment agreement does not provide for severance terms, or supplementary contributions to pension plans. Benefits for the Chairman are in line with local practices for UBS employ- ees. The Compensation Committee approves the Chairman’s compensation annually, taking into consideration fee and / or compensation levels for comparable roles outside the firm. With the exception of the Chairman, all BoD members are deemed to be independent directors and receive a fixed base fee of CHF 325,000 per annum. In addition to the base fee, independent BoD members receive fees known as committee retainers that reflect their services on the firm’s various board committees. The Senior Independent Director and the Vice Chairman of the BoD each receives an additional retainer of CHF 250,000. As noted above, independent BoD members are required to use a minimum of 50% of their fees to purchase UBS shares that are blocked for four years. However, they may elect to use up to 100% of their fees to purchase blocked UBS shares. In all cases, the number of shares that independent BoD members are entitled to receive is calculated with a discount of 15% below the average market price over the last 10 trading days in February. In accordance with their roles, independent BoD members do not receive perfor- mance awards, severance payments or benefits. The chart on the following page provides details and additional information on the remuneration framework for independent BoD members. Base fees, committee retainers and any other payments to be received by independent BoD members are subject to an annual review with a proposal being submitted by the Chairman of the BoD to the Compensation Committee, which in turn submits a recommendation to the BoD for approval. The BoD proposes at each AGM for shareholder approval the aggregate amount of BoD remuneration, including compensation of the Chairman, that applies until the subsequent AGM. The table “Remuneration details and additional information for independent BoD members” shows the remuneration by inde- pendent BoD member for the period from AGM 2015 to AGM 2016. The fixed base fees have remained unchanged compared with the period 2014 / 15, and have been broadly flat since 1998. In accordance with BoD compensation practice, one BoD member chose to use 100% of the fees, less applicable deduc- tions, to purchase blocked UBS shares. 361 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation 2015 / 2016 Remuneration framework for independent BoD members CHF, except where indicated Fees including retainers for Committee chair / membership, and / or specific roles, are paid per annum. At least 50% of the total amounts must be used to purchase shares which are blocked for four years. Fixed base fee Senior Independent Director retainer Vice Chairman retainer Audit Committee Compensation Committee Governance and Nominating Committe Corporate Culture and Responsibility Committee Risk Committee 325,000 250,000 250,000 Chair Member 300,000 200,000 300,000 100,000 100,000 50,000 400,000 200,000 Pay mix Blocked shares 2 Cash 50% Delivery 1 50% 1 Independent BoD members can elect to use 100% of their remuneration to purchase blocked UBS shares 2 UBS blocked shares are granted with a price discount of 15% and are blocked for four years 2015 2016 2017 2018 2019 2020 Audited | Total payments to BoD members CHF, except where indicated Aggregate of all BoD members For the year 2015 2014 Total1 12,778,308 13,039,851 1 This figure includes social security contributions paid by the BoD members, but excludes the portion related to the legally required social security contributions paid by UBS, which for 2015 are estimated at grant at CHF 653,272 and for 2014 at CHF 623,790. Audited | Compensation details and additional information for non-independent BoD members CHF, except where indicated Name, function1 Axel A. Weber, Chairman For the year 2015 2014 Base salary 3,500,000 3,000,000 Annual share award2 2,200,000 2,566,672 Contributions to retirement benefit plans4 261,181 260,070 Benefits3 72,959 113,109 Total5 6,034,141 5,939,851 1 Axel A. Weber was the only non-independent member in office on 31 December 2015 and on 31 December 2014, respectively. 2 These shares are blocked for four years. 3 Benefits are all valued at market price. 4 This figure contains the portion related to UBS’s contribution to the statutory pension scheme. 5 This figure excludes the portion related to the legally required social security contributions paid by UBS, which for 2015 are estimated at grant at CHF 368,257 and for 2014 at CHF 363,488. The legally required social security contributions paid by the non-independent BoD members are included in the amounts shown in the table above, as appropriate. 362 Advisory vote Audited | Remuneration details and additional information for independent BoD members CHF, except where indicated e e t t i m m o C n o i t a s n e p m o C e e t t i m m o C y t i l i b i s n o p s e R d n a e r u t l u C e t a r o p r o C e e t t i m m o C g n i t a n m o N i d n a e c n a n r e v o G M M M M M M M M M M C C M M M M M M M M M e e t t i m m o C k s i R C C M M M M M M M M M For the period AGM to AGM Base fee Committee retainer(s) 2015 / 2016 325,000 2014 / 2015 325,000 2015 / 2016 325,000 2014 / 2015 325,000 2015 / 2016 325,000 2014 / 2015 325,000 2015 / 2016 325,000 2014 / 2015 325,000 2015 / 2016 210,347 2014 / 2015 325,000 2015 / 2016 – 2014 / 2015 325,000 2015 / 2016 325,000 2014 / 2015 325,000 2015 / 2016 325,000 2014 / 2015 325,000 2015 / 2016 154,375 2014 / 2015 – 2015 / 2016 325,000 2014 / 2015 325,000 2015 / 2016 325,000 2014 / 2015 325,000 400,000 400,000 500,000 500,000 255,000 150,000 500,000 500,000 129,444 200,000 – 300,000 402,500 350,000 300,000 300,000 142,500 – 400,000 400,000 250,000 250,000 e e t t i m m o C t i d u A M M M M C C M M M M Name, function1 Michel Demaré, Vice Chairman David Sidwell, Senior Independent Director Reto Francioni, member Ann F. Godbehere, member Axel P. Lehmann, member Helmut Panke, former member William G. Parrett, member Isabelle Romy, member Jes Staley, former member Beatrice Weder di Mauro, member Joseph Yam, member Total 2015 / 2016 Total 2014 / 2015 Additional payments2 250,000 250,000 250,000 250,000 Total3 975,000 975,000 1,075,000 1,075,000 580,000 475,000 825,000 825,000 339,792 525,000 – 625,000 727,500 675,000 625,000 625,000 296,875 – 725,000 725,000 575,000 575,000 6,744,167 7,100,000 Share percentage4 50 Number of shares5, 6 38,295 50 50 50 50 50 50 50 100 100 – 50 50 50 50 50 0 – 50 50 50 50 34,746 42,223 38,310 22,780 16,928 32,403 29,401 25,217 35,388 – 22,273 28,574 24,055 24,548 22,273 0 – 28,476 25,837 22,584 20,491 Legend: C = Chairperson of the respective Committee, M = Member of the respective Committee 1 There were nine independent BoD members in office on 31 December 2015. Jes Staley was elected at the AGM on 7 May 2015 and stepped down on 28 October 2015. Helmut Panke did not stand for re-election at the AGM on 7 May 2015. Reto Francioni was appointed as a Risk Committee member on 29 October 2015 and William G. Parrett was appointed as a Compensation Committee member on 29 October 2015 due to the vacancies opened by Jes Staley’s resignation. Axel P. Lehmann stepped down as BoD member on 31 December 2015. Jes Staley, Reto Francioni, William G. Parrett and Axel P. Lehmann were remunerated pro rata tempo- ris for 2015. There were 10 independent BoD members in office on 31 December 2014. Rainer-Marc Frey did not stand for re-election at the AGM on 7 May 2014. 2 This payments are associated with the Vice Chair- man or the Senior Independent Director function. 3 This figure excludes UBS’s portion related to the legally required social security contributions which for the period from the AGM 2015 to the AGM 2016 are estimated at grant to CHF 285,015 and which for the period from the AGM 2014 to the AGM 2015 were estimated at grant to CHF 260,302. The legally required social security contributions paid by the independent BoD members are included in the amounts shown in the table above, as appropriate. 4 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. 5 For 2015, UBS shares, valued at CHF 14.98 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2016), were granted with a price discount of 15% for a new value of CHF 12.73. These shares are blocked for four years. For 2014, UBS shares, valued at CHF 16.50 (average price of UBS shares at SIX Swiss Exchange over the last 10 trading days of February 2015), were granted with a price discount of 15% for a new value of CHF 14.03. These shares are blocked for four years. 6 Number of shares is reduced in case of the 100% election to deduct social security contributions. All remuneration payments are subject to social security contributions / withholding tax. 363 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Our compensation governance framework The Compensation Committee is a committee of the Board of Directors (BoD) and consists of four independent BoD members who are elected annually by shareholders at the Annual General Meeting (AGM). Pillar 3 | Compensation Committee As determined in the Articles of Association and the Organization Regulations of the firm, the Compensation Committee serves as the supervisory body for our human resources and compensation policies. The Compensation Committee ensures that we have appropriate governance and oversight of our compensation pro- cess and practices, that we have strong alignment between pay and performance, and that our compensation system does not encourage inappropriate or excessive risk-taking. Among its other responsibilities, the Compensation Committee, on behalf of the BoD: – reviews our Total Reward Principles – reviews and approves the design of the compensation frame- work annually, including compensation programs and plans – reviews performance award funding throughout the year and proposes the final performance award pool to the BoD for approval – together with the Group CEO, reviews performance targets, performance assessment and proposes base salaries and annual performance awards for other GEB members to the BoD, which approves the total compensation of each GEB member – together with the Chairman of the BoD, establishes perfor- mance targets, evaluates performance and proposes the com- pensation for the Group CEO to the BoD – approves the total compensation for the Chairman of the BoD – together with the Chairman, proposes the total individual compensation for independent BoD members for approval by the BoD – proposes, together with the BoD, the maximum aggregate amounts of compensation for the BoD and for the GEB, to be submitted for approval by shareholders at the AGM – reviews the Compensation Report and approves any material public disclosures of compensation matters The Compensation Committee meets at least four times a year. In 2015, the Compensation Committee held seven meetings and one conference call. All meetings were fully attended, with the exception of two meetings and the conference call where one member was absent. The Chairman of the BoD and the Group CEO were present at all meetings except during discussions related to their own compensation. The Chairperson of the Com- pensation Committee may also invite other executives to join the meeting in an advisory capacity. No individual is allowed to attend 364 meetings during which specific decisions are made about his or her own compensation. Such decisions are at the discretion of the Compensation Committee and the BoD. Following the meetings, the Chairperson of the Compensation Committee reports to the BoD on the activities of the Compensa- tion Committee and the matters discussed. In addition, where necessary, the Chairperson submits proposals for approval by the full BoD. The minutes of Compensation Committee meetings are made available to all members of the BoD. On 31 December 2015, the Compensation Committee mem- bers were Ann F. Godbehere, who chairs the committee, Michel Demaré, Reto Francioni and William G. Parrett who joined the Compensation Committee as of 29 October 2015, after Jes Stal- ey’s resignation from the BoD. Former Compensation Committee member Helmut Panke retired at the AGM on 7 May 2015. External advisors Pillar 3 | The Compensation Committee may retain external advisors to support it in fulfilling its duties. In 2015, HCM International Ltd. provided impartial independent advice on compensation matters. The company holds no other mandates with the firm. The com- pensation consulting firm Towers Watson continued to provide the Compensation Committee with data on market trends and benchmarks, including in relation to GEB and BoD compensation. Various subsidiaries of Towers Watson provide similar data to Human Resources in relation to compensation for employees below BoD and GEB level. Towers Watson holds no other com- pensation-related mandates with the firm. The Risk Committee’s role in compensation EDTF | We are engaged in a risk management business and our suc- cess depends on prudent risk-taking. We will not tolerate inap- propriate behavior that can harm the firm, its reputation or the interests of our various stakeholders. The Risk Committee, a com- mittee of the BoD, works closely with the Compensation Commit- tee to ensure our approach to compensation reflects proper risk management and control. The Risk Committee supervises and sets appropriate risk management and control principles and receives regular briefings on how risk is factored into the compen- sation process. It also monitors Group Risk Control’s involvement in compensation and reviews risk-related aspects of the compen- sation process. ➔ Refer to our corporate governance website at www.ubs.com/ governance for more information Advisory vote Compensation Committee 2015 / 2016 key activities and timeline This table provides an overview of the key Compensation Committee scheduled activities from AGM 2015 to AGM 2016. Jun July Sept Oct Dec Jan Mar Strategy, policy and governance Total Reward Principles 3-year Strategic Plan (2016-2018) update Compensation disclosure and stakeholder communication matters AGM reward-related items Compensation Committee Governance Annual compensation review Accruals and full-year forecast of the performance award pool funding Performance targets and performance assessment of the Group CEO and GEB members Group CEO and GEB members salaries and individual performance awards Update on market practice, trends and peer group matters Pay for performance (including governance on certain higher paid employees) and non- standard compensation arrangements Board of Directors remuneration Compensation framework 2015 compensation framework Deferred compensation matters Risk and regulatory Risk management in the compensation approach, including joint reviews with the Risk Committee Regulatory activities impacting employees and engagement with regulators 365 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Shareholder engagement and say-on-pay votes at the AGM The BoD and the Compensation Committee are committed to maintaining an ongoing dialogue with our shareholders to ascer- tain their perspectives on developments and trends in compensa- tion and corporate governance matters. In this context, we imple- mented the annual advisory vote on the Compensation Report in 2009 to provide shareholders with the opportunity to express their views on our compensation framework. In line with the Swiss Ordinance against Excessive Compensa- tion in Listed Stock Corporations, and similar to last year, we will again seek binding shareholder approval of the aggregate com- pensation for the GEB and aggregate remuneration for the BoD. The say-on-pay requirements provided for in the Articles of Association (AoA) were approved at the AGM 2014. The BoD believes that prospective approval of the fixed remu- neration for the BoD and the GEB provides the firm and its gov- erning bodies with the certainty needed to operate effectively. Furthermore, retrospective approval of the GEB’s variable com- pensation awards aligns total compensation for the GEB to per- formance and contribution, and to developments in the market place and across peers. The combination of the binding votes on compensation and the advisory vote on the compensation frame- work reflects our full commitment to ensuring that our sharehold- ers have a true say-on-pay. ➔ Refer to the sidebar “Provisions of the Articles of Association in relation to compensation” at the end of this section for more information. Say-on-pay – Compensation-related votes at the AGM 2015 The table provides an overview of the compensation-related agenda items at AGM 2015 and respective outcomes. 2015 AGM say-on-pay voting schemes 2015 actual shareholder votes % Vote “For” Compensation granted Binding vote on GEB variable compensation Proposal on the aggregate amount of variable compensation for the GEB for past performance year Binding vote on fixed GEB compensation Proposal on the maximum amount of fixed compensation for the GEB for the following financial year Binding vote on BoD remuneration Advisory vote on Compensation Report Proposal on the maximum aggregate amount of remuneration for the BoD for the period from AGM to AGM. This ensures that the term of office and the compensation period are aligned Proposal on the Compensation Report of the previous year, which provides valuable feedback on compensation practice in relation to the compensation framework, governance and policy of UBS Shareholders approved the aggregate amount of variable compensation of CHF 58,403,535 for the members of the GEB for the financial year 20141, 2, 3 Shareholders approved the maximum aggregate amount of fixed compensation of CHF 25,000,000 for the GEB for the financial year 2016 Shareholders approved the maximum aggregate amount of remuneration of CHF 14,000,000 for the BoD for the period from the 2015 AGM to 2016 AGM1,2 89.7% CHF 58,403,535 94.9% To be disclosed in the 2016 Compensation Report 91.7% CHF 12,778,308 Shareholders approved the UBS Group AG Compensation Report 2014 in an advisory vote 88.1% 1 Local currencies are converted into CHF using the exchange rates as detailed in “Note 36 Currency translation rates” in the “Financial information” section of UBS Group AG Annual Report 2014. 2 This figure excludes the portion related to the legally required employer’s social security contributions. 3 10 GEB members were in office on 31 December 2014. 366 Advisory vote AGM 2015 say-on-pay votes AGM 2016 say-on-pay votes At the AGM 2015, shareholders approved a maximum aggregate remuneration of CHF 14,000,000 for the BoD for the period from the AGM 2015 to the AGM 2016. This aggregate maximum amount includes the compensation for the Chairman and fees for independent BoD members, and was proposed on the assump- tion that the number of BoD members and each individual’s com- mittee and committee chair responsibilities remain unchanged for the specified period. A reserve was also included in the total amount of CHF 700,000 to take into account potential changes in BoD committee compositions. The maximum amount excludes the firm’s portion related to the legally required social security and the value of the discount on the share price due to the four year blocking period. For the period from the AGM 2015 to the AGM 2016, an aggregate amount of CHF 12,778,308 was paid to the Chairman and all independent BoD members. The difference when compared to the maximum amount approved by the share- holders at the AGM 2015 was due to the actual amount of ben- efits and contributions made to the retirement benefits plan for the Chairman, and also as a result of one independent BoD mem- ber having received his fees pro-rata after stepping down during the year. The reserve was not utilized. At the AGM 2015, shareholders approved an aggregate amount of variable compensation of CHF 58,403,535 for the members of the GEB for the financial year 2014. This amount was granted in May 2015. Shareholders also approved the aggregate amount of fixed compensation of CHF 25,000,000 for the members of the GEB for the financial year 2016. The final spend will be disclosed in the 2016 Compensation Report. For 2016 AGM say-on-pay votes, the BoD will propose the agenda items to shareholders based on the same approach as for 2015 AGM. Further details on the agenda items and the respective amounts will be set out in the AGM 2016 invitation. Overview of aggregate GEB variable compensation 2014 – 20151 (cid:49)(cid:88)(cid:71)(cid:84)(cid:88)(cid:75)(cid:71)(cid:89)(cid:2)(cid:81)(cid:72)(cid:2)(cid:67)(cid:73)(cid:73)(cid:84)(cid:71)(cid:73)(cid:67)(cid:86)(cid:71)(cid:2)(cid:41)(cid:39)(cid:36)(cid:2)(cid:88)(cid:67)(cid:84)(cid:75)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:71)(cid:80)(cid:85)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:20)(cid:18)(cid:19)(cid:22)(cid:115)(cid:20)(cid:18)(cid:19)(cid:23)(cid:149) (cid:37)(cid:42)(cid:40)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80) (cid:20)(cid:18)(cid:19)(cid:22) (cid:23)(cid:26)(cid:16)(cid:22) (cid:20)(cid:18)(cid:19)(cid:23) (cid:25)(cid:19)(cid:16)(cid:21) (cid:26)(cid:18) (cid:24)(cid:18) (cid:22)(cid:18) (cid:20)(cid:18) (cid:18) (cid:35)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:2)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:67)(cid:89)(cid:67)(cid:84)(cid:70)(cid:2)(cid:75)(cid:80)(cid:2)(cid:75)(cid:79)(cid:79)(cid:71)(cid:70)(cid:75)(cid:67)(cid:86)(cid:71)(cid:2)(cid:69)(cid:67)(cid:85)(cid:74) (cid:35)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:2)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:67)(cid:89)(cid:67)(cid:84)(cid:70)(cid:2)(cid:87)(cid:80)(cid:70)(cid:71)(cid:84)(cid:2)(cid:38)(cid:37)(cid:37)(cid:50) (cid:35)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:2)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:67)(cid:89)(cid:67)(cid:84)(cid:70)(cid:2)(cid:87)(cid:80)(cid:70)(cid:71)(cid:84)(cid:2)(cid:39)(cid:49)(cid:50) 1 Refer to the footnotes in the table “Total compensation for GEB members” for more information. 2016 Say-on-Pay— Time-based delineation of BoD / GEB compensation, subject to shareholder approval The following chart shows the prospective and retrospective elements of the say-on-pay votes approach. Shareholder approval requested at the AGM 2016 2015 Aggregate BoD remuneration AGM 2016 to AGM 2017 2016 Remuneration period 2017 Aggregate 2017 fixed compensation for the GEB Compensation period Aggregate 2015 variable compensation for the GEB Performance period Advisory vote on the 2015 Compensation Report Compensation Framework Voting at the AGM 2016 367 (cid:26)(cid:18) (cid:25)(cid:18) (cid:24)(cid:18) (cid:23)(cid:18) (cid:22)(cid:18) (cid:21)(cid:18) (cid:20)(cid:18) (cid:19)(cid:18) (cid:18) Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Our compensation model for employees other than GEB members The typical elements of an employee’s total reward are fixed compensation, a discretionary performance award, and pension contributions and benefits. The performance award may comprise a shorter-term immediate cash performance award and a longer-term deferred performance award. This mix encourages appropriate risk taking and behaviors that lead to sustainable performance. Base salary Pillar 3 | Employees’ fixed compensation reflects their skills, role, and experience, as well as local market practices. Fixed compensation generally consists of a base salary and, if applicable, a role-based allowance. Base salaries are usually paid monthly or fortnightly. We offer our employees competitive base salaries, although salary levels will vary greatly between functions and locations. Since 2011, salary increases have been limited. With effect from March 2016, total base salaries increased by CHF 104 million, or 1.7%. Such increases will continue to be paid to those employees who were promoted, those with scarce or in-demand skillsets, or those who delivered a very strong performance or took on increased responsibilities. As a firm, we focus on total compensation. For example, 2015 performance award pools take account of salary increases granted earlier in the year. We will continue to review salaries and perfor- mance awards in light of market developments, performance, affordability and our commitment to deliver sustainable returns to our shareholders. In addition to a base salary and as part of fixed compensation, some regulated employees may receive a role-based allowance as described in the UK Material Risk Takers section of this report. Such allowance represents a shift in the compensation mix between fixed and variable compensation and does not represent an increase in total compensation. Pensions, benefits, and employee share purchase program Pillar 3 | We offer certain benefits to our employees such as health insurance and retirement benefits. While these benefits may vary depending on the employee’s location, they aim to be competitive in each of the markets in which we operate. Pension contribu- tions and pension plans vary across locations and countries in accordance with local requirements and market practice. How- ever, pension plan rules in any one location are generally the same for all employees, including management. The Equity Plus Plan is our employee share purchase program. It allows employees below the rank of managing director to con- tribute up to 30% of their base salary and / or up to 35% of their performance award (up to CHF / USD 20,000 annually) toward the purchase of UBS shares. Eligible employees may purchase UBS shares at market price and receive one matching share for every three shares purchased through the program. The matching shares vest after three years, subject to continued employment with the firm and provided that the purchased shares have been retained for the entire holding period. ➔ Refer to “Note 28 Pension and other post-employment benefit plans” in the “Consolidated financial statements” section of the Annual Report 2015 for more information on the major post-employment benefit plans established in Switzerland and other countries Performance award Pillar 3 | Most of our employees are eligible for an annual discretion- ary performance award. The level of the award depends on the firm’s overall performance, the employee’s business division per- formance, the individual’s performance and behaviors reflecting their overall contributions. The award is at the complete discretion of the firm. To link pay with performance, the key performance indicators used to measure our progress in executing our strategy are taken into account when determining the size of each divi- sional performance award pool. They are also used as a basis for setting specific performance conditions for vesting of certain deferred compensation plan grants. In addition to the firm’s principles around Client focus, Excel- lence and Sustainable performance, on an individual level, behav- iors related to Integrity, Collaboration and Challenge are part of the performance management approach. Therefore, when assess- ing performance, we not only take into account what was achieved, but also how the objectives were achieved. 368 Advisory vote Benchmarking Pillar 3 | Because of the diversity of our businesses, the companies we use as benchmarks depends on the respective business divi- sion and location, as well as the nature of the positions involved. For certain businesses or positions, we may take into account practices at other major international banks, other large Swiss pri- vate banks, private equity firms, hedge funds and non-financial firms. Furthermore, we also benchmark employee compensation internally for comparable roles within and across business divi- sions and locations. Deferral of performance awards Pillar 3 | Our goal is to focus our employees on delivering sustainable profitability for the firm. In practice, this means that employees with the highest levels of compensation have a higher effective deferral rate. If an employee’s total compensation exceeds CHF / USD 300,000, a significant part of their performance award will be deferred for up to five years. The deferral increases at higher marginal rates in line with the value of the performance award, with the lowest deferral rate set at 30% of the performance award, down from 40% for 2014, and the highest rate at 75%. In addition, the portion paid out in immediate cash is capped at CHF / USD 1 million (or equivalent). Amounts in excess of the cash cap are deferred in notional shares under the Equity Ownership Plan (EOP). The effective deferral rate therefore depends on the value of the performance award and the value of total compensation. Of the deferred annual performance award, at least 60% is deferred in UBS notional shares under the EOP and up to 40% is deferred in notional instruments under the Deferred Contingent Capital Plan (DCCP). Asset Management employees receive at least 75% of their deferred performance awards in notional funds under the EOP and up to 25% under the DCCP. The average deferral period for deferred employee awards below GEB level was 3.5 years for 2015. ➔ Refer to the “Our deferred variable compensation plans for 2015” section of this report for more information about the terms of our deferred variable compensation plans, including the forfeiture provisions to which they are subject, and the terms applicable to Asset Management employees ➔ Refer to “Note 29 Equity participation and other compensation plans” in the “Consolidated financial statements” section of the Annual Report 2015 for more information on specific local plans with deferral provisions that differ from those described here Basic reward elements Shorter-term performance award Longer-term performance award Base salary Immediate performance award in the form of cash + + Notional shares (EOP) Notional instruments (DCCP) + Pension contributions and other benefits + = Total reward 369 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Other variable compensation components Pillar 3 | To support hiring and retention, particularly at senior levels, we may offer certain other compensation components. These include: – Replacement payments to compensate employees for deferred awards forfeited as a result of joining the firm. Such payments are industry practice and are often necessary to attract senior candidates who generally have a significant portion of their awards deferred at their current employer and where contin- ued employment is required to avoid forfeiture. – Retention payments made to key employees to induce them to stay, particularly during critical periods for the firm. – On a very limited basis, guarantees may be required to attract individuals with certain skills and experience. These awards, which are fixed incentives to which our standard deferral applies, are limited to the first full year of employment. – Award grants to employees hired late in the year to replace performance awards that they would have earned at their pre- vious employer, but have been foregone by joining the firm. These awards are structured with the same level of deferral as for employees at a similar level at UBS. In addition, in very exceptional cases, candidates may be offered sign-on pay- ments to increase the chances of them accepting an offer. These other variable compensation payments are subject to a comprehensive governance process. Authorization and responsi- bility are dependent on the level and / or type of payments, up to the BoD Compensation Committee. Further, severance payments are made to employees in redun- dancy cases. These are governed by location-specific severance policies. We offer severance terms which comply with the appli- cable local laws (legally obligated severance). In certain locations, we may provide severance packages that are negotiated with our local social partners that go beyond these minimum legal require- ments (standard severance). In addition, we may make severance payments that exceed legally obligated or standard severance payments (supplemental severance) where we believe that they are aligned with market practice and appropriate under the cir- cumstances. Under no circumstances are severance payments made to members of the GEB. Sign-on payments, replacement payments, severance payments and guarantees Total 2015 Of which expenses recognized in 20153 Of which expenses to be recognized in 2016 and later Total 2014 CHF million, except where indicated Total sign-on payments1 of which GEB members of which Key Risk Takers2 Total replacement payments of which GEB members of which Key Risk Takers2 Total guarantees of which GEB members of which Key Risk Takers2 Total severance payments1, 3 of which GEB members of which Key Risk Takers2 21 0 11 85 0 44 44 0 29 166 0 2 11 0 5 11 0 5 15 0 8 164 0 2 10 0 5 75 0 39 29 0 21 2 0 0 20 0 4 81 0 27 47 0 18 176 0 3 Number of beneficiaries 20144 162 2015 114 0 14 252 0 27 35 0 13 0 5 275 0 17 54 0 6 1,850 1,667 0 6 0 2 1 GEB members are not eligible for sign-on or severance payments. 2 Expenses for Key Risk Takers are full-year amounts for individuals in office on 31 December 2015. Key Risk Takers include employees with a total compensation exceeding CHF / USD 2.5 million (Highly-Paid Employees). 3 Severance payments include legally obligated and standard severance, as well as supplemental severance payments of CHF 8 million. 4 Expenses before post-vesting transfer restrictions. 370 Advisory vote Compensation for financial advisors in Wealth Management Americas Pillar 3 | In line with market practice for US wealth management businesses, the compensation for Financial Advisors in Wealth Management Americas is based on production payout and awards. Production payout, paid monthly, is primarily based on compensable revenue. Advisors may also qualify for year-end awards, which are deferred for between 6 and 10 years. The awards are based on strategic performance measures which include production, length of service with the firm, and net new money generated. Production payout rates and awards may be reduced if financial advisors make repeated or significant transac- tion errors and / or demonstrate negligence or carelessness or oth- erwise fail to comply with the firm’s rules, standards, practices and policies and / or applicable law. Key Risk Takers Pillar 3 | Key Risk Takers (KRTs) are globally defined as those employ- ees who, by the nature of their role, have been determined to materially set, commit or control significant amounts of the firm’s resources and / or exert significant influence over its risk profile. This includes employees who work in front-office roles, logistics and control functions. Identifying KRTs is part of the Risk Control framework and an important element in ensuring we incentivize only appropriate risk-taking. For 2015, we had 669 individuals classified as KRTs, including all 10 GEB members. This group also includes employees with a total compensation exceeding CHF / USD 2.5 million (Highly-Paid Employees) if they had not already been identified as KRTs during the performance year. KRTs identified at any point in time in the performance year are subject to a performance evaluation by the control functions. The vesting of their deferred awards is contingent on meeting Group and / or divisional performance conditions. Like all other employ- ees, KRTs are also subject to forfeiture or reduction of the deferred portion of their compensation if they commit harmful acts. All KRTs are subject to the mandatory deferral of at least 50% of their performance award regardless of whether or not the deferral threshold has been met. This is in order to comply with regulatory requirements. Group Managing Directors (GMDs) receive part of their annual performance award under the EOP and the DCCP, with the vest- ing of their EOP awards contingent on the same performance conditions to which KRTs are subject. Pillar 3 | Fixed and variable compensation for Key Risk Takers1 CHF million, except where indicated Amount % Amount % Amount % Total for the year ended 2015 Not deferred Deferred2 Total for the year ended 20143 Amount Total compensation Amount4 Number of beneficiaries Fixed compensation4, 5 Cash-based Equity-based Variable compensation Immediate cash6 Equity Ownership Plan (EOP) Deferred Contingent Capital Plan (DCCP) 1,413 100% 659 398 376 22 1,015 280 462 273 28% 27% 2% 72% 20% 33% 19% 655 398 376 22 280 280 0 0 46% 100% 100% 100% 28% 100% 0% 0% 758 54% 1,178 0 0 0 735 0 462 273 0% 0% 0% 72% 0% 100% 100% 615 351 323 28 827 217 383 227 1 Includes employees with a total compensation exceeding CHF / USD 2.5 million (Highly Paid Employees), excluding GEB members who were in office on 31 December 2015. 2 This is based on the specific plan vesting and reflects the total value at grant which may differ from the accounting expenses. 3 2014 figures as reported in our Annual Report 2014. EOP number includes CHF 13 million blocked shares. 4 Excludes benefits and employer’s contribution to retirement benefits plan. 5 Includes base salary and role-based allowances. 6 Includes allocation of vested but blocked shares, in line with UK Prudential Regulation Authority remuneration code. 371 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation UK Material Risk Takers In accordance with guidance issued by the UK Prudential Regula- tion Authority (PRA) and Financial Conduct Authority (FCA), for 2015, we identified a group of 571 employees, consisting of senior management, risk takers, staff engaged in control func- tions and any employee receiving total remuneration that takes them into the same remuneration bracket as these groups and whose professional activities have a material impact on the firm’s risk profile, as so-called UK Material Risk Takers (MRTs). Due to specific PRA requirements, 50% of performance awards for MRTs that are paid out immediately are delivered in UBS shares, which are blocked for six months. In addition, any notional shares granted to MRTs under the EOP for their performance in 2015 will be subject to an additional six-month post vest blocking period. From 2015 onwards, performance awards granted to MRTs are also subject to clawback provisions for a period of up to seven years from date of grant. The clawback provisions stipulate that the firm can require the repayment of any discretionary perfor- mance award (both the immediate and deferred element) if the employee contributes substantially to the Group incurring signifi- cant financial losses or to a significant downward restatement of the Group’s or a business division’s results, or engages in miscon- duct and / or fails to take expected actions which contributed to significant reputational harm to the Group. In line with market practice, MRTs may receive a role-based allowance in addition to their base salary. This allowance reflects the market value of a specific role and, unlike salary, is only paid as long as the employee is in such a role. Importantly, this allow- ance represents a shift in the compensation mix between fixed and variable compensation and does not represent an increase in total compensation. With respect to 2015, the allowance consisted of an immedi- ate cash portion along with a blocked UBS share award, if appli- cable. In 2014, the equity portion consisted of vesting shares instead of blocked shares. The 2015 approach is a structural change based on feedback from the European Banking Authority (EBA) and the PRA. Other EU-based employees who are subject to regulation have similar compensation structures in order to comply with EBA and local requirements. Control functions and Group Internal Audit Pillar 3 | To monitor risk effectively, our control functions, Risk Con- trol (including Compliance), Finance and Legal, must be indepen- dent. To support this, their compensation is determined indepen- dently from the revenue producers that they oversee, supervise or support. Their performance award pool is not based on the performance of these businesses, but instead reflects the perfor- mance of the firm as a whole. In addition, we consider other factors such as how well the function has performed, together with our market positioning. Decisions regarding individual com- pensation for the senior managers of the control functions are made by the function heads and approved by the Group CEO. Decisions regarding individual compensation within Group Inter- nal Audit (GIA) are made by the Head of GIA and approved by the Chairman. Total compensation for the Head of GIA is approved by the Compensation Committee in consultation with the Audit Committee. 372 Advisory vote Our deferred variable compensation plans for 2015 To ensure our employees’ and stakeholders’ interests are aligned and that compensation is appropriately linked to longer-term sustainable performance, all variable compensation plans require a significant part of performance awards above a total compensation threshold to be deferred in UBS notional shares and UBS notional instruments for up to five years. For the population with total compensation greater than CHF / USD 300,000, 51% of the overall performance award is deferred. All of these plans include forfeiture provisions and performance conditions. Equity Ownership Plan Pillar 3 | The Equity Ownership Plan (EOP) is a mandatory deferral plan for all employees with total compensation greater than CHF / USD 300,000. These employees receive at least 60% of their deferred performance award under the EOP in notional shares, which are eligible for reinvested dividend equivalents. For 2015, over 5,000 employees received EOP awards. EOP awards are granted annually. The plan includes provisions that enable the firm to trigger for- feiture of some, or all, of the unvested deferred portion if an employee commits certain harmful acts or in most cases where employment has been terminated. EOP awards granted to Asset Management employees have a different vesting schedule and deferral mix, as shown in the table below, and are granted as cash-settled notional funds. The vesting of an EOP award granted to GEB members, Group Managing Directors (GMDs) and Key Risk Takers (including Highly- Paid Employees) depends on meeting both Group and divisional performance thresholds. Group performance is measured by the average adjusted Group return on tangible equity (RoTE) over the performance period. Divisional performance is measured by the average adjusted divisional return on attributed equity (RoAE). For Corporate Center employees, it is measured by the average of the RoAE for all business divisions excluding Corporate Center (oper- ating businesses RoAE). By linking the vesting of EOP awards with minimum return on equity thresholds over a two to five-year time horizon, we focus our employees on developing and managing the business in a way that delivers sustainable returns. We believe that Group RoTE provides a more consistent basis to measure per- formance than the Group’s return on shareholders’ equity (RoE), which includes goodwill and intangibles. At Group level, the performance condition minimum threshold of RoTE is set at 8%. The intent of performance thresholds is to ensure that our senior employees are incentivized towards sus- tainable performance, without having to earn their awards twice. Overview of our deferred variable compensation plans Beneficiaries GEB members, Key Risk Takers and all employees with total compensation greater than CHF / USD 300,000 Equity Ownership Plan Deferral mix (between EOP and DCCP) GEB members: at least 62.5% Asset Management employees: at least 75% All other employees: at least 60% Vesting schedule GEB members: vests in three installments in years 3, 4 and 5 Asset Management employees: vests in three installments in years 2, 3 and 5 All other employees: vests in equal installments in year 2 and 3 Deferred Contingent Capital Plan GEB members, Key Risk Takers and all employees with total compensation greater than CHF / USD 300,000 GEB members: up to 37.5% Asset Management employees: up to 25% All other employees: up to 40% Vests in full in year 5 s n o i t i d n o C g n i c n e u fl n i t u o y a p Share price Forfeiture clauses Harmful acts Performance conditions GEB members, GMDs and Key Risk Takers (including Highly-Paid Employees): Number of UBS shares delivered at vesting depends on the achievement of both Group and respective divisional performance conditions1 Depends on whether a trigger event or viability event has occurred and, for GEB members, also on profitability Profitability as funding driver Instrument UBS notional shares 2 (eligible for dividend equivalents) Notional instruments and interest 1 Includes Asset Management employees who are GMDs, Key Risk Takers (including Highly-Paid Employees). 2 Notional funds for Asset Management employees. 373 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation If the average adjusted Group RoTE achieved is equal to or above the minimum 8% threshold, the EOP award will vest in full, subject to the relevant business divisional threshold also being met. If the average adjusted Group RoTE is 0% or negative, the installment will be fully forfeited for the entire firm regardless of any division’s individual performance. If the average adjusted Group RoTE falls between 0% and 8%, the award will vest on a linear basis between 0% and 100%, again subject to the relevant business divisional threshold being met. The purpose of the business divisional threshold is to reduce the amount of the EOP award that vests for any business division that does not meet its minimum performance threshold. There- fore, if the business divisional RoAE threshold (see table on the next page) is met, no adjustment is made to the EOP award. If, however, the RoAE falls below the minimum threshold but is above 0% for any business division, the award will be partially forfeited. The extent of the forfeiture depends on how much the actual RoAE falls below the threshold for that business division, and can be up to 40%. If the actual RoAE for a business division is 0% or negative, the installment will be fully forfeited for that business division. The Compensation Committee assesses the achievement of the performance conditions. The chart on the fol- lowing page shows how we determine the percentage vesting. (cid:35)(cid:70)(cid:76)(cid:87)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:84)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:67)(cid:80)(cid:73)(cid:75)(cid:68)(cid:78)(cid:71)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(cid:2)(cid:115)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:67)(cid:84)(cid:75)(cid:85)(cid:81)(cid:80)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:39)(cid:49)(cid:50)(cid:2) (cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:86)(cid:74)(cid:84)(cid:71)(cid:85)(cid:74)(cid:81)(cid:78)(cid:70)(cid:85)(cid:2) (cid:43)(cid:80)(cid:2)(cid:7) (cid:19)(cid:21)(cid:16)(cid:25) (cid:19)(cid:26) (cid:19)(cid:22) (cid:19)(cid:18) (cid:24) (cid:20) (cid:26) (cid:26) (cid:26) (cid:20)(cid:18)(cid:19)(cid:23) (cid:20)(cid:18)(cid:19)(cid:24) (cid:20)(cid:18)(cid:19)(cid:25) (cid:20)(cid:18)(cid:19)(cid:26) (cid:35)(cid:70)(cid:76)(cid:87)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:84)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:67)(cid:80)(cid:73)(cid:75)(cid:68)(cid:78)(cid:71)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(cid:19) (cid:39)(cid:49)(cid:50)(cid:2)(cid:67)(cid:70)(cid:76)(cid:87)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:84)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:67)(cid:80)(cid:73)(cid:75)(cid:68)(cid:78)(cid:71)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(cid:2)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:86)(cid:74)(cid:84)(cid:71)(cid:85)(cid:74)(cid:81)(cid:78)(cid:70)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:47)(cid:67)(cid:84)(cid:69)(cid:74)(cid:2)(cid:20)(cid:18)(cid:19)(cid:24)(cid:2)(cid:73)(cid:84)(cid:67)(cid:80)(cid:86)(cid:85) (cid:55)(cid:36)(cid:53)(cid:2)(cid:71)(cid:90)(cid:82)(cid:71)(cid:69)(cid:86)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:67)(cid:70)(cid:76)(cid:87)(cid:85)(cid:86)(cid:71)(cid:70)(cid:2)(cid:84)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:67)(cid:80)(cid:73)(cid:75)(cid:68)(cid:78)(cid:71)(cid:2)(cid:71)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)(cid:19) 1 Refer to the “Our strategy” section of the Annual Report 2015 for details. 374 (cid:20)(cid:22)(cid:18)(cid:18)(cid:18) (cid:19)(cid:26)(cid:18)(cid:18)(cid:18) (cid:19)(cid:20)(cid:18)(cid:18)(cid:18) (cid:24)(cid:18)(cid:18)(cid:18) (cid:18) Advisory vote Performance condition for EOP awards granted in February 2016 GEB GMDs, Key Risk Takers (including Highly-Paid Employees) Group RoTE threshold Group adjusted RoTE threshold Business divisional RoAE thresholds Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center1 1 For Corporate Center employees, operating businesses RoAE threshold. Installment vesting after Applicable performance period 3 years 4 years 5 years 2 years 3 years 2016, 2017 and 2018 2017, 2018 and 2019 2018, 2019 and 2020 2016 and 2017 2016, 2017 and 2018 ≥8% ≥50% ≥25% ≥20% ≥25% ≥15% ≥25% EOP performance conditions for GEB members, GMDs and Key Risk Takers (including Highly-Paid Employees) Group performance Business divisional performance Illustrative example (assuming constant share price) % vesting based on Group RoTE 100% vesting at a Group RoTE of ≥ 8% Adjustment based on business divisional RoAE 0% forfeiture if RoAE is at or above threshold Partial forfeiture of up to 40% determined on a linear basis if RoAE is between threshold and 0% Partial forfeiture determined on a linear basis if Group RoTE is between 0% and 8% 100% forfeiture at a Group RoTE of ≤ 0% 100% forfeiture if RoAE ≤ 0% Assume an EOP award of CHF 100,000 granted to an Investment Bank employee due to vest in 2019, and an actual average adjusted Group RoTE and Investment Bank RoAE (averaged over the performance years 2016 to 2018) of 4% and 7.5%, respectively. To determine the percentage of shares that vest –50% of 100K (50) – the award is reduced by 50% due to Group performance (as a 4% Group RoTE is 50% of the Group RoTE threshold) and – the award is reduced by a further 20% due to the Investment Bank’s divisional performance (the 7.5% RoAE represents half of the 15% Investment Bank RoAE threshold). 100 –20% of 50K (10) 50 40 Installment about to vest Adjustment due to Group performance Vesting based on Group performance Amount vesting Adjustment due to business divisional performance 100 80 60 40 20 0 375 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Deferred Contingent Capital Plan Pillar 3 | The Deferred Contingent Capital Plan (DCCP) is a manda- tory deferral plan for all employees with total compensation greater than CHF / USD 300,000. These employees receive up to 40% of their deferred performance award under the DCCP, with the exception of Asset Management employees, who receive up to 25%, and GEB members who receive up to 37.5% of their deferred performance awards under the plan. DCCP awards are granted annually. For 2015, over 5,000 employees received DCCP awards. Employees are awarded notional additional tier 1 (AT1) instru- ments, which can be settled either in the form of a cash payment or a perpetual, marketable AT1 instrument, at the discretion of the firm. Prior to grant, employees were able to elect to have their 2015 DCCP awards denominated in either Swiss francs or US dollars. Awards vest in full after five years, unless there is a trigger event. Awards granted under the DCCP forfeit if our phase-in common equity tier 1 capital ratio falls below 10% for GEB mem- bers and 7% for all other employees. In addition, awards are also forfeited if a viability event occurs, that is, if FINMA provides a written notice to the firm that the DCCP awards must be written down to prevent an insolvency, bankruptcy or failure of UBS, or if the firm receives a commitment of extraordinary support from the public sector that is necessary to prevent such an event. As an additional performance condition, if the firm does not achieve an adjusted Group profit before tax for any year during the vesting period, GEB members forfeit 20% of their award for each loss- making year. The plan includes provisions that enable the firm to trigger for- feiture of some, or all, of the unvested deferred portion if an employee commits certain harmful acts or in most cases where employment has been terminated. Under the DCCP, employees may receive discretionary annual interest payments. The notional interest rate for grants in 2016 is 7.35% for awards denominated in US dollars and 4.15% for awards denominated in Swiss francs. These interest rates are based on the current market rates for such AT1 instruments. Such interest will be paid out annually subject to review and confirma- tion by the firm. As part of our compensation framework, DCCP awards sup- port competitive pay while also contributing to the firm’s capital position. The following table illustrates the impact of DCCP on our AT1 and Tier 2 capital as well as on our total capital ratio. ➔ Refer to the “Supplemental information” section of this report for more information on performance awards, performance awards expenses and total personnel expenses in 2015, as well as past awards Impact of the Deferred Contingent Capital Plan on our capital ratio CHF million, except where indicated Deferred Contingent Capital Plan (DCCP) of which additional tier 1 capital of which Tier 2 capital Total capital ratio – fully applied (%) of which DCCP (%) 31.12.15 31.12.14 31.12.13 1,903 991 912 22.9 0.9 1,413 467 946 18.9 0.7 955 0 955 15.4 0.4 376 Advisory vote Supplemental information Performance awards granted for the 2015 performance year The “Total variable compensation” table below shows the amount of variable compensation awarded to employees for the perfor- mance year 2015, together with the number of beneficiaries for each type of award granted. We define variable compensation as the discretionary, performance-based award pool for the given year. In the case of deferred awards, the final amount paid to an employee depends on performance conditions and consideration of relevant forfeiture provisions. The deferred share award amount is based on the market value of these awards on the date of grant. The “Deferred compensation” table on the next page shows the current economic value of unvested outstanding deferred variable compensation awards subject to ex-post adjustments. For share-based plans, the economic value is determined based on the closing share price on 30 December 2015. For notional funds, it is determined using the latest available market price for the underlying funds at year-end 2015, and for deferred cash plans, it is determined based on the outstanding amount of cash owed to award recipients. All awards made under our deferred variable compensation plans listed in the “Deferred compensation” table on the next page are subject to ex-post adjustments, whether implicitly, through exposure to share price movements, or explicitly, for example, through forfeitures insti- gated by the firm. ➔ Refer to “Note 29 Equity participation and other compensation plans” in the “Consolidated financial statements” section of the Annual Report 2015 for more information Pillar 3 | Total variable compensation1 CHF million, except where indicated Cash performance awards Deferred Contingent Capital Plan UBS share plans Equity Ownership Plan – notional funds Total performance award pool CHF million, except where indicated Total variable compensation – other3 CHF million, except where indicated Total WMA financial advisor compensation5 Expenses 2015 2,073 172 261 28 2014 1,822 155 215 24 2,535 2,216 Expenses 2015 184 2014 260 Expenses 2015 2,673 2014 2,539 Expenses deferred to future periods 2015 2014 Adjustments2 2015 2014 0 343 524 34 900 0 312 459 36 807 (1) 0 63 0 62 (4) 0 44 0 40 Total Number of beneficiaries 2015 2,072 514 848 63 2014 1,818 467 718 60 2015 46,272 5,432 5,036 438 2014 46,298 5,248 4,897 397 3,497 3,063 46,311 46,305 Expenses deferred to future periods 2015 248 2014 307 Expenses deferred to future periods 2015 1,716 2014 754 Adjustments2 2015 (160)4 2014 (121)4 Total 2015 271 2014 446 Adjustments2 2015 2014 0 14 Total Number of beneficiaries 2015 4,389 2014 3,307 2015 7,038 2014 6,997 1 Expenses under “Total variable compensation – other” and “Total WMA financial advisor compensation” are not part of UBS’s performance award pool. 2 Adjustments relating to post-vesting transfer restrictions and other adjustments. 3 Replacement payments and retention plan payments including the 2012 Special Plan Award Program. 4 Included in expenses deferred to future periods is an amount of CHF 160 million (prior year CHF 121 million) relating to future interest on the DCCP. As the amount recognized as performance award represents the present value of the award at the date granted to the employee, this interest amount is adjusted out in the analysis. 5 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 and other variables. It also includes charges related to compensation commitments with financial advisors entered into at the time of recruitment, which are subject to vesting requirements. 377 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Performance award expenses in the 2015 performance year Performance award expenses include all immediate expenses related to 2015 compensation awards and expenses deferred to 2015 related to awards made in prior years. The chart “Amortiza- tion of deferred compensation” shows the amount at the end of 2015 of unrecognized awards to be amortized in subsequent years. This was CHF 1.6 billion for 2014 and CHF 1.7 billion for 2015. Pillar 3 | The table below shows the value of actual ex-post explicit and implicit adjustments to outstanding deferred compen- sation in the financial year 2015. Ex-post adjustments occur after an award has been granted. Ex-post explicit adjustments occur when we adjust compensation by forfeiting deferred awards. Ex- post implicit adjustments are unrelated to any action taken 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 adjust- ments made to UBS shares in 2015, based on the approximately 7 million shares forfeited during 2015, is a reduction of CHF 146 million. The total value of ex-post explicit adjustments made to UBS options and share-settled stock appreciation rights (SARs) in 2015, based on the approximately 0.1 million options / SARs for- feited during 2015, is a reduction in value of CHF 1 million. The size of implicit adjustments is mainly due to an increase in the share price. However, the share price as of year-end means that many of the options previously granted remain out of the money. Hence, the majority of outstanding option awards had no intrinsic value at the end of 2015. Amortization of deferred compensation CHF billion 6% (3%) 0.7 0.9 0.7 1.6 0.1 1.7 Amortized Forfeited 31.12.14 Unrecognized awards to be amortized including awards granted in 1Q15 for the performance year 2014 Expected amortization of prior-year awards in 2016 Annual awards granted including awards granted in 1Q16 for the performance year 2015 31.12.15 Unrecognized awards to be amortized including awards granted in 1Q16 for the performance year 2015 Pillar 3 | Deferred compensation1, 2 CHF million, except where indicated Deferred Contingent Capital Plan Equity Ownership Plan Equity Ownership Plan – notional funds Discontinued deferred compensation plans4 Total Relating to awards for 2015 514 848 63 0 1,424 Relating to awards for prior years3 1,397 2,672 393 19 Total 1,911 3,520 455 19 4,481 5,905 of which exposed to ex-post adjustments Total deferred compen- sation year end 2014 100% 100% 100% 100% 1,424 3,476 498 260 5,658 1 This is based on specific plan vesting and reflects the economic value of the outstanding awards, which may differ from the accounting expenses. 2 Refer to “Note 29 Equity participation and other compensation plans” in the “Consolidated financial statements” section of the Annual Report 2015 for more information. 3 This takes into account the ex-post implicit adjustments, given the share price movements since grant. 4 Cash Balance Plan (CBP), Senior Executive Equity Ownership Plan (SEEOP), Performance Equity Plan (PEP), Incentive Performance Plan (IPP), Deferred Cash Plan (DCP). Pillar 3 | Ex-post explicit and implicit adjustments to deferred compensation in 20151 CHF million UBS notional bonds (DCCP) UBS shares (EOP, IPP, PEP, SEEOP)2 UBS options (KESOP) and SARs (KESAP)2 UBS notional funds (EOP)3 Ex-post explicit adjustments4 31.12.15 31.12.14 Ex-post implicit adjustments to unvested awards5 31.12.15 31.12.14 (53) (146) (1) (6) (42) (121) (1) (3) 412 3 218 16 1 Compensation (performance awards and other variable compensation) relating to awards for previous performance years. 2 IPP, PEP, SEEOP, Key Employee Appreciation Rights Plan (KESAP) and Key Employee Stock Option Plan (KESOP) are discontinued deferred compensation plans. 3 Awards granted under this plan are cash-settled and 100% susceptible to ex-post implicit adjustments. 4 Ex-post explicit adjustments are cal- culated as units forfeited during the year, valued at the share price on 30 December 2015 (CHF 19.52) and on 30 December 2014 (CHF 17.09) for UBS shares and valued with the fair value at grant for UBS options. For the notional funds awarded to Asset Management employees under the EOP, this represents the forfeiture credits recognized in 2015 and 2014. For DCCP the fair value at grant of the forfeited awards during the year is reflected. 5 Ex-post implicit adjustments for UBS shares are calculated based on the difference between the weighted average grant date fair value and the share price at year end. The amount for notional funds is calculated using the mark-to-market change during 2015 and 2014. 378 Amortization of deferred compensation CHF billion X% (X%) 0.7 0.9 0.7 1.6 0.1 1.7 Amortized Forfeited 31.12.14 Unrecognized awards to be amortized including awards granted in 1Q15 for the performance year 2014 Expected amortization of prior-year awards in 2016 Annual awards granted including awards granted in 1Q16 for the performance year 2015 31.12.15 Unrecognized awards to be amortized including awards granted in 1Q16 for the performance year 2015 2.0 1.5 1.0 0.5 0.0 Advisory vote Total personnel expenses for 2015 As of 31 December 2015, there were 60,099 employees (on a full-time equivalent basis). The table “Personnel expenses” below shows our total personnel expenses for 2015. It includes salaries, pension contributions and other personnel costs, social security contributions and variable compensation. Variable compensation includes discretionary cash performance awards paid in 2016 for the 2015 performance year, the amortization of unvested deferred awards granted in previous years and the cost of deferred awards granted to employees who are eligible for retirement in the con- text of the compensation framework at the date of grant. The performance award pool reflects the value of discretionary performance awards granted relating to the 2015 performance year, including awards that are paid out immediately and those that are deferred. To determine our variable compensation expenses, the following adjustments are required in order to rec- oncile the performance award pool to the accounting expenses recognized in the Group’s financial statements prepared in accor- dance with IFRS: – reduction for the unrecognized future amortization (including accounting adjustments) of unvested deferred awards granted in 2016 for the performance year 2015 – addition for the 2015 amortization of unvested deferred awards granted in prior years As a large part of compensation consists of deferred awards, the amortization of unvested deferred awards granted in prior years forms a significant part of the IFRS accounting expenses in both 2014 and 2015. ➔ Refer to “Note 29 Equity participation and other compensation plans” in the “Consolidated financial statements” section of the Annual Report 2015 for more information Pillar 3 | Personnel expenses CHF million Salaries1 Cash performance awards Deferred Contingent Capital Plan Deferred cash plans UBS share plans UBS share option plans Equity Ownership Plan – notional funds Total variable compensation – performance award2 of which: guarantees for new hire Variable compensation – other2 of which: replacement payments3 of which: forfeiture credits of which: severance payments4 of which: retention plan and other payments Contractors Social security Pension and other post-employment benefit plans5 Wealth Management Americas: financial advisor compensation2, 6 Other personnel expenses Total personnel expenses7 Relating to awards for 2015 Relating to awards for prior years 6,282 2,073 172 0 261 0 28 2,535 15 184 11 0 157 15 365 785 808 2,673 579 14,209 0 (94) 258 12 461 0 38 675 23 162 65 (86) 0 183 0 35 0 879 21 1,772 Expenses Total 2015 6,282 1,980 429 12 722 0 67 2014 6,269 1,714 349 12 680 0 65 3,210 2,820 38 346 76 (86) 157 198 365 820 808 3,552 600 15,981 48 466 81 (70) 162 292 234 791 711 3,385 605 15,280 2013 6,268 1,912 248 55 692 0 79 2,986 76 288 78 (146) 114 242 190 792 887 3,140 631 15,182 1 Includes role-based allowances. 2 Refer to “Note 29 Equity participation and other compensation plans” in the “Consolidated financial statements” section of the Annual Report 2015 for more information. 3 Replacement payments are payments made to compensate employees for deferred awards forfeited as a result of joining UBS. This table includes the expenses recognized in the financial year (mainly the amortization of the award). 4 Includes legally obligated and standard severance payments. 5 2015 included credits of CHF 24 million related to changes to retiree benefit plans in the US. 2014 included credits of CHF 41 million related to changes to retiree benefit plans in the US. Refer to “Note 28 Pension and other post-employment benefit plans” of the “Consolidated financial statements” section of the Annual Report 2015 for more information. 6 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 produc- tivity, firm tenure, assets and other variables. It also includes charges related to compensation commitments with financial advisors entered into at the time of recruitment which are subject to vesting requirements. 7 Includes net restructuring expenses of CHF 460 million, CHF 327 million and CHF 156 million for the years ended 31 December 2015, 31 December 2014 and 31 December 2013, respectively. Refer to “Note 32 Changes in organization and disposals” in the “Consolidated financial statements” section of the Annual Report 2015 for more information. 379 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Vesting of outstanding awards granted in prior years subject to performance conditions The table below shows the extent to which the performance conditions of awards granted in prior years have been met and the percentage of the award which vests in 2016. Senior Executive Equity Ownership Plan 2010 / 11 and 2011 / 12 Performance threshold Performance achieved % of installment vesting Adjusted operating profit before tax for the business divi- sion or, for Corporate Center, adjusted Group operating profit before tax As the Group and the business divisions reported an operating profit for 2015, the profitability performance condition has been satisfied, hence the fifth installment of the SEEOP 2010 / 11 and the fourth installment of the SEEOP 2011 / 12 awards vest in full 100% Equity Ownership Plan 2012 / 13 and 2013 / 14 Performance threshold Performance achieved % of installment vesting Group return on tangible equity and the divisional return on attributed equity The Group and divisional performance conditions have been satisfied. For EOP 2012 / 2013 the first installment for the GEB members and the second installment for all otheremployeescoveredundertheplanvestinfull. For EOP 2013 / 14 the first installment for all other em- ployees covered under the plan vests in full 100% 380 Advisory vote Discontinued deferred compensation plans The table below lists discontinued compensation plans that have outstanding balances as of 31 December 2015 or which were retired during 2015. The firm 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 29 Equity participation and other compensation plans” in the “Consolidated financial statements” section of our Annual Report 2015 for more information Plan Performance Equity Plan (PEP) Senior Executive Equity Ownership Plan (SEEOP) Special Plan Award Program (SPAP) Incentive Performance Plan (IPP) Key Employee Stock Appreciation Rights Plan (KESAP) and Key Employee Stock Option Plan (KESOP) Senior Exe cutive Stock Appreciation Rights Plan (SESAP) and Senior Exe- cutive Stock Option Plan (SESOP) Years granted 2010–2012 2010–2012 2012 only 2010 only 2002–2009 2002–2009 Eligible employees GEB members GEB members and GMDs Selected Managing Directors and GMDs in the Investment Bank GEB members and other senior employees (approximately 900 employees) Selected employees (approximately 17,000 employees between 2002 and 2009) GEB members and Group Managing Board Instrument Performance shares Shares Shares Performance shares Performance conditions Dependent on whether the business division makes a loss (the amount forfeited de- pends on the extent of the loss and generally ranges from 10% to 50% of the award por- tion due to vest) Dependent on the level of reduction in risk-weighted assets achieved and the average published return on risk-weighted assets in the Invest- ment Bank in 2012, 2013 and 2014 Dependent on share price at the end of the five-year period The number of UBS shares delivered can be between zero and two times the number of performance shares granted, depending on whether performance targets relating to economic profit (EP) and relative total shareholder return (TSR) have been achieved Restrictions / other conditions Subject to continued employment and harmful act provisions Subject to continued employment and harmful act provi- sions Subject to continued employment and harmful act provisions Subject to continued employment and harmful act provisions Vesting period Vests in full three years after grant Vests in equal installments over a five-year period Vests in full three years after grant 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 Share-settled stock ap- preciation rights (SAR) or stock options with a strike price not less than the market value of a UBS share on the date of grant Share-settled stock ap- preciation rights (SAR) or stock options with a strike price not less than the market value of a UBS share on the date of grant None None 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 Vests in full three years after 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 Status as of March 2016 Expired Vesting and Perfor- mance measurement continue into 2016 and 2017 Expired Expired Expired (some option / SARs remain exercis- able) Expired (some options / SARs remain exercis- able) 381 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation List of tables Share and option ownership / entitlements of GEB members Total of all vested and unvested shares of GEB members Number of shares of BoD members Total of all blocked and unblocked shares of BoD members Vested and unvested options of GEB members Loans granted to GEB members Loans granted to BoD members Compensation paid to former BoD and GEB members Page 383 383 384 384 385 386 386 386 382 Advisory vote Audited | Share and option ownership / entitlements of GEB members1 Name, function on 31 December Sergio P. Ermotti, Group Chief Executive Officer Markus U. Diethelm, Group General Counsel Lukas Gähwiler, President Personal & Corporate Banking and President UBS Switzerland Ulrich Körner, President Asset Management and President UBS EMEA Philip J. Lofts, Group Chief Risk Officer Robert J. McCann, President Wealth Management Americas and President UBS Americas Tom Naratil, Group Chief Financial Officer and Group Chief Operating Officer Andrea Orcel, President Investment Bank Chi-Won Yoon, President UBS Asia Pacific Jürg Zeltner, President Wealth Management Total 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Number of unvested shares / at risk2 947,964 670,935 447,694 528,973 558,657 522,769 642,813 713,051 540,288 611,479 1,010,805 983,028 598,172 523,751 933,686 915,399 383,164 492,093 683,767 675,211 Number of vested shares Total number of shares Potentially conferred voting rights in % 155,736 97,589 61,797 0 1,515 1,052 95,597 292,519 247,929 204,346 0 62,901 310,054 288,151 117,646 408,296 683,994 507,602 3,721 0 1,103,700 768,524 509,491 528,973 560,172 523,821 738,410 1,005,570 788,217 815,825 1,010,805 1,045,929 908,226 811,902 1,051,332 1,323,695 1,067,158 999,695 687,488 675,211 8,424,999 8,499,145 0.059 0.039 0.027 0.027 0.030 0.027 0.039 0.051 0.042 0.042 0.054 0.053 0.049 0.041 0.056 0.068 0.057 0.051 0.037 0.034 0.450 0.434 Number of options3 0 Potentially conferred voting rights in %4 0.000 0 0 0 0 0 0 0 277,082 394,172 0 0 555,115 721,125 0 0 483,210 515,180 86,279 108,121 1,401,686 1,738,598 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.015 0.020 0.000 0.000 0.030 0.037 0.000 0.000 0.026 0.026 0.005 0.006 0.075 0.089 6,747,010 6,636,689 1,677,989 1,862,456 1 This table includes all vested and unvested shares and options of GEB members, including those held by 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 the “Our deferred variable compensation plans for 2015” section in this report for more information on the plans. 3 Refer to “Note 29 Equity participation and other compensation plans” in the “Consolidated financial statements” section of the Annual Report 2015 for more information. 4 No conversion rights are outstanding. Audited | Total of all vested and unvested shares of GEB members1, 2 Shares on 31 December 2015 8,424,999 1,677,989 1,148,988 1,561,296 2,004,014 1,314,398 Total of which vested of which vesting 2016 2017 2018 2019 Shares on 31 December 2014 8,499,145 1,862,456 2,112,409 1,148,988 1,538,703 1,263,098 2015 2016 2017 2018 2020 718,314 2019 573,491 1 Includes shares held by 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 the “Our deferred variable compensation plans for 2015” section in this report for more information on the plans. 383 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Audited | Number of shares of BoD members1 Name, function Axel A. Weber, Chairman Michel Demaré, Vice Chairman David Sidwell, Senior Independent Director Reto Francioni, member Ann F. Godbehere, member Axel P. Lehmann, member Helmut Panke, former member2 William G. Parrett, member Isabelle Romy, member Beatrice Weder di Mauro, member Joseph Yam, member Total on 31 December Number of shares held Voting rights in % 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 488,889 333,333 215,992 181,246 163,317 185,181 28,787 11,859 169,054 139,653 252,761 217,373 – 182,009 104,271 100,019 66,490 44,217 71,261 45,424 87,354 66,863 1,648,176 1,507,177 0.026 0.017 0.012 0.009 0.009 0.009 0.002 0.001 0.009 0.007 0.014 0.011 – 0.009 0.006 0.005 0.004 0.002 0.004 0.002 0.005 0.003 0.088 0.077 1 This table includes blocked and unblocked shares held by BoD members, including those held by related parties. No options were granted in 2015 and 2014. 2 Helmut Panke did not stand for re-election at the AGM on 7 May 2015. Audited | Total of all blocked and unblocked shares of BoD members1 Total of which unblocked Shares on 31 December 2015 1,648,176 211,748 Shares on 31 December 2014 1 Includes shares held by related parties. 1,507,177 228,189 2016 232,917 2015 172,868 of which blocked until 2017 384,118 2016 261,377 2018 416,408 2017 408,570 2019 402,985 2018 436,173 384 Advisory vote Audited | Vested and unvested options of GEB members1 on 31 December Total number of options2 Number of options3 Year of grant Vesting date Expiry date Strike price on 31 December Total number of options2 Number of options3 Year of grant Vesting date Expiry date Strike price Philip J. Lofts, Group Chief Risk Officer 2015 277,082 117,227 2006 01.03.2009 28.02.2016 CHF 72.57 2014 394,172 85,256 74,599 117,090 117,227 85,256 74,599 2007 01.03.2010 28.02.2017 CHF 73.67 2008 01.03.2011 28.02.2018 CHF 35.66 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 Tom Naratil, Group Chief Financial Officer and Group Chief Operating Officer 2015 555,115 2014 721,125 142,198 131,277 181,640 100,000 166,010 142,198 131,277 181,640 100,000 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 2009 01.03.2012 27.02.2019 CHF 11.35 2005 01.03.2008 28.02.2015 USD 44.81 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 2009 01.03.2012 27.02.2019 CHF 11.35 Chi-Won Yoon, President UBS Asia Pacific 2015 483,210 2014 515,180 21,316 21,314 21,311 8,881 8,880 8,880 42,628 350,000 10,659 10,657 10,654 21,316 21,314 21,311 8,881 8,880 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 2009 01.03.2012 27.02.2019 CHF 11.35 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 8,880 42,628 2007 01.03.2010 28.02.2017 CHF 67.00 2008 01.03.2011 28.02.2018 CHF 32.45 350,000 2009 01.03.2012 27.02.2019 CHF 11.35 Jürg Zeltner, President Wealth Management 2015 86,279 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 2008 01.03.2011 28.02.2018 CHF 35.66 2014 108,121 7,106 2005 01.03.2006 28.02.2015 CHF 47.58 7,103 7,103 93 161 149 127 7,106 7,103 7,103 110 242 230 221 7,105 7,105 7,103 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 2008 01.03.2011 28.02.2018 CHF 35.66 1 This table includes all options of GEB members, including those held by related parties. Sergio P. Ermotti, Markus U. Diethelm, Lukas Gähwiler, Ulrich Körner, Robert J. McCann and Andrea Orcel did not hold any options on 31 December 2014 and 31 December 2015, respectively. 2 No conversion rights are outstanding. 3 Refer to “Note 29 Equity participation and other compensation plans” in the “Consolidated financial state- ments” section of the Annual Report 2015 for more information. 385 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation Audited | Loans granted to GEB members1 In line with article 38 of our Articles of Association, GEB members may be granted loans, fixed advances and mortgages. Such loans are made in the ordinary course of business on substantially the same terms as those granted to other employees, including inter- est rates and collateral, and neither involve more than the normal risk of collectability nor contain any other unfavorable features for the firm. The total amount of such loans shall not exceed CHF 20 million per GEB member. CHF, except where indicated2 Name, function Ulrich Körner, President Asset Management and President UBS EMEA (highest loan in 2015) Ulrich Körner, President Asset Management and President UBS EMEA (highest loan in 2014) Aggregate of all GEB members on 31 December 2015 2014 2015 2014 Loans3 10,621,777 7,600,000 29,032,017 26,281,207 1 No loans have been granted to related parties of the GEB members at conditions not customary in the market. 2 Local currencies are converted into CHF using the exchange rates as detailed in “Note 36 Currency translation rates” in the “Consolidated financial statements” section of the Annual Report 2015. 3 All loans granted are secured loans. Audited | Loans granted to BoD members1 In line with article 33 of our Articles of Association, loans to inde- pendent BoD members are made in the ordinary course of busi- ness at general market conditions. The Chairman, as a non-inde- pendent member may receive a loan in the ordinary course of business on substantially the same terms as those granted to employees, including interest rates and collateral, and neither involve more than the normal risk of collectability nor contain any other unfavorable features for the firm. The total amount of such loans shall not exceed CHF 20 million per BoD member. CHF, except where indicated2 Aggregate of all BoD members on 31 December 2015 2014 Loans3, 4 3,604,950 1,100,000 1 No loans have been granted to related parties of the BoD members at conditions not customary in the market. 2 Local currencies are converted into CHF using the exchange rates as detailed in “Note 36 Currency translation rates” in the “Consolidated financial statements” section of the Annual Report 2015. 3 All loans granted are secured loans. 4 CHF 600,000 for Reto Francioni and CHF 3,004,950 for William G. Parrett in 2015 and CHF 1,100,000 for Reto Francioni in 2014. Audited | Compensation paid to former BoD and GEB members1 CHF, except where indicated2 Former BoD members Aggregate of all former GEB members3 Aggregate of all former BoD and GEB members For the year Compensation Benefits 2015 2014 2015 2014 2015 2014 0 0 435,448 0 435,448 0 0 0 39,999 37,714 39,999 37,714 Total 0 0 475,447 37,714 475,447 37,714 1 Compensation or remuneration that is connected with the former members’ activity on the BoD or GEB or that is not at market conditions. 2 Local currencies are converted into CHF using the exchange rates as detailed in “Note 36 Currency translation rates” in the “Consolidated financial statements” section of the Annual Report 2015. 3 Includes payments in 2015 to two former GEB members and a payment in 2014 to one former GEB member. 386 Advisory vote Provisions of the Articles of Association in relation to compensation Under the say-on-pay provisions in Switzerland, shareholders of Swiss-listed companies have significant influence over board and management compen- sation. This is achieved by means of an annual binding say-on-pay vote and through additional provisions in the Articles of Association (AoA). The Group’s revised AoA were approved at the AGM 2014 and include the following provisions related to compensation: Say-on-pay: The AGM shall approve the proposals of the BoD in relation to the maximum aggregate amount of compen- sation of the BoD for the period until the next AGM, the maximum aggregate amount of fixed compensation of the GEB for the following financial year and the aggregate amount of variable compensa- tion of the GEB for the preceding financial year. The BoD may submit for approval deviating or additional proposals. In the event the AGM does not approve a proposal the BoD shall determine, taking into account all relevant factors, an aggregate amount or partial amounts for subsequent approval by shareholders. Principles of compensation: compensation of the BoD comprises a base remunera- tion and may comprise other compensa- tion elements and benefits. Compen- sation of the GEB consists of fixed and variable compensation elements. Variable compensation elements depend on quantitative and qualitative performance measures as determined by the BoD. Remuneration of the BoD and com- pensation of the GEB may be paid or granted in the form of cash, shares, financial instruments or units, in kind or in the form of benefits. The BoD deter- mines the key features such as grant, vesting, exercise and forfeiture conditions and applicable harmful acts provisions. Additional amount for GEB members hired after the vote on the aggregate amount of compensation by the AGM: for the compensation of GEB members who will be appointed after the approval of compensation by the AGM, and to the extent that the aggregate amount of compensation as approved does not suffice, an amount of up to 40% of the average of total annual compensation paid or granted to the GEB during the previous three years is available without further approval of the AGM. ➔ Refer to our corporate governance website at www.ubs.com/governance 387 Corporate governance, responsibility and compensationAdvisory vote Corporate governance, responsibility and compensation Compensation 388 Advisory vote Consolidated financial statements Consolidated financial statements Table of contents 392 Introduction and accounting principles 393 UBS Group AG consolidated financial statements 393 Management’s report on internal control over financial reporting 394 Report of independent registered public accounting firm on internal control over financial reporting 396 Report of the statutory auditor and the independent registered public accounting firm on the consolidated financial statements Income statement 398 399 Statement of comprehensive income 401 Balance sheet 402 Statement of changes in equity 406 UBS Group AG shares issued and treasury shares held 407 Statement of cash flows 409 Notes to the UBS Group AG consolidated financial statements 1 Summary of significant accounting policies Segment reporting Income statement notes 3 Net interest and trading income Net fee and commission income Other income Personnel expenses General and administrative expenses Income taxes Earnings per share (EPS) and shares outstanding 2 4 5 6 7 8 9 409 432 437 437 438 438 439 439 440 444 390 445 445 446 447 448 449 457 458 459 461 Balance sheet notes: assets Due from banks and loans (held at amortized cost) 10 11 Cash collateral on securities borrowed and lent, reverse repurchase and repurchase agreements, and derivative instruments Allowances and provisions for credit losses Trading portfolio Derivative instruments and hedge accounting Financial investments available-for-sale Property, equipment and software 14 15 12 13 16 17 Goodwill and intangible assets 18 Other assets 462 Balance sheet notes: liabilities 462 19 20 21 Due to banks and customers Financial liabilities designated at fair value Debt issued held at amortized cost Provisions and contingent liabilities 22 23 Other liabilities 479 Additional information 479 24 Fair value measurement Restricted and transferred financial assets 25 26 Offsetting financial assets and financial liabilities Financial assets and liabilities – additional 27 information Pension and other post-employment benefit plans Equity participation and other compensation plans Interests in subsidiaries and other entities Business combinations Changes in organization and disposals 28 31 30 29 32 33 Operating leases and finance leases 34 Related parties Invested assets and net new money Currency translation rates Events after the reporting period Swiss GAAP requirements 35 36 37 38 462 463 465 478 504 507 510 513 530 540 549 550 552 553 556 557 557 558 560 UBS AG consolidated financial information 561 UBS AG (consolidated) key figures 562 Comparison UBS Group AG (consolidated) vs UBS AG 616 11 (consolidated) 563 UBS AG consolidated financial statements 563 Management’s report on internal control over financial reporting 564 Report of independent registered public accounting firm on internal control over financial reporting 566 Report of the statutory auditor and the independent registered public accounting firm on the consolidated financial statements Income statement 568 569 Statement of comprehensive income 571 Balance sheet 572 Statement of changes in equity 576 UBS AG shares issued and treasury shares held 577 Statement of cash flows 579 Notes to the UBS AG consolidated financial statements 579 Summary of significant accounting policies Segment reporting 603 2 1 608 608 609 609 610 610 611 614 4 5 6 7 8 9 Income statement notes 3 Net interest and trading income Net fee and commission income Other income Personnel expenses General and administrative expenses Income taxes Earnings per share (EPS) and shares outstanding 615 Balance sheet notes: assets 615 10 Due from banks and loans (held at amortized cost) Cash collateral on securities borrowed and lent, reverse repurchase and repurchase agreements, and derivative instruments Allowances and provisions for credit losses Trading portfolio Derivative instruments and hedge accounting Financial investments available-for-sale Property, equipment and software 16 17 Goodwill and intangible assets 18 Other assets 632 Balance sheet notes: liabilities 632 19 Due to banks and customers Financial liabilities designated at fair value Debt issued held at amortized cost Provisions and contingent liabilities 22 23 Other liabilities 649 Additional information 649 24 Fair value measurement Restricted and transferred financial assets 25 26 Offsetting financial assets and financial liabilities Financial assets and liabilities – additional 27 information Pension and other post-employment benefit plans Equity participation and other compensation plans Interests in subsidiaries and other entities Business combinations Changes in organization and disposals 31 28 30 29 32 33 Operating leases and finance leases 34 Related parties Invested assets and net new money 35 36 Currency translation rates 37 38 39 Events after the reporting period Swiss GAAP requirements Supplemental guarantor information required under SEC regulations 12 13 14 15 20 21 617 618 619 627 628 629 631 632 633 635 648 674 677 680 683 700 707 716 717 719 720 723 724 724 725 727 391 Consolidated financial statements Consolidated financial statements Introduction and accounting principles This section of the Annual Report consists of: – the audited consolidated financial statements of UBS Group AG for 2015, prepared in accordance with International Finan- cial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB); and – the audited consolidated financial statements of UBS AG for 2015, prepared in accordance with IFRS as issued by the IASB The significant accounting policies applied in the preparation of the UBS AG consolidated financial statements are described in Note 1 to the financial statements. Except where otherwise explic- itly stated in these financial statements, all financial information is in Swiss francs (CHF) and presented on a consolidated basis under IFRS, and all references to UBS AG refer to UBS AG (consolidated) and not to UBS AG (standalone). The significant accounting policies applied in the preparation of the UBS Group AG consolidated financial statements are described in Note 1 to the financial statements. Except where otherwise explicitly stated in these financial statements, all financial informa- tion is in Swiss francs (CHF) and presented on a consolidated basis under IFRS, and all references to UBS refer to the consolidated UBS Group and not to UBS Group AG on a standalone basis. All references to 2015, 2014 and 2013 refer to the financial years ended 31 December 2015, 2014 and 2013, respectively. The consolidated financial statements of UBS Group AG and UBS AG were audited by Ernst & Young Ltd. Refer to “Critical accounting policies” within the “Financial and operating performance” section of this report for more information on critical accounting policies as defined by SEC requirements. 392 UBS Group AG consolidated financial statements Management’s report on internal control over financial reporting Management’s responsibility for internal control over financial reporting The Board of Directors and management of UBS Group AG (UBS) are responsible for establishing and maintaining adequate inter- nal control over financial reporting. UBS’s internal control over financial reporting is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with IFRS as issued by the IASB. UBS’s internal control over financial reporting includes those policies and procedures that: – Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; – Provide reasonable assurance that transactions are recorded as necessary to permit preparation and fair presentation of 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 financial 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’s assessment of internal control over financial reporting as of 31 December 2015 UBS management has assessed the effectiveness of UBS’s internal control over financial reporting as of 31 December 2015 based on the criteria set forth by the Committee of Sponsoring Organiza- tions of the Treadway Commission (COSO) in Internal Control Integrated Framework (2013 Framework). Based on this assess- ment, management believes that, as of 31 December 2015, UBS’s internal control over financial reporting was effective. The effectiveness of UBS’s internal control over financial report- ing as of 31 December 2015 has been audited by Ernst & Young Ltd, UBS’s independent registered public accounting firm, as stated in their report appearing on pages 394 to 395, which expresses an unqualified opinion on the effectiveness of UBS’s internal control over financial reporting as of 31 December 2015. 393 Consolidated financial statements Consolidated financial statements UBS Group AG consolidated financial statements 394 395 Consolidated financial statements Consolidated financial statements UBS Group AG consolidated financial statements 396 397 Consolidated financial statements Consolidated financial statements UBS Group AG consolidated financial statements Audited | Income statement CHF million, except per share data Note 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 and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) attributable to preferred noteholders Net profit / (loss) attributable to non-controlling interests Net profit / (loss) attributable to UBS Group AG shareholders Earnings per share (CHF) Basic Diluted 3 3 3 12 4 3 5 6 7 16 17 8 9 9 31.12.15 13,177 (6,445) 6,732 (117) 6,615 17,140 5,742 1,107 30,605 15,981 8,107 920 107 25,116 5,489 (898) 6,386 183 6,203 1.68 1.64 For the year ended % change from 31.12.14 31.12.13 31.12.14 13,194 (6,639) 6,555 (78) 6,477 17,076 3,842 632 28,027 15,280 9,387 817 83 25,567 2,461 (1,180) 3,640 142 32 3,466 0.93 0.91 13,137 (7,351) 5,786 (50) 5,736 16,287 5,130 580 27,732 15,182 8,380 816 83 24,461 3,272 (110) 3,381 204 5 3,172 0.84 0.83 0 (3) 3 50 2 0 49 75 9 5 (14) 13 29 (2) 123 (24) 75 (100) 472 79 81 80 398 Statement of comprehensive income CHF million Comprehensive income attributable to UBS Group AG shareholders Net profit / (loss) Other comprehensive income that may be reclassified to the income statement 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, net of tax Financial investments available-for-sale Net unrealized gains / (losses) on financial investments available-for-sale, before tax Impairment charges reclassified to the income statement from equity Realized gains reclassified to the income statement from equity Realized losses reclassified to the income statement from equity Income tax relating to net unrealized gains / (losses) on financial investments available-for-sale Subtotal financial investments available-for-sale, net of tax Cash flow hedges Effective portion of changes in fair value of derivative instruments designated as cash flow hedges, before tax Net realized (gains) / losses reclassified to the income statement from equity Income tax relating to cash flow hedges Subtotal cash flow hedges, net of tax Total other comprehensive income that may be reclassified to the income statement, net of tax Other comprehensive income that will not be reclassified to the income statement Defined benefit plans Gains / (losses) on defined benefit plans, before tax Income tax relating to defined benefit plans Subtotal defined benefit plans, net of tax Property revaluation surplus Gains on property revaluation, before tax Net (gains) / losses reclassified to retained earnings Income tax relating to gains on property revaluation Subtotal changes in property revaluation surplus, net of tax Total other comprehensive income that will not be reclassified to the income statement, net of tax 298 (1,172) Total other comprehensive income Total comprehensive income attributable to UBS Group AG shareholders (506) 5,698 1,453 4,920 Table continues on the next page. For the year ended 31.12.15 31.12.14 31.12.13 6,203 3,466 3,172 (140) (90) (2) (231) 175 1 (292) 44 8 (63) 544 (1,182) 128 (509) (804) 316 (18) 298 0 0 0 0 1,800 2 (7) 1,795 335 75 (243) 25 (51) 141 2,068 (1,185) (195) 689 2,625 (1,410) 238 (1,172) 0 0 0 0 (440) (36) 5 (471) (57) 41 (265) 56 71 (154) (652) (1,261) 393 (1,520) (2,145) 1,178 (239) 939 0 (6) 0 (6) 933 (1,211) 1,961 399 Consolidated financial statements Consolidated financial statements UBS Group AG consolidated financial statements Statement of comprehensive income (continued) Table continued from previous page. CHF million Comprehensive income attributable to preferred noteholders Net profit / (loss) Other comprehensive income that will not be reclassified to the income statement Foreign currency translation movements, before tax Income tax relating to foreign currency translation movements Subtotal foreign currency translation, net of tax Total other comprehensive income that will not be reclassified to the income statement, net of tax Total comprehensive income attributable to preferred noteholders Comprehensive income attributable to non-controlling interests Net profit / (loss) Other comprehensive income that may be reclassified to the income statement Other comprehensive income that may be reclassified to the income statement, before tax Income tax relating to other comprehensive income that may be reclassified to the income statement Total other comprehensive income that may be reclassified to the income statement, net of tax Other comprehensive income that will not be reclassified to the income statement Foreign currency translation movements, before tax Income tax relating to foreign currency translation movements Subtotal foreign currency translation, net of tax Gains / (losses) on defined benefit plans, before tax Income tax relating to defined benefit plans Subtotal defined benefit plans, net of tax Total other comprehensive income that will not be reclassified to the income statement, net of tax Total other comprehensive income Total comprehensive income attributable to non-controlling interests Total comprehensive income Net profit / (loss) Other comprehensive income of which: other comprehensive income that may be reclassified to the income statement of which: other comprehensive income that will not be reclassified to the income statement Total comprehensive income For the year ended 31.12.15 31.12.14 31.12.13 142 80 0 80 80 221 32 5 (2) 3 80 0 80 (44) 8 (36) 44 47 79 204 355 0 355 355 559 5 0 0 0 (1) 0 (1) 0 0 0 (1) (1) 4 3,640 1,580 2,628 (1,048) 5,220 3,381 (857) (2,145) 1,288 2,524 183 (12) 2 (10) (95) 0 (95) 6 (1) 5 (90) (99) 83 6,386 (605) (814) 208 5,781 400 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 which may be sold or repledged by counterparties Positive replacement values Cash collateral receivables on derivative instruments Financial assets designated at fair value Loans Financial investments available-for-sale Investments in associates Property, equipment and software 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 Debt issued Provisions Other liabilities Total liabilities Equity Share capital Share premium Treasury shares Retained earnings Other comprehensive income recognized directly in equity, net of tax Equity attributable to UBS Group AG shareholders Equity attributable to non-controlling interests Total equity Total liabilities and equity Note 31.12.15 31.12.14 31.12.14 % change from 10, 12 11, 26 11, 26 13, 24 25 14, 24, 26 11, 26 24, 26, 27 10, 12 15, 24 30 16 17 8 18 19 11, 26 11, 26 13, 24 14, 24, 26 11, 26 20, 24, 26 19 21 22 8, 23 91,306 11,948 25,584 67,893 124,035 51,943 167,435 23,763 6,146 311,954 62,543 954 7,695 6,568 12,835 22,160 942,819 11,836 8,029 9,653 29,137 162,430 38,282 62,995 390,185 93,147 4,164 75,652 104,073 13,334 24,063 68,414 138,156 56,018 256,978 30,979 4,951 315,757 57,159 927 6,854 6,785 11,060 22,988 1,062,478 10,492 9,180 11,818 27,958 254,101 42,372 75,297 410,207 91,207 4,366 71,112 885,511 1,008,110 385 31,164 (1,693) 29,504 (4,047) 55,313 1,995 57,308 372 32,590 (1,393) 22,134 (3,093) 50,608 3,760 54,368 942,819 1,062,478 (12) (10) 6 (1) (10) (7) (35) (23) 24 (1) 9 3 12 (3) 16 (4) (11) 13 (13) (18) 4 (36) (10) (16) (5) 2 (5) 6 (12) 3 (4) 22 33 31 9 (47) 5 (11) 401 Consolidated financial statements Consolidated financial statements UBS Group AG consolidated financial statements Statement of changes in equity CHF million Balance as of 1 January 2013 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Equity classified as obligation to purchase own shares Preferred notes New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – foreign currency translation Balance as of 31 December 2013 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Equity classified as obligation to purchase own shares Preferred notes New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – foreign currency translation Changes to legal structure / reorganization: Effect of establishment of UBS Group AG Changes to legal structure / reorganization: Increase in UBS Group AG’s ownership interest in UBS AG Balance as of 31 December 2014 402 Share premium 33,862 Treasury shares (1,071) Retained earnings 16,491 Share capital 384 1 (846) 887 203 30 305 91 (564)2 (9) (11) 6 4,111 3,172 939 33,906 (1,031) 20,608 (5,866) (7,425) 95 1,463 48,002 384 0 (918) 519 24 3 619 3 (938)2 45 2,295 3,466 (1,172) (2,219) 1,449 22,134 (37) 24 372 (3,078) 2,006 37 32,590 (1,393) Other comprehensive income recognized directly in equity, net of tax1 (3,715) of which: Financial invest- of which: ments avail- able-for-sale 249 of which: Cash flow hedges 2,983 Total equity attributable to UBS Group AG shareholders 45,949 Foreign currency translation (6,954) Preferred Non-controlling noteholders interests Total equity 3,109 42 49,100 1 (846) 887 203 30 305 91 (564) (9) 0 6 (11) 1,961 3,172 (2,145) 939 (918) 519 24 619 (938) 45 0 0 3 3 0 0 0 0 4,920 3,466 2,625 (1,172) (4,968) 3,299 50,608 1 (846) 887 203 30 305 91 (773) (9) (1,572) 6 (11) 2,524 3,381 (2,145) 939 355 49,936 (918) 519 24 619 (1,084) 45 0 3 3 1 1 0 5,220 3,640 2,628 (1,208) 160 0 0 54,368 (204) (6) (1,572) 0 559 204 355 1,893 (142) 1 221 142 80 (1,974) 0 4 5 (1) 41 (4) 1 79 32 3 (36) 80 6,942 (3,299) 3,760 (2,151) (2,145) (471) (471) (154) (154) (1,520) (1,520) 2,625 2,625 366 (218) (3,093) 1,795 1,795 593 (369) (5,406) 141 141 (25) 16 228 689 689 (203) 135 2,084 Other comprehensive income recognized directly in equity, net of tax1 (3,715) of which: Foreign currency translation of which: Financial invest- ments avail- able-for-sale (6,954) 249 of which: Cash flow hedges 2,983 Total equity attributable to UBS Group AG shareholders 45,949 Preferred noteholders Non-controlling interests 3,109 42 Total equity 49,100 Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity Statement of changes in equity CHF million Balance as of 1 January 2013 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Preferred notes Equity classified as obligation to purchase own shares New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) net of tax – foreign currency translation Balance as of 31 December 2013 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Preferred notes Equity classified as obligation to purchase own shares New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – foreign currency translation Changes to legal structure / reorganization: Effect of establishment of UBS Group AG Changes to legal structure / reorganization: Increase in UBS Group AG’s ownership interest in UBS AG Balance as of 31 December 2014 Share premium 33,862 Treasury shares (1,071) Retained earnings 16,491 Share capital 384 1 (846) 887 (918) 519 203 30 305 91 (564)2 (9) (11) 24 3 619 3 (938)2 45 384 0 (37) 24 372 (3,078) 2,006 37 32,590 (1,393) 6 4,111 3,172 939 2,295 3,466 (1,172) (2,219) 1,449 22,134 1 (846) 887 203 30 305 91 (564) (9) 0 6 (11) 1,961 3,172 (2,145) 939 0 (2,151) (2,145) (471) (471) (154) (154) (1,520) (1,520) 33,906 (1,031) 20,608 (5,866) (7,425) 95 1,463 48,002 0 (918) 519 24 3 619 3 (938) 45 0 0 0 4,920 3,466 2,625 (1,172) 0 (4,968) 3,299 50,608 2,625 2,625 366 (218) (3,093) 1,795 1,795 593 (369) (5,406) 141 141 (25) 16 228 689 689 (203) 135 2,084 1 (846) 887 203 30 305 91 (773) (9) (1,572) 6 (11) 2,524 3,381 (2,145) 939 355 49,936 0 (918) 519 24 3 619 3 (204) (6) 4 5 (1) 41 (1,572) 0 559 204 355 1,893 (142) 1 221 142 80 (1,974) 0 (4) (1,084) 1 79 32 3 (36) 80 6,942 (3,299) 3,760 45 1 1 0 5,220 3,640 2,628 (1,208) 160 0 0 54,368 403 Consolidated financial statements Share premium 32,590 Treasury shares (1,393) Retained earnings 22,134 Share capital 372 0 (1,538) 1,275 (40) 33 302 9 (2,760)2 1 Other comprehensive income recognized directly in equity, net of tax1 (3,093) of which: Financial invest- of which: ments avail- able-for-sale 228 Total equity attributable to UBS Group AG shareholders of which: Cash flow hedges 2,084 Foreign currency translation (5,406) Preferred Non-controlling noteholders interests 3,760 Total equity 54,368 50,608 0 (1,538) 1,275 (40) 33 302 (2,760) 9 1 0 0 0 5,698 6,203 (804) 298 0 1,724 55,313 0 (1,538) 1,275 (40) 33 302 9 1 0 1 (1) 5,781 6,386 (814) 304 (95) 0 57,308 (124) (2,884) 1 (1) 83 183 (10) 5 (95) (1,724) 1,995 6,502 6,203 298 868 29,504 (804) (804) (231) (231) (150) (4,047) (220) (5,857) (63) (63) 7 172 (509) (509) 63 1,638 Consolidated financial statements UBS Group AG consolidated financial statements Statement of changes in equity (continued) CHF million Balance as of 31 December 2014 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Equity classified as obligation to purchase own shares Preferred notes New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – foreign currency translation Changes to legal structure / reorganization: Increase in UBS Group AG’s ownership interest in UBS AG Balance as of 31 December 2015 13 385 1,029 31,164 (37) (1,693) 1 Excludes defined benefit plans that are recorded directly in retained earnings. 2 Reflects the payment out of the capital contribution reserve of UBS Group AG (2014 and 2013 UBS AG) of CHF 0.75 (2014: CHF 0.25, 2013: CHF 0.15) per CHF 0.10 par value share. 404 Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity Statement of changes in equity (continued) CHF million Balance as of 31 December 2014 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Preferred notes Equity classified as obligation to purchase own shares New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – foreign currency translation Changes to legal structure / reorganization: Increase in UBS Group AG’s ownership interest in UBS AG Balance as of 31 December 2015 2013: CHF 0.15) per CHF 0.10 par value share. Share premium 32,590 Treasury shares (1,393) Retained earnings 22,134 Share capital 372 0 (1,538) 1,275 (40) 33 302 9 1 (2,760)2 6,502 6,203 298 868 29,504 Other comprehensive income recognized directly in equity, net of tax1 (3,093) of which: Foreign currency translation of which: Financial invest- ments avail- able-for-sale (5,406) 228 of which: Cash flow hedges 2,084 1 Excludes defined benefit plans that are recorded directly in retained earnings. 2 Reflects the payment out of the capital contribution reserve of UBS Group AG (2014 and 2013 UBS AG) of CHF 0.75 (2014: CHF 0.25, 13 385 1,029 31,164 (37) (1,693) (150) (4,047) (220) (5,857) (804) (804) (231) (231) (63) (63) 7 172 (509) (509) 63 1,638 Total equity attributable to UBS Group AG shareholders 50,608 0 (1,538) 1,275 (40) 33 302 9 (2,760) 1 0 0 0 5,698 6,203 (804) 298 0 1,724 55,313 Preferred noteholders Non-controlling interests 3,760 Total equity 54,368 0 (1,538) 1,275 (40) 33 302 9 (124) (2,884) 1 0 1 (1) 5,781 6,386 (814) 304 (95) 0 57,308 1 (1) 83 183 (10) 5 (95) (1,724) 1,995 405 Consolidated financial statements Consolidated financial statements UBS Group AG consolidated financial statements UBS Group AG shares issued and treasury shares held Number of shares Shares issued Balance at the beginning of the year Issuance of shares Balance at the end of the year Treasury shares2 Balance at the beginning of the year Acquisitions Disposals Balance at the end of the year For the year ended 31.12.15 31.12.141 3,717,128,324 132,603,211 3,849,731,535 87,871,737 89,594,586 (78,760,048) 98,706,275 3,717,128,324 3,717,128,324 73,800,252 49,271,831 (35,200,346) 87,871,737 1 UBS Group AG was incorporated on 10 June 2014 as a wholly owned subsidiary of UBS AG with a share capital of CHF 100,000 divided into 1,000,000 shares. 2 Comparative information represents movements in UBS AG treasury shares up to 27 November 2014 and movements in UBS Group AG treasury shares starting with 28 November 2014. On 28 November 2014, all UBS AG treasury shares were exchanged for UBS Group AG treasury shares. Conditional share capital As of 31 December 2015, 131,029,690 additional UBS Group AG shares could have been issued to fund UBS’s employee share option programs. Additional conditional capital up to a maximum number of 380,000,000 UBS Group AG shares was available as of 31 Decem- ber 2015 for conversion rights and warrants granted in connection with the issuance of bonds or similar financial instruments. 406 Statement of cash flows CHF million Cash flow from / (used in) operating activities Net profit / (loss) Adjustments to reconcile net profit to cash flow from / (used in) operating activities Non-cash items included in net profit and other adjustments: Depreciation and impairment of property, equipment and software Amortization and impairment 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 Other net adjustments Net change in operating assets and liabilities: Due from / to banks Cash collateral on securities borrowed and reverse repurchase agreements Cash collateral on securities lent and repurchase agreements Trading portfolio, replacement values and financial assets designated at fair value Cash collateral on derivative instruments Loans Due to customers Other assets, provisions 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 assets2 Purchase of property, equipment and software Disposal of property, equipment and software Net (investment in) / divestment of financial investments available-for-sale3 Net cash flow from / (used in) investing activities Table continues on the next page. 31.12.151 For the year ended 31.12.141 31.12.131 6,386 3,640 3,381 920 107 117 (169) (1,613) (934) (1,451) 3,686 1,763 (2,712) (2,909) 5,505 3,285 1,386 (18,404) 8,696 (551) 3,109 (13) 477 (1,841) 542 (7,605) (8,441) 817 83 78 (94) (1,635) (227) 2,135 (7,250) (1,235) 32,262 (3,698) (2,880) (7,301) (20,427) 8,804 4,734 (600) 7,205 (18) 70 (1,915) 350 4,108 2,596 816 83 50 (49) (545) (522) 3,988 5,326 (7,551) 43,754 (23,659) 43,944 (22,412) (7,108) 19,195 (3,935) (382) 54,374 (49) 136 (1,236) 639 5,966 5,457 407 Consolidated financial statements Consolidated financial statements UBS Group AG consolidated financial statements Statement of cash flows (continued) Table continued from previous page. CHF million 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 Distributions paid on UBS shares Issuance of long-term debt, including financial liabilities designated at fair value Repayment of long-term debt, including financial liabilities designated at fair value Net changes of non-controlling interests and preferred notes Net cash flow from / (used in) financing activities Effects of exchange rate differences on cash and cash equivalents Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents comprise: Cash and balances with central banks Due from banks Money market paper4 Total5 Additional information Net cash flow from / (used in) operating activities include: Cash received as interest Cash paid as interest Cash received as dividends on equity investments, investment funds and associates6 31.12.151 For the year ended 31.12.141 31.12.131 (6,404) (845) 0 (2,760) 47,790 (44,221) (156) (6,595) (1,742) (13,670) 116,715 103,044 91,306 10,814 924 103,044 11,144 5,270 2,120 (2,921) (694) 0 (938) 40,982 (34,210) (113) 2,108 8,522 20,430 96,284 116,715 104,073 11,772 869 116,715 11,321 5,360 1,961 (4,290) (341) 1 (564) 28,014 (68,954) (1,421) (47,555) (2,705) 9,569 86,715 96,284 80,879 11,117 4,288 96,284 12,148 7,176 1,421 1 In 2015, UBS refined its definition of cash and cash equivalents to exclude cash collateral receivables on derivatives with bank counterparties. Prior periods were restated. Refer to Note 1b for more informa- tion. 2 Includes dividends received from associates. 3 Includes gross cash inflows from sales and maturities (CHF 93,584 million for the year ended 31 December 2015, CHF 140,438 million for the year ended 31 December 2014, CHF 153,887 million for the year ended 31 December 2013) and gross cash outflows from purchases of (CHF 101,189 million for the year ended 31 December 2015, CHF 136,330 million for the year ended 31 December 2014, CHF 147,921 million for the year ended 31 December 2013). 4 Money market paper is included in the balance sheet under Trading portfolio assets (31 December 2015: CHF 795 mil- lion, 31 December 2014: CHF 835 million, 31 December 2013: CHF 1,716 million) and Financial investments available-for-sale (31 December 2015: CHF 129 million, 31 December 2014: CHF 34 million, 31 December 2013: CHF 2,571 million). 5 CHF 3,963 million, CHF 4,178 million and CHF 4,534 million of cash and cash equivalents (mainly reflected in Due from banks) were restricted as of 31 December 2015, 31 December 2014 and 31 December 2013, respectively. Refer to Note 25 for more information. 6 Includes dividends received from associates (2015: CHF 114 million, 2014: CHF 54 million, 2013: CHF 69 million) reported within cash flow from / (used in) investing activities. 408 Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies a) Significant accounting policies Pillar 3 | UBS Group AG was established in 2014 as the holding company of the Group and in 2015 it increased its ownership interest in UBS AG to 100%, following the successful completion of the procedure under article 33 of the Swiss Stock Exchange Act (SESTA procedure). Refer to Note 32 for more information. The significant accounting policies applied in the preparation of the consolidated financial statements (the “Financial State- ments”) of UBS Group AG and its subsidiaries (“UBS” or the “Group”) are described in this note. These policies have been applied consistently in all years presented unless otherwise stated. The consolidated financial statements of UBS Group AG were prepared as a continuation of the consolidated financial state- ments of UBS AG, applying the same accounting policies under International Financial Reporting Standards (IFRS). The compara- tive information for 2013 reflects the consolidated financial state- ments of UBS AG, as previously published, except for certain vol- untary changes in accounting policy and presentation that are unrelated to the establishment of UBS Group AG. 1) Basis of accounting UBS provides a broad range of financial services including: advi- sory services, underwriting, financing, market-making, asset management and brokerage on a global level, and retail banking in Switzerland. The Group was formed on 29 June 1998 when Swiss Bank Corporation and Union Bank of Switzerland merged. The Financial Statements are prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB), and are presented in Swiss francs (CHF), the currency of Switzerland, where UBS Group AG is incorporated. On 10 March 2016, the Financial Statements were authorized for issue by the Board of Directors. The Financial Statements are prepared using uniform accounting policies for similar transactions and other events. Intercompany transactions and balances have been eliminated. Disclosures incorporated in the “Risk, treasury and capital management” section of this Annual Report, which form part of these Financial Statements, are marked as audited. These disclo- sures relate to requirements under IFRS 7 Financial Instruments: Disclosures and IAS 1 Presentation of Financial Statements and are not repeated in the “Financial information – consolidated financial statements” section. 2) Use of estimates Preparation of these Financial Statements under IFRS requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and liabilities. These estimates and assumptions are based on the best available information. Actual results in the future could differ from such estimates and such differences may be material to the Financial Statements. Estimates are reviewed regularly and revisions are recognized in the period in which they occur. The following notes to the Financial Statements contain infor- mation about those areas of estimation uncertainty considered to require critical judgment and have the most significant effect on the amounts recognized in the Financial Statements: Note 8 Income taxes, Note 12 Allowances and provisions for credit losses, Note 17 Goodwill and intangible assets, Note 22 Provisions and contingent liabilities, Note 24 Fair value measurement, Note 28 Pension and other post-employment benefit plans, Note 29 Equity participation and other compensation plans and Note 30 Interests in subsidiaries and other entities. 3) Subsidiaries and structured entities Pillar 3 | The Financial Statements comprise those of the parent company (UBS Group AG) and its subsidiaries, including con- trolled structured entities (SEs), presented as a single economic entity. Equity attributable to non-controlling interests is presented on the consolidated balance sheet within Equity, separately from Equity attributable to UBS Group AG shareholders. UBS controls an entity when it has power over the relevant activities of the entity, exposure to variable returns and the ability to use its power to affect its returns. Where an entity is governed by voting rights, control is gener- ally indicated by a direct shareholding of more than one-half of the voting rights. 409 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) In other cases, the assessment of control is more complex and requires greater use of judgment. Where UBS has an interest in an entity that absorbs variability, UBS considers whether it has power over the entity that allows it to affect the variability of its returns. Consideration is given to all facts and circumstances to determine whether the Group has power over another entity, that is, the current ability to direct the relevant activities of an entity when decisions about those activities need to be made. Factors such as the purpose and design of the entity, rights held through contrac- tual arrangements such as call rights, put rights or liquidation rights, as well as potential decision-making rights are all consid- ered in this assessment. Where the Group has power over the relevant activities, a further assessment is made to determine whether, through that power, it has the ability to affect its own returns – that is, assessing whether power is held in a principal or agent capacity. Consideration is given to (i) the scope of decision- making authority, (ii) rights held by other parties, including removal or other participating rights and (iii) exposure to variabil- ity, including remuneration, relative to total variability of the entity as well as whether that exposure is different from other investors. If, after review of these factors, UBS concludes that it can exercise its power to affect its own returns, the entity is consolidated. Subsidiaries, including SEs, are consolidated from the date control is obtained and are deconsolidated from the date control ceases. Control, or the lack thereof, is reassessed if facts and cir- cumstances indicate that there is a change to one or more of the elements needed to establish that control is present. ➔ Refer to Note 30 for more information on subsidiaries and structured entities Structured entities (SEs) SEs are entities that have been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate only to administrative tasks and the relevant activities are directed by means of contrac- tual arrangements. Such entities generally have a narrow and well-defined objective and include those historically referred to as special purpose entities (SPEs) and some investment funds. UBS assesses whether an entity is an SE by considering the nature of the activities of the entity as well as the substance of voting or similar rights afforded to other parties, including investors and independent boards or directors. UBS considers rights such as the ability to liquidate the entity or remove the decision maker to be similar to voting rights when the holder has the substantive ability to exercise such rights without cause. In the absence of such rights or in cases where the existence of such rights cannot be fully established, the entity is considered to be an SE. The Group sponsors the formation of SEs and interacts with non-sponsored SEs for a variety of reasons including allowing cli- ents to obtain or be exposed to particular risk profiles, to provide funding or to sell or purchase credit risk. Many SEs are established as bankruptcy remote, meaning that only the assets in the SE are available for the benefit of the SE’s investors and such investors have no other recourse to UBS. UBS is deemed to be the sponsor of an SE when it is involved in its creation, establishment and promotion and facilitates its ongoing success through the transfer of assets or the provision of explicit or implicit financial, opera- tional or other support. Where the Group acts purely as an advi- sor, administrator or placement agent for an SE created by a third- party entity, it is not considered to be sponsored by UBS. Pillar 3 | Each individual entity is assessed for consolidation in line with the consolidation principles described above, considering the nature and scope of UBS involvement. As the nature and extent of UBS involvement is unique to each entity, there is no uniform consolidation outcome by entity – certain entities within a class are consolidated and others are not. When UBS does not consoli- date an SE but has an interest in an SE or has sponsored an SE, additional disclosures are provided in Note 30 on the nature of these interests and sponsorship activities. Pillar 3 | The classes of SEs UBS is involved with include the following: – Securitization structured entities are established to issue securi- ties to investors that are backed by assets held by the SE and whereby (i) significant credit risk associated with the securi- tized exposures has been transferred to third parties and (ii) there is more than one risk position or tranche issued by the securitization vehicle in line with the Basel III securitization definition. All securitization entities are classified as SEs. – Client investment structured entities are established predomi- nantly for clients to invest in specific assets or risk exposures through purchasing notes issued by the SE, predominantly on a fixed-term basis. The SE may source assets via a transfer from UBS or through an external market transaction. In some cases, UBS may enter into derivatives with the SE to either align the cash flows of the entity with the investor’s intended investment objective or to introduce other desired risk exposures. In cer- tain cases, UBS may have interests in a third-party sponsored SE to hedge specific risks or participate in asset-backed financ- ing. – Investment fund structured entities have a collective invest- ment objective, are managed by an investment manager and are either passively managed, such that any decision-making does not have a substantive effect on variability, or are actively managed and investors or their governing bodies do not have substantive voting or similar rights. UBS creates and sponsors a large number of funds in which it may have an interest through the receipt of variable management fees and / or a direct investment. In addition, UBS has interests in a number of funds created and sponsored by third parties, including exchange-traded funds and hedge funds, to hedge issued structured products. 410 Note 1 Summary of significant accounting policies (continued) Business combinations Business combinations are accounted for using the acquisition method. As of the acquisition date, UBS recognizes the identifi- able assets acquired and the liabilities assumed at their acquisi- tion-date fair values. For each business combination, UBS mea- sures the non-controlling interests in the acquiree either at fair value or at their proportionate share of the acquiree’s identifiable net assets. Generally, non-controlling interests are present owner- ship interests that entitle their holders to a proportionate share of the net assets of the acquiree in the event of liquidation. The cost of an acquisition is the aggregate of the assets trans- ferred, the liabilities owed 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 recog- nized at fair value as of the date of acquisition. If the contingent consideration is classified as an asset or liabil- ity, subsequent changes in the fair value of the contingent consid- eration are recognized in the income statement. If the contingent consideration is classified as equity, it is not remeasured and its subsequent settlement is accounted for within Equity. Any excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests over the net identifiable assets acquired and liabilities assumed is considered goodwill and is recognized as a separate asset on the balance sheet, initially measured at cost. If the fair value of the net assets of the subsid- iary acquired exceeds the aggregate of the consideration trans- ferred and the amount recognized for non-controlling interests, the difference is recognized in the income statement on the acquisition date. ➔ Refer to Note 31 for more information on business combinations 4) Associates and joint ventures Investments in entities in which UBS has significant influence, but not control, over the financial and operating policies of the entity are classified as investments in associates and accounted for under the equity method of accounting. Normally, significant influence is indicated when UBS owns between 20% and 50% of a company’s voting rights. Investments in associates are ini- tially recognized 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 profit or loss (including net profit or loss recognized directly in equity). Interests in joint ventures are also accounted for under the equity method of accounting. A joint venture is subject to a contractual agreement between UBS and one or more third parties, which establishes joint control over the relevant activities and provides rights to the net assets of the entity. Interests in joint ventures are classified as Investments in associates. If the reporting date of an associate or joint venture is different than UBS’s reporting date, the most recently available financial statements of the associate or joint venture are used to apply the equity method. Adjustments are made for effects of significant transactions or events that may occur between that date and the UBS reporting date. Investments in associates and interests in joint ventures are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through con- tinuing use. Refer to item 29 for more information. ➔ Refer to Note 30 for more information on associates and joint ventures 5) Recognition and derecognition of financial instruments UBS recognizes financial instruments on its balance sheet when the Group becomes a party to the contractual provisions of the instru- ments, provided the recognition criteria are satisfied. UBS also acts in a trustee or other fiduciary capacity, which results in the holding or placing of assets on behalf of individuals, trusts, retirement ben- efit plans and other institutions. Unless the recognition criteria are satisfied, these assets and the related income are excluded from UBS’s Financial Statements, as they are not assets of UBS. Pillar 3 | Financial assets UBS enters into certain transactions where it transfers financial assets recognized on its balance sheet but retains either all or a portion of the risks and rewards of the transferred financial assets. If all or substantially all of the risks and rewards are retained, the transferred financial assets are not derecognized from the balance sheet. Transactions where transfers of financial assets result in UBS retaining all or substantially all risks and rewards include securities lending and repurchase transactions described under items 13 and 14. They also include transactions where financial assets are sold to a third party together with a total return swap that results in UBS retaining all or substantially all risks and rewards of the transferred assets. These types of transactions are accounted for as secured financing transactions. In transactions where substantially all of the risks and rewards of ownership of a financial asset are neither retained nor trans- ferred, UBS derecognizes the financial asset if control over the asset is surrendered. The rights and obligations retained following the transfer are recognized separately as assets and liabilities, respectively. In transfers where control over the financial asset is retained, the Group continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset fol- lowing the transfer. Examples of such transactions include written put options, acquired call options, or other instruments linked to the performance of the transferred asset. 411 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) For the purposes of the Group’s disclosures of transferred financial assets, a financial asset is typically considered to have been transferred when the Group a) transfers the contractual rights to receive the cash flows of the financial asset or b) retains the contractual rights to receive the cash flows of that asset, but assumes a contractual obligation to pay the cash flows to one or more entities. Where financial assets have been pledged as collateral or in similar arrangements, they are considered to have been trans- ferred if the counterparty has received the contractual right to the cash flows of the pledged assets, as may be evidenced, for exam- ple, by the counterparty’s right to sell or repledge the assets. Where the counterparty to the pledged financial assets has not received the contractual right to the cash flows, the assets are considered pledged, but not transferred. ➔ Refer to Note 25b and 25c for more information on transferred financial assets Financial liabilities UBS derecognizes a financial liability from its balance sheet when it is extinguished, such as when the obligation specified in the contract is discharged, cancelled or has expired. When an existing financial liability is exchanged for a new one from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recog- nition of a new liability with any difference in the respective carry- ing amounts being recognized in the income statement. 6) Determination of fair value Fair value is the price that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market (or most advantageous market, in the absence of a principal market) as of the measurement date. ➔ Refer to Note 24 for more information on fair value measurement 7) Trading portfolio assets and liabilities Non-derivative financial assets and liabilities are classified at acquisition as held for trading and presented in the trading port- folio 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 identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short- term profit-taking. The trading portfolio includes non-derivative financial instru- ments (including those with embedded derivatives) and commod- ities. Financial instruments that are considered derivatives in their entirety generally are presented on the balance sheet as Positive replacement values or Negative replacement values. Refer to item 15 for more information. The trading portfolio includes recog- nized assets and liabilities relating to proprietary, hedging and client-related business. 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 liabilities include obligations to deliver financial instruments such as debt and equity instruments which the Group has sold to third parties but does not own (short positions). 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 income or Interest 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 profits and losses arising from changes in fair value in Net trading income. The correspond- ing receivable or payable is presented on the balance sheet as a Positive replacement value or Negative replacement value. On settlement date, the resulting financial 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 profits and losses are no longer recognized and, on settlement date, the asset is derecognized. Trading portfolio assets transferred to external parties that do not qualify for derecognition (refer to item 5 for more informa- tion) and where the transferee has obtained the right to sell or repledge the assets continue to be classified on the UBS balance sheet as Trading portfolio assets but are identified as Assets pledged as collateral which may be sold or repledged by counter- parties. Such assets continue to be measured at fair value. ➔ Refer to Note 13 and 24 for more information on trading portfolio assets and liabilities 412 Note 1 Summary of significant accounting policies (continued) 8) Financial assets and financial liabilities designated at fair value through profit or loss A financial instrument may be designated at fair value through profit or loss only upon initial recognition and this designation cannot be changed subsequently. Financial assets and financial liabilities designated at fair value are presented on separate lines on the face of the balance sheet. The fair value option can be applied only if one of the following criteria is met: – the financial instrument is a hybrid instrument that includes a substantive embedded derivative; – the financial instrument is part of a portfolio that 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 eliminates or significantly reduces an accounting mismatch that would otherwise arise. UBS has used the fair value option to designate most of its issued hybrid debt instruments as financial liabilities designated at fair value through profit or loss, on the basis that such financial instruments include embedded derivatives and / or are managed on a fair value basis. Such hybrid debt instruments predominantly include the following: – Equity-linked bonds or notes: linked to a single stock, a basket of stocks or an equity index; – 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 and – 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 commitments, otherwise accounted for at amortized cost, which are hedged predominantly with credit derivatives. The application of the fair value option to the loans and loan commitments reduces an accounting mismatch, as the credit derivatives are accounted for as derivative instruments at fair value through profit or loss. Similarly, UBS has applied the fair value option to certain structured loans and reverse repurchase and securities bor- rowing agreements which are part of portfolios managed on a fair value basis. The fair value option is applied to assets held to hedge deferred cash-settled employee compensation awards, in order to reduce an accounting mismatch that would otherwise arise due to the liability being measured on a fair value basis. Fair value changes related to financial instruments designated at fair value through profit or loss are recognized in Net trading income. Interest income and interest expense on financial assets and liabilities designated at fair value through profit or loss are recognized in Interest income on financial assets designated at fair value or Interest expense on financial liabilities designated at fair value, respectively. UBS applies the same recognition and derecognition principles to financial instruments designated at fair value as to financial instruments in the trading portfolio. Refer to items 5 and 7 for more information. ➔ Refer to Notes 3, 20, 24e and 27d for more information on financial assets and liabilities designated at fair value 9) Financial investments classified as available-for-sale Financial investments classified as available-for-sale are non-deriv- ative financial assets that are not classified as held for trading, designated at fair value through profit or loss, or loans and receiv- ables. They are recognized on a settlement date basis. Financial investments classified as available-for-sale include: (a) debt securities held as part of a large multi-currency portfolio of unencumbered, high-quality assets managed centrally by Corpo- rate Center – Group Asset and Liability Management, a majority of which is short-term, (b) strategic equity investments, (c) certain investments in real estate funds, (d) certain equity instruments including private equity investments, and (e) debt instruments and non-performing loans acquired in the secondary market. Financial investments that are classified as available-for-sale are recognized initially at fair value less transaction costs and are mea- sured subsequently at fair value. Unrealized gains and losses are reported in Other comprehensive income within Equity, net of applicable income taxes, until such investments are sold, collected or otherwise disposed of, or until any such investment is deter- mined to be impaired. Unrealized gains before tax are presented separately from unrealized losses before tax in Note 15. For monetary instruments (such as debt securities), foreign exchange translation gains and losses determined by reference to the amortized cost basis of the instruments 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 within Equity. Foreign exchange transla- tion gains and losses associated with non-monetary instruments (such as equity securities) are part of the overall fair value change of the instruments and are recognized in Other comprehensive income within Equity. Interest and dividend income on financial investments classi- fied as available-for-sale are included in Interest and dividend income from financial investments available-for-sale. Interest income is determined by reference to the instrument’s amortized cost basis using the effective interest rate (EIR). On disposal of an investment, any related accumulated unreal- ized gains or losses included in Equity are reclassified to the income statement and reported in Other income. Gains or losses on disposal are determined using the average cost method. 413 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) At each balance sheet date, UBS assesses whether indicators of impairment are present for an available-for-sale investment. An available-for-sale investment is impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the investment, the estimated future cash flows from the investment have decreased. A signifi- cant or prolonged decline in the fair value of an available-for-sale equity instrument below its original cost is considered objective evidence of impairment. In the event of a significant decline in fair value below its original cost (20%) or a prolonged decline (six months), an impairment is recorded unless facts and circum- stances clearly indicate that the decline in value, on its own, is not evidence of an impairment. For debt investments, objective evidence of impairment includes significant financial difficulty of the issuer or counter- party, default or delinquency in interest or principal payments, or it becoming probable that the borrower will enter bankruptcy or financial reorganization. If an available-for-sale financial invest- ment is determined to be impaired, the related cumulative net unrealized loss previously recognized in Other comprehensive income within Equity is reclassified to the income statement within Other income. For equity instruments, any further loss is recognized directly in the income statement, whereas for debt instruments, any further loss is recognized in the income state- ment only if there is additional objective evidence of impairment. After an impairment of an equity instrument that is classified as available-for-sale, increases in the fair value are reported in Other comprehensive income within Equity. Subsequent increases in the fair value of debt instruments up to an amount that equals their amortized cost in original currency are recognized in Other income, provided that the fair value increase is related to an event occurring after the impairment loss was recorded. Increases in excess of that amount are reported in Other comprehensive income within Equity. UBS applies the same recognition and derecognition principles to financial assets classified as available-for-sale as to financial instruments in the trading portfolio (refer to items 5 and 7 for more information), except that unrealized gains and losses between trade date and settlement date are recognized in Other comprehensive income within Equity rather than in the income statement. ➔ Refer to Note 15 and 24 for more information on financial investments available-for-sale 10) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, not classified as held for trading, not designated at fair value through profit and loss or classified as 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 credit dete- rioration. Financial assets classified as loans and receivables include: – originated loans where funding is provided directly to the bor- rower; – participation in a loan from another lender and purchased loans; and – securities which were classified as loans and receivables at acquisition date, such as municipal auction rate securities in the Corporate Center – Non-core and Legacy Portfolio (refer to Note 27c for more information). Loans and receivables are recognized when UBS becomes a party to the contractual provisions of the instrument, which is when funding is advanced to borrowers. They are recorded ini- tially at fair value, based on the amount provided to originate or purchase the assets, together with any transaction costs directly attributable to the acquisition. Subsequently, they are measured at amortized cost using the EIR method, less allowances for credit losses. Refer to item 11 for information on allowances for credit losses and to Note 27a for an overview of the financial assets clas- sified as loans and receivables. Interest on loans and receivables is included in Interest earned on loans and advances and is recognized on an accrual basis. Upfront fees and direct costs relating to loan origination, refinanc- ing or restructuring as well as to loan commitments are generally deferred and amortized to Interest earned on loans and advances over the life of the loan using the EIR method. For loan commit- ments that are not expected to result in a loan being advanced, the fees are recognized in Net fee and commission income over the commitment period. For loan syndication fees where UBS does not retain a portion of the syndicated loan, or where UBS does retain a portion of the syndicated loan at the same effective yield for comparable risk as other participants, fees are credited to Net fee and commission income when the services have been pro- vided. Presentation of receivables from central banks Deposits with central banks that are available on demand are pre- sented on the balance sheet as Cash and balances with central banks. All longer-dated receivables with central banks are pre- sented under Due from banks. 414 Note 1 Summary of significant accounting policies (continued) Financial assets reclassified to loans and receivables When a financial asset is reclassified from held for trading to loans and receivables, the financial asset is reclassified at its fair value on the date of reclassification. Any gain or loss recognized in the income statement before reclassification is not reversed. The fair value of a financial asset on the date of reclassification becomes its cost basis going forward. In 2008 and 2009, UBS determined that certain financial assets classified 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 assets for the foreseeable future, considered to be a period of approximately twelve months from the reclassification. There- fore, these assets were reclassified from held for trading to loans and receivables. ➔ Refer to Note 27c for more information on reclassified assets Renegotiated loans A renegotiated or restructured loan is a loan for which the terms have been modified or for which additional collateral has been requested that was not contemplated in the original contract. If a loan is derecognized in these circumstances, the new loan is measured at fair value at initial recognition. Any allowance taken to date against the original loan is derecognized and is not attributed to the new loan. Consequently, the new loan is assessed for impairment on an individual basis. If the loan is not impaired, the loan is included within the general collective loan assessment for the purpose of measuring credit losses. 11) Allowances and provisions for credit losses EDTF | 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 thereof) on a claim, based on the original contractual terms due to credit deterioration of the issuer or counterparty. 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 instrument. Objective evidence of impairment includes significant financial difficulty of the issuer or counterparty, default or delinquency in interest or principal pay- ments, or a likelihood that the borrower will enter bankruptcy or financial reorganization. Typical key features of terms and conditions granted through renegotiation to avoid default include special interest rates, post- ponement of interest or amortization payments, modification of the schedule of repayments or amendment of loan maturity. There is no change in the EIR following a renegotiation. An allowance for credit losses is reported as a reduction of the carrying value of a claim on the balance sheet. For an off-balance- sheet item, such as a commitment, a provision for credit loss is reported in Provisions. Changes to allowances and provisions for credit losses are recognized as Credit loss expense / recovery. If a loan is renegotiated with preferential conditions (i.e., new or modified terms and conditions are agreed which do not meet the normal market criteria for the quality of the obligor and the type of loan), the position is still classified as non-performing and is rated as being in counterparty default. It will remain so until the loan is collected or written off and will be assessed for impairment on an individual basis. If a loan is renegotiated on a non-preferential basis (e.g., addi- tional collateral is provided by the client, or new terms and condi- tions are agreed which meet the normal market criteria for the quality of the obligor and the type of loan), the loan will be re- rated using the Group’s regular rating scale. In these circum- stances, the loan is removed from impaired status and included in the collective assessment of loan loss allowances, unless an indi- cation of impairment exists, in which case the loan is assessed for impairment on an individual basis. For the purposes of measuring credit losses within the collective loan loss assessment, these loans are not segregated from other loans which have not been renego- tiated. Management regularly reviews all loans to ensure that all criteria according to the loan agreement continue to be met and that future payments are likely to occur. Refer to item 11 for more information on allowances and provisions for credit losses. A restructuring of a loan could lead to a fundamental change in the terms and conditions of a loan, resulting in the original loan being derecognized and a new loan being recognized. Allowances and provisions for credit losses are evaluated at both a counterparty-specific level and collectively based on the following principles: Counterparty-specific: A loan 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 thereof) based on the original contractual terms. Individual credit exposures are evaluated based on the borrower’s overall financial condition, resources and payment record, the prospects of sup- port from contractual guarantors and, where applicable, the real- izable value of any collateral. The estimated recoverable amount is the present value, calculated using the claim’s original EIR, of expected future cash flows including amounts that may result from restructuring or the liquidation of collateral. If a loan has a variable interest rate, the discount rate used for calculating the recoverable amount is the current EIR. Impairment is measured and allowances for credit losses are established based on the dif- ference between the carrying amount and the estimated recover- able amount. Upon impairment, the accrual of interest income based on the original terms of the loan is discontinued. The increase in the present value of the impaired loan due to the pas- sage of time is reported as Interest income. 415 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) All impaired loans are reviewed and analyzed at least annually. Any subsequent changes to the amounts and timing of the expected future cash flows compared with prior estimates result in a change in the allowance for credit losses and are charged or credited to Credit loss expense / recovery. An allowance for impair- ment is reversed only when the credit quality has improved to such an extent that there is reasonable assurance of timely collec- tion of principal and interest in accordance with the original con- tractual terms of the claim, or the equivalent value thereof. 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 loan is classified as non-performing when the payment of interest, principal or fees is overdue by more than 90 days, when insolvency proceedings have commenced, or when obligations have been restructured on preferential terms. Loans are evaluated individually for impairment when amounts have been overdue by more than 90 days, or if other objective evidence indicates that a loan may be impaired. Collectively: All loans for which no impairment is identified at a counterparty-specific level are grouped on the basis of the Group’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 flows for a group of financial 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 reflect the effects of current conditions of the group of financial 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 flows for the group of financial assets reflect, and are directionally consistent with, changes in related observable data from year to year. The methodology and assump- tions used for estimating future cash flows for the group of finan- cial assets are reviewed regularly to reduce any differences between loss estimated and actual loss experience. Allowances for collective impairment assessments 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 accrued on each loan according to its contractual terms. If objec- tive evidence becomes available that indicates that an individual financial asset is impaired, it is removed from the group of finan- cial assets assessed for impairment on a collective basis and is assessed separately as a counterparty-specific claim. Reclassified securities and similar acquired securities carried at amortized cost: Estimated cash flows associated with financial assets reclassified from the held for trading category to loans and receivables in accordance with the requirements in item 10 and other similar assets acquired subsequently are reviewed periodi- cally. Adverse revisions in cash flow estimates related to credit events are recognized in the income statement as Credit loss expense / recovery. For a reclassified loan, a change in expectation regarding the recoverability of the security and its future cash receipts requires an adjustment to the EIR on the loan from the date of change (refer to Note 27c for more information). ➔ Refer to Note 12 for more information on allowances and provisions for credit losses 12) Securitization structures set up by UBS Pillar 3 | UBS securitizes certain financial assets, generally selling Trading portfolio assets to SEs that issue securities to investors. UBS applies the policies set out in item 3 in determining whether the respective SE must be consolidated and those set out in item 5 in determining whether derecognition of transferred financial assets is appropriate. The following statements mainly apply to transfers of financial assets that qualify for derecognition. Gains or losses related to the sale of Trading portfolio assets involving a securitization are recognized when the derecognition criteria are satisfied; the resulting gain or loss is included in Net trading income. Interests in the securitized financial assets may be retained in the form of senior or subordinated tranches, interest-only strips or other residual interests (retained interests). Retained interests are primarily recorded in Trading portfolio assets and are carried at fair value. Synthetic securitization structures typically involve derivative finan- cial instruments for which the principles set out in item 15 apply. 416 Note 1 Summary of significant accounting policies (continued) 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 clients during the period prior to securitization. UBS then typically sells the collateral into designated trusts upon closing of the securitization. In other secu- ritizations, UBS may only provide financing to a designated trust in order to fund the purchase of collateral by the trust prior to securitization. Furthermore, UBS underwrites the offerings to investors, earning fees for its placement and structuring services. Consistent 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 mod- els 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 avail- able. ➔ Refer to Note 30c for more information on the Group’s involvement with securitization vehicles 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 borrows or lends equity and debt securities in exchange for securities or cash collateral. Additionally, UBS bor- rows securities from its clients’ custody accounts in exchange for a fee. The transactions are normally conducted under standard agreements employed by financial market participants and are undertaken with counterparties subject to UBS’s normal credit risk control processes. UBS monitors on a daily basis the market value of the securities received or delivered and requests or provides additional collateral or returns or recalls surplus collateral in accor- dance with the underlying agreements. Cash collateral received is recognized with a corresponding obligation to return it (Cash collateral on securities lent) and cash collateral delivered is derecognized and a corresponding receiv- able reflecting 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. Refer to item 5 for more information. UBS-owned securities transferred to a borrower that is granted the right to sell or repledge those transferred securities are presented on the bal- ance sheet as Trading portfolio assets, of which: assets pledged as collateral which may be sold or repledged by counterparties. Securities received in a borrowing transaction are disclosed as off- balance-sheet items if UBS has the right to resell or repledge them, with additional disclosure provided for securities that UBS has actually resold or repledged. The sale of securities which is settled by delivering securities received in a borrowing transaction generally triggers the recognition of a trading liability (short sale). Where securities are either received or delivered in lieu of cash the securities (securities-for-securities received or delivered nor the obligation to return or right to receive the securities are recognized on the balance sheet, as derecognition criteria are not met. Refer to item 5 for more infor- mation. transactions), neither Interest is recognized in the income statement on an accrual basis and is recorded as Interest income or Interest expense. Inter- est income includes interest earned on securities borrowing, and negative interest, including fees, on securities lending. Interest expense includes interest on securities lent and negative interest, including fees, on securities borrowing. ➔ Refer to Notes 11, 25 and 26 for more information on securities borrowing and lending 14) Repurchase and reverse repurchase transactions Securities purchased under agreements to resell (Reverse repur- chase agreements) and securities sold under agreements to repur- chase (Repurchase agreements) are treated as collateralized financing transactions. Nearly all reverse repurchase and repur- chase agreements involve debt instruments, such as bonds, notes or money market paper. The transactions are normally conducted under standard agreements employed by financial market partici- pants and are undertaken with counterparties subject to UBS’s normal credit risk control processes. UBS monitors on a daily basis the market value of the securities received or delivered and requests or provides additional collateral or returns or recalls sur- plus collateral in accordance with the underlying 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, representing UBS’s right to receive the cash back. Similarly, in a repurchase agreement, the cash received is recog- nized and a corresponding obligation, including accrued interest, is recorded in the balance sheet line Repurchase agreements. Securities received under reverse repurchase agreements and securities delivered under repurchase agreements are not recog- nized on or derecognized from the balance sheet, unless the risks and rewards of ownership are transferred. UBS-owned securities transferred to a recipient who is granted the right to resell or repledge them are presented on the balance sheet as Trading portfolio assets, of which: assets pledged as collateral which may be sold or repledged by coun- terparties. Securities received in reverse repurchase agreements are disclosed as off-balance-sheet items if UBS has the right to resell or repledge them, with additional disclosure provided for securities that UBS has actually resold or repledged (refer to Note 25d for more information). Additionally, the sale of securi- ties which is settled by delivering securities received in reverse repurchase transactions generally triggers the recognition of a trading liability (short sale). 417 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) Interest is recognized in the income statement on an accrual basis and is recorded as Interest income or Interest expense. Inter- est income includes interest earned on reverse repurchase agree- ments and negative interest on repurchase agreements. Interest expense includes interest on repurchase agreements and negative interest on reverse repurchase agreements. The Group generally offsets reverse repurchase agreements and repurchase agreements with the same counterparty, maturity, currency and Central Securities Depository (CSD) in accordance with the relevant accounting requirements. Refer to item 35 for more information. ➔ Refer to Notes 11, 25 and 26 for more information on repurchase and reverse repurchase transactions 15) Derivative instruments and hedge accounting Derivative instruments that UBS enters into are initially recog- nized, and remain carried, at fair value. Fair value changes are generally recognized in the income statement unless and to the extent they are designated in hedge relationships which require recognition of the effective portion of such changes within other comprehensive income. Derivative instruments are generally reported on the balance sheet as Positive replacement values or Negative replacement val- ues. Exchange-traded derivatives that economically settle on a daily basis, and certain OTC derivatives that in substance net set- tle on a daily basis, are classified as Cash collateral receivables on derivative instruments or Cash collateral payables on derivative instruments. Products that receive this treatment include futures contracts, 100% daily margined exchange-traded options and interest rate swaps transacted with the London Clearing House. Changes in the fair value of derivative instruments are recorded in Net trading income, unless the derivatives are designated and effective as hedging instruments in certain types of hedge accounting relationships. ➔ Refer to Note 14 for more information on derivative instruments and hedge accounting Hedge accounting The Group uses derivative instruments as part of its risk manage- ment activities to manage exposures particularly to interest rate and foreign currency risks, including exposures arising from fore- cast transactions. If derivative and non-derivative instruments meet certain criteria specified below, they may be designated as hedging instruments in hedges of the change in fair value of rec- ognized assets or liabilities (fair value hedges), hedges of the vari- ability in future cash flows attributable to a recognized asset or liability or highly probable forecast transactions (cash flow hedges) or hedges of a net investment in a foreign operation (net invest- ment hedges). At the time a financial instrument is designated in a hedge relationship, 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 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 value or cash flows associated with the designated risk of the hedged items. A hedge is considered highly effective if the follow- ing criteria are met: (i) at inception of the hedge and throughout its life, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk and (ii) actual results of the hedge are within a range of 80% to 125%. In the case of hedging forecast transactions, the transaction must have a high probability of occurring and must present an exposure to variations in cash flows that could ultimately affect the reported net profit or loss. The Group discon- tinues hedge accounting voluntarily, or when the Group deter- mines 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 exercised, when the hedged item matures, is sold or repaid or when forecast transactions are 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 flows of the hedging instrument exceed changes in the present value of expected cash flows of the hedged item. Such ineffectiveness is recorded in current period earnings in Net trading income. Interest income and expense on derivatives desig- nated as hedging instruments in effective hedge relationships is included in 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 attrib- utable 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 reflected in the carrying value of the hedged item. If the hedge accounting 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 amortized to the income statement over the remaining term to maturity of the hedged item. 418 Note 1 Summary of significant accounting policies (continued) For a portfolio hedge of interest rate risk, the equivalent change in fair value is reflected within Other assets or Other liabil- ities. If the hedge relationship is terminated for reasons other than the derecognition of the hedged item, the amount included in Other assets or Other liabilities is amortized to the income state- ment over the remaining term to maturity of the hedged items. way as derivative instruments used for trading purposes (i.e., real- ized and unrealized gains and losses are recognized in Net trading income), except for the forward points on certain short duration foreign exchange contracts, which are reported in Net interest income. ➔ Refer to Note 14 for more information on economic hedges Cash flow hedges Fair value gains or losses associated with the effective portion of derivatives designated as cash flow hedges for cash flow repricing risk are recognized initially in Other comprehensive income within Equity. When the hedged forecast cash flows affect profit or loss, the associated gains or losses on the hedging derivatives are reclassified from Equity to the income statement. If a cash flow hedge of forecasted transactions is no longer considered effective, or if the hedge relationship is terminated, the cumulative gains or losses on the hedging derivatives previ- ously reported in Equity remain there until the committed or fore- casted transactions occur and affect profit or loss. If the fore- casted transactions are no longer expected to occur, the deferred gains or losses are reclassified immediately to the income state- ment. Hedges of net investments in foreign operations Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are rec- ognized 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 ineffective and / or undesignated portion (for example, the interest element of a forward contract) are recognized in the income statement. Upon disposal or partial disposal of the foreign operation, the cumulative value of any such gains or losses associ- ated with the entity, and recognized directly in Equity, is reclassi- fied to the income statement. Economic hedges that do not qualify for hedge accounting Derivative instruments that are transacted as economic hedges but do not qualify for hedge accounting are treated in the same Embedded derivatives Derivatives may be embedded in other financial instruments (host contracts). For example, they could be represented by the conver- sion feature embedded in a convertible bond. Such hybrid instru- ments arise predominantly from the issuance of certain structured debt instruments. An embedded derivative is generally required to be separated from the host contract and accounted for as a standalone derivative instrument at fair value through profit or loss if: (i) the host contract is not carried at fair value with changes in fair value reported in the income statement, (ii) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host con- tract and (iii) the terms of the embedded derivative would meet the definition of a standalone derivative were they contained in a separate contract. Bifurcated embedded derivatives are presented on the same balance sheet line as the host contract, and are shown in Note 27a in the Held for trading category, reflecting the measurement and recognition principles applied. Typically, UBS applies the fair value option to hybrid instru- ments (refer to item 8 for more information), in which case bifur- cation of an embedded derivative component is not required. 16) Loan commitments Loan commitments are defined amounts (unutilized credit lines or undrawn portions of credit lines) against which clients can borrow money under defined terms and conditions. Loan commitments that can be cancelled at any time by UBS at its discretion, 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 drawdown by the counterparty, the amount of the loan is accounted for in accor- dance with Loans and receivables. Refer to item 10 for more information. 419 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) 18) Cash and cash equivalents For the purposes of the statement of cash flows, 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. 19) Physical commodities Physical commodities (precious metals, base metals and other commodities) held by UBS as a result of its broker-trader activities are accounted for at fair value less costs to sell and recognized within Trading portfolio assets. Changes in fair value less costs to sell are recorded in Net trading income. improvements, 20) Property, equipment and software Property, equipment and software includes own-used properties, information technology hardware, leasehold externally purchased and internally generated software and com- munication and other similar equipment. All Property, equipment and software is carried at cost (which includes capitalized interest from associated borrowings, where applicable), less accumulated depreciation and impairment losses, and is reviewed periodically for impairment. ➔ Refer to Note 16 for more information on property and equipment Leasehold improvements Leasehold improvements are investments made to customize buildings and offices occupied under operating lease contracts to make them suitable for their intended purpose. The present value of estimated reinstatement costs required to bring a leased prop- erty back into its original condition at the end of the lease is capi- talized as part of total leasehold improvements with a correspond- ing liability recognized to reflect the obligation incurred. Irrevocable loan commitments (where UBS has no right to withdraw the loan commitment once communicated to the ben- eficiary, or which are revocable only due to automatic cancellation upon deterioration in a borrower’s creditworthiness) are classified into the following categories: – derivative loan commitments, being loan commitments that can be settled net in cash or by delivering or issuing another financial instrument, or loan commitments for which there is a past practice of selling those loans resulting from similar loan commitments before or shortly after origination; – loan commitments designated at fair value through profit and loss (refer to item 8 for more information) and – all other loan commitments. These are not recorded in the bal- ance sheet, but a provision is recognized if it is probable that a loss has been incurred and a reliable estimate of the amount of the obligation can be made. Other loan commitments include irrevocable forward starting reverse repurchase and irrevocable securities borrowing agreements. Any change in the liability relating to these other loan commitments is recorded in the income statement in Credit loss expense / recovery. Refer to items 11 and 27 for more information. 17) Financial guarantee contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for an incurred loss because a specified debtor fails to make payments when due in accordance with the terms of a specified debt instru- ment. UBS issues such financial guarantees to banks, financial institutions and other parties on behalf of clients to secure loans, overdrafts and other banking facilities. Certain written financial guarantees that are managed on a fair value basis are designated at fair value through profit or loss. Refer to item 8 for more information. Financial guarantees that are not managed on a fair value basis are initially recognized in the financial statements at fair value. Subsequent to initial recog- nition, these financial guarantees are measured at the higher of the amount initially recognized less cumulative amortization, and to the extent a payment under the guarantee has become prob- able, the present value of the expected payment. Any change in the liability relating to probable expected payments resulting from guarantees is recorded in the income statement in Credit loss expense / recovery. 420 Note 1 Summary of significant accounting policies (continued) Reinstatement costs are recognized in the income statement through depreciation of the capitalized leasehold improvements over their estimated useful lives and the resulting liability is extin- guished as cash payments are made. 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 occur within 12 months, these assets are classified as non-cur- rent assets held for sale and are reclassified to Other assets. Upon classification as held for sale, they are no longer depreciated and are carried at the lower of book value or fair value less cost to sell. Software Software development costs are capitalized only when the costs can be measured reliably and it is probable that future economic benefits will arise. Estimated useful life of property, equipment and software An asset within property, equipment and software is depreciated on a straight-line basis over its estimated useful life. Depreciation of an asset within property, equipment and software begins when it is available for use; that is, when it is in the location and condi- tion necessary for it to be capable of operating in the manner intended by management. Estimated useful life of property, equipment and software Properties, excluding land Leasehold improvements Other machines and equipment IT hardware and communication equipment Software Not exceeding 67 years Residual lease term Not exceeding 10 years Not exceeding 5 years Not exceeding 10 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 identifiable assets of the acquired entity at the date of acquisition. Goodwill is not amortized. It is tested annually for impairment and, additionally, when an indication of impairment exists at the end of each reporting period. For goodwill impairment testing purposes, UBS considers the segments reported in Note 2a as separate cash- generating units, since this is the level at which the performance of investments is reviewed and assessed by management. The recoverable amount of a segment is determined on the basis of its value-in-use. Intangible assets are comprised of separately identifiable intan- gible items arising from business combinations and certain pur- chased trademarks and similar items. Intangible assets are recog- nized at cost. The cost of an intangible asset acquired in a business combination is its fair value at the date of acquisition. Intangible assets with a definite useful life are amortized using the straight- line method over their estimated useful life, generally not exceed- ing 20 years. Intangible assets with an indefinite useful life are not amortized. In nearly all cases, identified intangible assets have a definite useful life. At each balance sheet date, intangible assets are reviewed for indications of impairment. If such indications exist, the intangible assets are analyzed to assess whether their carrying amount is fully recoverable. An impairment loss is recog- nized if the carrying amount exceeds the recoverable amount. Intangible assets are classified into two categories: (i) infra- structure and (ii) customer relationships, contractual rights and other. Infrastructure consists of a branch network intangible asset recognized in connection with the acquisition of PaineWebber Group, Inc. Client relationships, contractual rights and other includes mainly intangible assets for client relationships, non- compete agreements, favorable contracts, trademarks and trade names acquired in business combinations. ➔ Refer to Note 17 for more information on goodwill and intangible assets 22) Income taxes Income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in the period in which profits arise. The tax effects of income tax losses available for carry forward are recognized as a deferred tax asset if it is prob- able that future taxable profit (based on profit forecast assump- tions) 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 sufficient taxable profits will be available against which these differences can be utilized. Deferred tax liabilities are recognized for temporary differences between the carrying amounts of assets and liabilities in the bal- ance sheet that reflect the expectation that certain items will give rise to taxable income 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. Deferred and current tax assets and liabilities are offset when they arise from the same tax reporting group, they relate to the same tax authority, the legal right to offset exists, and they are intended to be settled net or realized simultaneously. 421 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) Current and deferred taxes are recognized as income tax benefit or expense in the income statement except for current and deferred taxes recognized (i) upon the acquisition of a subsidiary, (ii) for unrealized gains or losses on financial investments that are classified as available-for-sale, for changes in fair value of deriva- tive instruments designated as cash flow hedges, for remeasure- ments of defined benefit plans, and for certain foreign currency translations of foreign operations, and (iii) for gains and losses on the sale of treasury shares. Deferred taxes recognized in a busi- ness combination (point (i)) are considered when determining goodwill. Amounts relating to points (ii) and (iii) are recognized in Other comprehensive income within Equity. instruments measured at amortized cost is included in Interest on debt issued. ➔ Refer to Note 21 for more information on debt issued 24) Pension and other post-employment benefit plans UBS sponsors a number of post-employment benefit plans for its employees worldwide, which include defined benefit and defined contribution pension plans, and other post-employment benefits such as medical and life insurance benefits that are payable after the completion of employment. The major defined benefit pension plans are located in Switzerland, the UK, the US and Germany. ➔ Refer to Note 28 for more information on pension and other ➔ Refer to Note 8 for more information on income taxes post-employment benefit plans 23) Debt issued Debt issued is carried at amortized cost. In cases where there is a legal mechanism for write-down or conversion into equity (as is the case for instance with senior unsecured debt issued by the Group that is subject to write-down or conversion under resolu- tion authority granted to FINMA under Swiss law) this is not part of the contractual terms, and, therefore, it does not affect the amortized cost accounting treatment applied to these instru- ments. If the debt were to be written down or converted into equity in a future period, this would result in the full or partial derecognition of the financial liabilities, with the difference between the carrying value of the debt written down or con- verted into equity and the fair value of any equity shares issued recognized in the income statement. In cases where, as part of the Group’s risk management activ- ity, fair value hedge accounting is applied to fixed-rate debt instruments carried at amortized cost, their carrying amount is adjusted for changes in fair value related to the hedged expo- sure. Refer to item 15 for more information on hedge account- ing. In most cases, structured notes issued are designated at fair value through profit or loss using the fair value option, on the basis that they are managed on a fair value basis, that the struc- tured notes contain an embedded derivative, or both. Refer to item 8 for more information on the fair value option. The fair value option is not applied to certain structured notes that con- tain embedded derivatives that reference foreign exchange rates and / or precious metal prices. For these instruments, the embed- ded derivative component is measured on a fair value basis and the related underlying debt host component is measured on an amortized cost basis, with both components presented together within Debt issued. Refer to item 15 for more information on embedded derivatives. Defined benefit pension plans Defined benefit pension plans specify an amount of benefit that an employee will receive, which is usually dependent on one or more factors such as age, years of service and compensation. The defined benefit liability recognized in the balance sheet is the present value of the defined benefit obligation less the fair value of the plan assets at the balance sheet date. If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the recognition of the resulting net defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future con- tributions to the plan. UBS applies the projected unit credit method to determine the present value of its defined benefit obli- gations, the related current service cost and, where applicable, past service cost. These amounts, which take into account the specific features of each plan, including risk sharing between the employee and employer, are calculated periodically by indepen- dent qualified actuaries. Defined contribution plans A defined contribution plan is a pension plan under which UBS pays fixed contributions into a separate entity from which post- employment and other benefits are paid. UBS has no legal or constructive obligation to pay further contributions if the plan does not hold sufficient assets to pay employees the benefits relating to employee service in the current and prior periods. UBS’s contributions are expensed when the employees have ren- dered services in exchange for such contributions. This is gener- ally in the year of contribution. Prepaid contributions are recog- nized as an asset to the extent that a cash refund or a reduction in future payments is available. Debt issued and subsequently repurchased in relation to mar- ket-making or other activities is treated as redeemed. A gain or loss on redemption (depending on whether the repurchase price of the bond is lower or higher than its carrying value) is recorded in Other income. A subsequent sale of own bonds in the market is treated as a reissuance of debt. Interest expense on debt Other post-retirement benefits UBS also provides post-retirement medical and life insurance ben- efits to certain retirees in the US and the UK. The expected costs of these benefits are recognized over the period of employment using the same accounting methodology used for defined benefit pension plans. 422 Note 1 Summary of significant accounting policies (continued) 25) Equity participation and other compensation plans Equity participation plans UBS has established several equity participation plans which include mandatory, discretionary and voluntary plans. UBS recog- nizes the fair value of awards granted under these plans, deter- mined at the date of grant, as compensation expense, over the period during which the employee is required to provide services in order to earn the award. If the employee is not required to provide future services, such as for awards granted to employees who are retirement eligible, including those employees who meet full career retirement crite- ria, compensation expense is recognized on or prior to the grant date. Such awards may remain forfeitable until the legal vesting date if certain non-vesting conditions are not met. Forfeiture events resulting from breach of a non-vesting condition do not result in a reversal of compensation expense. If future service is required, compensation expense is recog- nized over that future period. For awards that are delivered in tranches, each tranche is considered a separate award and amor- tized separately. Plans may contain provisions that shorten the required service period due to achievement of retirement eligibil- ity or upon termination due to redundancy. In such instances, compensation expense is recognized over the period from grant date to the retirement eligibility or redundancy date. Forfeiture of these awards that occurs during the service period results in a reversal of compensation expense. Awards settled in UBS shares are classified as equity settled. The fair value of an equity-settled award is determined at the date of grant and is not subsequently remeasured, unless its terms are modified such that the fair value immediately after modification exceeds the fair value immediately prior to modification. Any increase in fair value resulting from a modification is recognized as compensation expense, either over the remaining service period or, for vested awards, immediately. Cash-settled awards are classified as liabilities and are remea- sured to fair value at each balance sheet date as long as the award is outstanding. Changes in fair value are reflected in compensa- tion expense and, on a cumulative basis, no compensation expense is recognized for awards that expire worthless or remain unexercised. ➔ Refer to Note 29 for more information on equity participation plans Other compensation plans UBS has established other fixed and variable deferred compensa- tion plans, the values of which are not linked to UBS’s own equity. Deferred cash compensation plans are either mandatory or discre- tionary plans and include awards based on a notional cash amount, where ultimate payout is fixed or may vary based on achievement of performance conditions or the value of specified underlying assets. Compensation expense is recognized over the period that the employee is required to provide services to earn the award. If the employee is not required to provide future ser- vices, such as for awards granted to employees who are retire- ment eligible, including those employees who meet full career retirement criteria, compensation expense is recognized on or prior to the grant date. The amount recognized during the service period is based on an estimate of the amount expected to be paid out under the plan, such that cumulative expense recognized ulti- mately equals the cash distributed to employees. For awards in the form of alternative investment vehicles or similar structures, which provide employees with a payout based on the value of specified underlying assets, the initial value is based on the fair value at the grant date of the underlying assets (e.g., money mar- ket funds, UBS and non-UBS mutual funds and other UBS-spon- sored funds). These awards are remeasured at each reporting date based on the fair value of the underlying assets until the award is distributed. Changes in value are recognized proportionately to the elapsed service period. Forfeiture of these awards results in the reversal of compensation expense. ➔ Refer to Note 29 for more information on other compensation plans 26) Amounts due under unit-linked investment contracts Financial liabilities from unit-linked investment contracts are presented as Other liabilities on the balance sheet. These con- tracts allow investors to invest in a pool of assets through issued investment units. The unit holders receive all rewards and bear all risks associated with the reference asset pool. The financial liability represents the amounts due to unit holders and is equal to the fair value of the reference asset pool. Assets held under unit-linked investment contracts are presented as Trading port- folio assets. ➔ Refer to Notes 13 and 23 for more information on unit-linked investment contracts 27) Provisions Provisions are liabilities of uncertain timing or amount, and are recognized when UBS has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. The majority of UBS’s provisions relate to litigation, regulatory and similar matters, restructuring, employee benefits, real estate and loan commitments and guarantees. Provisions that are similar in nature are aggregated to form a class, while the remaining provisions, including those of less significant amounts are pre- sented under Other provisions. Provisions are presented sepa- rately on the balance sheet and, when they are no longer consid- ered uncertain in timing or amount, are reclassified to Other liabilities – Other. 423 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) The Group recognizes provisions for litigation, regulatory and similar matters when, in the opinion of management after seek- ing legal advice, it is more likely than not that the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required, and the amount can be reliably estimated. Where these factors are otherwise satisfied, a provision may be established for claims that have not yet been asserted against the Group, but are neverthe- less expected to be, based on the Group’s experience with similar asserted claims. Restructuring provisions are recognized when a detailed and formal restructuring plan has been approved and a valid expecta- tion has been raised that the restructuring will be carried out, either through commencement of the plan or announcements to affected employees. Provisions are recognized for lease contracts if the unavoidable costs of a contract exceed the benefits expected to be received under it (onerous lease contracts). For example, this may occur when a significant portion of a leased property is expected to be vacant for an extended period. Provisions for employee benefits are recognized mainly in respect of service anniversaries and sabbatical leave. Provisions are recognized at the best estimate of the consider- ation required to settle the present obligation at the balance sheet date. Such estimates are based on all available information and are revised over time as more information becomes available. If the effect of the time value of money is material, provisions are discounted and measured at the present value of the expenditure expected to settle or discharge the obligation, using a rate that reflects the current market assessments of the time value of money and the risks specific to the obligation. A provision is not recognized when UBS has a present obliga- tion that has arisen from past events but it is not probable that an outflow of resources will be required to settle it, or a sufficiently reliable estimate of the amount of the obligation cannot be made. Instead, a contingent liability is disclosed, unless the likelihood of an outflow of resources is remote. Contingent liabilities are also disclosed for possible obligations that arise from past events whose existence will be confirmed only by uncertain future events not wholly within the control of UBS. ➔ Refer to Note 22 for more information on provisions 28) Equity, treasury shares and contracts on UBS Group AG shares Non-controlling interests and preferred noteholders Net profit and Equity are presented including non-controlling interests and preferred noteholders. Net profit is split into Net profit attributable to UBS Group AG shareholders, Net profit attributable to non-controlling interests and Net profit attribut- able to preferred noteholders. Equity is split into Equity attribut- able to UBS Group AG shareholders, Equity attributable to non- controlling interests and Equity attributable to preferred noteholders. UBS Group AG shares held (treasury shares) UBS Group AG shares held by the Group are presented in Equity as Treasury shares at their acquisition cost, which includes trans- action costs. Treasury shares are deducted from Equity until they are cancelled or reissued. The difference between the proceeds from sales of treasury shares and their weighted average cost (net of tax, if any) is reported as Share premium. Net cash settlement contracts Contracts on UBS Group AG shares that require net cash settle- ment, or provide the counterparty or UBS with a settlement option which includes a choice of settling net in cash, are classi- fied as held for trading, with changes in fair value reported in the income statement as Net trading income. Contracts with mandatory gross physical settlement UBS issues contracts with mandatory gross physical settlement in UBS Group AG shares where a fixed amount of shares is exchanged against a fixed amount of cash or another financial asset. 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 financial liability booked against Equity. The financial liability is subsequently accreted, using the EIR method, over the life of the contract to the nominal purchase obligation with the amount recognized in Interest expense. Upon settlement of the contract, the liability is derecognized against the consideration paid, and the amount of equity originally recognized as a liability is reclassi- fied within Equity to Treasury shares. The premium received for writing such put options is recognized directly in Share premium. All other contracts with mandatory gross physical settlement in UBS Group AG shares are presented in Equity as Share premium and accounted for at cost, which is added to or deducted from Equity as appropriate. Upon settlement of such contracts, the dif- ference between the proceeds received and their cost (net of tax, if any) is reported as Share premium. 424 Note 1 Summary of significant accounting policies (continued) Preferred notes issued to non-consolidated preferred securities entities UBS issued subordinated notes (that is, the preferred notes) to cer- tain non-consolidated entities that issued preferred securities. UBS AG has fully and unconditionally guaranteed all contractual pay- ments on the preferred securities. UBS’s obligations under these guarantees are subordinated to the full prior payment of the deposit liabilities of UBS AG and all other liabilities of UBS AG. The preferred notes do not contain a contractual obligation to deliver cash and, therefore, they are classified as equity instruments. Prior to the share-for-share exchange that took place in 2014, the preferred notes were presented as Equity attributable to pre- ferred noteholders on the consolidated balance sheet and state- ment of changes in equity of UBS AG. Distributions on these pre- ferred notes were presented as Net profit attributable to preferred noteholders in the consolidated income statement and statement of comprehensive income. Following the share-for-share exchange, these preferred notes are presented as Equity attributable to non- controlling interests on the consolidated balance sheet and state- ment of changes in equity of UBS Group AG. Future distributions on these preferred notes will be presented as Net profit attribut- able to non-controlling interests in the consolidated income state- ment and statement of comprehensive income. 29) Non-current assets and disposal groups held for sale UBS classifies individual non-current assets and disposal 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 disposal 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. Furthermore, 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. Assets held for sale and 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. Non-current assets and liabilities of subsidiaries are classified as held for sale if their carrying amount will be recov- ered principally through a sale transaction rather than through continuing use. 30) Leasing UBS enters into lease contracts, or contracts that include lease components, predominantly of premises and equipment, and pri- marily as lessee. Leases that transfer substantially all the risks and rewards, but not necessarily legal title in the underlying assets, are classified as finance leases. All other leases are classified as oper- ating leases. Assets leased pursuant to finance leases are recognized on the balance sheet as Property and equipment and are depreciated over the lesser of the useful life of the asset or the lease term, with corresponding amounts payable included in Due to banks / customers. Finance charges payable are recognized in Net interest income over the period of the lease based on the interest rate implicit in the lease on the basis of a constant yield. Lease contracts classified as operating leases where UBS is the lessee are disclosed in Note 33. These contracts include non-can- cellable long-term leases of office 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 with control of the physical use of the property. Lease incentives are treated as a reduction of rental expense and are recognized on a consistent basis over the lease term. Where UBS acts as lessor under a finance lease, a receivable is recognized in Loans at an amount equal to the present value of the aggregate of the minimum lease payments plus any unguar- anteed residual value that UBS expects to recover at the end of the lease term. Initial direct costs are also included in the initial measurement of the lease receivable. Lease payments received during the lease term are allocated to repayment of the outstand- ing receivable and interest income to reflect a constant periodic rate of return on UBS’s net investment using the interest rate implicit in the lease. UBS reviews the estimated unguaranteed residual value annually and if the estimated residual value to be realized is less than the amount assumed at lease inception, a loss is recognized for the expected shortfall. 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 the incep- tion of the arrangement whether the fulfillment of the arrange- ment is dependent on the use of a specific asset or assets and, if so, the arrangement is accounted for as a lease. ➔ Refer to Notes 18 and 23 for more information on non-current ➔ Refer to Note 33 for more information on operating leases and assets and disposal groups held for sale finance leases 425 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) 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 catego- ries: fees earned from services that are provided over a certain period of time (for example, investment fund fees, portfolio man- agement and advisory fees) and fees earned from providing trans- action-type services (for example, underwriting fees, corporate finance fees and brokerage fees). 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 specific performance criteria. Such fees are recognized when the performance criteria are fulfilled and when collectability is reasonably assured. Fees earned from providing transaction-type services are recognized when the ser- vice has been completed. Generally, fees are presented in the income statement in line with the balance sheet classification of the underlying instruments. With respect to loan commitment fees on lending arrange- ments where there is an initial expectation that the facility will be drawn down, such fees 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. Where the initial expectation is that the facil- ity is unlikely to be drawn down, the loan commitment fees are recognized on a straight-line basis over the commitment period. If, in such cases, the facility is ultimately drawn down, the unamor- tized component of the loan commitment fees is amortized as an adjustment to the effective yield over the life of the loan. ➔ Refer to Note 4 for more information on net fee and commission income 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 monetary assets and liabilities denominated in foreign currency are translated to the functional currency using the closing exchange rate. Non-monetary items measured at historical cost are translated at the exchange rate on the date of the transaction. Foreign currency translation differences on financial investments classified as available-for-sale are generally recorded directly in Equity until the asset is sold or becomes impaired. However, trans- lation differences on available-for-sale monetary financial invest- ments are reported in Net trading income, along with all other foreign currency translation differences on monetary assets and liabilities. 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. The resulting foreign currency translation differences attributable to UBS Group AG shareholders are recognized directly in Foreign currency translation within Equity which forms part of Total equity attributable to UBS Group AG shareholders, whereas the foreign currency translation differences attributable to non- controlling interests are shown within Equity attributable to non- controlling interests. When a foreign operation is disposed or partially disposed of, the cumulative amount in Foreign currency translation within Equity related to that foreign operation is reclassified to the income statement 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 but retains control, the related por- tion of the cumulative currency translation balance is reclassified to Equity attributable to non-controlling interests. When UBS dis- poses of a portion of its investment in an associate or joint venture that includes a foreign operation while retaining significant influ- ence or joint control, the related portion of the cumulative cur- rency translation balance is reclassified to the income statement. ➔ Refer to Note 36 for more information on currency translation rates 33) Earnings per share (EPS) Basic EPS are calculated by dividing the net profit or loss for the period attributable to ordinary shareholders by the weighted aver- age number of ordinary shares outstanding during the period. Diluted EPS are calculated using the same method as for basic EPS and adjusting the net profit or loss for the period attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding to reflect the potential dilution that could occur if options, warrants, convertible debt securities or other contracts to issue ordinary shares were converted or exer- cised into ordinary shares. ➔ Refer to Note 9 for more information on EPS 34) Segment reporting UBS‘s businesses are organized globally into five business divi- sions: Wealth Management, Wealth Management Americas, Per- sonal & Corporate Banking, Asset Management and the Invest- ment Bank, supported by the Corporate Center. The five business divisions qualify as reportable segments for the purpose of seg- ment reporting and, together with the Corporate Center and its components, reflect the management structure of the Group. Additionally, the non-core activities and legacy positions formerly in the Investment Bank are managed and reported as a separate reportable segment within the Corporate Center as Non-core and Legacy Portfolio. Financial information about the five business divisions and the Corporate Center (with its components) is pre- sented separately in internal management reports to the Group Executive Board, which is considered the “chief operating deci- sion maker” within the context of IFRS 8 Operating Segments. 426 Note 1 Summary of significant accounting policies (continued) 35) Netting UBS nets financial assets and liabilities on its balance sheet if it has the unconditional and legally enforceable right to set-off the recognized amounts, both in the normal course of business and in the event of default, bankruptcy or insolvency of the entity and all of the counterparties, and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. Netted positions include, for example, over-the-counter interest rate swaps transacted with the London Clearing House, netted by currency and across maturity dates, and repurchase and reverse repurchase transactions entered into with both the Lon- don Clearing House and the Fixed Income Clearing Corporation, netted by counterparty, currency, central securities depository and maturity, as well as transactions with various other counter- parties, exchanges and clearing houses. In assessing whether the Group intends to either settle on a net basis, or to realize the asset and settle the liability simultane- ously, emphasis is placed on the effectiveness of operational set- tlement mechanics in eliminating substantially all credit and liquidity exposure between the counterparties. This condition precludes offsetting on the balance sheet for substantial amounts of the Group’s financial assets and liabilities, even though they may be subject to enforceable netting arrangements. For deriva- tive contracts, balance sheet offsetting is generally only permit- ted in circumstances in which a market settlement mechanism exists via an exchange or clearing house that effectively accom- plishes net settlement through a daily cash margining process. For repurchase arrangements and securities financings, balance sheet offsetting may be permitted only to the extent that the settlement mechanism eliminates or results in insignificant credit and liquidity risk. ➔ Refer to Note 26 for more information on offsetting financial assets and financial liabilities 36) Negative interest Negative interest income arising on a financial asset does not meet the definition of interest income and therefore negative interest on financial assets and negative interest on financial liabil- ities is presented within Interest expense and Interest income respectively. ➔ Refer to Note 3 for more information on interest income and interest expense UBS’s internal accounting policies, which include management accounting policies and service level agreements, determine the revenues and expenses directly attributable to each reportable segment. Internal charges and transfer pricing adjustments are reflected in operating results of the reportable segments. Transac- tions between the reportable segments are carried out at inter- nally agreed rates and are also reflected in the operating results of the reportable segments. Revenue-sharing agreements are used to allocate external client revenues to reportable segments where several reportable segments are involved in the value-creation chain. Commissions are credited to the reportable segments based on the corresponding client relationship. Net interest income is generally allocated to the reportable segments based on their balance sheet positions. Interest income earned from man- aging UBS’s consolidated equity is allocated to the reportable seg- ments based on average attributed equity. Own credit gains and losses on financial liabilities designated at fair value are excluded from the measurement of performance of the business divisions, are considered reconciling differences to UBS Group results and are reported collectively under Corporate Center – Group Asset and Liability Management (Group ALM). Assets and liabilities of the reportable segments are funded through and invested with Corporate Center – Group Asset and Liability Management, and the net interest margin is reflected in the results of each reportable segment. Total intersegment revenues for the Group are immaterial as the majority of the revenues are allocated across the segments by means of reve- nue-sharing agreements. Segment balance sheet assets are based on a third-party view and do not include intercompany balances. This view is in line with internal reporting to management. Certain assets managed centrally by Corporate Center – Services and Corporate Center – Group Asset and Liability Management (including property and equipment and certain financial assets) may be allocated to the segments on a basis different to that which the corresponding costs and / or revenues are allocated. For example, certain assets that are reported in Corporate Center – Services or Corporate Center – Group Asset and Liability Management may be retained on the balance sheets of these components of Corporate Center notwithstanding that the costs and / or revenues associated with these assets may be entirely or partially allocated to the segments. Similarly, certain assets are reported in the business divisions, whereas the corresponding costs and / or revenues are entirely or partially allocated to Corporate Center – Services and Corporate Center – Group Asset and Liability Management. For the purpose of segment reporting under IFRS 8, non-cur- rent assets consist of investments in associates and joint ventures, goodwill, other intangible assets and property, equipment and software. ➔ Refer to Note 2 for more information on segment reporting 427 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) b) Changes in accounting policies, comparability and other adjustments Statement of cash flows – definition of cash and cash equivalents In 2015, UBS refined its definition of cash and cash equivalents presented in the statement of cash flows to exclude cash collat- eral receivables on derivative instruments with bank counterpar- ties. The refined definition is consistent with the treatment of these receivables in UBS’s liquidity and funding management framework and with liquidity and funding regulations, which became effective in 2015, and is considered to result in the pre- sentation of more relevant information. Comparative period information was restated accordingly. As a result, cash and cash equivalents as of 31 December 2014, 31 December 2013 and 31 December 2012 were reduced by CHF 10,265 million, CHF 8,982 million and CHF 12,393 million, respectively. On a restated basis, cash flow from operating activi- ties for the year ended 31 December 2014 decreased by CHF 1,195 million (2013: increase by CHF 3,415 million) and the gain from effects of exchange rate differences on cash and cash equiv- alents decreased by CHF 89 million for the same period (2013: loss from currency effects increased by CHF 3 million). Review of actuarial assumptions used in calculating defined benefit obligations UBS regularly reviews the actuarial assumptions used in calculat- ing its defined benefit obligations to determine their continuing relevance. In 2015, UBS carried out a methodology review of the actuarial assumptions used in calculating its defined benefit obligation for its Swiss pension plan. As a result, UBS enhanced its methodology for estimating the discount rate by improving the construction of the yield curve where the market for long tenor maturities of Swiss high-quality corporate bonds was not sufficiently deep. Fur- thermore, UBS refined its approach to estimating the rate of sal- ary increases, the rate of interest credit on retirement savings, the employee turnover rate, the rate of employee disabilities and the rate of marriage. These improvements in estimates resulted in a total net decrease in the defined benefit obligation (DBO) of the Swiss pension plan of CHF 2.1 billion, of which CHF 1.0 billion related to demographic assumptions and CHF 1.0 billion related to financial assumptions, and a corresponding increase in Other comprehensive income. Furthermore, UBS enhanced methodologies and refined approaches used to estimate various actuarial assumptions for its UK and other pension plans. These improvements in estimates resulted in a total net decrease in the DBO of the UK pension plan of CHF 0.2 billion, of which CHF 0.1 billion related to demo- graphic assumptions and CHF 0.1 billion related to financial assumptions, and a corresponding increase in Other comprehen- sive income. Valuation methodology for the own credit component of financial liabilities designated at fair value In 2015, UBS made enhancements to its valuation methodology for the own credit component of fair value of financial liabilities designated at fair value. Prior to the fourth quarter of 2015, own credit was estimated using a funds transfer pricing curve (FTP), which was derived by discounting UBS new issuance senior debt curve spreads, with the discount primarily reflecting the differences between the spreads in the senior unsecured debt market for UBS debt and the levels at which UBS medium- term notes (MTN) were issued. A decline in long-dated UBS MTN issuance volumes, following UBS’s business transforma- tion, resulted in a reduction in the observable market data avail- able to benchmark the FTP. From the fourth quarter of 2015 onwards, own credit is estimated using an own credit adjust- ment curve (OCA), which incorporates more observable market data, including market-observed secondary prices for UBS senior debt, UBS credit default swap (CDS) spreads and senior debt curves of UBS’s peers. 428 Note 1 Summary of significant accounting policies (continued) This change in accounting estimate was finalized in the fourth quarter of 2015, following a multi-period implementation project to develop an enhanced fair value approach supported by related infrastructure enhancements. The change was implemented on a prospective basis in the fourth quarter of 2015 and resulted in a gain of CHF 260 million on a total carrying amount of CHF 63 billion in financial liabilities designated at fair value. Additionally, UBS will early adopt the own credit presentation requirements of IFRS 9 in the first quarter of 2016. No restate- ment of prior periods is required. Under IFRS 9, changes in the fair value of financial liabilities designated at fair value through profit and loss related to own credit will be recognized in Other compre- hensive income and will not be reclassified to the income state- ment. UBS will adopt the other requirements of IFRS 9 (classifica- tion and measurement, impairment and hedge accounting) as of the mandatory effective date in 2018. Global Asset Management renamed Asset Management During 2015, the business division Global Asset Management was renamed Asset Management. This change is reflected throughout this report. Retail & Corporate renamed Personal & Corporate Banking Effective 2016, the business division Retail & Corporate has been renamed Personal & Corporate Banking. This change is reflected throughout this report. New structure of the Corporate Center As of 1 January 2015, Corporate Center – Core Functions was reorganized into two new units, Corporate Center – Services and Corporate Center – Group Asset and Liability Management (Group ALM). Therefore, UBS now reports: (i) Corporate Center – Services, (ii) Corporate Center – Group ALM and (iii) Corporate Center – Non-Core and Legacy Portfolio separately, which enhances the transparency on Corporate Center activities. Group ALM is responsible for centrally managing the Group’s liquidity and funding position, as well as providing other balance sheet and capital management services to the Group. Most of the income generated and expenses incurred by Group ALM from these activities continues to be allocated to the business divisions and other Corporate Center units. Additional transparency on revenue allocations from Group ALM to business divisions and other Corporate Center units is provided in Note 2. Own credit gains and losses on financial liabilities designated at fair value are presented in Group ALM. Corporate Center – Services includes the Group’s central con- trol functions and all logistics and support functions serving the business divisions and other Corporate Center units. Most of the expenses of Corporate Center – Services are allocated to the busi- ness divisions and other Corporate Center units. ➔ Refer to Note 2 for more information Service and personnel allocations from Corporate Center –Ser- vices to business divisions and other Corporate Center units In 2015, UBS revised the presentation of service allocations from Corporate Center – Services to the business divisions and other Corporate Center units to better reflect the economic relation- ship between them. These cost allocations were previously pre- sented within the Personnel expenses, General and administrative expenses and Depreciation and impairment of property, equip- ment and software line items and are newly presented in the Ser- vices (to) / from business divisions and Corporate Center line items. Prior-period information was restated to reflect this change. This change in presentation did not affect total operating expenses or performance before tax of the business divisions and Corporate Center units for any period presented. Similarly, personnel of Cor- porate Center – Services are no longer allocated to the business divisions and other Corporate Center units. Prior-period informa- tion was restated accordingly. ➔ Refer to Note 2 for more information Change in segment reporting related to fair value gains and losses on certain internal funding transactions Consistent with changes in the manner in which operating seg- ment performance is assessed, beginning in 2015, UBS has applied fair value accounting for certain internal funding trans- actions between Corporate Center – Group ALM and the Invest- ment Bank and Corporate Center – Non-core and Legacy Portfolio rather than applying amortized cost accounting. This treatment better aligns with the mark-to-market basis on which these inter- nal transactions are risk managed within the Investment Bank and Corporate Center – Non-core and Legacy Portfolio. The terms of the funding transactions remain otherwise unchanged. Prior peri- ods have been restated to reflect this change. As a result, Invest- ment Bank operating income and performance before tax decreased by CHF 37 million for the year ended 31 December 2014 and by CHF 162 million for the year ended 31 December 2013, with offsetting increases in Corporate Center. This change did not affect the Group’s total operating income or net profit for any period presented. ➔ Refer to Note 2 for more information 429 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) c) International Financial Reporting Standards and Interpretations to be adopted in 2016 and later and other adjustments IFRS 9, Financial Instruments In July 2014, the IASB published the final version of IFRS 9, Finan- cial Instruments. The standard reflects the classification and mea- surement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39, Financial Instruments: Recognition and Measurement. 9 hedge accounting requirements is optional, pending the com- pletion by the IASB of its project on macro hedge accounting strategies. UBS will adopt the own credit presentation changes in the first quarter of 2016 and is currently assessing the impact of the other requirements of IFRS 9 on its financial statements. The standard requires all financial assets, except equity instru- ments, to be classified at fair value through profit or loss, fair value through other comprehensive income (OCI) or amortized cost on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. If a financial asset meets the criteria to be measured at amortized cost or at fair value through OCI, it can be designated at fair value through profit or loss under the fair value option if doing so would significantly reduce or eliminate an accounting mismatch. Equity instruments that are not held for trading may be accounted for at fair value through OCI, with no subsequent reclassification of realized gains or losses to the income statement, while all other equity instruments will be accounted for at fair value through profit or loss. The accounting guidance for financial liabilities is unchanged with one exception: any gain or loss arising out of a financial lia- bility designated at fair value through profit or loss that is attribut- able to changes in the credit risk of that liability (own credit) is presented in OCI and not recognized in the income statement. There is no subsequent reclassification of realized gains or losses on own credit from OCI to the income statement. In addition, the standard introduces a forward-looking expected credit loss impairment model, replacing the incurred loss model of IAS 39. IFRS 9 also incorporates a reformed approach to hedge accounting that introduces substantial changes to hedge effectiveness and eligibility requirements as well as new disclo- sures. The standard does not explicitly address macro hedge accounting strategies. The mandatory effective date of the new standard is 1 Janu- ary 2018, with earlier adoption permitted. Adoption of the IFRS IFRS 15, Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which establishes principles for revenue recogni- tion that apply to all contracts with customers. The standard requires an entity to recognize revenue as goods or services are transferred to the customer in an amount that reflects the consid- eration to which the entity expects to be entitled to in exchange for those goods or services. It also establishes a cohesive set of disclosure requirements regarding information about the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. The standard is effective for UBS report- ing periods beginning on 1 January 2018, with early adoption permitted. Entities can choose to apply the standard retrospec- tively or use a modified approach in the year of adoption. UBS is currently assessing the impact of the new standard on its financial statements. IFRS 16, Leases In January 2016, the IASB issued IFRS 16, Leases. The standard substantially changes the accounting by lessees as operating leases previously accounted for as off-balance sheet financing arrangements will be recognized as on-balance sheet liabilities with a corresponding right of use asset also being recorded. The standard replaces IAS 17, Leases and is effective for UBS from 1 January 2019. Early application is permitted for companies that also apply IFRS 15, Revenue from Contracts with Customers. UBS is currently assessing the impact of the new standard on its finan- cial statements. The Group’s undiscounted minimum lease pay- ments for operating leases are disclosed in Note 33. 430 Note 1 Summary of significant accounting policies (continued) Amendments to IFRS 11, Joint Arrangements; IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets In May 2014, the IASB issued amendments to IFRS 11, Joint Arrange- ments, IAS 16, Property, Plant and Equipment and IAS 38, Intangi- ble Assets. The standard is effective for UBS reporting periods beginning on 1 January 2016. The amendments will have no mate- rial impact on the Group’s financial statements. UBS’s joint arrange- ments are immaterial, both individually and in aggregate (refer to Note 30), and UBS does not use revenue-based depreciation meth- odologies, which the amendments to IAS 16 and IAS 38 prohibit. Annual Improvements to IFRSs 2012 – 2014 Cycle In September 2014, the IASB issued Annual Improvements to IFRSs 2012 – 2014 Cycle that resulted in amendments to four IFRSs (IFRS 5, Non-current asset held for sale and discontinued operations, IFRS 7, Financial Instruments Disclosures, IAS 19, Employee Benefits and IAS 34, Interim Financial Reporting). Gen- erally, the amendments are effective for UBS on 1 January 2016. UBS expects that the adoption of these amendments will not have a material impact on its financial statements. Amendments to IAS 1, Presentation of Financial Statements In December 2014, the IASB issued amendments to IAS 1 to fur- ther encourage companies to apply professional judgment in determining what information to disclose in their financial state- ments and in determining where and in what order information is presented in the financial disclosures. The amendments have a mandatory effective date of 1 January 2016 for the Group. The adoption of these amendments will not have a material impact on the Group’s financial statements. Amendments to IAS 12, Income Taxes In January 2016, the IASB issued narrow scope amendments to IAS 12, Income Taxes, clarifying how to account for deferred tax assets related to debt instruments measured at fair value. Enti- ties are required to apply the amendments for annual periods beginning on or after 1 January 2017. UBS expects that the adop- tion of these amendments will not have a material impact on its financial statements. Amendments to IAS 7, Statement of Cash Flows In January 2016, the IASB issued amendments to IAS 7, State- ment of Cash Flows, which inter-alia requires companies to pro- vide information about changes in their financial liabilities arising from financing activities, including changes from cash flows and non-cash changes (such as foreign exchange gains or losses). Enti- ties are required to apply the amendments for annual periods beginning on or after 1 January 2017. 431 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 2a Segment reporting The operational structure of the Group is comprised of the Corpo- rate Center and five business divisions: Wealth Management, Wealth Management Americas, Personal & Corporate Banking, Asset Management and the Investment Bank. Asset Management Asset Management is a large-scale global asset manager. It offers investment capabilities and investment styles across all major tra- ditional and alternative asset classes to institutions, wholesale intermediaries and wealth management clients around the world. Wealth Management Wealth Management provides comprehensive financial services to wealthy private clients around the world, with the exception of those served by Wealth Management Americas. UBS is a global firm with global capabilities, and its clients benefit from a full spectrum of resources, including wealth planning, investment management solutions and corporate finance advice, banking and lending solutions as well as a wide range of specific offerings. Wealth Management’s guided architecture model gives clients access to a wide range of products from the world’s leading third- party institutions that complement its own products. Wealth Management Americas Wealth Management Americas is one of the leading wealth man- agers in the Americas in terms of financial advisor productivity and invested assets. Its business includes UBS’s domestic US and Canadian wealth management businesses, as well as interna- tional business booked in the US. It provides a fully integrated set of wealth management solutions designed to address the needs of ultra high net worth and high net worth clients. Personal & Corporate Banking Personal & Corporate Banking provides comprehensive financial products and services to UBS’s private, corporate and institutional clients in Switzerland, maintaining a leading position in these seg- ments and embedding its offering in a multi-channel approach. The business is a central element of UBS’s universal bank delivery model in Switzerland, supporting other business divisions by referring clients and growing the wealth of the firm’s private cli- ents so they can be transferred to Wealth Management. Personal & Corporate Banking leverages the cross-selling potential of UBS’s asset-gathering and investment bank businesses, and manages a substantial part of UBS’s Swiss infrastructure and banking prod- ucts platform. Investment Bank The Investment Bank provides corporate, institutional and wealth management clients with expert advice, innovative solutions, exe- cution and comprehensive access to international capital markets. It offers advisory services and provides in-depth cross-asset research, along with access to equities, foreign exchange, pre- cious metals and selected rates and credit markets, through its business units, Corporate Client Solutions and Investor Client Ser- vices. The Investment Bank is an active participant in capital mar- kets flow activities, including sales, trading and market-making across a range of securities. Corporate Center Corporate Center is comprised of Services, Group Asset and Lia- bility Management (Group ALM) and Non-core and Legacy Port- folio. Services includes the Group’s control functions such as finance, risk control (including compliance) and legal. In addition, it provides all logistics and support services, including operations, information technology, human resources, regulatory relations and strategic initiatives, communications and branding, corporate services, physical security, information security as well as out- sourcing, nearshoring and offshoring. Group ALM is responsible for centrally managing the Group’s liquidity and funding position, as well as providing other balance sheet and capital management services to the Group. Non-core and Legacy Portfolio is comprised of the non-core businesses and legacy positions that were part of the Investment Bank prior to its restructuring. 432 Note 2a Segment reporting (continued) Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CHF million For the year ended 31 December 2015 Corporate Center UBS Services Group ALM Non-core and Legacy Portfolio Net interest income Non-interest income Allocations from Corporate Center – Group ALM to business divisions and other CC units Income1, 2 Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets3 Total operating expenses4 Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Additional Information Total assets 1,825 5,859 471 8,155 0 8,155 2,532 637 2,289 2,209 5 3 5,465 2,689 1,067 6,213 104 7,384 (4) 7,381 4,579 822 1,209 1,193 3 51 6,663 718 1,890 1,603 421 3,913 (37) 3,877 873 264 1,077 1,180 17 0 2,231 1,646 (34) 2,077 15 2,057 0 2,057 729 232 502 523 2 8 1,474 584 1,573 7,526 (211) 8,889 (68) 8,821 3,220 841 2,817 2,731 26 24 6,929 1,892 (340) 435 145 241 0 241 3,903 4,483 (8,215) (8,245) 868 21 1,059 (818) 795 356 (876) 277 0 277 30 21 (56) 95 0 0 (5) 282 (44) (79) (71) (195) (8) (203) 116 807 378 314 0 0 1,301 (1,503) 6,732 23,990 0 30,722 (117) 30,605 15,981 8,107 0 0 920 107 25,116 5,489 (898) 6,386 Additions to non-current assets 6 4 14 1 18 119,850 60,993 141,164 12,874 253,486 22,566 1,851 237,517 94,369 0 1 942,819 1,895 1 Impairments of financial investments available-for-sale for the year ended 31 December 2015 totaled CHF 1 million, of which CHF 1 million was incurred in Wealth Management. 2 Refer to Note 24 for more infor- mation on own credit in Corporate Center – Group ALM. 3 Refer to Note 17 for more information. 4 Refer to Note 32 for information on restructuring expenses. 433 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 2a Segment reporting (continued)1 Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CHF million For the year ended 31 December 2014 Corporate Center UBS Services Group ALM Non-core and Legacy Portfolio Net interest income Non-interest income Allocations from Corporate Center – Group ALM to business divisions and other CC units Income2, 3 Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets4 Total operating expenses5 Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Additional Information Total assets 1,693 5,726 481 7,902 (1) 7,901 2,467 918 2,180 2,122 4 5 5,574 2,326 864 6,004 116 6,984 15 6,998 4,363 550 1,137 1,121 0 48 6,099 900 1,801 1,575 461 3,836 (95) 3,741 850 293 1,074 1,196 17 0 2,235 1,506 (39) 1,914 27 1,902 0 1,902 643 305 478 495 2 9 1,435 467 1,583 6,823 (100) 8,306 2 8,308 2,964 2,671 2,711 2,658 32 15 8,392 (84) (338) 158 217 37 0 37 3,843 4,123 (8,046) (8,084) 762 6 688 (652) 816 307 (1,120) 2 0 2 26 21 (47) 82 0 0 0 2 174 (956) (82) (863) 2 (862) 124 507 513 411 0 0 1,144 (2,005) 6,555 21,550 0 28,105 (78) 28,027 15,280 9,387 0 0 817 83 25,567 2,461 (1,180) 3,640 Additions to non-current assets 7 6 9 2 7 127,588 56,026 143,711 15,207 292,347 19,871 1,677 237,902 169,826 1,062,478 0 0 1,708 1 Figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. Refer to Note 1b for more information. 2 Impairments of financial investments available-for-sale for the year ended 31 December 2014 totaled CHF 76 million, of which CHF 49 million were incurred in the Investment Bank and CHF 23 million were incurred in Corporate Center – Non-core and Legacy Portfolio. 3 Refer to Note 24 for more information on own credit in Corporate Center – Group ALM. 4 Refer to Note 17 for more information. 5 Refer to Note 32 for information on restructuring expenses. 434 Note 2a Segment reporting (continued)1 Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CHF million For the year ended 31 December 2013 Corporate Center UBS Services Group ALM Non-core and Legacy Portfolio Net interest income Non-interest income Allocations from Corporate Center – Group ALM to business divisions and other CC units Income2, 3 Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets4 Total operating expenses5 Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Additional Information Total assets 1,568 5,519 486 7,573 (10) 7,563 2,433 708 2,165 2,074 3 7 5,316 2,247 742 5,629 193 6,565 (27) 6,538 4,102 383 1,145 1,127 0 49 5,680 858 1,822 1,556 396 3,774 (18) 3,756 843 297 1,140 1,301 19 0 2,298 1,458 (44) 1,954 23 1,935 0 1,935 609 218 521 535 4 8 1,359 576 1,102 7,552 (217) 8,436 2 8,438 2,899 843 2,517 2,487 28 13 6,300 2,138 (388) 347 218 178 0 178 4,065 4,249 (8,276) (8,304) 761 4 804 624 (544) (921) (841) 0 (841) 26 14 3 87 0 0 43 (626) (884) 359 (18) 5,786 21,997 (179) 163 3 166 205 1,668 785 693 0 2 2,660 (2,494) 0 27,782 (50) 27,732 15,182 8,380 0 0 816 83 24,461 3,272 (110) 3,381 Additions to non-current assets 5 1 17 1 81 109,758 45,491 141,369 14,223 239,971 17,203 1,236 230,204 215,135 1,013,355 0 0 1,341 1 Figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. Refer to Note 1b for more information. 2 Impairments of financial investments available-for-sale for the year ended 31 December 2013 totaled CHF 41 million, of which CHF 10 million was incurred in Wealth Management, CHF 20 million was incurred in the Investment Bank and CHF 8 million was incurred in Corporate Center – Non-core and Legacy Portfolio. 3 Refer to Note 24 for more information on own credit in Corporate Center – Group ALM. 4 Refer to Note 17 for more information. 5 Refer to Note 32 for information on restructuring expenses. 435 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 2b Segment reporting by geographic location The operating regions shown in the table below correspond to the regional management structure of the Group. The allocation of operating income to these regions reflects, and is consistent with, the basis on which the business is managed and its perfor- mance evaluated. These allocations involve assumptions and judgments that management considers to be reasonable, and may be refined to reflect changes in estimates or management structure. The main principles of the allocation methodology are that client revenues are attributed to the domicile of the client and trading and portfolio management revenues are attributed to the country where the risk is managed. This revenue attribu- tion is consistent with the mandate of the country and regional Presidents. Certain revenues, such as those related to Corporate Center – Non-core and Legacy Portfolio, are managed at a Group level. These revenues are included in the Global line. The geographic analysis of non-current assets is based on the location of the entity in which the assets are recorded. Total operating income Total non-current assets CHF billion Share % CHF billion Share % 11.3 10.7 5.0 6.8 7.1 0.5 30.6 37 35 16 22 23 2 100 7.1 6.7 0.5 1.7 5.9 0.0 15.2 47 44 3 11 39 0 100 Total operating income Total non-current assets CHF billion Share % CHF billion Share % 10.7 10.1 4.6 6.8 6.8 (0.9) 28.0 38 36 16 24 24 (3) 100 7.0 6.6 0.4 1.5 5.6 0.0 14.6 48 45 3 10 38 0 100 Total operating income Total non-current assets CHF billion Share % CHF billion Share % 10.2 9.6 4.5 6.6 6.8 (0.4) 27.7 37 35 16 24 25 (1) 100 6.1 5.6 0.4 1.5 5.3 0.0 13.1 46 43 3 11 40 0 100 For the year ended 31 December 2015 Americas of which: USA Asia Pacific Europe, Middle East and Africa Switzerland Global Total For the year ended 31 December 2014 Americas of which: USA Asia Pacific Europe, Middle East and Africa Switzerland Global Total For the year ended 31 December 2013 Americas of which: USA Asia Pacific Europe, Middle East and Africa Switzerland Global Total 436 Income statement notes Note 3 Net interest and trading income CHF million Net interest and trading income Net interest income Net trading income Total net interest and trading income Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank of which: Corporate Client Solutions of which: Investor Client Services Corporate Center of which: Services of which: Group ALM of which: own credit on financial liabilities designated at fair value1 of which: Non-core and Legacy Portfolio Total net interest and trading income Net interest income Interest income Interest earned on loans and advances2 Interest earned on securities financing transactions3 Interest and dividend income from trading portfolio Interest income on financial assets designated at fair value Interest and dividend income from financial investments available-for-sale Total Interest expense Interest on amounts due to banks and customers Interest on securities financing transactions4 Interest expense from trading portfolio5 Interest on financial liabilities designated at fair value Interest on debt issued Total Net interest income Net trading income Investment Bank Corporate Client Solutions Investment Bank Investor Client Services 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 value1, 6 For the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 6,732 5,742 12,474 3,034 1,537 2,613 (5) 5,186 1,001 4,185 110 (3) 426 553 (313) 6,555 3,842 10,397 2,845 1,352 2,536 0 4,517 1,030 3,487 (854) 34 16 292 (904) 5,786 5,130 10,915 2,868 1,323 2,485 9 4,852 1,146 3,707 (622) (166) (535) (283) 79 12,474 10,397 10,915 8,625 896 3,071 194 391 8,722 752 3,196 208 315 8,686 852 2,913 364 322 13,177 13,194 13,137 476 976 1,670 730 2,592 6,445 6,732 321 3,494 1,928 5,742 (127) 3,701 708 827 1,804 919 2,382 6,639 6,555 276 2,760 807 3,842 (89) (2,380) 893 829 1,846 1,197 2,586 7,351 5,786 425 3,541 1,164 5,130 99 (2,056) 3 49 20 7 14 3 15 (3) 20 89 (65) 20 (1) 19 (4) (7) 24 0 (33) 18 (7) (21) 9 (3) 3 16 27 139 49 43 1 Refer to Note 24 for more information on own credit. 2 Includes interest income on impaired loans and advances of CHF 16 million for 2015, CHF 15 million for 2014 and CHF 15 million for 2013. 3 Includes inter- est income on securities borrowed and reverse repurchase agreements and negative interest, including fees, on securities lent and repurchase agreements. 4 Includes interest expense on securities lent and repurchase agreements and negative interest, including fees, on securities borrowed and reverse repurchase agreements. 5 Includes expense related to dividend payment obligations on trading liabilities. 6 Excludes fair value changes of hedges related to financial liabilities designated at fair value and foreign currency translation effects arising from translating foreign currency transactions into the respective functional currency, both of which are reported within net trading income. 437 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 4 Net fee and commission income CHF million Underwriting fees of which: equity underwriting fees of which: debt underwriting fees M&A and corporate finance fees Brokerage fees Investment fund fees Portfolio management and advisory fees Other Total fee and commission income Brokerage fees paid Other Total fee and commission expense Net fee and commission income of which: net brokerage fees Note 5 Other income CHF million Associates and subsidiaries Net gains / (losses) from disposals of subsidiaries1 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 (excluding net gains / (losses) from disposals)3 Net gains / (losses) from investment properties4 Net gains / (losses) from disposals of properties held for sale Net gains / (losses) from disposals of loans and receivables Other Total other income For the year ended 31.12.15 1,246 31.12.14 1,470 31.12.13 1,374 836 410 737 3,930 3,567 7,858 1,678 19,016 869 1,007 1,876 17,140 3,060 947 522 731 3,918 3,717 7,343 1,760 18,940 818 1,045 1,863 17,076 3,100 850 524 613 4,035 3,803 6,625 1,725 18,176 839 1,050 1,889 16,287 3,196 % change from 31.12.14 (15) (12) (21) 1 0 (4) 7 (5) 0 6 (4) 1 0 (1) For the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 2642 0 169 433 252 (1) 251 28 (1) 378 26 (8)5 1,107 56 69 94 219 219 (76) 143 30 2 44 39 155 632 111 0 49 160 209 (41) 168 35 (16) 291 53 (111) 580 371 (100) 80 98 15 (99) 76 (7) 759 (33) 75 1 Includes foreign exchange gains / (losses) reclassified from other comprehensive income related to disposed or dormant subsidiaries. 2 Includes a net gain on sale of subsidiaries of CHF 113 million in Wealth Man- agement and a net gain on sale of subsidiaries of CHF 56 million in Asset Management. Refer to Note 32 for more information. 3 Includes net rent received from third parties and net operating expenses. 4 Includes unrealized and realized gains / (losses) from investment properties and foreclosed assets. 5 Includes a net gain on sale of businesses of CHF 56 million in Wealth Management. Refer to Note 32 for more information. 438 Note 6 Personnel expenses CHF million Salaries1 Variable compensation – performance awards2 of which: guarantees for new hires Variable compensation – other2 of which: replacement payments3 of which: forfeiture credits of which: severance payments4 of which: retention plan and other payments Contractors Social security Pension and other post-employment benefit plans5 Wealth Management Americas: Financial advisor compensation2, 6 Other personnel expenses Total personnel expenses7 For the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 6,282 3,210 38 346 76 (86) 157 198 365 820 808 3,552 600 15,981 6,269 2,820 48 466 81 (70) 162 292 234 791 711 3,385 605 15,280 6,268 2,986 76 288 78 (146) 114 242 190 792 887 3,140 631 15,182 0 14 (21) (26) (6) 23 (3) (32) 56 4 14 5 (1) 5 1 Includes role-based allowances. 2 Refer to Note 29 for more information. 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 Refer to Note 28 for more information. 6 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues gener- ated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes expenses related to compensation commitments with financial advisors entered into at the time of recruitment which are subject to vesting requirements. 7 Includes net restructuring expenses of CHF 460 million, CHF 327 million and CHF 156 million for the years ended 31 December 2015, 31 December 2014 and 31 December 2013, respectively. Refer to Note 32 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 Provisions for litigation, regulatory and similar matters1 Other Total general and administrative expenses2 31.12.15 930 510 611 718 486 460 1,354 1,743 1,087 208 8,107 For the year ended 31.12.14 1,005 31.12.13 1,044 479 608 610 468 458 1,306 1,603 2,594 256 9,387 458 609 638 478 451 1,032 1,340 1,701 628 8,380 % change from 31.12.14 (7) 6 0 18 4 0 4 9 (58) (19) (14) 1 Reflects the net increase in provisions for litigation, regulatory and similar matters recognized in the income statement. Refer to Note 22 for more information. Also includes recoveries from third parties of CHF 10 mil- lion, CHF 10 million and CHF 15 million for the years ended 31 December 2015, 31 December 2014 and 31 December 2013, respectively. 2 Includes net restructuring expenses of CHF 761 million, CHF 319 million and CHF 548 million for the years ended 31 December 2015, 31 December 2014 and 31 December 2013, respectively. Refer to Note 32 for more information. 439 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 8 Income taxes CHF million Tax expense / (benefit) Swiss Current Deferred Non-Swiss Current Deferred Total income tax expense / (benefit) Income tax expense / (benefit) The Swiss current tax expense of CHF 239 million related to tax- able profits against which no losses were available to offset, mainly earned by Swiss subsidiaries. The Swiss deferred tax expense of CHF 330 million mainly reflected a net decrease of deferred tax assets previously recognized in relation to tax losses carried forward, partially offset by an increase in recognized deferred tax assets related to temporary differences. The non-Swiss current tax expense of CHF 476 million related to taxable profits earned by non-Swiss subsidiaries and branches, against which no losses were available to offset. The non-Swiss net deferred tax benefit of CHF 1,943 million was primarily due For the year ended 31.12.15 31.12.14 31.12.13 239 330 476 (1,943) (898) 46 1,348 409 (2,983) (1,180) 93 455 342 (1,000) (110) to an increase in US deferred tax assets, reflecting updated profit forecasts and an extension of the relevant taxable profit forecast period used in valuing deferred tax assets. Based on the perfor- mance of its businesses and the accuracy of historical forecasts, UBS extended the deferred tax asset forecast period for US tax- able profits to seven years from six. In addition, UBS considers other factors in evaluating the recoverability of its deferred tax assets, including the remaining tax loss carry-forward period, and its confidence level in assessing the probability of taxable profit beyond the current forecast period. Estimating future prof- itability is inherently subjective and is particularly sensitive to future economic, market and other conditions which are difficult to predict. CHF million Operating profit / (loss) before tax of which: Swiss of which: Non-Swiss Income taxes at Swiss tax rate of 21% Increase / (decrease) resulting from: Non-Swiss tax rates differing from Swiss tax rate Tax effects of losses not recognized Previously unrecognized tax losses now utilized Non-taxable and lower taxed income Non-deductible expenses and additional taxable income Adjustments related to prior years – current tax Adjustments related to prior years – deferred tax Change in deferred tax valuation allowances Adjustments to deferred tax balances arising from changes in tax rates Other items Income tax expense / (benefit) 440 For the year ended 31.12.15 31.12.14 31.12.13 5,489 3,753 1,736 1,153 (73) 107 (107) (297) 541 29 (48) (2,419) 190 27 (898) 2,461 1,173 1,288 517 70 325 (285) (384) 1,069 5 (9) (2,373) (183) 69 (1,180) 3,272 3,323 (51) 687 (305) 58 (419) (624) 1,245 (32) 6 (859) 107 28 (110) Note 8 Income taxes (continued) The components of operating profit before tax, and the differ- ences between income tax expense reflected in the financial statements and the amounts calculated at the Swiss tax rate, are provided in the table on the previous page and explained below. expense arises in relation to those taxable profits. Therefore, the tax expense calculated by applying the local rate on those profits is reversed. Non-Swiss tax rates differing from Swiss tax rate To the extent that Group profits or losses arise outside Switzer- land, the applicable local tax rate may differ from the Swiss tax rate. This item reflects, for such profits or losses, an adjustment from the tax expense / benefit that would arise at the Swiss tax rate and the tax expense / benefit that would arise at the applica- ble local tax rate. If an entity generates a profit, a tax expense arises where the local tax rate is in excess of the Swiss tax rate and a tax benefit arises where the local tax rate is below the Swiss tax rate. Conversely, if an entity incurs a loss, a tax benefit arises where the local tax rate is in excess of the Swiss tax rate and a tax expense arises where the local tax rate is less than the Swiss tax rate. Tax effects of losses not recognized This item relates to tax losses of entities arising in the year, which are not recognized as deferred tax assets. Consequently, no tax benefit arises in relation to those losses. Therefore, the tax benefit calculated by applying the local tax rate to those losses as described above is reversed. Previously unrecognized tax losses now utilized This item relates to taxable profits of the year, which are offset by tax losses of previous years, for which no deferred tax assets were previously recorded. Consequently, no current tax or deferred tax Non-taxable and lower taxed income This item relates to profits for the year, which are either perma- nently not taxable or are taxable, but at a lower rate of tax than the local tax rate. It also includes any permanent deductions made for tax purposes, which are not reflected in the accounts, thereby effectively ensuring that profits covered by the deduction are not taxable. Non-deductible expenses and additional taxable income This item mainly relates to income for the year, which is imputed for tax purposes for an entity, but is not included in its operating profit. In addition, it includes expenses for the year which are per- manently non-deductible. Adjustments related to prior years – current tax This item relates to adjustments to current tax expenses for prior years, for example, if the tax payable for a year agreed with the tax authorities is expected to differ from the amount previously reflected in the accounts. Adjustments related to prior years – deferred tax This item relates to adjustments to deferred tax positions recog- nized in prior years, for example, if a tax loss for a year is fully recognized and the amount of the tax loss agreed with the tax authorities is expected to differ from the amount previously rec- ognized as deferred tax assets in the accounts. 441 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 8 Income taxes (continued) Change in deferred tax valuation allowances This item includes revaluations of deferred tax assets previously recognized resulting from reassessments of expected future tax- able profits. It also includes changes in temporary differences in the year, for which deferred tax is not recognized. The amount in the year mainly relates to the upward revaluation of deferred tax assets. Adjustments to deferred tax balances arising from changes in tax rates This item relates to re-measurements of deferred tax assets and liabilities recognized due to changes in tax rates. These have the effect of changing the future tax saving that is expected from tax losses or deductible tax differences and therefore the amount of deferred tax assets recognized or, alternatively, changing the tax cost of additional taxable income from taxable temporary differ- ences and therefore the deferred tax liability. Other items Other items include other differences between profit or losses at the local tax rate and the actual local tax expense or benefit, including increases in provisions for uncertain positions in relation to the current year, interest accruals for such provisions in relation to prior years and other items. CHF million Deferred tax assets1 Tax loss carry-forwards Temporary differences of which: related to compensation and benefits of which: related to trading assets of which: related to investments in subsidiaries and goodwill of which: other Total deferred tax assets Deferred tax liabilities Goodwill and intangible assets Financial investments Investments in associates and other Total deferred tax liabilities 1 Less deferred tax liabilities as applicable. 442 Tax recognized in equity Certain tax expenses and benefits were recognized directly in equity. These included a tax benefit of CHF 131 million related to cash flow hedges (2014: expense of CHF 196 million), a tax ben- efit of CHF 8 million related to financial investments classified as available-for-sale (2014: expense of CHF 52 million), a tax expense of CHF 1 million related to foreign currency translation gains and losses (2014: expense of CHF 7 million) and a tax expense of CHF 19 million related to defined benefit plans (2014: benefit of CHF 246 million) recognized in other comprehensive income. In addi- tion, they included a tax benefit of CHF 9 million recognized in share premium (2014: benefit of CHF 3 million). Furthermore, there were net foreign currency translation movements related to the effects of exchange rate changes on tax assets and liabilities denominated in currencies other than Swiss francs. Deferred tax assets and liabilities The Group has deferred tax assets related to tax loss carry-for- wards and other items as shown in the table below. As of 31 December 2015, deferred tax assets of CHF 2,094 million (CHF 1,378 million as of 31 December 2014) were recognized by enti- ties which incurred losses in either the current or preceding year. The valuation allowance reflects deferred tax assets which were not recognized because it was not considered probable that future taxable profits will be available to utilize the related tax loss carry-forwards and deductible temporary differences. 31.12.15 Valuation allowance Recognized (18,378) (1,284) (267) (77) 0 (940) 7,093 5,742 1,310 1,038 2,310 1,084 Gross 25,471 7,026 1,576 1,116 2,310 2,023 32,497 (19,661) 12,835 31.12.14 Valuation allowance (22,271) (1,264) (317) (61) 0 (886) (23,535) Recognized 7,456 3,605 1,107 1,398 0 1,100 11,060 Gross 29,727 4,869 1,424 1,459 0 1,986 34,596 28 1 27 56 32 13 35 80 Note 8 Income taxes (continued) As of 31 December 2015, tax loss carry-forwards totaling CHF 56,973 million (31 December 2014: CHF 68,869 million), which are not recognized as deferred tax assets, were available to be offset against future taxable profits. These tax losses expire as out- lined in the table below. Unrecognized tax loss carry-forwards CHF million Within 1 year From 2 to 5 years From 6 to 10 years From 11 to 20 years No expiry Total 31.12.15 31.12.14 3,727 33 753 34,833 17,627 56,973 9,341 43 613 39,899 18,973 68,869 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. The Group recognizes deferred tax liabilities on undistributed earnings of subsidiaries except to the extent that those earnings are indefinitely invested. As of 31 December 2015, no such earn- ings were considered indefinitely invested. 443 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 9 Earnings per share (EPS) and shares outstanding As of or for the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 Basic earnings (CHF million) Net profit / (loss) attributable to UBS Group AG shareholders Diluted earnings (CHF million) Net profit / (loss) attributable to UBS Group AG shareholders Less: (profit) / loss on UBS Group AG equity derivative contracts Net profit / (loss) attributable to UBS Group AG shareholders for diluted EPS 6,203 3,466 3,172 6,203 0 6,203 3,466 0 3,466 3,172 0 3,172 Weighted average shares outstanding Weighted average shares outstanding for basic EPS Effect of dilutive potential shares resulting from notional shares, in-the-money options and warrants outstanding Weighted average shares outstanding for diluted EPS 3,690,375,879 3,720,188,713 3,763,076,788 90,898,386 85,325,322 81,111,217 3,781,274,265 3,805,514,035 3,844,188,005 Earnings per share (CHF) Basic Diluted Shares outstanding1 Shares issued Treasury shares Shares outstanding Exchangeable shares Shares outstanding for EPS 1.68 1.64 0.93 0.91 0.84 0.83 3,849,731,535 3,717,128,324 3,842,002,069 98,706,275 87,871,737 73,800,252 3,751,025,260 3,629,256,587 3,768,201,817 0 0 246,042 3,751,025,260 3,629,256,587 3,768,447,859 79 79 79 (1) 7 (1) 81 80 4 12 3 3 1 As UBS Group AG is considered to be the continuation of UBS AG, UBS AG share information is presented for the comparative period as of 31 December 2013. The table below outlines the potential shares which could dilute basic earnings per share in the future, but were not dilutive for the periods presented. Number of shares 31.12.15 31.12.14 31.12.13 31.12.14 % change from Potentially dilutive instruments Employee share-based compensation awards Other equity derivative contracts Total 67,766,835 6,061,848 94,335,120 6,728,173 117,623,624 16,517,384 73,828,683 101,063,293 134,141,008 (28) (10) (27) 444 Balance sheet notes: assets Note 10 Due from banks and loans (held at amortized cost) CHF million By type of exposure Due from banks, gross of which: due from central banks Allowance for credit losses Due from banks, net Loans, gross Residential mortgages Commercial mortgages Lombard loans Other loans1 Finance lease receivables2 Securities3 Subtotal Allowance for credit losses Loans, net Total due from banks and loans, net4 31.12.15 31.12.14 11,951 1,035 (3) 11,948 141,608 21,509 107,084 38,552 1,083 2,807 312,643 (689) 311,954 323,902 13,347 648 (13) 13,334 142,380 22,368 108,230 38,925 1,101 3,448 316,452 (695) 315,757 329,091 1 Includes corporate loans. 2 Refer to Note 33 for more information. 3 Includes securities reclassified from held for trading. Refer to Note 1a item 10 and Note 27 for more information. 4 Refer to “Maximum expo- sure to credit risk” in the “Risk management and control” section of this report for information on collateral and credit enhancements. 445 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements EDTF | Note 11 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 manages 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. ➔ Refer to Note 26 for more information on offsetting between financial assets and financial liabilities Balance sheet assets CHF million By counterparty Banks Customers Total Balance sheet liabilities CHF million By counterparty Banks Customers Total 31.12.15 31.12.14 Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments 8,658 16,925 25,584 12,903 54,991 67,893 6,037 17,727 23,763 10,517 13,546 24,063 13,746 54,668 68,414 10,265 20,713 30,979 31.12.15 31.12.14 Cash collateral on securities lent Repurchase agreements Cash collateral payables on derivative instruments Cash collateral on securities lent Repurchase agreements Cash collateral payables on derivative instruments 7,078 951 8,029 5,637 4,016 9,653 17,041 21,241 38,282 7,041 2,138 9,180 5,174 6,644 11,818 20,895 21,477 42,372 446 EDTF | Note 12 Allowances and provisions for credit losses CHF million By movement Balance at the beginning of the year Write-offs / usage of provisions Recoveries Increase / (decrease) recognized in the income statement Reclassifications Foreign currency translation Other Balance at the end of the year Specific allowances Collective allowances Total allowances 704 (162) 48 114 (9) (11) 2 686 8 (2) 0 0 0 0 0 6 711 (164) 48 114 (9) (11) 2 692 Provisions1 23 0 0 2 9 0 0 35 Total 31.12.15 Total 31.12.14 735 (164) 48 117 0 (11) 2 727 750 (154) 29 78 0 21 11 735 1 Represents provisions for loan commitments and guarantees. Refer to Note 22 for more information. Refer to the “Financial and operating performance” section of this report for the maximum irrevocable amount of loan commitments and guarantees. By balance sheet line Due from banks Loans Cash collateral on securities borrowed Provisions1 Balance at the end of the year 1 Represents provisions for loan commitments and guarantees. Specific allowances Collective allowances Total allowances Provisions Total 31.12.15 Total 31.12.14 3 683 0 686 0 6 0 6 3 689 0 692 3 689 0 35 727 35 35 13 695 4 23 735 447 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 13 Trading portfolio CHF million Trading portfolio assets by issuer type1 Debt instruments Government and government agencies of which: Switzerland of which: USA of which: United Kingdom of which: Australia of which: Sweden of which: Singapore of which: Germany Banks Corporates and other Total debt instruments Equity instruments 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 type1 Debt instruments Government and government agencies of which: Switzerland of which: USA of which: France of which: Italy of which: Australia of which: Japan of which: Germany Banks Corporates and other Total debt instruments Equity instruments Total trading portfolio liabilities 1 Refer to Note 24e for more information on product type and fair value hierarchy categorization. 448 31.12.15 31.12.14 18,768 16,625 119 6,050 3,915 1,649 1,274 1,259 796 2,691 19,431 40,890 63,984 15,519 120,393 3,642 124,035 7,257 50 2,754 915 838 798 725 510 782 2,014 10,053 19,084 29,137 293 3,816 2,103 2,307 191 822 1,280 4,342 24,252 45,219 69,763 17,410 132,392 5,764 138,156 8,716 232 2,987 1,259 569 1,087 810 335 743 2,591 12,050 15,908 27,958 Note 14 Derivative instruments and hedge accounting EDTF | Pillar 3 | Derivatives: overview A derivative is a financial instrument, the value of which is derived from the value of one or more variables (underlyings). Underlyings may be indices, foreign currency exchange or interest rates, or the value of shares, commodities, bonds or other financial instru- ments. A derivative commonly requires little or no initial net investment by either counterparty to the trade. The majority of derivative contracts are negotiated with respect to notional amounts, tenor, price and settlement mechanisms, as is customary with other financial instruments. Over-the-counter (OTC) derivative contracts are usually traded under a standardized International Swaps and Derivatives Associ- ation (ISDA) master agreement between UBS and its counterpar- ties. Terms are negotiated directly with counterparties and the contracts will have industry-standard settlement mechanisms pre- scribed by ISDA. The industry continues to promote the use of central counterparties (CCPs) to clear OTC trades. The trend toward CCP clearing and settlement will generally facilitate the reduction of systemic credit exposures. Other derivative contracts are standardized in terms of their amounts and settlement dates, and are bought and sold on regu- lated exchanges. These are commonly referred to as exchange- traded derivatives (ETD) contracts. Exchanges offer the benefits of pricing transparency, standardized daily settlement of changes in value, and consequently reduced credit risk. For presentation purposes, the Group is subject to the IFRS net- ting provisions for derivative contracts. Derivative instruments are measured at fair value and generally classified as Positive replace- ment values and Negative replacement values on the face of the balance sheet. However, ETD which are economically settled on a daily basis and certain OTC derivatives which are in substance net settled on a daily basis are classified as Cash collateral receivables on derivative instruments or Cash collateral payables on derivative instruments. Changes in the replacement values of derivatives are recorded in Net trading income, unless the derivatives are desig- nated and effective as hedging instruments in certain types of hedge accounting relationships. ➔ Refer to Note 1a item 15 for more information Valuation principles and techniques applied in the measure- ment of derivative instruments are discussed in Note 24. Positive replacement values represent the estimated amount the Group would receive if the derivative contract were sold on the balance sheet date. Negative replacement values indicate the estimated amount the Group would pay to transfer its obligations in respect of the underlying contract, were it required or entitled to do so on the balance sheet date. Derivatives embedded in other financial instruments are not included in the table “Derivative instruments” within this Note. Bifurcated embedded derivatives are presented on the same bal- ance sheet line as the host contract. In cases where UBS applies the fair value option to hybrid instruments, bifurcation of an embedded derivative component is not required and as such, this component is also not included in the table “Derivative instru- ments.” ➔ Refer to Notes 20 and 24 for more information EDTF | Pillar 3 | Types of derivative instruments The Group uses various derivative financial instruments for both trading and hedging purposes. Through the use of the products listed below, the Group is engaged in extensive high-volume mar- ket-making and client facilitation trading referred to as the flow business. The main types of derivative instruments used by the Group are: – Swaps: Swaps are transactions in which two parties exchange cash flows on a specified notional amount for a predetermined period. Cross-currency swaps involve the exchange of interest payments based on two different currency notional amounts and reference interest rates and generally also entail exchange of notional amounts at the start or end of the contract. Most cross-currency swaps are traded in the OTC market. – Forwards and futures: Forwards and futures are contractual obligations to buy or sell financial instruments or commodities on a future date at a specified price. Forward contracts are tailor-made agreements that are transacted between counter- parties in the OTC market, whereas futures are standardized contracts transacted on regulated exchanges. – 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- ified quantity of a financial 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). 449 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 14 Derivative instruments and hedge accounting (continued) The main derivative product types used by the Group are: – Interest rate contracts: Interest rate products include interest rate swaps, forward rate agreements, swaptions and caps and floors. – Credit derivative contracts: 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 occur- rence of a contractually defined credit event with respect to a specified third-party credit entity. Settlement following a credit event may be a net cash amount, or cash in return for physical delivery of one or more obligations of the credit entity, and is made regardless of whether the protection buyer has actually suffered a loss. After a credit event and settlement, the con- tract is generally terminated. More information on credit deriv- atives is included in a separate section on the following pages. Total return swaps (TRSs) are structured with one party making payments based on a set rate, either fixed or variable, plus any negative changes in fair value of an underlying asset, and the other party making payments based on the return of the asset, which includes both income it generates and any positive changes in its fair value. – Foreign exchange contracts: Foreign exchange contracts 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 defined 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 and structured commodities business. The index and structured business are client facilitation businesses trad- ing exchange-traded funds, OTC swaps and options on com- modity indices and individual underlying commodities. The underlying indices cover third-party and UBS owned indices such as the UBS Bloomberg Constant Maturity Commodity Index and the Bloomberg Commodity Indices. All of the trad- ing is cash-settled with no physical delivery of the underlying. The Group also has an established precious metals business in both flow and non-vanilla OTC products incorporating both physical and non-physical trading. The flow business is investor led and products include ETD, vanilla and certain non-vanilla OTC. The vanilla OTC are in forwards, swaps and options. Measurement techniques applied to determine the fair value of each derivative product type are described in Note 24. EDTF | Pillar 3 | 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 described in the audited sections of the “Risk management and control” 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 its counterparties. The Group’s approach to credit risk is described in the audited portions of Credit risk in the “Risk management and control” 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 expo- sure, the positive replacement values for a counterparty are rarely an adequate reflection of the Group’s credit exposure in its deriva- tives business with that counterparty. This is generally the case because, on the one hand, replacement values can increase over time (potential future exposure), while on the other hand, expo- sure may be mitigated by entering into master netting agree- ments and bilateral collateral arrangements. Both the exposure measures used internally by the Group to control credit risk and the capital requirements imposed by regulators reflect these addi- tional factors. The replacement values presented on UBS’s balance sheet include netting in accordance with IFRS requirements (refer to Note 1a item 35), which is generally more restrictive than netting in accordance with Swiss federal banking law. Swiss federal bank- ing law netting is generally based on close-out netting arrange- ments that are enforceable in case of insolvency. ➔ Refer to Note 26 for more information on the values of positive and negative replacement values after consideration of netting potential allowed under enforceable netting arrangements 450 Note 14 Derivative instruments and hedge accounting (continued) EDTF | Pillar 3 | Derivative instruments1 31.12.15 31.12.14 Notional values related to PRVs3 Total PRV2 Notional values related to NRVs3 Other notional values3, 5 Total NRV4 48.6 840.1 581.7 22.7 0.1 57.0 17.3 0.0 0.1 0.2 48.2 19.1 0.0 0.1 51.9 782.0 549.8 15.5 2,351.4 5,904.7 346.0 169.4 Notional values related to PRVs3 Notional values related to NRVs3 Other notional values3, 5 Total NRV4 49.0 1,323.4 799.8 15.7 55.9 2,622.8 1,233.4 10,244.3 790.3 4.9 446.0 134.7 0.2 83.7 33.9 0.0 0.1 Total PRV2 0.1 91.8 31.7 0.0 0.1 74.5 1,493.1 67.6 1,399.3 8,771.4 123.7 2,187.9 117.9 2,084.5 13,447.7 6.1 0.6 0.0 6.7 152.7 5.0 4.2 161.9 6.0 0.6 0.0 6.7 165.7 4.1 0.1 169.8 17.8 38.3 9.5 727.6 1,429.9 496.8 16.6 37.6 9.3 673.9 1,330.1 478.0 0.0 0.0 3.4 0.0 0.0 4.6 65.7 2,657.7 63.5 2,486.6 8.1 8.1 0.0 2.9 4.8 4.3 5.0 16.9 0.0 64.1 59.1 107.2 230.3 0.0 4.3 6.7 5.2 4.9 21.2 0.0 87.0 92.6 126.0 30.0 13.4 305.6 43.3 11.1 0.4 0.0 11.5 20.6 62.2 15.6 0.0 0.0 98.4 0.1 3.4 6.4 4.8 4.9 19.5 238.1 3.8 6.5 248.4 817.6 1,626.3 667.3 4.9 3,116.2 0.1 58.5 71.7 109.4 239.6 11.3 0.4 0.0 11.7 19.2 62.3 16.0 0.1 0.0 97.6 0.0 4.7 8.9 4.8 4.8 23.3 245.8 5.1 1.6 252.4 741.4 1,554.0 601.4 3.7 14.8 2,900.5 14.8 0.1 70.0 115.4 124.2 27.9 10.1 309.6 38.0 CHF billion Interest rate contracts Over-the-counter (OTC) contracts Forward contracts6 Swaps Options Exchange-traded contracts Futures Options Agency transactions7 Total Credit derivative contracts Over-the-counter (OTC) contracts Credit default swaps Total 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 transactions7 Total Equity / index contracts Over-the-counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts Futures Options Agency transactions7 Total Table continues on the next page. 451 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 14 Derivative instruments and hedge accounting (continued) Derivative instruments1 (continued) Table continued from the previous page. CHF billion Commodity contracts Over-the-counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts Futures Forward contracts Options Agency transactions7 Total Unsettled purchases of non-derivative financial investments8 Unsettled sales of non-derivative financial investments8 Total derivative instruments, based on IFRS netting9 31.12.15 31.12.14 Notional values related to PRVs3 Total PRV2 Notional values related to NRVs3 Other notional values3, 5 Total NRV4 Notional values related to PRVs3 Total PRV2 Notional values related to NRVs3 Other notional values3, 5 Total NRV4 0.3 0.7 0.9 0.0 0.0 1.5 3.4 0.1 0.2 2.8 9.9 11.8 4.4 1.0 30.0 9.6 20.1 0.3 0.5 0.6 0.2 0.1 1.5 3.2 0.2 0.1 2.3 9.4 7.5 3.7 1.9 24.6 16.7 6.4 8.2 0.1 8.3 0.3 0.9 0.9 0.0 0.0 1.4 3.6 0.1 0.2 4.6 13.8 12.5 6.5 0.8 38.1 11.4 16.1 0.3 0.5 0.7 0.1 0.1 1.4 3.2 0.2 0.1 4.4 7.9 9.8 5.3 3.7 31.1 12.9 9.1 7.3 0.1 7.3 167.4 4,602.7 162.4 4,409.0 8,831.1 257.0 5,857.8 254.1 5,600.2 13,507.9 1 Bifurcated embedded derivatives are presented on the same balance sheet lines as their host contracts and are excluded from this table. As of 31 December 2015, these derivatives amounted to a PRV of CHF 0.1 bil- lion (related notional values of CHF 0.6 billion) and an NRV of CHF 0.2 billion (related notional values of CHF 3.4 billion). As of 31 December 2014, these derivatives amounted to a PRV of CHF 0.3 billion (related notional values of CHF 6.5 billion) and an NRV of CHF 0.3 billion (related notional values of CHF 7.8 billion). 2 PRV: Positive replacement value. 3 In cases where replacement values are presented on a net basis on the bal- ance sheet, the respective notional values of the netted replacement values are still presented on a gross basis. 4 NRV: Negative replacement value. 5 Other notional values relate to derivatives which are cleared through either a central clearing counterparty or an exchange. The fair value of these derivatives is presented on the balance sheet net of the corresponding cash margin under Cash collateral receivables on derivative instruments and Cash collateral payables on derivative instruments and was not material for the periods presented. 6 Negative replacement values as of 31 December 2015 include CHF 0.1 billion related to derivative loan commitments (31 December 2014: CHF 0.0 billion). No notional amounts related to these replacement values are included the table. The maximum irrevocable amount related to these commitments was CHF 15.8 billion as of 31 December 2015 (31 December 2014: CHF 4.5 billion). 7 Notional values of exchange-traded agency transactions and OTC cleared transactions entered into on behalf of clients are not disclosed due to their significantly different risk profile. 8 Changes in the fair value of purchased and sold non-derivative financial investments between trade date and settlement date are recognized as replacement values. 9 Refer to Note 26 for more information on netting arrangements. EDTF | The notional 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 generally not a direct indication of the values which are exchanged between parties, and are therefore not a direct measure of risk or financial exposure, but are viewed as an indication of the scale of the different types of derivatives entered into by the Group. The maturity profile of OTC interest rate contracts held as of 31 December 2015, based on notional values, was: approximately 53% (31 December 2014: 45%) mature within one year, 29% (31 December 2014: 34%) within one to five years and 18% (31 December 2014: 22%) after five years. Notional values of inter- est rate contracts cleared with a clearing house that qualify for IFRS balance sheet netting are presented under other notional values and are categorized into maturity buckets on the basis of contrac- tual maturities of the cleared underlying derivative contracts. EDTF | 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 activ- ities include market-making to directly support the facilitation and execution of client activity. Market-making involves quoting bid and offer prices to other market participants with the intention of generating revenues based on spread and volume. Credit derivatives UBS is an active dealer in the fixed income market, including CDS and related products, with respect to a large number of issuers’ securities. The primary purpose of these activities is for the benefit of UBS’s clients through market-making activities and for the ongoing hedging of trading book exposures. . 452 Note 14 Derivative instruments and hedge accounting (continued) Market-making activity, which is undertaken within the Invest- ment Bank, consists of buying and selling single-name CDS, index CDS, loan CDS and related referenced cash instruments to facili- tate client trading activity. UBS also actively utilizes CDS to eco- nomically hedge specific counterparty credit risks in its accrual and traded loan portfolios (including off-balance sheet loan com- mitments) with the aim of reducing concentrations in individual names, sectors or specific portfolios. In addition, UBS actively utilizes CDS to economically hedge specific counterparty credit risks in its OTC derivative portfolios including financial instruments which are designated at fair value through profit or loss. The tables below provide further details on credit protection bought and sold, including replacement and notional value infor- mation by instrument type and counterparty type. 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 CDS, and in connection with collateral arrangements in place. On a notional value basis, credit protection bought and sold as of 31 December 2015 matures in a range of approximately 22% (31 December 2014: 27%) within one year, approximately 68% (31 December 2014: 64%) within one to five years and approximately 10% (31 December 2014: 8%) after five years. EDTF | Credit derivatives by type of instrument CHF billion Single-name credit default swaps Multi-name index linked credit default swaps Multi-name other credit default swaps Total rate of return swaps Options and warrants Total 31 December 2015 of which: credit derivatives related to economic hedges of which: credit derivatives related to market-making CHF billion Single-name credit default swaps Multi-name index linked credit default swaps Multi-name other credit default swaps Total rate of return swaps Options and warrants Total 31 December 2014 of which: credit derivatives related to economic hedges of which: credit derivatives related to market-making Protection bought Protection sold Fair value: PRV Fair value: NRV Notional values Fair value: PRV Fair value: NRV Notional values 3.1 0.3 0.1 0.5 0.0 4.0 2.7 1.4 1.9 0.6 0.1 0.2 0.0 2.8 2.4 0.4 115.5 48.0 2.4 6.3 4.2 176.4 152.8 23.6 1.9 0.6 0.0 0.1 0.0 2.6 2.2 0.4 2.9 0.5 0.1 0.4 0.0 3.9 2.5 1.3 Protection bought Protection sold Fair value: PRV Fair value: NRV Notional values Fair value: PRV Fair value: NRV 5.9 0.4 0.1 0.1 0.0 6.5 3.2 3.3 4.0 0.9 0.3 0.3 0.0 5.4 5.0 0.4 173.3 72.8 4.8 5.4 6.5 262.8 245.5 17.3 3.0 1.7 0.0 0.3 0.0 5.0 4.6 0.5 5.6 0.5 0.1 0.2 0.0 6.3 3.0 3.3 105.1 45.6 1.8 2.8 0.1 155.3 132.8 22.5 Notional values 148.8 80.7 3.4 3.5 1.6 238.0 220.5 17.4 453 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 14 Derivative instruments and hedge accounting (continued) EDTF | Credit derivatives by counterparty CHF billion Broker-dealers Banks Central clearing counterparties Other Total 31 December 2015 CHF billion Broker-dealers Banks Central clearing counterparties Other Total 31 December 2014 EDTF | Pillar 3 | UBS’s CDS trades are documented using industry standard forms of documentation or equivalent terms docu- mented in a bespoke agreement. The agreements that govern CDS generally do not contain recourse provisions that would enable UBS to recover from third parties any amounts paid out by UBS. 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, restructuring, obli- gation acceleration and repudiation / moratorium. Contingent collateral features of derivative liabilities Certain derivative payables contain contingent collateral or termi- nation features triggered upon a downgrade of the published credit rating of the Group in the normal course of business. Based on UBS’s credit ratings as of 31 December 2015, contractual out- flows related to OTC derivative transactions of approximately CHF 0.2 billion, CHF 1.6 billion and CHF 1.9 billion would have been required in the event of a one-notch, two-notch and three-notch reduction in long-term credit ratings, respectively. 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 long-term credit ratings, and a corresponding reduction in short-term ratings. 454 Protection bought Protection sold Fair value: PRV Fair value: NRV Notional values Fair value: PRV Fair value: NRV Notional values 0.8 1.9 0.4 0.8 4.0 0.3 1.3 0.8 0.4 2.8 27.3 78.0 55.3 15.8 176.4 0.2 1.2 0.9 0.3 2.6 0.6 1.6 0.9 0.8 3.9 19.5 68.3 58.9 8.7 155.3 Protection bought Protection sold Fair value: PRV Fair value: NRV Notional values Fair value: PRV Fair value: NRV Notional values 1.4 4.0 0.2 0.9 6.5 0.5 2.9 1.1 0.9 5.4 32.8 156.4 53.2 20.4 262.8 0.3 2.6 1.3 0.8 5.0 1.1 4.4 0.3 0.5 6.3 23.5 144.3 56.7 13.5 238.0 EDTF | Derivatives transacted for hedging purposes Derivatives used for structural hedging The Group enters into derivative transactions for the purposes of hedging risks inherent in assets, liabilities and forecast transac- tions. The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and whether the hedge qualifies as such for accounting purposes. Derivative transactions that qualify and are designated as hedges for accounting purposes are described under the corre- sponding headings in this Note (fair value hedges, cash flow hedges and hedges of net investments in foreign operations). The Group’s accounting policies for derivatives designated and accounted for as hedging instruments are explained in Note 1a item 15, where 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 applied. These include interest rate swaps and other interest rate derivatives (e.g., futures) for day-to-day economic interest rate risk management purposes. In addition, the Group has used equity futures, options and, to a lesser extent, swaps for eco- nomic hedging in a variety of equity trading strategies to offset underlying equity and equity volatility exposure. The Group has also entered into CDS that provide economic hedges for credit risk exposures (refer to the credit derivatives section of this Note). Fair value changes of derivatives that are part of economic rela- tionships, but do not qualify for hedge accounting treatment, are reported in Net trading income, except for the forward points on certain short duration foreign exchange contracts, which are reported in Net interest income. Note 14 Derivative instruments and hedge accounting (continued) Fair value hedges: interest rate risk related to debt instruments The Group’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate debt instruments, such as non-structured fixed-rate bonds, covered bonds and subordinated debt, due to movements in market interest rates. The fair values of outstanding interest rate derivatives designated as fair value hedges were assets of CHF 1,656 million and liabilities of CHF 11 million as of 31 Decem- ber 2015 and assets of CHF 2,236 million and liabilities of CHF 37 million as of 31 December 2014. EDTF | 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 31.12.15 31.12.14 31.12.13 554 (552) 2 1,113 (1,111) 2 (1,123) 1,116 (7) Fair value hedges: portfolio interest rate risk related to loans 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 within Other assets on the balance sheet. The fair values of outstanding interest rate derivatives designated for these hedges as of 31 December 2015 were assets of CHF 7 million and liabilities of CHF 327 million (31 December 2014: liabilities of CHF 256 million). EDTF | Fair value hedge of portfolio 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 31.12.15 31.12.14 31.12.13 (176) 147 (29) (694) 676 (18) 636 (625) 11 Cash flow hedges of forecasted transactions The Group is exposed to variability in future interest cash flows on non-trading financial assets and liabilities that bear interest at variable rates or are expected to be refinanced or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected based on contrac- tual terms and other relevant factors including estimates of pre- payments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying the non-trading interest rate risk of the Group, which is hedged with interest rate swaps, the maximum maturity of which is 13 years. The table on the following page shows fore- casted principal balances on which expected interest cash flows arise as of 31 December 2015. Amounts shown represent, by time bucket, average assets and liabilities subject to forecasted cash flows designated as hedged items in cash flow hedge accounting relationships. As of 31 December 2015, the fair values of outstanding deriva- tives designated as cash flow hedges of forecasted transactions were CHF 2,176 million assets and CHF 195 million liabilities (31 December 2014: CHF 4,521 million assets and CHF 1,262 mil- lion liabilities). In 2015, a gain of CHF 150 million was recognized in Net trad- ing income due to hedge ineffectiveness, compared with a gain of CHF 87 million in 2014 and a loss of CHF 80 million in 2013. 455 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 14 Derivative instruments and hedge accounting (continued) EDTF | Principal balances subject to cash flow forecasts CHF billion Assets Liabilities Net balance Within 1 year 1–3 years 3–5 years 5–10 years Over 10 years 61 4 57 81 7 74 48 3 45 54 3 51 1 0 1 Hedges of net investments in foreign operations The Group applies hedge accounting for certain net investments in foreign operations. As of 31 December 2015, the positive replacement values and negative replacement values of FX deriva- tives (mainly FX swaps) designated as hedging instruments in net investment hedge accounting relationships were CHF 170 million and CHF 79 million, respectively (31 December 2014: positive replacement values of CHF 158 million and negative replacement values of CHF 305 million). As of 31 December 2015, the underly- ing hedged structural exposures in several currencies amounted to CHF 5.5 billion (31 December 2014: CHF 8.0 billion). Hedges of structural FX exposures in currencies other than the US dollar may be comprised of two jointly designated derivatives as the foreign currency risk may be hedged against the US dollar first and then converted into Swiss francs, the presentation cur- rency of the Group, as part of a separate FX derivative transaction. The aggregated notional amount of designated hedging deriva- tives as of 31 December 2015 was CHF 11.2 billion in total (31 December 2014: CHF 14.7 billion) including CHF 5.6 billion notional values related to US dollar versus Swiss franc swaps and CHF 5.6 billion notional values related to derivatives hedging for- eign currencies (other than the US dollar) versus the US dollar. The effective portion of gains and losses of these FX swaps is trans- ferred directly to OCI 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 exposure resulting in the accumulation of FCT on the level of indi- vidual foreign branches and subsidiaries and hence on the total FCT OCI of the Group. UBS designates certain non-derivative foreign currency finan- cial assets and liabilities of foreign branches or subsidiaries as hedging instruments in net investment hedge accounting arrange- ments. The FX translation difference recorded in 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 2015, the nominal amount of non-derivative financial assets and liabilities desig- nated as hedging instruments in such net investment hedges was CHF 3.1 billion and CHF 3.1 billion, respectively (31 December 2014: CHF 14.3 billion non-derivative financial assets and CHF 14.3 billion non-derivative financial liabilities). Ineffectiveness of hedges of net investments in foreign opera- tions was not material in 2015, 2014 and 2013. Undiscounted cash flows The table below provides undiscounted cash flows of all derivative instruments designated in hedge accounting relationships. Inter- est rate swap cash flows include cash inflows and cash outflows of all interest rate swaps designated in hedge accounting relation- ships, which are either assets or liabilities of UBS as of 31 Decem- ber 2015. The table includes derivatives traded on an exchange or through a clearing house where the change in fair value is settled each day, either in fact or in substance, through cash payment of variation margin. EDTF | Derivatives designated in hedge accounting relationships (undiscounted 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 Total CHF billion Interest rate swaps1 Cash inflows Cash outflows FX swaps / forwards Cash inflows Cash outflows Net cash flows 0 0 0 0 0 0 0 7 7 0 0 0 3 3 0 2 1 0 0 1 4 3 0 0 2 2 1 0 0 0 8 5 10 10 3 1 The table includes gross cash inflows and cash outflows of all interest rate swaps designated in hedge accounting relationships, which are either assets or liabilities of UBS as of 31 December 2015. 456 Note 15 Financial investments available-for-sale CHF million Financial investments available-for-sale by issuer type1 Debt instruments Government and government agencies of which: Switzerland of which: USA of which: Germany of which: France of which: Netherlands of which: United Kingdom Banks Corporates and other Total debt instruments Equity instruments Total financial investments available-for-sale Unrealized gains – before tax Unrealized (losses) – before tax Net unrealized gains / (losses) – before tax Net unrealized gains / (losses) – after tax 1 Refer to Note 24e for more information on product type and fair value hierarchy categorization. 31.12.15 31.12.14 47,245 702 21,424 8,583 3,566 2,934 2,782 12,268 2,385 61,898 645 62,543 462 (171) 291 167 45,334 43 17,219 10,145 5,351 2,528 2,348 8,490 2,670 56,494 664 57,159 430 (64) 365 238 457 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 16 Property, equipment and software At historical cost less accumulated depreciation CHF million Historical cost Own-used properties Leasehold improvements IT hardware and communication Internally generated software Purchased software Other machines and equipment Projects in progress 31.12.15 31.12.14 Balance at the beginning of the year 7,756 3,060 2,377 1,525 Additions Disposals / write-offs1 Reclassifications Foreign currency translation Balance at the end of the year Accumulated depreciation 68 (181) 221 0 50 (87) 197 (37) 264 (747) 22 (39) 26 (54) 888 (9) 7,863 3,183 1,878 2,375 Balance at the beginning of the year 4,365 2,120 1,976 1,089 Depreciation Impairment2 Disposals / write-offs1 Reclassifications Foreign currency translation 161 2 (157) (11) (3) Balance at the end of the year Net book value at the end of the year3, 4 4,356 3,506 181 10 (78) 2 (25) 2,211 973 228 1 (744) (2) (35) 1,425 453 230 3 (46) 0 (1) 1,275 1,100 536 85 (209) 9 (9) 412 452 41 0 (209) 2 (8) 276 135 847 28 (27) 27 (8) 866 592 62 1 (26) (14) (6) 609 257 1,341 1,331 0 (1,394) (7) 17,442 1,853 (1,306) (32)6 (109) 16,136 1,690 (518) (359) 493 1,270 17,847 17,442 0 0 0 0 0 0 0 1,2705 10,593 10,140 903 18 (1,260) (23)6 (78) 10,153 7,695 799 19 (474) (217) 326 10,593 6,8497 1 Includes write-offs of fully depreciated assets. 2 Impairment charges recorded in 2015 relate to assets for which the recoverable amount was determined based on value-in-use (recoverable amount of the impaired assets: CHF 0 million Leasehold improvements, CHF 2 million Internally generated software). 3 As of 31 December 2015, contractual commitments to purchase property in the future amounted to approximately CHF 0.6 billion. 4 Includes CHF 47 million related to leased assets, mainly IT hardware and communication. 5 Includes CHF 928 million related to Internally generated software, CHF 86 million related to Own-used prop- erties and CHF 257 million related to Leasehold improvements. 6 Reflects reclassifications to Properties held-for-sale (CHF 9 million on a net basis) reported within Other assets. 7 Excludes investment properties of CHF 5 million. 458 Note 17 Goodwill and intangible assets Introduction UBS performs an impairment test on its goodwill assets on an annual basis, or when indicators of impairment exist. UBS consid- ers the segments, as reported in Note 2, as separate cash-gener- ating units (CGU). The impairment test is performed for each seg- ment to which goodwill is allocated by comparing the recoverable amount, based on its value-in-use, to the carrying amount of the respective segment. An impairment charge is recognized if the carrying amount exceeds the recoverable amount. As of 31 December 2015, total goodwill recognized on the balance sheet was CHF 6.2 billion, of which CHF 1.3 billion, CHF 3.5 bil- lion and CHF 1.4 billion was carried by Wealth Management, Wealth Management Americas and Asset Management, respec- tively. Based on the impairment testing methodology described below, UBS concluded that the goodwill balances as of 31 Decem- ber 2015 allocated to these segments remain recoverable and thus were not impaired. Methodology for goodwill impairment testing The recoverable amounts are determined using a discounted cash flow model, which has been adapted to use inputs that consider features of the banking business and its regulatory environment. The recoverable amount of a segment is the sum of the dis- counted earnings attributable to shareholders from the first three forecasted years and the terminal value. The terminal value, which covers all periods beyond the third year, is calculated on the basis of the forecast of third-year profit, the discount rate and the long- term growth rate and is adjusted for the effect of the capital assumed to be needed to support the perpetual growth implied by the long-term growth rate. The carrying amount for each segment is determined by refer- ence to the Group’s equity attribution framework. Within this framework, which is described in the “Capital management” section of this report, the Board of Directors (BoD) attributes equity to the businesses after considering their risk exposure, risk-weighted assets and leverage ratio denominator usage, goodwill and intangible assets. The total amount of equity attrib- uted to the business divisions can differ from the Group’s actual equity during a given period. The framework is primarily used for purposes of measuring the performance of the businesses and includes certain management assumptions. Attributed equity equals 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 pro- cess, the inputs from which are used in calculating the recover- able amounts of the respective CGU. ➔ Refer to the “Capital management” section of this report for more information on the equity attribution framework Assumptions 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 three, 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 different regions worldwide. Earnings available to sharehold- ers are estimated based on forecast results, which are part of the business plan approved by the BoD. The discount rates are determined by applying a capital-asset- pricing-model-based approach, as well as considering quantita- tive and qualitative inputs from both internal and external ana- lysts and the view of management. The discount rates were unchanged between 2014 and 2015. Key assumptions used to determine the recoverable amounts of each segment are tested for sensitivity by applying a reasonably possible change to those assumptions. Forecast earnings available to shareholders were changed by 10%, the discount rates were changed by 1.0 percentage point and the long-term growth rates were changed by 0.5 percentage point. Under all scenarios, the recoverable amounts for each segment exceeded the respective carrying amount, such that the reasonably possible changes in key assumptions would not result in impairment. If the estimated earnings and other assumptions in future peri- ods deviate from the current outlook, the value of goodwill may become impaired in the future, giving rise to losses in the income statement. Recognition of any impairment of goodwill would reduce IFRS equity and net profit. It would not impact cash flows and, as goodwill is required to be deducted from capital under the Basel capital framework, no impact would be expected on the Group total capital ratios. 459 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 17 Goodwill and intangible assets (continued) Discount and growth rates In % Wealth Management Wealth Management Americas Investment Bank Asset Management CHF million Historical cost Balance at the beginning of the year Additions Disposals Write-offs Foreign currency translation Balance at the end of the year Accumulated amortization and impairment Balance at the beginning of the year Amortization Impairment1 Disposals Write-offs Foreign currency translation Balance at the end of the year Net book value at the end of the year Discount rates Growth rates 31.12.15 31.12.14 31.12.15 31.12.14 9.0 9.0 11.0 9.0 9.0 9.0 11.0 9.0 1.7 2.4 2.4 2.4 1.7 2.4 2.4 2.4 Goodwill Total Infrastructure Intangible assets Customer relationships, contractual rights and other Total 31.12.15 31.12.14 6,368 (30) (97) 6,240 0 0 6,240 756 5 761 536 37 5 578 183 833 30 (1) (20) (22) 820 635 57 13 (1) (20) (10) 675 145 1,589 30 (1) (20) (16) 1,581 1,171 94 13 (1) (20) (5) 1,253 328 7,957 30 (32) (20) (114) 7,821 1,171 94 13 (1) (20) (5) 1,253 6,568 7,283 17 (1) 0 657 7,957 990 80 2 0 0 99 1,171 6,785 1 Impairment charges recorded in 2015 and 2014 relate to assets for which the recoverable amount was determined based on value-in-use (recoverable amount of the impaired assets: CHF 4 million for 2015 and CHF 3 million for 2014). The table below presents the disclosure of goodwill and intangible assets by segment for the year ended 31 December 2015. CHF million Goodwill Wealth Management Wealth Management Americas Investment Bank Asset Management Corporate Center – Services Balance at the beginning of the year 1,359 3,490 44 1,476 Additions Disposals Impairment Foreign currency translation Balance at the end of the year Intangible assets Balance at the beginning of the year Additions / transfers Disposals Amortization Impairment Foreign currency translation Balance at the end of the year 460 (7) (40) 1,312 45 (3) (4) 38 25 3,514 246 4 (51) 0 199 (14) 29 84 0 0 (13) (11) (6) 53 (23) (68) 1,385 17 (5) (2) (1) 8 25 25 (21) 30 Total 6,368 0 (30) 0 (97) 6,240 417 30 0 (94) (13) (12) 328 Note 17 Goodwill and intangible assets (continued) The estimated, aggregated amortization expenses for intangible assets are as follows: CHF million Estimated, aggregated amortization expenses for: 2016 2017 2018 2019 2020 Thereafter Not amortized due to indefinite useful life Total Note 18 Other assets CHF million Prime brokerage receivables1 Recruitment loans to financial advisors Other loans to financial advisors Bail deposit2 Accrued interest income Accrued income – other Prepaid expenses Net defined benefit pension and post-employment assets3 Settlement and clearing accounts VAT and other tax receivables Properties and other non-current assets held for sale Assets of disposal group held for sale4 Other Total other assets Intangible assets 93 66 56 45 37 23 9 328 31.12.15 11,341 31.12.14 12,534 3,184 418 1,221 462 844 1,033 50 402 398 134 279 2,393 22,160 2,909 372 1,323 453 1,009 1,027 0 617 272 236 0 2,236 22,988 1 Prime brokerage services include clearance, settlement, custody, financing and portfolio reporting services for corporate clients trading across multiple asset classes. Prime brokerage receivables are mainly comprised of margin lending receivables. 2 Refer to item 1 in Note 22b for more information. 3 Refer to Note 28 for more information. 4 Refer to Note 32 for more information. 461 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Balance sheet notes: liabilities Note 19 Due to banks and customers CHF million Due to banks Due to customers: demand deposits Due to customers: time deposits Due to customers: fiduciary deposits Due to customers: retail savings / deposits Total due to customers Total due to banks and customers Note 20 Financial liabilities designated at fair value CHF million Non-structured fixed-rate bonds of which: issued by UBS AG with original maturity greater than one year1, 2 Structured debt instruments issued Equity-linked3 Credit-linked Rates-linked4 Other Total structured debt instruments issued of which: issued by UBS AG with original maturity greater than one year1, 5 Structured over-the-counter debt instruments Equity-linked3 Other Total structured over-the-counter debt instruments of which: issued by UBS AG with original maturity greater than one year1, 6 Repurchase agreements Loan commitments and guarantees7 Total of which: life-to-date own credit (gain) / loss 31.12.15 11,836 172,778 49,421 6,139 161,848 390,185 402,021 31.12.14 10,492 186,745 52,269 14,766 156,427 410,207 420,699 31.12.15 31.12.14 4,098 3,542 30,965 3,652 16,587 1,231 52,436 36,539 2,885 2,608 5,493 4,497 849 119 62,995 (287) 4,488 3,616 37,725 4,645 19,380 2,138 63,888 45,851 2,508 3,154 5,662 3,691 1,167 93 75,297 302 1 Issued by UBS AG (standalone). Based on original contractual maturity without considering any early redemption features. 2 100% of the balance as of 31 December 2015 was unsecured. 3 Includes investment fund unit-linked instruments issued. 4 Includes non-structured rates-linked debt instruments issued. 5 More than 98% of the balance as of 31 December 2015 was unsecured. 6 More than 35% of the balance as of 31 December 2015 was unsecured. 7 Loan commitments recognized as “Financial liabilities designated at fair value” until drawn and recognized as loans. See Note 1a item 8 for additional information. As of 31 December 2015, the contractual redemption amount at maturity of Financial liabilities designated at fair value through profit or loss was CHF 0.1 billion higher than the carrying value. As of 31 December 2014, the contractual redemption amount at maturity of such liabilities was CHF 0.7 billion lower than the carrying value. The table on the following page shows the residual contractual maturity of the carrying value of financial liabilities designated at fair value, split between fixed-rate and floating-rate instruments based on the contractual terms and does not consider any early redemption features. Interest rate ranges for future interest pay- ments related to these financial liabilities designated at fair value have not been included in the table on the following page as a majority of these liabilities are structured products, and therefore the future interest payments are highly dependent upon the embedded derivative and prevailing market conditions at the time each interest payment is made. ➔ Refer to Note 27b for maturity information on an undiscounted cash flow basis 462 Note 20 Financial liabilities designated at fair value (continued) Contractual maturity of carrying value CHF million UBS AG1 Non-subordinated debt Fixed-rate Floating-rate Subtotal Other subsidiaries2 Non-subordinated debt Fixed-rate Floating-rate Subtotal Total 2016 2017 2018 2019 2020 2021–2025 Thereafter Total 31.12.15 Total 31.12.14 2,873 23,148 26,021 29 260 288 1,912 5,314 7,226 58 484 542 776 3,559 4,335 179 188 367 279 2,839 3,118 17 122 139 302 3,286 3,588 34 127 161 1,623 2,838 4,461 164 178 342 2,938 8,839 11,777 10,702 49,824 60,526 513 116 629 993 1,475 2,469 12,891 58,643 71,535 1,473 2,289 3,762 26,310 7,768 4,702 3,257 3,749 4,803 12,406 62,995 75,297 1 Comprises instruments issued by UBS AG (standalone). 2 Comprises instruments issued by subsidiaries of UBS AG. Note 21 Debt issued held at amortized cost CHF million Certificates of deposit Commercial paper Other short-term debt Short-term debt1 Non-structured fixed-rate bonds of which: issued by UBS AG with original maturity greater than one year2 Senior unsecured debt that will contribute to total loss-absorbing capacity3 Covered bonds Subordinated debt of which: high-trigger loss-absorbing additional tier 1 perpetual capital notes of which: low-trigger loss-absorbing additional tier 1 perpetual capital notes of which: phase-out additional tier 1 capital of which: low-trigger loss-absorbing tier 2 capital of which: phase-out tier 2 capital Debt issued through the central bond institutions of the Swiss regional or cantonal banks Other long-term debt of which: issued by UBS AG with original maturity greater than one year2 Long-term debt4 Total debt issued held at amortized cost5 31.12.15 11,967 31.12.14 16,591 3,824 5,424 21,215 31,240 31,078 5,633 8,490 17,763 2,837 2,326 0 10,346 2,254 8,237 570 278 71,932 93,147 4,841 5,931 27,363 24,582 24,433 0 13,614 16,123 0 0 1,197 10,464 4,462 8,029 1,495 861 63,844 91,207 1 Debt with an original maturity of less than one year. 2 Issued by UBS AG (standalone). Based on original contractual maturity without considering any early redemption features. 100% of the balance as of 31 Decem- ber 2015 was unsecured. 3 Issued by UBS Group Funding (Jersey) Ltd., a funding subsidiary directly held and guaranteed by UBS Group AG. 4 Debt with original maturity greater than or equal to one year. 5 Net of bifurcated embedded derivatives with a net negative fair value of CHF 130 million as of 31 December 2015 (31 December 2014: net negative fair value of CHF 25 million). The Group uses interest rate and foreign exchange derivatives to manage the risks inherent in certain debt instruments held at amortized cost. In certain cases, the Group applies hedge account- ing for interest rate risk as discussed in Note 1a item 15 and Note 14. As a result of applying hedge accounting, the carrying value of debt issued increased by CHF 1,037 million and by CHF 1,703 million as of 31 December 2015 and 2014, respectively, reflecting changes in fair value due to interest rate movements. 463 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 21 Debt issued held at amortized cost (continued) Subordinated debt consists of unsecured debt obligations that are contractually subordinated in right of payment to all other present and future non-subordinated obligations of the respective issuing entity. All of the subordinated debt instruments outstand- ing as of 31 December 2015 pay a fixed rate of interest. The table below shows the residual contractual maturity of the carrying value of debt issued, split between fixed-rate and float- ing-rate based on the contractual terms and does not consider any early redemption features. The effects from interest rate swaps, which are used to hedge various fixed-rate debt issuances by changing the repricing characteristics into those similar to floating-rate debt, are also not considered in the table below. ➔ Refer to Note 27b for maturity information on an undiscounted cash flow basis Contractual maturity dates of carrying value CHF million, except where indicated UBS Group AG1 Subordinated debt Fixed-rate Interest rates (range in %) Subtotal UBS AG2 Non-subordinated debt Fixed-rate Interest rates (range in %) Floating-rate Subordinated debt Fixed-rate Interest rates (range in %) Subtotal Other subsidiaries3 Non-subordinated debt Fixed-rate Interest rates (range in %) Floating-rate Subtotal Total 2016 2017 2018 2019 2020 2021–2025 Thereafter Total 31.12.15 Total 31.12.14 0 0 0 0 0 0 0 0 0 0 0 0 5,163 5.8–7.1 5,163 5,163 5,163 0 0 13,064 0–6.4 10,014 918 3.1–5.9 23,996 3,936 0–8.3 0 3,936 27,932 6,334 0–5.9 3,721 414 4.1–7.4 10,468 8,004 0–6.6 963 4,036 2.4–4.0 939 4,340 0–4.9 239 0 0 0 8,967 4,974 4,579 728 791 742 0.3–8.1 0.4–3.7 0.5–2.9 0 728 11,196 8 799 9,766 0 742 5,717 2,219 0.1–3 297 2,516 7,095 4,375 1.3–4.0 0 8,772 4.8–8.8 13,147 7,433 0–4.1 0 7,434 20,581 0 40,153 59,327 2,031 17,907 11,296 2,497 4.8–7.8 4,528 1,171 0.4–2.8 0 1,171 10,861 12,600 16,123 70,659 86,746 17,020 4,460 306 17,325 93,147 1 4,462 91,207 1 Comprises debt issued by UBS Group AG (standalone). 2 Comprises debt issued by UBS AG (standalone). 3 Comprises debt issued by other direct subsidiaries of UBS Group AG and by subsidiaries of UBS AG. 464 Note 22 Provisions and contingent liabilities a) Provisions CHF million Balance at the beginning of the year 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 Reclassifications Foreign currency translation / unwind of discount Balance at the end of the year Litigation, regulatory and similar matters2 3,053 Operational risks1 50 43 (7) (37) 0 0 (1) 47 1,263 (166) (1,174) 0 0 7 2,983 Loan com- mitments and guarantees Restruc- turing 647 361 (102) (287) 0 0 5 6243 23 6 (3) 0 0 9 0 35 Real estate 153 27 (1) (28) 5 0 2 1574 Employee benefits5 215 7 (18) (1) 0 0 (5) 198 Other 224 71 (40) (133) 0 0 (3) 120 Total 31.12.15 Total 31.12.14 4,366 1,778 (337) (1,660) 5 9 3 4,164 2,971 3,308 (528) (1,659) 0 8 266 4,366 1 Comprises provisions for losses resulting from security risks and transaction processing risks. 2 Comprises provisions for losses resulting from legal, liability and compliance risks. 3 Includes personnel related restruc- turing provisions of CHF 110 million as of 31 December 2015 (31 December 2014: CHF 116 million) and provisions for onerous lease contracts of CHF 514 million as of 31 December 2015 (31 December 2014: CHF 530 million). 4 Includes reinstatement costs for leasehold improvements of CHF 95 million as of 31 December 2015 (31 December 2014: CHF 98 million) and provisions for onerous lease contracts of CHF 62 million as of 31 December 2015 (31 December 2014: CHF 55 million). 5 Includes provisions for sabbatical and anniversary awards as well as provisions for severance which are not part of restructuring provisions. Restructuring provisions primarily relate to onerous lease con- tracts and severance payments. The utilization of onerous lease provisions is driven by the maturities of the underlying lease con- tracts. Severance-related provisions are utilized within a short time period, usually within six months, but potential changes in amount may be triggered when natural staff attrition reduces the number of people affected by a restructuring and therefore the estimated costs. Information on provisions and contingent liabilities in respect of Litigation, regulatory and similar matters, as a class, is included in Note 22b. There are no material contingent liabilities associated with the other classes of provisions. 465 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) EDTF | b) Litigation, regulatory and similar matters The Group operates in a legal and regulatory environment that exposes it to significant litigation and similar risks arising from disputes and regulatory proceedings. As a result, UBS (which for purposes of this Note may refer to UBS Group AG and / or one or more of its subsidiaries, as applicable) is involved in various dis- putes and legal proceedings, including litigation, arbitration, and regulatory and criminal investigations. Such matters are subject to many uncertainties and the out- come is often difficult to predict, particularly in the earlier stages of a case. There are also situations where the Group may enter into a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, even for those matters for which the Group believes it should be exonerated. The uncertainties inherent in all such matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been established and other contingent liabilities. The Group makes provisions for such matters brought against it when, in the opinion of management after seeking legal advice, it is more likely than not that the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required, and the amount can be reliably estimated. Where these factors are otherwise satisfied, a provision may be established for claims that have not yet been asserted against the Group, but are nevertheless expected to be, based on the Group’s experience with similar asserted claims. If any of those conditions is not met, such matters result in contingent liabilities. If the amount of an obligation cannot be reliably estimated, a liability exists that is not recognized even if an outflow of resources is probable. Accordingly, no provision is established even if the potential outflow of resources with respect to select matters could be significant. Specific litigation, regulatory and other matters are described below, including all such matters that management considers to be material and others that management believes to be of sig- nificance due to potential financial, reputational and other effects. The amount of damages claimed, the size of a transac- tion or other information is provided where available and appro- priate in order to assist users in considering the magnitude of potential exposures. In the case of certain matters below, we state that we have established a provision, and for the other matters, we make no such statement. When we make this statement and we expect disclosure of the amount of a provision to prejudice seriously our position with other parties in the matter, because it would reveal what UBS believes to be the probable and reliably estimable out- flow, we do not disclose that amount. In some cases, we are sub- ject to confidentiality obligations that preclude such disclosure. With respect to the matters for which we do not state whether we have established a provision, either (a) we have not estab- lished a provision, in which case the matter is treated as a contin- gent liability under the applicable accounting standard or (b) we have established a provision but expect disclosure of that fact to prejudice seriously our position with other parties in the matter because it would reveal the fact that UBS believes an outflow of resources to be probable and reliably estimable. With respect to certain litigation, regulatory and similar mat- ters for which we have established provisions, we are able to estimate the expected timing of outflows. However, the aggre- gate amount of the expected outflows for those matters for which we are able to estimate expected timing is immaterial rela- tive to our current and expected levels of liquidity over the rele- vant time periods. 466 Note 22 Provisions and contingent liabilities (continued) The aggregate amount provisioned for litigation, regulatory and similar matters as a class is disclosed in Note 22a above. It is not practicable to provide an aggregate estimate of liability for our litigation, regulatory and similar matters as a class of contin- gent liabilities. Doing so would require us to provide speculative legal assessments as to claims and proceedings that 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 quantified by the claimants. Although we therefore cannot provide a numerical estimate of the future losses that could arise from litigation, regulatory and similar matters, we believe that the aggregate amount of possible future losses from this class that are more than remote substan- tially exceeds the level of current provisions. Litigation, regulatory and similar matters may also result in non-monetary penalties and consequences. For example, the non-prosecution agreement (NPA) described in paragraph 5 of this Note, which we entered into with the US Department of Justice (DOJ), Criminal Division, Fraud Section in connection with our submissions of benchmark interest rates, including, among others, the British Bankers’ Asso- ciation London Interbank Offered Rate (LIBOR), was terminated by the DOJ based on its determination that we had committed a US crime in relation to foreign exchange matters. As a consequence, UBS AG has pleaded guilty to one count of wire fraud for conduct in the LIBOR matter, and has agreed to pay a USD 203 million fine and accept a three-year term of probation. A guilty plea to, or conviction of, a crime (including as a result of termination of the NPA) could have material consequences for UBS. Resolution of regulatory proceedings may require us to obtain waivers of regu- latory disqualifications to maintain certain operations, may entitle regulatory authorities to limit, suspend or terminate licenses and regulatory authorizations and may permit financial market utilities to limit, suspend or terminate our participation in such utilities. Failure to obtain such waivers, or any limitation, suspension or termination of licenses, authorizations or participations, could have material consequences for UBS. The risk of loss associated with litigation, regulatory and similar matters is a component of operational risk for purposes of deter- mining our capital requirements. Information concerning our capital requirements and the calculation of operational risk for this purpose is included in the “Capital management” section of this report. EDTF | Provisions for litigation, regulatory and similar matters by business division and Corporate Center unit1 CHF million Balance at the beginning of the year Increase in provisions recognized in the income statement Release of provisions recognized in the income statement Provisions used in conformity with designated purpose Reclassifications Foreign currency translation / unwind of discount Balance at the end of the year Wealth Manage- ment Wealth Manage- ment Americas Personal & Corporate Banking Asset Manage- ment Investment Bank CC – Services CC – Group ALM 188 114 (10) (36) 0 (12) 245 209 372 (19) (110) 0 7 459 92 0 (3) (5) 0 (2) 83 53 0 (3) (33) 0 (1) 16 1,258 17 (15) (675) 0 0 585 312 15 (1) (13) 0 (3) 310 0 0 0 0 0 0 0 CC – Non-core and Legacy Portfolio Total 31.12.15 Total 31.12.14 941 744 (115) (302) 0 18 3,053 1,263 (166) (1,174) 0 7 1,284 2,983 1,622 2,941 (395) (1,286) (2) 172 3,053 1 Provisions, if any, for the matters described in this Note are recorded in Wealth Management (item 3), Wealth Management Americas (item 4), Corporate Center – Services (item 7) and Corporate Center – Non-core and Legacy Portfolio (items 2 and 8). Provisions, if any, for the matters described in this Note in items 1 and 6 are allocated between Wealth Management and Personal & Corporate Banking, and provisions, if any, for the matters described in this Note in item 5 are allocated between the Investment Bank, Corporate Center – Services and Corporate Center – Non-core and Legacy Portfolio. 467 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) 1. Inquiries regarding cross-border wealth management businesses Tax and regulatory authorities in a number of countries have made inquiries, served requests for information or examined employees located in their respective jurisdictions relating to the cross-border wealth management services provided by UBS and other financial institutions. It is possible that implementation of automatic tax information exchange and other measures relating to cross-border provision of financial services could give rise to further inquiries in the future. As a result of investigations in France, in 2013, UBS (France) S.A. and UBS AG were put under formal examination (“mise en examen”) for complicity in having illicitly solicited clients on French territory, and were declared witness with legal assistance (“témoin assisté”) regarding the laundering of proceeds of tax fraud and of banking and financial solicitation by unauthorized persons. In 2014, UBS AG was placed under formal examination with respect to the potential charges of laundering of proceeds of tax fraud, and the investigating judges ordered UBS to provide bail (“cau- tion”) of EUR 1.1 billion. UBS AG appealed the determination of the bail amount, but both the appeal court (“Cour d’Appel”) and the French Supreme Court (“Cour de Cassation”) upheld the bail amount and rejected the appeal in full in late 2014. UBS AG has filed and has had accepted a petition to the European Court of Human Rights to challenge various aspects of the French court’s decision. In September 2015, the former CEO of UBS Wealth Man- agement was placed under formal examination in connection with these proceedings. In addition, the investigating judges have sought to issue arrest warrants against three Swiss-based former employees of UBS AG who did not appear when summoned by the investigating judge. In February 2016, the investigating judge notified UBS that he does not intend to conduct further investiga- tion. This notification commences a period in which the prosecutor may file a request for a judge to issue formal charges. In March 2015, UBS (France) S.A. was placed under formal examination for complicity regarding the laundering of proceeds of tax fraud and of banking and financial solicitation by unauthor- ized persons for the years 2004 until 2008 and declared witness with legal assistance for the years 2009 to 2012. A bail of EUR 40 million was imposed, and was reduced by the Court of Appeals in May 2015 to EUR 10 million. Separately, in 2013, the French banking supervisory authority’s disciplinary commission repri- manded UBS (France) S.A. for having had insufficiencies in its con- trol and compliance framework around its cross-border activities and know your customer obligations. It imposed a penalty of EUR 10 million, which was paid. UBS AG has been notified by the Brussels public prosecutor’s office that it is investigating various aspects of UBS’s cross-border business. 468 In January 2015, UBS received inquiries from the US Attorney’s Office for the Eastern District of New York and from the US Secu- rities and Exchange Commission (SEC), which are investigating potential sales to US persons of bearer bonds and other unregis- tered securities in possible violation of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the registration require- ments of the US securities laws. UBS is cooperating with the authorities in these investigations. UBS has, and reportedly numerous other financial institu- tions have, received inquiries from authorities concerning accounts relating to the Fédération Internationale de Football Association (FIFA) and other constituent soccer associations and related persons and entities. UBS is cooperating with authorities in these inquiries. Our balance sheet at 31 December 2015 reflected provisions with respect to matters described in this item 1 in an amount that UBS believes to be appropriate under the applicable accounting standard. As in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provi- sion that we have recognized. 2. Claims related to sales of residential mortgage-backed securities and mortgages From 2002 through 2007, prior to the crisis in the US residential loan market, UBS was a substantial issuer and underwriter of US residential mortgage-backed securities (RMBS) and was a pur- chaser and seller of US residential mortgages. A subsidiary of UBS, UBS Real Estate Securities Inc. (UBS RESI), acquired pools of resi- dential mortgage loans from originators and (through an affiliate) deposited them into securitization trusts. In this manner, from 2004 through 2007, UBS RESI sponsored approximately USD 80 billion in RMBS, based on the original principal balances of the securities issued. UBS RESI also sold pools of loans acquired from originators to third-party 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 significant 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 active from 2006 to 2008, and securitized less than half of these loans. Note 22 Provisions and contingent liabilities (continued) RMBS-related lawsuits concerning disclosures: UBS is named as a defendant relating to its role as underwriter and issuer of RMBS in lawsuits related to approximately USD 6.2 billion in original face amount of RMBS underwritten or issued by UBS. Of the USD 6.2 billion in original face amount of RMBS that remains at issue in these cases, approximately USD 3.2 billion was issued in offerings in which a UBS subsidiary transferred underlying loans (the major- ity of which were purchased from third-party originators) into a securitization trust and made representations and warranties about those loans (UBS-sponsored RMBS). The remaining USD 3 billion of RMBS to which these cases relate was issued by third parties in securitizations in which UBS acted as underwriter (third- party RMBS). In connection with certain of these lawsuits, UBS has indemni- fication 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. UBS is a defendant in two lawsuits brought by the National Credit Union Administration (NCUA), as conservator for certain failed credit unions, asserting misstatements and omissions in the offering documents for RMBS purchased by the credit unions. Both lawsuits were filed in US District Courts, one in the District of Kansas and the other in the Southern District of New York (SDNY). The original principal balance at issue in the Kansas case is approx- imately USD 1.15 billion and the original principal balance at issue in the SDNY case is approximately USD 400 million. In February 2016, UBS made an offer of judgment to NCUA in the SDNY case, which NCUA has accepted, pursuant to which UBS will pay USD 33 million plus an amount of prejudgment interest that will be determined by the court and reasonable attorneys’ fees. Once these amounts are determined and judgment is entered, the SDNY case will end. Prejudgment interest and attorneys’ fees are expected to significantly increase the total amount to be paid in the SDNY case. tions relating to the characteristics of the underlying loans. In the event of a material breach of these representations, we were in certain circumstances contractually obligated to repurchase the loans to which the representations related or to indemnify certain parties against losses. UBS has received demands to repurchase US residential mortgage loans as to which UBS made certain rep- resentations at the time the loans were transferred to the securi- tization trust aggregating approximately USD 4.1 billion in origi- nal principal balance. Of this amount, UBS considers claims relating to approximately USD 2 billion in original principal bal- ance to be resolved, including claims barred by the statute of limitations. Substantially all of the remaining claims are in litiga- tion, including the matters described in the next paragraph. UBS believes that new demands to repurchase US residential mort- gage loans are time-barred under a decision rendered by the New York Court of Appeals. In 2012, certain RMBS trusts filed an action (Trustee Suit) in the SDNY seeking to enforce UBS RESI’s obligation to repur- chase loans in the collateral pools for three RMBS securitizations (Transactions) with an original principal balance of approxi- mately USD 2 billion, for which Assured Guaranty Municipal Corp. (Assured Guaranty), a financial guaranty insurance com- pany, had previously demanded repurchase. In January 2015, the court rejected plaintiffs’ efforts to seek damages for all loans purportedly in breach of representations and warranties in any of the three Transactions and limited plaintiffs to pursuing claims based solely on alleged breaches for loans identified in the complaint or other breaches that plaintiffs can establish were independently discovered by UBS. In February 2015, the court denied plaintiffs’ motion seeking reconsideration of its ruling. With respect to the loans subject to the Trustee Suit that were originated by institutions still in existence, UBS intends to enforce its indemnity rights against those institutions. Trial is currently scheduled for April 2016. Lawsuits related to contractual representations and warranties concerning mortgages and RMBS: When UBS acted as an RMBS sponsor or mortgage seller, we generally made certain representa- We also have tolling agreements with certain institutional pur- chasers of RMBS concerning their potential claims related to sub- stantial purchases of UBS-sponsored or third-party RMBS. 469 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) Provision for claims related to sales of residential mortgage-backed securities and mortgages USD million Balance at the beginning of the year Increase in provision recognized in the income statement Release of provision recognized in the income statement Provision used in conformity with designated purpose Balance at the end of the year 31.12.15 31.12.14 849 662 (94) (199) 1,218 817 239 (120) (87) 849 Mortgage-related regulatory matters: In 2014, UBS received a subpoena from the US Attorney’s Office for the Eastern District of New York issued pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which seeks documents and information related to UBS’s RMBS business from 2005 through 2007. In September 2015, the Eastern District of New York identified a number of transactions that are currently the focus of their inquiry, as to which we are providing additional information. UBS continues to respond to the FIRREA subpoena and to subpoenas from the New York State Attorney General (NYAG) relating to its RMBS business. In addition, UBS has also been responding to inquiries from both the Special Inspector Gen- eral for the Troubled Asset Relief Program (SIGTARP) (who is work- ing in conjunction with the US Attorney’s Office for Connecticut and the DOJ) and the SEC relating to trading practices in connec- tion with purchases and sales of mortgage-backed securities in the secondary market from 2009 through the present. We are cooperating with the authorities in these matters. Numerous other banks reportedly are responding to similar inquiries from these authorities. As reflected in the table “Provision for claims related to sales of residential mortgage-backed securities and mortgages,” our balance sheet at 31 December 2015 reflected a provision of USD 1,218 million with respect to matters described in this item 2. As in the case of other matters for which we have established provi- sions, the future outflow of resources in respect of this matter cannot be determined with certainty based on currently avail- able information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provision that we have recognized. 470 Note 22 Provisions and contingent liabilities (continued) 3. 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 the Swiss Financial Market Super- visory Authority (FINMA) and the Luxembourg Commission de Surveillance du Secteur Financier (CSSF). Those inquiries con- cerned two third-party funds established under Luxembourg law, substantially all assets of which were with BMIS, as well as certain funds established in offshore jurisdictions with either 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 billion in the aggregate, although that figure likely includes fictitious profit reported by BMIS. The documentation establishing both funds identifies UBS entities in various roles including custodian, admin- istrator, manager, distributor and promoter, and indicates that UBS employees serve as board members. UBS (Luxembourg) SA and certain other UBS subsidiaries are responding to inquiries by Luxembourg investigating authorities, without, however, being named as parties in those investigations. In 2009 and 2010, the liquidators of the two Luxembourg funds filed claims on behalf of the funds against UBS entities, non-UBS entities and certain indi- viduals including current and former UBS employees. The amounts claimed are approximately EUR 890 million and EUR 305 million, respectively. The liquidators have filed supplementary claims for amounts that the funds may possibly be held liable to pay the BMIS Trustee. These amounts claimed by the liquidator are approximately EUR 564 million and EUR 370 million, respectively. In addition, a large number of alleged beneficiaries have filed claims against UBS entities (and non-UBS entities) for purported losses relating to the Madoff scheme. The majority of these cases are pending in Luxembourg, where appeals were filed by the claimants against the 2010 decisions of the court in which the claims in a number of test cases were held to be inadmissible. In July 2014, the Luxembourg Court of Appeal dismissed one test appeal in its entirety, which decision was appealed by the investor. In July 2015, the Luxembourg Supreme Court found in favor of UBS and dismissed the investor’s appeal. In the US, the BMIS Trustee filed claims in 2010 against UBS entities, among others, in relation to the two Luxembourg funds and one of the offshore funds. The total amount claimed against all defendants in these actions was not less than USD 2 billion. Following a motion by UBS, in 2011, the SDNY dismissed all of the BMIS 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 BMIS Trustee lacks standing to bring such claims. In 2013, the Second Circuit affirmed the District Court’s decision and, in June 2014, the US Supreme Court denied the BMIS Trustee’s petition seeking review of the Second Circuit rul- ing. In December 2014, several claims, including a purported class action, were filed in the US by BMIS customers against UBS enti- ties, asserting claims similar to the ones made by the BMIS Trustee, seeking unspecified damages. One claim was voluntarily with- drawn by the plaintiff. In July 2015, following a motion by UBS, the SDNY dismissed the two remaining claims on the basis that the New York courts did not have jurisdiction to hear the claims against the UBS entities. In Germany, certain clients of UBS are exposed to Madoff-managed positions through third-party funds and funds administered by UBS entities in Germany. A small num- ber of claims have been filed with respect to such funds. In Janu- ary 2015, a court of appeal reversed a lower court decision in favor of UBS in one such case and ordered UBS to pay EUR 49 million, plus interest (approximately EUR 15.3 million). UBS filed an application for leave to appeal the decision. That application was rejected by the German Federal Supreme Court in December 2015, meaning that the Court of Appeal’s decision is final. 471 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) 4. Puerto Rico Declines since August 2013 in the market prices of Puerto Rico municipal bonds and of closed-end funds (the funds) that are sole-managed and co-managed by UBS Trust Company of Puerto Rico and distributed by UBS Financial Services Incorporated of Puerto Rico (UBS PR) have led to multiple regulatory inquiries, as well as customer complaints and arbitrations with aggregate claimed damages of USD 1.6 billion, of which claims with aggre- gate claimed damages of approximately USD 374 million have been resolved through settlements or arbitration. The claims are filed by clients in Puerto Rico who own the funds or Puerto Rico municipal bonds and / or who used their UBS account assets as collateral for UBS non-purpose loans; customer complaint and arbitration allegations include fraud, misrepresentation and unsuitability of the funds and of the loans. A shareholder deriva- tive action was filed in 2014 against various UBS entities and cur- rent and certain former directors of the funds, alleging hundreds of millions in losses in the funds. In 2015, defendants’ motion to dismiss was denied. Defendants are seeking leave to appeal that ruling to the Puerto Rico Supreme Court. In 2014, a federal class action complaint also was filed against various UBS entities, cer- tain members of UBS PR senior management, and the co-man- ager of certain of the funds seeking damages for investor losses in the funds during the period from May 2008 through May 2014. Defendants have moved to dismiss that complaint. In March 2015, a class action was filed in Puerto Rico state court against UBS PR seeking equitable relief in the form of a stay of any effort by UBS PR to collect on non-purpose loans it acquired from UBS Bank USA in December 2013 based on plaintiffs’ allegation that the loans are not valid. In 2014, UBS reached a settlement with the Office of the Com- missioner of Financial Institutions for the Commonwealth of Puerto Rico (OCFI) in connection with OCFI’s examination of UBS’s operations from January 2006 through September 2013. Pursu- ant to the settlement, UBS contributed USD 3.5 million to an investor education fund, offered USD 1.68 million in restitution to certain investors and, among other things, committed to under- take an additional review of certain client accounts to determine if additional restitution would be appropriate. That review resulted in an additional USD 2.1 million in restitution being offered to certain investors. In September 2015, the SEC and the Financial Industry Regula- tory Authority (FINRA) announced settlements with UBS PR of their separate investigations stemming from the 2013 market events. Without admitting or denying the findings in either mat- ter, UBS PR agreed in the SEC settlement to pay USD 15 million (which includes USD 1.18 million in disgorgement, a civil penalty of USD 13.63 million and pre-judgment interest), and USD 18.5 million in the FINRA matter (which includes up to USD 11 million in restitution to 165 UBS PR customers and a civil penalty of USD 7.5 million). The SEC settlement involves a charge against UBS PR of failing to supervise the activities of a former financial advisor who had recommended the impermissible investment of non- purpose loan proceeds into the UBS PR closed-end funds, in viola- tion of firm policy and the customer loan agreements. In the FINRA settlement, UBS PR is alleged to have failed to supervise certain customer accounts which were both more than 75% invested in UBS PR closed-end funds and leveraged against those positions. We also understand that the DOJ is conducting a crimi- nal inquiry into the impermissible reinvestment of non-purpose loan proceeds. We are cooperating with the authorities in this inquiry. In 2011, a purported derivative action was filed on behalf of the Employee Retirement System of the Commonwealth of Puerto Rico (System) against over 40 defendants, including UBS PR and other consultants and underwriters, trustees of the System, and the President and Board of the Government Development Bank of Puerto Rico. The plaintiffs alleged that defendants violated their purported fiduciary duties and contractual obligations in connec- tion with the issuance and underwriting of approximately USD 3 billion of bonds by the System in 2008 and sought damages of over USD 800 million. UBS is named in connection with its under- writing and consulting services. In 2013, the case was dismissed by the Puerto Rico Court of First Instance on the grounds that plaintiffs did not have standing to bring the claim, but that dis- missal was subsequently overturned on appeal. Defendants have renewed their motion to dismiss the complaint on grounds not addressed when the court issued its prior ruling. Also, in 2013, an SEC Administrative Law Judge dismissed a case brought by the SEC against two UBS executives, finding no violations. The charges had stemmed from the SEC’s investigation of UBS’s sale of closed-end funds in 2008 and 2009, which UBS settled in 2012. Beginning in 2012, two federal class action com- plaints, which were subsequently consolidated, were filed against various UBS entities, certain of the funds, and certain members of UBS PR senior management, seeking damages for investor losses in the funds during the period from January 2008 through May 2012 based on allegations similar to those in the SEC action. A motion for class certification was denied without prejudice to the right to refile the motion after limited discovery, and that motion has since been refiled. 472 Note 22 Provisions and contingent liabilities (continued) In June 2015 Puerto Rico’s Governor stated that the Common- wealth is unable to meet its obligations. In addition, certain agen- cies and public corporations of the Commonwealth have held discussions with their creditors to restructure their outstanding debt, and certain agencies and public corporations of the Com- monwealth have defaulted on certain interest payments that were due in August 2015 and January 2016. The United States Supreme Court has agreed to hear Puerto Rico’s appeal of a US District Court’s invalidation of the Puerto Rico Public Corporations Debt Enforcement and Recovery Act (the Act), under which Puerto Rico’s public corporations would be permitted to effect a manda- tory restructuring of their respective debts with a specified credi- tor vote that would be binding on all applicable creditors, once approved by a court or, alternatively, under a court-supervised bankruptcy type restructuring. The foregoing events, any further defaults by the Commonwealth or its agencies and public corpo- rations on (or any debt restructurings proposed by them with respect to) their outstanding debt, a Supreme Court decision upholding the Act (or sending it back to the District Court for further proceedings) and any further actions taken by Puerto Rico’s public corporations under the Act, as well as any market reactions to any of the foregoing, may increase the number of claims against UBS concerning Puerto Rico securities as well as potential damages sought. Our balance sheet at 31 December 2015 reflected provisions with respect to matters described in this item 4 in amounts that UBS believes to be appropriate under the applicable accounting standard. As in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provi- sions that we have recognized. 5. Foreign exchange, LIBOR, and benchmark rates, and other trading practices Foreign exchange-related regulatory matters: Following an initial media report in 2013 of widespread irregularities in the foreign exchange markets, UBS immediately commenced an internal review of its foreign exchange business, which includes our pre- cious metals and related structured products businesses. Since then, various authorities have commenced investigations con- cerning possible manipulation of foreign exchange markets, including FINMA, the Swiss Competition Commission (WEKO), the DOJ, the SEC, the US Commodity Futures Trading Commis- sion (CFTC), the Board of Governors of the Federal Reserve Sys- tem (Federal Reserve Board), the UK Financial Conduct Authority (FCA) (to which certain responsibilities of the UK Financial Services Authority (FSA) have passed), the UK Serious Fraud Office (SFO), the Australian Securities and Investments Commission (ASIC), the Hong Kong Monetary Authority (HKMA), the Korea Fair Trade Commission (KFTC) and the Brazil Competition Authority (CADE). In addition, WEKO is, and a number of other authorities report- edly are, investigating potential manipulation of precious metals prices. UBS has taken and will take appropriate action with respect to certain personnel as a result of its ongoing review. In 2014, UBS reached settlements with the FCA and the CFTC in connection with their foreign exchange investigations, and FINMA issued an order concluding its formal proceedings with respect to UBS relating to its foreign exchange and precious met- als businesses. UBS has paid a total of approximately CHF 774 million to these authorities, including GBP 234 million in fines to the FCA, USD 290 million in fines to the CFTC, and CHF 134 mil- lion to FINMA representing confiscation of costs avoided and profits. In May 2015, the Federal Reserve Board and the Con- necticut Department of Banking issued an Order to Cease and Desist and Order of Assessment of a Civil Monetary Penalty Issued upon Consent (Federal Reserve Order) to UBS AG. As part of the Federal Reserve Order, UBS AG paid a USD 342 million civil mon- etary penalty. 473 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) In May 2015, the DOJ’s Criminal Division (Criminal Division) terminated the December 2012 Non-Prosecution Agreement (NPA) with UBS AG related to UBS’s submissions of benchmark interest rates. As a result, UBS AG entered into a plea agreement with the Criminal Division pursuant to which UBS AG agreed to and did plead guilty to a one-count criminal information filed in the US District Court for the District of Connecticut charging UBS AG with one count of wire fraud in violation of 18 USC Sections 1343 and 2. Under the plea agreement, UBS AG agreed to a sen- tence that includes a USD 203 million fine and a three-year term of probation. The criminal information charges that between approximately 2001 and 2010, UBS AG engaged in a scheme to defraud counterparties to interest rate derivatives transactions by manipulating benchmark interest rates, including Yen LIBOR. Sen- tencing is currently scheduled for 9 May 2016. The Criminal Divi- sion terminated the NPA based on its determination, in its sole discretion, that certain UBS AG employees committed criminal conduct that violated the NPA, including fraudulent and deceptive currency trading and sales practices in conducting certain foreign exchange market transactions with clients and collusion with other participants in certain foreign exchange markets. We have ongoing obligations to cooperate with these authori- ties and to undertake certain remediation, including actions to improve processes and controls. UBS has been granted conditional immunity by the Antitrust Division of the DOJ (Antitrust Division) from prosecution for EUR / USD collusion and entered into a non-prosecution agree- ment covering other currency pairs. As a result, UBS AG will not be subject to prosecutions, fines or other sanctions for antitrust law violations by the Antitrust Division, subject to UBS AG’s con- tinuing cooperation. However, the conditional immunity grant does not bar government agencies from asserting other claims and imposing sanctions against UBS AG, as evidenced by the set- tlements and ongoing investigations referred to above. UBS has also been granted conditional leniency by authorities in certain jurisdictions, including WEKO, in connection with potential com- petition law violations relating to precious metals, and as a result, will not be subject to prosecutions, fines or other sanctions for antitrust or competition law violations in those jurisdictions, sub- ject to UBS AG’s continuing cooperation. In October 2015, UBS AG settled charges with the SEC relating to structured notes issued by UBS AG that were linked to the UBS V10 Currency Index with Volatility Cap. Investigations relating to foreign exchange and precious metals matters by numerous authorities, including the CFTC, remain ongoing notwithstanding these resolutions. Foreign exchange-related civil litigation: Putative class actions have been filed since November 2013 in US federal courts and in other jurisdictions against UBS and other banks on behalf of puta- tive classes of persons who engaged in foreign currency transac- tions with any of the defendant banks. They allege collusion by the defendants and assert claims under the antitrust laws and for unjust enrichment. In 2015, additional putative class actions were filed in federal court in New York against UBS and other banks on behalf of a putative class of persons who entered into or held any foreign exchange futures contracts and options on foreign exchange futures contracts since 1 January 2003. The complaints assert claims under the Commodity Exchange Act (CEA) and the US antitrust laws. In July 2015, a consolidated complaint was filed on behalf of both putative classes of persons covered by the US federal court class actions described above. UBS has entered into a settlement agreement that would resolve all of these US federal court class actions. The agreement, which has been preliminarily approved by the court and is subject to final court approval, requires, among other things, that UBS pay an aggregate of USD 141 million and provide cooperation to the settlement classes. 474 Note 22 Provisions and contingent liabilities (continued) In June 2015, a putative class action was filed in federal court in New York against UBS and other banks on behalf of partici- pants, beneficiaries, and named fiduciaries of plans qualified under the Employee Retirement Income Security Act of 1974 (ERISA) for whom a defendant bank provided foreign currency exchange transactional services, exercised discretionary authority or discretionary control over management of such ERISA plan, or authorized or permitted the execution of any foreign currency exchange transactional services involving such plan’s assets. The complaint asserts claims under ERISA. In 2015, UBS was added to putative class actions pending against other banks in federal court in New York and other juris- dictions on behalf of putative classes of persons who bought or sold physical precious metals and various precious metal products and derivatives. The complaints in these lawsuits assert claims under the antitrust laws and the CEA, and other claims. LIBOR and other benchmark-related regulatory matters: Numerous government agencies, including the SEC, the CFTC, the DOJ, the FCA, the SFO, the Monetary Authority of Singapore (MAS), the HKMA, FINMA, the various state attorneys general in the US, and competition authorities in various jurisdictions have conducted or are continuing to conduct investigations regarding submissions with respect to LIBOR and other benchmark rates. These investigations focus on whether there were improper attempts by UBS, among others, either acting on our own or together with others, to manipulate LIBOR and other benchmark rates at certain times. In 2012, UBS reached settlements with the FSA, the CFTC and the Criminal Division of the DOJ in connection with their investi- gations of benchmark interest rates. At the same time, FINMA issued an order concluding its formal proceedings with respect to UBS relating to benchmark interest rates. UBS has paid a total of approximately CHF 1.4 billion in fines and disgorgement – includ- ing GBP 160 million in fines to the FSA, USD 700 million in fines to the CFTC, USD 500 million in fines to the DOJ, and CHF 59 million in disgorgement to FINMA. UBS Securities Japan Co. Ltd. (UBSSJ) entered into a plea agreement with the DOJ under which it entered a plea to one count of wire fraud relating to the manip- ulation of certain benchmark interest rates, including Yen LIBOR. UBS entered into an NPA with the DOJ, which (along with the plea agreement) covered conduct beyond the scope of the conditional leniency / immunity grants described below, required UBS to pay the USD 500 million fine to the DOJ after the sentencing of UBSSJ, and provided that any criminal penalties imposed on UBSSJ at sentencing be deducted from the USD 500 million fine. Under the NPA, we agreed, among other things, that for two years from 18 December 2012 UBS would not commit any US crime, and we would advise DOJ of any potentially criminal conduct by UBS or any of its employees relating to violations of US laws concerning fraud or securities and commodities markets. The term of the NPA was extended by one year to 18 December 2015. In May 2015, the Criminal Division terminated the NPA based on its determina- tion, in its sole discretion, that certain UBS AG employees commit- ted criminal conduct that violated the NPA. As a result, UBS entered into a plea agreement with the DOJ under which it entered a guilty plea to one count of wire fraud relating to the manipulation of certain benchmark interest rates, including Yen LIBOR, and agreed to pay a fine of USD 203 million and accept a three-year term of probation. Sentencing is currently scheduled for 9 May 2016. In 2014, UBS reached a settlement with the European Com- mission (EC) regarding its investigation of bid-ask spreads in con- nection with Swiss franc interest rate derivatives and paid a EUR 12.7 million fine, which was reduced to this level based in part on UBS’s cooperation with the EC. The MAS, HKMA and the Japan Financial Services Agency have also resolved investigations of UBS (and in some cases, other banks). We have ongoing obligations to cooperate with the authorities with whom we have reached reso- lutions and to undertake certain remediation with respect to benchmark interest rate submissions. Investigations by the CFTC, ASIC and other governmental authorities remain ongoing notwithstanding these resolutions. 475 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) UBS has been granted conditional leniency or conditional immunity from authorities in certain jurisdictions, including the Antitrust Division of the DOJ, WEKO and the EC, in connection with potential antitrust or competition law violations related to submissions for Yen LIBOR and Euroyen TIBOR. WEKO has also granted UBS conditional immunity in connection with potential competition law violations related to submissions for CHF LIBOR and certain transactions related to CHF LIBOR. As a result of these conditional grants, we will not be subject to prosecutions, fines or other sanctions for antitrust or competition law violations in the jurisdictions where we have conditional immunity or leniency in connection with the matters covered by the conditional grants, subject to our continuing cooperation. However, the conditional leniency and conditional immunity grants we have received do not bar government agencies from asserting other claims and imposing sanctions against us, as evidenced by the settlements and ongoing investigations referred to above. In addition, as a result of the conditional leniency agreement with the DOJ, we are eligible 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 antitrust action, subject to our satisfying the DOJ and the court presiding over the civil litigation of our cooperation. The conditional leniency and conditional immunity grants do not oth- erwise affect the ability of private parties to assert civil claims against us. LIBOR and other benchmark-related civil litigation: A number of putative class actions and other actions are pending in, or expected to be transferred to, the federal courts in New York against UBS and numerous other banks on behalf of parties who transacted in certain interest rate benchmark-based derivatives. Also pending are actions asserting losses related to various prod- ucts whose interest rate was linked to USD LIBOR, including adjustable rate mortgages, preferred and debt securities, bonds pledged as collateral, loans, depository accounts, investments and other interest-bearing instruments. All of the complaints allege manipulation, through various means, of various benchmark interest rates, including USD LIBOR, Euroyen TIBOR, Yen LIBOR, EURIBOR, CHF LIBOR, GBP LIBOR or USD ISDAFIX rates and seek unspecified compensatory and other damages under varying legal theories. In 2013, the court in the USD action dismissed the fed- eral antitrust and racketeering claims of certain USD LIBOR plain- tiffs and a portion of their claims brought under the CEA and state common law. Plaintiffs have appealed the dismissal, and the appeal remains pending. In 2014, the court in one of the Euroyen TIBOR lawsuits dismissed certain of the plaintiff’s claims, including federal antitrust claims. In 2015, the same court dismissed plain- tiff’s federal racketeering claims and affirmed its previous dis- missal of plaintiff’s antitrust claims. UBS and other defendants in other lawsuits including those related to EURIBOR, CHF LIBOR and GBP LIBOR have filed motions to dismiss. Since September 2014, putative class actions have been filed in federal court in New York and New Jersey against UBS and other financial institutions, among others, on behalf of parties who entered into interest rate derivative transactions linked to ISDAFIX. The complaints, which have since been consolidated into an amended complaint, allege that the defendants conspired to manipulate ISDAFIX rates from 1 January 2006 through January 2014, in violation of US antitrust laws and the CEA, among other theories, and seeks unspecified compensatory damages, includ- ing treble damages. UBS and other defendants have filed a motion to dismiss, which remains pending. Government bonds: Putative class actions have been filed in US federal courts against UBS and other banks on behalf of persons who participated in markets for US Treasury securities since 2007. The complaints generally allege that the banks colluded with respect to and manipulated prices of US Treasury securities sold at auction. They assert claims under the antitrust laws and the CEA and for unjust enrichment. The cases have been consolidated in the SDNY. Following filing of these complaints, UBS and report- edly other banks have received requests for information from various authorities regarding US Treasury securities and other gov- ernment bond trading practices. With respect to additional matters and jurisdictions not encom- passed by the settlements and order referred to above, our bal- ance sheet at 31 December 2015 reflected a provision in an amount that UBS believes to be appropriate under the applicable accounting standard. As in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provision that we have recognized. 476 Note 22 Provisions and contingent liabilities (continued) 6. Swiss retrocessions The Federal Supreme Court of Switzerland ruled in 2012, in a test case against UBS, that distribution fees paid to a firm for distribut- ing third party and intra-group investment funds and structured products must be disclosed and surrendered to clients who have entered into a discretionary mandate agreement with the firm, absent a valid waiver. FINMA has issued a supervisory note to all Swiss banks in response to the Supreme Court decision. The note sets forth the measures Swiss banks are to adopt, which include informing all affected clients about the Supreme Court decision and directing them to an internal bank contact for further details. UBS has met the FINMA requirements and has notified all potentially affected clients. The Supreme Court decision has resulted, and may continue to result, in a number of client requests for UBS to disclose and potentially surrender retrocessions. Client requests are assessed on a case-by-case basis. Considerations taken into account when assessing these cases include, among others, the existence of a discretionary mandate and whether or not the client documenta- tion contained a valid waiver with respect to distribution fees. Our balance sheet at 31 December 2015 reflected a provision with respect to matters described in this item 6 in an amount that UBS believes to be appropriate under the applicable accounting standard. The ultimate exposure will depend on client requests and the resolution thereof, factors that are difficult to predict and assess. Hence, as in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provi- sion that we have recognized. 7. Banco UBS Pactual tax indemnity Pursuant to the 2009 sale of Banco UBS Pactual S.A. (Pactual) by UBS to BTG Investments, LP (BTG), BTG has submitted contractual indemnification claims that UBS estimates amount to approxi- mately BRL 2.4 billion, including interest and penalties, which is net of liabilities retained by BTG. The claims pertain principally to several tax assessments issued by the Brazilian tax authorities against Pactual relating to the period from December 2006 through March 2009, when UBS owned Pactual. The majority of these assessments relate to the deductibility of goodwill amortiza- tion in connection with UBS’s 2006 acquisition of Pactual and payments made to Pactual employees through various profit-shar- ing plans. These assessments are being challenged in administra- tive and judicial proceedings. In May 2015, the administrative court issued a decision that was largely in favor of the tax author- ity with respect to the goodwill amortization assessment. This decision has been appealed. 8. Matters relating to the CDS market In 2013, the EC issued a Statement of Objections against 13 credit default swap (CDS) dealers including UBS, as well as data service provider Markit and the International Swaps and Derivatives Asso- ciation (ISDA). The Statement of Objections broadly alleges that the dealers infringed European Union antitrust rules by colluding to prevent exchanges from entering the credit derivatives market between 2006 and 2009. In December 2015, the EC issued a statement that it had decided to close its investigation against all 13 dealers, including UBS. The EC’s investigation regarding Markit and ISDA is ongoing. Since mid-2009, the Antitrust Division of the DOJ has also been investigating whether multiple dealers, includ- ing UBS, conspired with each other and with Markit to restrain competition in the markets for CDS trading, clearing and other services. In 2014, putative class action plaintiffs filed consolidated amended complaints in the SDNY against 12 dealers, including UBS, as well as Markit and ISDA, alleging violations of the US Sherman Antitrust Act and common law. Plaintiffs allege that the defendants unlawfully conspired to restrain competition in and / or monopolize the market for CDS trading in the US in order to pro- tect the dealers’ profits from trading CDS in the over-the-counter market. In September 2015, UBS and the other defendants entered into settlement agreements to resolve the litigation, pur- suant to which UBS has paid USD 75 million out of a total settle- ment amount paid by all defendants of approximately USD 1.865 billion. The agreements have received preliminary court approval but are subject to final court approval. 477 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 23 Other liabilities CHF million Prime brokerage payables1 Amounts due under unit-linked investment contracts Compensation-related liabilities of which: accrued expenses of which: deferred contingent capital plans of which: other deferred compensation plans of which: net defined benefit pension and post-employment liabilities2 Third-party interest in consolidated investment funds Settlement and clearing accounts Current and deferred tax liabilities3 VAT and other tax payables Deferred income Accrued interest expenses Other accrued expenses Liabilities of disposal group held for sale4 Other Total other liabilities 31.12.15 45,306 15,718 31.12.14 38,633 17,643 6,839 2,885 1,181 2,038 736 536 894 819 447 210 1,431 2,500 235 718 75,652 6,732 2,633 794 1,931 1,374 648 1,054 643 422 259 1,327 2,473 0 1,279 71,112 1 Prime brokerage services include clearance, settlement, custody, financing and portfolio reporting services for corporate clients trading across multiple asset classes. Prime brokerage payables are mainly comprised of client securities financing and deposits. 2 Refer to Note 28 for more information. 3 Refer to Note 8 for more information. 4 Refer to Note 32 for more information. 478 Additional information Note 24 Fair value measurement This Note provides fair value measurement information for both financial and non-financial instruments and is structured as follows: a) Valuation principles b) Valuation governance c) Valuation techniques d) Valuation adjustments e) Fair value measurements and classification within the f) Transfers between Level 1 and Level 2 in the fair value hierarchy g) Movements of Level 3 instruments h) Valuation of assets and liabilities classified as Level 3 i) Sensitivity of fair value measurements to changes in unobservable input assumptions j) Financial instruments not measured at fair value fair value hierarchy Pillar 3 | a) Valuation principles Fair value is defined as the price that would be received for the sale of an asset or paid to transfer a liability in an orderly transac- tion between market participants in the principal market (or most advantageous market, in the absence of a principal market) as of the measurement date. In measuring fair value, the Group uti- lizes various valuation approaches and applies a hierarchy for prices and inputs that maximizes the use of observable market data, if available. All financial and non-financial assets and liabilities measured or disclosed at fair value are categorized into one of three fair value hierarchy levels. In certain cases, the inputs used to measure fair value may fall within different levels of the fair value hierarchy. For disclosure purposes, the level in the hierarchy within which the instrument is classified in its entirety is based on the lowest level input that is significant to the position’s fair value measurement: – Level 1 – quoted prices (unadjusted) in active markets for iden- tical assets and liabilities; – Level 2 – valuation techniques for which all significant inputs are, or are based on, observable market data or – Level 3 – valuation techniques for which significant inputs are not based on observable market data. If available, fair values are determined using quoted prices in active markets for identical assets or liabilities. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing data on an ongoing basis. Assets and liabilities that are quoted and traded in an active market are valued at the currently quoted price multi- plied by the number of units of the instrument held. Where the market for a financial instrument or non-financial asset or liability is not active, fair value is established using a valu- ation technique, including pricing models. Valuation techniques involve the use of estimates, the extent of which depends on the complexity of the instrument and the availability of market-based data. Valuation adjustments may be made to allow for additional factors including model, liquidity, credit and funding risks, which are not explicitly captured within the valuation technique, but which would nevertheless be considered by market participants when establishing a price. The limitations inherent in a particular valuation technique are considered in the determination of an asset or liability’s classification within the fair value hierarchy. Many cash instruments and over-the-counter (OTC) derivative contracts have bid and offer prices that can be observed in the marketplace. Bid prices reflect the highest price that a party is will- ing to pay for an asset. Offer prices represent the lowest price that a party is willing to accept for an asset. In general, long positions are measured at a bid price and short positions at an offer price, reflecting the prices at which the instruments could be transferred under normal market conditions. Offsetting positions in the same financial instrument are marked at the mid-price within the bid- offer spread. Generally, the unit of account for a financial instrument is the individual instrument, and UBS applies valuation adjustments at an individual instrument level, consistent with that unit of account. However, if certain conditions are met, UBS may estimate the fair value of a portfolio of financial assets and liabilities with substan- tially similar and offsetting risk exposures on the basis of the net open risks. For transactions where the valuation technique used to mea- sure fair value requires significant inputs that are not based on observable market data, the financial instrument is initially recog- nized at the transaction price. This initial recognition amount may differ from the fair value obtained using the valuation technique. Any such difference is deferred and not recognized in the income statement and referred to as deferred day-1 profit or loss. ➔ Refer to Note 24d for more information 479 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) Pillar 3 | b) Valuation governance UBS’s fair value measurement and model governance framework includes numerous controls and other procedural safeguards that are intended to maximize the quality of fair value measurements reported in the financial statements. New products and valuation techniques must be reviewed and approved by key stakeholders from risk and finance control functions. Responsibility for the ongoing measurement of financial and non-financial instruments at fair value resides with the business divisions. In carrying out their valuation responsibilities, the businesses are required to con- sider the availability and quality of external market data and to provide justification and rationale for their fair value estimates. The fair value estimates provided by the businesses are validated by risk and finance control functions, which are independent of the business divisions. Independent price verification is performed by finance through benchmarking the business divisions’ fair value estimates with observable market prices and other independent sources. Controls and governance are in place to ensure the quality of third-party pricing sources where used. For instruments where valuation models are used to determine fair value, independent valuation and model control groups within finance and risk evalu- ate UBS’s models on a regular basis, including valuation and model input parameters as well as pricing. As a result of the valuation controls employed, valuation adjustments may be made to the business divisions’ estimates of fair value to align with independent market data and the relevant accounting standard. ➔ Refer to Note 24d for more information Pillar 3 | c) Valuation techniques Valuation techniques are used to value positions for which a market price is not available from market sources. This includes certain less liquid debt and equity instruments, certain exchange- traded derivatives and all derivatives transacted in the OTC mar- ket. UBS uses widely recognized valuation techniques for deter- mining the fair value of financial and non-financial instruments that are not actively traded and quoted. The most frequently applied valuation techniques include discounted value of expected cash flows, relative value and option pricing method- ologies. Discounted value of expected cash flows is a valuation tech- nique that measures fair value using estimated expected future cash flows from assets or liabilities and then discounts these cash flows using a discount rate or discount margin that reflects the credit and / or funding spreads required by the market for instru- ments with similar risk and liquidity profiles to produce a present value. When using such valuation techniques, expected future cash flows are estimated using an observed or implied market price for the future cash flows or by using industry standard cash flow projection models. The discount factors within the calcula- tion are generated using industry standard yield curve modeling techniques and models. Relative value models measure fair value based on the market prices of equivalent or comparable assets or liabilities, making adjustments for differences between the characteristics of the observed instrument and the instrument being valued. Option pricing models incorporate assumptions regarding the behavior of future price movements of an underlying referenced asset or assets to generate a probability-weighted future expected payoff for the option. The resulting probability-weighted expected payoff is then discounted using discount factors generated from industry standard yield curve modeling techniques and models. The option pricing model may be implemented using a closed- form analytical formula or other mathematical techniques (e.g., binomial tree or Monte Carlo simulation). Where available, valuation techniques use market-observable assumptions and inputs. If such data is not available, inputs may be derived by reference to similar assets in active markets, from recent prices for comparable transactions or from other observ- able market data. In such cases, the inputs selected are based on historical experience and practice for similar or analogous instru- ments, derivation of input levels based on similar products with observable price levels and knowledge of current market condi- tions and valuation approaches. For more complex instruments and instruments not traded in an active market, fair values may be estimated using a combina- tion of observed transaction prices, consensus pricing services and relevant quotes. Consideration is given to the nature of the quotes (e.g., indicative or firm) and the relationship of recently evidenced market activity to the prices provided by consensus pricing ser- vices. UBS also uses internally developed models, which are typi- cally based on valuation methods and techniques recognized as standard within the industry. 480 Note 24 Fair value measurement (continued) Assumptions and inputs used in valuation techniques include benchmark interest rate curves, credit and funding spreads used in estimating discount rates, bond and equity prices, equity index prices, foreign exchange rates, levels of market volatility and corre- lation. Refer to Notes 24e and 24h for more information. The dis- count curves used by the Group incorporate the funding and credit characteristics of the instruments to which they are applied. Pillar 3 | d) Valuation adjustments The output of a valuation technique is always an estimate of a fair value that cannot be measured with complete certainty. As a result, valuations are adjusted, where appropriate and when such factors would be considered by market participants in estimating fair value, to reflect close-out costs, credit exposure, model-driven valuation uncertainty, funding costs and benefits, trading restric- tions and other factors. Valuation adjustments are an important component of fair value for assets and liabilities that are mea- sured using valuation techniques. Such adjustments are applied to reflect uncertainties within the fair value measurement process, to adjust for an identified model simplification or to incorporate an aspect of fair value that requires an overall portfolio assessment rather than an evaluation based on an individual instrument level characteristic. The major classes of valuation adjustments are discussed in fur- Day-1 reserves For new transactions where the valuation technique used to mea- sure fair value requires significant inputs that are not based on observable market data, the financial instrument is initially recog- nized at the transaction price. The transaction price may differ from the fair value obtained using a valuation technique where any such difference is deferred and not initially recognized in the income statement. These day-1 profit or loss reserves are reflected, where appropriate, as valuation adjustments. The table below summarizes the changes in deferred day-1 profit or loss reserves during the respective period. Amounts deferred are released and gains or losses are recorded in Net trad- ing income when pricing of equivalent products or the underly- ing parameters become observable or when the transaction is closed out. ther detail below. Deferred day-1 profit or loss CHF million Balance at the beginning of the year Profit / (loss) deferred on new transactions (Profit) / loss recognized in the income statement Foreign currency translation Balance at the end of the year For the year ended 31.12.15 31.12.14 31.12.13 480 268 (321) (6) 421 486 344 (384) 35 480 474 694 (653) (29) 486 481 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) Own credit adjustments on financial liabilities designated at fair value In addition to considering the valuation of the derivative risk com- ponent, the valuation of fair value option liabilities also requires consideration of the funded component and specifically the own credit component of fair value. Own credit risk is reflected in the valuation of our fair value option liabilities where this component is considered relevant for valuation purposes by our counterpar- ties and other market participants. On the other hand, own credit risk is not reflected in the valuation of our liabilities that are fully collateralized or for other obligations for which it is established market practice not to include an own credit component. In 2015, UBS made enhancements to the valuation methodol- ogy for the own credit component of fair value of financial liabili- ties designated at fair value. Prior to the fourth quarter of 2015, own credit was estimated using a funds transfer pricing curve (FTP), which was derived by discounting UBS new issuance senior debt curve spreads, with the discount primarily reflecting the dif- ferences between the spreads in the senior unsecured debt mar- ket for UBS debt and the levels at which UBS medium-term notes (MTN) were issued. A decline in long-dated UBS MTN issuance volumes, following UBS’s business transformation, resulted in a reduction in the observable market data available to benchmark the FTP. From the fourth quarter of 2015 onwards, own credit is estimated using an own credit adjustment curve (OCA), which incorporates more observable market data, including market- observed secondary prices for UBS senior debt, UBS credit default swap (CDS) spreads and senior debt curves of peers. This change in accounting estimate was finalized in the fourth quarter of 2015, following a multi-period implementation project to develop an enhanced fair value approach supported by related infrastruc- ture enhancements. The change was implemented on a prospec- tive basis in the fourth quarter of 2015 and resulted in a gain of CHF 260 million on a total carrying amount of CHF 63 billion in financial liabilities designated at fair value. OCA is generally a Level 2 pricing input. However, certain long- dated exposures that are beyond the tenors that are actively traded are classified as Level 3. The effects of own credit adjustments related to financial liabil- ities designated at fair value (predominantly issued structured products) are summarized in the table below. Life-to-date amounts reflect the cumulative change since ini- tial recognition. The change in own credit for the period consists of changes in fair value that are attributable to the change in UBS’s credit spreads, as well as the effect of changes in fair values attributable to factors other than credit spreads, such as redemp- tions, effects from time decay and changes in interest and other market rates. Own credit adjustments on financial liabilities designated at fair value CHF million Gain / (loss) for the year ended Life-to-date gain / (loss) As of or for the year ended 31.12.15 31.12.14 31.12.13 553 287 292 (302) (283) (577) 482 Note 24 Fair value measurement (continued) Credit valuation adjustments In order to measure the fair value of OTC derivative instruments, including funded derivative instruments which are classified as Financial assets designated at fair value, credit valuation adjust- ments (CVA) are necessary to reflect the credit risk of the coun- terparty inherent in these instruments. This amount represents the estimated fair value of protection required to hedge the counterparty credit risk of such instruments. A CVA is deter- mined for each counterparty, considering all exposures to that counterparty, and is dependent on the expected future value of exposures, default probabilities and recovery rates, applicable collateral or netting arrangements, break clauses and other con- tractual factors. Funding valuation adjustments Funding valuation adjustments (FVA) reflect the costs and benefits of funding associated with uncollateralized and partially collater- alized derivative receivables and payables and are calculated as the valuation impact from moving the discounting of the uncol- lateralized derivative cash flows from LIBOR to OCA using the CVA framework. In the fourth quarter of 2015, as mentioned above, UBS replaced the FTP curve with the OCA curve for purposes of valu- ing its liabilities carried at fair value. As applied to the FVA associ- ated with uncollateralized and partially collateralized derivative payables, the change resulted in a charge to the income state- ment of CHF 40 million. An FVA is also applied to collateralized derivative assets in cases where the collateral cannot be sold or repledged. Debit valuation adjustments A debit valuation adjustment (DVA) is estimated to incorporate own credit in the valuation of derivatives, effectively consistent with the CVA framework. DVA is determined for each counter- party, considering all exposures with that counterparty and taking into account collateral netting agreements, expected future mark- to-market movements and UBS’s credit default spreads. Upon the implementation of FVA in the second half of 2014, UBS reversed DVA to the extent it overlapped with FVA. Other valuation adjustments Instruments that are measured as part of a portfolio of combined long and short positions are valued at mid-market levels to ensure consistent valuation of the long and short component risks. A liquidity valuation adjustment is then made to the overall net long or short exposure to move the fair value to bid or offer as appro- priate, reflecting current levels of market liquidity. The bid-offer spreads used in the calculation of this valuation adjustment are obtained from market transactions and other relevant sources and are updated periodically. Uncertainties associated with the use of model-based valua- tions are incorporated into the measurement of fair value through the use of model reserves. These reserves reflect the amounts that the Group estimates should be deducted from valuations pro- duced directly by models to incorporate uncertainties in the rele- vant modeling assumptions, in the model and market inputs used, or in the calibration of the model output to adjust for known model deficiencies. In arriving at these estimates, the Group con- siders a range of market practices, including how it believes mar- ket participants would assess these uncertainties. Model reserves are reassessed periodically in light of data from market transac- tions, consensus pricing services and other relevant sources. Valuation adjustments on financial instruments Life-to-date gain / (loss), CHF billion Credit valuation adjustments1 Funding valuation adjustments Debit valuation adjustments Other valuation adjustments of which: liquidity of which: model uncertainty 1 Amounts do not include reserves against defaulted counterparties. As of 31.12.15 31.12.14 (0.3) (0.2) 0.0 (0.8) (0.5) (0.3) (0.5) (0.1) 0.0 (0.9) (0.5) (0.4) 483 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) e) Fair value measurements and classification within the fair value hierarchy The fair value hierarchy classification of financial and non-finan- cial assets and liabilities measured at fair value is summarized in the table below. The narrative that follows describes the signifi- cant valuation inputs and assumptions for each class of assets and liabilities measured at fair value, the valuation techniques, where applicable, used in measuring their fair value, and the factors determining their classification within the fair value hierarchy. Determination of fair values from quoted market prices or valuation techniques1 CHF billion Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 31.12.15 31.12.14 Assets measured at fair value on a recurring basis Financial assets held for trading2 of which: Government bills / bonds Corporate bonds and municipal bonds, including bonds issued by financial institutions Loans Investment fund units Asset-backed securities Equity instruments Financial assets for unit-linked investment contracts Positive replacement values of which: Interest rate contracts Credit derivative contracts Foreign exchange contracts Equity / index contracts Commodity contracts Financial assets designated at fair value of which: Loans (including structured loans) Structured reverse repurchase and securities borrowing agreements Other Financial investments available-for-sale of which: Government bills / bonds Corporate bonds and municipal bonds, including bonds issued by financial institutions Investment fund units Asset-backed securities Equity instruments Non-financial assets Precious metals and other physical commodities Assets measured at fair value on a non-recurring basis Other assets3 Total assets measured at fair value 484 120.4 101.7 21.9 3.3 8.1 1.8 5.7 1.0 1.5 0.7 164.0 74.4 5.4 64.9 15.9 3.4 2.7 2.3 0.0 0.3 27.7 2.0 22.2 0.1 3.4 0.0 2.1 0.0 0.7 0.8 0.2 0.2 0.1 0.1 2.9 0.1 1.3 0.5 1.0 0.0 3.3 1.7 1.5 0.1 0.7 0.0 0.0 0.1 0.0 0.5 16.2 9.0 2.6 11.9 1.2 64.0 15.5 167.4 74.5 6.7 65.7 16.9 3.4 6.1 4.0 1.6 0.6 62.5 33.1 25.2 0.2 3.4 0.6 96.4 12.9 0.2 0.0 6.1 0.0 62.4 14.8 0.5 0.0 0.0 0.3 0.0 0.0 0.2 0.0 0.0 0.2 34.2 31.1 3.0 0.0 0.0 0.1 3.7 27.2 4.7 11.0 2.2 6.4 1.5 0.8 0.6 251.6 123.4 9.8 97.0 17.7 3.6 1.3 0.8 0.1 0.5 23.9 2.8 16.9 0.1 4.0 0.1 0.0 3.5 0.0 1.4 1.1 0.3 0.6 0.1 0.1 4.4 0.2 1.7 0.6 1.9 0.0 3.5 1.0 2.4 0.1 0.6 0.0 0.0 0.2 0.0 0.4 0.0 132.4 13.6 12.9 3.2 13.4 2.1 69.8 17.4 257.0 123.7 11.5 98.4 19.5 3.6 5.0 1.7 2.5 0.7 57.2 33.1 19.1 0.3 4.0 0.7 5.8 8.8 0.6 0.0 6.7 0.0 68.8 16.8 1.0 0.0 0.0 0.7 0.0 0.0 0.1 0.0 0.0 0.1 32.7 30.3 2.2 0.0 0.0 0.2 5.8 0.0 0.0 3.7 0.3 135.2 0.1 216.4 0.1 9.0 0.4 360.6 0.0 141.4 0.1 304.0 0.2 12.2 0.2 457.5 Note 24 Fair value measurement (continued) Determination of fair values from quoted market prices or valuation techniques1 (continued) CHF billion Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 31.12.15 31.12.14 Liabilities measured at fair value on a recurring basis Trading portfolio liabilities of which: Government bills / bonds Corporate bonds and municipal bonds, including bonds issued by financial institutions Investment fund units Asset-backed securities Equity instruments Negative replacement values of which: Interest rate contracts Credit derivative contracts Foreign exchange contracts Equity / index contracts Commodity contracts Financial liabilities designated at fair value of which: Non-structured fixed-rate bonds Structured debt instruments issued Structured over-the-counter debt instruments Structured repurchase agreements Loan commitments and guarantees Other liabilities – amounts due under unit-linked investment contracts Liabilities measured at fair value on a non-recurring basis Other liabilities3 Total liabilities measured at fair value 25.5 6.0 0.0 0.7 0.0 18.8 0.6 0.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.5 0.8 2.4 0.1 0.0 0.2 158.5 67.2 5.4 63.0 19.7 3.2 52.3 1.5 45.7 4.7 0.3 0.1 15.7 0.2 0.0 0.1 0.0 0.0 0.0 3.3 0.3 1.3 0.2 1.4 0.0 10.7 2.6 6.7 0.8 0.6 0.0 0.0 29.1 23.9 6.8 2.5 0.7 0.0 7.0 0.1 1.1 0.0 19.1 15.7 162.4 67.6 6.7 63.5 21.2 3.2 63.0 4.1 52.4 5.5 0.8 0.1 15.7 1.1 0.0 0.0 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.9 1.2 2.4 0.1 0.0 0.1 248.1 117.3 10.0 96.6 20.9 3.2 63.4 2.3 56.6 4.1 0.3 0.1 17.6 0.0 26.1 0.2 230.3 0.0 14.1 0.2 270.5 0.0 25.0 0.0 333.0 0.1 0.0 0.1 0.0 0.0 0.0 5.0 0.6 1.7 0.3 2.4 0.0 11.9 2.2 7.3 1.5 0.9 0.0 0.0 0.0 17.0 28.0 8.2 2.6 1.2 0.0 15.9 254.1 117.9 11.7 97.6 23.3 3.2 75.3 4.5 63.9 5.7 1.2 0.1 17.6 0.0 375.0 1 Bifurcated embedded derivatives are presented on the same balance sheet lines as their host contracts and are excluded from this table. As of 31 December 2015, net bifurcated embedded derivative liabilities held at fair value, totaling CHF 0.1 billion (of which CHF 0.1 billion were net Level 2 assets and CHF 0.2 billion net Level 2 liabilities) were recognized on the balance sheet within Debt issued. As of 31 December 2014, net bifurcated embedded derivative liabilities held at fair value, totaling CHF 0.0 billion (of which CHF 0.3 billion were net Level 2 assets and CHF 0.3 billion net Level 2 liabilities) were recognized on the balance sheet within Debt issued. 2 Financial assets held for trading do not include precious metals and other physical commodities. 3 Other assets and other liabilities primarily consist of assets held for sale as well as assets and liabili- ties of a disposal group held for sale, which are measured at the lower of their net carrying amount or fair value less costs to sell. Refer to Note 32 for more information on the disposal group held for sale. 485 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) Financial assets and liabilities held for trading, financial assets designated at fair value and financial investments classified as available-for-sale Government bills and bonds Government bills and bonds include fixed-rate, floating-rate and inflation-linked bills and bonds issued by sovereign governments, as well as interest and principal strips based on these bonds. Such instruments are generally traded in active markets and prices can be obtained directly from these markets, resulting in classification as Level 1, while the remaining positions are classified as Level 2. Instruments that cannot be priced directly using active market data are valued using discounted cash flow valuation techniques that incorporate market data for similar government instruments converted into yield curves. These yield curves are used to project future index levels, and to discount expected future cash flows. The main inputs to valuation techniques for these instruments are bond prices and inputs to estimate the future index levels for floating or inflation index-linked instruments. Instruments classi- fied as Level 3 are limited and are generally classified as such due to the requirement to extrapolate yield curve inputs outside the range of active market trading. Corporate and municipal bonds Corporate bonds include senior, junior and subordinated debt issued by corporate entities. Municipal bonds are issued by state and local governments. While most instruments are standard fixed or floating-rate securities, some may have more complex coupon or embedded option features. Corporate and municipal bonds are generally valued using prices obtained directly from the market. In cases where no directly comparable price is available, instruments may be valued using yields derived from other securi- ties by the same issuer or benchmarked against similar securities, adjusted for seniority, maturity and liquidity. Instruments that can- not be priced directly using active market data are valued using discounted cash flow valuation techniques incorporating the credit spread of the issuer, which may be derived from other issu- ances or CDS data for the issuer, estimated with reference to other equivalent issuer price observations or from credit modeling techniques. Corporate bonds are typically classified as Level 2 because, although market data is readily available, there is often insufficient third-party trading transaction data to justify an active market and corresponding Level 1 classification. Municipal bonds are generally classified as Level 1 or Level 2 depending on the depth of trading activity behind price sources. Level 3 instruments have no suitable price available and also cannot be referenced to other securities issued by the same issuer. Therefore, these instru- ments are measured based on price levels for similar issuers adjusted for relative tenor and issuer quality. Convertible bonds are generally valued using prices obtained directly from market sources. In cases where no directly compa- rable price is available, issuances may be priced using a convert- ible bond model, which values the embedded equity option and debt components and discounts these amounts using a curve that incorporates the credit spread of the issuer. Although market data is readily available, convertible bonds are typically classified as Level 2 because there is insufficient third-party trading transaction data to justify a Level 1 classification. Pillar 3 | Traded loans and loans designated at fair value Traded loans and loans designated at fair value are valued directly using market prices that reflect recent transactions or quoted dealer prices where available. For illiquid loans where no market price data are available, alternative valuation techniques are used, which include relative value benchmarking using pricing derived from debt instruments in comparable entities or different prod- ucts in the same entity. The corporate lending portfolio is valued using either directly observed market prices typically from consen- sus providers, or by using a credit default swap valuation tech- nique, which requires inputs for credit spreads, credit recovery rates and interest rates. Even though price data are generally available for these instruments, corporate loans typically do not satisfy Level 1 classification criteria insofar as the price data may not be directly observable, and moreover the market for these instruments is not actively traded. Instruments with suitably deep and liquid price data available will be classified as Level 2, while any positions requiring the use of valuation techniques or for which the price sources have insufficient trading depth are classi- fied as Level 3. Recently originated commercial real estate loans that are classified as Level 3 are measured using a securitization approach based on rating agency guidelines. Included within loans are various contingent lending transac- tions for which valuations are dependent on actuarial mortality levels and actuarial life insurance policy lapse rates. Mortality and lapse rate assumptions are based on external actuarial estimations for large homogeneous pools, and contingencies are derived from a range relative to the actuarially expected amount. In addition, the pricing technique uses volatility of mortality as an input. 486 Note 24 Fair value measurement (continued) Investment fund units Investment fund units are predominantly exchange-traded, with readily available quoted prices in liquid markets. Where market prices are not available, fair value may be measured using net asset values (NAV), taking into account any restrictions imposed upon redemption. Listed units are classified as Level 1, provided there is sufficient trading to justify active market classification, while other positions are classified as Level 2. Positions where NAV is not available or which are not redeemable at the measure- ment date or in the near future are classified as Level 3. Pillar 3 | Asset-backed securities: residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), other asset-backed securities (ABS) and collateralized debt obligations (CDO) RMBS, CMBS, ABS and CDO are instruments generally issued through the process of securitization of underlying interest-bear- ing assets. The underlying collateral for RMBS is residential mort- gages, for CMBS, commercial mortgages, for ABS, other assets such as credit card, car or student loans and leases, and for CDO, other securitized positions of RMBS, CMBS or ABS. The market for these securities is not active, and therefore a variety of valu- ation techniques are used to measure fair value. For more liquid securities, trade data or quoted prices may be obtained periodi- cally for the instrument held, and the valuation process will use this trade and price data, updated for movements in market lev- els between the time of trading and the time of valuation. Less liquid instruments are measured using discounted expected cash flows incorporating price data for instruments or indices with similar risk profiles. Expected cash flow estimation involves the modeling of the expected collateral cash flows using input assumptions derived from proprietary models, fundamental analysis and / or market research based on management’s quan- titative and qualitative assessment of current and future eco- nomic conditions. The expected collateral cash flows estimated are then converted into the securities’ projected performance under such conditions based on the credit enhancement and subordination terms of the securitization. Expected cash flow schedules are discounted using a rate or discount margin that reflects the discount levels required by the market for instru- ments with similar risk and liquidity profiles. Inputs to discounted expected cash flow techniques include asset prepayment rates, discount margin or discount yields, asset default rates and asset loss on default severity, which may in turn be estimated using more fundamental loan and economic drivers such as, but not limited to, loan-to-value data, house price appreciation, foreclo- sure costs, rental income levels, void periods and employment rates. RMBS, CMBS and ABS are generally classified as Level 2. However, if significant inputs are unobservable, or if market or fundamental data are not available for instruments or collateral with a sufficiently similar risk profile to the positions held, they are classified as Level 3. Equity instruments The majority of equity securities are actively traded on public stock exchanges where quoted prices are readily and regularly available, resulting in their classification as Level 1. Units held in hedge funds are also classified as equity instruments. Fair value for these units is measured based on their published NAV, taking into account any restrictions imposed upon the redemption. These units are classified as Level 2, except for positions where pub- lished NAV is not available or which are not redeemable at the measurement date or in the near future, in which case they are classified as Level 3. Unlisted equity holdings, including private equity positions, are initially marked at their transaction price and are revalued to the extent reliable evidence of price movements becomes available or the position is deemed to be impaired. Financial assets underlying unit-linked investment contracts Unit-linked investment contracts allow investors to invest in a pool of assets through issued investment units. The unit holders are exposed to all risks and rewards associated with the reference asset pool. Assets held under unit-linked investment contracts are presented as Trading portfolio assets. The majority of assets are listed on exchanges and are classified as Level 1 if actively traded, or Level 2 if trading is not active. However, instruments for which prices are not readily available are classified as Level 3. Structured (reverse) repurchase agreements Structured (reverse) repurchase agreements designated at fair value are measured using discounted expected cash flow tech- niques. The discount rate applied is based on funding curves that are specific to the collateral eligibility terms for the contract in question. Collateral terms for these positions are not standard and therefore funding spread levels used for valuation purposes cannot be observed in the market. As a result, these positions are mostly classified as Level 3. 487 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) Replacement values The curves used for discounting expected cash flows in the valua- tion of collateralized derivatives reflect the funding terms associ- ated with the relevant collateral arrangement for the instrument being valued. These collateral arrangements differ across counter- parties with respect to the eligible currency and interest terms of the collateral. The majority of collateralized derivatives are mea- sured using a discount curve that is based on funding rates derived from overnight interest in the cheapest eligible currency for the respective counterparty collateral agreement. Uncollateralized and partially collateralized derivatives are dis- counted using the LIBOR (or equivalent) curve for the currency of the instrument. As described in Note 24d, the fair value of uncol- lateralized and partially collateralized derivatives is then adjusted by CVA, DVA and FVA as applicable, to reflect an estimation of the impact of counterparty credit risk, UBS’s own credit risk and funding costs and benefits. Interest rate contracts Interest rate swap contracts include interest rate swaps, basis swaps, cross-currency swaps, inflation swaps and interest rate for- wards, often referred to as forward-rate agreements (FRA). These products are valued by estimating future interest cash flows and discounting those cash flows using a rate that reflects the appro- priate funding rate for the position being measured. The yield curves used to estimate future index levels and discount rates are generated using market standard yield curve models using inter- est rates associated with current market activity. The key inputs to the models are interest rate swap rates, FRA rates, short-term interest rate futures prices, basis swap spreads and inflation swap rates. In most cases, the standard market contracts that form the inputs for yield curve models are traded in active and observable markets, resulting in the majority of these financial instruments being classified as Level 2. Interest rate option contracts include caps and floors, swap- tions, swaps with complex payoff profiles and other more com- plex interest rate options. These contracts are valued using various market standard option models, using inputs that include interest rate yield curves, inflation curves, volatilities and correlations. The volatility and correlation inputs within the models are implied from market data based on market observed prices for standard option instruments trading within the market. Option models used to value more exotic products have a number of model parameter inputs that require calibration to enable the exotic model to price standard option instruments to the price levels observed in the market. Although these inputs cannot be directly observed, they are generally treated as Level 2, as the calibration process enables the model output to be validated to active market levels. Models calibrated in this way are then used to revalue the portfolio of both standard options as well as more exotic prod- ucts. In most cases, there are active and observable markets for the standard market instruments that form the inputs for yield curve models as well as the financial instruments from which vola- tility and correlation inputs are derived, resulting in the majority of these products being classified as Level 2. Within interest rate option contracts, exotic options for which appropriate volatility or correlation input levels cannot be implied from observable market data are classified as Level 3. These options are valued using vola- tility and correlation levels derived from non-market sources. Interest rate swap and option contracts are classified as Level 3 when the maturity of the contract exceeds the term for which standard market quotes are observable for a significant input parameter. Such positions are valued by extrapolation from the last observable point using standard assumptions or by reference to another observable comparable input parameter to represent a suitable proxy for that portion of the term. Balance guaranteed swaps (BGS) are interest rate or currency swaps that have a notional schedule based on a securitization vehicle, requiring the valuation to incorporate an adjustment for the unknown future variability of the notional schedule. Inputs to value BGS are those used to value the standard market risk on the swap and those used to estimate the notional schedule of the underlying securitization pool (i.e., prepayment, default and inter- est rates). BGS are classified as Level 3, as the correlation between unscheduled notional changes and the underlying market risk of the BGS does not have an active market and cannot be observed. 488 Note 24 Fair value measurement (continued) Credit derivative contracts Credit derivative contracts based on a single credit name include credit default swaps (CDS) based on corporate and sovereign single names, CDS on loans and certain total return swaps (TRS). These contracts are valued by estimating future default probabili- ties using industry standard models based on market credit spreads, upfront pricing points and implied recovery rates. These default and recovery assumptions are used to generate future expected cash flows that are then discounted using market stan- dard discounted cash flow models and a discount rate that reflects the appropriate funding rate for that portion of the portfolio. TRS and certain single-name CDS contracts for which a derivative- based credit spread is not directly available are valued using a credit spread derived from the price of the cash bond that is ref- erenced in the credit derivative, adjusted for any funding differ- ences between the cash and synthetic product. Loan CDS for which a credit spread cannot be observed directly may be valued, where possible, using the corporate debt curve for the entity, adjusted for differences between loan and debt default defini- tions and recovery rate assumptions. Inputs to the valuation mod- els used to value single-name and loan CDS include single-name credit spreads and upfront pricing points, recovery rates and fund- ing curves. In addition, corporate bond prices are used as inputs to the valuation model for TRS and certain single-name or loan CDS as described. Many single-name credit default swaps are classified as Level 2 because the credit spreads and recovery rates used to value these contracts are actively traded and observable market data are available. Where the underlying reference name is not actively traded, these contracts are classified as Level 3. Credit derivative contracts based on a portfolio of credit names include credit default swaps on a credit index, credit default swaps based on a bespoke portfolio or first to default swaps (FTD). The valuation of these contracts is similar to that described above for single-name CDS and includes an estimation of future default probabilities using industry standard models based on market credit spreads, upfront pricing points and implied recovery rates. These default and recovery assumptions are used to generate future expected cash flows that are then discounted using market standard discounted cash flow models based on an estimation of the funding rate for that portion of the portfolio. Tranche products and FTD are valued using industry standard models that, in addi- tion to default and recovery assumptions as above, incorporate implied correlations to be applied to the credits within the portfo- lio in order to apportion the expected credit loss at a portfolio level across the different tranches or names within the overall structure. These correlation assumptions are derived from prices of actively traded index tranches or other FTD baskets. Inputs to the valuation models used for all portfolio credit default swaps include single- name or index credit spreads and upfront pricing points, recovery rates and funding curves. In addition, models used for tranche and FTD products have implied credit correlations as inputs. Credit derivative contracts based on a portfolio of credit names are clas- sified as Level 2 when credit spreads and recovery rates are deter- mined from actively traded observable market data, and when the correlation data used to value bespoke and index tranches are based on actively traded index tranche instruments. These correla- tion data undergo a mapping process that takes into account both the relative tranche attachment / detachment points in the overall capital structure of the portfolio and portfolio composition. Where the mapping process requires extrapolation beyond the range of available and active market data, the position is classified as Level 3. This relates to a small number of index and all bespoke tranche contracts. FTD are classified as Level 3 as the correlations between specific names in the FTD portfolio are not actively traded. Also classified as Level 3 are several older credit index posi- tions, referred to as off-the-run indices, due to the lack of any active market for the index credit spread. Credit derivative contracts on securitized products have an underlying reference asset that is a securitized product (RMBS, CMBS, ABS or CDO) and include credit default swaps and certain TRS. These credit default swaps (typically referred to as pay-as- you-go (PAYG) CDS) and TRS are valued using a similar valuation technique to the underlying security (by reference to equivalent securities trading in the market, or through cash flow estimation and discounted cash flow techniques as described in the Asset- backed securities section above), with an adjustment made to reflect the funding differences between cash and synthetic form. Inputs to the PAYG CDS and TRS are those used to value the underlying security (prepayment rates, default rates, loss severity, discount margin / rate and other inputs) and those used to capture the funding basis differential between cash and synthetic form. The classification of PAYG CDS and these TRS follow the charac- teristics of the underlying security and are therefore distributed across Level 2 and Level 3. 489 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) Foreign exchange (FX) contracts Open spot FX contracts are valued using the FX spot rate observed in the market. Forward FX contracts are valued using the FX spot rate adjusted for forward pricing points observed from standard market-based sources. As the markets for both FX spot and FX forward pricing points are both actively traded and observable, FX contracts are generally classified as Level 2. OTC FX option contracts include standard call and put options, options with multiple exercise dates, path-dependent options, options with averaging features, options with discontinuous pay- off characteristics and options on a number of underlying FX rates. OTC FX option contracts are valued using market standard option valuation models. The models used for shorter-dated options (i.e., maturities of five years or less) tend to be different than those used for longer-dated options because the models needed for longer-dated OTC FX contracts require additional con- sideration of interest rate and FX rate interdependency. Inputs to the option valuation models include spot FX rates, FX forward points, FX volatilities, interest rate yield curves, interest rate vola- tilities and correlations. The inputs for volatility and correlation are implied through the calibration of observed prices for standard option contracts trading within the market. As inputs are derived mostly from standard market contracts traded in active and observable markets, a significant proportion of OTC FX option contracts are classified as Level 2. OTC FX option contracts classified as Level 3 include long-dated FX exotic option contracts for which there is no active market from which to derive volatility or correlation inputs. The inputs used to value these OTC FX option contracts are calculated using consensus pricing services without an underlying principal market, historical asset prices or by extrapolation. Cross-currency balance guaranteed swaps are classified as for- eign exchange contracts. Details of the fair value classification can be found under the interest rate contracts section above. Equity / index contracts Equity / index contracts include equity forward contracts and equity option contracts. Equity forward contracts have a single stock or index underlying and are valued using market standard models. The key inputs to the models are stock prices, estimated dividend rates and equity funding rates (which are implied from prices of forward contracts observed in the market). Estimated cash flows are then discounted using market standard discounted cash flow models using a rate that reflects the appropriate fund- ing rate for that portion of the portfolio. As inputs are derived mostly from standard market contracts traded in active and observable markets, a significant proportion of equity forward contracts are classified as Level 2. Positions classified as Level 3 have no market data available for the instrument maturity and are valued by some form of extrapolation of available data, use of historical dividend data, or use of data for a related equity. Equity option contracts include market standard single or bas- ket stock or index call and put options as well as equity option contracts with more complex features including option contracts with multiple or continuous exercise dates, option contracts for which the payoff is based on the relative or average performance of components of a basket, option contracts with discontinuous payoff profiles, path-dependent options and option contracts with a payoff calculated directly upon equity features other than price (i.e., dividend rates, volatility or correlation). Equity option contracts are valued using market standard models that estimate the equity forward level as described above for equity forward contracts and incorporate inputs for stock volatility and for cor- relation between stocks within a basket. The probability-weighted expected option payoff generated is then discounted using mar- ket standard discounted cash flow models using a rate that reflects the appropriate funding rate for that portion of the port- folio. Positions for which inputs are derived from standard mar- ket contracts traded in active and observable markets are classi- fied as Level 2. Level 3 positions are those for which volatility, forward or correlation inputs are not observable and are there- fore valued using extrapolation of available data, historical divi- dend, correlation or volatility data, or the equivalent data for a related equity. Commodity derivative contracts Commodity derivative contracts include forward, swap and option contracts on individual commodities and on commodity indices. Commodity forward and swap contracts are measured using mar- ket standard models that use market forward levels on standard instruments. Commodity option contracts are measured using market standard option models that estimate the commodity for- ward level as described above for commodity forward and swap contracts, incorporating inputs for the volatility of the underlying index or commodity. The option model produces a probability- weighted expected option payoff that is then discounted using market standard discounted cash flow models using a rate that reflects the appropriate funding rate for that portion of the port- folio. For commodity options on baskets of commodities or bespoke commodity indices, the valuation technique also incor- porates inputs for the correlation between different commodities or commodity indices. Individual commodity contracts are typi- cally classified as Level 2 because active forward and volatility market data are available. 490 Note 24 Fair value measurement (continued) Financial liabilities designated at fair value Structured and OTC debt instruments issued Structured debt instruments issued are comprised of medium- term notes (MTNs), which are held at fair value under the fair value option. These MTNs are tailored specifically to the holder’s risk or investment appetite with structured coupons or payoffs. The risk management and the valuation approaches for these MTNs are closely aligned to the equivalent derivatives business and the underlying risk, and the valuation techniques used for this component are the same as the relevant valuation techniques described above. For example, equity-linked notes should be ref- erenced to equity / index contracts and credit-linked notes should be referenced to credit derivative contacts. Other liabilities – amounts due under unit-linked investment contracts Unit-linked investment contracts allow investors to invest in a pool of assets through issued investment units. The unit holders are exposed to all risks and rewards associated with the reference asset pool. The financial liability represents the amounts due to unit holders and is equal to the fair value of the reference asset pool. The fair values of investment contract liabilities are deter- mined by reference to the fair value of the corresponding assets. The liabilities themselves are not actively traded, but are mainly referenced to instruments that are and are therefore classified as Level 2. f) Transfers between Level 1 and Level 2 in the fair value hierarchy The amounts provided below reflect transfers between Level 1 and Level 2 for instruments that were held for the entire reporting period. Assets totaling approximately CHF 0.6 billion, which were mainly comprised of financial investments classified as available- for-sale, primarily corporate and municipal bonds, and financial assets held for trading, were transferred from Level 2 to Level 1 during 2015, generally due to increased levels of trading activity observed within the market. Transfers of financial liabilities from Level 2 to Level 1 during 2015 were not significant. Assets totaling approximately CHF 0.8 billion, which were mainly comprised of financial assets held for trading, primarily equity instruments and government bills / bonds, and financial investments classified as available-for-sale, mainly corporate and municipal bonds, were transferred from Level 1 to Level 2 during 2015, generally due to diminished levels of trading activity observed within the market. Transfers of financial liabilities from Level 1 to Level 2 during 2015 were not significant. 491 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) g) Movements of Level 3 instruments Significant changes in Level 3 instruments The table on the following pages presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis. Level 3 assets and liabilities may be hedged with instruments classified as Level 1 or Level 2 in the fair value hierar- chy, and, as a result, realized and unrealized gains and losses included in the table may not include the effect of related hedg- ing activity. Further, the realized and unrealized gains and losses presented within the table are not limited solely to those arising from Level 3 inputs, as valuations are generally derived from both observable and unobservable parameters. Assets and liabilities transferred into or out of Level 3 are pre- sented as if those assets or liabilities had been transferred at the beginning of the year. As of 31 December 2015, financial instruments measured with valuation techniques using significant non-market-observable inputs (Level 3) were mainly comprised of: – loans (including structured loans); – structured reverse repurchase and securities borrowing agree- ments; Financial assets held for trading Financial assets held for trading decreased to CHF 2.1 billion from CHF 3.5 billion during the year. Issuances of CHF 5.4 billion and purchases of CHF 0.7 billion, mainly comprised of loans and cor- porate bonds, respectively, were more than offset by sales of CHF 7.6 billion, also primarily comprised of loans and corporate bonds. Transfers into Level 3 during the year amounted to CHF 0.9 billion and were mainly comprised of equity instruments and investment fund units due to decreased observability of the respective equity volatility inputs. Transfers out of Level 3 amounted to CHF 0.5 bil- lion and were primarily comprised of loans, reflecting increased observability of the respective credit spread inputs. Financial assets designated at fair value Financial assets designated at fair value decreased to CHF 3.3 bil- lion from CHF 3.5 billion during the year, mainly reflecting settle- ments of CHF 1.3 billion, partly offset by issuances of CHF 0.8 billion. Transfers into and out of Level 3 amounted to CHF 0.8 billion and CHF 0.4 billion, respectively. – credit derivative contracts; – equity / index contracts; – non-structured fixed-rate bonds and – structured debt instruments issued (equity and credit-linked). Financial investments classified as available-for-sale Financial investments classified as available-for-sale increased to CHF 0.7 billion from CHF 0.6 billion during the year, primarily due to purchases totaling CHF 0.1 billion. Significant movements in Level 3 instruments during the year ended 31 December 2015 were as follows. 492 Note 24 Fair value measurement (continued) Positive replacement values Positive replacement values decreased to CHF 2.9 billion from CHF 4.4 billion during the year, primarily due to settlements of CHF 2.9 billion, primarily related to credit derivative contracts and equity / index contracts, partly offset by issuances totaling CHF 1.7 billion, also primarily related to credit derivative contracts and equity / index contracts. Transfers into Level 3, totaling CHF 0.7 billion, were mainly comprised of interest rate contracts and equity / index contracts and primarily resulted from changes in the correlation between the portfolios held and the representative market portfolio used to independently verify market data. Trans- fers out of Level 3, totaling CHF 0.5 billion, were mainly com- prised of equity / index contracts and also primarily related to changes in the correlation between the portfolio held and the representative market portfolio used to independently verify mar- ket data. Negative replacement values Negative replacement values decreased to CHF 3.3 billion from CHF 5.0 billion during the year. Settlements and issuances amounted to CHF 2.2 billion and CHF 1.0 billion, respectively, and were primarily comprised of equity / index contracts. Transfers into and out of Level 3 both amounted to CHF 0.5 billion, and primar- ily related to changes in the availability of the respective observ- able equity volatility and credit spread inputs. Financial liabilities designated at fair value Financial liabilities designated at fair value decreased to CHF 10.7 billion from CHF 11.9 billion during the year. Issuances of CHF 6.1 billion, primarily comprised of structured debt instruments issued and structured over-the-counter debt instruments, were more than offset by settlements of CHF 6.7 billion, also primarily com- prised of structured debt instruments issued and structured over- the-counter debt instruments. Transfers into Level 3, totaling CHF 1.3 billion, were primarily comprised of equity and credit-linked structured debt instruments issued, and mainly related to a reduc- tion in the observable equity volatility inputs and from changes in the respective credit spreads used to determine the fair value of the embedded options in these structures. Transfers out of Level 3, totaling CHF 2.2 billion, were also mainly comprised of equity- and credit-linked structured debt instruments issued, and mainly related to changes in the observable equity volatility inputs and from changes in the respective credit spreads used to determine the fair value of the embedded options in these structures. 493 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) Movements of Level 3 instruments Total gains / losses included in comprehensive income Balance as of 31 De- cem- ber 2013 Net interest income, net trading income and other income of which: related to Level 3 in- struments held at the end of the reporting period Other com- prehensive income CHF billion Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Foreign currency trans- lation income Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Foreign currency Balance as of trans- lation 31 Decem- ber 20151 Total gains / losses included in comprehensive income Net interest income, Balance net trading as of 31 Decem- ber 2014 income and other income of which: related to Level 3 in- struments held at the end of the reporting period Other com- prehensive Financial assets held for trading 4.3 (1.6) (0.9) 1.4 (6.5) 5.2 0.0 1.0 (0.5) 0.1 3.5 (0.2) (0.4) 0.7 (7.6) 5.4 0.0 0.9 (0.5) (0.1) 2.1 of which: Corporate bonds and municipal bonds, including bonds issued by financial institutions Loans Asset-backed securities Other Financial assets designated at fair value of which: Loans (including structured loans) Structured reverse repurchase and securities borrowing agreements Other Financial investments available-for-sale Positive replacement values of which: Credit derivative contracts Foreign exchange contracts Equity / index contracts Other Negative replacement values of which: Credit derivative contracts Foreign exchange contracts Equity / index contracts Other Financial liabilities designated at fair value of which: Non-structured fixed-rate bonds Structured debt instruments issued Structured over-the-counter debt instruments Structured repurchase agreements 1.7 1.0 1.0 0.6 4.4 1.1 3.1 0.2 0.8 5.5 3.0 0.9 1.2 0.3 4.4 2.0 0.5 1.5 0.5 12.1 1.2 7.9 1.8 1.2 (0.1) (1.4) 0.0 (0.1) (0.1) (0.8) 0.0 0.0 (0.8) (0.3) (0.3) (0.5) 0.0 0.0 1.1 0.3 0.1 0.6 0.0 0.7 0.1 0.0 0.4 0.2 0.5 0.4 0.9 (0.4) (0.3) (0.2) 0.0 0.0 0.0 0.0 (0.8) 0.1 0.5 0.1 (0.6) (1.2) 0.0 0.4 0.3 1.3 0.3 0.4 (0.1) 0.7 0.0 0.9 0.2 0.1 0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.2) (4.1) (0.7) (0.5) 0.0 0.0 0.0 0.0 (0.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.2 0.0 0.0 1.3 0.6 0.7 0.0 0.0 2.6 1.1 0.1 1.3 0.2 2.5 1.0 0.0 1.5 0.0 7.4 1.9 3.7 1.4 0.5 0.0 0.0 0.0 0.0 (1.2) (0.2) (1.0) 0.0 0.0 (5.1) (3.2) (0.2) (1.3) (0.4) (3.7) (2.4) 0.0 (1.2) (0.1) (7.4) (1.4) (4.2) (1.5) (0.4) 0.2 0.2 0.5 0.1 0.0 0.0 0.0 0.0 0.0 1.1 0.5 0.0 0.3 0.3 1.4 1.0 0.0 0.3 0.1 2.0 0.4 1.2 0.4 0.0 (0.2) (0.1) (0.3) 0.0 (0.3) (0.3) 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.2 0.0 0.1 0.0 0.0 (0.5) (0.2) (0.4) (0.1) (0.2) (0.1) (0.2) (0.1) (0.5) (0.2) (0.1) (0.1) 0.0 (3.2) (0.4) (2.6) (0.2) 0.0 0.1 (0.3) 0.0 0.0 0.2 0.3 0.0 0.0 (0.1) 0.5 0.1 0.4 0.0 0.0 1.4 1.1 0.6 0.5 3.5 1.0 2.4 0.1 0.6 4.4 1.7 0.6 1.9 0.3 5.0 1.7 0.3 2.4 0.6 11.9 2.2 7.3 1.5 0.9 0.0 0.0 (0.1) (0.1) 0.0 0.0 (0.1) 0.0 (0.1) 0.1 0.0 0.0 (0.1) (0.1) 0.0 (0.1) (0.4) 0.3 0.0 (0.4) (0.2) 0.6 (0.1) 0.5 0.2 0.0 0.0 (0.3) 0.0 (0.1) 0.1 0.0 0.0 0.2 0.0 (0.3) (0.1) 0.0 0.6 (0.1) (0.5) (0.1) 0.0 0.0 0.1 (0.1) 0.0 0.5 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.0) (5.5) (0.6) (0.5) 0.0 0.0 0.0 0.0 (0.1) (0.1) 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.4 0.0 0.0 0.8 0.7 0.1 0.0 0.0 1.7 0.9 0.1 0.7 0.0 1.0 0.0 0.0 0.9 0.1 6.1 1.1 3.8 1.2 0.0 0.0 0.0 0.0 0.0 (1.3) (0.2) (1.0) 0.0 0.0 (2.9) (1.1) (0.1) (1.4) (0.3) (2.2) (0.9) (0.1) (1.2) 0.0 (6.7) (0.2) (4.2) (2.0) (0.3) 0.1 0.2 0.2 0.4 0.8 0.8 0.0 0.0 0.0 0.7 0.1 0.0 0.2 0.4 0.5 0.3 0.0 0.1 0.1 1.3 0.1 1.3 0.0 0.0 (0.4) (0.1) (0.1) (0.3) (0.1) 0.0 (0.4) 0.0 0.0 0.0 (0.5) (0.1) 0.0 (0.3) (0.1) (0.1) 0.0 (0.4) 0.0 (0.4) (1.9) 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 (0.1) 0.0 0.0 (0.1) (0.1) 0.0 0.0 0.0 0.0 0.0 (0.1) (0.1) 0.0 (0.2) (0.1) 0.0 (0.5) (0.1) (2.2) (0.3) 10.7 0.7 0.8 0.2 0.4 3.3 1.7 1.5 0.1 0.7 2.9 1.3 0.5 1.0 0.1 3.3 1.3 0.2 1.4 0.3 2.6 6.7 0.8 0.6 1 Total Level 3 assets as of 31 December 2015 were CHF 9.0 billion (31 December 2014: CHF 12.2 billion). Total Level 3 liabilities as of 31 December 2015 were CHF 14.1 billion (31 December 2014: CHF 17.0 billion). 494 Note 24 Fair value measurement (continued) Movements of Level 3 instruments Total gains / losses included in comprehensive income Net interest Balance income, of which: related to Level 3 in- struments as of net trading held at the 31 De- cem- income end of the Other com- and other reporting prehensive CHF billion ber 2013 income period income Purchases Sales Issuances Settlements Transfers Transfers into Level 3 out of Level 3 Foreign currency trans- lation of which: Corporate bonds and municipal bonds, including bonds issued by financial institutions Asset-backed securities Loans Other Financial assets designated at fair value of which: Loans (including structured loans) Structured reverse repurchase and securities borrowing agreements Other Financial investments available-for-sale Positive replacement values of which: Credit derivative contracts Foreign exchange contracts Equity / index contracts Other Negative replacement values of which: Credit derivative contracts Foreign exchange contracts Equity / index contracts Other Financial liabilities designated at fair value of which: Non-structured fixed-rate bonds Structured debt instruments issued Structured over-the-counter debt instruments Structured repurchase agreements 1.7 1.0 1.0 0.6 4.4 1.1 3.1 0.2 0.8 5.5 3.0 0.9 1.2 0.3 4.4 2.0 0.5 1.5 0.5 12.1 1.2 7.9 1.8 1.2 (0.8) (0.3) (0.1) (1.4) 0.0 (0.1) (0.3) (0.5) 0.0 0.0 1.1 0.3 0.1 0.6 0.0 0.7 0.1 0.0 0.4 0.2 0.5 0.4 0.9 (0.4) (0.3) (0.1) (0.8) 0.0 0.0 (0.2) 0.0 0.0 0.0 0.0 (0.8) 0.1 0.5 0.1 (0.6) (1.2) 0.0 0.4 0.3 1.3 0.3 0.4 (0.1) 0.7 0.0 (0.2) (0.5) (0.2) 0.9 0.2 0.1 0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.2) (4.1) (0.7) (0.5) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.2 0.0 0.0 1.3 0.6 0.7 0.0 0.0 2.6 1.1 0.1 1.3 0.2 2.5 1.0 0.0 1.5 0.0 7.4 1.9 3.7 1.4 0.5 0.0 0.0 0.0 0.0 (1.2) (0.2) (1.0) 0.0 0.0 (5.1) (3.2) (0.2) (1.3) (0.4) (3.7) (2.4) 0.0 (1.2) (0.1) (7.4) (1.4) (4.2) (1.5) (0.4) 0.2 0.2 0.5 0.1 0.0 0.0 0.0 0.0 0.0 1.1 0.5 0.0 0.3 0.3 1.4 1.0 0.0 0.3 0.1 2.0 0.4 1.2 0.4 0.0 (0.2) (0.1) (0.3) 0.0 (0.3) (0.3) 0.0 0.0 0.0 (0.2) (0.1) (0.2) (0.1) (0.5) (0.2) (0.1) (0.1) 0.0 (3.2) (0.4) (2.6) (0.2) 0.0 0.1 0.1 0.0 0.0 0.2 0.0 0.1 0.0 0.0 0.1 (0.3) 0.0 0.0 0.2 0.3 0.0 0.0 (0.1) 0.5 0.1 0.4 0.0 0.0 1 Total Level 3 assets as of 31 December 2015 were CHF 9.0 billion (31 December 2014: CHF 12.2 billion). Total Level 3 liabilities as of 31 December 2015 were CHF 14.1 billion (31 December 2014: CHF 17.0 billion). Financial assets held for trading 4.3 (1.6) (0.9) 1.4 (6.5) 5.2 0.0 1.0 (0.5) 0.1 3.5 (0.2) (0.4) 0.7 (7.6) 5.4 0.0 0.9 (0.5) (0.1) 2.1 Total gains / losses included in comprehensive income Net interest income, net trading income and other income Balance as of 31 Decem- ber 2014 of which: related to Level 3 in- struments held at the end of the reporting period Other com- prehensive income Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Foreign currency trans- lation Balance as of 31 Decem- ber 20151 0.0 1.4 1.1 0.6 0.5 3.5 1.0 2.4 0.1 0.6 4.4 1.7 0.6 1.9 0.3 5.0 1.7 0.3 2.4 0.6 11.9 2.2 7.3 1.5 0.9 0.0 (0.1) 0.0 (0.1) 0.0 (0.3) 0.0 (0.1) 0.0 0.0 (0.1) (0.1) 0.1 0.0 0.0 0.1 0.0 0.0 (0.4) (0.1) (0.1) (0.1) 0.0 (0.1) (0.4) 0.3 0.0 (0.4) (0.2) 0.6 (0.1) 0.5 0.2 0.0 0.2 0.0 (0.3) (0.1) 0.0 0.6 (0.1) (0.5) (0.1) 0.0 0.0 0.1 (0.1) 0.0 0.5 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.0) (5.5) (0.6) (0.5) 0.0 0.0 0.0 0.0 (0.1) (0.1) 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.4 0.0 0.0 0.8 0.7 0.1 0.0 0.0 1.7 0.9 0.1 0.7 0.0 1.0 0.0 0.0 0.9 0.1 6.1 1.1 3.8 1.2 0.0 0.0 0.0 0.0 0.0 (1.3) (0.2) (1.0) 0.0 0.0 (2.9) (1.1) (0.1) (1.4) (0.3) (2.2) (0.9) (0.1) (1.2) 0.0 (6.7) (0.2) (4.2) (2.0) (0.3) 0.1 0.2 0.2 0.4 0.8 0.8 0.0 0.0 0.0 0.7 0.1 0.0 0.2 0.4 0.5 0.3 0.0 0.1 0.1 1.3 0.1 1.3 0.0 0.0 (0.1) (0.3) (0.1) 0.0 (0.1) 0.0 0.0 0.0 (0.4) (0.1) (0.4) 0.0 0.0 0.0 (0.5) (0.1) 0.0 (0.3) (0.1) 0.0 (0.1) 0.0 0.0 (0.1) (0.1) 0.0 0.0 0.0 (0.5) (0.1) (0.1) 0.0 (0.4) 0.0 0.0 0.0 (0.1) (0.1) 0.7 0.8 0.2 0.4 3.3 1.7 1.5 0.1 0.7 2.9 1.3 0.5 1.0 0.1 3.3 1.3 0.2 1.4 0.3 (2.2) (0.3) 10.7 (0.4) (1.9) 0.0 0.0 0.0 (0.2) (0.1) 0.0 2.6 6.7 0.8 0.6 495 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) h) Valuation of assets and liabilities classified as Level 3 The table on the following pages presents the assets and liabilities recognized at fair value and classified as Level 3, together with the valuation techniques used to measure fair value, the significant inputs used in the valuation technique that are considered unob- servable and a range of values for those unobservable inputs. The range of values represents the highest and lowest level input used in the valuation techniques. Therefore, the range does not reflect the level of uncertainty regarding a particular input, but rather the different underlying characteristics of the relevant assets and liabilities. The ranges will therefore vary from period to period and parameter to parameter based on characteristics of the instruments held at each balance sheetdate. Further, the ranges of unobservable inputs may differ across other financial institutions due to the diversity of the products in each firm’s inventory. Significant unobservable inputs in Level 3 positions This section discusses the significant unobservable inputs identi- fied in the table on the following pages and assesses the potential effect that a change in each unobservable input in isolation may have on a fair value measurement, including information to facili- tate an understanding of factors that give rise to the input ranges shown. Relationships between observable and unobservable inputs have not been included in the summary below. Pillar 3 | Valuation techniques and inputs used in the fair value measurement of Level 3 assets and liabilities CHF billion 31.12.15 31.12.14 31.12.15 31.12.14 Fair value Assets Liabilities Valuation technique(s) Significant unobservable input(s)1 Range of inputs 31.12.15 31.12.14 low high low high unit1 Financial assets held for trading / Trading portfolio liabilities, Financial assets / liabilities desig- nated at fair value and Financial investments available-for-sale Corporate bonds and municipal bonds, including bonds issued by financial institutions Traded loans, loans designated at fair value, loan commitments and guarantees Investment fund units3 Asset-backed securities Equity instruments3 Structured (reverse) repurchase agreements Financial assets for unit-linked investment contracts3 Structured debt instruments and non-structured fixed-rate bonds4 496 0.7 1.4 2.6 2.2 0.3 0.2 0.6 1.5 0.1 0.5 0.6 0.5 2.4 0.1 0.1 0.0 0.0 0.0 0.0 0.6 0.1 0.0 0.0 0.0 0.0 0.9 Relative value to market comparable Relative value to market comparable Discounted expected cash flows Market comparable and securitization model Mortality dependent cash flow Relative value to market comparable Discounted cash flow projection Relative value to market comparable Relative value to market comparable Discounted expected cash flows Relative value to market comparable 10.1 11.0 Bond price equivalent 0 134 8 144 points Loan price equivalent 65 100 Credit spread 30 252 Discount margin / spread 1 14 80 37 0 Volatility of mortality2 270 280 Net asset value Constant prepayment rate Discount margin / spread Bond price equivalent 0 0 1 18 12 92 0 0 0 101 points basis points % % % % 138 13 18 22 102 points Price Funding spread 18 183 10 163 basis points Price Note 24 Fair value measurement (continued) Valuation techniques and inputs used in the fair value measurement of Level 3 assets and liabilities (continued) Fair value Assets Liabilities 31.12.15 31.12.14 31.12.15 31.12.14 Valuation technique(s) Significant unobservable input(s)1 Range of inputs 31.12.15 31.12.14 low high low high unit1 CHF billion Replacement values Interest rate contracts 0.1 0.2 0.3 0.6 Option model Volatility of interest rates Credit derivative contracts 1.3 1.7 1.3 1.7 Discounted expected cash flows Discounted expected cash flow based on modeled defaults and recoveries Discounted cash flow projection on underlying bond Rate-to-rate correlation Intra-curve correlation Constant prepayment rate Credit spreads Upfront price points Recovery rates Credit index correlation Discount margin / spread Credit pair correlation Constant prepayment rate Constant default rate Loss severity Discount margin / spread Bond price equivalent Foreign exchange contracts 0.5 0.6 0.2 0.3 Option model Rate-to-FX correlation Equity / index contracts 1.0 1.9 1.4 2.4 Option model Discounted expected cash flows FX-to-FX correlation Constant prepayment rate2 Equity dividend yields Volatility of equity stocks, equity and other indices 16 84 36 0 130 94 94 3 1 1,163 8 0 10 1 57 0 0 0 1 0 (57) (70) 0 0 25 95 85 72 94 15 9 100 15 104 60 80 57 143 82 13 84 50 0 0 15 0 10 0 57 1 0 0 1 12 (57) (70) 0 0 1 (55) 94 94 94 3 963 83 95 85 32 94 16 9 100 33 100 60 80 13 15 130 84 % % % % basis points % % % % % % % % % points % % % % % % % Equity-to-FX correlation (44) Non-financial assets3, 5 0.1 0.2 Relative value to market comparable Price Equity-to-equity correlation 3 99 18 99 Discounted cash flow projection Projection of cost and income related to the particular property Discount rate Assessment of the particular property’s condition 1 The ranges of significant unobservable inputs are represented in points, percentages and basis points. Points are a percentage of par. For example, 100 points would be 100% of par. 2 The range of inputs is not dis- closed as of 31 December 2015 because this unobservable input parameter was not significant to the respective valuation technique as of that date. 3 The range of inputs is not disclosed due to the dispersion of pos- sible values given the diverse nature of the investments. 4 Valuation techniques, significant unobservable inputs and the respective input ranges for structured debt instruments and non-structured fixed-rate bonds are the same as the equivalent derivative or structured financing instruments presented elsewhere in this table. 5 Non-financial assets include other assets which primarily consist of assets held for sale. 497 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) Bond price equivalent: Where market prices are not available for a bond, fair value is measured by comparison with observable pricing data from similar instruments. Factors considered when selecting comparable instruments include credit quality, maturity and industry of the issuer. Fair value may be measured either by a direct price comparison or by conversion of an instrument price into a yield (either as an outright yield or as a spread to LIBOR). Bond prices are expressed as points of the nominal, where 100 represents a fair value equal to the nominal value (i.e., par). For corporate and municipal bonds, the range of 0–134 points represents the range of prices from reference issuances used in determining fair value. Bonds priced at 0 are distressed to the point that no recovery is expected, while prices significantly in excess of 100 or par relate to inflation-linked or structured issu- ances that pay a coupon in excess of the market benchmark as of the measurement date. The weighted average price is approxi- mately 94 points, with a majority of positions concentrated around this price. For asset-backed securities, the bond price range of 1–92 points represents the range of prices for reference securities used in determining fair value. An instrument priced at 0 is not expected to pay any principal or interest, while an instrument priced close to 100 points is expected to be repaid in full as well as pay a yield close to the market yield. The weighted average price for Level 3 assets within this portion of the Level 3 portfolio is 72 points. For credit derivatives, the bond price range of 0–104 points represents the range of prices used for reference instruments that are typically converted to an equivalent yield or credit spread as part of the valuation process. The range is comparable to that for corporate and asset-backed issuances described above. Loan price equivalent: Where market prices are not available for a traded loan, fair value is measured by comparison with observable pricing data for similar instruments. Factors considered when selecting comparable instruments include industry segment, col- lateral quality, maturity and issuer-specific covenants. Fair value may be measured either by a direct price comparison or by con- version of an instrument price into a yield. The range of 65–100 points represents the range of prices derived from reference issu- ances of a similar credit quality used in measuring fair value for loans classified as Level 3. Loans priced at 0 are distressed to the point that no recovery is expected, while a current price of 100 represents a loan that is expected to be repaid in full. The weighted average is approximately 93 points. Credit spread: Valuation models for many credit derivatives require an input for the credit spread, which is a reflection of the credit quality of the associated referenced underlying. The credit spread of a particular security is quoted in relation to the yield on a benchmark security or reference rate, typically either US Treasury or LIBOR, and is generally expressed in terms of basis points. An increase / (decrease) in credit spread will increase / (decrease) the value of credit protection offered by CDS and other credit deriva- tive products. The income statement impact from such changes depends on the nature and direction of the positions held. Credit spreads may be negative where the asset is more creditworthy than the benchmark against which the spread is calculated. A wider credit spread represents decreasing creditworthiness. The ranges of 30–252 basis points in loans and 1–1163 basis points in credit derivatives represents a diverse set of underlyings, with the lower end of the range representing credits of the highest quality (e.g., approximating the risk of LIBOR) and the upper end of the range representing greater levels of credit risk. Constant prepayment rate: A prepayment rate represents the amount of unscheduled principal repayment for a pool of loans. The prepayment estimate is based on a number of factors, such as historical prepayment rates for repaid and existing loans with similar characteristics and the future economic outlook, consider- ing factors including, but not limited to, future interest rates. In general, a significant increase / (decrease) in this unobservable input in isolation would result in a significantly higher / (lower) fair value for bonds trading at a discount. For bonds trading at a pre- mium the reverse would apply, with a decrease in fair value when the constant prepayment rate increases. However, in certain cases the effect of a change in prepayment speed on instrument price is more complicated and depends on both the precise terms of the securitization and the position of the instrument within the secu- ritization capital structure. For asset-backed securities, the range of 0–18% represents inputs across various classes of asset-backed securities. Securities with an input of 0% typically reflect no current prepayment behavior with respect to the underlying collateral, and with no expectation of this changing in the immediate future, while the high range of 18% relates to securities that are currently experi- encing high prepayments. Different classes of asset-backed secu- rities typically show different ranges of prepayment characteris- tics depending on a combination of factors, including the borrowers’ ability to refinance, prevailing refinancing rates, and the quality or characteristics of the underlying loan collateral pools. The weighted average constant prepayment rate for the portfolio is 5.0%. 498 Note 24 Fair value measurement (continued) For credit derivatives, the range of 0–15% represents the input assumption for credit derivatives on asset-backed securi- ties. The range is driven in a similar manner to that for asset- backed securities. For interest rate contracts, the range of 0–3% represents the prepayment assumptions on securitizations underlying the BGS portfolio. Constant default rate (CDR): The CDR represents the percentage of outstanding principal balances in the pool that are projected to default and liquidate and is the annualized rate of default for a group of mortgages or loans. The CDR estimate is based on a number of factors, such as collateral delinquency rates in the pool and the future economic outlook. In general, a significant increase / (decrease) in this unobservable input in isolation would result in significantly lower / (higher) cash flows for the deal (and thus lower / (higher) valuations). However, different instruments within the capital structure can react differently to changes in the CDR rate. Generally, subordinated bonds will decrease in value as CDR increases, but for well protected senior bonds an increase in CDR may cause an increase in price. In addition, the presence of a guarantor wrap on the collateral pool of a security may result in notes at the junior end of the capital structure experiencing a price increase with an increase in the default rate. The range of 0–9% for credit derivatives represents the expected default percentage across the individual instruments’ underlying collateral pools. Loss severity / recovery rate: The projected loss severity / recovery rate reflects the estimated loss that will be realized given expected defaults. Loss severity is generally applied to collateral within asset-backed securities while the recovery rate is the analogous pricing input for corporate or sovereign credits. Recovery is the reverse of loss severity, so a 100% recovery rate is the equivalent of a 0% loss severity. Increases in loss severity levels / decreases in recovery rates will result in lower expected cash flows into the structure upon the default of the instruments. In general, a sig- nificant decrease / (increase) in the loss severity in isolation would result in significantly higher / (lower) fair value for the respective asset-backed securities. The impact of a change in recovery rate on a credit derivative position will depend on whether credit pro- tection has been bought or sold. Loss severity is ultimately driven by the value recoverable from collateral held after foreclosure occurs relative to the loan princi- pal and possibly unpaid interest accrued at that point. For credit derivatives, the loss severity range of 0–100% applies to deriva- tives on asset-backed securities. The recovery rate range of 0–95% represents a wide range of expected recovery levels on credit derivative contracts within the Level 3 portfolio. Discount margin (DM) spread: The DM spread represents the dis- count rates used to present value cash flows of an asset to reflect the market return required for uncertainty in the estimated cash flows. DM spreads are a rate or rates applied on top of a floating index (e.g., LIBOR) to discount expected cash flows. Generally, a decrease / (increase) in the unobservable input in isolation would result in a significantly higher / (lower) fair value. The different ranges represent the different discount rates across loans (1–14%), asset-backed securities (0–12%) and credit derivatives (1–72%). The high end of the range relates to securi- ties that are priced very low within the market relative to the expected cash flow schedule. This indicates that the market is pricing an increased risk of credit loss into the security that is greater than what is being captured by the expected cash flow generation process. The low ends of the ranges are typical of funding rates on better quality instruments. For asset-backed securities the weighted average DM is 2.7% and for loans the average effective DM is 2.4%. Equity dividend yields: The derivation of a forward price for an individual stock or index is important for measuring fair value for forward or swap contracts and for measuring fair value using option pricing models. The relationship between the current stock price and the forward price is based on a combination of expected future dividend levels and payment timings, and, to a lesser extent, the relevant funding rates applicable to the stock in ques- tion. Dividend yields are generally expressed as an annualized per- centage of the share price with the lowest limit of 0% represent- ing a stock that is not expected to pay any dividend. The dividend yield and timing represents the most significant parameter in determining fair value for instruments that are sensitive to an equity forward price. The range of 0–57% reflects the expected range of dividend rates for the portfolio. Volatility: Volatility measures the variability of future prices for a particular instrument and is generally expressed as a percentage, where a higher number reflects a more volatile instrument for which future price movements are more likely to occur. The mini- mum level of volatility is 0% and there is no theoretical maximum. Volatility is a key input into option models, where it is used to derive a probability-based distribution of future prices for the underlying instrument. The effect of volatility on individual posi- tions within the portfolio is driven primarily by whether the option contract is a long or short position. In most cases, the fair value of an option increases as a result of an increase in volatility and is reduced by a decrease in volatility. Generally, volatility used in the measurement of fair value is derived from active market option prices (referred to as implied volatility). A key feature of implied volatility is the volatility “smile” or “skew,” which represents the effect of pricing options of different option strikes at different implied volatility levels. 499 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) – Volatility of interest rates – the range of 16–130% reflects the range of unobservable volatilities across different currencies and related underlying interest rate levels. Volatilities of low interest rates tend to be much higher than volatilities of high interest rates. In addition, different currencies may have sig- nificantly different implied volatilities. – Volatility of equity stocks, equity and other indices – the range of 1–143% reflects the range of underlying stock volatilities. Correlation: Correlation measures the inter-relationship between the movements of two variables. It is expressed as a percentage between -100% and +100%, where +100% represents perfectly correlated variables (meaning a movement of one variable is asso- ciated with a movement of the other variable in the same direc- tion), and -100% implies the variables are inversely correlated (meaning a movement of one variable is associated with a move- ment of the other variable in the opposite direction). The effect of correlation on the measurement of fair value depends on the spe- cific terms of the instruments being valued, due to the range of different payoff features within such instruments. – Rate-to-rate correlation – the correlation between interest rates of two separate currencies. The range of 84–94% results from the different pairs of currency involved. – Intra-curve correlation – the correlation between different tenor points of the same yield curve. Correlations are typically fairly high, as reflected by the range of 36–94%. – Credit index correlation of 10–85% reflects the implied corre- lation derived from different indices across different parts of the benchmark index capital structure. The input is particularly important for bespoke and Level 3 index tranches. – Credit pair correlation is particularly important for first to default credit structures. The range of 57–94% reflects the dif- ference between credits with low correlation and similar highly correlated credits. – Rate-to-FX correlation – captures the correlation between interest rates and FX rates. The range for the portfolio is (57)– 60%, which represents the relationship between interest rates and foreign exchange levels. The signage on such correlations depends on the quotation basis of the underlying FX rate (e.g., EUR / USD and USD / EUR correlations to the same interest rate will have opposite signs). – FX-to-FX correlation is particularly important for complex options that incorporate different FX rates in the projected payoff. The range of (70)–80% reflects the underlying charac- teristics across the main FX pairs to which UBS has exposure. – Equity-to-FX correlation is important for equity options based on a currency different than the currency of the underlying stock. The range of (44)–82% represents the range of the relationship between underlying stock and foreign exchange volatilities. – Equity-to-equity correlation is particularly important for com- plex options that incorporate, in some manner, different equi- ties in the projected payoff. The closer the correlation is to 100%, the more related one equity is to another. For example, equities with a very high correlation could be from different parts of the same corporate structure. The range of 3–99% reflects this. Funding spread: Structured financing transactions are valued using synthetic funding curves that best represent the assets that are pledged as collateral for the transactions. They are not repre- sentative of where UBS can fund itself on an unsecured basis, but provide an estimate of where UBS can source and deploy secured funding with counterparties for a given type of collateral. The funding spreads are expressed in terms of basis points over or under LIBOR, and if funding spreads widen this increases the impact of discounting. The range of 18–183 basis points for both structured repurchase agreements and structured reverse repur- chase agreements represents the range of asset funding curves, where wider spreads are due to a reduction in liquidity of underly- ing collateral for funding purposes. A small proportion of structured debt instruments and non- structured fixed-rate bonds within financial liabilities designated at fair value had an exposure to funding spreads that was longer in duration than the actively traded market. Such positions are within the range of 18–183 basis points reported above. Upfront price points: These are a component in the price quota- tion of credit derivative contracts, whereby the overall fair value price level is split between the credit spread (as described above) and a component that is quoted and settled upfront on transact- ing a new contract. This latter component is referred to as upfront price points and represents the difference between the credit spread paid as protection premium on a current contract versus a small number of standard contracts defined by the mar- ket. Distressed credit names frequently trade and quote CDS protection only in upfront points rather than as a running credit in upfront points will spread. An increase / (decrease) the value of credit protection offered by CDS and other credit derivative products. The effect of increases or decreases in upfront price points depends on the nature and direction of the positions held. Upfront price points may be neg- ative where a contract is quoting for a narrower premium than the market standard, but are generally positive, reflecting an increase in credit premium required by the market as creditwor- thiness deteriorates. The range of 8–25% within the table repre- sents the variety of current market credit spread levels relative to the benchmarks used as a quotation basis. Upfront points of 25% represent a distressed credit. increase / (decrease) 500 Note 24 Fair value measurement (continued) i) Sensitivity of fair value measurements to changes in unobservable input assumptions The table below summarizes those financial assets and liabilities classified as Level 3 for which a change in one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change fair value significantly, and the esti- mated effect thereof. As of 31 December 2015, the total favor- able and unfavorable effects of changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions for financial instruments classified as Level 3 were CHF 0.8 billion and CHF 0.6 billion, respectively (31 December 2014: CHF 1.0 billion and CHF 0.8 billion, respectively). The table shown presents the favorable and unfavorable effects for each class of financial assets and liabilities for which the potential change in fair value is considered significant. The sensitivity data presented represent an estimation of valuation uncertainty based on reasonably possible alternative values for Level 3 inputs at the balance sheet date and do not represent the estimated effect of stress scenarios. Typically, these financial assets and liabilities are sensitive to a combination of inputs from Levels 1–3. Although well-defined interdependencies may exist between Levels 1–2 and Level 3 parameters (e.g., between interest rates, which are generally Level 1 or Level 2, and prepayments, which are generally Level 3), these have not been incorporated in the table. Further, direct inter-relationships between the Level 3 parameters discussed below are not a significant element of the valuation uncertainty. Sensitivity data are estimated using a number of techniques including the estimation of price dispersion among different mar- ket participants, variation in modeling approaches and reason- ably possible changes to assumptions used within the fair value measurement process. The sensitivity ranges are not always sym- metrical around the fair values as the inputs used in valuations are not always precisely in the middle of the favorable and unfa- vorable range. Sensitivity data are determined at a product or parameter level and then aggregated assuming no diversification benefit. The cal- culated sensitivity is applied to both the outright position and any related Level 3 hedge. The main interdependencies across different Level 3 products to a single unobservable input parameter have been included in the basis of netting exposures within the calcula- tion. Aggregation without allowing for diversification involves the simple summation of individual results with the total sensitivity, therefore representing the impact of all unobservable inputs which, if moved to a reasonably possible favorable or unfavorable level at the same time, would result in a significant change in the valuation. Diversification would incorporate estimated correlations across different sensitivity results and, as such, would result in an overall sensitivity that would be less than the sum of the individual component sensitivities. The Group believes that, while there are diversification benefits within the portfolios representing these sensitivity numbers, they are not significant to this analysis. Sensitivity of fair value measurements to changes in unobservable input assumptions CHF million Government bills / bonds Corporate bonds and municipal bonds, including bonds issued by financial institutions Traded loans, loans designated at fair value, loan commitments and guarantees Asset-backed securities Equity instruments Interest rate derivative contracts, net Credit derivative contracts, net Foreign exchange derivative contracts, net Equity / index derivative contracts, net Structured debt instruments issued and non-structured fixed-rate bonds Other Total 31.12.15 31.12.14 Favorable changes1 0 Unfavorable changes1 (1) Favorable changes1 10 Unfavorable changes1 (1) 24 88 7 166 107 174 33 61 136 14 809 (25) (28) (6) (74) (67) (196) (28) (57) (146) (13) (640) 33 103 16 105 106 248 35 82 202 23 965 (41) (63) (12) (42) (58) (277) (32) (83) (199) (17) (824) 1 Of the total favorable changes, CHF 164 million as of 31 December 2015 (31 December 2014: CHF 116 million) related to financial investments available-for-sale. Of the total unfavorable changes, CHF 71 million as of 31 December 2015 (31 December 2014: CHF 56 million) related to financial investments available-for-sale. 501 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 24 Fair value measurement (continued) j) Financial instruments not measured at fair value The table below provides the estimated fair values of financial instruments not measured at fair value. Financial instruments not measured at fair value CHF billion Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments Loans Other assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Cash collateral payables on derivative instruments Due to customers Debt issued Other liabilities Guarantees / Loan commitments Guarantees1 Loan commitments Carrying value 31.12.15 Fair value Carrying value 31.12.14 Fair value Total Total Level 1 Level 2 Level 3 Total Total Level 1 Level 2 Level 3 91.3 11.9 25.6 67.9 23.8 312.0 20.0 11.8 8.0 9.7 38.3 390.2 93.0 51.4 91.3 11.9 25.6 67.9 23.8 314.1 20.0 11.8 8.0 9.7 38.3 390.2 95.5 51.4 0.0 0.0 (0.1) 0.0 91.3 11.5 0.0 0.0 0.0 0.0 0.0 10.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 25.6 65.8 23.8 170.2 20.0 1.4 8.0 9.6 38.3 390.2 89.5 51.4 0.0 0.0 0.0 2.1 0.0 143.9 0.0 0.0 0.0 0.0 0.0 0.0 6.0 0.0 0.0 0.0 (0.1) 0.0 104.1 104.1 13.3 24.1 68.4 31.0 315.8 21.3 10.5 9.2 11.8 42.4 13.3 24.1 68.4 31.0 318.3 21.1 10.5 9.2 11.8 42.4 410.2 410.2 91.2 45.4 0.0 0.0 94.3 45.4 (0.1) 0.0 104.1 12.6 0.0 0.0 0.0 0.0 0.0 9.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.7 24.1 66.5 31.0 186.4 21.1 0.9 9.2 11.6 42.4 410.2 88.5 45.4 0.0 0.0 0.0 2.0 0.0 131.9 0.0 0.0 0.0 0.2 0.0 0.0 5.8 0.0 0.0 0.0 (0.1) 0.0 1 The carrying value of guarantees represented a liability of CHF 0.0 billion as of 31 December 2015 (31 December 2014: CHF 0.0 billion). The estimated fair value of guarantees represented an asset of CHF 0.1 billion as of 31 December 2015 (31 December 2014: CHF 0.1 billion). 502 Note 24 Fair value measurement (continued) The fair values included in the table on the previous page were calculated for disclosure purposes only. The fair value valuation techniques and assumptions described below relate only to the fair value of UBS’s financial instruments not measured at fair value. Other institutions may use different methods and assump- tions for their fair value estimation, and therefore such fair value disclosures cannot necessarily be compared from one financial institution to another. The following principles were applied when determining fair value estimates for financial instruments not measured at fair value: – For financial 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 flows using current market interest rates or appropriate yield curves for instruments with similar credit risk and maturity. These esti- mates generally include adjustments for counterparty credit risk or UBS’s own credit. – For short-term financial instruments with remaining maturities of three months or less, the carrying amount, which is net of credit loss allowances, is generally considered a reasonable esti- mate of fair value. The following financial instruments not mea- sured at fair value had remaining maturities of three months or less as of 31 December 2015: 100% of cash and balances with central banks, 96% of amounts due from banks, 100% of cash collateral on securities borrowed, 87% of reverse repurchase agreements, 100% of cash collateral receivables on derivatives, 51% of loans, 88% of amounts due to banks, 87% of cash collateral on securities lent, 96% of repurchase agreements, 100% of cash collateral payable on derivatives, 99% of amount due to customers and 16% of debt issued. – The fair value estimates for repurchase and reverse repurchase agreements with variable and fixed interest rates, for all matur- ities, 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 financial 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 flow analysis. 503 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 25 Restricted and transferred financial assets This Note provides information on restricted financial assets (Note 25a), transfers of financial assets (Note 25b and 25c) and financial assets which are received as collateral with the right to resell or repledge these assets (Note 25d). EDTF | Pillar 3 | a) Restricted financial assets Restricted financial assets consist of assets pledged as collateral against an existing liability or contingent liability and other assets that are otherwise explicitly restricted such that they cannot be used to secure funding. Financial assets are mainly pledged as collateral in securities lending transactions, in repurchase transactions, against loans from Swiss mortgage institutions and in connection with the issu- ance of covered bonds. The Group generally enters into repur- chase and securities lending arrangements under standard market agreements, with a market-based haircut applied to the collateral, which results in the associated liabilities having a carrying value below the carrying value of the assets. Pledged mortgage loans serve as collateral for existing liabilities against Swiss central mort- gage institutions and for existing covered bond issuances of CHF 16,727 million as of 31 December 2015 (31 December 2014: CHF 21,644 million). Other restricted financial assets include assets protected under client asset segregation rules, assets held by the Group’s insurance entities to back related liabilities to the policy holders, assets held in certain jurisdictions to comply with explicit minimum local asset maintenance requirements and assets held in consolidated bank- ruptcy remote entities such as certain investment funds and other structured entities. The carrying value of the liabilities associated with these other restricted financial assets is generally equal to the carrying value of the assets, with the exception of assets held to comply with local asset maintenance requirements for which the associated liabilities are greater. UBS Group AG and its subsidiaries are generally not subject to significant restrictions that would prevent the transfer of divi- dends and capital within the Group. However, certain regulated subsidiaries are required to maintain capital and / or liquidity to comply with local regulations and may be subject to prudential limitations by regulators that limit the amount of funds that they can distribute or otherwise transfer. Non-regulated subsidiaries are generally not subject to such requirements and transfer restric- tions. However, restrictions can also be the result of different legal, regulatory, contractual, entity or country-specific arrange- ments and / or requirements. EDTF | Restricted financial assets CHF million Financial assets pledged as collateral Trading portfolio assets of which: assets pledged as collateral which may be sold or repledged by counterparties Loans of which: mortgage loans1 Financial investments available-for-sale of which: assets pledged as collateral which may be sold or repledged by counterparties Total financial assets pledged as collateral2 Other restricted financial assets Due from banks Reverse repurchase agreements Trading portfolio assets Cash collateral receivables on derivative instruments Financial assets designated at fair value Financial investments available-for-sale Other Total other restricted financial assets Total financial assets pledged and other restricted financial assets 31.12.15 31.12.14 57,023 51,943 24,980 24,980 632 6 82,635 3,285 1,099 24,388 7,104 337 502 480 37,196 119,830 61,304 56,018 27,973 27,973 2,868 2,662 92,144 3,511 1,896 25,567 6,135 458 1,209 221 38,997 131,142 1 These pledged mortgage loans serve as collateral for existing liabilities against Swiss central mortgage institutions and for existing covered bond issuances. Of these pledged mortgage loans, approximately CHF 4.4 billion for 31 December 2015 (31 December 2014: approximately CHF 4.5 billion) could be withdrawn or used for future liabilities or covered bond issuances without breaching existing collateral requirements. 2 Does not include assets placed with central banks related to undrawn credit lines and for payment, clearing and settlement purposes (31 December 2015: CHF 4.9 billion, 31 December 2014: CHF 6.1 billion). 504 Note 25 Restricted and transferred financial assets (continued) EDTF | b) Transferred financial assets that are not derecognized in their entirety The table below presents information for financial assets, which have been transferred but are subject to continued recognition in full, as well as recognized liabilities associated with those transferred assets. EDTF | Transferred financial assets subject to continued recognition in full CHF million 31.12.15 31.12.14 Carrying value of transferred assets Carrying value of associated liabilities recognized on-balance sheet Carrying value of transferred assets Carrying value of associated liabilities recognized on-balance sheet Trading portfolio assets transferred which may be sold or repledged by counterparties relating to securities lending and repurchase agreements in exchange for cash received relating to securities lending agreements in exchange for securities received relating to other financial asset transfers Financial investments available-for-sale transferred which may be sold or repledged by counterparties Total financial assets transferred 51,943 13,406 37,097 1,440 6 51,950 13,146 13,146 0 0 6 13,152 56,018 19,366 35,557 1,095 2,662 58,680 18,289 18,147 0 142 2,584 20,873 Transactions in which financial assets are transferred, but con- tinue to be recognized in their entirety on UBS’s balance sheet include securities lending and repurchase agreements as well as other financial asset transfers. Repurchase and securities lending arrangements are, for the most part, conducted under standard market agreements, and are undertaken with counterparties sub- ject to UBS’s normal credit risk control processes. ➔ Refer to Note 1a items 13 and 14 for more information on repurchase agreements and securities lending agreements As of 31 December 2015, approximately a quarter of the transferred financial assets were trading portfolio assets trans- ferred in exchange for cash, in which case the associated recog- nized liability represents the amount to be repaid to counterpar- ties. For securities lending and repurchase agreements, a haircut between 0% and 15% is generally applied to the collateral, which results in associated liabilities having a carrying value below the carrying value of the transferred assets. The counter- parties to the associated liabilities presented in the table above have full recourse to UBS. In securities lending arrangements entered into in exchange for the receipt of other securities as collateral, neither the securi- ties received nor the obligation to return them are recognized on UBS’s balance sheet, as the risks and rewards of ownership are not transferred to UBS. In cases where such financial assets received are subsequently sold or repledged in another transac- tion, this is not considered to be a transfer of financial assets. Other financial asset transfers primarily include securities trans- ferred to collateralize derivative transactions, for which the carry- ing value of associated liabilities is not provided in the table above because those replacement values are managed on a portfolio basis across counterparties and product types, and therefore is not a direct relationship between the specific collateral pledged and the associated liability. Transferred assets other than trading portfolio assets and financial investments available-for-sale which may be sold or repledged by counterparties were not material as of 31 December 2015 and as of 31 December 2014. Transferred financial assets that are not subject to derecogni- tion in full, but which remain on the balance sheet to the extent of the Group’s continuing involvement, were not material as of 31 December 2015 and as of 31 December 2014. 505 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 25 Restricted and transferred financial assets (continued) EDTF | c) Transferred financial assets that are derecognized in their entirety with continuing involvement Continuing involvement in a transferred and fully derecognized financial asset may result from contractual provisions in the trans- fer agreement or in a separate agreement with the counterparty or a third party entered into in connection with the transfer. The table below provides information on the Group’s continuing involvement in transferred and fully derecognized financial assets. EDTF | Transferred financial assets that are derecognized in their entirety with continuing involvement CHF million 31.12.15 Balance sheet line item Carrying amount of continuing involvement Fair value of continuing involvement Gain / (loss) recognized at the date of transfer of the financial assets2 Gain / (loss) from continuing involvement in transferred and derecognized financial assets For the year ended 31.12.15 Life-to-date 31.12.15 Type of continuing involvement Purchased and retained interest in securitization structures Trading portfolio assets/ Replacement values1 Total CHF million 15 15 15 15 31.12.14 8 8 16 16 (1,566) (1,566) Balance sheet line item Carrying amount of continuing involvement Fair value of continuing involvement Gain / (loss) recognized at the date of transfer of the financial assets Gain / (loss) from continuing involvement in transferred and derecognized financial assets For the year ended 31.12.14 Life-to-date 31.12.14 Type of continuing involvement Purchased and retained interest in securitization structures Total Trading portfolio assets/ Replacement values1 (22) (22) (22) (22) 22 22 13 13 (1,582) (1,582) 1 As of 31 December 2015, total purchased and retained interest in securitization structures consisted of trading portfolio assets of CHF 37 million and negative replacement values of CHF 22 million. As of 31 December 2014, total purchased and retained interest in securitization structures consisted of trading portfolio assets of CHF 29 million and negative replacement values of CHF 51 million. 2 Represents gains / (losses) recognized on the date of transfer during the respective reporting period. Purchased and retained interests in securitization vehicles In cases where UBS has transferred assets into securitization vehi- cles and retained or purchased interests therein, UBS has a con- tinuing involvement in those transferred assets. The majority of the retained continuing involvement securitization positions held in the trading portfolio are collateralized debt obligations, US commercial mortgage-backed securities and residential mort- gage-backed securities. As a result of losses incurred in previous years, the majority of these continuing involvement positions had a carrying amount of zero as of 31 December 2015. As of 31 December 2015, the maximum exposure to loss related to pur- chased and retained interests in securitization structures was CHF 55 million compared with CHF 48 million as of 31 December 2014, both mainly related to trading portfolio assets. Undis- counted cash outflows of CHF 41 million may be payable to the transferee in future periods as a consequence of holding the pur- chased and retained interests. The earliest period in which pay- ment may be required is less than one month. Life-to-date losses presented in the table above only relate to retained interests held as of 31 December 2015. 506 Note 25 Restricted and transferred financial assets (continued) d) Off-balance-sheet assets received EDTF | The table below presents assets received from third parties that can be sold or repledged, that are not recognized on the balance sheet, but that are held as collateral, including amounts that have been sold or repledged. EDTF | Off-balance-sheet assets received CHF million Fair value of assets received which can be sold or repledged received as collateral under reverse repurchase, securities borrowing and lending arrangements, derivative transactions and other transactions1 received in unsecured borrowings thereof sold or repledged2 in connection with financing activities to satisfy commitments under short sale transactions in connection with derivative and other transactions1 31.12.15 401,511 393,839 7,672 286,757 241,992 29,137 15,628 31.12.14 388,855 383,354 5,502 271,963 227,515 27,958 16,491 1 Includes securities received as initial margin from its clients that UBS is required to remit to CCPs, brokers and deposit banks through its exchange-traded derivative (ETD) clearing and execution services. 2 Does not include off-balance sheet securities (31 December 2015: CHF 47.3 billion, 31 December 2014: CHF 37.6 billion) placed with central banks related to undrawn credit lines and for payment, clearing and settlement pur- poses for which there are no associated liabilities or contingent liabilities. Note 26 Offsetting financial assets and financial liabilities EDTF | Pillar 3 | UBS enters into netting agreements with counterpar- ties to manage the credit risks associated primarily with repur- chase and reverse repurchase transactions, securities borrowing and lending, and over-the-counter (OTC) and exchange-traded derivatives (ETD). These netting agreements and similar arrange- ments generally enable the counterparties to set-off liabilities against available assets received in the ordinary course of busi- ness and / or in the event that the counterparty to the transac- tion is unable to fulfill its contractual obligations. The right of set-off is a legal right to settle or otherwise eliminate all or a portion of an amount due by applying an amount receivable from the same counterparty against it, thus reducing credit exposure. The table on the following page provides a summary of finan- cial assets subject to offsetting, enforceable master netting arrangements and similar agreements, as well as financial collat- eral received to mitigate credit exposures for these financial assets. The gross financial assets of the Group that are subject to offsetting, enforceable netting arrangements and similar agree- ments are reconciled to the net amounts presented within the associated balance sheet line, after giving effect to financial liabil- ities with the same counterparties that have been offset on the balance sheet and other financial assets not subject to an enforce- able netting arrangement or similar agreement. Further, related amounts for financial liabilities and collateral received that are not offset on the balance sheet are shown to arrive at financial assets after consideration of netting potential. The Group engages in a variety of counterparty credit mitiga- tion strategies in addition to netting and collateral arrange- ments. Therefore, the net amounts presented in the tables on the next pages do not purport to represent the Group’s actual credit exposure. 507 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 26 Offsetting financial assets and financial liabilities (continued) Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements Assets subject to netting arrangements 31.12.15 Netting recognized on the balance sheet Netting potential not recognized on the balance sheet3 CHF billion Cash collateral on securities borrowed Reverse repurchase agreements Positive replacement values Cash collateral receivables on derivative instruments1 Financial assets designated at fair value Total assets Gross assets before netting 23.9 117.9 161.9 85.9 2.4 392.1 Netting with gross liabilities2 0.0 (62.1) (2.5) (66.3) 0.0 (131.0) Net assets recognized on the balance sheet 23.9 55.8 159.3 19.6 2.4 261.1 Assets after consid- eration of netting potential 0.0 0.0 10.8 7.2 0.6 18.7 Financial liabilities Collateral received (3.1) (4.4) (123.0) (10.9) 0.0 (20.9) (51.4) (25.5) (1.5) (1.8) (141.3) (101.1) 31.12.14 Assets subject to netting arrangements Netting recognized on the balance sheet Netting potential not recognized on the balance sheet3 CHF billion Cash collateral on securities borrowed Reverse repurchase agreements Positive replacement values Cash collateral receivables on derivative instruments1 Financial assets designated at fair value Total assets Gross assets before netting 22.7 99.2 249.9 245.7 3.1 620.5 Netting with gross liabilities2 0.0 (42.8) (3.1) (218.4) 0.0 (264.2) Net assets recognized on the balance sheet 22.7 56.4 246.8 27.4 3.1 356.3 Assets after consid- eration of netting potential 0.0 0.1 17.3 7.0 0.1 24.5 Financial liabilities Collateral received (1.9) (3.4) (198.7) (18.8) 0.0 (20.8) (52.8) (30.8) (1.6) (3.0) (222.9) (108.9) Assets not subject to netting arrangements4 Assets recognized on the balance sheet 1.6 12.1 8.1 4.1 3.7 29.7 Assets not subject to netting arrangements4 Assets recognized on the balance sheet 1.4 12.1 10.1 3.6 1.9 29.1 Total assets Total assets after consid- eration of netting potential Total assets recognized on the balance sheet 1.6 12.1 18.9 11.3 4.4 48.4 25.6 67.9 167.4 23.8 6.1 290.8 Total assets Total assets after consid- eration of netting potential Total assets recognized on the balance sheet 1.4 12.2 27.4 10.6 2.0 53.6 24.1 68.4 257.0 31.0 5.0 385.4 1 The net amount of Cash collateral receivables on derivative instruments recognized on the balance sheet includes certain OTC derivatives which are in substance net settled on a daily basis under IAS 32, and ETD which are economically settled on a daily basis. In addition, this balance includes OTC and ETD cash collateral balances which correspond with the cash portion of collateral pledged, reflected on the Negative replacement val- ues line in the table presented on the following page. 2 The logic of the table results in amounts presented in the “Netting with gross liabilities” column corresponding directly to the amounts presented in the “Netting with gross assets”column in the liabilities table presented on the following page. 3 For the purpose of this disclosure, the amounts of financial instruments and cash collateral presented have been capped by the rel- evant netting agreement so as not to exceed the net amount of financial assets presented on the balance sheet; i.e., over-collateralization, where it exists, is not reflected in the table. 4 Includes assets not subject to enforceable netting arrangements and other out-of-scope items. 508 Note 26 Offsetting financial assets and financial liabilities (continued) The table below provides a summary of financial liabilities subject to offsetting, enforceable master netting arrangements and simi- lar agreements, as well as financial collateral pledged to mitigate credit exposures for these financial liabilities. The gross financial liabilities of UBS that are subject to offsetting, enforceable net- ting arrangements and similar agreements are reconciled to the net amounts presented within the associated balance sheet line, after giving effect to financial assets with the same counterpar- ties that have been offset on the balance sheet and other finan- cial liabilities not subject to an enforceable netting arrangement or similar agreement. Further, related amounts for financial assets and collateral pledged that are not offset on the balance sheet are shown to arrive at financial liabilities after consideration of netting potential. Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements Liabilities subject to netting arrangements 31.12.15 Netting recognized on the balance sheet Netting potential not recognized on the balance sheet3 Liabilities not subject to netting arrangements4 Total liabilities CHF billion Cash collateral on securities lent Repurchase agreements Negative replacement values Cash collateral payables on derivative instruments1 Financial liabilities designated at fair value Total liabilities Gross liabilities before netting 7.9 69.0 154.2 99.9 3.9 334.9 Netting with gross assets2 0.0 (62.1) (2.5) (66.3) Net liabilities recognized on the balance sheet Liabilities after consid- eration of netting potential Liabilities recognized on the balance sheet Total liabilities after consid- eration of netting potential Total liabilities recognized on the balance sheet Financial assets Collateral pledged 7.9 6.9 (3.1) (4.4) 151.7 (123.0) (4.8) (2.5) (17.4) 33.6 (19.0) (2.5) 0.0 (131.0) 3.9 203.9 0.0 (149.4) (0.7) (28.0) Liabilities subject to netting arrangements 31.12.14 0.0 0.0 11.3 12.1 3.1 26.5 0.1 2.8 10.7 4.7 59.1 77.4 0.1 2.8 22.1 16.8 62.3 104.0 8.0 9.7 162.4 38.3 63.0 281.4 Netting recognized on the balance sheet Netting potential not recognized on the balance sheet3 Liabilities not subject to netting arrangements4 Total liabilities Gross liabilities before netting 8.4 51.5 243.3 Netting with gross assets2 0.0 (42.8) (3.1) Net liabilities recognized on the balance sheet Liabilities after consid- eration of netting potential Liabilities recognized on the balance sheet Total liabilities after consid- eration of netting potential Total liabilities recognized on the balance sheet Financial assets Collateral pledged 8.4 8.7 (1.9) (3.4) 240.2 (198.7) (6.5) (5.2) (21.8) 256.1 (218.4) 37.7 (25.1) (2.3) 3.8 563.1 0.0 (264.2) 3.8 298.8 0.0 (229.2) (1.4) (37.3) 0.0 0.0 19.7 10.3 2.4 32.4 0.7 3.2 13.9 4.6 71.5 93.9 0.8 3.2 33.5 14.9 73.9 126.3 9.2 11.8 254.1 42.4 75.3 392.8 CHF billion Cash collateral on securities lent Repurchase agreements Negative replacement values Cash collateral payables on derivative instruments1 Financial liabilities designated at fair value Total liabilities 1 The net amount of Cash collateral payables on derivative instruments recognized on the balance sheet includes certain OTC derivatives which are in substance net settled on a daily basis under IAS 32, and ETD which are economically settled on a daily basis. In addition, this balance includes OTC and ETD cash collateral balances which correspond with the cash portion of collateral received, reflected on the Positive replacement val- ues line in the table presented on the previous page. 2 The logic of the table results in amounts presented in the “Netting with gross assets” column corresponding directly to the amounts presented in the “Netting with gross liabilities” column in the assets table presented on the previous page. 3 For the purpose of this disclosure, the amounts of financial instruments and cash collateral presented have been capped by the rel- evant netting agreement so as not to exceed the net amount of financial liabilities presented on the balance sheet; i.e., over-collateralization, where it exists, is not reflected in the table. 4 Includes liabilities not subject to enforceable netting arrangements and other out-of-scope items. 509 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 27 Financial assets and liabilities – additional information a) Measurement categories of financial assets and liabilities The table below provides information about the carrying amounts of individual classes of financial instruments within the measure- ment categories of financial assets and liabilities as defined in IAS 39 Financial Instruments: Recognition and Measurement. Only those assets and liabilities that arefinancial instruments as defined in IAS 32 Financial Instruments: Presentation are included in the table below, which causes certain balances to differ from those presented on the balance sheet. ➔ Refer to Note 24 for more information on how the fair value of financial instruments is determined Measurement categories of financial assets and financial liabilities CHF million Financial assets1 Held for trading Trading portfolio assets of which: assets pledged as collateral which may be sold or repledged by counterparties Debt issued2 Positive replacement values Total Fair value through profit or loss Financial assets designated at fair value Financial assets at amortized cost Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments Loans3 Other assets Total Available-for-sale Financial investments available-for-sale Total financial assets 31.12.15 31.12.14 120,393 51,943 106 167,435 287,934 132,392 56,018 283 256,978 389,653 6,146 4,951 91,306 11,948 25,584 67,893 23,763 311,954 20,048 552,496 62,543 909,119 104,073 13,334 24,063 68,414 30,979 315,757 21,251 577,872 57,159 1,029,634 29,137 236 162,430 191,803 Financial liabilities Held for trading Trading portfolio liabilities Debt issued2 Negative replacement values Total Fair value through profit or loss, other Financial liabilities designated at fair value Amounts due under unit-linked investment 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 Debt issued Other liabilities Total Total financial liabilities 1 As of 31 December 2015, CHF 123 billion of Loans, CHF 0 billion of Due from banks, CHF 1 billion of Reverse repurchase agreements, CHF 30 billion of Financial investments available-for-sale and CHF 3 billion of Financial assets designated at fair value are expected to be recovered or settled after 12 months. As of 31 December 2014, CHF 119 billion of Loans, CHF 0 billion of Due from banks, CHF 1 billion of Reverse repurchase agreements, CHF 35 billion of Financial investments available-for-sale and CHF 4 billion of Financial assets designated at fair value are expected to be recovered or settled after 12 months. 2 Represents the embedded derivative component of structured debt issued for which the fair value option has not been applied and which is presented within Debt issued on the balance sheet. 3 Includes finance lease receivables of CHF 1.1 bil- lion as of 31 December 2015 (31 December 2014: CHF 1.1 billion). Refer to Notes 10 and 33 for more information. 11,836 8,029 9,653 38,282 390,185 93,018 51,384 602,387 872,903 10,492 9,180 11,818 42,372 410,207 91,183 45,414 620,665 995,972 27,958 308 254,101 282,367 62,995 15,718 78,713 75,297 17,643 92,940 510 Note 27 Financial assets and liabilities – additional information (continued) b) Maturity analysis of financial liabilities The contractual maturities for non-derivative and non-trading financial liabilities as of 31 December 2015 are based on the ear- liest date on which UBS could be contractually required to pay. The total amounts that contractually mature in each time-band are also shown for 31 December 2014. Derivative positions and trading liabilities, predominantly made up of short sale transac- tions, are assigned to the column Due within 1 month, as this provides a conservative reflection of the nature of these trading activities. The contractual maturities may extend over signifi- cantly longer periods. Maturity analysis of financial liabilities1 CHF billion Financial liabilities recognized on balance sheet2 Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities3, 4 Negative replacement values3 Cash collateral payables on derivative instruments Financial liabilities designated at fair value5 Due to customers Debt issued Other liabilities Total 31.12.15 Total 31.12.14 Guarantees, commitments and forward starting transactions6 Loan commitments Guarantees Forward starting transactions Reverse repurchase agreements Securities borrowing agreements Total 31.12.15 Total 31.12.14 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 8.1 5.7 7.9 29.1 162.4 38.3 15.2 371.8 5.7 66.0 710.3 811.0 55.7 15.9 6.6 0.0 78.1 78.3 2.4 1.3 1.4 15.9 13.1 10.2 44.3 48.4 0.2 0.0 0.2 0.1 1.1 1.0 0.2 13.1 4.6 16.5 36.4 39.4 0.2 0.0 0.2 0.2 0.3 0.1 11.9 0.5 40.8 53.6 60.9 0.0 0.1 0.1 0.2 0.0 0.2 12.0 0.1 32.3 44.6 49.8 0.0 0.0 0.0 Total 11.8 8.0 9.7 29.1 162.4 38.3 68.1 390.2 105.4 66.0 889.2 1,009.5 56.1 16.0 6.6 0.0 78.7 78.8 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 replacement values (see footnote 3), the amounts presented generally represent undiscounted cash flows of future interest and principal payments. 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 14 for undiscounted cash flows of derivatives designated in hedge accounting relationships. 4 Con- tractual maturities of trading portfolio liabilities are: CHF 27.2 billion due within one month (2014: CHF 26.7 billion), CHF 1.2 billion due between one month and one year (2014: CHF 1.3 billion), and CHF 0.8 billion due between 1 and 5 years (2014: CHF 0 billion). 5 Future interest payments on variable rate liabilities are determined by reference to the applicable interest rate prevailing as of the reporting date. Future principal payments which are variable are determined by reference to the conditions existing at the reporting date. 6 Comprises the maximum irrevocable amount of guarantees, commitments and forward starting transactions. 511 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 27 Financial assets and liabilities – additional information (continued) c) Reclassification of financial assets In 2008 and 2009, certain financial assets were reclassified from Trading portfolio assets to Loans. On their reclassification date, these assets had fair values of CHF 26 billion and CHF 0.6 billion, respectively. reclassified financial assets, which were entirely comprised of municipal auction rate securities, was CHF 0.2 billion (31 Decem- ber 2014: CHF 0.7 billion), which was equal to the fair value of these assets. The reclassification of financial assets reflected UBS’s change in intent and ability to hold these financial assets for the foreseeable future rather than for trading in the near term. The financial assets were reclassified using their fair value on the date of the reclassification, which became their new cost basis at that date. As of 31 December 2015, the carrying value of the remaining The overall impact on operating profit before tax from reclas- sifed financial assets for the year ended 31 December 2015 was a profit of CHF 23 million (2014: CHF 84 million). If the financial assets had not been reclassified, the impact on operating profit before tax for the year ended 31 December 2015 would have been a profit of less than CHF 10 million. d) Maximum exposure to credit risk of financial assets designated at fair value Financial assets designated at fair value totaled CHF 6,146 million as of 31 December 2015 (31 December 2014: CHF 4,951 million). Maximum exposure to credit risk from financial assets designated at fair value was CHF 5.6 billion as of 31 December 2015 (31 Decem- ber 2014: CHF 4.3 billion). The exposure related to structured loans and reverse repurchase and securities borrowing agreements was mitigated by securities collateral of CHF 3.5 billion as of 31 Decem- ber 2015 (31 December 2014: CHF 3.3 billion). 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. Investment fund units designated at fair value do not have a direct exposure to credit risk. ➔ Refer to Note 24 for more information on financial assets designated at fair value, and to “Maximum exposure to credit risk” in the “Risk management and control” section of this report for more information on collateral related to financial assets designated at fair value Notional amounts of loans designated at fair value and related credit derivatives CHF million Loans – notional amount Credit derivatives related to loans – notional amount1 Credit derivatives related to loans – fair value1 1 Credit derivatives contracts include credit default swaps, total return swaps and similar instruments. 31.12.15 31.12.14 687 630 4 667 644 1 The table below provides the effect on 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 of loans and related credit derivatives attributable to changes in credit risk CHF million Changes in fair value of loans designated at fair value, attributable to changes in credit risk1 Changes in fair value of credit derivatives and similar instruments which mitigate the maximum exposure to credit risk of loans designated at fair value1 For the year ended Cumulative from inception until the year ended 31.12.15 31.12.14 31.12.15 31.12.14 (3) 3 (3) 3 (4) 4 (2) 1 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 the derivatives which have been used to mitigate credit risk of these loans since designation at fair value. For loans reported under the fair value option, changes in fair value due to changes in the credit standing of the borrower are calculated using counterparty credit information obtained from independent market sources. 512 Note 28 Pension and other post-employment benefit plans The table below provides information relating to pension costs for defined benefit plans and defined contribution plans. These costs are part of Personnel expenses. Income statement – expenses related to pension and other post-employment benefit plans CHF million Net periodic pension cost for defined benefit plans of which: related to major pension plans1 of which: Swiss plan of which: UK plan of which: other plans of which: related to post-retirement medical and life insurance plans2 of which: UK plan of which: US plans of which: related to remaining plans and other costs3 Pension cost for defined contribution plans4 of which: UK of which: US of which: other countries Total pension and other post-employment benefit plan expenses5 31.12.15 31.12.14 31.12.13 569 546 515 18 12 4 1 2 19 239 86 100 53 808 467 508 458 17 33 (36) 2 (37) (5) 244 91 91 62 711 651 638 555 24 58 (11) 2 (12) 24 236 91 91 54 887 1 Refer to Note 28a for more information. 2 Refer to Note 28b for more information. 3 Other costs include differences between actual and estimated performance award accruals and net accrued pension costs related to restructuring. 4 Refer to Note 28c for more information. 5 Refer to Note 6. The table below provides information relating to amounts recognized in other comprehensive income for defined benefit plans. Other comprehensive income – gains / (losses) on pension and other post-employment benefit plans CHF million Major pension plans1 of which: Swiss plan of which: UK plan of which: other plans Post-retirement medical and life insurance plans2 of which: UK plan of which: US plans Remaining plans Gains / (losses) recognized in other comprehensive income, before tax Tax (expense) / benefit relating to defined benefit plans recognized in other comprehensive income Gains / (losses) recognized in other comprehensive income, net of tax3 of which: gains / (losses) recognized in other comprehensive income attributable to UBS Group AG shareholders of which: gains / (losses) recognized in other comprehensive income attributable to non-controlling interests 1 Refer to Note 28a for more information. 2 Refer to Note 28b for more information. 3 Refer to the “Statement of comprehensive income”. 31.12.15 31.12.14 31.12.13 339 58 317 (35) (3) 6 (9) (14) 322 (19) 303 298 5 (1,456) (1,032) (168) (256) (5) (3) (2) 7 (1,454) 247 (1,208) (1,172) (36) 1,168 1,119 (65) 115 3 2 1 7 1,178 (239) 939 513 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) The tables below provide information on UBS’s assets and liabilities with respect to pension and post-employment benefit plans. These are recognized on the balance sheet within Other assets and Other liabilities. Balance sheet – net defined benefit pension and post-employment asset CHF million Major pension plans1 of which: Swiss plan of which: UK plan of which: other plans Post-retirement medical and life insurance plans of which: UK plan of which: US plans Remaining plans Total net defined benefit pension and post-employment asset2 1 Refer to Note 28a for more information. 2 Refer to Note 18. Balance sheet – net defined benefit pension and post-employment liability CHF million Major pension plans1 of which: Swiss plan of which: UK plan of which: other plans2 Post-retirement medical and life insurance plans3 of which: UK plan of which: US plans Remaining plans Total net defined benefit pension and post-employment liability4 31.12.15 31.12.14 50 0 50 0 0 0 0 0 50 31.12.15 622 0 0 622 84 25 59 30 736 0 0 0 0 0 0 0 0 0 31.12.14 1,256 25 568 664 85 32 53 32 1,374 1 Refer to Note 28a for more information. 2 Liability consists of: CHF 315 million related to US plans and CHF 307 million related to German plans (31 December 2014: CHF 297 million related to US plans and CHF 367 million related to German plans). 3 Refer to Note 28b for more information. 4 Refer to Note 23. 514 Note 28 Pension and other post-employment benefit plans (continued) a) Defined benefit pension plans UBS has established defined benefit pension plans for its employ- ees in various locations, with the major plans located in Switzer- land, the UK, the US and Germany. Independent actuarial valua- tions for the plans in these countries are performed as required. The overall investment policy and strategy for UBS’s defined benefit pension plans is guided by the objective of achieving an investment return which, together with contributions, ensures that there will be sufficient assets to pay pension benefits as they fall due while also mitigating the various risks of the plans. For the plans with assets (i.e., funded plans), the investment strate- gies for the plans are managed under local laws and regulations in each jurisdiction. The actual asset allocation is determined by the governance body with reference to the prevailing current and expected economic and market conditions and in consider- ation of specific asset class risk in the risk profile. Within this framework, UBS ensures that the fiduciaries consider how the asset investment strategy correlates with the maturity profile of the plan liabilities and the respective potential impact on the funded status of the plans, including potential short-term liquid- ity requirements. The defined benefit obligation for all of UBS’s defined benefit pension plans is directly impacted by changes in yields of high- quality corporate bonds in the respective country in which the plan is held, as the applicable discount rate used to determine the defined benefit obligation is based on these yields. For the funded plans, the pension assets are invested in a diversified portfolio of financial assets including real estate, bonds, investment funds and cash across geographic regions to ensure a balance of risk and return to the extent allowed under local pension laws. The market value of these financial assets is not fully correlated to changes in high-quality corporate bond yields. This results in volatility in the net asset / liability position for each plan. Specific asset-liability matching strategies for each pension plan are independently determined by the responsible governance body in each country. The net asset / liability volatility for each plan is dependent on the specific financial assets chosen by each plan’s fiduciaries. For cer- tain pension plans, a liability-driven investment approach is applied to a portion of the plan assets to reduce potential volatility. Swiss pension plan The Swiss pension plan covers employees of UBS AG and employ- ees of companies having close economic or financial ties with UBS and exceeds the minimum benefit requirements under Swiss pen- sion law. Contributions to the pension plan are paid by the employer and the employees. The Swiss pension plan allows employees a choice with regard to the level of contributions paid by them. Employee contributions are calculated as a percentage of the con- tributory salary and are deducted monthly. The percentages deducted from salary depend on age and choice of contribution category and vary between 1% and 13.5% of contributory base salary and between 0% and 9% of contributory variable compen- sation. Depending on the age of the employee, UBS pays a con- tribution that ranges between 6.5% and 27.5% of contributory base salary and between 3.6% and 9% of contributory variable compensation. UBS also pays risk contributions which are used to finance benefits paid out in the event of death and disability, as well as to finance bridging pensions. The plan benefits include retirement benefits and disability, death and survivor pensions. The pension plan offers to members at the normal retirement age of 64 a choice between a lifetime pension with or without full restitution and a partial or full lump sum payment. Members can draw early retirement benefits start- ing from the age of 58. Since 2015, employees have the possibil- ity to make additional purchases of benefits to fund early retire- ment benefits (Plan 58+). The payable pension amount is a result of the conversion rate applied on the accumulated balance of the individual plan par- ticipant’s pension account at the retirement date. The accumu- lated balance of each individual plan participant’s pension account is based on credited vested benefits transferred from previous employers, purchases of benefits and the employee and employer contributions that have been made to the pension account of each individual plan participant, as well as the interest accrued on the accumulated balance. The interest rate accrued is defined annually by the Pension Foundation Board. Although the Swiss pension plan is based on a defined contri- bution promise under Swiss pension law, it is accounted for as a defined benefit plan under IAS 19, primarily because of the obliga- tion to accrue interest on the pension accounts and the payment of lifetime pensions. The actuarial assumptions used for the Swiss pension plan are based on the Swiss economic environment. ➔ Refer to Note 1a item 24 for a description of the accounting policy for defined benefit pension plans 515 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) The Swiss pension plan is governed by the Pension Foundation Board as required by Swiss pension law and the responsibilities of this board are defined by Swiss pension law and by the plan rules. According to Swiss pension law, a temporary limited underfund- ing is permitted. However, should an underfunded situation occur, the Pension Foundation Board is required to take the necessary measures to ensure that full funding can be expected to be restored within a maximum period of ten years. Under Swiss pen- sion law, if a Swiss pension plan became significantly underfunded on a Swiss pension law basis, then additional employer and employee contributions could be required. In these situations, the risk is shared between employer and employees, and the employer is not legally obliged to cover more than 50% of the additional contributions required. The Swiss pension plan has a technical funding ratio under Swiss pension law of 123.3% as of 31 Decem- ber 2015 (31 December 2014: 123.7%). The investment strategy of the Swiss plan is implemented based on a multi-level investment and risk management process and is in line with Swiss pension law, including the rules and regu- lations relating to diversification of plan assets. These rules, among others, specify restrictions to the composition of plan assets, e.g., there is a limit of 50% for investments in equities. The investment strategy of the Swiss plan is aligned to the defined risk budget set out by the Pension Foundation Board. The risk budget is determined based on regularly performed asset and liability management analyses. In order to implement the risk budget, the Swiss plan may use direct investments, investment funds and derivatives. To mitigate foreign currency risk, a specific currency hedging strategy was implemented. The Pension Foundation Board strives for a medium- and long-term balance between assets and liabilities. Under IAS 19, volatility arises in the Swiss pension plan net asset / liability because the fair value of the plan assets is not directly correlated to movements in the value of the plan’s defined benefit obligation in the short-term. As of 31 December 2015, the Swiss pension plan was in a surplus situation on an International Financial Reporting Stan- dards (IFRS) measurement basis, as the fair value of plan assets exceeded the defined benefit obligation by CHF 1,283 million (31 December 2014: deficit of CHF 25 million). However, a surplus can only be recognized on the balance sheet to the extent that it does not exceed the estimated future economic benefit, which equals the difference between the present value of the estimated future net service cost and the present value of the estimated future employer contributions. The maximum future economic benefit is highly variable based on changes in the discount rate. As of 31 December 2015, the estimated future economic benefit was zero and hence, no net defined benefit asset was recognized on the balance sheet. The difference of CHF 1,283 million between the pension plan surplus and the estimated future eco- nomic benefit, the so-called asset ceiling effect, was recognized in other comprehensive income. The employer contributions expected to be made to the Swiss pension plan in 2016 are estimated to be CHF 474 million. Non-Swiss pension plans The non-Swiss locations of UBS offer various defined benefit pen- sion plans in accordance with local regulations and practices. The non-Swiss locations with major defined benefit plans are the UK, the US and Germany. Defined benefit pension plans in other loca- tions are not material to the financial results of UBS and hence not separately disclosed. The non-Swiss plans provide benefits in the event of retire- ment, death or disability. The level of benefits provided depends on the specific rate of benefit accrual and the level of employee compensation. UBS’s general principle is to ensure that the plans are appropriately funded under local pension regulations in each country and this is the primary driver for determining when addi- tional contributions are required. Similar to the Swiss pension plan, volatility arises in the net asset / liability position of the non- Swiss plans because the fair value of the respective plans’ assets are not directly correlated to movements in the value of the plans’ defined benefit obligations. The funding policy for these plans is consistent with local gov- ernment regulations and tax requirements, and actuarial assump- tions used are based on the local economic environment. ➔ Refer to Note 1a item 24 for a description of the accounting policy for defined benefit pension plans UK The UK plan is a career-average revalued earnings scheme, and benefits increase automatically based on UK price inflation. Nor- mal retirement age for participants in the UK plan is 60. On 1 July 2013, UBS closed the UK defined benefit pension plan for future service. After that date, UBS no longer recognized current service costs for this plan. Plan participants who were active employees under the defined benefit plan were eligible to become partici- pants of the defined contribution plan for any service after the plan was closed for future service. 516 Note 28 Pension and other post-employment benefit plans (continued) The responsibility for governance of the UK plan lies jointly with the Pension Trustee Board, which is required under local pen- sion laws, and UBS. The employer contributions to the pension fund included regular contributions and specific deficit-funding contributions until the date of the closure for future service and thereafter only reflected agreed-upon deficit-funding contribu- tions. The deficit-funding contributions are determined based on the most recent actuarial valuation, which is conducted based on assumptions agreed by the Pension Trustee Board and UBS. In the event of an underfunding, UBS must agree to a deficit recovery plan with the Pension Trustee Board within statutory deadlines. In 2015, UBS made a deficit-funding contribution of CHF 316 mil- lion (2014: CHF 75 million). The plan assets are invested in a diversified portfolio of finan- cial assets. A liability-driven investment approach is applied as a portion of the plan assets are invested in inflation-indexed bonds which provide a partial hedge against price inflation. If price infla- tion increases, the defined benefit obligation will likely increase more significantly than any change in the fair value of plan assets, which would result in an increase in the net defined benefit liabil- ity. Plan rules and local pension legislation cap the level of infla- tionary increase that can be applied to plan benefits. As the plan is obligated to provide guaranteed lifetime pension benefits to plan participants upon retirement, increases in life expectancy will result in an increase in the plan’s liabilities. This is particularly significant in the UK plan, where inflationary increases result in higher sensitivity to changes in life expectancy. As of 31 December 2015, the UK plan was in a surplus situa- tion on an IFRS measurement basis, as the fair value of plan assets exceeded the defined benefit obligation by CHF 50 million. This surplus was recognized on the UBS balance sheet, as UBS has a right to a refund with regards to the UK plan. No employer contributions are expected to be made to the UK defined benefit plan in 2016. US There are two distinct major defined benefit pension plans in the US. Normal retirement age for participants in the US plans is 65. The plans are closed to new entrants, who instead can participate in defined contribution plans. One of the major defined benefit pension plans is a contribu- tion-based plan in which each participant accrues a percentage of salary in a pension account. The pension account is credited annu- ally with interest based on a rate that is linked to the average yield on one-year US government bonds. For the other major defined benefit pension plan, retirement benefits accrue based on the career-average earnings of each individual plan participant. Upon retirement, the plans allow participants a choice between a lump sum payment and a lifetime pension. Both of these defined benefit pension plans have fiduciaries as required under local state pension laws. The fiduciaries, along with UBS, are jointly responsible for governance of the plans. Actuarial valuations are regularly completed for the plans, and UBS has historically elected to make contributions to the plans in order to maintain a funded ratio of at least 80%, as calculated under local pension regulations. The annual employer contribu- tions are equal to the present value of benefits accrued each year plus a rolling amortization of any prior underfunding. If the employer contributes more than the minimum or the plan has assets exceeding the liabilities, the excess can be used to offset minimum funding requirements. The plan assets for both plans are invested in a diversified port- folio of financial assets. Each pension plan’s fiduciaries are respon- sible for the investment decisions with respect to the plan assets. A liability-driven investment approach is applied for one of the US plans to support the volatility management in the net asset / liabil- ity position. Derivative instruments may also be employed to man- age volatility, including, but not limited to, interest rate futures, equity futures and swaps, including credit default swaps and interest rate swaps. In 2015, the US pension plan rules were amended such that former UBS employees with vested benefits in the US defined benefit pension plans have the option to receive a lump sum pay- ment (or early annuity payments) instead of a lifetime pension commencing at retirement age. This resulted in a reduction in the defined benefit obligation of CHF 24 million and a corresponding gain recognized in the income statement in 2015, of which CHF 21 million was recorded in Wealth Management Americas. In 2013, UBS offered a one-time option to former UBS employ- ees with vested benefits in the US defined benefit pension plans to receive a lump sum payment (or early annuity payments) instead of a lifetime pension. This resulted in a reduction in the defined benefit obligation of CHF 196 million, a reduction of fair value of plan assets of CHF 216 million and a charge to the income statement of CHF 20 million in 2013. The employer contributions expected to be made to the US defined benefit plans in 2016 are estimated to be CHF 43 million. 517 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) Germany There are two different defined benefit pension plans in Germany and both are contribution-based plans. No plan assets are set aside to fund these plans and benefits are directly paid by UBS. Normal retirement age for the participants in the German plans is 65. Within the larger of the two pension plans, each participant accrues a percentage of salary in a pension account. On an annual basis the accumulated account balance of the plan participant is credited with guaranteed interest at a rate of 5%. The other plan is a deferred compensation plan in which amounts are accrued annually based on employee elections. For this deferred compen- sation plan, the accumulated account balance is credited on an annual basis with a guaranteed interest rate of 4% for amounts accrued after 2009. Both German plans are regulated under Ger- man pension law, under which the responsibility to pay pension benefits when they are due rests entirely with UBS. For the Ger- man plans, a portion of the pension payments is directly increased in line with price inflation. The employer contributions expected to be made to the Ger- man plans in 2016 are estimated to be CHF 8 million. The table on the following pages provides an analysis of the movement in the net asset / liability recognized on the balance sheet for defined benefit pension plans from the beginning to the end of the year, as well as an analysis of amounts recognized in net profit and in other comprehensive income. In 2015, disclosures within this Note have been expanded to separately present UK plan information, which was previously included within “Non-Swiss” plans. Consequently, the US and German plans are now shown together within “Other”. Com- parative information was adjusted accordingly. 518 Note 28 Pension and other post-employment benefit plans (continued) Defined benefit pension plans CHF million For the year ended Defined benefit obligation at the beginning of the year Current service cost Interest expense Plan participant contributions Remeasurements of defined benefit obligation of which: actuarial (gains) / losses arising from changes in demographic assumptions of which: actuarial (gains) / losses arising from changes in financial assumptions of which: experience (gains) / losses1 Past service cost related to plan amendments Curtailments Benefit payments Termination benefits Foreign currency translation Defined benefit obligation at the end of the year of which: amounts owing to active members of which: amounts owing to deferred members of which: amounts owing to retirees Fair value of plan assets at the beginning of the year Return on plan assets excluding amounts included in interest income Interest income Employer contributions – excluding termination benefits Employer contributions – termination benefits Plan participant contributions Benefit payments Administration expenses, taxes and premiums paid Payments related to plan amendments Foreign currency translation Fair value of plan assets at the end of the year Asset ceiling effect Net defined benefit asset / (liability) Movement in the net asset / (liability) recognized on the balance sheet Net asset / (liability) recognized on the balance sheet at the beginning of the year Net periodic pension cost Amounts recognized in other comprehensive income Employer contributions – excluding termination benefits Employer contributions – termination benefits Foreign currency translation Net asset / (liability) recognized on the balance sheet at the end of the year Funded and unfunded plans Defined benefit obligation from funded plans Defined benefit obligation from unfunded plans Plan assets Surplus / (deficit) Asset ceiling effect Net defined benefit asset / (liability) Swiss UK Other Total 31.12.15 23,956 589 270 205 (1,231) 31.12.14 20,738 496 465 202 3,120 31.12.15 3,949 0 137 0 (441) 31.12.14 3,355 0 158 0 349 31.12.15 1,693 10 57 0 (8) 31.12.14 1,315 10 59 0 270 31.12.15 29,598 599 463 205 (1,681) 31.12.14 25,408 506 682 202 3,739 (1,038) (237) 44 0 (81) (1,071) 1 0 22,636 10,359 0 12,278 23,931 109 273 482 1 205 (1,071) (10) 0 0 23,919 1,283 0 (25) (515) 58 482 1 0 0 22,636 0 23,919 1,283 1,283 0 66 2,705 349 0 (54) (1,045) 34 0 23,956 11,480 0 12,477 22,498 1,262 513 478 34 202 (1,045) (10) 0 0 23,931 0 (25) 952 (458) (1,032) 478 34 0 (25) 23,956 0 23,931 (25) 0 (25) (122) (201) (119) 0 0 (128) 0 (166) 3,350 255 1,864 1,230 3,381 (124) 118 316 0 0 (128) 0 0 (163) 3,400 0 50 (568) (18) 317 316 0 3 50 3,350 0 3,400 50 0 50 (15) 489 (126) 0 0 (91) 0 178 3,949 312 2,211 1,425 2,922 181 141 75 0 0 (91) 0 0 154 3,381 0 (568) (433) (17) (168) 75 0 (24) (568) 3,949 0 3,381 (568) 0 (568) 34 (71) 28 (24) 0 (83) 0 (26) 1,619 267 523 829 1,029 (44) 39 57 0 0 (83) (8) 0 7 997 0 (622) (664) (12) (35) 57 0 33 (622) 1,288 331 997 (622) 0 (622) 85 180 6 0 0 (81) 0 119 1,693 312 545 836 845 14 43 107 0 0 (81) (6) 0 107 1,029 0 (664) (470) (33) (256) 107 0 (12) (664) 1,301 392 1,029 (664) 0 (664) (1,125) (509) (47) (24) (81) (1,283) 1 (192) 27,605 10,881 2,388 14,336 28,341 (59) 430 855 1 205 (1,283) (18) 0 (156) 28,316 1,283 (572) (1,256) (546) 339 855 1 36 136 3,374 228 0 (54) (1,218) 34 297 29,598 12,104 2,756 14,738 26,266 1,457 697 659 34 202 (1,218) (16) 0 261 28,341 0 (1,256) 50 (508) (1,456) 659 34 (36) (572) (1,256) 27,274 331 28,316 711 1,283 (572) 29,205 392 28,341 (1,256) 0 (1,256) 1 Experience (gains) / losses are a component of actuarial remeasurements of the defined benefit obligation which reflect the effects of differences between the previous actuarial assumptions and what has actually occurred. 519 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) Analysis of amounts recognized in net profit CHF million For the year ended Current service cost Interest expense related to defined benefit obligation Interest income related to plan assets Interest expense on asset ceiling effect Administration expenses, taxes and premiums paid Plan amendments Curtailments Termination benefits Net periodic pension cost Swiss UK Other Total 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 589 270 (273) 0 10 0 (81) 1 515 496 465 (513) 19 10 0 (54) 34 458 0 137 (118) 0 158 (141) 0 0 0 0 0 0 0 0 0 0 18 17 10 57 (39) 0 8 (24) 0 0 12 10 59 (43) 0 6 0 0 0 33 599 463 (430) 0 18 (24) (81) 1 546 506 682 (697) 19 16 0 (54) 34 508 Analysis of amounts recognized in other comprehensive income CHF million For the year ended Swiss UK Other Total 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 Remeasurement of defined benefit obligation Return on plan assets excluding amounts included in interest income Asset ceiling effect excluding interest expense on asset ceiling effect Interest expense on asset ceiling effect Total gains / (losses) recognized in other comprehensive income, before tax of which: gains / (losses) recognized in other comprehensive income attributable to UBS Group AG shareholders of which: gains / (losses) recognized in other comprehensive income attributable to non-controlling interests 1,231 109 (1,283) 0 58 53 5 (3,120) 1,262 808 19 (1,032) (995) (36) 441 (124) 0 0 317 315 2 (349) 181 0 0 (168) (170) 8 (44) 0 0 (270) 1,681 14 0 0 (59) (1,283) 0 339 (3,739) 1,457 808 19 (1,456) (35) (256) (35) (246) 333 (1,412) 2 0 (10) 7 (44) The table below provides information on the duration of the defined benefit pension obligations and the distribution of the timing of benefit payments. Duration of the defined benefit obligation (in years) Maturity analysis of benefits expected to be paid CHF million Benefits expected to be paid within 12 months Benefits expected to be paid between 1 to 3 years Benefits expected to be paid between 3 to 6 years Benefits expected to be paid between 6 to 11 years Benefits expected to be paid between 11 to 16 years Benefits expected to be paid in more than 16 years 1 The duration of the defined benefit obligation represents a weighted average across other plans. Swiss UK Other1 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 15.1 16.7 19.7 20.2 11.3 12.5 1,146 2,218 3,403 5,526 5,173 1,033 2,023 3,035 5,394 5,571 80 177 338 785 981 81 173 322 768 997 92 185 291 509 510 85 171 274 485 513 18,892 26,613 7,348 7,926 1,172 1,363 520 Note 28 Pension and other post-employment benefit plans (continued) UBS regularly reviews the actuarial assumptions used in calcu- lating its defined benefit obligations to determine their continu- ing relevance. In 2015, UBS carried out a methodology review of the actuarial assumptions used in calculating its defined benefit obligation for its Swiss pension plan. As a result, UBS enhanced its methodology for estimating the discount rate by improving the construction of the yield curve where the market for long tenor maturities of Swiss high-quality corporate bonds was not sufficiently deep. Fur- thermore, UBS refined its approach to estimating the rate of sal- ary increases, the rate of interest credit on retirement savings, the employee turnover rate, the rate of employee disabilities and the rate of marriage. These improvements in estimates resulted in a total net decrease in the defined benefit obligation (DBO) of the Swiss pension plan of CHF 2,055 million, of which CHF 1,038 mil- lion related to demographic assumptions and CHF 1,017 million related to financial assumptions. Out of the total of CHF 2,055 million, CHF 2,002 million was attributable to UBS Group AG shareholders and CHF 53 million was attributable to non-control- ling interests. These reductions in the DBO from improvements in estimates were partly offset by market-driven discount rate changes, resulting in an overall downward remeasurement of the Swiss plan DBO of CHF 1,231 million, which was recognized in other comprehensive income. Furthermore, UBS enhanced methodologies and refined approaches used to estimate various actuarial assumptions for its UK and other pension plans. These improvements in estimates resulted in a total net decrease in the DBO of the UK pension plan of CHF 192 million, of which CHF 122 million related to demo- graphic assumptions and CHF 71 million related to financial assump- tions. Out of the total of CHF 192 million, CHF 188 million was attributable to UBS Group AG shareholders and CHF 4 million was attributable to non-controlling interests. In addition, mainly market- driven discount rate changes reduced the DBO further, resulting in an overall downward remeasurement of the UK plan DBO of CHF 441 million, which was recognized in other comprehensive income. The tables below show the principal actuarial assumptions used in calculating the defined benefit obligations. Principal actuarial assumptions used (%) Assumptions used to determine defined benefit obligations at the end of the year Discount rate Rate of salary increase Rate of pension increase Rate of interest credit on retirement savings 1 Represents weighted average assumptions across other plans. Swiss UK Other1 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 1.09 1.75 0.00 1.09 1.15 2.40 0.00 1.40 3.90 0.00 3.02 0.00 3.69 0.00 3.08 0.00 4.01 2.89 1.50 1.48 3.60 3.01 1.75 1.13 Mortality tables and life expectancies for major plans Country Switzerland UK US Germany Country Switzerland UK US Germany Mortality table BVG 2010 G S2PA CMI_2015, with projections1 RP2014 WCHA, with MP2015 projection scale2 Dr. K. Heubeck 2005 G Mortality table BVG 2010 G S2PA CMI_2015, with projections1 RP2014 WCHA, with MP2015 projection scale2 Dr. K. Heubeck 2005 G 1 In 2014 the mortality table S1NA_L CMI 2014 G, with projections was used. 2 In 2014 the mortality table RP2014 G, with MP2014 projection scale was used. Life expectancy at age 65 for a male member currently aged 65 aged 45 31.12.15 31.12.14 31.12.15 31.12.14 21.5 23.9 23.0 20.0 21.4 24.4 21.7 19.9 23.2 25.6 24.5 22.6 23.2 27.2 23.4 22.5 Life expectancy at age 65 for a female member currently aged 65 aged 45 31.12.15 31.12.14 31.12.15 31.12.14 24.0 25.8 24.6 24.1 23.9 25.7 23.9 23.9 25.7 28.0 26.2 26.6 25.6 28.0 25.6 26.5 521 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) – Rate of interest credit on retirement savings: the Swiss plan and one of the plans in the US have retirement saving balances that are increased annually by an interest credit rate. For these plans, an increase in the interest credit rate would increase the respective plan’s defined benefit obligation. – Life expectancy: for most of UBS’s defined benefit pension plans, the respective plan is obligated to provide guaranteed lifetime pension benefits. The defined benefit obligation for all plans is calculated using an underlying best estimate of the life expectancy of plan participants. An increase in the life expec- tancy of plan participants will increase the plan’s defined ben- efit obligation. The table below presents a sensitivity analysis for each signifi- cant actuarial assumption showing how the defined benefit obli- gation would be affected by changes in the relevant actuarial assumption that were reasonably possible at the balance sheet date. Unforeseen circumstances may arise, which could result in variations that are outside the range of alternatives deemed rea- sonably possible. This sensitivity analysis applies to the defined benefit obligation only and not to the net asset / liability in its entirety. Caution should be used in extrapolating the sensitivities below to the overall impact on the defined benefit obligation, as the sensitivities may not be linear. Volatility arises in the defined benefit obligation for each of the pension plans due to the following actuarial assumptions applied in the measurement of the defined benefit obligation: – Discount rate: the discount rate is based on the yield of high- quality corporate bonds of the market in the respective pen- sion plan country. Consequently, a decrease in the yield of high-quality corporate bonds will increase the defined benefit obligation of the pension plans. Conversely, an increase in the yield of high-quality corporate bonds will decrease the defined benefit obligation of the pension plans. – Rate of salary increase: an increase in the salary of plan partici- pants will generally increase the defined benefit obligation, specifically for the Swiss and German plans. For the UK plan, as the plan is closed for future service, UBS employees no longer accrue future service benefits and thus salary increases have no impact on the defined benefit obligation. For the US plans, only a small percentage of the total population continues to accrue benefits for future service, therefore the impact of a salary increase on the defined benefit obligation is minimal. – Rate of pension increase: for the Swiss plan, there is no auto- matic indexing of pensions. Any increase would be decided by the Pension Foundation Board. Similarly, for the US plans, there is no automatic indexing of pensions. For the UK plan, pen- sions are automatically indexed to price inflation as per plan rules and local pension legislation. Similarly, the German defined benefit pension plans are automatically indexed and a portion of the pensions are directly increased by price inflation. An increase in price inflation in the UK and Germany will increase the respective plan’s defined benefit obligation. Sensitivity analysis of significant actuarial assumptions1 CHF million Discount rate Increase by 50 basis points Decrease by 50 basis points Rate of salary increase Increase by 50 basis points Decrease by 50 basis points Rate of pension increase Increase by 50 basis points Decrease by 50 basis points Rate of interest credit on retirement savings Increase by 50 basis points Decrease by 50 basis points Life expectancy Increase in longevity by one additional year Swiss plan: increase / (decrease) in defined benefit obligation UK plan: increase / (decrease) in defined benefit obligation Other plans: increase / (decrease) in defined benefit obligation 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 (1,416) 1,609 82 (86) 1,163 –3 263 (249) 719 (1,688) 1,936 210 (198) 1,315 –3 334 (315) 755 (308) 354 –2 –2 343 (300) –4 –4 97 (372) 428 –2 –2 414 (363) –4 –4 135 (84) 92 1 (1) 6 (5) 8 (8) 42 (98) 108 2 (2) 8 (7) 9 (8) 45 1 The sensitivity analyses are based on a change in one assumption while holding all other assumptions constant, so that interdependencies between the assumptions are excluded. 2 As the plan is closed for future service, a change in assumption is not applicable. 3 As the assumed rate of pension increase was 0% as of 31 December 2015 and as of 31 December 2014, a downward change in assumption is not applicable. 4 As the plan does not provide interest credits on retirement savings, a change in assumption is not applicable. 522 Note 28 Pension and other post-employment benefit plans (continued) The table below provides information on the composition and fair value of plan assets of the Swiss pension plan, the UK pension plan and the other pension plans. Composition and fair value of plan assets Swiss plan 31.12.15 31.12.14 Fair value Plan asset allocation % Fair value Plan asset allocation % CHF million Cash and cash equivalents Real estate / property Domestic Investment funds Equity Domestic Foreign Bonds1 Domestic, AAA to BBB– Foreign, AAA to BBB– Foreign, below BBB– Real estate Foreign Other Other investments Total Total fair value of plan assets of which: Bank accounts at UBS and UBS debt instruments UBS shares Securities lent to UBS2 Property occupied by UBS Derivative financial instruments, counterparty UBS2 Structured products, counterparty UBS Quoted in an active market 517 Other 0 Total 517 0 2,647 2,647 699 6,948 2,112 6,109 1,056 0 1,064 0 18,505 0 1,085 0 0 0 63 1,605 15 5,414 699 8,033 2,112 6,109 1,056 63 2,669 15 23,919 31.12.15 23,919 522 38 962 82 (170) 0 Quoted in an active market 829 Other 0 Total 829 0 2,582 2,582 798 6,245 2,591 6,418 104 0 2,513 0 0 994 0 0 0 104 736 17 798 7,239 2,591 6,418 104 104 3,249 17 2 11 3 34 9 26 4 0 11 0 3 11 3 30 11 27 0 0 14 0 100 19,499 4,432 23,931 100 31.12.14 23,931 385 38 921 87 (357) 42 1 The bond credit ratings are primarily based on Standard and Poor’s credit ratings. Ratings AAA to BBB– and below BBB– represent investment grade and non-investment grade ratings, respectively. In cases where credit ratings from other rating agencies were used, these were converted to the equivalent rating in the Standard & Poor’s rating classification. 2 Securities lent to UBS and derivative financial instruments are presented gross of any collateral. Net of collateral, derivative financial instruments amounted to CHF (90) million as of 31 December 2015 (31 December 2014: CHF (123) million). Securities lent to UBS were fully covered by collateral as of 31 December 2015 and 31 December 2014. 523 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) Composition and fair value of plan assets (continued) UK plan 31.12.15 31.12.14 Quoted in an active market 426 98 1,080 1,305 53 189 31 46 (32) 6 3,202 Fair value Other 0 0 0 0 0 0 0 68 123 7 198 Plan asset allocation % Quoted in an active market 192 122 1,042 1,344 179 91 153 43 (33) 0 13 3 32 38 2 6 1 3 3 0 Total 426 98 1,080 1,305 53 189 31 115 91 13 3,400 100 3,133 Fair value Other 0 0 0 0 0 0 0 99 139 10 248 Plan asset allocation % 6 4 31 40 5 3 5 4 3 0 Total 192 122 1,042 1,344 179 91 153 142 106 10 3,381 100 CHF million Cash and cash equivalents Investment funds Equity Domestic Foreign Bonds1 Domestic, AAA to BBB– Domestic, below BBB– Foreign, AAA to BBB– Foreign, below BBB– Real estate Domestic Other Other investments Total fair value of plan assets 1 The bond credit ratings are primarily based on Standard and Poor’s credit ratings. Ratings AAA to BBB– and below BBB– represent investment grade and non-investment grade ratings, respectively. In cases where credit ratings from other rating agencies were used, these were converted to the equivalent rating in the Standard & Poor’s rating classification. 524 Note 28 Pension and other post-employment benefit plans (continued) Composition and fair value of plan assets (continued) Other plans 31.12.15 31.12.14 CHF million Cash and cash equivalents Bonds1 Domestic, AAA to BBB– Domestic, below BBB– Foreign, AAA to BBB– Foreign, below BBB– Private equity Investment funds Equity Domestic Foreign Bonds1 Domestic, AAA to BBB– Domestic, below BBB– Foreign, AAA to BBB– Foreign, below BBB– Real estate Domestic Other Insurance contracts Asset-backed securities Other investments Total fair value of plan assets Quoted in an active market Fair value Other 52 56 60 17 6 0 240 240 134 13 31 3 0 56 0 14 5 926 0 0 0 0 0 0 0 0 0 0 0 0 12 42 17 0 0 70 Total 52 56 60 17 6 0 240 240 134 13 31 3 12 98 17 14 5 Weighted average plan asset allocation % Fair value Quoted in an active market Other 5 6 6 2 1 0 24 24 13 1 3 0 1 10 2 1 0 32 104 10 24 3 0 250 258 142 13 32 4 0 66 0 17 5 0 0 0 0 0 0 0 0 0 0 0 0 13 39 17 0 0 68 Weighted average plan asset allocation % 3 10 1 2 0 0 24 25 14 1 3 0 1 10 2 2 0 100 Total 32 104 10 24 3 0 250 258 142 13 32 4 13 105 17 17 5 1,029 997 100 961 1 The bond credit ratings are primarily based on Standard and Poor’s credit ratings. Ratings AAA to BBB– and below BBB– represent investment grade and non-investment grade ratings, respectively. In cases where credit ratings from other rating agencies were used, these were converted to the equivalent rating in the Standard & Poor’s rating classification. 525 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) b) Post-retirement medical and life insurance plans In the US and in the UK, UBS offers post-retirement medical benefits that contribute to the health care coverage of certain employees and their beneficiaries after retirement. The UK post-retirement medical plan is closed to new entrants. In the US, in addition to post-retirement medical benefits, UBS also provides post-retirement life insurance benefits to certain employees. The post-retirement medical benefits in the UK and the US cover all types of medical expenses including, but not lim- ited to, the cost of doctor visits, hospitalization, surgery and phar- maceuticals. These plans are not pre-funded plans and costs are recognized as incurred. In the US, the retirees also contribute to the cost of the post-retirement medical benefits. In 2014, UBS announced changes to the US post-retirement medical plans in relation to a reduction or elimination of the sub- sidy provided for medical benefits. This change reduced the post- retirement benefit obligation by CHF 33 million, resulting in a cor- responding gain recognized in the income statement in 2014. Further in 2014, UBS announced changes to the US post- retirement life insurance plans in relation to an elimination of the US post-retirement life insurance policy. This change reduced the post-retirement benefit obligation by CHF 8 million, resulting in a corresponding gain recognized in the income statement in 2014. The employer contributions expected to be made to the post- retirement medical and life insurance plans in 2016 are estimated to be CHF 6 million. The table on the following page provides an analysis of the net asset / liability recognized on the balance sheet for post-retirement medical and life insurance plans from the beginning to the end of the year, as well as an analysis of amounts recognized in net profit and in other comprehensive income. In 2015, disclosures within this Note have been expanded to separately present UK post-retirement medical plan information, which was previously presented together with the US post-retire- ment medical plans. Comparative information was adjusted accordingly. 526 Note 28 Pension and other post-employment benefit plans (continued) Post-retirement medical and life insurance plans CHF million For the year ended Post-retirement benefit obligation at the beginning of the year Current service cost Interest expense Plan participant contributions Remeasurements of post-retirement benefit obligation of which: actuarial (gains) / losses arising from changes in demographic assumptions of which: actuarial (gains) / losses arising from changes in financial assumptions of which: experience (gains) / losses1 Past service cost related to plan amendments Benefit payments2 Foreign currency translation Post-retirement benefit obligation at the end of the year of which: amounts owing to active members of which: amounts owing to deferred members of which: amounts owing to retirees Fair value of plan assets at the end of the year Net post-retirement benefit asset / (liability) Analysis of amounts recognized in net profit Current service cost Interest expense related to post-retirement benefit obligation Past service cost related to plan amendments Net periodic cost Analysis of gains / (losses) recognized in other comprehensive income Remeasurement of post-retirement benefit obligation Total gains / (losses) recognized in other comprehensive income, before tax of which: gains / (losses) recognized in other comprehensive income attributable to UBS Group AG shareholders of which: gains / (losses) recognized in other comprehensive income attributable to non-controlling interests UK US Total 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 32 0 1 0 (6) 2 (1) (7) 0 (1) (2) 25 5 0 20 0 (25) 0 1 0 1 6 6 6 0 28 53 87 85 114 0 1 0 3 0 4 0 0 (2) 1 32 12 0 21 0 (32) 0 1 0 2 (3) (3) (3) 0 0 2 2 9 2 (2) 9 0 (8) 1 59 0 0 59 0 0 3 2 2 4 5 (7) (41) (9) 8 53 0 0 53 0 0 3 2 3 4 (3) 2 0 (10) (1) 84 5 0 79 0 0 5 2 5 4 8 (7) (41) (10) 10 85 12 0 74 0 (59) (53) (84) (85) 0 2 0 2 (9) (9) (9) 0 0 3 (41) (37) (2) (2) (2) 0 0 3 0 4 (3) (3) (3) 0 0 5 (41) (36) (5) (5) (5) 0 1 Experience (gains) / losses are a component of actuarial remeasurements of the post-retirement benefit obligation which reflect the effects of differences between the previous actuarial assumptions and what has actu- ally occurred. 2 Benefit payments are funded by employer contributions and plan participant contributions. 527 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) The post-retirement benefit obligation is determined by using the assumed average health care cost trend rate, the discount rate and the life expectancy. On a country-by-country basis, the same discount rate is used for the calculation of the post-retirement benefit obligation from medical and life insurance plans as for the defined benefit obligations arising from pension plans. UBS regularly reviews the actuarial assumptions used in calcu- lating its post-retirement benefit obligations to determine their continuing relevance. In 2015, UBS enhanced methodologies and refined approaches used to estimate various actuarial assump- tions. These improvements in estimates resulted in a net increase in the post-retirement benefit obligation. The discount rate and the assumed average health care cost trend rates are presented in the table below. The basis for life expectancy assumptions is the same as provided for defined ben- efit pension plans in Note 28a. Principal weighted average actuarial assumptions used (%)1 Assumptions used to determine post-retirement benefit obligations at the end of the year For the year ended Discount rate Average health care cost trend rate – initial Average health care cost trend rate – ultimate 1 The assumptions for life expectancies are provided within Note 28a. UK US 31.12.15 31.12.14 31.12.15 31.12.14 3.90 5.10 5.10 3.69 5.50 5.50 4.23 6.75 5.00 3.93 7.00 5.00 Volatility arises in the post-retirement benefit obligation for each of the post-retirement medical and life insurance plans due to the following actuarial assumptions applied in the measure- ment of the post-retirement benefit obligation: – Discount rate: similar as for defined benefit pension plans, a decrease in the yield of high-quality corporate bonds will increase the post-retirement benefit obligation for these plans. Conversely, an increase in the yield of high-quality corporate bonds will decrease the post-retirement benefit obligation for these plans. – Average health care cost trend rate: an increase in health care costs would generally increase the post-retirement benefit obligation. Sensitivity analysis of significant actuarial assumptions1 – Life expectancy: as some plan participants have lifetime bene- fits under these plans, an increase in life expectancy would increase the post-retirement benefit obligation. The table below presents a sensitivity analysis for each signifi- cant actuarial assumption showing how the post-retirement ben- efit obligation would have been affected by changes in the rele- vant actuarial assumption that were reasonably possible at the balance sheet date. CHF million Discount rate Increase by 50 basis points Decrease by 50 basis points Average health care cost trend rate Increase by 100 basis points Decrease by 100 basis points Life expectancy Increase in longevity by one additional year Increase / (decrease) in post-retirement benefit obligation UK US 31.12.15 31.12.14 31.12.15 31.12.14 (1) 2 3 (3) 2 (2) 2 4 (4) 2 (3) 3 1 (1) 5 (2) 2 (1) 1 5 1 The sensitivity analyses are based on a change in one assumption while holding all other assumptions constant, so that interdependencies between the assumptions are excluded. c) Defined contribution plans UBS sponsors a number of defined contribution plans in locations outside of Switzerland. The locations with significant defined con- tribution plans 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 are recognized as an expense which, for the years ended 31 December 2015, 2014 and 2013, amounted to CHF 239 mil- lion, CHF 244 million and CHF 236 million, respectively. 528 Note 28 Pension and other post-employment benefit plans (continued) d) Related party disclosure UBS is the principal provider of banking services for the pension fund of UBS in Switzerland. In this function, UBS is engaged to execute most of the pension fund’s banking activities. These activ- ities can include, but are not limited to, trading and securities lending and borrowing. The non-Swiss UBS pension funds do not have a similar banking relationship with UBS. 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 10 years each. During 2009, UBS renegotiated one of the lease con- tracts, which reduced UBS’s remaining lease commitment. In 2013, after the first five years, the early break options for most of the leases were not exercised, which resulted in an increase in the minimum commitment for an additional five years. As of 31 December 2015, the minimum commitment toward the Swiss pension fund under the related leases is approximately CHF 11 million (31 December 2014: CHF 14 million). The following amounts have been received or paid by UBS from and to the pension funds in respect of these banking activi- ties and arrangements. Related party disclosure CHF million Received by UBS Fees Paid by UBS Rent Interest Dividends and capital repayments The transaction volumes in UBS shares and UBS debt instruments are as follows. Transaction volumes – UBS shares and UBS debt instruments Financial instruments bought by pension funds UBS shares1 (in thousands of shares) UBS debt instruments (par values in CHF million) Financial instruments sold by pension funds or matured UBS shares1 (in thousands of shares) UBS debt instruments (par values in CHF million) For the year ended 31.12.15 31.12.14 31.12.13 33 5 (1) 14 33 6 0 4 33 8 1 2 For the year ended 31.12.15 31.12.14 1,544 3 2,255 4 2,092 4 1,735 4 1 Represents purchases / sales of UBS AG shares up to 28 November 2014 and purchases / sales of UBS Group AG shares thereafter. Refer to Note 32 for more information. UBS defined contribution pension funds held 15,782,722 UBS Group AG shares with a fair value of CHF 306 million as of 31 December 2015 (31 December 2014: 16,253,804 UBS Group AG shares with a fair value of CHF 276 million). More information on the fair value of the plan assets of the defined benefit pension plans are disclosed in Note 28a. 529 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 29 Equity participation and other compensation plans a) Plans offered The UBS Group operates several equity participation and other compensation plans to align the interests of executives, managers and staff with the interests of shareholders. Some plans (e.g., Equity Plus and Equity Ownership Plan) are granted 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. Certain plans are used in specific coun- tries, business areas (e.g., awards granted within Wealth Manage- ment Americas), or are only offered to members of the Group Executive Board (GEB). The UBS Group operates compensation plans on a mandatory, discretionary and voluntary basis. The explanations below provide a general description of the terms of the most significant plans offered by the Group which relate to the performance year 2015 (awards granted in 2016) and those from prior years that were partly expensed in 2015. ➔ Refer to Note 1a item 25 for a description of the accounting policy related to equity participation and other compensation plans Mandatory share-based compensation plans Equity Ownership Plan (EOP): Select employees receive a portion of their annual performance-related compensation above a cer- tain threshold in the form of an EOP award in UBS shares, notional shares or UBS performance shares (notional shares that are sub- ject to performance conditions). From February 2014 onwards, only notional shares and UBS performance shares have been granted. Since 2011, performance shares have been granted to EOP participants who are Key Risk-Takers, Group Managing Direc- tors (GMD) or employees whose incentive awards exceed a cer- tain threshold, and since 2013 to GEB members. For performance shares granted in respect of the performance years 2012 and thereafter, the performance conditions are based on the Group return on tangible equity and the divisional return on attributed equity (for Corporate Center participants, the return on attributed equity of the Group excluding Corporate Center). Awards issued outside the normal performance year cycle, such as replacement awards or sign-on awards, may be offered in deferred cash under the EOP plan rules. Awards in UBS shares allow for voting and dividend rights dur- ing the vesting period, whereas notional and performance shares represent a promise to receive UBS shares at vesting and do not carry voting rights during the vesting period. Notional and perfor- mance shares granted before February 2014 have no rights to dividends, whereas for awards granted since February 2014 employees are entitled to receive a dividend equivalent that may be paid in notional shares and / or cash, and which will vest on the same terms and conditions as the award. Awards granted in the form of UBS shares, notional shares and performance shares are settled by delivering UBS shares at vesting, except in countries where this is not permitted for legal or tax reasons. EOP awards granted until 2012 generally vested in three equal increments over a three-year vesting period and awards granted since March 2013 generally vest in equal increments in years two and three following grant. The awards are generally forfeitable upon, among other circumstances, voluntary termination of employ- ment with UBS. Compensation expense is recognized in the per- formance 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): Up to 2012 (performance year 2011), GEB members and selected senior exec- utives received a portion of their mandatory deferral in UBS shares or notional shares, which vest in one-fifth increments over a five- year vesting period and are forfeitable if certain conditions are not met. Awards granted in 2011 and 2012 are subject to the same performance conditions as performance shares granted under the EOP. They will only vest in full if the participant’s business division is profitable (for Corporate Center participants, the Group as a whole must be profitable) in the financial year preceding sched- uled vesting. Awards granted under SEEOP are settled by deliver- ing UBS shares at vesting. Compensation expense is recognized on the same basis as for share-settled EOP awards. No new SEEOP awards were granted since 2012. From 2013 (performance year 2012), GEB members have received EOP performance awards. Incentive Performance Plan (IPP): In 2010, GEB members and certain other senior employees received part of their annual incen- tive in the form of performance shares granted under the IPP. Each performance share granted was a contingent right to receive between one and three UBS shares at vesting, depending on the achievement of share price targets. Vesting was subject to contin- ued employment with UBS and certain other conditions. The IPP awards vested in March 2015. Compensation expense was recog- nized on a tiered basis from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. IPP was a one-time plan granted in 2010 only. 530 Note 29 Equity participation and other compensation plans (continued) Performance Equity Plan (PEP): In 2012 GEB members received part of their annual incentive in the form of performance shares granted under the PEP. Each performance share was a contingent right to receive between zero and two UBS shares at vesting, depending on the achievement of Economic Profit (EP) and Total Shareholder Return (TSR) targets. Vesting was subject to contin- ued employment with UBS and certain other conditions. The last PEP awards vested in March 2015. Compensation expense was recognized on a tiered basis from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. No PEP awards were granted after 2012. Special Plan Award Program for the Investment Bank 2012 (SPAP): In April 2012, certain Managing Directors and Group Managing Directors of the Investment Bank were granted an award of UBS shares which vested in 2015. Vesting was subject to performance conditions, continued employment with the firm and certain other conditions. Compensation expense was recog- nized from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. Role-based allowances (RBA): In line with market practice, in certain countries, employees are entitled to receive a role-based allowance in addition to their base salary. This allowance reflects the market value of a specific role and is only paid as long as the employee is within such a role. The allowance is generally paid in cash and above a threshold it is granted in blocked shares. Such shares will be unblocked in equal instalments after two and three years. The compensation expense is recognized in the year of grant. Mandatory deferred cash compensation plans Deferred Contingent Capital Plan (DCCP): The DCCP is a manda- tory performance award deferral plan for all employees whose total compensation exceeds a certain threshold. For awards granted up to January 2015, employees received part of their annual incentive in the form of notional bonds, which are a right to receive a cash payment at vesting. For awards granted for the performance years 2014 and 2015, employees have been awarded notional additional tier 1 (AT1) instruments, which at the discretion of UBS can either be settled in the form of a cash payment or a perpetual, marketable AT1 instrument. Awards vest in full after five years, subject to there being no trigger event. Awards granted under the DCCP forfeit if UBS’s phase-in common equity tier 1 capital ratio falls below 10% for GEB members and 7% for all other employees. In addition, awards are also forfeited if a viability event occurs, that is, if FINMA pro- vides a written notice to UBS that the DCCP awards must be written down to prevent an insolvency, bankruptcy or failure of UBS, or if UBS receives a commitment of extraordinary support from the public sector that is necessary to prevent such an event. For GEB members, an additional performance condition applies. If UBS does not achieve an adjusted profit before tax for any year during the vesting period, GEB members forfeit 20% of their award for each loss-making year. For awards granted up to Janu- ary 2015, interest on the awards is paid annually for perfor- mance years in which the firm generates an adjusted profit before tax. For awards granted since February 2015 interest pay- ments are discretionary. The awards are subject to standard for- feiture and harmful acts provisions, including voluntary termina- tion of employment with UBS. 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 from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. Long-Term Deferred Retention Senior Incentive Scheme (LTDRSIS): Awards granted under the LTDRSIS are granted to employees in Australia and represent a profit share amount based on the profitability of the Australian business. Awards vest after three years and include an arrangement which allows for unpaid installments to be reduced if the business has a loss during the calendar year preceding vesting. The awards are generally forfeit- able upon voluntary termination of employment with UBS. Com- pensation 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 rat- ably from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. 2014 was the last year awards were granted under LTDRSIS. Asset Management Equity Ownership Plan: In order to align their compensation with the performance of the funds they man- age, Asset Management employees who receive EOP awards receive them in the form of cash-settled notional funds. The amount depends on the value of the relevant underlying Asset Management funds at the time of vesting. The awards are gener- ally forfeitable upon, among other circumstances, voluntary ter- mination of employment with UBS. Compensation expense 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. Wealth Management Americas financial advisor compensation Financial advisor compensation plans generally provide for cash payments and deferred awards that are formula driven and fluc- tuate in proportion to the level of business activity. 531 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 29 Equity participation and other compensation plans (continued) UBS also may enter into compensation commitments with cer- tain new financial advisors primarily as a recruitment incentive and to incentivize certain eligible active financial advisors to achieve specified revenue production and other performance thresholds. The compensation may be earned and paid to the employee during a period of continued employment and may be forfeited under certain circumstances. GrowthPlus is a program for selected financial advisors whose revenue production and length of service exceeds defined thresh- olds from 2010 through 2017. Compensation arrangements were granted in 2010, 2011 and 2015, with potential arrangements to be granted in 2018. The awards vest ratably over seven years from grant with the exception of the 2018 arrangement, which vests over five years. PartnerPlus is a mandatory deferred cash compensation plan for certain eligible financial advisors. Awards (UBS company con- tributions) are based on a predefined formula during the perfor- mance year. Participants are also allowed to voluntarily contribute additional amounts otherwise payable during the year, up to a certain percentage of their pay, which are vested upon contribu- tion. Company contributions and voluntary contributions are credited with interest in accordance with the terms of the plan. Rather than being credited with interest, a participant may elect to have voluntary contributions, along with vested company con- tributions, credited with notional earnings based on the perfor- mance of various mutual funds. Company contributions and interest on both company and voluntary contributions ratably vest in 20% increments six to ten years following grant date. Com- pany contributions and interest / notional earnings on both com- pany and voluntary contributions are forfeitable under certain circumstances. Compensation expense for awards is recognized in the performance year if the employee meets the qualifying separation eligibility requirements at the date of grant. Otherwise, compensation expense for awards is recognized ratably com- mencing in the performance year to the earlier of the vesting date or the qualifying separation eligibility date of the employee. Com- pensation expense for voluntary contributions is recognized in the year of deferral. 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 employ- ment with UBS. Compensation expense is recognized from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. No options or SARs awards have been granted since 2009. 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 the performance award and / or monthly through regular deduc- tions from salary. If the shares purchased are held for three years, and in general if the employee remains in employment, the notional UBS shares vest. For notional UBS shares granted from April 2014 onwards, employees are entitled to receive a dividend equivalent which may be paid in either notional shares and / or cash. Prior to 2010, instead of notional shares participants received two UBS options for each share they purchased under this plan. The options 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 deliver- ing UBS shares, except in countries where this is not permitted for legal reasons. Compensation expense for Equity Plus is recognized from the grant date to the earlier of the vesting date or the retire- ment eligibility date of the employee. Share delivery obligations As of 31 December 2015, total future share delivery obligations in relation to employee share-based compensation awards were 138 million shares (31 December 2014: 131 million shares), taking the respective performance conditions into account. Share delivery obligations related to unvested and vested notional share awards, options and stock appreciation rights. 532 Note 29 Equity participation and other compensation plans (continued) As of 31 December 2015, UBS held 98 million UBS Group AG treasury shares (31 December 2014: 88 million) which were avail- able to satisfy the share delivery obligations. Additionally, 131 mil- lion UBS Group AG shares (31 December 2014: 136 million) to be issued out of conditional share capital were available to satisfy the share delivery obligation specifically related to options and stock appreciation rights. Treasury shares held or newly issued shares are delivered to employees at exercise or vesting. b) Effect on the income statement Effect on the income statement for the financial year and future periods The following table summarizes the compensation expenses rec- ognized for the year ended 31 December 2015 and deferred com- pensation expenses that will be recognized as an expense in the income statements of 2016 and later. The deferred compensation expenses in the table also include vested and non-vested awards granted mainly in February 2016, which relate to the performance year 2015. Personnel expenses – Recognized and deferred1 Personnel expenses for the year ended 2015 Personnel expenses deferred to 2016 and later CHF million Performance awards Cash performance awards Deferred Contingent Capital Plan (DCCP) Deferred cash plans (DCP and other cash plans) Equity Ownership Plan (EOP / SEEOP) – UBS shares Incentive Performance Plan (IPP) Total UBS share plans Equity Ownership Plan (EOP) – notional funds Total performance awards Variable compensation Variable compensation – other Financial advisor compensation – cash payments Compensation commitments with recruited financial advisors GrowthPlus and other deferral plans UBS share plans Wealth Management Americas: Financial advisor compensation5 Total Expenses relating to awards for 2015 Expenses relating to awards for prior years 2,073 172 0 261 0 261 28 2,535 184 2,460 43 132 37 2,673 5,391 (94) 258 12 461 0 461 38 675 162 0 692 142 45 879 1,716 Relating to awards for 2015 Relating to awards for prior years 0 343 0 524 0 524 34 900 2483 0 940 710 66 1,716 2,864 0 446 3 338 0 338 35 822 2934 0 1,899 456 115 2,470 3,585 Total 1,980 429 12 722 0 722 67 3,210 3462 2,460 735 275 82 3,552 7,108 Total 0 789 3 861 0 861 69 1,722 541 0 2,839 1,166 182 4,186 6,449 1 Total share-based personnel expenses recognized for the year ended 31 December 2015 were CHF 1,028 million and were comprised of UBS share plans of CHF 807 million, Equity Ownership Plan – notional funds of CHF 67 million, related social security costs of CHF 56 million and other compensation plans (reported within Variable compensation – other) of CHF 98 million. 2 Includes replacement payments of CHF 76 million (of which CHF 65 million related to prior years), forfeiture credits of CHF 86 million (all related to prior years), severance payments of CHF 157 million (all related to 2015) and retention plan and other payments of CHF 198 million (of which CHF 183 million related to prior years). 3 Includes DCCP interest expense of CHF 160 million for DCCP awards 2015 (granted in 2016). 4 Includes DCCP interest expense of CHF 200 million for DCCP awards 2014, 2013 and 2012 (granted in 2015, 2014 and 2013). 5 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 charges related to compensation commitments with financial advisors entered into 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. 533 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 29 Equity participation and other compensation plans (continued) Personnel expenses – Recognized and deferred1 CHF million Performance awards Cash performance awards Deferred Contingent Capital Plan (DCCP) Deferred cash plans (DCP and other cash plans) Equity Ownership Plan (EOP / SEEOP) – UBS shares Incentive Performance Plan (IPP) Total UBS share plans Equity Ownership Plan (EOP) – notional funds Total performance awards Variable compensation Variable compensation – other Financial advisor compensation – cash payments Compensation commitments with recruited financial advisors GrowthPlus and other deferral plans UBS share plans Wealth Management Americas: Financial advisor compensation5 Total Personnel expenses for the year ended 2014 Personnel expenses deferred to 2015 and later Expenses relating to awards for 2014 Expenses relating to awards for prior years Relating to awards for 2014 Relating to awards for prior years Total 1,822 (108) 1,714 155 0 215 0 215 24 2,216 260 2,396 39 81 23 2,539 5,015 194 12 444 21 465 41 604 206 0 636 153 57 846 1,656 349 12 659 21 680 65 2,820 4662 2,396 675 234 80 3,385 6,671 0 312 0 459 0 459 36 807 3073 0 524 189 41 754 1,868 0 386 8 367 0 367 33 794 3404 0 2,058 528 143 2,729 3,863 Total 0 698 8 826 0 826 69 1,601 647 0 2,582 717 184 3,483 5,731 1 Total share-based personnel expenses recognized for the year ended 31 December 2014 were CHF 999 million and were comprised of UBS share plans of CHF 800 million, Equity Ownership Plan – notional funds of CHF 65 million, related social security costs of CHF 41 million and other compensation plans (reported within Variable compensation – other) of CHF 93 million. 2 Includes replacement payments of CHF 81 million (of which CHF 70 million related to prior years), forfeiture credits of CHF 70 million (all related to prior years), severance payments of CHF 162 million (all related to 2014) and retention plan and other payments of CHF 292 million (of which CHF 206 million related to prior years). 3 Includes DCCP interest expense of CHF 121 million for DCCP awards 2014 (granted in 2015). 4 Includes DCCP interest expense of CHF 161 million for DCCP awards 2013 and 2012 (granted in 2014 and 2013). 5 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 charges related to compensation commitments with financial advisors entered into 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. During 2015 and 2014, UBS accelerated the recognition of expenses for certain deferred compensation arrangements relat- ing to employees that were affected by restructuring programs. Based on the redundancy provisions of the plan rules, these employees retain their deferred compensation awards. However, as the employees are not required to provide future service, com- pensation expense relating to these awards was accelerated to the termination date based on the shortened service period. The amounts accelerated and recognized relating to share-based pay- ment awards in 2015 and 2014 were CHF 9 million and CHF 38 million respectively, and the amounts related to deferred cash awards were CHF 10 million and CHF 29 million, respectively. UBS also shortened the service period for certain employees in accordance with the mutually agreed termination provisions of their deferred compensation awards. Expense recognition was accelerated to the termination date. The amounts acceler- ated and recognized relating to share-based payment awards in 2015 and 2014 were CHF 6 million and CHF 11 million, respec- tively, and the amounts related to deferred cash awards were CHF 11 million and CHF 8 million, respectively. 534 Note 29 Equity participation and other compensation plans (continued) Personnel expenses – Recognized and deferred CHF million Performance awards Cash performance awards Deferred Contingent Capital Plan (DCCP) Deferred cash plans (DCP and other cash plans) Equity Ownership Plan (EOP / SEEOP) – UBS shares Performance Equity Plan (PEP) Incentive Performance Plan (IPP) Total UBS share plans Equity Ownership Plan (EOP) – notional funds Total performance awards Variable compensation Variable compensation – other Financial advisor compensation – cash payments Compensation commitments with recruited financial advisors GrowthPlus and other deferral plans UBS share plans Wealth Management Americas: Financial advisor compensation5 Total Personnel expenses for the year ended 2013 Personnel expenses deferred to 2014 and later Expenses relating to awards for 2013 Expenses relating to awards for prior years 1,942 152 2 190 0 0 190 19 2,305 152 2,219 33 62 20 2,334 4,791 (30) 96 53 466 3 33 502 60 681 136 0 605 132 69 806 1,623 Relating to awards for 2013 Relating to awards for prior years 0 348 7 520 0 0 520 37 912 3403 0 440 107 45 592 1,844 0 230 12 307 0 21 328 36 606 3984 0 2,098 564 165 2,827 3,831 Total 1,912 248 55 656 3 33 692 79 2,986 2882 2,219 638 194 89 3,140 6,414 Total 0 578 19 827 0 21 848 73 1,518 738 0 2,538 671 210 3,419 5,675 1 Total share-based personnel expenses recognized for the year ended 31 December 2013 were CHF 1.042 million and were comprised of UBS share plans of CHF 787 million, Equity Ownership Plan – notional funds of CHF 79 million, related social security costs of CHF 65 million and other compensation plans (reported within Variable compensation – other) of CHF 111 million. 2 Includes replacement payments of CHF 78 million (of which CHF 72 million related to prior years), forfeiture credits of CHF 146 million (all related to prior years), severance payments of CHF 114 million (all related to 2013) and retention plan and other payments of CHF 242 million (of which CHF 210 million related to prior years). 3 Includes DCCP interest expense of CHF 101 million for DCCP awards 2013 (granted in 2014). 4 Includes DCCP interest expense of CHF 109 million for DCCP awards 2012 (granted in 2013). 5 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 charges related to compensation commitments with financial advisors entered into 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 notional funds granted under EOP) The total share-based personnel expenses recognized for the years ended 31 December 2015, 2014 and 2013 were CHF 1,028 million, CHF 999 million and CHF 1,042 million, respectively. This includes the current period expense, amortization and related social security costs for awards issued in prior periods and perfor- mance year expensing 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 2015 relating to prior years to be recognized in future periods is CHF 553 million and will be recognized as personnel expenses over a weighted average period of 1.9 years. This includes UBS share plans, the Equity Ownership Plan (notional funds), other variable compensation and the Equity Plus Plan. Total deferred compensation amounts included in the 2015 table differ from this amount as the deferred compensation amounts also include non-vested awards granted in February 2016 related to the performance year 2015. Actual payments to participants in cash-settled share-based plans, including amounts granted as notional funds issued under the EOP, for the years ended 31 December 2015 and 2014 were CHF 98 million and CHF 90 million, respectively. The total carry- ing amount of the liability related to these plans was CHF 170 million as of 31 December 2015 and CHF 143 million as of 31 December 2014. 535 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 29 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) 15 16 14 16 17 Number of shares 2015 168,778,334 66,444,272 (84,411,907) (6,625,596) 144,185,104 58,920,339 Number of shares 2014 186,633,491 58,925,185 (69,921,325) (6,859,017) 168,778,334 48,749,489 Weighted average grant date fair value (CHF) 15 18 16 16 15 The fair value of shares that became legally vested and were distributed (i.e., all restrictions were fulfilled) during the years ended 2015 and 2014 was CHF 1,443 million and CHF 1,269 million, respectively. Movements in performance shares granted under the IPP are as follows: Incentive Performance Plan Forfeitable, at the beginning of the year Vested during the year Forfeited during the year Forfeitable, at the end of the year of which: performance shares vested for accounting purposes Forfeitable, at the beginning of the year Vested during the year Forfeited during the year Forfeitable, at the end of the year of which: performance shares vested for accounting purposes 2015 Weighted average fair value of IPP performance shares at grant date (CHF)1 22 22 22 22 22 22 22 22 Number of performance shares 12,742,168 (12,017,543)2 (673,468) 51,1573 51,157 2014 13,151,023 (240,064) (168,791) 12,742,1683 12,742,168 1 The weighted average fair value takes into account the applicable performance conditions and the range of possible outcomes. 2 The corresponding number of UBS shares distributed in 2015 was 12,017,543. In 2014 it amounted to 240,064. 3 As of 31 December 2015 and 31 December 2014, the number of deliverable UBS shares was equal to the number of forfeitable performance shares. 536 Note 29 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 Vested during the year Forfeited during the year Forfeitable, at the end of the year of which: performance shares vested for accounting purposes Forfeitable, at the beginning of the year Vested during the year Forfeited during the year Forfeitable, at the end of the year of which: performance shares vested for accounting purposes 2015 Weighted average fair value of PEP performance shares at grant date (CHF)1 13 2014 13 13 16 19 19 13 Number of performance shares 767,531 (337,718)2 (429,813) 03 0 1,380,958 (613,427) 0 767,5313 767,531 1 The weighted average fair value takes into account the applicable performance conditions and the range of possible outcomes. 2 The corresponding number of UBS shares distributed in 2015 was 337,718. In 2014 it amounted to 245,371. 3 As of 31 December 2015, the number of deliverable UBS shares was zero as the remaining awards vested in 2015. As of 31 December 2014, the number of deliverable UBS shares was 337,714 based on the applicable performance conditions. UBS option awards Movements in option awards were as follows: UBS option awards Outstanding, at the beginning of 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 2015 108,396,107 (2,971,211) (113,015) (24,463,664) 80,848,217 80,848,217 Weighted average exercise price (CHF)1 45 13 47 48 45 45 Number of options 2014 133,170,139 (1,498,620) (71,376) (23,204,036) 108,396,107 108,396,107 Weighted average exercise price (CHF)1 45 13 41 48 45 45 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 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) 31.12.15 31.12.14 19 19.5 18 8.0 537 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 29 Equity participation and other compensation plans (continued) The following table provides additional information about options outstanding and options exercisable as of 31 December 2015: 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) 8,373,024 7,947,669 23,259,254 1,525,691 1,724,376 3,363,167 34,646,511 80,839,692 0 8,525 8,525 11.37 19.09 31.48 35.67 53.65 60.14 67.52 0.00 50.30 68.3 12.5 0.0 0.0 0.0 0.0 0.0 80.8 0.0 0.0 0.0 2.9 2.9 2.0 2.0 1.7 1.1 0.7 0.0 0.1 8,373,024 7,947,669 23,259,254 1,525,691 1,724,376 3,363,167 34,646,511 80,839,692 0 8,525 8,525 11.37 19.09 31.48 35.67 53.65 60.14 67.52 0.00 50.30 68.3 12.5 0.0 0.0 0.0 0.0 0.0 80.8 0.0 0.0 0.0 2.9 2.9 2.0 2.0 1.7 1.1 0.7 0.0 0.1 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 36.91–45.00 45.01–55.00 36.91–55.00 UBS SAR awards Movements in SAR awards were as follows: UBS SARs awards Outstanding, at the beginning of 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 2015 17,689,089 (4,917,534) (14,500) (237,290) 12,519,765 12,519,765 Weighted average exercise price (CHF) 12 11 12 12 12 12 Number of SARs 2014 21,444,016 (3,575,927) (14,500) (164,500) 17,689,089 17,689,089 Weighted average exercise price (CHF) 12 11 14 12 12 12 The following table provides additional information about SARs exercises 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) 31.12.15 31.12.14 19 38.9 18 22.8 538 Note 29 Equity participation and other compensation plans (continued) The following table provides additional information about SARs outstanding as of 31 December 2015: 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) 12,161,765 4,000 42,000 312,000 12,519,765 11.34 14.22 16.80 19.25 99.5 0.0 0.1 0.1 99.7 0.4 3.5 3.4 3.7 12,161,765 4,000 42,000 312,000 12,519,765 11.34 14.22 16.80 19.25 99.5 0.0 0.1 0.1 99.7 0.4 3.5 3.4 3.7 Range of exercise prices CHF 9.35–12.50 12.51–15.00 15.01–17.50 17.51–20.00 9.35–20.00 d) Valuation UBS share awards UBS measures compensation expense based on the average mar- ket price of the UBS share on the grant date as quoted on the SIX Swiss Exchange, taking into consideration post-vesting sale and hedge restrictions, non-vesting conditions and market conditions, where applicable. 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 purchasing an at-the-money European put option for the term of the transfer restriction. The weighted average dis- count for share and performance share awards granted during 2015 is approximately 16.7% (2014: 12.9%) 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 dividends to be paid between the grant date and distribution. UBS options and SARs awards The fair values of options and SARs have been determined using a standard closed-formula option valuation model. The expected term of each instrument is calculated based on historical 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. Expected future dividends are derived from traded UBS options or from the historical dividend pattern. No options or SARs have been granted since 2009. 539 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 30 Interests in subsidiaries and other entities a) Interests in subsidiaries UBS defines its significant subsidiaries as those entities that, either individually or in aggregate, contribute significantly to the Group’s financial position or results of operations, based on a number of criteria, including the subsidiaries’ equity and their contribution to the Group’s total assets and profit and loss before tax, in accordance with the requirements set by IFRS 12, Swiss regulations and the regulations of the US Securities and Exchange Commission (SEC). Individually significant subsidiaries The two tables below list the Group’s individually significant sub- sidiaries as of 31 December 2015. Unless otherwise stated, the subsidiaries listed below have share capital consisting solely of ordinary shares, which are held fully by the Group, and the pro- portion of ownership interest held is equal to the voting rights held by the Group. The country where the respective registered office is located is also generally the principal place of business. Pillar 3 | Subsidiaries of UBS Group AG as of 31 December 2015 Company UBS AG Registered office Zurich and Basel, Switzerland UBS Business Solutions AG Zurich, Switzerland UBS Group Funding (Jersey) Ltd. St. Helier, Jersey Share capital in million CHF CHF CHF 385.8 1.0 0.0 Pillar 3 | Individually significant subsidiaries of UBS AG as of 31 December 2015 Company Registered office Primary business division UBS Americas Holding LLC Wilmington, Delaware, USA Corporate Center UBS Bank USA Salt Lake City, Utah, USA Wealth Management Americas UBS Financial Services Inc. Wilmington, Delaware, USA Wealth Management Americas UBS Limited UBS Securities LLC UBS Switzerland AG London, United Kingdom Wilmington, Delaware, USA Zurich, Switzerland Investment Bank Investment Bank Personal & Corporate Banking Share capital in million 1,200.01 0.0 USD USD USD GBP USD CHF 0.0 226.6 1,283.12 10.0 Equity interest accumulated in % 100.0 100.0 100.0 Equity interest accumulated in % 100.0 100.0 100.0 100.0 100.0 100.0 1 Comprised of common share capital of USD 1,000 and non-voting preferred share capital of USD 1,200,000,000. 2 Comprised of common share capital of USD 100,000 and non-voting preferred share capital of USD 1,283,000,000. In 2015, UBS Group AG increased its ownership interest in UBS AG to 100% following the successful completion of the proce- dure under article 33 of the Swiss Stock Exchange Act (SESTA procedure). In addition, UBS Business Solutions AG was estab- lished as a direct subsidiary of UBS Group AG, to act as the Group service company. Also in 2015, UBS transferred its Personal & Corporate Banking and Wealth Management business booked in Switzerland from UBS AG to UBS Switzerland AG, a newly formed bank subsidiary. ➔ Refer to Note 32 for more information UBS Americas Holding LLC, UBS Limited and UBS Switzerland AG are fully held by UBS AG. UBS Bank USA, UBS Financial Ser- vices Inc. and UBS Securities LLC are fully held, directly or indi- rectly, by UBS Americas Holding LLC. 540 Note 30 Interests in subsidiaries and other entities (continued) Other subsidiaries The table below lists other subsidiaries of UBS AG that are not individually significant but that contribute to the Group’s total assets and aggregated profit before tax thresholds and are thereby disclosed in accordance with the requirements set by the SEC. Other subsidiaries of UBS AG as of 31 December 2015 Registered office Primary business division Share capital in million Equity interest accumulated in % Company Topcard Service AG UBS (Italia) SpA UBS (Luxembourg) S.A. UBS Americas Inc. Glattbrugg, Switzerland Personal & Corporate Banking Milan, Italy Luxembourg, Luxembourg Wealth Management Wealth Management Wilmington, Delaware, USA Corporate Center UBS Asset Management (Americas) Inc. Wilmington, Delaware, USA UBS Asset Management (Australia) Ltd UBS Asset Management (Deutschland) GmbH Sydney, Australia Frankfurt, Germany UBS Asset Management (Hong Kong) Limited Hong Kong, Hong Kong UBS Asset Management (Japan) Ltd Tokyo, Japan Asset Management Asset Management Asset Management Asset Management Asset Management Asset Management Asset Management Asset Management Investment Bank Wealth Management Wealth Management Asset Management Asset Management Asset Management Investment Bank Asset Management UBS Asset Management (Singapore) Ltd UBS Asset Management (UK) Ltd UBS Asset Management AG UBS Australia Holdings Pty Ltd UBS Bank, S.A. UBS Beteiligungs-GmbH & Co. KG UBS Card Center AG UBS Credit Corp. UBS Deutschland AG UBS Fund Advisor, L.L.C. Singapore, Singapore London, United Kingdom Zurich, Switzerland Sydney, Australia Madrid, Spain Frankfurt, Germany Glattbrugg, Switzerland Personal & Corporate Banking Wilmington, Delaware, USA Wealth Management Americas Frankfurt, Germany Wealth Management Wilmington, Delaware, USA Wealth Management Americas UBS Fund Mangement (Luxembourg) S.A. Luxembourg, Luxembourg UBS Fund Mangement (Switzerland) AG Basel, Switzerland UBS Hedge Fund Solutions LLC Wilmington, Delaware, USA UBS Italia SIM SpA UBS O’Connor LLC UBS Real Estate Securities Inc. UBS Realty Investors LLC UBS Securities (Thailand) Ltd UBS Securities Australia Ltd UBS Securities Canada Inc. UBS Securities España Sociedad de Valores SA UBS Securities India Private Limited UBS Securities Japan Co., Ltd. UBS Securities Pte. Ltd. UBS Services LLC UBS South Africa (Proprietary) Limited UBS Trust Company of Puerto Rico UBS UK Properties Limited Milan, Italy Dover, Delaware, USA Wilmington, Delaware, USA Investment Bank Boston, Massachusetts, USA Asset Management Bangkok, Thailand Sydney, Australia Toronto, Canada Madrid, Spain Mumbai, India Tokyo, Japan Singapore, Singapore Wilmington, Delaware, USA Sandton, South Africa Hato Rey, Puerto Rico Investment Bank Investment Bank Investment Bank Investment Bank Investment Bank Investment Bank Investment Bank Corporate Center Investment Bank Wealth Management Americas London, United Kingdom Corporate Center 1 Includes a nominal amount relating to redeemable preference shares. CHF EUR CHF USD USD AUD EUR HKD JPY SGD GBP CHF AUD EUR EUR CHF USD EUR USD EUR CHF USD EUR USD USD USD THB AUD CAD EUR INR JPY SGD USD ZAR USD GBP 0.2 95.0 150.0 0.0 0.0 20.11 7.7 150.0 2,200.0 4.0 125.0 0.1 46.7 97.2 568.8 0.1 0.0 176.0 0.0 13.0 1.0 0.1 15.1 1.0 0.0 9.0 500.0 0.31 10.0 15.0 140.0 46,450.0 420.4 0.0 0.0 0.1 132.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 541 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 30 Interests in subsidiaries and other entities (continued) Changes in consolidation scope During 2015, a number of subsidiaries were incorporated in order to improve the resolvability of the Group in response to too big to fail requirements, namely UBS Business Solutions AG, UBS Americas Holding LLC, UBS Switzerland AG and UBS Asset Man- agement AG. UBS Fund Services (Cayman) Ltd and a few smaller subsidiaries of Asset Management were removed from the scope of consolidation as part of the sale of the Alternative Fund Ser- vices business. Non-controlling interests As of 31 December 2015, non-controlling interests mainly com- prised preferred notes issued by UBS AG. Apart from this, non- controlling interests were not material to the Group. As of 31 December 2014, UBS Group AG recognized equity attribut- able to non-controlling interests in relation to the 3.32% of UBS AG shares held by non-controlling shareholders. ➔ Refer to the “Statement of changes in equity” and Note 32 for more information As of 31 December 2015 and 31 December 2014, there were no significant restrictions on UBS’s ability to access or use the assets and settle the liabilities of the Group resulting from protec- tive rights of non-controlling interests. Consolidated structured entities UBS consolidates a structured entity (SE) if it has power over the relevant activities of the entity, exposure to variable returns and the ability to use its power to affect its returns. Consolidated SEs include certain investment funds, securitization vehicles and client investment vehicles. UBS has no individually significant subsidiar- ies that are SEs. Investment fund SEs are generally consolidated when the Group’s aggregate exposure combined with its decision making rights indicate the ability to use such power in a principal capacity. Typically the Group will have decision making rights as fund man- ager, earning a management fee, and will provide seed capital at the inception of the fund or hold a significant percentage of the fund units. Where other investors do not have the substantive ability to remove UBS as decision maker, the Group is deemed to have control and therefore consolidates the fund. Securitization SEs are generally consolidated when the Group holds a significant percentage of the asset backed securities issued by the SE and has the power to remove without cause the servicer of the asset portfolio. Client investment SEs are generally consolidated when the Group has a substantive liquidation right over the SE or a decision right over the assets held by the SE and has exposure to variable returns through derivatives traded with the SE or holding notes issued by the SE. In 2015 and 2014, the Group has not entered into any con- tractual obligation that could require the Group to provide finan- cial support to consolidated SEs. In addition, the Group did not provide support, financial or otherwise, to a consolidated SE when the Group was not contractually obligated to do so, nor has the Group an intention to do so in the future. Further, the Group did not provide support, financial or otherwise, to a previously unconsolidated SE that resulted in the Group controlling the SE during the reporting period. 542 Note 30 Interests in subsidiaries and other entities (continued) Pillar 3 | b) Interests in associates and joint ventures As of 31 December 2015 and 2014, no associate or joint venture was individually material to the Group. In addition, there were no significant restrictions on the ability of associates or joint ventures to transfer funds to UBS Group AG or its subsidiaries in the form of cash dividends or to repay loans or advances made. There were no quoted market prices for any associates or joint ventures of the Group. Pillar 3 | Investments in associates and joint ventures CHF million Carrying amount at the beginning of the year Additions Disposals Share of comprehensive income of which: share of net profit1, 2 of which: share of other comprehensive income3 Dividends received Foreign currency translation Carrying amount at the end of the year of which: associates of which: UBS Securities Co. Limited, Beijing4 of which: SIX Group AG, Zurich5 of which: other associates of which: joint ventures 31.12.15 31.12.14 927 12 (2) 151 169 (18) (114) (20) 954 925 411 413 102 29 842 1 (2) 103 94 9 (54) 38 927 900 404 406 90 27 1 For 2015, consists of CHF 158 million from associates and CHF 11 million from joint ventures. For 2014, consists of CHF 83 million from associates and CHF 11 million from joint ventures. 2 In 2015, the SIX Group sold its stake in STOXX Ltd and Indexium Ltd. The UBS share of the resulting gain on sale was CHF 81 million. 3 For 2015, consists of CHF (18) million from associates and CHF 0 million from joint ventures. For 2014, consists of CHF 8 million from associates and CHF 0 million from joint ventures. 4 During 2015, UBS AG’s equity interest increased to 24.99% (20.0% as of 31 December 2014). 5 UBS AG’s equity interest amounts to 17.3%. UBS AG is represented on the Board of Directors. 543 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 30 Interests in subsidiaries and other entities (continued) Pillar 3 | c) Interests in unconsolidated structured entities During 2015, the Group sponsored the creation of various SEs and interacted with a number of non-sponsored SEs, including securitization vehicles, client vehicles as well as certain investment funds, which UBS did not consolidate as of 31 December 2015 because it did not control these entities. ➔ Refer to Note 1a item 3 for more information on the nature, purpose, activities and financing structure of these entities The table below presents the Group’s interests in and maxi- mum exposure to loss from unconsolidated SEs as of 31 Decem- ber 2015. In addition, the total assets held by the SEs in which UBS had an interest as of 31 December 2015 are provided, except for investment funds sponsored by third parties, for which the carrying value of UBS’s interest as of 31 December 2015 has been disclosed. Interests in unconsolidated structured entities CHF million, except where indicated Trading portfolio assets Positive replacement values Financial assets designated at fair value Loans Financial investments available-for-sale Other assets Total assets Negative replacement values Total liabilities Assets held by the unconsolidated structured entities in which UBS had an interest (CHF billion) CHF million, except where indicated Trading portfolio assets Positive replacement values Financial assets designated at fair value Loans Financial investments available-for-sale Other assets Total assets Negative replacement values Total liabilities Assets held by the unconsolidated structured entities in which UBS had an interest (CHF billion) Securitization vehicles Client vehicles 1,060 41 0 0 1,1013 304 305 1416 463 101 972 0 3,396 452 4,102 631 631 437 Securitization vehicles Client vehicles 1,955 26 466 2,4473 2454 2455 3556 676 83 1152 40 4,029 522 4,996 27 27 1137 31.12.15 Investment funds 6,102 57 95 101 102 0 6,457 0 0 3208 31.12.14 Investment funds 8,079 2 102 206 94 8,482 75 75 3048 Maximum exposure to loss1 7,624 200 1,730 101 3,498 937 19 Maximum exposure to loss1 10,711 111 2,422 712 4,123 1,248 21 Total 7,624 200 191 101 3,498 45 11,660 661 661 Total 10,711 111 217 712 4,123 52 15,925 347 347 1 For purposes of this disclosure, maximum exposure to loss amounts do not consider the risk-reducing effects of collateral or other credit enhancements. 2 Represents the carrying value of loan commitments, both designated at fair value and held at amortized cost. The maximum exposure to loss for these instruments is equal to the notional amount. 3 As of 31 December 2015, CHF 0.9 billion of the CHF 1.1 billion was held in Corporate Center – Non-core and Legacy Portfolio. As of 31 December 2014, CHF 2.2 billion of the CHF 2.4 billion was held in Corporate Center – Non-core and Legacy Portfolio. 4 Comprised of credit default swap (CDS) liabilities and other swap liabilities. The maximum exposure to loss for CDS is equal to the sum of the negative carrying value and the notional amount. For other swap liabilities, no maximum exposure to loss is reported. 5 Entirely held in Corporate Center – Non-core and Legacy Portfolio. 6 Represents principal amount outstanding. 7 Represents the market value of total assets. 8 Represents the net asset value of the investment funds sponsored by UBS (31 December 2015: CHF 310 billion, 31 December 2014: CHF 296 billion) and the carrying value of UBS’s interests in the investment funds not sponsored by UBS (31 December 2015: CHF 10 billion, 31 December 2014: CHF 8 billion). 544 Note 30 Interests in subsidiaries and other entities (continued) Pillar 3 | The Group retains or purchases interests in unconsoli- dated SEs in the form of direct investments, financing, guaran- tees, letters of credit, derivatives and through management contracts. For retained interests, the Group’s maximum exposure to loss is generally equal to the carrying value of the Group’s interest in the SE, with the exception of guarantees, letters of credit and credit derivatives for which the contract’s notional amount, adjusted for losses already incurred, represents the maximum loss that the Group is exposed to. In addition, the current fair value of deriva- tive swap instruments with a positive replacement value only, such as total return swaps, is presented as UBS’s maximum expo- sure to loss. Risk exposure for these swap instruments could change over time with market movements. The maximum exposure to loss disclosed in the table on the previous page does not reflect the Group’s risk management activities, including effects from financial instruments that the Group may utilize to economically hedge the risks inherent in the unconsolidated SE or the risk-reducing effects of collateral or other credit enhancements. In 2015 and 2014, the Group did not provide support, finan- cial or otherwise, to an unconsolidated SE when the Group was not contractually obligated to do so, nor has the Group an inten- tion to do so in the future. In 2015 and 2014, income and expenses from interests in unconsolidated SEs primarily resulted from mark-to-market move- ments recognized in net trading income, which have generally been hedged with other financial instruments, as well as fee and commission income received from UBS sponsored funds. Interests in securitization vehicles As of 31 December 2015 and 31 December 2014, the Group retained interests in various securitization vehicles. As of 31 December 2015, a majority of our interests in securitization vehicles related to a portfolio of credit default swap (CDS) posi- tions referencing asset-backed securities (ABS), which are held within Corporate Center – Non-core and Legacy Portfolio. The Investment Bank also retained interests in securitization vehicles related to financing, underwriting, secondary market and deriva- tive trading activities. In some cases the Group may be required to absorb losses from an unconsolidated SE before other parties because the Group’s interest is subordinated to others in the ownership structure. An overview of the Group’s interests in unconsolidated securitization vehicles and the relative ranking and external credit rating of those interests as of 31 December 2015 and 31 December 2014 is presented in the table on the following page. The numbers outlined in that table differ from the securitiza- tion positions presented in the “UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regula- tions” section of this report, primarily due to: (i) exclusion from the table on the following page of synthetic securitizations trans- acted with entities that are not SEs and transactions in which the Group did not have an interest because it did not absorb any risk, (ii) a different measurement basis in certain cases (e.g., IFRS carry- ing value within the table above compared with net exposure amount at default for Basel III Pillar 3 disclosures) and (iii) different classification of vehicles viewed as sponsored by the Group versus sponsored by third parties. ➔ Refer to Note 1a items 3 and 12 for more information on when the Group is viewed as the sponsor of an SE and for the Group’s accounting policies regarding securitization vehicles established by UBS ➔ Refer to the “UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations” section of this report for more information on securitization exposures Interests in client vehicles As of 31 December 2015 and 31 December 2014, the Group retained interests in client vehicles sponsored by the Group and third parties that relate to financing and derivative activities and to hedge structured product offerings. Included within these investments are securities guaranteed by US government agen- cies. Interests in investment funds The Group holds interests in a number of investment funds, pri- marily resulting from seed investments or to hedge structured product offerings. In addition to the interests disclosed in the table on the previous page, the Group manages the assets of various pooled investment funds and receives fees that are based, in whole or part, on the net asset value of the fund and / or the performance of the fund. The specific fee structure is determined based on various market factors and considers the nature of the fund, the jurisdiction of incorporation as well as fee schedules negotiated with clients. These fee contracts represent an interest in the fund as they align the Group’s exposure to investors, pro- viding a variable return that is based on the performance of the entity. Depending on the structure of the fund, these fees may be collected directly from the fund assets and / or from the investors. Any amounts due are collected on a regular basis and are gener- ally backed by the assets of the fund. The Group did not have any material exposure to loss from these interests as of 31 December 2015 or as of 31 December 2014. 545 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 30 Interests in subsidiaries and other entities (continued) Pillar 3 | Interests in unconsolidated securitization vehicles1 CHF million, except where indicated Sponsored by UBS Interests in senior tranches of which: rated investment grade of which: defaulted Interests in mezzanine tranches of which: rated investment grade of which: rated sub-investment grade of which: defaulted Total of which: Trading portfolio assets Total assets held by the vehicles in which UBS had an interest (CHF billion) Not sponsored by UBS Interests in senior tranches of which: rated investment grade Interests in mezzanine tranches of which: rated investment grade of which: defaulted Interests in junior tranches of which: rated investment grade of which: not rated Total of which: Trading portfolio assets Total assets held by the vehicles in which UBS had an interest (CHF billion) Residential mortgage- backed securities Commercial mortgage- backed securities 31.12.15 Other asset-backed securities2 Re-securiti- zation3 Total 0 3 2 1 3 3 0 284 284 61 58 3 11 11 0 356 356 64 54 54 7 7 61 61 28 66 65 17 17 3 0 3 86 86 37 0 0 0 0 0 0 383 383 17 17 0 400 400 6 13 13 0 13 13 1 140 140 0 0 0 140 140 2 66 54 13 10 7 2 1 77 77 29 873 872 95 92 3 14 11 3 983 983 109 1 This table excludes derivative transactions with securitization vehicles. 2 Includes credit card, car and student loan structures. 3 Includes collateralized debt obligations. 546 Note 30 Interests in subsidiaries and other entities (continued) Interests in unconsolidated securitization vehicles1 (continued) CHF million, except where indicated Sponsored by UBS Interests in senior tranches of which: rated investment grade of which: defaulted Interests in mezzanine tranches of which: rated investment grade of which: defaulted of which: not rated Total of which: Trading portfolio assets of which: Loans Total assets held by the vehicles in which UBS had an interest (CHF billion) Not sponsored by UBS Interests in senior tranches of which: rated investment grade of which: rated sub-investment grade Interests in mezzanine tranches of which: rated investment grade of which: rated sub-investment grade of which: defaulted Interests in junior tranches of which: rated investment grade of which: rated sub-investment grade of which: defaulted of which: not rated Total of which: Trading portfolio assets of which: Loans Total assets held by the vehicles in which UBS had an interest (CHF billion) Residential mortgage- backed securities Commercial mortgage- backed securities 31.12.14 Other asset-backed securities2 Re-securiti- zation3 0 0 1 1 1 1 1 376 369 6 154 134 15 5 68 56 4 0 8 598 598 115 59 59 16 7 1 8 75 75 14 293 286 6 143 105 37 1 18 11 6 0 1 453 453 0 115 1 1 0 1 1 3 454 452 2 172 164 8 1 1 627 588 39 88 389 381 8 6 6 395 14 381 2 207 205 1 62 54 8 0 2 2 271 225 46 12 1 This table excludes derivative transactions with securitization vehicles. 2 Includes credit card, car and student loan structures. 3 Includes collateralized debt obligations. Total 450 442 8 22 13 2 8 472 91 381 20 1,329 1,313 15 531 457 69 5 89 67 10 1 11 1,949 1,865 85 331 547 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 30 Interests in subsidiaries and other entities (continued) Sponsored unconsolidated structured entities in which UBS did not have an interest For several sponsored SEs, no interest was held by the Group as of 31 December 2015 or as of 31 December 2014. However, during the respective reporting period the Group transferred assets, pro- vided services and held instruments that did not qualify as an inter- est in these sponsored SEs, and accordingly earned income or incurred expenses from these entities. The table below presents the income earned and expenses incurred directly from these entities during 2015 and 2014 as well as corresponding asset information. The table does not include income earned and expenses incurred from risk management activities, including income and expenses from financial instruments that the Group may utilize to economi- cally hedge instruments transacted with the unconsolidated SEs. Sponsored unconsolidated structured entities in which UBS did not have an interest at year end1 CHF million, except where indicated Net interest income Net fee and commission income Net trading income Total income Asset information (CHF billion) CHF million, except where indicated Net interest income Net fee and commission income Net trading income Total income Asset information (CHF billion) As of or for the year ended 31.12.15 Securitization vehicles Client vehicles Investment funds 2 0 18 20 82 (11) 0 208 197 13 0 57 48 104 124 As of or for the year ended 31.12.14 Securitization vehicles Client vehicles Investment funds 6 63 69 42 (51) (158) (208) 13 54 10 64 144 Total (10) 57 274 321 Total (44) 54 (85) (75) 1 These tables exclude profit attributable to non-controlling interests of CHF 77 million for the year ended 31 December 2015 and CHF 142 million of profit attributable to preferred noteholders for the year ended 31 December 2014. 2 Represents the amount of assets transferred to the respective securitization vehicles. Of the total amount transferred, CHF 3 billion was transferred by UBS (31 December 2014: CHF 1 billion) and CHF 5 billion was transferred by third parties (31 December 2014: CHF 3 billion). 3 Represents total assets transferred to the respective client vehicles. Of the total amount transferred, CHF 1 billion was transferred by UBS (31 December 2014: CHF 1 billion) and CHF 1 billion was transferred by third parties (31 December 2014: CHF 1 billion). 4 Represents the total net asset value of the respective investment funds. 548 Note 30 Interests in subsidiaries and other entities (continued) During 2015 and 2014, the Group primarily earned fees and recognized net trading income from sponsored SEs in which UBS did not hold an interest. The majority of the fee income arose from investment funds that are sponsored and administrated by the Group, but managed by third parties. As the Group does not provide any active management services, UBS was not exposed to risk from the performance of these entities and was therefore deemed not to have an interest in them. In certain structures, the fees receivable for administrative pur- poses may be collected directly from the investors and have there- fore not been included in the table above. In addition, the Group incurred net trading income from mark- to-market movements arising primarily from derivatives, such as interest rate swaps and credit derivatives, in which the Group pur- chases protection, and financial liabilities designated at fair value, which do not qualify as interests because the Group does not absorb variability from the performance of the entity. The net income reported does not reflect economic hedges or other miti- gating effects from the Group’s risk management activities. During 2015, UBS and third parties transferred assets totaling CHF 9 billion (2014: CHF 6 billion) into sponsored securitization and client vehicles created in 2015. For sponsored investment funds, transfers arose during the period as investors invested and redeemed positions, thereby changing the overall size of the funds, which, when combined with market movements, resulted in a total closing net asset value of CHF 12 billion (31 December 2014: CHF 14 billion). Note 31 Business combinations In 2015 and 2014, UBS did not complete any significant business combinations. 549 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 32 Changes in organization and disposals Measures to improve the resolvability of the Group in response to too big to fail requirements in Switzerland and other countries in which the Group operates In December 2014, UBS Group AG completed an exchange offer for the shares of UBS AG and established UBS Group AG as the holding company for UBS Group. During 2015, UBS Group AG filed and completed a court procedure under article 33 of the Swiss Stock Exchange Act (SESTA procedure) resulting in the can- cellation of the shares of the remaining minority shareholders of UBS AG. As a result, UBS Group AG now owns 100% of the outstanding shares of UBS AG. In June 2015, UBS transferred its Personal & Corporate Bank- ing and Wealth Management business booked in Switzerland from UBS AG to UBS Switzerland AG. In the second quarter of 2015, UBS also completed the imple- mentation of a more self-sufficient business and operating model for UBS Limited, its investment banking subsidiary in the UK, under which UBS Limited bears and retains a larger proportion of the risk and reward in its business activities. In the third quarter, UBS established UBS Business Solutions AG as a direct subsidiary of UBS Group AG to act as the Group service company. The purpose of the service company structure is to improve the resolvability of the Group by enabling to maintain operational continuity of critical services should a recovery or res- olution event occur. Also during 2015, UBS AG established a new subsidiary, UBS Americas Holding LLC, which UBS intends to designate as its intermediate holding company for its US subsidiaries prior to the 1 July 2016 deadline under new rules for foreign banks in the US pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). During the third quarter of 2015, UBS AG contributed its equity participation in the principal US operating subsidiaries to UBS Americas Holding LLC to meet the requirement under Dodd-Frank that the intermediate holding company own all of our US operations, except branches of UBS AG. Lastly, UBS also established UBS Asset Management AG, a new subsidiary of UBS AG, in 2015. Sale of subsidiaries and businesses In 2015, UBS sold its Alternative Fund Services (AFS) business to Mitsubishi UFJ Financial Group Investor Services. The Asset Man- agement Investment Fund Services business, which provides fund administration for traditional mutual funds, was not included in the sale. Upon completion of the sale, UBS recognized a gain on sale of CHF 56 million and reclassified an associated net foreign currency translation gain of CHF 119 million from Other compre- hensive income to the Income statement. Also during 2015, UBS completed the sale of certain subsidiar- ies and businesses within Wealth Management, which resulted in the recognition of a combined gain of CHF 197 million. Finally, in 2015, UBS agreed to sell certain businesses within Wealth Management and these sales are expected to close in 2016 subject to customary closing conditions. As of 31 December 2015, the assets and liabilities of these subsidiaries and businesses were presented as a disposal group held-for-sale within Other assets and Other liabilities and amounted to CHF 279 million and CHF 235 million, respectively. UBS recognized a loss of CHF 28 million in 2015 related to these sales. Restructuring expenses Restructuring expenses arise from programs that materially change either the scope of business undertaken by the Group or the manner in which such business is conducted. Restructuring expenses are temporary costs that are necessary to effect such programs and include items such as severance and other person- nel-related expenses, duplicate headcount costs, impairment and accelerated depreciation of assets, contract termination costs, consulting fees, and related infrastructure and system costs. These costs are presented in the income statement according to the underlying nature of the expense. As the costs associated with restructuring programs are temporary in nature, and in order to provide a more thorough understanding of business performance, such costs are separately presented in this Note. 550 Note 32 Changes in organization and disposals Net restructuring expenses by business division and Corporate Center unit CHF million Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center of which: Services of which: Non-core and Legacy Portfolio Total net restructuring expenses of which: personnel expenses of which: general and administrative expenses of which: depreciation and impairment of property, equipment and software of which: amortization and impairment of intangible assets Net restructuring expenses by personnel expense category CHF million Salaries Variable compensation – performance awards Variable compensation – other Contractors Social security Pension and other post-employment benefit plans Other personnel expenses Total net restructuring expenses: personnel expenses Net restructuring expenses by general and administrative expense category CHF million Occupancy Rent and maintenance of IT and other equipment Administration Travel and entertainment Professional fees Outsourcing of IT and other services Other1 Total net restructuring expenses: general and administrative expenses 1 Mainly comprised of onerous real estate lease contracts. For the year ended 31.12.15 31.12.14 31.12.13 323 137 101 82 396 196 140 56 1,235 460 761 12 2 185 55 64 50 261 61 30 31 677 327 319 29 2 178 59 54 43 210 229 (6) 235 772 156 548 68 0 For the year ended 31.12.15 31.12.14 31.12.13 312 38 108 46 5 (65) 15 460 145 35 138 28 4 (29) 6 327 65 (15) 88 3 5 8 3 156 For the year ended 31.12.15 31.12.14 31.12.13 109 31 6 17 187 316 95 761 49 23 3 11 148 82 2 319 35 8 2 4 76 59 364 548 551 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 33 Operating leases and finance leases Information on lease contracts classified as operating leases where UBS is the lessee is provided in Note 33a and information on finance leases where UBS acts as a lessor is provided in Note 33b. a) Operating lease commitments As of 31 December 2015, UBS was obligated under a number of non-cancellable operating leases for premises and equipment used primarily for banking purposes. The significant premises leases usually include renewal options and escalation clauses in line with general office rental market conditions, as well as rent adjustments based on price indices. However, the lease agree- ments do not contain contingent rent payment clauses and pur- chase options, nor do they impose any restrictions on UBS’s ability to pay dividends, engage in debt financing transactions or enter into further lease agreements. CHF million Expenses for operating leases to be recognized in: 2016 2017 2018 2019 2020 2021 and thereafter Subtotal commitments for minimum payments under operating leases Less: Sublease rental income commitments Net commitments for minimum payments under operating leases CHF million Gross operating lease expense recognized in the income statement Sublease rental income Net operating lease expense recognized in the income statement 31.12.15 746 688 563 479 415 1,869 4,759 348 4,411 31.12.15 31.12.14 31.12.13 743 70 673 759 73 686 792 74 718 b) Finance lease receivables UBS leases a variety of assets to third parties under finance leases, such as commercial vehicles, production lines, medical equip- ment, construction equipment and aircrafts. At the end of the respective leases, assets may be sold to third parties or be leased further. Lessees may participate in any sales proceeds achieved. Leasing charges cover the cost of the assets less their residual value as well as financing costs. As of 31 December 2015, unguaranteed residual values of CHF 167 million had been accrued, and the accumulated allow- ance for uncollectible minimum lease payments receivable amounted to CHF 10 million. No contingent rents were received in 2015. Lease receivables CHF million 2016 2017–2020 thereafter Total 552 31.12.15 Total minimum lease payments Unearned finance income Present value 341 651 158 1,150 23 38 6 67 318 613 152 1,083 Note 34 Related parties UBS defines related parties as associates (entities which are sig- nificantly influenced by UBS), post-employment benefit plans for the benefit of UBS employees, key management personnel, close family members of key management personnel and entities which are, directly or indirectly, controlled or jointly controlled by key management personnel or their close family members. Key man- agement personnel is defined as members of the Board of Direc- tors (BoD) and Group Executive Board (GEB). a) Remuneration of key management personnel The non-independent members of the BoD have top management employment contracts and receive pension benefits upon retire- ment. Total remuneration of the non-independent members of the BoD and GEB members, including those who stepped down during 2015, is provided in the table below. Remuneration of key management personnel CHF million Base salaries and other cash payments Incentive awards – cash2 Annual incentive award under DCCP Employer’s contributions to retirement benefit plans Benefits in kind, fringe benefits (at market value) Equity-based compensation3 Total 31.12.15 231 10 31.12.14 221 8 21 2 2 42 99 18 2 1 35 86 31.12.13 19 10 19 2 2 38 89 1 Includes role-based allowances that have been made in line with with market practice in response to the EU Capital Requirements Directive of 2013 (CRD IV). 2 Includes immediate and deferred cash. 3 Expenses for shares granted is measured at grant date and allocated over the vesting period, generally for 5 years. In 2015, 2014 and 2013, equity-based compensation was entirely comprised of EOP awards. The independent members of the BoD do not have employment or service contracts with UBS, and thus are not entitled to benefits upon termination of their service on the BoD. Payments to these individuals for their services as external board members amounted to CHF 6.7 million in 2015, CHF 7.1 million in 2014 and CHF 7.6 million in 2013. b) Equity holdings of key management personnel Number of stock options from equity participation plans held by non-independent members of the BoD and the GEB members1 Number of shares held by members of the BoD, GEB and parties closely linked to them2 1 Refer to Note 29 for more information. 2 Excludes shares granted under variable compensation plans with forfeiture provisions. 31.12.15 1,401,686 3,326,165 31.12.14 1,738,598 3,716,957 Of the share totals above, 95,597 shares were held by close family members of key management personnel on 31 December 2015 and 31 December 2014. No shares were held by entities that are directly or indirectly controlled or jointly controlled by key management personnel or their close family members on 31 December 2015 and 31 December 2014. Refer to Note 29 for more information. As of 31 December 2015, no member of the BoD or GEB was the beneficial owner of more than 1% of UBS Group AG’s shares. 553 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 34 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, fixed advances and mortgages on the same terms and conditions that are available to other employees, which are based on terms and conditions granted to third parties but are adjusted for differing credit risk. Independent BoD members are granted loans and mortgages under 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 1 Loans are granted by UBS AG. All loans are secured loans. 2015 2014 27 6 (1) 33 20 10 (3) 27 d) Other related party transactions with entities controlled by key management personnel In 2015, UBS did not enter into transactions with entities which are directly or indirectly controlled or jointly controlled by UBS’s key management personnel or their close family members. In 2014, UBS entered into transactions with Immo Heudorf AG (Switzerland). Other related party transactions CHF million Balance at the beginning of the year Additions Reductions Balance at the end of the year1 1 Comprised of loans. 2015 2014 0 0 0 0 10 0 10 0 In 2014 and 2015, entities controlled by key management personnel did not sell goods or provide services to UBS, and therefore did not receive any fees from UBS. Furthermore, UBS did not provide services to such entities in both 2014 and 2015, and therefore also did not receive any fees. 554 Note 34 Related parties (continued) e) Transactions with associates and joint ventures Loans and outstanding receivables to associates and joint ventures CHF million Carrying value at the beginning of the year Additions Reductions Impairment Foreign currency translation Carrying value at the end of the year of which: unsecured loans includes allowances for credit losses Other transactions with associates and joint ventures CHF million Payments to associates and joint ventures for goods and services received Fees received for services provided to associates and joint ventures Commitments and contingent liabilities to associates and joint ventures ➔ Refer to Note 30 for an overview of investments in associates and joint ventures 2015 552 9 (85) 0 0 476 464 1 2014 288 313 (1) (51) 3 552 539 1 As of or for the year ended 31.12.15 31.12.14 149 7 4 169 1 2 555 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 35 Invested assets and net new money Invested assets Net new money 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, fiduciary deposits, time deposits, savings accounts and wealth management secu- rities or brokerage accounts. All assets held for purely transac- tional purposes and custody-only assets, including corporate client assets held for cash management and transactional pur- poses, are excluded from invested assets as the Group only administers the assets and does not offer advice on how the assets should be invested. Also excluded are non-bankable assets (e.g., art collections) and deposits from third-party banks for funding or trading purposes. Discretionary assets are defined as client assets that UBS decides how to invest. Other invested assets are those where the client ultimately decides how the assets are invested. When a single product is created in one business division and sold in another, it is counted in both the business division that manages the investment and the one that distributes it. This results in dou- ble counting within UBS total invested assets, as both business divisions are independently providing a service to their respective clients, 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, under which inflows and outflows to / from invested assets are deter- mined at the client level based on transactions. Interest and divi- dend income from invested assets are not counted as net new money inflows. Market and currency movements as well as fees, commissions and interest on loans charged are excluded from net new money, as are the effects resulting from any acquisition or divestment of a UBS subsidiary or business. Reclassifications between invested assets and custody-only assets as a result of a change in the service level delivered are generally treated as net new money flows; however, where such change in service level directly results from a new externally-imposed regulation, the one-time net effect of the implementation is reported as an asset reclassification without net new money impact. The Investment Bank does not track invested assets and net new money. However, when a client is transferred from the Invest- ment Bank to another business division, this produces net new money even though client assets were already with UBS. There were no such transfers between the Investment Bank and other business divisions in 2015 and 2014. Invested assets and net new money CHF billion Fund assets managed by UBS Discretionary assets Other invested assets Total invested assets1 of which: double count Net new money1 1 Includes double counts. Development of invested assets CHF billion Total invested assets at the beginning of the year1 Net new money Market movements2 Foreign currency translation Other effects of which: acquisitions / (divestments) Total invested assets at the end of the year1 1 Includes double counts. 2 Includes interest and dividend income. 556 For the year ended 31.12.15 31.12.14 282 830 1,577 2,689 185 27.7 270 854 1,610 2,734 173 58.9 For the year ended 31.12.15 2,734 31.12.14 2,390 28 (24) (31) (16) (16) 59 115 173 (3) 0 2,689 2,734 Note 36 Currency translation rates The following table shows the rates of the main currencies used to translate the financial information of foreign operations into Swiss francs. 1 USD 1 EUR 1 GBP 100 JPY Spot rate As of Average rate1 For the year ended 31.12.15 31.12.14 31.12.15 31.12.14 31.12.13 1.00 1.09 1.48 0.83 0.99 1.20 1.55 0.83 0.97 1.06 1.47 0.80 0.92 1.21 1.51 0.86 0.92 1.23 1.45 0.95 1 Monthly income statement items of foreign operations with a functional currency other than the Swiss franc are translated with month-end rates into Swiss francs. Disclosed average rates for a year represent an aver- age of 12 month-end rates, weighted according to the income and expense volumes of all foreign operations of the Group with the same functional currency for each month. Weighted average rates for individual busi- ness divisions may deviate from the weighted average rates for the Group. EDTF | Note 37 Events after the reporting period There have been no material events after the reporting period which would require disclosure in or adjustment to the 31 December 2015 Financial Statements. 557 Consolidated financial statements Consolidated financial statements Notes to the UBS Group AG consolidated financial statements Note 38 Swiss GAAP requirements The consolidated financial statements of UBS Group AG are pre- pared in accordance with International Financial Reporting Stan- dards (IFRS). The Swiss Financial Market Supervisory Authority (FINMA) requires financial groups that present their financial statements under IFRS to provide a narrative explanation of the main differences between IFRS and Swiss GAAP (FINMA Circular 2015 / 1 and the Banking Ordinance). Included in this Note are the significant differences in the recognition and measurement between IFRS and the provisions of the Banking Ordinance and the guidelines of FINMA governing true and fair view financial statement reporting pursuant to Article 25 through Article 42 of the Banking Ordinance. 1. Consolidation Under IFRS, all entities that are controlled by the holding entity are consolidated. Under Swiss GAAP, controlled entities that are deemed imma- terial to the group or that are held temporarily only are exempt from consolidation, but instead are recorded as participations or financial investments. 2. Financial investments classified as available-for-sale Under IFRS, financial investments classified as 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 dis- posed of, or until an investment is determined to be impaired. At the time an available-for-sale investment is determined to be impaired, the cumulative unrealized loss previously recognized in equity is included in net profit or loss for the period. On disposal of a financial investment classified as available-for-sale, the cumu- lative unrealized gain or loss previously recognized in equity is reclassified to the income statement. Under Swiss GAAP, classification and measurement of financial investments designated as available-for-sale depends on the nature of the investment. Equity instruments with no permanent holding intent, as well as debt instruments, are classified as Finan- cial investments and measured at the lower of (amortized) cost or market value. Market value adjustments up to the original cost amount and realized gains or losses upon disposal of the invest- ment are recorded in the income statement as Other income from ordinary activities. Equity instruments with a permanent holding intent are classified as participations in Investments in subsidiaries and other participations and measured at cost less impairment. Impairment losses are recorded in the income statement as Impair- ment of investments in subsidiaries and other participations. Reversal of impairments up to the original cost amount as well as realized gains or losses upon disposal of the investment are recorded as Extraordinary income / Extraordinary expenses in the income statement. 3. Cash flow hedges Under IFRS, when hedge accounting is applied, the fair value gain or loss on the effective portion of the derivative designated as a cash flow hedge is recognized in equity. When the hedged cash flows materialize, the accumulated unrealized gain or loss is reclassified to the income statement. Under Swiss GAAP, the effective portion of the fair value change of the derivative instrument used to hedge cash flow exposures is deferred on the balance sheet as Other assets or Other liabilities. The deferred amounts are released to the income statement when the hedged cash flows materialize. 4. Fair value option Under IFRS, UBS applies the fair value option to certain financial assets and financial liabilities not held for trading. Instruments for which the fair value option is applied are accounted for at fair value with changes in fair value reflected in Net trading income. The fair value option is applied primarily to structured debt instru- ments, certain non-structured debt instruments, structured reverse repurchase and repurchase agreements and securities bor- rowing agreements, certain structured and non-structured loans as well as loan commitments. Under Swiss GAAP, the fair value option can only be applied to structured debt instruments that consist of a debt host contract and one or more embedded derivatives that do not relate to own equity. Furthermore, changes in fair value attributable to changes in unrealized own credit are not recognized in the income state- ment and the balance sheet. 558 Note 38 Swiss GAAP requirements (continued) 5. Goodwill and intangible assets Under IFRS, goodwill acquired in a business combination is not amortized but tested annually for impairment. Intangible assets with an indefinite useful life are also not amortized but tested annually for impairment. Under Swiss GAAP, goodwill and intangible assets with indefi- nite useful lives are amortized over a period not exceeding five years, unless a longer useful life, which may not exceed 10 years, can be justified. 6. Pension and other post-employment benefit plans Swiss GAAP permits the use of IFRS or Swiss accounting standards for pension and other post-employment benefit plans, with the election made on a plan-by-plan basis. UBS has elected to apply IFRS (IAS 19) for the non-Swiss defined benefit plans in UBS AG standalone financial statements and Swiss GAAP (FER 16) for the Swiss pension plan in the UBS AG and the UBS Switzerland AG standalone financial statements. The requirements of Swiss GAAP are better aligned with the spe- cific nature of Swiss pension plans, which are hybrid in that they combine elements of defined contribution and defined benefit plans, but are treated as defined benefit plans under IFRS. Key differences between Swiss GAAP and IFRS include the treatment of dynamic elements, such as future salary increases and future interest credits on retirement savings, which are not considered under the static method used in accordance with Swiss GAAP. Also, the discount rate used to determine the defined benefit obligation in accordance with IFRS is based on the yield of high- quality corporate bonds of the market in the respective pension plan country. The discount rate used in accordance with Swiss GAAP, i.e., the technical interest rate, is determined by the Pen- sion Foundation Board based on the expected returns of the Board’s investment strategy. For defined benefit plans, IFRS requires the full defined benefit obligation net of the plan assets to be recorded on the balance sheet, with changes resulting from remeasurements recognized directly in equity. However, for plans for which IFRS is elected, Swiss GAAP requires that changes due to remeasurements are recognized in the income statement. Swiss GAAP requires that employer contributions to the pen- sion fund are recognized as personnel expenses in the income statement. Further, Swiss GAAP requires an assessment as to whether, based on the financial statements of the pension fund prepared in accordance with Swiss accounting standards (FER 26), an economic benefit to, or obligation of, the employer arises from the pension fund and is recognized in the balance sheet when conditions are met. Conditions for recording a pension asset or liability would be met if, for example, an employer contribution reserve is available or the employer is required to contribute to the reduction of a pension deficit (on a FER 26 basis). 7. Netting of replacement values Under IFRS, replacement values and related cash collateral are reported on a gross basis unless the restrictive IFRS netting require- ments are met: i) existence of master netting agreements and related collateral arrangements that are unconditional and legally enforceable, both in the normal course of business and in the event of default, bankruptcy or insolvency of UBS and its counter- parties, and ii) UBS’s intention to either settle on a net basis or to realize the asset and settle the liability simultaneously. Under Swiss GAAP, replacement values and related cash col- lateral are generally reported on a net basis, provided the master netting and the related collateral agreements are legally enforce- able in the event of default, bankruptcy or insolvency of UBS’s counterparties. 8. Negative interest Under IFRS, negative interest income arising on a financial asset does not meet the definition of interest income and, therefore, negative interest on financial assets and negative interest on financial liabilities is presented within interest expense and inter- est income, respectively. Under Swiss GAAP, negative interest on financial assets is pre- sented within interest income and negative interest on financial liabilities is presented within interest expense. 9. Extraordinary income and expense Certain non-recurring and non-operating income and expense items, such as realized gains or losses from the disposal of partici- pations, fixed and intangible assets, as well as reversals of impair- ments of participations and fixed assets, are classified as extraor- dinary items under Swiss GAAP. This distinction is not available under IFRS. 10. Other presentational differences Under IFRS, financial statements are comprised of an Income statement, Statement of comprehensive income, Balance sheet, Statement of changes in equity, Statement of cash flows and Notes to the financial statements. Under Swiss GAAP, the concept of other comprehensive income does not exist and consequently no Statement of comprehensive income is required. In addition, various other presentational differences exist. 559 Consolidated financial statements Consolidated financial statements UBS AG consolidated financial information UBS AG consolidated financial information This section contains key figures for UBS AG (consolidated), as well as a comparison of selected financial and capital informa- tion between UBS Group AG (consolidated) and UBS AG (consolidated). Comparison UBS Group AG (consolidated) vs UBS AG (consolidated) The accounting policies applied under International Financial Reporting Standards (IFRS) to both UBS Group AG and UBS AG consolidated financial statements are identical. However, there are certain scope and presentation differences which relate to: – Assets, liabilities, operating income, operating expenses and operating profit before tax relating to UBS Group AG and its directly held subsidiaries, including UBS Business Solutions AG, are reflected in the consolidated financial statements of UBS Group AG but not of UBS AG. UBS AG’s assets, liabilities, oper- ating income, and operating expenses related to transactions with UBS Group AG and its directly held subsidiaries are not subject to elimination in the UBS AG consolidated financial statements, but are eliminated in the UBS Group AG consoli- dated financial statements. – Total equity of UBS Group AG consolidated includes non-con- trolling interests (NCI) in UBS AG as of 31 December 2014. Most of the difference in equity attributable to shareholders between the consolidated equity of UBS Group AG and UBS AG as of 31 December 2014 related to these non-controlling interests. Net profit attributable to minority shareholders of UBS AG was presented as net profit attributable to NCI in the consolidated income statement of UBS Group AG. – Preferred notes issued by UBS AG are presented in the consoli- dated UBS Group AG balance sheet as equity attributable to NCI, while in the consolidated UBS AG balance sheet, these preferred notes are required to be presented as equity attribut- able to preferred noteholders. – Fully applied total capital of UBS AG (consolidated) was lower than for UBS Group AG (consolidated) as of 31 December 2015, reflecting lower AT1 capital and lower tier 2 capital, partly offset by higher CET1 capital. The difference in CET1 capital was primarily due to compensation-related regulatory capital accruals, liabilities and capital instruments which are reflected at the UBS Group AG level. The difference in AT1 capital relates to issuances of AT1 capital notes by UBS Group AG in 2015, as well as to deferred contingent capital plan (DCCP) awards granted for the performance years 2014 and 2015. The difference in tier 2 capital relates to DCCP awards for performance years 2012 and 2013, held at the UBS Group AG level. ➔ Refer to the “Capital management” section of this report for more information on differences in capital information between UBS Group AG (consolidated) and UBS AG (consolidated) 560 UBS AG (consolidated) key figures CHF million, except where indicated Results Operating income Operating expenses Operating profit / (loss) before tax Net profit / (loss) attributable to UBS AG shareholders Key performance indicators1 Profitability Return on tangible equity (%) Return on assets, gross (%) Cost / income ratio (%) Growth Net profit growth (%) Net new money growth for combined wealth management businesses (%)2 Resources Common equity tier 1 capital ratio (%, fully applied)3 Leverage ratio (phase-in, %)4 Additional information Profitability Return on equity (RoE) (%) Return on risk-weighted assets, gross (%)5 Resources Total assets Equity attributable to UBS AG shareholders Common equity tier 1 capital (fully applied)3 Common equity tier 1 capital (phase-in)3 Risk-weighted assets (fully applied)3 Risk-weighted assets (phase-in)3 Common equity tier 1 capital ratio (%, phase-in)3 Total capital ratio (%) (fully applied)3 Total capital ratio (%) (phase-in)3 Leverage ratio (fully applied, %)4 Leverage ratio denominator (fully applied)4 Leverage ratio denominator (phase-in)4 Other Invested assets (CHF billion)6 Personnel (full-time equivalents) As of or for the year ended 31.12.15 31.12.14 31.12.13 30,605 25,198 5,407 6,235 28,026 25,557 2,469 3,502 27,732 24,461 3,272 3,172 13.5 3.1 82.0 78.0 2.2 15.4 5.7 11.7 14.1 8.2 2.8 90.9 10.4 2.5 14.2 5.4 7.0 12.4 8.0 2.5 88.0 3.4 12.8 4.7 6.7 11.4 943,256 1,062,327 1,013,355 55,248 32,042 41,516 208,186 212,609 19.5 21.0 24.9 4.9 898,251 904,518 2,689 58,131 52,108 30,805 44,090 217,158 221,150 19.9 19.0 25.6 4.1 48,002 28,908 42,179 225,153 228,557 18.5 15.4 22.2 3.4 999,124 1,006,001 1,015,306 1,022,924 2,734 60,155 2,390 60,205 1 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 2 Based on adjusted net new money, which excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital optimization program. 3 Based on the Basel III framework as applicable for systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 4 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, the Swiss SRB leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 5 Based on phase- in risk-weighted assets. 6 Includes invested assets for Personal & Corporate Banking. 561 Consolidated financial statements Consolidated financial statements UBS AG consolidated financial information Comparison UBS Group AG (consolidated) versus UBS AG (consolidated) As of or for the year ended 31.12.15 As of or for the year ended 31.12.14 UBS Group AG (consolidated) UBS AG (consolidated) Difference (absolute) Difference (%) UBS Group AG (consolidated) UBS AG (consolidated) Difference (absolute) Difference (%) 30,605 25,116 5,489 2,689 718 1,646 584 1,892 (2,040) (818) 282 (1,503) 6,386 6,203 183 (605) (506) (99) 5,781 5,698 83 942,819 885,511 57,308 55,313 30,044 6,154 11,237 47,435 30,605 25,198 5,407 2,676 692 1,646 583 1,852 (2,042) (822) 281 (1,501) 6,314 6,235 77 3 (606) (545) (59) (2) 5,709 5,690 18 1 943,256 886,013 57,243 55,248 1,954 41 32,042 1,252 10,325 43,619 0 (82) 82 13 26 0 1 40 2 4 1 (2) 72 (32) (77) 180 1 39 59 (97) 72 8 (18) 82 (437) (502) 65 65 (1,954) 1,954 (1,998) 4,902 912 3,816 (656) (0.9) 1.9 (644) 0.4 0 0 2 0 4 0 0 2 0 0 0 0 1 (1) 0 (7) 1 0 0 0 0 0 (6) 9 9 0 0 28,027 25,567 2,461 2,326 900 1,506 467 (84) (2,655) (652) 2 (2,005) 3,640 3,466 142 32 1,580 1,453 80 47 5,220 4,920 221 79 28,026 25,557 2,469 2,326 900 1,506 467 (84) (2,646) (643) 2 (2,005) 3,649 3,502 142 5 1,580 1,459 119 3 5,229 4,961 260 7 1 10 (8) 0 0 0 0 0 (9) (9) 0 0 (9) (36) 0 27 0 (6) (39) 44 (9) (41) (39) 72 1,062,478 1,008,110 54,368 50,608 3,760 28,941 467 11,398 40,806 216,462 13.4 18.9 1,062,327 1,008,162 54,165 52,108 2,013 45 151 (52) 203 (1,500) (2,013) 3,715 30,805 (1,864) 0 10,451 41,257 217,158 14.2 19.0 467 947 (451) (696) (0.8) (0.1) 0 0 0 0 0 0 0 0 0 1 0 0 0 (1) 0 540 0 0 (33) 0 (1) (15) 0 0 0 (3) (6) 9 (1) 0 997,822 999,124 (1,302) 0 4.1 4.1 0.0 207,530 208,186 14.5 22.9 15.4 21.0 897,607 898,251 5.3 4.9 CHF million, except where indicated Income statement Operating income Operating expenses Operating profit / (loss) before tax of which: Wealth Management of which: Wealth Management Americas of which: Personal & Corporate Banking of which: Asset Management of which: Investment Bank of which: Corporate Center of which: Services of which: Group ALM of which: Non-core and Legacy Portfolio Net profit / (loss) of which: net profit / (loss) attributable to shareholders of which: net profit / (loss) attributable to preferred noteholders of which: net profit / (loss) attributable to non-controlling interests Statement of comprehensive income Other comprehensive income of which: attributable to shareholders of which: attributable to preferred noteholders of which: attributable to non-controlling interests Total comprehensive income of which: attributable to shareholders of which: attributable to preferred noteholders of which: attributable to non-controlling interests Balance sheet Total assets Total liabilities Total equity of which: equity attributable to shareholders of which: equity attributable to preferred noteholders Capital information (fully applied) Common equity tier 1 capital Additional tier 1 capital Tier 2 capital Total capital Risk-weighted assets Common equity tier 1 capital ratio (%) Total capital ratio (%) Leverage ratio denominator Leverage ratio (%) 562 of which: equity attributable to non-controlling interests 1,995 UBS AG consolidated financial statements Management’s report on internal control over financial reporting Management’s responsibility for internal control over financial reporting The Board of Directors and management of UBS AG are respon- sible for establishing and maintaining adequate internal control over financial reporting. UBS AG’s internal control over financial reporting is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial state- ments in accordance with IFRS as issued by the IASB. UBS AG’s internal control over financial reporting includes those policies and procedures that: – Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; – Provide reasonable assurance that transactions are recorded as necessary to permit preparation and fair presentation of finan- cial statements, and that receipts and expenditures of the com- pany are being made only in accordance with authorizations of UBS AG management; and – Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over 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’s assessment of internal control over financial reporting as of 31 December 2015 UBS AG management has assessed the effectiveness of UBS AG’s internal control over financial reporting as of 31 December 2015 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework (2013 Framework). Based on this assessment, management believes that, as of 31 December 2015, UBS AG’s internal control over financial reporting was effective. The effectiveness of UBS AG’s internal control over financial reporting as of 31 December 2015 has been audited by Ernst & Young Ltd, UBS AG’s independent registered public accounting firm, as stated in their report appearing on pages 564 to 565, which expresses an unqualified opinion on the effectiveness of UBS AG’s internal control over financial reporting as of 31 December 2015. 563 Consolidated financial statements Consolidated financial statements UBS AG consolidated financial statements 564 565 Consolidated financial statements Consolidated financial statements UBS AG consolidated financial statements 566 567 Consolidated financial statements Consolidated financial statements UBS AG consolidated financial statements Audited | Income statement CHF million, except per share data 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 and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) attributable to preferred noteholders Net profit / (loss) attributable to non-controlling interests Net profit / (loss) attributable to UBS AG shareholders Note 3 3 3 12 4 3 5 6 7 16 17 8 31.12.15 13,178 (6,449) 6,729 (117) 6,612 17,184 5,696 1,112 30,605 15,954 8,219 918 107 25,198 5,407 (908) 6,314 77 3 6,235 For the year ended % change from 31.12.14 31.12.13 31.12.14 13,194 (6,639) 6,555 (78) 6,477 17,076 3,841 632 28,026 15,280 9,377 817 83 25,557 2,469 (1,180) 3,649 142 5 3,502 13,137 (7,351) 5,786 (50) 5,736 16,287 5,130 580 27,732 15,182 8,380 816 83 24,461 3,272 (110) 3,381 204 5 3,172 0 (3) 3 50 2 1 48 76 9 4 (12) 12 29 (1) 119 (23) 73 (46) (40) 78 568 Statement of comprehensive income CHF million Comprehensive income attributable to UBS AG shareholders Net profit / (loss) Other comprehensive income that may be reclassified to the income statement 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, net of tax Financial investments available-for-sale Net unrealized gains / (losses) on financial investments available-for-sale, before tax Impairment charges reclassified to the income statement from equity Realized gains reclassified to the income statement from equity Realized losses reclassified to the income statement from equity Income tax relating to net unrealized gains / (losses) on financial investments available-for-sale Subtotal financial investments available-for-sale, net of tax Cash flow hedges Effective portion of changes in fair value of derivative instruments designated as cash flow hedges, before tax Net realized (gains) / losses reclassified to the income statement from equity Income tax relating to cash flow hedges Subtotal cash flow hedges, net of tax Total other comprehensive income that may be reclassified to the income statement, net of tax Other comprehensive income that will not be reclassified to the income statement Defined benefit plans Gains / (losses) on defined benefit plans, before tax Income tax relating to defined benefit plans Subtotal defined benefit plans, net of tax Property revaluation surplus Gains on property revaluation, before tax Net (gains) / losses reclassified to retained earnings Income tax relating to gains on property revaluation Subtotal changes in property revaluation surplus, net of tax Total other comprehensive income that will not be reclassified to the income statement, net of tax 304 (1,208) Total other comprehensive income Total comprehensive income attributable to UBS AG shareholders Table continues on the next page. (545) 5,690 1,459 4,961 For the year ended 31.12.15 31.12.14 31.12.13 6,235 3,502 3,172 (174) (90) (1) (266) 180 1 (298) 45 8 (64) 550 (1,199) 131 (518) (848) 322 (19) 304 0 0 0 0 1,839 2 (7) 1,834 335 76 (244) 25 (52) 140 2,086 (1,197) (196) 693 2,667 (1,454) 247 (1,208) 0 0 0 0 (440) (36) 5 (471) (57) 41 (265) 56 71 (154) (652) (1,261) 393 (1,520) (2,145) 1,178 (239) 939 0 (6) 0 (6) 933 (1,211) 1,961 569 Consolidated financial statements Consolidated financial statements UBS AG consolidated financial statements Statement of comprehensive income (continued) Table continued from previous page. CHF million Comprehensive income attributable to preferred noteholders Net profit / (loss) Other comprehensive income that will not be reclassified to the income statement Foreign currency translation movements, before tax Income tax relating to foreign currency translation movements Subtotal foreign currency translation, net of tax Total other comprehensive income that will not be reclassified to the income statement, net of tax Total comprehensive income attributable to preferred noteholders Comprehensive income attributable to non-controlling interests Net profit / (loss) Other comprehensive income that will not be reclassified to the income statement Foreign currency translation movements, before tax Income tax relating to foreign currency translation movements Subtotal foreign currency translation, net of tax Total other comprehensive income that will not be reclassified to the income statement, net of tax Total comprehensive income attributable to non-controlling interests Total comprehensive income Net profit / (loss) Other comprehensive income of which: other comprehensive income that may be reclassified to the income statement of which: other comprehensive income that will not be reclassified to the income statement Total comprehensive income For the year ended 31.12.15 31.12.14 31.12.13 77 (59) 0 (59) (59) 18 3 (2) 0 (2) (2) 1 142 119 0 119 119 260 5 3 0 3 3 7 204 355 0 355 355 559 5 (1) 0 (1) (1) 4 6,314 (606) (848) 243 5,709 3,649 1,580 2,667 (1,087) 5,229 3,381 (857) (2,145) 1,288 2,524 570 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 which may be sold or repledged by counterparties Positive replacement values Cash collateral receivables on derivative instruments Financial assets designated at fair value Loans Financial investments available-for-sale Investments in associates Property, equipment and software 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 Debt issued Provisions Other liabilities Total liabilities Equity Share capital Share premium Treasury shares Retained earnings Other comprehensive income recognized directly in equity, net of tax Equity attributable to UBS AG shareholders Equity attributable to preferred noteholders Equity attributable to non-controlling interests Total equity Total liabilities and equity Note 31.12.15 31.12.14 31.12.14 % change from 10, 12 11, 26 11, 26 13, 24 25 14, 24, 26 11, 26 24, 26, 27 10, 12 15, 24 30 16 17 8 18 19 11, 26 11, 26 13, 24 14, 24, 26 11, 26 20, 24, 26 19 21 22 8, 23 91,306 11,866 25,584 67,893 124,047 51,943 167,435 23,763 5,808 312,723 62,543 954 7,683 6,568 12,833 22,249 943,256 11,836 8,029 9,653 29,137 162,430 38,282 62,995 402,522 82,359 4,163 74,606 104,073 13,334 24,063 68,414 138,156 56,018 256,978 30,979 4,493 315,984 57,159 927 6,854 6,785 11,060 23,069 1,062,327 10,492 9,180 11,818 27,958 254,101 42,372 75,297 410,979 91,207 4,366 70,392 886,013 1,008,162 386 29,477 0 29,433 (4,047) 55,248 1,954 41 57,243 943,256 384 32,057 (37) 22,902 (3,199) 52,108 2,013 45 54,165 1,062,327 (12) (11) 6 (1) (10) (7) (35) (23) 29 (1) 9 3 12 (3) 16 (4) (11) 13 (13) (18) 4 (36) (10) (16) (2) (10) (5) 6 (12) 1 (8) (100) 29 27 6 (3) (9) 6 (11) 571 Consolidated financial statements Consolidated financial statements UBS AG consolidated financial statements Statement of changes in equity CHF million Balance as of 1 January 2013 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Equity classified as obligation to purchase own shares Preferred notes New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – foreign currency translation Balance as of 31 December 2013 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Equity classified as obligation to purchase own shares Preferred notes New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – foreign currency translation 572 Other comprehensive income recognized directly in equity, net of tax1 (3,715) of which: Financial invest- of which: ments avail- able-for-sale 249 of which: Cash flow hedges 2,983 Total equity attributable to UBS AG shareholders 45,949 Foreign currency translation (6,954) Preferred Non-controlling noteholders interests Total equity 3,109 42 49,100 Share premium 33,862 Treasury shares (1,071) Retained earnings 16,491 Share capital 384 1 (846) 887 203 30 305 91 (564)2 (9) (11) 6 4,111 3,172 939 (2,151) (2,145) (471) (471) (154) (154) (1,520) (1,520) 33,906 (1,031) 20,608 (5,866) (7,425) 95 1,463 48,002 384 0 (953) 1,946 24 802 (1,785) 3 (938)2 46 2,294 3,502 (1,208) 2,667 2,667 1,834 1,834 140 140 693 693 1 (846) 887 203 30 305 91 (564) (9) 0 6 (11) 1,961 3,172 (2,145) 939 0 0 3 0 0 0 0 (953) 1,946 24 802 (1,785) (938) 46 4,961 3,502 2,667 (1,208) 1 (846) 887 203 30 305 91 (773) (9) (1,572) 6 (11) 2,524 3,381 (2,145) 939 355 49,936 0 (953) 1,946 24 802 (1,785) (1,084) 46 3 1 1 0 5,229 3,649 2,667 (1,208) 121 (204) (6) (1,572) 0 559 204 355 1,893 (142) 1 260 142 119 4 5 (1) 41 (4) 1 7 5 3 Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity Statement of changes in equity CHF million Balance as of 1 January 2013 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Preferred notes Equity classified as obligation to purchase own shares New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) net of tax – foreign currency translation Balance as of 31 December 2013 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Equity classified as obligation to purchase own shares Dividends Preferred notes New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – foreign currency translation Share premium 33,862 Treasury shares (1,071) Retained earnings 16,491 Share capital 384 1 (846) 887 203 30 305 91 (564)2 (9) (11) 24 802 (1,785) (938)2 3 46 384 0 (953) 1,946 6 4,111 3,172 939 2,294 3,502 (1,208) Other comprehensive income recognized directly in equity, net of tax1 (3,715) of which: Foreign currency translation of which: Financial invest- ments avail- able-for-sale (6,954) 249 of which: Cash flow hedges 2,983 Total equity attributable to UBS AG shareholders 45,949 Preferred noteholders Non-controlling interests 3,109 42 Total equity 49,100 1 (846) 887 203 30 305 91 (564) (9) 0 6 (11) 1,961 3,172 (2,145) 939 0 (2,151) (2,145) (471) (471) (154) (154) (1,520) (1,520) 33,906 (1,031) 20,608 (5,866) (7,425) 95 1,463 48,002 0 (953) 1,946 24 802 (1,785) 3 (938) 46 0 0 0 4,961 3,502 2,667 (1,208) 0 2,667 2,667 1,834 1,834 140 140 693 693 (204) (6) (1,572) 0 559 204 355 1,893 (142) 1 260 142 119 4 5 (1) 41 (4) 1 7 5 3 1 (846) 887 203 30 305 91 (773) (9) (1,572) 6 (11) 2,524 3,381 (2,145) 939 355 49,936 0 (953) 1,946 24 802 (1,785) 3 (1,084) 46 1 1 0 5,229 3,649 2,667 (1,208) 121 573 Consolidated financial statements Consolidated financial statements UBS AG consolidated financial statements Statement of changes in equity (continued) CHF million Balance as of 31 December 2014 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Equity classified as obligation to purchase own shares Preferred notes New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – foreign currency translation Share premium 32,057 Treasury shares (37) Retained earnings 22,902 Share capital 384 1 (292) 328 42 290 (6) 9 (2,914)2 0 (8) 6,538 6,235 304 Balance as of 31 December 2015 386 29,477 0 29,433 (4,047) (5,857) 172 1,638 55,248 1 Excludes defined benefit plans that are recorded directly in retained earnings. 2 Reflects the payment out of the capital contribution reserve of UBS AG of CHF 0.75 (2014: CHF 0.25, 2013: CHF 0.15) per CHF 0.10 par value share. Other comprehensive income recognized directly in equity, net of tax1 (3,199) of which: Financial invest- of which: ments avail- able-for-sale 236 of which: Cash flow hedges 2,156 Total equity attributable to UBS AG shareholders 52,108 Foreign currency translation (5,591) Preferred Non-controlling noteholders interests Total equity 2,013 45 54,165 (848) (848) (266) (266) (64) (64) (518) (518) (2,922) (77) (5) (3,004) 1 (292) 328 42 290 (6) 9 0 0 0 0 5,690 6,235 (848) 304 0 1 (292) 328 42 290 (6) 9 0 1 0 (1) 5,709 6,314 (848) 304 (61) 57,243 1 18 77 (59) 1,954 (1) 1 3 (2) 41 574 Treasury share gains / (losses) and net premium / (discount) on own equity derivative activity Statement of changes in equity (continued) CHF million Balance as of 31 December 2014 Issuance of share capital Acquisition of treasury shares Disposal of treasury shares Premium on shares issued and warrants exercised Employee share and share option plans Tax (expense) / benefit recognized in share premium Dividends Preferred notes Equity classified as obligation to purchase own shares New consolidations and other increases / (decreases) Deconsolidations and other decreases Total comprehensive income for the year of which: Net profit / (loss) of which: Other comprehensive income that may be reclassified to the income statement, net of tax of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – defined benefit plans of which: Other comprehensive income that will not be reclassified to the income statement, net of tax – foreign currency translation Balance as of 31 December 2015 par value share. Share premium 32,057 Treasury shares (37) Retained earnings 22,902 Share capital 384 1 (292) 328 42 290 (6) 9 0 (2,914)2 (8) 6,538 6,235 304 Other comprehensive income recognized directly in equity, net of tax1 (3,199) of which: Foreign currency translation of which: Financial invest- ments avail- able-for-sale (5,591) 236 of which: Cash flow hedges 2,156 Total equity attributable to UBS AG shareholders 52,108 Preferred noteholders Non-controlling interests 2,013 45 Total equity 54,165 1 (292) 328 42 290 (6) 9 1 (292) 328 42 290 (6) 9 (2,922) (77) (5) (3,004) 1 Excludes defined benefit plans that are recorded directly in retained earnings. 2 Reflects the payment out of the capital contribution reserve of UBS AG of CHF 0.75 (2014: CHF 0.25, 2013: CHF 0.15) per CHF 0.10 386 29,477 0 29,433 (4,047) (5,857) 172 1,638 55,248 (848) (848) (266) (266) (64) (64) (518) (518) 0 0 0 0 5,690 6,235 (848) 304 0 1 18 77 (59) 1,954 0 1 0 (1) 5,709 6,314 (848) 304 (61) 57,243 (1) 1 3 (2) 41 575 Consolidated financial statements Consolidated financial statements UBS AG consolidated financial statements UBS AG shares issued and treasury shares held Conditional share capital As of 31 December 2015, shares issued by UBS AG totaled 3,858,408,466 (31 December 2014: 3,844,560,913 shares). As of 1 January 2015, UBS AG held 2,115,255 treasury shares, which were exchanged with UBS Group AG shares in 2015. No treasury shares were held as of 31 December 2015. ➔ Refer to the “UBS shares” section of this report for more information As of 31 December 2015, UBS AG’s share capital could have been increased through the issuance of 136,200,312 shares upon exer- cise of employee options. Additional conditional capital up to a maximum number of 380,000,000 shares was available as of 31 December 2015 for conversion rights and warrants granted in connection with the issuance of bonds or similar financial instruments. Furthermore, UBS AG’s share capital could have been increased by a maximum of 36,152,447 shares as of 31 December 2015 through the exercise of options granted in connection with the cash or title dividend distributed in 2015. 576 Statement of cash flows CHF million Cash flow from / (used in) operating activities Net profit / (loss) Adjustments to reconcile net profit to cash flow from / (used in) operating activities Non-cash items included in net profit and other adjustments: Depreciation and impairment of property, equipment and software Amortization and impairment 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 Other net adjustments Net change in operating assets and liabilities: Due from / to banks Cash collateral on securities borrowed and reverse repurchase agreements Cash collateral on securities lent and repurchase agreements Trading portfolio, replacement values and financial assets designated at fair value Cash collateral on derivative instruments Loans Due to customers Other assets, provisions 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 assets2 Purchase of property, equipment and software Disposal of property, equipment and software Net (investment in) / divestment of financial investments available-for-sale3 Net cash flow from / (used in) investing activities Table continues on the next page. 31.12.151 For the year ended 31.12.141 31.12.131 6,314 3,649 3,381 918 107 117 (169) (1,614) (934) (1,654) 3,628 1,768 (2,712) (2,909) 5,407 3,285 841 (17,362) 7,516 (551) 1,997 (13) 477 (1,841) 547 (7,605) (8,434) 817 83 78 (94) (1,635) (227) 2,135 (7,250) (1,235) 32,262 (3,698) (2,879) (7,301) (20,427) 8,803 4,751 (600) 7,231 (18) 70 (1,915) 350 4,108 2,596 816 83 50 (49) (545) (522) 3,988 5,326 (7,551) 43,754 (23,659) 43,944 (22,412) (7,108) 19,195 (3,935) (382) 54,374 (49) 136 (1,236) 639 5,966 5,457 577 Consolidated financial statements Consolidated financial statements UBS AG consolidated financial statements Statement of cash flows (continued) Table continued from previous page. CHF million 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 Distributions paid on UBS AG shares Issuance of long-term debt, including financial liabilities designated at fair value Repayment of long-term debt, including financial liabilities designated at fair value Dividends paid and repayments of preferred notes Net changes of non-controlling interests Net cash flow from / (used in) financing activities Effects of exchange rate differences on cash and cash equivalents Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents comprise: Cash and balances with central banks Due from banks Money market paper4 Total5 Additional information Net cash flow from / (used in) operating activities include: Cash received as interest Cash paid as interest Cash received as dividends on equity investments, investment funds and associates6 31.12.151 For the year ended 31.12.141 31.12.131 (6,404) 0 0 (2,626) 47,790 (44,221) (108) (5) (5,573) (1,742) (13,753) 116,715 102,962 91,306 10,732 924 102,962 11,144 5,267 2,120 (2,921) (719) 0 (938) 40,982 (34,210) (110) (3) 2,081 8,522 20,430 96,284 116,715 104,073 11,772 869 116,715 11,321 5,360 1,961 (4,290) (341) 1 (564) 28,014 (68,954) (1,415) (6) (47,555) (2,705) 9,569 86,715 96,284 80,879 11,117 4,288 96,284 12,148 7,176 1,421 1 In 2015, UBS AG refined its definition of cash and cash equivalents to exclude cash collateral receivables on derivatives with bank counterparties. Prior periods were restated. Refer to Note 1b for more informa- tion. 2 Includes dividends received from associates. 3 Includes gross cash inflows from sales and maturities (CHF 93,584 million for the year ended 31 December 2015, CHF 140,438 million for the year ended 31 December 2014, CHF 153,887 million for the year ended 31 December 2013) and gross cash outflows from purchases of (CHF 101,189 million for the year ended 31 December 2015, CHF 136,330 million for the year ended 31 December 2014, CHF 147,921 million for the year ended 31 December 2013). 4 Money market paper is included in the balance sheet under Trading portfolio assets (31 December 2015: CHF 795 mil- lion, 31 December 2014: CHF 835 million, 31 December 2013: CHF 1,716 million) and Financial investments available-for-sale (31 December 2015: CHF 129 million, 31 December 2014: CHF 34 million, 31 December 2013: CHF 2,571 million). 5 CHF 3,963 million, CHF 4,178 million and CHF 4,534 million of cash and cash equivalents (mainly reflected in Due from banks) were restricted as of 31 December 2015, 31 December 2014 and 31 December 2013, respectively. Refer to Note 25 for more information. 6 Includes dividends received from associates (2015: CHF 114 million, 2014: CHF 54 million, 2013: CHF 69 million) reported within cash flow from / (used in) investing activities. 578 Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies a) Significant accounting policies The significant accounting policies applied in the preparation of the consolidated financial statements (the “Financial Statements”) of UBS AG and its subsidiaries (“UBS AG”) are described in this note. These policies have been applied consistently in all years presented unless otherwise stated. 1) Basis of accounting UBS AG provides a broad range of financial services including: advisory services, underwriting, financing, market-making, asset management and brokerage on a global level, and retail banking in Switzerland. UBS AG was formed on 29 June 1998 when Swiss Bank Corporation and Union Bank of Switzerland merged. UBS Group AG was established in 2014 as the holding company of the Group and in 2015 it increased its ownership interest in UBS AG to 100%, following the successful completion of the procedure under article 33 of the Swiss Stock Exchange Act (SESTA proce- dure). Refer to Note 32 for more information. The Financial Statements are prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB), and are presented in Swiss francs (CHF), the currency of Switzer- land, where UBS AG is incorporated. On 10 March 2016, the Financial Statements were authorized for issue by the Board of Directors. The Financial Statements are prepared using uniform accounting policies for similar transactions and other events. Intercompany transactions and balances have been eliminated. Disclosures incorporated in the “Risk, treasury and capital management” section of this Annual Report, which form part of these Financial Statements, are marked as audited. These disclo- sures relate to requirements under IFRS 7 Financial Instruments: Disclosures and IAS 1 Presentation of Financial Statements and are not repeated in the “Financial information – consolidated financial statements” section. 2) Use of estimates Preparation of these Financial Statements under IFRS requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and liabilities. These estimates and assumptions are based on the best available information. Actual results in the future could differ from such estimates and such differences may be material to the Financial Statements. Estimates are reviewed regularly and revisions are recognized in the period in which they occur. The following notes to the Financial Statements contain infor- mation about those areas of estimation uncertainty considered to require critical judgment and have the most significant effect on the amounts recognized in the Financial Statements: Note 8 Income taxes, Note 12 Allowances and provisions for credit losses, Note 17 Goodwill and intangible assets, Note 22 Provisions and contingent liabilities, Note 24 Fair value measurement, Note 28 Pension and other post-employment benefit plans, Note 29 Equity participation and other compensation plans and Note 30 Interests in subsidiaries and other entities. 3) Subsidiaries and structured entities The Financial Statements comprise those of UBS AG and its subsid- iaries, including controlled structured entities (SEs), presented as a single economic entity. Equity attributable to non-controlling inter- ests is presented on the consolidated balance sheet within Equity, separately from Equity attributable to UBS AG shareholders. UBS AG controls an entity when it has power over the relevant activities of the entity, exposure to variable returns and the ability to use its power to affect its returns. Where an entity is governed by voting rights, control is gener- ally indicated by a direct shareholding of more than one-half of the voting rights. 579 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) In other cases, the assessment of control is more complex and requires greater use of judgment. Where UBS AG has an interest in an entity that absorbs variability, UBS AG considers whether it has power over the entity that allows it to affect the variability of its returns. Consideration is given to all facts and circumstances to determine whether UBS AG has power over another entity, that is, the current ability to direct the relevant activities of an entity when decisions about those activities need to be made. Factors such as the purpose and design of the entity, rights held through contrac- tual arrangements such as call rights, put rights or liquidation rights, as well as potential decision-making rights are all consid- ered in this assessment. Where UBS AG has power over the rele- vant activities, a further assessment is made to determine whether, through that power, it has the ability to affect its own returns – that is, assessing whether power is held in a principal or agent capacity. Consideration is given to (i) the scope of decision-making authority, (ii) rights held by other parties, including removal or other participating rights and (iii) exposure to variability, including remuneration, relative to total variability of the entity as well as whether that exposure is different from other investors. If, after review of these factors, UBS AG concludes that it can exercise its power to affect its own returns, the entity is consolidated Subsidiaries, including SEs, are consolidated from the date control is obtained and are deconsolidated from the date control ceases. Control, or the lack thereof, is reassessed if facts and cir- cumstances indicate that there is a change to one or more of the elements needed to establish that control is present. ➔ Refer to Note 30 for more information on subsidiaries and structured entities Structured entities (SEs) SEs are entities that have been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate only to administrative tasks and the relevant activities are directed by means of contrac- tual arrangements. Such entities generally have a narrow and well-defined objective and include those historically referred to as special purpose entities (SPEs) and some investment funds. UBS AG assesses whether an entity is an SE by considering the nature of the activities of the entity as well as the substance of voting or similar rights afforded to other parties, including investors and independent boards or directors. UBS AG considers rights such as the ability to liquidate the entity or remove the decision maker to be similar to voting rights when the holder has the substantive ability to exercise such rights without cause. In the absence of such rights or in cases where the existence of such rights cannot be fully established, the entity is considered to be an SE. UBS AG sponsors the formation of SEs and interacts with non- sponsored SEs for a variety of reasons including allowing clients to obtain or be exposed to particular risk profiles, to provide funding or to sell or purchase credit risk. Many SEs are established as bankruptcy remote, meaning that only the assets in the SE are available for the benefit of the SE’s investors and such investors have no other recourse to UBS AG. UBS AG is deemed to be the sponsor of an SE when it is involved in its creation, establishment and promotion and facilitates its ongoing success through the transfer of assets or the provision of explicit or implicit financial, operational or other support. Where UBS AG acts purely as an advisor, administrator or placement agent for an SE created by a third-party entity, it is not considered to be sponsored by UBS AG. Each individual entity is assessed for consolidation in line with the consolidation principles described above, considering the nature and scope of UBS AG’s involvement. As the nature and extent of UBS AG’s involvement is unique to each entity, there is no uniform consolidation outcome by entity – certain entities within a class are consolidated and others are not. When UBS AG does not consolidate an SE but has an interest in an SE or has sponsored an SE, additional disclosures are provided in Note 30 on the nature of these interests and sponsorship activities. The classes of SEs UBS AG is involved with include the following: – Securitization structured entities are established to issue securi- ties to investors that are backed by assets held by the SE and whereby (i) significant credit risk associated with the securi- tized exposures has been transferred to third parties and (ii) there is more than one risk position or tranche issued by the securitization vehicle in line with the Basel III securitization definition. All securitization entities are classified as SEs. – Client investment structured entities are established predomi- nantly for clients to invest in specific assets or risk exposures through purchasing notes issued by the SE, predominantly on a fixed-term basis. The SE may source assets via a transfer from UBS AG or through an external market transaction. In some cases, UBS AG may enter into derivatives with the SE to either align the cash flows of the entity with the investor’s intended investment objective or to introduce other desired risk expo- sures. In certain cases, UBS AG may have interests in a third- party sponsored SE to hedge specific risks or participate in asset-backed financing. – Investment fund structured entities have a collective invest- ment objective, are managed by an investment manager and are either passively managed, such that any decision-making does not have a substantive effect on variability, or are actively managed and investors or their governing bodies do not have substantive voting or similar rights. UBS creates and sponsors a large number of funds in which it may have an interest through the receipt of variable management fees and / or a direct investment. In addition, UBS AG has interests in a num- ber of funds created and sponsored by third parties, including exchange-traded funds and hedge funds, to hedge issued structured products. 580 Note 1 Summary of significant accounting policies (continued) Business combinations Business combinations are accounted for using the acquisition method. As of the acquisition date, UBS AG recognizes the iden- tifiable assets acquired and the liabilities assumed at their acquisi- tion-date fair values. For each business combination, UBS AG measures the non-controlling interests in the acquiree either at fair value or at their proportionate share of the acquiree’s identifi- able net assets. Generally, non-controlling interests are present ownership interests that entitle their holders to a proportionate share of the net assets of the acquiree in the event of liquidation. The cost of an acquisition is the aggregate of the assets trans- ferred, the liabilities owed 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 AG is recognized at fair value as of the date of acquisition. If the contingent consideration is classified as an asset or liabil- ity, subsequent changes in the fair value of the contingent consid- eration are recognized in the income statement. If the contingent consideration is classified as equity, it is not remeasured and its subsequent settlement is accounted for within Equity. Any excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests over the net identifiable assets acquired and liabilities assumed is considered goodwill and is recognized as a separate asset on the balance sheet, initially measured at cost. If the fair value of the net assets of the subsid- iary acquired exceeds the aggregate of the consideration trans- ferred and the amount recognized for non-controlling interests, the difference is recognized in the income statement on the acquisition date. ➔ Refer to Note 31 for more information on business combinations 4) Associates and joint ventures Investments in entities in which UBS AG has significant influence, but not control, over the financial and operating policies of the entity are classified as investments in associates and accounted for under the equity method of accounting. Normally, significant influence is indicated when UBS AG owns between 20% and 50% of a company’s voting rights. Investments in associates are initially recognized at cost, and the carrying amount is increased or decreased after the date of acquisition to recognize UBS AG’s share of the investee’s net profit or loss (including net profit or loss recognized directly in equity). Interests in joint ventures are also accounted for under the equity method of accounting. A joint venture is subject to a contractual agreement between UBS AG and one or more third parties, which establishes joint control over the relevant activities and provides rights to the net assets of the entity. Interests in joint ventures are classified as Investments in associates. If the reporting date of an associate or joint venture is different than UBS AG’s reporting date, the most recently available finan- cial statements of the associate or joint venture are used to apply the equity method. Adjustments are made for effects of signifi- cant transactions or events that may occur between that date and UBS AG’s reporting date. Investments in associates and interests in joint ventures are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through con- tinuing use. Refer to item 29 for more information. ➔ Refer to Note 30 for more information on associates and joint ventures 5) Recognition and derecognition of financial instruments UBS AG recognizes financial instruments on its balance sheet when UBS AG becomes a party to the contractual provisions of the instru- ments, provided the recognition criteria are met. UBS AG also acts in a trustee or other fiduciary capacity, which results in the holding or placing of assets on behalf of individuals, trusts, retirement ben- efit plans and other institutions. Unless the recognition criteria are satisfied, these assets and the related income are excluded from UBS AG’s Financial Statements, as they are not assets of UBS AG. Financial assets UBS AG enters into certain transactions where it transfers finan- cial assets recognized on its balance sheet but retains either all or a portion of the risks and rewards of the transferred financial assets. If all or substantially all of the risks and rewards are retained, the transferred financial assets are not derecognized from the balance sheet. Transactions where transfers of financial assets result in UBS AG retaining all or substantially all risks and rewards include securities lending and repurchase transactions described under items 13 and 14. They also include transactions where financial assets are sold to a third party together with a total return swap that results in UBS AG retaining all or substan- tially all risks and rewards of the transferred assets. These types of transactions are accounted for as secured financing transactions. In transactions where substantially all of the risks and rewards of ownership of a financial asset are neither retained nor trans- ferred, UBS AG derecognizes the financial asset if control over the asset is surrendered. The rights and obligations retained following the transfer are recognized separately as assets and liabilities, respectively. In transfers where control over the financial asset is retained, UBS AG continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset fol- lowing the transfer. Examples of such transactions include written put options, acquired call options, or other instruments linked to the performance of the transferred asset. 581 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) For the purposes of UBS AG’s disclosures of transferred financial assets, a financial asset is typically considered to have been trans- ferred when UBS AG a) transfers the contractual rights to receive the cash flows of the financial asset or b) retains the contractual rights to receive the cash flows of that asset, but assumes a con- tractual obligation to pay the cash flows to one or more entities. Where financial assets have been pledged as collateral or in similar arrangements, they are considered to have been trans- ferred if the counterparty has received the contractual right to the cash flows of the pledged assets, as may be evidenced, for exam- ple, by the counterparty’s right to sell or repledge the assets. Where the counterparty to the pledged financial assets has not received the contractual right to the cash flows, the assets are considered pledged, but not transferred. ➔ Refer to Note 25b and 25c for more information on transferred financial assets Financial liabilities UBS AG derecognizes a financial liability from its balance sheet when it is extinguished, such as when the obligation specified in the contract is discharged, cancelled or has expired. When an existing financial liability is exchanged for a new one from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability with any difference in the respective carrying amounts being recognized in the income statement. 6) Determination of fair value Fair value is the price that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market (or most advantageous market, in the absence of a principal market) as of the measurement date. ➔ Refer to Note 24 for more information on fair value measurement 7) Trading portfolio assets and liabilities Non-derivative financial assets and liabilities are classified at acquisition as held for trading and presented in the trading port- folio 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 identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short- term profit-taking. The trading portfolio includes non-derivative financial instru- ments (including those with embedded derivatives) and commod- ities. Financial instruments that are considered derivatives in their entirety generally are presented on the balance sheet as Positive replacement values or Negative replacement values. Refer to item 15 for more information. The trading portfolio includes recog- nized assets and liabilities relating to proprietary, hedging and client-related business. 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 UBS AG (long positions). Trading portfolio liabilities include obligations to deliver financial instruments such as debt and equity instruments which UBS AG 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 income or Interest expense. UBS AG 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 AG recognizes any unrealized profits and losses arising from changes in fair value in Net trading income. The correspond- ing receivable or payable is presented on the balance sheet as a Positive replacement value or Negative replacement value. On settlement date, the resulting financial 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 profits and losses are no longer recognized and, on settlement date, the asset is derecognized. Trading portfolio assets transferred to external parties that do not qualify for derecognition (refer to item 5 for more informa- tion) and where the transferee has obtained the right to sell or repledge the assets continue to be classified on the UBS AG bal- ance sheet as Trading portfolio assets but are identified as Assets pledged as collateral which may be sold or repledged by counter- parties. Such assets continue to be measured at fair value. ➔ Refer to Note 13 and 24 for more information on trading portfolio assets and liabilities. 582 Note 1 Summary of significant accounting policies (continued) 8) Financial assets and financial liabilities designated at fair value through profit or loss A financial instrument may be designated at fair value through profit or loss only upon initial recognition and this designation cannot be changed subsequently. Financial assets and financial liabilities designated at fair value are presented on separate lines on the face of the balance sheet. The fair value option can be applied only if one of the following criteria is met: – the financial instrument is a hybrid instrument that includes a substantive embedded derivative; – the financial instrument is part of a portfolio that 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 eliminates or significantly reduces an accounting mismatch that would otherwise arise. UBS AG has used the fair value option to designate most of its issued hybrid debt instruments as financial liabilities designated at fair value through profit or loss, on the basis that such financial instruments include embedded derivatives and / or are managed on a fair value basis. Such hybrid debt instruments predominantly include the following: – Equity-linked bonds or notes: linked to a single stock, a basket of stocks or an equity index; – 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 and – 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 commitments, otherwise accounted for at amortized cost, which are hedged predominantly with credit derivatives. The application of the fair value option to the loans and loan commitments reduces an accounting mismatch, as the credit derivatives are accounted for as derivative instruments at fair value through profit or loss. Similarly, UBS AG has applied the fair value option to certain structured loans and reverse repurchase and securities borrowing agreements which are part of portfolios managed on a fair value basis. The fair value option is applied to assets held to hedge deferred cash-settled employee compensation awards, in order to reduce an accounting mismatch that would otherwise arise due to the liability being measured on a fair value basis. Fair value changes related to financial instruments designated at fair value through profit or loss are recognized in Net trading income. Interest income and interest expense on financial assets and liabilities designated at fair value through profit or loss are recognized in Interest income on financial assets designated at fair value or Interest expense on financial liabilities designated at fair value, respectively. UBS AG applies the same recognition and derecognition prin- ciples to financial instruments designated at fair value as to finan- cial instruments in the trading portfolio. Refer to items 5 and 7 for more information. ➔ Refer to Notes 3, 20, 24e and 27d for more information on financial assets and liabilities designated at fair value 9) Financial investments classified as available-for-sale Financial investments classified as available-for-sale are non-deriv- ative financial assets that are not classified as held for trading, designated at fair value through profit or loss, or loans and receiv- ables. They are recognized on a settlement date basis. Financial investments classified as available-for-sale include: (a) debt securities held as part of a large multi-currency portfolio of unencumbered, high-quality assets managed centrally by Corpo- rate Center – Group Asset and Liability Management, a majority of which is short-term, (b) strategic equity investments, (c) certain investments in real estate funds, (d) certain equity instruments including private equity investments, and (e) debt instruments and non-performing loans acquired in the secondary market. Financial investments that are classified as available-for-sale are recognized initially at fair value less transaction costs and are mea- sured subsequently at fair value. Unrealized gains and losses are reported in Other comprehensive income within Equity, net of applicable income taxes, until such investments are sold, collected or otherwise disposed of, or until any such investment is deter- mined to be impaired. Unrealized gains before tax are presented separately from unrealized losses before tax in Note 15. For monetary instruments (such as debt securities), foreign exchange translation gains and losses determined by reference to the amortized cost basis of the instruments 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 within Equity. Foreign exchange transla- tion gains and losses associated with non-monetary instruments (such as equity securities) are part of the overall fair value change of the instruments and are recognized in Other comprehensive income within Equity. Interest and dividend income on financial investments classi- fied as available-for-sale are included in Interest and dividend income from financial investments available-for-sale. Interest income is determined by reference to the instrument’s amortized cost basis using the effective interest rate (EIR). On disposal of an investment, any related accumulated unreal- ized gains or losses included in Equity are reclassified to the income statement and reported in Other income. Gains or losses on disposal are determined using the average cost method. 583 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) At each balance sheet date, UBS AG assesses whether indica- tors of impairment are present for an available-for-sale invest- ment. An available-for-sale investment is impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the investment, the esti- mated future cash flows from the investment have decreased. A significant or prolonged decline in the fair value of an available- for-sale equity instrument below its original cost is considered objective evidence of impairment. In the event of a significant decline in fair value below its original cost (20%) or a prolonged decline (six months), an impairment is recorded unless facts and circumstances clearly indicate that the decline in value, on its own, is not evidence of an impairment. For debt investments, objective evidence of impairment includes significant financial difficulty of the issuer or counter- party, default or delinquency in interest or principal payments, or it becoming probable that the borrower will enter bankruptcy or financial reorganization. If an available-for-sale financial invest- ment is determined to be impaired, the related cumulative net unrealized loss previously recognized in Other comprehensive income within Equity is reclassified to the income statement within Other income. For equity instruments, any further loss is recognized directly in the income statement, whereas for debt instruments, any further loss is recognized in the income state- ment only if there is additional objective evidence of impairment. After an impairment of an equity instrument that is classified as available-for-sale, increases in the fair value are reported in Other comprehensive income within Equity. Subsequent increases in the fair value of debt instruments up to an amount that equals their amortized cost in original currency are recognized in Other income, provided that the fair value increase is related to an event occurring after the impairment loss was recorded. Increases in excess of that amount are reported in Other comprehensive income within Equity. UBS AG applies the same recognition and derecognition prin- ciples to financial assets classified as available-for-sale as to financial instruments in the trading portfolio (refer to items 5 and 7 for more information), except that unrealized gains and losses between trade date and settlement date are recognized in Other comprehensive income within Equity rather than in the income statement. ➔ Refer to Note 15 and 24 for more information on financial investments available-for-sale 10) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, not classified as held for trading, not designated at fair value through profit and loss or classified as available-for-sale, and are not assets for which UBS AG may not recover substantially all of its initial net investment other than because of credit deteriora- tion. Financial assets classified as loans and receivables include: – originated loans where funding is provided directly to the borrower; – participation in a loan from another lender and purchased loans; and – securities which were classified as loans and receivables at acquisition date, such as municipal auction rate securities in the Corporate Center – Non-core and Legacy Portfolio (refer to Note 27c for more information). Loans and receivables are recognized when UBS AG becomes a party to the contractual provisions of the instrument, which is when funding is advanced to borrowers. They are recorded ini- tially at fair value, based on the amount provided to originate or purchase the assets, together with any transaction costs directly attributable to the acquisition. Subsequently, they are measured at amortized cost using the EIR method, less allowances for credit losses. Refer to item 11 for information on allowances for credit losses and to Note 27a for an overview of the financial assets clas- sified as loans and receivables. Interest on loans and receivables is included in Interest earned on loans and advances and is recognized on an accrual basis. Upfront fees and direct costs relating to loan origination, refinanc- ing or restructuring as well as to loan commitments are generally deferred and amortized to Interest earned on loans and advances over the life of the loan using the EIR method. For loan commit- ments that are not expected to result in a loan being advanced, the fees are recognized in Net fee and commission income over the commitment period. For loan syndication fees where UBS AG does not retain a portion of the syndicated loan, or where UBS AG does retain a portion of the syndicated loan at the same effective yield for comparable risk as other participants, fees are credited to Net fee and commission income when the services have been provided. Presentation of receivables from central banks Deposits with central banks that are available on demand are pre- sented on the balance sheet as Cash and balances with central banks. All longer-dated receivables with central banks are pre- sented under Due from banks. 584 Note 1 Summary of significant accounting policies (continued) Financial assets reclassified to loans and receivables When a financial asset is reclassified from held for trading to loans and receivables, the financial asset is reclassified at its fair value on the date of reclassification. Any gain or loss recognized in the income statement before reclassification is not reversed. The fair value of a financial asset on the date of reclassification becomes its cost basis going forward. In 2008 and 2009, UBS AG deter- mined that certain financial assets classified as held for trading were no longer held for the purpose of selling or repurchasing in the near term and that UBS AG had the intention and ability to hold these assets for the foreseeable future, considered to be a period of approximately twelve months from the reclassification. Therefore, these assets were reclassified from held for trading to loans and receivables. ➔ Refer to Note 27c for more information on reclassified assets Renegotiated loans A renegotiated or restructured loan is a loan for which the terms have been modified or for which additional collateral has been requested that was not contemplated in the original contract. If a loan is derecognized in these circumstances, the new loan is measured at fair value at initial recognition. Any allowance taken to date against the original loan is derecognized and is not attributed to the new loan. Consequently, the new loan is assessed for impairment on an individual basis. If the loan is not impaired, the loan is included within the general collective loan assessment for the purpose of measuring credit losses. 11) Allowances and provisions for credit losses An allowance or provision for credit losses is established if there is objective evidence that UBS AG will be unable to collect all amounts due (or the equivalent thereof) on a claim, based on the original contractual terms due to credit deterioration of the issuer or counterparty. A claim means a loan or receivable carried at amortized cost, or a commitment such as a letter of credit, a guar- antee, or another similar instrument. Objective evidence of impairment includes significant financial difficulty of the issuer or counterparty, default or delinquency in interest or principal pay- ments, or a likelihood that the borrower will enter bankruptcy or financial reorganization. Typical key features of terms and conditions granted through renegotiation to avoid default include special interest rates, post- ponement of interest or amortization payments, modification of the schedule of repayments or amendment of loan maturity. There is no change in the EIR following a renegotiation. An allowance for credit losses is reported as a reduction of the carrying value of a claim on the balance sheet. For an off-balance- sheet item, such as a commitment, a provision for credit loss is reported in Provisions. Changes to allowances and provisions for credit losses are recognized as Credit loss expense / recovery. If a loan is renegotiated with preferential conditions (i.e., new or modified terms and conditions are agreed which do not meet the normal market criteria for the quality of the obligor and the type of loan), the position is still classified as non-performing and is rated as being in counterparty default. It will remain so until the loan is collected or written off and will be assessed for impairment on an individual basis. If a loan is renegotiated on a non-preferential basis (e.g., addi- tional collateral is provided by the client, or new terms and condi- tions are agreed which meet the normal market criteria, for the quality of the obligor and the type of loan), the loan will be re- rated using UBS AG’s regular rating scale. In these circumstances, the loan is removed from impaired status and included in the col- lective assessment of loan loss allowances, unless an indication of impairment exists, in which case the loan is assessed for impair- ment on an individual basis. For the purposes of measuring credit losses within the collective loan loss assessment, these loans are not segregated from other loans which have not been renegoti- ated. Management regularly reviews all loans to ensure that all criteria according to the loan agreement continue to be met and that future payments are likely to occur. Refer to item 11 for more information on allowances and provisions for credit losses. A restructuring of a loan could lead to a fundamental change in the terms and conditions of a loan, resulting in the original loan being derecognized and a new loan being recognized. Allowances and provisions for credit losses are evaluated at both a counterparty-specific level and collectively based on the following principles: Counterparty-specific: A loan is considered impaired when management determines that it is probable that UBS AG will not be able to collect all amounts due (or the equivalent value thereof) based on the original contractual terms. Individual credit expo- sures are evaluated based on the borrower’s overall financial con- dition, resources and payment record, the prospects of support from contractual guarantors and, where applicable, the realizable value of any collateral. The estimated recoverable amount is the present value, calculated using the claim’s original EIR, of expected future cash flows including amounts that may result from restruc- turing or the liquidation of collateral. If a loan has a variable inter- est rate, the discount rate used for calculating the recoverable amount is the current EIR. Impairment is measured and allow- ances for credit losses are established based on the difference between the carrying amount and the estimated recoverable amount. Upon impairment, the accrual of interest income based on the original terms of the loan is discontinued. The increase in the present value of the impaired loan due to the passage of time is reported as Interest income. 585 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) All impaired loans are reviewed and analyzed at least annually. Any subsequent changes to the amounts and timing of the expected future cash flows compared with prior estimates result in a change in the allowance for credit losses and are charged or credited to Credit loss expense / recovery. An allowance for impair- ment is reversed only when the credit quality has improved to such an extent that there is reasonable assurance of timely collec- tion of principal and interest in accordance with the original con- tractual terms of the claim, or the equivalent value thereof. 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 loan is classified as non-performing when the payment of interest, principal or fees is overdue by more than 90 days, when insolvency proceedings have commenced, or when obligations have been restructured on preferential terms. Loans are evaluated individually for impairment when amounts have been overdue by more than 90 days, or if other objective evidence indicates that a loan may be impaired. Collectively: All loans for which no impairment is identified at a counterparty-specific level are grouped on the basis of UBS AG’s internal credit grading system that considers credit risk char- acteristics such as asset type, industry, geographical location, col- lateral type, past-due status and other relevant factors, to col- lectively assess whether impairment exists within a portfolio. Future cash flows for a group of financial assets that are collec- tively evaluated for impairment are estimated on the basis of his- torical loss experience 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 reflect the effects of current conditions of the group of financial assets on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently in the portfolio. Estimates of changes in future cash flows for the group of financial assets reflect, and are directionally consistent with, changes in related observable data from year to year. The methodology and assumptions used for estimating future cash flows for the group of financial assets are reviewed regularly to reduce any differences between loss estimated and actual loss experience. Allowances for collective impairment assessments 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 accrued on each loan according to its contractual terms. If objective evidence becomes available that indicates that an individual financial asset is impaired, it is removed from the group of financial assets assessed for impair- ment on a collective basis and is assessed separately as a counter- party-specific claim. Reclassified securities and similar acquired securities carried at amortized cost: Estimated cash flows associated with financial assets reclassified from the held for trading category to loans and receivables in accordance with the requirements in item 10 and other similar assets acquired subsequently are reviewed periodi- cally. Adverse revisions in cash flow estimates related to credit events are recognized in the income statement as Credit loss expense / recovery. For a reclassified loan, a change in expectation regarding the recoverability of the security and its future cash receipts requires an adjustment to the EIR on the loan from the date of change (refer to Note 27c for more information). ➔ Refer to Note 12 for more information on allowances and provisions for credit losses 12) Securitization structures set up by UBS AG UBS AG securitizes certain financial assets, generally selling Trad- ing portfolio assets to SEs that issue securities to investors. UBS AG applies the policies set out in item 3 in determining whether the respective SE must be consolidated and those set out in item 5 in determining whether derecognition of transferred financial assets is appropriate. The following statements mainly apply to transfers of financial assets that qualify for derecognition. Gains or losses related to the sale of Trading portfolio assets involving a securitization are recognized when the derecognition criteria are satisfied; the resulting gain or loss is included in Net trading income. Interests in the securitized financial assets may be retained in the form of senior or subordinated tranches, interest-only strips or other residual interests (retained interests). Retained interests are primarily recorded in Trading portfolio assets and are carried at fair value. Synthetic securitization structures typically involve derivative financial instruments for which the principles set out in item 15 apply. 586 Note 1 Summary of significant accounting policies (continued) UBS AG acts as structurer and placement agent in various mortgage-backed securities (MBS) and other asset-backed secu- rities (ABS) securitizations. In such capacity, UBS AG may pur- chase collateral on its own behalf or on behalf of clients during the period prior to securitization. UBS AG then typically sells the collateral into designated trusts upon closing of the securitiza- tion. In other securitizations, UBS AG may only provide financing to a designated trust in order to fund the purchase of collateral by the trust prior to securitization. Furthermore, UBS AG under- writes the offerings to investors, earning fees for its placement and structuring services. Consistent with the valuation of similar inventory, fair value of retained tranches is initially and subse- quently determined using market price quotations where avail- able 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 observ- able information is available. ➔ Refer to Note 30c for more information on the UBS AG’s involvement with securitization vehicles 13) Securities borrowing and lending Securities borrowing and securities lending transactions are gen- erally entered into on a collateralized basis. In such transactions, UBS AG typically borrows or lends equity and debt securities in exchange for securities or cash collateral. Additionally, UBS AG borrows securities from its clients’ custody accounts in exchange for a fee. The transactions are normally conducted under standard agreements employed by financial market participants and are undertaken with counterparties subject to UBS AG’s normal credit risk control processes. UBS AG monitors on a daily basis the mar- ket value of the securities received or delivered and requests or provides additional collateral or returns or recalls surplus collateral in accordance with the underlying agreements. Cash collateral received is recognized with a corresponding obligation to return it (Cash collateral on securities lent) and cash collateral delivered is derecognized and a corresponding receiv- able reflecting UBS AG’s right to receive it back is recorded (Cash collateral on securities borrowed). The securities which have been transferred are not recognized on, or derecognized from, the balance sheet unless the risks and rewards of ownership are also transferred. Refer to item 5 for more information. UBS AG- owned securities transferred to a borrower that is granted the right to sell or repledge those transferred securities are presented on the balance sheet as Trading portfolio assets, of which: assets pledged as collateral which may be sold or repledged by counter- parties. Securities received in a borrowing transaction are dis- closed as off-balance-sheet items if UBS AG has the right to resell or repledge them, with additional disclosure provided for securi- ties that UBS AG has actually resold or repledged. The sale of securities which is settled by delivering securities received in a borrowing transaction generally triggers the recognition of a trading liability (short sale). Where securities are either received or delivered in lieu of cash (securities-for-securities transactions), neither the securities received or delivered nor the obligation to return or right to receive the securities are recognized on the bal- ance sheet, as derecognition criteria are not met. Refer to item 5 for more information. Interest is recognized in the income statement on an accrual basis and is recorded as Interest income or Interest expense. Inter- est income includes interest earned on securities borrowing, and negative interest, including fees, on securities lending. Interest expense includes interest on securities lent and negative interest, including fees, on securities borrowing. ➔ Refer to Notes 11, 25 and 26 for more information on securities borrowing and lending 14) Repurchase and reverse repurchase transactions Securities purchased under agreements to resell (Reverse repur- chase agreements) and securities sold under agreements to repur- chase (Repurchase agreements) are treated as collateralized financing transactions. Nearly all reverse repurchase and repur- chase agreements involve debt instruments, such as bonds, notes or money market paper. The transactions are normally conducted under standard agreements employed by financial market partici- pants and are undertaken with counterparties subject to UBS AG’s normal credit risk control processes. UBS AG monitors on a daily basis the market value of the securities received or delivered and requests or provides additional collateral or returns or recalls sur- plus collateral in accordance with the underlying 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, representing UBS AG’s right to receive the cash back. Similarly, in a repurchase agreement, the cash received is recog- nized and a corresponding obligation, including accrued interest, is recorded in the balance sheet line Repurchase agreements. Securities received under reverse repurchase agreements and securities delivered under repurchase agreements are not recog- nized on or derecognized from the balance sheet, unless the risks and rewards of ownership are transferred. UBS AG-owned securi- ties transferred to a recipient who is granted the right to resell or repledge them are presented on the balance sheet as Trading portfolio assets, of which: assets pledged as collateral which may be sold or repledged by coun- terparties. Securities received in reverse repurchase agreements are disclosed as off-balance-sheet items if UBS AG has the right to resell or repledge them, with additional disclosure provided for securities that UBS AG has actually resold or repledged (refer to Note 25d for more information). Additionally, the sale of securi- ties which is settled by delivering securities received in reverse repurchase transactions generally triggers the recognition of a trading liability (short sale). 587 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) Interest is recognized in the income statement on an accrual basis and is recorded as Interest income or Interest expense. Inter- est income includes interest earned on reverse repurchase agree- ments and negative interest on repurchase agreements. Interest expense includes interest on repurchase agreements and negative interest on reverse repurchase agreements. UBS AG generally offsets reverse repurchase agreements and repurchase agreements with the same counterparty, maturity, cur- rency and Central Securities Depository (CSD) in accordance with the relevant accounting requirements. Refer to item 35 for more information. ➔ Refer to Notes 11, 25 and 26 for more information on repurchase and reverse repurchase transactions 15) Derivative instruments and hedge accounting Derivative instruments that UBS AG enters into are initially recog- nized, and remain carried, at fair value. Fair value changes are generally recognized in the income statement unless and to the extent they are designated in hedge relationships which require recognition of the effective portion of such changes within other comprehensive income. Derivative instruments are generally reported on the balance sheet as Positive replacement values or Negative replacement val- ues. Exchange-traded derivatives that economically settle on a daily basis, and certain OTC derivatives that in substance net set- tle on a daily basis, are classified as Cash collateral receivables on derivative instruments or Cash collateral payables on derivative instruments. Products that receive this treatment include futures contracts, 100% daily margined exchange-traded options and interest rate swaps transacted with the London Clearing House. Changes in the fair value of derivative instruments are recorded in Net trading income, unless the derivatives are designated and effective as hedging instruments in certain types of hedge accounting relationships. ➔ Refer to Note 14 for more information on derivative instruments and hedge accounting Hedge accounting UBS AG uses derivative instruments as part of its risk manage- ment activities to manage exposures particularly to interest rate and foreign currency risks, including exposures arising from fore- cast transactions. If derivative and non-derivative instruments meet certain criteria specified below, they may be designated as hedging instruments in hedges of the change in fair value of rec- ognized assets or liabilities (fair value hedges), hedges of the vari- ability in future cash flows attributable to a recognized asset or liability or highly probable forecast transactions (cash flow hedges) or hedges of a net investment in a foreign operation (net invest- ment hedges). At the time a financial instrument is designated in a hedge rela- tionship, UBS AG 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, UBS AG 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 value or cash flows associated with the designated risk of the hedged items. A hedge is considered highly effective if the following criteria are met: (i) at inception of the hedge and throughout its life, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk and (ii) actual results of the hedge are within a range of 80% to 125%. In the case of hedging forecast transactions, the transac- tion must have a high probability of occurring and must present an exposure to variations in cash flows that could ultimately affect the reported net profit or loss. UBS AG discontinues hedge accounting voluntarily, or when UBS AG determines that a hedging instru- ment is not, or has ceased to be, highly effective as a hedge, when the derivative expires or is sold, terminated or exercised, when the hedged item matures, is sold or repaid or when forecast transac- tions are 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 flows of the hedging instrument exceed changes in the present value of expected cash flows of the hedged item. Such ineffectiveness is recorded in current period earnings in Net trading income. Interest income and expense on derivatives desig- nated as hedging instruments in effective hedge relationships is included in 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 attrib- utable 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 reflected in the carrying value of the hedged item. If the hedge accounting 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 amortized to the income statement over the remaining term to maturity of the hedged item. 588 Note 1 Summary of significant accounting policies (continued) For a portfolio hedge of interest rate risk, the equivalent change in fair value is reflected within Other assets or Other liabil- ities. If the hedge relationship is terminated for reasons other than the derecognition of the hedged item, the amount included in Other assets or Other liabilities is amortized to the income state- ment over the remaining term to maturity of the hedged items. Cash flow hedges Fair value gains or losses associated with the effective portion of derivatives designated as cash flow hedges for cash flow repricing risk are recognized initially in Other comprehensive income within Equity. When the hedged forecast cash flows affect profit or loss, the associated gains or losses on the hedging derivatives are reclassified from Equity to the income statement. If a cash flow hedge of forecasted transactions is no longer considered effective, or if the hedge relationship is terminated, the cumulative gains or losses on the hedging derivatives previously reported in Equity remain there until the committed or forecasted transactions occur and affect profit or loss. If the forecasted trans- actions are no longer expected to occur, the deferred gains or losses are reclassified immediately to the income statement. Hedges of net investments in foreign operations Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are rec- ognized 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 ineffective and / or undesignated portion (for example, the interest element of a forward contract) are recognized in the income statement. Upon disposal or partial disposal of the foreign operation, the cumulative value of any such gains or losses associ- ated with the entity, and recognized directly in Equity, is reclassi- fied to the income statement. Economic hedges that do not qualify for hedge accounting Derivative instruments that 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 for the forward points on certain short duration foreign exchange contracts, which are reported in Net interest income. ➔ Refer to Note 14 for more information on economic hedges Embedded derivatives Derivatives may be embedded in other financial instruments (host contracts). For example, they could be represented by the conver- sion feature embedded in a convertible bond. Such hybrid instru- ments arise predominantly from the issuance of certain structured debt instruments. An embedded derivative is generally required to be separated from the host contract and accounted for as a standalone derivative instrument at fair value through profit or loss if: (i) the host contract is not carried at fair value with changes in fair value reported in the income statement, (ii) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host con- tract and (iii) the terms of the embedded derivative would meet the definition of a standalone derivative were they contained in a separate contract. Bifurcated embedded derivatives are presented on the same balance sheet line as the host contract, and are shown in Note 27a in the Held for trading category, reflecting the measurement and recognition principles applied. Typically, UBS AG applies the fair value option to hybrid instru- ments (refer to item 8 for more information), in which case bifur- cation of an embedded derivative component is not required. 16) Loan commitments Loan commitments are defined amounts (unutilized credit lines or undrawn portions of credit lines) against which clients can borrow money under defined terms and conditions. Loan commitments that can be cancelled at any time by UBS AG at its discretion, according to their general terms and condi- tions, 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 for more information. 589 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) Irrevocable loan commitments (where UBS AG has no right to withdraw the loan commitment once communicated to the ben- eficiary, or which are revocable only due to automatic cancellation upon deterioration in a borrower’s creditworthiness) are classified into the following categories: – derivative loan commitments, being loan commitments that can be settled net in cash or by delivering or issuing another financial instrument, or loan commitments for which there is a past practice of selling those loans resulting from similar loan commitments before or shortly after origination; – loan commitments designated at fair value through profit and loss (refer to item 8 for more information) and – all other loan commitments. These are not recorded in the bal- ance sheet, but a provision is recognized if it is probable that a loss has been incurred and a reliable estimate of the amount of the obligation can be made. Other loan commitments include irrevocable forward starting reverse repurchase and irrevocable securities borrowing agreements. Any change in the liability relating to these other loan commitments is recorded in the income statement in Credit loss expense / recovery. Refer to items 11 and 27 for more information. 17) Financial guarantee contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for an incurred loss because a specified debtor fails to make payments when due in accordance with the terms of a specified debt instru- ment. UBS AG issues such financial guarantees to banks, financial institutions and other parties on behalf of clients to secure loans, overdrafts and other banking facilities. Certain written financial guarantees that are managed on a fair value basis are designated at fair value through profit or loss. Refer to item 8 for more information. Financial guarantees that are not managed on a fair value basis are initially recognized in the financial statements at fair value. Subsequent to initial recog- nition, these financial guarantees are measured at the higher of the amount initially recognized less cumulative amortization, and to the extent a payment under the guarantee has become prob- able, the present value of the expected payment. Any change in the liability relating to probable expected payments resulting from 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 flows, 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. 19) Physical commodities Physical commodities (precious metals, base metals and other commodities) held by UBS AG as a result of its broker-trader activ- ities are accounted for at fair value less costs to sell and recog- nized within Trading portfolio assets. Changes in fair value less costs to sell are recorded in Net trading income. improvements, 20) Property, equipment and software Property, equipment and software includes own-used properties, information technology hardware, leasehold externally purchased and internally generated software and com- munication and other similar equipment. All Property, equipment and software is carried at cost (which includes capitalized interest from associated borrowings, where applicable), less accumulated depreciation and impairment losses, and is reviewed periodically for impairment. ➔ Refer to Note 16 for more information on property and equipment Leasehold improvements Leasehold improvements are investments made to customize buildings and offices occupied under operating lease contracts to make them suitable for their intended purpose. The present value of estimated reinstatement costs required to bring a leased prop- erty back into its original condition at the end of the lease is capi- talized as part of total leasehold improvements with a correspond- ing liability recognized to reflect the obligation incurred. 590 Note 1 Summary of significant accounting policies (continued) Reinstatement costs are recognized in the income statement through depreciation of the capitalized leasehold improvements over their estimated useful lives and the resulting liability is extin- guished as cash payments are made. Property held for sale Where UBS AG has decided to sell non-current assets such as prop- erty or equipment and the sale of these assets is highly probable to occur within 12 months, these assets are classified as non-current assets held for sale and are reclassified to Other assets. Upon clas- sification 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 only when the costs can be measured reliably and it is probable that future economic benefits will arise. Estimated useful life of property, equipment and software An asset within property, equipment and software is depreciated on a straight-line basis over its estimated useful life. Depreciation of an asset within property, equipment and software begins when it is available for use; that is, when it is in the location and condi- tion necessary for it to be capable of operating in the manner intended by management. Estimated useful life of property, equipment and software Properties, excluding land Leasehold improvements Other machines and equipment IT hardware and communication equipment Software Not exceeding 67 years Residual lease term Not exceeding 10 years Not exceeding 5 years Not exceeding 10 years 21) Goodwill and intangible assets Goodwill represents the excess of the cost of an acquisition over the fair value of UBS AG’s share of net identifiable assets of the acquired entity at the date of acquisition. Goodwill is not amor- tized. It is tested annually for impairment and, additionally, when an indication of impairment exists at the end of each reporting period. For goodwill impairment testing purposes, UBS AG con- siders the segments reported in Note 2a as separate cash-gener- ating units, since this is the level at which the performance of investments is reviewed and assessed by management. The recov- erable amount of a segment is determined on the basis of its value-in-use. Intangible assets are comprised of separately identifiable intan- gible items arising from business combinations and certain pur- chased trademarks and similar items. Intangible assets are recog- nized at cost. The cost of an intangible asset acquired in a business combination is its fair value at the date of acquisition. Intangible assets with a definite useful life are amortized using the straight- line method over their estimated useful life, generally not exceed- ing 20 years. Intangible assets with an indefinite useful life are not amortized. In nearly all cases, identified intangible assets have a definite useful life. At each balance sheet date, intangible assets are reviewed for indications of impairment. If such indications exist, the intangible assets are analyzed to assess whether their carrying amount is fully recoverable. An impairment loss is recog- nized if the carrying amount exceeds the recoverable amount. Intangible assets are classified into two categories: (i) infra- structure and (ii) customer relationships, contractual rights and other. Infrastructure consists of a branch network intangible asset recognized in connection with the acquisition of PaineWebber Group, Inc. Client relationships, contractual rights and other includes mainly intangible assets for client relationships, non- compete agreements, favorable contracts, trademarks and trade names acquired in business combinations. ➔ Refer to Note 17 for more information on goodwill and intangible assets 22) Income taxes Income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in the period in which profits arise. The tax effects of income tax losses available for carry forward are recognized as a deferred tax asset if it is prob- able that future taxable profit (based on profit forecast assump- tions) 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 sufficient taxable profits will be available against which these differences can be utilized. Deferred tax liabilities are recognized for temporary differences between the carrying amounts of assets and liabilities in the bal- ance sheet that reflect the expectation that certain items will give rise to taxable income 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. Deferred and current tax assets and liabilities are offset when they arise from the same tax reporting group, they relate to the same tax authority, the legal right to offset exists, and they are intended to be settled net or realized simultaneously. 591 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) Current and deferred taxes are recognized as income tax benefit or expense in the income statement except for current and deferred taxes recognized (i) upon the acquisition of a subsidiary, (ii) for unrealized gains or losses on financial investments that are classified as available-for-sale, for changes in fair value of deriva- tive instruments designated as cash flow hedges, for remeasure- ments of defined benefit plans, and for certain foreign currency translations of foreign operations, and (iii) for gains and losses on the sale of treasury shares. Deferred taxes recognized in a busi- ness combination (point (i)) are considered when determining goodwill. Amounts relating to points (ii) and (iii) are recognized in Other comprehensive income within Equity. instruments measured at amortized cost is included in Interest on debt issued. ➔ Refer to Note 21 for more information on debt issued 24) Pension and other post-employment benefit plans UBS AG sponsors a number of post-employment benefit plans for its employees worldwide, which include defined benefit and defined contribution pension plans, and other post-employment benefits such as medical and life insurance benefits that are payable after the completion of employment. The major defined benefit pension plans are located in Switzerland, the UK, the US and Germany. ➔ Refer to Note 28 for more information on pension and other ➔ Refer to Note 8 for more information on income taxes post-employment benefit plans 23) Debt issued Debt issued is carried at amortized cost. In cases where there is a legal mechanism for write-down or conversion into equity (as is the case for instance with senior unsecured debt issued by UBS AG that is subject to write-down or conversion under resolution authority granted to FINMA under Swiss law) this is not part of the contractual terms, and, therefore, it does not affect the amortized cost accounting treatment applied to these instru- ments. If the debt were to be written down or converted into equity in a future period, this would result in the full or partial derecognition of the financial liabilities, with the difference between the carrying value of the debt written down or con- verted into equity and the fair value of any equity shares issued recognized in the income statement. In cases where, as part of UBS AG’s risk management activity, fair value hedge accounting is applied to fixed-rate debt instru- ments carried at amortized cost, their carrying amount is adjusted for changes in fair value related to the hedged expo- sure. Refer to item 15 for more information on hedge account- ing. In most cases, structured notes issued are designated at fair value through profit or loss using the fair value option, on the basis that they are managed on a fair value basis, that the struc- tured notes contain an embedded derivative, or both. Refer to item 8 for more information on the fair value option. The fair value option is not applied to certain structured notes that con- tain embedded derivatives that reference foreign exchange rates and / or precious metal prices. For these instruments, the embed- ded derivative component is measured on a fair value basis and the related underlying debt host component is measured on an amortized cost basis, with both components presented together within Debt issued. Refer to item 15 for more information on embedded derivatives. Defined benefit pension plans Defined benefit pension plans specify an amount of benefit that an employee will receive, which is usually dependent on one or more factors such as age, years of service and compensation. The defined benefit liability recognized in the balance sheet is the present value of the defined benefit obligation less the fair value of the plan assets at the balance sheet date. If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the recognition of the resulting net defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future con- tributions to the plan. UBS AG applies the projected unit credit method to determine the present value of its defined benefit obli- gations, the related current service cost and, where applicable, past service cost. These amounts, which take into account the specific features of each plan, including risk sharing between the employee and employer, are calculated periodically by indepen- dent qualified actuaries. Defined contribution plans A defined contribution plan is a pension plan under which UBS AG pays fixed contributions into a separate entity from which post-employment and other benefits are paid. UBS AG has no legal or constructive obligation to pay further contributions if the plan does not hold sufficient assets to pay employees the benefits relating to employee service in the current and prior periods. UBS AG’s contributions are expensed when the employees have ren- dered 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 payments is available. Debt issued and subsequently repurchased in relation to mar- ket-making or other activities is treated as redeemed. A gain or loss on redemption (depending on whether the repurchase price of the bond is lower or higher than its carrying value) is recorded in Other income. A subsequent sale of own bonds in the market is treated as a reissuance of debt. Interest expense on debt Other post-retirement benefits UBS AG also provides post-retirement medical and life insurance benefits to certain retirees in the US and the UK. The expected costs of these benefits are recognized over the period of employ- ment using the same accounting methodology used for defined benefit pension plans. 592 Note 1 Summary of significant accounting policies (continued) 25) Equity participation and other compensation plans Transfer of deferred compensation plans As part of the Group reorganization in 2014, UBS Group AG assumed obligations of UBS AG as grantor in connection with certain outstanding awards under employee share, option, notional fund and deferred cash compensation plans. This section separately describes the accounting policies applied to these plans during the periods prior to and post the Group reorganization and transfer of deferred compensation plans. Periods prior to the Group reorganization and transfer of deferred compensation plans Equity participation plans UBS AG has established several equity participation plans which include mandatory, discretionary and voluntary plans. UBS AG recognizes the fair value of awards granted under these plans, determined at the date of grant, as compensation expense, over the period during which the employee is required to provide ser- vices in order to earn the award. If the employee is not required to provide future services, such as for awards granted to employees who are retirement eligible, including those employees who meet full career retirement crite- ria, compensation expense is recognized on or prior to the grant date. Such awards may remain forfeitable until the legal vesting date if certain non-vesting conditions are not met. Forfeiture events resulting from breach of a non-vesting condition do not result in a reversal of compensation expense. If future service is required, compensation expense is recog- nized over that future period. For awards that are delivered in tranches, each tranche is considered a separate award and amor- tized separately. Plans may contain provisions that shorten the required service period due to achievement of retirement eligibil- ity or upon termination due to redundancy. In such instances, compensation expense is recognized over the period from grant date to the retirement eligibility or redundancy date. Forfeiture of these awards that occurs during the service period results in a reversal of compensation expense. Awards settled in UBS AG shares or options are classified as equity settled. The fair value of an equity-settled award is deter- mined at the date of grant and is not subsequently remeasured, unless its terms are modified such that the fair value immediately after modification exceeds the fair value immediately prior to modification. Any increase in fair value resulting from a modifica- tion is recognized as compensation expense, either over the remaining service period or, for vested awards, immediately. Cash-settled awards are classified as liabilities and are remea- sured to fair value at each balance sheet date as long as the award is outstanding. Changes in fair value are reflected in compensation expense and, on a cumulative basis, no compen- sation expense is recognized for awards that expire worthless or remain unexercised. ➔ Refer to Note 29 for more information on equity participation plans Other compensation plans UBS AG has established other fixed and variable deferred com- pensation plans, the values of which are not linked to UBS AG’s own equity. Deferred cash compensation plans are either man- datory or discretionary plans and include awards based on a notional cash amount, where ultimate payout is fixed or may vary based on achievement of performance conditions or the value of specified underlying assets. Compensation expense is recognized over the period that the employee is required to pro- vide services to earn the award. If the employee is not required to provide future services, such as for awards granted to employ- ees who are retirement eligible, including those employees who meet full career retirement criteria, compensation expense is rec- ognized on or prior to the grant date. The amount recognized during the service period is based on an estimate of the amount expected to be paid out under the plan, such that cumulative expense recognized ultimately equals the cash distributed to employees. For awards in the form of alternative investment vehicles or similar structures, which provide employees with a payout based on the value of specified underlying assets, the initial value is based on the fair value at the grant date of the underlying assets (e.g., money market funds, UBS and non-UBS mutual funds and other UBS-sponsored funds). These awards are remeasured at each reporting date based on the fair value of the underlying assets until the award is distributed. Changes in value are recognized proportionately to the elapsed service period. Forfeiture of these awards results in the reversal of com- pensation expense. ➔ Refer to Note 29 for more information on other compensation plans Periods post the Group reorganization and transfer of deferred compensation plans Equity participation plans UBS Group AG has established, and maintains the obligation to settle, several equity participation plans which are granted to employees of UBS AG. UBS Group AG’s equity participation plans include mandatory, discretionary and voluntary plans. UBS AG recognizes the fair value of awards granted to its employees, determined at the grant date, over the period that the employee is required to provide services in order to earn the award. 593 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) If the employee is not required to provide future services, such as for awards granted to employees who are retirement eligible, including those employees who meet full career retirement crite- ria, compensation expense is recognized on or prior to the grant date. Such awards may remain forfeitable until the legal vesting date if certain non-vesting conditions are not met. Forfeiture events resulting from breach of a non-vesting condition do not result in a reversal of compensation expense. If future service is required, compensation expense is recog- nized over that future period. For awards that are delivered in tranches, each tranche is considered a separate award and amor- tized separately. Plans may contain provisions that shorten the required service period due to achievement of retirement eligibil- ity or upon termination due to redundancy. In such instances, compensation expense is recognized over the period from grant date to the retirement eligibility or redundancy date. Forfeiture of these awards that occurs during the service period results in a reversal of compensation expense. UBS AG has no obligation to settle the awards and therefore awards over UBS Group AG shares are classified as equity settled share-based payment transactions. The fair value of an equity- settled award is determined at the date of grant and is not subse- quently remeasured, unless its terms are modified such that the fair value immediately after modification exceeds the fair value immediately prior to modification. Any increase in fair value resulting from a modification is recognized as compensation expense, either over the remaining service period or, for vested awards, immediately. ➔ Refer to Note 29 for more information on equity participation plans Other compensation plans UBS Group AG has established other fixed and variable deferred compensation plans, the values of which are not linked to UBS Group AG’s or UBS AG’s own equity. Deferred cash compensation plans are either mandatory or discretionary plans and include awards based on a notional cash amount, where ultimate payout is fixed or may vary based on achievement of performance condi- tions or the value of specified underlying assets. Compensation expense is recognized over the period that the employee is required to provide services to earn the award. If the employee is not required to provide future services, such as for awards granted to employees who are retirement eligible, including those employ- ees who meet full career retirement criteria, compensation expense is recognized on or prior to the grant date. The amount recognized during the service period is based on an estimate of the amount expected to be paid out under the plan, such that cumulative expense recognized ultimately equals the cash distrib- uted to employees. For awards in the form of alternative invest- ment vehicles or similar structures, which provide employees with a payout based on the value of specified underlying assets, the initial value is based on the fair value of the underlying assets (e.g., money market funds, UBS and non-UBS mutual funds and other UBS-sponsored funds). These awards are remeasured at each reporting date based on the fair value of the underlying assets until the award is distributed. Changes in value are recog- nized proportionately to the elapsed service period. Forfeiture of these awards results in the reversal of compensation expense. ➔ Refer to Note 29 for more information on other compensation plans 26) Amounts due under unit-linked investment contracts Financial liabilities from unit-linked investment contracts are pre- sented as Other liabilities on the balance sheet. These contracts allow investors to invest in a pool of assets through issued invest- ment units. The unit holders receive all rewards and bear all risks associated with the reference asset pool. The financial liability rep- resents the amounts due to unit holders and is equal to the fair value of the reference asset pool. Assets held under unit-linked investment contracts are presented as Trading portfolio assets. ➔ Refer to Notes 13 and 23 for more information on unit-linked investment contracts 27) Provisions Provisions are liabilities of uncertain timing or amount, and are recognized when UBS AG has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. The majority of UBS AG’s provisions relate to litigation, regula- tory and similar matters, restructuring, employee benefits, real estate and loan commitments and guarantees. Provisions that are similar in nature are aggregated to form a class, while the remain- ing provisions, including those of less significant amounts are pre- sented under Other provisions. Provisions are presented sepa- rately on the balance sheet and, when they are no longer considered uncertain in timing or amount, are reclassified to Other liabilities – Other. 594 Note 1 Summary of significant accounting policies (continued) UBS AG recognizes provisions for litigation, regulatory and similar matters when, in the opinion of management after seek- ing legal advice, it is more likely than not that UBS AG has a pres- ent legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required, and the amount can be reliably estimated. Where these factors are other- wise satisfied, a provision may be established for claims that have not yet been asserted against UBS AG, but are nevertheless expected to be, based on the experience of UBS AG with similar asserted claims. Restructuring provisions are recognized when a detailed and formal restructuring plan has been approved and a valid expecta- tion has been raised that the restructuring will be carried out, either through commencement of the plan or announcements to affected employees. Provisions are recognized for lease contracts if the unavoidable costs of a contract exceed the benefits expected to be received under it (onerous lease contracts). For example, this may occur when a significant portion of a leased property is expected to be vacant for an extended period. Provisions for employee benefits are recognized mainly in respect of service anniversaries and sabbatical leave. Provisions are recognized at the best estimate of the consider- ation required to settle the present obligation at the balance sheet date. Such estimates are based on all available information and are revised over time as more information becomes available. If the effect of the time value of money is material, provisions are discounted and measured at the present value of the expenditure expected to settle or discharge the obligation, using a rate that reflects the current market assessments of the time value of money and the risks specific to the obligation. A provision is not recognized when UBS AG has a present obli- gation that has arisen from past events but it is not probable that an outflow of resources will be required to settle it, or a suffi- ciently reliable estimate of the amount of the obligation cannot be made. Instead, a contingent liability is disclosed, unless the likelihood of an outflow of resources is remote. Contingent liabil- ities are also disclosed for possible obligations that arise from past events whose existence will be confirmed only by uncertain future events not wholly within the control of UBS AG. ➔ Refer to Note 22 for more information on provisions 28) Equity, treasury shares and contracts on UBS AG shares Non-controlling interests and preferred noteholders Net profit and Equity are presented including non-controlling interests and preferred noteholders. Net profit is split into Net profit attributable to UBS AG shareholders, Net profit attributable to non-controlling interests and Net profit attributable to pre- ferred noteholders. Equity is split into Equity attributable to UBS AG shareholders, Equity attributable to non-controlling interests and Equity attributable to preferred noteholders. UBS AG shares held (treasury shares) UBS AG shares held by UBS AG are presented in Equity as Treasury shares at their acquisition cost, which includes transaction costs. Treasury shares are deducted from Equity until they are cancelled or reissued. The difference between the proceeds from sales of treasury shares and their weighted average cost (net of tax, if any) is reported as Share premium. Preferred notes issued to non-consolidated preferred securities entities UBS AG issued subordinated notes (that is, the preferred notes) to certain non-consolidated entities that issued preferred securi- ties. UBS AG has fully and unconditionally guaranteed all con- tractual payments on the preferred securities. UBS AG’s obliga- tions under these guarantees are subordinated to the full prior payment of the deposit liabilities of UBS AG and all other liabili- ties of UBS AG. The preferred notes do not contain a contractual obligation to deliver cash and, therefore, they are classified as equity instruments. They are presented as Equity attributable to preferred noteholders on the consolidated balance sheet and statement of changes in equity. Distributions on these preferred notes are presented as Net profit attributable to preferred note- holders in the consolidated income statement and statement of comprehensive income. Net cash settlement contracts Prior to the share-for-share exchange, UBS AG issued contracts on own shares that required net cash settlement, or provided the counterparty or UBS AG with a settlement option which included a choice of settling net in cash. These contracts were classified as held for trading, with changes in fair value reported in the income statement as Net trading income. Following the share-for-share exchange, these contracts con- tinue to be accounted for in the same manner, however, they are no longer classified as contracts on own shares. 595 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) 29) Non-current assets and disposal groups held for sale UBS AG classifies individual non-current assets and disposal groups as held for sale if such assets or disposal groups are avail- able for immediate sale in their present condition subject to terms that are usual and customary for sales of such assets or disposal 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. Assets held for sale and 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. Non-current assets and liabilities of subsidiaries are classified as held for sale if their carrying amount will be recov- ered principally through a sale transaction rather than through continuing use. ➔ Refer to Notes 18 and 23 for more information on non-current assets and disposal groups held for sale 30) Leasing UBS AG enters into lease contracts, or contracts that include lease components, predominantly of premises and equipment, and pri- marily as lessee. Leases that transfer substantially all the risks and rewards, but not necessarily legal title in the underlying assets, are classified as finance leases. All other leases are classified as oper- ating leases. Assets leased pursuant to finance leases are recognized on the balance sheet as Property and equipment and are depreciated over the lesser of the useful life of the asset or the lease term, with corresponding amounts payable included in Due to banks / customers. Finance charges payable are recognized in Net interest income over the period of the lease based on the interest rate implicit in the lease on the basis of a constant yield. Lease contracts classified as operating leases where UBS AG is the lessee are disclosed in Note 33. These contracts include non- cancellable long-term leases of office buildings in most UBS AG locations. Operating lease rentals payable are recognized as an expense on a straight-line basis over the lease term, which com- mences with control of the physical use of the property. Lease incentives are treated as a reduction of rental expense and are recognized on a consistent basis over the lease term. Where UBS AG acts as lessor under a finance lease, a receiv- able is recognized in Loans at an amount equal to the present value of the aggregate of the minimum lease payments plus any unguaranteed residual value that UBS AG expects to recover at the end of the lease term. Initial direct costs are also included in the initial measurement of the lease receivable. Lease payments received during the lease term are allocated to repayment of the outstanding receivable and interest income to reflect a constant periodic rate of return on UBS AG’s net investment using the interest rate implicit in the lease. UBS AG reviews the estimated unguaranteed residual value annually and if the estimated resid- ual value to be realized is less than the amount assumed at lease inception, a loss is recognized for the expected shortfall. 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 AG determines at the inception of the arrangement whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and, if so, the arrangement is accounted for as a lease. ➔ Refer to Note 33 for more information on operating leases and finance leases 31) Fee income UBS AG earns fee income from a diverse range of services it pro- vides to its clients. Fee income can be divided into two broad categories: fees earned from services that are provided over a cer- tain period of time (for example, investment fund fees, portfolio management and advisory fees) and fees earned from providing transaction-type services (for example, underwriting fees, corpo- rate finance fees and brokerage fees). Fees earned from services that are provided over a certain period of time are recognized ratably over the service period, with the exception of perfor- mance-linked fees or fee components with specific performance criteria. Such fees are recognized when the performance criteria are fulfilled and when collectability is reasonably assured. Fees earned from providing transaction-type services are recognized when the service has been completed. Generally, fees are pre- sented in the income statement in line with the balance sheet classification of the underlying instruments. 596 Note 1 Summary of significant accounting policies (continued) With respect to loan commitment fees on lending arrange- ments where there is an initial expectation that the facility will be drawn down, such fees 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. Where the initial expectation is that the facil- ity is unlikely to be drawn down, the loan commitment fees are recognized on a straight-line basis over the commitment period. If, in such cases, the facility is ultimately drawn down, the unamor- tized component of the loan commitment fees is amortized as an adjustment to the effective yield over the life of the loan. ➔ Refer to Note 4 for more information on net fee and commission income When a foreign operation is disposed or partially disposed of, the cumulative amount in Foreign currency translation within Equity related to that foreign operation is reclassified to the income statement as part of the gain or loss on disposal. When UBS AG disposes of a portion of its interest in a subsidiary that includes a foreign operation but retains control, the related por- tion of the cumulative currency translation balance is reclassified to Equity attributable to non-controlling interests. When UBS AG disposes of a portion of its investment in an associate or joint venture that includes a foreign operation while retaining signifi- cant influence or joint control, the related portion of the cumula- tive currency translation balance is reclassified to the income statement. ➔ Refer to Note 36 for more information on currency translation 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 monetary assets and liabilities denominated in foreign currency are translated to the functional currency 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. Foreign currency translation differences on financial investments classified as available-for-sale are generally recorded directly in Equity until the asset is sold or becomes impaired. However, translation differ- ences on available-for-sale monetary financial investments are reported in Net trading income, along with all other foreign cur- rency translation differences on monetary assets and liabilities. Upon consolidation, assets and liabilities of foreign operations are translated into Swiss francs (CHF), UBS AG’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. The resulting foreign currency translation differences attributable to UBS AG shareholders are recognized directly in Foreign currency translation within Equity which forms part of Total equity attributable to UBS AG shareholders, whereas the foreign currency translation differences attributable to non-con- trolling interests are shown within Equity attributable to non-con- trolling interests. rates 33) Earnings per share (EPS) During 2015, UBS AG shares were delisted from the SIX and the NYSE. As of 31 December 2015, 100% of UBS AG’s issued shares were held by UBS Group AG and therefore were not publicly traded. Accordingly, earnings per share information is not pro- vided for UBS AG. 34) Segment reporting UBS AG’s businesses are organized globally into five business divisions: Wealth Management, Wealth Management Americas, Personal & Corporate Banking, Asset Management and the Investment Bank, supported by the Corporate Center. The five business divisions qualify as reportable segments for the purpose of segment reporting and, together with the Corporate Center and its components, reflect the management structure of UBS AG. Additionally, the non-core activities and legacy positions for- merly in the Investment Bank are managed and reported as a separate reportable segment within the Corporate Center as Non-core and Legacy Portfolio. Financial information about the five business divisions and the Corporate Center (with its com- ponents) is presented separately in internal management reports to the Group Executive Board, which is considered the “chief operating decision maker” within the context of IFRS 8 Operat- ing Segments. 597 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) UBS AG’s internal accounting policies, which include manage- ment accounting policies and service level agreements, determine the revenues and expenses directly attributable to each reportable segment. Internal charges and transfer pricing adjustments are reflected in operating results of the reportable segments. Transac- tions between the reportable segments are carried out at inter- nally agreed rates and are also reflected in the operating results of the reportable segments. Revenue-sharing agreements are used to allocate external client revenues to reportable segments where several reportable segments are involved in the value-creation chain. Commissions are credited to the reportable segments based on the corresponding client relationship. Net interest income is generally allocated to the reportable segments based on their balance sheet positions. Interest income earned from man- aging UBS AG’s consolidated equity is allocated to the reportable segments based on average attributed equity. Own credit gains and losses on financial liabilities designated at fair value are excluded from the measurement of performance of the business divisions, are considered reconciling differences to UBS AG results and are reported collectively under Corporate Center – Group Asset and Liability Management (Group ALM). Assets and liabilities of the reportable segments are funded through and invested with Corporate Center – Group Asset and Liability Management, and the net interest margin is reflected in the results of each reportable segment. Total intersegment reve- nues for UBS AG are immaterial as the majority of the revenues are allocated across the segments by means of revenue-sharing agreements. Segment balance sheet assets are based on a third-party view and do not include intercompany balances. This view is in line with internal reporting to management. Certain assets managed centrally by Corporate Center – Services and Corporate Center – Group Asset and Liability Management (including property and equipment and certain financial assets) may be allocated to the segments on a basis different to that which the corresponding costs and / or revenues are allocated. For example, certain assets that are reported in Corporate Center – Services or Corporate Center – Group Asset and Liability Management may be retained on the balance sheets of these components of Corporate Center notwithstanding that the costs and / or revenues associated with these assets may be entirely or partially allocated to the segments. Similarly, certain assets are reported in the business divisions, whereas the corresponding costs and / or revenues are entirely or partially allocated to Corporate Center – Services and Corporate Center – Group Asset and Liability Management. For the purpose of segment reporting under IFRS 8, non-current assets consist of investments in associates and joint ventures, good- will, other intangible assets and property, equipment and software. ➔ Refer to Note 2 for more information on segment reporting 35) Netting UBS AG nets financial assets and liabilities on its balance sheet if it has the unconditional and legally enforceable right to set-off the recognized amounts, both in the normal course of business and in the event of default, bankruptcy or insolvency of the entity and all of the counterparties, and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. Netted positions include, for example, over-the-counter interest rate swaps transacted with the London Clearing House, netted by currency and across maturity dates, and repurchase and reverse repurchase transactions entered into with both the London Clear- ing House and the Fixed Income Clearing Corporation, netted by counterparty, currency, central securities depository and maturity, as well as transactions with various other counterparties, exchanges and clearing houses. In assessing whether UBS AG intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously, emphasis is placed on the effectiveness of operational settlement mechanics in eliminating substantially all credit and liquidity expo- sure between the counterparties. This condition precludes offset- ting on the balance sheet for substantial amounts of UBS AG’s financial assets and liabilities, even though they may be subject to enforceable netting arrangements. For derivative contracts, bal- ance sheet offsetting is generally only permitted in circumstances in which a market settlement mechanism exists via an exchange or clearing house that effectively accomplishes net settlement through a daily cash margining process. For repurchase arrange- ments and securities financings, balance sheet offsetting may be permitted only to the extent that the settlement mechanism elim- inates or results in insignificant credit and liquidity risk. ➔ Refer to Note 26 for more information on offsetting financial assets and financial liabilities 36) Negative interest Negative interest income arising on a financial asset does not meet the definition of interest income and therefore negative interest on financial assets and negative interest on financial liabilities is pre- sented within Interest expense and Interest income respectively. ➔ Refer to Note 3 for more information on interest income and interest expense 598 Note 1 Summary of significant accounting policies (continued) b) Changes in accounting policies, comparability and other adjustments Statement of cash flows – definition of cash and cash equivalents In 2015, UBS AG refined its definition of cash and cash equiva- lents presented in the statement of cash flows to exclude cash collateral receivables on derivative instruments with bank coun- terparties. The refined definition is consistent with the treatment of these receivables in UBS AG’s liquidity and funding manage- ment framework and with liquidity and funding regulations, which became effective in 2015, and is considered to result in the presentation of more relevant information. Comparative period information was restated accordingly. As a result, cash and cash equivalents as of 31 December 2014, 31 December 2013 and 31 December 2012 were reduced by CHF 10,265 million, CHF 8,982 million and CHF 12,393 million, respectively. On a restated basis, cash flow from operating activi- ties for the year ended 31 December 2014 decreased by CHF 1,195 million (2013: increase by CHF 3,415 million) and the gain from effects of exchange rate differences on cash and cash equiv- alents decreased by CHF 89 million for the same period (2013: loss from currency effects increased by CHF 3 million). Review of actuarial assumptions used in calculating defined benefit obligations UBS AG regularly reviews the actuarial assumptions used in calculating its defined benefit obligations to determine their con- tinuing relevance. In 2015, UBS AG carried out a methodology review of the actuarial assumptions used in calculating its defined benefit obligation for its Swiss pension plan. As a result, UBS AG enhanced its methodology for estimating the discount rate by improving the construction of the yield curve where the market for long tenor maturities of Swiss high-quality corporate bonds was not sufficiently deep. Furthermore, UBS AG refined its approach to estimating the rate of salary increases, the rate of interest credit on retirement savings, the employee turnover rate, the rate of employee disabilities and the rate of marriage. These improvements in estimates resulted in a total net decrease in the defined benefit obligation (DBO) of the Swiss pension plan of CHF 2.1 billion, of which CHF 1.0 billion related to demographic assumptions and CHF 1.0 billion related to finan- cial assumptions, and a corresponding increase in Other com- prehensive income. Furthermore, UBS AG enhanced methodologies and refined approaches used to estimate various actuarial assumptions for its UK and other pension plans. These improvements in estimates resulted in a total net decrease in the DBO of the UK pension plan of CHF 0.2 billion, of which CHF 0.1 billion related to demo- graphic assumptions and CHF 0.1 billion related to financial assumptions, and a corresponding increase in Other comprehen- sive income. Valuation methodology for the own credit component of financial liabilities designated at fair value In 2015, UBS AG made enhancements to its valuation methodol- ogy for the own credit component of fair value of financial liabili- ties designated at fair value. Prior to the fourth quarter of 2015, own credit was estimated using a funds transfer pricing curve (FTP), which was derived by discounting UBS Group AG (consoli- dated) new issuance senior debt curve spreads, with the discount primarily reflecting the differences between the spreads in the senior unsecured debt market for UBS Group AG (consolidated) debt and the levels at which UBS Group AG (consolidated) medium-term notes (MTN) were issued. A decline in long-dated UBS Group AG (consolidated) MTN issuance volumes, following UBS Group AG’s (consolidated) business transformation, resulted in a reduction in the observable market data available to bench- mark the FTP. From the fourth quarter of 2015 onwards, own credit is estimated using an own credit adjustment curve (OCA), which incorporates more observable market data, including mar- ket-observed secondary prices for UBS Group AG (consolidated) senior debt, UBS Group AG (consolidated) credit default swap (CDS) spreads and senior debt curves of peers. This change in accounting estimate was finalized in the fourth quarter of 2015, following a multi-period implementation project to develop an enhanced fair value approach supported by related infrastructure enhancements. The change was implemented on a prospective basis in the fourth quarter of 2015 and resulted in a gain of CHF 260 million on a total carrying amount of CHF 63 billion in finan- cial liabilities designated at fair value. 599 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) Additionally, UBS AG will early adopt the own credit presenta- tion requirements of IFRS 9 in the first quarter of 2016. No restate- ment of prior periods is required. Under IFRS 9, changes in the fair value of financial liabilities designated at fair value through profit and loss related to own credit will be recognized in Other compre- hensive income and will not be reclassified to the income state- ment. UBS AG will adopt the other requirements of IFRS 9 (clas- sification and measurement, impairment and hedge accounting) as of the mandatory effective date in 2018. Global Asset Management renamed Asset Management During 2015, the business division Global Asset Management was renamed Asset Management. This change is reflected throughout this report. Retail & Corporate renamed Personal & Corporate Banking Effective 2016, the business division Retail & Corporate has been renamed Personal & Corporate Banking. This change is reflected throughout this report. New structure of the Corporate Center As of 1 January 2015, Corporate Center – Core Functions was reorganized into two new units, Corporate Center – Services and Corporate Center – Group Asset and Liability Management (Group ALM). Therefore, UBS AG now reports: (i) Corporate Cen- ter – Services, (ii) Corporate Center – Group ALM and (iii) Corpo- rate Center – Non-Core and Legacy Portfolio separately, which enhances the transparency on Corporate Center activities. Group ALM is responsible for centrally managing UBS AG’s liquidity and funding position, as well as providing other balance sheet and capital management services to UBS AG. Most of the income generated and expenses incurred by Group ALM from these activities continues to be allocated to the business divisions and other Corporate Center units. Additional transparency on revenue allocations from Group ALM to business divisions and other Corporate Center units is provided in Note 2. Own credit gains and losses on financial liabilities designated at fair value are presented in Group ALM. Corporate Center – Services includes UBS AG’s central control functions and all logistics and support functions serving the busi- ness divisions and other Corporate Center units. Most of the expenses of Corporate Center – Services are allocated to the busi- ness divisions and other Corporate Center units. ➔ Refer to Note 2 for more information Service and personnel allocations from Corporate Center – Services to business divisions and other Corporate Center units In 2015, UBS AG revised the presentation of service allocations from Corporate Center – Services to the business divisions and other Corporate Center units to better reflect the economic rela- tion-ship between them. These cost allocations were previously presented within the Personnel expenses, General and adminis- trative expenses and Depreciation and impairment of property, equipment and software line items and are newly presented in the Services (to) / from business divisions and Corporate Center line items. Prior-period information was restated to reflect this change. This change in presentation did not affect total operating expenses or performance before tax of the business divisions and Corporate Center units for any period presented. Similarly, per- sonnel of Corporate Center – Services are no longer allocated to the business divisions and other Corporate Center units. Prior- period information was restated accordingly. ➔ Refer to Note 2 for more information Change in segment reporting related to fair value gains and losses on certain internal funding transactions Consistent with changes in the manner in which operating seg- ment performance is assessed, beginning in 2015, UBS AG has applied fair value accounting for certain internal funding transactions between Corporate Center – Group ALM and the Investment Bank and Corporate Center – Non-core and Legacy Portfolio rather than applying amortized cost accounting. This treatment better aligns with the mark-to-market basis on which these internal transactions are risk managed within the Invest- ment Bank and Corporate Center – Non-core and Legacy Portfo- lio. The terms of the funding transactions remain otherwise unchanged. Prior periods have been restated to reflect this change. As a result, Investment Bank operating income and per- formance before tax decreased by CHF 37 million for the year ended 31 December 2014 and by CHF 162 million for the year ended 31 December 2013, with offsetting increases in Corporate Center. This change did not affect UBS AG’s total operating income or net profit for any period presented. ➔ Refer to Note 2 for more information 600 Note 1 Summary of significant accounting policies (continued) c) International Financial Reporting Standards and Interpretations to be adopted in 2016 and later and other adjustments IFRS 9, Financial Instruments In July 2014, the IASB published the final version of IFRS 9, Finan- cial Instruments. The standard reflects the classification and mea- surement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39, Financial Instruments: Recognition and Measurement. The standard requires all financial assets, except equity instru- ments, to be classified at fair value through profit or loss, fair value through other comprehensive income (OCI) or amortized cost on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. If a financial asset meets the criteria to be measured at amortized cost or at fair value through OCI, it can be designated at fair value through profit or loss under the fair value option if doing so would significantly reduce or eliminate an accounting mismatch. Equity instruments that are not held for trading may be accounted for at fair value through OCI, with no subsequent reclassification of realized gains or losses to the income statement, while all other equity instruments will be accounted for at fair value through profit or loss. The accounting guidance for financial liabilities is unchanged with one exception: any gain or loss arising out of a financial lia- bility designated at fair value through profit or loss that is attribut- able to changes in the credit risk of that liability (own credit) is presented in OCI and not recognized in the income statement. There is no subsequent reclassification of realized gains or losses on own credit from OCI to the income statement. In addition, the standard introduces a forward-looking expected credit loss impairment model, replacing the incurred loss model of IAS 39. IFRS 9 also incorporates a reformed approach to hedge accounting that introduces substantial changes to hedge effectiveness and eligibility requirements as well as new disclo- sures. The standard does not explicitly address macro hedge accounting strategies. The mandatory effective date of the new standard is 1 January 2018, with earlier adoption permitted. Adoption of the IFRS 9 hedge accounting requirements is optional, pending the comple- tion by the IASB of its project on macro hedge accounting strate- gies. UBS AG will adopt the own credit presentation changes in the first quarter of 2016 and is currently assessing the impact of the other requirements of IFRS 9 on its financial statements. IFRS 15, Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which establishes principles for revenue recogni- tion that apply to all contracts with customers. The standard requires an entity to recognize revenue as goods or services are transferred to the customer in an amount that reflects the consid- eration to which the entity expects to be entitled to in exchange for those goods or services. It also establishes a cohesive set of disclosure requirements regarding information about the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. The standard is effective for UBS AG reporting periods beginning on 1 January 2018, with early adop- tion permitted. Entities can choose to apply the standard retro- spectively or use a modified approach in the year of adoption. UBS AG is currently assessing the impact of the new standard on its financial statements. IFRS 16, Leases In January 2016, the IASB issued IFRS 16, Leases. The standard substantially changes the accounting by lessees as operating leases previously accounted for as off-balance sheet financing arrangements will be recognized as on-balance sheet liabilities with a corresponding right of use asset also being recorded. The standard replaces IAS 17, Leases and is effective for UBS AG from 1 January 2019. Early application is permitted for companies that also apply IFRS 15, Revenue from Contracts with Customers. UBS AG is currently assessing the impact of the new standard on its financial statements. UBS AG’s undiscounted minimum lease pay- ments for operating leases are disclosed in Note 33. 601 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 1 Summary of significant accounting policies (continued) Amendments to IFRS 11, Joint Arrangements; IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets In May 2014, the IASB issued amendments to IFRS 11, Joint Arrangements, IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets. The standard is effective for UBS AG reporting periods beginning on 1 January 2016. The amendments will have no material impact on UBS AG’s financial statements. UBS AG’s joint arrangements are immaterial, both individually and in aggre- gate (refer to Note 30), and UBS AG does not use revenue-based depreciation methodologies, which the amendments to IAS 16 and IAS 38 prohibit. Annual Improvements to IFRSs 2012 – 2014 Cycle In September 2014, the IASB issued Annual Improvements to IFRSs 2012 – 2014 Cycle that resulted in amendments to four IFRSs (IFRS 5, Non-current asset held for sale and discontinued operations, IFRS 7, Financial Instruments Disclosures, IAS 19, Employee Benefits and IAS 34, Interim Financial Reporting). Gen- erally, the amendments are effective for UBS AG on 1 January 2016. UBS AG expects that the adoption of these amendments will not have a material impact on its financial statements. Amendments to IAS 1, Presentation of Financial Statements In December 2014, the IASB issued amendments to IAS 1 to fur- ther encourage companies to apply professional judgment in determining what information to disclose in their financial state- ments and in determining where and in what order information is presented in the financial disclosures. The amendments have a mandatory effective date of 1 January 2016 for UBS AG. The adoption of these amendments will not have a material impact on the financial statements. Amendments to IAS 12, Income Taxes: In January 2016, the IASB issued narrow scope amendments to IAS 12, Income Taxes, clarifying how to account for deferred tax assets related to debt instruments measured at fair value. Enti- ties are required to apply the amendments for annual periods beginning on or after 1 January 2017. UBS AG expects that the adoption of these amendments will not have a material impact on its financial statements. Amendments to IAS 7, Statement of Cash Flows In January 2016, the IASB issued amendments to IAS 7, State- ment of Cash Flows, which inter-alia requires companies to pro- vide information about changes in their financial liabilities arising from financing activities, including changes from cash flows and non-cash changes (such as foreign exchange gains or losses). Enti- ties are required to apply the amendments for annual periods beginning on or after 1 January 2017. 602 Note 2a Segment reporting The operational structure of UBS AG is comprised of the Corpo- rate Center and five business divisions: Wealth Management, Wealth Management Americas, Personal & Corporate Banking, Asset Management and the Investment Bank. Asset Management Asset Management is a large-scale global asset manager. It offers investment capabilities and investment styles across all major tra- ditional and alternative asset classes to institutions, wholesale intermediaries and wealth management clients around the world. Wealth Management Wealth Management provides comprehensive financial services to wealthy private clients around the world, with the exception of those served by Wealth Management Americas. UBS AG is a global firm with global capabilities, and its clients benefit from a full spectrum of resources, including wealth planning, investment management solutions and corporate finance advice, banking and lending solutions as well as a wide range of specific offerings. Wealth Management’s guided architecture model gives clients access to a wide range of products from the world’s leading third- party institutions that complement its own products. Wealth Management Americas Wealth Management Americas is one of the leading wealth man- agers in the Americas in terms of financial advisor productivity and invested assets. Its business includes UBS AG’s domestic US and Canadian wealth management businesses, as well as interna- tional business booked in the US. It provides a fully integrated set of wealth management solutions designed to address the needs of ultra high net worth and high net worth clients. Personal & Corporate Banking Personal & Corporate Banking provides comprehensive financial products and services to UBS AG’s private, corporate and institu- tional clients in Switzerland, maintaining a leading position in these segments and embedding its offering in a multi-channel approach. The business is a central element of UBS AG’s universal bank delivery model in Switzerland, supporting other business divisions by referring clients and growing the wealth of the firm’s private clients so they can be transferred to Wealth Management. Personal & Corporate Banking leverages the cross-selling poten- tial of UBS AG’s asset-gathering and investment bank businesses, and manages a substantial part of UBS AG’s Swiss infrastructure and banking products platform. Investment Bank The Investment Bank provides corporate, institutional and wealth management clients with expert advice, innovative solutions, exe- cution and comprehensive access to international capital markets. It offers advisory services and provides in-depth cross-asset research, along with access to equities, foreign exchange, pre- cious metals and selected rates and credit markets, through its business units, Corporate Client Solutions and Investor Client Ser- vices. The Investment Bank is an active participant in capital mar- kets flow activities, including sales, trading and market-making across a range of securities. Corporate Center Corporate Center is comprised of Services, Group Asset and Lia- bility Management (Group ALM) and Non-core and Legacy Port- folio. Services includes UBS AG’s control functions such as finance, risk control (including compliance) and legal. In addition, it pro- vides all logistics and support services, including operations, infor- mation technology, human resources, regulatory relations and strategic initiatives, communications and branding, corporate ser- vices, physical security, information security as well as outsourc- ing, nearshoring and offshoring. Group ALM is responsible for centrally managing UBS AG’s liquidity and funding position, as well as providing other central internal balance sheet and capital management services. Non-core and Legacy Portfolio is com- prised of the non-core businesses and legacy positions that were part of the Investment Bank prior to its restructuring. 603 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 2a Segment reporting (continued) Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CHF million For the year ended 31 December 2015 Net interest income Non-interest income Allocations from Corporate Center – Group ALM to business divisions and other CC units Income1, 2 Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets3 Total operating expenses4 Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Additional Information Total assets Corporate Center UBS Services Group ALM Non-core and Legacy Portfolio 1,825 5,859 471 8,155 0 8,155 2,532 650 2,289 2,209 5 3 5,478 2,676 1,067 6,213 104 7,384 (4) 7,381 4,579 848 1,209 1,193 3 51 6,689 692 1,890 1,603 421 3,913 (37) 3,876 873 264 1,077 1,180 17 0 2,231 1,646 (34) 2,077 15 2,057 0 2,057 729 233 502 523 2 8 1,475 583 1,573 7,525 (211) 8,889 (68) 8,821 3,220 882 2,816 2,730 26 24 6,969 1,852 (337) 434 145 243 0 243 3,875 4,517 (8,214) (8,243) 866 21 1,065 (822) 789 361 (876) 275 0 275 30 20 (56) 95 0 0 (6) 281 (44) (79) (71) (195) (8) (203) 116 805 378 314 0 0 1,298 (1,501) 6,729 23,993 0 30,721 (117) 30,605 15,954 8,219 0 0 918 107 25,198 5,407 (908) 6,314 Additions to non-current assets 6 4 14 1 18 119,850 60,993 141,174 12,874 253,571 22,866 1,844 237,560 94,369 943,256 0 1 1,888 1 Impairments of financial investments available-for-sale for the year ended 31 December 2015 totaled CHF 1 million, of which CHF 1 million was incurred in Wealth Management. 2 Refer to Note 24 for more infor- mation on own credit in Corporate Center – Group ALM. 3 Refer to Note 17 for more information. 4 Refer to Note 32 for information on restructuring expenses. 604 Note 2a Segment reporting (continued)1 Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center UBS Services Group ALM Non-core and Legacy Portfolio CHF million For the year ended 31 December 2014 Net interest income Non-interest income Allocations from Corporate Center – Group ALM to business divisions and other CC units Income2, 3 Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets4 Total operating expenses5 Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Additional Information Total assets 1,693 5,726 481 7,902 (1) 7,901 2,467 918 2,180 2,122 4 5 5,574 2,326 864 6,004 116 6,984 15 6,998 4,363 550 1,137 1,121 0 48 6,099 900 1,801 1,575 461 3,836 (95) 3,741 850 293 1,074 1,196 17 0 2,235 1,506 (39) 1,914 27 1,902 0 1,902 643 305 478 495 2 9 1,435 467 1,583 6,823 (100) 8,306 2 8,308 2,964 2,671 2,711 2,658 32 15 8,392 (84) (338) 157 217 35 0 35 3,843 4,113 (8,046) (8,084) 762 6 679 (643) 816 307 (1,120) 2 0 2 26 21 (47) 82 0 0 0 2 174 (956) (82) (863) 2 (862) 124 507 513 411 0 0 1,144 (2,005) 6,555 21,549 0 28,104 (78) 28,026 15,280 9,377 0 0 817 83 25,557 2,469 (1,180) 3,649 Additions to non-current assets 7 6 9 2 7 127,588 56,026 143,711 15,207 292,347 19,720 1,677 237,901 169,826 1,062,327 0 0 1,708 1 Figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. Refer to Note 1b for more information. 2 Impairments of financial investments available-for-sale for the year ended 31 December 2014 totaled CHF 76 million, of which CHF 49 million were incurred in the Investment Bank and CHF 23 million were incurred in Corporate Center – Non-core and Legacy Portfolio. 3 Refer to Note 24 for more information on own credit in Corporate Center – Group ALM. 4 Refer to Note 17 for more information. 5 Refer to Note 32 for information on restructuring expenses. 605 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 2a Segment reporting (continued)1 Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank CHF million For the year ended 31 December 2013 Net interest income Non-interest income Allocations from Corporate Center – Group ALM to business divisions and other CC units Income2, 3 Credit loss (expense) / recovery Total operating income Personnel expenses General and administrative expenses Services (to) / from other business divisions and Corporate Center of which: services from CC – Services Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets4 Total operating expenses5 Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Additional Information Total assets Corporate Center UBS Services Group ALM Non-core and Legacy Portfolio 1,568 5,519 486 7,573 (10) 7,563 2,433 708 2,165 2,074 3 7 5,316 2,247 742 5,629 193 6,565 (27) 6,538 4,102 383 1,145 1,127 0 49 5,680 858 1,822 1,556 396 3,774 (18) 3,756 843 297 1,140 1,301 19 0 2,298 1,458 (44) 1,954 23 1,935 0 1,935 609 218 521 535 4 8 1,359 576 1,102 7,552 (217) 8,436 2 8,438 2,899 843 2,517 2,487 28 13 6,300 2,138 (388) 347 218 178 0 178 4,065 4,249 (8,276) (8,304) 761 4 804 624 (544) (921) (841) 0 (841) 26 14 3 87 0 0 43 (626) (884) 359 (18) (179) 163 3 166 205 1,668 785 693 0 2 2,660 (2,494) 5,786 21,997 0 27,782 (50) 27,732 15,182 8,380 0 0 816 83 24,461 3,272 (110) 3,381 Additions to non-current assets 5 1 17 1 81 109,758 45,491 141,369 14,223 239,971 17,203 1,236 230,204 215,135 1,013,355 0 0 1,341 1 Figures in this table may differ from those originally published in quarterly and annual reports due to adjustments following organizational changes, restatements due to the retrospective adoption of new accounting standards or changes in accounting policies, and events after the reporting period. Refer to Note 1b for more information. 2 Impairments of financial investments available-for-sale for the year ended 31 December 2013 totaled CHF 41 million, of which CHF 10 million was incurred in Wealth Management, CHF 20 million was incurred in the Investment Bank and CHF 8 million was incurred in Corporate Center – Non-core and Legacy Portfolio. 3 Refer to Note 24 for more information on own credit in Corporate Center – Group ALM. 4 Refer to Note 17 for more information. 5 Refer to Note 32 for information on restructuring expenses. 606 Note 2b Segment reporting by geographic location The operating regions shown in the table below correspond to the regional management structure of UBS AG. The allocation of operating income to these regions reflects, and is consistent with, the basis on which the business is managed and its performance evaluated. These allocations involve assumptions and judgments that management considers to be reasonable, and may be refined to reflect changes in estimates or management structure. The main principles of the allocation methodology are that client rev- enues are attributed to the domicile of the client and trading and portfolio management revenues are attributed to the country where the risk is managed. This revenue attribution is consistent with the mandate of the country and regional Presidents. Certain revenues, such as those related to Corporate Center – Non-core and Legacy Portfolio, are managed at a global level. These reve- nues are included in the Global line. The geographic analysis of non-current assets is based on the location of the entity in which the assets are recorded. For the year ended 31 December 2015 Americas of which: USA Asia Pacific Europe, Middle East and Africa Switzerland Global Total For the year ended 31 December 2014 Americas of which: USA Asia Pacific Europe, Middle East and Africa Switzerland Global Total For the year ended 31 December 2013 Americas of which: USA Asia Pacific Europe, Middle East and Africa Switzerland Global Total Total operating income Total non-current assets CHF billion Share % CHF billion Share % 11.3 10.7 5.0 6.8 7.1 0.5 30.6 37 35 16 22 23 2 100 7.1 6.7 0.5 1.7 5.9 0.0 15.2 47 44 3 11 39 0 100 Total operating income Total non-current assets CHF billion Share % CHF billion Share % 10.7 10.1 4.6 6.8 6.8 (0.9) 28.0 38 36 16 24 24 (3) 100 7.0 6.6 0.4 1.5 5.6 0.0 14.6 48 45 3 10 38 0 100 Total operating income Total non-current assets CHF billion Share % CHF billion Share % 10.2 9.6 4.5 6.6 6.8 (0.4) 27.7 37 35 16 24 25 (1) 100 6.1 5.6 0.4 1.5 5.3 0.0 13.1 46 43 3 11 40 0 100 607 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Income statement notes Note 3 Net interest and trading income CHF million Net interest and trading income Net interest income Net trading income Total net interest and trading income Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank of which: Corporate Client Solutions of which: Investor Client Services Corporate Center of which: Services of which: Group ALM of which: own credit on financial liabilities designated at fair value1 of which: Non-core and Legacy Portfolio Total net interest and trading income Net interest income Interest income Interest earned on loans and advances2 Interest earned on securities financing transactions3 Interest and dividend income from trading portfolio Interest income on financial assets designated at fair value Interest and dividend income from financial investments available-for-sale Total Interest expense Interest on amounts due to banks and customers Interest on securities financing transactions4 Interest expense from trading portfolio5 Interest on financial liabilities designated at fair value Interest on debt issued Total Net interest income Net trading income Investment Bank Corporate Client Solutions Investment Bank Investor Client Services 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 value1, 6 For the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 6,729 5,696 12,425 3,034 1,537 2,613 (5) 5,186 1,001 4,185 61 (1) 375 553 (313) 6,555 3,841 10,396 2,845 1,352 2,536 0 4,517 1,030 3,487 (855) 33 16 292 (904) 5,786 5,130 10,915 2,868 1,323 2,485 9 4,852 1,146 3,707 (622) (166) (535) (283) 79 12,425 10,396 10,915 8,626 896 3,071 194 391 8,722 752 3,196 208 315 8,686 852 2,913 364 322 13,178 13,194 13,137 774 976 1,670 730 2,299 6,449 6,729 321 3,494 1,882 5,696 (119) 3,701 708 827 1,804 919 2,382 6,639 6,555 276 2,760 806 3,841 (81) (2,380) 893 829 1,846 1,197 2,586 7,351 5,786 425 3,541 1,164 5,130 99 (2,056) 3 48 20 7 14 3 15 (3) 20 89 (65) 20 (1) 19 (4) (7) 24 0 9 18 (7) (21) (3) (3) 3 16 27 133 48 47 1 Refer to Note 24 for more information on own credit. 2 Includes interest income on impaired loans and advances of CHF 16 million for 2015, CHF 15 million for 2014 and CHF 15 million for 2013. 3 Includes interest income on securities borrowed and reverse repurchase agreements and negative interest, including fees, on securities lent and repurchase agreements. 4 Includes interest expense on securities lent and repur- chase agreements and negative interest, including fees, on securities borrowed and reverse repurchase agreements. 5 Includes expense related to dividend payment obligations on trading liabilities. 6 Excludes fair value changes of hedges related to financial liabilities designated at fair value and foreign currency translation effects arising from translating foreign currency transactions into the respective functional currency, both of which are reported within net trading income. 608 Note 4 Net fee and commission income CHF million Underwriting fees of which: equity underwriting fees of which: debt underwriting fees M&A and corporate finance fees Brokerage fees Investment fund fees Portfolio management and advisory fees Other Total fee and commission income Brokerage fees paid Other Total fee and commission expense Net fee and commission income of which: net brokerage fees Note 5 Other income CHF million Associates and subsidiaries Net gains / (losses) from disposals of subsidiaries1 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 (excluding net gains / (losses) from disposals)3 Net gains / (losses) from investment properties4 Net gains / (losses) from disposals of properties held for sale Net gains / (losses) from disposals of loans and receivables Other Total other income For the year ended 31.12.15 1,290 31.12.14 1,470 31.12.13 1,374 836 455 737 3,930 3,567 7,858 1,678 19,060 869 1,007 1,876 17,184 3,060 947 522 731 3,918 3,717 7,343 1,760 18,940 818 1,045 1,863 17,076 3,100 850 524 613 4,035 3,803 6,625 1,725 18,176 839 1,050 1,889 16,287 3,196 % change from 31.12.14 (12) (12) (13) 1 0 (4) 7 (5) 1 6 (4) 1 1 (1) For the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 2642 0 169 433 252 (1) 251 28 (1) 378 26 (4)5 1,112 56 69 94 219 219 (76) 143 30 2 44 39 155 632 111 0 49 160 209 (41) 168 35 (16) 291 53 (111) 580 371 (100) 80 98 15 (99) 76 (7) 759 (33) 76 1 Includes foreign exchange gains / (losses) reclassified from other comprehensive income related to disposed or dormant subsidiaries. 2 Includes a net gain on sale of subsidiaries of CHF 113 million in Wealth Man- agement and a net gain on sale of subsidiaries of CHF 56 million in Asset Management. Refer to Note 32 for more information. 3 Includes net rent received from third parties and net operating expenses. 4 Includes unrealized and realized gains / (losses) from investment properties and foreclosed assets. 5 Includes a net gain on sale of businesses of CHF 56 million in Wealth Management. Refer to Note 32 for more information. 609 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 6 Personnel expenses CHF million Salaries1 Variable compensation – performance awards2 of which: guarantees for new hires Variable compensation – other2 of which: replacement payments3 of which: forfeiture credits of which: severance payments4 of which: retention plan and other payments Contractors Social security Pension and other post-employment benefit plans5 Wealth Management Americas: Financial advisor compensation2, 6 Other personnel expenses Total personnel expenses7 For the year ended % change from 31.12.15 31.12.14 31.12.13 31.12.14 6,260 3,209 38 346 76 (86) 157 198 365 817 807 3,552 597 15,954 6,269 2,820 48 466 81 (70) 162 292 234 791 711 3,385 605 15,280 6,268 2,986 76 288 78 (146) 114 242 190 792 887 3,140 631 15,182 0 14 (21) (26) (6) 23 (3) (32) 56 3 14 5 (1) 4 1 Includes role-based allowances. 2 Refer to Note 29 for more information. 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 Refer to Note 28 for more information. 6 Financial advisor compensation consists of grid-based compensation based directly on compensable revenues gener- ated by financial advisors and supplemental compensation calculated based on financial advisor productivity, firm tenure, assets and other variables. It also includes expenses related to compensation commitments with financial advisors entered into at the time of recruitment which are subject to vesting requirements. 7 Includes net restructuring expenses of CHF 458 million, CHF 327 million and CHF 156 million for the years ended 31 December 2015, 31 December 2014 and 31 December 2013, respectively. Refer to Note 32 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 Provisions for litigation, regulatory and similar matters1 Other Total general and administrative expenses2 31.12.15 928 510 610 855 484 456 1,351 1,742 1,087 195 8,219 For the year ended 31.12.14 1,005 31.12.13 1,044 479 608 608 468 458 1,306 1,603 2,594 248 9,377 458 609 638 478 451 1,032 1,340 1,701 628 8,380 % change from 31.12.14 (8) 6 0 41 3 0 3 9 (58) (21) (12) 1 Reflects the net increase in provisions for litigation, regulatory and similar matters recognized in the income statement. Refer to Note 22 for more information. Also includes recoveries from third parties of CHF 10 mil- lion, CHF 10 million and CHF 15 million for the years ended 31 December 2015, 31 December 2014 and 31 December 2013, respectively. 2 Includes net restructuring expenses of CHF 760 million, CHF 319 million and CHF 548 million for the years ended 31 December 2015, 31 December 2014 and 31 December 2013, respectively. Refer to Note 32 for more information. 610 Note 8 Income taxes CHF million Tax expense / (benefit) Swiss Current Deferred Non-Swiss Current Deferred Total income tax expense / (benefit) For the year ended 31.12.15 31.12.14 31.12.13 230 329 476 (1,943) (908) 46 1,348 409 (2,983) (1,180) 93 455 342 (1,000) (110) Income tax expense / (benefit) The Swiss current tax expense of CHF 230 million related to tax- able profits against which no losses were available to offset, mainly earned by Swiss subsidiaries. The Swiss deferred tax expense of CHF 329 million mainly reflected a net decrease of deferred tax assets previously recognized in relation to tax losses carried forward, partially offset by an increase in recognized deferred tax assets related to temporary differences. The non-Swiss current tax expense of CHF 476 million related to taxable profits earned by non-Swiss subsidiaries and branches, against which no losses were available to offset. The non-Swiss net deferred tax benefit of CHF 1,943 million was primarily due to an increase in US deferred tax assets, reflecting updated profit forecasts and an extension of the relevant taxable profit forecast period used in valuing deferred tax assets. Based on the perfor- mance of its businesses and the accuracy of historical forecasts, UBS AG extended the deferred tax asset forecast period for US taxable profits to seven years from six. In addition, UBS AG con- siders other factors in evaluating the recoverability of its deferred tax assets, including the remaining tax loss carry-forward period, and its confidence level in assessing the probability of taxable profit beyond the current forecast period. Estimating future prof- itability is inherently subjective and is particularly sensitive to future economic, market and other conditions which are difficult to predict. CHF million Operating profit / (loss) before tax of which: Swiss of which: Non-Swiss Income taxes at Swiss tax rate of 21% Increase / (decrease) resulting from: Non-Swiss tax rates differing from Swiss tax rate Tax effects of losses not recognized Previously unrecognized tax losses now utilized Non-taxable and lower taxed income Non-deductible expenses and additional taxable income Adjustments related to prior years – current tax Adjustments related to prior years – deferred tax Change in deferred tax valuation allowances Adjustments to deferred tax balances arising from changes in tax rates Other items Income tax expense / (benefit) For the year ended 31.12.15 31.12.14 31.12.13 5,407 3,665 1,742 1,135 (69) 107 (107) (273) 519 29 (48) (2,419) 191 26 (908) 2,469 1,181 1,288 519 68 325 (285) (384) 1,069 5 (9) (2,373) (183) 69 (1,180) 3,272 3,323 (51) 687 (305) 58 (419) (624) 1,245 (32) 6 (859) 107 28 (110) 611 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 8 Income taxes (continued) The components of operating profit before tax, and the differ- ences between income tax expense reflected in the financial statements and the amounts calculated at the Swiss tax rate, are provided in the table on the previous page and explained below. expense arises in relation to those taxable profits. Therefore, the tax expense calculated by applying the local rate on those profits is reversed. Non-Swiss tax rates differing from Swiss tax rate To the extent that UBS AG profits or losses arise outside Switzer- land, the applicable local tax rate may differ from the Swiss tax rate. This item reflects, for such profits or losses, an adjustment from the tax expense / benefit that would arise at the Swiss tax rate and the tax expense / benefit that would arise at the appli- cable local tax rate. If an entity generates a profit, a tax expense arises where the local tax rate is in excess of the Swiss tax rate and a tax benefit arises where the local tax rate is below the Swiss tax rate. Conversely, if an entity incurs a loss, a tax benefit arises where the local tax rate is in excess of the Swiss tax rate and a tax expense arises where the local tax rate is less than the Swiss tax rate. Tax effects of losses not recognized This item relates to tax losses of entities arising in the year, which are not recognized as deferred tax assets. Consequently, no tax benefit arises in relation to those losses. Therefore, the tax benefit calculated by applying the local tax rate to those losses as described above is reversed. Previously unrecognized tax losses now utilized This item relates to taxable profits of the year, which are offset by tax losses of previous years, for which no deferred tax assets were previously recorded. Consequently, no current tax or deferred tax Non-taxable and lower taxed income This item relates to profits for the year, which are either perma- nently not taxable or are taxable, but at a lower rate of tax than the local tax rate. It also includes any permanent deductions made for tax purposes, which are not reflected in the accounts, thereby effectively ensuring that profits covered by the deduction are not taxable. Non-deductible expenses and additional taxable income This item mainly relates to income for the year, which is imputed for tax purposes for an entity, but is not included in its operating profit. In addition, it includes expenses for the year which are per- manently non-deductible. Adjustments related to prior years – current tax This item relates to adjustments to current tax expenses for prior years, for example, if the tax payable for a year agreed with the tax authorities is expected to differ from the amount previously reflected in the accounts. Adjustments related to prior years – deferred tax This item relates to adjustments to deferred tax positions recog- nized in prior years, for example, if a tax loss for a year is fully recognized and the amount of the tax loss agreed with the tax authorities is expected to differ from the amount previously rec- ognized as deferred tax assets in the accounts. 612 Note 8 Income taxes (continued) Change in deferred tax valuation allowances This item includes revaluations of deferred tax assets previously recognized resulting from reassessments of expected future tax- able profits. It also includes changes in temporary differences in the year, for which deferred tax is not recognized. The amount in the year mainly relates to the upward revaluation of deferred tax assets. Adjustments to deferred tax balances arising from changes in tax rates This item relates to re-measurements of deferred tax assets and liabilities recognized due to changes in tax rates. These have the effect of changing the future tax saving that is expected from tax losses or deductible tax differences and therefore the amount of deferred tax assets recognized or, alternatively, changing the tax cost of additional taxable income from taxable temporary differ- ences and therefore the deferred tax liability. Other items Other items include other differences between profit or losses at the local tax rate and the actual local tax expense or benefit, including increases in provisions for uncertain positions in relation to the current year, interest accruals for such provisions in relation to prior years and other items. Tax recognized in equity Certain tax expenses and benefits were recognized directly in equity. These included a tax benefit of CHF 131 million related to cash flow hedges (2014: expense of CHF 196 million), a tax ben- efit of CHF 8 million related to financial investments classified as available-for-sale (2014: expense of CHF 52 million), a tax expense of CHF 1 million related to foreign currency translation gains and losses (2014: expense of CHF 7 million) and a tax expense of CHF 19 million related to defined benefit plans (2014: benefit of CHF 246 million) recognized in other comprehensive income. In addi- tion, they included a tax benefit of CHF 9 million recognized in share premium (2014: benefit of CHF 3 million). Furthermore, there were net foreign currency translation movements related to the effects of exchange rate changes on tax assets and liabilities denominated in currencies other than Swiss francs. Deferred tax assets and liabilities UBS AG has deferred tax assets related to tax loss carry-forwards and other items as shown in the table below. As of 31 December 2015, deferred tax assets of CHF 2,094 million (CHF 1,378 million as of 31 December 2014) were recognized by entities which incurred losses in either the current or preceding year. The valuation allowance reflects deferred tax assets which were not recognized because it was not considered probable that future taxable profits will be available to utilize the related tax loss carry-forwards and deductible temporary differences. CHF million Deferred tax assets1 Tax loss carry-forwards Temporary differences of which: related to compensation and benefits of which: related to trading assets of which: related to investments in subsidiaries and goodwill of which: other Total deferred tax assets Deferred tax liabilities Goodwill and intangible assets Financial investments Investments in associates and other Total deferred tax liabilities 1 Less deferred tax liabilities as applicable. 31.12.15 Valuation allowance (18,378) (1,284) (267) (77) 0 (940) Recognized 7,093 5,739 1,310 1,038 2,310 1,081 Gross 25,471 7,023 1,576 1,116 2,310 2,021 32,494 (19,661) 12,833 31.12.14 Valuation allowance (22,271) (1,264) (317) (61) 0 (886) (23,535) Gross 29,727 4,869 1,424 1,459 0 1,986 34,596 Recognized 7,456 3,605 1,107 1,398 0 1,100 11,060 28 1 27 56 32 13 35 80 613 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 8 Income taxes (continued) As of 31 December 2015, tax loss carry-forwards totaling CHF 56,973 million (31 December 2014: CHF 68,869 million), which are not recognized as deferred tax assets, were available to be offset against future taxable profits. These tax losses expire as out- lined in the table below. Unrecognized tax loss carry-forwards CHF million Within 1 year From 2 to 5 years From 6 to 10 years From 11 to 20 years No expiry Total 31.12.15 31.12.14 3,727 33 753 34,833 17,627 56,973 9,341 43 613 39,899 18,973 68,869 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. UBS AG recognizes deferred tax liabilities on undistributed earnings of subsidiaries except to the extent that those earnings are indefinitely invested. As of 31 December 2015, no such earn- ings were considered indefinitely invested. Note 9 Earnings per share (EPS) and shares outstanding During 2015, UBS AG shares were delisted from the SIX and the NYSE. As of 31 December 2015, 100% of UBS AG’s issued shares were held by UBS Group AG and therefore were not publicly traded. Accordingly, earnings per share information is not provided for UBS AG. 614 Balance sheet notes: assets Note 10 Due from banks and loans (held at amortized cost) CHF million By type of exposure Due from banks, gross of which: due from central banks Allowance for credit losses Due from banks, net Loans, gross Residential mortgages Commercial mortgages Lombard loans Other loans1 Finance lease receivables2 Securities3 Subtotal Allowance for credit losses Loans, net Total due from banks and loans, net4 31.12.15 31.12.14 11,869 1,035 (3) 11,866 141,608 21,509 107,084 39,321 1,083 2,807 313,413 (689) 312,723 324,590 13,347 648 (13) 13,334 142,380 22,368 108,230 39,152 1,101 3,448 316,679 (695) 315,984 329,317 1 Includes corporate loans. 2 Refer to Note 33 for more information. 3 Includes securities reclassified from held for trading. Refer to Note 1a item 10 and Note 27 for more information. 4 Refer to “Maximum expo- sure to credit risk” in the “Risk management and control” section of this report for information on collateral and credit enhancements. 615 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 11 Cash collateral on securities borrowed and lent, reverse repurchase and repurchase agreements, and derivative instruments UBS AG 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. UBS AG manages 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 UBS AG when deemed necessary. ➔ Refer to Note 26 for more information on offsetting between financial assets and financial liabilities Balance sheet assets CHF million By counterparty Banks Customers Total Balance sheet liabilities CHF million By counterparty Banks Customers Total 31.12.15 31.12.14 Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments Cash collateral on securities borrowed Reverse repurchase agreements 8,658 16,925 25,584 12,903 54,991 67,893 6,037 17,727 23,763 10,517 13,546 24,063 13,746 54,668 68,414 31.12.15 31.12.14 Cash collateral on securities lent Repurchase agreements Cash collateral payables on derivative instruments Cash collateral on securities lent 7,078 951 8,029 5,637 4,016 9,653 17,041 21,241 38,282 7,041 2,138 9,180 Repurchase agreements 5,174 6,644 11,818 Cash collateral receivables on derivative instruments 10,265 20,713 30,979 Cash collateral payables on derivative instruments 20,895 21,477 42,372 616 Note 12 Allowances and provisions for credit losses CHF million By movement Balance at the beginning of the year Write-offs / usage of provisions Recoveries Increase / (decrease) recognized in the income statement Reclassifications Foreign currency translation Other Balance at the end of the year Specific allowances Collective allowances Total allowances 704 (162) 48 114 (9) (11) 2 686 8 (2) 0 0 0 0 0 6 711 (164) 48 114 (9) (11) 2 692 Provisions1 23 0 0 2 9 0 0 35 Total 31.12.15 Total 31.12.14 735 (164) 48 117 0 (11) 2 727 750 (154) 29 78 0 21 11 735 1 Represents provisions for loan commitments and guarantees. Refer to Note 22 for more information. Refer to the “Financial and operating performance” section of this report for the maximum irrevocable amount of loan commitments and guarantees. By balance sheet line Due from banks Loans Cash collateral on securities borrowed Provisions1 Balance at the end of the year 1 Represents provisions for loan commitments and guarantees. Specific allowances Collective allowances Total allowances Provisions Total 31.12.15 Total 31.12.14 3 683 0 686 0 6 0 6 3 689 0 692 3 689 0 35 727 13 695 4 23 735 35 35 617 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 13 Trading portfolio CHF million Trading portfolio assets by issuer type1 Debt instruments Government and government agencies of which: Switzerland of which: USA of which: United Kingdom of which: Australia of which: Sweden of which: Singapore of which: Germany Banks Corporates and other Total debt instruments Equity instruments 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 type1 Debt instruments Government and government agencies of which: Switzerland of which: USA of which: France of which: Italy of which: Australia of which: Japan of which: Germany Banks Corporates and other Total debt instruments Equity instruments Total trading portfolio liabilities 1 Refer to Note 24e for more information on product type and fair value hierarchy categorization. 618 31.12.15 31.12.14 18,768 16,625 119 6,050 3,915 1,649 1,274 1,259 796 2,691 19,443 40,902 63,984 15,519 120,405 3,642 124,047 7,257 50 2,754 915 838 798 725 510 782 2,014 10,053 19,084 29,137 293 3,816 2,103 2,307 191 822 1,280 4,342 24,252 45,219 69,763 17,410 132,392 5,764 138,156 8,716 232 2,987 1,259 569 1,087 810 335 743 2,591 12,050 15,908 27,958 Note 14 Derivative instruments and hedge accounting Derivatives: overview A derivative is a financial instrument, the value of which is derived from the value of one or more variables (underlyings). Underlyings may be indices, foreign currency exchange or interest rates, or the value of shares, commodities, bonds or other financial instru- ments. A derivative commonly requires little or no initial net investment by either counterparty to the trade. The majority of derivative contracts are negotiated with respect to notional amounts, tenor, price and settlement mechanisms, as is customary with other financial instruments. Over-the-counter (OTC) derivative contracts are usually traded under a standardized International Swaps and Derivatives Associ- ation (ISDA) master agreement between UBS AG and its counter- parties. Terms are negotiated directly with counterparties and the contracts will have industry-standard settlement mechanisms pre- scribed by ISDA. The industry continues 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. Other derivative contracts are standardized in terms of their amounts and settlement dates, and are bought and sold on regu- lated exchanges. These are commonly referred to as exchange- traded derivatives (ETD) contracts. Exchanges offer the benefits of pricing transparency, standardized daily settlement of changes in value, and consequently reduced credit risk. For presentation purposes, UBS AG is subject to the IFRS net- ting provisions for derivative contracts. Derivative instruments are measured at fair value and generally classified as Positive replacement values and Negative replacement values on the face of the balance sheet. However, ETD which are economi- cally settled on a daily basis and certain OTC derivatives which are in substance net settled on a daily basis are classified as Cash collateral receivables on derivative instruments or Cash collateral payables on derivative instruments. Changes in the replacement values of derivatives are recorded in Net trading income, unless the derivatives are designated and effective as hedging instruments in certain types of hedge accounting relationships. ➔ Refer to Note 1a item 15 for more information Valuation principles and techniques applied in the measure- ment of derivative instruments are discussed in Note 24. Positive replacement values represent the estimated amount UBS AG would receive if the derivative contract were sold on the balance sheet date. Negative replacement values indicate the estimated amount UBS AG would pay to transfer its obligations in respect of the underlying contract, were it required or entitled to do so on the balance sheet date. Derivatives embedded in other financial instruments are not included in the table “Derivative instruments” within this Note. Bifurcated embedded derivatives are presented on the same bal- ance sheet line as the host contract. In cases where UBS AG applies the fair value option to hybrid instruments, bifurcation of an embedded derivative component is not required and as such, this component is also not included in the table “Derivative instruments.” ➔ Refer to Notes 20 and 24 for more information Types of derivative instruments UBS AG uses the following derivative financial instruments for both trading and hedging purposes. Through the use of the prod- ucts listed below, UBS AG is engaged in extensive high-volume market-making and client facilitation trading referred to as the flow business. The main types of derivative instruments used by UBS AG are: – Swaps: Swaps are transactions in which two parties exchange cash flows on a specified notional amount for a predetermined period. Cross-currency swaps involve the exchange of interest payments based on two different currency notional amounts and reference interest rates and generally also entail exchange of notional amounts at the start or end of the contract. Most cross-currency swaps are traded in the OTC market. – Forwards and futures: Forwards and futures are contractual obligations to buy or sell financial instruments or commodities on a future date at a specified price. Forward contracts are tailor-made agreements that are transacted between counter- parties in the OTC market, whereas futures are standardized contracts transacted on regulated exchanges. – 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- ified quantity of a financial 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). 619 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 14 Derivative instruments and hedge accounting (continued) The main derivative product types used by UBS AG are: – Interest rate contracts: Interest rate products include interest rate swaps, forward rate agreements, swaptions and caps and floors. – Credit derivative contracts: Credit default swaps (CDS) 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 occur- rence of a contractually defined credit event with respect to a specified third-party credit entity. Settlement following a credit event may be a net cash amount, or cash in return for physical delivery of one or more obligations of the credit entity, and is made regardless of whether the protection buyer has actually suffered a loss. After a credit event and settlement, the con- tract is generally terminated. More information on credit deriv- atives is included in a separate section on the following pages. Total return swaps (TRS) are structured with one party making payments based on a set rate, either fixed or variable, plus any negative changes in fair value of an underlying asset, and the other party making payments based on the return of the asset, which includes both income it generates and any positive changes in its fair value. – Foreign exchange contracts: Foreign exchange contracts 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: UBS AG uses equity derivatives linked to single names, indices and baskets of single names and indi- ces. The indices used may be based on a standard market index, or may be defined by UBS AG. The product types traded include vanilla listed derivatives, both options and futures, total return swaps, forwards and exotic OTC contracts. – Commodities contracts: UBS AG has an established commod- ity derivatives trading business, which includes the commodity index and structured commodities business. The index and structured business are client facilitation businesses trading exchange-traded funds, OTC swaps and options on commod- ity indices and individual underlying commodities. The underly- ing indices cover third-party and UBS AG owned indices such as the UBS Bloomberg Constant Maturity Commodity Index and the Bloomberg Commodity Indices. All of the trading is cash-settled with no physical delivery of the underlying. UBS AG also has an established precious metals business in both flow and non-vanilla OTC products incorporating both physical and non-physical trading. The flow business is investor led and products include ETD, vanilla and certain non-vanilla OTC. The vanilla OTC are in forwards, swaps and options. Measurement techniques applied to determine the fair value of each derivative product type are described in Note 24. 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. UBS AG’s approach to market risk is described in the audited sections of the “Risk management and control” 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 UBS AG’s overall credit exposure to its counterparties. UBS AG’s approach to credit risk is described in the audited portions of Credit risk in the “Risk management and control” 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 UBS AG’s credit exposure, the positive replacement values for a counterparty are rarely an ade- quate reflection of UBS AG’s credit exposure in its derivatives busi- ness with that counterparty. This is generally the case because, on the one hand, replacement values can increase over time (poten- tial future exposure), while on the other hand, exposure may be mitigated by entering into master netting agreements and bilat- eral collateral arrangements. Both the exposure measures used internally by UBS AG to control credit risk and the capital require- ments imposed by regulators reflect these additional factors. The replacement values presented on UBS AG’s balance sheet include netting in accordance with IFRS requirements (refer to Note 1a item 35), which is generally more restrictive than netting in accordance with Swiss federal banking law. Swiss federal bank- ing law netting is generally based on close-out netting arrange- ments that are enforceable in case of insolvency. ➔ Refer to Note 26 for more information on the values of positive and negative replacement values after consideration of netting potential allowed under enforceable netting arrangements 620 Note 14 Derivative instruments and hedge accounting (continued) Derivative instruments1 31.12.15 31.12.14 Notional values related to PRVs3 Total PRV2 Notional values related to NRVs3 Other notional values3, 5 Total NRV4 Notional values related to PRVs3 Total PRV2 Notional values related to NRVs3 Other notional values3, 5 Total NRV4 48.6 840.1 581.7 22.7 0.1 57.0 17.3 0.0 0.1 0.2 48.2 19.1 0.0 0.1 51.9 2,351.4 5,904.7 782.0 549.8 0.1 91.8 31.7 49.0 1,323.4 799.8 346.0 169.4 15.5 15.7 0.0 0.1 55.9 2,622.8 1,233.4 10,244.3 790.3 446.0 134.7 4.9 0.2 83.7 33.9 0.0 0.1 74.5 1,493.1 67.6 1,399.3 8,771.4 123.7 2,187.9 117.9 2,084.5 13,447.7 6.1 0.6 0.0 6.7 152.7 5.0 4.2 161.9 6.0 0.6 0.0 6.7 165.7 4.1 0.1 169.8 17.8 38.3 9.5 727.6 1,429.9 496.8 16.6 37.6 9.3 673.9 1,330.1 478.0 0.0 0.0 3.4 0.0 0.0 4.6 8.1 238.1 3.8 6.5 248.4 817.6 1,626.3 667.3 4.9 11.1 0.4 0.0 11.5 20.6 62.2 15.6 0.0 0.0 11.3 0.4 0.0 11.7 19.2 62.3 16.0 0.1 0.0 245.8 5.1 1.6 252.4 741.4 1,554.0 601.4 14.8 3.7 65.7 2,657.7 63.5 2,486.6 8.1 98.4 3,116.2 97.6 2,900.5 14.8 0.0 2.9 4.8 4.3 5.0 16.9 0.0 64.1 59.1 107.2 230.3 0.0 4.3 6.7 5.2 4.9 21.2 0.0 87.0 92.6 126.0 30.0 13.4 305.6 43.3 0.1 3.4 6.4 4.8 4.9 19.5 0.1 58.5 71.7 109.4 239.6 0.0 4.7 8.9 4.8 4.8 23.3 0.1 70.0 115.4 124.2 27.9 10.1 309.6 38.0 CHF billion Interest rate contracts Over-the-counter (OTC) contracts Forward contracts6 Swaps Options Exchange-traded contracts Futures Options Agency transactions7 Total Credit derivative contracts Over-the-counter (OTC) contracts Credit default swaps Total 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 transactions7 Total Equity / index contracts Over-the-counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts Futures Options Agency transactions7 Total Table continues on the next page. 621 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 14 Derivative instruments and hedge accounting (continued) Derivative instruments1 (continued) Table continued from the previous page. CHF billion Commodity contracts Over-the-counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts Futures Forward contracts Options Agency transactions7 Total Unsettled purchases of non-derivative financial investments8 Unsettled sales of non-derivative financial investments8 Total derivative instruments, based on IFRS netting9 31.12.15 31.12.14 Notional values related to PRVs3 Total PRV2 Notional values related to NRVs3 Other notional values3, 5 Total NRV4 Notional values related to PRVs3 Total PRV2 Notional values related to NRVs3 Other notional values3, 5 Total NRV4 0.3 0.7 0.9 0.0 0.0 1.5 3.4 0.1 0.2 2.8 9.9 11.8 4.4 1.0 30.0 9.6 20.1 0.3 0.5 0.6 0.2 0.1 1.5 3.2 0.2 0.1 2.3 9.4 7.5 3.7 1.9 24.6 16.7 6.4 8.2 0.1 8.3 0.3 0.9 0.9 0.0 0.0 1.4 3.6 0.1 0.2 4.6 13.8 12.5 6.5 0.8 38.1 11.4 16.1 0.3 0.5 0.7 0.1 0.1 1.4 3.2 0.2 0.1 4.4 7.9 9.8 5.3 3.7 31.1 12.9 9.1 7.3 0.1 7.3 167.4 4,602.7 162.4 4,409.0 8,831.1 257.0 5,857.8 254.1 5,600.2 13,507.9 1 Bifurcated embedded derivatives are presented on the same balance sheet lines as their host contracts and are excluded from this table. As of 31 December 2015, these derivatives amounted to a PRV of CHF 0.1 bil- lion (related notional values of CHF 0.6 billion) and an NRV of CHF 0.2 billion (related notional values of CHF 3.4 billion). As of 31 December 2014, these derivatives amounted to a PRV of CHF 0.3 billion (related notional values of CHF 6.5 billion) and an NRV of CHF 0.3 billion (related notional values of CHF 7.8 billion). 2 PRV: Positive replacement value. 3 In cases where replacement values are presented on a net basis on the bal- ance sheet, the respective notional values of the netted replacement values are still presented on a gross basis. 4 NRV: Negative replacement value. 5 Other notional values relate to derivatives which are cleared through either a central clearing counterparty or an exchange. The fair value of these derivatives is presented on the balance sheet net of the corresponding cash margin under Cash collateral receivables on derivative instruments and Cash collateral payables on derivative instruments and was not material for the periods presented. 6 Negative replacement values as of 31 December 2015 include CHF 0.1 billion related to derivative loan commitments (31 December 2014: CHF 0.0 billion). No notional amounts related to these replacement values are included the table. The maximum irrevocable amount related to these commitments was CHF 15.8 billion as of 31 December 2015 (31 December 2014: CHF 4.5 billion). 7 Notional values of exchange-traded agency transactions and OTC cleared transactions entered into on behalf of clients are not disclosed due to their significantly different risk profile. 8 Changes in the fair value of purchased and sold non-derivative financial investments between trade date and settlement date are recognized as replacement values. 9 Refer to Note 26 for more information on netting arrangements. The notional 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 generally not a direct indication of the values which are exchanged between parties, and are therefore not a direct measure of risk or financial exposure, but are viewed as an indication of the scale of the different types of derivatives entered into by UBS AG. The maturity profile of OTC interest rate contracts held as of 31 December 2015, based on notional values, was: approximately 53% (31 December 2014: 45%) mature within one year, 29% (31 December 2014: 34%) within one to five years and 18% (31 December 2014: 22%) after five years. Notional values of inter- est rate contracts cleared with a clearing house that qualify for IFRS balance sheet netting are presented under other notional values and are categorized into maturity buckets on the basis of contrac- tual maturities of the cleared underlying derivative contracts. Derivatives transacted for trading purposes Most of UBS AG’s derivative transactions relate to sales and trad- ing activities. Sales activities include the structuring and market- ing of derivative products to customers to enable them to take, transfer, modify, or reduce current or expected risks. Trading activ- ities include market-making to directly support the facilitation and execution of client activity. Market-making involves quoting bid and offer prices to other market participants with the intention of generating revenues based on spread and volume. Credit derivatives UBS AG is an active dealer in the fixed income market, including CDS and related products, with respect to a large number of issu- ers’ securities. The primary purpose of these activities is for the benefit of UBS AG’s clients through market-making activities and for the ongoing hedging of trading book exposures. . 622 Note 14 Derivative instruments and hedge accounting (continued) Market-making activity, which is undertaken within the Invest- ment Bank, consists of buying and selling single-name CDS, index CDS, loan CDS and related referenced cash instruments to facili- tate client trading activity. UBS AG also actively utilizes CDS to economically hedge specific counterparty credit risks in its accrual and traded loan portfolios (including off-balance sheet loan com- mitments) with the aim of reducing concentrations in individual names, sectors or specific portfolios. In addition, UBS AG actively utilizes CDS to economically hedge specific counterparty credit risks in its OTC derivative port- folios including financial instruments which are designated at fair value through profit or loss. The tables below provide further details on credit protection bought and sold, including replacement and notional value infor- mation by instrument type and counterparty type. The value of protection bought and sold is not, in isolation, a measure of UBS AG’s credit risk. Counterparty relationships are viewed in terms of the total outstanding credit risk, which relates to other instru- ments in addition to CDS, and in connection with collateral arrangements in place. On a notional value basis, credit protec- tion bought and sold as of 31 December 2015 matures in a range of approximately 22% (31 December 2014: 27%) within one year, approximately 68% (31 December 2014: 64%) within one to five years and approximately 10% (31 December 2014: 8%) after five years. Credit derivatives by type of instrument CHF billion Single-name credit default swaps Multi-name index linked credit default swaps Multi-name other credit default swaps Total rate of return swaps Options and warrants Total 31 December 2015 of which: credit derivatives related to economic hedges of which: credit derivatives related to market-making CHF billion Single-name credit default swaps Multi-name index linked credit default swaps Multi-name other credit default swaps Total rate of return swaps Options and warrants Total 31 December 2014 of which: credit derivatives related to economic hedges of which: credit derivatives related to market-making Protection bought Protection sold Fair value: PRV Fair value: NRV Notional values Fair value: PRV Fair value: NRV Notional values 3.1 0.3 0.1 0.5 0.0 4.0 2.7 1.4 1.9 0.6 0.1 0.2 0.0 2.8 2.4 0.4 115.5 48.0 2.4 6.3 4.2 176.4 152.8 23.6 1.9 0.6 0.0 0.1 0.0 2.6 2.2 0.4 2.9 0.5 0.1 0.4 0.0 3.9 2.5 1.3 Protection bought Protection sold Fair value: PRV Fair value: NRV Notional values Fair value: PRV Fair value: NRV 5.9 0.4 0.1 0.1 0.0 6.5 3.2 3.3 4.0 0.9 0.3 0.3 0.0 5.4 5.0 0.4 173.3 72.8 4.8 5.4 6.5 262.8 245.5 17.3 3.0 1.7 0.0 0.3 0.0 5.0 4.6 0.5 5.6 0.5 0.1 0.2 0.0 6.3 3.0 3.3 105.1 45.6 1.8 2.8 0.1 155.3 132.8 22.5 Notional values 148.8 80.7 3.4 3.5 1.6 238.0 220.5 17.4 623 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 14 Derivative instruments and hedge accounting (continued) Credit derivatives by counterparty CHF billion Broker-dealers Banks Central clearing counterparties Other Total 31 December 2015 CHF billion Broker-dealers Banks Central clearing counterparties Other Total 31 December 2014 Protection bought Protection sold Fair value: PRV Fair value: NRV Notional values Fair value: PRV Fair value: NRV Notional values 0.8 1.9 0.4 0.8 4.0 0.3 1.3 0.8 0.4 2.8 27.3 78.0 55.3 15.8 176.4 0.2 1.2 0.9 0.3 2.6 0.6 1.6 0.9 0.8 3.9 19.5 68.3 58.9 8.7 155.3 Protection bought Protection sold Fair value: PRV Fair value: NRV Notional values Fair value: PRV Fair value: NRV Notional values 1.4 4.0 0.2 0.9 6.5 0.5 2.9 1.1 0.9 5.4 32.8 156.4 53.2 20.4 262.8 0.3 2.6 1.3 0.8 5.0 1.1 4.4 0.3 0.5 6.3 23.5 144.3 56.7 13.5 238.0 UBS AG’s CDS trades are documented using industry standard forms of documentation or equivalent terms documented in a bespoke agreement. The agreements that govern CDS generally do not contain recourse provisions that would enable UBS AG to recover from third parties any amounts paid out by UBS AG. The types of credit events that would require UBS AG to per- form under a CDS contract are subject to agreement between the parties at the time of the transaction. However, nearly all transac- tions are traded using credit events that are applicable under cer- tain market conventions based on the type of reference entity to which the transaction relates. Applicable credit events by market conventions include bankruptcy, failure to pay, restructuring, obli- gation acceleration and repudiation / moratorium. Contingent collateral features of derivative liabilities Certain derivative payables contain contingent collateral or termi- nation features triggered upon a downgrade of the published credit rating of UBS AG in the normal course of business. Based on UBS AG’s credit ratings as of 31 December 2015, contractual outflows related to OTC derivative transactions of approximately CHF 0.2 billion, CHF 1.6 billion and CHF 1.9 billion would have been required in the event of a one-notch, two-notch and three- notch reduction in long-term credit ratings, respectively. In evalu- ating UBS AG’s liquidity requirements, UBS AG considers addi- tional collateral or termination payments that would be required in the event of a reduction in UBS AG’s long-term credit ratings, and a corresponding reduction in short-term ratings. Derivatives transacted for hedging purposes Derivatives used for structural hedging UBS AG enters into derivative transactions for the purposes of hedging risks inherent in assets, liabilities and forecast transac- tions. The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and whether the hedge qualifies as such for accounting purposes. Derivative transactions that qualify and are designated as hedges for accounting purposes are described under the corre- sponding headings in this Note (fair value hedges, cash flow hedges and hedges of net investments in foreign operations). UBS AG’s accounting policies for derivatives designated and accounted for as hedging instruments are explained in Note 1a item 15, where terms used in the following sections are explained. UBS AG has also entered into various hedging strategies utiliz- ing derivatives for which hedge accounting has not been applied. These include interest rate swaps and other interest rate derivatives (e.g., futures) for day-to-day economic interest rate risk manage- ment purposes. In addition, UBS AG has used equity futures, options and, to a lesser extent, swaps for economic hedging in a variety of equity trading strategies to offset underlying equity and equity volatility exposure. UBS AG has also entered into CDS that provide economic hedges for credit risk exposures (refer to the credit derivatives section of this Note). Fair value changes of deriva- tives that are part of economic relationships, but do not qualify for hedge accounting treatment, are reported in Net trading income, except for the forward points on certain short duration foreign exchange contracts, which are reported in Net interest income. 624 Note 14 Derivative instruments and hedge accounting (continued) Fair value hedges: interest rate risk related to debt instruments UBS AG’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate debt instruments, such as non-structured fixed-rate bonds, covered bonds and subordinated debt, due to movements in market interest rates. The fair values of outstanding interest rate derivatives designated as fair value hedges were assets of CHF 1,656 million and liabilities of CHF 11 million as of 31 Decem- ber 2015 and assets of CHF 2,236 million and liabilities of CHF 37 million as of 31 December 2014. 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 31.12.15 31.12.14 31.12.13 554 (552) 2 1,113 (1,111) 2 (1,123) 1,116 (7) Fair value hedges: portfolio interest rate risk related to loans UBS AG 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 within Other assets on the balance sheet. The fair values of outstanding interest rate derivatives designated for these hedges as of 31 December 2015 were assets of CHF 7 million and liabilities of CHF 327 million (31 December 2014: liabilities of CHF 256 million). Fair value hedge of portfolio 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 31.12.15 31.12.14 31.12.13 (176) 147 (29) (694) 676 (18) 636 (625) 11 Cash flow hedges of forecasted transactions UBS AG is exposed to variability in future interest cash flows on non-trading financial assets and liabilities that bear interest at vari- able rates or are expected to be refinanced or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected based on contrac- tual terms and other relevant factors including estimates of prepay- ments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identify- ing the non-trading interest rate risk of UBS AG, which is hedged with interest rate swaps, the maximum maturity of which is 13 years. The table on the following page shows forecasted principal balances on which expected interest cash flows arise as of 31 Decem- ber 2015. Amounts shown represent, by time bucket, average assets and liabilities subject to forecasted cash flows designated as hedged items in cash flow hedge accounting relationships. As of 31 December 2015, the fair values of outstanding deriva- tives designated as cash flow hedges of forecasted transactions were CHF 2,176 million assets and CHF 195 million liabilities (31 December 2014: CHF 4,521 million assets and CHF 1,262 mil- lion liabilities). In 2015, a gain of CHF 150 million was recognized in Net trad- ing income due to hedge ineffectiveness, compared with a gain of CHF 87 million in 2014 and a loss of CHF 80 million in 2013. 625 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 14 Derivative instruments and hedge accounting (continued) Principal balances subject to cash flow forecasts CHF billion Assets Liabilities Net balance Within 1 year 1–3 years 3–5 years 5–10 years Over 10 years 61 4 57 81 7 74 48 3 45 54 3 51 1 0 1 Hedges of net investments in foreign operations UBS AG applies hedge accounting for certain net investments in foreign operations. As of 31 December 2015, the positive replace- ment values and negative replacement values of FX derivatives (mainly FX swaps) designated as hedging instruments in net investment hedge accounting relationships were CHF 170 million and CHF 79 million, respectively (31 December 2014: positive replacement values of CHF 158 million and negative replacement values of CHF 305 million). As of 31 December 2015, the underly- ing hedged structural exposures in several currencies amounted to CHF 5.5 billion (31 December 2014: CHF 8.0 billion). Hedges of structural FX exposures in currencies other than the US dollar may be comprised of two jointly designated derivatives as the foreign currency risk may be hedged against the US dollar first and then converted into Swiss francs, the presentation cur- rency of UBS AG, as part of a separate FX derivative transaction. The aggregated notional amount of designated hedging deriva- tives as of 31 December 2015 was CHF 11.2 billion in total (31 December 2014: CHF 14.7 billion) including CHF 5.6 billion notional values related to US dollar versus Swiss franc swaps and CHF 5.6 billion notional values related to derivatives hedging for- eign currencies (other than the US dollar) versus the US dollar. The effective portion of gains and losses of these FX swaps is trans- ferred directly to OCI 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 exposure resulting in the accumulation of FCT on the level of indi- vidual foreign branches and subsidiaries and hence on the total FCT OCI of UBS AG. UBS AG designates certain non-derivative foreign currency financial assets and liabilities of foreign branches or subsidiaries as hedging instruments in net investment hedge accounting arrange- ments. The FX translation difference recorded in 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 UBS AG is unchanged from this hedge designation. As of 31 December 2015, the nominal amount of non-derivative financial assets and liabilities designated as hedg- ing instruments in such net investment hedges was CHF 3.1 bil- lion and CHF 3.1 billion, respectively (31 December 2014: CHF 14.3 billion non-derivative financial assets and CHF 14.3 billion non-derivative financial liabilities). Ineffectiveness of hedges of net investments in foreign opera- tions was not material in 2015, 2014 and 2013. Undiscounted cash flows The table below provides undiscounted cash flows of all derivative instruments designated in hedge accounting relationships. Inter- est rate swap cash flows include cash inflows and cash outflows of all interest rate swaps designated in hedge accounting relation- ships, which are either assets or liabilities of UBS AG as of 31 December 2015. The table includes derivatives traded on an exchange or through a clearing house where the change in fair value is settled each day, either in fact or in substance, through cash payment of variation margin. Derivatives designated in hedge accounting relationships (undiscounted cash flows) CHF billion Interest rate swaps1 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 0 0 0 0 0 7 7 0 0 0 3 3 0 2 1 0 0 1 4 3 0 0 2 2 1 0 0 0 Total 8 5 10 10 3 1 The table includes gross cash inflows and cash outflows of all interest rate swaps designated in hedge accounting relationships, which are either assets or liabilities of UBS as of 31 December 2015. 626 Note 15 Financial investments available-for-sale CHF million 31.12.15 31.12.14 Financial investments available-for-sale by issuer type1 Debt instruments Government and government agencies of which: Switzerland of which: USA of which: Germany of which: France of which: Netherlands of which: United Kingdom Banks Corporates and other Total debt instruments Equity instruments Total financial investments available-for-sale Unrealized gains – before tax Unrealized (losses) – before tax Net unrealized gains / (losses) – before tax Net unrealized gains / (losses) – after tax 1 Refer to Note 24e for more information on product type and fair value hierarchy categorization. 47,245 702 21,424 8,583 3,566 2,934 2,782 12,268 2,385 61,898 645 62,543 462 (171) 291 167 45,334 43 17,219 10,145 5,351 2,528 2,348 8,490 2,670 56,494 664 57,159 430 (64) 365 238 627 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 16 Property, equipment and software At historical cost less accumulated depreciation CHF million Historical cost Balance at the beginning of the year Additions Disposals / write-offs1 Reclassifications Foreign currency translation Balance at the end of the year Accumulated depreciation Balance at the beginning of the year Depreciation Impairment2 Disposals / write-offs1 Reclassifications Foreign currency translation Balance at the end of the year Net book value at the end of the year3, 4 Own-used properties Leasehold improvements IT hardware and communication Internally generated software Purchased software Other machines and equipment Projects in progress 31.12.15 31.12.14 7,756 68 (181) 220 0 7,863 4,365 161 2 (157) (11) (3) 4,356 3,506 3,060 2,377 1,525 47 (97) 194 (36) 3,169 2,120 180 10 (81) 1 (25) 2,206 963 262 (750) 21 (39) 26 (54) 888 (9) 1,872 2,375 1,976 1,089 227 1 (748) (2) (35) 1,420 452 230 3 (46) 0 (1) 1,275 1,100 536 85 (210) 9 (9) 411 452 41 0 (209) 2 (8) 276 135 847 26 (30) 27 (8) 862 592 62 1 (29) (14) (6) 606 256 1,341 1,331 0 (1,394) (7) 17,442 1,846 (1,322) (35)6 (108) 16,136 1,690 (518) (359) 493 1,270 17,823 17,442 0 0 0 0 0 0 0 1,2705 10,593 10,140 901 18 (1,270) (25)6 (77) 10,140 7,683 799 19 (474) (217) 326 10,593 6,8497 1 Includes write-offs of fully depreciated assets. 2 Impairment charges recorded in 2015 relate to assets for which the recoverable amount was determined based on value-in-use (recoverable amount of the impaired assets: CHF 0 million Leasehold improvements, CHF 2 million Internally generated software). 3 As of 31 December 2015, contractual commitments to purchase property in the future amounted to approximately CHF 0.6 billion. 4 Includes CHF 47 million related to leased assets, mainly IT hardware and communication. 5 Includes CHF 928 million related to Internally generated software, CHF 86 million related to Own-used prop- erties and CHF 257 million related to Leasehold improvements. 6 Reflects reclassifications to Properties held-for-sale (CHF 11 million on a net basis) reported within Other assets. 7 Excludes investment properties of CHF 5 million. 628 Note 17 Goodwill and intangible assets Introduction UBS AG performs an impairment test on its goodwill assets on an annual basis, or when indicators of impairment exist. UBS AG considers the segments, as reported in Note 2, as separate cash- generating units (CGU). The impairment test is performed for each segment to which goodwill is allocated by comparing the recoverable amount, based on its value-in-use, to the carrying amount of the respective segment. An impairment charge is rec- ognized if the carrying amount exceeds the recoverable amount. As of 31 December 2015, total goodwill recognized on the bal- ance sheet was CHF 6.2 billion, of which CHF 1.3 billion, CHF 3.5 billion and CHF 1.4 billion was carried by Wealth Management, Wealth Management Americas and Asset Management, respec- tively. Based on the impairment testing methodology described below, UBS AG concluded that the goodwill balances as of 31 December 2015 allocated to these segments remain recover- able and thus were not impaired. Methodology for goodwill impairment testing The recoverable amounts are determined using a discounted cash flow model, which has been adapted to use inputs that consider features of the banking business and its regulatory environment. The recoverable amount of a segment is the sum of the dis- counted earnings attributable to shareholders from the first three forecasted years and the terminal value. The terminal value, which covers all periods beyond the third year, is calculated on the basis of the forecast of third-year profit, the discount rate and the long- term growth rate and is adjusted for the effect of the capital assumed to be needed to support the perpetual growth implied by the long-term growth rate. The carrying amount for each segment is determined by refer- ence to the Group’s equity attribution framework. Within this framework, which is described in the “Capital management” sec- tion of this report, the Board of Directors (BoD) attributes equity to the businesses after considering their risk exposure, risk- weighted assets and leverage ratio denominator usage, goodwill and intangible assets. The total amount of equity attributed to the business divisions can differ from UBS AG’s actual equity during a given period. The framework is primarily used for purposes of measuring the performance of the businesses and includes certain management assumptions. Attributed equity equals the capital that a segment requires to conduct its business and is considered an appropriate starting point from which to determine the carry- ing 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 CGU. ➔ Refer to the “Capital management” section of this report for more information on the equity attribution framework Assumptions Valuation parameters used within UBS AG’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 three, 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 different regions worldwide. Earnings available to sharehold- ers are estimated based on forecast results, which are part of the business plan approved by the BoD. The discount rates are determined by applying a capital-asset- pricing-model-based approach, as well as considering quantita- tive and qualitative inputs from both internal and external ana- lysts and the view of management. The discount rates were unchanged between 2014 and 2015. Key assumptions used to determine the recoverable amounts of each segment are tested for sensitivity by applying a reasonably possible change to those assumptions. Forecast earnings available to shareholders were changed by 10%, the discount rates were changed by 1.0 percentage point and the long-term growth rates were changed by 0.5 percentage point. Under all scenarios, the recoverable amounts for each segment exceeded the respective carrying amount, such that the reasonably possible changes in key assumptions would not result in impairment. If the estimated earnings and other assumptions in future peri- ods deviate from the current outlook, the value of goodwill may become impaired in the future, giving rise to losses in the income statement. Recognition of any impairment of goodwill would reduce IFRS equity and net profit. It would not impact cash flows and, as goodwill is required to be deducted from capital under the Basel capital framework, no impact would be expected on UBS AG’s total capital ratios. 629 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 17 Goodwill and intangible assets (continued) Discount and growth rates In % Wealth Management Wealth Management Americas Investment Bank Asset Management CHF million Historical cost Balance at the beginning of the year Additions Disposals Write-offs Foreign currency translation Balance at the end of the year Accumulated amortization and impairment Balance at the beginning of the year Amortization Impairment1 Disposals Write-offs Foreign currency translation Balance at the end of the year Net book value at the end of the year Discount rates Growth rates 31.12.15 31.12.14 31.12.15 31.12.14 9.0 9.0 11.0 9.0 9.0 9.0 11.0 9.0 1.7 2.4 2.4 2.4 1.7 2.4 2.4 2.4 Goodwill Total Infrastructure Intangible assets Customer relationships, contractual rights and other Total 31.12.15 31.12.14 6,368 (30) (97) 6,240 0 0 6,240 756 5 761 536 37 5 578 183 833 30 (1) (20) (22) 820 635 57 13 (1) (20) (10) 675 145 1,589 30 (1) (20) (16) 1,581 1,171 94 13 (1) (20) (5) 1,253 328 7,957 30 (32) (20) (114) 7,821 1,171 94 13 (1) (20) (5) 1,253 6,568 7,283 17 (1) 0 657 7,957 990 80 2 0 0 99 1,171 6,785 1 Impairment charges recorded in 2015 and 2014 relate to assets for which the recoverable amount was determined based on value-in-use (recoverable amount of the impaired assets: CHF 4 million for 2015 and CHF 3 million for 2014). The table below presents the disclosure of goodwill and intangible assets by segment for the year ended 31 December 2015. CHF million Goodwill Wealth Management Wealth Management Americas Investment Bank Asset Management Corporate Center – Services Balance at the beginning of the year 1,359 3,490 44 1,476 Additions Disposals Impairment Foreign currency translation Balance at the end of the year Intangible assets Balance at the beginning of the year Additions / transfers Disposals Amortization Impairment Foreign currency translation Balance at the end of the year 630 (7) (40) 1,312 45 (3) (4) 38 25 3,514 246 4 (51) 0 199 (14) 29 84 0 0 (13) (11) (6) 53 (23) (68) 1,385 17 (5) (2) (1) 8 25 25 (21) 30 Total 6,368 0 (30) 0 (97) 6,240 417 30 0 (94) (13) (12) 328 Note 17 Goodwill and intangible assets (continued) The estimated, aggregated amortization expenses for intangible assets are as follows: CHF million Estimated, aggregated amortization expenses for: 2016 2017 2018 2019 2020 Thereafter Not amortized due to indefinite useful life Total Note 18 Other assets CHF million Prime brokerage receivables1 Recruitment loans to financial advisors Other loans to financial advisors Bail deposit2 Accrued interest income Accrued income – other Prepaid expenses Net defined benefit pension and post-employment assets3 Settlement and clearing accounts VAT and other tax receivables Properties and other non-current assets held for sale Assets of disposal group held for sale4 Other Total other assets Intangible assets 93 66 56 45 37 23 9 328 31.12.15 11,341 31.12.14 12,534 3,184 418 1,221 462 844 1,032 50 402 397 134 279 2,485 22,249 2,909 372 1,323 453 1,009 1,027 0 616 272 236 0 2,317 23,069 1 Prime brokerage services include clearance, settlement, custody, financing and portfolio reporting services for corporate clients trading across multiple asset classes. Prime brokerage receivables are mainly comprised of margin lending receivables. 2 Refer to item 1 in Note 22b for more information. 3 Refer to Note 28 for more information. 4 Refer to Note 32 for more information. 631 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Balance sheet notes: liabilities Note 19 Due to banks and customers CHF million Due to banks Due to customers: demand deposits Due to customers: time deposits Due to customers: fiduciary deposits Due to customers: retail savings / deposits Total due to customers Total due to banks and customers Note 20 Financial liabilities designated at fair value CHF million Non-structured fixed-rate bonds of which: issued by UBS AG with original maturity greater than one year1, 2 Structured debt instruments issued Equity-linked3 Credit-linked Rates-linked4 Other Total structured debt instruments issued of which: issued by UBS AG with original maturity greater than one year1, 5 Structured over-the-counter debt instruments Equity-linked3 Other Total structured over-the-counter debt instruments of which: issued by UBS AG with original maturity greater than one year1, 6 Repurchase agreements Loan commitments and guarantees7 Total of which: life-to-date own credit (gain) / loss 31.12.15 11,836 174,262 60,274 6,139 161,848 402,522 414,358 31.12.14 10,492 187,516 52,269 14,766 156,427 410,979 421,471 31.12.15 31.12.14 4,098 3,542 30,965 3,652 16,587 1,231 52,436 36,539 2,885 2,608 5,493 4,497 849 119 62,995 (287) 4,488 3,616 37,725 4,645 19,380 2,138 63,888 45,851 2,508 3,154 5,662 3,691 1,167 93 75,297 302 1 Issued by UBS AG (standalone). Based on original contractual maturity without considering any early redemption features. 2 100% of the balance as of 31 December 2015 was unsecured. 3 Includes investment fund unit-linked instruments issued. 4 Includes non-structured rates-linked debt instruments issued. 5 More than 98% of the balance as of 31 December 2015 was unsecured. 6 More than 35% of the balance as of 31 December 2015 was unsecured. 7 Loan commitments recognized as “Financial liabilities designated at fair value” until drawn and recognized as loans. See Note 1a item 8 for additional information. As of 31 December 2015, the contractual redemption amount at maturity of Financial liabilities designated at fair value through profit or loss was CHF 0.1 billion higher than the carrying value. As of 31 December 2014, the contractual redemption amount at maturity of such liabilities was CHF 0.7 billion lower than the car- rying value. The table on the following page shows the residual contractual maturity of the carrying value of financial liabilities designated at fair value, split between fixed-rate and floating-rate instruments based on the contractual terms and does not consider any early redemption features. Interest rate ranges for future interest pay- ments related to these financial liabilities designated at fair value have not been included in the table on the following page as a majority of these liabilities are structured products, and therefore the future interest payments are highly dependent upon the embedded derivative and prevailing market conditions at the time each interest payment is made. ➔ Refer to Note 27b for maturity information on an undiscounted cash flow basis 632 Note 20 Financial liabilities designated at fair value (continued) Contractual maturity of carrying value CHF million UBS AG1 Non-subordinated debt Fixed-rate Floating-rate Subtotal Other subsidiaries2 Non-subordinated debt Fixed-rate Floating-rate Subtotal Total 2016 2017 2018 2019 2020 2021–2025 Thereafter Total 31.12.15 Total 31.12.14 2,873 23,148 26,021 29 260 288 1,912 5,314 7,226 58 484 542 776 3,559 4,335 179 188 367 279 2,839 3,118 17 122 139 302 3,286 3,588 34 127 161 1,623 2,838 4,461 164 178 342 2,938 8,839 11,777 10,702 49,824 60,526 513 116 629 993 1,475 2,469 12,891 58,643 71,535 1,473 2,289 3,762 26,310 7,768 4,702 3,257 3,749 4,803 12,406 62,995 75,297 1 Comprises instruments issued by UBS AG (standalone). 2 Comprises instruments issued by subsidiaries of UBS AG. Note 21 Debt issued held at amortized cost CHF million Certificates of deposit Commercial paper Other short-term debt Short-term debt1 Non-structured fixed-rate bonds of which: issued by UBS AG with original maturity greater than one year2 Covered bonds Subordinated debt of which: phase-out additional tier 1 capital of which: low-trigger loss-absorbing tier 2 capital of which: phase-out tier 2 capital Debt issued through the central bond institutions of the Swiss regional or cantonal banks Other long-term debt of which: issued by UBS AG with original maturity greater than one year2 Long-term debt3 Total debt issued held at amortized cost4 31.12.15 11,967 31.12.14 16,591 3,824 5,424 21,215 31,240 31,078 8,490 12,600 0 10,346 2,254 8,237 577 278 61,144 82,359 4,841 5,931 27,363 24,582 24,433 13,614 16,123 1,197 10,464 4,462 8,029 1,495 861 63,844 91,207 1 Debt with an original maturity of less than one year. 2 Issued by UBS AG (standalone). Based on original contractual maturity without considering any early redemption features. 100% of the balance as of 31 Decem- ber 2015 was unsecured. 3 Debt with original maturity greater than or equal to one year. 4 Net of bifurcated embedded derivatives with a net negative fair value of CHF 130 million as of 31 December 2015 (31 December 2014: net negative fair value of CHF 25 million). UBS AG uses interest rate and foreign exchange derivatives to manage the risks inherent in certain debt instruments held at amortized cost. In certain cases, UBS AG applies hedge account- ing for interest rate risk as discussed in Note 1a item 15 and Note 14. As a result of applying hedge accounting, the carrying value of debt issued increased by CHF 1,024 million and by CHF 1,703 million as of 31 December 2015 and 2014, respectively, reflecting changes in fair value due to interest rate movements. 633 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 21 Debt issued held at amortized cost (continued) Subordinated debt consists of unsecured debt obligations that are contractually subordinated in right of payment to all other present and future non-subordinated obligations of the respective issuing entity. All of the subordinated debt instruments outstand- ing as of 31 December 2015 pay a fixed rate of interest. ing-rate based on the contractual terms and does not consider any early redemption features. The effects from interest rate swaps, which are used to hedge various fixed-rate debt issuances by changing the repricing characteristics into those similar to floating-rate debt, are also not considered in the table below. The table below shows the residual contractual maturity of the carrying value of debt issued, split between fixed-rate and float- ➔ Refer to Note 27b for maturity information on an undiscounted cash flow basis Contractual maturity dates of carrying value CHF million, except where indicated UBS AG1 Non-subordinated debt Fixed-rate Interest rates (range in %) Floating-rate Subordinated debt Fixed-rate Interest rates (range in %) Subtotal Subsidiaries2 Non-subordinated debt Fixed-rate Interest rates (range in %) Floating-rate Subtotal Total 2016 2017 2018 2019 2020 2021–2025 Thereafter Total 31.12.15 Total 31.12.14 13,064 0–6.4 10,014 918 3.1–5.9 23,996 3,936 0–8.3 0 3,936 27,932 6,334 0–5.9 3,721 414 4.1–7.4 10,468 8,004 0–6.6 963 4,036 2.4–4.0 939 4,340 0–4.9 239 0 0 0 8,967 4,974 4,579 728 791 742 732 0.3–8.1 0.4–3.7 0.5–2.9 0.1–2.8 0 728 11,196 7 798 9,765 0 742 5,717 0 732 5,311 4,375 1.3–4.0 0 40,153 59,327 0 2,031 17,907 11,296 8,772 4.8–8.8 13,147 3,592 0–3.4 0 3,593 16,740 2,497 4.8–7.8 4,528 1,171 0.4–2.8 0 1,171 5,699 12,600 16,123 70,659 86,746 11,692 4,460 8 11,700 82,359 1 4,462 91,207 1 Comprises debt issued by UBS AG (standalone). 2 Comprises debt issued by subsidiaries of UBS AG. 634 Note 22 Provisions and contingent liabilities a) Provisions CHF million Balance at the beginning of the year 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 Reclassifications Foreign currency translation / unwind of discount Balance at the end of the year Litigation, regulatory and similar matters2 3,053 Operational risks1 50 43 (7) (37) 0 0 (1) 47 1,263 (166) (1,174) 0 0 7 2,983 Loan com- mitments and guarantees Restruc- turing 647 361 (102) (287) 0 0 5 6243 23 6 (3) 0 0 9 0 35 Real estate 153 27 (1) (28) 5 0 2 1574 Employee benefits5 215 7 (18) (1) 0 0 (5) 198 Other 224 71 (40) (133) 0 0 (3) 120 Total 31.12.15 Total 31.12.14 4,366 1,778 (337) (1,660) 5 9 3 4,163 2,971 3,308 (528) (1,659) 0 8 266 4,366 1 Comprises provisions for losses resulting from security risks and transaction processing risks. 2 Comprises provisions for losses resulting from legal, liability and compliance risks. 3 Includes personnel related restruc- turing provisions of CHF 110 million as of 31 December 2015 (31 December 2014: CHF 116 million) and provisions for onerous lease contracts of CHF 514 million as of 31 December 2015 (31 December 2014: CHF 530 million). 4 Includes reinstatement costs for leasehold improvements of CHF 94 million as of 31 December 2015 (31 December 2014: CHF 98 million) and provisions for onerous lease contracts of CHF 62 million as of 31 December 2015 (31 December 2014: CHF 55 million). 5 Includes provisions for sabbatical and anniversary awards as well as provisions for severance which are not part of restructuring provisions. Restructuring provisions primarily relate to onerous lease con- tracts and severance payments. The utilization of onerous lease provisions is driven by the maturities of the underlying lease con- tracts. Severance-related provisions are utilized within a short time period, usually within six months, but potential changes in amount may be triggered when natural staff attrition reduces the number of people affected by a restructuring and therefore the estimated costs. Information on provisions and contingent liabilities in respect of Litigation, regulatory and similar matters, as a class, is included in Note 22b. There are no material contingent liabilities associated with the other classes of provisions. 635 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) b) Litigation, regulatory and similar matters UBS operates in a legal and regulatory environment that exposes it to significant litigation and similar risks arising from disputes and regulatory proceedings. As a result, UBS (which for purposes of this Note may refer to UBS AG and / or one or more of its sub- sidiaries, as applicable) is involved in various disputes and legal proceedings, including litigation, arbitration, and regulatory and criminal investigations. Such matters are subject to many uncertainties and the out- come is often difficult to predict, particularly in the earlier stages of a case. There are also situations where UBS may enter into a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, even for those matters for which UBS believes it should be exonerated. The uncertainties inherent in all such matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been established and other contingent liabilities. UBS makes pro- visions for such matters brought against it when, in the opinion of management after seeking legal advice, it is more likely than not that UBS has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required, and the amount can be reliably estimated. Where these factors are otherwise satisfied, a provision may be established for claims that have not yet been asserted against UBS, but are nev- ertheless expected to be, based on UBS’s experience with similar asserted claims. If any of those conditions is not met, such matters result in contingent liabilities. If the amount of an obligation can- not be reliably estimated, a liability exists that is not recognized even if an outflow of resources is probable. Accordingly, no provi- sion is established even if the potential outflow of resources with respect to select matters could be significant. Specific litigation, regulatory and other matters are described below, including all such matters that management considers to be material and others that management believes to be of sig- nificance due to potential financial, reputational and other effects. The amount of damages claimed, the size of a transac- tion or other information is provided where available and appro- priate in order to assist users in considering the magnitude of potential exposures. In the case of certain matters below, we state that we have established a provision, and for the other matters, we make no such statement. When we make this statement and we expect disclosure of the amount of a provision to prejudice seriously our position with other parties in the matter, because it would reveal what UBS believes to be the probable and reliably estimable out- flow, we do not disclose that amount. In some cases, we are sub- ject to confidentiality obligations that preclude such disclosure. With respect to the matters for which we do not state whether we have established a provision, either (a) we have not estab- lished a provision, in which case the matter is treated as a contin- gent liability under the applicable accounting standard or (b) we have established a provision but expect disclosure of that fact to prejudice seriously our position with other parties in the matter because it would reveal the fact that UBS believes an outflow of resources to be probable and reliably estimable. With respect to certain litigation, regulatory and similar mat- ters for which we have established provisions, we are able to estimate the expected timing of outflows. However, the aggre- gate amount of the expected outflows for those matters for which we are able to estimate expected timing is immaterial rela- tive to our current and expected levels of liquidity over the rele- vant time periods. 636 Note 22 Provisions and contingent liabilities (continued) The aggregate amount provisioned for litigation, regulatory and similar matters as a class is disclosed in Note 22a above. It is not practicable to provide an aggregate estimate of liability for our litigation, regulatory and similar matters as a class of contin- gent liabilities. Doing so would require us to provide speculative legal assessments as to claims and proceedings that 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 quantified by the claimants. Although we therefore cannot provide a numerical estimate of the future losses that could arise from litigation, regulatory and similar matters, we believe that the aggregate amount of possible future losses from this class that are more than remote substan- tially exceeds the level of current provisions. Litigation, regulatory and similar matters may also result in non-monetary penalties and consequences. For example, the non-prosecution agreement (NPA) described in paragraph 5 of this Note, which we entered into with the US Department of Justice (DOJ), Criminal Division, Fraud Section in connection with our submissions of benchmark interest rates, including, among others, the British Bankers’ Asso- ciation London Interbank Offered Rate (LIBOR), was terminated by the DOJ based on its determination that we had committed a US crime in relation to foreign exchange matters. As a consequence, UBS AG has pleaded guilty to one count of wire fraud for conduct in the LIBOR matter, and has agreed to pay a USD 203 million fine and accept a three-year term of probation. A guilty plea to, or conviction of, a crime (including as a result of termination of the NPA) could have material consequences for UBS. Resolution of regulatory proceedings may require us to obtain waivers of regu- latory disqualifications to maintain certain operations, may entitle regulatory authorities to limit, suspend or terminate licenses and regulatory authorizations and may permit financial market utilities to limit, suspend or terminate our participation in such utilities. Failure to obtain such waivers, or any limitation, suspension or termination of licenses, authorizations or participations, could have material consequences for UBS. The risk of loss associated with litigation, regulatory and similar matters is a component of operational risk for purposes of deter- mining our capital requirements. Information concerning our capital requirements and the calculation of operational risk for this purpose is included in the “Capital management” section of this report. Provisions for litigation, regulatory and similar matters by business division and Corporate Center unit1 CHF million Balance at the beginning of the year Increase in provisions recognized in the income statement Release of provisions recognized in the income statement Provisions used in conformity with designated purpose Reclassifications Foreign currency translation / unwind of discount Balance at the end of the year Wealth Manage- ment Wealth Manage- ment Americas Personal & Corporate Banking Asset Manage- ment Investment Bank CC – Services CC – Group ALM 188 114 (10) (36) 0 (12) 245 209 372 (19) (110) 0 7 459 92 0 (3) (5) 0 (2) 83 53 0 (3) (33) 0 (1) 16 1,258 17 (15) (675) 0 0 585 312 15 (1) (13) 0 (3) 310 0 0 0 0 0 0 0 CC – Non-core and Legacy Portfolio Total 31.12.15 Total 31.12.14 941 744 (115) (302) 0 18 3,053 1,263 (166) (1,174) 0 7 1,284 2,983 1,622 2,941 (395) (1,286) (2) 172 3,053 1 Provisions, if any, for the matters described in this Note are recorded in Wealth Management (item 3), Wealth Management Americas (item 4), Corporate Center – Services (item 7) and Corporate Center – Non-core and Legacy Portfolio (items 2 and 8). Provisions, if any, for the matters described in this Note in items 1 and 6 are allocated between Wealth Management and Personal & Corporate Banking, and provisions, if any, for the matters described in this Note in item 5 are allocated between the Investment Bank, Corporate Center – Services and Corporate Center – Non-core and Legacy Portfolio. 637 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) 1. Inquiries regarding cross-border wealth management busi- nesses Tax and regulatory authorities in a number of countries have made inquiries, served requests for information or examined employees located in their respective jurisdictions relating to the cross-border wealth management services provided by UBS and other financial institutions. It is possible that implementation of automatic tax information exchange and other measures relating to cross-border provision of financial services could give rise to further inquiries in the future. As a result of investigations in France, in 2013, UBS (France) S.A. and UBS AG were put under formal examination (“mise en examen”) for complicity in having illicitly solicited clients on French territory, and were declared witness with legal assistance (“témoin assisté”) regarding the laundering of proceeds of tax fraud and of banking and financial solicitation by unauthorized persons. In 2014, UBS AG was placed under formal examination with respect to the potential charges of laundering of proceeds of tax fraud, and the investigating judges ordered UBS to provide bail (“caution”) of EUR 1.1 billion. UBS AG appealed the determi- nation of the bail amount, but both the appeal court (“Cour d’Appel”) and the French Supreme Court (“Cour de Cassation”) upheld the bail amount and rejected the appeal in full in late 2014. UBS AG has filed and has had accepted a petition to the European Court of Human Rights to challenge various aspects of the French court’s decision. In September 2015, the former CEO of UBS Wealth Management was placed under formal examina- tion in connection with these proceedings. In addition, the inves- tigating judges have sought to issue arrest warrants against three Swiss-based former employees of UBS AG who did not appear when summoned by the investigating judge. In February 2016, the investigating judge notified UBS that he does not intend to conduct further investigation. This notification commences a period in which the prosecutor may file a request for a judge to issue formal charges. In March 2015, UBS (France) S.A. was placed under formal examination for complicity regarding the laundering of proceeds of tax fraud and of banking and financial solicitation by unauthor- ized persons for the years 2004 until 2008 and declared witness with legal assistance for the years 2009 to 2012. A bail of EUR 40 million was imposed, and was reduced by the Court of Appeals in May 2015 to EUR 10 million. Separately, in 2013, the French banking supervisory authority’s disciplinary commission repri- manded UBS (France) S.A. for having had insufficiencies in its con- trol and compliance framework around its cross-border activities and know your customer obligations. It imposed a penalty of EUR 10 million, which was paid. UBS AG has been notified by the Brussels public prosecutor’s office that it is investigating various aspects of UBS’s cross-border business. In January 2015, UBS received inquiries from the US Attorney’s Office for the Eastern District of New York and from the US Secu- rities and Exchange Commission (SEC), which are investigating potential sales to US persons of bearer bonds and other unregis- tered securities in possible violation of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the registration require- ments of the US securities laws. UBS is cooperating with the authorities in these investigations. UBS has, and reportedly numerous other financial institutions have, received inquiries from authorities concerning accounts relating to the Fédération Internationale de Football Association (FIFA) and other constituent soccer associations and related per- sons and entities. UBS is cooperating with authorities in these inquiries. Our balance sheet at 31 December 2015 reflected provisions with respect to matters described in this item 1 in an amount that UBS believes to be appropriate under the applicable accounting standard. As in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provi- sion that we have recognized. 2. Claims related to sales of residential mortgage-backed securities and mortgages From 2002 through 2007, prior to the crisis in the US residential loan market, UBS was a substantial issuer and underwriter of US residential mortgage-backed securities (RMBS) and was a pur- chaser and seller of US residential mortgages. A subsidiary of UBS, UBS Real Estate Securities Inc. (UBS RESI), acquired pools of resi- dential mortgage loans from originators and (through an affiliate) deposited them into securitization trusts. In this manner, from 2004 through 2007, UBS RESI sponsored approximately USD 80 billion in RMBS, based on the original principal balances of the securities issued. UBS RESI also sold pools of loans acquired from originators to third-party 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 significant 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 active from 2006 to 2008, and securitized less than half of these loans. 638 Note 22 Provisions and contingent liabilities (continued) RMBS-related lawsuits concerning disclosures: UBS is named as a defendant relating to its role as underwriter and issuer of RMBS in lawsuits related to approximately USD 6.2 billion in original face amount of RMBS underwritten or issued by UBS. Of the USD 6.2 billion in original face amount of RMBS that remains at issue in these cases, approximately USD 3.2 billion was issued in offerings in which a UBS subsidiary transferred underlying loans (the major- ity of which were purchased from third-party originators) into a securitization trust and made representations and warranties about those loans (UBS-sponsored RMBS). The remaining USD 3 billion of RMBS to which these cases relate was issued by third parties in securitizations in which UBS acted as underwriter (third- party RMBS). In connection with certain of these lawsuits, UBS has indemni- fication 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. UBS is a defendant in two lawsuits brought by the National Credit Union Administration (NCUA), as conservator for certain failed credit unions, asserting misstatements and omissions in the offering documents for RMBS purchased by the credit unions. Both lawsuits were filed in US District Courts, one in the District of Kan- sas and the other in the Southern District of New York (SDNY). The original principal balance at issue in the Kansas case is approxi- mately USD 1.15 billion and the original principal balance at issue in the SDNY case is approximately USD 400 million. In February 2016, UBS made an offer of judgment to NCUA in the SDNY case, which NCUA has accepted, pursuant to which UBS will pay USD 33 million plus an amount of prejudgment interest that will be deter- mined by the court and reasonable attorneys’ fees. Once these amounts are determined and judgment is entered, the SDNY case will end. Prejudgment interest and attorneys’ fees are expected to significantly increase the total amount to be paid in the SDNY case. Lawsuits related to contractual representations and warranties concerning mortgages and RMBS: When UBS acted as an RMBS sponsor or mortgage seller, we generally made certain representa- tions relating to the characteristics of the underlying loans. In the event of a material breach of these representations, we were in certain circumstances contractually obligated to repurchase the loans to which the representations related or to indemnify certain parties against losses. UBS has received demands to repurchase US residential mortgage loans as to which UBS made certain rep- resentations at the time the loans were transferred to the securi- tization trust aggregating approximately USD 4.1 billion in origi- nal principal balance. Of this amount, UBS considers claims relating to approximately USD 2 billion in original principal bal- ance to be resolved, including claims barred by the statute of limitations. Substantially all of the remaining claims are in litiga- tion, including the matters described in the next paragraph. UBS believes that new demands to repurchase US residential mort- gage loans are time-barred under a decision rendered by the New York Court of Appeals. In 2012, certain RMBS trusts filed an action (Trustee Suit) in the SDNY seeking to enforce UBS RESI’s obligation to repurchase loans in the collateral pools for three RMBS securitizations (Trans- actions) with an original principal balance of approximately USD 2 billion, for which Assured Guaranty Municipal Corp. (Assured Guaranty), a financial guaranty insurance company, had previ- ously demanded repurchase. In January 2015, the court rejected plaintiffs’ efforts to seek damages for all loans purportedly in breach of representations and warranties in any of the three Transactions and limited plaintiffs to pursuing claims based solely on alleged breaches for loans identified in the complaint or other breaches that plaintiffs can establish were independently discov- ered by UBS. In February 2015, the court denied plaintiffs’ motion seeking reconsideration of its ruling. With respect to the loans subject to the Trustee Suit that were originated by institutions still in existence, UBS intends to enforce its indemnity rights against those institutions. Trial is currently scheduled for April 2016. We also have tolling agreements with certain institutional pur- chasers of RMBS concerning their potential claims related to sub- stantial purchases of UBS-sponsored or third-party RMBS. 639 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) Provision for claims related to sales of residential mortgage-backed securities and mortgages USD million Balance at the beginning of the year Increase in provision recognized in the income statement Release of provision recognized in the income statement Provision used in conformity with designated purpose Balance at the end of the year 31.12.15 31.12.14 849 662 (94) (199) 1,218 817 239 (120) (87) 849 Mortgage-related regulatory matters: In 2014, UBS received a subpoena from the US Attorney’s Office for the Eastern District of New York issued pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which seeks documents and information related to UBS’s RMBS business from 2005 through 2007. In September 2015, the Eastern District of New York identified a number of transactions that are currently the focus of their inquiry, as to which we are providing additional information. UBS continues to respond to the FIRREA subpoena and to subpoenas from the New York State Attorney General (NYAG) relating to its RMBS business. In addition, UBS has also been responding to inquiries from both the Special Inspector Gen- eral for the Troubled Asset Relief Program (SIGTARP) (who is work- ing in conjunction with the US Attorney’s Office for Connecticut and the DOJ) and the SEC relating to trading practices in connec- tion with purchases and sales of mortgage-backed securities in the secondary market from 2009 through the present. We are cooperating with the authorities in these matters. Numerous other banks reportedly are responding to similar inquiries from these authorities. As reflected in the table “Provision for claims related to sales of residential mortgage-backed securities and mortgages,” our balance sheet at 31 December 2015 reflected a provision of USD 1,218 million with respect to matters described in this item 2. As in the case of other matters for which we have established provi- sions, the future outflow of resources in respect of this matter cannot be determined with certainty based on currently avail- able information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provision that we have recognized. 640 Note 22 Provisions and contingent liabilities (continued) 3. 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 the Swiss Financial Market Super- visory Authority (FINMA) and the Luxembourg Commission de Surveillance du Secteur Financier (CSSF). Those inquiries con- cerned two third-party funds established under Luxembourg law, substantially all assets of which were with BMIS, as well as certain funds established in offshore jurisdictions with either 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 billion in the aggregate, although that figure likely includes fictitious profit reported by BMIS. The documentation establishing both funds identifies UBS entities in various roles including custodian, admin- istrator, manager, distributor and promoter, and indicates that UBS employees serve as board members. UBS (Luxembourg) SA and certain other UBS subsidiaries are responding to inquiries by Luxembourg investigating authorities, without, however, being named as parties in those investigations. In 2009 and 2010, the liquidators of the two Luxembourg funds filed claims on behalf of the funds against UBS entities, non-UBS entities and certain indi- viduals including current and former UBS employees. The amounts claimed are approximately EUR 890 million and EUR 305 million, respectively. The liquidators have filed supplementary claims for amounts that the funds may possibly be held liable to pay the BMIS Trustee. These amounts claimed by the liquidator are approximately EUR 564 million and EUR 370 million, respectively. In addition, a large number of alleged beneficiaries have filed claims against UBS entities (and non-UBS entities) for purported losses relating to the Madoff scheme. The majority of these cases are pending in Luxembourg, where appeals were filed by the claimants against the 2010 decisions of the court in which the claims in a number of test cases were held to be inadmissible. In July 2014, the Luxembourg Court of Appeal dismissed one test appeal in its entirety, which decision was appealed by the investor. In July 2015, the Luxembourg Supreme Court found in favor of UBS and dismissed the investor’s appeal. In the US, the BMIS Trustee filed claims in 2010 against UBS entities, among others, in relation to the two Luxembourg funds and one of the offshore funds. The total amount claimed against all defendants in these actions was not less than USD 2 billion. Following a motion by UBS, in 2011, the SDNY dismissed all of the BMIS 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 BMIS Trustee lacks standing to bring such claims. In 2013, the Second Circuit affirmed the District Court’s decision and, in June 2014, the US Supreme Court denied the BMIS Trustee’s petition seeking review of the Second Circuit rul- ing. In December 2014, several claims, including a purported class action, were filed in the US by BMIS customers against UBS enti- ties, asserting claims similar to the ones made by the BMIS Trustee, seeking unspecified damages. One claim was voluntarily with- drawn by the plaintiff. In July 2015, following a motion by UBS, the SDNY dismissed the two remaining claims on the basis that the New York courts did not have jurisdiction to hear the claims against the UBS entities. In Germany, certain clients of UBS are exposed to Madoff-managed positions through third-party funds and funds administered by UBS entities in Germany. A small num- ber of claims have been filed with respect to such funds. In Janu- ary 2015, a court of appeal reversed a lower court decision in favor of UBS in one such case and ordered UBS to pay EUR 49 million, plus interest (approximately EUR 15.3 million). UBS filed an application for leave to appeal the decision. That application was rejected by the German Federal Supreme Court in December 2015, meaning that the Court of Appeal’s decision is final. 641 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) 4. Puerto Rico Declines since August 2013 in the market prices of Puerto Rico municipal bonds and of closed-end funds (the funds) that are sole-managed and co-managed by UBS Trust Company of Puerto Rico and distributed by UBS Financial Services Incorporated of Puerto Rico (UBS PR) have led to multiple regulatory inquiries, as well as customer complaints and arbitrations with aggregate claimed damages of USD 1.6 billion, of which claims with aggre- gate claimed damages of approximately USD 374 million have been resolved through settlements or arbitration. The claims are filed by clients in Puerto Rico who own the funds or Puerto Rico municipal bonds and / or who used their UBS account assets as collateral for UBS non-purpose loans; customer complaint and arbitration allegations include fraud, misrepresentation and unsuitability of the funds and of the loans. A shareholder deriva- tive action was filed in 2014 against various UBS entities and cur- rent and certain former directors of the funds, alleging hundreds of millions in losses in the funds. In 2015, defendants’ motion to dismiss was denied. Defendants are seeking leave to appeal that ruling to the Puerto Rico Supreme Court. In 2014, a federal class action complaint also was filed against various UBS entities, cer- tain members of UBS PR senior management, and the co-man- ager of certain of the funds seeking damages for investor losses in the funds during the period from May 2008 through May 2014. Defendants have moved to dismiss that complaint. In March 2015, a class action was filed in Puerto Rico state court against UBS PR seeking equitable relief in the form of a stay of any effort by UBS PR to collect on non-purpose loans it acquired from UBS Bank USA in December 2013 based on plaintiffs’ allegation that the loans are not valid. In 2014, UBS reached a settlement with the Office of the Com- missioner of Financial Institutions for the Commonwealth of Puerto Rico (OCFI) in connection with OCFI’s examination of UBS’s operations from January 2006 through September 2013. Pursu- ant to the settlement, UBS contributed USD 3.5 million to an investor education fund, offered USD 1.68 million in restitution to certain investors and, among other things, committed to under- take an additional review of certain client accounts to determine if additional restitution would be appropriate. That review resulted in an additional USD 2.1 million in restitution being offered to certain investors. In September 2015, the SEC and the Financial Industry Regula- tory Authority (FINRA) announced settlements with UBS PR of their separate investigations stemming from the 2013 market events. Without admitting or denying the findings in either matter, UBS PR agreed in the SEC settlement to pay USD 15 million (which includes USD 1.18 million in disgorgement, a civil penalty of USD 13.63 million and pre-judgment interest), and USD 18.5 million in the FINRA matter (which includes up to USD 11 million in restitution to 165 UBS PR customers and a civil penalty of USD 7.5 million). The SEC settlement involves a charge against UBS PR of failing to supervise the activities of a former financial advisor who had rec- ommended the impermissible investment of non-purpose loan proceeds into the UBS PR closed-end funds, in violation of firm policy and the customer loan agreements. In the FINRA settlement, UBS PR is alleged to have failed to supervise certain customer accounts which were both more than 75% invested in UBS PR closed-end funds and leveraged against those positions. We also understand that the DOJ is conducting a criminal inquiry into the impermissible reinvestment of non-purpose loan proceeds. We are cooperating with the authorities in this inquiry. In 2011, a purported derivative action was filed on behalf of the Employee Retirement System of the Commonwealth of Puerto Rico (System) against over 40 defendants, including UBS PR and other consultants and underwriters, trustees of the System, and the President and Board of the Government Development Bank of Puerto Rico. The plaintiffs alleged that defendants violated their purported fiduciary duties and contractual obligations in connec- tion with the issuance and underwriting of approximately USD 3 billion of bonds by the System in 2008 and sought damages of over USD 800 million. UBS is named in connection with its under- writing and consulting services. In 2013, the case was dismissed by the Puerto Rico Court of First Instance on the grounds that plaintiffs did not have standing to bring the claim, but that dis- missal was subsequently overturned on appeal. Defendants have renewed their motion to dismiss the complaint on grounds not addressed when the court issued its prior ruling. Also, in 2013, an SEC Administrative Law Judge dismissed a case brought by the SEC against two UBS executives, finding no violations. The charges had stemmed from the SEC’s investigation of UBS’s sale of closed-end funds in 2008 and 2009, which UBS settled in 2012. Beginning in 2012, two federal class action com- plaints, which were subsequently consolidated, were filed against various UBS entities, certain of the funds, and certain members of UBS PR senior management, seeking damages for investor losses in the funds during the period from January 2008 through May 2012 based on allegations similar to those in the SEC action. A motion for class certification was denied without prejudice to the right to refile the motion after limited discovery, and that motion has since been refiled. 642 Note 22 Provisions and contingent liabilities (continued) In June 2015 Puerto Rico’s Governor stated that the Common- wealth is unable to meet its obligations. In addition, certain agen- cies and public corporations of the Commonwealth have held discussions with their creditors to restructure their outstanding debt, and certain agencies and public corporations of the Com- monwealth have defaulted on certain interest payments that were due in August 2015 and January 2016. The United States Supreme Court has agreed to hear Puerto Rico’s appeal of a US District Court’s invalidation of the Puerto Rico Public Corporations Debt Enforcement and Recovery Act (the Act), under which Puerto Rico’s public corporations would be permitted to effect a manda- tory restructuring of their respective debts with a specified credi- tor vote that would be binding on all applicable creditors, once approved by a court or, alternatively, under a court-supervised bankruptcy type restructuring. The foregoing events, any further defaults by the Commonwealth or its agencies and public corpo- rations on (or any debt restructurings proposed by them with respect to) their outstanding debt, a Supreme Court decision upholding the Act (or sending it back to the District Court for further proceedings) and any further actions taken by Puerto Rico’s public corporations under the Act, as well as any market reactions to any of the foregoing, may increase the number of claims against UBS concerning Puerto Rico securities as well as potential damages sought. Our balance sheet at 31 December 2015 reflected provisions with respect to matters described in this item 4 in amounts that UBS believes to be appropriate under the applicable accounting standard. As in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provi- sions that we have recognized. 5. Foreign exchange, LIBOR, and benchmark rates, and other trading practices Foreign exchange-related regulatory matters: Following an initial media report in 2013 of widespread irregularities in the foreign exchange markets, UBS immediately commenced an internal review of its foreign exchange business, which includes our pre- cious metals and related structured products businesses. Since then, various authorities have commenced investigations con- cerning possible manipulation of foreign exchange markets, including FINMA, the Swiss Competition Commission (WEKO), the DOJ, the SEC, the US Commodity Futures Trading Commis- sion (CFTC), the Board of Governors of the Federal Reserve Sys- tem (Federal Reserve Board), the UK Financial Conduct Authority (FCA) (to which certain responsibilities of the UK Financial Services Authority (FSA) have passed), the UK Serious Fraud Office (SFO), the Australian Securities and Investments Commission (ASIC), the Hong Kong Monetary Authority (HKMA), the Korea Fair Trade Commission (KFTC) and the Brazil Competition Authority (CADE). In addition, WEKO is, and a number of other authorities report- edly are, investigating potential manipulation of precious metals prices. UBS has taken and will take appropriate action with respect to certain personnel as a result of its ongoing review. In 2014, UBS reached settlements with the FCA and the CFTC in connection with their foreign exchange investigations, and FINMA issued an order concluding its formal proceedings with respect to UBS relating to its foreign exchange and precious met- als businesses. UBS has paid a total of approximately CHF 774 million to these authorities, including GBP 234 million in fines to the FCA, USD 290 million in fines to the CFTC, and CHF 134 mil- lion to FINMA representing confiscation of costs avoided and profits. In May 2015, the Federal Reserve Board and the Con- necticut Department of Banking issued an Order to Cease and Desist and Order of Assessment of a Civil Monetary Penalty Issued upon Consent (Federal Reserve Order) to UBS AG. As part of the Federal Reserve Order, UBS AG paid a USD 342 million civil monetary penalty. 643 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) In May 2015, the DOJ’s Criminal Division (Criminal Division) terminated the December 2012 Non-Prosecution Agreement (NPA) with UBS AG related to UBS’s submissions of benchmark interest rates. As a result, UBS AG entered into a plea agreement with the Criminal Division pursuant to which UBS AG agreed to and did plead guilty to a one-count criminal information filed in the US District Court for the District of Connecticut charging UBS AG with one count of wire fraud in violation of 18 USC Sections 1343 and 2. Under the plea agreement, UBS AG agreed to a sen- tence that includes a USD 203 million fine and a three-year term of probation. The criminal information charges that between approximately 2001 and 2010, UBS AG engaged in a scheme to defraud counterparties to interest rate derivatives transactions by manipulating benchmark interest rates, including Yen LIBOR. Sen- tencing is currently scheduled for 9 May 2016. The Criminal Divi- sion terminated the NPA based on its determination, in its sole discretion, that certain UBS AG employees committed criminal conduct that violated the NPA, including fraudulent and deceptive currency trading and sales practices in conducting certain foreign exchange market transactions with clients and collusion with other participants in certain foreign exchange markets. We have ongoing obligations to cooperate with these authori- ties and to undertake certain remediation, including actions to improve processes and controls. UBS has been granted conditional immunity by the Antitrust Division of the DOJ (Antitrust Division) from prosecution for EUR / USD collusion and entered into a non-prosecution agree- ment covering other currency pairs. As a result, UBS AG will not be subject to prosecutions, fines or other sanctions for antitrust law violations by the Antitrust Division, subject to UBS AG’s con- tinuing cooperation. However, the conditional immunity grant does not bar government agencies from asserting other claims and imposing sanctions against UBS AG, as evidenced by the set- tlements and ongoing investigations referred to above. UBS has also been granted conditional leniency by authorities in certain jurisdictions, including WEKO, in connection with potential com- petition law violations relating to precious metals, and as a result, will not be subject to prosecutions, fines or other sanctions for antitrust or competition law violations in those jurisdictions, sub- ject to UBS AG’s continuing cooperation. In October 2015, UBS AG settled charges with the SEC relating to structured notes issued by UBS AG that were linked to the UBS V10 Currency Index with Volatility Cap. Investigations relating to foreign exchange and precious metals matters by numerous authorities, including the CFTC, remain ongoing notwithstanding these resolutions. Foreign exchange-related civil litigation: Putative class actions have been filed since November 2013 in US federal courts and in other jurisdictions against UBS and other banks on behalf of puta- tive classes of persons who engaged in foreign currency transac- tions with any of the defendant banks. They allege collusion by the defendants and assert claims under the antitrust laws and for unjust enrichment. In 2015, additional putative class actions were filed in federal court in New York against UBS and other banks on behalf of a putative class of persons who entered into or held any foreign exchange futures contracts and options on foreign exchange futures contracts since 1 January 2003. The complaints assert claims under the Commodity Exchange Act (CEA) and the US antitrust laws. In July 2015, a consolidated complaint was filed on behalf of both putative classes of persons covered by the US federal court class actions described above. UBS has entered into a settlement agreement that would resolve all of these US federal court class actions. The agreement, which has been preliminarily approved by the court and is subject to final court approval, requires, among other things, that UBS pay an aggregate of USD 141 million and provide cooperation to the settlement classes. 644 Note 22 Provisions and contingent liabilities (continued) In June 2015, a putative class action was filed in federal court in New York against UBS and other banks on behalf of partici- pants, beneficiaries, and named fiduciaries of plans qualified under the Employee Retirement Income Security Act of 1974 (ERISA) for whom a defendant bank provided foreign currency exchange transactional services, exercised discretionary authority or discretionary control over management of such ERISA plan, or authorized or permitted the execution of any foreign currency exchange transactional services involving such plan’s assets. The complaint asserts claims under ERISA. In 2015, UBS was added to putative class actions pending against other banks in federal court in New York and other juris- dictions on behalf of putative classes of persons who bought or sold physical precious metals and various precious metal products and derivatives. The complaints in these lawsuits assert claims under the antitrust laws and the CEA, and other claims. LIBOR and other benchmark-related regulatory matters: Numerous government agencies, including the SEC, the CFTC, the DOJ, the FCA, the SFO, the Monetary Authority of Singapore (MAS), the HKMA, FINMA, the various state attorneys general in the US, and competition authorities in various jurisdictions have conducted or are continuing to conduct investigations regarding submissions with respect to LIBOR and other benchmark rates. These investigations focus on whether there were improper attempts by UBS, among others, either acting on our own or together with others, to manipulate LIBOR and other benchmark rates at certain times. In 2012, UBS reached settlements with the FSA, the CFTC and the Criminal Division of the DOJ in connection with their investi- gations of benchmark interest rates. At the same time, FINMA issued an order concluding its formal proceedings with respect to UBS relating to benchmark interest rates. UBS has paid a total of approximately CHF 1.4 billion in fines and disgorgement – includ- ing GBP 160 million in fines to the FSA, USD 700 million in fines to the CFTC, USD 500 million in fines to the DOJ, and CHF 59 million in disgorgement to FINMA. UBS Securities Japan Co. Ltd. (UBSSJ) entered into a plea agreement with the DOJ under which it entered a plea to one count of wire fraud relating to the manip- ulation of certain benchmark interest rates, including Yen LIBOR. UBS entered into an NPA with the DOJ, which (along with the plea agreement) covered conduct beyond the scope of the conditional leniency / immunity grants described below, required UBS to pay the USD 500 million fine to the DOJ after the sentencing of UBSSJ, and provided that any criminal penalties imposed on UBSSJ at sentencing be deducted from the USD 500 million fine. Under the NPA, we agreed, among other things, that for two years from 18 December 2012 UBS would not commit any US crime, and we would advise DOJ of any potentially criminal conduct by UBS or any of its employees relating to violations of US laws concerning fraud or securities and commodities markets. The term of the NPA was extended by one year to 18 December 2015. In May 2015, the Criminal Division terminated the NPA based on its determina- tion, in its sole discretion, that certain UBS AG employees commit- ted criminal conduct that violated the NPA. As a result, UBS entered into a plea agreement with the DOJ under which it entered a guilty plea to one count of wire fraud relating to the manipulation of certain benchmark interest rates, including Yen LIBOR, and agreed to pay a fine of USD 203 million and accept a three-year term of probation. Sentencing is currently scheduled for 9 May 2016. In 2014, UBS reached a settlement with the European Com- mission (EC) regarding its investigation of bid-ask spreads in con- nection with Swiss franc interest rate derivatives and paid a EUR 12.7 million fine, which was reduced to this level based in part on UBS’s cooperation with the EC. The MAS, HKMA and the Japan Financial Services Agency have also resolved investigations of UBS (and in some cases, other banks). We have ongoing obligations to cooperate with the authorities with whom we have reached reso- lutions and to undertake certain remediation with respect to benchmark interest rate submissions. Investigations by the CFTC, ASIC and other governmental authorities remain ongoing notwithstanding these resolutions. 645 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 22 Provisions and contingent liabilities (continued) UBS has been granted conditional leniency or conditional immunity from authorities in certain jurisdictions, including the Antitrust Division of the DOJ, WEKO and the EC, in connection with potential antitrust or competition law violations related to submissions for Yen LIBOR and Euroyen TIBOR. WEKO has also granted UBS conditional immunity in connection with potential competition law violations related to submissions for CHF LIBOR and certain transactions related to CHF LIBOR. As a result of these conditional grants, we will not be subject to prosecutions, fines or other sanctions for antitrust or competition law violations in the jurisdictions where we have conditional immunity or leniency in connection with the matters covered by the conditional grants, subject to our continuing cooperation. However, the conditional leniency and conditional immunity grants we have received do not bar government agencies from asserting other claims and imposing sanctions against us, as evidenced by the settlements and ongoing investigations referred to above. In addition, as a result of the conditional leniency agreement with the DOJ, we are eligible 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 antitrust action, subject to our satisfying the DOJ and the court presiding over the civil litigation of our cooperation. The conditional leniency and conditional immunity grants do not oth- erwise affect the ability of private parties to assert civil claims against us. LIBOR and other benchmark-related civil litigation: A number of putative class actions and other actions are pending in, or expected to be transferred to, the federal courts in New York against UBS and numerous other banks on behalf of parties who transacted in certain interest rate benchmark-based derivatives. Also pending are actions asserting losses related to various prod- ucts whose interest rate was linked to USD LIBOR, including adjustable rate mortgages, preferred and debt securities, bonds pledged as collateral, loans, depository accounts, investments and other interest-bearing instruments. All of the complaints allege manipulation, through various means, of various benchmark interest rates, including USD LIBOR, Euroyen TIBOR, Yen LIBOR, EURIBOR, CHF LIBOR, GBP LIBOR or USD ISDAFIX rates and seek unspecified compensatory and other damages under varying legal theories. In 2013, the court in the USD action dismissed the federal antitrust and racketeering claims of certain USD LIBOR plaintiffs and a portion of their claims brought under the CEA and state common law. Plaintiffs have appealed the dismissal, and the appeal remains pending. In 2014, the court in one of the Euroyen TIBOR lawsuits dismissed certain of the plaintiff’s claims, including federal antitrust claims. In 2015, the same court dismissed plain- tiff’s federal racketeering claims and affirmed its previous dis- missal of plaintiff’s antitrust claims. UBS and other defendants in other lawsuits including those related to EURIBOR, CHF LIBOR and GBP LIBOR have filed motions to dismiss. Since September 2014, putative class actions have been filed in federal court in New York and New Jersey against UBS and other financial institutions, among others, on behalf of parties who entered into interest rate derivative transactions linked to ISDAFIX. The complaints, which have since been consolidated into an amended complaint, allege that the defendants conspired to manipulate ISDAFIX rates from 1 January 2006 through January 2014, in violation of US antitrust laws and the CEA, among other theories, and seeks unspecified compensatory damages, includ- ing treble damages. UBS and other defendants have filed a motion to dismiss, which remains pending. Government bonds: Putative class actions have been filed in US federal courts against UBS and other banks on behalf of persons who participated in markets for US Treasury securities since 2007. The complaints generally allege that the banks colluded with respect to and manipulated prices of US Treasury securities sold at auction. They assert claims under the antitrust laws and the CEA and for unjust enrichment. The cases have been consolidated in the SDNY. Following filing of these complaints, UBS and report- edly other banks have received requests for information from various authorities regarding US Treasury securities and other gov- ernment bond trading practices. With respect to additional matters and jurisdictions not encom- passed by the settlements and order referred to above, our bal- ance sheet at 31 December 2015 reflected a provision in an amount that UBS believes to be appropriate under the applicable accounting standard. As in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provision that we have recognized. 646 Note 22 Provisions and contingent liabilities (continued) 6. Swiss retrocessions The Federal Supreme Court of Switzerland ruled in 2012, in a test case against UBS, that distribution fees paid to a firm for distribut- ing third party and intra-group investment funds and structured products must be disclosed and surrendered to clients who have entered into a discretionary mandate agreement with the firm, absent a valid waiver. FINMA has issued a supervisory note to all Swiss banks in response to the Supreme Court decision. The note sets forth the measures Swiss banks are to adopt, which include informing all affected clients about the Supreme Court decision and directing them to an internal bank contact for further details. UBS has met the FINMA requirements and has notified all potentially affected clients. The Supreme Court decision has resulted, and may continue to result, in a number of client requests for UBS to disclose and potentially surrender retrocessions. Client requests are assessed on a case-by-case basis. Considerations taken into account when assessing these cases include, among others, the existence of a discretionary mandate and whether or not the client documenta- tion contained a valid waiver with respect to distribution fees. Our balance sheet at 31 December 2015 reflected a provision with respect to matters described in this item 6 in an amount that UBS believes to be appropriate under the applicable accounting standard. The ultimate exposure will depend on client requests and the resolution thereof, factors that are difficult to predict and assess. Hence, as in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provi- sion that we have recognized. 7. Banco UBS Pactual tax indemnity Pursuant to the 2009 sale of Banco UBS Pactual S.A. (Pactual) by UBS to BTG Investments, LP (BTG), BTG has submitted contractual indemnification claims that UBS estimates amount to approxi- mately BRL 2.4 billion, including interest and penalties, which is net of liabilities retained by BTG. The claims pertain principally to several tax assessments issued by the Brazilian tax authorities against Pactual relating to the period from December 2006 through March 2009, when UBS owned Pactual. The majority of these assessments relate to the deductibility of goodwill amortiza- tion in connection with UBS’s 2006 acquisition of Pactual and payments made to Pactual employees through various profit-shar- ing plans. These assessments are being challenged in administra- tive and judicial proceedings. In May 2015, the administrative court issued a decision that was largely in favor of the tax author- ity with respect to the goodwill amortization assessment. This decision has been appealed. 8. Matters relating to the CDS market In 2013, the EC issued a Statement of Objections against 13 credit default swap (CDS) dealers including UBS, as well as data service provider Markit and the International Swaps and Derivatives Asso- ciation (ISDA). The Statement of Objections broadly alleges that the dealers infringed European Union antitrust rules by colluding to prevent exchanges from entering the credit derivatives market between 2006 and 2009. In December 2015, the EC issued a statement that it had decided to close its investigation against all 13 dealers, including UBS. The EC’s investigation regarding Markit and ISDA is ongoing. Since mid-2009, the Antitrust Division of the DOJ has also been investigating whether multiple dealers, includ- ing UBS, conspired with each other and with Markit to restrain competition in the markets for CDS trading, clearing and other services. In 2014, putative class action plaintiffs filed consolidated amended complaints in the SDNY against 12 dealers, including UBS, as well as Markit and ISDA, alleging violations of the US Sherman Antitrust Act and common law. Plaintiffs allege that the defendants unlawfully conspired to restrain competition in and / or monopolize the market for CDS trading in the US in order to pro- tect the dealers’ profits from trading CDS in the over-the-counter market. In September 2015, UBS and the other defendants entered into settlement agreements to resolve the litigation, pur- suant to which UBS has paid USD 75 million out of a total settle- ment amount paid by all defendants of approximately USD 1.865 billion. The agreements have received preliminary court approval but are subject to final court approval. 647 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 23 Other liabilities CHF million Prime brokerage payables1 Amounts due under unit-linked investment contracts Compensation-related liabilities of which: accrued expenses of which: other deferred compensation plans of which: net defined benefit pension and post-employment liabilities2 Third-party interest in consolidated investment funds Settlement and clearing accounts Current and deferred tax liabilities3 VAT and other tax payables Deferred income Accrued interest expenses Other accrued expenses Liabilities of disposal group held for sale4 Other Total other liabilities 31.12.15 31.12.14 45,306 15,718 5,122 2,827 1,559 736 594 893 810 446 210 1,438 2,492 235 1,343 74,606 38,633 17,643 5,414 2,583 1,457 1,374 707 1,054 642 420 259 1,327 2,472 0 1,820 70,392 1 Prime brokerage services include clearance, settlement, custody, financing and portfolio reporting services for corporate clients trading across multiple asset classes. Prime brokerage payables are mainly comprised of client securities financing and deposits. 2 Refer to Note 28 for more information. 3 Refer to Note 8 for more information. 4 Refer to Note 32 for more information. 648 Additional information Note 24 Fair value measurement This Note provides fair value measurement information for both financial and non-financial instruments and is structured as follows: a) Valuation principles b) Valuation governance c) Valuation techniques d) Valuation adjustments e) Fair value measurements and classification within the f) Transfers between Level 1 and Level 2 in the fair value hierarchy g) Movements of Level 3 instruments h) Valuation of assets and liabilities classified as Level 3 i) Sensitivity of fair value measurements to changes in unobservable input assumptions j) Financial instruments not measured at fair value fair value hierarchy a) Valuation principles Fair value is defined as the price that would be received for the sale of an asset or paid to transfer a liability in an orderly transac- tion between market participants in the principal market (or most advantageous market, in the absence of a principal mar- ket) as of the measurement date. In measuring fair value, UBS AG utilizes various valuation approaches and applies a hierarchy for prices and inputs that maximizes the use of observable mar- ket data, if available. All financial and non-financial assets and liabilities measured or disclosed at fair value are categorized into one of three fair value hierarchy levels. In certain cases, the inputs used to measure fair value may fall within different levels of the fair value hierarchy. For disclosure purposes, the level in the hierarchy within which the instrument is classified in its entirety is based on the lowest level input that is significant to the position’s fair value measurement: – Level 1 – quoted prices (unadjusted) in active markets for iden- tical assets and liabilities; – Level 2 – valuation techniques for which all significant inputs are, or are based on, observable market data or – Level 3 – valuation techniques for which significant inputs are not based on observable market data. If available, fair values are determined using quoted prices in active markets for identical assets or liabilities. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing data on an ongoing basis. Assets and liabilities that are quoted and traded in an active market are valued at the currently quoted price multi- plied by the number of units of the instrument held. Where the market for a financial instrument or non-financial asset or liability is not active, fair value is established using a valu- ation technique, including pricing models. Valuation techniques involve the use of estimates, the extent of which depends on the complexity of the instrument and the availability of market-based data. Valuation adjustments may be made to allow for additional factors including model, liquidity, credit and funding risks, which are not explicitly captured within the valuation technique, but which would nevertheless be considered by market participants when establishing a price. The limitations inherent in a particular valuation technique are considered in the determination of an asset or liability’s classification within the fair value hierarchy. Many cash instruments and over-the-counter (OTC) derivative contracts have bid and offer prices that can be observed in the marketplace. Bid prices reflect the highest price that a party is will- ing to pay for an asset. Offer prices represent the lowest price that a party is willing to accept for an asset. In general, long positions are measured at a bid price and short positions at an offer price, reflecting the prices at which the instruments could be transferred under normal market conditions. Offsetting positions in the same financial instrument are marked at the mid-price within the bid- offer spread. Generally, the unit of account for a financial instrument is the individual instrument, and UBS applies valuation adjustments at an individual instrument level, consistent with that unit of account. However, if certain conditions are met, UBS may estimate the fair value of a portfolio of financial assets and liabilities with substan- tially similar and offsetting risk exposures on the basis of the net open risks. For transactions where the valuation technique used to mea- sure fair value requires significant inputs that are not based on observable market data, the financial instrument is initially recog- nized at the transaction price. This initial recognition amount may differ from the fair value obtained using the valuation technique. Any such difference is deferred and not recognized in the income statement and referred to as deferred day-1 profit or loss. ➔ Refer to Note 24d for more information 649 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) b) Valuation governance UBS AG’s fair value measurement and model governance frame- work includes numerous controls and other procedural safe- guards that are intended to maximize the quality of fair value measurements reported in the financial statements. New prod- ucts and valuation techniques must be reviewed and approved by key stakeholders from risk and finance control functions. Respon- sibility for the ongoing measurement of financial and non-finan- cial instruments at fair value resides with the business divisions. In carrying out their valuation responsibilities, the businesses are required to consider the availability and quality of external market data and to provide justification and rationale for their fair value estimates. The fair value estimates provided by the businesses are vali- dated by risk and finance control functions, which are indepen- dent of the business divisions. Independent price verification is performed by finance through benchmarking the business divi- sions’ fair value estimates with observable market prices and other independent sources. Controls and governance are in place to ensure the quality of third-party pricing sources where used. For instruments where valuation models are used to determine fair value, independent valuation and model control groups within finance and risk evaluate UBS AG’s models on a regular basis, including valuation and model input parameters as well as pric- ing. As a result of the valuation controls employed, valuation adjustments may be made to the business divisions’ estimates of fair value to align with independent market data and the relevant accounting standard. ➔ Refer to Note 24d for more information c) Valuation techniques Valuation techniques are used to value positions for which a mar- ket price is not available from market sources. This includes certain less liquid debt and equity instruments, certain exchange-traded derivatives and all derivatives transacted in the OTC market. UBS AG uses widely recognized valuation techniques for determining the fair value of financial and non-financial instruments that are not actively traded and quoted. The most frequently applied valu- ation techniques include discounted value of expected cash flows, relative value and option pricing methodologies. Discounted value of expected cash flows is a valuation tech- nique that measures fair value using estimated expected future cash flows from assets or liabilities and then discounts these cash flows using a discount rate or discount margin that reflects the credit and / or funding spreads required by the market for instru- ments with similar risk and liquidity profiles to produce a present value. When using such valuation techniques, expected future cash flows are estimated using an observed or implied market price for the future cash flows or by using industry standard cash flow projection models. The discount factors within the calculation are generated using industry standard yield curve modeling tech- niques and models. Relative value models measure fair value based on the market prices of equivalent or comparable assets or liabilities, making adjustments for differences between the characteristics of the observed instrument and the instrument being valued. Option pricing models incorporate assumptions regarding the behavior of future price movements of an underlying referenced asset or assets to generate a probability-weighted future expected payoff for the option. The resulting probability-weighted expected payoff is then discounted using discount factors generated from industry standard yield curve modeling techniques and models. The option pricing model may be implemented using a closed- form analytical formula or other mathematical techniques (e.g., binomial tree or Monte Carlo simulation). Where available, valuation techniques use market-observable assumptions and inputs. If such data is not available, inputs may be derived by reference to similar assets in active markets, from recent prices for comparable transactions or from other observ- able market data. In such cases, the inputs selected are based on historical experience and practice for similar or analogous instru- ments, derivation of input levels based on similar products with observable price levels and knowledge of current market condi- tions and valuation approaches. For more complex instruments and instruments not traded in an active market, fair values may be estimated using a combina- tion of observed transaction prices, consensus pricing services and relevant quotes. Consideration is given to the nature of the quotes (e.g., indicative or firm) and the relationship of recently evidenced market activity to the prices provided by consensus pricing ser- vices. UBS AG also uses internally developed models, which are typically based on valuation methods and techniques recognized as standard within the industry. 650 Note 24 Fair value measurement (continued) Assumptions and inputs used in valuation techniques include benchmark interest rate curves, credit and funding spreads used in estimating discount rates, bond and equity prices, equity index prices, foreign exchange rates, levels of market volatility and correlation. Refer to Notes 24e and 24h for more informa- tion. The discount curves used by UBS AG incorporate the fund- ing and credit characteristics of the instruments to which they are applied. d) Valuation adjustments The output of a valuation technique is always an estimate of a fair value that cannot be measured with complete certainty. As a result, valuations are adjusted, where appropriate and when such factors would be considered by market participants in estimating fair value, to reflect close-out costs, credit exposure, model-driven valuation uncertainty, funding costs and benefits, trading restric- tions and other factors. Valuation adjustments are an important component of fair value for assets and liabilities that are mea- sured using valuation techniques. Such adjustments are applied to reflect uncertainties within the fair value measurement process, to adjust for an identified model simplification or to incorporate an aspect of fair value that requires an overall portfolio assessment rather than an evaluation based on an individual instrument level characteristic. The major classes of valuation adjustments are discussed in fur- Day-1 reserves For new transactions where the valuation technique used to mea- sure fair value requires significant inputs that are not based on observable market data, the financial instrument is initially recog- nized at the transaction price. The transaction price may differ from the fair value obtained using a valuation technique where any such difference is deferred and not initially recognized in the income statement. These day-1 profit or loss reserves are reflected, where appropriate, as valuation adjustments. The table below summarizes the changes in deferred day-1 profit or loss reserves during the respective period. Amounts deferred are released and gains or losses are recorded in Net trad- ing income when pricing of equivalent products or the underly- ing parameters become observable or when the transaction is closed out. ther detail below. Deferred day-1 profit or loss CHF million Balance at the beginning of the year Profit / (loss) deferred on new transactions (Profit) / loss recognized in the income statement Foreign currency translation Balance at the end of the year For the year ended 31.12.15 31.12.14 31.12.13 480 268 (321) (6) 421 486 344 (384) 35 480 474 694 (653) (29) 486 651 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) Own credit adjustments on financial liabilities designated at fair value In addition to considering the valuation of the derivative risk com- ponent, the valuation of fair value option liabilities also requires consideration of the funded component and specifically the own credit component of fair value. Own credit risk is reflected in the valuation of our fair value option liabilities where this component is considered relevant for valuation purposes by our counterpar- ties and other market participants. On the other hand, own credit risk is not reflected in the valuation of our liabilities that are fully collateralized or for other obligations for which it is established market practice not to include an own credit component. In 2015, UBS AG made enhancements to the valuation method- ology for the own credit component of fair value of financial liabil- ities designated at fair value. Prior to the fourth quarter of 2015, own credit was estimated using a funds transfer pricing curve (FTP), which was derived by discounting UBS Group AG (consolidated) new issuance senior debt curve spreads, with the discount primarily reflecting the differences between the spreads in the senior unse- cured debt market for UBS Group AG (consolidated) debt and the levels at which UBS Group AG (consolidated) medium-term notes (MTN) were issued. A decline in long-dated UBS Group AG (con- solidated) MTN issuance volumes, following UBS Group AG’s (con- solidated) business transformation, resulted in a reduction in the observable market data available to benchmark the FTP. From the fourth quarter of 2015 onwards, own credit is estimated using an own credit adjustment curve (OCA), which incorporates more observable market data, including market-observed secondary prices for UBS Group AG (consolidated) senior debt, UBS Group AG (consolidated) credit default swap (CDS) spreads and senior debt curves of peers. This change in accounting estimate was finalized in the fourth quarter of 2015, following a multi-period implementa- tion project to develop an enhanced fair value approach supported by related infrastructure enhancements. The change was imple- mented on a prospective basis in the fourth quarter of 2015 and resulted in a gain of CHF 260 million on a total carrying amount of CHF 63 billion in financial liabilities designated at fair value. OCA is generally a Level 2 pricing input. However, certain long- dated exposures that are beyond the tenors that are actively traded are classified as Level 3. The effects of own credit adjustments related to financial liabil- ities designated at fair value (predominantly issued structured products) are summarized in the table below. Life-to-date amounts reflect the cumulative change since initial recognition. The change in own credit for the period consists of changes in fair value that are attributable to the change in UBS AG’s credit spreads, as well as the effect of changes in fair values attributable to factors other than credit spreads, such as redemp- tions, effects from time decay and changes in interest and other market rates. Own credit adjustments on financial liabilities designated at fair value CHF million Gain / (loss) for the year ended Life-to-date gain / (loss) As of or for the year ended 31.12.15 31.12.14 31.12.13 553 287 292 (302) (283) (577) 652 Note 24 Fair value measurement (continued) Credit valuation adjustments In order to measure the fair value of OTC derivative instruments, including funded derivative instruments which are classified as Financial assets designated at fair value, credit valuation adjust- ments (CVA) are necessary to reflect the credit risk of the coun- terparty inherent in these instruments. This amount represents the estimated fair value of protection required to hedge the counterparty credit risk of such instruments. A CVA is deter- mined for each counterparty, considering all exposures to that counterparty, and is dependent on the expected future value of exposures, default probabilities and recovery rates, applicable collateral or netting arrangements, break clauses and other con- tractual factors. Funding valuation adjustments Funding valuation adjustments (FVA) reflect the costs and benefits of funding associated with uncollateralized and partially collater- alized derivative receivables and payables and are calculated as the valuation impact from moving the discounting of the uncol- lateralized derivative cash flows from LIBOR to OCA using the CVA framework. In the fourth quarter of 2015, as mentioned above, UBS AG replaced the FTP curve with the OCA curve for purposes of valu- ing its liabilities carried at fair value. As applied to the FVA associ- ated with uncollateralized and partially collateralized derivative payables, the change resulted in a charge to the income state- ment of CHF 40 million. An FVA is also applied to collateralized derivative assets in cases where the collateral cannot be sold or repledged. Valuation adjustments on financial instruments Life-to-date gain / (loss), CHF billion Credit valuation adjustments1 Funding valuation adjustments Debit valuation adjustments Other valuation adjustments of which: liquidity of which: model uncertainty 1 Amounts do not include reserves against defaulted counterparties. Debit valuation adjustments A debit valuation adjustment (DVA) is estimated to incorporate own credit in the valuation of derivatives, effectively consistent with the CVA framework. DVA is determined for each counter- party, considering all exposures with that counterparty and taking into account collateral netting agreements, expected future mark- to-market movements and UBS AG’s credit default spreads. Upon the implementation of FVA in the second half of 2014, UBS AG reversed DVA to the extent it overlapped with FVA. Other valuation adjustments Instruments that are measured as part of a portfolio of combined long and short positions are valued at mid-market levels to ensure consistent valuation of the long and short component risks. A liquidity valuation adjustment is then made to the overall net long or short exposure to move the fair value to bid or offer as appro- priate, reflecting current levels of market liquidity. The bid-offer spreads used in the calculation of this valuation adjustment are obtained from market transactions and other relevant sources and are updated periodically. Uncertainties associated with the use of model-based valua- tions are incorporated into the measurement of fair value through the use of model reserves. These reserves reflect the amounts that UBS AG estimates should be deducted from valuations produced directly by models to incorporate uncertainties in the relevant modeling assumptions, in the model and market inputs used, or in the calibration of the model output to adjust for known model deficiencies. In arriving at these estimates, UBS AG considers a range of market practices, including how it believes market par- ticipants would assess these uncertainties. Model reserves are reassessed periodically in light of data from market transactions, consensus pricing services and other relevant sources. As of 31.12.15 31.12.14 (0.3) (0.2) 0.0 (0.8) (0.5) (0.3) (0.5) (0.1) 0.0 (0.9) (0.5) (0.4) 653 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) e) Fair value measurements and classification within the fair value hierarchy The fair value hierarchy classification of financial and non-finan- cial assets and liabilities measured at fair value is summarized in the table below. The narrative that follows describes the signifi- cant valuation inputs and assumptions for each class of assets and liabilities measured at fair value, the valuation techniques, where applicable, used in measuring their fair value, and the factors determining their classification within the fair value hierarchy. Determination of fair values from quoted market prices or valuation techniques1 CHF billion Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 31.12.15 31.12.14 Assets measured at fair value on a recurring basis Financial assets held for trading2 of which: Government bills / bonds Corporate bonds and municipal bonds, including bonds issued by financial institutions Loans Investment fund units Asset-backed securities Equity instruments Financial assets for unit-linked investment contracts Positive replacement values of which: Interest rate contracts Credit derivative contracts Foreign exchange contracts Equity / index contracts Commodity contracts Financial assets designated at fair value of which: Loans (including structured loans) Structured reverse repurchase and securities borrowing agreements Other Financial investments available-for-sale of which: Government bills / bonds Corporate bonds and municipal bonds, including bonds issued by financial institutions Investment fund units Asset-backed securities Equity instruments Non-financial assets Precious metals and other physical commodities Assets measured at fair value on a non-recurring basis Other assets3 Total assets measured at fair value 654 96.4 12.9 0.2 0.0 6.1 0.0 62.4 14.8 0.5 0.0 0.0 0.3 0.0 0.0 0.2 0.0 0.0 0.2 34.2 31.1 3.0 0.0 0.0 0.1 3.7 120.4 101.7 21.9 3.3 8.1 1.8 5.7 1.0 1.5 0.7 164.0 74.4 5.4 64.9 15.9 3.4 2.3 2.3 0.0 0.0 27.7 2.0 22.2 0.1 3.4 0.0 2.1 0.0 0.7 0.8 0.2 0.2 0.1 0.1 2.9 0.1 1.3 0.5 1.0 0.0 3.3 1.7 1.5 0.1 0.7 0.0 0.0 0.1 0.0 0.5 16.2 9.0 2.6 11.9 1.2 64.0 15.5 167.4 74.5 6.7 65.7 16.9 3.4 5.8 4.0 1.6 0.3 62.5 33.1 25.2 0.2 3.4 0.6 27.2 4.7 11.0 2.2 6.4 1.5 0.8 0.6 251.6 123.4 9.8 97.0 17.7 3.6 0.9 0.8 0.1 0.0 23.9 2.8 16.9 0.1 4.0 0.1 0.0 3.5 0.0 1.4 1.1 0.3 0.6 0.1 0.1 4.4 0.2 1.7 0.6 1.9 0.0 3.5 1.0 2.4 0.1 0.6 0.0 0.0 0.2 0.0 0.4 0.0 132.4 13.6 12.9 3.2 13.4 2.1 69.8 17.4 257.0 123.7 11.5 98.4 19.5 3.6 4.5 1.7 2.5 0.3 57.2 33.1 19.1 0.3 4.0 0.7 5.8 8.8 0.6 0.0 6.7 0.0 68.8 16.8 1.0 0.0 0.0 0.7 0.0 0.0 0.1 0.0 0.0 0.1 32.7 30.3 2.2 0.0 0.0 0.2 5.8 0.0 0.0 3.7 0.3 135.2 0.1 216.0 0.1 9.0 0.4 360.3 0.0 141.4 0.1 303.5 0.2 12.2 0.2 457.1 Note 24 Fair value measurement (continued) Determination of fair values from quoted market prices or valuation techniques1 (continued) CHF billion Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 31.12.15 31.12.14 Liabilities measured at fair value on a recurring basis Trading portfolio liabilities of which: Government bills / bonds Corporate bonds and municipal bonds, including bonds issued by financial institutions Investment fund units Asset-backed securities Equity instruments Negative replacement values of which: Interest rate contracts Credit derivative contracts Foreign exchange contracts Equity / index contracts Commodity contracts Financial liabilities designated at fair value of which: Non-structured fixed-rate bonds Structured debt instruments issued Structured over-the-counter debt instruments Structured repurchase agreements Loan commitments and guarantees Other liabilities – amounts due under unit-linked investment contracts Liabilities measured at fair value on a non-recurring basis Other liabilities3 Total liabilities measured at fair value 25.5 6.0 0.0 0.7 0.0 18.8 0.6 0.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.5 0.8 2.4 0.1 0.0 0.2 158.5 67.2 5.4 63.0 19.7 3.2 52.3 1.5 45.7 4.7 0.3 0.1 15.7 0.2 0.0 0.1 0.0 0.0 0.0 3.3 0.3 1.3 0.2 1.4 0.0 10.7 2.6 6.7 0.8 0.6 0.0 0.0 29.1 6.8 2.5 0.7 0.0 19.1 162.4 67.6 6.7 63.5 21.2 3.2 63.0 4.1 52.4 5.5 0.8 0.1 15.7 23.9 7.0 0.1 1.1 0.0 15.7 1.1 0.0 0.0 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.9 1.2 2.4 0.1 0.0 0.1 248.1 117.3 10.0 96.6 20.9 3.2 63.4 2.3 56.6 4.1 0.3 0.1 17.6 0.0 26.1 0.2 230.3 0.0 14.1 0.2 270.5 0.0 25.0 0.0 333.0 0.1 0.0 0.1 0.0 0.0 0.0 5.0 0.6 1.7 0.3 2.4 0.0 11.9 2.2 7.3 1.5 0.9 0.0 0.0 0.0 17.0 28.0 8.2 2.6 1.2 0.0 15.9 254.1 117.9 11.7 97.6 23.3 3.2 75.3 4.5 63.9 5.7 1.2 0.1 17.6 0.0 375.0 1 Bifurcated embedded derivatives are presented on the same balance sheet lines as their host contracts and are excluded from this table. As of 31 December 2015, net bifurcated embedded derivative liabilities held at fair value, totaling CHF 0.1 billion (of which CHF 0.1 billion were net Level 2 assets and CHF 0.2 billion net Level 2 liabilities) were recognized on the balance sheet within Debt issued. As of 31 December 2014, net bifurcated embedded derivative liabilities held at fair value, totaling CHF 0.0 billion (of which CHF 0.3 billion were net Level 2 assets and CHF 0.3 billion net Level 2 liabilities) were recognized on the balance sheet within Debt issued. 2 Financial assets held for trading do not include precious metals and other physical commodities. 3 Other assets and other liabilities primarily consist of assets held for sale as well as assets and liabili- ties of a disposal group held for sale, which are measured at the lower of their net carrying amount or fair value less costs to sell. Refer to Note 32 for more information on the disposal group held for sale. 655 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) Financial assets and liabilities held for trading, financial assets designated at fair value and financial investments classified as available-for-sale Government bills and bonds Government bills and bonds include fixed-rate, floating-rate and inflation-linked bills and bonds issued by sovereign governments, as well as interest and principal strips based on these bonds. Such instruments are generally traded in active markets and prices can be obtained directly from these markets, resulting in classification as Level 1, while the remaining positions are classified as Level 2. Instruments that cannot be priced directly using active market data are valued using discounted cash flow valuation techniques that incorporate market data for similar government instruments converted into yield curves. These yield curves are used to project future index levels, and to discount expected future cash flows. The main inputs to valuation techniques for these instruments are bond prices and inputs to estimate the future index levels for floating or inflation index-linked instruments. Instruments classi- fied as Level 3 are limited and are generally classified as such due to the requirement to extrapolate yield curve inputs outside the range of active market trading. Corporate and municipal bonds Corporate bonds include senior, junior and subordinated debt issued by corporate entities. Municipal bonds are issued by state and local governments. While most instruments are standard fixed or floating-rate securities, some may have more complex coupon or embedded option features. Corporate and municipal bonds are generally valued using prices obtained directly from the market. In cases where no directly comparable price is available, instruments may be valued using yields derived from other securi- ties by the same issuer or benchmarked against similar securities, adjusted for seniority, maturity and liquidity. Instruments that can- not be priced directly using active market data are valued using discounted cash flow valuation techniques incorporating the credit spread of the issuer, which may be derived from other issu- ances or CDS data for the issuer, estimated with reference to other equivalent issuer price observations or from credit modeling techniques. Corporate bonds are typically classified as Level 2 because, although market data is readily available, there is often insufficient third-party trading transaction data to justify an active market and corresponding Level 1 classification. Municipal bonds are generally classified as Level 1 or Level 2 depending on the depth of trading activity behind price sources. Level 3 instruments have no suitable price available and also cannot be referenced to other securities issued by the same issuer. Therefore, these instru- ments are measured based on price levels for similar issuers adjusted for relative tenor and issuer quality. Convertible bonds are generally valued using prices obtained directly from market sources. In cases where no directly compa- rable price is available, issuances may be priced using a convert- ible bond model, which values the embedded equity option and debt components and discounts these amounts using a curve that incorporates the credit spread of the issuer. Although market data is readily available, convertible bonds are typically classified as Level 2 because there is insufficient third-party trading transaction data to justify a Level 1 classification. Traded loans and loans designated at fair value Traded loans and loans designated at fair value are valued directly using market prices that reflect recent transactions or quoted dealer prices where available. For illiquid loans where no market price data are available, alternative valuation techniques are used, which include relative value benchmarking using pricing derived from debt instruments in comparable entities or different prod- ucts in the same entity. The corporate lending portfolio is valued using either directly observed market prices typically from consen- sus providers, or by using a credit default swap valuation tech- nique, which requires inputs for credit spreads, credit recovery rates and interest rates. Even though price data are generally available for these instruments, corporate loans typically do not satisfy Level 1 classification criteria insofar as the price data may not be directly observable, and moreover the market for these instruments is not actively traded. Instruments with suitably deep and liquid price data available will be classified as Level 2, while any positions requiring the use of valuation techniques or for which the price sources have insufficient trading depth are classi- fied as Level 3. Recently originated commercial real estate loans that are classified as Level 3 are measured using a securitization approach based on rating agency guidelines. Included within loans are various contingent lending transac- tions for which valuations are dependent on actuarial mortality levels and actuarial life insurance policy lapse rates. Mortality and lapse rate assumptions are based on external actuarial estimations for large homogeneous pools, and contingencies are derived from a range relative to the actuarially expected amount. In addition, the pricing technique uses volatility of mortality as an input. 656 Note 24 Fair value measurement (continued) Investment fund units Investment fund units are predominantly exchange-traded, with readily available quoted prices in liquid markets. Where market prices are not available, fair value may be measured using net asset values (NAV), taking into account any restrictions imposed upon redemption. Listed units are classified as Level 1, provided there is sufficient trading to justify active market classification, while other positions are classified as Level 2. Positions where NAV is not available or which are not redeemable at the measure- ment date or in the near future are classified as Level 3. Asset-backed securities: residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), other asset-backed securities (ABS) and collateralized debt obligations (CDO) RMBS, CMBS, ABS and CDO are instruments generally issued through the process of securitization of underlying interest-bear- ing assets. The underlying collateral for RMBS is residential mort- gages, for CMBS, commercial mortgages, for ABS, other assets such as credit card, car or student loans and leases, and for CDO, other securitized positions of RMBS, CMBS or ABS. The market for these securities is not active, and therefore a variety of valu- ation techniques are used to measure fair value. For more liquid securities, trade data or quoted prices may be obtained periodi- cally for the instrument held, and the valuation process will use this trade and price data, updated for movements in market lev- els between the time of trading and the time of valuation. Less liquid instruments are measured using discounted expected cash flows incorporating price data for instruments or indices with similar risk profiles. Expected cash flow estimation involves the modeling of the expected collateral cash flows using input assumptions derived from proprietary models, fundamental analysis and / or market research based on management’s quan- titative and qualitative assessment of current and future eco- nomic conditions. The expected collateral cash flows estimated are then converted into the securities’ projected performance under such conditions based on the credit enhancement and subordination terms of the securitization. Expected cash flow schedules are discounted using a rate or discount margin that reflects the discount levels required by the market for instru- ments with similar risk and liquidity profiles. Inputs to discounted expected cash flow techniques include asset prepayment rates, discount margin or discount yields, asset default rates and asset loss on default severity, which may in turn be estimated using more fundamental loan and economic drivers such as, but not limited to, loan-to-value data, house price appreciation, foreclo- sure costs, rental income levels, void periods and employment rates. RMBS, CMBS and ABS are generally classified as Level 2. However, if significant inputs are unobservable, or if market or fundamental data are not available for instruments or collateral with a sufficiently similar risk profile to the positions held, they are classified as Level 3. Equity instruments The majority of equity securities are actively traded on public stock exchanges where quoted prices are readily and regularly available, resulting in their classification as Level 1. Units held in hedge funds are also classified as equity instruments. Fair value for these units is measured based on their published NAV, taking into account any restrictions imposed upon the redemption. These units are classified as Level 2, except for positions where pub- lished NAV is not available or which are not redeemable at the measurement date or in the near future, in which case they are classified as Level 3. Unlisted equity holdings, including private equity positions, are initially marked at their transaction price and are revalued to the extent reliable evidence of price movements becomes available or the position is deemed to be impaired. Financial assets underlying unit-linked investment contracts Unit-linked investment contracts allow investors to invest in a pool of assets through issued investment units. The unit holders are exposed to all risks and rewards associated with the reference asset pool. Assets held under unit-linked investment contracts are presented as Trading portfolio assets. The majority of assets are listed on exchanges and are classified as Level 1 if actively traded, or Level 2 if trading is not active. However, instruments for which prices are not readily available are classified as Level 3. Structured (reverse) repurchase agreements Structured (reverse) repurchase agreements designated at fair value are measured using discounted expected cash flow tech- niques. The discount rate applied is based on funding curves that are specific to the collateral eligibility terms for the contract in question. Collateral terms for these positions are not standard and therefore funding spread levels used for valuation purposes cannot be observed in the market. As a result, these positions are mostly classified as Level 3. 657 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) Replacement values The curves used for discounting expected cash flows in the valua- tion of collateralized derivatives reflect the funding terms associ- ated with the relevant collateral arrangement for the instrument being valued. These collateral arrangements differ across counter- parties with respect to the eligible currency and interest terms of the collateral. The majority of collateralized derivatives are mea- sured using a discount curve that is based on funding rates derived from overnight interest in the cheapest eligible currency for the respective counterparty collateral agreement. Uncollateralized and partially collateralized derivatives are dis- counted using the LIBOR (or equivalent) curve for the currency of the instrument. As described in Note 24d, the fair value of uncol- lateralized and partially collateralized derivatives is then adjusted by CVA, DVA and FVA as applicable, to reflect an estimation of the impact of counterparty credit risk, UBS AG’s own credit risk and funding costs and benefits. Interest rate contracts Interest rate swap contracts include interest rate swaps, basis swaps, cross-currency swaps, inflation swaps and interest rate for- wards, often referred to as forward-rate agreements (FRA). These products are valued by estimating future interest cash flows and discounting those cash flows using a rate that reflects the appro- priate funding rate for the position being measured. The yield curves used to estimate future index levels and discount rates are generated using market standard yield curve models using inter- est rates associated with current market activity. The key inputs to the models are interest rate swap rates, FRA rates, short-term interest rate futures prices, basis swap spreads and inflation swap rates. In most cases, the standard market contracts that form the inputs for yield curve models are traded in active and observable markets, resulting in the majority of these financial instruments being classified as Level 2. Interest rate option contracts include caps and floors, swap- tions, swaps with complex payoff profiles and other more com- plex interest rate options. These contracts are valued using various market standard option models, using inputs that include interest rate yield curves, inflation curves, volatilities and correlations. The volatility and correlation inputs within the models are implied from market data based on market observed prices for standard option instruments trading within the market. Option models used to value more exotic products have a number of model parameter inputs that require calibration to enable the exotic model to price standard option instruments to the price levels observed in the market. Although these inputs cannot be directly observed, they are generally treated as Level 2, as the calibration process enables the model output to be validated to active market levels. Models calibrated in this way are then used to revalue the portfolio of both standard options as well as more exotic prod- ucts. In most cases, there are active and observable markets for the standard market instruments that form the inputs for yield curve models as well as the financial instruments from which vola- tility and correlation inputs are derived, resulting in the majority of these products being classified as Level 2. Within interest rate option contracts, exotic options for which appropriate volatility or correlation input levels cannot be implied from observable market data are classified as Level 3. These options are valued using vola- tility and correlation levels derived from non-market sources. Interest rate swap and option contracts are classified as Level 3 when the maturity of the contract exceeds the term for which standard market quotes are observable for a significant input parameter. Such positions are valued by extrapolation from the last observable point using standard assumptions or by reference to another observable comparable input parameter to represent a suitable proxy for that portion of the term. Balance guaranteed swaps (BGS) are interest rate or currency swaps that have a notional schedule based on a securitization vehicle, requiring the valuation to incorporate an adjustment for the unknown future variability of the notional schedule. Inputs to value BGS are those used to value the standard market risk on the swap and those used to estimate the notional schedule of the underlying securitization pool (i.e., prepayment, default and inter- est rates). BGS are classified as Level 3, as the correlation between unscheduled notional changes and the underlying market risk of the BGS does not have an active market and cannot be observed. 658 Note 24 Fair value measurement (continued) Credit derivative contracts Credit derivative contracts based on a single credit name include credit default swaps (CDS) based on corporate and sovereign single names, CDS on loans and certain total return swaps (TRS). These contracts are valued by estimating future default probabili- ties using industry standard models based on market credit spreads, upfront pricing points and implied recovery rates. These default and recovery assumptions are used to generate future expected cash flows that are then discounted using market stan- dard discounted cash flow models and a discount rate that reflects the appropriate funding rate for that portion of the portfolio. TRS and certain single-name CDS contracts for which a derivative- based credit spread is not directly available are valued using a credit spread derived from the price of the cash bond that is ref- erenced in the credit derivative, adjusted for any funding differ- ences between the cash and synthetic product. Loan CDS for which a credit spread cannot be observed directly may be valued, where possible, using the corporate debt curve for the entity, adjusted for differences between loan and debt default defini- tions and recovery rate assumptions. Inputs to the valuation mod- els used to value single-name and loan CDS include single-name credit spreads and upfront pricing points, recovery rates and fund- ing curves. In addition, corporate bond prices are used as inputs to the valuation model for TRS and certain single-name or loan CDS as described. Many single-name credit default swaps are classified as Level 2 because the credit spreads and recovery rates used to value these contracts are actively traded and observable market data are available. Where the underlying reference name is not actively traded, these contracts are classified as Level 3. Credit derivative contracts based on a portfolio of credit names include credit default swaps on a credit index, credit default swaps based on a bespoke portfolio or first to default swaps (FTD). The valuation of these contracts is similar to that described above for single-name CDS and includes an estimation of future default probabilities using industry standard models based on market credit spreads, upfront pricing points and implied recovery rates. These default and recovery assumptions are used to generate future expected cash flows that are then discounted using market standard discounted cash flow models based on an estimation of the funding rate for that portion of the portfolio. Tranche products and FTD are valued using industry standard models that, in addi- tion to default and recovery assumptions as above, incorporate implied correlations to be applied to the credits within the portfo- lio in order to apportion the expected credit loss at a portfolio level across the different tranches or names within the overall structure. These correlation assumptions are derived from prices of actively traded index tranches or other FTD baskets. Inputs to the valuation models used for all portfolio credit default swaps include single- name or index credit spreads and upfront pricing points, recovery rates and funding curves. In addition, models used for tranche and FTD products have implied credit correlations as inputs. Credit derivative contracts based on a portfolio of credit names are clas- sified as Level 2 when credit spreads and recovery rates are deter- mined from actively traded observable market data, and when the correlation data used to value bespoke and index tranches are based on actively traded index tranche instruments. These correla- tion data undergo a mapping process that takes into account both the relative tranche attachment / detachment points in the overall capital structure of the portfolio and portfolio composition. Where the mapping process requires extrapolation beyond the range of available and active market data, the position is classified as Level 3. This relates to a small number of index and all bespoke tranche contracts. FTD are classified as Level 3 as the correlations between specific names in the FTD portfolio are not actively traded. Also classified as Level 3 are several older credit index posi- tions, referred to as off-the-run indices, due to the lack of any active market for the index credit spread. Credit derivative contracts on securitized products have an underlying reference asset that is a securitized product (RMBS, CMBS, ABS or CDO) and include credit default swaps and certain TRS. These credit default swaps (typically referred to as pay-as- you-go (PAYG) CDS) and TRS are valued using a similar valuation technique to the underlying security (by reference to equivalent securities trading in the market, or through cash flow estimation and discounted cash flow techniques as described in the Asset- backed securities section above), with an adjustment made to reflect the funding differences between cash and synthetic form. Inputs to the PAYG CDS and TRS are those used to value the underlying security (prepayment rates, default rates, loss severity, discount margin / rate and other inputs) and those used to capture the funding basis differential between cash and synthetic form. The classification of PAYG CDS and these TRS follow the charac- teristics of the underlying security and are therefore distributed across Level 2 and Level 3. 659 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) Foreign exchange (FX) contracts Open spot FX contracts are valued using the FX spot rate observed in the market. Forward FX contracts are valued using the FX spot rate adjusted for forward pricing points observed from standard market-based sources. As the markets for both FX spot and FX forward pricing points are both actively traded and observable, FX contracts are generally classified as Level 2. OTC FX option contracts include standard call and put options, options with multiple exercise dates, path-dependent options, options with averaging features, options with discontinuous pay- off characteristics and options on a number of underlying FX rates. OTC FX option contracts are valued using market standard option valuation models. The models used for shorter-dated options (i.e., maturities of five years or less) tend to be different than those used for longer-dated options because the models needed for longer-dated OTC FX contracts require additional con- sideration of interest rate and FX rate interdependency. Inputs to the option valuation models include spot FX rates, FX forward points, FX volatilities, interest rate yield curves, interest rate vola- tilities and correlations. The inputs for volatility and correlation are implied through the calibration of observed prices for standard option contracts trading within the market. As inputs are derived mostly from standard market contracts traded in active and observable markets, a significant proportion of OTC FX option contracts are classified as Level 2. OTC FX option contracts classified as Level 3 include long-dated FX exotic option contracts for which there is no active market from which to derive volatility or correlation inputs. The inputs used to value these OTC FX option contracts are calculated using consensus pricing services without an underlying principal market, historical asset prices or by extrapolation. Cross-currency balance guaranteed swaps are classified as for- eign exchange contracts. Details of the fair value classification can be found under the interest rate contracts section above. Equity / index contracts Equity / index contracts include equity forward contracts and equity option contracts. Equity forward contracts have a single stock or index underlying and are valued using market standard models. The key inputs to the models are stock prices, estimated dividend rates and equity funding rates (which are implied from prices of forward contracts observed in the market). Estimated cash flows are then discounted using market standard discounted cash flow models using a rate that reflects the appropriate fund- ing rate for that portion of the portfolio. As inputs are derived mostly from standard market contracts traded in active and observable markets, a significant proportion of equity forward contracts are classified as Level 2. Positions classified as Level 3 have no market data available for the instrument maturity and are valued by some form of extrapolation of available data, use of historical dividend data, or use of data for a related equity. Equity option contracts include market standard single or bas- ket stock or index call and put options as well as equity option contracts with more complex features including option contracts with multiple or continuous exercise dates, option contracts for which the payoff is based on the relative or average performance of components of a basket, option contracts with discontinuous payoff profiles, path-dependent options and option contracts with a payoff calculated directly upon equity features other than price (i.e., dividend rates, volatility or correlation). Equity option contracts are valued using market standard models that estimate the equity forward level as described above for equity forward contracts and incorporate inputs for stock volatility and for cor- relation between stocks within a basket. The probability-weighted expected option payoff generated is then discounted using mar- ket standard discounted cash flow models using a rate that reflects the appropriate funding rate for that portion of the port- folio. Positions for which inputs are derived from standard mar- ket contracts traded in active and observable markets are classi- fied as Level 2. Level 3 positions are those for which volatility, forward or correlation inputs are not observable and are there- fore valued using extrapolation of available data, historical divi- dend, correlation or volatility data, or the equivalent data for a related equity. Commodity derivative contracts Commodity derivative contracts include forward, swap and option contracts on individual commodities and on commodity indices. Commodity forward and swap contracts are measured using mar- ket standard models that use market forward levels on standard instruments. Commodity option contracts are measured using market standard option models that estimate the commodity for- ward level as described above for commodity forward and swap contracts, incorporating inputs for the volatility of the underlying index or commodity. The option model produces a probability- weighted expected option payoff that is then discounted using market standard discounted cash flow models using a rate that reflects the appropriate funding rate for that portion of the port- folio. For commodity options on baskets of commodities or bespoke commodity indices, the valuation technique also incor- porates inputs for the correlation between different commodities or commodity indices. Individual commodity contracts are typi- cally classified as Level 2 because active forward and volatility market data are available. 660 Note 24 Fair value measurement (continued) Financial liabilities designated at fair value Structured and OTC debt instruments issued Structured debt instruments issued are comprised of medium- term notes (MTNs), which are held at fair value under the fair value option. These MTNs are tailored specifically to the holder’s risk or investment appetite with structured coupons or payoffs. The risk management and the valuation approaches for these MTNs are closely aligned to the equivalent derivatives business and the underlying risk, and the valuation techniques used for this component are the same as the relevant valuation techniques described above. For example, equity-linked notes should be ref- erenced to equity / index contracts and credit-linked notes should be referenced to credit derivative contacts. Other liabilities – amounts due under unit-linked investment contracts Unit-linked investment contracts allow investors to invest in a pool of assets through issued investment units. The unit holders are exposed to all risks and rewards associated with the refer- ence asset pool. The financial liability represents the amounts due to unit holders and is equal to the fair value of the reference asset pool. The fair values of investment contract liabilities are determined by reference to the fair value of the corresponding assets. The liabilities themselves are not actively traded, but are mainly referenced to instruments that are and are therefore clas- sified as Level 2. f) Transfers between Level 1 and Level 2 in the fair value hierarchy The amounts provided below reflect transfers between Level 1 and Level 2 for instruments that were held for the entire reporting period. Assets totaling approximately CHF 0.6 billion, which were mainly comprised of financial investments classified as available- for-sale, primarily corporate and municipal bonds, and financial assets held for trading, were transferred from Level 2 to Level 1 during 2015, generally due to increased levels of trading activity observed within the market. Transfers of financial liabilities from Level 2 to Level 1 during 2015 were not significant. Assets totaling approximately CHF 0.8 billion, which were mainly comprised of financial assets held for trading, primarily equity instruments and government bills / bonds, and financial investments classified as available-for-sale, mainly corporate and municipal bonds, were transferred from Level 1 to Level 2 during 2015, generally due to diminished levels of trading activity observed within the market. Transfers of financial liabilities from Level 1 to Level 2 during 2015 were not significant. 661 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) g) Movements of Level 3 instruments Significant changes in Level 3 instruments The table on the following pages presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis. Level 3 assets and liabilities may be hedged with instruments classified as Level 1 or Level 2 in the fair value hierar- chy, and, as a result, realized and unrealized gains and losses included in the table may not include the effect of related hedg- ing activity. Further, the realized and unrealized gains and losses presented within the table are not limited solely to those arising from Level 3 inputs, as valuations are generally derived from both observable and unobservable parameters. Assets and liabilities transferred into or out of Level 3 are pre- sented as if those assets or liabilities had been transferred at the beginning of the year. As of 31 December 2015, financial instruments measured with valuation techniques using significant non-market-observable inputs (Level 3) were mainly comprised of: – loans (including structured loans); – structured reverse repurchase and securities borrowing agree- ments; Financial assets held for trading Financial assets held for trading decreased to CHF 2.1 billion from CHF 3.5 billion during the year. Issuances of CHF 5.4 billion and purchases of CHF 0.7 billion, mainly comprised of loans and cor- porate bonds, respectively, were more than offset by sales of CHF 7.6 billion, also primarily comprised of loans and corporate bonds. Transfers into Level 3 during the year amounted to CHF 0.9 billion and were mainly comprised of equity instruments and investment fund units due to decreased observability of the respective equity volatility inputs. Transfers out of Level 3 amounted to CHF 0.5 bil- lion and were primarily comprised of loans, reflecting increased observability of the respective credit spread inputs. Financial assets designated at fair value Financial assets designated at fair value decreased to CHF 3.3 bil- lion from CHF 3.5 billion during the year, mainly reflecting settle- ments of CHF 1.3 billion, partly offset by issuances of CHF 0.8 billion. Transfers into and out of Level 3 amounted to CHF 0.8 billion and CHF 0.4 billion, respectively. – credit derivative contracts; – equity / index contracts; – non-structured fixed-rate bonds and – structured debt instruments issued (equity and credit-linked). Financial investments classified as available-for-sale Financial investments classified as available-for-sale increased to CHF 0.7 billion from CHF 0.6 billion during the year, primarily due to purchases totaling CHF 0.1 billion. Significant movements in Level 3 instruments during the year ended 31 December 2015 were as follows. 662 Note 24 Fair value measurement (continued) Positive replacement values Positive replacement values decreased to CHF 2.9 billion from CHF 4.4 billion during the year, primarily due to settlements of CHF 2.9 billion, primarily related to credit derivative contracts and equity / index contracts, partly offset by issuances totaling CHF 1.7 billion, also primarily related to credit derivative contracts and equity / index contracts. Transfers into Level 3, totaling CHF 0.7 billion, were mainly comprised of interest rate contracts and equity / index contracts and primarily resulted from changes in the correlation between the portfolios held and the representative market portfolio used to independently verify market data. Trans- fers out of Level 3, totaling CHF 0.5 billion, were mainly com- prised of equity / index contracts and also primarily related to changes in the correlation between the portfolio held and the representative market portfolio used to independently verify mar- ket data. Negative replacement values Negative replacement values decreased to CHF 3.3 billion from CHF 5.0 billion during the year. Settlements and issuances amounted to CHF 2.2 billion and CHF 1.0 billion, respectively, and were primarily comprised of equity / index contracts. Transfers into and out of Level 3 both amounted to CHF 0.5 billion, and primar- ily related to changes in the availability of the respective observ- able equity volatility and credit spread inputs. Financial liabilities designated at fair value Financial liabilities designated at fair value decreased to CHF 10.7 billion from CHF 11.9 billion during the year. Issuances of CHF 6.1 billion, primarily comprised of structured debt instruments issued and structured over-the-counter debt instruments, were more than offset by settlements of CHF 6.7 billion, also primarily com- prised of structured debt instruments issued and structured over- the-counter debt instruments. Transfers into Level 3, totaling CHF 1.3 billion, were primarily comprised of equity and credit-linked structured debt instruments issued, and mainly related to a reduc- tion in the observable equity volatility inputs and from changes in the respective credit spreads used to determine the fair value of the embedded options in these structures. Transfers out of Level 3, totaling CHF 2.2 billion, were also mainly comprised of equity- and credit-linked structured debt instruments issued, and mainly related to changes in the observable equity volatility inputs and from changes in the respective credit spreads used to determine the fair value of the embedded options in these structures. 663 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) Movements of Level 3 instruments Total gains / losses included in comprehensive income of which: related to Level 3 in- struments held at the end of the reporting period Net interest income, net trading income and other income Balance as of 31 Decem- ber 2013 Other com- prehensive income CHF billion Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Foreign currency trans- lation income Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Foreign currency Balance as of trans- lation 31 Decem- ber 20151 Total gains / losses included in comprehensive income Net interest income, Balance net trading of which related to Level 3 in- struments held at the as of income end of the re- 31 Decem- ber 2014 and other income porting period Other com- prehensive Financial assets held for trading 4.3 (1.6) (0.9) 1.4 (6.5) 5.2 0.0 1.0 (0.5) 0.1 3.5 (0.2) (0.4) 0.7 (7.6) 5.4 0.0 0.9 (0.5) (0.1) 2.1 of which: Corporate bonds and municipal bonds, including bonds issued by financial institutions Loans Asset-backed securities Other Financial assets designated at fair value of which: Loans (including structured loans) Structured reverse repurchase and securities borrowing agreements Other Financial investments available-for-sale Positive replacement values of which: Credit derivative contracts Foreign exchange contracts Equity / index contracts Other Negative replacement values of which: Credit derivative contracts Foreign exchange contracts Equity / index contracts Other Financial liabilities designated at fair value of which: Non-structured fixed-rate bonds Structured debt instruments issued Structured over-the-counter debt instruments Structured repurchase agreements 1.7 1.0 1.0 0.6 4.4 1.1 3.1 0.2 0.8 5.5 3.0 0.9 1.2 0.3 4.4 2.0 0.5 1.5 0.5 12.1 1.2 7.9 1.8 1.2 (0.1) (1.4) 0.0 (0.1) (0.1) (0.8) 0.0 0.0 (0.8) (0.3) (0.3) (0.5) 0.0 0.0 1.1 0.3 0.1 0.6 0.0 0.7 0.1 0.0 0.4 0.2 0.5 0.4 0.9 (0.4) (0.3) (0.2) 0.0 0.0 0.0 0.0 (0.8) 0.1 0.5 0.1 (0.6) (1.2) 0.0 0.4 0.3 1.3 0.3 0.4 (0.1) 0.7 0.0 0.9 0.2 0.1 0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.2) (4.1) (0.7) (0.5) 0.0 0.0 0.0 0.0 (0.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.2 0.0 0.0 1.3 0.6 0.7 0.0 0.0 2.6 1.1 0.1 1.3 0.2 2.5 1.0 0.0 1.5 0.0 7.4 1.9 3.7 1.4 0.5 0.0 0.0 0.0 0.0 0.2 0.2 0.5 0.1 (0.2) (0.1) (0.3) 0.0 (1.2) 0.0 (0.3) (0.2) (1.0) 0.0 0.0 (5.1) (3.2) (0.2) (1.3) (0.4) (3.7) (2.4) 0.0 (1.2) (0.1) 0.0 0.0 0.0 0.0 1.1 0.5 0.0 0.3 0.3 1.4 1.0 0.0 0.3 0.1 0.1 0.1 0.0 0.0 0.2 0.0 0.1 0.0 (0.3) 0.0 0.0 0.0 0.0 (0.5) (0.2) (0.2) (0.1) (0.2) (0.1) 0.1 (0.3) 0.0 0.0 (0.5) 0.2 (0.2) (0.1) (0.1) 0.0 0.3 0.0 0.0 (0.1) (7.4) 2.0 (3.2) 0.5 (1.4) (4.2) (1.5) (0.4) 0.4 1.2 0.4 0.0 (0.4) (2.6) (0.2) 0.0 0.1 0.4 0.0 0.0 1 Total Level 3 assets as of 31 December 2015 were CHF 9.0 billion (31 December 2014: CHF 12.2 billion). Total Level 3 liabilities as of 31 December 2015 were CHF 14.1 billion (31 December 2014: CHF 17.0 billion). 664 0.0 1.4 1.1 0.6 0.5 3.5 1.0 2.4 0.1 0.6 4.4 1.7 0.6 1.9 0.3 5.0 1.7 0.3 2.4 0.6 11.9 2.2 7.3 1.5 0.9 0.0 (0.1) 0.0 (0.1) 0.0 (0.1) 0.1 0.0 0.0 (0.4) (0.1) (0.1) 0.0 (0.1) (0.4) 0.3 0.0 (0.4) (0.2) 0.6 (0.1) 0.5 0.2 0.0 0.0 (0.3) 0.0 (0.1) 0.0 (0.1) 0.1 0.0 0.0 (0.1) 0.2 0.0 (0.3) (0.1) 0.0 0.6 (0.1) (0.5) (0.1) 0.0 0.0 0.1 (0.1) 0.0 0.5 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.0) (5.5) (0.6) (0.5) 0.0 0.0 0.0 0.0 (0.1) (0.1) 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.4 0.0 0.0 0.8 0.7 0.1 0.0 0.0 1.7 0.9 0.1 0.7 0.0 1.0 0.0 0.0 0.9 0.1 6.1 1.1 3.8 1.2 0.0 0.0 0.0 0.0 0.0 (1.3) (0.2) (1.0) 0.0 0.0 (2.9) (1.1) (0.1) (1.4) (0.3) (2.2) (0.9) (0.1) (1.2) 0.0 (6.7) (0.2) (4.2) (2.0) (0.3) 0.1 0.2 0.2 0.4 0.8 0.8 0.0 0.0 0.0 0.7 0.1 0.0 0.2 0.4 0.5 0.3 0.0 0.1 0.1 1.3 0.1 1.3 0.0 0.0 (0.4) (0.1) (0.1) (0.3) (0.1) 0.0 (0.4) 0.0 0.0 0.0 (0.5) (0.1) 0.0 (0.3) (0.1) (0.1) 0.0 (0.4) 0.0 (0.4) (1.9) 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 (0.1) 0.0 0.0 (0.1) (0.1) 0.0 0.0 0.0 0.0 0.0 (0.1) (0.1) 0.0 (0.2) (0.1) 0.0 (0.5) (0.1) (2.2) (0.3) 10.7 0.7 0.8 0.2 0.4 3.3 1.7 1.5 0.1 0.7 2.9 1.3 0.5 1.0 0.1 3.3 1.3 0.2 1.4 0.3 2.6 6.7 0.8 0.6 (0.8) (0.3) (1.2) 0.0 (0.3) Note 24 Fair value measurement (continued) Movements of Level 3 instruments Total gains / losses included in comprehensive income of which: related to Net interest Level 3 in- income, struments Balance net trading held at the as of income end of the Other com- and other reporting prehensive 31 Decem- ber 2013 CHF billion income period income Purchases Sales Issuances Settlements of which: Corporate bonds and municipal bonds, including bonds issued by financial institutions Loans Other Asset-backed securities Financial assets designated at fair value of which: Loans (including structured loans) Structured reverse repurchase and securities borrowing agreements Other Financial investments available-for-sale Positive replacement values of which: Credit derivative contracts Foreign exchange contracts Equity / index contracts Other Negative replacement values of which: Credit derivative contracts Foreign exchange contracts Equity / index contracts Other Financial liabilities designated at fair value of which: Non-structured fixed-rate bonds Structured debt instruments issued Structured over-the-counter debt instruments Structured repurchase agreements 1.7 1.0 1.0 0.6 4.4 1.1 3.1 0.2 0.8 5.5 3.0 0.9 1.2 0.3 4.4 2.0 0.5 1.5 0.5 12.1 1.2 7.9 1.8 1.2 (0.1) (1.4) 0.0 (0.1) (0.3) (0.5) 0.0 0.0 1.1 0.3 0.1 0.6 0.0 0.7 0.1 0.0 0.4 0.2 0.5 0.4 0.9 (0.4) (0.3) (0.1) (0.8) 0.0 0.0 (0.2) 0.0 0.0 0.0 0.0 (0.8) 0.1 0.5 0.1 (0.6) (1.2) 0.0 0.4 0.3 1.3 0.3 0.4 (0.1) 0.7 0.0 (0.2) 0.9 0.2 0.1 0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.2) (4.1) (0.7) (0.5) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.2 0.0 0.0 1.3 0.6 0.7 0.0 0.0 2.6 1.1 0.1 1.3 0.2 2.5 1.0 0.0 1.5 0.0 7.4 1.9 3.7 1.4 0.5 Transfers Transfers into Level 3 out of Level 3 Foreign currency trans- lation 0.0 0.0 0.0 0.0 (0.2) (1.0) 0.0 0.0 (5.1) (3.2) (0.2) (1.3) (0.4) (3.7) (2.4) 0.0 (1.2) (0.1) (1.4) (4.2) (1.5) (0.4) 0.2 0.2 0.5 0.1 0.0 0.0 0.0 0.0 1.1 0.5 0.0 0.3 0.3 1.4 1.0 0.0 0.3 0.1 0.4 1.2 0.4 0.0 0.0 0.0 (0.5) (0.2) (0.5) 0.2 (0.2) (0.1) (0.3) 0.0 (0.3) 0.0 0.0 (0.2) (0.1) (0.2) (0.1) (0.2) (0.1) (0.1) 0.0 (0.4) (2.6) (0.2) 0.0 0.1 0.1 0.0 0.0 0.2 0.0 0.1 0.0 0.1 (0.3) 0.0 0.0 0.3 0.0 0.0 (0.1) 0.1 0.4 0.0 0.0 (7.4) 2.0 (3.2) 0.5 1 Total Level 3 assets as of 31 December 2015 were CHF 9.0 billion (31 December 2014: CHF 12.2 billion). Total Level 3 liabilities as of 31 December 2015 were CHF 14.1 billion (31 December 2014: CHF 17.0 billion). Financial assets held for trading 4.3 (1.6) (0.9) 1.4 (6.5) 5.2 0.0 1.0 (0.5) 0.1 3.5 (0.2) (0.4) 0.7 (7.6) 5.4 0.0 0.9 (0.5) (0.1) 2.1 Total gains / losses included in comprehensive income of which related to Level 3 in- struments held at the end of the re- porting period Net interest income, net trading income and other income Balance as of 31 Decem- ber 2014 Other com- prehensive income Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Foreign currency trans- lation Balance as of 31 Decem- ber 20151 0.0 1.4 1.1 0.6 0.5 3.5 1.0 2.4 0.1 0.6 4.4 1.7 0.6 1.9 0.3 5.0 1.7 0.3 2.4 0.6 11.9 2.2 7.3 1.5 0.9 0.0 (0.1) 0.0 (0.1) 0.0 (0.1) 0.1 0.0 0.0 (0.4) (0.1) (0.1) 0.0 (0.1) (0.4) 0.3 0.0 (0.4) (0.2) 0.6 (0.1) 0.5 0.2 0.0 0.0 (0.3) 0.0 (0.1) 0.0 (0.1) 0.1 0.0 0.0 (0.1) 0.2 0.0 (0.3) (0.1) 0.0 0.6 (0.1) (0.5) (0.1) 0.0 0.0 0.1 (0.1) 0.0 0.5 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.0) (5.5) (0.6) (0.5) 0.0 0.0 0.0 0.0 (0.1) (0.1) 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.4 0.0 0.0 0.8 0.7 0.1 0.0 0.0 1.7 0.9 0.1 0.7 0.0 1.0 0.0 0.0 0.9 0.1 6.1 1.1 3.8 1.2 0.0 0.0 0.0 0.0 0.0 (1.3) (0.2) (1.0) 0.0 0.0 (2.9) (1.1) (0.1) (1.4) (0.3) (2.2) (0.9) (0.1) (1.2) 0.0 (6.7) (0.2) (4.2) (2.0) (0.3) 0.1 0.2 0.2 0.4 0.8 0.8 0.0 0.0 0.0 0.7 0.1 0.0 0.2 0.4 0.5 0.3 0.0 0.1 0.1 1.3 0.1 1.3 0.0 0.0 (0.1) (0.3) (0.1) 0.0 (0.1) 0.0 0.0 0.0 (0.4) (0.1) (0.4) 0.0 0.0 0.0 (0.5) (0.1) 0.0 (0.3) (0.1) 0.0 (0.1) 0.0 0.0 (0.1) (0.1) 0.0 0.0 0.0 (0.5) (0.1) (0.1) 0.0 (0.4) 0.0 0.0 0.0 (0.1) (0.1) 0.7 0.8 0.2 0.4 3.3 1.7 1.5 0.1 0.7 2.9 1.3 0.5 1.0 0.1 3.3 1.3 0.2 1.4 0.3 (2.2) (0.3) 10.7 (0.4) (1.9) 0.0 0.0 0.0 (0.2) (0.1) 0.0 2.6 6.7 0.8 0.6 665 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) h) Valuation of assets and liabilities classified as Level 3 The table on the following pages presents the assets and liabilities recognized at fair value and classified as Level 3, together with the valuation techniques used to measure fair value, the significant inputs used in the valuation technique that are considered unob- servable and a range of values for those unobservable inputs. The range of values represents the highest and lowest level input used in the valuation techniques. Therefore, the range does not reflect the level of uncertainty regarding a particular input, but rather the different underlying characteristics of the relevant assets and liabilities. The ranges will therefore vary from period to period and parameter to parameter based on charac- teristics of the instruments held at each balance sheetdate. Fur- ther, the ranges of unobservable inputs may differ across other financial institutions due to the diversity of the products in each firm’s inventory. Significant unobservable inputs in Level 3 positions This section discusses the significant unobservable inputs identi- fied in the table on the following pages and assesses the potential effect that a change in each unobservable input in isolation may have on a fair value measurement, including information to facili- tate an understanding of factors that give rise to the input ranges shown. Relationships between observable and unobservable inputs have not been included in the summary below. Valuation techniques and inputs used in the fair value measurement of Level 3 assets and liabilities CHF billion 31.12.15 31.12.14 31.12.15 31.12.14 Valuation technique(s) Fair value Assets Liabilities Significant unobservable input(s)1 Range of inputs 31.12.15 31.12.14 low high low high unit1 Financial assets held for trading / Trading portfolio liabilities, Financial assets / liabilities desig- nated at fair value and Financial investments available-for-sale Corporate bonds and municipal bonds, including bonds issued by financial institutions Traded loans, loans designated at fair value, loan commitments and guarantees Investment fund units3 Asset-backed securities Equity instruments3 Structured (reverse) repurchase agreements Financial assets for unit-linked investment contracts3 Structured debt instruments and non-structured fixed-rate bonds4 666 0.7 2.6 0.3 0.2 0.6 1.5 0.1 1.4 2.2 0.5 0.6 0.5 2.4 0.1 0.1 0.0 0.0 0.0 0.0 0.6 0.1 0.0 0.0 0.0 0.0 0.9 Relative value to market comparable Relative value to market comparable Discounted expected cash flows Market comparable and securitization model Mortality dependent cash flow Relative value to market comparable Discounted cash flow projection Relative value to market comparable Relative value to market comparable Discounted expected cash flows Relative value to market comparable 10.1 11.0 Bond price equivalent 0 134 8 144 points Loan price equivalent Credit spread Discount margin / spread Volatility of mortality2 Net asset value Constant prepayment rate Discount margin / spread Bond price equivalent Price 65 30 1 0 0 1 100 252 14 18 12 92 270 280 80 37 0 0 0 0 101 points basis points % % % % 138 13 18 22 102 points Funding spread 18 183 10 163 basis points Price Note 24 Fair value measurement (continued) Valuation techniques and inputs used in the fair value measurement of Level 3 assets and liabilities (continued) CHF billion 31.12.15 31.12.14 31.12.15 31.12.14 Valuation technique(s) Fair value Assets Liabilities Significant unobservable input(s)1 Range of inputs 31.12.15 31.12.14 low high low high unit1 Replacement values Interest rate contracts 0.1 0.2 0.3 0.6 Option model Volatility of interest rates Credit derivative contracts 1.3 1.7 1.3 1.7 Discounted expected cash flows Discounted expected cash flow based on modeled defaults and recoveries Discounted cash flow projection on underlying bond Foreign exchange contracts 0.5 0.6 0.2 0.3 Option model Equity / index contracts 1.0 1.9 1.4 2.4 Option model Discounted expected cash flows Rate-to-rate correlation Intra-curve correlation Constant prepayment rate Credit spreads Upfront price points Recovery rates Credit index correlation Discount margin / spread Credit pair correlation Constant prepayment rate Constant default rate Loss severity Discount margin / spread Bond price equivalent Rate-to-FX correlation FX-to-FX correlation Constant prepayment rate2 Equity dividend yields Volatility of equity stocks, equity and other indices Equity-to-FX correlation Equity-to-equity correlation 16 84 36 0 1 8 0 10 1 57 0 0 0 1 0 (57) (70) 0 0 (44) 3 130 94 94 3 1,163 25 95 85 72 94 15 9 100 15 104 60 80 57 143 82 99 13 84 50 0 0 15 0 10 0 57 1 0 0 1 12 (57) (70) 0 0 1 (55) 18 94 94 94 3 % % % % basis points 963 83 95 85 32 94 16 9 100 33 % % % % % % % % % 100 points 60 80 13 15 130 84 99 % % % % % % % Non-financial assets3, 5 0.1 0.2 Relative value to market comparable Price Discounted cash flow projection Projection of cost and income related to the particular property Discount rate Assessment of the particular property’s condition 1 The ranges of significant unobservable inputs are represented in points, percentages and basis points. Points are a percentage of par. For example, 100 points would be 100% of par. 2 The range of inputs is not dis- closed as of 31 December 2015 because this unobservable input parameter was not significant to the respective valuation technique as of that date. 3 The range of inputs is not disclosed due to the dispersion of pos- sible values given the diverse nature of the investments. 4 Valuation techniques, significant unobservable inputs and the respective input ranges for structured debt instruments and non-structured fixed-rate bonds are the same as the equivalent derivative or structured financing instruments presented elsewhere in this table. 5 Non-financial assets include other assets which primarily consist of assets held for sale. 667 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) Bond price equivalent: Where market prices are not available for a bond, fair value is measured by comparison with observable pricing data from similar instruments. Factors considered when selecting comparable instruments include credit quality, maturity and industry of the issuer. Fair value may be measured either by a direct price comparison or by conversion of an instrument price into a yield (either as an outright yield or as a spread to LIBOR). Bond prices are expressed as points of the nominal, where 100 represents a fair value equal to the nominal value (i.e., par). For corporate and municipal bonds, the range of 0–134 points represents the range of prices from reference issuances used in determining fair value. Bonds priced at 0 are distressed to the point that no recovery is expected, while prices significantly in excess of 100 or par relate to inflation-linked or structured issu- ances that pay a coupon in excess of the market benchmark as of the measurement date. The weighted average price is approxi- mately 94 points, with a majority of positions concentrated around this price. For asset-backed securities, the bond price range of 1–92 points represents the range of prices for reference securities used in determining fair value. An instrument priced at 0 is not expected to pay any principal or interest, while an instrument priced close to 100 points is expected to be repaid in full as well as pay a yield close to the market yield. The weighted average price for Level 3 assets within this portion of the Level 3 portfolio is 72 points. For credit derivatives, the bond price range of 0–104 points represents the range of prices used for reference instruments that are typically converted to an equivalent yield or credit spread as part of the valuation process. The range is comparable to that for corporate and asset-backed issuances described above. Loan price equivalent: Where market prices are not available for a traded loan, fair value is measured by comparison with observable pricing data for similar instruments. Factors considered when selecting comparable instruments include industry segment, col- lateral quality, maturity and issuer-specific covenants. Fair value may be measured either by a direct price comparison or by con- version of an instrument price into a yield. The range of 65–100 points represents the range of prices derived from reference issu- ances of a similar credit quality used in measuring fair value for loans classified as Level 3. Loans priced at 0 are distressed to the point that no recovery is expected, while a current price of 100 represents a loan that is expected to be repaid in full. The weighted average is approximately 93 points. Credit spread: Valuation models for many credit derivatives require an input for the credit spread, which is a reflection of the credit quality of the associated referenced underlying. The credit spread of a particular security is quoted in relation to the yield on a benchmark security or reference rate, typically either US Treasury or LIBOR, and is generally expressed in terms of basis points. An increase / (decrease) in credit spread will increase / (decrease) the value of credit protection offered by CDS and other credit deriva- tive products. The income statement impact from such changes depends on the nature and direction of the positions held. Credit spreads may be negative where the asset is more creditworthy than the benchmark against which the spread is calculated. A wider credit spread represents decreasing creditworthiness. The ranges of 30–252 basis points in loans and 1–1163 basis points in credit derivatives represents a diverse set of underlyings, with the lower end of the range representing credits of the highest quality (e.g., approximating the risk of LIBOR) and the upper end of the range representing greater levels of credit risk. Constant prepayment rate: A prepayment rate represents the amount of unscheduled principal repayment for a pool of loans. The prepayment estimate is based on a number of factors, such as historical prepayment rates for repaid and existing loans with similar characteristics and the future economic outlook, consider- ing factors including, but not limited to, future interest rates. In general, a significant increase / (decrease) in this unobservable input in isolation would result in a significantly higher / (lower) fair value for bonds trading at a discount. For bonds trading at a pre- mium the reverse would apply, with a decrease in fair value when the constant prepayment rate increases. However, in certain cases the effect of a change in prepayment speed on instrument price is more complicated and depends on both the precise terms of the securitization and the position of the instrument within the secu- ritization capital structure. For asset-backed securities, the range of 0–18% represents inputs across various classes of asset-backed securities. Securities with an input of 0% typically reflect no current prepayment behav- ior with respect to the underlying collateral, and with no expecta- tion of this changing in the immediate future, while the high range of 18% relates to securities that are currently experiencing high prepayments. Different classes of asset-backed securities typically show different ranges of prepayment characteristics depending on a combination of factors, including the borrowers’ ability to refi- nance, prevailing refinancing rates, and the quality or characteris- tics of the underlying loan collateral pools. The weighted average constant prepayment rate for the portfolio is 5.0%. 668 Note 24 Fair value measurement (continued) For credit derivatives, the range of 0–15% represents the input assumption for credit derivatives on asset-backed securi- ties. The range is driven in a similar manner to that for asset- backed securities. For interest rate contracts, the range of 0–3% represents the prepayment assumptions on securitizations underlying the BGS portfolio. Constant default rate (CDR): The CDR represents the percentage of outstanding principal balances in the pool that are projected to default and liquidate and is the annualized rate of default for a group of mortgages or loans. The CDR estimate is based on a number of factors, such as collateral delinquency rates in the pool and the future economic outlook. In general, a significant increase / (decrease) in this unobservable input in isolation would result in significantly lower / (higher) cash flows for the deal (and thus lower / (higher) valuations). However, different instruments within the capital structure can react differently to changes in the CDR rate. Generally, subordinated bonds will decrease in value as CDR increases, but for well protected senior bonds an increase in CDR may cause an increase in price. In addition, the presence of a guarantor wrap on the collateral pool of a security may result in notes at the junior end of the capital structure experiencing a price increase with an increase in the default rate. The range of 0–9% for credit derivatives represents the expected default percentage across the individual instruments’ underlying collateral pools. Loss severity / recovery rate: The projected loss severity / recovery rate reflects the estimated loss that will be realized given expected defaults. Loss severity is generally applied to collateral within asset-backed securities while the recovery rate is the analogous pricing input for corporate or sovereign credits. Recovery is the reverse of loss severity, so a 100% recovery rate is the equivalent of a 0% loss severity. Increases in loss severity levels / decreases in recovery rates will result in lower expected cash flows into the structure upon the default of the instruments. In general, a sig- nificant decrease / (increase) in the loss severity in isolation would result in significantly higher / (lower) fair value for the respective asset-backed securities. The impact of a change in recovery rate on a credit derivative position will depend on whether credit pro- tection has been bought or sold. Loss severity is ultimately driven by the value recoverable from collateral held after foreclosure occurs relative to the loan princi- pal and possibly unpaid interest accrued at that point. For credit derivatives, the loss severity range of 0–100% applies to deriva- tives on asset-backed securities. The recovery rate range of 0–95% represents a wide range of expected recovery levels on credit derivative contracts within the Level 3 portfolio. Discount margin (DM) spread: The DM spread represents the dis- count rates used to present value cash flows of an asset to reflect the market return required for uncertainty in the estimated cash flows. DM spreads are a rate or rates applied on top of a floating index (e.g., LIBOR) to discount expected cash flows. Generally, a decrease / (increase) in the unobservable input in isolation would result in a significantly higher / (lower) fair value. The different ranges represent the different discount rates across loans (1–14%), asset-backed securities (0–12%) and credit derivatives (1–72%). The high end of the range relates to securi- ties that are priced very low within the market relative to the expected cash flow schedule. This indicates that the market is pricing an increased risk of credit loss into the security that is greater than what is being captured by the expected cash flow generation process. The low ends of the ranges are typical of funding rates on better quality instruments. For asset-backed securities the weighted average DM is 2.7% and for loans the average effective DM is 2.4%. Equity dividend yields: The derivation of a forward price for an individual stock or index is important for measuring fair value for forward or swap contracts and for measuring fair value using option pricing models. The relationship between the current stock price and the forward price is based on a combination of expected future dividend levels and payment timings, and, to a lesser extent, the relevant funding rates applicable to the stock in ques- tion. Dividend yields are generally expressed as an annualized per- centage of the share price with the lowest limit of 0% represent- ing a stock that is not expected to pay any dividend. The dividend yield and timing represents the most significant parameter in determining fair value for instruments that are sensitive to an equity forward price. The range of 0–57% reflects the expected range of dividend rates for the portfolio. Volatility: Volatility measures the variability of future prices for a particular instrument and is generally expressed as a percentage, where a higher number reflects a more volatile instrument for which future price movements are more likely to occur. The mini- mum level of volatility is 0% and there is no theoretical maximum. Volatility is a key input into option models, where it is used to derive a probability-based distribution of future prices for the underlying instrument. The effect of volatility on individual posi- tions within the portfolio is driven primarily by whether the option contract is a long or short position. In most cases, the fair value of an option increases as a result of an increase in volatility and is reduced by a decrease in volatility. Generally, volatility used in the measurement of fair value is derived from active market option prices (referred to as implied volatility). A key feature of implied volatility is the volatility “smile” or “skew,” which represents the effect of pricing options of different option strikes at different implied volatility levels. 669 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) – Volatility of interest rates – the range of 16–130% reflects the range of unobservable volatilities across different currencies and related underlying interest rate levels. Volatilities of low interest rates tend to be much higher than volatilities of high interest rates. In addition, different currencies may have sig- nificantly different implied volatilities. – Volatility of equity stocks, equity and other indices – the range of 1–143% reflects the range of underlying stock volatilities. Correlation: Correlation measures the inter-relationship between the movements of two variables. It is expressed as a percentage between -100% and +100%, where +100% represents perfectly correlated variables (meaning a movement of one variable is asso- ciated with a movement of the other variable in the same direc- tion), and -100% implies the variables are inversely correlated (meaning a movement of one variable is associated with a move- ment of the other variable in the opposite direction). The effect of correlation on the measurement of fair value depends on the spe- cific terms of the instruments being valued, due to the range of different payoff features within such instruments. – Rate-to-rate correlation – the correlation between interest rates of two separate currencies. The range of 84–94% results from the different pairs of currency involved. – Intra-curve correlation – the correlation between different tenor points of the same yield curve. Correlations are typically fairly high, as reflected by the range of 36–94%. – Credit index correlation of 10–85% reflects the implied corre- lation derived from different indices across different parts of the benchmark index capital structure. The input is particularly important for bespoke and Level 3 index tranches. – Credit pair correlation is particularly important for first to default credit structures. The range of 57–94% reflects the dif- ference between credits with low correlation and similar highly correlated credits. – Rate-to-FX correlation – captures the correlation between interest rates and FX rates. The range for the portfolio is (57)– 60%, which represents the relationship between interest rates and foreign exchange levels. The signage on such correlations depends on the quotation basis of the underlying FX rate (e.g., EUR / USD and USD / EUR correlations to the same interest rate will have opposite signs). – FX-to-FX correlation is particularly important for complex options that incorporate different FX rates in the projected pay- off. The range of (70)–80% reflects the underlying characteris- tics across the main FX pairs to which UBS AG has exposure. – Equity-to-FX correlation is important for equity options based on a currency different than the currency of the underlying stock. The range of (44)–82% represents the range of the relationship between underlying stock and foreign exchange volatilities. – Equity-to-equity correlation is particularly important for com- plex options that incorporate, in some manner, different equi- ties in the projected payoff. The closer the correlation is to 100%, the more related one equity is to another. For example, equities with a very high correlation could be from different parts of the same corporate structure. The range of 3–99% reflects this. Funding spread: Structured financing transactions are valued using synthetic funding curves that best represent the assets that are pledged as collateral for the transactions. They are not repre- sentative of where UBS AG can fund itself on an unsecured basis, but provide an estimate of where UBS AG can source and deploy secured funding with counterparties for a given type of collateral. The funding spreads are expressed in terms of basis points over or under LIBOR, and if funding spreads widen this increases the impact of discounting. The range of 18–183 basis points for both structured repurchase agreements and structured reverse repur- chase agreements represents the range of asset funding curves, where wider spreads are due to a reduction in liquidity of underly- ing collateral for funding purposes. A small proportion of structured debt instruments and non- structured fixed-rate bonds within financial liabilities designated at fair value had an exposure to funding spreads that was longer in duration than the actively traded market. Such positions are within the range of 18–183 basis points reported above. Upfront price points: These are a component in the price quota- tion of credit derivative contracts, whereby the overall fair value price level is split between the credit spread (as described above) and a component that is quoted and settled upfront on transact- ing a new contract. This latter component is referred to as upfront price points and represents the difference between the credit spread paid as protection premium on a current contract versus a small number of standard contracts defined by the market. Dis- tressed credit names frequently trade and quote CDS protection only in upfront points rather than as a running credit spread. An increase / (decrease) in upfront points will increase / (decrease) the value of credit protection offered by CDS and other credit deriva- tive products. The effect of increases or decreases in upfront price points depends on the nature and direction of the positions held. Upfront price points may be negative where a contract is quoting for a narrower premium than the market standard, but are gener- ally positive, reflecting an increase in credit premium required by the market as creditworthiness deteriorates. The range of 8–25% within the table represents the variety of current market credit spread levels relative to the benchmarks used as a quotation basis. Upfront points of 25% represent a distressed credit. 670 Note 24 Fair value measurement (continued) i) Sensitivity of fair value measurements to changes in unobservable input assumptions The table below summarizes those financial assets and liabilities classified as Level 3 for which a change in one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change fair value significantly, and the esti- mated effect thereof. As of 31 December 2015, the total favor- able and unfavorable effects of changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions for financial instruments classified as Level 3 were CHF 0.8 billion and CHF 0.6 billion, respectively (31 December 2014: CHF 1.0 billion and CHF 0.8 billion, respectively). The table shown presents the favorable and unfavorable effects for each class of financial assets and liabilities for which the potential change in fair value is considered significant. The sensitivity data presented represent an estimation of valuation uncertainty based on reasonably possible alternative values for Level 3 inputs at the balance sheet date and do not represent the estimated effect of stress scenarios. Typically, these financial assets and liabilities are sensitive to a combination of inputs from Levels 1–3. Although well-defined interdependencies may exist between Levels 1–2 and Level 3 parameters (e.g., between interest rates, which are generally Level 1 or Level 2, and prepayments, which are generally Level 3), these have not been incorporated in the table. Further, direct inter-relationships between the Level 3 parameters discussed below are not a significant element of the valuation uncertainty. Sensitivity data are estimated using a number of techniques including the estimation of price dispersion among different mar- ket participants, variation in modeling approaches and reason- ably possible changes to assumptions used within the fair value measurement process. The sensitivity ranges are not always sym- metrical around the fair values as the inputs used in valuations are not always precisely in the middle of the favorable and unfa- vorable range. Sensitivity data are determined at a product or parameter level and then aggregated assuming no diversification benefit. The cal- culated sensitivity is applied to both the outright position and any related Level 3 hedge. The main interdependencies across different Level 3 products to a single unobservable input parameter have been included in the basis of netting exposures within the calcula- tion. Aggregation without allowing for diversification involves the simple summation of individual results with the total sensitivity, therefore representing the impact of all unobservable inputs which, if moved to a reasonably possible favorable or unfavorable level at the same time, would result in a significant change in the valuation. Diversification would incorporate estimated correlations across different sensitivity results and, as such, would result in an overall sensitivity that would be less than the sum of the individual component sensitivities. UBS AG believes that, while there are diversification benefits within the portfolios representing these sensitivity numbers, they are not significant to this analysis. Sensitivity of fair value measurements to changes in unobservable input assumptions CHF million Government bills / bonds Corporate bonds and municipal bonds, including bonds issued by financial institutions Traded loans, loans designated at fair value, loan commitments and guarantees Asset-backed securities Equity instruments Interest rate derivative contracts, net Credit derivative contracts, net Foreign exchange derivative contracts, net Equity / index derivative contracts, net Structured debt instruments issued and non-structured fixed-rate bonds Other Total 31.12.15 31.12.14 Favorable changes1 0 Unfavorable changes1 (1) Favorable changes1 10 Unfavorable changes1 (1) 24 88 7 166 107 174 33 61 136 14 809 (25) (28) (6) (74) (67) (196) (28) (57) (146) (13) (640) 33 103 16 105 106 248 35 82 202 23 965 (41) (63) (12) (42) (58) (277) (32) (83) (199) (17) (824) 1 Of the total favorable changes, CHF 164 million as of 31 December 2015 (31 December 2014: CHF 116 million) related to financial investments available-for-sale. Of the total unfavorable changes, CHF 71 million as of 31 December 2015 (31 December 2014: CHF 56 million) related to financial investments available-for-sale. 671 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 24 Fair value measurement (continued) j) Financial instruments not measured at fair value The table below provides the estimated fair values of financial instruments not measured at fair value. Financial instruments not measured at fair value CHF billion Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments Loans Other assets Liabilities Due to banks Cash collateral on securities lent Repurchase agreements Cash collateral payables on derivative instruments Due to customers Debt issued Other liabilities Guarantees / Loan commitments Guarantees 1 Loan commitments Carrying value 31.12.15 Fair value Total Total Level 1 Level 2 Level 3 Carrying value Total 31.12.14 Fair value Total Level 1 Level 2 Level 3 91.3 11.9 25.6 67.9 23.8 312.7 20.1 11.8 8.0 9.7 38.3 402.5 82.2 52.1 0.0 0.0 91.3 11.9 25.6 67.9 23.8 314.9 20.1 11.8 8.0 9.7 38.3 402.8 84.4 52.1 (0.1) 0.0 91.3 11.4 0.0 0.0 0.0 0.0 0.0 10.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 25.6 65.8 23.8 170.9 20.1 1.4 8.0 9.6 38.3 402.8 78.4 52.1 0.0 0.0 0.0 0.0 0.0 2.1 0.0 143.9 0.0 0.0 0.0 0.0 0.0 0.0 6.0 0.0 (0.1) 0.0 104.1 104.1 13.3 24.1 68.4 31.0 316.0 21.3 10.5 9.2 11.8 42.4 411.0 91.2 46.0 0.0 0.0 13.3 24.1 68.4 31.0 318.6 21.2 10.5 9.2 11.8 42.4 411.0 94.3 46.0 (0.1) 0.0 104.1 12.6 0.0 0.0 0.0 0.0 0.0 9.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.7 24.1 66.5 31.0 186.6 21.2 0.9 9.2 11.6 42.4 411.0 88.5 46.0 0.0 0.0 0.0 0.0 0.0 2.0 0.0 131.9 0.0 0.0 0.0 0.2 0.0 0.0 5.8 0.0 (0.1) 0.0 1 The carrying value of guarantees represented a liability of CHF 0.0 billion as of 31 December 2015 (31 December 2014: CHF 0.0 billion). The estimated fair value of guarantees represented an asset of CHF 0.1 billion as of 31 December 2015 (31 December 2014: CHF 0.1 billion). 672 Note 24 Fair value measurement (continued) The fair values included in the table on the previous page were calculated for disclosure purposes only. The fair value valuation techniques and assumptions described below relate only to the fair value of UBS AG’s financial instruments not measured at fair value. Other institutions may use different methods and assump- tions for their fair value estimation, and therefore such fair value disclosures cannot necessarily be compared from one financial institution to another. The following principles were applied when determining fair value estimates for financial instruments not measured at fair value: – For financial 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 flows using current market interest rates or appropriate yield curves for instruments with similar credit risk and maturity. These esti- mates generally include adjustments for counterparty credit risk or UBS AG’s own credit. – For short-term financial instruments with remaining maturities of three months or less, the carrying amount, which is net of credit loss allowances, is generally considered a reasonable esti- mate of fair value. The following financial instruments not mea- sured at fair value had remaining maturities of three months or less as of 31 December 2015: 100% of cash and balances with central banks, 96% of amounts due from banks, 100% of cash collateral on securities borrowed, 87% of reverse repurchase agreements, 100% of cash collateral receivables on derivatives, 52% of loans, 88% of amounts due to banks, 87% of cash collateral on securities lent, 96% of repurchase agreements, 100% of cash collateral payable on derivatives, 96% of amount due to customers and 18% of debt issued. – The fair value estimates for repurchase and reverse repurchase agreements with variable and fixed interest rates, for all matur- ities, 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 financial 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 flow analysis. 673 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 25 Restricted and transferred financial assets This Note provides information on restricted financial assets (Note 25a), transfers of financial assets (Note 25b and 25c) and financial assets which are received as collateral with the right to resell or repledge these assets (Note 25d). a) Restricted financial assets Restricted financial assets consist of assets pledged as collateral against an existing liability or contingent liability and other assets that are otherwise explicitly restricted such that they cannot be used to secure funding. Financial assets are mainly pledged as collateral in securities lending transactions, in repurchase transactions, against loans from Swiss mortgage institutions and in connection with the issu- ance of covered bonds. UBS AG generally enters into repurchase and securities lending arrangements under standard market agreements, with a market-based haircut applied to the collateral, which results in the associated liabilities having a carrying value below the carrying value of the assets. Pledged mortgage loans serve as collateral for existing liabilities against Swiss central mort- gage institutions and for existing covered bond issuances of CHF 16,727 million as of 31 December 2015 (31 December 2014: CHF 21,644 million). Other restricted financial assets include assets protected under client asset segregation rules, assets held by UBS AG’s insurance entities to back related liabilities to the policy holders, assets held in certain jurisdictions to comply with explicit minimum local asset maintenance requirements and assets held in consolidated bank- ruptcy remote entities such as certain investment funds and other structured entities. The carrying value of the liabilities associated with these other restricted financial assets is generally equal to the carrying value of the assets, with the exception of assets held to comply with local asset maintenance requirements for which the associated liabilities are greater. UBS AG and its subsidiaries are generally not subject to signifi- cant restrictions that would prevent the transfer of dividends and capital between UBS AG and its subsidiaries. However, certain regulated subsidiaries are required to maintain capital and / or liquidity to comply with local regulations and may be subject to prudential limitations by regulators that limit the amount of funds that they can distribute or otherwise transfer. Non-regulated sub- sidiaries are generally not subject to such requirements and trans- fer restrictions. However, restrictions can also be the result of dif- ferent legal, regulatory, contractual, entity or country-specific arrangements and / or requirements. Restricted financial assets CHF million Financial assets pledged as collateral Trading portfolio assets of which: assets pledged as collateral which may be sold or repledged by counterparties Loans of which: mortgage loans1 Financial investments available-for-sale of which: assets pledged as collateral which may be sold or repledged by counterparties Total financial assets pledged as collateral2 Other restricted financial assets Due from banks Reverse repurchase agreements Trading portfolio assets Cash collateral receivables on derivative instruments Financial investments available-for-sale Other Total other restricted financial assets Total financial assets pledged and other restricted financial assets 31.12.15 31.12.14 57,024 51,943 24,980 24,980 632 6 82,636 3,285 1,099 24,388 7,104 502 480 36,858 119,494 61,304 56,018 27,973 27,973 2,868 2,662 92,144 3,511 1,896 25,567 6,135 1,209 679 38,997 131,142 1 These pledged mortgage loans serve as collateral for existing liabilities against Swiss central mortgage institutions and for existing covered bond issuances. Of these pledged mortgage loans, approximately CHF 4.4 billion for 31 December 2015 (31 December 2014: approximately CHF 4.5 billion) could be withdrawn or used for future liabilities or covered bond issuances without breaching existing collateral requirements. 2 Does not include assets placed with central banks related to undrawn credit lines and for payment, clearing and settlement purposes (31 December 2015: CHF 4.9 billion, 31 December 2014: CHF 6.1 billion). 674 Note 25 Restricted and transferred financial assets (continued) b) Transferred financial assets that are not derecognized in their entirety The table below presents information for financial assets, which have been transferred but are subject to continued recognition in full, as well as recognized liabilities associated with those transferred assets. Transferred financial assets subject to continued recognition in full CHF million 31.12.15 31.12.14 Carrying value of transferred assets Carrying value of associated liabilities recognized on-balance sheet Carrying value of transferred assets Carrying value of associated liabilities recognized on-balance sheet Trading portfolio assets transferred which may be sold or repledged by counterparties relating to securities lending and repurchase agreements in exchange for cash received relating to securities lending agreements in exchange for securities received relating to other financial asset transfers Financial investments available-for-sale transferred which may be sold or repledged by counterparties Total financial assets transferred 51,943 13,406 37,097 1,440 6 51,950 13,146 13,146 0 0 6 13,152 56,018 19,366 35,557 1,095 2,662 58,680 18,289 18,147 0 142 2,584 20,873 Transactions in which financial assets are transferred, but con- tinue to be recognized in their entirety on UBS AG’s balance sheet include securities lending and repurchase agreements as well as other financial asset transfers. Repurchase and securities lending arrangements are, for the most part, conducted under standard market agreements, and are undertaken with counterparties sub- ject to UBS AG’s normal credit risk control processes. ➔ Refer to Note 1a items 13 and 14 for more information on repurchase agreements and securities lending agreements As of 31 December 2015, approximately a quarter of the trans- ferred financial assets were trading portfolio assets transferred in exchange for cash, in which case the associated recognized liability represents the amount to be repaid to counterparties. For securities lending and repurchase agreements, a haircut between 0% and 15% is generally applied to the collateral, which results in associ- ated liabilities having a carrying value below the carrying value of the transferred assets. The counterparties to the associated liabili- ties presented in the table above have full recourse to UBS AG. In securities lending arrangements entered into in exchange for the receipt of other securities as collateral, neither the secu- rities received nor the obligation to return them are recognized on UBS AG’s balance sheet, as the risks and rewards of owner- ship are not transferred to UBS AG. In cases where such finan- cial assets received are subsequently sold or repledged in another transaction, this is not considered to be a transfer of financial assets. Other financial asset transfers primarily include securities trans- ferred to collateralize derivative transactions, for which the carry- ing value of associated liabilities is not provided in the table above because those replacement values are managed on a portfolio basis across counterparties and product types, and therefore is not a direct relationship between the specific collateral pledged and the associated liability. Transferred assets other than trading portfolio assets and financial investments available-for-sale which may be sold or repledged by counterparties were not material as of 31 December 2015 and as of 31 December 2014. Transferred financial assets that are not subject to derecogni- tion in full, but which remain on the balance sheet to the extent of UBS AG’s continuing involvement, were not material as of 31 December 2015 and as of 31 December 2014. 675 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 25 Restricted and transferred financial assets (continued) c) Transferred financial assets that are derecognized in their entirety with continuing involvement Continuing involvement in a transferred and fully derecognized financial asset may result from contractual provisions in the trans- fer agreement or in a separate agreement with the counterparty or a third party entered into in connection with the transfer. The table below provides information on UBS AG’s continuing involve- ment in transferred and fully derecognized financial assets. Transferred financial assets that are derecognized in their entirety with continuing involvement CHF million 31.12.15 Balance sheet line item Carrying amount of continuing involvement Fair value of continuing involvement Gain / (loss) recognized at the date of transfer of the financial assets2 Gain / (loss) from continuing involvement in transferred and derecognized financial assets For the year ended 31.12.15 Life-to-date 31.12.15 Type of continuing involvement Purchased and retained interest in securitization structures Trading portfolio assets/ Replacement values1 Total CHF million 15 15 15 15 31.12.14 8 8 16 16 (1,566) (1,566) Balance sheet line item Carrying amount of continuing involvement Fair value of continuing involvement Gain / (loss) recognized at the date of transfer of the financial assets Gain / (loss) from continuing involvement in transferred and derecognized financial assets For the year ended 31.12.14 Life-to-date 31.12.14 Type of continuing involvement Purchased and retained interest in securitization structures Total Trading portfolio assets/ Replacement values1 (22) (22) (22) (22) 22 22 13 13 (1,582) (1,582) 1 As of 31 December 2015, total purchased and retained interest in securitization structures consisted of trading portfolio assets of CHF 37 million and negative replacement values of CHF 22 million. As of 31 December 2014, total purchased and retained interest in securitization structures consisted of trading portfolio assets of CHF 29 million and negative replacement values of CHF 51 million. 2 Represents gains / (losses) recognized on the date of transfer during the respective reporting period. Purchased and retained interests in securitization vehicles In cases where UBS AG has transferred assets into securitization vehicles and retained or purchased interests therein, UBS AG has a continuing involvement in those transferred assets. The majority of the retained continuing involvement securitization positions held in the trading portfolio are collateralized debt obligations, US commercial mortgage-backed securities and residential mort- gage-backed securities. As a result of losses incurred in previous years, the majority of these continuing involvement positions had a carrying amount of zero as of 31 December 2015. As of 31 December 2015, the maximum exposure to loss related to pur- chased and retained interests in securitization structures was CHF 55 million compared with CHF 48 million as of 31 December 2014, both mainly related to trading portfolio assets. Undis- counted cash outflows of CHF 41 million may be payable to the transferee in future periods as a consequence of holding the pur- chased and retained interests. The earliest period in which pay- ment may be required is less than one month. Life-to-date losses presented in the table above only relate to retained interests held as of 31 December 2015. 676 Note 25 Restricted and transferred financial assets (continued) d) Off-balance-sheet assets received The table below presents assets received from third parties that can be sold or repledged, that are not recognized on the balance sheet, but that are held as collateral, including amounts that have been sold or repledged. Off-balance-sheet assets received CHF million Fair value of assets received which can be sold or repledged received as collateral under reverse repurchase, securities borrowing and lending arrangements, derivative transactions and other transactions1 received in unsecured borrowings thereof sold or repledged2 in connection with financing activities to satisfy commitments under short sale transactions in connection with derivative and other transactions1 31.12.15 401,511 393,839 7,672 286,757 241,992 29,137 15,628 31.12.14 388,855 383,354 5,502 271,963 227,515 27,958 16,491 1 Includes securities received as initial margin from its clients that UBS AG is required to remit to CCPs, brokers and deposit banks through its exchange-traded derivative (ETD) clearing and execution services. 2 Does not include off-balance sheet securities (31 December 2015: CHF 47.3 billion, 31 December 2014: CHF 37.6 billion) placed with central banks related to undrawn credit lines and for payment, clearing and settlement purposes for which there are no associated liabilities or contingent liabilities. Note 26 Offsetting financial assets and financial liabilities UBS AG enters into netting agreements with counterparties to manage the credit risks associated primarily with repurchase and reverse repurchase transactions, securities borrowing and lending, and over-the-counter (OTC) and exchange-traded derivatives (ETD). These netting agreements and similar arrangements gener- ally enable the counterparties to set-off liabilities against available assets received in the ordinary course of business and / or in the event that the counterparty to the transaction is unable to fulfill its contractual obligations. The right of set-off is a legal right to settle or otherwise eliminate all or a portion of an amount due by applying an amount receivable from the same counterparty against it, thus reducing credit exposure. The table on the following page provides a summary of finan- cial assets subject to offsetting, enforceable master netting arrangements and similar agreements, as well as financial collat- eral received to mitigate credit exposures for these financial assets. The gross financial assets of UBS AG that are subject to offsetting, enforceable netting arrangements and similar agree- ments are reconciled to the net amounts presented within the associated balance sheet line, after giving effect to financial liabil- ities with the same counterparties that have been offset on the balance sheet and other financial assets not subject to an enforce- able netting arrangement or similar agreement. Further, related amounts for financial liabilities and collateral received that are not offset on the balance sheet are shown to arrive at financial assets after consideration of netting potential. UBS AG engages in a variety of counterparty credit mitigation strategies in addition to netting and collateral arrangements. Therefore, the net amounts presented in the tables on the next pages do not purport to represent UBS AG’s actual credit exposure. 677 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 26 Offsetting financial assets and financial liabilities (continued) Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements Assets subject to netting arrangements 31.12.15 Netting recognized on the balance sheet Netting potential not recognized on the balance sheet3 Gross assets before netting Netting with gross liabilities2 Net assets recognized on the balance sheet Assets after consid- eration of netting potential Financial liabilities Collateral received Assets not subject to netting arrangements4 Assets recognized on the balance sheet Total assets Total assets after consid- eration of netting potential Total assets recognized on the balance sheet 23.9 117.9 161.9 85.9 2.4 392.1 0.0 (62.1) (2.5) (66.3) 23.9 55.8 159.3 (3.1) (4.4) (123.0) 19.6 (10.9) 0.0 (131.0) 2.4 261.1 0.0 (20.9) (51.4) (25.5) (1.5) (1.8) (141.3) (101.1) 31.12.14 0.0 0.0 10.8 7.2 0.6 18.7 1.6 12.1 8.1 4.1 3.4 29.3 1.6 12.1 18.9 11.3 4.0 48.0 25.6 67.9 167.4 23.8 5.8 290.5 Assets subject to netting arrangements Netting recognized on the balance sheet Netting potential not recognized on the balance sheet3 Gross assets before netting Netting with gross liabilities2 Net assets recognized on the balance sheet Assets after consid- eration of netting potential Financial liabilities Collateral received Assets not subject to netting arrangements4 Assets recognized on the balance sheet Total assets Total assets after consid- eration of netting potential Total assets recognized on the balance sheet 22.7 99.2 249.9 245.7 3.1 620.5 0.0 (42.8) (3.1) 22.7 56.4 246.8 (1.9) (3.4) (198.7) (218.4) 27.4 (18.8) 0.0 (264.2) 3.1 356.3 0.0 (222.9) (108.9) (20.8) (52.8) (30.8) (1.6) (3.0) 0.0 0.1 17.3 7.0 0.1 24.5 1.4 12.1 10.1 3.6 1.4 28.6 1.4 12.2 27.4 10.6 1.5 53.1 24.1 68.4 257.0 31.0 4.5 384.9 CHF billion Cash collateral on securities borrowed Reverse repurchase agreements Positive replacement values Cash collateral receivables on derivative instruments1 Financial assets designated at fair value Total assets CHF billion Cash collateral on securities borrowed Reverse repurchase agreements Positive replacement values Cash collateral receivables on derivative instruments1 Financial assets designated at fair value Total assets 1 The net amount of Cash collateral receivables on derivative instruments recognized on the balance sheet includes certain OTC derivatives which are in substance net settled on a daily basis under IAS 32, and ETD which are economically settled on a daily basis. In addition, this balance includes OTC and ETD cash collateral balances which correspond with the cash portion of collateral pledged, reflected on the Negative replacement val- ues line in the table presented on the following page. 2 The logic of the table results in amounts presented in the “Netting with gross liabilities” column corresponding directly to the amounts presented in the “Netting with gross assets”column in the liabilities table presented on the following page. 3 For the purpose of this disclosure, the amounts of financial instruments and cash collateral presented have been capped by the rel- evant netting agreement so as not to exceed the net amount of financial assets presented on the balance sheet; i.e., over-collateralization, where it exists, is not reflected in the table. 4 Includes assets not subject to enforceable netting arrangements and other out-of-scope items. 678 Note 26 Offsetting financial assets and financial liabilities (continued) The table below provides a summary of financial liabilities subject to offsetting, enforceable master netting arrangements and simi- lar agreements, as well as financial collateral pledged to mitigate credit exposures for these financial liabilities. The gross financial liabilities of UBS AG that are subject to offsetting, enforceable netting arrangements and similar agreements are reconciled to the net amounts presented within the associated balance sheet line, after giving effect to financial assets with the same counter- parties that have been offset on the balance sheet and other financial liabilities not subject to an enforceable netting arrange- ment or similar agreement. Further, related amounts for financial assets and collateral pledged that are not offset on the balance sheet are shown to arrive at financial liabilities after consideration of netting potential. Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements Liabilities subject to netting arrangements 31.12.15 Netting recognized on the balance sheet Netting potential not recognized on the balance sheet3 Liabilities not subject to netting arrangements4 Gross liabilities before netting 7.9 69.0 154.2 99.9 3.9 334.9 Netting with gross assets2 0.0 (62.1) (2.5) (66.3) 0.0 (131.0) Net liabilities recognized on the balance sheet Liabilities after consid- eration of netting potential Liabilities recognized on the balance sheet Financial assets Collateral pledged 7.9 6.9 (3.1) (4.4) 151.7 (123.0) (4.8) (2.5) (17.4) 33.6 (19.0) (2.5) 3.9 203.9 0.0 (149.4) (0.7) (28.0) 0.0 0.0 11.3 12.1 3.1 26.5 0.1 2.8 10.7 4.7 59.1 77.4 Liabilities subject to netting arrangements 31.12.14 Netting recognized on the balance sheet Netting potential not recognized on the balance sheet3 Liabilities not subject to netting arrangements4 Gross liabilities before netting 8.4 51.5 243.3 Netting with gross assets2 0.0 (42.8) (3.1) Net liabilities recognized on the balance sheet Liabilities after consid- eration of netting potential Liabilities recognized on the balance sheet Financial assets Collateral pledged 8.4 8.7 (1.9) (3.4) 240.2 (198.7) (6.5) (5.2) (21.8) 256.1 (218.4) 37.7 (25.1) (2.3) 3.8 563.1 0.0 (264.2) 3.8 298.8 0.0 (229.2) (1.4) (37.3) 0.0 0.0 19.7 10.3 2.4 32.4 0.7 3.2 13.9 4.6 71.5 93.9 Total liabilities Total liabilities after consid- eration of netting potential Total liabilities recognized on the balance sheet 0.1 2.8 22.1 16.8 62.3 104.0 8.0 9.7 162.4 38.3 63.0 281.4 Total liabilities Total liabilities after consid- eration of netting potential Total liabilities recognized on the balance sheet 0.8 3.2 33.5 14.9 73.9 126.3 9.2 11.8 254.1 42.4 75.3 392.8 CHF billion Cash collateral on securities lent Repurchase agreements Negative replacement values Cash collateral payables on derivative instruments1 Financial liabilities designated at fair value Total liabilities CHF billion Cash collateral on securities lent Repurchase agreements Negative replacement values Cash collateral payables on derivative instruments1 Financial liabilities designated at fair value Total liabilities 1 The net amount of Cash collateral payables on derivative instruments recognized on the balance sheet includes certain OTC derivatives which are in substance net settled on a daily basis under IAS 32, and ETD which are economically settled on a daily basis. In addition, this balance includes OTC and ETD cash collateral balances which correspond with the cash portion of collateral received, reflected on the Positive replacement val- ues line in the table presented on the previous page. 2 The logic of the table results in amounts presented in the “Netting with gross assets” column corresponding directly to the amounts presented in the “Netting with gross liabilities” column in the assets table presented on the previous page. 3 For the purpose of this disclosure, the amounts of financial instruments and cash collateral presented have been capped by the rel- evant netting agreement so as not to exceed the net amount of financial liabilities presented on the balance sheet; i.e., over-collateralization, where it exists, is not reflected in the table. 4 Includes liabilities not subject to enforceable netting arrangements and other out-of-scope items. 679 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 27 Financial assets and liabilities – additional information a) Measurement categories of financial assets and liabilities The table below provides information about the carrying amounts of individual classes of financial instruments within the measure- ment categories of financial assets and liabilities as defined in IAS 39 Financial Instruments: Recognition and Measurement. Only those assets and liabilities that arefinancial instruments as defined in IAS 32 Financial Instruments: Presentation are included in the table below, which causes certain balances to differ from those presented on the balance sheet. ➔ Refer to Note 24 for more information on how the fair value of financial instruments is determined Measurement categories of financial assets and financial liabilities CHF million Financial assets1 Held for trading Trading portfolio assets of which: assets pledged as collateral which may be sold or repledged by counterparties Debt issued2 Positive replacement values Total Fair value through profit or loss Financial assets designated at fair value Financial assets at amortized cost Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Cash collateral receivables on derivative instruments Loans3 Other assets Total Available-for-sale Financial investments available-for-sale Total financial assets 31.12.15 31.12.14 120,405 51,943 106 167,435 287,946 132,392 56,018 283 256,978 389,653 5,808 4,493 91,306 11,866 25,584 67,893 23,763 312,723 20,139 553,275 62,543 909,572 104,073 13,334 24,063 68,414 30,979 315,984 21,332 578,179 57,159 1,029,483 27,958 308 254,101 282,367 29,137 236 162,430 191,803 Financial liabilities Held for trading Trading portfolio liabilities Debt issued2 Negative replacement values Total Fair value through profit or loss, other Financial liabilities designated at fair value Amounts due under unit-linked investment 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 Debt issued Other liabilities Total Total financial liabilities 1 As of 31 December 2015, CHF 123 billion of Loans, CHF 0 billion of Due from banks, CHF 1 billion of Reverse repurchase agreements, CHF 30 billion of Financial investments available-for-sale and CHF 3 billion of Financial assets designated at fair value are expected to be recovered or settled after 12 months. As of 31 December 2014, CHF 119 billion of Loans, CHF 0 billion of Due from banks, CHF 1 billion of Reverse repurchase agreements, CHF 35 billion of Financial investments available-for-sale and CHF 4 billion of Financial assets designated at fair value are expected to be recovered or settled after 12 months. 2 Represents the embedded derivative component of structured debt issued for which the fair value option has not been applied and which is presented within Debt issued on the balance sheet. 3 Includes finance lease receivables of CHF 1.1 bil- lion as of 31 December 2015 (31 December 2014: CHF 1.1 billion). Refer to Notes 10 and 33 for more information. 11,836 8,029 9,653 38,282 402,522 82,230 52,065 604,617 875,133 10,492 9,180 11,818 42,372 410,979 91,183 46,013 622,036 997,343 62,995 15,718 78,713 75,297 17,643 92,940 680 Note 27 Financial assets and liabilities – additional information (continued) b) Maturity analysis of financial liabilities The contractual maturities for non-derivative and non-trading financial liabilities as of 31 December 2015 are based on the ear- liest date on which UBS could be contractually required to pay. The total amounts that contractually mature in each time-band are also shown for 31 December 2014. Derivative positions and trading liabilities, predominantly made up of short sale transac- tions, are assigned to the column Due within 1 month, as this provides a conservative reflection of the nature of these trading activities. The contractual maturities may extend over signifi- cantly longer periods. Maturity analysis of financial liabilities1 CHF billion Financial liabilities recognized on balance sheet2 Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities3, 4 Negative replacement values3 Cash collateral payables on derivative instruments Financial liabilities designated at fair value5 Due to customers Debt issued Other liabilities Total 31.12.15 Total 31.12.14 Guarantees, commitments and forward starting transactions6 Loan commitments Guarantees Forward starting transactions Reverse repurchase agreements Securities borrowing agreements Total 31.12.15 Total 31.12.14 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 8.1 5.7 7.9 29.1 162.4 38.3 15.2 373.3 5.7 66.7 712.5 812.3 55.7 15.9 6.6 0.0 78.1 78.3 2.4 1.3 1.4 15.9 13.4 9.9 44.3 48.4 0.2 0.0 0.2 0.1 1.1 1.0 0.2 13.1 4.8 16.3 36.4 39.4 0.2 0.0 0.2 0.2 0.3 0.1 11.9 4.1 36.6 53.0 60.9 0.0 0.1 0.1 0.2 0.0 0.2 12.0 9.7 22.7 44.6 49.8 0.0 0.0 0.0 Total 11.8 8.0 9.7 29.1 162.4 38.3 68.1 405.3 91.2 66.7 890.7 1,010.9 56.1 16.0 6.6 0.0 78.7 78.8 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 replacement values (see footnote 3), the amounts presented generally represent undiscounted cash flows of future interest and principal payments. 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 14 for undiscounted cash flows of derivatives designated in hedge accounting relationships. 4 Con- tractual maturities of trading portfolio liabilities are: CHF 27.2 billion due within one month (2014: CHF 26.7 billion), CHF 1.2 billion due between one month and one year (2014: CHF 1.3 billion), and CHF 0.8 billion due between 1 and 5 years (2014: CHF 0 billion). 5 Future interest payments on variable rate liabilities are determined by reference to the applicable interest rate prevailing as of the reporting date. Future principal payments which are variable are determined by reference to the conditions existing at the reporting date. 6 Comprises the maximum irrevocable amount of guarantees, commitments and forward starting transactions. 681 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 27 Financial assets and liabilities – additional information (continued) c) Reclassification of financial assets In 2008 and 2009, certain financial assets were reclassified from Trading portfolio assets to Loans. On their reclassification date, these assets had fair values of CHF 26 billion and CHF 0.6 billion, respectively. reclassified financial assets, which were entirely comprised of municipal auction rate securities, was CHF 0.2 billion (31 Decem- ber 2014: CHF 0.7 billion), which was equal to the fair value of these assets. The reclassification of financial assets reflected UBS’s change in intent and ability to hold these financial assets for the foreseeable future rather than for trading in the near term. The financial assets were reclassified using their fair value on the date of the reclassification, which became their new cost basis at that date. As of 31 December 2015, the carrying value of the remaining The overall impact on operating profit before tax from reclas- sifed financial assets for the year ended 31 December 2015 was a profit of CHF 23 million (2014: CHF 84 million). If the financial assets had not been reclassified, the impact on operating profit before tax for the year ended 31 December 2015 would have been a profit of less than CHF 10 million. d) Maximum exposure to credit risk of financial assets designated at fair value Financial assets designated at fair value totaled CHF 5,808 million as of 31 December 2015 (31 December 2014: CHF 4,493 million). Maximum exposure to credit risk from financial assets designated at fair value was CHF 5.6 billion as of 31 December 2015 (31 December 2014: CHF 4.3 billion). The exposure related to structured loans and reverse repurchase and securities borrowing agreements was mitigated by securities collateral of CHF 3.5 bil- lion as of 31 December 2015 (31 December 2014: CHF 3.3 billion). 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. Investment fund units designated at fair value do not have a direct exposure to credit risk. ➔ Refer to Note 24 for more information on financial assets designated at fair value, and to “Maximum exposure to credit risk” in the “Risk management and control” section of this report for more information on collateral related to financial assets designated at fair value Notional amounts of loans designated at fair value and related credit derivatives CHF million Loans – notional amount Credit derivatives related to loans – notional amount1 Credit derivatives related to loans – fair value1 1 Credit derivatives contracts include credit default swaps, total return swaps and similar instruments. 31.12.15 31.12.14 687 630 4 667 644 1 The table below provides the effect on 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 of loans and related credit derivatives attributable to changes in credit risk CHF million Changes in fair value of loans designated at fair value, attributable to changes in credit risk1 Changes in fair value of credit derivatives and similar instruments which mitigate the maximum exposure to credit risk of loans designated at fair value1 For the year ended Cumulative from inception until the year ended 31.12.15 31.12.14 31.12.15 31.12.14 (3) 3 (3) 3 (4) 4 (2) 1 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 the derivatives which have been used to mitigate credit risk of these loans since designation at fair value. For loans reported under the fair value option, changes in fair value due to changes in the credit standing of the borrower are calculated using counterparty credit information obtained from independent market sources. 682 Note 28 Pension and other post-employment benefit plans The table below provides information relating to pension costs for defined benefit plans and defined contribution plans. These costs are part of Personnel expenses. Income statement – expenses related to pension and other post-employment benefit plans CHF million Net periodic pension cost for defined benefit plans of which: related to major pension plans1 of which: Swiss plan of which: UK plan of which: other plans of which: related to post-retirement medical and life insurance plans2 of which: UK plan of which: US plans of which: related to remaining plans and other costs3 Pension cost for defined contribution plans4 of which: UK of which: US of which: other countries Total pension and other post-employment benefit plan expenses5 31.12.15 31.12.14 31.12.13 569 546 515 18 12 4 1 2 19 239 86 100 53 808 467 508 458 17 33 (36) 2 (37) (5) 244 91 91 62 711 651 638 555 24 58 (11) 2 (12) 24 236 91 91 54 887 1 Refer to Note 28a for more information. 2 Refer to Note 28b for more information. 3 Other costs include differences between actual and estimated performance award accruals and net accrued pension costs related to restructuring. 4 Refer to Note 28c for more information. 5 Refer to Note 6. The table below provides information relating to amounts recognized in other comprehensive income for defined benefit plans. Other comprehensive income – gains / (losses) on pension and other post-employment benefit plans CHF million Major pension plans1 of which: Swiss plan of which: UK plan of which: other plans Post-retirement medical and life insurance plans2 of which: UK plan of which: US plans Remaining plans Gains / (losses) recognized in other comprehensive income, before tax Tax (expense) / benefit relating to defined benefit plans recognized in other comprehensive income Gains / (losses) recognized in other comprehensive income, net of tax3 1 Refer to Note 28a for more information. 2 Refer to Note 28b for more information. 3 Refer to the “Statement of comprehensive income”. 31.12.15 31.12.14 31.12.13 339 58 317 (35) (3) 6 (9) (14) 322 (19) 303 (1,456) (1,032) (168) (256) (5) (3) (2) 7 (1,454) 247 (1,208) 1,168 1,119 (65) 115 3 2 1 7 1,178 (239) 939 683 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) The tables below provide information on UBS AG’s assets and liabilities with respect to pension and post-employment benefit plans. These are recognized on the balance sheet within Other assets and Other liabilities. Balance sheet – net defined benefit pension and post-employment asset CHF million Major pension plans1 of which: Swiss plan of which: UK plan of which: other plans Post-retirement medical and life insurance plans of which: UK plan of which: US plans Remaining plans Total net defined benefit pension and post-employment asset2 1 Refer to Note 28a for more information. 2 Refer to Note 18. Balance sheet – net defined benefit pension and post-employment liability CHF million Major pension plans1 of which: Swiss plan of which: UK plan of which: other plans2 Post-retirement medical and life insurance plans3 of which: UK plan of which: US plans Remaining plans Total net defined benefit pension and post-employment liability4 31.12.15 31.12.14 50 0 50 0 0 0 0 0 50 31.12.15 622 0 0 622 84 25 59 30 736 0 0 0 0 0 0 0 0 0 31.12.14 1,256 25 568 664 85 32 53 32 1,374 1 Refer to Note 28a for more information. 2 Liability consists of: CHF 315 million related to US plans and CHF 307 million related to German plans (31 December 2014: CHF 297 million related to US plans and CHF 367 million related to German plans). 3 Refer to Note 28b for more information. 4 Refer to Note 23. 684 Note 28 Pension and other post-employment benefit plans (continued) a) Defined benefit pension plans UBS AG has established defined benefit pension plans for its employees in various locations, with the major plans located in Switzerland, the UK, the US and Germany. Independent actuarial valuations for the plans in these countries are per- formed as required. Swiss pension plan The Swiss pension plan covers employees of UBS AG and employ- ees of companies having close economic or financial ties with UBS AG and exceeds the minimum benefit requirements under Swiss pension law. The overall investment policy and strategy for UBS AG’s defined benefit pension plans is guided by the objective of achieving an investment return which, together with contribu- tions, ensures that there will be sufficient assets to pay pension benefits as they fall due while also mitigating the various risks of the plans. For the plans with assets (i.e., funded plans), the invest- ment strategies for the plans are managed under local laws and regulations in each jurisdiction. The actual asset allocation is determined by the governance body with reference to the pre- vailing current and expected economic and market conditions and in consideration of specific asset class risk in the risk profile. Within this framework, UBS AG ensures that the fiduciaries con- sider how the asset investment strategy correlates with the matu- rity profile of the plan liabilities and the respective potential impact on the funded status of the plans, including potential short-term liquidity requirements. The defined benefit obligation for all of UBS AG’s defined ben- efit pension plans is directly impacted by changes in yields of high-quality corporate bonds in the respective country in which the plan is held, as the applicable discount rate used to deter- mine the defined benefit obligation is based on these yields. For the funded plans, the pension assets are invested in a diversified portfolio of financial assets including real estate, bonds, invest- ment funds and cash across geographic regions to ensure a bal- ance of risk and return to the extent allowed under local pension laws. The market value of these financial assets is not fully cor- related to changes in high-quality corporate bond yields. This results in volatility in the net asset / liability position for each plan. Specific asset-liability matching strategies for each pension plan are independently determined by the responsible governance body in each country. The net asset / liability volatility for each plan is dependent on the specific financial assets chosen by each plan’s fiduciaries. For certain pension plans, a liability-driven investment approach is applied to a portion of the plan assets to reduce potential volatility. Contributions to the pension plan are paid by the employer and the employees. The Swiss pension plan allows employees a choice with regard to the level of contributions paid by them. Employee contributions are calculated as a percentage of the con- tributory salary and are deducted monthly. The percentages deducted from salary depend on age and choice of contribution category and vary between 1% and 13.5% of contributory base salary and between 0% and 9% of contributory variable compen- sation. Depending on the age of the employee, UBS AG pays a contribution that ranges between 6.5% and 27.5% of contribu- tory base salary and between 3.6% and 9% of contributory vari- able compensation. UBS AG also pays risk contributions which are used to finance benefits paid out in the event of death and dis- ability, as well as to finance bridging pensions. The plan benefits include retirement benefits and disability, death and survivor pensions. The pension plan offers to members at the normal retirement age of 64 a choice between a lifetime pension with or without full restitution and a partial or full lump sum payment. Members can draw early retirement benefits start- ing from the age of 58. Since 2015, employees have the possibil- ity to make additional purchases of benefits to fund early retire- ment benefits (Plan 58+). The payable pension amount is a result of the conversion rate applied on the accumulated balance of the individual plan par- ticipant’s pension account at the retirement date. The accumu- lated balance of each individual plan participant’s pension account is based on credited vested benefits transferred from previous employers, purchases of benefits and the employee and employer contributions that have been made to the pension account of each individual plan participant, as well as the interest accrued on the accumulated balance. The interest rate accrued is defined annually by the Pension Foundation Board. Although the Swiss pension plan is based on a defined contri- bution promise under Swiss pension law, it is accounted for as a defined benefit plan under IAS 19, primarily because of the obliga- tion to accrue interest on the pension accounts and the payment of lifetime pensions. The actuarial assumptions used for the Swiss pension plan are based on the Swiss economic environment. ➔ Refer to Note 1a item 24 for a description of the accounting policy for defined benefit pension plans 685 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) The Swiss pension plan is governed by the Pension Foundation Board as required by Swiss pension law and the responsibilities of this board are defined by Swiss pension law and by the plan rules. According to Swiss pension law, a temporary limited underfund- ing is permitted. However, should an underfunded situation occur, the Pension Foundation Board is required to take the necessary measures to ensure that full funding can be expected to be restored within a maximum period of ten years. Under Swiss pen- sion law, if a Swiss pension plan became significantly underfunded on a Swiss pension law basis, then additional employer and employee contributions could be required. In these situations, the risk is shared between employer and employees, and the employer is not legally obliged to cover more than 50% of the additional contributions required. The Swiss pension plan has a technical funding ratio under Swiss pension law of 123.3% as of 31 Decem- ber 2015 (31 December 2014: 123.7%). The investment strategy of the Swiss plan is implemented based on a multi-level investment and risk management process and is in line with Swiss pension law, including the rules and regu- lations relating to diversification of plan assets. These rules, among others, specify restrictions to the composition of plan assets, e.g., there is a limit of 50% for investments in equities. The investment strategy of the Swiss plan is aligned to the defined risk budget set out by the Pension Foundation Board. The risk budget is determined based on regularly performed asset and liability management analyses. In order to implement the risk budget, the Swiss plan may use direct investments, investment funds and derivatives. To mitigate foreign currency risk, a specific currency hedging strategy was implemented. The Pension Foundation Board strives for a medium- and long-term balance between assets and liabilities. Under IAS 19, volatility arises in the Swiss pension plan net asset / liability because the fair value of the plan assets is not directly correlated to movements in the value of the plan’s defined benefit obligation in the short-term. As of 31 December 2015, the Swiss pension plan was in a surplus situation on an International Financial Reporting Stan- dards (IFRS) measurement basis, as the fair value of plan assets exceeded the defined benefit obligation by CHF 1,283 million (31 December 2014: deficit of CHF 25 million). However, a surplus can only be recognized on the balance sheet to the extent that it does not exceed the estimated future economic benefit, which equals the difference between the present value of the estimated future net service cost and the present value of the estimated future employer contributions. The maximum future economic benefit is highly variable based on changes in the discount rate. As of 31 December 2015, the estimated future economic benefit was zero and hence, no net defined benefit asset was recognized on the balance sheet. The difference of CHF 1,283 million between the pension plan surplus and the estimated future eco- nomic benefit, the so-called asset ceiling effect, was recognized in other comprehensive income. The employer contributions expected to be made to the Swiss pension plan in 2016 are estimated to be CHF 474 million. Non-Swiss pension plans The non-Swiss locations of UBS AG offer various defined benefit pension plans in accordance with local regulations and practices. The non-Swiss locations with major defined benefit plans are the UK, the US and Germany. Defined benefit pension plans in other locations are not material to the financial results of UBS AG and hence not separately disclosed. The non-Swiss plans provide benefits in the event of retire- ment, death or disability. The level of benefits provided depends on the specific rate of benefit accrual and the level of employee compensation. UBS AG’s general principle is to ensure that the plans are appropriately funded under local pension regulations in each country and this is the primary driver for determining when additional contributions are required. Similar to the Swiss pension plan, volatility arises in the net asset / liability position of the non- Swiss plans because the fair value of the respective plans’ assets are not directly correlated to movements in the value of the plans’ defined benefit obligations. The funding policy for these plans is consistent with local gov- ernment regulations and tax requirements, and actuarial assump- tions used are based on the local economic environment. ➔ Refer to Note 1a item 24 for a description of the accounting policy for defined benefit pension plans UK The UK plan is a career-average revalued earnings scheme, and benefits increase automatically based on UK price inflation. Nor- mal retirement age for participants in the UK plan is 60. On 1 July 2013, UBS AG closed the UK defined benefit pension plan for future service. After that date, UBS AG no longer recognized cur- rent service costs for this plan. Plan participants who were active employees under the defined benefit plan were eligible to become participants of the defined contribution plan for any service after the plan was closed for future service. 686 Note 28 Pension and other post-employment benefit plans (continued) The responsibility for governance of the UK plan lies jointly with the Pension Trustee Board, which is required under local pen- sion laws, and UBS AG. The employer contributions to the pen- sion fund included regular contributions and specific deficit-fund- ing contributions until the date of the closure for future service and thereafter only reflected agreed-upon deficit-funding contri- butions. The deficit-funding contributions are determined based on the most recent actuarial valuation, which is conducted based on assumptions agreed by the Pension Trustee Board and UBS AG. In the event of an underfunding, UBS AG must agree to a deficit recovery plan with the Pension Trustee Board within statutory deadlines. In 2015, UBS AG made a deficit-funding contribution of CHF 316 million (2014: CHF 75 million). The plan assets are invested in a diversified portfolio of financial assets. A liability-driven investment approach is applied as a portion of the plan assets are invested in inflation-indexed bonds which provide a partial hedge against price inflation. If price inflation increases, the defined benefit obligation will likely increase more significantly than any change in the fair value of plan assets, which would result in an increase in the net defined benefit liability. Plan rules and local pension legislation cap the level of inflationary increase that can be applied to plan benefits. As the plan is obligated to provide guaranteed lifetime pension benefits to plan participants upon retirement, increases in life expectancy will result in an increase in the plan’s liabilities. This is particularly significant in the UK plan, where inflationary increases result in higher sensitivity to changes in life expectancy. As of 31 December 2015, the UK plan was in a surplus situa- tion on an IFRS measurement basis, as the fair value of plan assets exceeded the defined benefit obligation by CHF 50 million. This surplus was recognized on the UBS AG balance sheet, as UBS AG has a right to a refund with regards to the UK plan. No employer contributions are expected to be made to the UK defined benefit plan in 2016. US There are two distinct major defined benefit pension plans in the US. Normal retirement age for participants in the US plans is 65. The plans are closed to new entrants, who instead can participate in defined contribution plans. One of the major defined benefit pension plans is a contribu- tion-based plan in which each participant accrues a percentage of salary in a pension account. The pension account is credited annu- ally with interest based on a rate that is linked to the average yield on one-year US government bonds. For the other major defined benefit pension plan, retirement benefits accrue based on the career-average earnings of each individual plan participant. Upon retirement, the plans allow participants a choice between a lump sum payment and a lifetime pension. Both of these defined benefit pension plans have fiduciaries as required under local state pension laws. The fiduciaries, along with UBS AG, are jointly responsible for governance of the plans. Actuarial valuations are regularly completed for the plans, and UBS AG has historically elected to make contributions to the plans in order to maintain a funded ratio of at least 80%, as calculated under local pension regulations. The annual employer contribu- tions are equal to the present value of benefits accrued each year plus a rolling amortization of any prior underfunding. If the employer contributes more than the minimum or the plan has assets exceeding the liabilities, the excess can be used to offset minimum funding requirements. The plan assets for both plans are invested in a diversified port- folio of financial assets. Each pension plan’s fiduciaries are respon- sible for the investment decisions with respect to the plan assets. A liability-driven investment approach is applied for one of the US plans to support the volatility management in the net asset / liabil- ity position. Derivative instruments may also be employed to man- age volatility, including, but not limited to, interest rate futures, equity futures and swaps, including credit default swaps and interest rate swaps. In 2015, the US pension plan rules were amended such that former UBS AG employees with vested benefits in the US defined benefit pension plans have the option to receive a lump sum pay- ment (or early annuity payments) instead of a lifetime pension commencing at retirement age. This resulted in a reduction in the defined benefit obligation of CHF 24 million and a corresponding gain recognized in the income statement in 2015, of which CHF 21 million was recorded in Wealth Management Americas. In 2013, UBS AG offered a one-time option to former UBS AG employees with vested benefits in the US defined benefit pension plans to receive a lump sum payment (or early annuity payments) instead of a lifetime pension. This resulted in a reduction in the defined benefit obligation of CHF 196 million, a reduction of fair value of plan assets of CHF 216 million and a charge to the income statement of CHF 20 million in 2013. The employer contributions expected to be made to the US defined benefit plans in 2016 are estimated to be CHF 43 million. 687 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) Germany There are two different defined benefit pension plans in Germany and both are contribution-based plans. No plan assets are set aside to fund these plans and benefits are directly paid by UBS AG. Normal retirement age for the participants in the German plans is 65. Within the larger of the two pension plans, each par- ticipant accrues a percentage of salary in a pension account. On an annual basis the accumulated account balance of the plan par- ticipant is credited with guaranteed interest at a rate of 5%. The other plan is a deferred compensation plan in which amounts are accrued annually based on employee elections. For this deferred compensation plan, the accumulated account balance is credited on an annual basis with a guaranteed interest rate of 4% for amounts accrued after 2009. Both German plans are regulated under German pension law, under which the responsibility to pay pension benefits when they are due rests entirely with UBS AG. For the German plans, a portion of the pension payments is directly increased in line with price inflation. The employer contributions expected to be made to the Ger- man plans in 2016 are estimated to be CHF 8 million. The table on the following pages provides an analysis of the movement in the net asset / liability recognized on the balance sheet for defined benefit pension plans from the beginning to the end of the year, as well as an analysis of amounts recognized in net profit and in other comprehensive income. In 2015, disclosures within this Note have been expanded to separately present UK plan information, which was previously included within “Non-Swiss” plans. Consequently, the US and German plans are now shown together within “Other”. Com- parative information was adjusted accordingly. 688 Note 28 Pension and other post-employment benefit plans (continued) Defined benefit pension plans CHF million For the year ended Swiss UK Other Total 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 Defined benefit obligation at the beginning of the year 23,956 20,738 3,949 3,355 1,693 1,315 29,598 25,408 Current service cost Interest expense Plan participant contributions Remeasurements of defined benefit obligation of which: actuarial (gains) / losses arising from changes in demographic assumptions of which: actuarial (gains) / losses arising from changes in financial assumptions of which: experience (gains) / losses1 Past service cost related to plan amendments Curtailments Benefit payments Termination benefits Foreign currency translation Defined benefit obligation at the end of the year of which: amounts owing to active members of which: amounts owing to deferred members of which: amounts owing to retirees Fair value of plan assets at the beginning of the year Return on plan assets excluding amounts included in interest income Interest income Employer contributions – excluding termination benefits Employer contributions – termination benefits Plan participant contributions Benefit payments Administration expenses, taxes and premiums paid Payments related to plan amendments Foreign currency translation Fair value of plan assets at the end of the year Asset ceiling effect Net defined benefit asset / (liability) Movement in the net asset / (liability) recognized on the balance sheet Net asset / (liability) recognized on the balance sheet at the beginning of the year Net periodic pension cost Amounts recognized in other comprehensive income Employer contributions – excluding termination benefits Employer contributions – termination benefits Foreign currency translation Net asset / (liability) recognized on the balance sheet at the end of the year Funded and unfunded plans Defined benefit obligation from funded plans Defined benefit obligation from unfunded plans Plan assets Surplus / (deficit) Asset ceiling effect Net defined benefit asset / (liability) 589 270 205 (1,231) (1,038) 496 465 202 3,120 66 (237) 2,705 44 0 (81) 349 0 (54) (1,071) (1,045) 1 0 22,636 10,359 0 12,278 23,931 109 273 482 1 205 34 0 23,956 11,480 0 12,477 22,498 1,262 513 478 34 202 0 137 0 (441) (122) (201) (119) 0 0 (128) 0 (166) 3,350 255 1,864 1,230 3,381 (124) 118 316 0 0 0 158 0 349 (15) 489 (126) 0 0 (91) 0 178 3,949 312 2,211 1,425 2,922 181 141 75 0 0 (1,071) (1,045) (128) (91) (10) (10) 0 0 0 0 23,919 23,931 1,283 0 0 (25) (25) (515) 58 482 1 0 0 952 (458) (1,032) 478 34 0 (25) 0 0 (163) 3,400 0 50 (568) (18) 317 316 0 3 50 0 0 154 3,381 0 (568) (433) (17) (168) 75 0 (24) (568) 10 57 0 (8) 34 (71) 28 (24) 0 (83) 0 (26) 10 59 0 270 85 180 6 0 0 (81) 0 119 1,619 1,693 312 545 836 845 14 43 107 0 0 (81) (6) 0 107 1,029 267 523 829 1,029 (44) 39 57 0 0 (83) (8) 0 7 997 0 599 463 205 (1,681) (1,125) (509) (47) (24) (81) 506 682 202 3,739 136 3,374 228 0 (54) (1,283) (1,218) 1 (192) 27,605 10,881 2,388 14,336 28,341 (59) 430 855 1 205 34 297 29,598 12,104 2,756 14,738 26,266 1,457 697 659 34 202 (1,283) (1,218) (18) 0 (156) (16) 0 261 28,316 28,341 0 1,283 0 (622) (664) (572) (1,256) (664) (12) (35) 57 0 33 (622) (470) (33) (256) 107 0 (12) (664) (1,256) (546) 339 855 1 36 50 (508) (1,456) 659 34 (36) (572) (1,256) 22,636 23,956 3,350 3,949 1,288 0 0 0 23,919 23,931 3,400 1,283 1,283 0 (25) 0 (25) 50 0 50 0 3,381 (568) 0 (568) 1,301 392 1,029 27,274 29,205 331 392 28,316 28,341 331 997 (622) (664) 711 (1,256) 0 0 1,283 0 (622) (664) (572) (1,256) 1 Experience (gains) / losses are a component of actuarial remeasurements of the defined benefit obligation which reflect the effects of differences between the previous actuarial assumptions and what has actually occurred. 689 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) Analysis of amounts recognized in net profit CHF million For the year ended Current service cost Interest expense related to defined benefit obligation Interest income related to plan assets Interest expense on asset ceiling effect Administration expenses, taxes and premiums paid Plan amendments Curtailments Termination benefits Net periodic pension cost Analysis of amounts recognized in other comprehensive income CHF million For the year ended Remeasurement of defined benefit obligation Return on plan assets excluding amounts included in interest income Asset ceiling effect excluding interest expense on asset ceiling effect Interest expense on asset ceiling effect Total gains / (losses) recognized in other comprehensive income, before tax Swiss UK Other Total 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 589 270 496 465 (273) (513) 0 137 (118) 0 158 (141) 0 10 0 (81) 1 515 19 10 0 (54) 34 458 0 0 0 0 0 0 0 0 0 0 18 17 10 57 (39) 0 8 (24) 0 0 12 10 59 (43) 0 6 0 0 0 33 599 463 (430) 0 18 (24) (81) 1 546 506 682 (697) 19 16 0 (54) 34 508 Swiss UK Other Total 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 1,231 (3,120) 109 1,262 (1,283) 0 58 808 19 441 (124) 0 0 (349) 181 0 0 8 (44) 0 0 (270) 1,681 (3,739) 14 0 0 (59) 1,457 (1,283) 0 339 808 19 (1,456) (1,032) 317 (168) (35) (256) The table below provides information on the duration of the defined benefit pension obligations and the distribution of the timing of benefit payments. Duration of the defined benefit obligation (in years) Maturity analysis of benefits expected to be paid CHF million Benefits expected to be paid within 12 months Benefits expected to be paid between 1 to 3 years Benefits expected to be paid between 3 to 6 years Benefits expected to be paid between 6 to 11 years Benefits expected to be paid between 11 to 16 years Benefits expected to be paid in more than 16 years 1 The duration of the defined benefit obligation represents a weighted average across other plans. Swiss UK Other1 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 15.1 16.7 19.7 20.2 11.3 12.5 1,146 2,218 3,403 5,526 5,173 1,033 2,023 3,035 5,394 5,571 80 177 338 785 981 81 173 322 768 997 92 185 291 509 510 85 171 274 485 513 18,892 26,613 7,348 7,926 1,172 1,363 690 Note 28 Pension and other post-employment benefit plans (continued) UBS AG regularly reviews the actuarial assumptions used in calculating its defined benefit obligations to determine their con- tinuing relevance. In 2015, UBS AG carried out a methodology review of the actuarial assumptions used in calculating its defined benefit obli- gation for its Swiss pension plan. As a result, UBS AG enhanced its methodology for estimating the discount rate by improving the construction of the yield curve where the market for long tenor maturities of Swiss high-quality corporate bonds was not suffi- ciently deep. Furthermore, UBS AG refined its approach to esti- mating the rate of salary increases, the rate of interest credit on retirement savings, the employee turnover rate, the rate of employee disabilities and the rate of marriage. These improve- ments in estimates resulted in a total net decrease in the defined benefit obligation (DBO) of the Swiss pension plan of CHF 2,055 million, of which CHF 1,038 million related to demographic assumptions and CHF 1,017 million related to financial assump- tions. These reductions in the DBO from improvements in esti- mates were partly offset by market-driven discount rate changes, resulting in an overall downward remeasurement of the Swiss plan DBO of CHF 1,231 million, which was recognized in other comprehensive income. Furthermore, UBS AG enhanced methodologies and refined approaches used to estimate various actuarial assumptions for its UK and other pension plans. These improvements in estimates resulted in a total net decrease in the DBO of the UK pension plan of CHF 192 million, of which CHF 122 million related to demo- graphic assumptions and CHF 71 million related to financial assumptions. In addition, mainly market-driven discount rate changes reduced the DBO further, resulting in an overall down- ward remeasurement of the UK plan DBO of CHF 441 million, which was recognized in other comprehensive income. The tables below show the principal actuarial assumptions used in calculating the defined benefit obligations. Principal actuarial assumptions used (%) Assumptions used to determine defined benefit obligations at the end of the year Discount rate Rate of salary increase Rate of pension increase Rate of interest credit on retirement savings 1 Represents weighted average assumptions across other plans. Mortality tables and life expectancies for major plans Country Switzerland UK US Germany Country Switzerland UK US Germany Mortality table BVG 2010 G S2PA CMI_2015, with projections1 RP2014 WCHA, with MP2015 projection scale2 Dr. K. Heubeck 2005 G Mortality table BVG 2010 G S2PA CMI_2015, with projections1 RP2014 WCHA, with MP2015 projection scale2 Dr. K. Heubeck 2005 G Swiss UK Other1 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 1.09 1.75 0.00 1.09 1.15 2.40 0.00 1.40 3.90 0.00 3.02 0.00 3.69 0.00 3.08 0.00 4.01 2.89 1.50 1.48 3.60 3.01 1.75 1.13 Life expectancy at age 65 for a male member currently aged 65 aged 45 31.12.15 31.12.14 31.12.15 31.12.14 21.5 23.9 23.0 20.0 21.4 24.4 21.7 19.9 23.2 25.6 24.5 22.6 23.2 27.2 23.4 22.5 Life expectancy at age 65 for a female member currently aged 65 aged 45 31.12.15 31.12.14 31.12.15 31.12.14 24.0 25.8 24.6 24.1 23.9 25.7 23.9 23.9 25.7 28.0 26.2 26.6 25.6 28.0 25.6 26.5 1 In 2014 the mortality table S1NA_L CMI 2014 G, with projections was used. 2 In 2014 the mortality table RP2014 G, with MP2014 projection scale was used. 691 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) Volatility arises in the defined benefit obligation for each of the pension plans due to the following actuarial assumptions applied in the measurement of the defined benefit obligation: – Discount rate: the discount rate is based on the yield of high- quality corporate bonds of the market in the respective pen- sion plan country. Consequently, a decrease in the yield of high-quality corporate bonds will increase the defined benefit obligation of the pension plans. Conversely, an increase in the yield of high-quality corporate bonds will decrease the defined benefit obligation of the pension plans. – Rate of salary increase: an increase in the salary of plan partici- pants will generally increase the defined benefit obligation, specifically for the Swiss and German plans. For the UK plan, as the plan is closed for future service, UBS AG employees no longer accrue future service benefits and thus salary increases have no impact on the defined benefit obligation. For the US plans, only a small percentage of the total population contin- ues to accrue benefits for future service, therefore the impact of a salary increase on the defined benefit obligation is mini- mal. – Rate of pension increase: for the Swiss plan, there is no auto- matic indexing of pensions. Any increase would be decided by the Pension Foundation Board. Similarly, for the US plans, there is no automatic indexing of pensions. For the UK plan, pen- sions are automatically indexed to price inflation as per plan rules and local pension legislation. Similarly, the German defined benefit pension plans are automatically indexed and a portion of the pensions are directly increased by price inflation. An increase in price inflation in the UK and Germany will increase the respective plan’s defined benefit obligation. – Rate of interest credit on retirement savings: the Swiss plan and one of the plans in the US have retirement saving balances that are increased annually by an interest credit rate. For these plans, an increase in the interest credit rate would increase the respective plan’s defined benefit obligation. – Life expectancy: for most of UBS AG’s defined benefit pension plans, the respective plan is obligated to provide guaranteed lifetime pension benefits. The defined benefit obligation for all plans is calculated using an underlying best estimate of the life expectancy of plan participants. An increase in the life expec- tancy of plan participants will increase the plan’s defined ben- efit obligation. The table below presents a sensitivity analysis for each signifi- cant actuarial assumption showing how the defined benefit obli- gation would be affected by changes in the relevant actuarial assumption that were reasonably possible at the balance sheet date. Unforeseen circumstances may arise, which could result in variations that are outside the range of alternatives deemed rea- sonably possible. This sensitivity analysis applies to the defined benefit obligation only and not to the net asset / liability in its entirety. Caution should be used in extrapolating the sensitivities below to the overall impact on the defined benefit obligation, as the sensitivities may not be linear. Sensitivity analysis of significant actuarial assumptions1 CHF million Discount rate Increase by 50 basis points Decrease by 50 basis points Rate of salary increase Increase by 50 basis points Decrease by 50 basis points Rate of pension increase Increase by 50 basis points Decrease by 50 basis points Rate of interest credit on retirement savings Increase by 50 basis points Decrease by 50 basis points Life expectancy Increase in longevity by one additional year Swiss plan: increase / (decrease) in defined benefit obligation UK plan: increase / (decrease) in defined benefit obligation Other plans: increase / (decrease) in defined benefit obligation 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 (1,416) 1,609 82 (86) 1,163 –3 263 (249) 719 (1,688) 1,936 210 (198) 1,315 –3 334 (315) 755 (308) 354 –2 –2 343 (300) –4 –4 97 (372) 428 –2 –2 414 (363) –4 –4 135 (84) 92 1 (1) 6 (5) 8 (8) 42 (98) 108 2 (2) 8 (7) 9 (8) 45 1 The sensitivity analyses are based on a change in one assumption while holding all other assumptions constant, so that interdependencies between the assumptions are excluded. 2 As the plan is closed for future service, a change in assumption is not applicable. 3 As the assumed rate of pension increase was 0% as of 31 December 2015 and as of 31 December 2014, a downward change in assumption is not applicable. 4 As the plan does not provide interest credits on retirement savings, a change in assumption is not applicable. 692 Note 28 Pension and other post-employment benefit plans (continued) The table below provides information on the composition and fair value of plan assets of the Swiss pension plan, the UK pension plan and the other pension plans. Composition and fair value of plan assets Swiss plan 31.12.15 31.12.14 Fair value Plan asset allocation % Fair value Plan asset allocation % Quoted in an active market 517 Other 0 Total 517 0 2,647 2,647 699 6,948 2,112 6,109 1,056 0 1,085 0 0 0 0 63 1,064 1,605 0 15 699 8,033 2,112 6,109 1,056 63 2,669 15 Quoted in an active market 829 Other 0 Total 829 0 2,582 2,582 798 6,245 2,591 6,418 104 0 2,513 0 0 994 0 0 0 104 736 17 798 7,239 2,591 6,418 104 104 3,249 17 2 11 3 34 9 26 4 0 11 0 18,505 5,414 23,919 100 19,499 4,432 23,931 3 11 3 30 11 27 0 0 14 0 100 CHF million Cash and cash equivalents Real estate / property Domestic Investment funds Equity Domestic Foreign Bonds1 Domestic, AAA to BBB– Foreign, AAA to BBB– Foreign, below BBB– Real estate Foreign Other Other investments Total Total fair value of plan assets of which: Bank accounts at UBS AG and UBS AG debt instruments UBS Group AG shares Securities lent to UBS AG2 Property occupied by UBS AG Derivative financial instruments, counterparty UBS AG2 Structured products, counterparty UBS AG 31.12.15 23,919 522 38 962 82 (170) 0 31.12.14 23,931 385 38 921 87 (357) 42 1 The bond credit ratings are primarily based on Standard and Poor’s credit ratings. Ratings AAA to BBB– and below BBB– represent investment grade and non-investment grade ratings, respectively. In cases where credit ratings from other rating agencies were used, these were converted to the equivalent rating in the Standard & Poor’s rating classification. 2 Securities lent to UBS AG and derivative financial instruments are presented gross of any collateral. Net of collateral, derivative financial instruments amounted to CHF (90) million as of 31 December 2015 (31 December 2014: CHF (123) million). Securities lent to UBS AG were fully covered by collateral as of 31 December 2015 and 31 December 2014. 693 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) Composition and fair value of plan assets (continued) UK plan 31.12.15 31.12.14 CHF million Cash and cash equivalents Investment funds Equity Domestic Foreign Bonds1 Domestic, AAA to BBB– Domestic, below BBB– Foreign, AAA to BBB– Foreign, below BBB– Real estate Domestic Other Other investments Total fair value of plan assets Fair value Plan asset allocation % Quoted in an active market 426 98 1,080 1,305 53 189 31 46 (32) 6 3,202 Other 0 0 0 0 0 0 0 68 123 7 198 Total 426 98 1,080 1,305 53 189 31 115 91 13 Quoted in an active market 192 122 1,042 1,344 179 91 153 43 (33) 0 13 3 32 38 2 6 1 3 3 0 3,400 100 3,133 Fair value Other 0 0 0 0 0 0 0 99 139 10 248 Plan asset allocation % 6 4 31 40 5 3 5 4 3 0 Total 192 122 1,042 1,344 179 91 153 142 106 10 3,381 100 1 The bond credit ratings are primarily based on Standard and Poor’s credit ratings. Ratings AAA to BBB– and below BBB– represent investment grade and non-investment grade ratings, respectively. In cases where credit ratings from other rating agencies were used, these were converted to the equivalent rating in the Standard & Poor’s rating classification. 694 Note 28 Pension and other post-employment benefit plans (continued) Composition and fair value of plan assets (continued) Other plans 31.12.15 31.12.14 CHF million Cash and cash equivalents Bonds1 Domestic, AAA to BBB– Domestic, below BBB– Foreign, AAA to BBB– Foreign, below BBB– Private equity Investment funds Equity Domestic Foreign Bonds1 Domestic, AAA to BBB– Domestic, below BBB– Foreign, AAA to BBB– Foreign, below BBB– Real estate Domestic Other Insurance contracts Asset-backed securities Other investments Total fair value of plan assets Fair value Quoted in an active market Other 52 56 60 17 6 0 240 240 134 13 31 3 0 56 0 14 5 926 0 0 0 0 0 0 0 0 0 0 0 0 12 42 17 0 0 70 Total 52 56 60 17 6 0 240 240 134 13 31 3 12 98 17 14 5 Weighted average plan asset allocation % Fair value Quoted in an active market Other Weighted average plan asset allocation % 3 10 1 2 0 0 24 25 14 1 3 0 1 10 2 2 0 Total 32 104 10 24 3 0 250 258 142 13 32 4 13 105 17 17 5 1,029 100 0 0 0 0 0 0 0 0 0 0 0 0 13 39 17 0 0 68 5 6 6 2 1 0 24 24 13 1 3 0 1 10 2 1 0 32 104 10 24 3 0 250 258 142 13 32 4 0 66 0 17 5 997 100 961 1 The bond credit ratings are primarily based on Standard and Poor’s credit ratings. Ratings AAA to BBB– and below BBB– represent investment grade and non-investment grade ratings, respectively. In cases where credit ratings from other rating agencies were used, these were converted to the equivalent rating in the Standard & Poor’s rating classification. 695 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) b) Post-retirement medical and life insurance plans In the US and in the UK, UBS AG offers post-retirement medical benefits that contribute to the health care coverage of certain employees and their beneficiaries after retirement. The UK post-retirement medical plan is closed to new entrants. In the US, in addition to post-retirement medical benefits, UBS AG also provides post-retirement life insurance benefits to certain employees. The post-retirement medical benefits in the UK and the US cover all types of medical expenses including, but not lim- ited to, the cost of doctor visits, hospitalization, surgery and phar- maceuticals. These plans are not pre-funded plans and costs are recognized as incurred. In the US, the retirees also contribute to the cost of the post-retirement medical benefits. In 2014, UBS AG announced changes to the US post-retire- ment medical plans in relation to a reduction or elimination of the subsidy provided for medical benefits. This change reduced the post-retirement benefit obligation by CHF 33 million, result- ing in a corresponding gain recognized in the income statement in 2014. Further in 2014, UBS AG announced changes to the US post- retirement life insurance plans in relation to an elimination of the US post-retirement life insurance policy. This change reduced the post-retirement benefit obligation by CHF 8 million, resulting in a corresponding gain recognized in the income statement in 2014. The employer contributions expected to be made to the post- retirement medical and life insurance plans in 2016 are estimated to be CHF 6 million. The table on the following page provides an analysis of the net asset / liability recognized on the balance sheet for post-retirement medical and life insurance plans from the beginning to the end of the year, as well as an analysis of amounts recognized in net profit and in other comprehensive income. In 2015, disclosures within this Note have been expanded to separately present UK post-retirement medical plan information, which was previously presented together with the US post- retirement medical plans. Comparative information was adjusted accordingly. 696 Note 28 Pension and other post-employment benefit plans (continued) Post-retirement medical and life insurance plans CHF million For the year ended Post-retirement benefit obligation at the beginning of the year Current service cost Interest expense Plan participant contributions Remeasurements of post-retirement benefit obligation of which: actuarial (gains) / losses arising from changes in demographic assumptions of which: actuarial (gains) / losses arising from changes in financial assumptions of which: experience (gains) / losses1 Past service cost related to plan amendments Benefit payments2 Foreign currency translation Post-retirement benefit obligation at the end of the year of which: amounts owing to active members of which: amounts owing to deferred members of which: amounts owing to retirees Fair value of plan assets at the end of the year Net post-retirement benefit asset / (liability) Analysis of amounts recognized in net profit Current service cost Interest expense related to post-retirement benefit obligation Past service cost related to plan amendments Net periodic cost Analysis of gains / (losses) recognized in other comprehensive income Remeasurement of post-retirement benefit obligation Total gains / (losses) recognized in other comprehensive income, before tax UK US Total 31.12.15 31.12.14 31.12.15 31.12.14 31.12.15 31.12.14 32 0 1 0 (6) 2 (1) (7) 0 (1) (2) 25 5 0 20 0 (25) 0 1 0 1 6 6 28 0 1 0 3 0 4 0 0 (2) 1 32 12 0 21 0 (32) 0 1 0 2 (3) (3) 53 0 2 2 9 2 (2) 9 0 (8) 1 59 0 0 59 0 87 0 3 2 2 4 5 (7) (41) (9) 8 53 0 0 53 0 (59) (53) 0 2 0 2 (9) (9) 0 3 (41) (37) (2) (2) 85 0 3 2 3 4 (3) 2 0 (10) (1) 84 5 0 79 0 (84) 0 3 0 4 (3) (3) 114 0 5 2 5 4 8 (7) (41) (10) 10 85 12 0 74 0 (85) 0 5 (41) (36) (5) (5) 1 Experience (gains) / losses are a component of actuarial remeasurements of the post-retirement benefit obligation which reflect the effects of differences between the previous actuarial assumptions and what has actu- ally occurred. 2 Benefit payments are funded by employer contributions and plan participant contributions. 697 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 28 Pension and other post-employment benefit plans (continued) The post-retirement benefit obligation is determined by using the assumed average health care cost trend rate, the discount rate and the life expectancy. On a country-by-country basis, the same discount rate is used for the calculation of the post-retirement benefit obligation from medical and life insurance plans as for the defined benefit obligations arising from pension plans. UBS AG regularly reviews the actuarial assumptions used in calculating its post-retirement benefit obligations to determine their continuing relevance. In 2015, UBS AG enhanced method- ologies and refined approaches used to estimate various actuarial assumptions. These improvements in estimates resulted in a net increase in the post-retirement benefit obligation. The discount rate and the assumed average health care cost trend rates are presented in the table below. The basis for life expectancy assumptions is the same as provided for defined ben- efit pension plans in Note 28a. Principal weighted average actuarial assumptions used (%)1 Assumptions used to determine post-retirement benefit obligations at the end of the year For the year ended Discount rate Average health care cost trend rate – initial Average health care cost trend rate – ultimate 1 The assumptions for life expectancies are provided within Note 28a. UK US 31.12.15 31.12.14 31.12.15 31.12.14 3.90 5.10 5.10 3.69 5.50 5.50 4.23 6.75 5.00 3.93 7.00 5.00 Volatility arises in the post-retirement benefit obligation for each of the post-retirement medical and life insurance plans due to the following actuarial assumptions applied in the measure- ment of the post-retirement benefit obligation: – Discount rate: similar as for defined benefit pension plans, a decrease in the yield of high-quality corporate bonds will increase the post-retirement benefit obligation for these plans. Conversely, an increase in the yield of high-quality corporate bonds will decrease the post-retirement benefit obligation for these plans. – Average health care cost trend rate: an increase in health care costs would generally increase the post-retirement benefit obli- gation. – Life expectancy: as some plan participants have lifetime bene- fits under these plans, an increase in life expectancy would increase the post-retirement benefit obligation. The table below presents a sensitivity analysis for each signifi- cant actuarial assumption showing how the post-retirement ben- efit obligation would have been affected by changes in the rele- vant actuarial assumption that were reasonably possible at the balance sheet date. Sensitivity analysis of significant actuarial assumptions1 CHF million Discount rate Increase by 50 basis points Decrease by 50 basis points Average health care cost trend rate Increase by 100 basis points Decrease by 100 basis points Life expectancy Increase in longevity by one additional year Increase / (decrease) in post-retirement benefit obligation UK US 31.12.15 31.12.14 31.12.15 31.12.14 (1) 2 3 (3) 2 (2) 2 4 (4) 2 (3) 3 1 (1) 5 (2) 2 (1) 1 5 1 The sensitivity analyses are based on a change in one assumption while holding all other assumptions constant, so that interdependencies between the assumptions are excluded. c) Defined contribution plans UBS AG sponsors a number of defined contribution plans in loca- tions outside of Switzerland. The locations with significant defined contribution plans are the UK and the US. Certain plans permit employees to make contributions and earn matching or other contributions from UBS AG. The employer contributions to these plans are recognized as an expense which, for the years ended 31 December 2015, 2014 and 2013, amounted to CHF 239 mil- lion, CHF 244 million and CHF 236 million, respectively. 698 Note 28 Pension and other post-employment benefit plans (continued) d) Related party disclosure UBS AG is the principal provider of banking services for the pen- sion fund of UBS AG in Switzerland. In this function, UBS AG is engaged to execute most of the pension fund’s banking activi- ties. These activities can include, but are not limited to, trading and securities lending and borrowing. The non-Swiss UBS AG pension funds do not have a similar banking relationship with UBS AG. In 2008, UBS AG sold certain bank-occupied properties to the Swiss pension fund. Simultaneously, UBS AG and the Swiss pen- sion fund entered into lease-back arrangements for some of the properties with 25-year lease terms and two renewal options for 10 years each. During 2009, UBS AG renegotiated one of the lease contracts, which reduced UBS AG’s remaining lease commit- ment. In 2013, after the first five years, the early break options for most of the leases were not exercised, which resulted in an increase in the minimum commitment for an additional five years. As of 31 December 2015, the minimum commitment toward the Swiss pension fund under the related leases is approximately CHF 11 million (31 December 2014: CHF 14 million). The following amounts have been received or paid by UBS AG from and to the pension funds in respect of these banking activi- ties and arrangements. Related party disclosure CHF million Received by UBS AG Fees Paid by UBS AG Rent Interest Dividends and capital repayments The transaction volumes in UBS shares and UBS AG debt instruments are as follows. Transaction volumes – UBS shares and UBS AG debt instruments Financial instruments bought by pension funds UBS shares1 (in thousands of shares) UBS AG debt instruments (par values in CHF million) Financial instruments sold by pension funds or matured UBS shares1 (in thousands of shares) UBS AG debt instruments (par values in CHF million) For the year ended 31.12.15 31.12.14 31.12.13 33 5 (1) 14 33 6 0 4 33 8 1 2 For the year ended 31.12.15 31.12.14 1,544 3 2,255 4 2,092 4 1,735 4 1 Represents purchases / sales of UBS AG shares up to 28 November 2014 and purchases / sales of UBS Group AG shares thereafter. Refer to Note 32 for more information. UBS AG defined contribution pension funds held 15,782,722 UBS Group AG shares with a fair value of CHF 306 million as of 31 December 2015 (31 December 2014: 16,253,804 UBS Group AG shares with a fair value of CHF 276 million). More information on the fair value of the plan assets of the defined benefit pension plans are disclosed in Note 28a. 699 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 29 Equity participation and other compensation plans a) Plans offered The UBS Group operates several equity participation and other compensation plans to align the interests of executives, managers and staff with the interests of shareholders. Some plans (e.g., Equity Plus and Equity Ownership Plan) are granted 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. Certain plans are used in specific coun- tries, business areas (e.g., awards granted within Wealth Manage- ment Americas), or are only offered to members of the Group Executive Board (GEB). The UBS Group operates compensation plans on a mandatory, discretionary and voluntary basis. The explanations below provide a general description of the terms of the most significant plans offered by the Group which relate to the performance year 2015 (awards granted in 2016) and those from prior years that were partly expensed in 2015. ➔ Refer to Note 1a item 25 for a description of the accounting policy related to equity participation and other compensation plans Transfer of deferred compensation plans As part of the Group reorganization in 2014, UBS Group AG assumed obligations of UBS AG as grantor in connection with certain outstanding awards under employee share, option, notional fund and deferred cash compensation plans. As a result of the transfer, UBS Group AG assumed all responsibilities and rights associated with the grantor role for the plans from UBS AG, including the right of recharge to its subsidiaries employing the personnel. Obligations relating to deferred compensation plans which are required to be, and have been, granted by employing and / or sponsoring subsidiaries have not been assumed by UBS Group AG and will continue on this basis. Furthermore, obliga- tions related to other compensation awards, such as defined ben- efit pension plans and other local awards, have not been assumed by UBS Group AG and are retained by the relevant employing and / or sponsoring subsidiaries. For the purpose of this Note, ref- erences to shares, performance shares, notional shares and options refer to UBS Group AG instruments for the period after the transfer and to UBS AG instruments for the period before the transfer. The tables within this Note outline the effects from equity par- ticipation and other compensation plans on the UBS AG income statement, as well as the movements in UBS share and notional share awards retained by UBS AG. Mandatory share-based compensation plans Equity Ownership Plan (EOP): Select employees receive a portion of their annual performance-related compensation above a cer- tain threshold in the form of an EOP award in UBS shares, notional shares or UBS performance shares (notional shares that are sub- ject to performance conditions). From February 2014 onwards, only notional shares and UBS performance shares have been granted. Since 2011, performance shares have been granted to EOP participants who are Key Risk-Takers, Group Managing Direc- tors (GMD) or employees whose incentive awards exceed a cer- tain threshold, and since 2013 to GEB members. For performance shares granted in respect of the performance years 2012 and thereafter, the performance conditions are based on the Group return on tangible equity and the divisional return on attributed equity (for Corporate Center participants, the return on attributed equity of the Group excluding Corporate Center). Awards issued outside the normal performance year cycle, such as replacement awards or sign-on awards, may be offered in deferred cash under the EOP plan rules. Awards in UBS shares allow for voting and dividend rights dur- ing the vesting period, whereas notional and performance shares represent a promise to receive UBS shares at vesting and do not carry voting rights during the vesting period. Notional and perfor- mance shares granted before February 2014 have no rights to dividends, whereas for awards granted since February 2014 employees are entitled to receive a dividend equivalent that may be paid in notional shares and / or cash, and which will vest on the same terms and conditions as the award. Awards granted in the form of UBS shares, notional shares and performance shares are settled by delivering UBS shares at vesting, except in countries where this is not permitted for legal or tax reasons. EOP awards granted until 2012 generally vested in three equal increments over a three-year vesting period and awards granted since March 2013 generally vest in equal increments in years two and three following grant. The awards are generally forfeitable upon, among other circumstances, voluntary termination of employment with UBS AG. Compensation expense 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 retire- ment eligibility date of the employee, on a tiered basis. Senior Executive Equity Ownership Plan (SEEOP): Up to 2012 (performance year 2011), GEB members and selected senior exec- utives received a portion of their mandatory deferral in UBS shares or notional shares, which vest in one-fifth increments over a five- year vesting period and are forfeitable if certain conditions are not met. Awards granted in 2011 and 2012 are subject to the same performance conditions as performance shares granted under the EOP. They will only vest in full if the participant’s business division is profitable (for Corporate Center participants, the Group as a whole must be profitable) in the financial year preceding sched- uled vesting. Awards granted under SEEOP are settled by deliver- ing UBS shares at vesting. Compensation expense is recognized on the same basis as for share-settled EOP awards. No new SEEOP awards were granted since 2012. From 2013 (performance year 2012), GEB members have received EOP performance awards. 700 Note 29 Equity participation and other compensation plans (continued) Incentive Performance Plan (IPP): In 2010, GEB members and certain other senior employees received part of their annual incen- tive in the form of performance shares granted under the IPP. Each performance share granted was a contingent right to receive between one and three UBS shares at vesting, depending on the achievement of share price targets. Vesting was subject to contin- ued employment with UBS AG and certain other conditions. The IPP awards vested in March 2015. Compensation expense was recognized on a tiered basis from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. IPP was a one-time plan granted in 2010 only. Performance Equity Plan (PEP): In 2012 GEB members received part of their annual incentive in the form of performance shares granted under the PEP. Each performance share was a contingent right to receive between zero and two UBS shares at vesting, depending on the achievement of Economic Profit (EP) and Total Shareholder Return (TSR) targets. Vesting was subject to contin- ued employment with UBS AG and certain other conditions. The last PEP awards vested in March 2015. Compensation expense was recognized on a tiered basis from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. No PEP awards were granted after 2012. Special Plan Award Program for the Investment Bank 2012 (SPAP): In April 2012, certain Managing Directors and Group Managing Directors of the Investment Bank were granted an award of UBS shares which vested in 2015. Vesting was subject to performance conditions, continued employment with the firm and certain other conditions. Compensation expense was recog- nized from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. Role-based allowances (RBA): In line with market practice, in certain countries, employees are entitled to receive a role-based allowance in addition to their base salary. This allowance reflects the market value of a specific role and is only paid as long as the employee is within such a role. The allowance is generally paid in cash and above a threshold it is granted in blocked shares. Such shares will be unblocked in equal instalments after two and three years. The compensation expense is recognized in the year of grant. Mandatory deferred cash compensation plans Deferred Contingent Capital Plan (DCCP): The DCCP is a manda- tory performance award deferral plan for all employees whose total compensation exceeds a certain threshold. For awards granted up to January 2015, employees received part of their annual incentive in the form of notional bonds, which are a right to receive a cash payment at vesting. For awards granted for the performance years 2014 and 2015, employees have been awarded notional additional tier 1 (AT1) instruments, which at the discretion of UBS Group AG (consolidated) can either be settled in the form of a cash payment or a perpetual, marketable AT1 instrument. Awards vest in full after five years, subject to there being no trigger event. Awards granted under the DCCP forfeit if UBS Group AG’s consolidated phase-in common equity tier 1 capital ratio falls below 10% for GEB members and 7% for all other employees. In addition, awards are also forfeited if a viability event occurs, that is, if FINMA provides a written notice to UBS Group AG that the DCCP awards must be written down to prevent an insolvency, bankruptcy or failure of UBS Group AG (consolidated), or if UBS Group AG (consolidated) receives a commitment of extraordinary support from the public sector that is necessary to prevent such an event. For GEB members, an additional performance condition applies. If UBS Group AG (consolidated) does not achieve an adjusted profit before tax for any year during the vesting period, GEB members forfeit 20% of their award for each loss-making year. For awards granted up to January 2015, interest on the awards is paid annually for perfor- mance years in which the firm generates an adjusted profit before tax. For awards granted since February 2015 interest pay- ments are discretionary. The awards are subject to standard for- feiture and harmful acts provisions, including voluntary termina- tion of employment with UBS AG. 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 from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. Long-Term Deferred Retention Senior Incentive Scheme (LTDRSIS): Awards granted under the LTDRSIS are granted to employees in Australia and represent a profit share amount based on the profitability of the Australian business. Awards vest after three years and include an arrangement which allows for unpaid installments to be reduced if the business has a loss during the calendar year preceding vesting. The awards are generally forfeit- able upon voluntary termination of employment with UBS AG. 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 recog- nized ratably from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. 2014 was the last year awards were granted under LTDRSIS. Asset Management Equity Ownership Plan: In order to align their compensation with the performance of the funds they man- age, Asset Management employees who receive EOP awards receive them in the form of cash-settled notional funds. The amount depends on the value of the relevant underlying Asset Management funds at the time of vesting. The awards are gener- ally forfeitable upon, among other circumstances, voluntary ter- mination of employment with UBS AG. Compensation expense 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. 701 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 29 Equity participation and other compensation plans (continued) Wealth Management Americas financial advisor compensation Financial advisor compensation plans generally provide for cash payments and deferred awards that are formula driven and fluc- tuate in proportion to the level of business activity. UBS AG also may enter into compensation commitments with certain new financial advisors primarily as a recruitment incentive and to incentivize certain eligible active financial advisors to achieve specified revenue production and other performance thresholds. The compensation may be earned and paid to the employee during a period of continued employment and may be forfeited under certain circumstances. GrowthPlus is a program for selected financial advisors whose revenue production and length of service exceeds defined thresh- olds from 2010 through 2017. Compensation arrangements were granted in 2010, 2011 and 2015, with potential arrangements to be granted in 2018. The awards vest ratably over seven years from grant with the exception of the 2018 arrangement, which vests over five years. PartnerPlus is a mandatory deferred cash compensation plan for certain eligible financial advisors. Awards (UBS AG company contributions) are based on a predefined formula during the per- formance year. Participants are also allowed to voluntarily contrib- ute additional amounts otherwise payable during the year, up to a certain percentage of their pay, which are vested upon contribu- tion. Company contributions and voluntary contributions are cred- ited with interest in accordance with the terms of the plan. Rather than being credited with interest, a participant may elect to have voluntary contributions, along with vested company contributions, credited with notional earnings based on the performance of vari- ous mutual funds. Company contributions and interest on both company and voluntary contributions ratably vest in 20% incre- ments six to ten years following grant date. Company contribu- tions and interest / notional earnings on both company and volun- tary contributions are forfeitable under certain circumstances. Compensation expense for awards is recognized in the perfor- mance year if the employee meets the qualifying separation eligi- bility requirements at the date of grant. Otherwise, compensation expense for awards is recognized ratably commencing in the per- formance year to the earlier of the vesting date or the qualifying separation eligibility date of the employee. Compensation expense for voluntary contributions is recognized in the year of deferral. 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 appre- ciation 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 AG. Com- pensation expense is recognized from the grant date to the earlier of the vesting date or the retirement eligibility date of the employee. No options or SARs awards have been granted since 2009. 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 the performance award and / or monthly through regular deduc- tions from salary. If the shares purchased are held for three years, and in general if the employee remains in employment, the notional UBS shares vest. For notional UBS shares granted from April 2014 onwards, employees are entitled to receive a dividend equivalent which may be paid in either notional shares and / or cash. Prior to 2010, instead of notional shares participants received two UBS options for each share they purchased under this plan. The options 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 deliver- ing UBS shares, except in countries where this is not permitted for legal reasons. Compensation expense for Equity Plus is recognized from the grant date to the earlier of the vesting date or the retire- ment eligibility date of the employee. 702 Note 29 Equity participation and other compensation plans (continued) b) Effect on the income statement Effect on the income statement for the financial year and future periods The following table summarizes the compensation expenses rec- ognized for the year ended 31 December 2015 and deferred com- pensation expenses that will be recognized as an expense in the income statements of 2016 and later. The deferred compensation expenses in the table also include vested and non-vested awards granted mainly in February 2016, which relate to the performance year 2015. Personnel expenses – Recognized and deferred1 Personnel expenses for the year ended 2015 Personnel expenses deferred to 2016 and later CHF million Performance awards Cash performance awards Deferred Contingent Capital Plan (DCCP) Deferred cash plans (DCP and other cash plans) Equity Ownership Plan (EOP / SEEOP) – UBS shares Incentive Performance Plan (IPP) Total UBS share plans Equity Ownership Plan (EOP) – notional funds Total performance awards Variable compensation Variable compensation – other Financial advisor compensation – cash payments Compensation commitments with recruited financial advisors GrowthPlus and other deferral plans UBS share plans Wealth Management Americas: Financial advisor compensation5 Total Expenses relating to awards for 2015 Expenses relating to awards for prior years 2,073 172 0 261 0 261 28 2,535 184 2,460 43 132 37 2,673 5,391 (94) 258 12 461 0 461 38 675 162 0 692 142 45 879 1,716 Relating to awards for 2015 Relating to awards for prior years 0 343 0 524 0 524 34 900 2483 0 940 710 66 1,716 2,864 0 446 3 338 0 338 35 822 2934 0 1,899 456 115 2,470 3,585 Total 1,980 429 12 722 0 722 67 3,210 3462 2,460 735 275 82 3,552 7,108 Total 0 789 3 861 0 861 69 1,722 541 0 2,839 1,166 182 4,186 6,449 1 Total share-based personnel expenses recognized for the year ended 31 December 2015 were CHF 1,028 million and were comprised of UBS share plans of CHF 807 million, Equity Ownership Plan – notional funds of CHF 67 million, related social security costs of CHF 56 million and other compensation plans (reported within Variable compensation – other) of CHF 98 million. 2 Includes replacement payments of CHF 76 million (of which CHF 65 million related to prior years), forfeiture credits of CHF 86 million (all related to prior years), severance payments of CHF 157 million (all related to 2015) and retention plan and other payments of CHF 198 million (of which CHF 183 million related to prior years). 3 Includes DCCP interest expense of CHF 160 million for DCCP awards 2015 (granted in 2016). 4 Includes DCCP interest expense of CHF 200 million for DCCP awards 2014, 2013 and 2012 (granted in 2015, 2014 and 2013). 5 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 charges related to compensation commitments with financial advisors entered into 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. 703 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 29 Equity participation and other compensation plans (continued) Personnel expenses – Recognized and deferred1 CHF million Performance awards Cash performance awards Deferred Contingent Capital Plan (DCCP) Deferred cash plans (DCP and other cash plans) Equity Ownership Plan (EOP / SEEOP) – UBS shares Incentive Performance Plan (IPP) Total UBS share plans Equity Ownership Plan (EOP) – notional funds Total performance awards Variable compensation Variable compensation – other Financial advisor compensation – cash payments Compensation commitments with recruited financial advisors GrowthPlus and other deferral plans UBS share plans Wealth Management Americas: Financial advisor compensation5 Total Personnel expenses for the year ended 2014 Personnel expenses deferred to 2015 and later Expenses relating to awards for 2014 Expenses relating to awards for prior years Relating to awards for 2014 Relating to awards for prior years Total 1,822 (108) 1,714 155 0 215 0 215 24 2,216 260 2,396 39 81 23 2,539 5,015 194 12 444 21 465 41 604 206 0 636 153 57 846 1,656 349 12 659 21 680 65 2,820 4662 2,396 675 234 80 3,385 6,671 0 312 0 459 0 459 36 807 3073 0 524 189 41 754 1,868 0 386 8 367 0 367 33 794 3404 0 2,058 528 143 2,729 3,863 Total 0 698 8 826 0 826 69 1,601 647 0 2,582 717 184 3,483 5,731 1 Total share-based personnel expenses recognized for the year ended 31 December 2014 were CHF 999 million and were comprised of UBS share plans of CHF 800 million, Equity Ownership Plan – notional funds of CHF 65 million, related social security costs of CHF 41 million and other compensation plans (reported within Variable compensation – other) of CHF 93 million. 2 Includes replacement payments of CHF 81 million (of which CHF 70 million related to prior years), forfeiture credits of CHF 70 million (all related to prior years), severance payments of CHF 162 million (all related to 2014) and retention plan and other payments of CHF 292 million (of which CHF 206 million related to prior years). 3 Includes DCCP interest expense of CHF 121 million for DCCP awards 2014 (granted in 2015). 4 Includes DCCP interest expense of CHF 161 million for DCCP awards 2013 and 2012 (granted in 2014 and 2013). 5 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 charges related to compensation commitments with financial advisors entered into 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. During 2015 and 2014, UBS AG accelerated the recognition of expenses for certain deferred compensation arrangements relat- ing to employees that were affected by restructuring programs. Based on the redundancy provisions of the plan rules, these employees retain their deferred compensation awards. However, as the employees are not required to provide future service, com- pensation expense relating to these awards was accelerated to the termination date based on the shortened service period. The amounts accelerated and recognized relating to share-based pay- ment awards in 2015 and 2014 were CHF 9 million and CHF 38 million respectively, and the amounts related to deferred cash awards were CHF 10 million and CHF 29 million, respectively. UBS AG also shortened the service period for certain employ- ees in accordance with the mutually agreed termination provi- sions of their deferred compensation awards. Expense recognition was accelerated to the termination date. The amounts acceler- ated and recognized relating to share-based payment awards in 2015 and 2014 were CHF 6 million and CHF 11 million, respec- tively, and the amounts related to deferred cash awards were CHF 11 million and CHF 8 million, respectively. 704 Note 29 Equity participation and other compensation plans (continued) Personnel expenses – Recognized and deferred CHF million Performance awards Cash performance awards Deferred Contingent Capital Plan (DCCP) Deferred cash plans (DCP and other cash plans) Equity Ownership Plan (EOP / SEEOP) – UBS shares Performance Equity Plan (PEP) Incentive Performance Plan (IPP) Total UBS share plans Equity Ownership Plan (EOP) – notional funds Total performance awards Variable compensation Variable compensation – other Financial advisor compensation – cash payments Compensation commitments with recruited financial advisors GrowthPlus and other deferral plans UBS share plans Wealth Management Americas: Financial advisor compensation5 Total Personnel expenses for the year ended 2013 Personnel expenses deferred to 2014 and later Expenses relating to awards for 2013 Expenses relating to awards for prior years 1,942 152 2 190 0 0 190 19 2,305 152 2,219 33 62 20 2,334 4,791 (30) 96 53 466 3 33 502 60 681 136 0 605 132 69 806 1,623 Relating to awards for 2013 Relating to awards for prior years 0 348 7 520 0 0 520 37 912 3403 0 440 107 45 592 1,844 0 230 12 307 0 21 328 36 606 3984 0 2,098 564 165 2,827 3,831 Total 1,912 248 55 656 3 33 692 79 2,986 2882 2,219 638 194 89 3,140 6,414 Total 0 578 19 827 0 21 848 73 1,518 738 0 2,538 671 210 3,419 5,675 1 Total share-based personnel expenses recognized for the year ended 31 December 2013 were CHF 1.042 million and were comprised of UBS share plans of CHF 787 million, Equity Ownership Plan – notional funds of CHF 79 million, related social security costs of CHF 65 million and other compensation plans (reported within Variable compensation – other) of CHF 111 million. 2 Includes replacement payments of CHF 78 million (of which CHF 72 million related to prior years), forfeiture credits of CHF 146 million (all related to prior years), severance payments of CHF 114 million (all related to 2013) and retention plan and other payments of CHF 242 million (of which CHF 210 million related to prior years). 3 Includes DCCP interest expense of CHF 101 million for DCCP awards 2013 (granted in 2014). 4 Includes DCCP interest expense of CHF 109 million for DCCP awards 2012 (granted in 2013). 5 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 charges related to compensation commitments with financial advisors entered into 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 notional funds granted under EOP) The total share-based personnel expenses recognized for the years ended 31 December 2015, 2014 and 2013 were CHF 1,028 million, CHF 999 million and CHF 1,042 million, respectively. This includes the current period expense, amortization and related social security costs for awards issued in prior periods and perfor- mance year expensing 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 2015 relating to prior years to be recognized in future periods is CHF 553 million and will be recognized as personnel expenses over a weighted average period of 1.9 years. This includes UBS share plans, the Equity Ownership Plan (notional funds), other variable compensation and the Equity Plus Plan. Total deferred compensation amounts included in the 2015 table differ from this amount as the deferred compensation amounts also include non-vested awards granted in February 2016 related to the performance year 2015. Actual payments to participants in cash-settled share-based plans, including amounts granted as notional funds issued under the EOP, for the years ended 31 December 2015 and 2014 were CHF 98 million and CHF 90 million, respectively. The total carry- ing amount of the liability related to these plans was CHF 170 million as of 31 December 2015 and CHF 143 million as of 31 December 2014. 705 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 29 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 Transfer to UBS Group AG Outstanding, at the end of the year of which: shares vested for accounting purposes Weighted average grant date fair value (CHF) 15 17 15 19 18 Number of shares 2015 467,848 259,334 (279,415) (20,323) 427,443 138,908 Weighted average grant date fair value (CHF) 15 18 16 16 15 15 Number of shares 2014 186,633,491 56,851,628 (69,921,325) (6,859,017) (166,704,777) 467,848 26,946 The fair value of shares that became legally vested and were distributed (i.e., all restrictions were fulfilled) during the years ended 2015 and 2014 was CHF 1,443 million and CHF 1,269 million, respectively. d) Valuation UBS share awards UBS AG 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 restrictions, non-vesting conditions and market condi- tions, where applicable. 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 purchasing an at-the-money European put option for the term of the transfer restriction. The weighted average dis- count for share and performance share awards granted during 2015 is approximately 16.7% (2014: 12.9%) 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 dividends to be paid between the grant date and distribution. 706 Note 30 Interests in subsidiaries and other entities a) Interests in subsidiaries UBS AG defines its significant subsidiaries as those entities that, either individually or in aggregate, contribute significantly to UBS AG’s financial position or results of operations, based on a num- ber of criteria, including the subsidiaries’ equity and their contri- bution to UBS AG’s total assets and profit and loss before tax, in accordance with the requirements set by IFRS 12, Swiss regula- tions and the regulations of the US Securities and Exchange Commission (SEC). Individually significant subsidiaries The table below lists UBS AG’s individually significant subsidiaries as of 31 December 2015. Unless otherwise stated, the subsidiar- ies listed below have share capital consisting solely of ordinary shares, which are held fully by UBS AG, and the proportion of ownership interest held is equal to the voting rights held by UBS AG. The country where the respective registered office is located is also generally the principal place of business. Individually significant subsidiaries as of 31 December 2015 Company UBS Americas Holding LLC UBS Bank USA UBS Financial Services Inc. UBS Limited UBS Securities LLC UBS Switzerland AG Registered office Primary business division Wilmington, Delaware, USA Corporate Center Salt Lake City, Utah, USA Wealth Management Americas Wilmington, Delaware, USA Wealth Management Americas London, United Kingdom Wilmington, Delaware, USA Zurich, Switzerland Investment Bank Investment Bank Personal & Corporate Banking Share capital in million 1,200.01 0.0 USD USD USD GBP USD CHF 0.0 226.6 1,283.12 10.0 Equity interest accumu- lated in % 100.0 100.0 100.0 100.0 100.0 100.0 1 Comprised of common share capital of USD 1,000 and non-voting preferred share capital of USD 1,200,000,000. 2 Comprised of common share capital of USD 100,000 and non-voting preferred share capital of USD 1,283,000,000. In 2015, UBS transferred its Personal & Corporate Banking and Wealth Management business booked in Switzerland from UBS AG to UBS Switzerland AG, a newly formed bank subsidiary. ➔ Refer to Note 32 for more information UBS Americas Holding LLC, UBS Limited and UBS Switzerland AG are fully held by UBS AG. UBS Bank USA, UBS Financial Ser- vices Inc. and UBS Securities LLC are fully held, directly or indi- rectly, by UBS Americas Holding LLC. 707 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 30 Interests in subsidiaries and other entities (continued) Other subsidiaries The table below lists other subsidiaries that are not individually significant but that contribute to UBS AG’s total assets and aggregated profit before tax thresholds and are thereby disclosed in accordance with the requirements set by the SEC. Other subsidiaries as of 31 December 2015 Registered office Primary business division Share capital in million Equity interest accumulated in % Glattbrugg, Switzerland Personal & Corporate Banking Company Topcard Service AG UBS (Italia) SpA UBS (Luxembourg) S.A. UBS Americas Inc. Milan, Italy Luxembourg, Luxembourg Wilmington, Delaware, USA UBS Asset Management (Americas) Inc. Wilmington, Delaware, USA UBS Asset Management (Australia) Ltd Sydney, Australia UBS Asset Management (Deutschland) GmbH Frankfurt, Germany UBS Asset Management (Hong Kong) Limited Hong Kong, Hong Kong UBS Asset Management (Japan) Ltd Tokyo, Japan UBS Asset Management (Singapore) Ltd Singapore, Singapore UBS Asset Management (UK) Ltd London, United Kingdom UBS Asset Management AG UBS Australia Holdings Pty Ltd UBS Bank, S.A. UBS Beteiligungs-GmbH & Co. KG UBS Card Center AG UBS Credit Corp. UBS Deutschland AG UBS Fund Advisor, L.L.C. Zurich, Switzerland Sydney, Australia Madrid, Spain Frankfurt, Germany Wealth Management Wealth Management Corporate Center Asset Management Asset Management Asset Management Asset Management Asset Management Asset Management Asset Management Asset Management Investment Bank Wealth Management Wealth Management Glattbrugg, Switzerland Personal & Corporate Banking Wilmington, Delaware, USA Wealth Management Americas Frankfurt, Germany Wealth Management Wilmington, Delaware, USA Wealth Management Americas UBS Fund Mangement (Luxembourg) S.A. Luxembourg, Luxembourg UBS Fund Mangement (Switzerland) AG Basel, Switzerland UBS Hedge Fund Solutions LLC Wilmington, Delaware, USA UBS Italia SIM SpA UBS O’Connor LLC UBS Real Estate Securities Inc. UBS Realty Investors LLC UBS Securities (Thailand) Ltd UBS Securities Australia Ltd UBS Securities Canada Inc. Milan, Italy Dover, Delaware, USA Wilmington, Delaware, USA Boston, Massachusetts, USA Bangkok, Thailand Sydney, Australia Toronto, Canada UBS Securities España Sociedad de Valores SA Madrid, Spain UBS Securities India Private Limited UBS Securities Japan Co., Ltd. Mumbai, India Tokyo, Japan UBS Securities Pte. Ltd. UBS Services LLC UBS South Africa (Proprietary) Limited UBS Trust Company of Puerto Rico Singapore, Singapore Wilmington, Delaware, USA Sandton, South Africa Hato Rey, Puerto Rico Asset Management Asset Management Asset Management Investment Bank Asset Management Investment Bank Asset Management Investment Bank Investment Bank Investment Bank Investment Bank Investment Bank Investment Bank Investment Bank Corporate Center Investment Bank Wealth Management Americas UBS UK Properties Limited London, United Kingdom Corporate Center 1 Includes a nominal amount relating to redeemable preference shares. 708 CHF EUR CHF USD USD AUD EUR HKD JPY SGD GBP CHF AUD EUR EUR CHF USD EUR USD EUR CHF USD EUR USD USD USD THB AUD CAD EUR INR JPY SGD USD ZAR USD GBP 0.2 95.0 150.0 0.0 0.0 20.11 7.7 150.0 2,200.0 4.0 125.0 0.1 46.7 97.2 568.8 0.1 0.0 176.0 0.0 13.0 1.0 0.1 15.1 1.0 0.0 9.0 500.0 0.31 10.0 15.0 140.0 46,450.0 420.4 0.0 0.0 0.1 132.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note 30 Interests in subsidiaries and other entities (continued) Changes in consolidation scope During 2015, a number of subsidiaries were incorporated in order to improve the resolvability of UBS AG in response to too big to fail requirements, namely UBS Americas Holding LLC, UBS Swit- zerland AG and UBS Asset Management AG. UBS Fund Services (Cayman) Ltd and a few smaller subsidiaries of Asset Manage- ment were removed from the scope of consolidation as part of the sale of the Alternative Fund Services business. Non-controlling interests As of 31 December 2015 and 31 December 2014, non-controlling interests were not material to UBS AG. In addition, as of these dates there were no significant restrictions on UBS AG’s ability to access or use the assets and settle the liabilities of subsidiaries resulting from protective rights of non-controlling interests. ➔ Refer to the “Statement of changes in equity” for more information Consolidated structured entities UBS AG consolidates a structured entity (SE) if it has power over the relevant activities of the entity, exposure to variable returns and the ability to use its power to affect its returns. Consolidated SEs include certain investment funds, securitization vehicles and client investment vehicles. UBS AG has no individually significant subsidiaries that are SEs. Investment fund SEs are generally consolidated when UBS AG’s aggregate exposure combined with its decision making rights indicate the ability to use such power in a principal capacity. Typi- cally UBS AG will have decision making rights as fund manager, earning a management fee, and will provide seed capital at the inception of the fund or hold a significant percentage of the fund units. Where other investors do not have the substantive ability to remove UBS AG as decision maker, UBS AG is deemed to have control and therefore consolidates the fund. Securitization SEs are generally consolidated when UBS AG holds a significant percentage of the asset backed securities issued by the SE and has the power to remove without cause the servicer of the asset portfolio. Client investment SEs are generally consolidated when UBS AG has a substantive liquidation right over the SE or a decision right over the assets held by the SE and has exposure to variable returns through derivatives traded with the SE or holding notes issued by the SE. In 2015 and 2014, UBS AG has not entered into any contractual obligation that could require UBS AG to provide financial support to consolidated SEs. In addition, UBS AG did not provide support, financial or otherwise, to a consolidated SE when UBS AG was not contractually obligated to do so, nor has UBS AG an intention to do so in the future. Further, UBS AG did not provide support, financial or otherwise, to a previously unconsolidated SE that resulted in UBS AG controlling the SE during the reporting period. 709 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 30 Interests in subsidiaries and other entities (continued) b) Interests in associates and joint ventures As of 31 December 2015 and 2014, no associate or joint venture was individually material to UBS AG. In addition, there were no significant restrictions on the ability of associates or joint ven- tures to transfer funds to UBS AG or its subsidiaries in the form of cash dividends or to repay loans or advances made. There were no quoted market prices for any associates or joint ven- tures of UBS AG. Investments in associates and joint ventures CHF million Carrying amount at the beginning of the year Additions Disposals Share of comprehensive income of which: share of net profit1, 2 of which: share of other comprehensive income3 Dividends received Foreign currency translation Carrying amount at the end of the year of which: associates of which: UBS Securities Co. Limited, Beijing4 of which: SIX Group AG, Zurich5 of which: other associates of which: joint ventures 31.12.15 31.12.14 927 12 (2) 151 169 (18) (114) (20) 954 925 411 413 102 29 842 1 (2) 103 94 9 (54) 38 927 900 404 406 90 27 1 For 2015, consists of CHF 158 million from associates and CHF 11 million from joint ventures. For 2014, consists of CHF 83 million from associates and CHF 11 million from joint ventures. 2 In 2015, the SIX Group sold its stake in STOXX Ltd and Indexium Ltd. The UBS share of the resulting gain on sale was CHF 81 million. 3 For 2015, consists of CHF (18) million from associates and CHF 0 million from joint ventures. For 2014, consists of CHF 8 million from associates and CHF 0 million from joint ventures. 4 During 2015, UBS AG’s equity interest increased to 24.99% (20.0% as of 31 December 2014). 5 UBS AG’s equity interest amounts to 17.3%. UBS AG is represented on the Board of Directors. 710 Note 30 Interests in subsidiaries and other entities (continued) c) Interests in unconsolidated structured entities During 2015, UBS AG sponsored the creation of various SEs and interacted with a number of non-sponsored SEs, including securi- tization vehicles, client vehicles as well as certain investment funds, which UBS AG did not consolidate as of 31 December 2015 because it did not control these entities. ➔ Refer to Note 1a item 3 for more information on the nature, purpose, activities and financing structure of these entities The table below presents UBS AG’s interests in and maximum exposure to loss from unconsolidated SEs as of 31 December 2015. In addition, the total assets held by the SEs in which UBS AG had an interest as of 31 December 2015 are provided, except for investment funds sponsored by third parties, for which the carrying value of UBS AG’s interest as of 31 December 2015 has been disclosed. Interests in unconsolidated structured entities CHF million, except where indicated Trading portfolio assets Positive replacement values Financial assets designated at fair value Loans Financial investments available-for-sale Other assets Total assets Negative replacement values Total liabilities Securitization vehicles Client vehicles 31.12.15 Investment funds 1,060 41 0 0 1,1013 304 305 463 101 972 0 3,396 452 4,102 631 631 6,102 57 101 102 0 6,362 0 0 Assets held by the unconsolidated structured entities in which UBS AG had an interest (CHF billion) 1416 437 3208 CHF million, except where indicated Trading portfolio assets Positive replacement values Financial assets designated at fair value Loans Financial investments available-for-sale Other assets Total assets Negative replacement values Total liabilities Securitization vehicles Client vehicles 1,955 26 466 2,4473 2454 2455 676 83 1152 40 4,029 522 4,996 27 27 31.12.14 Investment funds 8,079 2 102 206 94 8,482 75 75 Maximum exposure to loss1 7,624 200 1,636 101 3,498 937 19 Maximum exposure to loss1 10,711 111 2,422 712 4,123 1,248 21 Total 7,624 200 97 101 3,498 45 11,565 661 661 Total 10,711 111 217 712 4,123 52 15,925 347 347 Assets held by the unconsolidated structured entities in which UBS AG had an interest (CHF billion) 3556 1137 3048 1 For purposes of this disclosure, maximum exposure to loss amounts do not consider the risk-reducing effects of collateral or other credit enhancements. 2 Represents the carrying value of loan commitments, both designated at fair value and held at amortized cost. The maximum exposure to loss for these instruments is equal to the notional amount. 3 As of 31 December 2015, CHF 0.9 billion of the CHF 1.1 billion was held in Corporate Center – Non-core and Legacy Portfolio. As of 31 December 2014, CHF 2.2 billion of the CHF 2.4 billion was held in Corporate Center – Non-core and Legacy Portfolio. 4 Comprised of credit default swap (CDS) liabilities and other swap liabilities. The maximum exposure to loss for CDS is equal to the sum of the negative carrying value and the notional amount. For other swap liabilities, no maximum exposure to loss is reported. 5 Entirely held in Corporate Center – Non-core and Legacy Portfolio. 6 Represents principal amount outstanding. 7 Represents the market value of total assets. 8 Represents the net asset value of the investment funds sponsored by UBS AG (31 December 2015: CHF 310 billion, 31 December 2014: CHF 296 billion) and the carrying value of UBS AG’s interests in the investment funds not sponsored by UBS (31 Decem- ber 2015: CHF 10 billion, 31 December 2014: CHF 8 billion). 711 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 30 Interests in subsidiaries and other entities (continued) UBS AG retains or purchases interests in unconsolidated SEs in the form of direct investments, financing, guarantees, letters of credit, derivatives and through management contracts. For retained interests, UBS AG’s maximum exposure to loss is generally equal to the carrying value of UBS AG’s interest in the SE, with the exception of guarantees, letters of credit and credit derivatives for which the contract’s notional amount, adjusted for losses already incurred, represents the maximum loss that UBS AG is exposed to. In addition, the current fair value of derivative swap instruments with a positive replacement value only, such as total return swaps, is presented as UBS AG’s maximum exposure to loss. Risk exposure for these swap instruments could change over time with market movements. The maximum exposure to loss disclosed in the table on the previous page does not reflect UBS AG’s risk management activi- ties, including effects from financial instruments that UBS AG may utilize to economically hedge the risks inherent in the unconsoli- dated SE or the risk-reducing effects of collateral or other credit enhancements. In 2015 and 2014, UBS AG did not provide support, financial or otherwise, to an unconsolidated SE when UBS AG was not contractually obligated to do so, nor has UBS AG an intention to do so in the future. In 2015 and 2014, income and expenses from interests in unconsolidated SEs primarily resulted from mark-to-market move- ments recognized in net trading income, which have generally been hedged with other financial instruments, as well as fee and commission income received from UBS sponsored funds. Interests in securitization vehicles As of 31 December 2015 and 31 December 2014, UBS AG retained interests in various securitization vehicles. As of 31 December 2015, a majority of our interests in securitization vehicles related to a portfolio of credit default swap (CDS) posi- tions referencing asset-backed securities (ABS), which are held within Corporate Center – Non-core and Legacy Portfolio. The Investment Bank also retained interests in securitization vehicles related to financing, underwriting, secondary market and deriva- tive trading activities. In some cases UBS AG may be required to absorb losses from an unconsolidated SE before other parties because UBS AG’s interest is subordinated to others in the ownership structure. An overview of UBS AG’s interests in unconsolidated securitization vehicles and the relative ranking and external credit rating of those interests as of 31 December 2015 and 31 December 2014 is presented in the table on the following page. ➔ Refer to Note 1a items 3 and 12 for more information on when UBS AG is viewed as the sponsor of an SE and for UBS AG’s accounting policies regarding securitization vehicles established by UBS AG Interests in client vehicles As of 31 December 2015 and 31 December 2014, UBS AG retained interests in client vehicles sponsored by UBS AG and third parties that relate to financing and derivative activities and to hedge structured product offerings. Included within these invest- ments are securities guaranteed by US government agencies. Interests in investment funds UBS AG holds interests in a number of investment funds, primarily resulting from seed investments or to hedge structured product offerings. In addition to the interests disclosed in the table on the previous page, UBS AG manages the assets of various pooled investment funds and receives fees that are based, in whole or part, on the net asset value of the fund and / or the performance of the fund. The specific fee structure is determined based on various market factors and considers the nature of the fund, the jurisdiction of incorporation as well as fee schedules negotiated with clients. These fee contracts represent an interest in the fund as they align UBS AG’s exposure to investors, providing a variable return that is based on the performance of the entity. Depending on the structure of the fund, these fees may be collected directly from the fund assets and / or from the investors. Any amounts due are collected on a regular basis and are generally backed by the assets of the fund. UBS AG did not have any material exposure to loss from these interests as of 31 December 2015 or as of 31 December 2014. 712 Note 30 Interests in subsidiaries and other entities (continued) Interests in unconsolidated securitization vehicles1 Residential mortgage- backed securities Commercial mortgage- backed securities 31.12.15 Other asset-backed securities2 Re-securiti- zation3 Total CHF million, except where indicated Sponsored by UBS AG Interests in senior tranches of which: rated investment grade of which: defaulted Interests in mezzanine tranches of which: rated investment grade of which: rated sub-investment grade of which: defaulted Total of which: Trading portfolio assets Total assets held by the vehicles in which UBS AG had an interest (CHF billion) Not sponsored by UBS AG Interests in senior tranches of which: rated investment grade Interests in mezzanine tranches of which: rated investment grade of which: defaulted Interests in junior tranches of which: rated investment grade of which: not rated Total of which: Trading portfolio assets Total assets held by the vehicles in which UBS AG had an interest (CHF billion) 0 3 2 1 3 3 0 284 284 61 58 3 11 11 0 356 356 64 54 54 7 7 61 61 28 66 65 17 17 3 0 3 86 86 37 0 0 0 0 0 0 383 383 17 17 0 400 400 6 13 13 0 13 13 1 140 140 0 0 0 140 140 2 1 This table excludes derivative transactions with securitization vehicles. 2 Includes credit card, car and student loan structures. 3 Includes collateralized debt obligations. 66 54 13 10 7 2 1 77 77 29 873 872 95 92 3 14 11 3 983 983 109 713 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 30 Interests in subsidiaries and other entities (continued) Interests in unconsolidated securitization vehicles1 (continued) CHF million, except where indicated Sponsored by UBS AG Interests in senior tranches of which: rated investment grade of which: defaulted Interests in mezzanine tranches of which: rated investment grade of which: defaulted of which: not rated Total of which: Trading portfolio assets of which: Loans Total assets held by the vehicles in which UBS AG had an interest (CHF billion) Not sponsored by UBS AG Interests in senior tranches of which: rated investment grade of which: rated sub-investment grade Interests in mezzanine tranches of which: rated investment grade of which: rated sub-investment grade of which: defaulted Interests in junior tranches of which: rated investment grade of which: rated sub-investment grade of which: defaulted of which: not rated Total of which: Trading portfolio assets of which: Loans Total assets held by the vehicles in which UBS AG had an interest (CHF billion) Residential mortgage- backed securities Commercial mortgage- backed securities 31.12.14 Other asset-backed securities2 Re-securiti- zation3 0 0 1 1 1 1 1 376 369 6 154 134 15 5 68 56 4 0 8 598 598 115 59 59 16 7 1 8 75 75 14 293 286 6 143 105 37 1 18 11 6 0 1 453 453 0 115 1 1 0 1 1 3 454 452 2 172 164 8 1 1 627 588 39 88 389 381 8 6 6 395 14 381 2 207 205 1 62 54 8 0 2 2 271 225 46 12 Total 450 442 8 22 13 2 8 472 91 381 20 1,329 1,313 15 531 457 69 5 89 67 10 1 11 1,949 1,865 85 331 1 This table excludes derivative transactions with securitization vehicles. 2 Includes credit card, car and student loan structures. 3 Includes collateralized debt obligations. 714 Note 30 Interests in subsidiaries and other entities (continued) Sponsored unconsolidated structured entities in which UBS AG did not have an interest For several sponsored SEs, no interest was held by UBS AG as of 31 December 2015 or as of 31 December 2014. However, during the respective reporting period UBS AG transferred assets, pro- vided services and held instruments that did not qualify as an interest in these sponsored SEs, and accordingly earned income or incurred expenses from these entities. The table below presents the income earned and expenses incurred directly from these enti- ties during 2015 and 2014 as well as corresponding asset infor- mation. The table does not include income earned and expenses incurred from risk management activities, including income and expenses from financial instruments that UBS AG may utilize to economically hedge instruments transacted with the unconsoli- dated SEs. Sponsored unconsolidated structured entities in which UBS AG did not have an interest at year end1 CHF million, except where indicated Net interest income Net fee and commission income Net trading income Total income Asset information (CHF billion) CHF million, except where indicated Net interest income Net fee and commission income Net trading income Total income Asset information (CHF billion) As of or for the year ended 31.12.15 Securitization vehicles Client vehicles Investment funds 2 0 18 20 82 (11) 0 208 197 13 0 57 48 104 124 As of or for the year ended 31.12.14 Securitization vehicles Client vehicles Investment funds 6 63 69 42 (51) (158) (208) 13 54 10 64 144 Total (10) 57 274 321 Total (44) 54 (85) (75) 1 These tables exclude profit attributable to preferred noteholders of CHF 77 million for the year ended 31 December 2015 and CHF 142 million for the year ended 31 December 2014. 2 Represents the amount of assets transferred to the respective securitization vehicles. Of the total amount transferred, CHF 3 billion was transferred by UBS AG (31 December 2014: CHF 1 billion) and CHF 5 billion was transferred by third parties (31 December 2014: CHF 3 billion). 3 Represents total assets transferred to the respective client vehicles. Of the total amount transferred, CHF 1 billion was transferred by UBS AG (31 December 2014: CHF 1 billion) and CHF 1 billion was transferred by third parties (31 December 2014: CHF 1 billion). 4 Represents the total net asset value of the respective investment funds. 715 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 30 Interests in subsidiaries and other entities (continued) During 2015 and 2014, UBS AG primarily earned fees and rec- ognized net trading income from sponsored SEs in which UBS AG did not hold an interest. The majority of the fee income arose from investment funds that are sponsored and administrated by UBS AG, but managed by third parties. As UBS AG does not pro- vide any active management services, UBS AG was not exposed to risk from the performance of these entities and was therefore deemed not to have an interest in them. In certain structures, the fees receivable for administrative pur- poses may be collected directly from the investors and have there- fore not been included in the table above. In addition, UBS AG incurred net trading income from mark- to-market movements arising primarily from derivatives, such as interest rate swaps and credit derivatives, in which UBS AG pur- chases protection, and financial liabilities designated at fair value, which do not qualify as interests because UBS AG does not absorb variability from the performance of the entity. The net income reported does not reflect economic hedges or other mitigating effects from UBS AG’s risk management activities. During 2015, UBS AG and third parties transferred assets total- ing CHF 9 billion (2014: CHF 6 billion) into sponsored securitiza- tion and client vehicles created in 2015. For sponsored investment funds, transfers arose during the period as investors invested and redeemed positions, thereby changing the overall size of the funds, which, when combined with market movements, resulted in a total closing net asset value of CHF 12 billion (31 December 2014: CHF 14 billion). Note 31 Business combinations In 2015 and 2014, UBS AG did not complete any significant business combinations. 716 Note 32 Changes in organization and disposals Measures to improve the resolvability of the Group in response to too big to fail requirements in Switzerland and other countries in which the Group operates In December 2014, UBS Group AG completed an exchange offer for the shares of UBS AG and established UBS Group AG as the holding company for UBS Group. During 2015, UBS Group AG filed and completed a court procedure under article 33 of the Swiss Stock Exchange Act (SESTA procedure) resulting in the can- cellation of the shares of the remaining minority shareholders of UBS AG. As a result, UBS Group AG now owns 100% of the outstanding shares of UBS AG. In June 2015, UBS AG transferred its Personal & Corporate Banking and Wealth Management business booked in Switzer- land to UBS Switzerland AG. In the second quarter of 2015, UBS AG also completed the implementation of a more self-sufficient business and operating model for UBS Limited, its investment banking subsidiary in the UK, under which UBS Limited bears and retains a larger propor- tion of the risk and reward in its business activities. Also during 2015, UBS AG established a new subsidiary, UBS Americas Holding LLC, which UBS AG intends to designate as its intermediate holding company for its US subsidiaries prior to the 1 July 2016 deadline under new rules for foreign banks in the US pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). During the third quarter of 2015, UBS AG contributed its equity participation in the principal US operating subsidiaries to UBS Americas Holding LLC to meet the requirement under Dodd-Frank that the intermediate holding company own all of our US operations, except branches of UBS AG. Lastly, UBS AG also established UBS Asset Management AG, a new subsidiary, in 2015. Sale of subsidiaries and businesses In 2015, UBS AG sold its Alternative Fund Services (AFS) business to Mitsubishi UFJ Financial Group Investor Services. The Asset Management Investment Fund Services business, which provides fund administration for traditional mutual funds, was not included in the sale. Upon completion of the sale, UBS AG recognized a gain on sale of CHF 56 million and reclassified an associated net foreign currency translation gain of CHF 119 million from Other comprehensive income to the Income statement. Also during 2015, UBS AG completed the sale of certain sub- sidiaries and businesses within Wealth Management, which resulted in the recognition of a combined gain of CHF 197 million. Finally, in 2015, UBS AG agreed to sell certain businesses within Wealth Management and these sales are expected to close in 2016 subject to customary closing conditions. As of 31 Decem- ber 2015, the assets and liabilities of these subsidiaries and busi- nesses were presented as a disposal group held-for-sale within Other assets and Other liabilities and amounted to CHF 279 mil- lion and CHF 235 million, respectively. UBS recognized a loss of CHF 28 million in 2015 related to these sales. Restructuring expenses Restructuring expenses arise from programs that materially change either the scope of business undertaken by UBS AG or the manner in which such business is conducted. Restructuring expenses are temporary costs that are necessary to effect such programs and include items such as severance and other person- nel-related expenses, duplicate headcount costs, impairment and accelerated depreciation of assets, contract termination costs, consulting fees, and related infrastructure and system costs. These costs are presented in the income statement according to the underlying nature of the expense. As the costs associated with restructuring programs are temporary in nature, and in order to provide a more thorough understanding of business performance, such costs are separately presented in this Note. 717 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 32 Changes in organization and disposals Net restructuring expenses by business division and Corporate Center unit CHF million Wealth Management Wealth Management Americas Personal & Corporate Banking Asset Management Investment Bank Corporate Center of which: Services of which: Non-core and Legacy Portfolio Total net restructuring expenses of which: personnel expenses of which: general and administrative expenses of which: depreciation and impairment of property, equipment and software of which: amortization and impairment of intangible assets Net restructuring expenses by personnel expense category CHF million Salaries Variable compensation – performance awards Variable compensation – other Contractors Social security Pension and other post-employment benefit plans Other personnel expenses Total net restructuring expenses: personnel expenses Net restructuring expenses by general and administrative expense category CHF million Occupancy Rent and maintenance of IT and other equipment Administration Travel and entertainment Professional fees Outsourcing of IT and other services Other1 Total net restructuring expenses: general and administrative expenses 1 Mainly comprised of onerous real estate lease contracts. 718 For the year ended 31.12.15 31.12.14 31.12.13 323 137 101 82 396 194 138 56 1,233 458 760 12 2 185 55 64 50 261 61 30 31 677 327 319 29 2 178 59 54 43 210 229 (6) 235 772 156 548 68 0 For the year ended 31.12.15 31.12.14 31.12.13 311 38 108 46 5 (65) 15 458 145 35 138 28 4 (29) 6 327 65 (15) 88 3 5 8 3 156 For the year ended 31.12.15 31.12.14 31.12.13 109 31 7 16 187 316 95 760 49 23 3 11 148 82 2 319 35 8 2 4 76 59 364 548 Note 33 Operating leases and finance leases Information on lease contracts classified as operating leases where UBS AG is the lessee is provided in Note 33a and information on finance leases where UBS AG acts as a lessor is provided in Note 33b. a) Operating lease commitments As of 31 December 2015, UBS AG was obligated under a number of non-cancellable operating leases for premises and equipment used primarily for banking purposes. The significant premises leases usually include renewal options and escalation clauses in line with general office rental market conditions, as well as rent adjustments based on price indices. However, the lease agree- ments do not contain contingent rent payment clauses and pur- chase options, nor do they impose any restrictions on UBS AG’s ability to pay dividends, engage in debt financing transactions or enter into further lease agreements. CHF million Expenses for operating leases to be recognized in: 2016 2017 2018 2019 2020 2021 and thereafter Subtotal commitments for minimum payments under operating leases Less: Sublease rental income commitments Net commitments for minimum payments under operating leases CHF million Gross operating lease expense recognized in the income statement Sublease rental income Net operating lease expense recognized in the income statement 31.12.15 743 683 558 475 413 1,858 4,730 348 4,382 31.12.15 31.12.14 31.12.13 741 70 671 759 73 686 792 74 718 b) Finance lease receivables UBS AG leases a variety of assets to third parties under finance leases, such as commercial vehicles, production lines, medical equipment, construction equipment and aircrafts. At the end of the respective leases, assets may be sold to third parties or be leased further. Lessees may participate in any sales proceeds achieved. Leasing charges cover the cost of the assets less their residual value as well as financing costs. As of 31 December 2015, unguaranteed residual values of CHF 167 million had been accrued, and the accumulated allowance for uncollectible minimum lease payments receivable amounted to CHF 10 million. No contingent rents were received in 2015. Lease receivables CHF million 2016 2017–2020 thereafter Total 31.12.15 Total minimum lease payments Unearned finance income Present value 341 651 158 1,150 23 38 6 67 318 613 152 1,083 719 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 34 Related parties UBS AG defines related parties as associates (entities which are significantly influenced by UBS AG), post-employment benefit plans for the benefit of UBS AG 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 defined as members of the Board of Directors (BoD) and Group Executive Board (GEB). a) Remuneration of key management personnel The non-independent members of the BoD have top management employment contracts and receive pension benefits upon retire- ment. Total remuneration of the non-independent members of the BoD and GEB members, including those who stepped down during 2015, is provided in the table below. Remuneration of key management personnel CHF million Base salaries and other cash payments Incentive awards – cash2 Annual incentive award under DCCP Employer’s contributions to retirement benefit plans Benefits in kind, fringe benefits (at market value) Equity-based compensation3 Total 31.12.15 211 9 31.12.14 221 8 20 1 2 39 92 18 2 1 35 86 31.12.13 19 10 19 2 2 38 89 1 Includes role-based allowances that have been made in line with with market practice in response to the EU Capital Requirements Directive of 2013 (CRD IV). 2 Includes immediate and deferred cash. 3 Expenses for shares granted is measured at grant date and allocated over the vesting period, generally for 5 years. In 2015, 2014 and 2013, equity-based compensation was entirely comprised of EOP awards. The independent members of the BoD do not have employment or service contracts with UBS AG, and thus are not entitled to benefits upon termination of their service on the BoD. Payments to these individuals for their services as external board members amounted to CHF 6.7 million in 2015, CHF 7.1 million in 2014 and CHF 7.6 million in 2013. b) Equity holdings of key management personnel Number of stock options from equity participation plans held by non-independent members of the BoD and the GEB members1 Number of shares held by members of the BoD, GEB and parties closely linked to them2 1 Refer to Note 29 for more information. 2 Excludes shares granted under variable compensation plans with forfeiture provisions. 31.12.15 1,401,686 3,324,650 31.12.14 1,738,598 3,716,957 Of the share totals above, 95,597 shares were held by close family members of key management personnel on 31 December 2015 and 31 December 2014. No shares were held by entities that are directly or indirectly controlled or jointly controlled by key management personnel or their close family members on 31 December 2015 and 31 December 2014. Refer to Note 29 for more information. As of 31 December 2015, no member of the BoD or GEB was the beneficial owner of more than 1% of UBS Group AG’s shares. 720 Note 34 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, fixed advances and mortgages on the same terms and conditions that are available to other employees, which are based on terms and conditions granted to third parties but are adjusted for differing credit risk. Independent BoD members are granted loans and mortgages under 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 1 Loans are granted by UBS AG. All loans are secured loans. 2015 2014 27 6 (1) 33 20 10 (3) 27 d) Other related party transactions with entities controlled by key management personnel In 2015, UBS AG did not enter into transactions with entities which are directly or indirectly controlled or jointly controlled by UBS AG’s key management personnel or their close family members. In 2014, UBS AG entered into transactions with Immo Heudorf AG (Swit- zerland). Other related party transactions CHF million Balance at the beginning of the year Additions Reductions Balance at the end of the year1 1 Comprised of loans. 2015 2014 0 0 0 0 10 0 10 0 In 2014 and 2015, entities controlled by key management personnel did not sell goods or provide services to UBS AG, and therefore did not receive any fees from UBS AG. Furthermore, UBS AG did not provide services to such entities in both 2014 and 2015, and therefore also did not receive any fees. 721 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 34 Related parties (continued) e) Transactions with associates and joint ventures Loans and outstanding receivables to associates and joint ventures CHF million Carrying value at the beginning of the year Additions Reductions Impairment Foreign currency translation Carrying value at the end of the year of which: unsecured loans includes allowances for credit losses Other transactions with associates and joint ventures CHF million Payments to associates and joint ventures for goods and services received Fees received for services provided to associates and joint ventures Commitments and contingent liabilities to associates and joint ventures ➔ Refer to Note 30 for an overview of investments in associates and joint ventures f) Receivables and payables from / to UBS Group AG and other subsidiaries of UBS Group AG CHF million Receivables Loans Trading portfolio assets Other assets Payables Due to customers Other liabilities 722 2015 552 9 (85) 0 0 476 464 1 2014 288 313 (1) (51) 3 552 539 1 As of or for the year ended 31.12.15 31.12.14 149 7 4 169 1 2 2015 2014 774 12 93 12,323 943 227 0 80 772 511 Note 35 Invested assets and net new money Invested assets Net new money Invested assets include all client assets managed by or deposited with UBS AG for investment purposes. Invested assets include managed fund assets, managed institutional assets, discretionary and advisory wealth management portfolios, fiduciary deposits, time deposits, savings accounts and wealth management securi- ties or brokerage accounts. All assets held for purely transactional purposes and custody-only assets, including corporate client assets held for cash management and transactional purposes, are excluded from invested assets as UBS AG 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 collec- tions) and deposits from third-party banks for funding or trading purposes. Discretionary assets are defined as client assets that UBS AG decides how to invest. Other invested assets are those where the client ultimately decides how the assets are invested. When a single product is created in one business division and sold in another, it is counted in both the business division that manages the investment and the one that distributes it. This results in dou- ble counting within UBS AG total invested assets, as both busi- ness divisions are independently providing a service to their respective clients, 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 AG by new and existing clients, less those withdrawn by existing clients and clients who termi- nated their relationship with UBS AG. Net new money is calculated using the direct method, under which inflows and outflows to / from invested assets are deter- mined at the client level based on transactions. Interest and divi- dend income from invested assets are not counted as net new money inflows. Market and currency movements as well as fees, commissions and interest on loans charged are excluded from net new money, as are the effects resulting from any acquisition or divestment of a UBS AG subsidiary or business. Reclassifications between invested assets and custody-only assets as a result of a change in the service level delivered are generally treated as net new money flows; however, where such change in service level directly results from a new externally-imposed regulation, the one-time net effect of the implementation is reported as an asset reclassification without net new money impact. The Investment Bank does not track invested assets and net new money. However, when a client is transferred from the Invest- ment Bank to another business division, this produces net new money even though client assets were already with UBS AG. There were no such transfers between the Investment Bank and other business divisions in 2015 and 2014. Invested assets and net new money CHF billion Fund assets managed by UBS Discretionary assets Other invested assets Total invested assets1 of which: double count Net new money1 1 Includes double counts. Development of invested assets CHF billion Total invested assets at the beginning of the year1 Net new money Market movements2 Foreign currency translation Other effects of which: acquisitions / (divestments) Total invested assets at the end of the year1 1 Includes double counts. 2 Includes interest and dividend income. For the year ended 31.12.15 31.12.14 282 830 1,577 2,689 185 27.7 270 854 1,610 2,734 173 58.9 For the year ended 31.12.15 2,734 31.12.14 2,390 28 (24) (31) (16) (16) 59 115 173 (3) 0 2,689 2,734 723 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 36 Currency translation rates The following table shows the rates of the main currencies used to translate the financial information of foreign operations into Swiss francs. 1 USD 1 EUR 1 GBP 100 JPY Spot rate As of Average rate1 For the year ended 31.12.15 31.12.14 31.12.15 31.12.14 31.12.13 1.00 1.09 1.48 0.83 0.99 1.20 1.55 0.83 0.97 1.06 1.47 0.80 0.92 1.21 1.51 0.86 0.92 1.23 1.45 0.95 1 Monthly income statement items of foreign operations with a functional currency other than the Swiss franc are translated with month-end rates into Swiss francs. Disclosed average rates for a year represent an aver- age of 12 month-end rates, weighted according to the income and expense volumes of all foreign operations with the same functional currency for each month. Weighted average rates for individual business divisions may deviate from the weighted average rates for UBS AG. Note 37 Events after the reporting period There have been no material events after the reporting period which would require disclosure in or adjustment to the 31 December 2015 Financial Statements. 724 Note 38 Swiss GAAP requirements The consolidated financial statements of UBS AG are prepared in accordance with International Financial Reporting Standards (IFRS). The Swiss Financial Market Supervisory Authority (FINMA) requires financial groups that present their financial statements under IFRS to provide a narrative explanation of the main differ- ences between IFRS and Swiss GAAP (FINMA Circular 2015 / 1 and the Banking Ordinance). Included in this Note are the significant differences in the recognition and measurement between IFRS and the provisions of the Banking Ordinance and the guidelines of FINMA governing true and fair view financial statement reporting pursuant to Article 25 through Article 42 of the Banking Ordinance. 1. Consolidation Under IFRS, all entities that are controlled by the holding entity are consolidated. Under Swiss GAAP, controlled entities that are deemed imma- terial to the group or that are held temporarily only are exempt from consolidation, but instead are recorded as participations or financial investments. 2. Financial investments classified as available-for-sale Under IFRS, financial investments classified as 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 dis- posed of, or until an investment is determined to be impaired. At the time an available-for-sale investment is determined to be impaired, the cumulative unrealized loss previously recognized in equity is included in net profit or loss for the period. On disposal of a financial investment classified as available-for-sale, the cumu- lative unrealized gain or loss previously recognized in equity is reclassified to the income statement. Under Swiss GAAP, classification and measurement of financial investments designated as available-for-sale depends on the nature of the investment. Equity instruments with no permanent holding intent, as well as debt instruments, are classified as Finan- cial investments and measured at the lower of (amortized) cost or market value. Market value adjustments up to the original cost amount and realized gains or losses upon disposal of the invest- ment are recorded in the income statement as Other income from ordinary activities. Equity instruments with a permanent holding intent are classified as participations in Investments in subsidiaries and other participations and measured at cost less impairment. Impairment losses are recorded in the income statement as Impair- ment of investments in subsidiaries and other participations. Reversal of impairments up to the original cost amount as well as realized gains or losses upon disposal of the investment are recorded as Extraordinary income / Extraordinary expenses in the income statement. 3. Cash flow hedges Under IFRS, when hedge accounting is applied, the fair value gain or loss on the effective portion of the derivative designated as a cash flow hedge is recognized in equity. When the hedged cash flows materialize, the accumulated unrealized gain or loss is reclassified to the income statement. Under Swiss GAAP, the effective portion of the fair value change of the derivative instrument used to hedge cash flow exposures is deferred on the balance sheet as Other assets or Other liabilities. The deferred amounts are released to the income statement when the hedged cash flows materialize. 4. Fair value option Under IFRS, UBS AG applies the fair value option to certain finan- cial assets and financial liabilities not held for trading. Instruments for which the fair value option is applied are accounted for at fair value with changes in fair value reflected in Net trading income. The fair value option is applied primarily to structured debt instru- ments, certain non-structured debt instruments, structured reverse repurchase and repurchase agreements and securities bor- rowing agreements, certain structured and non-structured loans as well as loan commitments. Under Swiss GAAP, the fair value option can only be applied to structured debt instruments that consist of a debt host contract and one or more embedded derivatives that do not relate to own equity. Furthermore, changes in fair value attributable to changes in unrealized own credit are not recognized in the income state- ment and the balance sheet. 725 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 38 Swiss GAAP requirements (continued) 5. Goodwill and intangible assets Under IFRS, goodwill acquired in a business combination is not amortized but tested annually for impairment. Intangible assets with an indefinite useful life are also not amortized but tested annually for impairment. Under Swiss GAAP, goodwill and intangible assets with indefi- nite useful lives are amortized over a period not exceeding five years, unless a longer useful life, which may not exceed 10 years, can be justified. 6. Pension and other post-employment benefit plans Swiss GAAP permits the use of IFRS or Swiss accounting standards for pension and other post-employment benefit plans, with the election made on a plan-by-plan basis. UBS AG has elected to apply IFRS (IAS 19) for the non-Swiss defined benefit plans and Swiss GAAP (FER 16) for the Swiss pen- sion plan in its standalone financial statements. The requirements of Swiss GAAP are better aligned with the specific nature of Swiss pension plans, which are hybrid in that they combine elements of defined contribution and defined benefit plans, but are treated as defined benefit plans under IFRS. Key differences between Swiss GAAP and IFRS include the treatment of dynamic elements, such as future salary increases and future interest credits on retirement savings, which are not considered under the static method used in accordance with Swiss GAAP. Also, the discount rate used to determine the defined benefit obligation in accordance with IFRS is based on the yield of high-quality corporate bonds of the mar- ket in the respective pension plan country. The discount rate used in accordance with Swiss GAAP, i.e., the technical interest rate, is determined by the Pension Foundation Board based on the expected returns of the Board’s investment strategy. For defined benefit plans, IFRS requires the full defined benefit obligation net of the plan assets to be recorded on the balance sheet, with changes resulting from remeasurements recognized directly in equity. However, for plans for which IFRS is elected, Swiss GAAP requires that changes due to remeasurements are recognized in the income statement. Swiss GAAP requires that employer contributions to the pen- sion fund are recognized as personnel expenses in the income statement. Further, Swiss GAAP requires an assessment as to whether, based on the financial statements of the pension fund prepared in accordance with Swiss accounting standards (FER 26), an economic benefit to, or obligation of, the employer arises from the pension fund and is recognized in the balance sheet when conditions are met. Conditions for recording a pension asset or liability would be met if, for example, an employer contribution reserve is available or the employer is required to contribute to the reduction of a pension deficit (on a FER 26 basis). 7. Netting of replacement values Under IFRS, replacement values and related cash collateral are reported on a gross basis unless the restrictive IFRS netting require- ments are met: i) existence of master netting agreements and related collateral arrangements that are unconditional and legally enforceable, both in the normal course of business and in the event of default, bankruptcy or insolvency of UBS AG and its counterparties, and ii) UBS AG’s intention to either settle on a net basis or to realize the asset and settle the liability simultaneously. Under Swiss GAAP, replacement values and related cash col- lateral are generally reported on a net basis, provided the master netting and the related collateral agreements are legally enforce- able in the event of default, bankruptcy or insolvency of UBS AG’s counterparties. 8. Negative interest Under IFRS, negative interest income arising on a financial asset does not meet the definition of interest income and, therefore, negative interest on financial assets and negative interest on financial liabilities is presented within interest expense and inter- est income, respectively. Under Swiss GAAP, negative interest on financial assets is pre- sented within interest income and negative interest on financial liabilities is presented within interest expense. 9. Extraordinary income and expense Certain non-recurring and non-operating income and expense items, such as realized gains or losses from the disposal of partici- pations, fixed and intangible assets, as well as reversals of impair- ments of participations and fixed assets, are classified as extraor- dinary items under Swiss GAAP. This distinction is not available under IFRS. 10. Other presentational differences Under IFRS, financial statements are comprised of an Income statement, Statement of comprehensive income, Balance sheet, Statement of changes in equity, Statement of cash flows and Notes to the financial statements. Under Swiss GAAP, the concept of other comprehensive income does not exist and consequently no Statement of comprehensive income is required. In addition, various other presentational differences exist. 726 Note 39 Supplemental guarantor information required under SEC regulations Guarantee of PaineWebber securities Prior to its acquisition by UBS in 2000, Paine Webber Group Inc. (PaineWebber) was an SEC registrant. Upon acquisition, PaineWebber was merged into UBS Americas Inc., a wholly owned subsidiary of UBS AG. Following the acquisition, UBS AG entered into a full and unconditional guarantee of the senior notes (Debt Securities) issued by PaineWebber. Under the guaran- tee, 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 first proceeding against UBS Americas Inc. As of 31 December 2015, the amount of outstanding senior notes of UBS Americas Inc. was approximately CHF 150 million. These senior notes mature between 2017 and 2018. Guarantee of other securities Certain US-domiciled entities that are 100% legally owned by UBS AG have outstanding trust preferred securities, which are registered under the US Securities Act. These entities, UBS Pre- ferred Funding Trust IV and UBS Preferred Funding Trust V, are not consolidated by UBS AG as UBS AG does not absorb any variability from the performance of these entities. However, UBS AG has fully and unconditionally guaranteed these securities. The non-consolidated issuing US domiciled entities are pre- sented in a separate column in the supplemental guarantor information provided in the following tables. Amounts pre- sented in this column are eliminated in the Elimination entries column, as these entities are not consolidated. UBS AG’s obliga- tions under the guarantee are subordinated to the prior pay- ment in full of the deposit liabilities of UBS AG and all other liabilities of UBS AG. As of 31 December 2015, the outstanding amount of the pre- ferred securities was USD 1.3 billion and the amount of senior liabilities of UBS AG to which the holders of these securities would be subordinated was approximately CHF 872 billion. Joint liability of UBS Switzerland AG In June 2015, the Retail & Corporate and Wealth Management businesses booked in Switzerland were transferred from UBS AG to UBS Switzerland AG through an asset transfer in accordance with the Swiss Merger Act. Under the terms of the asset transfer agreement, UBS Switzerland AG assumed joint liability for con- tractual obligations of UBS AG existing on the asset transfer date, including the existing guarantee of abovementioned PaineWeb- ber and other securities. To reflect this joint liability, UBS Switzer- land AG is, on a prospective basis, presented in a separate column as a subsidiary co-guarantor. 727 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated income statement CHF million For the year ended 31 December 2015 UBS AG (standalone)1 UBS Switzerland AG (standalone)1 UBS Americas Inc.2 UBS Preferred Funding Trust IV & V Other subsidiaries2 Elimination entries UBS AG (consolidated) 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 Other income Total operating income Operating expenses Personnel expenses General and administrative expenses Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) attributable to preferred noteholders Net profit / (loss) attributable to non-controlling interests Net profit / (loss) attributable to UBS AG shareholders 8,911 (5,882) 3,029 (109) 2,921 2,852 5,252 10,335 21,359 6,800 549 672 22 8,044 13,315 1,136 12,180 77 3,040 (544) 2,496 (12) 2,484 2,539 709 564 6,296 1,607 2,579 11 4,197 2,099 489 1,610 1,662 (590) 1,072 0 1,072 7,751 274 496 9,592 6,281 3,442 159 73 9,955 (362) (1,200) 837 12,103 1,610 837 63 63 63 63 63 63 31 32 1,515 (1,321) 194 4 198 4,115 224 (917) 3,620 1,265 1,647 76 12 3,001 619 (1,317) 1,936 3 (2,013) 1,888 (125) 0 (126) (72) (763) (9,366) (10,326) 0 2 0 0 2 (10,327) (16) (10,313) (31) 0 13,178 (6,449) 6,729 (117) 6,612 17,184 5,696 1,112 30,605 15,954 8,219 918 107 25,198 5,407 (908) 6,314 77 3 1,933 (10,281) 6,235 1 Amounts presented for UBS AG (standalone) and UBS Switzerland AG (standalone) represent IFRS-standalone information. Refer to the UBS AG standalone and UBS Switzerland AG standalone financial statements for information prepared in accordance with Swiss GAAP. 2 Amounts presented in these columns serve as a basis for preparing UBS AG consolidated financial statements in accordance with IFRS. 728 Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated statement of comprehensive income CHF million For the year ended 31 December 2015 UBS AG (standalone)1 UBS Switzerland AG (standalone)1 UBS Americas Inc.2 UBS Preferred Funding Trust IV & V Other subsidiaries2 Elimination entries UBS AG (consolidated) Comprehensive income attributable to UBS AG shareholders Net profit / (loss) 12,103 1,610 837 32 1,933 (10,281) 6,235 Other comprehensive income Other comprehensive income that may be reclassified to the income statement Foreign currency translation, net of tax Financial investments available-for-sale, net of tax Cash flow hedges, net of tax Total other comprehensive income that may be reclassified to the income statement, net of tax Other comprehensive income that will not be reclassified to the income statement Defined benefit plans, net of tax Total other comprehensive income that will not be reclassified to the income statement, net of tax Total other comprehensive income (11) (51) (503) (564) 701 701 136 0 43 (72) (29) (337) (337) (366) Total comprehensive income attributable to shareholders 12,239 1,244 Total comprehensive income attributable to preferred noteholders Total comprehensive income attributable to non- controlling interests Total comprehensive income attributable to UBS Preferred Funding Trust IV & V 18 0 0 0 0 0 121 (21) 0 100 (71) (71) 29 866 0 0 0 Total comprehensive income 12,257 1,244 866 (843) (16) 0 467 (19) 57 (266) (64) (518) (859) 504 (848) 27 27 (832) (15) (15) 489 304 304 (545) 1,101 (9,792) 5,690 0 1 0 1,102 0 0 (40) (9,832) 18 1 0 5,709 0 0 0 32 0 0 40 72 1 Amounts presented for UBS AG (standalone) and UBS Switzerland AG (standalone) represent IFRS-standalone information. Refer to the UBS AG standalone and UBS Switzerland AG standalone financial statements for information prepared in accordance with Swiss GAAP. 2 Amounts presented in these columns serve as a basis for preparing UBS AG (consolidated) financial statements in accordance with IFRS. 729 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated balance sheet CHF million As of 31 December 2015 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 which may be sold or repledged by counterparties Positive replacement values Cash collateral receivables on derivative instruments Financial assets designated at fair value Loans Financial investments available-for-sale Investments in subsidiaries and associates Property, equipment and software 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 Debt issued Provisions Other liabilities Total liabilities Equity attributable to UBS AG shareholders Equity attributable to preferred noteholders Equity attributable to non-controlling interests Total equity Total liabilities and equity UBS AG (standalone)1 UBS Switzerland AG (standalone)1 UBS Americas Inc.2 UBS Preferred Funding Trust IV & V Other subsidiaries2 Elimination entries UBS AG (consolidated) 45,125 29,225 27,925 61,253 94,132 53,708 175,943 19,026 6,303 89,052 32,044 45,689 6,499 347 2,332 12,108 647,006 31,725 34,094 20,658 21,193 170,718 31,399 61,630 102,483 70,792 1,680 40,255 586,628 58,423 1,954 0 60,378 647,006 38,701 3,224 7,414 16,258 1,736 0 6,033 1,056 0 186,872 23,184 14 15 0 845 1,255 286,608 18,948 2,493 6,505 128 5,655 374 0 231,252 8,274 179 1,806 275,611 10,997 0 0 4,971 12,776 38,007 21,039 5,931 3,038 21,463 5,964 199 47,054 5,360 1 972 5,112 7,766 10,041 186,654 26,320 23,437 11,490 3,919 21,109 6,438 288 53,633 3,126 1,969 16,683 168,411 18,243 0 0 10,997 286,608 18,243 186,654 1,310 2,509 27,510 6,506 14,586 30,132 2,264 28,921 12,678 2,628 14,554 5,996 1 197 1,139 1,890 3,111 0 (60,868) (54,268) (45,243) (9,194) (7,066) (64,925) (14,962) (3,322) (24,809) (4,042) (44,751) 0 (30) 0 (4,266) 1,310 152,359 (330,680) 4 1 4 4 1,302 0 1,306 1,310 5,782 2,274 16,244 11,317 29,877 15,033 4,675 34,002 321 319 (70,944) (54,268) (45,243) (7,420) (64,928) (14,962) (3,598) (18,848) (153) 17 20,179 (4,318) 140,023 (284,664) 12,296 0 41 (44,714) (1,302) 0 12,336 (46,016) 152,359 (330,680) 91,306 11,866 25,584 67,893 124,047 51,943 167,435 23,763 5,808 312,723 62,543 954 7,683 6,568 12,833 22,249 943,256 11,836 8,029 9,653 29,137 162,430 38,282 62,995 402,522 82,359 4,163 74,606 886,013 55,248 1,954 41 57,243 943,256 1 Amounts presented for UBS AG (standalone) and UBS Switzerland AG (standalone) represent IFRS-standalone information. Refer to the UBS AG standalone and UBS Switzerland AG standalone financial statements for information prepared in accordance with Swiss GAAP. 2 Amounts presented in these columns serve as a basis for preparing UBS AG (consolidated) financial statements in accordance with IFRS. 730 Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated statement of cash flows CHF million For the year ended 31 December 2015 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 assets2 Purchase of property, equipment and software Disposal of property, equipment and software 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) Distributions paid on UBS AG shares Issuance of long-term debt, including financial liabilities designated at fair value Repayment of long-term debt, including financial liabilities designated at fair value Dividends paid and repayments of preferred notes Net changes of non-controlling interests Net activity related to group internal capital transactions and dividends3 Net cash flow from / (used in) financing activities Effects of exchange rate differences on cash and cash equivalents 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:3 Cash and balances with central banks Due from banks Money market paper4 Total UBS AG1 (1,457) UBS Switzerland AG1 2,681 UBS Americas Inc.1 (525) Other subsidiaries1 1,298 (12) 464 (1,423) 503 (15,144) (15,613) (5,603) (2,626) 46,882 (42,415) (108) 0 (30,512) (34,382) (1,309) (52,760) 100,662 47,902 45,125 2,072 704 47,902 0 0 (5) 0 3,815 3,810 24 0 772 (402) 0 0 33,293 33,687 67 40,246 0 40,246 38,701 1,438 107 40,246 (1) 13 (299) 9 230 (47) (826) 0 7 (129) 0 0 (114) (1,062) (241) (1,875) 8,960 7,084 4,971 2,009 104 7,084 0 0 (114) 35 3,494 3,415 0 0 129 (1,274) 0 (5) (2,666) (3,817) (259) 638 7,093 7,731 2,509 5,213 9 7,731 UBS AG (consolidated) 1,997 (13) 477 (1,841) 547 (7,605) (8,434) (6,404) (2,626) 47,790 (44,221) (108) (5) 0 (5,573) (1,742) (13,753) 116,715 102,962 91,306 10,732 924 102,9625 1 Cash flows generally represent a third-party view from a UBS AG (consolidated) perspective. As a consequence, the non-consolidated UBS Preferred Funding Trusts IV and V are not presented in this table. For the year ended 31 December 2015, these trusts had cash inflows of CHF 77 million from operating activities and an equivalent cash outflow for dividends paid to preferred note holders. 2 Includes dividends received from asso- ciates. 3 Includes transfer of cash and cash equivalents from UBS AG to UBS Switzerland AG of CHF 33,283 million. Refer to “Establishment of UBS Switzerland AG” in the “Legal entity financial and regulatory infor- mation” section of this report for more information on the business transfer from UBS AG to UBS Switzerland AG. 4 Money market paper is included in the balance sheet under Trading portfolio assets and Financial investments available-for-sale. 5 CHF 3,963 million of cash and cash equivalents were restricted. 731 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated income statement CHF million For the year ended 31 December 2014 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 Other income Total operating income Operating expenses Personnel expenses General and administrative expenses Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) attributable to preferred noteholders Net profit / (loss) attributable to non-controlling interests Net profit / (loss) attributable to UBS AG shareholders UBS AG (standalone)1 UBS Americas Inc.2 Other subsidiaries2 Elimination entries UBS AG (consolidated) 11,585 (6,287) 5,298 (108) 5,190 6,111 2,750 5,584 19,636 7,991 5,621 595 7 14,214 5,421 949 4,472 142 0 4,330 1,591 (597) 995 9 1,003 7,288 438 95 8,825 5,806 2,415 139 59 8,420 404 (2,375) 2,779 0 0 1,160 (898) 262 9 270 3,799 237 (46) 4,261 1,483 1,341 83 16 2,922 1,339 248 1,091 0 5 (1,143) 1,143 0 13 13 (122) 416 (5,002) (4,695) 0 0 0 0 0 (4,695) (2) (4,693) 0 0 2,779 1,086 (4,693) 13,194 (6,639) 6,555 (78) 6,477 17,076 3,841 632 28,026 15,280 9,377 817 83 25,557 2,469 (1,180) 3,649 142 5 3,502 1 Amounts presented for UBS AG (standalone) represent IFRS-standalone information. Refer to the UBS AG standalone financial statements for information prepared in accordance with Swiss GAAP. 2 Amounts pre- sented in these columns serve as a basis for preparing UBS AG (consolidated) financial statements in accordance with IFRS. 732 Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated statement of comprehensive income CHF million For the year ended 31 December 2014 UBS AG (standalone)1 UBS Americas Inc.2 Other subsidiaries2 Elimination entries UBS AG (consolidated) Comprehensive income attributable to UBS AG shareholders Net profit / (loss) Other comprehensive income Other comprehensive income that may be reclassified to the income statement Foreign currency translation, net of tax Financial investments available-for-sale, net of tax Cash flow hedges, net of tax Total other comprehensive income that may be reclassified to the income statement, net of tax Other comprehensive income that will not be reclassified to the income statement Defined benefit plans, net of tax Property revaluation surplus, net of tax Total other comprehensive income that will not be reclassified to the income statement, net of tax Total other comprehensive income Total comprehensive income attributable to UBS AG shareholders Total comprehensive income attributable to preferred noteholders Total comprehensive income attributable to non-controlling interests Total comprehensive income 4,330 2,779 1,086 (4,693) 3,502 325 32 693 928 78 0 1,050 1,006 (999) 0 (999) 51 4,381 260 0 4,641 (167) 0 (167) 838 3,617 0 0 1,500 37 0 1,537 (56) 0 (56) 1,481 2,567 0 7 (920) (6) 0 (926) 14 0 14 (912) (5,605) 0 0 1,834 140 693 2,667 (1,208) 0 (1,208) 1,459 4,961 260 7 5,229 3,617 2,575 (5,605) 1 Amounts presented for UBS AG (standalone) represents IFRS-standalone information. Refer to the UBS AG (standalone) audited financial statements for information prepared in accordance with Swiss GAAP. 2 Amounts presented in these columns serve as a basis for preparing UBS AG consolidated Financial Statements in accordance with IFRS. 733 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated balance sheet CHF million As of 31 December 2014 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 which may be sold or repledged by counterparties Positive replacement values Cash collateral receivables on derivative instruments Financial assets designated at fair value Loans Financial investments available-for-sale Investments in subsidiaries and associates Property, equipment and software 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 Debt issued Provisions Other liabilities Total liabilities Equity attributable to UBS AG shareholders Equity attributable to preferred noteholders Equity attributable to non-controlling interests Total equity Total liabilities and equity UBS AG (standalone)1 UBS Americas Inc.2 Other subsidiaries2 Elimination entries UBS AG (consolidated) 95,711 32,448 33,676 64,496 101,922 51,476 262,073 25,501 4,691 299,032 42,580 27,163 5,792 354 4,290 14,649 1,014,379 38,461 33,284 22,087 18,936 258,680 32,106 73,857 362,564 86,894 2,725 33,699 963,293 49,073 2,013 0 51,085 1,014,379 6,440 7,099 36,033 24,417 6,697 3,310 19,597 5,503 481 43,566 5,403 2 823 5,381 6,479 9,021 1,923 52,637 5,181 30,328 34,479 6,969 51,327 14,487 2,882 16,553 9,175 1 238 1,051 349 2,256 0 (78,850) (50,827) (50,827) (4,943) (5,737) (76,020) (14,512) (3,562) (43,168) 0 (26,239) 0 0 (57) (2,857) 104,073 13,334 24,063 68,414 138,156 56,018 256,978 30,979 4,493 315,984 57,159 927 6,854 6,785 11,060 23,069 176,942 222,867 (351,860) 1,062,327 38,269 22,961 12,548 4,856 19,448 5,926 130 48,236 157 1,268 17,615 171,415 5,527 0 0 5,527 176,942 12,611 3,761 28,010 8,234 51,993 18,852 5,598 43,474 4,312 372 21,985 199,201 23,621 0 45 23,666 222,867 (78,850) (50,827) (50,827) (4,068) (76,020) (14,512) (4,288) (43,294) (156) 0 (2,907) (325,748) (26,113) 0 0 (26,113) (351,860) 10,492 9,180 11,818 27,958 254,101 42,372 75,297 410,979 91,207 4,366 70,392 1,008,162 52,108 2,013 45 54,165 1,062,327 1 Amounts presented for UBS AG (standalone) represents IFRS-standalone information. Refer to the UBS AG (standalone) audited financial statements for information prepared in accordance with Swiss GAAP. 2 Amounts presented in these columns serve as a basis for preparing UBS AG consolidated Financial Statements in accordance with IFRS. 734 Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated statement of cash flows CHF million For the year ended 31 December 2014 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 assets2 Purchase of property, equipment and software Disposal of property, equipment and software 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 Distributions paid on UBS AG shares Issuance of long-term debt, including financial liabilities designated at fair value Repayment of long-term debt, including financial liabilities designated at fair value Dividends paid and repayments of preferred notes Net changes of non-controlling interests Net activity related to group internal capital transactions and dividends Net cash flow from / (used in) financing activities Effects of exchange rate differences on cash and cash equivalents Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents comprise: Cash and balances with central banks Due from banks Money market paper3 Total UBS AG1 7,438 UBS Americas Inc.1 (1,814) Other subsidiaries1 1,608 UBS AG (consolidated) 7,231 (18) 41 (1,521) 313 7,774 6,589 (3,984) (719) (938) 40,272 (32,083) (110) 0 (319) 2,118 7,394 23,539 77,123 100,662 95,711 4,119 832 100,662 0 9 (300) 14 (568) (845) 0 0 0 24 (494) 0 0 0 (470) 840 (2,289) 11,249 8,960 6,440 2,489 31 8,960 0 20 (94) 23 (3,098) (3,149) 1,064 0 0 686 (1,632) 0 (3) 319 434 289 (819) 7,911 7,093 1,923 5,164 6 7,093 (18) 70 (1,915) 350 4,108 2,596 (2,921) (719) (938) 40,982 (34,210) (110) (3) 0 2,081 8,522 20,430 96,284 116,715 104,073 11,772 869 116,7154 1 Cash flow generally represent a third-party view from a UBS AG (consolidated) perspective. 2 Includes dividends received from associates. 3 Money market paper is included in the balance sheet under Trading port- folio assets and Financial investments available-for-sale. 4 CHF 4,178 million of cash and cash equivalents were restricted. 735 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated income statement CHF million For the year ended 31 December 2013 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 Other income Total operating income Operating expenses Personnel expenses General and administrative expenses Depreciation and impairment of property, equipment and software Amortization and impairment of intangible assets Total operating expenses Operating profit / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) attributable to preferred noteholders Net profit / (loss) attributable to non-controlling interests Net profit / (loss) attributable to UBS AG shareholders UBS AG (standalone)1 UBS Americas Inc.2 Other subsidiaries2 Elimination entries UBS AG (consolidated) 11,308 (7,093) 4,215 (19) 4,196 6,430 4,922 499 16,046 8,099 3,959 575 6 12,639 3,408 570 2,837 204 0 2,634 1,984 (695) 1,290 (33) 1,257 6,781 379 416 8,833 5,584 3,364 133 60 9,141 (307) (937) 630 0 0 630 1,204 (930) 275 (3) 271 3,079 159 (909) 2,600 1,499 1,058 107 17 2,681 (81) 261 (342) 0 5 (347) (1,359) 1,366 6 5 11 (4) (329) 574 252 0 0 0 0 0 252 (3) 256 0 0 256 13,137 (7,351) 5,786 (50) 5,736 16,287 5,130 580 27,732 15,182 8,380 816 83 24,461 3,272 (110) 3,381 204 5 3,172 1 Amounts presented for UBS AG (standalone) represent IFRS-standalone information. Refer to the UBS AG standalone financial statements for information prepared in accordance with Swiss GAAP. 2 Amounts pre- sented in these columns serve as a basis for preparing UBS AG (consolidated) financial statements in accordance with IFRS. 736 Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated statement of comprehensive income CHF million For the year ended 31 December 2013 UBS AG (standalone)1 UBS Americas Inc.2 Other subsidiaries2 Elimination entries UBS AG (consolidated) Comprehensive income attributable to UBS AG shareholders Net profit / (loss) Other comprehensive income Other comprehensive income that may be reclassified to the income statement Foreign currency translation, net of tax Financial investments available-for-sale, net of tax Cash flow hedges, net of tax Total other comprehensive income that may be reclassified to the income statement, net of tax Other comprehensive income that will not be reclassified to the income statement Defined benefit plans, net of tax Property revaluation surplus, net of tax Total other comprehensive income that will not be reclassified to the income statement, net of tax Total other comprehensive income Total comprehensive income attributable to UBS AG shareholders Total comprehensive income attributable to preferred noteholders Total comprehensive income attributable to non-controlling interests Total comprehensive income 2,634 630 (347) 256 3,172 392 17 (1,520) (1,112) 824 (6) 818 (294) 2,340 559 0 2,899 (348) (163) 0 (510) 110 0 110 (401) 229 0 0 229 (311) (16) 0 (327) 6 0 6 (321) (668) 0 4 (664) (204) 8 0 (471) (154) (1,520) (196) (2,145) 0 0 0 (196) 60 0 0 60 939 (6) 933 (1,211) 1,961 559 4 2,524 1 Amounts presented for UBS AG (standalone) represents IFRS-standalone information. Refer to the UBS AG (standalone) audited financial statements for information prepared in accordance with Swiss GAAP. 2 Amounts presented in these columns serve as a basis for preparing UBS AG consolidated Financial Statements in accordance with IFRS. 737 Consolidated financial statements Consolidated financial statements Notes to the UBS AG consolidated financial statements Note 39 Supplemental guarantor information required under SEC regulations (continued) Supplemental guarantor consolidated statement of cash flows CHF million For the year ended 31 December 2013 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 assets2 Purchase of property, equipment and software Disposal of property, equipment and software 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 Distributions paid on UBS AG shares Issuance of long-term debt, including financial liabilities designated at fair value Repayment of long-term debt, including financial liabilities designated at fair value Dividends paid and repayments of preferred notes Net changes of non-controlling interests Net activity related to group internal capital transactions and dividends Net cash flow from / (used in) financing activities Effects of exchange rate differences on cash and cash equivalents Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents comprise: Cash and balances with central banks Due from banks Money market paper3 Total UBS AG1 58,756 UBS Americas Inc.1 (8,311) Other subsidiaries1 3,929 UBS AG (consolidated) 54,374 (49) 136 (1,032) 545 751 351 (1,400) (341) 1 (564) 27,442 (65,112) (1,415) 0 12 (41,377) (2,329) 15,400 61,723 77,123 69,808 3,091 4,224 77,123 0 0 (160) 5 6,076 5,922 0 0 0 0 59 (486) 0 0 23 (405) (203) (2,998) 14,247 11,249 8,893 2,327 28 11,249 0 0 (44) 91 (861) (815) (2,890) 0 0 0 513 (3,356) 0 (6) (35) (5,774) (174) (2,834) 10,745 7,911 2,178 5,699 35 7,911 (49) 136 (1,236) 639 5,966 5,457 (4,290) (341) 1 (564) 28,014 (68,954) (1,415) (6) 0 (47,555) (2,705) 9,569 86,715 96,284 80,879 11,117 4,288 96,2844 1 Cash flow generally represent a third-party view from a UBS AG (consolidated) perspective. 2 Includes dividends received from associates. 3 Money market paper is included in the balance sheet under Trading port- folio assets and Financial investments available-for-sale. 4 CHF 4,534 million of cash and cash equivalents were restricted. 738 Legal entity financial and regulatory information Legal entity financial and regulatory information Table of contents 742 Introduction UBS Group AG 766 Establishment of UBS Switzerland AG UBS AG 743 UBS Group AG standalone financial statements 772 UBS AG standalone financial statements Income statement 743 744 Balance sheet 745 Statement of appropriation of retained earnings and proposed dividend distribution out of capital contribution reserve Income statement 772 773 Balance sheet 775 Statement of changes in equity 775 Statement of appropriation of retained earnings and proposed dividend distribution 746 747 749 749 749 749 749 750 750 750 750 751 751 752 752 752 752 753 754 754 754 755 756 12 13 14 15 16 17 21 22 23 746 Notes to the UBS Group AG standalone 2 3 4 5 financial statements 1 Corporate information Accounting policies Other operating income Financial Income Personnel expenses Other operating expenses Financial expenses Liquid assets Marketable securities 9 10 Other short-term receivables 11 8 6 7 Accrued income and prepaid expenses Investments in subsidiaries Financial assets Accrued expenses and deferred income Long-term interest-bearing liabilities Compensation-related long-term liabilities Share capital Treasury shares 18 19 Guarantees 20 Assets pledged to secure own liabilities Contingent liabilities Significant shareholders Share and option ownership of the members of the Board of Directors, the Group Executive Board and other employees Related parties 758 24 759 Report of the statutory auditor on the financial statements Independent auditor’s report related to the issue of new shares from conditional capital Independent auditor’s report related to a capital increase 761 762 740 2 1 4 3a 3b 776 780 780 780 776 Notes to the UBS AG standalone financial statements Name, legal form and registered office 776 Accounting policies Net trading income by business Net trading income by underlying risk category Sundry ordinary income and expenses Personnel expenses General and administrative expenses Extraordinary income and expenses Taxes Securities financing transactions 9 10a Collateral for loans and off-balance sheet transac- 783 781 782 781 782 8 6 5 7 783 784 784 784 785 786 787 787 787 787 788 788 789 789 790 790 791 791 791 tions 10b Impaired financial instruments 11a Allowances 11b Provisions 12 Trading portfolio and other financial instruments measured at fair value Derivative instruments Financial investments by instrument type 14a 14b Financial investments by counterparty rating – debt 13 instruments 15a Other assets 15b Other liabilities Pledged assets 16 Country risk of total assets Structured debt instruments 18 19a Share capital 19b Significant shareholders 20 17 Swiss pension plan and non-Swiss defined benefit plans Share-based compensation Related parties Fiduciary transactions 21 22 23 791 Invested assets and net new money 24a 24b Development of invested assets 792 793 Report of the statutory auditor on the financial 795 statements Independent auditor’s report related to the issue of new shares from conditional capital 796 UBS AG (standalone) regulatory information UBS Switzerland AG 800 UBS Switzerland AG standalone financial statements Income statement 800 801 Balance sheet 803 Statement of changes in equity 803 Statement of appropriation of retained earnings 811 812 812 812 812 812 813 813 814 814 814 815 815 816 816 11 Derivative instruments Financial investments by instrument type 12a 12b Financial investments by counterparty rating – debt instruments 13a Other assets 13b Other liabilities Pledged assets 14 Country risk of total assets 18 15 16a Share capital 16b Significant shareholders Swiss pension plan 17 Share-based compensation Related parties Fiduciary transactions Invested assets and net new money 21a 21b Development of invested assets 19 20 804 Notes to the UBS Switzerland AG standalone financial statements 817 Report of the statutory auditor on the financial statements 1 804 804 807 807 807 808 808 808 809 809 809 810 810 2 3a 3b 4 5 6 7 8a 8b 9a 9b 10 Name, legal form and registered office Accounting policies Net trading income by business Net trading income by underlying risk category Personnel expenses General and administrative expenses Taxes Securities financing transactions Collateral for loans and off-balance sheet transactions Impaired financial instruments Allowances Provisions Trading portfolio and other financial instruments measured at fair value 819 UBS Switzerland AG (standalone) regulatory information UBS Limited 823 UBS Limited (standalone) financial and regulatory information Income statement 823 823 Statement of comprehensive income 824 Balance sheet 825 Basis of accounting 825 Capital information 741 Legal entity financial and regulatory information UBS Limited Select standalone financial information and standalone regulatory information in accordance with FINMA Circular 2008 / 22 “Disclo- sure – banks.” Other legal entity-specific disclosures In addition to legal entity disclosures provided within this Annual Report, UBS provides further legal entity-specific disclosures, including disclosures in accordance with Article 89 of the Euro- pean Union Capital Requirements Directive IV (CRD IV), in “Sub- sidiary and branch information” at www.ubs.com / investors. Under CRD IV, UBS is required to provide certain disclosures (such as nature of activities, location, turnover, number of employ- ees, and profit or loss before tax), on an annual basis by Member State and by third country in which it has an establishment. UBS subsidiaries domiciled in Luxembourg, France, Germany, Italy, Monaco, The Netherlands, Spain and the UK are in scope of this requirement. ➔ Refer to “Subsidiary and branch information” at www.ubs.com / investors for more information All references to 2015 and 2014 refer to the financial years ended 31 December 2015 and 2014, respectively. Legal entity financial and regulatory information Introduction This section of the Annual Report includes select financial and regulatory information for UBS Group AG, the holding company of the UBS Group, and those legal entities within the UBS Group that are considered by the Swiss Financial Market Supervisory Authority (FINMA) to be significant for Pillar 3 reporting purposes and consists of: UBS Group AG Audited 2015 standalone financial statements prepared in accor- dance with the principles of the Swiss Law on Accounting and Financial Reporting (32nd title of the Swiss Code of Obligations). Establishment of UBS Switzerland AG Transition disclosures including pre- and post-transfer balance sheets for UBS AG and UBS Switzerland AG. UBS AG – Audited 2015 standalone financial statements prepared in accordance with Swiss GAAP (FINMA Circular 2015 / 1 and the Banking Ordinance); and – Standalone regulatory disclosures in accordance with FINMA Circular 2008 / 22 “Disclosure – banks.” UBS Switzerland AG – Audited 2015 standalone financial statements prepared in accordance with Swiss GAAP (FINMA Circular 2015 / 1 and the Banking Ordinance); and – Standalone regulatory disclosures in accordance with FINMA Circular 2008 / 22 “Disclosure – banks.” The financial statements of UBS Group AG, UBS AG and UBS Switzerland AG have been audited by Ernst & Young Ltd. 742 UBS Group AG standalone financial statements Audited | Income statement CHF million Dividend income from the investment in UBS AG Other operating income Financial income Operating income Personnel expenses Other operating expenses Financial expenses Operating expenses Profit / (loss) before income taxes Tax expense / (benefit) Net profit / (loss) for the period For the year ended For the period ended % change from Note 31.12.15 31.12.14 31.12.14 3 4 5 6 7 2,869 49 294 3,213 9 171 267 447 2,765 9 2,756 551 0 8 0 8 0 10 7 17 (10) 0 (10) UBS Group AG was incorporated on 10 June 2014. The Income statement and corresponding Notes presented for the period ended on 31 December 2014 include income and expenses for the period from 10 June to 31 December 2014 only. 743 Legal entity financial and regulatory information Legal entity financial and regulatory information UBS Group AG standalone financial statements Balance sheet CHF million Assets Liquid assets Marketable securities Other short-term receivables Accrued income and prepaid expenses Total current assets Investments in subsidiaries of which: Investment in UBS AG Financial assets Prepaid assets Total non-current assets Total assets of which: amounts due from subsidiaries Liabilities Current interest-bearing liabilities Accrued expenses and deferred income Total short-term liabilities Long-term interest-bearing liabilities Compensation-related long-term liabilities Total long-term liabilities Total liabilities of which: amounts due to subsidiaries Equity Share capital General reserves of which: statutory capital reserve of which: capital contribution reserve of which: other capital reserve Voluntary earnings reserve Treasury shares Reserve for own shares held by subsidiaries Net profit / (loss) for the period Equity attributable to shareholders Total liabilities and equity 744 Note 31.12.15 31.12.14 % change from 31.12.14 8 9 10 11 12 13 14 15 16 17 18 1,442 85 632 264 2,422 40,431 40,376 5,475 54 45,959 48,381 7,503 736 1,006 1,741 5,106 3,119 8,225 9,966 750 385 37,006 37,006 38,035 (1,029) (10) (1,724) 1 2,756 38,415 48,381 742 113 511 91 1,457 38,691 38,691 320 64 39,074 40,531 1,239 227 838 1,065 0 2,313 2,313 3,377 227 372 38,321 38,321 39,428 (1,107) 0 (1,529) 0 (10) 37,154 40,531 94 (25) 24 190 66 4 4 (16) 18 19 505 224 20 64 35 256 195 230 4 (3) (3) (4) (7) 13 3 19 Statement of appropriation of retained earnings and proposed dividend distribution out of capital contribution reserve The Board of Directors proposes that the Annual General Meeting of Shareholders (AGM) on 10 May 2016 approves the following appropriation of retained earnings. Proposed appropriation of retained earnings CHF million Net profit for the period Retained earnings carried forward Total retained earnings available for appropriation Proposed appropriation of retained earnings Appropriation to other capital reserve Appropriation to voluntary earnings reserve Retained earnings carried forward For the year ended 31.12.15 2,756 0 2,756 (1,029) (1,727) 0 Proposed dividend distribution out of capital contribution reserve The Board of Directors proposes that the Annual General Meeting of Shareholders (AGM) on 10 May 2016 approves an ordinary dividend distribution of CHF 0.60 in cash per share of CHF 0.10 par value and a special dividend distribution of CHF 0.25 in cash per share of CHF 0.10 par value payable out of the capital contri- bution reserve. Provided that the proposed dividend distribution out of the capital contribution reserve is approved, the total pay- ment of CHF 0.85 per share would be made on 17 May 2016 to holders of shares on the record date 13 May 2016. The shares will be traded ex-dividend as of 12 May 2016 and, accordingly, the last day on which the shares may be traded with entitlement to receive the dividend will be 11 May 2016. CHF million, except where indicated Total statutory capital reserve: capital contribution reserve before proposed distribution1, 2 Proposed ordinary distribution of capital contribution reserve within statutory capital reserve: CHF 0.60 per dividend-bearing share3 Proposed special distribution of capital contribution reserve within statutory capital reserve: CHF 0.25 per dividend-bearing share3 Total statutory capital reserve: capital contribution reserve after proposed distribution 31.12.15 38,035 (2,310) (962) 34,763 1 The capital contribution reserve of CHF 38,035 million is a component of the statutory capital reserve of CHF 37,006 million after taking into account the negative other capital reserve of CHF 1,029 million. 2 The Swiss Federal tax authorities confirmed that UBS Group AG would be able to repay to shareholders a maximum amount of CHF 25.6 billion of the disclosed capital contribution reserve (status as of 31 December 2014) without being subject to the withholding tax deduction that applies to dividends paid out of retained earnings. This assessment reflects the qualification of the capital contribution reserve of UBS AG as a consequence of the reorganization implemented by the share-for-share exchange. The amount decreased to CHF 22.9 billion as of 31 December 2015 subsequent to distributions in 2015. 3 Dividend-bearing shares are all shares issued except for treasury shares held by UBS Group AG as of the record date. The CHF 2,310 million and CHF 962 million presented are based on the total number of shares issued as of 31 December 2015. 745 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Group AG standalone financial statements Notes to the UBS Group AG standalone financial statements Note 1 Corporate information UBS Group AG is incorporated and domiciled in Switzerland and its registered office is at Bahnhofstrasse 45, CH-8001 Zurich, Switzerland. UBS Group AG operates under the Swiss Code of Obligations as a stock corporation (Aktiengesellschaft), a corpora- tion that has issued shares of common stock to investors. and will continue on this basis. Furthermore, obligations related to other compensation awards, such as defined benefit pension plans and other local awards, have not been assumed by UBS Group AG and are retained by the relevant employing and / or sponsoring subsidiaries. UBS Group AG is the ultimate holding company of the UBS Group, the grantor of the majority of UBS’s deferred compensa- tion plans and also issues long-term capital instruments. Establishment of UBS Group AG UBS Group AG was incorporated on 10 June 2014 as a wholly- owned subsidiary of UBS AG. On 29 September 2014, UBS Group AG launched an offer to acquire all issued ordinary shares of UBS AG in exchange for registered shares of UBS Group AG on a one- for-one basis. On 28 November 2014, the first settlement of the exchange offer was completed and UBS Group AG became the holding company of UBS Group and the parent company of UBS AG. Following the exchange offer and subsequent private exchanges on a one-for-one basis with various shareholders and banks in Swit- zerland and elsewhere outside the United States, UBS Group AG acquired 96.68% of UBS AG shares by 31 December 2014. In March 2015, UBS Group AG initiated a procedure under article 33 of the Swiss Stock Exchange Act (SESTA procedure). Upon the successful completion of the SESTA procedure in August 2015, all UBS AG shares that had remained publicly held were canceled and UBS Group AG shares were delivered as compensa- tion. As a result, UBS Group AG now owns 100% of the issued shares of UBS AG. UBS AG shares traded on 27 August 2015 for the last time on the SIX Swiss Exchange. Transfer of deferred compensation plans As part of the Group reorganization in 2014, UBS Group AG assumed obligations of UBS AG as grantor in connection with cer- tain outstanding awards under employee share, option, notional fund and deferred cash compensation plans. At the same time, UBS Group AG acquired the beneficial ownership of the financial assets and 90.5 million treasury shares of UBS Group AG held to hedge the economic exposure arising from these plans. As a result of the trans- fer, UBS Group AG assumed all responsibilities and rights associated with the grantor role for the plans from UBS AG, including the right of recharge to its subsidiaries employing the personnel. Obligations relating to deferred compensation plans which are required to be, and have been, granted by employing and / or sponsoring subsidiaries have not been assumed by UBS Group AG Establishment of UBS Business Solutions AG In 2015, UBS Business Solutions AG was established as a direct subsidiary of UBS Group AG. Its purpose is to act as the Group service company. As part of the establishment of UBS Business Solutions AG, UBS AG paid a cash dividend of CHF 30 million and transferred its participation in the Poland Service Center (PSC) as a dividend-in-kind at book value of CHF 5 million to UBS Group AG. UBS Group AG then contributed CHF 30 million and the participa- tion in the PSC at book value into UBS Business Solutions AG. Further, during 2015, UBS Business Solutions AG purchased UBS Corporate Management (Shanghai) Co. Ltd from UBS AG for CHF 4 million in cash consideration. UBS Business Solutions (India) Private Limited was incorporated on 18 November 2015 as a direct subsidiary of UBS Business Solu- tions AG. Issuance of additional tier 1 capital instruments During 2015, UBS Group AG issued perpetual capital notes, which qualify as Basel III additional tier 1 (AT1) capital on a consolidated UBS Group basis. The issuances consisted of: i) EUR 1.0 billion, low-trigger loss-absorbing capital notes with a fixed-rate initial coupon of 5.75% and an optional first call date in 7 years, ii) USD 1.25 billion high- trigger loss-absorbing capital notes with a fixed-rate initial coupon of 7.125% and an optional first call date in 5 years, iii) USD 1.25 billion low-trigger loss-absorbing capital notes with a fixed-rate initial cou- pon of 7% and an optional first call date in 10 years, iv) USD 1.575 billion high-trigger loss-absorbing capital notes with a fixed-rate ini- tial coupon of 6.875% and an optional first call date in 10 years. Furthermore, UBS Group AG granted deferred contingent cap- ital plan (DCCP) awards to UBS Group employees during 2015. These DCCP awards also qualify as Basel III AT1 capital on a con- solidated UBS Group basis. As of 31 December 2015, UBS Group AG’s distributable items for the purpose of additional tier 1 capital instruments were CHF 38.0 billion. For this purpose, distributable items are defined in the terms and conditions of the relevant instruments as the aggregate of (i) net profits carried forward and (ii) freely distributable reserves, in each case, less any amounts that must be contributed to legal reserves under applicable law. 746 Note 2 Accounting policies The UBS Group AG standalone financial statements are prepared in accordance with the principles of the Swiss Law on Accounting and Financial Reporting (32nd title of the Swiss Code of Obliga- tions). The functional currency of UBS Group AG is the Swiss franc. The significant accounting and valuation principles applied are described below. Foreign currency translation Transactions denominated in foreign currency are translated into Swiss francs at the spot exchange rate on the date of the transac- tion. At the balance sheet date, all current assets and short-term liabilities as well as Financial assets measured at fair value, which are denominated in a foreign currency, are translated into Swiss francs using the closing exchange rate. For other non-current assets and long-term liabilities, where the asset mirrors the terms of a corresponding liability or the asset and liability otherwise form an economic hedge relationship, the asset and liability are treated as one unit of account for foreign currency translation purposes, with offsetting unrealized foreign currency translation gains and losses based on the closing exchange rate presented net in the income statement. Investments in subsidiaries mea- sured at historic cost are translated at the exchange rate on the date of the transaction. All currency translation effects are recog- nized in the income statement. after the balance sheet date. These are equity instruments and are measured at fair value based on their quoted market prices or other observable market prices as of the balance sheet date. Gains and losses resulting from fair value changes are recognized in Financial income and Financial expenses, respectively. Investments in AIVs that have no quoted market price or no other observable market price are recognized as Financial assets and are measured at their acquisition cost adjusted for impair- ment losses. Financial assets further include loans granted to UBS AG which substantially mirror the terms of additional tier 1 perpetual capital notes issued. The loans are measured at nominal value. ➔ Refer to Note 13 for more information Investments in subsidiaries Investments in subsidiaries are equity interests that are held to carry on the business of UBS Group or for other strategic pur- poses. They include all subsidiaries directly held by UBS Group AG through which UBS conducts its business on a global basis. The investments are measured individually and carried at cost less impairment. ➔ Refer to Note 2 to the consolidated financial statements for a description of businesses of the UBS Group ➔ Refer to Note 30 to the consolidated financial statements The main currency translation rates used by UBS Group AG can Treasury shares be found in Note 36 to the consolidated financial statements. Marketable securities Marketable securities include investments in alternative invest- ment vehicles (AIVs) with a short-term holding period. The hold- ing period is deemed short-term if the vesting of the awards hedged by the AIV is within 12 months after the balance sheet date. These are equity instruments and are measured at fair value based on quoted market prices or other observable market prices as of the balance sheet date. Gains and losses resulting from fair value changes are recognized in Financial income and Financial expenses, respectively. Financial assets Financial assets include investments in AIVs with a long-term holding period. The holding period is deemed long-term if the vesting of the awards hedged by the AIV is more than 12 months Treasury shares acquired by UBS Group AG are recognized at acquisition cost and are presented as a deduction from sharehold- ers’ equity. Upon disposition or settlement of related share awards, the realized gain or loss is recognized through the income statement as Financial income and Financial expenses, respec- tively. For settlement of related share awards, the realized gains and losses on treasury shares represent the difference between the market price of the treasury shares at settlement and their acquisition cost. For shares of UBS Group AG acquired by a direct or indirect subsidiary, a Reserve for own shares held by subsidiaries is gener- ally created in UBS Group AG’s equity. However, where UBS AG or UBS Switzerland AG acquire shares of UBS Group AG and hold them in their trading portfolios, no Reserve for own shares held by subsidiaries is created. ➔ Refer to Note 18 for more information 747 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Group AG standalone financial statements Note 2 Accounting policies (continued) Equity participation and other compensation plans Transfer from UBS AG to UBS Group AG The transfer of the deferred compensation plans and related hedging assets in 2014 was conducted on an arm’s length basis, with a step-up of the plan obligation to fair value. This step-up resulted in a net liability that was recorded in the standalone financial statements of UBS AG and transferred to UBS Group AG (net liability related to deferred compensation plan transfer) in 2014. The fair value of this net liability is taken into account in the income statement over the average vesting period (for share awards) or upon exercise / expiry (for option awards) as Other operating income. Upon exercise of option awards that are set- tled using conditional capital, the fair value of this net liability is recorded in the Statutory capital reserve within General reserves. The difference between the fair value of the hedging assets and the fair value of the obligations on the plans transferred was com- pensated for with a loan from UBS AG to UBS Group AG. Equity participation plans The grant date fair value of equity-settled share-based compensa- tion awards granted to employees is generally recognized over the vesting period of the awards. Awards granted in the form of UBS Group AG shares, notional shares and performance shares are settled by delivering UBS Group AG shares at vesting and are recognized as Compensation-related long-term liabilities if vesting is more than 12 months after the balance sheet date or as Accrued expenses and deferred income if vesting is within 12 months from the balance sheet date. The amount recognized is adjusted for forfeiture assumptions, such that the amount ultimately recog- nized is based on the number of awards that meet the related service conditions at the vesting date. The grant date fair value is based on the UBS Group AG share price, taking into consideration post-vesting sale and hedge restrictions, non-vesting conditions and market conditions, where applicable. Upon settlement of the share awards, any realized gain or loss is recognized in the income statement as Other operating income and Other operating expenses, respectively. Realized gains and losses on share awards represent the difference between the mar- ket price of the treasury shares at settlement and the grant date fair value of the share awards. For certain awards, employees receive beneficial and legal ownership of the underlying UBS Group AG shares at the grant date (prepaid awards). Such prepaid awards are recognized as Prepaid assets if vesting is more than 12 months after the balance sheet date or as Accrued income and prepaid expenses if vesting is within 12 months from the balance sheet date. Shares awarded to employees that are settled using conditional capital are accounted for as follows at settlement: the amount paid by the employees for the nominal value of the shares awarded is recorded in Share capital, while any paid amount exceeding the nominal value is considered to be share premium and is recorded in the Statutory capital reserve within General reserves. Other compensation plans Deferred compensation plans that are not share-based, including deferred contingent capital plan (DCCP) awards and awards in the form of AIVs, are accounted for as cash-settled awards. The fair value of the amount payable to employees that is settled in cash is recognized as a liability generally over the vesting period, as Compensation-related long-term liabilities if vesting is more than 12 months after the balance sheet date and as Accrued expenses and deferred income if vesting is within 12 months from the balance sheet date. The liabilities are remeasured at each bal- ance sheet date at the fair value of the corresponding award and investments in AIVs, respectively. Gains and losses resulting from fair value changes in the liabilities are recognized in Other operat- ing income and Other operating expenses, respectively. Recharge of compensation expenses Expenses related to deferred compensation plans are recharged by UBS Group AG to its subsidiaries employing the personnel. Upon recharge, UBS Group AG recognizes a receivable from its subsidiaries and a liability representing its obligation towards employees. Dispensations in the standalone financial statements As UBS Group AG prepares consolidated financial statements in accordance with IFRS, UBS Group AG is exempt from various dis- closures in the standalone financial statements. The dispensations include the management report and the statement of cash flows, as well as certain note disclosures. 748 Income statement notes Note 3 Other operating income CHF million Fair value gains on alternative investment vehicles awards Realized gains from the settlement of equity-settled awards Amortization of net liability related to deferred compensation plan transfer Commission income from guarantees issued Total other operating income For the year ended For the period ended % change from 31.12.15 31.12.14 13 29 6 1 49 7 0 0 0 8 31.12.14 82 551 Note 4 Financial Income CHF million For the year ended For the period ended % change from 31.12.15 31.12.14 31.12.14 Realized gains on disposition of and settlement of equity-settled awards with treasury shares Interest income on long-term receivables from UBS AG Foreign currency translation gains Total financial income 32 253 10 294 0 0 0 0 Note 5 Personnel expenses Personnel expenses include recharges from UBS AG for person- nel-related costs for activities performed by UBS AG personnel for the benefit of UBS Group AG. UBS Group AG had no employees throughout 2015. All employees of the UBS Group, including the members of the Group Executive Board of UBS Group AG, were employed by sub- sidiaries of UBS Group AG. As of 31 December 2015, the UBS Group employed 60,099 personnel (31 December 2014: 60,155) on a full-time equivalent basis. Note 6 Other operating expenses CHF million Realized losses from the settlement of equity-settled awards Capital tax Stamp tax Other Total other operating expenses Note 7 Financial expenses CHF million Fair value losses on marketable securities and financial assets Interest expense on interest-bearing liabilities Total financial expenses For the year ended For the period ended % change from 31.12.15 31.12.14 31.12.14 147 13 1 11 171 0 8 2 0 10 66 (69) For the year ended For the period ended % change from 31.12.15 31.12.14 13 255 267 7 0 7 31.12.14 83 749 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Group AG standalone financial statements Balance sheet notes Note 8 Liquid assets Liquid assets comprise current accounts held at UBS Switzerland AG. Note 9 Marketable securities Marketable securities include investments in AIVs related to compensation awards vesting within 12 months after the balance sheet date. Note 10 Other short-term receivables Other short-term receivables are mainly comprised of receivables from employing entities related to compensation awards. Note 11 Accrued income and prepaid expenses CHF million Short-term portion of prepaid awards Accrued interest income Total accrued income and prepaid expenses 31.12.15 31.12.14 7 257 264 91 0 91 % change from 31.12.14 (92) 190 750 Note 12 Investments in subsidiaries Unless otherwise stated, the subsidiaries listed in the tables below have share capital consisting solely of ordinary shares, which are held by UBS Group AG or UBS AG, respectively. The proportion of ownership interest held is equal to the voting rights held by UBS Group AG or UBS AG, respectively. The country where the respec- tive registered office is located is also generally the principal place of business. Directly held subsidiaries as of 31 December 2015 Company UBS AG UBS Business Solutions AG UBS Group Funding (Jersey) Ltd. Registered office Zurich and Basel, Switzerland Zurich, Switzerland St. Helier, Jersey Individually significant subsidiaries of UBS AG as of 31 December 2015 Company UBS Americas Holding LLC UBS Bank USA UBS Financial Services Inc. UBS Limited UBS Securities LLC UBS Switzerland AG Registered office Primary business division Wilmington, Delaware, USA Corporate Center Salt Lake City, Utah, USA Wealth Management Americas Wilmington, Delaware, USA Wealth Management Americas London, United Kingdom Wilmington, Delaware, USA Investment Bank Investment Bank Zurich, Switzerland Personal & Corporate Banking Share capital in million Equity interest accumulated in % CHF CHF CHF 385.8 1.0 0.0 100.0 100.0 100.0 Share capital in million USD 1,200.01 0.0 USD USD 0.0 GBP 226.6 USD 1,283.12 10.0 CHF Equity interest accumulated in % 100.0 100.0 100.0 100.0 100.0 100.0 1 Comprised of common share capital of USD 1,000 and non-voting preferred share capital of USD 1,200,000,000. 2 Comprised of common share capital of USD 100,000 and non-voting preferred share capital of USD 1,283,000,000. Individually significant subsidiaries of UBS AG are those entities that contribute significantly to the Group’s financial position or results of operations, based on a number of criteria, including the subsidiaries’ equity and their contribution to the Group’s total assets and profit and loss before tax, in accordance with Swiss regulations. UBS Americas Holding LLC, UBS Limited and UBS Switzerland AG are fully held by UBS AG. UBS Bank USA, UBS Financial Ser- vices Inc. and UBS Securities LLC are fully held, directly or indi- rectly, by UBS Americas Holding LLC. Note 13 Financial assets CHF million Long-term receivables from UBS AG1 Investments in alternative investment vehicles at fair value related to awards vesting after 12 months Investments in alternative investment vehicles at cost less impairment Total financial assets 31.12.15 31.12.14 5,171 294 9 5,475 0 309 11 320 1 Long-term receivables from UBS AG include the onward lending of the proceeds from the issuances of additional tier 1 (AT1) perpetual capital notes. % change from 31.12.14 (5) (12) 751 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Group AG standalone financial statements Note 14 Accrued expenses and deferred income CHF million Short-term portion of net liability related to deferred compensation plan transfer Short-term portion of compensation liabilities of which: deferred contingent capital plan of which: other deferred compensation plans Accrued interest expense Other Total accrued expenses and deferred income 31.12.15 31.12.14 31.12.14 % change from 2 720 65 655 255 29 1,006 6 830 49 781 0 3 838 (68) (13) 32 (16) 984 20 Note 15 Long-term interest-bearing liabilities Notes issued, overview by amount, maturity and coupon in million, except where indicated Euro-denominated low-trigger loss-absorbing additional tier 1 perpetual capital notes US dollar-denominated low-trigger loss-absorbing additional tier 1 perpetual capital notes US dollar-denominated high-trigger loss-absorbing additional tier 1 perpetual capital notes US dollar-denominated high-trigger loss-absorbing additional tier 1 perpetual capital notes Total long-term interest-bearing liabilities Carrying value in transaction currency 31.12.15 Carrying value in CHF 988 1,234 1,234 1,555 1,075 1,236 1,236 1,558 5,106 Maturity1 19.02.22 19.02.25 19.02.20 07.08.25 Coupon1 5.750% 7.000% 7.125% 6.875% 1 The disclosed maturity refers to the optional first call date of the respective issuance and the disclosed coupon refers to the fixed coupon rate from the issue date up to (but excluding) the optional first call date. Note 16 Compensation-related long-term liabilities CHF million Long-term portion of net liability related to deferred compensation plan transfer Long-term portion of compensation liabilities of which: deferred contingent capital plan of which: other deferred compensation plans Total compensation-related long-term liabilities Note 17 Share capital 31.12.15 31.12.14 31.12.14 % change from 11 3,107 1,109 1,999 3,119 15 2,298 745 1,552 2,313 (24) 35 49 29 35 On 31 December 2015, the issued share capital consisted of 3,849,731,535 (31 December 2014: 3,717,128,324) registered shares at a par value of CHF 0.10 each. ➔ Refer to “UBS shares” in the “Risk, treasury and capital management” section of this report for more information on UBS Group AG shares 752 Note 18 Treasury shares Balance as of 10 June 2014 Share-for-share exchange Capital reduction Acquisitions Dispositions Delivery of shares to settle equity-settled awards Balance as of 31 December 2014 of which: treasury shares held by UBS Group AG1 of which: short sales of treasury shares by UBS AG and other subsidiaries Share-for-share exchange Acquisitions Dispositions Delivery of shares to settle equity-settled awards Balance as of 31 December 2015 of which: treasury shares held by UBS Group AG1 of which: treasury shares held by UBS AG and other subsidiaries Number of registered shares Average price in CHF 1,000,000 91,453,788 (1,000,000) 641 (3,268,157) (314,535) 87,871,737 90,176,988 (2,305,251) (100,923) 89,594,586 (27,510,789) (51,148,336) 98,706,275 98,465,708 240,567 0.10 16.95 0.10 15.24 17.31 17.08 16.94 16.95 17.30 19.90 17.57 17.08 17.29 17.51 17.50 19.51 1 Treasury shares held by UBS Group AG had a carrying value of CHF 1,724 million as of 31 December 2015 (31 December 2014: CHF 1,529 million). line item share-for-share exchange The includes 90,490,886 UBS AG treasury shares that were held by UBS AG as a hedge of its share based compensation plans before the share- for-share exchange. These shares were exchanged into UBS Group in 2014 AG shares and were transferred to UBS Group AG in connection with the transfer of the deferred compensation plans. They were transferred from UBS AG to UBS Group AG at the price of CHF 16.95, the fair value at the date of transfer. 753 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Group AG standalone financial statements Additional information Note 19 Guarantees In 2015, UBS Group AG issued senior unsecured debt, through its subsidiary UBS Group Funding (Jersey) Ltd, for a nominal amount equivalent to CHF 5,668 million as of 31 December 2015. This debt will contribute to the total loss-absorbing capacity (TLAC) of the Group. UBS Group AG issued guarantee to the external inves- tors against any default in payments of interest and principal by UBS Group Funding (Jersey) Ltd. Note 20 Assets pledged to secure own liabilities As of 31 December 2015, total pledged assets of UBS Group AG were CHF 41,835 million (31 December 2014: CHF 39,761 mil- lion). These assets, which primarily consist of the investment in UBS AG, as well as certain liquid assets, marketable securities and financial assets were pledged to UBS AG. The associated liabilities secured by these pledged assets were CHF 581 million as of 31 December 2015 (31 December 2014: CHF 206 million). Note 21 Contingent liabilities UBS Group AG is jointly and severally liable for the value added tax (VAT) liability of Swiss subsidiaries that belong to its VAT group. 754 Note 22 Significant shareholders Shareholders registered in the UBS Group AG share register with 3% or more of total share capital % of share capital Chase Nominees Ltd., London GIC Private Limited, Singapore DTC (Cede & Co.), New York1 Nortrust Nominees Ltd., London 1 DTC (Cede & Co.), New York, “The Depository Trust Company”, is a US securities clearing organization. 31.12.15 31.12.14 9.14 6.38 6.14 3.60 9.05 6.61 5.76 3.52 As of 1 January 2016, the Federal Act on Financial Market Infra- structures and Market Conduct in Securities and Derivatives Trad- ing of 19 June 2015 (Swiss Financial Market Infrastructure Act) replaced certain provisions of the Swiss Federal Act on Stock Exchanges and Securities Trading of 24 March 1995 as amended (Swiss Stock Exchange Act). Under the Swiss Financial Market Infrastructure Act, anyone holding shares in a company listed in Switzerland, or holding derivative rights related to shares of such a company, must notify the company and the SIX if the holding reaches, falls below or exceeds one of the following thresholds: 3, 5, 10, 15, 20, 25, 331⁄3, 50, or 662⁄3% of voting rights, regardless of whether or not such rights may be exercised. The detailed dis- closure requirements and the methodology for calculating the thresholds are defined in the Swiss Financial Market Supervisory Authority Ordinance on Financial Market Infrastructure (FMIO- FINMA), which replaced certain provisions of the Swiss Financial Market Supervisory Authority Ordinance on Stock Exchanges and Securities Trading (SESTO-FINMA) as of 1 January 2016. In partic- ular, the FMIO-FINMA (as the former SESTO-FINMA) sets forth that nominee companies that cannot autonomously decide how voting rights are exercised are not obligated to notify the com- pany and SIX if they reach, exceed or fall below the threshold percentages. In addition, pursuant to the Swiss Code of Obliga- tions, UBS Group AG must disclose in the notes to its financial statements the identity of any shareholder with a holding of more than 5% of the total share capital of UBS Group AG. According to disclosure notifications filed on 10 December 2014 with UBS Group AG and the SIX under the Swiss Stock Exchange Act and respective FINMA Ordinance, both as in force at that time, GIC Private Limited disclosed a holding of 7.07% of the total share capital of UBS Group AG. The beneficial owner of this holding is the Government of Singapore. On 10 December 2014, Norges Bank, Oslo, the Central Bank of Norway, disclosed a holding of 3.30%. On 15 January 2015, BlackRock Inc., New York, disclosed a holding of 4.89% and on 10 February 2016, MFS Investment Management, Boston, disclosed a holding of 3.05%. In accordance with the Swiss Stock Exchange Act and, as of 1 January 2016, the Swiss Financial Market Infrastructure Act, the aforementioned percentages were calculated in relation to the total share capital of UBS Group AG reflected in the Articles of Association at the time of the respective disclosure notification. Information on disclosures under the Swiss Stock Exchange Act and the Swiss Financial Market Infrastructure Act, respectively, is available on the SIX Disclosure Office website at www.six- exchange-regulation.com/en/home/publications/significantshare- holders.html. According to the 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 above were registered with 3% or more of the total share capital of UBS Group AG as of 31 December 2015. 755 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Group AG standalone financial statements Note 23 Share and option ownership of the members of the Board of Directors, the Group Executive Board and other employees Shares awarded Awarded to members of the Board of Directors Awarded to members of the Group Executive Board Awarded to other UBS Group employees Total For the year ended 31.12.15 For the year ended 31.12.14 Number of shares 425,258 2,230,800 64,213,472 66,869,530 Value of shares in CHF million Number of shares Value of shares in CHF million 7 37 1,042 1,087 473,567 1,888,666 57,036,519 59,398,752 9 35 1,045 1,088 ➔ Refer to the “Corporate Governance “ section in this report for more information on the terms and conditions of the shares and options awarded to the members of the Board of Directors and the Group Executive Board Number of shares of BoD members1 Name, function Axel A. Weber, Chairman Michel Demaré, Vice Chairman David Sidwell, Senior Independent Director Reto Francioni, member Ann F. Godbehere, member Axel P. Lehmann, member Helmut Panke, former member2 William G. Parrett, member Isabelle Romy, member Beatrice Weder di Mauro, member Joseph Yam, member Total on 31 December Number of shares held Voting rights in % 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 488,889 333,333 215,992 181,246 163,317 185,181 28,787 11,859 169,054 139,653 252,761 217,373 – 182,009 104,271 100,019 66,490 44,217 71,261 45,424 87,354 66,863 1,648,176 1,507,177 0.026 0.017 0.012 0.009 0.009 0.009 0.002 0.001 0.009 0.007 0.014 0.011 – 0.009 0.006 0.005 0.004 0.002 0.004 0.002 0.005 0.003 0.088 0.077 1 This table includes blocked and unblocked shares held by BoD members, including those held by related parties. No options were granted in 2015 and 2014. 2 Helmut Panke did not stand for re-election at the AGM on 7 May 2015. 756 Note 23 Share and option ownership of the members of the Board of Directors, the Group Executive Board and other employees (continued) Share and option ownership / entitlements of GEB members1 Name, function on 31 December Sergio P. Ermotti, Group Chief Executive Officer Markus U. Diethelm, Group General Counsel Lukas Gähwiler, President Personal & Corporate Banking and President UBS Switzerland Ulrich Körner, President Asset Management and President UBS EMEA Philip J. Lofts, Group Chief Risk Officer Robert J. McCann, President Wealth Management Americas and President UBS Americas Tom Naratil, Group Chief Financial Officer and Group Chief Operating Officer Andrea Orcel, President Investment Bank Chi-Won Yoon, President UBS Asia Pacific Jürg Zeltner, President Wealth Management Total 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Number of unvested shares / at risk2 947,964 670,935 447,694 528,973 558,657 522,769 642,813 713,051 540,288 611,479 1,010,805 983,028 598,172 523,751 933,686 915,399 383,164 492,093 683,767 675,211 Number of vested shares Total number of shares Potentially conferred voting rights in % 155,736 97,589 61,797 0 1,515 1,052 95,597 292,519 247,929 204,346 0 62,901 310,054 288,151 117,646 408,296 683,994 507,602 3,721 0 1,103,700 768,524 509,491 528,973 560,172 523,821 738,410 1,005,570 788,217 815,825 1,010,805 1,045,929 908,226 811,902 1,051,332 1,323,695 1,067,158 999,695 687,488 675,211 8,424,999 8,499,145 0.059 0.039 0.027 0.027 0.030 0.027 0.039 0.051 0.042 0.042 0.054 0.053 0.049 0.041 0.056 0.068 0.057 0.051 0.037 0.034 0.450 0.434 Potentially conferred voting rights in %4 0.000 Number of options3 0 0 0 0 0 0 0 0 277,082 394,172 0 0 555,115 721,125 0 0 483,210 515,180 86,279 108,121 1,401,686 1,738,598 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.015 0.020 0.000 0.000 0.030 0.037 0.000 0.000 0.026 0.026 0.005 0.006 0.075 0.089 6,747,010 6,636,689 1,677,989 1,862,456 1 This table includes all vested and unvested shares and options of GEB members, including those held by 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 the “Our deferred variable compensation plans for 2015” section in this report for more information on the plans. 3 Refer to “Note 29 Equity participation and other compensation plans” in the “Consolidated financial statements” section of the Annual Report 2015 for more information. 4 No conversion rights are out- standing. 757 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Group AG standalone financial statements Note 24 Related parties Related parties are defined under the Swiss Code of Obligations as direct and indirect participants with voting rights of 20% or more, management bodies (Board of Directors and Group Execu- tive Board), external auditors and direct and indirect investments in subsidiaries. Payables due to members of the Board of Directors and Group Executive Board are provided in the table below. Amounts due from and due to subsidiaries are provided on the face of the balance sheet. CHF million Payables due to the members of the Board of Directors and Group Executive Board of which: deferred contingent capital plan of which: other deferred compensation plans 31.12.15 31.12.14 % change from 31.12.14 144 53 91 102 28 74 41 89 23 758 759 Legal entity financial and regulatory information Legal entity financial and regulatory information 760 761 Legal entity financial and regulatory information Legal entity financial and regulatory information 762 763 Legal entity financial and regulatory information Legal entity financial and regulatory information 764 765 Legal entity financial and regulatory information Legal entity financial and regulatory information Establishment of UBS Switzerland AG Establishment of UBS Switzerland AG Establishment of UBS Switzerland AG UBS Switzerland AG is a stock corporation (Aktiengesellschaft) incorporated and organized under the laws of, and domiciled in, Switzerland, with its registered office at Bahnhofstrasse 45, Zurich. UBS Switzerland AG was incorporated on 3 September 2014 as a wholly owned subsidiary of UBS AG. Between 3 September 2014 and 31 March 2015, UBS Switzerland AG had a share capi- tal of CHF 100,000, but no operations and recorded therefore virtually no profit or loss during that period. On 12 May 2015, the share capital of UBS Switzerland AG was increased to CHF 10 mil- lion and on 21 May 2015, UBS Switzerland AG received banking, securities dealer and custodian bank licenses from FINMA. On 14 June 2015, UBS AG transferred its Personal & Corporate Banking and Wealth Management businesses booked in Switzer- land to UBS Switzerland AG. This business transfer was executed by way of transfer of assets and liabilities in accordance with arti- cles 69 ff. of the Swiss Federal Act on Merger, Scission, Conver- sion and Transfer of Assets and Liabilities (Merger Act) as an equity contribution to UBS Switzerland AG, thereby increasing UBS AG’s investment in UBS Switzerland AG. The transfer was recorded retrospectively as of 1 April 2015. The opening balance sheet of UBS Switzerland AG as of 1 April 2015, presented within the table on page 770, was audited by Ernst & Young. Business transferred to UBS Switzerland AG The following businesses and related functions booked in Switzer- land were transferred from UBS AG to UBS Switzerland AG: i. The Personal & Corporate Banking and Wealth Management businesses of UBS AG, including the front- and middle-office functions, but excluding certain specific transactions, as out- lined in the “Businesses retained in UBS AG” paragraph; ii. other businesses of UBS AG, mainly from the Investment Bank, including market-making on the SIX Swiss Exchange, secured financing transactions and the bank notes business; iii. the access to financial market infrastructure serving the busi- ness, including payment and custody infrastructure, third- party brokers and certain exchange memberships; and iv. select finance, risk control and legal functions, generally part of Corporate Center, aligned with the businesses mentioned under items i to iii above. Businesses retained in UBS AG UBS AG retained the following businesses and related functions: i. Personal & Corporate Banking and Wealth Management busi- ness booked outside Switzerland; ii. certain Personal & Corporate Banking and Wealth Manage- ment business transactions (mainly comprised of derivative transactions) booked within Switzerland. This primarily relates to clients that had entered into international trading agree- ments with various UBS AG branches (multi-branch trading agreements); and iii. the business or functions of the Corporate Center and all other business divisions of UBS AG, especially the Investment Bank and Asset Management, with the exception of the aforementioned functions aligned with the transferred busi- nesses. Financial accounting effects for UBS AG and UBS Switzerland AG UBS AG’s investment in UBS Switzerland AG The business transfer resulted in a CHF 7,822 million increase in UBS AG’s investment in UBS Switzerland AG and a corresponding increase in the General reserve of UBS Switzerland AG. The value of this equity contribution was equal to the net book value of assets and liabilities transferred to, or assumed by, UBS Switzer- land AG immediately prior to the transfer. UBS AG did not recog- nize any gains or losses as a result of the transfer. Transfer of third party assets and liabilities from UBS AG to UBS Switzerland AG Total assets and liabilities transferred from UBS AG to UBS Swit- zerland AG amounted to CHF 272,634 million and CHF 274,671 million, respectively. The transfer of the Personal & Corporate Banking and Wealth Management business booked in Switzer- land resulted in the transfer of nearly all Mortgage loans, a sig- nificant portion of Lombard and other loans as well as the major- ity of amounts Due to customers. 766 Additionally, certain foreign exchange and interest rate deriva- tive instruments with Personal & Corporate Banking and Wealth Management clients were transferred. The transfer of receivables and payables from and to banks mainly related to positions with UBS Group subsidiaries entered into in connection with the Wealth Management business and Corporate Center – Group Asset and Liability Management functions. Balances with UBS Group subsidiaries mainly related to UBS Switzerland AG having assumed the clearing business of UBS AG (and any related receiv- ables and payables) in connection with the business transfer. These balances significantly decreased until 31 December 2015 as UBS Group subsidiaries and their clients have updated their settle- ment instructions for the newly established clearing accounts in UBS AG. The remainder of the assets and liabilities transferred mainly consisted of alternative funding sources such as liquid assets, money market paper and financial investments in connec- tion with the management of liquidity risk of UBS Switzerland AG. Intercompany assets and liabilities between UBS AG and UBS Switzerland AG As a result of the business transfer, certain internal transactions between businesses and functions of UBS AG became intercom- pany transactions between UBS AG and UBS Switzerland AG as of 1 April 2015. These transactions mainly relate to securities financ- ing transactions, on-demand payables and receivables in various currencies, derivative instruments that transfer the market risk of derivative transactions with Personal & Corporate Banking and Wealth Management from UBS Switzerland AG to UBS AG, as well as derivatives to manage the UBS Switzerland AG interest rate risk. Recognition of goodwill by UBS Switzerland AG As part of the business transfer and in addition to net assets of CHF 7,822 million, UBS Switzerland AG recognized Goodwill of CHF 5,250 million. This Goodwill will be amortized over five years. Despite tax technical limitations otherwise restricting the level of UBS AG tax losses that could be transferred as part of the estab- lishment of UBS Switzerland AG, UBS Group’s tax position in Swit- zerland and globally remains materially unchanged. The business transfer did not result in the recognition of a tax expense from any write-off of deferred tax assets at the Group level, largely as a result of the aforementioned recognition of Goodwill by UBS Switzerland AG that is deductible for tax purposes as it is amor- tized into the income statement. Other For UBS AG, the business transfer also resulted in a balance sheet reclassification of fiduciary deposits, totaling CHF 9,977 million, from Due to customers to Due to banks, as the counterparty to these liabilities is now UBS Switzerland AG and not its clients. For UBS Switzerland AG, these fiduciary deposits are recorded as off- balance sheet positions as UBS Switzerland AG only acts in a fidu- ciary capacity for these deposits. UBS Switzerland AG has also recognized CHF 7,782 million of off-balance sheet contingent liabilities and CHF 7,784 million of off-balance sheet irrevocable commitments as a result of the busi- ness transfer. Joint and several liability As of the asset transfer date, UBS AG assumed joint liability for approximately CHF 260 billion of obligations of UBS Switzerland AG, excluding the collateralized portion of secured contractual obligations. Conversely, UBS Switzerland AG assumed joint liabil- ity for approximately CHF 325 billion of obligations of UBS AG, excluding the collateralized portion of secured contractual obliga- tions and covered bonds. ➔ Refer to the UBS AG and UBS Switzerland AG standalone financial statements within this section for more information 767 Legal entity financial and regulatory information Legal entity financial and regulatory information Establishment of UBS Switzerland AG UBS AG (standalone): reconciliation of pre- and post-transfer balance sheet Balance sheet as of 31.3.15 Transfer of third-party assets and liabilities to UBS Switzerland AG1 Intercompany assets and liabilities with UBS Switzerland AG as counterparty Investment in UBS Switzerland AG and other items Balance sheet as of 1.4.15 60,944 39,784 110,022 32,570 77,453 153,306 155,391 102,153 45,234 56,341 2,157 26,243 5,881 52 3,709 (30,564) (6,153) (7,800) (7,800) 0 (44,125) (151,121) (2,792) (3,017) (26,058) (276) (42) (22) 0 (663) 761,216 (272,634) 43,111 54,833 32,347 22,486 381,935 21,884 48,398 45,968 539 105,690 4,147 8,098 2,542 (18,978) (4,355) (3,409) (946) (238,574) (191) (2,109) 0 (539) (7,901) (314) (1,538) (174) 19,288 16,668 4,123 12,545 651 46 2,057 38,708 25,238 23,214 1,361 21,853 75 5 37 717,144 (274,671) 48,569 384 36,302 5,689 1,696 44,072 761,216 (274,671) 48,569 424 30,380 52,918 118,890 28,893 89,998 109,180 4,270 99,361 42,868 30,283 1,926 34,022 5,859 52 5,526 535,538 59,348 73,691 30,299 43,393 7,822 424 8,246 9,977 (9,977) 133,384 424 424 21,693 46,363 45,968 0 97,789 3,838 7,021 2,369 491,466 384 36,302 5,689 1,696 44,072 535,538 CHF million, Swiss GAAP Assets Cash and balances with central banks Due from banks Receivables from securities financing transactions of which: cash collateral on securities borrowed of which: reverse repurchase agreements Due from customers Mortgage loans Trading portfolio assets Positive replacement values Financial investments Accrued income and prepaid expenses Investments in subsidiaries and other participations Property, equipment and software Goodwill and other intangible assets Other assets Total assets Liabilities Due to banks Payables from securities financing transactions of which: cash collateral on securities lent of which: repurchase agreements Due to customers Trading portfolio liabilities Negative replacement values Financial liabilities designated at fair value Medium-term notes Bonds issued and loans from central mortgage institutions Accrued expenses and deferred income Other liabilities Provisions Total liabilities Equity Share capital General reserve Voluntary earnings reserve Net profit / (loss) for the period Total equity Total liabilities and equity 1 Includes balances with other UBS Group subsidiaries. 768 UBS AG (standalone): reconciliation of pre- and post-transfer off-balance sheet items CHF million, Swiss GAAP Contingent liabilities1 Irrevocable commitments1 Forward starting transactions2 Liabilities for calls on shares and other equities Off-balance sheet as of 31.3.15 Transfer of third-party UBS AG positions Intercompany positions with UBS Switzerland AG as counterparty Off-balance sheet as of 1.4.15 38,986 49,448 16,394 45 (7,782) (7,784) (37) 74 0 881 31,278 41,665 17,275 7 1 Numbers are presented net of sub-participations. 2 Cash to be paid in the future by either UBS AG or the counterparty. 769 Legal entity financial and regulatory information Legal entity financial and regulatory information Establishment of UBS Switzerland AG UBS Switzerland AG (standalone): reconciliation of pre- and post-transfer balance sheet Balance sheet as of 31.3.15 Transfer of third-party assets and liabilities from UBS AG1 Intercompany assets and liabilities with UBS AG as counterparty Subtotal including equity Recognition of goodwill Balance sheet as of 1.4.15 0 30,564 6,153 7,800 7,800 0 44,125 151,121 2,792 3,017 26,058 276 42 22 0 663 0 272,634 18,978 4,355 3,409 946 238,574 191 2,109 0 539 7,901 314 1,538 174 25,238 23,214 1,361 21,853 75 5 37 48,569 19,288 16,668 4,123 12,545 651 46 2,057 30,564 31,391 31,013 9,161 21,853 44,125 151,121 2,792 3,092 26,058 281 42 22 0 700 30,564 31,391 31,013 9,161 21,853 44,125 151,121 2,792 3,092 26,058 281 42 22 5,250 700 5,250 321,203 5,250 326,452 38,265 21,023 7,531 13,491 238,574 191 2,760 0 539 7,901 360 3,594 174 38,265 21,023 7,531 13,491 238,574 191 2,760 0 539 7,901 360 3,594 174 274,671 38,710 313,381 313,381 0 0 0 0 7,822 7,822 321,203 5,250 5,250 5,250 0 13,072 13,072 326,452 274,671 38,710 CHF million, Swiss GAAP Assets Cash and balances with central banks Due from banks Receivables from securities financing transactions of which: cash collateral on securities borrowed of which: reverse repurchase agreements Due from customers Mortgage loans Trading portfolio assets Positive replacement values Financial investments Accrued income and prepaid expenses Investments in subsidiaries and other participations Property, equipment and software Goodwill and other intangible assets Other assets Total assets Liabilities Due to banks Payables from securities financing transactions of which: cash collateral on securities lent of which: repurchase agreements Due to customers Trading portfolio liabilities Negative replacement values Financial liabilities designated at fair value Medium-term notes Bonds issued and loans from central mortgage institutions Accrued expenses and deferred income Other liabilities Provisions Total liabilities Equity Share capital General reserve Voluntary earnings reserve Net profit / (loss) for the period Total equity Total liabilities and equity 1 Includes balances with other UBS Group subsidiaries. 770 UBS Switzerland AG (standalone): reconciliation of pre- and post-transfer off-balance sheet items CHF million, Swiss GAAP Contingent liabilities1 Irrevocable commitments1 Forward starting transactions2 Liabilities for calls on shares and other equities Off-balance sheet as of 31.3.15 Transfer of third-party UBS AG positions Intercompany positions with UBS AG as counterparty Off-balance sheet as of 1.4.15 7,782 7,784 37 881 7,782 7,784 881 37 1 Numbers are presented net of sub-participations. 2 Cash to be paid in the future by either UBS Switzerland AG or the counterparty. 771 Legal entity financial and regulatory information Legal entity financial and regulatory information UBS AG standalone financial statements UBS AG standalone financial statements For the year ended % change from Note 31.12.15 31.12.14 31.12.14 6,204 2,602 199 (5,917) 3,088 (158) 2,929 3,416 285 110 (1,012) 2,799 3,725 150 1,218 565 4,706 (831) 5,809 15,263 6,438 5,615 12,053 413 674 22 25 13,187 2,076 10,264 136 220 11,984 8,653 2,683 210 (6,450) 5,097 (129) 4,968 6,248 492 598 (1,147) 6,192 3,407 147 878 26 4,494 (1,816) 3,729 18,297 6,787 5,727 12,514 415 596 20 1,484 15,029 3,267 4,850 57 212 7,849 3 4 4 5 6 7 7 8 (28) (3) (5) (8) (39) 22 (41) (45) (42) (82) (12) (55) 9 2 39 5 (54) 56 (17) (5) (2) (4) 0 13 10 (98) (12) (36) 112 139 4 53 Audited | Income statement CHF million Interest and discount income Interest and dividend income from trading portfolio Interest and dividend income from financial investments Interest expense Gross interest income Credit loss (expense) / recovery Net interest income Fee and commission income from securities and investment business Credit-related fees and commissions 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 ordinary income Sundry ordinary expenses Other income from ordinary activities Total operating income Personnel expenses General and administrative expenses Subtotal operating expenses Impairment of investments in subsidiaries and other participations Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and other intangible assets Changes in provisions and other allowances and losses Total operating expenses Operating profit Extraordinary income Extraordinary expenses Tax expense / (benefit) Net profit / (loss) 772 Balance sheet CHF million Assets Cash and balances with central banks Due from banks Receivables from securities financing transactions of which: cash collateral on securities borrowed of which: reverse repurchase agreements Due from customers Mortgage loans Trading portfolio assets Positive replacement values Financial investments Accrued income and prepaid expenses Investments in subsidiaries and other participations Property, equipment and software Goodwill and other intangible assets Other assets Total assets of which: subordinated assets of which: subject to mandatory conversion and / or debt waiver Liabilities Due to banks Payables from securities financing transactions of which: cash collateral on securities lent of which: repurchase agreements Due to customers Trading portfolio liabilities Negative replacement values Financial liabilities designated at fair value Medium-term notes Bonds issued and loans from central mortgage institutions Accrued expenses and deferred income Other liabilities Provisions Total liabilities Equity Share capital General reserve of which: statutory capital reserve of which: capital contribution reserve1 of which: statutory earnings reserve Voluntary earnings reserve Net profit / (loss) for the period Total equity Total liabilities and equity of which: subordinated liabilities of which: subject to mandatory conversion and / or debt waiver Note 31.12.15 31.12.14 31.12.14 % change from 9 10 10 12 13 14 15 9 12 13 12,18 15 11 19 45,125 40,611 90,479 27,925 62,553 97,401 4,679 94,210 20,987 27,528 1,708 43,791 6,503 36 3,986 477,045 5,752 4,020 36,669 55,457 34,094 21,363 95,711 39,245 100,158 33,676 66,481 156,344 155,406 107,549 42,385 42,384 2,012 27,199 5,899 33 3,568 777,893 4,257 0 43,787 56,460 33,284 23,175 144,842 397,194 21,179 24,669 58,104 0 72,750 4,356 5,505 1,786 18,965 42,911 49,803 602 111,302 4,700 6,962 2,831 425,316 735,517 386 33,669 38,149 38,149 (4,480) 5,689 11,984 51,728 477,045 16,139 11,858 384 28,453 40,782 40,782 (12,329) 5,689 7,849 42,376 777,893 18,538 10,687 (53) 3 (10) (17) (6) (38) (97) (12) (50) (35) (15) 61 10 9 12 (39) 35 (16) (2) 2 (8) (64) 12 (43) 17 (100) (35) (7) (21) (37) (42) 0 18 (6) (6) (64) 0 53 22 (39) (13) 11 773 Legal entity financial and regulatory information Legal entity financial and regulatory information UBS AG standalone financial statements Balance sheet (continued) CHF million Off-balance sheet items Contingent liabilities, gross Sub-participations Contingent liabilities, net of which: guarantees to third parties related to subsidiaries of which: credit guarantees and similar instruments of which: performance guarantees and similar instruments of which: documentary credits Irrevocable commitments, gross Sub-participations Irrevocable commitments, net of which: loan commitments of which: payment commitment related to deposit insurance Forward starting transactions2 of which: reverse repurchase agreements of which: securities borrowing agreements of which: repurchase agreements of which: securities lending agreements Liabilities for calls on shares and other equity instruments 31.12.15 31.12.14 31.12.14 % change from 27,787 (1,866) 25,920 19,392 4,224 26 2,278 50,901 (1,559) 49,342 49,342 0 4,195 1,626 6 2,561 2 7 41,872 (2,792) 39,080 23,140 7,842 2,555 5,543 54,296 (1,256) 53,040 52,172 868 9,932 6,048 125 3,758 0 45 (34) (33) (34) (16) (46) (99) (59) (6) 24 (7) (5) (100) (58) (73) (95) (32) (84) 1 Effective 1 January 2011, the Swiss withholding tax law provides that payments out of the capital contribution reserve are not subject to withholding tax. This law has led to interpretational differences between the Swiss Federal Tax Authorities and companies about the qualifying amounts of capital contribution reserve and the disclosure in the financial statements. In view of this, the Swiss Federal Tax Authorities have confirmed that UBS would be able to repay to shareholders CHF 27.4 billion of disclosed capital contribution reserve (status as of 1 January 2011) without being subject to the withholding tax deduction that applies to dividends paid out of retained earnings. This amount decreased to CHF 23.0 billion as of 31 December 2015 subsequent to distributions in 2012, 2013, 2014 and 2015. The decision about the remaining amount has been deferred to a future point in time. 2 Cash to be paid in the future by either UBS AG or the counterparty. Off-balance sheet items Off-balance sheet items include indemnities and guarantees issued by UBS AG for the benefit of subsidiaries and creditors of subsidiaries. Where the indemnity amount issued by UBS AG is not specifi- cally defined, the indemnity relates to the solvency or minimum capitalization of a subsidiary, and therefore no amount is included in the table above. In addition, UBS AG is jointly and severally liable for the value added tax (VAT) liability of Swiss subsidiaries that belong to its VAT group. This contingent liability is not included in the table above. Guarantee to UBS Limited UBS AG has issued a guarantee for the benefit of each counter- party of UBS Limited. Under this guarantee, UBS AG irrevocably and unconditionally guarantees each and every obligation that UBS Limited enters into. UBS AG promises to pay to that counter- party on demand any unpaid balance of such liabilities under the terms of the guarantee. Joint and several liability UBS Switzerland AG In June 2015, the Personal & Corporate Banking and Wealth Management businesses booked in Switzerland were transferred from UBS AG to UBS Switzerland AG through an asset transfer in accordance with the Swiss Merger Act (refer to “Establishment of UBS Switzerland AG” in this section for more information). Under the Swiss Merger Act, UBS AG assumed joint liability for obliga- tions existing on the asset transfer date, 14 June 2015, which were transferred to UBS Switzerland AG. UBS AG has no liability for new obligations incurred by UBS Switzerland AG after the asset transfer date. As of the asset transfer date, UBS AG assumed joint liability for approximately CHF 260 billion of obligations of UBS Switzerland AG, excluding the collateralized portion of secured contractual obligations. The joint liability amount declines as obligations mature, terminate or are novated following the asset transfer date. As of 31 December 2015, the joint liability amounted to approximately CHF 55 billion. As of 31 December 2015, the probability of an outflow under this joint and several liability was assessed to be remote and as a result, the table above does not include any exposures arising under this joint and several liability. 774 Statement of changes in equity CHF million Balance as of 1 January 2015 Capital increase Dividends and other distributions Net profit / (loss) appropriation Net profit / (loss) for the period Share capital Statutory capital reserve Statutory earnings reserve Voluntary earnings reserve Net profit / (loss) for the period 384 1 40,782 (12,329) 5,689 7,849 (2,633) 7,849 Total equity 42,376 1 (2,633) 0 11,984 51,728 (7,849) 11,984 11,984 Balance as of 31 December 2015 386 38,149 (4,480) 5,689 Statement of appropriation of retained earnings and proposed dividend distribution The Board of Directors proposes that the Annual General Meeting of Shareholders (AGM) on 4 May 2016 approves the following appropriation of retained earnings and dividend distribution. Pro- vided that the proposed dividend distribution is approved, the payment of CHF 3,434 million would be made on 12 May 2016 to UBS Group AG. Dividend payments out of retained earnings are generally subject to Swiss withholding tax. However, as cer- tain conditions are met, the withholding tax related to the divi- dend distribution from UBS AG to UBS Group AG will be settled with the Swiss Federal Tax Administration through a so-called dividend notification procedure. Under this procedure, effectively no tax will be withheld. Proposed appropriation of retained earnings CHF million Net profit for the period Retained earnings carried forward Total retained earnings available for appropriation Proposed appropriation of retained earnings Appropriation to general reserve: statutory earnings reserve Appropriation to voluntary earnings reserve Dividend distribution Retained earnings carried forward For the year ended 31.12.15 11,984 0 11,984 (4,480) (4,070) (3,434) 0 775 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS AG standalone financial statements Notes to the UBS AG standalone financial statements Note 1 Name, legal form and registered office UBS AG is incorporated and domiciled in Switzerland. Its regis- tered offices are at Bahnhofstrasse 45, CH-8001 Zurich and Aeschenvorstadt 1, CH-4051 Basel, Switzerland. UBS AG oper- ates under the Swiss Code of Obligations and Swiss Federal Bank- ing Law as a stock corporation (Aktiengesellschaft), a corporation that has issued shares of common stock to investors. UBS AG is 100% owned by UBS Group AG, the ultimate parent of the UBS Group. Note 2 Accounting policies a) Significant accounting policies UBS AG standalone financial statements are prepared in accor- dance with Swiss GAAP (FINMA Circular 2015 / 1 and the Banking Ordinance) in the form of reliable assessment statutory single- entity financial statements. The accounting policies are principally the same as for the consolidated financial statements outlined in Note 1 to the consolidated financial statements. Major differences between the Swiss GAAP requirements and International Finan- cial Reporting Standards are described in Note 38 to the consoli- dated financial statements. The significant accounting policies applied for the standalone financial statements of UBS AG are discussed below. Risk management UBS AG (standalone) is fully integrated into the Group-wide risk management process described in the audited part of the “Risk, treasury and capital management” section of this report. Further information on the use of derivative instruments and hedge accounting are outlined in Notes 1 and 14 to the consoli- dated financial statements. Compensation policy The compensation structure and processes of UBS AG conform to the compensation principles and framework of UBS Group AG. For detailed information refer to the Compensation Report of UBS Group AG. Foreign currency translation Transactions denominated in foreign currency are translated into Swiss francs at the spot exchange rate on the date of the transac- tion. At the balance sheet date, all monetary assets and liabilities, as well as equity instruments recorded in Trading portfolio assets and Financial investments denominated in foreign currency, are translated into Swiss francs using the closing exchange rate. Non- monetary items measured at historic cost are translated at the exchange rate on the date of the transaction. Assets and liabilities of foreign branches are translated into Swiss francs at the closing exchange rate. Income and expense items of foreign branches are translated at weighted average exchange rates for the period. All currency translation effects are recognized in the income state- ment. The main currency translation rates used by UBS AG can be found in Note 36 to the consolidated financial statements. Structured products Structured products consist of a host contract and one or more embedded derivatives that do not relate to UBS AG’s own equity. The embedded derivatives are assessed for bifurcation for mea- surement purposes and presented in the same balance sheet line as the host contract. By applying the fair value option, certain structured debt instruments are measured at fair value as a whole, and recognized in Financial liabilities designated at fair value. Structured debt instruments comprise structured debt instru- ments issued and structured over-the-counter debt instruments. The fair value option for structured debt instruments can be applied only if the following criteria are cumulatively met: – the structured debt instrument is measured on a fair value basis and is subject to risk management that is equivalent to risk management for trading activities; – the application of the fair value option eliminates or signifi- cantly reduces an accounting mismatch that would otherwise arise; and – changes in fair value attributable to changes in unrealized own credit are not recognized in the income statement and the bal- ance sheet. Fair value changes related to Financial liabilities designated at fair value, excluding changes in unrealized own credit, are recognized in Net trading income. Interest expense on Financial liabilities des- ignated at fair value is recognized in Interest expense. ➔ Refer to Note 18 for more information 776 Note 2 Accounting policies (continued) Investments in subsidiaries and other participations Investments in subsidiaries and other participations are equity interests that are held to carry on the business of UBS AG or for other strategic purposes. They include all subsidiaries directly held by UBS AG through which UBS AG conducts its business on a global basis. The investments are measured individually and car- ried at cost less impairment. The carrying value is tested for impairment when indications for a decrease in value exist, which include incurrence of significant operating losses or a severe depreciation of the currency in which the investment is denomi- nated. If an investment in a subsidiary is impaired, its value is gen- erally written down to the net asset value. Subsequent recoveries in value are recognized up to the original cost value based on either the increased net asset value or a value above the net asset value if, in the opinion of management, forecasts of future profit- ability 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 recog- nized. Impairments of investments are presented as Impairment of investments in subsidiaries and other participations. Reversals of impairments are presented as Extraordinary income in the income statement. Impairments and partial or full reversals of impair- ments for a subsidiary during the same annual period are deter- mined on a net basis. Deferred taxes Deferred tax assets are not recognized in UBS AG’s standalone financial statements. However, deferred tax liabilities may be rec- ognized for taxable temporary differences. Changes in the deferred tax liability balance are recognized in the income state- ment. Services provided to and received from subsidiaries, affiliated entities and UBS Group AG Services provided to and received from UBS Group AG or any of its subsidiaries are settled in cash as hard cost transfers or hard revenue transfers paid or received. When the nature of the underlying transaction between UBS AG and UBS Group AG or any of its subsidiaries contains a single, clearly identifiable service element, related income and expenses are presented in the respective income statement line item, e.g., Fee and commission income from securities and investment busi- ness, Other fee and commission income, Fee and commission expense, Net trading income or General and administrative expenses. To the extent the nature of the underlying transaction contains various service elements and is not clearly attributable to a particular Income statement line item, related income and expenses are presented in Sundry ordinary income and Sundry ordinary expenses. ➔ Refer to Notes 4 and 6 for more information Pension and other post-employment benefit plans Swiss GAAP permits the use of IFRS or Swiss accounting standards for pension and other post-employment benefit plans, with the election made on a plan-by-plan basis. UBS AG has elected to apply Swiss GAAP (FER 16) for the Swiss pension plan in its standalone financial statements. The require- ments of Swiss GAAP are better aligned with the specific nature of Swiss pension plans, which are hybrid in that they combine elements of defined contribution and defined benefit plans, but are treated as defined benefit plans under IFRS. Swiss GAAP requires that the employer contributions to the pension fund are recognized as Personnel expenses in the income statement. The employer contributions to the Swiss pension fund are determined as a percentage of contributory compensation. Further, Swiss GAAP requires an assessment as to whether, based on the finan- cial statements of the pension fund prepared in accordance with Swiss accounting standards (FER 26), an economic benefit to, or obligation of, UBS AG arises from the pension fund and is recog- nized in the balance sheet when conditions are met. Conditions for recording a pension asset or liability would be met if, for example, an employer contribution reserve is available or UBS AG is required to contribute to the reduction of a pension deficit (on a FER 26 basis). Key differences between Swiss GAAP and IFRS include the treatment of dynamic elements, such as future salary increases and future interest credits on retirement savings, which are not considered under the static method used in accordance with Swiss GAAP. Also, the discount rate used to determine the defined benefit obligation in accordance with IFRS is based on the yield of high-quality corporate bonds of the market in the respective pen- sion plan country. The discount rate used in accordance with Swiss GAAP, i.e., the technical interest rate, is determined by the Pension Foundation Board based on the expected returns of the Board’s investment strategy. ➔ Refer to Note 20 for more information UBS AG has elected to apply IFRS (IAS 19) for its non-Swiss defined benefit plans. However, remeasurements of the defined benefit obligation and the plan assets are recognized in the income statement rather than directly in equity. For corresponding disclosures in accordance with IAS 19 requirements, refer to Note 28 to the consolidated financial statements. 777 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS AG standalone financial statements Note 2 Accounting policies (continued) Subordinated assets and liabilities Subordinated assets are comprised of claims that arise from an irrevocable written declaration where in the event of liquidation, bankruptcy or restructuring of the debtor, rank after the claims of all other creditors and may not be offset against amounts payable to the debtor nor secured by its assets. Subordinated liabilities are comprised of corresponding obligations. Subordinated assets and liabilities that contain a point-of-non- viability clause in accordance with Swiss capital requirements per articles 29 and 30 of the Capital Adequacy Ordinance are dis- closed as being subject to mandatory conversion and / or debt waiver and provide for the claim or the obligation to be written off or converted into equity in the event that the issuing bank reaches a point of non-viability. Dispensations in the standalone financial statements As UBS AG prepares consolidated financial statements in accor- dance with IFRS, UBS AG is exempt from various disclosures in the standalone financial statements. The dispensations include the management report, the statement of cash flows and various note disclosures, as well as the publication of interim financial statements. b) Changes in accounting policies, comparability and other adjustments Comparative period figures Comparative figures presented for 31 December 2014 include the Personal & Corporate Banking and Wealth Management busi- nesses booked in Switzerland, which were transferred from UBS AG to UBS Switzerland AG effective 1 April 2015. ➔ Refer to “Establishment of UBS Switzerland AG” within this section of the report for more information Furthermore, as explained in further detail below, UBS AG adopted the revisions to Swiss GAAP retrospectively from 1 Janu- ary 2015. The comparative 2014 income statement and balance sheet were only amended for changes in presentation. Also, no comparatives are provided for Note disclosures that are newly required under revised Swiss GAAP, as UBS AG made use of the available transition relief. Lastly, UBS AG re-assessed the presentation of hard cost and revenue transfers and 2015 figures are presented on a revised basis, while comparative 2014 amounts were not amended. Fur- ther details are provided on the next page. Amendment of accounting standards applicable to banks and securities dealers The Swiss Law on Accounting and Financial Reporting (32nd title of the Swiss Code of Obligations) was revised in 2011 and became effective on 1 January 2013 with a transition period of two years (i.e., is effective for annual periods beginning on or after 1 Janu- ary 2015). Following this change, the accounting standards appli- cable to banks and securities dealers were amended accordingly. On 30 April 2014, the Swiss Federal Council passed the amended Banking Ordinance, and on 3 June 2014 the new FINMA Circular 2015 / 1 Accounting – banks was published. Revised Swiss GAAP, in accordance with the amended Banking Ordinance and the new FINMA Circular, is effective for annual periods beginning on or after 1 January 2015. UBS AG made use of transition relief for interim reporting from the first to third quarter of 2015 and adopted revised Swiss GAAP as of 1 November 2015 for the 2015 annual financial statements, retrospectively from 1 January 2015. The main transition effects on the UBS AG standalone financial statements from this adoption are summarized below. Recognition and measurement changes The scope of the fair value option was increased to include struc- tured debt instruments with embedded derivatives that are clearly and closely related to the host debt contracts. As a result, structured debt instruments with a fair value in the amount of CHF 19.3 billion were reclassified to Financial liabilities designated at fair value from Due to customers and Bonds issued and loans from central mort- gage institutions. The transition impact from measuring those struc- tured debt instruments at fair value was CHF 190 million, which was recognized as a decrease to Net trading income in 2015. Own bonds held in the amount of CHF 4.9 billion previously recognized within Trading portfolio assets were offset against bonds issued recognized within Financial liabilities designated at fair value and Bonds issued and loans from central mortgage insti- tutions. An accumulated measurement difference between own bonds held and own bonds issued in the amount of CHF 25 mil- lion was recognized as a decrease to Net trading income in 2015. A reduction of the useful life of certain intangible assets from 20 to 10 years had an immaterial impact on the income statement and balance sheet. 778 Note 2 Accounting policies (continued) Revision to Swiss GAAP: presentational balance sheet changes CHF million Total assets of which: Money market paper of which: Trading portfolio assets of which: Financial investments of which: Due from banks of which: Due from customers of which: Receivables from securities financing transactions Total liabilities of which: Money market paper issued of which: Bonds issued and loans from central mortgage institutions of which: Due to banks of which: Due to customers on savings and deposit accounts of which: Other amounts due to customers of which: Due to customers of which: Payables from securities financing transactions Former Swiss GAAP Revised Swiss GAAP Absolute change 31.12.14 31.12.14 31.12.14 777,893 10,966 101,820 37,154 112,649 183,091 735,517 34,235 77,067 94,952 112,709 289,779 777,893 107,549 42,384 39,245 156,344 100,158 735,517 111,302 43,787 397,194 56,460 0 (10,966) 5,729 5,230 (73,404) (26,747) 100,158 0 (34,235) 34,235 (51,165) (112,709) (289,779) 397,194 56,460 Presentation and disclosure changes The presentation order of certain items in the income statement was amended and different sub-totals were added to the income statement. Furthermore, Credit loss (expense) / recovery is now included within Net interest income, whereas previously this was included within Allowances, provisions and losses. The compara- tive income statement for 2014 was amended accordingly and as a result, Net interest income and Total operating income decreased by CHF 129 million with a corresponding increase in Changes in provisions and other allowances and losses, reflecting the afore- mentioned change in presentation of Credit loss (expense) / recov- ery. There was no impact on net profit or equity. The structure of the balance sheet was also amended. Money market paper held and money market paper issued are no longer shown as separate balance sheet line items but are instead reported within Trading portfolio assets, Financial investments, Due from customers and Bonds issued and loans from central mortgage institutions. Conversely, Receivables from securities financing transactions and Payables from securities financing transactions are now shown separately, whereas previously these receivables and payables were reported within Due from banks, Due from customers, Due to banks and Due to customers. Lastly, the previously disclosed balance sheet lines Due to customers on savings and deposit accounts and Other amounts due to custom- ers were combined into Due to customers. The table above pro- vides the quantitative effect on the balance sheet as of 31 Decem- ber 2014 from these presentational changes. In addition to the aforementioned changes to the income statement and balance sheet, certain Notes have been added to the financial statements. Presentation of internal hard transfers During 2015, UBS re-assessed the presentation of hard cost and revenue transfers between UBS AG and its subsidiaries, affiliated entities and UBS Group AG, and aligned the presentation of the related income and expenses with the underlying nature of the transaction for the year ended 31 December 2015, without adjusting comparative period amounts. When the nature of the underlying transaction contains a single, clearly identifiable ser- vice element, related income and expenses are newly presented in the respective income statement line item. Only to the extent that the nature of the underlying transaction contains various service elements and is not clearly attributable to a particular Income statement line item, related income and expenses continue to be presented in Sundry ordinary income and Sundry ordinary expenses. 779 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS AG standalone financial statements Note 3a Net trading income by business CHF million Investment Bank Corporate Client Solutions Investment Bank Investor Client Services Other business divisions and Corporate Center Total net trading income Note 3b Net trading income by underlying risk category CHF million Interest rate instruments (including funds) Foreign exchange instruments Equity instruments (including funds) Credit instruments Precious metals / commodities Total net trading income of which: net gains / (losses) from financial liabilities designated at fair value1 For the year ended % change from 31.12.15 31.12.14 31.12.14 318 3,203 205 3,725 56 3,039 313 3,407 467 5 (35) 9 For the year ended 31.12.15 (346) 1,912 1,822 290 47 3,725 3,139 1 Excludes fair value changes of hedges related to financial liabilities designated at fair value and foreign currency effects arising from translating foreign currency transactions into the respective functional currency, both of which are reported within net trading income. Note 4 Sundry ordinary income and expenses CHF million Gains from sale of loans and receivables Income from hard cost transfers1, 2 Income from hard revenue transfers2 Other Total sundry ordinary income Losses from early redemption of debt Expenses from hard revenue transfers2 Other Total sundry ordinary expenses For the year ended % change from 31.12.15 31.12.14 31.12.14 23 4,580 18 86 4,706 (275) (497) (59) (831) 47 2,498 1,853 96 4,494 (4) (1,772) (40) (1,816) (52) 83 (99) (11) 5 (72) 47 (54) 1 Represents income received from UBS Group AG and subsidiaries in the UBS Group for services provided by UBS AG. Services provided by UBS AG primarily related to Corporate Center functions. 2 Refer to Note 2b for more information. 780 Note 5 Personnel expenses CHF million Salaries Variable compensation – performance awards Variable compensation – other Contractors Social security Pension and other post-employment benefit plans of which: value adjustments for economic benefits or obligations from pension funds1 Wealth Management Americas: Financial advisor compensation Other personnel expenses Total personnel expenses 1 Reflects the remeasurement of the defined benefit obligation and return on plan assets for the non-Swiss defined benefit plans where UBS AG applies IAS 19. Note 6 General and administrative expenses CHF million Occupancy Rent and maintenance of IT equipment Communication and market data services Administration1 of which: hard cost transfers paid Marketing and public relations Travel and entertainment Fees to audit firms of which: financial and regulatory audits of which: audit related services of which: tax and other services Other professional fees Outsourcing of IT and other services Total general and administrative expenses 1 Includes hard cost transfers paid to UBS Group AG and subsidiaries in the UBS Group for services provided to UBS AG. For the year ended 31.12.15 3,459 1,707 191 303 408 122 (318) 8 240 6,438 For the year ended 31.12.15 588 383 322 1,413 955 283 226 53 44 6 3 776 1,571 5,615 781 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS AG standalone financial statements Note 7 Extraordinary income and expenses CHF million Gains from disposals of subsidiaries and other participations Reversal of impairments and provisions of subsidiaries and other participations Prior period related income Other extraordinary income Total extraordinary income Losses from disposals of subsidiaries and other participations Prior period related expenses Other extraordinary expenses Total extraordinary expenses For the year ended % change from 31.12.15 31.12.14 31.12.14 334 9,551 0 379 10,264 1 0 134 136 96 4,646 63 45 4,850 0 55 2 57 249 106 (100) 735 112 (100) 139 In the third quarter of 2015, UBS AG contributed its participations in UBS Americas Inc., UBS Securities LLC and three Asset Manage- ment subsidiaries into UBS Americas Holding LLC, a direct subsid- iary of UBS AG. This contribution was made at a fair value of CHF 21.2 billion, resulting in a gain of CHF 10.0 billion that was recog- nized in the income statement, largely as extraordinary income, and which increased UBS AG’s investment value in UBS Americas Holding LLC. Note 8 Taxes CHF million Income tax expense / (benefit) of which: current of which: deferred Capital tax Total tax expense / (benefit) For the year ended 31.12.15 186 185 1 34 220 For the year ended 31 December 2015, the average tax rate, defined as income tax expense divided by the sum of operating profit and extraordinary income minus extraordinary expenses and capital tax, was 1.5%. Income tax expense for the year ended 31 December 2015 includes a benefit of CHF 3,188 million from the utilization of tax losses carried forward in UBS AG’s main tax jurisdictions. 782 Note 9 Securities financing transactions CHF billion On-balance sheet Receivables from securities financing transactions, gross Netting of securities financing transactions Receivables from securities financing transactions, net Payables from securities financing transactions, gross Netting of securities financing transactions Payables from securities financing transactions, net Assets pledged as collateral in connection with securities financing transactions of which: trading portfolio assets of which: assets which may be sold or repledged by counterparties of which: financial investments of which: assets which may be sold or repledged by counterparties Off-balance sheet Fair value of assets received as collateral in connection with securities financing transactions of which: repledged of which: sold in connection with short sale transactions Note 10a Collateral for loans and off-balance sheet transactions 31.12.15 133.3 (42.8) 90.5 98.2 (42.8) 55.5 54.0 52.8 51.9 1.2 1.2 249.9 183.0 21.2 CHF million On-balance sheet Due from customers, gross Mortgage loans, gross of which: residential mortgages of which: office and business premises mortgages of which: industrial premises mortgages of which: other mortgages Total on-balance sheet, gross Allowances Total on-balance sheet, net Off-balance sheet Contingent liabilities, gross Irrevocable commitments, gross Forward starting reverse repurchase and securities borrowing transactions Liabilities for calls on shares and other equities Total off-balance sheet Secured Secured by collateral Real estate Other collateral1 31.12.15 Secured by other credit enhancements2 Unsecured Total 4 4,681 4,605 4 44 28 4,684 (2) 4,683 0 456 0 0 456 64,223 0 1,457 0 31,9473 0 97,630 4,681 4,605 4 44 28 64,223 (152) 64,071 2,121 9,673 1,632 0 13,425 1,457 0 1,457 2,093 7,515 0 0 31,947 102,311 (77) (231) 31,870 102,080 23,573 33,256 0 7 27,787 50,901 1,632 7 9,608 56,837 80,327 1 Mainly comprised of cash and securities. 2 Includes credit default swaps and guarantees. 3 Primarily comprised of amounts due from subsidiaries. 783 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS AG standalone financial statements Note 10b Impaired financial instruments CHF million Amounts due from customers Mortgage loans Guarantees and loan commitments Total impaired financial instruments Note 11a Allowances CHF million Specific allowances for amounts due from customers and mortgage loans Specific allowances for due from banks Collective allowances1 Other allowances Total allowances Gross impaired finan- cial instruments Allowances and provisions Estimated liquidation proceeds of collateral Net impaired finan- cial instruments 31.12.15 474 5 17 496 229 2 3 234 0 4 0 4 245 0 14 259 Increase recognized in the income statement Balance as of 31.12.14 Release recognized in the income statement Write-offs Recoveries and past due interest Reclassifica- tions / other2 Foreign currency translation Transfer to UBS Switzerland AG Balance as of 31.12.15 655 12 5 0 673 198 0 0 0 198 (39) 0 (1) 0 (40) (18) 0 0 0 (18) 21 0 0 0 21 44 0 0 0 44 (18) 0 0 0 (18) (611) (12) (5) 0 (628) 231 0 0 0 231 1 Mainly relates to amounts due from customers. 2 Includes CHF 47 million related to a specific allowance for amounts due from customers, which was recognized in a prior period. Note 11b Provisions CHF million Default risk related to loan commitments and guarantees Operational risks Litigation, regulatory and similar matters1 Restructuring Real estate2 Employee benefits Parental support to subsidiaries Deferred taxes Other Total provisions Increase recognized in the income statement Release recognized in the income statement Balance as of 31.12.14 Provisions used in conformity with designated purpose 23 28 1,881 329 83 208 97 10 172 2,831 3 8 95 158 26 4 0 1 6 301 (3) (5) (73) (40) (1) (15) 0 0 0 (3) (720) (160) (16) 0 0 0 (15) (152) (112) (1,011) Recoveries Reclassifi- cations Foreign currency translation Transfer to UBS Switzerland AG Balance as of 31.12.15 0 0 0 7 3 2 0 0 0 12 3 0 0 0 0 0 0 0 0 3 0 (2) (17) 3 (1) (7) 0 (1) 0 (24) (23) (7) (103) (9) 0 (27) 0 0 (5) 3 20 1,063 288 94 165 96 10 47 (174) 1,786 1 Includes provisions for litigation resulting from security risks. 2 Includes provisions for onerous lease contracts of CHF 25 million as of 31 December 2015 (31 December 2014: CHF 14 million) and reinstatement cost provisions for leasehold improvements of CHF 69 million as of 31 December 2015 (31 December 2014: CHF 70 million). 784 Note 12 Trading portfolio and other financial instruments measured at fair value CHF million Assets Trading portfolio assets of which: debt instruments1 of which: listed of which: equity instruments of which: precious metals and other physical commodities Total assets measured at fair value of which: fair value derived using a valuation model of which: securities eligible for repurchase transactions in accordance with liquidity regulations Liabilities Trading portfolio liabilities of which: debt instruments1 of which: listed of which: equity instruments Financial liabilities designated at fair value2 Total liabilities measured at fair value of which: fair value derived using a valuation model 1 Includes money market paper. 2 Refer to Note 18 for more information. 31.12.15 94,210 22,261 13,831 70,035 1,915 94,210 18,783 15,894 21,179 4,190 3,899 16,989 58,104 79,283 60,520 785 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS AG standalone financial statements Note 13 Derivative instruments CHF billion Interest rate contracts Forwards1 Swaps of which: designated in hedge accounting relationships Futures Over-the-counter (OTC) options Exchange-traded options Total Foreign exchange contracts Forwards Interest and currency swaps Futures Over-the-counter (OTC) options Exchange-traded options Total Equity / index contracts Forwards Swaps Futures Over-the-counter (OTC) options Exchange-traded options Total Credit derivative contracts Credit default swaps Total return swaps Other Total Commodity, precious metals and other contracts Forwards Swaps Futures Over-the-counter (OTC) options Exchange-traded options Total Total before netting as of 31 December 2015 of which: trading derivatives of which: fair value derived using a valuation model of which: derivatives designated in hedge accounting relationships of which: fair value derived using a valuation model Netting with cash collateral payables / receivables Replacement value netting Total after netting as of 31 December 2015 of which: with central clearing counterparties of which: with bank and broker-dealer counterparties of which: other client counterparties CHF billion Total before netting as of 31 December 2014 Netting with cash collateral payables / receivables Replacement value netting Total after netting as of 31 December 2014 1 Includes forward rate agreements. 2 PRV: positive replacement values. 3 NRV: negative replacement values. 786 31.12.15 NRV3 Total notional values 2,458 7,636 6 335 1,132 208 11,769 1,388 2,837 8 975 8 5,217 15 150 25 156 231 577 318 12 4 334 5 19 8 19 11 63 17,960 0.3 60.7 0.0 0.0 19.2 0.0 80.1 16.5 38.0 0.0 9.3 0.0 63.8 0.1 4.6 0.0 6.7 6.5 18.0 5.9 0.7 0.0 6.5 0.3 0.5 0.0 0.6 0.9 2.3 170.7 170.7 170.3 0.0 0.0 (9.7) (136.3) 24.7 0.6 9.2 14.9 Total notional values 25,017 31.12.14 NRV3 258.7 (16.0) (199.8) 42.9 PRV2 0.1 69.3 0.4 0.0 17.4 0.0 86.9 17.7 38.8 0.0 9.6 0.0 66.1 0.1 3.5 0.0 4.7 5.5 13.8 6.0 0.6 0.0 6.7 0.3 0.7 0.0 0.9 0.7 2.5 176.0 175.6 175.2 0.4 0.4 (18.7) (136.3) 21.0 0.0 7.4 13.6 PRV2 262.2 (20.0) (199.8) 42.4 Note 14a Financial investments by instrument type CHF million Debt instruments available-for-sale Equity instruments of which: qualified participations1 Property Total financial investments of which: securities eligible for repurchase transactions in accordance with liquidity regulations 1 Qualified participations are investments in which UBS AG holds 10% or more of the total capital or has at least 10% of total voting rights. Note 14b Financial investments by counterparty rating – debt instruments 31.12.15 Carrying value 27,296 223 133 9 27,528 27,127 CHF million Internal UBS rating1 0–1 2–3 4–5 6–8 9–13 Non-rated Total financial investments 1 Refer to Note 17 for more information. Note 15a Other assets CHF million Settlement and clearing accounts VAT and other indirect tax receivables Bail deposit1 Other of which: other receivables from UBS Group AG and subsidiaries in the UBS Group Total other assets 1 Refer to item 1 in Note 22b to the consolidated financial statements for more information. Note 15b Other liabilities CHF million Deferral position for hedging instruments Settlement and clearing accounts Net defined benefit liabilities VAT and other indirect tax payables Other of which: other payables to UBS Group AG and subsidiaries in the UBS Group Total other liabilities Fair value 27,354 234 137 9 27,598 27,181 31.12.15 26,632 653 0 0 0 10 27,296 31.12.15 31.12.14 31.12.14 % change from 116 226 1,210 2,435 1,850 3,986 348 179 1,323 1,718 1,344 3,568 (67) 26 (9) 42 38 12 31.12.15 2,826 31.12.14 3,597 232 129 110 2,208 1,694 5,505 720 680 232 1,732 818 6,962 % change from 31.12.14 (21) (68) (81) (53) 27 107 (21) 787 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS AG standalone financial statements Note 16 Pledged assets1 The table below provides information on assets that are primarily pledged in connection with derivative transactions. Information for 31 December 2014 included loans pledged to Swiss mortgage institutions and in connection with the issuance of covered bonds. These loans were transferred to UBS Switzerland AG during 2015. The table excludes securities financing transactions. ➔ Refer to Note 9 for more information on securities financing transactions CHF million Mortgage loans2 Securities Pledges of precious metals to subsidiaries and other Total pledged assets 31.12.15 31.12.14 Carrying value of pledged assets Effective commitment Carrying value of pledged assets 0 2,597 0 2,597 0 258 0 258 27,973 1,568 1,153 30,694 Effective commitment 21,643 0 0 21,643 1 Excludes assets placed with central banks related to undrawn credit lines and for payment, clearing and settlement purposes (31 December 2015: CHF 2.1 billion, 31 December 2014: CHF 4.9 billion). 2 These pledged mortgage loans serve as collateral for existing liabilities against Swiss central mortgage institutions and for existing covered bond issuances. Of these pledged mortgage loans, approximately CHF 0 billion as 31 Decem- ber 2015 (31 December 2014: approximately CHF 4.5 billion) could be withdrawn or used for future liabilities or covered bond issuances without breaching existing collateral requirements. Note 17 Country risk of total assets The table below provides a breakdown of total non-Swiss assets by credit rating. These credit ratings represent the sovereign credit rating of the country to which the ultimate risk of the underlying asset is related. The ultimate risk country on unsecured loan posi- tions is the domicile of the immediate borrower, or, in the case of a legal entity, the domicile of the ultimate parent entity. For col- lateralized or guaranteed positions, the ultimate risk country is the domicile of the provider of the collateral or guarantor, or, if applicable, the domicile of the ultimate parent entity of the pro- vider of the collateral or guarantor. For mortgage loans, the ulti- mate risk country is the country where the real estate is located. Similarly, the ultimate risk country of property and equipment is the country where the property and equipment is located. Assets for which Switzerland is the ultimate risk country are provided separately in order to reconcile to total balance sheets assets. ➔ Refer to the “Risk management and control” section of this report for more information Classification Internal UBS rating Description Moody’s Investors Service 0 and 1 Investment grade Aaa Sub-investment grade 2 3 4 5 6 7 8 9 10 11 12 13 Default Defaulted Aa1 to Aa3 A1 to A3 Baa1 to Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa Ca to C D Low risk Medium risk High risk Very high risk Distressed Subtotal Switzerland Total assets 788 Standard & Poor’s AAA AA+ to AA– A+ to A– BBB+ to BBB Fitch AAA AA+ to AA– A+ to AA– BBB+ to BBB BBB– BB+ BB BB– B+ B B– CCC CC to C D BBB– BB+ BB BB– B+ B B– CCC CC to C D 31.12.15 CHF million 227,855 141,073 39,846 19,053 4,399 2,430 84 73 173 93 954 216 82 5 % 48 30 8 4 1 1 0 0 0 0 0 0 0 0 436,336 40,709 477,045 91 9 100 Note 18 Structured debt instruments The table below provides a breakdown of financial liabilities designated at fair value which are considered structured debt instruments. CHF million Fixed rate bonds with structured features Structured debt instruments issued: Equity-linked Rates-linked Credit-linked Commodities-linked1 FX-linked Structured over-the-counter debt instruments Total financial liabilities designated at fair value 1 Includes precious metals-linked debt instruments issued. 31.12.15 3,017 30,236 16,118 2,949 1,075 218 4,491 58,104 In addition to financial liabilities designated at fair value, certain structured debt instruments were reported within the balance sheet lines Bonds issued and loans from central mortgage institu- tions and Due to customers. These instruments were bifurcated for measurement purposes. As of 31 December 2015, the carry- ing values of the host instruments amounted to CHF 3,304 million and CHF 320 million, respectively. The carrying values of the bifur- cated embedded derivatives were negative CHF 126 million and positive CHF 66 million, respectively. Note 19a Share capital Share capital1 of which: shares outstanding of which: treasury shares held by UBS AG Conditional share capital of which: capital increase during the year 1 Registered shares issued. 31.12.15 31.12.14 Par value in CHF Number of shares Of which: dividend bearing Par value in CHF Number of shares Of which: dividend bearing 385,840,847 3,858,408,466 3,858,408,466 385,840,847 3,858,408,466 3,858,408,466 384,456,091 384,244,566 211,526 3,844,560,913 3,842,445,658 3,842,445,658 3,842,445,658 2,115,255 55,235,276 552,352,759 1,384,755 13,847,553 51,620,031 516,200,312 255,884 2,558,844 UBS AG’s share capital is fully paid up. Each share has a par value of CHF 0.10 and entitles the holder to one vote at the UBS AG shareholder’s meeting, if entered into the share register as having the right to vote, as well as a proportionate share of distributed dividends. UBS AG does not apply any restrictions or limitations on the transferability of shares. Treasury shares As of 1 January 2015, UBS AG held 2,115,255 treasury shares, which were exchanged with UBS Group AG shares in 2015. Non-distributable reserves Non-distributable reserves consist of 50% of the share capital of UBS AG, amounting to CHF 193 million as of 31 December 2015. Non-cash dividends During 2015, shares issued by UBS AG increased by 13,847,553 shares due to the issuance of new UBS AG shares out of conditional share capital upon distribution of a share dividend in May 2015. As part of the establishment of UBS Business Solutions AG, UBS AG transferred its participation in the Poland Service Center as a dividend-in-kind at book value of CHF 5 million to UBS Group AG. 789 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS AG standalone financial statements Note 19b Significant shareholders CHF million, except where indicated Significant direct shareholder of UBS AG UBS Group AG Significant indirect shareholders of UBS AG Chase Nominees Ltd., London GIC Private Limited, Singapore DTC (Cede & Co.), New York1 Nortrust Nominees Ltd, London 1 DTC (Cede & Co.), New York, “The Depository Trust Company”, is a US securities clearing organization. 31.12.15 31.12.14 Share capital held Shares held (%) Share capital held Shares held (%) 386 35 25 24 14 100 9 6 6 4 372 34 25 21 13 97 9 7 6 4 Significant shareholders presented in this Note are those that, directly or indirectly, hold 3% or more of UBS AG’s total share capital. The sole direct shareholder of UBS AG is UBS Group AG, which holds 100% of UBS AG shares. These shares entitle to vot- ing rights. Indirect shareholders of UBS AG included in the table above comprise direct shareholders of UBS Group AG, who are entered into the UBS Group AG share register. The shares and share capital of UBS AG held by indirect shareholders represent their relative holding of UBS Group AG shares. They do not have voting rights in UBS AG. ➔ Refer to Note 22 to the UBS Group AG standalone financial statements for more information on significant shareholders of UBS Group AG Note 20 Swiss pension plan and non-Swiss defined benefit plans a) Liabilities related to Swiss pension plan and non-Swiss defined benefit plans CHF million Provision for Swiss pension plan Net defined benefit liabilities for non-Swiss defined benefit plans Total provision for Swiss pension plan and net defined benefit liabilities for non-Swiss defined benefit plans Bank accounts at UBS and UBS debt instruments held by Swiss pension fund UBS derivative financial instruments held by Swiss pension fund Total liabilities related to Swiss pension plan and non-Swiss defined benefit plans b) Swiss pension plan CHF million Pension plan surplus1 Economic benefit / (obligation) of UBS AG Change in economic benefit / obligation recognized in the income statement Employer contributions for the period recognized in the income statement Performance rewards related employer contributions accrued Total pension expense recognized in the income statement within Personnel expenses 31.12.15 31.12.14 0 129 129 260 27 416 0 680 680 385 102 1,168 As of or for the year ended 31.12.15 2,243 31.12.14 4,572 0 0 270 30 300 0 0 444 45 489 1 The pension plan surplus is determined in accordance with FER 26 and consists of the reserve for the fluctuation in asset value. The surplus did not represent an economic benefit for UBS AG in accordance with FER 16 as of 31 December 2015 or 31 December 2014. UBS AG has elected to apply FER 16 for the Swiss pension plan and IAS 19 for its UK and other non-Swiss defined benefit plans. ➔ Refer to Note 28 to the consolidated financial statements for more information on non-Swiss defined benefit plans in accordance with IAS 19 The Swiss pension plan had no employer contribution reserve in 2015 or 2014. 790 Note 21 Share-based compensation Following the establishment of UBS Group AG as the ultimate holding company of the UBS Group, the obligations of UBS AG as grantor of certain outstanding awards under employee share, option, notional fund and deferred cash compensation plans were transferred to UBS Group AG. Expenses for such awards granted to UBS AG employees are charged by UBS Group AG to UBS AG. Obligations relating to deferred compensation plans which are required to be, and have been, granted by employing and / or sponsoring subsidiaries, such as UBS AG, have not been assumed by UBS Group AG and will continue on this basis. Furthermore, obligations related to other compensation vehicles, such as defined benefit pension plans and other local awards, have not been assumed by UBS Group AG and are retained by the relevant employing and / or sponsoring subsidiaries, such as UBS AG. ➔ Refer to Note 29 to the consolidated financial statements for more information Note 22 Related parties Transactions with related parties are conducted at internally agreed transfer prices, at arm’s length, or with respect to loans, fixed advances and mortgages to non-independent members of the Board of Directors and Group Executive Board members on the same terms and conditions that are available to other employees. CHF million Qualified shareholders of which: Due from / to customers Subsidiaries of which: Due from / to banks of which: Due from / to customers of which: Receivables / payables from securities financing transactions Affiliated entities of which: Due from / to customers Members of the Board of Directors and Group Executive Board External auditors Other related parties1 1 Primarily relates to UBS Securities Co. Limited, Beijing, in which UBS AG has a 24.99% equity interest. 31.12.15 Amounts due from Amounts due to 581 567 119,900 37,278 23,308 54,422 117 39 33 9 5,776 5,171 87,059 28,685 8,558 44,149 5,752 5,699 20 As of 31 December 2015, off-balance sheet positions related to subsidiaries amounted to CHF 26.5 billion, of which CHF 19.4 billion were guarantees to third parties and CHF 5.3 billion were loan commitments. Note 23 Fiduciary transactions CHF million Fiduciary deposits of which: placed with third-party banks of which: placed with subsidiaries and affiliated entities Total fiduciary transactions 31.12.15 31.12.14 31.12.14 % change from 310 310 0 310 5,869 5,853 16 5,869 (95) (95) (100) (95) Fiduciary transactions encompass transactions entered into or granted by UBS AG that result in holding or placing assets on behalf of individuals, trusts, defined benefit plans and other insti- tutions. Unless the recognition criteria for the assets are satisfied, these assets and the related income are excluded from UBS AG’s balance sheet and income statement, but disclosed in this Note as off-balance sheet fiduciary transactions. Client deposits that are initially placed as fiduciary transactions with UBS AG may be rec- ognized on UBS AG’s balance sheet in situations in which the deposit is subsequently placed within UBS AG. In such cases, these deposits are not reported in the table above. 791 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS AG standalone financial statements Note 24a Invested assets and net new money CHF billion Fund assets managed Discretionary assets Other invested assets Total invested assets of which: double count Net new money Note 24b Development of invested assets CHF billion Total invested assets at the beginning of the year1 Net new money Market movements2 Foreign currency translation Transfer to UBS Switzerland AG Other effects of which: acquisitions / (divestments) Total invested assets at the end of the year1 1 Includes double counts. 2 Includes interest and dividend income. ➔ Refer to Note 35 to the consolidated financial statements for more information For the year ended 31.12.15 11 166 311 488 2 0.0 For the year ended 31.12.15 1,076 0 8 (29) (557) (10) (10) 488 792 793 Legal entity financial and regulatory information Legal entity financial and regulatory information 794 795 Legal entity financial and regulatory information Legal entity financial and regulatory information UBS AG (standalone) regulatory information UBS AG (standalone) regulatory information Swiss SRB capital requirements and capital information Pillar 3 | UBS AG is considered a systemically relevant bank (SRB) under Swiss banking law and is subject to capital regulations on a standalone basis. Under Swiss SRB regulations, article 125 “Reliefs for financial groups and individual institutions” of the Swiss Capital Ordinance (CAO) stipulates that the Swiss Financial Market Supervisory Authority (FINMA) may grant, under certain conditions, capital relief to individual institutions, to ensure that an individual institu- tion’s compliance with the capital requirements does not lead to a de facto overcapitalization of the group of which it is part. FINMA granted relief concerning the regulatory capital require- ments of UBS AG on a standalone basis by means of a decree issued on 20 December 2013, which became effective on 1 Janu- ary 2014. Reconciliation of Swiss federal banking law equity to Swiss SRB capital CHF billion Equity – Swiss federal banking law1 Deferred tax assets Defined benefit plans Investments in the finance sector Goodwill and intangible assets Other2 Common equity tier 1 capital (phase-in) Additional tier 1 capital (phase-in) Tier 2 capital (phase-in) Total capital (phase-in) 31.12.15 51.7 1.9 0.0 (16.6) (0.4) (4.0) 32.7 0.0 0.0 32.7 31.12.143 42.4 3.5 3.7 (9.2) (0.4) (4.2) 35.9 0.0 6.4 42.2 1 Equity under Swiss federal banking law is adjusted to derive equity in accordance with IFRS and then further adjusted to derive common equity tier 1 (CET1) capital in accordance with Swiss SRB require- ments. 2 Includes accruals for proposed dividends to shareholders and other items. 3 Comparative balances presented for 31 December 2014 include the Personal & Corporate Banking and Wealth Management businesses booked in Switzerland which were transferred from UBS AG to UBS Switzerland AG effective 1 April 2015. Refer to “Establishment of UBS Switzerland AG” within this section for more information. 796 Swiss SRB capital ratio requirements and information (phase-in) CHF million, except where indicated Common equity tier 1 capital of which: effect of countercyclical buffer Common equity tier 1 capital / high-trigger loss-absorbing capital Low-trigger loss-absorbing capital less net deductions Total capital Capital ratio (%) Capital Requirement Actual Requirement Eligible 31.12.15 31.12.15 10.0 0.0 11.6 14.0 14.4 0.0 14.4 0.0 14.4 31.12.141 12.2 0.1 12.2 2.2 14.4 31.12.15 22,717 0 26,337 31,804 31.12.15 32,656 0 32,656 0 32,656 31.12.141 35,851 322 35,851 6,390 42,241 1 Comparative balances presented for 31 December 2014 include the Personal & Corporate Banking and Wealth Management businesses booked in Switzerland, which were transferred from UBS AG to UBS Switzerland AG effective 1 April 2015. Refer to “Establishment of UBS Switzerland AG” for more information. Swiss SRB capital information (phase-in) CHF million, except where indicated Common equity tier 1 capital Common equity tier 1 capital Additional tier 1 capital High-trigger loss-absorbing capital Net deductions Total additional tier 1 capital Tier 1 capital Tier 2 capital Low-trigger loss-absorbing capital Net deductions Total tier 2 capital Total capital Common equity tier 1 capital ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) Risk-weighted assets 31.12.15 31.12.141 32,656 35,851 1,252 (1,252) 0 32,656 10,325 (10,325) 0 32,656 14.4 14.4 14.4 0 0 0 35,851 10,451 (4,061) 6,390 42,241 12.2 12.2 14.4 227,170 293,889 1 Comparative balances presented for 31 December 2014 include the Personal & Corporate Banking and Wealth Management businesses booked in Switzerland, which were transferred from UBS AG to UBS Switzerland AG effective 1 April 2015. Refer to “Establishment of UBS Switzerland AG” for more information. 797 Legal entity financial and regulatory information Legal entity financial and regulatory information UBS AG (standalone) regulatory information Leverage ratio information Swiss SRB leverage ratio The Swiss SRB leverage ratio requirement is equal to 24% of the capital ratio requirements (excluding the countercyclical buffer requirement). As of 31 December 2015, the effective total leverage ratio require- ment for UBS AG (standalone) was 3.4%, resulting from multiply- ing the total capital ratio requirement (excluding the countercycli- cal buffer requirement) of 14.0% by 24%. Swiss SRB leverage ratio requirements and information (phase-in) CHF million, except where indicated Common equity tier 1 capital Common equity tier 1 capital and high-trigger loss-absorbing capital Total capital Swiss SRB leverage ratio (%) Swiss SRB leverage ratio capital Requirement1 31.12.15 Actual 31.12.15 2.4 2.8 3.4 5.2 5.2 5.2 31.12.143 3.8 3.8 4.5 Requirement2 31.12.15 15,216 17,640 21,302 Eligible 31.12.15 32,656 32,656 32,656 31.12.143 35,851 35,851 42,241 1 Requirements for common equity tier 1 capital (24% of 10%), common equity tier 1 capital / high-trigger loss absorbing capital (24% of 11.6%) and total capital (24% of 14%). 2 The leverage ratio denominator (LRD) used to calculate the actual requirements is calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, these are fully aligned to the BIS Basel III rules and the LRD is reported on a spot basis. Prior to the alignment to BIS rules, the LRD was calculated based on former FINMA rules and reported on a 3-month average basis and is therefore not fully comparable. 3 Comparative balances presented for 31 Decem- ber 2014 include the Personal & Corporate Banking and Wealth Management businesses booked in Switzerland which were transferred from UBS AG to UBS Switzerland AG effective 1 April 2015. Refer to “Establish- ment of UBS Switzerland AG” within this section for more information. Swiss SRB leverage ratio1 CHF million, except where indicated Swiss GAAP total assets Difference between Swiss GAAP and IFRS total assets Less derivative exposures and securities financing transactions2 On-balance sheet exposures (excluding derivative exposures and securities financing transactions) Derivative exposures2 Securities financing transactions2 Off-balance sheet items Items deducted from Swiss SRB tier 1 capital, phase-in Total exposures (leverage ratio denominator), phase-in3 Phase-in Common equity tier 1 capital Tier 2 capital Total capital Swiss SRB leverage ratio (%) As of 31.12.15 Average 4Q14 477,045 169,961 (295,490) 351,516 124,079 130,766 42,573 (14,948) 633,985 As of 31.12.15 32,656 0 32,656 5.2 770,253 231,226 (374,315) 627,165 153,659 70,859 102,117 (9,552) 944,248 31.12.14 35,851 6,390 42,241 4.5 1 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, the Swiss SRB leverage ratio denominator (LRD) calculation is fully aligned to the BIS Basel III rules and the LRD is reported on a spot basis. Prior to the alignment to BIS rules, the LRD was calculated based on former FINMA rules and reported on a 3-month average basis and is therefore not fully comparable to the LRD reported for 31 December 2015, although the presentation format was aligned. In addition, due to the business transfer to UBS Switzerland AG effective in June 2015, numbers are not comparable. Refer to “Establishment of UBS Switzerland AG” within this section for more information. 2 Consists of positive replacement values, cash collateral receivables on derivative instruments, cash collateral on securities borrowed, reverse repurchase agreements, margin loans and prime brokerage receivables related to securities financing transactions, which are presented separately under derivative exposures and securities financing transactions in this table. 3 In accordance with former Swiss SRB LRD calculation rules, the leverage ratio denominator for average 4Q14 excludes forward starting repos, securities lending indemnifications and CEM add-ons for exchange-traded derivatives (ETD), both pro- prietary and agency transactions, and for OTC derivatives with a qualifying central counterparty. BIS Basel III leverage ratio (phase-in) CHF million, except where indicated BIS Basel III tier 1 capital Total exposures (leverage ratio denominator) BIS Basel III leverage ratio (%) 798 31.12.15 32,656 633,985 5.2 Liquidity coverage ratio FINMA and Basel III rules require disclosure of the liquidity coverage ratio (LCR). As a Swiss SRB, we must maintain an LCR of at least 100% since 1 January 2015 and disclose LCR information on a quarterly basis. Liquidity coverage ratio CHF billion, except where indicated High-quality liquid assets Total net cash outflows of which: cash outflows of which: cash inflows Liquidity coverage ratio (%) 1 Calculated after the application of haircuts and inflow and outflow rates. Weighted value1 Average 4Q15 108 93 219 125 116 799 Legal entity financial and regulatory information Legal entity financial and regulatory information UBS Switzerland AG standalone financial statements UBS Switzerland AG standalone financial statements Audited | Income statement CHF million Interest and discount income Interest and dividend income from trading portfolio Interest and dividend income from financial investments Interest expense Gross interest income Credit loss (expense) / recovery Net interest income Fee and commission income from securities and investment business Credit-related fees and commissions 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 ordinary income Sundry ordinary expenses Other income from ordinary activities Total operating income Personnel expenses General and administrative expenses Subtotal operating expenses Depreciation and impairment of property, equipment and software Amortization and impairment of goodwill and other intangible assets Changes in provisions and other allowances and losses Total operating expenses Operating profit Extraordinary income Extraordinary expenses Tax expense / (benefit) Net profit / (loss) For the financial year ended1 31.12.15 Note 2,963 0 54 (533) 2,484 (4) 2,480 2,642 116 524 (281) 3,001 735 11 30 0 103 (66) 79 6,295 1,608 2,583 4,192 11 788 15 5,005 1,290 0 0 222 1,068 3 4 5 6 1 The financial year ended 31 December 2015 covers the period 1 April 2015 to 31 December 2015. Comparative results have not been presented as no material profit / (loss) was generated by UBS Switzerland AG dur- ing the prior period. 800 Balance sheet CHF million Assets Cash and balances with central banks Due from banks Receivables from securities financing transactions of which: cash collateral on securities borrowed of which: reverse repurchase agreements Due from customers Mortgage loans Trading portfolio assets Positive replacement values Financial investments Accrued income and prepaid expenses Investments in subsidiaries and other participations Property, equipment and software Goodwill and other intangible assets Other assets Total assets of which: subordinated assets of which: subject to mandatory conversion and / or debt waiver Liabilities Due to banks Payables from securities financing transactions of which: cash collateral on securities lent of which: repurchase agreements Due to customers Trading portfolio liabilities Negative replacement values Medium-term notes Bonds issued and loans from central mortgage institutions Accrued expenses and deferred income Other liabilities Provisions Total liabilities Equity Share capital General reserve of which: statutory capital reserve of which: capital contribution reserve Voluntary earnings reserve Net profit / (loss) for the period Total equity Total liabilities and equity of which: subordinated liabilities of which: subject to mandatory conversion and / or debt waiver Note 31.12.15 1.4.151 1.4.15 % change from 9 7 8, 9 8, 9 10 11 12 13 7 10 11 13 9 16 38,701 3,477 23,672 7,414 16,258 38,373 148,492 1,736 2,274 22,878 237 42 15 4,463 817 285,176 0 0 19,280 8,997 2,493 6,505 30,564 31,391 31,013 9,161 21,853 44,125 151,121 2,792 3,092 26,058 281 42 22 5,250 700 326,452 1,155 0 38,265 21,023 7,531 13,491 231,294 238,574 128 1,092 0 8,274 822 963 179 191 2,760 539 7,901 360 3,594 174 271,027 313,381 10 13,072 13,072 13,072 0 1,068 14,149 285,176 4,020 4,020 0 13,072 13,072 13,072 0 0 13,072 326,452 19 0 27 (89) (24) (19) (26) (13) (2) (38) (26) (12) (16) 0 (32) (15) 17 (13) (100) (50) (57) (67) (52) (3) (33) (60) (100) 5 128 (73) 3 (14) 0 0 0 8 (13) 801 Legal entity financial and regulatory information Legal entity financial and regulatory information UBS Switzerland AG standalone financial statements Balance sheet (continued) CHF million Off-balance sheet items Contingent liabilities, gross Sub-participations Contingent liabilities, net of which: guarantees to third parties related to subsidiaries of which: credit guarantees and similar instruments of which: performance guarantees and similar instruments of which: documentary credits Irrevocable commitments, gross Sub-participations Irrevocable commitments, net of which: loan commitments of which: payment commitment related to deposit insurance Forward starting transactions2 of which: reverse repurchase agreements of which: repurchase agreements Liabilities for calls on shares and other equity instruments 31.12.15 1.4.15 1.4.15 % change from 8,784 (854) 7,930 9 3,313 2,318 2,291 7,982 0 7,982 7,117 865 0 0 0 37 8,689 (907) 7,782 9 2,895 2,413 2,465 7,784 0 7,784 6,916 868 881 733 148 37 1 (6) 2 0 14 (4) (7) 3 3 3 0 (100) (100) (100) 0 1 As of 31 March 2015, UBS Switzerland AG had share capital of CHF 0.1 million and a corresponding balance in Due from banks. Comparative balances have been provided as of 1 April 2015 in order to provide greater transparency with respect to movements during the period. 2 Cash to be paid in the future by either UBS or the counterparty. Off-balance sheet items 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. The Swiss Financial Market Supervisory Authority (FINMA) estimates the share of UBS Switzerland AG from 1 July 2015 to 30 June 2016 to be CHF 865 million, which is reflected in the table above. Joint and several liability UBS Switzerland AG In June 2015, the Personal & Corporate Banking and Wealth Management businesses booked in Switzerland were transferred from UBS AG to UBS Switzerland AG through an asset transfer in accordance with the Swiss Merger Act (refer to “Establishment of UBS Switzerland AG” in this section for more information). Under the Swiss Merger Act, UBS AG assumed joint liability for obliga- tions existing on the asset transfer date, 14 June 2015, which were transferred to UBS Switzerland AG. As of the asset transfer date, UBS Switzerland AG assumed joint liability for approximately CHF 325 billion of obligations of UBS AG, excluding the collateralized portion of secured contrac- tual obligations and covered bonds. UBS Switzerland AG has no liability for new obligations incurred by UBS AG after the asset transfer date. The joint liability amount declines as obligations mature, terminate or are novated following the asset transfer date. As of 31 December 2015, the joint liability of UBS Switzer- land AG amounted to approximately CHF 136 billion. As of 31 December 2015, the probability of an outflow under this joint and several liability was assessed to be remote and as a result, the table above does not include any exposures arising under this joint and several liability. 802 Statement of changes in equity CHF million Balance as of 1 April 2015 Capital increase Net profit / (loss) for the period Balance as of 31 December 2015 Share capital Statutory capital reserve Voluntary earnings reserve Net profit / (loss) for the period 0 10 10 13,072 13,072 0 0 0 1,068 1,068 Total equity 13,072 10 1,068 14,149 Statement of appropriation of retained earnings The Board of Directors proposes that the Annual General Meeting of Shareholders (AGM) on 25 April 2016 approves the following appropriation of retained earnings. Proposed appropriation of retained earnings CHF million Net profit for the period Retained earnings carried forward Total retained earnings available for appropriation Proposed appropriation of retained earnings Appropriation to voluntary earnings reserve Retained earnings carried forward For the financial year ended 31.12.15 1,068 0 1,068 (1,068) 0 803 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Switzerland AG standalone financial statements Notes to the UBS Switzerland AG standalone financial statements Note 1 Name, legal form and registered office UBS Switzerland AG is incorporated and domiciled in Switzerland. Its registered office is at Bahnhofstrasse 45, CH-8001 Zurich, Switzerland. UBS Switzerland AG operates under the Swiss Code of Obligations and Swiss Federal Banking Law as a stock corpora- tion (Aktiengesellschaft), a corporation that has issued shares of common stock to investors. UBS Switzerland AG is 100% owned by UBS AG. Note 2 Accounting policies a) Significant accounting policies UBS Switzerland AG standalone financial statements are prepared in accordance with Swiss GAAP (FINMA Circular 2015 / 1 and the Banking Ordinance) in the form of reliable assessment statutory single-entity financial statements. The accounting policies are principally the same as for the consolidated financial statements of UBS Group AG outlined in Note 1 to the consolidated financial statements of UBS Group AG. Major differences between the Swiss GAAP requirements and International Financial Reporting Standards are described in Note 38 to the consolidated financial statements of UBS Group AG. The significant accounting policies applied for the standalone financial statements of UBS Switzer- land AG are discussed below. Risk management Foreign currency translation Transactions denominated in foreign currency are translated into Swiss francs at the spot exchange rate on the date of the transac- tion. At the balance sheet date, all monetary assets and liabilities, as well as equity instruments recorded in Trading portfolio assets and Financial investments denominated in foreign currency, are translated into Swiss francs using the closing exchange rate. Non- monetary items measured at historic cost are translated at the exchange rate on the date of the transaction. All currency transla- tion effects are recognized in the income statement. The main currency translation rates used by UBS Switzerland AG can be found in Note 36 to the consolidated financial state- ments of UBS Group AG. UBS Switzerland AG (standalone) is fully integrated into the Group-wide risk management process described in the audited part of the “Risk, treasury and capital management” section of this report. Further information on the use of derivative instruments and hedge accounting are outlined in Notes 1 and 14 to the consoli- dated financial statements of UBS Group AG. Goodwill As part of the business transfer as outlined in the section “Estab- lishment of UBS Switzerland AG”, UBS Switzerland AG recog- nized goodwill of CHF 5,250 million. This goodwill is amortized on a straight-line basis over five years and assessed for impair- ment annually. Compensation policy Deferred taxes The compensation structure and processes of UBS Switzerland AG conform to the compensation principles and framework of UBS Group AG. For detailed information refer to the Compensation Report of UBS Group AG. Deferred tax assets are not recognized in UBS Switzerland AG’s standalone financial statements. However, deferred tax liabilities may be recognized for taxable temporary differences. Changes in the deferred tax liability balance are recognized in the income statement. 804 Note 2 Accounting policies (continued) Services provided to and received from subsidiaries, affiliated entities, UBS AG and UBS Group AG Services provided to and received from UBS Group AG or any of its subsidiaries are settled in cash as hard cost transfers or hard revenue transfers paid or received. When the nature of the underlying transaction between UBS Switzerland AG and UBS Group AG or any of its subsidiaries con- tains a single, clearly identifiable service element, related income and expenses are presented in the respective Income statement line item, e.g., Fee and commission income from securities and investment business, Other fee and commission income, Fee and commission expense, Net trading income or General and admin- istrative expenses. To the extent the nature of the underlying transaction contains various service elements and is not clearly attributable to a particular Income statement line item, related income and expenses are presented in Sundry ordinary income and Sundry ordinary expenses. ➔ Refer to Note 5 for more information Pension and other post-employment benefit plans Swiss GAAP permits the use of IFRS or Swiss accounting standards for pension and other post-employment benefit plans, with the election made on a plan-by-plan basis. UBS Switzerland AG has elected to apply Swiss GAAP (FER 16) for its pension plan. The requirements of Swiss GAAP are better aligned with the specific nature of Swiss pension plans, which are hybrid in that they combine elements of defined contribution and defined benefit plans, but are treated as defined benefit plans under IFRS. Swiss GAAP requires that the employer contributions to the pension fund are recognized as Personnel expenses in the income statement. The employer contributions to the Swiss pen- sion fund are determined as a percentage of contributory com- pensation. Further, Swiss GAAP requires an assessment as to whether, based on the financial statements of the pension fund prepared in accordance with Swiss accounting standards (FER 26), an economic benefit to, or obligation of, UBS Switzerland AG arises from the pension fund and is recognized in the balance sheet when conditions are met. Conditions for recording a pen- sion asset or liability would be met if, for example, an employer contribution reserve is available or UBS Switzerland AG is required to contribute to the reduction of a pension deficit (on a FER 26 basis). ➔ Refer to Note 17 for more information Subordinated assets and liabilities Subordinated assets are comprised of claims that arise from an irrevocable written declaration where in the event of liquidation, bankruptcy or restructuring of the debtor, rank after the claims of all other creditors and may not be offset against amounts payable to the debtor nor secured by its assets. Subordinated liabilities are comprised of corresponding obligations. Subordinated assets and liabilities that contain a point-of-non- viability clause in accordance with Swiss capital requirements per articles 29 and 30 of the Capital Adequacy Ordinance are dis- closed as being subject to mandatory conversion and / or debt waiver and provide for the claim or the obligation to be written off or converted into equity in the event that the issuing bank reaches a point of non-viability. Dispensations in the standalone financial statements As UBS Switzerland AG has no listed shares outstanding and is within the scope of the UBS Group AG consolidated financial statements prepared in accordance with IFRS, UBS Switzerland AG is exempt from various disclosures in the standalone financial statements. The dispensations include the management report and the statement of cash flows, as well as various note disclo- sures. b) Changes in accounting policies, comparability and other adjustments Amendment of accounting standards applicable to banks and securities dealers The Swiss Law on Accounting and Financial Reporting (32nd title of the Swiss Code of Obligations) was revised in 2011 and became effective on 1 January 2013 with a transition period of two years (i.e., is effective for annual periods beginning on or after 1 Janu- ary 2015). Following this change, the accounting standards appli- cable to banks and securities dealers were amended accordingly. On 30 April 2014, the Swiss Federal Council passed the amended Banking Ordinance, and on 3 June 2014 the new FINMA Circular 2015 / 1 Accounting – banks was published. Revised Swiss GAAP, in accordance with the amended Banking Ordinance and the new FINMA Circular, is effective for annual periods beginning on or after 1 January 2015. UBS Switzerland AG made use of transition relief for interim reporting for the second and third quarters of 2015 and adopted revised Swiss GAAP as of 1 November 2015 for the 2015 annual financial statements, retrospectively from 1 April 2015. 805 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Switzerland AG standalone financial statements Note 2 Accounting policies (continued) The main transition effects on the UBS Switzerland AG standalone financial statements from this adoption are summarized below. The presentation order of certain items in the income state- ment was amended and different sub-totals were added to the income statement. Furthermore, Credit loss (expense) / recovery is now included within Net interest income, whereas previously this was included within Allowances, provisions and losses. There was no impact on net profit or equity. The structure of the balance sheet was also amended. Money market paper held and money market paper issued are no longer shown as separate balance sheet line items but are instead reported within Trading portfolio assets, Financial investments, Due from customers and Bonds issued and loans from central mortgage institutions. Conversely, Receivables from securities financing transactions and Payables from securities financing transactions are now shown separately, whereas previously these receivables and payables were reported within Due from banks, Due from customers, Due to banks and Due to customers. Lastly, the previously disclosed balance sheet lines Due to customers on savings and deposit accounts and Other amounts due to custom- ers were combined into Due to customers. The table below pro- vides the quantitative effect on the balance sheet as of 1 April 2015 from these presentational changes. Term deposits previously presented as Medium-term notes were re-classified to Due to customers under revised Swiss GAAP. UBS Switzerland AG presents its remaining immaterial balance of medium-term notes within Bonds issued and loans from central mortgage institutions. In addition to the aforementioned changes to the income statement and balance sheet, certain Notes have been added to the financial statements. Comparative period figures UBS Switzerland AG prepared its first annual financial statements as a bank for the short financial year beginning 1 April 2015 and ending 31 December 2015. During the period from its incorpora- tion on 3 September 2014 to 31 March 2015, UBS Switzerland AG had share capital of CHF 0.1 million and a corresponding bal- ance in Due from banks, but no operations and hence recorded virtually no profit or loss during that period. Refer to “Establish- ment of UBS Switzerland AG” within this section for more infor- mation. Therefore, no comparative results have been presented for the income statement and no comparative results or balances have been presented for the Notes. Comparative balances for the balance sheet and off-balance sheet items have been provided as of 1 April 2015 in order to provide greater transparency with respect to movements during the aforementioned short financial year. Revision to Swiss GAAP: presentational balance sheet changes Former Swiss GAAP Revised Swiss GAAP Absolute change CHF million Total assets of which: Money market paper of which: Trading portfolio assets of which: Financial investments of which: Due from banks of which: Due from customers of which: Receivables from securities financing transactions Total liabilities of which: Money market paper issued of which: Bonds issued and loans from central mortgage institutions of which: Due to banks of which: Due to customers on savings and deposit accounts of which: Other amounts due to customers of which: Due to customers of which: Payables from securities financing transactions 806 1.4.15 326,452 5,825 2,762 20,269 62,405 44,119 313,381 36 7,865 59,287 96,542 142,032 1.4.15 326,452 2,792 26,058 31,391 44,125 31,013 313,381 7,901 38,265 238,574 21,023 1.4.15 0 (5,825) 29 5,789 (31,013) 7 31,013 0 (36) 36 (21,022) (96,542) (142,032) 238,574 21,023 Note 3a Net trading income by business CHF million Wealth Management Personal & Corporate Banking Other business divisions and Corporate Center Total net trading income Note 3b Net trading income by underlying risk category CHF million Interest rate instruments (including funds) Foreign exchange instruments Equity instruments (including funds) Credit instruments Precious metal / commodities Total net trading income Note 4 Personnel expenses CHF million Salaries Variable compensation – performance awards Variable compensation – other Contractors Social security Pension and other post-employment benefit plans Other personnel expenses Total personnel expenses For the financial year ended 31.12.15 280 248 206 735 For the financial year ended 31.12.15 123 571 11 7 22 735 For the financial year ended 31.12.15 976 314 14 3 80 181 41 1,608 807 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Switzerland AG standalone financial statements Note 5 General and administrative expenses CHF million Occupancy Rent and maintenance of IT equipment Communication and market data services Administration1 of which: hard cost transfer paid Marketing and public relations Travel and entertainment Fees to audit firms of which: financial and regulatory audits of which: other services Other professional fees Outsourcing of IT and other services Total general and administrative expenses 1 Includes hard cost transfers paid to UBS Group AG and subsidiaries in the UBS Group for services provided to UBS Switzerland AG. Note 6 Taxes CHF million Income tax expense / (benefit) of which: current of which: deferred Capital tax Total tax expense / (benefit) For the financial year ended 31.12.15 2 5 23 2,182 2,097 148 75 2 1 0 69 78 2,583 For the financial year ended 31.12.15 199 199 0 23 222 For the financial year ended 31 December 2015, the average tax rate, defined as income tax expense divided by the sum of operat- ing profit and extraordinary income minus extraordinary expenses and capital tax, was 15.7%. Income tax expense for the financial year ended 31 December 2015 includes a benefit of CHF 66 mil- lion from the utilization of tax losses carried forward in Switzer- land. Note 7 Securities financing transactions CHF billion On-balance sheet Receivables from securities financing transactions, gross Netting of securities financing transactions Receivables from securities financing transactions, net Payables from securities financing transactions, gross Netting of securities financing transactions Payables from securities financing transactions, net Off-balance sheet Fair value of assets received as collateral in connection with securities financing transactions of which: repledged of which: sold in connection with short sale transactions 808 31.12.15 24.4 (0.8) 23.7 9.8 (0.8) 9.0 118.1 102.9 0.1 Note 8a Collateral for loans and off-balance sheet transactions CHF million On-balance sheet Due from customers, gross Mortgage loans, gross of which: residential mortgages of which: office and business premises mortgages of which: industrial premises mortgages of which: other mortgages Total on-balance sheet, gross Allowances Total on-balance sheet, net Off-balance sheet Contingent liabilities gross Irrevocable commitments gross Forward starting transactions Total off-balance sheet 31.12.15 Secured Unsecured Total Secured by collateral Real estate Other collateral1 Secured by other credit enhancements2 1,301 148,514 127,252 7,908 3,170 10,184 149,815 (28) 149,787 175 1,251 1,425 27,589 1,462 8,533 27,589 (73) 27,517 2,452 82 2,535 1,462 (57) 1,405 1,033 304 0 1,336 8,533 (376) 8,157 5,125 6,345 11,507 38,885 148,514 127,252 7,908 3,170 10,184 187,400 (534) 186,865 8,784 7,982 0 16,804 1 Includes but not limited to deposits, securities, life insurance contracts, inventory, accounts receivable, patents, and copyrights. 2 Includes credit default swaps and guarantees. Note 8b Impaired financial instruments CHF million Amounts due from banks Amounts due from customers Mortgage loans Guarantees and loan commitments Total impaired financial instruments 1 Includes CHF 4 million collective loan loss allowances. Note 9a Allowances CHF million Specific allowances for amounts due from customers and mortgage loans Specific allowances for due from banks Collective allowances2 Total allowances 31.12.15 Gross impaired financial instruments 3 702 185 275 1,164 Allowances and provisions1 3 512 22 31 568 Estimated liquidation proceeds of collateral Net impaired financial instruments 0 22 137 4 163 0 168 26 239 433 Balance as of 1.4.151 Increase recognized in the income statement Release recognized in the income statement Recoveries and past due interest Reclassifications Foreign currency translation Balance as of 31.12.15 Write-offs 611 12 5 628 135 0 0 135 (133) 0 0 (133) (127) (9) 0 (137) 44 0 0 44 (6) 0 0 (6) 6 0 0 6 1 Represents the effects of the business transfer from UBS AG. 2 Mainly relates to amounts due from customers. 530 3 4 537 809 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Switzerland AG standalone financial statements Note 9b Provisions CHF million Default risk related to loan commitments and guarantees Operational risks Litigation, regulatory and similar matters2 Restructuring Employee benefits Other Total provisions Balance as of 1.4.151 Increase recognized in the income statement Release recognized in the income statement Provisions used in conformity with designated purpose 23 7 103 9 27 5 174 2 0 11 37 1 6 58 0 0 (2) (9) (2) 0 (14) 0 (4) (15) (24) 0 (3) (46) Recoveries Reclassifications Foreign currency translation Balance as of 31.12.15 0 0 0 0 0 0 0 6 1 (2) 1 0 0 6 0 0 1 0 0 0 0 31 3 96 13 27 8 179 1 Represents the effects of the business transfer from UBS AG. 2 Includes provisions for litigation resulting from security risks. Note 10 Trading portfolio and other financial instruments measured at fair value 31.12.15 1,736 2 1 7 1,728 1,736 6 128 64 61 64 128 89 CHF million Assets Trading portfolio assets of which: debt instruments of which: listed of which: equity instruments of which: precious metals and other physical commodities Total assets measured at fair value of which: fair value derived using a valuation model Liabilities Trading portfolio liabilities of which: debt instruments of which: listed of which: equity instruments Total liabilities measured at fair value of which: fair value derived using a valuation model 810 Note 11 Derivative instruments CHF million, except where indicated Interest rate contracts Forwards1 Swaps of which: designated in hedge accounting relationships Over-the-counter (OTC) options Total Foreign exchange contracts Forwards Interest and currency swaps Over-the-counter (OTC) options Total Equity / index contracts Forwards Swaps Over-the-counter (OTC) options Exchange-traded options Total Credit derivative contracts Credit default swaps Total Commodity, precious metals and other contracts Forwards Swaps Over-the-counter (OTC) options Total Total before netting as of 31 December 2015 of which: trading derivatives of which: fair value derived using a valuation model of which: derivatives designated in hedge accounting relationships of which: fair value derived using a valuation model Netting with cash collateral payables / receivables Replacement value netting Total after netting as of 31 December 2015 of which: with bank and broker-dealer counterparties of which: other client counterparties 1 Includes forward rate agreements. 2 PRV: positive replacement values. 3 NRV: negative replacement values. 31.12.15 NRV3 19 3,099 382 78 3,196 517 819 244 1,580 21 2 323 281 627 10 10 14 51 176 241 5,655 5,273 5,223 382 382 (804) (3,759) 1,092 259 833 PRV2 13 3,393 1,022 81 3,488 551 876 245 1,672 18 2 323 281 625 7 7 15 51 176 242 6,033 5,011 4,968 1,022 1,022 (3,759) 2,274 80 2,194 Total notional values (CHF billion) 5 213 44 3 222 42 127 31 200 3 0 7 0 10 1 1 1 2 6 9 441 811 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Switzerland AG standalone financial statements Note 12a Financial investments by instrument type CHF million Debt instruments available-for-sale Property Total financial investments of which: securities eligible for repurchase transactions in accordance with liquidity regulations 31.12.15 Carrying value 22,849 29 22,878 22,849 Note 12b Financial investments by counterparty rating – debt instruments CHF million Internal UBS rating1 0–1 2–3 4–5 6–8 9–13 Non-rated Total financial investments 1 Refer to Note 15 for more information. Note 13a Other assets CHF million Deferral position for hedging instruments Settlement and clearing accounts VAT and other indirect tax receivables Other of which: other receivables from UBS Group AG and subsidiaries in the UBS Group Total other assets Note 13b Other liabilities CHF million Settlement and clearing accounts VAT and other indirect tax payables Other of which: other payables to UBS Group AG and subsidiaries in the UBS Group Total other liabilities Note 14 Pledged assets1 CHF million Mortgage loans2 Securities Pledges of precious metals to subsidiaries and other Total pledged assets 31.12.15 Carrying value of pledged assets 24,980 0 0 Effective commitment 16,235 0 0 24,980 16,235 1 Excluding securities financing transactions. Refer to Note 7 for more information on securities financing transactions. 2 These pledged mortgage loans serve as collateral for existing liabilities against Swiss central mortgage institutions and for existing covered bond issuances. Of these pledged mortgage loans, approximately CHF 4.4 billion as 31 December 2015 could be withdrawn or used for future liabilities or covered bond issuances without breaching existing collateral requirements. 812 Fair value 22,875 29 22,904 22,875 31.12.15 22,321 528 0 0 0 0 22,849 31.12.15 349 101 33 334 293 817 31.12.15 338 115 510 323 963 Note 15 Country risk of total assets The table below provides a breakdown of total non-Swiss assets by credit rating. These credit ratings represent the sovereign credit rating of the country to which the ultimate risk of the underlying asset is related. The ultimate risk country on unsecured loan posi- tions is the domicile of the immediate borrower, or, in the case of a legal entity, the domicile of the ultimate parent entity. For col- lateralized or guaranteed positions, the ultimate risk country is the domicile of the provider of the collateral or guarantor, or, if applicable, the domicile of the ultimate parent entity of the provider of the collateral or guaran- tor. For mortgage loans, the ultimate risk country is the country where the real estate is located. Similarly, the ultimate risk country of property and equipment is the country where the property and equipment is located. Assets for which Switzerland is the ultimate risk country are provided separately in order to reconcile to total balance sheets assets. ➔ Refer to the “Risk management and control” section of this report for more information Classification Internal UBS rating Description Moody’s Investors Service 0 and 1 Investment grade Aaa Sub-investment grade 2 3 4 5 6 7 8 9 10 11 12 13 Default Defaulted Aa1 to Aa3 A1 to A3 Baa1 to Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa Ca to C D Low risk Medium risk High risk Very high risk Distressed Subtotal Switzerland Total assets Note 16a Share capital Share capital1 of which: shares outstanding 1 Registered shares issued. Standard & Poor’s AAA AA+ to AA– A+ to A– BBB+ to BBB Fitch AAA AA+ to AA– A+ to AA– BBB+ to BBB BBB– BB+ BB BB– B+ B B– CCC CC to C D BBB– BB+ BB BB– B+ B B– CCC CC to C D 31.12.15 CHF million 40,924 14,884 5,906 2,518 1,248 884 17 16 53 39 99 144 33 0 % 14 5 2 1 0 0 0 0 0 0 0 0 0 0 66,767 218,410 285,176 23 77 100 31.12.15 Par value in CHF Number of shares Of which: dividend bearing 10,000,000 10,000,000 100,000,000 100,000,000 100,000,000 100,000,000 UBS Switzerland AG’s share capital is fully paid up. Each share has a par value of CHF 0.10 and entitles the holder to one vote at the UBS Switzerland AG shareholder’s meeting, if entered into the share register as having the right to vote, as well as a proportion- ate share of distributed dividends. UBS Switzerland AG does not apply any restrictions or limitations on the transferability of shares. Non-distributable reserves Non-distributable reserves consist of 50% of the share capital of UBS Switzerland AG, amounting to CHF 5 million as of 31 Decem- ber 2015. 813 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Switzerland AG standalone financial statements Note 16b Significant shareholders CHF million, except where indicated Significant direct shareholder of UBS Switzerland AG UBS AG Significant indirect shareholders of UBS Switzerland AG UBS Group AG Chase Nominees Ltd., London GIC Private Limited, Singapore DTC (Cede & Co.), New York1 Nortrust Nominees Ltd, London 1 DTC (Cede & Co.), New York, “The Depository Trust Company”, is a US securities clearing organization. 31.12.15 Share capital held Shares held (%) 10 10 1 1 1 0 100 100 9 6 6 4 Significant shareholders presented in this Note are those that, directly or indirectly, hold 3% or more of UBS Switzerland AG’s total share capital. The sole direct shareholder of UBS Switzerland AG is UBS AG, which holds 100% of UBS Switzerland AG shares. These shares entitle to voting rights. Indirect shareholders of UBS Switzerland AG, which do not have voting rights, include UBS Group AG, which holds 100% of UBS AG shares. The table above additionally includes as indirect shareholders of UBS Switzerland the shareholders of UBS Group AG, who are entered into the UBS Group AG share register. The shares and share capital of UBS Switzerland held by indirect shareholders other than UBS Group AG represent their relative holding of UBS Group AG shares. ➔ Refer to Note 22 to the UBS Group AG standalone financial statements for more information on significant shareholders of UBS Group AG Note 17 Swiss pension plan a) Liabilities related to Swiss pension plan CHF million Provision for Swiss pension plan Bank accounts at UBS and UBS debt instruments held by Swiss pension fund UBS derivative financial instruments held by Swiss pension fund Total liabilities related to Swiss pension plan b) Swiss pension plan1 CHF million Pension plan surplus Economic benefit / (obligation) of UBS Switzerland AG Change in economic benefit / obligation recognized in the income statement Employer contributions for the period recognized in the income statement Performance rewards related employer contributions accrued Total pension expense recognized in the income statement within Personnel expenses 31.12.15 0 262 27 289 As of or for the financial year ended 31.12.15 2,264 0 0 158 24 181 1 The pension plan surplus is determined in accordance with FER 26 and consists of the reserve for the fluctuation in asset value. The surplus did not represent an economic benefit for UBS Switzerland AG in accordance with FER 16 as of 31 December 2015. The Swiss pension plan had no employer contribution reserve in 2015. Note 18 Share-based compensation UBS Group AG is the grantor of the majority of UBS’s deferred compensation plans. Expenses for awards granted under such plans to UBS Switzerland AG employees are charged by UBS Group AG to UBS Switzerland AG. ➔ Refer to Note 29 to the UBS Group AG consolidated financial statements for more information 814 Note 19 Related parties Transactions with related parties are conducted at internally agreed transfer prices or at arm’s length, or with respect to loans, fixed advances and mortgages to non-independent members of the Board of Directors and Group Executive Board members on the same terms and conditions that are available to other employ- ees. CHF million Qualified shareholders1 of which: Due from / to banks of which: Receivables / payables from securities financing transactions of which: Due from / to customers Subsidiaries2 of which: Due from / to customers Affiliated entities3 of which: Due from / to banks of which: Receivables / payables from securities financing transactions of which: Due from / to customers Members of the Board of Directors and Group Executive Board External auditors Other related parties4 31.12.15 Amounts due from Amounts due to 11,232 743 9,958 169 35 30 1,239 318 372 78 7 468 21,683 13,881 5,760 1,442 380 380 2,232 629 786 328 1 1 Qualified shareholders of UBS Switzerland AG are UBS Group AG and UBS AG. 2 Subsidiaries of UBS Switzerland AG are UBS Card Center AG, Topcard Service AG and UBS Hypotheken AG. 3 Affiliated entities of UBS Switzerland AG are all direct and indirect subsidiaries of UBS Group AG including subsidiaries of UBS AG. 4 Primarily relates to SIX Group AG, in which UBS AG has a 17.3% equity interest. Note 20 Fiduciary transactions CHF million Fiduciary deposits of which: placed with third-party banks of which: placed with subsidiaries and affiliated entities Total fiduciary transactions 31.12.15 13,210 7,246 5,964 13,210 Fiduciary transactions encompass transactions entered into or granted by UBS Switzerland AG that result in holding or placing assets on behalf of individuals, trusts, defined benefit plans and other institutions. Unless the recognition criteria for the assets are satisfied, these assets and the related income are excluded from UBS Switzerland AG’s balance sheet and income statement, but disclosed in this Note as off-balance sheet fiduciary transactions. Client deposits that are initially placed as fiduciary transactions with UBS Switzerland AG may be recognized on UBS Switzerland AG’s balance sheet in situations in which the deposit is subse- quently placed within UBS Switzerland AG. In such cases, these deposits are not reported in the table above. 815 Legal entity financial and regulatory information Legal entity financial and regulatory information Notes to the UBS Switzerland AG standalone financial statements Note 21a Invested assets and net new money CHF billion Fund assets managed Discretionary assets Other invested assets Total invested assets of which: double count Net new money Note 21b Development of invested assets CHF billion Total invested assets as of 1.4.151, 2 Net new money Market movements3 Foreign currency translation Other effects of which: acquisitions / (divestments) Total invested assets at the end of the year2 1 Represents the effects of the business transfer from UBS AG. 2 Includes double counts. 3 Includes interest and dividend income. ➔ Refer to Note 35 to the UBS Group AG consolidated financial statements for more information For the financial year ended 31.12.15 0 88 444 532 0 (17.3) For the financial year ended 31.12.15 557 (17) (17) 9 0 0 532 816 817 Legal entity financial and regulatory information Legal entity financial and regulatory information 818 UBS Switzerland AG (standalone) regulatory information Swiss SRB capital requirements and capital information UBS Switzerland AG (standalone) met these capital requirements since commencement of business. Pillar 3 | UBS Switzerland AG is considered a systemically relevant bank (SRB) under Swiss banking law and is subject to capital regu- lations on a standalone basis. The tables in this section provide capital information under Swiss SRB regulations for UBS Switzerland AG (standalone), in accordance with the abovementioned requirements. As of 31 December 2015, the total capital requirement for UBS Switzerland AG (standalone) according to the Swiss Capital Ade- quacy Ordinance was 12.8% of RWA and consisted of: (i) base capital of 4.5%, (ii) buffer capital of 5.5%, of which 0.4% was attributable to the countercyclical buffer capital requirement and (iii) progressive buffer capital of 2.8%. In addition, FINMA has defined capital requirements for UBS Switzerland AG (standalone) which are outlined in footnote 1 of the table “Swiss SRB capital ratio requirements and information (phase-in)” on the next page. In the first quarter of 2016, UBS Switzerland AG increased its additional tier 1 capital by CHF 0.5 billion. The respective instru- ments are held by UBS AG. They are not included in the table below. ➔ Refer to “Disclosure for subsidiaries and branches” at www.ubs. com / investors for more information on the capital instruments of UBS Switzerland AG on a standalone basis Reconciliation of Swiss federal banking law equity to Swiss SRB capital CHF billion Equity – Swiss federal banking law1 Deferred tax assets Goodwill and intangible assets Other Common equity tier 1 capital (phase-in) Additional tier 1 capital (phase-in) Tier 2 capital (phase-in) Total capital (phase-in) 31.12.15 14.1 0.9 (4.5) (0.1) 10.5 1.5 2.5 14.5 1 Equity under Swiss federal banking law is adjusted to derive equity in accordance with IFRS and then further adjusted to derive common equity tier 1 (CET1) capital in accordance with Swiss SRB requirements. 819 Legal entity financial and regulatory information Legal entity financial and regulatory information UBS Switzerland AG (standalone) regulatory information Swiss SRB capital ratio requirements and information (phase-in) CHF million, except where indicated Base capital (common equity tier 1 capital) Buffer capital (common equity tier 1 capital and high-trigger loss-absorbing capital) of which: effect of countercyclical buffer Progressive buffer capital (high- and low-trigger loss-absorbing capital) Total capital Capital ratio (%) Capital Requirement1 31.12.15 Actual2 31.12.15 Requirement 31.12.15 4.5 5.53 0.4 2.8 12.8 4.5 7.8 0.4 2.8 15.1 4,309 5,259 351 2,711 12,280 Eligible 31.12.15 4,309 7,447 351 2,7114 14,468 1 The total capital ratio requirement of 12.8% is the current phase-in requirement according to the Swiss Capital Adequacy Ordinance. In addition, FINMA defined a total capital ratio requirement for UBS Switzerland AG which is the sum of 14.4% and the effect of the countercyclical buffer requirement of 0.4%, of which 10.0% plus the effect of the countercyclical buffer requirement must be satisfied with CET1 capital. The FINMA total capital requirement will be effective until it is exceeded by the Swiss SRB phase-in requirement. 2 Swiss SRB CET1 capital exceeding the base capital requirement is allocated to the buffer capital. 3 CET1 capi- tal can be substituted by high-trigger loss-absorbing capital up to 2.3% in 2015. 4 Includes tier 2 capital of CHF 2,500 million; the residual amount of CHF 211 million was allocated from buffer capital to meet the progressive buffer requirement. Swiss SRB capital information (phase-in) CHF million, except where indicated Common equity tier 1 capital Common equity tier 1 capital Additional tier 1 capital High-trigger loss-absorbing capital Tier 1 capital1 Tier 2 capital Low-trigger loss-absorbing capital Tier 2 capital1 Total capital Common equity tier 1 capital ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) Risk-weighted assets2 31.12.15 10,468 1,500 11,968 2,500 2,500 14,468 10.9 12.5 15.1 95,765 1 CHF 211 million of tier 1 capital and CHF 2,500 million tier 2 capital are used to meet the progressive buffer requirement. 2 Effective 31 December 2015, UBS Switzerland AG early adopted revised Basel 1 floor requirements set by FINMA, resulting in CHF 14 billion higher RWA compared with the RWA disclosed in our third quarter 2015 report. 820 Leverage ratio information Swiss SRB leverage ratio The Swiss SRB leverage ratio requirement is equal to 24% of the capital ratio requirements (excluding the countercyclical buffer requirement). As of 31 December 2015, the effective total leverage ratio requirement for UBS Switzerland AG (standalone) was 3.0%, resulting from multiplying the total capital ratio requirement (excluding the countercyclical buffer requirement) of 12.5% by 24%. Swiss SRB leverage ratio requirements and information (phase-in) CHF million, except where indicated Base capital (common equity tier 1 capital) Buffer capital (common equity tier 1 capital and high-trigger loss-absorbing capital) Progressive buffer capital (low-trigger loss-absorbing capital) Total Swiss SRB leverage ratio (%) Actual2, 3 31.12.15 Requirement1 31.12.15 Requirement Swiss SRB leverage ratio capital Eligible2, 3 31.12.15 31.12.15 1.1 1.23 0.7 3.0 1.1 3.0 0.8 4.9 3,206 3,651 2,017 8,875 3,206 8,762 2,500 14,468 1 The total leverage ratio requirement of 3.0% is the current phase-in requirement according to the Swiss Capital Adequacy Ordinance. In addition, FINMA defined a total leverage ratio requirement of 3.5%, which will be effective until it is exceeded by the Swiss SRB phase-in requirement. 2 Swiss SRB CET1 capital exceeding the base capital requirement is allocated to the buffer capital. 3 CET1 capital can be substituted by high- trigger loss-aborbing capital up to 0.5% in 2015. Swiss SRB leverage ratio1 CHF million, except where indicated Swiss GAAP total assets Difference between Swiss GAAP and IFRS total assets Less derivative exposures and securities financing transactions2 On-balance sheet exposures (excluding derivative exposures and securities financing transactions) Derivative exposures2 Securities financing transactions2 Off-balance sheet items Items deducted from Swiss SRB tier 1 capital, phase-in Total exposures (leverage ratio denominator), phase-in Phase-in Common equity tier 1 capital Loss-absorbing capital Common equity tier 1 capital including loss-absorbing capital Swiss SRB leverage ratio (%) 31.12.15 285,176 1,431 (30,761) 255,846 4,736 24,705 11,871 (292) 296,865 10,468 4,000 14,468 4.9 1 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, the Swiss SRB leverage ratio denominator (LRD) calculation is fully aligned to the BIS Basel III rules and the LRD is reported on a spot basis. 2 Consists of positive replacement values, cash collateral receivables on derivative instruments, cash collateral on securities borrowed, reverse repurchase agreements, margin loans and prime brokerage receiv- ables related to securities financing transactions, which are presented separately under derivative exposures and securities financing transactions in this table. BIS Basel III leverage ratio (phase-in) CHF million, except where indicated BIS Basel III tier 1 capital Total exposures (leverage ratio denominator) BIS Basel III leverage ratio (%) 31.12.15 11,968 296,865 4.0 821 Legal entity financial and regulatory information Legal entity financial and regulatory information UBS Switzerland AG (standalone) regulatory information Liquidity coverage ratio FINMA and Basel III rules require disclosure of the liquidity coverage ratio (LCR). As a Swiss SRB, we must maintain an LCR of at least 100% and disclose LCR information on a quarterly basis. Liquidity coverage ratio CHF billion, except where indicated High-quality liquid assets Total net cash outflows of which: cash outflows of which: cash inflows Liquidity coverage ratio (%) 1 Calculated after the application of haircuts and inflow and outflow rates. Weighted value1 Average 4Q15 75 65 106 41 115 822 UBS Limited (standalone) financial and regulatory information Income statement GBP million Interest income Interest expense Net interest income Credit loss expense / recovery Net fee and commission income Net trading income Other income Total operating income Total operating expenses Operating profit before tax Tax expense / (benefit) Net profit Statement of comprehensive income GBP million Net profit Other comprehensive income Other comprehensive income that may be reclassified to the income statement Financial investments available-for-sale Net unrealized gains / (losses) on financial investments available-for-sale Total other comprehensive income that may be reclassified to the income statement Total comprehensive income For the year ended % change from 31.12.15 31.12.14 31.12.14 289 (289) 0 2 667 42 17 727 538 189 (52) 241 313 (270) 43 (2) 439 (45) 47 482 383 99 (101) 199 (8) 7 52 (64) 51 40 91 (48) 21 For the year ended % change from 31.12.15 241 31.12.14 199 31.12.14 21 (5) (5) 236 6 6 205 15 823 Legal entity financial and regulatory information Legal entity financial and regulatory information UBS Limited (standalone) financial and regulatory information Balance sheet GBP million Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Positive replacement values Cash collateral receivables on derivative instruments Financial assets designated at fair value Loans Financial Investments Deferred tax asset 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 Other liabilities Total liabilities Equity Share capital Share premium Retained earnings Cumulative net income recognized directly in equity, net of tax Other equity instruments Total equity Total liabilities and equity 824 31.12.15 31.12.14 31.12.14 % change from 5 841 3,711 2,973 3,770 17,668 6,027 666 791 3,163 172 320 40,106 2,309 668 4,021 4,787 18,040 5,966 728 230 316 9 900 2,486 8,914 3,937 30,042 7,052 527 364 5,512 106 214 60,063 5,150 946 7,818 2,447 29,929 7,991 559 754 257 37,064 55,851 227 2,184 396 1 235 3,042 40,106 227 3,123 241 6 615 4,212 60,063 (43) (7) 49 (67) (4) (41) (15) 26 117 (43) 62 50 (33) (55) (29) (49) 96 (40) (25) 30 (69) 23 (34) 0 (30) 64 (78) (62) (28) (33) Basis of accounting The financial statements of UBS Limited are prepared in accor- dance with International Financial Reporting Standards (IFRS), as endorsed by the European Union (EU), and are stated in British pounds (GBP), the functional currency of the entity. UBS Limited is 100% owned by UBS AG, which is 100% owned by UBS Group AG, the ultimate parent company of the UBS Group. This financial information is unaudited and should be read in conjunction with the audited financial statements of UBS Limited. The full Annual Report and Financial Statements of UBS Limited for the year ended 31 December 2015 will be available from April 2016 in the “Subsidiary and branch information” section at www. ubs.com / investors. Capital information1, 2, 3 GBP million, except where indicated Tier 1 capital of which: common equity tier 1 capital Tier 2 capital Total capital Common equity tier 1 capital ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) Risk-weighted assets Leverage Ratio % Leverage Ratio Denominator 31.12.15 31.12.14 3,947 3,332 997 4,944 30.8 36.5 45.7 10,810 2,629 2,394 587 3,216 19.4 21.3 26.1 12,316 6.9 38,046 1 Capital information for UBS Limited has been prepared in accordance with Regulation (EU) No 575 / 2013 (as amended by Regulation (EU) 2015 / 62 in respect of the leverage ratio). 2 There is no local disclosure requirement for the liquidity coverage ratio for UBS Limited. 3 Capital information disclosed in this table excludes 2015 net profit carried forward, which will become eligible for inclusion only after completion of the statutory audit. 825 Legal entity financial and regulatory information Additional regulatory information Additional regulatory information Table of contents 831 UBS Group AG consolidated supplemental disclosures required under SEC regulations 853 UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations 831 A – Introduction 854 Introduction 832 B – Selected financial data 833 Key figures 835 836 Balance sheet data Income statement data 837 C – Information on the company 837 Property, plant and equipment 838 D – Information required by industry guide 3 838 Selected statistical information 839 Average balances and interest rates 842 Analysis of changes in interest income and expense 844 Deposits 845 Short-term borrowings 845 Contractual maturities of investments in debt instruments available-for-sale 846 Due from banks and loans (gross) 847 Due from banks and loan maturities (gross) Impaired and non-performing loans 848 849 Cross-border outstandings 850 Summary of movements in allowances and provisions for credit losses 855 Location of Pillar 3 disclosures 858 Our approach to measuring risk exposure and risk-weighted assets 860 Scope of regulatory consolidation 860 Table 1: Main legal entities consolidated under IFRS but not included in the regulatory scope of consolidation 861 Overview of exposures and risk-weighted assets 862 Table 2: Detailed segmentation of exposures and risk-weighted assets 864 Credit risk 865 Table 3: Regulatory credit risk exposure and RWA 865 Table 4: Regulatory gross credit risk exposure by geographical region 866 Table 5: Regulatory gross credit risk exposure by counterparty type 866 Table 6: Regulatory gross credit risk exposure 851 Allocation of the allowances and provisions by residual contractual maturity for credit losses 867 Table 7: Credit risk mitigation for standardized and 852 Due from banks and loans by industry sector (gross) A-IRB approaches 867 Table 8: Regulatory gross credit risk exposure covered by guarantees and credit derivatives 867 Advanced internal ratings-based approach 868 Table 9a: Sovereigns – A-IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings 869 Table 9b: Banks – A-IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings 870 Table 9c: Corporates – A-IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings 828 871 Table 9d: Residential mortgages – A-IRB approach: 886 Market risk Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings 872 Table 9e: Lombard lending – A-IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings 887 Securitization 887 Table 17: Securitization / re-securitization 873 Table 9f: Qualifying revolving retail exposures – A-IRB 888 Objectives, roles and involvement approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings 874 Table 9g: Other retail – A-IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings 875 Standardized approach 875 Table 10a: Regulatory gross and net credit risk exposure by risk weight under the standardized approach 876 Table 10b: Regulatory net credit risk exposure under the standardized approach risk-weighted using external ratings 876 Table 11: Eligible financial collateral recognized under the 890 Securitization exposures in the banking and trading book 890 Table 18: Securitization activity for the year in the banking book 891 Securitization activity for the year in the trading book 891 Table 19: Outstanding securitized exposures 892 Table 20: Impaired or past due securitized exposures and losses related to securitized exposures in the banking book 892 Table 21: Exposures intended to be securitized in the standardized approach banking and trading book 877 Comparison of A-IRB approach and Standardized in the banking book Approach (SA) 894 Table 23: Securitization positions retained or purchased 878 Table 12: Breakdown by exposure segments in the trading book 893 Table 22: Securitization positions retained or purchased Impairment, default and credit loss 882 882 Table 13: Total actual and expected credit losses 883 Derivatives credit risk 883 Table 14: Credit risk exposure of derivative instruments 884 Other credit risk information 884 Table 15: Credit derivatives 885 Equity instruments in the banking book 885 Table 16: Equity instruments in the banking book 895 Table 24a: Capital requirement for securitization / re- securitization positions retained or purchased in the banking book 895 Table 24b: Securitization / re-securitization exposures treated under the ratings-based approach by rating clusters – banking book 896 Table 24c: Securitization / re-securitization exposures treated under the supervisory formula approach by rating clusters – banking book 896 Gains on sale – securitization exposures to be deducted from Basel III tier 1 capital 829 Additional regulatory information Additional regulatory information 896 Securitization exposures subject to early amortization in 908 UBS AG consolidated supplemental disclosures the banking and trading book required under SEC regulations 896 Re-securitization positions retained or purchased in the banking book 908 A – Introduction 897 Table 25: Re-securitization positions retained or pur- chased in the trading book 897 Outstanding notes issued by securitization vehicles related to UBS’s retained exposures subject to the market risk approach 898 Table 26: Correlation products subject to the comprehen- sive risk measure or the securitization framework for specific risk 899 Table 27a: Securitization positions and capital require- ment for trading book positions subject to the securitiza- tion framework 899 Table 27b: Securitization / re-securitization exposures treated under the ratings-based approach by rating clusters – trading book 900 Table 27c: Securitization / re-securitization exposures treated under the supervisory formula approach by rating clusters – trading book 909 B – Selected financial data 910 Key figures 911 913 Balance sheet data 913 Ratio of earnings to fixed charges Income statement data 914 C – Information on the company 914 Property, plant and equipment 915 D – Information required by industry guide 3 915 Selected statistical information 916 Average balances and interest rates 919 Analysis of changes in interest income and expense 921 Deposits 922 Short-term borrowings 922 Contractual maturities of investments in debt instruments 900 Table 28: Capital requirement for securitization positions available-for-sale related to correlation products 901 Balance sheet reconciliation 901 Table 29: Reconciliation of accounting balance sheet to balance sheet under the regulatory scope of consolida- tion 903 Composition of capital 904 Table 30: Composition of capital 907 G-SIB indicators 923 Due from banks and loans (gross) 924 Due from banks and loan maturities (gross) Impaired and non-performing loans 925 926 Cross-border outstandings 927 Summary of movements in allowances and provisions for credit losses 928 Allocation of the allowances and provisions for credit losses 929 Due from banks and loans by industry sector (gross) 830 UBS Group AG consolidated supplemental disclosures required under SEC regulations A – Introduction The following pages contain supplemental UBS Group AG disclo- sures that are required under SEC regulations. UBS Group AG’s consolidated financial statements have been prepared in accor- dance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and are denominated in Swiss francs (CHF), the reporting cur- rency of the Group. The consolidated financial statements of UBS Group AG were prepared as a continuation of the consolidated financial statements of UBS AG, applying the same accounting policies under Interna- tional Financial Reporting Standards (IFRS). The comparative infor- mation for 2013, 2012 and 2011 reflects the consolidated financial statements of UBS AG, as previously published, except for certain voluntary changes in accounting policy and presentation that are unrelated to the establishment of UBS Group AG. 831 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures 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 certified for customs purposes by the Federal Reserve Bank of New York. On 29 February 2016, the noon purchase rate was 1.0040 USD per 1 CHF. Year ended 31 December 2011 2012 2013 2014 2015 Month September 2015 October 2015 November 2015 December 2015 January 2016 February 2016 1 The average of the noon purchase rates on the last business day of each full month during the relevant period. Average rate (USD per 1 CHF)1 1.1398 1.0724 1.0826 1.0893 1.0368 At period end 1.0668 1.0923 1.1231 1.0066 0.9983 High 1.3706 1.1174 1.1292 1.1478 1.1781 High 1.0401 1.0539 1.0149 1.0180 1.0028 1.0303 Low 1.0251 1.0043 1.0190 1.0066 0.9704 Low 1.0225 1.0086 0.9704 0.9713 0.9779 0.9802 832 Key figures CHF million, except where indicated 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 As of or for the year ended Group results Operating income Operating expenses Operating profit / (loss) from continuing operations before tax Net profit / (loss) attributable to UBS Group AG shareholders Diluted earnings per share (CHF)1 Key performance indicators2 Profitability Return on tangible equity (%) Return on assets, gross (%) Cost / income ratio (%) Growth Net profit growth (%) Net new money growth for combined wealth management businesses (%)3 Resources Common equity tier 1 capital ratio (%, fully applied)4 BIS tier 1 capital ratio, Basel 2.5 (%) BIS total capital ratio, Basel 2.5 (%) Swiss SRB leverage ratio (phase-in, %)5 Additional information Profitability Return on equity (RoE) (%) Return on risk-weighted assets, gross (%)6 Resources Total assets Equity attributable to UBS Group AG shareholders Common equity tier 1 capital (fully applied)4 Common equity tier 1 capital (phase-in)4 Risk-weighted assets (fully applied)4 Risk-weighted assets (phase-in)4 Common equity tier 1 capital ratio (%, phase-in)4 Total capital ratio (%) (fully applied)4 Total capital ratio (%) (phase-in)4 Swiss SRB leverage ratio (fully applied, %)5 Swiss SRB leverage ratio denominator (fully applied)5 Swiss SRB leverage ratio denominator (phase-in)5 BIS tier 1 capital, Basel 2.5 BIS risk-weighted assets, Basel 2.5 Average equity of average assets (%) 30,605 25,116 5,489 6,203 1.64 13.7 3.1 81.8 79.0 2.2 14.5 28,027 25,567 2,461 3,466 0.91 8.2 2.8 91.0 9.3 2.5 13.4 27,732 24,461 3,272 3,172 0.83 8.0 2.5 88.0 3.4 12.8 6.2 5.4 4.7 11.8 14.1 7.0 12.4 6.7 11.4 25,423 27,216 (1,794) (2,480) (0.66) 1.6 1.9 106.6 3.2 9.8 21.3 25.2 3.6 (5.1) 12.0 942,819 1,062,478 1,013,355 1,259,797 55,313 30,044 40,378 207,530 212,302 19.0 22.9 26.8 5.3 50,608 28,941 42,863 216,462 220,877 19.4 18.9 25.5 4.1 48,002 28,908 42,179 225,153 228,557 18.5 15.4 22.2 3.4 897,607 904,014 997,822 1,004,869 1,015,306 1,022,924 5.0 4.7 4.0 45,949 25,182 40,032 258,113 261,800 15.3 11.4 18.9 2.4 1,206,214 1,216,561 40,982 192,505 3.4 27,788 22,482 5,307 4,138 1.08 11.9 2.1 80.7 (44.5) 2.4 15.9 17.2 9.1 13.7 1,416,962 48,530 38,370 240,962 3.2 833 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under SEC regulations Key figures (continued) CHF million, except where indicated Other Invested assets (CHF billion)7 Personnel (full-time equivalents) Americas of which: USA Asia Pacific Europe, Middle East and Africa of which: United Kingdom of which: Rest of Europe of which: Middle East and Africa Switzerland Market capitalization8 Total book value per share (CHF)8 Tangible book value per share (CHF)8 Registered ordinary shares (number)9 Treasury shares (number)8 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 As of or for the year ended 2,689 60,099 20,816 19,897 7,539 10,505 5,373 4,957 176 21,238 75,147 14.75 13.00 2,734 60,155 20,951 19,715 7,385 10,254 5,425 4,663 166 21,564 63,526 13.94 12.14 2,390 60,205 21,317 20,037 7,116 10,052 5,595 4,303 153 21,720 65,007 12.74 11.07 2,230 62,628 21,995 20,833 7,426 10,829 6,459 4,202 167 22,378 54,729 12.26 10.54 2,088 64,820 22,924 21,746 7,690 11,019 6,674 4,182 162 23,188 42,843 12.95 10.36 3,849,731,535 3,717,128,324 3,842,002,069 3,835,250,233 3,832,121,899 98,706,275 87,871,737 73,800,252 87,879,601 84,955,551 1 Refer to Note 9 to the consolidated financial statements for more information. 2 Refer to the “Measurement of performance” section of this report for the definitions of our key performance indicators. 3 Based on adjusted net new money, which excludes the negative effect on net new money in 2015 of CHF 9.9 billion from our balance sheet and capital optimization program. 4 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 5 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, the Swiss SRB leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 6 Based on phase-in risk-weighted assets. 7 Includes invested assets for Personal & Corporate Banking. 8 Refer to the “UBS shares” section of this report for more information. 9 Registered ordinary shares as of 31 December 2015 and 31 December 2014 reflect UBS Group AG shares. Other comparative period information relates to UBS AG shares. Refer to the “UBS shares” section of this report for more information. 834 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 / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) attributable to preferred noteholders Net profit / (loss) attributable to non-controlling interests Net profit / (loss) attributable to UBS Group AG shareholders Cost / income ratio (%)1 Per share data (CHF) Basic2 Diluted2 Ordinary cash dividends declared per share (CHF)3, 4 Ordinary cash dividends declared per share (USD)3, 4 Special cash dividends declared per share (CHF)3, 4 Special cash dividends declared per share (USD)3, 4 Dividend payout ratio (%) Rates of return (%) Return on equity attributable to UBS Group AG shareholders Return on average equity Return on average assets 31.12.15 13,177 (6,445) 6,732 (117) 6,615 17,140 5,742 1,107 30,605 25,116 5,489 (898) 6,386 183 6,203 81.8 1.68 1.64 0.60 0.25 52 11.8 11.8 0.6 For the year ended 31.12.14 31.12.13 13,194 (6,639) 6,555 (78) 6,477 17,076 3,842 632 28,027 25,567 2,461 (1,180) 3,640 142 32 3,466 91.0 0.93 0.91 0.50 0.54 0.25 0.26 555 7.0 7.0 0.3 13,137 (7,351) 5,786 (50) 5,736 16,287 5,130 580 27,732 24,461 3,272 (110) 3,381 204 5 3,172 88.0 0.84 0.83 0.25 0.28 30 6.7 6.7 0.3 31.12.12 15,968 (9,990) 5,978 (118) 5,860 15,396 3,526 641 25,423 27,216 (1,794) 461 (2,255) 220 5 (2,480) 106.6 (0.66) (0.66) 0.15 0.16 (23) (5.1) (5.0) (0.2) 31.12.11 17,969 (11,143) 6,826 (84) 6,742 15,236 4,343 1,467 27,788 22,482 5,307 901 4,406 268 4,138 80.7 1.10 1.08 0.10 0.11 9 9.1 9.1 0.3 1 Operating expenses / operating income before credit loss expense. 2 Refer to Note 9 to the consolidated financial statements for more information. 3 Dividends and / or distribution of the capital contribution reserve are normally approved and paid in the year subsequent to the reporting period. 4 Refer to the “Proposed dividend distribution out of capital contribution reserve” in the UBS Group AG standalone financial statements for more information. 5 The calculation of the dividend payout ratio for the year ended 31 December 2014 excludes the special cash dividend related to the one-time supplementary capital return paid after the suc- cessful completion of the SESTA procedure. 835 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under SEC regulations 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 942,819 1,062,478 1,013,355 1,259,797 1,416,962 91,306 11,948 25,584 67,893 124,035 51,943 167,435 23,763 311,954 62,543 22,160 11,836 8,029 9,653 29,137 162,430 38,282 62,995 104,073 13,334 24,063 68,414 138,156 56,018 256,978 30,979 315,757 57,159 22,988 10,492 9,180 11,818 27,958 80,879 13,874 27,496 91,563 122,848 42,449 254,084 26,548 286,959 59,525 20,228 12,862 9,491 13,811 26,609 66,383 21,220 37,372 130,941 160,564 44,698 418,957 30,413 279,901 66,230 17,244 23,024 9,203 38,557 34,247 254,101 248,079 395,260 42,372 75,297 44,507 69,901 71,148 91,901 373,459 104,837 66,523 45,949 40,638 23,218 58,763 213,501 181,525 39,936 486,584 41,322 266,604 53,174 15,492 30,201 8,136 102,429 39,480 473,400 67,114 88,982 342,409 140,617 69,633 48,530 390,185 410,207 390,825 93,147 75,652 55,313 91,207 71,112 50,608 81,586 62,777 48,002 Balance sheet data CHF million Assets Total 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 which may be sold or repledged by counterparties 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 Group AG shareholders 836 C – Information on the company Property, plant and equipment As of 31 December 2015, UBS operated about 856 business and banking locations worldwide, of which approximately 41% were in Switzerland, 41% in the Americas, 11% in the rest of Europe, Middle East and Africa and 7% in Asia Pacific. Of the business and banking locations in Switzerland, 33% were owned directly by UBS, with the remainder, along with most of UBS’s offices out- side Switzerland, being held under commercial leases. These premises are subject to continuous maintenance and upgrading and are considered suitable and adequate for current and antici- pated operations. 837 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under SEC regulations D – Information required by industry guide 3 Selected statistical information The following tables set forth select statistical information regarding the Group’s banking operations extracted from the financial state- ments. Unless otherwise indicated, average balances for the years ended 31 December 2015, 31 December 2014 and 31 December 2013 are calculated from monthly data. The distinction between domestic (Swiss) and foreign (non-Swiss) is generally based on the booking location. For loans, this method is not significantly different from an analysis based on the domicile of the borrower. 838 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 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 31.12.15 31.12.14 31.12.13 Average balance Interest income Average yield (%) Average balance Interest income Average yield (%) Average balance Interest income Average yield (%) 3,524 10,846 5 61 6,415 138,961 4,921 121,542 0 141 6141 159 2,912 0 0.1 0.6 0.2 0.4 3.2 2.4 3,269 16,692 7,374 133,640 5,105 118,038 0 8 95 4 463 209 2,988 0 0.2 0.6 0.1 0.3 4.1 2.5 3,051 16,420 11,479 162,479 5,189 119,894 0 8 82 10 575 177 2,736 0 121,542 2,912 2.4 118,038 2,988 2.5 119,894 2,736 249 29,469 710 4,715 3 59 1 193 192,815 120,692 3,644 2,510 20,037 43,131 0 43,131 0 12,749 710,777 63 328 0 328 0 526 11,092 1,630 4551 13,177 1.2 0.2 0.1 4.1 1.9 2.1 0.3 0.8 0.8 4.1 1.6 113 27,920 729 4,982 1 54 1 207 192,993 109,137 3,780 2,520 2,006 52,642 0 52,642 0 12,024 8 307 0 307 0 477 686,662 11,123 1,613 458 0.9 0.2 0.1 4.2 2.0 2.3 0.4 0.6 0.6 4.0 1.6 155 29,244 414 10,113 0 70 0 364 189,969 100,027 3,974 2,420 1,980 60,093 0 60,093 0 8,953 11 310 0 310 0 430 719,460 11,168 1,528 441 0.3 0.5 0.1 0.4 3.4 2.3 2.3 0.0 0.2 0.0 3.6 2.1 2.4 0.6 0.5 0.5 4.8 1.6 Interest income on off-balance sheet securities and other Interest income and average interest-earning assets 710,777 1.9 686,662 13,194 1.9 719,460 13,137 1.8 Non-interest-earning assets Positive replacement values Fixed assets Other Total average assets 213,913 7,154 126,767 1,058,611 232,739 6,383 127,799 1,053,584 337,781 6,054 115,921 1,179,216 839 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under SEC regulations Average balances and interest rates (continued) CHF million, except where indicated Liabilities and equity Due to banks Domestic Foreign Cash collateral on securities lent and repurchase agreements Domestic Foreign Trading portfolio liabilities Domestic Foreign 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 Total interest-bearing liabilities Interest expense on off-balance sheet securities and other 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 31.12.15 31.12.14 31.12.13 Average balance Interest expense Average interest rate (%) Average balance Interest expense Average interest rate (%) Average balance Interest expense Average interest rate (%) 9,571 2,480 3,413 71,129 11 11 22 4422 535 5 31,418 1,665 993 41,499 2,055 65,446 124,210 96,848 12,372 233,430 157,496 873 26,425 18,717 49,457 0 39,968 754,904 1 57 6 724 (19) 70 11 62 264 4 107 720 1,762 0 58 5,899 5462 0.1 0.4 0.1 0.6 0.9 5.3 0.1 0.1 0.3 1.1 0.0 0.1 0.1 0.0 0.2 0.5 0.4 3.8 3.6 0.1 0.8 8,932 3,691 5,328 58,639 16 14 1 338 638 14 28,733 1,789 612 42,595 1,747 68,928 130,593 97,825 7,593 236,012 159,170 1,270 26,734 14,937 43,264 0 35,503 736,733 0 45 13 906 43 172 12 227 340 2 101 447 1,833 0 58 6,145 495 0.2 0.4 0.0 0.6 2.2 6.2 0.0 0.1 0.7 1.3 0.0 0.2 0.2 0.1 0.2 0.2 0.4 3.0 4.2 0.2 0.8 13,859 4,073 5,344 65,088 37 24 2 344 628 12 29,874 1,834 540 58,693 1,207 79,182 126,953 95,937 4,379 227,268 155,312 1,703 33,363 11,823 50,053 0 35,706 773,717 0 65 9 1,188 60 246 15 321 373 3 170 281 2,131 0 67 6,863 489 0.3 0.6 0.0 0.5 1.9 6.1 0.0 0.1 0.7 1.5 0.0 0.3 0.3 0.1 0.2 0.2 0.5 2.4 4.3 0.2 0.9 754,904 6,445 0.9 736,733 6,640 0.9 773,717 7,351 1.0 210,551 37,960 1,003,415 55,196 1,058,611 229,286 35,474 1,001,493 52,091 1,053,584 321,681 34,188 1,129,586 49,630 1,179,216 6,732 6,555 5,786 0.9 1.0 0.8 1 Includes negative interest, including fees, on securities lent and repurchase agreements. 2 Includes negative interest, including fees, on securities borrowed and reverse repurchase agreements. 840 Average balances and interest rates (continued) The percentage of total average interest-earning assets attribut- able to foreign activities was 68% for 2015 (69% for 2014 and 71% for 2013). The percentage of total average interest-bearing liabilities attributable to foreign activities was 64% for 2015 (63% for 2014 and 66% for 2013). All assets and liabilities are trans- lated into CHF at uniform month-end rates. Interest income and expense are translated at monthly average rates. Average rates earned and paid on assets and liabilities can change from period to period based on the changes in interest rates in general, but are also affected by changes in the currency mix included in the assets and liabilities. This is especially true for foreign assets and liabilities. Tax-exempt income is not recorded on a tax-equivalent basis. For all three years presented, tax-exempt income is considered to be insignificant and the impact from such income is therefore negligible. 841 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures 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 income and expense due to changes in volume and interest rates for the year ended 31 December 2015 compared with the year ended 31 December 2014, and for the year ended 31 December 2014 compared with the year ended 31 Decem- ber 2013. Volume and rate variances have been calculated on movements in average balances and changes in interest rates. Changes due to a combination of volume and rates have been allocated proportionally. 2015 compared with 2014 2014 compared with 2013 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 1 (35) (1) 16 (8) 88 0 88 1 3 0 (11) (4) 266 72 (57) 0 (57) 0 29 61 299 360 (5) 2 11 135 (42) (164) 0 (164) 1 2 0 (4) (131) (276) (17) 78 0 78 0 19 (183) (208) (391) (4) (33) 10 151 (50) (76) 0 (76) 2 5 0 (15) (135) (10) 55 21 0 21 0 48 (122) 91 (31) 17 (4) (17) 1 1 (4) (115) (3) (43) 0 (43) 0 (3) 0 (185) 63 219 0 (37) 0 (37) 0 147 57 (16) 41 (1) 11 (2) 4 35 295 0 295 1 (12) 1 28 (258) (120) (3) 34 0 34 0 (99) (227) 140 (87) 0 12 (6) (111) 32 252 0 252 0 (15) 1 (157) (195) 99 (3) (3) 0 (3) 0 48 (170) 124 (46) 86 17 57 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 and other Total interest income 842 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 expense on interest-bearing liabilities Interest expense on off-balance sheet securities and other Total interest expense 2015 compared with 2014 2014 compared with 2013 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 1 (5) 0 75 (2) 166 0 (1) 2 (45) 0 (2) 10 8 (3) (1) (1) 113 260 0 9 121 455 576 (6) 2 0 30 (8) (290) 1 13 (9) (137) (62) (100) (11) (173) (73) 3 7 160 (332) 0 (9) (32) (790) (822) (5) (3) 0 105 (10) (124) 1 12 (7) (182) (62) (102) (1) (165) (76) 2 6 273 (72) 0 0 89 (335) (246) 51 (195) (15) (2) 0 (32) 0 (70) 0 (16) 4 (154) 0 6 10 16 8 (1) (33) 75 (292) 0 0 79 (591) (512) (6) (7) 0 26 2 25 0 (4) 0 (128) (18) (80) (13) (111) (41) (1) (36) 91 (6) 0 (9) (25) (181) (206) (21) (9) 0 (6) 2 (45) 0 (20) 4 (282) (18) (74) (3) (95) (33) (2) (69) 166 (298) 0 (9) 54 (772) (718) 6 (712) 843 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures 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 2015, 2014 and 2013. 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 72,532 million, CHF 76,362 million and CHF 76,246 million at 31 December 2015, 31 December 2014 and 31 December 2013, respectively. CHF million, except where indicated 31.12.15 Average deposits Average rate (%) 31.12.14 Average deposits Average rate (%) 31.12.13 Average deposits Average rate (%) Banks Domestic offices Demand deposits Time deposits Total domestic offices Foreign offices Interest-bearing deposits Total due to banks1 Customer accounts Domestic offices Demand deposits Savings deposits Time deposits Total domestic offices Foreign offices Demand deposits Time and savings deposits Total foreign offices Total due to customers 5,261 4,310 9,571 2,437 12,007 124,210 96,848 12,372 233,430 52,404 105,091 157,496 390,925 (0.2) 0.5 0.1 0.4 0.2 0.0 0.1 0.1 0.0 0.0 0.2 0.2 0.1 5,149 3,783 8,932 3,691 12,624 130,593 97,825 7,593 236,012 49,098 110,072 159,170 395,182 (0.1) 0.6 0.2 0.4 0.2 0.0 0.2 0.2 0.1 0.0 0.3 0.2 0.1 8,513 5,346 13,859 3,763 17,622 126,953 95,937 4,379 227,268 43,954 111,358 155,312 382,580 (0.1) 0.8 0.3 0.6 0.3 0.0 0.3 0.3 0.1 0.0 0.3 0.2 0.2 1 Due to banks is considered to represent short-term borrowings to the extent that the total Due to banks exceeds total Due from banks, without differentiating between domestic and foreign offices. The remainder of total Due to banks is considered to represent deposits for the purpose of this disclosure. As of 31 December 2015, the maturity of time deposits was as follows: Domestic 16,145 887 314 235 60 Foreign 39,735 1,982 812 596 99 17,642 43,225 CHF million Within 3 months 3 to 6 months 6 to 12 months 1 to 5 years Over 5 years Total time deposits 844 Short-term borrowings The table below 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 2015, 2014 and 2013. CHF million, except where indicated 31.12.15 31.12.14 31.12.13 31.12.15 Short-term debt Due to banks1 31.12.14 31.12.13 Repurchase agreements2 31.12.14 31.12.15 31.12.13 Period-end balance Average balance Maximum month-end balance Average interest rate during the period (%) Average interest rate at period-end (%) 21,215 27,298 31,911 0.4 0.5 27,363 28,004 33,674 0.4 0.2 27,633 35,067 44,789 0.5 0.4 0 44 570 0.2 0.0 0 0 0 0.0 0.0 0 309 1,370 0.3 0.0 71,775 65,118 80,372 0.3 0.2 54,625 52,865 65,033 0.2 0.2 41,160 61,251 76,014 0.2 0.2 1 Amounts due to banks are presented net of amounts due from banks in order 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-sale1, 2 CHF million, except percentages 31 December 2015 Swiss national government and agencies US Treasury and agencies Foreign governments and official institutions Corporate debt securities Mortgage-backed securities Total fair value3 CHF million, except percentages 31 December 2014 Swiss national government and agencies US Treasury and agencies Foreign governments and official institutions Corporate debt securities Mortgage-backed securities Total fair value3 CHF million, except percentages 31 December 2013 Swiss national government and agencies US Treasury and agencies Foreign governments and official institutions Corporate debt securities Mortgage-backed securities Total fair value3 Within 1 year 1 up to 5 years 5 to 10 years Over 10 years Total Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) (0.83) 0.39 0.21 0.42 701 11,171 13,966 6,062 31,900 6,856 11,049 8,118 0 26,023 1.29 0.64 0.87 5.20 1 4.00 1.33 1.27 104 264 369 3,396 3,396 1.74 Within 1 year 1 up to 5 years 5 to 10 years Over 10 years Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) 0.48 0.23 0.31 0.45 41 4,873 14,072 2,089 21,075 8,317 13,758 8,489 0 30,563 1.02 0.74 0.84 4.82 1 4.00 243 280 0 525 1.25 1.33 4.42 4,029 4,029 1.34 Within 1 year 1 up to 5 years 5 to 10 years Over 10 years Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) 0.17 0.27 0.52 849 25,483 743 27,075 0.46 0.36 0.55 0.80 43 13,010 7,277 6,873 27,202 1 3 63 178 0 245 3.55 3.30 0.98 0.85 4.71 19 1 4,017 4,037 12.16 6.60 2.09 702 18,027 25,119 14,443 3,396 61,688 Total 43 13,189 28,072 10,858 4,029 56,192 Total 44 13,861 32,842 7,795 4,017 58,559 1 Debt instruments without fixed maturities are not disclosed in this table. 2 Average yields are calculated on an amortized cost basis. 3 Includes investments in debt instruments as of 31 December 2015 issued by US government and government agencies of CHF 21,424 million (31 December 2014: CHF 17,219 million, 31 December 2013: CHF 17,876 million), the German government of CHF 8,583 million (31 December 2014: CHF 10,145 million, 31 December 2013: CHF 6,733 million), the French government of CHF 3,566 million (31 December 2014: CHF 5,351 million, 31 December 2013: CHF 5,601 million) and the UK government of CHF 2,782 million (31 December 2014: CHF 2,348 million, 31 December 2013: CHF 8,089 million). 845 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under SEC regulations EDTF | Due from banks and loans (gross) The Group’s lending portfolio is widely diversified across industry sectors. CHF 186.7 billion (57.5% of the total) consists of loans to thousands of private households, predominantly in Switzerland, and mostly secured by mortgages, financial collateral or other assets. Exposure to banks and financial institutions amounted to CHF 73.7 billion (22.7% of the total). Exposure to banks includes money market deposits with highly rated institutions. Excluding banks and financial institutions, the largest industry sector expo- sure as of 31 December 2015 was CHF 23.2 billion (7.1% of the total) to Services. For further discussion of the loan portfolio, refer to the “Risk management and control” section of this report. The table below illustrates the diversification of the loan port- folio among industry sectors as of 31 December 2015, 2014, 2013, 2012 and 2011. The industry categories presented are con- sistent with the classification of loans for reporting to the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank. Loans designated at fair value and loans held in the trading portfolio are excluded from the tables below. CHF million Domestic Banks Chemicals Construction Electricity, gas and water supply Financial services Food and beverages Hotels and restaurants Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other Total domestic Foreign Banks Chemicals Construction Electricity, gas and water supply Financial services Food and beverages Hotels and restaurants Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other Total foreign Total gross 846 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 538 308 1,520 234 5,325 208 1,647 2,012 23 123,967 1,609 13,707 3,687 5,250 1,876 697 1,157 392 1,418 260 6,466 206 1,696 2,319 34 125,461 2,098 14,549 4,169 4,794 1,964 732 736 382 1,429 255 4,643 241 1,817 2,512 36 124,569 2,415 14,511 3,784 5,330 2,013 753 532 300 1,360 351 4,265 284 1,745 2,976 45 123,167 2,708 13,682 4,345 5,862 1,728 830 566 377 1,292 260 4,257 276 1,831 3,252 35 120,671 2,992 13,169 4,433 5,770 1,414 769 162,609 167,713 165,426 164,180 161,364 11,413 12,190 113 635 706 56,375 65 148 1,958 1,466 62,695 1,272 2,213 1,975 17,929 2,858 163 75 645 1,100 57,645 56 120 1,961 1,345 60,466 1,413 2,517 1,924 17,470 3,017 142 13,201 178 1,132 1,337 43,125 63 181 1,850 1,175 49,920 1,322 2,995 1,791 14,733 2,809 362 20,711 254 1,731 1,205 40,650 45 347 1,828 1,279 46,458 4,319 2,721 2,063 10,735 3,021 301 161,985 324,594 162,086 329,800 136,174 301,601 137,669 301,849 22,669 392 750 746 38,801 49 372 1,955 1,979 41,045 5,459 2,158 2,044 8,529 2,068 282 129,300 290,664 EDTF | Due from banks and loans (gross) (continued) The table below analyzes the Group’s mortgage portfolio by client domicile and type of mortgage as of 31 December 2015, 2014, 2013, 2012 and 2011. 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 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 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 144,230 18,887 163,117 141,608 21,509 163,117 146,637 18,112 164,748 142,380 22,368 164,748 144,852 15,235 160,086 137,370 22,716 160,086 142,143 12,311 154,454 132,033 22,421 154,454 138,204 8,818 147,022 125,775 21,247 147,022 Within 1 year 1 to 5 years Over 5 years Total 538 60,404 14,461 75,403 11,354 5,170 109,263 125,787 201,191 0 49,062 2,555 51,617 34 4,615 18,387 23,036 74,654 0 34,764 824 35,588 24 9,102 4,035 13,162 48,750 538 144,230 17,840 162,609 11,413 18,887 131,685 161,985 324,594 As of 31 December 2015, the total amounts of Due from banks and Loans granted at fixed- and floating-rates were as follows: CHF million Fixed-rate loans Adjustable or floating-rate loans Total Within 1 year 1 to 5 years Over 5 years 136,297 64,893 201,191 59,052 15,601 74,654 38,929 9,821 48,750 Total 234,278 90,316 324,594 847 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under SEC regulations EDTF | Impaired and non-performing loans A loan (included in Due from banks or Loans) is classified as non- performing: (i) when the payment of interest, principal or fees is overdue by more than 90 days, (ii) when insolvency proceedings have commenced or (iii) when obligations have been restructured on preferential terms. For IFRS reporting purposes, the definition of impaired loans is more comprehensive, covering both non-per- forming loans and other situations where objective evidence indi- cates that UBS may be unable to collect all amounts due. Refer to “Impaired loans” in the “Risk management and control” section of this report for comprehensive information on UBS’s impaired loans, of which non-performing loans are a component. Also, refer to Note 1 to the consolidated financial statements for more information on the various risk factors that are considered to be indicative of impairment. The table below provides an analysis of the Group’s non-per- forming loans. 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 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 1,174 455 1,630 1,293 309 1,602 1,113 469 1,582 1,121 395 1,516 1,199 329 1,529 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 6 7 26 5 9 6 22 7 6 4 23 7 8 3 28 6 10 9 29 6 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. Instead, specific loan allowances are established as necessary. Unrecognized inter- est related to restructured loans was not material to the results of operations in 2015, 2014, 2013, 2012 or 2011. 848 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. The following tables list those countries for which cross-border outstandings exceeded 0.75% of total IFRS assets at 31 Decem- ber 2015, 2014 and 2013. As of 31 December 2015, there were no outstandings that exceeded 0.75% of total IFRS assets in any country currently facing debt restructuring or liquidity problems that the Group expects would materially impact the country’s abil- ity to service its obligations. Aggregate country risk exposures are monitored and reported on an ongoing basis. The internal risk view is not directly comparable to the cross-border outstandings in the table below due to different approaches to netting, differ- ing trade populations and differing approach to allocation of exposures to countries. For more information on the country framework within risk control, refer to the “Risk management and control” section of this report. CHF million USA United Kingdom Japan France Hong Kong CHF million USA United Kingdom Japan France CHF million USA United Kingdom Japan France Germany Private sector Public sector Total outstandings % of total assets 31.12.15 90,201 56,282 11,275 3,758 7,692 27,807 9,560 5,054 681 121 31.12.14 Private sector Public sector 84,629 47,003 16,906 6,006 59,103 13,928 5,422 67 31.12.13 Private sector Public sector 76,047 39,528 17,009 7,478 2,664 51,287 8,583 4,765 56 1,900 126,641 70,414 19,794 8,482 8,160 Total outstandings 153,019 67,220 24,107 10,025 Total outstandings 149,327 58,749 22,794 12,273 8,478 13.4 7.5 2.1 0.9 0.9 % of total assets 14.4 6.3 2.3 0.9 % of total assets 14.7 5.8 2.2 1.2 0.8 Guarantees and Commitments1 42,286 6,448 136 5,029 79 Guarantees and Commitments1 34,967 7,660 1,771 5,037 Guarantees and Commitments1 38,778 8,494 289 6,997 2,062 Banks 8,633 4,571 3,466 4,043 347 Banks 9,287 6,288 1,780 3,952 Banks 21,993 10,638 1,019 4,739 3,914 1 Includes forward starting transactions (reverse repurchase agreements and securities borrowing agreements). 849 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under SEC regulations EDTF | 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. 31.12.15 31.12.14 31.12.13 31.12.12 735 750 794 938 31.12.11 1,287 CHF million Balance at beginning of year Domestic Write-offs Construction Electricity, gas and water supply Financial services Hotels and restaurants Manufacturing Private households Real estate and rentals Retail and wholesale Services Transport, storage and communications Total gross domestic write-offs Foreign Write-offs Banks 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 communications Total gross foreign write-offs Total usage of provisions Total write-offs / usage of provisions Recoveries Domestic Foreign Total recoveries Total net write-offs / usage of provisions (116) (124) Increase / (decrease) in specific allowances and provisions recognized in the income statement Increase / (decrease) in collective loan loss allowances recognized in the income statement Foreign currency translation Other Balance at end of year1 1 Includes allowances for cash collateral on securities borrowed. 117 0 (11) 2 727 89 (11) 21 11 735 850 (2) (1) (3) 0 (9) (35) 0 (47) (3) (9) (110) (9) 0 0 (3) 0 (1) (12) 0 0 (19) (10) 0 (54) 0 (164) 41 7 48 (1) 0 0 0 (3) (39) (1) (28) (15) (3) (90) (15) (1) (1) (12) (7) 0 (6) 0 (2) (2) (14) (1) (63) (1) (154) 29 0 29 (2) 0 (6) 0 (4) (38) 0 (11) (4) (1) (67) (1) (6) 0 (44) 0 0 (6) (1) (1) (1) 0 0 (61) 0 (128) 35 10 45 (83) 144 (93) (9) (3) 750 (1) (6) 0 (1) (20) (45) (2) (21) (6) (11) (8) 0 (17) 0 (31) (59) (3) (37) (21) (6) (112) (183) 0 0 0 (106) 0 0 (15) (54) 0 0 (19) (5) (201) 0 (313) 43 21 63 (8) 0 0 (39) 0 0 (72) (175) (7) 0 (1) 0 (303) (14) (501) 50 1 51 (250) (450) 133 (15) (8) (3) 794 0 84 (1) 18 938 EDTF | 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 2015, 2014, 2013, 2012 and 2011. 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. 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 CHF million Domestic Banks Chemicals Construction Electricity, gas and water supply Financial services Food and beverages Hotels and restaurants Manufacturing Private households Real estate and rentals Retail and wholesale Services Transport, storage and communication Other1 Total domestic specific allowances Foreign Banks2 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 Total foreign specific allowances Collective loan loss allowances Provisions for loan commitments and guarantees Total allowances and provisions for credit losses3 1 Includes mining and public authorities. 2 Counterparty allowances only. 3 Includes allowances for cash collateral on securities borrowed. 3 0 13 2 17 3 13 77 47 13 78 23 32 0 321 0 0 1 0 90 13 46 61 14 1 80 19 40 365 6 35 727 2 0 14 1 18 4 16 72 52 18 123 25 29 0 374 10 0 1 0 35 9 11 65 14 1 112 29 43 330 8 23 735 3 1 16 1 16 2 12 57 54 9 152 23 19 0 365 13 0 17 1 37 18 2 66 16 2 77 35 19 303 20 61 750 3 0 16 0 21 3 9 44 60 10 123 24 12 1 326 19 1 20 1 37 23 0 45 39 4 39 35 27 290 114 64 794 1 0 15 9 19 2 6 65 77 14 131 24 16 1 379 16 8 6 1 96 23 0 60 33 10 15 28 39 335 131 93 938 851 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures 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. 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 0.2 0.1 0.5 0.1 1.6 0.1 0.5 0.6 38.2 0.5 4.2 1.1 1.6 0.6 0.2 50.1 3.5 0.0 0.2 0.2 17.4 0.0 0.6 0.5 19.3 0.4 0.7 0.6 5.5 0.9 0.1 0.4 0.1 0.4 0.1 2.0 0.1 0.5 0.7 38.0 0.6 4.4 1.3 1.5 0.6 0.2 50.9 3.7 0.0 0.2 0.3 17.5 0.0 0.6 0.4 18.3 0.4 0.8 0.6 5.3 0.9 0.0 0.2 0.1 0.5 0.1 1.5 0.1 0.6 0.8 41.3 0.8 4.8 1.3 1.8 0.7 0.2 54.8 4.4 0.1 0.4 0.4 14.3 0.1 0.6 0.4 16.6 0.4 1.0 0.6 4.9 0.9 0.1 0.2 0.1 0.5 0.1 1.4 0.1 0.6 1.0 40.8 0.9 4.5 1.4 1.9 0.6 0.3 54.4 6.9 0.1 0.6 0.4 13.5 0.1 0.6 0.4 15.4 1.4 0.9 0.7 3.6 1.0 0.1 0.2 0.1 0.4 0.1 1.5 0.1 0.6 1.1 41.5 1.0 4.5 1.5 2.0 0.5 0.3 55.5 7.8 0.1 0.3 0.3 13.3 0.1 0.7 0.7 14.1 1.9 0.7 0.7 2.9 0.7 0.1 49.9 100.0 49.1 100.0 45.2 100.0 45.6 100.0 44.5 100.0 In % Domestic Banks Chemicals Construction Electricity, gas and water supply Financial services Food and beverages Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other1 Total domestic Foreign Banks Chemicals Construction Electricity, gas and water supply Financial services Hotels and restaurants Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other2 Total foreign Total gross 1 Includes mining 2 Includes food and beverages 852 UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations 853 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Introduction This section of the report provides supplemental Bank for International Settlements (BIS) Basel III Pillar 3 disclosures for UBS Group AG on a consolidated basis. These disclosures complement other required Pillar 3 disclosures that are pro- vided elsewhere in the Annual Report 2015 and are labelled accordingly as Pillar 3 |. The capital adequacy framework consists of three complementary pillars. Pillar 1 provides a framework for measuring minimum cap- ital requirements for the credit, market, operational and non- counterparty-related risks faced by banks. Pillar 2 addresses the principles of the supervisory review process, emphasizing the need for a qualitative approach to supervising banks. Pillar 3 aims to encourage market discipline by requiring banks to publish a range of disclosures, mainly on risk and capital. This supplemental Pillar 3 disclosures section relates to UBS Group AG on a consolidated basis as Pillar 3 disclosure requirements are applicable at this level. An exception is the requirement to dis- close total and tier 1 capital ratios related to the significant bank subsidiaries UBS AG, UBS Switzerland AG and UBS Limited, which are presented in the “Legal entity financial and regulatory informa- tion” section of this report. Capital information as of 31 December 2015 for UBS Group AG (consolidated) and UBS AG (consolidated) is provided in the “Capital management” section of this report. This supplemental Pillar 3 disclosures section is based on phase- in rules under the BIS Basel III framework, as implemented by the revised Swiss Capital Adequacy Ordinance issued by the Swiss Federal Council and required by Swiss Financial Market Supervi- sory Authority (FINMA) regulation. Further, as UBS is considered a systemically relevant bank (SRB) under Swiss banking law, UBS Group and UBS AG are required to comply with regulations based on the Basel III framework as applicable to Swiss SRBs on a con- solidated basis. FINMA requires us to publish comprehensive quantitative and qualitative Pillar 3 disclosures annually, as well as an update of quantitative disclosures and any significant changes to qualitative information semi-annually. For the first half of 2015, our Basel III Pillar 3 disclosures were provided in the Basel III Pillar 3 report published on the UBS website. ➔ Refer to the “Legal entity financial and regulatory information” section of this report for more information on UBS AG, UBS Switzerland AG and UBS Limited ➔ Refer to the “Capital management” section of this report for more information on regulatory requirements and differences between the Swiss SRB and BIS Basel III capital regulations ➔ Refer to “Pillar 3, SEC filings & other disclosures” at www.ubs. com/investors for more information on G-SIBs indicators and previous Pillar 3 reports Revised Pillar 3 disclosure requirements In January 2015, the Basel Committee on Banking Supervision (BCBS) issued revised Pillar 3 disclosure requirements that aim to improve comparability and consistency of disclosures, through the introduction of harmonized templates. The revised requirements will take effect at the end of 2016. 854 Location of Pillar 3 disclosures The following table provides an overview of Pillar 3 disclosures in this report. Location in this supplemental section Scope of regulatory consolidation (on page 860) Table 1: Main legal entities consolidated under IFRS but not included in the regulatory scope of consolidation Pillar 3 disclosures Scope of consolidation and transfer restrictions Capital structure Location in our UBS Group AG Annual Report 2015 Consolidatedfinancialstatements –Note1Summaryofsignificant accounting policies – Note 30 Interests in subsidiaries and other entities – Note 25 Restricted and transferred financialassets Capital management (on pages 253 – 257, 260) Capital adequacy Capital management (on page 249) Capital instruments BIS Basel III leverage ratio Capital management (on pages 258 – 259) “Bondholder information” at www.ubs.com/investors Capital management (on page 275) “Pillar3,SECfilings&otherdisclosures” at www.ubs.com/investors Risk management objec- tives, policies and method- ologies – qualitative disclo- sures Risk management and control (on pages 165 – 233) Currency management (on page 247) Capital management (on page 250) Risk-weighted assets Capital management (on pages 263 – 266) Overview of exposures and risk-weighted assets (on pages 861 – 863) Table 2: Detailed segmentation of exposures and risk-weighted assets 855 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Location of Pillar 3 disclosures (continued ) The following table provides an overview of Pillar 3 disclosures in this report. Pillar 3 disclosures Credit risk Location in our UBS Group AG Annual Report 2015 Risk management and control (on pages 177, 196 – 201) Information on – Impaired assets by region, – Impaired assets by exposure segment, and on – Changes in allowances and provi- sions (on pages 181 – 186) Treasury management (on page 244) Consolidatedfinancialstatements – Note 14 Derivative instruments and hedge accounting Location in this supplemental section Credit risk (on pages 864 – 885) Table 3: Regulatory credit risk exposure and RWA Table 4: Regulatory gross credit risk exposure by geographical region Table 5: Regulatory gross credit risk exposure by counterparty type Table 6: Regulatory gross credit risk exposure by residual contractual maturity Table 7: Credit risk mitigation for standardized and A-IRB approaches Table 8: Regulatory gross credit risk exposure covered by guarantees and credit derivatives Table 9a: Sovereigns – A-IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings Table 9b: Banks – A-IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings – Note26Offsettingfinancialassets Table 9c: Corporates – A-IRB approach: Regulatory net credit risk exposure, andfinancialliabilities weighted average PD, LGD and RWA by internal UBS ratings Table 9d: Residential mortgages – A-IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS rat- ings Table 9e: Lombard lending – A-IRB approach: Regulatory net credit risk expo- sure, weighted average PD, LGD and RWA by internal UBS ratings Table 9f: Qualifying revolving retail exposures – A-IRB approach: Regulatory net credit risk exposures, weighted average PD, LGD and RWA by internal UBS ratings Table 9g: Other retail – A-IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings Table 10a:Regulatory gross and net credit risk exposure by risk weight under the standardized approach Table 10b: Regulatory net credit risk exposure under the standardized approach risk-weighted using external ratings Table11: Eligiblefinancialcollateralrecognizedunder the standardized approach Table 12: Breakdown by exposure segments Table 13: Total actual and expected credit losses Table 14: Credit risk exposure of derivative instruments Table 15: Credit derivatives Table 16: Equity instruments in the banking book 856 Location of Pillar 3 disclosures (continued) The following table provides an overview of Pillar 3 disclosures in this report. Pillar 3 disclosures Location in our UBS Group AG Location in this supplemental section Market risk Operational risk Annual Report 2015 Risk management and control (on pages 204 – 205) Information on Group regulatory value- at-risk (on pages 207, 209 – 216) Consolidatedfinancialstatements – Note 24 Fair value measurement Risk management and control (on pages 230 – 233) Interest rate risk in the banking book Risk management and control (on pages 217 – 221) Securitization Securitization (on pages 887 – 900) Table 17: Securitization / re-securitization Table 18: Securitization activity for the year in the banking book Securitization activity for the year in the trading book Table 19: Outstanding securitized exposures Table 20: Impaired or past due securitized exposures and losses related to securi- tized exposures in the banking book Table 21: Exposures intended to be securitized in the banking and trading book Table 22: Securitization positions retained or purchased in the banking book Table 23: Securitization positions retained or purchased in the trading book Table 24a: Capital requirement for securitization / re-securitization positions retained or purchased in the banking book Table 24b: Securitization / re-securitization exposures treated under the ratings- based approach by rating clusters – banking book Table 24c: Securitization / re-securitization exposures treated under the supervisory formula approach by rating clusters – banking book Gains on sale – securitization exposures to be deducted from Basel III tier 1 capital Securitization exposures subject to early amortization in the banking and trading book Re-securitization positions retained or purchased in the banking book Table 25: Re-securitization positions retained or purchased in the trading book Outstanding notes issued by securitization vehicles related to UBS’s retained expo- sures subject to the market risk approach Table 26: Correlation products subject to the comprehensive riskmeasureorthesecuritizationframeworkforspecificrisk Table 27a: Securitization positions and capital requirement for trading book posi- tions subject to the securitization framework Table 27b: Securitization / re-securitization exposures treated under the ratings- based approach by rating clusters – trading book Table 27c: Securitization / re-securitization exposures treated under the supervisory formula approach by rating clusters – trading book Table 28: Capital requirement for securitization positions related to correlation products 857 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Location of Pillar 3 disclosures (continued) The following table provides an overview of Pillar 3 disclosures in this report. Pillar 3 disclosures Location in our UBS Group AG Annual Report 2015 Location in this supplemental section Balance sheet reconciliation (on pages 901–902) Table 29: Reconciliation of accounting balance sheet to balance sheet under the regulatory scope of consolidation Composition of capital (on pages 903–906) Table 30: Composition of capital G-SIB indicator (on page 907) “Pillar3,SECfilings&otherdisclosures”atwww.ubs.com/investors Balance sheet reconciliation Composition of capital G-SIB indicators (annual disclosure requirement only) Remuneration (annual disclosure requirement only) Equity attribution and performance measurement Legal entity information Compensation (on pages 342–343, 344, 348, 353–354, 356–357, 360, 364, 368– 372, 373–374, 376–379) Corporate governance (on page 308) Measurement of performance (on page 39) Equity attribution framework (on pages 280–281) Legalentityfinancialandregulatoryinfor- mation (on pages 796–799, 819–822) Our approach to measuring risk exposure and risk-weighted assets Measures of risk exposure may differ depending on whether the exposures are calculated for financial accounting purposes under International Financial Reporting Standards (IFRS), for deriving our regulatory capital requirement or for risk management purposes. Our Basel III Pillar 3 disclosures are generally based on measures of risk exposure used to derive the regulatory capital required to underpin those risks. The table on the next page provides a summary of the approaches we use for the main risk categories to derive risk- weighted assets (RWA). The naming conventions for the exposure segments used in the following tables are based on BIS rules and may differ from those under Swiss and European Union (EU) regulations. For example, “sovereigns” under the BIS naming convention are termed “central governments and central banks” under the Swiss and EU regulations. Similarly, “banks” are “institutions” and “res- idential mortgages” are “claims secured by residential real estate.” Our RWA are published according to the BIS Basel III frame- work, as implemented by the revised Swiss Capital Adequacy Ordinance issued by the Swiss Federal Council and required by FINMA regulation. ➔ Refer to the “Capital management” section of this report for more information on differences between Swiss SRB and BIS Basel III capital regulations 858 Category Credit risk Credit risk by exposure segment UBS approach Under the advanced internal ratings-based (A-IRB) approach applied for the majority of our businesses, counterparty risk weights are determined by reference to internal counterparty ratings and loss given default estimates. We use internal models tomeasurethecreditriskexposurestothirdpartiesonderivativesandsecuritiesfinancingtransactions.Allinternalcreditrisk models are approved by FINMA. For a subset of our credit portfolio, we apply the standardized approach, based on external ratings. Securitization / re-securitization in the banking book Securitization / re-securitization exposures in the banking book are generally assessed using the ratings-based approach, applying risk weights based on external ratings. For certain exposures, the supervisory formula-based approach is applied, considering the A-IRB risk weights. Equity instruments in the banking book Credit valuation adjust- ment (CVA) Simple risk weight method under the IRB approach. The credit valuation adjustment (CVA) is an additional capital requirement to the existing counterparty credit risk default charge. Banks are required to hold capital for the risk of mark-to-market losses (i.e., CVA) associated with the deterioration of counterparty credit quality. The model that we use is approved by FINMA. For a subset of our credit portfolio, we apply the standardized approach. Settlement risk Capital requirements for failed transactions are determined according to the rules for failed trades and non-delivery-versus- payment transactions under the Basel III framework. Non-counterparty- related risk The required capital for non-counterparty-related assets such as our premises, other property, equipment and software, deferredtaxassetsontemporarydifferencesanddefinedbenefitplansiscalculatedaccordingtoprescribedregulatoryrisk weights. Market risk Value-at-risk (VaR) Stressed VaR (SVaR) Add-on for risks-not-in- VaR (RniV) Incremental risk charge (IRC) Comprehensive risk mea- sure (CRM) Securitization / re-securitization in the trading book Operational risk The regulatory capital requirement is calculated using a variety of methods approved by FINMA. The components are value- at-risk (VaR), stressed VaR (SVaR), an add-on for risks which are potentially not fully modeled in VaR (RniV), the incremental risk charge (IRC), the comprehensive risk measure (CRM) for the correlation portfolio and the securitization framework for securitization positions in the trading book, which is described below. Details on the derivation of RWA for each of these components are provided in the “Risk management and control” section of this report. Securitization/re-securitizationinthetradingbookareassessedfortheirgeneralmarketriskaswellasfortheirspecificrisk. The capital requirement for general market risk is determined by the VaR and SVaR methods, whereas the capital requirement forspecificriskisdeterminedusingtheCRMmethodortheratings-basedapproach,applyingriskweightsbasedonexternal ratings. Our model to quantify operational risk meets the regulatory capital standard under the advanced measurement approach and is approved by FINMA. Operational risk RWA also include the incremental operational risk RWA based on the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA. ➔ Refer to the “Risk management and control” section of this report for more information 859 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Scope of regulatory consolidation The scope of consolidation for the purpose of calculating Group regulatory capital is generally the same as the consolidation scope under IFRS and includes subsidiaries directly or indirectly con- trolled by UBS Group AG that are active in the banking and finance sector. However, subsidiaries consolidated under IFRS that are active in sectors other than banking and finance are excluded from the regulatory scope of consolidation. More information on the IFRS scope of consolidation, as well as the list of significant subsidiaries included in this scope as of 31 December 2015, are available in the “Consolidated financial statements” section of this report. ➔ Refer to “Note 1 Summary of significant accounting policies” and “Note 30 Interests in subsidiaries and other entities” in the “Consolidated financial statements” section of this report for more information The main differences in the basis of consolidation between IFRS and regulatory capital purposes relate to the following enti- ties as of 31 December 2015: – Investments in insurance, real estate and commercial compa- nies as well as investment vehicles that were consolidated under IFRS, but not for regulatory capital purposes, and were subject to risk-weighting; – Joint ventures which were fully consolidated for regulatory capital purposes, but which were accounted for under the equity method under IFRS; – Entities that have issued preferred securities which were con- solidated for regulatory capital purposes but not consolidated under IFRS. These entities hold bonds issued by UBS AG, which are eliminated in the consolidated regulatory capital accounts. These entities do not have material third-party asset balances, and their equity is attributable to non-controlling interests. The table below provides a list of the most significant entities that were included in the IFRS scope of consolidation, but not in the regulatory capital scope of consolidation. As of 31 December 2015, entities consolidated under IFRS, but not included in the regulatory scope of consolidation, did not report any significant capital deficiencies. In the banking book, certain equity investments were not required to be consolidated, neither under IFRS nor in the regula- tory scope. These investments mainly consisted of infrastructure holdings and joint operations (for example, settlement and clear- ing institutions, stock and financial futures exchanges) and included our participation in the SIX Group. These investments were risk-weighted based on applicable threshold rules. ➔ Refer to “Table 16: Equity instruments in the banking book” of this section for more information on the measurement of these instruments ➔ Refer to “Table 29: Reconciliation of accounting balance sheet to balance sheet under the regulatory scope of consolidation” of this section for more information ➔ Refer to “Note 25 Restricted and transferred financial assets” in the “Consolidated financial statements” section of this report for more information on transferability restrictions under IFRS 12 Table 1: Main legal entities consolidated under IFRS but not included in the regulatory scope of consolidation CHF million UBS Asset Management Life Ltd – Long Term Fund UBS International Life Designated Activity Company A&Q Alternative Solution Limited A&Q Alternative Solution Master Limited UBS Life AG A&Q Alpha Select Hedge Fund XL A&Q Alpha Select Hedge Fund Limited O’Connor Global Multi-Strategy Alpha (Levered) Limited UBS Life Insurance Company USA A&Q Global Alpha Strategies XL Limited Key Multi-Manager Alternative Commodities Fund Limited 31.12.15 Total assets1 10,032 5,806 660 647 293 275 219 189 166 145 113 Total equity1 16 82 6312 6402 57 1392 2132 1892 43 732 1052 Purpose Life insurance Life Insurance Investment vehicle for multiple investors Investment vehicle for feeder funds Life insurance Investment vehicle for multiple investors Investment vehicle for multiple investors Investment vehicle for multiple investors Life Insurance Investment vehicle for multiple investors Offshore hedge fund 1 Total assets and total equity on a standalone basis. 2 Represents the net asset value (NAV) of issued fund units. These fund units are subject to liability treatment in the consolidated financial statements in accordance with IFRS. 860 Overview of exposures and risk-weighted assets “Table 2: Detailed segmentation of exposures and risk-weighted assets” and subsequent tables provide a breakdown according to BIS-defined exposure segments as follows: – Sovereigns, consisting of exposures relating to sovereign states and their central banks, the BIS, the International Monetary Fund, the EU (including the European Central Bank) and eligi- ble multilateral development banks. – Banks, consisting of exposures to legal entities holding a bank- ing license. This segment also includes securities firms subject to supervisory and regulatory arrangements, including risk- based capital requirements, which are comparable to those applied to banks according to the framework. This segment also includes exposures to public sector entities with tax-raising power or entities whose liabilities are fully guaranteed by a public entity. – Corporates, consisting of all exposures that do not fit into any of the other exposure segments. This segment includes private commercial entities such as corporations, partnerships or pro- prietorships, insurance companies and funds (including man- aged funds). – Central counterparties (CCP) are clearing houses that interpose themselves between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the future performance of open contracts. A CCP becomes a counter- party to trades with market participants through novation, an open offer system, or another legally binding arrangement. – Retail, Residential mortgages, consisting of residential mort- gages, regardless of exposure size, if the debtor occupies or rents out the mortgaged property. – Retail, Lombard lending, consisting of loans made against the pledge of eligible marketable securities or cash. – Retail, Qualifying revolving retail exposures, consisting of unse- cured revolving credits that exhibit appropriate loss character- istics relating to credit card relationships treated under the advanced internal ratings-based (A-IRB) approach. – Retail, Other retail, consisting of exposures to small businesses, private clients and other retail customers without mortgage financing. Table 2 also shows the gross and net exposure at default (EAD) per risk type and exposure segment, which forms the basis for the calculation of the RWA as well as the capital requirement per exposure category. The Basel III credit risk-related component “Stressed expected positive exposure (sEPE)” is newly included in “Credit risk by exposure segment” while “Credit valuation adjust- ment (CVA)” is still disclosed separately in this table. Comparative figures for December 2014 have been restated accordingly. Gross EAD decreased by CHF 20 billion to CHF 724 billion in 2015, of which CHF 17 billion related to credit risk. This decrease was primarily a result of lower high-quality liquid assets held at central banks and reductions in derivative and securities financing transactions as a higher portion of these exposures with banks and corporate counterparties were treated with an internal expo- sure model. Further decreases resulted from asset size reductions and currency effects. These reductions were partially offset by increased gross EAD with central clearing houses following a change in treatment of these exposures. Gross EAD related to highly-rated securities held for liquidity purposes previously treated with the standardized approach are now treated under the A-IRB / model-based approach. This resulted in a CHF 30 billion increase in exposures to sovereigns treated under the A-IRB / model-based approach and a corre- sponding decrease in exposures to sovereigns treated under the standardized approach. Capital requirements presented in the following tables are cal- culated based on our Swiss SRB total capital requirement of 12.6% of RWA as of 31 December 2015 and 11.1% of RWA as of 31 December 2014, respectively. ➔ Refer to the table “Risk-weighted assets by exposure segment” in the “Capital management” section of this report for more information on RWA by business division and Corporate Center unit ➔ Refer to the table “Risk-weighted assets movement by key driver – fully applied” in the “Capital management” section of this report for more information on RWA movements 861 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations EDTF | Table 2: Detailed segmentation of exposures and risk-weighted assets Gross EAD A-IRB / model-based approach Standardized approach Total 31.12.15 Swiss SRB (phase-in) Total Net EAD 703,326 571,755 Capital requirement Net EAD 10,757 118,036 CHF million Credit risk Credit risk by exposure segment3 Sovereigns Banks Corporates Central counterparties Retail Residential mortgages Lombard lending Qualifying revolving retail exposures Other retail Securitization / re-securitization in the banking book Equity instruments in the banking book4 Credit valuation adjustment (CVA) Settlement risk Non-counterparty-related risk Deferred tax assets Property, equipment and software Other Market risk Value-at-risk (VaR) Stressed value-at-risk (SVaR) Add-on for risks-not-in-VaR (RNiV) Incremental risk charge (IRC) Comprehensive risk measure (CRM) Securitization / re-securitization in the trading book5 Operational risk of which: incremental RWA6 RWA1 85,210 76,653 2,710 7,934 566,121 138,754 44,217 137,438 41,768 245,712 130,408 113,131 1,504 669 4,207 1,272 155 24,241 17,617 5,743 526 355 707 4,072 3,557 221 697,240 162,229 50,210 159,570 69,193 256,039 136,696 113,131 1,504 4,708 4,207 1,272 607 19,652 9,634 7,612 2,406 1,263 9,676 342 1,002 5,273 3,060 2,224 725 66 45 89 514 449 28 RWA1 19,231 17,147 317 1,115 7,051 2,846 5,817 2,360 Capital requirement 2,428 2,165 40 141 890 359 734 298 117,604 23,475 4,561 10,048 69,193 10,327 6,288 4,038 3,457 436 432 19,652 9,634 7,612 2,406 1,798 286 20,743 12,901 7,612 230 227 36 2,619 1,629 961 29 1,263 12,063 1,523 1,528 2,835 4,212 2,732 84 1,263 1,263 672 75,055 13,327 193 358 532 345 11 85 9,475 1,682 Net EAD 689,792 RWA1 104,441 requirement2 13,184 Capital 683,725 162,229 48,778 147,486 69,193 256,039 136,696 113,131 1,504 4,708 4,207 1,272 587 19,652 9,634 7,612 2,406 1,263 1,263 93,800 3,027 9,050 48,819 2,846 30,058 19,977 5,743 526 3,812 707 4,072 5,355 508 20,743 12,901 7,612 230 12,063 1,528 2,835 4,212 2,732 84 672 75,055 13,327 11,841 382 1,142 6,163 359 3,794 2,522 725 66 481 89 514 676 64 2,619 1,629 961 29 1,523 193 358 532 345 11 85 9,475 1,682 Total Swiss SRB 724,241 573,018 172,328 21,754 137,688 39,974 5,046 710,706 212,302 26,800 1 Refer to the “Capital management” section of this report for more information on the differences between phase-in and fully applied RWA. 2 Calculated based on our Swiss SRB total capital requirement of 12.6% of RWA. 3 Includes sEPE, most of which relates to exposures to Banks and Corporates. 4 Simple risk weight method applied. 5 The EAD of securitization positions equals the fair value of the net long and net short securitization positions retained or purchased in the trading book. 6 Incremental RWA reflect the effect of the supplemental operational risk capital analysis mutually agreed by UBS and FINMA. 862 Table 2: Detailed segmentation of exposures and risk-weighted assets (continued) Gross EAD A-IRB / model-based approach Standardized approach Total 31.12.14 Swiss SRB (phase-in) Net EAD 697,810 RWA1 108,601 CHF million Credit risk Credit risk by exposure segment3 Sovereigns Banks Corporates Central counterparties Retail Residential mortgages Lombard lending Qualifying revolving retail exposures Other retail Securitization / re-securitization in the banking book Equity instruments in the banking book4 Credit valuation adjustment (CVA) Settlement risk Non-counterparty-related risk Deferred tax assets Property, equipment and software Other5 Market risk Value-at-risk (VaR) Stressed value-at-risk (SVaR) Add-on for risks-not-in-VaR (RNiV) Incremental risk charge (IRC) Comprehensive risk measure (CRM) Securitization / re-securitization in the trading book6 Operational risk of which: incremental RWA7 Total 720,039 709,293 166,261 59,302 172,605 54,291 256,834 137,159 115,192 1,524 2,959 9,048 1,448 250 22,126 10,010 6,760 5,356 1,610 Net EAD 553,788 543,230 108,939 48,628 145,399 240,263 131,121 107,036 1,524 582 9,048 1,448 62 RWA1 86,282 72,406 1,319 8,070 41,126 21,892 15,767 5,359 532 233 2,650 4,735 6,395 96 Capital requirement 9,594 8,051 147 897 4,573 2,434 1,753 596 59 26 295 526 711 11 1,610 16,483 1,833 Net EAD 144,021 143,841 57,321 7,916 15,899 54,291 8,414 6,038 RWA1 22,318 18,694 189 2,360 10,650 1,478 4,017 2,234 Capital requirement 2,482 2,079 21 262 1,184 164 447 248 2,376 1,783 198 180 22,126 10,010 6,760 5,356 3,381 244 376 27 19,060 2,119 8,897 6,760 3,404 989 752 378 2,024 4,115 5,911 3,039 131 1,262 76,734 17,451 225 458 657 338 15 140 8,532 1,940 1,610 1,610 687,072 166,261 56,544 161,298 54,291 248,678 137,159 107,036 1,524 2,959 9,048 1,448 242 22,126 10,010 6,760 5,356 1,610 1,610 Capital requirement2 12,075 10,129 168 1,160 5,757 164 2,881 2,002 596 59 224 295 526 1,087 38 2,119 989 752 378 91,099 1,508 10,430 51,775 1,478 25,909 18,002 5,359 532 2,016 2,650 4,735 9,775 340 19,060 8,897 6,760 3,404 16,483 1,833 2,024 4,115 5,911 3,039 131 1,262 76,734 17,451 225 458 657 338 15 140 8,532 1,940 Total Swiss SRB 743,774 555,398 179,498 19,958 166,147 41,379 4,601 721,545 220,877 24,559 1 Refer to the “Capital management” section of this report for more information on the differences between phase-in and fully applied RWA. 2 Calculated based on our Swiss SRB total capital requirement of 11.1% of RWA. 3 Includes sEPE, most of which relates to exposures to Banks and Corporates. 4 Simple risk weight method applied. 5 Primarily relates to defined benefit plans. 6 The EAD of securitization positions equals the fair value of the net long and net short securitization positions retained or purchased in the trading book. 7 Incremental RWA reflect the effect of the supplemental operational risk capital analysis mutually agreed by UBS and FINMA. 863 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Credit risk The tables in this section provide details on the exposures used to determine the firm’s credit risk-related regulatory capital require- ment. The parameters applied under the A-IRB approach are gen- erally based on the same methodologies, data and systems we use for internal credit risk quantification, except where certain treatments are specified by regulatory 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 pre- sented in this section therefore differs from our internal manage- ment view disclosed in the “Risk management and control” sec- tions of our quarterly and annual reports. Similarly, the regulatory capital prescribed measure of credit risk exposure also differs from that required under IFRS. The following credit risk-related tables are based on Swiss SRB phase-in requirements and corre- spond to the credit risk by exposure segment which is shown in “Table 2: Detailed segmentation of exposures and risk-weighted assets”. Stressed expected positive exposure (sEPE) is newly included in credit risk by exposure segment and comparative fig- ures for December 2014 have been restated accordingly in the following tables. ➔ Refer to the “Risk management and control” section of this report for more information The regulatory gross credit exposure for banking products is equal to the drawn loan amounts represented on the balance sheet, with the exception of off-balance sheet commitments where the regulatory gross credit exposure is calculated by applying a credit conversion factor to the undrawn amount or contingent claim. Within traded products, we determine the regulatory credit exposure on the majority of our derivatives portfolio by applying the effective EPE and sEPE as defined in the Basel III framework. However, for the rest of the portfolio we apply the current expo- sure method (CEM) based on the replacement value of derivatives in combination with a regulatory prescribed add-on. For the majority of securities financing transactions (securities borrow- ing / lending and repurchase agreements / reverse repurchase agreements), we determine the regulatory gross credit exposure using the close-out period (COP) approach. The regulatory gross credit exposure for traded products is equal to regulatory net credit exposure in the credit risk tables on the following pages. The regulatory net credit risk exposure detailed in the tables on the following pages is shown as the regulatory exposure at default after applying collateral, netting and other eligible risk mitigants permitted by the relevant regulations. The information on impaired and defaulted assets, consistent with the regulatory capital treatment, is presented in the “Impairment, default and credit loss” section of this report. 864 EDTF | Table 3: Regulatory credit risk exposure and RWA This table shows the derivation of RWA from the regulatory gross credit risk exposure including sEPE broken down by major types of regulatory gross credit risk exposure according to classes of financial instruments. Exposure Regulatory gross credit risk exposure Less: regulatory credit risk offsets and adjustments Regulatory net credit risk exposure Average regulatory risk weighting1 RWA2 CHF million Cash and balances with central banks Due from banks4 Loans Financial assets designated at fair value Guarantees, commitments and forward starting transactions Banking products Derivatives Cash collateral on derivative instruments Securities financing Traded products Trading portfolio assets Financial investments available-for-sale Other assets Other products Total 31.12.15 Total 31.12.14 Average regulatory gross credit risk exposure3 84,113 11,564 311,190 3,191 33,764 443,823 78,202 44,585 57,468 89,776 9,902 310,138 3,962 32,788 446,565 73,473 44,925 54,995 180,254 173,394 3,417 64,222 11,103 78,742 702,820 671,762 6,034 60,842 10,406 77,281 697,240 709,293 89,776 9,902 298,329 3,422 32,386 433,815 73,473 44,925 54,995 173,394 6,034 60,842 9,641 76,517 683,725 687,072 (11,808) (540) (402) (12,750) (765) (765) (13,515) (22,221) 1% 20% 16% 23% 36% 14% 21% 3% 9% 12% 15% 4% 77% 14% 14% 13% 779 2,009 46,476 774 11,726 61,764 15,294 1,535 4,712 21,542 892 2,168 7,433 10,493 93,800 91,099 1 Calculated as a ratio of regulatory net credit risk exposure to the corresponding RWA. 2 The derivation of RWA is based on the various credit risk parameters of the A-IRB approach and the standardized approach, respectively. 3 The average regulatory gross credit exposure represents the average of the applicable quarter-end exposures for the relevant reporting periods. 4 Includes non-bank financial institutions. EDTF | Table 4: Regulatory gross credit risk exposure by geographical region This table provides a breakdown of our portfolio including sEPE broken down by major types of regulatory gross credit risk exposure according to classes of financial instruments by geographical regions. The geographical distribution is based on the legal domicile of the counterparty or issuer. CHF million Cash and balances with central banks Due from banks1 Loans Financial assets designated at fair value Guarantees, commitments and forward starting transactions Banking products Derivatives Cash collateral on derivative instruments Securities financing Traded products Trading portfolio assets Financial investments available-for-sale Other assets Other products Total 31.12.15 Total 31.12.14 1 Includes non-bank financial institutions. Asia Pacific Latin America Middle East and Africa 5,921 2,317 22,624 1,016 908 32,786 7,304 4,888 4,836 17,029 85 1,735 508 2,328 52,142 55,198 35 6,112 4 300 6,451 632 35 206 872 7 46 41 94 191 4,551 421 5,163 580 38 1,478 2,096 21 14 34 7,418 8,658 7,293 7,632 North America 25,480 2,942 80,098 1,724 Switzerland 46,596 763 161,885 389 18,551 7,081 128,795 216,715 24,994 17,436 24,899 67,329 2,869 28,781 6,094 37,744 233,868 261,607 6,756 164 2,282 9,202 11 2,163 702 2,875 228,793 211,551 Rest of Europe 11,778 3,655 34,867 829 5,526 56,655 33,207 22,363 21,295 76,865 3,042 28,117 3,047 34,206 167,727 164,646 Total regulatory gross credit risk exposure Total regulatory net credit risk exposure 89,776 9,902 310,138 3,962 32,788 446,565 73,473 44,925 54,995 173,394 6,034 60,842 10,406 77,281 697,240 709,293 89,776 9,902 298,329 3,422 32,386 433,815 73,473 44,925 54,995 173,394 6,034 60,842 9,641 76,517 683,725 687,072 865 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations EDTF | Table 5: Regulatory gross credit risk exposure by counterparty type This table provides a breakdown of our portfolio including sEPE broken down by major types of regulatory gross credit risk exposure according to classes of financial instruments by counterparty type. The counterparty type is different from the BIS-defined exposure segments used in certain other tables in this section. CHF million Cash and balances with central banks Due from banks1 Loans Financial assets designated at fair value Guarantees, commitments and forward starting transactions Banking products Derivatives Cash collateral on derivative financial instruments Securities financing Traded products Trading portfolio assets Financial investments available-for-sale Other assets Other products Total 31.12.15 Total 31.12.14 1 Includes non-bank financial institutions. Private individuals Corporates1 Public entities (including sovereigns and central banks) Banks and multilateral institutions Total regulatory gross credit risk exposure Total regulatory net credit risk exposure 197,507 496 2,574 200,577 1,936 24 28 109,758 3,020 28,744 141,522 45,108 42,424 39,088 1,988 126,619 951 9,898 3,488 14,337 282,478 283,300 4,419 4,419 206,984 205,470 89,267 1,032 2,873 4 33 93,209 5,076 677 4,918 10,671 4,945 34,342 1,596 40,882 144,763 153,477 508 8,870 443 1,437 11,257 21,353 1,800 10,962 34,115 138 16,602 903 17,643 63,015 67,046 89,776 9,902 310,138 3,962 32,788 446,565 73,473 44,925 54,995 173,394 6,034 60,842 10,406 77,281 697,240 709,293 89,776 9,902 298,329 3,422 32,386 433,815 73,473 44,925 54,995 173,394 6,034 60,842 9,641 76,517 683,725 687,072 EDTF | Table 6: Regulatory gross credit risk exposure by residual contractual maturity This table provides a breakdown of our portfolio including sEPE by major types of regulatory gross credit risk exposure according to classes of financial instruments by residual contractual maturity, not taking into account any early redemption features. Due in 1 year or less Due between 1 year and 5 years Due over 5 years Total regulatory gross credit risk exposure Total regulatory net credit risk exposure CHF million Cash and balances with central banks Due from banks2 Loans Financial assets designated at fair value Guarantees, commitments and forward starting transactions On demand1 89,776 7,885 41,476 1,966 147,231 1,207 8,321 Banking products Derivatives Cash collateral on derivative instruments Securities financing Traded products Trading portfolio assets Financial investments available-for-sale Other assets Other products Total 31.12.15 139,137 158,725 12,486 42,258 54,744 5,583 5,583 199,464 45,319 8,711 11,403 65,434 295 31,303 56 31,654 255,812 26 72,673 2,408 21,374 96,481 15,790 9,925 1,334 27,049 572 25,790 2,899 29,260 152,790 24 48,757 348 3,093 52,222 12,364 13,803 26,167 5,167 3,750 1,868 10,784 89,173 89,776 9,902 310,138 3,962 32,788 446,565 73,473 44,925 54,995 173,394 6,034 60,842 10,406 77,281 697,240 89,776 9,902 298,329 3,422 32,386 433,815 73,473 44,925 54,995 173,394 6,034 60,842 9,641 76,517 683,725 Total 31.12.14 1 Includes loans without a fixed term, cash collateral on derivative instruments and securities financing transactions, on which notice of termination has not been given. 2 Includes non-bank financial institutions. 141,195 709,293 250,598 239,564 687,072 77,935 866 Table 7: Credit risk mitigation for standardized and A-IRB approaches This table provides a derivation of the regulatory net credit risk exposure from the regulatory gross credit risk exposure including sEPE after the application of credit risk mitigation according to the A-IRB and the standardized approach. CHF million Total regulatory gross credit risk exposure Less: regulatory credit risk offsets and adjustments Total regulatory net credit risk exposure Total 31.12.14 Advanced IRB approach Standardized approach Total 31.12.15 Total 31.12.14 573,246 (7,125) 566,121 543,230 123,994 (6,391) 117,604 143,841 697,240 (13,515) 683,725 709,293 (22,221) 687,072 ➔ Refer to “Table 2: Detailed segmentation of exposures and risk-weighted assets” for more information on the regulatory net credit exposure by exposure segment Table 8: Regulatory gross credit risk exposure covered by guarantees and credit derivatives This table provides a breakdown of regulatory gross credit risk exposure including sEPE covered by guarantees and credit derivatives according to BIS-defined exposure segments. The amounts in the table reflect the values used for determining regulatory capital to the extent collateral is eligible under the BIS framework. CHF million Exposure segment Sovereigns Banks Corporates Central counterparties Retail Residential mortgages Lombard lending Qualifying revolving retail exposures Other retail Total 31.12.15 Total 31.12.14 1 Includes guarantees and standby letters of credit provided by third parties, the majority of which are banks. Advanced internal ratings-based approach UBS uses the advanced internal ratings-based (A-IRB) approach for calculating certain credit risk exposures. Under the A-IRB approach, the required capital for credit risk is quantified through empirical models that we have developed to estimate the proba- bility of default (PD), loss given default (LGD), exposure at default (EAD) and other parameters, subject to FINMA approval. ➔ Refer to the “Risk management and control” section of this report for more information Regulatory gross credit risk exposure of which: covered by guarantees1 of which: covered by credit derivatives 162,229 50,210 159,570 69,193 136,696 113,131 1,504 4,708 697,240 709,293 105 234 3,212 1 1,360 56 1 4,969 4,507 43 7,263 7,306 9,392 Tables 9a to 9g provide a breakdown of the regulatory net credit risk exposure, weighted average PD, LGD, RWA and the average risk weight under the A-IRB approach by internal UBS ratings across BIS-defined exposure segments. In line with the numbers presented in table 2, impaired and defaulted assets and sEPE are now included in tables 9a through 9g. Comparative fig- ures for December 2014 have been restated accordingly. 867 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations EDTF | Table 9a: Sovereigns – Advanced IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.15 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % 31.12.15 65,602 65,207 3,937 3,365 117 434 29 15 10 13 3 8 3 0 12 138,754 1 87 0 1 0 1 89 0.0 0.0 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 13.0 22.0 0.02 34.0 32.9 36.7 46.8 66.0 42.0 36.1 41.6 28.5 25.9 39.8 40.4 10.0 10.0 RWA 0 1,627 335 443 49 179 14 12 9 10 3 13 2 0 13 Average risk weight in % 0.0 2.5 8.5 13.2 42.3 41.3 48.7 79.2 90.5 79.6 118.4 153.8 55.2 60.2 106.0 2.0 33.92 2,710 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of this report for information on impaired and defaulted financial instruments. CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.14 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.14 95,107 6,888 2,277 4,142 185 286 8 9 1 7 3 1 9 0 17 108,939 1 79 4 0 0 0 1 84 0.0 0.0 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 13.0 22.0 0.02 33.1 32.9 44.2 51.6 58.9 42.4 10.2 42.6 85.8 12.6 39.8 16.1 30.7 10.0 29 243 223 584 67 126 2 6 1 3 4 0 13 0 18 34.12 1,319 0.0 3.5 9.8 14.1 36.4 44.0 21.0 63.0 175.7 42.3 121.8 66.4 154.3 54.5 106.0 1.2 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of our Annual Report 2014 for information on impaired and defaulted financial instruments. 868 Table 9b: Banks – Advanced IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.15 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.15 22,392 13,699 4,449 1,899 1,241 331 85 63 18 28 3 1 9 3,335 2,025 101 3 4 0 2 1 44,217 5,471 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 13.0 22.0 0.12 32.9 34.6 39.2 43.5 40.1 46.4 34.2 38.9 44.2 44.5 42.0 23.1 2,168 2,301 1,443 881 698 202 73 74 26 50 8 1 10 34.82 7,934 9.7 16.8 32.4 46.4 56.2 61.2 85.8 117.4 146.8 179.2 227.6 132.8 106.0 17.9 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of this report for information on impaired and defaulted financial instruments. CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.14 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.14 29,231 12,022 3,644 2,197 779 425 80 141 45 31 11 5 17 5,550 1,567 106 6 7 1 48,628 7,236 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 13.0 22.0 0.12 35.9 35.6 39.3 44.9 43.0 43.9 30.6 36.2 35.5 43.0 43.3 43.6 2,859 2,028 1,135 940 484 253 58 149 53 56 25 12 18 36.72 8,070 9.8 16.9 31.1 42.8 62.1 59.5 72.6 105.5 116.8 179.5 225.5 259.1 106.0 16.6 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of our Annual Report 2014 for information on impaired and defaulted financial instruments. 869 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 9c: Corporates – Advanced IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.15 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.15 48,252 14,745 15,857 12,199 11,794 12,888 9,830 5,579 3,060 1,228 532 114 1,359 137,4383 3,673 3,960 3,245 1,868 752 512 766 395 1,153 464 213 40 19 17,058 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 13.0 22.0 0.72 20.1 35.1 37.3 37.6 25.1 20.1 15.6 18.7 24.6 16.4 13.2 17.4 25.42 3,482 3,111 5,636 6,177 5,187 5,757 3,777 3,044 2,804 879 369 103 1,441 41,7684 7.2 21.1 35.5 50.6 44.0 44.7 38.4 54.6 91.6 71.6 69.4 90.2 106.0 30.4 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of this report for infrormation on impaired and defaulted financial instruments. 3 Includes CHF 38,954 million relating to exposures with managed funds. Typically these funds have virtually no debt, are very low risk, and therefore have a very low A-IRB risk weight. 4 Includes high volatility commercial real estate (HVCRE) exposures. These exposures relate to specialized lending that is secured by properties sharing higher vol- atilities in portfolio default rates (RWA: CHF 98 million as of 31 December 2015). CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.14 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.14 53,700 20,974 11,427 12,071 13,741 12,287 8,250 5,579 3,994 1,416 300 108 1,552 145,3993 2,568 5,431 1,354 992 708 500 611 586 1,575 452 82 21 4 14,884 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 13.0 22.0 0.72 19.2 36.8 37.9 36.4 26.9 22.8 18.5 20.8 21.1 17.5 14.6 23.1 25.82 3,744 4,108 3,728 5,417 6,114 5,424 3,492 3,038 3,028 1,068 186 135 1,645 41,1264 7.0 19.6 32.6 44.9 44.5 44.1 42.3 54.4 75.8 75.4 62.1 124.3 106.0 28.3 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of our Annual Report 2014 for information on impaired and defaulted financial instruments. 3 Includes CHF 45,653 million relating to exposures with managed funds. Typically these funds have virtually no debt, are very low risk, and therefore have a very low A-IRB risk weight. 4 Includes high volatility commercial real estate (HVCRE) exposures. These exposures relate to specialized lending that is secured by properties sharing higher volatilities in portfolio default rates (RWA: CHF 159 million as of 31 December 2014). 870 Table 9d: Residential mortgages – Advanced IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.15 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.15 38,012 16,511 17,272 15,144 11,461 11,601 8,617 5,740 3,221 1,455 618 208 548 130,408 191 60 51 60 49 281 47 24 16 4 11 2 796 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 13.0 22.0 0.82 10.6 11.0 11.2 11.4 12.3 12.0 12.0 11.3 10.9 10.7 11.2 10.9 688 622 1,163 1,637 1,801 2,544 2,643 2,380 1,778 1,028 546 206 581 11.22 17,617 1.8 3.8 6.7 10.8 15.7 21.9 30.7 41.5 55.2 70.6 88.4 99.1 106.0 13.5 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of this report for information on impaired and defaulted financial instruments. CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.14 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.14 37,281 16,673 17,109 15,197 11,824 12,011 9,318 5,829 3,144 1,452 581 224 477 131,121 156 45 48 47 60 236 57 34 9 13 4 5 714 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 13.0 22.0 0.82 10.6 11.0 11.2 11.4 12.4 12.0 12.1 11.3 11.0 10.8 10.8 11.0 579 540 995 1,433 1,658 2,331 2,517 2,132 1,525 909 443 199 506 11.32 15,767 1.6 3.2 5.8 9.4 14.0 19.4 27.0 36.6 48.5 62.6 76.3 89.1 106.0 12.0 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of our Annual Report 2014 for information on impaired and defaulted financial instruments. 871 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 9e: Lombard lending – Advanced IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.15 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.15 61,107 36,902 2,632 7,010 2,226 1,433 604 95 578 537 6 113,131 146 63 1 4 1 8 15 10 0 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 248 0.22 20.02 1,610 1,650 203 872 365 390 180 28 212 228 7 5,743 2.6 4.5 7.7 12.4 16.4 27.2 29.8 29.1 36.6 42.4 106 5.1 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of this report for information on impaired and defaulted financial instruments. CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.14 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.14 56,020 35,336 3,257 6,651 3,007 1,463 358 38 503 398 6 107,036 199 102 6 32 2 1 11 28 11 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 393 0.22 20.02 1,473 1,577 250 807 520 315 111 11 156 132 6 5,359 2.6 4.5 7.7 12.1 17.3 21.6 31.0 29.1 31.0 33.3 106 5.0 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of our Annual Report 2014 for information on impaired and defaulted financial instruments. 872 Table 9f: Qualifying revolving retail exposures – Advanced IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.15 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.15 117 1,380 7 1,504 1.7 2.7 47.0 42.0 2.62 42.42 33 485 8 526 28.0 35.2 106.0 34.9 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of this report for information on impaired and defaulted financial instruments. CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.14 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.14 124 1,394 7 1,524 1.7 2.7 47.0 42.0 2.62 42.42 35 490 7 532 28.0 35.2 106.0 34.9 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of our Annual Report 2014 for information on impaired and defaulted financial instruments. 873 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 9g: Other retail – Advanced IRB approach: Regulatory net credit risk exposure, weighted average PD, LGD and RWA by internal UBS ratings CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.15 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.15 133 21 8 11 7 263 4 203 7 3 0 8 669 0 0 2 3 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 13.0 18.0 16.6 10.5 10.0 15.6 41.4 14.1 58.5 23.7 20.4 63.2 5 1 0 1 1 162 1 172 3 1 0 9 1.42 39.62 355 3.6 3.9 4.5 6.6 14.2 61.4 17.6 84.6 37.2 33.8 112.8 106.0 53.0 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of this report for information on impaired and defaulted financial instruments. CHF million, except where indicated Investment grade Rating 0 Rating 1 Rating 2 Rating 3 Rating 4 Rating 5 Sub-investment grade Rating 6 Rating 7 Rating 8 Rating 9 Rating 10 Rating 11 Rating 12 Rating 13 Impaired and defaulted2 Total 31.12.14 Regulatory net credit risk exposure of which: loan commitments Average PD in %1 Average LGD in % RWA Average risk weight in % 31.12.14 146 63 7 10 2 107 3 217 8 10 0 8 582 0.0 0.1 0.2 0.4 0.6 1.0 1.7 2.7 4.6 7.8 13.0 18.0 18.4 12.4 11.3 14.1 32.8 22.7 51.8 26.4 49.7 16.5 7 3 0 1 0 38 1 163 3 8 0 9 1.52 34.12 233 4.8 4.3 5.1 7.3 12.9 35.7 28.1 75.0 42.0 81.1 30.2 106.0 40.1 1 1 1 Average PD for internal rating categories is based on midpoint values. 2 Total weighted average PD and LGD exclude impaired and defaulted financial instruments. Refer to the “Risk management and control” sec- tion of our Annual Report 2014 for information on impaired and defaulted financial instruments. 874 Standardized approach The standardized approach is generally applied where it is not possible to use the A-IRB approach. The standardized approach requires banks to use, where possible, risk assessments prepared by external credit assessment institutions (ECAI) or export credit agencies to determine the risk weightings applied to rated coun- terparties. We use FINMA-recognized ECAI risk assessments to determine the risk weight for certain counterparties according to the BIS- defined exposure segments. We use three FINMA-recognized ECAI for this purpose: Stan- dard & Poor’s, Moody’s Investors Service and Fitch Ratings. The mapping of external ratings to the standardized approach risk weights is determined by FINMA and published on its website. EDTF | Table 10a: Regulatory gross and net credit risk exposure by risk weight under the standardized approach This table provides a breakdown of the regulatory gross and net credit risk exposure by risk weight according to BIS-defined exposure segments for those credit exposures for which we apply the standardized approach. CHF million Risk weight Regulatory gross credit risk exposure Sovereigns Banks Corporates Central counterparties Retail Residential mortgages Lombard lending Qualifying revolving retail exposures Other retail Total 31.12.15 Total 31.12.14 Regulatory net credit risk exposure Sovereigns Banks Corporates Central counterparties Retail Residential mortgages Lombard lending Qualifying revolving retail exposures Other retail Total 31.12.15 Total 31.12.14 Total exposure Total exposure 0% >0–20% 21–50% 51–100% over 100% 31.12.15 31.12.14 22,842 148 3,933 3,133 398 620 998 26,3311 41,913 85 22 12,280 578 2 13 371 23,475 4,575 16,425 69,193 57,321 8,044 21,065 54,291 5,993 295 6,288 6,038 49,173 86,387 49,127 35,861 8,010 9,823 22,842 148 3,919 3,133 398 620 990 26,3311 41,913 4,038 17,299 16,823 85 22 5,911 578 386 243 2 13 371 4,038 123,994 23,475 4,561 10,048 69,193 2,377 149,136 57,321 7,916 15,899 54,291 5,993 295 6,288 6,038 49,173 86,387 49,114 35,859 8,002 9,705 4,038 10,930 11,662 386 228 4,038 117,604 2,376 143,841 1 A risk weight of 0% is applied for trades that we have entered into with central counterparties on behalf of a client and where the client has signed a legally enforceable agreement reflecting that the default risk of that central counterparty is carried by the client. 875 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 10b: Regulatory net credit risk exposure under the standardized approach risk-weighted using external ratings This table provides a breakdown of the rated and unrated regulatory net credit risk exposure by ECAI and by risk weight according to BIS-defined exposure segments for those credit exposures for which we apply the standardized approach. CHF million Risk weight Regulatory net credit risk exposure2 Sovereigns Banks Corporates Total 31.12.15 Total 31.12.14 Total exposure1 Total exposure1 0% >0–20% 21–50% 51–100% over 100% 31.12.15 31.12.14 Rated3 Unrated Rated3 Unrated Rated3 Unrated 22,517 325 148 1,237 2,683 3,133 398 232 388 990 22,842 56,931 7,201 11,330 2,008 3,905 28 57 22 39 5,872 6,019 8,952 2 23,093 57,249 382 1,491 3,071 4,172 5,876 38,084 72 3,720 4,196 7,038 8,861 81,136 9 4 15 19 1 As external ratings are not used in the calculation of RWA for retail exposures and exposures to central counterparties, these exposures are not reflected in the above table. For more information on the risk weights applied for these exposures, please refer to “Table 10a: Regulatory gross and net credit risk exposure by risk weight under the standardized approach”. 2 For a breakdown of securitization exposures by risk weight bands and rating clusters refer to tables 24a to 24c (banking book) and 27a to 27c (trading book) of this report. 3 We use three FINMA-recognized ECAI to determine the risk weight for certain counterparties: Stan- dard & Poor’s, Moody’s Investors Service and Fitch Ratings. Table 11: Eligible financial collateral recognized under the standardized approach This table provides a breakdown of the financial collateral eligible for recognition in the regulatory capital calculation under the stan- dardized approach, according to BIS-defined exposure segments. CHF million Exposure segment Sovereigns Banks Corporates Central counterparties Retail Residential mortgages Lombard lending Qualifying revolving retail exposures Other retail Total Regulatory net credit risk exposure under standard- ized approach Eligible financial collateral recognized in capital cal- culation1 31.12.15 31.12.14 31.12.15 31.12.14 23,475 4,561 10,048 69,193 6,288 4,038 117,604 57,321 7,916 15,899 54,291 6,038 2,376 143,841 442 7,762 30,961 39,165 3 1,662 6,604 9,465 19 17,752 1 Eligible financial collateral recognized in the capital calculation is based on the difference between the regulatory gross credit risk exposure and the regulatory net credit risk exposure for exposures not covered under internal exposure models. 876 Comparison of A-IRB approach and Standardized Approach (SA) In accordance with current prudential regulations, FINMA has approved our use of the Advanced IRB (A-IRB) approach for calcu- lating the required capital for a majority of our credit risk exposures. In light of a number of Basel Committee on Banking Supervi- sion (BCBS) consultations on material changes to current Stan- dardized Approach (SA) rules, and potential implementation of capital floors based on the revised SA, we have outlined below the principal differences between the current SA rules and the A-IRB approach. UBS is actively participating in the Quantitative Impact Studies, whereby the BCBS collects data from banks for the design of the revised SA rules. Given the uncertainty regarding the final rules and the calibration of any floors, the discussion of the differences provided below is based on the current SA rules. There can be no assurance that the differences described will be indicative of the differences under the revised rules. We continue to believe that advanced approaches that ade- quately capture economic risks are paramount for the appropriate representation of the capital requirements related to risk-taking activities. Within a strong risk control framework and in combina- tion with robust stress testing practices, strict risk limits, as well as leverage and liquidity requirements, advanced approaches pro- mote a proactive risk culture, ensuring the right incentives are in place to prudently manage risks. Key methodological differences between A-IRB and current SA approaches In line with the BCBS objective, the A-IRB approach seeks to bal- ance the maintenance of prudent levels of capital while encour- aging, where appropriate, the use of advanced risk management techniques. By design, the calibration of the current SA rules and the A-IRB approaches is such that low-risk, short-maturity, well- collateralized portfolios across the various asset classes (with the exception of Sovereigns) receive lower risk weights under the A-IRB than under the current SA rules. Accordingly, risk weighted assets (RWA) and capital requirements under the current SA rules would be substantially higher than under the A-IRB approach for lower risk portfolios. Conversely, RWA for higher risk portfolios are higher under the A-IRB than under the current SA approach. Differences primarily arise due to the measurement of Expo- sure at Default (EAD) and to the risk weights applied. In both cases, the treatment of risk mitigation such as collateral can have a significant impact. EAD measurement: For the measurement of EAD, the main differences relate to deriv- atives, driven by the differences between the Internal Model Method (IMM) and the regulatory prescribed Current Exposure Method (CEM). The model-based approaches to derive estimates of EAD for derivatives and securities financing transactions reflect the detailed characteristics of individual transactions. They model the range of possible exposure outcomes across all transactions within the same legally enforceable netting set at various future time points. This assesses the net amount that may be owed to us, or that we may owe to others, taking into account the impact of correlated market moves over the potential time it could take to close out a position. The calculation considers current market con- ditions, and is therefore sensitive to deteriorations in the market environment. In contrast, EAD under the regulatory prescribed rules are cal- culated as replacement costs at the balance sheet date plus regu- latory add-ons, which take into account potential future market movements, but, at predetermined fixed rates, which are not sen- sitive to changes in market conditions. These add-ons are crudely differentiated by reference to only five product types and three maturity buckets. Further, the current regulatory prescribed rules calculation gives very limited recognition to the benefits of diver- sification across transactions within the same legally enforceable netting set. As a result, large diversified portfolios, such as those arising from our activities with other market making banks, will generate much higher EAD under the current regulatory pre- scribed rules than under the model-based approach. Risk Weights: Under the A-IRB approach, risk weights are assigned according to the bank’s internal credit assessment of the counterparty to deter- mine the Probability of Default (PD) and Loss Given Default (LGD). The PD is an estimate of the likelihood of a counterparty defaulting on its contractual obligations. It is assessed using rating tools tailored to the various categories of counterparties. Statisti- cally developed scorecards, based on key attributes of the obligor, are used to determine PD for many of our corporate clients and for loans secured by real estate. Where available, market data may also be used to derive the PD for large corporate counterpar- ties. For Lombard loans, Merton-type model simulations are used that take into account potential changes in the value of securities collateral. PD is not only an integral part of the credit risk mea- surement, but also an important input for determining the level of credit approval required for any given transaction. Moreover, for the purpose of capital underpinning, the majority of counterparty PDs are subject to a floor. The LGD is an estimate of the magnitude of the likely loss if there is a default. The calculation takes into account the loss of principal, interest and other amounts such as workout costs, including the cost of carrying an impaired position during the workout process less recovered amounts. Importantly, LGD con- siders credit mitigation by way of collateral or guarantees, with the estimates being supported by our internal historical loss data and external information where available. 877 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations The combination of PD and LGD determined at the counter- party level results in a highly granular level of differentiation of the economic risk from different borrowers and transactions. In contrast, the SA risk weights are largely reliant on external rating agencies’ assessments of the credit quality of the counter- party, with a 100% risk weight typically being applied where no external rating is available. Even where external ratings are avail- able, there is only a coarse granularity of risk weights, with only four primary risk weights used for differentiating counterparties, with the addition of a 0% risk weight for AA- or better rated sovereigns. In addition, weights of 35% and 75% are used for mortgages and retail exposures. In addition, the SA does not differentiate across transaction maturities except for interbank lending, albeit in a very simplistic manner considering only shorter or longer than three-months. This has clear limitations. For example, the economic risk of a six-month loan to, say, a BB rated US corporate, is significantly different to that of a 10-year loan to the same borrower. This difference is evi- dent from the distinction of probability of default levels based on ratings assigned by external rating agencies through their separate ratings for short-term and long-term debt for a given issuer. The SA typically assigns lower risk weights to sub-investment grade counterparties than the A-IRB approach, thereby potentially understating the economic risk. Conversely, investment grade counterparties typically receive higher risk weights under the SA than under the A-IRB approach. Maturity also plays an important factor, with the A-IRB approach producing a higher capital requirement for longer maturity exposures than for shorter maturity exposures. Since the accelerated implementation of our strategy, the maturity effect has become particularly important as we had a notable shift from longer-term to shorter-term transactions in our credit portfolio. Additionally, under the A-IRB approach we calculate expected loss measures that are deducted from CET1 capital to the extent that they exceed general provisions, which is not the case under the SA. Given the divergence between the SA and the economic risk, which is better represented under the A-IRB approach, particularly for lower grade counterparties, there is a risk that applying the SA could incentivize higher risk taking without a commensurate increase in capital required. Comparison of the A-IRB approach EAD and Leverage Ratio Denominator by exposure segment The following table shows EAD, average risk-weight (RW), risk- weighted assets (RWA) and Leverage Ratio Denominator (LRD) per Basel III Exposure Segment for Sovereigns, Banks, Corporates and Retail credit risk exposures subject to the A-IRB approach, consistent with our Pillar 3 disclosures. LRD is the exposure mea- sure used for the Leverage Ratio. LRD estimates presented in the table reflect the credit risk- related component of exposures only and are therefore not repre- sentative of the LRD requirement at bank level overall. The LRD estimates exclude exposures subject to market risk, non-counter- party related risk and SA credit risk, to provide a like-for-like com- parison with the A-IRB credit risk EAD shown. Table 12: Breakdown by exposure segments in CHF billion Sovereigns Banks Corporates Retail o / w Residential mortgages o / w Lombard Lending A-IRB LRD EAD 139 44 137 246 130 113 RW 2% 18% 30% 10% 14% 5% RWA 3 8 42 24 18 6 138 71 205 246 130 114 878 Comparison of the A-IRB approach, the SA and LRD by exposure segment The following discusses the differences between the A-IRB approach, the SA and LRD per exposure segment. Exposure Segment Sovereigns: The regulatory net EAD for Sovereigns is CHF 139 billion under the A-IRB approach. Since the vast majority of our exposure to Sovereigns is driven by banking products exposures, the LRD is broadly in line with the A-IRB net EAD and we would expect a similar amount under the SA. The chart below provides a comparison of risk weights for Sov- ereigns exposures calculated under the A-IRB approach and the SA. Risk weights under the A-IRB approach are shown for 1-year and 5-year maturities, both assuming an LGD of 45% (the default LGD assigned for senior unsecured exposures under the Founda- tion IRB approach). Our internal A-IRB ratings have been mapped to external ratings based on the long-term average of one-year default rates available from the major credit rating agencies, as described on page 200 of our Annual Report 2014. (cid:37)(cid:81)(cid:79)(cid:82)(cid:67)(cid:84)(cid:75)(cid:85)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:89)(cid:71)(cid:75)(cid:73)(cid:74)(cid:86)(cid:85)(cid:2)(cid:115)(cid:2)(cid:53)(cid:81)(cid:88)(cid:71)(cid:84)(cid:71)(cid:75)(cid:73)(cid:80)(cid:85) (cid:21)(cid:18)(cid:18) (cid:20)(cid:18)(cid:18) (cid:19)(cid:18)(cid:18) (cid:18) (cid:55)(cid:80)(cid:84)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85) (cid:35)(cid:35)(cid:35) (cid:35)(cid:13) (cid:36)(cid:36)(cid:36)(cid:13) (cid:36)(cid:36)(cid:13) (cid:36)(cid:13) (cid:37)(cid:37)(cid:37) (cid:35)(cid:15)(cid:43)(cid:52)(cid:36)(cid:2)(cid:19)(cid:15)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:10)(cid:22)(cid:23)(cid:7)(cid:2)(cid:46)(cid:41)(cid:38)(cid:11) (cid:35)(cid:15)(cid:43)(cid:52)(cid:36)(cid:2)(cid:23)(cid:15)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:10)(cid:22)(cid:23)(cid:7)(cid:2)(cid:46)(cid:41)(cid:38)(cid:11) (cid:53)(cid:86)(cid:67)(cid:80)(cid:70)(cid:67)(cid:84)(cid:70)(cid:75)(cid:92)(cid:71)(cid:70)(cid:2)(cid:35)(cid:82)(cid:82)(cid:84)(cid:81)(cid:67)(cid:69)(cid:74) The SA assigns a zero risk weight to Sovereigns counterparties rated AA- and better, while the A-IRB approach generally assigns risk weights higher than zero even for the highest quality sover- eign counterparties. Despite this, we would expect an increase in average risk weight under the SA due to exposures to unrated counterparties such as sovereign wealth funds, which attract a 100% risk weight under the SA despite being generally considered very low risk, and short-term repo transactions with central banks rated below AA-, such as the Bank of Japan. 300 However, as the Sovereigns exposure segment is not a signifi- cant driver of RWA, we would expect any resulting increase in RWA to be relatively small. 0 Exposure Segment Banks: The regulatory net EAD for Banks is CHF 44 billion under the A-IRB approach. The A-IRB net EAD is lower compared to the LRD as a result of collateral mitigation on derivatives and securities financing transactions. We would expect the net EAD to increase significantly under the regulatory prescribed rules related to deriv- atives and securities financing transactions within the Investment Bank, due to the aforementioned methodological differences between the calculation of EAD under the two approaches. The chart below provides a comparison of risk weights for SA. (cid:37)(cid:81)(cid:79)(cid:82)(cid:67)(cid:84)(cid:75)(cid:85)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:89)(cid:71)(cid:75)(cid:73)(cid:74)(cid:86)(cid:85)(cid:2)(cid:115)(cid:2)(cid:36)(cid:67)(cid:80)(cid:77)(cid:85) (cid:21)(cid:18)(cid:18) (cid:20)(cid:18)(cid:18) (cid:19)(cid:18)(cid:18) (cid:18) (cid:35)(cid:35)(cid:35) (cid:35)(cid:13) (cid:36)(cid:36)(cid:36)(cid:13) (cid:36)(cid:36)(cid:13) (cid:36)(cid:13) (cid:37)(cid:37)(cid:37) (cid:55)(cid:80)(cid:84)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85) (cid:35)(cid:15)(cid:43)(cid:52)(cid:36)(cid:2)(cid:19)(cid:15)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:10)(cid:22)(cid:23)(cid:7)(cid:2)(cid:46)(cid:41)(cid:38)(cid:11) (cid:35)(cid:15)(cid:43)(cid:52)(cid:36)(cid:2)(cid:23)(cid:15)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:10)(cid:22)(cid:23)(cid:7)(cid:2)(cid:46)(cid:41)(cid:38)(cid:11) (cid:53)(cid:86)(cid:67)(cid:80)(cid:70)(cid:67)(cid:84)(cid:70)(cid:75)(cid:92)(cid:71)(cid:70)(cid:2)(cid:35)(cid:82)(cid:82)(cid:84)(cid:81)(cid:67)(cid:69)(cid:74) As can be seen from Table 9b of our Pillar 3 disclosures, the vast majority of our Banks exposure is of investment grade quality. The average contractual maturity of this exposure is closer to the 1-year example provided. Therefore, we would expect a higher average risk weight under the SA than the 18% average risk weight under the A-IRB approach. In combination with higher EAD, we would expect this to lead to significantly higher RWA for Banks under the SA. 300 (cid:19)(cid:19)(cid:19)(cid:14)(cid:25)(cid:25)(cid:21) (cid:20)(cid:20)(cid:23)(cid:14)(cid:26)(cid:23)(cid:22) (cid:21)(cid:19)(cid:14)(cid:24)(cid:21)(cid:23) (cid:21)(cid:24)(cid:14)(cid:21)(cid:20)(cid:21) (cid:20)(cid:19)(cid:26)(cid:14)(cid:24)(cid:26)(cid:19) (cid:20)(cid:21)(cid:18)(cid:14)(cid:18)(cid:19)(cid:23) (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) Exposure Segment Corporates: The regulatory net EAD for Corporates is CHF 137 billion under the A-IRB approach. The A-IRB net EAD is lower compared to the LRD as a result of collateral mitigation on derivatives and securities financing transactions. We would expect the EAD figure to be higher under the regulatory prescribed rules related to derivatives, which typically account for one third of the EAD for this exposure segment, due to the aforementioned methodological differences between the calculation of EAD under the two approaches. 0 The following chart provides a comparison of risk weights for Corporates exposures calculated under the A-IRB approach and the SA. These exposures primarily arise from corporate lending and derivatives trading within the Investment Bank, and lending to large corporates and small- and medium-sized enterprises within Switzerland. 879 (cid:19)(cid:19)(cid:19)(cid:14)(cid:25)(cid:25)(cid:21) (cid:21)(cid:19)(cid:14)(cid:24)(cid:21)(cid:23) (cid:21)(cid:24)(cid:14)(cid:21)(cid:20)(cid:21) (cid:20)(cid:20)(cid:23)(cid:14)(cid:26)(cid:23)(cid:22) (cid:20)(cid:21)(cid:18)(cid:14)(cid:18)(cid:19)(cid:23) (cid:20)(cid:19)(cid:26)(cid:14)(cid:24)(cid:26)(cid:19) (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) Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations (cid:37)(cid:81)(cid:79)(cid:82)(cid:67)(cid:84)(cid:75)(cid:85)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:89)(cid:71)(cid:75)(cid:73)(cid:74)(cid:86)(cid:85)(cid:2)(cid:115)(cid:2)(cid:37)(cid:81)(cid:84)(cid:82)(cid:81)(cid:84)(cid:67)(cid:86)(cid:71)(cid:85) (cid:21)(cid:18)(cid:18) (cid:20)(cid:18)(cid:18) (cid:19)(cid:18)(cid:18) (cid:18) (cid:55)(cid:80)(cid:84)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:87)(cid:84)(cid:71)(cid:85) (cid:35)(cid:35)(cid:35) (cid:35)(cid:13) (cid:36)(cid:36)(cid:36)(cid:13) (cid:36)(cid:36)(cid:13) (cid:36)(cid:13) (cid:37)(cid:37)(cid:37) (cid:35)(cid:15)(cid:43)(cid:52)(cid:36)(cid:2)(cid:19)(cid:15)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:10)(cid:22)(cid:23)(cid:7)(cid:2)(cid:46)(cid:41)(cid:38)(cid:11) (cid:35)(cid:15)(cid:43)(cid:52)(cid:36)(cid:2)(cid:23)(cid:15)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:10)(cid:22)(cid:23)(cid:7)(cid:2)(cid:46)(cid:41)(cid:38)(cid:11) (cid:53)(cid:86)(cid:67)(cid:80)(cid:70)(cid:67)(cid:84)(cid:70)(cid:75)(cid:92)(cid:71)(cid:70)(cid:2)(cid:35)(cid:82)(cid:82)(cid:84)(cid:81)(cid:67)(cid:69)(cid:74) Investment grade counterparties typically receive higher risk weights under the SA than under the A-IRB approach. The major- ity of our Corporates exposures fall into this category, as can be seen from the distribution of Corporates regulatory net EAD pro- vided in table 9c. We would therefore expect risk weights for Cor- porates to be generally higher under the SA. In addition, SA risk weights are reliant on external ratings, with a default weighting of 100% applied where no external rating is available. Typically, counterparties with no external rating are risk- ier and thus also have higher risk weights under the A-IRB approach. However, managed funds, which comprise nearly one third of our Corporates EAD, typically have no debt and are there- fore unrated. The SA applies a 100% risk weight to exposures to these funds. Under A-IRB, these funds are considered very low risk and have an average risk weight of 5%. We believe the SA sig- nificantly overstates the risk. (cid:20)(cid:19)(cid:26)(cid:14)(cid:24)(cid:26)(cid:19) (cid:20)(cid:21)(cid:18)(cid:14)(cid:18)(cid:19)(cid:23) (cid:19)(cid:19)(cid:19)(cid:14)(cid:25)(cid:25)(cid:21) (cid:20)(cid:20)(cid:23)(cid:14)(cid:26)(cid:23)(cid:22) (cid:21)(cid:24)(cid:14)(cid:21)(cid:20)(cid:21) (cid:21)(cid:19)(cid:14)(cid:24)(cid:21)(cid:23) Conversely, for certain exposures, we consider the risk weight of 100% under the SA resulting from the absence of an external rating as insufficient, as evident from the hypothetical leveraged finance counterparty example in the table below. (cid:21)(cid:19)(cid:14)(cid:23)(cid:19)(cid:27) (cid:20)(cid:24)(cid:14)(cid:25)(cid:18)(cid:19) (cid:22)(cid:19)(cid:14)(cid:26)(cid:23)(cid:26) (cid:21)(cid:22)(cid:14)(cid:23)(cid:23)(cid:24) Comparison of risk weights as a function of internal rating assessment 300 The table assumes two counterparties without external rating assignment. Interest payment coverage 0 (EBITDA / Total interest payments) Managed fund > 1000 Leverage finance counterparty < 2 Total debt / EBITDA Debt / assets Liquidity (fraction of assets that are liquid) Internal rating assessment Exposure maturity 0 > 2.5 0 > 50% 100% 0% AAA–A BB–C < 1Y > 5Y A-IRB risk weight range 10%–20% 100%–250% SA risk weight 100% 100% 880 Exposure Segment Retail Sub-segment residential mortgages: The regulatory net EAD for residential mortgages is CHF 130 bil- lion under the A-IRB approach. Since the vast majority is driven by banking products exposures, the LRD is broadly in line with the A-IRB net EAD and we would expect a similar amount under the SA. With our leading personal and corporate banking business in Switzerland, our domestic portfolios represent a significant por- tion of our overall lending exposures, with the largest being loans secured by residential properties. Our internal models take a sophisticated approach in assigning risk weights to such loans by considering the debt service capacity of borrowers as well as the availability of other collateralizing assets. These are important considerations for the Swiss market, where there is legal recourse to the borrower. In contrast, and different to the assignment of risk weights for exposure segments above, the SA only crudely differentiates the risk weights based on loan-to-value (LTV) ranges as shown in the table below. (cid:53)(cid:35)(cid:2)(cid:84)(cid:75)(cid:85)(cid:77)(cid:2)(cid:89)(cid:71)(cid:75)(cid:73)(cid:74)(cid:86)(cid:85)(cid:2)(cid:115)(cid:2)(cid:52)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:75)(cid:67)(cid:78)(cid:2)(cid:47)(cid:81)(cid:84)(cid:86)(cid:73)(cid:67)(cid:73)(cid:71)(cid:85) (cid:19)(cid:23)(cid:18) (cid:19)(cid:18)(cid:18) (cid:23)(cid:18) (cid:18) (cid:46)(cid:54)(cid:56)(cid:28) (cid:24)(cid:25)(cid:7) (cid:26)(cid:18)(cid:7) (cid:19)(cid:18)(cid:18)(cid:7) (cid:53)(cid:86)(cid:67)(cid:80)(cid:70)(cid:67)(cid:84)(cid:70)(cid:75)(cid:92)(cid:71)(cid:70)(cid:2)(cid:35)(cid:82)(cid:82)(cid:84)(cid:81)(cid:67)(cid:69)(cid:74) 150 100 50 0 The vast majority of our exposures would attract the 35% risk weight under the SA, compared to the 14% observed under the A-IRB approach. The difference is largely due to the current SA rules not giving benefit to the portion of exposures with LTV lower than 67%. The vast majority of exposures fall within this category, as shown in the “Swiss mortgages: distribution of net exposure at default (EAD) across exposure segments and loan-to-value (LTV) buckets” table in the “Risk management and control” section of this report. The following example illustrates the importance of consider- ing the quality of the portfolio at a more granular level than the SA allows. The majority of the CHF 130 billion Residential mort- gages EAD shown relates to loans secured by real estate in Swit- zerland. If the value assigned to the real estate collateral underly- ing those Swiss mortgage loans were to reduce by 30% and costs of closing out impaired loans would be 20% of the current prop- erty value, we estimate that the default rates would need to be higher than 10% to lose an amount equivalent to the current capital requirement of CHF 2.2 billion related to that portfolio (calculated based on our Swiss SRB Basel III total capital ratio requirement of 12.6% of RWA, including the countercyclical buf- fer). Moreover, FINMA requires banks using the A-IRB approach to apply bank-specific A-IRB multipliers when calculating RWA for Swiss mortgages. As the multiplier is phased in through 2019, the default rate required to generate a loss exceeding the capital requirement will increase substantially. Sub-segment Lombard Lending: Lombard loans, with CHF 113 billion of regulatory net EAD under the A-IRB approach, mainly arise in our wealth management busi- nesses, which offer comprehensive financial services to private clients with substantial financial resources. Eligible collateral is more limited under the SA than under A-IRB. However, the haircuts applied to collateral under the A-IRB approach are generally greater than those prescribed under the SA. Given this, we would expect the overall effect of applying cur- rent SA rules to be limited for this portfolio. (cid:19)(cid:19)(cid:19)(cid:14)(cid:25)(cid:25)(cid:21) (cid:20)(cid:20)(cid:23)(cid:14)(cid:26)(cid:23)(cid:22) (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:20)(cid:19)(cid:26)(cid:14)(cid:24)(cid:26)(cid:19) (cid:20)(cid:21)(cid:18)(cid:14)(cid:18)(cid:19)(cid:23) (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) 881 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Impairment, default and credit loss EDTF | The table below and on the next page provides a breakdown over the last four years of expected loss estimates on our credit exposures (covering banking and traded products) and actual losses recognized in our income statement, broken down by exposure segments. Both expected and actual losses relate to defaulted and non-defaulted counterparties, include specific credit valuation adjustments on derivatives and are presented net of recoveries. Although such a comparison may provide some insight, the comparison between expected and actual losses has limitations and the two measures are not directly comparable. For example, our estimates of expected loss are calibrated on a through the cycle basis, taking into account observed losses over a prolonged historical period. In contrast, the actual loss figures presented are a point in time view of our credit loss expenses, equal to the amount recognized in the income statement in a specific financial year. Furthermore, the estimated expected loss at the start of the period assumes that the portfolio will be unchanged throughout the coming year. In reality, the portfolio composition changes on an ongoing basis, affecting the actual loss experience. ➔ Refer to the “Risk management and control” section and “Note 12 Allowances and provisions for credit losses” in the “Consolidated financial statements” section of this report for more information on the impaired, default and credit loss- related disclosures EDTF | Table 13: Total actual and expected credit losses1 CHF million Sovereigns Banks Corporates Central Counterparties Retail Residential mortgages Lombard lending Qualifying revolving other retail exposures Other retail Not allocated segment2 Total (gain) / loss As of 31.12.14 for the year ended 31.12.15 For the year ended 31.12.15 As of 31.12.13 for the year ended 31.12.14 For the year ended 31.12.14 Expected loss Allowances balance Actual loss Expected loss Allowances balance Actual loss 17 45 989 145 54 33 19 14 17 654 40 47 17 9 6 83 26 4 0 16 130 1,001 158 61 34 18 1,302 803 114 1,416 14 27 792 39 19 16 15 8 930 122 80 1 5 0 (11) 196 1 Actual losses reflect credit losses for financial assets at amortized cost and financial instruments not recognized on the balance sheet as well as specific credit valuation adjustments for derivative instruments recog- nized in our IFRS income statement, including recoveries. Actual and expected losses include defaulted and not defaulted assets. Prior period numbers for 2014, 2013 and 2012 have been restated accordingly. 2 Includes changes in collective loan loss allowances. 882 Table 13: Total actual and expected credit losses1 (continued) CHF million Sovereigns Banks Corporates Central Counterparties Retail Residential mortgages Lombard lending Qualifying revolving other retail exposures Other retail Not allocated segment2 Total (gain) / loss As of 31.12.12 for the year ended 31.12.13 For the year ended 31.12.13 As of 31.12.11 for the year ended 31.12.12 For the year ended 31.12.12 Expected loss Allowances balance Actual loss Expected loss Allowances balance Actual loss 20 75 1,150 147 67 34 17 14 91 812 46 31 17 13 20 1,510 1,044 14 (21) (1) 7 0 (93) (94) 35 63 2,410 124 46 18 30 2,726 15 39 951 51 35 18 14 114 1,238 (3) 227 12 7 0 (15) 229 1 Actual losses reflect credit losses for financial assets at amortized cost and financial instruments not recognized on the balance sheet as well as specific credit valuation adjustments for derivative instruments recog- nized in our IFRS income statement, including recoveries. Actual and expected losses include defaulted and not defaulted assets. Prior period numbers for 2014, 2013 and 2012 have been restated accordingly. 2 Includes changes in collective loan loss allowances. Derivatives credit risk EDTF | Table 14: Credit risk exposure of derivative instruments This table provides an overview of our credit risk exposures arising from derivatives. Exposures are provided based on the balance sheet carrying values of derivatives as well as regulatory net credit risk exposures. The net balance sheet credit exposure differs from the regulatory net credit risk exposures because of differences in valuation methods, netting and collateral deductions used for accounting and regulatory capital purposes. Net current credit risk exposure is derived from gross positive replacement values which reflect the balance sheet carrying values of derivatives after net- ting and eligible financial collateral, where an enforceable Master Netting Agreement is in place. Regulatory net credit exposure is calculated using our internal models or the supervisory approach. CHF million Gross positive replacement values Netting benefits recognized1 Collateral held1 of which: cash collateral of which: non-cash collateral Net current credit exposure Regulatory net credit risk exposure of which: based on internal models (effective EPE) of which: based on supervisory approaches (current exposure method) 31.12.15 167,435 (122,985) (25,513) (19,757) (5,756) 18,938 73,473 58,662 14,811 31.12.14 256,978 (198,744) (30,794) (25,128) (5,666) 27,439 82,961 68,917 14,044 1 For the purpose of this disclosure, the amounts of financial instruments and cash collateral presented have been capped by the relevant netting agreement so as not to exceed the net amount of financial assets pre- sented on the balance sheet; i.e., over-collateralization, where it exists, is not reflected in the table. ➔ Refer to “Note 14 Derivative instruments and hedge accounting” in the “Consolidated financial statements” section of this report for more information on derivative instruments 883 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Other credit risk information Our credit derivatives trading is predominantly conducted on a collateralized basis. This means that our mark-to-market expo- sures arising from derivatives activities with collateralized counter- parties are typically 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 is typically conducted under an International Swaps and Deriva- tives Association (ISDA) master netting agreement. Credit expo- sures to those counterparties from credit default swaps (CDS), together with exposures from other over-the-counter (OTC) deriv- atives, are netted and included in the calculation of the collateral that is required to be posted. Trading with lower-rated counter- parties, such as hedge funds, would generally require an initial margin to be posted by the counterparty. We receive collateral from or post collateral to our counterpar- ties based on our open net receivable or net payable from OTC derivative activities. Under the terms of the ISDA master netting agreement and similar agreements, this collateral, which gener- ally takes the form of cash or highly liquid debt securities, is avail- able to cover any amounts due under those derivative transac- tions. Table 15: Credit derivatives This table provides an overview of the notional amount of credit derivatives, including those used to manage risks within our bank- ing and trading books. Notional amounts of credit derivatives do not include any netting benefits. For capital underpinning of the counterparty credit risk of derivative positions, the effective EPE or exposure according to current exposure method is applied. Notional amounts are reported based on the regulatory scope of consolidation. Notional amounts, CHF million Credit default swaps Total rate of return swaps Options and warrants Total 31.12.15 Total 31.12.14 Regulatory banking book Regulatory trading book Total Protection bought 10,644 2,819 13,463 13,970 Protection sold 369 369 751 Total 11,013 2,819 13,832 14,722 Protection bought 155,257 3,456 4,225 162,938 248,849 Protection sold Total 152,095 307,352 2,810 54 154,959 237,231 6,266 4,280 317,897 486,080 31.12.15 318,365 9,085 4,280 331,729 31.12.14 483,875 8,899 8,028 500,802 Measured on a notional basis, our counterparties for buying and selling protection are mainly banks and central counterparties and to a lesser extent broker-dealers. In 2015, we saw a material reduction in notional exposures of CDS in the regulatory trading book, primarily with banks. ➔ Refer to “Note 14 Derivative instruments and hedge accounting” in the “Consolidated financial statements” section of this report for more information on credit derivatives by instrument and counterparty 884 Equity instruments in the banking book The regulatory capital view for equity instruments in the banking book differs from the IFRS view, primarily due to the following: – Differences in the basis of valuation, for example, financial investments classified as available-for-sale are subject to fair value accounting under IFRS but for regulatory capital pur- poses the “lower of cost or market” or “cost less impairment” concept is applied. – Certain instruments which are held as debt investments on the IFRS balance sheet, mainly investment fund units, are treated as equity instruments for regulatory capital purposes. – Certain instruments which are held as trading portfolio assets on the IFRS balance sheet, but which are not part of the regu- latory VaR framework, are included as equity instruments in the banking book for regulatory capital purposes. – Differences in the scope of consolidation. ➔ Refer to the “Scope of regulatory consolidation” section of this supplemental Pillar 3 section for more information EDTF | Table 16: Equity instruments in the banking book The table below shows the different equity instruments categories held in the banking book on the basis of amounts recognized under IFRS, followed by the regulatory capital adjustment amount. This adjustment considers the abovementioned differences to IFRS resulting in the total regulatory equity instruments exposure under the BIS framework, the corresponding RWA and the capital requirement. The table also shows net realized gains and losses and unreal- ized revaluation gains relating to equity instruments. CHF million Equity instruments Financial investments available-for-sale Investments in associates Total equity instruments under IFRS Regulatory capital adjustment1 Total equity instruments under regulatory capital2 of which: to be risk-weighted publicly traded (risk-weighted at 300%) privately held (risk-weighted at 400%)3 not deducted in application of threshold, but risk-weighted at 250% of which: deduction from common equity tier 1 capital4 RWA according to simple risk-weight method5 Capital requirement according to simple risk-weight method5 Total capital requirement (including deductions from common equity tier 1 capital) Net realized gains / (losses) and unrealized gains from equity instruments Net realized gains / (losses) from disposals Unrealized revaluation gains of which: included in the BIS tier 2 capital As of 31.12.15 31.12.14 645 954 1,598 419 2,017 37 814 805 360 4,072 514 875 664 927 1,591 780 2,371 219 1,039 738 375 4,735 526 901 For the year ended 31.12.15 For the year ended 31.12.14 106 332 149 80 285 128 1 Includes CHF 477 million of investment fund units treated as debt investments under IFRS as of 31 December 2015 (31 December 2014: CHF 767 million). 2 The gross and net EAD of CHF 1,272 million presented for “Equity instruments in the banking book” line of “Table 2: Detailed segmentation of exposures and risk-weighted assets” excludes CHF 385 million booked in trust entities (compensation and benefit vehicles) and CHF 360 million goodwill of investments in associates. 3 Includes CHF 385 million exposure booked in trust entities (compensation and benefit vehicles) that did not generate risk-weighted assets. 4 Goodwill related to investments in associates is deducted from common equity tier 1 capital. 5 Risk-weighted assets of CHF 4,072 million and the capital requirement of CHF 514 million, as of 31 December 2015, are also disclosed in the “Equity instruments in the banking book” line of “Table 2: Detailed segmentation of exposures and risk-weighted assets.” 885 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Market risk The “Risk management and control” section of this report provides comprehensive information on market risk-related Pillar 3 disclosures. ➔ Refer to “Market risk” in the “Risk management and control” section of this report for more information 886 Securitization This section provides details of traditional and synthetic securitiza- tion exposures in the banking and trading book based on the Basel III framework. Securitized exposures are generally risk- weighted, based on their external ratings. This section also pro- vides details of the regulatory capital requirement associated with these exposures. tions, enabling us to transfer significant risk to third-party inves- tors. As sponsor, we manage, provide financing or advise secu- ritization programs. In line with the Basel framework, sponsoring includes underwriting, that is, placing securities in the market. In all other cases, we act in the role of investor by taking securi- tization positions. In a traditional securitization, a pool of loans (or other debt obligations) is typically transferred to structured entities that have been established to own the loan pool and to issue tranched securities to third-party investors referencing this pool of loans. In a synthetic securitization, legal ownership of securitized pools of assets is typically retained, but associated credit risk is transferred to structured entities typically through guarantees, credit deriva- tives or credit-linked notes. Hybrid structures with a mix of tradi- tional and synthetic features are disclosed as synthetic securitiza- tions. 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- RWA attributable to securitization positions decreased to CHF 1.4 billion as of 31 December 2015 from CHF 3.9 billion as of 31 December 2014, mainly due to a decline of CHF 2.2 billion in Corporate Center – Non-core and Legacy Portfolio, primarily due to the termination of hedging transactions synthetically transfer- ring credit risk. ➔ Refer to “Note 30 Interests in subsidiaries and other entities subsidiaries and other entities” in the “Consolidated financial statements” section of this report for more information on structured entities ➔ Refer to the “Corporate Center” section of this report for more information on RWA by portfolio composition and exposure category Table 17: Securitization / re-securitization CHF million Gross EAD Net EAD RWA Capital requirement Gross EAD Net EAD 31.12.15 31.12.14 Securitization / re-securitization in the banking book CC – Non-core and Legacy Portfolio Other business divisions1 Securitization / re-securitization in the trading book CC – Non-core and Legacy Portfolio Other business divisions1 1 Mainly reflecting exposures in the Investment Bank. 4,207 1,089 3,119 1,263 925 338 4,207 1,089 3,119 1,263 925 338 707 319 388 672 518 154 89 40 49 85 65 19 9,048 4,735 4,313 1,610 1,205 405 9,048 4,735 4,313 1,610 1,205 405 RWA 2,650 2,028 622 1,262 993 268 Capital requirement 295 226 69 140 110 30 887 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Objectives, roles and involvement Securitization in the banking book Securitization positions held in the banking book include tranches of synthetic securitization of loan exposures. These were primarily hedging transactions executed by synthetically transferring credit risk. In addition, securitization in the banking book includes leg- acy risk positions in Corporate Center – Non Core and Legacy portfolio. In 2015, we acted in the roles of both originator and sponsor. As originator, we sold originated commercial mortgage loans into securitization programs. As sponsor, we managed or advised securitization programs and helped to place the securities in the market. Refer to “Table 18: Securitization activity for the year in the banking book” for an overview of our originating and spon- soring activities in 2015 and 2014, respectively. Securitization and re-securitization positions in the banking book are measured either at fair value or at amortized cost less impairment. The impairment assessment for a securitized position is generally based on the net present value of future cash flows expected from the underlying pool of assets. Securitization in the trading book Securitizations (including correlation products) held in the trading book are part of the trading activities, which typically include market-making and client facilitation. Included in the trading book are positions in our correlation book and legacy positions in leveraged super senior tranches. In the trading book, securitiza- tion and re-securitization positions are measured at fair value, reflecting market prices where available or are based on our inter- nal pricing models. Type of structured entities and affiliated entities involved in the securitization transactions For the securitization of third-party exposures, the type of struc- tured entities employed is selected as appropriate based on the type of transaction undertaken. Examples include limited liability corporations, common law trusts and depositor entities. We also manage or advise significant groups of affiliated enti- ties that invest in exposures we have securitized or in structured entities that we sponsor. ➔ Refer to “Note 30 Interests in subsidiaries and other entities” in the “Consolidated financial statements” section of this report for more information on structured entities ➔ Refer to the “Corporate Center” section of this report for more information on RWA by portfolio composition and exposure category Managing and monitoring of the credit and market risk of securitization positions The banking book securitization and re-securitization portfolio is subject to specific risk monitoring, which may include interest rate and credit spread sensitivity analysis, as well as inclusion in firm- wide earnings-at-risk, capital-at-risk and combined stress test metrics. The trading book securitization and re-securitization positions are also subject to multiple risk limits, such as management VaR and stress limits as well as market value limits. As part of manag- ing risks within pre-defined risk limits, traders may utilize hedging and risk mitigation strategies. Hedging may, however, expose the firm to basis risks as the hedging instrument and the position being hedged may not always move in parallel. Such basis risks are managed within the overall limits. Any retained securitization from origination activities and any purchased securitization posi- tions are governed by risk limits together with any other trading positions. Legacy trading book securitization exposure is subject to the same management VaR limit framework. Additionally, risk limits are used to control the unwind, novation and asset sales process on an ongoing basis. 888 Regulatory capital treatment of securitization structures Generally, in both the banking and trading book we apply the ratings-based approach to securitization positions using ratings, if available, from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings for all securitization and re-securitization exposures. The selection of the External Credit Assessment Institutions (ECAI) is based on the primary rating agency concept. This concept is applied, in principle, to avoid having the credit assessment by one ECAI applied to one or more tranches and another ECAI for the other tranches, unless this is the result of the application of the specific rules for multiple assessments. If any two of the above- mentioned rating agencies have issued a rating for a particular position, we would apply the lower credit rating of the two. If all three rating agencies have issued a rating for a particular position, we would apply the middle credit rating of the three. Under the ratings-based approach, the amount of capital required for secu- ritization 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 programs. For the pur- poses of determining regulatory capital and the Pillar 3 disclosure for these positions, the underlying exposures are reported under the standardized approach, the advanced internal ratings-based approach or the securitization approach, depending on the cate- gory of the underlying security. If the underlying security is reported under the standardized approach or the advanced inter- nal ratings-based approach, the related positions are excluded from the tables on the following pages. The supervisory formula approach is applied to synthetic secu- ritizations of portfolios of counterparty credit risk inherent in derivatives and loan exposures for which an external rating was not sought. The supervisory formula approach is also applied to leveraged super senior tranches. In the trading book, the comprehensive risk measure is used for the correlation portfolio as defined by Basel III requirements. This measure broadly covers securitizations of liquid corporate underlying assets as well as associated hedges that are not neces- sarily securitizations, for example, single-name credit default swaps and credit default swaps on indices. We do not apply the concentration ratio approach or the inter- nal assessment approach to securitization positions. The counterparty risk of interest rate or foreign currency deriv- atives 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 “Consolidated financial statements” section of this report for information on accounting policies that relate to securitization activities, primarily “Note 1a item 3 Subsidiaries and structured entities” and “Note 1a item 12 Securitization structures set up by UBS.” We disclose our intention to securitize exposures as an origina- tor if assets are designated for securitization and a tentative pric- ing date for a transaction is known as of the balance sheet date or if a pricing of a transaction has been fixed. Exposures intended to be securitized continue to be valued in the same way until such time as the securitization transaction takes place. Presentation principles It is our policy to present Pillar 3 disclosures for securitization transactions and balances in line with the capital adequacy treat- ments which were applied under Pillar 1 in the respective period presented. We do not amend comparative prior period numbers for pre- sentational changes triggered by new and revised information from third-party data providers, as long as the updated informa- tion does not impact the Pillar 1 treatments of prior periods. Good practice guidelines Disclosures within this section consider the “Industry good prac- tice guidelines on Pillar 3 disclosure requirement for securitiza- tion” as published by the European Banking Federation, the Asso- ciation for Financial Markets in Europe, the European Savings Banks Group and the European Association of Public Banks and Funding Agencies. 889 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Securitization exposures in the banking and trading book Table 18 outlines the exposures measured as the transaction size we securitized at inception in the banking book in 2015 and in 2014. The activity is further broken down by our role (origina- tor / sponsor) and by type (traditional / synthetic). Amounts disclosed under the Traditional column of this table reflect the total outstanding notes at par value issued by the secu- ritization vehicle at issuance. For synthetic securitization transac- tions, the amounts disclosed generally reflect the balance sheet carrying values of the securitized exposures at issuance. For securitization transactions where we acted as originator, exposures are split into two parts: those in which we have retained securitization positions and / or continue to be involved on an ongoing basis (for example credit enhancement or implicit sup- port), and those in which we do not have retained securitization positions and / or have no further involvement. 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, as of 31 December 2015 and 31 December 2014, amounts of CHF 2.8 billion and CHF 2.9 billion, respec- tively, were included in “Table 18: Securitization activity for the year in the banking book” under both Originator and Sponsor and in “Table 19: Outstanding securitized exposures” under both Originator and Sponsor. Table 18: Securitization activity for the year in the banking book 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 973 1,784 51 7,891 973 1,784 2,718 2,718 0 1,680 1,262 51 68 7,891 0 9,258 1,680 1,262 351 351 0 68 9,258 0 CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or small and medium-sized enterprises Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.15 Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or small and medium-sized enterprises Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.14 890 Securitization activity for the year in the trading book In 2015 and 2014, we had no securitization activity in the trading book. Table 19: Outstanding securitized exposures This table outlines the outstanding transaction size of securitiza- tion exposures which we have originated / sponsored and retained securitization positions at the balance sheet date in the banking or trading book and / or are otherwise involved on an ongoing basis, for example through the provision of credit enhancement or implicit support. Amounts disclosed under the Traditional column in this table reflect the total outstanding notes at par value issued by the secu- ritization vehicle. For synthetic securitization transactions, we generally disclose the balance sheet carrying values of the expo- sures securitized or, for hybrid structures, the outstanding notes at par value issued by the securitization vehicle. The table also includes securitization activities conducted in 2015 and in 2014 in which we retained and / or purchased posi- tions. These can also be found in “Table 18: Securitization activity for the year in the banking book.” Where no positions were retained, the outstanding transaction size is only disclosed in the year of inception for originator transactions. All values in this table are as of the balance sheet date. Banking book Trading book1, 2 Originator Sponsor Originator Sponsor Traditional Synthetic Traditional Synthetic Traditional Synthetic CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or small and medium-sized enterprises Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.15 Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or small and medium-sized enterprises Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.14 673 1,822 23,874 263 359 4,864 4,864 423 26,741 1,053 0 673 1,053 1,008 2,756 2,756 2,942 Synthetic Traditional3 3,119 5,894 0 311 13,341 22,665 7,307 2,437 742 17,234 282 405 1,106 463 19,489 243 7,306 7,549 2,942 199 1,057 0 1,207 1,057 10,487 0 1 Both net long and net short positions are underpinned in the trading book and EAD is capped at the maximum possible loss. 2 In line with our disclosure principles, we disclose the UBS originated and sponsored deals only where the positions result in a RWA or capital deduction under Pillar 1. 3 This disclosure excludes sponsor-only activity where we do not retain a position. In such cases, we advised the originator or placed securities in the market for a fee, and there was no other impact on our capital ratios. 891 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 20: Impaired or past due securitized exposures and losses related to securitized exposures in the banking book This table provides a breakdown of the outstanding impaired or past due exposures at the balance sheet date as well as losses recognized in our income statement for transactions in which we acted as originator or sponsor in the banking book. Losses are reported after taking into account the offsetting effects of any credit protection from eligible risk mitigation instruments under the Basel III framework for the retained or purchased positions. Where we did not retain positions, impaired or past due infor- mation is only reported in the year of inception of a transaction. Where available, past due information is derived from investor reports. Past due is generally defined as delinquency above 60 days. Where investor reports do not provide 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. 31.12.15 31.12.14 Originator Sponsor Originator Sponsor Impaired or past due in securitized exposures Recognized losses in income statement Impaired or past due in securitized exposures Recognized losses in income statement Impaired or past due in securitized exposures Recognized losses in income statement Impaired or past due in securitized exposures Recognized losses in income statement 13 36 6 55 1 0 0 2 30 8 38 0 0 1 0 6 6 0 2 2 CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or small and medium-sized enterprises Consumer loans Student loans Trade receivables Re-securitizations Other Total Table 21: Exposures intended to be securitized in the banking and trading book This table provides the amount of exposures by exposure type we intend to securitize in the banking and trading book. We disclose our intention to securitize exposures as an originator if assets are designated for securitization and a tentative pricing date for a transaction is known at the balance sheet date or if a pricing of a transaction has been fixed. CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or small and medium-sized enterprises Consumer loans Student loans Trade receivables Re-securitizations Other Total 892 31.12.15 31.12.14 Banking book Trading book Banking book Trading book 323 144 323 0 144 0 Table 22: Securitization positions retained or purchased in the banking book This table provides a breakdown of securitization positions we retained or purchased in the banking book, irrespective of our role in the securitization transaction. The value disclosed is the net exposure amount at default subject to risk-weighting at the balance sheet date. CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or small and medium-sized enterprises Consumer loans Student loans Trade receivables Re-securitizations Other2 Total1 31.12.15 Off-balance sheet3 On balance sheet 351 0 0 0 178 0 3,678 4,207 0 0 Total 351 0 0 0 178 0 3,678 4,207 On balance sheet 31.12.14 Off-balance sheet3 499 31 1 173 1 402 452 7,449 9,009 39 39 Total 499 31 1 173 1 402 492 7,449 9,048 1 The total exposure of CHF 4,207 million as of 31 December 2015 is also disclosed in “Table 2: Detailed segmentation of exposures and risk-weighted assets” in line “Securitization / re-securitization in the banking book.” 2 “Other” primarily includes securitization of portfolios of counterparty credit risk in over-the-counter (OTC) derivatives and loan exposures. 3 Synthetic long exposures through sold CDS positions are classi- fied as off-balance sheet exposures. 893 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 23: Securitization positions retained or purchased in the trading book This table provides a breakdown of securitization positions we purchased or retained in the trading book subject to the securiti- zation framework for specific market risk, 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 offsetting cash and derivative positions to the extent eligible under the Basel III framework. The amounts disclosed are either the fair value or, in the case of derivative positions, the aggregate of the notional amount and the associated replace- ment value at the balance sheet date. CHF million Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or small and medium-sized enterprises Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.15 Residential mortgages Commercial mortgages Credit card receivables Leasing Loans to corporates or small and medium-sized enterprises Consumer loans Student loans Trade receivables Re-securitizations Other Total 31.12.14 Cash positions Derivative positions Total Gross long Gross short Gross long Gross short Net long Net short 7 146 0 24 5 183 14 238 28 3 283 1 0 0 0 1 3 1 0 4 260 1,500 291 1,570 13 209 15 117 24 106 1,889 481 1,299 19 106 1,985 633 1,332 106 203 2,090 39 203 2,208 9 5 236 16 427 15 3 461 1 133 45 6 4 55 Net Total1, 2 28 326 10 5 369 61 433 18 3 515 1 Both net long and net short positions are underpinned in the trading book and EAD is capped at the maximum possible loss. 2 Figures as of 31 December 2015 exclude CHF 894 million related to leveraged super senior tranches treated under the supervisory formula approach which are reported in “Table 27c: Securitization / re-securitization exposures treated under the supervisory formula approach by rating clusters – trading book.” Including these exposures, net total exposures were CHF 1,263 million, which equals the gross and net exposure of securitization / re-securitization in the trading book presented in “Table 2: Detailed segmenta- tion of exposures and risk-weighted assets.” 894 Table 24a: Capital requirement for securitization / re-securitization positions retained or purchased in the banking book Tables 24a to 24c provide the capital requirements for securitiza- tion and re-securitization positions we purchased or retained in the banking book, irrespective of our role in the securitization transaction, split by risk weight bands and regulatory capital approach. We use three FINMA-recognized ECAI for this purpose: Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. 31.12.15 31.12.14 Ratings-based approach Supervisory formula approach Ratings-based approach Supervisory formula approach Securitization Re- securitization Securitization Re- securitization Total Securitization securitization Securitization Re- Re- securitization 12 2 1 7 13 0 0 0 36 28 1 23 52 40 3 1 7 13 0 0 0 23 89 0 20 5 6 11 7 6 5 34 16 110 16 2 18 0 0 1 10 2 49 45 53 37 135 0 0 0 Total 81 60 24 11 7 6 6 44 55 295 CHF million over 0–20% over 20–35% over 35–50% over 50–75% over 75–100% over 100–250% over 250–1,249% 1,250% rated 1,250% unrated Total1 1 Refer to “Table 2: Detailed segmentation of exposures and risk-weighted assets.” On 31 December 2015, CHF 4,207 million banking book securitization net exposures translated into an overall capital requirement of CHF 89 million. Table 24b: Securitization / re-securitization exposures treated under the ratings-based approach by rating clusters – banking book CHF million Exposure amount Capital requirement Exposure amount Capital requirement 31.12.15 31.12.14 AAA AA A+ A A– BBB+ BBB BBB– BB+ BB BB– Below BB– / unrated Total 205 302 31 92 39 20 89 99 0 0 878 3 6 1 2 2 1 7 13 0 1 37 223 917 54 335 119 121 126 69 26 9 6 44 2,050 4 27 1 8 5 10 11 12 10 5 6 62 159 895 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 24c: Securitization / re-securitization exposures treated under the supervisory formula approach by rating clusters – banking book CHF million over 0–20% over 20–35% 1,250% Total 31.12.15 31.12.14 Exposure amount Capital charge Exposure amount Capital charge 3,247 68 15 3,329 28 1 23 52 5,190 1,782 27 6,998 45 53 37 135 Gains on sale – securitization exposures to be deducted from Basel III tier 1 capital In 2015 and in 2014, we have not retained any significant expo- sures relating to securitization for which we have recorded gains on sale requiring deduction from Basel III tier 1 capital. Securitization exposures subject to early amortization in the banking and trading book In 2015 and in 2014, we have not retained any securitization structures in the banking and trading book that are subject to early amortization treatment. Re-securitization positions retained or purchased in the banking book During 2015, the majority of our Re-securitization positions retained or purchased in the banking book have been sold or terminated. 896 Table 25: Re-securitization positions retained or purchased in the trading book The table below outlines re-securitization positions retained or purchased subject to the securitization framework for specific market risk 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, that is, gross long and short positions after offsetting to the extent it is eligible under the Basel III frame- work. As of 31 December 2015, none of the retained or pur- chased trading book re-securitization positions had an integrated insurance wrapper. CHF million Total 31.12.15 Total 31.12.14 Gross long Gross short Net long Net short 48 134 19 41 9 15 1 4 Outstanding notes issued by securitization vehicles related to UBS’s retained exposures subject to the market risk approach The information presented in table 26 in our Annual Report 2014 is now located within the “Trading Book” information in “Table 19: Outstanding securitized exposures” in this report. In 2015 and 2014, there was no origination activity for securitization vehicles in the trading book. 897 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 26: Correlation products subject to the comprehensive risk measure or the securitization framework for specific risk This table outlines products in the correlation portfolio that we retained or purchased in the trading book, irrespective of our role in the securitization transaction. They are subject to either the com- positive replacement value and negative replacement value. The prehensive risk measure or the securitization framework for spe- decrease in notional values related to positive and negative cific risk. Correlation products subject to the securitization frame- replacement values resulted mainly from trades maturing during work are leveraged super senior positions. The values disclosed the year, as well as from trade terminations. are market values for cash positions, replacement values and notional values for derivative positions. Derivatives are split by CHF million 31.12.15 Positions subject to comprehensive risk measure Positions subject to securitization framework1 31.12.14 Positions subject to comprehensive risk measure Positions subject to securitization framework1 1 Includes leveraged super senior tranches. Cash positions Derivative positions Assets Liabilities Assets Liabilities Market value Market value Positive replacement value Positive replacement value notionals Negative replacement value Negative replacement value notionals 59 481 60 137 609 254 1 1,371 2,569 4,019 3,095 305 627 1 2,011 2,569 5,610 3,095 898 Table 27a: Securitization positions and capital requirement for trading book positions subject to the securitization framework Tables 27a to 27c outline securitization positions we purchased or retained and the capital requirement in the trading book subject to the securitization framework for specific market risk, irrespec- tive of our role in the securitization transaction, broken down by risk weight bands and regulatory capital approach. The amounts disclosed for securitization positions are market values at the bal- ance sheet date after eligible netting under the Basel III frame- work. CHF million over 0–20% over 20–35% over 35–50% over 50–75% over 75–100% over 100–250% over 250–1,249% 1,250% rated 1,250% unrated Total3 31.12.15 Ratings-based approach 31.12.14 Ratings-based approach Net long Net short 147 52 9 6 2 5 9 6 236 97 5 0 14 0 14 3 133 Net Total1 244 Capital requirement2 4 57 9 6 16 0 5 23 9 369 2 1 1 2 0 3 36 13 62 Net long Net short 346 51 17 8 0 8 13 18 461 0 0 3 6 0 42 2 55 Net Total1 347 51 18 11 6 8 0 55 20 516 Capital requirement 5 2 1 1 1 2 0 76 28 116 1 Both net long and net short positions are underpinned in the trading book and EAD is capped at the maximum possible loss. 2 The capital requirement of CHF 85 million as of 31 December 2015 disclosed in “Table 2: Detailed segmentation of exposures and risk-weighted assets” in line “Securitization / re-securitization in the trading book” includes the total ratings-based approach charge of CHF 62 million and a CHF 23 million capital requirement for leveraged super senior tranches as disclosed in “Table 28: Capital requirement for securitization positions related to correlation products.” 3 Leveraged super senior tranches (subject to the secu- ritization framework) are not included in this table, but are disclosed in “Table 26: Correlation products subject to the comprehensive risk measure or the securitization framework for specific risk.” Table 27b: Securitization / re-securitization exposures treated under the ratings-based approach by rating clusters – trading book CHF million Exposure amount Capital requirement Exposure amount Capital requirement 31.12.15 31.12.14 AAA AA A+ A A– BBB+ BBB BBB– BB+ BB BB– Below BB– / unrated Total 224 40 4 37 9 1 16 0 5 0 32 369 4 1 0 2 1 0 2 0 3 0 50 62 301 60 12 35 14 4 6 8 0 75 515 4 1 1 1 1 0 1 2 0 104 116 899 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 27c: Securitization / re-securitization exposures treated under the supervisory formula approach by rating clusters – trading book CHF million over 0–20% Total 31.12.15 31.12.14 Exposure amount Capital requirement Exposure amount Capital requirement 894 894 23 23 1,095 1,095 24 24 Table 28: Capital requirement for securitization positions related to correlation products This table outlines the capital requirement for securitization posi- tions in the trading book for correlation products, including posi- tions subject to comprehensive risk measure and positions related to leveraged super senior positions and certain re-securitized cor- porate credit exposure positions subject to the securitization framework. Our model does not distinguish between “default risk,” “migration risk” and “correlation risk.” The capital require- ment for positions subject to the comprehensive risk measure declined mainly from trades maturing during the year, as well as from trade terminations CHF million Positions subject to comprehensive risk measure Positions subject to securitization framework1 Total 1 Leveraged super senior tranches. 31.12.15 31.12.14 Capital requirement Capital requirement 11 23 34 15 24 39 900 Balance sheet reconciliation Table 29: Reconciliation of accounting balance sheet to balance sheet under the regulatory scope of consolidation The table below provides a reconciliation of the IFRS balance sheet to the balance sheet according to the regulatory scope of consolidation as defined by BIS and FINMA. Lines in the balance sheet under the regulatory scope of consolidation are expanded and referenced where relevant to display all components that are used in “Table 30: Composition of capital.” ➔ Refer to the “Introduction” section for more information Balance sheet in accordance with IFRS scope of consolidation Effect of deconsolidated entities for regulatory consolidation Effect of additional consolidated entities for regulatory consolidation Balance sheet in accordance with regulatory scope of consolidation References1 CHF million Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Positive replacement values Cash collateral receivables on derivative instruments Financial assets designated at fair value Loans Financial investments available-for-sale Consolidated participations Investments in associates of which: goodwill Property, equipment and software Goodwill and intangible assets of which: goodwill of which: intangible assets Deferred tax assets of which: deferred tax assets recognized for tax loss carry- forwards of which: deferred tax assets on temporary differences Other assets of which: net defined benefit pension and other post- employment assets Total assets 31.12.15 91,306 11,948 25,584 67,893 124,035 167,435 23,763 6,146 311,954 62,543 0 954 360 7,695 6,568 6,240 328 12,835 7,093 5,742 22,160 50 942,819 (280) (16,302) 17 78 (80) 166 (83) (1) (1) (280) (16,764) 91,306 11,668 25,584 67,893 107,733 167,452 23,763 6,146 312,032 62,463 166 954 360 7,612 6,568 6,240 328 12,834 7,092 5,742 21,881 50 926,055 1 1 4 4 5 9 12 10 901 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 29: Reconciliation of accounting balance sheet to balance sheet under the regulatory scope of consolidation (continued) Balance sheet in accordance with IFRS scope of consolidation Effect of deconsolidated entities for regulatory consolidation Effect of additional consolidated entities for regulatory consolidation Balance sheet in accordance with regulatory scope of consolidation References1 CHF million 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 of which: amount eligible for high-trigger loss-absorbing additional tier 1 capital2 of which: amount eligible for low-trigger loss-absorbing additional tier 1 capital2 of which: amount eligible for low-trigger loss-absorbing tier 2 capital3 of which: amount eligible for capital instruments subject to phase-out from tier 2 capital4 Provisions Other liabilities of which: amount eligible for high-trigger loss-absorbing capital (Deferred Contingent Capital Plan (DCCP))5 Total liabilities Equity Share capital Share premium Treasury shares Retained earnings Other comprehensive income recognized directly in equity, net of tax of which: unrealized gains / (losses) from cash flow hedges according to regulatory scope of consolidation Equity attributable to UBS Group AG shareholders Equity attributable to non-controlling interests Total equity Total liabilities and equity 31.12.15 11,836 8,029 9,653 29,137 162,430 38,282 62,995 390,185 93,147 2,837 2,326 10,325 996 4,164 75,652 1,134 885,511 385 31,164 (1,693) 29,504 (4,047) 1,638 55,313 1,995 57,308 942,819 (54) 81 68 (165) (19) (16,544) (16,633) (1) (247) 116 (132) 1 (131) (16,764) 11,781 8,029 9,653 29,137 162,512 38,282 63,063 390,021 93,129 2,837 2,326 10,325 996 4,164 59,108 1,134 868,878 385 31,164 (1,693) 29,257 (3,932) 1,638 55,181 1,996 57,177 926,055 13 13 7 8 13 1 1 3 2 3 11 6 0 1 (1) 1 1 1 1 References link the lines of this table to the respective reference numbers provided in the column “References” in “Table 30: Composition of capital.” 2 Represents IFRS book value. 3 IFRS book value is CHF 10,346 million. 4 IFRS book value is CHF 2,254 million. 5 IFRS book value is CHF 1,181 million. Refer to the “Compensation” section of this report for more information on the DCCP. 902 Composition of capital The table on the next pages provides the “Composition of capi- tal” as defined by BIS and FINMA. The naming convention does not always reflect the UBS naming convention. Reference is made to items reconciling to the balance sheet under the regulatory scope of consolidation as disclosed in “Table 29: Reconciliation of accounting balance sheet to balance sheet under the regulatory scope of consolidation.” Where relevant, the effect of phase-in arrangements is disclosed as well. ➔ Refer to the “Capital management” section of this report for more information on phase-in arrangements An overview of the main features of our regulatory capital instruments, as well as the full terms and conditions, are pub- lished in the “Bondholder information” section of our Investor Relations website. ➔ Refer to “Bondholder information” at www.ubs.com/investors for more information on the capital instruments of UBS Group AG and UBS AG on a consolidated and on a standalone basis 903 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations EDTF | Table 30: Composition of capital CHF million, except where indicated Directly issued qualifying common share (and equivalent for non-joint stock companies) capital plus related stock surplus Retained earnings Accumulated other comprehensive income (and other reserves) Directly issued capital subject to phase-out from common equity tier 1 capital (only applicable to non-joint stock companies) Common share capital issued by subsidiaries and held by third parties (amount allowed in group common equity tier 1 capital) Common equity tier 1 capital before regulatory adjustments Prudential valuation adjustments Goodwill, net of tax, less hybrid capital and additional tier 1 capital2 Intangible assets, net of tax2 Deferred tax assets recognized for tax loss carry-forwards3 Unrealized (gains) / losses from cash flow hedges, net of tax Expected losses on advanced internal ratings-based portfolio less general provisions Securitization gain on sale Own credit related to financial liabilities designated at fair value and replacement values, net of tax Defined benefit plans Compensation and own shares-related capital components (not recognized in net profit) Reciprocal crossholdings in common equity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 17a Qualifying interest where a controlling influence is exercised together with other owners (CET instruments) 17b Consolidated investments (CET1 instruments) Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) 18 19 20 Mortgage servicing rights (amount above 10% threshold) Numbers phase-in 31.12.15 Effect of the transition phase 31.12.15 References1 31,549 29,257 (5,625) 55,181 (83) (2,618) (323) (2,988) (1,638) (311) (442) (20) (1,383) 1 2 3 4 5 9 11 10 (3,927) (4,480) (30) 21 22 23 24 25 26 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability)6 Amount exceeding the 15% threshold (702) (1,896) 12 of which: significant investments in the common stock of financials of which: mortgage servicing rights of which: deferred tax assets arising from temporary differences Expected losses on equity investments treated according to the PD / LGD approach 26a Other adjustments relating to the application of an internationally accepted accounting standard 26b Other deductions (402) (3,895) 13 Regulatory adjustments applied to common equity tier 1 due to insufficient additional tier 1 and tier 2 to cover deductions Total regulatory adjustments to common equity tier 1 Common equity tier 1 capital (CET1) (14,804) 40,378 (10,334) (10,334) 27 28 29 904 Table 30: Composition of capital (continued) CHF million, except where indicated Directly issued qualifying additional tier 1 instruments plus related stock surplus of which: classified as equity under applicable accounting standards of which: classified as liabilities under applicable accounting standards5 Directly issued capital instruments subject to phase-out from additional tier 1 Additional tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group additional tier 1) of which: instruments issued by subsidiaries subject to phase-out Additional tier 1 capital before regulatory adjustments Investments in own additional tier 1 instruments Reciprocal crossholdings in additional tier 1 instruments 30 31 32 33 34 35 36 37 38 38a Qualifying interest where a controlling influence is exercised together with other owner (AT1 instruments) 38b Holdings in companies which are to be consolidated (additional tier1 instruments) 39 40 41 42 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold) Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) National specific regulatory adjustments Regulatory adjustments applied to additional tier 1 due to insufficient tier 2 to cover deductions Tier 1 adjustments on impact of transitional arrangements of which: prudential valuation adjustment of which: own CET1 instruments Effect of the transition phase 31.12.15 References1 Numbers phase-in 31.12.15 6,154 6,154 1,954 1,954 8,108 0 0 (1,954) (1,954) (1,954) (3,927) (3,927) 3,927 3,927 of which: goodwill net of tax, offset against hybrid capital and low-trigger loss-absorbing capital (3,927) 3,927 of which: intangible assets (net of related tax liabilities) of which: gains from the calculation of cash flow hedges of which: IRB shortfall of provisions to expected losses of which: gains on sales related to securitization transactions of which: gains / losses in connection with own credit risk of which: investments of which: expected loss amount for equity exposures under the PD / LGD approach of which: mortgage servicing rights 42a Excess of the adjustments which are allocated to the common equity tier 1 capital 43 44 45 46 47 48 49 50 51 Total regulatory adjustments to additional tier 1 capital Additional tier 1 capital (AT1) Tier 1 capital (T1 = CET1 + AT1) Directly issued qualifying tier 2 instruments plus related stock surplus4 Directly issued capital instruments subject to phase-out from tier 2 Tier 2 instruments (and CET1 and additional tier 1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group tier 2) of which: instruments issued by subsidiaries subject to phase-out Provisions Tier 2 capital before regulatory adjustments (3,927) 4,181 44,559 11,242 998 3,927 1,973 (8,361) 0 (998) 12,239 (998) 13 6 7 8 905 Additional regulatory information Additional regulatory information UBS Group AG consolidated supplemental disclosures required under Basel III Pillar 3 regulations Table 30: Composition of capital (continued) CHF million, except where indicated Investments in own tier 2 instruments Reciprocal cross holdings in tier 2 instruments 52 53 53a Qualifying interest where a controlling influence is exercised together with other owner (tier 2 instruments) 53b Investments to be consolidated (tier 2 instruments) Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold) Significant investments in the capital banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) National specific regulatory adjustments 54 55 56 56a Excess of the adjustments which are allocated to the additional tier 1 capital 57 58 Total regulatory adjustments to tier 2 capital Tier 2 capital (T2) of which: high-trigger loss-absorbing capital5 of which: low-trigger loss-absorbing capital4 59 Total capital (TC = T1 + T2) Amount with risk-weight pursuant the transitional arrangement (phase-in) of which: net defined benefit pension assets of which: DTA on temporary differences 60 Total risk-weighted assets Capital ratios and buffers 61 62 63 64 65 66 67 68 Common equity tier 1 (as a percentage of risk-weighted assets) Tier 1 (Pos 45 as a percentage of risk-weighted assets) Total capital (pos 59 as a percentage of risk-weighted assets) CET1 requirement (base capital, buffer capital and countercyclical buffer requirements) plus G-SIB buffer requirement, expressed as a percentage of risk-weighted assets of which: capital buffer requirement of which: bank-specific countercyclical buffer requirement of which: G-SIB buffer requirement Common equity tier 1 available to meet buffers (as a percentage of risk-weighted assets) 68a–f Not applicable for systemically relevant banks according to FINMA RS 11 / 2 72 73 Non-significant investments in the capital of other financials Significant investments in the common stock of financials 74 Mortgage servicing rights (net of related tax liability) 75 Deferred tax assets arising from temporary differences (net of related tax liability) Applicable caps on the inclusion of provisions in tier 2 Provisions eligible for inclusion in tier 2 in respect of exposures subject to standardised approach (prior to application of cap) Cap on inclusion of provisions in tier 2 under standardized approach Provisions eligible for inclusion in tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap) Cap for inclusion of provisions in tier 2 under internal ratings-based approach 76 77 78 79 Numbers phase-in 31.12.15 (6) Effect of the transition phase References1 31.12.15 2 7, 8 13 7 2 (996) (9,357) (4,771) (30) (4,741) (4,771) (6) 12,233 912 10,325 56,792 212,302 19.0 21.0 26.8 7.5 2.9 0.2 19.0 1,074 800 5,862 1 References link the lines of this table to the respective reference numbers provided in the column “References” in “Table 29: Reconciliation of accounting balance sheet to balance sheet under the regulatory scope of consolidation.” 2 The CHF 6,545 million (CHF 2,618 million and CHF 3,927 million) reported in line 8 includes goodwill on investments in associates of CHF 360 million and DTL on goodwill of CHF 55 million. The CHF 323 million reported in line 9 includes DTL on intangibles assets of CHF 5 million. 3 The CHF 7,468 million (CHF 2,988 million and CHF 4,480 million) deferred tax assets recognized for tax loss carry-forwards reported in line 10 differ from the CHF 7,093 million deferred tax assets shown in the line “Deferred tax assets” in Table 29 because the latter figure is shown after the offset of deferred tax liabilities for cash flow hedge gains (CHF 350 million) and other temporary differences, which are adjusted out in line 11 and other lines of this table respectively. 4 The CHF 11,242 million in the line 46 includes CHF 10,330 million low-trigger loss- absorbing tier 2 capital recognized in line “Debt issue” in table 29, which is shown net of CHF 4 million investments in own tier 2 instruments reported in the line 52 of this table and high-trigger loss-absorbing capital of CHF 912 million reported in line 58. 5 CHF 6,154 million and CHF 912 million reported in line 32 and 58 respectively of this report, includes the following positions: CHF 2,837 million and CHF 2,326 million recog- nized in the line “Debt issued” in table 29, CHF 1,134 million DCCP recognized in the line “Other liabilities” in table 29 and CHF 769 million recognized as a DCCP-related charge for regulatory capital purposes in the 6 The CHF 2,598 million (CHF 702 million and CHF 1,896 million) deferred tax assets arising from temporary differences in line 20 differ from the CHF 5,742 million deferred line 26b “Other deductions” of this table. tax assets on temporary differences shown in the line “Deferred tax assets” in Table 29 as the former relates only to the amount above the 10% threshold. 906 G-SIB indicators The Financial Stability Board (FSB) determined that UBS is a global systemically important bank (G-SIB), using an indicator-based methodology adopted by the Basel Committee on Banking Super- vision (BCBS). Based on published indicators, G-SIB are subject to additional CET1 capital buffer requirements in the range from 1.0% to 3.5%. These requirements will be phased in from 1 Janu- ary 2016 to 31 December 2018 and become fully effective on 1 January 2019. In November 2015, the FSB determined that, based on the year-end 2014 indicators, the requirement for UBS Group is 1.0%. As our Swiss SRB Basel III capital requirements exceed the BCBS requirements including the G-SIB buffer, UBS is not affected by the above. Banks that qualify as G-SIBs are required to disclose, as defined by the BCBS, the 12 indicators for assessing the systemic impor- tance of G-SIBs. These 12 indicators are used for the G-SIB score calculation and cover the five categories size, cross-jurisdictional activity, inter-connectedness, substitutability / financial institution infrastructure and complexity. Our G-SIB indicators per 31 December 2015 will be available online by the end of April 2016. ➔ Refer to “Pillar 3, SEC filings & other disclosures” at www.ubs. com/investors for more information 907 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures required under SEC regulations UBS AG consolidated supplemental disclosures required under SEC regulations A – Introduction The following pages contain supplemental UBS AG disclosures that are required under SEC regulations. UBS AG’s consolidated financial statements have been prepared in accordance with Inter- national Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and are denomi- nated in Swiss francs (CHF), the reporting currency of UBS AG. 908 B – Selected financial data The tables below provide information concerning the noon pur- chase rate for the Swiss franc, expressed in United States dol- lars, or USD, per one Swiss franc. The noon purchase rate is the rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. On 29 February 2016, the noon purchase rate was 1.0040 USD per 1 CHF. Year ended 31 December 2011 2012 2013 2014 2015 Month September 2015 October 2015 November 2015 December 2015 January 2016 February 2016 1 The average of the noon purchase rates on the last business day of each full month during the relevant period. Average rate (USD per 1 CHF)1 1.1398 1.0724 1.0826 1.0893 1.0368 At period end 1.0668 1.0923 1.1231 1.0066 0.9983 High 1.3706 1.1174 1.1292 1.1478 1.1781 High 1.0401 1.0539 1.0149 1.0180 1.0028 1.0303 Low 1.0251 1.0043 1.0190 1.0066 0.9704 Low 1.0225 1.0086 0.9704 0.9713 0.9779 0.9802 909 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures required under SEC regulations Key figures CHF million, except where indicated 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 As of or for the year ended Results Operating income Operating expenses Operating profit / (loss) from continuing operations before tax Net profit / (loss) attributable to UBS AG shareholders Key performance indicators1 Profitability Return on tangible equity (%) Return on assets, gross (%) Cost / income ratio (%) Growth Net profit growth (%) Net new money growth for combined wealth management businesses (%) Resources Common equity tier 1 capital ratio (%, fully applied)2 BIS tier 1 capital ratio, Basel 2.5 (%) BIS total capital ratio, Basel 2.5 (%) Swiss SRB leverage ratio (phase-in, %) Additional information Profitability Return on equity (RoE) (%) Return on risk-weighted assets, gross (%)3 Resources Total assets Equity attributable to UBS AG shareholders Common equity tier 1 capital (fully applied)2 Common equity tier 1 capital (phase-in)2 Risk-weighted assets (fully applied)2 Risk-weighted assets (phase-in)2 Common equity tier 1 capital ratio (%, phase-in)2 Total capital ratio (%) (fully applied)2 Total capital ratio (%) (phase-in)2 Swiss SRB leverage ratio (fully applied, %) Swiss SRB leverage ratio denominator (fully applied)4 Swiss SRB leverage ratio denominator (phase-in)4 BIS tier 1 capital, Basel 2.5 BIS risk-weighted assets, Basel 2.5 Average equity of average assets (%) 30,605 25,198 5,407 6,235 13.5 3.1 82.0 78.0 2.2 15.4 28,026 25,557 2,469 3,502 8.2 2.8 90.9 10.4 2.5 14.2 27,732 24,461 3,272 3,172 8.0 2.5 88.0 3.4 12.8 5.7 5.4 4.7 11.7 14.1 7.0 12.4 6.7 11.4 25,423 27,216 (1,794) (2,480) 1.6 1.9 106.6 3.2 9.8 21.3 25.2 3.6 (5.1) 12.0 943,256 1,062,327 1,013,355 1,259,797 55,248 32,042 41,516 208,186 212,609 19.5 21.0 24.9 4.9 52,108 30,805 44,090 217,158 221,150 19.9 19.0 25.6 4.1 48,002 28,908 42,179 225,153 228,557 18.5 15.4 22.2 3.4 898,251 904,518 999,124 1,006,001 1,015,306 1,022,924 5.0 4.8 4.0 45,949 25,182 40,032 258,113 261,800 15.3 11.4 18.9 2.4 1,206,214 1,216,561 40,982 192,505 3.4 27,788 22,482 5,307 4,138 11.9 2.1 80.7 (44.5) 2.4 15.9 17.2 9.1 13.7 1,416,962 48,530 38,370 240,962 3.2 910 Key figures (continued) CHF million, except where indicated Other Invested assets (CHF billion)5 Personnel (full-time equivalents) Americas of which: USA Asia Pacific Europe, Middle East and Africa of which: United Kingdom of which: Rest of Europe of which: Middle East and Africa Switzerland Registered ordinary shares (number)6 Treasury shares (number)6 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 As of or for the year ended 2,689 58,131 20,816 19,897 7,348 8,730 5,373 3,181 176 21,238 2,734 60,155 20,951 19,715 7,385 10,254 5,425 4,663 166 21,564 2,390 60,205 21,317 20,037 7,116 10,052 5,595 4,303 153 21,720 2,230 62,628 21,995 20,833 7,426 10,829 6,459 4,202 167 22,378 2,088 64,820 22,924 21,746 7,690 11,019 6,674 4,182 162 23,188 3,858,408,466 3,844,560,913 3,842,002,069 3,835,250,233 3,832,121,899 0 2,115,255 73,800,252 87,879,601 84,955,551 1 For the definitions of our key performance indicators, refer to the “Measurement of performance” section of this report. 2 Based on the Basel III framework as applicable for Swiss systemically relevant banks (SRBs). Refer to the “Capital management” section of this report for more information. 3 Based on phase-in risk-weighted assets. 4 Calculated in accordance with Swiss SRB rules. From 31 December 2015 onward, the Swiss SRB leverage ratio denominator calculation is fully aligned with the BIS Basel III rules. Prior-period figures are calculated in accordance with former Swiss SRB rules and are therefore not fully comparable. Refer to the “Capital management” section of this report for more information. 5 Total UBS AG invested assets includes invested assets for Personal & Corporate Banking. 6 Refer to the “UBS shares” section of this report for more information. 911 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures 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 / (loss) before tax Tax expense / (benefit) Net profit / (loss) Net profit / (loss) attributable to preferred noteholders Net profit / (loss) attributable to non-controlling interests Net profit / (loss) attributable to UBS AG shareholders Cost / income ratio (%)1 Rates of return (%) Return on equity attributable to UBS AG shareholders Return on average equity Return on average assets 1 Operating expenses / operating income before credit loss expense. 31.12.15 13,178 (6,449) 6,729 (117) 6,612 17,184 5,696 1,112 30,605 25,198 5,407 (908) 6,314 77 3 6,235 82.0 11.7 11.7 0.6 For the year ended 31.12.14 31.12.13 13,194 (6,639) 6,555 (78) 6,477 17,076 3,841 632 28,026 25,557 2,469 (1,180) 3,649 142 5 3,502 90.9 7.0 7.0 0.3 13,137 (7,351) 5,786 (50) 5,736 16,287 5,130 580 27,732 24,461 3,272 (110) 3,381 204 5 3,172 88.0 6.7 6.7 0.3 31.12.12 15,968 (9,990) 5,978 (118) 5,860 15,396 3,526 641 25,423 27,216 (1,794) 461 (2,255) 220 5 (2,480) 106.6 (5.1) (5.0) (0.2) 31.12.11 17,969 (11,143) 6,826 (84) 6,742 15,236 4,343 1,467 27,788 22,482 5,307 901 4,406 268 4,138 80.7 9.1 9.1 0.3 912 Balance sheet data CHF million Assets Total 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 which may be sold or repledged by counterparties 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 AG shareholders Ratio of earnings to fixed charges 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 943,256 1,062,327 1,013,355 1,259,797 1,416,962 91,306 11,866 25,584 67,893 124,047 51,943 167,435 23,763 312,723 62,543 22,249 11,836 8,029 9,653 29,137 162,430 38,282 62,995 104,073 13,334 24,063 68,414 138,156 56,018 256,978 30,979 315,984 57,159 23,069 10,492 9,180 11,818 27,958 80,879 13,874 27,496 91,563 122,848 42,449 254,084 26,548 286,959 59,525 20,228 12,862 9,491 13,811 26,609 66,383 21,220 37,372 130,941 160,564 44,698 418,957 30,413 279,901 66,230 17,244 23,024 9,203 38,557 34,247 254,101 248,079 395,260 42,372 75,297 44,507 69,901 71,148 91,901 373,459 104,837 66,523 45,949 40,638 23,218 58,763 213,501 181,525 39,936 486,584 41,322 266,604 53,174 15,492 30,201 8,136 102,429 39,480 473,400 67,114 88,982 342,409 140,617 69,633 48,530 402,522 410,979 390,825 82,359 74,606 55,248 91,207 70,392 52,108 81,586 62,777 48,002 The following table sets forth UBS AG’s ratio of earnings to fixed charges on an IFRS basis for the periods indicated. The ratios are calculated based on earnings from continuing operations. Ratios of earnings to fixed charges and preferred share dividends are not presented as there were no mandatory preferred share dividends in any of the periods indicated. For the year ended 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 1.76 1.33 1.41 0.83 1.42 913 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures required under SEC regulations C – Information on the company Property, plant and equipment As of 31 December 2015, UBS AG operated about 856 business and banking locations worldwide, of which approximately 41% were in Switzerland, 41% in the Americas, 11% in the rest of Europe, Middle East and Africa and 7% in Asia Pacific. Of the business and banking locations in Switzerland, 33% were owned directly by UBS AG, with the remainder, along with most of UBS AG’s offices outside Switzerland, being held under commercial leases. These premises are subject to continuous maintenance and upgrading and are considered suitable and adequate for cur- rent and anticipated operations. 914 D – Information required by industry guide 3 Selected statistical information The following tables set forth select statistical information regard- ing the UBS AG’s banking operations extracted from the financial statements. Unless otherwise indicated, average balances for the years ended 31 December 2015, 31 December 2014 and 31 December 2013 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. 915 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures 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 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 31.12.15 31.12.14 31.12.13 Average balance Interest income Average yield (%) Average balance Interest income Average yield (%) Average balance Interest income Average yield (%) 3,525 10,822 5 60 6,415 138,961 5,016 121,558 0 141 6141 159 2,912 0 0.1 0.6 0.2 0.4 3.2 2.4 3,269 16,692 7,374 133,640 5,105 118,038 0 8 95 4 463 209 2,988 0 0.2 0.6 0.1 0.3 4.1 2.5 3,051 16,420 11,479 162,479 5,189 119,894 0 8 82 10 575 177 2,736 0 121,558 2,912 2.4 118,038 2,988 2.5 119,894 2,736 249 29,469 377 4,689 3 59 1 193 194,032 120,664 3,646 2,510 20,037 43,131 0 43,131 0 12,749 711,695 63 328 0 328 0 526 11,093 1,630 4551 13,178 1.2 0.2 0.3 4.1 1.9 2.1 0.3 0.8 0.8 4.1 1.6 113 27,920 672 4,969 1 54 1 207 193,026 109,137 3,780 2,520 2,006 52,642 0 52,642 0 12,024 8 307 0 307 0 477 686,626 11,123 1,613 458 0.9 0.2 0.1 4.2 2.0 2.3 0.4 0.6 0.6 4.0 1.6 155 29,244 414 10,113 0 70 0 364 189,969 100,027 3,974 2,420 1,980 60,093 0 60,093 0 8,953 11 310 0 310 0 430 719,460 11,168 1,528 441 0.3 0.5 0.1 0.4 3.4 2.3 2.3 0.0 0.2 0.0 3.6 2.1 2.4 0.6 0.5 0.5 4.8 1.6 Interest income on off-balance sheet securities and other Interest income and average interest-earning assets 711,695 1.9 686,626 13,194 1.9 719,460 13,137 1.8 Non-interest-earning assets Positive replacement values Fixed assets Other Total average assets 213,913 7,149 126,820 1,059,576 232,739 6,383 127,812 1,053,561 337,781 6,054 115,921 1,179,216 916 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 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 and other 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 31.12.15 31.12.14 31.12.13 Average balance Interest expense Average interest rate (%) Average balance Interest expense Average interest rate (%) Average balance Interest expense Average interest rate (%) 9,571 2,480 3,413 71,129 11 11 22 4422 569 5 31,426 1,665 993 41,499 2,057 65,446 126,048 96,848 15,930 238,825 159,027 873 26,425 15,182 47,941 0 39,968 756,824 1 57 6 724 (19) 70 261 312 312 4 107 471 1,717 0 58 5,904 5462 0.1 0.4 0.1 0.6 0.9 5.3 0.1 0.1 0.3 1.1 0.0 0.1 1.6 0.1 0.2 0.5 0.4 3.1 3.6 0.1 0.8 8,932 3,691 5,328 58,639 16 14 1 338 638 14 28,737 1,789 612 42,595 1,747 68,928 130,703 97,825 7,593 236,121 159,170 1,270 26,734 14,937 43,264 0 35,503 736,847 0 45 13 906 43 172 12 227 340 2 101 447 1,833 0 58 6,145 495 0.2 0.4 0.0 0.6 2.2 6.2 0.0 0.1 0.7 1.3 0.0 0.2 0.2 0.1 0.2 0.2 0.4 3.0 4.2 0.2 0.8 13,859 4,073 5,344 65,088 37 24 2 344 628 12 29,874 1,834 540 58,693 1,207 79,182 126,953 95,937 4,379 227,268 155,312 1,703 33,363 11,823 50,053 0 35,706 773,717 0 65 9 1,188 60 246 15 321 373 3 170 281 2,131 0 67 6,863 489 0.3 0.6 0.0 0.5 1.9 6.1 0.0 0.1 0.7 1.5 0.0 0.3 0.3 0.1 0.2 0.2 0.5 2.4 4.3 0.2 0.9 756,824 6,449 0.9 736,847 6,640 0.9 773,717 7,351 1.0 210,551 37,041 1,004,416 55,160 1,059,576 229,286 35,359 1,001,493 52,068 1,053,561 321,681 34,188 1,129,586 49,630 1,179,216 6,729 6,555 5,786 0.9 1.0 0.8 1 Includes negative interest, including fees, on securities lent and repurchase agreements. 2 Includes negative interest, including fees, on securities borrowed and reverse repurchase agreements. 917 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures required under SEC regulations Average balances and interest rates (continued) The percentage of total average interest-earning assets attribut- able to foreign activities was 68% for 2015 (69% for 2014 and 71% for 2013). The percentage of total average interest-bearing liabilities attributable to foreign activities was 64% for 2015 (63% for 2014 and 66% for 2013). All assets and liabilities are trans- lated into CHF at uniform month-end rates. Interest income and expense are translated at monthly average rates. Average rates earned and paid on assets and liabilities can change from period to period based on the changes in interest rates in general, but are also affected by changes in the currency mix included in the assets and liabilities. This is especially true for foreign assets and liabilities. Tax-exempt income is not recorded on a tax-equivalent basis. For all three years presented, tax-exempt income is considered to be insignificant and the impact from such income is therefore negligible. 918 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 income and expense due to changes in volume and interest rates for the year ended 31 December 2015 compared with the year ended 31 December 2014, and for the year ended 31 December 2014 compared with the year ended 31 December 2013. Volume and rate variances have been calculated on movements in aver- age balances and changes in interest rates. Changes due to a combination of volume and rates have been allocated proportion- ally. 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 and other Total interest income 2015 compared with 2014 2014 compared with 2013 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 1 (35) (1) 16 (4) 88 0 88 1 3 0 (12) 20 265 72 (57) 0 (57) 0 29 89 297 386 (5) 1 11 135 (46) (164) 0 (164) 1 2 0 (3) (153) (275) (17) 78 0 78 0 19 (209) (207) (416) (4) (34) 10 151 (50) (76) 0 (76) 2 5 0 (15) (133) (10) 55 21 0 21 0 48 (120) 90 (30) 17 (4) (17) 1 1 (4) (115) (3) (43) 0 (43) 0 (3) 0 (185) 64 219 0 (37) 0 (37) 0 147 58 (16) 42 (1) 11 (2) 4 35 295 0 295 1 (12) 1 28 (258) (120) (3) 34 0 34 0 (99) (228) 140 (87) 0 12 (6) (111) 32 252 0 252 0 (15) 1 (157) (194) 99 (3) (3) 0 (3) 0 48 (170) 124 (45) 86 17 57 919 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures required under SEC regulations Analysis of changes in interest income and expense (continued) 2015 compared with 2014 2014 compared with 2013 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 1 (5) 0 75 (2) 167 0 (1) 2 (45) 0 (2) 17 15 0 (1) (1) 7 196 0 9 22 395 417 (6) 2 0 30 (8) (291) 1 13 (9) (137) (62) (100) 232 70 (29) 3 7 18 (312) 0 (9) 68 (727) (658) (5) (3) 0 105 (10) (124) 1 12 (7) (182) (62) (102) 249 85 (29) 2 6 25 (116) 0 0 90 (332) (241) 51 (190) (15) (2) 0 (32) 0 (69) 0 (16) 4 (154) 0 6 10 16 8 (1) (33) 75 (292) 0 0 79 (590) (511) (6) (7) 0 26 2 24 0 (4) 0 (128) (18) (80) (13) (111) (41) (1) (36) 91 (6) 0 (9) (25) (182) (206) (21) (9) 0 (6) 2 (45) 0 (20) 4 (282) (18) (74) (3) (95) (33) (2) (69) 166 (298) 0 (9) 54 (772) (718) 6 (712) 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 expense on interest-bearing liabilities Interest expense on off-balance sheet securities and other Total interest expense 920 Deposits The following table analyzes average deposits and average rates on each deposit category listed below for the years ended 31 December 2015, 2014 and 2013. 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 72,544 million, CHF 76,391 million and CHF 76,246 million at 31 December 2015, 31 December 2014 and 31 December 2013, respectively. CHF million, except where indicated Banks Domestic offices Demand deposits Time deposits Total domestic offices Foreign offices Interest-bearing deposits Total due to banks1 Customer accounts Domestic offices Demand deposits Savings deposits Time deposits Total domestic offices Foreign offices Demand deposits Time and savings deposits Total foreign offices Total due to customers 31.12.15 31.12.14 31.12.13 Average deposits Average rate (%) Average deposits Average rate (%) Average deposits Average rate (%) 5,261 4,310 9,571 2,437 12,007 126,048 96,848 15,930 238,825 52,406 106,622 159,027 397,853 (0.2) 0.5 0.1 0.4 0.2 0.0 0.1 0.1 0.1 0.0 0.2 0.2 0.2 5,149 3,783 8,932 3,691 12,624 130,703 97,825 7,593 236,121 49,098 110,072 159,170 395,292 (0.1) 0.6 0.2 0.4 0.2 0.0 0.2 0.2 0.1 0.0 0.3 0.2 0.1 8,513 5,346 13,859 3,763 17,622 126,953 95,937 4,379 227,268 43,954 111,358 155,312 382,580 (0.1) 0.8 0.3 0.6 0.3 0.0 0.3 0.3 0.1 0.0 0.3 0.2 0.2 1 Due to banks is considered to represent short-term borrowings to the extent that the total Due to banks exceeds total Due from banks, without differentiating between domestic and foreign offices. The remainder of total Due to banks is considered to represent deposits for the purpose of this disclosure. As of 31 December 2015, the maturity of time deposits was as follows: CHF million Within 3 months 3 to 6 months 6 to 12 months 1 to 5 years Over 5 years Total time deposits Domestic 16,145 887 314 238 5,242 22,826 Foreign 39,735 1,982 812 2,399 3,965 48,893 921 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures required under SEC regulations Short-term borrowings The table below 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 2015, 2014 and 2013. CHF million, except where indicated 31.12.15 31.12.14 31.12.13 31.12.15 Short-term debt Due to banks1 31.12.14 31.12.13 Repurchase agreements2 31.12.14 31.12.15 31.12.13 Period-end balance Average balance Maximum month-end balance Average interest rate during the period (%) Average interest rate at period-end (%) 21,215 27,298 31,911 0.4 0.5 27,363 28,004 33,674 0.4 0.2 27,633 35,067 44,789 0.5 0.4 0 44 570 0.2 0.0 0 0 0 0.0 0.0 0 309 1,370 0.3 0.0 71,775 65,118 80,372 0.3 0.2 54,625 52,865 65,033 0.2 0.2 41,160 61,251 76,014 0.2 0.2 1 Amounts due to banks are presented net of amounts due from banks in order 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-sale1, 2 CHF million, except percentages Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Within 1 year 1 up to 5 years 5 to 10 years Over 10 years Total 31 December 2015 Swiss national government and agencies US Treasury and agencies Foreign governments and official institutions Corporate debt securities Mortgage-backed securities Total fair value3 (0.83) 0.39 0.21 0.42 701 11,171 13,966 6,062 31,900 6,856 11,049 8,118 0 26,023 1.29 0.64 0.87 5.20 1 4.00 1.33 1.27 104 264 369 3,396 3,396 1.74 CHF million, except percentages Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Within 1 year 1 up to 5 years 5 to 10 years Over 10 years 31 December 2014 Swiss national government and agencies US Treasury and agencies Foreign governments and official institutions Corporate debt securities Mortgage-backed securities Total fair value3 0.48 0.23 0.31 0.45 41 4,873 14,072 2,089 21,075 8,317 13,758 8,489 0 30,563 1.02 0.74 0.84 4.82 1 243 280 0 525 4.00 1.25 1.33 4.42 4,029 4,029 1.34 CHF million, except percentages Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Within 1 year 1 up to 5 years 5 to 10 years Over 10 years 31 December 2013 Swiss national government and agencies US Treasury and agencies Foreign governments and official institutions Corporate debt securities Mortgage-backed securities Total fair value3 0.17 0.27 0.52 849 25,483 743 27,075 0.46 0.36 0.55 0.80 43 13,010 7,277 6,873 27,202 1 3 63 178 0 245 3.55 3.30 0.98 0.85 4.71 19 1 4,017 4,037 12.16 6.60 2.09 702 18,027 25,119 14,443 3,396 61,688 Total 43 13,189 28,072 10,858 4,029 56,192 Total 44 13,861 32,842 7,795 4,017 58,559 1 Debt instruments without fixed maturities are not disclosed in this table. 2 Average yields are calculated on an amortized cost basis. 3 Includes investments in debt instruments as of 31 December 2015 issued by US government and government agencies of CHF 21,424 million (31 December 2014: CHF 17,219 million, 31 December 2013: CHF 17,876 million), the German government of CHF 8,583 million (31 December 2014: CHF 10,145 million, 31 December 2013: CHF 6,733 million), the French government of CHF 3,566 million (31 December 2014: CHF 5,351 million, 31 December 2013: CHF 5,601 million) and the UK government of CHF 2,782 million (31 December 2014: CHF 2,348 million, 31 December 2013: CHF 8,089 million). 922 Due from banks and loans (gross) UBS AG’s lending portfolio is widely diversified across industry sectors. CHF 186.7 billion (57.4% of the total) consists of loans to thousands of private households, predominantly in Switzerland, and mostly secured by mortgages, financial collateral or other assets. Exposure to banks and financial institutions amounted to CHF 74.3 billion (22.9% of the total). Exposure to banks includes money market deposits with highly rated institutions. Excluding banks and financial institutions, the largest industry sector expo- sure as of 31 December 2015 was CHF 23.2 billion (7.1% of the total) to Services. For further discussion of the loan portfolio, refer to the “Risk management and control” section of this report. The table below illustrates the diversification of the loan port- folio among industry sectors as of 31 December 2015, 2014, 2013, 2012 and 2011. The industry categories presented are con- sistent with the classification of loans for reporting to the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank. Loans designated at fair value and loans held in the trading portfolio are excluded from the tables below. CHF million Domestic Banks Chemicals Construction Electricity, gas and water supply Financial services Food and beverages Hotels and restaurants Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other Total domestic Foreign Banks Chemicals Construction Electricity, gas and water supply Financial services Food and beverages Hotels and restaurants Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other Total foreign Total gross 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 772 308 1,520 234 6,061 208 1,647 2,012 23 123,967 1,609 13,707 3,687 5,250 1,876 697 1,157 392 1,418 260 6,693 206 1,696 2,319 34 125,461 2,098 14,549 4,169 4,794 1,964 732 736 382 1,429 255 4,643 241 1,817 2,512 36 124,569 2,415 14,511 3,784 5,330 2,013 752 532 300 1,360 351 4,265 284 1,745 2,976 45 123,167 2,708 13,682 4,345 5,862 1,728 830 566 377 1,292 260 4,257 276 1,831 3,252 35 120,671 2,992 13,169 4,433 5,770 1,414 769 163,578 167,940 165,426 164,180 161,364 11,097 12,190 113 635 706 56,414 65 148 1,958 1,466 62,695 1,272 2,213 1,975 17,924 2,858 163 75 645 1,100 57,645 56 120 1,961 1,345 60,466 1,413 2,517 1,924 17,470 3,017 142 13,201 178 1,132 1,337 43,125 63 181 1,850 1,175 49,920 1,322 2,995 1,791 14,733 2,809 361 20,711 254 1,731 1,205 40,650 45 347 1,828 1,279 46,458 4,319 2,721 2,063 10,735 3,021 301 22,669 392 750 746 38,802 49 372 1,955 1,979 41,045 5,459 2,158 2,044 8,529 2,068 281 161,703 325,281 162,086 330,027 136,174 301,601 137,669 301,849 129,300 290,664 923 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures required under SEC regulations Due from banks and loans (gross) (continued) The table below analyzes UBS AG’s mortgage portfolio by client domicile and type of mortgage as of 31 December 2015, 2014, 2013, 2012 and 2011. 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 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 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 144,230 18,887 163,117 141,608 21,509 163,117 146,637 18,112 164,748 142,380 22,368 164,748 144,852 15,235 160,086 137,370 22,716 160,086 142,143 12,311 154,454 132,033 22,421 154,454 138,204 8,818 147,022 125,775 21,247 147,022 Within 1 year 1 to 5 years Over 5 years Total 772 60,404 15,196 76,373 11,038 5,170 109,297 125,505 201,878 0 49,062 2,555 51,617 34 4,615 18,387 23,036 74,654 0 34,764 824 35,588 24 9,102 4,035 13,162 48,750 772 144,230 18,576 163,578 11,097 18,887 131,719 161,703 325,281 As of 31 December 2015, the total amounts of Due from banks and Loans granted at fixed- and floating-rates were as follows: CHF million Fixed-rate loans Adjustable or floating-rate loans Total Within 1 year 1 to 5 years Over 5 years 136,297 65,581 201,878 59,052 15,601 74,654 38,929 9,821 48,750 Total 234,278 91,003 325,281 924 Impaired and non-performing loans A loan (included in Due from banks or Loans) is classified as non- performing: (i) when the payment of interest, principal or fees is overdue by more than 90 days, (ii) when insolvency proceedings have commenced or (iii) when obligations have been restructured on preferential terms. For IFRS reporting purposes, the definition of impaired loans is more comprehensive, covering both non-per- forming loans and other situations where objective evidence indi- cates that UBS AG may be unable to collect all amounts due. Refer to “Impaired loans” in the “Risk management and control” section of this report for comprehensive information on UBS AG’s impaired loans, of which non-performing loans are a component. Also, refer to Note 1 to the consolidated financial statements for more information on the various risk factors that are considered to be indicative of impairment. The table below provides an analysis of the UBS AG’s non- performing loans. 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 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 1,174 455 1,630 1,293 309 1,602 1,113 469 1,582 1,121 395 1,516 1,199 329 1,529 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 6 7 26 5 9 6 22 7 6 4 23 7 8 3 28 6 10 9 29 6 UBS AG 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. Instead, specific loan allowances are established as necessary. Unrecognized inter- est related to restructured loans was not material to the results of operations in 2015, 2014, 2013, 2012 or 2011. 925 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures required under SEC regulations 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. The following tables list those countries for which cross-border outstandings exceeded 0.75% of total IFRS assets at 31 December 2015, 2014 and 2013. As of 31 December 2015, there were no outstandings that exceeded 0.75% of total IFRS assets in any coun- try currently facing debt restructuring or liquidity problems that UBS AG expects would materially impact the country’s ability to service its obligations. Aggregate country risk exposures are monitored and reported on an ongoing basis. The internal risk view is not directly comparable to the cross-border outstandings in the table 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 “Risk management and control” section of this report. CHF million USA United Kingdom Japan France Hong Kong CHF million USA United Kingdom Japan France CHF million USA United Kingdom Japan France Germany Private sector Public sector outstandings % of total assets 31.12.15 Total 90,201 56,282 11,275 3,758 7,692 27,807 9,560 5,054 681 121 31.12.14 Private sector Public sector 84,629 47,003 16,906 6,006 59,103 13,928 5,422 67 31.12.13 Private sector Public sector 76,047 39,528 17,009 7,478 2,664 51,287 8,583 4,765 56 1,900 126,641 70,340 19,794 8,482 8,157 Total outstandings 153,019 67,220 24,107 10,025 Total outstandings 149,327 58,749 22,794 12,273 8,478 13.4 7.5 2.1 0.9 0.9 % of total assets 14.4 6.3 2.3 0.9 % of total assets 14.7 5.8 2.2 1.2 0.8 Guarantees and Commitments1 42,286 6,448 136 5,029 79 Guarantees and Commitments1 34,967 7,660 1,771 5,037 Guarantees and Commitments1 38,778 8,494 289 6,997 2,062 Banks 8,633 4,498 3,466 4,043 344 Banks 9,287 6,288 1,780 3,952 Banks 21,993 10,638 1,019 4,739 3,914 1 Includes forward starting transactions (reverse repurchase agreements and securities borrowing agreements). 926 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 AG writes off loans against allowances only on final set- tlement of bankruptcy proceedings, the sale of the underlying assets and / or in the case of debt forgiveness. Under Swiss law, a creditor can continue to collect from a debtor who has emerged from bankruptcy, unless the debt has been forgiven through a formal agreement 31.12.15 31.12.14 31.12.13 31.12.12 735 750 794 938 31.12.11 1,287 CHF million Balance at beginning of year Domestic Write-offs Construction Electricity, gas and water supply Financial services Hotels and restaurants Manufacturing Private households Real estate and rentals Retail and wholesale Services Transport, storage and communications Total gross domestic write-offs Foreign Write-offs Banks 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 communications Total gross foreign write-offs Total usage of provisions Total write-offs / usage of provisions Recoveries Domestic Foreign Total recoveries Total net write-offs / usage of provisions Increase / (decrease) in specific allowances and provisions recognized in the income statement Increase / (decrease) in collective loan loss allowances recognized in the income statement Foreign currency translation Other Balance at end of year1 1 Includes allowances for cash collateral on securities borrowed. (116) (124) 117 0 (11) 2 727 89 (11) 21 11 735 (2) (1) (3) 0 (9) (35) 0 (47) (3) (9) (110) (9) 0 0 (3) 0 (1) (12) 0 0 (19) (10) 0 (54) 0 (164) 41 7 48 (1) 0 0 0 (3) (39) (1) (28) (15) (3) (90) (15) (1) (1) (12) (7) 0 (6) 0 (2) (2) (14) (1) (63) (1) (154) 29 0 29 (2) 0 (6) 0 (4) (38) 0 (11) (4) (1) (67) (1) (6) 0 (44) 0 0 (6) (1) (1) (1) 0 0 (61) 0 (128) 35 10 45 (83) 144 (93) (9) (3) 750 (1) (6) 0 (1) (20) (45) (2) (21) (6) (11) (8) 0 (17) 0 (31) (59) (3) (37) (21) (6) (112) (183) 0 0 0 (106) 0 0 (15) (54) 0 0 (19) (5) (201) 0 (313) 43 21 63 (8) 0 0 (39) 0 0 (72) (175) (7) 0 (1) 0 (303) (14) (501) 50 1 51 (250) (450) 133 (15) (8) (3) 794 0 84 (1) 18 938 927 Additional regulatory information Additional regulatory information UBS AG consolidated supplemental disclosures required under SEC regulations Allocation of the allowances and provisions for credit losses The following table provides an analysis of the allocation of the allowances and provisions for credit loss by industry sector and geographic location at 31 December 2015, 2014, 2013, 2012 and 2011. 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 Chemicals Construction Electricity, gas and water supply Financial services Food and beverages Hotels and restaurants Manufacturing Private households Real estate and rentals Retail and wholesale Services Transport, storage and communication Other1 Total domestic specific allowances Foreign Banks2 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 Total foreign specific allowances Collective loan loss allowances Provisions for loan commitments and guarantees Total allowances and provisions for credit losses3 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 3 0 13 2 17 3 13 77 47 13 78 23 32 0 321 0 0 1 0 90 13 46 61 14 1 80 19 40 365 6 35 727 2 0 14 1 18 4 16 72 52 18 123 25 29 0 374 10 0 1 0 35 9 11 65 14 1 112 29 43 330 8 23 735 3 1 16 1 16 2 12 57 54 9 152 23 19 0 365 13 0 17 1 37 18 2 66 16 2 77 35 19 303 20 61 750 3 0 16 0 21 3 9 44 60 10 123 24 12 1 326 19 1 20 1 37 23 0 45 39 4 39 35 27 290 114 64 794 1 0 15 9 19 2 6 65 77 14 131 24 16 1 379 16 8 6 1 96 23 0 60 33 10 15 28 39 335 131 93 938 1 Includes mining and public authorities. 2 Counterparty allowances only. 3 Includes allowances for cash collateral on securities borrowed. 928 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. In % Domestic Banks Chemicals Construction Electricity, gas and water supply Financial services Food and beverages Hotels and restaurants Manufacturing Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other1 Total domestic Foreign Banks Chemicals Construction Electricity, gas and water supply Financial services Hotels and restaurants Manufacturing Mining Private households Public authorities Real estate and rentals Retail and wholesale Services Transport, storage and communication Other2 Total foreign Total gross 1 Includes mining 2 Includes food and beverages 31.12.15 31.12.14 31.12.13 31.12.12 31.12.11 0.2 0.1 0.5 0.1 1.9 0.1 0.5 0.6 38.1 0.5 4.2 1.1 1.6 0.6 0.2 50.3 3.4 0.0 0.2 0.2 17.3 0.0 0.6 0.5 19.3 0.4 0.7 0.6 5.5 0.9 0.1 0.4 0.1 0.4 0.1 2.0 0.1 0.5 0.7 38.0 0.6 4.4 1.3 1.5 0.6 0.2 50.9 3.7 0.0 0.2 0.3 17.5 0.0 0.6 0.4 18.3 0.4 0.8 0.6 5.3 0.9 0.0 0.2 0.1 0.5 0.1 1.5 0.1 0.6 0.8 41.3 0.8 4.8 1.3 1.8 0.7 0.1 54.8 4.4 0.1 0.4 0.4 14.3 0.1 0.6 0.4 16.6 0.4 1.0 0.6 4.9 0.9 0.2 0.2 0.1 0.5 0.1 1.4 0.1 0.6 1.0 40.8 0.9 4.5 1.4 1.9 0.6 0.3 54.4 6.9 0.1 0.6 0.4 13.5 0.1 0.6 0.4 15.4 1.4 0.9 0.7 3.6 1.0 0.1 0.2 0.1 0.4 0.1 1.5 0.1 0.6 1.1 41.5 1.0 4.5 1.5 2.0 0.5 0.3 55.5 7.8 0.1 0.3 0.3 13.3 0.1 0.7 0.7 14.1 1.9 0.7 0.7 2.9 0.7 0.1 49.7 100.0 49.1 100.0 45.2 100.0 45.6 100.0 44.5 100.0 929 Additional regulatory information Appendix Abbreviations frequently used in our financial reports asset-backed security annual general meeting of shareholders alternative investment vehicle advanced measurement approach additional tier 1 Basel Committee on Banking Supervision Bank for international Settlements Board of Directors Corporate Center Comprehensive Capital Analysis and Review credit conversion factors central counterparty collateralized debt obligation constant default rate credit default swap Commodity Exchange Act Chief Executive Officer common equity tier 1 Chief Financial Officer Swiss franc credit-linked note collateralized loan obligation commercial mortgage backed security credit valuation adjustment D DBO DCCP DOJ DTA DVA E EAD EC ECB EIR EMEA EOP EPS ETD ETF EU EUR EURIBOR F FCA FCT FDIC FINMA FRA FSA FSB FTD FTP FVA FX defined benefit obligation Deferred Contingent Capital Plan Department of Justice deferred tax asset debit valuation adjustment G GAAP GBP GEB GIIPS generally accepted accounting principles British pound Group Executive Board Greece, Italy, Ireland, Portugal and Spain Group ALM Group Asset and Liability Management exposure at default European Commission European Central Bank effective interest rate Europe, Middle East and Africa Equity Ownership Plan earnings per share exchange-traded derivatives exchange-traded fund European Union euro Euro Interbank Offered Rate UK Financial Conduct Authority foreign currency translation Federal Deposit Insurance Corporation Swiss Financial Market Supervisory Authority forward rate agreement UK Financial Services Authority Financial Stability Board first to default funds transfer price funding valuation adjustment foreign exchange H HQLA I IAS IASB IFRS IRB IRC ISDA K KPI L LAC LAS LCR LGD LIBOR LRD LTV M MTN high-quality liquid assets International Accounting Standards International Accounting Standards Board International Financial Reporting Standards internal ratings-based incremental risk charge International Swaps and Derivatives Association key performance indicator loss-absorbing capital liquidity-adjusted stress liquidity coverage ratio loss given default London Interbank Offered Rate leverage ratio denominator loan-to-value medium-term note A ABS AGM AIV AMA AT1 B BCBS BIS BoD C CC CCAR CCF CCP CDO CDR CDS CEA CEO CET1 CFO CHF CLN CLO CMBS CVA 930 Abbreviations frequently used in our financial reports (continued) N NAV NRV NPA NSFR O OCI OTC P PRA PRV R RLN RMBS net asset value negative replacement values non-prosecution agreement net stable funding ratio other comprehensive income over-the-counter UK Prudential Regulation Authority positive replacement values reference-linked note residential mortgage- backed security RoAE RoE RoTE RV RWA S SE SEC SEEOP SFT SNB SRB SRM SVaR T TBTF TLAC TRS U USD V VaR return on attributed equity return on equity return on tangible equity replacement value risk-weighted assets structured entity US Securities and Exchange Commission Senior Executive Equity Ownership Plan securities financing transaction Swiss National Bank systemically relevant bank Single Resolution Mechanism stressed value-at-risk too big to fail total loss-absorbing capacity total return swap US dollar value-at-risk 931 Information sources Reporting publications Other information Annual publications: Annual report (SAP no. 80531): Published in both English and German, this single volume report provides a description of our Group strategy and performance; the strategy and performance of the business divisions and the Corporate Center; a description of risk, treasury, capital management, cor- porate governance, responsibility and senior management com- pensation, including compensation for the Board of Directors and the Group Executive Board members; 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 our compensation framework and provides information on compensation for the Board of Directors and the Group Executive Board members. It is published in English and German. Quarterly publications: Letter to shareholders: The letter is pub- lished for the first, second and third quarter and provides an update from executive management on our strategy and perfor- mance. The letter is published in English, German, French and Italian. Financial report (SAP no. 80834) and results materials: The quarterly financial report, published for the first, second and third quarter, and the fourth-quarter earnings release and financial supplement provide an update on our strategy and performance for the respective quarter. They are mainly available in English. How to order reports: The annual and quarterly publications are available in PDF on the internet at www.ubs.com/investors in the “Financial information” section. Printed copies can be ordered from the same website in the “Investor services” section, which can be accessed via the link 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. Website: The “Investor Relations” website at www.ubs.com/ investors provides the following information on UBS: news releases, financial information, including results-related filings with the US Securities and Exchange Commission, corporate infor- mation, 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. Result presentations: Our quarterly results presentations are webcast live. A playback of most presentations is downloadable at www.ubs.com/presentations. Messaging service / UBS news alert: On the www.ubs.com/ newsalerts website, it is possible to subscribe to receive news alerts about UBS via SMS or email. Messages are sent in English, German, French or Italian and it is possible to state theme prefer- ences for the alerts received. Form 20-F and other submissions to the US Securities and Exchange Commission: We file periodic reports and submit other information about UBS to the US Securities and Exchange Commission (SEC). Principal among these filings is the annual report on Form 20-F, filed pursuant to the US Securities Exchange Act of 1934. The filing of Form 20-F is structured as a “wrap- around” document. Most sections of the filing can be satisfied by referring to parts of the annual report. However, there is a small amount of additional information in Form 20-F which is not pre- sented elsewhere, and is particularly targeted at readers in the US. Readers are encouraged to refer to this additional disclosure. Any document that we file with the SEC is available to read and copy on the SEC’s website, www.sec.gov, or at the SEC’s public refer- ence room at 100 F Street, N.E., Room 1580, Washington, DC, 20549. Please call the SEC by dialing +1–800-SEC-0330 for further information on the operation of its public reference room. Please visit www.ubs.com/investors for more information. 933 Appendix 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: (i) the degree to which UBS is successful in executing its announced strategic plans, including its cost reduction and efficiency initiatives and its targets for risk-weighted assets (RWA) and leverage ratio denominator (LRD), and the degree to which UBS is successful in implement- ing changes to its wealth management businesses to meet changing market, regulatory and other conditions; (ii) the continuing low or negative interest rate environment, developments in the macroeconomic climate and in the markets in which UBS operates or to which it is exposed, including movements in securities prices or liquidity, credit spreads, and currency exchange rates, and the effect of economic conditions and market developments on the financial position or creditworthiness of UBS’s clients and counterparties; (iii) changes in the availability of capital and funding, including any changes in UBS’s credit spreads and ratings, as well as availability and cost of funding to meet requirements for debt that will be eligible for total loss-absorbing capacity (TLAC) requirements, or loss-absorbing capital; (iv) changes in or the implementation of financial legislation and regulation in Switzerland, the US, the UK and other financial centers that may impose, or result in, more stringent capital, TLAC, leverage ratio, liquidity and funding requirements, incremental tax requirements, additional levies, limita- tions on permitted activities, constraints on remuneration or other measures; (v) uncertainty as to when and to what degree the Swiss Financial Market Supervisory Authority (FINMA) will approve reductions to the incremental RWA resulting from the supplemental operational risk capital analysis mutually agreed to by UBS and FINMA, or will approve a limited reduction of capital or gone concern requirements due to measures to reduce resolvability risk; (vi) the degree to which UBS is successful in implementing changes to its legal structure to improve its resolvability and meet related regulatory requirements, including changes in legal struc- ture and reporting required to implement US enhanced prudential standards, implementing a service company model, the transfer of the Asset Management business to a holding company, and the potential need to make further changes to the legal structure or booking model of UBS Group in response to legal and regulatory requirements relating to capital requirements, resolvability requirements and proposals in Switzerland and other countries for mandatory structural reform of banks and the extent to which such changes have the intended effects; (vii) 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; (viii) changes in the standards of conduct applicable to our businesses that may result from new regulation or new enforcement of existing standards, including measures to impose new or enhanced duties when interacting with customers or in the execution and handling of customer transactions; (ix) the liability to which UBS may be exposed, or possible constraints or sanctions that regulatory authorities might impose on UBS, due to litigation, contractual claims and regulatory investiga- tions, including the potential for disqualification from certain businesses or loss of licenses or privileges as a result of regulatory or other governmental sanctions; (x) the effects on UBS’s cross-border banking business of tax or regulatory developments and of possible changes in UBS’s policies and practices relating to this business; (xi) UBS’s ability to retain and attract the employees necessary to generate revenues and to manage, support and control its businesses, which may be affected by competitive factors including differences in compensation practices; (xii) changes in accounting or tax standards or policies, and determinations or interpretations affecting the recognition of gain or loss, the valuation of goodwill, the recognition of deferred tax assets and other matters; (xiii) limitations on the effectiveness of UBS’s internal processes for risk management, risk control, measurement and modeling, and of financial models generally; (xiv) whether UBS will be successful in keeping pace with competitors in updating its technology, particularly in trading businesses; (xv) the occurrence of operational failures, such as fraud, misconduct, unauthorized trading, financial crime, cyber-attacks, and systems failures; (xvi) restrictions on the ability of UBS Group AG to make payments or distributions, including due to restrictions on the ability of its subsidiaries to make loans or distributions, directly or indirectly, or, in the case of financial difficul- ties, due to the exercise by FINMA of its broad statutory powers in relation to protective measures, restructuring and liquidation proceedings; (xvii) the degree to which changes in regulation, capital or legal structure, financial results or other factors, including methodology, assumptions and stress scenarios, may affect UBS’s ability to maintain its stated capital return objective; and (xviii) the effect that these or other factors or unanticipated events may have on our reputation and the additional consequences that this may have on our business and performance. The sequence in which the factors above are presented is not indicative of their likelihood of occurrence or the potential magnitude of their consequences. 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 2015. 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, percent changes and absolute variances are calculated based on rounded figures displayed in the tables and text and may not precisely reflect the percentages, percent changes and absolute variances that would be derived based on figures that are not rounded. Tables | Within tables, blank fields generally indicate that the field is not applicable or not meaningful, or that information is not available as of the relevant date or for the relevant period. Zero values generally indicate that the respective figure is zero on an actual or rounded basis. 934 935 UBS Group AG P.O. Box, CH-8098 Zurich UBS AG P.O. Box, CH-8098 Zurich P.O. Box, CH-4002 Basel www.ubs.com
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